f1 Cima Workbook Q & A PDF

CIMA F1
Financial Reporting
& Taxation
Workbook
1
Mind Map 1 - Tax I
2
Illustration 1
In year ended 31/01/X1 Johnboy Co. had Profit Before Tax of $30,000. This was after the
deduction of personal expenses that were disallowable for tax purposes worth $4700. In
addition Johnboy Co. had $7000 of income exempt from taxation.
Johnboy Co’s Non Current Assets totaled $35,000 and these were being depreciated at
25% on cost.
Tax is Payable at 20%.
Calculate the Tax Payable for the year ended 31/01/X1.
Solution
Profit Before Tax 30,000
Add back Personal Expenses 4,700
Less Exempt Income -7,000
Add back Depreciation (35,000 x 25%) 8750
Taxable Profit 36450
Tax Due (36,450 x 20%) 7290
3
Illustration 2
Jimmy Co. purchased an asset worth $500,000. WDAs are available on the asset at 25%
on the reducing balance basis.
Show the tax allowable depreciation (WDAs) for the first 5 years of the asset and the
Written Down Value (WDV) at the end of each year. (Round to the nearest $)
Solution
WDA
Year O’Bal WDV
25%
1 500,000 125,000 375,000
2 375,000 93,750 281,250
3 281,250 70,313 210,938
4 210,938 52,734 158,203
5 158,203 39,551 118,652
4
Illustration 3
Andy Co. purchased an asset in 20X1 worth $100,000. WDAs are available on the asset
at 25% on the reducing balance basis.
At the end of 20X3 Andy Co. sold the asset for $40,000.
Calculate the Balancing Charge/Allowance on the sale
Solution
WDV
WDA
Year O’Bal WDV
25%
X1 100,000 25,000 75,000
X2 75,000 18,750 56,250
X3 56,250
Proceeds 40,000
WDV (W1) -56,250
Balancing Allowance -16,250
5
Illustration 4
Welling Co. had assets at 01/02/20X2 with a carrying value in the financial statements of
$600,000 and a tax written down value of 400,000.
Accounting Depreciation was charged on the assets 10% reducing balance. WDAs are
available on the at 25% also on the reducing balance basis.
On 31/01/X4 20X4 Welling Co. sold all the assets for $500,000.
In year ended 31/01/X4 Welling Co. had Profit Before Tax of $2,000,000. This was after
the deduction of entertainment expenses that were disallowable for tax purposes worth
$30,000. In addition Welling Co. had $200,000 of income exempt from taxation.
Process to follow:
Be careful with the year ends.

Calculate the WDV at the year end 31/01/X4
That enables you to get the Balancing Charge
Calculate the Carrying Value at the year end 31/01/X4
That enables you to get the Accounting Profit on disposal & Dep’n Charge
Fill it all into the Pro-forma
Solution
WDV
WDA
Year O’Bal WDV
25%
31/01/X3 400,000 100,000 300,000
31/01/X4 300,000
Proceeds 500,000
WDV (W1) -300,000
Balancing Charge 200,000
6
Depreciation & Disposal
Year O’Bal Dep’n CV
31/01/X3 600,000 60,000 540,000
31/01/X4 540,000 54,000 486,000
Proceeds 500,000
Carrying Value -486,000
Accounting Profit 14,000
Tax Computation
Profit Before Tax 2,000,000
Add back Entertainment Expenses 30,000
Add back Depreciation (W2) 54,000
Less Accounting Profit on Disposal (W2) -14,000
Add Balancing Charge (W1) 200,000
Taxable Profit 2,070,000
Tax Due (2,070,000 x 22%) 455,400
7
Illustration 5
Using the taxable profit for the year ended 31/01/X4 from Illustration 4 of $2,070,000 and
tax rates of:
01/04/02 - 01/04/03 - 20%

01/04/03 - 01/04/03 - 25%
Assuming that profit accrues evenly across the period:
Solution
Tax Due to 01/04/03 ($2,070,000 x 2/12 x 20%) 69000
Tax Due to 31/01/04 ($2,070,000 x 10/12 x 25%) 431250
Total Tax Due 500250
8
Illustration 6
In Fabbland it is possible to carry back losses to set against trading profit in previous years
and then forwards against trading profits in future years.
Kalls Co. has the following results:
Year Trading Profit/Loss
1 500,000
2 -1,400,000
3 2,000,000
4 400,000
Calculate the taxable profit based on the above information in each of the 4 years.
Solution
Trading Profit/
Year Loss Allocation Taxable Profits
Loss
1 500,000 -500,000 0
2 -1,400,000 0 0
3 2,000,000 -900,000 1,100,000
4 400,000 400,000
Loss Allocated -1,400,000
9
Illustration 7
In Lalaland it is possible to carry back losses in the year of cessation to set against trading
profit in previous years for up to 3 years on a LIFO (most recent first) basis.
Marbles Co. has the following results:
Year Trading Profit/Loss
1 500,000
2 600,000
3 200,000
Year of Cessation -900,000
Calculate the taxable profit based on the above information in each of the 4 years.
Solution
Trading Profit/
Year Loss Allocation Taxable Profits
Loss
1 500,000 -100,000 400,000
2 600,000 -600,000 0
3 200,000 -200,000 0
4 -900,000 0 0
Loss Allocated -300,000
10
Objective Test Questions
1. There are certain principles that a tax system should have in an ideal situation. Which of
the following is NOT traditionally regarded as a principle of an ideal tax?
A. The cost of collecting the tax should bot outweigh the benefits of it.
B. The timing of the tax and the method to pay it should be convenient.
C. The amount to be paid should be certain.
D. The amount raised should be the maximum amount possible for the government.
Answer D
2. Which of the following best describes Hypothecation?
A. A tax charges on the sale of goods to consumers.

B. A tax system that collects the tax at source.
C. A tax charge that is imposed directly on an entity and paid to the authorities.
D. A tax charge that has the proceeds raised from it earmarked for a specific purpose.
Answer D
3. ABC Ltd. earns profit of $500,000 and pays tax of $100,000. In the same country, CBD
Ltd. earns profit of $130,000 and pays tax of $26,000.
The income tax regime in this country could be described as:
A. Progressive
B. Proportional
C. Regressive
D. Fixed Amount
Answer B
11
4.In year ended 31/01/X4 Endeavor Co. had Profit Before Tax of $220,000. This was after
the deduction of entertainment expenses that were disallowable for tax purposes worth
$30,000. In addition Endeavor Co. had $25,000 of income exempt from taxation.
Endeavor Co. had Non Current Assets with a carrying value of $500,000 at the start of the
year and these were being depreciated at 10% reducing balance.
What is the tax payable for the year?
A. $47,300
B. $71,500
C. $60,500
D. $49,599
Answer C
Solution
Add back Entertainment Expenses 30,000
Add back Depreciation (500,000 x 10%) 50,000
Taxable Profit 275,000
Tax Due (275,000 x 22%) 60,500
12
Mind Map 2 - Tax II
13
Illustration 1
In year ended 31/01/X1 ABD Co. decided to sell an asset that they had bought 10 years
previously. The asset had cost $40,000 and was sold for $100,000. Indexation allowance
of 25% of the cost of the asset was allowed for the effects of inflation.
Capital gains are taxed at 30%
Calculate the capital tax payable.
Solution
Proceeds from sale 100,000
Less Original Cost -40,000
Less Indexation Allowance

-10,000
(40,000 x 25%)
Capital Gain 50,000
Tax Due (50,000 x 30%) 15,000
Illustration 2
In year ended 31/01/X1 ABD Co. decided to sell an building that they had bought 10 years
previously. The building had cost $300,000 plus legal fees of $3,000 and was sold for
$600,000. Indexation allowance of 30% of the cost of the asset was allowed for the effects
of inflation.
The building had been extended when purchased initially costing $100,000 and costs to
sell of $6,000 were incurred on the sale.
14
Solution
Less Cost to sell -6,000
Net Proceeds 594,000
Less Costs to Buy -3,000
Less Enhancement Costs -100,000
Less Indexation Allowance

-120,900
((300,000 + 100,000 + 3,000) x 30%)
Capital Gain 70,100
Tax Due (20%) 14,020
15
Illustration 3
On 01/01/X5 DFT Co. sold a building they had purchased on 01/01/X0. The building had
cost $500,000 plus legal fees of $1,000 and was sold for $900,000.
The building had been extended on 01/01/X3 costing $50,000 and costs to sell of $2,000
were incurred on the sale.
Indexation allowance is available on assets bought/built at the below times at the following
rates:
01/01/X1 - 31/12/X2 = 20%

01/01/X3 - 01/01/X5 = 15%
Solution
Less Cost to sell -2,000
Less Costs to Buy -1,000
Less Enhancement Costs -50,000
Less Indexation Allowance (Building)

-100,200
(500,000 x 20%)
Less Indexation Allowance (Extension)

-7,500
(50,000 x 15%)
Capital Gain 239,300
Tax Due (25%) 59,825
16
Illustration 4
In Fabbland it is not possible to carry back capital losses to set against capital gains in
previous years. However losses can be relieved against other current year capital gains,
and then forward against future capital gains
Kalls Co. has the following results:
Year Capital Gains/(Losses)
1 5,000
2 -12,000
3 10,000
4 7,000
Calculate the taxable gains based on the above information in each of the 4 years.
Solution
Capital Gains/
Year Loss Allocation Taxable Gains
(Losses)
1 5,000 0 5000
2 -12,000 0 0
3 10,000 -10,000 0
4 7,000 -2,000 5,000
Loss Allocated -12,000
17
1. LM recently disposed of a building for £600,000 on 31 December 2009. The original

cost of the building was £110,000 which reflected its dilapidated condition. £40,000 was
spent to repair the roof on 31 December 2015 to bring it into occupation. ..A further
£75,000 was spent on an extension on 31 December 20X7.
The indexation factors are as follows:
20X5 to 20X9 30%

20X7 to 20X9 20%
Calculate the capital gains tax arising on the disposal assuming a tax rate of 20%
(rounded to the nearest £)
Answer
Proceeds 600000
Less cost -110000
Less enhancement1 -40000
Less enhancement2 -75000
Less: Indexation (110K + 40K) * 30% -45000
Less: Indexation (75K) * 20% -15000
Chargeable Gain 215000
Tax @ 20% 43,000
2. MM purchases an asset on 1 April 20X0 for 375,000, incurring legal fees of 12,000 .MM
is resident in country X. There was no indexation allowed on the asset.
MM sold the asset on 31 March 20X3 for 450,000 incurring transaction charges of 15,000.
Tax is charded at 25%.
Calculate the capital gains tax due from MM on the disposal of the asset. (Round to the
nearest £)
Answer 12,000
Disposal Proceeds 450,000

Costs to sell -15,000
Cost -375000
Duties -12000
Taxable gain 48000
Tax @ 25% 12000
18
3. Capital losses in the year must first be offset against capital gains in the year before
being carried forward to offset against the first available gains in the future. During the year
ended 30 April 20X4 SM made two disposals resulting in a capital gain of 15,000 and a
capital loss of 18,000. In the year ended 30 April 20X5, the entity also disposed of a
chargeable asset for 90,000. The asset originally cost 30,000 in 20X0 and maintenance
costs of 5,000 were incurred in 20X3. In 20X4 there was enhancement expenditure of
10,000.
The indexation factors were:

20X0 – 20X2 40%
20X3 – 20X4 38%
20X4 – 20X5 28%
Which of the following options correctly shows the capital gains tax due for 31 March 20X4
and 20X5. You should assume a tax rate of 20% and no annual exemption throughout.
A. 2004 Nil 2005 7,040

B. 2004 (600) 2005 6,440
C. 2004 Nil 2005 6,440
D. 2004 (3,000) 2005 6,440
Answer C
20X4 Net Capital Loss of 3,000 is assessed as NIL
2005
Proceeds 90,000
Less Loss b/f -3000
Less Enhancement -10,000
Less IA Cost -12000
Less IA Enhance -2800
Taxable Gain 32200
Tax @ 20% 6440
19
4. Profit Ltd and Loss Ltd are in a group for corporation tax purposes. Profit Ltd relevant
trading profit of 150,000. Loss Ltd relevant trading loss of 90,000 and capital losses of
40,000.
Calculate the group taxable profit.
Answer
Profit Ltd 150,000

Loss Ltd (90,000)
Group Taxable Profits 60,000
5. An entity makes a taxable profit of 300,000 and pays corporate income tax at 20%.
The entity pays a dividend to its shareholders. A shareholder receiving 7,000 dividend then
pays the standard personal income tax rate 12% on the divided, paying a further 960 tax.
The tax system could be said to be

A A classical system
B An Imputation system
C A partial imputation system
D A split rate system
Answer
A A classical system
20
Mind Map 3 - Tax III
21
Illustration 1
In Lalaland the rate of VAT is 15%. The following purchases and sales of a computer
happen before it is eventually sold to the consumer.
Abel manufactures the computer and sells it to a distributor for $200.
The distributor sells it to a retailer for $300.
The retailer sells it to the consumer for $500.
The figures above are exclusive of VAT.
Calculate the VAT payable by each of the parties above.
Solution
VAT payable on each transaction:
Abel manufactures the computer and sells it to a distributor for $200 = VAT of (200 x 15%)
$30
The distributor sells it to a retailer for $300 = VAT of (300 x 15%) $45
The retailer sells it to the consumer for $500 = VAT of (500 x 15%) $75
Input Tax Paid Output Tax Paid Net Amount

Party
when Purchased when Sold Payable
Manufacturer 0 30 30
Distributor 30 45 15
Retailer 45 75 30
Consumer 75 0 75
22
Illustration 2
Arttie Co. is registered for VAT and the VAT rate applicable is 12%.
In the most recent VAT period they made sales of $120,000 and purchases of $50,000.
Both of these figures are exclusive of VAT.
Calculate the VAT payable in the period.
Solution
VAT Due on Sales (120,000 x 12%) 14400
VAT Paid on Purchases (50,000 x 12%) 6000
Net Amount Payable to Authorities 8400
23
Illustration 3
Jenny’s business is registered for sales tax purposes. During the quarter ending 31
December 2011, she made the following sales and purchases, all of which were subject to
VAT at 20%:
Sales $ Purchases $
Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055
Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720
Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420
Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140
What is the amount of VAT payable or receivable on 31 December 2011?
Solution
Sale of Goods (Excludes Tax) 550 x 20% 110
Sale of Goods (Includes Tax) 900 x (20 / 120) 150
Sale of Goods (Excludes Tax) 945 x 20% 189
Sale of Goods (Includes Tax) 660 x (20 / 120) 110
Total Sales Tax on Sales 559
Purchases of Goods (Excludes Tax) 1,055 x 20% 211
Purchases of Goods (Includes Tax) 720 x (20 / 120) 120
Purchases of Goods (Includes Tax) 420 x (20 / 120) 70
Purchases of Goods (Includes Tax) 1,140 x (20 / 120) 190
Total Sales Tax on Purchases 591
Total Receivable (591 - 559) 32
24
1. Which of the following is not an indirect tax?

A Wealth Tax
B Excise Duty
C Property Tax
D Income Tax
Answer
D Income Tax
2. Zoe is in the process of completing her VAT return for the quarter ended 31 March
2013. The following information is available:
• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated expenses amounted to £24,800.
• On 15 February 2013 Gwen purchased machinery at a cost of £24,150. This figure is

inclusive of VAT.
Unless stated otherwise all of the above figures are exclusive of VAT. The standard rate of
tax is 20%.
What is the Vat payable?
Answer
VAT return – quarter ended 31 March 2013
Output VAT
Sales (128,000 x 20%) 25,600
Input VAT
Expenses (24,800 x 20%) 4,960
Machinery (24,150 x 20/120) 4,025
______
(8,985)
______
VAT payable 16,615
______
25
3. Correctly identify the difference between exempt and zero rated supplies. The options
cannot be used more than once.
Type of Supply
Zero Rated
Exempt
Options
Entity must be registered for VAT purposes
Entity does not register for VAT purposes
Vat can be claimed back on purchases
Vat cannot be claimed back on purchases
26
Mind Map 4 - Tax IV
27
1. Which of the following is a characteristic of transfer pricing?

A This does not have an effect on individual entity purposes
B The results in transactions not taking place at “arms length” and profits being
effected by the group members.
C A legal way of reducing your tax bill
D An illegal way of reducing your tax bill
Answer B
2. Identify which of the following is a Benefit in Kind

A Company Car
B Time in Lieu
C Gym Membership
D Overtime
Answer A & C
3. Which of the following describes Avoidance of Tax?

A Illegal means to avoid tax
B Legal means to avoid tax
Answer B
28
Mind Map 5 - International
Tax
29
1. What determines a company’s country of residence?
A. Where the company’s income is earned

B. Where the company’s place of control is
C. Where they receive dividends
D. Where the majority of their subsidiaries are located
Answer B
2. Which of the following statements is correct about the deduction method of double
taxation relief?
A. Tax relief is obtained by deducting foreign tax as an expense in the statement of profit
and loss
B. Tax relief is obtained by treating foreign tax as a loss
C. Tax relief is obtained by deducting the foreign tax from the foreign income so that only
the net amount is subject to tax in the country of residency
D. Tax relief is obtained by deducting foreign tax from revenue in the statement of profit
or loss.
Answer C
3. Which of the following is a concept of a Branch of a company?
A. Loss relief is available

B. Loss relief is not available
C. Separate company
D. Asset transfers can result in a gain or loss
Answer A
4. Which of the following is an advantage for the tax authority of deduction of tax at
source?
A. Administration costs are borne by the entity deducting tax

B. Tax is deducted after income is paid to the taxpayer
C. Tax is collected later
D. The total amount of tax due for the period is difficult to calculate
Answer A
30
5. Which of the following cannot be classed as a permanent establishment under the
OECD Model?
A. Factory
B. Office/Branch
C. Construction project
D. Pop up Restaurant
Answer D
31
Mind Map 6 - Intro to Groups
32
1. What does NCI stand for in terms of Group Accounting?

A. Nuclear Control Institute
B. Non Coded Information
C. Non Controlling Interest
D. Non Conforming Image
Answer C
2. Which of the following can constitute “control” of a company after an undertaking?

