ADVANCED CORPORATE REPORTING

PROFESSIONAL 2 EXAMINATION

NOTES:
You are required to answer ALL Questions.

STUDENTS HAVE OPTIONAL USE OF THE EXTENDED TRIAL BALANCE , WHICH IF USED,
MUST BE INCLUDED IN THE ANSWER BOOKLET.

PRO-FORMA INCOME STATEMENT BY NATURE,

INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED
Time Allowed
3.5 hours plus 10 minutes to read the paper

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to the limitations advised on the Institutes website.

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writing in your answer booklet.

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relevant legislation, case law or examples where appropriate.

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The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ADVANCED CORPORATE REPORTNG

PROFESSIONAL 2 EXAMINATION - APRIL 2009
Time Allowed: 3.5 hours, plus 10 minutes to read the paper. You are required to answer ALL questions.

If you make an assumption in any question,

please state your assumption clearly.

ELECTROLITE plc (ELECTROLITE), an Irish company, commenced trading in 1998. The company was formed
by three school friends, Christopher, Caiti and Ellen, who believed that there was an opportunity to utilise their
respective accounting, computing and engineering degrees. Despite being a public limited company,
ELECTROLITEs shares are held primarily by Christopher, Caiti and Ellen, who are also the Directors of the
company.

ELECTROLITE manufactures a variety of sensors and electronic components that are used in the construction
industry. After a slow beginning, the company experienced a period of strong growth between 2002 and 2007.
Towards the end of this period, Christopher, Caiti and Ellen realised that the company required substantial
additional finance if it was to continue to grow and take full advantage of the business opportunities available to
it. Consequently, at the end of 2007, the Directors decided to reorganise the capital structure of the company
during 2008, with a view to seeking further equity investment in 2009. As a result, among other things, it was
imperative that the 2008 financial statements presented as positive a picture as possible of the companys
performance and financial position. However, given the financial climate, particularly in the latter half of the year,
trading conditions proved very difficult.

You are Christopher, the Finance Director of ELECTROLITE and a qualified Certified Public Accountant, and your
assistant has presented you with the following draft trial balance for ELECTROLITE as at 31st December 2008
together with additional information.

Page 1
 ELECTROLITE
Draft Trial Balance as at 31st December 2008

Revenue 83,800
000 000

Inventory electronic components held at 1st January 2008 1,580

Purchases 52,250
Operating expenses 21,280
Profit on sale of land site GAMMA 550
Profit on sale of property SIGMA 1,600
Interest received and receivable 1,830
Interest paid and payable 1,660
Land site BETA valuation at 1st January 2008 2,000
Land site Omega valuation at 1st January 2008 1,500
Property cost at 1st January 2008 14,500
Property accumulated depreciation at 1st January 2008 1,820
Plant cost at 1st January 2008 2,100
Plant accumulated depreciation at 1st January 2008 1,180
Equipment cost at 1st January 2008 2,000
Equipment accumulated depreciation at 1st January 2008 1,300
Trade receivables 10,800
Other receivables 2,200
Bank and cash 2,220
Trade payables 4,080
Other payables 1,380
Taxation 100
1 ordinary shares 1,000
Revaluation reserve 2,500
Retained earnings 12,200
5% 1 convertible cumulative redeemable preference shares 1,000
Ordinary dividends paid 200
Preference dividends paid 50
114,340 114,340
Additional Information:

1. On 1st July 2008, ELECTROLITE issued 1,000,000 1 ordinary shares at 1.50 per share, receiving the
proceeds on the same day. Subsequently, on 1st October 2008, the company purchased and cancelled
200,000 of its own 1 ordinary shares at par. On 28th February 2009, prior to the finalisation of the 2008
financial statements, ELECTROLITE made a bonus issue of one for four 1 ordinary shares. No entry has
been made in the books and records of ELECTROLITE in respect of the above transactions.

2. At 1st January 2008, ELECTROLITE had two share option schemes in operation, and the options
outstanding on this date were as follows:

400,000 1 ordinary shares at 1.75; and

600,000 1 ordinary shares at 1.90.

