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Financial Reporting (International)

June 2014

Time allowed Reading and planning: 15 minutes Writing:

3 hours

All FIVE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.

Kaplan Publishing/Kaplan Financial

Paper F7 (INT)

ACCA REVISION MOCK


ACCA F7 (INT ) : F INA NCIA L RE POR TIN G

Š Kaplan Financial Limited, 2014 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

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REV IS ION MO CK : QUESTI ONS

All FIVE questions are compulsory and MUST be attempted 1

PIP On 1 April 2013 Pip purchased 56 million shares in Squeak. The consideration consisted of two elements: a share exchange of two shares in Pip for every five shares in Squeak and a payment of $30 million to be paid on 1 April 2016. At the date of acquisition shares in Pip had a market value of $4.70 each and the shares of Squeak had a market value of $1.60. Pip’s cost of capital is 8%. Squeak made profit of $9 million in the year ended 31 March 2014. Neither elements of the consideration have been recorded yet in Pip’s financial statements. On 1 April 2012 Pip paid $15 million (included in Pip’s investments) for 25% of the equity shares of Alf, a company that was incorporated on that date. The statements of financial position of the three entities at 31 March 2014 were as follows: Non-current assets: Property, plant and equipment Investments

Current assets: Inventories Trade receivables Bank

Total assets Equity and liabilities Equity Equity shares of $1 each Retained earnings Total equity Non-current liabilities: Loan notes Current liabilities: Trade payables Taxation Total current liabilities Total equity and liabilities

KAPLAN PUBLISHING

Pip $000 224,000 33,000 ––––––– 257,000 –––––––

Squeak $000 100,000 Nil ––––––– 100,000 –––––––

Alf $000 112,000 Nil ––––––– 112,000 –––––––

40,000 48,800 9,000 ––––––– 97,800 ––––––– 354,800 –––––––

32,000 30,000 8,000 ––––––– 70,000 ––––––– 170,000 –––––––

28,000 32,000 10,000 ––––––– 70,000 ––––––– 182,000 –––––––

100,000 158,800 ––––––– 258,800 –––––––

70,000 39,000 ––––––– 109,000 –––––––

60,000 56,000 ––––––– 116,000 –––––––

60,000

36,000

42,000

30,000 6,000 ––––––– 36,000 ––––––– 354,800 –––––––

18,000 7,000 ––––––– 25,000 ––––––– 170,000 –––––––

20,000 4,000 ––––––– 24,000 ––––––– 182,000 –––––––

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ACCA F7 (INT ) : F INA NCIA L RE POR TIN G

(i)

The directors of Pip carried out a fair value exercise to measure the identifiable assets and liabilities of Squeak at 1 April 2013. The following matters emerged: Land having a carrying value of $10 million had an estimated market value of $15 million. Plant and equipment having a carrying value of $40 million had an estimated market value of $44 million. The estimated future economic life of the plant at 1 April 2013 was four years. The fair value adjustments have not been reflected in the individual financial statements of Squeak.

(ii)

The inventories of Pip at 31 March 2014 included components purchased from Squeak during the year at a cost of $20 million to Pip. Squeak supplied these components at cost plus a mark up of one-third.

(iii)

The trade receivables of Squeak included $5 million receivable from Pip in respect of the purchase of components. This disagreed with the trade payables of Pip due to cash in transit of $2 million.

(iv)

Pip’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Squeak’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(v)

There has been no impairment of consolidated goodwill.

Required: (a)

Prepare the consolidated statement of financial position of Pip at 31 March 2014. (21 marks)

(b)

Explain why there is a difference in the accounting treatment of Squeak and Alf in the consolidated financial statements. (4 marks) (Total: 25 marks)

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REV IS ION MO CK : QUESTI ONS

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PEDRO The following trial balance relates to Pedro as at 31 March 2014. $000 Equity shares of 25c each 4% convertible loan note (note (ii)) Retained earnings – 1 April 2013 Revaluation reserve Share premium Land and buildings at valuation – 1 April 2013 Land ($30 million) and buildings ($195.5 million) (note (ii)) Plant and equipment – at cost (note (ii)) Accumulated depreciation plant and equipment – 1 April 2013 Inventory at 31 March 2014 Trade receivables Bank Deferred tax (note (v)) Trade payables Provision (note (iv)) Revenue (notes (i) and (ii)) Cost of sales Administrative expenses Distribution costs Convertible loan note interest paid Bank interest Current tax (note (v))

$000 60,000 32,000 56,914 5,000 15,000

225,500 90,600 50,600 16,914 24,440 2,640 10,900 30,800 6,000 507,400 319,400 59,000 40,600 1,280 260 ––––––– 777,994 –––––––

740 ––––––– 777,994 –––––––

The following notes are relevant: (i)

Revenue includes $2 million for the sale on 1 April 2013 of maturing goods to Pony. The goods had a cost of $800,000 at the date of sale. Pedro can repurchase the goods from Pony on 31 March 2015 for $2.42 million (based on Pony achieving a lenders rate of return of 10% per annum) at which time the goods are expected to have a value of $3 million.

