Monitoring Test MT2C

Financial
Reporting
F7FR-MT2C-Z16-Q

Time allowed 1.5 hours

All THREE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

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All THREE questions are compulsory and MUST be answered

1 Pandulph acquired 80% of the share capital of Shylock on 1 October 2014 when the
revaluation surplus and retained earnings of Shylock were $15 million and $72 million
respectively. Neither company has issued or redeemed any share capital since the date of
acquisition.

Pandulph acquired the shares by a 5-for-4 share-for-share exchange together with a cash
payment which is to be made on 1 October 2017. The present value of the cash consideration
on 1 October 2014, using Pandulph’s cost of capital of 6%, was $38.4 million. Pandulph has
not made any adjustment to this amount since the date of acquisition. Pandulph’s share price
on 1 October 2014 was $1.60 and that of Shylock was $2.20. Pandulph has a small number of
other financial asset investments which are included in its statement of financial position at
fair value.

The statements of financial position of the two companies at 30 September 2016 are shown
below:
Pandulph Shylock
$m $m $m $m
Non-current assets
Land 70 89
Buildings 133.3 106.4
Plant and equipment 107.2 99.7
Development expenditure 31.3 –
Investments 216.4 –
_____ _____
558.2 295.1
Current assets
Inventory 22.7 23.2
Accounts receivable 37.1 34.3
Bank 10.7 70.5 – 57.5
_____ _____ _____ _____
Total assets 628.7 352.6
––––– –––––
Capital and reserves:
Ordinary shares of $1 each 240 100
Share premium 74 25
Revaluation surplus 32 20
Retained earnings 127.1 86
_____ _____
473.1 231
Non-current liabilities
Deferred consideration 38.4 –
8% Loan note 75 113.4 90 90
_____ _____
Current liabilities
Accounts payable 27.9 12.7
Taxation 14.3 4.9
Overdraft – 42.2 14 31.6
_____ _____ _____ _____
Total equity and liabilities 628.7 352.6
––––– –––––

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 The following information is relevant:

(i) During the year Shylock sold goods to Pandulph for $20 million. Shylock prices its
product by including a 25% mark-up on cost price. At 30 September 2016
Pandulph had paid for only half of the goods and still held three-quarters of them in
inventory.

(ii) On 1 October 2014 Shylock’s buildings had a fair value that was $20 million higher
than their carrying amount and a remaining useful life of 20 years. Their residual
value was deemed to be nil.

On 1 October 2014 the fair value of Shylock’s inventory was $4 million lower than
its carrying amount. This inventory had all been sold at 30 September 2016.

The carrying amounts of Shylock’s other assets and liabilities closely approximated
to their fair values.

(iii) Pandulph has identified that one of its properties is no longer of any use and has
decided to sell it, in its present condition, within the next three months. The
carrying amounts of the land and buildings are $1.2 million and $5.6 million,
respectively. The fair value less costs of disposal of the property is $4 million of
which 20% is attributed to the land. Pandulph revalues its land on a regular basis in
accordance with IAS 16 Property, Plant and Equipment. There is a revaluation
surplus of $0.3 million in respect of the land to be sold.

(iv) Pandulph’s policy is to value the non-controlling interest at fair value at the date of
acquisition which was $49.6 million. Since the acquisition took place goodwill has
fallen in value by 35% of the amount determined on acquisition.

Required:

Prepare the consolidated statement of financial position of Pandulph as at 30 September

2016.

(20 marks)

2 IAS 38 Intangible Assets deals with the recognition and subsequent measurement of
intangible assets.

Required:

(a) Explain the following:

(i) The meaning of the term “intangible asset” and those intangible
assets that are within the scope of IAS 38;

(ii) The criteria that need to be satisfied before expenditure can be

recognised as an intangible asset under IAS 38;

(iii) How recognised intangible assets should be subsequently measured.

