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PL Financial Accounting and Reporting IFRS Exam June 2019
PL Financial Accounting and Reporting IFRS Exam June 2019
PL Financial Accounting and Reporting IFRS Exam June 2019
(3 HOURS)
Marks breakdown
Question 1 33 marks
Question 2 27 marks
Question 3 16 marks
Question 4 24 marks
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Unless otherwise stated, make all calculations to the nearest month and the nearest £.
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.
Grouper Ltd manufactures and installs surfaces for various sporting activities. The following
trial balance has been extracted from Grouper Ltd’s nominal ledger at 31 December 2018.
Note(s) £ £
Sales 3,125,800
Purchases 2,055,200
Administrative expenses 349,860
Distribution costs 89,100
Intangible assets (1) 799,800
Investment in sole trader (2) 300,000
Plant and equipment (1) to (3)
Cost 856,200
Accumulated depreciation at
31 December 2017 501,500
Construction costs (4) 254,000
Bank loan (4) 100,000
Retained earnings at
31 December 2017 782,800
Ordinary share capital 400,000
Cash at bank 14,400
Inventories at
31 December 2017 120,600
Trade receivables 254,740
Trade payables 160,300
Income tax (5) 5,300
5,084,800 5,084,800
Notes:
£
Project X 502,800
Project Y 297,000
799,800
The costs for Project X are those correctly capitalised up to 31 December 2017 on a
project to develop a new hard-wearing surface for tennis courts. The new surface was
launched on 1 May 2018 and is expected to generate profits for five years before a
superior surface is developed.
The costs for Project Y are the costs incurred during the year ended 31 December 2018.
Project Y initially began on 1 January 2018 as research into a new artificial surface for
cricket pitches, but was assessed as meeting the criteria of IAS 38, Intangible Assets,
for capitalisation on 1 October 2018. Production of the new surface is expected to
commence during 2019.
Project Y’s costs accrued evenly over the year, with the exception of a machine
purchased on 1 October 2018 for £25,000. The cost of this machine is included in the
costs of Project Y above and it was put to use immediately to help finalise the new
Grouper Ltd wishes to capitalise the maximum amount allowed under IFRS. All
expenses relating to intangible assets should be presented in cost of sales.
(2) On 30 June 2018 Grouper Ltd purchased the assets and trade of a sole trader for cash
of £300,000. This was debited to investment in sole trader and credited to cash. No
other accounting entries have been made in relation to this acquisition. The assets
consisted of the following, stated at their fair values on 30 June 2018.
£
Plant and equipment 228,300
Trade receivable (Loach Ltd) 25,100
253,400
On 1 July 2018 the plant and equipment had a remaining useful life of three years.
In the last few months Loach Ltd has encountered financial difficulties due to the
unexpected entry of a new competitor to its main market. The amount due from
Loach Ltd is still unpaid. Grouper Ltd now believes that it would be prudent to
make an allowance of 60% of this amount.
(3) Depreciation for the year has not been charged. Unless otherwise indicated Grouper Ltd
depreciates its plant and equipment on a straight-line basis over five years.
Depreciation is recognised in cost of sales.
(4) In the current year Grouper Ltd began to construct a new manufacturing facility. The
construction was still in progress at the year end. On 1 April 2018 Grouper Ltd borrowed
£100,000 to fund the second phase of the construction. The company immediately
spent these funds which are included in construction costs in the trial balance above.
The loan is repayable on 31 December 2019 and has an interest rate of 5% pa paid
annually in arrears. No interest on the loan has yet been recognised by Grouper Ltd.
(5) The income tax liability for the year ended 31 December 2018 is estimated at £8,000.
The amount shown in the trial balance is the balance remaining in the nominal ledger
after paying the tax liability outstanding at 31 December 2017.
