study question bank - Becker Professional Education

Transcription

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December 2014–June 2015 Edition
STUDY QUESTION BANK
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ACCA
Paper F7 | FINANCIAL REPORTING
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ACCA
PAPER F7
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FINANCIAL REPORTING
(INTERNATIONAL)
STUDY QUESTION BANK
For Examinations to June 2015
®
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
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This training material has been prepared and published by Becker Professional Development
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STUDY QUESTION BANK – FINANCIAL REPORTING (F7)
CONTENTS
Question
Page
Answer
Marks
1
1001
12
1
1
1
2
2
2
1002
1003
1004
1004
1005
1006
6
8
8
5
16
8
2
3
1007
1008
12
8
3
4
5
6
8
1009
1010
1012
1014
1016
20
22
17
26
18
9
1018
20
10
1020
25
11
12
1023
1023
8
13
13
13
1025
1026
12
15
14
14
15
1028
1030
1032
15
14
20
16
1033
6
Date worked
INTERNATIONAL FINANCIAL REPORTING STANDARDS
1
IASB (ACCA J98)
CONCEPTUAL FRAMEWORK
Nette (ACCA J04)
Limitations
Framework
Regulatory Framework
Four Concepts (ACCA D98)
Comparability (ACCA J04)
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2
3
4
5
6
7
ACCOUNTING FOR SUBSTANCE
8
9
Substance over form
Hughes and Custom cars
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
Objectives (ACCA Pilot Paper 97)
Mercury
Sulphur
Cayman
Oscar
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10
11
12
13
14
IAS 8 ACCOUNTING POLICIES
15
Perseus (ACCA J01)
IAS 18 REVENUE
16
Jenson
IAS 2 INVENTORY
17
18
Allrights Inc
Sampi (ACCA J98)
IAS 11 CONSTRUCTION CONTRACTS
19
20
William
Merryview
IAS 16 PROPERTY, PLANT AND EQUIPMENT
21
22
23
Adjustments
Fam
Stoat (ACCA D99)
IAS 23 BORROWING COSTS
24
Dawes (ACCA D97)
(iii)
FINANCIAL REPORTING (F7) – STUDY QUESTION BANK
Question
Page
Answer
Marks
16
1033
12
17
1035
13
18
19
1037
1039
15
20
Date worked
IAS 20 GOVERNMENT GRANTS
25
Sponger
IAS 40 INVESTMENT PROPERTY
26
Monet
IAS 38 INTANGIBLE ASSETS
Intellectual Individuals
Lamond (ACCA D00)
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27
28
IFRS 5 HELD FOR SALE ASSETS AND DISCONTINUED OPERATIONS
29
Davis
19
1040
6
20
1041
8
21
21
1042
1044
9
15
IAS 36 IMPAIRMENT OF ASSETS
30
Justin (ACCA D99)
IAS 17 LEASES
31
32
XYZ
Snow
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Rovers (ACCA J97)
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33
22
1046
9
22
23
1047
1048
13
12
24
25
26
26
27
1049
1050
1051
1052
1052
8
27
29
1053
1055
10
10
30
30
1056
1056
5
4
IAS 10 EVENTS AFTER THE REPORTING PERIOD
34
35
Earley
Accounting treatment
IAS 12 INCOME TAXES
36
37
38
39
40
Shep (I)
Shep (II)
Shep (III)
Shep (IV)
Broken dreams
FINANCIAL INSTRUMENTS
41
42
Simpkins
Iota
REGULATORY FRAMEWORK
43
44
Danny
Picant
BASIC PRINCIPLES – CONSOLIDATED STATEMENT OF FINANCIAL POSITION
45
46
(iv)
Consolidations
Haggis
30
33
1057
1061
19
12
Question
Page
Answer
Marks
34
36
37
1063
1065
1067
12
12
15
38
1070
13
39
40
41
42
1072
1073
1075
1077
12
10
10
13
43
44
45
1079
1081
1082
10
10
16
46
47
48
1084
1086
1089
20
18
10
49
50
1090
1093
20
20
51
1095
14
54
55
56
59
61
63
63
65
66
68
70
72
1098
1101
1102
1105
1107
1109
1110
1111
1114
1117
1120
1124
25
10
25
25
15
12
15
25
25
21
25
25
Date worked
INTER-COMPANY ADJUSTMENTS
47
48
49
Hatton
Hammer
Hat
FURTHER CONSOLIDATION ADJUSTMENTS
50
Hut
51
52
53
54
Honey
Humphrey
High
Happy
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
IAS 28 INVESTMENTS IN ASSOCIATES
55
56
57
Haley
Hamish
Hydrogen
ANALYSIS AND INTERPRETATION
Witton Way
Rapido
Not-for-profit
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58
59
60
IAS 7 STATEMENT OF CASH FLOWS
61
62
Standard
Fallen
IAS 33 EARNINGS PER SHARE
63
Earnings per share
FURTHER PRACTICE QUESTIONS
64
65
66
67
68
69
70
71
72
73
74
75
Angelino (ACCA D06) – Substance over form
Fresno (ACCA J94) – Accounts preparation
Wellmay (ACCA J07) – Accounts preparation
Candel (ACCA D08) – Accounts preparation
Dune (ACCA J10 adapted) – Accounts preparation
Torrent (ACCA J06) – IAS 11
Shiplake (ACCA J02) – IAS 36
Highveldt (ACCA J05) – Group accounts
Hedra (ACCA D05) – Group accounts
Picant (ACCA J10) – Group accounts
Minster (ACCA D06) – IAS 7
Mocha (ACCA D11) – IAS 7
(v)
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(vi)
Question 1 IASB
Required:
(a)
State the objectives of the International Accounting Standards Board (IASB). (4 marks)
(b)
Explain how the IASB approaches the task of producing a standard, with particular
reference to the way in which comment or feedback from interested parties is obtained.
(8 marks)
(12 marks)
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Question 2 NETTE
Nette, a public limited company, manufactures mining equipment and extracts natural gas. The
directors are uncertain about the role of the IASB’s Conceptual Framework for Financial Reporting
(the “Framework”) in corporate reporting. Their view is that accounting is based on the transactions
carried out by the company and these transactions are allocated to the company’s accounting period by
using the matching and prudence concepts. The argument put forward by the directors is that the
Framework does not take into account the business and legal constraints within which companies
operate.
Required:
Explain the importance of the “Framework” to the reporting of corporate performance and
whether it takes into account the business and legal constraints placed upon companies.
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(6 marks)
Question 3 LIMITATIONS
Financial statements identify position, performance and changes in position over a period of time. The
main statements include Statement of Financial Position, Statement of Comprehensive Income and
Statement of Cash Flows. These statements are intended to show how well a company has performed
and give an indication of the value of the business. However, many accountants feel that the financial
statements are limited in their value to the users of financial statements.
Required:
Identify and discuss the limitations of financial statements.
(8 marks)
Question 4 THE FRAMEWORK
(a)
State the main purpose of the Conceptual Framework for Financial Reporting (“The
Framework”) adopted by the International Accounting Standards Board (IASB).
(4 marks)
(b)
Explain the status of “The Framework”.
(c)
State the underlying assumption of financial statements identified by “The Framework”.
(2 marks)
(2 marks)
(8 marks)
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Question 5 REGULATORY FRAMEWORK
Required:
Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a
regulatory framework in financial reporting.
(5 marks)
Question 6 FOUR CONCEPTS
Required:
(a)
(b)
(c)
(d)
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Define the following accounting concepts and explain for each their implications for the
preparation of financial statements:
The entity concept
Going concern
Materiality
Fair presentation (true and fair view)
(4 marks)
(4 marks)
(4 marks)
(4 marks)
(16 marks)
Question 7 COMPARABILITY
Comparability is an enhancing qualitative characteristic which adds to the usefulness of financial
statements.
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Required:
(a)
Explain what is meant by the term “comparability” in financial statements, referring to
TWO types of comparison that users of financial statements may make.
(4 marks)
(b)
Explain TWO ways in which the IASB’s Conceptual Framework for Financial Reporting
and the requirements of accounting standards aid the comparability of financial
information.
(4 marks)
(8 marks)
Question 8 SUBSTANCE OVER FORM
“The accounting treatment and disclosure of the vast majority of transactions will remain the same
whether they are accounted for on the basis of ‘substance’ or ‘form’. However, some transactions will
have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be
sufficient to account for them merely by recording that form.”
Required:
Discuss the proposal that accounts should always reflect the commercial substance of
transactions.
(12 marks)
2
Question 9 HUGHES AND CUSTOM CARS
(a)
On 10 December 2012, Hughes sold inventory with a production cost of $30 million to the
Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the
goods exercisable on 10 January 2013 at a price of $37.8 million. The Wodwo Bank has a
put option (an option to resell to the seller) exercisable on 10 February 2013 at a price of
$39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2012.
(4 marks)
Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma,
by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them
from its showroom on the same site, which it owns. During the year, the showroom was
renovated and enlarged by means of an extension to the existing building. Sigma contributed
many of the interior fitments, such as display stands for the cars, free of charge and also made
a cash payment toward the total costs.
Required:
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(b)
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars.
(4 marks)
(8 marks)
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Question 10 OBJECTIVES
The objective of financial statements is to provide information about financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions.
Required:
(a)
State five potential users of company published financial statements, briefly explaining
for each one their likely information needs from those statements.
(10 marks)
(b)
Briefly discuss whether you think that the company published financial statements,
prepared in accordance with IFRS, achieve the objective stated above, giving your
reasons.
Include in your answer two ways in which you think the quality of the information disclosed
in financial statements could be improved.
(10 marks)
(20 marks)
3
Question 11 MERCURY
The trial balance of Mercury at 30 June 2013 was as follows:
Dr
$000
450
300
900
135
1,020
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7% Preferred shares of $1
Ordinary shares of 50 cents
Share premium account
Retained earnings, at 1 July 2012
Inventory, 1 July 2012
Land at cost
Buildings at cost
Buildings, accumulated depreciation, 1 July 2012
Plant at cost
Plant, accumulated depreciation, 1 July 2012
Trade payables
Trade receivables
Allowance for doubtful debts, at 1 July 2012
Purchases
Administrative expenses
Revenue
Distribution costs
Other expenses
Bank balance
Ordinary dividend paid
10% Loan notes
Cr
$000
500
250
180
70
370
900
600
25
2,030
205
3,000
240
50
110
25
_____
500
_____
5,930
–––––
5,930
–––––
You are provided with the following additional information:
(i)
Depreciation on buildings is to be provided at 5% per year on cost and allocated to
administrative expenses.
(ii)
Plant is to be depreciated at 20% per year using the reducing balance method and included in
distribution costs.
(iii)
Closing inventory is valued at $500,000.
(iv)
The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable
balances.
(v)
An accrual for distribution wages of $30,000 is required.
(vi)
Interest on the loan notes has not been paid during the year.
(vii)
During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This
has not been entered into the books. The bonus shares do not rank for dividend for the
current financial year.
(viii)
Provisions are to be made for the following:


4
the preferred dividend for the year;
an income tax charge of $55,000 for the year.
Required:
Prepare for Mercury for the year ended 30 June 2013, in accordance with IAS 1 Presentation of
Financial Statements:
(a)
(b)
(c)
a statement of profit or loss; and
a statement of changes in equity; and
a statement of financial position.
(8 marks)
(5 marks)
(9 marks)
Notes to the accounts are NOT required.
(22 marks)
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Question 12 SULPHUR
The balances listed below were extracted from the records of Sulphur Co on 30 June 2013:
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Revenue
Purchases
Returns (inwards)
Delivery vehicles (carrying amount)
Factory plant and equipment (carrying amount)
Land and buildings (carrying amount)
Factory overheads
Rent received
Investments (unlisted)
Investment income
Inventory at 1 July 2012
Trade receivables
Trade payables
Distribution costs
Cash in hand
Bank overdraft
Ordinary shares ($1 each)
Retained earnings at 1 July 2012
$
530,650
298,400
1,880
19,230
24,000
350,000
66,420
18,710
12,000
30,000
1,500
24,680
15,690
34,700
44,280
410
4,820
150,000
160,030
The following transactions and events occurred on 30 June 2013, after the above balances had been
extracted:
(1)
Sulphur received $460 from a customer.
(2)
Inventory was valued at $29,170 at the close of business.
(3)
Sulphur received an electricity bill for $1,240 relating to the factory for the three months to
30 June 2013. The bill was paid in July 2013.
(4)
Sulphur paid $690 to a supplier in full settlement of an invoice for $700.
(5)
The company’s land and buildings were valued by a chartered surveyor at $390,000 and the
new value is to be included in the statement of financial position.
(6)
Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles
Factory plant and equipment
20%
10%
(7)
Bonus shares were issued on the basis of one for every two held on 29 June 2013.
(8)
Income tax for the financial year ended 30 June 2013 was estimated at $38,100.
5
Required:
Prepare for Sulphur for the year ended 30 June 2013, in accordance with IAS 1 Presentation of
Financial Statements:
(i)
a statement of total comprehensive income using the “cost of sales” (i.e. function of
expense) method;
(7 marks)
(ii)
a statement of changes in equity; and
(3 marks)
(iii)
a statement of financial position.
(7 marks)
Notes to the financial statements are NOT required.
Question 13 CAYMAN
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(17 marks)
Cayman prepares annual financial statements to 30 September. At 30 September 2012, the company’s
list of account balances was as follows:
$000
7,400
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Revenue
Production costs
Inventory at 1 October 2011
Distribution costs
Loan interest expense
Land at valuation
Buildings – cost
– accumulated depreciation at 1 October 2011
Plant and equipment
– cost
4,140
695
540
730
120
5,250
4,000
1,065
6,400
– accumulated depreciation at 1 October 2011
Trade accounts receivable
Trade accounts payable
Bank overdraft
Issued shares (50 cent ordinary) at 30 September 2012
Share premium account at 30 September 2012
Revaluation surplus
Retained earnings
12% loan (payable 2019)
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$000
1,240
2,060
1,120
40
7,000
______
2,000
1,500
1,570
1,000
______
23,935
––––––
23,935
––––––
The following matters are relevant to the preparation of the financial statements for the year ended 30
September 2012:
(2)
Inventory at 30 September 2012 amounted to $780,000 at cost before adjusting for the
following:
(i)
Items which had cost $40,000 and which would normally sell for $60,000 were
found to be faulty. $10,000 needs to be spent on these items in order to sell them
for $45,000.
(ii)
Goods sent to a customer on a sale or return basis have been omitted from inventory
and included as sales in September 2012. The cost of these items was $8,000 and
they were included in revenue at $12,000. The goods were returned by the
customer in October 2012.
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(1)
Depreciation is to be provided on cost as follows:
Buildings:
Plant and equipment:
2% per year
20% per year
80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs
and administrative expenses.
(3)
Land is to be revalued to $5,000,000.
(4)
Accrued expenses and prepayments were:
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Accrued expenses
$000
Distribution costs
95
35
Prepayments
$000
60
30
(5)
During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2012. No dividends
were paid during the year.
(6)
Loan interest is paid annually, in arrears, on 30 September each year.
Required:
Prepare for Cayman for the year ended 30 September 2012:
(i)
(ii)
(iii)
a statement of total comprehensive income;
a statement of financial position; and
a statement of changes in equity,
(10 marks)
(10 marks)
(6 marks)
in accordance with IAS 1 Presentation of Financial Statements.
Notes to the financial statements are NOT required.
(26 marks)
7
Question 14 OSCAR
A trial balance has been extracted from the books of account of Oscar as at 31 March 2013 as follows:
$000
210
Share capital (ordinary shares of $1 fully paid)
Receivables
Bank overdraft
Income tax (overprovision in 2012)
Provision for pollution costs
Distribution costs
Listed financial asset investments
Investment income
Plant and machinery: Cost
Accumulated depreciation (at 31 March 2013)
Retained earnings (at 1 April 2012)
Purchases
Inventory (at 1 April 2012)
Trade payables
Sales revenue
Interim dividend paid
600
470
80
25
180
420
560
75
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Additional information
$000
750
220
180
960
140
260
2,010
120
———
3,630
———
———
3,630
———
Inventory at 31 March 2013 was valued at $150,000.
(2)
The following items are already included in the balances listed in the above trial balance:
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(1)
Depreciation (for the year to 31 March 2013)
Hire of plant and machinery
Auditors’ remuneration
Directors’ emoluments
Distribution
costs
$000
27
20
–
–
Administrative
expenses
$000
5
15
30
45
(3)
The income tax rate is 33%.
(4)
The income tax charge based on the profits for the year is estimated to be $74,000.
(5)
The provision for pollution costs is to be increased by $16,000.
(6)
Authorised ordinary share capital consists of 1,000,000 ordinary shares of $1 each.
(7)
There were no purchases or disposals of fixed assets during the year.
(8)
The market value of the listed financial asset investments, which are classed as “fair value
through profit or loss” as at 31 March 2013 was $580,000. There were no purchases or sales
of such investments during the year.
Required:
Insofar as the information permits, prepare the company’s statement of profit or loss for the year
to 31 March 2012 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks)
8
Question 15 PERSEUS
The list of account balances of Perseus, a limited liability company, contains the following items at 31
December 2012:
Dr
Cr
$
$
Opening inventory
3,850,000
Accounts receivable ledger balances
2,980,000
1,970
Accounts payable ledger balances
14,300
1,210,400
Prepayments
770,000
Cash at bank A
940,000
Overdraft at bank B
360,000
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The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items
(2) and (3) below.
In the course of preparing the financial statements at 31 December 2012, the need for a number of
adjustments emerged, as detailed below:
The opening inventory was found to have been overstated by $418,000 as a result of errors in
calculations of values in the inventory sheets.
(2)
Some items included in closing inventory at cost of $16,000 were found to be defective and
were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
(3)
Goods with a sales value of $88,000 were in the hands of customers at 31 December 2012 on
a sale or return basis. The goods had been treated as sold in the records and the full sales
value of $88,000 had been included in trade receivables. After the end of the reporting
period, the goods were returned in good condition. The cost of the goods was $66,000.
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(1)
(4)
Accounts receivable amounting to $92,000 are to be written off.
(5)
An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6)
The manager of the main selling outlet of Perseus is entitled, from 1 January 2012, to a
commission of 2% of the company’s profit after charging that commission. The profit
amounted to $1,101,600 before including the commission, and after adjusting for items (1) to
(5) above. The manager has already received $25,000 on account of the commission due
during the year ended 31 December 2012.
Required:
(a)
(b)
(i)
Explain how adjustment should be made for the error in the opening
inventory, according to IAS 8 “Accounting Policies, Changes in Accounting
Estimates and Errors”. (Assume that it constitutes a material error.)
(ii)
State two disclosures required by IAS 8 in the financial statements at 31
December 2012 for the adjustment in (i) above.
(6 marks)
Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2012.
(14 marks)
(20 marks)
9
Question 16 JENSON
The timing of revenue (income) recognition has long been an area of debate and inconsistency in
accounting. Industry practice in relation to revenue recognition varies widely; the following are
examples of different points in the operating cycle of businesses that revenue and profit can be
recognised:
on the acquisition of goods;
during the manufacture or production of goods;
on delivery/acceptance of goods;
when certain conditions have been satisfied after the goods have been delivered;
receipt of payment for credit sales;
on the expiry of a guarantee or warranty.
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





