PROFESSIONAL 1 EXAMINATION - AUGUST 2007

Answer Questions 1 to 3 and Question 4 or 5. PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED

FINANCIAL ACCOUNTING

NOTES

TIME ALLOWED: INSTRUCTIONS:

3.5 hours, plus 10 minutes to read the paper. During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.

The Institute of Certified Public Accountants in Ireland, 9 Ely Place, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
PROFESSIONAL 1 EXAMINATION AUGUST 2007

Time allowed 3.5 hours, plus 10 minutes to read the paper.

Answer Questions 1 to 3 and Question 4 or 5.

1.

Finns Blocks Ltd., a distributor of concrete building products, has extracted the following trial balance at 31 December 2006: Revenue Purchases Investment Income Administrative expenses Distribution costs Interim preference dividend paid Interim ordinary dividend paid Land & buildings at valuation Land & buildings accumulated depreciation 01.01.06 Plant and equipment at cost Plant and equipment accumulated depreciation 01.01.06 Investment property at valuation 01.01.06 Inventories Trade receivables Trade payables Cash at bank Accruals Provision for liabilities and charges 10% Debentures 2010 Ordinary share capital (nominal value 50c) 8% Redeemable preference shares 1 Share premium Revaluation reserve 01.01.06 Retained earnings 01.01.06 The following information has also been provided: 2. m 103 127 5 12 695 25 115 147 13 520 712 m 1,407 5

115

40

2,474

20 4 150 200 125 50 74 133 2,474

151

1.

3. 4.

Finns Blocks Ltd. carried out a revaluation exercise on all its land and buildings at 31 December 2001. The full valuation of 695 million was booked at this date, with 295 million of relating to the land. At that date, the remaining useful life of the buildings was estimated at 40 years. A further revaluation was carried out at 31 December 2006 which valued the land at 350 million and buildings at 330 million. The remaining useful life of the buildings is now estimated at 33 years. The 2006 revaluation has not been reflected in the above trial balance. Plant and equipment is depreciated at 20% per annum on a reducing balance basis. Depreciation on all property, plant and equipment is charged to cost of sales. A provision of 150 million is required for the total estimated Corporation Tax on 2006 profits.
Page 1

Closing inventory on 31 December 2006 was valued at 120 million. On 10 January 2007, Finns Blocks Ltd. sold products for 2 million that had been valued at 6 million at 31 December.

5.

The above trial balance includes the results of Finns Blocks paving stones division which ceased trading on 30 September 2006 because of an unacceptably low level of profits due to highly competitive market conditions. The results of the discontinued paving stones operation, for the 9 months to 30 September 2006 are as follows: Revenue Cost of Sales Administrative expenses Income tax estimate m 51 40 7 1

6.

7.

8. 9. 10.

REQUIREMENT: (a)

The directors have been informed that the market value of the investment property at 31 December 2006 is 28 million. The property cost 12 million in 2001. Finns Blocks Ltd. use the fair value method allowed under IAS 40.

On 30 November 2006 the company issued and accounted for 40 million new shares at a premium of 50c.

Prior to the year end the shareholders approved a final ordinary dividend of 4c per share in respect of 2006.

The companys solicitor wrote to Finns Blocks Ltd. on 30 November 2006 informing them that a customer intends to sue the company for 10 million in respect of a large batch of faulty concrete used in a new apartment block development. In the view of the solicitor there is a 40% possibility that the case will go against Finns Blocks Ltd. in court. The Financial Controller has included a provision for 4 million in administrative expenses.

On 10 January 2007, there was a large diesel spillage at one of the companys depots which has affected local residential property and also some farming land. Finns Blocks has a long standing environmental policy which it highlights annually in its annual report and they have admitted partial (60%) responsibility for the spillage. The oil distribution company accepted the remaining responsibility. Independent engineers have estimated the total clean-up cost to be 5 million.

During December 2006 the company informed the ten employees of the paving stones division that they are to be made redundant and proposes to pay a total of 2 million to them in early 2007.

