MN-M503 Financial Accounting

Question 1

Park and Sketty presents the following statements of financial position as at 30 June 2020:

You have been presented with the following information:

i. Park acquired 85% of the ordinary share of Sketty for £150,000 on 1 July 2016. At the acquisition date, the retained earnings of Sketty were £75,000. The fair value of non-controlling interest in Sketty at the date of acquisition was £40,000.

ii. At the date of acquisition, the fair value of the net assets of Sketty approximated the carrying amounts, with the exception of a property whose land was recorded in the financial statements of Sketty at its cost of £75,000 but was estimated to have a fair value of £90,000. This land was still owned by Sketty at 30 June 2020.

iii. During the year ended 30 June 2020, Sketty sold goods to Park for £25,000 making a gross profit margin on the sale of 25%. 60% of these goods had been sold by Park by 30 June 2020.

iv. At the reporting date, Park still had a payable due to Sketty for £15,000, and this agreed with the receivables recorded in Sketty’s accounting records.

Required:

a) Prepare the consolidated statement of financial position for Park Group as at 30 June 2020. [35 marks]

It is well known that when we refer to ‘Business combinations and changes in ownership’, interests can be identified into three possible scenarios - Investment to Associate, Investment to Subsidiary, and Associate to Subsidiary - where significant influence or control is achieved in stages.

Required:

b) Therefore, identify and explain with your own words, the accounting treatment for each of the three scenarios above. [9 marks]

For the following three investments:

i. 30% of the share capital of Lucy. The other 70% is owned by Silvy, another listed company, whose directors make up Lucy’s Board.

ii. 80% of the share capital of Dario, whose activities are significantly different from the rest of Sophie group. iii. 30% of the share capital of Kevin. The Sophie group have appointed 2 of the 5 board members of Kevin, with the other board members coming from three other entities.

Required

c) Identify and explain the correct accounting treatments for the above investments in the consolidated financial statements of Sophie group. [6 marks]

[Total Question 1 - 50 marks]

Question 2

a) An entity has previously charged interest incurred in connection with the construction of tangible non-current assets to the statement of profit or loss. Following the revision of IAS 23 Borrowing Costs, and in accordance with the revised requirements of that standard, it now capitalises this interest.

b) An entity has previously depreciated vehicles using the reducing balance method at 40% per annum. It now uses the straight-line method over a period of five years.

c) An entity has previously shown certain overheads within cost of sales. It now shows those overheads within administrative expenses.

d) An entity has previously measured inventory at weighted average cost. It now measures inventory using the first in first out (FIFO) method.

Required:

Explain giving reasons in your own words, for each of the items above, whether it is a change in accounting policy as opposed to a change in estimation technique.

[Total Question 2 – 10 marks]

Question 3

The following financial statements and supporting information relate to Snowman Co, a limited liability company:

You have been presented with the following information:

a) Snowman Co disposed of some items of plant and equipment in the year for sale proceeds of £2,000,000. The carrying amount of the items disposed of was £1,500,000.

b) In addition, land and building were revalued during the year.

c) Snowman Co estimated that the income tax liability arising on the profit for the year was £3,500,000.

Required:

Prepare the statement of cash flows for the year ended 30 September 2020 in accordance with IAS 7 Statement of cash flows.

[Total Question 3 - 40 marks]