ACCA

FR
Financial Reporting

Revision Kit
Compiled by:

Jayashini Rodrigo

Design & Editing:

Kaveesha Jeyanthan

Under the Guidance of:

Azad Hye

Althaf Haaris

Anushan Sathananthasarma

Hafsa Nimnaz

Published by:
Achievers ®
No. 39, Bauddhaloka Mawatha,
Colombo – 04
[Link]

All rights reserved. No part of this publication may be reproduced,

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the prior written permission of Achievers.
©
Achievers 2021
 Contents

Topic Question Page Answer Page

Multiple Choice Questions
A. The Conceptual and Regulatory
8 276
Framework for Financial Reporting
B. Accounting for transactions in
financial statements
B1. Tangible Non-Current Assets 15 279
B2. Intangible Non-current Assets 21 282
B3. Impairment of Assets 24 284
B4. Inventory and Biological
29 286
assets
B5. Financial Instruments 33 288
B6. Leasing 37 290
B7. Provisions and events after
43 293
the Reporting period
B8. Taxation 52 295
B9. Reporting financial
56 297
performance
B10. Revenue 65 301
B11. Government grants 71 306
B12. Foreign Currency
73 307
transactions
C. Analysing and interpreting the
financial statements of single 76 308
entities and groups
D. Preparation of financial statements 86 312
E. Objective Test Questions 110 323
Constructed Response Questions
Analysing and interpreting the financial
statements of single entities and groups
1. Lex Co. 162 345
2. Mary Co. 165 349
3. Panther Co. 167 351
4. Joker Co. 169 354
5. Arrow Co. 171 356
6. Martian Co. 174 359
7. Wonder Co. 176 361
8. Sinestro Co. 178 364
9. Atom Co. 180 367
10. Merlyn Co. 183 369
11. Wolf Co. 185 372
12. Hex Co. 187 374
13. Thawne Co. 189 376
14. Hawk Co. 191 379
15. Multiplex Co. 193 382
16. Firestorm Co. 195 385
17. Nightwing Co. 197 387
18. Hulk Group 199 390
19. Loki Co. 201 393
20. Polka and Stripe 203 395

Single Entity Statements

1. Phoenix Co. 205 397
2. Sphinx Co. 207 400
3. Centaur Co. 209 403
4. Garuda Co. 211 406
5. Unicorn Co. 212 408
6. Hercules Co. 215 411
7. Griffin Co. 217 413
Single Entity Statements
8. Pegasus Co. 219 415
9. Chimera Co. 221 417
10. Medusa Co. 223 420
11. Cerberus Co. 225 423
12. Faun Co. 227 425
13. Dragon Co. 229 428
14. Cyclopes Co. 231 430
15. Tartarus Co. 233 433
16. Gorgon Co. 235 435
17. Orion Co. 237 438
18. Hydra Co. 240 441

Business Combinations
1. Monica Co. and Chandler Co. 242 443
2. Phoebe Co. and Mike Co. 244 446
3. Rachel Co. and Ross Co. 245 448
4. Joey Co. and Cathy Co. 247 451
5. Janice Co. and David Co. 249 453
6. Frost Co. and Black Co. 250 455
7. Chemistro Co. and Cage Co. 252 457
8. Moon Co. and Knight Co. 254 460
9. Ultron Co. and Sentry Co. 256 462
10. Claw Co. and Galactus Co. 258 464
11. Adam Co. and Eve Co. 260 467
12. Sweet Co. and Sour Co. 262 470
13. War Co. and Peace Co. 264 472
14. Hell Co. and Heaven Co. 265 474
15. Square Co. and Triangle Co. 268 476
16. Milky Co. and Dairy Co. 269 479
17. Billie Co. and Jean Co. 272 482
18. Ice Co. and Fire Co. 274 484
Questions
Achievers Revision Kit

Syllabus Area A: The Conceptual and Regulatory

Framework for Financial Reporting

1) Which of the following gives the best description of the objectives of the
financial statements as set out by the International Accounting Standards
Board’s Conceptual Framework for Financial Reporting?
a. To provide information about the financial position, performance and
changes in financial position of the enterprise that is useful to wide
range of users in making economic decisions.
b. To fairly present the financial position and performance of an enterprise.
c. To provide the information about financial position and performance of
an enterprise that is useful to a wide range of users making economic
decisions.
d. To fairly present the financial position, performance and changes in
financial position of an enterprise.

2) International Accounting Standards Board’s Conceptual Framework for

Financial Reporting defines an Asset as:
a. A present economic resource to which an entity has a future
commitment as a result of past events and from which the economic
resource is a right that has the potential to produce economic benefits.
b. A present economic resource which is a right that has the potential to
produce economic benefits, owned by an entity as a result of past events.
c. A present economic resource controlled by an entity as a result of past
events and which has the potential to produce economic benefits.
d. A present economic resource over which the entity has legal rights and
which has the potential to produce economic benefits.

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3) Which describes the accounting framework used under IFRS standards

best?

True False
It is a rules-based framework
It is not a legal obligation

4) Which of the following is NOT a requirement that need to be satisfied in

order for an element to be recognized with in the Financial Statements?
a. It meets the definition of an element of the financial statements
b. Recognition provides relevant information
c. Recognition provides faithful representation of the element
d. The element has a fair value

5) Information that influences the decision of users is the definition for which
of the following?
a. Relevant Information
b. Reliable Information
c. Faithfully Represented Information
d. Comparable Information

6) Which of the following is an example for faithful representation?

a. Recording the entire amount of a convertible loan as a liability
b. Recording a sale and repurchase transaction as a loan rather than a sale
c. Showing lease payments as a rental expense
d. Creating a provision for staff relocation costs as a part of planned
restructuring

7) Relevant Information contains ________________.

a. Approximate value
b. Confirmatory value
c. Fair value
d. Instructive value

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8) Which of the following could be classified as a liability?

a. Alpha has estimated the tax charge on its profits for the year just ended
as $ 52 000
b. Beta’s business manufactures a product under a license. In a year it
expires and Beta will have to pay $ 20 000 to renew it.
c. Charlie purchased an investment 6 months ago for $ 100 000. The market
for this has fallen and now the investment is valued at $ 60 000.
d. Delta is planning to invest in new machinery and has been quoted a price
of $ 270 000.

9) Match accordingly

Completeness
Faithful Representation
Predictive value

Neutrality
Relevance
Confirmatory Value

10) _______________ and __________________ are the Fundamental Qualitative

characteristics according to the IASB’s Conceptual Framework for financial
reporting.
a. Comparability b. Faithful Representation
c. Reliability d. Relevance

11) Which two of the following are NOT advantages of applying a principles-
based framework of accounting rather than a rules-based framework?
a. It is easier to prove non-compliance.
b. It avoids fire-fighting where standards are developed in responses to
specific problems as they arise.
c. A set of rules is given which attempts to cover every eventuality
d. Principles based standards are thought to be harder to circumvent.

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12) Which of the following is NOT a purpose of the IASB’s Conceptual

Framework?
a. To assist the auditors in forming an opinion on whether the financial
statements comply with the IFRS standards.
b. To assist the Board in preparation and review of IFRS’s.
c. To be authoritative where a specific IFRS standard conflicts with the
framework.
d. To assist in determining the treatment for the items which are not
specifically covered by a standard.

13) Which of the following is an example for faithful representation?

a. Treating redeemable shares as equity.
b. Capitalizing development costs as an intangible asset.
c. Continuing to recognize factored receivables sold with recourse.
d. Including a convertible loan note in equity on the basis that the holders
are likely to choose the equity option on conversion.

14) Decreases in assets or increases in liability, that result in decreases in

equity, other than those relating to distributions to equity holders is the
definition of ___________________. (Expenses/ Liabilities)

15) Are the following advantages of global harmonization of accounting

standards?
a. Greater comparability between different firms (Yes/No)
b. Greater compatibility with legal systems (Yes/No)
c. Easier for large international accounting firms (Yes/No)

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16) Which of the following should not be recognized in the financial statements
as described?
a. A provision for tsunami damage to property for an entity located in an
area which experiences a high incidence of tsunami as a non-current
liability.
b. $ 10 000 due from a customer which has been factored with recourse.
c. Irredeemable preference shares as non-current liability
d. The whole sales proceeds from the sale of an item of manufactured
plant which has to be maintained by the seller for two years as part of
the sales agreement.

17) Which of the following treatments apply for the principle of Faithful
representation?
a. Allocating a part of the sales proceeds of motor vehicle to interest
received even though it was sold with interest-free finance.
b. Reporting a transaction based on its legal status rather than its
economic substance.
c. Excluding a subsidiary from consolidation because its activities are
significantly different from the rest of the group.
d. Recording the whole of a convertible loan in liabilities.

18) Julius acquired an item of plant on 1st April 20X5 at a cost of $ 400 000. It
is being depreciated over 10 years, using straight-line depreciation and
estimated residual value of 10% of its historical cost or current cost as
appropriate. As at 31st March 20X7 the manufacturer of the plant still
manufactures the same plant and its current price is $ 500 000.
What are the correct amounts to be shown in the Statement of Financial
position of Julius as at 31st March 20X7?
Historical Cost Current Cost
328 000 500 000
292 000 410 000

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19) Which of the following criticisms apply to historical cost financial

statements during a period of inflation?
a. They are difficult to verify as transactions could have happened many
years ago.
b. They understate assets.
c. They understate profits.
d. They do not contain mixed values, some at out of date values and some
at current values.

20) Comparability is an enhancing qualitative characteristic. Which of the

following does NOT improve comparability?
a. Disclosing discontinued operations separately in financial statements.
b. Restating the financial statements of the previous years when there is
a change in accounting policy.
c. Prohibiting changes of accounting policy unless required by the IFRS
standards or to give more reliable and relevant information.
d. Applying an entity’s current accounting policy to a transaction which the
entity has not engaged in before.

21) Which of the following is recognized as an asset in the financial

statements?
a. A government grant relating to a purchase of an item of plant 2 years
ago which ha a remaining life of 2 years.
b. A highly skilled and trained workforce who were very expensive to
train, still employed in the company.
c. A full recourse factored receivables of $ 700 000.
d. A highly lucrative contract which has been signed during the year but
still haven’t commenced.

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22) Identify the two liabilities out of the following list.

a. A loss making, non-cancellable contract which was signed during the
year.
b. The provision for warranty when there are no outstanding claims and
the others are expired.
c. The cost of reorganization which was approved by the board during the
year but has not yet been implemented or communicated to the staff.
d. Deferred tax which arose as a result of revaluation of property which
the entity has no intention of selling in the foreseeable future.

23) What is the underlying assumption in preparing financial statements

Identified in the conceptual framework?
a. Accruals b. Going Concern
c. Materiality d. Prudence

24) Which of the following correctly describes the net realizable value of a 5
year old asset?
a. The present value of the future cash flows obtainable from the asset
from continuous use.
b. The cost of an equivalent new asset less 5 years depreciation.
c. The original cost of the asset less 5 years depreciation.
d. The amount that could be obtained from selling the asset, less any cost
of disposals.

25) There are several stages in developing an International Financial

Reporting Standard by IASB. What is the earliest stage?
a. The IASB identifies a subject and appoints an advisory committee on
the issue.
b. The IASB publishes an exposure draft for public comment.
c. The IASB issues a discussion paper to encourage comment.
d. Publishing the final text of IFRS.

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Syllabus Area B: Accounting for Transactions in Financial

Statements.

B.1 Tangible Non-Current Assets

1) Which of the following expenses should be capitalised with in the initial

carrying amount of the plant?
a. Cost of a three year maintenance agreement
b. Cost of a training course for staff to operate the plant.
c. A deduction to reflect the estimated realisable value.
d. Cost of installing a new power supply required to operate the plant.

2) An entity purchased property for $ 12 million on 1st July 20X5. The land
element of the purchase was $ 2 million. The expected life of the
building was 50 years and its residual value is nil. On 30th June 20X7
the property was revalued to $ 14 million of which the land element
was $ 2.48 million. On 30th June 20X9 the property was sold for $ 13.6
million
What is the gain on disposal of the property that would be recorded in
the statement of profit or loss for the year ended 30th June 20X9?
a. Gain $ 2 000 000
b. Gain $ 2 480 000
c. Loss $ 400 000
d. Gain $ 80 000

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3) State whether the following are true or false.

a. When an item of Property plant and equipment are revalued there
is a requirement that the entire class of assets to which the item
belongs should be revalued. (True/False)
b. If the revaluation model is used for property, plant and equipment
revaluations must be subsequently made with sufficient regularity
to ensure that the carrying amount does not materially differ from
the fair value. (True/ False).

4) Joel acquired a new administration building on 1st October 20X8. Its

initial carrying amount consisted of,
(‘000)
Land - 1 000
Building structure - 5 000
Air conditioning System - 2 000
8 000
The estimated life of the building structure and air conditioning
system is 25 years and 10 years respectively. When the air conditioning
system is due for replacement it is estimated that the old system will
be dismantled and sold for $ 250 000. Depreciation is time apportioned
where applicable.
At what amount will the administration building be shown in Joel’s
Statement of Financial position as at 31st March 20X9?
a. $ 7 812 500
b. $ 7 800 000
c. $ 7 600 000
d. $ 7 612 500

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5) Are the following expenses capitalised according to IAS 16 Property

Plant and Equipment in an entity which is constructing a new asset
using its own staff?
a. An entity’s own staff wages for time spent working on construction
(Yes/No)
b. Site clearance costs prior to the construction (Yes/No)
c. Professional surveyor fees for managing the construction of the
asset (Yes/No)
d. A proportion of the entity’s administrative costs, based on staff time
spent (Yes/No)

6) During the current year Mitchell Company has in place $ 2 million 6%

loan finance and $ 4 million of 9% loan finance. It constructed a new
factory which cost $ 1 200 000 and this was funded out of the existing
loan finance. The factory took 8 months to complete. To the nearest
thousand what borrowing costs should be capitalised?
________________________

7) Which one of the following would be classified as an Investment

Property?
a. A small building used for executive training.
b. A new building which is used by the entity, purchased specifically
due to its capital gains potential.
c. Land purchased for its investment potential. Planning permission of
any kind of construction has not been obtained.
d. A property that has been leased but which is no longer required and
is held for sale.

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8) The following trial balance is extracted from Peter’s business as at

1st April 20X5
(’000) (’000)
Dr. Cr.
Property at cost (20 years original life) 24 000
Accumulated depreciation as at 7 200
1/4/20X4

On 1st October 20X5 Peter revalued its properties to 21.6 million

What will be the depreciation charge in Peter’s Statement of Profit or
Loss for the year ended 31st March 20X6?
a. $ 2 280 000
b. $ 1 140 000
c. $ 1 400 000
d. $ 2 000 000

9) Jackson Co. purchased a building with a 50 year life for $ 5 million on

1st January 20X5, On 30th June 20X7 Jackson Co. moved out of the
building to rent it out for a third party on a short term lease. Jackson
Co. uses fair value model for the Investment properties. At 30 th June
20X7 the fair value of the property was $ 5.5 million and at 31 st
December 20X7 it was $ 5.75 million.
What is the total net amount to be recorded in the statement of profit
or loss in respect of the office for the year ended 31st December 20X7?
a. $ 250 000
b. $ 200 000
c. $ 300 000
d. $ 150 000

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10) Jill acquired a building with a 40 year life for the investment potential
for $ 4 million on 1st January 20X1. At December 20X1 the fair value of
the property was estimated at $ 4.5 million with costs to sell
estimated at $ 200 000.
If Jill uses the Fair value model to value the Investment properties
what gain should be recorded in the Statement of Profit or Loss for
the year ended 31st December 20X1?
a. $ 500 000
b. $ 300 000
c. $ 1 000 000
d. $ 200 000

11) Tim Co. borrowed $ 4.8 million to finance the building of a factory.
Construction is expected to take two years. The loan was drawn
down on 1st January 20X5 and work began on 1st March 20X5. $ 2
million of the loan was not utilised until 1st July 20X5 so Tim was able
to invest until needed. Tim is paying 8% on the loan and can invest
surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended
31st December 20X5?
______________________

12) Identify whether the following are true or false

Following initial recognition, the investment properties must True False

be held at cost model.
Transaction costs are considered when the investment True False
properties are initially measured.
A gain or loss arising from a change of value in Investment True False
properties should be recognised in Profit or Loss statement.
If the fair value model is used for one Investment property it True False
should be applied to all the Investment properties of the entity.

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13) Henry Co. purchased a plant for $ 30 000 on 1st April 20X7 and
assigned it a useful life of 15 years. On 30th June 20X9 it was revalued
to $ 32 000 with no change in useful life.
What will the depreciation charged to Profit or Loss Statement for
the year ended 31st March 20X9?
a. $ 4 765
b. $ 4 509
c. $ 2 382
d. $ 3 882

14) Match accordingly. Which of the following costs incurred when

building a new factory are capitalized?

Architect’s fees
Capitalized
Business rates for
the year

Site Overheads
Not capitalized
Land

15) Which TWO of the following statements are correct?

a. An entity should recognize the gain or loss at the transfer date
when a capitalised property is transferred to Investment
property in other comprehensive income.
b. Transfers from an investment property to an IAS 16 property
must be done at the carrying value at the transferring date.
c. Transfers to or from investment property should only be made
when there is a change in their use.
d. An entity could hold some investment properties at fair value and
the rest at cost.

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B.2 Intangible Assets

1) Which of the following CANNOT be recognised as an Intangible non-

current asset in the Tris’s consolidated statement of financial position
as at 30th September 20X9?
a. Tris spent $ 50 000 during the year on the development of a new drug,
after the management concluded it would be viable in March 20X9. It
is being launched to the market in December 20X9.
b. Tris purchased a brand name for $ 45 000 in November 20X8.
c. Tris spent $ 100 000 developing a new vaccine. In June 20X9 the
management worried about the project being too expensive. The
finances to complete the project came from a benefactor received in
November 20X9.
d. Tris purchased the subsidiary Spooky during the year. It was found
that the subsidiary had a brand name with an estimated value of $
49,000 but this was not recognised in Spooky’s individual statements
as it was internally generated.

2) Lavender Co. is a popular vaccine producing company. Lavender

commenced developing of a new vaccine on 1st January 20X5. $ 50 000
was incurred monthly until the project was completed on 30th June 20X5,
when the vaccine went into production. The project was announced
viable on 1st March 20X5. The vaccine has a useful life of 5 years.
Lavender use time apportionment where applicable.
How much will be charged to the financial statements of Lavender for
the year ended 30th September 20X5 including any ammortisation?
a. $ 140 000
b. $ 110 000
c. $ 137 500
d. $ 150 000

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3) A new development process which does not increase revenue cannot

be capitalised as an Intangible asset. (True/False)
Intangible assets cannot be revalued and should be held at either
amortised cost or at an impaired amount. (True/False)

4) Which of the following can be classified as a development expenditure?

a. $ 50 000 spent on developing an electronic waste management
machine which is near completion and to be launched. However it is
expected that this project will make a loss.
b. $ 100 000 spent on researching an alternative to plastic.
c. $ 120 000 spent on developing a weed removing machine which was
declared not viable during the year.
d. $ 60 000 spent on developing a new solar panel which will reduce the
company’s distribution costs by $ 25 000.

5) During the year ended 31st December 20X8 Anne Co. has spent a total of
$ 375 000 on Project Luna up until 31st October 20X8 when the project
was successfully completed and the product went on sale from 30 th
November 20X8. It was declared feasible on 1st July 20X8 and had a
useful life of 5 years.
What is the carrying amount of the intangible assed capitalised as at 31st
December 20X8?
a. $ 147 500 c. $ 0
b. $ 150 000 d. $ 368 750

6) Which TWO of the following are the reasons why the trained employees
cannot be capitalised as an asset?
a. They do not provide future economic benefits.
b. They are inseparable from the business
c. They are not controlled by the business.
d. The value cannot be reliably measured.

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7) Identify whether the following internally generated items of a single

entity can be recognised as Intangible assets or not.
A working model of a new machine used t remove weeds that uses new
technology for testing the prototype. (Yes/No)
The mastheads of a newspaper (Yes/No)

8) Trouser acquired Pocket on 1st January 20X8. Pocket has a customer list
which has been reliably valued by Trouser at $ 100 000. Pocket also has
a license which was unable to value.
How should these items be treated in the consolidated statements for
the year 20X8?
a. Both should be included in goodwill
b. Both should be capitalised as intangible assets.
c. Customer list should be capitalised while the license should be
included in goodwill.
d. License should be capitalised while the customer list should be
included in the goodwill.

9) Ariel Co. had capitalised development expenditure of $ 40 million as at

1st October 20X6. A new project was commenced on the same date and
the research stage of it lasted until 31st December 20X6 and incurred $
2.8 million of costs. From that date the project incurred $ 1.6 million per
month. On 1st April 20X7 the project was declared viable. The project was
still in development at the year end. Capitalised development costs are
amortised at 20% per annum.
What amount will be charged to profit or loss statement in respect of
research and development costs?
___________________________

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10) Which of the following would not allow development expenditure to be

capitalised?
a. The entity does not have a license to produce the product.
b. No sales agreements have been signed in respect of the product.
c. The product is still under developed.
d. The development costs of the product cannot be measured reliably.

B.3 Impairment of Assets

1) Jace owns a machinery which has a carrying amount of $ 124 000 as at 1st
January 20X3. It is being depreciated at a rate of 12.5% per annum on a
reducing balance basis. Jace estimated that this machine will be retired
form use on 31st December 20X7. On 1st January 20X4 Jace had an offer from
Raphael to purchase the machine at $ 100 000
Net Cash flows Present Values
Year 31 December 20X5 $ 60 000 $ 54 600
Year 31 December 20X6 $ 40 000 $ 33 200
Year 31 December 20X7 $ 26 000 $ 19 500
$ 126 000 $ 107 300

At what amount should the machine appear in Jace’s financial statements

as at 31st December 20X3?
a. $ 107 300
b. $ 108 500
c. $ 100 000
d. $ 124 000

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The estimated net realisable value of the Indicator of Not an indicator

inventory has reduced due to damage by impairment of impairment
flood and, greater than its carrying
amount.
A decrease in Interest rates which also Indicator of Not an indicator
decrease the discounting rate of the impairment of impairment
entity.
Advances in technology which has an Indicator of Not an indicator
adverse effect on the asset’s future use impairment of impairment
The carrying amount of entity’s net Indicator of Not an indicator
assets is higher than the entity’s no. of impairment of impairment
shares in issue into share price.

2) The net assets of Magnus, a cash generating unit are as follows,

Property Plant and Equipment - $ 400 000
Goodwill - $ 100 000
Patent - $ 40 000
Net current Assets ( at NRV) - $ 60 000
Recoverable amount - $ 400 000
What would be the value of patent after allocating for the impairment loss?
a. $ 30 909
b. $ 9 091
c. $ 21 818
d. $ 26 667

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3) Clary acquired a plant at a cost of $ 50 000 which had a useful life of 10

years and nil residual value on 1st October 20X4. This has been correctly
depreciated up to 30th September 20X9. At that date the plant was
impaired. At that date the fair value less costs to sell was $ 15 000 and
the expected future cash flows were $ 4 250 per annum for the next 5
years. The five year annuity of $ 1 per annum at 10% is 3.79.
What amount is charged to profit or loss statement in relation to the
impairment?
_______________________

4) Following relates to a division of an entity

Goodwill $ 350 000
Plant $ 475 000
Intangibles $ 400 000
Building $ 1 150 000
Other net assets (at NRV) $ 215 000
Due to a recession the recoverable amount of the division is $ 2 million.
Recent study revealed that the building has a market value of $ 1.25
million. The entity uses the cost model for valuing building and plant.
What is the balance of the building following the impairment review?
_________________________

5) A piece of machinery costing $ 50 000 which has a useful life of 5 years

was damaged exactly half way through the year. The Expected present
value of future cash flows of the machinery as at that date was $ 15 000
and the fair value less costs to sales was
$ 8 000. What is the recoverable amount of the machine?
_______________________

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6) Following balances were extracted from a division of Simon’s business.

Goodwill $ 70 000
Building $ 230 000
Patent $ 80 000
Plant $ 95 000
Other net assets (at NRV) $ 43 000
Due to loss making the recoverable amount of the division at the end of
the period was $ 400 000. The building had a market value of $ 250 000.
The cost model is used to value the plants and the building.
To the nearest thousand what is the carrying value of plant after
impairment?
a. $ 73 000
b. $ 67 000
c. $ 69 000
d. $ 70 000

7) Maia Co. has a single cash generating unit which has the following
assets.
Plant and Equipment $ 30 000
Property $ 20 000
Brand name $ 10 000
Goodwill $ 6 000
Net current assets $ 4 000
The value of the brand name at the end of the year was $ 4 000 and the
recoverable amount of the business was $ 48 000. At what amount
should the property be measured at the end of the year (to the nearest
‘000)?
a. $ 16 500
b. $ 15 200
c. $ 16 000
d. $ 16 300

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8) Which two of the following are NOT an EXTERNAL indicator of

impairment?
a. Evidence of obsolescence
b. An unusual fall in market value of an asset
c. An increase in market interest rate
d. A decline in economic performance of an asset

9) The cash generating unit of Jordan’s business comprise the following

assets.
Goodwill $ 0.9 million
Building $ 7 million
Plant $ 2 million
Current Assets $ 0.2 million
The recoverable amount of the unit is $ 7.5 million and one of the
machines costing $ 400 000 has been damaged and scrapped.
What will be the carrying amount of the plant after the impairment (to
the nearest ’000)?
________________________

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B.4 Inventories and Biological Assets

1) Which of the following items are accounted under IAS 41 Agriculture?

a. Cheese
b. Processed meat
c. Wool
d. Sheep

2) On 31st December 20X8 Isabelle had a closing inventory of $ 500 000 at

its cost. This included a stock of inventory which was damaged during
the year due to fire which cost $ 105 000. These goods were planned to
sell with a gross profit margin of 30%.
However due to the damage these stocks will be handled by an agent
who will sell them at 80% of the normal selling price and charges a
commission of 25%.
What will be the value of the closing inventory in financial statements
for the year ended 31st December 20X8?
_______________________

3) Which of the following are included in the cost of finished goods

inventories?

Marketing and selling Overhead

Cost of delivering raw materials to

the factory
Included
Abnormal increase in overhead
charges

Factory management overhead

Not included
allocated to production

Variable production overhead

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4) Alec has incurred the following costs in producing a unit of inventory.

Raw materials $ 3.0
Production overhead costs $ 0.5
Import duties $ 0.8
Storage costs $ 0.1
Direct labour $ 1.0
Recoverable sales tax $ 0.4
Subcontracted labour costs $ 1.6
Abnormal wastage costs $ 0.2
At what cost would be Alec’s inventory valued?
a. $ 7.0
b. $ 6.9
c. $ 7.6
d. $ 7.4

5) In addition to IAS 2 Inventories which of the following standards is

relevant in determining the value of closing inventories?
a. IAS 41 Agriculture
b. IAS 10 Events after the reporting period.
c. IAS 8 Accounting policies, changes in accounting estimates and
errors
d. IFRS 5 Non-current assets held for sale and discontinued
operations

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6) Maryse owned sheep costing $ 5 250 on 1st April 20X8. As at 31st March
20X9 the fair value of the sheep is $ 6 500 and the costs to sell is 2% of
the fair value. What is the correct accounting treatment relevant to the
above scenario?
a. Revalue to $6 500 and recognise a gain of $ 1 250 in profit or loss
statement.
b. Revalue to $6 500 and recognise a gain of $ 1 250 in revaluation
surplus.
c. Revalue to $6 370 and recognise a gain of $ 1 120 in profit or loss
statement.
d. Hold at cost of $5 250.

7) Which of the following is in the scope of IAS 41 Agriculture?

a. Land which is used to grow fruits.
b. Cheese which is stored in the store.
c. A herd of cattle.
d. Costs of developing a new fertiliser.

8) Aline has only the following items in her inventory.

Item A – A new mobile phone which was constructed for another
customer for a contracted price of $ 7 200. The total cost to complete
was $ 6 720. However, the customer is demanding new features which
will cost $ 1 680 where the customer agreed to contribute half of the
extra cost.
Item B – Material of $ 4 800 was bought for assembly on behalf of a
customer under a one-off order where high profit margin is expected.
However at the reporting date the cost of material has fallen by $ 4 000.
What is the value of closing inventory in the financial statements?
______________________

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9) To produce the financial statements related to the year ended 31 st

December 20X5 the inventory count was carried on 6th January 20X6.
The value was recorded as $ 18 million. Between 31st December and 6th
January sales of 3.9 million were made at a mark-up of 30% also goods
costing $ 1.35 million were received in to the inventory.
What is the correct amount that should be recorded as closing
inventory in the financial statements for the year ended 31st December
20X5?
______________________

10) Mark co. has the following products in inventory at the year end.
Product Quantity Selling price Selling cost Cost
X 850 $ 20 $2 $ 15
Y 600 $ 10 $5 $8
Z 1 000 $ 25 $6 $ 18
What is the value of the closing stock that is recorded in the Statement
of Financial Position?
a. $ 37 300
b. $ 33 750
c. $ 35 550
d. $ 34 650

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B.5 Financial Instruments

1) What are the TWO tests that a debt investment must pass in order to
be held under amortised cost?
a. Amortised cost test
b. Cash flow characteristics test
c. Business model test
d. Fair value test

2) Sebastian issued $ 100 000 8% loan notes on 1st January [Link]

issue costs are $ 5 000 and the effective rate of interest is 10%. What
is the finance cost expensed to the statement of profit or loss for the
year ended 31st December 20X6?
a. 9 500
b. 7 600
c. 9 650
d. 7 568

3) On 1st April 20X3, Lightwood Co. issued 5% $ 5 million loan notes. It is

redeemable on 31st March 20X6. A similar loan note without the
conversion would have an interest rate of 8%.
Year 5% 8%
1 0.95 0.93
2 0.91 0.86
3 0.86 0.79

How much would be recorded in equity in relation to the loan notes?

___________________________

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4) Which of the following instrument is treated under Fair value through

other comprehensive income?
a. Convertible loan notes
b. Loan notes which are not held for trading
c. Equity Investments (default)
d. Equity investments where the entity has an intention to hold it long
term.

5) Valentine purchased 30 000 shares in Fairchild Co. on 1st January 20X8

at a cost of $ 5.00 each. Transaction costs on the purchase amounted
to $ 1 000. At the year end these shares are now worth $ 6.25 each.
Select the correct gain and where it is recorded?

$ 37 500 Other Comprehensive Income

$ 47 500 Statement of Profit or Loss

6) Kyle Co. issued $ 20 million 10% loan notes on 1st October 20X8,
incurring issue costs of $ 600 000. Effective rate of the loan note is
15%. What amount is expensed to profit or loss statement as finance
cost for the year ended 30th September 20X9?
___________________________

7) What is the default classification of an equity investment?

a. Fair value through other comprehensive income
b. Fair value through profit or loss
c. Amortised Cost
d. Not recorded

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8) Maureen Co. issued 5 000 convertible bonds of $ 1 500 each. They have
a three year term and interest should be payable annually in arrears
at 7%. Each bond is convertible to 100 shares at any time up to
maturity. The interest rate for similar bonds without conversion
options is 9%.
Year 7% 9%
1 0.93 0.91
2 0.87 0.84
3 0.81 0.77
What is the initial debt element to be recorded?
a. $ 7 098 000 c. $ 7 360 500
b. $ 7 445 250 d. $ 7 715 250

9) Amatis purchased 4000 shares on 1st July 20X6, making the election
to use the alternative treatment under IFRS 9 Financial Instruments.
The cost of a share was $ 2.5 and the transaction costs were
amounted to $ 1 000. At 30th June 20X7 the share price was $ 4 per
share. What is the gain to be recognised at the year ended?
______________________________

10) Which is NOT classified as a financial instrument under IAS 32

Financial Instruments: Presentation?
a. Trade receivables of $ 40 000
b. 10 000 6% loan notes
c. Redeemable preference shares
d. A newly developed fertilizer recorded as an intangible asset

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11) On 1st January 20X2 Luke Co. purchased a debt instrument at its fair
value $800 000 which had a principal amount of $ 900 000. It has a
fixed interest of 5% and an effective interest rate of 8%. It is due to
mature in 3 years.
At what amount is the debt instrument shown in the financial
statements for the year ended 31st December 20X3?
a. $ 839 520
b. $ 849 920
c. $ 800 000
d. $ 776 000

12) Raziel Co. had a financial asset which had a carrying amount of
$ 250 000 as at 1st January 20X7. These are held in a fund whose value
changes in proportion to a specified market index. At 1st January 20X7
the index was 1,200 and at the year end it has changed to 1.350. What
amount of gain or loss should be recognised in respect of the asset at
the year end? ________________________

13) State whether the following are true or false.

a. Equity instruments are treated under fair value through profit or
loss at default. (True/False)
b. Transaction costs are excluded under amortised cost method.
(True/False)

14) Ithuriel issued a 5% loan note on 1st January 20X3 for $ 40 million.
Direct issue costs were $ 1 million. The effective interest rate is 10%
and the loan note will be redeemable on 30th June 20X6. At what
amount will the loan note be recorded in the statement of Financial
Position as at 31st December 20X4?
a. $ 42 000 000 b. $ 42 990 000
b. $ 40 900 000 c. $ 44 200 000

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15) Michael Co. purchased 25 000 $ 1 listed shares at a price of $ 2.5 per
share. Transaction costs were $ 2 750. An irrevocable election was
made to recognise the shares at fair value through other
comprehensive income. At the particular year end the shares were
trading at $ 3.75 per share.
What amount will be recognised under ‘investment in equity
instruments’ at the particular year end?

B.6 Leasing

1) On 1st January 20X5 Zeus Co. acquired a machine on a lease

agreement. The initial payment of $ 27 520 is paid immediately.
Commencing on the same date further $ 40 000 annual instalments
are to be paid for the next 5 years with an interest of 8% payable in
advance. The present value of the lease payment excluding the initial
payment is $ 172 480. What amount will be recorded as the non-
current liability for the year ended 31st December 20X7?
___________________________

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2) Athena Co. entered into the following lease agreements during the
year ended 31st December 20X8.
1. On 1st January 20X8 Athena paid $ 45 000 to acquire a machine being
the first of five equal annual instalments where the interest rate is
10%. The present value of the total lease payments as at the date
was $ 170 000.
2. On 1st April 20X8 the company paid $ 9 000 for a 12 months lease of
an item of plant.
What amount will be expensed to Athena’s statement of Profit or
loss for the year ended 31st December 20X8?
a. $ 54 000 c. $ 53 250
b. $ 55 500 d. $ 57 750

3) Hades leases an item of machinery which has a useful life of 6 years

for a period of 5 years and an optional secondary period of 2 years
where a nominal rental will be paid. The present value of the initial
period lease payment is $ 75 000.
What will be the carrying amount of the right of use asset at the end
of the second year of the lease agreement?
__________________________
4) Poseidon entered into a 5 year lease agreement on 1st April 20X5 by
paying $ 2 195 per annum commencing on the 31st March 20X6. The
interest rate is 7% and the present value of the lease payments is $ 9
000.
What is the amount to be recorded as the current liability in regard of
the above lease for the year ended 31st March 20X6?
a. $ 5 240
b. $ 5 760.5
c. $ 7 435
d. $ 7 281.4

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5) Are the following included on the initial cost of the right of use asset?
a. Total lease rentals payable under the lease agreement (Yes/No)
b. Estimated dismantling costs at the end of the period. (Yes/No)
c. Installation cost of the asset (Yeas/No)
d. Payments made to lessor before the commencement of lease
(Yes/No)

6) On 1st October 20X2 Hestia leased a machinery with a useful life of 5

years for a period of 4 years paying $ 42 000 annually in arrears. The
present value of the lease payment is $ 127 000 where an interest rate
of 12.2% is applicable. The ownership of the asset is passed to Hestia at
the end of the lease term. For the year ended 30th September 20X3
Hestia recorded the payment of $ 42 000 as operating expenses. This
error was recognised after the statements were finalised.
To correct tis error what adjustment would be necessary for the
retained earnings in the statement of changes in equity for the year
ended 30th September 20X4?
a. $ 1 106 credit c. $ 1 106 debit
b. $ 26 506 credit d. $ 26 06 debit

7) Which of the following assets leased by Hera Co. would be permitted to

exempt under IFRS 16 Leases?
a. A building with a cost of $ 65 000 leased for 2 ½ years.
b. A motor vehicle costing $ 67 000 leased for 24 months to rent for
the customers on a daily basis.
c. A piece of plant which cost $ 42 000 and is leased for a period of 12
months.
d. An item of machinery which cost $ 17 000 and is leased for 5 years
which now has a fair value of $ 1 000.

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8) On 1st January 20X4 Ares Co. sold a property for $250 000 and leased it
back for 5 years paying $ 18 750 per annum at the end of each year. The
present value of the rentals payables was $ 74 875 and the interest rate
applicable is 8%. The carrying amount of the asset on 1st January 20X4
was $ 200 000 and had a remaining useful life of 20 years.
What entries should be posted to the statement of profit or loss for the
year ended 31st December 20X4?
a. Profit on disposal $ 50 000, rental expense $ 18 750
b. Finance cost $ 5 990, Profit on disposal $ 50 000, depreciation
$ 11 980
c. Finance cost $ 5 990, Profit on disposal $ 35 025, depreciation
$ 14 975.
d. Finance cost, $ 5 990, Profit on disposal $ 35 025, depreciation
$ 11 980.

9) On 1st October 20X1 Artemis Co. acquired a motor vehicle for a 6 year
lease agreement which had a useful life of 10 years at that date. Which
of the following situations will allow Artemis to depreciate the motor
vehicle over 10 years?
a. Artemis can purchase the asset at the end of the lease term by
paying the market value.
b. Artemis’s policy says that any asset should be depreciated over its
useful life.
c. Artemis has the option to extend the lease for another 4 years.
d. At the end of the lease term the ownership of the asset would be
passed to Artemis.

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10) On 1st October 20X1 Artemis Co. acquired a motor vehicle for a 6 year
lease agreement which had a useful life of 10 years at that date. Which
of the following situations will allow Artemis to depreciate the motor
vehicle over 10 years?
e. Artemis can purchase the asset at the end of the lease term by
paying the market value.
f. Artemis’s policy says that any asset should be depreciated over its
useful life.
g. Artemis has the option to extend the lease for another 4 years.
h. At the end of the lease term the ownership of the asset would be
passed to Artemis.

11) Apollo Co. entered in to a sale and lease back agreement on 1st October
20X5 when he sold the property at $ 14 million and leased it back on 10
year lease. This property had a carrying amount of $ 10.5 million with
a useful life 10 years at the date of sale. The interest rate applicable is
5%.
What is the depreciation expense for the year ended 30th September
20X6?
_________________________

12) On 1st July 20X6 Aphrodite acquired a machine for a five year lease
agreement. The present value of the lease is $ 11.5 million. The annual
rent is $ 3 million per annum and the relevant interest rate is 10%.
What would be the current liability which will be recorded in the
Statement of Financial position for the year ended 30th June 20X7 in
regards of the lease?
a. $ 9 650 000
b. $ 2 500 000
c. $ 2 035 000
d. $ 1 925 000

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13) During the year ended 31st December 20X1 Dionysus entered in to the
following agreements.
Dionysus leased an item of plant for $ 68 000 which had a useful life of
5 years on 1st January 20X1. A payment in advance of 18 000 was paid at
the beginning of the year being the first of five equal annual instalments.
Interest rate is 10%.
On 1st November 20X1 Dionysus made payment of 9 000 for a nine month
lese of a machine. Dionysus is expecting to utilise the exceptions under
the standard.
What amount would be charged to the Statement of Profit or Loss for
the year ended 31st December 20X1 in related to the above transactions?
________________________

14) Which of the following statements does NOT indicate a lease?

a. The contract relates to an identified asset.
b. The lessee obtains all of the economic benefits from using the asset.
c. The lessor can substitute an identical asset.
d. Ownership of the asset is transferred at the end of the lease term.

15) Hypnos Co. entered into a 8 year lease agreement on 1st October 20X6
which requires a payment of $ 375 000 in arrears. Present value of the
lease payment is $ 2 328 500 with an interest rate of 6%. Directly
attributable costs paid on 1st October 20X6 is 18 750. What is the total
charge to Statement of profit or loss for the respective year end?
a. $ 433 162.5
b. $ 293 475.5
c. $ 139 725
d. $ 514 725

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16) Which one of the following equations is accurate?

a. Lease Liability – prepayments – other direct costs + incentives
received
b. Lease Liability + Other direct costs + Prepayments – incentives
received
c. Lease Liability – prepayments – other direct costs
d. Lease Liability + Other direct costs – incentives received

B.7 Provisions and events after the reporting period

1) Percy was suggested the following accounting treatments at a review

carried out at the year ended 31st December 20X8. Which one of the
following can be treated as a provision according to the IFRS standard?
a. The reversal of provision for depreciation of a machinery due to
increase in the useful life.
b. Providing $ 500 000 deferred tax at 15% relating to a revalued
property which Percy has no intention in selling in the near future.
c. A customer is suing Percy regarding faulty goods and Percy is
contesting the claim. The lawyers of Percy has stated that it is very
likely that Percy will win the case.
d. Providing $ 600 000 for an unseen liability based on the past
experience which Percy believes will have to be paid in the future.

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2) On 1st March 20X4, Annabeth started Gem mining in a nearby gem

deposit and expects to continue for the next five years.. This will cause
relative damage to the environment and it is estimated that $ 10 000
(ignore discounting) restorative costs should be paid per month until the
mining is finished. Annabeth is also required to dismantle the equipment
used at the end of the five year period. The estimated cost to dismantle
the equipment is $ 15 000 million on 30th April 20X9. The cost of capital
of the company is 8% per annum and discounting factor after five years
would be 0.68.
What is the total provision that should be recorded in the financial
statements to the year ended 30th April 20X5?
a. $ 131 016
b. $ 130 200
c. $ 135 000
d. $ 136 200

3) Select the true statement about provision from the following.

a. Prudent concept is applied which means the maximum possible
amount that should be paid is provided.
b. When recording provisions, the amount should not be discounted to
the present value if the value of money is material.
c. Provision cannot be recorded for expected future losses.
d. Changes in provision is adjusted in the prior year financial
statements, treating it retrospectively.

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4) Jason has decided to close down a division of his company. His year end
is 30th September and on the 17th of September 20X5 Jason has
announced the decision to all the employees. Employees of the division
would be either made redundant or relocated. The estimated costs for
discontinuing the division are as follows.
Redundancy costs $ 600 000
Relocation of other employees $ 450 000
Retraining the relocated employees $ 100 000
What provision should be recognised in related to the close down of the
above division? ____________________________

5) Piper is operating a large company which exports clothes. Its year end
is 30th September. During the month of September 20X8 the government
of the country announced a change in health and safety regulations.
According to this change the fire alarm system should be upgraded. The
estimated cost is $ 1m. Piper has a good reputation of complying to the
government regulations throughout the past years.
In the above scenario how many criteria in order to record a provision
is met?
a. A reliable estimate can be made (Yes/No)
b. There is a probable outflow of economic benefits (Yes/No)
c. There is a present obligation from a past event (Yes/No)

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6) According to IAS 10 Events after the reporting period which of the

following would be an adjusting event for the year ended 31st December
20X5 where the financial statements were approved on 15th April 20X6?
a. A strike by the employees commenced on 1st July 20X5, demanding
a higher wage which stopped the production activities for a month
causing $ 500 000 loss.
b. The director proposed a reorganisation on the 2nd of January 29X6
which was approved by the board on 21st April 20X6.
c. The company has purchased a brand new machinery on 15th January
20X6 on credit basis. The payment for the machine should be done
during the month of March 20X6 and by that time the exchange rate
has reduced significantly.
d. The receipt of cash of $ 150 000 from the insurance company on 1st
March 20X6 related to a fire which occurred in October 20X5. The
amount was not recognised as at 31st December 20X5 due to the
uncertainty of the receipt.

7) True or False?
a. According to IAS 10 Events after the reporting period covers the
period from the end of the financial year to the date where the
financial statements are authorised for issue. (True/False)
b. According to IAS 10 Events after the reporting period non-adjusting
events are not adjusted or disclosed anywhere in the financial
statements. (True/False)

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8) To which of the following should Leo Co. require a provision for liability
to be created for the year ended 30th June 20X3?
a. Leo Co. continues the policy of refunding the money to the customer
if any good purchased is returned within 3 weeks.
b. The government has implemented news laws on health and safety
which will be in effect from 1st October 20X3, which require Leo to
upgrade some parts of his company which will cost $ 2m. At the year
end the board is waiting for the report on which parts to be exactly
upgraded and how.
c. Due to a recession of the economy predicted by the economists the
company expects to incur losses in the next year.
d. An employee is suing Leo Co. for an accident which happened during
work. However, the lawyers of the company stated that it is very
unlikely that the employee will win the case.

9) Which of the following events which occurred after the reporting date
but before financial statements are authorised for issue are non-
adjusting events?
a. Determining the sales proceeds of a building which was sold before
the year end.
b. A change in tax rate announced but affecting the current tax liability.
c. Discovery of fraud by the financial assistant which has occurred
during the year.
d. The decision to acquire a subsidiary.

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10) Hazel is facing a number of legal claims from her customers regarding
faulty goods. The total claim is $ 5 million. Hazel’s lawyers stated that
the customer has a 60% chance of winning the case. What amount should
be recognised as provision in related to the above scenario?
____________________

11) The following occurred after the reporting date but before the financial
statements were authorised for issue.
a. A settlement of an insurance claim related to a fire occurred during
the year. (Adjusting event/Non-adjusting event)
b. A public announcement on discontinuing an operation. The
announcement was made after the reporting date but the board
approved it during the year. (Adjusting event/Non-adjusting event)

12) Allocate the correct treatment in each situation for the year ended 31 st
March 20X6 ?
Frank took a legal action A legal action claiming a
against a supplier for compensation of $ 800 000
supplying faulty goods filed against Frank by an
claiming $ 500 000 which employee during March 20X5.
started in January 20X4 and Frank was advised by his
is now near completion. It is lawyers that its more likely that
more likely that Frank will the employee will win the case.
win the case.
Contingent
Liability
Provision
Asset
Contingent
Asset

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13) During the year Nico started drilling oil from an undersea oil field. To
restore the area Nico would have to incur a cost of $ 5 million in ten
years’ time in present value. These costs will have to be still incurred
even if Nico stops drilling before 10 years.
How should this $ 5 m be recorded in the current year financial
statements?
a. Should not be recorded as no costs have yet arisen.
b. Provision of $ 5 million and charging $ 5 million to administration
costs.
c. Provision of $ 5 million and capitalising $ 5 million to the cost of Oil
field.
d. Accrual $ 500 000 for the next ten years.

14) True or False?

a. A restructuring provision should only be made when the company
has a detailed plan for the restructuring. (True/False)
b. Provisions should be made for both legal and constructive
obligations. (True/False)
c. Estimated costs of redunding employees is included in the provision
for restructuring. (True/False)
d. Future values must be discounted to the present value when
recording provisions. (True/False)

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15) Festus [Link] extracting iron ore from iron ore mines and has a widely
publicised environment policy stating that it will incur a cost to
landscape the area once the extraction is over. Extraction in a particular
mine started on 1st January 20X5. At this time Festus Co. estimated that
it would cost $ 6 million to landscape the land in five year’s time. Festus
Co. has a cost of capital of 7% and the applicable present value factor is
0.713.
At what amount is this provision valued in the financial statements for
the year ended 30th September 20X5?
a. $ 4 053 405
b. $ 3 978 540
c. $ 5 580 000
d. $ 4 278 000

16) Octavian Co. sells electrical appliances under a six months warranty.
Any defect that arises in the appliances with in this period will be
repaired free of charge. The company has estimated that it will cost $ 4
million if all the goods sold have minor defects. If all the goods sold
have serious defects it will cost $ 12 million for repair. The normal
pattern would be 20% of the goods sold will have minor effects while
2% of the goods sold will have more serous defects.
What is the amount of provision required?
_______________________

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17) Following events occurred in the month of October 20X1. The year end
is 30th September 20X1.
Which TWO of the following require adjustments?
a. Dakota, a customer of Rachel’s company has died on a road
accident and it is very unlikely that the company would be able to
recover the outstanding receivable of $ 500 000
b. The board has taken a decision to sell a division of Rachel Co.
during September. However, the public announcement was made
in October.
c. Inventory that was on the stores as at 30th September costing $
800 000 has been sold to $ 900 000 during October.
d. A customer has filed a case against Rachel during October which
will most likely result in Rachel Co. loosing.

18) Bellona Co. is being sued by a customer for $ 5 million. The opinion of
Bellona Co’s lawyers is that there is a 15% chance of Bellona Co. losing
the case. The legal fee regarding the case was $ 800 000. How much
should be provided in related to the above scenario?
_____________________

19) Which TWO of the following can be treated as provisions?

a. An entity has acquired a new item of plant to produce a brand new
product and the staff require special training for this. It will cost $ 5
m and will occur in next financial period.
b. An entity has acquired a subsidiary but still has not made the public
announcement.
c. An entity has entered in to a non-cancellable contract to provide
high quality beauty products. New investigations show that it will
cost more to produce these products which will exceed the revenue
received.
d. An entity has a policy of cleaning the environment affected by its
production activities even though it is not legally obliged to do so.

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20) Fill in the blanks

a. Provision is a ___________________________ of uncertain timing and
uncertain amount.
b. Contingent Liability is a __________________ obligation that arises as a
result of past transactions and events whose existence will be
confirmed by occurrence or non-occurrence of one or more future
events not wholly with in the entity’s control.
c. Contingent asset can be recorded in the statement of Financial
Position if it is __________________________ that is more than 95% sure
that the company will receive the asset.

8. Taxation

1) The following information was extracted from Ariel Co.

Estimated income tax for the year ended 31st December 20X2 - $ 37 500
Income tax paid for the year ended 31st December 20X2 - $ 40 000
Estimated tax for the year ended 31st December 20X3 - $ 41 500
Choose the amounts recorded accordingly for the year ended 31st
December 20X3.
Statement of Profit or Loss Statement of Financial Position
$ 37 500 $ 37 500
$ 40 000 $ 40 000
$ 44 000 $ 44 000
$ 41 500 $ 41 500

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2) Mulan Co. has the following balances recorded in the trial balance as at
30th September 20X4.
Taxation $ 5 600 credit
Deferred tax $ 12 800 credit
The estimated provision for taxation on current year profits is $ 9 600.
Balance of the deferred tax account should be increased to $ 18 400
which includes the following property valuation.
Mulan revalued a building during the year which resulted in a gai of $
8,000. The rate of tax is 30%. What is the amount charged to profit or
loss statement relating to tax?
a. $ 800
b. $ 9 600
c. $ 18 400
d. $ 7 200

3) Income tax payable for the year $ 36 000

Under provision (previous year) $ 2 700
Opening provision for deferred tax $ 1 560
Closing provision for deferred tax $ 1 920
How much is charged to Statement of profit or loss?
_______________________

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4) Belle has the following balances included on its trial balance at 30 th

September 20X3.
Taxation $ 12 000 credit
Deferred taxation $ 36 000 credit
At the year end the estimated taxation for the current year profit is
$ 45 000
The carrying amount of the non-current assets exceed the tax written
down value by $ 90 000. The tax rate is 30%.
How much is charged to statement of Profit or Loss in regard to tax?
a. $ 84 000
b. $ 24 000
c. $ 69 000
d. $ 36 000

5) The trial balance of Aurora Co. as at 31st December 20X3 showed a credit
balance of $ 720 000 on current tax and $ 2.34 million on deferred tax.
A property was revalued during the year giving rise to a deferred tax of
$ 3 375 000. This has been included in the deferred tax provision of $
6.075 million as at the year end. The income tax liability for the year end
is estimated at $ 17.46 million. What will be the income tax charge for
the year in the profit or loss statement?
_________________________

6) Jasmine Co. has a $ 560 000 debit balance of current tax and $ 6.72
million credit balance of deferred tax. The provision for the income tax
for the year is $ 3.6 million and the required deferred tax provision is $
4.48 million. Of this $ 0.96 million related to property revaluation. What
is the income tax charge recognised in Statement of Profit or Loss?
a. $ 800 000
b. $ 2 800 000
c. $ 960 000
d. $ 1 920 000

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7) Eric Co. purchased a new machinery on 1st October 20X8 for $ 600 000
which had a residual value of $ 120 000, and an estimated useful life of
8 years. It is being depreciated over the straight-line basis. Tax
allowance of 50% of the cost of the asset can be claimed in the year of
purchase, as depreciation is not allowed for tax purposes. Income tax
rate is 30%. What amount of deferred tax should be recognised for the
year ended 30th September 20X9?

$ 49 500 Asset

$ 72 000 Liability

8) Following information was extracted from Arendelle Co.

20X2 20X1
Deferred tax $ 217 m $ 98 m
Taxation $ 91 m $ 112 m
The tax charge in the statement of Profit or Loss for the year ended 31st
December 20X6 is $ 189 m. What amount of tax was paid during the
year?
_____________________

9) Following information related to Olaf Co.

At 1st July 20X3 the carrying amount of non-current asset s exceeded
their tax written down value by $ 255 000. For the year ended 30th June
20X4 the entity charged a depreciation of $ 135 000 to its financial
statements and claimed depreciation for tax purpose of $ 150 000.
During the year the revaluation surplus by revaluing the property was
$ 75 000. The tax rate is 30%
What is the provision for deferred tax for the year?
a. $ 72 000
b. $ 103 500
c. $ 94 500
d. $ 81 000
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10) Tiara Co. has a debit balance of $ 1.68 m of current tax and a credit
balance of $ 4.32 m on deferred tax at the beginning of the year. The tax
charge for the current year is estimated at $ 12.96 m. The carrying
amount of the non-current assets exceeds their tax base by $ 10.4 m.
The income tax rate is 30%. What amount will be charged to statement
of profit or loss for the year related to the income tax?
a. $ 14.64 m
b. $ 10.08 m
c. $ 12.48 m
d. $ 13.44 m

B.9 Reporting Financial Performance

1) At 1st October 20X7 Bella owned a property which is held under cost
model with a carrying amount of $ 320 000. It had a remaining useful
life of 16 years. On 1st April 20X8, Harry decided to sell the property and
correctly classified it under held-for-sale. It was reported that the fair
value less costs to sell of that property as at that date was $ 316 200
which had not changed at the year end as at 30th September 20X8. At
what amount should this asset be recorded in the statement of financial
position as at 30th September 20X8?
a. $ 310 000
b. $ 300 000
c. $ 306 000
d. $ 316 200

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2) According to IFRS 5 Non-current assets held for sale and Discontinued

operations which of the following is NOT a criterion to classify an asset
under held for sale?
a. The asset should be sold within 12 months.
b. The asset is available to sell in the immediate condition.
c. There should already be an agreement with a customer that he will
buy the asset within a year.
d. The entity is committed to the plan of selling the asset.

3) As at 30th September 20X5 Edward Co. had an item of machinery with a

cost of $ 31 500 which had a useful life of 15 years. As at that date the
accumulated depreciation related to machine was $ 4 200. On 1st April
20X6 Edward decided to sell the machine and marketed it at a price of
$ 29 400. The expected costs to sell were $ 700. Recent investigations
show that for this type of machinery the actual selling price achieved is
10% less than the price at which it is marketed. At what amount should
the machinery should be recorded in Edward’s Financial statements as
at 30th September 20X6?
a. $ 29 400 c. $ 26 250
b. $ 25 760 d. $ 25 200

4) Alice disposed the following two lines of business with in the year which
ended on 31st December 20X3.
1. Sector Rose operated in Wakanda – Sector Rose contributed only up
to 0.8% of the revenue of Alice and she has no operations in Wakanda
other than Rose.
2. Sector Lily operated in Gotham City – Sector Lily sold a totally
different product compared to the other components of Alice and
contributed up to 20% of the total revenue.
Which of the above can be classified as a discontinued operation?
a. Sector Lily only c. Both sectors
b. Sector Rose only d. Neither of the two sectors

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5) Following information relates to a held-for-sale asset in Jasper Co.

Carrying amount $ 270 000
Fair value $ 240 000
Costs to sell $ 15 000
What amount is recorded in regard of the held-for-sale asset as at the
year end?
___________________________

6) Charlie Co has decided to sell a factory and made the public

announcement on 1st June 20X6. Renee Co will purchase the factory on
16th July 20X6. Following information related to the factory which will be
accurate for both at 5th June 20X6 and 30th June 20X6.
Carrying amount as at 30/5/20X6 $ 2.88 m
Fair value $ 3.84 m
Value in use $ 3.52 m
Costs to sell $ 0.48 m
Depreciation for December $ 0.32 m
What is the carrying amount of the factory as at 30th June 20X6?
a. $ 2.56 m
b. $ 3.36 m
c. $ 3.04 m
d. $ 2.88 m

7) What is the main reason for presenting discontinued operations

separately with in financial statements?
a. To improve the verifiability.
b. To make the financial statements easier to understand.
c. To show an accurate valuation of the business.
d. To enhance the predictive nature.

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8) What are the TWO situations that will allow an entity to change its
accounting policy?
a. If a new accounting policy is more understandable and easier to use.
b. The board of directors have collectively agreed that a new policy will
be favorable for the business.
c. If a policy change is required by an IFRS standard.
d. If such a change will allow a more reliable and relevant presentation
of transactions.

9) Esme Co. has found a material error that has occurred in the previous
financial period. How should Esme treat that error in the current
financial statements according to IAS 8 Accounting Policies, Changes in
Accounting Estimates and errors?
a. Restate the comparative amounts in the previous financial
statements.
b. Restate the comparative amounts in the previous financial
statements and disclose the nature of the error in a note.
c. By making an adjustment in the current statements as a movement
in reserves.
d. By making an adjustment in the current statements as a movement
in reserves and disclosing the nature of the error in a note.

10) Which of the following concepts ensure that excess dividends are not
paid in times of changing prices?
a. Capital maintenance
b. Going Concern
c. Prudence
d. Materiality Concept

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11)
The useful life of a machine has Change in Change in
been reduced to 5 years from 8 Accounting Policy Accounting
years. Estimate
Classifying amortization Change in Change in
expenses as administrative Accounting Policy Accounting
expenses rather than cost of Estimate
sales expenses.
Increased the allowance for Change in Change in
doubtful debts from 6% to 8% Accounting Policy Accounting
Estimate
Depreciation method is changed Change in Change in
to straight line from reducing Accounting Policy Accounting
balance method. Estimate

12) Which of the following statements regarding IFRS 13 Fair Value

Measurement is true?
a. Level 2 inputs include quoted prices for identical products in active
market.
b. Level 1 inputs are likely to need a lot of adjustments before they
become useful hence are the least reliable information.
c. Level 3 inputs are based on the best information which available in
the market.
d. Level 1 inputs include quoted prices for similar assets and liabilities
in active market.

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13) Which TWO of the following are change in accounting policy according
to IAS 8 Accounting Policies, Changes in Accounting Estimates and
errors?
a. Change in valuation of inventory from FIFO to weighted average
cost.
b. Classifying commission income as revenue rather than operating
income.
c. Changing the policy of acquiring non-current assets on cash basis
and start leasing them.
d. Revaluing the inventory of a subsidiary according to the policy
followed by the parent company.

14) Match accordingly

Accounting Policy Prospectively

Accounting Estimate Retrospectively

15) Choose the correct answer.

a. Using revaluation model for assets which were previously held at
cost is a change in ___________________________ (Accounting estimate,
Accounting policy, neither)
b. Reducing the value of inventory from cost to net realizable value due
to a valid adjustment is a ____________________(Accounting estimate,
Accounting policy, neither)

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16) On 1st October 20X5 Emmet Co. had 6 million shares in issue. On 1st
March 20X6 Emmet Co made a bonus share issue of 1 share for every 3
shares. On 30th June 20X6 further 2 million shares were issued at full
market price. Emmet had a profit after tax of $ 4 million. What is the
basic Earning per share (EPS) figure for the year ended 30th September
20X5?
a. $ 0.52
b. $ 0.47
c. $ 0.57
d. $ 0.50

17) Why is EPS a more reliable indicator of underlying performance than

the trend of the net profit?
a. The comparative EPS is restated while the previous year’s profit is
not adjusted when there is a change in accounting policy.
b. Net profit can be manipulated by use of different accounting policies
but EPS cannot be manipulated.
c. EPS takes into account the additional resources available to earn
profits when new shares are issued for cash, whereas net profit
does not.
d. The diluted EPS figure is a forecast of profit for future profits.

18) Mike Co. had 3.8 million shares in issue as at 1st January 20X&. On 1st
April Mike made a 1 for 5 rights issue at a price of $ 1.40 when the
market price of a share was $ 2.00. The profit after tax was $ 5 million.
What is the EPS as at 31st December 20X7?
______________________

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19) Garrett Co. had a profit for the year ended 30th September 20X5 of $ 4
million. On 1st October 20X3 the company had 8 million shares in issue
and did not make any further issues. At the year end Garrett had 2
million outstanding options to buy shares at $ 3 each. For the year
ended 30th September 20X5 the average market value of a Garrett’s
share was $5.
What is the diluted Earnings per share of Garrett as at 30th September
20X5?
a. $ 0.50
b. $ 0.29
c. $ 0.45
d. $ 0.43

20) Which TWO of the following need to be removed when calculating the
earnings figure to be used in the EPS calculation?
a. Irredeemable preference share dividends
b. Profit attributable to the Non-controlling interest
c. Redeemable preference share dividends
d. Ordinary dividends

21) Charles Co. has 4.8 million shares as at 30th June 20X9. On 1st of July
20X8 Charles has issued a convertible bond with an initial value of $ 2
million and an interest rate of 8%. The bond is convertible in 10 years,
with 50 shares issued for every $ 100 of the bond. Charles Co’s profit
for the year amounted to $ 8. 4 million and the tax rate is 28%.
What is the diluted Earnings per share figure?
a. $ 1.78
b. $ 1.75
c. $ 1.48
d. $ 1.47

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22) During the year Makenna made a 1 for 3 rights issue at $ 1.3 when the
market price was $ 1.8. Last year’s EPS was $ 0.72. Assuming there
were no other share issues what is the comparative restated EPS
figure?
_________________________

23) Which of the following are included with in the diluted EPS calculation?
a. Equity share issued during the year at the market price.
b. Issue of a convertible bond.
c. A 1 for 4 rights issue at $ 1.30 when the market price of a share is $
2
d. The granting of a share option which was exercisable in another 5
years.