(b) (c) (d)

Prepare the Statement of Changes in Equity of Finns Blocks Ltd. for the year ended 31 December 2006. (7 marks)

Prepare the Income Statement of Finns Blocks Ltd. for the year ended 31 December 2006, and present it in accordance with International Financial Reporting Standards. (13 marks)

Set out any two accounting policies relevant to the financial statements of Finns Blocks Ltd. (4 marks)

Write a brief memo to the Financial Controller of Finns Blocks Ltd., explaining the required accounting treatment of items 6 and 7 above. (6 marks) [TOTAL: 30 MARKS]

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2.

The draft consolidated income statement and statement of changes in equity of Big Construction Plc for the year ended 31 December 2006, and the Balance Sheet as at that date, are shown below. Draft Consolidated Income Statement for the Year Ended 31 December 2006

m Cost of sales Revenue (3,779) 1,179 (594) 585 4,958

Profit on disposal of property, plant & equipment Finance income Finance costs Profit before taxation

Net operating expenses Operating profit

Gross profit

Income tax expense Attributable to: Profit for the period

(205)

(30) 417 622

26 41

Minority interest

Equity holders of the parent

409 417

Draft Consolidated Statement of Changes in Equity for the year ended 31 December 2006 1 Ordinary Shares m 155 Share Premium Account m 371 (1) 3

Dividends

Expenses connected with share issue Profit for the period

At 1 January 2006

Retained Earnings m 625

Shares issued on acquisition

160

373

(290)

744

409

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Draft Consolidated Balance Sheet at 31 December 2006 Assets 2006

m 36

2005 m 26

Property, plant & equipment Current Assets Inventory

Non-current Assets

Intangible assets - goodwill

Note 1

1,566 129

1,602 653

1,316 1,342 606 118

Cash and cash equivalents Total Assets Equity

Trade receivables

1,044

262

245 2,311

Equity and Liabilities

2,646

969

Minority interest

Retained earnings

Other reserves

Share premium account

Called up share capital

1,314

744

373

160

37

Non-current Liabilities Long-term borrowings Deferred taxation

Note 2

1,347

33

1,188 1,223

625

371

155

37

35 48

228 390

162

203 251

Current Liabilities Total Liabilities

Note 3

Total Equity and Liabilities

1,299

909

2,646

1,088 2,311

837

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Additional information:

(1) Property, plant & equipment Cost or valuation

Land & Buildings m 120 552 432

Plant & Equipment m 1,483 (73) 427 375 225

Total m 1,915 (73) 599 202 375 345

Disposals

Additions

Subsidiary acquired Edmir Ltd. [See Note (4)]

At 1 January 2006

On disposal

Subsidiary acquired Edmir Ltd. [See Note (4)]

Charge for year

Accumulated depreciation At 1 January 2006

172

2,010 148

2,562

At 31 December 2005

Net book value:

314 238

88

54

(52) 682

159

(52) 996

247

At 31 December 2006

260

1,056 2006 m 162 130 32

1,328

1,316 2005 m 48 48

1,566

(2) Non-current Liabilities Finance lease obligations (3) Current Liabilities Bank overdraft Trade payables Medium-term bank loans

2006 m 510 168 909 160

Dividends Accruals

Finance lease obligation Income tax

Property, plant and equipment payable

2005 m 470 157 837 155 40

51

9 4

13 2 1

Accruals comprise interest payable on: Bank borrowings Finance leases

1 2

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(4)

Purchase of subsidiary undertaking: Property, plant and equipment Inventory Trade receivables Bank overdraft Cash and cash equivalents

During 2006 Big Construction Plc purchased Edmir Ltd., acquiring the following net assets at fair value: m 30 58 98

Medium-term loans Income taxation Less Minority interest (10%)

Trade payables

(14)

(45)

(65)

(5)

Goodwill

(6) 10 64

60

Cash

REQUIREMENT:

Total Consideration

Shares allotted (5 million shares)

Consideration was satisfied as follows:

56

64

Prepare the consolidated cash flow statement of Big Construction Plc for the year ended 31 December 2006, in accordance with IAS 7, Cash Flow Statements.

Note: You are not required to provide notes to the consolidated cash flow statement.

[Total: 30 marks]

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3.

The following multiple choice question contains eight sections, each of which is followed by a choice of answers. Only one of each set of answers is strictly correct. REQUIREMENT: Give your answer to each section in the answer sheet provided. [Total: 20 marks]

1.

