psa financial accounting question bank

Land and buildings Trade receivables and trade payables 420,000 380,000 The company intends to transfer to retained earnings that element of the revaluation reserve realised by depreciat

The Institute of Chartered Accountants of Bangladesh

FINANCIAL ACCOUNTING Professional Stage Application Level

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Question Bank

These learning materials have been prepared by the Institute of Chartered Accountants in England and WalesISBN: 978-1-84152-838-0

First edition 2009

All rights reserved No part of this publication may be reproduced or

transmitted in any form or by any means or stored in any retrieval system, or

transmitted in, any form or by any means, electronic, mechanical, photocopying,

recording or otherwise without prior permission of the publisher

Time allocation

Preparation of full single entity

Title Marks Mins Question Answer

Preparation of full consolidated

Single entity financial statements

Objective test questions

50 BAS 1 Presentation of Financial Statements 66 250

52 BAS 7 Cash Flow Statements (single company

53 BAS 8 Accounting Policies, Changes in

54 BAS 10 Events after the Balance Sheet Date 78 254

58 BAS 32 and BAS 39 Financial Instruments 88 258

60 BAS 37 Provisions, Contingent Liabilities and

62 BFRS 5 Non-current Assets Held for Sale and

Title Marks Mins Question Answer

Consolidated financial statements

Objective test questions

64 Consolidated statements of financial

Question Bank

Your exam will consist of

Part one 5-15 short-form questions 20 marks

(worth 1-4 marks each)

(each worth around 20 marks)

Preparation of full single entity financial statements

1 Howells Ltd

The trial balance of Howells Ltd as at 31 December 20X8 is as follows

Share capital

10% Debentures (issued and redeemable at par) 62,600

2,037,707 2,037,707You are provided with the following information in respect of 20X8

(1) The gain on sale of the property is not expected to recur

(2) Depreciation is to be provided on the basis of the following policies

Buildings Straight line over 50 years

Plant and machinery Straight line over 10 years

The land originally cost CU115,000 In previous years the policy in respect of plant and machinery had

been to depreciate on a reducing balance basis All the plant was acquired on 1 January 20X5 with the

exception of a machine acquired for CU22,000 at the start of 20X8

(3) The intangible asset is a brand arising on the purchase of a sole trader which is held in the books at

original cost Following an impairment review, fair value less costs to sell has been estimated at

CU10,000 and value in use at CU12,000

(4) Howells Ltd wishes to propose an ordinary dividend of CU25,000 which will be paid on 25 March

(7) Inventories held at 31 December 20X8 are valued at cost of CU68,000 Within this amount there are1,000 units of finished goods valued at CU20 each These units are now expected to sell at a

discounted price of CU18 each and incur CU1 selling costs per unit

Requirements

(a) Prepare the income statement, statement of changes in equity and notes thereto for the year ended

31 December 20X8 in a form suitable for publication to the extent the information is available You

(b) Explain the concept of 'fair presentation' (4 marks)

(24 marks)

2 Berwick Ltd

Berwick Ltd has produced the following trial balance as at 31 January 20X5

Land and buildings

Trade receivables and trade payables 420,000 380,000

The company intends to transfer to retained earnings that element of the revaluation reserve realised

by depreciation but has not yet done so for the year ended 31 January 20X5

(2) No adjustments have been made for the depreciation charges for the year ended 31 January 20X5.Depreciation rates are as follows

Land and buildings – see (1) above

Plant and machinery – 10% straight line

Motor vehicles – 20% reducing balance

(3) The bank loan is repayable over five years in equal annual instalments starting on 30 June 20X5.(4) Tax on profits for the year has been estimated at CU135,000 and has yet to be provided for in thetrial balance

(5) The development expenditure was incurred during the year and relates to a single product.

Development will be completed in 20X6 The company believes it has a reasonable expectation of

future benefits but has been unable to demonstrate this

(6) One of Berwick Ltd's customers was declared insolvent on 15 February 20X5 The customer owed

Berwick Ltd CU20,000 at 31 January 20X5

Requirement

Prepare the balance sheet of Berwick Ltd as at 31 January 20X5 and the statement of changes in equity for

the year ended 31 January 20X5 in a form suitable for publication to the extent the information is available

You are not required to prepare any notes to the financial statements (20 marks)

Note:Work to the nearest CU'000

3 Angus Ltd

An extract from Angus Ltd's nominal ledger at 28 February 20X7 is as follows

CU'000Freehold land and buildings

Accumulated depreciation at 29 February 20X6 2,800

The following additional information is available This information is not reflected in the balances above

(1) On 1 March 20X6 the company commissioned a valuation of its freehold land and buildings for the

first time This valuation showed an open market value of CU20 million (land element CU4 million)

and an existing use value of CU15 million (land CU3 million) The accounting records have not yet

been adjusted to reflect this valuation Depreciation for the year ended 28 February 20X7 has not yet

been charged and is to be based on a 40-year useful life Previously, annual depreciation of CU280,000

had been charged

(2) The company announced the intended sale of its European operations on 31 January 20X7, when a

formal disposal plan was approved and adopted for full implementation by 30 June 20X7 Plant and

equipment with a carrying amount of CU3 million was classified as held for sale, its fair value at the

date of classification being estimated at CU2.85 million and the costs to sell it at CU50,000 On

10 February 20X7 the company contracted to terminate various operating leases for a payment of

CU50,000 Other costs flowing from this disposal decision were estimated at CU100,000 The

European operations contributed 10% of the revenue and 20% of the expenses shown above The

company uses the cost model as its accounting policy for plant and equipment

(3) As a result of the sale in (2) above the company will need to carry out a reorganisation of its other

activities at a cost of CU1.25 million This reorganisation was announced to the workforce and the

public at the same time as the above

(4) Prior to the year end the company declared an ordinary dividend of CU2 million

(5) During April 20X6 a major project on inventory valuation had revealed that inventories in America on

28 February 20X6 had been overvalued by CU355,000 due to a compilation error No adjustment has

(a) Prepare, as far as the information permits, the following statements, in a form suitable for publication,for Angus Ltd for the year ended 28 February 20X7

(i) Income statement

(b) Explain the objectives of financial statements, giving appropriate examples (6 marks)

5% Preference share capital (redeemable 20X8) – CU1 nominal value 120,000

Accumulated depreciation on computers, 1 January 20X4 20,000

The following additional information is available

(1) Closing finished inventories are valued at cost of CU180,000 whilst work in progress has increased toCU140,000 These valuations do not take into account the fact that, at the year end physical inventorycount, it was discovered that ten computer games consoles with a cost CU500 each had been badlydamaged These items have a scrap value of CU50 each

(2) The patent rights were acquired on 1 January 20X4 in respect of a program with a three-year lifespan

If the company chose to do so it could sell these rights on without there being a significant impact onthe remainder of the business

(3) Buildings are depreciated over 30 years At 1 January 20X4 they were revalued to CU360,000 Thishas not been reflected in the accounts Computers are depreciated over five years Goblins Ltd makes

a transfer between the revaluation reserve and retained earnings each period as a result of the

revaluation in accordance with best practice

(4) A final dividend of 15p per ordinary share was declared on 15 December 20X4 and was paid shortlyafter the year end The preference dividend has not yet been paid

(5) A necessary provision for specific receivables amounting to 5% of year-end receivables is to be

created In addition, Goblins Ltd received notice on 15 January 20X5 that one of its customers hadgone into liquidation This customer owed CU45,000 at the year end

(6) There is an estimated income tax bill in relation to 20X4 of CU120,000 The income tax figure in thetrial balance (a credit balance) represents the difference between the opening provision and the income

(a) Prepare the income statement for Goblins Ltd for the year ended 31 December 20X4 and the balance

sheet at that date in a form suitable for publication to the extent the information is available You

should classify expenses according to their nature (22 marks)