24) Alistair Co. had $ 4.5 million of equity shares of $ 0.50 each in issue as
at 1st July 20X6. No new shares were issued during the period but there
were exercisable share options to purchase 5 million equity shares at
$ 2.5 each. The market price of a share during the year was $ 4 per
share. Alistair had a profit after tax of $ 7.5 million for the year ended
30th June 20X7. What is the diluted EPS?
______________________

25) What figure should be used as Earnings in the EPS calculation in an

entity which owns a no. of subsidiaries?
a. Net profit for the year in the consolidated statement.
b. Total Comprehensive income in the consolidated statement.
c. Profit attributable to the parent shareholders.
d. Profit attributed to the Non-controlling interest.

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B.10 Revenue

1) Randall Co is a construction business which recognize profit based on

work certified as a proportion of total contract price. It entered in to a
long term contract as a t 1st October 20X3. The total contract price was
$ 54 million. As at 30th September 20X4 the costs incurred were $ 46.2
million and it was estimated further $ 19.8 million would need to be
spent to complete the contract. As at 30th September 20X4 a surveyor
measured the work completed as $ 37.8 million. Select the correct
values.
Revenue Cost of sales
$ 37.8 million $ 46.2 million
$ 34.2 million $ 49.8 million

2) Charlotte Co. has entered in to a long-term contract of constructing a

building and will satisfy the obligations over time. The progress towards
satisfying the obligation at the year end was 45%. The total contract
price was $ 6.4 m and Charlotte has spent $ 3.6 million to date and
further costs of $ 4.4 m is expected to be incurred regarding the
contract. To date the customer has paid $ 2.4 m.
What is the net liability that should be recorded in Charlotte’s statement
of Financial position?
_________________________

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3) Which of the following items has been correctly included in Peter Co’s
revenue for the year ended 30th September 20X6?
a. $ 470 000 relating to a surplus land owned by Peter Co.
b. $ 3.5 million in relation to a stock of goods sold by Peter on behalf
of Tan Co. where Peter acted as an agent and received 50%
commission.
c. $ 650 000 relating to a sale of an item of plant whose cost was $
800 000 where $ 150 000 relates to the servicing of the plant in next
3 years, hence not included in revenue.
d. $ 500 000 relating to a stock of goods sold on credit to a customer
on 31st December 20X5 the credit is due after 5 years. Interest rate
is 5%.

4) Santiago Co. has entered in to a contract to build a machine for a

customer. Santiago recognizes the performance towards completion
using an output method, based on work certified compared to contract
price.
Contract Price $ 750 000
Cost incurred to date $ 397 500
Estimated costs to complete $ 127 500
Work certified to date and invoiced $ 450 000

What is the value of the contract asset that will be recorded in the
statement of Financial position?
a. $ 112 500
b. $ 75 000
c. $ 142 500
d. $ 82 500

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5) Renata Co. sells air conditioning machines, and also offers installation
and technical support services. Renata sold a machine on 1st August
20X5 charging a price of $ 160, including installation and one year
service. The whole package of products was purchased by the
customer. The selling price of individual products are given below.

Air conditioning machine $ 120

Installation $ 48
One year service $ 72

How much revenue should be recorded regarding the above

transaction as at 31st March 20X6?
_________________________

6) Heidi Co. enter in to a contract to construct a building on 1st April 20X3.

The contract price is $ 3.25 m. The costs incurred up to 31st March 20X4
is $ 1.04 m. Further costs of 1.56 m is expected to be incurred until the
completion. The contract progress is measured on the basis of amount
billed compare to the contract price. Heidi received $ 1.17 m from the
customer which also the total amount billed.
What is the contract asset recorded in Statement of Financial position
as at 31st March 20X4?
____________________________

7) Demetri Co. is a construction business. The following information relates

to a long-term contract as at 31st March 20X8. The company recognizes
progress based on work certified based on work certified as a
proportion to total contract value.
Contract Price $ 270 000
Cost incurred to date $ 175 500
Estimated costs to complete $ 27 000
Work certified to date $ 243 000

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In the year to 31st March 20X7 the company recognized revenue of

$ 81 000 and profit of $ 20 250 in respect of this contract. What profit
should appear in Demetri’s statement of Profit or Loss as at 31st March
20X8 in respect of this contract?
a. $ 60 750
b. $ 67 500
c. $ 64 800
d. $ 40 500

8) Aro Co. sold an item of inventory to a bank on 1st July 20X4 for
$ 475 000. The cost of the inventory as at this date was $ 190 000. The
fair value of this inventory was $ 855 000 and is expected to increase
over the next 3 years. Aro has the option to repurchase the inventory
for $ 632 225. The interest rate is 10%. How much finance cost should
be recorded in the Statement of Profit or Loss for the year ended 31 st
March 20X5?
_____________________________

9) What is the correct order of the steps in recognizing revenue in

accordance with IFRS 15 Revenue from contracts with customers?
Step Step No.
Identify the contract
Identify the separate performance obligations
within a contract.
Allocate the transaction price to the performance
obligations in the contract.
Determine the transaction price.
Recognize revenue as a performance obligation is
fulfilled.

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10) Caius Co. commenced a contract to build a hospital during the year
ended 31st December 20X6. The contract price was $ 1 275 000. The total
expected costs to complete the contract is $ 680 000. The company
recognizes progress on the basis of work certified compared to the
contract price. The following figures are relevant to the above contract.
20X4 20X5
Revenue 382,500 ?
Cost of sales (204,000) ?
Profit 178,500 ?
Cost incurred to date 276,250 488,750
Work certified to date 382,500 892,500
What should Caius include in its statement of profit or loss for the year
ended 31st December 20X5 as cost of sales?
a. $ 272 000
b. $ 212 500
c. $ 476 000
d. $ 204,000

11) Which of the following is correctly included in revenue according to the

IFRS 15 Revenue from contracts with customers?
a. Sales of $ 530 000 stock of electrical appliances. The customer
agreed to pay the full amount a year later. The cost of capital is 10%
b. Sales proceeds of $ 400 000 received from selling an item of
machinery which is no longer required by the entity.
c. $ 350 000 received from selling a stock of goods on behalf of
another customer where the entity is entitled to a commission of
10%.
d. Recording a sale of an air conditioning machine for $ 500 000. The
amount invoiced and received from the customer is $ 600 000 which
includes $ 100 000 for ongoing service for next 5 years.

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12) Kachiri Co. entered in to a contract with a customer on 1st February 20X1.
The contract has a contract price of $ 48 million. Following information
are available.
Cost incurred to date 19.2 m
Estimated costs of completion 21.6 m
Progress as at 31 January 20X2
st
45%
What amount is recorded as cost of sales in the financial statements
for the year ended 31st January 20X2?
a. $ 36 800 000 b. $ 18 360 000
c. $ 19 200 000 d. $ 21 600 000

13) Senna Co. is a refrigerator retailer. On 1st October 20X3 Senna sold a
refrigerator to Zafrina for a cost of $ 24 288. Zafrina paid $ 12 144 (half
the cost) immediately on the same date and will pay the remaining
amount two years later on 30th September 20X5. The cost of capital is
10%.
What amount in total should Senna credit to the statement of profit or
loss in related to the above transaction as at 31st September 20X4?
__________________________

14) Tanya Co. entered into a contract to build a new machine for Irina Co.
Irina Co on 1st May 20X0. will obtain the control of the asset as it is
constructed. The performance obligations are measured according to
the certificates issued by the surveyor. As at 30th April 20X1 contract
was certified by the surveyor as 35% complete.
The total contract price was $ 1 568 000. Costs to complete are 784 000.
$ 448 000 has been invoiced to the customer and has not yet been paid.
Select the correct options.

Contract Asset $ 134 400

Contract Liability $ 100 800

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15) On 24th January 20X1 Carlisle Co. received an order from Esme for
products with a sales value of $ 414 000. Esme has also deposited
$ 41 400. On 31st January 20X1 Carlisle has not dispatched any goods or
has completed credit checks. What amount of revenue should be
recognized Carlisle’s financial statements for the year ended 31st
January 20X1?
a. $ 414 000
b. $ 41 400
c. $ 372 600
d. $ nil

B.11. Government Grants

1) Jacob Co. receives a government grant of $ 5 m on 1st October 20X7 to

purchase a new machine for the manufacturing purposes. The asset
has a useful life of 10 year. The grant will have to be repaid if the asset
was to be sold within 8 years which the entity does not intend to do.
What is the deferred income liability balance as at 30th September 20X8?
_________________________

2) Which TWO of the following are acceptable methods of accounting for a

government grant relating to an asset according to IAS 20 Accounting
for Government Grants and Disclosure of Government Assistance?
a. Add the grant to the carrying amount of the asset
b. Credit the amount received to profit or loss
c. Set up the grant as deferred income
d. Deduct the grant from the carrying amount of the asset

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3) Sam Co. has received a government grant of $ 336 000 on 1st January
20X6 which was correctly recorded as at that date. This grant was
received to cover 50% of the cost of new item of plant. The machinery
will be depreciated over five years and the residual value is $ 21 000.
Record the correct double entries along with the correct amounts.

Dr. Cr.
Other Income
Deferred Income
Depreciation expenses
Accumulated depreciation

4) On 1st April 20X8 Leah Co. received a government grant of $ 2 m on the

On 1st April 20X8 Leah Co. received a government grant of $ 2 m on the
condition that they would employ at least 500 staff each year for the
next 4 years. Due to lack of demand and reduction of customers on 1st
of April 20X9 Leah decided that she no longer need to increase more
staff. The grant is breached and required full repayment. Which of the
following is the correct entry to record the above situation?
a. Reduce deferred income by $ 1.5 m and recognize a loss of
$ 500 000
b. Reduce deferred income by $ 1.5 m
c. Reduce deferred income by $ 2 m
d. Reduce deferred income by $ 2 m and recognize a gain of $ 500 000

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5) Seth Co. received a government grant of $ 975 000 to buy an asset

costing the same amount on 1st July 20X5. The asset has a ten year
useful life and is depreciated on a 20% reducing balance basis. Seth Co.
account for all grants using the deferred income method. What amount
of income will be recognized for the year ended 30th June 20X6?
a. $ 975 000
b. $ 195 000
c. $ 325 000
d. $ 97 500

B.12. Foreign currency transactions

1) Embry Co. took out a bank loan for 6 million Yuan on 1st January 20X4.
It repaid 1.5 million Yuan on 30th November 20X4. The year end is 31st
December 20X4 and the functional currency is US dollars.
Yuan : $ 1
1st January 20X4 6.0
30th November 20X4 5.0
31st December 20X4 5.6
What is the total loss arising at the year end? (to the nearest ’000)
_______________________________

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2) In relation to IAS 21 The effects of changes in Foreign Exchange Rates

which TWO of the following statements are correct?
a. Both monetary and non-monetary assets are in foreign currency are
retranslated at the reporting period.
b. Non-monetary items measured at historical cost in a foreign
currency are not retranslated at the reporting date.
c. The gains and losses arising on the retranslation is are recognized
in the statement of profit or loss.
d. An intangible asset is a monetary item

3) Collin Co. purchased a land overseas at a cost of 16.5 million Yen on 18th
June 20X9. The land is accounted under IAS 16 and is valued under cost
model. The fair value of the land as at 31st December 20X9 was 17.6
million Yen. The functional currency of Collin Co. is US dollars and the
year end is 31st December. Exchange rates are as follows,
Yen : $1
As at 18th June 20X9 3.0
As at 31st December 20C9 2.0
Average rate for the year 2.5
What is the carrying amount of the land as at 31st December 20X9?
a. $ 6.6 million
b. $ 8.25 million
c. $ 5.5 million
d. $ 8.8 million

4) Which one of the following correctly defines Functional Currency?

a. The currency of the country where the entity is headquartered.
b. The currency in which the financial statements are presented.
c. The currency of the primary economic environment of the entity.
d. The currency in which operating costs are incurred.

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5) Renesmee Co. buys a machine for 15 million Dinars on 1st October 20X7.
The machine is held under cost model and has a useful life 20 years.
The entity has a year end of 30th September and the functional currency
is US dollars. Exchange rates are as follows,
Dinars : $1
1st October 20X7 2.0
30th September 20X8 3.0
Average rate for the year 2.5
What is the carrying amount of the asset at the year end?
a. $ 7.275 m c. $ 7.2 m
b. $ 7.125 m d. $ 4.725 m

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Syllabus Area C: Analysing and Interpreting the Financial

Statements of Single Entities and Groups.

1) Which of the following ratios is likely to be most relevant for a not for
profit charity organisation?
a. Return on Equity
b. Earnings per share
c. Net profit margin
d. Acid test ratio

2) Garfield Co. has $ 4 million of $ 0.50 shares in issue for the year ended
30th April 20X5. The current market price of a share is $ 4.50. The total
dividend paid during the year amounted to $ 2 880 000.
What is the dividend yield for the year ended 30th April 20X5 to one
decimal place?
________________________

3) Which of the following is NOT a one-off item which will affect the
comparability of the ratios?
a. Acquiring a new subsidiary which produce entirely different goods
than the entity.
b. A new website launched to collect orders online so the deliveries
can be more efficient and more diverse resulting in higher delivery
costs.
c. A flood during the year which has damaged the stock in stores.
d. Closing down of a division and redunding the employees.

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4) Sonic Co. has obtained a bank loan on 1st March 20X4. The initial
proceeds of the loan was $ 1 625 000. This is after the payment of issue
costs of $ 162 500. The effective rate is 8% while the coupon rate is 6%.
The bank requested that Sonic should maintain an interest cover of 9
times.
What is the minimum operating profit that should be maintained by
Sonic to meet the interest cover specified by the bank as at 28 th
February 20X5?
a. $ 1 170 000
b. $ 877 500
c. $ 292 500
d. $ 1 287 000

5) Are the following limitations of applying ratio analysis to financial

statements or not?
a. Different accounting policies can be used to calculate the same
ratio which affect the comparability. (Limitation/Not a limitation)
b. Complex and one- off items are omitted from financial statements
(Limitation/Not a limitation)
c. The accounting figures can be manipulated by the directors in a way
which is favorable for them. (Limitation/Not a limitation)
d. The events which are not covered by the IFRS standards are
omitted from the financial statements. (Limitation/Not a limitation)

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6) The following information relates to Shrek Co. for the year ended 30 th
September 20X1.
Cash Cycle as at 30th September 20X1 65 days.
Year end trade payables $ 350 000
Purchases on credit $ 2.5 million
Inventory turnover 10 times
Cost of sales $ 2 million
What is Shrek Co’s Trade receivables collection period for the year
ended 30th September 20X1?
______________________

7) Which TWO of the following will lead to an increase in trade receivables

collection period?
a. Due to the recession faced by the economy some of the trade
receivables are struggling to pay on time.
b. A large one-off credit sale was completed just before the year end.
c. The company has recently opened a no. of retail outlets in different
cities.
d. The entity has launched a website where the customers can buy the
goods directly from the website.

8) Which of the following current year events will lead to a reduction of an

entity’s operating profit margin compared to last year?
a. Recording commission income as revenue rather than operating
income.
b. A reduction in the allowances for expected losses from trade
receivables.
c. Changing the inventory valuation policy from FIFO method to
Weighted Average Cost method during a time of inflation.
d. An increase in gearing leading to a higher interest cost.

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9) Are the following statements true or false?

a. Diluted EPS is a warning to shareholders that EPS calculation could
have been lower. (True/False)
b. Diluted EPS is a prediction of the future EPS figure. (True/False)

10) Beauty Co. and Beast Co. operates in the same industry. They both have
a return on capital employed ratio (ROCE) of 12% in the current year. Both
the companies have the same year end. Beauty Co. has a net profit
margin of 35% and Beast Co. have a net profit margin of 2.5%.
What is the difference between these two companies even though they
have the same ROCE ratio?
a. Beauty is a not for profit company while Beast is a for profit company.
b. Beauty operates at the low end of the market while Beast operates
at the higher end.
c. Beauty operates at the high end of the market while Beast operates
at the lower end.
d. Neither of the above.

11) The following information is available.

Revenue 343 000
Debt 105 000
Payables 52 000
Cost of sales 147 000
Operating expenses 25 000
Equity 500 000
Calculate the return on capital employed (ROCE) ratio?
a. 28.3%
b. 34.2%
c. 36.5%
d. 26%

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12) Elsa Co. had an inventory turnover of 5 times. The receivable collection
period was 56 days. Cost of the sales was $ 1 679 000. The cash cycle was
98 days. Credit purchases for the year was $ 978 000.
What is the trade payables payment period of Elsa Co. for the nearest full
day?
___________________

13) Which of the following is a reason for gross profit margin to decrease?
a. Some plant and equipment has been disposed during the year which
has led to a decrease of depreciation expense.
b. Costs to deliver the products to the customers has increased due to
a rise in prices of fuel.
c. The sales price has been cut down to half due to a recession faced by
the whole economy.
d. The entity was able to purchase raw materials at a lower price due to
the good relationships with the suppliers.

14) Which of the following will increase the gearing of a given entity?
a. A rights issue of equity shares of 1 for 5 made during the year.
b. Revaluing a property upward by $ 600 000
c. An environmental provision was made during the year regarding a
new project to extract oil from an oil deposit.
d. An item of machinery was acquired under a lease agreement.

15) Which of the following ratios will be least relevant for an entity which
rent out commercial properties?
a. Return on capital employed
b. Inventory turnover period
c. Non- current asset turnover
d. Average rent earned

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16) Jewel Co. has reported a net profit of $ 1 850 000 for the year ended 31st
March [Link] has $ 3 500 000 $ 0.50 equity shares in issue. The current
market price of a share is $ 2.3.
What is the Price Earnings (P/E) ratio for the year?
___________________________

17) Which of the following statements regarding a not-for-profit company is

true?
a. The current value of its property is not relevant
b. The financial statements are not essentially prepared.
c. Using ratio analysis to interpret the financial statements is
meaningless
d. EPS calculation is not relevant as it does not have shareholders.

18) The following information are available.

Receivables $ 520 000
Payables $ 422 000
Inventory $ 680 000
Deferred tax $ 85 000
Cash $ 560 000
Overdraft $ 47 000
Calculate the quick ratio as per the above information?
a. 1.2:1
b. 2.0:1
c. 1.9:1
d. 1.1:1

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19) Suppose Scooby Co. is planning to takeover Shaggy Co. Which of the
following information of Shaggy Co. will be available to Scooby Co. in
order to make this decision?
a. Recent financial statements of Shaggy Co. (Available/Not available)
b. Information of different regions Shaggy Co. is operating in.
(Available/Not available)
c. Internal plans of Shaggy Co. as to which new industries the company
is going to expand. (Available/Not available)
d. The new proposals that has been accepted by the board of directors
of Shaggy Co. which are still not in effect. (Available/Not available)

20) Lightyear Co. is a toy business which has been commenced recently. It
has been funded through equity investments and debt investments such
as bank loans. The company is manufacturing toys in its own premises.
The company has still not started trading the toys in the market. It is
planning to start selling toys in the next accounting period. Which of the
following ratios is most relevant for the current year?
a. Gross profit margin b. Price Earnings ratio
c. Current Ratio d. Receivables Collection period

21) Woody Co. has a dividend yield of 12%. The dividend yield of the industry it
is operating in is 20%. Which ONE of the following statements is correct
regarding the dividend yield of Woody?
a. It can be expected that the dividend per share of Woody will grow in
the future more than the dividend per share in the industry.
b. It can be expected that the dividend per share of Woody will reduce in
the future to a lesser amount than the dividend per share in the
industry.
c. Dividend Yield is calculated by Dividends/[Link] shares.
d. We cannot make decisions regarding the future growth of dividend by
analyzing the Dividend Yie

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22) Which TWO of the following indicators can be used to assess the
performance of a not-for -profit entity?
a. Return on Capital Employed ratio.
b. Efficiency in managing the costs of the entity.
c. How successful the entity is in achieving its objectives.
d. Earnings per share ratio

23) Candy Co. is an entity selling ice creams. Its activities are highly seasonal
and most sales are expected only in Summer season which is from 1 st
April to 30th September. For the year ended 30th September 20X6 the
company decided to compare its operating performance with the industry
and obtained some industrial averages.
Which TWO of the following will invalidate the comparison between Candy
Co. and the industry.
a. The properties of Candy Co. is held under the cost model while it is
aware that the industry uses revaluation model.
b. The whole economy is facing a recession during the year.
c. Candy discovered a fraud that took place during the year and
corrected it.
d. The sector average has been compiled from companies whose year
end is 31st March.

24) Increasing the _____________________ will reduce the cash cycle of an

entity.
What is the most suitable for the above blank?
a. Trade receivables collection period
b. Trade payables payment period
c. Inventory turnover
d. Inventory holding period

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25) In relation to an impairment review carried out by Bunny Co. it was

discovered that the value of the property of the entity has fallen
significantly during the current year. The impairment loss is recognized
in its financial statements.
The effect of this impairment will
_____________________(Increase/Decrease) gearing ratio and
_____________________(Increase/Decrease) Return on Capital Employed
ratio.

26) Which of the following is a reason for the inventory holding period to
increase?
a. The demand for the product has been high in the current period.
b. The entity decided to sell the products at half the price as a
promotion.
c. Higher sales volume following a successful advertising campaign.
d. Obsolete Inventory lines

27) What is the effect of the credit purchases of inventory on current ratio
and quick ratio?
a. Both current ratio and quick ratio increases
b. Current ratio will increase and Quick ratio will decrease.
c. Current ratio will decrease and Quick ratio will increase.
d. Both current ratio and quick ratio decreases.

28) Following information relates to Stuart Co.

Gross profit margin 25%
Inventory turnover 15.2
ROCE 19.8%
Asset turnover 5.3 times
What is the operating profit margin for the period (to the nearest two
decimal places)?
________________________

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29) Profit after tax of Donald Co. for the year ended 31st March 20X7 is $ 6 m.
It also had $ 650 000 $ 0.50 ordinary shares in issue. It pays a dividend
of $ 3.5 per share. Calculate the dividend cover of the company?
_____________________________

30) How will the following actions affect gearing?

Recording a sale and leaseback Increase No effect Decrease

transaction as a sale
Treating a lease as a short term Increase No effect Decrease
rental agreement
Repaying a loan at the year end Increase No effect Decrease
and borrowing the same
amount at the beginning of the
next year
Renegotiating a loan to secure a Increase No effect Decrease
lower interest rate

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Syllabus Area D: Preparation of Financial Statements

1) Bert has acquired 80% of the share capital of Ernie on 1st October 20X3.
Part of the purchase consideration was $ 270 000 cash which was to be
paid on 1st October 20X6. The cost of capital was 10%.
What will be the deferred consideration liability as at 30th September
20X5?
a. $ 202 854
b. $ 245 455
c. $ 270 000
d. $ 223 139

2) Sherlock acquired 80% of Watson on 1st July 20X5. The financial

statements for the year ended 31st March 20X6 showed a cost of sales of
$ 11.76 m and $ 9.28 m for Sherlock and Watson respectively. From the
date of acquisition to the year end Watson sold goods to Sherlock for $
3.44 m at a mark up of 10%. Sherlock’s inventory at the year end included
$ 1.76 m of such inventory.
What is the cost of sales figure to be shown in the consolidated statement
of profit or loss for the year ended 31st march 20X6?
a. $ 15.12 m
b. $ 16.16 m
c. $ 15.28 m
d. $ 15.44 m

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3) On 1st January 20X2, Mickey purchase 75% of Minnie’s 90 million shares.

The consideration paid consisted of two elements. First 1 share was issue
for every 5 shares acquired in Minnie. Further $ 1 was paid for every
share acquired. At the date of acquisition the market price of a share in
Mickey was $ 3.5. At the acquisition date Minnie had retained earnings of
$ 55 million.
What is the total amount of consideration paid by Mickey on1st January
20X2?
______________________________

4) Tom bought 65% of the share capital of Jerry on 1st April 20X8. The
financial statements of Jerry as at 30th June 20X8 showed an equity
share capital of $ 500 000 and retained earnings of $ 350 000. The profit
for the year of Jerry was calculated to be $ 55 000.
What were the net assets of Jerry at the date of acquisition?
a. $ 850 000
b. $ 905 000
c. $ 836 250
d. $ 891 250

5) Which of the following statements about consolidated financial

statements is NOT true?
a. It is not necessary for all the companies in a group to have the same
year end in order to prepare consolidated financial statements.
b. All companies with in a group should adopt same accounting policies
in their individual financial statements.
c. Only the profit relating to inventory which is remaining in the group at
the year end should be eliminated from consolidated financial
statements regarding intra group sales.
d. For consolidation it is acceptable to use financial statements of the
subsidiary where the year end differs from parent by 3 months.

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6) Bat acquired a 70% holding in Robin on 1st April 20X1. As per the financial
statements for the year ended 30th September 20X1, Bat and Robin had
finance costs amounting to $ 110,000 and $ 38 500 respectively. At the
acquisition date Bat gave Robin a 8% loan of $ 275 000. The interest on
loan is correctly accounted in Robin’s individual statements.
What are consolidated finance costs for the year ended 30th September
20X1?
a. $ 123 750 b. $ 118 250
c. $ 126 500 d. $ 137 500

7) Which TWO of the following situations will represent control over the
investee?
a. Owning 40% of the equity shares and 85% of the preference shares
of the investee.
b. Owning 45% of the shares but being able to elect 5 of the 9 directors.
c. Owning 55% equity shares and having the majority of voting rights
within the investee.
d. Owning 52% of the equity shares, but the constitution requires that
decisions need unanimous consent of shareholders.

8) Which of the following will affect the profit attributable to non-controlling

interest in the consolidated statements if NCI is measured at fair value?
The fair value of one of the machinery Affect the Does not affect
owned by the subsidiary is $ 700 000 profit the profit
which is above its carrying amount. It attributable to attributable to
has a remaining life of 7 years. NCI NCI
Due to experiencing consecutive losses Affect the Does not affect
the goodwill has been impaired by profit the profit
$ 250 000 attributable to attributable to
NCI NCI
The parent sold inventory to the Affect the Does not affect
subsidiary for $ 300 000 at a mark up profit the profit
of 10%. Half of this inventory remained attributable to attributable to
at the year end. NCI NCI

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9) On 1st January 20X7 Flintstone acquired 80% of the equity shares of

Rubble when Rubble had retained earnings amounting to $ 232 000.
During the year ended 31st December 20X7 Rubble purchased goods from
Flintstone for $ 371 200 at a mark up of 25%. At the year end one quarter
of these were still in inventory of Rubble.
At 31st December 20X7 the retained earnings of the two companies are as
follows,
Flintstone – $ 522 000
Rubble - $ 394 400
How much will be the retained earnings in Flintstone’s consolidated
financial statements as at 31st December 20X7? __________________________

10) True or false?

a. When there are intra-group sales the unrealized profit should be fully
eliminated from the consolidated financial statements. (True/False)
b. The profit made by a parent on the sale of goods to a subsidiary is only
realised when the subsidiary sells the goods to a third party.
(True/False)
c. Eliminating unrealized profits related to an intra group sales will
never have an effect on non-controlling interest. (True/False)

11) Tweety acquired 90% of Sylvester on 1st of April 20X4. As consideration it

paid $ 7 million including $ 500 000 of professional fees. Tweety also
agreed to pay $ 4 million on another 2 years time. The cost of capital is
10%.
Identify which TWO of the following should be included with in the
calculation of goodwill for the acquisition of Sylvester as at 30 th March
20X5?
a. Cash consideration of $ 7 m
b. Cash consideration of $ 6.5 m
c. Deferred consideration of $ 4 m
d. Deferred consideration $ 3.3 m

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12) On 31th December 20X9 Tramp group disposed of its 60% holding in the
ordinary shares of Lady for $ 6.9 m. The non- controlling interest of Lady
at acquisition was measured at fair value at $ 1.012 m.
Lady’s Net assets net assets at the acquisition and the disposal date were
$ 2.3 m and $ 3.68 m respectively. Goodwill arising in the acquisition of
Lady of $ 460 000 had been fully impaired by the date of disposal.
What is the profit or loss arising on the disposal of Lady that will be
recorded in the consolidated statement of profit or loss for the year
ended 31st December 20X9?
a. Profit of $ 4 784 000
b. Profit of $ 4 600 000
c. Profit of $ 4 232 000
d. Profit of $ 4 692 000

13) Identify the correct treatment for the following

A group owns 80% of equity share Subsidiary Associate Investment
capital of B which operates in an
industry which is significantly
different from that of A.
Y group owns 35% equity shares of Subsidiary Associate Investment
Z. The other 65% is owned by
another listed company, Zoro Co.
whose board of directors is same
as that of Z.
C group owns 35% of share capital Subsidiary Associate Investment
of D where C has the ability to
appoint 3 of the 7 members in the
board while the rest come from
other different entities.

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14) On 1st July 20X3 Marlin bought 80% of the equity share capital of Dory.
Sales from Marlin to Dory throughout the year to 31st March 20X4 has been
$ 768 000 per month at a mark up of 25%. Dory had $ 1 440 000 of these
goods in inventory at the year end. For the year ended 31st March 20X4
the following were extracted from the financial statements.
Marlin Dory
Revenue $ 62 016 000 $ 36 480 000
Cost of Sales $ 49.152 000 $ 24 960 000

What would be the cost of sales recorded in the consolidated statement

of Profit or Loss for the year ended 31st March 20X4?
__________________________

15) a. The gain or loss arising due to a disposal of a subsidiary is recognized

in the other comprehensive income in consolidated financial statements.
( True/False )
b. If a subsidiary is disposed in the first date of the reporting period then
the assets and liabilities relating to the disposed subsidiary should not
be included in the consolidated statements at the current year end. (
True/False )

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16) SpongeBob acquired Patrick on 1st January 20X8 by paying a cash

consideration of $ 2.38 m. After a fair value measurement, the net assets
of Patrick were as follows at the date of purchase.
Property $ 2.55 m
Intangible assets $ 0.425 m
Trade receivables $ 0.5 m
Trade payables $ 0.33 m
Inventory $ 0.255
How will this purchase be reflected in the consolidated statements?
a. Record the net assets at the above values and credit goodwill with $
1.02 m
b. Record the net assets at the above values and debit goodwill with $
1.02 m
c. Record the net assets at the above values and credit profit or loss
with $ 1.02 m
d. Record the above purchase as a financial investment

17) Calvin has a 75% owned subsidiary, Hobbs. Calvin has sold inventory to
Hobbs for $ 624 000 at a mark up of 25% on cost. Hobbs have since sold
75% of this inventory to third parties.
What is the adjustment to the inventory that would be included in the
consolidated statement of financial position for the year regarding the
above transactions?
a. $ 93 600
b. $ 124 800
c. $ 39 000
d. $ 31 200

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18) Calvin has a 75% owned subsidiary, Hobbs. Calvin has sold inventory to
Hobbs for $ 624 000 at a mark up of 25% on cost. Hobbs have since sold
75% of this inventory to third parties.
What is the adjustment to the inventory that would be included in the
consolidated statement of financial position for the year regarding the
above transactions?
e. $ 93 600
f. $ 124 800
g. $ 39 000
h. $ 31 200

19) Kirk Co, has a 80% owned subsidiary, Spock Co which has been a
subsidiary of Kirk for 10 years. At the year end the unrealised profit
resulted from sales by Spock to Kirk was $ 40 800. The profit after tax of
Spock for the year end was $ 408 000.
What is the value of non-controlling interest that would be recorded in
consolidated statement of profit or loss and other comprehensive income
of Kirk group for the year?
____________________________

20) Harry acquired 75% of equity share capital of Lloyd on 1st May 20X5. The
year end of Harry is 30th September.
How will Lloyd’s results be included in the consolidated statement of
profit or loss of Harry group?
a. 75% of the revenue and expenses of Lloyd for the whole year is
included.
b. 75% of the revenue and expenses of Lloyd for 5 months (1st May – 30th
September) is included.
c. 100% of revenue and expenses of Lloyd for the whole year is included.
d. 100% of the revenue and expenses of Lloyd for 5 months (1st May – 30th
September) is included.

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21) 30% of Vincent was bought by Jules on 1st October 20X7. The financial
statements of Vincent shows a profit for the year of $ 232 000. Moreover,
Vincent has paid a dividend amounting to $ 29 000 to Jules. At the year
end the investment in Vincent has been impaired by $ 5 800.
What will be the share of profit from associate shown in consolidated
statement of profit or loss of Jules group for the year ended 31 st March
20X8?
a. $ 34 800 c. $ 33 060
b. $ 31 800 d. $ 63 800

22) Which concept is applied in removing unrealized profits on group sales

and removing intra group balances?
a. Going concern concept b. Prudence concept
c. Single entity concept d. Substance over form concept

23) Doc acquired 30% of Mary on 1st October 20X9 for a cost of $ 6.6 m. For
the year ended 31st December 20X9 Mary has reported a net profit of $
750 000. What is the value of investment on associate for the year end?
_____________________________

24) Which TWO of the following are NOT requirements in preparing

consolidated financial statements?
a. All assets and liabilities of the subsidiary should be included at fair
value.
b. All subsidiaries should apply the same accounting policies as that of
the parent in their respective individual financial statements.
c. Subsidiaries operating in entirely different industries than that of the
parent should not be consolidated.
d. Unrealised profits within the group should be eliminated from the
consolidated financial statements.

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25) Hannibal acquired 80% of Clarice on 1st January 20X3, paying $ 3 per each
share acquired which represents a 20% premium over the current market
price of a share in Clarice.
Clarice’s equity as at 30th September 20X3 was,
Equity shares of $ 1 each $ 56 000
Retained Earnings as at $ 44 800
1st October 20X2
Profit for the year ended $ 22 400 $ 67 200
30th September 20X3
$ 123 200

Hannibal measures the Non-controlling interest at fair value. For this

purpose, the market value of the shares of Clarice that date can be
deemed to be representative of the fair value of the shares held by the
non-controlling interest.
The only fair value adjustment required to Clarice’s net assets on
consolidation was a $ 11,200 increase in the value of its land.
What will be the carrying amount of Non-controlling interest of Clarice in
the consolidated statement of financial position of Hannibal as at 30th
September 20X3?
a. $ 30 240
b. $ 28 000
c. $ 31 360
d. $ 32 480

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26) A – Jupiter has 500 000 equity shares where 40% is owned by Gaia.
Moreover Gaia also owns $ 650 000 of $ 800 000 5% convertible bonds
which can be converted on the basis of 50 equity shares for each $ 50 or
they may be redeemed in cash.
B – Gaia owns 48% of the equity shares of Neptune. As a result of this
investment Gaia receives variable returns and has the power to affect
these returns.
C – Pluto has $ 400 000 non-voting equity shares and $ 750 000 voting
equity shares. Out of these Gaia owns half of the non-voting equity shares
and $ 300 000 of voting equity shares.
In which of the above situations is Gaia the parent?
a. A and B
b. B and C
c. B only
d. All three

27) Brennan bought 30% of Dale’s equity shares on 1st May 20X6 for $ 792 000.
On 31st December 20X6 Dale had remaining inventory of $ 198 000 which
was bought from Brennan in September 20X6. These were sold by
Brennan at a mark up of 20%. Dale had a profit after tax of $ 495 000 for
the year ended 31st December 20X6.
If Dale is an associate of Brennan what is the carrying amount of
investment in the consolidated statement of financial position as at 31 st
December 20X6?
________________________

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28) On 31st December 20X5 Thelma group has disposed the 80% holding in
Louise for $ 12.6 million. This is considered to be a discontinued operation.
The year end of Thelma group is 31st March. The following information
relates to Louise,
Net assets at disposal $ 11.34 m
Non-controlling interest at disposal $ 3.78 m
Goodwill at disposal $ 2.52 m
What should be recorded as the profit or loss on disposal in the
consolidated statements of Thelma group?
a. Profit of $ 2.52 m
b. Loss of $ 2.52 m
c. Profit of $ 5.04 m
d. Loss of $ 5.04 m

29) Jay group owns 100% share capital of the following companies.
A – Andy is located in a country where it is compulsory to follow local
accounting standards, which are not compatible with IFRS standards.
B – Red is operating in an industry which is significantly different from
the industry which Jay group is operating in. It will be meaningless to
consolidate Red.
C – Bob is an entity located in a country where a military coup has taken
place recently. As a result Jay has lost control over Bob for the
foreseeable future.
Which of the above can be consolidated at the year end?
a. A only
b. B and C only
c. A and C only
d. A and B only

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30) On 31st March 20X1 Bonnie has bought 400,000 shares of Clyde’s 500 000
shares.
Bonnie issued 2 shares for every 5 shares acquired in Clyde. At the date
of acquisition, the market price of Clyde’s share was $ 2.50 and market
price of Bonnie’s share was $ 4.50.
Moreover, Bonnie agreed to pay $ 550 000 in cash after one year and the
cost of capital was 10% per annum. Bonnie also paid professional fees of
$ 400 000.
What is the value of consideration paid that will be used in the goodwill
calculation in current year’s financial statements?
____________________________

31) Which of the following is not included in the definition of control as per
IFRS 10 Consolidated Financial Statements?
a. Having power over the investee.
b. Having the majority of shares in the investee
c. Receiving variable returns as a result of the investment.
d. Having the power to affect the amount of return from the investee.

32) Peter owns 75% of the equity share capital of Sydney. On 1 st April 20X8
Sydney has transferred a property to Peter for $ 54 400. This property
had cost $ 57 120 and at the date of transfer had a carrying amount of $
40 800. At the transfer date the remaining useful life was 5 years.
The carrying amount of the property, plant and equipment as at 31st March
20X9 of Peter and Sydney were $ 408 000 and $ 81 600 respectively.
What is the carrying amount of property, plant and equipment recorded
in the consolidated financial position of Peter for the year ended 31 st
March 20X8?
_______________________________

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33) Which TWO of the following statements are true?

a. Impairment will be apportioned between the parent and non-
controlling interest when NCI is measured at fair value.
b. An agreement to pay $ 50 000 if the subsidiary achieves a profit over
$ 250 000 in the first three years is included in the cost of investment.
c. Professional fees paid to get advice on the investment is included in
the cost of investment.
d. Impairment will always be deducted in full from parent retained
earnings.

34) On 1st January 20X4 Claven acquired 60% of the equity share capital of
Fife. At this date Fife owned a building with a fair value of $ 150 000 in
excess of its carrying amount, and a remaining life of 10 years. All
depreciation is charged to operating expenses. Goodwill have been
impaired by $ 41250 in the year to 31st December 20X4. As at 31st December
20X5 Claven and Fife had operating expenses balance of $ 450 000 and
$ 262 500 respectively.
What are consolidated operating expenses for the year to 31st December
20X5?
a. $ 712 500
b. $ 768 750
c. $ 727 500
d. $ 738 750

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35) Which of the following will result in an unrealized profit with in the group?
a. A parent sells inventory costing $ 56 000 to its subsidiary for $ 60 000.
The subsidiary has sold all of these goods before the year end.
b. A parent has sold a building to its only subsidiary for $ 3.5 million. Its
carrying amount on that date was $ 2.5 million. However the subsidiary
has sold this building to a third party before the year end.
c. A parent has sold goods costing $ 67 000 by keeping a mark up of 12%
to its only subsidiary. One quarter of these goods remained in the
inventory of the subsidiary at the year end.
d. A parent has sold goods costing $ 15 000 to its only associate for
$ 20 000. The associate has sold all these goods to third parties before
the year end.

36) Mathilda has owned 80% of equity share capital of Leon for many years.
In the current year Mathilda has sold goods to Leon for a total value of
$ 60 000, keeping a margin of 20%. Half of these goods remained in the
Leon’s inventory as at the year end.
As at 30th September 20X1 the following figures were reported as revenue
in the individual financial statements.
Mathilda - $ 3.3 million
Leon – $ 1.26 million
What is the consolidated revenue figure for the Mathilda group for the
year ended 30th September 20X1?
______________________________

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37) Which of the following is NOT a condition which should be met by the
parent in order to exempt from producing consolidated financial
statements?
a. The parent’s debt or equity instruments are not traded in the public
market.
b. The parent itself is a wholly owned or partially owned subsidiary
whose owners are satisfied with the decision of not producing
consolidated statements.
c. The parent produces consolidated statements which are compatible
with IFRS standards.
d. The activities of the subsidiary is significantly different from the
activities of the rest of the group, so it would be meaningless to
consolidate.

38) On 1st January 20X6 Tyler has acquired 30% of Durden, when it had a share
capital of 250 000 $ 1 shares. And $ 1 million retained earnings. The
consideration paid by Tyler consisted of 1 share for every 3 bought. At the
date of acquisition Tyler’s shares had a market price of $ 4.50 and
Durden’s shares was $ 2. At 31st December 20X6 Durden had net assets
of $ 1.15 million.
What is the value recorded as investment in associate for the year ended
31st December 20X6?
a. $ 82 500
b. $ 20 000
c. $ 307 500
d. $ 157 500

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39) Punch has owned 30% of Judy for many years. During the year ended 30th
September 20X3 Judy made a net profit of $ 1 110 000. Judy has sold goods
with a value of $ 1 480 000 to Punch at a margin of 30%. Half of these
goods still remained in Punch’s inventory at the year end.
Punch has recognized previous impairment relating to Judy of $ 166 500
and has recognized an additional impairment of $ 25 900 for the current
year.
What is the share of profit of associate to be shown in the consolidated
statement of profit or loss?
______________________________

40) Which TWO of the following indicates the presence of significant

influence?
a. The investor has representation in the board of directors of the
investee
b. The investor controls the votes of a majority of the board members
c. The investor have the ability to insist that all the purchases of the
investee should be made from a subsidiary owned by the investor.
d. The investor owns 660 000 of the 3 000 000 equity shares of the
investee.
41) On 1st June 20X7 Leo group acquired 480 000 of Kate’s 1.6 million equity
shares by paying $ 6 per share. Kate’s profit after tax for the year ended
30th November 20X7 was $ 800 000.
Assuming that Kate is an associate of Leo, what amount will be recorded
as the carrying amount of the investment in Leo’s consolidated statement
of financial position as at 30th November 20X7?
a. $ 3 000 000 c. $ 3 030 000
b. $ 2 910 000 d. $ 2 790 000

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42) Which TWO of the following are correct?

a. When acquiring a subsidiary, patents must be included in goodwill
because it is impossible to determine the fair value of patents because
they are unique.
b. Using fair value to record the acquired assets of subsidiary does not
comply with the historical cost concept.
c. When acquiring a subsidiary the fair value of liabilities and contingent
liabilities should also be considered.
d. Deferred cash consideration should be discounted to the present
value to reflect its fair value.

43) On 1st October 20X8 Brad acquired 80% of the equity share capital of Pitt.
At the year ended 30th September 20X9, Pitt recorded a payable of to Brad
of $ 19 200 which did not agree to the Brad’s receivable balance due to
$ 6 400 cash in transit.
The followings were the receivable balances extracted from their
statement of financial position for the year ended 30th September 20X9.
Brad - $ 41 344
Pitt - $ 24 320
What is the value of the receivables in the consolidated statement of
financial position at the year end?
_____________________________
44) Gregory has owned 80% of Peck for many years. Gregory holds this
investment in its individual statement of financial position at a cost of
$ 3 360 000. On 31st December 20X9 it was disposed for $ 8 400 000 in
cash.
What profit will be reported in Gregory’s individual statements for the
year ended 31st December 20X9 regarding this disposal?
____________________________

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45) George Co. acquired 70% of the Clooney Co’s 40 000 $ 1 ordinary shares
for $ 320 000, when the retained earnings of Clooney Co. were $ 228 000.
Clooney Co. also has an internally developed brand name which has been
independently valued at $ 36 000. The non-controlling interest is valued
at $ 88 000 at the date of acquisition.
What was the goodwill arising in the acquisition?
a. $ 52 000
b. $ 180 000
c. $ 140 000
d. $ 152 000

46) On 31st March 20X5, Garland group disposed of its 80% holding in the
ordinary shares of Judy for $ 3.15 million cash. Garland originally
purchased the shares for $ 2.1 million. Judy’s net assets and non-
controlling interest at the disposal date were $ 1.75 million and 1.085
million respectively. At the acquisition date the goodwill was $ 1.61 million
and it has not been impaired.
What is the profit arising on the disposal that will be recorded in the
consolidated statement of profit or loss for the year ended 31 st March
20X5?
_____________________________

47) On 1st April 20X4, Freddy acquired 60% of the equity share capital of
Mercury. On that date Freddy made a 8% $ 5 million loan to Mercury. What
will be the effect on group retained earnings as of 30th September 20X4?
a. There will be no effect on group retained earnings.
b. Group retained earnings will increase by $ 200 000.
c. Group retained earnings will decrease by $ 200 000.
d. Group retained earnings decrease by $ 120 000.

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48) Bradley Co. acquired a 70% holding in Cooper Co. on 1st April 20X3 for $
330 000. At that date the fair value of net assets of Cooper Co. was
$ 385 000. Bradley Co. measures the non-controlling interest at its share
of net assets.
On 31st March 20X6 Bradley Co. sold all its shares in Cooper for $ 522 500.
At that date the goodwill has not been impaired and the fair value of net
assets was $ 467 500.
What was the profit or loss on disposal to be recognized in the
consolidated statement of profit or loss of Bradley Co.?
a. $ 74 250 b. $ 110 000
c. $ 134 750 d. $ 195 250

49) Jennifer has owned 60% of the share capital of Natalie Co. for many years.
As at 30th September 20X4 the following balances were shown in the
financial statements of the two companies.
Jennifer Co. Natalie Co.
Current Assets 595 000 425 000
Current Liabilities 255 000 170 000

During the year ended 30th September 20X4 Jennifer had made $ 85 000
sales on credit to Natalie by keeping a 20% profit margin. One quarter of
these were still in Natalie’s inventory at the year end.
On 30th September 20X4Natalie sent a cheque of $ 42 500to pay the
outstanding balances in Jennifer Co. The cheque was not received by
Jennifer before the year end. The in-transit items should be adjusted in
the parent company.
Both the companies didn’t have an overdraft at the year end.
What is the impact of the above transactions on the current assets and
current liabilities at the year end?
a. Current Assets $ 1 017 450 and current liabilities $ 425 000
b. Current Assets $ 1 015 750 and current liabilities $ 425 000
c. Current Assets $ 969 000 and current liabilities $ 382 500
d. Current Assets $ 1 017 450 an current liabilities $ 382 500

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50) On 1st March 20X5 Emma Co. acquired 80% of Stone Co. In the post-
acquisition period Emma Co. sold goods costing $ 8.55 million to Stone
Co. at a price of $ 11.4 million. During the year ended 30th November 20X5
Stone Co. has sold 9.5 million of these goods to third parties at a price of
$ 14.25 million.
How will the above transaction affect the consolidated cost of sales for
the year ended 30th November 20X5?
a. Increase by $ 10 925 000 c. Increase by $ 9 120 000
b. Decrease by $ 10 925 000 d. Decrease by $ 9 120 000

51) Which item would NOT be shown in the statement of cash flows using the
indirect method?
a. Cash paid to purchase property, plant and equipment.
b. Lease rentals paid
c. Cash paid to employees
d. Cash paid as dividends to the shareholders

52) The following information is extracted from the financial statement of

Paris Co. as at 31st March.
20X5 20X6
Carrying amounts of PPE 9 360 15 210
During the year ended 31st march 20X6, an environmental provision of
$ 2 600 was capitalized and depreciation of $ 1 625 was charged. An item
of machinery was disposed for $ 1 170. It had a carrying amount of $ 1 950.
Moreover a property was revalued upwards by $ 1 300.
What amount will be recorded in the statement of cashflows of Paris Co.
in related to the purchase of property, plant and equipment?
_____________________________

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53) During the year to 31st December 20X8 Vienna Co. made a profit of $
34,500 after accounting for a depreciation charge of $ 2 300. During the
year receivables increased by $ 1 840, inventories decreased by $ 3 312
and trade payables increased by $ 644. During the year non-current
assets were purchased for $ 14 720.
What was the increase in cash and bank balance during the year?
a. $ 24 196
b. $ 22 908
c. $ 27 876
d. $ 19 596

54) At 1st July 20X5 Athens Co. had government grants held in deferred
income of $ 1 080 000. During the year Athens released $ 120 000 to the
statement of profit or loss. At 30th June 20X6 the remaining deferred
income balance was $ 1 320 000.
Which TWO of the following reflects the correct amounts to be recorded
in the statement of cashflows?
a. Increase of $ 120 000 to cash generated from operations.
b. Decrease of $ 120 000 to cash generated from operations.
c. Cash received from grant $ 120 000 in investing activities.
d. Cash received from grant $ 360 000 in investing activities.

55) The statement of Profit or loss of Florence Co. shows an income tax
expense of $ 115,900 for the year ended 31st December 20X4. The following
were also extracted from Florence’s financial statements,
20X4 20X3
Deferred taxation $ 36 100 $ 25 650
Current tax payable $ 113 050 $ 100 700
What is the amount that should be recorded as tax paid in Florence’s cash
flow statement for the year ended 31st December 20X4?
___________________________

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56) Venice Co. had property, plant and equipment with a carrying amount of
$ 153 000 as at 1st July 20X5. In the year ended 30th June 20X6 Venice has
revalued a property from $ 63 750 to $ 85 000. Venice Co. has also
disposed an asset with a carrying amount of $ 51 000 for $ 42 500. The
company has also charged depreciation of $ 17 000. At the end of the year
the carrying amount of property, plant and equipment was $ 212 500.
How much will be recorded under ‘cash flows from investing activities’ in
the cashflow statement of Venice Co. for the year ended 30th June 20X6?
a. $ 106 250 outflow c. $ 114 750 outflow
b. $ 63 750 outflow d. $ 42 500 inflow

57) Which TWO of the following is added to the profit before tax in the
calculation of net cash from operating activities under the indirect
method?
a. Increase in inventories
b. Profit on sale of non-current assets
c. Decrease in trade receivables
d. Depreciation

58) At 1st January 20X3, Amsterdam Co. had accrued interest payable of $ 12
600. During the year ended 31st December 20X3, Amsterdam charged
finance cost of $ 43 050 to its statement of profit or loss, including
unwinding a discount relating to a provision stated at its present value $
157 500 at 1st January 20X3. The closing balance on accrued interest
payable amount at the year end was $ 15 750. The discount rate relevant
is 6%.
How much interest paid should be included in the statement of cashflows
for the year ended 31st December 20X3?
a. $ 43 050
b. $ 39 900
c. $ 30 450
d. $ 36 750

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59) Which TWO of the following will be included under the heading ‘Cash flows
from financing activities’?
a. Depreciation of PPE
b. Proceeds from issue of shares
c. Development expenditure
d. Dividend paid

60) Wales Co. has the following balances in its financial statements for the
year ended 30th September 20X5 and 20X6,
20X6 20X5
Share Capital $ 110 500 $ 97 500
Share premium $ 68 250 $ 61 750
10% debentures $ 110 500 $ 13 500

How much will appear under ‘cashflows from financing activities’ in the
statement of Cash flows for the year ended 30th September 20X6?
________________________

61) Extracts from New York Co. for the year ended 31st December are as
follows,
20X2 20X1
Right of use asset $ 4.875 m $ 1.875 m
Non-current liabilities $ 3.6 m $ 1.5 m
Lease obligations
Current Liabilities $ 1.275 m $ 0.6 m
Lease Obligations

During the year ended 31st December 20X2the depreciation charged in

relation to leased plant was $ 1.35 m.
What amount will be shown under cash payment made under lease in the
cashflow statement for the year ended 31st December 20X2?
_________________________

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Objective Case Questions

1) Harry owns the following two properties and uses the fair value
accounting where possible.
Property X – A building owned by Harry which has been rented out for
one of its subsidiaries under a 12 month lease agreement. At the
beginning of the year it had a fair value of $ 3.9 million at the end of the
year it has risen to $ 4.2 million.
Property Y – A factory building which is used by Harry for its production
activities. At 1st January 20X3 it had a carrying amount of $ 1.5 million and
a remaining useful life of 10 years. On 1st July 20X3, the property was
reclassified as investment property and has been let to a third party. At
that date the building had a fair value of $ 1.7 million and at the year end
it has risen to $ 1.8 million.

i) In the consolidated statements of Harry group how would property A

be accounted for?
a. As property, plant and equipment
b. As Investment Property
c. As a Right of Use asset
a. Within Goodwill

ii) How much gain should be recorded when reclassifying property Y as

an Investment property and where should it be recorded?

$ 275 000 Statement of Profit or Loss

$ 350 000 Other Comprehensive

Income

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iii) What is the total gain from Investment properties to be included in

Harry’s individual financial statements for the year ended 31st
December 20X3?
__________________________

iv) If Harry uses cost model for investment properties, what would be the
carrying amount of Property Y at the end of the year?
a. $ 1.425 m
b. $ 1.5 m
c. $ 1.75 m
d. $ 1.35 m

v) Which one of the following is incorrect?

a. Fair value model can be used to account for Investment property.
b. Cost model can be used to account for Investment property.
c. Revaluation model can be used to account for Investment
property.
d. Cost model can be used to account for property, plant and
equipment.

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2) Titanic is a company which produces ships and maintain them. It

considers a ship as a complex non-current asset and uses the cost
model when accounting for the ships. The details of a ship is as follows,
Cost Useful life
Interior cabin fittings 8.75 m 5 years
Engine 3.15 m 36,000 sailing hours

Both the above parts of the ship is installed on 1st July 20X4. In the year
ended 30th June 20X8 the ship has sailed for 1,200 hours for the 6 months
to 31st December 20X7.
On 1st January 20X8 the ship met an accident which has damaged the
engine of the ship beyond the repair. Therefore a new engine was
replaced with a life of 36,000 hours at a cost of $ 3.78 million.

i) The accident indicates an impairment. The ship will be impaired if its

___________ exceeds its recoverable amount. Fill in the blank.
a. Fair value less costs to sell
b. Carrying amount
c. Replacement cost
d. Value in use

ii) What is the amount of depreciation to be charged in relation of the

ship’s engine for the period up to 1st January 20X8?
__________________________

iii) After the accident the following costs were also incurred.
A – The captain’s cabin was repaired incurring a cost of $ 6 million.
B – The ship was repainted incurring a cost of $ 4.5 million
Which of the above costs should be expensed to Statement Profit or
Loss?
a. A only b. B only
c. A and B d. Neither

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iv) What is the correct accounting treatment for the replaced engine?
a. Write off the damaged engine, capitalise the new engine and
depreciate it over 36 000 sailing hours.
b. Treat the $ 3.78 as an expense in the Statement of profit or loss.
c. Capitalise the carrying amount of the damaged engine and write
off the rest as an expense.
d. Write off the damaged engine, capitalise the new engine and
depreciate it over 1 200 sailing hours.

v) Titanic Co. upgraded the cabin facilities on 1st January 20X8 at a cost
of $ 1.575 million. This did not increase the remaining useful life of
the cabin but enabled the company to increase the sailing fare as the
facilities were improved.
What is the carrying amount of the cabins as at 30th June 20X8?
a. $ 3 010 000
b. $ 2 537 500
c. $ 1 750 000
d. $ 2 800 000

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3) Draco Co. is a company which manufactures footwear. On 1st April 20X5 it

purchased a machine costing $ 72 000 which had a useful life of 10 years.
It is depreciated on straight line basis and is time apportioned in the years
of acquisition and disposal. An year later, on 1st April 20X6 the machine
was revalued to $ 72 900. There was no change in useful life.
On 1st July 20X8 a fire within the premises has damaged the machine and
it should be impaired. As at that date the following information were
available.
Carrying amount of the machine $ 54 675
Value in use $ 34 816.50
It could be sold for $ 40 500 incurring a dismantling cost of $ 1 800
An equivalent new machine would cost $ 81 000

i) Which TWO of the following are internal indicators of impairment?

a. Physical damages to the asset
b. Lower level of performance expected from the asset
c. Significant increase in interest rate
d. Unusual reduction in market value of the asset

ii) What is the depreciation charged to the statement of profit or loss for
the year ended 30th September 20X6?
a. $ 7 436
b. $ 8 100
c. $ 7 650
d. $ 7 200

iii) What is the impairment loss associated with Draco’s machine as at 1st
July 20X8?
a. $ 15 975
b. $ 19 859
c. $ 14 175
d. $ nil

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iv) Which TWO of the following are incorrect regarding the cash
generating units?
a. A cash generating unit is the smallest identifiable group of assets
for which independent cash flows can be identified.
b. A cash generating unit must be a subsidiary of the company
c. A cash generating unit to which goodwill has been allocated
should be tested for impairment in every five years.
d. Assets in cash generating unit should never be impaired below
their recoverable amount.

v) At 1st April 20X9 it was discovered that the machine is worthless and
the recoverable amount of the factory as a cash generating unit is
estimated to be $ 855 000. As at that date the CGU comprised of the
following assets.
Plant and Equipment (includes the damaged machine at a carrying
amount of $ 31 500) $ 301 500
Building $ 450 000
Net current assets at recoverable amount $ 225 000
Goodwill $ 76 500
After the impairment loss is allocated to the cash generating unit, how
much will be the carrying amount of the plant and equipment?
a. $ 33 750
b. $ 48 745
c. $ 252 754
d. $ 236 250

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4) Ron Co. is constructing a new administrative building. To finance this, it

received a $ 7.5 million 6% loan on 1st January 20X1. It has an effective
interest rate of 7.5% and will be redeemed at a premium.
The construction of the building commenced on 1st February 20X1 and
ready for use on 30th November 20X1. It was opened for use on 1st January
20X2.
i) Which TWO of the following are correct regarding IAS 23 Borrowing\
Costs?
a. Borrowing costs may be capitalised if it is directly attributable to
a qualifying asset.
b. Borrowing costs must be capitalised if it is directly attributable to
a qualifying asset.
c. Borrowing costs should commenced to be capitalised once the
expenditure is incurred on the construction of the asset.
d. Borrowing costs should cease to capitalised once the related
asset is substantially complete.
i) How much interest should be capitalized as property, plant and
equipment as at 31st December 20X1?
_________________________

ii) How should the loan be treated for the year ended 31st December 20X1?
a. Amortised cost
b. Fair value through profit or loss
c. Fair value through other comprehensive income
d. Present value

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iii) What is the finance cost that should be expensed to the statement of
profit or loss for the year ended 31st December 20X1?
a. $ 93 750
b. $ 450 000
c. $ 75 000
d. $ 25 000

iv) Ron has decided to temporarily invest some of the funds in January
20X1 and has earned $ 30 000 interest.
How should this interest income be accounted?
a. Take to statement of profit or loss as investment income
b. Take to other comprehensive income
c. Net off the amount capitalized in property, plant and equipment.
d. Deducted from the outstanding loan amount in the statement of
financial position

5) Bellatrix Co. has started research work on a new project to develop a

vaccine. It is expected to be profitable. Moreover, Bellatrix has incurred
$ 500 000 to train the staff to develop the vaccine according to the
standards released by WHO.
Bellatrix also developed an online platform to enable the purchase of
vaccine online during the year. For this purpose it incurred $ 50 000
monthly from 1st May 20X5 to 31st January 20X6. The project was declared
to be feasible on 1st August 20X5. The platform was launched on 1st
February 20X6 and is expected to last for 4 years.
i) Which of the following is NOT a criteria to be considered when
recognizing an intangible asset?
a. It should be identifiable
b. The entity should have the control over the asset.
c. It should be internally generated
d. There should be future economic benefits from the asset and the
value should be able to measured reliably.

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ii) How much should be recorded in Statement of profit or loss for the
year ended 31st March 20X5 in relation to the online platform?
a. $ 150 000
b. $ 450 000
c. $ 225 000
d. $ 162 500

iii) Which TWO of the following statements are correct?

a. Training costs should be expensed to statement of profit or loss.
b. Once capitalized development costs should be held at fair value
at each year end.
c. Research costs may be expensed to statement of profit or loss
d. Depreciation on any plant used to develop the intangible asset
would be capitalised as part of the development cost.

iv) Which TWO of the following would be required if Bellatrix Co. adopts
the Revaluation model for the measurement of intangible assets?
a. Can be used at initial recognition of the asset if there is an active
market
b. The asset may include costs of pre-paid marketing expenses and
training costs.
c. Valid active market for the asset
d. The entire class of intangible assets must be revalued at the same
time.

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v) Bellatrix has acquired a brand name with a 5 year life for $ 480 000
on 1st April 20X5. On 31st March 20X6 the company carried out an
impairment review. The fair value of this at the year end was
$ 384 000 and the estimated selling costs amounted to $ 19 200. Value
in use of the asset was $ 460 800.
What is the value of impairment loss as at 31st March 20X6?
a. Nil
b. $ 67 200
c. $ 28 800
d. $ 19 200

6) On 1st July 20X3 Luna Co., a company operating in the hotel industry
purchased a land for $ 10.2 million Ruble. The functional currency of Luna
Co. is dollar ($). The exchange rates throughout the year was as follows,
1st July 20X3 – 4 Ruble : $ 1
31st December 20X3 – 2 Ruble : $1
Average rate – 3 Ruble : $ 1
Luna also constructed a new hotel near the sea on 1st January 20X3 which
resulted in environmental damage which must be repaired in another 10
years. The present value of this is estimated to be $ 3.4 million. The
relevant cost of capital is 8%.
On 1st July 20X3 Luna received a government grant of $ 960 000 relating
to a construction equipment with useful life of 5 years. Luna uses
deferred income method to account for the grants.

i) What is the carrying amount of the land to be shown in the statement

of financial position as at 31st December 20X3?
________________________

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ii) How much is expensed to the statement of profit or loss in relation to

the environmental damage?
a. $ 136 000 c. $ 4 000 000
b. $ 272 000 d. $ 544 000

iii) The following expenses relate to the construction of the hotel. Which
one of the following is NOT capitalised?
a. Direct labour costs in constructing the hotel.
b. Costs of site preparation
c. Advertising costs incurred to make people aware of the new hotel.
d. Legal fees relating to site purchase.

iv) What is the amount released to the statement of profit or loss as grant
income in respect of the government grant which should be recorded
in Statement of Financial position as at 31st December 20X3?
_____________________________

v) If Luna has breached the conditions relating to the grant and the grant
has to be repaid, which TWO of the following explains the correct
accounting treatment?
a. Increase the cost of the plant
b. Make an adjustment to the prior year financial statements
c. Remove all deferred income balances
d. Record an expense in the statement of profit or loss

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7) Hagrid Co. is a company engaged in agricultural activities producing milk

and yogurt as well as tea from the tea estates owned. Hagrid Co. owns a
flock of sheep. Hagrid obtain milk from the sheep and produces yogurt.
On 1st October 20X4 Hagrid bought another flock of sheep for $ 60 000
including the transaction cost of $ 3 000. At 30th September 20X5 the flock
was valued at $ 72 000. Hagrid uses this flock to sell the animals and
earn a profit. Every time an animal is sold 5% commission is payable by
Hagrid. Hagrid uses historical cost method and all depreciation is
charged to operating expenses.
Hagrid’s machinery cost $ 120 000 as at 1st October 20X1 with a useful life
of 5 years. As at 30th September 20X5 the current price of the same
machinery is $ 180 000.

i) What is the value of the machinery as at 30th September 20X5, if the

current cost accounting was used?
a. $ 180 000
b. $ 144 000
c. $ 36 000
d. $ 72 000

ii) Which of the following items would be accounted under IAS 41

Agriculture?
a. Yogurt
b. Machinery used in tea production
c. Tea bushes from which tea leaves are obtained
d. Milk obtained from sheep

iii) What gain should be taken to Hagrid’s statement of profit or loss for
the year ended 30th September 20X5?
_________________________

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iv) Hagrid owned two buildings for administrative purposes. A property

valuer has informed that during the year the value of these buildings
has increased significantly. This has been decided by looking at the
price of similar properties in the market.
According to IFRS 13 Fair value Measurement which level of input is
used in the above scenario?
a. Level 1 b. Level 2
c. Level 3 d. Level 4

v) Instead of using the historical cost method if Hagrid decides to use

revaluation model, which TWO of the following ratios will be affected?
a. Acid test ratio b. Gross profit margin
c. Return on Capital employed d. Net profit margin

8) Snape Co. is a technology company which is based in USA. During the board
meeting held on 30th September 20X6 the following decisions were made.
A - The decision to sell a specialized machinery used to produce computer
chips which had a carrying value of $ 2.8 million as at 1st January 20X6 and
a remaining life of 20 years. The plant is expected to be sold for a price of
$ 2.73 million with in the next year.
B – A decision to spend $ 52 500 for advertising a new mobile phone
released recently.
C – The decision to closedown the regional store in St. Louis which was
communicated to the employees before the year end. Half of the employees
would be retrained incurring a cost $ 70 000, the others would be made
redundant after paying $ 210 000.
D – It also disposed all the outlets in Russia and rebranded the outlets in
China to target business clients. Previously it was targeting the locals.