Munchers Ltd. purchased goods from an American company on 20 February 2007 for US$200,000, which was due for payment on 30 April 2007. The financial statements for the year to 31 March 2007 were approved on 30 May 2007. The following exchange rates are available: 20 February 31 March 30 April 30 May 1 1 1 1 = = = = US$1.310 US$1.295 US$1.286 US$1.277

The amounts that would appear in the financial statements of Munchers Ltd. in respect of the above transaction are: (a) (b) (c) (d) Purchases 262,000 152,672 152,672 154,440 Payables 259,000 154,440 155,521 156,617

2.

The value of inventories to be included in the Balance Sheet of Great Sports Plc at 31 March 2007 should be: (a) (b) (c) (d) 18.4 18.6 17.6 17.7 million million million million

Great Sports Plc held inventories at their year end 31 March 2007 of 21 million. After the stock count it was discovered that goods which cost 5 million were obsolete and could only be sold in a clearout sale for 2.5 million. A special clear-out sale would cost 100,000 to advertise and run. Just before the accounts were approved on 1 June 2007, another batch of goods in inventory at 31 March valued at 3.1 were sold for 2.3 million.

3.

The appropriate accounting treatment in the year end 31 December 2006 financial statements of MML is: (a) (c) (b) (d)

The companys solicitors wrote to Martin Management Ltd. (MML) on 30 November 2006, informing them that a former client intends to sue the company for 5 million in respect of incorrect and possibly slanderous comments in a recent consultants report prepared by MML during 2005. In the view of the solicitor there is a 30% possibility that the case will go against MML in court with the likely cost being in the region of 3 million. Provide for the 5 million claim in full and disclose the details of the case in the notes to the financial statements. Provide for the 3 million likely cost and disclose the details of the case in the notes to the financial statements. Provide for 0.9 million (30% of the likely cost) and disclose the details of the case in the notes to the financial statements. Do not provide any amount, but disclose the details of the case in the notes to the financial statements.

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4.

The net book value of the property plant and equipment in the Prince Group balance sheet as at 30 April 2007 is: (a) (b) (c) (d) 588,000 600,000 585,000 591,000

On 1 May 2006 Prince Plc sold equipment that originally cost 70,000, with a net book value of 45,000 to Power Ltd. for 60,000, being its market value at the time. Group policy is to depreciate such equipment at 20% on a reducing balance basis.

Prince Plc is preparing the group balance sheet as at 30 April 2007 for itself and its 80% subsidiary Power Ltd. The net book values of the property plant and equipment in the balance sheets of the two individual companies at that date are: Prince Plc 440,000 160,000 Power Ltd

5.

IAS 16 Property, Plant and Equipment allows an entity to measure assets using the revaluation model if they so choose. (a) (b) (c) (d) When the revaluation model is used, revaluation surpluses are recognised as an adjustment to the accumulated depreciation account of the asset. in the income statement in the period in which the revaluation takes place. in equity. in the balance sheet as a deferred credit.

6.

7.

Purchase of property, plant and equipment Loss on disposal of property, plant and equipment Proceeds from disposal of property, plant and equipment Depreciation charge (a) (b) (c) (d)

The following items have been extracted from the cash flow statement of Jones Plc for the year ended 31 March 2007. 50,000 15,000 30,000 60,000

(a) (b) (c) (d)

Halpin Properties Ltd. has decided to move from the cost model to the fair value model of measurement of its investment properties, as allowed under IAS 40 Investment Property. This proposal normally involves: a a a a change in accounting estimate. prior year adjustment for a material error. change in accounting policy with retrospective application. change in accounting policy with prospective application.

If the net book value of property, plant and equipment was 200,000 on 31 March 2007, what was the net book value per the balance sheet as at 31 March 2006? 255,000 145,000 160,000 240,000

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8.

(a) (b) (c) (d)

i. ii. iii. iv.

Which of the following line items must be disclosed on the face of the Balance Sheet? Total assets held for sale. Current Tax Liability. Cash & cash equivalents. Dividends accrued.

(ii) and (iv) only (i), (ii) and (iii) only All of the above (ii) only.

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4.

