This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

279 0091 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme

Financial Reporting
Wednesday, 14th May 2008 : 2.30pm to 5.45pm

Candidates should answer FOUR of the following SEVEN questions. All questions carry
equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.

University of London 2008

UL08/122
D04

PLEASE TURN OVER

Page 1 of 9

1.

The balance sheets for Breakfast Plc, Jam Ltd and Honey Ltd as at 31 December 2007
are given as follows:

Fixed assets (land)

Investments
Stocks
Trade debtors
Inter company debtors
from Jam Ltd
Inter company debtors
from Honey Ltd
Cash
Trade creditors
Inter company creditors
Net assets
Share capital (1
nominal value shares)
Revaluation reserve
Profit and loss account
reserve
Capital and reserves

Breakfast Plc

400,000
650,000
25,000
55,000
30,000

Jam Ltd

300,000

Honey Ltd

140,000

165,000
164,000

9,000
2,000

950,000

112,000
(6,000)
(25,000)
710,000

500
(1,500)
(4,000)
146,000

500,000

200,000

50,000

450,000

150,000
360,000

96,000

950,000

710,000

146,000

4,000
11,000
(225,000)

Breakfast Plc acquired 75 % of Jam Ltd for 500,000 on 1 January 2001. At the time of
acquisition, the fair value of Jam Ltds fixed assets was 300,000 (historic cost
150,000) and Jam Ltd included the revaluation in its accounts. No other assets were
revalued at the date of acquisition. Jam Ltd's share capital and reserves on the date of
acquisition were 420,000, after the revaluation had correctly been incorporated into the
companys accounts.
Breakfast Plc acquired 20% of Honey Ltd on 1 January 2003 for 120,000 when Honey
Ltds net assets at fair value were 70,000.
Goodwill is capitalised and amortised over 10 years.
The stock in Breakfast Plc includes 10,000 of stock purchased from Jam Ltd. These
goods had cost Jam Ltd 2,000. The stock in Breakfast Plc also includes 5,000 of stock
purchased from Honey Ltd. These goods had cost Honey Ltd, 3,000.
Any differences in inter-company balances are due to cash in transit.
At the year end Breakfast Plc declares a dividend of 5p per share, Jam Ltd declares a
dividend of 20p per share and Honey Ltd declares a dividend of 10p per share. These
dividends have not been accounted for by any of the companies.
Required
(a)

Prepare a consolidated balance sheet for Breakfast Plc for the year ended 31 December
2007.
(20 marks)

(b)

What are joint ventures and how should they be accounted for?

UL08/122
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(5 marks)

2.

On 1 January 2008, Shoe Ltds long term budget showed anticipated net receipts of
24,000 and thereafter 40,800 each year for the foreseeable future. The companys
cost of capital is 10% per annum and this is not expected to change.
During 2008, the following occur:
I

General economic conditions suggest that the budget for existing activities after
2008 should be revised from net receipts of 40,800 per annum to net receipts of
34,200 per annum.

II

A new three year contract is undertaken which requires an initial outlay of 7,800
on 31 December 2008 and is expected to produce receipts of 4,080 on 31
December of each of the following years. This contract has not been included in
the budget in part I.

III

The company receives a grant of 3,600 for its environmental policies in 2008.
This has not been included in the budget in part I.

IV

The cost of capital was 10% but is now expected to be 15% for the foreseeable
future.

Otherwise everything proceeds to plan and other expectations are unchanged. You may
assume that all cashflows arise on 31 December each year. Ignore taxation and inflation.
Required
(a)

Explain Hicks definition of well offness and Hicks measures of income

numbers 1 and 2.
(9 marks)

(b)

Calculate Hicks income number 1 ex post version A and Hicks income number
1 ex post version B.
(8 marks)

(c)

Calculate Hicks income number 2 ex post version A and Hicks income number
2 ex post version B.
(8 marks)

UL08/122
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3.

On 1 January 2008, Air Ltd entered into the following lease agreements with Leasing
and Hiring Ltd:
I

The rental of machine K. The lease was for four years, with a quarterly rental of
11,592 payable in advance, the first payment being due on 1 January 2008. The
fair value of the machine is 150,000. Air Ltd is responsible for all repairs and
maintenance of the machine which has a useful economic life of four years with
no residual value.

II

The rental of machine L, paying 10 annual instalments of 90,000 each, the first
payable on 1 January 2008. On 1 January 2008, the fair value of the machine was
800,000. The machine has an estimated useful life of 10 years at the end of
which the machine has no residual value. Leasing and Hiring Ltd retains
responsibility for maintaining the machine and Air Ltd will return machine L to
Leasing and Hiring Ltd at the end of the contract. The cost of capital for Air Ltd is
10%.

Required
(a)

Define finance leases and operating leases and discuss how both these types of
leases would be accounted for in the accounts of the lessee.
(9 marks)

(b)

Show how the above transactions will be reflected in the financial statements of
Air Ltd for 2008, including its notes, in accordance with standard accounting
practice, giving reasons for your choice of accounting treatment.
(16 marks)

UL08/122
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4.

Hope Ltd started trading on 1 January 2007. The profit and loss account and the balance
sheet for the first year of trading are given as follows:
Profit and loss account
Sales
Cost of sales
Opening stock
Purchases
Closing stock

150,000

15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)
50,000

Gross profit
Expenses
Depreciation

Balance sheet

Fixed assets
Plant and machinery
Cost
Accumulated depreciation
Net book value
Current assets
Stock
Other current assets
Net current assets
Long term liabilities
Debentures
Net assets

200,000
(10,000)
190,000
20,000
60,000
80,000
(120,000)
150,000

Share capital (1 shares)

Profit and loss account
Share capital and reserves

100,000
50,000
150,000

The price change indices for the year were identified as follows:
Indices

Stock
Plant and
machinery
RPI

1 January
2007

Average for
the year

30 November
2007

31December
2007

115
125

130
145

140
150

150
155

135

155

160

170

Closing stock was acquired on 30 November 2007. All fixed assets and opening stock
were acquired on the first day of trading. Sales and purchases accrue evenly throughout
the year.
(question continues on next page)
UL08/122
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Required

5.

(a)

Prepare the current purchasing power profit and loss account and balance sheet as
at 31 December 2007 and explain how the gain or loss on monetary items arises.
(8 marks)

(b)

Prepare the current value (replacement cost) profit and loss account and balance
sheet as at 31 December 2007 and explain how the fixed asset adjustment arises.
Ignore gains and losses on net monetary items and gearing adjustments and use
the maintenance of physical / operating capacity principle. Depreciation is to be
calculated on year end replacement cost.
(9 marks)

(c)

Discuss the advantages and disadvantages of CPP and current value financial
statements.
(8 marks)

The following information on its activities is provided by Unknown Plc. Answer all
parts of the following questions, dealing separately with each part. Justify your
treatment in each case with reference to accounting standards where applicable. All
parts of the question carry equal marks.
(25 marks)
(a)

Unknown Plc entered into a long term contract with the following information:
Date commenced
Expected completion date
Final contract price
Costs to 31 December 2007
Value of work certified to 31 December 2007
Progress payments invoiced to 31 December 2007
Estimated costs to completion

1 January 2007
31 December 2009
8,000,000
6,200,000
5,100,000
5,500,000
900,000

How would this contract be accounted for by Unknown Plc for the year ended 31
December 2007?
(b)

A lawsuit has been filed against Unknown Plc. Unknown Plc is fighting the
lawsuit but its outcome is uncertain. The directors of Unknown Plc consider that
there is a 40% chance of the lawsuit being successful. If they lose the lawsuit, the
expected settlement will be approximately 100,000. Discuss the accounting
treatment for this lawsuit.

(c)

Unknown Plc bought a new machine on 1 June 2007 from International Org for
150,000 bans, the currency in which International Org trades, on credit. No
payment had taken place in relation to this purchase at the year end. The exchange
rate at date of purchase of the fixed asset was 15 bans to and the exchange rate
at year end is 10 bans to . How would this acquisition be accounted for by
Unknown Plc for the year ended 31 December 2007?