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i) On 4th of February 20X7 before the financial statements were authorized

the following events occurred,
X – The plat held for sale was sold
Y – Redundancies were settles by incurring an extra cost of $ 20 000
Which of the above events are adjusting events according to the IAS 10
Events after the Reporting period?
a. X only
b. Y only
c. Neither
d. Both

ii) At what value should the plant be held under Non-current Assets held
for sale as at 31st December 20X6?
a. $ 2.66 m
b. $ 2.695 m
c. $ 2.73 m
d. $ 2.8 m

iii) Which TWO of the following criteria need to be satisfied to classify an

asset under held for sale in accordance with IFRS 5 Non-current assets
held for sale and discontinued operations?
a. Asset is no longer in use.
b. Asset is likely to be sold with in the next year
c. Asset is being actively marketed
d. Sale of the asset has been agreed

iv) What provision should be recorded in relation of the closure of the

regional store?
a. $ 210 000
b. $ 332 500
c. $ 262 500
d. $ 280 000

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v) In relation to the change in operations in outlets located in Russia and

China, which situation represent a discontinued operation in
accordance with IFRS 5 Non-current assets held for sale and
discontinued operations?
a. China only
b. Russia Only
c. Both
d. Neither

9) On 1st October 20X4 Dumbledore Co. leased a new item of machinery under
a 5 year lease. The asset had a useful life of 6 years and the ownership
transferred to Dumbledore at the end of the lease period. The present
value of the lease liability is $ 1 578 750 and $ 375 000 was payable on 30th
September of each year. The interest rate is 6%
On the same date it sold a building to another company but continued to
use it until the end of its 20 years of its remaining life under a lease
agreement. The carrying amount of the building as at that date was $ 12.5
million and the fair value and sales proceeds were $ 14.375 m.

i) What would be the carrying amount of the right of use machinery asset
as at 30th September 20X5?
a. $ 1 298 750
b. $ 1 578 750
c. $ 1 315 625
d. $ 1 263 000

ii) What would be the finance cost in respect of the leased machinery for
the year ended 30th September 20X5?
_______________________

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iii) What is the current liability (to the nearest thousand) that will be
recorded in Dumbledore’s statement of financial position as at 30 th
September 20X5?
a. $ 1 001 000
b. $ 1 298 000
c. $ 297 000
d. $ 375 000

iv) In a sale and leaseback transaction if the agreement meets the criteria
to classify it as a sale, how should any profit on the sale be treated?
a. Recognise proportion relating to right of use transferred
b. Defer profit and amortise over the lease term
c. Recognise whole amount of profit immediately in profit or loss
d. Recognise the proportion relating to right of use retained

v) What would be the carrying amount of the building as at 30th September

20X5?
a. $ 11 875 000
b. Nil
c. $ 13 656 250
d. $ 10 093 750

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10) Neville has Item D in his inventory. It costs $ 30 per unit. Due to the lack
of demand for Item D a stock of 2000 units is still in inventory. A distributor
has agreed to sell the items for $ 33 per each, but will charge a
commission of 20%.
Neville also has a special type of raw material which has been purchased
during the year under a one-off contract costing $ 48 000. This is not yet
used, but a further cost of $ 12 000 will convert it into a product which
could be sold to an agreed price of $ 90 000. Since buying the material the
cost price has fallen by $ 30 000.
On 31st December 20X9 Neville also wishes to change its method of
inventory valuation from first in first out (FIFO) method to average cost
valuation method (AVCO). The following information are available,
FIFO basis AVCO basis
As at 31st December 20X9 $ 12 million $ 10.8 million
As at 31st December 20X8 $ 9 million $ 8.04 million
Moreover Neville has decided to change the useful life of one of its
machinery from 10 years to 7 years due to a damage which was occurred.

i) The change in useful life of plant is a change in accounting

_________________ and it should be treated ____________________.
a. Policy, Retrospectively
b. Estimate, Retrospectively
c. Policy, Prospectively
d. Estimate, Prospectively

ii) At what value should Item D be included under inventory in Neville’s

statement of financial position as at 31st December 20X9?
_________________________

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iii) At what value should special raw material be included under inventory
in Neville’s statement of financial position as at 31st December 20X9?
a. $ 78 000
b. $ 30 000
c. $ 48 000
d. $ 60 000

iv) Which TWO of the following circumstances are acceptable reasons to

change accounting policies?
a. To show the best possible results for the investors.
b. If tax law in a country changes
c. If required by an International Financial Reporting Standard
d. If a change results in providing more reliable and relevant
information to users

v) When the accounting treatment is changed from FIFO to AVCO, by how

much the profit will reduce?
a. $ 240 000
b. $ 1 200 000
c. $ 960 000
d. $ 480 000

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11) Sirius works as an agent for small retailers earning a commission of 10%.
Sirius’s revenue includes $ 7.8 million received from clients under these
agreements with $ 7.02 charged to cost of sales representing the amount
paid to the retailers.
On 1st January 20X3 Sirius also sold several machines for $ 13 million to a
customer who paid $ $ 1.287 million at the point of sale and agreed to pay
the balance on 1st January 20X4. The cost of capital is 6%.
Sirius Co. sold and installed an air conditioning machine for $ 1 040 000
on 1st May 20X3. Included in the price was installation fee of $ 65 000 and
a 2 year servicing contract with a value of $ 312 000.
Sirius also has sold some maturing inventory to a bank on 30th June 20X3
for $ 3.9 million, when the estimated value of the goods were $ 6.5 million.
Sirius keep the inventory in his premises and has the option of
repurchasing two years later at a price of $ 4 719 000.

i) What should be the adjustment made to revenue regarding the

commission sales?
a. Reduce by $ 780 000
b. Increase by $ 780 000
c. Reduce by $ 7 020 000
d. Increase by $ 7 020 000

ii) How much should be recognized as initial revenue as at 30th June 20X3
regarding the machines sold? ________________________

iii) How much should be recognized as revenue in relation to the sale of

air conditioning machine in the statement of profit or loss for the year
ended 30th June 20X3?
a. $ 689 000
b. $ 728 000
c. $ 754 000
d. $ 884 000

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iv) Consignment inventory is an arrangement where by inventory is held

by one party and is owned by another party.
Which TWO of the following are characteristic of consignment
inventory?
a. Dealer bears slow movement risk
b. Manufacturer can require the dealer to return the inventory
c. Manufacturer bears obsolescence risk
d. Dealer has no right of return of inventory

v) Which of the following is the correct treatment for maturing inventory?

a. Take $ 3.9 million to revenue, disclosing the repurchase option.
b. Record a loss on disposal of $ 2.6 million in the statement of profit
or loss
c. Leave the inventory in current assets, increasing in value as the
goods mature
d. Treat the $ 3.9 million as a loan with 10% compound interest accruing
over 2 years.

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12) The following balances were extracted from Voldemort Co. as at 31st
December 20X6,
Equity investment $ 3 million
Convertible loan notes – liability component as $ 14.254 million
at 1st January 20X6
5% loan notes 5 million
The equity investment is relating to 1 million shares bought in Quirrell
Company. As at 31st December 20X6 the market value of Quirrell’s shares
were $ 3.50 each. During the year Quirrell paid a dividend of 5 cents per
share.
The convertible loan notes are 8% $ 15 million loan notes issued on 1st
January 20X6 at par. Equivalent loan note without the conversion option
will have an interest rate of 10%. The company has correctly split the
equity and liability components but has doe nothing else.
The 5% loan notes were issued at par of $ 5 million, incurring issue costs
of $ 200 000. The loan notes have an effective interest rate of 10%.

i) What income should be recorded in relation to the equity investment?

a. $ 800 000
b. $ 500 000
c. $ 300 000
d. $ 550 000

ii) What should be the value of the liability component of of the convertible
loan note as at 31st December 20X6?
a. $ 15 000 000
b. $ 14 254 000
c. $ 14 194 500
d. $ 14 479 500

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iii) What finance costs should be recorded in the statement of profit or loss
for the year ended 31st December 20X6 in relation of the loan notes?
_______________________

iv) In which TWO of the following situations should the transaction costs
be capitalised as part of the initial value of the asset?
a. Fair value through other comprehensive income
b. Fair value through profit or loss
c. Net realizable value method
d. Amortised Cost

v) Which of the above items could be classified as financial instruments?

a. Loan notes and equity investment
b. Convertible loan notes and loan notes
c. All three
d. Equity investment only

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13) Umbridge Co. has an year end of 31st March. The financial statements for
the year ended 31st March 20X8 has been authorized on 24th April 20X8
and the annual general meeting will be held on 5th May 20X8. The
following events occurred after the year end.
A - A stock of goods in Umbridge’s warehouse was sold on 2nd of April for
$ 266 000. The cost of this stock was $ 437 000.
B – On 5th of April Umbridge acquired a lead mine at a cost of $ 28.5
million. The estimated cost to restore the environment which is damaged
by the mining activities is $ 14.25 million. The cost will have to be incurred
at the end of the asset’s useful life which is 10 years. The present value
of $ 1 in 10 years using the cost of capital of 8% is $ 0.46.
C – On 12th April a fire occurred in one of Umbridge’s stores and the store
was completely destroyed. The carrying amount of the store as at that
date was $ 9.5 million. Umbridge will be able to recover $ 8..55 million
from its insurers and its going concern is not in doubt.
D – On 23rd April the government announced a change in tax rates. This
change will increase Umbridge’s deferred tax liability by $ 25,000 as at
31st March 20X8

i) Which of the above events are Adjusting events according to IAS 10

Events after reporting period?
a. B and C b. A only
b. B only c. All 4 events

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ii) There is no legal obligation to restore the environment but Umbridge

has a published environment conservation policy.
How should the environmental restoration cost be accounted in
Umbridge’s financial statements?
a. A contingent liability should be recorded as there is no legal
obligation.
b. No provision need to be recognized.
c. A provision need to be recognized as there is a constructive
obligation.
d. The present value of the cost should be expensed to Statement of
profit or loss

iii) How much should be recorded as provision regarding the lead mine as
at 31st March 20X9?
_____________________

iv) Kacey Co., a subsidiary of Umbridge has a loan of $ 15 million which is

repayable in 5 years. Half of the loan is guaranteed by Umbridge in the
event of a default by Kacey. It is possible that Kacey will not be able to
repay the loan, but not likely.
How should this be treated in the financial statements of Umbridge?
a. A provision
b. A contingent liability
c. A non-current liability
d. Not included

v) On 26th April 20X8 Umbridge acquired a new subsidiary. Which of the

following is correct regarding this acquisition according to IAS 10
Events after Reporting period as at 31st March 20X8?
a. It is an adjusting event
b. It is a non-adjusting event but disclosure is required.
c. It is a non-adjusting event and need disclosure is not required.
d. It is neither an adjusting or non-adjusting event.

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14) The following information is available in Dudley Co. as at 31st December

20X2 about contracts in progress which were commenced this year.
Contract A Contract B Contract C
($ m) ($ m) ($ m)
Price 14.5 11.6 5.8
Cost to date 8.7 5.8 0.725
Costs to complete 1.45 8.7 2.9
Progress 80% 60% 25%
Amount billed to 10.15 4.35 1.45
date
i) A – When a loss making contract is considered, 100% loss should be
recognized in the current financial statements, irrespective of the
progress.
B – Where the progress and profit are unknown, no contract asset or
liability can be recognized.
Which of the above statements are correct?
a. A only
b. B only
c. Both A and B
d. Neither A or B

ii) What revenue should be recorded in relation to Contract A?

____________________

iii) How much cost of sales should be recorded in relation to the Contract
B?
a. $ 6 090 000
b. $ 13 630 000
c. $ 9 860 000
d. $ 8 178 000

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iv) What should be the amount recorded in Statement of Financial

position in relation to Contract C?
a. $ 225 000 contract asset
b. $ 225 000 contract liability
c. $ 181 250 contract asset
d. $ 181 250 contract liability

v) Dudley is considering changing the way of measuring the progress.

It is a change in accounting _________________ and applied
__________________.
Fill in the blanks.
a. Estimate, Prospectively
b. Policy, Retrospectively

15) On 1st April 20X4 Granger Co. issued 5% $ 12 million convertible loan notes
which is redeemable after 3 years. A similar loan note without the
conversion option would have an interest rate of 8%. Relevant discount
rates are given below,
Yr 5% 8%
1 0.95 0.93
2 0.93 0.86
3 0.86 0.79
On 1st March 20X5 Granger factored its receivables of $ 2.4 million to a
bank. Granger received an immediate payment of $ 2.16 million. Under the
factoring agreement any receivable not collected after four months will
be sold back to Granger.
On 1st April 20X4 Granger sold some maturing inventory which had a cost
of 5.4 million to another company to its fair value of $ 6 million. Under the
terms of the agreement Granger can repurchase the inventory after 10
years at a value of $8.88 million. At this date the fair value of the inventory
is estimated to be $ 13.2 million, and the repurchase price reflects an
equivalent annual rate of interest of 4%.

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i) Splitting the convertible loan into equity and liability components is

important to satisfy which of the following qualitative characteristics?
a. Timeliness
b. Verifiability
c. Faithful representation
d. Relevance

ii) What amount should be recorded in equity in respect of the convertible

loan notes issued by Granger?
_______________________

iii) How much non-current liability should be recorded in the statement of

financial position as at 31st March 20X5 regarding the convertible loans?
_______________________

iv)Which of the following is correct regarding Granger’s factoring of

receivables for the year ended 31st March 20X5?
a. This represents a without recourse factoring agreement.
b. The receivable should be removed form the statement of financial
position
c. $ 240 000 should be recorded as an administrative expense for the
disposal of receivables.
d. The receipt of $ 2.16 million should be treated as a loan

v) Which TWO of the following should be recorded in Granger’s financial

statements for the year ended 31st March 20X5 in respect of the
maturing inventory sale?
a. $ 6.24 million loan
b. $ 240 000 finance cost
c. $ 6 million revenue
d. $ 600 000 gross profit

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16) On 1st January 20X5 Tonks Co. entered into a lease agreement to lease a
machine for four years. The present value of the total lease payment is $
245,000. The lease required four annual payments in advance of $ 70,000
each on 1st October. The plant has a useful life four years and will be
scrapped at the end.
On 1st July 20X4 Tonks Co. entered into another agreement to lease twenty
telephones for the sales officers. The telephones are to be leased for a
period of 2 years. The present value of the lease payment is $ 6.873. $ 180
per computer per annum is payable in advance.
The cost of capital of the company is 10%

i) Which TWO of the following are criteria to classify a transaction as a

lease according to IFRS 16 Leases?
a. The asset concerned in the agreement cannot be substituted.
b. The lessor has the right to direct the use of the asset
c. The lease term will be equal to the identified useful life of the asset
d. The lessee has substantially all the economic benefits from the use
of the asset.

ii) What would be the carrying amount of the right-of-use machinery as

at 30th June 20X5?
____________________________

iii) What interest would be charged to Tonks’ statement of profit or loss

for the year ended 30th June 20X5 in respect of the leased machinery?
a. $ 24 500
b. $ 8 750
c. $ 12 250
d. $ 17 500

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iv) Due to the capitalization of the leased plant and identifying lease
liability according to IFRS 16, which TWO of the following ratios would
decrease?
a. Gross Profit margin
b. Gearing
c. Interest Cover
d. Return on capital Employed

v) How much would be charged to Tonks’ statement of profit or loss for

the year ended 30th June 20X5 in respect of the telephones?
a. $ 4 123.5
b. $ 3 600
c. $ 3 436.5
d. $ 3 273

17) On 17th September Weasley Co. has decided to dispose one of its divisions.
The public announcement was made during that date. Some of the staff
relating to the division will be retrained for a new division incurring a cost
of 0.48 million and some were made redundant with a cost of 0.72 million.
The investment to commence the new branch would be $ 1.2 million.

Weasley has sold 10,000 products which are manufactured in the factory
that are covered by a warrant agreement as at 30th September 20X8. It is
believed that 6% of the products will develop major faults and 8% will
develop minor faults after sales. For a major fault to be repaired Weasley
will have to incur a cost of $ 60 and for a minor fault it is $ 18.
On 5th October 20X8 Weasley was informed that the company is being
sued by a customer in relation of faulty goods that was bought by him in
July 20X8. The legal advisors advise that Weasley is certain to lose the
case. The following information is available,

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Estimated Costs Probability of the payment

occurring
$ 2 million 30%
$ 4 million 60%
$ 6 million 10%

i) A – The value can be reliably measured

B – A present obligation from a past event
C – It is possible that an outflow of resources will be required.
Which of the above criteria are necessary to identify and recognize a
provision?
a. A and B
b. A and C
c. B and C
d. All 3

ii) What amount should be recognized as a provision in related to the

disposing of the division?
a. $ 1.2 million
b. $ 0.72 million
c. $ 1.92 million
d. $ 2.4 million

iii) What amount should be recognized as a warranty provision in the year

ended 30th September 20X8?
________________________

iv) What amount should be recognized as a provision in relation to the

legal procedure against the company by the customer?
a. $ 2 million b. $ 6 million
b. $ 4 million c. $ 12 million

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v) The finance manager of Weasley has reliably forecast an operating

loss of $ 5 million for the year ending 30th September 20X9.
Can Weasley recognize a provision in relation to the above situation?
a. Yes
b. No

18) Hedwig Co. has calculated its estimated tax expense for the year ended
31st March 20X6 as $ 34 400. However, he has mistakenly ignored the
deferred tax. The deferred tax liability as at 1st April 20X5 is $ 104 000. At
the year end Hedwig had a temporary taxable difference of $ 288 000.
Hedwig pays tax at 25%.
Hedwig buys and sells goods in Euro, but its functional currency is
dollars($)
Hedwig purchased goods on 1st January 20X6 for 8 000 Euro. As at 31st
March 20X6 this amount remained unpaid.
Hedwig sold goods on 1st January 20X6 for 48,000 Euro. On 1st February
20X6 Hedwig received 24 000 Euro. The remaining amount was unpaid at
the year end.
The relevant exchange rates are as follows,
Date Euro : $
1st January 10 : 1
1st February 10.5 : 1
31st March 8:1
Average rate 9:1
i) According to IAS 21 at which exchange rate should non-monetary items
carried at historical cost be measured?
a. Average rate
b. Closing rate
c. Rate at date of transaction
d. Rate at the beginning of the year

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ii) What will be the tax expense recorded in the statement of profit or loss
for the year ended 31st March 20X6?
___________________________

iii) It was also discovered that there is a debit balance on the trial balance
of $ 2 400 in relation to the over/under provision of tax from the prior
year.
What impact will this have on Hedwig’s current year financial
statements?
a. Increase in the tax expense by $ 2, 400 in the statement of profit or
loss.
b. Decrease in the tax expense by $ 2 400 in the statement of profit or
loss.
c. Increase in the tax liability by $ 2 400 in the statement of financial
position.
d. Decrease in the tax liability by $ 2 400 in the statement of financial
position.

iv) What gain or loss should be recorded in the statement of profit or loss
for the year ended 31st March 20X6 in relation to the payable recorded
for the purchase of goods?
a. Gain $ 88.8
b. Loss $ 88.8
c. Gain $ 200
d. Loss $ 200

v) What gain should be recorded in the statement of profit or loss for the
year ended 31st March 20X6 in relation to the sale of goods (to the
nearest dollar)?
_______________________

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19) The profit after tax for Ginny for the year ended 31st December 20X1 was
$ 9 million. On 1st January 20X1 Ginny had 25.5 million shares in issue. On
1st May Ginny made a market issue of 2.25 million shares at full price and
after 5 months on 1st October a bonus issue was made one new share for
every five held.
Fred Co. had a profit after tax of $ 9.75 million for the year ended 31 st
December 20X1. The equity shares in issue as at that date was 23.4
million. On 1st April Fred made a fully subscribed rights issue of one new
share for every four shares held at a price of $ 2.80 each. The market
price of a share at that time was $ 3.80.
The profit after tax of Arthur Co. for the year ended 31st December 20X1
was $ 8.25 million. It had 23 787 500 equity shares in issue at the
beginning of the year. Further it also had $ 5.5 million convertible loan
notes with an effective rate of 8%. The loan note could be redeemed at
par or converted into equity shares on the basis of 25 shares for each $
100 of loan note at the loan note holder’s option. The loan interest is tax
deductible.

i) Which of the above three companies will have to restate the prior year
comparative earnings per share(EPS) figure?
a. Ginny only
b. Ginny and Fred
c. All three companies
d. Arthur only

ii) What is the basic EPS of Ginny?

a. $ 0.32
b. $ 0.26
c. $ 0.31
d. $ 0.28

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iii) What is the basic EPS of Fred?

a. $ 0.42
b. $ 0.36
c. $ 0.35
d. $ 0.34

iv) What is the diluted earnings per share of Arthur?

a. $ 0.34
b. $ 0.33
c. $ 0.35
d. $ 0.36

v) The financial statements of Fred for the year ended 31st December 20X0
(previous year) showed an EPS figure of $ 0.40. What will be the restated
EPS for the year ended 31st December 20X0?
_________________________

20) On 1st October 20X3 Slytherin acquired 80% of Gryffindor ’s 2 million $ 1

ordinary shares. At this date the following information were available.
Slytherin Gryffindor
Retained Earnings $ 9.5 million $ 3.8 million
Revaluation Surplus $ 4.75 million $ 1.9 million
As at the acquisition date Gryffindor’s net assets were equal to their
carrying amounts with an exception of a building which had a fair value
of $ 760,000 excess of its carrying amount and a remaining useful life of
20 years.
At 30th September 20X4, both these companies revalued their assets.
Slytherin’s assets increased by a further $ 1.9 million while there was a
increase of $ 475,000 in Gryffindor. The retained earnings at the end of
the year was,
Slytherin - $ 10.45 million
Gryffindor - $ 3.325 million

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i) What will be the other comprehensive income attributable to Slytherin

for the year ended 30th September 20X4?
_____________________________

ii) What will be the consolidated retained earnings as at 30th September

20X4?
a. $ 10 779 600
b. $ 10 039 600
c. $ 10 032 000
d. $ 10 860 400

iii) Slytherin also owns 30% of Albus Co. for many years. During the year
Slytherin sold $ 2.85 million of goods to Albus at a mark up of 20%.
Albus has a quarter of goods left in inventory at year end.
What is the value of the unrealised profit adjustment as at 30th
September 20X4?
a. $ 35 625
b. $ 142 500
c. $ 118 750
d. $ 42 750

iv) After 2 years Slytherin disposed the entire holding in Gryffindor for $
8.55 million. At this date the following information were available,
Fair value of Net assets $ 10 070 000
NCI $ 2 375 000
Goodwill $ 950 000
What is the profit/loss on disposal that is to be shown in the
consolidated financial statement of Slytherin?
a. $ 1 805 000 gain
b. $ 4 845 000 loss
c. $ 1 919000 gain
d. $ 95 000 loss

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v) According to IAS 1 Presentation of financial statements which of the

following is NOT an item that should be shown on the face of
statement of financial position?
a. Intangible Assets
b. Provisions
c. Government Grants
d. Inventories

21) The accountant of Delphia Co. has completed a draft of the cash flow
statement as at 31st March 20X3 and he has observed some important
information.
On 1st April 20X2 the deferred income relating to government grants was
$ 4.8 million and the closing deferred income balance was $ 6.4 million.
Also, the balance of property on 1stApril 20X2 was $ 31.6 million and at the
year end it was $ 23.2 million. There were no additions of property in the
year.
The drafted statement was as follows,
($’000)
Profit from operations 2 800
Depreciation 3 680
Profit on disposal of property (2 960)
Release of government grant 1 120
Increase in trade payables 720
Decrease in trade receivables (240)
Increase in inventories (320)
Cash generated from operations 4 800

i) In the above format what are the errors made by Delphi’s accountant?
a. Addition of Depreciation expenses
b. Addition of release of government grant
c. Deducting profit on disposal of property
d. Deducting decrease in the trade receivables

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ii) What will be recorded as the receipt of government grant in the year?
_______________________

iii) How much would be recorded in Delphia’s Statement of cashflows in

relation to the sale of property?
a. $ 2 960 000
b. $ 1 760 000
c. $ 7 680 000
d. $ 4 720 000

iv) A – A bonus issue will increase the cash flow from financing activities.
B - Intangible assets will have no impact on statement of cash flows
Which of the above statements are correct?
a. A only
b. B only
c. Both A and B
d. Neither A or B

v) What method has been used to calculate the cash from operations in
the above scenario?
a. Direct Method
b. Indirect Method
c. Classification by function
d. Classification by nature

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22) On 1st October 20X7 Krum acquired 80% of Ollivander’s equity shares in a
share for share exchange. Krum issued 2 shares for every 5 shares
acquired and the share price as at that date was $ 5.30.
As at 31st March 20X8 the following information are available
Krum Ollivander
Property, plant and $ 224 250 000 $ 91 650 000
equipment
Trade receivables $ 21 060 000 $ 24 700 000
Equity shares $1 each $ 102 000 000 $ 9 750 000
Share premium $ 3 900 000 $ 1 300 000
Ollivander made a profit of $ 15.6 million during the year ended 31st March
20X8.
Krum measures non-controlling interest at fair value. At the date of
acquisition it was $ 4.68 million.
Krum sold an item of machinery to Ollivander on the acquisition date for
$ 16.25 million when it had a remaining useful life of 5 years and the
carrying amount was $ 13 million.
During the year Krum sold goods to Ollivander and Krum’s receivable
balance differed from Ollivander’s payables balance of $ 3.9 million due
to a cash in transit of $ 1.3 million.
Krum also owns 30% of Arnold. Krum does not have the ability to appoint
any member of the board. The whole board is appointed by another entity
with control over Arnold.

i) How should the investment in Arnold accounted for?

a. As a subsidiary
b. As an associate
c. As a contingent asset
d. As a financial instrument

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ii) What will be recorded as share premium on the consolidated statement

of financial position as at 31st March 20X8?
a. $ 17 316 000
b. $ 18 616 000
c. $ 20 436 000
d. $ 21 736 000

iii) What will be reported as property, plant and equipment on the

consolidated statement of financial position as at 31st March 20X8?
________________________

iv) What will be reported as receivables on the consolidated statement

of financial position as at 31st March 20X8?
__________________________

v) What will be reported as Non-controlling interest on the consolidated

statement of financial position as at 31st March 20X8?
a. $ 6 175 000
b. $ 6 240 000
c. $ 4 680 000
d. $ 6 305 000

23) Lucius has the following records as at 1st January 20X8.

($ ’000)
Land and Plant License
Building
Cost 196 000 105 000 210 000
Accumulated (28 000) (72 100) (21 000)
depreciation
Carrying 168 000 31 500 189 000
amount

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The land and building was revalued on 1st January 20X3 with $ 56 million
attributable to land and $ 140 million attributable to building. At that date
the estimated remaining useful life of the building was 25 years. On 1 st
January 20X8 land and building were revalued again at 59.5 million and
$ 126 million respectively. The remaining estimated life was 20 years as
at that date. There were no disposals of NCA during the year.
Plant is depreciated at 20% per annum on cost. On 1st July 20X8 a new
plant was bought for $ 31.5 million. In addition to this $ 3.5 million was
paid for installation.
The license was bought from the government on 1st January 20X7. It is
amortised on straight line basis and as at 31st December 20X8 the fair
value of the license was only $ 70 million. It has a useful life of 10 years
i) What is the carrying amount of the land and buildings as at 31st
December 20X8?
a. $ 179 200 000
b. $ 185 500 000
c. $ 168 000 000
d. $ 189 700 000

ii) What is the depreciation charge on the plant for the year ended 31 st
December 20X8?
a. $ 21 million c. $ 14 million
b. $ 24.5 million d. $ 17.5 million

iii) The recoverable amount of the asset is the higher of

____________________ and ___________________________.
Choose the correct answers
a. Value in Use
b. Carrying amount
c. Fair value less costs of disposal
d. Carrying amount less costs of disposal

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iv) What is the amount of impairment loss on the license?

a. $ 119 million
b. $ 98 million
c. $ 70 million
d. $ 168 million

v) Which of the following is NOT required to be disclosed in relation to

revaluation?
a. The effective date of revaluation
b. The basis used to revalue the asset
c. Professional qualifications of the valuer
d. The carrying amount of asset if it wasn’t revalued.

24) Lupin Co. has undertaken a $ 4.5 million contract to construct an

administrative building for an entity. The contract was signed on 1st
December 20X6 and is expected to take 2 years to complete. The
progress of the contract is measured according to % of the work
completed as certified by the surveyor.
The details of the contract were as follows.
As at 30th September As at 30th September
20X8 20X7
Total Contract value 4 500 000 4 500 000
% certified complete 75% 40%
Costs to date 3 240 000 2 070 000
Estimated cost to 630 000 1 890 000
complete
Work invoiced to date 2 700 000 1 800 000
Cash received to date 2 160 000 1 350 000

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i) Which TWO of the following would be acceptable methods of measuring

the performance obligations completed?
a. Time spent as a percentage of total expected contract time.
b. Work invoiced to date as a percentage of total contract price.
c. Cash incurred as a percentage of total expected costs.
d. Cash received to date as a percentage of total contract price.

ii) What is the profit recognized for the year end 30th September 20X7?
______________________________

iii) What amount is included in trade receivables in relation to this

contract as at 30th September 20X7?
a. $ 450 000
b. $ 1 800 000
c. $ 2 700 000
d. $ 180 000

iv) What is the contract asset to be recognized as at 30th September

20X8?
____________________________

v) If at 30th September 20X8 Lupin Co. had completed only 10% of a

certain contract for a cost of $ 360 000 and felt that it was too late to
predict whether the contract would be profitable. What amount should
be recognized as revenue for the current year?
_______________________

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25) Muggle Co. purchased 70% of the Wizard Co. as at 1st April 20X4. Muggle
agreed to pay $ 3.6 million on 31st March 20X6. The cost of capital
relevant is 8%.
The extracts from statement of profit or loss for the year ended 30 th
September 20X4 is given below,
Muggle Co. Wizard Co.
Cost of Sales 191 520 000 105 840 000
Operating Expenses 30 366 000 19 872 000
X - On acquisition Wizard’s net assets were equal to their carrying
amounts with an exception of a factory building, which had a fair value
of $ 2.4 million in excess of its carrying amount and a remaining life at
acquisition of 20 years.
Y - Since acquisition Muggle sold goods to Wizard totaling $ 600 000
per month, making a margin of 20%. As at 30th September 20X4 Wizard
had 30% of these goods in inventory.
Z - At 30th September 20X4 goodwill is impaired by $ 360 000. Muggle
values its net assets at fair value.
The goodwill impairment and depreciation is included with in operating
expenses.

i) What is the cost of sales figure to be recorded in the consolidated

financial statement of profit or loss for the year ended 30th September
20X4?
a. $ 237 840 000
b. $ 241 560 000
c. $ 241 056 000
d. $ 237 456 000

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ii) What is the operating expenses figure to be recorded in the

consolidated financial statement of profit or loss for the year ended
30th September 20X4?
a. $ 40 542 000
b. $ 40 782 000
c. $ 40 602 000
d. $ 40 722 000

iii) Which of the items in the scenario will affect the profit attributable to
the non-controlling interest?
a. X and Y
b. Y and Z
c. X, Y and Z
d. X and Z

iv) What liability should be recorded in respect of the deferred

consideration in Muggle’s Consolidated financial statements for the
year ended 30th September 20X4?
_________________________

v) 1 – Muggle can include the professional fees associated with the

acquisition of Wizard Co. with in goodwill
2 – Muggle should include all of Wizard’s assets, liabilities and
contingent liabilities at fair value in the consolidated financial
statements.
Which of the above statements are correct?
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 or 2

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26) Malfoy Co. is a manufacturing company and its financial position is given
below.
Statement of Financial Position as at 31st December 20X7
Non-Current Assets 579 500
Current Assets
Inventories 91 200
Trade receivables 27 550
Current asset investments 4 750
Cash and cash equivalence 2 850 126 350
Total Assets 705 850

Equity and Liabilities

$1 ordinary shares 380 000
Retained Earnings 180 500 560 500
Non-current Liabilities
Loans 47 500
Current Liabilities
Trade payables 97 850
705 850
i) Malfoy [Link] a manufacturing company. Which of the following ratios
is suitable to best assess the efficiency of the company?
a. Current Ratio
b. Asset turnover ratio
c. Price/Earnings Ratio
d. Gearing Ratio

ii) What is the current ratio of Malfoy Co. as at 31st December 20X7?
a. 0.87
b. 1.26
c. 1.29
d. 0.37

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iii) Which of the following would contribute to increase Malfoy’s current

ratio?
a. Make a bonus issue of shares
b. Make a rights issue of shares
c. Sell the current asset investments
d. Offer a settlement discount to customers

iv) Calculate the Quick ratio of Malfoy Co. as at 31st December 20X7?
________________________

v) Malfoy Co. is concerned about its acid teat ratio. Delaying the
payment to all trade payables by one month will
_______________________ (Increase/Decrease) the Acid test ratio.

27) Black Co. issued $ 5 million 6% loan notes on 1st April 20X2. The loan
note is redeemable at premium and has an effective interest rate of
7.5%. The loan was specifically issued to finance the construction of a
building which is a qualifying asset. Constructions began on 1st May
20X2 and was finished and ready to use on 28th February 20X3. It
opened for trading on 1st April 20X3.

i) What is the definition of a “Qualifying Asset”?

a. An asset that has been financed through a specific loan
b. An asset that is intended to use rather than sell
c. An asset that is ready for use or sell at the time of purchase
d. An asset that takes a substantial period of time to get ready for
the intended use.

ii) What is the total of the finance costs which can be capitalised in
respect of the new building?
_______________________

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iii) Rather than taking out a loan specifically to finance the new building
the company would have used cash from some existing borrowings
which are,
10% loan - $ 25 million
8% loan - $ 15 million
What would have been the capitalisation rate?
a. 8.75%
b. 9%
c. 9.25%
d. 10%

iv) If Black Co. was able to temporarily invest the proceeds of loan for
one month until the construction began, how would the proceeds
be accounted for?
a. Deducted from the cost of assets
b. Deducted from the finance cost
c. Recognised as investment income
d. Deducted from administrative expenses

v) Which of the following is NOT a requirement that should be fulfilled

to capitalise the borrowing costs?
a. The construction of the asset should be on going
b. The loan should be already issued
c. Expenditure on the asset should be incurred
d. Physical construction of the asset is nearing completion.

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28) The following were extracted from the financial statements for the
year ended 31st December 20X8 of Crucifix Co.
Statement of Profit or Loss
Finance Costs (45 000)
Profit before tax 106 500
Income tax expense (42 750)
Profit for the year 63 750
Statement of financial position extracts :
20X8 20X7
Retained Earnings $ 675 000 $ 705 000
5% Loan notes $ 386 250 $ 375 000
Deferred tax liability $ 112 500 $ 93 750
Tax payable $ 22 500 $ 30 000
Lease Liabilities $ 225 000 $ 232 500
Additional Information –
1. During the year Crucifix received a dividend from its only
subsidiary.
2. Crucifix disposed a land during the year, which had a remaining
revaluation surplus at disposal of $ 15 000
3. $ 30 000 of the finance costs relate to the loan notes which are
repayable at a premium which has the effective interest rate of 8%.
The remaining interest relates to lease liabilities.
4. Crucifix acquired $ 52 500 of new assets under lease agreements
during the year. Crucifix makes annual payments under leases on
31st December each year.

i) What amount will be recorded under tax paid in the statement of

cash flows for the year ended 31st December 20X8?
_____________________________

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ii) What amount should be recorded under dividend paid in the

statement of cash flows for the year ended 31st December 20X8?
_____________________________

iii) Where should the dividend received be recorded?

a. Financing activities
b. Operating activities
c. Investing activities
d. Neither of the above

iv) What will be recorded under interest paid in the statement of cash
flows for the year ended 31st December 20X8?
a. $ 18 750 c. $ 15 000
b. $ 33 750 d. $ 45 000

v) How much should be shown under lease liabilities repaid in the

statement of cash flows for the year ended 31st December 20X8?
____________________________

29) Azkaban Co. entered into a lease agreement to lease a plant on 1 st

July 20X6. An initial payment is made on that date and the present
value of the future lease payments at that date is $ $ 112 775.
Payments in respect of the lease are made in advance and are $ 65
000 per annum, commencing on 1st July 20X7. The interest rate is
10%. The ownership of the plant is not transferred to Azkaban at the
end of the lease period. Azkaban also incurred initial direct cost of
$ 13 000 and received a lease incentive of $ 4 550.

i) What Is the initial cost of the right-of-use asset?

a. $ 190 775
b. $ 121 225
c. $ 230 450
d. $ 186 225

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ii) Over what period should the right-of-use asset be depreciated?

a. Longer of the lease period and useful life of the asset
b. Shorter of the lease period and useful life of the asset
c. Useful life of the asset
d. Lease period

iii) What is the total lease liability as at 30th June 20X7 (to the nearest
dollar)?
a. $ 59 053
b. $ 130 000
c. $ 112 775
d. $ 124 053

iv) In which TWO of the following situations would charging lease

payment to profit or loss be the correct accounting treatment
assuming that Azkaban takes advantage of any exemptions
available?
a. The asset has a low underlying value
b. The lease is less than 12 months
c. Ownership is transferred at the end of the period.
d. The asset has been specially adopted for the use of lessee

v) On 1st January 20X6 Azkaban Co. leased another item of plant for
a period of 10 months paying $ 600 per month in arrears. As an
incentive it received the first month rent free.
How much should be recognized as payments under short term
leases for the year ended 30th June 20X7?
a. $ 3 250
b. $ 3 900
c. $ 2 925
d. $ 3 510

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30) On 1st January 20X3 Quidditch Co. acquired 58 million of Snitch Co’s
72.5 million ordinary shares for an immediate cash payment of $
252 million and issued at par one 10% $ 100 loan note for every 200
shares acquired.
At the date of acquisition Snitch Co. had a property with a carrying
amount of $ 74.4 million, whose fair value as at that date amounted
to $ 98.4 million. It had an estimated useful life of 20 years.
Snitch Co. also had an internally generated brand which was valued
at $ 30 million at the acquisition date. It had a remaining useful life
10 years.
The inventory of Snitch Co. as at 31st December 20X4 includes goods
supplied by Quidditch Co. for a price of $ 67.2 million. Quidditch adds
a mark-up of 40% total sales.

i) How should the unrealised profit be posted?

a. Dr. Inventories, Cr. Cost of sales
b. Dr. Cost of sales, Cr. NCI
c. Dr. NCI, Cr. Cost of sales
d. Dr. Cost of sales, Cr. Inventories

ii) What is the total amount of consideration paid by Quidditch Co. to

acquire Snitch Co.?
___________________________

iii) What will be the amount that should be adjusted to group retained
earnings as at 31st December 20X3 in respect of the movement on
the fair value adjustments?
a. $ 8.4 m
b. $ 3.36 m
c. $ 4.2 m
d. $ 6.72 m

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iv) What is the amount of the unrealised profit arising from the
intragroup trading?
________________________

v) Which of the following situation would allow a subsidiary to be

excluded from consolidation?
a. Control of the subsidiary is temporary.
b. The subsidiary is operating in a significantly different market
from the parent.
c. Control of the subsidiary has been lost.
d. The subsidiary does not follow the same accounting policies
as that of the parent.

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Constructed Response Questions

Analysing Financial Statements

1) Lex Co.
Lex would like to acquire 100% of a suitable entity. It has obtained the
following draft financial statements from Luthor Co. and Super Co. which
are operating in the same industry. They have recently announced that they
would be receptive to a takeover.
Statement of Profit or Loss for the year ended 31st March 20X5 ($’000)
Luthor Co. Super Co.
Revenue 10 800 18 450
Cost of Sales (9 450) (16 200)
Gross Profit 1 350 2 250
Operating Expenses (216) (450)
Finance Cost (189) (540)
Profit before tax 945 1 260
Income tax expense (135) (360)
Profit for the year 810 900

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Statement of Financial Position as at 31st March 20X5

Luthor Co. Super Co.
Non-Current Assets
Freehold Factory 3 960 -
Owned Plant 4 500 1 980
Right-of-use Asset - 4 770
8 460 6 750
Current Assets
Inventory 1 800 3 240
Trade Receivables 2 160 3 330
Bank 540 -
Total Assets 12 960 13 320

Equity and Liabilities

Equity shares of $ 1 each 1 800 1 800
Revaluation Surplus 810 -
Retained Earnings 2 340 720
4 950 2 520
Non-current Liabilities
7% Loan notes 2 700 -
10% Loan notes - 2 700
Lease Liabilities - 2 880
Deferred tax 540 180
Government grants 1 080 -
4 320 5 670
Current Liabilities
Bank Overdraft - 1 080
Trade Payables 2 790 3 420
Government Grants 360 -
Lease Liabilities - 450
Taxation 540 180
Total Equity and liabilities 12 960 13 320

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Additional Information –
a) Dividends paid during the year – Luthor Co. – 225 , Super Co – 630
b) Finance Costs break down –
Luthor Co Super Co.
Finance costs - Loan 189 270
Overdraft - 9
Lease - 261
c) Both entities operate from similar premises.
d) The interest rate within Super Co. for leases is 7.5%. When
calculating Gearing and ROCE, all lease obligations are treated as
long-term interest bearing borrowings.
e) Additional details on plant –
Luthor Co. Super Co.
Owned Plant – Cost 7 200 9 000
Right-of-use plant (Initial Value) - 6 750
f) The following has been accurately calculated for Luthor:
Return on Capital Employed (ROCE) 14.8%
Operating Profit margin 10.5%
Gross Profit margin 12.5%
Current Ratio 1.2:1
Trade payable’s payment period 108 days
Trade receivables collection period 73 days
Closing inventory holding period 70 days
Gearing 35.3%
i) Calculate all the equivalent ratios as above for Super Co. (4 marks)
ii) Assess the relative performance and financial position of Luthor
and Super for the year ended 31st March 20X5 to inform the
directors of Lex Co. in their acquisition decision. (11 marks)
iii) Outline the problems in using ratios for comparison purposes
between entities, and suggest what additional information would be
useful for Lex Co. in reaching its decision. (5 marks)

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2) Mary Co.
Craven is interested in acquiring Mary Co, a retailing business, which is one
of the several entities owned and managed by Martha Group. The
summarized financial statements of Mary Co. is given below.
Statement of Profit or Loss for the year ended 30th September 20X3
($’000)
Revenue 56 000
Cost of Sales (36 000)
Gross Profit 20 000
Operating Expenses (5 600)
Director’s Salaries (800)
Profit before tax 13 600
Income tax expense (2 400)
Profit for the year 11 200
Statement of Financial Position as at 30th September 20X3
($ ’000) ($ ’000)
Non-Current Assets
Property, plant and equipment 25 920
Current Assets
Inventory 6 000
Bank 80 6 080
Total Assets 32 000

Equity and Liabilities

Equity shares of $ 1 each 800
Retained Earnings 14 960 15 760
Non-current Liabilities
Director’s loan accounts 8 000
Current Liabilities
Trade payables 6 000
Current tax payable 2 240 8 240
Total Equity and liabilities 32 000

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a) From the above financial statements Craven has calculated the ratios
below for Mary and has obtained equivalent sector averages,
Mary Sector averages
Return on Equity (ROE) (including 47.1% 22.0%
director’s loan accounts)
Net asset turnover 2.36 times 1.67 times
Gross Profit margin 35.7% 30%
Net profit margin 20% 12%
b) Craven expects the purchase price of Mary to be $ 24 million.
Craven would replace the existing board of directors in Mary and need to
pay $ 2 million per annum as remuneration.
The directors’ loan account would be repaid by obtaining a loan of the
same amount with interest of 10%per annum
Mary buys all of its trading inventory from Martha at a price which is
10%less than the market price for such goods.

i) Recalculate the ratios for Mary Co. after making appropriate adjustments
to the financial statements for notes (a) to (e) above. For this purpose the
expected purchase price of $ 24 million should be taken as Mary’s equity
and net assets are equal to this equity plus the loan. You may assume the
changes don’t affect the taxation. (6 marks)

ii) In relation to the ratios calculated in (i) above and the ratios given,
comment on the performance of Mary compared to its retail sector
averages. (9 marks)

iii) Explain any concerns that would be raised about basing the investment
decision on the consolidated statements of Martha group rather than
Mary’s individual statements.(5 marks)

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3) Panther Co.
Panther is a group which owns a number of 100% owned subsidiaries.
Consolidated Statement of Profit or Loss for the year ended 31 st
December
($’000) ($’000)
20X7 20X6
Revenue 65 00 47 950
Cost of Sales (32 200) (19 600)
Gross Profit 33 600 28 350
Distribution Costs (14 840) (13 510)
Administration Costs (17 920) (10 780)
Profit from operations 840 4 060
Investment Income 0 420
Finance Cost (84) 0
Profit before tax 756 4 480
Taxation (210) (1 344)
Profit for the year 546 3 136

Attributable to :
Shareholders 1 106 3 136
Non-controlling interest (560) -

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Extracts from consolidated statement of financial position as at 31 st

December ,
($’000) ($’000)
20X7 20X6
Inventories 4 550 3 199
Trade Receivables 11 900 10 920
Bank 427 4 200
Equity
Equity shares $1 each 17 500 4 200
Retained Earnings 51 450 50 750
Non-controlling interest 357 -
Non-current Liabilities
Loan 14 000 -
Current Liabilities 6 370 3 983

a) The following ratios has been calculated for the year ended 31st December
20X6,
Return on Capital Employed (ROCE) 7.4%
Operating Profit margin 8.5%
Gross Profit margin 59.1%
Current Ratio 4.6:1
Inventory turnover period 60 days
Receivables collection period 83 days
b) Panther has concern on two areas. Firstly, the fuel prices has increased
which means that delivering the products locally has become extremely
expensive. Secondly, the reliance on large supermarkets put pressure on
cash flow as they demand long payment terms.
c) To manage this Panther has acquired 80% of Black Co. which is operating
in the hotel industry. Panther hoped that this would improve cash flow as
customers pay upfront.

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d) To fund this acquisition Panther has disposed of $ 7.7 million held in

investments, making a profit on disposal of 3.15 million. This is included
with in administrative expenses.
e) Black Co. opened a new hotel in June 20X7. After poor reviews Panther
recruited a new marketing director in September. Following an extensive
marketing campaign, online feedback was improved.

i) For the ratios provided above, prepare the equivalent figures for the year
ended 31st December 20X7. (5 marks)
ii) Analyse the financial performance and position of Panther for the year
ended 31st December 20X7, making specific reference to any concerns or
expectations regarding the future periods. (15 marks)

4) Joker Co.
Consolidated Statement of Profit or Loss for the year ended 31st March
($’000) ($’000)
20X2 20X1
Revenue 150 000 108 000
Cost of Sales (120 000) (90 000)
Gross Profit 30 000 18 000
Operating expenses (15 600) (13 200)
Finance Cost (4 800) Nil
Profit before tax 9 600 4 800
Taxation (2 400) (1 200)
Profit for the year 7 200 3 600

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Consolidated Statement of Financial Position as at 31st March

($’000) ($’000)
20X2 20X1
Non-Current Assets
Property, plant and equipment 126 000 54 000
Goodwill 6 000 Nil
132 000 54 000
Current Assets
Inventory 15 000 9 000
Trade Receivables 7 800 4 800
Bank Nil 8 400
Total Assets 154 800 76 200

Equity and Liabilities

Equity shares of $ 1 each 60 000 60 000
Retained Earnings 8 400 7 200
68 400 67 200
Non-current Liabilities
8% Loan notes 60 000 Nil

Current Liabilities
Bank Overdraft 10 200 Nil
Trade Payables 13 800 7 800
Current tax payable 2 400 1 200
Total Equity and liabilities 154 800 76 200
a) Extracts from Chief Executives Report,
The revenue has increased by 39%
Gross profit margin has risen from 16.7% to 20%
The profit has doubled during the period
In response to the improved profits the board has paid a dividend of $
0.1 per share in December 20X2 an increase of 25% on the previous year.

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b) On 1st January 20X2 Joker has purchased 100% equity of Bat Co. for $ 60
million. The contribution of the purchase to Joker’s results for the year
ended 31st December 20X2 is as follows:
($’000)
Revenue 42 000
Cost of Sales (24 000)
Gross Profit 18 000
Operating expenses (4 800)
Profit before tax 13 200
c) There were no disposals of non-current assets during the period.
d) The following ratios have been correctly calculated
20X2 20X1
Return on capital employed 7.1%
(PBIT/ Total assets less current liabilities)
Net asset turnover 1.2 1.6
Net profit (before tax) margin 6.4% 4.4%
Current ratio 2.5
Closing inventory holding period 37 days
Trade receivables collection period 16 days
Trade payables payment period 42 days 32 days
Gearing (Debt/Debt+Equity) Nil
i) Calculate the missing ratios for 20X2 (5 marks)
ii) Assess the financial performance and position of Joker Co. for the year
ended 31st December 20X2 compared to the previous year. Your answer
should refer to the information in the Chief Executive’s report and the
impact of the purchase of Bat Co. (15 marks)

5) Arrow Co.
Green Co. has identified Arrow Co. as a possible acquisition within the
same industry. Arrow Co. is currently owned by the Leila Group. The
following extracts of financial statements are from Arrow Co.
Statement of Profit or Loss for the year ended 30th September 20X4

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($’000)
Revenue 21 680
Cost of Sales (8 600)
Gross Profit 13 080
Operating expenses (4 680)
Operating Profit 8 400
Consolidated Statement of Financial Position as at 30th September 20X4
($’000) ($’000)
Non-Current Assets 9 760

Current Assets
Inventory 1 960
Receivables 2 280
Bank 920 5 160
Total Assets 14 920

Equity and Liabilities

Equity shares of $ 1 each 400
Retained Earnings 3 200
3 600
Non-current Liabilities
Loan 6 680
Current Liabilities
2Trade Payables 2 160
Current tax payable 2 480 4 640
Total Equity and liabilities 14 920
a) On 1st January 20X4 Arrow decided to dispose one of its non-core
divisions. The disposal generated a loss of $ 600 000 which is included
in operating expenses. The following extracts show the results of the
disposed non-core division for the period prior to the disposal which
were included in Arrow’s results:

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($’000)
Revenue 840
Cost of Sales (480)
Gross Profit 360
Operating expenses (280)
Operating Profit 80
b) The factories of Arrow Co. are currently located within the premises of
Leila Group. If Arrow was acquired, the company would need to seek
alternative premises. Arrow Co. paid rent $ 18 400 in 20X4. Market rent
for equivalent factory space is $ 48 000
c) At present Arrow Co. pays a management charge of 1% of the revenue
to the Leila group which is included in the operating expenses. Green
Co. charges management charge of 10% of gross profit on all
subsidiaries..
d) The following are some of the sector averages:
Gross profit margin 45%
Operating profit margin 28%
Current ratio 1.6:1
Acid test ratio 1.4:1
Receivables collection period 41 days
Gearing (Debt/Equity) 240%

i) Redraft the statement of profit or loss of Arrow Co. to adjust for the
disposal of the division and the adjustments necessary if Arrow was
acquired by Green (5 marks)
ii) Calculate the equivalent ratios for Arrow Co. for the year 20X4
Note : You should assume that any increase or decrease in profit will
also increase or decrease cash.(5 marks)
iii) Comment on the compared to the e performance and position of Arrow
Co. for the year ended 30th September 20X4 in comparison to the sector.
(10 marks)

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6) Martian Co.
Statement of Cash flows for the year ended 31st March 20X9
($’000) ($’000)
Cash flows from Operating activities
Profit before tax 396
Depreciation 252
Loss on disposal of property 81
Increase in warranty provision 90
Investment Income (54)
Finance Costs 45
Redemption penalty costs 18
828
Increase in inventories (360)
Decrease in trade receivables 54
Increase in trade payables 324 18
Cash generated from operations 846
Interest paid (45)
Tax refund received 54
Net cash from operating activities 855

Cash flows from investing activities

Purchase of property, plant and equipment (1,296)
Sale of property, plant and equipment 135
Rent income from investment property 36
Net cash used in investing activities (1,125)

Cash flows from Financing activities

Proceeds from issue of shares 900
Repayment of loan notes (378)
Dividends paid (135)
Net cash from financing activities 387

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Net increase in cash and cash equivalence 117

Cash and cash equivalence at the (108)
beginning
Cash and cash equivalence at the end of 9
the period.

a) There was a share issue on 1st October 20X8

b) Martian gives 1 year warranty on some of the products it sells. The
amounts shown in current liabilities as warranty provision are an
accurate assessment. Warranty costs are included in the cost of sales.
c) An item of plant with a carrying amount of $ 216 000 was sold at a loss
of $ 81 000 during the year. Depreciation of $ 252 000 was charged to
cost of sales for property, plant and equipment in the year ended 31st
March 20X9. Martian uses the fair value model to value the investment
properties and there were no purchase or sale of these during the year.
d) The 6% loan notes were redeemed early incurring a penalty cost of $
18,000which has been charged as an administrative expense.

i) Comment on the cash flow management of Martian Co. as revealed by

the cash flows statement and the information provided above for the
year ended 31st March 20X9. (15 marks)
ii) Discuss the extent to which an entity’s statement of cash flows may be
more useful and reliable than its statement of profit or loss, (5 marks)

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7) Wonder Co.
The following information were extracted from Wonder group for the year
ended 30th June,
20X6 20X5
(Consolidated) (Wonder Co.
Individual)
(’000) (’000)
Revenue 23 110 17 857
Cost of sales (11 990) (9 857)
Gross profit 11 120 8 000
Operating expenses (1 650) (5 000)
Operating profits 9 470 3 000
Finance costs (480) (850)
Profit before tax 8 990 2 150
a) The following had been correctly calculated by using the figures in the
above financial statements.
20X6 20X5
(Consolidated) (Wonder Co. Individual)
Gross profit margin 48.1% 44.8%
Operating profit margin 41% 16.8%
Interest cover 19.7 times 3.5 times
b) On 1st March 20X6 Wonder has disposed all of its only subsidiary,
Cheetah Co. for 14.32 million. Wonder acquired 80% of Cheetah few
years back by paying $ 9.6 million as consideration. On the acquisition
date the following information were available,
Net Assets - $ 9.9 million
Non-controlling interest – $ 2.45 million (measured at fair value)
Goodwill has not impaired since acquisition and at the date of disposal
the value of net assets amounted to $ 13.05 million.

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c) In order to compare the given two financial statements the results of

Cheetah should be eliminated from the consolidated statements.
Although Cheetah was correctly accounted for in the group financial
statements for the year ended 30th June 20X6, again on disposal of $
4.72 m is included in the operating expenses. This is the gain which
should have been recorded in the individual statements of Wonder.

d) In the year ended 30th June 20X6 the following results were recorded
by Cheetah,
(’000)
Revenue 6,750
Cost of Sales 3,300
Operating expenses 1,255
Finance costs 600
e) Cheetah used one of the Wonder’ s buildings as its administrative
office. Wonder didn’t charge a rent for this. Since the disposal of
Cheetah Co. Winder has rented out the same building for a third party
recording the rental income in operating expenses.
f) From beginning of the year to the date of disposal Wonder has sold $
500,000 goods to Cheetah Co. at a margin of 0%. Cheetah has sold all
these goods by the date of disposal.

i) Calculate the gain of disposal which should be recorded in the

consolidated statement of profit or loss of Wonder group for the year
ended 30th June 20X6.
(5 marks)
ii) Remove the results of Cheetah Co. and the gain on disposal of the
subsidiary and prepare a revised statement of profit or loss for the
year. (4 marks)
iii) Calculate the equivalent ratios for the given ratios using the revised
figures. (2marks)
iv) Comment on the performance of Wonder Co. for the years ended 30th
June 20X6 and 20X5 (8 marks)

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8) Sinestro Co.
Sinestro is considering the acquisition of an entity. The financial
statements of potential target entities are given below. Both the entities
are operating in the same industry and acquisition of 100% of the entities
is $ 8.4 million each.
Statement of Profit or Loss for the year ended 31st March 20X7
Lantern Co. Malefic Co.
($’000) ($’000)
Revenue 17 500 28 000
Cost of Sales (13 300) (22 960)
Gross Profit 4 200 5 040
Distribution and Administration (875) (1 610)
Expenses
Finance Cost (175) (630)
Profit before tax 3 150 2 800
Income tax expense (630) (700)
Profit for the year 2 520 2 100
Statement of Financial Position as at 31st March 20X7
Lantern Co. Malefic Co.
($’000) ($’000)
Non-Current Assets
Property Nil 2,100
Owned Plant 3 360 1 400
Right-of-use Asset Nil 3 710
3 360 7 210
Current Assets
Inventory 1 120 2 380
Trade Receivables 1 470 3 570
Bank 770 140
3 360 6 090
Total Assets 6 720 13 300

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Equity and Liabilities

Equity shares of $ 1 each 700 1 400
Revaluation Surplus Nil 630
Retained Earnings 1 120 1 890
1 820 3 920

Non-current Liabilities
5% Loan notes 3 500 Nil
10% Loan notes Nil 3 500
Lease Liabilities Nil 2 940

Current Liabilities
Trade Payables 875 1 470
Lease Liabilities Nil 700
Taxation 525 770
1 400 2 940
Total Equity and liabilities 6 720 13 300
a) Carrying amount of plant

Lantern Co. Malefic Co.

($’000) ($’000)
Owned Plant 5 600 7 000
Less : Government Grant (1 400)
4 200
Accumulated Depreciation (840) (5 600)
3 360 1 400
Right of use asset – initial value Nil 5 600
b) The following ratios have been calculated :
Lantern Co. Malefic Co.
Return on capital employed(ROCE) 62.5%
Net asset turnover 3.3 times 2.5 times

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Gross profit margin 24% 18%

Net profit (before tax) margin 19%
Current ratio 2.4:1 2.1:1
Closing inventory holding period 31 days 38 days
Trade receivables collection period 31 days 47 days
Trade payables payment period 24 days
Gearing (Debt/Debt+Equity) 65.8%

i) Calculate the missing ratios for Malefic Co. All lease liabilities are treated
as debt and profit before interest and tax should be used for the
calculation of ROCE.
(4 marks)
ii) Using the above information assess the performance and financial
position of the two entities comparatively for the year ended 31 st March
20X7 in order to assess the directors of Sinestro Co. to make an
acquisition date. (12 marks)
iii) Describe what further information may be useful to Sinestro when
making acquisition decisions (4 marks)

9) Atom Co.
Atom Co. is considering to acquire 100% of the equity capital of Kronos Co.
The summarized financial statements for the year ended 31st December
20X8 is given below.
Statement of Profit or Loss
($’000)
Revenue 56 400
Cost of Sales (43 800)
Gross Profit 12 600
Distribution Expenses (2 400)
Administration Expenses (3 600)
Finance Cost (240)
Profit before tax 6 360
Income tax expense (1 272)
Profit for the year 5 088

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Statement of Financial Position

($’000) ($’000)
Non-Current Assets
Property, plant and equipment 17 640
Current Assets
Inventory 6 300
Bank 60 6 360
Total Assets 24 000

Equity and Liabilities

Equity shares of $ 1 each 6 000
Retained Earnings 5 280
11 280
Current Liabilities
4% loan notes (redeemable in 1st March 6 000
20X9)
Trade Payables 5 520
Current tax payable 1 200 12 720
Total Equity and liabilities 24 000
a) Atom Co. has calculated the following ratios based on the above financial
statements and has obtained the equivalent sector ratios.
Kronos Co. Sector average
Return on Capital Employed 18% 58.5%
Net asset (total assets-total 2.7 times 5 times
liabilities) turnover
Gross profit margin 22% 22.3%
Operating profit margin 6.7% 11.7%
Annual sales per square meter of $ 7 833 $ 8 000
floor space
Gearing (Debt/Equity) nil 30%

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A note accompanying the sector average ratios explain that it is the

practice of the sector to carry retail property at market value. The
market value of Kronos’ retail property is $ 1.8 million more than it’s
carrying amount (ignore excess depreciation) and gives 7 200 square
meters of floor space.
b) The 4% loan notes have been classified as current liabilities due to their
imminent redemption. They will be replaced immediately after
redemption by 8% loan notes with the same nominal value, repayable in
10 years time.
c) Kronos pay an annual license fee of $ 600 000 (included in cost of sales)
to Minerva for the right to sell under a well-known brand name. If
Kronos is acquired, the arrangement would be discontinued. Atom
estimates that this would not affect the volume of sales in Kronos, but
without the brand name, overall sales revenue would be 5% lower than
currently.
d) Kronos buys 50% of its purchases from Minerva, one of Atom’s rivals
and receives a bulk buying discount of 10% off normal prices. This will
not be available if Kronos is acquired by Atom.

i) After making necessary adjustments to make Kronos comparable to the

sector restate the following. (5 marks)
a. Revenue
b. Cost of sales
c. Finance costs
d. Equity assume that the adjustment to profit or loss will result in
$ 1.38 m of retained earnings at the year end
e. Non-current Liabilities

ii) Recalculate the comparable sector average ratios for Kronos based on
the restated figures in (i) above (6 marks)

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iii) Comment on the performance and gearing of Kronos compared to the

sector as a basis for advising Atom regarding the possible acquisition of
Kronos. (9 marks)
10) Merlyn Co.
Merlyn Co. operates in the jewellery industry and sells through retail
stores in the city. It is concerned about its declining profitability and has
obtained the sector ratios to analyse its performance. Below are the ratios
of the sector as of 30th September 20X7
Return on Capital Employed (ROCE) 16.8%
Net Asset turnover 1.4 times
Gross profit margin 35%
Operating Profit margin 12%
Current Ratio 1.25:1
Average inventory turnover 3 times
Trade payables payment period 64 days
Debt to equity 38%
Statement of Profit or Loss for the year ended 30th September 20X7
($’000) ($’000)
Revenue 50 400
Opening inventory 7 470
Purchases 39 510
Closing inventory (9 180) (37 800)
Gross Profit 12 600
Operating costs (8 820)
Finance Cost (720)
Profit before tax 3 060
Income tax expense (900)
Profit for the year 2 160

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Statement of Financial Position as at 30th September 20X7

($’000) ($’000)
Non-Current Assets
Property and shop fittings 23 040
Deferred development expenditure 4 500 27 540
Current Assets
Inventory 9 180
Bank 900 10 080
Total Assets 37 620

Equity and Liabilities

Equity shares of $ 1 each 13 500
Revaluation Surplus 2 700
Retained Earnings 7 740 23 940

Non-current Liabilities
10% Loan notes 7 200
Current Liabilities
Trade Payables 4 860
Taxation 1 620 6 480
Total Equity and liabilities 37 620
Note – The deferred development expenditure relates to an investment in
a process to manufacture artificial precious gems to be sold in the future
by Merlyn.

i) Prepare the ratios for Merlyn which is equivalent to the given ratios
of the sector. (7 marks)
ii) Assess the financial and operating performance of Merlyn in
comparison to the sector. (13 marks)

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11) Wolf Co.