In the past the “critical event” approach has been used to determine the timing of revenue recognition.
The International Accounting Standards Board in its Conceptual Framework for Financial Reporting
(“the Framework”) has defined the “elements” of financial statements, and it uses these to determine
when a gain or loss occurs.
Required:
Explain what is meant by the critical event in relation to revenue recognition and
discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
(b)
For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs.
(12 marks)
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(a)
(c)
Jenson has entered into the following transactions/agreements in the year to 31 March 2013:
(i)
Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2012. Jenson has an option to repurchase the goods from Wholesaler at any time
within the next two years. The repurchase price will be $35,000 plus interest
charged at 12% per year from the date of sale to the date of repurchase. It is
expected that Jenson will repurchase the goods.
(ii)
Jenson owns the rights to a fast food franchise. On 1 April 2012 it sold the right to
open a new outlet to Mr Cody. The franchise is for five years. Jenson received an
initial fee of $50,000 for the first year and will receive $5,000 per year thereafter.
Jenson has continuing service obligations on its franchise for advertising and
product development that amount to approximately $8,000 per year per franchised
outlet. A reasonable profit margin on rendering the continuing services is deemed
to be 20% of revenues received.
(iii)
On 1 September 2012 Jenson received total subscriptions in advance of $240,000.
The subscriptions are for 24 monthly publications of a magazine produced by
Jenson. At the year end Jenson had produced and despatched six of the 24
publications. The total cost of producing the magazine is estimated at $192,000
with each publication costing a broadly similar amount.
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2013.
(8 marks)
(25 marks)
10
Question 17 ALLRIGHTS
Allrights is an old established company operating in the highly competitive business of manufacturing
and marketing radios and television sets.
A new board of directors is considering the draft accounts, prepared under the historical cost
convention, for the year ended 31 March 2013. The main executive directors involved in the policy
discussions are:
–
–
–
Stevie Striver
Charlie Chatty
Gordon Gloome
(managing)
(sales)
(production)
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You are in attendance to give advice.
A standard model radio has the following disclosed costs:
Direct labour and material
Bought-in components
Factory overhead costs
Royalty on sale payable to the owner of a patent
$
38
5
8
2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
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Salary and space costs of executive responsible for production planning
General office administration
Selling and distribution costs, including a fixed $4 per set commission
payable to salesmen
$
4,000
2,500
7,500
The advertised selling price of the model has recently been reduced to $60 because of intensive
competition.
The three directors have expressed the following views on the most appropriate method of valuing the
company’s closing inventories:
(1)
Stevie Striver
“A most prudent approach is necessary, particularly as the company has a cash flow problem
which means that the amount locked up in inventory should be kept as low as possible. I
propose a valuation of $43 per set.”
(2)
Charlie Chatty
“All the functions of the company are directed towards the production and sale of a good
finished product and therefore I think each set should be valued at the total cost involved,
including the other overhead costs.”
(3)
Gordon Gloome
“$47 per set, because that’s what the production cost would have been if we had been more
efficient and kept in line with budgets.”
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the
principles involved.
(8 marks)
11
Question 18 SAMPI
(a)
IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and of net realisable value.
Required:
Describe three methods of arriving at cost of inventory which are acceptable
under IAS 2 and explain how they are regarded as acceptable.
(5 marks)
(ii)
Explain how the cost of an inventory of finished goods held by the
manufacturer would normally be arrived at when obtaining the figure for the
financial statements.
(3 marks)
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(b)
(i)
Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first
in, first out) in valuing inventory, but it is interested to know the effect on its inventory
valuation of using weighted average cost instead of FIFO
At 28 February 2013 the company had inventory of 4,000 standard plastic tables, and has
computed its value on each side of the two bases as:
Basis
FIFO
Weighted average
Unit
cost
$
16
13
Total
value
$
64,000
52,000
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During March 2013 the movements on the inventory of tables were as follows:
Received from factory:
Date
8 March
22 March
Revenue:
12 March
18 March
24 March
28 March
Number
of units
3,800
6,000
Production
cost per
unit
$
15
18
Number of
units
5,000
2,000
3,000
2,000
On a FIFO basis the inventory at 31 March was $32,400.
Required:
Compute what the value of the inventory at 31 March 2013 would be using weighted
average cost
(5 marks)
In arriving at the total inventory values you should make calculations to two decimal
places (where necessary) and deal with each inventory movement in date order.
(13 marks)
12
Question 19 WILLIAM
William, a company which designs and builds racecourses, commenced a four year contract early in
2009. The price was initially agreed at $12,000,000.
Profit, which was reasonably foreseeable from the year ended 31 December 2009, is to be taken on a
costs basis, and revenue is to be taken on a consistent basis.
Relevant figures are as follows:
Required:
2010
$000
3,000
7,750
5,000
2011
$000
4,200
1,550
11,000
2012
$000
1,150
–
12,500
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Costs incurred in year
Anticipated future costs
Work certified and invoiced to date
2009
$000
2,750
7,750
3,000
Show how the above would be disclosed in the statement of profit or loss and statement of
financial position of William for each of the four years ended 31 December 2012.
(12 marks)
Question 20 MERRYVIEW
Merryview specialises in construction contracts. One of its contracts, with Better Homes, is to build a
complex of luxury flats. The price agreed for the contract is $40 million and its scheduled date of
completion is 31 December 2013. Details of the contract to 31 March 2012 are:
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Commencement date
Contract costs:
Architects’ and surveyors’ fees
Materials delivered to site
Direct labour costs
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete (excluding depreciation – see below)
1 July 2011
$000
500
3,100
3,500
14,800
Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 2011. At the end of the
contract it is expected to be transferred to a different contract at a value of $600,000. Depreciation is to
be based on a time apportioned basis.
Inventory of materials on site at 31 March 2012 is $300,000.
Better Homes paid a progress payment of $12,800,000 to Merryview on 31 March 2012.
At 31 March 2013 the details for the construction contract have been summarised as:
Contract costs to date (i.e. since the start of the contract)
excluding all depreciation
Estimated cost to complete (excluding depreciation)
20,400
6,600
A further progress payment of $16,200,000 was received on 31 March 2013.
Merryview accrues profit on its construction contracts using the percentage of completion basis as
measured by the percentage of the cost to date compared to the total estimated contract cost.
13
Required:
Prepare extracts of the financial statements of Merryview for the construction contract with
Better Homes for:
(i)
(ii)
the year to 31 March 2012;
the year to 31 March 2013.
(8 marks)
(7 marks)
(15 marks)
Question 21 ADJUSTMENTS
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Adjustments manufactures items for use in engineering products. You note that amongst its many
tangible non-current assets it has the following:
A lathe was purchased on 1 January 2006 for $150,000. The plant had an estimated useful
life of twelve years, residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the asset’s carrying amount is $75,000, the directors decide that the
asset’s total useful life is only 10 years.
(b)
A grinder was purchased on 1 January 2009 for $100,000. The plant had an estimated useful
life of 10 years and a residual value of Nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the asset’s carrying amount is $70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
(c)
The company purchased a fifty year lease some years ago for $1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2012, when the carrying
amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to
$1,500,000. This revised value is being incorporated into the accounts.
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(a)
Required:
As the company’s financial accountant, prepare a memorandum for the attention of the board
explaining the effects of these changes on the depreciation charge and indicating what additional
disclosures need to be made in the accounts for the year to 31 December 2012.
(15 marks)
Question 22 FAM
Fam had the following tangible non-current assets at 31 December 2011:
Land
Buildings
Plant and machinery
Fixtures and fittings
Assets under construction
14
Cost
$000
500
400
1,613
390
91
———
2,994
———
Depreciation
$000
–
80
458
140
–
——
678
——
Carrying amount
$000
500
320
1,155
250
91
———
2,316
———
In the year ended 31 December 2012 the following transactions occur:
(1)
Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2)
A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3)
Additions to plant are $154,000.
(4)
Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5)
The following assets are sold:
Plant
Fixtures
Depreciation
brought forward
$000
195
31
Proceeds
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Cost
$000
277
41
$000
86
2
(6)
Land and buildings were revalued at 1 January 2012 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of existing use value on the open market.
(7)
The useful economic life of the buildings is unchanged. The buildings were purchased 10
years before the revaluation.
(8)
Depreciation is provided on all assets in use at the year end at the following rates:
2% per year straight line
20% per year straight line
25% per year reducing balance
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Buildings
Plant
Fixtures
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published
accounts for the year ended 31 December 2012.
(14 marks)
Question 23 STOAT
The directors of Stoat, a limited liability company, are reviewing the company’s draft financial
statements for the year ended 30 June 2013.
Two matters under discussion are depreciation and non-current asset valuation – several directors are of
the opinion that the company’s depreciation methods and rates are unsatisfactory, and that the statement
of financial position values of some of the non-current assets are unrealistic.
Required:
Draft a memorandum for the directors dealing with the following matters:
(a)
The purpose of depreciation and the factors affecting the assessment of useful life
according to IAS 16 “Property, Plant and Equipment”.
(7 marks)
(b)
Three items of evidence obtainable from inside or outside the company, to check
whether the company’s depreciation rates are in fact likely to be too low.
(3 marks)
15
Answer 1 IASB
(b)
Objectives

To formulate and publish in the public interest accounting standards to be observed
in the presentation of financial statements and to promote their world-wide
acceptance and observance.

