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ACCA Paper F 7 Financial Reporting F7FR(Int) Mock1 d08 Qs

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(1)

Mock 1

Financial

Reporting

F7FR-MK1-Z08-Q

Time allowed 3 hours

All FIVE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

(2)

1 Gold acquired 60% of Silver’s equity shares on 1 October 2006 at a cost of $5,020,000, Silver’s retained earnings on this date were $6,740,000.

On 1 February 2008 Gold acquired 30% of Bronze’s shares through a 1 for 1 share exchange and a cash payment of $83,400. Gold’s shares were valued at $3 on 1 February 2008. Gold exerts significant influence over the operating and financing decisions of Bronze.

The following are the statements of comprehensive income of the three companies for the year ending 30 September 2008.

Gold Silver Bronze

The share capital and reserves of the three companies at 30 September 2008 were:

Gold Silver Bronze

Neither Silver nor Bronze have issued any new shares since their respective acquisitions by Gold.

The following information is relevant:

(i) During the year the following inter company transactions took place:

Gold sold goods to Silver for $120,000, one third of the goods remain in inventory at the year-end.

Bronze sold goods to Gold on 1st September 2008 for $25,000, all of these goods

remain in inventory at the year-end.

Silver, whose main line of operations is the sale of computers, sold goods to Gold on 1st October 2007 for $220,000. Gold is using the computers as non-current assets

(3)

(ii) Plant and equipment of Silver had a fair value which was $60,000 in excess of its carrying value at the date of acquisition. These assets had four years remaining life on that date.

(iii) Profits accrue evenly throughout the year.

(iv) Silver paid a dividend of $150,000 on 1 July 2008, no dividends have been proposed by any of the three companies.

(v) Non-controlling interest is valued at its proportionate share of the identifiable net assets; it is not credited with its share of goodwill.

Goodwill is tested for impairment on an annual basis. The goodwill in respect of the acquisition of Silver has fallen in value by 12½%, based on its original value, in each of the two years since acquisition. The recoverable amount of the investment in Bronze is greater than the year-end carrying value of the investment in the consolidated statement of financial position:

Required:

(a) Calculate the goodwill on acquisition of both Silver and Bronze and identify

the charge in respect of goodwill, to the statement of comprehensive income for

the current period. (7 marks)

(b) Prepare the consolidated statement of comprehensive income of Gold for the

year to 30 September 2008. (13 marks)

(c) Prepare a reconciliation of the consolidated retained earnings for year ended

30 September 2008. (5 marks)

(4)

2 The following trial balance relates to Telenorth at 30 September 2008:

$000 $000

Sales revenue 283,460

Inventory 1 October 2007 12,400

Purchases 147,200

Distribution expenses 22,300

Administration expenses 34,440

Loan note interest paid 300

Interim dividends – ordinary 2,000

– preference 480

Investment income 1,500

25 year leasehold building – cost 56,250

Plant and equipment – cost 55,000

Computer system – cost 35,000

Investments – at valuation 34,500

Depreciation 1 October 2007 (note (ii)) – leasehold 18,000

– plant and equipment 12,800

– computer system 9,600

Trade accounts receivable (note (iii)) 35,700

Bank overdraft 1,680

Trade accounts payable 17,770

Deferred tax (note (iv)) 5,200

Ordinary shares of $1 each 20,000

Suspense account (note (v)) 26,000

6% Loan notes (issued 1 October 2007) 10,000

8% Preference shares 12,000

Revaluation surplus (note (iv)) 3,400

Accumulated profits 1 October 2007 _______ _______ 14,160

435,570 435,570 _______ _______

The following notes are relevant:

(i) An inventory count was not conducted by Telenorth until 4 October 2008 due to operational reasons. The value of the inventory on the premises at this date was $16 million at cost. Between the year-end and the inventory count the following transactions have been identified:

$

normal sales at a mark up on cost of 40% 1,400,000

sales on a sale or return basis at a mark up on cost of 30% 650,000

goods received at cost 820,000

All sales and purchases had been correctly recorded in the period in which they occurred. (ii) Telenorth has the following depreciation policy:

„ leasehold – straight-line;

„ plant and equipment – five years straight line with residual values estimated at $5,000,000;

(5)

Depreciation of the leasehold and plant is treated as cost of sales; depreciation of the computer system is an administration cost.

