PROFESSION PROFESSIONAL AL STAGE APPLICA TION EXAMINATION TUESDAY 22 MARCH 2011 (2½ hours)
FINANCIAL ACCOUNTING This paper consists of FIFTEEN objective FIFTEEN objective test (OT) questions (20 marks) and FOUR written FOUR written test questions (80 marks).
1.
Ensure your candidate details are on the front of your answer booklet.
2.
Answer each question in black pen only.
Objecti ve Test Test Qu estion s (1 – 15) 15) 3.
Record your OT responses responses on the separate answer sheet provided: provided: this must not not be be folded or creased. Your candidate details are printed on the sheet.
4.
For each of the 15 OT 15 OT questions there are four options: A, B, C, D. Choose the response that appears to be the best and indicate your choice in the correct box, as shown on the answer sheet.
5.
Attempt all questions; questions; you will score score equally for each each correct response. response. There will will be no deductions for incorrect responses or omissions.
Writt en Test Test Quest ion s (1 – 4) 6.
Answers to each written test question must begin on a new page and must be clearly numbered. Use both sides of the paper in your answer booklet.
7.
The examiner will take account of the way in which answers are presented.
Unless Unless otherwise st ated, ated, make all all c alculations to t he nearest nearest mo nth and the nearest nearest £. All Al l ref erences eren ces to IFRS are t o Inter In ter nat io nal Financ Fin anc ial Report Repo rt in g St andard and ard s an d In ter nat io nal Acco Ac co un ti ng Standar Stan dar ds .
IMPORTANT Question papers contain confidential information and must NOT be removed from the examination examination hall.
Place your label here. If you do not have a label you MUST enter your candidate number in this box
DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO TO BEGIN B EGIN WORK
© The Institute of Chartered Accountants in England and Wales 2011
Page 1 of 8
1.
Applegarth Ltd Ltd is an independent travel company. Its nominal ledger at 31 December 2010 showed the following balances.
Revenue Purchases Administrative expenses expenses Other operating expenses Inventories at 1 January 2010 Retained earnings at 1 January 2010 Ordinary share capital (£1 shares) Share premium account Land and buildings – cost (including land at £300,000) – accumulated depreciation depreciation at at 1 January 2010 Fixtures and fittings – cost – accumulated depreciation depreciation at at 1 January 2010 Cash at bank 6% Debentures (redeemable at par on 1 September 2011) Trade and other receivables Trade and other payables
£ 2,070,000 1,260,000 289,000 276,000 12,000 72,700 495,000 24,000 650,000 75,000 386,000 76,600 29,000 40,000 37,500 86,200
The following additional information is available: (1)
Revenue consists of Applegarth Ltd’s holidays sold direct to the public and holidays sold on behalf of third party travel agents for which it earns a 10% commission. Where holidays are sold on behalf of third party travel agents Applegarth Ltd receives the full gross amount from the customer and then remits the fee, less the 10% commission, to the third party travel agent. All cash received from customers under this arrangement to 30 November 2010 had been correctly remitted to third party travel agents and correctly recognised in the nominal ledger. However, Applegarth Ltd made made sales in December December under under such arrangements arrangements with a total gross value of £85,000. This cash was still held by Applegarth Ltd at the year end and has been recognised in full as part of revenue.
(2)
On 1 September 2010 one of Applegarth Ltd’s premises had a refit costing £120,000 and this was recognised in administrative expenses. However, on further investigation, it was discovered that half of this amount should should have been recognised as part of the cost of fixtures and fittings in accordance with IAS 16, Property, Plant and Equipment.
(3)
Depreciation Depreciati on on property, plant and equipment has yet to be charged and should be recognised in administrative expenses. Applegarth Ltd charges depreciation as follows: •
•
Buildings – on a straight-line straight-l ine basis with the current year charge based on a revised remaining useful life of 50 years at 1 January 2010. Fixtures and fittings – at a rate of 15% 15% pa on reducing balance.
