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The Institute of Chartered Accountants of Bangladesh
FINANCIAL ACCOUNTINGProfessional Stage Application Level
www.icab.org.bd
Question Bank
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ii © The Institute of Chartered Accountants in England and Wales, March 2009
Financial accounting
The Institute of Chartered Accountants of Bangladesh Professional Stage
These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales
ISBN: 978-1-84152-838-0
First edition 2009
All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means or stored in any retrieval system, or
transmitted in, any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior permission of the publisher.
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© The Institute of Chartered Accountants in England and Wales, March 2009 iii
Contents
Page
Title Marks
Time
allocationMins Question Answer
Preparation of full single entity
financial statements
1 Howells Ltd 24 36 3 119
2 Berwick Ltd 20 28 4 122
3 Angus Ltd 21 30 5 124
4 Goblins Ltd 26 39 6 127
5 Harry Ltd 25 38 7 131
6 Frodo Ltd 26 39 8 134
7 Plodder Ltd 22 31 9 137
8 Copeland Ltd 24 36 11 140
9 Pippin Ltd 18 27 13 143
10 Merry Ltd 25 38 14 145
Preparation of extracts from
financial statements
11 Montrose Ltd 18 27 17 149
12 Gandalf Ltd 23 35 18 152
13 Cagreg Ltd 22 33 19 155
14 Roberts Ltd 13 19 20 157
15 Dumfries Ltd 20 30 21 159
16 Crieff Ltd 23 32 21 162
17 ITC Solutions Ltd 16 24 22 166
18 Withington Ltd 18 27 23 167
19 Islay Ltd 11 17 24 169
20 Greenstones Ltd 17 26 25 172
21 Okehampton Ltd 17 26 26 174
22 Banchory Ltd 18 27 26 176
23 Banff Ltd 23 35 28 178
24 Skinner Ltd 19 29 29 18125 Rosetta Ltd 17 25 30 184
26 Arran Ltd 21 32 31 186
27 Elie Ltd 16 26 33 189
28 Wester Ross Ltd 25 38 34 191
29 Shadowlands Ltd 15 23 36 194
30 Scribo Ltd 7 11 37 195
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iv © The Institute of Chartered Accountants in England and Wales, March 2009
Page
Title Marks
Time
allocation
Mins Question Answer
Preparation of full consolidated
financial statements
31 Hemmingway Ltd 18 27 39 197
32 Highland Ltd 24 36 40 200
33 Ullapool Ltd 14 21 41 203
34 Law Ltd 17 26 42 206
35 Heeley Ltd 16 24 43 208
36 Harris Ltd 19 29 45 211
37 Lowland Ltd 22 33 46 214
38 Vanguard Ltd 18 27 47 217
39 Heaton Ltd 15 23 48 220
40 Jerome Ltd 17 26 49 223
41 Hardmead Ltd 23 35 51 22642 Tain Ltd 18 27 52 229
43 Glencoe Ltd 17 25 53 232
44 Herdings Ltd 23 35 54 235
45 Camden Ltd 30 45 56 238
46 Gallant Ltd 17 26 57 242
47 Slick Ltd 20 30 58 244
48 Senorita Ltd 18 27 60 247
Single entity financial statements
Objective test questions
49 Accounting and reporting concepts 61 249
50 BAS 1 Presentation of Financial Statements 66 250
51 BAS 2 Inventories 68 250
52 BAS 7 Cash Flow Statements (single company
only) 71 251
53 BAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors 76 254
54 BAS 10 Events after the Balance Sheet Date 78 254
55 BAS 16 Property, Plant and Equipment 80 254
56 BAS 17 Leases 84 256
57 BAS 18 Revenue 86 257
58 BAS 32 and BAS 39 Financial Instruments 88 258
59 BAS 36 Impairment of Assets 90 258
60 BAS 37 Provisions, Contingent Liabilities and
Contingent Assets 91 259
61 BAS 38 Intangible Assets 94 259
62 BFRS 5 Non-current Assets Held for Sale and
Discontinued Operations 97 260
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© The Institute of Chartered Accountants in England and Wales, March 2009 v
Page
Title Marks
Time
allocation
Mins Question Answer
Consolidated financial statements
Objective test questions
63 Consolidated balance sheets 101 263
64 Consolidated statements of financial
performance 107 265
65 Consolidated cash flow statements 110 266
66 Group accounts accounting standards 114 268
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vi © The Institute of Chartered Accountants in England and Wales, March 2009
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© The Institute of Chartered Accountants in England and Wales, March 2009
1
Question Bank
Your exam will consist of
Part one 5-15 short-form questions 20 marks
(worth 1-4 marks each)
Part two 4 questions 80 marks
(each worth around 20 marks)
Time available 2.5 hours
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2 © The Institute of Chartered Accountants in England and Wales, March 2009
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QUESTION BANK
© The Institute of Chartered Accountants in England and Wales, March 2009 3
Preparation of full single entity financial statements
1 Howells Ltd
The trial balance of Howells Ltd as at 31 December 20X8 is as follows.CU CU
Share capitalCU1 ordinary shares 100,000CU1 5% preference shares (irredeemable) 50,000
Retained earnings 56,015General reserve as at 31 December 20X8 20,000Intangible assets 20,500Land and buildings
Cost 450,000Accumulated depreciation 81,000
Plant and machineryCost 82,000Accumulated depreciation 18,000
Inventories at 1 January 20X8 58,045Sundry net current assets 261,349Revenue 1,600,047Purchases 907,989Debenture interest paid 6,260Royalties received 14,005Administrative salaries 126,232Salesmen's salaries and commission 24,291Factory wages 54,117Operating lease rentals 6,002
Gain on sale of property 25,040Administrative expenses 18,822Selling and distribution expenses 9,600Dividend received from Morgans Ltd 11,00010% Debentures (issued and redeemable at par) 62,60020X7 final dividend paid 12,500
2,037,707 2,037,707
You are provided with the following information in respect of 20X8.
(1) The gain on sale of the property is not expected to recur.
(2) Depreciation is to be provided on the basis of the following policies.
Buildings Straight line over 50 years
Plant and machinery Straight line over 10 years
The land originally cost CU115,000. In previous years the policy in respect of plant and machinery had
been to depreciate on a reducing balance basis. All the plant was acquired on 1 January 20X5 with the
exception of a machine acquired for CU22,000 at the start of 20X8.
(3) The intangible asset is a brand arising on the purchase of a sole trader which is held in the books at
original cost. Following an impairment review, fair value less costs to sell has been estimated at
CU10,000 and value in use at CU12,000.
(4) Howells Ltd wishes to propose an ordinary dividend of CU25,000 which will be paid on 25 March
20X9. The 20X8 preference dividends have been declared but not yet paid.
(5) Tax of CU22,500 is to be charged for the current year.
(6) During the year the directors transferred CU10,000 to the general reserve.
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(7) Inventories held at 31 December 20X8 are valued at cost of CU68,000. Within this amount there are
1,000 units of finished goods valued at CU20 each. These units are now expected to sell at a
discounted price of CU18 each and incur CU1 selling costs per unit.
Requirements
(a) Prepare the income statement, statement of changes in equity and notes thereto for the year ended
31 December 20X8 in a form suitable for publication to the extent the information is available. You
should classify expenses by function. (20 marks)
(b) Explain the concept of 'fair presentation'. (4 marks)
(24 marks)
2 Berwick Ltd
Berwick Ltd has produced the following trial balance as at 31 January 20X5.
CU CUProfit before tax 370,000Interim dividends paid 22,000
Final dividends paid 66,000Development expenditure capitalised 70,000Land and buildings
Revalued 1,500,000Plant and machinery
Cost 650,000Accumulated depreciation 160,000
Motor vehiclesCost 250,000Accumulated depreciation 90,000
Inventories and work in progress 370,000Trade receivables and trade payables 420,000 380,000Prepayments and accruals 97,000 100,000
Value added tax 50,000Bank balance in hand and overdrawn 249,000 110,000Bank loan 200,000Share capital – ordinary shares of CU1 each 850,000Retained earnings 770,000Revaluation reserve 564,000Share premium account 50,000
3,694,000 3,694,000
Additional information
(1) The company’s land and buildings were revalued on 1 February 20X4 at CU1.5 million (land element
CU300,000). The remaining useful life of the buildings at that date was estimated at 40 years. The
property originally cost CU1 million on 1 February 20X0 (land element CU200,000) and was being
depreciated over 50 years.
The company intends to transfer to retained earnings that element of the revaluation reserve realised
by depreciation but has not yet done so for the year ended 31 January 20X5.
(2) No adjustments have been made for the depreciation charges for the year ended 31 January 20X5.