(question continues on next page)

UL08/122
D04

Page 6 of 9

(d) The forecast profit before interest and tax for the year ended 31 December 2007
for Unknown Plc is estimated at 100,000. Currently Unknown Plc has issued
share capital of 400,000 comprising of 50p shares. Unknown Plc is considering
issuing 250,000 10% debentures. Define earnings per share and discuss the
information provided by this ratio. Calculate earnings per share for Unknown Plc
before and after the debenture issue.
(e)

Unknown Plc provides you with the following projected data in order to provide
for deferred taxation on the full basis.
Year ended 31/12 Taxable profit Capital allowances
000
000
2007
2008

2,500
2,400

800
160

Depreciation
000
160
320

The tax rate for Unknown Plc is 33%. Calculate the deferred tax provision for
Unknown Plc for the years ended 31 December 2007 and 31 December 2008.

6.

Either
Discuss the strengths and limitations of the concept of deprival value. Should this
concept be used in reporting financial results?
Or
Compare the accounting treatment of non-current tangible assets to that of investment
properties and discuss how the different accounting treatments affect the financial
statements.

7.

Either
Discuss the accounting treatment of research and development and critically assess an
accounting standard in this area.
Or
Discuss the advantages and limitations of standardising corporate financial reporting.

UL08/122
D04

Page 7 of 9

Present Value interest factor per 1.00 due at the end of n years for interest rate of:
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

10

0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.811
0.803
0.795
0.788
0.780

0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.660
0.647
0.634
0.622
0.610

0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.538
0.522
0.507
0.492
0.478

0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.439
0.422
0.406
0.390
0.375

0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.359
0.342
0.326
0.310
0.295

0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.294
0.278
0.262
0.247
0.233

0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.242
0.226
0.211
0.197
0.184

0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.199
0.184
0.170
0.158
0.146

0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.164
0.150
0.138
0.126
0.116

0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
0.135
0.123
0.112
0.102
0.092

11

12

13

14

15

16

17

18

19

20

0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
0.112
0.101
0.091
0.082
0.074

0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
0.093
0.083
0.074
0.066
0.059

0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
0.077
0.068
0.060
0.053
0.047

0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
0.064
0.056
0.049
0.043
0.038

0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
0.053
0.046
0.040
0.035
0.030

0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
0.044
0.038
0.033
0.028
0.024

0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
0.037
0.032
0.027
0.023
0.020

0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
0.031
0.026
0.022
0.019
0.016

0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074
0.062
0.052
0.044
0.037
0.031
0.026
0.022
0.018
0.015
0.013

0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
0.022
0.018
0.015
0.013
0.010

UL08/122
D04

Page 8 of 9

Present Value interest factor for an annuity of 1.00 for a series of n years for interest rate of :
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

10

0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046
18.857
19.660
20.456
21.243
22.023

0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.678
16.351
17.011
17.658
18.292
18.914
19.523

0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.877
15.415
15.937
16.444
16.936
17.413

0.962
1.886
2.775
3.630
4.452
5.242
6.002
6.733
7.435
8.111
8.760
9.385
9.986
10.563
11.118
11.652
12.166
12.659
13.134
13.590
14.029
14.451
14.857
15.247
15.622

0.952
1.859
2.723
3.546
4.329
5.076
5.786
6.463
7.108
7.722
8.306
8.863
9.394
9.899
10.380
10.838
11.274
11.690
12.085
12.462
12.821
13.163
13.489
13.799
14.094

0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
7.887
8.384
8.853
9.295
9.712
10.106
10.477
10.828
11.158
11.470
11.764
12.042
12.303
12.550
12.783

0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594
10.836
11.061
11.272
11.469
11.654

0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818
10.017
10.201
10.371
10.529
10.675

0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129
9.292
9.442
9.580
9.707
9.823

0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514
8.649
8.772
8.883
8.985
9.077

11

12

13

14

15

16

17

18

19

20

0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963
8.075
8.176
8.266
8.348
8.422

0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469
7.562
7.645
7.718
7.784
7.843

0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025
7.102
7.170
7.230
7.283
7.330

0.877
1.647
2.322
2.914
3.433
3.889
4.288
4.639
4.946
5.216
5.453
5.660
5.842
6.002
6.142
6.265
6.373
6.467
6.550
6.623
6.687
6.743
6.792
6.835
6.873

0.870
1.626
2.283
2.855
3.352
3.784
4.160
4.487
4.772
5.019
5.234
5.421
5.583
5.724
5.847
5.954
6.047
6.128
6.198
6.259
6.312
6.359
6.399
6.434
6.464

0.862
1.605
2.246
2.798
3.274
3.685
4.039
4.344
4.607
4.833
5.029
5.197
5.342
5.468
5.575
5.668
5.749
5.818
5.877
5.929
5.973
6.011
6.044
6.073
6.097

0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628
5.665
5.696
5.723
5.746
5.766

0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
4.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353
5.384
5.410
5.432
5.451
5.467

0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101
5.127
5.149
5.167
5.182
5.195

0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
4.870
4.891
4.909
4.925
4.937
4.948

END OF PAPER
UL08/122
D04

Page 9 of 9

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

279 0091 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme

Financial Reporting
Wednesday, 14th May 2008 : 2.30pm to 5.45pm

Candidates should answer FOUR of the following SEVEN questions. All questions carry
equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.

University of London 2008

UL08/122
D03

PLEASE TURN OVER

Page 1 of 9

1.

The profit and loss accounts for the year ended 31 December 2007 for Sand Plc, Sea Ltd
and Tree Ltd are given as follows:

Sales
Cost of sales
Gross profit
Admin costs
Distribution costs
Dividends receivable
Profit before tax
Tax
Profit after tax
Transfers to general reserves
Dividends payable
Net profit for the year
Retained profit brought forward
Retained profit for the year

Sand Plc

Sea Ltd

Tree Ltd

1,500,000
(1,120,000)
380,000
(60,900)
(20,000)
8,400
307,500
(100,000)
207,500
(10,000)
(110,000)
87,500
720,000
807,500

400,000
(100,000)
300,000
(34,000)
(26,000)

150,000
(15,000)
135,000
(7,000)
(5,000)

240,000
(60,000)
180,000
(30,000)
(10,000)
140,000
600,000
740,000

123,000
(20,000)
103,000
(10,000)
(1,000)
92,000
200,000
292,000

Sand Plc acquired 80% of Sea Ltd for 50,000 on 1 January 2003, when Sea Ltd's profit
and loss account reserve was 40,000. The share capital of Sea Ltd totals 10,000. During
the year Sea Ltd sold goods costing 5,000 to Sand Plc for 7,000. 10% of these goods are
still in Sand Plcs stock.
Sand Plc acquired 40% of Tree Ltd for 100,000 on 1 January 2005, when Tree Ltds
share capital and reserves were 75,000. The share capital of Tree Ltd is 20,000 50p
shares. During the year Tree Ltd sold goods costing 3,000 to Sand Plc for 4,000. 50% of
these goods are still in Sand Plcs stock.
Goodwill is capitalised and amortised over 10 years.
At the year end Sand Plc proposes charging Sea Ltd a management fee of 10,000 and
charging Tree Ltd a management fee of 5,000. Sand Plc has included this management
fee in its sales figure and Sea Ltd and Tree Ltd have included the management fee payable
to Sand Ltd in admin costs.

Required
(a)

Prepare the consolidated profit and loss account for Sand Plc for the year ended 31
December 2007.
(20 marks)

(b)

What are joint ventures and how are they accounted for?

UL08/122
D03

Page 2 of 9

(5 marks)

2.

On 1 January 2008, Boot Ltds long term budget showed anticipated net receipts of
32,000 and thereafter 54,400 each year for the foreseeable future. The companys
cost of capital is 10% per annum and this is not expected to change.
During 2008, the following occur:
I

General economic conditions suggest that the budget for existing activities
after 2008 should be revised from net receipts of 54,400 per annum to net
receipts of 45,600 per annum.

II

A new three year contract is undertaken which requires an initial outlay of

10,400 on 31 December 2008 and is expected to produce receipts of 5,440
on 31 December of each of the following years. This contract has not been
included in the budget in part I.

III

The company receives a grant for its environmental policy for 4,800 in 2008.
This has not been included in the budget in part I.

IV

The cost of capital was 10% but is now expected to be 15% for the foreseeable
future.

Otherwise everything proceeds to plan and other expectations are unchanged. You
may assume that all cashflows arise on 31 December each year. Ignore taxation and
inflation.
Required
(a)

Explain Hicks definition of well offness and Hicks measures of income

numbers 1 and 2.
(9 marks)

(b)

Calculate Hicks income number 1 ex post version A and Hicks income

number 1 version B.
(8 marks)

(c)

Calculate Hicks income number 2 ex post version A and Hicks income

number 2 version B.
(8 marks)

UL08/122
D03

Page 3 of 9

3.

