The Examiner's Answers for Financial Accounting and Tax Principles

Transcription

1 The Examiner's Answers for Financial Accounting and Tax Principles SECTION A Answers to Question One 1.1 A 1.2 D 1.3 D 1.4 B 1.5 Invoiced amount less maintenance, excluding VAT 117,000 Concrete base 12, , B 1.7 A 1.8 D 1.9 D 1.10 A 1.11 Tax evasion is the illegal manipulation of the tax system to avoid paying taxes. November P7 Examiners Answers

2 x 16 x 61,000 1, ,250 EOQ Two from: Exemption Tax credit Deduction 1.14 Tax base: $000 Accounting book value: $000 Cost 1/10/ Cost 1/10/ /9/08 First year allowance 450 ½ Depreciation 2007/8 100 ½ 50% /9 25% ½ Depreciation 2008/9 100 ½ /9 $000 Accounting book value Tax base Temporary difference Deferred tax balance at 25% (365/20) % 1.16 Using 5% and 2% from tables ($50 x 3.546) + ($1,000 x 0.823) ,000.3 ($50 x 3.808) + ($1,000 x 0.924) , , ,100 2% + x 3 2% % 1, ,000.3 P7 Examiners Answers 2 November 2009

3 1.17 Total Finance Cost Issue expenses 5,000 Redemption premium 13,000 4% dividend for 5 years 40,000 58,000 Workings: Balance Interest Paid Total $ $ $ $ 31/08/ /08/ /08/ /08/ /08/ Note: only 2009 and 2010 are required for the answer The annual charge to the profit or loss is: Year ended 31/08/09 $11,212 Year ended 31/08/10 $11,397 November P7 Examiners Answers

4 SECTION B Answers to Question Two (a) According to the Framework, its purposes are to: assist the Board in the development of future IFRSs and in its review of existing IFRSs; assist the Board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs; assist national standard-setting bodies in developing national standards; assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to be covered in an IFRS; assist auditors in forming an opinion as to whether financial statements conform with IFRSs; assist users of financial statements that are prepared using IFRSs; provide information about how the IASB has formulated its approach to the development of IFRSs. (b) JB needs $250,000 within three months to reduce its overdraft. ½ If expectations are realised JB will be able to repay it s overdraft in 10 months from cash flows. ½ Within the 3 months JB expects to generate $150,000 to reduce the overdraft ½, leaving a balance of $100,000 cash required. ½ A short term bank loan (6 months) could be arranged for $150,000 to provide finance to reduce the overdraft. The advantage is that the loan agreement will specify the interest rate and period of the loan, it is not repayable on demand like an overdraft. Debt factoring could be used to raise the cash, assuming that JB has trade receivables of $200,000 or more it could factor the debts with a finance company and raise cash on the security of the outstanding balances. Discounting bills of exchange or invoices at a bank. If JB has any bills of exchange or large customer invoices outstanding it could discount them at a bank and receive cash to reduce the overdraft. Supplier finance could be used, JB may be able to negotiate extended credit terms with its largest suppliers, releasing cash to reduce the overdraft. JB could also delay payment to its suppliers without agreement, this may provide the funds needed but would have the disadvantage that it could erode supplier goodwill and impact on JB s credit rating. How effective supplier finance is depends on the volume of purchases that JB make in a period. If JB s purchases are high in value $150,000 may be a relatively low percentage of the total and be easy to adjust. Sale and leaseback could be used if JB has suitable assets. JB would need to survey it s non-current assets and identify items that could be sold and leased back. P7 Examiners Answers 4 November 2009

