EFIM20007 : FINANCIAL ACCOUNTING

Section A

Question 1

(a) On 1st January 2020 Zeus Limited purchased a thunderbolt machine for £ 115,000, of which £ 15,000 was funded by a non-repayable government grant and the rest was paid in cash. In ten years' time, the thunderbolt machine is expected to have a Net Realisable Value of £ 22,000.

Zeus Limited usually depreciates plant and machinery over a ten-year life, using straight-line depreciation.

Zeus Limited accounts for government grants towards the purchase of property, plant and equipment using the deferred credit method.

Required

Calculate the balances (you may ignore the bank balance) arising from this set of transactions, which would appear in Zeus Limited's Statement of Financial Position as at 31st December 2020, and the items which would appear in the Income Statement for the year then ended.

State how they would be categorised (for example, current asset or equity). (3 marks)

(b) According to IAS16 Property, Plant and Equipment, which of the following would NOT be part of the cost of an item of property, plant and equipment?

(A) costs of advertising and promotional activities;

(B) costs of site preparation;

(C) initial delivery and handling costs; (D) solicitors' fees (1 mark)

(c) During the year ended 31st December 2020, some of Hephaestus Limited's blacksmiths worked full-time to build a forge for use in the business, partially funded by an interest-only bank loan of £ 90,000 taken out on 30th June 2020 at an interest rate of 10% per annum and repayable in ten years' time. The bank loan was fully used to pay for some of the following costs. The wages of those blacksmiths for the period when they were building the forge, together with associated pension and employer's National Insurance Contributions, amounted to £ 143,000. The materials used in its construction cost £ 69,000, directly allocated electricity costs were £9,000 and apportioned overheads amounted to £ 8,000.

Had Hephaestus Limited contracted out the work, it would have saved space on its own premises which it could have rented out for £ 146,000 per month.

Due to stringent metallurgy regulations, regular inspections were required and so the forge necessarily took a long time to get ready for its intended use. The cost of the inspections and testing amounted to £ 69,000, and the forge was finally ready for use on 31st December 2020.

Required

Calculate the amount at which the forge should be measured at initial recognition on 31st December 2020. Marks will be deducted for incorrect adjustments actively made. (3 marks)

(d) Iris Limited has a cost of capital of 10% and leases an item of machinery, the lease profile being as follows

Which of the following gives the correct split of the lease obligation as at the end of the 2020 reporting period?

(A) Current lease obligation £6,657, non-current lease obligation £66,567;

B) Current lease obligation £10,224, non-current lease obligation £63,000;

(C) Current lease obligation £15,777, non-current lease obligation £57,447;

(D) Current lease obligation £21,000, non-current lease obligation £52,224. (1 mark)

(e) On 30th June 2020, Hermes Plc purchased 30% of the ordinary share capital of Ares Limited, issuing one of its own shares for every three purchased, at a time when Hermes Plc's shares were worth £ 16.80 each and Ares Limited's retained earnings were £ 1,452,000.

The financial statements of the companies were as follows:

On 30th June 2020, the fair value of the assets and liabilities of Ares Limited were the same as their carrying amounts, except for land and buildings, which had a fair value £ 126,000 higher than their carrying amount and inventory, which had a fair value £ 63,000 higher than its carrying amount. Three-quarters of these inventories were sold by the reporting date. Ares Limited did not revalue any of the above items in its individual financial statements.

The companies have the same depreciation policy for land and buildings, which is to depreciate them using reducing balance depreciation at a rate of 5% per annum.

Assume a full year's depreciation charge for any additions / revaluations in the year. Apart from the shares issued by Hermes Plc on 30th June, no shares were issued by Hermes Plc or Ares Limited during the period of account under review.

Required

Calculate the figure to be included in the consolidated Statement of Financial Position as at 31st December 2020 for "Investment in associate". (3 marks)

(f) Thetis Limited commenced trading on 1st January 2020, issuing 143,000 £1 ordinary shares at par and corporate bonds of £ 160,000 at par. The corporate bonds were fixed-interest bonds at a rate of 2.0% per annum, payable half-yearly on 30th June and 31st December, and redeemable ten years after issue. Mid-year, the market rate of return required on corporate bonds of similar risk to those issued by Thetis Limited increased to 4% per annum.