On 1 January 2008, Pair Ltd entered into the following lease agreements with Leasing
and Hiring Ltd:
I

The rental of machine K. The lease was for four years, with a quarterly rental of
15,456 payable in advance, the first payment being due on 1 January 2008. The
fair value of the machine is 200,000. Pair Ltd is responsible for all repairs and
maintenance of the machine which has a useful economic life of four years with
no residual value.

II

The rental of machine L, paying 10 annual instalments of 100,000 each, the first
payable on 1 January 2008. On 1 January 2008, the fair value of the machine was
900,000. The machine has an estimated useful life of 10 years at the end of
which the machine has no residual value. Leasing and Hiring Ltd retains
responsibility for maintaining the machine and Pair Ltd will return machine L to
Leasing and Hiring Ltd at the end of the contract. The cost of capital for Pair Ltd
is 10%.

Required
(a)

Define finance leases and operating leases and discuss how both these types of
leases would be accounted for in the accounts of the lessee.
(9 marks)

(b)

Show how the above transactions will be reflected in the financial statements of
Pair Ltd for 2008, including its notes, in accordance with standard accounting
practice, giving reasons for your choice of accounting treatment.
(16 marks)

UL08/122
D03

Page 4 of 9

4.

T Org, an 80% subsidiary of D Plc, prepares its accounts in the currency bots. The
financial statements of T Org as at 31 December 2007 are given as follows:
Balance sheet as at 31 December
2007

T Org
bots

Fixed assets
Less accumulated depreciation
Net book value
Current assets
Stock
Other net current assets

T Org
bots

3,600,000
(800,000)
2,800,000
8,000,000
2,200,000
10,200,000

Long term liabilities

8% debentures

(6,000,000)
7,000,000

Share capital
Profit for the year

5,000,000
2,000,000
7,000,000

Profit and loss account for the

year ended 31 December 2007

T Org
bots

Turnover
Cost of sales
Opening stock
Purchases
Closing stock

T Org
bots
12,000,000

7,200,000
7,000,000
(8,000,000)
(6,200,000)
5,800,000

Gross profit
General expenses
Depreciation

(200,000)
(800,000)
(1,000,000)
4,800,000
(1,800,000)
3,000,000
(1,000,000)
2,000,000

Profit before tax

Tax
Profit after tax
Dividends
T Org was set up on 1 January 2007.
The exchange rates are given as follows:
Date
1 January 2007
1 April 2007
1 September 2007
31 December 2007
Average 2007

bots to
10

When ordinary shares issued and

opening stock purchased
When fixed assets purchased
When closing stock for 2007 bought
When dividend paid

15
18
25
20
(question continues on next page)

UL08/122
D03

Page 5 of 9

Required

5.

(a)

Translate the balance sheet for T Org using the closing rate method. Explain how
the foreign exchange difference arises under the closing rate method.
(7 marks)

(b)

Translate the balance sheet and the profit and loss account using the temporal
method. Explain how the foreign exchange difference arises under the temporal
method.
(11 marks)

(b)

Discuss the advantages and disadvantages of the closing rate and temporal
methods and outline the situations in which each method should be used.
(7 marks)

The following information on its activities is provided by Piece Ltd. Answer all parts of
the question, dealing separately with each part. Justify your treatment in each case with
reference to accounting standards where applicable. All parts of the question carry
equal marks.
(25 marks)
(a)

Piece Ltd started a new business selling widgets. 200 widgets were bought on 1
January 2007 for 1,000 each and sold for 1,500 each on 1 June 2007. On 1 June
2007, the replacement cost of widgets was 1,200 each. Piece Plc intends to use
current value accounting for this transaction. Calculate the cost of sales
adjustment for this transaction.

(b)

Piece Ltd entered into a long term contract with the following information:
Date commenced

1 January 2007

Expected completion date

Final contract price
Costs to 31 December 2007
Value of work certified to 31
December 2007
Progress payments invoiced to 31
December 2007
Estimated costs to completion

31 December 2009
16,000,000
12,400,000
10,200,000
11,500,000
1,500,000

How would this contract be accounted for by Piece Ltd for the year ended 31
December 2007?
(c)

A lawsuit has been filed against Piece Ltd. Piece Ltd is fighting the lawsuit but its
outcome is uncertain. The directors of Piece Ltd consider that there is a 40%
chance that the lawsuit will be successful. If they lose the lawsuit, the expected
settlement will be approximately 300,000. Discuss the accounting treatment for
this lawsuit.

(question continues on next page)

UL08/122
D03

Page 6 of 9

(d) Piece Ltd undertakes research and development into new products and processes
for the first time in 2007. The total cost for research and development totals
400,000. Of this 5% is pure research, 20% is applied research and 75% are costs
to develop a new product. How would Piece Ltd account for this research and
development expenditure for the year ended 31 December 2007?
(e)

Piece Ltd provides you with the following projected data in order to provide for
deferred taxation on a full basis for 2007 and 2008:
Year ended 31/12
2007
2008

Taxable profit
000
8,000
4,000

Capital allowances
000
3,800
2,200

Depreciation
000
3,200
5,600

The tax rate for Piece Ltd is 33%. Calculate the deferred tax provision for the
years ended 31 December 2007 and 31 December 2008.

6.

Either
Discuss the major issues in accounting for goodwill and critically assess an accounting
standard in this area.
Or
Discuss the arguments for and against the regulation of financial reporting.

7.

Either
What are fully stabilised current value accounts? Discuss the benefits and limitations
of fully stabilised current value accounts.
Or
Compare the accounting treatment of non-current tangible assets to that of investment
properties and discuss how the different accounting treatments affect the financial
statements.

UL08/122
D03

Page 7 of 9

Present Value interest factor per 1.00 due at the end of n years for interest rate of:
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

10

0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.811
0.803
0.795
0.788
0.780

0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.660
0.647
0.634
0.622
0.610

0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.538
0.522
0.507
0.492
0.478

0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.439
0.422
0.406
0.390
0.375

0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.359
0.342
0.326
0.310
0.295

0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.294
0.278
0.262
0.247
0.233

0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.242
0.226
0.211
0.197
0.184

0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.199
0.184
0.170
0.158
0.146

0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.164
0.150
0.138
0.126
0.116

0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
0.135
0.123
0.112
0.102
0.092

11

12

13

14

15

16

17

18

19

20

0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
0.112
0.101
0.091
0.082
0.074

0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
0.093
0.083
0.074
0.066
0.059

0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
0.077
0.068
0.060
0.053
0.047

0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
0.064
0.056
0.049
0.043
0.038

0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
0.053
0.046
0.040
0.035
0.030

0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
0.044
0.038
0.033
0.028
0.024

0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
0.037
0.032
0.027
0.023
0.020

0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
0.031
0.026
0.022
0.019
0.016

0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074
0.062
0.052
0.044
0.037
0.031
0.026
0.022
0.018
0.015
0.013

0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
0.022
0.018
0.015
0.013
0.010

UL08/122
D03

Page 8 of 9

Present Value interest factor for an annuity of 1.00 for a series of n years for interest rate of :
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

10

0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046
18.857
19.660
20.456
21.243
22.023

0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.678
16.351
17.011
17.658
18.292
18.914
19.523

0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.877
15.415
15.937
16.444
16.936
17.413

0.962
1.886
2.775
3.630
4.452
5.242
6.002
6.733
7.435
8.111
8.760
9.385
9.986
10.563
11.118
11.652
12.166
12.659
13.134
13.590
14.029
14.451
14.857
15.247
15.622

0.952
1.859
2.723
3.546
4.329
5.076
5.786
6.463
7.108
7.722
8.306
8.863
9.394
9.899
10.380
10.838
11.274
11.690
12.085
12.462
12.821
13.163
13.489
13.799
14.094

0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
7.887
8.384
8.853
9.295
9.712
10.106
10.477
10.828
11.158
11.470
11.764
12.042
12.303
12.550
12.783

0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594
10.836
11.061
11.272
11.469
11.654

0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818
10.017
10.201
10.371
10.529
10.675

0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129
9.292
9.442
9.580
9.707
9.823

0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514
8.649
8.772
8.883
8.985
9.077

11

12

13

14

15

16

17

18

19

20

0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963
8.075
8.176
8.266
8.348
8.422

