ACCA F7 (INT) Financial Reporting - Study text - 2010

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Answers to practice questions

(3) Allocation of costs

Change in

inventories

Staff

costs

Depreciation

etc

Other

expenses



$000 $000 $000 $000

Work-in-progress (140 – 125) (15)



Staff costs 260



Finished goods (180 – 155) (25)



Consultancy fees



Directors’ salaries 360



Doubtful receivables (420 × 5%)



Sundry



294

Amortisation of patent (W2) 20

Depreciation (12 + 10) (W1) 22



(40) 620 42 359

7 Duncan

Statement of changes in equity (extract)



Retained

earnings

Retained

earnings



Year 2 Year 1



$000 $000

Opening balance as reported 23,950 22,500

Change in accounting policy (W2) 450 400

–

––––––

–

––––––

Re-stated balance 24,400 22,900

Profit after tax for the period (W1) 4,442 3,250

Dividends paid (2,500) (1,750)

–

––

–

–––

–

––––––

Closing balance 26,342 24,400

–

––––––

–

––––––

Workings

(1) Revised profit



Year 2 Year 1



$000 $000

Per question 4,712 3,200

Add back: Expenditure for the year 600 500

Minus: Depreciation (870) (450)

–

–––––

–

–––––

Revised profit 4,442 3,250

–

–––––

–

–––––

(2) Prior period adjustment

The prior period adjustment is the reinstatement of the $400,000 asset on 1

January Year 1 and the $450,000 asset at 1 January Year 2. On 31 December

Year 2 the closing balance above of $26,342,000 can be reconciled as the

original $26,162,000 plus the reinstatement of the remaining asset of $180,000.

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8 Saul

Income statement for the year ended 31 December Year 1



$000

Continuing operations



Revenue 3,315

Cost of sales (2,125)

–

–––––

Gross profit 1,190

Distribution costs (255)

Administrative expenses (680)

–

–––––

Profit before tax 255

Income tax expense (90)

–

–––––

Profit for the period from continuing operations 165

Discontinued operations



Loss for the period from discontinued operations (W) (15)

–

–––––

Profit for the period 150

–

–––––

Statement of financial position as at 31 December Year 1



$000 $000

Assets



Non-current assets



Property, plant and equipment (1,900 – 510) 1,390

Intangible assets 40

–

–––––

1,430

Current assets



Inventories 350

Trade and other receivables 190

Cash 90

–

–––––

630



–

–––––

 

2,060

Non-current assets classified as held for sale



450



–

–––––

Total assets



2,510



–

–––––

Equity and liabilities



Equity



Share capital 600

Retained earnings (1,700 – 60) 1,640

–

–––––

2,240

Current liabilities



Trade and other payables (195 – 10) 185

Current tax payable 75

Liabilities classified as held for sale 10

–

–––––

270



–

–––––

Total equity and liabilities



2,510



–

–––––

Answers to practice questions

Tutorial note

Division A is classified as discontinued in Year 1 because, although it has not been

sold during the period it meets the IFRS5 criteria for classification as ‘held for sale’.

Working: Discontinued operation



Continuing

operations

Discontinued

operations

Total



$000 $000 $000

Revenue 3,315 585 3,900

Cost of sales (2,125) (375) (2,500)

–

–––––

–

–––

–

–––––

Gross profit 1,190 210 1,400

Distribution costs (255) (45) (300)

Administrative expenses (680) (120) (800)

Impairment loss (510 – 450) - (60) (60)

–

–––––

–

–––

–

–––––

Profit before tax 255 (15) 240

Income tax expense (90) - (90)

–

–––––

–

–––

–

–––––

Profit/(loss) for the period 165 (15) 150

–

–––––

–

–––

–

–––––

9 Richard

Statement of changes in equity for the year ended 31 December Year 1



capital

premium

Capital

reserve

Revaluation

reserve

Retained

earnings

Total



$000 $000 $000 $000 $000 $000

Balance at 1

January Year 1

2,000 600 500 560 460 4,120

Net revaluation

surplus in the year

(350 – 260)

- - - 90 - 90

Loss after tax for

the period

- - - - (75) (75)

Issue of share

capital

300 150 - - - 450

Dividends paid - - - - (145) (145)

