ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Paper F7 (INT)
Financial Reporting
Q&A
Practice questions
Contents
Page
The conceptual framework
1 Definitions
478
Recognition and measurement
2 Carrie
478
3 David
478
Accounting for the substance of transactions
4 Peter
479
The regulatory framework
The financial statements of a single company
5 Larry
479
6 Barry
480
Reporting financial performance
7 Duncan
481
8 Saul
481
9 Richard
483
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Tangible non-current assets
10 Carly
483
11 Katie
484
12 Victoria
485
Intangible assets
13 Henry
485
14 Toby
486
Impairment of assets
15 Charlotte
486
Inventory
16 Henrietta
487
17 Anabelle
488
Financial assets and financial liabilities
18 Michael
488
Leases
19 Finley
489
20 Fabian
489
Provisions, contingent liabilities and
contingent assets
21 Georgina
489
Taxation
22 Olivia
490
23 Francesca
491
Earnings per share
24 Mary
491
25 Mandy
492
Practice questions
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Statements of cash flows
26 Bella
492
27 Chester
493
Consolidated accounts
28 Faye
495
35 Major – Part 1
495
30 Major – Part 2
496
31 Harry
497
32 Max
498
33 Bruce
498
34 Hack and Sack 499
Consolidated accounts: intra-group
adjustments
35 Holdings
500
36 Polly
500
37 Parent
501
Associates
38 Porthos
501
39 Anna
502
Analysis and interpretation of financial
statements
40 Sam
502
41 Chris and Caroline 503
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1 Definitions
“A statement of financial position is a snapshot of a business at a point in time. It
shows the assets that an entity owns and the liabilities that it owes. This is all that is
required to convey a business’s performance, position and adaptability.
As income generated and expenses incurred by a business are already reflected
within the assets and liabilities shown in the statement of financial position, an
income statement is a superfluous statement.”
Required
Briefly appraise the validity of the above statement, defining the words underlined.
(Note: The term ‘income statement’ should be taken to mean the section of the
statement of comprehensive income that reports the profit or loss for the reporting
period.)
2 Carrie
Carrie starts in business on 1 January Year 1. Carrie’s sole shareholder contributed
capital of $1,000. Carrie purchased one item of inventory for $1,000 and sold that
inventory for cash of $1,400. At the end of Year 1 the replacement cost of the same
item of inventory is $1,100. General inflation during the year was 7%.
Required
Calculate the profit for the year and set out a summary statement of financial
position as of 31 December Year 1 under the following capital maintenance
concepts.
(a) Physical capital maintenance
(b) Financial capital maintenance
(i) Historical cost accounting
(ii) Constant purchasing power accounting
3 David
David manufactures and sells machines. Customers are required to pay a deposit of
10% on order. The remaining 90% is paid on delivery.
Machines are delivered to customers by a third party. Within one week after
delivery, David’s employees install the machines on customers’ premises.
Installation costs are negligible and installation is straightforward.
Fees for after sales support and servicing for three years, amounting to 5% of the
total sales price, are included in the final invoice.
Required
Using the sale of a single machine with a selling price of $100,000 as an example,
state how the above should be treated in accordance with IAS18.
Practice questions
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4 Peter
The following transactions took place at Peter in the year ended 31 March Year 3.
(1) On 5 March Peter sold goods to a bank for $18,000 cash and agreed to
repurchase the goods for $20,000 cash on 5 April Year 3.
(2) Peter entered into a factoring arrangement in respect of $22,000 of trade
receivables outstanding on 31 March Year 3. Peter received cash for 75% of the
face value of the receivables on that date. Peter will receive a further 24% in
respect of receivables paying in April, 23% for those paying in May, with the
amount decreasing at 1% per month thereafter. The factor has recourse to
Peter for any bad debts.
(3) On 31 March Peter’s car manufacturing division consigned several vehicles to
independent dealers for sale to third parties. The sales price to the dealer is
Peter’s list price at the date of sale to third parties. If a vehicle is unsold after
six months, the dealer has a right to return the vehicle to Peter.
(4) On 31 March Peter sold a machine held in tangible non-current assets at a
carrying value of $467,000 to Anthony for $550,000. Peter immediately leased
the machine back under a finance lease.
Required
Discuss how the above transactions should be accounted for in the financial
statements of Peter for the year ended 31 March Year 3.
