Monitoring Test MT2C

Financial
Reporting
F7FR-MT2C-Z15-Q

Time allowed 1.5 hours

BOTH questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

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1 Pandulph acquired 80% of the share capital of Shylock on 1 October 2013 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 2016. The present value of the cash consideration
on 1 October 2013, 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 2013 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 2015 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 2015
Pandulph had paid for only half of the goods and still held three-quarters of them in
inventory.

(ii) On 1 October 2013 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 2013 the fair value of Shylock’s inventory was $4 million lower than
its carrying amount. This inventory had all been sold at 30 September 2015.

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:

(a) Prepare the consolidated statement of financial position of Pandulph as at 30

September 2015. (20 marks)

(b) The chairman of Pandulph has asked you to explain how it is possible for a parent to
account for a 40% investment as a subsidiary. He had always thought that a
subsidiary relationship only exists when the parent owns more than 50% of the
share capital of a company.

Required:

Explain the circumstances in which a parent should account for an investment

as a subsidiary. (5 marks)

(25 marks)

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2 Falstaff operates a chain of national restaurants and provides vending and other catering
services to corporate clients. All restaurants offer “eat-in”, “take-away” and “home delivery”
services. The draft financial statements for the year ended 30 September 2015 show revenue
of $42.2 million, profit before taxation of $1.8 million and total assets of $30.7 million.

The following issues noted during the preparation of the financial statements have been left
on a schedule of points for the finance director’s attention:

(a) Change in operations

In September 2015 the management board announced plans to cease offering “home
delivery” sales of food and beverages that amounted to $600,000 for the year to 30
September 2015 (2014 – $800,000) with effect from the end of the month. Delivery
vehicles have been classified as non-current assets held for sale as at 30 September
2015 and measured at fair value less costs of disposal $800,000 (carrying amount
$500,000). (7 marks)

(b) Revenue recognition

Falstaff has recently moved into the field of catering for events and has entered into
five contracts to cater for weddings which will take place in the next accounting
year. Customers have been required to pay a 20% deposit on the signing of the
contract, half of which is non-refundable if the customer subsequently cancels the
contract. No specific costs have been incurred regarding any of these contracts.
However, Falstaff has incurred costs of $500,000 in promoting and advertising its
new service which has been included as an intangible asset in the statement of
financial position. (6 marks)

(c) Inventory

Inventory valued at $480,000 at 30 September 2015 held in a warehouse was totally

destroyed in a warehouse fire on 13 November 2015. Only 75% of the inventory’s
carrying amount is expected to be recovered under the insurance policy. (6 marks)

(d) Property

Property with a carrying amount of $1,015,500 at 30 September 2015 was sold in

November 2015 for $669,000. Falstaff depreciates property at 2% per annum on
cost. (6 marks)

Required:

State, with reasons, how each of the four matters should be dealt with in Falstaff’s
financial statements for the year ended 30 September 2015. Your answer should include
relevant provisions of International Financial Reporting Standards (IFRSs).
NOTE: The mark allocation is shown against each of the four issues.
(25 marks)

End of Question Paper

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