PREMIUM EDUCATION HUB

Transcription

1 PREMIUM EDUCATION HUB INSTITUTE OF CHARTERED ACCOUNTANTS GHANA (ICAG) MAY 2018 MOCK EXAMINATION FINANCIAL REPORTING ATTEMPT ALL QUESTIONS IN THE ALLOCATED TIME TIME ALLOCATED: 3HRS READING TIME: 15MINUTES THURSDAY 3RD MAY, 2018

2 QUESTION 1 Minster is a publicly listed company. Details of its financial statements for the year ended 30 September 20X6, together with a comparative statement of financial position, are: Statement of financial position at 30 September 20X6 30 September 20X5 $000 $000 $000 $000 Non-current assets (note (i)) Property, plant and equipment 1, Software 135 Nil Investments at fair value through profit and loss ,565 1,065 Current assets Inventories Trade receivables Amounts due from construction contracts Bank Nil Total assets 2,395 2,045 Equity and liabilities Equity shares of 25 cents each Reserves Share premium (note (iii)) Revaluation reserve Retained earnings 950 1, ,075 1 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

3 1,660 1,375 Non-current liabilities 9% loan note 120 Nil Environmental provision 162 Nil Deferred tax Current liabilities Trade payables Bank overdraft Current tax payable Total equity and liabilities 2,395 2,045 Statement of profit or loss for the year ended 30 September 20X6 Revenue 1,397 Cost of sales (1,110) Gross profit 287 Operating expenses (125) 162 Finance costs (note (i)) (40) 2 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

4 Investment income and gain on investments (note (ii)) 20 Profit before tax 142 Income tax expense (57) Profit for the year 85 The following supporting information is available: (i) Included in property, plant and equipment is a coal mine and related plant that Minster purchased on 1 October 20X5. Legislation requires that in ten years time (the estimated life of the mine) Minster will have to landscape the area affected by the mining. The future cost of this has been estimated and discounted at a rate of 8% to a present value of $150,000. This cost has been included in the carrying amount of the mine and, together with the unwinding of the discount, has also been treated as a provision. The unwinding of the discount is included within finance costs in the statement of profit or loss. Other land was revalued (upward) by $35,000 during the year. Depreciation of property, plant and equipment for the year was $255,000. There were no disposals of property, plant and equipment during the year. The software was purchased on 1 April 20X6 for $180,000. (ii) The market value of the investments had increased during the year by $15,000. There have been no sales of these investments during the year. (iii) On 1 April 20X6 there was a bonus (scrip) issue of equity shares of one for every four held utilising the share premium reserve. A further cash share issue was made on 1 June 20X6. No shares were redeemed during the year. (iv) A dividend of 5 cents per share was paid on 1 July 20X6. 3 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

5 Prepare a statement of cash flows for Minster for the year to 30 September 20X6 in accordance with IAS 7 Statements of cash flows. QUESTION 2 (Total: 20 marks) On 1 October 2010, Paladin secured a majority equity shareholding in Saracen on the following terms: - an immediate payment of $4 per share on 1 October and a further amount deferred until 1 October 2011 of $5.4 million. - The immediate payment has been recorded in Paladin s financial statements, but the deferred payment has not been recorded. Paladin s cost of capital is 8% per annum. On 1 February 2011, Paladin also acquired 25% of the equity shares of Augusta paying $10 million in cash. The summarised statements of financial position of the three companies at 30 September 2011 are: Paladin Saracen Augusta Assets $000 $000 $000 Non-current assets Property, plant and equipment 40,000 31,000 30,000 Intangible assets 7,500 Investments Saracen (8 million shares at $4 each) 32,000 Current assets Augusta 10,000 nil nil 89,500 31,000 30,000 Inventory 11,200 8,400 10,000 Trade receivables 7,400 5,300 5,000 4 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

