Question 1 OSCAR INC
The following trial balance has been extracted from the books of accounts of Oscar Inc as at 31 March 2008.
$000 $000
Administrative expenses 210
Share capital (ordinary shares of $1 fully paid) 600
Receivables 470
Bank overdraft 80
Income tax (overprovision in 2007) 25
Provision for pension costs 180
Distribution costs 420
Listed fixed asset investments 560
Investment income 75
Plant and machinery
At cost 750
Accumulated depreciation (at 31 March 2008) 220
Retained earnings (at 1 April 2007) 180
Purchases 960
Inventory (at 1 April 2007) 140
Trade payables 260
Sales revenue 2,010
Interim dividend paid 120
——— ——— 3,630 3,630 ——— ——— Additional information
(1) Inventory at 31 March 2008 was valued at $150,000.
(2) The following items are already included in the balances listed in the above trial balance.
Distribution Administrative
costs expenses
$000 $000
Depreciation (for the year to 31 March 2008) 27 5
Hire of plant and machinery 20 15
Auditors’ remuneration – 30
Directors’ emoluments – 45
(3) The income tax rate is 33%.
(4) The income tax charge based on the profits for the year is estimated to be $74,000.
(5) The provision for pension costs is to be increased by $16,000.
(6) The company’s authorised ordinary share capital consists of 1,000,000 ordinary shares of $1 each.
(7) A final dividend of 50 cents per share had been proposed prior to the year end but has not been recorded.
(9) The market value of the listed fixed asset investments, which are classed as ‘Fair Value through profit or loss’ as at 31 March 2008 was $580,000. There were no purchases or sales of such investments during the year.
Required:
Insofar as the information permits, prepare the company’s statement of comprehensive income for the year to 31 March 2008 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks) Question 2 MERCURY CO
The trial balance of Mercury Co at 30 June 2008 was as follows:
Dr Cr
$000 $000
7% Preferred shares of $1 500
Ordinary shares of 50 cents 250
Share premium account 180
Retained earnings, at 1 July 2007 70
Inventory, 1 July 2007 450
Land at cost 300
Buildings at cost 900
Buildings, accumulated depreciation, 1 July 2007 135
Plant at cost 1,020
Plant, accumulated depreciation, 1 July 2007 370
Trade payables 900
Trade receivables 600
Allowance for doubtful debts, at 1 July 2007 25
Purchases 2,030 You are provided with the following additional information:
(i) Depreciation on buildings is to be provided at 5% per annum on cost and allocated to administrative expenses.
(ii) Plant is to be depreciated at 20% per annum using the reducing balance method and included in distribution costs.
(iii) Closing inventory is valued at $500,000.
(vi) Interest on the loan notes has not been paid during the year.
(vii) During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This has not been entered into the books. The bonus shares do not rank for dividend for the current financial year.
(viii) Provisions are to be made for the following:
−
the preferred dividend for the year;−
an interim ordinary dividend of 5 cents per share;−
an income tax charge of $55,000 for the year.Required:
Prepare for Mercury for the year ended 30 June 2008, in accordance with IAS 1 Presentation of Financial Statements:
(a) a statement of comprehensive income; and (8 marks)
(b) a statement of changes in equity; and (5 marks)
(c) a statement of financial position. (9 marks)
Submit ALL workings. Notes to the accounts are NOT required.
(22 marks) Question 3 SULPHUR
The balances listed below were extracted from the records of Sulphur Co on 30 June 2008.
$
Revenue 530,650
Purchases 298,400
Returns (inwards) 1,880
Delivery vehicles (net book value) 19,230 Factory plant and equipment (net book value) 24,000 Land and buildings (net book value) 350,000
Factory overheads 66,420
Administrative expenses 18,710
Rent received 12,000
Investments (unlisted) 30,000
Investment income 1,500
Inventory at 1 July 2007 24,680
Trade receivables 15,690
Trade payables 34,700
Distribution costs 44,280
Cash in hand 410
Bank overdraft 4,820
Ordinary shares ($1 each) 150,000
The following transactions and events occurred on 30 June 2008, after the above balances had been extracted:
(1) Sulphur received $460 from a customer.
(2) Inventory was valued at $29,170 at the close of business.
(3) Sulphur received an electricity bill for $1,240 relating to the factory for the three months to 30 June 2008. The bill was paid in July 2008.
(4) Sulphur paid $690 to a supplier in full settlement of an invoice for $700.
(5) The company’s land and buildings were valued by a chartered surveyor at $390,000 and the new value is to be included in the statement of financial position.
(6) Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles 20% Factory plant and equipment 10%
(7) Bonus shares were issued on the basis of one for every two held on 29 June 2008.
(8) Income tax for the financial year ended 30 June 2008 was estimated at $38,100.
Required:
Prepare for Sulphur Co for the year ended 30 June 2008, in accordance with IAS 1 Presentation of Financial Statements:
(i) a statement of comprehensive income using the “cost of sales” (ie function of expense)
method; (7 marks)
(ii) a statement of changes in equity; and (3 marks)
(iii) a statement of financial position. (7 marks)
NOTE: Notes to the financial statements are NOT required.
Question 4 CAYMAN
Cayman Co prepares annual financial statements to 30 September. At 30 September 2008, the company’s list of account balances was as follows:
$000 $000
Revenue 7,400
Production costs 4,140
Inventory at 1 October 2007 695
Distribution costs 540
Administrative expenses 730
Loan interest expense 120
Land at valuation 5,250
Buildings – cost 4,000
– accumulated depreciation at 1 October 2007 1,065 Plant and equipment
– cost 6,400
– accumulated depreciation at 1 October 2007 1,240 Trade accounts receivable 2,060
Trade accounts payable 1,120
Bank overdraft 40
Issued shares (50 cent ordinary) at 30 September 2008 7,000 Share premium account at 30 September 2008 2,000
Revaluation surplus 1,500
Retained earnings 1,570
12% loan (payable 2015) 1,000
______ ______ 23,935 23,935 –––––– ––––––
The following matters are relevant to the preparation of the financial statements for the year ended 30 September 2008:
(1) Inventory at 30 September 2008 amounted to $780,000 at cost before adjusting for the following:
(i) Items which had cost $40,000 and which would normally sell for $60,000 were found to be faulty. $10,000 needs to be spent on these items in order to sell them for $45,000.
