FRS 102 Questions and Answers

Transcription

1 FRS 102 Questions and Answers Christy Kearney E&OE Page 1

2 QUESTION BANK Q. NAME ISSUES PAGE SOL Alpha Restructuring, Revenue Recognition, Inventory, Revaluations, Government Grant, Investment Property, Leasing, PPE 2 Beta Revenue Recognition Gamma Share based payments, Basic financial instruments Delta Goodwill, Impairment of Goodwill Epsilon Deferred Tax Zeta Intangibles Theta Defined Benefit Scheme Iota Goodwill Kappa Leasing (sale & leaseback) Lambda Statement of Cash flows Nu PPE and Decommissioning Liabilities Xi Basic Financial Instruments and Impairment Omicron Convertible Bonds Rho Foreign Exchange Tau Long term contracts Upsilon Pension Schemes Phi Share Based payments Psi Government Grants Omega Property, Plant & Equipment Abramovich Impairment of assets Late Late Events after the end of the Reporting period Many Changes Changes in Accounting policies & Estimates and Errors Christy Kearney E&OE Page 2

3 QUESTION 1 ALPHA LIMITED Alpha Ltd is a local company which manufactures and sells products to the building trade. The financial accountant has recently resigned and you have been appointed in his place. One of your first tasks is to prepare the financial statements for the year ended 31 December 2014 under FRS 102. However, there are a number of unresolved issues which have not yet been accounted for, or may require adjustment in accordance with FRS 102. These are also detailed below. Prepare appropriate journal adjustments in order to adjust the draft financial statements (ignoring taxation) at 31 st December ISSUE 1 The continuing poor economic climate has affected revenues in one of the company s production divisions. The directors announced in October 2014 that they were examining possible options and in December 2014 they announced their intentions to scale down operations in this division over the following months. The estimated cost of scaling down operations is 2.3 million. This is made up as follows: 000 Loss on disposal of plant & machinery 650 Redundancy costs 350 Redesign of factory 370 Marketing costs in relation to continuing product lines 410 Future operating losses in respect of discontinued product line sales 520 2,300 No provision has been made for the above cost of scaling down operations in the draft financial statements at 31 December ISSUE 2 Although there is no legal obligation to do so, the company offers customers the choice of a cash refund or exchange, if goods are returned. Based on past experience, it is estimated that cash refunds relating to 2014 sales will amount to 900,000 in Additionally, it is estimated that 700,000 of goods sold in 2014 will be exchanged in The company earns an average gross margin of 40% on sales. The company also offers warranties in respect of faulty goods. The company estimates that the discounted value of future warranty claims against goods supplied by the company during 2014 amounts to 1.5 million at 31 December No provisions have been made in the draft financial statements at 31 December 2014, either in respect of warranties, refunds or exchanges. Christy Kearney E&OE Page 3

4 ISSUE 3 The company buys a specialised item of raw material from an American supplier. Purchases over the last 3 months of the financial year were as follows: Month Units purchased Total cost US$ October ,000 November ,000 December 9 630,000 The company values its closing inventory on a FIFO basis. The net realisable value of the raw material at 31December 2014 was 30,000 per unit. The company expects to sell the corresponding finished products at a profit. The rate of exchange at 31 December 2014 was 1 = $1.50. This was also the rate throughout the last quarter of the year. The company debited the acquisitions each month to the purchases account, but, at present, none of these raw material items are included within the closing inventory balance. There are 17 units of this raw material in inventory at 31 December ISSUE 4 On 1 January 2011, the company purchased a warehouse for its own use at a cost of 300,000. The warehouse was revalued to 500,000 on 31 December 2012 and was sold for 600,000 in March It is company policy to depreciate buildings over 50 years on a straight-line basis. A full year s depreciation is charged in the year of acquisition, and no depreciation is charged in the year of disposal. The company has not made subsequent adjustments to the revaluation reserve since No entries have been made in the draft financial statements for the year ended 31 December 2014 relating to this property. ISSUE 5 The company purchased a machine on 1 January 2013 at a cost of 500,000. A government grant of 100,000 was received, which was set up as a Deferred Liability in the financial statements and released to the P&L in accordance with depreciation rates in the year ended 31 December In July 2014, a government inspector found that the company had failed to meet the conditions of the grant agreement, relating to employee numbers, and a demand was issued for its repayment. It is company policy to depreciate plant and machinery at 10% per annum on a reducing balance basis, and depreciation has been charged for 2013 and Depreciation is charged to cost of sales. No entries have been made in the draft financial statements for the year ended 31 December 2014 relating to the repayment of the grant. Christy Kearney E&OE Page 4

