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acca financial reporting (ACCA F7)

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Association of Chartered Certified Accountants

Listed booksActive Experiences for Active Children Fundamentals of financial accounting ACCA F7 Financial Reporting ACCA, the Association of Chartered Certified Accountants

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Fundamentals Level – Skills Module

Time allowed Reading and planning: 15 minutes Writing: 3 hours

ALL FIVE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.

This question paper must not be removed from the examination hall.

Paper F7 (INT)

Financial Reporting

(International)

Tuesday 11 December 2007

The Association of Chartered Certified Accountants

ALL FIVE questions are compulsory and MUST be attempted

1 On 1 October 2006 Plateau acquired the following non-current investments:

3 million equity shares in Savannah by an exchange of one share in Plateau for every two shares in Savannah plus $1 per acquired Savannah share in cash. The market price of each Plateau share at the date of acquisition was $6.
30% of the equity shares of Axle at a cost of $7·50 per share in cash. Only the cash consideration of the above investments has been recorded by Plateau. The summarised draft balance sheets of the three companies at 30 September 2007 are: Plateau Savannah Axle $’000 $’000 $’ Assets Non-current assets Property, plant and equipment 18,400 10,400 18, Investments in Savannah and Axle 12,000 nil nil Available-for-sale investments 6,500 nil nil ––––––– ––––––– ––––––– 36,900 10,400 18, Current assets Inventory 6,900 6,200 3, Trade receivables 3,200 1,500 2, ––––––– ––––––– ––––––– Total assets 47,000 18,100 24, ––––––– ––––––– ––––––– Equity and liabilities Equity shares of $1 each 10,000 4,000 4, Retained earnings – at 30 September 2006 16,000 6,500 11,
- for year ended 30 September 2007 8,000 2,400 5, ––––––– ––––––– ––––––– 34,000 12,900 20, Non-current liabilities 7% Loan notes 5,000 1,000 1, Current liabilities 8,000 4,200 3, ––––––– ––––––– ––––––– Total equity and liabilities 47,000 18,100 24, ––––––– ––––––– ––––––– The following information is relevant: (i) At the date of acquisition the fair values of Savannah’s assets were equal to their carrying amounts with the exception of Savannah’s land which had a fair value of $500,000 belowits carrying amount; it was written down by this amount shortly after acquisition and has not changed in value since then. (ii) On 1 October 2006, Plateau sold an item of plant to Savannah at its agreed fair value of $2·5 million. Its carrying amount prior to the sale was $2 million. The estimated remaining life of the plant at the date of sale was five years (straight-line depreciation). (iii) During the year ended 30 September 2007 Savannah sold goods to Plateau for $2·7 million. Savannah had marked up these goods by 50% on cost. Plateau had a third of the goods still in its inventory at 30 September
1. There were no intra-group payables/receivables at 30 September 2007. (iv) Impairment tests on 30 September 2007 concluded that the value of the investment in Axle was not impaired, but consolidated goodwill was impaired by $900,000. (v) The available-for-sale investments are included in Plateau’s balance sheet (above) at their fair value on 1 October 2006, but they have a fair value of $9 million at 30 September 2007 (vi) No dividends were paid during the year by any of the companies.

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2 The following trial balance relates to Llama, a listed company, at 30 September 2007:

