University of East Anglia

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1 University of East Anglia The Norwich Business School. UG examination May 2012 Financial Accounting NBS-2A1Y Time allowed 3 Hours *Answer any FOUR questions (all questions carry 25 marks) Notes are not permitted in this examination. Do not turn over until you are told to do so by the invigilator, *N.B.Format of exam has changed this year: NBS-2A1Y Copyright of the University of East Anglia

2 1. The trial balance of Nippy Ltd at 31 December 2011 is shown below Ordinary shares 4,000 Share premium account 1,500 Cash and cash equivalents 200 Trade receivables 4,200 Trade payables 700 Plant and machinery at cost 3,000 Land at Valuation 8,000 Motor vehicles at cost 2,500 Provision for depreciation, plant and machinery 1,400 Provision for depreciation, motor vehicles 1,800 Profit on sale of plant 200 Investment at cost 1,900 Intangible asset: development costs 700 Provision for doubtful trade receivables 100 Sales revenue 14,000 Purchases 3,800 Inventory 1 January Salaries and wages 2,750 Distribution costs 1,300 Administrative expenses 2,000 Bad debts 100 ` 8% Debenture loan 5,000 Ordinary share dividend paid March Taxation (over provision 2010) 50 Debenture loan interest paid 200 Retained earnings 1 January ,700 Revaluation reserve 1 January ,700 31,700 Continued on the next page

3 Notes: 1. Depreciate plant and machinery by 10% of cost, this is to be included in cost of sales. 2. Depreciate motor vehicles by 20% of cost, this is to be included in distribution costs. 3. Salaries owing to employees at 31 December amounted to 250, Salaries and wages are to be apportioned to cost of sales (50%), distribution costs (25%) and administrative expenses (25%). 5. The provision for doubtful receivables is to be reduced to 50,000. (administrative item) 6. The intangible asset (development costs) represents expenditure incurred developing a new product over the last three years. Unfortunately, due to legal issues, this product cannot now be completed. 7. The provision for tax on the company profits for the year is estimated to be 450, The land is to be further revalued by 500,000 at 31 December Inventory valuation at 31 December 2011 is 700, The recoverable amount of the investment is 1,850,000. Prepare a statement of comprehensive income for the year ended 31 December for Nippy Ltd. This statement should be in a form suitable for publication in so far as the information given permits. (11 marks) Explain your treatment of the development costs described in note 6 above. (6 marks) (c) Prepare a statement of changes in equity for the year ended 31 December 2011 for Nippy Ltd. (4 marks) (d) Explain the purpose of the statement of changes in equity you have prepared. (4 marks) NB: YOU ARE NOT REQUIRED TO PREPARE A STATEMENT OF FINANCIAL POSITION.

4 2. Pearl Ltd has invested in Ruby Ltd. Pearl acquired its 100% interest in Ruby on 31 December 2011 for 3,800,000 cash, when the non current assets of Ruby were valued at 4,100,000. The summary statements of financial position for Pearl and Ruby at 31 December 2011 immediately before the acquisition of Ruby are shown below. Pearl Ltd 000 Ruby Ltd 000 Non current assets 13,000 4,000 Current assets 5,000 1,000 Total assets 18,000 5,000 1 Ordinary shares 3,000 2,000 Reserves 12, Liabilities-non current 2,000 1,000 Liabilities-current 1,000 1,500 Total equity and liabilities 18,000 5,000 Explain why Pearl Ltd should prepare consolidated financial statements following the acquisition of Ruby. (5 marks) Prepare the statements of financial position of Pearl Ltd and Ruby Ltd immediately after the investment in Ruby by Pearl. (6marks) (c) Prepare the summary consolidated statement of financial position of Pearl Ltd as at 31 December (8marks) (d) Explain why positive purchased goodwill is recognised as an asset in consolidated financial statements of financial position, if it arises as a result of an acquisition. (YOU ARE NOT REQUIRED TO DISCUSS THE ACCOUNTING PROCEDURES FOR GOODWILL) (6 marks)