Statement of Profit or Loss for the year ended 31st December,
20X3 20X2
($’000) ($’000)
Revenue 20 400 13 800
Cost of Sales (11 840) (8 280)
Gross Profit 8 560 5 520
Distribution Expenses (3 840) (2 640)
Finance Cost (520) (80)
Profit before tax 4 200 2 800
Income tax expense (1 800) (800)
Profit for the year 2 400 2 000
Statement of Cash flows for the year ended 31st December 20X3
($’000) ($’000)
Cash flows from Operating activities
Profit from operations 4 720
Depreciation 512
Increase in inventories (1 440)
Increase in receivables (800)
Increase in trade payables 520
Cash generated from operations 3 512
Finance cost paid (520)
Income tax paid (1 000)
Net cash from operating activities 1 992

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Cash flows from investing activities

Purchase of property, plant and (5 392)
equipment
Purchase of Intangibles (4 960)
Net cash used in investing activities (10 352)

Cash flows from Financing activities

Issue of 8% loan notes 5 600
Dividends paid (600)
Net cash from financing activities 5 000

Net decrease in cash and cash (3 360)

equivalence
Cash and cash equivalence at the 3 200
beginning
Cash and cash equivalence at the end of 160
the period.
a) A member of the board has observed that even though the revenue has
increased by 48% during the year, profit has only increased by 20%
b) There were no disposal of non-current assets during the period.
However, some of the assets were classified as held-for-sale as at 31st
December 20X3

i) Comment on the performance of Wolf Co. for the year ended 31 st

December 20X3. Your analysis should also address the observation made
by the board member. (20 marks)
Up to 5 marks are available for calculation of ratios.

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12) Hex Co.

Statement of Profit or Loss for the year ended 30th June,
20X5 20X4
($’000) ($’000)
Revenue 25 200 35 000
Cost of Sales (16 800) (21 000)
Gross Profit 8 400 14 000
Profit from sale of a division 700 Nil
Distribution Costs (2 450) (3 710)
Administration Costs (3 360) (2 030)
Finance Cost (280) (560)
Profit before tax 3 010 7 700
Income tax expense (910) (2 310)
Profit for the year 2 100 5 390
Statement of Financial Position as at 30th June
20X5 20X4
($’000) ($’000)
Non-Current Assets
Property, plant and equipment 11 410 13 300
Intangible - Goodwill Nil 1 400
Current Assets
Inventory 2 380 4 060
Trade Receivables 910 1 680
Bank 1 050 Nil
Total Assets 15 750 20 440

Equity and Liabilities

Equity shares of $ 1 each 7 000 7 000
Retained Earnings 2 100 2 800
Non-current Liabilities
10% Loan notes 2 800 5 600
Current Liabilities
Trade Payables 3 010 2 170
Overdraft Nil 980
Current tax payable 840 1 890
Total Equity and liabilities 15 750 20 440
a) The following ratios have been calculated for Hex Co. for the year ended
30th June 20X4 based on the reported figures above,
Gross Profit margin 40%
Operating profit margin 23.6%
Return on capital employed 53.6%
Net asset turnover 2.27 times

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b) On 1st July 20X4, Hex Co. sold the net assets including goodwill of Quentin
Co. which was a separate division for $ 5.6 million cash on which it made
a profit of $ 700 000. This decision required the approval of shareholders
and in order to secure this, the management of Hex paid a dividend of $
0.28 per each share in issue out of the proceeds of the sale. The trading
results of the Quentin division which are included in the statement of
Profit or loss for the year ended 30th June 20X4 is as follows,
($’000)
Revenue 12 600
Cost of Sales (7 000)
Gross Profit 5 600
Distribution Costs (700)
Administration Costs (840)
Profit before interest and tax 4 060
i) Calculate the equivalent ratios for Hex:
a. For the year ended 30th June 20X4 after excluding the contribution
made by Quentin
b. For the year ended 30th June 20X5 excluding the profit from selling
Quentin
ii) Comment on the comparative performance and position of Hex Co. for
the year ended 30th June 20X5.
iii) On a separate matter you have been asked to advise on borrowing a loan
to improve the facilities of a gym which operates as a not-for-profit
organization. The financial statements from last 4 years are also
provided. Identify and explain the ratios that you would use to deciding on
whether to borrow the loan or not.

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13) Thawne Co.

Thawne group owns a number of subsidiaries. On 30th September 20X8, it
sold the entire holding in Flash. The consolidated statement of profit or
loss of Thawne group for the year 20X8 has been produced without the
results of Flash due to its disposal. No profit or loss on disposal has been
included in the 20X8 consolidated statement of profit or loss.
Statement of Profit or Loss for the year ended 30th September 20X8
20X8 20X7
($’000) ($’000)
Revenue 51 600 59 400
Cost of Sales (38 040) (40 320)
Gross Profit 13 560 19 080
Other Income 2,040 900
Operating expenses (12 780) (13 920)
Profit from operations 2 820 6 060
Finance costs (900) (1 140)
a) The profit or loss statement for the year ended 30th September 20X8 for
Flash Co is given below.

Statement of Profit or Loss for the year ended 30th September 20X8
($’000)
Revenue 9 600
Cost of Sales (6 240)
Gross Profit 3 360
Operating expenses (1 920)
Profit from operations 1 440
Finance costs (540)
b) Flash sold goods amounting to $ 4.8 million to Thawne (included in
Thawne’s cost of sales) during the year. Thawne held none of these goods
at the year end . Flash has made a margin of 40% on all goods sold to
Thawne.

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c) Flash was based in the Thawne’s head office, for which it pays an annual
rent of $ 180 000, significantly below the market rate for equivalent
rentals. As Flash is no longer in the group, Thawne has included this
income with in Other income. Flash records rent payments under
operating expenses.
d) Thawne received a dividend of $ 600 000 from Flash Co. during the year.
Flash has also paid interest of $ 300 000 on a loan given by Thawne. Both
of these are recorded in Thawne’s other income.
e) The following ratios have been calculated for Thawne group using the
reported figures.
20X8 20X7
Gross profit margin 26.3% 32.1%
Operating profit margin 5.5% 10.2%
Interest Cover 3.1 times 5.3 times

i) Calculate the equivalent ratios for the consolidated statement of profit or

loss for the year ended 30th September 20X8 if Flash has been
consolidated. (7 marks)
ii) Analyse the performance of the Thawne Group for the year ended 30 th
September 20X8. This should also include a discussion of Flash. (8 marks)
iii) Thawne acquired 80% of Flash’s 6 million $ 1 shares on 1st October 20X3
for $ 10.2 million when Flash had retained earnings of $ 1.8 million. Thawne
uses the fair value method for valuing the non-controlling interest. At
acquisition the fair value of NCI was $ 1.8 million.
On 30th September 20X8 Thawne sold the entire holding in Flash for $ 15
million when Flash had retained earnings of $ 4.2 million, Goodwill have
suffered no impairment since acquisition.
Calculate the gain or loss to be shown in the consolidated statement of
Profit or Loss.

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14) Hawk Co.

Statement of Profit or Loss for the year ended 31st December
20X4 20X3
(consolidated) (single entity)
($’000) ($’000)
Revenue 41 850 25 200
Cost of Sales (33 480) (18 720)
Gross Profit 8 370 6 480
Operating expenses (1 620) (1 080)
Profit from operations 6 750 5 400
Income tax expense (1 350) (900)
Profit for the year 5 400 4 500
Profit attributable to:
Equity holders of the parent 5 130 -
Non-controlling interest 270 -

Statement of Financial Position as at 30th June

20X4 20X3
(consolidated) (single entity)
($’000) ($’000)
Non-Current Assets
Property, plant and equipment 49 140 37 350
Goodwill 2 700 Nil

Current Assets 39 600 32 400

Total Assets 91 440 69 750

Equity and Liabilities

Equity shares of $ 1 each 41 400 36 000
Other components of equity 5 400 Nil
Retained Earnings 16 830 11 700

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Equity attributable to:

Owners of the parent 63 630 47 700
Non-controlling interest 3 240
Total Equity 66 870 47 700
Current Liabilities 24 570 22 050
Total Equity and liabilities 91 440 69 750
a) Hawk Co. is a company which didn’t own any subsidiary until 1st July 20X4.
Om that date Hawk acquired 75% of Shark Co.’s equity shares by means
of a share exchange of two new shares of Hawk for every five acquired
in Shark. These shares were issued at market value and this is the only
share issue during the year.
b) The value of property, plant and equipment held by both entities have
been rising for several years.
c) Each month since acquisition Hawk has sold goods for $ 1. Million per
month to Shark Co. The profit margin made was 10%.
d) One of the shareholders has observed the following and has the concerns
given below,
a. Whether the low price at which the goods are being sold to Shark is
undermining the group’s overall profitability.
b. The profit for the year has increased by $ 900 000 which is up 20% on
last year, but the shareholders has expected a higher rise in profit as
Shark is supposed to be more profitable.
c. The shareholder has calculated the EPS for 20X4 as $ 0.13
(5,400/41,400*100) and for 20X5 at $ 0.125 (4,500/36,000*100%) and, he
is worried that although the profit has increased by 20% the EPS has
barely changed.
d. The share price at the end of the year is $ 2.30, how does this compare
with the share price immediately before the acquisition of Shark.

i) Reply to the four observations of the shareholder. (8 marks)

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ii) Using the above financial statements calculate the following ratios for
the year ended 1st December 20X4 and 20X3. And comment on the
comparative performance (12 marks)
a. Return on capital employed (ROCE)
b. Net asset turnover
c. Gross profit margin
d. Operating profit margin
Your answer to (i) and (ii) should reflect the impact of the consolidation
of Shark Co. during the year ended 31st December 20X4.

15) Multiplex Co.

Multiplex is a cruise line which sells cruise ships to the public and sails to
destinations all over the world. Multiplex CO. experienced strong initial
growth but lately it is criticized for under-investing in its non-current
assets.

Statement of Financial Position as at 30th September

20X6 20X5
($’000) ($’000)
Non-Current Assets
Property, plant and equipment 253 600 139 200
Intangible Assets 16 000 12 800
269 600 152 000
Current Assets
Inventories 464 392
Trade receivables 4 880 5 040
Cash and cash equivalence 7 440 17 680
12 784 23 112
Total Assets 282 384 175 112

Equity and Liabilities

Equity shares of $ 1 each 2 400 2 400
Retained Earnings 35 280 33 440
Revaluation Surplus 116 000 Nil
Total Equity 153 680 35 840

Non-Current Liabilities
6% Loan notes 104 768 120 320

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Current Liabilities
Trade payables 8 384 3 400
6% Loan notes 15 552 15 552
23 936 18 952
282 384 175 112

Total Equity and liabilities

a) Other extracts from Multiplex Co. is as follows,

20X6 20X5
($’000) ($’000)
Revenue 123 200 127 200
Operating profits 9 840 14 880
Finance costs 7 360 8 160
Cash generated from Operations 14 784 19 448
b) Multiplex Co. had the same cruising schedule in 20X6 and 20X5 with the
overall sails and destinations being the same in both years.
c) In June 20X6 Multiplex Co. had to renegotiate its licenses with five major
harbors, which led to an increase in the prices Multiplex have to pay for
the right to operate cruise ships there. The licenses with ten more major
harbors are due to expire in near future. Multiplex is currently negotiating
with those harbors.

i) Calculate the following ratios for both the years

a. Operating profit margin
b. Return on Capital Employed
c. Net Asset turnover
d. Current ratio
e. Interest Cover
f. Gearing (Debt/Equity
For calculation purposes all loan notes are treated as debt. (6 marks)

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ii) Comment on the performance and position of Multiplex Co. for the year
ended 30th September 20X6, highlighting any issues which the company
should consider in the near future. (14 marks)

16) Firestorm Co.

Statement of Profit or Loss for the year ended 30th June,
20X1 20X0
($’000) ($’000)
Revenue 64 820 57 190
Cost of Sales 938 920) (36 610)
Gross Profit 25 900 20 580
Operating expenses (10 080) (8 610)
Profit from operations 15 820 11 970
Finance costs (3 570) (2 940)
Profit before tax 12 250 9 030

Statement of Cash flows for the year ended 30th June 20X1
($’000) ($’000)
Cash flows from Operating activities
Profit before tax 12 250
Depreciation 4 760
Finance Cost 3 570
Decrease in inventories 2 170
Increase in receivables (94 340)
Increase in trade payables 2 520
Cash generated from operations 20 930
Interest paid (93 010)
Income tax paid (2 170)
Net cash from operating activities 15 750

Cash flows from investing activities

Purchase of property, plant and equipment (22 120)
Net cash used in investing activities (22 120)

Cash flows from Financing activities

Issue of 8% loan notes 7 000
Dividends paid (2 800)
Net cash from financing activities 4 200

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Net decrease in cash and cash (2 170)

equivalence
Cash and cash equivalence at the 3 290
beginning
Cash and cash equivalence at the end of 1 120
the period.
a) Firestorm Co. is a business which sells it products both directly to the
customer and also to business trade customers.
b) It operates from several properties owned by itself. During 20X1, one of
firestorm’s rivals ceased business activities. Firestorm acquired the
property of the rival company and started a new store in these properties
in May 20X1.
c) During the year 20X Firestorm expanded into new geographical regions in
which it was previously unrepresented. This expansion has helped
firestorm to negotiate improved terms with its major suppliers.
d) During the year 20X, the sale of item Z was a key area in business. During
the year demand has been often higher than the supply.
e) One of the members of the board of firestorm has expressed his confusion
over deterioration of the cash position despite the increase in profits.
f) The cash generated from operations for the year ended 30 th June 20X0
was $ 12.6 million

i) Calculate the following ratios for the year ended 20X1 and 20X0 (4 marks)
a. Gross Profit margin
b. Operating profit margin
c. Interest Cover
d. Cash generated from operations/ profit from operations %
ii) Comment on the performance and cash flows of Firestorm Co. for the year
ended 20X1and address the board member’s confusion. (16 marks)

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17) Nightwing Co.

Statement of Profit or Loss for the year ended 31st December,
20X9 20X8
($’000) ($’000)
Revenue 135 000 99 000
Cost of Sales (105 300) (77 220)
Gross Profit 29 700 21 780
Distribution expenses (5 400) (4 500)
Administration expenses (8 100) (8 280)
Finance costs (1 575) (450)
Profit before tax 14 625 8 550
Income tax expense (5 175) (2 700)
Profit for the year 9 450 5 850

Statement of Financial Position as at 30th September

20X9 20X8
($’000) ($’000)
Non-Current Assets
Property, plant and equipment 106 200 76 500
Goodwill 27 000 Nil
133 200 76 500
Current Assets
Inventories 13 950 10 800
Trade receivables 9 900 7 200
Bank 450 4 500
24 300 22 500
Total Assets 157 500 99 000

Equity and Liabilities

Equity shares of $ 1 each 72 000 72 000
Retained Earnings 13 500 9 000
Total Equity 85 500 81 000

Non-Current Liabilities
10% Loan notes 49 500 4 500

Current Liabilities
Trade payables 18 900 11 700
Current ta payable 3 600 1 800
22 500 13 500
Total Equity and liabilities 157 500 99 000

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a) On 1st October 20X9 Nightwing Co. has acquired Blockbuster for $ 45

million. The purchase was financed by issuing additional 10% loan notes.
The results for the three months and the net assets of Blockbuster Co.
is included with in the Nightwing’s financial statements as at 31st
December 20X9. There were no tother purchases or sale of non-current
assets.
b) Results extracted from Blockbuster Co.’s financial statements for the
year ended 31st December 20X9 for the three months which are included
in Nightwing’s statements are as follows.
20X9
($’000)
Revenue 27 000
Cost of Sales (18 900)
Gross Profit 8 100
Distribution expenses (1 800)
Administration expenses (1 800)
c) The following ratios have been correctly calculated for Nightwing,
20X9 20X8
Return on capital employed 10.5% 12%
Net Asset turnover 1.16 times 1 time
Gross profit margin 22% 22%
Operating profit margin 9.1% 12%
Current ratio 1.7:1 1.08:1
Gearing(Debt/(Debt+Equity)) 5.3% 36.7%

i) Calculate for the year ended 31st December 20X9 equivalent ratios to the
first FOUR only for Nightwing excluding the effect of acquisition of
Blockbuster. Assume the capital employed for Blockbuster is equal to
its purchase price of $ 45 million. (4 marks)
ii) Assess the comparative financial performance and position of Nightwing
Co. for the year ended 31st December 20X9. Your answer should refer to
the effects of the purchase of Blockbuster. (12 marks)

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iii) Explain what further information on acquisition of Blockbuster would

allow you to make more informed assessment of Nightwing’s
performance and position
(4 marks)

18) Hulk Group

Hulk Group Hulk Co.
30th September 20X3 30th September 20X2
($’000) ($’000)
Profit from operations 11 600 10 160
Current assets 24 320 23 000
Share Capital 8 800 6 400
Share premium 4 800 1 600
Retained Earnings A 7 520
Non-controlling interest B Nil
Long term loans 9 200 5 600
Current Liabilities 17 040 12 480
a) Hulk Co. has acquired 80% of Ross Co. on 1st April 20X3. The fair value of
the non-controlling interest as at that date was deemed to be $ 2.72
million. Ross Co. has made a profit of $ 5.6 million for the year ended 30th
September 20X3.
b) The retained earnings of Hulk Co. in its individual financial statements as
at 30th September 20X3 is $ 10.56 million. Hulk Co. incurred professional
fees of $0.4 million, which has been capitalised as an asset in the
consolidated financial statements.
c) At acquisition the net assets of Ross Co. were equal to their carrying
amount with the exception of a brand name which had a fair value of $ 2.4
million but was not recognized in the individual statements. The brand has
a useful life of 5 years.
d) On 30th September 20X3 Ross Co. has sold a land with a carrying amount
of $ 2 million at a price of $ 3.2 million for Hulk Co.

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e) Hulk Co. did not borrow any additional funds during the year and has never
used a bank overdraft facility.
f) Ross Co. is operating in the service industry, and majority of its revenue
comes from 3 major contract with entities which are well established and
financially stable.
g) The following ratios have been correctly calculated based on the above
financial statements
20X3 20X2
Receivables Collection period 52 days 34 days
Inventory Holding period 41days 67 days
Other than the non-controlling interest and retained earnings no
adjustment is required to other figures in the draft financial statements.

i) Calculate the Retained Earnings(A) and the non-controlling interest(B) to

be included in the consolidated financial statements as at 30th September
20X3. (6 marks)
ii) Based on the answers to part (i) and the financial statements provided,
calculate the following ratios for the years 20X3 and 20X2 (4 marks)
a. Current ratio
b. Return on capital employed
c. Gearing (Debt/Equity)
iii) Using the information provided and the ratios calculated above, comment
on the comparative performance and position for the two years. Your
answer should specifically comment on the impact of the acquisition of
Ross Co. on your analysis. (10 marks)

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19) Loki Co.

Statement of Profit or Loss for the year ended 31st December,
20X5 20X4
($’000) ($’000)
Revenue 149 436 151 774
Cost of Sales (80 934) (83 657)
Gross Profit 68 502 68 117
Operating expenses (50 652) (47 698)
Profit from operations 17 850 20 419
Investment Income 1 540 1 715
Finance Cost (12 460) (11 340)
Profit before tax 6 930 10 794
Share of profit from associate 3 234 2 212
Income tax expense (1 911) (2 758)
Profit for the year 8 253 10 248
Attributable to:
Shareholders of Loki 6 251 8967
Non- controlling interest 2 002 1 281

a) On 31st December 20X5 Loki group disposed of its entire 80% holding in
Thor Co. for $ 210 million. The results of the Thor Co. have been fully
consolidated in both of the above financial statements and Thor does not
represent a discontinued operation. The proceeds from this disposal are
recorded in a suspense account and no gain or less has been identified.
b) Loki group originally acquired Thor Co. for $ 147 million. At this date, the
goodwill of Thor was calculated to be $ 49 million. Goodwill has not been
acquired since its acquisition, and as of 31st December 20X5 it was
estimated to be $ 77 million.
c) On 31st December 20X5 Thor Co. had net assets with a carrying amount of
$ 182 million. In addition to this, Thor’s brand name was valued at $ 35
million at acquisition in the consolidated financial statements. This is not
reflected in the Thor’s individual financial statements and the value is
assumed to be the same at the date of disposal.
d) Thor Co. was the only subsidiary where Loki group owned less than 100%
of the equity. The non-controlling interest is measured at fair value and
NCI at the date of disposal is deemed to be $ 46.2 million.

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e) Until December 20X4 Loki group has rented one of its properties to a third
party. This arrangement ended in January 20X5 and Thor moved into this
property at that date. Loki charged a reduced rent from Thor as it is a part
of the group. However Thor’s properties were sold in April 20X5 for $ 1.4
million which is included in the administrative expenses.
f) Loki Group is planning to go into direct competition with Thor after the
disposal. For this purpose Loki employed the two founding directors of
Thor. The directors did not take the annual bonus of $ 700 000 from Thor.
Instead they received a similar joining fees from Loki as at 31st December
20X5. These individuals have excellent relationships with major
customers of Thor Co.
g) Thor Co’s revenue remained constant at $ 18.2 million in both the above
years and it has high level of debt. Key ratios for Thor as per the reported
figures are given below.
20X5 20X4
Gross Profit margin 81% 80%
Operating Profit margin 66% 41%
Interest Cover 1.2 times 1.1 times
i) Calculate the gain/loss on disposal of Thor which will be recorded in, (5
marks)
a. The individual financial statements of Loki Co.
b. The consolidated financial statements of Loki Group
ii) Calculate the ratios equivalent to those provided in note (g) for the Loki
Group for both the years. No adjustment is required for the gain/loss on
disposal of Thor. (3 marks)
iii) Comment on the performance and interest cover of Loki Group for both
the years comparatively. Your answer should comment on the overall
performance of Loki group, How, once accounted for, the disposal of Thor
will impact on your analysis and the implications of the disposal of Thor
for the future results of Loki Group. (12 marks)

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20) Polka and Stripe

Polka and stripe are two entities operating in the garment sector which
sells clothing items.
Statement of Profit or Loss for the year ended 31st March 20X7
Polka Co. Stripe Co.
($’000) ($’000)
Revenue 225 000 198 000
Cost of Sales (171 000) (135 000)
Gross Profit 54 000 63 000
Profit on disposal 4 500
Operating Expenses (36 000) (34 200)
Operating profit 22 500 28 800
Finance Cost (6 750) (900)
Profit before tax 15 750 27 900

Draft Statement of Financial Position as at 31st March 20X7

Polka Co. Stripe Co.
($’000) ($’000)
Cash 4 500 9 000
Total Equity 81 000 54 000
Non-Current liabilities 40 500 13 500
Trade payables 31 500 10 800
a) Polka Co. is a manufacturer and a retailer of branded clothing which it
sells online and in its own international chain of branded stores.
b) Stripe Co. sells clothing to local customers in department stores and
online. It does not manufacture but purchase from suppliers and sell
directly to the customer. It does not carry out international trading but it
has a plan on expanding its trading activities internationally in the next
financial year.

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c) On 31st March 20X7 Polka Co. disposed one of its divisions for a
consideration of $ 9 million. The proceeds have been recorded as
receivable as at that date and the gain on disposal is included in the
statement of profit r loss.

d) Flowery division (the disposed division) had the following ratios for the
year ended 31st March 20X7
Gross profit margin – 40%
Operating profit margin - 5%
e) Polka Co. also charges $ 90 000 per month from Flowery division for
central services which was deducted from operating expenses in the
financial statements.

i) Using the financial statements provided, calculate the following ratios for
both Polka Co. and Stripe Co. (6 marks)
a. Gross profit margin
b. Operating profit margin
c. Trade payable days
d. Return on capital employed
e. Gearing (Debt/Equity)

ii) Comment on the performance and position of both the companies as at

31st March 20X7. (14 marks)

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Preparation of Single Entity Financial Statements

1) Phoenix Co.
The following trial balance relate to Phoenix Co. for the year ended 30th
September 20X1
($’000) ($’000)
Equity shares of 50 cents each 3 600
Retained earnings at 1st October 840
20X0
8% convertible loan note (b) 18 000
Property – at cost (land-15 m) (a) 45 000
Accumulated depreciation 1/10/X0 6 000
Current tax (c) 480
Deferred tax (c) 1 560
Closing inventory 21 600
Trade receivables (d) 28 260
Bank 6 900
Trade payables 14 700
Revenue 203 790
Cost of sales 124 650
Distribution Costs 16 500
Administration costs (d) 18 420
Loan interest (b) 1 440
255 870 255 870
a) On 1st October 20X0 Phoenix Co. decided to revalue its property. The
market value of property on this date was $ 48 million of which $ 18 million
is related to land. At this date the remaining estimated useful life is 20
years. Phoenix does not make transfers to retained earnings in respect of

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the excess depreciation of revalued assets. All depreciation is charged to

cost of sales.
b) The 8% $ 18 million convertible loan note was issued on 1st October 20X0
at par. Interest is payable in arrears on 30th September of each year. The
loan note is redeemable at par on 30th September 20X3 or convertible in
to equity shares at the option of the loan note holders on the basis of 30
shares for each $ 100 of loan note. A equivalent loan note without a
conversion option would have an interest rate of 10%. Applicable discount
rates are,
8% 10%
Year 1 0.93 0.91
Year 2 0.86 0.83
Year 3 0.79 0.75
c) The required provision for income tax for the year ended 30th September
20X1 is $ 11.64 million. The difference between the carrying amounts of the
assets (including the property revaluation in (a) above) and their tax base
(lower) as at 30th September 20X1 is $ 16.2 million. Current tax represents
under/over provision of the tax liability for the year ended 30th September
20X0. The rate of income tax is 25%.
d) On 30th September 20X1 Phoenix has factored trade receivables with a
book value of $ 6 million to a bank. Phoenix received an immediate
payment of $ 5.22 million and will pay the bank 2% per month on any
uncollected balance. Any of the receivables outstanding after 6 months
will be refunded to the bank. Phoenix has derecognized the receivables in
full and charged $ 0.78 million to administrative expenses. If these
receivable were not factored an allowance of $ 360 000 will be made
against them.

Required,
i) Statement of profit or loss and other comprehensive income for Phoenix
for the year ended 30th September 20X1. (8 marks)
ii) Statement of Financial Position as at 30th September 20X1 (12 marks)

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2) Sphinx Co.
The following balances were extracted from trial balance of Sphinx Co. as
at 31st December 20X5
($’000) ($’000)
Equity shares of 50 cents each 35 000
Retained earnings at 1st October 20X0 7 840
Plant and Equipment (At cost) 66 150
Property – at cost (land-7 m) 42 000
Accumulated depreciation 1/1/X4
Plant and equipment 17 150
Building 14 000
Current tax 840
Deferred tax 4 340
Closing inventory 30 590
Trade receivables 29 540
Bank 4 760
Trade payables 24 570
Revenue 385 000
Cost of sales 288 050
Distribution Costs 15 050
Administration costs 21 630
Bank interest 490
493 500 493 500
a) Non-Current Assets:
On 1st July 20X5 Sphinx Co. terminated the production of one of its
products. Form this date the plant used to produce that product is actively
marketed at $ 2.94 million. This plant is included in the trial balance at a
cost of $ 6.3 million with accumulated depreciation of $ 3.5 million.
On 1st January 20X5 the land and building was revalued to the market
price. The land was valued at $ 8.4 million and the buildings at $ 24.5
million. The remaining value of the building as at that date was 14 years.

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Sphinx does not make transfers to retained earnings for excess

depreciation. Ignore deferred tax on revaluation surplus.
Plant and equipment is depreciated at 20% per annum using the reducing
balance method and time apportioned as suitable.
All depreciation is charged to cost of sales and no depreciation is charged
for the current year.
b) Sphinx estimate that an income tax provision of $ 19.04 million is required
for the year ended 31st December 20X and as at that date the liability to
deferred tax is $ 6.58 million. The balance of current tax on trial balance
represent the under/over provision of the tax liability for the previous
year.
c) Revenue includes the sale of $ 7 million of maturing inventory made to
ABC co. on 1st July 20X5. The cost of these goods at the date of sale was
$ 4.9 million and Sphinx has an option to repurchase these goods at any
time within three years of the sale at a price of $ 7 million plus accrued
interest from the date of sale at 10% per annum. On 31st December 20X5
the option had not been exercised, but it is highly likely that it will be
before the date it lapses.
d) On 31st December 20X5 a provision is required for director’s bonuses
equal to 1% of revenue for the year.

Required,
i) Statement of Profit or Loss and Other comprehensive Income for the year
ended 31st December 20X5. (9 marks)
ii) Statement of Financial Position for the year ended 31st December 20X5.
(11 marks)

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3) Centaur Co.
The following trial balance relate to Centaur Co. for the year ended 30th June
20X7,
($’000) ($’000)
Property -carrying amount as at 1/7/X6 14 400
Ordinary shares $1 each at 1/7/X6 16 000
Share Premium at 1/7/X6 2 400
Revaluation Surplus at 1/7/X6 640
Retained Earnings at 1/7/X6 5 016
Draft profit for the year ended 30/6/X7 1 800
4% convertible loan notes 6 400
Dividends paid 2 896
Cash received from contract customer 1 120
Cost incurred on contract to date 1 520
Inventories 3 448
Trade receivables 4 408
Cash 8 256
Current Liabilities 1 552
34 928 34 928

a) During the year Centaur Co. entered into a contract for a customer. The
total contract price was $11.2 m. The costs to date of $ 1.52 mare included
in the above trial balance. Costs to complete the contract are estimated at
$ 5.68 m. On 30th June 20X5 the contract was estimated to be 40%
complete. To date Centaur Co. has received $ 11.2 m from the customer
and it is included in the above trial balance.
b) Centaur Co’s property has been revalued previously, leading to the
revaluation surplus on 1st July 20X4. The property had a remaining life of
25 years as of 1st July 20X4. On 30th June it was valued at $ 12.8 m. No
entries have been made regarding the revaluation or the depreciation
charge during the current year. Centaur Co. does not make an annual

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transfer from the revaluation surplus in respect of the excess

depreciation.
c) It has been discovered that inventory totalling $ 312,000 had been omitted
from the final inventory count in the above trial balance.
d) Centaur Co. made a 1 for 5 bonus issues on 30th June 20X5, which has not
yet been recorded in the above trial balance. Centaur Co. intends to utilize
the share premium as far as possible in recording the bonus issue.
e) On 1st July 20X4, Centaur Co. issued $ 64 000 $ 100 4% convertible loan
notes. The loan note can be converted to equity shares on 30 th June 20X7
or redeemed at par on the same date. An equivalent loan without the
conversion rights would require an interest of 6%. Interest payable in
arrears on 30th June every year. The annual payment has been included in
the finance costs for the year.
4% 6%
Year 1 0.962 0.943
Year 2 0.925 0.890
Year 3 0.889 0.840

Required,
i) Calculate the adjusted profit for the year ended 30th June 20X5 (6 marks)
ii) Prepare the Statement of Changes in Equity for the year ended 30 th June
20X5 (6 marks)
iii) Prepare the statement of financial position as at 30th June 20X5 (8 marks)

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4) Garuda Co.
The following information were extracted from draft financial statements of
Garuda Co. for the year ended 31st March 20X8
($’000) ($’000)
Equity Shares $1 each 36 000
Retained Earnings 31/3/X8 17 550
Proceeds of 6% loan 27 000
Land (4.5m) and buildings (at cost) 49 500
Plant and equipment – at cost 52 650
Accumulated depreciation at 1/4/X7
Buildings 18 000
Plant and equipment 31 050
Current Assets 61 830
Current Liabilities 34 560
Deferred tax 2 250
Interest Payment 1 620
Investments 1 800
Current tax 990
167 400 167 400
a) Non-current assets:
On 1st April 20X7 Land were revalued to $ 7.2 m and buildings were
revalued to $ 35.1 m. The remaining useful life of building as at that date
was 15 years. Garuda Co. does not make annual transfers to retained
earnings relating to the excess depreciation. However, the revaluation
will give rise to a deferred tax liability. The income tax rate of Garuda is
20%.
Plant and equipment is depreciated at 12.5% per annum using the
reducing balance method. No depreciation has been yet charged in
relation to the current year.

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b) The loan notes were issued on 1st April 20X7 and incurred issue costs of
$ 900 000 which were charged to profit or loss. Interest of $ 1.62 m was
paid on 31st March 20X8. The loan is redeemable after 6 years at a
premium which gives an effective rate of interest of 9%.
c) The investments in the trial balance are held at fair value at 1st April 20X7.
On 31st March 20X8 the value had risen to $ 2.34 m.
d) A provision of $ 2.16 m is required for current income tax on the profit of
the year to 31st March 20X8. The balance on current tax in the trial balance
is the under/over provision of tax for the previous year. In addition to the
revaluation Garuda has further taxable temporary differences of $ 9 m
as of 31st March 20X8.

Required,
i) Prepare a schedule of adjustments required to the retained earnings of
Garuda as of 31st March 20X8 (9 marks)
ii) Prepare the statement of Financial Position as of 31st March 20X8 (11
marks)

5) Unicorn Co.
The following relates to Unicorn Co. for the year ended 31st December 20X3
($’000) ($’000)
Leasehold property- at valuation 40 000
1/1/X3
Plant and equipment – at cost 61 280
Plant and equipment – accumulated 19 680
depreciation as at 1/1/X3
Capitalised Development expenditure 16 000
– 1/1/X3
Development expenditure – 4 800
accumulated amortisation at 1/1/X3
Closing inventory 16 000

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Trade receivables 34 480

Bank 1 040
Trade Payables 19 040
Draft profit before tax 47 280
Preference dividend paid 640
Research and development costs 6 880
Equity shares of 25 cents each 40 000
8% redeemable preference shares of $ 16 000
1 each
Retained earnings as at 1/1/X3 14 800
Deferred tax 4 640
Leasehold property revaluation 8 000
surplus at 1/1/X3
175 280 175 280

a) Non-current assets – Tangible:

The leasehold property had a remaining life of 20 years at 1st January
20X3. Unicorn’s policy is to revalue its property at each year end and at
31st December 20X3 it was valued at $ 34.4 m. Ignore deferred tax on
revaluation.
On 1st January 20X3 and item of plant was disposed of for $ 2 m cash. The
proceeds have been treated as sales revenue by Unicorn. The plant is
still included in the above trial balance figures at its cost of $ 6.4 m and
accumulated depreciation of $ 3.2 m. (to the date of disposal)
All plant is depreciated at 20% per annum using the reducing balance
method. Depreciation and amortisation of all non-current assets is
charged to cost of sales.

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b) Non-current assets – Intangible:

In addition to the capitalised development expenditure of $ 16 million.,
further research and development costs were incurred on a new project
which commenced on 1st January 20X3. The research stage of the new
project lasted until 30th September 20X3 and incurred $ 1.12 m. From that
date the project incurred development costs of $ 640 000 per month. On
1st July 20X3 the directors became confident that the project would be
successful and yield a profit well in excess of its costs. The project is
still in development at 31st December 20X3.
Capitalised development expenditure is amortised at 20% per annum
using the straight line method, All expenses regarding to this is charged
to cost of sales.

c) Unicorn is being sued by a customer for $ 1.6 m for breach of contract

over a cancelled order. Unicorn has obtained legal opinion that there is
a 20% chance that Unicorn will lose the case. Accordingly, Unicorn has
provided $ 320 000 (1.6*20%) included in administrative expenses in
respect of the claim. The unrecoverable legal costs are $80 000. These
have not been provided for as the legal action will go to court next year.

d) The preference shares were issued on 1st July 20X3 at par. They are
redeemable at a large premium which gives them an effective finance
cost of 12% per annum. The dividend paid in the trial balance represents
the debit side of the cash payment made during the year.
e) The provision for income tax for the year ended 31st December 20X3 is
estimated to be $ 9.12 m. The required deferred tax provision as at that
date was $ 4.8 million.

Required,
i) Calculate the revised profit for the year (8 marks)
ii) Prepare the Statement of Financial Position as at 31st December 20X3 (12
marks)

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6) Hercules Co.
The following trial balance relate to Hercules Co. as of 30th June 20X4
($’000) ($’000)
Equity shares of $1 each 28 000
Share Premium 14 000
5% Loan note 14000
Retained Earnings at 1/7/X3 26 880
Leasehold property (15 years) -at cost 31 500
Plant and Equipment 47 250
Accumulated Depreciation 1/7/X3
Building 4 200
Plant and equipment 16 450
Investments (Fair value through P&L) 18 550
Closing inventory 33 600
Trade receivables 28 490
Bank 10 850
Deferred tax 4 200
Trade payables 36 400
Revenue 280 000
Cost of Sales 205 800
Distribution Costs 18 480
Administration Costs 23 940
Dividend paid 7 000
Loan note interest paid 350
Bank Interest 140
Investment Income 840
Current tax 980
425 950 425 950

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a) Non-Current assets:
In order to fund a new project on 1st January 20X4 Hercules decided to
sell its leasehold property. From that date it commenced short-term
rental of an equivalent property. The leasehold property is being
marketed at $ 28 m. The expected costs to sell have been estimated to
$ 350 000. Recent investigations suggests that actual selling price
achieved for this type of property in the current market conditions are
15% less than the value at which they are marketed. On 30th June 20X3
the property has not been sold.
Plant and equipment is depreciated at 15% per annum using the
reducing balance method.
No depreciation or amortisation has been charged for this year. All
these costs are included in cost of sales.
b) Hercules have accounted for a fully subscribed rights issue of equity
shares made on 1st April 20X4 of 1 new share for every 4 in issue at $
0.42 each, when the market value of the share was $ 0.82.
c) The investments had a fair value of $ 19.6 m on 30th June 20X4. There
were no purchases or disposals of investments during the year.
d) The 5% loan note was issued on 1st July 20X3 at its nominal value of $ 14
m. The issue costs were $ 350 000 and these have been charged to
administrative expenses. The loan note will be redeemed on 30 th June
20X6 at a premium. The effective rate of interest is 10%
e) The required provision of income tax for the year ended 30th June 20X4
is $ 8.4 m. The balance of current tax in trial balance shows the
under/over provision for the previous year. On 30th June 20X4 the tax
base of Hercules’ net assets was $ 9.8 m less than its carrying amount.
The income tax rate of Hercules is 30%

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Required,
i) Prepare the Statement of Profit or Loss for the year ended 30 th June
20X4.
ii) Prepare the Statement of Financial Position as of 30th June 20X4.
iii) Calculate the Earnings per share figure for Hercules for the year ended
30th June 20X4 and restate the 20X3 EPS figure of the original EPS in
20X3 was $ 0.68 per share.

7) Griffin Co.
The following were extracted from the financial statement of Griffin Co.
for the year ended 30th September 20X2.
($’000) ($’000)
Revenue 68 100
Cost of Sales 53 100
Research and Development costs 4 680
Distribution Costs 1 680
Administrative Costs 4 080
Loan note interest and dividend paid 3 000
Investment Income 180
Equity shares $ 1 each 18 000
5% loan note 12 000
Retained Earnings as at 1/10/X1 3 720
Revaluation Surplus as at 1/10/X1 1 800
Share premium 5 580
Property at valuation as at 1/10/X1 17 100
Plant and Equipment a cost 16 260
Accumulated depreciation of plant 5 460
and equipment as at 1/10X1

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a) Non-Current assets
Griffin’s property is carried at fair value which at 30th September was $
17.4 m. The remaining life of the property at the beginning of the year
was 15 years. Griffin does not make an annual transfer to retained
earnings in respect of the revaluation surplus. Ignore deferred tax on
revaluation.
Plant and equipment is depreciated at 15% per annum on reducing
balance basis. No depreciation has yet been charged in respect of the
current year. All depreciation is charged to cost of sales.
b) The 5% loan note was issued on 1st October 20X1 at its nominal value of
$ 12 m incurring issue costs of $ 300 000 which have been charged to
administrative expenses. The loan will be redeemed after 3 years at
premium which will give an effective rate of interest of 8% per annum.
Annual interest was pai d on 30th September 20X2.
c) Griffin commenced a research and development project on 1st April 20X2.
It spent $ 600 000 per month on research until 30th June 20X2. From this
date it spent $ 960 000 per month until the year end at which the
development was completed. However, it was not until 1st August 20X2
that the directors were confident that the new product will be a
commercial success. Expenses on research and development is
charged to cost of sales.
d) A provision for current tax for the year ended 30th September 20X2 of $
720 000 is required, together with an increase to the deferred tax
provision to be charged to profit or loss of $ 480 000.
e) Griffin paid a dividend of $ 0.20 cents per share on 30th June 20X2, which
was followed the day after by an issue of $ 6 million equity shares at
their full market value of $ 1.70.

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Required,
i) Statement of Profit or Loss and Other Comprehensive Income for the
year ended 30th September 20X2. (10 marks)
ii) Statement of Changes in Equity for the year ended 30th September 20X2.
(5 marks)
iii) Prepare the extracts of cashflows in respect of investing and finance
activities.
(5 marks)

8) Pegasus Co.
The following balances were extracted from Pegasus Co. for the year
ended 31st December 20X6.
($’000) ($’000)
Equity shares of $ 0.50 each 40 500
Share premium 4 500
Retained Earnings as at 1/1/X6 4 590
Equity financial asset investment 5 400
Leased Property (12 years) -at cost 43 200
Plant and Equipment 42 750
Accumulated amortisation of leased 14 400
plant as at 1/1/X6
Accumulated Depreciation of plant and 30 150
equipment as at 1/1/X6
Deferred tax 2 880
Revenue 315 000
Cost of Sales 268 830
Lease payment 7 200
Distribution costs 14 490
Administration expenses 24 210
Bank Interest 270
Current tax 720

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Suspense a/c 12 150

a) Non Current Assets:
On 1st January 20X6 Pegasus decided to revalue its leased property at $
32.4 m. The remaining life of the leased property is eight years as at that
date. Pegasus makes an annual transfer to retained earnings reflect the
realization of the revaluation surplus. The revaluation does not give rise
to any tax liability.
On 1st January 20X6
Pegasus acquired an item of plant under a lease agreement that had an
implicit finance cost of 10% per annum. The lease payment in the trial
balance represents an initial deposit of $ 1.8 m paid on 1st January 20X6
and the first annual rental of $ 5.4 m paid on 31st December 20X6. The
lease agreement requires further annual payments of $ 5.4 m on 1st
December each year for the next four years. The present value of the
lease payments excluding the initial deposit was $ 2.7 m. Plant and
equipment is depreciated at 20% per annum using the reducing balance
method.
No depreciation or amortisation has been charged for the current year.
These are charged to cost of sales.
b) The suspense account represents the corresponding credit for cash
received for a fully subscribed rights issue of equity shares made on 1 st
October 20X6. The terms of the rights issue was one new share for every
five held at $ 0.75 each.
c) The investments had a fair value of $ 6.48 m as at 31st December 20X6.
There were no acquisitions or disposals of these investments during the
year ended 31st December 20X6.
d) In December 20X6 a fraud was discovered. $ 3.6 m of the trade
receivables have been stolen by the credit controller and is not
recoverable. Of this amount $ 900 000 relates to the year ended 31st
December 20X5 and the remainder to the current year.

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e) The income tax calculation of the company shows an income tax refund
of $ 2.16 m for the year ended 31st December 20X6. The balance on the trial
balance reflects the under/over provision of the previous year. On 31st
December 20X6 Pegasus had a taxable temporary difference of $ 10.8 m
requiring a deferred tax liability. The income tax rate of Pegasus is 25%

Required,
i) Statement of Profit or Loss and Other Comprehensive Income for the
year ended 31st December 20X6. (13 marks)
ii) Statement of Changes in Equity for the year ended 31st December 20X6.
(7 marks)

9) Chimera Co.
The following balances relate to Chimera Co. as at 31st March 20X9
($’000) ($’000)
Leasehold property – at valuation 31/3/X8 20 160
Plant and equipment at cost 37 440
Right-of-use asset at cost 16 000
Accumulated depreciation as at 31/3/X8
Plant and equipment 10 240
Right-of-use plant 4 000
Lease payment (paid on 31/3/X9) 4 800
Lease liability at 1/4/X8 12 480
Contract with customer 11 440
Closing inventory 22 560
Trade receivables 26 480
Bank 4 400
Trade payables 26 720
Revenue 248 000
Cost of sales 187 600
Distribution costs 15 600
Administrative expenses 22 000
Equity dividend paid 6 400
Equity shares of $ 0.50 each 32 000
Retained Earnings at 31/3X8 35 280
Current tax 560
Deferred tax 6 720
375 440 375 440

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a) Non-Current Assets:
The 15 year leasehold property was acquired on 1st April 20X7 at a cost of
$ 24 m. These properties are revalued to its fair value at each year end.
The valuation in the trail balance of $ 20.16 m as of 31st March 20X8 led to
an impairment charge of $ 2.24 m which was recorded in the statement
of profit or loss for the year ended 31st March 20X. On 31st March 20X9 the
property was valued at $ 19.92 m. Owned plant is depreciated at 25% per
annum using the reducing balance method.
The right of use plant was acquired on 1st April 20X7. The rentals are $ 6
m per annum for four years payable in arrears on 31st March each year.
The interest rate is 8%. Right of use plant is depreciated over the lease
period. No depreciation has yet been charged in relation to the current
year. All depreciation is charged to cost of sales.
b) Chimera’s revenue includes $ 6.4 m for goods it sold acting as an agent
for Mars. Chimera earned a commission of 20% on these sales and
remitted the difference of $ 5.12 m (included in cost of sales) to Mars.
c) On 1st October 20X8 Chimera entered into a contract to construct an asset
for a customer. The contract price was $ 40 m. The $ 11.44 in the trial
balance is:
Materials, Labour and overheads 9 600
Specialist plant acquired 1/10/X8 6 400
Payment from customer (4 560)
11 440
The sales value of the work done on 31st March 20X9 has been agreed at
$ 17.6 m and the estimated costs to complete (excluding plant
depreciation) is $ 8 m. The specialist plant will have no residual value at
the end of the contract and should be depreciated on a monthly basis.
Chimera identifies progress towards satisfaction of the performance
obligation on the output basis as determined by the agreed work to date
compared to the total contract price. The contract is to be completed in
two years.

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d) The provision for income tax for the year ended 31st March 20X9 has been
estimated at $ 3.6 m. The required deferred tax provision on 31st March
20X9 is $ 4.48 m. The current tax in the trial balance represents the
under/over provision of the income tax liability of the previous year,

Required,
i) Statement of Profit or Loss and Other Comprehensive Income for the
year ended 31st March 20X9 (10 marks)
ii) Statement of Financial Position as of 31st March 20X9 (10 marks)

10) Medusa Co.

The following trial balance relates to Medusa Co. for the year ended 30 th
September 20X7
($’000) ($’000)
Revenue 149 450
Cost of Sales 95 760
Distribution Costs 8 750
Administrative expenses 13 300
Loan note interest 1 050
Dividend paid 13 440
Investment Income 280
Equity shares of $ 0.25 each 42 000
6% Loan note 17 500
Retained Earnings at 1st October 20X6 4 550
Plant and equipment at cost 58 590
Accumulated depreciation at 1/10/X6 : 23 590
Plant and equipment
Equity financial Investments 11 900
Closing inventory 17 360
Trade receivables 19 950
Bank 2 030
Current tax 770
Deferred tax 840
Trade payables 4 690
242 900 242 900

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a) Medusa issued a $ 17.5m 6% loan note on 1st October 20X6. Issue Costs
were $ 700 000 and these have been charged to administrative
expenses. The loan will be redeemed in 3 years at a premium which
gives it an effective interest rate of 8%.
b) Plant and equipment is depreciated at 15% per annum using the
reducing balance method.
No depreciation had been yet charged in relation to the current year.
And depreciation is charged to cost of sales.
c) On 1st October 20X6 Medusa sold one of its products for $ 7 m (included
in revenue). As part of the sales agreement, Medusa is committed to
the ongoing service of this product until 30th September 20X9. The
value of this is included in sales value of $ 7 m. The estimated cost to
Medusa in the servicing is $ 420 000 per annum and Medusa’s normal
gross profit margin is 25%. The service performance obligations will
be satisfied over time. Ignore discounting.
d) The investments had a fair value of $ 10.99 m as at 30th September 20X7.
There were no acquisitions or disposals of these during the year.
e) The balance of current tax represent the under/over provision of tax
liability of the previous year. A provision for the tax liability for the year
ended 30th Medusa had September 20X7 of $ 5.18 m is required. On 30th
September 20X7 Medusa had a taxable temporary difference of $ 3.5
m requiring a provision of deferred tax. The income tax rate of Medusa
is 20%.

Required,
i) Statement of profit or loss and Other Comprehensive Income for the
year ended 30th September 20X7. (10 marks)
ii) Statement of Financial position as of 30th September 20X7. (10 marks)

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11) Cerberus Co.

The following details were extracted from Cerberus Co. for the year ended
31st March 20X5
($’000) ($’000)
Revenue 226,560
Material purchase 38 400
Production labour 74 400
Factory overheads 48 000
Distribution Costs 8 520
Administrative expenses 27 840
Finance costs 210
Investment Income 480
Property- at cost 30 000
Plant and equipment – At cost 26 700
Accumulated Depreciation as at 1/4/20X4
Property 6 000
Plant and equipment 8 700
Opening inventory 28 020
Trade receivables 18 690
Trade payables 16 680
Bank 1 380
Equity shares of $ 0.20 each 30 000
Retained Earnings as at 1/4/20X4 9 360
Deferred tax 1 620
300 780 300 780

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a) Non-current assets:
During the year Cerberus manufactured an item of plant for its own use.
The direct material and labour were $ 1.8 m and $ 2.4 m respectively.
Production overheads are 75% of direct labour cost and Cerberus
determine the final selling price for goods by adding a markup on total
cost of 40%. These manufacturing costs are included in the relevant
expenses items in the trial balance. The plant was complete and put into
immediate use on 1st October 20X4.
All plant and equipment are depreciated at 20% per annum using the
reducing balance method with time apportionment in the year of
acquisition.
The directors decided to revalue the property in line with recent
increases in market values. On 1st April 20X4 the property was valued at
$ 28.8m. The property is being amortised over a useful life of 20 years
which has not changed. The revaluation gain will give rise to a deferred
tax liability.
All depreciation and amortisation is charged to cost of sales and no
depreciation or amortisation has been recognized in relation to the
current year.
b) On 18th February 20X5 the market price of a share of Cerberus was $ 2.40.
On this date a dividend was paid (included in administrative expenses)
that was calculated to give a dividend yield of 4%
c) The closing inventory was valued at $ 33.96 m
d) A provision for the income tax for the year ended 31st March 20X5 of $
14.58 is required. At 31st March 20X5 the tax base of the net assets was
$ 9 m less than its carrying amount. This excludes the effects of
revaluation of leased property. The income tax rate is 30%

Required,
i) Statement of Profit or Loss and Other Comprehensive Income for the
year ended 31st March 20X5. (12 marks)
ii) Statement of Financial Position as at 31st March 20X5. (8 mark

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12) Faun Co.

The following balances relate to Faun Co. as at 30th June 20X1
($’000) ($’000)
Revenue 441 000
Cost of sales 261 540
Operating Costs 63 270
Loan note interest 2 250
Bank Interest 810
Plant and equipment – at cost 139 950
Accumulated depreciation as at 1/7/X0 39 150
Plant and equipment
Closing inventory 86 400
Trade receivables 92 700
Trade payables 28 980
Bank 4 950
Equity shares $1 each 59 400
Share premium 13 500
Retained Earnings as at 1/7/X0 13 680
5% convertible loan 45 000
Current tax 2 880
Deferred tax 4 140
649 800 649 800

a) On 1st July 20X4, Faun co issued a 5% $4.5 m convertible loan note at

par. Interest is payable annually in arrears on 30th June every year. The
loan note is redeemable at par or convertible into equity shares at the
option of the loan note holders on 30th June 20X7. The interest on a
similar lone note without the conversion option would be 8% per annum.
5% 8%
Year 1 0.95 0.93
Year 2 0.91 0.86
Year 3 0.86 0.79

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b) The equity shares and share premium balances in the trial balance
above include a fully subscribed 1 for 5 rights issue at $ 1.60 per share
which was made on 1st January 20X5. The market value of Faun’s share
as at that date was $ 2.50
c) Plant and equipment is depreciated at 12.5% per annum on the reducing
balance method. All depreciation is charged to cost of sales.
d) The current tax balance represents the under/over provision of the tax
liability of the previous year. A provision of $ 25.2 mis required for
current tax for the current year. The deferred tax balance at the end of
the year was$ 7.47m.

Required, (all answers should be presented to the nearest ‘000)

i) Statement of Profit or Loss for the year ended 30th June 20X5 (6 marks)
ii) Statement of Financial Position as of 30th June 20X5 (9 marks)
iii) Basic Earnings per share for Faun Co, for the year ended 30th June 20X5.
(5 marks)

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13) Dragon Co.

Given below is the summarized trial balance of Dragon Co. for the year
ended 31st December 20X8
($’000) ($’000)
Equity Shares $ 1 each 40 000
Retained Earnings as at 1/1/20X8 2 800
Draft profit before interest and tax at 24 000
31/12/X8
6% Convertible loan notes 32 000
Property (25 years) – at cost 60 000
Plant and equipment - at cost 57 680
Accumulated Depreciation as at 1/1/X8
Leased property 12 000
Plant and Equipment 22 480
Trade receivables 22 400
Other current assets 7 440
Current Liabilities 14 160
Deferred tax 2 560
Interest payment 1 920
Current tax 560
150 000 150 000

a) Non-current assets:
The directors decided to revalue the property at $ 53.04 m on 1 st July
20X8. Dragon Co. does not make an annual transfer from the
revaluation surplus to retained earnings to reflect the realization of
the revaluation gain, however it will give rise to a deferred tax liability
at a tax rate of 20%.
The property is depreciated on straight line basis and plant and
equipment at 15% per annum using the reducing balance method,
No depreciation has yet been charged in relation to the current year.

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b) Triage Co. issued $ 320 000 $ 100 6% convertible loan notes on 1st
January 20X8. Interest is payable annually in arrears on 31st December
20X8. The loan can be converted to equity shares on the basis of 20
shares for each $ 100 loan note redeemed at par for cash after three
years.
6% 8%
Year 1 0.94 0.93
Year 2 0.89 0.86
Year 3 0.84 0.79

c) In June 20X8, the directors of Dragon Co. has discovered a fraud. $560
000 had been stolen from receivables of which $ 360 000 belongs to
the previous year and the rest belong to the current year. The directors
are hopeful that 50% could be covered from their insurers
d) A provision of $ 2.16 m is required for income tax for the current year.
The balance on the trial balance reflects the under/over provision of
the tax liability previous year. In addition to the revaluation, the
carrying amount of Dragon Co’s net assets are $ 9.6 m more than their
tax base.

Required,
i) Prepare a schedule of adjustments required to the draft profit before
interest and tax to give the profit or loss of Dragon Co. for the year
ended 31st December 20X8. (5 marks)
ii) Statement of Financial Position as of 31st December 20X8 (12 marks)
iii) Calculate the diluted Earnings per Share for the year ended 31 st
December 20X8 (3 marks)

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14) Cyclopes Co.

The following was extracted from Cyclopes Co. for the year ended 31 st
March 20X4
($’000) ($’000)
Convertible loan notes 3 500
Cost of sales 15 190
Finance costs 868
Investment Income 84
Operating expenses 9 464
Retained Earnings as at 1/4/X3 24 780
Revenue 30 240
Equity share capital of $ 1 shares as at 8 540
1/4/X3
Tax 91

a) On 1st August 20X3, Cyclopes Co. issued $ 1.05 m shares at their full
market price of $ 2.20. The proceeds were credited to a suspense a/c.
b) $ 1.75 m pf trade receivables were stolen. This fraud was discovered
in August 20X3. Of this $ 0.63 m belongs to the current year while the
rest belongs to previous periods.
c) Cyclopes Co. began the construction of an asset on 1st April 20X3 which
was completed on 31st December 20X3. A cost of $ 22.4 m was
capitalised. This includes $ 1.792 m, being a full 12 months interest on
a 17.92 m 10% loan taken out specifically for this construction. On
construction the property has a useful life of 20 years.
d) Cyclopes Co. issued $ 3.5 m 6% convertible loan notes on 1st April 20X3.
Interest is payable annually in arrears. These bonds can be converted
into one share for every $ 2 in two years. Similar loan notes without
the conversion option have an interest rate of 8%. Cyclopes has
recorded the full amount in liabilities and charged the annual payment
of $ 0.21 made on 31st March 20X4 to finance costs.

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6% 8%
Year 1 0.94 0.926
Year 2 0.89 0.857

e) The tax estimate to the current year is $ $ 1.47 m. The tax balance in
the trial balance relate to under/over provision of tax liability in
previous year. In addition to this there has been a decrease in taxable
difference of $ 1.4 m in the year. The tax rate in Cyclopes Co. is 25%
f) On 1st October 20X3 Cyclopes Co. was notified that an employee had
started court proceeding against them for unfair dismissal. Legal
advice was that there was an 80% chance that Cyclopes Co. would lose
the case and would need to pay an estimated $ 708 400 on 1st October
20X4. Based on this advice Cyclopes recorded a provision of $ 560 000
on 1st October 20X3 and has made no further adjustments. The
provision was recorded in operating expenses. The cost of capital is
10% and the discounting factor for one year is 0.9091
g) Cyclopes Co. entered into a contract where the performance obligation
is satisfied over time. The total contract price was $ 6.3 m. The total
expected costs were $ 3.5 m. The progress towards completion was
measured at 50% on 31st March 20X3 and 80% on 31st March 20X2. The
correct entries were made in the previous year, but no entries were
made for the current year.

Required,
i) Statement of Profit or Loss for the year ended 31st March 20X4 (12
marks)
ii) Statement of changes in equity for the year ended 31st March 20X4
(8 marks)
iii) Calculate basic earnings per share for the year ended 31st March 20X4
(3 marks)

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15) Tartarus Co.

The following trial balance extracts are from Tartarus Co. for the year
ended 30th September 20X8.
($’000) ($’000)
Equity shares of $ 1 each 21 000
Retained Earnings – 30th September 20X8 19 860
8% loan notes 12 000
Plant and equipment 46 200
Right of Use plant 4 800
Accumulated depreciation as at 1/10/X7 11 400
Plant and Equipment
Investments as at 1/10/X7 3 600
Closing inventory 7 020
Trade receivables 12 300
Bank 1 140
Deferred tax 1 620
Trade payables 5 640
Environmental provision 2 400
Lease Liability 2 520
Loan note interest paid 480
Suspense a/c 3 480
Investment Income 300
77 880 77 880

a) On 30th September 20X8, one quarter of the 8% loan notes were

redeemed at par and six months loan interest was paid. The
suspense a/c represents the debit entry corresponding to the cash
payment for the capital redemption and the outstanding interest.

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b) Non-current Assets:
An item of plant with a cost of $ 8.4 m which was purchased on 1 st
October 20X7 is included in the plant and equipment. This plant will
cause environmental damage which will have to be rectified when it
is dismantled after the end of 5 years. The present value of the
rectification is $ 2.4 m. The environmental provision has been
correctly accounted for, no finance cost has yet been charged in
relation to this provision.
No depreciation has been charged in relation to the current year. It
should be charged to cost of sales.
c) The right of use plant was acquired on 1st October 20X7 under a fie
year lease with an initial deposit of $ 1.38 m and annual payments of
$ 0.9 m on 30th September each year. The present value of the annual
payments of the lease (excluding the initial deposit) at 1st October
20X7was $ 3.42 m. The lease has a rate of interest of 10%. The lease
liability in the above trial balance reflects the initial liability less the
first annual payment.
d) The investments through profit or loss had a fair value of $ 3.9 m, as
of 30th September 20X8. The investments figure in the above trial
balance is after the sale below. The sold investments had a carrying
amount of $ 840 000 was sold for $ 960 000. Investment income in
the trial balance includes the profit on the sale of the investment and
dividend received during the year.
e) A provision for current tax for the current year of $ 2.1 m is required.
On 30th September 20X8 the tax base of Clarion’s net assets was $
7.2 m less than their carrying amounts. The income tax rate of
Tartarus is 25%.

Required,
i) Statement of Financial Position as of 30th September 20X8. (15 marks)

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ii) Prepare extracts from the statement of cash flows for the year ended
30th September 20X8 in respect of investing and financing activities.
(5 marks)

16) Gorgon Co.

The following were extracted from Gorgon Co’s trial balance for the year
ended 31st December 20X5.
($’000) ($’000)
Contract to construct asset 3 600
Lease rental paid on 31/12/X5 8 280
Land(10.8 m) and building(43.2 m) at cost 54 000
Leased plant at initial carrying amount 31 500
Accumulated Depreciation as at 1/1/X5
Building 9 000
Leased plant 6 300
Closing inventory 50 940
Trade receivables 34 650
Bank 6 570
Insurance provision 135
Deferred tax 7 200
Lease liability at 1/1/X5 26 370
Trade payables 19 170
Equity shares of $ 1 each 24 300
Loan note 36 000
Retained Earnings as at 31/12/X5 47 925

a) The $ 36 m loan note was issued at par on 1st January 20X5, No interest
will be paid on the loan. However, it will be redeemed in 3 years for $
47 916 000 which gives an effective interest rate of 10% per annum.

