UNIVERSITY OF DERBY

The Faculty of Business, Computing & Law

EXAMINATION PAPER

BA ACCOUNTING & FINANCE

LEVEL FIVE

FINANCIAL ACCOUNTING
5AG006 (RESIT)

DATE: AUGUST 2008

TIME ALLOWED: 3 HOURS

Instructions to Candidates

1. Answer Questions 1, 2 and 3

2. Choose ONE from Questions 4 and 5

DO NOT TURN OVER UNTIL INSTRUCTED

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 1

Desmond PLC
The draft accounts of Desmond PLC, a manufacturing company, have been
prepared for the year ended 30 September 2006 and are shown below.

The authorised share capital is 6,000,000 8% preference shares of 50p

each and 18,000,000 ordinary shares of 25p each.

Extract from trial balance for the year ended 30 September 2006
Debit Credit
£'000 £'000
Revenue 318,000
Increase in allowance for bad receivables 131
Auditor's fees 93
Loan interest 405
Dividends paid:
Interim preference 120
Interim ordinary 370
Tax (over provision) 20
Directors' emoluments 400
Administration expenses 7,500
Distribution costs 29,250
Inventories at 1 October 2005 9,000
Purchases 267,662
Trade payables 2,160
Retained earnings 1 October 2005 5,467
Loan 6,000
Preference shares (50p) 3,000
Ordinary shares (25p) 4,500
Plant and machinery 2,580
Accumulated depreciation 774
Land 2,400
Buildings 3,900
Accumulated depreciation --Buildings 462
Fixtures and Fittings 720
Accumulated depreciation -- Fixtures and fittings 144
Trade receivables 6,315
Bank 9,681
340,527 340,527

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 1 continued

1. The policy of the company is to provide depreciation at the following

rates:
Buildings 2% per annum on cost £78,000
Plant and machinery 20% per annum on cost 516,000
Fixtures and fittings 10% per annum on cost 72,000

2. The loan is unsecured and repayable in the year 2008. It carries interest
of 9% per annum

3. The charge for Tax for the year is estimated to be £4,360,000

An overprovision of £20,000 had been made in the previous year.

4. The directors emoluments comprise of the following:

Salary Fees

Managing directors 146,000 10,000

Chairman 120,000
Four directors each receiving 25,000 6,000

5. The closing inventories are £9,828,000 are valued at lower of cost

and net realisable value

Required:

a) Prepare the income statement for the year ended 30 September 2006
(10 marks)
b) Balance sheet as at 30 September 2006 (10 marks)

c) Statement of changes in equity, and the relevant notes for publication

(10 marks)
(TOTAL 30 MARKS)

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 2

Page PLC has supplied you with the following abridged income
statement for the year ended 31/10/2004

£'000
Profit from operations 2,520
Interest paid -168
Profit before tax 2,352
Tax -750
Profit for the year 1,602

Balance sheet as at 31 October 2004 2,003

£'000 £'000 £'000 £'000

Non current assets

At cost 9,000 8,400
Accumulated depreciation -1,800 -1,500
7,200 6,900
Current assets
Inventories 84 69
Trade receivables 255 270
Cash and cash equivalent 48 30
387 369

Current liabilities
Trade payables 108 81
Tax liabilities 291 285
399 366
Net current (liabilities)/ assets -12 3
7,188 6,903
Non-current liabilities
Loan 600 2,400
6,588 4,503

Equity
Called up share capital 3,000 2,550
Share premium 177
Retained earnings 3,411 1953
6,588 4,503

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 2 continued

1. Dividend proposed were: £144,000 in 2003, and £225,000 in 2004.

These dividends were paid in year ending 31st October 2004 and
year ending 31st October 2005 respectively.

2. During the second year the company sold a non-current asset for £8,000
cash. The asset had originally cost £29,000 and had been depreciated
by £18,000 at the time of sale

Required:
Prepare a cash flow statement for the year ended 31 October 2004 in
accordance with the requirements of IAS 7.
(25 Marks)

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 3
The following summarised balance sheets relate to the Wrap group of
companies as at 30th November 2004
Wrap plc Churchill Ltd
£'000 £'000
Non current assets 5,000 600
Investment in Churchill Ltd 900
Current assets
Inventories 150 30
Trade receivables 80 35
Cash and cash equivalent 10 5
240 70
Current liabilities
Trade payables -160 -120
5,980 550
Equity

Ordinary shares of £1 each 4,000 400

Retained earnings 1,980 150
5,980 550

Additional information
Wrap PLC purchased a 90% holding in Churchill Ltd on 1 December
2002 when Churchill's retained earnings balance was £50,000

During the year to 30 November 2004 Churchill purchased goods from

Wrap for £60,000. Wrap had invoiced these goods at cost
plus 33.3%. A third of these goods were still held as inventories at the
year end.

At 30 November 2004 the following inter-group debt was still outstanding:

Churchill owed Winthrop £10,000

Ten percent of any goodwill arising upon consolidation is to be written off as

an impairment loss each year.

Required:
Prepare the Wrap group of companies consolidated balance sheet
as at 30 November 2004.

(25 Marks)

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 4

a) Distinguish betweem research expenditure and Development expenditure

(7 Marks)
b) Expalin the accounting treatment required by IAS 38 in relation to each of these
types of expenditure. (3 Marks)

c) During the year to 31 July 2006, a pharmaceuticals company spent a total of

£830,000 on research and development. Of this amount £370,000 was spent on an
unsuccessful attempt to find a cure for the common cold. The remaining £460,000
was spent on the development of a new range of cosmetic products. How should this
expenditure be accounted for in the company's financial statements?
(10 Marks)

(20 Marks)

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UNIVERSITY OF DERBY
The Faculty of Business, Computing & Law
EXAMINATION PAPER
BA ACCOUNTING AND FINANCE
LEVEL FIVE
FINANCIAL ACCOUNTING
5AG006 (RESIT)

QUESTION 5

Hillard prepares financial statements to 31 March every year. Consider each

of the following situations and determine in each case whether or not a provision
should be recognised in accordance with IAS 37, Provisions, contingent liabilities
and contingent assets , in the company's financial statements for the year ended
31 March 2006.

a) On 23 January 2006, the board of directors decided to close down one of the
company's operations. By 31 March 2006, this decision had been announced to the
workforce and a detailed plan had been drawn up for its implementation. The
closure would involve redundancy payments of £375,000

b) On 12 March 2006, the directors decided to close another of the company's

operations. This would involve redundancy payment of £250,000. At 31 March 2006
the decision had not been announced and had not yet been acted upon.

c) For the past few years, the company had been conducting two operations which
cause environmental damage. One of these operations is in the country with
legislation that requires companies to rectify ay environmental damage which
they cause. The other is in the country with no such legislation. The cost of
rectifying the damage caused to date by these two operations are estimated
at £5 million and £10 million respectively

d) At 31 March 2006, the company owns a fleet of cars, all of which require an
annual services. The servicing work is expected to occur in the first few months of the
year to 31 March 2007, at an estimated cost of £50,000

(TOTAL 20 MARKS)

© University of Derby

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