(b) Explain briefly how assets and liabilities are recorded/carried under each of the four different

measurement bases referred to in BFRS Framework for the Preparation and Presentation of Financial

(26 marks)

5 Harry Ltd

Harry Ltd is a company which makes exclusive furniture to customers’ precise specifications An extract

from Harry Ltd’s nominal ledger at 31 December 20X5 is as follows

CU

Freehold land and buildings

Accumulated depreciation at 1 January 20X5 640,000

Plant and machinery

Preference share capital – 4% redeemable CU1 shares 120,000

The following additional information is relevant

(1) During the year the company used employees’ idle time to produce new furniture for the company’s

offices The old furniture was all scrapped Raw materials costing CU54,000 were used The

employees’ time amounted to a cost to the company of CU20,500 No adjustment has been made for

this in the above

(2) On 1 January 20X5 Harry Ltd entered into a lease agreement for a new machine The fair value of this

machine was CU53,000 The lease agreement provides for six annual payments of CU10,000 on

31 December each year Interest is to be allocated on the sum-of-the-digits basis No other plant was

purchased or sold during the year

(3) Freehold land and buildings were revalued for the first time on 1 January 20X5 The surveyor

performing the valuation estimated an alternative use valuation of CU5 million (including CU4 million

for the land) and an existing use valuation of CU3.5 million (including CU3 million for the land)

Buildings are to continue to be depreciated on a straight-line basis at a rate of 4% but Harry Ltd makes

(4) During the year the company made a 1 for 5 bonus issue of its ordinary shares No entries have beenmade in respect of this Transaction costs amounted to legal costs of CU5,000 and an estimate ofdirectors’ time amounting to a cost of CU10,000 Both of these costs have been charged against theshare premium account.

(5) The preference shares are redeemable in 20X9 Dividends of 10p per share on the ordinary sharesand at the coupon rate on the preference shares were declared on 15 December 20X5 and paid early

in 20X6 The income tax charge for the period has been estimated at CU250,000

(6) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January 20X5.This patent is considered to have a useful life of 20 years The annual impairment review has indicatedthat the patent has a recoverable value at 31 December 20X5 of CU14,000

(7) Closing inventories at cost amounted to work in progress of CU50,200 and finished goods of

CU15,000 The latter included a table with a cost of CU5,000 The customer who had ordered thistable has been declared bankrupt He had paid a CU1,000 deposit (which has been credited to

revenue) and owed CU10,000 at the year end in respect of other items It is estimated that the tablecan be sold for CU4,000

Requirement

Prepare an income statement for Harry Ltd for the year ended 31 December 20X5 and a balance sheet as

at that date in a form suitable for publication You should classify expenses according to their nature

(25 marks)

6 Frodo Ltd

Frodo Ltd is a company which publishes a single textbook and provides tuition courses relating to that text

An extract from Frodo Ltd’s nominal ledger at 31 March 20X6 is as follows

Freehold land and buildings

Accumulated depreciation at 1 April 20X5 480,000Plant and machinery

Accumulated depreciation at 1 April 20X5 337,000

Preference share capital – 5% irredeemable CU1 shares 200,000

The following additional information is relevant

(1) The borrowings are repayable in ten equal instalments, commencing on 1 April 20X6

(2) Revenue is made up of the following

The tuition fees all relate to courses held during the year except for fees of CU300,000 which relate

to a ten-week course Five weeks of this course had already been held by the year end The remainder

is to be held in June 20X6 The advances relate to a new publication which Frodo Ltd has

commissioned and advertised heavily but which is not yet in production

(3) There were no movements of non-current assets during the year However, on 28 February 20X6,

Frodo Ltd decided to sell a major item of plant for which it no longer has any use This plant cost

CU120,000 on 1 April 20X1 and was advertised for sale on 1 March 20X6 at a price of CU5,000 In

April 20X6 a buyer was identified at the advertised price The sale is expected to be completed in May

20X6

Plant is depreciated on a 10% straight line basis, taking into account the month of sale or purchase

Freehold buildings are depreciated over their useful life of 40 years Depreciation on plant is charged

to cost of sales Depreciation on freehold land and buildings is charged to administrative expenses

(4) At the year end the company was in the throes of a legal action by one of its competitors which claims

that Frodo’s textbook has breached copyright The case is not due to be decided until June 20X6 but

Frodo Ltd’s legal advisors think that the company has a 60% chance of losing the case and estimates

that this would cost Frodo Ltd CU100,000

(5) One of Frodo Ltd’s customers who owed CU10,000 at the year end was declared bankrupt on 1 May

20X6

(6) Closing inventories at cost amounted to CU120,000 Within this valuation is an amount of CU50,000

relating to fixed overheads, being a share of total fixed overheads of CU1 million Frodo Ltd had

expected to produce one million books during the year but, due to production difficulties only in fact

produced 800,000 Overheads have been allocated on the basis of CU1.25 per book

(7) The following should be provided for at the year end

Income tax of CU350,000

An ordinary dividend of 20p per share

The preference dividend

Requirements

(a) Prepare an income statement for Frodo Ltd for the year ended 31 March 20X6 and a balance sheet as

at that date in a form suitable for publication You should classify expenses by function (21 marks)

(b) Explain the considerations underlying the accounting requirements for not-for-profit entities, including

the possible relevance of BFRSs and IPSASs (5 marks)

20X0 20W9

EQUITY AND LIABILITIES

Capital and reserves

3,602,000 2,511,000Non-current liabilities

Plodder Ltd's income statement for the year ended 30 November 20X0 was as follows

The following additional information is relevant

(1) Included within trade and other payables at 30 November 20X0 is CU351,000 (20W9 CU106,000)relating to purchases of property, plant and equipment

(2) Included within accruals at 30 November 20X0 is CU25,000 (20W9 CU50,000) in respect of interestpayable

(3) Property, plant and equipment and intangible assets can be analysed as follows

550,000 584,000(4) During the year, plant with an original cost of CU479,000 and a carrying amount at the date of

disposal of CU326,000 was sold for CU424,000 which was received in cash Intangible assets withaccumulated amortisation at the date of disposal of CU40,000 were sold for CU12,000

(5) On 30 November 20X0 freehold land which originally cost CU175,000 (and had not been

depreciated) was revalued to CU550,000

Requirement

Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in

accordance with BAS 7 Cash Flow Statements for Plodder Ltd for the year ended 30 November 20X0, using

the indirect method

EQUITY AND LIABILITIES

Capital and reserves

7,962,000 4,423,000Non-current liabilities

Copeland's income statement for the year ended 31 May 20X2 was as follows.

The following additional information is relevant

(1) On 31 May 20X2 property which was originally purchased for CU734,000 (and which had not

previously been revalued) was revalued to CU1,000,000 There were no other movements on therevaluation reserve during the year

(2) During the year plant and equipment with an original cost of CU1,201,000 and a carrying amount atthe date of disposal of CU496,000 was sold at a loss of CU189,000 As at 31 May 20X2 CU165,000 ofthe sale proceeds had yet to be received and is included within trade and other receivables As at

31 May 20X1 the corresponding figure in respect of disposals made during the year then ended wasCU79,000, which was received in full in June 20X1

(3) As in the previous year, all acquisitions of property, plant and equipment made during the year werepaid for in cash at the date of acquisition However, included within trade and other payables as at 31May 20X2 is CU376,000 (20X1 – CUnil) relating to the acquisition of intangible assets

(4) There were no disposals of intangible assets or investments during the year Trade and other

receivables as at 31 May 20X2 include CU10,000 (20X1 – CU8,000) in respect of interest receivable

on investments

(5) As at 31 May 20X1 the ordinary share capital of Copeland Ltd consisted of 1 million shares, each with

a CU1 nominal value The following day the company made a 1 for 2 bonus issue of 500,000 shares(utilising available profits)

(6) The dividend payable at both balance sheet dates represents a 10p per share dividend on the

company’s ordinary shares Dividends of CU243,000 were charged to retained earnings in the yearended 31 May 20X2

(7) Copeland Ltd has not yet prepared its statement of changes in equity for the year ended 31 May 20X2

Requirement

Prepare a cash flow statement and a note reconciling profit before tax to cash generated from operations in

accordance with BAS 7 Cash Flow Statements for Copeland Ltd for the year ended 31 May 20X2, using the

9 Pippin Ltd

The following are the draft financial statements for Pippin Ltd for the year ended 31 December 20X7

Income statement for the year ended 31 December 20X7

Balance sheet as at 31 December 20X7

EQUITY AND LIABILITIES

Capital and reserves

7,057,800 6,893,500Non-current liabilities

Preference share capital (redeemable) 500,000 400,000

Statement of changes in equity for the year ended 31 December 20X7 (extract)

Retained earnings

CU

The following additional information is relevant.