0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469
7.562
7.645
7.718
7.784
7.843

0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025
7.102
7.170
7.230
7.283
7.330

0.877
1.647
2.322
2.914
3.433
3.889
4.288
4.639
4.946
5.216
5.453
5.660
5.842
6.002
6.142
6.265
6.373
6.467
6.550
6.623
6.687
6.743
6.792
6.835
6.873

0.870
1.626
2.283
2.855
3.352
3.784
4.160
4.487
4.772
5.019
5.234
5.421
5.583
5.724
5.847
5.954
6.047
6.128
6.198
6.259
6.312
6.359
6.399
6.434
6.464

0.862
1.605
2.246
2.798
3.274
3.685
4.039
4.344
4.607
4.833
5.029
5.197
5.342
5.468
5.575
5.668
5.749
5.818
5.877
5.929
5.973
6.011
6.044
6.073
6.097

0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628
5.665
5.696
5.723
5.746
5.766

0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
4.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353
5.384
5.410
5.432
5.451
5.467

0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101
5.127
5.149
5.167
5.182
5.195

0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
4.870
4.891
4.909
4.925
4.937
4.948

END OF PAPER
UL08/122
D03

Page 9 of 9

Examiners commentaries 2008

Examiners commentary 2008

91 Financial reporting
General remarks
Learning outcomes
At the end of this unit and having completed the essential reading and
activities, you should be able to:

explain and apply a number of theoretical approaches to financial

accounting

record and analyse data

prepare financial statements under alternative accounting

conventions

describe a number of regulatory issues relating to financial

accounting

critically evaluate theories and practices of, and other matters

relating to, financial accounting.

What are the Examiners looking for?

The examination paper contains seven questions, five of which
combine numerical and written components and two which are essaybased. Each of the essay questions has a choice of two essays. The
combined questions require students to prepare calculations on a
variety of topics as well as showing a critical grasp of the theories
underlying the techniques. To do well students need to be able to both
explain and evaluate the theories and prepare a range of financial
statements and calculations.
For quantitative parts of questions, Examiners are looking for accurate
preparation of financial statements which follow generally accepted
formats with clear headings and accurate application of accounting
techniques to specific areas within financial reporting. Workings
should always be provided clearly.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices and critical
evaluation of theories and practices.
Good answers to essay-based questions will be structured coherently
and logically, include an introduction, a main body and a conclusion
and cover all parts of the essay question.
Typically an essay-based question will require an explanation of an
issue within financial reporting and a critical analysis of the issue.
Explanations should be clear and include a discussion of key definitions
with examples if appropriate. The critical analysis should show critical
awareness of both sides of an argument or application of a theory or

91 Financial reporting

concept to financial reporting with an assessment of its appropriateness

to financial reporting.

Planning your time in the examination

All questions in the paper carry equal marks and equal time should be
devoted to each question. It is important that students attempt all four
questions and all parts of each question. Marks for each section are
given and should be used by students to guide their work and time
allocation. Where questions are in parts, students should avoid
excessively long answers to some parts and missing out other parts.

Key steps to improvement

Students can improve performance by improving the presentation of
their work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often students
seem to focus attention on the preparation of financial statements and
the financial calculations without being able to explain, discuss and
evaluate the theories and practices central to financial reporting.

Examiners commentaries 2008

Examiners commentary 2008

91 Financial reporting
Specific comments on questions Zone A
Question 1
The balance sheets for Breakfast Plc [For full question please refer to
the examination paper.]
Required
a) Prepare a consolidated balance sheet for Breakfast Plc for the year ended 31
December 2007.
(20 marks)
For details on the preparation of consolidated accounts, please refer to
the subject guide, Chapter 7 and International financial reporting,
Chapter 24. The material is also covered widely in any advanced
financial reporting textbook.
The solution with workings is as follows:
H = holding company = Breakfast Plc
S = Subsidiary = Jam Ltd
A = Associate = Honey Ltd
Consolidated balance sheet for Breakfast Plc as at 31 December 2007.
Fixed assets
Investment
Share in Associate
Goodwill
Stock
Trade debtors
Inter company A
Dividend receivable A
Cash
Trade creditors
Dividend payable

Workings
H+S
1
6
2
3
H+S

4
H+S
5

700,000
30,000
27,800
108,500
182,000
219,000
4,000
1,000
128,000
(231,000)
(35,000)
1,134,300

Share capital
Profit and loss account
Minority interest

H only
6
6

500,000
468,800
165,500
1,134,300

91 Financial reporting

Workings
1.

Investment
= investment in non group companies
= total investment investment in H investment in A
= 650,000 500,000 120,000 = 30,000

2.

Goodwill
= cost of investment Hs share of Ss net assets at acquisition
or
Cost of investment Hs share of As net assets at acquisition or
Jam 500,000 75%*420,000 = 185,000
Honey 120,000 20%*70,000 = 106,000
Total = 291,000
Amortisation

Jam = 7 years = 185,000 *7/10 = 29,500

Honey = 5 years = 106,000 *5/10 = 53,000

Balance sheet
Jam
185,000 129,500 = 55,500
Honey 106,000 53,000 = 53,000
Total 108,500
Against P+L reserve = 129,500 + 53,000 = 182,500
3.

Stock

= H + S provision for unrealised profit

= 25,000 + 165,000 8,000

4.

Cash

= H + S + cash in transit

5.

= 11,000 + 112,000 + 5,000

6.

Share in A and minority interest and profit and loss account reserve

Profit and loss account reserve

Provision for unrealised profit on stock
Dividend payable
Dividend receivable jam
Dividend receivable honey
Revised profit and loss account reserve
Revaluation
Share capital
Total reserves

H
450,000
(25,000)
30,000
1,000
456,000
500,000
956,000

S
360,000
(8,000)
(40,000)

A
96,000
(2,000)
(5,000)

312,000
150,000
200,000
662,000

89,000
50,000
139,000

Minority interest
= Minority share of Ss net assets at balance sheet date
= 25% * 662,000
= 165,500
Share in associate
= Hs share of As net assets at balance sheet date = 20% *
139,000 = 27,800
Profit and loss account reserve = H + Hs share of Ss post
acquisition reserves + Hs share of As post acquisition reserves
goodwill amortised
= 460,000 + 0.75*(312,000 70,000) + 0.2*(89,000
20,000) 182,500 = 468,800

Examiners commentaries 2008

b) What are joint ventures and how should they be accounted for? (5 marks)
Students are required to outline what a joint venture is and describe
the different ways in which they may be accounted for, outlining the
preferred accounting treatment. Details are given in the subject guide,
in IAS 31, FRS 9 and in any advanced financial reporting text
including International financial reporting.
Question 2
On 1 January 2008, Shoe Ltds [For full question please refer to the
examination paper.]
Required
a) Explain Hicks definition of well offness and Hicks measures of income
numbers 1 and 2.
(9 marks)
A good answer would clearly explain Hicks definition of well offness
and measures of income including explanations of ex ante and ex post
measures and versions A and B of the measures. A good answer would
clearly distinguish between the differences between the measures.
Details can be found in the subject guide, Chapter 3 and in
International financial reporting, Chapter 4. The Examiner is looking
for a clear explanation of the concepts and not just a reproduction of
the formulas for the measures.
b) Calculate Hicks income number 1 ex post version A and Hicks income
number 1 ex post version B.
(8 marks)
Calculations with workings are given as follows:
Income ex post 1A
Income ex post 1B

d1 t1 + v1 t1 v0 t0
d1 t1 + v1 t1 v0 t1

(135,626)
23,373

v0 t0

24000/1.1 + 408000/1.1

392,730

34200/0.15 2.28*34200 + 2.28*38280

19800/1.1 + 237302/1.1

19,800
237,318
233,742

d1 t1
v1 t1
v0 t1

91 Financial reporting

c)

Calculate Hicks income number 2 ex post version A and Hicks income

number 2 ex post version B.
(8 marks)
Calculations with workings are given as follows:
Income ex post 2a
Income ex post 2b

d1 t1 + v1 t1 ex ante income/r1
v0 t1 = y/1 + r0t1 + (y/r1 t1*1/1 + r0t1)

(4,718)
33,534

d1 t0
v 1 t0
Income (ex ante)

