Monitoring Test MT1B
Financial
Reporting
F7FR-MT1B-Z08-A
1 ORANGE GROUP INC
Orange Group – Consolidated statement of financial position as at 31 December 2007
ASSETS $
Non current assets
Investments (only Apple Inc) 12,000
Tangible (243,500+162,000+20,000)(W8) 425,500
Intangible – goodwill – (W3) 2,000
––––––– 439,500
Current assets
Inventory (52,000+30,000–2,400(W7)) 79,600
Receivables (33,000+21,000+16,000–16,000) 54,000
Cash and bank 14,000
–––––––
Total assets 587,100
––––––– EQUITY AND LIABILITIES
Capital and reserves
Share capital – Orange only 300,000
Retained earnings – (W5) 189,950
––––––– 489,950
Non-controlling interest – (W4) 53,650
––––––– 543,600
Current liabilities
Payables (13,500+10,000) 23,500
Proposed dividends to Oranges shareholders 15,000
Proposed dividends to minority interest 20,000–15,000 5,000
–––––––
Total equity and liabilities 587,100
Consolidated statement of comprehensive income for the year ended 31 December 2007
$
Revenue (597,000+462,000–120,000(W6)) 939,000
Cost of sales (322,000+271,000–120,000(W6)+2,400(W7)) (475,400) –––––––
Gross profit 463,600
Administrative expenses (101,000+32,000+3,000 goodwill charge for 2006) (136,000)
Distribution costs (53,000+27,000) (80,000)
–––––––
Operating profit 247,600
Investment income (7,500+2,000+15,000(W9)–22,500(W9)) 2,000
–––––––
Profit before tax 249,600
Taxation (39,000)
–––––––
Profit after tax 210,600
Attributable to:
Non-controlling interest (25% of 113,000–2,400(W7) 27,650
Shareholders of Parent 182,950
––––––– 210,600 ––––––– Extract from SOCIE
Profit retained as at 1 January 2007 (W10) 32,000
Profit for year 182,950
Dividends – Orange only (25,000)
–––––––
Profit retained as at 31 December 2007 189,950
–––––––
CONSOLIDATION WORKINGS
(1) Establish group structure
Orange Non-controlling interest 25%
75/100
= 75%
(2) Net assets of Apple
Reporting
date acquisition Date of Change $ $ $
Share capital 100,000 100,000 0
Retained earnings
Per question 97,000 30,000 67,000
Unrealised profits (2,400) (2,400)
Fair value adjustment 20,000
––––––– –––––––20,000 ––––––– 0
Cost of investment 122,500
Orange % of Apples net assets at the date of acquisition
75% × 150,000 (112,500)
–––––––
Goodwill 10,000
–––––––
Value of goodwill 31 Dec 2006 5,000
Value of goodwill 31 Dec 2007 (SOFP) 2,000
Impairment charged to CRE 8,000
Impairment charged to current years SOCI 3,000
(4) Non-controlling interest
$ Fair value net assets at reporting date 214,600
NCI % 25%
––––––– 53,650 –––––––
(5) Consolidated retained earnings at 31 December 2007
$
All of Orange – per question 134,500
– dividend receivable 15,000
Orange’s share of Post acquisition profits of Apple
75% × 64,600 48,450
(6) Interco sales
Dr Revenue 120,000
Cr Cost of sales 120,000
To eliminate interco sales
(7) Unrealised profits
% $
Sales 125 12,000
Cost of sales 100
––– ––––––(9,600)
Gross profit 25
––– ––––––2,400
Dr Cost of sales 2,400 Apple Cr Inventory 2,400 SOFP
To eliminate unrealised profits
Tutorial note: Remember to adjust Apple’s net asset statement.
(8) Fair value adjustment
At date of acquisition assets worth $150,000 Per net asset statement assets worth $130,000 Therefore need to revalue by $20,000.
(9) Dividends
Dr Div receivables 15,000
Cr Investment income 15,000
To record Dividends receivable by Orange from Apple
Tutorial note: Remember to adjust Orange’s retained earnings.
