Monitoring Test MT1A

Financial
Reporting
F7FR-MT1A-Z16-A

Answers & Marking Scheme

©2016 DeVry/Becker Educational Development Corp.   
®
1 HOMER GROUP

Consolidated statement of financial position as at 31 December 2016

ASSETS $000
Non-current assets
Tangible (21,972 + 9,745 + 120) 31,837* 1
Intangible – goodwill – W3 100 4
––––––
31,937
Current assets
Inventory (15,322 + 8,546 – 20 (W7)) 23,848* 1
Receivables (15,891 + 8,258 – 50 (W8) – 250 (W8)) 23,849* 1+1
Cash and bank (2,174 + 5,266 + 50 (W8)) 7,490* 1
––––––
Total assets 87,124
––––––
EQUITY AND LIABILITIES
Capital and reserves
Share capital – Homer only 10,000 ½
Share premium – Homer only 3,000 ½
Retained earnings – W5 25,601 3
––––––
38,601
Non-controlling interest – W4 6,720 3
––––––
45,321

Non-current liabilities
Loans (10,000 + 3,500) 13,500*

Current liabilities
Payables (19,238 + 9,315 – 250 (W8)) 28,303* 1
––––––
Total equity and liabilities 87,124
––––––

* maximum of 3 marks for adding together figures given in question

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 2
CONSOLIDATION SCHEDULES

(1) Establish group structure

Homer Non-controlling interest – 35%

6,500 ÷ 10,000 (50c shares)

= 65%

Simpson

(2) Net assets of Simpson

Reporting Date of Change

date acquisition
$000 $000 $000
Share capital 5,000 5,000 0
Share premium 2,500 2,500 0
Retained earnings 11,500 2,000 9,500
Fair value reserve 120 200 (80)
Unrealised profits (20) (20)
–––––– –––––– ––––––
Total 19,100 9,700 9,400
–––––– –––––– ––––––
W3 W5

(3) Goodwill

$000
Cost of investment 6,500 ½
Non-controlling interest (5,000 ÷ 50 cent)  35%  $1 3,500 1
Simpson’s net assets at the date of acquisition (W2) (9,700) 1½
––––––
Goodwill 300
––––––
Impaired 2/3 200
Remaining 1/3 to consolidated statement of financial position 100 1

Of the impairment loss of $200, 65% (130) will be charged against consolidated retained
earnings and 35% (70) will be charged to non-controlling interests.

(4) Non-controlling interest

$000
Fair value on acquisition (W3) 3,500 1
Share of post-acquisition profits (W2) (9,400  35%) 3,290 1
Goodwill impaired (W3) (70) 1
––––––
6,720
––––––

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 3
(5) Group retained earnings at 31 December 2016

$000
All of Homer’s – per question 19,621 1

Homer’s share of Post-acquisition profits of Simpson

65%  9,400 6,110 1
1
Less goodwill impaired (W3) (130) 1
––––––
Group retained earnings 25,601
––––––

(6) Fair value adjustment

Dr Tangibles 200
Cr Fair value reserve 200

To revalue assets at date of acquisition and end of reporting period

Dr Retained earnings 80
Cr Tangibles 80

To account for additional depreciation on the revaluation done at date of acquisition (200 ×
2
/5 years)

(7) Unrealised profits

% $000
Sales 125 100
Cost of sales 100 (80)
––– –––
Gross profit 25 20
––– –––

Dr Retained earnings 20 Simpson – net asset statement

Cr Inventory 20 Consolidated statement of financial position

To eliminate unrealised profits

Tutorial note: Remember to adjust Simpson’s net asset statement.

(8) Cash in transit and inter-company balances

Dr Cash 50
Cr Receivables 50

To account for cash in transit in Simson’s account – as he is the recipient

Dr Payables 250
Cr Receivables 250

To eliminate the inter-company balance – was 300 less cash in transit 50 =250

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 4
2 JONES

(a) Theory of revenue

(i) Meaning

IFRS 15 Revenue from Contracts with Customers was issued in 2014, it replaced IAS 18
Revenue, and deals with the recognition and measurement of revenue; one of the biggest
numbers in an entity’s financial statements.

Revenue is defined as “income arising in the course of an entity’s ordinary activities”. 1

Revenue is recognised as the entity satisfies specified any performance obligations; a 1

distinct performance obligation must be inherent in a sale contract before revenue can be
recognised.

The amount of revenue recognised will be based on the transaction price, this is the amount 1
of consideration which the entity expects to be entitled to in exchange for the transfer of
goods or services to a customer.