Applegarth Ltd has has previously measured property, property, plant and equipment equipment using using the historical cost cost model. However, on 1 January 2010 the board of directors made the decision to revalue the company’s land and buildings. On that date, the land was valued at £700,000 and buildings at £450,000. Applegarth Ltd wishes to make annual transfers between the revaluation surplus and retained earnings, in accordance with best practice. (4)
Inventories Inventor ies at 31 December 2010 were valued correctly at £15,000.
(5)
On 1 June 2010 Applegarth Ltd issued 300,000 £1 ordinary shares at a cash price of £1.25 per share. The full amount has been recognised as part of ordinary share capital.
© The Institute of Chartered Accountants in England and Wales 2011
Page 2 of 8
(6)
A dividend of 20p per ordinary share was paid on 19 December 2010 on the correct number of shares in issue at that date. This dividend payment has been included in other operating expenses. The 6% Debentures were issued in 2008 and interest for the year ended 31 December 2010 remained unpaid at the year end.
(7)
The income tax charge for the year has been estimated at £74,900.
Requirement Prepare an income statement and a statement of changes in equity for Applegarth Ltd for the year ended 31 December 2010 and a statement of financial position as at that date in a form suitable for publication. (22 marks ) NOTE NOTES: S: Notes to the financial statements are are not required. Expenses Expenses shou ld be analysed analysed by fun cti on.
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© The Institute of Chartered Accountants in England and Wales 2011
Page 3 of 8
2.
Lessimore plc has investments investment s in a number of subsidiaries and is preparing its financial statements statement s for the year ended 31 December 2010. (i)
Lessimore plc acquired 122,500 ordinary shares in Hoare Ltd a number of years ago. The consideration consisted of £80,000 cash and 150,000 £1 ordinary shares in Lessimore plc. Lessimore plc paid £4,000 of professional fees in relation to the acquisition of Hoare Ltd. Lessimore plc sold its investment in Hoare Ltd on 30 September 2010 for £600,000. Shares in Lessimore plc had a fair value of £1.60 each at the date Hoare Ltd was acquired and £2.25 each at the date of its disposal. Extracts from Hoare Ltd’s statements of financial position are shown below: At acqui acq ui si ti on
Ordinary share capital (£1 nominal value) Share premium account Retained earnings
£ 175,000 35,000 127,000
At 31 December Decem ber 2009 £ 175,000 35,000 419,000
Hoare Ltd made a profit for the year ended 31 December 2010 of £132,000. Profits accrued evenly throughout the period.
(ii)
Lessimore plc holds 90% of the ordinary share capital of Brebner Ltd. Brebner Ltd is in the process of completing its statement of cash flows for the year ended 31 December 2010. There are a number of calculations outstanding that need to be completed before the statement of cash flows can be finalised. The following information is relevant: Property, plant and equipment Carrying amount at 1 January 2010 Carrying amount at 31 December 2010
£ 272,000 180,500
Depreciation for year
126,500
Disposal (carrying amount)
25,000
A profit of £3,000 was was made on the above above disposal. disposal. On 1 January 2008 Brebner Ltd acquired its first intangible non-current asset, a brand, for £50,000, which was assessed as having a useful life of eight years. On 31 December 2010 Brebner Ltd acquired a second brand for cash. No other intangible non-current assets were acquired or disposed of during the year. The carrying amount of intangible non-current assets at 31 December 2010 was £66,250. Brebner Ltd showed investment income of £17,200 in its income statement for the year ended 31 December 2010. Accrued investment income of £2,350 and £3,070 was recognised in Brebner Ltd’s statements of financial position as at 31 December 2009 and 2010 respectively.