$’000 $’ Land and buildings – at valuation 1 October 2006 (note (i)) 130, Plant – at cost (note (i)) 128, Accumulated depreciation of plant at 1 October 2006 32, Investments – at fair value through profit and loss (note (i)) 26, Investment income 2, Cost of sales (note (i)) 89, Distribution costs 11, Administrative expenses 12, Loan interest paid 800 Inventory at 30 September 2007 37, Income tax (note (ii)) 400 Trade receivables 35, Revenue 180, Equity shares of 50 cents each fully paid 60, Retained earnings at 1 October 2006 25, 2% loan note 2009 (note (iii)) 80, Trade payables 34, Revaluation reserve (arising from land and buildings) 14, Deferred tax 11, Suspense account (note (iv)) 24, Bank 6, –––––––– –––––––– 471,000 471, –––––––– –––––––– The following notes are relevant: (i) Llama has a policy of revaluing its land and buildings at each year end. The valuation in the trial balance includes a land element of $30 million. The estimated remaining life of the buildings at that date (1 October 2006) was 20 years. On 30 September 2007, a professional valuer valued the buildings at $92 million with no change in the value of the land. Depreciation of buildings is charged 60% to cost of sales and 20% each to distribution costs and administrative expenses. During the year Llama manufactured an item of plant that it is using as part of its own operating capacity. The details of its cost, which is included in cost of sales in the trial balance, are: $’ Materials cost 6, Direct labour cost 4, Machine time cost 8, Directly attributable overheads 6, The manufacture of the plant was completed on 31 March 2007 and the plant was brought into immediate use, but its cost has not yet been capitalised. All plant is depreciated at 12 1 / 2 % per annum (time apportioned where relevant) using the reducing balance method and charged to cost of sales. No non-current assets were sold during the year. The fair value of the investments held at fair value through profit and loss at 30 September 2007 was $27·1 million. (ii) The balance of income tax in the trial balance represents the under/over provision of the previous year’s estimate. The estimated income tax liability for the year ended 30 September 2007 is $18·7 million. At 30 September 2007 there were $40 million of taxable temporary differences. The income tax rate is 25%. Note: you may assume that the movement in deferred tax should be taken to the income statement. (iii) The 2% loan note was issued on 1 April 2007 under terms that provide for a large premium on redemption in 2009. The finance department has calculated that the effect of this is that the loan note has an effective interest rate of 6% per annum.

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(iv) The suspense account contains the corresponding credit entry for the proceeds of a rights issue of shares made on 1 July 2007. The terms of the issue were one share for every four held at 80 cents per share. Llama’s share price immediately before the issue was $1. The issue was fully subscribed.

Required:

Prepare for Llama:

(a) An income statement for the year ended 30 September 2007. (9 marks)

(b) A balance sheet as at 30 September 2007. (13 marks)

(c) A calculation of the earnings per share for the year ended 30 September 2007. (3 marks)

Note: a statement of changes in equity is not required.

(25 marks)

5[P.T.

You have also been provided with the following further information.

On 1 October 2006 Harbin purchased the whole of the net assets of Fatima (previously a privately owned entity) for $100 million. The contribution of the purchase to Harbin’s results for the year ended 30 September 2007 was:

$’ Revenue 70, Cost of sales (40,000) ––––––– Gross profit 30, Operating expenses (8,000) ––––––– Profit before tax 22, –––––––

There were no disposals of non-current assets during the year.

The following ratios have been calculated for Harbin for the year ended 30 September 2006:

Return on year-end capital employed 7·1% (profit before interest and tax over total assets less current liabilities) Net asset (equal to capital employed) turnover 1· Net profit (before tax) margin 4·4% Current ratio 2· Closing inventory holding period (in days) 37 Trade receivables’ collection period (in days) 16 Trade payables’ payment period (based on cost of sales) (in days) 32 Gearing (debt over debt plus equity) nil

Required:

(a) Calculate ratios for Harbin for the year ended 30 September 2007 equivalent to those calculated for the year ended 30 September 2006 (showing your workings). (8 marks)

(b) Assess the financial performance and position of Harbin for the year ended 30 September 2007 compared to the previous year. Your answer should refer to the information in the Chief Executive’s report and the impact of the purchase of the net assets of Fatima. (17 marks)

(25 marks)

7[P.T.

4(a) An important requirement of the IASB’s Framework for the Preparation and Presentation of Financial Statements (Framework) is that in order to be reliable, an entity’s financial statements should represent faithfully the transactions and events that it has undertaken.

Required: Explain what is meant by faithful representation and how it enhances reliability. (5 marks)

(b) On 1 April 2007, Fino increased the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of $350,000. On the recommendation of the finance director, Fino entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of $100,000 each commencing on 1 April 2007. The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the company’s return on capital employed (compared to outright purchase of the plant).

Required: (i) Discuss the validity of the finance director’s comment and describe how IAS 17 Leases ensures that leases such as the above are faithfully represented in an entity’s financial statements. (4 marks) (ii) Prepare extracts of Fino’s income statement and balance sheet for the year ended 30 September 2007 in respect of the rental agreement assuming: (1) It is an operating lease (2 marks) (2) It is a finance lease (use an implicit interest rate of 10% per annum). (4 marks)

(15 marks)

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