A. Has the right to exercise a dominant influence over an undertaking
B. Owns 35% of the shares
C. Has not got the right to appoint or remove a majority of its board of directors
D. Has no right to returns from the company
Answer A
33
Mind Map 7 - Introduction to
Group SFP
34
Illustration 1
Almeria Murcia
Non Current Assets
Tangible 100 100
Investment in Murcia 300
Current Assets
Inventory 40 200
Receivables 60 100
Cash 200 200
700 600
Ordinary Shares 160 100
Accumulated Profits 240 200
Equity 400 300
Non Current Liabilities 100 200
Current Liabilities 200 100
700 600
Additional Information
Almeria today acquired all the shares in Murcia for $300m.
The Fair Value of the NCI at acquisition was 0.
Required
Prepare the consolidated statement of financial position for the Almeria group
35
Pro-Forma
Working 1 - Group Structure
Almeria
Murcia
Date Acquired
Parent Share
NCI
Working 2 - Equity Table

At Acquisition At Year End
Share Capital
Accumulated Profits
Working 3 - Goodwill
Cost of Parent Investment
Fair Value of NCI at acquisition
Less net assets at acquisition (W2)
Goodwill
36
Working 4 - NCI
NCI% of Sub Post-Acq Profits
Value of NCI at Year End
Working 5 - Accumulated Profits
Parent’s Accumulated Profits
Add: Parent % of the subsidiary’s post acquisition profits
37
SFP for Almeria Group
Almeria Murcia Group
Non Current Assets
Goodwill
Tangible 100 100
Investment in Murcia 300
Current Assets
Inventory 40 200
Receivables 60 100
Cash 200 200
700 600
Non Controlling Interest
Equity 400 300
700 600
38
Solution
Working 1 - Group Structure
Almeria
↓ 100%
Murcia
Date Acquired TODAY
Parent Share 100%
NCI 0%

Share Capital 100 100
300 300
Cost of Parent Investment 300
Fair Value of NCI 0
Less net assets at acquisition (W2) -300
Goodwill 0
39
Working 4 - NCI
Fair Value of NCI at acquisition 0
NCI% of Sub Post-Acq Profits 0
Value of NCI at Year End 0
Parent’s Accumulated Profits 240
Add: Parent % of the subsidiary’s post acquisition profits Nil
240
40
SFP for Almeria Group
Almeria Murcia Group
Non Current Assets
Goodwill None (W3) Nil
Tangible 100 100 100 + 100 200
Investment in Murcia 300 Cancel out Nil
Current Assets
Inventory 40 200 40 + 200 240
Receivables 60 100 60 +100 160
Cash 200 200 200 + 200 400
700 600 1000
Ordinary Shares 160 100 Parent 160
Accumulated Profits 240 200 W5 240
Non Controlling Interest W4 Nil
Equity 400 300 400
Non Current Liabilities 100 200 100 + 200 300
Current Liabilities 200 100 200 + 100 300
700 600 1000
41
Information for Illustration 2 - OTQs for Lecture 7
Ant Dec
Assets 500 500
Investment in Dec 350
850 500
Equity 350 300
Liabilities 500 200
850 500
Ant today acquired 160m of the 200m shares in Dec.
The Fair Value of the NCI was 50.
OTQ 1
What is the percentage ownership and the date of acquisition for Ant Group?
A. 70% & Today

B. 80% & 1 year ago
C. 80% & Today
D. 100% & Today
Answer C
42
OTQ 2
What is the value of the net assets acquired by Ant in Dec on the date of acquisition
A. 200
B. 300
C. 100
D. 600
Answer B
Working 2- Equity Table

300 300
OTQ 3
What is the value of the Goodwill in Dec on the date of acquisition?
A. 100
B. 350
C. 50
D. 400
Answer A
Goodwill 100
OTQ 4
43
What is the value of the non controlling interest in Dec at the year end?
A. 100
B. 300
C. 100
D. 50
Answer D
Working 4 - NCI
NCI% of Sub Post-Acq Profits 0
OTQ 5
What is the value of the retained earnings for the group at the year end?
A. 200
B. 300
C. 250
D. 50
Answer C

$
Add: Parent % of the subsidiary’s post acquisition profits Nil
250
OTQ 6
44
What is the value of the total assets and the share capital that will appear in the statement
of financial position for Ant Group?
A. 1000 & 100

B. 100 & 100
C. 1,100 & 300
D. 1,100 & 100
Answer B
Statement of Financial Position for Ant Group
Ant Dec Group
Goodwill W3 100
Assets 500 500 500 + 500 1000
Investment in Cancelled in
350 Nil
Dec Goodwill W3
Total Assets 850 500 1100
Ordinary
100 200 Parent Only 100
Shares
Accumulated
250 100 W5 250
Profits
NCI W4 50
Liabilities 500 200 500 +200 700
Total Equity &

850 500 1100
Liabilities
45
Mind Map 8 - Group SFP
continued
46
Illustration 1
Evan Dando
Assets 200 350
Investment in Dando 500
Current Assets 200 300
900 650
Ordinary Shares ($1) 200 200
Equity 450 300
Liabilities 170 150
900 650
Evan acquired 150m shares in Dando one year ago when the reserves of Dando were
$40m. The Fair Value of the NCI on the date of acquisition was $100m.
Required
Prepare the consolidated statement of financial position for the Evan group.
47
Solution
Working 1- Group Structure
↓
Date Acquired
Parent Share
NCI
Share Capital
Accumulated Profits
Cost of Parent Investment
Less net assets at acquisition (W2)
Goodwill
48
Working 4 - NCI
NCI% of Sub Post-Acq Profits
Value of NCI at Year End
Parent’s Accumulated Profits
Add: Parent % of the subsidiary’s post acquisition profits
49
Statement of Financial Position for Evan Group
Evan Dando Group
Goodwill
Assets 200 350
Investment in 500
Dando
900 650
Ordinary 200 200

Shares ($1)
Accumulated 250 100

Profits
NCI
Equity 450 300
Non Current 280 200

Liabilities
Liabilities 170 150
900 650
50
Solution
Evan
↓ 75%
Dando
Date Acquired 1 Year Ago
Parent Share 75%
NCI 25%
100%
240 300
Goodwill 360
51
Working 4 - NCI
NCI% of Sub Post-Acq Profits (25% x 60m) 15
Add: Parent % of the subsidiary’s post acquisition profits (75% x 60m) 45
295
52
Statement of Financial Position for Evan Group
Evan Dando Group
Goodwill W3 360
Assets 200 350 200 + 350 550
Investment in 500 Cancelled out Nil

Dando in W3.
Current Assets 200 300 200 + 300 500
1410
Ordinary Parent Only 200

Shares ($1)
Accumulated W5 295
Profits
NCI W4 115
570
Non Current 280 200 280 + 200 480

Liabilities
Liabilities 170 150 170 + 150 320
1410
53
Illustration 2
Virtual Insanity
Assets 1000 800
Investment in Insanity 600
2000 1000
Equity 1550 500
Liabilities 200 200
2000 1000
Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were
$60m. The Fair Value of the NCI at that date was $120m.
Required
Prepare the consolidated statement of financial position for the Virtual group
54
Solution
Virtual
↓ 60%
Insanity
Date Acquired 1 Year Ago
Parent Share 60%
NCI 40%
100%
160 500
Goodwill 560
55
Working 4 - NCI
NCI% of Sub Post-Acq Profits (40% x (500 - 136

160))
Add: Parent % of the subsidiary’s post acquisition profits (60% x (500 - 204
160)
954
56
Statement of Financial Position for Virtual Group
Virtual Insanity Group
Goodwill W3 560
Assets 1000 800 1000 + 800 1800
Investment in 600 Cancelled in Nil

Insanity W3
Current Assets 400 200 400 + 200 600
2000 1000 2960
Ordinary 800 100 Parent Only 800

Shares ($1)
Accumulated 750 400 W5 954

Profits
NCI W4 256
Equity 1550 500 1954
Non Current 250 300 250 + 300 550

Liabilities
Liabilities 200 200 200 + 200 400
2000 1000 2960
57
Illustration 3
Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100
shares in issue with a nominal value of $1 and Angelina’s share price is $8. At
the date of acquisition the net assets of Angelina are $600.
Calculate the gross goodwill arising on the acquisition.
Solution
Goodwill
Cost of Parent’s investment 800
Fair value of NCI at acquisition (100 x 20% x $8) 160
960
Less net assets at acquisition in W2 -600
Gross Goodwill 360
58
Illustration 4
Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100
shares in issue with a nominal value of $1 and Angelina’s share price is $8. At
the date of acquisition the net assets of Angelina are $600.
Calculate the goodwill arising using the proportionate method.
Solution
Goodwill
Value of NCI (600 x 20%) 120
Net assets at acquisition (W2) -600
Goodwill 320
59
Illustration 5
Archie acquires 60% of Mitchell’s share capital with consideration of $900.

Mitchell has 200 shares in issue with a share price is $5. At the date of
acquisition the net assets of Mitchell were $800 and are $950 at the year end.
At the year end the retained earnings of Archie were $1,000.
An impairment review has been carried out on the goodwill at the year end
which has found it to be impaired by $40.
Calculate the gross goodwill, the retained earnings and the NCI at the year
end.
Solution
Goodwill
Fair value of NCI at acquisition (200 x 40% x $5) 400
1300
Less 100% net assets at acquisition in W2 -800
Gross Goodwill 500
Impairment -40
Post Impairment Goodwill 460
Dr W4 16
Dr W5 24
60
NCI
Fair Value of NCI at Acquisition 400
NCI% Post Acquisition Profit (950 - 800) x 40% 60
NCI Share of Impairment -16
444
Retained Earnings
Parent 1000
NCI% Post Acquisition Profit (950 - 800) x 60% 90
Parent Share of Impairment -24
1066
61
Illustration 6
French acquired 75% of Shambles several years ago.
Cost of Fair Value of Net assets at Net assets at Goodwill

Investment NCI at acquisition year end Impairment at
acquisition Y/E
$ $ $ $ $
1,000 300 800 3,000 200
If French has $1500 of retained earnings at the year end, calculate the gross
goodwill, retained earnings for the group and the NCI at the year end.
62
Solution
Goodwill
Cost of Parent’s investment 1,000
Fair value of NCI at acquisition (Market Value) 300
Gross Goodwill 500
Impairment -200
DR W4 50
DR W5 150
NCI
Plus NCI share of post acquisition profits 2200 x 25% 550
Impairment -50
800
63
Retained Earnings
Parent 1500
NCI% Post Acquisition Profit 2200 x 75% 1650
Parent Share of Impairment -150
3000
64
Illustration 7
Pinky acquired 80% of Brain 4 years ago. The following information is

relevant:
Net Assets at Net Assets at Cost of Fair Value of

year end acquisition investment NCI at
acquisition
$ $ $ $
150 100 175 25
Goodwill is calculated gross and is subject to an annual impairment review. In

the current year goodwill has been impaired by $20.
Pinky Brain
Investment in Pinky 175
Assets 100 100
Inventory 140 200
Receivables 160 100
Bank 125 200
700 600
Equity 400 150
Non current liabilities 100 250
Liabilities 300 100
700 600
65
Solution
Pinky
↓ 80%
Brain
Date Acquired 4 Years Ago
Parent Share 80%
NCI 20%
100%
Working 2 - Net Assets Subsidiary
Share Capital 50 50
100 150
66
Gross Goodwill 100
Impairment -20
Dr W4 (20%) 4
Dr W5 (80%) 16
Working 4 - NCI
Plus NCI share of post acquisition profits 50 x 20% 10
Less Goodwill Impairment 20 x 20% -4
31
67
Working 5 - Group Accumulated Profit
Less Goodwill Impairment 20 x 80% -16
Add: Parent % of the subsidiary’s post acquisition profits 80% x (100 - 40

150) (W2)
264
Statement of Financial Position for Pinky Group
Pinky Brain Group
Goodwill W3 80
Assets 100 100 100 + 100 200
Inventory 140 200 140 + 200 340
Receivables 160 100 160 + 100 260
Bank 125 200 125 + 200 325
700 600 1205
Ordinary 160 50 Parent Only 160

Shares ($1)
Accumulated 240 100 W5 264

Profits
NCI W4 31
Equity 400 150 455
Non current 100 250 100 + 250 350

liabilities
Liabilities 300 100 300 + 100 400
700 600 1205
68
Illustration 8
George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a
proportionate basis and at acquisition was $400m.
During the impairment review in the current year it was found that the carrying value of the
goodwill has been impaired by $50m
What is the required treatment to deal with the impairment of goodwill?
Solution
Goodwill on Balance Sheet
Proportionate goodwill 400
Impairment -50
Goodwill after impairment 350
Treatment
DR Retained Earnings (W5) 50
CR Goodwill 50
69
1. PRT acquired 90% of SUB’s ordinary shares on 1 January 2012 for $1,250,000 when
SUB’s retained earnings were $300,000. At 1 January 2011 the fair value of the Non-
Controlling Interest was $200,000.
The equity of SUB as at 31 December 2013:
Ordinary share capital 430,000

Share premium 86,000
Retained earnings 324 ,000
The retained earnings of PRT were $2,100,000 at 31 December 2013.
What is the amount that PRT should include in its consolidated statement of financial
position as at 31 December 2013 for the Non-Controlling Interest?
A. $250,000
B. $204,600
C. $205,000
D. $206,400
Answer D
Solution
Net Assets Subsidiary
Share Premium 86 86
776 840
Post Acq Profit 64
NCI
Plus NCI share of post acquisition profits 10% x 64 6.4
206.4
70
2. HX acquired 70% of SA’s equity shares on 1 July 2010 for $452,000.The fair value of
the NCI on the 1 July 2010 was $60,000 SA has $200,000 $1 equity shares in issue and at
1 July 2010 its reserves comprised share premium of $40,000 and retained earnings of
$62,000.
What is the value of the gross goodwill arising on the acquisition of SA?
A. $235,000
B. $210,000
C. $245,000
D. $135,000
Answer B
Solution
Share Capital 200,000 N/A
Share Premium 40,000
Accumulated Profits 62,000
302000
Fair value of NCI at acquisition (Market Value) 60,000
Less 100% net assets at acquisition in W2 -302,000
Gross Goodwill 210,000
71
3. HP acquired 70% of SA’s equity shares on 1 July 2010 for $652,000. Sauce has
$400,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share
premium of $220,000 and retained earnings of $122,000.
What is the value of the proportionate goodwill arising on the acquisition of SA?
A. $235,000
B. $210,000
C. $132,600
D. $135,000
Answer C
Solution
Share Capital 400,000 N/A
Share Premium 220,000
Accumulated Profits 122,000
742,000
Fair value of NCI at acquisition (742000 x 30%) 222,600
Less 100% net assets at acquisition in W2 -742,000
Gross Goodwill 132,600
72
SUB’s retained earnings were $260,000. At 1 January 2011 the fair value of the Non-
Controlling Interest was $300,000.
SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only
subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31
December 2013. The equity of SUB as at 31 December 2013:
$000
Ordinary share capital 430
Share premium 86
Retained earnings 324
position as at 31 December 2013 for Goodwill?
A. $250,000
B. $200,000
C. $440,000
D. $528,000
Answer D
73
Solution
Share Premium 86 86
776 840
Post Acq Profit 64
Gross Goodwill 660
Impairment -132
528
74
SUB’s retained earnings were $341,000.
subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by
10% at 31 December 2013. The equity of SUB as at 31 December 2013:
$000
Share premium 24
position as at 31 December 2013 for Goodwill?
A. $195,000
B. $1,395,000
C. $1,234,000
D. $155,000
Answer B
75
Solution
Share Premium 24 24
995 1230
Post Acq Profit 235
Fair value of NCI at acquisition (994 x 20%) 199
Gross Goodwill 1550
Impairment -155
1395
76
Mind Map 9 - Inter Company
Transactions
77
Illustration 1
A Parent company has recorded an asset of $500 goods receivable with a subsidiary.
The subsidiary had recorded this as a payable of $500.
How should this be adjusted for on consolidation?
Solution
When cross casting assets & liabilities:
Less Payables $500 (DR)
Less Receivables $500 (CR)
Illustration 2
A Parent company has recorded an asset of $300 goods receivable with a subsidiary.
The subsidiary had recorded this as an initial liability payable of $300 but has just recorded
and sent a cheque payment to the parent of $50 leaving the payable balance of $250.
Solution
Plus Cash at bank $50 (DR)
78
Illustration 3
Parent has been selling goods to subsidiary. The parent has recorded an asset of $500
receivable from the subsidiary.
The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has
not received them. As a result the subsidiary has a balance of $400 recorded as a liability
in payables.
How should this be treated on consolidation?
Solution
Plus Inventory $100 (DR)
79
Illustration 4
Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below
Arctic Monkeys
Current Assets
Inventory 300 100
Receivables 200 250
Bank 100 50
600 400
The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction
of $10m in respect of cash sent by Monkeys but not yet received by Arctic.
The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these
goods had been dispatched by Arctic, but were not yet received by Monkeys.
Show the treatment on consolidation.
80
Solution
Remember!
Add the goods/cash in transit
Subtract the inter company current accounts
+/- Item Where? $m
+ Cash in transit Cash at Bank 10
+ Goods in transit Inventory 25
- Inter Company Current Account Payables 35
- inter Company Current Account Receivables 70
Arctic Monkeys Group
Current Assets
Inventory 300 100 300 + 100 + Goods in 425

transit of 25
Receivables 200 250 200 + 250 - 70 inter 380

company current account
Bank 100 50 100 + 50 + cash in transit 160

10
600 400 965
Current Liabilities 420 220 420 + 220 - inter company 605

current account 35
81
Illustration 5
Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below
Sea Lion
Current Assets
Inventory 400 250
Receivables 100 100
Bank 150 100
650 450
The trade payables of Lion includes $20m due to Arctic. This was after the deduction of
$15m in respect of cash sent by Lion but not yet received by Sea.
The receivables of Sea at the year end include $50m due from Lion. $15m of these goods
had been dispatched by Sea, but were not yet received by Lion.
Show the treatment on consolidation.
82
Solution
Remember!
Add the goods/cash in transit
Subtract the inter company current accounts
+/- Item Where? $m
+ Cash in transit Cash at Bank 15
+ Goods in transit Inventory 15
- Inter Company Current Account Payables 20
- inter Company Current Account Receivables 50
Sea Lion Group
Current Assets
Inventory 400 250 400 + 250 + Goods in 665

transit of 15
Receivables 100 100 100 + 100 - 50 inter 150

company current account
Bank 150 100 150 + 100 + cash in transit 265

15
650 450 965
Current Liabilities 90 140 90 + 140 - inter company 210

current account 20
83
Illustration 6
Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At
the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.
I. Calculate the PURP.
II. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the subsidiary company is the seller.
IV. Do parts I - III if the goods had been sold at a margin of 30%.
84
Solution (Mark-up)
Unsold Inventory Mark-up PURP
(400 x 3/4) = 300 25/125 60
Parent is seller
DR/CR Account $ $
DR Accumulated Profits (W5) to decrease 60
CR Inventory to decrease 60
Subsidiary is seller
DR/CR Account $ $
DR Accumulated Profits (W5) with parent share to 48

decrease (60 x 80%)
DR NCI (W4) with subsidiary share to decrease 12
85
Solution (Margin)
Unsold Inventory Margin PURP
(400 x 3/4) = 300 30% 90
Parent is seller
DR/CR Account $ $
DR/CR Account $ $
DR Accumulated Profits (W5) with parent share to 72