5 ISSUE 6 The company purchased a disused building on 1 January 2013 for 1,500,000. The intention at this time was to develop the property and to subsequently let the various floors to tenants. A further 300,000 was spent over the next 11 months on renovations and improvements to the building prior to letting. The building was ready for tenant occupation on 1 December 2013.The valuation of the completed property at 31 December 2013 was 2,000,000. Due to unforeseen difficulties in obtaining tenants, the building remained unoccupied. The Investment property was correctly recognized at 2,000,000 on 31 December In February 2014, the company decided to immediately relocate its headquarters to the building. The company managed to secure new tenants for the company s old headquarters. At the date of letting in February, the carrying value of the old headquarters was 1,500,000. The company uses the fair value model to account for investment property. No entries have been made in the draft financial statements for the year ended 31 December 2014 relating to these two properties. Ignore depreciation in this case. The valuations for both buildings at 31 December 2014 were as follows: Old headquarters (now rented) 1,950,000 Current headquarters (PPE) 2,500,000 ISSUE 7 On 1 January 2014, Alpha Ltd entered into a leasing contract to lease a number of machines. The lease is for a fouryear period, which is the estimated useful economic life of the machines. Alpha is required to repair and insure the machines, which have no estimated residual value at the end of the lease. The lease rentals were set at 10,000 every six months, payable in advance. The lease rentals paid to date of 20,000 are included within cost of sales. The rate of interest implicit in this lease was 5% per six-monthly period and the present value of the minimum lease payments was very close to the fair value of the assets at the inception of the lease, which was estimated at 70,000. No depreciation has been charged as yet in respect of these leased assets. Plant and equipment is depreciated on a straight-line basis at 25% per annum and should be charged to cost of sales. ISSUE 8 The company has acquired an item of plant in December The details of the acquisition are; List Price of plant 240,000 with a Trade 12.5%. amounting to 30,000. Shipping Costs 2,750, Pre-Production testing 12,500, Electric Cable installation 14,000. Concrete reinforcement 4,500 and own labour costs 7,500. In addition, you ascertain the following; An error was made installing the electric cable. The error cost 6,000 to rectify and is included in the 14,000. At the end of the useful life (10-year period), there will be compulsory decommissioning costs of 14,000 (already discounted at the appropriate rate). The plant was ready for use on 1 January 2015 No entries have been made in the accounts except for labour costs which have been charged to the Profit & Loss account. Christy Kearney E&OE Page 5

6 QUESTION 2 BETA LIMITED Beta is an entity that prepares financial statements to 31 December each year. During the year ended 31 December 2014 the following transactions occurred. You are required to prepare the necessary journals for each transaction under FRS 102 for the year ended 31 December 2014 ISSUE 1 On 29 December 2014 Beta delivered two machines to a customer. Details relating to the machines are as follows: Machine Construction cost Invoiced price A 190, ,000 B 200, ,000 Machine A was unpacked and connected to the power supply necessary to operate the machine on 3 January As soon as this was done, the machine was able to operate immediately. Machine B needed to be installed by an expert fitter before it was capable of operating in the intended manner. The installation process was complete, and the machine passed ready for use, on 4 January The customer paid for both machines on 31 January ISSUE 2 On 15 December 2014 Beta transferred goods to a third party, Omicron, on a consignment basis. Omicron undertook to sell the goods on behalf of Beta and remit the proceeds, less a commission of 10%, when the final purchaser paid Omicron for them. The invoiced value of these goods (the price payable by the final purchaser was 400,000). The goods cost Beta 320,000 to manufacture. By 31 December 2014 Omicron had sold goods at an invoiced price of 240,000 and received payments of 160,000. No payment had been made to Beta by Omicron by 31 December Since 31 December 2014 Omicron has sold the remaining goods, received all the proceeds, and remitted 360,000 ( 400,000 x 90%) to Beta. ISSUE 3 On 1 January 2014 Beta sold a property it owned to a bank for 3,000,000. The carrying value of the property at 1 January 2014 was 2,000,000, of which 1,200,000 was depreciable. The remaining useful economic life of the depreciable element was 30 years from 1 January Beta continued to occupy the property and be responsible for its security and maintenance and did not exercise the option to repurchase at 31 December The market value of the property on 1 January 2014 was 5,000,000 and it is considered unlikely that this will fall significantly in the foreseeable future. Beta measures all its property, plant and equipment under the cost model. The terms of the sale allowed Beta the option to repurchase the property as follows: On 31 December 2014 for 3,300,000. On 31 December 2015 for 3,630,000. On 31 December 2016 for 3,993,000. Christy Kearney E&OE Page 6

7 QUESTION 3 GAMMA LIMITED For the transactions below, prepare the appropriate journal entries for the year ended 31 December ISSUE 1 On 1 January 2013 Gamma granted share options to 500 sales staff. The entitlement of each member of staff depended on the achievement of overall sales targets in the three-year period to 31 December Details are as follows: Cumulative sales less than 100 million: 100 options each. Cumulative sales between 100 million and 150 million: 150 options each. Cumulative sales more than 150 million: 200 options each. The options had a fair value of 1.20 per option on 1 January This had increased to 1.30 per option by 31 December 2013 and by 31 December 2014 the fair value of an option was 1.35 per option. When the options were granted and at 31 December 2014, management estimated that total sales in the three-year period would be 130 million. However, following a very good year in the year to 31 December 2014 that estimate was revised to 160 million. The directors (@ 31 December 2013 or 2014) did not expect any sales staff to leave. ISSUE 2 On 1 January 2014 Gamma had purchased an equity investment in a listed entity. Gamma purchased 1 million shares at the then quoted price of 2 per share. This shareholding does not allow Gamma to exercise control or significant influence over the listed entity. Gamma intended to keep the shares for their growth potential rather than treat them as part of a trading portfolio. All the shares were still held by Gamma on 31 December 2014 and at that date their quoted price was 3.20 per share. Christy Kearney E&OE Page 7

