Paper F7 (INT) Fundamentals level – Skills Module

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Financial Reporting
(International)
ACCA Mock Exam – Dec 2009

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

ALL FIVE questions are compulsory and MUST be attempted.

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 Globe Ltd (GL) is a listed company and has held shares in two companies, Year Limited (YL) and Block
Q1
Limited (BL), since July 1, 20x6. The details of acquisition of shares in these companies are as follows:

(A) GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million. The acquisition
was made by issuing four shares in GL for every five shares in YL. The market price of GL’s shares at
July 1, 20x6 was Rs. 20 per share. A fair value exercise was carried out for YL’s assets and liabilities at
the time of its acquisition with the following results:
Book Value Fair Value
Rupees in million
Land 170 192
Machines 25 45
Investments 3 6

The remaining life of machine on acquisition was 5 years. The fair values of the assets have not been
accounted for in YL’s financial statements.

(B) 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of acquisition, the
reserves of BL stood at Rs. 40 million.
The summarized income statements of the three companies for the year ended June 30, 20x8 are as
follows:
GL YL BL
Rupees in million
Sales 875 350 200
Cost of sales (567) (206) (244)
Gross profit / (loss) 308 144 (44)
Selling expenses (33) (11) (15)
Administrative expenses (63) (40) (16)
Interest expenses (30) (22) (15)
Other income 65 - -
Profit/ (loss) before tax 247 71 (90)
Income tax (73) (15) 8
Profit/ (loss) for the period 174 56 (82)

The following relevant information is available:

(i) The share capital and reserves as at July 1, 20x7 were as follows:
GL YL BL
Rupees in million
Ordinary share capital of Rs. 10 each 600 200 150
Reserves 652 213 108
The share capitals of all companies have remained unchanged since their incorporation.

(ii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made at a mark up
of 25% on cost. 30% of these goods were still in the inventories of YL at June 30, 20x8.

(iii) GL manufactures a component used by BL. During the year, GL sold these components amounting to
Rs. 20 million to BL. Transfers are made at cost plus 15%. BL held Rs. 11.5 million of these components
in inventories at June 30, 20x8.

(iv) All assets are depreciated on straight line method.

(v) Other income includes dividend received from YL on April 15, 20x8.

(vi) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii) An impairment test was carried out on June 30, 20x8 for the goodwill of YL and investments in BL,
appearing in the consolidated financial statements. The test indicated that:
goodwill of YL was impaired by 20%;
Due to recent losses, the fair value of investment in BL has been reduced to Rs.40 million.
No such impairment was required in previous years.

Required:
Prepare, in a format suitable for inclusion in the annual report, a consolidated income statement for the
year ended June 30, 20x8. (20 marks)
 Wallet Limited has provided you the following information for determining its tax and deferred tax
Q 2(a)
expense for the year 2006 and 2007:

(i) During the year ended December 31, 2007, the company’s accounting profit before tax amounted to
Rs. 40 million (2006: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million
(2006: Rs. 8 million) which are exempt from tax.

(ii) The accounting written down values of the fixed assets, as at December 31, 2005 was as follows:
Cost Accumulated Written
Depreciation down value
-------------- Rupees in millions --------------
Machinery 200 25 175
Furniture and fittings 50 10 40

No additions or disposals of fixed assets were made in the years 2006 and 2007.

(iii) Machinery was acquired on January 1, 2005 and is being depreciated on straight-line basis over its
estimated useful life of 8 years. The tax base of machinery as at December 31, 2005 was Rs. 90 million.

(iv) Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The
tax base of furniture and fittings as at December 31, 2005 was Rs. 40.5 million.

(v) Normal rate of tax depreciation on both types of assets is 10% on written down value.

(vi) As on December 31, 2005, Wallet Limited had unused tax losses of Rs. 75 million.

(vii) The tax rates for 2005, 2006 and 2007 were 35%, 35% and 30% respectively.

Required:
Determine the tax and deferred tax expense for the year 2006 and 2007. (15 marks)

Q 2(b) On January 1, 2001, Silver Hawk Enterprises purchased a machine for Rs.20,000 that had an
estimated useful life of 5 years. The accountant incorrectly charged of this machine in 2001.

The error was discovered in 2002. The company desires to use straight-line depreciation method
on this asset.