Required

Using Current Cost Accounting, calculate the corporate bonds liability at 31st December 2020 and the interest expense for the year then ended. (6 marks)

(g) What type of audit opinion takes the form “Except for … might …”? (1 mark)

(h) Suppose an auditor had obtained sufficient appropriate audit evidence, and agreed with the accounting treatments and disclosures made in its client’s Annual Report and Financial Statements, but there were an inherent uncertainty regarding the outcome of litigation against the company. What type of audit opinion should the auditors give in their report? (1 mark)

(i) Hera Plc is the parent company owning 100% of Athena Limited, and has been for several years. During the year ended 31st December 2020.During that year, Athena Limited sold inventories to Hera Plc for £ 74,000 which had originally cost £ 57,000. By the reporting date, Hera Plc had sold three-quarters of those inventories.

Required

Calculate the consolidated revenue, cost of sales and gross profit for the group, for the year ended 31st December 2020. (3 marks)

(j) Provide suitable words to fill the gaps in the following sentence: “Audit risk is a product of __________ risk, __________ risk and __________ risk.” (3 marks)

Section B

Question 2

Odyssey ---- International Financial Reporting Standards Odyssey commenced trading on 1st January 2020 as a manufacturing, retail and distribution business, raising share capital of £ 900,000.

For its financial reporting period ended 31st December 2020, Odyssey earned revenue of £ 800,000 and its draft operating expenses for the year amounted to £ 640,000. These figures represent the results of Odyssey's entire business, including all its divisions, but do not include depreciation, amortisation or impairment.

Required

(a) Prepare a Statement of Financial Position for Odyssey as at 31st December 2020 and a Statement of Comprehensive Income for the year then ended, in accordance with International Financial Reporting Standards (including IASs). You may calculate the cash figure as the balancing figure in the Statement of Financial Position. (19 marks)

(b) If, on 31st December 2021, Odyssey's premises referred to in note 1 were worth £100,000, what impact would that have on Odyssey's accounts for the year ending on that date? (2 marks) (

c) What difference would it make to your answer if the “other unidentified value” in note 2 included work done on the development of a new product? (4 marks)

Total 25 marks

Question 3

Poseidon, Scamander, and Amphitrite ---- Group Accounts On 30th June 2020, Poseidon Plc acquired 80% of the share capital of Scamander Limited in exchange for 45,000 Poseidon Plc shares worth £ 8.00 each, at a time when Scamander Limited's retained earnings were £ 32,000.

On 30th September 2020, Poseidon Plc also purchased 30% of the ordinary share capital of Amphitrite Limited, issuing one of its own shares for every two purchased, at a time when Poseidon Plc's shares were worth £ 11.00 each and Amphitrite Limited's retained earnings were £ 43,636.

Required

Prepare the consolidated Statement of Financial Position for the Poseidon Plc group as at 31st December 2020.

25 marks

Question 4

Apollo Limited ---- Income Concepts Apollo Limited commenced trading on 1st January 2020, issuing 471,000 £1 ordinary shares at par.

On the same day, the funds raised were used to purchase freehold land and buildings of £175,000, plant and machinery of £ 200,000 and 4,800 units of inventory for £ 20 each.

Required

(a) Prepare a Statement of Financial Position for Apollo Limited as at 31st December 2020, and an Income Statement for the year then ended, using:

(i) Historic cost accounting; and

(ii) Current Cost Accounting*; and

(iii) CoCoA (Continuously Contemporary Accounting)

We recommend that you set up your answer using parallel columns for the different valuation bases, so that you only need to write the captions for the Statement of Financial Position and the Income Statement once.

* In your Income Statement for Current Cost Accounting, you should split holding gains for the assets between realised and unrealised gains. (16 marks)

(b) Discuss how the information provided might be useful to potential providers of finance. (9 marks)

Total 25 marks

Section C

Question 5

International Financial Reporting Standards If you were responsible for writing a new standard to replace IAS37, how would you improve the requirements for accounting for provisions, contingent liabilities and contingent assets? Explain your answer. 25 marks

Question 6

Group Accounts Describe and explain the consolidation adjustments you would need to make to deal with the situation of a lease agreement between a parent company and a subsidiary company. 25 marks

Question 7

Income Concepts Discuss how the insights of economic concepts of income (such as those of J. R. Hicks) can provide support for dividends decisions. 25 marks