2-5int 2002 Jun Q

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Paper 2.5(INT)
Financial
Reporting
(International Stream)
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PART 2
THURSDAY 13 JUNE 2002
QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A THIS ONE question is compulsory and MUST be

answered
Section B THREE questions ONLY to be answered
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Section A – THIS ONE question is compulsory and MUST be attempted
1 Horsefield, a public company, acquired 90% of Sandfly’s $1 ordinary shares on 1 April 2000 paying $3·00 per share.
The balance on Sandfly’s accumulated profits at this date was $800,000. On 1 October 2001, Horsefield acquired
30% of Anthill’s $1 ordinary shares for $3·50 per share. The balance sheets of the three companies at 31 March
2002 are shown below:
Horsefield Sandfly Anthill
Non-current assets $000 $000 $000 $000 $000 $000
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000
_______ 910
______ nil
______
12,050 4,510 1,650
Current assets
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240
____ 1,590
_______ nil
____ 630
______ 100
____ 700
______
Total assets 13,640
_______ 5,140
______ 2,350
______
Equity and liabilities
Capital and reserves:
Ordinary shares of $1 each 5,000 1,200 600

Reserves:
Accumulated profits b/f 6,000 1,400 800
Profit year to 31 March 2002 1,300
______ 7,300
_______ 800
______ 2,200
______ 600
____ 1,400
______
12,300 3,400 2,000
Non-current liabilities
10% Loan notes 500 240 nil
Current liabilities
Accounts payable 420 960 200
Taxation 220 250 150
Proposed dividends 200 100 nil
Overdraft nil
___ 840
_______ 190
______ 1,500
______ nil
___ 350
______
Total equity and liabilities 13,640
_______ 5,140
______ 2,350
______
The following information is relevant:

(i) Fair value adjustments:
On 1 April 2000 Sandfly owned an investment property that had a fair value of $120,000 in excess of its book
value. The value of this property has not changed since acquisition.
Just prior to its acquisition, Sandfly was successful in applying for a six-year licence to dispose of hazardous
waste. The licence was granted by the government at no cost, however Horsefield estimated that the licence was
worth $180,000 at the date of acquisition.
(ii) In January 2002 Horsefield sold goods to Anthill for $65,000. These were transferred at a mark up of 30% on
cost. Two thirds of these goods were still in the inventory of Anthill at 31 March 2002.
(iii) To facilitate the consolidation procedures the group insists that all inter company current account balances are
settled prior to the year-end. However a cheque for $40,000 from Sandfly to Horsefield was not received until
early April 2002. Inter company balances are included in accounts receivable and payable as appropriate.
(iv) The group accounting policy for goodwill is to write it off on a straight-line basis over a period of five years, with
a proportionate charge where it arises part way through an accounting period.
(v) Anthill is to be treated as an associated company of Horsefield.
(vi) The directors of Horsefield and Sandfly declared the proposed dividends on 20 March 2002.
2
(vii) Horsefield uses the allowed alternative treatment in IAS 22 ‘Business Combinations’ to allocate the cost of
acquisition.
(viii) Horsefield has not accounted for any of Sandfly’s proposed dividend.
Required:
(a) Prepare the consolidated balance sheet of Horsefield as at 31 March 2002. (20 marks)
(b) Discuss the matters to consider in determining whether an investment in another company constitutes
associated company status. (5 marks)
(25 marks)
3 [P.T.O.
Section B – THREE questions ONLY to be attempted
2 The following balance sheet has been extracted from the draft financial statements of Deltoid for the year to 31 March
2002:
Balance sheet as at 31 March 2002
Non-current assets $000 $000
Property, plant and equipment 12,110
Current assets
Inventory 3,850
Trade accounts receivable 2,450
Bank 250
______ 6,550
_______
Total assets 18,660
_______
Ordinary shares of 50 cents each 2,000
Reserves
Share premium 1,000
Revaluation reserve 3,000
Accumulated profits b/f at 1 April 2001 2,500

Profit after tax for year to 31 March 2002 2,000
______ 4,500
_______
10,500
Environmental provision (note (iv)) 1,200
6% Convertible loan note (note (iii)) 3,000
_____ 4,200
Current liabilities
Trade accounts payable 2,820
Taxation 1,140
_____ 3,960
_______
_______
The following additional information is available:

