Question Bank

ACCA
Financial Reporting (FR)
Exams from September 2023

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ii I n t r o d u c t i o n ACCA FR Question Bank

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ACCA FR Question Bank Introduction iii

PART 1
Introduction
Question practice is VITAL for passing this examination. This question bank contains plenty of
questions to practice. There are also additional online only questions on your online course.

Icons in this Question Bank

You will find a tutor recording for this question on your online course.

Section A: Objective test questions

Attempt ALL Section A questions below twice:
(i) during the first (learning) phase of your course and
(ii) at the revision phase.
You’ll find additional section A Test Your Learning questions online. Test Your Learning questions are
short tests. You must complete the whole test before you look at the answer to a question and the
test is computer marked so you will receive a score. You can attempt the Test Your Learning questions
as many times as you wish. We recommend you do them a few times to see how your score improves.

Section B and Section C questions

The Section B and C questions in Part 1 of this question bank are used on the first phase of your
course. Where you see the debrief icon next to the question name, you will find that there is a video
on our online course in which your online tutor works through the answer giving advice on exam
technique and also on tricky areas.

Section A and Section B

Question Page ref
no Q A

1: An introduction to group accounts

1-5 Objective test 1 87
2: More group accounts
1-27 Objective test 3 89
3: Consolidated statement of profit or loss and other comprehensive income
1-7 Objective test 13 98
4: Accounting for associates
1-9 Objective test 16 100
Scenario question
10-14 Club, Green and Tee 19 102
5: Interpreting financial statements
1-11 Objective test 21 103

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iv I n t r o d u c t i o n ACCA FR Question Bank

Question Page ref

no Q A

6: Statement of cash flows

1-8 Objective test 25 106
Scenario question
9-13 AWX 28 108
7: Principles and concepts
1-23 Objective test 31 110
9: Tangible non-current assets
1-27 Objective test 37 115
Scenario question
28-32 Delta 45 122
10: Intangible assets
1-8 Objective test 47 124
11: Preparation of single company accounts
Scenario questions
1-5 DFG 50 128
12: Leasing
1-6 Objective test 53 130
13: Revenue and inventory
1-19 Objective test 55 132

14: Financial instruments

1-7 Objective test 61 136
Scenario question
8-12 Pingway 63 137

15: Provisions and events after the reporting period

1-14 Objective test 65 139

16: Taxation
1-4 Objective test 69 142

17: Foreign currency transactions

1-5 Objective test 71 144

18: Earnings per share

1-3 Objective test 73 145

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ACCA FR Question Bank Introduction v

Section C
Page ref Tuition (T)
Question name Syllabus area Q A Stretch (S)

2: More group accounts

Paradigm (Q1, Group financial statements 74 146 T
June 2013 (statement of financial position)
Amended)
3: Consolidated statement of profit or loss and other
comprehensive income
Pinardi Co (Q2 Group financial statements 76 149 T
September/ (statement of profit or loss and
December 2021) Statement of changes of Equity;
Statement of Cashflows – investing
and operating activities)
4: Accounting for associates
Pumice (Q1, 2007 Group financial statements 78 154 T
Pilot paper, (statement of financial position
amended) including an associate)
5: Interpreting financial statements
Quartile (Q3, Analysis and interpretation of 79 157 T
December 2012) financial statements

6: Statement of cash flows

Mocha (Q3, Statement of cash flows 81 160 S
December 2011,
amended)
11: Preparation of single company accounts
1 Sandown (Q2, Preparation of single company financial 83 163 T
December 2009) statements
2 Triage Co (Q31, Preparation of single company financial 84 166 T
September 2016) statements (including earnings per
share)

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vi I n t r o d u c t i o n ACCA FR Question Bank

Revision Preparation
At this stage you should have attempted all the questions in phase 1 of this question bank. Before you
start the revision phase 2, you will have a tuition course exam to complete and you should also look at
the ACCA practice platform:

The ACCA practice platform

It is important to use the ACCA practice platform (https://cbept.accaglobal.com) to practice
questions in the same CBE layout as the real exam.
The specimen exam and two past exams can be accessed on the platform and these will be updated to
reflect the Examinable Documents for September 2022 to June 2023. At the time of printing this
question bank we are unsure which two past papers will be on the platform – but expect it to be the
two 2021 real exams.
The two 2021 real exams are not in this question bank and you should attempt one before you start
your revision course and one at the end of the revision course as preparation for your mock. This
allows you to practice questions with the real exam format and functionality, and to familiarise
yourself with the tools you will need to use to present your answers well. Your responses to these
questions will be saved, sections A and B will be marked automatically and you can self‐mark section C
using marking guides and suggested answers.