8 QUESTION 4 DELTA LIMITED Delta is an entity with a number of subsidiaries. The year end of the entity is 31 December. On 1 January 2014 Delta acquired an 100% interest in Friendly. Details of the acquisition were as follows: Delta acquired 800,000 (100%) shares in Friendly by issuing two equity shares for every five acquired. The fair value of a Delta share on 1 January 2014 was 4. Delta incurred further legal and professional costs of 100,000 that directly related to the acquisition. The fair values of the identifiable net assets of Friendly at 1 January 2014 were measured at 1 12million. Friendly comprises three cash generating units A, B and C. When Friendly was acquired the directors of Delta estimated that the goodwill arising on acquisition could reasonably be allocated to units A:B:C on a 2:2:1 basis. Goodwill is amortised over 10 years. (reliable estimate of useful life) The carrying values of the assets in these cash generating units and their recoverable amounts are as follows on 31 December 2014: Unit Carrying value Recoverable amount (before goodwill allocation) A B C The carrying value of the goodwill arising on acquisition of Friendly in the consolidated statement of financial position of Delta at 30 September 2014 following the impairment review is: The total impairment loss arising as a result of the impairment review is: Christy Kearney E&OE Page 8

9 QUESTION 5 EPSILON LIMITED The deferred tax liability of Epsilon at 31 December 2013 was 2m which related solely to timing differences on property, plant and equipment. The following information is relevant regarding the computation of deferred tax for the year ended 31 December 2014: (1) At 31 December 2014, the carrying amount of property, plant and equipment was 44m and its tax base was 27m. The carrying amount of 44m incorporates a surplus of 6m that arose as a result of a property revaluation on 31 December This property revaluation had no effect on the tax base of the property. (2) Since June 2013 Epsilon has been carrying out a project to develop a more efficient production process. On 1 January 2014, the project was assessed and found to be at a stage that justified capitalising future costs incurred on the project. Accordingly, an intangible asset of 900,000 was included in the draft statement of financial position at 31 December Amortisation is expected to begin sometime in the year ended 30 December All expenditure on the project qualifies for tax relief as the expenditure is incurred. (3) On 1 September 2014 Epsilon sold goods to one of its subsidiaries for 4m. The goods cost Epsilon 3m to manufacture. Prior to 31 December 2014 the subsidiary sold 40% of the goods to a non-group company for 2.2m. (4) On 31 December 2014 Epsilon borrowed 20m from a non-group company. The financial liability is not designated as fair value through profit or loss. Epsilon incurred costs of 1m in connection with the borrowing and this qualified for tax relief in the year ended 31 December (5) There were no other temporary differences affecting the Epsilon group at 31 December The tax rate that applies to all companies in the Epsilon group is 25%. Required: Compute the deferred tax charge or credit that will appear in the consolidated statement of profit and loss and other comprehensive income of Epsilon for the year ended 31 December 2014 and in the consolidated statement of financial position as at 31 December You should support your figures with relevant journal adjustments. Christy Kearney E&OE Page 9

10 QUESTION 6 ZETA LIMITED Zeta measures assets using the revaluation model wherever this is possible under FRS 102. During its financial year ended 31 December 2014 Zeta entered into the following transactions: 1. On 1 October 2013 Zeta began a project to investigate a more efficient production process. Expenses relating to the project of 2 million were charged in the statement of comprehensive income in the year ended 31 December Further costs of 1 5 million were incurred in the three-month period to 31 March On that date, it became apparent that the project was technically feasible and commercially viable. Further expenditure of 3 million was incurred in the nine-month period from 1 April 2014 to 31 December The new process, which began on 1 January 2015, was expected to generate cost savings of at least 600,000 per annum over the 10-year period commencing 1 January On 1 April 2014 Zeta acquired a new subsidiary, Omicron. The directors of Zeta carried out a fair value exercise as required by FRS102 and concluded that the brand name of Omicron had a fair value of 10 million and would be likely to generate economic benefits for a ten-year period from 1 April They further concluded that the expertise of the employees of Omicron contributed 5 million to the overall value of Omicron. The estimated average remaining service lives of the Omicron employees was eight years from 1 April On 1 July 2014 Zeta renewed its licence to extract minerals that are needed as part of its production process. The cost of renewal of the licence was 200,000 and the licence is for a five-year period starting on 1 July There is no active market for this type of licence. However, the directors of Zeta estimated that at 31 December 2014 the fair value less costs to sell of the licence was 175,000. They further estimated that over the remaining 54 months of its duration the licence would generate net cash flows for Zeta that had a present value at 31December 2014 of 185,000. Assuming the Zeta group has no intangible assets other than those mentioned above, the carrying value of intangible assets in the Statement of financial position of Zeta as at 31 December 2014 is: You are NOT required to compute the goodwill arising on acquisition of Omicron. Christy Kearney E&OE Page 10

11 QUESTION 7 THETA LIMITED Theta provides post-employment benefits to its employees through a defined benefit plan. The following data relates to the plan for the year ended 31 st December: Present Value of Obligation at year end 36,000 33,000 Fair Value of plan assets at year end 31,000 30,000 Current service cost 6,000 5,700 Benefits paid by plan 8,000 7,500 Contributions paid into plan 5,800 5,600 Discount rate at start of year 10% 9% At year end 31st December 2014: The net pension expense in the Profit and Loss is: The re-measurement gain or loss in OCI is: The net pension asset / liability in the SOFP is: Christy Kearney E&OE Page 11