Dr Proposed dividend 15,000
Cr Div Receivable 15,000
To eliminate interco balances in SOFP
(10) Opening group retained earnings
$ All of Orange at 1 January 2007 – per SOCI 49,000
Orange’s share of Post acquisition profits of Apple
75% × (14,000-30,000) (12,000)
Less goodwill impaired (5,000)
––––––
Group retained earnings 32,000
––––––
2 CARLISLE INC
Statement of comprehensive income extracts
A101 B102 C103 D104 Total
$ $ $ $ $
Revenue 97,500 475,000 345,000 28,000 945,500
Cost of sales (100,000)
––––––– (340,000)––––––– (403,000)––––––– ––––––– (28,000) (871,000)–––––––
Gross profit (2,500)
––––––– –––––––135,000 ––––––– (58,000) ––––––– 0 –––––––74,500
Extracts from financial statements
$
Revenues recognised in the year 945,500
Costs to date plus foreseeable profits less losses 1,577,500
Gross amounts due from customers 40,500
Gross amounts due to customers 28,000
WORKINGS
(1) Calculate total expected profit
A101 B102 C103 D104
$ $ $ $
Revenue 650,000 1,000,000 850,000 790,000
Costs
To date 150,000 400,000 800,000 28,000
Future 450,000
––––––– –––––––240,000 ––––––– 88,000 –––––––672,000
Total expected 600,000 640,000 888,000 700,000
––––––– ––––––– ––––––– –––––––
(2) Calculate percentage complete on a cost basis
A101 B102 C103 D104
Costs to date .
Total expected costs 150,000 600,000 400,000 640,000 800,000 888,000 28,000 700,000
% complete 25% 62.5% 90% 4%
(3) Statement of comprehensive income
A101 B102 C103 D104
$ $ $ $ REVENUE
Revenue to date
A 25% of 650,000 162,500
B 62.5% of 1,000,000 625,000
C 90% of 850,000 765,000
D Make equal to costs 28,000
Previous period (65,000)
––––––– (150,000)––––––– (420,000) ––––––– –––––––0
Current year revenue 97,500 475,000 345,000 28,000
––––––– ––––––– ––––––– –––––––
COSTS
A 25% of 600,000 150,000
B 62.5% of 640,000 400,000
C Balance as loss making contract 803,000
D Use actual costs incurred 28,000
Previous period (50,000)
––––––– –––––––(60,000) (400,000) ––––––– –––––––0
Current year expenses 100,000 340,000 403,000 28,000
––––––– ––––––– ––––––– –––––––
PROFITS
To date 12,500 225,000 (38,000) 0
Previous period (15,000)
––––––– –––––––(90,000) ––––––– (20,000) –––––––0
Current year profits (2,500)
––––––– –––––––135,000 ––––––– (58,000) –––––––0
(4) Disclosures
A101 B102 C103 D104
$ $ $ $
Costs to date 150,000 400,000 800,000 28,000
Foreseeable profits/(losses) 12,500
––––––– –––––––225,000 ––––––– (38,000) ––––––– 0
Total 162,500 625,000 762,000 28,000
Amounts billed (130,000)
––––––– (650,000)––––––– (765,000) ––––––– ––––––– (20,000)
Due from customers 32,500 8,000
3 ORLICK
(a) Definitions
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease.
(b) Accounting treatment
This lease appears to be a finance lease. The lease term is six-years (because it is almost certain that Orlick will contract to lease the asset for the secondary period) which is equal to the useful life of the asset. At the end of this second period, the useful economic life of the asset is expected to be negligible. The present value of the minimum lease payments is:
(1·10)
Which is approximately equal to $2·4 million, the fair value of the asset. The profit or loss will show depreciation as an operating expense. The asset will be depreciated over six years, which is both the lease term and the useful economic life of the asset. Therefore (assuming a straight line basis of deprecation) the annual depreciation will be $400,000. The profit or loss will also show a finance cost of $240,000, being the “interest” on the effective borrowing of $2·4 million at 10%.
The statement of financial position will show property, plant and equipment at a depreciated cost of $2 million ($2·4 million – $400,000). The effective borrowing will be shown as a liability, split between current and non-current liabilities. In order to compute the split, it is necessary to “profile” the effective loan for the first two years as shown below:
Year Opening Finance Cash Closing Balance Cost Paid Balance
$000 $000 $000 $000
1 2,400 240 (760) 1,880
2 1,880 188 (760) 1,308
Marking Scheme
1 ORANGE INC
Marks
CBS presentation 1
Investments ½
Tangible NCA 2
Goodwill 2
Inventory 1
Receivables 1
Cash and bank ½
Share capital ½
Retained earnings 2½
Minority interest 1½
Payables ½
Dividends 1
CIS presentation 1
Revenue 1
Cost of sales 2
Admin expenses 1
Distribution costs ½
Investment income ½
Tax ½
Minority interest 1
Dividend ½
Revenue to date 1 mark per contract 4
Deduct prior periods revenue ½ mark per contract 1½
Costs to date 1 mark per contract 4
Deduct prior period costs ½ mark per contract 1½
Disclosures
Costs to date ½ each contract 2
Profit/loss ½ each contract 2
Billings ½ each contract 2
Due to/from customers ½ each sum 1
Discussion of points, 1 mark for each relevant point to max Interest expense
PPE value
