DECEMBER 2007 APPLICATION LEVEL

Professional Stage Examination

Tuesday 8 December 2009
(2 hours)

FINANCIAL ACCOUNTING
This paper is in two parts.
Instructions for answering are given before each part. Read them carefully.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.
Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT
Question papers contain confidential information and must NOT be removed from
the examination hall.
You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

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December 2009

FINANCIAL ACCOUNTING - PART TWO

(80 marks)

1.

Answer all FOUR questions.

2.

Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3.

Submit all workings.

4.

Ensure your candidate number is written on the front of your answer booklet.

5.

Answer each question in black pen.

6.

The examiner will take account of the way in which material is presented.

7.

Unless otherwise stated, make all calculations to the nearest month and to the nearest .

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1.

Set out below is the trial balance of Moreton Ltd as at 30 September 2009.

Sales
Purchases
Administrative expenses
Distribution costs
Rent
Inventories at 30 September 2008
Retained earnings at 30 September 2008
Provision for legal claim at 30 September 2008
Ordinary share capital (1 shares)
Share premium
Patent cost
Patent accumulated amortisation at 30 September 2008
Cash in hand
Cash at bank
Bank loan (repayable 1 October 2010)
Interest paid
Trade and other receivables
Trade and other payables
Suspense account

2,885,500

1,345,600
456,700
234,600
789,000
134,000
178,900
27,000
100,000
20,000
40,000
8,000
820
13,600
200,000
7,500
978,400
578,620
25,000
4,011,620

4,011,620

The following additional information is available:

(1)

The finance director has calculated that prepaid administrative expenses of 56,000 and
accrued distribution costs of 75,000 need to be adjusted for at 30 September 2009.

(2)

Inventories on hand at 30 September 2009 were valued at 156,000 before any adjustment for
goods held by third parties.
At 30 September 2009, Kingham Ltd, a customer of Moreton Ltd, held inventories which it had
purchased on credit from Moreton Ltd on a sale or return basis for 30,000. This transaction
has been accounted for as a normal credit sale by Moreton Ltd. The goods had cost Moreton
Ltd 20,000. Kingham Ltd has not yet settled its liability with Moreton Ltd in respect of these
goods.

(3)

Moreton Ltd rents its premises and all of its equipment under operating leases. Of the
789,000 above, 70% should be allocated to cost of sales and 30% to administrative
expenses.

(4)

The patent was acquired on 1 October 2006 and is being amortised over its estimated useful
life of 10 years. Amortisation charges on this patent are presented in cost of sales. On 1 April
2009 the directors decided to sell this patent to a competitor, as the company wishes to move
out of that particular market sector.
The patent was expected to sell for 22,000 with selling costs of 1,000. A buyer was found on
1 September 2009 at that price, although the sale was not completed until after the year end.
No adjustments to the financial statements have been made in respect of this patent. On
1 April 2009 the patent met the held for sale criteria of IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations, and continued to do so as at the year end.

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(5)

The legal claim provided for at 30 September 2008 was settled during the current year for
25,000. The 25,000 was posted to the nominal ledger by Moreton Ltds accounting clerk
who only made one entry in the ledger, to the bank account when the cheque was despatched
to the claimant. The balance on the suspense account arose because of this oversight.

(6)

On 15 October 2009, Moreton Ltd received a separate claim from a different customer in
respect of faulty goods supplied to it by Moreton Ltd on 20 September 2009. The customer is
claiming for the cost of the goods (60,000) and for damages (10,000). Moreton Ltds legal
advisers are of the opinion that there is a 60% chance that the claim will be settled at 60,000
and a 40% chance that the claim will be settled at 70,000.
Moreton Ltd has made a counter claim, against its supplier, for 75% of the amount at which
the above claim is expected to be settled. The legal advisers believe that Moreton Ltd is
virtually certain to recover this from its supplier.
The legal advisers expect both claims to be settled within six months of the year end.

(7)

The bank loan was taken out on 1 March 2008 and bears interest at 5%.

(8)

The income tax charge for the year has been estimated at 4,000.

