ACCA paper f 7 financial reporting F7FR(Int) mock1 d08 qs

The following are the statements of comprehensive income of the three companies for the year ending 30 September 2008.. The following information is relevant: i During the year the follo

Mock 1

Financial

Reporting

F7FR-MK1-Z08-Q

Time allowed 3 hours

All FIVE questions are compulsory and MUST be attempted

Do NOT open this paper until instructed by the supervisor

1 Gold acquired 60% of Silver’s equity shares on 1 October 2006 at a cost of $5,020,000,

Silver’s retained earnings on this date were $6,740,000

On 1 February 2008 Gold acquired 30% of Bronze’s shares through a 1 for 1 share exchange and a cash payment of $83,400 Gold’s shares were valued at $3 on 1 February 2008 Gold exerts significant influence over the operating and financing decisions of Bronze

The following are the statements of comprehensive income of the three companies for the year ending 30 September 2008

Gold Silver Bronze

Cost of sales (2,413) _ (2,108) _ _ (690)

Dividend received _ 120 _ 10 _ –

Income tax expense _ (125) _ (90) _ (30)

Profit for the period _ 376 _ 280 _ 96

The share capital and reserves of the three companies at 30 September 2008 were:

Gold Silver Bronze

Retained earnings _ 7,960 _ 7,190 _ 656

Total equity 12,560 _ _ 8,490 _ 1,206

Neither Silver nor Bronze have issued any new shares since their respective acquisitions by Gold

The following information is relevant:

(i) During the year the following inter company transactions took place:

Gold sold goods to Silver for $120,000, one third of the goods remain in inventory

at the year-end

Bronze sold goods to Gold on 1st September 2008 for $25,000, all of these goods remain in inventory at the year-end

Silver, whose main line of operations is the sale of computers, sold goods to Gold

on 1st October 2007 for $220,000 Gold is using the computers as non-current assets and depreciating them over their useful life of 4 years

All companies sell their goods at a mark up of 25% on cost

(ii) Plant and equipment of Silver had a fair value which was $60,000 in excess of its

carrying value at the date of acquisition These assets had four years remaining life

on that date

(iii) Profits accrue evenly throughout the year

(iv) Silver paid a dividend of $150,000 on 1 July 2008, no dividends have been

proposed by any of the three companies

(v) Non-controlling interest is valued at its proportionate share of the identifiable net

assets; it is not credited with its share of goodwill

Goodwill is tested for impairment on an annual basis The goodwill in respect of the acquisition of Silver has fallen in value by 12½%, based on its original value, in each of the two years since acquisition The recoverable amount of the investment

in Bronze is greater than the year-end carrying value of the investment in the consolidated statement of financial position:

Required:

the charge in respect of goodwill, to the statement of comprehensive income for

(25 marks)

2 The following trial balance relates to Telenorth at 30 September 2008:

Depreciation 1 October 2007 (note (ii)) – leasehold 18,000

Trade accounts receivable (note (iii)) 35,700

Accumulated profits 1 October 2007 _ _ 14,160

435,570 435,570 _ _

The following notes are relevant:

(i) An inventory count was not conducted by Telenorth until 4 October 2008 due to

operational reasons The value of the inventory on the premises at this date was $16 million at cost Between the year-end and the inventory count the following transactions have been identified:

$

sales on a sale or return basis at a mark up on cost of 30% 650,000

All sales and purchases had been correctly recorded in the period in which they occurred (ii) Telenorth has the following depreciation policy:

̈ leasehold – straight-line;

̈ plant and equipment – five years straight line with residual values estimated at

$5,000,000;

̈ computer system – 40% per annum reducing balance

Depreciation of the leasehold and plant is treated as cost of sales; depreciation of the computer system is an administration cost

(iii) The outstanding account receivable of a major customer amounting to $12 million

was factored to Kwikfinance on 1 September 2008 The terms of the factoring were:

̈ Kwikfinance paid 80% of the outstanding account to Telenorth immediately;

̈ the balance will be paid (less the charges below) when the account is collected in

full Any amount of the account outstanding after four months will be transferred back to Telenorth at its full book value

̈ Kwikfinance will charge 1% per month of the net amount owing from Telenorth at

the beginning of each month Kwikfinance had not collected any of the amounts receivable by the year-end

Telenorth debited the cash from Kwikfinance to its bank account and removed the account receivable from its sales ledger It has prudently charged the difference as an administration cost

(iv) A provision for income tax of $23.4 million for the year to 30 September 2008 is

required The deferred tax liability is to be increased by $2.2 million, all of which is

to be charged to profit or loss

(v) The suspense account contains the proceeds of two share issues:

̈ the exercise of all the outstanding directors’ share options of four million shares on

1 October 2007 at $2 each;

̈ a fully subscribed rights issue on 1 July 2008 of 1 for 4 held at a price of $3 each

The stock market price of Telenorth’s shares immediately before the rights issue was $4

(vi) On 20 September 2008, the company declared a final ordinary dividend of 15 cents

per share

Required:

Prepare:

accordance with International Accounting Standards as far as the

Notes to the financial statements are not required

(25 marks)

3 The financial statements of Nedberg for the year to 30 September 2008, together with the

comparative statement of financial position for the year to 30 September 2007 are shown below:

Statement of comprehensive income – year to 30 September 2008:

–––––

Operating expenses (note (1)) (300)