© The Institute of Chartered Accountants in England and Wales 2011
Page 4 of 8
(iii)
Lessimore plc raised substantial amounts of cash during the year via a number of different financial instruments, which have not yet been recognised in the draft financial statements. On 1 January 2010 Lessimore plc issued 2 million £1 ordinary shares for £1.30 each. On 1 April 2010 Lessimore plc issued 5 million 5% £1 redeemable preference shares at par. The preference shares are redeemable on 1 April 2015. No dividend had been paid by the year end. On 1 July 2010 Lessimore plc issued 3 million 6% £1 irredeemable preference shares at par. The dividend for the year in respect of these shares was paid on 31 December 2010 along with an ordinary dividend of 25p per share. Lessimore plc’s equity at 31 December 2009 was as follows:
£1 ordinary shares Share premium account Retained earnings
£ 1,500,000 450,000 879,800
Equity
2,829,800
Lessimore plc had a draft profit for the year ended 31 December 2010 of £287,600 before accounting for the above transactions. Requirements (a)
Using the information information in (i) above, above, calculate calculate the profit or or loss from discontinued discontinued operations in respect of Hoare Ltd as it would be presented in the consolidated income statement of Lessimore plc for the year ended 31 December 2010, in accordance with IFRS 5, Non-current Assets Held for Sale Sale and Discontinued Discontinued Operations. Operations. (6 marks)
(b)
Using the information information in (ii) above, above, prepare prepare the investing activities section from Brebner Brebner Ltd’s (6 marks) statement of cash flows for the year ended 31 December 2010.
(c)
Using the information information in (iii) above, prepare extracts from Lessimore Lessimore plc’s individual individual (ie single entity) income statement for the year ended 31 December 2010 and its individual statement of financial position as at that date. (6 marks) (18 marks )
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© The Institute of Chartered Accountants in England and Wales 2011
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3.
Bugbee plc has investments in two companies, Garton Ltd and Horsfall Ltd. Bugbee plc acquired 320,000 of Garton Ltd’s £1 ordinary shares several years ago. On 1 April 2010 Bugbee plc acquired 119,000 of Horsfall Ltd’s £1 ordinary shares. The draft, summarised statements of f inancial position position of the three companies at 31 December 2010 are shown below: Bugbee plc £ ASSETS Non-current assets Property, Propert y, plant and equipment Goodwill Investments – Garton Ltd – Horsfall Ltd Current assets Inventories Trade and other receivables receivables Cash and cash equivalents
Total asset s EQUITY EQUITY AND LIA BILITIES BIL ITIES Equity Ordinary share capital (£1 shares) Share premium account Revaluation surplus Retained earnings
Current liabilities Trade and other payables Taxation
Total equit y and liabi lit ies
Garton Garton Ltd £
Horsfall Ltd £
900,000 – 450,000 150,000 1,500,000
665,000 35,000 – – 700,000
530,000 – – – 530,000
92,800 56,950 9,600 159,350
35,000 26,500 4,000 65,500
29,600 32,000 1,500 63,100
1,659,350 1,659,350
765,500 765,500
593,100
800,000 – 350,000 390,450 1,540,450
400,000 – 150,000 146,810 696,810
340,000 100,000 – 103,760 543,760
49,600 69,300 118,900
31,690 37,000 68,690
28,340 21,000 49,340
1,659, 1,659,350 350
765,50 765,500 0
593,100
Addi Ad di ti on al i nf or mat io n: (1)
At the date of acquisition Garton Ltd had a balance of £91,600 on its retained earnings and £50,000 on its revaluation surplus. Garton Ltd’s statement of financial position at acquisition included goodwill of £65,000, which had arisen on the acquisition of the business of a sole trader. At 31 December 2010 this amount had been impaired by £30,000. The fair values of the other assets and liabilities held by Garton Ltd at the t he date of acquisition acquisition were equal to their carrying amounts. Garton Ltd’s financial statements also disclosed a contingent liability which had a fair value of £75,000 at t he date of acquisition and its fair value had not changed at 31 December 2010.
© The Institute of Chartered Accountants in England and Wales 2011
Page 6 of 8
(2)
At the date of of its acquisition by Bugbee Bugbee plc plc the fair value value of Horsfall Ltd’s net net assets was the same as the carrying amount, apart from an item of equipment, equipment, which had a fair value of £40,000 in excess of its carrying amount. At the date of acquisition the piece of equipment was thought to have a remaining useful life of four years. No fair value adjustment has been made in the books of Horsfall Ltd and there was no change in the fair value of this equipment at the year end. At the date of acquisition Horsfall Ltd had a balance on its retained earnings of £86,800.