12 QUESTION 8 IOTA PLC Iota s year end is 31 December On 31 December 2014 Iota purchased 80% of the equity shares of Gamma. The purchase consideration was as follows: Iota issued 30 million shares to the shareholders of Gamma. The market price of an Iota share on 31 December 2014 was Iota agreed to make an additional payment of 25 million to the shareholders of Gamma on 31 December This payment was contingent on the post-acquisition profits of Gamma reaching a specified level in the two-year period ending on 31 December The directors of Iota assessed that it was probable that the payment would be made. Iota incurred incremental legal and professional fees of 1 million in connection with the acquisition of Gamma and debited these costs to the cost of investment in Gamma. 400,000 of this amount related to the costs of issuing the Iota shares. The individual financial statements of Gamma as at 31 December 2014 showed net assets of 80 million. The directors of Iota carried out a fair value exercise on Gamma s net assets. The fair values of the net assets of Gamma were the same as their book values with the exception of: Plant and equipment that had a book value of 60 million and a fair value of 66 million. The estimated remaining useful economic life of this plant and equipment was three years at 31 December Depreciation of plant and equipment is charged to cost of sales. A loan liability that was carried at its amortised cost of 32 million. The fixed annual rate of interest payable in arrears on this loan was 10%. The loan is repayable on 31 December The market rate of interest for this type of loan was 8% per annum at 31 December 2014, therefore the fair value of this loan at that date was million. The goodwill figure in the consolidated SOFP at 31 December 2014 is: Christy Kearney E&OE Page 12

13 QUESTION 9 KAPPA LTD Kappa Limited s year end is 31 st December In an attempt to alleviate some liquidity problems, Kappa sold one of its buildings to a bank on 1 January 2014 and immediately leased it back for a period of 20 years. This is believed to be a major part of the building s economic life. The lease is non-cancellable. The main facts about the building and the lease are as follows: Lease term 20 years Economic life of the building 20 years Net book value of the building 1.4m Sales proceeds 2,000,000 Annual rental payments (years 1-20) 176,436 Amount of interest included in first lease payment 140,000 Present value of minimum lease payments 2,000,000 This transaction has not yet been recorded in the books on Prayax. By the year end, the company has not recorded any details regarding the sale and leaseback transactions. Christy Kearney E&OE Page 13

14 QUESTION 10 LAMBDA LTD Lambda acquired a 75% shareholding in Bankayla Limited on the 1 st January This was the only acquisition in the current financial year. Information relating to the acquisition of Bankayla Limited: 000 Machinery 495 Inventories 96 Trade receivables 84 Cash 336 Trade payables (204) Income tax (51) 756 Non-Controlling Interest (25%) (189) 567 Goodwill Consideration paid: 2,640,000 shares 825 Cash The consolidated Statement of Cash Flows will show: Cash Flows in Investing Activities Acquisition of Subsidiary Christy Kearney E&OE Page 14

15 QUESTION 11 NU LIMITED Nu is a private company. You are the financial controller of the entity and its consolidated financial statements for the year ended 31 March 2011 are being prepared. Your assistant, who has prepared the first draft of the statements, is unsure about the correct treatment of the transaction below and has asked for your advice. Details of the transaction are: On 1 January 2014 Nu began to extract minerals from a large site that it had recently constructed. The direct costs of constructing the site totalled 25 million. The directors of Nu estimate that an appropriate allocation of general administrative costs to this project would be 2.5 million. The site has an expected useful economic life of 10 years and at the end of that period the cost of rectifying the damage to the environment caused by the construction of the site is estimated at 6 million. Nu is under no legal obligation to rectify this damage but its published policies indicate that rectification is its usual practice in such circumstances. Your assistant has included 27.5 million in property, plant and equipment and charged 2.75 million depreciation in the income statement. He has not included any provision for the cost of rectifying the environmental damage because Nu has no legal obligation to rectify it and could therefore choose not to. The relevant discount rate to be used in any calculations is 8% per annum and the present value of 1 receivable at the end of 10 years at this rate is cents. Journalise the appropriate accounting treatment of the transactions in the financial statements for the year ended 31 December Christy Kearney E&OE Page 15

16 QUESTION 12 XI LIMITED Xi purchased 5% debentures in Cryptco on 1 st January 2013 (their issue date) for $100,000. The term of the debentures was 5 years and the maturity value is $130,525. The effective interest rate is 10% and the company classified them as financial assets at amortised cost. At the end of 2014, Cryptco went into liquidation. All interest has been paid until that date. On 31 st December 2014, the liquidator of Cryptco announced that no further interest would be paid and only 80% of the maturity value would be repaid, on the original repayment date (31 December 2017) The market rate on similar bonds on that date is 8%. Required The carrying Value of the debentures just before the impairment became apparent The carrying value of the debentures at 31 st December 2014 after impairment The journal entry to record the impairment at 31 st December 2014 is: DEBIT CREDIT Christy Kearney E&OE Page 16

17 QUESTION 13 OMICRON LIMITED On 1 st January 2014, Omicron issued 10,000 5% convertible bonds at their par value of $50 each. The bonds will be redeemed on 1 st January Each bond is convertible at the option of the holder any time during the 5-year period. Interest on the bond will be paid annually in arrears. The prevailing market interest rate for similar debt without conversion options at the date of issue was 6%. Omicron has recognised a liability of $500,000 and has a finance cost of $25,000 reflected in the calculation of profit for the year. Required Prepare the journal entries, if any, to record the convertible debt in the financial statements of Omicron at its year end 31 st December 2014 Christy Kearney E&OE Page 17

18 QUESTION 14 RHO LIMITED Rho is an Irish resident company with a year end of 31 December Rho had contracted to purchase an item of plant and equipment from a company based in US for 12 million US Dollars on the following terms: Payable on signing contract (1 September 2014) 50% Payable on delivery and installation (31 December 2015) 50% The amount payable on signing the contract (the deposit) was paid on the due date and is refundable. The following exchange rates are relevant: Dollars to Euro 1 September December 1.35 A full year s charge for depreciation of property, plant and equipment is made in the year of acquisition using the straight-line method over six years. No entries have been made for the transactions above. Required Prepare the journal entries, if any, required at year end 31 December 2014 in respect of this item. Christy Kearney E&OE Page 18