To work generally for the improvement and harmonisation of regulations,
accounting standards and procedures relating to the presentation of financial
statements.
Producing an IFRS
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(a)

A Steering Committee is set up, chaired by a Board representative, and usually
including representatives of at least three other countries.

The Steering Committee identifies and reviews all the accounting issues associated
with the topic. These will include:
the application of the IASB Conceptual Framework for Financial
Reporting; and

review of existing national and regional accounting requirements and
practice.
The Steering Committee then submits a Point Outline to the Board.
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


After receiving comments from the Board, the Steering Committee prepares and
publishes a Draft Statement of Principles. Comments are invited from all interested
parties during an exposure period, usually between four and six months.

The next stage is the preparation of a final Statement of Principles, which is
submitted to the Board by the Steering Committee. This final Statement is used as a
basis for preparing an Exposure Draft of a proposed IFRS. The final Statement of
Principles is available to the public on request, but is not formally published.

The Steering Committee prepares a draft Exposure Draft for approval by the Board.
After revision, and with the approval of at least 9 members of the board, the
Exposure Draft is published. Comments are invited from all interested parties
during an exposure period, usually six months.

The Steering Committee reviews the comments and prepares a draft IFRS for
review by the Board. After revision, and with the approval of at least 9 members of
the board, the IFRS is published.
During the process, the Board may decide to issue a Discussion Paper for comment, or to
issue more than one Exposure Draft.
1001
Answer 2 NETTE
The Conceptual Framework for Financial Reporting provides a conceptual underpinning for the
International Financial Reporting Standards (IFRS). The framework is in the process of being updated
by the IASB and as at 2012 it is a mixture of the “old” framework document plus two new chapters that
have been issued by the IASB as a replacement for sections of the old framework.
IFRS are based on the Framework and its aim is to provide a framework for the formulation of
accounting standards. If accounting issues arise which are not covered by accounting standards then
the Framework can provide a basis for the resolution of such issues. The Framework deals with several
areas:
the objective of financial statements
the underlying assumption
the qualitative characteristics of useful financial information
the elements of financial statements
recognition in financial statements
measurement in financial statements
concepts of capital and capital maintenance
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






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The Framework adopts an approach which builds corporate reporting around the definitions of assets
and liabilities and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
measurement and recognition of assets and liabilities is the starting point for the determination of the
profit of the business does not sit easily with most practising accountants who see the transactions of
the company as the basis for accounting. The Framework provides a useful basis for discussion and is
an aid to academic thought. However, it seems to ignore the many legal and business roles that
financial statements play. In many jurisdictions, the financial statements form the basis of dividend
payments, the starting point for the assessment of taxation, and often the basis for executive
remuneration. A statement of financial position, fair value system which the IASB seems to favour
would have a major impact on the above elements, and would not currently fit the practice of
accounting. Very few companies fit this practice of accounting. Very few companies take into account
the principles embodied in the Framework unless those principles themselves are embodied in an
accounting standard. Some International Financial Reporting Standards are inconsistent with the
Framework primarily because they were issued earlier than the Framework. The Framework is a useful
basis for financial reporting but a fundamental change in the current basis of financial reporting will be
required for it to have any practical application. The IASB seems intent on ensuring that this change
will take place.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to the use of
the Framework where there is no IFRS or IFRIC in issue. The standard says ‘in making the judgement,
management shall refer to, and consider the applicability of, the following sources in descending order:

the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and

the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework.’
1002
Answer 3 LIMITATIONS
The following list includes some of the limitations of financial statements:
Nowadays, financial statements prepared under a financial reporting framework (e.g. IFRS)
contain very complex and detailed information. Most users will not be able to fully
understand what the financial statements are trying to communicate. For example, accounting
for financial instruments encompasses detailed rules, which even accountants may struggle to
understand.

Decision-making processes undertaken by management require timely information on matters
that are not incorporated in financial statements. Therefore financial statements are of limited
use to management.

The values used in financial statements are mixed in nature. Some transactions and balances
are accounted for at historic cost whilst others are incorporated at fair value. Without detailed
knowledge of how these figures have been determined, their meaning can be difficult to
construe.

The financial statements are mainly historic in nature and summarise what has happened, not
what is going to happen. They cannot be used to make predictions about the future.

Many items are excluded from the financial statements. For example, many internallygenerated intangible assets (e.g. a brand name) can never be recognised in the statement of
financial position of the reporting entity. The only way in which such assets can be
recognised is if the entity is acquired, but even then they are recognised only in the
consolidated statement of financial position of the acquiring company.

Management may be very creative in how information is presented in the financial statements.
Much of the information which is required to be disclosed is subjective in nature and
management may interpret the accounting requirements to portray information in a particular
light. Enron is the “classic” example of management being creative and, in doing so, the
financial statements not showing a realistic picture.

How the financial market perceives an entity cannot be recognised in the financial statements.
The market value of a company is very different to the carrying value presented in the
financial statements because market value reflects, for example, shareholders’ expectations of
future returns.

It can be quite difficult to judge at what point revenue should be recognised. When complex
contractual agreements are made between parties it may also be difficult to specify an
appropriate amount of revenue to be included. Therefore the statement of comprehensive
income may be inadequate in reflecting the amount of profit made in a period.

Financial statements are drawn up at a specified point in time. A cut-off therefore has to be
established to be able to prepare the financial statements. The point of cut-off could be in the
middle of a very detailed or complex transaction or related transactions which again the
financial statements may not be able to reflect fully.

From the end of the reporting period to when the statements are authorised for publication is
usually a minimum of three months. A lot can happen in that three-month period, so the
statements become out of date very quickly.

Many transactions take place between related parties. Although certain disclosures should be
made regarding related party transactions it is still difficult for the financial statements to fully
reflect the impact of these transactions.
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
1003
Answer 4 FRAMEWORK
(b)
Main purpose

To assist the Board of IASCF in developing future International Financial Reporting
Standards (IFRSs) and reviewing existing ones

To promote harmonisation of regulations by providing a basis for reducing the
number of alternative accounting treatments permitted by IFRSs

To assist national standard-setting bodies in developing national standards

To assist preparers of accounts in applying IFRSs and in dealing with topics
that have yet to be covered by an IFRS.

To assist auditors in forming an opinion on whether the accounts comply with
IFRS.

To assist users of financial statements in the interpretation of information contained
in those statements.

To provide those who are interested in the work of the IASB with information about
its approach to the formulation of standards.
Status
The Framework is not an IFRS hence it does not define standards.
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
1 per point to
max 4
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(a)

Nothing in the framework overrides any specific IFRS.
In a limited number of cases where a conflict between the framework and an
IFRS arises, the IFRS prevails.
(c)
Underlying assumption
Going concern


