Examiners commentaries 2013

Transcription

1 Important note This commentary reflects the examination and assessment arrangements for this course in the academic year The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. General remarks Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to: explain and apply a number of theoretical approaches to financial accounting record and analyse data prepare financial statements under alternative accounting conventions describe a number of regulatory issues relating to financial accounting critically evaluate theories and practices of, and other matters relating to, financial accounting. What are the Examiners looking for? The combined questions in Section A will require you to prepare calculations on a variety of topics as well as showing a critical grasp of the theories underlying the techniques. To do well, you need to be able both to explain and evaluate the theories and prepare a range of financial statements and calculations. For quantitative parts of questions, Examiners are looking for the accurate preparation of financial statements that follow generally accepted formats with clear headings and accurate application of accounting techniques to specific areas within financial reporting. Workings should always be clearly provided. Written components of combined questions require clear and coherent explanations of theories, techniques and practices. You must critically evaluate theories and practices. 1

2 Good answers to essay-based questions in Section B will be structured coherently and logically. They should include an introduction, a main body and conclusion, and cover all parts of the question. Typically, an essay-based question will require an explanation of an issue within financial reporting and a critical analysis of the issue. Explanations should be clear and include a discussion of key definitions, with examples if appropriate. The analysis should show critical awareness of both sides of an argument or the application of a theory or concept to financial reporting, with an assessment of its appropriateness to financial reporting. Planning your time in the examination All questions in the examination paper carry equal marks and equal time should be devoted to each question. It is important that you attempt four questions and all parts of each question you answer. Marks for each section are shown and should be used to guide your work and time allocation. Where questions are in parts, you should avoid excessively long answers to some parts and missing out other parts. Key steps to improvement You can improve your performance by improving the presentation of your work, providing clear workings, answering the required number of questions and attempting all sections of a question. Often candidates seem to focus attention on the preparation of financial statements and the financial calculations without being able to explain, discuss and evaluate the theories and practices central to financial reporting. 2

3 Question spotting Many candidates are disappointed to find that their examination performance is poorer than they expected. This can be due to a number of different reasons and the Examiners commentaries suggest ways of addressing common problems and improving your performance. We want to draw your attention to one particular failing question spotting, that is, confining your examination preparation to a few question topics which have come up in past papers for the course. This can have very serious consequences. We recognise that candidates may not cover all topics in the syllabus in the same depth, but you need to be aware that Examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions. The syllabus can be found in the Course information sheet in the section of the VLE dedicated to this course. You should read the syllabus very carefully and ensure that you cover sufficient material in preparation for the examination. Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers every topic on the syllabus is a legitimate examination target. So although past papers can be helpful in revision, you cannot assume that topics or specific questions that have come up in past examinations will occur again. If you rely on a question spotting strategy, it is likely you will find yourself in difficulties when you sit the examination paper. We strongly advise you not to adopt this strategy. 3

4 Zone A Important note This commentary reflects the examination and assessment arrangements for this course in the academic year The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following SIX questions: including AT LEAST ONE EACH from Section A and Section B. All questions will carry equal marks. Section A Answer one question and no more than two further questions from this section. Question 1 The statements of financial position for Apple Plc, Kiwi Ltd and Orange Ltd as at 31 December 2012 are given below: Apple Kiwi Orange Non-current assets 580,000 1,900,000 1,400,000 Investments 1,800,000 Inventory 200, ,000 1,120,000 Trade receivables 340, , ,000 Cash 140, , ,000 Inter co receivable from Kiwi 80,000 Interco receivable from Orange 320,000 Total assets 3,460,000 3,140,000 2,980,000 4