(ii)

Non-current assets Pedro revalues its land and buildings at the end of each accounting year. At 31 March 2014 the relevant value to be incorporated into the financial statements is $214 million. The building’s remaining life at the beginning of the current year (1 April 2013) was 23 years. Pedro does not make an annual transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation surplus. On 1 April 2013 an item of plant was disposed of for $5 million cash. The proceeds have been included in revenue. The plant is still included in the above trial balance figures at its cost of $16 million and accumulated depreciation of $8 million (to the date of disposal). The remaining plant and equipment should now be depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged on any non-current asset for the year ended 31 March 2014. All depreciation is charged to cost of sales.

KAPLAN PUBLISHING

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ACCA F7 (INT ) : F INA NCIA L RE POR TIN G

(iii)

The 4% convertible loan note was issued for proceeds of $32 million on 1 April 2013. It has an effective interest rate of 7% due to its conversion option and is redeemable on 31 March 2016. The present value of $1 receivable at the end of each year, based on discount rates of 4% and 7% are: End of year

1 2 3

4% 0.96 0.92 0.89

7% 0.93 0.87 0.82

(iv)

Pedro operates some plant that will need a major overhaul on 1 April 2015. The overhaul is estimated to have a cost of $9 million. The provision of $6 million represents two amounts of $3 million made in the years to 31 March 2013 and 2014 that had been included in cost of sales when accounted for.

(v)

A provision for income tax for the year ended 31 March 2014 of $23 million is required. The balance on current tax represents the under/over provision of the tax liability for the year ended 31 March 2013. At 31 March 2014 the tax base of Pedro’s net assets was $48 million less than their carrying amounts. The movement on deferred tax should be taken to the statement of profit or loss. The income tax rate of Pedro is 28%.

Required: (a)

Prepare the statement of profit or loss and other comprehensive income for Pedro for the year ended 31 March 2014. (11 marks)

(b)

Prepare the statement of changes in equity for Pedro for the year ended 31 March 2014. (3 marks)

(c)

Prepare the statement of financial position of Pedro as at 31 March 2014. (11 marks)

Notes to the financial statements are not required.

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(Total: 25 marks)

K A P LA N P UB L I S H I N G


REV IS ION MO CK : QUESTI ONS

3

CANDY Candy is a public listed company. Its most recent financial statements are shown below: Statement of profit or loss for the year ended 31 March 2014 $000 60,750 (37,850) –––––– 22,900 (6,750) (6,250) –––––– 9,900 (1,100) –––––– 8,800 (2,800) –––––– 6,000 ––––––

Revenue Cost of Sales Gross Profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Income tax expense Profit for the year

2013 $000 43,125 (25,875) –––––– 17,250 (4,625) (3,625) –––––– 9,000 (250) –––––– 8,750 (2,500) –––––– 6,250 ––––––

Statement of Financial Position as at 31 March 2014 $000 Non-current assets Property, plant and equipment Investments

Current assets Inventory Receivables Non-current assets held for sale Bank

Total assets Equity Equity $1 share capital Retained earnings

KAPLAN PUBLISHING

$000

2013 $000

23,750 5,275 –––––– 29,025 9,000 6,000 5,000 – ––––––

20,000 –––––– 49,025 –––––– 12,500 10,625 –––––– 23,125

$000 13,500 Nil –––––– 13,500

4,500 3,500 – 10,000 ––––––

18,000 –––––– 31,500 –––––– 12,500 5,625 –––––– 18,125

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ACCA F7 (INT ) : F INA NCIA L RE POR TIN G

Non-current liabilities 6% Loan notes 8% Loan notes Current liabilities Trade payables Bank overdraft Taxation

Total equity and liabilities

5,000 11,000 6,500 500 2,900 ––––––

9,900 –––––– 49,025 ––––––

5,000 Nil 5,375 Nil 3,000 ––––––

8,375 –––––– 31,500 ––––––

Additional information: (i)

There were no disposals of non-current assets during the year but some assets were reclassified as held for sale at 31 March 2014. These assets had a fair value above their carrying value, so are expected to be sold at a profit. Depreciation of property, plant and equipment for the year ended 31 March 2014 was $1.6 million.