REQUIRED:
Pass the entry and give computation in this effect on December 31, 2002, to correct for this error,
given that the:
(i) Books have not been closed for 2002
(ii) Books have been closed for 2002 (05 marks)
 SH Leasing Limited (the lessor) has entered into a three year agreement with FS Limited (the lessee) to
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lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000.

The following information relating to lease transaction is available:

(i) Date of commencement of lease is July 1, 2007.

(ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term, the value of
the machine will be Rs. 300,000.

(iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30.

(iv) The implicit interest rate is 12.9972%.

Required:
(a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in the books of lessor.
Ignore tax.

(b) Produce extracts from the balance sheet including relevant notes as at June 30, 2008 to show how the
transactions carried out in 2008 would be reflected in the financial statements of the lessor.

(Disclosure of accounting policy is not required.) (20 marks)

On November 01, 2001 JN & Company contracted War Construction Company to have a
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building constructed for Rs 2.8 millions on land costing Rs 0.2 million (purchased from the
contractor and included in the first payment). JN & Company made the following payments to
the construction company during 2002:
January 1 March 1 May 1 December 31 Total
Rs420,000 Rs 600,000 Rs 1,080,000 Rs 900,000 Rs 3,000,000

Construction was completed and the building was ready for occupancy on December 31, 2002.
JN & Company had the following debt outstanding at December 31, 2002:
Specific Construction Debt
i. 15%, 3-year loan to finance purchase of land and construction of the building, dated
December 31, 2001, with interest payable annually on December 31 - Rs. 1.5 million
Other Debts
ii. 10%, 5-year loan payable, dated December 31, 1998, with interest payable annually on
December 31 - Rs.1.1 million
iii. 12%, 10-year bonds issued on December 31, 1997, with interest payable annually on
December 31 - Rs. 1.2 million
REQUIRED
Keeping in view the requirement of IAS 23, calculate the following:
a) Total actual interest cost for the year (03 marks)
b) Capitalization rate of borrowing cost (05 marks)
c) Interest cost to be capitalized (07 marks)
Q5 Balance Sheet of Quarantine Ltd. as on June 30, 2009 and the Profit and Loss account for the
year then ended are as follows:
BALANCE SHEET

2009 2008 2009 2008

FIXED ASSETS SHAREHOLDER’S EQUITY

Building 97,000 29,000 Paid up share capital 360,400 326,400
Plant & Machinery 340,000 102,000 General reserves 200,000 150,000
Acc. depreciation (68,000) (34,000) Un-appropriated profit 28,000 20,000
369,000 97,000 588,400 496,400
Capital work in progress 238,000 -
Deferred cost - 5,000 Long term loans 476,000 50,000

CURRENT ASSETS CURRENT LIABILITIES

Stock in trade 442,000 289,000 Current maturity of long
Debtors 312,800 238,000 Term Loans 119,000 18,000
Less Provision for bad Bills payable 166,600 149,600
debts Accrued expenses 20,400 17,000
5,000 -
307,800
Advances and deposits 13,600 20,400 Income tax payable 17,000 13,600
Cash and bank balances 17,000 95,200
780,400 642,600 323,000 198,200
Total 1,387,400 744,600 1,387,400 744,600

INCOME STATEMENT

Rupees
Sales 1,700,000
Cost of goods sold (1,029,000)
Gross profit 671,000
Administrative expenses (282,000)
Financial expenses (37,400)
(319,400)
Operating profit 351,600
Loss on sale of fixed assets (25,000)
Profit before taxation 326,600
Taxation (102,000)
Profit after taxation 224,600
Un-appropriated profit brought forward 20,000
Profit available for appropriation 244,600
Appropriation:
Dividend (166,600)
Transfer to general reserves (50,000)
(216,600)
Un-appropriated profit carried forward 28,000

During the month of May 2009 the company purchased a machine for Rs.100,000, but due to
sudden change in production plan, the machine was sold for Rs.75,000 in the same month.
Company has not charged any depreciation on the plant sold during the year.
Required:
1. Prepare Cash flow statement of Quarantine Ltd. for the period ended 2009. (12 marks)
2. Write a report briefly analyzing the performance and financial position of Quarantine Ltd. for
the years ended 2008 and 2009 (13 marks)
Your report should be supported by appropriate ratios (25 marks)