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ACCA MOCK
FINANCIAL REPORTING
Answers

Time allowed
3 hours and 15 minutes
This paper is divided into three sections:
Section A ‐ All 15 questions are compulsory and MUST be
attempted
Section B ‐ All 15 questions are compulsory and MUST be
attempted
Section C ‐ BOTH questions are compulsory and MUST be
attempted
Formulae sheet, present value and annuity tables are on pages
3, 4
and 5

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Section A
1. B
Given that the chances of employee’s victory are less than probable, the issue
should be disclosed in notes. The 2nd issue results in a constructive obligation for
Strength Co. Therefore, a provision is required.

2. D
To be capitalised, all development costs must meet certain conditions listed by
IAS 38. The first project fails the condition of commercial viability. Although
Technology Co can use the findings in other projects, this specific project cannot
be capitalised. Project 2 cannot be capitalised as the business lacks sufficient
financial resources to complete the project.

3. C
$60,000 + $4,000 + $2,000 = $66,000
The cost of the fixed asset and any costs incurred to bring the asset to location
and workable condition are included in the initial carrying amount. Training
provided to the employees cannot be capitalised as the business cannot control
the knowledge of employees. Maintenance cost will be expensed out each year.

4. C
Bearer plants and land related to agricultural activity are both excluded from the
scope of IAS 41. Unlike biological assets, agricultural produce must always be
measured at fair value.

5. B
Disclosures related to IAS 37 have been added to F7 syllabus from 2016.
Disclosures for prior year reconciliations are not required under IAS 37.
6. A
Cost (500,000 x 20% x $4) $400,000
Share of profit for 20X7 ($100,000 x 6 /12 x 20%) $10,000
Share of profit for 20X8 ($250,000 x 20%) $50,000
Less: Dividend received ($20,000 x 20%) ($4,000)
Carrying value of Beta Co $456,000
Dividends are considered to be received when they are declared. The actual
receipt of the cheque is irrelevant.

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7. A
Retained earnings of Huge Co $400,000
Share of Tiny Co ($200,000 - $150,000) x 60% $30,000
Unrealised profit ($10,000 - $8,000) / 2 ($1,000)
Total retained earnings $429,000

8. D
The CGU has suffered a total loss of $750,000 - $500,000 = $250,000
The goodwill of $100,000 should be written off in full. The remaining loss, after the
allocation to goodwill, will be $150,000.
Inventory cannot be written off further as it is already valued at net realisable
value. Therefore, the combined value of equipment and furniture after the
impairment will be: $400,000 + $200,000 - $150,000 = $450,000

9. C
Under IFRS 10, entities meeting the definition of 'investment entity' are granted
special exemption from consolidation.

10. B
Although percentage of ownership is important in deciding the relationship
between two companies, the critical factors are level of control and decision-
making influence. Only the 2nd and 3rd investment meet this criteria to be
classified as subsidiaries.

11. A
Inventories, deferred tax assets, non-current assets held for sale and financial
assets are all excluded from the scope of IAS 36. Their valuation is dealt with by the
respective accounting standard.

12. D
Profit before interest and tax $70,000
Depreciation ($100,000 x 20%) $20,000
Increase in account receivable ($5,000)
Foreign exchange loss $5,000
Decrease in inventory $4,000
Increase in payable $3,000
Cash generated from operations $97,000

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13. C
Cost of sales – P Co $90,000
Cost of sales – S Co ($60,000 / 12 x 9) $45,000
Intra-group sales ($10,000)
Unrealised profit ($10,000 / 100 x 20) / 2 $1,000

14. A
Lease is defined as “A contract, or part of a contract, that conveys the right to use
an asset, referred to as the underlying asset, for a period of time in exchange for a
consideration.”

15. D
Capitalising the repair expense will result in overstated profits. Overstated profits
will overstate EPS and ROCE.

16. C
Depreciation for first six months ($200,000 / 10 x 6 / 12) = $10,000
Depreciation for last six months ($195,000 / 7.5 x 6 / 12) = $13,000
Total charge for the year = $23,000
Note: Remaining useful life of 7.5 years can be calculated by utilising the
information for accumulated depreciation.

17. B
Grant 1 - Grants related to taxable income are excluded from the scope of IAS 20.
Grant 2 - $100,000 can be recognised.
Grant 3 - Reduced rate loans can be recognised under IAS 20.
Total Grant Income: $200,000 + $100,000 (7% - 3%) = $204,000

18. A
The evidence of the claim existed before the reporting date. It was simply not
received by White Co. Therefore, Issue 1 needs to be adjusted. No evidence of
Issue 2 existed at the reporting date. It needs not to be adjusted.

