This paper is not to be removed from the Examination Halls

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1 ~~AC3091 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC3091 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Financial Reporting Wednesday, 20 May 2015 : 10:00 to 13:15 Candidates should answer FOUR of the following SIX questions: ONE from Section A, ONE from Section B and TWO further questions from either section. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. Extracts from compound interest tables are given after the final question on this paper. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. PLEASE TURN OVER UL15/0175 Page 1 of 9

2 SECTION A Answer one question and no more than two further questions from this section. 1. The statements of financial position as at 31 December 2014 and the statements of comprehensive income for the year ended 31 December 2014 for Tea Plc, Coffee Ltd and Juice Ltd are given as follows: Statements of financial position as at 31 December 2014 Tea Plc Coffee Ltd Juice Ltd Non-current assets (land) Investments 1, Inventory Cash Inter-company receivable from Coffee Ltd Inter-company receivable from Juice Ltd Total assets 1,680 1,090 1,030 Share capital Retained earnings Trade payables Inter-company payable to Tea Plc Equity and liabilities 1,680 1,090 1,030 Statements of comprehensive Income for the year ended 31 December 2014 Tea Plc Coffee Ltd Juice Ltd Revenue Cost of sales (200) (300) (50) Gross profit Operating expenses (90) (160) (60) Profit before tax Tax (240) (70) (20) Profit after tax Question continues on next page. UL15/0175 Page 2 of 9

3 Notes Tea Plc acquired 80% of Coffee Ltd on 1 January 2003 for 400,000 when the share capital and reserves of Coffee Ltd were 150,000. At the date of acquisition, the fair value of Coffee Ltd s non-current assets (land) was 900,000. The cost of the non-current assets (land) was 800,000 on the date of acquisition and Coffee Ltd has not accounted for this revaluation. Tea Plc acquired 25% of Juice Ltd on 1 January 2005 for 300,000 when the share capital and reserves of Juice Ltd were 200,000. Tea Plc has significant influence over Juice Ltd. Goodwill for all acquisitions is capitalised. Impairment of 20% of the total goodwill is seen in No impairment has arisen in prior years. In 2014, Coffee Ltd sold Tea Plc inventory which cost 60,000 for 100,000 and Juice Ltd sold inventory to Tea Plc for 80,000. This had cost Juice Ltd 60,000. There were no other inter-group sales. Half of the inventory sold by both Coffee Ltd and Juice Ltd to Tea Plc remains unsold. A management fee of 10% of revenue is charged by Tea Plc to both Coffee Ltd and Juice Ltd for The management fee has not been received or paid as at 31 December None of the companies has accounted for this management fee. The retained earnings brought forward for Tea Plc are 450,000, the retained earnings brought forward for Coffee Ltd are 260,000 and the retained earnings brought forward for Juice Ltd are 400,000. Prepare the consolidated statement of comprehensive income for the year ended 31 December 2014, showing the non-controlling interest, profit attributable to the holding company and retained profit brought forward, either on the face of the consolidated statement of comprehensive income or in a separate calculation. Prepare the consolidated statement of financial position as at 31 December UL15/0175 Page 3 of 9

4 2. Answer all parts of the question. (a) Lid Plc is considering whether to (i) issue share capital of 600,000 ( 1 nominal value shares) or (ii) issue 300,000 ( 1 nominal value shares) and raise 300,000 from a long term loan with an interest rate of 5% per annum. The future is uncertain and if Lid Plc has a good year, profit before interest and tax will be 200,000 but if it has a poor year, profit before interest and tax will be 40,000. Calculate profit after tax and earnings per share in both scenarios and comment on your results. Assume the tax rate is 35%. (8 marks) (b) (c) (d) Define ordinary shares, preference shares, share premium and debentures. Discuss the permissible uses for the share premium account. (5 marks) Define LIFO (last in first out) and FIFO (first in and first out) in relation to inventory valuations. Discuss the impact on cost of sales and closing inventory if a company used the LIFO method for valuing inventory instead of the FIFO method in times of decreasing prices. (5 marks) Company D issued 400,000 ordinary shares with a nominal value of 50p for 3.00 each and then issued bonus shares, in respect of all its ordinary shares, on a 4 for 1 basis. Before the share issue and the bonus issue Company D s share capital and reserves were as follows: Ordinary share capital (nominal value 50p) 3,000,000 Ordinary share premium 9,000,000 Preference share capital 4,400,000 Retained profits 96,000,000 Total capital and reserves 112,400,000 i. What are bonus issues and rights issues? (2 marks) ii. Show the capital and reserves of Company D after the share issues. (5 marks) UL15/0175 Page 4 of 9