Depreciation rates are as follows.
Land and buildings – see (1) above
Plant and machinery – 10% straight line
Motor vehicles – 20% reducing balance
(3) The bank loan is repayable over five years in equal annual instalments starting on 30 June 20X5.
(4) Tax on profits for the year has been estimated at CU135,000 and has yet to be provided for in the
trial balance.
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QUESTION BANK
© The Institute of Chartered Accountants in England and Wales, March 2009 5
(5) The development expenditure was incurred during the year and relates to a single product.
Development will be completed in 20X6. The company believes it has a reasonable expectation of
future benefits but has been unable to demonstrate this.
(6) One of Berwick Ltd's customers was declared insolvent on 15 February 20X5. The customer owed
Berwick Ltd CU20,000 at 31 January 20X5.
Requirement
Prepare the balance sheet of Berwick Ltd as at 31 January 20X5 and the statement of changes in equity for
the year ended 31 January 20X5 in a form suitable for publication to the extent the information is available.
You are not required to prepare any notes to the financial statements. (20 marks)
Note: Work to the nearest CU'000.
3 Angus Ltd
An extract from Angus Ltd's nominal ledger at 28 February 20X7 is as follows.
CU'000Freehold land and buildingsCost 16,000Accumulated depreciation at 29 February 20X6 2,800
Revenue 200,000Operating expenses 180,000Income tax charge for period 6,000Ordinary share capital 200,000Retained earnings at 29 February 20X6 300,000
The following additional information is available. This information is not reflected in the balances above.
(1) On 1 March 20X6 the company commissioned a valuation of its freehold land and buildings for thefirst time. This valuation showed an open market value of CU20 million (land element CU4 million)
and an existing use value of CU15 million (land CU3 million). The accounting records have not yet
been adjusted to reflect this valuation. Depreciation for the year ended 28 February 20X7 has not yet
been charged and is to be based on a 40-year useful life. Previously, annual depreciation of CU280,000
had been charged.
(2) The company announced the intended sale of its European operations on 31 January 20X7, when a
formal disposal plan was approved and adopted for full implementation by 30 June 20X7. Plant and
equipment with a carrying amount of CU3 million was classified as held for sale, its fair value at the
date of classification being estimated at CU2.85 million and the costs to sell it at CU50,000. On
10 February 20X7 the company contracted to terminate various operating leases for a payment of
CU50,000. Other costs flowing from this disposal decision were estimated at CU100,000. The
European operations contributed 10% of the revenue and 20% of the expenses shown above. Thecompany uses the cost model as its accounting policy for plant and equipment.
(3) As a result of the sale in (2) above the company will need to carry out a reorganisation of its other
activities at a cost of CU1.25 million. This reorganisation was announced to the workforce and the
public at the same time as the above.
(4) Prior to the year end the company declared an ordinary dividend of CU2 million.
(5) During April 20X6 a major project on inventory valuation had revealed that inventories in America on
28 February 20X6 had been overvalued by CU355,000 due to a compilation error. No adjustment has
been made for this error, which is considered material but not fundamental.
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6 © The Institute of Chartered Accountants in England and Wales, March 2009
Requirements
(a) Prepare, as far as the information permits, the following statements, in a form suitable for publication,
for Angus Ltd for the year ended 28 February 20X7.
(i) Income statement
(ii) Statement of changes in equity (15 marks)
(b) Explain the objectives of financial statements, giving appropriate examples. (6 marks)(21 marks)
4 Goblins Ltd
Goblins Ltd is a computer games manufacturer based in the East End of London. At 31 December 20X4 the
following balances have been extracted.
CUPatent rights 60,000Work in progress, 1 January 20X4 125,500Leasehold buildings 300,000Ordinary share capital – CU1 nominal value 500,0005% Preference share capital (redeemable 20X8) – CU1 nominal value 120,000Revenue 1,740,600Staff costs 260,400Accumulated depreciation on buildings, 1 January 20X4 60,000Inventories of finished games, 1 January 20X4 155,600Consultancy fees paid 44,000Directors' emoluments 360,000Computers used on site 50,000Accumulated depreciation on computers, 1 January 20X4 20,000Income tax 12,400Ordinary dividend paid, 30 September 20X4 50,000Bank account 515,200
Trade and other receivables 420,300Trade and other payables 80,200Raw materials 294,500Retained earnings, 1 January 20X4 102,300
The following additional information is available.
(1) Closing finished inventories are valued at cost of CU180,000 whilst work in progress has increased to
CU140,000. These valuations do not take into account the fact that, at the year end physical inventory
count, it was discovered that ten computer games consoles with a cost CU500 each had been badly
damaged. These items have a scrap value of CU50 each.
(2) The patent rights were acquired on 1 January 20X4 in respect of a program with a three-year lifespan.
If the company chose to do so it could sell these rights on without there being a significant impact on
the remainder of the business.
(3) Buildings are depreciated over 30 years. At 1 January 20X4 they were revalued to CU360,000. This
has not been reflected in the accounts. Computers are depreciated over five years. Goblins Ltd makes
a transfer between the revaluation reserve and retained earnings each period as a result of the
revaluation in accordance with best practice.
(4) A final dividend of 15p per ordinary share was declared on 15 December 20X4 and was paid shortly
after the year end. The preference dividend has not yet been paid.
(5) A necessary provision for specific receivables amounting to 5% of year-end receivables is to be
created. In addition, Goblins Ltd received notice on 15 January 20X5 that one of its customers had
gone into liquidation. This customer owed CU45,000 at the year end.
(6) There is an estimated income tax bill in relation to 20X4 of CU120,000. The income tax figure in the
trial balance (a credit balance) represents the difference between the opening provision and the incometax paid in the year.
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QUESTION BANK
© The Institute of Chartered Accountants in England and Wales, March 2009 7
Requirements
(a) Prepare the income statement for Goblins Ltd for the year ended 31 December 20X4 and the balance
sheet at that date in a form suitable for publication to the extent the information is available. You
should classify expenses according to their nature. (22 marks)
(b) Explain briefly how assets and liabilities are recorded/carried under each of the four different
measurement bases referred to in BFRS Framework for the Preparation and Presentation of Financial
Statements. (4 marks)
(26 marks)
5 Harry Ltd
Harry Ltd is a company which makes exclusive furniture to customers’ precise specifications. An extract
from Harry Ltd’s nominal ledger at 31 December 20X5 is as follows.
CURaw materials and consumables 1,570,000Salaries and wages 1,250,500Work in progress at 1 January 20X5 45,600Finished inventories at 1 January 20X5 13,400Freehold land and buildings
Cost (land CU2 million) 3,600,000Accumulated depreciation at 1 January 20X5 640,000
Plant and machineryCost 520,000Accumulated depreciation at 1 January 20X5 375,000
Office furnitureCost 32,000Accumulated depreciation at 1 January 20X5 28,500
Intangible assets 15,000Lease payment 10,000
Trade and other receivables 37,500Trade and other payables 25,400Retained earnings at 1 January 20X5 1,968,600Ordinary share capital – CU1 nominal value 500,000Preference share capital – 4% redeemable CU1 shares 120,000Share premium account 200,000Cash and cash equivalents 263,500Revenue 3,500,000
The following additional information is relevant.
(1) During the year the company used employees’ idle time to produce new furniture for the company’s
offices. The old furniture was all scrapped. Raw materials costing CU54,000 were used. The
employees’ time amounted to a cost to the company of CU20,500. No adjustment has been made for
this in the above.
(2) On 1 January 20X5 Harry Ltd entered into a lease agreement for a new machine. The fair value of this
machine was CU53,000. The lease agreement provides for six annual payments of CU10,000 on
31 December each year. Interest is to be allocated on the sum-of-the-digits basis. No other plant was
purchased or sold during the year.
(3) Freehold land and buildings were revalued for the first time on 1 January 20X5. The surveyor
performing the valuation estimated an alternative use valuation of CU5 million (including CU4 million
for the land) and an existing use valuation of CU3.5 million (including CU3 million for the land).
Buildings are to continue to be depreciated on a straight-line basis at a rate of 4% but Harry Ltd makes
no transfer between the revaluation reserve and retained earnings in respect of this.
Plant is depreciated on a reducing balance basis at a rate of 20%. Office furniture is depreciated on a
15% straight line basis.
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(4) During the year the company made a 1 for 5 bonus issue of its ordinary shares. No entries have been
made in respect of this. Transaction costs amounted to legal costs of CU5,000 and an estimate of
directors’ time amounting to a cost of CU10,000. Both of these costs have been charged against the
share premium account.
