Professional Documents
Culture Documents
Diploma
FA1208
1.13FA
Financial Accounting
morning 2 December 2008
FA1208
ABE 2008
T/500/3691
SECTION A
Question 1 is compulsory.
Q1
The trial balance of Zen enterprise for the year ended 30 September 2008 is as follows:
Purchases
Revenue
Opening inventory (stock) 1 October 2007
Distribution expenses (note vi)
Administration expenses (note vii)
Dividends received from investment in Electra enterprise
Preference dividend paid
Ordinary dividend paid
Investment in Electra enterprise at cost
Trade receivables (debtors)
Trade payables (creditors)
Land and Property at valuation (note ii)
Plant and equipment at cost (note iii)
Plant and equipment accumulated depreciation as at 1 October 2007
Revaluation reserve
Retained earnings as at 1 October 2007
Ordinary share capital 1 shares
5% preference shares 1
6% Debentures (note iv)
Bank and cash
Bank interest paid
000s
Debits
54,200
000s
Credits
93,700
3,700
7,200
3,500
80
40
90
11,000
1,500
1,650
32,000
4,300
1,120
3,000
2,700
13,500
800
5,000
4,000
20
121,550
121,550
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Required:
Prepare the income statement (prot and loss account) for the year ended 30 September
2008 and the balance sheet as at that date for Zen enterprise in accordance with relevant
International Accounting Standards (IASs).
(25 marks)
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SECTION B
Answer THREE questions only. All questions carry equal marks.
Q2
On 1 October 2000, Box enterprise acquired 3 million of the 4 million issued shares of Vox
enterprise. The retained earnings of Vox as at 1 October 2000, the date of acquisition, were
940,000 and the share premium 720,000. The draft balance sheets of the two enterprises
as at 30 September 2008 were as follows:
Balance sheets as at 30 September 2008
ASSETS
Non-current assets:
Land and buildings
Plant and equipment
Investment in Vox
Current assets:
Inventory
Trade receivables
Bank and cash
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Ordinary 1 shares
Share premium
Retained earnings
Non-current liabilities:
Loans
Current liabilities:
Trade payables
Tax
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Box
000s
Vox
000s
12,620
1,720
5,500
19,840
6,540
80
6,620
530
620
10
1,160
21,000
110
90
20
220
6,840
13,700
2,800
1,740
18,240
4,000
720
1,320
6,040
1,500
530
760
500
1,260
21,000
120
150
270
6,840
(iv)
When Box bought the shares in Vox it also made a loan to Vox of 130,000. This loan
is still outstanding.
A review of the consolidated goodwill has been carried out each year since acquisition
and no impairment has occurred.
The fair value of Voxs land and buildings at the date of acquisition was 0.2 million
and 1 million respectively in excess of the carrying values at that date. This fair value
has not been incorporated into the balance sheet of Vox as at 30 September 2008
and there has been no further increase in fair value of the land and buildings since
the acquisition date. The group policy is to depreciate property 2% per annum on a
straight-line basis.
During the year ended 30 September 2008, Box sold goods to Vox for 1.3 million. Box
adds a 25% mark-up on cost to all its sales. Goods with a transfer price of 155,000
were included in Voxs inventory as at 30 September 2008.
Required:
Prepare the consolidated balance sheet of the Box group as at 30 September 2008.
(25 marks)
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Q3
The summarised balance sheets of three enterprises, X, Y and Z, in the same industry are
shown below as at the year ended 30 September 2008.
ASSETS
Non-current assets:
Intangible assets
Tangible assets
Current assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Share capital
Revaluation reserve
Retained prots
Non-current liabilities
Current liabilities
TOTAL EQUITY AND LIABILITIES
X
000s
Y
000s
Z
000s
150
1,329
1,479
1,380
2,859
873
873
870
1,743
16
870
886
1,424
2,310
300
120
1,584
2,004
150
705
2,859
60
1,275
1,335
30
378
1,743
450
1,056
1,506
75
729
2,310
The revenue and prot for the year ended 30 September 2008 for the three enterprises are
as follows:
X
Y
Z
000s
000s
000s
Revenue
3,150
2,250
2,625
Prot for the year after depreciation
and amortisation charges
423
291
222
The three enterprises have different accounting treatments for the intangible assets:
X amortises at 10% per annum and Z at 20% per annum; Y has written off all its intangible
assets of 60,000 against its operating prots for the year ended 30 September 2008.
Intangible assets of all three enterprises were acquired on 1 October 2007 and the standard
amortisation method of intangible assets in the industry is 10% per annum.