decrease (90 x 80%)
DR NCI (W4) with subsidiary share to decrease 18
86
Illustration 7
Avco Co. owns 60% of Strappo Co. and on the first day of this accounting period a Non
Current Asset with a carrying value of $100,000 and a useful economic life of 5 years was
sold between the two for $120,000.
I. Show the accounting treatment if the parent company is the seller
II.Show the accounting treatment if the subsidiary company is the seller
Solution
Parent is seller
DR/CR Account $ $
Adjust the Value of the Asset
DR Accumulated Profits (W5) 20,000
CR Non Current Asset to decrease 20,000
Reduce depreciation as too much provided
DR Non Current Asset to Increase (20,000 / 5) 4,000
CR Accumulated Profits (W5) 4,000
Account $ $
DR Accumulated Profits (W5) with P% of PURP (20,000 x 60%) 12,000
DR NCI (W4) with NCI% of PURP (20,000 x 40%) 8,000
CR Non Current to decrease 20,000
DR Non Current to Increase (20,000 / 5) 4,000
CR NCI (W4) with NCI% of Dep’n (4,000 x 40%) 1,600
CR Accumulated Profits (W5) with P% of Dep’n (4,000 x 60%) 2,400
87
1. A Parent company has recorded an asset of $800 goods receivable with a subsidiary.
The subsidiary had recorded this as a payable of $800.
The treatment on consolidation has been recorded as:
Less Payables $800 (CR)
Less Receivables $800 (DR)
Is this treatment:
A Correct
B Incorrect
Answer B (The DR and CR are the wrong way around)
2. A Parent company has recorded an asset of $2,000 goods receivable with a subsidiary.
The subsidiary had recorded this as an initial liability payable of $2000 but has just
recorded and sent a cheque payment to the parent of $230 leaving the payable balance of
$1,770.
Less Payables $1,770 (DR)
Plus Cash at bank $230 (DR)
Less Receivables $2,000 (CR)
Is this treatment:
A Correct
B Incorrect
Answer A
88
3. Dafo has sold goods to their subsidiary Aldo during the year and at the year end has
recorded a receivable of $4,690 due from Aldo.
Aldo has sent a cheque which has not yet been received by Dafo which means that the
payable due to Dafo is recorded as $3,240 in the financial statements of Aldo.
Before adjustment for any of the above the group cash balance stood at $134,880.
What will the balance on cash be after making an adjustment for the above?
A. $139,570
B. $138,120
C. $136,330
D. $133,430
Answer C
Solution
Cash in transit (4690 - 3240) $1450
Group Cash (134,880 + 1450) $136,330
89
4. DW sold goods to PR. DW is PR’s 80% owned subsidiary on 1 February 2011. The
goods were sold to PR for $90,000. HW made a profit of 25% on the original cost of the
goods.
At the year end, 30 June 2011, 30% of the goods had been sold by PR, the balance were
still in PR’s inventory and PR had not paid for any of the goods.
Which ONE of the following states the correct adjustments required in the HW group’s
consolidated statement of financial position at 30 June 2011?
A. Reduce inventory and retained earnings by $12,600 and Reduce payables and
receivables by $12,600.
B. Reduce inventory by $12,600, the NCI by $2,520, retained earnings by $10,080 and
Reduce payables and receivables by $90,000.
C. Reduce inventory and retained earnings by $15,750 and Reduce payables and
receivables by $15,750.
D. Reduce inventory by $15,750, the NCI by $3,150, retained earnings by $12,600 and
Reduce payables and receivables by $90,000.
Answer C
Solution
Unsold Mark up PURP
90,000 x 70% = 63,000 25/125 12,600
CR Inventory 12,600
DR NCI (20%) 2,520
DR Ret. Earnings (80%) 10,080
DR Payables 90,000
CR Payables 90,000
90
5. Dando Co. owns 80% of Pobo Co. and on the first day of this accounting period Pobo
Co. sold a Non Current Asset to Dando Co. The asset had a carrying value of $250,000
and a useful economic life of 4 years was sold between the two for $300,000.
What amount will go to NCI to account for the above transaction?
A. $7,500 CR
B. $7,500 DR
C. $10,000 DR
D. $2,500 CR
Answer B
Solution
Account $ $
DR Accumulated Profits (W5) with P% of PURP (50,000 x 80%) 40,000
DR NCI (W4) with NCI% of PURP (50,000 x 20%) 10,000
CR Non Current to decrease 50,000
DR Non Current to Increase (50,000 / 4) 12,500
CR NCI (W4) with NCI% of Dep’n (12,500 x 20%) 2,500
CR Accumulated Profits (W5) with P% of Dep’n (12,500 x 80%) 10,000
7,500
Amount to NCI (10,000 (DR) - 2,500 (CR))
(DR)
91
Mind Map 10 - Associates
(IAS 28)
92
Illustration 1
3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of
$400,000. Since that time Wars Ltd.has had the following results:
Year Profit Dividend Paid By

Associate
1 $200,000 0
2 $160,000 $150,000
3 $30,000 0
Due to poor trading results and customer service issues, Star Ltd feel that in the current
year the investment in Wars Ltd. has been impaired by $20,000.
Show the treatment of War Ltd. in the statement of financial position of Star Group
and in the Income statement for the 3 years of the investment.
Solution
Year 1 Investment In Associate (SFP)
Initial Investment 400,000
Parent Share of Post Acquisition

(200,000) x 25% 50,000
Profit
Investment in Associate 450,000
Year 1 Income From Associate (Income Statement)
Parent share of Current Year Income (200,000 x 25%) 50,000
93

(200,000 + 160,000) x 25% 90,000
Profit
Share of Dividend (150,000 x 25%) -37,500
Parent share of Current Year Income (160,000 x 25%) 40,000

(200,000 + 160,000 + 30,000) x 25% 97,500
Profit
Share of Dividend (150,000 x 25%) -37,500
Impairment -20,000
Parent share of Current Year Income (30,000 x 25%) 7500
Impairment -20,000
Loss From Associate -12500
94
Illustration 2
Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%.
At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.
I. Calculate the PURP.
II. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the Associate company is the seller.
95
Solution
Unsold Inventory Mark-up PURP Group %
(1300 x 1/2) = 650 30/130 150 45
Parent is seller
DR/CR Account $ $
CR Investment in Associate 45
Associate is seller
DR/CR Account $ $
CR Group Inventory 45
96
1. An associate is an entity in which an investor has significant influence over the investee.
Which of the following indicate(s) the presence of significant influence?
I. The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
II. The investor has representation on the board of directors of the investee
III. The investor is able to insist that all of the sales of the investee are made to a
subsidiary of the investor
IV. The investor controls the votes of a majority of the board members
A (i) and (ii) only

B (i), (ii) and (iii)
C (ii) and (iii) only
D All four
Answer A
2. The Caddy group acquired 240,000 of August’s 800,000 equity shares for $6 per share
on 1 April 2014. August’s profit after tax for the year ended 30 September 2014 was
$400,000 and it paid an equity dividend on 20 September 2014 of $150,000.
On the assumption that August is an associate of Caddy, what would be the carrying
amount of the investment in August in the consolidated statement of financial position of
Caddy as at 30 September 2014?
A $1,455,000
B $1,500,000
C $1,515,000
D $1,395,000
Answer A
Solution
Parent Investment (240 x 6) 1,440
Share Profit (400 x 30% x 6/12) 60
Dividend Received (150 x 30%) -45
1,455
97
3. HB sold goods to AT, its 30% owned associate, on 1 November 20X0. The goods were
sold to S2 for $33,000. HB made a profit of 25% on the original cost of the goods.
At the year end, 31 March 20X1, 50% of the goods had been sold by S2. The remaining
goods were included in inventory.
What is the amount of the adjustment required to retained earnings in the consolidated
statement of financial position at 31 March 20X1.
A. $660
B. $1,238
C. $3,300
D. $990
Answer D
Solution
Unsold Mark up Associate % PURP
16,500 25/125 30% 990
4. The HC group acquired 30% of the equity share capital of AF on 1 April 2010 paying
$25,000.
At 1 April 2010 the equity of AF comprised:
$1 equity shares 50,000

Share premium 12,500
Retained earnings 10,000
AF made a profit for the year to 31 March 2011 (prior to dividend distribution) of $6,500
and paid a dividend of $3,500 to its equity shareholders.
What is the value of HC’s investment in AF for inclusion in HC’s statement of financial
position at 31 March 2011.
A $26,950
B $31,500
C $28,000
D $25,900
Answer D
98
Solution
Parent Investment 25,000
Share Profit (6,500 x 30%) 1,950
Dividend Received (3,500 x 30%) -1,050
25,900
5. Which of the following statements relating to the method of consolidation are true?
A. All subsidiaries of the parent are consolidated using equity accounting.

B. All associates of the parent are consolidated using equity accounting.
C. The only way to gain control of a subsidiary is to purchase 50% or more of the share
capital.
D. If a company buys some shares but owns less than 50% of another entity it is
accounted for as a subsidiary.
Answer B
99
Mind Map 11 - Group
Statement of Comprehensive
Income
100
Illustration 1
Nero Co. purchased 80% of Jax Co. on 01/06/X2. The figures for Profit and Loss items for
the year ended 01/12/X2 were as follows:
Nero Jax
Revenue 8000 3000
Cost of Sales -4000 -1000
Gross Profit 4000 2000
Operating Costs -1500 -1500
Finance Costs -1000 -200
Profit Before Tax 1500 300
Tax -700 -100
Profit for the year 800 200
Show the figures to be shown in the Group Statement of Profit or Loss and calculate
the Group Profit or Loss for the year ended 01/12/12.
Solution
6 Months
Nero Jax Group
Jax
Revenue 8000 3000 1500 9500
Cost of Sales -4000 -1000 -500 -4500
Gross Profit 5000
Operating Costs -1500 -1500 -750 -2250
Finance Costs -1000 -200 -100 -1100
Profit Before Tax 1650
Tax -700 -100 -50 -750
Profit for the year 900
101
Illustration 2
Simo Co. purchased 80% of Loco Co. on 01/03/X2. The figures for Profit and Loss items
for the year ended 01/12/X2 were as follows:
Simo Loco
Revenue 9000 2000
Finance Income 300 0
Profit Before Tax 3000 -200
Tax -800 -60
Profit for the year 2200 -260
During the period since acquisition Simo sold goods to Loco during the year at a margin of
40% and worth $1000. Half of these goods have been sold on by Loco by the year end.
Loco paid interest of $200 to Simo after acquisition.
Simo paid dividend of $125 on 31/11/X2.
Show the figures to be shown in the Group Statement of Profit or Loss and calculate
the Group Profit or Loss for the year ended 01/12/12.
Solution
102
PURP
(1000 x 1/2) = 500 40% 200
As the Parent is seller
DR/CR Account $ $
DR Cost of sales to increase 200
Remember to remove the total amount of the sales also from sales and cost of sales
DR/CR Account $ $
DR Revenue to decrease 1000
CR Cost of sales to decrease 1000
9 Mths
Simo Loco Adjustments Group
Loco
Revenue 9000 2000 1500 -1000 9500
Cost of Sales -4000 -1000 -750 1000
PURP (W1) -200 -3950
Gross Profit 9500
Operating Costs -1000 -700 -525 -1525
Finance Income 300 0
Sub. Dividend (125 x 80%) -100
Sub. Interest -200 0
Finance Costs -1000 -500 -375
Sub Interest 200 -1175
Profit Before Tax 7975
Tax -800 -60 -45 -845
Group Profit for the year 7130
103
Illustration 3
Argentina owns an 80% share of Messi which it purchased one year ago.
The information below relates to Messi at the date of acquisition.
Ordinary Reserves Fair Value of Fair value of Cost of the

Share Capital the net assets the NCI investment
$m $m $m $m $m
200 400 800 200 1900
The income statements for both are:
Argentina Messi
Revenue 8000 3000
Profit Before Tax 1500 300
Tax -700 -100
Profit for the year 800 200
Other information
I. Messi sold goods to Argentina during the year at a margin of 40% and worth $100m.
Half of these goods have been sold on by Messi by the year end.
II. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year
end an impairment review has found that the goodwill has been impaired by 10%.
Produce a consolidated Income Statement for the Argentina group.
104
Solution
Argentina
↓ 80%
Messi
Date Acquired 1 Year Ago (No time apportionment)
Parent Share 80%
NCI 20%
100%
Working 2 - Inter Company
PURP
(100 x 1/2) = 50 40% 20
As the Sub is seller we will need to adjust the NCI share Profit
DR/CR Account $ $
Remember to remove the total amount of the sales also from sales and cost of sales
DR/CR Account $ $
DR Revenue to decrease 100
CR Cost of sales to decrease 100
105
Net Assets at Acquisition -800
Gross Goodwill 1300
Goodwill impairment
Gross Goodwill 1300
Impairment Loss (1300 x 10%) 130
The treatment for this is:
DR/CR Account $ $
CR Goodwill Intangible Asset to decrease 130
Working 4 - Cost of Sales
$m
Parent 4000
Subsidiary 1000
Less Inter Company Sales -100
Plus the PURP 20
Plus impairment loss 130
5050
106
Working 5 - NCI
NCI % of the subsidiary’s profits in question 200 x 20% 40
Less NCI share of PURP 20 x 20% -4
Less NCI share of Impairment of goodwill 130 x 20% -26
10
Statement of Profit or Loss for Argentina Group
Argentina Messi Group
Revenue 8000 3000 8000 + 3000 - 100 inter 10900

company sales
Cost of Sales -4000 -1000 W4 -5,050
Gross Profit 4000 2000 5850
Operating Costs -1500 -1500 1500 + 1500 -3000
Finance Costs -1000 -200 1000 + 200 -1200
Profit Before Tax 1500 300 1650
Tax -700 -100 700 + 100 -800
Profit for the year 800 200 850
Attributable to Parent (Balancing Figure) 840
Attributable to NCI (W5) 10
850
107
1. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of
their statements of profit or loss for the year ended 30 September 2014 are:
Walter White
‘000 ‘000
Revenue 35,000 26,000
COS -23,000 -14,000
What would be the cost of sales in Walter’s consolidated statement of profit or loss for the
year ended 30 September 2014?
A $37.00 million
B $28.50 million
C $35.50 million
D $47.50 million
Answer B
Solution
Parent 23,000
Sub (14,000 x 3/12) 5,500
28,500
108
2. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of
their statements of profit or loss for the year ended 30 September 2014 are:
Walter White
‘000 ‘000
Revenue 35,000 26,000
COS -23,000 -14,000
Sales from Walter to White throughout the year ended 30 September 2014 had
consistently been $500,000 per month. Walter made a mark-up on cost of 30% on these
sales. White had $260,000 of these goods in inventory as at 30 September 2014.
What would be the cost of sales in Walter’s consolidated statement of profit or loss for the
A $27.00 million
B $28.56 million
C $35.56 million
D $27.06 million
Answer D
Solution
Parent 23,000
Sub (14,000 x 3/12) 5,500
Inter-Co Sales (500 x 3) -1,500
PURP (260 x 30/130) 60
27,060
109
3. PT acquired 60% of SB’s ordinary shares on 1 January 2011 for $2,346,000 when
SUB’s retained earnings were $341,000.
subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by
10% at 31 December 2013. The equity of SUB as at 31 December 2013:
$000
Share premium 24
What adjustment should be made to the NCI share of profit for the goodwill impairment?
A. $0
B. $995 DR
C. $155,000 CR
D. $155,000 DR
Answer A
Proportionate goodwill does not affect the NCI.
110
Mind Map 12 - Regulatory
Environment
111
1. There are different approaches to corporate governance: rules-based and principles-

based.
For each of the characteristics below, select whether it is a rules-based or a principle-
based approach.
A. Comply with the code or explain why
B. Applied in the US
C. Instils the code into law
D. Applied in the UK
Answer
Rules-based = B&C
Principles-based = A&D
2. Which three of the following are topics included in the International Accounting
Standards Board’s (IASB) The Conceptual Framework for Financial Reporting?
A. The objective of financial statements
B. Concepts of capital maintenance
C. Regulatory bodies governing financial statements
D. Measurement of the elements of financial statements
E. The standard setting process.
Answer
A, B & D
112
3. What is the purpose of the International Organization of Securities Commission
(IOSCO)
A. Regulates the world’s securities and futures markets.
B. Promotes rigorous application of the international financial reporting standards
C. Reviews issues not covered by IFRS
D. Issues accounting standards
Answer
A
4. List the following in the correct order for the International Financial Reporting Standard
setting process.
A. Consultation with advisory committee in order to set agenda and planning process
B. Issue exposure draft for public consultation
C. Issue Discussion paper for public consultation
D. Issue IFRS
Answer B
A. A, B, C, D
B. A, C, B, D
C. A, D, B, C
D. B, D, A, C
5. Which of the following are NOT responsibilities of the IFRS Advisory Council?
A. Give advice to IASB on agenda decisions and priorities in its work
B. Annually review the strategy of the IASB
C. Inform the IASB of the views of the members of the council on proposed new
standards
D. Appoint the member of the IASB
Answer
C&D
113
Mind Map 13 - Conceptual
Framework
114
1. Which of the following is NOT a purpose of the IASB’s Conceptual Framework?
A. To assist the IASB in the preparation and review of IFRS

B. To assist auditors in forming an opinion on whether financial statements comply with
IFRS
C. To assist in determining the treatment of items not covered by an existing IFRS
D. To be authoritative where a specific IFRS conflicts with the Conceptual Framework
Answer D
2. The IASB’s Framework for the preparation and presentation of financial statements lists
four qualitative characteristics of financial statements, one of which is reliability.
Which ONE of the following lists three characteristics of reliability?
A. Neutrality, prudence and comparability.

B. Prudence, faithful representation and relevance.
C. Comparability, relevance and completeness.
D. Neutrality, faithful representation and prudence.
Answer D
3. Which ONE of the following is NOT listed as an element of financial statements by the
IASB Framework?
A Asset
B Equity
C Profit
D Expenses
Answer C
115
4. The following are possible methods of measuring assets and liabilities other than
historical cost:
(i) Current cost

(ii) Realisable value
(iii) Present value
(iv) Replacement cost
According to the IASB’s Conceptual Framework for Financial Reporting (2010)

(Framework) which of the measurement bases above can be used by an entity for
measuring assets and liabilities shown in its statement of financial position?
A (i) and (ii)

B (i), (ii) and (iii)
C (ii) and (iii)
D (i), (ii) (iii) and (iv)
Answer D
5. Which of the following criticisms does NOT apply to historical cost accounts during a
period of rising prices?
A. They contain mixed values; some items are at current values, some at out of date
values
B. They are difficult to verify as transactions could have happened many years ago
C. They understate assets and overstate profit
D. They overstate gearing in the statement of financial position
Answer B
116
Mind Map 14 - External Audit
117
Illustration 1
Statal Co. has just been audited and the auditor has found that management have
incorrectly calculated depreciation for the current year. The error is material to the financial
statements and the directors have refused to correct the error.
What action should the auditor take in issuing the audit opinion?
Solution
The auditor should issue a modified audit report with an ‘except for’ paragraph.
Illustration 2
Newrit Co. is currently being audited and the auditor has discovered that the payroll
function is outsourced to Payroller Co. The auditor has contacted Payroller Co. but they
are unable to provide them with the payroll records of Newrit Co. due to a recent computer
failure. Payroll is material to the financial statements.
What action should the auditor take in issuing the audit opinion?
Solution
The auditor should issue a modified audit report with an ‘except for’ paragraph.
118
1. What is the responsibility of the external auditor?

A. To report on whether the financial statements are prepared in a true and fair manner
B. To prepare the financial statements
C. Implement internal controls
D. Appoint the internal auditor
Answer
A
2. Select which of the following are the rights of an auditor.