(5) The preference shares are redeemable in 20X9. Dividends of 10p per share on the ordinary shares
and at the coupon rate on the preference shares were declared on 15 December 20X5 and paid early
in 20X6. The income tax charge for the period has been estimated at CU250,000.(6) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January 20X5.
This patent is considered to have a useful life of 20 years. The annual impairment review has indicated
that the patent has a recoverable value at 31 December 20X5 of CU14,000.
(7) Closing inventories at cost amounted to work in progress of CU50,200 and finished goods of
CU15,000. The latter included a table with a cost of CU5,000. The customer who had ordered this
table has been declared bankrupt. He had paid a CU1,000 deposit (which has been credited to
revenue) and owed CU10,000 at the year end in respect of other items. It is estimated that the table
can be sold for CU4,000.
Requirement
Prepare an income statement for Harry Ltd for the year ended 31 December 20X5 and a balance sheet as
at that date in a form suitable for publication. You should classify expenses according to their nature.
(25 marks)
6 Frodo Ltd
Frodo Ltd is a company which publishes a single textbook and provides tuition courses relating to that text.
An extract from Frodo Ltd’s nominal ledger at 31 March 20X6 is as follows.
CUManufacturing costs 4,450,000Administrative salaries 410,500Selling and distribution costs 375,000
Inventories at 1 April 20X5 113,400Freehold land and buildings
Cost (land CU1,750,000) 2,550,000Accumulated depreciation at 1 April 20X5 480,000
Plant and machineryCost 620,000Accumulated depreciation at 1 April 20X5 337,000
Borrowings 200,000Trade and other receivables 37,500Trade and other payables 25,400Retained earnings at 1 April 20X5 212,500Ordinary share capital – 50p nominal value 500,000Preference share capital – 5% irredeemable CU1 shares 200,000Cash and cash equivalents 63,500Revenue 6,700,000Finance costs 35,000
The following additional information is relevant.
(1) The borrowings are repayable in ten equal instalments, commencing on 1 April 20X6.
(2) Revenue is made up of the following.
CUTuition fees 1,500,000Book sales 5,100,000Advances 100,000
6,700,000
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QUESTION BANK
© The Institute of Chartered Accountants in England and Wales, March 2009 9
The tuition fees all relate to courses held during the year except for fees of CU300,000 which relate
to a ten-week course. Five weeks of this course had already been held by the year end. The remainder
is to be held in June 20X6. The advances relate to a new publication which Frodo Ltd has
commissioned and advertised heavily but which is not yet in production.
(3) There were no movements of non-current assets during the year. However, on 28 February 20X6,
Frodo Ltd decided to sell a major item of plant for which it no longer has any use. This plant cost
CU120,000 on 1 April 20X1 and was advertised for sale on 1 March 20X6 at a price of CU5,000. In
April 20X6 a buyer was identified at the advertised price. The sale is expected to be completed in May
20X6.
Plant is depreciated on a 10% straight line basis, taking into account the month of sale or purchase.
Freehold buildings are depreciated over their useful life of 40 years. Depreciation on plant is charged
to cost of sales. Depreciation on freehold land and buildings is charged to administrative expenses.
(4) At the year end the company was in the throes of a legal action by one of its competitors which claims
that Frodo’s textbook has breached copyright. The case is not due to be decided until June 20X6 but
Frodo Ltd’s legal advisors think that the company has a 60% chance of losing the case and estimates
that this would cost Frodo Ltd CU100,000.
(5) One of Frodo Ltd’s customers who owed CU10,000 at the year end was declared bankrupt on 1 May
20X6.(6) Closing inventories at cost amounted to CU120,000. Within this valuation is an amount of CU50,000
relating to fixed overheads, being a share of total fixed overheads of CU1 million. Frodo Ltd had
expected to produce one million books during the year but, due to production difficulties only in fact
produced 800,000. Overheads have been allocated on the basis of CU1.25 per book.
(7) The following should be provided for at the year end.
Income tax of CU350,000
An ordinary dividend of 20p per share
The preference dividend
Requirements
(a) Prepare an income statement for Frodo Ltd for the year ended 31 March 20X6 and a balance sheet as
at that date in a form suitable for publication. You should classify expenses by function. (21 marks)
(b) Explain the considerations underlying the accounting requirements for not-for-profit entities, including
the possible relevance of BFRSs and IPSASs. (5 marks)
(26 marks)
7 Plodder Ltd
As at 30 November 20X0 and 30 November 20W9 Plodder Ltd had the following summarised balance
sheets.
20X0 20W9CU CU CU CU
ASSETSNon-current assets
Property, plant and equipment 2,918,000 2,401,000Intangibles 550,000 584,000Investments 406,000 –
3,874,000 2,985,000Current assets
Inventories 685,000 598,000Trade and other receivables 480,000 465,000Prepayments 96,000 126,000Cash and cash equivalents 226,000 200,000
1,487,000 1,389,000
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20X0 20W9CU CU CU CU
Total assets 5,361,000 4,374,000
EQUITY AND LIABILITIESCapital and reserves
Ordinary share capital 1,100,000 1,000,000Share premium account 342,000 200,000
Revaluation reserve 375,000 – Retained earnings 1,785,000 1,311,000
3,602,000 2,511,000Non-current liabilities
Borrowings 500,000 1,000,000Current liabilities
Trade and other payables 749,000 427,000Accruals 108,000 131,000Taxation 282,000 165,000Provisions 120,000 140,000
1,259,000 863,000Total equity and liabilities 5,361,000 4,374,000
Plodder Ltd's income statement for the year ended 30 November 20X0 was as follows.
CURevenue 5,762,000Cost of sales (4,630,000)Gross profit 1,132,000Distribution costs (236,000)Administrative expenses (127,000)Profit from operations 769,000Finance charge (68,000)Investment income 55,000
Profit before tax 756,000Income tax expense (232,000)Profit for the period 524,000
The following additional information is relevant.
(1) Included within trade and other payables at 30 November 20X0 is CU351,000 (20W9 CU106,000)
relating to purchases of property, plant and equipment.
(2) Included within accruals at 30 November 20X0 is CU25,000 (20W9 CU50,000) in respect of interest
payable.
(3) Property, plant and equipment and intangible assets can be analysed as follows.
20X0 20W9
CU CUProperty, plant and equipment
Cost or valuation 7,839,000 6,375,000Accumulated depreciation (4,921,000) (3,974,000)
2,918,000 2,401,000Intangibles
Cost 883,000 938,000Accumulated amortisation (333,000) (354,000)
550,000 584,000
(4) During the year, plant with an original cost of CU479,000 and a carrying amount at the date of
disposal of CU326,000 was sold for CU424,000 which was received in cash. Intangible assets with
accumulated amortisation at the date of disposal of CU40,000 were sold for CU12,000.
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© The Institute of Chartered Accountants in England and Wales, March 2009 11
(5) On 30 November 20X0 freehold land which originally cost CU175,000 (and had not been
depreciated) was revalued to CU550,000.
Requirement
Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Plodder Ltd for the year ended 30 November 20X0, using
the indirect method.
(22 marks)
8 Copeland Ltd
As at 31 May 20X1 and 31 May 20X2 Copeland Ltd had the following summarised balance sheets.
20X2 20X1CU CU CU CU
ASSETSNon-current assets
Property, plant and equipmentCost or valuation 5,164,000 4,347,000
Accumulated depreciation (2,198,000) (2,001,000)2,966,000 2,346,000Intangibles
Cost 9,360,000 8,645,000Accumulated amortisation (3,690,000) (2,715,000)
5,670,000 5,930,000Investments 2,145,000 127,000
10,781,000 8,403,000Current assets
Inventories 1,112,000 1,086,000Trade and other receivables 948,000 840,000Prepayments 95,000 108,000Cash and cash equivalents 489,000 322,000
2,644,000 2,356,000Total assets 13,425,000 10,759,000
EQUITY AND LIABILITIESCapital and reserves
Ordinary share capital 1,800,000 1,000,000Share premium account 1,543,000 1,421,000Revaluation reserve 1,880,000 1,256,000Retained earnings 2,739,000 746,000
7,962,000 4,423,000Non-current liabilities
15% debenture loan 3,000,000 4,500,000Current liabilities
Trade and other payables 1,417,000 896,000Interest payable 225,000 337,000Taxation 641,000 503,000Dividends payable 180,000 100,000
2,463,000 1,836,000Total equity and liabilities 13,425,000 10,759,000
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Copeland's income statement for the year ended 31 May 20X2 was as follows.
CURevenue 8,646,000Cost of sales (3,705,000)Gross profit 4,941,000Distribution costs (465,000)
Administrative expenses (571,000)Profit from operations 3,905,000Finance cost (563,000)Investment income 78,000Profit before tax 3,420,000Income tax expense (684,000)Profit for the period 2,736,000
The following additional information is relevant.
