SECTION A
QUESTION ONE
The following trial balance has been extracted from the books of Delta plc as at 31 December 2021:
The following information is also available:
• The inventory at 31 December 2021 has been valued at £425,000.
• The buildings, equipment and vehicles were acquired on 1 January 2015. The buildings’ estimated useful life is 50 years, and it was decided to adopt the straight line depreciation method for the buildings, assuming no residual value. Equipment and vehicles are depreciated at 10% per annum on the straight-line method basis.
• As the company is a trading company, its building depreciation expenses should be split 50:50 between distribution costs and administrative expenses. Depreciation of equipment and vehicles should be split 75:25 between distribution costs and administrative expenses.
• The company’s director fees should be treated as administrative expenses, while staff wages and salaries are to be split 50:50 between distribution costs and administrative expenses.
• The trade receivables include bad debts of £6,000 which should be written off. The allowance for doubtful receivables should then be adjusted to 2% of the remaining trade receivables.
• The trial balance shows that corporation tax for the year to 31 December 2020 was underestimated by £6,000. The corporation tax liability for the year to 31 December 2021 is estimated to be £140,000.
• The interest of the long-term loan, which was borrowed on 1 January 2021, remained outstanding at the end of the year.
• The non-depreciable land property has been further revalued at 31 December 2021 at the market price of £1,755,000.
Required: Prepare the following financial statements for Delta plc for the year ended 31 December 2021 in accordance with IAS 1 Preparation of Financial Statements and show working notes where necessary:
(a) a statement of comprehensive income for the year to 31 December 2021. (14 marks)
(b) a statement of changes in equity for the year to 31 December 2021. (7 marks)
(c) a statement of financial position as at 31 December 2021. (12 marks) [TOTAL 33 MARKS]
QUESTION TWO
Brick Ltd acquired 80% of the shares in Mortar Ltd on 1 January 2019 for an initial consideration of £39,000,000 cash and a further £13,000,000 will be paid on 1 January 2021. On 1 January 2019, Mortar Ltd had retained earnings of £7,800,000 and the market price of its shares was £1.50 per share. The Statement of Financial Position of Brick Ltd and its subsidiary Mortar Ltd as at 31 December 2019 are as follows:
The following additional information was provided:
• The cost of capital of Brick Ltd is 5%.
• Mortar Ltd has an internally developed brand named ‘Foder’ which was valued at £6,500,000 on 1 January 2019. The share capital and revaluation surplus of Mortar Ltd has not changed since that date.
• There is no impairment of goodwill.
• The group policy is to value non-controlling interest at full fair value. Non-controlling interest was valued at £11,700,000 on the acquisition date.
• On 31 December 2019 Mortar Ltd had invoiced Brick Ltd for goods to the value of £2,600,000 and Brick Ltd had sent payment in full but this had not been received by Mortar Ltd.
Required:
(a) Prepare the Consolidated Statement of Financial Position of Brick Group as at 31 December 2019 in accordance with the IFRS 3, Business Combinations and IAS 27, Consolidated and Separate Financial Statements. Show all your workings clearly and clearly state any assumptions you make. Round up all figures in the consolidated statement to the nearest whole number. (25 Marks)
(b) Explain the circumstances under which a parent company may be exempted from preparing group accounts (consolidation). (8 Marks) [TOTAL: 33 MARKS]
QUESTION THREE
The following draft financial statements are available for Danvers plc for the year ended 30 September 2021: Summarised Statement of Comprehensive Income for the year ended 30 September:
The following additional information is also available:
• Dividends received during the year ending 30 September 2021 amounted to £80,000. There were no dividends paid during the year 2021.
• Two new plants were acquired during the year ending 30 September 2021, one was purchased at a cost of £3,320,000 and the second was acquired under finance lease at a cost of £2,860,000 (this has no immediate cash flow implications). Depreciation charge for property, plant and equipment for current year amounted to £1,000,000. There has not been a revaluation of property plant and equipment during the year ending 30 September 2021.
• Freehold property with an original cost of £2,000,000, and accumulated depreciation of £400,000 was sold for £3,240,000 during the year ending 30 September 2021.
• There had been a bonus issue of ordinary shares that was funded from the share premium and from some of the revaluation reserve on 1 April 2021. This was followed by an issue of new shares for cash at par value on 30 April 2021.
• The cash on 7-day deposit ranks as cash equivalent.
• Non-current asset investments which had a market value of £1,200,000 were sold during the year ending 30 September 2021 for £1,360,000. No new investments were purchased during the year.
• A new debenture loan of £2,680,000 was acquired during the year ending 30 September 21. Required:
(a) Prepare the Statement of Cash Flows for the year ending 30 September 2021 for Danvers plc in accordance with IAS7, Statement of Cash Flows, using the indirect method. [Clearly state any assumptions you make.] (26 marks)
(b) Critically discuss the significance of the information provided by the company’s Statement of Cash Flows. (7 Marks) [TOTAL 33 MARKS]
SECTION B
QUESTION FOUR
The objective of IAS 10, Events after the Reporting Period, is to prescribe when an entity should adjust its financial statements for events after the reporting period, and what disclosures the entity should make about the events after the reporting period. With reference to IAS 10, Events after the Reporting Period, discuss;
(a) The importance of reporting the events occurring after the end of the reporting period, (5 Marks)
(b) The reporting period covered by IAS 10, (5 Marks)
(c) The identification and accounting treatments of adjusting and non-adjusting events. You should provide several (at least three) relevant examples of each type of event, (20 Marks) (d) The challenges in identifying these events (3 Marks) [TOTAL: 33 MARKS]
QUESTION FIVE
(a) With reference to IAS 16 (Property, Plant and Equipment), discuss the differences between “the cost model” and “the revaluation model” for the subsequent measurement of property, plant and equipment after its initial recognition. (18 marks)
(b) Explain the differences between depreciation expense and impairment loss of property, plant and equipment, discussing the depreciation methods and the indicators of impairment. (15 marks) [TOTAL: 33 MARKS]
QUESTION SIX
Required:
(a) Discuss how a deferred tax provision can arise under IAS 12, Income Taxes, and the available methods for calculating the deferred tax provision. (25 marks)
(b) Discuss to what extent deferred tax accounting can be used for income smoothing. (8 marks) [TOTAL: 33 MARKS]
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