ACCA paper f 7 financial reporting F7FR(Int) MT1B as d08

Cr Investment income 15,000 To record Dividends receivable by Orange from Apple Tutorial note: Remember to adjust Orange’s retained earnings.. Cr Div Receivable 15,000 To eliminate inter

Monitoring Test MT1B

Financial

Reporting

F7FR-MT1B-Z08-A

ATC

1 ORANGE GROUP INC

Orange Group – Consolidated statement of financial position as at 31 December 2007

Non current assets

––––––– 439,500

Current assets

–––––––

––––––– EQUITY AND LIABILITIES

Capital and reserves

––––––– 489,950

––––––– 543,600

Current liabilities

–––––––

–––––––

Consolidated statement of comprehensive income for the year ended 31 December 2007

$

Cost of sales (322,000+271,000–120,000(W6)+2,400(W7)) (475,400)

–––––––

Administrative expenses (101,000+32,000+3,000 goodwill charge for 2006) (136,000)

–––––––

–––––––

–––––––

Attributable to:

––––––– 210,600 ––––––– Extract from SOCIE

–––––––

–––––––

CONSOLIDATION WORKINGS

75/100

= 75%

Apple

(2) Net assets of Apple

Reporting date acquisition Date of Change

$ $ $

Retained earnings

––––––– –––––––20,000 ––––––– 0

––––––– –––––––150,000 ––––––– 64,600

$

Orange % of Apples net assets at the date of acquisition

–––––––

–––––––

$ Fair value net assets at reporting date 214,600

–––––––

53,650 –––––––

$

– dividend receivable 15,000

Orange’s share of Post acquisition profits of Apple

–––––––

(6) Interco sales

Dr Revenue 120,000

Cr Cost of sales 120,000

To eliminate interco sales

––– ––––––(9,600)

––– ––––––2,400

Dr Cost of sales 2,400 Apple

Cr Inventory 2,400 SOFP

To eliminate unrealised profits

Tutorial note: Remember to adjust Apple’s net asset statement

At date of acquisition assets worth $150,000

Per net asset statement assets worth $130,000

Therefore need to revalue by $20,000

Cr Investment income 15,000

To record Dividends receivable by Orange from Apple

Tutorial note: Remember to adjust Orange’s retained earnings

Cr Div Receivable 15,000

To eliminate interco balances in SOFP

Dr Investment income 22,500

Cr Div Appropriation 22,500

To eliminate interco items in the SOCI

(10) Opening group retained earnings

$ All of Orange at 1 January 2007 – per SOCI 49,000

Orange’s share of Post acquisition profits of Apple

––––––

––––––

Statement of comprehensive income extracts

A101 B102 C103 D104 Total

$ $ $ $ $

Cost of sales (100,000)

––––––– (340,000)––––––– (403,000)––––––– ––––––– (28,000) (871,000)–––––––

––––––– –––––––135,000 ––––––– (58,000) ––––––– 0 –––––––74,500

Extracts from financial statements

$

Costs to date plus foreseeable profits less losses 1,577,500

WORKINGS

A101 B102 C103 D104

$ $ $ $

Costs

––––––– –––––––240,000 ––––––– 88,000 –––––––672,000

(2) Calculate percentage complete on a cost basis

A101 B102 C103 D104

Costs to date

Total expected costs 150,000 600,000 400,000 640,000 800,000 888,000 28,000 700,000

A101 B102 C103 D104

$ $ $ $ REVENUE

Revenue to date

––––––– (150,000)––––––– (420,000) ––––––– –––––––0

COSTS

––––––– –––––––(60,000) (400,000) ––––––– –––––––0

PROFITS

––––––– –––––––(90,000) ––––––– (20,000) –––––––0

––––––– –––––––135,000 ––––––– (58,000) –––––––0

A101 B102 C103 D104

$ $ $ $

Foreseeable profits/(losses) 12,500

––––––– –––––––225,000 ––––––– (38,000) ––––––– 0

––––––– (650,000)––––––– (765,000) ––––––– ––––––– (20,000)

3 ORLICK

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset Title may or may not eventually be transferred

An operating lease is a lease other than a finance lease

This lease appears to be a finance lease The lease term is six-years (because it is almost certain that Orlick will contract to lease the asset for the secondary period) which is equal to the useful life of the asset At the end of this second period, the useful economic life of the asset is expected to be negligible The present value of the minimum lease payments is:

(1·10)

$760,000 +

(1·10)

$760,000

2 + (1·10)

$760,000

(1·10)

$760,000

4

Which is approximately equal to $2·4 million, the fair value of the asset The profit or loss will show depreciation as an operating expense The asset will be depreciated over six years, which is both the lease term and the useful economic life of the asset Therefore (assuming a straight line basis of deprecation) the annual depreciation will be $400,000 The profit or loss will also show a finance cost of $240,000, being the “interest” on the effective borrowing of

$2·4 million at 10%

The statement of financial position will show property, plant and equipment at a depreciated cost of $2 million ($2·4 million – $400,000) The effective borrowing will be shown as a liability, split between current and non-current liabilities In order to compute the split, it is necessary to “profile” the effective loan for the first two years as shown below:

Year Opening Finance Cash Closing

Balance Cost Paid Balance

Therefore the total liability at the end of year 1 is $1,880,000, of which $1,308,000 is non-current and $572,000 ($1,880,000 – $1,308,000) non-current

Marking Scheme

Marks

––

––

Disclosures

––

––

FL definition

OL Definition

Discussion of points, 1 mark for each relevant point to max

Interest expense

PPE value

Non current liability

Current liability

2

1

3

1

1

1

1 ––