(3)
During December 2010 Bugbee plc sold goods to Garton Ltd and Horsfall Ltd for £20,000 and £30,000 respectively on which its gross margin was 30%. Both Garton Ltd and Horsfall Ltd held half of these goods in inventories at the year end and had paid cash on delivery.
(4)
Bugbee plc has undertaken annual impairment reviews. Impairment losses of £12,000 and £5,000 have been identified in respect of Garton Ltd and Horsfall Ltd respectively for the year ended 31 December 2010. These need to be recognised in the consolidated financial statements of Bugbee plc.
Requirement Prepare the consolidated statement of financial position of Bugbee plc as at 31 December 2010. (22 marks)
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© The Institute of Chartered Accountants in England and Wales 2011
Page 7 of 8
4.
Kempster plc operates in the oil extraction extract ion and refining business and is preparing its draft financial statements for the year ended 31 December 2010. The following information has been collected for the preparation of the provisions and contingencies notes. (1)
A new site was acquired on 1 January 2009 and is being used as the site for a new oil refinery. Initial preparation work was undertaken at the site at the start of 2009 and the oil refinery was completed and ready for use on 31 December 2009. The new refinery was expected to have a useful life of 25 years. Kempster plc has a well-publicised policy that it will reinstate any environmental damage caused caused by its activities. The estimated cost of reinstating the environment is £1,300,000 for damage caused during the initial preparation work. (Ignore the effect of discounting.) discounting.)
(2)
An explosion at one of Kempster plc’s oil extraction plants on 1 July 2010 has led to a number of personal injury claims being made by employees who were injured during the explosion. To date five claims have been made. If these claims are successful, it is likely that a further three employees who were also injured will make a claim. Kempster plc’s lawyers estimate that it is probable that the claims will succeed and that the estimated average cost of each pay-out will be £50,000. The lawyers have recommended that Kempster plc settles the claims out of court as quickly as possible at their estimated amount for all eight employees injured to avoid any adverse publicity. An additional two two claims have been been made by employees employees for the stress, stress, rather than injury, injury, that the explosion has caused them. If these claims were to succeed the lawyers have estimated that the likely pay-out would be around £10,000 per employee. However, the lawyers have stated that they believe it to be unlikely that these employees employees will win such a case. Kempster plc made an insurance claim to try to recover the personal injury costs that it is probable that it will incur. The claim is now in its advanced stages and the insurance company has agreed to meet the cost of the claims in full. The insurance company will refund Kempster plc once the claims have been settled.
(3)
The future of Kempster plc’s business operations is in doubt following the explosion at the oil extraction plant. The national press criticised Kempster plc for t he way that it handled the problem. To address this, on 1 October 2010 Kempster plc paid £12,000 to a risk assessment specialist who has recommended introducing a new disaster recovery plan at an estimated cost of £500,000.
(4)
Kempster plc entered into an operating lease in the previous period for some office space. However, the company’s plans changed and the office space was no longer required. At 1 January 2010 a correctly calculated provision had been made for the future outstanding rentals of £80,000 for the remaining five years. The rent paid during the period was £15,000. In addition, Kempster plc has signed a sub-lease to rent out the space for the first six months of next year for total rental income of £6,000. No other tenants are expected to be found for t he office space. (Ignore the effect of discounting.)
Requirements (a)
(b)
Using the information above, prepare: (i)
the provisions and contingencies contingenci es notes showing the numerical movements table and relevant narrative disclosures, disclosures, for inclusion in the financial statements of Kempster plc for the year ended 31 December 2010; and
(ii)
a summary summary of of the amounts that should should be be recognised recognised in the income statement for the year ended 31 December 2010. (11 marks )
Explain the two bases of accounting referred to by the IASB Framework as “underlying assumptions”, illustrating illustrating their application application with reference to Kempster plc. (7 marks) (18 marks)
© The Institute of Chartered Accountants in England and Wales 2011
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