X revalued its tangible assets as at 1 October 2007, which gave rise to an extra depreciation
charge of 6,000 at 30 September 2008 over and above the historical cost depreciation
charge.
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Required:
Q4
(a)
Appraise the nancial performance and position of each enterprise as far as the
information mentioned above permits and after adjusting for the different accounting
treatments.
(15 marks)
(b)
List the further information, about the three enterprises, that you would like to receive
to help you in assessing the nancial performance and position of the
enterprises.
(10 marks)
(Total 25 marks)
An enterprise is seeking funds to expand and has asked you to advise the board of directors
on the advantages and disadvantages of each of the following methods of nancing the
expansion:
L
Overdraft
L
Long-term loans
L
Leasing
L
Raising further equity capital
Required:
Write a report to advise the board of directors as requested above.
(25 marks)
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Q5
Identify and explain, in accordance with relevant International Accounting Standards (IASs),
the accounting entries to reect each of the following items in the nancial statements of Fox
for the year ended 30 September 2008.
(a)
Fox has spent 450,000 during the year ended 30 September 2008 on research aimed
at increasing the life of its products. The research has not yet led to an increase in the
life of its products. Fox has also spent 2 million on developing a new product A which
it is estimated will go into production on 1 July 2009 and will produce sufcient prots
to cover its costs. In addition, Fox capitalised 3 million at 30 September 2007 on the
development of product B, which it estimated at that time would go into production on
1 March 2008. Fox has now found that product B is not viable as costs of production
are excessive.
(6 marks)
(b)
Fox acquired a piece of machinery from Rats enterprise on 1 October 2007 under a
lease agreement. The agreement was for a lease period of 5 years, requiring 5 annual
rentals payable in advance of 10,500. The fair value of the machine, if purchased
outright, is estimated to be 46,370 and the interest rate implicit in the lease is 6.625%.
The only entries in the books of Fox at the year-end 30 September 2008 have been to
credit cash and charge the rst rental payment of 10,500 to the income statement.
Fox depreciates machinery over its useful life on a straight-line basis.
(8 marks)
(c)
Fox sells products under warranty. Past experience indicates that 85% of products
sold will have no defects, 10% will have minor defects and 5% major defects. If minor
defects occurred in all products sold, the cost of repairs would be 3 million and if
major defects occurred in all products sold, the cost of repairs would be 17 million.
Fox has recorded the full value of all products sold under warranty as part of revenue
and made no allowance for the costs of any warranties.
(7 marks)
(d)
Fox sold products to Rex for 500,000 on 1 January 2008 and at the same time
agreed to buy them back for 536,000 on 1 December 2008. Under the terms of the
agreement of sale, Rex cannot sell the products on to anyone else and must on
1 December 2008 sell them back to Fox. As at 30 September 2008, Fox has recorded
the 500,000 as revenue in its income statement.
(4 marks)
(Total 25 marks)
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Q6
Within nancial accounting there is general agreement that there are twelve traditional
accounting concepts. Four of these concepts are:
L
L
L
L
Matching (accruals)
Going concern
Business entity
Prudence
Required:
Using suitable examples, explain in detail each of the four concepts above.
Q7
(a)
(25 marks)
Within the International Accounting Standards Boards Framework for the preparation
and presentation of nancial statements, assets and liabilities are dened and criteria
identied for their recognition.
Required:
Dene assets and liabilities and explain why these denitions are important in the
preparation of an enterprises balance sheet and income statement.
(12 marks)
(b)
During the year ended 30 September 2008, Cat enterprise acquired 80% of the share
capital of Mouse enterprise at a cost of 5 million. The fair value of Mouses net assets
at the date of acquisition was 4 million giving rise to goodwill on consolidation of 1.8
million. As at 30 September 2008, the value of Cats goodwill was estimated at
2 million. The directors of Cat wish to incorporate both the consolidated goodwill of
1.8 million and Cats individual goodwill of 2 million in the balance sheet as at
30 September 2008.
Required:
Advise the directors of Cat on the treatment of goodwill in their nancial statements as at
30 September 2008.
(8 marks)
(c)
Cat has paid 1 million in interest costs in connection with the borrowing of funds
during the year ended 30 September 2008. The directors of Cat wish to capitalise
these borrowing costs.
Required:
Advise the directors of Cat on the treatment of the borrowing costs in their nancial
statements as at 30 September 2008.
