This can only be achieved if the substance of transactions is recorded.. If this did not happen the financial statements would not represent faithfully the transactions and other events
Trang 1Monitoring Test MT2A
Financial
Reporting
F7FR-MT2A-Z08-A
INTERNATIONAL
Trang 21 HUGHES INC
The consolidated statement of financial position of the Hughes Inc Group as at 30 September
2008 is as follows:
Group
$000 NON CURRENT ASSETS
Property, plant and equipment (5980+4275+100) 10,355
––––––
12,855 CURRENT ASSETS
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––––––
EQUITY AND LIABILITIES
––––––
12,390
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13,330 NON CURRENT LIABILITIES
CURRENT LIABILITIES
––––––
21,970 ––––––
WORKINGS
(1) Group structure
Hughes 30% Auden
80%
Scott
Trang 3(2) Net assets of Scott Inc
URP (100)
4,700 ––––– ––––– 4,400 –––––300
Net assets of Auden
URP (50)
5,050 ––––– ––––– 4,550 –––––500
(3) Goodwill
Less H% of NA’s at DOA
30% of 4,550
––––– (1,365)–––––
980 ––––– ––––– 180
The goodwill in respect of Auden is included in
“investment in associate”
Trang 4(4) Non-controlling interest
$000 Fair value of S net asset at reporting date 4,700
20% –––––
–––––
(5) Group retained earnings
$000
––––– 5,640 –––––
(6) Investment in Associate
$000
––––– 1,650 –––––
OR
$000
P % of As net assets at reporting date (30% × 5,050) 1,515
––––– 1,650 –––––
2 TARANTULA INC
(a) EPS
Earnings (Profit available to ordinary shareholders) 700
–––––
–––––
(b) EPS
–––––
Trang 5(c) EPS
–––––
–––––
–––––
(d) EPS
–––––
–––––
–––––
Rights issue bonus fraction
––––– 7 ––––––7,000 3000
––––– 9 ––––––27,000 Therefore bonus fraction is 10/9
(e) EPS
––––––
2,450 ––––––
Proceeds if options exercised (1,200 × 5) $6,000
If exercised at market value for $6000 would get 750 shares
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Trang 6(f) EPS
1.10 to 31.12 = 2000*3/12*7/5*10/9 777
––––––
––––––
––––––
Rights issue bonus fraction
–––––– 7 –––––– 11,550
Therefore bonus fraction is 10/9
3 FRAMEWORK
(a)
In order to be useful information contained in financial statements must be relevant and reliable This can only be achieved if the substance of transactions is recorded If this did not happen the financial statements would not represent faithfully the transactions and other events that had occurred Although there are many instances where there are genuine commercial reasons for contracts and transactions adopting the legal form that they do (eg to secure legal title), equally the legal form is often used to achieve less desirable purposes In general these amount to manipulating the financial statements to create a favourable impression The typical outcomes of such manipulation are:
̈ the omission of assets and particularly liabilities from statements of financial
position;
̈ improvements to profits and profit smoothing;
̈ improvements of other performance measures such as earnings per share, liquidity
ratios, profitability ratios and gearing
Clearly such effects are not helpful to users of financial statements and thus it is important that the substance of a transaction should be recorded in order to avoid the above distortions
Trang 7(b)
This transaction would be regarded as a financing transaction in that the company has not transferred the risks and rewards of ownership of the timber The timber will remain on the company’s statement of financial position as inventory and the loan (the proceeds) will appear
as a liability
The statement of financial position at the year end will show:
The statement of comprehensive income will show:
Calculation of the effective interest rate
Total finance charge over the term of the loan is:
$m
––––
––––
This must be spread to profits using the effective interest rate This is calculated as the IRR of the loan as follows:
5 56.1/40 – 1 = ).07 or 7%
The annual interest cost and the carrying value of the loan at each year end over the life of the loan is given below (this is not required in the question but is given for tutorial purposes)
Trang 8Marking Scheme
1 HUGHES INC
Marks
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––
2 TARANTULA
Marks
(a)
(b)
(c)
(d)
Trang 9(e)
(f)
––
21
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3 FRAMEWORK
Marks
Description of accounting rules – 1 mark a point to a maximum of 2
––
10
––