REQUIREMENT: (a)

Under IAS11 Construction Contracts, the principal concern of accounting for long-term construction contracts involves the timing of revenue and profit recognition. Accordingly, contract revenue and associated costs should be recognised in an appropriate and consistent manner. Different criteria have been prescribed by IAS 11 for assessing whether the outcome can be estimated reliably for a contract, depending on whether it is a fixed-price contract or cost-plus contract. (9 marks)

You are required to outline the criteria in respect of both forms of contracts. (b) (c)

Describe the rules for revenue and cost recognition in circumstances where the outcome of a contract cannot be estimated reliably. (3 marks) Buildup Ltd. is an established company in the construction industry and undertook a 21-month contract to build an apartment block, which was almost complete at the year-end. Details of the contract as at their year end 31 May 2007 are as follows: 000 Cost of work done to date 4,050 Cost of work certified 3,840 Value of work certified by clients architects 5,350 Progress payments invoiced and received 3,250 Progress payments received 3,100 Estimate of final cost, including future costs of rectification and guaranteed work 4,500 Final contract price 6,400 Estimated completion date 31 July 2007

REQUIREMENT:

The income statement for the year ended 31 May 2006 included revenue and cost of sales amounts of 1,000,000 each in respect of the above contract.

The companys accounting policy is to recognise profit on a percentage completion basis, calculated as the costs incurred to date as a proportion of the total estimated costs.

Show the amounts (in 000) to be included in the income statement of Buildup Ltd. for the year ended 31 May 2007 in respect of the above contract and also the amounts to be included in the Balance Sheet as at that date. (8 marks) [Total: 20 marks]

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5.

REQUIREMENT: (a) (b) (c) (d)

The market value of the machinery at 1 January 2005 was 120,000 and it was deemed to have an estimated useful life of 8 years. Jones Ltd. will have the option of purchasing the machinery for 1 at the end of the lease period. Jones Ltd. is responsible for the maintenance of the machinery during the whole of the lease period. Briefly explain how the above lease should be accounted for in accordance with IAS 17 Leases. (4 Marks)

Commencement date of lease: Term of lease: Rental: Payments:

Jones Ltd. prepares its financial statements to 31 December each year. During 2005 they commenced a lease of a piece of specialised machinery with the following terms: 1 January 2005 6 years 11,100 every 6 months for 6 years Made in arrears on 30 June and 31 December

Briefly describe the following concepts in the context of accounting for leases.
G G G

Prepare the relevant notes to the financial statements for the year ended 31 December 2006 in respect of the lease, including 2005 comparatives. (7 Marks) an asset; substance over form; and matching

Show the extracts from the Income Statement and Balance Sheet of Jones Ltd. for the year ended 31 December 2006, including 2005 comparatives, using the sum of the digits method. (6 Marks)

[Total: 20 marks]

(3 Marks)

END OF PAPER

Page 11

SUGGESTED SOLUTIONS

SOLUTION 1

FINANCIAL ACCOUNTING
PROFESSIONAL 1 EXAMINATION AUGUST 2007
Finns Blocks Ltd. m 120.00 (4.00) 116.00

Working 1 Closing inventory Value Write down (6m -2m)

Working 2 Land is not normally depreciated unless governed by extraction or use Bulidings Previous Valuation (695 - 295) Accumulated Depreciation 01.01.06 Depreciation charge 2006 - (695 - 295) / 40yrs Net Book Value 31.12.06 Revalued amount - 31.12.06 Revaluation deficit - revaluation reserve - SOCE (Net against previous surplus)

Note: the sale of inventory at lower than the closing inventory value is an adjustable event under IAS 10.