1.1 Prepare the following for Grouper Ltd, in a form suitable for publication in the financial
statements for the year ended 31 December 2018:
1.2 Describe the differences between IFRS and UK GAAP in respect of IAS 38, Intangible
Assets and IAS 23, Borrowing Costs. (3 marks)
Total: 33 marks
You are an ICAEW Chartered Accountant and the financial controller of Medaka plc, a listed
company. Jim Fish, the finance director, who is also an ICAEW Chartered Accountant, has
prepared draft financial statements for the year ended 31 December 2018, which include the
following figures:
£
Profit for the year 561,200
Equity £
Ordinary share capital (£1 shares) 500,000
Share premium 75,000
Retained earnings 5,625,300
Since joining Medaka plc, you have become concerned that Jim’s technical knowledge is not
up to date. You raised this with the managing director and, as a result, you have been asked
to review the following issues in the draft financial statements. The directors are paid an
annual bonus which is linked to EPS.
(1) On 1 March 2018 Medaka plc ordered a specialist machine from Italy for €585,200. The
manufacturer of the machine remained responsible for insurance of the machine until
Medaka plc took delivery on 1 July 2018. Jim capitalised the cost of the machine on the
date it was ordered, debiting property, plant and equipment and crediting payables,
using the spot exchange rate on that date.
The manufacturer was paid on 15 July 2018. Jim debited payables and credited cash,
using the spot exchange rate on 15 July 2018.
On 31 December 2018 Jim retranslated the cost of the machine using the spot
exchange rate at this date, taking the retranslation difference to profit or loss.
The machine has an estimated useful life of 10 years. However, Jim has not
depreciated the machine because he said it had increased in value since it was
purchased.
(2) Included in inventories at 31 December 2018 were 2,000 units of finished goods. In
valuing these inventories Jim has based his allocation of fixed production overheads on
the 20,000 units produced in the year. Production is normally 32,000 units pa. The
shortfall in production was due to a fire in the factory which stopped production for
several weeks. Fixed overheads for the year were £460,000.
Jim recognised the bond in the draft financial statements as a financial instrument at its
redemption value, taking the difference between this amount and the total cash paid,
including the broker’s fees, to profit or loss.
(4) On 1 September 2018 Medaka plc made a 1 for 5 bonus issue. Jim has not accounted
for this bonus issue in the draft financial statements. He has based his calculation of
EPS on 500,000 ordinary shares, as shown in the draft financial statements. In
accounting for this bonus issue the directors wish to maximise distributable profits.
Requirements
2.1 Explain the required IFRS financial reporting treatment of Issues (1) to (4) in the
financial statements of Medaka plc for the year ended 31 December 2018, preparing all
relevant calculations. (18 marks)
2.2 Using your calculations from 2.1 above calculate the following for Medaka plc’s financial
statements for the year ended 31 December 2018:
2.3 Discuss the ethical issues arising for yourself and Jim and the steps that you should
take to address them.
(5 marks)
Total: 27 marks
On 1 January 2018 Kokopu plc had a number of subsidiary companies and one associated
company. Extracts from the group’s consolidated financial statements for the year ended
