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Paper F7 (INT)
Fundamentals level – Skills Module
fd
Financial Reporting (International) ACCA Mock Exam – Dec 2009
Time allowed Reading and planning: 15 minutes Writing: 3 hours ALL FIVE questions are compulsory and MUST be attempted.
For Online Classes, Mock Exams and other Other resources:
www.acca-live.com
Q1
Globe Ltd (GL) is a listed company and has held shares in two companies, Year Limited (YL) and Block Limited (BL), since July 1, 20x6. The details of acquisition of shares in these companies are as follows: (A) GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million. The acquisition was made by issuing four shares in GL for every five shares in YL. The market price of GL’s shares at July 1, 20x6 was Rs. 20 per share. A fair value exercise was carried out for YL’s assets and liabilities at the time of its acquisition with the following results: Book Value Fair Value Rupees in million Land 170 192 Machines 25 45 Investments 3 6 The remaining life of machine on acquisition was 5 years. The fair values of the assets have not been accounted for in YL’s financial statements. (B) 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of acquisition, the reserves of BL stood at Rs. 40 million. The summarized income statements of the three companies for the year ended June 30, 20x8 are as follows: GL YL BL Rupees in million Sales 875 350 200 Cost of sales (567) (206) (244) Gross profit / (loss) 308 144 (44) Selling expenses (33) (11) (15) Administrative expenses (63) (40) (16) Interest expenses (30) (22) (15) Other income 65 Profit/ (loss) before tax 247 71 (90) Income tax (73) (15) 8 Profit/ (loss) for the period 174 56 (82) The following relevant information is available: (i) The share capital and reserves as at July 1, 20x7 were as follows: GL
YL Rupees in million Ordinary share capital of Rs. 10 each 600 200 Reserves 652 213 The share capitals of all companies have remained unchanged since their incorporation.
BL 150 108
(ii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made at a mark up of 25% on cost. 30% of these goods were still in the inventories of YL at June 30, 20x8. (iii) GL manufactures a component used by BL. During the year, GL sold these components amounting to Rs. 20 million to BL. Transfers are made at cost plus 15%. BL held Rs. 11.5 million of these components in inventories at June 30, 20x8. (iv) All assets are depreciated on straight line method. (v) Other income includes dividend received from YL on April 15, 20x8. (vi) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii) An impairment test was carried out on June 30, 20x8 for the goodwill of YL and investments in BL, appearing in the consolidated financial statements. The test indicated that: goodwill of YL was impaired by 20%; Due to recent losses, the fair value of investment in BL has been reduced to Rs.40 million. No such impairment was required in previous years. Required: Prepare, in a format suitable for inclusion in the annual report, a consolidated income statement for the year ended June 30, 20x8. (20 marks)
Q 2(a)
Wallet Limited has provided you the following information for determining its tax and deferred tax expense for the year 2006 and 2007: (i) During the year ended December 31, 2007, the company’s accounting profit before tax amounted to Rs. 40 million (2006: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million (2006: Rs. 8 million) which are exempt from tax. (ii) The accounting written down values of the fixed assets, as at December 31, 2005 was as follows: Cost Accumulated Written Depreciation down value -------------- Rupees in millions -------------Machinery 200 25 175 Furniture and fittings 50 10 40 No additions or disposals of fixed assets were made in the years 2006 and 2007. (iii) Machinery was acquired on January 1, 2005 and is being depreciated on straight-line basis over its estimated useful life of 8 years. The tax base of machinery as at December 31, 2005 was Rs. 90 million. (iv) Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The tax base of furniture and fittings as at December 31, 2005 was Rs. 40.5 million. (v) Normal rate of tax depreciation on both types of assets is 10% on written down value. (vi) As on December 31, 2005, Wallet Limited had unused tax losses of Rs. 75 million. (vii) The tax rates for 2005, 2006 and 2007 were 35%, 35% and 30% respectively. Required: Determine the tax and deferred tax expense for the year 2006 and 2007.