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ACCA FR Question Bank Introduction vii

PART 2

Section B and Section C questions

The Section B and C questions in Part 2 of this question bank are for the revision phase of your course.

Question Page ref

no Q A

3: Consolidated statement of profit or loss and other comprehensive income

Scenario questions
1-5 RW 171 251
6-10 Bycomb 172 253
4: Accounting for associates
Scenario questions
1-5 Pyramid 174 255
6-10 TX and SX 176 256
11-15 Poplar 178 257
5: Interpreting financial statements
Scenario questions
1-5 JG 180 258
6-10 Monty 182 259
6: Statement of cash flows
Scenario question
1-5 OP 185 261
9: Tangible non-current assets
Scenario questions
1-5 Linetti Co (March/June 2019) 187 262
6-10 Fundo 188 263
11-15 Flightline 190 264

10: Intangible assets

Scenario questions
1-5 Wilrob Co (March/June 2021) 192 267

13: Revenue and inventory

Scenario questions
1-5 Campbell Co (September/December 2020) 194 271

14: Financial instruments

Scenario questions
1-5 Diaz Co (March/June 2019) 196 273

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viii I n t r o d u c t i o n ACCA FR Question Bank

Question Page ref

no Q A

15: Provisions and events after the reporting period

Scenario questions
1-5 Jeffers Co (March/June 2019) 198 274
6-10 Borough 200 275
11-15 Skeptic 201 276
16-20 Manco 203 277

16: Taxation
Scenario question
1-5 Norwood 205 278

Section C
Page ref Revision (R)
Question name Syllabus area Q A Stretch (S)

2: More group accounts

1 Party Co and Group financial statements 207 280 S
Streamer Co (Q32, (statement of financial position)
September/
December 2017)
2 Palistar (Q3, Group financial statements 208 283 R
September 2015 (statement of financial position)
amended)
3 Plastik (Q3, Group financial statements 209 286 R
December 2014 (statement of financial position)
amended)
4 Polestar (Q1, Group financial statements 211 289 R
December 2013 (statement of profit or loss and
amended) statement of financial position)

3: Consolidated statement of profit or loss and other

comprehensive income
1 Penketh (Q1, Group financial statements 213 293 S
June 2014 (statement of profit or loss)
amended)
2 Premier (Q1, Group financial statements 214 294 S
December 2010, (statement of profit or loss and
amended) statement of financial position)

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ACCA FR Question Bank Introduction ix

Page ref Revision (R)

Question name Syllabus area Q A Stretch (S)

4: Accounting for associates

1 Plank Co (Q32, Group financial statements 216 298 R
March/July 2020) (statement of profit or loss and
other comprehensive income;
treatment of associate)
2 Runner Co (Q32, Group financial statements 217 300 S
September/ (statement of financial position;
December 2019) treatment of associate)
3 Dargent Co (Q32, Group financial statements 218 304 R
March/June 2017) (statement of financial position)
4 Viagem (Q1, Group financial statements 220 306 R
December 2012 (goodwill; statement of profit or
amended) loss)
5 Gold Co (Q4 Group financial statements (goodwill; 221 308 R
March/June 2021) investment in associate; statement of
profit or loss)