–

––––

–

––––

–

––––

–

––––

–

––––

–

––––

Balance at 

 

31 December Year 1 2,300 750 500 650 240 4,440

–

––––

–

––––

–

––––

–

––––

–

–––

–

––––

10 Carly

Financial statements for the year ended 31 December Year 1 (extract)

Property, plant and equipment



Land and

buildings

Plant and

machinery

Computer

equipment

Total



$ $ $ $

Cost/valuation

  

At 1 January Year 1 1,500,000 340,500 617,800 2,458,300

Revaluation 250,000 - - 250,000

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Additions (W2) - 17,550 - 17,550

Disposals - (80,000) - (80,000)

–

–––––––––

–

–––––––

–

–––––––

–

–––––––––

At 31 December Year 1 1,750,000 278,050 617,800 2,645,850

–

–––––––––

–

–––––––

–

–––––––

–

–––––

–

––

Accumulated

depreciation

  

At 1 January Year 1 600,000 125,900 505,800 1,231,700

Revaluation (600,000) - - (600,000)

Charge for the year (W1) 27,500 52,287 44,800 124,587

Disposals - (57,000) - (57,000)

–

–––––––––

–

–––––––

–

–––––––

–

–––––––––

At 31 December Year 1 27,500 121,187 550,600 699,287

–

–––––––––

–

–––––––

–

–––––––

–

–––––––––

Carrying amount

  

At 31 December Year 0 900,000 214,600 112,000 1,226,600

–

–––––––––

–

–––––––

–

–––––––

–

–––––––––

At 31 December Year 1 1,722,500 156,863 67,200 1,946,563

–

–––––––––

–

–––––––

–

–––––––

–

–––––––––

Workings

(1) Depreciation charges

Buildings = (1,750,000 – 650,000) ÷ 40 = $27,500

Plant and machinery:



New machine (17,550 × 25%)

4,387

Existing plant (((340,500 – 80,000) – (125,900 – 57,000)) × 25%)

47,900

–

––––––



52,287

–

––––––

Computer equipment = 112,000 × 40% = $44,800

(2) Cost of new machine



Purchase price (20,000 – 3,000 – 1,000) 16,000

Delivery costs 500

Installation costs 750

Interest on loan taken out to finance the purchase 300

–

––––––



17,550

–

––––––

11 Katie

Option 1 – Net grants off related expenditure

Statement of financial position as at 30 June Year 2 (extracts)



Non-current assets



Property, plant and equipment 223,333

 

Current liabilities



Other current liabilities 100,000

Answers to practice questions

Notes to the financial statements for the year ended 30 June Year 2 (extracts)

Property, plant and equipment

Cost (350,000 – 100,000) 250,000

Accumulated depreciation ((250,000 – 50,000) ÷ 5 × 8/12)

(26,667)

–

–––––––

Carrying amount 223,333

–

–––––––

Included in income statement for the year ended 30 June Year 2



Depreciation charge 26,667

Training costs (70,000 – 40,000) 30,000

Option 2 – Show grants separately from related expenditure

Statement of financial position as at 30 June Year 2 (extracts)



Non-current assets

Property, plant and equipment 310,000



Current liabilities

Other current liabilities 186,667

Notes to the financial statements for the year ended 30 June Year 2 (extracts)



Property, plant and equipment



Cost 350,000

Accumulated depreciation ((350,000 – 50,000) ÷ 5 × 8/12)

(40,000)

–

–––––––

Carrying amount 310,000

–

–––––––

Other current liabilities 



Deferred income relating to government grants

(100,000 - (100,000 ÷ 5 × 8/12))

86,667

Government grant repayable 100,000

–

–––––––



186,667

–

–––––––

Included in income statement for the year ended 30 June Year 2



Depreciation charge 40,000

Training costs 70,000

Government grant received (40,000)

Release of deferred government grant (13,333)

Tutorial note

The $100,000 grant in (3) has conditions attached to it. In such a situation, IAS20

states that grants should not be recognised until there is reasonable assurance that

the entity will comply with any conditions attaching to the grant. Since Katie is

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struggling to recruit, and there is only one month left for recruitment to meet these

conditions, then it does not seem that there is ‘reasonable assurance’. Hence the

grant should not be recognised as such, but should be held in current liabilities,

pending repayment.