400.00 (40.00) (10.00) 350.00 330.00 20.00 295.00 350.00 55.00 35.00

Land

Working 3 Plant and Equipment Working 4 Revenue Depreciation

Revaluation reserve Net 2006 surplus (55m - 20m)

Previous valuation Revalued amount - 31.12.06 Revaluation surplus- revaluation reserve - SOCE

NBV (520 - 115) x 20% =

81.00 1,407.00 (51.00) 1,356.00 Adjust 10.00 81.00 Cost of Sales 712.00 10.00 81.00 115.00 Distribution Admin

Per TB Discontinued operation

Working 5 Analysis of expenses

Discontinued Continuing

Per T/B Purchases 712.00 Depreciation buildings (W2) Depreciation plant (W3) Inventory 115.00 Administrative expenses 103.00 Redundancy Provision Product liability Distribution cost 127.00 Closing Inventory (W1)

(116.00)

(116.00) 802.00 (40.00) 762.00

127.00 127.00

103.00 2.00 (4.00) 101.00 (9.00)* 92.00

127.00

* [7m + 2m redundancy]

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Working 6 Finance costs

Working 7 Fair value gain on investment property Working 8 Income taxation

Debenture interest 10% x 150m Redeemable Preference shares (8% x 125m) Fair Value 31.12.06 Fair Value 01.01.06 Fair value gain

15.00 10.00 25.00

28.00 25.00 3.00

Working 9 Ordinary dividend paid - TB Ordinary dividend approved (200m / 50c = 400m shares x 4c per share) Working 10 Issue of share capital Nominal value 50c x 40million shares Share premium 50c x 40million shares (a) Finn's Blocks Ltd. Income Statement for year ended 31 December 2006 m 1,356.00 (762.00) 594.00 5.00 (127.00) (92.00) 380.00

Total provision Discontinued ops Continued operations

150.00 (1.00) 149.00 12.00 16.00 28.00 20.00 20.00 40.00 Marks

Continuing operations Revenue Other income Distribution costs Administrative expense Operating profit Cost of sales

0.5 0.5 2 1 1.5 1

Discontinued operations Profit for the period from discontinued operations Profit for the year

Fair value gain on investment property Finance costs Profit before tax Taxation Profit for the period from continuing operations

3.00 (25.00) 358.00 (149.00) 209.00 1.00 210.00

1.5

[Total marks :13]

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(b)

Statement of Changes in Equity for the year ended 31 December 2006 Balance 01.01.06 Profit for the period Equity dividend paid Equity dividend declared Issue of share capital Revaluation surplus (W2) Balance 31.12.06 Ordinary Share Capital 180.00 20.00 Share Premium 30.00 20.00

Revaluation reserves 74.00

200.00

50.00

Tutorial note: The following financial information would be disclosed in respect of the discontinued paving plant. Note xx The company closed down one of its operations, results of which for the period to 30 September 2006 are as follows:
Revenue Cost of Sales Operating Profit Administrative Expenses Redundancy costs Profit before tax Taxation Profit for the year 51.00 (40.00) 11.00 (7.00) (2.00) 2.00 (1.00) 1.00

Revaluation Equity dividend declared All other figures [8 x 0.5 marks] Total marks

35.00 109.00

Retained Earnings 133.00 210.00 (12.00) (16.00) 315.00

2 marks 1 mark 4 marks 7 marks

Total 417.00 210.00 (12.00) (16.00) 40.00 35.00 674.00

(c)

Show any TWO accounting policies

Basis of preparation The financial statements, which been presented in millions, have been prepared under the historical cost convention except as modified by the revaluation of land and buildings. Revenue Revenue represents the value of goods and services supplied to external customers and excludes V.A.T.

[2 x 2 marks]

Property, plant and equipment With the exception of the revaluation of land and buildings noted below, items of property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairments.

Depreciation rates:

Land and buildings Both land and buildings were revalued in 2001 and again at 31 December 2006. The 2006 valuation assessment was carried out using professionally qualified valuers. The remaining useful life of the buildings was revised from 35 to 33 years.
Plant & Equipment Buildings 20% p.a. reducing balance 33 years

Provisions Provisions are recognised where the company has a present obligation arising from a past event and it is probable that there will be a transfer of economic benefits to settle an obligation and a reliable estimate can be made of that obligation.

Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all expenditure incurred in acquiring the inventories and bringing them to their present location and condition and is based on the first-in firstout principle.
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(d)

Investment Property Investment Property, which is property held to earn rentals and/or for capital appeciation, is stated at its fair value at the balance sheet date. Gains or losses arising from changes in the fair value of investment property are included in profit or loss for the period in which they arise. Item 6 The diesel spillage occurred after the year end and it is likely that the company will have to pay a considerable amount in clean up costs and compensation. However, this is not an adjusting event in accordance with IAS 10 Events after the Balance Sheet Date as the issue does not reflect conditions in existence at 31.12.06. If the issue was deemed to be of such material importance that non-disclosure would influence economic decisions of users of the financial statements then disclosure of the nature of the potential liability and the likely financial effect should be made in the notes to the financial statements. Item 7 IAS 37 requires that for a provision to be valid it must be based on: - a present obligation (legal or constructive) - from a past event - with a probable outflow of economic benefits - with a reliable estimate of the amount [2 x 3 marks]

If the obligation is probable (> 50% chance) the reliable estimate should be provided in the accounts. If the obligation is just possible (< 50% chance) then a Contingent Liability should be disclosed in the notes to the financial statements.

In this case there is only a 40% chance that Finn's Blocks will lose that case, so it is only a possible obligation. Therefore the possible outflow of 4m should just be disclosed as a contingent liability. The provision of 4m should therefore be reversed.

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SOLUTION 2

Big Construction Plc Consolidated Cash Flow Statement for the year ended 31 December 2006 Ref. m Marks Cash flows from operating activities: Net profit before taxation 622 0.5 Adjustments: Depreciation 202 0.5 Profit on disposal of property, plant & equipment (26) 0.5 (41) 0.5 Interest income Finance costs 30 0.5 787 Decrease in inventory W2 19 (3 x 0.5) = 1.5 Decrease in accounts receivable W3 11 (3 x 0.5) = 1.5 Decrease in accounts payable W4 (5) (3 x 0.5) = 1.5 Cash generated from operations 812 Finance costs paid W5 (28) (3 x 0.5) = 1.5 Interest income received 41 0.5 Income tax paid W6 (183) (6 x 0.5) = 3.0 Net cash inflows from operating activities 642 Cash flow from investing activities: Purchase of subsidiary undertaking Purchase of property, plant & equipment Proceeds from sale of property, plant & equipment Net cash outflow from investing activities Cash flows from financing activities: Share issue expenses Medium-term loans Capital element of finance leases Equity dividends paid Dividends paid to minority shareholders Net cash outflow from financing activities W7 W8 W9 (58) (370) 47 (381) (3 x 0.5) = 1.5 (10 x 0.5) = 5.0 (2 x 0.5) = 1.0

W10 W11 W12 W13 W14 W14

Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(1) 65 (20) (279) (16) (251) 10 245 255

0.5 (2 x 0.5) = 1.0 (4 x 0.5) = 2.0 (3 x 0.5) = 1.5 (4 x 0.5) = 2.0 0.5 (2 x 0.5) = 1.0 2.0 30.0

Presentation marks Total available for question

Page 17

Workings:

W1 Movement in goodwill Balance at end of year Balance at beginning Acquired during the year

W2 Decrease in Inventory Balance at end of year Inventory acquired from Edmir Balance at beginning of year Decrease in inventory

36 (26) 10

129 (30) 99 (118) (19)

W3 Decrease in trade receivables Balance at end of year Debtors acquired from Edmir Balance at beginning of year Decrease in trade receivables

W4 Increase in trade payables Balance at end of year Payables acquired from Edmir Balance at beginning of year Decrease in trade payables

653 (58) 595 (606) (11) 510 (45) 465 (470) (5) 2 30 (4) 28 360 205 14 579 (396) 183 56 (3) 5 58 1,566 (98) 21 202 (5) 1,686 (1,316) 370

W6 Tax paid Balance at beginning of year (157+203) Income statement Acquired from Edmir Balance at end of year (168+228) Paid during the year

W5 Finance costs paid Balance at beginning of year Income statement Balance at end of year Paid during the year

Balance at start of year (NBV) Cash paid for additons

W8 Purchase of property, plant and equipment Balance at end of year (NBV) Net book value of assets acquired from Edmir (345-247) Net book value of disposals (73-52) Depreciation charge Increase in PPE payable (160-155)

W7 Purchase of subsidiary undertaking Cash consideration Cash at bank and in hand acquired Bank overdraft acquired Net outflow of cash and cash equivalents in respect of the purchase of subsidiary undertaking

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W10 Medium term loans Balance at end of year Acquired from Edmir Balance at beginning year Cash movement