(1) During the year Pippin Ltd issued both further ordinary shares and further redeemable preferenceshares The latter were issued at par

(2) Investments categorised as current assets are held for the short-term and are readily convertible intocash on demand

(3) During the year Pippin Ltd sold plant and equipment with a carrying amount of CU560,500 for

CU600,000 Total depreciation charges for the year were CU750,600

(4) Trade and other payables include accrued interest of CU5,000 (20X6 CU7,000)

(5) Intangibles relate to development costs capitalised in accordance with BAS 38 Intangible Assets Costs

amounting to CU77,500 were capitalised during the year

Requirement

Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in

accordance with BAS 7 Cash Flow Statements for Pippin Ltd for the year ended 31 December 20X7, using

10 Merry Ltd

The following are the draft financial statements for Merry Ltd for the year ended 31 March 20X5

Income statement for the year ended 31 March 20X5

Balance sheet as at 31 March 20X5

Trade and other receivables 269,000 244,500

20X5 20X4

EQUITY AND LIABILITIES

Capital and reserves

4,192,500 2,724,500Non-current liabilities

The following additional information is relevant

(1) Merry Ltd has not yet prepared its statement of changes in equity

(2) During the year Merry Ltd made a 1 for 10 bonus issue of its ordinary shares It subsequently issued

further shares at the market price No dividends were payable as at 31 March 20X5 or 20X4

(3) Cash paid to and on behalf of employees during the year amounted to CU2,650,000

(4) An impairment review at 31 March 20X5 identified a fall in the recoverable amount of certain

investments As a result, an impairment loss of CU12,000 was identified and written off to

administrative expenses

(5) During the year Merry Ltd acquired plant and equipment for cash of CU2,057,000 In addition, plant

and equipment with a fair value of CU600,000 was acquired under a finance lease All finance costs

relate to finance leases The depreciation charge for the year, charged to cost of sales, was

CU750,600 A loss on sale of plant of CU55,000 was made during the year

Requirements

(a) Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements using the direct method

and a note of gross operating cash flows for Merry Ltd for the year ended 31 March 20X5

(21 marks)

(b) Prepare the note reconciling profit before tax to cash generated from operations for Merry Ltd for

the year ended 31 March 20X5 as it would appear under the indirect method (4 marks)

(25 marks)

Preparation of extracts from financial statements

11 Montrose Ltd

Montrose Ltd has various outstanding matters to resolve regarding inventories in preparing its financial

statements for the year ended 30 September 20X4

(1) Overheads relating to finished goods and work in progress have yet to be included in the final

inventory valuation An analysis of the company's costing records shows the following

The company's production activity has been as follows

Full capacity of the plant is 900,000 units

A new production process will be introduced in 20X5

(2) The supply of raw materials in the year ended 30 September 20X4 was interrupted, due to a fire at a

supplier's premises As compensation for production delays, the supplier agreed to a one-off payment

of CU100,000, which was received on 31 August 20X4, and this was credited to production

(4) Half of the work in progress is 75% complete, and the remainder is 50% complete as to labour and

overheads, all raw materials having been issued

(5) The company manufactures to customers' requirements for all orders The final selling price is

determined on a cost plus standard mark-up basis for the majority of orders

(6) Inventory at 30 September 20X4 amounted to the following

Units

(7) The total net realisable value (NRV) of finished goods is CU560,000 The following is an analysis ofmajor orders in finished goods at the year end.

(a) Calculate the amount to be included in the financial statements of Montrose Ltd for the year ended

30 September 20X4 in respect of inventories, preparing all relevant extracts from the financial

statements excluding accounting policy notes (12 marks)

(b) Explain the different concepts of capital and capital maintenance used in accrual basis accounting,illustrating your explanation with appropriate examples (6 marks)

(18 marks)

12 Gandalf Ltd

At 1 July 20X5 the capital and reserves section of Gandalf Ltd's balance sheet showed the following

CU

1,387,500The accountant of Gandalf Ltd has prepared a draft income statement for the year ended 30 June 20X6which shows a profit for the period of CU135,500 However, there are certain matters which he is unsurehow to deal with and these are set out below He has also asked for your assistance in preparing thestatement of changes in equity for that year It is Gandalf Ltd's policy to maintain as high a possible balance

on retained earnings, whilst following BFRS

(1) During the year Gandalf Ltd issued a further 300,000 ordinary shares at a price of CU1.25 per share Italso issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p redeemablepreference shares at a price of 70p per share Transaction costs in relation to these share issues wereCU5,000, CU3,000 and CU1,000 respectively

(2) During the year an ordinary interim dividend of CU30,000 was paid The accountant has debited this

to finance charges A further ordinary dividend of CU25,000 was declared on 15 June 20X6 and isexpected to be paid shortly The accountant has made no entries in respect of this dividend or thetwo preference dividends which had been declared by the year end and are due to be paid shortly.(3) On 1 July 20X5 Gandalf Ltd revalued its freehold land and buildings which were carried in the books atthat date at a cost of CU500,000 (land CU300,000 and buildings CU200,000) and accumulated

depreciation of CU50,000 Depreciation is charged on a straight-line basis over an original estimateduseful life of 40 years The valuation showed a fair value for the land of CU600,000 and for the

buildings of CU400,000 The estimated remaining useful life of the buildings was reassessed at thesame date and is believed to be 50 years Depreciation for the year on freehold land and buildings hasnot yet been charged

(4) On 1 July 20X5 Gandalf Ltd decided to change its depreciation policy for plant and machinery from20% straight-line to 25% reducing balance Prior to charging depreciation for the year ended 30 June20X6 the plant and machinery account showed a cost of CU357,800 and accumulated depreciation ofCU125,700 There were no movements on the plant and machinery account during the year The

(5) Whilst preparing the draft financial statements the accountant discovered an error in the previous

year's financial statements Expenditure of CU42,500 had been capitalised as an intangible asset

whereas in fact this was in contravention of BAS 38 This expenditure has been subject to an

amortisation charge of 10% in the current year

Requirements

(a) Calculate a revised profit for the period reflecting the above matters (4 marks)

(b) Prepare the statement of changes in equity for Gandalf Ltd for the year ended 30 June 20X6

(11 marks)

(c) Explain the difference between financial statements prepared using the accrual basis and those

prepared using the cash accounting or break-up bases, illustrating your answers with simple

Freehold land was acquired on 1 February 20X8 for CU100,000 to build a new factory Due to

planning difficulties, building has not yet been started The directors wish to revalue the land to its fair

value of CU130,000 at 30 September 20X9

(2) Buildings

On 1 October 20X8 the directors reviewed the useful life of the buildings and determined that the

remaining life was 56 years The buildings were acquired for CU200,000 on 1 October 20X4, when

their useful life was estimated at 40 years

(3) Plant and machinery

Plant and machinery is accounted for under the cost model accounting policy and is depreciated at the

rate of 40% per annum based on carrying amount Such plant has an estimated life of five years