19 QUESTION 15 TAU LIMITED Tau Ltd. is in the intermediate stage of a construction contract for the building of a new privately-owned road bridge over a river estuary. The original details of the contract are: Approximate duration of the contract: 3 years Date of commencement: 1 st October 2012 Total contract price 40 million Estimated total cost 28 million On 1 st April 2014, Tau agreed to a contract variation that would involve an additional fee of 5 million with associated additional estimated costs of 2 million. (not included above) Total costs incurred at: 31 st December million 31 st December million (including the 9 million in 2013) Progress billings at 31 st March 2014 were 25 million. The costs incurred during the year to 31 st December 2014 include 2.5 million relating to the replacement of some bolts which had been made from material that had been specified by the firm of civil engineers who were contracted by Tau to design the bridge. These costs were not included in the original estimates but Tau is hopeful that they can be recovered from the firm of civil engineers. The advice to Tau from its lawyers is that there is a 60% chance of success. Tau calculates profit on construction contract using the percentage of completion method. The percentage of completion of the contract is based on the value of the work certified to date compared to the total contract price. Prepare the Statement of Profit and Loss and Other Comprehensive Income and Statement of Financial Position extracts in respect of the year 31 st December h 2014 only. Christy Kearney E&OE Page 19

20 QUESTION 16 UPSILON LIMITED Upsilon, is a leading support services company which focuses on the building industry. The company would like advice on how to treat certain items under FRS 102 Employee Benefits. The company operates the Upsilon (2006) Pension Plan which commenced on 1 November 2006 and the Upsilon (1990) Pension Plan, which was closed to new entrants from 31 October 2006, but which was open to future service accrual for the employees already in the scheme. The assets of the schemes are held separately from those of the company in funds under the control of trustees. The following information relates to the two schemes: Upsilon (1990) Pension Plan The terms of the plan are as follows: i. Employees contribute 6% of their salaries to the plan ii. Upsilon contributes, currently, the same amount to the plan for the benefit of the employees iii. On retirement, employees are guaranteed a pension which is based upon the number of years service with the company and their final salary. The following details relate to the plan in the year to 31 December2014: m Present value of obligation at 1 November Present value of obligation at 31 October Fair value of plan assets at 1 November Fair value of plan assets at 31 October Current service cost 20 Pension benefits paid 19 Total contributions paid to the scheme for year to 31 October Upsilon (2006) Pension Plan Under the terms of the plan, Upsilon does not guarantee any return on the contributions paid into the fund. The company s legal and constructive obligation is limited to the amount that is contributed to the fund. The following details relate to this scheme: m Fair value of plan assets at 31 October Contributions paid by company for year to 31 October Contributions paid by employees for year to 31 October The discount rates and expected return on plan assets for the two plans are: 1 January December 2014 Discount rate 5% 6% The company would like advice on how to treat the two pension plans, for the year ended 31 December 2014, together with an explanation of the differences between a defined contribution plan and a defined benefit plan. Christy Kearney E&OE Page 20

21 QUESTION 17 PHI On 1 st January 2013 Phi granted 1,000 employees options to purchase 5,000 shares each in the entity. The options vest on 1 st October 2015 for those employees who remain employed by the entity until that date. The options allow the employees to purchase the shares for 9 per share. The market price of the shares and the fair values of the share options (estimated using an appropriate option pricing model) varied as follows: Date Market Price of Share Fair Value of Option 1 st January st December st December When preparing the financial statements for the year ended 31 st December 2013 the directors estimated that 50 of the relevant employees would leave in each of the years ended 31 st December 2013, 2014 and of the relevant employees did leave in both years ended 31 st December 2013 and However, the directors now believe that no further relevant employees will leave in the year ended 31st December REQUIREMENT: Prepare extracts that show the amounts that will appear in the statement of financial position of Phi as at 31st December 2014 in respect of the share options and the amounts that will appear in the SPLOCI for the year ended 30 th September (assume 2013 accounted for correctly in accord with FRS 102). Christy Kearney E&OE Page 21

22 QUESTION 18 PSI LIMITED On 1 July 2014 Psi opened a new factory in an area designated by the government as an economic development area. On that day, the government provided Psi with a grant of 30 million to assist it in the development of the factory. This grant was in three parts: (i) (ii) (iii) 6 million of the grant was a payment by the government as an inducement to Psi to begin developing the factory. No conditions were attached to this part of the grant. 15 million of the grant related to the construction of the factory at a cost of 60 million. The land was leased so the whole of the 60 million is depreciable over the estimated 40-year useful life of the factory. The remaining 9 million was received subject to keeping at least 200 employees working at the factory for a period of at least five years. If the number drops below 200 at any time in any financial year in this five-year period then 20% of the grant is repayable in that year. From 1 July 2014, 220 workers were employed at the factory and estimates are that this number is unlikely to fall below 200 over the relevant five-year period. Required: Prepare journals to record the treatment of the grant of 30 million in the financial statements of Psi for the year ended 31 December (depreciation recognized on a monthly basis) Christy Kearney E&OE Page 22