Q 2(b)
(15 marks)
On January 1, 2001, Silver Hawk Enterprises purchased a machine for Rs.20,000 that had an estimated useful life of 5 years. The accountant incorrectly charged of this machine in 2001. The error was discovered in 2002. The company desires to use straight-line depreciation method on this asset. REQUIRED: Pass the entry and give computation in this effect on December 31, 2002, to correct for this error, given that the: (i) Books have not been closed for 2002 (ii) Books have been closed for 2002 (05 marks)
Q3
SH Leasing Limited (the lessor) has entered into a three year agreement with FS Limited (the lessee) to lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000. The following information relating to lease transaction is available: (i) Date of commencement of lease is July 1, 2007. (ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term, the value of the machine will be Rs. 300,000. (iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30. (iv) The implicit interest rate is 12.9972%.
Required: (a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in the books of lessor. Ignore tax. (b) Produce extracts from the balance sheet including relevant notes as at June 30, 2008 to show how the transactions carried out in 2008 would be reflected in the financial statements of the lessor. (Disclosure of accounting policy is not required.)
Q4
(20 marks)
On November 01, 2001 JN & Company contracted War Construction Company to have a building constructed for Rs 2.8 millions on land costing Rs 0.2 million (purchased from the contractor and included in the first payment). JN & Company made the following payments to the construction company during 2002: January 1 Rs420,000
March 1 Rs 600,000
May 1 Rs 1,080,000
December 31 Total Rs 900,000 Rs 3,000,000
Construction was completed and the building was ready for occupancy on December 31, 2002. JN & Company had the following debt outstanding at December 31, 2002: Specific Construction Debt i. 15%, 3-year loan to finance purchase of land and construction of the building, dated December 31, 2001, with interest payable annually on December 31 - Rs. 1.5 million Other Debts ii. 10%, 5-year loan payable, dated December 31, 1998, with interest payable annually on December 31 - Rs.1.1 million iii. 12%, 10-year bonds issued on December 31, 1997, with interest payable annually on December 31 - Rs. 1.2 million REQUIRED Keeping in view the requirement of IAS 23, calculate the following: a) Total actual interest cost for the year b) Capitalization rate of borrowing cost c) Interest cost to be capitalized
(03 marks) (05 marks) (07 marks)
Q5
Balance Sheet of Quarantine Ltd. as on June 30, 2009 and the Profit and Loss account for the year then ended are as follows: BALANCE SHEET 2009 FIXED ASSETS Building 97,000 Plant & Machinery 340,000 Acc. depreciation (68,000) 369,000 Capital work in progress 238,000 Deferred cost CURRENT ASSETS Stock in trade Debtors Less Provision for bad debts Advances and deposits Cash and bank balances Total
2008
2009
29,000 102,000 (34,000) 97,000 5,000
442,000 312,800
289,000 238,000
5,000 307,800 13,600 17,000 780,400 1,387,400
20,400 95,200 642,600 744,600
2008
SHAREHOLDER’S EQUITY Paid up share capital 360,400 326,400 General reserves 200,000 150,000 Un-appropriated profit 28,000 20,000 588,400 496,400 Long term loans
476,000
50,000
CURRENT LIABILITIES Current maturity of long Term Loans 119,000 Bills payable 166,600 Accrued expenses 20,400
18,000 149,600 17,000
Income tax payable
17,000
13,600
323,000 1,387,400
198,200 744,600
INCOME STATEMENT Sales Cost of goods sold Gross profit Administrative expenses Financial expenses Operating profit Loss on sale of fixed assets Profit before taxation Taxation Profit after taxation Un-appropriated profit brought forward Profit available for appropriation Appropriation: Dividend Transfer to general reserves Un-appropriated profit carried forward
Rupees 1,700,000 (1,029,000) 671,000 (282,000) (37,400) (319,400) 351,600 (25,000) 326,600 (102,000) 224,600 20,000 244,600 (166,600) (50,000) (216,600) 28,000
During the month of May 2009 the company purchased a machine for Rs.100,000, but due to sudden change in production plan, the machine was sold for Rs.75,000 in the same month. Company has not charged any depreciation on the plant sold during the year.
Required: 1. Prepare Cash flow statement of Quarantine Ltd. for the period ended 2009. (12 marks) 2. Write a report briefly analyzing the performance and financial position of Quarantine Ltd. for the years ended 2008 and 2009 (13 marks) Your report should be supported by appropriate ratios (25 marks)
Fundamentals level – Skills Module
fd
Financial Reporting (International) ACCA Mock Exam – Dec 2009
Time allowed Reading and planning: 15 minutes Writing: 3 hours ALL FIVE questions are compulsory and MUST be attempted.