(ii) Revenue from the sale of goods

IFRS 15 requires the following five criteria be met before an entity can recognise revenue
from a contract with a customer:

 The parties to the contract have approved the contract and are committed to ½
perform their respective obligations;

 The entity can identify each party’s right regarding the goods or services to be ½
transferred;

 The entity can identify the payment terms for the goods or services to be ½
transferred;

 The contract has commercial substance. Commercial substance exists if the risk, 1
timing or amount of the entity’s future cash flows is expected to change as a result
of the contract; and

 It is probable that the entity will collect consideration in exchange for goods or ½
services transferred to the customer. ————
6
(b) Transactions ————

(i) Measurement

$400,000 is recognised as revenue. The amount of revenue recognised is after allowing for 1
any volume discounts.

The prompt payment discount of $20,000 would not reduce revenue but would be 1
recognised as a discount in profit or loss in the period of settlement. ————
2
(ii) Installation ————

Because the installation process is simple, revenue from Machine 1 will be recognised on ½
31 March 2017.

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 5
 Therefore, for Machine 1, $320,000 will be recognised as revenue and $160,000 as cost of 1
sales.

Revenue from Machine 2 will not be recognised until 5 April, the date the installation is ½
complete. Until that date, Jones has not satisfied its performance obligation.

Therefore no revenue or cost of sales will be recognised on Machine 2 in the year ended 31 1
March 2017.

The cost of producing Machine 2 ($150,000) will be recognised in inventory at 31 March 1

2017 and the installation cost ($10,000) will be recognised as part of cost of sales when the ————
revenue is recognised on 5 April 2017 (i.e. in the year ended 31 March 2018). 4
————
(iii) Sale and repurchase

No revenue would be recognised on the sale of the property as there is no distinct 1

performance obligation within the contract, the item of property will not be transferred to the
customer, a bank. This is so because the option to re-purchase is almost certain to be
exercised, due to the value being at substantially below market value and the expectation of a
rise in property prices.

Although legally a sale has occurred and the repurchase is likely to take place the 1
substance of the transaction is that of a secured loan. Therefore the sale of property is not
recognised and the property remains in Jones statement of financial position.

The finance cost for the year ended 31 March 2017 will be $100,000 ($2 million × 10% × 1
6
/12). This will be shown in the statement of profit or loss. 1

The closing liability will be $2·1 million ($2 million + $100,000 finance cost). This will 1
be shown as a non-current liability. ————
4
(iv) Deferred payment ————

Jones would recognise revenue on 30 September 2016 because the risks and rewards of ½
ownership have been transferred and Jones has no continuing managerial involvement with
the machine.

The amount recognised should be the fair value of the consideration receivable which, ½
under the principles of IFRS 13 Fair Value Measurement, involves discounting the
consideration to present value.

The amount of revenue recognised is $800,000 ($1,007,557 × 0·794). ½

Jones would recognise $600,000 in cost of sales. ½

Jones would recognise finance income of $32,000 ($800,000 × 8% × 6/12). This will be 1
shown in the statement of profit or loss.

Jones would recognise a closing receivable of $832,000 ($800,000 + $32,000). 1

————
4
————
20
————

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 6
3 CONNEL

(a) Temporary differences

Carrying Tax base Temporary Taxable/

amount differences deductible
$ $ $
Non-current assets
Land 500,000 420,000 80,000 Taxable ½
Computer equipment 180,000 100,000 80,000 Taxable 1
Plant and equipment 350,000 300,000 50,000 Taxable 1

Current assets
Inventory 255,000 255,000 0 N/A ½
Receivables 275,000 290,000 (15,000) Deductible 1

Current liabilities
Fine payable (25,000) (25,000) 0 N/A ½
Interest payable (10,000) 0 (10,000) Deductible 1
Trade payables (320,000) (320,000) 0 N/A ½
–––––––
185,000 6
–––––––

(b) Amounts in the financial statements

Statement of financial position (W1)

Deferred tax liability $84,000 1

Deferred tax asset $10,000 1

Statement of profit or loss and other comprehensive income (W2)

Charge to profit or loss $14,500 1

Other comprehensive income $32,000 1
___

WORKINGS 4
___

(1) Temporary Deferred tax

differences @40%
$ $
Deferred tax liability – taxable differences 210,000 84,000
Deferred tax asset – deductible differences (25,000) (10,000)
––––––– –––––––
185,000 74,000
––––––– –––––––

(2) $
Opening deferred tax position – per question 27,500
To other comprehensive income 32,000
(40% of 80,000 – revaluation of land)
To profit or loss (balancing figure) 14,500
–––––––
Closing deferred tax position 74,000
–––––––

©2016 DeVry/Becker Educational Development Corp.  All rights reserved. 7