(i) Plant which cost CU20,000 on 1 October 20X6 was classified as held for sale on 1 February

20X9 The sale was agreed at CU5,600 and completed on 31 March 20X9

(ii) New plant acquired cost CU60,000 on 1 January 20X9

At 1 October 20X8 the cost of plant and machinery (not leased) was CU200,000, with accumulated

depreciation of CU72,000

(4) Computer

Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost The

computer was acquired on 1 January 20X7 for CU60,000, and by the beginning of this accounting year

CU10,500 of depreciation had been charged In an effort to charge out computer time to departments,

a record is now kept of computer time used Management wish to depreciate the computer on a

usage basis The manufacturer's estimate of total usage time of the computer's life is 40,000 hours The

data processing manager estimates that some 10,000 hours have been worked prior to the current

accounting period During the current year the record shows 4,800 hours worked The computer will

have a scrap value of CU4,500 at the end of its useful life

Requirements

(a) Prepare the schedule of non-current assets which will form the note to the company's published

14 Roberts Ltd

Roberts Ltd is a pharmaceutical company owning significant non-current tangible assets which are all initiallyrecorded at cost Subsequently, land and buildings are remeasured at fair value when this differs materiallyfrom the carrying amount Roberts Ltd adopts the policy of transferring the revaluation surplus included inequity to retained earnings as it is realised

During the year ended 31 December 20X4 the following events have occurred

(1) On 30 September 20X4 a fire occurred in the Newcastle factory All of the inventories and themajority of the non-current assets located at the site were fully insured and therefore the companyhas suffered no loss in respect of those assets However, one item of specialised machinery had beentransferred into the Newcastle factory on 1 June 20X4 to help the company fulfil a special order.Unfortunately the insurance company was not notified about this and has refused any compensation.The specialised machinery originally cost CU2.8 million on 1 February 20X0 and was being depreciatedover eight years Following the damage caused by the fire, Roberts Ltd has identified two options.(i) Sell the machine A prospective purchaser has been identified and has indicated that he would pay65% of the carrying amount at the date of the fire However, before the sale takes place, thepurchaser expects Roberts Ltd to carry out repairs to the asset This work can be done byemployees of Roberts Ltd and will take approximately 600 hours of skilled labour Such labour isroutinely charged out to customers at an hourly rate of CU38.40 (including a profit margin of20% on cost) In addition Roberts Ltd will have to pay for the machinery to be moved to its newlocation An estimate of CU21,000 has been obtained from a transport company, and there willalso be a one-off insurance cost for the journey of CU2,000

(ii) Repair the asset, transfer it to a factory in Belgium and use it there for approximately three years.The local accountant in Belgium has prepared detailed cash flow projections (which include therepair costs) and estimates the value in use to be CU600,000

(2) On 1 April 20X1 Roberts Ltd acquired a plot of land in Cardiff at a cost of CU2.6 million During20X1 a factory was built on the land at a cost of CU1.7 million Additional architects' fees of

CU80,000 were also incurred The building work was finished on 1 May 20X2, when the factory wasoccupied and brought into use

On 31 December 20X3 the land and buildings were revalued to their fair value of CU7.8 million (with60% of the value relating to the land) At this date the directors also reassessed the total useful life ofthe building, increasing it from 30 to 40 years

On 31 December 20X4 it was discovered that toxic chemicals had been leaking from the factory intothe land The building can no longer be used However, a waste disposal company has offered CU1.5million for the site (the purchaser intends to demolish the building and use the site for landfill)

Requirements

(a) Calculate the carrying amounts of the land and the buildings (separately) at 31 December 20X3 and

31 December 20X4 and the balance on the revaluation reserve at 31 December 20X4 (6 marks)

(b) Calculate the impairment charges to the income statement for the year ended 31 December 20X4 and

Note:Work to the nearest CU'000

(13 marks)

15 Dumfries Ltd

Dumfries Ltd, which uses the straight-line method of depreciation, entered into leasing contracts on

1 May 20X4 for certain items of plant and machinery and office equipment The following information is

relevant

(1) Plant and machinery with a fair value of CU109,140 was leased under an agreement which required

annual payments of CU31,300 payable in advance The primary period of the lease is four years, after

which the company can continue to lease the plant and machinery at a nominal rent and is likely to do

so

Dumfries Ltd has estimated the useful life of the plant and machinery at five years and its residual value

as CUnil Using the interest rate implicit in the lease of 10%, the present value of the minimum lease

payments is CU109,143 The company is fully responsible for the insurance and maintenance of the

plant and machinery

(2) Office equipment with a fair value of CU60,510 was leased under an agreement which required annual

payments of CU15,000 payable in advance The company is committed to the lease for three years but

the lessor is responsible for the insurance and maintenance of the equipment The lessor has

estimated the useful life of the office equipment at 12 years Using the interest rate implicit in the lease

of 10%, the present value of the minimum lease payments is CU41,040

Requirements

(a) Indicate how the accounting treatment of assets acquired under finance leases reflects the definition of

elements, the recognition criteria and the measurement bases set out in BFRS Framework.

(6 marks)

(b) For leases (1) and (2) above, using the actuarial method, calculate the amounts to be included in the

income statement for each year of the leases and in the balance sheet as at 30 April 20X5, preparing

the reconciliation note for property, plant and equipment and the other notes specifically required by

(20 marks)

16 Crieff Ltd

Crieff Ltd had the following transactions in the year ended 30 June 20X8

(1) A computer-controlled cutting machine was leased at a cost of CU40,000 per annum payable in

advance The primary lease term is for five years from 1 July 20X7 and the machine is expected to

have a useful life of five years, with no residual value The machine would have cost CU175,000 if

bought outright Crieff Ltd is responsible for the maintenance and insurance of the asset The interest

rate implicit in the agreement is 8% per annum and the present value of the minimum lease payments

is CU172,480

(2) Items of office equipment were leased at a cost of CU7,500 per month payable in advance The lease

term is for two years from 1 September 20X7 and can be cancelled at any time by either party to the

lease Any maintenance is carried out by the lessor The office equipment would have cost CU300,000

if bought outright, and is expected to have a useful life of six years

(3) An agreement was entered into on 1 July 20X7 for the lease of an automatic packing machine at an

annual cost of CU30,000 payable in arrears on 30 June each year The agreement is for five years and

Crieff Ltd has the option to purchase the asset at the end of the five years at a nominal cost The asset

is expected to have a useful life of eight years The machine would have cost CU120,000 if bought

outright The interest rate implicit in the agreement is 8% per annum and the present value of the

The useful life of the buildings has been professionally assessed at 45 years The interest rate implicit inthe lease is 10% and the present value of the minimum lease payments attributable to the buildings isCU528,120.