For Online Classes, Mock Exams and other Other resources:
www.acca-live.com
Q1
Globe Ltd (GL) is a listed company and has held shares in two companies, Year Limited (YL) and Block Limited (BL), since July 1, 20x6. The details of acquisition of shares in these companies are as follows: (A) GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million. The acquisition was made by issuing four shares in GL for every five shares in YL. The market price of GL’s shares at July 1, 20x6 was Rs. 20 per share. A fair value exercise was carried out for YL’s assets and liabilities at the time of its acquisition with the following results: Book Value Fair Value Rupees in million Land 170 192 Machines 25 45 Investments 3 6 The remaining life of machine on acquisition was 5 years. The fair values of the assets have not been accounted for in YL’s financial statements. (B) 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of acquisition, the reserves of BL stood at Rs. 40 million. The summarized income statements of the three companies for the year ended June 30, 20x8 are as follows: GL YL BL Rupees in million Sales 875 350 200 Cost of sales (567) (206) (244) Gross profit / (loss) 308 144 (44) Selling expenses (33) (11) (15) Administrative expenses (63) (40) (16) Interest expenses (30) (22) (15) Other income 65 Profit/ (loss) before tax 247 71 (90) Income tax (73) (15) 8 Profit/ (loss) for the period 174 56 (82) The following relevant information is available: (i) The share capital and reserves as at July 1, 20x7 were as follows: GL
YL Rupees in million Ordinary share capital of Rs. 10 each 600 200 Reserves 652 213 The share capitals of all companies have remained unchanged since their incorporation.
BL 150 108
(ii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made at a mark up of 25% on cost. 30% of these goods were still in the inventories of YL at June 30, 20x8. (iii) GL manufactures a component used by BL. During the year, GL sold these components amounting to Rs. 20 million to BL. Transfers are made at cost plus 15%. BL held Rs. 11.5 million of these components in inventories at June 30, 20x8. (iv) All assets are depreciated on straight line method. (v) Other income includes dividend received from YL on April 15, 20x8. (vi) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii) An impairment test was carried out on June 30, 20x8 for the goodwill of YL and investments in BL, appearing in the consolidated financial statements. The test indicated that: goodwill of YL was impaired by 20%; Due to recent losses, the fair value of investment in BL has been reduced to Rs.40 million. No such impairment was required in previous years. Required: Prepare, in a format suitable for inclusion in the annual report, a consolidated income statement for the year ended June 30, 20x8. (20 marks)
Q 2(a)
Wallet Limited has provided you the following information for determining its tax and deferred tax expense for the year 2006 and 2007: (i) During the year ended December 31, 2007, the company’s accounting profit before tax amounted to Rs. 40 million (2006: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million (2006: Rs. 8 million) which are exempt from tax. (ii) The accounting written down values of the fixed assets, as at December 31, 2005 was as follows: Cost Accumulated Written Depreciation down value -------------- Rupees in millions -------------Machinery 200 25 175 Furniture and fittings 50 10 40 No additions or disposals of fixed assets were made in the years 2006 and 2007. (iii) Machinery was acquired on January 1, 2005 and is being depreciated on straight-line basis over its estimated useful life of 8 years. The tax base of machinery as at December 31, 2005 was Rs. 90 million. (iv) Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The tax base of furniture and fittings as at December 31, 2005 was Rs. 40.5 million. (v) Normal rate of tax depreciation on both types of assets is 10% on written down value. (vi) As on December 31, 2005, Wallet Limited had unused tax losses of Rs. 75 million. (vii) The tax rates for 2005, 2006 and 2007 were 35%, 35% and 30% respectively. Required: Determine the tax and deferred tax expense for the year 2006 and 2007.
