ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Practice questions
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Required
Show how the above transactions should be reflected in the financial statements of
Katie for the year ended 30 June Year 2. Where any accounting standards allow a
choice you should show all possible options.
12 Victoria
Victoria owns several properties and has a year end of 31 December. Wherever
possible, Victoria carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of $1 million, comprising
$500,000 for land and $500,000 for buildings. The buildings have a useful life of 40
years. Victoria uses this property as its head office.
Property 2 was acquired many years ago for $1.5 million for its investment
potential. On 31 December Year 7 it had a fair value of $2.3 million. By 31 December
Year 8 its fair value had risen to $2.7 million. This property has a useful life of 40
years.
Property 3 was acquired on 30 June Year 2 for $2 million for its investment
potential. The directors believe that the fair value of this property was $3 million on
31 December Year 7 and $3.5 million on 31 December Year 8. However, due to the
specialised nature of this property, these figures cannot be corroborated. This
property has a useful life of 50 years.
Required
(a) For each of the above properties briefly state how it would be treated in the
financial statements of Victoria for the year ended 31 December Year 8,
identifying any impact on profit or loss.
(b) Produce an analysis of property, plant and equipment for Victoria for the year
ended 31 December Year 8, showing each of the above properties separately.
13 Henry
During Year 2 Henry has the following research and development projects in
progress.
Project A was completed at the end of Year 1. Development expenditure brought
forward at the beginning of Year 2 was $412,500 on this project. Savings in
production costs arising from this project are first expected to arise in Year 2. In
Year 2 savings are expected to be $100,000, followed by savings of $300,000 in Year 3
and $200,000 in Year 3.
Project B commenced on 1 April Year 2. Costs incurred during the year were
$56,000. In addition to these costs a machine was purchased on 1 April Year 2 for
$30,000 for use on the project. This machine has a useful life of five years. At the end
of Year 2 there were still some uncertainties surrounding the completion of the
project.
Project C had been started in Year 1. In Year 1 the costs relating to this project of
$36,700 had been written off, as at the end of Year 1 there were still some
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uncertainties surrounding the completion of the project. Those uncertainties have
now been resolved and a further $45,000 costs incurred during the year.
Required
Show how the above would appear in the financial statements (including notes to
the financial statements) of Henry as of 31 December Year 2.
14 Toby
Toby entered into the following transactions during the year ended 31 December
Year 1. The directors of Toby wish to capitalise all assets wherever possible.
(1) On 1 January Toby acquired the net assets of George for $105,000. The assets
acquired had the following book and fair values.
Book value Fair value
$
$
Goodwill 5,000
5,000
Patents 15,000
20,000
Non-current assets 40,000
50,000
Other sundry net assets 30,000
25,000
–
––––––
–
–––––––
90,000
100,000
–
––––––
–
–––––––
The patent expires at the end of Year 8. The goodwill arising from the above
had a recoverable value at the end of Year 1 of $7,000.
(2) On 1 April Toby acquired a brand from a competitor for $50,000. The directors
of Toby have assessed the useful life of the brand as five years.
(3) During the year Toby spent $40,000 on developing a new brand name. The
development was completed on 30 June. The useful life of this brand has been
assessed as eight years.
(4) The directors of Toby believe that there is total goodwill of $2 million within
Toby and that this has an indefinite useful life.
Required
Prepare the note to the financial statements for intangible assets as at 31 December
Year 1.
15 Charlotte
The following is relevant to three tangible non-current assets held by Charlotte.
Machine 1 was purchased on 1 January Year 1 for $420,000. It had an estimated
residual value of $50,000 and a useful life of ten years and was being depreciated on
a straight-line basis. On 1 January Year 6 Charlotte revalued this machine to
$275,000 and reassessed its total useful life as fifteen years. On 1 January Year 7 an
impairment review showed machine 1’s recoverable amount to be $100,000 and its
remaining useful life to be five years.
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Machine 2 was purchased on 1 January Year 1 for $500,000. It had an estimated
residual value of $60,000 and a useful life of ten years and was being depreciated on
a straight-line basis. On 1 January Year 7 this machine was classified as held for sale,
at which time its fair value was estimated at $200,000 and costs to sell at $5,000. On
31 March Year 7 the machine was sold for $210,000.
Machine 3 was purchased on 1 January Year 1 for $600,000. In Year 1 depreciation
of $30,000 was charged. On 1 January Year 2 this machine was revalued to $800,000
and its remaining useful life assessed as eight years. On 1 January Year 7 this
machine was classified as held for sale, at which time, its fair value was estimated at
$550,000 and costs to sell at $5,000. On 31 March Year 7 the machine was sold for
$550,000.