12 Victoria

(a) Treatment in the financial statements for the year ended 31 December Year 8

(IAS16)

Property 1

This is used by Victoria as its head office and therefore cannot be treated as an

investment property. It will be stated at cost minus accumulated deprecation

in the statement of financial position. The depreciation for the year will be

charged in the income statement.

Property 2

This is held for its investment potential and should be treated as an

investment property. It will be carried at fair value, Victoria’s policy of choice

for investment properties. It will be revalued to fair value at each year end and

any resultant gain or loss taken to the income statement ($400,000 in Year 8).

Property 3

This is held for its investment potential and should be treated as an

investment property. However, since its fair value cannot be arrived at

reliably it will be held at cost minus accumulated deprecation in the statement

of financial position. The depreciation for the year will be an expense in the

income statement.

This situation provides the exception to the rule whereby all investment

properties must be held under either the fair value model, or the cost model.

(b) Analysis of property, plant and equipment for the year ended 31 December

Year 8



Other land

and

buildings

(W1)

Investment

property

held

at fair

value

Investment

property

held at cost

(W2)

Total



$ $ $ $

Cost/valuation



On 1 January Year 8 1,000,000 2,300,000 2,000,000 5,300,000

Revaluation - 400,000 - 400,000

–

––––––––

–

––––––––

–

––––––––

–

––––––––

On 31 December Year 8 1,000,000 2,700,000 2,000,000 5,700,000

–

––––––––

–

––––––––

–

––––––––

–

––––––––

Accumulated

depreciation



On 1 January Year 8 87,500 - 220,000 307,500

Charge for the year (W1) 12,500 - 40,000 52,500

–

––––––––

–

––––––––

–

––––––––

–

––––––––

On 31 December Year 8 100,000 - 260,000 360,000

–

––––––––

–

––––––––

–

––––––––

–

––––––––

Answers to practice questions

Carrying amount



On 31 December Year 7 912,500 2,300,000 1,780,000 4,992,500

–

––––––––

–

––––––––

–

––––––––

–

––––––––

On 31 December Year 8 900,000 2,700,000 1,740,000 5,340,000

–

––––––––

––

–

––––––

–

––––––––

–

––––––––

Tutorial note

In practice, with a more complex property, plant and equipment table the

investment properties would be included within the land and buildings

column with the required disclosures being given separately in a note to the

table.

Workings

(1) Depreciation on Property 1



$

Brought forward (500,000 ÷ 40 × 7)

87,500

Year 8 (500,000 ÷ 40) 12,500

(2) Depreciation on Property 3



$

Brought forward (2,000,000 ÷ 50 × 5.5)

220,000

Year 8 (2,000,000 ÷ 50) 40,000

13 Henry

Property, plant and equipment



Plant and machinery

Cost

On 1 January Year 2 X

Additions 30,000

–

––––––

On 31 December Year 2 X

–

––––––

Accumulated depreciation

On 1 January Year 2 X

Charge for the year (30,000 × 9/12 ÷ 5)

4,500

–

––––––

On 31 December Year 2 X

–

––––––

Carrying amount

On 31 December Year 1 X

–

––––––

On 31 December Year 2 25,500

–

––––––

Paper F7: Financial reporting (International)

Intangible assets



Internally generated research and

development expenditure

Cost

$

On 1 January Year 2 412,500

Additions 45,000

–

–––––––

On 31 December Year 2 457,500

–

–––––––

Accumulated amortisation



On 1 January Year 2 -

Charge for the year (W) 68,750

–

–––––––

On 31 December Year 2 68,750

–

––––

–

––

Carrying amount



On 31 December Year 1 412,500

–

–––––––

On 31 December Year 2 388,750

–

–––––––

Working

Amortisation charge (Project A)



$

Total savings (100,000 + 300,000 + 200,000) 600,000

Year 2 amortisation charge (100,000/600,000

412,500)

68,750

Tutorial notes

The costs in respect of Project B cannot be capitalised as there are uncertainties

surrounding the successful outcome of the project – but the machine bought may be

capitalised in accordance with IAS16.

The Year 2 costs in respect of Project C can be capitalised as the uncertainties have

now been resolved. However, the Year 1 costs cannot be reinstated.

