ACCA P2 (INT) Corporate Reporting - Study text

Practice questions

11 Abbeville

Abbeville was incorporated 35 years ago by Gill and Steve Jones (who are still the

sole shareholders) to import food and wine from France. The company has been

very successful. Three wholly-owned subsidiary companies, Narbonne, Bonneville

and Lynette, were set up by Abbeville some years ago to deal with some specialised

areas of the trade.

To grow the organisation, Gill and Steve feel that the company should expand

across the wider European Union market. On this basis, a business combination is

proposed with Northcote, a company which specialises in importing food from Italy

and Germany. The finance director has just resigned from Northcote and the other

directors, including the chief executive, are food and drink specialists but have little

accounting knowledge.

A joint meeting was arranged with the directors of both Abbeville and Northcote to

discuss various proposals to change the structure of Abbeville and the proposed

combining of the two companies. The proposals are as follows:

(a) A holding company, Gourmet Delights, is to be set up by Gill and Steve for

the Abbeville group. The ordinary shares in Abbeville are to be exchanged on

a share for share basis with Gourmet Delights. The same share exchange will

be carried out with Northcote to effect the merger.

(b) The shareholding of Abbeville in Narbonne is to be sold or de-merged, either

wholly or in part.

(c) Lynette is to become a wholly-owned subsidiary of Bonneville. This

reorganisation will be effected by the issue of 200,000 $1 ordinary shares in

Bonneville. This part of the group might then be sold or de-merged.

In the case of group reorganisations by way of share exchange, local company law

allows the carrying value of the investment transferred to be maintained at its value

in the books of the transferor.

The following information was presented at the meetings:

(i) Statements of financial position as at 30 September Year 4

Abbeville Narbonne Bonneville Lynette

$000 $000 $000 $000

Nettangibleassets 2,200 1,500 1,300 840

Investments:

Narbonne 1,000 ‐ ‐ ‐

Bonneville

580 ‐ ‐ ‐

Lynette

450 ‐ ‐ ‐

––––––––––––– ––––––––––––– ––––––––––––– –––––––––––––

4,230 1,500 1,300 840

––––––––––––– ––––––––––––– ––––––––––––– –––––––––––––

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Sharecapital($1ordinaryshares)

3,500 1,000 580 450

Otherreserves

200 100 300 90

Accumulatedprofits

530 400 420 300

––––––––––––– ––––––––––––– ––––––––––––– –––––––––––––

4,230 1,500 1,300 840

––––––––––––– ––––––––––––– ––––––––––––– –––––––––––––

(ii) Estimated results

Profitaftertaxforyearended

30SeptemberYear5 720 (150) 185 160

(iii) Estimated fair values

Fairvaluesofnettangibleassetsat

30



SeptemberYear4 6,300 1,875 1,750 1,500

The finance director of Abbeville has instructed you as his accountant to prepare

certain information for the directors of both Abbeville and Northcote explaining the

proposed reorganisation.

Required

(a) Prepare the entity statements of financial position of Abbeville and of

Bonneville, reflecting the reorganisation and the acquisition of Lynette by

Bonneville.

(b) (i) Prepare the consolidated statement of financial position of the Abbeville

Group, as at 30 September Year 4, on the basis that Abbeville disposes of

35% of its shareholding in Narbonne for $700,000 on 30 September Year

4. Ignore any taxation implications.

(ii) If Abbeville disposes of 75%, rather than 35%, of its shares in Narbonne

on 30 September Year 4 for $1,650,000, advise on the accounting

implications for the consolidated accounts of the Abbeville Group if the

fair value of its remaining investment in Narbonne is $400,000. Use the

data in the question to illustrate your answer. Ignore tax and assume the

75% of shares are sold to a large number of different investors.

(iii) Explain the effect on the consolidated profit or loss of the Abbeville

Group for the year to 30 September Year 5 of the disposal of 75% of the

shares in Narbonne for $1,650,000 on 30 September Year 4, assuming

that the 75% shareholding is purchased by a single buyer.

(c) If the share for share exchange between Gourmet Delights and Abbeville were

to take place, the directors expressed their intent to account for the

combination using merger accounting (pooling of interests). You have

informed them that this method is no longer available and they have asked

you to explain the key differences in the accounting approach which they

should adopt in order to comply with IFRS 3.

Practice questions

12 Orlando

Orlando is an entity whose functional currency is the US dollar. It prepares its

financial statements to 30 June each year. The following transactions take place on

21 May Year 4 when the spot exchange rate was $1 = €0.8.

 Goods were sold to Koln, a customer in Germany, for €96,000.