5 Share capital 2,000, , ,000 Retained earnings 1,380,000 1,740,000 2,000,000 Bonds (10%) 20, ,000 40,000 Interco payable to Apple 80, ,000 Trade payables 60, , ,000 Capital, reserves and liabilities 3,460,000 3,140,000 2,980,000 Apple Plc acquired 75% of Kiwi Ltd on 1 January 2006 for 920,000 when Kiwi Ltd s share capital and reserves were 640,000. The fair value of Kiwi Ltd s noncurrent assets on 1 January 2006 was 1,980,000 and this revaluation has not been incorporated into Kiwi Ltd s accounts. Apple Plc acquired 20% of the bonds of Kiwi Ltd for 60,000 on 1 January Apple Plc acquired 40% of Orange Ltd on 1 January 2007 for 400,000 when Orange Ltd s share capital and reserves were 600,000. The fair value of Orange Ltd s non-current assets on 1 January 2007 was 1,600,000 and this revaluation has not been incorporated into Orange Ltd s accounts. Apple Plc s policy is to capitalise goodwill. Impairment of 15% of the goodwill of Kiwi Ltd is seen in 2012 and impairment of 20% of the goodwill of Orange Ltd is seen in In 2012, Apple Plc acquired inventory from Kiwi Ltd for 40,000 and inventory from Orange Ltd for 100,000. This inventory has not been sold as at 31 December All companies earn a gross profit percentage of 10% on these transactions. Apple Plc has not accounted for the interest payable on the bonds which was due on the last day of the period Required: a. Define the following: i. Non-controlling interest ii. Provision for unrealized profit on inventory iii. Impairment (6 marks) b. Prepare the consolidated statement of financial position for Apple Plc as at 31 December (19 marks) Subject guide, Chapter 5. Alexander, D., A. Britton and A. Jorissen International financial reporting and analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN ], Chapter 24. Part a You need to provide definitions of subsidiaries and associates covering control, significant influence and partial influence with percentage shareholdings that are relevant for both relationships. You also need to provide a comparison of the main similarities and difference in accounting for subsidiaries and associates. This may include line by line versus single line consolidation, goodwill, reserves and inter-company transactions. Part b Solutions for the consolidated statement of financial position are given below. You must provide workings for each item. Note workings are in

6 Non current assets 2,560, Investments 420,000 1, Goodwill 348,500 Share in A 1,098,400 Inventories 796, Trade receivables 840, Interco receivables from a 320,000 int rec from s 0 Cash 280, ,662,900 Share capital 2,000,000 P+L reserves 3,278,650 Bonds 140, (80%*150) NCI 600,250 int pay 14,000.1*20+(.8*.1*150) Trade payables 630, ,662,900 Goodwill S shares = 920,000 75% (640, ,000) = 380,000 S bonds = 60,000 20% * 150,000 = 30,000 A shares= 400,000 40% (600, ,000) = 80,000 Goodwill of S = *( ) = = reserves H S A P+L 1,380,000 1,740,000 2,000,000 Purp (4,000) (10,000) Int pay (2,000) (15,000) (4,000) Int rec s 3,000 1,381,000 1,721,000 1,986,000 Share cap 2,000, , ,000 Revaln 80, ,000 3,381,000 2,401,000 2,586,000 P + L = 1, % (1,721 40) + 40% (1, ) = 1, , = 3, Share in a = % (1, ) 16 = 1, = impairment = 20% of goodwill of A = 20% * 80 6 Nci (mint) = 2,401*25% =

7 Question 2 Company X enters into a project, expecting annual cashflows of 8,000 per annum to be generated in perpetuity with interest rates remaining at 10% in perpetuity. The company receives 8,000 at the end of year 1 but then revises its expectations in relation to future cashflows to 16,000 per annum in perpetuity. The rate of interest also changes at the end of year 1 to 20% in perpetuity. These revised estimates are not expected to change in the future. All cashflows arise at the end of the year. Required: a. Discuss Hicks concepts of income and their implications for accountants. (13 marks) b. Calculate the following: i. Hicks income number 1 ex ante ii. Hicks income number 1 ex post iii. Hicks income number 2 ex post version A and reconcile this income number to that calculated in (i) iv. Hicks income number 2 ex post version B and reconcile this income number to that calculated in (i) (12 marks) Subject guide, Chapter 3. Alexander et al. (2011), Chapter 4. Part a You need to provide an explanation of Hick s version of economists view of income and capital with explanations and examples of different income numbers, both ex ante and ex post. You must provide explanations and not just list the equations. The implications for accountants should be addressed clearly and may cover issues such as future assumptions, expectations of performance, ex post and ex ante perspectives and decision making perspectives. Other issues may also be discussed. Part b The workings for each version required are given below. You must provide workings for each calculation. d1 t1 = = 8,000 v1 t1 = 16,000/0.2 80,000 v0 t1 = 8,000/ ,000/1.1 = 80,000 d1 t0 = 8,000 v1 t0 = 8,000/0.1 80,000 v0t0 = income (ex ante) = 8,000/0.1 80,000 i. Income number 1 ex ante = 8,000 ii. Income number 1 ex post = 8,000 iii. Income number 2 ex post version a = 48,000 7