40800/0.1
0.1*392728

24,000
408,000
39,276

Question 3
On 1 January 2008, Air Ltd [For full question please refer to the
examination the paper.]
Required
a) Define finance leases and operating leases and discuss how both these types
of leases would be accounted for in the accounts of the lessee. (9 marks)
A good answer would clearly define the two different types of leases
together with a discussion of the factors that would be taken into
account in practice when deciding upon whether a lease was a finance
lease or an operating lease. The accounting treatment of both types of
leases in the profit and loss account and the balance sheet and the
main disclosures should be outlined clearly. Reading for this question
can be found in the subject guide, Chapter 9, International financial
reporting, Chapter 12, in most advanced financial reporting texts and
in relevant accounting standards, for example IAS 17 and SSAP 21.
b) Show how the above transactions will be reflected in the financial
statements of Air Ltd for 2008, including its notes, in accordance with
standard accounting practice, giving reasons for your choice of accounting
treatment.
(16 marks)
Transaction 1 should be identified as a finance lease with reasons given
for this decision. Once the lease has been correctly identified, the
interest rate implicit in the lease needs to be calculated, noting that
payments are made in advance and are made quarterly.
There are 15 periods since the first payment is in advance, therefore
the calculation to obtain the rate implicit in the lease is: 150,000 =
11,592 + 11,592*annuity factor 15. This gives the annuity factor
15 to be 11.94. From the discount factor tables provided, this equates
to a 3% rate implicit in the lease.
Once the rate implicit in the lease has been calculated, the calculation
or rental payment, finance charge and the obligation under the finance
lease can be calculated as follow:

Examiners commentaries 2008

Date
1.01.2008
1.01.2008
1.04.2008
1.07.2008
1.10.2008
1.01.2009
1.04.2009
1.07.2009
1.10.2009
1.01.2010

Rental payment

Finance
charge

Capital
repayment

11,592
11,592
11,592
11,592
11,592
11,592
11,592
11,592
11,592

4,152
3,929
3,699
3,462
3,218
2,967
2,709
2,442

11,592
7,440
7,663
7,893
8,130
8,374
8,625
8,883
9,150

Obligation
under
finance
lease
150,000
138,408
130,968
123,305
115,412
107,283
98,909
90,285
81,401
72,251

The accounting entries in the financial statements can then be obtained

as follows:
P+l
Finance charge
Depreciation

15,243
37,500

b/s
Non current assets
Leased assets

112,500

Creditors due within one year

Accrual
Obligation under finance lease

3,462
34,011

In creditors after more than one year

Obligation under finance lease
Reasons for f lease

81,401

Transaction II should be identified as an operating lease giving reasons

for this, including the calculation of the present value of lease
payments as % of fair value. An operating lease exists if minimum lease
payments do not exceed 80% of the fair value of the asset:
Time
0
1
2
3
4
5
6
7
8
9
Net present value
Fair value

Payment
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000

Discount
1
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424

Present value
90,000
81,818
74,380
67,618
61,471
55,883
50,803
46,184
41,986
38,169
608,312
800,000

91 Financial reporting

Therefore an operating lease is indicated. The accounting entry should

show an expense of 90,000 for lease payments in the profit and loss
account.
Question 4
Hope Ltd started trading [For full question please refer to the
examination paper.]
Required
a) Prepare the current purchasing power profit and loss account and balance
sheet as at 31 December 2007 and explain how the gain or loss on monetary
items arises.
(8 marks)
Current purchasing power profit and loss account

Sales
Op stock
Purchases
Cl stock
Cost of sales
Gross profit
Expenses
Depreciation
Monetary
working capital
Adj note 1
Net profit

Current

150,000

15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)

Adjustment
170/155
170/135
170/155
170/160

CPP

CPP
164,516

18,889
82,258
(21,250)
(79,897)
84,619
(21,935)
(12,593)

170/155
170/135

24,491
74,5832

50,000

Purchasing

Fixed asset
Stock
Other current assets
Debentures

Power Balance

Sheet

190,000

Adjustment
170/135

CPP
239,259

20,000
60,000
(120,000)

170/160
170/170
170/170

21,250
60,000
(120,000)

150,000
Share capital
P+L reserve

Note 2

100,000
50,000

200,509
170/135

150,000

125,926
74,583
200,509

An explanation of monetary working capital adjustment is required,

not a calculation of this.
Note 1
Balancing figure from balance sheet or calculation with gain on
debentures of 31,111 and loss on other current assets of 6,619.

Examiners commentaries 2008

Note 2
This is calculated as a balancing figure.
b) Prepare the current value (replacement cost) profit and loss account and
balance sheet as at 31 December 2007 and explain how the fixed asset
adjustment arises. Ignore gains and losses on net monetary items and
gearing adjustments and use the maintenance of physical/operating capacity
principle. Depreciation is to be calculated on year end replacement cost.
(9 marks)
Solutions with workings are provided as follows:
Current value (replacement cost) profit and loss account and balance
sheet
P+L

Sales
Op stock
Purchases
Cl stock
Cos
Gp
Exp
Depn

150,000

15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)

Adjustment
130/130
130/115
130/130
130/140

130/130
155/125

CV

CV
150,000

16,957
75,000
(18,571)
(73,385)
76,615
(20,000)
(12,400)

Net profit

50,000

Balance
sheet
Fixed asset

190,000

Adjustment
155/125

CV
235,600

20,000
60,000
(120,000)

150/140

21,429
60,000
(120,000)

Stock
Other current assets
Debentures

44,215

150,000
Share capital
P+L
Cosa adj
Depn adj
Fa adj
Stock adj

100,000
50,000
Note 2
Note 3
Note 4
Note 5
150,000

197,029

From P+L

100,000
44,215
3,385
2,400
45,600
1,429
197,029

An explanation of the fixed asset adjustment is required, not a

calculation.
Note 1 = 73,385 70,000
Note 2 = 12,400 10,000
Note 3 = 235,600 190,000
Note 4 = 21, 429 20,000

91 Financial reporting

c)

Discuss the advantages and disadvantages of CPP and current value financial
statements.
(8 marks)
A good answer would briefly outline the two types of statements and
discuss both the advantages and limitations of each. More details on
this area can be found in the subject guide, Chapters 5 and 6, in
International financial reporting Chapters 5, 6 and 7 and in any
advanced financial reporting text.

Question 5
The following information on its activities is provided by Unknown Plc.
Answer all parts of the following questions, dealing separately with each
part. Justify your treatment in each case with reference to accounting
standards where applicable. All parts of the question carry equal marks.
(25 marks)
a)

Unknown Plc entered into a long term contract with the following
information:
Date commenced

1 January 2007

Expected completion date

31 December 2009

Final contract price

8,000,000

Costs to 31 December 2007

6,200,000

Value of work certified to 31 December 2007

5,100,000

Progress payments invoiced to 31 December 2007

5,500,000

Estimated costs to completion

900,000

How would this contract be accounted for by Unknown Plc for the year
ended 31 December 2007?
This question relates to construction contracts. The accounting entries
for this contract with workings are as follows:
Contract price
Costs to date
Costs to completion
Expected profit
P+L
Turnover
Cos
Attributable profit
B/S
Long term contract balance
= costs + attributable profit progress payments

8,000,000
(6,200,000)
(900,000)
900,000

5,100,000
(4,526,250)
573,750

1,273,750

The % completed method should be used and brief details of either IAS
11 or SSAP 9 should be given. Details of this area can be found in the
subject guide Chapter 11 and International financial reporting, Chapter
15.