Tax is at the rate of 30%.
Required
For each machine show the effect of the above on profit or loss, other
comprehensive income and revaluation reserve of Charlotte in Year 7. You should
also show the brought forward balance on the revaluation reserve (at 1 January Year
7) in respect of machines 1 and 3.
Henrietta was formed on 1 January Year 1. The entity manufactures and sells a
single product and values it on a first-in, first-out basis. The following details relate
to Year 1.
16 Henrietta
Purchases of raw materials
Purchases: 1,000 tonnes of raw materials per week
Price: $100 per tonne on 1 January, increasing to
$150 per tonne on 1 July
Import duties: $10 per tonne
Transport from docks to factory: $20 per tonne
Production costs
Production capacity: 1,500 tonnes per week
Variable costs: $25 per tonne
Fixed costs: $30,000 per week
Sales details
Selling price: $240 per tonne
Delivery costs to customers: $8 per tonne
Selling costs: $4 per tonne
Inventories at 31 December Year 1
Raw materials: 2,000 tonnes
Finished goods: 2,000 tonnes
Required
Calculate and disclose the value of inventories on 31 December Year 1 in accordance
with IAS2.
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17 Anabelle
On 31 March Year 5 Anabelle had four construction contracts in progress. Details
are set out below.
Contract
A
Contract
B
Contract
C
Contract
D
$000
$000
$000 $000
Contract price 1,850
750
960 800
Costs to date 1,490
590
405 120
Estimated future costs -
25
600 480
Work certified at 31 March Year 5 1,850
695
480 120
Profits taken in earlier years 190
-
- -
Revenue taken in earlier years 990
100
- -
Progress billings to date 1,850
690
650 100
Cash received to date 1,850
600
600 100
All contracts are expected to take more than 12 months to complete. Contract A was
completed during the year. Contract C commenced on 1 May Year 4. Contract D
commenced on 1 January Year 5. It is not considered possible on 31 March Year 5 to
assess the outcome of Contract D with any certainty.
Anabelle recognises revenue in respect of construction contracts on the percentage
of completion basis, based on the proportion of total costs incurred to date.
Required
Show how the above would be included or disclosed in the financial statements of
Annabelle for the year ended 31 March Year 5. Work to the nearest $000.
18 Michael
On 1 January Year 1 Michael has the following capital and reserves.
Equity
$
Share capital ($1 ordinary shares) 1,000,000
Share premium 200,000
Retained earnings 5,670,300
–
–––––––––
6,870,300
–
–––––––––
During Year 1 the following transactions took place.
1 January An issue of $100,000 8% $1 redeemable preference shares at a premium
of 60%. Issue costs are $2,237. Redemption is at 100% premium on 31
December Year 5. The effective rate of interest is 9.5%.
31 March An issue of 300,000 ordinary shares at a price of $1.30 per share. Issue
costs, net of tax benefit, were $20,000
30 June A 1 for 4 bonus issue of ordinary shares.
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Profit for the year, before accounting for the above, was $508,500. The dividends on
the redeemable preference shares have been charged to retained earnings.
Required
Set out capital and reserves and liabilities resulting from the above on 31 December
Year 1.
19 Finley
On 1 January Year 4, Finley entered into an agreement to lease a boat. The fair value
of the boat was $36,000 and the term of the lease was four years. Annual lease
payments of $10,000 are payable in advance. The interest rate implicit in the lease is
7.5%. Finley is responsible for insuring and maintaining the boat throughout the
term of the lease.
Required
Show how this lease would be presented in the income statement of Finley for the
year ended 31 December Year 4 and the statement of financial position as at that
date. Detailed disclosure notes are not required.
20 Fabian
In the year ended 31 December Year 7, Fabian leased two assets.
(1) A car was leased on 1 July Year 7 via a three year lease agreement. Fabian paid
a deposit of $7,500 followed by 36 monthly payments of $700 each on the 1st
of each month. At the end of the three years Fabian will return the car. The car
has a useful life of eight years.