(ii) Goods sent to a customer on a sale or return basis have been omitted from inventory and included as sales in September 2008. The cost of these items was $8,000 and they were included in revenue at $12,000. The goods were returned by the customer in October 2008.
(2) Depreciation is to be provided on cost as follows:
Buildings: 2% per annum Plant and equipment: 20% per annum
(4) Accrued expenses and prepayments were:
Accrued expenses Prepayments
$000 $000
Distribution costs 95 60
Administrative expenses 35 30
(5) During the year 4 million ordinary shares were issued at 75 cents each. The directors of Cayman declared an interim dividend of 2 cents per share in September 2008. No dividends were paid during the year.
(6) Loan interest is paid annually, in arrears, on 30 September each year.
Required:
Prepare for Cayman Co for the year ended 30 September 2008:
(i) an statement of comprehensive income; (10 marks)
(ii) a statement of financial position; and (10 marks)
(iii) a statement of changes in equity, (6 marks)
in accordance with IAS 1 Presentation of Financial Statements. NOTE: Notes to the financial statements are NOT required.
(26 marks) Question 5 FIVE CONCEPTS
Required:
Define the following accounting concepts and explain for each their implications for the preparation of financial statements.
(a) The entity concept (4 marks)
(b) Going concern (4 marks)
(c) Materiality (4 marks)
(d) Fair presentation (true and fair view) (4 marks)
(16 marks) Question 6 IASB
Required:
(a) What are the stated objectives of the International Accounting Standards Board
(IASB)? (4 marks)
(b) Explain how the IASB approaches the task of producing a standard, with particular reference to the way in which comment or feedback from interested parties is obtained.
(c) As well as developing International Accounting Standards, the IASB has published a Framework for the Preparation and Presentation of Financial Statements.
What are the stated purposes of the Framework? (8 marks) (20 marks) Question 7 OBJECTIVES
The objective of financial statements is to provide information about financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
Required:
(a) State five potential users of company published financial statements, briefly explaining for each one their likely information needs from those statements. (10 marks) (b) Briefly discuss whether you think that the company published financial statements, prepared in accordance with IFRS, achieve the objective stated above, giving your reasons.
Include in your answer two ways in which you think the quality of the information disclosed in financial statements could be improved. (10 marks)
(20 marks) Question 8 COMPARABILITY
Comparability is a characteristic which adds to the usefulness of financial statements.
Required:
(a) Explain what is meant by the term “comparability” in financial statements, referring to TWO types of comparison that users of financial statements may make. (4 marks) (b) Explain TWO ways in which the IASB’s Framework for the Preparation and Presentation of Financial Statements and the requirements of accounting standards aid the
comparability of financial information. (4 marks)
Question 9 ADJUSTMENTS INC
Adjustments Inc manufactures items for use in engineering products. You note that amongst its many tangible non current assets it has the following.
(a) A lathe was purchased on 1 January 2001 for $150,000. The plant had an estimated useful life of twelve years, residual value of Nil. Depreciation is charged on the straight line basis. On 1 January 2007, when the asset’s net book value is $75,000, the directors decide that the asset’s total useful life is only ten years.
(b) A grinder was purchased on 1 January 2004 for $100,000. The plant had an estimated useful life of ten years and a residual value of Nil. Depreciation is charged on the straight line basis. On 1 January 2007, when the asset’s net book value is $70,000, the directors decide that it would be more appropriate to depreciate this asset using the sum of digits approach. The remaining useful life is unchanged.
(c) The company purchased a fifty year lease some years ago for $1,000,000. This was being depreciated over its life on a straight line basis. On 1 January 2007, when the net book value is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to $1,500,000. This revised value is being incorporated into the accounts.
Required:
As the company’s financial accountant, prepare a memorandum for the attention of the board explaining the effects of these changes on the depreciation charge and indicating what additional disclosures need to be made in the accounts for the year to 31 December 2007.
(15 marks)
Question 10 SPONGER INC
Sponger Inc has been having financial difficulties recently due to the economic climate in its industry sector. However, its financial director Mr Philip Tislid has discovered that there are a number of schemes by which he can obtain government financial assistance. Details of the assistance obtained are as follows.
(a) Sponger Inc has received three grants of $10,000 each in the current year relating to ongoing research and development projects. One grant relates to the Cuckoo project which involves research into the effect of various chemicals on the pitch of the human voice. No constructive conclusions have been reached yet.
The second relates to the development of a new type of hairspray which is expected to be extremely popular. Commercial production will commence in 2009 and large profits are foreseen. The third relates to the purchase of high powered microscopes.
(c) Sponger Inc entered into an agreement with the government that, in exchange for a grant of $60,000, it will provide “vocational experience” tours around its factory, for twelve young criminals per month over a five year period starting on 1 January 2007. The grant was to be paid on the date Sponger Inc purchased a minibus (useful life three years) to take the inmates to the factory and back. The bus was bought and the grant received on 1 January 2007.
The grant becomes repayable on a pro rata basis for every monthly visit not fulfilled. During 2007 five visits did not take place due to the pressure of work and this pattern is expected to be repeated over the next four years.
No repayments have yet been made.
Mr Tislid is totally confused as to how to account for these grants.
Required:
Write a memorandum to Mr Tislid explaining to him how he should account for the above grants in the accounts for the year ended 31 December 2007.
(12 marks) Question 11 FAM
Fam had the following tangible non-current assets at 31 December 2006.
Cost Depreciation NBV
In the year ended 31 December 2007 the following transactions occur.
(1) Further costs of $53,000 are incurred on buildings being constructed by the company. A building costing $100,000 is completed during the year.
(2) A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3) Additions to plant are $154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5) The following assets are sold.
Cost Depreciation Proceeds brought forward
$000 $000 $000
Plant 277 195 86
(6) Land and buildings were revalued at 1 January 2007 to $1,500,000, of which land is worth $900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were purchased ten years before the revaluation.
(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line Plant 20% per annum straight line Fixtures 25% per annum reducing balance
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published accounts for the year ended 31 December 2007.