6 Bank 3,400 nil 2,000 Total assets 111,500 44,700 47,000 Equity and liabilities Equity Equity shares of $1 each 50,000 10,000 10,000 Retained earnings at 1 October ,700 12,000 31,800 for year ended 30 September ,200 6,000 1,200 84,900 28,000 43,000 Non-current liabilities Deferred tax 15,000 8,000 1,000 Current liabilities Bank nil 2,500 nil Trade payables 11,600 6,200 3,000 Total equity and liabilities 111,500 44,700 47,000 The following information is relevant: (i) Paladin s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose the directors of Paladin considered a share price for Saracen of $3.50 per share to be appropriate. 5 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

7 (ii) At the date of acquisition, the fair values of Saracen s property, plant and equipment was equal to its carrying amount with the exception of Saracen s plant which had a fair value of $4 million above its carrying amount. At that date the plant had a remaining life of four years. Saracen uses straight-line depreciation for plant assuming a nil residual value. Also at the date of acquisition, Paladin valued Saracen s customer relationships as a customer base intangible asset at fair value of $3 million. Saracen has not accounted for this asset. Trading relationships with Saracen s customers last on average for six years. (iii) At 30 September 2011, Saracen s inventory included goods bought from Paladin (at cost to Saracen) of $2.6 million. Paladin had marked up these goods by 30% on cost. Paladin s agreed current account balance owed by Saracen at 30 September 2011 was $1.3 million. (iv) Impairment tests were carried out on 30 September 2011 which concluded that consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the investment in Augusta was impaired by $2.5 million. (v) Assume all profits accrue evenly through the year. Prepare the consolidated statement of financial position for Paladin as at 30 September (20 marks) 6 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

8 QUESTION 3 Greenwood is a public listed company. During the year ended 31 March 2007 the directors decided to cease operations of one of its activities and put the assets of the operation up for sale (the discontinued activity has no associated liabilities). The cessation qualifies as a discontinued operation and has been accounted for accordingly. Note: The statement of profit or loss figures down to the profit for the period from continuing operations are those of the continuing operations only. Statement of profit or loss for the year ended 31 March $000 $000 Revenue 27,500 21,200 Cost of sales (19,500) (15,000) Gross profit 8,000 6,200 Operating expenses (2,900) (2,450) 5,100 3,750 Finance costs (600) (250) Profit before taxation 4,500 3,500 Income tax expense (1,000) (800) Profit for the period from continuing operations 3,500 2,700 Profit/(Loss) from discontinued operations (1,500) W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

9 Profit for the period 2,000 3,020 Analysis of discontinued operations Revenue 7,500 9,000 Cost of sales (8,500) (8,000) Gross profit/(loss) (1,000) 1,000 Operating expenses (400) (550) Profit/(loss) before tax (1,400) 450 Tax (expense)/relief 300 (130) (1,100) 320 Loss on measurement to fair value of disposal group (500) Tax relief on disposal group 100 Profit/(Loss) from discontinued operations (1,500) 320 Statement of financial positions as at 31 March $000 $000 $000 $000 Non-current assets 17,500 17,600 8 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

10 Current assets Inventory 1,500 1,350 Trade receivables 2,000 2,300 Bank Nil 50 Assets held for sale (at fair value) 6,000 9,500 Nil 3,700 Total assets 27,000 21,300 Equity and liabilities Equity shares of $1 each 10,000 10,000 Retained earnings 4,500 2,500 Non-current liabilities 14,500 12,500 5% loan notes 8,000 5,000 Current liabilities Bank overdraft 1,150 Nil Trade payables 2,400 2,800 Current tax payable 950 4,500 1,000 3,800 Total equity and liabilities 27,000 21,300 9 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

11 Note: The carrying amount of the assets of the discontinued operation at 31 March 2006 was $6.3 million. Analyse the financial performance and position of Greenwood for the two years ended 31 March Note: Your analysis should be supported by FIVE appropriate ratios and refer to the effects of the discontinued operation. (Total: 15 marks) QUESTION 4 a) On 1March2017, Premium Shopping Mall commenced business selling Laptops to Government workers on hire purchase. Under the terms of the agreement an initial deposit of 35% of selling price is payable on delivery, followed by seven monthly installments, the first being due a month after the date of sale. During the year ended 31 December 2017, sales were made as follows: Cost Price GHCm HP Sales Price GHCm 9March April July September October November W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