31 December 2018 are set out below.
Consolidated statement of profit or loss for the year ended 31 December 2018 (extract)
Continuing operations £
Profit from operations 980,250
Finance costs (10,250)
Share of profits of associate 56,200
Profit before tax 1,026,200
Income tax expense (205,240)
Profit for the year from continuing operations 820,960
Discontinued operations
Profit for the year from discontinued operations 55,630
Profit for the year 876,590
Attributable to:
Owners of Kokopu plc 610,350
Non-controlling interest 266,240
876,590
2018 2017
ASSETS £ £
Non-current assets
Property, plant and equipment 1,327,500 1,123,400
Intangible assets 441,300 502,500
Investment in associate 237,500 206,300
2,006,300 1,832,200
Current assets
Inventories 901,300 752,200
Trade and other receivables 599,800 603,200
Cash and cash equivalents 545,650 3,600
2,046,750 1,359,000
Total assets 4,053,050 3,191,200
EQUITY AND LIABILITIES
Equity
Ordinary share capital (£1 shares) 500,000 500,000
Revaluation surplus 760,000 715,000
Retained earnings 1,173,750 563,400
Attributable to the equity holders of
Kokopu plc 2,433,750 1,778,400
Non-controlling interest 701,200 652,400
3,134,950 2,430,800
Non-current liabilities
Finance lease liabilities 180,600 120,500
Additional information:
(1) On 30 September 2018 Kokopu plc sold all of its 80% holding in Rohu Ltd for cash of
£742,700. The profit from discontinued operations in the consolidated statement of profit
or loss relates wholly to the sale of the shares in Rohu Ltd and can be analysed as
follows:
£
Profit before tax 61,890
Income tax expense (12,500)
Profit on disposal 6,240
55,630
£
Property, plant and equipment 839,300
Trade and other receivables 128,075
Cash and cash equivalents 1,400
Trade and other payables (99,700)
869,075
(3) During the year ended 31 December 2018 the group made no disposals of property,
plant and equipment other than through the disposal of Rohu Ltd. The group purchased
property, plant and equipment for cash of £956,200, and entered into finance leases for
assets with a cash price of £298,000. All finance costs relate to finance leases. Kokopu
plc also revalued a plot of land during the year.
(4) Kokopu plc did not pay a dividend during the year ended 31 December 2018. However,
dividends were paid to the
non-controlling interest by subsidiaries and Kokopu plc received dividends from its
associated company.
Requirement
Prepare a consolidated statement of cash flows for Kokopu plc for the year ended 31
December 2018, including a note reconciling profit before tax to cash generated from
operations, using the indirect method. A note showing the effects of the disposal of Rohu Ltd
is not required. Total: 16 marks
4. On 1 January 2018 Opaleye plc had one subsidiary company, Perch Ltd. During 2018
Opaleye plc purchased a second subsidiary, Tetra Ltd.
EQUITY AND
LIABILITIES
Equity
Ordinary share
capital (£1 shares) 1,000,000 500,000 100,000
Revaluation surplus 375,000 150,000 –
Retained earnings 545,900 481,500 (5,800)
1,920,900 1,131,500 94,200
Current liabilities
Trade and other
payables 285,500 99,200 69,400
Income tax 205,000 101,000 –
490,500 200,200 69,400
Total equity and
liabilities 2,411,400 1,331,700 163,600
Additional information:
(2) The fair value of the non-controlling interest in Perch Ltd at acquisition was estimated at
£300,000.
The fair values of Perch Ltd’s assets, liabilities and contingent liabilities on the date of
acquisition were equal to their carrying amounts with the exception of land and buildings.
These had a fair value £32,000 in excess of their carrying amount, £10,000 of which
related to the land. The buildings had a 50 year remaining useful life on 1 January 2012.
Perch Ltd made a profit for the year ended 31 December 2018 of £126,300. There has
been no movement in the revaluation surplus in the current year.
(3) Tetra Ltd has been loss making for a number of years but Opaleye plc believes it will be
profitable going forward. The fair values of Tetra Ltd’s assets, liabilities and contingent
liabilities on the date of acquisition were equal to their carrying amounts. These were
reassessed following acquisition and no adjustments were necessary.
(4) On 31 December 2018 Perch Ltd’s inventories included goods purchased from Tetra Ltd
for £19,500 in November 2018. These goods cost Tetra Ltd £18,100. The invoice to
Perch Ltd for these goods was unpaid at the year end.
(5) Opaleye plc has undertaken annual impairment reviews of goodwill. At 1 January 2018
cumulative impairments of £12,000 had been recognised against goodwill arising on the
acquisition of Perch Ltd. On 31 December 2018 a further impairment of £5,000 was
identified in respect of goodwill arising on the acquisition of Perch Ltd and needs to be
recognised.
Requirements
4.2 Calculate the non-controlling interest in the group brought forward at 1 January 2018.
(3 marks)
Total: 24 marks