Examiners commentaries 2008

b) A lawsuit has been filed against Unknown Plc. Unknown Plc is fighting the
lawsuit but its outcome is uncertain. The directors of Unknown Plc consider
that there is a 40% chance of the lawsuit being successful. If they lose the
lawsuit, the expected settlement will be approximately 100,000. Discuss
the accounting treatment for this lawsuit.
This question relates to contingent liabilities. A contingent liability
should be identified and discussed with reference to IAS 37 or FRS 12.
The liability in the question should be identified as possible but not
probable and the appropriate accounting treatment, that of disclosure,
identified. Details of this area can be found in the subject guide Chapter
12 and in International financial reporting, Chapters 16 and 18.
c)

Unknown Plc bought a new machine on 1 June 2007 from International Org
for 150,000 bans, the currency in which International Org trades, on credit.
No payment had taken place in relation to this purchase at the year end. The
exchange rate at date of purchase of the fixed asset was 15 bans to and
the exchange rate at year end is 10 bans to . How would this acquisition be
accounted for by Unknown Plc for the year ended 31 December 2007?
Solutions are given as follows:
At acquisition
Cost of machine in bs
Creditor in b/s

150,000/15

At b/s date
Machine in b/s
Creditor in b/s

10,000
10,000

10,000
150,000/10

Loss in P+L

15,000
5,000

d) The forecast profit before interest and tax for the year ended 31 December
2007 for Unknown Plc is estimated at 100,000. Currently Unknown Plc has
issued share capital of 400,000 comprising of 50p shares. Unknown Plc is
considering issuing 250,000 10% debentures. Define earnings per share and
discuss the information provided by this ratio. Calculate earnings per share
for Unknown Plc before and after the debenture issue.
A good answer would define earnings per share, state its importance
and outline the information provided by the ratio. Earnings per share
would be calculated as follows:
Current e/s

100,000/200,000

0.50 per share

Revised profit

100,000 25,000 = 75,000

0.38 per share

New e/s

75,000/200,000

If debenture issue goes ahead, interest

will be deducted from profits

91 Financial reporting

Further reading can be found in the subject guide, Chapter 14, in

International financial reporting, Chapters 26 and 27 and in most
advanced financial reporting texts.
e)

Unknown Plc provides you with the following projected data in order to
provide for deferred taxation on the full basis.
Year ended 31/12

Taxable profit

Capital allowances

Depreciation

000

000

000

2007

2,500

800

160

2008

2,400

160

320

The tax rate for Unknown Plc is 33%. Calculate the deferred tax provision
for Unknown Plc for the years ended 31 December 2007 and 31 December
2008.
This question relates to deferred tax. Deferred tax should be defined
and its accounting treatment identified with reference to IAS 12 or FRS
19. Deferred tax accounting entries should be calculated as follows:
2008

2009

Capital allowances
Depreciation

800,000
160,000

160,000
320,000

Deferred tax @ 33%

640,000
211,200

(160,000)
(52,800)

Full basis in P+L

211,200

(52,800)

B/S provision

211,200

158,400

Question 6
Either
Discuss the strengths and limitations of the concept of deprival value.
Should this concept be used in reporting financial results?
This question relates to the concept of deprival value. A good answer
would start by clearly defining and discussing the concept of deprival
value. The answer may cover briefly its use within current value
accounting. The answer would then go on to discuss both the
theoretical and practical strengths and limitations of the concept and
whether it should be used in financial reporting even though it is not
currently used.
A weak answer would perhaps just define the deprival value concept
with little discussion of its strengths, limitations and potential use in
financial reporting.
Reading for this area can be found in the subject guide Chapter 6, in
International financial reporting, Chapters 5 and 6 and in most
advanced financial reporting texts.

10

Examiners commentaries 2008

Or
Compare the accounting treatment of non-current tangible assets to that
of investment properties and discuss how the different accounting
treatments affect the financial statements.
This question related to a specific accounting issue, that of non-current
tangible assets and the difference between accounting for such assets
and investment properties.
A good answer would define both types of assets, giving examples of
both, referring to accounting standards for example IAS 16, IAS 36,
FRS 15 and SSAP 19. The accounting treatment of both would be
outlined and its affect on financial statements discussed, perhaps using
an example to highlight key differences and the implications of these;
for example on users of financial reporting, on financial performance
assessment; and on key accounting ratios.
A weak answer would just summarise the accounting standards in the
area and outline the accounting policies with little discussion of the
affect on financial statements and the implications of this.
Reading for this area is covered in the subject guide, Chapter 9, and
International financial reporting, Chapter 12 and in most advanced
financial reporting texts.
Question 7
Either
Discuss the accounting treatment of research and development and
critically assess an accounting standard in this area.
The question relates to a specific intangible asset, research and
development. A good answer would define intangible assets and
research and development, giving appropriate examples.
The accounting treatment for research and development would be
discussed, together with the criteria required for these, with perhaps a
consideration of the effect of the different treatments on the financial
statements.
A good answer would then outline either IAS 38 or SSAP 13 and then
critically assess the chosen standard. In the critical assessment, both
the benefits and problems of the standard should be discussed.
A weak answer would define research and development and
summarise the accounting standard on research and development with
little critical analysis of the standard.
Reading for this area can be found in the subject guide, Chapter 10, in
International financial reporting, Chapter 13, in the accounting
standards on this area and in most advanced financial reporting texts.
Or
Discuss the advantages and limitations of standardising corporate
financial reporting.
This question was a general question on standardising financial
reporting and not on any specific standard or rule. A good answer
would start by discussing what was meant by standardisation and the
regulatory mechanisms to achieve this; for example, regulation by

11

91 Financial reporting

government using company law, professional accounting regulation

and the use of accounting standards and regulation by international
accounting bodies such as the International Accounting Standards
Board. The answer would then go on to discuss both the advantages of
standardising financial reporting and the difficulties of and problems in
standardising corporate financial reporting.
A weak answer would outline the different types of accounting
regulation in existence and give details of specific accounting standards
without focusing on the issue of standardisation.
Reading for this area is covered in the subject guide, Chapter 1 and in
International financial reporting, Chapter 1, as well as in most
advanced textbooks.

12

Examiners commentaries 2008

Examiners commentary 2008

91 Financial reporting
Specific comments on questions Zone B
Question 1
The profit and loss accounts for the year ended 31 December 2007 for Sand
Plc, Sea Ltd [For full question please refer to the examination paper.]
Required
a) Prepare the consolidated profit and loss account for Sand Plc for the year
ended 31 December 2007.
(20 marks)
For details on the preparation of consolidated accounts, please refer to
the subject guide, Chapter 7 and International financial reporting,
Chapter 24. The material is also covered widely in any advanced
financial reporting textbook.
The solution with workings is as follows:
Consolidated Profit and Loss accounts for Sand Plc for the
year ended 31 December 2007
Workings

Sales

1,883,000

Cost of sales

(1,213,200)

Gross profit

669,800

Administration costs

(84,900)

Distribution costs

Sand + Sea

(46,000)

Goodwill

(8,000)

Share in associate

49,000

Profit before tax

Tax

579,900
6

Profit after tax

Minority interest

(168,000)
411,900

Profit after tax and minority interest

(35,960)
375,940

Dividends

Sand

(110,000)

Transfer to reserves

(38,000)

Net profit for year

Retained profit bfwd
Retained profit cfwd

227,940
9

1,204,000
1,431,940

Workings (Sand = holding company, Sea = subsidiary and

Tree = associate)
1.

Sales
= Sand + Sea inter-company sales + provision for unrealised
profit
= 1,500,000 + 400,000 10,000 7,000

91 Financial reporting

2.

Cost of sales
= Sand + Sea inter-company sales
= 1,120,000 + 100,000 7,000 + 200

3.

Administration costs
= Sand + Sea inter-company management fee
= 60,900 + 34,000 10,000

4.

Goodwill
Goodwill Sea
= Cost of investment share of net assets at acquisition
= 50,000 80% * 50,000 = 10,000
Goodwill Tree
= Cost of investment share of net assets at acquisition
= 100,000 40% * 75,000 = 70,000
Total goodwill amortisation per annum
= 1,000 for Sea and 7,000 for Tree, total = 8,000
Goodwill against retained profit brought forward
4 years for Sea = 4,000
2 years for Tree = 14,000

5.

Share in Associate = Sands share of Trees profit before tax after

adjustment for provision for unrealised profit
= 40% * (123,000 500)

6.

Tax
= Sand + Sea + Sands share of Tree
= 100,000 + 60,000 + 40% * 20,000

7.

Minority interest
= Minority share of Seas profit after tax after adjustment for
provision for unrealised profit
= 20% * (180,000 200)

8.

Transfer to reserves
= Sand + Sands share of Sea
= 10,000 + 80% * 30,000 + 40% * 10,000

9.

Retained profit brought forward

= Sand + post acquisition profits of Sea + post acquisition
profits of Tree goodwill adjustment
= 720,000 + 80% * (600,000 40,000) + 40% * (200,000
65,000) 18,000 + 1,204,000

b) What are joint ventures and how are they accounted for? (5 marks)
Students are required to outline what a joint venture is and describe the
different ways in which they may be accounted for, outlining the
preferred accounting treatment. Details are given in the subject guide, in
IAS 31, FRS 9 and in any advanced financial reporting text including
International financial reporting.

