ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Practice questions
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28 Faye
Faye set up a new subsidiary, Bob, on 1 January Year 3 and subscribed for all the
issued $1 ordinary shares of Bob, paying par value ($1 per share). The draft
statements of financial position of the two entities on 31 December Year 3 showed
the following.
Faye Bob
$ $ $ $
Non-current assets
Property, plant and equipment at cost 10,000
3,000
Minus depreciation (5,000)
(1,000)
–
–––––
5,000
–
–––––
2,000
Investment in subsidiary
2,000
-
–
–––––
–
–––––
7,000
2,000
Current assets
Inventories 12,000
4,000
Receivables 15,000
2,000
Cash at bank 20,000
1,000
–
–––––
47,000
–
–––––
7,000
–
–––––
–
–––––
54,000
9,000
–
–––––
–
–––––
Capital and reserves
Ordinary share capital $1 shares) 30,000
2,000
Accumulated profits 13,000
2,000
–
–––––
43,000
–
–––––
4,000
Current liabilities
Payables
11,000
5,000
–
–––––
–
–––––
54,000
9,000
–
–––––
–
–––––
Required
Prepare a consolidated statement of financial position as at 31 December Year 3.
29 Major – Part 1
Major acquired 100,000 ordinary shares in Minor on 1 September Year 3 when the
retained earnings of Minor were $10,000. Major also bought 20,000 of the 25,000 8%
loan notes, which Minor had in issue. There was no trading between the two
entities. Minor always pays all debenture interest on the final day of each
accounting period.
The draft statements of financial position of the two entities as of 31 August Year 4
are as shown below.
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Major
Minor
$
$
Non-current assets at net book value 30,000
50,000
Investment in Minor
- Shares at cost 80,000
-
- Loan notes at cost 20,000
-
Inventories 25,000
30,000
Receivables 10,000
40,000
Cash at bank 10,000
-
–
––––––
–
––––––
175,000
120,000
–
––––––
–
––––––
Ordinary share capital ($1 shares) 100,000
-
Ordinary share capital (50 cent shares) -
50,000
Retained earnings 60,000
25,000
8% loan notes -
25,000
Payables 15,000
20,000
–
––––––
–
––––––
175,000
120,000
–
––––––
–
––––––
Required
(a) Prepare a consolidated statement of financial position as at 31 August Year 4
using the figures above and assuming that no impairment had taken place in
the value of goodwill.
(b) Explain how your answer would differ if you are told that goodwill has
suffered an impairment amounting to $5,000.
30 Major – Part 2
Refer back to the data in Question 29.
The facts are the same except that you are now provided with the following
additional information concerning the fair values of Minor’s assets at acquisition on
1 September Year 3.
The fair value of the non-current assets is $25,000 in excess of the carrying value.
The inventories were found to be overvalued by $5,000. This inventory was sold by
31 August Year 4.
Required
Prepare a revised consolidated statement of financial position as at 31 August Year
4.
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31 Harry
Harry acquired control of Sally on 1 August Year 3, subscribing for 3 million of the 4
million $1 ordinary shares issued by Sally. The net assets of Sally, as reported in its
statement of financial position at this date, amounted to $10 million. There was no
trading between the two entities, but Harry made a five year, interest free, loan to
Sally on 1 December Year 3.
The draft statements of financial position of the two companies as of 31 July Year 4
were as follows.
Harry
Sally
$000 $000 $000
$000
Non-current assets
Property, plant and equipment
at net book value
41,000 -
Freehold land at cost in Year 2 - 10,000
Investment in subsidiary 12,000 -
–
––––––
53,000
–
––––––
10,000
Current assets
Inventories 20,000 16,000
Loan to Sally 5,000 -
Other receivables 25,000 15,000
–
––––––
50,000
–
––––––
31,000
–
––––––
–
––––––
103,000
41,000
–
––––––
–
––––––
Equity
Ordinary share capital ($1
shares)
40,000 4,000
Retained earnings 36,000 8,000
–
––––––
76,000
–
––––––
12,000
Current liabilities
Payables 27,000 24,000
Loan from Harry - 5,000
–
––––––
–
––––––
27,000
29,000
–
––
–
–
––
–
––––––
103,000
41,000
–
––––––
–
––––––
The fair value of Sally's land at the date of acquisition was $12 million.
Goodwill has suffered impairment of $2,000 since acquisition.
For purposes of consolidation, the parent company measures the non-controlling
interest (NCI) in Sally at the NCI’s proportionate share of the identifiable net assets
of Sally (the ‘traditional’ or ‘old’ method).
Required
Prepare a consolidated statement of financial position as at 31 July Year 4.
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32 Max
Max acquired 100% of Min several years ago. Their draft income statements for the
year ended 31 December Year 3 are as follows.