8 Reconciliation Budgeted income for the year ex ante 8,000 Change in forecasted cash flows 8,000/0.1 80,000 Change in interest rate 8,000/0.2 8,000/0.1 (40,000) Income for the year ex post version a 48,000 iv. Income number 2 ex post version b = 14,667. Budgeted income for the year ex ante 8,000 Change in forecasted cash flows 8,000/0.2 1/1.2 = 33,333 Interest on revised capital 0.2 * 33,333 6,667 Income for the year ex post version a 14,667 Question 3 On 1 January 2001, Rice Ltd acquired 80% of the ordinary shares of a subsidiary, Cream Org. Cream Org trades in the currency potts. On 1 January 2001 the balance on the accumulated profits of Cream Org was 160,000 potts and the share capital of Cream Org was 1,200,000 potts. The summary income statements and statements of financial position of Cream Org are given as follows: Statement of financial position as at 31 December 2012 Cream potts Non-current assets 1,800,000 Inventories 75,000 Cash 305,000 Total assets less liabilities 2,180,000 Share capital 1,200,000 Retained profit 980,000 2,180,000 8

9 Income statement year ended 31 December 2012 Cream potts Cream potts Sales 380,000 Opening inventory 50,000 Purchases 200,000 Closing inventory (75,000) (175,000) Gross profit 205,000 Depreciation (20,000) Other expenses (5,000) Profit before tax 180,000 Tax (30,000) Profit after tax 150,000 Dividends (5,000) Net profit for the year 145,000 The following information is also available: 1. Non-current assets were acquired on 1 January Opening inventories were acquired on 12 November 2011 and closing inventories were acquired on 15 December Exchange rates 1 January = 10 potts 12 November = 5 potts 1 January = 6 potts average for = 4 potts 15 December = 2 potts 20 December = 2.5 potts 31 December = 3 potts 4. The translated profit and loss account reserve brought forward for Cream Org is 99,500 under the temporal method and 219,167 under the closing rate method. 5. Dividends are paid on 20 December Required: a. Outline the temporal and closing rate methods and discuss when each of these methods should be used. (8 marks) b. Translate the income statement and statement of financial position of Cream Org using the temporal method. (10 marks) c. Translate the income statement and statement of financial position of Cream Org using the closing rate method. (7 marks) Subject guide, Chapter 6. Alexander et al. (2011), Chapter 29. 9

10 Part a You need to outline the key elements of both the temporal and closing rate methods including translation currencies, goodwill, where the reserves are recorded and functional currency. You need to discuss when each method is used. Part b The solutions for the income statement and statement of financial position are given below. You must provide workings for each calculation. SFP Nca 1,800, ,000 Inventories 75, ,500 cash 305, ,667 2,180, ,167 Share cap 1,200, ,000 P+L bfwd 835,000 99,500 P+L for year 145,000 Bal 99,667 2,180, ,167 Income statement Sales 380, ,000 Cost of sales Opening inventory 50, ,000 Purchases 200, ,000 Closing inventory (75,000) 2 (37,500) (175,000) (22,500) Gross profit 205,000 72,500 Other expenses (5,000) 4 (1,250) depreciation (20,000) 10 (2,000) fx 39,917 Profit before tax 180, ,167 Tax (30,000) 4 (7,500) Profit after tax 150, ,667 Dividends (5,000) 2.5 (2,000) net profit for year 145,000 99,667 10