W9 Cash from sale of property, plant and equipment Per income statement profit on disposal NBV of assets disposed (73-52) Cash received

26 21 47 130 (65) 65 65 61 (41) 20 40 290 (51) 279 35 8 6 (33) 16 2006 m 262 (7) 255 2005 m 245 245 Movement m 17 (7) 10

W11 Capital element of finance leases Balance at beginning of year (13+48) Balance at end of year (9+32) Cash outflow W12 Dividends paid Balance at beginning of year Retained earnings Balance at end of year dividends paid

W13 Dividends paid to minority shareholders Balance at beginning of year Income statement Minority interest on acquisition Balance at end of year Dividends paid to MI W14 Movement in cash and cash equivalents Cash and cash equivalents Bank overdraft

Page 19

Solution 3 1. Solution = (b)

Multi-choice Questions (8 x 2.5 marks)

2.

Purchases stated at rate ruling when goods bought, i.e. 20 February = $200,000/1.31 Payables are restated at rate ruling at balance sheet date, i.e. 31 March = $200,000/1.295 Solution (c) Obsolete goods: NRV = 2.4m (2.5m - 0.1m) => write down = 2.6m Sale post year end: write-down = 0.8m (3.1m 2.3m) Total inventory value = 21m - 2.6m - 0.8m = 17.6 m Solution (d) This is a Contingent Liability as the probability of the case being successful is only 30%, thus making payment only possible rather than probable as is required by IAS 37 for a provision to be made. Solution (a) Prince Plc Power Ltd 440,000 160,000 600,000 36,000 48,000 12,000 588,000

3.

4.

Equipment NBV if not transferred = 45k (45x20%) NBV at transfer value= 60k (60x20%) Over valuation of equipment Consolidated NBV of PPE OR

600,000 unrealised profit 15,000 + over-charge of depreciation 3,000 [(60,000x20%) (45,000x20%)] Solution (c)

5. 6. 7.

IAS 16 states that the revaluation surpluses are recognised as a reserve directly in equity. Solution (c) IAS 8 paragraph 22 states that a change in accounting policy should be applied retrospectively. Solution (a) Opening Balance b/d (required figure) Additions PPE Account (at NBV) 255,000 Disposal 50,000 Depreciation Balance c/d 305,000 45,000 60,000 200,000 305,000

OR

8.

Solution (b)

Opening balance = Deprec 60k + NBV of disposal 45k (30k+15k)+ Closing balance 200k less Additions of 50k = 255k

(i), (ii) and (iii) only

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Solution 4 (a)

Fixed price contracts [IAS 11, para. 23]

[ 6 points x 1.5 marks = 9 Marks]

In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all of the following conditions are satisfied:
G G G

Cost plus contracts [IAS 11, para. 24]

The total contract revenue can be measured reliably; It is probable that the economic benefits associated with the contract will flow to the enterprise; Both the contract costs to complete and the stage of completion at the balance sheet date can be measured reliably; The contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when both the following conditions are satisfied:
G G

(b)

[3 marks] It is not unusual that during the early stages of a contract, outcome cannot be estimated reliably. This would be particularly likely to be true if the contract represents a type of project with which the contractor has had limited experience in the past. IAS 11 establishes the following rules for revenue recognition in cases where the outcome of a contract cannot be estimated reliably: 1.

It is probable that the economic benefits associated with the contract will flow to the enterprise; The contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.

2. (c)

Revenue should be recognized only to the extent of the contract costs incurred that are probable of being recoverable. Contract costs should be recognized as an expense in the period in which they are incurred. = costs to date Total costs to completion = 4,050 4,500 000 4,760 3,050 1,710 3,250 (3,100) 150

Any expected losses should, however, be recognized immediately. % completion

= 90% Marks

Gross amounts due from customers Costs of work done to date Profits recognised to date
Less invoiced billings to date

Balance Sheet Trade Receivables Progress payments invoiced Progress payments received

Revenue Cost of sales Gross Profit

Income Statement

[(90% x 6,400) 1,000] [(90% x 4,500) 1,000]

1.5 1.5

1.0 1.0 1.0 1.0

4,050 1,710 5,760 (3,250) 2,510

1.0

[Total : 8 Marks]

Page 21

Solution 5 (a) Briefly explain how the above lease should be accounted for in accordance with IAS 17 Leases.