(14 marks) Question 12 STOAT
The directors of Stoat, a limited liability company, are reviewing the company’s draft financial statements for the year ended 30 June 2008.
Two matters under discussion are depreciation and non-current asset valuation – several directors are of the opinion that the company’s depreciation methods and rates are unsatisfactory, and that the statement of financial position values of some of the non-current assets are unrealistic.
Required:
Draft a memorandum for the directors dealing with the following matters:
(a) The purpose of depreciation and the factors affecting the assessment of useful life according to IAS 16 “Property, Plant and Equipment”. (7 marks) (b) Three items of evidence obtainable from inside or outside the company, to check whether the company’s depreciation rates are in fact likely to be too low. (3 marks) (c) The disclosures, if any, which would be required in the financial statements if the company decided to change its depreciation methods. (4 marks) (d) The requirements of IAS 16 “Property, Plant and Equipment” regarding revaluation of
non-current assets. (6 marks)
Question 13 SUBSTANCE OVER FORM
“The accounting treatment and disclosure of the vast majority of transactions will remain the same whether they are accounted for on the basis of ‘substance’ or ‘form’. However, some transactions will have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be sufficient to account for them merely by recording that form.”
Required:
Discuss the proposal that accounts should always reflect the commercial substance of transactions.
(12 marks) Question 14 HUGHES AND CUSTOM CARS
(a) On 10 December 2007, Hughes sold inventory with a production cost of $30 million to the Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the goods exercisable on 10 January 2008 at a price of $37.8 million. The Wodwo Bank has a put option (an option to resell to the seller) exercisable on 10 February 2008 at a price of $39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2007. (4 marks)
(b) Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma, by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them from its showroom on the same site, which it owns. During the year, the showroom was renovated and enlarged by means of an extension to the existing building. Sigma contributed many of the interior fitments, such as display stands for the cars, free of charge and also made a cash payment toward the total costs.
Required:
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars. (4 marks)
(8 marks) Question 15 PERSEUS
The list of account balances of Perseus, a limited liability company, contains the following items at 31 December 2007:
Dr Cr
$ $
Opening inventory 3,850,000
Accounts receivable ledger balances 2,980,000 1,970 Accounts payable ledger balances 14,300 1,210,400
Prepayments 770,000
The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items (2) and (3) below.
In the course of preparing the financial statements at 31 December 2007, the need for a number of adjustments emerged, as detailed below:
(1) The opening inventory was found to have been overstated by $418,000 as a result of errors in calculations of values in the inventory sheets.
(2) Some items included in closing inventory at cost of $16,000 were found to be defective and were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
(3) Goods with a sales value of $88,000 were in the hands of customers at 31 December 2007 on a sale or return basis. The goods had been treated as sold in the records and the full sales value of $88,000 had been included in trade receivables. After the end of the reporting period, the goods were returned in good condition. The cost of the goods was $66,000.
(4) Accounts receivable amounting to $92,000 are to be written off.
(5) An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6) The manager of the main selling outlet of Perseus is entitled, from 1 January 2007, to a commission of 2% of the company’s profit after charging that commission. The profit amounted to $1,101,600 before including the commission, and after adjusting for items (1) to (5) above. The manager has already received $25,000 on account of the commission due during the year ended 31 December 2007.
Required:
(a) (i) Explain how adjustment should be made for the error in the opening inventory, according to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. (Assume that it constitutes a material error.)
(ii) State two disclosures required by IAS 8 in the financial statements at 31 December 2007 for the adjustment in (i) above. (6 marks) (b) Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2007. (14 marks)
(20 marks) Question 16 JENSON
The timing of revenue (income) recognition has long been an area of debate and inconsistency in accounting. Industry practice in relation to revenue recognition varies widely, the following are examples of different points in the operating cycle of businesses that revenue and profit can be recognised:
on the acquisition of goods;
during the manufacture or production of goods; on delivery/acceptance of goods;
when certain conditions have been satisfied after the goods have been delivered; receipt of payment for credit sales;
In the past the “critical event” approach has been used to determine the timing of revenue recognition. The International Accounting Standards Board in its “Framework for the Preparation and Presentation of Financial Statements (Framework)” has defined the “elements” of financial statements, and it uses these to determine when a gain or loss occurs.
Required:
(a) Explain what is meant by the critical event in relation to revenue recognition and discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
(b) For each of the stages of the operating cycle identified above, explain why it may be an appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs. (12 marks)
(c) Jenson has entered into the following transactions/agreements in the year to 31 March 2008: (i) Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2007. Jenson has an option to repurchase the goods from Wholesaler at any time within the next two years. The repurchase price will be $35,000 plus interest charged at 12% per annum from the date of sale to the date of repurchase. It is expected that Jenson will repurchase the goods.
(ii) Jenson owns the rights to a fast food franchise. On 1 April 2007 it sold the right to open a new outlet to Mr Cody. The franchise is for five years. Jenson received an initial fee of $50,000 for the first year and will receive $5,000 per annum thereafter. Jenson has continuing service obligations on its franchise for advertising and product development that amount to approximately $8,000 per annum per franchised outlet. A reasonable profit margin on the provision of the continuing services is deemed to be 20% of revenues received.
(iii) On 1 September 2007 Jenson received total subscriptions in advance of $240,000. The subscriptions are for 24 monthly publications of a magazine produced by Jenson. At the year end Jenson had produced and despatched six of the 24 publications. The total cost of producing the magazine is estimated at $192,000 with each publication costing a broadly similar amount.
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2008. (8 marks)
(25 marks) Question 17 XYZ INC
A lessor, ABC Inc, leases an asset, which it purchased for $4,400, to XYZ Inc under a finance lease. It estimates that its residual value after five years will be $400 and after seven years will be zero.
Required:
(a) Show the relevant extracts from the accounts of XYZ Inc at the year end 31 December
2007. (9 marks)
(b) Show the allocation of the finance charge for XYZ Inc using the actuarial before tax method (using the interest rate implicit in the lease). Compare this with the sum of the
digits allocation in (a) above. (5 marks)
The rate of interest implicit in the lease is 7.68% per half year.
(14 marks)
Question 18 SNOW INC
On 1 January 2007, Snow Inc entered into the following finance lease agreements.
