Adam Smith Business School
Subject of Accounting and Finance
Degree of MAcc in International Accounting & Financial
Management, Economics
International Financial Accounting for MNC’s, ACCFIN5024 December
2017
Please ensure that you write the course code (on the front of this exam paper), your student
ID, date of birth and the number of the question that you have attempted on each answer
sheet.
How to complete this exam:
SECTION A: You must answer Question ONE
SECTION B: You must answer any TWO questions from Section B
Materials allowed:
Calculators:
o You may use Business School approved models only: Casio FX-83GT/Casio-83GT+,
Casio FX-85GT/Casio FX-85GT+, Sharp EL531WH, Aurora AX-582BL/Sharp EL-
233SBBK
Instructions to students:
Both entry and exit to the examination hall shall be at the absolute discretion of the invigilator.
No candidate will be permitted to leave within the first hour or the last half hour of this exam.
Using exam answer sheets
Always use a black pen.
Complete personal information on all white sheets supplied before the exam begins.
Write your answer to each question on a SEPARATE white answer sheet, using BOTH sides
if required. For this exam, the required number of white answer sheets is THREE.
Request yellow continuation sheets to continue an answer if one white sheet is not enough.
Use the standard character set, printed above, when hand writing in data boxes. E.g. Student
ID, Date of Birth, Question Number. Keep your characters inside the boxes.
You must return all white answer sheets to the invigilator even if you have not attempted all
questions.
1
This page has been left blank for student notes – anything written here will not be marked.
…/continued overleaf
2
SECTION A: You must answer Question 1:
QUESTION 1
On 1 October 2016 Echo plc acquired the following investments:
80% of the ordinary share capital of Foxtrot Ltd at a cost of €13.6 million
1.6 million ordinary shares in Golf Ltd at a cost of €6.25 each
Draft statements for these three companies at 31 March 2017 are summarised below:
Echo Foxtrot Golf
€000 €000 €000
Assets
Non-current assets
Property, plant and equipment 20,000 8,500 16,500
Investments 26,000 _____ 1,500
46,000 8,500 18,000
Current assets 15,000 8,000 11,000
Total assets 61,000 16,500 29,000
Equity
Ordinary Shares 10,000 3,000 4,000
Retained earnings 37,000 8,000 20,000
47,000 11,000 24,000
Liabilities
Non-current liabilities
Loan 4,000 2,000
Current liabilities 10,000 3,500 5,000
Total equity and liabilities 61,000 16,500 29,000
The following additional information is given:
On 1 October 2016 the fair value of Foxtrot’s assets were equal to their carrying
value other than land and the value of its brand name. The fair value of the land was
€400,000 in excess of its carrying value and the brand name fair value was
€1,600,000. The brand name was considered to have an indefinite life. Neither have
been reflected in the above statements.
An impairment test on 31 March 2017 concluded that the consolidated goodwill was
impaired by €400,000.
The net profit after tax for the year ended 31 March 2017 was €2 million for Foxtrot
and €8 million for Golf. Profits accrue evenly throughout the year.
No dividends were paid during the year by any of the companies and their share
capital is unchanged since 1 October 2016
Non-controlling interests in any subsidiaries are to be measured at the appropriate
proportion of the subsidiaries identifiable net assets
Echo’s own financial statements reflect investments at cost and the fair value of its
investments other than Foxtrot and Golf have not changed.
…/continued overleaf
3
Required:
1.1 Explain how the investments in Foxtrot and Golf should be treated in the consolidated
financial statements.
(6%)
1.2 Prepare the consolidated statements of financial position for the Echo Group as at 31
March 2017, showing your workings.
(18%)
1.3 Explain why it is appropriate to recognise the Foxtrot brand name in the consolidated
accounts when it has not been recognised in the Foxtrot statement of financial
position.
(6%)
1.4 Echo has identified that one of its assets may be subject to an impairment which has
not yet been reflected in its own draft financial statements. The company has
collected the following information about this asset:
Carrying value €50,000
Undiscounted expected future cashflows €48,000
Present value of future cash flows €42,000
Fair value of asset €44,000
Costs to sell €4,000
Calculate what Echo must report under IFRS and how this would differ under US
GAAP (explain your workings).
(10%)
(Total 40%)
…/continued overleaf
4
SECTION B: You must answer any TWO questions from Section B:
QUESTION 2
Accounting standards IAS 16 Property, Plant & Equipment and IAS 40 Investment Property
prescribe a number of recognition, measurement and disclosure requirements regarding
tangible non-current assets. The information given below relates to two companies, both of
which have a year-end of 31 December.
Rose plc
Rose plc bought a machine on 1 January 2016 incurring total costs of £862,500. This figure
comprised:
£
Manufacturer’s list price 840,000
Less trade discount 84,000
756,000
Delivery charges 16,500
Installation costs 34,000
Maintenance charge to December 2017 20,000
Small spare parts 5,000
Legal costs 6,000
Alterations to factory to accommodate machine 25,000
862,500
Rose has estimated that the useful life of the machine is 5 years and the residual value is
£50,000.
