Solution to Question 1 Seven Short Questions

Level 2 Financial Accounting Semester 2 May 2018

Short question 1

Harry plc has one subsidiary, Sister Ltd. Sister Ltd was sold in 2018, at no profit or
loss to Harry plc. Using the information below, you are required to show the
comparative amounts that would appear for 2017, in the 2018 accounts of Harry plc.

Harry plc Sister Income statement 2017

Ltd
€m €m €m
Revenue 1,000 100 1,100
Cost of sales (600) (60) (660)
Gross profit 400 40 440
Other income 20 2 22
Distribution costs (100) (10) (110)
Administrative expenses (150) (15) (165)
Profit before taxation 170 17 187
Income tax expense (30) (3) (33)
Profit after taxation 140 14 154

Continuing operations1/2 mark 2018 2017

Revenue 1,000 ¼ mark
Cost of sales 600 ¼ mark
Gross profit 400
Other income 20 ¼ mark
Distribution costs (100) ¼ mark
Administrative expenses (150) ¼ mark
Profit before taxation 170
Income tax expense (30) ¼ mark
Profit after taxation 140
Results of discontinued operations1/2 mark 14 2 marks
Profit for period attributable to equity holders 1/2 mark 154 5 marks

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 Solution to Question 1 Seven Short Questions
Level 2 Financial Accounting Semester 2 May 2018

Short question 2

Well Snow plc is a quoted company. Set out below are extracts from the company’s
income statements for the years ended 30 April 2018 and 30 April 2017, together with
additional information. You are required to calculate the basic earnings per share for
30 April 2018, together with comparative figures for the previous year, in accordance
with the rules laid down in IAS 33 Earnings per Share.

Income statement extracts 30.4.2018 30.4.2017

Year end €000 €000
Profit on continuing activities before taxation 950 740
Taxation (120) (80)
Profit on ordinary activities after taxation 830 660

(1) The issued share capital of Well Cold plc from 1 May 2016 to 30 June 2017
was:
 400,000 10% convertible preference shares of €1 each. Each preference
share is convertible into one ordinary share.
 2,000,000 ordinary shares of 50 cent each

(2) On 1 July 2017, €1,000,000 of reserves were capitalised and issued to existing
shareholders as fully paid up bonus shares.

(3) On 1 November 2017, Well Cold plc issued 2,000,000 ordinary shares at full
market price for cash.

(W1) Earnings for basic EPS calculation 1.5.2017 - 1.5.2016 -

30.4.2018 30.4.2017
€000 €000
Profit on ordinary activities ½ marks830 ½ marks 660
Deduct: Preference dividend – 10% x 400,000 ½ marks(40) ½ marks(40)
Earnings for basic EPS calculation 790 620 2 marks

(W2) Absolute number shares for basic EPS 1.5.2017 - 1.5.2016 -

30.4.2018 30.4.2017
000 000
Opening balance 1 May 2017 / 1 May 2016 2,000 2,000
Bonus issue 1/7/2017 €1m x 2 (50cent shares) (time weighting irrelevant) 2,000
New issue 1/11/2017 2,000 _____
Closing balance 30 April 2018 / 30 April 2017 6,000 2,000

(W3) Weighted average no. shares for basic EPS 1.5.2017 - 1.5.2016 -
30.4.2018 30.4.2017
000 000
Opening balance 1 May 2017 / 1 May 2016 ½ mark2,000 ½ mark2,000
Bonus issue (proportionate adjustment) 1 mark2,000 ____
2,000Total weighted average number shares before bonus issue x 1/1Bonus issue proportion
New issue 1/11/2017 (weighted average: *2,000shares x 6months/12months) 1 mark1,000
Closing balance 30 April 2018 / 30 April 2017 5,000 2,000 3 marks
*Remember – ordinary shares are 50c each, so €1,000,000 becomes 2,000,000 shares

Basic earnings per share

Earnings per share: 30.4.2018: €790Earnings W1/5,000shares W3 = €15.80 cent1 mark

Earnings per share: (as originally reported) 30/4/2017: €620Earnings W1/2,000shares W3 = 31.00cent

Earnings per share: (revised) 30.4.2017: 31.00Original EPS x 2,000Before bonus issue/4,000After bonus issue = 15.50 cent 1 mark
The numbers are the numbers of shares before/after the bonus issue, ie the rule of thumb approach to adjusting the prior year EPS 7 marks

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 Solution to Question 1 Seven Short Questions
Level 2 Financial Accounting Semester 2 May 2018

Short question 3

G.N. Oble plc purchased a new machine costing €220 million on 1 May 2016. The
machine has an estimated useful life of five years and an estimated residual value of
€20 million. On 1 May 2017, the estimated useful life was reduced to three years, and
the estimated residual value was reduced to €12 million. You are required to calculate
the depreciation charge for 2016/17 and 2017/18 and show the net book value at year
end.

2016/17 €000
Depreciation 220Cost-20Residual value x 1/5 40 1 mark
Net book value (220Cost-40Aggregate depreciation) 180 1 mark

2017/18
Depreciation 180Net book value -12Revised residual value x 1/3 56 1 mark
Net book value (180Previous net book value --56Aggregate depreciation) 124 1 mark
4 marks

Short question 4

Nobble Granny plc purchased a new machine costing €100 million on 1 May 2013. The
machine had a useful life of ten years, and a residual value of €Nil. On 1 May 2017, the
machine was revalued to €80 million. You are required to show the double entries to
reflect the revaluation in the financial statements for 2017/18, together with the
amounts that will appear the financial statements for the machine value, depreciation,
and surplus/deficit on revaluation.

