UNIVERSITY OF BRADFORD

FINANCIAL ACCOUNTING, AFE5008-B

FINAL EXAMINATION

Exam Date: 21st January 2022 14:30 – 17:30 hrs

UB Number.........................................

INSTRUCTIONS TO CANDIDATES
TYPE OF ASSESSMENT
(CLOSED BOOK EXAMINATION)
 This examination accounts for 70% of the total marks available for this
module.   
 It must be completed individually.  
 Please use authorized calculator during the examination.
 Answer ALL 4 QUESTIONS.  
 You are expected to present all your workings.
 Please start each answer on a fresh page
 All workings should be shown and made to the nearest month and pound
unless the question requires otherwise.

ANSWER ALL FOUR QUESTIONS:

Page 1 of 9
Question 1:
The following trial balance has been extracted from the books of account of Oscar Plc as at
31 March 2021:

£ £
Administrative expenses 210,000
Ordinary share capital 600,000
Trade receivable 470,000
Bank overdraft 80,000
Provision for warranty cost 205,000
Distribution costs 420,000
Non-current assets investments 560,000
Investment income 75,000
Finance cost 10,000
Freehold land and building at cost 200,000
Plant and equipment
At cost 550,000
Accumulated Depreciation (at 31 March 2020) 220,000
Retained earnings (at 1 April 2020) 180,000
Purchases 960,000
Inventories(at 1 April 2020) 150,000
Trade payables 260,000
Revenue 2,010,000
2020 final dividend paid 65,000
2021 interim dividend paid 35,000
Total 3,630,00 3,630,000
0

Additional Information
1- Inventories at 31 March 2021 were valued at £160,000.

2- The following items are already included in the balances listed in this trial balance.

Distribution Costs Admin Expanses

£ £
Depreciation charge for the year 27,000 5,000
Employee benefits 150,000 80,000

3- The income tax charge for the year is estimated at £74,000

4- The warranty provision is to be increased by £16,000, charged to administrative

expenses.

5- Staff bonuses totalling £40,000 are to be provided for, charged equally to distribution
costs and administrative expenses.

6- In May 2021 a final dividend for 2021 of 10p per share was proposed on each of the
company’s 600,000 ordinary shares.

Page 2 of 9
 Requirement
Prepare Oscar Plc’s statement of profit or loss and statement of changes in equity for
the year to 31 March 2021, a statement of financial position at that date and notes in
accordance with the requirements of IAS1 Presentation of Financial Statements to
the extent the information is available. (25 Marks)

END OF QUESTION 1

Question 2:

Page 3 of 9
The following information has been extracted from the draft financial statements of London
Ltd for the year ended 31 October 2021. All figures are expressed in £’000s.
Income statement for the year ended to 31 October 2021

Sales 112
Cost of sales (10)
Gross profit 102
Less: Expenses (18)
Operating profit 84
Interest expense (6)
Interest income 4
Loss on disposal of non-current asset (8)
Profit before taxation 74
Taxation (39)
Profit after taxation 35
Balance sheet as at:

31 October 2021 31 October 2020

Non-current assets 1,750 1,250
Current assets
Inventory 330 130
Trade receivables 148 191
Cash at bank 260 0
Total assets 2,488 1,571
Current liabilities
Bank overdraft 0 60
Trade payables 730 376
Non-current liabilities
Long-term bank loan 334 381
Equity
Share capital (£1) 638 401
Share premium 266 196
Other reserves 520 157
Total equity and 2,488 1,571
liability

Additional information:

Page 4 of 9
 1. Accumulated depreciation at the start of the year amounted to £15,000, and the
closing depreciation provision stood at £40,000.
2. During the financial year, there was no revaluation on the Non-current Assets.
3. Interest and Taxation balance

2021 2020
Interest 20,000 36,000
Taxation 75,000 45,000
4. London Ltd has received the dividend of £368,000 and paid the dividend of £79,000
to shareholders.
5. The historical cost of the non-current asset has been sold during the year is £50,000.
Depreciation which had been charged on the assets sold in the year totalled £20,000.
6. The historic cost of the non-current assets at the start of the year was £1,350,000.
The total historic cost of non-current assets on 31 October 2021 was £1,850,000.

You Are Required To:

a. Use indirect method to prepare a cash flow statement for the year ended to 31 October
2021 in accordance with IAS 7.

(18 Marks)

b. Explain why depreciation and a loss made on disposal of a non-current asset are both
treated as a source of cash.

(4 Marks)

c. Briefly comment on the cash position of London Ltd.