(i) The financial statements include an item of plant based on its treatment in the company’s management accounts
where plant is depreciated on a machine hour use basis. The details of this item of plant are:
Cost (1 April 2000) $250,000
Estimated residual value $50,000
Estimated machine hour life 8,000
Measured usage in year to: 31 March 2001 2,000
31 March 2002 800
In the financial statements the company policy is that plant and machinery should be written off at 20% per
annum on the reducing balance basis.
(ii) The income statement includes a charge of $150,000 being the first two of ten payments of $75,000 each in
respect of a five-year lease of an item of plant. The payments were made on 1 April 2001 and 1 October 2001.
The fair value of this plant at the date it was leased was $600,000. Information obtained from the finance
department confirms that this is a finance lease and an appropriate periodic rate of interest is 10% per annum.
Deltoid has treated the lease as an operating lease in the above financial statements. The company depreciates
plant used under finance leases on a straight-line basis over the life of the lease.
(iii) On 1 April 2001 Deltoid issued a $3 million 6% convertible loan note at par. The loan note is redeemable at a
premium of 10% on 31 March 2005 or it may be converted into ordinary shares on the basis of 50 shares for
each $100 of loan note at the option of the holder. The interest (coupon) rate for an equivalent loan note without
the conversion rights would have been 10%. In the draft financial statements Deltoid has paid and charged
interest of $180,000 and shown the loan note at $3 million on the balance sheet.
4
The present value of $1 receivable at the end of each year, based on discount rates of 6% and 10% can be taken
as:
6% 10%
End of year 1 0·94 0·91
2 0·89 0·83
3 0·84 0·75
4 0·79 0·68
(iv) The draft financial statements contain an accumulating provision for the cost of restoring (landscaping) the site
of a quarry that is being operated by Deltoid. The result of an environmental audit has concluded that the
provision has been calculated on the wrong basis and is materially underprovided. A firm of environmental
consultants has summarised the required revision:
current provision required provision
$000 $000
Income statement charge – year to 31 March 2002 180 245
Balance sheet liability – at 31 March 2002 1,200 2,150
The directors consider that the incorrect original estimate constitutes a fundamental error.
(v) Deltoid made a 1 for 4 bonus issue of shares on 1 March 2002 utilising the revaluation reserve. This has not
yet been recorded in the above financial statements.
(vi) The directors of Deltoid wish to propose a final dividend that will give an earnings yield of 4% to the ordinary
shareholders. This is to be based on the current market price of Deltoid’s shares of $2·00 each. The bonus shares
in note (v) will rank for the final dividend. No interim dividends have been paid during the year. Deltoid discloses
proposed dividends as a note to the financial statements.
Required:
(a) Redraft the balance sheet of Deltoid as at 31 March 2002 making appropriate adjustments for the items in
(i) to (vi) above. (20 marks)
Note: work to the nearest $000 and show separately your working for the accumulated profits included in the
balance sheet.
(b) Calculate the basic and diluted earnings per share for Deltoid for the year to 31 March 2002. Assume a tax
rate of 25% and that only the actual loan interest paid is available for tax relief.
Ignore deferred tax. (5 marks)
(25 marks)
5 [P.T.O.
3 It is generally recognised in practice that non-current assets should not be carried in a balance sheet at values that
are greater than they are ‘worth’. In the past there has been little guidance in this area with the result that impairment
losses were not recognised on a consistent or timely basis or were not recognised at all. IAS 36 ‘Impairment of Assets’
was issued in June 1998 on this topic.
Required:
(a) (i) Define an impairment loss and explain when companies should carry out a review for impairment of
assets; (3 marks)
(ii) Describe the circumstances that may indicate that a company’s assets may have become impaired.
(7 marks)
(b) Shiplake is preparing its financial statements to 31 March 2002. The following situations have been identified
by an impairment review team:
(i) On 1 April 2001 Shiplake acquired two subsidiary companies, Halyard and Mainstay, in separate
acquisitions. Consolidated goodwill was calculated as:
Halyard Mainstay
$000 $000
Purchase consideration 12,000 4,500
Estimated fair value of net assets (8,000)