Recording/accounting for revaluations:

 Fixed asset is adjusted to show it at its revalued amount
 Aggregate depreciation is removed (“set the clock back to zero”)
 Revaluation surplus/deficit = difference between net book value and revalued
amount
 Current year depreciation to be based on revalued amount

(W1) Workings €000

1 May 2013: Cost 100
Aggregate depreciation 4 years (04/05, 05/06, 06/07, 07/08) (40)
Net book value 1 May 2017 60 1 mark
Valuation (per question) 80 1 mark
Surplus on revaluation 2017/18 20

Double entries revaluation of machine

Debit
Aggregate depreciation (W1) (“set the clock back to zero”) 40 1 mark
Credit
Revaluation reserve (via Statement of changes in equity) 20 1 mark
(W1)
Fixed assets (To change old to new cost (100Old cost-80New cost)) 20 1 mark

Where the useful life of an asset is changed, the net book value of the asset at
the date of change must be written off over the remaining useful life which in this
question is six years. Therefore, the depreciation expense for 2017/18 is:
(€80,000 New cost x 1/6) = €13,333 1 mark
6 marks

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 Solution to Question 1 Seven Short Questions
Level 2 Financial Accounting Semester 2 May 2018

Short question 5

T. Rick plc manufactures widgets. There were no finished goods or work in progress
in inventory at the beginning of the year. There were 250,000 units of finished widgets
in inventories at the year-end. The normal level of production is 750,000 widgets, but
in the year ended 30 April 2018, only 450,000 were produced because of a strike.

For the year ended 30 April 2018, the following costs appear in the books of the
company. Based on IAS 2 Inventories, you are required to value the finished
goods inventory at cost.

Per unit
Direct materials €1.00
Direct labour €1.00
Direct expenses €0.50

Per year
Production overheads €600,000
Administrative overheads €200,000
Selling overheads €300,000
Interest payments €100,000

Per unit
€
Direct materials 1.00 1 mark
Direct labour 1.00 1 mark
Direct expenses 0.50 1 mark
Production overhead (€600,000Production overheads / 750,000Normal level of production) 0.80 3 marks
Total per unit cost 3.30

Quantity 250,000units

Valuation at cost (250,000units x €3.30per unit) €825,000 1 mark

7 marks

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 Solution to Question 1 Seven Short Questions
Level 2 Financial Accounting Semester 2 May 2018

Short question 6

Finished plc’s year end is 30 April 2018 and the financial statements are being finalised in early June 2018. You are required to classify each of
the following items as a Provision, a Post Balance Sheet Event (indicating whether it is adjusting or non-adjusting) or a Contingent Liability.
Where an adjustment is required to the 2017/18 financial statements, please clearly show that adjustment.

1.On 19 May 2018 a warehouse of uninsured goods valued at €1 million burns down.

2.On 3 May 2018, Finished plc discovers that it is being sued by a customer for €200,000. Lawyers estimate that damages of at least
€100,000 will have to be paid, but the amount could be higher.

3.In early June 2018, the company discovers that one of its debtors has been liquidated. At the year end the company was aware that the
debtor was having financial problems.

Event Provision, post balance sheet Adjustment Nature of adjustment

event, contingent liability?
On 19 May 2018 a warehouse full of uninsured goods Post balance sheet event 1 mark Do not adjust – conditions did not None1 mark 2 marks
burns down. The value of the goods is €1m. exist at the balance sheet date

On 3 May 2018, Finished plc discovers that it is being
sued for a customer for €200,000. The company’s lawyers
estimate that damages of €100,000 will have to be paid.
However, they also state that the damages could be
higher.
Provision and contingent liability1
mark
Adjust for provision (€100,000)1/2
mark, do not adjust for contingent
liability – disclose as note in
accounts (€100,000)1/2 mark
Dr. Other expenses - Legal damages 3 marks
(I/S)1/2 mark
Cr. Provision for legal damages1/2 mark
(If material, possibly an exceptional
item to be disclosed on face of or as a
note to the income statement)

In early June 2018, the company discover that one of its Post balance sheet event1 mark Adjust – conditions (debtor’s Dr Distribution costs/ Other expenses - 2 marks
debtors has been liquidated. At the year end the company financial difficulties) existed at year Bad debts (I/S)1/2 mark
were aware that the debtor was having financial problems. end Cr Trade receivables/Debtors1/2 mark

7 marks

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 Solution to Question 1 Seven Short Questions
Level 2 Financial Accounting Semester 2 May 2018

Short question 7

The following is an extract from the notes to the financial statement of CRH plc.

Required:

By reference to the CRH plc example, what is the difference between “Depreciation”,
“Amortisation” and “Impairment”?
(4 Marks)
Solution

 Depreciation is the systematic allocation of the cost of property plant and equipment
against the revenue generated from the use of that asset 1 mark

 Amortisation is the systematic allocation of the cost of intangible non-current assets against
the revenue generated from the use of that asset 11/2 marks

 Impairment is the once-off reduction in value of an asset following annual impairment

reviews of all assets at the balance sheet date 11/2 marks

4 marks