5: Interpreting financial statements

1 Fit Co (Q31, Analysis and interpretation of 223 313 R
March/July 2020) financial statements (comparison of
two companies; sale of a division)
2 Bun Co (Q31, Analysis and interpretation of 224 315 R
September/ financial statements; events after
December 2019) the reporting period; limitations of
ratio analysis
3 Pirlo Co (Q31, Analysis and interpretation of 225 318 R
March/June 2019) consolidated financial statements;
group financial statements (disposal
of subsidiary)
4 Duke Co (Q31, Analysis and interpretation of 227 321 S
September/ consolidated financial statements;
December 2018) group financial statements (non-
controlling interest; retained
earnings)
5 Perkins Co (Q31, Analysis and interpretation of 228 325 S
March/June 2018) consolidated financial statements;
group financial statements
(statement of profit or loss;
disposal)
6 Funject Co (Q31, Analysis and interpretation of 230 328 R
March/June 2017) consolidated financial statements
7 Gregory Co (Q32, Analysis and interpretation of 231 331 R
September 2016) consolidated financial statements
8 Pastry Co (Q3, Analysis and interpretation of 233 335 R
March/June 2021) financial statements; extract of
financial statement

6: Statement of cash flows

1 Minster Statement of cash flows including 235 339 R
interpretation

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x Introduction ACCA FR Question Bank

Page ref Revision (R)

Question name Syllabus area Q A Stretch (S)
2 Deltoid Statement of cash flows including 237 342 R
interpretation

11: Preparation of single company accounts

1 Vernon Co (Q32, Preparation of single company 239 345 R
March/June 2019) financial statements (including
earnings per share)
2 Duggan Co (Q32, Preparation of single company 240 348 R
September/ financial statements (including
December 2018) earnings per share)
3 Clarion (Q3, June Preparation of single company 242 350 R
2015, amended) financial statements (including cash
flows and earnings per share)
4 Mims (Q1, Preparation of single company 243 356 R
September/ financial statements (including
December 2021) statement of changes in equity and
cash flows)
5 Xtol (Q2, June Preparation of single company 245 357 S
2014 amended) financial statements (including
earnings per share)
6 Atlas (Q2, June Preparation of single company 246 361 R
2013 amended) financial statements
7 Keystone (Q2, Preparation of single company 248 365 R
December 2011, financial statements
amended)

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ACCA FR Question Bank Introduction xi

Final Exam Preparation

At this stage you should have attempted all the questions in this question bank. Before your real exam
you will have a revision mock exam to complete and you should also look at the ACCA practice
platform.

The ACCA practice platform

It is important to use the ACCA practice platform (https://cbept.accaglobal.com) to practice
questions in the same CBE layout as the real exam.
The specimen exam and two past exams can be accessed on the platform and these will be updated to
reflect the Examinable Documents for September 2022 to June 2023. At the time of printing this
question bank we are unsure which two past papers will be on the platform – but expect it to be the
two 2021 real exams.
The two 2021 real exams are not in this question bank and you should have attempted one before you
start your revision course and you should complete one at the end of the revision course as final exam
preparation. This allows you to practice questions with the real exam format and functionality, and to
familiarise yourself with the tools you will need to use to present your answers well. Your responses to
these questions will be saved, sections A and B will be marked automatically and you can self-mark
section C using marking guides and suggested answers.

Icons in this Question Bank

You will find a tutor recording for this question on your online course.

For PwC's Academy Student Use Only. Not for Distribution.

xii I n t r o d u c t i o n ACCA FR Question Bank

For PwC's Academy Student Use Only. Not for Distribution.

ACCA FR Question Bank Part 1 questions: 1: An introduction to group accounts 1

PART 1 QUESTIONS: Objective test and Scenario

1: An introduction to group accounts

1 How should goodwill arising on acquisition be accounted for?

 Carried at cost, with an annual impairment review.
 Written off against reserves on acquisition.
 Amortised over its useful life.
 Revalued to fair value at each year end. (2 marks)

2 Petre owns 100% of the share capital of the following companies. The directors are unsure of
whether the investments should be consolidated.
In which of the following circumstances would the investment NOT be consolidated?
 Petre has decided to sell its investment in Alpha as it is loss-making; the directors believe
its exclusion from consolidation would assist users in predicting the group’s future profits
 Beta is a bank and its activity is so different from the engineering activities of the rest of
the group that it would be meaningless to consolidate it
 Delta is located in a country where local accounting standards are compulsory and these
are not compatible with IFRS standards used by the rest of the group
 Gamma is located in a country where a military coup has taken place and Petre has lost
control of the investment for the foreseeable future