(1) On 31 May 20X2 property which was originally purchased for CU734,000 (and which had not
previously been revalued) was revalued to CU1,000,000. There were no other movements on the
revaluation reserve during the year.
(2) During the year plant and equipment with an original cost of CU1,201,000 and a carrying amount atthe date of disposal of CU496,000 was sold at a loss of CU189,000. As at 31 May 20X2 CU165,000 of
the sale proceeds had yet to be received and is included within trade and other receivables. As at
31 May 20X1 the corresponding figure in respect of disposals made during the year then ended was
CU79,000, which was received in full in June 20X1.
(3) As in the previous year, all acquisitions of property, plant and equipment made during the year were
paid for in cash at the date of acquisition. However, included within trade and other payables as at 31
May 20X2 is CU376,000 (20X1 – CUnil) relating to the acquisition of intangible assets.
(4) There were no disposals of intangible assets or investments during the year. Trade and other
receivables as at 31 May 20X2 include CU10,000 (20X1 – CU8,000) in respect of interest receivable
on investments.
(5) As at 31 May 20X1 the ordinary share capital of Copeland Ltd consisted of 1 million shares, each witha CU1 nominal value. The following day the company made a 1 for 2 bonus issue of 500,000 shares
(utilising available profits).
(6) The dividend payable at both balance sheet dates represents a 10p per share dividend on the
company’s ordinary shares. Dividends of CU243,000 were charged to retained earnings in the year
ended 31 May 20X2.
(7) Copeland Ltd has not yet prepared its statement of changes in equity for the year ended 31 May 20X2.
Requirement
Prepare a cash flow statement and a note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Copeland Ltd for the year ended 31 May 20X2, using the
indirect method. (24 marks)
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9 Pippin Ltd
The following are the draft financial statements for Pippin Ltd for the year ended 31 December 20X7.
Income statement for the year ended 31 December 20X7
CURevenue 7,350,500
Cost of sales (4,560,600)Gross profit 2,789,900Administrative expenses (1,060,800)Distribution costs (768,000)Profit from operations 961,100Finance charge (75,000)Profit before tax 886,100Income tax expense (350,000)Profit for the period 536,100
Balance sheet as at 31 December 20X7
20X7 20X6CU CU CU CU
ASSETSNon-current assets
Property, plant and equipment 7,500,400 6,950,300Intangibles 350,700 300,500
7,851,100 7,250,800Current assets
Inventories 560,500 765,100Trade and other receivables 169,000 144,500Investments 25,000 12,400Cash and cash equivalents 10,700 20,200
765,200 942,200Total assets 8,616,300 8,193,000
EQUITY AND LIABILITIESCapital and reserves
Ordinary share capital 4,000,000 3,500,000Share premium account 1,200,000 950,000Revaluation reserve 500,000 236,800Retained earnings 1,357,800 2,206,700
7,057,800 6,893,500Non-current liabilities
Preference share capital (redeemable) 500,000 400,000
Current liabilitiesTrade and other payables 148,500 139,500
Taxation 410,000 360,000Ordinary dividend payable 500,000 400,000
1,058,500 899,500Total equity and liabilities 8,616,300 8,193,000
Statement of changes in equity for the year ended 31 December 20X7 (extract)
Retained
earningsCU
Transfer from revaluation reserve 15,000Profit for the period 536,100Dividends on ordinary shares (1,400,000)Balance brought forward 2,206,700
Balance carried forward 1,357,800
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The following additional information is relevant.
(1) During the year Pippin Ltd issued both further ordinary shares and further redeemable preference
shares. The latter were issued at par.
(2) Investments categorised as current assets are held for the short-term and are readily convertible into
cash on demand.
(3) During the year Pippin Ltd sold plant and equipment with a carrying amount of CU560,500 forCU600,000. Total depreciation charges for the year were CU750,600.
(4) Trade and other payables include accrued interest of CU5,000 (20X6 CU7,000).
(5) Intangibles relate to development costs capitalised in accordance with BAS 38 Intangible Assets. Costs
amounting to CU77,500 were capitalised during the year.
Requirement
Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Pippin Ltd for the year ended 31 December 20X7, using
the indirect method. (18 marks)
10 Merry Ltd
The following are the draft financial statements for Merry Ltd for the year ended 31 March 20X5.
Income statement for the year ended 31 March 20X5CU
Revenue 5,650,500Cost of sales (3,460,600)Gross profit 2,189,900Administrative expenses (978,800)Distribution costs (256,000)Profit from operations 955,100Finance charge (89,000)Profit before tax 866,100Income tax expense (297,600)Profit for the period 568,500
Balance sheet as at 31 March 20X520X5 20X4
CU CU CU CUASSETSNon-current assets
Property, plant and equipment 4,360,400 2,950,300Investments 172,000 156,000
4,532,400 3,106,300
Current assetsInventories 460,600 365,100Trade and other receivables 269,000 244,500Cash and cash equivalents 135,000 120,200
864,600 729,800Total assets 5,397,000 3,836,100
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20X5 20X4CU CU CU CU
EQUITY AND LIABILITIESCapital and reserves
Ordinary share capital 3,000,000 1,800,000Share premium account 1,050,000 850,000Retained earnings 142,500 74,500
4,192,500 2,724,500Non-current liabilitiesFinance lease liabilities 500,000 400,000
Current liabilitiesTrade and other payables 348,500 289,600Taxation 300,000 350,000Finance lease liabilities 56,000 72,000
704,500 711,600Total equity and liabilities 5,397,000 3,836,100
The following additional information is relevant.
(1) Merry Ltd has not yet prepared its statement of changes in equity.
(2) During the year Merry Ltd made a 1 for 10 bonus issue of its ordinary shares. It subsequently issued
further shares at the market price. No dividends were payable as at 31 March 20X5 or 20X4.
(3) Cash paid to and on behalf of employees during the year amounted to CU2,650,000.
(4) An impairment review at 31 March 20X5 identified a fall in the recoverable amount of certain
investments. As a result, an impairment loss of CU12,000 was identified and written off to
administrative expenses.
(5) During the year Merry Ltd acquired plant and equipment for cash of CU2,057,000. In addition, plant
and equipment with a fair value of CU600,000 was acquired under a finance lease. All finance costs
relate to finance leases. The depreciation charge for the year, charged to cost of sales, was
CU750,600. A loss on sale of plant of CU55,000 was made during the year.
Requirements
(a) Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements using the direct method
and a note of gross operating cash flows for Merry Ltd for the year ended 31 March 20X5.
(21 marks)
(b) Prepare the note reconciling profit before tax to cash generated from operations for Merry Ltd for
the year ended 31 March 20X5 as it would appear under the indirect method. (4 marks)
(25 marks)
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11 Montrose Ltd
Montrose Ltd has various outstanding matters to resolve regarding inventories in preparing its financial
statements for the year ended 30 September 20X4.
(1) Overheads relating to finished goods and work in progress have yet to be included in the final
inventory valuation. An analysis of the company's costing records shows the following.
CUDirect labour 1,000,000Production overheads 660,000General administration overheads 300,000Distribution overheads 200,000Design and marketing overheads 150,000
The company's production activity has been as follows.
Year ended Actual units Budget units
30 September 20X3 650,000 650,00030 September 20X4 500,000 700,00030 September 20X5 (projected) – 800,000
Full capacity of the plant is 900,000 units.
A new production process will be introduced in 20X5.
(2) The supply of raw materials in the year ended 30 September 20X4 was interrupted, due to a fire at a
supplier's premises. As compensation for production delays, the supplier agreed to a one-off payment
of CU100,000, which was received on 31 August 20X4, and this was credited to production
overheads.
(3) Raw materials are imported at a purchase cost of CU5.00 per unit. Other costs arising are as follows.
CU per unit
Import duty 1.00Transport to factory 0.50Storage and handling costs 1.00
(4) Half of the work in progress is 75% complete, and the remainder is 50% complete as to labour and
overheads, all raw materials having been issued.
(5) The company manufactures to customers' requirements for all orders. The final selling price is
determined on a cost plus standard mark-up basis for the majority of orders.
(6) Inventory at 30 September 20X4 amounted to the following.
UnitsRaw materials 100,000Work in progress 50,000Finished goods 50,000
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(7) The total net realisable value (NRV) of finished goods is CU560,000. The following is an analysis of
major orders in finished goods at the year end.
