Monitoring Test MT2A
Financial
Reporting
F7FR-MT2A-Z08-A
Accountancy Tuition Centre Ltd
ATC
1 HUGHES INC
The consolidated statement of financial position of the Hughes Inc Group as at 30 September 2008 is as follows:
Group $000 NON CURRENT ASSETS
Property, plant and equipment (5980+4275+100) 10,355
Interest in associate 1,650
Goodwill 600
Investments (200+50) 250
–––––– 12,855 CURRENT ASSETS
Inventory (2520+1860-100) 4,280
Receivables (2200+1755) 3,955
Cash (880) 880
––––––
TOTAL ASSETS 21,970
–––––– EQUITY AND LIABILITIES
Share capital 5,000
Share premium 1,750
Retained earnings (W5) 5,640
–––––– 12,390
NON-CONTROLLING INTEREST (W4) 940
–––––– 13,330 NON CURRENT LIABILITIES
Loans (2000+1000) 3,000
CURRENT LIABILITIES
Payables (3250+2060) 5,310
Bank overdraft (180) 180
Tax payable(150) 150
–––––– 21,970 ––––––
WORKINGS
(1) Group structure
(2) Net assets of Scott Inc
Net assets of Auden
BSD DOA Change
Cost of investment 4,500 1,545
Less H% of NA’s at DOA
(4) Non-controlling interest
$000 Fair value of S net asset at reporting date 4,700 20% –––––
NCI 940
–––––
(5) Group retained earnings
$000
All of P 5,675
P% of post acq profits of S 80% of 300 240
P% of post acq profits of A 30% of 500 150
Less impaired goodwill (380 + 45) (425)
––––– 5,640 –––––
(6) Investment in Associate
$000
Cost of investment 1,545
Share of A post acq profits 30% × 500 150
Less Goodwill impaired (45)
–––––
Goodwill not yet impaired 135
––––– 1,650 –––––
2 TARANTULA INC (a) EPS
Earnings (Profit available to ordinary shareholders) 700
Number of shares (10,000/5) 2,000
(c) EPS
EPS (700/2,250) 31.11c
–––––
Rights issue bonus fraction
Number $/share $
Before 2000 10 20,000
Right 1000
––––– 7 ––––––7,000 3000
––––– 9 ––––––27,000 Therefore bonus fraction is 10/9
(e) EPS
Earnings 700
Basic 2000
Free 450
––––––
Number of shares ––––––
2,450 ––––––
EPS (700/2,450) 28.57c
Proceeds if options exercised (1,200 × 5) $6,000 If exercised at market value for $6000 would get 750 shares
Total possible shares 1200 shares
––––––––––
Free shares – dilutive 450 shares
(f) EPS
Earnings 700
1.10 to 31.12 = 2000*3/12*7/5*10/9 777
1.1 to 31.3 = 2800*3/12*10/9 777
1.4 to 30.6 = 3300*3/12*10/9 917
1.7 to 30.9 = 4950*3/12 1238
––––––
Number of shares 3,709
––––––
EPS (700/3,709) 18.87c
–––––– Rights issue bonus fraction
Number $/share $
Before 3,300 10 33,000
Right 1,650
–––––– 7 –––––– 11,550
4,950 9 44,550
–––––– ––––––
Therefore bonus fraction is 10/9
3 FRAMEWORK (a)
In order to be useful information contained in financial statements must be relevant and reliable. This can only be achieved if the substance of transactions is recorded. If this did not happen the financial statements would not represent faithfully the transactions and other events that had occurred. Although there are many instances where there are genuine commercial reasons for contracts and transactions adopting the legal form that they do (eg to secure legal title), equally the legal form is often used to achieve less desirable purposes. In general these amount to manipulating the financial statements to create a favourable impression. The typical outcomes of such manipulation are:
the omission of assets. and particularly liabilities from statements of financial
position;
improvements to profits and profit smoothing;
improvements of other performance measures such as earnings per share, liquidity
ratios, profitability ratios and gearing.
(b)
This transaction would be regarded as a financing transaction in that the company has not transferred the risks and rewards of ownership of the timber. The timber will remain on the company’s statement of financial position as inventory and the loan (the proceeds) will appear as a liability.
The statement of financial position at the year end will show:
Inventory $40m
Loan repayable after more than one year $42.8m
The statement of comprehensive income will show:
Interest payable of 40m *7%= $2.8m
Calculation of the effective interest rate
Total finance charge over the term of the loan is:
$m
Total repayments 56.1
Amount borrowed (40)
––––
Interest 16.1
––––
This must be spread to profits using the effective interest rate. This is calculated as the IRR of the loan as follows:
5 56.1/40 – 1 = ).07 or 7%
The annual interest cost and the carrying value of the loan at each year end over the life of the loan is given below. (this is not required in the question but is given for tutorial purposes).
Marking Scheme 1 HUGHES INC
Marks
Presentation 1
Property, plant and equipment 1
Goodwill 2½
Interest in associate 2½
Investments 1
Inventory 1
Receivables ½
Cash and bank ½
Share capital and premium 1
Retained earnings 4
Non-controlling interest 2
Loan ½
Comparative 1
(e)
Proceeds if exercised 1
Number of shares if at market value 1
Free shares 1
EPS 1
(f)
Time apportionment and number of shares at date 1
Application of bonus fraction ½
Calculation and application of RIBF 1 ½
EPS 1
Description of accounting rules – 1 mark a point to a maximum of 2
