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

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Answers to practice questions

(3) Machine 3



1 January Year 1 Cost 600,000

Depreciation to 1 January Year 2 (30,000)

–

–––––––

Carrying amount on 1 January Year 2 570,000

Revalued to 800,000

–

–––––––

Taken to revaluation reserve/deferred tax (70%/30%) 230,000

–

–––––––

 

Carrying amount on1 January Year 2 800,000

Depreciation to 1 January Year 7 ((800,000 ÷ 8) × 5)

(500,000)

–

–––––––

Carrying amount on 1 January Year 7 300,000

–

–––––––

 

Fair value on classification as held for sale 550,000

Value at lower of carrying amount and fair value less costs to

sell: therefore

300,000

16 Henrietta



$

Raw materials (2,000 × 173 (W2))

346,000

Finished goods (2,000 × 228 (W2))

456,000

–

––––––



802,000

–

––––––

Workings

(1) Cost per unit



Raw materials 150

Import duties 10

Transport costs (to present location and condition) 20

Total raw materials cost 180

Variable costs 25

Fixed costs ($30,000 ÷ 1,000) (based on normal level of activity) 30

–

–––

Total finished goods cost 235

–

–––

(2) Net realisable value

Raw materials:



$ $

Estimated selling price



240

Minus all costs to make item ready for sale 

Variable (W1) 25

Fixed (W2) 30

–

–––

(55)

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Minus all costs necessary to make the sale



Delivery costs

8

Selling costs 

4

–

–––

(12)



–

–––

NRV

173



–

–––

Finished goods:



Estimated selling price 240

Minus all costs necessar

to make the sale (as above) (12)

–

–––

 228

–

–––

17 Anabelle

Included in income statement



$000

Revenue (860 + 619 + 387 + 120) (W3) 1,986

Costs (balancing figure) (1,732)

–

–––––

Profit (170 + 129 – 45) (W3) 254

–

–––––

Included in statement of financial position



$000

Current assets

Due from customers on contracts (29 + 20) (W4) 49



Receivables: Amounts recoverable on contracts ((690 – 600) + (650 – 600) 140



Non-current liabilities

Due to customers on contracts (W4) 290

Workings

(1) Total profit expected on the contract



Contract



A B C D



$000 $000 $000 $000

Contract price 1,850 750 960 800

Minus costs to date (1,490) (590) (405) (120)

Estimated future costs - (25) (600) (480)

–

–––––

–

–––––

–

–––––

–

–––––

Total expected profit/(foreseeable loss)

360 135 (45) 200

–

–––––

–

–––––

–

–––––

–

–––––

Answers to practice questions

(2) Proportion of work completed to date



Contract



A B C



D

Costs to date



1,490 590 405



Too early to assess

with reasonable

certainty therefore

take nil profit (i.e.

revenue = costs)

Total costs



1,490 590 + 25 405 + 600



 

=100% 95.9% 40.3%



(3) Income statement figures

Revenue:



Contract



A B C



$000 $000 $000



$000

Cumulative to year end

(750 × 95.9% (W2)) (960 ×

40.3%(W2)) 1,850



719



387



120

(= costs

to date)

Minus taken to income

statement in previous years (990)



(100)



-



-

–

–––––

–

–––––

–

–––––

–

–––––

This year (balancing figure) 860 619 387



120

–

–––––

–

–––––

–

–––––

–

–––––

Profit:



Contract



A B C D



$000 $000 $000 $000

Cumulative to year end

(135 (W1) x 95.9% (W2))

360

(W1)

129 (45)

(Take

whole

of loss)

nil

Minus taken to income statement

in previous years (190) - - -

–

–––––

–

–––––

–

–––––

–

–––––

This year (balancing figure) 170 129 (45) -

–

–––––

–

–––––

–

–––––

–

–––––

(4) Figures in statement of financial position



Contract



A B C D



$000 $000 $000 $000

Costs incurred 1,490 590 405 120

Recognised profits/(losses) (W2) 360 129 (45) nil

Minus progress billings (1,850) (690) (650) (100)

–

–––––

–

–––––

–

–––––

–

–––––

Due from customers on contracts/

(Due to customers on contracts)

(290)

–

–––––

–

–––––

–

–––––

–

–––––

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18 Michael

Capital and reserves

$

Share capital ($1 ordinary shares) (W2) 1,625,000

Share premium (W3) -

Retained earnings  6,116,812

–

––––––––



7,741,812

Liabilities (W5) 164,751

Workings

(1) Profit for the year



$

Original 508,500

Minus: Finance charges (W5) (14,988)