14 Toby

Intangible assets



Goodwill Patents Brands Total



$ $ $ $

Cost



On 1 January Year 1 - - - -

Additions (W1) 10,000 20,000 50,000 80,000

–

––––––

–

––––––

–

––––––

–

––––––

On 31 December Year 1 10,000 20,000 50,000 80,000

–

––––––

–

––––––

–

––––––

–

––––––

Answers to practice questions



Goodwill Patents Brands Total



$ $ $ $

Accumulated amortisation/impairment



On 1 January Year 1 - - - -

Written off/amortised during the year

(W1 and W2) 3,000 2,500 7,500 13,000

–

––––––

–

––––––

–

––––––

–

––––––

On 31 December Year 1 3,000 2,500 7,500 13,000

–

––––––

–

––––––

–

––––––

–

––––––

Carrying amount



On 31 December Year 0 - - - -

–

––––––

–

––––––

–

––––––

–

––––

–

On 31 December Year 1 7,000 17,500 42,500 67,000

–

––––––

–

––––––

–

––––––

–

––––––

Workings

(1) Goodwill on acquisition of George



Cost of acquisition 105,000

Minus fair value of net assets acquired (100,000 – 5,000) (95,000)

–

–––––––

Goodwill 10,000

Recoverable value (7,000)

–

–––––––

Impairment write off 3,000

–

–––––––

(2) Amortisation of patent

20,000 ÷ 8 = $2,500

(3) Amortisation of brand

50,000 ÷ 5 × 9/12 = $7,500

Tutorial note

IAS38 Intangible assets prohibits the recognition of internally generated brands (3)

or internally-generated goodwill (4).

15 Charlotte

Effect on Year 7 profit or loss



Machine 1 Machine 2 Machine 3



$ $ $

Impairment loss (107,500) (W1) (41,000) (W2) (5,000)

Depreciation charge (100,000 ÷ 5) (20,000) - -

Gain on disposal (210,000 - 195,000 (W2))

- 15,000

Effect on Year 7 other comprehensive income



Machine 1 Machine 2 Machine 3



$ $ $

Revaluation loss (40,000) (W1) (41,000) (W2) (5,000)

Less: Associated taxation 12,000



Paper F7: Financial reporting (International)

Effect on Year 7 revaluation reserve

Machine 1 Machine 3

$ $

On 1 January Year 7: Machine 1 (W1): Machine 3

$230,000 less 30% 28,000 161,000

Revaluation to fair value on classification as held for

sale

Impairment loss, 31 December Year 7 (W1) (28,000)

Transferred to retained earnings on disposal (161,000)

–

–––––

––––––––

On 31 December Year 7 - -

–

–––––

––––––––

Workings

(1) Machine 1



1 January Year 1 Cost 420,000

Depreciation to 1 January Year 6 (((420,000 – 50,000) ÷ 10) × 5)

(185,000)

–

–––––––

Carrying amount on 1 January Year 6 235,000

Revalued to

275,000

–

–––––––

Revaluation gain before tax 40,000

–

–––––––

Carrying amount on 1 January Year 6 275,000

Depreciation to 1 January Year 7 (275,000 ÷ (15 – 5)) (27,500)

–

–––––––

Carrying amount at 1 January Year 7 247,500

Recoverable amount (100,000)

–

–––––––

Impairment loss 147,500

–

–––––––

In the year to 31 December Year 6, the asset is revalued upwards by $40,000.

Of this, $28,000 is taken to the revaluation reserve and $12,000 ($40,000 × 30%)

to deferred tax as a liability.

In the year to 31 December Year 7, the impairment loss is $147,500. Of this,

$40,000 reverses the gain in the previous year. The revaluation reserve is

reduced by $28,000 and the deferred tax liability by $12,000. The remaining

impairment loss of $107,500 is written off as a loss in Year 7.

(2) Machine 2



1 January Year 1 Cost 500,000

Depreciation to 1 January Year 7 (((500,000 – 60,000) ÷ 10) × 6)

(264,000)

–

–––––––

Carrying amount on 1 January Year 7 236,000

Fair value minus cost to sell (200,000 – 5,000) (195,000)

–

–––––––

Impairment loss 41,000

–

–––––––

ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing

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