12 The computers sold in July were repossessed in October after non-payment of September installment. There possessed computers were eventually sold in December for GHC cash. All other installments were paid on the due dates. GrossprofitandinterestarecreditedtoIncomestatementintheproportionthatdepositsand Installments received bear to hire purchase price. Prepare a Hire Purchase Income Statement showing profit or loss on the hire purchase transactions (Including the repossessed goods) and the Statement of Financial Position for the year ended 31/12/2017 (15marks) b) An important requirement of the IASB s Conceptual Framework for Financial Reporting is that an entity s financial statements should represent faithfully the transactions and events that it has undertaken. Explain what is meant by faithful representation according to the IASB s Conceptual Framework for Financial Reporting. (4 marks) c) The IASB s Framework Conceptual Framework for Financial Reporting requires financial statements to be prepared on the basis that they comply with certain accounting concepts, underlying assumptions and (qualitative) characteristics. Five of these are: Matching/accruals Faithful representation Prudence Comparability Materiality Briefly explain the meaning of each of the above concepts/assumptions. (6 marks) (Total: 25 marks) 11 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

13 QUESTION 5 a) On 1 April 2007, Fino increased the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of $350,000. On the recommendation of the finance director, Fino entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of $100,000 each commencing on 1 April The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the company s return on capital employed (compared to outright purchase of the plant). Prepare extracts of Fino s statement of profit or loss and statement of financial position for the year ended 30 September 2007 in respect of the rental agreement assuming: It is a finance lease (use an implicit interest rate of 10% per annum). (4marks) b) The profit after tax for Barstead for the year ended 30 September 2009 was $15 million. At 1 October 2008 the company had in issue 36 million equity shares and a $10 million 8% convertible loan note. The loan note will mature in 2010 and will be redeemed at par or converted to equity shares on the basis of 25 shares for each $100 of loan note at the loan-note holders option. On 1 January 2009 Barstead made a fully subscribed rights issue of one new share for every four shares held at a price of $2.80 each. The market price of the equity shares of Barstead immediately before the issue was $3.80. The earnings per share (EPS) reported for the year ended 30 September 2008 was 35 cents. Barstead s income tax rate is 25%. Calculate the (basic) EPS figure for Barstead (including comparatives) and the diluted EPS (comparatives not required) that would be disclosed for the year ended 30 September (6 marks) c) Your assistant has been criticised over a piece of assessed work that he produced for his study course for giving the definition of a non-current asset as a physical asset of substantial cost, owned by the company, which will last longer than one year. 12 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )

14 Explain the weaknesses in the assistant s definition of non-current assets. (3 marks) d) The same assistant has encountered the following matters during the preparation of the draft financial statements of Darby for the year ending 30 September He has given an explanation of his treatment of them. (i) Darby spent $200,000 sending its staff on training courses during the year. This has already led to an improvement in the company s efficiency and resulted in cost savings. The organiser of the course has stated that the benefits from the training should last for a minimum of four years. The assistant has therefore treated the cost of the training as an intangible asset and charged six months amortisation based on the average date during the year on which the training courses were completed. (3 marks) (ii) During the year the company started research work with a view to the eventual development of a new processor chip. By 30 September 2009 it had spent $1.6 million on this project. Darby has a past history of being particularly successful in bringing similar projects to a profitable conclusion. As a consequence the assistant has treated the expenditure to date on this project as an asset in the statement of financial position. Darby was also commissioned by a customer to research and, if feasible, produce a computer system to install in motor vehicles that can automatically stop the vehicle if it is about to be involved in a collision. At 30 September 2009, Darby had spent $2.4 million on this project, but at this date it was uncertain as to whether the project would be successful. As a consequence the assistant has treated the $2.4 million as an expense in the statement of profit or loss. (4 marks) For each of the above items (i) and (ii) comment on the assistant s treatment of them in the financial statements for the year ended 30 September 2009 and advise him how they should be treated under International Financial Reporting Standards. (Total: 20 marks) 13 W W W. P R E M I U M O N L I N E H U B. C O M ( 0 )