Requirement
Prepare an income statement for Moreton Ltd for the year ended 30 September 2009 and a statement
of financial position as at that date in a form suitable for publication.
(19 marks)
NOTES: Notes to the financial statements are not required
Expenses should be analysed by function

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2.

You are the assistant accountant at Bushley plc, a manufacturing company, and have been asked to
prepare the note showing the movements on property, plant and equipment for inclusion in Bushley
plcs financial statements for the year ended 30 September 2009.
You have extracted the following balances in relation to property, plant and equipment from the
financial statements for the year ended 30 September 2008:

Land and buildings

Cost
Accumulated depreciation

1,300,000
(180,000)
1,120,000

Plant and equipment

870,000
(423,000)
447,000

You have also gathered the following information:

(1)

Bushley plc has previously adopted the cost model for all of its property, plant and equipment.
However, on 1 October 2008, the land and buildings were revalued as follows:

Original cost on 1 October 1978

Valuation on 1 October 2008

Land

Buildings

1,000,000
1,800,000

300,000
700,000

The buildings were being depreciated over a 50-year useful life. The revised remaining useful
life of the buildings at the date of the valuation was estimated to be 40 years. Bushley plc
wishes to make an annual transfer between the revaluation surplus and retained earnings in
accordance with best practice.
(2)

The plant and equipment (cost) nominal ledger account for the year ended 30 September
2009 showed the following movements:

1 Oct 2008 B/f

1 Apr 2009 Bank (Machine 251)
1 July 2009 Purchases
1 July 2009 Wages

870,000
120,000
56,000
24,000

1 July 2009 Disposal (Machine 157)

56,000

The transfers from purchases and wages are in respect of a specialised cutting machine which
Bushley plc started constructing for its own use in the current year. This machine was almost
complete by 30 September 2009.
All plant and equipment is depreciated, on a straight-line basis, over five years. Machine 157,
which was disposed of on 1 July 2009, had been purchased on 1 July 2006.
(3)

The directors reviewed a number of the companys machines for possible impairment on
30 September 2009. Machine 132, which had cost 78,000 on 1 October 2006, was found to
be impaired. It was estimated that its fair value at 30 September 2009 was 15,000 and that
costs to sell would be 500. Its value in use was estimated at 20,000.

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Requirements
(a)

Prepare the note showing the movements on property, plant and equipment, including
accumulated depreciation, which would be included in the financial statements of Bushley plc
for the year ended 30 September 2009. (13 marks)

(b)

Calculate the balance on the revaluation surplus at 30 September 2009. (3 marks)

(c)

Set out the differences between IAS 16, Property, Plant and Equipment and UK GAAP.
(4 marks)

(d)

According to the IASBs Framework for the Preparation and Presentation of Financial
Statements, all users require information regarding financial position, financial performance
and changes in financial position.
Explain how the information contained in a set of single entity financial statements in respect
of property, plant and equipment meets those information needs. (5 marks)
(25 marks)

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3.

During the year ended 30 September 2009, Bredon Ltd reorganised its resources, selling one of its
subsidiary companies and issuing a number of shares. Details of these transactions and an error
discovered in the course of the audit are set out below:
(1)

Bredon Ltd acquired 80% of Longdon Ltds 100,000 1 ordinary shares several years ago.
Goodwill acquired in this business combination was 22,800. Since the acquisition,
impairment losses of 5,000 have been recognised in respect of this goodwill.
Longdon Ltds retained earnings at 30 September 2008 were 717,000. In the year ended
30 September 2009 Longdon Ltd made a profit after tax of 32,000, which accrued evenly
over the year. On 1 April 2009, Bredon Ltd sold all of its shares in Longdon Ltd for 700,000.

(2)

During the year ended 30 September 2009, Bredon Ltd made the following share issues, all for
cash.
(i)

On 1 October 2008, an issue of 200,000 1 ordinary shares at a price of 1.50 per

share.

(ii)

On 31 March 2009, an issue of 100,000 1 redeemable 3% preference shares at par.

These shares are redeemable in 2015.

(iii)

On 1 July 2009, an issue of 50,000 1 irredeemable 4% preference shares at a price of

1.10 per share.

