Monitoring Test MT1B
Financial
Reporting
F7FR-MT1B-Z08-Q
Time allowed 1.5 hours
All THREE questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
Accountancy Tuition Centre Ltd
ATC
Accountancy Tuition Centre (International Holdings) Ltd 2008 2
1 Orange Inc has one subsidiary undertaking, Apple Inc (its only investment). It acquired 75,000 of Apple’s $1 ordinary shares on 1 January 2004 for $122,500. At that date the balance on Apple’s retained earnings was $30,000.
Statements of financial position and statements of comprehensive income for the two companies for the year ended 31 December 2007 are given below
Statements of financial position as at 31 December 2007
Orange Inc Apple Inc
Total equity and liabilities 463,000
Accountancy Tuition Centre (International Holdings) Ltd 2008 3
Statements of comprehensive income for the year ended 31 December 2007
Orange Inc Apple Inc
$ $
Revenue 597,000 462,000
Cost of sales (322,000)
––––––– (271,000) –––––––
Gross profit 275,000 191,000
Administrative expenses (101,000) (32,000)
Distribution expenses (53,000)
––––––– (27,000) –––––––
Operating profit 121,000 132,000
Investment income 7,500
––––––– ––––––– 2,000
Profit before tax 128,500 134,000
Taxation (18,000)
––––––– (21,000) –––––––
Profit after tax 110,500 113,000
––––––– –––––––
Extract from SOCIE
Retained profit 1 January 2007 49,000 14,000
Profit for year 110,500 113,000
Dividends
Paid (10,000) (10,000)
Proposed (15,000)
––––––– (20,000) –––––––
Retained profit at 31 December 2007 134,500 97,000
––––––– –––––––
Additional information
(i) Non-controlling interest is valued at their proportionate share of the identifiable net assets on acquisition, they are not credited with goodwill.
(ii) The value of goodwill on the following dates is.
31 December 2006 $5,000
31 December 2007 $2,000
(iii) During the year Apple sold goods to Orange for $120,000. Apple sells all goods at a mark-up of 25%. At 31 December 2007 Orange’s inventory included $12,000 of these goods.
(iv) For the purposes of calculating the original amount paid for the shares of Apple Inc, Orange valued Apple’s net assets at $150,000. No adjustment was made in the books of Apple’s books to reflect this valuation which was due to land (included in tangible non current assets) being worth more than its book value.
(v) Orange Inc has not yet accrued for its share of Apple’s proposed dividend. The dividends were proposed prior to the financial year end.
Required:
Prepare the consolidated statement of financial position and statement of comprehensive income of Orange Inc for the year ended 31 December 2007. Notes to the accounts are not required.
Accountancy Tuition Centre (International Holdings) Ltd 2008 4
2 Carlisle Inc carried out work on 4 construction contracts during the financial year to 30 September 2008. Details of the four projects are set out below:
A101 B102 C103 D104
$ $ $ $
Contract value 650,000 1,000,000 850,000 790,000
Costs to date 150,000 400,000 800,000 28,000
Estimated future costs 450,000 240,000 88,000 672,000 Payments on account 130,000 650,000 765,000 20,000
Date of commencement October2006 July2006 August2006 August 2008
Revenues recognised in
Calculate the amounts to be included in the financial statements of Carlisle Inc for the year ended 30 September 2008, preparing all relevant extracts of the financial statements but excluding accounting policy notes. The directors do not recognise profits until the contracts are 5% complete and it is the accounting policy to calculate percentage completion on a cost basis.
(20 marks)
3 Orlick needs to re-fit one of its production plants with new machinery. The machinery would cost $2·4 million to buy and would have an expected useful economic life of six years. As an alternative to outright purchase the machines could be leased on a four-year lease with payments of $760,000 annually in arrears. At the end of the four-year period Orlick has the option to continue to lease the machinery for a further two years for an annual rental of $1, payable in arrears. Orlick is responsible for the repair and maintenance of the machinery throughout the primary and secondary rental period. At the end of six years the machinery is likely to have a negligible residual value.
Required:
(a) Define a finance lease and an operating lease in accordance with IAS 17 Leases.
(3 marks)
(b) Assuming the leasing option is chosen by Orlick, compute all relevant amounts (excluding cash) that would appear in the statement of comprehensive income and the statement of financial position for the first year of the lease. Assume that the lease commenced on the first day of the accounting period and that all payments in arrears have been made by the end of the reporting period. Where relevant, you should refer to appropriate international financial reporting standards. Assume, where necessary, an annual finance cost of 10%.
(7 marks)
(10 marks)