(a) Snowplough
To lease a snowplough for 3 years from Ice Inc. The machine had cost Ice Inc $35,000.
A deposit of $2,000 was payable on 1 January 2007 followed by 6 half yearly instalments of $6,500 payable in arrears, commencing on 30 June 2007. Finance charges are to be allocated on a sum of digits basis.
(b) Snow machine
To lease a snow machine for 5 years from Slush Inc. The snow machine cost Slush Inc $150,000 and is estimated to have a useful life of 5 years.
Snow Inc has agreed to make 5 annual instalments of $35,000, payable in advance, commencing on 1 January 2007.
The interest rate implicit in the lease is 8.36%.
Required:
Show the relevant extracts from the accounts of Snow Inc for year ended 31 December 2007. (15 marks)
Question 19 INTELLECTUAL INDIVIDUALS INC
Intellectual Individuals Inc is a company involved in a wide range of activities. At 31 December 2007 it provided you with details of the following projects.
Project Rico
Project Mounsey
The company has for the last few years been trying to devise a miniature radio transmitter for golf balls. This will enable golfers to locate their balls when they are mis-hit into the rough. The company had no success until the end of 2002, when a breakthrough was made, although costs of $120,000 had been incurred to that date. The product went on sale at the end of 2004 after a further $200,000 expenditure had been incurred on cosmetic changes. The advertising budget is $100,000 a year for the three years commencing 1 January 2007. The product has achieved spectacular sales and profits. The company anticipates sales continuing for between five and fifteen more years from the end of the current year.
Project Wellington
The company had found that an existing product could be used as a petrol additive which would cut fuel consumption by 50%. Various oil companies had expressed support for the product, and it was clear that it would be very popular with the public. Up to the end of 2003 a total of $400,000 had been spent refining the product to ensure that it works in all types of engine. The product was estimated to have a shelf life of ten years and has been successful since 2005. However, legislation proposed by the government during the current year to control exhaust emissions means that the product will have to be withdrawn from the market.
Required:
(a) Write a memorandum to the chairman justifying the accounting treatment which the company should have adopted for each of the projects assuming that the prime aim is to
match revenues to costs. (8 marks)
(b) Disclose the note to the financial statements in respect of research development. (An
accounting policy note is not required). (7 marks)
(15 marks) Question 20 ROVERS (IASs 10, 37 & 38)
The directors of Rovers are reviewing the company’s most recent draft financial statements and the following points have been raised for discussion:
(a) Research and development
(b) Provision/Contingent liability
An ex-director of the company has commenced an action against the company claiming substantial damages for wrongful dismissal. The company lawyers have advised that the ex-director is unlikely to succeed with his claim. The lawyers potential liabilities are:
$000 – legal costs (to be incurred whether the claim is successful or not) 50 – settlement of claim if successful 500 ____ 550 —— At present there is no provision or note for this contingency
(4 marks)
Required:
State with reasons whether or not you consider the accounting treatments in draft financial statements, as described above, are acceptable. Include in your answer, where appropriate, an explanation of the relevant provisions of IFRS.
(9 marks) Question 21 LAMOND
Lamond, a limited liability company, is engaged in a number of research and development projects. Its accounting policy as regards research and development is to capitalise expenditure as far as allowed by IAS 38 “Intangible Assets”. At 30 June 2007 the following balances existed in the company’s accounting records:
Project A Development completed 30 June 2005. Total expenditure $200,000. Being amortised over five years on the straight line basis in accordance with the company’s standard policy. Balance at 30 June 2007: $120,000.
Project B A development project commenced 1 July 2005. Total expenditure in the years ended 30 June 2006 and 30 June 2007 totalled $175,000. During the year ended 30 June 2008, it became clear that a competitor had launched a superior product and the project was abandoned. Further development expenditure in the year ended 30 June 2008 amounted to $55,000.
Project C Development commenced 1 October 2006. Expenditure to date:
Year ended 30 June 2007 $85,000 Year ended 30 June 2008 $170,000
All expenditure on Project C meets the criteria for capitalisation in IAS 38.
Project D In addition, research project D commenced on 1 July 2007. Expenditure to date (all research):
Required:
(a) State the conditions which must be met if development expenditure is to be recognised as
an intangible asset. (6 marks)
(b) Calculate the amounts which should appear in the company’s statement of comprehensive income and statement of financial position for research and development
for the year ended 30 June 2008. (7 marks)
(c) Show the notes which IAS 38 requires in the financial statements for the year giving supporting figures for the items in the statement of comprehensive income and
statement of financial position. (7 marks)
(20 marks) Question 22 ALLRIGHTS INC
Allrights Inc is an old established company operating in the highly competitive business of manufacturing and marketing radios and television sets.
A new board of directors is considering the draft accounts, prepared under the historical cost convention, for the year ended 31 March 2008.
The main executive directors involved in the policy discussions are
– Stevie Striver (managing) – Charlie Chatty (sales) – Gordon Gloome (production)
You are in attendance to give advice.
A standard model radio has the following disclosed costs.
$
Direct labour and material 38
Bought-in components 5
Factory overhead costs 8
Royalty on sale payable to the owner of a patent 2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows.
$ Salary and space costs of executive responsible for production planning 4,000
General office administration 2,500
Selling and distribution costs, including a fixed $4 per set commission
payable to salesmen 7,500
The advertised selling price of the model has recently been reduced to $60 because of intensive competition.
(1) Stevie Striver
“A most prudent approach is necessary, particularly as the company has a cash flow problem which means that the amount locked up in inventory should be kept as low as possible. I propose a valuation of $43 per set.”
(2) Charlie Chatty
“All the functions of the company are directed towards the production and sale of a good finished product and therefore I think each set should be valued at the total cost involved, including the other overhead costs.”
(3) Gordon Gloome
“$47 per set, because that’s what the production cost would have been if we’d been more efficient and kept in line with budgets.”
Required:
Give your opinions in note form on the views expressed by each director with your own opinion of the appropriate valuation, stating the principles involved.
(8 marks) Question 23 SAMPI (IAS 2)
(a) IAS 2 “Inventories” requires inventories of raw materials and finished goods to be valued in financial statements at the lower of cost and of net realisable value.