11 Part c The solutions for the income statement and statement of financial position are given below. You must provide workings for each calculation. SFP Nca 1,800, ,000 Inventories 75, ,000 Cash 305, ,667 2,180, ,667 Share cap 1,200, ,000 P + L bfwd 835, ,167 P + L for year 145,000 Bal 35,500 FX 352,000 2,180, ,667 Income statement Sales 380, ,000 Cost of sales Opening inventory 50, ,500 Purchases 200, ,000 Closing inventory (75,000) 4 (18,750) (175,000) (43,750) Gross profit 205,000 51,250 Other expenses (5,000) 4 (1,250) depreciation (20,000) 4 (5,000) Profit before tax 180,000 45,000 Tax (30,000) 4 (7,500) Profit after tax 150,000 37,500 Dividends (5,000) 2.5 (2,000) net profit for year 145,000 35,500 Question 4 Answer all parts of the question a. Discuss the problems that may arise when defining the return on assets ratio. (5 marks) b. Outline the main differences between the merger and acquisition accounting methods and discuss the reasons why merger accounting has been discontinued. (5 marks) c. On 1 January 2007, Honey Ltd receives 1,671,000 on the issue of 8% debentures with a nominal value of 2,000,000. The debentures are redeemable at the end of 2012 at par. 11

12 Required: Show in tabular form how the debentures should be recorded in the financial statements of Honey Ltd from 2007 to 2012? (5 marks) d. During 2012, a lawsuit was filed against Jam Ltd. The lawsuit relates to faulty products sold to customers. Jam Ltd intend to fight the lawsuit but they have received legal advice indicating that there is a 50% chance that they will lose the case. Required: What are contingent liabilities? Outline how the lawsuit would be treated in the financial statements of Jam Ltd. (5 marks) e. Make Ltd started a new business selling widgets and entered into the following transactions: 100 widgets were bought on 1 January 2012 for 50 each. 10 widgets were sold on 1 June 2012 for 75 each. 60 widgets were sold for 90 each on 1 December On 1 June 2012, the replacement cost of widgets was 60 each, on 1 December 2012, the replacement cost of widgets was 80 each and on 31 December 2012 the replacement cost of widgets was 85 each. Make Ltd uses current value accounting based on replacement cost for this business and has a 31 December year end. Required: Prepare the current value (replacement cost) income statement for the year ending 31 December 2012 using physical capital maintenance and identify the value of closing inventory as at 31 December (5 marks) (a) Subject guide, Chapter 12. Alexander et al. (2011), Chapters 11, 30 and 31. You must provide a definition of return on assets and discuss possible reasons for its change relating to both return and assets. (b) Subject guide, Chapter 5. Alexander et al. (2011), Chapter 27. You must outline the key differences between the two methods which may include goodwill, reserves, asset values, merger reserve and value of shares. The reasons for the discontinuation of merger accounting should be clearly explained. (c) Subject guide, Chapter 10. The solutions are given as follows: interest = 160,000 rate of interest implicit in lease = 12% Debt liability and finance charges: 12

13 Opening balance Finance charge at 12% payment Closing balance ,671, , ,000 1,711, ,711, , ,000 1,756, ,756, , ,000 1,807, ,807, , ,000 1,864, ,864, , ,000 1,928, ,928, , ,000 2,000,000 (d) Subject guide, Chapter 10. Alexander et al. (2011), Chapter 19. You need to define contingent liabilities and their treatment. You then need to identify the type of contingent liability in the example and discuss its treatment. (e) Subject guide, Chapter 4. Alexander et al. (2011), Chapter 22. The solutions for the replacement cost income statement and closing inventory are given below. You need to give workings for all items. Section B Workings Sales 6,150 10*75 60*90 Cos (5,400) 10*60 60*80 G profit 750 Cl inventory 2,550 30*85 Answer one question and no more than one further question from this section. Question 5 Answer either: Discuss the aims and objectives of conceptual frameworks of accounting. Outline the desirable characteristics of accounting information and discuss the advantages and limitations of these qualitative characteristics for financial reporting. (25 marks) Subject guide, Chapter 2. Alexander et al. (2011), Chapter 8. You need to briefly define a conceptual framework. This may include a brief summary of each chapter but detailed repetition of all the chapters is not required. The aims and objectives of conceptual frameworks need to be discussed. For example you may discuss decision making, common framework of reference, the need for many detailed standards and benefits of principles over rules. You may also discuss other issues. 13