–––––

900

–––––

–––––

–––––

Extract from SOCIE:

Dividends: ordinary – Interim (120)

– Final (280) (400)

–––––

Statements of financial position as at 30 September:

2008 2007

Current assets

Equity and liabilities

Reserves

Less dividends paid and declared (400) 1,610 (300) 1,400

Notes to the financial statements:

(1) Cost of sales includes depreciation of property, plant and equipment of $320 million

and a loss on the sale of plant of $50 million It also includes a credit for the amortisation of government grants Operating expenses include a charge of $20 million for the impairment of goodwill

(2) Intangible non-current assets:

2008 2007

(3) Non-current liabilities:

(4) Current liabilities:

The following additional information is relevant:

The company successfully completed the development of a new product during the current year, capitalising a further $500 million before amortisation charges for the period

̈ The company revalued its buildings by $200 million on 1 October 2007 The

surplus was credited to a revaluation reserve

̈ New plant was acquired during the year at a cost of $250 million and a government

grant of $50 million was received for this plant

̈ On 1 October 2007 a bonus issue of 1 new share for every 10 held was made from

the revaluation reserve

̈ $10 million has been transferred from the revaluation reserve to realised profits as a

year-end adjustment in respect of the additional depreciation created by the revaluation

̈ The remaining movement on property, plant and equipment was due to the disposal

of obsolete plant

In addition to the bonus issue referred to above Nedberg made a further issue of ordinary shares for cash

Required:

(25 marks)

4 IAS 36 “Impairment of Assets” requires that where the carrying amount of an asset exceeds its

recoverable amount, the carrying amount should be written down to the recoverable amount The phrase “recoverable amount” is defined in IAS 36 as “the higher of the assets value in use

or it’s fair value less costs to sell” The issues of how one identifies an impaired asset, the measurement of an asset when impairment has occurred and the recognition of impairment losses were are also covered in the standard

Required:

of Assets” The following information is relevant to the impairment review:

AB acquired a car taxi business on 1 January 2008 for $230,000 The values of the

assets of the business at that date based on net selling prices were as follows:

On 1 February 2008, the taxi company had three of its vehicles stolen The fair value of these vehicles was $30,000 and because of non-disclosure of certain risks

to the insurance company, the vehicles were uninsured As a result of this event, AB wishes to recognise an impairment loss of $45,000 (inclusive of the loss of the stolen vehicles) due to the decline in the value in use of the income generating unit, that is the taxi business On 1 March 2008 a rival taxi company commenced business in the same area It is anticipated that the business revenue of AB will be reduced by 25% leading to a decline in the present value in use of the business which is calculated at $150,000 The fair value of the taxi licence has fallen to

$25,000 as a result of the rival taxi operator The fair values of the other assets have

remained the same as at 1 January 2008 throughout the period (8 marks)

Required:

Describe how AB should treat the above impairments of assets in its financial statements

(In part (b) candidates should show the treatment of the impairment loss at 1 February 2008 and 1 March 2008.)

(15 marks)

5 IAS 12 “Income Taxes” uses the concept of temporary differences Temporary differences are

the difference between the carrying value of an asset and its tax base The standard distinguishes between “taxable temporary differences” and “deductible temporary differences”

Required:

The following balances and information relate to Capone, an incorporated enterprise, and are relevant as at 30th September 2008

Carrying value Base Tax Notes

Buildings – (held at a revalued amount) 100,000 2

Receivables:

Gross amounts owed by customer To be

Payables

Note 1

This oilrig cost the company $220,000 at the start of the year It is being depreciated on a 10% straight line basis for accounting purposes The company’s tax advisers have said that the company can claim 25% as a taxable expense in this years tax computation

Note 2

The building has been revalued during the year in accordance with IAS 16 It originally cost

$75,000 It is to be written off over its remaining useful economic life of 50 years

Note 3

The asset held under the finance lease was acquired two years ago Under IAS the company has charged interest of $6,286 in total and depreciation of $5,000 per annum to the income statement The annual rental in respect of the asset is $7,000 It is classified as an operating lease for tax purposes

Note 4

The trade receivables balance in the accounts is made up of the following amounts:

$

––––––

53,000 ––––––

Note 5

The credit balance on the deferred taxation account on 1st October 2007 was $3,890

Note 6

The company is engaged in a construction contract as defined in IAS 11 The following information is relevant The contract commenced on 1st October 2007

$

Note 7

The company borrowed $100,000 on 1st October 2007 The terms of the loan are that it is redeemable for a $150,000 in 5 years The company allocates interest so as to give a constant periodic rate of charge on the outstanding obligation The effective yield on the bond is 8.45%

Note 8

Capone, operates in country where the tax regime is as follows;

The tax code allows for the general application of the accounting principles of prudence and accruals, but it does state the following:

Tax allowable depreciation is computed according to rules set out in the tax code

Allowance for doubtful debts are only deductible under very strict and limited circumstances

Interest is taxed/allowable on a strict cash basis

Unrealised exchange differences are not taxed/allowable

Profit recognised under the rules in IAS 11 is not taxable Such contracts are taxed on completion and all costs incurred are allowable in the calculation of taxable profit on the contract

The tax base of property is not affected by asset revaluations

The tax treatment for leases is to expense the rentals on an accruals basis

The tax rate is 30%

Required:

Calculate the charge to the statement of comprehensive income in respect of deferred

(10 marks)

End of Question Paper