Units NRV CU
Order M147 1,800 22,000Order M293 5,555 55,000Order M467 6,500 60,000
Order M364 4,630 54,000Order M191 3,240 40,000
21,725 231,000
Requirements
(a) Calculate the amount to be included in the financial statements of Montrose Ltd for the year ended
30 September 20X4 in respect of inventories, preparing all relevant extracts from the financial
statements excluding accounting policy notes. (12 marks)
(b) Explain the different concepts of capital and capital maintenance used in accrual basis accounting,
illustrating your explanation with appropriate examples. (6 marks)
(18 marks)
12 Gandalf Ltd
At 1 July 20X5 the capital and reserves section of Gandalf Ltd's balance sheet showed the following.
CUOrdinary share capital (CU1 shares) 500,000Share premium account 120,000Revaluation reserve 420,000Retained earnings 347,500
1,387,500
The accountant of Gandalf Ltd has prepared a draft income statement for the year ended 30 June 20X6
which shows a profit for the period of CU135,500. However, there are certain matters which he is unsurehow to deal with and these are set out below. He has also asked for your assistance in preparing the
statement of changes in equity for that year. It is Gandalf Ltd's policy to maintain as high a possible balance
on retained earnings, whilst following BFRS.
(1) During the year Gandalf Ltd issued a further 300,000 ordinary shares at a price of CU1.25 per share. It
also issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p redeemable
preference shares at a price of 70p per share. Transaction costs in relation to these share issues were
CU5,000, CU3,000 and CU1,000 respectively.
(2) During the year an ordinary interim dividend of CU30,000 was paid. The accountant has debited this
to finance charges. A further ordinary dividend of CU25,000 was declared on 15 June 20X6 and is
expected to be paid shortly. The accountant has made no entries in respect of this dividend or the
two preference dividends which had been declared by the year end and are due to be paid shortly.
(3) On 1 July 20X5 Gandalf Ltd revalued its freehold land and buildings which were carried in the books at
that date at a cost of CU500,000 (land CU300,000 and buildings CU200,000) and accumulated
depreciation of CU50,000. Depreciation is charged on a straight-line basis over an original estimated
useful life of 40 years. The valuation showed a fair value for the land of CU600,000 and for the
buildings of CU400,000. The estimated remaining useful life of the buildings was reassessed at the
same date and is believed to be 50 years. Depreciation for the year on freehold land and buildings has
not yet been charged.
(4) On 1 July 20X5 Gandalf Ltd decided to change its depreciation policy for plant and machinery from
20% straight-line to 25% reducing balance. Prior to charging depreciation for the year ended 30 June
20X6 the plant and machinery account showed a cost of CU357,800 and accumulated depreciation of
CU125,700. There were no movements on the plant and machinery account during the year. Theaccountant has not yet calculated the depreciation charge for the year as he is unsure how to do this.
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(5) Whilst preparing the draft financial statements the accountant discovered an error in the previous
year's financial statements. Expenditure of CU42,500 had been capitalised as an intangible asset
whereas in fact this was in contravention of BAS 38. This expenditure has been subject to an
amortisation charge of 10% in the current year.
Requirements
(a) Calculate a revised profit for the period reflecting the above matters. (4 marks)
(b) Prepare the statement of changes in equity for Gandalf Ltd for the year ended 30 June 20X6.(11 marks)
(c) Explain the difference between financial statements prepared using the accrual basis and those
prepared using the cash accounting or break-up bases, illustrating your answers with simple
calculations. (8 marks)
(23 marks)
13 Cagreg Ltd
Cagreg Ltd manufactures and sells heavy plant. The company also hires out plant for monthly periods (ormultiples thereof).
You ascertain the following details.
(1) Freehold land
Freehold land was acquired on 1 February 20X8 for CU100,000 to build a new factory. Due to
planning difficulties, building has not yet been started. The directors wish to revalue the land to its fairvalue of CU130,000 at 30 September 20X9.
(2) Buildings
On 1 October 20X8 the directors reviewed the useful life of the buildings and determined that the
remaining life was 56 years. The buildings were acquired for CU200,000 on 1 October 20X4, whentheir useful life was estimated at 40 years.
(3) Plant and machinery
Plant and machinery is accounted for under the cost model accounting policy and is depreciated at therate of 40% per annum based on carrying amount. Such plant has an estimated life of five years.
(i) Plant which cost CU20,000 on 1 October 20X6 was classified as held for sale on 1 February
20X9. The sale was agreed at CU5,600 and completed on 31 March 20X9.
(ii) New plant acquired cost CU60,000 on 1 January 20X9.
At 1 October 20X8 the cost of plant and machinery (not leased) was CU200,000, with accumulateddepreciation of CU72,000.
(4) Computer
Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost. The
computer was acquired on 1 January 20X7 for CU60,000, and by the beginning of this accounting year
CU10,500 of depreciation had been charged. In an effort to charge out computer time to departments,a record is now kept of computer time used. Management wish to depreciate the computer on a
usage basis. The manufacturer's estimate of total usage time of the computer's life is 40,000 hours. The
data processing manager estimates that some 10,000 hours have been worked prior to the current
accounting period. During the current year the record shows 4,800 hours worked. The computer willhave a scrap value of CU4,500 at the end of its useful life.
Requirements
(a) Prepare the schedule of non-current assets which will form the note to the company's published
balance sheet at 30 September 20X9. (16 marks)
(b) Briefly explain the qualitative characteristics contained in BFRS Framework for the Preparation and
Presentation of Financial Statements illustrating your answer with reference to the provisions of BAS 16
Property, Plant and Equipment. (6 marks)
(22 marks)
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14 Roberts Ltd
Roberts Ltd is a pharmaceutical company owning significant non-current tangible assets which are all initially
recorded at cost. Subsequently, land and buildings are remeasured at fair value when this differs materially
from the carrying amount. Roberts Ltd adopts the policy of transferring the revaluation surplus included in
equity to retained earnings as it is realised.
During the year ended 31 December 20X4 the following events have occurred.
(1) On 30 September 20X4 a fire occurred in the Newcastle factory. All of the inventories and the
majority of the non-current assets located at the site were fully insured and therefore the company
has suffered no loss in respect of those assets. However, one item of specialised machinery had been
transferred into the Newcastle factory on 1 June 20X4 to help the company fulfil a special order.
Unfortunately the insurance company was not notified about this and has refused any compensation.
The specialised machinery originally cost CU2.8 million on 1 February 20X0 and was being depreciated
over eight years. Following the damage caused by the fire, Roberts Ltd has identified two options.
(i) Sell the machine. A prospective purchaser has been identified and has indicated that he would pay
65% of the carrying amount at the date of the fire. However, before the sale takes place, the
purchaser expects Roberts Ltd to carry out repairs to the asset. This work can be done by
employees of Roberts Ltd and will take approximately 600 hours of skilled labour. Such labour isroutinely charged out to customers at an hourly rate of CU38.40 (including a profit margin of
20% on cost). In addition Roberts Ltd will have to pay for the machinery to be moved to its new
location. An estimate of CU21,000 has been obtained from a transport company, and there will
also be a one-off insurance cost for the journey of CU2,000.
(ii) Repair the asset, transfer it to a factory in Belgium and use it there for approximately three years.
The local accountant in Belgium has prepared detailed cash flow projections (which include the
repair costs) and estimates the value in use to be CU600,000.
(2) On 1 April 20X1 Roberts Ltd acquired a plot of land in Cardiff at a cost of CU2.6 million. During
20X1 a factory was built on the land at a cost of CU1.7 million. Additional architects' fees of
CU80,000 were also incurred. The building work was finished on 1 May 20X2, when the factory was
occupied and brought into use.
On 31 December 20X3 the land and buildings were revalued to their fair value of CU7.8 million (with
60% of the value relating to the land). At this date the directors also reassessed the total useful life of
the building, increasing it from 30 to 40 years.
On 31 December 20X4 it was discovered that toxic chemicals had been leaking from the factory into
the land. The building can no longer be used. However, a waste disposal company has offered CU1.5
million for the site (the purchaser intends to demolish the building and use the site for landfill).
Requirements
(a) Calculate the carrying amounts of the land and the buildings (separately) at 31 December 20X3 and
31 December 20X4 and the balance on the revaluation reserve at 31 December 20X4. (6 marks)
(b) Calculate the impairment charges to the income statement for the year ended 31 December 20X4 andshow how they would be disclosed. (7 marks)
Note: Work to the nearest CU'000.
(13 marks)
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15 Dumfries Ltd
Dumfries Ltd, which uses the straight-line method of depreciation, entered into leasing contracts on
1 May 20X4 for certain items of plant and machinery and office equipment. The following information is
relevant.
(1) Plant and machinery with a fair value of CU109,140 was leased under an agreement which requiredannual payments of CU31,300 payable in advance. The primary period of the lease is four years, after
which the company can continue to lease the plant and machinery at a nominal rent and is likely to do
so.