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b) On 1st January 20X8, Gorgon received a renewal quote of $ 360 000

from their property insurer. The directors were surprised at how much
it had increased and believed it would be less expensive to ‘self-
insure’. Accordingly, they charged $ 360 000 to operating expenses and
credited the same account to the insurance provision. During the year
expenses of $ 225 000 were incurred, relating to previously insured
property damage which Gorgon has debited to the provision.
c) During the year Gorgon entered into a contract to construct an asset
for a customer. The performance obligation is satisfied over time. The
balance in the trial balance represents,
Cost incurred to date - $ 12.6 m
Value of the contract billed - $ 9 m
The contract commenced on 1st January 20X5 and the contract price is
$ 22.5 m. The costs to complete the contract at 31st December 20X5 are
estimated at $ 5.4 m. Gorgon’s policy is to measure progress is to
measure progress based on the work certified as a percentage of the
contract price.
d) Non-current assets:
Gorgon decided to revalue its land and building for the first time on 1st
January 20X5. Accordingly, land was valued at $ 14.4 m and building at
$ 34.56 m. The building’s remaining life at the date of revaluation was
16 years. This was not reflected in trial balance figures. Gorgon does
not make a transfer from the revaluation surplus to retained earnings
in respect of the realization of the revaluation surplus. Deferred tax is
applicable to the revaluation surplus at 25%.
The lease plant was acquired on 1st January 20X4 under a five-year
lease which has an interest rate of 10% per annum. The rentals are $
8.28 m per annum payable on 31st December each year.
No depreciation has been charged in relation to the current year. All
depreciation is charged to cost of sales.

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e) A provision for income tax for the year ended 31st December 20X5 of $
3.06 m is required. At 31st December 20X5 the tax base of Gorgon’s net
assets was $ 21.6 m less than their carrying amount. This does not
include the effect of the revaluation mentioned above. The income tax
rate is 25%.
Required,
i) Prepare a schedule of adjustments required to the retained earnings
as at 31st December 20X5. (8 marks)
ii) Statement of Financial Position as at 31st December 20X5 (12 marks)

17) Orion Co.

Statement of profit or loss and other comprehensive income
for the year ended 30th September ,
($’000) ($’000)
20X8 20X7
Revenue 35 920 35 200
Cost of Sales (25 040) (23 200)
Gross Profit 10 880 12 000
Distribution Costs (1 920) (1 680)
Administrative costs (6 280) (4 720)
Investment properties
Rental received 280 320
Fair value changes (560) 400
Finance Cost (480) (480)
Profit before tax 1 920 5 840
Income tax (480) (1 360)
Profit for the year 1 440 4 480
Other Comprehensive Income (1 040) 800
Total Comprehensive Income 400 5 280

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Statement of Financial Position

As at 30th September ,
(’000) (’000)
20X8 20X7
Non-Current Assets
Property, plant and equipment 21 360 20 160
Investment properties 3 280 4 000

Current Assets
Inventories 1 840 2 480
Trade receivables 2 400 2 720
Bank Nil 240
Total Assets 28 880 29 600

Equity and Liabilities

Equity shares of $ 1 each 13 760 12 000
Revaluation Surplus 960 2 000
Retained Earnings 6 160 6 960
Total Equity 20 880 20 960

Non-Current Liabilities
12% Loan notes 4 000 4 000

Current Liabilities
Trade payables 3 360 3 120
Accrued Finance costs 80 40
Bank Overdraft 160 Nil
Current tax payable 400 1 480
Total Equity and liabilities 28 880 29 600

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a) On 1st July 20X8, Orion acquired a new investment property at a cost

of $ 1.12 m. On the same date Orion also transferred an investment
property to property, plant and equipment at its fair value of $ 1.28m.
Orion uses the fair value model for its investment property.
b) Orion also has a policy of revaluing the other property, plant and
equipment to market value at each year end. Other Comprehensive
Income and revaluation surplus both relate to these properties.
c) Depreciation of Property, plant and equipment during the year was $
1.2 m. An item of plant with a carrying amount of 1.84 m was sold for
1.44 m during September 20X8.

Required,
i) Statement of Cash flows for the year ended 30th September 20X8
using the indirect method. (15 marks)
ii) A board member was concerned about the fact that even though there
is a slight increase in revenue the profit before tax had fallen
dramatically. The purchasing director commented that he was
concerned about the impact of rising prices. During the current year,
most of Orion’s manufacturing and operating expenses have risen by
8% per annum.
Explain the cause of the fall in Orion’s profit before tax.

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18) Hydra Co.

Statement of profit or loss and other comprehensive income
for the year ended 31st March 20X5
($’000)
Revenue 21 700
Cost of Sales (15 260)
Gross Profit 6 440
Distribution Costs (2 415)
Administrative costs (1 540)
Finance Cost
Loan interest (280)
Lease Interest (105)
Profit before tax 2,100
Income tax (700)
Profit for the year 1 400
Other Comprehensive Income 945
Total Comprehensive Income 2 345

Statement of Financial Position

As at 31st March
(’000) (’000)
20X5 20X4
Non-Current Assets
Property, plant and equipment 9 800 7,490
Deferred development expenditure 700 Nil

Current Assets
Inventories 2 310 2 660
Trade receivables 2 065 1 540
Bank 1 386 910
Total Assets 16 261 12 600

Equity and Liabilities

Equity shares of $ 1 each 4 900 4 900
Revaluation Surplus 945 Nil
Retained Earnings 2 240 1 225
Total Equity 8 085 6 125

Non-Current Liabilities
8% Loan notes 2 856 2 800
Deferred tax 1 050 560
Lease Liability 840 630
Government grant 140 70
4 886 4 060

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Current Liabilities
Lease Liability 525 420
Trade payables 1 855 1 470
Current tax payable 875 508
Government grant 35 17
Total Equity and liabilities 16 261 12 601

a) On 1st July 20X4, Hydra acquired plant under a lease with an initial value
of $ 1.05 m. The right of use asset is included with in property, plat and
equipment. On this date it also revalued its property upwards by $ 1.4 m
and transferred $ 455 000 of the resulting revaluation surplus this
create to deferred tax. There were no disposals of non-current assets
during the period.
b) Depreciation of property, plant and equipment was $ 630 000 and
amortisation of deferred development expenditure was $ 140 000 for
the year ended 31st March 20X5.
c) The 8% loan notes are repayable at a premium, giving them an effective
rate of 10%. No loan notes were issued or redeemed during the year.
d) $ 17 500 was credited to administrative expenses in respect of
government grants during the year.

Required,
Prepare Cash flow statement for the year ended 31st March 20X5

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Business Combinations
1) Monica Co. and Chandler Co.
On 1st July 20X6 Monica acquired 75% of Chandler’s equity shares by means
of a share exchange of two new shares in Monica for every five acquired
in Chandler. In addition, Monica issued to the shareholders of Chandler a $
100 10% loan note for every 1,000 shares acquired. Monica has not recorded
any of the purchase consideration, although it does have other 10% loan
notes already in issue. The market value of Monica’s shares as of 1st July
20X6 was $ 2 each.
The summarized financial statements of the two entities as of 31st
December 20X6 is as follows,
(’000) (’000)
Monica Chandler
Non-Current Assets
Property, plant and equipment 42 660 22 950
Financial asset: equity investments 6 750 2 880
49 410 25 830
Current Assets
Inventories 18 360 7 560
Trade receivables 13 320 8 100
Bank 1 890 Nil
Total Assets 82 980 41 490

Equity and Liabilities

Equity shares of $ 1 each 36 000 18 000
Retained Earnings
At 1/1/20X6 17 280 (3 600)
For year ended 31/12/X6 6 660 7 200
Total Equity 59 940 21 600

Non-Current Liabilities
10% Loan notes 7,200 Nil

Current Liabilities
Trade payables 15 840 11 700
Bank Overdraft Nil 8 190
Total Equity and liabilities 82 980 41 490

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a) At the date of acquisition Chandler produced a draft statement of

profit or loss which showed it has made a net loss after tax of $ 1.8 m
at that date. Monica accepted the figure as the basis for calculating
the pre and post acquisition split of Chandler’s profit for the year
ended 31st December 20X6.
Also on the date of acquisition Monica conducted a fair value exercise
on Chandler’s net asset which were equal to their carrying amounts
with the exception of an item of plant with a fair value of $ 2.7 m below
its carrying amount. The plant had a remaining useful life of three
years on 1st July 20X6
Monica’s policy is to measure the non-controlling interest at fair value
at the date of acquisition. For this purpose, a share price for Chandler
of $ 1.20 each is representative pf the fair value of the shares held by
non-controlling interest.
b) Each month since acquisition, Monica’s sales to Chandler were
consistently $4.14 m. Monica has marked these up by 15% on cost.
Chandler had one month’s supply of these goods in inventory as at the
year end. Monica’s normal mark up for the customers is 40%
c) The financial asset equity investment of Monica and Chandler are
carried at their fair values as at 1st January 20X6. At 31st December
20X6, these had fair values of $ 6.39 m and $ 3.51 m respectively.
d) There were no impairment losses with in the group during the current
year.

Required,
i) Consolidated Statement of Financial Position as at 31st December 20X6
(15 marks)
ii) A trainee accountant has noted that the net assets of a subsidiary at
acquisition is included at their fair value in the consolidated statement
of Financial position. He thinks it is inconsistent as most of the
parent’s net assets are carried at historical cost.

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Comment on this observation and explain why the net assets of the
acquired subsidiary is consolidated at acquisition at their fair values.
(5 marks)

2) Phoebe Co. and Mike Co.

On 1st November 20X3 Phoebe purchased 13.5 million of a total of 18 million
equity shares in Mike Co. The acquisition was through a share exchange
of two shares in Phoebe for every three shares in Mike. The par value of
the shares of both the entities is $1. The market price of Phoebe Co.’s share
as of 1st November 20X3 was$ 5.75 per share.
Phoebe will also pay $ 2.42 per every share acquired in Mike as at 31st
October 20X5. The cost of capital relevant is 10%. The reserves of Mike on
1st July 20X3 were $ 51.75 m.
Phoebe has held an investment of 30% of the equity shares in Diana Co.
for many years. Diana made a profit of $ 4.5 m for the year ended 30th June
20X4.
The summarized statement of profit or loss for the two entities for the
year ended 30th June 20X4 is given below,
(’000) (’000)
Phoebe Mike
Revenue 112 500 58 500
Cost of sales (70 500) (38 250)
Gross Profit 42 000 20 250
Distribution costs (5 550) (2 250)
Administrative costs (9 375) (4 500)
Finance costs (1 500) (675)
Profit before tax 25 575 12 825
Income tax (7 800) (2 700)
Profit for the year 17 775 10 125

a) Prior to its acquisition, Mike was a good customer of Phoebe. In the

year to 30th June 20X4, Phoebe sold goods at a value of $ 937 500 per
month to Mike both pre and post acquisition. At 30th June 20X4, Mike
still had these goods of value $ 2.25 m in its inventory. Phoebe made a
profit of 20% on the cost of these sales.

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b) Phoebe measures non-controlling interest at fair value. An

impairment test on the goodwill of Mike Co. conducted on 30 th June
20X4 concluded that it should be written down by $ 1.5 m. The value of
investment in Diana was not impaired.
c) The fair values of the net assets of Mike at the date of acquisition were
equal to their carrying amounts with the exception of property and
plant which had fair values of $ 3.075 m and 1.875 m respectively in
excess of their carrying amounts. The increase in the fair value of
property would create an additional depreciation of $ 150 000 in the
consolidated financial statements for the year ended 30th June 20X4
and the plant had a remaining life of four years at the date of
acquisition. All depreciation is charged to cost of sales.
The fair values have not been reflected in Mike’s financial statements.
No fair value adjustments were required on the acquisition of Diana.
d) The finance cost of Phoebe do not include the finance cost on the
deferred consideration.
e) All items accrue evenly throughout the year.

Required,
i) Calculate the consideration paid on the acquisition of Mike as of 1st
November 20X3 (3 marks)
ii) Consolidated Statement of profit or loss of Phoebe Group for the year
ended 30th June 20X4. (17 marks)

3) Rachel Co. and Ross Co.

On 1st April 20X7 Rachel Co. acquired 75% of Ross Co. Ross Co. had been
experiencing difficult trading conditions and making significant losses. In
allowing for Ross’s difficulties, Rachel made an immediate cash payment
of only $ 1.50 per share. In addition, Rachel Co. will pay a further amount in
cash on 30th September 20X8 if Ross Co. returns to profitability by that date.
The fair value of this contingent consideration at the date of acquisition was
estimated to be $ 1.35 m, but at 30th September 20X7 in the light of

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continuing losses, its value was estimated at $ 1.125 m. The contingent

consideration has not been recorded by Rachel Co. The acquisition is
expected to be a bargain purchase leading to negative goodwill.
Below are the summarized draft financial statements of both entities,
Statement of profit or loss for the year ended 30th September 20X7,
(’000) (’000)
Rachel Co. Ross Co.
Revenue 88 000 52 800
Cost of sales (70 400) (53 760)
Gross Profit 17 600 (960)
Operating expenses (6 800) (3 520)
Profit before tax 10 800 (4 480)
Income tax (2 800) 800
Profit for the year 8 000 (3 680)

Statement of Financial Position as at 30th September 20X7

(’000) (’000)
Rachel Ross
Non-Current Assets
Property, plant and equipment 32 800 16 800
Investments 10 800

Current Assets 15 200 3 840

Total Assets 58 800 20 640

Equity and Liabilities

Equity shares of $ 0.50 each 24 000 4 800
Retained Earnings 22 800 9 600

Current Liabilities 12 000 6 240

Total Equity and liabilities 58 800 20 640

a) At the date of acquisition, the fair value of Ross Co’s net assets were
equal to their carrying amount with the exception of a property. This
had a fair value of $ 1.6 m above its carrying amount and a remaining
useful life of 10 years at that date. All depreciation is included in the
cost of sales.
b) Rachel’s policy is to value the non-controlling interest at fair value at
the date of acquisition. This was $ 2.88 m

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c) Rachel transferred raw materials at their cost of $ 3.2m to Ross in

June 20X7. Ross processed all these raw materials incurring
additional direct costs of $ 1.12 m and sold them back to Rachel in
August 20X7 for $ 7.2 m. At 30th September 20X7 Rachel had $ 1.2 m of
these goods still in inventory. There were no other intra group sales.
Required,
i) Consolidated Statement of Profit or Loss for the year ended 30 th
September 20X7 (11 marks)
ii) Consolidated Statement of Financial Position as at 30th September
20X7 (9 marks)

4) Joey Co. and Cathy Co.

On 1st January 20X1 Joey Co. acquired 75% of Cathy Co’s equity shares by a
share exchange of two shares in Joey for every 5 shares acquired. The
market price of one share of Joey and Cathy is $ 4 and $ 3 respectively.
Additionally, Joey Co. will pay $ 1.32 per acquired share , deferred until 1st
January 20X2. None of the above considerations have been recorded by
Joey. The cost of capital is 10% per annum.
The summarized statement of Financial Position of both the entities as at
30th June 20X1 is as follows,
(’000) (’000)
Joey Cathy
Non-Current Assets
Property, plant and equipment 38 500 20 020
Financial asset: Equity investments 8 050 4 200
46 550 24 220
Current Assets
Inventory 11 900 10 780
Trade receivable 10 010 7 350
Bank 1 540 1 120
Total Assets 70 000 43 470

Equity and Liabilities

Equity shares of $ 1 each 14 000 14 000
Share premium 2 800 Nil
Retained Earnings

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1st July 20X0 18 340 9 800

30th June 20X1 16 800 7 000
51 940 30 800
Current Liabilities 18 060 12 670
Total Equity and liabilities 70 000 43 470

a) At the date of acquisition the fair value of Cathy’s net assets were equal
to their carrying amounts with the following exceptions.
a. The fair value of Cathy’s financial asset equity investments, carried at a
value of $ 4.2 m, was $ 4.9 m.
b. Cathy also owned the rights to a popular video game. At the date of
acquisition these rights were worth $ 8.4 m and had a remaining useful
life of 5 years.
b) Joey’s policy is to measure non-controlling interest at fair value at the
date of acquisition. For this purpose the value given for Cathy’s shares
might be used.
c) Following an impairment review, consolidated goodwill is to be written
down by $ 2.1 m as at 30th June 20X1.
d) Cathy’s business is seasonal and 60% of its annual profit is made in the
period from 1st January to 30th June each year.
e) Joey sells goods to Cathy at cost plus 30%. Cathy had $ 1.26 m of these
goods in its inventory as at the year end. In addition on 29 th June 20X1,
Joey processed the sale of $ 560 000 of goods to Cathy, which Cathy did
not account for until their receipt on 5th July 20X1. The in-transit
reconciliation should be achieved by assuming the transaction has been
recorded in the books of Cathy before the year end. At 30 th June 20X1,
Joey had a receivable balance of $ 1.68m due from Cathy which differed
to the equivalent balance in Cathy’s books due to the sale made on 29th
June 20X1.
f) At 30th June 20X1 the fair values of the financial asset equity
investments in Joey and Cathy were $ 9.24 m and $ 5.53 m respectively.

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Required,
Consolidated statement of financial position as at 30th June 20X1 (20
marks)

5) Janice Co. and David Co.

On 1st October 20X4 Janice acquired 54 m of David’s 90 m $ 0.50 shares.
Janice will pay $ 1.54 per each share acquired on 30th September 20X5.
David’s share price at the date of acquisition was $ 1.25. The cost of capital
is 10% per annum.
The statement of profit or loss and other comprehensive income for the
year ended 31st March 20X5 are,
(’000) (’000)
Janice David
Revenue 372 000 186 000
Cost of sales (240 000) (90 000)
Gross Profit 132 000 96 000
Distribution costs (24 000) (12 000)
Administrative costs (21 600) (15 000)
Investment Income 3 000 960
Finance costs (1 200) (3 360)
Profit before tax 88 200 66 600
Income tax (27 000) (18 600)
Profit for the year 61 200 48 000
Other Comprehensive Income
Gain/Loss on revaluation of land (1 320) 600
59 880 48 600
a) A fair value exercise at the date of acquisition of David concluded
that the fair value of David’s net assets equal to their carrying
amounts with the following exceptions,
a. Janice valued David’s good relationship with the customers at $
3 m. and assumes that these relationships will last for another
5 years. Amortisation is charged to administrative expenses.
b. Plant with remaining life of 2 year had a fair value of $ 3.6 m in
excess of its carrying amount. Depreciation is charged to cost
of sales.

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b) Janice measures the non-controlling interest at fair value at the

date of acquisition. To calculate the fair value, the share price of
David should be used.
c) David’s land is valued using the revaluation model and has
increased its value by $ 600 000 since acquisition.
d) After the acquisition Janice sold goods to David for $ 12 m at a 25%
mark-up. David had one fifth of these goods still in inventory as of
31st March 20X5.
e) David had retained earnings of $ 42 m as of 1st April 20X4. There
were no other components of equity as at that date.

Required,
i) Calculate the Goodwill arising on the acquisition of David as of 1st
October 20X4. (5 marks)
ii) Consolidated Statement of profit or loss and other comprehensive
income for the year ended 31st March 20X5 (15 marks)

6) Frost Co. and Blade Co.

On 1st January 20X9 Frost Co. acquired 75% of the equity share capital of
Blade Co. by means of a share exchange of two shares in Frost for every
three shares acquired in Blade.
On that date, as a part of consideration, further $ 100 8% loan notes were
issued for every 100 shares acquired. None of the purchase consideration
nor the outstanding interest on loan notes were recorded by Frost Co. At
the date of acquisition, the market price of a share of Frost and Blade were
$ 3.20 and $ 1.80 respectively.
The summarized statements of financial position of the two companies as
of 31st March 20X9 are as follows,

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(’000) (’000)
Frost Blade
Non-Current Assets
Property, plant and equipment 37 600 15 750
Investment in Titania Co. at 1/4/X8 2 250 Nil
39 850 15 750
Current Assets
Inventory 9 700 9 400
Trade receivable 7 350 6 250
Bank 600 300
Total Assets 57 500 31 700

Equity and Liabilities

Equity shares of $ 1 each 25 000 10 000
Retained Earnings
1st April 20X8 10 000 9 500
For the year ended 31st March 20X9 8 000 4 000
Total Equity 43 000 23 500

Non-current Liabilities
8% loan notes 2 500 Nil

Current Liabilities 12 000 8 200

Total Equity and liabilities 57 500 31 700
a) At the date of acquisition the fair value of Blade’s net assets were equal
to their carrying amounts. However Blade operates a gem mine which
requires decommissioning in five years. No provision has yet been
identified. The present value of the decommissioning is $ 2 m and will be
paid five years from the date of acquisition.
b) Frost measures the non-controlling interest at fair value at the date of
acquisition. To calculate the fair value, the share price of Blade should
be used.
c) The investment in Titania Co. represents 30% of its share capital. Titania
Co.’s profit for the year ended 31st March 20X9 is $ 3 m. Titania also paid
total dividends of $ 1 m during the year. Frost Co. has recorded its share
of the dividend received in investment income.
d) The inventory of Blade Co. includes goods brought from Frost Co. for $
1.05 m. Frost Co. applies a mark up on cost of 40%.

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On 27th March 20X9 Frost dispatched goods to Blade with a selling price
of $ 350 000. These were not received by Blade until the year end, so
have not been included in the inventory for the year.
At 31st March 20X9 Frost had a receivable due from Blade of $ 1.5 m. This
differed from equivalent payable in Blade due to the goods in transit.
The intra group reconciliation should be achieved by assuming that
Blade has received the goods in transit before the year end.

Required,
Consolidated Statement of Financial Position as at 31st March 20X9

7) Chemistro Co. and Cage Co.

On 1st January 20X7 Chemistro purchased 75% of the equity shares of Cage.
The summarized statement of profit or loss and other comprehensive
income for the year ended 30th June 20X7 are as follows,
(’000) (’000)
Chemistro Cage
Revenue 360 000 192 000
Cost of sales (208 000) (88 000)
Gross Profit 152 000 104 000
Distribution costs (18 880) (9 600)
Administrative costs (21 600) (18 400)
Finance costs (1 200) (960)
Profit before tax 110 320 75 040
Income tax (38 400) (22 240)
Profit for the year 71 920 52 800
Other Comprehensive Income
Gain on revaluation of land 2,000 800
73 920 53 600

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The following extracts of the equity of the entities as at 30 th June 20X7

are also given.
(’000) (’000)
Chemistro Cage
Revaluation surplus (land) 6 720 Nil
Retained Earnings 72 000 100 000
a) Immediately after the acquisition of Cage on 1st January 20X7,
Chemistro transferred an item of plant with a carrying amount of $ 3.2
m to Cage at an agreed price of $ 4 m. At this date the plant had a
remaining useful life of two and a half years. Chemistro had included
the profit on this transfer as a reduction in its depreciation costs which
are included with in cost of sales.
b) Chemistro’s policy is to revalue the group’s land to market value at
each year end. Prior to its acquisition by Chemistro, Cage’s land had
been valued at historical cost. During the post-acquisition period
Cage’s land had increased its value over its value at the date of
acquisition by $ 800 000. Cage has recognized the revaluation with in
its individual financial statements.
c) After the acquisition, Cage sold goods to Chemistro for $ 32 m. These
goods had cost Cage $ 24 m. $9.6 m of the goods sold remained in
Chemistro’s closing inventory.
d) Chemsitro’s policy is to measure the non-controlling interest at fair
value at the date of acquisition which was $ 80 m

Required,
i) Consolidated Statement of Profit or Loss and other comprehensive
income for the year ended 30th June 20X7. (15 marks)
ii) Prepare extracts of equity section of the consolidated statement of
financial position as of 30th June 20X7. (5 marks)

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8) Moon Co. and Knight Co.

On 1st June 20X3, Moon Co. acquired 80% of the equity share capital of
Knight. The consideration consisted of two elements: a share exchange of
three shares in Moon for every 5 shares acquired and $ 480 000 cash. The
share issue has not yet been recorded by Moon. At the date of acquisition
shares in Moon had a market value of $ 5 each. Following are the draft
financial statements of both entities,
(’000) (’000)
Moon Knight
Non-Current Assets
Property, plant and equipment 15 300 8 340
Investments 1 080 Nil
16 380 8 340
Current Assets
Inventory 3 180 300
Trade receivable 2 520 660
Bank 1800 480
Total Assets 23 880 9 780

Equity and Liabilities

Equity shares of $ 1 each 7 200 3 000
Other equity reserves 300 Nil
Retained Earnings 7 380 2 700
Total Equity 14 880 5 700

Current Liabilities 9 000 4 080

Total Equity and liabilities 23 880 9 780

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a) Moon Co’s investments include investments in shares which at the

acquisition were classified as fair value through other comprehensive
income (FVTOCI). The investments have increased in value by $ 180 000
during the year. The other equity reserves relate to these investments
and is based on their value as of 30th September 20X2. There is no
acquisitions or disposals of any of these investments during the year.
b) At the date of acquisition the fair values of Knight’s net assets were
equal to their carrying amounts with the exception of its property. This
had a fair value of $ 720 000 below its carrying amount and had a
remaining useful life of 8 years at the date of acquisition. This was not
incorporated in its financial statements.
c) Moon had $ 1.2 m o inventory that has been supplied by Knight in the
post acquisition period, as of 30th September 20X3. Knight made a
markup on cost of 25% on these sales.
d) Moon had a trade payable balance owing to Knight of $ 210 000 as at
30th September 20X3. This did not agree with the correspondent
receivable in Knight’s books due to a $ 78 000 payment made to Knight,
which Knight have yet not received.
e) Moon’s policy is to value non-controlling interest at fair value and at
the date of acquisition it was $ 2.1 m
f) The consolidated goodwill was impaired by $ 900 000 at 30th
September 20X3.
Required,
Consolidated Statement of Financial Position as of 30th September
20X3

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9) Ultron Co. and Sentry Co.

On 1st January 20X7, Ultron acquired 90% of the equity share capital of
Sentry Co. The consideration was through a share exchange of two new
share of Ultron for every three shares acquired. Additionally, on 31st
December 20X7, Ultron will pay the shareholders of Sentry $ 1.76 per share
acquired. Cost of Capital is 10% per annum. The deferred consideration has
not yet been recorded by Ultron.
At the date of acquisition, the market price of the shares of Ultron and
Sentry are $ 6.50 and $ 2.50 respectively.
The extracts from financial statements of both entities for the year ended
30th September 20X7 are given below,
(’000) (’000)
Ultron Sentry
Revenue 58 140 34 200
Cost of sales (46 080) (23 400)
Gross Profit 12 060 10 800
Distribution costs (1 440) (1 620)
Administrative costs (3 420) (2 160)
Investment Income 450 Nil
Finance costs (378) Nil
Profit before tax 7 272 7 020
Income tax (2 520) (1 440)
Profit for the year 4 752 5 580

(’000) (’000)
Ultron Sentry
Equity shares of $1 each 27 000 9 000
Retained Earnings 48 600 31 500

a) At the date of acquisition, the fair values of Sentry’s net assets were
equal to their carrying amount with the exception of the following
items.
a. An item of plant had a fair value of $ 1.62 m 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.

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b. Sentry had a contingent liability which Ultron estimated to have a

fair value of $ 405 000. This has not changed at the year end.
These changes were not incorporated in the individual financial
statements of Sentry.
b) Ultron’s policy is to value non-controlling interest at fair value at the
date of acquisition. For the calculation, the share price of Sentry as at
that date could be used.
c) Sales from Ultron to Sentry throughput the year ended 30th September
20X7 had consistently been $ 720 000 per month. Ultron made a
markup on cost of 25% on these sales. Sentry had $ 1.35 m of these
goods in inventory as of 30th September 20X7
d) Ultron’s investment income is a dividend received from its investment
in a 40% owned associate which it has held for several years. The
profit s of the associate for the year ended 30th September 20X7 were
$ 1.8 m.
e) The goodwill has been impaired by $ 1.8 m as at 30th September 20X7

Required,
i) Calculate the consolidated goodwill at the date of acquisition of
Sentry.
(7 marks)
ii) Consolidated Statement of Profit or Loss for the year ended 30th
September 20X7 (13 marks)

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10) Claw Co. and Galactus Co.

On 1st January 20X5, Claw Co. acquired 80% of the equity share capital of
Galactus. The consideration is satisfied by a share exchange of two
shares in Claw for every three shares acquired in Galactus. At the date
of acquisition, shares in Claw Co. and Galactus Co. had a market value
of $ 3 and $ 2.50 each respectively. Claw will also pay consideration of
27.5 cents on 1st January 20X6 for each acquired share in Galactus. Cost
of capital is 10% per annum. None of the consideration has been recorded
by Claw.
Below are the extracts of draft financial statements of both entities as
of 30th September 20X6,

(’000) (’000)
Claw Galactus
Non-Current Assets
Property, plant and equipment 14 960 11 120
Investments: 10% loan note from Galactus 800 Nil
15 760 11 120
Current Assets 7 200 3 200
Total Assets 22 960 14 320

Equity and Liabilities

Equity shares of $ 1 each 8 000 7 200
Revaluation Surplus 1 600 Nil
Retained Earnings 5 040 2 800
Total Equity 14 640 10 000

Non-current Liabilities
10% loan notes 2 000 800

Current Liabilities
Trade payables 6 320 3 520
Total Equity and liabilities 22 960 14 320

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(’000) (’000)
Claw Galactus
Revenue 50,080 24,000
Cost of sales (36,640) (19,200)
Finance costs (160) Nil

a) At the date of acquisition, the fair values of Galactus’s net assets were
equal to their carrying amounts with the exception of property which
had a fair value of $ 3.2 m above its carrying amount. For consolidation
purposes, this led to an increase in depreciation charges (in cost of
sales) of $ 80 000 in the post acquisition period. Galactus has not
incorporated the fair value property increase into its entity financial
statements.
The policy of the Claw group is to revalue all properties to fair value
at each year end. On 30th September 20X6, the increase in Claw’s
property has already being recorded, however a further increase in $
480 000 in the value of Galactus’s property since its value at
acquisition and 30th September 20X6 has not been recorded.
b) On 30th September 20X6, Claw accepted a $ 800 000 10% loan note
from Galactus.
c) Sales from Claw to Galactus through out the year ended 30 th
September 20X had been $ 240 000 per month. Claw made a mark up
on cost of 25%. $ 480 000 of these goods remained as at the year end
with in the inventory of Galactus.
d) Claw had a trade receivable balance owing from Galactus of $ 960 000
as at 30th September 20X6. This deferred to the equivalent payable of
Galactus due to a payment of $ 320 000 made in September 20X6. This
amount was received by Claw in October 20X6. Both entities have over
drafts rather than positive cash balances.
e) Claw measures non-controlling interest at fair value at the date of
acquisition. For this purpose, the share price of Galactus as at that
date can be used.
f) Galactus’s profit for the year ended 30th September 20X6 is $ 1.6 m.

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Required,
i) Prepare extracts from Consolidated statement of profit or loss for the
year ended 30th September 20X6 for, (5 marks)
a. Revenue
b. Cost of sales
c. Finance costs
ii) Consolidated statement of Financial Position for the year ended 30th
September 20X6 (15 marks)

11) Adam Co. and Eve Co.

On 1st April 20X8 Adam acquired 75% of Eve’s share capital in a share
exchange of three shares in Adam for every two shares in Eve. The market
price of a share in Adam and Eve are $ 3.20 and $ 4.50 respectively.
In addition, Adam agreed to pay a further amount on 1st April 20X9 which
was contingent upon the post-acquisition performance of Eve. At the date
of acquisition the fair value of the contingent consideration was $ 2.94 m,
but by 31st March 20X9 it was clear that the actual amount to be paid would
be only $ 1.89 m (ignore discounting). Adam has recorded the share
exchange and provided for the initial estimate for the contingent
consideration.
On 1st October 20X8 Adam also acquired 40% of the equity shares of Kronos
paying $ 4 per acquired share and issuing at par one $ 100 7% loan note
for every 50 shares acquired in Kronos. This consideration has also been
recorded by Adam. Adam has no other investments.
Given below is the summarized statement of financial position for the year
ended 31st March 20X9

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(’000) (’000) (’000)

Adam Eve Kronos
Non-Current Assets
Property, plant and equipment 26 250 17 150 14 700
Investments 31 500 Nil Nil
57 750 17 150 14 700
Current Assets
Inventory 7 000 6 300 3 500
Trade receivables 4 550 1 050 2 100

Total Assets 69 300 24 500 20 300

Equity and Liabilities

Equity shares of $ 1 each 17 500 5 600 3 500
Share Premium 13 860 Nil Nil
Retained Earnings
1st April 20X8 11 340 11 550 10 500
31st March 20X9 7 700 700 4 200
Total Equity 50 400 17 850 18 200

Non-current Liabilities
7% loan notes 10 150 1 400 Nil

Current Liabilities
Contingent consideration 2 940 Nil Nil
Other 5 810 5 250 2 100
Total Equity and liabilities 69 300 24 500 20 300

a) At the date of acquisition the fair values of Eve’s net assets were equal
to their carrying amount with the exception of a property which had a
fair value of $ 1.4 m above its carrying amount. This was not adjusted
by Eve. This requires additional annual depreciation of $ 70 000 in the
consolidated financial statements in the post acquisition period.
Also at the date of acquisition, Eve had an intangible asset of $ 350 000
for software in its statement of financial position. It was believed that
the software has no recoverable amount. Therefore, Eve wrote it off
shortly after the acquisition.

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b) Adam’s policy is to measure non-controlling interest at fair value at the

date of acquisition. For this purpose, the share price of Eve at the date
of acquisition can be used.
c) On 31st March 20X9 Adam’s current account with Eve was $ 2.38 m
(debit). This did not agree with the equivalent balance in Eve’s books
due to some goods in transit invoiced at $ 1.26 m that were sent by Adam
on 30th March 20X9 but had not been received by Eve until after the year
end. Adam sold all these goods at a markup of 50%.
d) Impairment tests were carried out on 31st March 20X9 which concluded
that the investment in Kronos had not impaired. But consolidated
goodwill was impaired by $ 2.66 m.

Required,
i) Consolidated statement of Financial Position as at 31st March 20X9
(15 marks)
ii) As at 31st March 20X9 the other 60% of Kronos is owned by many
separate investors. Shortly after this date, another entity which is
unrelated to Adam acquired that 60% of Kronos. As a result, Adam lost
the seat in Kronos’s board.
Explain with reasons, the accounting treatment Adam should adopt for
the investment in Kronos when it prepares its financial statements for
the next year. (5 marks)

12) Sweet Co. and Sour Co.

On 1st January 20X4, Sweet Co. acquired 60% of the equity share capital of
Sour [Link] a share exchange in which Sweet issued three new shares for
every five shares acquired in Sour. This was not recoded by Sweet.
Additionally, on 31st December 20X4, Sweet will pay $ 1.2 per share
acquired. Cost of capital is 8% per annum.
At the date of acquisition Sweet and Sour has a market value of a share
of $ 7 and $ 2 respectively.

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Statement of profit or loss for the year ended 30th September 20X4

(’000) (’000)
Sweet Sour
Revenue 50 700 31 200
Cost of sales (34 920) (20 400)
Gross Profit 15 780 10 800
Distribution costs (1 200) (960)
Administrative costs (2 460) (1 680)
Investment Income 300 240
Finance costs (180) Nil
Profit before tax 12 240 8 400
Income tax (2 880) (2 160)
Profit for the year 9 360 6 240
The equity of the companies as at 1st October 20X3,
(’000) (’000)
Sweet Co. Sour Co.
Equity shares of $1 each 12 000 9 000
Retained Earnings 43 200 15 000
a) At the date of acquisition the fair value of the net assets of Sour was
equal to their carrying amounts with the following exceptions.
1. An item of plant had a fair value of $ 2.4 m above its carrying
amount. At the date of acquisition it had a remaining life of two
years.
2. Inventory of $ 480 000 had a fair value of $ 600 000. All of these
inventories have been sold as at the year end.
b) Sweet’s policy is to value non-controlling interest at fair value at
acquisition. For this purpose, the market price of Sour’s share as at
that date could be used.

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c) Sweet has traded with Sour for many years. Sales from Sour to
Sweet throughout the year ended 30th September 20X4 were
consistently $ 720 000 per month. Sour made a markup on cost of
20% on these sales. Sweet had $ 1.08 m of these goods in inventory
as at 30th September 20X4.
d) Sweet’s investment income consists of the following
1. Its share of dividend of $ 300 000 paid by Sour in July 20X4
2. A dividend of $ 120 000 received from Bitter Co., a 25% owned
associate which it has had for several years. The profit for the year
of Bitter is $ 1.44 m.
Required,
i) Calculate the consolidated goodwill at the date of acquisition of Sour.
(7 marks)
ii) Consolidated statement of Profit or Loss for the year ended 30 th
September 20X4. (13 marks)

13) War Co. and Peace Co.

On 1st April 20X2 War acquired 60% of the 3.6 million $ 1 shares of Peace
Co. in a share exchange of two shares in War for every 3 shares acquired
in Peace. At the date of acquisition the shares in War had market value of
$ 6 each. Below are the statements of profit or loss of both entities for the
year ended 30th September 20X2,
(’000) (’000)
War Peace
Revenue 76 500 37 800
Cost of sales (56 700) (28 800)
Gross Profit 19 800 9 000
Distribution costs (2 790) (3 240)
Administrative costs (4 680) (1 800)
Profit before tax 12 330 3 960
Income tax (4 230) (1 260)
Profit for the year 8 100 2 700

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a) At the date of acquisition, the fair value of Peace’s net assets were equal
to their carrying amounts with the exception of an item of plant, which
had a fair value of $ 1.8 m in excess of its carrying amount. It had a
remaining life of five years at that date. This was not adjusted by Peace.
b) Sales from Peace to war in the post acquisition period was $ 7.2 m.
Peace made a mark-up on cost of 40% on these sales. War had sold $
4.68 of these goods by 30th September 20X2.
c) As of 30th September 20X2the balance on Peace’s retained earnings was
$5.85 m.
d) Consolidated goodwill is impaired by $ 900 000 as at 30th September
20X2.
e) War’s policy is to measure the non-controlling interest at fair value. At
the date of acquisition NCI amounted to $ 5.31 m.

Required,
i) Consolidated Statement of Profit or Loss for the year ended 30 th
September 20X2. (12 marks)
ii) Calculate the following values to be included in the consolidated
statement of financial position as of 30th September 20X2.
1. Goodwill (5 marks)
2. Non controlling interest (3 marks)

14) Hell Co. and Heaven Co.

On 1st April 20X6, Hell acquired 80% of Heaven’s equity shares by means
of an immediate share exchange and a cash payment of $ 0.88 per
acquired share, deferred until 1st April 20X7. Hell has recorded the share
exchange but not the cash consideration. The cost of capital is 10% per
annum.
The statement of financial position of the two companies as at 31st March
20X7 are as follows,

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(’000) (’000)
Hell Heaven
Non-Current Assets
Property, plant and equipment 30 480 22 800
Investments:
Square 19 200 Nil
Other equity investments 1 600 Nil
51 280 22 800
Current Assets
Inventory 11 120 8 320
Trade receivables 9 120 4 400
Bank 7 520 480
Total Assets 79 040 36 000

Equity and Liabilities

Equity shares of $ 1 each 20 000 8 000
Share Premium 14 080 Nil
Retained Earnings
At 1st April 20X6 12 960 14 400
For the year ended 31st March 20X7 11 200 6 400
Total Equity 58 240 28 800

Non-current Liabilities 13 200 3 200

Current Liabilities 7 600 4 000

Total Equity and liabilities 79 040 36 000
a) At the date of acquisition, the fair value of Heaven’s net assets were
equal to their carrying amounts with the following exceptions,
1. A building had a fair value of $ 2.4 m above its carrying amount. At
the date of acquisition it had a remaining life of five years. Ignore
deferred tax on revaluation.

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2. Heaven had unrecorded deferred tax liability of $ 800 000, which

was unchanged as at 31st March 20X7.
b) Hell’s policy is to measure the non-controlling interest at fair value.
For this purpose the share price of Heaven at acquisition can be used.
As at acquisition the market price of a Heaven’s share was $ 3.50
c) Hell Co. sells goods to Heaven at cost plus 50%. Below is a summary
of the recorded activities for the year ended 31st March 20X7,
Hell Heaven
Sales to Heaven 12 800
Purchases from Hell 11 600
Included in Hell’s receivables 3 520
Included in Heaven’s payables 1 360
On 27th March 20X7, Hell sold and dispatched goods to Heaven, which
Heaven did not record until they were received on 5th April 20X7.
Heaven’s inventory was counted on 31st March 20X7 and does not
include any goods purchased from Hell.
On 29th March 20X7, Heaven remitted to Hell a cash payment which
was not received by Hell until 2nd April 20X7. This payment accounted
for the remaining difference on the current accounts.
d) The other equity investments of Hell are carried at their fair values on
1st April 20X6. A 31st March 20X7, these had increased to $ 2.24 m.

Required,
i) Consolidated Statement of Financial Position as at 31st March 20X7
(20 marks)

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15) Square Co. and Triangle Co.

The following are the draft financial statements of Square Co. and
Triangle Co. as at 30th September 20X2
(’000) (’000)
Square Triangle
Non-Current Assets
Property, plant and equipment 274 400 58 800
Investments 84 000 Nil
358 400 58 800
Current Assets 66 290 31 255
Total Assets 424 690 90 055

Equity and Liabilities

Equity shares of $ 1 each 133 000 42 000
Revaluation Surplus 28 980 2 800
Retained Earnings 147 000 25 550
Total Equity 308 980 70 350

Non-current Liabilities
Deferred Consideration 19 600 Nil
Current Liabilities 96 110 19 705
Total Equity and liabilities 424 690 90 055
a) On 1st October 20X1, Square Co. acquired 80% of the share capital of
Triangle Co. At this date the retained earnings of Triangle Co. were
$ 23.8 m and the revaluation surplus stood at $ 2.8 m. Square Co.
paid an initial cash amount of $ 64.4 m and agreed to pay the owners
of Triangle Co. a further $ 19.6 m on 1st October 20X3. The accountant
has recorded the full amount of both the considerations in
investment. The cost of capital is 8%. The appropriate discount rate
is 0.857.

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b) On 1st October 20X1 , the fair values of Triangle Co’s net assets were
equal to their carrying amount with the exception of some inventory
which had cost $ 2.1 m but had a fair value of $ 2.52 m. On 30 th
September 20X2, 10% of these goods remained in the inventory of
Triangle Co.
c) During the year Square Co. sold goods totalling $ 5.6 m to Triangle
Co. at a gross profit margin of 25%. On 30th September 20X2, Triangle
Co. still held $ 0.7 m of these goods in inventory, Square Co’s normal
margin is 45%.
d) Square group uses the fair value method in measuring the non-
controlling interest. At acquisition it was valued at 10.5 m

Required,
i) Consolidated statement of Financial Position as at 30th September
20X2 (15 marks)
ii) Square Co. buys struggling businesses, reverse their decline and
sells them at a profit in a short period of time. Square Co. is hoping
to do the same with Triangle Co.
Explain any concerns in making investment decisions based on the
information available in the Square Group’s consolidated financial
statements in comparison to that available in the individual financial
statements of Triangle Co. (5 marks).

16) Milky Co. and Dairy Co.

On 1st July 20X8, Milky acquired 80% of Dairy’s equity shares. The
consideration consisted of two elements: A share exchange of two
shares in Milky Co. for every three shares acquired in Dairy, and a cash
payment due on 30th June 20X9 of $ 1.54 per share acquires. Cost of
capital is 10%.
At the date of acquisition, shares in Milky and Dairy had a market price of
$ 3.00 and $ 2.50 each respectively.

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Given below are the extracts of Statement of Profit or Loss for the year
ended 31st March 20X9

(’000) (’000)
Milky Dairy
Revenue 14 520 6 480
Cost of sales (10 680) (4 080)
Gross Profit 3 840 2 400
Distribution costs (300) (204)
Administrative costs (480) (216)
Finance costs (240) (180)
Profit before tax 2 820 1 800
Income tax (1 020) (360)
Profit for the year 1 800 1 440

Equity of Dairy as at 31st March 20X9

(’000)
Equity shares of $1 each 7 200
Retained Earnings 8 100
a) At the date of acquisition, the fair value of Dairy’s net assets were
equal to their carrying amounts with the exception of an item of plant
which had a fair value of $ 432 000 above its carrying amount. The
remaining life of the plant as at that date was 18 months. Depreciation
is charged to cost of sales.
b) Milky’s policy is to value the non-controlling interest at fair value at
the date of acquisition. For this purpose, the market price of a share
of Dairy as at that date can be used.

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c) On 1st April 20X8, Dairy commenced the construction of a new

production facility, financing this by a bank loan. There is a rule in the
country in which Dairy operates, prohibiting the capitalization of
borrowing costs. However Dairy calculated that, in accordance with
IFRS 23 Borrowing costs, interest of $ 60 000 would have been
capitalised as at 31st March 20X9. The production facility is still under
construction as at that date.
d) Sales from Milky to Dairy in the post-acquisition period were $ 1. 8 m
at a markup of 20%. Dairy had $ 252,000of these goods in inventory
as of 31st March 20X9.
e) On 31st March 20X9 it was identified that the goodwill on acquisition
was impaired by $ 300 000. This is charged to cost of sales.
Required,
i) Calculate the consolidated goodwill at the date of acquisition of Dairy.
(6 marks)
ii) Prepare extracts form Dairy’s consolidated statement of profit or
loss for the year ended 31st March 20X9, for, (9 marks)
1. Revenue
2. Cost of sales
3. Finance Costs
4. Profit or loss attributable to non-controlling interest
iii) IFRS 3 Business Combinations allow the non-controlling interest to
be measured in two methods.
1. At its fair value
2. At its proportionate share of the net assets
Explain the difference that the accounting treatment of these
alternative methods could have on the consolidated financial
statements, including where consolidated goodwill may be impaired.
(5 marks)

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17) Billie Co. and Jean Co.

On 1st October 20X7, Billie acquired majority equity shares in Jean Co. The
consideration consisted to elements. An immediate payment of $ 4 per
share on 1st October 20X7 and a further amount deferred until 1st October
20X8 of $ 4.86 m. The immediate payment has been recorded in Billie’s
financial statements, but the deferred payment has not been recorded.
Cost of capital is 8% per annum.
On 1st February 20X8, Billie also acquired 25% of the equity shares of
Jackson co. paying $ 9 million in cash. Jackson made a profit of $ 1.08 m
for the year ended 30th September 20X8.
The summarized statements of financial position of the two entities as at
30th September 20X8 are,
(’000) (’000)
Billie Jean
Non-Current Assets
Property, plant and equipment 36 000 27 900
Intangible assets 6 750 Nil
Investments:
Jean (7.2 m shares $ 4 each) 28 800 Nil
Jackson 9000 Nil
80 550 27 900
Current Assets 19 800 12 330
Total Assets 100 350 40 230

Equity and Liabilities

Equity shares of $ 1 each 45 000 9 000
Retained Earnings
At 1st October 20X7 23 130 10 800
For the year ended 30th September 20X8 8 280 5 400
Total Equity 76 410 25 200

Non-current Liabilities
Deferred tax 13 500 7 200
Current Liabilities 10 440 7 830
Total Equity and liabilities 100 350 40 230

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a) Billie’s policy is to value the non-controlling interest at fair value at the

date of acquisition. For this purpose the share price of Jean as at the
date of acquisition of $ 3.50 can be used.
b) At the date of acquisition, the fair values of Jean’s property, plant and
equipment was equal to its carrying amount with the exception of an
item of a plant which had a fair value of $ 3.6 m above its carrying
amount. At that date, the plant had a remaining useful life of four years.
Jean uses straight-line depreciation for plant assuming a nil residual
value.
Also at the date of acquisition, Billie valued Jean’s customer
relationships as an intangible asset at fair value of $ 2.7 m. Jean has
not accounted for this asset. These relationships are expected to last 6
years.
c) On 30th September 20X8, Jean’s inventory included goods bought from
Billie of $ 2.34 m. Billie had marked up these goods by 30% on the cost.
d) As at the year end consolidated goodwill was not impaired but the value
of the investment in Jackson Co. was impaired by $ 2.25 m.

Required,
Consolidated Statement of Financial Position as at 30th September 20X8

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18) Ice Co. and Fire Co.

On 1st April 20X3 Ice purchased 80% of the equity shares in Fire Co. On the
same date Ice acquired 40% of the 32 million equity shares in Soil Co. by
paying $ 2 per share.
The statement of profit or loss for the year ended 30 th September 20X3
are:
(’000) (’000) (’000)
Ice Fire Soil
Revenue 168 000 120 000 40 000
Cost of Sales (100 800) (80 000) (32 000)
Gross profit 67 200 40 000 8 000
Distribution Costs (8 960) (5 600) (4 000)
Administrative expenses (14 640) (7 200) (8 800)
Investment Income 7 600 - -
(Interest and Dividend)
Finance costs (1 440) (2 400) Nil
Profit/Loss before tax 49 760 24 800 (4 800)
Income tax expense/ release (12 000) (8 000) 800
Profit/Loss for the year 37 760 16 800 (4000)

a) The fair values of the net assets of Fire at the date of acquisition were
equal to their carrying amounts with the exception of an item of plant
which had a fair value of $ 13.6 m and a carrying amount of $ 9.6 m. This
plant had a remaining life of five years at the date of acquisition and all
depreciation is charged to cost of sales. The fair value of the plant has not
been reflected in Fire’s financial statements.
b) Ice measures the non-controlling interest at fair value.
c) Immediately after its acquisition of Fire, Ice invested $ 40 m in an 8% loan
note from Fire. All interest accruing to 30th September 20X3 has been
accounted for by both entities. Fire has other loan notes in issue as at that
date.

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d) After the acquisition, Ice sold goods to Fire for $ 12 m on which Ice made
a gross profit of 20%. Fire had one third of these goods still in its inventory
on 30th September 20X3. Ice also sold goods to Soil for $ 4.8 m, making
the same margin. Soil has half of these goods still in inventory as at the
year end.
e) The goodwill of Fire has been impaired by $ 1.6 m on 30th September 20X3.
The investment in Soil has been impaired by $ 2.4 m
Required,
i) Carrying amount of the investment in Fire to be included with in the
consolidated statement of Financial Position as of 30th September 20X3. (4
marks)
ii) Consolidated statement of profit or loss for the year ended 30th September
20X3 (16 marks)

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The conceptual and Regulatory Framework for financial

Reporting

1)
Note that providing information about the changes in financial position is also
included with in the objectives set out by IASB Framework.
2) c
A present economic resource controlled by an entity as a result of past events
and from which the economic resource is a right that has the potential to
produce economic benefits.
3)
It is a rules-based framework False
It is not a legal obligation True

IFRS standards are based on a principles-based framework, as they are based

on the IASB’s conceptual framework for Financial Reporting. It does not
represent a legal obligation.
4) d
Recognition must provide relevant information and a faithful representation
and also should meet the recognition criteria.
5) a
Information is relevant if it influences the economic decisions of the users.
6) b
Faithful representation means presenting transactions according to their
economic substance rather than their legal form. All other options represent
incorrect accounting treatments.
7) b
Relevant information contains information which has both predictive and
confirmatory value.

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8) a
The license payment could be avoided by ceasing manufacture, The fall in
investment is a loss chargeable to P&L and planned expenditure does not
constitute an obligation.
9) Faithful Representation – Completeness, Neutrality
Relevance – Predictive Value, Confirmatory value
10) b and d
11) a and c
A principles based framework recognises that it is not possible to draw up a
set of rules to cover every eventuality. It is also harder to prove compliance
as there are fewer prescriptive rules in place.
12) c
Where there is a conflict between a standard and the framework the standard
will prevail. Example is recording a government grant as a liability despite not
fulfilling the conditions for a liability in IAS 20 Government Grants.
13) c
Receivables sold with recourse do not represent a transfer of control to the
purchaser, as the risk and rewards are not transferred. Thus it should not be
derecognised.
14) Expenses
15) A. Yes
B. No
C. Yes
16) d
17) d
The substance is that there is no free finance. Its cost is built into the selling
price, and this will represent a significant financing component.

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18)
Historical Cost Current Cost
328 000 410 000

Historical cost annual depreciation – ((400 000-40 000)/10) = $ 36 000

After two years carrying amount would be (400 000-(36 000*2)) = $ 328 000
Current cost annual depreciation – ((500 000-50 000)/10) = $ 45 000
After two years carrying amount would be (500 000-(45 000*2)) = $ 410 000
19) b
They understate assets and overstate profits as depreciation is understated.
20) d
21) c
As the receivables are sold with recourse it should be continued to recognise
as an asset.
22) a and d
The non-cancellable contract is an onerous contract. Moreover to record a
provision for the reorganisation it is necessary to communicate the plan to the
staff.
23) b
24) d
25) a
The IASB identifies a subject and appoints an advisory committee on the issue.
The IASB issues a discussion paper to encourage comment.
The IASB publishes an exposure draft for public comment.
Publishing the final text of IFRS.
The publication of an IFRS, exposure draft of IFRIC interpretation require at
least 8 votes of the 15 IASB members.

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Syllabus Area B: Accounting for Transactions in Financial

Statements.

B.1 Tangible Non-Current Assets

1) d
The cost of the training should be expensed and the residual value is taken to
calculate depreciation but not for the amount capitalised.

2) d

Land Building Total

Cost 1st July 20X5 2.00 10.00 12.00

Building (0.4) (0.4)

depreciation
($ 10 million/50
years=
$ 0.2m per year * 2)
2.00 9.6 11.6
Carrying amount at
30th June 20X7

Revaluation Gain 0.48 1.92 2.4

Revalued Amount 2.48 11.52 14

(0.48) (0.48)
Building
depreciation
($ 11.52 million/48=
$ 0.24 m *2 )
Carrying amount at 2.48 11.04 13.52
30th June 20X9

Disposal Proceeds 13.6

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Gain on disposal 0.08

3) a. True
b. True

4)
Six month’s depreciation is required on the building structure and air
conditioning system.
Land (Not depreciated) 1 000

Building Structure 4 900

(5 000 – (5 000/25*6/12))
Air 1 912.5
conditioning System
(2 000- (1 750/10*6/12)
7 812.5

5) a. Yes
b. Yes
c. Yes
d. No
The allocation of administration costs would not be capitalised as they are
not directly incurred as a result of the construction. All other expenses
would not have been incurred if not for the construction.
6) $ 64 000
The weighted average cost of borrowing is 8% (($2m*6%) + ($4m*9%)/ $6m)
Therefore the amount to be capitalised 8% * $ 1 200 000 * 8/12 = $64 000
7) c
Asset D will be classified as a non-current asset held for sale while the
other two will be classified as Property Plant and Equipment.

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8) c
Six months depreciation to the date of revaluation will be $ 600 000 (24
000/20*6/12). Six months depreciation from the date of revaluation to the
year end would be $ 800 000 (21 600/13.5 remaining years of life*6/12). Total
depreciation is $ 1 400 000.

9) b
Six month’s depreciation should be accounted for up to 30 June 20X7,which
is $ 50 000 expense ($ 5m/50*6/12).
When the asset is transferred to investment property it should be revalued
to the fair value and the gain is recognised in other comprehensive income
and revaluation surplus. From this date the fair value model is used and no
depreciation is calculated. But the asset will be revalued and the gain or
loss will be recognised in the statement of profit or loss. As there is a gain
of $ 250 000 this would be recorded in SOPL.
The net income would be $ 200 000 ($ 250 000-$ 50 000)

10) a
(4.5 m – 4 m) Costs to sell are ignored and since the fair value model is
used the depreciation is not calculated.

11) $280 000 (320 000 – 40 0000)

Borrowing costs (March-December) - $ 4.8m * 8% * 10/12 = 320 000
Less Investment Income $ 2m * 6% * 4/12 = 40 000

12) False
Investment properties can be held at either cost model or fair value model
following initial recognition.
True
True

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True

13) c
$ 2 382
The plant has been owned for 2 years and 3 months, therefore the remaining
useful life on 30th June 20X9 is 12 years and 9 months.
Depreciation prior to the revaluation – (30 000/15*3/12) $ 500
Depreciation after the revaluation – (32 000/153*9) $ 1 882
14) Capitalised – Architect’s fees, Land, Testing of fire alarms
Not capitalised – Business rates for the year

15) a and c
Transfers from an investment property to an IAS 16 property must be done
at the Fair value at the transferring date.
If one investment is held at fair value all other investment properties should
also be held at fair value.

B.2 Intangible assets

1) c
The finance was only available after the year end. Therefore the criteria of
recognising an asset were not met, as the resources were not available to
complete.
2) b
$ 110 000 (100 000+10 000)
Write off (1st Jan- 28th Feb) - $ 50 000*2 = 100 000
Capitalise (March to June) - $ 50 000*4 = 200 000
Ammortisation 200 000/5 years* 3/12 = 10 000
3) False A process could generate other benefits other than increase in
revenue.
False An intangible asset could be held at revalued amount if the asset has
an active market.

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4) d
a and c do not meet the criteria to capitalise. B is research expense.

5) A
The total costs have been $ 375 000 which means $ 37 500 was spent
monthly on the project. It was declared feasible on 1st July 20X8, so the
amount that could be capitalised is (37.500*4) = $ 150 000. The product will
be amortised from the day it went on sale. So according to the above
scenario 1 month amortisation is considered. (150,000/5*1/12) = $ 2 500.
Therefore the carrying amount of the asset would be $ 150 000 - $ 2 500 =
$ 147 500.

6) c and d

7) Yes
No

8) c
The customer list could be measured reliably therefore identified as a
separate intangible asset. As the license cannot be measured reliably it
forms part of the goodwill calculation.

9) $ 15 600 000
Research costs - $ 2 800 000
Expensed development(Jan- March) - $ 1 600 000*3 = $ 4 800 000
Amortisation ($ 40m*20%) = $ 8 000 000
No amortisation is charged to the new project as its still in development.

10) d

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B.3 Impairment of Assets

1) a
Fair value less costs to sell = $ 100 000
Value in use = $ 107 300
Recoverable amount is the higher of the above two which is $ 107 300
Carrying amount = $ 108 500 (124,000-(124,000*12.5%)
It’s the lower of carrying amount and the recoverable amount which is $ 107
300

2)

The estimated net realisable Indicator of Not an indicator of

value of the inventory has impairment impairment
reduced due to damage by flood
and, greater than its carrying
amount.
A decrease in Interest rates Indicator of Not an indicator of
which also decrease the impairment impairment
discounting rate of the entity.
Advances in technology which Indicator of Not an indicator of
has an adverse effect on the impairment impairment
asset’s future use
The carrying amount of entity’s Indicator of Not an indicator of
net assets is higher than the impairment impairment
entity’s [Link] shares in issue into
share price.

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3) a
Impairment = $ 200 000 (600 000-400 000)
Goodwill should be allocated in full. Therefore, 200 000- 100 000
As net current assets are at NRV impairment is not allocated.
Hence, for patent the impairment allocated is $ 9 091 (100 000/440 000*40
000)
The carrying amount of the patent would be $ 30 909.

4) Carrying amount as at 30th September 20X9 – (50 000-(50 000*5/10)) = $ 25

000
Recoverable amount is the higher of Fair value less costs to sell (15,000)
and the value in use of $ 16 107.5 (4 250*3.79)
Impairment is $ 8 892.5 (25 000-16 107.5)

5) $ 1 150 000
No asset can be impaired below its recoverable amount. The valuation of $
1.25 million shows that the asset is not impaired. However as the company
uses the cost model the buildings cannot be recorded at the revalued
amount.

6) $ 15 000
The recoverable amount is the higher of the value in use and the fair value
less costs to sell.

7) c
Impairment = (518 000-400 000) $ 118 000
Any asst should not be impaired below the recoverable amount meaning
that the building and other net assets are not impaired.
First the impairment is allocated to goodwill. (118 000-70 000) = 48 000
Impairment allocated to plant – (48 000/175 000*95 000) = 26 000
Then the carrying amount of plant = (95 000- 26 000) = $ 69 000

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8) d
Impairment = $ 22 000 (70 000-48 000)
The impairment is first allocated to goodwill then the brand name is written
down. (22 000- 6 000-6 000) = 10 000
Impairment allocated to property = $ 3 704 (10 000/54 000*20 000)
Carrying amount of the property = $ 16 296

9) a and d

10) $ 136 000

Impairment = $ 2.6 million (10.1m – 7.5m)
The impairment is first allocated to goodwill then the damaged asset. (2.6m
– 0.9m - 0.4m) = $ 1.3 million
Impairment allocated to plant – (1.3/8.6*1.6) = $ 0.24 million
Carrying amount – 1.6 m – 0.24 m = 1.36 m

B.4 Inventories and Biological Assets

1) c and d
Cheese and processed meat are not harvest. Therefore they are outside the
scope of IAS 41.

2) $ 485 000 (500 000-15 000)

The planned selling price of the damaged stock – (105 000/70*100) = $
150,000
Selling price after the damage – (150 000*80%) = $ 120 000
Sales commission (120,000*25%) = $ 30 000
NRV – (120,000-30,000) = $ 90 000
The expected loss on the damaged inventory - $ 15 000 (105 000-90 000)

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3) Included - Cost of delivering raw materials to the factory

Factory management overhead allocated to production
Variable production overhead
Not Included - Abnormal increase in overhead charges
Marketing and selling Overhead

4) b
The storage costs, Abnormal wastage costs and sales tax are not included.

5) b
If the net realizable value of inventories has fallen below their cost it should
be adjusted using this standard.
6) c
Biological assets should be revalued to their fair value less costs to sell at
each year end and the gain or loss should be recognized in profit or loss
statement.
7) c
Land is under IAS 16 Property, Plant and Equipment, Cheese is under IAS 2
Inventory, Costs of the new fertilizer is under IAS 38 Intangible Assets.