3 Which of the following should be accounted for as subsidiaries in the consolidated financial
statements of Preece Co?
1 Gilber Co - Preece Co currently owns 40% of the share capital of Gilber Co and holds
options to purchase another 20% which it can exercise immediately
2 Grovez Co - Preece Co owns 60% of Grovez Co and has appointed the majority of the
board of directors
3 Roge Co - Preece Co owns 80% of Roge Co. Roge Co is loss-making and Preece Co is
considering selling it in the near future
 1 and 2 only
 2 and 3 only
 1 and 3 only
 1, 2 and 3

4 An investor company assesses control to determine whether or not it is the parent of an

investee company.
Which THREE of the following are required to determine whether an investor has control of an
investee?
 The ability to use its power over the investee to affect the amount of the investor’s
returns
 Exposure, or rights, to variable returns from its involvement with the investee
 Acquisition of 50% or more of the share capital
 Power over the investee

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2 Part 1 questions: 1: An introduction to Group accounts ACCA FR Question Bank

5 Indicate whether the following statements are true or false in relation to accounting for the
acquisition of a subsidiary.
TRUE FALSE
Where a parent company is satisfied that there has been a gain on a  
bargain purchase (negative goodwill), it should be recognised in the
consolidated statement of profit or loss immediately.
If the liabilities of the acquired entity are overstated, then goodwill  
will also be overstated.

(2 marks)
[MJ21]

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 3

2: More group accounts

1 HW sold goods to SD, its 100% owned subsidiary on 1 February 20X8. The goods were sold to
SD for $48,000. HW made a mark-up of 33.33% on the original cost of the goods.
At the year end, 30 June 20X8, 40% of the goods had been sold by SD, the balance were still in
SD’s inventory and SD had not paid for any of the goods.
Use the tokens to state the correct adjustments required in the HW group’s consolidated
statement of financial position at 30 June 20X8.

inventories and retained earnings by $

and

payables and receivables by $

Tokens:
Reduce 7,200
Increase 9,600
48,000
(2 marks)

2 Fielding purchased 80,000 ordinary shares in Richardson for $110,000 many years ago, when
Richardson’s retained earnings were $25,000.
At 30 June 20X4, Richardson’s equity and reserves were as follows:
$
Ordinary shares $1 100,000
Retained earnings 90,000
The fair value of the non-controlling interest at acquisition was $30,000. Fielding’s policy is to
value the non-controlling interest at fair value.
What was the goodwill arising on acquisition of Richardson?
 $10,000
 $15,000
 $30,000
 $50,000 (2 marks)

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4 Part 1 questions: 2: More group accounts ACCA FR Question Bank

3 On 30 September 20X3, H acquired 75% of the share capital of S. The non-controlling interest
had a fair value of $900,000. H’s policy is to value non-controlling interest at fair value.
Extracts from the statement of financial position of S at 30 September 20X3 and 30 September
20X4 are shown below.
Statement of financial position:
20X3 20X4
$ $
Ordinary share capital 500,000 500,000
Retained earnings 2,800,000 3,400,000
What figure for non-controlling interest should appear in the consolidated statement of
financial position as at 30 September 20X4?
 $825,000
 $900,000
 $975,000
 $1,050,000 (2 marks)

4 Sterne acquired 60% of the voting equity shares of Defoe. Defoe had the following equity at the
date of acquisition:
$
Ordinary shares $1 500,000
Retained earnings 250,000
The fair value of consideration was $850,000 and the fair value of the non-controlling interest at
acquisition was $120,000. Sterne’s policy is to value the non-controlling interest at fair value.
Calculate the goodwill on acquisition of Defoe.