Dumfries Ltd has estimated the useful life of the plant and machinery at five years and its residual value
as CUnil. Using the interest rate implicit in the lease of 10%, the present value of the minimum lease
payments is CU109,143. The company is fully responsible for the insurance and maintenance of the
plant and machinery.
(2) Office equipment with a fair value of CU60,510 was leased under an agreement which required annual
payments of CU15,000 payable in advance. The company is committed to the lease for three years but
the lessor is responsible for the insurance and maintenance of the equipment. The lessor has
estimated the useful life of the office equipment at 12 years. Using the interest rate implicit in the leaseof 10%, the present value of the minimum lease payments is CU41,040.
Requirements
(a) Indicate how the accounting treatment of assets acquired under finance leases reflects the definition of
elements, the recognition criteria and the measurement bases set out in BFRS Framework.
(6 marks)
(b) For leases (1) and (2) above, using the actuarial method, calculate the amounts to be included in the
income statement for each year of the leases and in the balance sheet as at 30 April 20X5, preparing
the reconciliation note for property, plant and equipment and the other notes specifically required by
BAS 17 Leases. (14 marks)
(20 marks)
16 Crieff Ltd
Crieff Ltd had the following transactions in the year ended 30 June 20X8.
(1) A computer-controlled cutting machine was leased at a cost of CU40,000 per annum payable in
advance. The primary lease term is for five years from 1 July 20X7 and the machine is expected to
have a useful life of five years, with no residual value. The machine would have cost CU175,000 if
bought outright. Crieff Ltd is responsible for the maintenance and insurance of the asset. The interest
rate implicit in the agreement is 8% per annum and the present value of the minimum lease payments
is CU172,480.
(2) Items of office equipment were leased at a cost of CU7,500 per month payable in advance. The leaseterm is for two years from 1 September 20X7 and can be cancelled at any time by either party to the
lease. Any maintenance is carried out by the lessor. The office equipment would have cost CU300,000
if bought outright, and is expected to have a useful life of six years.
(3) An agreement was entered into on 1 July 20X7 for the lease of an automatic packing machine at an
annual cost of CU30,000 payable in arrears on 30 June each year. The agreement is for five years and
Crieff Ltd has the option to purchase the asset at the end of the five years at a nominal cost. The asset
is expected to have a useful life of eight years. The machine would have cost CU120,000 if bought
outright. The interest rate implicit in the agreement is 8% per annum and the present value of the
minimum lease payments is CU119,790.
(4) A long-term lease of 40 years for land and buildings with lease payments of CU60,000 per annum in
advance was entered into on 1 July 20X7. The fair value of the leasehold interests has been estimated
at CU600,000 of which CU60,000 relates to land and CU540,000 to buildings.
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The useful life of the buildings has been professionally assessed at 45 years. The interest rate implicit in
the lease is 10% and the present value of the minimum lease payments attributable to the buildings is
CU528,120.
Requirements
(a) Briefly explain the concepts underlying the accounting treatments required by BAS 17 Leases with
reference to BFRS Framework. (3 marks)
(b) Calculate the appropriate amounts to be disclosed in the financial statements for the year ended
30 June 20X8, preparing all relevant disclosure notes. You should use the actuarial method to
apportion any finance charges. You are not required to produce any notes relevant to the cash flow
statement or accounting policies notes. (20 marks)
(23 marks)
17 ITC Solutions Ltd
ITC Solutions Ltd (ITC) is a company assembling and selling computers. You are the financial accountant of
the company and you have prepared draft annual financial statements for the year ended 28 February 20X5,
for the approval of the board.The CEO has challenged the figure for revenue as it is less than the figure he was expecting, based on his
personal records. He asked you to provide an analysis of revenue from each client, which he compared to
his own figures, and he has found three apparent discrepancies. These apparent discrepancies relate to the
following transactions:
(1) ITC entered into a fixed price contract for CU120,000 with Arial Ltd to build a computer. Work had
begun on this project; the costs incurred to date were CU60,000 and it was estimated to be two-
thirds completed. However, the engineers have just discovered an incompatibility between two key
components and the work on the computer to date will need major revisions. It is difficult to estimate
the costs of completing the work because of the complexity of the new hardware. It is considered that
CU50,000 of the costs incurred to date are recoverable from Arial Ltd.
(2) ITC acts as an agent for ProMarket Ltd, a marketing company. The arrangement is that ITC offers toits clients the services of ProMarket Ltd. If an ITC client uses ProMarket Ltd then the gross fee is paid
to ITC, who then remit the fee, less 15% commission, to ProMarket Ltd. In the year ended
28 February 20X5 ITC received gross fees of CU300,000 for marketing services provided by
ProMarket Ltd.
(3) ITC is the exclusive retailer of computers manufactured by LapTop Ltd. LapTop Ltd have announced
that its latest model, which has a very high specification, is now ready for sale and will be released to
the market in mid-April 20X5. ITC will buy the computers for CU600 and sell them for CU1,000. In
the short term, demand for the computer will exceed supply and 500 customers of ITC have each paid
a deposit of CU150 in February 20X5 to secure a computer.
The CEO cannot understand your figures and he considers that the total revenue from these three projects
is: CU(1) 120,000(2) 300,000
(3) 500 CU150 = 75,000
495,000
Requirements
Prepare notes for a meeting with the CEO which:
(a) Explain what is meant by elements of financial statements and the principles of recognition of those
elements. (4 marks)
(b) Applies these principles to the above three transactions, showing how you have calculated revenue in
the financial statements for the year ended 28 February 20X5. (12 marks)
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(16 marks)
18 Withington Ltd
Withington Ltd is organised into several divisions. The following events relate to the year ended
31 December 20X0.
(1) A number of customers have initiated legal proceedings relating to the supply of electrical transformerunits during 20X0. Two thousand units were installed during the year. A number proved to be faulty.
Following adverse publicity substantially all of the customers are claiming the units are faulty.
Withington Ltd's lawyers have confirmed that they believe 25% of the claims are defendable at no cost.
The average level of damages per successful claim is estimated at CU1,000. A similar provision was in
place at 31 December 20W9 disclosed in the balance sheet at CU1 million. CU800,000 was paid out in
such claims during 20X0.
(2) A mechanical transformer unit supplied to Swithin Ltd during the year exploded, causing a fire. Swithin
Ltd has initiated legal proceedings for damages of CU10 million against Withington Ltd. A legal expert
has advised Withington Ltd that there is only a 30% chance of defending the claim successfully. The
present value of this claim has been estimated at CU9 million. The expert has investigated the cause of
the problem with a team of accident consultants. Together they have concluded that parts supplied by
George Ltd to Withington Ltd for inclusion in the transformer unit were defective and contributed tothe explosion. They have estimated that George Ltd's contributory negligence is 40% of any final
settlement. Negotiations have commenced with George Ltd and the legal expert believes that this
claim is likely to succeed.
(3) On 1 January 20X0 Withington Ltd installed a new electric machine. The electric machine cost
CU200,000 and has an expected life of 20 years. The machine is lined with a special compound. The
lining needs replacing every four years. The cost of the lining included within the machine cost is
CU40,000. The financial controller proposes to capitalise the machine at CU200,000 and depreciate
over 20 years, while building up a replacement provision over four years for the relining of the
machine.
(4) Withington Ltd has begun the extraction of metal ore in an overseas country, Didland. On 1 January
20X0 Withington Ltd erected some infrastructure on the site at a cost of CU200,000. Withington Ltd
has a five year operating licence issued by Didland government for the site. Didland has noenvironmental clean-up law enacted. Withington Ltd made public statements during the licence
negotiations that as a responsible company it would restore the environment at the end of the licence.
At the end of five years the cost of removing the infrastructure has been estimated at CU100,000. In
addition, further clean-up costs will be progressively created as the ore is extracted. On the basis of
the planned extraction, the total cost of cleaning up the extracted ore hole will be CU400,000 at the
end of five years. Extraction commenced on 1 January 20X0 and is currently at planned levels.
(5) On 1 July 20X0 Withington Ltd entered into a two-year, fixed price, long run manufacturing contract
with Franklin Ltd. Withington Ltd is manufacturing 1,000 processor units per month. The forecast
profit per unit was CU10 but, due to unforeseen cost increases and production problems, each unit is
anticipated to make a loss of CU7. The compensation payable for not fulfilling the contract is CU2
million.
(6) During the year a restructuring of the Chuckholder division began. The aim of the plan was to reducecosts and improve business efficiency. The division has not been separately reported as a business
segment, and accounts for only 2% of group revenue. The plan was implemented on 1 September
20X0, when the main attributes were announced to the workforce.