(2) A machine was leased on 1 January Year 7 via a four year lease. The machine
has a fair value of $130,000 and Fabian is responsible for its upkeep. Lease
payments of $40,000 are payable in arrears annually. The interest rate implicit
in the lease is 10% and the present value of the minimum lease payments is
$126,760.
Required
Show how the two lease agreements would be presented in the income statement
for Year 7 and the statement of financial position at 31 December Year 7. Notes to
the financial statements are not required.
21 Georgina
Georgina Company is preparing its financial statements for the year ended 30
September Year 7. The following matters are all outstanding at the year end.
(1) Georgina is facing litigation for damages from a customer for the supply of
faulty goods on 1 September Year 7. The claim, which is for $500,000, was
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received on 15 October Year 7. Georgina’s legal advisors consider that
Georgina is liable and that it is likely that this claim will succeed. On 25
October Year 7 Georgina sent a counter-claim to its suppliers for $400,000.
Georgina’s legal advisors are unsure whether or not this claim will succeed.
(2) Georgina’s sales director, who was dismissed on 15 September, has lodged a
claim for $100,000 for unfair dismissal. Georgina’s legal advisors believe that
there is no case to answer and therefore think it is unlikely that this claim will
succeed.
(3) Although Georgina has no legal obligation to do so, it has habitually operated
a policy of allowing customers to return goods within 28 days, even where
those goods are not faulty. Georgina estimates that such returns usually
amount to 1% of sales. Sales in September Year 7 were $400,000. By the end of
October Year 7, prior to the drafting of the financial statements, goods sold in
September for $3,500 had been returned.
(4) On 15 September Year 7 Georgina announced in the press that it is to close one
of its divisions in January Year 8. A detailed closure plan is in place and the
costs of closure are reliably estimated at $300,000, including $50,000 for staff
relocation.
Required
State, with reasons, how the above should be treated in Georgina’s financial
statements for the year ended 30 September Year 7.
22 Olivia
The following information is relevant to the financial statements of Olivia for the
year ended 31 March Year 8.
(1) During the year Olivia made sales of $5,570,500 and purchases of $4,789,400,
both net of government sales tax at 15%. During the year ended 31 March Year
8 Olivia paid $113,700 in sales taxes.
(2) Olivia made profit before tax for the year of $345,900. Taxable profits were
$379,600. In addition to the settlement of the opening liability, during the year
Olivia paid current tax on account of $10,000. The current tax rate is 30%.
(3) During the year Olivia received interest of $30,000 on which tax of $9,000 was
withheld. Olivia paid interest of $20,000 on which tax of $6,000 was withheld.
(4) The deferred tax provision at 31 March Year 8 has been calculated at $35,500.
Liabilities on 1 April Year 7 included the following.
$
Government sales taxes 25,600
Current tax 15,500 (settled during the year at $16,200)
Deferred tax 32,700
Required
Show how the above would be included or disclosed in the financial statements of
Olivia for the year ended 31 March Year 8.
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23 Francesca
On 30 June Year 2 Francesca Company had a credit balance on its deferred tax
account of $1,340,600 all in respect of the difference between depreciation and
capital allowances.
During the year ended 30 June Year 3 the following transactions took place.
(1) $45 million was charged against profit in respect of depreciation. The tax
computation showed capital allowances of $50 million.
(2) Interest receivable of $50,000 was reflected in profit for the period. However,
only $45,000 of interest was actually received during the year. Interest is not
taxed until it is received.
(3) Interest payable of $32,000 was treated as an expense for the period. However,
only $28,000 of interest was actually paid during the year. Interest is not an
allowable expense for tax purposes until it is paid.
(4) During the year Francesca incurred development costs of $500,600, which it
has capitalised. Development costs are an allowable expense for tax purposes
in the period in which they are paid.
(5) Land and buildings with a net book value of $4,900,500 were revalued to $6
million.
The tax rate is 30%. Francesca has a right of offset between its deferred tax liabilities
and its deferred tax assets.
Required
Calculate the deferred tax liability on 30 June Year 3. Show where the increase or
decrease in the liability in the year would be charged or credited.
24 Mary
On 1 January Year 5, Mary had 5 million ordinary shares in issue. The following
transactions in shares took place during the next year.
1 February A 1 for 5 bonus issue
1 April A 1 for 2 rights issue at $1 per share. The market price of the shares
prior to the rights issue was $4.