Q 2(b)
(15 marks)
On January 1, 2001, Silver Hawk Enterprises purchased a machine for Rs.20,000 that had an estimated useful life of 5 years. The accountant incorrectly charged of this machine in 2001. The error was discovered in 2002. The company desires to use straight-line depreciation method on this asset. REQUIRED: Pass the entry and give computation in this effect on December 31, 2002, to correct for this error, given that the: (i) Books have not been closed for 2002 (ii) Books have been closed for 2002 (05 marks)
Q3
SH Leasing Limited (the lessor) has entered into a three year agreement with FS Limited (the lessee) to lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000. The following information relating to lease transaction is available: (i) Date of commencement of lease is July 1, 2007. (ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term, the value of the machine will be Rs. 300,000. (iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30. (iv) The implicit interest rate is 12.9972%.
Required: (a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in the books of lessor. Ignore tax. (b) Produce extracts from the balance sheet including relevant notes as at June 30, 2008 to show how the transactions carried out in 2008 would be reflected in the financial statements of the lessor. (Disclosure of accounting policy is not required.)
Q4
(20 marks)
On November 01, 2001 JN & Company contracted War Construction Company to have a building constructed for Rs 2.8 millions on land costing Rs 0.2 million (purchased from the contractor and included in the first payment). JN & Company made the following payments to the construction company during 2002: January 1 Rs420,000
March 1 Rs 600,000
May 1 Rs 1,080,000
December 31 Total Rs 900,000 Rs 3,000,000
Construction was completed and the building was ready for occupancy on December 31, 2002. JN & Company had the following debt outstanding at December 31, 2002: Specific Construction Debt i. 15%, 3-year loan to finance purchase of land and construction of the building, dated December 31, 2001, with interest payable annually on December 31 - Rs. 1.5 million Other Debts ii. 10%, 5-year loan payable, dated December 31, 1998, with interest payable annually on December 31 - Rs.1.1 million iii. 12%, 10-year bonds issued on December 31, 1997, with interest payable annually on December 31 - Rs. 1.2 million REQUIRED Keeping in view the requirement of IAS 23, calculate the following: a) Total actual interest cost for the year b) Capitalization rate of borrowing cost c) Interest cost to be capitalized
(03 marks) (05 marks) (07 marks)
Q5
Balance Sheet of Quarantine Ltd. as on June 30, 2009 and the Profit and Loss account for the year then ended are as follows: BALANCE SHEET 2009 FIXED ASSETS Building 97,000 Plant & Machinery 340,000 Acc. depreciation (68,000) 369,000 Capital work in progress 238,000 Deferred cost CURRENT ASSETS Stock in trade Debtors Less Provision for bad debts Advances and deposits Cash and bank balances Total
2008
2009
29,000 102,000 (34,000) 97,000 5,000
442,000 312,800
289,000 238,000
5,000 307,800 13,600 17,000 780,400 1,387,400
20,400 95,200 642,600 744,600
2008
SHAREHOLDER’S EQUITY Paid up share capital 360,400 326,400 General reserves 200,000 150,000 Un-appropriated profit 28,000 20,000 588,400 496,400 Long term loans
476,000
50,000
CURRENT LIABILITIES Current maturity of long Term Loans 119,000 Bills payable 166,600 Accrued expenses 20,400
18,000 149,600 17,000
Income tax payable
17,000
13,600
323,000 1,387,400
198,200 744,600
INCOME STATEMENT Sales Cost of goods sold Gross profit Administrative expenses Financial expenses Operating profit Loss on sale of fixed assets Profit before taxation Taxation Profit after taxation Un-appropriated profit brought forward Profit available for appropriation Appropriation: Dividend Transfer to general reserves Un-appropriated profit carried forward
Rupees 1,700,000 (1,029,000) 671,000 (282,000) (37,400) (319,400) 351,600 (25,000) 326,600 (102,000) 224,600 20,000 244,600 (166,600) (50,000) (216,600) 28,000
During the month of May 2009 the company purchased a machine for Rs.100,000, but due to sudden change in production plan, the machine was sold for Rs.75,000 in the same month. Company has not charged any depreciation on the plant sold during the year.
Required: 1. Prepare Cash flow statement of Quarantine Ltd. for the period ended 2009. (12 marks) 2. Write a report briefly analyzing the performance and financial position of Quarantine Ltd. for the years ended 2008 and 2009 (13 marks) Your report should be supported by appropriate ratios (25 marks)
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