Sunflower plc
On 1 January 2015, Sunflower plc purchased land for £2,500,000 to be held for long term
capital appreciation. On 31 December 2015 the fair value of the land had increased to
£2,750,000 but by 31 December 2016 this had decreased to £2,300,000 due to a downturn
in the property market.
REQUIRED:
2.1 Calculate the cost figure at which the machine bought by Rose plc should initially be
measured, in accordance with IAS 16 and explain how you have determined this
figure.
Calculate the depreciation charge for year ended 31 December 2016 using the straight
line method and the reducing balance method (using a rate of 40%).
(12%)
…/continued overleaf
5
2.2 Show how Sunflower plc would account for the land in its financial statements for years
ended 31 December 2015 and 31 December 2016 if it adopts the fair value model
under IAS 40, explaining your calculations. How would this differ if the cost model is
adopted under IAS 40?
(8%)
2.3 If Sunflower plc had occupied the land for its own use, show how this would be
accounted for in the years ended 31 December 2015 and 31 December 2016 based on
the revaluation model and explain your calculations.
(10%)
(Total: 30 %)
QUESTION 3
Sunny plc has traded profitably for a number of years in the packaging sector. Recently the
bank overdraft has been rising and one of the Board members has sought your help to
understand why. The draft financial statements for Sunny plc are presented below.
Sunny plc
Statement of profit or loss and other comprehensive income
for the period ending 30 June 2017
£000
Revenue 12,500
Cost of sales 10,000
Gross Profit 2,500
Distribution costs 600
Administration costs 1,100
Interest 65
Profit before tax 735
Taxation 150
Profit after tax 585
Other comprehensive income
Revaluation of property 250
Total comprehensive income 835
Sunny plc 30 June 2017 30 June 2016
Statement of financial position as at
£000 £000
Non-current assets
Property, plant and equipment 1,880 1,260
Current assets:
Inventory 945 410
Accounts receivables 700 540
Bank - 330
Total assets 3,525 2,540
6
Equity and liabilities
Ordinary shares 500 400
Share premium 155 100
Revaluation reserve 550 300
Retained earnings 985 600
2,190 1,400
Non-current liabilities
Loan 600 500
Current liabilities
Accounts payable 540 510
Interest payable 40 20
Tax payable 80 110
Overdraft 75 -
735 640
Total equity and liabilities 3,525 2,540
Additional information:
1. The profit before tax includes depreciation of £242,000.
2. No assets were disposed of during the year.
3. The business paid a dividend during the year to 30 June 2017
REQUIRED
3.1 Prepare the statement of cashflow for Sunny plc for the year ended 30 June 2017 in
accordance with IAS 7. Taxation and interest payments are to be classified as
operating cashflows. Clearly show your workings.
(20%)
3.2 Comment on how the business has managed its cash during the year and suggest
what the business could do to improve its cash flow.
(10%)
(Total: 30 %)
QUESTION 4
One of the key suppliers to the company you work for has recently gone out of business and
your employer is now seeking an alternative and reliable source of supply. You have been
asked to assess two alternative suppliers, Skye Ltd and Mull Ltd, who both prepare their
financial statements to 31 December. You have obtained copies of their most recent
statements and these are summarised below.
…/continued overleaf
7
Statement of profit or loss and other comprehensive income for the period ending
31 December 2016
Skye Ltd Mull Ltd
£000 £000
Revenue 2,860 3,155
Cost of sales 1,920 2,120
Gross Profit 940 1,035
Distribution costs 280 300
Administration costs 100 240
Interest 25 175
Profit before tax 535 320
Taxation 160 105
Profit after tax 375 215
Statement of financial position as at 31 December 2016
Skye Ltd Mull Ltd
£000 £000
ASSETS
Non-current assets
Property, plant and equipment 2,285 3,165
Current assets:
Inventory 255 445
Accounts receivables 335 545
Bank 170 -
760 990
Total assets 3,045 4,155
EQUITY AND LIABILITIES
Equity
Ordinary shares 1,000 1,000
Retained earnings 1,410 515
2,410 1,515
Non-current liabilities
Loan 250 1,750
Current liabilities
Accounts payable 225 565
Tax payable 160 105
Overdraft - 220
385 890
Total equity and liabilities 3,045 4,155
For both companies all sales and purchases are made on credit terms.
…/continued overleaf
8
REQUIRED
4.1 Calculate the following ratios for Skye and Mull Ltd for the year ended 31 December
2016 and show your workings in each case:
Return on capital employed
Gross profit margin
Net profit margin
Current ratio
Inventory holding period
Trade payables payment period
Gearing
(14%)
4.2 Discuss these ratios and use them to explain which of these companies is more likely
to be a reliable source of supply.
(12%)
4.3 Identify what further information should be obtained before a final decision is made.
(4%)
(Total: 30 %)
(TOTAL FOR SECTION B - 60%)
Please ensure that you have written the course code (you will find this on the front of this
exam paper), your student ID, date of birth and the number of the question that you have
attempted on each answer sheet.
Put your exam answers in the order of the question number, ensuring that yellow answer
sheets follow the appropriate white answer sheet.
Do not place any other exam materials, including the exam paper, beside the A3 answer
sheets.
END