Required:
(i) Describe three methods of arriving at cost of inventory which are acceptable under IAS 2 and explain how they are regarded as acceptable. (5 marks) (ii) Explain how the cost of an inventory of finished goods held by the manufacturer would normally be arrived at when obtaining the figure for the
financial statements. (3 marks)
(b) Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first in, first out) in valuing inventory, but it is interested to know the effect on its inventory valuation of using weighted average cost instead of FIFO
At 28 February 2008 the company had inventory of 4,000 standard plastic tables, and has computed its value on each side of the two bases as:
Basis Unit Total
cost value
$ $
FIFO 16 64,000
During March 2008 the movements on the inventory of tables were as follows:
On a FIFO basis the inventory at 31 March was $32,400.
Required:
Compute what the value of the inventory at 31 March 2008 would be using weighted
average cost (5 marks)
In arriving at the total inventory values you should make calculations to two decimal places (where necessary) and deal with each inventory movement in date order.
(20 marks) Question 24 WILLIAM INC
William Inc, a company which designs and builds racecourses, commenced a four year contract early in 2004. The price was initially agreed at $12,000,000.
Profit, which was reasonably foreseeable from the year ended 31 December 2004, is to be taken on a costs basis, and revenue is to be taken on a consistent basis.
Relevant figures are as follows.
2004 2005 2006 2007
$000 $000 $000 $000 Costs incurred in year 2,750 3,000 4,200 1,150 Anticipated future costs 7,750 7,750 1,550 – Work certified and invoiced to date 3,000 5,000 11,000 12,500
Required:
Show how the above would be disclosed in the statement of comprehensive income and statement of financial position of William Inc for each of the four years ended 31 December 2007.
Note Work to the nearest $000.
Question 25 EARLEY INC
Earley Inc is finalising its accounts for the year ended 31 December 2007. The following events have arisen since the year end and the financial director has asked you to comment on the final accounts. (a) At 31 December 2007 trade receivables included a figure of $250,000 in respect of Nedengy
Inc. On 8 March 2008, when the current debt was $200,000, Nedengy Inc went into receivership. Recent correspondence with the receiver indicates that no dividend will be paid to unsecured creditors.
(b) On 15 March 2008 Earley Inc sold its former head office building, Whitley Wood, for $2.7 million. At the year end the building was unoccupied and carried at a value of $3.1 million. (c) Inventories at the year end included $650,000 of a new electric tricycle, the Opasney. In
January 2008 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in Bongolia, is being investigated, although the current price is expected to be cost less 30%.
(d) Stingy Inc, a subsidiary in Outer Sonning, was nationalised in February 2008. The Outer Sonning authorities have refused to pay any compensation. The net assets of Stingy Inc have been valued at $200,000 at the year end.
(e) Freak floods caused $150,000 damage to the Southcote branch of Earley Inc in January 2008. The branch was fully insured.
(f) On 1 April 2008 Earley Inc announced a 1 for 1 rights issue aiming to raise $15 million.
Required:
Explain how you would respond to the matters listed above.
(13 marks)
Question 26 ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 2007 and you should assume that the amounts involved are material in each case.
(a) At the year end there was a debit balance in the books of a company for $15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 2008, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that $18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost $400,000 in 2004 and was expected to last for ten years. At the beginning of the financial year 2007 the book value was $280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only $80,000 at 31 December 2007.
(d) An item has been produced at a manufacturing cost of $1,800 against a customer’s order at an agreed price of $2,300. The item was in inventory at the year end awaiting delivery instructions. In January 2008 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately $300, which is expected to make it marketable with other customers at a price of about $1,900.
(e) At 31 December a company has a total potential liability of $1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs is likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year end financial statements as appropriate.
(12 marks)
Assume the following tax rules in respect of questions 27 – 31:
Transactions are only deductible for tax purposes when they are “booked”, i.e. double entered
into statutory accounting records. This means that there is often little difference between accounting profit under local GAAP and the taxable profit. However, it is common practice for large companies to maintain a parallel set of records and accounts for reporting according to IFRS rules. These are notably different to the rules in the domestic tax code and as a result the accounting profit under IFRS can be very different from the taxable profit.
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 taxable/allowable on a cash basis.
Development expenditure is allowable for tax in the period in which it is incurred.
The government operates a system of incentive through the tax system known as “Investment
Relief”. Under this system a company is able to claim a proportion of the costs of qualifying fixed assets, as being deductible, in excess of the normal depreciation rates which would result from adoption of IFRSs.
The tax code defines finance leases but the criteria in the code are stricter than those in IAS
Question 27 SHEP (I)
Shep was incorporated on 1 January 2007. In the year ended 31 December 2007 the company made a profit before taxation of $121,000
This figure was after a depreciation charge of $11,000.
During the period Shep made the following capital additions. $
Plant 48,000
Motor vehicles 12,000
Tax allowances for the current year are $15,000.
Corporate tax is chargeable at the rate of 30%.
Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 2007. (b) Calculate the deferred tax balance that is required as at 31st December 2007.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 2007
(d) Prepare the note which shows the compilation of the tax expense for the year ended 31st December 2007.
Question 28 SHEP (II)
Continuing from the previous year. The following information is relevant for the year ended 31st
December 2008.
(a) Capital transactions
$ Depreciation charged 14,000
Tax allowances 16,000
(b) Interest payable
On 1st April 2008 the company issued $25,000 of 8% convertible loan stock. Interest is paid
in arrears on 30th September and 30th March.
(c) Interest receivable
On 1st April Shep purchased debentures having a nominal value of $4,000. Interest at 15% pa
is receivable on 30th September and 30th March. The investment is regarded as a financial
(d) Provision for warranty
In preparing the financial statements for the year to 31st December 2008, Shep has recognised
a provision for warranty payments in the amount of $1,200. This has been correctly recognised in accordance with IAS 37 and the amount has been expensed. Shep operates in a tax regime where warranty expense is deductible only when paid.
(e) Fine
During the period Shep has paid a fine of $6,000. The fine is not tax deductible.
(f) Further information
The accounting profit before tax for the year was $125,000.
Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 2008. (b) Calculate the deferred tax balance that is required as at 31st December 2008.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 2008.
Question 29 SHEP (III)
Continuing from the previous year. The following information is relevant for the year ended 31st
December 2009.
(a) Interest payable/Interest receivable
Shep still has $25,000 of 8% convertible loan stack in issue and still retains its holding in the debentures purchased in 2008.
(b) Provision for warranty
During the year Shep had paid out $500 in warranty claims and provided for a further $2,000.
(c) Development costs
During 2009 Shep has capitalised development expenditure of $17,800 in accordance with the provisions of IAS 38
(d) Further information
$ Profit before taxation 175,000 Depreciation charged 18,500 Tax allowable depreciation 24,700 (e) Entertainment
Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 2009. (b) Calculate the deferred tax balance that is required as at 31st December 2009.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 2009.
Question 30 SHEP (IV)
Using the information provided in “Shep III” answer, assume that the government changed the rate of tax to 28% during 2009.
Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 2009. (b) Calculate the deferred tax balance that is required as at 31st December 2009.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 2009.
Question 31 BROKEN DREAMS
Broken Dreams, a manufacturing company, has consistently adopted a progressive policy towards deferred taxation. The accountant is, however, unsure of his next move and has turned to you for advice.
The poor demented man supplies you with the following information in respect of the year ended 30 June 2008.
(a) The company made an accounting profit of $900,000.
(b) Freehold properties were revalued from $240,000 to $300,000 in the period. The company has no intention of disposing of the properties.
(c) The remaining fixed assets comprised plant and machinery. On 1 July 2007 this amounted to $
Tax written down value 500,000 Net book value 1,300,000
During the year to 30 June 2008 depreciation amounted to $260,000 and capital allowances of $175,000 were claimed.
(d) The company entered into a five year lease on 1 July 2007 for an item of plant with a useful economic life of ten years. The lease rentals (which have all been paid on time to date) were to be as follows.
$ Initial payment (1 July 2007) 110,000
Rentals (30 June 2008, 2009, 2010, 2011, 2012) 50,000 per rental
Required:
Prepare the note to the statement of financial position at 30 June 2008 for deferred taxation on the basis of IAS 12.
(15 marks) Question 32 CONSOLIDATIONS
(a) Statements of financial position at 31 December 2006
P Inc S Inc
P Inc acquired the whole of the issued share capital of S Inc for $65,000 on 31 December 2006.
Required:
Prepare the consolidated statement of financial position at 31 December 2006. (3 marks) (b) Statements of financial position at 31 December 2007
P Inc S Inc
(c) Facts as in part (a) above except that 80% of ordinary share capital of S Inc was acquired for $52,000.
Non-controlling interest are valued at their proportionate share of the subsidiary’s identifiable net assets, they are not credited with their share of goodwill.
P Inc S Inc
$ $
Investment in S Inc 52,000 –
Sundry net assets 115,000 55,000
———– ———
167,000 55,000
———– ———
Ordinary share capital ($1 shares) 127,000 30,000
Retained earnings 40,000 25,000
———– ———
167,000 55,000
———– ———
Required:
Prepare the consolidated statement of financial position at 31 December 2006. (4 marks) (d) Statements of financial position at 31 December 2007
P Inc S Inc
$ $
Investment in S Inc 52,000 –
Sundry net assets 129,000 62,000
———– ———
181,000 62,000
———– ———
Ordinary share capital ($1 shares) 127,000 30,000
Retained earnings 54,000 32,000
———– ———
181,000 62,000
———– ———
Same facts as in part (c) above.
Required:
Question 33 HONEY
Statements of financial position as at 30 June 2008
Honey Sugar
Assets $ $
Non-current assets
Tangible assets 27,000 12,500
Investments: 2,000 ordinary shares in Sugar at cost 2,000
——— ——— Non-current liabilities: 10% Debenture loan 12,000
–
Current liabilities 7,000 7,500
——— ———
54,000 24,500
——— ———
Honey acquired its shares in Sugar more than five years ago when the balance on the retained earnings was $nil.
Statements of comprehensive income for the year ended 30 June 2008
Honey Sugar
Administrative expenses (1,500) (2,700)
——— ———
Retained earnings brought forward 2,000 4,000 Profit for the financial year 7,000 10,000
——— ———
Retained earnings carried forward 9,000 14,000
Required:
Prepare the consolidated statement of comprehensive income and the consolidated statement of financial position of Honey for the year ended 30 June 2008. Goodwill on acquisition was nil.
(12 marks)
Question 34 HATTON
The following are the statements of financial position of Hatton and its subsidiary Slap as at 31 December 2007.
Hatton
$ $
Assets
Non-current assets
Tangible assets 157,000
Investments 70,000
Current assets
Inventory 73,200
Trade receivables 82,100
Slap current account 14,700
Cash at bank and in hand 8,000
———–
178,000 ———– 405,000 ———– Equity and liabilities
Shareholders equity
Called up share capital ($1 shares) 250,000
Retained earnings 32,000
———– 282,000
Current liabilities 123,000
Slap Non-current liabilities: 6% debentures 20,000 Current liabilities
Trade payables 50,000
Hatton current account 8,000
———– balances on Slap’s reserves were
$
Share premium account 6,250
Revaluation surplus –
Retained earnings 10,000
Hatton also acquired $12,000 of Slap’s debentures at par on the same date.
(2) Non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets, they are not credited with their share of goodwill. Half of the goodwill on acquisition has been impaired by 31 December 2007.
(3) Both Hatton and Slap declared a $2,000 dividend before the year end but have not yet accounted for it.
(4) The current account difference is due to cash in transit.
Required:
Question 35 HAGGIS
Statements of financial position at 31 December 2007
Haggis Stovies
$ $
Assets
Non-current assets
Tangible assets 33,000 20,000
Investments: Shares in Stovies at cost 12,000 –
Current assets 5,000 15,000
——— ———
50,000 35,000
——— ———
Equity and liabilities Capital and reserves
Called up share capital ($1 ordinary shares) 10,000 4,000
Share premium account 5,000 –
Retained earnings 6,000 12,000
——— ———
21,000 16,000 Non-current liabilities
8% Debenture loans 20,000 9,000
Current liabilities 9,000 10,000
——— ———
50,000 35,000
——— ———
On 1 January 2005 Haggis acquired 3,000 shares in Stovies. At that date the balance on Stovies’s retained earnings was $8,000. Non-controlling interest are valued at fair value, the fair value of the non-controlling interest on acquisition was $4,000. Goodwill has been impaired by $2,400 since acquisition.