Requirements

(a) Briefly explain the concepts underlying the accounting treatments required by BAS 17 Leases with

(b) Calculate the appropriate amounts to be disclosed in the financial statements for the year ended

30 June 20X8, preparing all relevant disclosure notes You should use the actuarial method to

apportion any finance charges You are not required to produce any notes relevant to the cash flow

statement or accounting policies notes (20 marks)

(23 marks)

17 ITC Solutions Ltd

ITC Solutions Ltd (ITC) is a company assembling and selling computers You are the financial accountant ofthe company and you have prepared draft annual financial statements for the year ended 28 February 20X5,for the approval of the board

The CEO has challenged the figure for revenue as it is less than the figure he was expecting, based on hispersonal records He asked you to provide an analysis of revenue from each client, which he compared tohis own figures, and he has found three apparent discrepancies These apparent discrepancies relate to thefollowing transactions:

(1) ITC entered into a fixed price contract for CU120,000 with Arial Ltd to build a computer Work hadbegun on this project; the costs incurred to date were CU60,000 and it was estimated to be two-thirds completed However, the engineers have just discovered an incompatibility between two keycomponents and the work on the computer to date will need major revisions It is difficult to estimatethe costs of completing the work because of the complexity of the new hardware It is considered thatCU50,000 of the costs incurred to date are recoverable from Arial Ltd

(2) ITC acts as an agent for ProMarket Ltd, a marketing company The arrangement is that ITC offers toits clients the services of ProMarket Ltd If an ITC client uses ProMarket Ltd then the gross fee is paid

to ITC, who then remit the fee, less 15% commission, to ProMarket Ltd In the year ended

28 February 20X5 ITC received gross fees of CU300,000 for marketing services provided by

ProMarket Ltd

(3) ITC is the exclusive retailer of computers manufactured by LapTop Ltd LapTop Ltd have announcedthat its latest model, which has a very high specification, is now ready for sale and will be released tothe market in mid-April 20X5 ITC will buy the computers for CU600 and sell them for CU1,000 Inthe short term, demand for the computer will exceed supply and 500 customers of ITC have each paid

a deposit of CU150 in February 20X5 to secure a computer

The CEO cannot understand your figures and he considers that the total revenue from these three projectsis:

Prepare notes for a meeting with the CEO which:

(a) Explain what is meant by elements of financial statements and the principles of recognition of those

(b) Applies these principles to the above three transactions, showing how you have calculated revenue in

(16 marks)

18 Withington Ltd

Withington Ltd is organised into several divisions The following events relate to the year ended

31 December 20X0

(1) A number of customers have initiated legal proceedings relating to the supply of electrical transformer

units during 20X0 Two thousand units were installed during the year A number proved to be faulty

Following adverse publicity substantially all of the customers are claiming the units are faulty

Withington Ltd's lawyers have confirmed that they believe 25% of the claims are defendable at no cost

The average level of damages per successful claim is estimated at CU1,000 A similar provision was in

place at 31 December 20W9 disclosed in the balance sheet at CU1 million CU800,000 was paid out in

such claims during 20X0

(2) A mechanical transformer unit supplied to Swithin Ltd during the year exploded, causing a fire Swithin

Ltd has initiated legal proceedings for damages of CU10 million against Withington Ltd A legal expert

has advised Withington Ltd that there is only a 30% chance of defending the claim successfully The

present value of this claim has been estimated at CU9 million The expert has investigated the cause of

the problem with a team of accident consultants Together they have concluded that parts supplied by

George Ltd to Withington Ltd for inclusion in the transformer unit were defective and contributed to

the explosion They have estimated that George Ltd's contributory negligence is 40% of any final

settlement Negotiations have commenced with George Ltd and the legal expert believes that this

claim is likely to succeed

(3) On 1 January 20X0 Withington Ltd installed a new electric machine The electric machine cost

CU200,000 and has an expected life of 20 years The machine is lined with a special compound The

lining needs replacing every four years The cost of the lining included within the machine cost is

CU40,000 The financial controller proposes to capitalise the machine at CU200,000 and depreciate

over 20 years, while building up a replacement provision over four years for the relining of the

machine

(4) Withington Ltd has begun the extraction of metal ore in an overseas country, Didland On 1 January

20X0 Withington Ltd erected some infrastructure on the site at a cost of CU200,000 Withington Ltd

has a five year operating licence issued by Didland government for the site Didland has no

environmental clean-up law enacted Withington Ltd made public statements during the licence

negotiations that as a responsible company it would restore the environment at the end of the licence

At the end of five years the cost of removing the infrastructure has been estimated at CU100,000 In

addition, further clean-up costs will be progressively created as the ore is extracted On the basis of

the planned extraction, the total cost of cleaning up the extracted ore hole will be CU400,000 at the

end of five years Extraction commenced on 1 January 20X0 and is currently at planned levels

(5) On 1 July 20X0 Withington Ltd entered into a two-year, fixed price, long run manufacturing contract

with Franklin Ltd Withington Ltd is manufacturing 1,000 processor units per month The forecast

profit per unit was CU10 but, due to unforeseen cost increases and production problems, each unit is

anticipated to make a loss of CU7 The compensation payable for not fulfilling the contract is CU2

million

(6) During the year a restructuring of the Chuckholder division began The aim of the plan was to reduce

costs and improve business efficiency The division has not been separately reported as a business

segment, and accounts for only 2% of group revenue The plan was implemented on 1 September

20X0, when the main attributes were announced to the workforce

At 31 December 20X0 the anticipated further costs to be incurred are as follows

(a) Prepare the provisions and contingencies note for the financial statements for the year ended

31 December 20X0, including narrative commentary (15 marks)

(b) Calculate the annual depreciation charge for 20X0 arising from the above transactions (3 marks)

(18 marks)

19 Islay Ltd

Islay Ltd has acquired the following businesses

(1) Savalight, a business specialising in the production of low-cost, energy-efficient light bulbs, acquired on

1 June 20X6 for CU580,000 The identifiable assets, liabilities and contingent liabilities of the businesshad a net carrying amount of CU550,000, and were valued at CU500,000 on 1 June 20X6 An

impairment loss of CU20,000 in relation to the goodwill acquired in this business combination wasrecognised in the year ended 31 May 20X8

(2) Green Goods, a business specialising in the distribution of a range of environmentally-friendly

products, acquired on 1 June 20X7 for CU1.8 million The assets, liabilities and contingent liabilities ofthe business had a net carrying amount of CU1.1 million and were valued at CU1.3 million on

1 June 20X7, including goodwill of the business of CU150,000 and a patent of CU70,000 allowing IslayLtd sole use of unique distribution systems for ten years An impairment loss of CU50,000 in relation

to the goodwill acquired in this business combination is to be recognised in the year ended 31 May20X9

(3) 70% of Smart IT Ltd, a business specialising in the distribution of computers, acquired on 1 June 20X8for CU1.1 million cash The identifiable assets, liabilities and contingent liabilities of the business had anet carrying amount of CU1 million and were valued at CU1.2 million on 1 June 20X8 In addition, thedirectors of Smart IT Ltd believe that they have built up goodwill within the company and that it isworth CU200,000

Islay Ltd revalued one class of its property, plant and equipment on 1 June 20X8, and created a revaluationreserve of CU600,000 The revalued assets have a remaining useful life of ten years

The group's capital and reserves (before reflecting any goodwill impairment or amortisation of intangiblesarising from the above acquisitions) in the draft consolidated financial statements as at 31 May 20X9 are asfollows

CU'000Capital and reserves

Called up share capital (5,000,000 ordinary shares of CU1 each) 5,000Revaluation reserve (before any 20X9 transfer to retained earnings) 600Retained earnings (CU175,500 for the year ended 31 May 20X9) 700

6,300

Requirement

Calculate and disclose the amounts for intangible assets to be included in the consolidated financial

statements for Islay Ltd for the year ended 31 May 20X9, providing the following disclosures

 Balance sheet extracts

 Disclosure note for intangibles (a schedule showing the movements in the year)

 Statement of changes in equity attributable to the equity holders of Islay Ltd (11 marks)

20 Greenstones Ltd

Greenstones Ltd is a large international company operating in high-tech industries and it incurs significant

costs in researching and developing new products During the year to 31 December 20X8 its Rajshahi

division has been working on three key projects

Project Alpha Development of a new microchip on behalf of Codack Ltd (costs plus 40% to be

reimbursed by Codack Ltd)