14 You then need to discuss the qualitative characteristics (e.g. relevance, reliability, comparability, understandability, materiality, conservatism/ prudence) giving examples as appropriate. The advantages and limitations of the qualitative characteristics for financial reporting must be clearly outlined. Some advantages include clear identification of key characteristics, the identification of the most important characteristics, consistency, and debate on fundamental concepts. You may also discuss other issues. Some disadvantages include trade off between different characteristics, definitional issues and judgement in application. You may also discuss other issues. You must present your answer in essay style. Or Critically assess the need for regulating financial reporting. Your answer should cover both traditional and economic arguments. (25 marks) Subject guide, Chapter 1. Alexander et al. (2011), Chapter 1. You need to define accounting regulation and may give brief summary of the different types of regulation seen and links to functioning of markets. Arguments for and against regulation from both traditional and economic arguments (e.g. Baxter) must be discussed. You must provide a critical assessment of these arguments and discuss which arguments, in your opinion, are the most persuasive. You must present your answer in essay style. Question 6 Answer either: Compare and contrast current purchasing power financial statements and current value financial statements. To what extent do these types of financial statements address the criticisms of historic cost accounting? (25 marks) Subject guide, Chapter 4. Alexander et al. (2011), Chapters 5, 6 and 7. You need to outline current purchasing power financial statements and current value financial statements and the key concepts underlying these types of financial statements must be clearly explained. Examples to illustrate the different types of financial statements should be given. You need to clearly discuss the limitations of historic cost financial statements and may include issues such as inflation, subjectivity, relevance, company value, additivity and holding gains. Other issues may also be discussed. You need to discuss the advantages and limitations of both types of financial statements and discuss which criticisms of historic cost are addressed and which are not. You must present your answer in essay style. 14

15 Or What is goodwill? Discuss the reasons why it has been difficult to account for goodwill. Outline three different methods for accounting for goodwill, showing how goodwill would be accounted for in the financial statements for each of the methods and critically assess each of the methods. (25 marks) Subject guide, Chapter 8. Alexander et al. (2011), Chapter 13. You must provide a definition of goodwill and give examples of different types of goodwill (e.g. purchased, internally generated). You may also cover negative goodwill. You must present a clear discussion of why goodwill is hard to account for. For example you may wish to discuss the nature of goodwill, the many differing accounting policies and the impact on financial statements. You can choose any three methods for accounting for goodwill. For each method, you must discuss the accounting concepts, reasons for the policy, impact on financial statements and give a critical assessment of the method. You must present your answer in essay style. 15

16 Zone B Important note This commentary reflects the examination and assessment arrangements for this course in the academic year The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following SIX questions: including AT LEAST ONE EACH from Section A and Section B. All questions will carry equal marks. Section A Answer one question and no more than two further questions from this section. Question 1 The income statements for Duck Ltd, Cat Ltd and Bird Ltd for the year ended 31 December 2012 are given as follows: Duck Ltd Cat Ltd Bird Ltd Sales 6,000,000 3,400,000 2,400,000 Cost of sales (2,360,000) (1,180,000) (920,000) Gross profit 3,640,000 2,220,000 1,480,000 Dividends receivable 120,000 Administration costs (379,000) (284,000) (140,000) Distribution costs (160,000) (452,000) (70,000) Interest receivable 100,000 Interest payable (20,000) (36,000) Profit before tax 3,301,000 1,448,000 1,270,000 Tax (200,000) (140,000) (40,000) 16

17 Profit after tax 3,101,000 1,308,000 1,230,000 Dividends payable (360,000) (100,000) (148,000) Profit for the year 2,741,000 1,208,000 1,082,000 Retained profit brought forward 3,200,000 1,200, ,000 Retained profit carried forward 5,941,000 2,408,000 1,882,000 Duck Ltd acquired 60% of Cat Ltd on 1 January 2003 for 300,000 when Cat Ltd s retained profits were 160,000. The share capital of Cat Ltd totals 80,000. Interest payable by Cat Ltd is in respect of a bond issue of which 70% was acquired by Duck Ltd. No goodwill arose on the acquisition of these bonds. During the year Cat Ltd sold goods costing 8,000 to Duck Ltd for 28, % of this inventory is included in Duck Ltd s inventory at the year end. Duck Ltd acquired 25% of Bird Ltd for 400,000 when Bird Ltd s share capital and reserves were 150,000 on 1 January The share capital of Bird Ltd is 40,000 50p shares. During the year Bird Ltd sold goods costing 12,000 to Duck Ltd for 16, % of this inventory is still in Duck Ltd s inventory at the year end. Goodwill is capitalised. Impairment of 50% of the value of the goodwill of Cat Ltd was seen in 2010 and impairment of 20% of the value of the goodwill in Bird Ltd is seen in At the year end Duck Ltd charges both Cat Ltd and Bird Ltd a management fee of 5% of turnover. None of the companies has accounted for this management fee. Required: a. What are subsidiaries and associates? Compare and contrast accounting for subsidiaries with accounting for associates. (6 marks) b. Prepare the consolidated income statement for Duck Ltd for the year ended 31 December (19 marks) Subject guide, Chapter 5. Alexander, D., A. Britton and A. Jorissen International financial reporting and analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN ], Chapter 24. Part a You need to provide definitions of subsidiaries and associates covering control, significant influence and partial influence with percentage shareholdings that are relevant for both relationships. You also need to provide a comparison of the main similarities and difference in accounting for subsidiaries and associates. This may include line by line versus single line consolidation, goodwill, reserves and inter-company transactions. Part b Solutions for the consolidated income statement are given below. You must provide workings for each item. Note workings are in 000. Sales (6,000 3,400 28) 9,372,000 Cost of sales(2,360 1, ) (3,516,000) Gross profit 5,856,000 17