(5 marks)
(Total 25 marks)
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Q8
621
(396)
225
(30)
195
(75)
120
Revenue
Cost of sales
Gross prot
Operating expenses
Finance costs
Prot before tax
Tax
Prot after tax
ASSETS
Non-current assets
Current assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Ordinary share capital
Share premium
Retained prots
Non-current liabilities
Current liabilities:
Tax
Bank overdraft
Other
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10
2007
000s
2008
000s
996
390
1,386
1140
510
1,650
240
576
816
120
300
60
696
1,056
195
90
15
345
450
1,386
75
324
399
1,650
Required:
(a)
Prepare a cash ow statement for Zebra enterprise for the year ended 30 September
2008 in accordance with IAS 7 Cash Flow Statements. (Notes to the cash ow
statement are not required.)
(20 marks)
(b)
Comment on the nancial position of Zebra as shown by the cash ow statement you
have prepared.
(5 marks)
(Total 25 marks)
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FA1208
Diploma
Financial Accounting
Examiners Suggested Answers
Section A
Q1
Income statement for Zen enterprise for the year ended 30 September 2008
000s
Revenue
Opening inventory
Purchases
3,700
54,200
57,900
3,900
Closing inventory
Gross prot
Dividends received
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54,000
39,700
80
39,780
7,958
4,398
300
20
12,676
27,104
8,107
18,997
90
40
18,867
Depreciation calculations
Property valuation
Useful life
Depreciation
000s
93,700
26,000,000
26 years
26,000,000/26 = 1,000,000 charged 500,000 to
distribution and 500,000 to administration.
4,300,000
1,120,000
12
ASSETS
Non-current assets
Land and property
Plant and equipment
000s
Cost or
Valuation
000s
Depreciation
000s
NBV
32,000
4,300
36,300
1,000
1,120 + 636
2,756
31,000
2,544
33,544
Investment in Electra
11,000
44,544
Current assets
Inventory
Trade receivables
Payments in advance
Bank and cash
3,900
1,500
60
4,000
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Ordinary share capital 1
Preference share capital 1
5%
Revaluation reserve
Retained earnings (2,700 + 18,867)
9,460
54,004
13,500
800
3,000
21,567
38,867
Non-current liabilities
Debentures 6%
Current liabilities
Trade payables
Accrued insurance
Accrued interest
Taxation
5,000
1,650
80*
300
8,107
10,137
54,004
* Due to a typographical error, the gure of 80,000 did not appear in the notes to the
accounts. An appropriate allowance was made in marking the answer.
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Q2
Cost of control
Paid (5,500-130)
3,000
540
705
900
5,145
225
Goodwill
1,000
180
235
300
380
160
220
165
55
1,770
Current assets
Inventory (530 + 110-31 unrealised prot)
Trade receivables (620 + 90)
Bank and cash
609
710
30
1,349
23,574
TOTAL ASSETS
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20,200
1,800
225
22,225
13,700
2,800
1,874
1,770
20,144
14
Non-current liabilities
Loans (1,500 + 530-130 inter co. loan)
1,900
Current liabilities
Trade payables (760 + 120)
Tax (500 + 150)
880
650
1,530
23,574
Q3
(a)
Before calculating ratios for the three enterprises the difference in accounting
treatments needs to be eliminated as follows:
Intangible assets
Tangible assets
Operating prot
Capital employed
RATIOS
Prot/sales
Sales/capital employed
Prot/capital employed
Sales/tangible assets
CA:CL
Gearing
(b)
X
000s
150
1,329-120
revaluation + 6
excess dep = 1,215
423 + 6 dep = 429
(1/2)
Y
000s
54
873
Z
000s
18
870
2,154-114 = 2,040
291 + 60
intangible wo
-6 amortisation = 345
1,365 + 54 = 1,419
222 + 2 diff in
amortisation =
224
1,581 + 2 = 1,583
429/3,150 = 13.6%
3,150/2,040 = 1.54
429/2040 = 21%
3,150/1,215 = 2.6
1,380/705 = 1.96
150/2,040 = 7.4%
345/2,250 = 15.3%
2,250/1,419 = 1.59
345/1419 = 24.3%
2,250/873 = 2.6
870/378 = 2.3
30/1,419 = 2.1%
224/2,625 = 8.5%
2,625/1,583 = 1.66
224/1583 = 14.2%
2,625/870 = 3.0
1,424/729 = 1.95
75/1,583 = 4.7%
From the above ratios enterprise Y achieves the best return on capital employed
due to a higher margin ration.
Enterprise Z achieves more volume than either X or Y but at a cost of lower
margins.
Y is the most liquid of the three enterprises
Y displays the lowest gearing
Previous years balance sheets and income statements
Cash ow statements
Forecast budgets and cash ows, business plans
Information in respect of quality of goods and services and other factors affecting
the assessment of goodwill in the business
Industrial average ratios
Stock market valuations
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Q4
Disadvantages
Disadvantages
Leasing
Advantages
Disadvantages
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16
Disadvantages
Q5
(a)
The 450,000 should be debited to the income statement as expenses during the year
as it does not meet the criteria for capitalisation as no feasible product has been found.