5 (c) JE Working Capital Ratios Sept 2008 Sept 2009 Trade receivable days 250/2250 x days 390/3150 x days outstanding Inventory days outstanding 160/1910 x days 200/2800 x days Trade payables days 300/1910 x days 500/2800 x days outstanding Current ratio 500: :1 600:600 1:1 Quick ratio 340: :1 400: :1 (d) (i) According to IAS 18 revenue from the sale of services should be recognised when the following four conditions have been met: 1. The revenue can be measured reliably; 2. The costs incurred and the costs to be incurred can be measured reliably 3. It is probable that economic benefits associated with the transaction will flow to the service provider. 4. The stage of completion of the transaction can be measured reliably. Revenue is recognised according to the degree of completion. (ii) IAS 18 requires services such as maintenance contracts to be recognised according to the proportion of the contract fulfilled. In the example given the sale was made half way through the year, assuming the contract can be regarded as occurring evenly throughout the year JG would recognise six months worth of revenue, as this is a two year contract 6/24 would be recognised, that is $100,000. The balance, $300,000, due over the next 18 months will be shown under current liabilities $200,000 and non-current liabilities $100,000 at 30 September (e) $ Profit before tax 150,000 Add back: Entertaining 2,200 PP&E and Vehicle depreciation (note 1) 29, ,200 Less tax allowances PPE and Vehicle (note 1) (44,800) Taxable amount 136,400 Tax at 25% 34,100 November P7 Examiners Answers

6 Note to Income Statement for year ended 31 December 2008 Tax charge for year $ Estimated tax for year to 31 December ,100 Deferred tax increase (note 1) 3,950 38,050 Note 1: Depreciation PPE 27,000 - Vehicle 2,000 29,000 Tax allowances PPE 40,000 - Vehicle 4,800 44,800 Deferred tax increase in year 15,800 x 25% $3,950 (f) (i) Goodwill - Purchased goodwill - Purchased goodwill is the price paid over and above the fair value of the assets acquired from the sole trader. $ 000 Assets acquired (including brand) 650 Cash paid 700 Goodwill 50 Positive purchased goodwill of $50,000 will be recognised in the statement of financial position at cost at 1 November Annual impairment reviews will need to be carried out as required by IFRS 3 Business Combinations but no amortisation will be provided. (ii) Deferred development expenditure JX s deferred development expenditure appears to meet the IAS 38 criteria for deferment. ½ Therefore all development expenditure, including the amount purchased from the sole trader, $90,000 and that spent by JX, $500,000 can be treated as an intangible asset. The amount recognised at 31 October 2009 will be $590,000 and it will be amortised over the period expected to generate profits, 5 years at $118,000 a year (iii) Purchase of Brand Z brand name - IAS 38 allows intangible non-current assets to be carried at amortised cost or at revalued amount. For the purpose of revaluations under IAS 38, fair value is determined by reference to an active market. As there is no active market the revaluation model can not be used. The brand name Brand Z should be recognised in the statement of financial position at $200,000 at 1 November 2008 and amortised over its useful economic life. P7 Examiners Answers 6 November 2009

7 SECTION C Answer to Question Three (a) JZ Property, plant and equipment Property Machinery & Cost/Valuation Land Buildings Equip. Total $000 $000 $000 $000 Balance 30/9/08 3,500 7,460 3,680 14,640 Disposals (600) 0 (720) (1,320) 2,900 7,460 2,960 13,320 Acquisitions Balance 30/9/09 2,900 7,460 3,260 13,620 Depreciation Balance 30/9/08 0 1,930 1,720 3,650 Disposals 0 0 (720) (720) 0 1,930 1,000 2,930 Charge for year Balance 30/9/09 0 2,303 1,565 3,868 Net book value at 30/9/09 2,900 5,157 1,695 9,752 Net book value at 30/9/08 3,500 5,530 1,960 10,990 Workings: All figures in $000 Depreciation Buildings Machinery and equipment 7,460 x 5% 373 Reducing balance 3,260 1,000 2,260 x 25% 565 (b) JZ - Income statement for the year ended 30 September 2009 $000 $000 Revenue W1 7,825 Cost of sales W2 (3,190) Gross Profit 4,635 Gain on disposal of non-current asset W3 720 Administrative expenses W2 (1,157) Distribution costs W2 (405) Profit from operations 3,793 Finance cost W6 (109) Profit before tax 3,684 Income tax expense W4 (775) Profit for the period 2,909 November P7 Examiners Answers