Financial statements are normally prepared on the assumption that an enterprise is a
going concern and will continue in operation for the foreseeable future.
Therefore is assumed that the enterprise has neither intention nor need to liquidate
or curtail materially the scale of operations.
If such an intention or need exist, the financial statements may have to be
prepared on a different basis (and the basis used is disclosed).
Answer 5 REGULATORY FRAMEWORK
A regulatory framework has been defined as “a system of regulations and the means to enforce them,
usually established by a governing body to regulate a specific activity.” Without such a framework the
system would fail to function properly and ad hoc rules and regulations would emerge which
individuals and bodies would not be able to understand fully. There would be no direction or
guidelines governing the content, or rules, that should be followed and parties would devise their own
rules.
1004
1
1
1
___
max 2
___
½
½
1
1
1
___
max 2
___
8
___
A regulatory framework is needed for financial reporting to ensure that all relevant parties understand
exactly what should be reported by the entity, and how. The framework may be a set of rules and
regulations detailing exactly what and to whom an entity should report or it may be a less formal
framework providing guidance for reporting.
Company law and/or accounting standards can be issued to create Generally Accepted Accounting
Practice (GAAP) for reporting entities to follow when preparing their financial statements. There is a
need for some form of regulatory framework in financial reporting to ensure there is consistency in
accounting treatments so that comparisons can be made between financial statements (e.g. year-on-year
and between companies).
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Under IFRS the IASB has issued the Conceptual Framework for Financial Reporting. This is a
conceptual framework which is used by the IASB to assist relevant parties in the needs and
requirements of users of financial statements. It is used in conjunction with International Financial
Reporting Standards to form a set of principles with which reporting entities should comply when
preparing and presenting their financial statements. The conceptual framework is not in itself a
regulatory framework as there is no formal means of enforcing the issued standards, and as they are
principles-based they are open to interpretation.
Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities
of their members. UK GAAP is formed of company law issued by the UK government and accounting
standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial
Reporting Review Panel, whose function is to “police” the financial statements issued by UK
companies. It aims to ensure that published financial statements are prepared in conformity with the
UK regulatory framework.
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Answer 6 FOUR CONCEPTS
(a)
Entity concept
In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a
limited liability company, only transactions of that company must be included. There must be
no confusion between the transactions of the company and the transactions of its owners and
managers.
If the entity concept is not followed, the profit, financial position and cash flow may all be
distorted to the point where they become meaningless.
A limited liability company is therefore a separate entity which can sue and be sued in its own
name.
(b)
Going concern concept
The going concern is that financial statements are prepared on the basis that the entity will
continue for the foreseeable future – that there is no intention or necessity to liquidate or
curtail the scale of operations.
If the going concern concept is followed when it is not appropriate, assets may be overstated,
liabilities may continue to be shown as non-current when the collapse of the going concern
status of the entity renders them current liabilities, and the profit is likely to be overstated.
(c)
Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users. Materiality cannot always be measured in
monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit.
Above that level, for example, the transaction would need to be disclosed in the financial
statements.
1005
Materiality is not solely related to the size of a transaction; it would also be necessary to
consider the nature of the transaction and the fact that the nature would give rise to an item
being treated as material and require disclosure.
If the materiality concept is not followed, financial statements could become confused by the
inclusion of unnecessary detail of trivial matters, or could be rendered misleading by the
exclusion of reference to important matters.
(d)
Fair presentation (true and fair view)
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Fair presentation really means that all figures in financial statements have been arrived at
accurately when accuracy is possible (true) and that when judgement or estimation is needed
it has been exercised without bias (fair). Compliance with generally accepted concepts and
principles will normally result in fair presentation.
Failure to present information fairly will obviously mean that users may be misled by the
Answer 7 COMPARABILITY
(a)
Meaning and types
Comparability means that users are able to draw conclusions about the performance or
financial position of a business by relating amounts for a particular period to other relevant
amounts. Possible types of comparison are with:
figures for the same business for earlier periods;
figures for other businesses for the same period;
budgets or forecasts.
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


Tutorial note: Two types only required for full marks.
(b)
Aid to comparability
The IASB’s Framework and the requirements of accounting standards aid comparability by:
1006

requiring the disclosure of accounting policies (IAS 1 Presentation of Financial
Statements) and the effect of changes in them (IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors);

reducing or eliminating the number of possible alternative treatments for similar
items available to businesses;

requiring businesses to treat similar items in the same way in each period and from
one period to the next (unless a change is required to comply with accounting
standards or to ensure that a more appropriate presentation of events or transactions
is provided).
Answer 8 SUBSTANCE OVER FORM
Preparing accounts on a substance over form basis means that they should reflect the commercial
effect of transactions rather than their legal form.
The arguments for and against this treatment are discussed below.
Framework
The IASB’s Conceptual Framework for Financial Reporting notes that financial statements are
frequently described as showing a “true and fair view” (as in the UK), or as “presenting fairly” the
financial position (as in the US).
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Many other countries adopt similar requirements for financial statements, particularly in Europe
where the requirements of directives state that all member states’ financial statements should give a
true and fair view. This is, for example, translated as “donner une image fidele” in France. Some
countries interpret this as meaning in accordance with their own legislation, particularly in Germany,
but generally speaking, legislatures and accounting standard setters increasingly recognise an
overriding notion of truth and fairness.
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One of the fundamental qualitative characteristics required by the Framework is that of “faithful
representation”. To faithfully represent a transaction the entity must reflect the economic reality
(substance) rather than its legal form, if there is a difference. It gives the example of an entity
disposing of an asset in such a way that the documentation purports to pass legal ownership to a
third party, but where agreements exist to ensure that the entity continues to enjoy the future
economic benefits embodied in the assets. In such circumstances the reporting of a sale would not
represent faithfully the transaction entered into.
Application of the principle
IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where
certain conditions are met. In such cases the legal form of the transaction is that the lessor retains
the legal title to the assets. The economic substance of the transaction however is that the lessee is
the true “owner” of the asset as the lease transfers substantially all the risks and rewards incident to
the ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so
would distort gearing ratios.
IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show
information about the group as that of a single entity, without regard for the legal boundaries of the
separate legal entities.
IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal
form of equity, but are liabilities in substances and requires that classification of an instrument is
made on the basis of an assessment of its substance when it is first recognised.
IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form
and materiality in the selection and application of accounting policies and the preparation of
1007
Other areas where the principle applies include the factoring of receivables and the sale and
repurchase of inventories. Factored debts are “sold” to a third party in exchange for a proportion of
the carrying amount of the debt. Such agreements vary considerably in their nature and some leave
the entity with most of the risks associated with the collection of the receivables. In such
circumstances it may be appropriate to keep the receivables on the face of the statement of financial
position and recognise the cash received from the factor as a liability, rather than accounting for the
transaction as a sale of the receivable.
Consistency, comparability and subjectivity
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Another argument put forward against the use of substance over form is that it introduces yet more
subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were
accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of
accounts and hence more comparability. It may be true that the certainty of legal form would
increase, but this does not mean the comparability. In fact most accountants would say that it is the
substance over form principle which is designed to increase comparability by making transactions of
a similar nature treated in similar ways.
It may introduce another element of subjectivity, but accounts preparation inevitably does involve
many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence
duly comparable.
Accounting or extra disclosure
A further argument against the proposal is that it may not be essential to account on the basis of
substance over form, but merely to provide additional disclosure.
Sa
m
The argument here rests on whether any amount of disclosure can compensate for a transaction
which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much
addition as contradictory to the accounting treatment, then surely the result is confusing the user and
hence still misleading and not true and fair.
Conclusion
Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than
legal form. This is at least in part due to the historical separation of fiscal and financial accounting.
Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal
correctness of financial statements. With increasing globalisation of capital markets the trend, at the
moment seems to be away from legal form, and towards economic substance. However, the inherent
uncertainties in the notion of economic substance mean that there is an ever increasing volume of
accounting standards on what exactly is meant by “substance” as it is very easily abused.
Answer 9 HUGHES AND CUSTOM CARS
(a)
Hughes
The Conceptual Framework for Financial Reporting states that financial statements should
show the economic substance of transactions over their legal form.
Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes
has received $36 million now. If Hughes exercises its call option after one month, it will
repurchase the inventory at a premium of $1.8 million which represents a finance charge of
5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes
will repurchase the inventory at a premium of $3.7 million which represents a finance
charge of 5% for each of the two months.
1008
It is highly likely that one or other of the options will be exercised. Taking the transactions
as a whole, the commercial substance is that of a short-term loan secured on the inventory.
The inventory should remain in inventory at $30 million at year end. $36 million should
be shown in current liabilities. The interest payable to 31 December 2012of $1.2 million
($1.8m  21/31) should be charged to profit or loss and added to the liability in the statement
of financial position.
(b)
Custom Cars
pl
e
Unless Sigma’s cash contribution is very substantial (say 80% as opposed to 20% of the
expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns
the extension (and has the risks and rewards of ownership).
The fittings supplied free of charge by Sigma could be excluded from the statement of
financial position on the grounds that they are not owned by Custom Cars. Also their
economic benefit is primarily to Sigma in promoting Sigma’s product.
Answer 10 OBJECTIVES
(a)
Users
Information needs
Investors and their advisers

performance of management in achieving profit
growth while ensuring the continued solvency of
the company;

the risk inherent in the company’s operations.

stability and survival of the company;

ability of the company to provide remuneration,
employment opportunities and retirement benefits.

the solvency of the company;

profitability, to ensure payment of interest when
due;

asset values.
Sa
m
(1)
(2)
(3)
(b)
Employees
Lenders
(4)
Suppliers and other creditors

information as to the solvency of the company and
its ability to pay, probably over a shorter period
than lenders.
(5)
Customers

information about the continuance of the company,
especially if they have a long term involvement
with it.
Achieving objectives
Users of financial statements are interested in three main areas in their use of company
financial statements:



profitability;
solvency/liquidity;
the risk of the operation.
1009
The statement of comprehensive income provides a measure of profitability. However, the
use of historical cost accounting means that the profit is often overstated as depreciation is
often based on historical cost of the assets and inventory tends to be valued at an historic cost
which does not match itself to the current revenue figure.
The statement of financial position details of current assets and liabilities enable users to form
a reasonable assessment of a company’s solvency, because they are reasonably reliably
valued. Lack of information about the dates of payments to sundry accounts payable or
receipts from sundry accounts receivable could affect the position. Users would be very
interested in seeing the age analysis of the accounts receivable balances in order that they may
make a more informed judgement on the solvency of the business.
pl
e
The leverage ratio (percentage of total assets financed by debt) provides a reasonably reliable
assessment of the financial risk of the company’s operation.
Two ways in which the quality of information disclosed in financial statements could be
improved:


requiring regular revaluation of non-current assets;
reducing the number of alternative accounting treatments allowed by accounting
standards.
Answer 11 MERCURY
Statement of comprehensive income for the year ended 30 June 2013
$000
$000
Sa
m
(a)
$000
3,000
Revenue
Opening inventory
Purchases
Less closing inventory
450
2,030
_____
2,480
(500)
_____
Cost of sales
1,980
_____
Gross profit
1,020
Distribution costs
(240 + (20% × (1,020 – 370)) + 30)
Administrative expenses (205 + (5% × 900))
Other expenses (50+ 5 (W1))
Profit before interest and tax
Finance costs
Loan note interest (10% × 500)
Preference dividend (7% × 500)
1010
400
250
55
___
315
50
35
(85)
___
Profit before tax
Income tax
230
55
___
Profit after tax
175
___
(b)
Statement of changes in equity for the year ended 30 June 2013
Share
capital
$000
Balance at 1 July 2012
Bonus issue
Profit for the period
Ordinary dividend
(c)
250
100
180
(100)
Retained
earnings
$000
70
_____
_____
175
(25)
_____
350
–––––
80
–––––
220
–––––
Total
$000
500
175
(25)
_____
650
–––––
pl
e
Balance at 30 June 2013
Share
premium
$000
Statement of financial position as at 30 June 2013
Cost
Tangible non-current assets
Land
Buildings
Plant
$000
300
900
1,020
_____
Accumulated
depreciation
$000
2,220
_____
680
___
500
570
110
_____
Sa
m
Current assets
Inventory
Trade receivables (600 – 30)
Bank
180
500
___
Total assets
Capital and reserves
50 cent ordinary shares (250 + (2/3 × 250))
Share premium account (180 – 100)
Retained earnings
Non-current liabilities
10% Loan notes
7% Preferred shares of $1
Current liabilities
Trade payables
Income tax
Accrued expenses (50 + 30)
Dividends
Total equity and liabilities
900
55
80
35
_____
Net book
value
$000
300
720
520
_____
1,540
1,180
_____
2,720
_____
350
80
220
_____
650
500
500
1,070
_____
2,720
_____
1011
WORKING
(1)
Allowance for doubtful debts
5% trade receivables (5% × 600)
Brought forward
Expense
$000
30
(25)
__
5
___
Answer 12 SULPHUR
Statement of total comprehensive income for the year ended 30 June 2013
Profit or loss
pl
e
(i)
$
Revenue (530,650 – 1,880)
Cost of sales (W1)
528,770
(363,960)
______
164,810
13,500
______
Distribution costs (W1)
Administrative expenses (W1)
178,310
(48,126)
(18,710)
______
Sa
m
Gross profit
Other operating income (1,500 + 12,000)
Profit before tax
Income tax expense
111,474
(38,100)
______
Profit for year
73,374
Other Comprehensive income
Revaluation surplus
40,000
______
Total comprehensive income for year
(ii)
Statement of changes in equity
Share
capital
$
Balance at 1 July 2012
Comprehensive income
Bonus issue
1012
113,374
______
150,000
Revaluation
surplus
$
–
40,000
Retained
earnings
$
Total
$
310,030
113,374
–
_______
423,404
_______
75,000
_______
______
160,030
73,374
(75,000)
_______
225,000
_______
40,000
______
158,404
_______
(iii)
Statement of financial position as at 30 June 2013
$
ASSETS
Non-current assets
Land and buildings (at valuation)
Delivery vehicles (carrying amount)
($19,230 – $3,846)
Factory plant and equipment (carrying amount)
($24,000 – $2,400)
390,000
15,384
21,600
–––––––
426,984
30,000
pl
e
Investments
Current assets
Inventories
Trade receivables ($15,690 – $460)
Cash
Total assets
$
29,170
15,230
410
______
Sa
m
EQUITY AND LIABILITIES
Issued ordinary capital
Revaluation surplus
Retained earnings
Current liabilities
Trade payables ($34,700 – $700)
Accrued expenses
Bank overdraft ($4,820 + $690 – $460)
Income tax
44,810
–––––––
501,794
–––––––
225,000
40,000
158,404
–––––––
423,404
34,000
1,240
5,050
38,100
______
Total equity and liabilities
78,390
–––––––
501,794
–––––––
WORKING
(1)
Cost analysis
Cost of sales
$
Opening inventory
24,680
Purchases
298,400
Discount received
(10)
Closing inventory
(29,170)
Factory overheads (66,420 + 1,240) 67,660
Per trial balance
Depreciation (as calculated in (a))
2,400
_______
363,960
_______
Distribution
$
Administrative
$
44,280
3,846
______
18,710
______
48,126
______
18,710
______
1013
Answer 13 CAYMAN
Statement of total comprehensive income for the year ended 30 September 2012
Profit or loss
$000
7,388
(5,140)
_____
Gross profit
Distribution costs (W2)
Administrative expenses (W2)
2,248
(711)
(871)
_____
pl
e
Revenue (7,400 – 12)
Cost of sales (W1)
Profit from operations
Finance cost (12% × $1m)
Profit for the year
666
(120)
_____
546
Other comprehensive income
Revaluation deficit
(250)
_____
Total comprehensive income
WORKINGS
Cost of sales
Sa
m
(1)
296
_____
$000
Opening inventory
Production costs
Depreciation 80% × ([2% × $4m] + [20% × $6.4m])
Less: Closing inventory (780k – 5k + 8k)
(2)
5,140
–––––
Cost classification
Per list of balances
Prepayments
Accrued expenses
Depreciation
– buildings (10% × 2% × $4m)
– plant and equipment (10%  20% × $6.4m)
1014
695
4,140
1,088
(783)
_____
Distribution
$000
Admin
$000
540
(60)
95
730
(30)
35
8
128
___
8
128
___
711
–––
871
–––
Statement of financial position at 30 September 2012
$000
$000
ASSETS
Non-current assets
Property, plant and equipment (W3)
11,735
Current assets
Inventory (W1)
Trade receivables (2,060 – 12)
Prepayments (60 + 30)
2,921
______
14,656
––––––
pl
e
Total assets
783
2,048
90
–––––
EQUITY AND LIABILITIES
Issued capital
Share premium account
Revaluation surplus
Retained earnings
7,000
2,000
1,250
1,836
______
12,086
Interest bearing borrowings – 12% Loan (2019)
Sa
m
Current liabilities
Trade payables
Operating overdraft
Accrued expenses (95 + 35)
Interim dividend (14m × 2c)
1,000
1,120
40
130
280
–––––
1,570
______
14,656
––––––
Statement of changes in equity
for the year ended 30 September 2012
Share
capital
$000
Share
premium
$000
Balance at 1 October 2011
5,000 () 1,000 ()
Comprehensive income
Dividends (14m × 2c)
Issue of share capital
2,000
1,000
_____
_____
(4m × 50c and 25c)
Balance at 30 September 2012 7,000
2,000
–––––
–––––
Revaluation
surplus
$000
Retained
earnings
$000
1,500
(250)
1,570
546
(280)
_____
_____
9,070
296
(280)
3,000
______
1,250
–––––
1,836
–––––
12,086
––––––
Total
$000
1015
WORKINGS
(3)
Property, plant and equipment
$000
Land
Buildings
Plant and equipment
(4,000 – 1,065 – 80)
(6,400 – 1,240 – 1,280)
5,000
2,855
3,880
______
11,735
––––––
(a)
pl
e
Answer 14 OSCAR
Profit or loss for the year ended 31 March 2013
$000
Sales
Operating costs $(140 + 960 – 150 + 420 + 210 + 16)
Operating profit before interest
Income from investments $(75 + 20)
Profit before taxation
Income tax
(2)
(1)
(3)
Sa
m
Profit for year
2,010
(1,596)
———
414
95
———
509
(49)
———
460
———
Notes
Extract from statement of changes in equity (not required by question)
Opening retained earnings
180
Profit for year
460
Dividends
(120)
——
Closing retained earnings
520
——
1016
Statement of financial position as at 31 March 2013
$000
Assets
Non-current assets
Tangible assets
Investments
$000
530
580
——
Notes
(4)
(5)
1,110
Current assets
Inventory
Receivables
150
470
——
pl
e
620
—–—
1,730
—–—
Equity and liabilities
Share capital
Retained earnings
600
520
——
Provisions for liabilities and charges
Sa
m
Current liabilities
(8)
1,120
196
(7)
414
———
1,730
———
(6)
The following notes form part of these accounts:
Notes to the accounts for the year to 31 March 2013
(1)
Included in operating profit
Depreciation $(27 + 5)
Directors’ emoluments
(2)
32
45
Income from financial asset investments
Listed financial asset investments
Gain in value of investment
(3)
$000
$000
75
20
——
Income tax
Income tax based on the profits for the year at a rate of 33%
Over provision for tax in the previous year
$000
74
(25)
——
49
——
1017
(4)
Tangible assets – plant and machinery
$000
Cost at 1 April 2012 and 31 March 2013
750
——
Accumulated depreciation
At 31 March 2012
Charge for the year $(27 + 5)
188
32
——
220
——
At 31 March 2013
(5)
530
——
pl
e
Carrying amount at 31 March 2013
Investments
$000
The financial asset investments are classed as “fair value though profit or loss”,
their fair value at 31 March 2013 was $580,000. The gain in value of $20,000
has been credited to profit or loss.
(6)
Current liabilities
$000
Sa
m
Trade payables
Income tax
Bank overdraft
(7)
260
74
80
——
414
——
Provisions for liabilities and charges
$000
Pollution costs
At 1 April 2012
Provided in the year
180
16
——
196
——
At 31 March 2013
(8)
Called up share capital
Ordinary shares of $1 each
Authorised
$000
Issued
$000
1,000
———
600
——–
Answer 15 PERSEUS
(a)
1018
Adjustments to be made
(i)
For inventory

The opening balance of retained earnings should be adjusted in the statement of
changes in equity.