The 2 million spent on product A can be capitalised, debit intangible assets, as it
meets all criteria. Amortisation will commence, on a suitable basis, as from 1 July 2009.
The 3 million spent on product B, previously capitalised, must now be debited to
the income statement, credit intangible assets, as it no longer meets the criteria for
capitalisation.
Relevant standard is IAS 38.
(b)
Rental paid
1.10.07
46,370
10,500
35,870
2,376
1.10.08
38,246
10,500
27,746
1,838
1.10.09
29,584
10,500
19,084
1,264
1.10.10
20,348
10,500
9,848
652
1.10.11
10,500
10,500
52,500
Liability
Interest charge
during period
6.625%
6,130
The asset is capitalised and the loan raised by debiting tangible non-current assets and
crediting loans both with 46,370.
The asset is depreciated over 5 years and therefore 9,274 is debited to income
statement and credited to depreciation provision.
The interest due for the year ended 1.1.08 of 2,376 is debited to income statement.
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FA1208
The loan raised for the fair value of the asset will be reduced by the principal payments
made. In the year ended 30.9.08 the principal payment is 10,500 and therefore the
loan will be reduced to 35,870 of which 8,124 will be payable in less than one year
and 27,726 greater than one year. The interest payment of 2,376 will also need
accruing at the year end.
(c)
Fox needs to make a provision for the probable cost of warranties based on past
experience as there is:
Q6
(a)
Matching:
Matching requires that revenue earned in a period be matched with related costs.
The concept gives rise to accruals and prepayments in the balance sheet and
accounts for some of the difference between cash and prot.
The reasoning behind the concept is that prot for the period should represent
fairly the earnings of the period covered matched with all costs.
(b)
Going concern:
FAT1208
Going concern infers that the business is carrying on steadily trading from year to
year without reducing its operations.
Going concern directly inuences values placed on, for example, non-current
assets such as plant and equipment.
Going concern also allows for the principle of depreciation; if we depreciate an
item of plant over 10 years then we are assuming that the plant will have a useful
life to the enterprise of 10 years. This assumption can only be made if we rst
assume that the enterprise will continue for 10 years.
18
(c)
Business entity:
(d)
This states that the enterprise has an identity and existence distinct from its
owner/s.
This contrasts with the legal position, particularly for a sole trader and partnership.
The accountant can always speak of the enterprise owing the owner money e.g.
dividends, interest on capital within a partnership or borrowing money from the
owner e.g. share capital, capital invested by a sole trader.
This concept also ensures that salaries etc. paid to owners are classied as
expenses.
Prudence or conservatism:
This refers to the accounting concept of recognising all possible losses but not
anticipating possible gains.
However the accountant must NOT be overly pessimistic but free from bias.
Q7
(a)
(b)
Whilst it is acceptable to value the goodwill of 1.8 million of the subsidiary on the
basis described in the question and include it in the consolidated balance sheet, the
same treatment cannot be afforded to Cats own goodwill.
The calculation may indeed give a realistic value of 2 million for Cats own goodwill
but this is internal goodwill.
IFRS prohibit such internal goodwill appearing in the nancial statements. The main
reason for this is the unreliability of the measurement.
The purchased goodwill in the acquisition is measured reliably at the point in time of
purchase.
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(c)
IAS 23 only permits the capitalisation of borrowing costs if they are directly attributable
to the acquisition, construction or production of a qualifying asset.
A qualifying asset is one that takes a substantial amount of time to get ready for
its intended use or sale. Examples of qualifying assets are long term construction
contracts, ships or aircraft being built and inventory being matured such as wine or
spirits.
In this case the interest payable appears to be on the borrowing of general funds and
therefore cannot be capitalised.
Q8
(a)
195
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000s
105
36
30
366
(75)
(21)
270
(30)
(90)
150
(369)
84
(285)
120
75
195
60
(15)
45
Zebra has expanded its non-current assets by 369,000 which has only partly been
nanced from long term sources of equity 120,000 and loans 75,000.
The remaining nance has come from sale of non-current assets and the use of
operating activities cash.
20
Zebra after paying interest on loans and tax has improved its cash balance by 60,000
during the year.
The cash ow shows a comfortable position although the gearing has increased as
follows;
Non-current liabilities/equity
30.09.07
120/816 = 14.7%
30.09.08
195/1,056=18.5%
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1855-113-1
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