(ii)

Investments represent the purchase of a 10% shareholding in Cat Ltd on 31 March 2014. These shares have been classified as fair value through profit or loss in accordance with IFRS 9 Financial Instruments.

(iii)

During the year, Candy expanded the business by opening new manufacturing and distribution centres in geographical regions where they had previously done no business.

Required: (a)

Prepare a statement of cash flows for Candy Plc for the year ended 31 March 2014, in accordance with IAS 7 Statement of cash flows, using the indirect method. (9 marks)

(b)

Using the information in the question and your answer to (a) above, comment on the performance and financial position of Candy Plc for the year ended 31 March 2014.

Note: up to six marks are available for the calculation of appropriate ratios. (16 marks) (Total: 25 marks)

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REV IS ION MO CK : QUESTI ONS

4

GLOBAL INC (a)

The definition of an asset forms an important element of the International Accounting Standard Board’s Conceptual Framework for Financial Reporting which, in turn, forms the basis for IAS 38 Accounting for Intangible Assets. Required: Define an asset and describe the circumstances under which Intangible Assets should be recognised. (3 marks)

(b)

For many businesses, research and development costs can amount to a material amount. Required Describe the accounting treatment allowed per IAS 38 Accounting for Intangible Assets for such costs (4 marks)

(c)

(i)

Global Inc began a new project to develop a kinetic mobile phone on 1 April 2012 and incurred research and development costs from this date. The research phase lasted until 31 December 2012 and incurred $9million of costs. From January 2013 the project entered the development phase and costs for the period to 31 March amounted to a further $6 million, of which, $4 million was for the purchase of a new premises that has a useful economic life of twenty five years. It is company policy to charge a full year’s depreciation in the year of acquisition and none in the year of disposal. At the year end the directors were not confident that the phone would be completed due to a technical factor that had arisen during the early stages of development.

Required: Prepare extracts of the statement of profit or loss and statement of financial position to show how the above research & development costs should be accounted for in the year to 31 March 2013. (3 marks) (ii)

The project remained in development for most of 2014 and was completed at the end of November at a cost of $2 million per month. The technical problem was overcome and from 1 June the directors became confident that the project would be completed and profitable. From December, processes began to get the phone into commercial production and the first deliveries of the product to stores were made during in January. At the end of the year sales revenue amounted $18 million from forecast revenue of $50 million.

Required: Prepare extracts of the statement of profit or loss and statement of financial position to show how the above development costs should be accounted for in the year to 31 March 2014. Note: The depreciation on the premises is not to be included as part of the development costs calculation (5 marks) (Total: 15 marks)

KAPLAN PUBLISHING

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ACCA F7 (INT ) : F INA NCIA L RE POR TIN G

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COACH DREAMS (a)

The objective of IAS 36 Impairment is to ensure that an entity’s assets are included in the financial statements at no more than their recoverable amounts. Required: Define impairment and state how the standard adheres to the definition of an expense per the IASB’s Conceptual Framework (recognition of the elements of financial statements). (3 marks)

(b)

On 1 April 2013 Coach Dreams purchased 100% of the share capital of Bonkers Buses, a company that operates a party tour operation for the over 50’s. Bonkers Buses had been a welcome, profitable addition to Coach Dreams until 1 January 2014. On this date an incident on board the bus (travelling on an excursion to Skegness) led to three customers becoming injured and requiring hospital treatment. The incident was highly publicised, being covered by several major news channels. As a result Bonkers Buses has experienced a major reduction in demand for its tours and has experienced many cancellations on existing bookings. The carrying amounts of Bonkers Buses assets at 31 March 2014 are: Goodwill Operating licence Buses Land Buildings Inventories

$000 575 800 940 400 720 150 ––––– 3,585 –––––

A review at the year-end by an independent valuer confirmed that land had not fallen in value since it was purchased 20 years ago. Inventories contain some items that were recently damaged when some shelving collapsed. The cost of these items was $30,000 and it is expected that following remedial work costing $5,000 that they will be sold for $25,000. Based on the estimated future cash flows, the directors have estimated that the value in use of Bonkers Buses at 31 March 2014 amounts to $2.0 million and that the estimate fair value less costs to sell stands at $2.5 million. Required: Calculate the carrying amounts of Bonkers Buses (in Coach Dreams’ consolidated statement of financial position) at 31 March 2014. (Note: Your answer should be rounded to the nearest $000).

(7 marks) (Total: 10 marks)

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