On 1st April 2008, options for a further 1,000,000 1 ordinary shares at 1.95 were granted. Under each
of the share option schemes, the options are exercisable before 31st December 2012. On 1st November
2008, the options relating to the 400,000 1 ordinary shares at 1.75 were exercised, with the company
receiving the proceeds on the same day. The average market price of one ELECTROLITE 1 ordinary
share during the year ended 31st December 2008 was 2. No entry has been made in the books and
records of ELECTROLITE in respect of the above transactions.
(N.B.: As IFRS 2 Share-Based Payments is not examinable, the requirement of this standard with
respect to the expensing of share-based payments should be ignored.)

3. The 1,000,000 5% 1 convertible cumulative redeemable preference shares shown in the draft trial
balance as at 31st December 2008 were issued in 1998 and are convertible at the option of the preference
shareholders or ELECTROLITE on 31st December 2012 and 2013 on the basis of one 1 ordinary share
for every two 1 convertible cumulative redeemable preference shares held. The 1 convertible
cumulative redeemable preference shares are redeemable at the option of the preference shareholders on
31st December 2012 and 2013 at 1.65 per 1 convertible cumulative redeemable preference share.
None of the preference dividends are outstanding, with the 2008 preference dividend being paid on 31st
December 2008 and included in the draft trial balance on this date.

Page 2
4. ELECTROLITE issued 1,000,000 6% 1 convertible bonds on 1st January 2008. Each 1 bond is
convertible into two 1 ordinary shares at the option of the bond holder on 31st December 2017. No entry
has been made in the books and records of ELECTROLITE in respect of the bond issue, together with the
interest which remained unpaid at 31st December 2008.

5. In October 2008, in order to stimulate sales, ELECTROLITE introduced a scheme whereby the payment
for individual orders greater that 50,000 could be deferred for 12 months. During the last quarter of 2008,
sales on deferred payment terms amounted to 1,200,000. No entry has been made in the books and
records of ELECTROLITE in respect of these sales. ELECTROLITE offers a 10% discount to customers
that pay immediately, and there is a 25% profit margin on deferred payment sales. Past experience
indicates that 5% of ELECTROLITEs customers normally return goods for a refund, with the company
being able to resell 80% of returns at no additional cost to ELECTROLITE and the balance having to be
scrapped.

6. After a meeting of the Board of Directors in June 2008, the Directors publicly committed the company to a
restructuring programme costing 400,000 which commenced in January 2009. No provision for this
restructuring programme is included in ELECTROLITEs draft trial balance as at 31st December 2008. The
restructuring programme will result in the closure of Division ALPHA which contributed the following to the
companys activities during 2008:

Revenue 3,000
000 000

Opening inventory -
Purchases 1,100
Closing inventory - (1,100)
Gross profit 1,900
Operating expenses (900)
Profit from operations 1,000

These amounts are included in the corresponding figures shown in the draft trial balance as at 31st
December 2008. As a result of contractual commitments with three customers, Division ALPHAs operating
activities cannot cease until 31st May 2009. ELECTROLITEs Directors believe that DIVISION ALPHA will
incur operating losses during the first five months of 2009 of 300,000, of which 50% will be directly related
to fulfilling these customers contracts. No provision is included in the draft trial balance as at 31st
December 2008 in respect of these losses.

Additional issues associated with the restructuring programme are:

Redundancy costs of 200,000 will be incurred, although the Directors believe that there is an 80%
chance of being able to redeploy some employees which would save 75,000 of the estimated
redundancy costs; and
On completion of the restructuring programme, land (site BETA) will be surplus to requirements.
ELECTROLITE has agreed to sell site BETA to a supermarket chain for 2,500,000 in 2009. The land
was originally purchased for 900,000 and is included in the draft trial balance as at 31st December
2008 at 2,000,000. (You may ignore any deferred tax implications and selling costs associated with
the proposed sale of site BETA.)

7. In November 2008, ELECTROLITE agreed in principle to sell land (site GAMMA) to a local building
contractor for 1,400,000. The land, which originally cost 350,000, was included in ELECTROLITEs
financial statements for the year ended 31st December 2007 at a valuation of 850,000. The finalisation
of the sale has been deferred until 31st August 2009 in order to enable the building contractor to receive
the outcome of his application for planning permission. The sale is reflected in the draft trial balance as at
31st December 2008, with the deferred consideration being included in other receivables.