23 QUESTION 19 OMEGA OMEGA LTD acquired a property on 1 st January 2014 at a cost of 240,000. The Fair value of the land was 50,000 and the building 190,000. The estimated useful life of the property is 10 years. The company policy is to revalue its properties to their market values at the end of each year. Accumulated amortisation is eliminated and the property is restated to the revalued amount. Annual amortisation is calculated on the carrying values at the beginning of the year. The market values of the property on 31 December 2014 and 2015 were 241,000 (land 60,000) and 175,000 (land 45,000) respectively. The existing balance on the revaluation reserve at 1 st January 2014 was 50,000. This related to some other non-depreciable land whose value had not changed significantly since last revaluation. Requirement Prepare extracts of the financial statements of OMEGA LTD (including the movement on the revaluation reserve) for the years ended 31 December 2014 and 2015 in respect of the property. Christy Kearney E&OE Page 23

24 QUESTION 20 REVALUATION & IMPAIRMENT Abramovich Jetskis Ltd. hires out jet skis to tourists, on an island off the coast of Syriana, based on an hourly rate. The financial statements for the year ended 31 st December 2014 (draft) includes the following jet ski: Cost 10,000 Depreciation: b/fwd 2,500 Charge for year 2,500 5,000 Carrying amount 5,000 Depreciation is 25% per annum straight line. In December 2014, the only airline bringing tourists to the island withdraws from the route and the tourist market faces collapse. Revised projections made by directors for the jet ski are as follows: Expected revenue of 2,400 p.a. in 2015 and The jet ski will then be scrapped. Jet ski could be sold for 2,800 (less 250 selling costs) immediately The current interest rate is 10%. Required Calculate and journalise the impairment loss, if any, arising in In December 2015, a new airline, AirChelski, announce that they will commence a new flight service to the island. At the end of 2015, the recoverable amount is now estimated to be 3,900. Calculate and journalise the impairment reversal, if any, arising in Christy Kearney E&OE Page 24

25 QUESTION 21 LATE LATE - EVENTS AFTER THE REPORTING DATE Year end is 31 December Date accounts approved is 31 March 16. The following events occurred after the year-end. You are required to Classify as adjusting or non-adjusting? If adjusting, outline the correcting journal? Events 1. Legal claim estimate in the accounts at 10m. Counsel advice in February due to new evidence is best estimate of settlement is 15m. 2. Debtor goes into liquidation in March owing 20m ( 15m at year end in Debtors ledger). 3. Stock on hand at year end of 100,000 units at cost of 10 each. Decided to sell off at 8 each in January sale. Selling expenses per unit of 50 cent. Stock measured at cost of 10 each. 4. At year end, FX debtor of 100,000 included at Closing FX rate of $1.20 to 1 euro Functional currency is euro. FX rate goes to 1.30 in January. 5. Company decides to sell plant in January. Carrying value of 150,000 at December. Estimated selling price is 120, Company decides to sell another plant in January. Carrying value of 150,000 at December. Estimated selling price is 190, Company holds 1ml shares in a quoted company. Accounted for at Fair Value (Market price) of 5 per shares at year end. ( 5,00,000). Market price falls to 3 per share in February. Christy Kearney E&OE Page 25

26 QUESTION 21 Many Changes Your client has contacted you to advise on the appropriate treatment of the following issues in accordance with FRS 102 and also to illustrate the appropriate journals. You should assume that each item is material. 1. 1/1/2015 Cost 20,000 Depreciation (10,000) depreciation at 10% for 5 years Carrying Value 10,000 No depreciation provided for Asset originally purchased 5 years ago on 1 January Useful life original 10 years, now estimated only three years of useful life remaining at 31 December 2015? 2. The company uses FIFO to value stock. The directors have decided that stocks should be measured on an Average Cost basis for The stocks were measured on a FIFO basis in the draft accounts as follows (FIFO) 31/12/15-30,000 (FIFO) Cost of Sales calculated based on FIFO The revised stock figures on an AVCO basis are; (AVCO) 31/12/15-50,000 (AVCO) 3. There was an error discovered in the 2014 closing Inventory during Stocks were overstated by 40, Development expenditure capitalized in accounts at 31/12/2014 based on FRS 102 criteria. Intangible asset in SOFP brought forward of 45,000. In 2015, decided to cancel project and expenditure brought forward must be written off. Christy Kearney E&OE Page 26

27 FRS 102 SOLUTIONS Christy Kearney E&OE Page 27

28 QUESTION 1 ALPHA LIMITED ISSUE 1 Provide for redundancy costs 350,000 & Loss on disposal suggests the Plant & machinery is impaired at year end by 650,000 DEBIT SOCI P/L 1,000,000 CREDIT Provisions SOFP 350,000 CREDIT Plant & machinery 650,000 ISSUE 2 Provide for cash refunds 900,000 x 40% = 360,000 Do not provide for exchange = 0 Provide for warranty = 1,500,000 1,860,000 DEBIT P&L Revenues 360,000 DEBIT P&L Cost of Sales 1,500,000 CREDIT Provisions SOFP 1,860,000 In providing for the provision on refunds, the journal could be: DEBIT Revenue 900,000 CREDIT Receivables / cash 900,000 DEBIT Inventory 540,000 CREDIT Cost of sales 540,000 Christy Kearney E&OE Page 28