(iii) The outstanding account receivable of a major customer amounting to $12 million was factored to Kwikfinance on 1 September 2008. The terms of the factoring were:

„ Kwikfinance paid 80% of the outstanding account to Telenorth immediately; „ the balance will be paid (less the charges below) when the account is collected in

full. Any amount of the account outstanding after four months will be transferred back to Telenorth at its full book value.

„ Kwikfinance will charge 1% per month of the net amount owing from Telenorth at the beginning of each month. Kwikfinance had not collected any of the amounts receivable by the year-end.

Telenorth debited the cash from Kwikfinance to its bank account and removed the account receivable from its sales ledger. It has prudently charged the difference as an administration cost.

(iv) A provision for income tax of $23.4 million for the year to 30 September 2008 is required. The deferred tax liability is to be increased by $2.2 million, all of which is to be charged to profit or loss.

(v) The suspense account contains the proceeds of two share issues:

„ the exercise of all the outstanding directors’ share options of four million shares on 1 October 2007 at $2 each;

„ a fully subscribed rights issue on 1 July 2008 of 1 for 4 held at a price of $3 each. The stock market price of Telenorth’s shares immediately before the rights issue was $4.

(vi) On 20 September 2008, the company declared a final ordinary dividend of 15 cents per share.

Required:

Prepare:

(a) (i) The statement of comprehensive income of Telenorth for the year to

30 September 2008; and (11 marks)

(ii) A statement of financial position as at 30 September 2008 in

accordance with International Accounting Standards as far as the

information permits. (14 marks)

Notes to the financial statements are not required.

(6)

3 The financial statements of Nedberg for the year to 30 September 2008, together with the comparative statement of financial position for the year to 30 September 2007 are shown below:

Statement of comprehensive income – year to 30 September 2008:

$m $m

Sales revenue 3,820

Cost of sales (note (1)) (2,620)

–––––

Gross profit for period 1,200

Operating expenses (note (1)) (300) –––––

Dividends: ordinary – Interim (120)

– Final (280) (400)

––– –––––

Profit for period 200

(7)

Statements of financial position as at 30 September:

2008 2007

Non-current assets $m $m $m $m

Property, plant and equipment 1,890 1,830

Intangible assets (note (2)) 650 300

Total equity and liabilities 5,020 3,750

––––– –––––

Notes to the financial statements:

(1) Cost of sales includes depreciation of property, plant and equipment of $320 million and a loss on the sale of plant of $50 million. It also includes a credit for the amortisation of government grants. Operating expenses include a charge of $20 million for the impairment of goodwill.

(2) Intangible non-current assets:

2008 2007

$m $m

Deferred development expenditure 470 100

Goodwill 180 200

–––– ––––

650 300

–––– ––––

(3) Non-current liabilities:

(8)

(4) Current liabilities:

The following additional information is relevant:

(i) Intangible fixed assets:

The company successfully completed the development of a new product during the current year, capitalising a further $500 million before amortisation charges for the period.

(ii) Property, plant and equipment/revaluation reserve:

„ The company revalued its buildings by $200 million on 1 October 2007. The surplus was credited to a revaluation reserve.

„ New plant was acquired during the year at a cost of $250 million and a government grant of $50 million was received for this plant.

„ On 1 October 2007 a bonus issue of 1 new share for every 10 held was made from the revaluation reserve.

„ $10 million has been transferred from the revaluation reserve to realised profits as a year-end adjustment in respect of the additional depreciation created by the

revaluation.

„ The remaining movement on property, plant and equipment was due to the disposal of obsolete plant.

prepared in accordance with IAS 7 “Statement of Cash Flows”. (20 marks)

(b) Comment briefly on the financial position of Nedberg as portrayed by the

information in your statement of cash flows. (5 marks)

(9)

4 IAS 36 “Impairment of Assets” requires that where the carrying amount of an asset exceeds its recoverable amount, the carrying amount should be written down to the recoverable amount. The phrase “recoverable amount” is defined in IAS 36 as “the higher of the assets value in use or it’s fair value less costs to sell”. The issues of how one identifies an impaired asset, the measurement of an asset when impairment has occurred and the recognition of impairment losses were are also covered in the standard.