5 Larry
The trial balance of Larry at 31 December Year 1 is as follows.
$000
$000
Administration charges 342
Bank account 89
Cash 2
Payables’ ledger
86
Accumulated amortisation on patents at 31 December Year 1
5
Accumulated depreciation at 31 December Year 1
918
Receivables’ ledger 189
Distribution expenses 175
Property, plant and equipment at cost 2,830
Interest received
20
Issued share capital
400
Loan
18
Patents at cost 26
Accumulated profits
1,562
Purchases 2,542
Sales
3,304
Inventories at 31 December Year 0 118
–––––
–
––––
6,313
6,313
–––––
–
––––
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The following information is also relevant.
(1) Inventories on 31 December Year 1 amounted to $127,000.
(2) Current tax of $75,000 is to be provided.
(3) The loan is repayable by equal annual instalments over three years.
Required
Prepare an income statement (analysing expenses by function) for the year ended 31
December Year 1 and a statement of financial position as at that date. Work to the
nearest $000.
6 Barry
Barry is a manufacturer of computer games. The following is his trial balance at 31
December Year 4.
$000
$000
Patent rights 60
Work-in-progress, 1 January `Year 4 125
Leasehold buildings at cost 300
Ordinary share capital
600
Sales
1,740
Staff costs 260
Accumulated depreciation on buildings, 1 January Year 4
60
Inventories of finished games, 1 January Year 4 155
Consultancy fees 44
Directors’ salaries 360
Computers at cost 50
Accumulated depreciation on computers, 1 January Year 4
20
Dividends paid 125
Cash 440
Receivables 420
Trade payables
92
Sundry expenses 294
Accumulated profits, 1 January Year 4
121
–
–––––
–
––
–
––
2,633
2,633
–
–––––
–
–––––
The following information is also relevant.
(1) Closing inventories of finished games are valued at $180,000. Work in
progress has increased to $140,000.
(2) The patent rights relate to a computer program with a three year lifespan.
(3) On 1 January Year 4 buildings were revalued to $360,000. This has not yet
been reflected in the accounts. Computers are depreciated over five years.
Buildings are now to be depreciated over 30 years.
(4) An allowance for bad debts (irrecoverable debts) of 5% is to be created.
(5) There is an estimated bill for current tax of $120,000 which has not yet been
accounted for.
Practice questions
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Required
Prepare an income statement (analysing expenses by nature) and a statement of
changes in equity for the year ended 31 December Year 4 and a statement of
financial position as at that date. Work to the nearest $000.
7 Duncan
Duncan Company has previously written off any expenditure on borrowing costs in
the period in which it was incurred. It has now decided to change its accounting
policy, as allowed by IAS23 Borrowing costs, to one of capitalisation where the costs
relate to the construction of a qualifying asset.
The financial statements for Year 1 and the Year 2 draft financial statements, both
reflecting the old policy, show the following.
Statement of changes in equity (extract)
Year 1 Year 2
Retained earnings Retained earnings
$000 $000
Opening balance 22,500 23,950
Profit after tax for the period 3,200 4,712
Dividends paid (1,750) (2,500)
–
––––
–
–
–
––––––
Closing balance 23,950 26,162
–
––––––
–
––––––
Borrowing costs written off were $500,000 in Year 1 and $600,000 in Year 2.
The directors have calculated that borrowing costs, net of depreciation which would
have been included in property, plant and equipment had the new policy been
applied, are as follows.
$000
At 30 December Year 0 400
At 31 December Year 1 450
At 31 December Year 2 180
Had the new policy been in force depreciation of $450,000 would have been charged
in Year 1 and $870,000 in Year 2.
Required
Show how the change in accounting policy will be reflected in the statement of
changes in equity for the year ended 31 December Year 2. Work to the nearest $000.
8 Saul
Saul operates its business through a number of divisions. It has a year end of 31
December. Set out below are extracts from the draft financial statements of Saul for
the year ended 31 December Year 1.
