IB234 FINANCIAL REPORTING 2 EXAM REVISION QUESTIONS CONSOLIDATED ACCOUNTS 1.

The following summarized income statements have been prepared for the year ended 30th June 20X5 by Higg plc and Topp Ltd. Higg plc 647,200 (427,700) 219,500 (106,300) 113,200 11,600 124,800 (58,300) 66,500 Topp Ltd 296,800 (194,100) 102,700 (42,300) 60,400 2,000 (8,000) 54,400 (27,300) 27,100

Revenue Cost of sales Gross profit Operating costs Profit from operations Investment income Finance costs Profit before tax Income tax expense Profit for the year

The following information is relevant: (a) Higg plc acquired 70% of the 100,000 issued ordinary shares of Topp Ltd for 95,000 on 1st July 20X1 when retained earnings of Topp Ltd were 13,200. On the same date Higg acquired 20% of the 8% loan stock of Topp. The total loan stock issued at par is 100,000. (b) The revenue of Higg includes sales to Topp of 36,000, all invoiced at cost plus 25%. On 30th June 20X5 the inventory of Topp included 9,000 in respect of such goods. (c) Three years ago a goodwill impairment loss of 5,910 was recognized in Higgs consolidated financial statements. A further loss of 1,970 needs to be reflected in the current year consolidated financial statements. (d) During the year ended 30th June 20X5 Higg paid an interim ordinary dividend of 20,000 and total dividends to irredeemable preference shareholders of 8,000. Topp paid an interim ordinary dividend of 10,000. (e) The retained earnings of Higg and Topp at 1st July 20X4 were 72,400 and 29,600 respectively. The share capital of Higg comprises 500,000 1 ordinary shares and 100,000 1 irredeemable preference shares.

Required: Prepare the consolidated income statement and consolidated statement of changes in equity for the year ended 30th June 20X5.

2. Heaton plc has investments in two companies, Sharston Ltd and Ardwick Ltd. Extracts from the draft financial statements of the three companies for the year ended 31st March 20X4 are shown below. Income statements Revenue Cost of sales Gross profit Expenses Profit from operations Finance costs Dividend received Profit before tax Income tax expense Profit for the year Heaton 000 23,700 (17,580) 6,120 (2,870) 3,250 (220) 320 3,350 (1,230) 2,120 Sharston 000 12,500 (9,770) 2,730 (700) 2,030 (50) 1,980 (650) 1,330 Ardwick 000 5,200 (3,350) 1,850 (430) 1,420 1,380 (480) 900

Extracts from statements of changes in equity (retained earnings) Heaton Sharston 000 000 Balance at 1st April 20X3 4,250 2,200 Ordinary share dividends (1,000) (400) Profit for the year 2,120 1,330 Balance at 31st March 20X4 5,370 3,130 The only equity reserve of each company is retained earnings. Additional information: (i) The issued share capital of each company is:

Ardwick 000 1,450 900 2,350

1 ordinary shares Heaton plc 6 million Sharston Ltd 5 million Ardwick Ltd 4 million st There have been no movements in share capital since 1 April 20X2. (ii) Heaton acquired 80% of the 1 ordinary shares in Sharston on 1st April 20X2 for 6.4 million. At that date the balance on Sharstons retained earnings was a credit balance of 625,000. (iii) The fair value of the plant and equipment of Sharston Ltd was 500,000 in excess of its carrying amount at the date of acquisition. The remaining useful life of the plant and equipment was assessed at five years from that date. (iv) On 1st October 20X3 Heaton acquired 30% of the ordinary shares in Ardwick for 1.97 million. (v) Profits accrue evenly over the current year.

(vi) The impairment reviews relating to Sharston and Ardwick revealed the following losses: 2

Year ended 31st March 20X3 20X4

Sharston 000 300 300

Ardwick 000 20

(vii) Heaton sold goods at a transfer price of 2 million to Ardwick in January 20X4; one half of these goods remained in Ardwicks inventories at the year-end. Heaton calculates the transfer price of the goods using a mark-up of 25% on cost.

Required: (a) Prepare the consolidated income statement of Heaton plc for the year ended 31st March 20X4. (b) Prepare the retained earnings and non-controlling interest sections of the consolidated statement of changes in equity of Heaton plc for the year ended 31st March 20X4.