At 31 December 20X0 the anticipated further costs to be incurred are as follows.CU'000
Redundancy costs 1,000Lease termination 2,300Retraining 1,100Relocation 2,100Marketing relaunch 1,400Investment in new systems 1,000
8,900
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24 © The Institute of Chartered Accountants in England and Wales, March 2009
Requirements
(a) Prepare the provisions and contingencies note for the financial statements for the year ended
31 December 20X0, including narrative commentary. (15 marks)
(b) Calculate the annual depreciation charge for 20X0 arising from the above transactions. (3 marks)
(18 marks)
19 Islay Ltd
Islay Ltd has acquired the following businesses.
(1) Savalight, a business specialising in the production of low-cost, energy-efficient light bulbs, acquired on
1 June 20X6 for CU580,000. The identifiable assets, liabilities and contingent liabilities of the business
had a net carrying amount of CU550,000, and were valued at CU500,000 on 1 June 20X6. An
impairment loss of CU20,000 in relation to the goodwill acquired in this business combination was
recognised in the year ended 31 May 20X8.
(2) Green Goods, a business specialising in the distribution of a range of environmentally-friendly
products, acquired on 1 June 20X7 for CU1.8 million. The assets, liabilities and contingent liabilities of the business had a net carrying amount of CU1.1 million and were valued at CU1.3 million on
1 June 20X7, including goodwill of the business of CU150,000 and a patent of CU70,000 allowing Islay
Ltd sole use of unique distribution systems for ten years. An impairment loss of CU50,000 in relation
to the goodwill acquired in this business combination is to be recognised in the year ended 31 May
20X9.
(3) 70% of Smart IT Ltd, a business specialising in the distribution of computers, acquired on 1 June 20X8
for CU1.1 million cash. The identifiable assets, liabilities and contingent liabilities of the business had a
net carrying amount of CU1 million and were valued at CU1.2 million on 1 June 20X8. In addition, the
directors of Smart IT Ltd believe that they have built up goodwill within the company and that it is
worth CU200,000.
Islay Ltd revalued one class of its property, plant and equipment on 1 June 20X8, and created a revaluation
reserve of CU600,000. The revalued assets have a remaining useful life of ten years.
The group's capital and reserves (before reflecting any goodwill impairment or amortisation of intangibles
arising from the above acquisitions) in the draft consolidated financial statements as at 31 May 20X9 are as
follows.
CU'000Capital and reserves
Called up share capital (5,000,000 ordinary shares of CU1 each) 5,000Revaluation reserve (before any 20X9 transfer to retained earnings) 600Retained earnings (CU175,500 for the year ended 31 May 20X9) 700
6,300
Requirement
Calculate and disclose the amounts for intangible assets to be included in the consolidated financial
statements for Islay Ltd for the year ended 31 May 20X9, providing the following disclosures.
Balance sheet extracts
Disclosure note for intangibles (a schedule showing the movements in the year)
Statement of changes in equity attributable to the equity holders of Islay Ltd. (11 marks)
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20 Greenstones Ltd
Greenstones Ltd is a large international company operating in high-tech industries and it incurs significant
costs in researching and developing new products. During the year to 31 December 20X8 its Rajshahi
division has been working on three key projects.
Project Alpha Development of a new microchip on behalf of Codack Ltd (costs plus 40% to be
reimbursed by Codack Ltd).
Project Beta Research into the next generation of digital cameras.
Project Gamma Development of a new and improved nylon substitute for material currently used in
the casings for digital cameras.
At 1 January 20X8 the following costs had been capitalised.
Project Project Project Alpha Beta Gamma
CU CU CUSpecialised equipment – – 500,000Accumulated depreciation (useful life 60 months) – – (200,000)Research and development – 160,000 650,000
At 31 December 20X8 Project Alpha was held up awaiting supply of a suitable electronic microscope. It is
envisaged that commercial production by Codack Ltd will start in 20Y0.
Project Beta shows great promise but significant production problems still remain.
Project Gamma was completed on 1 October 20X8 with the start of production of the new product. On 1
April 20X7, when the accumulated research and development costs stood at CU470,000, the final technical
problems were overcome. On 1 October 20X8 the specialised equipment was transferred to other
projects at a carrying amount of CU140,000.
During the year the following costs were incurred.
Project
Gamma(to 1Project Project October
Alpha Beta 20X8)
CU CU CUMaterials 22,000 15,000 98,000Labour 45,000 65,000 75,000
In the three months to 31 December 20X8 sales of the new camera casings exceeded expectations and
profit margins were above forecast. It is estimated that the product will have a life of five years.
Requirements
(a) Explain the qualitative characteristics of relevance and reliability and the potential for conflict betweenthem, giving an appropriate example. (3 marks)
(b) Evaluate the treatment of development expenditure set out in BAS 38 Intangible Assets against the
characteristics of relevance and reliability. (4 marks)
(c) Prepare extracts from the financial statements for the year ended 31 December 20X8 reflecting the
above. The only note required is that relating to charges against operating profits. (10 marks)
(17 marks)
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26 © The Institute of Chartered Accountants in England and Wales, March 2009
21 Okehampton Ltd
Okehampton Ltd carries land and buildings under the revaluation model allowed by BAS 16 Property, Plant
and Equipment and plant and equipment under the cost model.
On 30 June 20X6 Okehampton Ltd decided to sell four of its non-current assets, all of which met the held
for sale criteria under BFRS 5 Non-current Assets Held for Sale and Discontinued Operations on that date.
Details of these four assets are as follows.(1) The George House land and buildings had a carrying amount of CU300,000 at 31 December 20X5 and
as it had originally cost CU200,000, a surplus of CU100,000 stood in the revaluation reserve in respect
of it at that date. Depreciation on the buildings element is charged at the rate of CU6,000 per annum;
on historical cost the annual charge would have been CU4,000. On 30 June 20X6 and 31 December
20X6 its fair value was estimated as CU320,000 and the costs to sell at CU9,000. It was sold in 20X7
for CU350,000 net of selling expenses.
(2) The Elizabeth House land and buildings had a carrying amount of CU400,000 at 31 December 20X5
and as it had originally cost CU350,000, a surplus of CU50,000 stood in the revaluation reserve in
respect of it at that date. Depreciation on the buildings element is charged at the rate of CU12,000
per annum; on historical cost the annual charge would have been CU8,000. On 30 June 20X6 and 31
December 20X6 its fair value was estimated as CU360,000 and the costs to sell at CU8,000. It was
sold in 20X7 for CU310,000 net of selling expenses.
(3) The Axford item of plant had a carrying amount of CU200,000 at 31 December 20X5. Depreciation is
charged at the rate of CU20,000 per annum. On 30 June 20X6 and 31 December 20X6 its fair value
was estimated as CU140,000 and the costs to sell at CU9,000. It was sold in 20X7 for CU120,000 net
of selling expenses.
(4) The Waterman item of plant had a carrying amount of CU600,000 at 31 December 20X5.
Depreciation is charged at the rate of CU90,000 per annum. On 30 June 20X6 and 31 December
20X6 its fair value was estimated as CU620,000 and the costs to sell at CU15,000. It was sold in 20X7
for CU635,000 net of selling expenses.
The balance on Okehampton Ltd's revaluation reserve at 31 December 20X5 was CU370,000 and there
were no movements on that reserve other than those in respect of George House and Elizabeth House.
Requirements
Prepare detailed calculations of:
(a) The carrying amounts of these four assets at 31 December 20X6 and the balance on the revaluation
reserve on that date. (9 marks)
(b) The amounts to be recognised in respect of these assets in the income statement for the year ended
31 December 20X6. (4 marks)
(c) The amounts to be recognised in respect of these assets in the income statement for the year ended
31 December 20X7 and the balance on the revaluation reserve on that date. (4 marks)
(17 marks)
22 Banchory Ltd
You have been approached by the financial controller of Banchory Ltd. She has asked you to prepare some
information in relation to the company's draft financial statements for the year ended 30 April 20X0 which
show a draft consolidated profit before tax of CU2,665,000. Details are as follows.
(1) Banchory Ltd has lodged a claim of CU500,000 against one of its suppliers for faulty materials supplied
and the consequential loss arising from their use. The supplier has contested the validity of this claim
and the legal costs arising from this dispute amounted to CU40,000 by 30 April 20X0. The company’s
solicitors have advised the directors that, although the outcome is not clear, they have a good case,
and the draft accounts show a receivable for CU500,000 due from the supplier with the corresponding
credit to cost of sales. No adjustment has been made for the legal costs which have not yet been paid.
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On 31 May 20X0 Banchory Ltd’s quality control staff obtained independent evidence which shows that
the materials were faulty. The company’s solicitors advise that it is now probable that the claim will be
settled in full.