A. Access to all records
B. Speak at the AGM
C. Call an EGM
D. Restate the financial statements
Answer
A, B & C
3. Put the following steps in order in relation to the Audit Process.

A. Audit planning
B. Detailed testing
C. Report at AGM
D. Review and Opinion
E. Risk Assessment
F. Appointment and Agree Terms
Answer A
A. F, E, A, B, D & C
B. F, E, B, A, D & C
C. F, E, A, D, B & C
D. F, E, A, B, C & D
119
4. Which of the following is NOT an element of the Auditors Report.
A. Fee
B. Title & Addressee
C. Opinion
D. Signature
Answer
A
5. The Auditor should only use an ‘Emphasis of Matter’ paragraph to highlight potential
important issues or uncertainties rather than for general communications to share holders.
Is this statement:
A. True
B. False
Answer A
6. The auditors have discovered that the inventory has been materially understated in the
financial statements.
What type of audit report should be issued in this situation?
A. A modified report, based on insufficient appropriate evidence, with a qualified
opinion
B. A modified report, based on material misstatements, with a qualified opinion
C. A modified report, based on material misstatements, with an adverse opinion
D. An unmodified report, with an unmodified opinion
Answer
B
120
Mind Map 15 - Ethics
121
1. Accountants must ensure that they act responsibly when carrying out the services they
provide to the public. Which of the following may influence an accountant not to act in the
public interest and must therefore be guarded against?
A. Becoming too familiar with a client and developing a close friendship.

B. Being offered a larger fee than the work really warrants.
C. Wanting to keep the client happy.
D. All of the above.
Answer D
2. Archie is an accountant who works in a small local manufacturing business. During the
recent recession the company has had cash flow problems and the CEO has asked Archie
to overstate profit by bringing in sales from next year. He assures Archie that it is a ‘one-off
to ensure our survival and the jobs of him and his colleagues’.
For Archie to do this would be a breach of which of the following principles?
A. Objectivity
B. Confidentiality
C. Integrity
D. Advocacy
Answer C
3. You have discovered an ethical threat. Which of the following should you do first?
A. Discuss with the director of the company
B. Discuss with your line manager
C. Discuss with the auditor
D. Discuss with your professional body
Answer D
122
4. In what situation is it appropriate to break confidentiality?
A. To obtain promotion
B. Under duress
C. Legal requirement
Answer C
123
Mind Map 16 - Corporate
Governance
124
1. Corporate Governance is best described as:
A. A system of policies by which the organisation is directed and controlled.

B. Guidance for the treatment of stakeholders by an organisation.
C. A system of penalties for unethical behaviour.
D. Guidance on how the organisation should interact with government.
Answer A
2. Which of the following statements relating to the US Sarbanes-Oxley Act 2002 is

correct?
A. It is a principles based code requiring compliance or an explanation of reasons for non-

compliance.
B. It came about as a response to the Second World War.
C. It requires the Auditor to be represented on the board of directors.
D. It requires an annual statement on Internal Controls.
Answer D
3. Which of the following is not required under the UK Corporate Governance Code?
A. Regular re-election of directors.

B. Separate people holding the post of CEO and Chairman.
C. All members of the board should be non-executives.
D. Directors should have regular performance evaluations.
Answer C
4. Evan has been asked to join the board of AST Ltd. as a Non-Executive director. Which
of the following would mean that he could not accept the role as he is not sufficiently
independent.
A. He was employed as a senior manager in AST Ltd from which he retired 8 years ago.
B. He is a director in HRT Ltd. who supply a major component to AST Ltd.
C. He went to school with the Chairman although they did not keep in contact.
D. He owns a very small number of AST Ltd’s shares.
Answer B
125
5. Which of the following is not a function of the Audit Committee?
A. Monitoring and review of the financial statements of the organisation.

B. Monitoring the work of Internal Audit.
C. Monitoring the performance of the board of directors.
D. Liaison with the external auditor.
Answer C
126
Mind Map 17 - Presentation
of Financial Statements
127
Statement of Financial Position Pro-Forma
YZ Group Statement of Financial Position as at 31 December 20X5
Assets
Non-Current Assets
Property Plant & Equipment X
Investments X
Intangibles X
Current Assets
Inventories X
Trade Receivables X
Cash & Cash Equivalents X
Total Assets X
Equity & Liabilities
Share Capital & Reserves
Ordinary Shares X
Share Premium Account X
Retained Earnings X
Other Components of Equity X
Total Equity X
Non-Current Liabilities X
Long Term borrowings X
Deferred Tax X
Current Liabilities X
Trade Payables X
Short Term Borrowings X
Current Tax Payable X
Short Term Provisions X X
Total Equity & Liabilities X
128
Statement of Changes in Equity Pro-Forma
Share Share Revaluation Retained Total

Capital Premium Reserve Earnings Equity
$ $ $ $ $
Balance B/F X X X X X
Change in
Accounting
(X) (X)
Policy/prior year
error
Restated
X X X X X
Balance
Dividends (X) (X)
Shares Issued X X X
Profit for the

X X
Period
Revaluation
X X
gain/loss
Transfer to
Retained (X) X -
Earnings
Balance C/F X X X X X
129
Statement of Comprehensive Income Pro-Forma
$
Revenue X
Cost of Sales (X)
Gross Profit X
Distribution Costs (X)
Admin Expenses (X)
Profit from Operations X
Finance Cost (X)
Investment Income X
Profit Before Tax X
Income Tax Expense (X)
Profit For the Year X
Other Comprehensive Income
Gain/Loss on Revaluation X
Gain/Loss on Financial Instruments Through Comprehensive Income X
Total Comprehensive Income for the Year X
130
Mind Map 18 - Non Current
Assets
131
Illustration 1
Mahesh Bhupathi started a painting business on 1 April 2010. In the year to 31 March
2011, he incurred costs which are summarised below.
Item $
Office 200,000
Legal fees relating to 8,000

purchase of office
Cost of materials and labour 250

to paint office
Paint brushes for business 10,000

use
Delivery costs of brushes 50
Staff wages 45,000
What amounts should be capitalised as Land and buildings, and Paint Brushes?
Solution
Land & Buildings $
Office 200,000
Legal Fees 8,000
Painting not included -
Total 208,000
Paint Brushes $
Paint brushes for business use 10,000
Delivery cost of brushes 50
Wages (Paid each year) -
Total 10,050
132
Illustration 2
Charlotte has been running a creche since 1 July 2010. She has purchased the following
items relating to this business:
1. A new microwave for the creche kitchen at a cost of $200 (purchased 5 May 2011)
2. New tables for the creche at a cost of $600 (purchased 1 July 2011)
She depreciates the oven at 8% straight line and the tables at 20% reducing balance. a full
year’s depreciation is charged in the year of purchase and none in the year of disposal.
What is the total depreciation charge for the year ended 30 September 2013?
Solution
Tables
Year O’Bal Dep’n Cl’Bal
2011 600 120 480
2012 480 96 384
2013 384 77 307
Microwave $
Cost at 5 May 2011 200
Dep’n 30 Sep 2012 (200 x 8%) 16
Dep’n 30 Sep 2013 (200 x 8%) 16
Total Depreciation for Year $
Tables 77
Microwave 16
Total Depreciation 93
133
Illustration 3
The following relates to the purchase of plant by Windsor Automotive:
Cost $20,000
Purchase Date 1 September 2010
Depreciation method Straight line pro rata
Residual value 2,000
Useful economic life 5
Review, 1 Sep 2011
New residual value 0
New Useful economic life 8
What is the total depreciation charge for the years ended 30 November 2010 and
2011?
Solution
Cost at 01 Sep 2010 20,000
Depreciation to date (20,000 - 2,000) / 5) x 3/12 -900
Carrying Value 30 Nov 10 19100
New Depreciation (19,100 - 0) / 8 -2,388
Carrying Value 30 Nov 10 16712
134
Illustration 4
Grigor Dimitrov purchased a new tennis racquet for $1,000 on 1 January 2010. At that
time, he believed that its useful economic life would be 10 years, with no residual value.
On 1 January 2012, Grigor changes his estimations. He believes that the racquet will be
used for a further 10 years after which time it will have a second-hand value of $100.
What is the depreciation charge for the year ended 31 December 2012?
Solution
Cost at 01 Jan 2010 1,000
Depreciation to date (1,000 / 10) x 3 -300
Carrying Value 700
New Depreciation (700 - 100) / 10 60
Illustration 5
Mr Gall runs a construction company. On 1 January 2010, he purchased a fork-lift vehicle

for $8,000. He depreciates it at 5% per anum straight line on a monthly basis. A few years
later, he decides to replace it with one which is of superior quality. He sells the forklift truck
on 30 June 2012 for $7,500.
How much is charged to Mr Gall’s income statement for the year ended 31
December 2012?
135
Solution
Cost at 01 Jan 2010 8,000
Depreciation 31 Dec 2010 (8,000 x 5%) -400
Depreciation 31 Dec 2011 (8,000 x 5%) -400
Depreciation 30 June 2012 (8,000 x 5%) x 6/12 -200
Carrying Value 7000
Sale Proceeds 7,500
Profit On Disposal 500
Depreciation in Year -200
Disposal Account
DR CR
Asset at Cost 8,000 Accumulated Dep’n 1,000
Proceeds 7,500
Profit on Sale 500
8500 8,500
136
1. Identify from the list below, revenue expenditure and capital expenditure.
A. Desktop Computer
B. Printer Paper
C. Ink
D. Laptop
E. Computer Desk
F. Server with Monitors
Answer
Revenue Expenditure = B & C
Capital Expenditure = A, D, E & F
2. Both Land and Land Improvements will generally be depreciated.

True or False
Answer
False
3. A company purchases equipment for £30,000 on July 1, 2014. It estimates that the
equipment will have a residual value of £2,000 and its useful life will be 7 years. Assuming
that the company's accounting year ends on December 31 of each year, what will be the
Depreciation Expense for the years 2014 and 2015 assuming straight-line depreciation?
2014 ______
2015 ______
Answer
2014 = £4,000
2015 = £4,000
Working (30,000-2,000)/7 = 4,000
137
4. On January 1, 2010 an asset was acquired for £30,000. Its useful life was expected to
be 10 years and the residual value is expected to be NIL. After 4 years, the company
reviewed the asset and found that it would be useful for only 3 more years. The company
uses the straight-line method of depreciation. What will the Depreciation Expense in each
of the years 2012 and 2014?
Answer
2012 = £3,000
2014 = £6,000
Working;
2010 = (30,000 – 0)/10 = 3,000 ;
2014 = NBV = 30,000 – (3,000 x 4) = 18,000, Dep’n 18,000/3 = 6,000
5. Calculate the profit or loss on disposal and indicate the journal entries required.
Sales Proceeds 35,500

Asset Cost 100,000
Depreciation to date 60,000
A. Profit on disposal 4,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500

B. Loss on disposal 4,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500
C. Profit on disposal 64,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500
D. Loss on disposal 64,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500
Answer B
138
Mind Map 19 - Non Current
Assets II
139
Illustration 1
John Boy has had a non current asset for several years which he bought for $300,000.
The depreciation on the asset to date has been $50,000. He decides to revalue the asset
and finds that it is now worth $350,000.
Show the journal entries to record the transaction.
Solution
Asset at cost 300,000

Depreciation to date -50,000
Carrying Value 250,000

New Value 350,000
Revaluation Reserve 100,000
Journal Entries
DR Acc Dep’n 50,000

DR Asset at Cost 50,000
CR Rev. Reserve 100,000
140
Illustration 2
Jamie owns a shoe factory. The premises were bought on 1 May 20X3 for $600,000 and
depreciated at 3% per annum straight line.
Jamie now wishes to revalue the factory premises to $900,000 on 1 May 20X8 to reflect
market value.
What is the balance on the revaluation reserve after this transaction?
Solution
Cost at 1 May 20X3 600,000
Depreciation to 1 May 20X8 (600,000 x 3%) x 5 -90,000
New Value 900,000
Revaluation Reserve (900,000 - 510,000) 390,000
141
Illustration 3
Antro Co. buys an asset on 01 Jan 20X4 for $500,000 with a useful economic life of 20
years. On 01 Jan 20X6 the asset is revalued to $600,000.
On 01 Jan 20X7 the asset is revalued again to $400,000.
Show the accounting treatment for the two revaluations and the depreciation charge
for the year ended 31 Dec 20X8.
Solution
Cost 500,000
Dep’n to 01 Jan 20X6 (500,000 / 20) x 2 -50,000
New Value 01 Jan 20X6 600,000
Dep’n to 01 Jan 20X7 (600,000 / 18) -33,333
Carrying Value 01 Jan 2007 566,667
Impairment -166,667
Remove Revaluation Reserve 150,000
Rest to P/L (166,667 - 150,000) 16,667
New Depreciation 400,000 / 17 23,529
142
Illustration 4
Charlie owns a shop in Smallville. He bought it 30 years ago for $150,000, depreciating it
over 50 years. At the start of 20X8 he decides to revalue the unit to $900,000. The shop
has a remaining useful life of 20 years.
What will the depreciation charge be in 20X8?
Solution
Cost 30 yrs ago 150,000
Accumulated Dep’n (150,000 / 50) x 30 -90,000
New Value 900,000
New Depreciation 900,000 / 20 45,000
143
1. The following information relates to OTQ1, OTQ2 and OTQ3.
ABC Company purchased a building on 1/1/07 at a cost of 1,250,000. The building is

depreciated at 2% per annum. At 31/12/10, the building was revalued at 1,500,000
reflecting its value on the market at that time. The company revalued the building 31/12/14
and found that the market value was 1,000,000.
What are the journal entries required in 2010 after the first revaluation?
A. Dr Asset 350,000 Cr Revaluation Reserve 350,000 Cr P&L 0

B. Cr Asset 350,000 Dr Revaluation Reserve 350,000 Cr P&L 0
C. Dr Asset 350,000 Cr Revaluation Reserve 0 Cr P&L 350,000
D. Cr Asset 350,000 Dr Revaluation Reserve 0 Dr P&L 350,000
Answer A
Working
NBV 2010 (1250000 – (1250000*0.02)*4) = 1,150,000
Revaluation = 1,500,000
Revaluation Gain = 350,000
2. What are the journal entries required in 2014 after the second revaluation?
A. Cr Asset 410,000 Dr Revaluation Reserve 350,000 Dr P&L 60,000

B. Dr Asset 410,000 Cr Revaluation Reserve 410,000 Cr P&L 0
C. Dr Asset 350,000 Cr Revaluation Reserve 350,000 Cr P&L 60,000
D. Dr Asset 410,000 Cr Revaluation Reserve 350,000 Cr P&L 60,000
Answer A
NBV 2014 (1500000 – (1500000*0.02)*3) = 1,410,000

Revaluation = 1,000,000
Revaluation Loss = 410,000
3. What is the depreciation charge for 2015?
2015 ______
Answer 20,000
Working
1,000,000 * 0.02 = 20,000
144
4. In the notes to the financial statements, what is missing from the disclosure items below
in terms of revaluation of a non current asset.
• Date
• Assumption
• Qualified Revaluer
• Revaluation Gain/Loss
Answer Cost of Asset
145
Mind Map 20 - Investment
Property (IAS 40)
146
Illustration 1
Which of the following are Investment Property?
• Building used as accommodation for staff.

• Land purchased as an investment. No planning consent yet.
• New office building purchased for capital appreciation.
Solution
Building used as accommodation for staff. NO
Land purchased as an investment. No planning consent yet. YES
New office building purchased for capital appreciation. YES
147
Illustration 2
A company has purchased a building for investment purposes on 1st Jan 20X0. The
building cost a total of $1.5m with the land element being estimated at $500,000.
The building has a useful life of 30 years. At the 31st December 20X0 the fair value of the
building (including the land) was $2m.
Show the treatment of the property for the two methods possible under IAS 40.
Solution
Cost Model
Cost of the Property $1,500,000
Depreciation in Period (1,500,000 - 500,000) / 30 $33,333
Carrying Value at 31 December 20X0 $1,466,667
Fair Value Model
Cost of the Property $1,500,000
Depreciation in Period Not Depreciated $0
Fair Value Adjustment to Income ($2m - $1.5m) $500,000
Carrying Value at 31 December 20X0 $2,000,000
148
Aston Co. owns a property which cost $400,000 7 years ago at which time it had a useful
economic life of 20 years. The property is rented out to Villa Co. under an operating lease
and has been treated using the cost model. Aston Co. has now decided to revalue the
property to it’s current fair value of $500,000.
Which of the following is correct?
A. A revaluation reserve of $240,000 will be created.