18 Administration costs ( ) (663,000) Distribution costs( ) (612,000) Investment income ( ) 23,000 Management fee from a 120,000 Interest receivable 100 (0.7*36) 74,800 Interest payable *36 (30,800) Share of Associate s earnings 0.25* (1, ) 287,000 Goodwill impairment (72,500) Profit before tax 4,982,500 Tax %*(40) (350,000) Profit after tax 4,632,500 NCI / Mint 40% (1, ) (453,600) Dividends payable (360,000) Profit for the year 3,818,900 Retained profit brought forward 3,913,500 Retained profit carried forward 7,732,400 Workings Goodwill S * (160 80) = 156 impairment = 78,000 = against P L bfwd Goodwill A *150 = 362,500 impairment = 72,500 Retained Profit brought forward = 3,200 60% (1, ) + 25% ( ) 78 = 3, = 3,913.5 Question 2 Company Z enters into a project, expecting annual cashflows of 10,000 per annum to be generated in perpetuity with interest rates remaining at 10% in perpetuity. The company receives 10,000 at the end of year 1 but then revises its expectations in relation to future cashflows to 20,000 per annum in perpetuity. The rate of interest also changes at the end of year 1 to 20% in perpetuity These revised estimates are not expected to change in the future. All cashflows arise at the end of the year. Required: a. Discuss Hicks concepts of income and their implications for accountants. (13 marks) b. Calculate the following: i. Hicks income number 1 ex ante ii. Hicks income number 1 ex post iii. Hicks income number 2 ex post version A and reconcile this income number to that calculated in (i) iv. Hicks income number 2 ex post version B and reconcile this income number to that calculated in (i) (12 marks) Subject guide, Chapter 3. Alexander et al. (2011), Chapter 4. 18

19 Part a You need to provide an explanation of Hicks version of economists view of income and capital with explanations and examples of different income numbers, both ex ante and ex post. You must provide explanations and not just list the equations. The implications for accountants should be addressed clearly and may cover issues such as future assumptions, expectations of performance, ex post and ex ante perspectives and decision making perspectives. Other issues may also be discussed. Part b The workings for each version required are given below. You must provide workings for each calculation. d1 t1 = = 10,000 v1 t1 = 20,000/ ,000 v0 t1 = 10,000/ ,000/1.1 = 100,000 d1 t0 = 10,000 v1 t0 = 10,000/ ,000 v0 t0 = income (ex ante) = 10,000/ ,000 i. Income number 1 ex ante = 10,000 ii. Income number 1 ex post = 10,000 iii. Income number 2 ex post version a = 60,000 Reconciliation Budgeted income for the year ex ante 10,000 Change in forecasted cash flows 10,000/ ,000 Change in interest rate 10,000/0.2 (50,000) 10,000/0.1 Income for the year ex post version a 60,000 iv. Income number 2 ex post version b = 18,340 Reconciliation Budgeted income for the year ex ante 10,000 Change in forecasted cash flows 10,000/0.2 1/1.2 = 41,667 Interest on revised capital 0.2 * 41,667 8,333 Income for the year ex post version a 18,333 19