(3 Marks)

[Total 25 Marks]

END OF QUESTION 2

Question 3:

Page 5 of 9
The statements of comprehensive income for Barcelona plc, Kent plc and Granada plc for
the year ended 31 October 2021 were as follows:
Statements of comprehensive income for the year ended 31 October 2021

Barcelona Kent Granada

£ 000 £ 000 £ 000

Sales 140,000 88,000 65,000

Cost of sales 50,000 28,000 15,000

Gross profit 90,000 60,000 50,000

Expenses 24,500 32,500 25,000

Dividends received 7,650 -------- 1,000

Profit before tax 73,150 27,500 26,000

Corporate Taxation 17,150 7,500 6,500

Profit for the year 56,000 20,000 19,500

Dividends paid in year 30,000 6,250 3,000

The following information is also relevant:

1. Barcelona plc acquired 80% of the shares in Kent plc on 1 May 2017 for a cash
consideration of £50,000,000. On that date, the balance on the retained earnings
of Kent plc was £30,000,000 and the balance on the general reserve of Kent plc
was £25,000,000.

2. Barcelona plc also acquired 20% of the shares in Granada plc on 1 June 2018. On
that date, the balance on Granada plc’s retained earnings was £14,600,000 and
the general reserve of Granada plc was £3,450,000. There was a revaluation on
Granada plc’ s net assets on that date, and this has been adjusted in the
comprehensive income statement.
3. During the year Barcelona plc sold Kent plc goods for £6,000,000 which included a
mark-up of 50%. Seventy-five percent (75%) of these goods were still in inventory
at the end of the year.
4. As at 31 October 2021, goodwill impaired by 30%, and the Method 1 is used to
calculate the goodwill.
5. During the year, the corporate taxation expense at Barcelona plc has been
overestimated by £7,150,000, and this has not been adjusted in the comprehensive

Page 6 of 9
 income statement.

You Are Required To:

a. Prepare Barcelona plc’s consolidated statement of comprehensive income for the year to
31 October 2021. All workings should be shown. (Note: The non-controlling interest
should not be charged with its proportion of the unrealised profit when calculating the
consolidated profit attributable to non-controlling shareholders.)
(16 Marks)

b. Barcelona plc has decided to write off 30% of the value of goodwill upon the acquisition of
Kent plc as an impairment loss. The implementation of an asset impairment loss has been
associated with the phenomenon known as Big Bath accounting (see graph below). You
are required to prepare the report to address the following tasks (The sub-heading is
recommended):

I. Discuss how the impairment is determined under IAS 36: Impairment of the
Assets.
II. Briefly evaluate whether you consider the management of Barcelona plc may have
decided to take a big bath in the decision to implement an asset impairment charge
upon the acquisition of Kent Plc.

Source: Basu,
1997.

(9 Marks)

[Total 25 Marks]
END OF QUESTION 3

Page 7 of 9
Question 4:
Hull plc has hired you as their financial accountant and you need to help them solve
the following tasks.

a. The following summary extract information for the last 3 years relates to Hull plc, a UK
retailer:

Extract information 2018 2019 2020

Operating Profit after tax 19,400,000 18,900,000 21,350,000

Long term liabilities 55,000,000 70,000,000 70,000,000

Shareholders’ funds 105,000,000 101,250,000 107,450,000

Dividend per share 0.90 1.00 1.30

Market value per share 12.75 9.90 14.20

Weighted average cost of capital 12% 11% 10%

Number of ordinary shares 5,000,000 5,000,000 5,000,000

You Are Required To:

Prepare the financial report to explain the company’s financial performance and position with
six following supporting financial ratios in Board meetings:

I. Gearing
II. Dividend cover
III. Dividend yield
IV. Return on equity
V. Earnings per share
VI. Price/earnings ratio

State clearly the formulas used for each ratio and show ALL workings

(12 Marks)

b. On 1 April 2020, Hull plc began a research project. The aim of the project was to
investigate ways of streamlining its production process. The initial costs of setting up the
project were £5 million. From 1 April 2020 to 30 June 2020 ongoing project costs were
£250,000 per month. On 1 July 2020 the project was considered to be technically feasible
and commercially viable and from this date project costs increased to £800,000 per month.
From 1 August 2020 to 30 September 2020, additional £1,150,000 was spent for the design
and construction of a pilot for the project. This pilot is not capable of operating on a scale
economically feasible for commercial production.

Page 8 of 9
From 1 October 2020 to 1 December 2020, additional £300,000 were also spent for testing
of the pilot. The project was not completed till 31 December 2020. Hull plc charged all the
costs to complete the project to administrative expenses.

You are Required to:

Discuss, with the reference to IAS 38: Intangible Assets, the correct accounting treatment
for all the costs incurred in relation to the research project for the year ended 31 December
2020.

(6 Marks)

c. Hull plc wants to start a new branch in Italy. Discuss which inventory valuation method
should Italian branch use in accordance with IAS 2: Inventory and critically evaluate the
chosen method.

(3 Marks)

d. The Hull plc decides to adopt straight-line depreciation on motor cars. The straight-line
depreciation is charged in periods of operation, but if the motor car is not in active use then
no depreciation is charged. The financial managers of Hull plc justify this on the grounds that
the economic benefits of the inactive motor cars are not being consumed. Some motor cars
can remain inactive for many years, although money is spent maintaining them during these
periods. The financial manager requires advice as to whether this depreciation policy is in
accordance with IAS 16 Property, Plant and Equipment.

(4 Marks)

[TOTAL 25 Marks]

END OF QUESTION 4

Page 9 of 9