B. A charge of $240,000 will be taken to Profit or Loss.
C. A gain of $240,000 will be taken to Profit or Loss.
D. The carrying value of the property will be increased by $100,000.
Answer C
Cost $400,000
Depreciation (400/20 x 7) $140,000
Carrying Value $260,000
Revalue to $500,000
Revaluation Amount $240,000 to P/L as Investment Property
149
Mind Map 21 - Intangible
Assets (IAS 38)
150
Illustration 1
Which of the following should be classified as development?
1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found
in the Arctic Circle is resistant to heat.
2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-
equipment which will be more durable.
3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.
4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new
heat-resistant body-suit for humans.
Solution
2 & 4 are development
151
Illustration 2
Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:
Expense Costs
20X5 20X6 20X7 20X8
$ $ $ $
Revenue from other activities 500 700 800 800
Revenue from Fold-up Bicycle 500 700 900
Development costs -600
Show how the development costs should be treated if:
1. the costs do not qualify for capitalisation

2. the costs do qualify for capitalisation.
Solution
1. Expense Costs
20X5 20X6 20X7 20X8 Total
Revenue from other 500 700 800 800 2800

activities
Revenue from other widgets 500 700 900 2100
Development costs -600 -600
Net Profit/Loss -100 1200 1500 1700 4300
2. Amortise Development Costs
20X5 20X6 20X7 20X8 Total
Revenue from other 500 700 800 800 2800

activities
Revenue from other widgets 500 700 900 2100
Development costs 0 -143 -200 -257 -600
Net Profit/Loss 500 1057 1300 1443 4300
600 x 600 x 600 x

Working for Costs
500/2100 700/2100 900/2100
152
Illustration 3
A company has 3 projects in development:
Project A is in development and testing of the product has proved successful. Production
has begun and some sales have been made to date. The costs have been measured
accurately and the project looks likely to be profitable. All costs incurred so far meet the
criteria to be capitalised under IAS 38.
Project B is also in development and testing of the product has proved successful. The
costs have been measured accurately and the company expects to begin production and
sales next year. All costs incurred so far meet the criteria to be capitalised under IAS 38.
Project C was begun in the current period and to date there has been a feasibility study
carried out which was inconclusive.
Other Information:
A B C
Total Costs to the start of the year 600 500
Costs incurred in the period 200 100 150
Total Anticipated Revenues 20,000 30,000 Unknown
Revenue in Period 5,000 0 0
Show how the above will be treated in the current period accounts discussing each project
individually.
153
Solution
Project A
Project A is in production and meets the criteria for capitalisation. All costs to date will
be capitalised and amortisation based on sales during the period will be charged
Costs Capitalised to Date 600
Costs in the period 200
Total costs to be capitalised 800
Ammortisation in Period (800 x 5,000/20,000) 200
Intangible Asset Carried Forward 600
Project B
Project B meets the criteria for capitalisation. All costs to date will be capitalised but
production has not begun meaning that no amortisation will occur.
Costs Capitalised to Date 500
Total costs to be capitalised 600
Intangible Asset Carried Forward 600
Project C
Project C does not meet the criteria for capitalisation as it is purely research into the
feasibility of the project and the outcome was uncertain. All costs to date will be
written off to the income statement in the period incurred.
154
1. Which one of the following could be classified as deferred development expenditure in

M’s statement of financial position as at 31 March 2010 according to IAS 38 Intangible
assets?
A. $120,000 spent on developing a prototype and testing a new type of propulsion system
for trains. The project needs further work on it as the propulsion system is currently not
viable.
B. A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques.
C. $35,000 spent on consumer testing a new type of electric bicycle. The project is near
completion and the product will probably be launched in the next twelve months. As this
project is the first of its kind for M it is expected to make a loss.
D. $65,000 spent on developing a special type of new packaging for a new energy efficient
light bulb. The packaging is expected to be used by M for many years and is expected
to reduce M’s distribution costs by $35,000 a year.
Answer D
2. Which ONE of the following events would result in an asset being recognised in KJH’s
statement of financial position at 31 January 2012?
A. KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the
advertising to generate additional sales of $100,000 over the period February to April
2012.
B. KJH is taking legal action against a contractor for faulty work. Advice from its legal team
is that it is likely that KJH will receive $250,000 in settlement of its claim within the next
12 months.
C. KJH purchased the copyright and film rights to the next book to be written by a famous
author for $75,000 on 1 March 2011.
D. KJH has developed a new brand name internally. The directors value the brand name at
$150,000.
Answer C
155
3. Dempsey’s year end is 30 September 2014. Dempsey commenced the development
stage of a project to produce a new pharmaceutical drug on 1 January 2014. Expenditure
of $40,000 per month was incurred until the project was completed on 30 June 2014 when
the drug went into immediate production. The directors became confident of the project’s
success on 1 March 2014. The drug has an estimated life span of five years; time
apportionment is used by Dempsey where applicable.
What amount will Dempsey charge to profit or loss for development costs, including any
amortisation, for the year ended 30 September 2014?
A $12,000
B $98,667
C $48,000
D $88,000
Answer D
The directors were only confident of success on 31 March so until then we write off the
monthly amount. So 2 months at $40,000 goes to P/L
From then until it ended on 30 June it is capitalised. So 4 months at $40,000 to SFP

$160,000.
Production began on 30 June so we can start amortisation of the $160,000 then over 60
months.
It’s 3 months until the year end so amortise for that length of time.
Write off to 1 January 2014 to 28 February 2014 (2 x $40,000) $80,000

Amortisation 160,000 (i.e. 4 x 40,000)/60 months x 3 (July to September) $8,000
$88,000
4. Which ONE of the following CANNOT be recognised as an intangible non-current asset

in GHK’s statement of financial position at 30 September 2011?
A. GHK spent $12,000 on a consultation to determine demand for a new type of product.
B. GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the
acquisition was $15,000.
C. GHK purchased a brand name from a competitor on 1 November 2010, for $65,000.
D. GHK spent $21,000 during the year on the development of a new product. The product
is being launched on the market on 1 December 2011 and is expected to be profitable.
Answer A
156
Mind Map 22 - Government
Grants (IAS 20)
157
Illustration 1
A company purchases an item of plant on which it receives a government grant of 30% of
the purchase price. The plant cost $2m and has no residual value.
The plant is to be depreciated on a straight line basis over it’s 10 year life.
Show the possible accounting treatments for the government grant in the first year.
Solution
DR CR
Plant at Cost 2,000,000
Cash 2,000,000
Income Statement Depreciation 200,000
Accumulated Depreciation 200,000
Cash for Government Grant 600,000
Deferred Income 600,000
Deferred Income Recognition in Year (600,000 / 10) 60,000
Income Statement 60,000
Total charge to Income Statement (200,000 - 60,000) = $140,000
DR CR
Plant at Cost 2,000,000
Cash 2,000,000
Cash 600,000
Plant at Cost 600,000
Income Statement Depreciation ((2m - 600k) /10) 140,000
Accumulated Depreciation 140,000
Total Charge to Income Statement = $140,000
158
1. Which of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
I. A government grant related to the purchase of an asset must be deducted from the
carrying amount of the asset in the statement of financial position
II. A government grant related to the purchase of an asset should be recognised in profit
or loss over the life of the asset
III. Free marketing advice provided by a government department is excluded from the
definition of government grants
IV. Any required repayment of a government grant received in an earlier reporting period
is treated as prior period adjustment
A (i) and (ii)

B (ii) and (iii)
C (ii) and (iv)
D (iii) and (iv)
Answer B
159
Mind Map 23 - Borrowing
Costs (IAS 23)
160
Illustration 1
A company is building a qualifying asset worth $2.5m and has issued a bond of the same
value to do so with an effective interest rate of 6%.
The asset will take 9 months to build and for the first 3 months the company invests the
proceeds of the bond and earns interest at 3%.
What borrowing costs should be capitalised?
Solution
Total Interest for the Year (2.5m x 6%) 150,000
For 9 months x 9/12 112,500
Temporary Investment Income (2.5m x 3%) x 3/12 -18,750
93,750
161
Illustration 2
A company has a £1m 6% loan and a £2m 8% loan. It builds a building costing £600,000
and it takes 8 months.
What borrowing costs should be capitalised?
Solution
Total Borrowing Cost Total Cost
$1m 6% 6
$2m 8% 16
$3m At total cost 22
Average Rate therefore is (22/3) = 7.33%
We can capitalise 600,000 x 7.33% x 8/12 = $29,320
Illustration 3
Company buys land on 1/12, a planning application is prepared during December and
January. Permission is obtained at the end of January. Payment for the land is made on
1/2. On this date a loan is taken out to pay for the land and building construction
Adverse weather conditions meant a delay in the commencement of work until 15/3.
When should interest be capitalised from?
Solution
Expenses start being incurred 1 December
Borrowing costs incurred 1 February
Activities started 15 March
Start Capitalising on 15 March
162
Illustration 4
Davos is building an office block and issued a $10 million unsecured loan with a coupon
(nominal) interest rate of 6% on 1 April 20X9. The loan is redeemable at a premium which
means the loan has an effective finance cost of 7·5% per annum.
The loan was specifically issued to finance the building of the new block which meets the
definition of a qualifying asset in IAS 23. Construction of the block commenced on 1 May
20X9 and it was completed and ready for use on 28 February 2010, but did not open for
trading until 1 April 20X0.
During the year trading at Davos’ was below expectations so they suspended the
construction of the new block for a two-month period during July and August 20X9. The
proceeds of the loan were temporarily invested for the month of May 20X9 and earned
interest of $40,000.
Calculate the borrowing costs that can be capitalised under IAS 23
Solution
The effective interest rate is 7.5% which should be used to capitalise the interest as this is
a qualifying asset.
The interest cost for the year to 31/03/20X0 would therefore be ($10m x 7.5%) =
$750,000.
However the building only began on 1/05/20X9 and was completed on 28/02/20X0 so one
month at the start and one month at the end can’t be capitalised.
In addition there were 2 months during which construction was suspended. 
8 months interest ($750,000 x 8/12) = $500,000 less the temporary investment income of
$40,000 should be caplitalised.
Total = $460,000 
The rest of the cost should be written off to the Income statement.
163
1. Indicate which of the following is NOT a qualifying asset.
A. You are distilling whisky, and it must be allowed 10 years to mature.

B. You are a wholesaler. All goods purchased leave your firm as sales, unchanged
from their state of arrival.
C. You are building a town’s power-generation facility, which will take 4 years to
complete
D. You are building a manufacturing plant, which will take 2 years to complete
Answer B
2. You have a qualifying asset, a chemical plant. 80% of your company’s borrowings are in
relation to this qualifying asset. The remainder of the borrowings are not used for
qualifying assets. Total borrowings are $30,000 and the effective rate is 6%. The plant was
finished 2 months before the year end.
How much can be capitalised?
A. 1,500
B. 400
C. 2,000
D. 3,600
Answer A
30,000 x 6% x 10/12 = $1,500
3. Capitalisation is suspended if active development of an asset is suspended for an

extended period of time.
True
False
Answer True
164
Mind Map 24 - Operating
Segments (IFRS 8)
165
Illustration 1
Norman, a public limited company, has three business segments which are currently
reported in its financial statements. Norman is an international hotel group which reports to
management on the basis of region. It does not currently report segmental information
under IFRS8 ‘Operating Segments’. The results of the regional segments for the year
ended 31 May 2008 are as follows:
Revenue Segmental Segmental Segmental

Region
External Internal Profit/Loss Assets Liabilities
$m $m $m $m $m
European 200 3 -10 300 200
South East Asia 300 2 60 800 300
Other 500 5 105 2,000 1,400
There were no significant inter company balances in the segment assets and liabilities.
The hotels are located in capital cities in the various regions, and the company sets
individual performance indicators for each hotel based on its city location.
Required:
Discuss how the principles in IFRS 8 ‘Operating Segments’ for the determination of
a company’s reportable operating segments would be applied to Norman plc using
the information given above.
166
Solution
The KPIs used by the management of Norman are based on city so it may well be that the
operating segments of Norman could be split further on a city basis.
Norman should investigate their reporting structure to evaluate whether decisions about
allocation and performance are made within the entity on a city basis and consider splitting
the segments further.
Regarding the current segments, only the South East Asia segment passes all 3 tests for a
reportable segment. The European segment meets only the criteria for 10% + of reported
revenue and fails on the others.
However both segments will be reportable as they meet at least one of the criteria.
The current reported segments report only 50% of the entity’s total external revenue so
they will have to identify further operating segments regardless of whether they meet the
criteria until the reach 75%.
By examining the internal reports of Norman the entity can determine whether the
operating segments should be further split based on the information used by management.
167
Illustration 2
JK is an entity that operates in the wholesale and retail clothing market sectors across
several countries. It prepares its financial statements in accordance with IFRSs. The
directors are considering listing JK on a local stock exchange within the next 12 months.
One of the directors has raised concerns about the costs associated with being a listed
entity, in particular the additional expense of producing operating segment information.
(a) Explain how the requirements of IFRS 8 Operating segments assist entities in
minimising the costs of producing the operating segment disclosures required
by the standard as well as the benefits that could be gained by investors from
reviewing the operating segment disclosures of JK when making decisions on
investment.
(b) Discuss the potential limitations faced by investors of using operating segment
information when making investment decisions.
Solution
(a)
IFRS 8 requires that operating segment disclosures be based on the information that the
entity already produces for internal purposes.
If the information is already being internally produced by JK it should not involve significant
costs to comply with the IFRS 8 disclosures.
 
Investors are normally looking for information that can help them estimate the future
performance of an entity.
While the financial statements of JK will provide information on the performance of the
entity as a whole, the business operates in both retail and wholesale and in different
geographic locations.
The risks associated with these sectors will be different and so to accurately assess the
future risks facing an entity, users will need more than the combined figures in the financial
statements.
The operating segment disclosures on the performance and resources of the parts of the
business will then provide the investors with an insight into this information.
(b)
Under IFRS 8, the management of JK would determine the reportable segments that exist
in the entity. Segments may be selected differently by each entity which reduces the
comparability of segmental disclosures across entities.
Also, not all of the financial information can easily be allocated to segments – eg head
office expenses and finance costs. This again makes it difficult for users to get a complete
picture of the performance of segments and reduces comparability.
168
1. Decking is a multidivisional company that has both internal sales and external sales to
customers. Decking should report segment financial information for each segment meeting
which of the following criteria?
A. Segment profit or loss is 10% or more of consolidated profit or loss.

B. Segment profit or loss is 10% or more of combined profit or loss of all company
segments.
C. Segment revenue is 10% or more of combined revenue of all company segments.
D. Segment revenue is 10% or more of consolidated profit or loss.
Answer B & C
2. The following information pertains to Willow Company for the year ended 31 December
20X4.
Sales to customers 2,000,000

Intersegment sales 600,000
All of Willows segments are engaged solely in manufacturing operations. Willow has a
reportable segment if that segment’s revenue exceeds:
A. 264,000
B. 260,000
C. 204,000
D. 200,000
Answer B
3. Reported segments should report _____% or more of the entity’s total external revenue.
What is the missing percentage?
A. 25%
B. 50%
C. 75%
D. 15%
Answer C
169
Mind Map 25 - Assets Held
For Sale and Discontinued
Operations (IFRS 5)
170
Illustration 1
Archie Co. committed itself at the beginning of the financial year to selling a property that
is being under-utilised following the economic downturn. As a result of the economic
downturn, the property was not sold by the end of the year. The asset was actively
marketed but there were no reasonable offers to purchase the asset. Archie is hoping that
the economic downturn will change in the future and therefore has not reduced the price of
the asset.
Can Archie Co. classify the property as available for sale under IFRS 5?
Solution
Although Archie has a plan to sell, it is available immediately and they are trying to locate a
buyer it would appear that they are not marketing the property at a reasonable price.
They have not reduced the price even though there has been a downturn that has
presumably reduced prices in general so cannot classify the property under IFRS 5.
Illustration 2
A company has a machine that cost $300,000 to buy two years ago. At the time of
purchase the machine had a useful economic life of 30 years and they apply the cost
model under IAS 16 (Cost less depreciation).
The company has decided to sell the machine and it’s fair value at this time is $220,000
with additional costs to sell being estimated at $5,000.
Although the machine has not been sold at the year end as the decision was taken that
day the company is confident that it will be sold quickly and is committed to selling it
having begun to market the machine to potential purchasers.
How should the machine be treated at the year end in the financial statements and
at what value will it be included?
171
Solution
(a)
Cost $300,000
Depreciation Year 1 (300,000 / 30) $10,000
Depreciation Year 2 (300,000 / 30) $10,000
Carrying Value of Machine $280,000
Fair Value $220,000
Cost to Sell $5,000
Fair Value less Cost to Sell $215,000
Impairment (280,000 - 215,000) $65,000
The impairment will reduce the carrying value of the machine to $215,000 and the charge will be written
off to the income statement.
The machine will no longer be depreciated.
172
Illustration 3
A company has two divisions each of which form a major line of business, Division A and
Division B.
Mid way through the current period Division A was shut down with losses of $50,000 on
the sale of the fixed assets of the business and redundancy costs of $100,000.
Division B was restructured incurring losses of $85,000.
Results in the period included the following information:
Div A Div B
$‘000 $‘000
Revenue 1,000 2,000
Cost of Sales 750 1,250
Distribution 250 300
Administration 100 50
Finance costs for the business were $40,000 in the period and the tax charge was
$32,000.
Prepare a note to the accounts showing the analysis of the discontinued operation
and draft the income statement for the company for the period.
173
Solution
Discontinued Operations Analysis
$‘000
Revenue 1,000
Cost of Sales 750
Gross Profit 250
Admin Expenses 100
Distribution Costs 250
Operating Loss -100
Loss on Disposal of Fixed Assets -50
Redundancy Costs -100
Total Loss -250
Income Statement for Company
$‘000
Revenue 2,000
Cost of Sales 1,250
Gross Profit 750
Admin Expenses 50
Distribution Costs 300
Operating Profit 400
Re-organisation Costs -85
PBIT 315
Finance Costs -40
PBT 275
Tax -32
Profit for Period from Continuing Operations 243
Loss for Period from Discontinued Operations -250
Loss for Period from Total Operations -7
174
1. BN has an asset that was classified as held for sale at 31 March 2012. The asset had a
carrying value of $900 and a fair value of $800. The cost of disposal was estimated to be
$50. The useful economic life of the asset was 10 years.
According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which
ONE of the following values should be used for the asset in BN’s statement of financial
position as at 31 March 2012?
A. $750
A. $750
B. $810
C. $720
Answer A
2. PQ has ceased operations overseas in the current accounting period. This resulted in
the closure of a number of small retail outlets.
Which one of the following costs would be excluded from the loss on discontinued
operations?
A Loss on the disposal of the retail outlets

B Redundancy costs for overseas staff
C Cost of restructuring head office as a result of closing the overseas operations
D Trading losses of the overseas retail outlets up to the date of closure
Answer C
175
Mind Map 26 - Impairment of
Assets (IAS 36)
176
Illustration 1
The carrying value of an item of plant in the financial statements is $400,000. The
recoverable amount of the plant has been determined as $275,000.
Is the plant impaired and if so by how much?
Solution
$m
Recoverable amount 275,000
Impairment 125,000
177
Illustration 2
A company has an asset for which the following information is relevant:
$‘000
Carrying amount 400
Fair Value 350
Cost to sell 25
Cash flows expected in each of the next 5 years 90
Discount rate 10%
Annuity rate for 10% over 5 years 3.791
Carry out the impairment review for the asset.
Solution
$‘000
Value in Use (90 x 3.791) 341.19
Fair Value less cost to sell (350,000 - 25,000) 325
Recoverable amount is the higher of these two which is the Value in Use of $341,190.
Carrying Value 400
Recoverable Amount 341.19
Impairment 58.81
178
Illustration 3
Marko owned a piece of property, plant and equipment (PPE) which cost $12 million and
was purchased on 1 May 20X8. It is being depreciated over 10 years on the straight-line
basis with zero residual value. On 30 April 20X9, it was revalued to $13 million and on 30
April 20X0, the PPE was revalued to $8 million.
The whole of the revaluation loss had been posted to the statement of comprehensive
income and depreciation has been charged for the year.
Show the correct treatment.
Solution
Revalued Am’t Revaluation Reserve
BF 12 0.0
Dep’n (12/10) -1.2 0.0
Revaluation 2.2 2.2
CF 13 2.2
Dep’n -1.44 0
NBV 11.56 2.20
New Valuation 8
Total Impairment 3.56
Remove revaluation 2.20
Income Statement 1.36
179
Illustration 4
A cash generating unit has the assets outlined below. It’s recoverable amount has been
assessed as $1,000. Show the treatment for any impairment.
Assets Carrying Value
Goodwill 100
PPE 800
Intangible 400
1300
Solution
Impairment Test
Carrying Value of Assets 1,300
Recoverable Amount 1,000
Impairment 300
Assets Carrying Value Impairment Post

Impairment
Goodwill 100 -100 Nil
PPE 800 (200 x 800/1,200) = -133 667
Intangible 400 (200 x 400/1,200) = -67 333
1300 1000
180
Illustration 5
A cash generating unit has the assets outlined below. It’s recoverable amount has been
assessed as $1,650.
The PPE has been damaged and now has a fair value of 700. The recoverable amount of
the receivables has been assessed at their current carrying amount.
Show the treatment for any impairment.
Assets Carrying Value
Goodwill 100
PPE 800
Intangibles 700
Receivables 200
Inventory 400
2200
181
Solution
Impairment Test
Carrying Value of Assets 2200
Recoverable Amount 1650
Impairment 550
Carrying Post
Assets Note Impairment
Value Impairment
PPE 800 Down to Fair Value -100 700
Goodwill 100 Write off all -100 0
Receivables 200 At Fair Value 0 200
Pro- Rata
Intangibles 700 -223 477
(350 x 700/1100)
Pro- Rata
Inventory 400 -127 273
(350 x 400/1100)
2200 -550 1650
182
1. Which of the following is NOT an indicator of impairment?
A. Advances in the technological environment in which an asset is employed have an

adverse impact on its future use
B. An increase in interest rates which increases the discount rate an entity uses
C. The carrying amount of an entity’s net assets is higher than the entity’s number of
shares in issue multiplied by its share price
D. The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount
Answer D
Although the estimated NRV is lower than it was (due to fire damage), the entity will still
make a profit on the inventory and thus it is not an indicator of impairment.
2. Riley acquired a non-current asset on 1 October 2009 at a cost of $100,000 which had
a useful economic life of ten years and a nil residual value. The asset had been correctly
depreciated up to 30 September 2014. At that date the asset was damaged and an
impairment review was performed. On 30 September 2014, the fair value of the asset less
costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for
the next five years. The current cost of capital is 10% and a five year annuity of $1 per
annum at 10% would have a present value of $3·79
What amount would be charged to profit or loss for the impairment of this asset for the
A $17,785
B $20,000
C $30,000
D $32,215
Answer A
Cost $100,000
Depreciation (100,000/10 x 5) $50,000
Value in Use (8,500 x 3.79) $32,215

Fair Value Less Costs $30,000
Use Higher $32,215

Impairment $17,785
183
3. The net assets of Fyngle, a cash generating unit (CGU), are:
Property, plant and equipment $200,000

Allocated goodwill $50,000
Product patent $20,000
Net current assets (at net realisable value) $30,000
As a result of adverse publicity, Fyngle has a recoverable amount of only $200,000.