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Income statement for the year ended 31 December Year 1
$000
Revenue 3,900
Cost of sales (2,500)
–
–––––
Gross profit 1,400
Distribution costs (300)
Administrative expenses (800)
–
–––––
Profit before tax 300
Income tax expense (90)
–
–––––
Profit for the period 210
–
–––––
Statement of financial position at 31 December Year 1
Assets
$000 $000
Non-current assets
Property, plant and equipment 1,900
Intangible assets 40
–
–––––
1,940
Current assets
Inventories 350
Trade and other receivables 190
Cash 90
–
–––––
630
–
–––––
Total assets 2,570
–
–––––
Equity and liabilities
$000 $000
Equity
Share capital 600
Retained earnings 1,700
–
–––––
2,300
Current liabilities
Trade and other payables 195
Current tax payable 75
–
–––––
270
–
–––––
Total equity and liabilities 2,570
–
–––––
On 30 November Year 1 Saul made the decision to close Division A, which is located
in a different part of the country and covers a separate major line of business. This
decision was immediately announced to the press and to the workforce and, by the
end of Year 1, a buyer had been found.
The directors of Saul have calculated the following.
15% of the entity’s income and expenses for the year was attributable to Division
A.
No tax is attributable to Division A.
Practice questions
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Property, plant and equipment of $510,000 and payables of $10,000 in the above
statement of financial position relate to Division A. The fair value minus costs to
sell of the property, plant and equipment is $450,000.
Required
Redraft the above financial statements to meet the provisions of IFRS5 Non-current
assets held for sale and discontinued operations. Work to the nearest $000.
9 Richard
On 1 January Year 1 Richard had the following capital and reserves.
Equity
$000
Share capital ($1 ordinary shares) 2,000
Share premium 600
Capital reserve 500
Revaluation reserve 560
Retained earnings 460
–
–––––
4,120
–
–––––
During Year 1 Richard
made a loss after tax of $75,000
revalued a non-current asset with a carrying value of $260,000 to $350,000
issued 300,000 ordinary shares for $1.50 each
paid a dividend of $145,000.
Required
Prepare a statement of changes in equity for Richard for the year ended 31
December Year 1.
10 Carly
The following is an extract from the financial statements of Carly on 31 December
Year 0.
Property, plant and equipment
Land and
buildings
Plant and
equipment
Computer
s
Total
$
$
$ $
Cost
On 31 December Year 0 1,500,000
340,500
617,800 2,458,300
–
––––––––
–
––––––––
–
––––––––
––––––––––
Accumulated depreciation
On 31 December Year 0 600,000
125,900
505,800 1,231,700
–
–––
–
–
––––
–
––––––––
–
––––––––
––––––––––
Carrying amount
On 31 December Year 0 900,000
214,600
112,000 1,226,600
–
–––
–
–
––––
–
––––––––
–
––––––––
––––––––––
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Accounting policies
Depreciation
Depreciation is provided at the following rates.
On land and buildings – 2% per annum straight line on buildings only
On plant and equipment – 25% reducing balance
On computers – 33.33% per annum straight line
A full year’s deprecation is charge in the year of purchase and none in the year of
sale.”
During Year 1 the following transactions took place.
(1) On 31 December the land and buildings were revalued to $1,750,000. Of this
amount, $650,000 related to the land (which had originally cost $500,000). The
remaining useful life of the buildings was assessed as 40 years.
(2) A machine which had cost $80,000 and had accumulated depreciation of
$57,000 at the start of the year was sold for $25,000.
(3) A new machine was purchased, incurring the following costs.
$
Purchase price, before discount, inclusive of reclaimable
sales tax of $3,000 20,000
Discount 1,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300
(4) On 1 January it was decided to change the method of providing depreciation
on computer equipment from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the
financial statements of Carly for the year ended 31 December Year 1. Ignore
taxation.
11 Katie
During the year ended 30 June Year 2, Katie received three grants, the details of
which are set out below.
(1) On 1 September, a grant of $40,000 from local government. This grant was is
respect of training costs of $70,000 which Katie had incurred.
(2) On 1 November Katie bought a machine for $350,000. A grant of $100,000 was
received from central government in respect of this purchase. The machine,
which has a residual value of $50,000, is depreciated on a straight-line basis
over its useful life of five years.
(3) On 1 June a grant of $100,000 from local government. This grant was in respect
of relocation costs that Katie had incurred moving part of its business from
outside the local area. The grant is repayable in full unless Katie recruits ten
employees locally by the end of Year 2. Katie is finding it difficult to recruit as
the local skill base does not match the needs of this part of the business.