Comparative information should be restated, unless it is impracticable to do so
(b)
(ii)
IAS 8 required disclosure

The nature of the error.

The amount of the correction for the current period and for each prior period
presented.

The fact that comparative information has been restated or that it is impracticable to
do so.
Current assets
$
4,249,800
2,674,300
773,400
940,000
WORKINGS
(1)
Inventory
pl
e
Inventory (W1)
Trade receivables (W2)
Prepayments
Cash at bank
$
As originally taken
Reduction to net realisable value
Original cost
Net realisable value (10,400 – 600)
Sa
m
(i)
(ii)
(2)
Goods on sale or return at cost
(6,200)
66,000
_________
4,249,800
_________
Trade receivables
As originally stated
Accounts receivable ledger
Less:
Goods on sale or return
Less:
16,000
9,800
$
4,190,000
Debts written off
Less: Allowance for doubtful debts
5% × $2,800,000
Accounts payable ledger balances
2,980,000
88,000
_________
2,892,000
92,000
_________
2,800,000
140,000
_________
2,660,000
14,300
_________
2,674,300
_________
1019
(3)
Prepayments
$
As originally stated
Payments on account
Less: Commission due
2
/102 × $1,101,600
$
770,000
25,000
21,600
______
3,400
_______
773,400
_______
(a)
Critical event
pl
e
Answer 16 JENSON
Sa
m
Problems of revenue recognition in accounting arise from the requirement to produce
financial statements for specific periods of reporting. Consequently accounting principles and
practices have evolved which focus on when and at what value transactions should be
recognised in financial statements. Annual reporting creates artificial periods that are not
related to the natural operating cycle of an entity. A typical operating cycle (for a
manufacturing company) would comprise of acquiring goods or raw materials from which a
saleable product is manufactured, at some stage orders would be obtained for these goods and
they would then be delivered to and accepted by customers. The collection of cash for these
sales is often considered to be the end of this process, but it should be borne in mind that in
some cases further risks can exist in relation to product warranties or other after-sale
commitments. The critical event theory argues that there comes a stage in the operating cycle,
beyond which there is either no further significant risks or uncertainties or that they can be
estimated with sufficient accuracy to enable revenue to be recognised. The point at which
there remain no further risks is referred to as the critical event. For most transactions the
critical event is synonymous with full performance, but in theory, the critical event could
occur at almost any point in the operating cycle.
The traditional view of determining profit involves matching revenues earned with the related
cost of earning those revenues. This involves the use of the accruals, matching and prudence
concept, with prudence being closely related to the principle of realisation. Under this
approach the statement of financial position is effectively a statement of unexpired costs and
un-discharged liabilities.
In its Framework, the IASB advocates a different approach; it takes a “balance sheet”
approach to the process of revenue recognition. It chooses to define the elements of financial
statements, principally assets and liabilities, and uses these to determine income (gains) and
expenses (losses). Recognition of gains and losses takes place when there is an increase or
decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases
in economic benefits in the form of enhancements of assets or decreases in liabilities result in
income, and decreases in economic benefits in the form of outflows or depletions of assets or
incurrences of liabilities results in losses (expenses). Recognition is the incorporation of an
item in the financial statements. It involves the depiction of the item in words and at a
monetary amount. For a transaction to be recognised as giving rise to a new asset or liability,
or to add to an existing one, it must meet the following recognition criteria:
1020
(i)
it is probable that any future economic benefit associated with the item will flow to
the entity; and
(ii)
the item has a cost or value that can be measured with reliability.
(b)
Acquisition of goods or raw materials
For most industries this event is a routine occurrence that could not be considered as critical.
However where this is a very difficult task, perhaps due the rarity or scarcity of materials,
then it may be critical. A rare practical example of this is in the extraction of precious metals
(e.g. gold mining). Because gold is a valuable and readily marketable commodity the real
difficulty in deriving income from it is obtaining it, so this is the critical event. A logical
progression of this point would be to say that any industry whose products are normally sold
on a commodities market could consider the obtaining of the product to be the critical event.
Such industries may include, for example, growing coffee beans.
During the manufacture or production of goods
pl
e
Again for most industries this is not the critical event. Normally there would be far too many
uncertainties remaining in the operating cycle. For example the manufacturing process could
be flawed and therefore not produce saleable goods. Even if the goods are manufactured
properly, it does not necessarily mean someone will buy them. It could be argued that where
there is a firm order for the goods this would overcome some of the uncertainties, but it would
still be imprudent to recognise firm orders as sales. There are however some industries
where, due to a long production period, revenues are recognised during the production or
manufacturing period. The most common example of this is the percentage of completion
method of profit recognition for construction contracts under IAS 11 Construction Contracts.
Where companies adopt this approach to revenue (and profit) recognition it is generally
referred to as the “accretion approach”.
Delivery/acceptance of the goods
Sa
m
For the vast majority of businesses this is the point at which revenue is recognised, and it
usually coincides with the transfer of the legal title to the goods and represents the point of
full performance. Although there may be some uncertainties beyond this point (e.g. the goods
may prove to be faulty or the customer may not be able to pay for them), these can usually be
quantified and provided for with reasonable accuracy based on past experience.
When a condition has been satisfied after the goods have been delivered
The most common occurrence of this type of sale is where the customer has the right to return
goods and not incur a liability for them. In most cases the condition is the passage of time
(e.g. goods may be returned within three months of delivery), but it may also occur in relation
to some other event such as their subsequent resale to another party. Traditionally with this
type of sale, its recognition is delayed until the condition has been met, however one could
argue that the substance of these transactions should be considered. Although a customer
may have the right to return goods, if it can be demonstrated that in practice this never
actually occurs, then recognising the sale before the expiry of the return period could be
justified. Another example of this type of condition is where the terms of a sale of say an
item of equipment required the seller to install and test the equipment. If this involves
significant expense or risk then recognition of this type of sale would be deferred until
completion of the installation.
Collection of cash
For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would
only be delayed to the point of receipt of cash if its collection was perceived to be particularly
difficult or risky. Revenues (and profits) from high risk credit sale agreements may be
examples of this. Another possibility is sales made to risky overseas countries/customers,
particularly if they are in non-convertible currencies or the country has strict exchange
controls.
1021
Expiry of guarantees/warranties
This serves as a reminder that not all the risks and associated costs are resolved when cash is
received. For some products such costs can be significant (e.g. with the supply of new motor
vehicles or rectification work on construction contracts); however it is normally possible to
reliably estimate these costs and provide for them at the time of the sale. It would be
unrealistic, and may cause distortions, if revenues were not recognised until such obligations
had elapsed.
Transactions
Although this agreement may be worded as a sale, and even if the title to the goods
passes to Wholesaler, it seems clear that this is not a sale – it is a secured loan.
Therefore Jenson should not treat the income from Wholesaler as revenue, but
instead as a loan in its statement of financial position. The goods should continue to
be recognised as inventory, and accrued interest of $3,150 ($35,000 × 12% × 9/12)
should be provided for against profit or loss.
(ii)
It appears that the on-going fees after the first initial payment are insufficient to
cover Jenson’s servicing cost and provide a reasonable profit.
In these
circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be
deferred and recognised in future periods as the servicing costs are incurred. As
there is a requirement to earn a (reasonable) profit of 20% on revenues, with ongoing servicing costs of $8,000, revenues of $10,000 would need to be recognised
in the next four years. The actual fees receivable are $5,000; therefore Jenson will
have to defer $20,000 ($5,000 × four years) of the initial fee. Thus in the year to 31
March 2013 Jenson would recognise $30,000 ($50,000 – $20,000) of the initial
franchise fee.
(iii)
An accruals/matching approach to this problem would be to say that the profit on
each publication would be $2,000 (($240,000 – $192,000)/24). In the year to 31
March 2013, as six of the 24 publications have been produced and delivered, the
profit or loss would include:
$
Sales (6 × 240,000/24)
60,000
Cost of sales (6 × 192,000/24)
(48,000)
––––––
Profit
12,000
––––––
pl
e
(i)
Sa
m
(c)
Deferred income on the statement of financial position would be $180,000 ($240,000 –
$60,000).
The problem with the above approach is that the deferred income does not seem to fit the
definition of liability in the Framework and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. A liability is defined as “an obligation of an entity to transfer economic
benefits as a result of past transactions or events”. The Framework effectively says that a
statement of financial position comprises only of assets, liabilities and equity. Deferred