3. The draft statements of financial position at 31st March 20X5 of Payne plc and Glass Ltd are as follows. Payne plc 000 000 ASSETS Non-current assets Property, plant and equipment Intangibles (including goodwill of 275,000) Investments: Shares in Glass Ltd Current assets Inventories Trade and other receivables Suspense account Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Ordinary share capital (50p shares) Revaluation reserve Retained earnings Total equity Current liabilities (trade payables) Total equity and liabilities Glass Ltd 000 000

3,138 90 3,228 927 975 128 836 2,866 6,094 403 423 132

552 475 1,027

958 1,985

2,000 475 1,905 4,380 1,714 6,094

700 765 1,465 520 1,985

The following information is relevant: (i) Payne plc acquired 1,120,000 shares in Glass Ltd. The consideration for the acquisition comprised cash of 90,000 and 800,000 shares with a nominal value of 50p and fair value of 130p each. The issue of shares has not yet been reflected in the books of Payne plc.

(ii) At the acquisition date the statement of financial position of Glass Ltd showed net assets with a carrying amount of 1,265,000. Included in this total were freehold land with a carrying amount of 250,000 (market value 683,000), and goodwill (arising on the acquisition of an unincorporated business some years ago) with a carrying amount of 300,000. The fair values of all other assets and liabilities are approximately equal to their carrying amounts. (iii) Professional fees to bankers and solicitors in respect of the acquisition amounted to 75,000. In addition the directors of Payne plc estimate that the value of their time spent working on the acquisition amounted to 53,000. At the moment these expenses have been posted to a suspense account. (iv) Glass Ltd sells part of its output to Payne plc. Included in the inventories of Payne plc are goods valued at 150,000 purchased from Glass Ltd since acquisition at cost plus 25%.

Required: (a) Calculate the value of the goodwill arising on the acquisition of Glass Ltd in accordance with IFRS 3 (revised) Business Combinations. (b) Prepare the consolidated statement of financial position for Payne plc at 31 March 20X5.

4. Herefield plc prepares its consolidated financial statements in accordance with IFRS. Herefield plc has investments in two companies, Wormford Ltd and Stringer Ltd. The draft summarised statements of financial position of the three companies at 30 June 20X6 are shown below. Herefield plc ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Wormford Ltd Stringer Ltd

1,280,000 10,950,000 12,230,000 785,000 240,000 57,600 1,082,600 13,312,600

1,800,000 1,800,000 290,000 440,000 730,000 2,530,000

5,995,000 5,995,000 90,000 394,000 300,000 784,000 6,779,000

Total assets EQUITY AND LIABILITIES Equity Issued capital - 1 ordinary shares Retained earnings Total equity Non-current liabilities Provisions Loans Current liabilities Trade and other payables Bank overdraft Taxation

9,000,000 2,734,600 11,734,600 300,000 620,000 920,000 378,000 280,000 658,000 13,312,600

2,000,000 (367,000) 1,633,000 550,000 550,000 255,000 47,000 45,000 347,000 2,530,000

4,000,000 2,396,000 6,396,000 187,000 187,000 72,000 124,000 196,000 6,779,000

Total equity and liabilities

Additional information: (1) On 1 July 20X2, Herefield plc acquired 1.7 million 1 ordinary shares in Wormford Ltd for 1.50 cash per share. The retained earnings of Wormford Ltd at that date were 0.25 million. (2) Herefield plc acquired 2.8 million 1 ordinary shares in Stringer Ltd on 31 March 20X6 for 3 cash per share. The retained earnings of Stringer Ltd at 31 March 20X6 were 2.0 million. The fair value of land held by Stringer Ltd at the date of acquisition was 2.5 million in excess of its carrying amount. (3) Wormford Ltd has been developing a new product based on revolutionary technology. No other similar products currently exist in the market. At 1 September 20X5 Wormford Ltd determined that the product development was at a stage where the criteria for capitalisation in accordance with IAS 38 Intangible Assets had been met. During the year Wormford Ltd incurred 720,000 of development costs, accrued evenly through the year. These costs 5

have been included in the income statement as operating expenses. The product is still under development at 30 June 20X6. An independent valuer has estimated the recoverable amount of the technology at 1 million at 30 June 20X6. (4) Wormford Ltd sold goods to Herefield plc for 170,000 during the year. At the year end half of these goods remained in inventory. Wormford Ltd sold the goods based on a transfer price of cost plus 25%. Wormford Ltds receivables included an amount for the goods at the year end, however, Herefield plc sent a cash payment for 170,000 to Wormford Ltd on 25 June 20X6. Wormford Ltd received the payment on 2 July 20X6. (5) Herefield plc has undertaken annual impairment reviews of goodwill. At 30 June 20X6 an impairment loss of 300,000 in respect of Wormford Ltd needs to be recognised.