20 Question 3 Fizz Ltd started trading on 1 January The income statement and the statement of financial position for the first year of trading are given as follows: Income statement Sales 4,400,000 Cost of sales Opening inventory 480,000 Purchases 3,280,000 Closing inventory (560,000) (3,200,000) Gross profit 1,200,000 Sundry expenses (616,000) Depreciation (96,000) Retained profit for year 488,000 Statement of financial position Non-current assets (net book value) 864,000 Inventory 560,000 Cash 24, ,000 Net assets 1,448,000 Share capital ( 1 shares) 800,000 Share premium 160,000 Retained profit 488,000 Share capital and reserves 1,448,000 On 1 January 2012, Fizz Ltd issued 800,000 ordinary shares with a nominal value of 1 for 1.20 and acquired inventory for 480,000. Non-current assets were acquired on 1 February Sales and purchases accrue evenly throughout the year. Closing inventory was acquired on 31 October 2012 and the interim dividend was also paid on 31 October Movements in the RPI and other specific indices are given as follows: Indices RPI Inventory Non-current assets 1 January February June 2012/average October December Required: a. Discuss the limitations of historic cost accounting. What are current purchasing power financial statements and how do they address the limitations of historic cost accounting? (12 marks) 20

21 b. Prepare the income statement for the year ended 31 December 2012 and statement of financial position as at 31 December 2012 under current purchasing power accounting. (10 marks) c. Explain how the loss or gain on net monetary assets arises. (3 marks) Subject guide, Chapter 4. Alexander et al. (2011), Chapters 5, 6 and 7. Part a You need to clearly discuss the limitations of historic cost financial statements and may include issues such as inflation, subjectivity, relevance, company value, additivity and holding gains. Other issues may also be discussed. CPP outlined and discussion of how CPP addresses/does not address limitations of historic cost accounting. Part b Solutions for the financial statements are provided below. You must provide workings for each calculation. SFP Rate CPP Nca 864, / ,680 Invent 560, / ,741 cash 24,000 24,000 Net assets 1,448,000 1,572,421 Share cap 800, / ,333 Share premium 160, / ,667 Ret profit 488,000 Bal 452,421 1,448,000 1,572,421 Income statement Cpp sales 4,400, /130 4,738,462 Op invnt 480, / ,000 Purch 3,280, /130 3,532,308 Cl invnet (560,000) 140/135 (580,741) (3,200,000) (3,511,567) G profit 1,200,000 1,226,895 Exp (616,000) 140/130 (663,385) Depn (96,000) 140/125 (107,520) Loss on nmwc (3,569) Net profit 488, ,421 21

22 Part c You must explain how the loss or gain on net monetary working capital adjustment arises and refer to the value of current assets and liabilities in times of increasing inflation. You must discuss this issue and not just provide a numerical calculation of the net monetary working capital adjustment. Question 4 Answer all parts of the question a. Window Ltd has seen an increase in its return on capital employed between 2011 and Discuss possible reasons for return on capital employed increasing. (5 marks) b. Outline the main differences between the merger and acquisition accounting methods and discuss the reasons why merger accounting has been discontinued. (5 marks) c. On 1 January 2007, Honey Ltd receives 6,684,000 on the issue of 8% debentures with a nominal value of 8,000,000. The debentures are redeemable at the end of 2012 at par. Required: Show in tabular form how the debentures should be recorded in the financial statements of Honey Ltd from 2007 to 2012? (5 marks) d. Pass Ltd s year end is 31 December On1 February 2013, there is a fire at Pass Ltd s factory, destroying the factory completely. The loss to the company due to the fire is 900,000 which is material for the company. Required: What are post balance sheet events? How should Pass Ltd account for the fire? (5 marks) e. A non-current asset (building) has been acquired by a company and it wishes to account for this as an investment property. The non-current asset cost 1,400,000 on 1 January 2012 and its market value on 31 December 2012 is 1,800,000. The company s depreciation policy for similar non-current assets is the reducing balance method using a rate of 10%. Required: What are investment properties and how are they accounted for? Show how the non-current asset would be accounted for in the income statement for the year ended 31 December 2012 and in the statement of financial position as at 31 December 2012 if it could be classed as an investment property using both the fair value model and the cost model. (5 marks) You must answer all parts of this question. (a) Subject guide, Chapter 12. Alexander et al. (2011), Chapters 11, 30 and 31. You must provide a definition of return on capital employed and discuss possible reasons for its increase relating to both return and capital. (b) Subject guide, Chapter 5. Alexander et al. (2011), Chapter