Max
Min
$
$
Revenue 216,300
24,400
Cost of sales (136,269)
(15,372)
–
––––––––
–
––––––––
Gross profit 80,031
9,028
Distribution costs and administrative expenses (21,630)
(2,440)
Income from shares in group companies 1,952
-
–
––––––––
–
––––––––
Profit before tax 60,353
6,588
Income tax expense (28,119)
(3,172)
–
––––––––
–
––––––––
Profit for the period 32,234
3,416
–
––––––––
–
––––––––
Dividends paid were 20,000
1,952
–
––––––––
–
––––––––
The goodwill on acquisition has suffered impairment of $4,000 during the current
period.
Required
Prepare the consolidated income statement for the year ended 31 December Year 3.
33 Bruce
Bruce acquired 80% of Gavin on 1 December Year 2. Their draft income statements
for the year ended 30 April Year 3 are as follows.
Bruce Gavin
$ $
Revenue 4,418 2,726
Cost of sales (1,974) (1,218)
–
–––––
–
–––––
Gross profit 2,444 1,508
Administrative expenses (752) (464)
–
–––––
–
–––––
Profit before tax 1,692 1,044
Income tax expense (799) (493)
–
–––––
–
–––––
Profit for the year 893 551
–
–––––
–
–––––
No impairment of goodwill has taken place during the year to 30 April Year 3.
Required
Prepare the consolidated income statement for the year ended 30 April Year 3,
showing the allocation of the profit for the year between the amount attributable to
the owners of the parent company and the amount attributable to the non-
controlling interest in the subsidiary.
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34 Hack and Sack
Hackacquired6millionsharesofSackon1JulyYear3.Thepurchaseconsideration
was1newshare in Hackfor every2sharesinSack. The valueof Hackshareswas
$8.50.Priortotheacquisition,sharesinSackweretradingat$3.90each.
Thedirectly‐attributablecosts of
theacquisitionwere$400,000.
Hack has chosen to use the fair value method for measuring non‐controlling
interestsinSack,aspermittedbyIFRS3(revised).
Thefollowingsummarybalancesheetsasat30JuneYear4havebeenprepared,but
theseexcludetheaccountingentriesnecessaryfortheacquisition
oftheinvestment
inSackandfortheacquisitionexpenses.
Summarystatementsof
financialpositionat30June
Year4
Hack Sack
$million$million
Assets:
Non‐currentassets 38.0 29.0
Currentassets 14.0 8.0
–
–––––––––––––
52.0 37.0
–
–––––––––––––
Equity
Equitysharesof$1each 10.0 8.0
Sharepremium 7.0 4.0
Retainedearningsat1JulyYear3 24.0 16.0
Retainedprofitforyearto30JuneYear4 3.0 2.0
–
–––––––––––––
44.0 30.0
Non‐currentliabilities:6%loannotes 5.0 5.0
Currentliabilities 3.0 2.0
–
–––––––––––––
52.0 37.0
–
–––––––––––––
ThevaluesoftheassetsandliabilitiesofSackreflecttheirfairvalues.Therehasbeen
noimpairmentinconsolidatedgoodwillsincetheacquisition.
Required
(a) Prepare a consolidated statement offinancial position forthe Hack Groupas
at30JuneYear4.
(b) Specify how the consolidated statement of
financial position would be
different if it had been the accounting policy of Hack to measure non‐
controllinginterestsattheirproportionateshareofthenetassetsofSack.
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35 Holdings
The draft statement of financial position of Holdings on 31 December Year 5 shows
a current account balance receivable from Subsidiary of $25,000.
At the same date, the draft statement of financial position of Subsidiary shows
payables due to Holdings of $20,000.
You are told that Subsidiary sent a payment of $3,000 to Holdings on 31 December
which has not been reflected in the draft statement of financial position of Holdings.
On the same date, Holdings sold goods to Subsidiary at a price of $2,000. The
purchase was not reflected in the draft statement of financial position of Subsidiary.
Required
Set out the consolidation adjustments necessary to record the above information.
36 Polly
Polly and its 100% owned subsidiary, Solly, had the following revenue and cost of
sales in the year ended 31 January Year 4. Polly has owned Solly throughout the
period.
Polly Solly
$000 $000
Revenue 800 500
Cost of sales (600) (300)
–
––––
–
––––
Gross profit 200 200
–
––––
–
––––
Included in these figures are sales of $50,000 by Solly to Polly. All these goods have
been sold on by Polly to its customers before 31 January Year 4.
Required
(a) Show the figures to be reported in the consolidated income statement for
revenue, cost of sales and gross profit for the year based on the information
above.
(b) You are now told that
one half of the goods sold by Solly to Polly remain in the inventory of Polly
on 31 January Year 4, and
Solly sold the goods to Polly at a mark-up of 25% on cost.
Re-compute the consolidated figures for revenue, cost of sales and gross profit
for the year.
(c) Show how your answer to (b) above would differ if Solly sold the goods at a
gross margin of 25%.