1 June An issue at full market price of 800,000 shares.
In Year 5 Mary made a profit before tax of $3,362,000. It paid ordinary dividends of
$1,200,000 and preference dividends of $800,000. Tax was $600,500. The reported
EPS for Year 4 was $0.32.
Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative
purposes.
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25 Mandy
Mandy has had 5 million shares in issue for many years. Earnings for the year
ended 31 December Year 4 were $2,579,000. Earnings for the year ended 31
December Year 3 were $1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of
years. These can be exercised at a future date at a price of $3 per share. The average
market price of shares in Year 3 was $4 and in Year 4 was $5.
On 1 April Year 3 Mandy issued $1,000,000 convertible 7% bonds. These are
convertible into ordinary shares at the following rates.
On 31 December Year 6 30 shares for every $100 of bonds
On 31 December Year 7 25 shares for every $100 of bonds
On 31 December Year 8 20 shares for every $100 of bonds
Required
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3.
26 Bella
The financial statements of Bella include the following.
Statements of financial position as at 31 March
Year 6
Year 5
$000 $000 $000
$000
Assets
Non-current assets
Property, plant and equipment 12,900 8,000
Intangible assets 800 300
–
––––––
13,700
–
––
–
–
–
8,300
Current assets
Inventories 280 100
Trade and other receivables 1,290 1,350
Cash 55 45
–
––––––
1,625
–
–––––
1,495
–
––––––
–
–––––
Total assets 15,325
9,795
–
––––––
–
–––––
Equity and liabilities
Equity
Share capital ($1 ordinary
shares)
1,900 1,100
Share premium 95 30
Retained earnings 11,407 7,540
–
––––––
13,402
–
–––––
8,670
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Non-current liabilities
Long-term loans 600 500
–
––––––
600
–
–––––
500
Current liabilities
Bank overdraft (repayable on
demand)
313 -
Trade and other payables 430 275
Interest payable 40 25
Current tax payable 540 325
–
––––––
1,323
–
–––––
625
–
––––––
–
––––––
Total equity and liabilities 15,325
9,795
–
––––––
–
––––––
Income statement for the year ended 31 March Year 6 (extract)
$000
Profit from operations 4,677
Interest
p
a
y
able (60)
–
–––––
Profit before tax 4,617
Income tax ex
p
ense (400)
–
–––––
Profit for the
p
eriod 4,217
–
–––––
The following occurred during the year.
(1) Dividends of $350,000 were paid.
(2) New plant was purchased for $6 million.
(3) Old plant which had a net book value of $800,000 was sold for $700,000.
(4) Shares were issued.
Required
Prepare a statement of cash flows for the year ended 31 March Year 6 using the
indirect method.
27 Chester
The financial statements of Chester include the following.
Statements of financial position as at 31 December
Year 5
Year 4
$000 $000 $000
$000
Assets
Non-current assets
Property, plant and equipment 3,900
2,500
Current assets
Inventories 480 320
Interest receivable 40 20
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Trade receivables 560 570
Cash 40 25
–
–––––
1,120
–
–––––
935
–
–––––
–
–––––
Total assets 5,020
3,435
–
–––––
–
–––––
Equity and liabilities
Equity
Share capital ($1 ordinary shares) 1,100 800
Share premium 200 50
Retained earnings 3,150 2,115
–
–––––
4,450
–
–
––––
2,965
Current liabilities
Trade and other payables 340 320
Current tax payable 230 150
–
–––––
570
–
–––––
470
–
–––––
–
–––––
Total equity and liabilities 5,020
3,435
–
–––––
–
–––––
Income statement for the year ended 31 December Year 5
$000
Revenue 3,500
Cost of sales (1,400)
–
–––––
2,100
Interest receivable 50
Distribution costs (400)
Administrative expenses (340)
–
–––––
Profit before tax 1,410
Income tax expense (200)
–
–––––
Profit for the period 1,210
–
–––––
The following is relevant to Year 5.
(1) Depreciation for the year was $500,000.
(2) New plant was purchased.
(3) Old plant which had a net book value of $350,000 was sold for $400,000.
(4) Shares were issued.
(5) The only movement on accumulated profits, other than the profit for the
period, was dividends paid.
(6) Cash paid to and behalf of employees amounted to $260,000.
Required
Prepare a statement of cash flows for the year ended 31 December Year 5 using the
direct method.