Required: Prepare the consolidated statement of financial position of Herefield plc at 30 June 20X6.

5. Ullapool plc acquired 70% of the ordinary share capital of Kyle Ltd on 1 May 20X7. The consideration comprised 500,000 cash payable 1 May 20X7 and 3 million 25p ordinary shares issued on 1 May 20X7 (market value 50p). Professional advisers' fees on the acquisition amounted to 250,000. On 31 August 20X7 Ullapool plc acquired 30% of the ordinary share capital of Portree Ltd (incorporated on 1 November 20X6) for 590,000 cash. Portree Ltd should be accounted for as an associate. The draft summarised balance sheets of the three companies at 31 October 20X7 showed the following. Ullapool plc Kyle Ltd Portree Ltd ASSETS '000 '000 '000 '000 '000 '000 Non-current assets Property, plant and equipment 6,500 2,900 1,800 Investments 2,840 9,340 2,900 1,800 Current assets Inventories 900 830 420 Trade receivables 430 350 130 Cash and cash equivalents 330 120 150 1,660 1,300 700 Total assets 11,000 4,200 2,500

EQUITY AND LIABILITIES Equity Issued 1 ordinary shares Issued 25p ordinary shares Share premium Retained earnings Total equity Current liabilities Trade payables Total equity and liabilities

4,750 1,250 2,200 8,200 2,800 11,000

1,700 1,850 3,550 650 4,200

800 1,200 2,000 500 2,500

Additional information (1) The 2,840,000 investments in the statement of financial position of Ullapool plc comprise 2,250,000 in respect of Kyle Ltd and 590,000 in respect of Portree Ltd. (2) The company estimates that a further cost of the acquisition of Kyle Ltd was 50,000 for its own staff time. This has been recognised as an expense in the year ended 31 October 20X7. (3) At the date of acquisition land held by Kyle Ltd had a market value of 290,000 in excess of its carrying amount. In addition inventories included raw materials at an original cost of 150,000, which had a replacement cost of 182,000. These inventories had all been sold by the year end. (4) As at 31 October 20X7 the impairment review indicated losses of 1,000 in relation to the acquisition of Portree Ltd. (5) At the dates of acquisition the retained earnings of Kyle Ltd and Portree Ltd were 1.25 million and 1 million respectively. (6) The inventories of Ullapool plc include goods purchased from Kyle Ltd for 51,000 on 10 October 20X7. Kyle Ltd applies a mark-up of 50% on the cost of its goods. Ullapool plc had paid for 31,000 of these goods on 20 October. The final 20,000 was paid on 30 October 20X7, but Kyle Ltd did not receive and account for the 20,000 cheque until 3 November 20X7.

Required: Prepare the consolidated balance sheet of Ullapool plc as at 31 October 20X7.

6.

(a) Explain how fair values are applied in accounting for business combinations, and the implications this has for the final consolidated financial statements.