 A specialised piece of machinery was bought from Frankfurt, a German

supplier. The invoice for the machinery is for €1,000,000.

 The company receives €96,000 from Koln on 12 June Year 4.

 At 31 June Year 4 it still owns the machinery purchased from Frankfurt. No

depreciation has been charged on the asset for the current period to 30

June Year

4.

 The liability for the machine is settled on 31 July Year 4.

 Relevant $/€ exchange rates are:

− 12 June Year 4 $1 = €0.9

− 30 June Year 4 $1 = €0.7

− 31 July Year 4 $1 = €0.8

Required

Show the effect on profit or loss of these transactions for:

(a) the year to 30 June Year 4

(b) the year to 30 June Year 5.

13 Mancaster and Stockpot

Part A

You are required to:

(1) Define and explain the following terms as used in IAS 21 The effects of

changes in foreign exchange rates.

(a) Functional currency

(b) Presentation currency.

(2) Outline the factors to be considered when determining the functional currency

of an overseas subsidiary.

Part B

The statements of financial position of Manchester and its subsidiary Stockpot at 31

March Year 4 and their income statements for year ended on that date are set out

below:

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Statementsoffinancialpositionat31MarchYear4

Mancaster Stockpot

$000 $000 €000 €000

Non‐currentassets:

Property,plantandequipment 20,000

30,000

Investments(notes1and2) 5,500

‐

25,500

30,000

Currentassets:

Inventories 10,000

18,000

Tradereceivables 10,000

15,000

20,000

33,000

Totalassets

45,500

63,000

Capitalandreserves:

Sharecapital($1/€1Shares)

9,000

15,000

Accumulatedprofits

12,500

10,000

21,500

25,000

Non‐currentliabilities(note4)

10,000

20,000

Currentliabilities

Tradepayables 7,900

10,400

Bankoverdraft 6,100

7,600

14,000

18,000

Totalequityandliabilities

45,500

63,000

Incomestatements–yearended31MarchYear4

Mancaster Stockpot

$000 €000

Revenue

50,000 60,000

Costofsales(notes2and5)

(25,000) (30,000)

Grossprofit

25,000 30,000

Otheroperatingexpenses

(15,000) (16,000)

Operatingprofit

10,000 14,000

Investmentincome(note3)

1,500 ‐

Interestpayable

(1,000) (2,000)

Profitbeforetax

10,500 12,000

Tax

(3,600) (4,200)

Profitaftertax

6,900 7,800

Practice questions

Statementofchangesinequity–yearended31MarchYear4

Mancaster

Stockpot

Sharecapital

Reserves

Share

capital

Reserves

$000 $000 €000 €000

Balanceat1AprilYear3

9,000 9,500 15,000 6,600

Profitfortheperiod

6,900

7,800

Dividendspaid

(3,900)

(4,400)

Balanceat31MarchYear4

9,000 12,500 15,000 10,000

You are provided with the following additional information:

(1) Investments represent the acquisition of 11.25 million shares in Stockpot on 31

March Year 0. The retained profits of Stockpot on this date stood at €5 million.

Any goodwill arising on the acquisition is to be treated as a foreign currency

asset. Stockpot operates as a reasonably autonomous entity on a day-to-day

basis although Mancaster does control the long-term strategy of Stockpot.

(2) Exchange rates have been as follows:

Date

€to$1

31MarchYear0

3.0

31



MarchYear3 2.4

31MarchYear4

2.2

AverageforYear4

2.3

(3) Investment income represents dividends received from Stockpot.

(4) The non-current liabilities represent long-term borrowings.

Required

(a) Translate the statement of financial position of Stockpot into the presentation

currency of dollars and prepare the consolidated statement of financial

position of the group at 31 March Year 4.

(b) Translate the income statement of Stockpot into dollars and prepare the

consolidated income statement of the group for the year ended 31 March Year

4, starting with revenue and ending with retained profit for the year.

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14 Statement of cash flows

Part A

The following information relates to the most recent financial year of an entity:

Required

Calculate the cash flow from operating activities using:

(a) the direct method

(b) the indirect method.

$000

Cashreceivedfromcustomers

15,424

Increaseininventory 194

Cashpaymentstosuppliers

5,824

Increaseinreceivables

72

Operatingprofitbeforetax

6,022

Cashpaidtoandonbehalfofemployees

2,200

Otheroperatingcashpayments

511

Depreciationcharges

899

Increaseintradepayables

234

Part B

In the table below, insert a tick to indicate the heading under which each item is

most likely to appear in a statement of cash flows prepared in accordance with IAS

7.