5 3. Cal Ltd has decided in future to account for assets on a current value basis, using deprival value of the assets as the definition of current value. The table and notes below give management estimates relating to three of the non-current assets owned by the company: Non-current asset 1 Non-current asset 2 Non-current asset 3 Net book value 100, , ,000 Net realisable value in market 120, , ,000 Current purchase price of an asset in similar condition 180, , ,000 Notes (i) (ii) (iii) Non-current asset 1 is rarely used but is kept as a standby. If it were not available it is estimated that 34,000 per annum would have to be spent on hire of a machine from another company. The annual expenditure on keeping this asset ready for use is set at 20,000. This asset will continue to be required as long as can be foreseen. Non-current asset 2, if retained, would have in its best use an expected life of 10 years at the end of which its selling price would be 150,000. Its annual net contribution to the cashflow during the ten years of use would be 60,000. The net contribution to cashflow each year is received at the year end. Non-current asset 3 is expected to have a life of 5 years, after which it would be sold for 150,000. Its net cash contribution during its five year life would be 90,000 per annum. The net cash contribution each year is received at the year end. The company expects to earn 10% per annum on capital invested. (a) Define deprival value. Discuss the advantages and disadvantages of recording noncurrent assets at deprival value for users of financial statements. (12 marks) (b) Calculate the deprival value for non-current assets 1, 2 and 3. (13 marks) UL15/0175 Page 5 of 9

6 4. (i) Pat Plc bought a non-current asset denominated in the currency imps. The noncurrent asset cost 30,000 imps on 1 August 2013 and on this date the exchange rate was 1:4 imps. Pat Plc has a December year end and the exchange rate on 31 December 2013 was 1:6 imps. Pat Plc paid for the asset on 31 January 2014 when the exchange rate was 1:2 imps. (ii) Pat Plc raised a 3 year loan of 1,000,000 rolls on 1 January Rolls are a foreign currency. The exchange rates were 1 : 5 rolls on 1 January : 6 rolls on 31 December 2013 and 1 : 4 rolls on 31 December (a) (b) Discuss when the closing rate and temporal methods should be used for translating the financial statements of overseas subsidiaries and explain what is meant by the functional currency. Compare and contrast the closing rate and temporal methods for translating the financial statements of overseas subsidiaries and critically assess both methods. (12 marks) Show how the transaction in (i) above would be accounted for by Pat Plc on 1 August 2013, 31 December 2013 and 31 January Show how the transaction in (ii) above would be accounted for on 1 January 2013, 31 December 2013 and 31 December (13 marks) UL15/0175 Page 6 of 9

7 SECTION B Answer one question and no more than two further questions from this section. 5. Either: Discuss the need for, and critically assess, conceptual frameworks for financial reporting. Or: Compare and contrast current purchasing power accounting and current value accounting. Critically assess these two methods and discuss the impact of the different methods on financial statements. 6. Either: Discuss the concepts of substance over form, off balance sheet finance and the impact of these concepts on financial statements. Illustrate your answers with three examples. Or: Define goodwill and discuss how goodwill should be accounted for. Discuss the main issues that arise when accounting for goodwill. END OF PAPER UL15/0175 Page 7 of 9

8 Compound interest factors over n periods at rate i per period Table 1: Present value factors To determine the present value of a single payment of 1 received n periods from the present at a constant discount rate of x% per period. Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% UL15/0175 Page 8 of 9

9 Table 2: Cumulative present value factors ( annuity factors ) The table gives the present value of n annual payments of 1 received for the next n years with a constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual payments of 1 the present value is Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% UL15/0175 Page 9 of 9