Project Beta Research into the next generation of digital cameras

Project Gamma Development of a new and improved nylon substitute for material currently used in

the casings for digital cameras

At 1 January 20X8 the following costs had been capitalised

Project Project Project

Accumulated depreciation (useful life 60 months) – – (200,000)

At 31 December 20X8 Project Alpha was held up awaiting supply of a suitable electronic microscope It is

envisaged that commercial production by Codack Ltd will start in 20Y0

Project Beta shows great promise but significant production problems still remain

Project Gamma was completed on 1 October 20X8 with the start of production of the new product On 1

April 20X7, when the accumulated research and development costs stood at CU470,000, the final technical

problems were overcome On 1 October 20X8 the specialised equipment was transferred to other

projects at a carrying amount of CU140,000

During the year the following costs were incurred

Project Gamma (to 1 Project Project October

In the three months to 31 December 20X8 sales of the new camera casings exceeded expectations and

profit margins were above forecast It is estimated that the product will have a life of five years

Requirements

(a) Explain the qualitative characteristics of relevance and reliability and the potential for conflict between

(b) Evaluate the treatment of development expenditure set out in BAS 38 Intangible Assets against the

characteristics of relevance and reliability (4 marks)

(c) Prepare extracts from the financial statements for the year ended 31 December 20X8 reflecting the

above The only note required is that relating to charges against operating profits (10 marks)

(17 marks)

21 Okehampton Ltd

Okehampton Ltd carries land and buildings under the revaluation model allowed by BAS 16 Property, Plant and Equipment and plant and equipment under the cost model.

On 30 June 20X6 Okehampton Ltd decided to sell four of its non-current assets, all of which met the held

for sale criteria under BFRS 5 Non-current Assets Held for Sale and Discontinued Operations on that date.

Details of these four assets are as follows

(1) The George House land and buildings had a carrying amount of CU300,000 at 31 December 20X5 and

as it had originally cost CU200,000, a surplus of CU100,000 stood in the revaluation reserve in respect

of it at that date Depreciation on the buildings element is charged at the rate of CU6,000 per annum;

on historical cost the annual charge would have been CU4,000 On 30 June 20X6 and 31 December20X6 its fair value was estimated as CU320,000 and the costs to sell at CU9,000 It was sold in 20X7for CU350,000 net of selling expenses

(2) The Elizabeth House land and buildings had a carrying amount of CU400,000 at 31 December 20X5and as it had originally cost CU350,000, a surplus of CU50,000 stood in the revaluation reserve inrespect of it at that date Depreciation on the buildings element is charged at the rate of CU12,000per annum; on historical cost the annual charge would have been CU8,000 On 30 June 20X6 and 31December 20X6 its fair value was estimated as CU360,000 and the costs to sell at CU8,000 It wassold in 20X7 for CU310,000 net of selling expenses

(3) The Axford item of plant had a carrying amount of CU200,000 at 31 December 20X5 Depreciation ischarged at the rate of CU20,000 per annum On 30 June 20X6 and 31 December 20X6 its fair valuewas estimated as CU140,000 and the costs to sell at CU9,000 It was sold in 20X7 for CU120,000 net

of selling expenses

(4) The Waterman item of plant had a carrying amount of CU600,000 at 31 December 20X5

Depreciation is charged at the rate of CU90,000 per annum On 30 June 20X6 and 31 December20X6 its fair value was estimated as CU620,000 and the costs to sell at CU15,000 It was sold in 20X7for CU635,000 net of selling expenses

The balance on Okehampton Ltd's revaluation reserve at 31 December 20X5 was CU370,000 and therewere no movements on that reserve other than those in respect of George House and Elizabeth House

Requirements

Prepare detailed calculations of:

(a) The carrying amounts of these four assets at 31 December 20X6 and the balance on the revaluation

(b) The amounts to be recognised in respect of these assets in the income statement for the year ended

(c) The amounts to be recognised in respect of these assets in the income statement for the year ended

31 December 20X7 and the balance on the revaluation reserve on that date (4 marks)

(17 marks)

22 Banchory Ltd

You have been approached by the financial controller of Banchory Ltd She has asked you to prepare someinformation in relation to the company's draft financial statements for the year ended 30 April 20X0 whichshow a draft consolidated profit before tax of CU2,665,000 Details are as follows

(1) Banchory Ltd has lodged a claim of CU500,000 against one of its suppliers for faulty materials suppliedand the consequential loss arising from their use The supplier has contested the validity of this claimand the legal costs arising from this dispute amounted to CU40,000 by 30 April 20X0 The company’ssolicitors have advised the directors that, although the outcome is not clear, they have a good case,and the draft accounts show a receivable for CU500,000 due from the supplier with the correspondingcredit to cost of sales No adjustment has been made for the legal costs which have not yet been paid

On 31 May 20X0 Banchory Ltd’s quality control staff obtained independent evidence which shows that

the materials were faulty The company’s solicitors advise that it is now probable that the claim will be

settled in full

(2) Banchory Ltd issues one-year warranties to customers on the supply of some of its products The

company has experienced a significant rise in the incidence of claims by customers since 1 May 20W9

Agreed claims now amount to 10% of the sales of these products Claims tend to arise two months

after the date of sale of the products Sales subject to warranty in the last six months of the year

amounted to CU6 million No adjustments have been made to the financial statements in respect of

this matter

(3) Banchory Ltd’s solicitors have advised the directors about correspondence from a past employee

claiming unfair dismissal with effect from 4 May 20X0 The claim, which has been provided for in the

draft financial statements, amounts to CU300,000 and the solicitors consider that it is highly unlikely

the company will have to pay any amount

(4) The company’s issued share capital on 1 May 20W9 was 2,000,000 ordinary shares of CU1 each, with

an authorised share capital of 4,000,000 ordinary CU1 shares There was also an opening balance on

the share premium account of CU450,000 Retained earnings on 1 May 20W9 were CU3,672,000

This figure is before any retrospective adjustments posted in the year ended 30 April 20X0

On 31 March 20X0 the company made a 1 for 10 bonus issue This was followed by a rights issue of 1

for 4 ordinary shares at CU1.75 on 15 April 20X0, when the current market price of each share was

CU2.00

The entire proceeds of the rights issue were immediately used to acquire the share capital of a

company whose net assets at the date of acquisition had a carrying amount of CU850,000 and a fair

value of CU950,000 The acquired business has not performed to expectations and an impairment

write-down to CUnil is required

(5) During the year the decision was taken to close down one of the company’s two factories, completing

the process, including the sale of the factory unit, prior to the year end The only gain or loss relating

to this closure was that on the disposal of the factory unit and this has been reflected in the draft

results At the time this decision was taken, the fair value of the factory was estimated at CU3.05

million and the costs to sell it at CU50,000 The factory was eventually sold for CU3.1 million, net of

selling expenses At the time of classification as held for sale the factory had a carrying amount of

CU2.1 million The factory had been included in the balance sheet at valuation and the profit on

disposal, which has been included in the draft results, is based on the historical cost carrying amount of

CU1.3 million The opening balance on the revaluation reserve was CU800,000

(6) A machine bought on 1 May 20W7 for CU1,800,000 was then thought to have a useful life of ten

years However, as at 1 May 20W9 it was discovered that the total useful life of this asset is actually

only six years The revision of the useful life has been dealt with as a change in accounting policy This

asset is being depreciated on a straight-line basis with an estimated residual value of CUnil

(7) On 30 October 20W9 Banchory Ltd revalued a freehold building, which had a remaining life of 50

years The revaluation surplus of CU500,000 has not been recognised in the financial statements but

the depreciation charge for the period, which has been included in the draft profit, has been based on

the revalued amount

Requirements

(a) Prepare the provisions and contingencies notes for the financial statements for the year ended

(b) Calculate a revised consolidated profit before tax figure for the year ended 30 April 20X0 (6 marks)

