Module Contact: Mrs Amanda Williams, NBS Copyright of the University of East Anglia Version 1

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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, ONE question from Section B, ONE question from Section C. 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 Amanda Williams, NBS Copyright of the University of East Anglia Version 1

2 Page 2 SECTION A Answer Section A IN FULL 1. The following trial balance has been extracted from the accounting records of Turmeric plc as at 31 March Revenue 1,250,000 Purchases 890,000 Administrative expenses 125,000 Interest Paid 5,000 Dividends paid 50,000 Ordinary shares at 1 April ,000 Share premium at 1 April ,000 Share issue 1,200,000 Retained earnings at 1 April ,200 Land at cost at 1 April ,300,000 Buildings at cost at 1 April ,000 Buildings accumulated depreciation at 1 210,000 April 16 Plant and machinery at cost at 1 April ,000 Plant and machinery accumulated 140,000 depreciation at 1April 16 Goodwill 40,000 Inventories at 1 April 16 69,420 Receivables 216,750 Cash and cash equivalents 33,030 Bank loan repayable on 1 April ,000 Payables 152,000 3,929,200 3,929,200 In addition the following notes are available: Note 1: Note 2: A credit note for 5,000 was issued in April 2017 which related to sales made in March A provision for doubtful debt is required for 10% of the outstanding receivables. Bad and doubtful debts should be charged to administrative expenses. Note 3: Inventories have been correctly valued at 31 march at 72,400. Note 4: Depreciation on buildings is calculated at 5% of cost and should be charged against administrative expenses.

3 Page 3 Note 5: Note 6: Depreciation on plant and machinery is calculated at 20% of cost and should be charged against cost of sales. Goodwill arose on the acquisition of the assets of a sole trader business 2 years ago. The annual impairment review at 31 March 2017 concluded that there was an impairment loss on goodwill of 10,000 which has yet to be accounted for. Note 7: Tax for the year is estimated at 12,300. Note 8: During the year Turmeric issued 400,000 new 1 ordinary shares at 3 per share. The money received was paid into the bank but the share issue has yet to be accounted for with the credit entry posted to a share issue account. Turmeric paid total dividends of 50,000 during the year. Prepare the following statements for Turmeric plc in a form suitable for publication. Notes to the accounts are not required. a) A statement of profit or loss for the year to 31 March 2017; b) A statement of changes in equity for the year to 31 march 2017; c) A balance sheet as at 31 March (10 marks) (3 marks) (12 marks) TURN OVER

4 Page 4 2. Parsnip plc is a quoted company with investments in two other companies, Spinach Ltd and Artichoke Ltd. The balance sheets and the statements of profit or loss of all three companies at 31 March 2017 are as follows: Balance Sheets Parsnip Spinach Artichoke Non-current assets Property, plant & equipment 200, , ,000 Investments 900,000 1,100, , ,000 Current assets 600, , ,000 1,700,000 1,050, ,000 Equity and liabilities Equity Share capital (1 ordinary shares) 600, , ,000 Retained earnings 700, , ,000 1,300, , ,000 Non-current liabilities 150,000 50,000 Current liabilities 250, ,000 1,700,000 1,050, ,000 Statement of profit or loss Parsnip Spinach Artichoke Revenue 1,000,000 1,200,000 1,400,000 Cost of sales (800,000) (900,000) (1,000,000) Gross profit 200, , ,000 Expenses (50,000) (100,000) (150,000) Operating profit 150, , ,000 Dividends received from associate 25,000 Profit before tax 175, , ,000 Income tax (50,000) (50,000) (50,000) Profit for the year 125, , ,000 Notes Note 1: On 1 October 2016 Parsnip plc, acquired 80% of the ordinary shares of Spinach Ltd for 700,000. On 1 April 2016 it acquired 25% of the ordinary shares of Artichoke Ltd for 200,000. On 1 April 2016 the

5 Page 5 retained earnings of both Spinach and Artichoke were 200,000 each. You may assume that profits accrue evenly throughout the year and that dividends were paid out of post-acquisition retained earnings Note 2: On 1 February 2017 Parsnip sold goods to Spinach for 50,000. Parsnip s normal margin is 20%. 75% of this inventory remains on hand in Spinach s warehouse at 31 March The 50,000 Spinach owed to Parsnip in relation to this transaction remained unpaid at the year end. Note 3: The groups accounting policy is to measure non-controlling interest at acquisition as a percentage share of the net assets acquired. Prepare the consolidated balance sheet and the consolidated statement of profit or loss for the Parsnip group for the year ended 31 March 2017, in accordance with international financial reporting standards. (25 marks) SECTION B Answer ONE question from Section B 3. The following information has been extracted from the Trial Balance of Broccoli plc at 31 March 2017: Freehold land and buildings Cost 841,000 Accumulated depreciation at 31 March ,400 Plant and equipment Cost 198,500 Accumulated depreciation at 31 March ,300 Finance lease payment 10,000 The following information is also relevant: Freehold land and buildings On 1 April 2016 the finance director decided that the revaluation basis would be more appropriate than the cost basis for Broccoli s land and buildings. On that date the land was valued at 700,000 and the buildings at 200,000, with the remaining useful life of the buildings assessed at 25 years. No entries have yet been made in respect of this revaluation. Broccoli does not make an annual transfer between retained earnings and the revaluation surplus. TURN OVER