8. On 1st January 2008, ELECTROLITE commenced the construction of a new warehouse and research
property under a fixed price contract of 1,800,000. The property was due to be completed on 31st July
2008, but construction was halted between 1st June 2008 and 30th September 2008 due to trading
difficulties and economic uncertainty. The property was finally completed on 30th November 2008. In order
to fund the construction of the property, ELECTROLITE arranged a bank loan of 1,800,000 for the period
1st January 2008 to 31st December 2008 at 10% interest per annum. The bank loan, together with the
related interest, was repaid on 31st December 2008. No entry has been made in the books and records of
ELECTROLITE in respect of the above transaction. It is company policy to capitalise qualifying borrowing
costs.

Page 3
9. On 1st October 2008, ELECTROLITE sold a property (SIGMA) under a 25 year lease for 6,000,000 and,
on the same date, signed an unconditional agreement to repurchase the lease in five years time for
7,500,000. The property, which originally cost 5,000,000, was recorded in ELECTROLITEs financial
statements for the year ended 31st December 2007 at 4,400,000. The sale is reflected in the draft trial
balance as at 31st December 2008.

10. On 1st January 2002, ELECTROLITE purchased specialised plant at a cost of 1,000,000. Due to the
unique nature of the sensors manufactured by this plant, ELECTROLITE operated it as a separate cash
generating unit. On 1st January 2005, ELECTROLITE was forced to mothball the plant and provide in full
for the carrying value of the plant at that date as less expensive foreign imports made it uneconomic for
ELECTROLITE to produce the sensors and the plant had no market value due to its specialised nature.
However, in June 2008, it became apparent that the sensor could be utilised to make certain construction
equipment more energy efficient. As a result, ELECTROLITE recommenced production of the sensor using
the specialised plant on 1st October 2008.

11. ELECTROLITE experienced cash flow problems during the third quarter of 2008 and deliberately reduced
the quantity of electronic components held in inventory. On 1st October 2008, ELECTROLITE held 20,000
components in inventory, all of which had been purchased in September 2008 at a cost of 11 per
component. During the last quarter of 2008, the electronic components purchased and used were as
follows:

October 2008 November 2008 December 2008

Quantity purchased 140,000 150,000 130,000
Purchase price per component
Quantity used 40,000 70,000 110,000
9 8 7

While ELECTROLITE normally values inventory on a First In First Out (FIFO) basis, the assistant
accountant has valued inventory at 31st December 2008 on a Last In First Out (LIFO), arriving at a value
of 1,900,000. Inventory shown in the draft trial balance as at 1st January 2008 is valued on a FIFO basis.
Although the purchase cost of the electronic components declined during the period October to December
2008, resulting in lower selling prices for finished goods, ELECTROLITE was able to maintain similar profit
margins as in the past and the company expects to continue to sell its products profitably in 2009.

12. The figure for taxation shown in the draft trial balance as at 31st December 2008 represents the balance
on the deferred tax account as at 31st December 2007. A figure of 2,500,000, of which 250,000 relates
to discontinued operations, should be provided in the financial statements for the year ended 31st
December 2008 in respect of taxation. This figure takes account of all items, including adjustments, with
the exception of the following, all of which relate to continuing activities:

At 31st December 2008, equipment, which originally cost 2,000,000, had a net book value of
300,000 after charging depreciation for 2008 and a tax written down value of 50,000;
At 31st December 2008, other receivables include deposit interest receivable of 450,000. Deposit
interest is taxed on a receipts basis;
At 31st December 2008, other payables include accrued pension costs of 200,000. Pension costs
are allowed for tax purposed when paid; and
The Directors wish to include land (site OMEGA) at its value on 31st December 2008 of 1,900,000
in the companys 2008 financial statements.

13. ELECTROLITE provides for depreciation on the following basis:

Land nil;
Property 4% per annum on a straight line basis;
Plant 10% per annum on a straight line basis; and
Equipment 20% per annum on a straight line basis.

It is company policy to charge a full years depreciation in the year of acquisition or construction and none
in the year of disposal. All depreciation charges and related items are included in operating expenses.

14. The taxation rate applicable for all taxes is 25%. Transaction costs associated with the share and bond
issues referred to in notes 1 4 above can be ignored.