As at 30 September 2008, the only shares in issue were 500,000 1 ordinary shares, issued at
par. Retained earnings at that date were 2,560,000.
Dividends due on both types of preference shares were paid on 30 September 2009. On
15 August 2009 an interim dividend of 10p per ordinary share was declared and was paid
shortly after the year end.
(3)

During their interim audit for the year ended 30 September 2009 the newly-appointed auditors
drew attention to an error in the financial statements for the previous year. In that year,
expenditure had been capitalised for the first time on an intangible asset which did not meet
the criteria set out in IAS 38, Intangible Assets. No further costs in respect of this asset were
capitalised in the current year. The carrying amount of the asset in Bredon Ltds draft
individual (single entity) statement of financial position as at 30 September 2009 is 45,000,
after charging amortisation for the current year of 5,000.

Total comprehensive income in Bredon Ltds draft individual statement of changes in equity for the
year ended 30 September 2009, before adjusting for (2) and (3) above, was 560,000.

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Requirements
(a)

Calculate the profit from discontinued operations in respect of Longdon Ltd as it would be
presented in the consolidated income statement of Bredon Ltd for the year ended
30 September 2009, in accordance with IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations. (3 marks)

(b)

In respect of the transactions set out in (2) and (3) above:

(i)

Prepare the individual statement of changes in equity of Bredon Ltd for the year ended
30 September 2009; and

(ii)

In so far as the information is available, prepare extracts from the following

individual financial statements of Bredon Ltd for the year ended 30 September 2009:
income statement
statement of financial position
statement of cash flows. (12 marks)
(15 marks)

NOTE: Notes to the financial statements are not required

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4.

Stow plc has investments in two companies, Bourton Ltd and Naunton Ltd.
The draft, summarised statements of financial position of the three companies at 30 September 2009
are shown below:

ASSETS
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares)
Share premium account
Retained earnings

Current liabilities
Trade and other payables
Taxation

Total equity and liabilities

Stow plc

Bourton Ltd

Naunton Ltd

4,175,500
5,250,000
9,425,500

2,678,500
2,678,500

1,457,700
1,457,700

1,237,000
976,500
9,500
2,223,000

1,050,000
750,000
1,500
1,801,500

790,000
756,000
4,800
1,550,800

11,648,500

4,480,000

3,008,500

3,000,000
1,000,000
6,602,500

2,000,000
500,000
1,202,200

1,000,000
100,000
1,298,100

10,602,500

3,702,200

2,398,100

766,000
280,000
1,046,000

637,800
140,000
777,800

515,400
95,000
610,400

11,648,500

4,480,000

3,008,500

Additional information:
(1)

Stow plc acquired its shares in Bourton Ltd and Naunton Ltd as follows:

Date of acquisition

Nominal value of ordinary shares acquired

Consideration
Retained earnings at the date of acquisition

Bourton Ltd

Naunton Ltd

1 June 2007

1 April 2009

1,600,000
4,500,000
1,575,000

400,000
750,000
875,000

No shares have been issued by Bourton Ltd or Naunton Ltd since Stow plc acquired its shares
in those companies.
At the date of its acquisition by Stow plc, Bourton Ltd held a piece of land which had an
excess of fair value over carrying amount of 1,000,000. This land is still owned by Bourton
Ltd. The carrying amounts of all other assets and liabilities held by Bourton Ltd and Naunton
Ltd at the dates of acquisition were equal to their fair values.

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(2)

During the second half of the current year both Bourton Ltd and Naunton Ltd sold goods to
Stow plc at a mark-up of 50%. The goods cost Bourton Ltd and Naunton Ltd 360,000 and
250,000 respectively. At the year end, half of each set of goods remained in Stow plcs
inventory but the invoices for the full amount of these goods had not been settled.

(3)

At 30 September 2008 cumulative impairment losses in respect of goodwill acquired in the

business combination with Bourton Ltd of 50,000 had been recognised. A further loss of
20,000 arose during the current year and needs to be recognised.

(4)

Stow plc has calculated that an impairment in the carrying amount of its investment in Naunton
Ltd of 10,000 arose in the six months to 30 September 2009 and needs to be recognised.

Requirement
Prepare the consolidated statement of financial position of Stow plc as at 30 September 2009.
(21 marks)

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