Item

Operating

activities

Investing

activities

Financing

activities

Cashpaymenttobuysharesinan

associate

Cashproceedsfromthesaleofintangible

assets

Incometaxrepaymentsreceived

Paymentofpatentroyalties

Repaymentsoffinanceleaseobligations

Cashpaymentstoacquireproperty,plant

andequipment

Dividendincomereceived

Interestpaid

Practice questions

Part C

Entity A acquired 90% of the shares of Entity B on 31 March Year 5. The fair values

of Entity B’s assets at that date were:

$000

Tangiblenoncurrentassets

50

Inventories 30

Cash

10

90

The purchase consideration consists of $55,000 in cash plus 60,000 ordinary shares of

$1, valued at par.

Required

Prepare a statement summarising the net effect of the acquisition on group cash

flow for the period, to include as a note to the group statement of cash flows.

15 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

Capitalandreserves

Issuedcapital($1ordinaryshares) 1,900

1,100

Sharepremium 95

30

Accumulatedprofits 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

Statement of comprehensive income for the year ended 31 March Year 6 (extract).

$000

Operatingprofit

4,677

Interestpayable (60)

Profitbeforetax

4,617

Taxexpense (400)

Profitfortheperiod

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 for cash during the period.

Required

Prepare a statement of cash flows for the year ended 31 March Year 6 using the

indirect method.

Practice questions

16 Bishop Group

You are provided with the information set out below relating to a group of

companies.

ConsolidatedincomestatementforBishopGroup

fortheyearended31DecemberYear2

20X2 20X1

$000 $000

Revenue

19,308 18,173

Costofsales

(4,315) (4,620)

–––––––––––––––– –––

Grossprofit 14,993 13,553

Distributioncosts

(6,439) (6,126)

Administrativeexpenses

(5,705) (6,719)

–––––––––––––––– –––

Profitbeforetaxandfinancecosts(note1) 2,849 708

Financeincome

90 75

Financecosts(note2)

(350) (230)

–––––––––––––––– –––

Profitbeforetaxation 2,589 553

Incometaxexpense(note3)

(800) (125)

Profitfortheyear

1,789 428

–––––––––––––––– –––

Attributableto:



Equityholdersoftheparent

1,369 318

Non‐controllinginterest

420 110

–––––––––––––––– –––

1,789 428

–––––––––––––––– –––

Summary statement of changes in equity for the year to 31 December Year 2



Issued

capital

Share

premium

Foreign

currency

translation

Retained

earnings Total NCI Equity

B/fwd1January 7,500 77

2,100

4,905 14,582 2,500 17,082

Issueofshares 3,500 324

3,824

3,824

Profitforyear

1,369 1,369 420 1,789

Dividends

(600) (600) (295) (895)

Exchange gain

700

700 175 875

 –––––– –––––– –––––– –––––– –––––– –––––– ––––––

C/fwd31Dec  11,000 401

2,800

5,674 19,875 2,800 22,675

 –––––– –––––– –––––– –––––– –––––– –––––– ––––––

Notes: NCI = non-controlling interest

Exchange gain = exchange gain on translation of subsidiary

Paper P2: Corporate reporting (International)

Consolidated statement of financial position as at 31 December Year 2

Year2

Year1

$000

Non‐currentassets

Tangibleassets 11,720

7,520

Investments 3,000

2,700

Currentassets

Inventories 6,135

5,740

Receivables 5,720

4,380

Cashatbankandinhand 820

169

27,395

20,509

Equityandliabilities

Ordinarysharecapital 11,000

7,500

Sharepremium

401

77

Foreigncurrencytranslation

2,800

2,100

Retainedearnings

5,674

4,905

Equityattributabletoownersofparent

19,875

14,582

Non‐controllinginterest 2,800

2,500

Totalequity

22,675

17,082

Currentliabilities

Payables 1,420

1,760

Tax 700

167

Obligationsunderfinanceleases 110

50

Non‐currentliabilities

Loans 1,200

800

Obligationsunderfinanceleases 740

250

Provisionsforliabilitiesandcharges

Deferredtax 550

400

27,395

20,509

Notes to the accounts

(1)

Operatingprofitisstatedaftercharging $000

$000

Depreciation:Ownedassets 960

840

Assetsheldunderfinanceleases 240

120

1,200

960

ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)

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