ACFI201:Financial Reporting I

Question 1

Melville Ltd has prepared the following trial balance at 31 March 2021 before taking account of the additional information below

Additional information 1. Inventories as at 31 March 2021 had a cost of £63,000 Within this figure there are some items currently included at their cost of £15,000 can only be sold for £12,500 after incurring rectification costs of £2,250. 2. On 13 March 2021 Melville made a 1-for-8 bonus issue, using the share premium account. This has yet to be accounted for. 3. A dividend of 84p per ordinary share was paid on 31 March 2021 on the correct number of shares in issue at that date. This was incorrectly debited to purchases. 4. Melville Ltd charges depreciation as follows: · Buildings – straight line over 50 years charged to administrative expenses · Plant and equipment – 20% per annum reducing balance charged to cost of sales 5. On 1 April 2020 the board of directors made a decision to revalue the company’s land to £800,000. This is yet to be accounted for. 6. The provision relates to costs to cover warranty claims. At year end of the 2,700 units sold and the best estimates of the cost of future claims is: 90% won’t be subject to warranty claims 7% will be subject to minor warranty claims at an average cost of £60 per unit 3% will be subject to a major warranty claim at an average cost of £200 per unit. Warranty provision is expensed to Cost of Sales 7. Interest has not been accrued for the loan note issued on a number of years ago which is repayable on 31 December 2026. 8. The Development asset relates to a new product for which development was completed on 31 January 2019. Sales commenced on 1 October 2020, 6,250 units were sold in the year ended 31 March 2021.Total forecast sales over the next 4 years being 50,000 units. Amortisation is to be taken to Cost of Sales. 9. The income tax charge for the year has been estimated as £14,633. Requirement a). Prepare a statement of profit or loss and other comprehensive income, and a statement of changes in equity for Melville for the year ended 31 March 2021 and a statement of financial position as at 31 March 2021 in a form suitable for publication. Notes to the financial statements are not required, expenses should be presented analysed by function and ignore effects on tax of any adjustments. (25 marks)

Question 2

Davenport Ltd has prepared the following financial statements and additional information as at 30 June 2021.

Statement of profit or loss and other comprehensive in income for year ended 30 June 2021.

Statement of Financial Position at 30 June 2021

Additional information

1. The depreciation charge in the year was £6,000 for buildings and £48,800 for plant and equipment.

2. On 1 July 2020 an item of plant and equipment was disposed of for proceeds of £26,000 with a carrying amount of £17,200. There were no disposals of land and buildings in the year.

3. Within trade and other receivables there is a balance for interest receivable of £350 (which was £280 in 2020).

4. In April 2021 there was a rights issue.

5. £300,000 of development expenditure was correctly capitalised during the year.

6. Davenport paid an ordinary dividend in March 2021

Requirement

a) Prepare a statement of cash flows for Davenport Ltd in accordance with IAS 7 Statement of cash flows for the year ended 30 June 2021. The indirect method should be used starting with profit before tax.

(25 marks)

b) What are the fundamental qualitative characteristics of financial information and how are they relevant to allowing revaluation of non-current assets as per IAS 16?

(4 marks)

(Total: 29 marks)

Question 3

You are employed as a financial reporting consultant for a hotel chain called Hillfield plc and the directors have asked you for advice on some outstanding issues in relation to preparation of their financial statements for year ended 30 June 2021.

Hillfield bought the land with a view to building the hotel on 1 February 2020, Architects were commissioned to draw up the plans on 1 May 2020, site preparation and construction began on 1 August 2020. The hotel was completed and opened to customers on 31 March 2021 and is expected to have a useful life of 80 years.

Hillfield increased centrally generated company borrowings to fund this new hotel. The central borrowings consist of a loan of £10 million carrying an interest rate of 5% and a loan of £13 million at an interest rate of 4.25%.

Foreign Exchange transaction

Hillfield uses £ as its functional currency. On 13 May 2021 bought a consignment of Wine from a US based supplier for $38,000. This invoice was still unsettled and the inventory unsold as of year ended 30 June 2021.

Requirement

a) Discuss and advise the directors of Hillfield the financial treatment of the above items for in the financial statements for the year ended 30 June 2020

(12 Marks)

b) Explain how the accounting treatment for the construction of new hotel may be different under UKGAAP

(2 Marks)

As of 1 July 2020, Hillfield had in issue 100,000 £1 ordinary shares. On 1 February 2021 Hillfield made a 1 for 5 rights issue of £2.00 a share, at this date the market rate was £3.50 a share.

Profit attributable to ordinary shareholder in the year ended 30 June 2021 was £146,000

EPS for year ended 30 June 2020 was 153.2p per share.

There had been no other share issues prior to this for a number of years

c) Calculate earnings per share and restate prior year comparative.

(7 Marks)

(21 Marks)

Question 4

A client of yours Ground TV Ltd (a satellite TV provider), has come to you for advice on a number of financial reporting issues of which they are unsure about the financial reporting treatment for the year ended 31 March 2021.

Package sale of satellite dish and 2 year advance subscription.

As of 1 April 2020 Ground started selling discounted packages to customers in which when they buy their Ground box and dish and a 2 years subscription in advance for £1,600.

Uptake on this has been good with 10,000 customers taking up this offer during year ended 31 March 2021, pattern of sales being constant throughout the year

Following the failure of Ground’s new 6G technology forecast revenue has fallen. An impairment review has been carried out and the recoverable value of the phone division to be £4,500,000.

Due to the failure of the 6G technology it is now considered worthless, receivables and cash within the division are still considered to be at their recoverable amount

Change in depreciation rate of machinery producing satellite dishes

Ground has a machine for producing satellite dishes they purchased on 1 April 2018 for £100,000. At the time they expected the machine to have a life of 6 years after which it would have a scrap value of £10,000.

However on 1 April 2020 due to changes in technology they now expect the machine to have useful life decreased to 4 years in total at the end of which its scrap value will be increased to £20,000.

Requirement

Discuss and advise the directors of Ground the financial treatment of the above items for in the financial statements for the year ended 31 March 2021

(21 Marks)

Part b

The directors have asked you to produce the financial statements of Floor Ltd for the year ended 31 March 2021.

They are negotiating with a potential investor, who they have optimistically informed profit for the year will be in excess of £100,000.

After the first draft of the financial statements profit is £85,000. The directors have asked you to find any possible amendments that can be made to increase the profit for the desired level of £100,000. They’ve indicated if you can do this, to show their gratitude they will pay double your usual fee.

.

Requirement

Explain the ethical issues arising from this and possible courses of action that you should take

(4 Marks)

(25 Marks)