8 JZ Statement of changes in equity for the year ended 30 September 2009 Equity Share Retained Total Shares Premium earnings $000 $000 $000 $000 Balance at 1 October , ,064 3,364 Share issue Profit for period 2,909 2,909 Balance at 30 September , ,973 6,723 JZ - Balance Sheet as at 30 September 2009 $000 $000 $000 Non-current assets Property, plant and equipment (answer (a)) 9,752 Current Assets Inventory 212 Trade receivables 937 Amount due on contract (W9) 15 Cash and cash equivalents 87 1,251 Total Assets 11,003 Equity and liabilities Equity Share capital 1,500 Share premium 250 Retained earnings 4,973 Total equity 6,723 Non-current Liabilities Long term borrowings 1,800 Liability under lease (W8) 199 Deferred tax 600 Total non-current liabilities 2,599 Current liabilities Trade and other payables (W7) 786 Provision for legal claim 40 Tax payable 795 Current element of lease (W8) 60 Total current liabilities 1,681 Total equity and liabilities 11,003 P7 Examiners Answers 8 November 2009

9 Workings All figures in $000 W1 Revenue Revenue per trial balance 7,720 Construction contract turnover (W9) 105 7,825 W2 Expenses CoS Admin Distr $000 $000 $000 Balance per trial balance 2, Depreciation Release of provision (5) Construction contract (W9) 69 Total 3,190 1, W3 Gain on disposal of non-current assets Land Cost 600 Less receipt 1,320 Gain 720 W4 Income tax expense Income tax for year 795 Deferred tax reduction (W5) (20) Income statement 775 W5 Deferred tax Balance 1 October Balance 30 September Reduction 20 W6 Finance cost Interest on loan (1,800 x 5%) 90 Lease finance charge (W8) W7 Trade and other payables Trade payables 741 Accrued loan interest W8 Finance lease liability Balance 1 October Paid per trial balance Finance 7.93% Due 1 October B/S Current liability 199 B/S Non-current liability November P7 Examiners Answers

10 W9 Construction contract Total contract Year 35% Revenue Cost to date 74 Cost to complete Profit Amount due from contract client Cost to date 74 Attributable Profit Less cash received 95 Amount due 15 P7 Examiners Answers 10 November 2009

11 The Examiner for Financial Accounting and Tax Principles offers to future candidates and to tutors using this booklet for study purposes, the following background and guidance on the questions included in this examination paper. Important Note: This paper is an all-compulsory paper, with Section A for 40 marks, Section B for 30 marks and Section C for 30 marks, which will contain one question covering at least two of four key financial reporting statements. Section A Question One Compulsory Question One consists of 17 sub-questions, designed to cover a variety of syllabus topics not covered elsewhere in the paper and addressing a selection of learning outcomes in all four sections of the syllabus. Section B Question Two Compulsory (a) Tests candidates ability to identify the purposes of the Framework. Tests learning outcome B (iv). (b) (c) (d) (e) Tests candidates ability to analyse cash flow needs and identify measures to improve cash flow. Tests learning outcome D (ii) and D (iii). Tests candidates ability to identify and calculate working capital and efficiency ratios. Tests learning outcome D (i). Tests candidates ability to identify the requirements of IAS 18 Revenue to the sale of services and then to apply the criteria to the provision of a repair and maintenance contract. Tests learning outcome C (iii). Tests candidates ability to calculate the amount of corporate income tax due for the year and prepare the relevant note to the income statement. Tests learning outcome A (viii) (f) Tests candidates ability to apply knowledge of international accounting standards to a given scenario and explain how the items should be treated in the financial statements. Tests learning outcome C (v). Section C Question Three Compulsory Tests candidates ability to prepare (from information provided in the question scenario) an income statement, balance sheet and a statement of changes in equity for the entity concerned, together with a property, plant and equipment note. The financial statements should be in a form suitable for publication and in accordance with current International Financial Reporting Standards. Tests learning outcomes A (viii) and C (i). November P7 Examiners Answers