What would be the value of Fyngle’s property, plant and equipment after the allocation of
the impairment loss?
A $154,545
B $170,000
C $160,000
D $133,333
Answer A
Solution
Impairment Test
Carrying Value of Assets 300,000
Recoverable Amount 200,000
Impairment 100,000
Assets Carrying Value Impairment Post

Impairment
PPE 200,000 200/220 x -50,000 = -45,455 154,545
Goodwill 50,000 -50,000 Nil
Product Plant 20,000 20/220 x -50,000 = -4,545 15,455
Current Assets 30,000 - 30,000
300,000 Total Impairment = 300 45,455
184
Mind Map 27 - Inventories
(IAS 2)
185
Illustration 1
ABC Co. has the following items in inventory:
i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy
has meant that these goods will now sell for $42,000 with costs to sell of $2,500.
ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The
manufacturer of the materials has just announced that from now on they will sell these
materials to you at a lower price of $28,000 per tonne.
iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the
customer of $60,000. New health and safety requirements mean that the plant will need
to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.
At what value should each of the above be included in the inventory of ABC Co.
Solution
Goods at $40,000
Cost 40,000
Net Realisable Value ($42,000 - 2,500) 39,500
Use Lower so value at... 39,500
The value of inventory will be reduced by $500 and this will be written off to the income
statement.
Materials at $30,000 per tonne
The fact that the manufacturer has changed the cost price is irrelevant.
The goods will be sold at a profit and thus will be valued at $30,000 per tonne cost.
Plant at $50,000
Cost 50,000
Net Realisable Value ($60,000 - 4,000) 56,000
Use Lower so value at... 50,000
The value of the inventory will remain at $50,000.
186
On 30 September 2014, Razor’s closing inventory was counted and valued at its cost of
$1 million. Some items of inventory which had cost $210,000 had been damaged in a flood
(on 15 September 2014) and are not expected to achieve their normal selling price which
is calculated to achieve a gross profit margin of 30%. The sale of these goods will be
handled by an agent who sells them at 80% of the normal selling price and charges Razor
a commission of 25%.
At what value will the closing inventory of Razor be reported in its statement of financial
position as at 30 September 2014?
A $1 million
B $790,000
C $180,000
D $970,000
Answer D
The normal selling price of damaged inventory is $300,000 (210/70%).

This will now sell for $240,000 (300,000 x 80%), and have a NRV of $180,000 (240 – (240
x 25%)). The expected loss on the inventory is $30,000 (210 cost – 180 NRV) and
therefore the inventory should be valued at $970,000 (1,000 – 30).
187
Mind Map 28 - Current Tax
(IAS 12)
188
Illustration 1
Sebastian Philpott commenced trade on 1 January 2011 and estimates that the tax
payable for the year ended 31 December 2011 is $200,000.
In August 2012, the accountant of Sebastian Philpott receives and pays tax of $210,000
for the year ended 31 December 2011. At 31 December 2012 he estimates that the
company owes $220,000 for corporation tax in relation to the Y/E 31 December 2012.
Calculate the tax charge and income tax payable accounts for the years ended 31
December 2011 and 2012, and detail the amounts shown in the statement of
financial position and income statement in both years.
Solution
DR CR
20X4 $ $
Income Statement Charge (Est. 2011) 200,000
Corp Tax Provision (SFP) 200,000
20X5
Income Statement Charge (Est. 2012) 220,000
Under Provision 20X4 to IS 10,000
20X4 20X5
Corp Tax Provision 200,000 220,000
Tax Expense I/S 200,000 230,000
189
Illustration 2
Kettle Ltd estimated last year’s tax charge to be $250,000. However, their tax advisor
settled with the tax authorities at $220,000.
This year, Kettle Ltd estimate their tax bill to be $270,000, but they are confused as to how
this should be reflected in the financial statements.
Calculate tax liability and tax charge to be shown in the statement of financial
position and income statement for the current year.
Solution
Income Statement Charge (Est.) 270,000
Over Provision to IS -30,000
Income Statement Charge 240,000
190
1. Which of the following statement about the income tax expense reported for accounting
purposes is NOT correct.
A. It is shown as an expense in the income statement

B. It is the amount that must be paid to the government in respect of the current
income tax year.
C. It is not necessarily the same as the income tax payable.
D. None of the above
Answer B
2. On 31 December 20X4, PS had a debit balance b/f on its corporate income tax account
of 42,000, representing an under provision of the tax charge for the year ended 31
December 20X3.
PS’s taxable profit for the year ended 31 December 20X4 was 325,000 and the applicable
income tax rate for the year to 31 December 20X4 was 19%.
Calculate the income tax expense that PS will charge in its statement of profit or loss for
the year ended 31 December 20X4. (To the nearest whole number)
31 December 20X4 _______
Answer
103,560
Charge for the year (324000 X 19% ) = 61560

Under provision for the previous year = 42000
Income Tax expense = 103560
191
3. On 31 December 20X4, SP had a credit balance b/f on its corporate income tax account
of 35,000, representing an over provision of the tax charge for the year ended 31
December 20X3.
SP’s taxable profit for the year ended 31 December 20X4 was 832,000 and the applicable
income tax rate for the year to 31 December 20X4 was 24%.
Calculate the income tax expense that SP will charge in its statement of profit or loss for
the year ended 31 December 20X4. (To the nearest whole number)
31 December 20X4 _______
Answer
164,680
Charge for the year ( 832000 X 24% ) = 199680

Over provision for the previous year = (35,000)
Income Tax expense = 164680
192
Mind Map 29 - IAS 8
Accounting Policies,
Estimates & Errors
193
Illustration 1
I. A change in the IFRS relating to leases means that an entity that used to recognise a
lease on an item of plant as an operating lease must now recognise it as a finance
lease.
II. Depreciation has previously been charged by the entity at 25% straight line but has
decided to change this to 30% reducing balance.
III. The entity had previously charged certain overheads within administration expenses
but now has decided to show them within cost of sales.
IV. The method used by the entity to measure the value of it’s inventory has been
changed.
For each of the above is it a change in accounting policy or a change in accounting

estimate?
Solution
The recognition and presentation of the lease has changed meaning this is a change in
accounting policy.
There is no change in recognition, measurement or the basis of measurement so this is

a change in an accounting estimate.
The presentation of the overheads has changed so this is a change in policy.
The measurement basis of inventory has changed so this is a change in accounting

policy.
194
Illustration 2
A company discovers that items of inventory with a value of £1m were included in the
Statement of Financial Position as at 31 December 20X0 even though they were in fact
sold prior to the year end.
The figures reported in the year to December 20X0 and the figures for the current year
were:
20X1 20X0
$‘000 $‘000
Sales 10,000 9,000
Cost of Sales 5,000 3,000
Gross Profit 5,000 6,000
Tax 300 250
Net Profit 4700 5750
Retained Earnings B/F 1st Jan 20X0 $12m
Show the retained earnings for each year and the revised 20X1 Income Statement with
comparatives (ignore any tax effects).
195
Solution
Income Statement
20X1 20X0
$‘000 $‘000
Sales 10,000 9,000
Cost of Sales
20X1 (5,000 - 1,000) 4,000
20X0 (3,000 + 1,000) 4,000
Tax 300 250
Net Profit 5700 4750
Retained Earnings
20X1 20X0
$‘000 $‘000
Retained Earnings B/F 17,750 12,000
Prior Period Adjustment -1,000
As Restated 16,750 12,000
Net Profit for Period 5,700 4,750
Retained Earnings C/F 22,450 16,750
196
Which of the following would be a change in accounting policy in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
A. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting

policies differ from those of its parent
B. A change in reporting depreciation charges as cost of sales rather than as
administrative expenses
C. Depreciation charged on reducing balance method rather than straight line
D. Reducing the value of inventory from cost to net realisable value due to a valid adjusting
event after the reporting
Answer B
Which of the following is a change of accounting policy under IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
A. Classifying commission earned as revenue in the statement of profit or loss, having

previously classified it as other operating income
B. Switching to purchasing plant using finance leases from a previous policy of
purchasing plant for cash
C. Changing the value of a subsidiary’s inventory in line with the group policy for
inventory valuation when preparing the consolidated financial statements
D. Revising the remaining useful life of a depreciable asset
Answer A
According to IAS 8 Accounting policies, changes in accounting estimates and errors, which
ONE of the following is a change in accounting policy requiring a retrospective adjustment
in financial statements for the year ended 31 December 2010?
A. The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years.
B. The depreciation method of vehicles was changed from straight line depreciation to
reducing balance.
C. The provision for warranty claims was changed from 10% of sales revenue to 5%.
D. Based on information that became available in the current period a provision was made
for an injury compensation claim relating to an incident in a previous year.
Answer A
197
Mind Map 31 - Pensions
(IAS 19)
198
Illustration 1
A company maintains a defined benefit pension scheme for it’s employees. The following
information is relevant:
The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000.
The Discount Rate is 11%.
Calculate the expected return on Pension Assets.
Solution
Pension Assets Brought Forward 1,000
Expected Return % 11%
Expected Return on Plan Assets 110
199
Illustration 2
The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end.
The discount rate is 12%.
Calculate the Interest Cost for the period.
Solution
Pension Liabilities Brought Forward 1,400
Discount Rate 12%
Interest Cost 168
200
Illustration 3 - Try this yourself!
The following details refer to Company A’s pension scheme.
B/F C/F
Pension Assets 1,000 2,000
Pension Liabilities 1,400 2,600
The discount rate is 11%
Calculate the return on assets and the interest cost.
Solution
Pension Assets Brought Forward 1,000
Expected Return % 11%
Expected Return on Plan Assets 110
Pension Liabilities Brought Forward 1,400
Discount Rate 11%
Interest Cost 154
201
Illustration 4
The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700.
The company contributes $90 per year into the scheme.
Benefits paid out in the period were $100.
The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end.
The discount rate is 12%.
The terms of the scheme have changed meaning that past service costs have arisen of
$35 and the current service costs for the period are $70.
Required:
Show the treatment for the pension scheme in the financial statements of the
company.
202
1. Which of the following represent a defined benefit scheme?
A. The employer undertakes to finance a pension income of a certain amount

B. The cost of providing pensions is not certain and varies from year to year
C. The employer has no further obligation after this amount is paid
Answer A & B
2. Which of the following represent a defined contribution scheme?
A. The employer has an ongoing obligation to make sufficient contributions to the plan
to fund the pensions
B. The annual cost to the employer is reasonably predictable
C. The employer’s contribution is usually a fixed percentage of the employee’s salary.
Answer A & C
3.Trampo Co makes contributions to a defined contribution pension fund for employees at

a rate of 5% of gross salary. The contributions made are $10,000 per month for
convenience with the balance being contributed in the first month of the following
accounting year. The wages and salaries for 20X4 are $4.7m.
Calculate the pension expense to be charged to the statement of profit or loss for 20X4.
Answer B
A. $100,000
B. $235,000
C. $4.7m
D. $200,000
Working
4.7m X 5% = $235,000
203
4. Trampo Co makes contributions to a defined contribution pension fund for employees at
a rate of 5% of gross salary. The contributions made are 10,000 per month for
convenience with the balance being contributed in the first month of the following
accounting year. The wages and salaries for 20X4 are 4.7m.
Calculate the pension accrual/prepayment at the end of the year.
Answer C
A. $100,000
B. $235,000
C. $115,000
D. $200,000
Working
Payments during the year = 10,000 X 12 = 120,000
Accrual = 235000-120000 = 115000
204
Mind Map 32 - Foreign
Exchange (IAS 21)
205
Illustration 1
Zian is located in a foreign country and imports its raw materials at a price which is
normally denominated in dollars. The product is sold locally at selling prices denominated
in dinars, and determined by local competition. All selling and operating expenses are
incurred locally and paid in dinars. Distribution of profits is determined by the parent
company, Ribby. Zian has financed part of its operations through a $4 million loan from
Hall which was raised on 1 June 2007. This is included in the financial assets of Hall and
the non-current liabilities of Zian. Zian’s management have a considerable degree of
authority and autonomy in carrying out the operations of Zian and other than the loan from
Hall, are not dependent upon group companies for finance.
Required
Discuss and apply the principles set out in IAS 21 ‘The effects of changes in foreign
exchange rates’ in order to determine the functional currency of Zian.
(8 marks)
206
Solution to Illustration 1
The functional currency is the currency of the primary economic environment in which the
entity operates (IAS21). The primary economic environment in which an entity operates is
normally the one in which it primarily generates and expends cash.
An entity’s management considers the following factors in determining its functional

currency (IAS21):
(i)the currency that dominates the determination of the sales prices; and
(ii) the currency that most influences operating costs
The currency that dominates the determination of sales prices will normally be the
currency in which the sales prices for goods and services are denominated and settled. It
will also normally be the currency of the country whose competitive forces and regulations
have the greatest impact on sales prices. In this case it would appear that currency is the
dinar as Zian sells its products locally and the prices are determined by local competition.
However, the currency that most influences operating costs is in fact the dollar, as Zian
imports goods which are paid for in dollars although all selling and operating expenses are
paid in dinars. The emphasis is, however, on the currency of the economy that determines
the pricing of transactions, as opposed to the currency in which transactions are
denominated.
Factors other than the dominant currency for sales prices and operating costs are also
considered when identifying the functional currency. The currency in which an entity’s
finances are denominated is also considered. Zian has partly financed its operations by
raising a $4 million loan from Hall but it is not dependent upon group companies for
finance. The focus is on the currency in which funds from financing activities are generated
and the currency in which receipts from operating activities are retained.
Additional factors include consideration of the autonomy of a foreign operation from the
reporting entity and the level of transactions between the two. Zian operates with a
considerable degree of autonomy both financially and in terms of its management.
Consideration is given to whether the foreign operation generates sufficient functional
cash flows to meet its cash needs which in this case Zian does as it does not depend on
the group for finance.
It would be said that the above indicators give a mixed view but the functional currency
that most faithfully represents the economic effects of the underlying transactions, events,
and conditions is the dinar, as it most affects sales prices and is most relevant to the
financing of an entity. The degree of autonomy and independence provides additional
supporting evidence in determining the entity’s functional currency.
207
Illustration 2
Bulldog Ltd has a year end of 31 January.
On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.
On 24th November Bulldog settles the transaction in full.
Exchange rates
13th October £1 : $1.45
24th November £1 : $1.55
Show the accounting entries for these transactions.
208
Illustration 2 Solution
Agreeing Transaction Working £
On date of agreeing the transaction use the spot rate 250,000 / 1.45 172,414
to record it
DR Purchases 172,414
CR Payables 172,414
On Settlement Working £
On date of agreeing the transaction use the spot rate 250,000 / 1.55 161,290
to record it
DR Payables 172,414
CR Cash with amount actually paid 161,414
CR FX Gain with the difference 11,000
209
Illustration 3
Jeff Ltd. purchases an item of plant from a foreign supplier for cash of €100,000. Jeff is a
US company and the exchange rate at the time was $ = €1.50.
What value in $ will the asset be recorded at?
210
Working $
The rate at the time of purchase is $ : €1.50 €100,000 / 1.50 66,666
DR Asset 66,666
CR Cash 66,666
211
Illustration 4
Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one month’s
credit for €100,000. Jeff is a US company.
Exchange rates
1st June $ = €1.50
21st June $ = €1.40
How will this transaction be dealt with in the accounts for the year to 21st June?
212
At Purchase Date Working $
The rate at the time of purchase is $ : €1.50 €100,000 / 1.50 66,666
DR Asset 66,666
CR Payables 66,666
At 21st June Working $
The rate at this time is $ : €1.40 €100,000 / 1.40 71,429
The payable must be retranslated at the year end as it is a monetary balance. So........
DR FX Loss (71,429 - 66,666) 4,763
CR Payables (71,429 - 66,666) 4,763
The $4,763 is unrealised so is included in Other Comprehensive Income.
213
1. Which of the following statements describes Functional Currency?
A. It is the main currency used by a business or unit of a business.