5 3. The summary statements of financial position for Opal Ltd at 31 December are shown below Non current assets Current assets: Inventory Trade receivables Cash and cash equivalents Total assets 1, Equity and liabilities 1 ordinary shares Share premium account Revaluation reserve 30 - Retained earnings Debenture loan Trade payables Bank overdraft Taxation , The summary statement of comprehensive income of Opal Ltd for the year ended 31 December 2011 is shown below. 000 Revenue 280 Cost of sales 100 Gross profit 180 Operating costs 60 Operating profit 120 Profit on disposal of non current assets 10 Profit before interest and taxation 130 Interest paid 9 Taxation 11 Profit for the year 110 Other comprehensive income-asset revaluation 30 Total comprehensive income 140

6 Notes: 1. Debenture interest paid in 2011 was 8, Bank overdraft interest of 1,000 was paid during Non current assets were revalued during 2011 by 30, Non current assets with a net book value of 20,000 were sold for 30,000 during Depreciation charged during 2011 was 80, A dividend of 100,000 was paid to the ordinary shareholders in Dividends paid should be treated as a financing cash flow. 8. Interest and taxation should be treated as operating cash flows. Prepare a statement of cash flows using the indirect method for Opal Ltd for the year ended 31 December (20 marks) Using the statement of cash flows prepared in part, discuss the reasons for the reduction in liquidity of Opal Ltd in the year to 31 December (5 Marks)

7 4. It is March 2012 and the draft financial statements of Box Ltd for the year ended 31 December 2011 have recently been prepared. Box Ltd manufactures parts for the motor vehicle industry. There are five, material, unresolved issues to deal with before the financial statements can be finalised, as shown below. The managing director of Box Ltd has invested heavily in new plant and machinery during The draft financial statements include the purchase costs of these items. No depreciation has been provided on these assets because the company intends to carry out an annual overhaul of each item to maintain its condition and therefore the managing director does not believe that a depreciation charge is needed. Respond to the managing director s decision not to depreciate the new assets (5 marks) In addition to the main activity of the company, Box Ltd also runs a car hire business. In order to rationalise its activities a board meeting of the company agreed to sell the car hire business during Explain how the disposal of this significant part of the business activities of Box Ltd will be accounted for in 2011 and (5marks) (c) The investment in new plant and machinery has resulted in a need to provide for deferred taxation in The managing director is concerned that as a result, profits will be reduced because of higher taxation charges. Explain the purpose of deferred taxation charges in financial statements and respond to the managing director s view. (5 marks) (d) In February 2012, Box Ltd received a report from its financial advisor which indicated that a long term investment owned by the company had fallen in value to 350,000 at 31 December The carrying value of the investment in the draft statement of financial position at 31 December 2011 was 550,000. The managing director believes that the value of the investment will soon increase again so no changes are required to the financial statements in Discuss the accounting issues arising from the fall in the value of the investment. (5 marks)

8 (e) Inventory was valued at 1,600,000 at 31 December Included in this inventory valuation were motor vehicle parts which cost 120,000 to manufacture. In November 2011 a customer of Box Ltd cancelled all future orders for these parts. They could be modified for use by another customer at a cost of 25,000 and could then sold for an estimated price of 60,000. Explain the effect of these changes in inventory on the financial statements of Box Ltd. (5 marks)

9 5. Discuss the meaning and main purposes of the conceptual framework as set out in the IASB Framework for the Preparation and Presentation of Financial Statements. 14 marks Explain your understanding of the term Generally Accepted Accounting Practice (G.A.A.P.) and give examples of the likely content of G.A.A.P. 6 marks (c) Explain why it is difficult to harmonise accounting practice from one country to another. 5 marks

10 6. The capital maintenance concept is a key element in financial reporting. Explain your understanding of the capital maintenance concept. 4 marks Explain and differentiate between two approaches to capital maintenance described as financial and operating capital maintenance. 8 marks (c) Briefly discuss the link between a chosen system of capital maintenance and the main qualitative characteristics of financial reporting identified in the IASB Framework for the Preparation and Presentation of Financial Statements. 6 marks (d) A small business starts with capital of 10,000 and has only one transaction in its first trading period. An item is bought for 10,000 and sold for 15,000. When the item is sold, the cost of purchasing an identical item is 11,000. General price inflation between the dates of buying and selling the item is 5%. Prepare income statements for the business, using the financial and operating capital maintenance concepts and explain the results. 7marks