Answer FOUR questions, TWO from Section A and TWO from Section B.

Transcription

1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series UG Examination FINANCIAL ACCOUNTING NBS-5002Y Time allowed 3 Hours Answer FOUR questions, TWO from Section A and TWO from Section B. Notes are not permitted in this examination. Do not turn over until you are told to do so by the invigilator. NBS-5002Y Module contact: Mrs Jessica Kirkham Copyright of the University of East Anglia Version 1

2 Page 2 SECTION A Answer both questions 1 and 2 in section A Question 1 The following trial balance relates to Oncue plc for the year ended 31 December 2017: Equity shares of 1 each 1,700 Share Premium 200 Retained earnings at 1 January Land and buildings at cost 1,098 Depreciation on premises at 1 January Plant and equipment at cost 1,800 Depreciation on plant and equipment at 1 January Inventory at 1 January Trade receivables 242 Cash and cash equivalents 222 Trade payables 164 5% Loan repayable Revenue 968 Purchases 290 Distribution costs 118 Administrative expenses 99 Loan Interest 1 Tax 2 Dividend paid 20 4,070 4,070 Further notes: 1) Inventory was valued at 220,000 at 31 December On 2 January 2018, it was discovered that inventory which had cost 80,000, had been damaged by flooding on 25 th December It was estimated that it could only be sold for 20,000. 2) The land cost 498,000. Buildings are to be depreciated at 10% straight line basis. 3) Plant and equipment is to be depreciated at 20% reducing balance basis. 4) All depreciation is to be treated as an administrative expense. 5) The estimated tax charge for the year is 16,000. The amount for tax in the trial balance is the under/over provision for the preceding year. 6) There is a bad debt of 2,000 and a provision of 5% is required for doubtful debts. 7) A final dividend of 60,000 is proposed at the year end.

3 Page 3 Required: Prepare the following statements in a form suitable for publication. Notes to the accounts are not required. a) A Statement of Profit or Loss for the year ended 31 December (8.5 marks) b) A Balance Sheet as at 31 December (11.5 marks) c) Explain your treatment of the damaged inventory in note (1). (3 marks) d) Explain your treatment of note (7). (2 marks) Total 25 marks TURN OVER

4 Page 4 Question 2 Pine plc, Salix Ltd and Ash Ltd have prepared the following balance sheets for the year ended 31 December 2017: Pine Salix Ash Non-current assets Property, plant & equipment 2,090 1, Investment in Salix 2,213 Investment in Ash 700 5,003 1, Current assets Inventories Receivables Cash and cash equivalents , Total Assets 6,104 2,570 1,154 Equity and Liabilities Equity Share Capital ( 1 ordinary shares) 3,000 1, Retained Earnings 2, Non-current liabilities Loans Current Liabilities Payables Total Equity and Liabilities 6,104 2,570 1,154 The following information is relevant for preparing the consolidated balance sheet of the Pine Group: 1) On 1 January 2017 Pine plc purchased 1,125,000 ordinary shares in Salix Ltd. At that date, the retained earnings of Salix Ltd were 985,000 and the fair value of Salix s net assets exceeded the carrying amount by 270,000. This increase related to land. 2) Also on 1 January 2017, Pine plc purchased 320,000 ordinary shares in Ash Ltd when the retained earnings of Ash were 120,000. 3) On 4 November 2017, Pine sold goods to Salix Ltd for 80,000. Pine charges a mark-up of 25%. Half of this inventory is held by Salix at 31 December 2017.

5 Page 5 4) A balance of 22,000 for the sale of inventory by Pine to Salix, is outstanding at the year end. 5) At the year end the goodwill in Salix is deemed to be impaired by 19,000. 6) The group s policy is to measure non-controlling interest as a percentage of net assets. Required: a) Explain the difference between a subsidiary and an associate. (4 marks) b) Prepare the Consolidated Balance Sheet of the Pine group for the year ended 31 December 2017, in accordance with International Financial Reporting Standards. (21 marks) Total 25 marks TURN OVER

6 Page 6 Section B Answer 2 from 4 questions in section B Question 3 Fastrack plc provided the following information for the year ended 31 March Income Statement for the year ended 31 March Revenue Cost of sales (424) (425) Gross profit Distribution costs (103) (115) Administrative expenses (210) (175) Profit from operations (11) 127 Income from investments 6 4 Finance costs (10) (10) Profit before tax (15) 121 Tax 0 (25) Profit for the year attributable to equity holders (15) 96 Statement of Financial Position at 31 March Non-current assets PPE at cost Accumulated depreciation on PPE (120) (95) Investments Current Assets Inventories Trade and other receivables Cash and cash equivalents Equity Ordinary shares Non-redeemable preference shares Share premium 20 0 Retained earnings Non-Current liabilities 5% debentures Current liabilities Trade and other payables Current tax liabilities 2 7 Bank overdraft Total equity and liabilities