Required:

(a) Describe the circumstances which indicate that an impairment loss relating to

anasset may have occurred. (7 marks)

(b) AB, a public limited company, has decided to comply with IAS 36 “Impairment

of Assets”. The following information is relevant to the impairment review:

AB acquired a car taxi business on 1 January 2008 for $230,000. The values of the assets of the business at that date based on net selling prices were as follows:

$000

Vehicles (12 vehicles) 120

Intangible assets (taxi licence) 30

Trade receivables 10 value of these vehicles was $30,000 and because of non-disclosure of certain risks to the insurance company, the vehicles were uninsured. As a result of this event, AB wishes to recognise an impairment loss of $45,000 (inclusive of the loss of the stolen vehicles) due to the decline in the value in use of the income generating unit, that is the taxi business. On 1 March 2008 a rival taxi company commenced business in the same area. It is anticipated that the business revenue of AB will be reduced by 25% leading to a decline in the present value in use of the business which is calculated at $150,000. The fair value of the taxi licence has fallen to $25,000 as a result of the rival taxi operator. The fair values of the other assets have remained the same as at 1 January 2008 throughout the period. (8 marks)

Required:

Describe how AB should treat the above impairments of assets in its financial statements.

(In part (b) candidates should show the treatment of the impairment loss at 1 February 2008 and 1 March 2008.)

(10)

5 IAS 12 “Income Taxes” uses the concept of temporary differences. Temporary differences are the difference between the carrying value of an asset and its tax base. The standard distinguishes between “taxable temporary differences” and “deductible temporary differences”.

Required:

The following balances and information relate to Capone, an incorporated enterprise, and are relevant as at 30th September 2008

Carrying

value Base Tax Notes

Fixed assets (NBV) $ $

Oil Rig 198,000 1

Buildings – (held at a revalued amount) 100,000 2

Plant and machinery 67,000 49,000

Assets held under finance lease 20,000 3

Receivables:

Gross amounts owed by customer To be

calculated 6

Trade receivables 53,000 4

Interest receivable 2,000

Payables

Fine 70,000

Zero coupon bond To be

calculated 7

Finance lease obligation To be

calculated 3

Interest payable 1,000

Note 1

This oilrig cost the company $220,000 at the start of the year. It is being depreciated on a 10% straight line basis for accounting purposes. The company’s tax advisers have said that the company can claim 25% as a taxable expense in this years tax computation.

Note 2

The building has been revalued during the year in accordance with IAS 16. It originally cost $75,000. It is to be written off over its remaining useful economic life of 50 years.

Note 3

(11)

Note 4

The trade receivables balance in the accounts is made up of the following amounts: $

The credit balance on the deferred taxation account on 1st October 2007 was $3,890.

Note 6

The company is engaged in a construction contract as defined in IAS 11. The following information is relevant. The contract commenced on 1st October 2007.

$

redeemable for a $150,000 in 5 years. The company allocates interest so as to give a constant periodic rate of charge on the outstanding obligation. The effective yield on the bond is 8.45%

Note 8

Capone, operates in country where the tax regime is as follows;

The tax code allows for the general application of the accounting principles of prudence and accruals, but it does state the following:

Tax allowable depreciation is computed according to rules set out in the tax code.

Allowance for doubtful debts are only deductible under very strict and limited circumstances.

Interest is taxed/allowable on a strict cash basis

Unrealised exchange differences are not taxed/allowable

Profit recognised under the rules in IAS 11 is not taxable. Such contracts are taxed on completion and all costs incurred are allowable in the calculation of taxable profit on the contract.

The tax base of property is not affected by asset revaluations.

(12)

Required:

Calculate the charge to the statement of comprehensive income in respect of deferred

tax for the year ending 30th September 2008.

(10 marks)

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