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19. A
The assets are impaired only when their carrying amount exceeds the recoverable
amount. Recoverable amount is higher of value in use and fair value less costs to sell.
Crane 1
Carrying amount = $600,000 - $120,000 = $480,000
Recoverable amount = $500,000
Impairment = Nil
Crane 2
Carrying amount = $750,000 - $250,000 = $500,000
Recoverable amount = $490,000
Impairment = $10,000
Crane 3
Carrying amount = $800,000 - $160,000 = $640,000
Recoverable amount = $300,000
Impairment = $340,000
Total impairment
$10,000 + $340,000 = $350,000

20. D
Initial recording ($10,000 x 90%) - 500 = $8,500
Interest charged ($8,500 x 12%) = $1,020
Cash paid ($10,000 x 8%) = ($800)

21. A
Profit before interest and tax $540,000
Depreciation $90,000
Loss on disposal $20,000
Increase in inventory ($10,000)
Decrease in receivables $5,000
Decrease in payables ($30,000)
Cash generated from operations $615,000

22. A
Cash generated from operations $615,000
Interest paid ($30,000)
Dividends paid ($55,000)
Tax paid (50 + 160 - 80) (130,000)
Net cash from operating activities $400,000
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23. C
Payment for purchase of NCA ($100,000)
Disposal of NCA (W1) ($20,000)
Net cash used in investing activities ($120,000)
Working 1
Cost of NCA disposed (1,400 + 100 – 1,460) = $40,000
Accumulated depreciation of NCA disposed (200 + 90 - 250) = $40,000
Net book value of asset disposed = $0
Therefore, entire loss on disposal relates to price actually paid for dismantling of NCA
24. D
Issue of share capital (310 + 125 – 300 – 120) $15,000
Loan repaid (380 – 90) (290,000)
Net cash used in financing activities ($275,000)

25. A
This can simply be calculated by subtracting open cash balance from closing cash
balance: $25,000 - $20,000 = $5,000

26. D
Only public limited companies, or those in the process of issuing securities to public,
are required to present EPS. There is no need to calculate EPS separately for each
company in the consolidated accounts.

27. B
Redeemable preference shares are treated as debt. Therefore, the dividend paid on
such shares is already deducted when arriving at net profit.
EPS = ($200,000 – 10,000) / 5,000
EPS = $38.00

28. A
Gross profit $ 1,000,000
Operating expenses ($200,000)
Preference dividends ($20,000)
Profit before tax $780,000
Tax at 30% (234,000)
Net profit $546,000
EPS = $546,000 / 200,000
EPS = $2.73
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29. A
The first step is to calculate theoretical ex-rights price:
Value of 5 shares before issue @ $3.20 $16.00
Value of rights issue @2.00 $2.00
Total value of 6 shares $18.00
Theoretical ex-rights price ($18/6) $3.00
EPS for 2016
Before rights issue = $500,000 / 100,000 = $5.00
Corresponding EPS with rights issue = $5.00 x $3.20 / $3.00 = $5.33
EPS for 2017
Before rights issue (100,000 / 12 x 3) x $3.20 / $3.00 = 26,667
After rights issue (120,000 / 12 x 9) = 90,000
Total weighted average shares = 116,667
EPS = $400,000 / 116,667 = $3.43

30. C
Theoretical ex-rights price is simply a fraction used in the calculation of EPS. No
separate disclosure is required for it.

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31. Hydrogen
Consolidated statement of financial position as at 31 December 2016:
$’000
Non-current assets
Property, plant and equipment (19,000 + 11,400) 30,400
Goodwill (W3) 6,400
Investment in associate (W6) 6,750
Investment – Fair value through profit or loss 8,000
Current assets
Inventory (8,500 + 5,500 – 500 PURP) (W7) 13,500
Trade receivables (3,500 + 800) 4,300
Cash and bank (1,000 + 500) 1,500
Total assets 70,850
Equity and liabilities
Equity shares of $1 each (10,000 + 1,500 ) (W1) 11,500
Share premium (W3) 8,250
Retained earnings (W5) 27,925
Non-controlling interest (W4) 3,975
Total equity 51,650
Loan notes 7% (5,000 + 2,000) 7,000
Trade payables (9,000 + 3,200) 12,200
Total equity and liabilities 70,850

W1 – Group structure
Sulphur = 3,000,000 / 4,000,000 = 75% holding
Argon = 25% holding
W2 – Net assets of Sulphur
Acquisition Reporting date Post acquisition
($’000) ($’000) ($’000)
Share capital 4,000 4,000 0
Retained earnings 7,000 9,000 2,000
Fair value adjustment (400) 0 400
PURP on inventory (W7) (500) (500)
10,600 12,500 1,900

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W3 – Goodwill Cost of investment of Hydrogen

Cash (3,000 x $1.25) $3,750
Shares (3,000 / 2 x $6.5) $9,750
$13,500
NCI at acquisition $3,500
$17,000
Less: Fair value of net assets (W2) (10,600)
Goodwill $6,400
In addition, share consideration needs to be recorded.
Share capital (3,000 / 2 x $1) = $1,500
Share premium (3,000 / 2 x $5.5) = $8,250