Page 4
1. REQUIREMENT:

Prepare the income statement for the year ended 31st December 2008 of ELECTROLITE and the balance
sheet as at that date.
[Total : 60 Marks]
(Notes to the financial statements are not required.)

2. REQUIREMENT:

(a) Calculate the basic and diluted earnings per share of ELECTROLITE for the year ended 31st
December 2008 in accordance with IAS 33 Earnings per Share.
(16 Marks)

(b) Prepare a memorandum addressed to Caiti and Ellen which explains why users of financial
statements may find the disclosure of diluted earnings per share useful.
(9 Marks)

[Total : 25 Marks]

3. REQUIREMENT:

Prepare a report addressed to Caiti and Ellen which explains the key accounting considerations for
ELECTROLITE in the current volatile economic climate.
[Total : 15 Marks]

[Total : 100 Marks]

END OF PAPER

Page 5
 SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ADVANCED CORPORATE REPORTNG

PROFESSIONAL 2 EXAMINATION - APRIL 2009

SOLUTION 1

ELECTROLITE
Income Statement for the Year Ended 31st December 2008

000s 000s
Continuing Operations:
Revenue 81,890.909
Opening inventory 1,580
Purchases 51,150
Closing inventory (1,630) (51,100)
Gross profit 30,790.909
Operating expenses (21,970.20)
Profit from operations 8,820.709
Investment income 1,830
Finance costs (includes prefence dividend as preference shares classified as debt) (1,920)
Profit before tax 8,730.709
Income tax expense (2,275)
6,455.709

Discontinued Operations:
Profit from discontinued operations 475
6,930.709

Format & presentation (2 Marks)

Page 7
 ELECTROLITE
Balance Sheet as at 31st December 2008

000s 000s
ASSETS
Non-current Assets
Land BETA -
Land OMEGA 1,900
Land GAMMA 850
Property 18,128.80
Plant 1,010
Equipment 300

Current Assets
Inventory 1,630
Trade receivables 11,866.909
Other receivables 800
Bank and cash 3,240

Non-current Asset Held for Sale 2,500

42,225.709

EQUITY AND LIABILITIES

Capital and Reserves
1 ordinary shares 2,200
Share premium 800
Revaluation reserve 3,800
Retained earnings 11,700
Less ordinary dividend paid (200)
Profit for year 6,930.709 18,430.709

Non-current Liabilities
5% 1 convertible cumulative redeemable preference shares 1,000
1 convertible bonds 1,000
Loan 6,075
Deferred taxation 225
Provision for restructuring 400

Current Liabilities
Trade payables 4,080
Other payables 1,440
Taxation 2,500
Onerous contract 150
Redundancy costs 125
42,225.709

Format & presentation (2 Marks)

Page 8
 ELECTROLITE
Trial Balance as at 31st December 2008
DRAFT ADJUSTMENTS FINAL
000 000 000 000 000 000
Revenue 83,500 w7a 3,000 w6a 1,090.909 81,890.909
Inventory electronic
components held at
1st January 2008 1,580 1,580
Purchases 52,250 w7a 1,100 51,150
Inventory electronic
components held at
31st December 2008 w12 1,630 1,630
Operating expenses 21,280 w6b 24, w7a 400,
w7b 150, w7c 125,
w14b 856.2, w7a 900,
w14c 210, w7e 275,
w14d 400 w11 300 21,570.2
Tax
income statement w13a 25, w15 2,500 w7a 250 2,275
Profit on sale of land
site BETA 550 w8a 550
Profit on sale of property
SIGMA 1,600 w10a 1,600
Interest received
and receivable 1,830 1,830
Interest paid w5b 60,
and payable 1,660 w9 75, 1,870
w10c 75
Land site BETA
valuation at 1st January
2008 2,000 w7d 500 w7d 2,500
Land site Omega
valuation at 1st January
2008 1,500 w13b 400 1,900
Land site GAMMA w8a 850 850
Property cost at 1st
January 2008 14,500 w9 1,905,
w10a 5,000 18,128.8
Property accumulated
depreciation at 1st
January 2008 1,820 w10a 600,
w14b 856.2
Plant cost at 1st
January 2008 2,100 w11 300 1,010
Plant accumulated
depreciation at 1st
January 2008 1,180 w14c 210
Equipment cost at
1st January 2008 2,000
Equipment
accumulated
depreciation at 1st
January 2008 1,300 w14c 400 300
Inventory w12 1,630 1,630
Trade receivables 10,800 w6a 1,090.909 w6b 24 11,866.909
Other receivables 2,200 w8a 1,400 800
Bank and cash 2,220 w1 1,500,
w3 700, w2 200,
w5a 1,000 w9 1,980 3,240
Page 9
 ELECTROLITE
Trial Balance as at 31st December 2008
DRAFT ADJUSTMENTS FINAL
000 000 000 000 000 000
Asset held for sale w7d 2,500 2,500
Trade payables 4,080 4,080
Other payables 1,380 w5b 60 1,440
w13a 125,
Taxation balance sheet 100 w15 2,500, 2,725
Restructuring Provision w7a 400 400
Onerous contract w7b 150 150
Redundancy costs w7c 125 125
w3 400
1 ordinary shares 1,000 w2 200 w1 1,000, 2,200
w3 400
Share premium w1 500, 800
w3 3,300
w7d 500,
Revaluation reserve 2,500 w13a 100 w8b 500,
w13b 400 3,800
Retained earnings 12,200 w8b 500 11,700
5% 1 convertible
cumulative redeemable
preference shares 1,000 1,000
Ordinary dividends paid 200 200
Preference dividends paid 50 50
Convertible bonds w5a 1,000 1,000
w10a 6,000,
Loan w10c 75 6,075
Profit discontinued
activities ______ ______ w7e 475 ________ 475
114,340 114,340 121,320.9 121,320.9