(c) Prepare the consolidated statement of changes in equity for the year ended 30 April 20X0 (8 marks)

(18 marks)

23 Banff Ltd

Banff Ltd sells computer hardware, with or without support services, and also develops unique software.The following matters are outstanding in the preparation of the published financial statements for the yearended 30 April 20X1

(1) The company has drawn up a detailed formal plan for the closure of its distribution division, which hasoperated as a separate cost centre, intending to sub-contract this work in the future This plan hasbeen approved by the board of directors and announced to employees by the year end The planidentified the following costs

CU

Costs of early termination of existing contracts 100,000Anticipated future operating losses – 1 May 20X1 to date of closure in June 20X1 190,000The company expects to realise a profit of CU90,000 on disposal of the non-current assets in thedivision to be closed These assets are accounted for under the cost model accounting policy

(2) The company has been constructing a specialised item of plant and machinery for its own use Theitem had been completed by the year end, and the construction director has summarised the costswhich his department was charged

Administration costs recharged by other departments – payroll, personnel,

purchasing (no additional staff required) 11,000Labour costs include CU20,000 relating to delays in the delivery of components These arose throughBanff Ltd mis-scheduling deliveries

The plant is expected to have a useful life of ten years with no residual value Major overhauls willneed to be carried out every four years at a cost of CU80,000 The company intends to provideCU20,000 annually to meet this cost

(3) Banff Ltd entered into a six-year finance lease for plant and machinery on 1 May 20X0, paying adeposit of CU100,000 to be followed by five equal annual instalments of CU150,000 on 1 May in eachsubsequent year The purchase price of the asset if bought outright would be CU780,000 The

company uses the sum-of-the-digits method to allocate finance charges Apart from recording thepayment of the deposit on 1 May 20X0, no other accounting entry has been made for this financelease

(4) The hardware division made a sale of a computer on 1 May 20X0 The proceeds of CU4 million werereceived on 1 July 20X0 and recognised as revenue The fee included the supply of hardware and afour year maintenance contract covering maintenance support The costs of providing that support onsimilar contracts have been CU500,000 per annum, and the mark-up on those maintenance contractswas 50% on cost

(5) The software division entered into a CU3 million contract on 1 May 20W9 to develop a uniqueproduct for a customer At 30 April 20X0 the contract was estimated at 25% complete However, asthe costs to complete could not be estimated reliably, only the costs incurred of CU200,000 wererecognised as revenue During the year to 30 April 20X1 a further CU2 million of costs have beenincurred and included within inventory The contract is now thought to be 75% complete, somethingconfirmed by an independent expert assessor who has also estimated the costs to complete asCU400,000 and has confirmed the feasibility of the product No invoice has yet been rendered to thecustomer

(6) On 1 May 20W9 Banff Ltd acquired an item of plant for CU1 million The useful life was estimated aseight years The carrying amount in the financial statements at 30 April 20X1 is CU750,000 under the

through sale A professional agent estimated its fair value as CU900,000 and it was advertised for sale

on 1 February 20X1 at that price The agent charges a 3% commission While the plant is available for

immediate sale, Banff Ltd has continued to use it for training and incidental production purposes The

other activities undertaken on the machine have been transferred to other items of plant A third

party has made an offer at the asking price and it is expected that the sale will be completed during

20X1

Requirements

(a) Prepare relevant extracts from the income statement for Banff Ltd for the year ended 30 April 20X1

and the balance sheet as at that date You are not required to prepare any disclosure notes.

(21 marks)

(b) Calculate the values for the six-year lease which would have appeared in the income statement and

balance sheet if the lease had been classified as an operating lease (2 marks)

(23 marks)

24 Skinner Ltd

You have been asked to help the directors of Skinner Ltd complete the financial statements for the year

ended 30 June 20X3 You have been asked to provide draft information to the board of directors based on

the following information provided by the assistant accountant of Skinner Ltd

(1) Property, plant and equipment as at 30 June 20X2 was as follows

Cost Depreciation Carrying

amount

Freehold land and buildings 1,620,000 148,800 1,471,200

2,898,000 688,400 2,209,600

The freehold land and buildings relate to the factory site, of which the land cost CU1 million On 1 July

20X2 the site was revalued to CU2.36 million, of which CU1.6 million relates to the land

The annual review of the expected lives of the property, plant and equipment has revealed that a

machine purchased for CU150,000 on 1 July 20X0 now has a remaining useful life of only five years

Plant and machinery costing CU430,000 was purchased on 1 January 20X3 There were no disposals

Depreciation is provided on cost on a straight-line basis The rates used are 2% per annum for

buildings and 10% per annum for plant and machinery

(2) On 1 July 20X2 the company leased a grinding machine under an eight year contract Lease payments

are CU65,000 per annum payable in arrears, commencing on 30 June 20X3 The only entry made in

the accounts has been to recognise this year’s lease payment as an expense in the income statement as

part of administrative expenses

The lease agreement shows that the rate of interest implicit in the lease is approximately 5%, and the

lessee is responsible for the maintenance of the machine The present value of the minimum lease

payments is CU419,900

Other working papers show that the cash price of the machine was CU450,000, and it has an

expected useful life of ten years

(3) Skinner Ltd manufactures one product, a food processor The costs of making a processor have been

established as follows

CUVariable cost per unit

In addition, the following costs are also incurred every month.

Cost/5,000 Cost/4,000 Total cost units units

(a) Prepare the note analysing the movement on property, plant and equipment for the year ended

30 June 20X3 and any other narrative notes required in respect of property, plant and equipment as a

(b) Prepare a note analysing future lease payments on the gross basis and show how the above lease will

be reflected in the financial statements for the year ended 30 June 20X3 (including the cash flowstatement) No other notes to the financial statements are required (6 marks)

(c) Calculate the carrying amount of inventory at 30 June 20X3 (3 marks)

(19 marks)

25 Rosetta Ltd

Rosetta Ltd, a listed group, is a multinational enterprise that focuses on developing and delivering

psychometric tests for recruitment purposes and a wide range of training courses/products

The group is currently finalising its consolidated financial statements for the year ended 31 December 20X2.These were prepared by the CEO in the absence of a financial controller The draft income statementshows profit before tax of CU17 million, which represents a 16% increase on the previous year

As the newly-appointed financial controller you have been asked to review the following matters

(1) At the start of the year an extensive review was carried out on all the property, plant and equipmentheld by the group Following advice from an independent industry expert, the following changes weremade with effect from 1 January 20X2

 The method of depreciation used on certain items of printing equipment was changed Theequipment was originally purchased on 1 January 20X1 for CU12 million and was initiallydepreciated using a 15% reducing-balance method This is to be changed to straight-line over atotal useful life of five years

 The total useful life of some property originally purchased on 1 January 20X0 for CU40 millionwas reduced from 25 to 20 years

In the draft accounts both of the above items have been dealt with as adjustments to the retainedearnings brought forward at 1 January 20X2 Retained earnings as restated are shown as CU35 million

in the draft accounts

(2) During the current year the group has expanded into the computer-based training market This hasbeen achieved in two ways

(i) Via the acquisition on 1 January 20X2 of 60% of Newtrain Ltd, a company which already had aportfolio of CD-Rom training products To integrate Newtrain Ltd into the group, Rosetta Ltdplanned substantially to reorganise its operations over the first three months of ownership, so at

the acquisition date a reorganisation provision of CU1.2 million was recognised Goodwill arising

in the business combination was then measured at CU6 million

In the draft accounts the goodwill has been amortised over its estimated useful life of twentyyears An impairment review at 31 December 20X2 revealed its recoverable amount to beCU4.1 million

(ii) Via the internal development of new IT technology which allows for close monitoring of trainees’

progression through the learning material The project was started in early February 20X2 andthe final product was successfully launched on 30 November 20X2 At that date the followingcosts were capitalised as an intangible non-current asset