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37 Parent
Parent has owned 90% of the share capital of Son for many years.
During the year to 31 December Year 4 Son sold goods to Parent for $300,000. This
amount reflected a mark-up of one third on the cost to Son.
Goods which cost Parent $30,000 were still in inventory on 31 December Year 4.
The income statements of each entity for the year are summarised below.
Parent Son
$000 $000
Revenue 900 700
Cost of sales (500) (400)
–
–––
–
–––
Gross profit 400 300
Administrative expenses (250) (180)
–
–––
–
–––
Profit before tax 150 120
Tax expense (50) (40)
–
–––
–
–––
Profit for the year 100 80
–
–––
–
–––
Required
Prepare the consolidated income statement for the year ended 31 December Year 4,
showing the allocation of the profit for the year between the amount attributable to
the owners of the parent company and the amount attributable to the non-
controlling interest in the subsidiary.
38 Porthos
Porthos acquired 30% of the equity shares in Aramis (which satisfies the definition
of associate) during Year 1 at a cost of $350,000 when the fair value of the net assets
of Aramis was $250,000. Since that time, the investment in Aramis has been
impaired by $4,000.
On 31 December Year 5, the net assets of Aramis were $400,000. Since the date of
acquisition, there have been no changes in the share capital of Aramis or in any
reserves other than retained earnings.
In the year to 31 December Year 5, the profits of Aramis after tax were $50,000.
Required
Show how the holding in Aramis would be reflected in the Year 5 consolidated
statement of financial position and consolidated income statement.
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39 Anna
On 31 December Year 5, an associate, Anna, holds inventory which is valued at
$32,000 purchased during the year from its investor entity, Paula. At the same date,
Paula holds inventory purchased from a subsidiary, Susie, which is valued at
$80,000.
Sales from Paula to Anna and from Susie to Paula are priced at a mark-up of one-
quarter on cost.
Paula owns 30% of Anna and 60% of Susie.
Required
Set out the adjustments necessary to reflect any unrealised profit in the above in the
consolidated statement of financial position.
40 Sam
Sam imports and retails wine. Extracts from the financial statements for this year
and last are set out below.
Income statements for the years ended 30 September
Year 7 Year 6
$000 $000
Revenue 2,160 1,806
Cost of sales (1,755) (1,444)
–
–––––
–
–––––
Gross profit 405 362
Distribution costs (130) (108)
Administrative expenses (260) (198)
–
–––––
–
–––––
Profit before tax 15 56
Income tax expense (6) (3)
–
–––––
–
–––––
Profit for the period 9 53
–
–––––
–
–––––
Statements of financial position as of 30 September
Year 7
Year 6
$000 $000 $000
$000
Assets
Non-current assets
Property, plant and equipment 78
72
Current assets
Inventories 106 61
Trade receivables 316 198
Cash - 6
–
––––
422
–
––––
265
–
––––
–
–
–––
Total assets 500
337
–
––––
–
––––
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Equity and liabilities
Equity
Ordinaryshares 110 85
Preference shares 23 11
Share premium 15 -
Revaluation reserve 20 20
Retained earnings 78 74
–
––––
246
–
––––
190
Current liabilities
Bank overdraft 49 -
Trade payables 198 142
Current tax payable 7 5
–
––––
254
–
––––
147
–
––––
–
––––
Total equity and liabilities 500
337
–
––––
–
––––
Required
Comment critically on Sam’s results, using appropriate ratios.
41 Chris and Caroline
The income statements and statements of financial position of two manufacturing
companies in the same sector are set out below.
Chris Caroline
$ $
Revenue 150,000 700,000
Cost of sales (60,000) (210,000)
–
–––––––
–
–––––––
Gross profit 90,000 490,000
Interest payable (500) (12,000)
Distribution costs (13,000) (72,000)
Administrative expenses (15,000) (35,000)
–
–––––––
–
–––––––
Profit before tax 61,500 371,000
Income tax expense (16,605) (100,170)
–
–––––––
–
–––––––
Profit for the period 44,895 270,830
–
–––––––
–
–––––––
Chris
Caroline
$ $ $
$
Assets
Non-current assets
Property - 500,000
Plant and equipment 190,000 280,000
–
––––––
190,000
–
––––––
780,000
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Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 500 22,000
–
––––––
50,000
–
––––––
153,250
–
––––––
–
––––––
Total assets 240,000
933,250
–
––––––
–
––––––
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
–
––––––
207,395
–
––––––
565,580
Non-current liabilities
Long-term debt 10,000
250,000
Current liabilities
Trade payables 22,605
117,670
–
––––––
–
––––––
Total equity and liabilities 240,000
933,250
–
––––––
–
––––––
Required
Using ratio analysis, briefly compare the profitability, efficiency/liquidity and
solvency of the two entities. State, giving reasons, which is the stronger company in
each case.