WORKINGS:

1. Issue of 1 ordinary shares on 1st July 2008

DR Bank 1,500,000
CR 1 ordinary share capital 1,000,000
CR Share premium 500,000
(2 Marks)

2. Cancellation of 1 ordinary shares on 1st October 2008

DR 1 ordinary share capital 200,000
CR Bank 200,000
(2 Marks)

3. Exercise of options on 1st November 2008

DR Bank (400,000 x 1.75) 700,000
CR 1 ordinary share capital 400,000
CR Share premium 300,000
(2 Marks)
4. Bonus issue on 28th February 2009
Non adjusting post balance sheet event in accordance with IAS 10 Events After the Reporting Period. However,
as the bonus issue was made prior to the finalisation of the 2008 financial statements, it should be included in
the calculation of the number of ordinary shares used in the earnings per share calculation (IAS 33 Earnings per
Share).
Page 10
5. Issue of 6% bonds
(a) Issue
DR Bank 1,000,000
CR Non-current liabilities convertible bonds 1,000,000
(2 Marks)

(b) Interest due

DR Income statement finance costs 60,000
CR Other payables 60,000
(2 Marks)

6. Deferred payment sales

(a) The revenue should be measured at the fair value of the consideration i.e. the deferred sales should be
discounted. As the cash discount is 10%, this appears an appropriate rate to use.

1,200,000 = 1,090,909
1.1

DR Trade receivables 1,090,909
CR Revenue 1,090,909
(2 Marks)

(b) Returns (IAS 37 Provisions, Contingent Liabilities and Contingent Assets)

Those that can be resold:
1,200,000 x 5% x 80% x 25% = 12,000 (1 Mark)

Those that cannot be resold:

1,200,000 x 5% x 20% = 12,000 (1 Mark)

DR Income statement operating expenses 24,000
CR Trade receivables 24,000
(2 Marks)

7. Restructuring programme
(a) Meets definition of discontinued under IFRS 5 Non-current Assets Held for Sale and Discontinued Activities,
and therefore profit/loss from discontinued activities should be shown separately at the foot of the income
statement.

Revenue 3,000,000
Cost of sales (1,100,000)
1,900,000
Operating expenses (900,000)
1,000,000
Tax (note 12) (250,000)
Profit from discontinued operations [see also (e) below] 750,000
(1 Mark)

Also need to provide for cost of restructuring programme in accordance with IAS 37 as ELETROLITE
has created a valid expectation that the programme will be implemented by announcing it publicly.

DR Income statement operating expenses1 400,000
CR Provision for restructuring2 400,000

1 Provision not charged to Division ALPHA on basis that the restructuring is company-wide (if assumed
otherwise then profit from discontinued operations would be reduced by 400,000);
2 Disclosed as non-current (could also assume that question implies this will be incurred in 2009).
(1 Mark)

Page 11
(b) Future operating losses generally cannot provide for such losses under IAS 37, but 50% of the losses appear
to relate to onerous contracts with three customers.