23 You must outline the key differences between the two methods which may include goodwill, reserves, asset values, merger reserve and value of shares. The reasons for the discontinuation of merger accounting should be clearly explained (c) Subject guide, Chapter 10. The solutions are given as follows; interest = 640,000 rate of interest implicit in lease = 12% Debt liability and finance charges: Opening balance Finance charge at 12% payment Closing balance ,684, , ,000 6,846, ,845, , ,000 7,027, ,027, , ,000 7,230, ,230, , ,000 7,458, ,458, , ,000 7,713, ,713, , ,000 8,000,000 (c) Subject guide, Chapter 10. You must define post balance sheet events, both adjusting and non adjusting events You must decide on the type of event in the question and discuss its treatment. In this case, the events indicate a non adjusting post balance sheet event which must be disclosed. (e) Subject guide, Chapter 7. Alexander et al. (2011), Chapter 12. You must define investment properties and show the calculations for the non current asset under both the fair value and the cost model. These are shown below. fair value model In SFP non current asset 1,800,000 revaluation = 400,000 recorded in income statement cost model In SFP, non current asset at net book value = 1,260,000, depreciation = 140,000 income statement 23

24 Section B Answer one question and no more than one further question from this section. Question 5 Answer either: For a conceptual framework of accounting of your choice, discuss the main arguments for and against conceptual frameworks in general and critically assess the particular framework that you have chosen. (25 marks) Subject guide, Chapter 2. Alexander et al. (2011), Chapter 8. You must provide a brief definition of a conceptual framework and its key components. A brief summary only is required not repetition of all the chapters. For any conceptual framework chosen, the advantages and limitations of conceptual frameworks in general must be discussed. In addition, the advantages and limitations of the chosen conceptual framework must also be discussed. Advantages may include discussion of clarification of conceptual underpinnings, consistency, understanding of accounting and standard setting, limiting bounds of judgment and government intervention. Other issues may also be included. Disadvantages may include discussion of generality, cost, choices, focus on investors and trade off between different qualitative characteristics. Other issues may also be included. Or What are accounting standards and how are they promulgated? Critically assess standard setting. (25 marks) Subject guide, Chapter 1. Alexander et al. (2011), Chapters 1 and 3. You must define accounting standards and discuss the standard setting process. You may outline the process from 1970 s and changes or just focus on the current system. The standard setting process should be assessed by discussing advantage and disadvantages. Advantages may include reduction in the number of options, consistency comparability, increase debate, improvement in accountants work, defence for accountants, and credibility of profession and improvement of the discipline. Other issues may be discussed. Limitations /disadvantages may include cost, overly bureaucratic, reduction of judgment to the detriment of financial accounting, political pressures and standard, overload. Other issues may also be discussed. 24

25 Question 6 Answer either: Compare and contrast the temporal and closing rate methods for translating overseas operations including the reasoning behind why the methods produce different outcomes. (25 marks) Subject guide, Chapter 6. Alexander et al. (2011), Chapter 29. You must outline both the temporal and closing rate method, give numerical examples. You must compare and contrast both methods and include a definition of functional currency. You may discuss goodwill, translation rates, where the foreign exchange gain or loss is recorded and when each method is used. Other comparison may also be provided. A clear explanation of the basis of the methods should be provided and how the different methods impact financial statements should be discussed. Or What is goodwill? Discuss the reasons why it has been difficult to account for goodwill. Outline three different methods for accounting for goodwill, showing how goodwill would be accounted for in the financial statements for each of the methods and critically assess each of the methods. (25 marks) Subject guide, Chapter 8. Alexander et al. (2011), Chapter 13. You must provide a definition of goodwill and give examples of different types of goodwill (e.g. purchased, internally generated). You may also cover negative goodwill. You must present a clear discussion of why goodwill is hard to account for. For example you may wish to discuss the nature of goodwill, the many differing accounting policies and the impact on financial statements. You can choose any three methods for accounting for goodwill. For each method, you must discuss the accounting concepts, reasons for the policy, impact on financial statements and give a critical assessment of the method. 25