(2) Banchory Ltd issues one-year warranties to customers on the supply of some of its products. The
company has experienced a significant rise in the incidence of claims by customers since 1 May 20W9.
Agreed claims now amount to 10% of the sales of these products. Claims tend to arise two months
after the date of sale of the products. Sales subject to warranty in the last six months of the year
amounted to CU6 million. No adjustments have been made to the financial statements in respect of
this matter.
(3) Banchory Ltd’s solicitors have advised the directors about correspondence from a past employee
claiming unfair dismissal with effect from 4 May 20X0. The claim, which has been provided for in the
draft financial statements, amounts to CU300,000 and the solicitors consider that it is highly unlikely
the company will have to pay any amount.
(4) The company’s issued share capital on 1 May 20W9 was 2,000,000 ordinary shares of CU1 each, with
an authorised share capital of 4,000,000 ordinary CU1 shares. There was also an opening balance on
the share premium account of CU450,000. Retained earnings on 1 May 20W9 were CU3,672,000.
This figure is before any retrospective adjustments posted in the year ended 30 April 20X0.
On 31 March 20X0 the company made a 1 for 10 bonus issue. This was followed by a rights issue of 1
for 4 ordinary shares at CU1.75 on 15 April 20X0, when the current market price of each share was
CU2.00.
The entire proceeds of the rights issue were immediately used to acquire the share capital of a
company whose net assets at the date of acquisition had a carrying amount of CU850,000 and a fair
value of CU950,000. The acquired business has not performed to expectations and an impairment
write-down to CUnil is required.
(5) During the year the decision was taken to close down one of the company’s two factories, completing
the process, including the sale of the factory unit, prior to the year end. The only gain or loss relating
to this closure was that on the disposal of the factory unit and this has been reflected in the draft
results. At the time this decision was taken, the fair value of the factory was estimated at CU3.05
million and the costs to sell it at CU50,000. The factory was eventually sold for CU3.1 million, net of
selling expenses. At the time of classification as held for sale the factory had a carrying amount of CU2.1 million. The factory had been included in the balance sheet at valuation and the profit on
disposal, which has been included in the draft results, is based on the historical cost carrying amount of
CU1.3 million. The opening balance on the revaluation reserve was CU800,000.
(6) A machine bought on 1 May 20W7 for CU1,800,000 was then thought to have a useful life of ten
years. However, as at 1 May 20W9 it was discovered that the total useful life of this asset is actually
only six years. The revision of the useful life has been dealt with as a change in accounting policy. This
asset is being depreciated on a straight-line basis with an estimated residual value of CUnil.
(7) On 30 October 20W9 Banchory Ltd revalued a freehold building, which had a remaining life of 50
years. The revaluation surplus of CU500,000 has not been recognised in the financial statements but
the depreciation charge for the period, which has been included in the draft profit, has been based on
the revalued amount.Requirements
(a) Prepare the provisions and contingencies notes for the financial statements for the year ended
30 April 20X0. (4 marks)
(b) Calculate a revised consolidated profit before tax figure for the year ended 30 April 20X0. (6 marks)
(c) Prepare the consolidated statement of changes in equity for the year ended 30 April 20X0. (8 marks)
(18 marks)
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28 © The Institute of Chartered Accountants in England and Wales, March 2009
23 Banff Ltd
Banff Ltd sells computer hardware, with or without support services, and also develops unique software.The following matters are outstanding in the preparation of the published financial statements for the yearended 30 April 20X1.
(1) The company has drawn up a detailed formal plan for the closure of its distribution division, which has
operated as a separate cost centre, intending to sub-contract this work in the future. This plan hasbeen approved by the board of directors and announced to employees by the year end. The planidentified the following costs.
CURedundancy costs 250,000Costs of early termination of existing contracts 100,000Anticipated future operating losses – 1 May 20X1 to date of closure in June 20X1 190,000
The company expects to realise a profit of CU90,000 on disposal of the non-current assets in thedivision to be closed. These assets are accounted for under the cost model accounting policy.
(2) The company has been constructing a specialised item of plant and machinery for its own use. Theitem had been completed by the year end, and the construction director has summarised the costswhich his department was charged.
CUMaterials 100,000Labour costs
Factory staff 100,000Supervision staff (one additional supervisor employed for this project) 15,000
Professional fees – sub-contracted designers 22,000Installation costs 13,000Administration costs recharged by other departments – payroll, personnel,
purchasing (no additional staff required) 11,000
Labour costs include CU20,000 relating to delays in the delivery of components. These arose throughBanff Ltd mis-scheduling deliveries.
The plant is expected to have a useful life of ten years with no residual value. Major overhauls willneed to be carried out every four years at a cost of CU80,000. The company intends to provideCU20,000 annually to meet this cost.
(3) Banff Ltd entered into a six-year finance lease for plant and machinery on 1 May 20X0, paying adeposit of CU100,000 to be followed by five equal annual instalments of CU150,000 on 1 May in eachsubsequent year. The purchase price of the asset if bought outright would be CU780,000. Thecompany uses the sum-of-the-digits method to allocate finance charges. Apart from recording thepayment of the deposit on 1 May 20X0, no other accounting entry has been made for this financelease.
(4) The hardware division made a sale of a computer on 1 May 20X0. The proceeds of CU4 million werereceived on 1 July 20X0 and recognised as revenue. The fee included the supply of hardware and afour year maintenance contract covering maintenance support. The costs of providing that support on
similar contracts have been CU500,000 per annum, and the mark-up on those maintenance contractswas 50% on cost.
(5) The software division entered into a CU3 million contract on 1 May 20W9 to develop a uniqueproduct for a customer. At 30 April 20X0 the contract was estimated at 25% complete. However, asthe costs to complete could not be estimated reliably, only the costs incurred of CU200,000 wererecognised as revenue. During the year to 30 April 20X1 a further CU2 million of costs have beenincurred and included within inventory. The contract is now thought to be 75% complete, somethingconfirmed by an independent expert assessor who has also estimated the costs to complete asCU400,000 and has confirmed the feasibility of the product. No invoice has yet been rendered to thecustomer.
(6) On 1 May 20W9 Banff Ltd acquired an item of plant for CU1 million. The useful life was estimated aseight years. The carrying amount in the financial statements at 30 April 20X1 is CU750,000 under the
cost model accounting policy. On 1 February 20X1 the plant was considered to be surplus torequirements and the management concluded that the carrying amount would be principally recovered
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© The Institute of Chartered Accountants in England and Wales, March 2009 29
through sale. A professional agent estimated its fair value as CU900,000 and it was advertised for saleon 1 February 20X1 at that price. The agent charges a 3% commission. While the plant is available forimmediate sale, Banff Ltd has continued to use it for training and incidental production purposes. Theother activities undertaken on the machine have been transferred to other items of plant. A thirdparty has made an offer at the asking price and it is expected that the sale will be completed during20X1.
Requirements
(a) Prepare relevant extracts from the income statement for Banff Ltd for the year ended 30 April 20X1
and the balance sheet as at that date. You are not required to prepare any disclosure notes.
(21 marks)
(b) Calculate the values for the six-year lease which would have appeared in the income statement and
balance sheet if the lease had been classified as an operating lease. (2 marks)
(23 marks)
24 Skinner Ltd
You have been asked to help the directors of Skinner Ltd complete the financial statements for the year
ended 30 June 20X3. You have been asked to provide draft information to the board of directors based onthe following information provided by the assistant accountant of Skinner Ltd.
(1) Property, plant and equipment as at 30 June 20X2 was as follows.
Cost Depreciation Carrying amount
CU CU CUFreehold land and buildings 1,620,000 148,800 1,471,200Plant and machinery 1,278,000 539,600 738,400
2,898,000 688,400 2,209,600
The freehold land and buildings relate to the factory site, of which the land cost CU1 million. On 1 July20X2 the site was revalued to CU2.36 million, of which CU1.6 million relates to the land.
The annual review of the expected lives of the property, plant and equipment has revealed that amachine purchased for CU150,000 on 1 July 20X0 now has a remaining useful life of only five years.
Plant and machinery costing CU430,000 was purchased on 1 January 20X3. There were no disposals.
Depreciation is provided on cost on a straight-line basis. The rates used are 2% per annum forbuildings and 10% per annum for plant and machinery.
(2) On 1 July 20X2 the company leased a grinding machine under an eight year contract. Lease paymentsare CU65,000 per annum payable in arrears, commencing on 30 June 20X3. The only entry made inthe accounts has been to recognise this year’s lease payment as an expense in the income statement aspart of administrative expenses.
The lease agreement shows that the rate of interest implicit in the lease is approximately 5%, and thelessee is responsible for the maintenance of the machine. The present