DR Operating expenses discontinued activities 150,000
CR Current liabilities onerous contract 150,000
(2 Marks)

(c) Redundancy costs provide for 125,000 and disclose 75,000 as contingent liability in accordance with IAS
37.

DR Operating expenses discontinued activities 125,000
CR Current liabilities redundancy costs 125,000
(2 Marks)

(d) Land site BETA should be recorded as asset held for sale in accordance with IFRS 5.

DR Land BETA 500,000
CR Revaluation reserve 500,000

DR Asset held for sale 2,500,000

CR Land BETA 2,500,000
(The balance on the revaluation reserve remains until the land is sold.)
(2 Marks)

(e) Profit from discontinued operations

Per (a) above 750,000
Less onerous contracts (b) (150,000)
Less redundancy costs (c) (125,000)
475,000
(1 Mark)

8. GAMMA contract
(a) Reverse sale the IAS 18 Revenue conditions for recognition do not appear to be satisfied i.e. contract
completion appears to be dependant upon planning permission. ELECTROLITE is exposed to the risks and
rewards of ownership and therefore the sale should not be recognised in the 2008 financial statements.
Furthermore, as the sale does not appear to be highly probable there is no need to classify the land as an asset
held for sale.

DR Land - GAMMA 850,000
DR Income statement profit on disposal 550,000
CR Other receivables 1,400,000
(2 Marks)

(b) Reverse transfer of revaluation surplus

DR Retained earnings 500,000
CR Revaluation reserve 500,000
(2 Marks)

9. Property construction and borrowing costs

The loan to finance the construction was taken out and repaid during the financial year. Under IAS 23 Borrowing
Costs those costs directly attributable to the construction of a qualifying asset may be capitalised. Capitalisation
should be suspended during periods when construction is suspended, and ceased when the property is
complete. Therefore, the following costs may be capitalised: 1,800,000 x 7/12 x 10% = 105,000.

DR Property 1,905,000
DR Income statement finance costs 75,000
CR Bank 1,980,000
(3 Marks)

Page 12
10. Sale of SIGMA
(a) The substance of the agreement is that it is a loan secured on the property and not a sale. Therefore, the asset
should be shown on the balance sheet and the sale proceeds recorded as a financial liability. The profit on
disposal of 1,600,000 (6,000,000 - 4,400,000) should be eliminated (there is no depreciation in the year of
disposal).

DR Property SIGMA 5,000,000
DR Profit on sale 1,600,000
CR Accumulated depreciation 600,000
CR Non-current liabilities loan 6,000,000
(2 Marks)

(b) Need to charge depreciation for 2008 - 5,000,000 x 4% = 200,000 (see W14).

(c) Charge interest to income statement

Repurchase price 7,500,000
Sale proceeds (6,000,000)
Interest 1,500,000

/ 5 years = 250,000 pa on a straight line basis x 3/12 = 75,000. (Does not appear to be any repayments due
during period and can ignore discounting.)

DR Income statement finance costs 75,000
CR Non-current liabilities loan 75,000
(2 Marks)

11. Specialised plant

The reversal of the impairment loss should be recognised immediately in profit/loss to the extent that the original
impairment was charged to the income statement (IAS 36 Impairment of Assets). The reversal is restricted by
the amount of depreciation that would have been charged had no impairment loss been written off.

1st January 2002 to 1st January 2005 = 3 years, therefore depreciation charged = 300,000 and the NBV
written off would have been 700,000.

As production restarted on 1st October 2008 (3 years 9 months later), the depreciation would have been
375,000 say 400,000 assuming full years depreciation for 2008. Consequently, the NBV to be
restated/impairment loss to be reversed is 300,000 (700,000 - 400,000).

DR Plant 300,000
CR Income statement operating expenses 300,000
(4 Marks)
[Adjustment therefore includes depreciation for last quarter of 2008 when in use.]