–

––––

–

––



493,512

–

–––––––

(2) Ordinary share capital



$

At 1 January 1,000,000

Issue at full price on 31 March 300,000

–

––––––––



1,300,000

Bonus issue on 30 June (1,300,000 ÷ 4) 325,000

–

––––––––



1,625,000

–

––––––––

(3) Share premium



$

At 1 January 200,000

Issue at full price on 31 March ((300,000 × 0.30) – 20,000)

70,000

–

––––––––



270,000

Bonus issue on 30 June (270,000)

–

––––––––



-

–

––––––––

(4) Retained earnings



$

At 1 January 5,670,300

Minus: Bonus issue on 30 June (325,000 (W2) – 270,000

(W3)

(55,000)

Add: Profit for the year (W1) 493,512

Add back: Preference dividends charged to retained

earnings (W5)

8,000

–

–––––––––



6,116,812

–

–––––––––

Answers to practice questions

(5) Redeemable preference shares



Liability at

beginning

of year

Finance

charge at

9.5%

Interest

paid at 4%

Outstanding

liability at

end of year



$ $ $ $

Year 1

((100,000 ×

$1.60) – 2,237)) 157,763 14,988 (8,000) 164,751



19 Finley

Financial statements for the year ended 31 December Year 4 (extracts)

Statement of financial position

Non-current assets

$

Property, plant and equipment (36,000 – 9,000) 27,000



Current liabilities



Finance lease obligations (W1) 10,000



Non-current liabilities



Finance lease obligations (W1) 17,950

Income statement



$

Depreciation on leased assets ((36,000 ÷ 4) 9,000

Finance lease charges (W1) 1,950

Workings

(1) Finance lease obligations (boat)

Year ended

Opening

balance

Lease

payment

Capital

outstanding

Interest

at 7.5%

Closing

balance



$ $ $ $ $

31 December Year 4 36,000 (10,000) 26,000 1,950 27,950

31 December Year 5 27,950 (10,000) 17,950 1,346 19,296



Current (balancing figure) 10,000

Non-current 17,950

–

––––––



27,950

–

––––––

Paper F7: Financial reporting (International)

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20 Fabian

Financial statements for the year ended 31 December Year 7 (extracts)

Statement of financial position

Non-current assets

$

Property, plant and equipment (126,760 – 31,690) 95,070



Current assets



Trade and other receivables (W1) 6,250



Current liabilities



Finance lease obligations (W2) 30,056

Non-current liabilities



Finance lease obligations (W2) 69,380

Income statement



$

Operating expenses



Operating lease rentals (W1) 5,450

Depreciation on leased assets (126,760 ÷ 4) 31,690

Finance costs



Finance lease charges (W2) 12,676

Tutorial note

The notes to the financial statements would disclose the fact that included in trade

and other receivables is $3,750 (W1) due in more than one year.

Workings

(1) Operating lease (car)



Income statement charge = ((7,500 + (36 × 700)) × 6/36) =

5,450

–

–––––

–

Cash paid in Year 7 (7,500 + (700 × 6))

11,700

Minus charged to income statement in Year 7 (5,450)

–

–––––

–

Prepayment at end of Year 7 6,250

–

–––––

–

Prepayment at end of Year 7 6,250

Cash paid in Year 8 (12 × 700)

8,400

Minus charged to income statement in Year 8 (5,450 × 2)

(10,900)

–

–––––

–

Prepayment at end of Year 8 3,750

–

––

–

––

–

Answers to practice questions

(2) Finance lease obligations (machine)

Date

Opening

balance

Interest (10%)

Lease

payment

Closing

balance



$ $ $ $

Year 7 126,760 12,676 (40,000) 99,436

Year 8 99,436 9,944 (40,000) 69,380



$

Current (balancing figure) 30,056

Non-current 69,380

–

––––––



99,436

–

––––––

21 Georgina

(1) Litigation for damages

Under IAS37, a provision should only be recognised when:

 an entity has a present obligation as a result of a past event

 it is probable that an outflow of economic benefits will be required to settle

the obligation

 a reliable estimate can be made of the amount of the obligation.

Applying this to the facts given:

 Georgina’s legal advisors have confirmed that there is a legal obligation.

This arose from the past event of the sale, on 1 September Year 7 (i.e.

before the year end).

 Probable is defined as ‘more likely than not’. The legal advisors have

confirmed that it is likely that the claim will succeed.

 A reliable estimate of $500,000 has been made.

Therefore a provision of $500,000 should be made.

Counter-claim

IAS37 requires that such a reimbursement should only be recognised where

receipt is ‘virtually certain’. Since the legal advisors are unsure whether this

claim will succeed no asset should be recognised in respect of this claim.