$ (2 marks)

5 On 1 January 20X4, Lyon acquired 75% of the voting equity shares of Drake by paying $800,000
cash and issuing 50,000 of its own $1 equity shares. At that date, Drake had net assets of
$1,000,000.
On 1 January 20X4, the fair value of shares in Lyon was $1.50 per share and the fair value of the
non-controlling interest in Drake was $225,000. Lyon’s policy is to value the non-controlling
interest at fair value.
What was the goodwill arising on acquisition of Drake?
 $25,000
 $75,000
 $100,000
 $125,000 (2 marks)

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 5

6 Moray acquired 80% of the voting equity shares of Forth for cash of $1,250,000. The fair value
of the non-controlling interest at acquisition was $300,000. Forth had the following equity at
the date of acquisition:
$
Ordinary shares $1 500,000
Retained earnings 700,000
The fair values of the net assets of Forth were the same as their book values, with the exception
of some land with a carrying amount of $500,000 and a fair value of $600,000. Moray’s policy is
to value the non-controlling interest at fair value at the date of acquisition.
What was the goodwill on acquisition of Forth?
 $50,000
 $210,000
 $250,000
 $350,000 (2 marks)

7 On 1 January 20X4, Tennyson acquired 60% of the share capital of Browning.

Extracts from the individual financial statements of the two companies are shown below.
Tennyson Browning
$ $
Ordinary share capital 800,000 400,000

Retained earnings at 1 October 20X3 1,000,000 500,000

Profit for the year ended 30 September 20X4 200,000 100,000
1,200,000 600,000

What figure for retained earnings should appear in the consolidated statement of financial
position as at 30 September 20X4?
 $1,245,000
 $1,260,000
 $1,300,000
 $1,725,000 (2 marks)

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6 Part 1 questions: 2: More group accounts ACCA FR Question Bank

8 Pater acquired 100% of the equity share capital of Scott many years ago, when Scott’s retained
earnings were $660,000.
Extracts from the statements of financial position of the two companies at 30 June 20X4 are
shown below.
Statement of financial position:
Pater Scott
$ $
Ordinary share capital 1,000,000 750,000
Retained earnings 950,000 940,000
During the year ended 30 June 20X4, Pater sold goods costing $100,000 to Scott for $150,000.
Half these goods remained in the inventories of Scott at the year-end.
What figure for retained earnings should appear in the consolidated statement of financial
position as at 30 June 20X4?
 $1,080,000
 $1,180,000
 $1,205,000
 $1,865,000 (2 marks)

9 Shelley owns 100% of the equity share capital of Keats. Extracts from the individual statements
of financial position of the two companies are shown below.
Statement of financial position:
Shelley Keats
$ $
Inventories 530,000 310,000
Trade and other receivables 480,000 290,000
During the year, Shelley sold goods costing $200,000 to Keats for $240,000. All of these goods
remained in the inventories of Keats at the year-end.
At the year-end, the trade receivables of Shelley included an amount of $30,000 owed to the
company by Keats.
Which figures should appear in the consolidated statement of financial position?
 Inventories $600,000; trade and other receivables $740,000
 Inventories $600,000; trade and other receivables $770,000
 Inventories $800,000; trade and other receivables $740,000
 Inventories $800,000; trade and other receivables $770,000 (2 marks)

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 7

10 On 1 December 20X3, Prime acquired 80% of Sext. At the date of acquisition, the fair values of
Sext’s assets were equal to their carrying amounts with the exception of an item of plant. This
had a fair value of $3 million above its carrying amount and a remaining useful life of five years
at that date.
At 30 September 20X4, the separate financial statements of the two companies showed that
Prime had property, plant and equipment of $33 million, while Sext had property, plant and
equipment of $16 million.
What amount is included in the consolidated statement of financial position for property,
plant and equipment as at 30 September 20X4?
 $47.8 million
 $51.4 million
 $51.5 million
 $52 million (2 marks)

11 On 1 October 20X3, Perch secured an 80% equity shareholding in Stem on the following terms:
An immediate payment of $4.5 per share on 1 October 20X3; and
A further amount deferred until 1 October 20X4 of $6.6 million.
Perch’s cost of capital is 10% per annum.
At the acquisition date, Stem had 10 million equity shares of $1 each and retained earnings of
$18 million. It is the policy of the group to value the non-controlling interest at fair value at the
date of acquisition. For this purpose, the directors of Perch considered a share price for Stem of
$4 per share to be appropriate.
What is the amount of goodwill arising on the acquisition of Stem?
 $14 million
 $22 million
 $22.6 million
 $28 million (2 marks)