Page 13
12. Inventory
Inventory should be valued at the lower of cost and NRV (IAS 2 Inventory), and cost should be assigned using
either FIFO or weighted average methods. LIFO is not an option. Therefore the year end inventory should be
valued on a FIFO basis.
Quantity LIFO FIFO
1-10-08
Inventory held 20,000 20,000 x 11 = 220,000
October
Purchased 140,000
Used (40,000) 100,000 x 9 = 900,000
120,000
November
Purchased 150,000
Used (70,000) 80,000 x 8 = 640,000 90,000 x 8 = 720,000
200,000

December
Purchased 130,000
Used (110,000) 20,000 x 7 = 140,000 130,000 x 7 = 910,000
220,000 1,900,000 1,630,000

DR Inventory (BS) 1,630,000
CR Cost of sales 1,630,000
(4 Marks)

13. Deferred tax (IAS 12 Income Taxes)

Accelerated capital allowances (300,000 - 50,000) 250,000
Prepaid deposit interest 450,000
Accrued pension costs (200,000)
500,000
Temporary differences x 25% 125,000
Capital gains tax (1,900,000 - 1,500,000 = 400,000 x 25%) 100,000
Deferred tax provision required at 31st December 2008 225,000
Deferred tax provision at 31st December 2007 100,000
Increase in provision 125,000

(a) Increase in provision

DR Revaluation reserve* 100,000
DR Income tax expense 25,000
CR Non-curent Liabilities - deferred taxation 125,000
(2 Marks)

(b) Increase in valuation of OMEGA

DR Land OMEGA 400,000
CR Revaluation reserve 400,000
(2 Marks)
* Revaluation surplus included in revaluation reserve, therefore the related deferred tax should be also.

Page 14
14. Depreciation

(a) Land not depreciated.

(b) Property 4% pa full in year of acquisition/construction and none in year of disposal.

Cost at 1st January 2008 14,500,000
Construction of new warehouse and research property (W9) 1,905,000
Property SIGMA (W10) 5,000,000
21,405,000
x 4% 856,200

DR Operating expenses 856,200
CR Property accumulated depreciation 856,200
(3 Marks)

(c) Plant
Cost at 1st January 2008 2,100,000
x 10% (see also W11) 210,000

DR Operating expenses 210,000
CR Plant accumulated depreciation 210,000
(2 Marks)

(d) Equipment
Cost at 1st January 2008 2,000,000
x 20% 400,000

DR Operating expenses 400,000
CR Equipment accumulated depreciation 400,000
(2 Marks)

15. Income tax charge

DR Income tax expense 2,500,000
CR Balance sheet taxation 2,500,000
(1 Mark)
(See also: W7a - 250,000 of tax charge relates to discontinued operations; and W13 for deferred tax adjustment.)

[Total: 60 Marks]

Page 15
SOLUTION 2

(a)
Basic Earnings per Share

Earnings:
PAIT 6,930,709
(1 Mark)
Prefence dividend of 50,000 included as part of finance cost in arriving at PAIT as preference shares
classified as debt in balance sheet.

Number of Shares:
Date Event Cumulative % Shares
1-1-08 to 1-7-08 Opening balance 1,000,000 6/12 500,000
1-7-08 to 1-10-08 Issue 1,000,000 ordinary shares 2,000,000 3/12 500,000
1-10-08 to 1-11-08 Cancel 200,000 ordinary shares 1,800,000 1/12 150,000
1-11-08 to 31-12-08 Exercise of 400,000 options 2,200,000 2/12 366,667
1,516,667
(3 Marks)
Bonus issue x 5/4* = 1,895,834
* Included as occurred prior to publication of 2008 financial statements (1 Mark)

EPS: 6,930,709 = 3.66 or 366 cents (1 Mark)

1,895,834

Diluted Earnings per Share

(i) 400,000 Options (exercised 1-11-08)

Proceeds 400,000 x 1.75 = 700,000

Shares issued 400,000

If full market price 700,000/2 350,000
Free shares 50,000
Included in basic EPS for 2 months, therefore x 10/12 41,667
(1 Mark)

(ii) 600,000 Options

Proceeds 600,000 x 1.90 = 1,140,000

Shares issued 600,000

If full market price 1,140,000/2 570,000
Free shares 30,000
(1 Mark)

(iii) 1,000,000 Options (granted 1-4-08)