Examiners commentaries 2008

Question 2
On 1 January 2008, Boot Ltds... [For full question please refer to the
examination paper.]
Required
a) Explain Hicks definition of well offness and Hicks measures of income
numbers 1 and 2.
(9 marks)
A good answer would clearly explain Hicks definition of well offness
and measures of income including explanations of ex ante and ex post
measures and versions A and B of the measures. A good answer would
clearly distinguish the differences between the measures. Details can be
found in the subject guide, Chapter 3 and in International financial
reporting, Chapter 4. The Examiner is looking for a clear explanation of
the concepts and not just a reproduction of the formulas for the
measures.
b) Calculate Hicks income number 1 ex post version A and Hicks income
number 1 version B.
(8 marks)
Calculations with workings are given as follows:
Cashflows
Ex ante
Time t
Net cashflows ()

1
32,000

2
54,400

3
54,400

4
54,400

5 onwards
54,400

Ex post
Time t
Revised cashflows ()
New contract ()
Grant ()
Net cashflow ()

5 onwards

32,000

45,600

45,600

45,600

45,600

(10,400)

5,440

5,440

5,440

51,040

51,040

51,040

4,800
26,400

Income ex post 1A

d1 t1 +v1 t1 v0 t0

(180,833)

Income ex post 1B

d1 t1 +v1 t1 v0 t1

31,164

v0 t0 =

32,000/1.1 + 544,000/1.1

d1 t1 =

523,636

26,400

v1 t1 =

45,600/0.15 2.28*45,600 + 2.28*51,040 =

316,403

v0 t1 =

26,400/1.1 + 316,403/1.1

311,639

Income ex post 1A

d1 t1 + v1 t1 v0 t0

(180,833)

Income ex post 1B

d1 t1 + v1 t1 v0 t1

31,164

45,600

91 Financial reporting

c) Calculate Hicks income number 2 ex post version A and Hicks income

number 2 version B.
(8 marks)
Calculations with workings are given as follows:
Income ex post 2a

d1 t1 + v1 t1 ex ante income/r1

(6,290)

v0 t1 = y/1 + r0t1 +
Income ex post 2b

(y/r1 t1*1/1 + r0t1)

d1 t0 =

44,711
32,000

v 1 t0 =

544,00/0.1

544,000

Income (ex ante) =

0.1*523,636

52,364

Question 3
On 1 January 2008, Pair Ltd [For full question please refer to the
examination paper.]
Required
a) Define finance leases and operating leases and discuss how both these
types of leases would be accounted for in the accounts of the lessee.
(9 marks)
A good answer would clearly define the two different types of leases
together with a discussion of the factors that would be taken into
account in practice when deciding upon whether a lease was a finance
lease or an operating lease. The accounting treatment of both types of
leases in the profit and loss account and the balance sheet and the main
disclosures should be outlined clearly. Reading for this question can be
found in the subject guide, Chapter 9, International financial reporting,
Chapter 12, in most advanced financial reporting texts and in relevant
accounting standards, for example, IAS 17 and SSAP 21.
b) Show how the above transactions will be reflected in the financial
statements of Pair Ltd for 2008, including its notes, in accordance with
standard accounting practice, giving reasons for your choice of
accounting treatment.
(16 marks)
Transaction 1 should be identified as a finance lease with reasons given
for this decision. Once the lease has been correctly identified, the
interest rate implicit in the lease needs to be calculated, noting that
payments are made in advance and are made quarterly.
There are 15 periods since the first payment is in advance, therefore the
calculation to obtain the rate implicit in the lease is: 200,000=
15,456 + 15,456*annuity factor 15. This gives the annuity factor 15
to be 11.94. From the discount factor tables provided, this equates to a
3% rate implicit in the lease.
Once the rate implicit in the lease has been calculated, the calculation of
rental payment, finance charge and the obligation under the finance
lease can be calculated as follows:

Examiners commentaries 2008

Date

Rental payment

Finance charge

Capital repayment

1.01.2008

Obligation under finance lease

200,000

1.01.2008

15,456

15,456

184,544

1.04.2008

15,456

5,536

9,920

174,624

1.07.2008

15,456

5,239

10,217

164,407

1.10.2008

15,456

4,932

10,524

153,883

1.01.2009

15,456

4,616

10,840

143,044

1.04.2009

15,456

4,291

11,165

131,879

1.07.2009

15,456

3,956

11,500

120,379

1.10.2009

15,456

3,611

11,845

108,535

1.01.2010

15,456

3,256

12,200

96,335

The accounting entries in the financial statements can then be obtained

as follows:
2008

Profit and loss account

Finance charge
Depreciation

20,324
50,000

Balance sheet
Non current assets
Leased assets

150,000

Creditors due within one year

Accrual
Obligation under finance lease

4,616
45,348

In creditors after more than one year

Obligation under finance lease

108,535

Transaction II should be identified as an operating lease giving reasons

for this, including the calculation of the present value of lease payments
as a percentage of fair value. An operating lease exists if the minimum
lease payments do not exceed 80% of the fair value of the asset as
follows:
Time

Payment

Discount factor

Present value

0
1
2
3
4
5
6
7
8
9

100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000

1
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424

100,000
90,909
82,645
75,131
68,301
62,092
56,447
51,316
46,651
42,410

Present value of minimum lease payments = 675,902

Fair value = 900,000 therefore operating lease is indicated.

The accounting entry should show an expense of 100,000 for lease

payments in the profit and loss account.

91 Financial reporting

Question 4
T Org, an 80% subsidiary of D Plc [For full question please refer to the
examination paper.]
Required
a) Translate the balance sheet for T Org using the closing rate method.
Explain how the foreign exchange difference arises under the closing rate
method.
(7 marks)
In this question, the profit and loss account was not required.
The solution for the translated balance sheet is given as follows:
Balance sheet

Bots

Translation rate

Fixed assets

2,800,000

25

112,000

Stock

8,000,000

25

320,000

Other nca

2,200,000

25

88,000

Debentures

(6,000,000)

25

(240,000)
280,000

Share capital

5,000,000

Profit

2,000,000/20

Foreign exchange
Reserve

Balancing figure
or calculation

10

500,000
100,000
(320,000)
280,000

A brief explanation of how the foreign exchange difference arises should

be given. Calculation of exactly how the exchange difference arises is
not required.
Details of foreign exchange translation can be found in the subject
guide, Chapter 8 and International financial reporting, Chapter 25 as
well as in most advanced financial reporting texts.
b) Translate the balance sheet and the profit and loss account using the
temporal method. Explain how the foreign exchange difference arises
under the temporal method.
(11 marks)
The translated balance sheet and profit and loss account are given as
follows:

Examiners commentaries 2008

Temporal
Balance sheet
Fixed assets
Stock
Other net current assets
Debentures

Share capital
Profit

Bots

Translation rate

2,800,000
8,000,000
2,200,000
(6,000,000)

15
18
25
25

186,667
444,444
88,000
(240,000)
479,111

5,000,000
Balancing figure or
calculation

10

500,000
(20,889)
479,111

Temporal
Profit and loss
account
Sales
Op stock
Purchase
Cl stock
Cost of sales
Gross profit
Expenses
Depreciation
Foreign exchange
difference
Profit before tax
Tax
Profit after tax
Dividends
Net profit

Working 1
Cos

Bots
12,000,000
7,200,000
7,000,000
(8,000,000)
(6,200,000)
5,800,000
(200,000)
(800,000)

4,800,000
(1,800,000)
3,000,000
(1,000,000)
2,000,000

7,200,000
7,000,000
(8,000,000)

600,000

20
10
20
18

20
15

(625,556)
(25,556)
(10,000)
(53,333)
198,000
109,111
(90,000)
19,111
(40,000)
(20,889)

20
25

10
20
18

720,000
350,000
(444,444)
625,556

A brief explanation of how the foreign exchange difference arises should

be given. Calculation of exactly how the exchange difference arises is
not required.
Details of foreign exchange translation can be found in the subject
guide, Chapter 8 and International financial reporting, Chapter 25 as
well as in most advanced financial reporting texts.
c) Discuss the advantages and disadvantages of the closing rate and
temporal methods and outline the situations in which each method should
be used.
(7 marks)
A good answer would discuss the advantages and disadvantages of both
methods for foreign exchange translation and detail the situations in
which each should be used. Weak answers focus just on the situations in