(9 marks)

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 (b) Spectrum is a listed entity that prepares consolidated financial statements.
Spectrum measures assets using the revaluation model wherever this is possible
under International Financial Reporting Standards. During its financial year ended
30 September 2016 Spectrum entered into the following transactions:

(i) On 1 April 2015 Spectrum began a project to investigate a more efficient

production process. Expenses relating to the project of $2 million were
charged to profit or loss in the year ended 30 September 2015. Further
costs of $1·5 million were incurred in the three-month period to 31
December 2015. On that date it became apparent that the project was
technically feasible and commercially viable.

Further expenditure of $3 million was incurred in the six-month period

from 1 January 2016 to 30 June 2016. The new process, which began on
1 July 2016, was expected to generate cost savings of at least $600,000
per annum over the 10-year period commencing 1 July 2016.

(ii) On 1 October 2015 Spectrum acquired a new subsidiary, Angel. The

directors of Spectrum carried out a fair value exercise as required by IFRS
3 Business Combinations and concluded that the brand name of Angel had
a fair value of $10 million and would be likely to generate economic
benefits for a ten-year period from 1 October 2015. They further
concluded that the expertise of the employees of Angel contributed $5
million to the overall value of Angel. The estimated average remaining
service lives of the Angel employees was eight years from 1 October
2015.

(iii) On 1 April 2016 Spectrum 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
April 2016. There is no active market for this type of licence. However,
the directors of Spectrum estimated that at 30 September 2016 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 Spectrum that had a present value at 30
September 2016 of $185,000.

Required:

Assuming that Spectrum has no intangible assets other than those mentioned
above, calculate the carrying amount of intangible assets in the consolidated
statement of financial position of Spectrum as at 30 September 2016. You
should provide relevant explanations to support your figures.

You are NOT required to calculate the goodwill arising on acquisition of

Angel. (11 marks)

(20 marks)

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3 Bandril prepares financial statements to 30 September each year. During the year ended 30
September 2016, the following transactions occurred:

(a) On 1 August 2016, Bandril supplied motor vehicles it had manufactured to a car
dealer. The normal selling price of the vehicles was $400,000 but Bandril did not
invoice the dealer at the date the vehicles were supplied, and Bandril retained legal
title to the vehicles. The terms of the transaction were that Bandril would invoice
the dealer, and transfer legal title to the vehicles, at the earlier of the date the dealer
found a buyer for the vehicles or 31 January 2017. The invoiced amount would be
selling price at the date of delivery plus a display charge of 1% per month (or part
month) the vehicles were displayed by the dealer before they assumed legal
ownership. The dealer has the right to return the vehicles to Bandril at any time in
the six months immediately following transfer, provided the vehicles are in good
condition. In these circumstances, the dealer would have to pay the appropriate
display charge plus an early return penalty of 50% of the normal selling price of the
returned vehicle at the date of original supply by Bandril. The dealer is responsible
for any loss of, or damage to, the vehicles during the display period. On 31 August
2016, the dealer sold 25% of the vehicles supplied by Bandril and accordingly
Bandril invoiced an amount of $101,000. The dealer paid this amount on 30
September 2016. On 30 September 2016, the dealer sold a further 20% of the
supplied vehicles and Bandril invoiced an amount of $81,608. The dealer has an
established record of settling invoices by the due date for payment. (5 marks)

(b) Bandril manufactures motoring accessories which it sells to retail outlets. On 1

September 2016 it sold 10,000 units of a newly designed car speaker system for
$100 each, the recommended retail price is $200. As a marketing promotion
Bandril intends to include a $40 discount voucher in the September edition of a
national motoring magazine, to be used against the purchase price of the speaker
system by the general public, the discount voucher must be used by 31 December
2016. Bandril will refund the value of the voucher to the retailer and expects that
2,000 vouchers will be redeemed by the public. Bandril is intending to recognise
the discount as a cost of sale in the year ended 30 September 2017, as the closing
date for the offer is in that financial year end. (5 marks)

Required:

For the two transactions determine:

(i) The total amount of revenue Bandril should recognise in the year ended 30
September 2016; and

(ii) The amount and nature of any assets relating to the transaction at 30
September 2016.

Your answer should include appropriate explanations to support your figures.

(10 marks)

End of Question Paper

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