Proceeds 1,000,000 x 1.95 = 1,950,000

Shares issued 1,000,000

If full market price 1,950,000/2 975,000
Free shares 25,000
Granted on 1-4-08, therefore x 9/12 18,750
(1 Mark)

(iv) 5% Convertible cumulative redeemable preference shares

Potential shares 1,000,000 x 1/2 500,000
Dividend saved 1,000,000 x 5% 50,000
50,000 0.10
500,000
(1 Mark)

Page 16
(v) 6% Convertible bonds
Potential shares 1,000,000 x 2 2,000,000
Interest saved 1,000,000 x 6% x 0.75 45,000
45,000 0.0225
2,000,000
(1 Mark)

Profit from continuing operations Number of shares EPS

Basic 6,455,709 1,895,834 3.41 (D)
(1 Mark)

Options (i) to (iii) 41,667

30,000
18,750
6,455,709 1,986,251 3.25 (D)
(1 Mark)

Convertible bonds (iv) 45,000 2,000,000

6,500,709 3,986,251 1.63 (D)
(1 Mark)

Preference shares (v) 50,000 500,000

6,550,709 4,486,251 1.46 (D)
(1 Mark)

Diluted EPS 6,930,709 + 45,000 + 50,000 1.57

4,486,251 (1 Mark)

(16 Marks)

(b) MEMO
DATE: dd/mm/yy
TO: Caiti and Ellen
FROM: Christopher
SUBJECT: Usefulness of diluted EPS

Further to our recent conversation, I have outlined briefly below some reasons why users of financial statements may
find the disclosure of the diluted EPS useful.
Format & presentation (1 Mark)
Linked to ELECTROLITEs circumstances (2 Marks)
Points might include:

(i) Future dilution

There are items which at present do not have claim to equity earnings but may do so in the future (e.g. options,
convertible bonds and convertible preference shares) and, combined with the future number of shares ranking
for dividend increasing, would reduce EPS.
(2 Marks)
(ii) Low interest rate instruments
Debt that has a low interest rate (6% convertible bonds) might be compensated by enhanced future rights (one
for two). Therefore there is the risk that profits could appear better now due to lower interest payments and if
converted in the future EPS and dividends could decline.
(2 Marks)
(iii) True growth pattern
To assess real earnings growth e.g. the true impact of convertible securities used to finance expansion.
(2 Marks)
(9 Marks)

[Total: 25 Marks]

Page 17
SOLUTION 3
REPORT

Date dd/mm/yy

Caiti and Ellen,

Further to our recent conversation, I have outlined below the key accounting considerations for ELECTROLITE in the
current volatile economic climate.
Format & presentation (1 Mark)
Discussion of key accounting considerations (11 Marks)
Linked to ELECTROLITEs circumstances (3 Marks)

Points might include:

(i) Determining fair values

Companies are exposed to declining asset values both directly as a result of having invested in assets whose
values are now declining, and indirectly through exposure to pension and other benefit plans that invested in
assets whose values are now declining. For example:

Fair value of financial instruments (IAS 39 Financial Instruments: Recognition and Measurement and IFRS
7 Financial Instruments: Disclosures); and

Fair value of non-financial items e.g. property, plant and equipment (IAS 16 Property, Plant and Equipment
and IAS 40 Investment Property), non-current assets held for sale (IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations), inventory (IAS 2 Inventories) and pension and other employee benefit
plans (assets and liabilities) (IAS 19 Employee Benefits).

(ii) Revised projections of economic outlook indicating impairment and lack of recoverability of assets

For example, revised cash flow projections used in the valuation of assets and liabilities may give rise to
impairment issues or raise doubts about the market value of assets held for sale now or in the future (IAS 36
Impairment of Assets and IFRS 5).

(iii) Reduced availability of credit and increasing cost of finance

For example, this could have implications for liquidity risk management disclosures (IFRS 7) or increase the risk
of breaching borrowing covenants.

(iv) Increased level of bankruptcy

This could have implications for the recoverability of trade receivables, and the size of provisions required.

(v) Enhanced disclosure requirements

For example: sources of estimation uncertainty (IAS 1 Presentation of Financial Statements), fair values (IFRS
7 Impairment), (IAS 36 Impairment of Assets), events after the balance sheet date IAS 10 Events After the
Reporting Period.

[Total: 15 Marks]

[Total Paper: 100 Marks]

Page 18