6 Page 6 Plant and equipment On 1 April 2016 the company entered into a finance lease for a new machine. The terms of this lease require Broccoli to pay 10,000 on 31 March annually for four years commencing on 31 March The only entries made in the accounting records in respect of the lease are for the payment made on 31 March The machine would have cost 36,000 to buy outright and has a useful life of five years. Broccoli allocates finance charges on a sum of digits basis. On 1 April 2016 Broccoli scrapped equipment which had a cost of 12,000 and which had accumulated depreciation of 7,200 on 31 March 2016, incurring a loss on disposal of 800. This has not yet been accounted for. Depreciation Depreciation for the year has yet to be charged. All depreciation is calculated on a straight line basis. All plant and equipment is estimated to have a useful life of five years. a) Prepare a property, plant and equipment note for Broccoli for the year ended 31 March 2017, in a form suitable for publication. You should show the movements on cost/valuation and on accumulated depreciation as well as the opening and closing carrying amounts for the different categories of property, plant and equipment. (15 marks) b) Prepare extracts from the statement of cash flows for Broccoli for the year ended 31 March 2017 which reflect the property, plant and equipment transactions that took place in the year. (10 marks) 4. Treacle plc is preparing its accounts to the year ended 31 March There are a number of issues which need some explanation and guidance which you have been asked to prepare as one of the accountants working in the finance department. Issue 1 In late March the directors of Treacle uncovered a material fraud that had been carried out by the company s credit controller and had been continuing for some time. Their investigations revealed that 4 million of trade receivables included in the balance sheet as at 31 March 2017 had actually been paid but the money had been stolen by the credit controller. More detailed analysis revealed that of the 4 million 1.5 million had been stolen in the year ended 31 March 2016, with the rest

7 Page 7 being stolen in the year ended 31 March It will not be possible to recover the money from the credit controller and the company is not insured against this loss. Issue 2 Treacle has provided a 12 month warranty on some of the products that it sells. They expect that the cost of meeting the promises made under the warranties is about 5% of relevant sales, the volume of relevant sales in the current year being 8 million. The warranty provision at 31 March 2016 was 100,000. Issue 3 On 15 th March 2017 Treacle sold goods to Petal Ltd, an unrelated company, for 100,000 on a sale or return basis, accounting for this transaction as a normal credit sale. These goods had cost Treacle 80,000. The goods have yet to be sold by Petal Ltd. For each of the transactions outlined above identify the accounting issue, state the relevant accounting principles and rules and finally apply those principles to the issues raised to provide advice to the Treacle about an appropriate accounting treatment. The marks available for each issue are: Issue 1 Issue 2 Issue 3 (9 marks) (8 marks) (8 marks) SECTION C Answer ONE question from Section C 5. CoffeeBean plc is a well-known brand associated with a chain of coffee shops around the world. It is estimated to be worth about 40 billion. CoffeeBean have developed the brand value over the last 10 years and now wish to include this asset on the balance sheet at valuation. The argument being put forward by the company directors is that when they considered the elements of financial statements as set out in the IASB Conceptual Framework for Financial Reporting the brand seemed to fall within the definition of an asset, and they considered that the brand value is financial information which is highly relevant to the primary users of their financial reports. TURN OVER

8 Page 8 a) Discuss the proposed accounting treatment for CoffeeBean s brand and explain whether it would be permitted under International Financial Reporting Standards. (10 marks) b) Explain what is meant by the terms: i. Elements of financial statements ii. Asset iii. Relevant to primary users (9 marks) c) Discuss the relationship between the conceptual framework and individual IFRS and IAS like IAS 38 Intangibles. (6 marks) 6. Molasses plc are considering the best way to get a fleet of cars for their sales force. They have two options: the first is to acquire the cars on a finance lease for 5 years at an annual cost of 250,000; the second option is to acquire the cars on an operating lease for 1 year at an annual cost of 300,000. The market price of purchasing the fleet of cars outright is 1,250,000. The present value of the minimum lease payments under the finance lease option is 1,136,488 and under the operating lease option is 300,000. The interest rate implicit in the lease is 5% in both cases. The useful life of the cars is 6 years. a) Describe the factors which are taken into account to determine whether a lease is a finance lease or an operating lease. (7 marks) b) Discuss the concept of substance over form and describe how it applies to finance leases and operating leases. (6 marks) c) Discuss what impact the choice of lease will have on the company s following ratios i. Net Profitability ii. Asset turnover iii. Return on capital employed iv. Gearing. (12 marks) END OF PAPER