8) $ 11 160
Cost NRV Lower
Item 1 6 720 6 360 6 360
Item 2 4 800 (note 1) 4 800
11 160
Note 1- The recoverable amount is not known but it must be above cost as
‘’high profit is expected. The fall in value of the cost of inventory is irrelevant
9) 19.65 m (18-1.35+3)
Per Inventory count - 18 m
Goods received – 1.35 m
Goods sold – 3 m (3.9m/130*100)

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10) b
Product Quantity NRV Cost Lower Total
X 850 $ 18 $ 15 $ 15 $ 12 750
Y 600 $5 $8 $5 $ 3 000
Z 1 000 $ 19 $ 18 $ 18 $ 18 000
$ 33 750

B.5 Financial Instruments

1) b and c
2) c
The initial recognition should be done after reducing the transaction costs.
(100 000-5 000).
Then it should be held at amortised cost.
Year b/f Interest(10%) Payment(8%) c/d
20X5 95 000 9 500 (8 000) 96 500
20X6 96 500 9 650

3)
Year CF DF(8%) PV
1 250 0.93 232.5
2 250 0.86 215
3 5250 0.79 4147.5
Value of the Liability – 4595
Equity – 405
4) d

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5)

$ 37 500 Statement of Profit or Loss

Equity investments by default are held under fair value through profit or
loss. These are therefore valued excluding any transaction costs. The initial
value of the above investment is $ 150 000 (30 000*5). At the end it is
revalued to $ 187 500 (30 000*6.25). Therefore a gain of 37 500 is recorded
in statement of profit or loss.
6) $ 210 000
The initial liability is $ 1.4 million. The finance cost based on the effective
rate is $ 210 000
7) b
8)
Year CF DF PV
1 525 0.91 477.75
2 525 0.84 441
3 8025 0.77 6179.25

Debt Element - $ 7 098

9) As the investment is treated under fair value through other
comprehensive income the transaction costs are also included. There fore
the initial value of the shares is $ 9 000 (4 000*2.5 – 1 000) At the end of
the year value of these shares is $ 16 000. Therefore the gain is $ 7 000
10) d
11) a

Year b/f Interest Cash paid c/d

1 800 000 64 000 (45 000) 819 000
2 819 000 65 520 (45 000) 839 520

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12) $ 31 250
Value at the year end – (250 000/1 200*1 350) = $ 281 250
Therefore the gain is $ 31 250
13) a. True
b. False
14) b
Year b/f Interest Cash paid c/d
20X3 39 000 3 900 (2 000) 40 900
20X4 40 900 4 090 (2 000) 42 990

16) $ 93 750 ($ 3.75* 25,000)

B.6 Leasing
1) $ 71 324
Year b/f payment Sub total Interest c/d
20X5 172 480 (40 000) 132 480 10 598 143 078
20X6 143 078 (40 000) 103 078 8 246 111 324
20X7 111 324 (40 000) 71 324

2) c
Depreciation of the leased plant - $ 34 000 (170 000/5)
Finance cost - $ 12 500 ((170 000-45 000)*10%)
Rental of plant - $ 6 750 (9 000*9/12)

3) $ 50 000
The initial amount capitalised is $ 75 000 which is then depreciated over 6
years being the lower of useful life and the lease term including the
optional period. The annual depreciation is $ 12 500 which will give the right
of use asset a value of 50 000 at the end of the second year. (75 000-(12
500*2))

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4) b
Year b/f Interest Payment c/d
20X5-20X6 9 000 630 (2 195) 7 435
20X6-20X7 7 435 520.45 (2 195) 5 760.45

5) a. No
b. Yes
c. Yes
d. Yes

6) a
Reverse incorrect treatment – Dr. Liability $ 42 000 Cr. Retained Earnings
$ 42 000
Depreciation – (127 000/5) = $ 25 400 Dr. Retained Earnings $ 25 400 Cr.
PPE $ 25 400
Finance costs – (127 000*12.2%) $ 15,494 Dr. Retained Earnings Cr. Liability
$ 15 494
Net adjustment - $ 1 106 credit
7) c
Low value assets and assets with a lease term less than 12 months are
permitted to exempt by IFRS 16 Leases. Here low value refers to the cost
of the asset rather than the fair value.
8) d
The control has been passed to the purchaser as Ares is only leasing the
asset back for 5 years out of the 20 remaining useful life.
Finance cost of the year would be (74 875*8%) = $ 5 990
Initial value of the right of use asset – (74 875/250 000*200 000) = $ 59
900
Hence the depreciation – (59 900/5) = $ 11 980
Profit will be calculated by taking into consideration the proportion of
asset which is not retained by Ares Co. ((250 000-74 875)/250 000)*(250
000-200 000) = $ 35 025

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9) d

10) As the control of the asset is not transferred to the purchaser this
transaction cannot be accounted as a sale. Therefore the sales proceeds
are treated as a loan.
Hence depreciation - $ 525 000 (10.5 million/20)

12) c
Year b/f Interest Payment c/d
20X6-20X7 11 500 000 1 150 000 (3 000 000) 9 650 000
20X7-20X8 9 650 000 965 000 (3 000 000) 7 615 000
The current liability is $ 2 035 000 (9 650 000-7 615 000)

13) $ 20 600
Lease interest ((68,000-18 000)*10%) = $ 5 000
Plant depreciation –(68 000/5) = $ 13 600
Short term lease (9000*2/9) = $ 2 000

14) c

15) a
Cost of the ROU (2 328 750+18 750) = $ 2 347 500
Depreciation (2 347 500/8) = $ 293 437.5
Lease interest (2 328 750*6%) = $ 139 725

16) b

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B.7 Provisions and events after the reporting period

1) b
2) a
Extraction provision for the year to 30th April 20X5 – 120 000 (10 000*12)
Dismantling provision at 1st March 20X4 – 10 200 (15 000*0.68)
Increase in Finance cost – 816
Total provision - $ 131 016
3) c
4) $ 600 000
Provisions cannot be made for the ongoing activities.

5) a. Yes
b. Yes
c. No

6) d

7) a. True
b. False. (Material non-adjusting events are disclosed in the notes to the
financial statements while non-material events are not disclosed.)

8) a

9) b and d

10) $ 5 million. (The pay out is probable. Therefore the whole amount should
be provided for.)

11) a. Adjusting
b. Non – adjusting (As the public announcement was made after the year end.)

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12) Scenario 1 – Contingent Asset (as its probable and not virtually certain to
be an asset)
Scenario 2 – Provision (As the outflow is probable)

13) c ( It will be then depreciated over 10 years )

14) a. False (It should be communicated to the employees)

b. True
c. True
d. True

15) a
Provision as at 1st January 20X8 – (6m*0.713) = 4 278 000
Interest as at 30th September 20X8 – (4.278*7%*9/12) = 224 595
Provision as at 30th September 20X8 – 4 053 405
16) $ 1 040 000
4 m * 20% = $ 800 000
12 m *2% = $ 240 000
17) a and c (Both the events provide evidences for conditions which were
already existing at the year end.)
18) $ 800 000
Loss of the case is not probable so it is not provided for.
19) c and d

20) a. Present obligation

b. Possible
c. Virtually certain

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8. Taxation
1) Tax liability (SOFP) - $ 41 500 (Year end estimate)
Tax expense (SOPL) - $ 44 000 ( 41,500+2500(under provision))

2) d
Deferred taxation increase – 5 600
Less : tax on revaluation gain – (2 400)
Charge to SPL – 3 200
Tax expense:
Current year estimate – 9 600
Prior year overprovision – (5 600)
Deferred tax (as above) - 3 200
Tax expense - $ 7 200

3) $ 39 060 (36 000+2 700+360)

4) b
Deferred tax provision required – 27 000 (90 000*30%)
Opening bal. – 36 000
Reduction in provision – 9 000 (36 000-27 000)
Tax expense –
Current year estimate – 45 000
Over provision - (12 000)
Deferred tax - (9 000)
Tax expense - 24 000

5) $ 17 100 000
Deferred tax working –
Required provision – 6 075 000
Less : Revaluation – 2 700 000 (6 075 000-3 375 000)
Balance b/f – 2 340 000

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Charge to income tax – 360 000 (2 700 000-2 340 000)

Current Charge 17 460 000
Over provision (720 000)
Deferred tax 360 000
P/L 17 100 000

6) c
Prior year under provision 560 000
Current year provision 3 600 000
Movement of Deferred tax( 6.72-4.48) (2 240 000)
Deferred tax on revaluation Surplus (960 000)
Income tax expense 960 000

7) $ 72 000 Liability
Carrying amount (30/9/20X9) - $ 540 000 (600-60)
Tax based amount - $ 300 000 (600-300) (50%)
Difference - $ 240 000
tax liability 30% - $ 72 000
As the tax base is less than the accounting carrying amount it is a liability.

8) $ 91 m
b/f (98+112) - 210 m
Charge for the year – 189 m
c/d (217+91) – 308 m
Tax paid (210+189-308) – $ 91 m

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9) b
b/f 255 000
Year to 30/6/20X4 15 000
Revaluation Surplus 75 000
345 000
30% 103 500

10) d
Charge for the year 12.96 m
Under provision 1.68 m
Deferred tax (1.2 m)
13.44 m

Deferred tax working –

Provision needed (10.4m*30%) - $ 3.12m
Provision b/f – (4.32 m)
Deferred tax – (1.2 m)

B.9 Reporting Financial Performance

1) a
The property would be depreciated for the first 6 months. Therefore the
carrying amount as at 1st April 20X8 is $ 310 000 (320 000-(320 000/16*6/12)).
As this is lower than the fair value less costs to sell value of $ 316 200 this
will be the value recorded for the asset in the statement of financial position
as at 30th September 20X8.

2) c

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3) b
Once reclassified as held-for-sale the asset is not depreciated further. The
asset will be recorded at the lower of carrying amount and the fair value
less costs to sell.
Carrying amount - $ 26 250 (31 500-(31 500/15*6/12)-4 200)
Fair value less costs to sell - $ 25 760 (29 400*90%)-700)

4) a
As it contributes a significant amount of Alice’s revenue.

5) $ 225 000
Carrying amount – 270 000
Fair value less costs to sell – 225 000
Lower – 225 000

6) d
Carrying amount - $ 2.88 m (Depreciation for December is not relevant as
the asset is already classified as held for sale)
Fair value less costs to sell - $ 3.36 (Value in use is not relevant)
Lower - $ 2.88 m

7) d

8) c and d

9) b

10) a

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11)
The useful life of a machine has Change in Change in
been reduced to 5 years from 8 Accounting Policy Accounting
years. Estimate
Classifying amortization Change in Change in
expenses as administrative Accounting Policy Accounting
expenses rather than cost of Estimate
sales expenses.
Increased the allowance for Change in Change in
doubtful debts from 6% to 8% Accounting Policy Accounting
Estimate
Depreciation method is changed Change in Change in
to straight line from reducing Accounting Policy Accounting
balance method. Estimate

12) c

13) a and b

14) Accounting Policy – Retrospectively

Accounting Estimates – Prospectively

15) a. Neither (Its dealt with IAS 16)

b. Neither (Its an adjustment required by IFRS Standards)

16) EPS - $ 0.47 (4 000 000/8 500 000)

Year Number Fraction of Bonus Weighted
the year. fraction Average
1/10-1/3 6 000 000 5/12 4/3 3 333 333
1/3-30/6 8 000 000 4/12 2 666 667
30/6-30/9 10 000 000 3/12 2 500 000
8 500 000

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17) c
18) TERP –
5 @ 2 - $ 10
1 @ 1.40 - $ 1.40
TERP – (11.40/6) = $ 1.9
EPS – (5 000 000/4 420 000) = $ 1.13
Year Number Fraction of Bonus Weighted
the year. fraction Average
1/1-1/4 3 800 000 3/12 2/1.9 1 000 000
1/4-31/12 4 560 000 9/12 3 420 000
4 420 000

19) c
If the options are exercised $ 6 million will be received ($ 3 *2 million)
At the market value of $ 5 this will allow to buy 1 200 000 shares As
there are 2 million options 800 000 shares are issued for free.
Diluted EPS - $ 4 million/(8 million+800 000)
$ 0.45

20) a and b

21) d

Earnings for basic EPS – 8 400 000

Interest saved (2m*8%) – 160 000
Tax (160 000*28%) – 44 800
Earnings for diluted EPS – $ 8 515 200
Shares for basic EPS – 4 800 000
Shares issued on conversion – 1 000 000 (2m/100*50)
Shares for diluted EPS – 5 800 000
EPS – (8 515 200/5 800 000) = $ 1.47

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22) $ 0.67
TERP
3 @ 1.8 – 5.4
1 @ 1.3 – 1.3
TERP – 6.7/4 = 1.68
Inverse rights fraction – 1.68/1.8
Restated earnings per share – 0.72*(1.68/1.8) = $ 0.67

23) b and d

24)
If options were exercised - 5 million * $ 2.5 = $ 12.5 million
Actual [Link] shares able to buy at market price – 3.125 million
Free shares – 1.875 million
Diluted EPS = (7.5 m/(9m+1.875m)) = $ 0.69

25) c

B.10 Revenue

1)
Step 1 $
Total Revenue 54 m
Total Cost (46.2+19.8) (66 m)
Overall Loss (12 m)
Step 2
Progress = Work certified / Total Price 37.8/54 = 70%
Step 3
Revenue (54 m *70%) 37.8 m
Cost of Sales (balancing figure) (49.8 m)
Overall Loss (12 m)

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2)
Costs to date 3.6 m
Loss (6.4 – (3.6+4.4)) (1.6 m)
Amount billed (2.4 m)
Contract liability (0.4 m)

3) c
For item C the service will be recognised over time so the revenue should
be deferred and recognised as the obligation is fulfilled.
For item A any profit or loss should be taken to the statement of profit or
loss and not included in the revenue. For Item B only the commission
should be recorded. Item D should be discounted to the present value as
it has a significant financing component.
4) d
Step 1
Total contract price 750 000
Total cost (397,500+127,500) (525 000)
Profit 225 000
Step 2
Progress (450,000/750,000) 60%
Step 3
Revenue(750,000*60%) 450 000
Cost of sales (balancing figure) (315 000)
Profit (225,000*60%) 135 000
Step 4
Costs to date 397 500
Profit to date 135 000
Amount billed (450 000)
Contract Asset 82 500

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5)
Air conditioning machine $ 80
(120*(160/240))
Installation (48*(160/240)) $ 32
Service (72*(160/240)) $ 48
As only 8months service has been performed – (48*8/12) = $ 32
Total Revenue – 80+32+32 = $ 144

6) $ 104 000
Step 1
Total contract price 3.25
Total cost (1.04+1.56) (2.6)
Profit 0.65
Step 2
Progress (1.17/3.25) 36%
Step 3
Profit (0.65*36%) 0.234
Step 4
Costs to date 1.04
Profit to date 0.234
Amount billed (1.17)
Contract Asset 0.104

7) d
Total contract price 270,000
Total Costs (175,500+27,000) (202,500)
Profit 67,500
Progress (243,000/270,000) 90%
Profit (67,500*90%) 60,750
Profit for this year (60,750-20,250) = $ 40,500

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8) $ 35 625
The sale will be recorded as a loan secured against the inventory,
therefore a $ 475 000 loan will be recorded in the non-current liability.
This loan would incur an interest of 10% a year. In a year an interest of $
47 500 would be recorded. This would then be apportioned for 9 months
which would be $ 35 625. (47,500*9/12)

9)
Step Step No.
Identify the contract 1
Identify the separate performance obligations 2
within a contract.
Allocate the transaction price to the performance 4
obligations in the contract.
Determine the transaction price. 3
Recognize revenue as a performance obligation is 5
fulfilled.

10) a
The cumulated progress percentage for 20X5 is 70%.
(892,500/1,275,000)*100%
Total costs to complete is $ 680 000 and 70% of this is $ 476 000. The
amount to be included the statement of profit or loss for the year ended
31st December 20X5 as cost of sales is $ 272 000 (476,000-204,000).

11) d

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12) b
Step 1
Total Revenue 48 m
Total Cost(19.2+21.6) (40.8 m)
Profit 7.2 m
Step 2
Progress 45%
Step 3
Revenue(48*45%) 21.6 m
Cost of sales (balancing figure) (18.36 m)
Profit(7.2*45%) 3.24 m

13) $ 23 184
At 31st September 20X4 deferred consideration of $ 12 144 would need to be
discounted by 10% for one year to $ 11 040. (deferring a finance cost of 1,104).
The total amount credited to profit or loss would be 23 184. (12,144+11,040).

14)
Revenue (1.568*35%) 548,800
Amount invoiced to date (448,000)
Contract Asset 100,800

15) d
No sale has been taken place as the control of the goods have not been
transferred.

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B.11. Government grants

1) $ 4 500 000
The grant should be released over the useful life. Therefore $ 5 m should be
released over 10 years, being a release of $ 500 000 per year. So at 30th
September 20X8 this leaves a deferred income liability of $ 4.5 million.
2) c and d
3)
Dr. Cr.
Other Income 67,200
Deferred Income 67,200
Depreciation expenses 130,200
Accumulated 130,200
depreciation

The grant is recognised as deferred income on the SOFP and released to the
profit or loss in the same manner as depreciation. (336,000/5 = 67,200)
Grant is 50% of the asset, so the asset costs (336,000*2) =672,000. The
depreciation is (672,000-21,000)/5 = $130 200

4) a
This is a revenue grant and would be released to the statement of profit or
loss over the 4 year life. By the end of the first year $ 500 000 would have
been credited to the SOPL and $ 1 500 000 would be held in deferred income.
At the point the amount is repaid, the deferred income is removed as well as
the income previously recorded.

5) b (975 000*20% = 195 000)

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B.12. Foreign currency transactions

1)
Yuan Rate $
1st January 20X4 6 000 000 6.0 1 000 000
30th November 20X4 (1 500 000) 5.0 (300 000)
Foreign exchange 104 000
loss
31st December 20X1 4 500 000 5.6 804 000

2) b and c

3) c
The land will be initially recorded at (16.5/3) = $ 5.5 m. And as it is a non-
monetary asset held at cost model it is not retranslated at the year end.

4) c

5) b
Initially the machine is recorded at $ 7.5 million. The machine is then
depreciated over its useful life. (7.5/20 = 375 000). Therefore the carrying
amount of the machine at the year end would be $ 7 125 000.

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Syllabus Area C: Analysing and Interpreting the Financial

Statements of Single Entities and Groups.
1) d

2) Total no. of shares – 8 million

Dividend per share – (2 880 000/8 000 000) = $ 0.36/share
Dividend Yield = dividend per share/current share price *100%
(0.36/4.5*100%) = 8%

3) b

4) a
The interest charged to profit or loss for the year - $ 130 000
Interest cover = Operating profit/Interest charge
Operating profit = (9*130 000) = $ 1 170 000

5) a. Limitation
b. Not a limitation
c. Limitation
d. Not a limitation

6) 79 days
Year end inventory of 10 times is 37 days (365/10)
Trade payable period is 51 days (350 000/2 500 000*365)
Therefore the receivables collection period is 79 days. (65+51-37)

7) a and b
The retail outlets and the website is unlikely to sell the products on credit
basis, therefore will reduce the trade receivable collection period.

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8) c
Weighted average cost method will give a higher cost of sales, that is lower
operating profit margin during inflation periods.

9) a. True
b. False

10) c
As both the companies have the same ROCE, Beauty would have a lower net
asset turnover as its net profit margin is high which explains Beauty is not
a volume driven company which operates at the higher end of the market.
On the other hand Beast would have a higher net asset turnover which
means it uses assets intensively to earn profits. It operates at the lower end
of the market.
11) a
ROCE = (profit from operations/Capital Employed)
= (343 000-147 000-25 000)/(500 000+105 000)
= 171 000/605 000 = 28.3%

12) 31 days
Inventory turnover is five times so the inventory days must be 73 days.
(365/5)
Cash Cycle = Receivable days + Inventory days – Trade payable days
Trade payable days = 56+73-98 = 31 days

13) c

14) d

15) b

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16) 8.8
EPS – Profit for the year / [Link] shares
1 850 000/(3 500 000/0.5) = $ 0.26
P/E – Current share price / Latest EPS
2.3/0.26 = 8.8

17) D

18) 1.2:1
Quick Ratio = Current assets excluding inventory/Current Liabilities
(520 000+560 000) / (422 000/470 000) = 1.2 times

19) a. Available
b. Available
c. Not available
d. Not available

20) c
As the company has still not commenced trading any ratio related to profit
or earnings is not relevant.

21) a
Lower the dividend yield, the more the market is expecting future growth
in the dividend.

22) b and c

23) a and d

24) b

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25) The effect of this impairment will Increase gearing ratio and Increase
Return on Capital Employed ratio.
Impairment loss will decrease revaluation surplus, increasing gearing and
it will decrease capital employed, increasing ROCE.

26) d

27) d (The value of the inventory will be added to both current assets and
current liabilities, but it will be proportionately more to the current
liabilities. Therefore the current ratio decreases. The effect will be more
on quick ratio as inventory is not added.

28) ROCE = Operating profit margin / Asset turnover

Operating profit margin = ROCE / Asset turnover
(19.8/5.3) = 3.74%

29) Dividends = Dividend per share * No. of shares

3.5 * (650 000/0.50) = $ 4.55 m
Dividend cover = (profit after tax / dividends)
(6 m / 4.55 m) = 1.32 times
30)

Recording a sale and leaseback Increase No effect Decrease

transaction as a sale
Treating a lease as a short term Increase No effect Decrease
rental agreement
Repaying a loan at the year end Increase No effect Decrease
and borrowing the same amount
at the beginning of the next year
Renegotiating a loan to secure a Increase No effect Decrease
lower interest rate

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Syllabus Area D : Preparation of Financial Statements

1) b
At 30th September 20X5 the deferred consideration needs to be discounted
to the present value by one year.
270 000/(1+0.1) = $ 245 455

2) Goods in inventory - $ 1.76 m

PUP – (1.76/110*10) = 0.16 m
Consolidated Cost of sales – 11.76 + (9.28 * 9/12) -3.44 + 0.16 = $ 15.44 m
3) $ 114 750 000
Consideration paid by the parent ($’000)
Consideration by issue of shares 47 250
(90 000*75%) / 5 *3.5)
Cash consideration 67 500
(90 000*75%*1)
114 750

4) c
Net assets at the date of acquisition
Share Capital 500 000
Retained Earnings 336 250
(350,000 - (55,000*3/12))
836 250

5) b
It is not necessary for all the companies to follow same accounting
policies.

6) a
Interest for the loan for 6 months – (275,000*8%*6/12) = $ 11 000
Without the interest finance cost of Robin – 38,500-11,000 = $ 27 500
Consolidated finance costs – (110,000 + (27,500*6/12)) = $ 123 750

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7) b and c

8)
The fair value of one of the machinery Affect the Does not affect
owned by the subsidiary is $ 700 000 profit the profit
which is above its carrying amount. It attributable to attributable to
has a remaining life of 7 years. NCI NCI
Due to experiencing consecutive losses Affect the Does not affect
the goodwill has been impaired by $ 250 profit the profit
000 attributable to attributable to
NCI NCI
The parent sold inventory to the Affect the Does not affect
subsidiary for $ 300 000 at a markup of profit the profit
10%. Half of this inventory remained at attributable to attributable to
the year end. NCI NCI

9) $ 633 360
Flintstone Rubble
As per the question 522 000 394 000
Pre-acquisition RE (232 000)
URP (18 560)
(371,200/4)*25/125
162 400
80% share of the 129 920
subsidiary
(162,000*80%)
Consolidated RE 633 360

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10) a. False (Only for the stocks remaining at the year end.)
b. True
c. False

11) b and d
Professional fees cannot be capitalised. The deferred cash consideration
should be discounted to the present value at the date of acquisition.

12) b
Sales Proceeds 6.9 m
Goodwill at disposal (nil)
Net assets at disposal (3.68 m)
NCI at acquisition 1.012 m
NCI% of post 0.552 m
acquisition net assets
(3.68-2.3*40%)
NCI % of goodwill (0.184 m)
impairment (0.46*40%)
NCI at disposal 1.38 m
Profit on disposal 4.6 m

13)
A group owns 80% of equity share Subsidiary Associate Investment
capital of B which operates in an
industry which is significantly
different from that of A.
Y group owns 35% equity shares of Subsidiary Associate Investment
Z. The other 65% is owned by
another listed company, Zoro Co.
whose board of directors is same
as that of Z.
C group owns 35% of share capital Subsidiary Associate Investment
of D where C has the ability to
appoint 3 of the 7 members in the
board while the rest come from
other different entities.

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14) $ 61 248 000

Total Sales (768 000*9) = 6 912 000
Goods in inventory - $ 1 440 000
URP (1 440 000*25/125) = $ 288 000
Cost of sales = (49 152 000+(24 960 000*9/12)-6 912 000+288 000) = $ 61
248 000

15) a. False
b. True

16) c (It is the correct treatment for bargain purchases or negative goodwill)

17) d
Goods in inventory – (624 000*25%) = $ 156 000
URP – (156 000*25/125) = $ 31 200

18) $ 73 440
Profit after tax of subsidiary - $ 408 000
(408 000-40 800) = $ 367 200
NCI – (367 200*20%) = $ 73 440

19) d

20) b
(232 000*6/12) – 10 000 = 106 000
106 000*30% = $ 31 800
Dividend will not be included in Vincent’s statement of profit or loss. The
dividends should be adjusted in investment income of Jules where it
would have been included.

21) c

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22) $ 6 787 500

Cost of Investment 6 600 000
% post acquisition profits 56 250
(750,000*3/12)*30%
Total 6 656 250

23) b and c

24) c
Market price of a share at acquisition – (3*100/120) = $ 2.5
NCI at acquisition – (56 000*20%*2.5) = $ 28 000
NCI share of the post acquisition profit – (22 400*9/12*20%) = $ 3 360
NCI as at 30th September 20X3 – (28 000+3 360) = $ 31 360

25) a

26) $ 881 100

Cost of investment – 792 000
Share of post acq. Profit – 99 000 (495 000*8/12*30%)
URP – 9 900 (198 000*20/120*30%)
Cost of investment as at 31st December 20X6 - $ 881 100 (792 000+99 000-
9 900)

27) a
Proceeds 12.6 m
Goodwill at disposal (2.52 m)
Net assets at disposal (11.34 m)
NCI at disposal 3.78 m
Profit on disposal 2.52 m

28) d

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29) $ 1 220 000

Consideration by share issue 720 000
(400,000/5*2*4.50)
Deferred consideration 500 000
(550,000/(1+0.1))
Consideration by the parent 1 220 000
30) b
While in some situation having a majority of shares may give control over
the investee it is not included with in the definition of control as per IFRS
10.

31) $ 478 720

The URP of the property transfer should be removed.
The carrying amount of the non-current asset at the year end after the
transfer is $ 43 520 (54 400 – (54 400/5))
The carrying amount of the non-current asset at the year end if it was not
transferred would be $ 32 640 (40 800 – (40 800/5)
The URP is $ 10 880
PPE in consolidated statements – (408 000+81 600-10 880) = $ 478 720

32) a and b

33) c
Operating expenses = (450 000+262 500+(150 000/10) = 727 500
Only current year income and expenses are adjusted in the current year
statements. Therefore the previous year depreciation and impairment is
not adjusted.

34) c

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35) $ 3.96 m (3.3+1.26-0.6)

36) d (The activities of the subsidiary is irrelevant in making the decisions of

consolidation.)

37) a
Cost of investment $ 112 500
(250 000*30%)/3*4.50
Share of post acquisition loss (30 000)
(0.25 m+1 m)-(1.15m)*30%
Investment in associate $ 82 500

38) $ 240 500

Share of net profit (1 110 000*30%) $ 333 000
Share of URP 30%*(1.48m/2*30%) ($ 66 600)
Current year impairment ($ 25 900)
$ 240 500

39) a and d

40) a
Cost (480 000*6) 2 880 000
Share of associate’s profit (800 000*6/12*30%) 120 000
3 000 000

41) c and d
While the use of fair value seems not to comply with the historical cost
concept, this will effectively form part of the cost of subsidiary to the
parent, so the principle is still applied.

42) $ 40 064
(41,344 + 24,320 - 6,400 - 19,200) = 40,064
The cash in transit should be treated as if received.
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43) $ 5.04 million

Proceeds 8 400 000
(-) Purchase price (3 360 000)
Profit on disposal 5 040 000

44) c
Consideration by the parent 320 000
Non-controlling interest 88 000
408 000
Fair value of net assets of subsidiary:
Share capital 40 000
Retained Earnings 228 000 (268 000)
Goodwill 140 000

45) $ 875 000

Proceeds 3 150 000
Goodwill at disposal (1 610 000)
Net Assets at disposal (1 750 000
Non-controlling interest at disposal 1 085 000
Profit on disposal 875 000

46) a

47) c
Disposal proceeds 522 500
Goodwill on disposal (330,000-(385,000*70%)) (60 500)
Share of Net assets at disposal (467,500*70%) (327 250)
Profit on disposal 134 750

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48) b
Current Assets = (595 000+425 000-4250 (URP)) = 1 015 750
Current Liabilities (255 000+170 000) = 425 000

49) b
Cost of sales decrease by the sales value of $ 11.4 million. Then cost of
sales increase by Unrealised profit of 0.475 million. (11.4-9.5)*25% margin.

50) c

51) $ 5 525
Property, Plant and Equipment
b/f 9 360 Disposal 1 950
Revaluation 1 300 Depreciation 1 625
Provision 2 600
Purchases 5 525 c/d 15 210

18,785 18,785

52) a
Profit 34 500
Depreciation 2 300
Increase in receivables (1 840)
Decrease in inventory 3 312
Increase in trade payables 644
Purchase of non-current assets (14 720)
Net increase in cash and cash equivalence 24 196

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53) b and d
Grant liability
b/f 1 080 000

SPL 120 000 Receipt of grant 360 000

c/d 1 320 000
1 440 000 1 440 000

54) $ 93 100
Income tax
b/f 126 350
Cash paid 93 100 SPL 115 900
c/d 149 150
242 250 242 250

55) b
PPE
b/f 153 000 Disposals 51 000
Revaluation 21 250 Depreciation 17 000
Cash 106 250 c/d 212 500
280 500 280 500
Cash flows from Investment activities:
Purchase of PPE – (106 250)
Sale of PPE – 42 500
The net outflow is $ 63 750

56) c and d

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57) c
Accrued interest b/f – 12 600
Interest charged to SPL – 43 050
Unwinding (157 500*6%) – 9 450
Accrued interest c/d – 15 750
Paid - $ 30 450 (12 600+43 050-9 450-15 750)

58) b and d
59) $ 6 500
Inflow due to share issue – (13 000+6 500) = $ 19 500 (movement of share
capital and share premium)
Outflow due to repayment of debentures - $ 13 000
Net inflow would be - $ 6 500 (19 500-13 000)

60) $ 1 575 000

b/f (1.5+0.6) = $ 2.1 m
Additions (4.875-1.875+1.35) = $ 4.35 m
c/d ( 3.6+1.275) = $ 4.875
Payments made (2.1+4.35-4.875) = $ 1.575

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Objective Case Questions

1) Harry Co.
i) a
In the individual statements of Harry Property X would be an investment
property. However in consolidated statements where the whole group is
considered as a single entity this will be accounted as property, plant
and equipment because it is owner occupied and is used by the group.

ii) $ 275 000 Other Comprehensive Income

Carrying amount on 1st July 20X3 – (1.5 – (1.5/10*6/12)) = $ 1.425 m
Gain on reclassifying – (1.7 – 1.425) = 0.275 m

iii) $ 400 000

Property X – (4.2 – 3.9) = 300 000
Property Y – (1.8 -1.7) = 100 000
Total Gain = $ 400 000 (0.3+0.1)

iv) d
If the cost model is used to measure investment properties then the
assets will be transferred at its carrying amount and will be
depreciated over the useful life. Therefore Property Y will be
depreciated for the whole year, 6 months as PPE and another 6
months as an investment property.
1.5 - (1.5 / 10) = 1.35 m

v) c
Revaluation model is only applied to property, plant and equipment.

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2) Titanic Co.
i) b

ii) Depreciation = (3.15 *1 200/36 000) = $ 105 000

iii) c

iv) a

v) d
The carrying amount of the cabin as at 1st January 20X8 – (8.75-
(8.75*3.5/5) = $ 2 625 000
The cost of improving the facilities is $ 1.575 million which will then
give the cabin a carrying amount of $ 4 200 000 (2 625 000+1 575 000)
It has a remaining useful life of 18 months and then it is depreciated
for 6 months.
Thus the carrying amount at the year end would be (4 200 000-(4 200
000*6/18)) = $ 2 800 000

3) Draco Co
i) a and b

ii) c
Depreciation charge for 1st 6 months – (72 000/10*6/12) = $ 3 600
Depreciation charge for the next 6 months – (72 900/9*6/12) = $ 4 050
Total = $ 7 650

iii) a
Value in use - $ 34 816.50
Fair value less costs to sell - $ 38 700
Highest - $ 38 200
Impairment – (54 675 – 38,700) = $ 15 975

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iv) b and c
A CGU can be a subsidiary but it is not a must. There is no requirement
to test the CGU more often than other assets.

v) d
Impairment loss is (1 053 000-855 000) = $ 198 000
Then it is allocated to the damaged machine and the goodwill (198 000-
31 500-76 500) = $ 9 000
The impairment allocated to the plant will be (90 000*270/720) = $ 33
750
Carrying amount of the plant (270 000-33 750) = $ 236 250

4) Ron Co
i) b and d
Borrowing costs must be capitalised if its is directly attributable to a
qualifying asset, which is an asset which takes a substantial period of
time to complete. Borrowing costs must commenced to be capitalised
when the expenditure are incurred, borrowing costs are incurred and
when the construction activities has commenced.

ii) $ 468 750

Finance cost for the year – (750,000,000-7.5%) = $ 562 500
Capitalised finance cost – (562,500*10/12) = $ 468 750

iii) a

iv) a (7,500,000*7.5% *2/12) = $ 93 750

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v) a
Temporary investment income earned during the construction period
should be netted against the amount capitalised. However the interest
was earned prior to the period of construction, therefore the interest
should be taken to statement of profit or loss as investment income.

5) Bellatrix Co.
i) c
Internally generated intangible assets are not capitalised.

ii) d
The expenses incurred from 1st May to 1st August should be expensed
(50,000*3) = $ 150 000
Then the cost incurred from 1st August to 31st January should be
capitalised (50,000*6) = $ 300 000
It should then be amortised over 4 years (300 000/4*2/12) = $ 12 500
Therefore the total amount expensed is $ 162 500 (150 000+12 500)

iii) a and d
Development costs are held at carrying amount not at fair value.
Research costs MUST be expensed.

iv) c and d - Initially the item should be measured at cost and training
costs cannot be capitalised.

v) a
Carrying amount at the year end – (480 000-(480 000/5) = $ 384 000
Fair value less estimated costs to sell - $ 364 800
Value in use - $ 46 800
Recoverable amount(highest) - $ 460 800
The carrying amount is lower than the recoverable amount, therefore
no impairment loss.

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6) Luna Co.
i) $ 2 550 000
The land is initially translated using the spot rate and as it is a non-
monetary asset it is not retranslated at the reporting date.

ii) b
(3,400,000*8%) = $ 272 000

iii) c (Advertising costs are not capitalised)

iv) $ 96 000 (960 000/5 * 6/12)

v) c and d

7) Hagrid Co.
i) c
A 4 year old asset under current cost accounting will be valued at (180
000-(180 000/5*4)) = $ 36 000

ii) d
Yogurt is produced after harvest so it is included in IAS 2 Inventory.
Machinery is accounted under IAS 16 and Tea bushes are bearer
plants which are also included under IAS 16.

iii) $ 11 400
The sheep will be held at fair value less estimated costs to sell.
Initial measurement - $ 57 000 (60 000-3 000)
Value as at 30th September 20X5 - $ 68 400 (72 000-(72 000*5%))
The gain would be $ 11 400

iv) b (similar)

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v) c and d (Revaluation will affect equity as well as depreciation)

8) Snape Co.
i) d (Both events relates to conditions in existence at the reporting
period)

ii) b
The depreciation stops at the date on which the asset is classified as a
non-current asset held for sale. Therefore the carrying amount of the
asset as at 30th September 20X6 is (2.8 m- (2.8/20*9/12)) = 2.695 m
The selling price is $ 2.73. It is higher than the carrying amount, so the
asset is held at carrying amount.

iii) b and c

iv) a (Only the redundant costs are provided)

v) b
The disposals of outlets in Russia represent a discontinued operation.
In china only different customers are targeted.750

9) Dumbledore Co.
i) c
Cost of the right of use asset – 1 578 750
Depreciation – (1 578 750/6) = $ 263 125
Carrying amount at the year end - $ 1 315 625 (1 578 750-263 125)

ii) $ 94 725 (1 578 750*6%)

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iii) b
b/f Interest Payment c/d
20X4-X5 1 578 750 94 725 (375 000) 1 298 475
20X5-X6 1 298 475 77 908.5 (375 000) 1 001 383.5

iv) a

v) a
This is sale and leaseback transaction where the seller retains the
full benefit of the asset over its useful life. The asset is not
derecognised and remains in the statement of financial position at
its carrying amount of $ 12.5 million and it is depreciated over the
remaining useful life of 20 years. Therefore the carrying amount at
the year end would be $ 11 875 000 (12.5-(12.5/20))

10) Neville Co.

i) d

ii) $ 52 800
Cost - $ 60 000
NRV - $ 52 800 (33*2000) = 66,000 (66 000-(66 000*20%))
Lowest = NRV

iii) c
Cost - $48 000
NRV - $ 78 000 (90 000-12 000)
Lowest = Cost

iv) c and d

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v) a
A change in accounting policy should be accounted retrospectively.
AVCO will reduce reported profit by the movement in the values of
opening and closing inventories of $
240 000 (12-10.8) – (9-8.4)

11) Sirius Co.

i) C
The revenue as an agent is made by earning commission. Therefore
the revenue on these sales should only be $ 780 000.

ii) $ 12 337 000

The $ 1.287 million received should immediately be identified as
revenue and the remaining $ 11 713 000 should be discounted to the
present value of $ 11 050 000. This is then unwound over the year
with recognising interest as finance income.
Total initial revenue – (1.287+11.05) = $ 12.337 million.

iii) c
The revenue earned from the machine and the installation should be
recognised immediately. The servicing will be recognised over the 2
year period. As at 30th June 20X3 only 2 months servicing has been
done. Therefore the servicing income is $ 26 000 (312 000*2/24). The
total revenue recognised at the year end is (1 040 000-286 000) = $
754 000

iv) b and c (Both indicates that the manufacturer retains the ownership)

v) d
This is not a real sale as the control has not been passed to the bank.
Therefore $ 3.9 million is considered as a loan The additional $ 819
000 represents interest of 10% a year over two years.

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12) Voldemort Co.

i) d
The dividend of $ 50 000 should also be recorded.

ii) d
b/f Interest(10%) Payment c/d
20X6 14 254 1 425.5 (1 200) 14 479 500

iii) $ 384 000

Initial value (5 000 000-200 000) = 4 800 000
Interest(8%) = 384 000

iv) a and d

v) c

13) Umbridge Co.

i) c ( It is the only event which gives evidences to already existing
circumstances as at the year end.)

ii) C

iii) $ 7 079 400

Discounted to present value - $ 6 555 000 (14.25*0.46)
Unwound by 8% for the first year – $ 524 400
Total Provision – 7 079 400

iv) b
From Umbridge’s perspective , as a separate entity, the guarantee
for Kacey’s loan is a contingent liability.

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v) d (The subsidiary was acquired after the time in consideration

according to IAS 10)

14) Dudley Co.

i) a

ii) $ 11.6 million (14.5*80%)

iii) c
Total Loss – (11.6 – 5.8 – 8.7) = $ 2.9
Revenue (11.6*60%) 6.96 m
Cost of sales (9.86 m)
Loss (2.9 m)

iv) d
Step 1
Total Revenue 5,800,000
Total Cost (0.725+2.9) (3 625 000)
Total Profit 2 175 000
Step 2
Progress 25%
Step 3
Revenue(5.8*25%) 1 450 000
Cost of sales (906 250)
Profit(2.175*25%) 543 750
Step 4
Cost incurred to date 725 000
Profit 543 750
Amount billed (1 450 000)
Contract Liability 181 250

v) a

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15) Granger Co.

i) c

ii) $ 972 000

Year CF DF PV
20X5 600 000 0.93 558 000
20X6 600 000 0.86 516 000
20X7 12 600 000 0.79 9 954 000
Liability 11 028 000
Equity = (12 m – 11.028 m) = $ 972 000

iii) $ 11 615 059

Year b/f Interest Cash paid c/d
20X4-X5 11 028 000 882 240 (600 000) 11 310 240
20X5-X6 11 310 240 904 819 (600 000) 11 615 059

iv) d (It is a with recourse agreement)

v) a and b ( The trade receivables should not be derecognised as the

control of the inventory has not been transferred

16) Tonks Co.

i) a and d

ii) $ 214 375

Initial value - $ 245 000
6 months depreciation – (245 000/4*6/12) = $ 30 625
Carrying amount as at 30th June 20X5 - $ 214 375

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iii) b (17 500*6/12)

Year b/f Lease Liability Financial Closing
payment during cost liability
year
1 245 000 (70 000) 175 000 17 500 192 500

iv) c and d (Gearing will increase and the gross profit margin will
not have an effect)

v) b (180*20)

17) Weasley Co.

i) a (Outflow of economic resources should be probable)

ii) b (Only the redundancy payments are provided for )

iii) $ 504 000

(100 000*6%*60) + (100 000*8%*18) = $ 504 000

iv) b (A provision is recognised to the best estimate of the

expenditure required.)

v) No (There is no obligation in future operating losses)

18) Hedwig Co.

i) c

ii) $ 2 400
Closing deferred tax liability – (288 000*25%) = $ 72 000
This means that deferred ta liability has decreased by $ 32 000
in the current year.
Tax expense - $ 2 400 (34 400 – 32 000)

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iii) a ( A debit balance is an under provision which should be added

to the tax expense. An under or over provision arises when the
prior year tax is paid so there is no adjustment to the tax
liability.)

iv) d
The payables should initially be translated at the spot rate giving
a payable of $ 800 (8000/10)
As payables are monetary it should be retranslated at the
reporting date giving a payable of $ 1 000 (8 000/8). Therefore
the loss is $ 200

v) $ 486
The receivables should initially be translated at spot rate which
will give a value of $ 4 800 (48 000/10)When the cash is
received the gain or loss should be recorded. At the rate of
10.5:1 the cash received will give a value of $ 2 286 and as this
would have originally included as $ 2 400 the loss would be $
114.
Finally the year end balance is retranslated to $ 3 000 (24
000/8). As this would have originally included as $ 2 400 this
gives a gain of $ 600

19) Ginny, Fred and Arthur

i) b
Prior year EPS should be restated if there is a bonus element
to a share issue. Both the bonus issue as well as the rights
issue has a bonus element.

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ii) d
[Link] [Link] months Bonus fraction W/A
shares
1st Jan 25 500 000 4/12 6/5 10 200 000
1st May 27 750 000 5/12 6/5 13 875 000
1st Oct 33 300 000 3/12 8 325 000
32 400 000
EPS – (profit after tax/weighted [Link] shares)
(9 000 000/32 400 000) = $ 0.28

iii) c
[Link] [Link] months Rights fraction W/A
shares
1st Jan 23 400 000 3/12 3.80/3.60 6 175 000
1st April 29 250 000 9/12 21 937 500
28 112 500
TERP –
4 @ 3.80 = 15.20
1 @ 2.80 = 2.80
TERP – 18/5 = $ 3.60
Rights Fraction – 3.80/3.60
EPS - (profit after tax/weighted [Link] shares)
EPS - (9,750,000/28,112,500) = $ 0.35

iv)a
Adjustment to profit
8 250 000 + (5 500 000*8%*75%) = 8 580 000
Adjustment number of shares
23 787 500 + (5 500 000*25/100) = 25 162 500
EPS - (profit after tax/weighted [Link] shares)
EPS – (8 580 000/25 162 500) = $ 0.34

v) $ 0.38
(0.40*3.6/3.8)

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20) Slytherin and Gryffindor

i) $ 2 280 000
The other comprehensive income attributable to the parent
will be 100% of the parent’s revaluation gain and 80% of the
subsidiary’s post acquisition revaluation gain.
1 900 000 + (80% * 475 000) = $ 2 280 000

ii) b
Slytherin Gryffindor
As per the question 10 450 000 3 325 000
(-) Pre acquisition RE (3 800 000)
(-) Excess depreciation (38 000)
(513 000)
80% share of parent (410 400)
10 039 600

iii) a
Goods in inventory (2.85/4) = $ 712 500
Unrealised profit (712,500*20/120) = $ 118 750
30% of URP = $ 35 625

iv) d
Proceeds 8 550 000
Goodwill at disposal (950 000)
Net assets at disposal (10 070 000)
NCI at disposal 2 375 000
Loss on disposal (95 000)

v) c

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21) Delphi Co.

i) b and d

ii) 2 720 000

Government Grant
Released 1 120 000 b/f 4 800 000
c/d 6 400 000 Received 2 720 000
7 520 000 7 520 000

iii) c
Property
b/f 31 600 000 Depreciation 3 680 000
Disposals 4 720 000
c/d 23 200 000
31 600 000 31 600 000

The carrying amount of the disposed asset is $ 4 720 000. As

a profit on disposal of $ 2 960 000 is made the sales proceeds
would be $ 7 680 000

iv) d
Bonus issue will have no impact on cash flows. Amortisation
on intangible assets will be added back to the profit.

v) b

22) Krum and Ollivander

i) d ( as it doesn’t have significant influence)

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ii) a
Shares issued as consideration – (9.75*80%*2/5) = 3.12 million
Total Consideration (3.12*5.30) = 16 536 000
Share premium (16 536 000-3 120 000) = 13 416 000
Total share premium in consolidated statements – (13 416
000+3 900 000) = $ 17 316 000

iii) $ 312 975 000

Carrying amount of the asset after it is transferred – (16.25 –
(16.25/5*6/12)) = $ 14.625 million
Carrying amount of the asset if it has never been transferred
– (13 – (13/5*6/12)) = 11.7 million
URP = 2.925 million
PPE = (224.25+91.65-2.925) = $ 312 975 000

iv) $ 40 560 000 (21.06+24.7-1.3-3.9)

v) d
NCI at acquisition 4 680 000
Post acquisition profits (15.6*6/12*20%) 1 560 000
Depreciation (3.25 / 5 *6/12 *20%) 65 000
6 305 000

23) Lucius Co.

i) a
Land - $ 59.5million
Building (126*19/20) - $ 119.7 million
Total - $ 179.2 million

ii) b
Existing plant – (105*20%) = 21 million
New plant (35*20%*6/12) = 3.5 million
Total – 24.5 million

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iii) a and

iv) b
Balance as at 1/1/X8 –189 m
Amortisation – 21 m
Carrying amount as at 31/12/X8 – $ 168 m
Impairment (168 – 70) = $ 98 m

v) c

24) Lupin Co.

i) b and c

ii) $ 216 000

Total contract price 4 500 000
Total Cost (2.07+1.89) (3 960 000)
Profit 540 000

Profit recognized for the year end 30th September 20X7 – (540*40%)
= $ 216 000.

iii) a
Work invoiced – Cash received (1 800 – 1 350) = $ 450 000

iv) $ 1 012 500

Step 1
Total Contract price 4 500 000
Total Cost (3.24+0.63) (3 870 000)
Total Profit 630 000
Step 2
Progress 75%
Step 3

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Profit (63 000*75%) 47 250

Step 4
Costs to date 3 240 000
Profit to date 472 500
Amount invoiced (2 700 000)
Contract Asset 1 012 500

v) $ 360 000 (The revenue is recognised to the extent of costs

incurred)

25) Muggle and Wizard Co.

i) c
191 520 000 + (105 840 000*6/12) – 3 600 000 + 216 000 =
$ 241 056 000
Total Intra group sales – (600 000*6) = $ 3 600 000
URP (3 600 000*30%*20%) = $ 216 000

ii) d
Excess depreciation – (2 400 000/20*6/12) = $ 60 000
Impairment - $ 360 000
Operating expenses = 30 366 000 + (19 872 000*6/12) + 60
000 + 360 000 = $ 40 722 000

iii) b (The intra group sales will only affect the profit
attributable to NCI if the sale is done by the subsidiary
to the parent.)

iv) $ 3 209 000

Initial value – (3 600 000/(1+0.08)^2) = 3 086 000
Unwinding for 6 months – (3 086 000 + (3 086
000*8%*6/12) )= $ 3 209 000

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v) b (Professional fees associated with the acquisition of

subsidiaries cannot be capitalised)

26) Malfoy Co.

i) b ( As it’s a manufacturing company it will have high non-
current assets)

ii) c
Current ratio = Current Assets/Current Liabilities
(126 350/97 850) = 1.29

iii) b

iv) 0.36
Quick Asset ratio – (Current Asset-Inventory) / Current
Liabilities
(126 350-91 200) / 97 850 = 0.36

v) Increase

27) Black Co.

i) d

ii) $ 312 500

(5 000 000*7.5%*10/12) = $ 312 500

iii) c
10% *25/40 – 6.25%
8% * 15/40 – 3%
9.25%
iv) c

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v) d
28) Crucifix Co.
i) $ 31 500
Tax a/c
b/f 123 750
Cash 31 500 P/L 42 750
c/d 135 000
166 500 166 500

ii) $ 108 750

Retained Earnings
b/f 705 000
Dividend paid 108 750 Revaluation Surplus 15 000
c/d 675 000 Profit 63 750
783 750 783 750

iii) C

iv) b
The loan interest paid is calculated based on the coupon
rate. Therefore the interest paid is (375 000*5%) = $ 18
750
If $ 30 000 related to the interest on loan notes then the
remaining $ 15 000 will be interest paid on lease liability.
Therefore the total interest paid during the year is $ $ 33
750 (18 750+15 000)
v) $ 60 000
Lease Liability
b/f 232 500
Cash 60 000 Additions 52 500
c/d 225 000
285 000 285 000

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29) Azkaban Co.

i) d
Present value of future cash flows 112,775
Payment made at the commencement 65,000
Direct costs 13,000
Lease incentive (4,550)
186,225

ii) b

iii) d

Present value of the future cash flows 112 775

Interest accrued 11 277.5
124 052.50

iv) a and b

v) d (5 850/10*6)

30) Quidditch and Snitch

i) d

ii) $ 281 000 000

Cash consideration 252 000 000

Loan notes (58 000 000*100/200) 29 000 000
281 000 000

iii) a
Acquisition Movement
Property 24 m 2.4 m
Band 30 m 6m

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8.4 m
8.4 m * 80% = $ 6.72 m

iv) $ 19.2 m (67.2*40/140)

v) c

Constructed Response Questions

Analysing Financial Statements

1) Lex Co.
i)
Return on Capital Employed (1 260+531)/ (2 880+450+2 700+2 20.9%
(ROCE) 520) *100%
Operating Profit margin (1 800 / 18 450) *100% 9.8%
Gross Profit margin (2 250 / 18 450) *100% 12.2%
Current Ratio (6 570 / 4 950) 1.3:1
Trade payable’s payment (3 420 / 16 200) *365 77 days
period
Trade receivables collection (3 330 / 18 450) *365 66 days
period
Closing inventory holding (3 240 / 16 200) *365 73 days
period
Gearing ((2 880+450+2700)/ 8 550)*100% 71%

As required by the question ALL the lease liabilities have been

treated as debt.

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ii) Introduction
This report is prepared based on the draft financial statements
supplied and the ratios sown in the above requirement. The report
will analyse the performance and position of Luthor Co. and Super
Co. from the point of view of a prospective acquisition of the entire
equity of one of the two entities.
Performance
ROCE is traditionally seen as a measurement of management’s
overall efficiency in the use of the finance and assets at its disposal.
The ROCE of 20.9% of Super is far more superior than the 14.8%
return achieved by Luthor. It could be seen that this superiority is
due to the efficient use of net assets in Super. It achieved a net
asset turnover of 2.3 times compared to the 1.2 times of Luthor.
The other element contributing to the ROCE ratio is the profit
margins. It could. The gross Profit margins are almost identical,
however the operating profit margin of 9.8% of Super is slightly
inferior to the 10.5% of Luthor. ROCE should be investigated further.
It could be seen that Luthor Co. is using the revaluation model while
Super maintains its assets under historical cost method. The use of
the current value for the factory will be adversely impacting on
Luthor’s ROCE. Super does not suufer this deterioration as it does
not own its own factory.
Super does not own its own premises whereas Luthor does. If
Super’s rental expenses, as a percentage of the value of the related
factory, was less that its overall ROCE, then it would be contributing
to its higher ROCE. There is insufficient information to determine
this.
Moreover, Super Co’s owned plant is nearing the end of its useful
life (carrying amount is 22% of its cost) and they seem to be
replacing owned plant with leased plant. The finance cost of leased
assets at only 7.5% is much lower than the overall ROCE, which will
help to improve Super’s ROCE.

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The ROCE measures the overall efficiency of management.

However as Lex is considering buying the equity of one of the two
entities it would be useful to look into ROE as well. Clearly Super’s
ROE of 50% is superior than the 19.1% of Luthor. Again the
revaluation in Luthor is making the ratio appear comparatively
worse. It would be more meaningful to calculate ROE based on the
price of each entity which would effectively be the carrying amount
of the relevant equity for Lex.
Gearing
From the gearing ratios it can be seen that 71% of Super’s assets
are financed by borrowings which is almost double the level of
Luthor. This provides evidence that Super is a high risk company.
The interest cover of Super is only 3.3 times where as in Luthor it
is 6 times. The lower interest cover in Super is a direct
consequence of high gearing and it makes profit vulnerable to
relatively small changes in operating activity.
Another observation is Luthor has taken advantages of the receipt
of government grants, while Super has not. This is due to Luthor
purchasing plant and Super is leasing plant.

Liquidity
Both entities have relatively low current ratios of 1.2 and 1.3 for
Luthor and Super respectively, although at least Luthor has $ 540
000 in the bank where as Super has a $ 1.08 million overdraft. In
this respect Super’s policy of high dividend payout is very
questionable. Furthermore both entities have similar inventory
days. Super collects receivables earlier than Luthor and the
notable difference is that Luthor receives a significantly longer
credit period from its suppliers. This may be a reflection of Luthor
being able to negotiate better credit terms because it has a higher
credit rating.
Conclusion

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Although both the entities may operate in a similar industry and

have similar profits after tax, they represent very different
purchases. Super’s sales revenue is 70% more than that of Luthor,
it is financed by high debt, it rents rather than owns property and it
chooses to lease rather than buy its replacement plant. Also its
remaining owned plant is nearing the end of its life. Its replacement
will either require cash injection if it is to be purchased or create
even higher levels of gearing if it continues its policy of leasing. In
short although Super’s overall return seems more attractive than
that of Luthor, it would represent a much more risky investment.
Ultimately investment decision may be determined by Lex co’s
attitude to risk, possible synergies with its existing business
activities, and not least by the asking price for each investment.

iii) Problems in using ratios -

Inconsistent definitions of ratios
Financial statements may have been deliberately manipulated
(creative accounting)
Different entities may use different accounting policies
Different managerial policies
Statement f financial position figures may not be representative of
average values throughout the year.
Distortion caused by inflation

Additional Useful information -

In this case the decisions are made based on the draft financial
statements which are unreliable and may be changed when being
finalised.. Audited Financial statements would have been more
reliable.
The current values of the assets being acquired.
The level of risk with in the business
Expected price to acquire the entity

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2) Mary Co.
i) Based on the additional information given if Mary was acquired by
Craven the following will need to be adjusted,
Cost of sales (36,000/0.9) = $ 40 000 000
Director’s remuneration - $ 2 000 000
Loan interest (10% * 8,000) = $ 800 000
Adjusted Statement of Profit or Loss
($’000)

Revenue 56 000
Cost of Sales (40 000)
Gross Profit 16 000
Operating Expenses (5 600)
Director’s Salaries (2 000)
Loan interest (800)
Profit before tax 7 600
Income tax expense (2 400)
Profit for the year 5 200

In the statement of financial position the following adjustments

would be made,
Equity would be the purchase price of Mary - $ 24 m
The director’s loan would be replaced by debt of $ 8

Recalculated ratios,

Return on Equity (ROE) (5 200 / 24 000)*100% 21.7%

(including director’s loan
accounts)
Net asset turnover (56 000/(24 000+8 000)) 1.75 times
Gross Profit margin (16,000/56 000)*100% 28.6%

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Net profit margin (5 200/56 000)*100% 9.3%

ii) Introduction
The following report is prepared to comment on the performance
of Mary Co. in relation to the Sector. For this purpose the sector
averages, reported ratios as well as the adjusted ratios are used.
Performance
An analysis of Mary’s ratios based on the financial statements
provided reveals strong, position and profitability compared to the
sector. Mary has a very high ROE which is a product of higher than
average profit margins and a significantly higher net asset
turnover. Thus on the surface Mary is managing to achieve higher
prices, has better control over costs and is using its net assets
more efficiently in terms of generating revenue.
However further investigations show that its not the actual case.
The effect of purchasing its inventory at a favourable price means
that its reported gross profit margin is overstated. When acquired
by Craven it is likely to make the purchases on market price which
will cause the gross profit margin to fll to 28.6% which is even
lower than the sector average of 30%.. This will affect the net profit
margin as well.
When Craven replace the existing board of directors it will have to
increase the director’s remuneration by $ 1.2 million. Additionally
the interest free directors’ loans are replaced with a commercial
loan, with interest at 10% per annum which will reduce the net
profit by a further $ 800 000.
When all these events are adjusted the ROE will show a value of
2.7% which is almost exactly in line with the sector ratio of 22%
In the similar way when the net asset turnover is calculated using
purchase price and commercial loan it would fall to 1.75 times
which is still higher than the sector.
Conclusion

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Mary’s adjusted results would be slightly ahead of the sector and

may justify the anticipated purchase price of $ 24 million. However,
the results will be no where near the excellently performing
business as suggested by the reported results and Cavern needs
to exercise a degree of caution in its negotiations.

iii) The consolidated financial statement of Martha group is of little

value when trying to assess the financial position and
performance of its subsidiary, Mary CO. Therefore the investment
decision should be based on Mary’s individual financial
statements. When it comes to a group there may be situations
where you can identify transactions with in the group which are
favourable for the company and is done below the commercial
rates. There may be relationships where Martha would give Mary
benefits that may not have happened had Mary not been part of the
group.
The main concern in this is regarding the benefits which has been
transferred from Martha to Mary which will be difficult to identify
from the published sources, whether consolidated or individual.

3) Panther Co.
i)
Return on Capital Employed (840/(69 307+14 000)*100% 1%
(ROCE)
Operating Profit margin (840/65 800)*100% 1.3%
Gross Profit margin (3 360/65 800)*100% 51.1%
Current Ratio (16 877/6 370) 2.6:1
Inventory turnover period (4 550/32 200)*365 52 days
Receivables collection period (11 900/65 800)*364 66 days

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ii) Performance
Revenue and expenses have all increased during the year due to
the acquisition of Black. Black would have contributed a full year’s
results to 20X7 which was not included in 20X6. Whilst revenue
has increased significantly, the higher expenses has led the
company to earn lesser profits than the last year. It is also worth
noting that the new hotel was opened only in June which means
the full year’s results was not contributed.
The gross profit margin has fallen. This is may be due to the lower
margins in hotel business. It is also possible that Black had to
offer lower rates in order to attract customers following the poor
feedback. However as the hotel establishes itself the need for
cutting prices will be low. The improve in online feedback should
lead to increased bookings which will mean that the hotel will
produce a better return in the future.
The operating profit margin has decreased dramatically. In
addition to this fall there is a significant one-off $ 3.15 million
income relating to disposal of investments, which show a false
position. If the income wasn’t there the company would have
made a loss.
Further analysis shows that there is a significant increase in
administrative expenses which may be linked to the acquisition of
Black and the new hotel project. These most likely would not
occur in future periods. Panther has also undertaken an extensive
marketing campaign which would have also contributed to the
increase in costs.
While the above can be classed as one-off expenses there are
many expenses that will remain high in the future periods as well.
The staff numbers would have ben increased due to the hotel and
also the consumption of heat, lighting will also increase. It is
questionable whether it was wise to diversify to avoid the fuel
prices as it seems that Black has smaller margins and will incur

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significant heat and lighting which is likely to rise in a similar

manner as fuel.
The ROCE ratio has also deteriorated during the year and would
have actually been negative if not for the income on disposing the
investment. The capital employed of Panther has increased
significantly as well. This is due to the issue of new shares and
the new loan which was taken out to fund the acquisition of Black.
Also it is important to notice that the new hotel has not been
operating a full year. It appears that Black is a loss making entity
, as the NCI share of the profit is negative. This could mean that
the rest of Panther group has remained profitable through out the
year.
Position
The cash balance has fallen to 0.42 million. It could be seen that
Panther has taken different measures to raise cash during the
year such as selling the investment, issuing shares and taking out
a loan. However the vast majority of cash raised as such was
used in the acquisition of Black.
The receivable days has decreased during the year . This may be
the effect of Black being largely cash based and having a positive
impact on cash flow. The inventory turnover period has also
reduced . This can be linked to Black as it is very likely that
entities operating in hotel industry is likely to have a very less
amount of inventory.
Conclusion
It is difficult to judge the success of the business in this
transitional year. There is a concern over the acquisition of Black
as it seems it is a loss making entity and put pressure on the cash
flow of Panther group despite of the dramatic increase in
revenue.
The individual results of Black need to be analysed for a more
meaningful comparison. However it is possible that the

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performance of the group will increase in the future when the full
results of the hotel is included with in the financial statements.

4) Joker Co.
i)
($’000)
Return on capital 14 400/(68 400+60 000)*100% 11.2%
employed
Current ratio (22 800/26 400) 0.86
Closing inventory (15 000/120 000)*365 46 days
holding period
Trade receivables (7 800/150 000)*365 19 days
collection period
Gearing (60 000/128 400)*100% 46.7%

ii) Introduction
The observations stated in the Chief Executive’s report in relation
of the performance of Joker might be factually correct, but they
take a one dimensional view solely basing the observations on
the reported figures and not making any reference to the
purchase of the subsidiary at the beginning of the year. The
financial statements of the two years are not directly comparable
due to this purchase. The following analysis will consider the
position and performance based on the reported figures and then
go on to consider the impact of the purchase has had on this
analysis.
Performance
The ROCE is a primary measurement when analysing the
operating performance. The ROCE ratio of Joker for year 20X2
represents a 58% increase than that of the last year. However
without the contribution of $ 13.2 million to profit before tax by Bat

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Co. Joker’s underlying profit would have been a loss of $ 3.6

million which would give a negative ROCE.
The principal reason for the beneficial impact of Bat’s purchase is
that its gross profit margin and net profit margin of 42.9% and
31.4% respectively are far superior than the margins obtained
when the two businesses are combined. It should be observed
that the other factor contributing to ROCE is the net asset
turnover and in this respect Bat’s is actually inferior at 0.6 times
to tht of the combined business of 1.2 times.
It could be argued that the finance costs should be allocated
against Bat’s results as the proceeds of the loan note appear to
be funding the purchase of Bat. Even if that is accepted Bat’s
results still far exceed those of the existing business.
Thus the facts in Chief Executive’s report is highly misleading.
With out the purchase of the subsidiary the revenue would have
been the same as last year ad the gross profit margin would be
down to 11.1% (12m/108m). The performance of the company has
been poor in the current year when compared to the previous
year.
Position
The current ratio has deteriorated dramatically from 2.5 to 0.86
which is extremely low and is a matter of serious concern. The
increase in the inventory holding period and the trade receivable
period has largely off set each other. There is a small increase in
the trade receivable collection period from 16 days to 19 days
which would actually improve the current ratio. This ratio is
unrealistically low as it is almost impossible to collect credit with
in such short time and may be indicative of factoring some of the
receivables , or a proportion of sales being cash sales. Factoring
is considered as a indicator of declining liquidity eventhough in
this case there is no actual evidence to say so.