Required:
Prepare the consolidated statement of financial position of Haggis as at 31 December 2007.
Question 36 HAMMER
The summarised statements of financial position of Hammer and Sickle as at 31 December 2007 were as follows.
Called up share capital ($1 ordinary shares) 120,000 60,000
Share premium account 18,000 –
Revaluation surplus on 1 January 2007 23,000 16,000 Retained earnings on 1 January 2007 40,000 8,000
Profit for 2007 16,000 5,000
———– ———– 254,700 100,000 ———– ———–
The following information is relevant.
(1) On 31 December 2006, Hammer acquired 48,000 shares in Sickle for $54,000 cash.
(2) The inventory of Hammer includes $4,000 goods from Sickle invoiced to Hammer at cost plus 25%.
(3) A cheque for $500 from Hammer to Sickle, sent before 31 December 2007, was not received by the latter company until January 2008.
Required:
Prepare the consolidated statement of financial position of Hammer and its subsidiary Sickle as at 31 December 2007. Any excess of NA acquired over cost paid is to be treated in accordance with IFRS 3.
Question 37 HUT
On 1 July 2006 Hut acquired 128,000 $1 ordinary shares of Shed. The following statements of financial position have been prepared as at 31 December 2007.
Hut Shed
$ $
Land at cost 80,000 72,000
Plant at cost 120,000 80,000
Cost of shares in Shed 203,000 –
Inventory at cost 112,000 74,400
Receivables 104,000 84,000
Bank balance 41,000 8,000
———– ———– 660,000 318,400 ———– ———–
Hut Shed
$ $
$1 ordinary share capital 400,000 160,000
Retained earnings 160,000 112,000
Plant depreciation at 31 December 2007 48,000 22,400
Payables 52,000 24,000
———– ———– 660,000 318,400 ———– ———– The following information is available.
(1) At 1 July 2006 Shed had a debit balance of $11,000 on retained earnings.
(2) In fixing the bid price for the shares of Shed, Hut valued the land at $90,000. Ignore depreciation on the land. All Shed’s plant was acquired since 1 July 2006.
(3) The inventory of Shed includes goods purchased from Hut for $16,000. Hut invoiced those goods at cost plus 25%.
(4) Non-controlling interest is valued at their proportionate share of the identifiable net assets on acquisition, they are not credited with their share of goodwill. Goodwill has been impaired by $27,760 since the acquisition occurred.
Required:
Prepare the consolidated statement of financial position of Hut as at 31 December 2007.
Question 38 HAT
On 30 June 2004, Hat acquired 60% of the ordinary share capital and 20% of the preferred share capital of Shoe for $95,000 and $8,000 respectively. At that date Shoe had a retained earnings balance of $50,000 and a share premium account balance of $9,000.
The following statements of financial position have been prepared as at 30 June 2008.
Hat Shoe
$ $
Assets
Non-current assets
Tangible assets 227,000 170,000
Investments: Shares in group undertakings 103,000
———– ———– originally cost $100,000 three years ago (in the year to 30 June 2005) and had a useful economic life of five years.
Shoe’s depreciation policy is 25% per annum based on cost. Both companies charge a full year’s depreciation in the year of acquisition and none in the year of disposal.
Non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets, they are not credited with their share of goodwill.
Required:
Prepare the consolidated statement of financial position of Hat and its subsidiary as at 30 June 2008. The value of goodwill at the 30 June 2008 is $2,520.
Question 39 HUMPHREY
The following are the statements of comprehensive income for the year ended 30 September 2008 of Humphrey and its subsidiary Stanley.
Humphrey Stanley
Dividends paid and proposed (100) (20)
——– —–
Retained profit carried forward 200 40
——– —–
The following information is relevant.
(1) Humphrey acquired 80% of Stanley many years ago, when the reserves of that company were $5,000.
(2) Total intra-group sales in the year amounted to $100,000, Humphrey selling to Stanley.
(3) At the year end the statement of financial position of Stanley included inventory purchased from Humphrey. Humphrey had taken a profit of $2,000 on this inventory.
(4) The investment income of Humphrey includes $16,000 from Stanley.
(5) Goodwill of $10,000 has been fully written off prior to the current period.
Required:
Prepare a consolidated statement of comprehensive income for the year ended 30 September 2008.
Question 40 HIGH
High acquired its 80% interest in the ordinary capital of Speed many years ago when Speed’s retained earnings were $4,000, for $10,000. There were no other reserves at that date.
The following are the draft statements of comprehensive income of High and Speed for the year ended 31 March 2008 prepared by an inexperienced bookkeeper.
High Speed
Retained earnings brought forward 28,000 17,250
Profit for year 26,400 19,550
———– ———– Retained earnings carried forward 54,400 36,800 ———– ———– The following information is also available.
(1) The inventory of High at 31 March 2008 includes goods purchased from Speed at a profit to that company of $700. Total intra-group sales for the year amounted to $37,500.
(2) In October 2007 High sold plant, whose carrying value was $7,000, to Speed for $10,000. Depreciation has been provided by Speed at 10% on the cost of $10,000 (with a full year’s charge in the year of acquisition and none in the year of sale) in line with group policy. (3) Included in Speed’s administration costs is an amount for $3,500 in respect of management
charges invoiced and included in turnover by High.
(4) Speed’s issued share capital comprises of 10,000 50 cent ordinary shares.
Required:
Prepare the consolidated statement of comprehensive income for the year ended 31 March 2008. (ignore goodwill)
Question 41 HAPPY
The following statements of comprehensive income were prepared for the year ended 31 March 2008.