Students should make the following points: Brief explanation of Finance Lease v Operating lease 1. 2. Risk and rewards of ownership (e.g. maintenance) - asset in books of lessee 3. Finance lease => Lease rental = finance charge + repayment of loan 4. Finance lease => recognise loan in balance sheet of lessee (lease obligation) 5. Finance charge allocated on systematic basis as a constant % of capital balance or similar method Finance charge debited to Income statement annually, not the rental amount 6. 7. Recognise non-current asset in balance sheet at fair value. 8. Charge depreciation on asset over lesser of lease term and useful life

(b)

(4 key points explained x 1 mark = 4 Marks)

WORKING 2005 Period 1 2 3 4 5 6 7 8 9 10 11 12

2006

2007

2008

2010

2009

Opening Balance 120,000 110,931 101,692 92,285 82,708 72,962 63,046 52,962 42,708 32,285 21,692 10,931

Tutorial Note:

The full working calculation is not necessary only the obligation at end of 2007 is required to complete the balance sheet notes. 133,200 (120,000) 13,200

Rental 11,100 11,100 11,100 11,100 11,100 11,100 11,100 11,100 11,100 11,100 11,100 11,100 133,200

sum of digits Interest [13,200 x 12/78] [13,200 x 11/78] [13,200 x 10/78] [13,200 x 9/78] [13,200 x 8/78] [13,200 x 7/78] [13,200 x 6/78] [13,200 x 5/78] [13,200 x 4/78] [13,200 x 3/78] [13,200 x 2/78] [13,200 x 1/78]

Interest 2,031 1,862 1,692 1,523 1,354 1,185 1,015 846 677 508 338 169 13,200

Capital 9,069 9,238 9,408 9,577 9,746 9,915 10,085 10,254 10,423 10,592 10,762 10,931 120,000

Closing Balance 110,931 101,692 92,285 82,708 72,962 63,046 52,962 42,708 32,285 21,692 10,931 0

Total payments Fair Value Interest payments Sum of digits

= n (n+1)/2 = (12 x 13)/2 = 78

Page 22

Financial Statement extracts Income Statement Depreciation on finance lease [120,000/ 6 years] *

2006 20,000 3,215 Note 1 2 2 2006 80,000 19,662 63,046 2006

2005 20,000 3,893 2005 100,000 18,984 82,708 2005

Marks 0.75 1.5

Finance Charge [2006:1692+1523; 2005: 2031+1862] Balance Sheet as at 31/12/06

Non-current assets Property Plant and Equipment Leasehold Machinery Current Liabilities Finance Lease obligations

0.75 1.5 1.5

Non Current Liabilities Finance Lease obligations

(c) Notes to the financial statements

Depreciation at lower of lease term and useful life of asset as per IAS 17.

(6 Marks)

Obligations under finance leases

The maturity of finance leases is as follows:

Present value of lease payments Within one year Between two to five years

Minimum lease payments Within one year Between two to five years Total gross payments Less finance charges included in above
(d)

22,200 66,600 88,800 6,092 82,708

19,662 63,046 82,708

18,984 82,708 101,692 22,200 88,800 111,000 9,308 101,692

1.5 1.5 1 1

Matching means that income and expenses are matched to the time period to which they relate and also with each other. In the case of a finance lease the finance charge is separated from the repayment of the loan balance and charge to the income statement over the period of the lease. This matches the expense with the period of the loan and also with the period during which the assets is generating income. (3 Marks)
Page 23

Substance over form means that a company should show the true economic substance or meaning of a transaction in its financial statements in order to faithfully represent the transaction as required by IAS 1. In the case of leasing it means distinguishing between leases that are just rentals of assets and those that are in effect a loan secured on the asset, which, in substance, belongs to the company.

According to the IASB Framework, an asset is defined as a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. In this case, the asset is to be used by Jones Ltd and it is responsible for its maintenance.

Briefly describe the following concepts in the context of accounting for leases. G an asset; G substance over form; and G matching

(7 Marks)

[Total : 20 Marks]