(b) Lowland plc acquired two subsidiaries as follows. 1st July 20X1 12,160,000 ordinary shares in Aviemore Ltd for 5 million when the carrying amount of the net assets of Aviemore Ltd was 4 million (represented by ordinary share capital of 3,800,000 in 25p shares and retained earnings of 200,000). 30th November 20X7 780,000 ordinary shares in Buchan Ltd for 2 million when the carrying amount of the net assets of Buchan Ltd was 1.6 million (represented by ordinary share capital of 1,200,000 in 1 shares and retained earnings of 400,000). The income statements of the companies for the year ended 31st March 20X8 were as follows. Lowland Aviemore Buchan plc Ltd Ltd '000 '000 '000 Revenue 5,000 3,000 2,910 Cost of sales (3,000) (2,300) (2,820) Gross profit 2,000 700 90 Net operating expenses (1,000) (500) (150) Finance cost (50) (210) Investment income 230 Profit/(loss) before tax 1,230 150 (270) Income tax expense (300) (50) Profit/(loss) for the year 930 100 (270) The retained earnings columns from the statements of changes in equity of the companies for the year ended 31st March 20X8 were as follows: Lowland Aviemore Buchan plc Ltd Ltd '000 '000 '000 Balance at 1st April 20X7 1,500 240 580 Interim dividends on ordinary shares (200) (50) Total profit (loss) for the year 930 100 (270) Balance at 31st March 20X8 2,230 290 310 Additional information (1) On 1st April 20X7 Buchan Ltd issued 2.1 million 10% loan stock to Lowland plc. Interest is payable twice yearly on 1st October and 1st April. Lowland plc has accounted only for the interest received on 1st October 20X7. (2) The property, plant and equipment of Buchan Ltd on 30th November 20X7 was valued at 500,000 (carrying amount 350,000) and was all acquired in April 20X7. Those assets have a total useful life of ten years. Buchan Ltd has not adjusted its accounting records to reflect fair values. (3) Lowland plc charges Aviemore Ltd an annual fee of 85,000 for management services. This has been recognised by Lowland plc in 'Investment income'. (4) Lowland plc has recognised its dividend received from Aviemore Ltd in 'Investment income'. 8

(5) In 20X2 the impairment review revealed a loss of 1,080,000 in relation to Aviemore Ltd. A further loss of 180,000 has been identified in the current year. In addition, the impairment review in relation to the acquisition of Buchan Ltd has revealed a loss of 102,000.

Required: Prepare the consolidated income statement for Lowland plc for the year ended 31st March 20X8 and the movement on retained earnings and non-controlling interest as they would appear in the consolidated statement of changes in equity for the year ended 31st March 20X8.

7.

The following financial statements have been drawn up for Gold plc and Silver Ltd. at 31st December 20X8: Income Statements for the year ended 31st December 20X8 Gold plc 000 Revenue 4,250 Cost of sales 2,300 Gross profit 1,950 Administrative expenses (750) Investment income 170 Profit before tax 1,370 Tax 275 Profit after tax 1,095 Statements of Financial Position at 31st December 20X8 Gold plc 000 Non-current assets Property, plant & equipment 3,200 Investments 1,250 4,450 Current assets Inventories 750 Receivables 500 Cash & cash equivalents 100 1,350 Total assets 5,800

Silver Ltd 000 900 150 750 (350) 400 40 360

Silver Ltd 000 980 980 500 300 60 860 1,840

Equity Ordinary share capital (1 shares) 6% Preference share capital (1 shares) Retained earnings Current liabilities Trade payables Other payables Provisions for liabilities and charges Total liabilities and equity

2,250 1,125 3,375 1,075 200 1,275 1,150 5,800

700 200 240 1,140 320 340 660 40 1,840

Additional information: 1. The cost of Golds investment in Silver is made up as follows: 000 560,000 ordinary shares 1,000 150,000 preference shares 250 1,250 2. The shares were acquired on 1st January 20X6 when the retained earnings of Silver amounted to 112,000. 3. At this date the fair values of Silvers property, plant & equipment were 100,000 greater than their book values. Silver uses an average depreciation policy of 30% reducing balance on its non-current assets. 4. A review for impairment of goodwill at 31st December 20X8 requires goodwill to be written down to 300,000. No previous write-downs have been required. 5. Gold and Silver do not trade with each other, but included in Golds revenue and Silvers administrative expenses is a management charge of 200,000. 50,000 is owing from Silver to Gold at 31st December 20X8. 6. Silver paid total dividends of 100,000 on the ordinary shares and 120,000 on the preference shares during the year ended 31st December 20X8. Gold paid an ordinary dividend of 270,000. Required Prepare Gold plcs consolidated income statement for the year ended 31st December 20X8 and a consolidated statement of financial position at that date. (You are not required to prepare a statement of changes in equity.)

Further questions from Elliott & Elliott Chapter 21 Chapter 22 Chapter 23 Question 4 Questions 4, 5, 6 Questions 1, 2, 5, 6, 7, 8

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