Happy Sleepy
$ $ $ $
Revenue 303,600 217,700
Cost of sales (143,800) (102,200)
———– ———–
Gross profit 159,800 115,500
Operating costs (71,200) (51,300)
———– ———–
Operating profit 88,600 64,200
Add Dividends receivable from
Quoted investments 2,800 1,200
———– ———–
Profit before tax 91,400 65,400
Income tax (46,200) (32,600)
———– ———–
Profit after tax 45,200 32,800
———– ———– Extract from SOCIE
Retained earnings brought forward 79,300 38,650
Profit for year 45,200 32,800
———– ———– Retained earnings carried forward 124,500 71,450 ———– ———–
On 30 November 2007 Happy acquired 75% of the issued ordinary capital of Sleepy.
Profits of both companies are deemed to accrue evenly over the year.
Required:
(a) Prepare the consolidated statement of comprehensive income for the year ended 31
March 2008. (Ignore goodwill) (10 marks)
(b) Explain why only four months’ of Sleepy’s results are included in the consolidated
statement of comprehensive income. (3 marks)
Question 42 HALEY
The draft statements of financial position as at 31 December 2007 of three companies are set out below.
Haley Socrates Aristotle
$000 $000 $000
Assets
Non-current assets
Tangible assets 300 100 160
Investments at cost 18,000 shares in Socrates 75 – – 18,000 shares in Aristotle 30 – –
Current assets 345 160 80
—— —— ——
750 260 240
—— —— ——
Equity and liabilities
Ordinary shares of $1 each 250 30 60
Retained earnings 400 180 100
Non-current loans 100 50 80
—— —— ——
750 260 240
—— —— ——
The reserves of Socrates and Aristotle when the investments were acquired were $70,000 and $30,000 respectively. Assume the investments were acquired ten years ago and that goodwill has been fully written off.
Required:
Prepare the consolidated statement of financial position as at 31 December 2007. Notes are not required.
Question 43 HAMISH
Hamish holds 80% of the ordinary share capital of Shug (acquired on 1 February 2008) and 30% of the ordinary share capital of Angus (acquired on 1 July 2007).
A director of Hamish has been appointed to the board of Angus to take an active part in the management of that company.
Hamish had no other investments, and none of the companies has any preferred capital.
The draft statements of comprehensive income for the year ended 30 June 2008, are set out below.
Hamish Shug Angus
$000 $000 $000
Revenue 12,614 6,160 8,640
Operating expenses (11,318) (5,524) (7,614)
——— ——– ——–
Operating profit 1,296 636 1,026
Dividends receivable 171 –
–
——— ——– ——–
1,467 636 1,026
Income tax (621) (275) (432)
——— ——– ——–
Profit after taxation 846 361 594
——— ——– ——–
Proposed dividends (from SOCIE) 500 120 250
Included in the inventory of Shug at 30 June 2008 was $50,000 for goods purchased from Hamish in May 2008 which the latter company had invoiced at cost plus 25%. These were the only goods sold by Hamish to Shug but it did make sales of $180,000 to Angus during the year. None of these goods remained in Angus’s inventory at the year end.
Required:
Prepare a consolidated statement of comprehensive income for Hamish for the year ended 30 June 2008. There was no impairment of goodwill during the year. Notes are not required.
Question 44 HYDROGEN
The draft statements of financial position of three companies as on 30 September 2008 are as follows.
Hydrogen Sodium Aluminium
982,156 804,169 618,321
———— ———— ———–
Debentures 400,000 150,000 100,000
Shareholders equity
Called up share capital 600,000 200,000 200,000 Retained earnings 1,050,000 850,000 478,000
———— 1,650,000 ———— 1,050,000 ———– 678,000
———— ———— ———–
2,425,366 1,452,179 967,721
———— ———— ———–
You are given the following additional information.
(1) Hydrogen purchased the shares in Sodium on 13 October 2003 when the balance on retained earnings was $500,000.
(2) The shares in Aluminium were acquired on 11 May 2003 when retained earnings stood at $242,000.
(3) Included in the inventory figure for Aluminium is inventory valued at $20,000 which had been purchased from Hydrogen at cost plus 25%.
(4) Non-controlling interest is valued at their proportionate share of the identifiable net assets acquired, they are not credited with their share of goodwill. Goodwill in respect of the acquisition of Sodium has been impaired by $1,500 since the acquisition.
(5) Included in the current liabilities figure of Hydrogen is $18,000 payable to Aluminium, the amount receivable being recorded in the receivables figure of Aluminium.
Required:
Prepare the consolidated statement of financial position and notes for Hydrogen as on 30 September 2008, together with your consolidation schedules.
(16 marks) Question 45 PERIOD OF INFLATION
During a period of inflation many accountants believe that financial reports prepared under the historical cost convention are subject to the following major limitations.
(a) Inventories are undervalued. (b) Depreciation is understated.
(c) Gains and losses on net monetary assets are undisclosed. (d) Asset and liability values are unrealistic.
(e) Meaningful periodic comparisons are difficult to make. Required:
Explain briefly the limitations of historical cost accounting in periods of inflation with reference to each of the items listed above.
(15 marks) Question 46 STANDARD INC
2007 2006
$ $
Freehold property at cost 130,000 110,000 Plant and machinery at cost 151,000 120,000 Fixtures and fittings at cost 29,000 24,000
Inventories 51,000 37,000
Trade receivables 44,000 42,800
Long-term investments 4,600 –
Cash at bank 11,400 200
———— ————
421,000 334,000
———— ————
The following information is relevant.
(a) There had been no disposal of freehold property in the year.
(b) A machine tool which had cost $8,000 (in respect of which $6,000 depreciation had been provided) was sold for $3,000, and fixtures which had cost $5,000 (in respect of which depreciation of $2,000 had been provided) were sold for $1,000. Profits and losses on those transactions had been dealt with through the statement of comprehensive income.
(c) The statement of comprehensive income charge in respect of tax was $22,000.
(d) The premium paid on redemption of the non-current loan was $2,000, which has been written off to the statement of comprehensive income.
(e) The proposed dividend for 2006 had been paid during the year.
(f) Interest received during the year was $450. Interest charged in the statement of comprehensive income for the year was $6,400. Accrued interest of $440 is included in payables at 31 December 2006 (nil at 31 December 2007).
(g) The government stock is a long term investment.
Required:
Prepare a statement of cash flows for the year ended 31 December 2007, together with notes as required by IAS 7.