_______ (3,000)
_______
Consolidated goodwill 4,000
_______ 1,500
_______
A review of the fair value of each subsidiary’s net assets was undertaken in March 2002. Unfortunately both
companies’ net assets had declined in value. The estimated value of Halyard’s net assets as at 1 April 2001
was now only $7 million. This was due to more detailed information becoming available about the market
value of its specialised properties. Mainstay’s net assets were estimated to have a fair value of $500,000
less than their carrying value. This fall was due to some physical damage occurring to its plant and
machinery. Shiplake amortises all goodwill over a five-year life. (3 marks)
(ii) Shiplake has an item of earth-moving plant, which is hired out to companies on short-term contracts. Its
carrying value, based on depreciated historical cost, is $400,000. The estimated selling price of this asset
is only $250,000, with associated selling expenses of $5,000. A recent review of its value in use based on
its forecast future cash flows was estimated at $500,000. Since this review was undertaken there has been
a dramatic increase in interest rates that has significantly increased the cost of capital used by Shiplake to
discount the future cash flows of the plant. (4 marks)
(iii) Shiplake is engaged in a research and development project to produce a new product. In the year to
31 March 2001 the company spent $120,000 on research that concluded that there were sufficient
grounds to carry the project on to its development stage and a further $75,000 had been spent on
development. At that date management had decided that they were not sufficiently confident in the ultimate
profitability of the project and wrote off all the expenditure to date to the income statement. In the current
year further direct development costs have been incurred of $80,000 and the development work is now
almost complete with only an estimated $10,000 of costs to be incurred in the future. Production is
expected to commence within the next few months. Unfortunately the total trading profit from sales of the
new product is not expected to be as good as market research data originally forecast and is estimated at
only $150,000. As the future benefits are greater than the remaining future costs, the project will be
completed, but due to the overall deficit expected, the directors have again decided to write off all the
development expenditure. (4 marks)
(iv) Shiplake owns a company called Klassic Kars. Extracts from Shiplake’s consolidated balance sheet relating
to Klassic Kars are:
$000
Goodwill 80,000
Franchise costs 50,000
Restored vehicles (at cost) 90,000
Plant 100,000
Other net assets 50,000
_________
370,000
_________
6
The restored vehicles have an estimated realisable value of $115 million. The franchise agreement contains
a ‘sell back’ clause, which allows Klassic Kars to relinquish the franchise and gain a repayment of
$30 million from the franchisor. An impairment review at 31 March 2002 has estimated that the value of
Klassic Kars as a going concern is only $240 million. (4 marks)
Required:
Explain, with numerical illustrations where possible, how the information in (i) to (iv) above would affect the
preparation of Shiplake’s consolidated financial statements to 31 March 2002. (15 marks as indicated)
(25 marks)
7 [P.T.O.
4 You are the assistant financial controller of Judicious. One of your company’s credit controllers has asked you to
consider the account balance of one of your customers, Breadline. He is concerned at the pattern of payments and
increasing size and age of the account balance. As part of company policy he has obtained the most recently filed
financial statements of Breadline and these are summarised below. A note to the financial statements of Breadline
states that it is a wholly owned subsidiary of Wheatmaster, and its main activities are the production and distribution
of bakery products to wholesalers. By coincidence your company’s Chief Executive has been made aware that
Breadline may be available for sale. She has asked for your opinion on whether Breadline would make a suitable
addition to the group’s portfolio.
Breadline
Income statement year to: 31 December 2001 31 December 2000
$000 $000 $000 $000
Sales revenue 8,500 6,500
Cost of sales (5,950)
______ (4,810)
______
Gross profit 2,550 1,690
Operating expenses (560) (660)
Finance costs – loan note 10 nil
– overdraft 10
___ (20)
______ 5
___ (5)
______
Profit before tax 1,970 1,025
Taxation (470)
______ (175)
______
Profit after tax 1,500 850
Dividends paid (900)
______ (nil)
______
Retained profit for year 600
______ 850
______
Balance sheets as at 31 December 2001 31 December 2000