29 ISSUE 3 Value of inventory using FIFO Month Units Purchased Total cost $ Cost per Unit $ Exchange rate Cost per Unit October ,000 50, ,333 November ,000 60, ,000 December 9 630,000 70, , units in inventory 9 units x 46,666 = 419,994 8 units x 40,000 = 320, units = 739,994 say 740,000 The Net Realisable Value of the raw material is 30,000 per unit. Therefore, the 17 units have a total NRV of 510,000. This is lower than the cost of 740,000. However, under FRS 102, materials held for use in the production of products are not written down below cost if the finished products are expected to be sold at or above cost. Therefore, these items of inventory are measured at cost. DEBIT Inventory SOFP 740,000 CREDIT P/L Cost of sales 740,000 ISSUE 4 Jan 2011 Cost 300,000 Depreciation (300k/50 yrs) 6,000 Dec 2011 Carrying Value 294,000 Depreciation 6,000 Dec 2012 Carrying Value 288,000 Revalue to 500,000 Gain 212,000 Jan 2013 Valuation 500,000 Depreciation (500k/48 yrs) 10,400 (rounded) Dec 2013 Carrying Value 489,600 Christy Kearney E&OE Page 29

30 Asset sold in March 2014 (no depreciation in year of sale) Sale Proceeds 600,000 Carrying Value 489,600 Profit on disposal 110,400 DEBIT Bank 600,000 DEBIT Accumulated Depreciation 10,400 CREDIT PPE 500,000 CREDIT SOCI P/L gain on disposal 110,400 DEBIT Revaluation reserve 212,000 CREDIT Retained earnings 212,000 ISSUE 5 When a capital based grant is repaid, reverse the original treatment of the grant and set up liability for repayment Current Carrying value of the Asset Jan 2013 Deferred Liability 100,000 Depreciation (10%) 10,000 Dec 2013 Carrying Value 90,000 Depreciation (10%- 6 months) 4,500 July 2014 Carrying Value 85,500 Total Amortisation released = 14,500 DEBIT P/L 14,500 CREDIT Current Liability 14,500 DEBIT Deferred Liability 85,500 CREDIT Current Liability 85,500 Christy Kearney E&OE Page 30

31 ISSUE 6 Feb 2014 Change of use of building from investment property to PPE (Fair value Model / revaluation model being used). Transfers are accounted for at the carrying value at the date of transfer (Section 16.8) DEBIT PPE 2,000,000 CREDIT Investment property 2,000,000 Old headquarters becomes investment property in February 2014 DEBIT Investment property 1,500,000 CREDIT PPE 1,500,000 At year end, revalue Investment Property to fair value (no depreciation) DEBIT Investment property 450,000 CREDIT SOCI P/L investment income 450,000 Note; Own Headquarters carrying value of 2,000,000 would be depreciated over its estimated useful life from February (details not provided). The Valuation for the headquarters of 2,500,000 would not be recognized unless the company adapted a Valuation policy for all assets in the same class Christy Kearney E&OE Page 31

32 ISSUE 7 Finance lease, payments in advance Period Opening balance Payments Interest Closing balance 1 70,000 (10,000) 3,000 63, ,000 (10,000) 2,650 55, ,650 (10,000) 2,283 47,933 DEBIT PPE Leased Asset 70,000 CREDIT Lease liability 55,650 CREDIT P/L Cost of sales 20,000 DEBIT P/L finance cost 5,650 DEBIT P/L depreciation 17,500 CREDIT Accumulated depreciation 17,500 ISSUE 8 The carrying cost of the plant is calculated as follows; Purchase Cost 210,000 (after trade discount) Shipping Costs 2,750 Pre-production testing 12,500 Electrical Costs 8,000 (after waste) Concrete 4,500 Own Labour Costs 7,500 Decommissioning Costs 14,000 Carrying Value 259,250 PPE should be recognized at 259,250. Waste in electrical costs must be written off to P&L. Wages must be transferred to PPE and reversed from P& A provision should be recognized for the Decommissioning costs as part of the initial cost of the Fixed Asset. Trade creditors for outstanding amounts must be recognized DEBIT PPE 259,250 DEBIT P&L (Waste) 6,000 CREDIT P&L (wages) 7,500 CREDIT Trade Creditors 243,750 CREDIT Provisions 14,000 Christy Kearney E&OE Page 32

33 QUESTION 2 BETA LIMITED ISSUE 1 Where goods are subject to installation and inspection, revenue is normally recognised only when installation and inspection are complete. However, where the installation process is simple in nature revenue is recognised immediately upon the buyer accepting the goods. This means that revenue of 250,000 from the sale of Machine A can be recognised in the year to December 2014, with 250,000 being debited to trade receivables. The cost of construction of the machine of 190,000 will be included in cost of sales. DEBIT SOCI P/L cost of sales 190,000 CREDIT Bank 190,000 DEBIT Trade Receivables 250,000 CREDIT Revenue 250,000 However, revenue from the sale of Machine B cannot be recognised until January 2015, when the installation process is complete. Therefore, this machine will be included in inventory at its construction cost of 200,000. DEBIT Inventory 200,000 CREDIT Bank 200,000 ISSUE 2 Where goods are sold on consignment then FRS 102 indicates that revenue should be recognised when the recipient (Omicron in this case) sells the goods to a third party. The only way this could be accelerated under the general principles of the standard would be where the terms of the consignment clearly transfer the risks and rewards of ownership of the consigned inventory to Omicron on delivery, which is not the case here. Therefore, only those goods sold by Omicron to the ultimate purchaser prior to 31 December should be recognised as revenue. The amount of revenue that should be recognised is the fair value of the consideration payable by the final purchaser, which in this case is 240,000. The manufactured cost of the goods treated as sold should be taken to cost of sales. This amount is 192,000 ( 320,000 x ( 240,000/ 400,000)). The commission payable of 24,000 ( 240,000 x 10%) should also be treated as selling costs and a current liability recognised. The cost of goods unsold by Omicron at 31 December 2014 of 128,000 ( 320, ,000) should be included in the inventory of Beta at 31 December Christy Kearney E&OE Page 33