B. It is the currency that the financial statements are presented in.
Answer A
The following information relates to OTQ2 and OTQ3:
Chill Company based in Japan sells goods to the UK for £500,000 on 12 March 20x4
when the exchange rate was Yen/£0.65. The customer pays in April 20X4 when the rate
was Yen/£0.60.
2. How does the entity account for the sale at 12 March 20X4?
A. Dr Receivables 769,231 Credit Sales 769,231
B. Dr Receivables 325,000 Credit Sales 325,000
C. Dr Receivables 833,000 Credit Sales 833,333
D. Dr Receivables 300,000 Credit Sales 300,000
Answer A
Working
500,000/0.65
3. What is the gain or loss on exchange when the payment is made in April 20X4?
A. Gain = 64,102
B. Loss = 64,102
C. Gain = 25,000
D. Loss = 25,000
Answer A
Working
Payment 500000/0.6 = 833,333
Receivables = 769231
Gain = 833,333-769231 = 64,102
214
Mind Map 33 - Subsequent
Events (IAS 10)
215
Illustration 1
Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June
20X1 and the accounts are approved on 20 August 20X1.
1. Sales of year-end inventory on 4 July 2011 at less than cost

2. Issue of new ordinary shares on 10 July 2011.
3. A fire in the warehouse occurred on 16 July 2011. All stock was destroyed.
4. A major credit customer was declared bankrupt on 20 July 2011.
5. All of the share capital of a rival, Haggis Ltd was acquired on 22 July 2011.
6. On 4 August, $700,000 was received in respect of an insurance claim dated 13
February 2011.
Which of the following are adjusting events for Fishcakes Ltd?
Solution
1, 4 and 6.
216
1. Which Which TWO of the following events which occur after the reporting date of a
company but before the financial statements are authorised for issue are classified as
ADJUSTING events in accordance with IAS 10 Events after the Reporting Period?
(i) A change in tax rate announced after the reporting date, but affecting the current tax
liability
(ii) The discovery of a fraud which had occurred during the year
(iii) The determination of the sale proceeds of an item of plant sold before the year end
(iv) The destruction of a factory by fire
A (i) and (ii)

B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)
Answer C
2. IAS 10 Events after the reporting period distinguishes between adjusting and non-
adjusting events.
Which ONE of the following is an adjusting event in XS’s financial statements?
A. A dispute with workers caused all production to cease six weeks after the year end.
B. A month after the year end XS’s directors decided to cease production of one of its
three product lines and to close the production facility.
C. One month after the year end a court determined a case against XS and awarded
damages of $50,000 to one of XS’s customers. XS had expected to lose the case and
had set up a provision of $30,000 at the year end.
D. Three weeks after the year end a fire destroyed XS’s main warehouse facility and most
of its inventory.
Answer C
217
3. Which ONE of the following would be classified by WDC as a non-adjusting event
according to IAS 10 Events After The Reporting Period? WDC’s year end is 30 September
2011.
A. WDC was notified on 5 November 2011 that one of its customers was insolvent and
was unlikely to repay any of its debts. The balance outstanding at 30 September 2011
was $42,000.
B. On 30 September WDC had an outstanding court action against it. WDC had made a
provision in its financial statements for the year ended 30 September 2011 for damages
awarded against it of $22,000. On 29 October 2011 the court awarded damages of
$18,000.
C. On 5 October 2011 a serious fire occurred in WDC’s main production centre and
severely damaged the production facility.
D. The year end inventory balance included $50,000 of goods from a discontinued product
line. On 1 November 2011 these goods were sold for a net total of $20,000.
Answer C
218
Mind Map 34 - Short Term
Finance I
219
1. Which of the following is NOT a source of short term finance?
A. Trade payables
B. Factoring
C. Overdraft
D. Share Issue
Answer D
2. Which of the following is an advantage of a bank overdraft?
A. Flexible source of finance

B. Repayable on demand
C. May require security
D. Variable finance costs
Answer A
3. What is factoring?
A. Outsourcing of the credit control department to a third party.

B. Invoices are used as security to borrow funds
Answer A
4. Which of the following is a method of dealing with credit risk on exports.
A. Negotiable instruments
B. Short dated government bonds
C. Documentary credits
D. Bills of exchange
Answer C & D
220
Mind Map 35 - Short Term
Finance II
221
Illustration 1
A US Treasury Bill with a face value of $10,000 is issued at a 6% discount yield for 60
days.
Calculate the discount value on the Bill assuming 360* days in the year.
*This is the number used on the US calculations.
Solution
D = R x F x T/Y
R = 6% as a decimal so 0.06
F = 10,000
T = 60
Y = 360
D = 0.06 x 10,000 x 60/360
D = $100
222
Illustration 2
A US Treasury Bill with a face value of $10,000 is issued at a 4% discount yield for 45
days.
Calculate the issue price of the Bill assuming 360* days in the year.
*This is the number used on the US calculations.
Solution
Calculate D first then P
D = R x F x T/Y
R = 4% as a decimal so 0.04
F = 10,000
T = 45
Y = 360
D = 0.04 x 10,000 x 45/360
D = $50
then...
P=F-D
P = (10,000 - 50) $9,950
223
Illustration 3
A Government has issued debt which is redeemable in 5 years time.
Interest is payable at 8%.
The current market value of the debt is $102.
Calculate the Yield to Maturity on the bond.
Solution
Period Item $ DR 5% PV DR 15% PV
1 -5 Interest 8 4.329 34.63 3.352 26.82
5 Capital 100 0.784 78.40 0.497 49.70
Market Value -102 -102
11.03 -25.48
IRR Calculation: 5 + (11.03 / (11.03 - (25.48)) (15 - 5) = 8.02%
224
Illustration 4
A Government has issued debt which is redeemable in 5 years time.
Interest is payable at 10%.
The current market value of the debt is $104.
Calculate the Yield to Maturity on the bond.
Solution
Perio Item $ DR 5% PV DR 15% PV

d
1 -5 Interest 10 4.329 43.29 3.352 33.52
5 Capital 100 0.784 78.40 0.497 49.70
17.69 -20.78
IRR Calculation: 5 + (17.69 / (17.69 - (20.78)) (15 - 5) = 9.6%
225
1. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.
Calculate the discount value on the Bill assuming 360 days in the year.
Answer
444
Working
0.09 x 20,000 x 90/360 = 450
2. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.
Calculate the issue price of the Bill.
Answer
19,550
Working
20,000 – 450 = 19,550
3. Hazel Co is considering investing in government bonds. The current price of a $100

bond with 5 years maturity is 98. The bonds have a coupon rate of 6% and repay face
value of $100 at the end of the 15 years.
 
Calculate the yield to maturity using discount rates of 5% and 15%.
A. 5.1%
B. 6.84%
C. 4.5%
D. 4.9%
Answer B
226
Perio Item $ DR 5% PV DR 15% PV
d
1 -5 Interest 6 4.329 25.97 3.352 20.11
5 Capital 100 0.784 78.40 0.497 49.70
6.37 -28.19
IRR Calculation: 5 + (6.37 / (6.37 - (28.19)) (15 - 5) = 6.84%
4. Which of the following describes a commercial paper (CP)
A. An unsecured, short-term debt instrument issued by a corporation, typically for the

financing of accounts receivable, inventories and meeting short-term liabilities
B. Is issued by a corporation in order to raise financing for a variety of reasons such as

to ongoing operations or to expand business 
Answer A
227
Mind Map 36 - Working
Capital
228
Illustration 1
Balance Sheet
$‘000
ASSETS
Non Current Assets 1000
Inventory 300
Receivables 200
Cash 300
1800
LIABILITIES
Ordinary Shares 800
Reserves 200
Long term Liabilities 700
Payables 100
Overdraft -
1800
Income Statement
$‘000
Revenue 1000
COS 800
Gross Profit 200
Other Costs 100
Net Profit 100
Other Information:
All sales are made on credit.
Required:
Calculate the Cash Operating Cycle for Inter Ltd.

229
Solution
Item Working Days
Inventory Period 300/800 x 365 137
Collection Period 200/1000 x 365 73
Less:
Payables Period 100/800 x 365 46
164
Part II
Show the journal entries and calculate the Revised Balance sheet if the operating cycle
changes to:
Item Days
Inventory Period 200
Collection Period 100
Less:
Payables Period 30
270
230
Solution
Item New Days Old Days Old Working New Movem’t

Balance Balance
Inventory 200 137 300 300 x 438 138

200/137
Receivabl 100 73 200 200 x 274 74

es 100/73
Less:
Payables 30 46 100 100 x 65 -35

30/46
270 164
Entries Dr Cr
Dr Inventory 138
Cr Cash 138
Dr Receivables 74
Cr Cash 74
Dr Payables 35
Cr Cash 35
231
Revised Balance Sheet
$‘000 Movement $‘000
ASSETS
Non Current Assets 1000 1000
Inventory 300 138 438
Receivables 200 74 274
Cash 300 -247 53
1800 1765
LIABILITIES
Reserves 200 200
Long term Liabilities 700 700
Payables 100 -35 65
Overdraft 0 0
1800 1765
232
Part III
Show the journal entries and calculate the Revised Balance sheet if the operating cycle
changes to:
Item Days
Inventory Period 90
Collection Period 30
Less:
Payables Period 60
60
Solution
Item New Days Old Days Old Working New Movem’t

Balance Balance
Inventory 90 200 438 438 x 197 -241

90/200
Receivabl 30 100 274 274 x 82 -192

es 30/100
Less:
Payables 60 30 65 65 x 60/30 130 65
60 270
233
Entries Dr Cr
Dr Cash 241
Cr Inventory 241
Dr Cash 192
Cr Receivables 192
Dr Cash 65
Cr Payables 65
498 498
Revised Balance Sheet
$‘000 Movement $‘000
ASSETS
Inventory 438 -241 197
Receivables 274 -192 82
Cash 53 498 551
1765 1830
LIABILITIES
Reserves 200 200
Payables 65 65 130
Overdraft 0 0
1765 1830
234
1. Which of the following are components of working capital within the financial
statements:
1. Non Current Assets.

2. Inventory.
3. Payables.
4. Intangible Assets.
A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 2 and 4
Answer B
2. Which of the following are indicators of overtrading.
i) Reliance on long term finance.

ii) Offering lax credit terms.
iii) Build up of inventory.
iv) Rapidly decreasing sales.
v) Deteriorating Current ratio.
A. i) iii) and iv) only

B. ii) iii) and v) only
C. All of the above
D. i) ii) and iii) only
Answer B
235
3. The following information has been calculated for A Co:
Trade receivables collection period 52 days 

Raw material inventory turnover period 42 days
Work in progress inventory turnover period 30 days
Trade payables payment period 66 days 
Finished goods inventory turnover period 45 days
What is the length of the working capital cycle?
A 103 days
B 131 days
C 235 days
D 31 days
Answer A
4. If inventory days go up from 100 to 150 the company will need to invest more cash in
the business.
Is this statement:
A. TRUE
B. FALSE
Answer A
5. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A conservative approach to working capital investment will increase profitability
3 Working capital management is a key factor in a company’s long-term success
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer B
236
2 A aggressive approach to working capital investment will increase profitability
3 Working capital management is not a key factor in a company’s long-term success
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer A
2 A moderate approach to working capital investment will increase profitability
3 An aggressive approach to working capital investment uses more long term finance than
short term.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer B
1 A conservative approach to working capital investment employs uses long term finance
to finance some fluctuating current assets.
2 An aggressive approach to working capital investment will increase profitability
3 Working capital management has no effect on profitability of the company.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer A
237
Mind Map 37 - Managing
Receivables & Payables
238
Illustration 1
Credit sales in the year are currently 1200 and the company offers 3 month credit terms.
The overdraft rate for the company is 10%.
New Policy
2% discount if paid in less than 10 days
2 month terms for everyone else.
20% will take the discount
Should the new policy be implemented?
Solution
Method = Compare the savings through reducing receivables by offering the

discount to the profit lost by doing so.
Working
Receivables Before 1200 x 3/12 300
Receivables After 20% who take (1200 x 10/365) x 7

discount 20%
Everyone else (1200 x 2/12) x 80% 160
167
Saving = (Reduction in receivables x (300 - 167) x 10% 13

Overdraft rate)
Lost Profit = Amount of Discount (1200 x 20%) x 2% 4.8
The saving made is greater than the profit lost so the discount should be offered
239
Illustration 2
Receivables are currently $4,600,000. Sales are $37,400,000
A factor has offered to take over the administration of trade receivables on a non-recourse
basis for an annual fee of 3% of credit sales.
The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will
save $100,000 per year in administration costs and $350,000 per year in bad debts.
A condition of the factoring agreement is that the factor would advance 80% of the face
value of receivables at an annual interest rate of 7%. The current overdraft rate is 5%
Solution
Difference on Receivables
Current Receivables 4,600,000
Receivables Under Factor 37,400,000 x (30 / 365) 3,073,973
Difference 1,526,027
Benefits & Costs of Factor
Benefits of Using Factor
Reduced Overdraft Interest 1,526,027 x 0.05 76,301
Admin Cost Savings 100,000
Bad Debt Savings 350,000
Total Benefits 526,301
Costs Of Using Factor
Annual Fee 37,400,000 x 0.03 1122000
Extra Interest Cost 3,073,973 x 80% x (7% - 5%) 49,184
Total Costs 1171184
Total Benefits Less Total Costs -644,883
240
1. How can a company assess the credit worthiness of their customers?
1. Get trade references from other suppliers or from banks.

2. Use a credit rating agency.
3. Offer initial high levels of credit.
4. Ask for a written promise to pay.
A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3
Answer B
2. Which of the following are benefits of a company offering a discount to customers for
early payment of invoices?
1. Better liquidity for the firm.

2. Less interest as less or no overdraft will be required.
3. Risk of more bad debt as customers take longer to pay.
4. Loss of customers who don’t take advantage of the discount.
A. 2 and 3 only
B. 1 and 3 only
C. 1 and 2 only
D. 1, 2 and 3
Answer C
241
3. The management of XYZ Co has annual credit sales of $20 million and accounts
receivable of $4 million. Working capital is financed by an overdraft at 12% interest per
year. Assume 365 days in a year.  
What is the annual finance cost saving if the management reduces the collection period to
60 days?  
A. $85,479
B $394,521
C $78,904
D $68,384
Answer A
Current Receivables = 4,000,000

New (20/365 x 60) = 3,287,671
Reduction = 712,329
Multiply by O’draft rate = (712,329 x 12%) = $85,479
4. Which of the following are disadvantages of debt factoring for a company?
1. It can be expensive.
2. It creates a bad impression with customers because the debt is collected by the factor.
3. It can increase the liquidity of the company.
4. It can lose the goodwill of customers.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer D
5. Which of the following statements relate to invoice discounting through a factor?
1. The company retains the risk of bad debt.

2. The factor collects the debt.
3. The factor advances a percentage of the invoice value to the company.
4. Invoice discounting can be used by any company.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer B
242
Mind Map 38 - Inventory
Management
243
Illustration 1
Demand of 1200 units per month.
Cost of making an order of $12.
Cost of one unit $10.
Holding cost per year of 10% of the purchase price of the goods.
Calculate the EOQ & check that it is correct.
Solution
Working
Annual Demand 1200 x 12 14400
Holding Cost $10 x 10% 1
Ordering Cost 12
EOQ √(2 x 12 x 14,400) / 1 588
Test
Ordering Costs (Cost Per order x 12 x (14,400 / 588) 294

(Demand / EOQ))
Holding Costs (Cost Per Unit x (EOQ / 2)) 1 x (588 / 2) 294
244
Illustration 2
Company orders when the level of stock reaches 50,000
It takes 4 weeks to receive new stock from the time of ordering.
The company uses 7,500 units on average per week.
Calculate the buffer stock.
Solution
Buffer Stock = Re-order level less usage in lead time
Re-order level 50,000
Lead Time 4 weeks
Usage per week 7,500
50,000 - (4 x 7,500) 20,000
245
Illustration 3
The current policy is to order 100,000 units when the inventory level falls to 35,000 units.
Forecast demand to meet production requirements during the next year is 625,000 units.
The cost of placing and processing an order is €250, while the cost of holding a unit in
stores is €0·50 per unit per year. Both costs are expected to be constant during the next
year. Orders are received two weeks after being placed with the supplier. You should
assume a 50-week year and that demand is constant throughout the year.
Calculate EOQ with buffer stock
Solution
Working
Buffer Stock (Re-order level - (Lead time x 35,000 - (2 weeks x 10,000

amount used per week)) 625,000/50)
EOQ ignoring buffer stock √ (2 x 250 x 625,000 / 25,000

0.5)
Total cost Calculations
Order Costs (Cost per order x No. Orders) 250 x 6,250

(625,000/25,000)
Holding Costs (Holding cost p/unit x Average 0.5 x (25,000 / 2) 6,250

Stock)
Holding Cost for Buffer (Holding cost p/unit x 0.5 x 10,000 5,000
Buffer Stock)
Total Costs 17,500
246
Illustration 4
Demand is 1000 units per month.
Purchase cost per unit £11.
Order cost £30
Holding cost 10% p.a. of stock value.
Required
Calculate the minimum total cost with a discount of 1% given on orders of 1500 and
over
Solution
EOQ with Discounts
1) Calculate EOQ in normal way (and the costs)
2) Calculate costs at the lower level of each discount above the EOQ
Working
EOQ √ (2 x 30 x 12,000 / 1.1) 809
Order Costs (Cost per order x No. 30 x (12,000 / 809) 445

Orders)
Holding Costs (Holding cost p/unit x 1.1 x (809/2) 445

Average Stock)
Cost of Purchases 12,000 x 11 132000
Total Costs 132890
If 1500 are ordered to take the

discount:
Order Costs (Cost per order x No. 30 x (12,000 / 1500) 240

Orders)
Holding Costs (Holding cost p/unit x (1.1 x 99%) x (1500/2) 817

Average Stock)
Cost of Purchases 12,000 x (11 x 99%) 130,608
Total Costs 131665
247
1. Which of the following types of cost we are seeking to minimise by using the Economic
Order Quantity?
A. Holding costs and inventory movement costs

B. Ordering costs and holding costs
C. Ordering costs and insurance costs
D. Holding costs and security costs
Answer B
2. If a company uses the Economic Order Quantity as the level at which to order, how will
they calculate total ordering costs for the year?
A. Cost per order x (Annual Demand / EOQ)

B. Annual Demand x (Cost per order /EOQ)
C. (EOQ / Cost per order) x Holding costs
D. Annual demand x EOQ
Answer A
3. ABC Co. sells widgets and expects annual demand of 3.4m units. The cost of making
an order is $49.71 and the cost of holding one unit for one year is $0.50.
What is the total ordering costs per year:
A. $5,687.34
B. $6,413.81
C. $6,500.54
D. $6,430.32
Answer C
248
4. ABC Co. sells widgets and expects annual demand of 1.2m units. The cost of making
an order is $25.21 and the cost of holding one unit for one year is $0.50.
What is the total holding costs per year:
A. $2,850
B. $3,750
C. $2,450
D. $2,750
Answer D
5. Layla Co. sells 200m wigs in a year with each order taking 15 days to be delivered once
made. They make an order every time their stock levels reach 10m wigs.
What is the buffer stock level for Layla Co.
A. 1,780,822
B. 6,666,666
C. 9,333,333
D. 2,345,632
Answer A
6. Which of the following are drawbacks of a company using the Economic Order Quantity
method of stock management?
1. Assumes constant ordering costs.