W4 – Non-controlling interest
NCI value at acquisition $3,500
Share of post-acquisition profits (1,900 x 25%) $475
Value of non-controlling interest $3,975

W5 – Consolidated Reserves
Hydrogen (15,000 + 8,000) $23,000
Professional cost of acquisition ($500)
Increase in fair value of investment (8,000 – 5,000) $3,000
Share of Sulphur (1,900 x 75%) $1,425
Share of Argon (W6) $1,000
Consolidated reserves $27,925

W6 – Investment in Associate
Cost of investment (4,000 x 25% x 5.75) $5,750
Share of profit (4,000 x 25%) $1,000
Value of Argon $6,750

W7 – Provision for unrealised profit on inventory

Amount of profit = $3,000,000 / 150 x 50 = 1,000
5% unsold = 1,000 x 50% = 500

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32. Delta Part (a)

Ratio Formula 2017 2016

Gross profit margin Gross profit / Revenue 40.35% 33.06%
Net profit margin Net profit / Revenue 2.11% 10.74%
ROCE Operating profit /
(Total assets - Current liabilities) 10.26% 14.03%
Gearing Debt / (Debit + Equity) 33.58% 14.29%
Interest cover Operating profit / Interest 1.38 times 3.6 times
Current ratio Current assets / Current liabilities 6.1 : 1 8.8 : 1
Quick ratio Quick assets / Current liabilities 3.5 : 1 4.9 : 1
Receivables days Trade receivables / Revenue x 365 236.93 days 66.36 days
Payables days Trade payables / Cost of sales x 365 115.94 days 36.05days
EPS Net profit / Number of shares 0.06 c 0.26 c

Part (b)
The performance of Delta can be assessed with the help of calculated ratios. Although
the revenue and the gross profit of the business have improved, there are many other
alarming areas. They are explained here in the light of each individual ratio.

Gross profit margin

Gross profit margin of Delta has improved from 33.06% in 2016 to 40.35% in 2017.
The growth of revenue has outperformed the growth of cost of sales. It indicates the
efficiency of sales departments in accelerating revenues as well as the efficiency of
production and procurement department in controlling the direct costs.

Net profit margin

Net profit margin of Delta has deteriorated from 10.74% in 2016 to 2.11% in 2017.
The major cause for this decline is the unusual increase in administration expense and
finance costs. Net profit margin, also known as the bottom line figure, is extremely
important from investor’s perspective. Unless these costs are controlled in the future,
Delta may struggle to keep its investors satisfied.

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Return on capital employed (ROCE)

Return on capital employed (ROCE) has fallen from 14.03% in 2016 to 10.26% in
2017. ROCE is yet another important ratio from the perspective of investors.
Although operating profit, the numerator of the ratio, has slightly improved, Delta
has used greater amount of finance to generate it.

Gearing
Incorporation of debt in the capital structure increases the risk profile of a
business. Gearing has increased from 14.29% to 33.58%. This is principally
because of the loan that Delta has acquired during the year. Although no industry
benchmarks about the acceptable level of gearing are provided, Delta needs to
be cautious with the inclusion of debt in its capital
structure.

Interest cover
The interest cover ratio has declined from 3.6 times to 1.38 times. Interest cover
ratio illustrates the ability of a business to repay interest as it falls due. Failing to
make the interest payments on time may result in liquidation from Delta. Unless,
the ratio is improved, Delta needs to monitor it closely.

Current ratio
The current ratio of Delta has also declined from 8.81: 1 to 6.11: 1. This ratio
depends entirely on the nature of the industry. The ratio varies significantly from
one industry to another. In the absence of any information about the industry,
the appropriateness of these results cannot be assessed. However, the ratio
appears not to be a major cause of concern for Delta.

Quick ratio
Quick ratio has also declined from 4.94: 1 to 3.52: 1. This ratio, once again,
depends on the nature of the industry. Nevertheless, there is no major cause of
concern as Delta can easily repay its current liabilities from its liquid assets.

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Receivables days
The most dramatic change from 2016 to 2017 is evident from receivable days. The
average period of collection from the customers has increased from 66 days to 237
days. It indicates the inability of Delta to recover the cash from its customers.
Perhaps, it is also the root cause for deteriorating liquidity condition. The lack of
recovery has forced Delta into cash crisis which, in turn, has forced Delta to take
loan, thereby leading to higher finance costs, lower net profits and low interest
cover ratio.

Payables days
Payable period have also increased from 36 days to 116 days. This is a serious cause
of concern has holding the suppliers’ payments may force them to stop supplying.
Delta needs to, somehow, make timely payments to suppliers in order to safeguard
the business relations.

Earnings per share (EPS)

Earnings per share have reduced from 0.26 cents to 0.06 cents. This is again
alarming and is simply because of the poor net profitability of the business.

Conclusion
The performance of Delta has significantly deteriorated in 2017. Almost every ratio
was healthy in 2016 and alarming in 2017. The most problematic area is working
capital management as it appears to be the root cause behind all other business
problems

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