CU

IT hardware (purchased 1 February 20X2, useful life 48 months) 600,000Employment costs of those developing the product 1,800,000Costs incurred in training staff to deliver the new product 480,000

2,880,000

This total cost is being amortised over the product's expected useful life of 72 months

60% of the employment costs were incurred prior to 31 August 20X2, the date on which thetechnical feasibility and financial viability of the product were confirmed A competitor hasrecently approached Rosetta Ltd and offered CU6 million for the know-how embodied in theproduct As a result, the intangible asset has been revalued to CU6 million in the draft financialstatements, and a gain of CU3,160,000 recognised in the income statement

Intangible assets at 1 January 20X2 comprised goodwill in respect of an earlier acquisition of

CU2,100,000 Accumulated impairment losses in relation to that goodwill at 1 January 20X2 were

CU300,000 A further CU200,000 still needs to be recognised in the current year

Requirements

(a) Prepare the note analysing the movement on intangible assets which would appear in the financial

statements of Rosetta Ltd for the year ended 31 December 20X2 (6 marks)

(b) Calculate a revised pre-tax profit for the year ended 31 December 20X2 and the correct retained

(17 marks)

26 Arran Ltd

The board of directors of Arran Ltd have asked you, as financial controller, to prepare some information in

relation to the company’s draft financial statements for the year ended 31 May 20X1 Details are as follows

(1) On 1 June 20W8 Arran Ltd acquired 75% of the ordinary share capital of Jura Ltd and 80% of the

ordinary share capital of Islay Ltd On 1 December 20X0 Arran Ltd purchased 30% of the ordinary

share capital of Millport Ltd On 31 January 20X1 Arran Ltd disposed of its entire holding in Islay Ltd

for CU2.5 million

The draft income statements of the four companies for the year ended 31 May 20X1 were as follows.

Arran Ltd Jura Ltd Islay Ltd Millport Ltd

Revenue 10,000,000 6,500,000 3,900,000 14,500,000Cost of sales (7,400,000) (4,500,000) (2,700,000) (10,000,000)

2,600,000 2,000,000 1,200,000 4,500,000Operating expenses (1,100,000) (650,000) (390,000) (1,700,000)Profit before tax 1,500,000 1,350,000 810,000 2,800,000

Profit for the period 1,050,000 950,000 570,000 1,960,000

 Arran Ltd acquired its holding in Islay Ltd for CU1,600,000 when the fair value of the net assets

of Islay Ltd was CU1,400,000 The net assets of Islay Ltd on 1 June 20X0 were CU1,700,000

 Goodwill impairment reviews to the start of the current year revealed cumulative impairments ofCU96,000 in relation to the acquisition of Islay Ltd

 Millport Ltd sold goods to Arran Ltd on 1 January 20X1 for CU480,000, at a mark-up on cost of

331/3% Arran Ltd still had half of these goods in inventory at the year end

 Arran Ltd has not yet accounted for the disposal of Islay Ltd

(2) Property, plant and equipment in the draft financial statements is currently stated as follows

Depreciation and impairments on plant and machinery are charged to cost of sales The incomestatement extracts above do not reflect the above issues All falls in value are considered to havetaken place in the second half of the year to 31 May 20X1

Requirements

(a) Calculate the following amounts for inclusion in the consolidated income statement of Arran Ltd forthe year ended 31 May 20X1

(i) Cost of sales

(ii) Profit arising on the disposal of Islay Ltd

(iii) Share of profits of associates

(b) Calculate the carrying amount of property, plant and equipment for inclusion in the consolidated

balance sheet of Arran Ltd as at 31 May 20X1 and prepare any relevant extracts from the financial

(c) Explain the rationale for the required treatment of each of the items in (a) above (6 marks)

(21 marks)

27 Elie Ltd

The directors of Elie Ltd are in the process of preparing financial statements for the year ended 30 June

20X2 They have asked you to assist them with certain calculations, details of which are set out below

(1) On 1 July 20X1 Elie Ltd acquired 80% of the CU1 million ordinary share capital of Monans Ltd by

issuing 200,000 CU1 ordinary shares Elie Ltd’s ordinary shares were quoted at CU17 on 1 July 20X1

Professional fees to support the acquisition process amounted to CU90,000 A further amount of

CU92,000 is payable in cash on 1 July 20X2

An issue of a further 24,000 shares is contingent on Monans Ltd achieving a 10% increase in revenue in

the year ended 31 October 20X2 These extra shares would be issued on 1 July 20X3 Monans Ltd has

achieved increases in revenue over the past five years of 11%, 8%, 10%, 11% and 12% (from the

earliest to the most recent year)

The net assets of Monans Ltd in its accounts as at 1 July 20X1 were CU3 million, with fair value CU1

million higher than carrying amount

Elie Ltd has identified the following matters not recognised in the financial statements of Monans Ltd

as at 1 July 20X1

 A legal claim had been made by Monans Ltd against a supplier for damages suffered as a result of

faulty goods supplied to Monans Ltd At the acquisition date the company’s lawyers considered itvirtually certain that the claim would succeed The fair value of the claim was assessed as

CU200,000 and this amount was received in December 20X1 Monans Ltd disclosed CU200,000

as a contingent asset at the acquisition date

 Operating losses of CU300,000 were expected to be incurred in the 6 months after acquisition

 Reorganisation costs of CU100,000 were to be incurred to bring Monans Ltd’s systems into line

with those of the group A detailed plan for these changes was not yet in existence and noannouncement for such changes had been made

 A fall of CU50,000 in the value of inventories held on 30 June 20X1 due to a fire at a warehouse

on 5 July 20X1 The inventories now have a net realisable value of CU5,000 All inventories in thegroup at 30 June 20X2 were correctly valued

 The goodwill impairment review at 30 June 20X2 revealed a loss of CU70,000 in relation to this

acquisition

(2) The consolidated income statement currently shows a profit for the period of CU1,456,500 but has

not yet been adjusted to reflect any adjustments required as a result of matter (1) above

In addition to the ordinary shares issued on acquisition of Monans Ltd Elie Ltd also issued 300,000

redeemable and 200,000 irredeemable preference shares during the year All preference shares were

issued at a premium of CU0.20p over their nominal value of CU1 per share and have a coupon rate of

5%

The following ordinary dividends were declared by Elie Ltd

All of the preference dividends were declared before the end of the year

on 1 July 20X0, was subjected to an impairment review on 30 June 20X2 The review revealed thatthis asset now has a recoverable amount of CU50,000.

Elie Ltd’s depreciation policy is to depreciate all plant on a 10% straight-line basis, whether based oncost or on revalued amount Elie Ltd makes an annual transfer between the revaluation reserve andretained earnings as a result of its revaluations in accordance with best practice

Depreciation for the year ended 30 June 20X2 has already been correctly charged to the incomestatement and includes depreciation on the above impaired asset No adjustment has been made as yet

in respect of the above impairment If total depreciation had been calculated on cost as opposed to onrevalued amounts, the charge would have been CU45,000 lower

(10 marks) (16 marks)

28 Wester Ross Ltd

On 1 February 20X0 Wester Ross Ltd acquired 75% of the ordinary share capital of Ullapool Ltd, financed

by the issue of 2 million CU1 ordinary shares of Wester Ross Ltd at CU7 per share and by CU7 million incash

On 10 March 20W8 Wester Ross Ltd acquired 30% of the ordinary share capital of Glenelg Ltd for CU2million cash

The summarised balance sheets of the companies were as follows

At 31 October 20X0 (draft) At acquisition Wester Ross Ullapool Glenelg Ullapool Glenelg

Trade and other receivables 8,500 1,700 400 1,500 100