7 Page 7 Additional information: 1) 50,000 debentures were redeemed at par on 1 March ) Additional preference shares were issued at nominal value 1 January A preference dividend of 4,000 was paid during the year. 3) A bonus issue of 10,000 ordinary shares was made on 31 August 2016 and there was a further issue of ordinary shares in February ) An interim dividend of 10,000 was paid on the ordinary shares and a final ordinary dividend of 10,000 was proposed at 31 March ) An item of machinery with a carrying amount of 85,000, was sold for 70,000 during the year. 6) Additions to PPE cost 130,000. Required: a) Prepare a Statement of Cash Flows for the year ended 31 March 2017 in accordance with IAS7. Use the indirect method. (19 marks) b) At the end of the year, the finance director thinks one item of machinery may have suffered an impairment loss of 20,000. Explain how this would change the Statement of Cash Flows. (3 marks) c) State three advantages of producing a Cashflow Statement. (3 marks) Total 25 marks TURN OVER

8 Page 8 Question 4 The directors of Sullivan plc are using accounting ratios to analyse the performance of the company. The following information is taken from the financial statements for the year ended 31 December 2017: Income Statement for the year ended 31 December 2017 Revenue 855,000 Cost of Sales (432,500) Gross Profit 422,500 Operating expenses (289,400) Profit from operations 133,100 Finance costs (44,000) Profit for the year 89,100 Statement of Financial Position at 31 December 2017 Non-current assets PPE 854,000 Current assets Inventories 72,300 Trade receivables 135,000 Cash and cash equivalents 13,700 Total assets 1,075,000 Equity and liabilities Equity Ordinary share capital ( 1 each) 350,000 Share premium 50,000 Retained earnings 38, ,000 Non-current liabilities 10% Loan (repayable 2025) 350,000 6% Redeemable preference shares 200,000 Current liabilities Trade payables 87,000 Total equity and liabilities 1,075,000

9 Page 9 Additional information: Inventory at 1 January 2017 was 74,000. The market price of an ordinary share at 31 December 2017 was Ding plc is the main competitor of Sullivan plc. It has a gearing ratio of 40% and a price earnings ratio of 12. Required: a) Calculate the following ratios for Sullivan plc to two decimal places. Show the formula used for each ratio. i. Return on capital employed ii. Gearing iii. Working capital cycle iv. Price earnings (10 marks) b) Evaluate what the gearing and price earnings ratios tell investors and compare the gearing and price earnings ratios of Sullivan plc and Ding plc. (9 marks) c) Explain three limitations of using ratio analysis to compare companies. (6 marks) Total 25 marks TURN OVER

10 Page 10 Question 5 A company prepares its financial statements to 31 December each year. On 1 January 2016, it entered a lease agreement for a machine which was specially designed for the business. The machine would have cost 550,000 if purchased for cash straight away. The lease required four annual payments of 150,000 in advance, the first payment to be made 1 January At the end of the lease, ownership will pass to the lessee. The company uses straight-line depreciation and has a discount rate of 10%. The actuarial method is used to calculate the finance cost. The machine has an expected useful life of ten years. Year DF 10% Required: a) Discuss what type of lease this is under IAS 17. (6 marks) b) Show the entries in the profit and loss account for the year ended 31 December (5 marks) c) Show the entries in the balance sheet at 31 December (6 marks) d) What is meant by substance over form? (2 marks) e) Discuss what is meant by off balance sheet finance and how this has been an issue with accounting for leases. (6 marks) Total 25 marks

11 Page 11 Question 6 Clockwise plc is a company that makes clocks and watches. The accounts for the year ended 31 March 2017 have been prepared but the finance director requires advice concerning the following situations: Issue 1 A machine was purchased for 400,000 three years ago and has been depreciated for three years on a 20% reducing balance basis. Due to a fall in demand for the product this machine produces, the market value for it is only thought to be 100,000 at the year end. The finance director does not know how to value it and what entries should be made in the accounts. Issue 2 It is discovered that due to fraud, the inventory at 31 March 2016 was overvalued. Issue 3 During July 2016, a customer commenced legal action against the company for damage caused by one of its products. The company lawyers advise that the claim, which is for 28,000, could possibly succeed. Issue 4 The company owns a non-current asset which it has decided it no longer wishes to use. It plans to sell it as soon as possible. The finance director does not know how to value it in the balance sheet. Required: For each of the issues above, outline the relevant accounting rules and apply them to the facts, advising on the appropriate accounting treatment. a) Issue 1 b) Issue 2 c) Issue 3 d) Issue 4 (7 marks) (5 marks) (7 marks) (6 marks) Total 25 marks END OF PAPER

12 NBS-5002Y FINANCIAL ACCOUNTING 2017/18 Q1. Most students managed to calculate the NBV of PPE correctly. Mistakes in COS were very common; the correct figures were used but wrong computation/total. Requirements c) and d) - answers were either very vague or they were not answered at all, marks were lost here. Q2. The majority of students answered this question very well, which demonstrates hard work and a good understanding of the topic. A small number of students completely ignored this topic, which is surprising given that the question/topic was compulsory. Q3. A very popular choice among questions from Section B. Some students answered this question very well; others had difficulties in computing the depreciation figure. In requirement b) many students discussed impairment instead of focusing on the impact on cash flow. Q4. Not a very popular choice. Of the few students who chose this topic, very few scored high marks. However, most students were able to discuss the limitations of ratio analysis very well. Q5. The most popular option with virtually all students choosing it. Generally, high marks scored here with the discussion part better answered than the numerical part. Q6. The least popular choice. Some good answers but most students who chose this question did not answer it well and/or the answers were very short.