2. Assumes constant demand.
3. Assumes known annual demand.
4. Assumes no buffer stock or lead time.
A 1, 2 and 4 only
B 1 and 3 only
C All of the above
D 1, 2 and 3
Answer C
249
7. Stavros Co’s current inventory policy is to order 60,000 units when the inventory level
falls to 55,000 units. Forecast demand to meet production requirements during the next
year is 800,000 units. The cost of placing and processing an order is $90, while the cost
of holding a unit in stores is $1 per unit per year. Both costs are expected to be constant
during the next year. Orders are received three weeks after being placed with the
supplier. You should assume a 50-week year and that demand is constant throughout
the year.
What is the total cost of ordering at the EOQ level?
A. $12,000
B. $6,000
C. $7,000
D. $19,000
Answer D
Solution
Working
Buffer Stock (Re-order level - (Lead time x 15,000 - (3 weeks x 7,000

amount used per week)) 800,000/50)
EOQ ignoring buffer stock √ (2 x 90 x 800,000 / 12,000

1)
Order Costs (Cost per order x No. Orders) 90 x (800,000/12,000) 6,000
Holding Costs (Holding cost p/unit x Average 1 x (12,000 / 2) 6,000

Stock)
Holding Cost for Buffer (Holding cost p/unit x 1 x 7,000 7,000

Buffer Stock)
Total Costs 19,000
250
Mind Map 39 - Cash
Management I
251
Illustration 1
A business expects to move 500,000 from it’s interest bearing account into cash over the
course of one year.
The interest rate is 7% and the cost of making a transfer is $250.
How much should the business transfer into cash each time it makes a transfer?
Solution
Working
Annual Disbursements $500,000
Interest Rate 7%
Cost of making a transfer $250
Amount to transfer √(2 x 250 x 500,000) / $59,761

0.07
252
Illustration 2
Using the information in illustration 1 calculate the total cost to the business each year of
their cash management policy.
Solution
Working
Holding Cost (Ave Cash ($59761 / 2) x 0.07 2091

Balance x Interest Rate)
Trading Cost (Cost of Transfer x $250 x (500,000 / 2091

No. Transfers) 59,761)
Total Cost 4182
253
Illustration 3
Subsonic Speaker Systems (SSS) has annual transactions of $9 million.
The fixed cost of converting securities into cash is $264.50 per conversion.
The annual opportunity cost of funds is 9%.
What is the optimal deposit size?
Solution
Working
Annual Disbursements $9,000,000
Interest Rate 9%
Cost of making a transfer $264.50
Amount to transfer √(2 x 264.5 x 9,000,000) / 230,000

0.09)
Working
Holding Cost (Ave Cash (230,000 / 2) x 0.09 10,350

Trading Cost (Cost of Transfer x $264.50 x (9,000,000 / 10,350

Total Cost 20,700
254
Illustration 4
If a company must maintain a minimum cash balance of £8,000, and the variance of its
daily cash flows is £4m (ie std deviation £2,000). The cost of buying/ selling securities is
£50 & the daily interest rate is 0.025 %.
Calculate the spread, the upper limit & the return point.
Solution
Working
Lower Limit Given in Question 8,000
Spread (3 x ((3/4 x 50 x 25,303

4,000,000) / 0.00025))1/3
Upper Limit (Lower Limit + 8,000 + 25,303 33,303

Spread)
Return Point (Lower Limit + 8,000 + (1/3 x 25,303) 16,434

(1/3 x Spread)
255
1. Which of the following are the reasons for a company to hold cash?
1. Speculation
2. Persuasion
3. Transaction
4. Reaction
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer B
2. Revaile Co. has annual transactions of $30 million. The fixed cost of converting
securities into cash is $500 per conversion. The annual opportunity cost of funds is 6%.
What is the optimal deposit size?
A. $21,213
B. $42,426
C. $707,107
D. $42.43
Answer C
Working
Annual Disbursements $30,000,000
Interest Rate 6%
Cost of making a transfer $500
Amount to transfer √(2 x 264.5 x 9,000,000) / 707,107

0.09)
Working
Holding Cost (Ave Cash (707,107 / 2) x 0.06 21,213

Trading Cost (Cost of Transfer x $500 x (30,000,000 / 21,213

Total Cost 42,426

256
3. Which of the following are problems with the Baumol Model?
1. Assumes constant cash disbursements

2. Assumes that there are no cash receipts, just movements
3. Assumes a risk free interest rate
4. Assumes no safety buffer for cash
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
Answer D
4. If a company must maintain a minimum cash balance of £20,000, and the variance of its
daily cash flows is £6.25m (ie std deviation £2,500). The cost of buying/ selling
securities is £80 & the daily interest rate is 0.035 %.
What is the upper-limit using the Miller-Orr model of cash management?
Working
Lower Limit Given in Question 20,000
Spread (3 x ((3/4 x 80 x 25,303

6,250,000) / 0.00035))1/3
Upper Limit (Lower Limit + 8,000 + 25,303 33,303

Spread)
Return Point (Lower Limit + 8,000 + (1/3 x 25,303) 16,434

(1/3 x Spread)
257
Mind Map 40 - Cash
Management II
258
Illustration 1
Jenkins Co. is preparing a cash flow forecast for the next four months. They have an
overdraft facility of $10,000 available and the following information is relevant:
1. Sales will be $40,000 in month one and are expected to rise by 5% per month.
2. Wages will be $15,000 in month one and are expected to rise by $500 per month.
3. Other costs will be $10,000 in month one and are expected to rise by $1000 per month.
4. Capital investment of $80,000 for new Plant is scheduled to occur in month 2.
5. An interim payment of 50% of the dividends declared for the year $240,000 will be paid
in month 3.
6. The opening balance on cash is $132,000.
Prepare the cash flow forecast and advise Jenkins on the implications as well as
possible action to take in response.
259
Solution
Month 1 Month 2 Month 3 Month 4
$ $ $ $
Sales Receipts 40,000 42,000 44,100 46,305
Payments:
Wages -15,000 -15,500 -16,000 -16,500
Other Costs -10,000 -11,000 -12,000 -13,000
Capital
-80,000
Investment
Dividend
-120,000
Payment
Net Cash Flow 15,000 -64,500 -103,900 16,805
Opening
132,000 147,000 82,500 -21,400
Balance
Closing
147,000 82,500 -21,400 -4,595
Balance
Implications
- By month 3 the cash balance has fallen to $34,000.
- This is below the level that can be covered through the overdraft of $10,000.
- The operating cash flows are positive so this is not a trading problem.
- The cause is the capital investment and the dividend payment.
- This is a severe liquidity risk to the company.
- Action will need to be taken to prevent it.
Actions
- Postpone the Capital investment.
- Finance the capital investment in another way e.g. lease rather than buy.
- Postpone the dividend payment for one month meaning that the balance is -$16,000 at
it’s worst point. Ask to increase the overdraft to $16,000 and within the next month the
positive trading income should wipe out the negative balance.
- Reduce the dividend.
260
1. Drill has produced the following sales forecast:
£ ‘000
July 850
August 860
September 870
October 880
November 890
December 900
Currently 15% of customers pay in cash, of the credit customers (excl irrecoverable debts),
55% pay in one month, 35% pay in two months and 10% in three months. Irrecoverable
debts are 3%. This payment pattern is expected to continue.
Calculate the forecast sales receipts for October to the nearest 1,000
Answer
1,476,000
Working
October Sales 880 * 15% 132

September Sales 870 * 85% * 55% *(100-3%) 395
August Sales 860 * 85% * 35% * (100-3%) 248
July Sales 850 * 85% * 10% * (100-3%) 701
1,476
2. The following items have been extracted from an entity's budget for the next month:
Sales on credit 140,000

Expected increase in inventory in the next month 30,000
Expected decrease in receivables in the next month 15,000
Calculate the budgeted receipt from trade receivables next month?
Answer
155,000
Working
(140,000+15,000)
261
3. Which of the following is a technique to create a cash budget?
A. A receipts and payments forecast

B. A statement of financial position forecast
C. A statement of profit and loss
D. A statement of changes in equity
Answer
A&B
262
Mind Map 41 - Cash Flow
Statements
263
Illustration 1
An entity has the following results in their financial statements:
2011 2010
ASSETS $‘000 $‘000
Inventory 300 400
Receivables 200 300
Cash 300 200
1800 1900
LIABILITIES
Reserves 200 199
Payables 100 100
1800 1900
$‘000 $‘000
Revenue 1000 1200
COS 800 1100
Profit on Sale of Non Current Asset 30 0
Other Costs 70 90
PBIT 100 10
Interest Cost 10 7
PBT 90 3
Tax 30 2
PAT 60 1
264
Other Information:
I. Within cost of sales is depreciation of $40,000 and amortisation of an intangible asset

of $30,000.
II. Within other costs is an increase in accrued admin expenses of $5,000.
Perform the reconciliation of Profit Before Tax to Cash Generated From Operations
for 2011.
Solution
Finance Costs (Often accrued - not cash so 10,000

add back)
Depreciation (Not Cash - add back) 40,000
Ammortisation (Not Cash - add back) 30,000
Profit On Sale of NCA (Not Cash - exclude) -30,000
Increase in Accruals (Not Cash Expenses - add 5,000 55,000

back)
Operating cash flow before working capital changes 145,000
Decrease in Inventory (Sold more so cash in) 100,000

(400 - 300)
Decrease in Receivables (Collecting cash more quickly 100,000

= cash in)
(300 - 200)
No Change in Payables - - 200000
Cash Generated from Operations 345000
265
Illustration 2
An entity has the following information in their financial statements:
2011 2010
PPE 2,000 1,100
Intangible Assets 500 400
Other information:
I. The entity disposed of a piece of plant during the year with a carrying value of $300
for a profit of $50.
II. Intangible assets are made up of qualifying development expenditure on a product
currently being sold, with amortisation in 2011 of $100.
What cash flows will appear in the statement of cash flows for the entity in the year
2011?
Solution
Property Plant & Equipment
Opening Balance 1,100
Closing Balance -2,000
Disposal (Remove Carrying Amount) -300
Balance -1200
This difference needs to increase the amount of PPE from 800 to 2000 to balance the
account so must be additions - A CASH FLOW
We have also sold some PPE & so received cash.

The amount received will be the carrying value plus (300 + 50) 350
the profit made.
266
Intangible Assets
Opening Balance 400
Closing Balance -500
Amortisation (Reduces the balance) -100
Balance -200
This difference needs to increase the amount of Intangible Asset by 200 to balance the
account so must be development expenditure - A CASH FLOW
267
Illustration 3
Statement of Financial Position 2011 2010
Non Current Assets
PPE (note (i)) 32,600 24,100
Financial Assets (note (ii)) 4,500 7,000
37,100 31,100
Current Assets
Inventory 10,200 7,200
Receivables 3,500 3,700
Bank 1,400
13,700 12,300
Total Assets 50,800 43,400
Equity & Liabilities
Ordinary Shares of $1 (note (iii)) 14,000 8,000
Share Premium (note (iii)) 2,000
Revaluation Reserve (note (iii)) 2,000 3,600
Retained Earnings 13,000 10,100
Non Current Liabilities
Finance Lease Obligations 7,000 6,900
Deferred Tax 1,300 900
Current Liabilities
Tax 1,000 1,200
Bank Overdraft 2,900
Prov’n for warranties (note (iv)) 1,600 4,000
Finance Lease Obligations 4,800 2,100
Trade Payables 3,200 4,600
Total Equity & Liabilities 50,800 43,400
268
Income Statement 2011 2010
$‘000 $‘000
Revenue 58,500 41,000
Cost of Sales -46,500 -30,000
Operating Activities -8,700 -4,500
Investment Income (note (ii)) 1,100 700
Profit Before Tax 3,900 6,800
Income Tax -1,000 -1,800
Profit For the year 2,900 5,000
Note (i) - Property Plant & Equipment
Cost Accumulated Carrying

Depreciation Amount
$‘000 $‘000 $‘000
At 30 September 2010 33,600 -9,500 24,100
New finance lease additions 6,700 6,700
Purchase of new plant 8,300 8,300
Disposal of property -5,000 1,000 -4,000
Depreciation for the year -2,500 -2,500
At 30 September 2011 43,600 -11,000 32,600
The property disposed of was sold for $8.1 million.
Note (ii) - Investments/Investment Income
During the year an investment that had a carrying amount of $3 million was sold for $3.4
million. No investments were purchased during the year.
Investment income consists of:
269
Year to 30 September 2011 2010
$‘000 $‘000
Dividends received 200 250
Profit on sale of investment 400 0
Increases in fair value 500 450
1100 700
Note (iii)
On 1 April 2011 there was a bonus issue of shares that was funded from the share
premium and some of the revaluation reserve. This was followed on 30 April 2011 by an
issue of shares for cash at par.
Note (iv)
The movement in the product warranty provision has been included in cost of sales.
Required:
Prepare a statement of cash flows for Mocha for the year ended 30 September 2011,
in accordance with IAS 7 Statement of cash flows, using the indirect method.
(19 marks)
270
Solution
$‘000 $’000
Finance Costs 500
Finance Income -1,100
Depreciation Note (i) 2,500
Profit On Sale of NCA (8,100 - 4,000) -4,100
Increase in Warranty (4,000 - 1,600) -2,400 -4600

Provision
Operating cash flow before working capital changes -700
Increase in Inventory (10,200 - 7,200) -3,000
Decrease in Receivables (3,700 - 3,500) 200
Decrease in Payables (4,600 - 3,200) -1,400 -4200
Cash Generated from Operations -4900
271
$‘000 $’000
Finance Costs 500
Finance Income -1,100
Depreciation Note (i) 2,500
Profit On Sale of NCA (8,100 - 4,000) -4,100
Increase in Warranty (4,000 - 1,600) -2,400 -4600

Provision
Operating cash flow before working capital changes -700
Increase in Inventory (10,200 - 7,200) -3,000
Decrease in Receivables (3,700 - 3,500) 200
Decrease in Payables (4,600 - 1,600) -1,400 -4200
Cash Generated from Operations -4900
Interest Paid -500
Income Tax Paid (W4) -800
Net Cash Deficit from operating activities -6200
Cash flows from investing activities
Purchase of Property Plant & Equipment -8,300
Disposal of Property Plant & Equipment 8,100
Disposal of Investment 3,400
Dividends Received 200
Net cash from investing activities 3400
Cash flows from financing activities
Shares Issued (W2) 2,400
Payment of Finance Lease obligations (W3) -3,900
Net cash from financing activities -1,500
Net decrease in cash and cash equivalents -4300
Cash and cash equivalents brought forward 1,400
Cash and cash equivalents carried forward -2900
272
W1 - Financial Assets
Financial Assets
Opening Balance 7,000
Closing Balance -4,500
Sale of Asset -3,000
Increase in Fair Value 500
Total 0
No Cash flows to deal with in Financial Assets
W2 - Shares Issued
Ordinary Shares of $1 (note (iii)) 8,000
Share Premium (note (iii)) 2,000
Revaluation Reserve (note (iii)) 3,600
Ordinary Shares of $1 (note (iii)) -14,000
Share Premium (note (iii)) 0
Revaluation Reserve (note (iii)) -2,000
Balance -2400
The difference is the shares issued for cash in the year which is a cash flow
W3 - Finance Leases
Opening Balance (Current Leases) 2,100
Opening Balance (Non Current Leases) 6,900
Closing Balance (Current Leases) -4,800
Closing Balance (Non Current Leases) -7,000
New Leases in Year 6,700
Balance 3,900
The difference is the leases REPAID in the year which is a cash flow
273
W4 - Income Tax
Opening Balance (Income Tax) 1,200
Opening Balance (Deferred Tax) 900
Closing Balance (Income Tax) -1,000
Closing Balance (Deferred Tax) -1,300
Income Statement Charge (Increase tax due) 1000
Balance 800
The difference is the tax PAID in the year which is a cash flow
274
1. Which of the following do not appear with cash flows from investing activities within a
statement of cash flows?
A. Interest Received
B. Cash purchase of a new car
C. Profit from disposal of an old car
D. Dividends received
E. Repayment of a loan taken out to purchase some machinery
Answer
C&E
2. An item of plant costing 1.8m was purchases on 01/01/X4 and is being depreciated over
its UEL of 10 years. Residual value is NIL. On 31/12/X5 the asset was revalued to 1.92m,
there was no change to its UEL. On 31/12/X6 the asset was sold for 2.1m.
The entity prepares financial statements at 31 December each year.
Which two amounts will appear on the statement of profit and loss and the statement of
cash flows regarding the disposal of the plant.
A. 2.1m inflow
B. 2.1m outflow
C. 0.42M Gain on Disposal
D. 0.18M Gain on Disposal
E. 0.372M Gain on Disposal
Answer
A&B
Working
31/12/X5 Revaluation 1.92 8 years UEL remaining Depreciation 0.24
NBV 31/12X6 = 1.92-0.24 = 1.68m

Sales Proceeds = 2.1m
Gain on disposal = 2.1-1.68 = 0.42m
275
3. The following is an extract of the Statement of Financial Position for Bubbly Company
for the years 20X4 and 20X3
Current Assets 20X4 20X3

Cash and Cash Equivalents 2,350,000 -
Current Liabilities
Cash and Cash Equivalents - 1,112,000
Which of the following is correct?
A. Net increase in cash of 1,238,000

B. Net increase in cash of 3,462,000
C. Net decrease in cash of 1,238,000
D. Net decrease in cash of 3,462,000
Answer
B
4. Which of the following is a disadvantage of Cash Flow Statements?
A. Used to value the business

B. Users can access the quality of profit
C. Harder to manipulate
D. Prepared on a Historic Basis
Answer
D
276

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CIMA F1

Tax is Payable at 20%.

Calculate the Tax Payable for the year ended 31/01/X1.

Profit Before Tax 30,000

Add back Personal Expenses 4,700

Less Exempt Income -7,000

Add back Depreciation (35,000 x 25%) 8750

Taxable Profit 36450

Tax Due (36,450 x 20%) 7290

1 500,000 125,000 375,000

2 375,000 93,750 281,250

3 281,250 70,313 210,938

4 210,938 52,734 158,203

5 158,203 39,551 118,652

Calculate the Balancing Charge/Allowance on the sale

X1 100,000 25,000 75,000

X2 75,000 18,750 56,250

WDV (W1) -56,250

Balancing Allowance -16,250

Tax is Payable at 22%.

Calculate the Tax Payable for the year ended 31/01/X4.

Be careful with the year ends.

31/01/X3 400,000 100,000 300,000

WDV (W1) -300,000

Balancing Charge 200,000

Year O’Bal Dep’n CV

31/01/X3 600,000 60,000 540,000

31/01/X4 540,000 54,000 486,000

Carrying Value -486,000

Accounting Profit 14,000

Profit Before Tax 2,000,000

Add back Entertainment Expenses 30,000

Less Exempt Income -200,000

Add back Depreciation (W2) 54,000

Less Accounting Profit on Disposal (W2) -14,000

Add Balancing Charge (W1) 200,000

Taxable Profit 2,070,000

Tax Due (2,070,000 x 22%) 455,400

01/04/02 - 01/04/03 - 20%

Assuming that profit accrues evenly across the period:

Calculate the Tax Payable for the year ended 31/01/X4.

Tax Due to 01/04/03 ($2,070,000 x 2/12 x 20%) 69000

Tax Due to 31/01/04 ($2,070,000 x 10/12 x 25%) 431250

Total Tax Due 500250

Kalls Co. has the following results:

Year Trading Profit/Loss

3 2,000,000 -900,000 1,100,000

Loss Allocated -1,400,000

Marbles Co. has the following results:

Year Trading Profit/Loss

Year of Cessation -900,000

1 500,000 -100,000 400,000

Loss Allocated -300,000

2. Which of the following best describes Hypothecation?

A. A tax charges on the sale of goods to consumers.

The income tax regime in this country could be described as:

Tax is Payable at 22%.

What is the tax payable for the year?

Profit Before Tax 220,000

Add back Entertainment Expenses 30,000

Less Exempt Income -25,000

Add back Depreciation (500,000 x 10%) 50,000

Taxable Profit 275,000