Non-current assets
Freehold premises at valuation nil 1,250
Leasehold premises 2,500 nil
Plant 1,620
______ 750
______
4,120 2,000
Current assets
Inventory 370 240
Accounts receivable 960 600
Bank nil
_____ 1,330
______ 250
_____ 1,090
______
Total assets 5,450
______ 3,090
______
Ordinary shares of $1 each 500 100
Reserves:
Share premium 200 nil
Revaluation reserve (re freehold premises) nil 700
Profit and loss reserve 3,000
______ 3,200
______ 1,700
______ 2,400
______
3,700 2,500
2% Loan note 500 nil
Current liabilities
Accounts payable 1,030 590
Overdraft 220
_____ 1,250
______ nil
_____ 590
______
______ 3,090
______
8
From your company’s own records you have ascertained that sales to Breadline for the year to 2001 and 2000 were
$1,200,000 and $800,000 respectively and the year-end account receivable balances were $340,000 and
$100,000 respectively. Normal credit terms, which should apply to Breadline, are that payment is due 30 days after
the end of the month of sale. You are also aware that the company has not changed its address and is trading from
the same premises. A note to Breadline’s financial statements says that the profit on the disposal of the freehold
premises has been included in cost of sales as this is where the depreciation on the freehold was charged.
Note: a commercial rate of interest on the loan note of Breadline would be 8% per annum.
Required:
(a) Describe the matters that may be relevant when entity financial statements are used to assess the
performance of a company that is a wholly owned subsidiary. (5 marks)
Note: your answer should give attention to related party issues.
(b) From the information above and with the aid of suitable ratios, prepare a report for your Chief Executive on
the overall financial position of Breadline. Your answer should include reference to matters in the financial
statements of Breadline that may give you cause for concern or require further investigation. (20 marks)
(25 marks)
9 [P.T.O.
5 Merryview specialises in construction contracts. One of its contracts, with Better Homes, is to build a complex of
luxury flats. The price agreed for the contract is $40 million and its scheduled date of completion is 31 December
2002. Details of the contract to 31 March 2001 are:
Commencement date 1 July 2000
Contract costs: $000
Architects’ and surveyors’ fees 500
Materials delivered to site 3,100
Direct labour costs 3,500
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete (excluding depreciation – see below) 14,800
Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 2000. At the end of the contract
it is expected to be transferred to a different contract at a value of $600,000. Depreciation is to be based on a time
apportioned basis.
Inventory of materials on site at 31 March 2001 is $300,000.
Better Homes paid a progress payment of $12,800,000 to Merryview on 31 March 2001.
At 31 March 2002 the details for the construction contract have been summarised as:
Contract costs to date (i.e. since the start of the contract) excluding all depreciation 20,400
Estimated cost to complete (excluding depreciation) 6,600
A further progress payment of $16,200,000 was received on 31 March 2002.

Merryview accrues profit on its construction contracts using the percentage of completion basis as measured by the
percentage of the cost to date compared to the total estimated contract cost.
Required:
(a) Prepare extracts of the financial statements of Merryview for the construction contract with Better Homes
for:
(i) the year to 31 March 2001; (8 marks)
(ii) the year to 31 March 2002. (7 marks)
(b) Merryview conducts its activities from two properties, a head office in the city centre and a property in the
countryside where staff training is conducted. Both properties were acquired on 1 April 1999 and had estimated
lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current
values. However, until recently property prices had not changed for some years. On 1 October 2001 the
properties were revalued by a firm of surveyors. Details of this and the original costs are:
land buildings
$ $
Head office – cost 1 April 1999 500,000 1,200,000
– revalued 1 October 2001 700,000 1,350,000
Training premises – cost 1 April 1999 300,000 900,000
– revalued 1 October 2001 350,000 600,000
The fall in the value of the training premises is due mainly to damage done by the use of heavy equipment during
training. The surveyors have also reported that the expected life of the training property in its current use will only
be a further 10 years from the date of valuation. The estimated life of the head office remained unaltered.
Note: Merryview treats its land and its buildings as separate assets. Depreciation is based on the straight-line
method from the date of purchase or subsequent revaluation.
Required:
Prepare extracts of the financial statements of Merryview in respect of the above properties for the year to
31 March 2002. (10 marks)
(25 marks)
End of Question Paper
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ACCA学习网：www.52acca.com ACCA论坛：bbs.52acca.

THURSDAY 13 JUNE 2002

Time allowed 3 hours

This paper is divided into two sections

Section A THIS ONE question is compulsory and MUST be

Section B THREE questions ONLY to be answered

ACCA Learning Web：en.52acca.com ACCA Forum：forum.52acca.com

Section A – THIS ONE question is compulsory and MUST be attempted

Ordinary shares of $1 each 5,000 1,200 600

The following information is relevant:

Section B – THREE questions ONLY to be attempted

Accumulated profits b/f at 1 April 2001 2,500

The following additional information is available:

Estimated fair value of net assets (8,000)

Balance sheets as at 31 December 2001 31 December 2000

A further progress payment of $16,200,000 was received on 31 March 2002.

End of Question Paper

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