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The real culprit for the dramatic decline in current ratio is the
cash position. Joker had a healthy bank balance of $ 8.4 million
at the end of 20X1 which has fallen to an overdraft of 10.2 million
in 20X2. A statement of cashflows would have been useful in
further investigations.
A dividend of $ 0.1 per share was paid which means $ 6 million
was paid as dividend. The low retained earnings indicate that
Joker has historically paid a high proportion of its profits as
dividend. However in times of declining liquidity such high pay
outs cannot be justified.
In regards of gearing Joker has gone from nil gearing to a gearing
of 46.7% in the current year. This is mainly due to the 8% loan note
which seems like the source of funding for the purchase of Bat
[Link] future downturn in results of Joker may cause a problem
in paying the loan interest and the shareholder’s return will
decrease. The increase of gearing has increased the risk of the
company. The risk would have been lower if the purchase was
funded by an issue of equity shares.
Conclusion
Acquisition of Bat has been a wise move by the management of
Joker which has been a great success. However the Chief
Executive’s report has tried to disguise the serious deterioration
of the underlying performance and the position of the existing
business activities of Joker.

5) Arrow Co.
i)
($’000)
Revenue (21,680-840) 20 840
Cost of Sales (8,600-480) (8 120)
Gross Profit 12 720

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Operating expenses (W1) (4 884.8)

Operating Profit 7 835.2

Working 1 (W1):
As per the question 4 680
Expense of Non-core division (280)
Loss on disposal of the division (600)
Leila group management charge (216.8)
Green Co. Management charge 1 272
Rent paid to Leila (18.4)
Commercial rent 48
4 884.8

ii)
Gross Profit margin (12 720/20 800)*100% 61%
Operating Profit margin (7835.2/20 800)*100% 38%
Current Ratio (2 280/20 840)*365 40 days
Acid test ratio (5 160-564.8)/4 640 1:1
Receivables collection period (5 160-1 960-564.8)/4 640 0.57:1
Gearing 6 680/(3 600-564.8) 220%

iii) Introduction
The following report is prepared to comment on the financial
performance and the position of Arrow Co. for the year ended 30th
September 20X4 in comparison to the sector. Relevant
adjustments need to be made in assuming that the entity will be
acquired by Green Co. The above calculated ratios and the sector
averages will be further analysed below.

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Performance
The disposed non-core division has a gross profit margin and net
profit margin of 43% (360/840*100%) and 10% (80/840*00%)
respectively. Before adjusting for the disposal Arrow has a gross
profit margin of 60% which has improved to 1% after the
adjustments. This means that the disposal has had a positive
impact on Arrow. Moreover the Gross profit margin of the
company is 16% higher than the sector average which may be due
to the negotiation of good delas with its suppliers for the cost of
goods purchased.
The operating profit margin has been adjusted for the disposal of
the division, the management charges and the commercial rent
charges which has resulted in a value of 38%. Although it is still
10% higher than the sector the some of the advantages of a high
gross profit margin has been lost due to the adjustments.
Although the management charges will be eliminated form the
consolidated statements it will still have an impact on individual
statements and there is no indication of the purpose of this
charge or whether it is at market rate.
The rent charge of $ 48 000 is on market rate which means the
previous rent was artificially low. Green would look in to
strengthen the good relationship between the Arrow and its
suppliers and also investigate whether the costs could be
reduced. It could also look into a similar rent agreement as before
in Green’s own premises.
Position
Arrow’s receivable collection period is almost similar to that of
the sector. Given this similarity the difference between the
current ratios is a surprise. This may be due to the lower current
assets other the receivables or higher current liabilities. As its
cash balance (920) is not low it is more likely that it has higher
current liabilities. Perhaps the good relationship with the

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suppliers has resulted in longer than average credit terms. As

Arrow’s acid test ratio of 0.57 is significantly low than the sector
average of 1.4, it suggests that Arrow id holding inventory for
more than the average time period. There is also tax payable
which has increased the liability. Green should look into the
procedure of inventory handling In Arrow before taking over.
Arrow Co. seems to be highly geared but it does not raise concern
as it seems that the sector gearing average is also high. It can be
assumed that the proceeds from the sale of division has been
used to pay the loans. As gearing in the sector is higher than that
of the company it could take out more loans in future but working
capital efficiency need to be increase in order to make sure that
sufficient cash is available to service the high borrowings.
Conclusion
Overall, Arrow’s financial statements gives little cause of
concern, the profitability margins appear to be healthy although
further investigations of operating costs and working capital
efficiency may be required.

6) Martian Co.
i) Introduction
The following report is prepared to comment on the cash flow
management of Martian Co. using the statement of cash flows for
the year ended 31st March 20X9 and the additional information
given.
Operating Cash flows
Martian’s operating cash inflows at $ 846 000 prior to the finance
cost, interest and dividends is significantly higher than the
equivalent profit of $ 387 000. The reason for this is the higher
non-cash expenses such as depreciation and warranty.
Working capital changes are relatively neutral, with a large
increase in inventory appearing to be financed by an increase in

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trade payables and a modest decrease in trade receivables. The

reduction in receivables is rather surprising as all other
indicators indicate towards increasing operating capacity. This
reflects a better control over the cash management of the trade
receivables (or a disappointing sales performance)
An unusual feature of the cash flow is that Martian has received
a tax refund of $ 54 000 during the year. This indicates that the
entity has incurred a loss in the previous year. While the current
year profit performance is an obvious improvement it would have
tax consequences in the nest year. Overall the entity has a
satisfactory ability in generating cash from operating activities.
Investing cash flows
There has been a dramatic investment in property, plant and
equipment. It is difficult to be sure whether this represents an
increase in the operating capacity or is the replacement of he
plant disposed of. However judged by the level of increase it is
apparent that there is an increase in operating capacity. It is usual
for there to be a time lag before increased investment reaches its
full beneficial effect and in this context it could be speculated that
future periods may show even more greater improvements.
The investment property is showing a good return of $ 36 000 in
the year.
Financing Activities
The financial structure of Martian Co. appears to be changed
during this year. Debt of $ 360 000 has been redeemed for $ 378
000 and there has been a share issue raising $ 900 000 which has
been used in the redemption of loan and the investment in
property, plant and equipment. The remainder for the financing of
and the investment in property, plant and equipment has come
from the very healthy operating cash flows. If the ROCE is higher
than 6% it may raise a question regarding the wisdom of the early
redemption especially given the penalty cost.

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Summary
The overall effect of the year’s cash flows is that they have
improved the cash position dramatically going from an overdraft
of $ 108 000 to a positive bank balance of $ 9 000 even after the
payment of $ 135 000. The above analysis indicates that Martian
has taken steps to invest largely in property, plant and equipment
which has been financed mostly by the operating cash flows. This
appear to have brought a dramatic turnaround in Martian’s
fortunes. All the indications are that the future financial
performance and position will continue to improve.

ii) Cash flows is an easy concept to understand, indeed many users

misinterpret statement of profit or loss items as being cash flows.
Cash flows help to assess the entity’s liquidity, solvency and
financial adaptability. Healthy liquidity is vital for going concern
It is difficult to manipulate the cash flows as they are real and
possess the characteristic of objectivity.
Many business investment decisions and valuations are based on
projected cash flows.
The quality of profit is said to said to be confirmed by closely
correlated cash flows. Some analysts take the view that if a
business shows a healthy profit from
operations, but has low or negative operating cash flows, there is
a suspicion of profit manipulation or creative accounting.

7) Wonder Co.
i) Gain on disposal in Wonder Co’s group consolidated statement of
profit or loss
($’000)
Proceeds 14 320
Goodwill (W1) (2 150)
Net assets at disposal (13 050)

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NCI at disposal (W2) 3 080

2 200

W1 – Goodwill
($’000)
Consideration 9 600
NCI at acquisition 2 450
Net assets at acquisition (9 900)
Goodwill 2 150

W2 -NCI at disposal
($’000)
NCI at acquisition 2 450
Subsidiary post acquisition profit * NCI% 630
(13,050-9,900)*20%
NCI at disposal 3 080

ii) Adjusted P/L extracts:

(’000)
Revenue (23,110 -4,500(S*8/12) +500(intragroup)) 19 110
Cost of sales (11,990 -2200(S*8/12)) (9 790)
Gross profit 9 320
Operating expenses (1,650 -836.5(S*8/12) +4720 (5 533.5)
(profit on disposal)
Operating profits 3 786.5
Finance costs (480 -400(S*8/12) (80)
Profit before tax 3 706.5

iii)
Gross profit margin (9,320/19,110)*100% 48.8%
Operating profit margin (3,786.5/19,110)*100% 19.8%
Interest cover (3,786.5/80) 47.3 times

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iv) Introduction
The following report is prepared to comment on the performance
of Wonder Co. in the year ended 30th June 20X in comparison to
the last year. But it is important to notice that the two years’
financial statements are not directly comparable due to the
disposal of the subsidiary in the current year. The relevant
adjustments are made above and recalculated ratios would be
used in the following analysis.
Gross profit margin
When analysing the gross profit margin of Wonder Co. it could be
seen that the underlying margin is higher than in 20X5. After the
removal of Cheetah Co. this continues to increase. Despite
Cheetah Co. having a gross profit margin of over 50% this could
be artificially inflatedby obtaining supplies form Wonder Co. ata
relatively less price. Wonder Co. makes a margin of 48.8% but
sells goods to Cheetah at 30%.

Operating Margin
At first sight the operating profit margin appears to have
increased dramatically. However this is due to the profit on
disposal which is included. Removing the effect of disposed
subsidiary still gives a value which is higher nut more in line with
the last year.
Cheetah Co’s operating profit margin of 32.6% again suggests that
a profitable business has been sold. However this high margin is
may be due to the fact that Cheetah has used Wonder’s building
without paying a rent meaning that its operating expenses are
understated compared to the market rate.
It is likely that the rental income earned by Wonder from renting
out the building to a third party has contributed to the increase in

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operating margin and will be further favourable in the future

periods as a full year’s rent will be received.
Interest Cover
Initially the interest cover has shown a strong growth in the
current year which is obviously due to the increased profits. But
even when the profit on disposal was stripped out still the interest
cover is in a healthy position and following the removal of the
impact of subsidiary it improved further meaning that Cheetah
may have allowed Wonder to repay debt and reduce the interest
expense incurred.
Conclusion
Cheetah Co. seems to have been a profitable company which
raises a question on its disposal. However most of the profits may
have been due to free rental and cheap supplies. It is worth noting
that Wonder now has a rental income which is likely to grow in
the future periods.

8) Sinestro Co.
i)
ROCE 3 430/(3 920+6 440+700)*100% 31%
Net profit (before tax) margin 3 430/28 000*100% 12.3%
Payables Payment period 1 470/22 960*365 23 days
Gearing (Debt/Debt+Equity) 7 140/11 060*100% 64.6%
ii) Introduction
This report is prepared to comment on the performance and the
financial position of the two entities, Lantern and Malefic in order
to assist the directors of Sinestro Co. in making an acquisition
decision.
Performance
When analysing the performance of the company ROCE us a
primary measure in measuring the management’s overall

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efficiency and performance. In this situation the ROCE of Lantern

is more than double the value than that of Malefic. This superiority
should be analysed further by looking at the components that is
included with in ROCE, that is the profit margins and the asset
turnover.
It seems that Lantern is far superior in both these aspects than
Malefic. Lantern is generating $ 3.30 for every dollar invested
while in Malefic it is only $ 2.50.
The gross profit margin of 24% in Lantern is a third higher than
the 18% of Malefic. This may be at least in part due to the different
marketing policies. Malefic might be deliberately charging lower
prices to increase the sales. This is reflected by the higher
revenue in Malefic of $ 28 000 when compared to the $ 17 500 of
Lantern. The superior gross margin of Lantern continues to the
operating level as well indicating that it has good control over its
costs.
However there are some concerns regarding the capital
employed that put this superiority into question. Lantern hs
deducted the government grant from its non-current assets
which is allowed but rather unusual as usually it is recorded as
deferred income. It also appears that Lantern rents its property
while Malefic owns property. While these factors will not
necessarily result in a higher profit for Lantern these may
contribute for a lower capital employed which will in return
produce a high ROCE.
It may be more helpful for Sinestro to calculate the Return on
Equity ratio (ROE)as this is regarding an acquisition. Using the
profit after tax and the purchase price the ROE of Lantern and
Malefic would be 30% (2520/8 400*100) and 25% (2 100/8 400*100)
respectively. t\This still supports the superiority of Lantern
however it is important to notice that both the entities have $ 3.5
m loan notes however the interest rate of Lantern is 5% and in

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Malefic its 10%. Also it seems that Lantern is paying a nominal

rate of tax on its profit of 20% compared with the 25% of Malefic.
This may be due to different tax issues or pervious year
adjustments. If Lantern had a comparable finance cost and a tax
rate to Malefic its return would be nearer to that of Malefic.
Position
The given ratios indicate that both the entities have a favourable
liquidity position although the current ratio of Lantern appears to
be too high. This seems to be due to holding more cash as it has
better control over inventory and receivables. It could be seen
that Malefic holds a larger inventory perhaps aiming to increase
revenue by selling more and the higher receivables indicate the
uncollectable credit which should be written off.
At around 65% both the entities are highly geared particularly due
to the low equity. The low retained earnings in both the entities
prove that they have a policy of paying out majority of the earnings
as dividend. Malefic’s high gearing is partly due to its policy in
leasing plants.
Conclusion
Although both the entities operate in the same industry and has
same level of profits it indicates two very different investments.
Malefic’s revenue is over 60% higher than that of Lantern, it is
financed by high levels of debt and it owns property rather than
renting. Also it is important to notice that the owned plant of
Malefic is nearing the end of its useful life and should be replaced
in the near future. Ultimately the investment decision would
depend on Sinestro’s attitude to risk and how well each of the
investment will fit in to present management of Sinestro.

iii) Further information that would be useful –

Non-published forward looking information such as profit
forecasts and capital commitments.

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Whether either of these entities are already established or young

and still growing
As noted above the assets in Malefic Co. is nearing the end of
their useful life and whether the need to be replaced or they are
already replaced by leased assets.
The fair value of the assets, compared to their carrying amounts,
which will affect in calculating the goodwill.
How much of the profit is due to the reputation or contracts of
the current management and would they continue in their role
after a takeover.

9) Atom Co.
i)
a. Revenue (56 400*95%) 53 580
b. Cost of Sales (see below) 45 600
c. Loan interest (6 000*8%) 480
d. Equity(6 000+ 1 380(RE) + 1 800(revaluation)) 9 180
e. Non-current Liability 6 000
Cost of sales – (43 800 – 600(license)) = $ 43 200
Half of these goods are net of a discount of 10% (21 600/90% - 21
600) = 2 400
Therefore cost of sales – (43 800 -600 +2 400) = $ 45 600

ii)
Return on Capital Employed 1 980/(9 180+6 000)*100% 13%
Net asset (total assets-total 53 580/(9 180+6 000) 3.5 times
liabilities) turnover
Gross profit margin 7 980/53 580*100% 15%
Operating profit margin 1 980/53 580*100% 3.7%
Annual sales per square meter of 53 580/7 200 $ 7 442
floor space

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Gearing (Debt/Equity) (6 000/9 180)*100% 65.4%

iii) Introduction
The following report is prepared to comment on the performance
and gearing of Kronos Co. when compared to the sector. It is
important to notice that there are some adjustments that should
be made in order to improve the comparability and all has been
correctly treated above.
Performance
When the ratios calculated using the reported figures is
compared to the sector the performance of Kronos has been
superior in almost every instance other than annual sales per
square meter of floor space which is marginally lower than the
sector. The ROCE ratio reflects a return of more than three times
the return of the sector by taking a high value of 58.5%. This
superiority is supported by the net asset turnover and the gross
profit margin as well. However the latter is almost in line with
the sector and when the annual sales per square meter is
considered we can assume the sales volume is comparable
between Kronos and the sector.
As indicated in the question if Atom was to acquire Kronos many
of the figures in profit or loss statement would be affected
unfavourably thus reducing the superiority of ratios and a
different picture emerges when the relevant adjustments are
made. In fact the recalculated ratios except the asset turnover
will fall even below the sector average due to the favourable
trading conditions. The most dramatic effect is on ROCE which
will be 27.8% lower than the sector. The reason is both the two
components included in ROCE, profit margin and net asset
turnover has been affected negatively.
However the Net asset turnover remains considerably higher
than the sector. The gross profit margin deteriorate from 22.3%

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to 15% caused by a combination of reduced revenue and the loss

on the discount in purchases. The reduction of saeles per square
meter of floor space is caused by the reduced volume from the
removal of branded sales.
Gearing
The gearing ratio of nil in unadjusted figures is not meaningful
due to previous debt being classified as current liability due to
its imminent redemption. When these debt are replaced by 8%
loan the gearing of the entity is much higher than the sector.
There is no information as to how the increased finance cost is
compared to the sector finance cost. If such a information was
available, it may give an indication of Kronos’ credit status
although the doubling of the rate imply a greater degree of risk
in Kronos seen by the lender.

Summary and advice

Based upon the reported figures Kronos seems to be a very
favourable investment. But when Kronos’ performance is
assessed based on the results and financial position which might
be expected under Atom’s ownership the ratios are generally
inferior. It is possible that under Atom’s ownership Kronos’ profit
margins could be improved, perhaps coming to a similar
arrangement regarding access to branded sales as currently
exist with Minerva, but with a different entity.

10) Merlyn Co.

i)
Return on Capital 3 780/(23 940+7 200)*100% 12.1%
Employed
Net Asset turnover 50 400/(23 940+7 200) 1.6 times
Gross profit margin 12 600/50 400*100% 25%

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Operating Profit margin 3 780/50 400*100% 7.5%

Current Ratio 10 080/6 480 1.6:1
Average inventory 37 800/((7 470+9 180)/2) 4.5 times
turnover
Trade payables payment 4 860/39 510*365 45 days
period
Debt to equity 7 200/23 940*100% 30%

ii) Performance
The ROCE ratio is an important ratio in analysing the
performance of a company and in this situation Merlyn’s ROCE
ratio of 12.1%is relatively underperforming when compared to
the sector average 16.8%. The main cause this for this must be
the lower gross profit margin. A possible explanation is that
Merlyn is selling the products at a lower margin to improve
the sales. This is further supported by the fact that inventory
turnover is 50% better than the sector.
The lower gross profit margin has also resulted in a lower
than sector Operating profit margin of 7.5% compared to the
sector average of 12%. However Merlyn’s operating costs at
17.5% (25 - 7.5%) appears to be under better control than the
operating costs in the sector of 23%. This may indicate that
Merlyn has a different cost classification between cost of
sales and operating expenses from the other entities in the
sector or may be the other entities are incurring more costs
on advertising in order to support their high margins.
The other component included in ROCE is the Net asset
turnover. Indeed if Merlyn’s policy is to charge lower margins
then a high net asset turnover is expected. But in this situation
at 1.6 times the net asset turnover of Merlyn is only marginally
better than the sector average of 1.4 times. However the net
asset turnover of Merlyn would have been slightly distorted

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due to the property revaluation and by whether the

development expenditure should be included with in net
assets for this purpose, as the net revenues expected have yet
to come on stream. If these were adjusted the net asset
turnover of Merlyn would be much higher.
Liquidity
The current ratio of Merlyn at 1.6:1 is comparatively higher than
the sector average of 1.25:1 which is worryingly lower than the
expected norm of 2. However as Merlyn is a retail entity, most
of the retail entities operate comfortably with low current
ratios due to the fact that their inventory is directly turned in
to cash and also they have very less amount of receivables if
any. Considering all these facts it could be said that the
current ratio of Merlyn is too high than expected. Also, as
Merlyn has lower level of inventory, it must also mean that
Merlyn has a very less amount of payables. The low payables
period of 45 days may reflect that the suppliers are being
cautious about extending the credit period to Merlyn but there
is no real evidence for this.
The gearing ratio of 30% is lower than the sector average
which means Merlyn is less risky than the entities in the
sector. Merlyn also has more than enough tangible assets to
secure the borrowings. Therefore Merlyn could borrow more
loans in future to fund its activities. However it should be
cautious not to increase the risk unnecessarily.
Conclusion
Merlyn is right to be concerned about the declining profitability
as its profitability is lower than that of the rival businesses
and it seems that the decision to increase revenue through
lower margins is not successful. The information about its
rival businesses suggests that the current market appears to

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favour a strategy of higher margins as being more profitable.

In liquidity aspect Merlyn is doing better than the sector.

11) Wolf Co.

i) Introduction
The following report is prepared to comment on the
performance and cash flow of Wolf Co. for the year ended 31st
December 20X3. The following ratios are used in the analysis
below,
20X3 20X2
Gross profit margin (8 560/20 400)*100% (5 520/13 800)*100
= 42% =40%
Operating profit (4 720/20 400)*100% (2 880/13 800)*100
margin =23.1% =20.9%
Interest Cover (4 720/520) (2 880/80)
=9 times =36 times
Effective rate of tax (1 800/4 200*100) (800/2 800*100)
=42.9% =28.6%
Net profit (before (4 200/20 400)*100% (2 800/13 800)*100%
tax) margin =20.6% =20.3%
Operating expenses (3 840/20 400)*100% (2 640/13 800)*100%
percentage =18.8% =19.1%

Performance
Indeed the observation of board member is accurate and cause
concern as a large increase in sales has not led to a
proportionate increase in profit. To find out the reasons more
investigation is required.
The most obvious reason would be that Wolf has increased its
sales by discounting prices and cutting profit margins. But the
ratios prove that this could not be the reason as the gross
profit margin has risen to 42% during the year.

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Another possible reason is that the cost of the entity is

becoming uncontrollable, however this possibility is also ruled
out by the ratios as Operating expenses percentage has
dropped slightly.
It seems that the culprit of this disparity would be the finance
cost. The interest cover has significantly fallen to 9 times from
36 times. The other potential cause would be the tax expense.
The effective rate of tax has dramatically evolved from 28.6%
to 42.9%. Form the information available it could be judged that
the reason for this differences in tax rate would be either a
material adjustment of under provision in previous year or an
increase in the tax rate levied by the government.
If the same tax rate as previous year has been used the profit
would be $ 2 999 200 (4 200* (100% - 28.6%) which would be a
50% increase which is slightly higher than the increase in
revenue.
The other significant observation when comparing the two
years that Wolf has a significant increase in its tangible and
intangible non-current assets which couldn’t be attributed to
usual internal growth. It is most likely that perhaps Wolf has
acquired another business. Indeed the decreased bank balance
and the issue of 8% loan notes support the above assumption.
It may be that these assets were part of the business
acquisition and are surplus to requirement s hence classified
as held for sale.
Conclusion
It can be concluded that although reported performance has
declined it is probable that the future results may improve due
to the current year investments. It would have been better if
shares were issued to lower the finance costs and the board
could have postponed the dividends.

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12) Hex Co.

i) a.
Gross Profit margin (14 000-5 600)/(35 000-12 37.5%
600)*100%
Operating profit margin (8 260-4 060)/(35 000-12 600)*100% 18.8%
Return on capital (8 260-4 060)/(20 440-5 040-4 40%
employed 900)*100%
Net asset turnover (35 000-12 600)/(20 440-5 040-4 2.13
900) times
The capital employed of Quentin which was sold is $ 4.9 million.
(5.6-0.7)
b. n
Gross Profit margin 8 400/25 200*100% 33.3%
Operating profit margin (8 400-2 450-3 360)/25 200*100% 10.3%
Return on capital employed 2 590/(9 100+2 800)*100% 21.8%
Net asset turnover 25 200/(9 100+2 800) 2.12 times

ii) Introduction
The following report is prepared to comment on the
performance and position of Hex Co. for the year ended 30th
June 20X5 when compared to previous year. However for
comparable purpose necessary adjustments are done in the
above requirement (i). The most relevant ratios to compare
would be the ratios of 20X5 and the adjusted ratios of 20X4.
Performance
The comparative sales has been increased by 12.5% even after
excluding the effect of the sold division but the gross profit
margin has fallen considerably as a result of the sale f the
division. Quentin’s gross profit margin is 44.4% and is superior
to that of the business.
There is also a significant fall in operating profit margin which
is mainly due to the lower gross profit margins and also the

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operating expenses are proportionately higher than the

previous year. (23% compared to 18.8%) This is may be due to
the expenses which are associated with the selling of the
division.
The most dramatic deterioration could be seen in the fall of
ROCE which has gone from 40% to 21.8%. As the net asset
turnover has remained more or less the same the main culprit
for this deterioration is the fall in operating profit margin.
While it is questionable why the management of Hex has sold
the most profitable part of the business, it still don’t fully
explain the dramatic fall in performance. Further
investigations are needed regarding this which could be an
internal problem or an external issue such as an economic
recession. Investigation of the sector averages will provide a
more meaningful analysis.
It is also very questionable that the company has paid high
dividends during the year just to persuade shareholders to vote
for the selling of most profitable part of the business. The
dividends represent almost double the value of the profit. After
paying the dividends it seems like the rest of the proceeds have
been used to pay down the half of 10% loan notes. This has
reduced the finance cost and interest cover but as 10% Is much
lower than the ROCE of 21.8% it will have had a detrimental
effect on overall profit available to shareholders.
Conclusion
When all facts are considered it seems that it was an unwise
decision to sell the most profitable part of the business at what
appears to be a very low price. It was the main reason that
contributed to the declining of performance. Also the proceeds
of the sale should have been used to increase capacity or fund
long term projects rather than returning it to shareholders.

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iii) Although gym is operating as a not-for-profit business,

borrowing a loan is a commercial activity. The main aspect of
granting a loan is how secure the loan would be. To determine
this a form of gearing should be calculated perhaps by using
already existing assets to net assets. If this ratio is high, it
would mean that more borrowings would increase risk.
The next aspect is to heck whether the gym can repay the loan
and interest. This may be determined by the statement of
comprehensive income. A form of interest cover should be
calculated by maybe considering excess income over
expenditure compared to interest payments. Higher the ratio
there will be less risk.
As such the calculation would be done for all the 4 years to
identify any trends. It would be also useful to investigate the
trend of income in the past 4 years. Also it is important to
investigate information such as the market value of the assets
which would be presented as security and whether any one-
off income or donations has been included in the income.

13) Thawne Co.

i) If Flash has been consolidated -

Revenue (51 600+9 600-4 800(intra group)) 56 400

Cost of Sales (38 040+6240-4 800(intra group)) 39 480
Gross Profit 16 920
Other Income (2 040-180(rent)-600(dividend)-300(interest)) 960
Operating expenses (12 780+1 920-180(rent)) (14 520)
Profit from operations 3 360
Finance costs(900+540-300(interest)) (1 140)

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Gross profit margin (16 920/56 400)*100% 30%

Operating profit margin (3 360/56 400)*100% 6%
Interest Cover (3 360/1 140) 2.9 times

ii) Performance
When looking at the figures which were calculated to Thawne
group it could be seen that the performance has declined in the
current year in terms of revenue, margins and interest cover.
This raise a question over the disposal of Flash Co. as the group
appears to performing worse without Flash. The individual
results of Flash Co. will confirm this as its ratios are far
superior than that of the group in terms of profit margins.
But there are some issues that should be investigated. Half of
the Flash’s revenue is made by selling to Thawne at a much
higher margin of 40%. It is possible that Thawne deliberately
purchased goods from Flash to inflate the performance of
Flash in order to achieve a better selling price for Flash.
Another issue is that Flash uses Thawne’s properties and is
paying a rent which is much lower than the market rate. This
will again inflate the operating margin of Flash.
It appears that Thawne has suffered lower margins due to the
actions it took to inflate Flash’s performance. Moreover
Thawne has received a dividend of $ 700 000 and an interest of
$ 300 000 for a loan given. This loan need to be further
investigated to determine whether the interest rate is in align
with the market rate. These income will be lost when Flash is
sold.
The only area that Flash underperformed comparatively is
when considering the interest cover. Perhaps Thawne is
charging a higher rate of interest from Flash in return of less
rent and high purchases.

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After Flash has been sold there are some issues that Thawne
should look into. To cover up the income lost due to the sale, it
can look into renting the property used by Flash at the market
rate. Moreover regarding the loan given to Flash, Thawne
would be able to charge interest at the market rate.
Conclusion
When all facts are considered the sale of Flash seems to be a
reasonable move. Though Flash seems to be generating high
margins when the rent and goods are being adjusted for its
performance is not as attractive. As long as Thawne is not
relying on Flash as its main supplier the sale seems
reasonable.

iii)
($’000)
Proceeds 15 000
Net assets at disposal(6,000+4,200) 10 200
Goodwill at disposal 4 200
NCI at disposal (2 280) (12 120)
Gain on disposal 2 880

Goodwill (W1)
($’000)
Consideration 10 200
NCI at acquisition 1 800
Net assets at acquisition(6,000+1,800) (7 800)
Goodwill at acquisition 4 200

Non-controlling interest (W2)

($’000)

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NCI at acquisition 1 800

NCI share of post acq. Profits(4,200-1,800)*20% 480
NCI at disposal 2 280

14) Hawk Co.

i)
a. Whether the low price at which the goods are being sold to
Shark is undermining the group’s overall profitability.
Assuming the consolidated financial statements has been
accurately prepared, the intragroup trading has already been
eliminated, this the pricing policy will have had no effect on
these financial statements. The comment is incorrect and
reflects a misunderstanding of the consolidation process.

b. The profit for the year has increased by $ 900 000 which is up
20% on last year, but the shareholders has expected a higher
rise in profit as Shark is supposed to be more profitable.
There are two issues regarding this statement. First the
current year’s results cannot be compared with the previous
year as in the previous ear Hawk was a single entity while in
the current year Hawk has acquired Shark. Secondly the
consolidated statement for the year ended 31st December 20X4
only includes the six months profit of Shark. Therefore in the
future the effect of full year’s profit of Shark will be included
driving the profits more higher.
c. The shareholder has calculated the EPS for 20X4 as $ 0.13 (5
400/41 400*100) and for 20X5 at $ 0.125 (4 500/36 000*100%)
and, he is worried that although the profit has increased by
20% the EPS has barely changed.
The calculation of EPS for the year ended 31st December 20X4
is incorrect due to two reasons. First, only the profit
attributable to shareholder should be used.

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Second the new 5.4 million shares were in issue for only 6
months. Therefore it should be weighted by 6/12. Thus the
correct EPS for 20X4 is $13.3 cents (5 130/38 700*100%). This
gives an increase of 6% than the last year but its still less than
the increase in profit. The reason why the EPS may not have
increased in line with the profit is that the acquisition is
financed by a share exchange which increased in the number
of shares in issue. Thus the EPS take into account of the
additional consideration used to generate profit. This is why
the EPS is often said to be a more accurate reflection of
performance than the trend of profits.
d. The share price at the end of the year is $ 2.30, how does this
compare with the share price immediately before the
acquisition of Shark.
The increase in the share capital is 5.4 million shares and the
increase in share premium is $ 5.4 million which means the
total proceeds for the 5.4 million shares was $ 10.8 million
giving a share price of $ 2 at the date of acquisition of Shark.
The current price of $ 2.30 presumably reflects the market’s
favourable view of Hawk’s current and future performance.

ii)
20X4 20X3
ROCE (6 750/66 870)*100% (5 400/47 700)*100%
=10.1% =11.3%
Net asset turnover (41 850/66 870) (25 200/47 700)
=0.63 times =0.53 times
Gross profit margin (8 370/41 850)*100% (6 480/25 200)*100%
=20% =25.7%
Operating profit margin (6 750/41 850)*100% (5 400/25 200)*100%
=16.1% =21.4%
Introduction

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The following report is prepared to comment on the

performance of Hawk Co. for the year ended 31st December
20X4 in comparison to the previous year of 20X3. However, the
financial statements of these two years are not directly
comparable due to the fact that Hawk has acquired a
subsidiary at the beginning of the current year. The ratios
calculated above using the reported figures will be used in the
following analysis.
Performance
When observing the ratios for the current year it seems that
the performance of Hawk Co. has marginally decreased during
the current year. It is reflected by the operating profit margin
which shows a decrease of almost 25% than the last year. The
main reason for this seems to be the over 22% fall in gross
profit margin. However, the group seems to have relatively
lower operating expenses amounting to around 4% of the
revenue.
The ROCE has fallen to 10.1% from 11.3%. The main culprit is the
lower profit margins. The effect of the lower margins has been
mitigated by the improvement in net asset turnover.
Eventhough there is an improvement in net asset turnover it
seems almost too low at 0.63.
According to the above analysis it seems that the acquisition
of Shark has been unfavourable to Hawk. But this might not
be the case because there are some additional factors to be
considered. As mentioned above only 6 months profit of Shark
has been included in the current consolidated statement of
profit or loss. However the consolidated statement of financial
position contains 100% of the net assets of Shark. This has
worsened the ROCE. This distortion would be corrected in the
future period as full year’s profit of Shark would be accounted
for.

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Another issue to be considered is that it seems that the net

assets and the goodwill of Shark has been included in the
consolidated statement of financial position at fair value while
the assets of Hawk is accounted under historical cost method.
As the value of plant and property has been rising throughout
the years this flatters the ROCE of 20X3. This is because the
statement of financial position for 20X only consists of the
assets of Hawk which is at historical cost, which may
considerably understate their fair value and may overstate the
ROCE.

Conclusion
In summary although at first sight it seems that the acquisition
of Shark has had a unfavourable effect worsening the group’s
performance when the distorting factors are considered it is
clear that the underlying performance is much better than
portrayed by the ratios. It is also evident that the contribution
of Shark for the group’s overall performance is significant and
will be much better in the future periods.

15) Multiplex Co.

i)
20X6 20X5
Operating profit (9 840/123 200)*100% (14 880/127 200)*100%
margin =8% =11.7%
ROCE (9 840/274 000)*100% (14 880/171 712)*100%
=3.6% =8.7%
Net asset (123 200/274 000) (127 200/171 712)
turnover =0.4 times =0.7 times
Current ratio (12 784/23 936) (23 112/18 952)
=0.5:1 =1.2:1

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Interest cover (9 840/7 360) (14 880/8 160)

=1.3 times =1.8 times
Gearing (120 320/153 680)*100% (135 872/35 840)
(Debt/Equity) =78.3% =379%
Performance
Multiplex Co.’s revenue has declined during the year. As the
company has had exactly the same number of sails as last
year, the decline must be due to either a decrease in
passengers or charging lower prices. Further investigations
should be done regarding this.
Not only the revenue, the operating profit margin has also
deteriorated during the year. As the same cruising schedule
have been carried out it could be assumed that most of the
operating expenses were same as the last year. It has been
noted that there has been an increase in cost of licenses
charged by harbors during the year, which might be the cause
for the decrease in operating margin as amortisation would
be higher. This only occurred in June so the full impact will be
felt in the coming year.
There seems to be many contracts which should be renewed
in the near future. This would lead to an increase in costs in
the future and might also result in Multiplex not being able to
use those harbors. If that was the case it would have a strong
unfavourable impact on the revenue and profit margins.
The ROCE ratio has declined significantly during the year
which may be due to two reasons. First the deteriorating profit
margins would affect ROCE negatively. Secondly Multiplex has
revalued its assets in the current year which has resulted in
a big revaluation surplus being included in equity which was
not there previous year. This has also affected ROCE
negatively. When ROCE is calculated without this it would be
6.2% which still represents a decline in overall performance.

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There is a dramatic decline in net asset turnover. Again

revaluing the property has made the two ratios incomparable.
If net asset turnover was calculated with out the effect of the
revaluation it would be 0.78 which is a slight improvement.
This improvement does not come from revenue as it has
declined during the year, rather it comes from the decrease in
capital employed which was a result of paying out some of the
loan notes.
Position
It is important to notice that the value of the non-current
assets has risen dramatically over the period by $ 117.6 million.
Most of it is attributable to the revaluation but it is evident that
Multiplex has acquired some new assets but it is not clear
what they are and looking at the value they don’t seem to be
significant.
The level of debt is a major concern and appears to incur a
large annual repayment. The reduction of the current ratio can
be attributed to the large decrease in cash which would be a
result of debt repayments made. It is worth noting that the
company is mostly financed by debt and there is an
opportunity for a new investor to consider putting more money
to the business.
Areas of concern in the future
A major concern is the ten licenses which should be renewed
in near future. This would increase the costs and affect the
profits negatively.
The debt appears to be being repaid in annual installments of
$ 15.2 million which means the company need to generate
more cash for this purpose. In addition to this the $ 7.2 million
interest means that the business cannot return any cash to
investors.

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Finally Multiplex is a business which is relying on large

complex items of non-current assets. It has been noted that
there is criticism in under-investing in these which could lead
to large potential outlays in the near future to replace assets.
Conclusion
Multiplex Co. has not shown weakened performance in the
current year but appears to be a profitable business at its
core. The major concern is the level of debt. Any investor who
is able to reduce these amounts as part of any future
purchase, would put the business in much stronger cash
position,

16) Firestorm Co.

i) Cs

20X1 20X0
Gross Profit (25,900/64,820)*100% (20,580/57,190)*00%
Margin =40% =36%
Operating Profit (15,820/64,820)*100% (11,970/57,190)*100%
margin =24.4% =20.6%
Interest Cover (15,820/3,570) (11,970/2,940)
=4.4 times =4.1 times
Cash generated (20,930/15,820)*100% (12,600/11,970)*100%
from operations/ =132.3% =105.3%
profit from
operations %
ii) Performance
Firestorm Co’s revenue has increased during the year by 13.3%
perhaps due to the geographical expansion. The loss of a
competitor during the year should have been favourable for

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the company as the rival’s customers would seek alternative

producer for the product. The impact of the new stores opened
would be much less significant this year. But the impact on
new stores would be significant in the future periods when the
full year’s income is earned through the stores.
Firestorm’s gross profit margin has increased from 36% to
40%. Firestorm might have been able to charge higher prices
for Item Z as its demand has been higher. Also, the better
negotiations with the suppliers would have led to a lower
purchase price.
The operating profit margin has also increased but in a lower
proportion than the gross profit margin. This would mean that
the operating costs have increased. Indeed analysis will show
there was an increase in operating costs of 17% and the
revenue only increased by 13%. This increase might be due to
some one-off costs related to the geographical expansion as
well as acquiring of properties and commencing new stores.
Interest cover has improved despite the higher interest costs
due to the issue of loan notes. This means Firestorm is
generating enough profits to service its interest.
Cashflow
Firestorm Co. is generating excellent cash from operations in
both the years when compares to the operating profit. The
cash generate from operations can easily cover the interest,
dividend and also tax. This means the company have sufficient
cash for its future expansions.
The working capital management of the company seems to be
stronger too. The inventory levels have fallen despite the
increased sales. This may be due to the high demand for item
Z. There is a high amount of receivables which might be a
effect of acquiring new customers of the rival. The increased
payables level is a result from the increased trading levels

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together with the increased payment period followed by the

negotiations with the suppliers.
The reason for the net cash outflow in the year is due to the
acquisition of large amount of property, plant and equipment
which can be linked to the geographical expansion and the
acquisition of new store.
The company has raised $ 7 million through issue of loan
notes. It also worth noticing that the finance costs are above
the interest paid This suggest that the effective rate of interest
on their overall funding is above the interest paid which will
result in paying a redemption premium in the future.
Conclusion
The board member should be reassured by pointing out that
cash inflows and outflows arise due to combination of three
activities, Operating, Investing and Financing. The increased
profits are reflected in the operating activities. However, the
net outflow is due to the investing activities carried out by the
business which will improve the profits I the future periods.

17) Nightwing Co
i)
Return on capital (16 200-4 500)/(134 500-45 000)*100 13.1%
employed

Net Asset turnover (135 000-27 000)/(134 500-45 000) 1.2 times

Gross profit margin (29 700-8 100)/(135 000 27 000)*100 20%

Operating profit margin (16,200-4500)/(135,000-27,000)*100 10.8%

ii) Introduction
In the case of Nightwing Co. the financial statements of the
two years are not directly comparable due to the fact that the

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financial statements for the year 20X9 includes three months

profit and net assets of Blockbuster. Also additional 10% loan
notes were issues to finance the acquisition. None of these
items were included in the financial statements of 20X8.
Performance
ROCE is an important ratio when analysing the performance
of a company. The ROCE of 12% in 20X9 compared to 10.5% in
20X8 shows a 14.3%improvement. When calculating ROCE
excluding the effect of Blockbuster it portrays even more
improvement. It seems like purchase of Blockbuster has had
a negative impact on ROCE. However it should be noted that
only 3 months profit of Blockbuster is included in the
statement of profit or loss whereas all the net assets of it is
included in the statement of financial position which will
impact negatively on ROCE. It would be fair to assume that in
the future periods when the full profits of Blockbuster is
included it will affect favourably to ROCE.
The ROCE should be further investigated by looking in to the
ratios which make up the ROCE, asset turnover and Operating
profit margin.
When looking at the reported figures it is clear that the reason
for the improvement in ROCE is the increase in Operating
profit margin from 9.1% to 12%. The net asset turnover has
actually decreased to 1 from 1.16. Gross profit margin is same
both the years.
When the effect of Blockbuster is excluded the picture
changes and it could be seen that the improvement of ROCE is
supported by both an increase in operating profit margin and
the net asset turnover. However the gross profit margin has
decreased. It could be assumed that the purchase of
Blockbuster has improved Nightwing’s profit margins but has
affected negatively to asset turnover. However this

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observation could be misleading as the fact that Blockbuster

was acquired 3 months before the year end would affect net
asset turnover as well.
Liquidity
The decrease in current ratio is alarming and is a cause of
concern. At 1.67 in 20X8 it was at acceptable range but in 20X9
it has fallen to 1.08 which is extremely low. It can be seen in
the statement of financial position that the reason for this is
the significant decrease in bank balance and the dramatic
increase in trade payables.
An analysis of the movement of retained earnings reveals that
a dividend of $ 4.95 million.. It seems unwise to pay such high
dividends at a time of expansion with demand on cashflow. If
the dividends were not paid the bank balance would have been
$ 5.4 million and the current ratio would e 1.3:1 which is still
low but would be reassuring than 1.08:1.
The gearing of the company has increased largely due to the
issue of 10% loan notes to fund the acquisition. It could be
arguably said that a share issue would have decreased the
gearing but the current gearing level is not too high and is still
acceptable. The finance cost of 10% would be more than
covered by the prospect of future high returns by Blockbuster.
Conclusion
The overall performance of Nightwing has improved during
the year, and it could be assumed to increase further when the
full year’s profit of Blockbuster is included. The concern is on
the liquidity. The company should look into better working
capital management. Blockbuster seems to be a profitable and
successful acquisition.
iii) Further information that would be useful –
The statement of financial position of Blockbuster to get a
better idea on the working capital cycle compared to that of

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Nightwing as the group has a low cash balance at the year

end.
The statement of cashflows in both the businesses would be
useful to find why the cash balance is low.
Any one-off expenses in acquisition of Blockbuster which
would affect the profit margins should be taken into
consideration.
The nature of Blockbuster’s business in comparison to that of
Nightwing’s It would be useful to know if Blockbuster is a
competitor of Nightwing or perhaps a supplier of goods. This
would help in future analysis.
A breakdown of Blockbuster’s major customers to check if any
has left due to the change in ownership.
Whether the acquisition of Blockbuster include any
consideration payable dependent on Blockbuster’s results. If
so it should be included as a liability at its fair value.

18) Hulk Co.

i) Retained Earnings (A) - $ 11 248 000
Non-controlling interest (B) – $ 2 992 000
W1 - Retained Earnings (A) –
($’000) ($’000)
Parent’s RE 10 560
Subsidiary post acq .profits 2 800
Professional fees (400)
FV depreciation (240)
URP(3,200-2,000) (1 200)
1 360
80% share 1 088
11 248
W2 -NCI
($’000)

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NCI at acquisition 2 720

NCI% * subsidiary post acq. Profit 560
NCI% * FV depreciation (48)
NCI% *URP (240)
2 992

ii)
20X3 20X2
Current Ratio 24 320/17 040 23,000/12,480
=1.4:1 =1.8:1
ROCE 11 600/(8 800+4 800+2 10,160/(6,400+1,600+
992+11 248+9 200)*100% 7,520+5,600)
= 31.3% =48.1%
Gearing 9,200/(8,800+4,800+2,992 5 600/(6 400+1 600+7
+11,248)*100% 520)*100%
=33% =36.1%

iii) Performance
The ROCE has declined significantly from 20X2. However the
operating profit has increased slightly. The reason for the
decline in ROCE is the increase in capital employed which has
gone from $ 21.12 m to almost around $ 40 m. This will be partly
because Ross Co’s acquisition is funded by issue of sahres.
The ROCE is looking worse because it contains only 6 months
of profit of Ross while the whole of liabilities and non-
controlling interest of Ross is increased.
As Ross Co. made a profit after tax of $ 5.6 m in the year, six
months of this would have made a significant increase in the
overall profit from the operations. If excluded from the
consolidated SOPL it suggests that there is a potential decline
in the profits made by Hulk Co.
Position

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The current ratio has decreased in the year form 1.8:1 to 1.4:1.
Some of this would be due to the fact that Ross is based on
service industry and tends to have a small amount of
inventory. The large fall in inventory holding period explains
this.
The increase in receivable collection period could mean that
Ross has a weaker position than Hulk Co.. While the size of
the customers may mean that there is little risk of
irrecoverable debts, Ross Co. may have a small or even
overdrawn, cash balance due to this long collection period.
The gearing has reduced from 36.1% to 33%. This is not due to
reduced levels of debt as these have actually increased during
the year. This is likely ot be due to the consolidation of the debt
held by Ross Co., as Hulk Co has not taken additional loans
during the year.
This increase in debt has been offset by the significant
increase in equity, which has resulted from the issue of
shares.
Conclusion
Ross Co. is a profitable company and is likely to have boosted
Hulk Co. profits, which may be slightly in decline. Ross Co. may
have more debt and have potentially put pressure on the cash
flow of the group, but Hulk Co. seems to be in a strong position
to cope with this.

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19) Loki Co.

i) Individual financial statements of Loki Co.
(’000)
Sales Proceeds 210 000
Cost of investment (147 000)
Gain on disposal 63 000
Consolidated statement of Loki Group
(’000)
Sales Proceeds 210 000
Goodwill (49 000)
Net assets (182,000+35,000(FV)) (217 000)
NCI 46 200
Loss on disposal (9 800)

ii)
20X5 20X4
Gross Profit margin 68 502/149 436*100% 68 117/151 774*100%
=45.8% =44.9%
Operating Profit 17 850/149 436*100% 20 419/15 774*100%
margin =11.9% =13.5%
Interest Cover 17 850/12 460 20 419/11 340
=1.43 times =1.8 times
iii) Performance
The revenue of the group has declined during the year. The
scenario states that the revenue of Thor has remained
constant therefore this would be a decline in the revenue of
other companies in the group.
Eventhough the revenue has declined the gross profit margin
has improved from 44.9% to 45.8%. It could be observed that
Thor has a n exceptionally high geoss profit margin. This

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reveals that other companies of the group is operating at

lower gross profit margins.
The operating profit margin for the group has decreased over
the year and it is surprising as there is a dramatic
improvement in Thor’s individual operating profit margin. But
this improvement need to be further investigated as there
seem to be some issues.
Firstly Thor has recorded a profit of disposal of properties of
$ 1.4 million which will inflate its operating profit in the current
year. In addition the lower rent charged by Loki has also
contributed to this improvement.
Also when looking at the share of profit from associate it
represents almost 40% of the overall profit of the group. This
raises a question over the profitability of Loki Co. and the other
subsidiaries which perhaps may be loss making.
The joining fee for the directors is a one-off cost to Loki.
However this would not affect the consolidated statements as
if not for Loki the same amount would have been paid by Thor
as director’s bonus.
The decline in interest cover is partly due to the decrease in
operating profits and partly due to the increase in finance
costs. As Thor has high level of debt and relatively low interest
cover, once it is disposed this ratio in Loki group should
improve in the future.
The sale of Thor which is the best performig part of the
business is rather surprising especially due to it was sold at
a loss. The loss on disposal should be included in the
consolidated statements and it would further reduce the
operating profits. But may be Loki thought that real value in
Thor is in employing the two founding directors.
Conclusion

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The disposal of Thor is does not appear to be a good move, as

it seems that Loki is losing its most profitable part. It is also
rather surprising that the directors of Loki has decided to go
into direct competition with Thor.

20) Polka and Stripe Co.

i)
Polka Co. Stripe Co.
Gross profit 54 000/225 000*100% 63 000/198 000*100%
margin =24% =31.8%
Operating Profit 22 500/225 000*100% 28 800/198 000*100%
margin =10% =14.5%
Trade payables 31 500/171 000*365 10 800/135 000*365
days =67 days =29 days
Return on 22 500/(81 000+40 500) 28 800/(54 000+13 500)
capital =18.5% =42.7%
employed
Gearing 40 500/81 00*100% 13 500/54 000*100%
(Debt/Equity) =50% =25%

ii) Performance
Although overall revenue is higher in Polka Co. it could be
seen that Stripe Co. has a higher gross profit margin. The
reason for this might be because Stripe directly purchase
goods from a supplier hence does not have to incur
manufacturing costs unlike Polka Co. But it is rather
surprising that the Gross profit margin of Polka is lower than
Stripe considering the fact that Polka sells branded clothing.
May be Polka has suffered severe competition and had to
lower the selling prices to attract more customers.

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Polka Co’s gross profit margin would further fall considering

the fact that the disposed division had a gross profit margin of
40% which far superior than the overall ratio. It could be
assumed that the gross profit margin of the rest of the Polka
Co. is much lower than the reported ratio.
The operating profit margin of Stripe is 4% higher than Polka
which is rather not surprising due to the superior gross profit
margin of Stripe Co. Further Polka would have higher costs as
it operates its own stores while Stripe uses department
stores. Moreover it is worth noticing that the operating profit
margin of Polka is inflated this year due to the inclusion of
non-recurring income such as the profit on disposal and
central services income.
Due to the higher operating profit margin and lower debt
Stripe has a much better ROCE than Polka Co.
Position
Polka Co. has a gearing ratio which twice as Stripe Co. as it
has higher long term debt. This reflects that Polka is a much
riskier business than Stripe. As the gearing of Stripe is low, it
should be able to secure debt finance if needed for its planned
international expansion.
Polka Co. is facing much higher finance costs due to the fact
that its mostly financed by debt compared to the equity
financed Stripe. Both the companies have enough profits to
cover the interest expenses but it could be seen that Polka
has much lower cash balance than Stripe. Pola should ensure
that it has enough cash in long-term to meet the cash
requirements.
Trade payables days are 67 For Polka and 29 for Stripe which
is consistent with the fact that Polka has much lower cash
balance. This could lead into issues with suppliers in Polka. It

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further reflects that Polka should monitor its cash balance

and ensure that it can trade in long term.
Conclusion
Overall, it would appear that Stripe Co is in a better financial
position than Polka Co, as it is more profitable, has lower debt,
and should be able to access additional resources for its
planned expansion.

Preparation of Single Entity Financial Statements

1) Phoenix Co.
i)
Phoenix Co.
Statement of profit or loss and other comprehensive
income
for the year ended 30th September 20X1
($’000)
Revenue 203 790
Cost of Sales (126 150)
Gross Profit 77 640
Distribution Costs, (16 500)
Administration Costs(18,420-780+360) (18 000)
Finance Cost (1 709)
Profit before tax 41 431
Income tax expense (11 400)
Profit for the year 30 031

Other Comprehensive Income

Revaluation of property 6 750
Total Comprehensive income 36 781
ii)
Statement of Financial Position
As at 30th September 20X1

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Non-Current Assets
Property 46 500

Current Assets
Inventories 21 600
Trade receivables(28,260+6,000-360) 33 900 55 500
Total Assets 102 000

Equity and Liabilities

Equity shares of $ 0.50 each 3 600
Retained Earnings(840+30,031) 30 871
Revaluation surplus (9,000–2,250) 6 750
Other 914
Total Equity 42 135

Non-Current Liabilities
8% Loan notes 17 355
Deferred tax 4 050
21 405
Current Liabilities
Trade payables 14 700
Overdraft 6 900
Current tax payable 11 640
Factor loan 5 220
38 460
Total Equity and liabilities 102 000

Workings
a) W1 - Cost of sales
Per trial balance 124 650
Depriciation 1 500
126 150

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b) W2 - Property
Land Building Total
Cost 15 000 30 000 45 000
Depriciation b/f (6 000) (6 000)
15 000 24 000 39 000
Revaluation gain 3 000 6 000 9 000
Revalued amount 18 000 30 000 48 000
Depriciation for the year (1 500) (1 500)
Carrying amount 18 000 28 500 46 500

c) W3 - Factored receivable
The trade receivables should be recognised as Phoenix still
bears the risk of them. The proceeds of the sale should be
treated as a current liability. The difference between them which
has been charged to administration expences should be
reversed except for the $ 360 000 for uncollectable receivables.

d) W4 - Convertible Loan notes

Year ended 30th Outflow DF Value
September
20X1 1 440 0.91 1 310.4
20X2 1 440 0.83 1 195.2
20X3 19 440 0.75 14 580
Liability 17 085.6
Equity 914.4

b/f Interest Cash paid c/d

17 085.6 1 709 (1 440) 17 437

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e) W5 –Deferred tax
Credit balance as at 30th September 20X0 4 050
(16,200*25%)
Revaluation of property (2 250)
Balance at 1st October 20X0 (1 560)
Charge to SPL 240

f) W6 – Income tax
Current Estimate 11 640
Under provision (480)
Deferred tax 240
Charge to SPL 11 400

2) Sphinx Co.
i)
Sphinx Co.
Statement of profit or loss and other comprehensive
income
for the year ended 31st December 20X5
($’000)
Revenue(385,000-7,000 (c)) 378 000
Cost of Sales (294 420)
Gross Profit 83 580
Distribution Costs, (15 050)
Administration Cost (21,630+3,780 (director’s bonus)) (25 410)
Finance Cost (490+350 (c)) (840)
Profit before tax 42 280
Income tax expense(19,040-840+(6,580-4,340)) (20 440)
Profit for the year 21 840

Other Comprehensive Income

Revaluation of property 4 900
Total Comprehensive income 26 740

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ii)
Statement of Financial Position
As at 30th September 20X1
(’000) (’000)
Non-Current Assets
Property 31 150
Plant and Equipment 36 960
68 110
Current Assets
Inventories(30,590+4,900 (c)) 35 490
Trade receivables 29,540
Non-current assets held for sale 2 520 67 550
Total Assets 135 660
Equity and Liabilities
Equity shares of $ 0.50 each 35 000
Retained Earnings (7,840+21,840) 29 680
Revaluation surplus 4 900
Total Equity 69 580

Non-Current Liabilities
Loan from ABC Co.(7,000+350) 7 350
Deferred tax 6 580
13 930
Current Liabilities
Trade payables 24 570
Overdraft 4 760
Current tax payable 19 040
Accrued director’s loan 3 780 52 150
Total Equity and liabilities 135 660
a) W1 – Non-current assets
Land and building
Carrying amount at 1/1/X5(42-14) 28 000

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Revaluation Gain 4 900

Revaluation 32 900
Buildings depreciation (24,500/14) (1 750)
Carrying amount of land and building 31 150
Plant and equipment
Carrying amount at 1/1/X5 49 000
Plant held for sale (6,300-3,500) (2 800)
46 200
Depreciation (9 240)
Carrying amount of land and building 36 960

Plant held for sale

At 1/1/X5 2 800
Depreciation to the reclassification date (280)
Carrying amount at 1st July 20X5 2 520
Total Depreciation (9 240+280) = $ 9 520
Plant held for sale is carried at the carrying amount and
is no longer depreciated.
b) W2 – Cost of sales
As per the question 288 050
Closing inventory in substance loan (c) (4 900)
Depreciation (9,520+1,750) 11 270
294 420
c) W3 – Substance Loan
The transaction with ABC Co. will not be recognized as
a sale. The control has not been transferred.
Therefore, this should be treated as financial liability
with interest of 10% accruing each year.
As transaction occurred halfway through the year 6
months interest should be included in the finance costs
and the liability. As this is not a sale inventory should be

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recognized at $ 4 900 and should be deducted from cost

of sales.