34 DEBIT Trade Receivables 240,000 DEBIT P/L Distribution costs 24,000 CREDIT Revenue 240,000 CREDIT Current Liabilities 24,000 DEBIT P/L cost of sales 192,000 DEBIT Inventory 128,000 CREDIT Bank 320,000 ISSUE 3 For sale transactions with an option or commitment to repurchase, FRS 102 requires an analysis of the transaction to ascertain whether, in substance, the seller has transferred the risks and rewards of ownership to the buyer. If this transfer has not occurred, the transaction is treated as a financing arrangement that does not give rise to revenue. In this case the terms of the sale leave Beta occupying the property, with responsibility for its maintenance. Also, it is highly likely that the option to repurchase will be exercised either on 31 March 2015 or Therefore, no revenue would be recognised and the sales proceeds would be treated as a borrowing. This means that the asset would remain an asset of Beta and be subject to depreciation of 40,000 ( 1,200,000 x 1/30). The closing carrying value of the asset would be 1,960,000 ( 2,000,000 40,000). The longer Beta takes to repurchase the property the higher the repurchase price. It can be seen that this repurchase is increasing at 10% per annum compound e.g. 3,300,000/ 3,000,000 = Therefore, the borrowing is treated as a financial liability measured at amortised cost with an effective annual interest rate of 10%. The finance cost for the year ended 31 March 2014 would be 300,000 ( 3,000,000 x 10%) and the closing borrowing 3,300,000 ( 3,000, ,000). This would be shown as a liability. DEBIT Bank 3,000,000 CREDIT Loan SOFP 3,000,000 DEBIT P/L-Cost of Sales 40,000 CREDIT Accumulated Depreciation 40,000 DEBIT P/L finance cost 300,000 CREDIT Loan SOFP 300,000 Christy Kearney E&OE Page 34

35 QUESTION 3 GAMMA LIMITED ISSUE 1 The cumulative amount recognised at 31 December 2014 is 500 x 200 x 1 20 x 2/3 = 80,000. This is shown in the statement of financial position as part of equity. The cumulative amount recognised at 31December 2013 is 500 x 150 x 1 20 x 1/3 = 30,000. So the amount recognised in the P&L for the year is 50,000 ( 80,000 30,000). DEBIT P/L 50,000 CREDIT Equity share options 50,000 ISSUE 2 The shares would be regarded as a Basic Financial Instrument under FRS 102. They would be classified as at fair value through the P&L. Therefore, a gain of 1.2m (1,000,000 x ( ) will have been recognised in P&L in Christy Kearney E&OE Page 35

36 QUESTION 4 DELTA LIMITED Computation of goodwill on acquisition Cost of investment (800,000 x 2/5 x 4) 1,280 Direct costs of acquisition 100 Fair value of identifiable net assets at date of acquisition (1,120) So goodwill at acquisition equals 260 NB: Acquisition costs are included as part of the fair value of the consideration given under FRS 102 Calculation of impairment loss Unit Carrying value Recoverable Impairment amount loss Net Assets Goodwill Amortis Including Before Allocation -ation Goodwill A (10.4) Nil B (10.4) Nil C ( 5.2) (26.0) Calculation of closing goodwill Goodwill arising on acquisition 260 Goodwill amortisation (26) Impairment loss (46.8) So closing goodwill equals Calculation of overall impairment loss Arising on goodwill 46.8 Arising on assets in unit C ( ) 50 So total loss equals 96.8 Christy Kearney E&OE Page 36

37 QUESTION 5 EPSILON LIMITED The charge or credit for deferred tax in the income statement is essentially the movement in the liability from one period to the next, excluding movements that are recognised in other comprehensive income. Therefore, the charge is as follows: 1. Property, plant and equipment: The carrying value is 44 million and the tax base is 27 million. This creates a taxable timing 17 million. 2. Intangible asset: The carrying value of the intangible is 900,000 and its tax base is nil because tax relief has already been given. Therefore, there is a taxable timing difference of 900, Intra-group sale The intra-group sale will result in an adjustment for unrealised profit of 600,000 (60% ( 4,000,000 3,000,000). Inventory that cost the subsidiary 2,400,000 (60% X 4,000,000) will be included in consolidated inventory at 1,800,000 (60% X 3,000,000). However, when the inventory is sold the group will obtain a tax deduction of 2,400,000. Therefore, at group level, the carrying value of the inventory is 1,800,000 and its tax base is 2,400,000. This creates a deductible timing difference of 600, million loan: The issue costs of the loan will be offset against its carrying value in the financial statements. The issue costs effectively create a taxable timing difference because the future write off of these issue costs (as part of the future finance cost of the loan) will not attract any tax relief because the tax relief has already been given. Therefore, the taxable timing difference is 1,000,000. Summary of temporary differences: Property, plant and equipment 17,000,000 Intangible asset 900,000 Intra-group sale (600,000) Loan issue costs 1,000,000 Net timing differences 18,300,000 Tax rate x25% Deferred tax liability 4,575,000 Deferred tax balance b/fwd 2,000,000 Deferred tax balance c/fwd 4,575,000 Increase in deferred tax liability 2,575,000 However, part of the increase has been brought about by the revaluation of PPE of 6,000,000. The deferred tax on this increase ( 6m x 25% = 1.5m is charged against equity). DEBIT OCI tax 1,500,000 DEBIT P/L tax 1,075,000 CREDIT Deferred Tax liability 2,575,000 Christy Kearney E&OE Page 37