(2) Claim for unfair dismissal

In this case, the legal advisers believe that success is unlikely (i.e. possible

rather than probable). Therefore this claim meets the IAS37 definition of a

contingent liability:

 a possible obligation

 arising from past events

 whose existence will be confirmed only by the occurrence or non-

occurrence of one or more uncertain future events.

The liability is a possible one, which will be determined by a future court case

or tribunal. It did arise from past events (the dismissal had taken place by the

year end).

Paper F7: Financial reporting (International)

This contingent liability should be disclosed in the financial statements (unless

the legal advisors believe that the possibility of success is in fact remote, and

then no disclosure is necessary).

(3) Returns

Applying the IAS37 conditions in (1) to the facts given:

 Although there is no legal obligation, a constructive obligation arises from

Georgina’s past actions. Georgina has created an expectation in its

customers that such refunds will be given.

 As at the year end, based on past experience, an outflow of economic

benefits is probable.

 A reliable estimate can be made. This could be 1% × 400,000 but since the

returns are now all in the actual figure of $3,500 can be used.

Therefore a provision of $3,500 should be made.

(4) Closure of division

Applying the above IAS37 conditions in (1) to the facts given:

 A present obligation exists because at the year end there is a detailed plan

in place and the closure has been announced in the press.

 An outflow of economic benefits is probable.

 A reliable estimate of $300,000 has been made.

However, IAS37 specifically states in respect of restructuring that any

provision should include only direct expenses, not ongoing expenses such as

staff relocation or retraining. Therefore a provision of $250,000 (300,000 –

50,000) should be made.

22 Olivia

Included in income statement



Revenue 5,570,500

Interest receivable (30,000 + 9,000) 39,000

Purchases (4,789,400)

Interest payable (20,000 + 6,000) (26,000)

Profit before tax 345,900

Tax (see note) (117,380)

Note to the income statement



$

Current tax for the year (W3) 113,880

Under provision of tax in the previous year (W3) 700

Deferred tax (35,500 – 32,700) 2,800

–

–––––––

Total tax charge 117,380

–

–––––––

Answers to practice questions

Statement of financial position



$

Current liabilities



Trade and other payables (W1) 29,065

Current tax payable (103,880 (W3) – 3,000 (W2)) 100,880

Non-current liabilities



Deferred tax 35,500

Workings

(1) Sales tax

$ $

Trade payables

(4,789,400 × 15%)

718,410



Brought forward 25,600

Bank 113,700



Trade receivables

5,570,500 × (15%) 835,575

Carried forward 29,065



–

––––––

–

––––––



861,175



861,175

–

––––––

–

––––––

(2) Withholding tax

$ $

Interest receivable 9,000



Interest payable 6,000



Carried forward 3,000

–

–––––

–

–––––



9,000



9,000

–

–––––

–

–––––

(3) Current tax

$ $

Bank 16,200



Brought forward 15,500



Income statement 700

–

––––––

–

––––––



16,200



16,200

–

––––––

–

––––––

Bank 10,000



Income statement

(379,600 × 30%) 113,880

Carried forward 103,880



–

––––––

–

––––––



113,880



113,880

–

––––––

–

––––––

Paper F7: Financial reporting (International)

23 Francesca



Opening liability



1,340,600

Capital allowances during the year 50,000,000



Depreciation charged during the year (45,000,000)



–

––––––––––



5,000,000

× 30%

1,500,000

–

––––––––––

Interest receivable in income statement 50,000



Interest received in tax computation (45,000)



–

––––––––––

Receivable in statement of financial

position

5,000  × 30% 1,500

–

––––––––––

Interest payable in income statement 32,000



Interest paid in tax computation (28,000)



–

––––––––––

Payable in balance sheet 4,000

× 30%

(1,200)

–

––––––––––



Development costs as allowable expense 500,600

× 30%

150,180



Revaluation 6,000,000



Carrying value (4,900,500)



–

––––––––––

Revaluation surplus 1,099,500 x 30% 329,850

–

––––––––––

–

–––––––––

Closing liability



3,320,930



–

–––––––––



Charged to the revaluation reserve 329,850

Charged in the income statement (balancing figure) 1,650,480

–

–––––––––

Total movement on the provision of (3,320,930 – 1,340,600) 1,980,330

–

–––––––––

24 Mary



2 existing shares have a cum rights value of (2 × $4)

1 new share is issued for 1

–

3 new shares have a theoretical value of 9

–

Theoretical ex-rights prices = $9/3 = $3

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

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