3) Centaur Co.
i)
(’000)
Draft profit 1 800
Convertible loan notes (108)
Contract revenue 4 480
Contract Cost of sales (2 880)
Depreciation (576)
Property Impairment (384)
Closing inventories 312
Revised Profit 2 644

ii)
Share Share Retained Revaluation Other
Capital Premium Earnings Surplus
b/f 16 000 2 400 5 016 640 -
Profit 2 644
Revaluation (640)
Loss
Bonus Issue 3 200 (2 400) (800)
Convertible 339.2
loan notes
Dividends (2 896)
c/d 19 200 - 3 964 - 339.2

iii)
Statement of Financial Position
As at 30th June 20X5

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(’000) (’000)
Non-Current Assets
Property 12 800

Current Assets
Inventories 3 760
Trade receivables 4 408
Contract Asset 2 000
Cash 8 256 18 424
Total Assets 31 224

Equity and Liabilities

Share Capital 19 200
Retained Earnings 3 964
Other 339.2
Total Equity 23 503.2

Non-Current Liabilities
Convertible loan notes 6 168.8

Current Liabilities 1 552

Total Equity and liabilities 31 224
a) W1- Contract
(’000)
Price 11 200
Total costs (7 200)
Total Profit 4 000
Stage of Completion 40%
Statement of Profit or Loss
Revenue (11,200*40%) 4 480
Cost of sales (2 880)

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Profit (4,000*40%) 1 600

Statement of Financial Position
Cost to date 1 520
Profit to date 1 600
Amount billed to date (1 120)
Contract Asset 2 000

b) W2 – Property
Depreciation – (14 400/25) = 576
Carrying amount – (14 400-576) = 13 824
When revalued to $ 12.8 m, there is a revaluation loss of
1 024
Revaluation Surplus Dr. 640
Draft Profit Dr. 384
Property Cr. 1,024

c) W3 – Inventories
Inventories Dr. 312
Draft profit Cr. 312

d) W4 – Bonus Issue
Share premium Dr. 2 400
Retained Earnings Dr. 800
Share Capital Cr. 3 200

e) W5 -Convertible loan notes

Year Outflow DF Value
20X5 256 0.943 241.6
20X6 256 0.890 228
20X7 6 656 0.840 5 591.2

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Liability 6 060.8
Equity 339.2

b/f Interest Cash paid c/d

6,060.8 364 (256) 6 168.8

4) Garuda Co.
i)
(’000)
Retained Earnings as per trial balance 17 550
Add back issue costs of loan note 900
Loan finance costs (2 349)
Depreciation (5 040)
Income tax expense (720)
Gain on investment 480
Adjusted retained earnings 10 881

ii)
Statement of Financial Position
As at 31st March 20X8
(’000) (’000)
Non-Current Assets
Property, plant and equipment 58 860
Investments 2 340
61 200
Current Assets 61 830
Total Assets 123 030

Equity and Liabilities

Equity shares of $ 1 each 36 000
Revaluation Surplus 8 640

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Retained Earnings 10 881

Total Equity 55 521

Non-Current Liabilities
6% loan note 26 829
Deferred tax 3 960
30 789
Current Liabilities 34 560
Current tax payable 2 160 36 720
Total Equity and liabilities 123 030

a) W1 – Non-current assets
Land and building –
Land Building Total
Cost 4 500 45 000 49 500
Depreciation b/f (18 000) (18 000)
4 500 27 000 31 500
Gain on revaluation 2 700 8 100 10 800
Revalued amount 7 200 35 100 42 300
Depreciation (2 340) (2 340)
c/d 7 200 32 760 39 960
Plant and equipment –
Land
Cost 52 650
Depreciation b/f (31 050)
21 600
Depreciation (2 700)
c/d 18 900
b)
Proceeds 27 000

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Issue costs (900)

Initial Liability 26 100
Interest at 9% 2 349
Interest paid as per the trial balance (1 620)
c/d 26 829

c) W3 - Income tax
Provision 2 160
Over provision (990)
Deferred tax (450)
Charge to SPL 720

Deferred tax
Provision at 31/3/X8 3 960
Provision at 1/4/X7 (2 250)
Movement in provision 1 710
Revaluation (12m*20%) (2 160)
(450)

5) Unicorn Co.
i)
(’000)
Draft profit before tax 47 280
Depreciation (9 680)
Removal of Disposal proceeds (2 000)
Loss on disposal of plant (3,200-2,000) (1 200)
Amortisation of development costs (3 200)
Research and Development expenses(1,120+1,920) (3 040)
Removal of legal provision 320
Legal costs (80)
Finance Costs (960)

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Income tax expense (9,120+(4800-4,640) (9 280)

Profit for the year 18 160

ii)

Statement of Financial Position

As of 31st December 20X3
(’000) (’000)
Non-Current Assets
Property, plant and equipment 65 120
Development Costs 11 840
76 960
Current Assets
Inventory 16 000
Trade receivables 34 480 50 480
Total Assets 127 440

Equity and Liabilities

Equity shares of $ 0.25 each 40 000
Revaluation Surplus(8,000-3,600) 4 400
Retained Earnings(14,000+18,160) 32 960
Total Equity 77 360

Non-Current Liabilities
8% Redeemable preference shares 16 320
Deferred tax 4 800
21 120
Current Liabilities
Trade payables(19,040-320+80) 18 800
Bank Overdraft 1 040
Current tax payable 9 120 28 960

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Total Equity and liabilities 127 440

a) W1 – Non-current assets
Leasehold Property:
Valuation as at 1/1/X3 40 000
Depreciation (2 000)
Carrying amount at the date of revaluation 38 000
Revaluation loss (3 600)
Carrying amount 34 400

Plant and Equipment

As per trial balance 41 600
Disposal (3 200)
38 400
Depreciation (7 680)
c/d 30 720

b) W2 – Preference shares
The finance cost of $ 0.96 million for the preference
shares is based on the effective rate of 12% applied to
$ 16 million issue proceeds of the shares for the six
months they have been in issue. The dividend of $ 640
000 is based on the nominal rate 8%. The additional
320 000 is added to the carried amount.

c) W3 – Research and development costs

Carrying amount 1/1/X3(16 000-4 800) 11 200
Amortisation for year (16 000*20%) (3 200)
Capitalised during the year (640*6) 3 840
Carrying amount 31/12/X3 11 840

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6) Hercules Co.
i)
Hercules Co.
Statement of profit or loss and other comprehensive
income
for the year ended 30th June 20X4
($’000)
Revenue 280 000
Cost of Sales (214 270)
Gross Profit 65 730
Distribution Costs, (18 480)
Administration Cost (23,940–350) (23 590)
Investment Income 840
Gain on Investments (19,600-18,550) 1 050
Finance Cost (140+1,365) (1 505)
Profit before tax 24 045
Income tax expense (8,400-980-1,260) (6 160)
Profit for the year 17 885
ii)
Statement of Financial Position
As at 30th June 20X4
(’000) (’000)
Non-Current Assets
Property, plant and equipment 26 180
Investments 19 600
45 780
Current Assets
Inventories 33 600
Trade receivables 28 490
Bank 10 850
Non-current assets held for sale 23 450 96 390
Total Assets 142 170

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Equity and Liabilities

Equity shares of $ 1 each 28 000
Share Premium 14 000
Retained Earnings(26,880+17,885-7,000) 37 765
Total Equity 79 765

Non-Current Liabilities
5% loan notes 14 315
Deferred tax 2 940
17 255
Current Liabilities
Trade payables 36 400
Accrued loan interest 350
Current tax payable 8 400 45 150
Total Equity and liabilities 142 170

iii) EPS
TERP –
4 @ 0.82 = $ 3.28
1@ 0.42 = $ 0.42
5 shares = 3.70
TERP = 3.70/5 = $ 0.74
Rights Fraction = 0.82/0.74
Date [Link] shares [Link] months Rights Weighted
Fraction Average
1st July 22 400 9/12 0.82/0.74 18 616.22
1st April 28 000 3/12 7 000
25 616.22
EPS – (17 885/25 616.22) = $ 0.70
Restated EPS – (0.68*(0.74/0.82)) = $ 0.61

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a) W1 – Cost of Sales
As per the question 205 800
Depreciation of leasehold property 1 050
Impairment of leasehold property 2 800
Depreciation of plant and equipment 4 620
214 270

b) W2 – Leasehold Properties
Depreciation up to 1st January 20X4 – 31 500/15*6/12 = $ 1
050
Carrying amount as at 1st January 20X4 - $ 26 250
Fair value less costs to sell – (28 000*85%)-350 = $ 23
450
Impairment – 26 250 -23 450 = 2 800

c) W3 – Finance costs
Initial liability of the loan - $ 13 650
Finance cost (13 650*10%) = $ 1 365
Interest paid = 350
The total interest to be paid should be $ 700. Therefore
the accrued loan interest is $ 350.

d) W4 – Deferred tax
Provision (14,000*30%) 2 940
Over provision (4 200)
Charge to SPL (1 260)

7) Griffin Co.
i)
Statement of profit or loss and other comprehensive
income

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for the year ended 30th June 20X4

($’000)
Revenue 68 100
Cost of Sales (58 620)
Gross Profit 9 480
Distribution Costs, (1 680)
Administration Cost (3 780)
Investment Income 180
Finance Cost (936)
Profit before tax 3 264
Income tax expense (1 200)
Profit for the year 2 064
Other Comprehensive Income
Gain on Revaluation 1 440
Total Comprehensive Income 3 504

ii)
Share Share Retained Revaluation Total
Capital Premium Earnings Surplus
b/f 12 000 1 380 3 720 1 800 18 900
Share Issue 6 000 4 200 10 200
TCI 2 064 1 440 3 504
Dividends (2 400) (2 400)
c/d 18 000 5 580 3 384 3 240 30 204

iii)
Cash flows from Investing activities (‘000)
Capitalised development costs (1 920)
Investment Income (180)
Cash flows from financing activities
Shares issued 10 200

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Dividends paid (2 400)

Loan notes issued 11 700

a) W1 -Cost of sales
As per the trial balance 53 100
Depreciation of property 1 140
Depreciation – plant(16 260-5 460)*15% 1 620
Research and development(1 800+960) 2 760
58 620

b) W2 – Loan interest
Initial value (12 000-300) = 11 700
Interest – 11 700*8% = 936

c) W3 – Dividends and share issue

Dividend was paid before the share issue. Therefore
(12m*0.2) = 2.4 m
Share issue : 6 m*1.70 =10.2 m (Share capital – 6m Share
premium – 4.2 m

8) Pegasus Co.
i)
Statement of profit or loss and other comprehensive
income
for the year ended 31st December 20X6
($’000)
Revenue 315 000
Cost of Sales (279 900)
Gross Profit 35 100
Distribution Costs, (14 490)
Administration Cost (24,210-2,700) (26 910)
Gain on investment(6,480-5,400) 1 080
Finance Cost (270+2,070) (2 340)

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Loss before tax (7 560)

Income tax (2,160+180-720) 1 620
Loss for the year (5 940)
Other Comprehensive Income
Gain on Revaluation 3 600
Total Comprehensive losses (2 340)

ii)
Share Share Retained Revaluation Total
Capital Premium Earnings Surplus
b/f 40 500 4 500 4 590 - 49 590
Prior period (900) (900)
adjustments
Restated bal. 3 690
Rights issue 8 100 4 050 12 150
TCI (5 940) 3 600 (2 340)
Transfer to 450 (450)
RE
c/d 48 600 8 550 (1 800) 3 150 58 500

a) W1 – Rights issue
Total shares – 16.2 m (40 500/0.5*1/5)
Total receipt – (16.2*0.75) = 12.15 m
Share capital – 8. 1 m (16.2*0.50)
Share premium - $ 4.05 m

b) W2 – Cost of Sales
Per question 268 830
Amortisation of leased property 4 050
Depreciation of right of use asset 4 500
Depreciation of Plant and equipment 2 520
279 900

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c) W3 – Non-current assets
Leasehold property Plant and equipment
Cost 43 200 42 750
Depreciation b/f (14 400) (30 150)
28 800 12 600
Revaluation gain 3 600
Revalued amount 32 400
Depreciation (4 050) (2 520)
28 350 10 080
Right of use asset – (22 500-4 500) = 18 000
d) W4 – Lease Liability
b/f Interest Payment c/d
31/12/X6 20 700 2 070 (5 400) 17 370

e) W5 – Deferred tax
Provision required at 31/12/X6 (10 800*25%) 2 700
Provision at 1/1/X6 (2 880)
Credit to SOPL (180)

9) Chimera Co.
i)
Statement of profit or loss and other comprehensive
income
for the year ended 31st March 20X9
($’000)
Revenue(248,000+17,600-5,120) 260 480
Cost of Sales (204 080)
Gross Profit 56 400
Distribution Costs, (15 600)
Administration Cost (22 000)

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Finance Cost (998)

Profit before tax 17 802
Income tax (1 920)
Profit for the year 15 882

ii)
Statement of Financial Position
As at 31st March 20X9
(’000) (’000)
Non-Current Assets
Property, plant and equipment 53 120

Current Assets
Inventories 22 560
Trade receivables 26 480
Bank 13 680
Contract Asset 4 400 67 120
Total Assets 120 240

Equity and Liabilities

Equity shares of $ 0.50 each 32 000
Retained Earnings 44 762
Total Equity 76 762

Non-Current Liabilities
Lease Liability 4 572
Deferred tax 4 480
9 052
Current Liabilities
Trade payables 26 720
Lease liability 4 106

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Current tax payable 3 600 34 426

Total Equity and liabilities 120 240

a) W1 – Contract
Step 1 (‘000)
Total Price 40 000
Total Cost (24 000)
Profit 16 000
Step 2
Progress (17,600/40,000) 44%
Step 3
Revenue (40,000*44%) 17 600
Cost of sales (10 560)
Profit (16,000*44%) 7 040
Step 4
Costs to date (9,600+1,600) 11 200
Profit to date 7 040
Payment from customer (4 560)
Contract Asset 13 680

b) W2 -Cost of sales
As per the question 187 600
Contract 10 560
Agency cost of sales (5 120)
Depreciation 12 240
Surplus on revaluation of property (1 200)
204 080

c) W3 - Non-current assets
Leasehold property Plant and
equipment
Cost 20 160 37 440

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Depreciation b/f (10 240)

27 200
Depreciation for the year (1 440) (6 800)
18 720 20 400
Revaluation Surplus 1 200
c/d 19 920 20 400

ROU asset Specialised plant

Cost 16 000 6 400
Depreciation b/f (4 000)
12 000
Depreciation for the year (4 000) (1 600)
8 000 4 800
d) W4 – Lease Liability
b/f Interest Paid c/d
12 480 998 (4 800) 8 678
8 678 694 (4 800) 4 572

e) W5 - Deferred tax
Provision 4 480
Bal b/f (6 720)
Credit to tax expense 2 240

10) Medusa Co.

i)
Statement of profit or loss and other comprehensive
income
for the year ended 30th September 20X7
($’000)
Revenue(149,450-1,120) 148 330
Cost of Sales (101 010)
Gross Profit 47 320

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Distribution Costs, (8 750)

Administration Cost (13,300-700) (12 600)
Loss on fair value of equity investments (11,900-10,990) (910)
Investment Income 280
Finance Cost (1 344)
Profit before tax 23 996
Income tax (770+,180-140) (5 810)
Profit for the year, 18 186

ii)
Statement of Financial Position
As at 30th September 20X7
(’000) (’000)
Non-Current Assets
Property, plant and equipment 29,750
Equity financial asset investment 10 990
40 740

Current Assets
Inventories 17 360
Trade receivables 19 950
Bank 2 030 39 340
Total Assets 80 080

Equity and Liabilities

Equity shares of $ 0.25 each 42 000
Retained Earnings (4,550+18,186-13,440) 9 296
Total Equity 51 296

Non-Current Liabilities
6% Loan notes 17 094
Deferred tax 700

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Deferred revenue 560

18 354
Current Liabilities
Trade payables 4 690
Deferred revenue 560
Current tax payable 5 180 10 430
Total Equity and liabilities 80 080

a) W1 -Loan notes
Issue costs should not be expensed. It should be deducted
from the proceeds of the loan.
b/f Interest (8%) Cash paid (6%) c/d
16,800 1 344 (1 050) 17 094

b) W2 – Plant and Equipment

Carrying amount (53.7 – 35 000

23.59)
Depreciation for the year (5 250)
29 750

c) W3 -Revenue
The revenue of the service must be deferred.
Revenue at normal gross profit margin – (420*2*100/75) $
1.12 m
This should be split equally between the two years.

d) W4 -Deferred tax
Provision 700
Provision b/f (840)
Credit to SOPL (140)

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e) W5 – Cost of sales
As per the question 95 760
Depreciation 5 250
101 010

11) Cerberus Co
i)
Statement of profit or loss and other comprehensive
income
for the year ended 31st March 20X5
($’000)
Revenue 226 560
Cost of Sales (154 860)
Gross Profit 71 700
Distribution Costs (8 520)
Administration Cost (27,840-14,400 (50,000*5*2.40*4%)) (13 440)
Investment Income 480
Finance Cost (210)
Profit before tax 50 010
Income tax (14,580+1,080) (15 660)
Profit for the year 34 350
Other Comprehensive Incom
Revaluation of property 3 360
Total Comprehensive Income 37 710

ii)
Statement of Financial Position
As at 31st March 20X5
(’000) (’000)
Non-Current Assets
Property, plant and equipment 46 800

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Current Assets
Inventories 33 960
Trade receivables 18 690 52 650
Total Assets 99 450

Equity and Liabilities

Equity shares of $ 1each 30 000
Revaluation Surplus 3 360
Retained Earnings (9,360+34,350-14,400) 29 310
Total Equity 62 670

Non-Current Liabilities
Deferred tax 4 140

Current Liabilities
Trade payables 16 680
Bank Overdraft 1 380
Current tax payable 14 580 32 640
Total Equity and liabilities 99 450

a) W1 -Cost of sales
Opening inventory 28 020
Materials (38,400-1,800) 36 600
Labour (74,400-2,400) 72 000
Factory overheads (48,000-(2,400*75%)) 46 200
Amortisation of leased property 1 800
Depreciation of plant 4 200
Closing inventory (33 960)
154 860

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b) W2 – Non current assets

Leased property :
Carrying amount at date of revaluation 24 000
Gain on revaluation 4 800
Revalued amount 28 800
Depreciation (28,800/16) (1 800)
c/d 27 000

Deferred tax on reevaluation – (4 800*30%) = 1 440

Plant and equipment
Self constructed plant – (6 000-(6 000*20%*6/12)) = 5 400
Other plant – (26 700-8 700)*20% = 14 400

c) W4 – Deferred tax
Provision (9 000+4 800)*30% 4 140
Provision b/f (1 620)
2 520
Revaluation Surplus (1 440)
Charge t o SPL 1 080

12) Faun Co.

i)
Statement of profit or loss and other comprehensive
income
for the year ended 30th June 20X5
($’000)
Revenue 441 000
Cost of Sales (274 140)
Gross Profit 166 860
Operating Costs (63 270)
Finance Cost (810+3,308) (4 118)
Profit before tax 99 472
Income tax (2,880+25,200+3,330) (31 410)

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Profit for the year 68 062

ii)
Statement of Financial Position
As at 31st June 20X5
(’000) (’000)
Non-Current Assets
Property, plant and equipment 88 200
(139,950-39,150-12,600)

Current Assets
Inventories 86 400
Trade receivables 92 700 179 100
Total Assets 267 300

Equity and Liabilities

Equity shares of $ 0.20 each 59 400
Share Premium 13 500
Other 3 645
Retained Earnings (13,680+68,062) 81 742
Total Equity 158 287

Non-Current Liabilities
Deferred tax (7,470 – 4,140) 7 470
5% Convertible loan 42 413
49 883
Current Liabilities
Trade payables 28 980
Bank Overdraft 4,950
Current tax payable 25 200 59 130
Total Equity and liabilities 267 300

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iii) Basic Earnings Per Share

TERP
5 @ 2.50 = $ 12.50
1 @ 1.60 = $ 1.60
6 shares = $ 14.1
TERP = 14.1/6 = $ 2.35
Rights fraction – 2.50/2.35
Date [Link] shares [Link] months Rights W/A
Fraction
1st July 49 500 6/12 2.50/2.35 26 330
1st January 59 400 6/12 29 700
56 030

EPS – 68,062/56,030 = $ 1.21

a) W1 – Cost of sales
As per the question 261 540
Depreciation of plant and equipment 12 600
274 140

b)
Year CF DF PV
1 2,250 0.93 2 093
2 2,250 0.86 1 935
3 47,250 0.79 37 327
Liability 41 355
Equity 3 645

Finance cost(41 355*8%) = 3 308

Carrying amount of the loan - $ 42 413

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13) Dragon Co.

i)
(’000)
Draft profit before interest and tax 24 000
Convertible loan finance costs (2 418)
Depreciation of property (2 560)
Depreciation of plant and equipment (5 280)
Loss on fraud (current year) (200)
Income tax expense (2 080)
Profit for the year 11 462

ii)

Statement of Financial Position

As at 31st December 20X3
(’000) (’000)
Non-Current Assets
Property, plant and equipment 81 600
(51,680+29,920)

Current Assets
Trade receivables(22,400-560) 21 840
Other 7 440 29 280
Total Assets 110 880

Equity and Liabilities

Equity shares of $ 1 each 40 000
Other 1 766
Revaluation Surplus(6,240-1,248) 4 992
Retained Earnings 13 902
(2,800-360(fraud)+11,462)

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Total Equity 60 660

Non-Current Liabilities
6% Convertible loan notes 30 732
Deferred tax 3 168
33 900
Current Liabilities 14 160
Current tax payable 2 160 16 320
Total Equity and liabilities 110 880

iii) Diluted EPS

The maximum additional shares on conversion – 6.4 million
(32 000*20/100). Total shares – 46.4 million
Earnings adjustment – (2 418*80%) = $ 1,934
Total earnings – 13 396
Diluted EPS = 13 396/46 400 = 28.9 cents

a) W1 – Non-current assets
Property Plant and
equipment
Carrying amount 1/1/X8 48 000 35 200
Depreciation to date of (1 200)
revaluation (60/25*6/12)
Carrying amount 46 800
Gain on revaluation 6 240
Revalued amount 53 040
Depreciation (1 360) (5 280)
(53,040/19.5*6/12)
Carrying amount 51 680 29 920
Revaluation gain deferred tax –
(6,240*20%) = 1 248

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b) W2 – Convertible loan notes

Year CF DF PV
1 1,920 0.93 1 786
2 1,920 0.86 1 651
3 33,920 0.79 26 797
Liability 30 234
Equity 1 766
Finance cost – (30 234*8%)= 2 418
The carrying amount as at 31/12/X8 – (30 234+2 418-
1,920) = 30 732

c) W3 – Deferred tax
Revalued property and other assets 3 168
Provision b/f (2 560)
608
Revaluation (1 248)
Balance credited to profit or loss 640

14) Cyclopes Co.

i)
Statement of profit or loss and other comprehensive
income
for the year ended 31st March 20X4
($’000)
Revenue (30 240+1 890) 32 130
Cost of Sales (15 190+1 050) 16 240
Gross Profit 15 890
Operating Costs (9 464+84-6+630) (10 172)
Finance Cost (868+32+60+448) (1 408)
Investment Income 84
Profit before tax 4 394
Income tax (1 470-350-90) (1 029)

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Profit for the year 3 365

ii)
Share Share Retained Other Total
Capital Premium Earnings
b/f 8 540 - 24 780 - 33 320
Fraud (1 120)
23 660
Share Issue 1 050 1 260 2 310
Profit 3 365 3 365
Convertible 126 126
issue
c/d 9 590 1 260 27 025 126 39 121

iii) Basic Earnings per share

EPS = Earnings/No. of shares
= 3 365/9 240
=$ 0.36
Date No. of shares No. of months W/A
1/4/X3 8 540 4/12 2 847
1/8/X3 9 590 8/12 6 393
9 240

a) W1 – Contract
Revenue – (80%*6.3)-(50%*6.3) = $ 1.89 m
Cost of sales – (80%*3.5)-(50%*3.5) = $ 1.05 m

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b) W2 – Court Case
As the most likely outcome would be a payable of $ 708
400 it should be discounted to the present value. (708
400*0.9091) = $ 644 000
As already $ 560 000 is included the operating expenses
should be adjusted by $ 84 000
Then it should be unwound for six months which will
result in an increase in finance costs of $ 32 000
(rounded)

c) W3 – Income tax
Current estimate 1 470
Deferred tax (1.4*25%) (350)
Prior year overprovision (91)
1 029

d) W4- Capitalised Interest

Of 1.792 m 3month interest should be expenses. = $ 448
Depreciation for 3 months – 448 /20*3/12 = 6

e) Convertible Loan notes

f) Year CF DF PV
1 210 0.926 195
2 3,710 0.857 3,179
Liability 3,374
Equity 126
Finance cost – (30,234*8%)= 2,418
The carrying amount as at 31/12/X8 – (30 234+2 418-1
920) = 30 732
Finance cost - $ 270 000

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As 210,000 is already recorded finance costs should

increase by $ 60 000
15) Tartarus Co.
i)
Statement of Financial Position
As at 30th September 20X8
(’000) (’000)
Non-Current Assets
Property, plant and equipment 29 400
(46,200+4,800-11,400-10,200)
Investments 3 900
33 300
Current Assets
Inventory 7 020
Trade receivables 12 300 19 320
Total Assets 52 620

Equity and Liabilities

Equity shares of $ 1 each 21 000
Retained Earnings 6 486
Total Equity 27 486

Non-Current Liabilities
8% loan notes 9 000
Deferred tax 1 800
Environmental Provision(2,400+192) 2 592
Lease Liability 2 248
15 640
Current Liabilities
Trade payables 5 640
Lease Liability 614
Bank Overdraft 1 140

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Current tax payable 2 100 9 494

Total Equity and liabilities 52 620

ii)
Cash flows from investing activities ($’000)
Purchase of plant and equipment (8 400)
Dividends received 180
Sale of investments 960
Cash flows from financing activities
Redemption of loan notes (3 000)
Repayment of lease liability (1 938)

a) W1 – Retained Earnings
As per trial balance 19 860
Depreciation – plant and equipment (10 200)
(46,200+4,800)*20%
Finance cost (480+480(suspense)) (960)
Lease interest (342)
Environmental provision (192)
Investment income 600
Current tax (2 100)
Deferred tax (180)
6 486

b) W2 – Investment Income
Dividend received and profit on sale per TB – 300
Gain on investments – 300
Total – 600

c) W3 – Deferred tax
Provision required at year end (7 200*25%) - $ 1 800
Balance b/f – (1 620)

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Charged to retained earnings – 180

d) W4 – Lease Liability
Year b/f Interest Paid c/d
20X8 3 420 342 (900) 2 862
20X9 2 862 286 (900) 2 248

e) W5 – Elimination of Suspense a/c

Cash cost of loan redemption (12 000*25%) – 3 000
Six months interest – (12 000*8%*6/12) – 480

16) Gorgon Co.

i) V
(’000)
Retained earnings as per trial balance 47 925
Contract with customer 1 800
Depreciation – building (2 160)
Deprecation – Right of use asset (6 300)
Lease interest (2 637)
Tax provision (3 060)
Deferred tax reduction 1 800
Removal of provision 135
Loan note interest (3 600)
Retained Earnings as at 31/12/X5 33 903

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ii)
Statement of Financial Position
As at 31st December 20X5
(’000) (’000)
Non-Current Assets
Property, plant and equipment 65 700

Current Assets
Inventory 50,940
Trade receivables 34,650
Contract Asset 5,400 90 990
Total Assets 156 690

Equity and Liabilities

Equity shares of $ 1 each 24,300
Revaluation Surplus 2,970
Retained Earnings 33 903
Total Equity 61 173

Non-Current Liabilities
.Loan notes 39 600
Deferred tax 6 390
Lease Liability 14 520
60 510
Current Liabilities
Lease liability 6 207
Trade payables 19 170
Bank Overdraft 6 570
Current tax payable 3 060 35 007

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Total Equity and liabilities 156 690

a) W1- Contract
Total contract revenue 22 500
Total Cost(12.6+5.4) (18 000)
4 500

Progress (9,000/22,500) 40%

Revenue(22,500*40%) 9 000
Cost of sales (7 200)
Profit (4,500*40%) 1 800

Cost to date 12 600

Profit to date 1 800
Billed to date (9 000)
Contract Asset 5 400

b) W2 – Plant, Property and equipment

Land Building ROU asset
1/1/X5 cost 10 800 43 200 31 500
Depreciation b/f (9 000) (6 300)
34 200 25 200
Revaluation gain 3 600 360
Revalued amount 14 400 34 560
Depreciation (2 160) (6 300)
c/d 14 400 32 400 18 900

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a. W3 – Lease Liability
Year b/f Interest paid c/d
20X5 26 370 2 637 (8 280) 20 727
20X6 20 727 2 073 (8 280) 14 520
c) W4 – Deferred tax
Provision b/f (7 200)
Provision c/d (21 600+3,960)*25% 6 390
Net reduction in provision (810)
Charged to OCI (3,960*25%) (990)
Credit to profit or loss 1 800

17) Orion Co.

i)
Statement of cash flows
Cash flows from Operating activities
Profit before tax 1,920
Depreciation 1,200
Loss on sale of plant 400
Finance costs 480
Investment properties
Fair value charges 560
Rental received (280)
4 280
Decrease in inventory 640
Decrease in receivables 320
Increase in payables 240
Cash generated from operation 5 480

Interest paid (480-80+40) (440)

Income tax paid (1 560)
Net cash from operating activities 3 480

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Cash flows from investing activities

Purchase of PPE (4 000)
Sale of PPE 1 440
Purchase of investment property (1 120)
Investment property rentals 280
Net cash used in investing activities (3 400)

Cash flows from financing activities

Issue of equity shares 1 760
Equity dividend paid (2 240)

Net cash used in financing activities (480)

Net decrease in cash (400)

Cash at the beginning of the period 240
Cash at the end of the period (160)

a) W1 -Income tax
Provision b/f (1 480)
Profit or loss charge (480)
Provision c/f 400
Tax paid (1 560)

b) W2 – Property, plant and equipment

Balance b/f (20 160)
Depreciation 1 200
Revaluation 1 040
Disposal 1 840

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Transfer from investment property (1 280)

c/d 21 360
Acquired during the year (4 000)

c) W3 – Equity dividends
Retained Earnings b/f 6 960
Profit for the year 1 440
Retained Earnings c/d (6 160)
Dividends paid 2 240

ii) The fall in Orion’s profit before tax can be analysed in three
elements: changes in gross profit margin, the effect of the
overheads and the relative effect of the investment
properties.
Gross profit margin
Despite slightly higher revenue, gross profit has fallen by $
1.4 m. This is attributable to a fall in the gross profit margin
from 34.1% to 30.3%. Applying the stated 8% rise in cost of
sales, last year’s cost of sales of $ 23.2 m would translate
to an equivalent figure of $ 25.1 m which is almost same the
current cost of sales. This reflects that the production
volume of sales has remained the same as last year. The
reason for the decrease in gross profit margin is due to
failing to pass on to the customers the percentage increase
in cost of sales.
Overheads
The administrative costs and distribution costs are the main
culprit of the fall in profit before tax as these are 28% higher
than the last year. Even if they have increased 8% due to
rising prices, they are much higher than expected which
reflects poor control over the overheads.
Performance of Investment Properties

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The performance of investment property has fallen during

the year. This can be analysed from two view points. First
the rental received from investment properties has
declined. Then the fair value of these have fallen compared
to the increase in last year.
18) Hydra Co.
Statement of cash flows
Cash flows from Operating activities (‘000) (’000)
Profit before tax 2 100
Depreciation 630
Amortisation 140
Release of government grant (18)
Finance costs(280+105) 385
3 237
Decrease in inventory 350
Increase in receivables (525)
Increase in payables 385
Cash generated from operation 3 447

Interest paid (224+105) (329)

Income tax paid (297)
Net cash from operating activities 2 821

Cash flows from investing activities

Purchase of PPE (490)
Deferred development expenditure (840)
Receipt of government grant 105
Net cash used in investing activities (1 225)

Cash flows from financing activities

Repayment of Lease Liabilities (735)
Equity dividend paid (385)

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Net cash used in financing activities (1 120)

Net decrease in cash 476

Cash at the beginning of the period 910
Cash at the end of the period 1 386

a) W1 – Income tax
Provision b/f (507+560) (1 067)
Profit or loss charge (700)
Transfer to revaluation surplus (455)
Provision c/f (875+1,050) 1 925
Tax paid (297)

b) W2 – Property Plant and equipment

b/f 7 490
Revaluation 1 400
New ROU asset 1 050
Depreciation (630)
c/d (9 800)
Cash purchases (490)

c) W3 – Lease Liability
b/f (420+630) (1 050)
New Lease (1 050)
c/d (525+840) 1 365
Cash payment (735)

d) W4 – Equity Dividend paid

Retained Earnings b/f 1 225
Profit for the year 1 400
Retained Earnings c/d (2 240)

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Dividend paid 385

e) W5 – Government grant
b/f 88
Released to P&L (18)
c/d (175)
Receipt of government grant 105

f) W6 – Finance costs
b/f 2 800
Statement of P&L 280
c/d (2.856)
Interest paid 224

Business Combinations
1) Monica Co. and Chandler Co.
Consolidated Statement of Financial Position
As at 31st December 20X6
(’000) (’000)
Non-Current Assets
Property, plant and equipment 63 360
(42,660+22,950-2,700(FV)+450(dep))
Goodwill 7 650
Financial asset: Equity investments 9 900
(6,390+3,510)
80 910
Current Assets
Inventory (18,360+7,560-540(URP)) 25 380
Trade receivables (13,320+8,100) 21 420
Bank 1 890 48 690

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Total Assets 129 600

Equity and Liabilities

Equity attributable to parent:
Equity shares of $ 1 each (36,000+5,400) 41 400
Share premium 5 400
Retained Earnings 30 532
77 332
Non-controlling interest 7 920
Total Equity 85 252

Non-Current Liabilities
10% Loan notes (7,200+1,350) 8 550

Current Liabilities
Trade payables (15,840+11,700+67) 27 608
Bank overdraft 8 190 35 798
Total Equity and liabilities 129 600

a) W1 – Group Structure
Monica
| 75% 6 months
Chandler

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b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Fair value of the shares issued 10 800
(18,000*75%)*2/5*2
Fair value of the loan notes issued 1 350
(18,000*75%)/1000*100
Total parent investment 12 150
Fair value of NCI 5 400
(18,000*25%)*1.2
Total Investment 17 550
(-) Fair value of Net assets of subsidiary
at acquisition
Share Capital 18 000
Retained Earnings (5 400)
Fair value adjustments
Decrease in the FV of Net assets (2 700) (9 900)
Goodwill 7 650

c) W3 – Retained Earnings
(’000) (’000)
Monica Chandler
As per the question 23 940 3 600
+ Pre acq. Retained Earnings 5 400
+ Excess depreciation 450
(-) URP (4,140*15/115) (540)
(-) Loss on investment (360)
+ Gain on investment 630
(-) Interest on unrecorded loan (68)
(1,350*10%*6/12)
10 080
Group share 75% 7 560

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Group retained Earnings 30 532

d) W4 – Non – controlling interest

Fair value at acquisition 5 400
Post acq. Profits (10,080*25%) 2 520
7 920

2) Phoebe and Mike

i)
Consideration by the parent (’000) (’000)
Share exchange 51 750
(13,500 *2/3*5.75)
Deferred payment 27 000
(13,500*2.42)*1/1.1^2
Total parent investment 78 750

ii) Consolidated Statement of Profit or Loss

(’000)
Revenue 112.5+(58.5*8/12)-(9.375*8) 144 000
Cost of sales (89 325)
Gross Profit 54 675
Distribution costs (5,550+(2,250*8/12)) (7 050)
Administrative costs(9,375+(4,500*8/12)) (12 375)
Finance costs (3 750)
Impairment of goodwill (1 500)
Share of profit from associate (4,500*30%) 1 350
Profit before tax 31 350
Income tax (9 600)

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Profit for the year 21 750

Attributable to:
Equity holders of the parent 20 550
NCI 1 200

a) W1 – Cost of Sales
Phoebe 70 500
Mike (38,250*8/12) 25 500
Intragroup purchases (7 500)
URP (2,250*20/120) 375
Additional depreciation
Plant 300
Property 150
89 325

b) W2 – Finance costs
Phoebe as per the question 1 500
Unwinding interest – deferred (27,000*10%*8/12) 1 800
Mike Co.(675*8/12) 450
3 750

c) W3 – Non-controlling interest
Mike post acquisition profit (10,125*8/12) 6 750
Fair value depreciation (450)
Impairment (1 500)
Mike adjusted profit 4 800
Non-controlling interest at 25% 1 200

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3) Rachel Co. and Ross Co.

i)

(’000)
Revenue 88+(52.8*6/12)-(3.2+7.2) 104 000
Cost of sales (87 440)
Gross Profit 16 560
Operating expenses 6.8+(3.52*6/12)-2.72 (5 840)
Decrease in contingent consideration 240
Profit before tax 10 960
Income tax (2.8-(0.8*6/12)) (2 400)
Profit for the year 8 560
Attributable to:
Equity holders of the parent 9 160
NCI (600)
Consolidated Statement of Profit or Loss

Consolidated Statement of financial Position

(’000) (’000)
Non-Current Assets
Property, plant and equipment 51 120
(32,800+16,800+1,600(FV)-80(dep))

Current Assets(15,200+3,840-480) 18 560

Total Assets 69 680

Equity and Liabilities

Equity attributable to parent:
Equity shares of $ 0.50 each 24 000
Retained Earnings 23 960
47 960
Non-controlling interest 2 280

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Total Equity 50 240

Current Liabilities 18 240

Contingent Consideration 1 200 19 440
Total Equity and liabilities 69 680

a) W1 – Group structure
Rachel Co.
| 75% 6 months
Ross Co.

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Cash Consideration 10 800
(4,800/0.5*75%*1.5)
Fair value of the loan notes issued 1 440
Total parent investment 12 240
Fair value of NCI 2880
Total Investment 15 120
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 4 800
Retained Earnings 11 440
Fair value adjustments
Increase in the FV of Net assets 1 600 (17 840)
Gain on bargain purchase (2 720)

c) W3 – Retained Earnings
(’000) (’000)
Rachel Ross

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As per the question 22 800 9 600

(-) Pre-acquisition retained earnings (11 440)
Excess depreciation(1,600/10*6/12) (80)
URP (note below) (480)
Change in contingent consideration 240
Gain on bargain purchase 2 720
(2 400)
75% group share (1 800)
Group retained earnings 23 960
Note : The profit on the sale of the goods back to Rachel Co. is $
2.88m (7 200-(3 200+1 120)). Therefore the unrealised profit in the
inventory of $ 1.2 m is $ 480 000. (2 880*1 200/7 200)

d) W4 – Non – controlling interest

At acquisition 2 880
Post acquisition losses (600)
2 280

e) W5 – Cost of Sales
Rachel 70 400
Ross 26 880
Intra-group purchases (10 400)
URP 480
Excess Depreciation 80
87 440

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4) Joey Co. and Cathy Co.

i) Consolidated statement of Financial Position
(’000) (’000)
Non-Current Assets
Property, plant and equipment 58 520
(38,500+20,020)
Goodwill 2 100
Game rights (8,400-840) 7 560
Financial asset: Equity investments 14 770
82 950

Current Assets
Inventory (11,900+10,780+560-420) 22 820
Trade receivable (10,010+7,350-1,680) 15 680
Bank 2 660 41 160
Total Assets 124 110

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1each(14,000+4,200) 18 200
Share premium (2,800+12,600) 15 400
Group retained earnings 36698
Non-controlling interest 10 972
81 270

Current Liabilities 29 610

(18,060+12,670-1,680(intra group)+560
Deferred consideration 13 230 42 840
Total Equity and liabilities 124 110

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a) W1 – Group structure
Joey Co.
| 75% 6 months
Cathy Co.

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Share exchange 16 800
(14 000*75%*2/5*4)
Deferred consideration 12 600
(14,000*75%*1.32/1.1)
Total parent investment 29 400
Fair value of NCI (14,000*25%*3) 10 500
Total Investment 39 900
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 14 000
Retained Earnings 16,800-(7,000*60%) 12 600
Fair value adjustments
Game rights 8 400
Investments 700 (35 700)
Goodwill on acquisition 4 200
(-) Impairment (2 100)
Goodwill as at 30th June 20X1 2 100

c) W3 – Retained Earnings

(’000) (’000)
Joey Cathy
As per the question 35 140 16 800
(-) Pre-acquisition retained earnings (12 600)
(-) Amortisation (8,400/5*6/12) (840)
(-) Finance cost (12,600*10%*6/12) (630)

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(-)URP (1,260+560)*30/130 (420)

+ Gain on equity investments 1 190 630
3 990
75% group share 2 993
Share of impairment (2,100*75%) (1 575)
Group retained earnings 36 698

d) W4 – Non – controlling interest

At acquisition 10 500
Post acq. Profits 997
Share of impairment (2,100*25%) (525)
10 972

5) Janice Co. and David Co.

i) Goodwill
Consideration by the parent (’000) (’000)
Deferred consideration 75 600
(54,000*1.54/1.1)

Fair value of NCI (1.25*36000) 45 000

Total Investment 120 600
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 45 000
Retained Earnings (42,000+24,000) 66 000
Fair value adjustments
Customer relationships 3 000
Plant 3 600 (117 600)
Goodwill on acquisition 3 000

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ii) Consolidated Statement of Profit or Loss and Other

Comprehensive Income for the year ended 31st March 20X5
(’000)
Revenue (372+(186*6/12)-12(intra group)) 453 000
Cost of sales (274 380)
Gross Profit 178 620
Distribution Costs (24+(12*6/12)) (30 000)
Administrative costs (21.6+(15*6/12)+(3/5*6/12)) (29 400)
Investment income (3,000+(960*6/12)) 3 480
Finance costs (1.2+(3.36*6/12)+(75.6*10%*6/12)) (6 660)
Profit before tax 116 040
Income tax (27+(18.6*6/12)) (36 300)
Profit for the year 79 740

Other comprehensive income

Loss on revaluation of land (1.32-0.6) (720)
Total comprehensive income for the year 79 020

Profit attributable to:

Equity holders of the parent 70 620
NCI 9 120

Total Comprehensive income attributable to:

Equity holders of the parent 69 660
NCI 9 360

a) W1 – Cost of sales
Janice as per the question 240 000
David (90*6/12) 45 000
Intra group purchases (12 000)
Excess depreciation (3,600/2*6/12) 900
URP (12,000/5*25/125) 480

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274 380
b) W2 – Non-controlling interest
David’s profit 24 000
Excess depreciation (900)
Excess amortization (300)
22 800
NCI at 40% (Profit attributable) 9 120
Other comprehensive income (600*40%) 240
TCI attributed to NCI 9 360

6) Frost Co. and Blade Co.

i)
Consolidated statement of Financial Position

(’000) (’000)
Non-Current Assets
Property, plant and equipment 55 250
(37,600+15,750+2,000(mine)-100(dep)
Goodwill 5 500
Investment in associate (2,250+600) 2 850
63 600
Current Assets
Inventory (9,700+9,400+350-400(URP) 19 050
Trade receivable (7,350+6,250-1,500) 12 100
Bank 900 32 050
Total Assets 95 650

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each (25,000+5,000) 30 000
Share premium 11 000
Group retained earnings 18 695 59 695
Non-controlling interest 4 715

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Total Equity 64 410

Non-current Liabilities
8% Loan notes (2,500+7,500) 10 000
Accrued loan interest 150
Environmental Provision (2,000+40) 2 040 12 190

Current Liabilities 19 050

(12,000+8,200+350 (GIT)-1,500 (intragap)
Total Equity and liabilities 95 650

a) W1 – Group Structure
Frost Co.
| 75% 3 months
Blade Co.

b) W2 - Goodwill
Consideration by the parent (’000) (’000)
Share exchange 16 000
(10,000*75%*2/3*3.20)
8% Loan notes 7 500
(10,000*75%*100/100)
Total parent investment 23 500
Fair value of NCI (10,000*25%*1.80) 4 500
Total Investment 28 000
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 10 000
Retained Earnings (9,500+3,000) 12 500
Fair value adjustments
Increase in asset (Mine) 2 000

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Increase in provision (Mine) (2 000) (22 500)

Goodwill on acquisition 5 500

c) W3 – Retained Earnings
(’000) (’000)
Frost Blade
As per the question 18 000 13 500
Pre acquisition retained earnings (12 500)
Unpaid loan interest (7,500*8%*3/12) (150)
URP (1,050+350)*40/140 (400)
Mine depreciation (2000/5*3/12) (100)
Interest on provision (2,000*8%*3/12) (40)
860
75% group share 645
30% Titania profit 600
(3,000-1,000)*30%
Group retained earnings 18 695

d) W4 – Non – controlling interest

At acquisition 4 500
Post acq. Profits 215
4 715

7) Chemistro Co. and Cage Co.

i) Consolidated Statement of Profit or Loss and Other Comprehensive
Income for the year ended 30th June 20X7
(’000)
Revenue (360 000+(192 000*6/12)-32 000(intra)) 424 000
Cost of sales (223 040)

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Gross Profit 200 960

Distribution Costs (18 880+(9 600*6/12)) (23 680)
Administrative costs (21 600+(18 400*6/12) (30 800)
Finance costs (1 200+(960*6/12)) (1 680)
Profit before tax 144 800
Income tax (38 400+(22 240*6/12)) (49 520)
Profit for the year 95 280
Other comprehensive income
Loss on revaluation of land (2 000+800) 2 800
Total comprehensive income for the year 98 080

Profit attributable to:

Equity holders of the parent 89 240
NCI 6 040

Total Comprehensive income attributable to:

Equity holders of the parent 91 840
NCI 6 240
ii)

Equity
Equity attributed to parent
Group retained earnings 161 240
Revaluation Surplus 9 320 170 560
(6,720+2,000+(800*75%))
Non-controlling interest 86 240
Total Equity 256 800
a) W1 – Cost of Sales
Chemistro 208 000
Cage 44 000
Intra group purchases (32 000)
URP on sale of plant 800
Depreciation on sale of plant (160)

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URP on sale of inventory 2 400

223 040

b) W2 – Non controlling interest (SPL)

Cage’s profit (52 800*6/12) 26 400
URP – Inventory (2 400)
Plant Depreciation 160
Cage’s adjusted profit 24 160
NCI (25%) 6 040
Other comprehensive income (800*25%) 200
NCI (TCI) 6 240
NCI (SOFP)
At acquisition 80 000
NCI post acq. reserves 6 240
86 240

c) W3 – Group retained Earnings

Chemistro (72 000+71,920) 143 920
Cage (24 160*75%) 18 120
NCA URP (800)
161 240

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8) Moon Co and Knight Co.

(’000) (’000)
Non-Current Assets
Property, plant and equipment 22 950
(15,300+8,340-720(FV)+30(FV))
Goodwill 4 680
Investments 780
(1,080-480 (consideration)+180(FVTOCI)
28 410

Current Assets
Inventory (3,180+300-240) 3 240
Trade receivable (2,520+660-78-210) 2 892
Bank (1,800+480+78) 2 358 8 490
Total Assets 36 900

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each (7,200+1,440) 8 640
Share premium 5 760
Other equity reserves(300+180) 480
Group retained earnings 7 116 21 996
Non-controlling interest 2 034
Total Equity 24 030

Current Liabilities 12 870

(9,000+4,080-210(intra))
Total Equity and liabilities 36 900

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a) W1 – Group Structure
Moon
| 80% 4 months
Knight

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Share exchange 7 200
(3 000*80%)*3/5*5
Cash 480
Total Parent investment 7 680
Fair value of NCI 2 100
Total Investment 9 780
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 3 000
Retained Earnings (2 700-(2 340*4/12) 1 920
Fair value adjustments
Decrease in assets (720) (4 200)
Goodwill on acquisition 5 580
Impairment (900)
Goodwill 4 680

c) W3 – Retained Earnings
(’000) (’000)
Moon Knight
As per the question 7 380 2 700
Pre-acquisition retained earnings (1 920)
+ Depreciation 30
(-) URP (240)
570
80% group share 456
80% share of impairment (900*80%) (720)
Group retained earnings 7 116

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d) W4 – Non – controlling interest

At acquisition 2 100
Post acq. Profits 114
Share of impairment (900*20%) (180)
2 034

9) Ultron Co. and Sentry Co.

i)
Consideration by the parent (’000) (’000)
Share exchange 35 100
(9,000*90%*2/3*6.50)
Deferred Consideration 12 960
(8,100*1.76/1.1)
Total Parent investment 48 060
Fair value of NCI (9,000*10%*2.50 2 250
Total Investment 50 310
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 9 000
Retained Earnings (31,500+(5,580*3/12) 32 895
Fair value adjustments
Plant 1 620
Contingent Liability (405) (43 110)
Goodwill on acquisition 7 200

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ii) Consolidated statement of Profit or loss for the year ended 30 th

September 20X7
(’000)
Revenue (58 140+(34 200*9/12)-6 480(intra)) 77 310
Cost of sales (57 825)
Gross Profit 19 485
Distribution Costs (1 440+(1 620*9/12)) (2 655)
Administrative costs (3 420+(2 160*9/12)+1 800) (6 840)
Income from Associate (1 800*40%) 720
Finance costs (378+(12 960*10%*9/12) (1 350)
Profit before tax 9 360
Income tax (2 520+(1 440*9/12)) (3 600)
Profit for the year 5 760

Profit attributable to:

Equity holders of the parent 5 562
NCI 198
a) W1 – Cost of sales
(’000)
Ultron 46 080
Sentry (23 400*9/12) 17 550
Intra group purchases (720*9) (6 480)
URP (1,350*25/125) 270
Additional Depreciation (1,620/3*9/12) 405
57 825
b) W2 – NCI
Sentry post acq. Profit (5 580*9/12) 4 185
Excess depreciation (405)
Impairment (1 800)
Adjusted profit 1 980
NCI 10% 198

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10) Claw Co. and Galactus Co.

i)
(‘000)
Revenue 65 920
(50 080+(24 000*9/12)-(240 *9)intra)
Cost of sales (49 056)
(36 640+(19 200*9/12)-2 160+96(URP)+80(dep))
Finance costs (268)
(160+108)

(’000) (’000)
Non-Current Assets
Property, plant and equipment 29 680
(14 960+11 120+3 200(FV)-
80(dep)+480(revaluation)
Goodwill 4 560 34 240

Current Assets (7 200+3 200- 9 344

96(URP)-320(cash-in-transit)-
640(intra)
Total Assets 43 584

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each (8 000+3 11 840
840)
Share premium 7 680
Revaluation reserve(1 1 984
600+(480*80%))

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Group retained earnings 5 732 27 236

Non-controlling interest 3 920
Total Equity 31 156

Non-current Liabilities
10% loan notes (2 000+800- 2 000
800(intra))

Current Liabilities
Trade payables (6 320+3 520- 8 880
320(cash-in-transit)-640(intra))
Deferred consideration 1 548 10 428
(1,440+108)
Total Equity and liabilities 43 584

a) W1 – Group Structure
Claw
| 80% 9 months
Galactus

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Share exchange 11 520
(7 200*80%*2/3*3)
Deferred Consideration 1 440
(7 200*80%*0.275*1/1.1)
Total Parent investment 12 960
Fair value of NCI (7 200*20%*2.5) 3 600
Total Investment 16 560
(-) Fair value of Net assets of subsidiary at
acquisition

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Share Capital 7 200

Retained Earnings 1 600
Fair value adjustments
Increase in assets 3 200 (12 000)
Goodwill on acquisition 4 560

c) W3 – Retained Earnings
(’000) (’000)
Claw Galactus
As per the question 5 040 2 800
Pre-acquisition retained earnings (1 600)
Excess depreciation (80)
Unwinding discount on deferred (108)
consideration (1 440*10%*9/12)
URP (480*25/125) (96)
1 120
80% group share 896
Group retained earnings 5 732
d) W4 – Non-controlling interest
At acquisition 3 600
Post acq. Profits 224
Post acquisition revaluation 96
3 920

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11) Adam Co. and Eve Co.

i)

(’000) (’000)
Non-Current Assets
Property, plant and equipment 44 730
(26 250+17 150+1 400(FV)-70(dep))
Goodwill 8 540
Investment in Kronos 9 240
62 510
Current Assets
Inventory 14 140
(7 000+6 300+1 260(GIT)-420(URP)
Trade receivables 3 220 17 360
(4 550+1 050-2 380(intra))
Total Assets 79 870

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each 17 500
Share premium 13 860
Group retained earnings 19 250 50 610
Non-controlling interest 5 880
Total Equity 56 490

Non-current Liabilities
7% loan notes (10 150+1 400) 11 550

Current Liabilities
Contingent Consideration 1 890

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Other (5 810+5 250-1 120(intra)) 9 940 11 830

Total Equity and liabilities 79 870
a) W1 – Group Structure
Adam Co.
| 75% 1 year
Eve Co.
Adam Co.
| 40% 6 months
Kronos Co.

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Share exchange 20 160
(5 600*75%*3/2*3.20)
Contingent Consideration 2 940
Total Parent investment 23 100
Fair value of NCI (5 600*25%*4.50) 6 300
Total Investment 29 400
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 5 600
Retained Earnings 11 550
Fair value adjustments
Increase in assets 1 400
Software written off (350) (18 200)
Goodwill on acquisition 11 200
Impairment (2 660)
Goodwill 8 540

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c) W3- Retained Earnings

(’000) (’000)
Adam Eve
As per the question 19 040 12 250
Pre-acquisition retained earnings (11 550)
Excess depreciation (70)
URP in inventories (1 260*50/150) (420)
Gain on contingent consideration 1 050
Software written off 350
980
75% group share 735
Kronos profit (4 200*6/12*40%) 840
Share of impairment (2 660*75%) (1 995)
Group retained earnings 19 250
d) W4 – Non-controlling interest
At acquisition 6 300
Post acq. Profits (90*25%) 245
Share of Impairment (665)
5 880
e) W5 – Investment in associate
Cash consideration (3 500*40%*4) 5 600
7% loan notes (3 500*40%*100/50) 2 800
8 400
Post acq. Profits (4 200*6/12*40%) 840
9 240

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ii) An associate is defined in IAS 28 as an investment over which the

investor has significant influence. There are several indicators of
significant influence, but the most important are usually considered to
be a holding of 20% or more of the voting shares and board
representation. Therefore, it is correct to assume that Kronos is an
associate of Adam up until 31st March 20X9.
However in the current position, even though Adam still owns 30% of
the voting shares the board representation is lost. Also Kronos has
become a subsidiary of another entity. Therefore it is unlikely that Adam
can exercise significant influence over Kronos.
It will cease to be equity accounted from the date of loss of significant
influence. Its carrying amount at the date will be its initial recognition
value under IFRS 9 Financial instruments. Thereafter it will be
accounted as an equity investment under IFRS 9.

12) Sweet Co. and Sour Co.

i)
Consideration by the parent (’000) (’000)
Share exchange 22 680
(9 000*60%*3/5*7)
Deferred Consideration 8 100
(9 000*60%*1.62/1.08)
Total Parent investment 30 780
Fair value of NCI (9,000*40%*2) 7 200
Total Investment 37 980
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 9 000
Retained Earnings 16 560
15 000+(6 240*3/12)
Fair value adjustments
Plant 2 400
Inventory 120 (28 080)
Goodwill on acquisition 9 900

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ii) Consolidated Statement of Profit or Loss for the year ended 30 th

September 20X4
(’000)
Revenue (50 700(31 200*9/12)-(720*9) 67 620
Cost of sales (44 940)
Gross Profit 22 680
Distribution Costs (1 200+(960*9/12)) (1 920)
Administrative costs (2 460+(1 680*9/12)) (3 720)
Investment Income (240*9/12) 180
Income from Associate (1 440*25%) 360
Finance costs (180+(8 100*8%*9/12)) (666)
Profit before tax 16 914
Income tax (2 880+(2 160*9/12)) (4 500)
Profit for the year 12 414

Profit attributable to:

Equity holders of the parent 11 022
NCI(6 240*9/12-120(inv)-900(dep)-180(URP)*40%) 1 392
a) W1 – Cost of sales
(’000)
Sweet 34 920
Sour (20,400*9/12) 15 300
Intra group purchases (720*9) (6 480)
Fair value inventory adjustment 120
URP (1,080*20/120) 180
Excess depreciation (2,400/2*9/12) 900
44 940

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13) War Co. and Peace Co.

i) Consolidated Statement of Profit or Loss for the year ended 30th
September 20X2
(’000)
Revenue (76 500+(37 800*6/12)-7 200(intra)) 88 200
Cost of sales (64 800)
Gross Profit 23 400
Distribution Costs (2 790+(3 240*6/12)) (4 410)
Administrative costs (4 680+(1 800*6/12)+900(imp.) (6 480)
Profit before tax 12 510
Income tax (4 230+(1 260*6/12)) (4 860)
Profit for the year 7 650

Profit attributable to:

Equity holders of the parent 7 830
NCI (180)
ii) 1. Goodwill
Consideration by the parent (’000) (’000)
Share exchange 8 640
(3 600*60%*2/3*6)
Fair value of NCI 5 310
Total Investment 13 950
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 3 600
Retained Earnings 6 500-(2 700*6/12)) 4 500
Fair value adjustments
Plant 1 800 (9 900)
Goodwill on acquisition 4 050
Impairment (900)
Goodwill 3 150

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2. Non-controlling interest
At acquisition 5 310
NCI share of post acquisition reserves 180
NCI share of impairment (360)
5 130
a) W1 – Group structure
War
| 60% 6 months
Peace

b) W2 – Cost of sales
(’000)
War 56 700
Peace 14 400
Intra group sales (7 200)
URP (7,200-4,680)*40/140 720
Excess depreciation (1,800/5*6/12) 180
64 800
c) W3 – Non-controlling interest (SPL)
Peace’s post acquisition (2,700*6/12) 1 350
Excess depreciation (180)
URP (720)
Impairment (900)
Peace Co. adjusted loss (450)
NCI at 40% (180)

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14) Hell Co. and Heaven Co.

(’000) (’000)
Non-Current Assets
Property, plant and equipment 55 200
(30,480+22,800+2,400(FV)-480(dep))
Goodwill 5 920
Investments 2 240
63 360
Current Assets
Inventory 20 240
(11,120+8,320+1,200(GIT)-400(URP))
Trade receivables 10 000
(9,120+4,400-960(CIT)-2,560(Intra))
Bank (7,520+480+960(CIT)) 8 960 39 200
Total Assets 102 560

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each 20 000
Share premium 14 080
Group retained earnings 28 624 62 704
Non-controlling interest 6 784
Total Equity 69 488

Non-current Liabilities 17 200

(13,200+3,200+800)

Current Liabilities
Deferred consideration (5,120+512) 5 632

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Other 10 240 15 872

(7,600+4,000+1,200(GIT)-2,560(intra))
Total Equity and liabilities 102 560
a) W1 – Group Structure
Hell
| 80% 1 year
Heaven

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Share exchange 19 200
Deferred Consideration 5 120
(8,000*80%*0.88*1/1.1)
Total Parent investment 24 320
Fair value of NCI (1,600*3.50) 5 600
Total Investment 29 920
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 8 000
Retained Earnings 14 400
Fair value adjustments
Plant 2 400
Deferred tax (800) (24 000)
Goodwill on acquisition 5 920
c) W3 – Retained Earnings
(’000) (’000)
Hell Heaven
As per the question 24 160 20 800
Pre-acquisition retained earnings (14 400)
Excess depreciation (480)
URP in inventories (1,200*50/150) (400)

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Gain on equity investments 640

Finance cost on deferred consideration (512)
(5,120*10%)
5 920
80% group share 4 736
Group retained earnings 28 624
d) W4 – Non-controlling interest
At acquisition 5 600
Post acq. Profits (5,920*20%) 1 184
6 784

15) Square Co. and Triangle Co.

i)

(’000) (’000)
Non-Current Assets
Property, plant and equipment 333 200
(274,400+58,800)
Goodwill 22 677
355 877
Current Assets 97 412
(66,290+31,255+42(FV)-175(URP)
Total Assets 453 289

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each 133 000
Revaluation Surplus 28 980
Group retained earnings 146 579 308 559
Non-controlling interest 10 774
Total Equity 316 333

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Non-current Liabilities
Deferred Consideration 18 141

Current Liabilities 115 815

(96,110+19,705)
Total Equity and liabilities 453 289
a) W1- Group Structure
Square
| 80% 1 year
Triangle

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Cash 64 400
Deferred Consideration 16 797
(19,600*0.857)
Total Parent investment 81 197
Fair value of NCI 10 500
Total Investment 91 697
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 42 000
Retained Earnings 23 800
Revaluation Surplus 2 800
Fair value adjustments
Inventory 420 (69 020)
Goodwill on acquisition 22 677

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c) W3 – Group Retained Earnings

(’000) (’000)
Square Triangle
As per the question 147 000 25 550
Pre-acquisition retained earnings (23 800)
URP in inventories (700*25%) (175)
Unwinding discount (16 797*8%) (1 344)
Fair value of inventory (378)
1 372
80% group share 1 098
Group retained earnings 146 579

d) W4 – Non-controlling interest
At acquisition 10 500
Post acq. Profits 274
10 774

ii) The consolidated financial statements of Square group are of little

value when trying to assess the performance of its subsidiary.
Therefore the most relevant information to base the investment
decision would be the individual financial statements of Triangle
Co.
However, when company is a part of a group, the individual
statements of the subsidiary might be influenced by the related
party transactions. In the above scenario, there has been a
significant amount of trading between Triangle Co. and Square Co.
It could be seen that Square has sold these goods to much lower
margin to Triangle making Triangle’s profits higher. There can be
many such intra group transactions. Square can inflate and flatter
the performance of subsidiary through such transactions,
especially to attract high prices. These kinds of transactions are
hard to identify by examining the publish resources.

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16) Milky Co. and Dairy Co,

i)
Consideration by the parent (’000) (’000)
Shares 11 520
(7 200*80%*2/3*3)
Deferred Consideration 8 064
(7 200*80%*1.54/1.1)
Total Parent investment 19 584
Fair value of NCI (7 200*20%*2.50) 3 600
Total Investment 23 184
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 7 200
Retained Earnings (8 100+(1 8 475
440+60(borrowing costs)*3/12))
Fair value adjustments
Increase in Fair value of plant 432 (16 107)
Goodwill on acquisition 7 077
ii) Extracts from Dairy’s consolidated statement of profit or loss
for the year ended 31st March 20X9
1. Revenue 17 580
(14 520+(6 480*9/12)-1 800)
2. Cost of sales (12 498)
3. Finance costs (935)
4. Profit attributable to NCI (609*20%) 122

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a) W1 – Cost of sales
(’000)
Milky 10 680
Dairy (4 080*9/12) 3 060
Intra group purchases (1 800)
URP in inventory (252*20/120) 42
Impairment of Goodwill 300
Excess depreciation (432*9/18) 216
12 498

b) W2 – Finance costs
Milky 240
Dairy (180-60(borrowing costs)*9/12) 90
Unwinding discount (8,064*10%*9/12) 605
935
c) W3 – Post acquisition profit of Dairy
Profit plus interest capitalised and time apportioned 1,125
(1,440+60)*9/12
Impairment of goodwill (300)
Excess depreciation (216)
609

e) As mentioned in the question IFRS 3 permits NCI to be valued by two

methods. Valuing the NCI at fair value is the most recent method and
would normally increase the value of the goodwill calculated in
acquisition. This increase reflects the non-controlling interest’s
ownership of the subsidiary’s goodwill. Under this method any
impairment of the subsidiary’s goodwill is charged against both the
parent and non-controlling interest in proportion to their
shareholding in the subsidiary.

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The other method is to measure non-controlling interest at its

proportionate share of the acquired subsidiary’s identifiable net
assets. Its effect on the statement of Financial position is the
resulting carrying amount of the purchased goodwill only relates to
the parent’s elements of such goodwill and as a consequence the NCI
does not reflect its share of the subsidiary’s goodwill. Any
impairment under this method, would only be charged against
parent’s interest, as the NCI’s share of goodwill is not included in the
consolidated financial statements.

(’000) (’000)
Non-Current Assets
Property, plant and equipment 66 600
(36,000+27,900+3,600(FV)-900(dep))
Intangible assets – Other 9 000
(6,750+2,700(FV)-450(dep))
- Goodwill 13 500
Investment in associate 6 930
96 030
Current Assets (19,800+12,330-540(URP) 31 590
Total Assets 127 620

Equity and Liabilities

Equity attributed to parent
Equity shares of $ 1 each 45 000
Group retained earnings 31 680 76 680
Non-controlling interest 7 110
Total Equity 83 790

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Non-current Liabilities
Deferred tax (13 500+7 200) 20 700

Current Liabilities 23 130

(10 440+7 830+4 860)
Total Equity and liabilities 127 620
17) Billie Co. and Jean Co.

a) W1 – Group Structure
Billie
| 80% 1 year
Jean

Billie
| 25% 8 months
Jackson

b) W2 – Goodwill
Consideration by the parent (’000) (’000)
Cash on consideration 28 800
Deferred Consideration 4 500
(4 860*100/108)
Total Parent investment 33 300
Fair value of NCI (1 800*3.50) 6 300
Total Investment 39 600
(-) Fair value of Net assets of subsidiary at
acquisition
Share Capital 9 000
Retained Earnings 10 800
Fair value adjustments
Intangible Asset 2 700
Increase in Fair value of plant 3 600 (26 100)
Goodwill on acquisition 13 500

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c) W3 – Retained Earnings
(’000) (’000)
Billie Jean
As per the question 31 410 16 200
Pre-acquisition retained earnings (10 800)
URP in inventories (2 340*30/130) (540)
Unwinding discount (4 500*8%) (360)
Jackson’s impairment loss (2 250)
Excess depreciation (3 600/4) (900)
Excess amortisation (2 700/6) (450)
4 050
80% group share 3 240
25% Jackson’s profit (1 080*8/12*25%) 180
Group retained earnings 31 680
d) W4 – Non-controlling interest
At acquisition 6 300
Post acq. Profits 810
7 110
e) W5 – Investment in associate
Cash consideration 9 000
Share of post acq. Profits (1 080*8/12*25%) 180
Impairment Loss (2 250)
6 930

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18) Ice Co. and Fire Co.

i)
(‘000)
Cost (32 m*40%*2) 25 600
Share of post acquisition losses (800)
(4 000*40%*6/12)
Impairment charge (2 400)
Unrealised profit (4 800*20%*1/2*40%) (192)
22 208
ii) Consolidated Statement of profit or loss for the year ended 30 th
September 20X3,
(’000)
Revenue (168 000+(120 000*6/12)-12 000) 216 000
Cost of sales (130 000)
Gross Profit 86 000
Distribution Costs (8 960+(5 600*6/12)) (11 760)
Administrative costs (19 840)
(14 640+(7 200*6/12)+1 600(impairment))
Investment Income 880
Finance costs (1 840)
Share of loss from associate (3 392)
Profit before tax 50 048
Income tax (12 000+(8 000*6/12)) (16 000)
Profit for the year 34 048

Profit attributable to:

Equity holders of the parent 32 928
NCI 1 120

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a) W1 – Cost of sales
(’000)
Ice 100 800
Fire 40 000
Intra group purchases (12 000)
Excess depreciation (4 000/5*6/12) 400
Unrealised profit on inventories (12 000/3*20%) 800
130 000
b) W2 -Investment Income
(’000)
Given 7 600
Intra group interest (40 000*8%*6/12) (1 600)
Intra group dividend (6 400*80%) (5 120)
880
c) W3 – Share of Loss from associate
(’000)
Share of loss from associate (4 000*40%*6/12) (800)
Impairment of investment in associate (2 400)
URP in associate (192)
(3 392)
d) W4 – Finance costs
(’000)
Ice 1 440
Fire ((2 400-1 600)*6/12 +1 600) 2 000
Intra group interest (1 600)
1 840

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e) W5 – Non-controlling Interest
(’000)
Fire’s post acquisition profit 7 600
Fair value depreciation (400)
Impairment (1 600)
5 600
NCI 20% 1 120
Note – The interest on the loan note of $ 1.6 m is in Fire’s profit in the
post acquisition period. Thus Fire’s profit of $ 16.8 m has a split of $
9.2 m pre acquisition (16.8+1.6)*6/12). The post acquisition profit is $ 7.6
m.

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