income does not satisfy the definition of any of the elements. The liability of Jenson is to
produce and deliver the next 18 publications. The cost of this liability is $144,000 ($192,000
× 18/24). Thus adopting the balance sheet approach to revenue recognition advocated in the
Framework would mean recognising only $144,000 as a liability on the statement of financial
position instead of $180,000 as deferred income under the accruals approach. The balance
sheet approach would mean that Jenson would recognise all of the profit on the publications
on receipt of the subscriptions. Many commentators have criticised the Framework for its
lack of prudence in reporting profit and being contrary to existing accounting practice and, in
some cases IFRS.
A similar argument to the above could be applied to the deferred franchise fees in (ii) above.
1022
Answer 17 ALLRIGHTS
Directors’ views on inventory valuation
Striver: A prudent approach is necessary, but the concept of accruals is also important. It is not
acceptable to undervalue inventories. Valuing inventories at low figures will not of itself help cash
flow although, as profit will be reduced, the outgoings for bonuses, taxation and dividends may also
be reduced.
Chatty: It is not acceptable to include selling costs or costs not related to production in the cost
calculation.
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Gloome: Budgeted cost is not acceptable.
Opinion
Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories.
“Cost” means all costs of purchase, of conversions and other costs incurred in bringing inventories to
their present location and condition. They include a systematic allocation of fixed and variable
production overheads including depreciation and maintenence of factory buildings and the cost of
factory management and administration. The allocation of these overheads must however be based
on the normal capacity of production facilities such that the value of inventories is not increased as a
result of inefficiencies.
Sa
m
In this case, Gloom indicates that there may have been some inefficiencies and these should be noted
carefully before any final decision is made.
Costs to be included are therefore as follows:
Direct labour and materials
Bought-in components
Factory overheads
Production planning ($4,000 ÷ 1,000)
$
38
5
8
4
——
55
——
“Net realisable value” means the selling price to be obtained on sale in the normal course of business
less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54).
Inventories therefore should be valued at $54.
Answer 18 SAMPI
(a)
IAS 2 treatment
(i)
Three acceptable methods
(1)
Unit cost
Inventory is priced at the actual amount paid for each individual item of inventory
held
1023
(2)
First in first out
Inventory is assumed to be composed of the items most recently purchased,
regardless of whether this is actually the case. Inventory is therefore valued
according to the price paid for the most recent purchase. If this purchase is
insufficient to cover the quantity in inventory, the price of the next most recent
purchase is taken as necessary.
(3)
Average cost
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Inventory is priced at the moving weighted average price at which each inventory
line was purchased during the accounting period, or brought forward from the
previous period.
All three of these methods are acceptable under IAS 2 because they are either the
actual cost of the inventory (method 1) or a reasonably close approximation to that
actual cost (methods 2 and 3).
(ii)
Finished goods valuation
The cost of the inventory of finished goods would normally be arrived at by taking the labour
and materials consumed in manufacturing the items plus an allocation of overheads. The
overhead allocation should be based on the normal level of production and should exclude
selling expenses and general management expenses.
(b)
Computation of value of inventory
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Value using weighted average basis
Number
of units
Weighted
average
cost
$
13.00
15.00
Opening inventory
8 March
4,000
3,800
_____
Balance
12 March
7,800
(5,000)
_____
13.97
13.97
18 March
2,800
(2,000)
_____
22 March
800
6,000
_____
13.97
18.00
6,800
(3,000)
_____
17.53
24 March
3,800
(2,000)
_____
17.53
28 March
1,800
_____
17.53
Total value
of closing
inventory
$
31,554
_____
Tutorial note: Or 31,558 without rounding differences.
1024
Answer 19 WILLIAM
(a)
Statement of profit or loss (extracts)
for the year ended 31 December
2009
2010
2011
2012
$000
$000
$000
$000
3,143
1,968
5,272
2,117
(2,750) (3,861) (3,339) (1,150)
——–
——–
——–
——–
393
(1,893)
1,933
967
——–
——–
——–
——–
Revenue(W3)
Cost of sales
Gross profit/(loss) (W1)
Statement of financial position (extracts)
as at 31 December
2009
2010
2011
$000
$000
$000
2012
$000
3,143
——–
1,968
——–
5,272
——–
2,117
——–
3,143
——–
4,250
——–
10,383
——–
12,500
——–
143
——–
Nil
——–
Nil
——–
Nil
——–
Nil
——–
750
——–
617
——–
Nil
——–
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(b)
Contract revenue recognised as revenue
in the period:
Contract costs incurred and recognised profits
( less recognised losses ) to date
Sa
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Gross amounts due from customers for
contract work (W2)
Gross amounts due to customers for
contract work (W2)
WORKINGS
(1)
Expected profit
2009
$000
Contract price
12,000
Less Costs to date (2,750) (2,750+3,000)
Est. future costs (7,750)
——–
1,500
——–
Allocate on
costs basis
393
(loss in full)
(see W3 for fraction)
Less prior periods
–
——
393
——
2010
$000
12,000
(5,750) (5,750+4,200)
(7,750)
——–
(1,500)
——–
2011
2012
$000
$000
12,000
12,500
(9,950)(9,950+1,150) (11,100)
(1,550)
–
——–
——–
500
1,400
——–
——–
(1,500)
433
(393)
——–
(1,893)
——–
1,500
——–
1,933
——–
1,400
(433)
——
967
——
1025
(2)
Disclosure workings
Contract costs incurred
Profits/losses
2009
2,750
393
–––––
3,143
2010
2011 2012
5,750
9,950 11,100
(1500)
433
1,400
––––– –––––– ––––––
4,250 10,383 12,500
(3000) (5,000) (11,000) (12,500)
––––– ––––– –––––– ––––––
*
143
(750)
(617)
nil
––––– ––––– –––––– ––––––
*Positive = a receivable; Negative = a payable.
(3)
Revenue
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Billings
Allocate on a costs basis
2009
$000
2010
$000
2011
$000
5,750
(5,750+7,750)
9,950
(9,950+1,550)
2012
$000
Costs to date
Total costs
2,750
(2,750+7,750)
% complete
× tender value
26%
× 12,000
43%
× 12,000
3,143
5,111
10,383
12,500
(3,143)
——–
1,968
——–
(5,111)
——–
5,272
——–
(10,383)
——–
2,117
——–
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Revenue to date
Less taken
in prior periods
Revenue in year
–
——–
3,143
——–
86%
× 12,000
11,100
11,100
100%
× Actual (12,500)
Answer 20 MERRYVIEW
(i)
Merryview – Statement of comprehensive income (extracts) – year to 31 March 2012
Sales revenue (40,000 × 35% (W1))
Cost of sales (W1)
$000
14,000
(9,100)
______
Profit on contract
4,900
______
Statement of financial position (extracts) as at 31 March 2012
Non-current assets
Plant and machinery (3,600 – 900 (W2))
Current assets
Amount due from customer (W3)
1026
2,700
1,500
(ii)
Merryview – Statement of comprehensive income (extracts) – year to 31 March 2013
Sales revenue (40,000 × 75% – 14,000 (W1))
Cost of sales (22,500 – 9,100 (W1))
$000
16,000
(13,400)
_______
Profit on contract
2,600
_______
Statement of financial position (extracts) as at 31 March 2013
Non-current assets
Plant and machinery (3,600 – 900 – 1,200 (W2))
Current assets
Amount due from customer (W3)
1,500
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1,000
WORKINGS (all figures $000):
(1)
Contract costs as at 31 March 2012
500
2,800
3,500
1,400
900
______
Cost at 31 March 2012
Estimated cost to complete:
Excluding depreciation
Plant depreciation (3,600 – 600 – 900)
9,100
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Architects’ and surveyors’ fees
Materials used (3,100 – 300 inventory)
Direct labour costs
Overheads (40% of 3,500)
Plant depreciation (9 months (W2))
14,800
2,100
______
Estimated total costs on completion
16,900
_______
26,000
_______
Percentage of completion at 31 March 2012 (9,100/26,000) =
Contract costs as at 31 March 2013
Summarised costs excluding depreciation
Plant depreciation (21 months at $100 per month)
Cost to date
Estimated cost to complete:
Excluding depreciation
Plant depreciation (9 months)
35%
20,400
2,100
_______
22,500
6,600
900
______
Estimated total costs on completion
7,500
_______
30,000
_______
Percentage of completion at 31 March 2013 (22,500/30,000) =
(2)
75%
The plant has a depreciable amount of $3,000 (3,600 – 600 residual value)
Its estimated life on this contract is 30 months (1 July 2011 to 31 December 2013)
Depreciation would be $100 per month i.e. $900 for the period to 31 March 2012;
$1,200 for the period to 31 March 2013; and a further $900 to completion.
1027
(3)
Amount due from customer at 31 March 2012
Contract cost incurred (9,100 + 300 materials inventory)
Recognised profit
9,400
4,900
_______
Cash received at 31 March 2012
14,300
(12,800)
_______
Amount due at 31 March 2012
1,500
_______
Amount due from customer at 31 March 2013
Contract costs incurred
Recognised profit (4,900 + 2,600)
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22,500
7,500
_______
30,000
Cash received – 31 March 2012
– 31 March 2013
(12,800)
(16,200)
_______
Amount due at 31 March 2013
Answer 21 ADJUSTMENTS
(29,000)
_______
1,000
_______
Internal memorandum
Members of the Board
S Bean, Financial Accountant
5 February 2013
Re
Adjustments to depreciation
Sa
m
To
From
Date
At the board meeting on 1 January 2012 it was decided to modify the depreciation charge on a
number of assets of the company. Set out below is the effect that these modifications will have on
the accounts for the year to 31 December 2012.
(a)
Lathe
The lathe was purchased in 2006 and was originally being written off over an estimated
useful life of 12 years. As at 1 January 2012 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
IAS 16 Property, Plant and Equipment requires that where the original estimate of useful
life is revised, adjustments should be made in current and future periods (not in prior
periods). I therefore propose that the unamortised cost of the asset should be charged to
revenue over the remaining useful life of the asset. The carrying amount of $75,000
should therefore be charged over the remaining four years of useful life, giving an annual
depreciation charge of $18,750.
The revision is not a change in accounting policy, or an error. It is merely a refinement of
an existing policy to reflect changed circumstances. It is therefore not appropriate to deal
with any excess depreciation by adjusting opening retained earnings.
1028
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