91 Financial reporting

which each method should be used and in describing the methods rather
than answering the full question.
Details of foreign exchange translation can be found in the subject
guide, Chapter 8 and International financial reporting, Chapter 25 as
well as in most advanced financial reporting texts.
Question 5
The following information on its activities is provided by Piece Ltd. Answer
all parts of the question, dealing separately with each part. Justify your
treatment in each case with reference to accounting standards where
applicable. All parts of the question carry equal marks.
(25 marks)
a) Piece Ltd started a new business selling widgets. 200 widgets were
bought on 1 January 2007 for 1,000 each and sold for 1,500 each on 1
June 2007. On 1 June 2007, the replacement cost of widgets was 1,200
each. Piece Plc intends to use current value accounting for this
transaction. Calculate the cost of sales adjustment for this transaction.
This question relates to current value accounting. The cost of sales
adjustment should be defined and calculated as follows:
Historical cost

Replacement cost

Sales

300,000

300,000

Cost of sales

(200,000)

(240,000)

Gross profit

100,000

60,000

Cost of sales adjustment

40,000

Details of this area can be found in the subject guide Chapter 6 and
International financial reporting, Chapters 5 and 6.
b) Piece Ltd entered into a long term contract with the following
information:
Date commenced

1 January 2007

Expected completion date

31 December 2009

Final contract price

16,000,000

Costs to 31 December 2007

12,400,000

Value of work certified to 31 December 2007

10,200,000

Progress payments invoiced to 31 December 2007

11,500,000

Estimated costs to completion

1,500,000

How would this contract be accounted for by Piece Ltd for the year ended
31 December 2007?
This question relates to construction contracts. The accounting entries
for this contract with workings are as follows:

Contract price

16,000,000

Costs to date

(12,400,000)

Costs to completion

(1,500,000)

Expected profit

2,100,000

Examiners commentaries 2008

Profit and loss account

Turnover

10,200,000

Cos

(8,861,250)

Attributable profit

1,338,750

Balance sheet

Long term contract balance

12400000 + 1338750 11500000

2,238,750

The % completed method should be used and brief details of either IAS
11 or SSAP 9 should be given. Readings on this area can be found in the
subject guide Chapter 11, in International financial reporting, Chapter 15
and in most advanced financial reporting texts.
c) A lawsuit has been filed against Piece Ltd. Piece Ltd is fighting the lawsuit
but its outcome is uncertain. The directors of Piece Ltd consider that there
is a 40% chance that the lawsuit will be successful. If they lose the
lawsuit, the expected settlement will be approximately 300,000. Discuss
the accounting treatment for this lawsuit.
This question relates to contingent liabilities. A contingent liability
should be identified and discussed with reference to IAS 37 or FRS 12.
The liability in the question should be identified as possible but not
probable and the appropriate accounting treatment, that of disclosure,
identified. Readings in this area can be found in the subject guide
Chapter 12, in International financial reporting, Chapters 16 and 18 and
in most advanced financial reporting texts.
d) Piece Ltd undertakes research and development into new products and
processes for the first time in 2007. The total cost for research and
development totals 400,000. Of this 5% is pure research, 20% is applied
research and 75% are costs to develop a new product. How would Piece
Ltd account for this research and development expenditure for the year
ended 31 December 2007?
This question relates to research and development. Good answers would
define research and development referring to IAS 38 or SSAP 13 and
outline the accounting treatment of all categories of research and
development including the conditions for capitalisation of applied
research. The total cost of 400,000 would be split into its components
of pure research, applied research and development and its accounting
treatment stated as follows:

Pure research

20,000

written off in P+L

Applied research 80,000

written off in P+L

Development

may be capitalised

300,000

Readings in this area can be found in the subject guide Chapter 10, in
International financial reporting, Chapter 13 and in any advanced
financial reporting text.

91 Financial reporting

e) Piece Ltd provides you with the following projected data in order to
provide for deferred taxation on a full basis for 2007 and 2008:
Year ended 31/12

Taxable profit

Capital allowances

Depreciation

000

000

000

2007

8,000

3,800

3,200

2008

4,000

2,200

5,600

The tax rate for Piece Ltd is 33%. Calculate the deferred tax provision for
the years ended 31 December 2007 and 31 December 2008.
This question relates to deferred tax. Deferred tax should be defined and
its accounting treatment identified with reference to IAS 12 or FRS 19.
Deferred tax accounting entries should be calculated as follows:
2008

2009

Capital allowances

3,800,000

2,200,000

Depreciation

3,200,000

5,600,000

600,000

(3,400,000)

Deferred tax @ 33%

198,000

(1,122,000)

Full basis in P+L

198,000

(1,122,000)

B/S provision

198,000

(924,000)

Deferred tax

Question 6
Either
Discuss the major issues in accounting for goodwill and critically assess an
accounting standard in this area.
The question related to a specific intangible asset, goodwill. A good
answer would define intangible assets and goodwill, giving examples of
how goodwill arises in practice, covering both internally generated and
externally generated goodwill and its importance in organisations. The
main issues relating to goodwill would then be identified and discussed.
These could include whether goodwill was an asset, measurement and
recognition issues in relation to goodwill, the different ways to account
for goodwill and the impact of these on financial statements,
impairment of goodwill and amortisation of goodwill. Both internally
generated and purchased goodwill should be covered.
A good answer would then outline an appropriate standard on the area;
for example IFRS 3 on business combinations or FRS 10 on goodwill
and intangible assets; and then critically assess the chosen standard. In
the critical assessment, both the benefits and problems of the standard
should be discussed. IAS 38 on intangible assets and FRS 11 on
impairment of non-current assets and goodwill may also be referred to.
A weak answer would define goodwill, briefly outline its accounting
treatment and summarise the main provisions of an appropriate
accounting standard without discussion of issues or critical assessment
of the standard.

10

Examiners commentaries 2008

This area is an ongoing area of interest within financial reporting and is

covered widely, both in textbooks and in professional and academic
journals. It is covered in the subject guide, Chapter 10 and in
International financial reporting, Chapter 13 as well as in most advanced
financial reporting texts.
Or
Discuss the arguments for and against the regulation of financial reporting.
This question related to accounting regulation in general and not to any
specific standard or rule. A good answer would start by discussing what
was meant by accounting regulation and outline briefly the different
types of accounting regulation that exists currently for example,
regulation by government using company law, professional accounting
regulation using accounting standards and regulation by international
accounting bodies such as the International Accounting Standards
Board. The answer would then go on to discuss both the benefits of
regulation and the problems with accounting regulation. A good answer
would cover both traditional arguments and economic based arguments
as covered, for example, by Beaver.
A weaker answer would perhaps just outline the different types of
accounting regulation in existence and give details of specific accounting
standards without focusing on accounting regulation more generally
and its advantages and disadvantages.
Reading for this area is covered in the subject guide, Chapter 1, in
International financial reporting, Chapter 1 as well in most advanced
textbooks. Key readings for economic arguments relating to the
regulation of accounting include Beaver, 1981 and Bromwich, 1992 as
indicated in the subject guide.
Question 7
Either
What are fully stabilised current value accounts? Discuss the benefits and
limitations of fully stabilised current value accounts.
This question relates to fully stabilized current value accounts, which
combines current purchasing power and current value accounts. A good
answer would explain the concepts behind fully stabilised current value
accounts with appropriate examples. Both the benefits and limitations of
these accounts would then be discussed covering both theoretical areas
and practical issues.
A weak answer would outline current purchasing power and current
value but not fully stabilised accounts and only touch upon benefits and
limitations.
This is an area of financial reporting which has a strong academic
debate surrounding it, dating back to the 1970s. More details can be
found in the subject guide, Chapters 5 and 6 and in International
financial reporting, Chapters 5, 6 and 7 and in most advanced financial
reporting texts.

11

91 Financial reporting

Or
Compare the accounting treatment of non-current tangible assets to that of
investment properties and discuss how the different accounting treatments
affect the financial statements.
This question relates to a specific accounting issue, that of non-current
tangible assets and the difference between accounting for such assets
and investment properties.
A good answer would define both types of assets, giving examples of
both, referring to accounting standards; for example IAS 16, IAS 36,
FRS 15 and SSAP 19. The accounting treatment of both would be
outlined and its affect on financial statements discussed, perhaps using
an example to highlight key differences and the implications of these for
assessing financial performance.
A weak answer would summarise the accounting standards in the area
and outline the accounting policies with little discussion on the effect on
financial statements and the implications of this.
Readings in area are covered in the subject guide, Chapter 9, in
International financial reporting, Chapter 12 and in most advanced
financial reporting texts.

12