12 Tazer, a parent company, acquired Lowdown, an unincorporated entity, for $2.8 million. A fair
value exercise performed on Lowdown’s net assets at the date of purchase showed:
$000
Property, plant and equipment 3,000
Identifiable intangible asset 500
Inventory 300
Trade receivables less payables 200
4,000

How should the purchase of Lowdown be reflected in Tazer’s consolidated statement of

financial position?
 Record the net assets at their values shown above and credit profit or loss with
$1.2 million
 Record the net assets at their values shown above and credit Tazer’s consolidated
goodwill with $1.2 million
 Write off the intangible asset ($500,000), record the remaining net assets at their values
shown above and credit profit or loss with $700,000
 Record the purchase as a financial asset investment at $2.8 million

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8 Part 1 questions: 2: More group accounts ACCA FR Question Bank

13 Pact acquired 80% of the equity shares of Sact on 1 July 20X4, paying $3.00 for each share
acquired. This represented a premium of 20% over the market price of Sact’s shares at that
date.
Sact’s shareholders’ funds (equity) as at 31 March 20X5 were:
$ $
Equity shares of $1 each 100,000
Retained earnings at 1 April 20X4 80,000
Profit for the year ended 31 March 20X5 40,000 120,000
220,000

The only fair value adjustment required to Sact’s net assets on consolidation was a $20,000
increase in the value of its land.
Pact’s policy is to value non-controlling interests at fair value at the date of acquisition. For this
purpose, the market price of Sact’s shares at that date can be deemed to be representative of
the fair value of the shares held by the non-controlling interest
What would be the carrying amount of the non-controlling interest of Sact in the consolidated
statement of financial position of Pact as at 31 March 20X5?
 $54,000
 $50,000
 $56,000
 $58,000

14 Wilmslow acquired 80% of the equity shares of Zeta on 1 April 20X4 when Zeta’s retained
earnings were $200,000.
During the year ended 31 March 20X5, Zeta purchased goods from Wilmslow totalling
$320,000. At 31 March 20X5, one quarter of these goods were still in the inventory of Zeta.
Wilmslow applies a mark-up on cost of 25% to all of its sales.
At 31 March 20X5, the retained earnings of Wilmslow and Zeta were $450,000 and $340,000
respectively.
What would be the amount of retained earnings in Wilmslow’s consolidated statement of
financial position as at 31 March 20X5?
 $706,000
 $542,000
 $498,000
 $546,000

15 On 1 September 20X8, Paper Co acquired 75% of Stone Co’s ordinary share capital. The fair
values of the net assets of Stone Co at the date of acquisition were equal to their carrying
amounts, with the exception of a liability, which had a carrying amount of $20,000 below the
fair value. Stone Co had not accounted for this fair value adjustment in its individual financial
statements.
It is the group policy to measure non-controlling interests at acquisition at fair value.
As a result of the above consolidation adjustment, what would be the impact on the goodwill
amount at the date of acquisition?
 Increase by $15,000
 Decrease by $15,000
 Increase by $20,000
 Decrease by $20,000

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 9

16 On 1 January 20X3 Parry Co purchased 80% of Scott Co. During the year ended 31 December
20X3, the goodwill arising on the acquisition was found to be impaired by $350,000. It is the
policy of the Parry Group to measure non-controlling interests at acquisition at their fair value.
What is the adjustment required to reflect the impairment of goodwill in the consolidated
financial statements of the Parry Group?
 Dr Retained earnings $280,000; Cr Goodwill $280,000
 Dr Retained earnings $350,000; Cr Goodwill $350,000
 Dr Goodwill $350,000; Cr Retained earnings $280,000; Cr Non-controlling interest
$70,000
 Dr Retained earnings $280,000; Dr Non-controlling interest $70,000; Cr Goodwill
$350,000

17 Which of the following would result in an elimination adjustment to the consolidated

statement of financial position?
 A long-term interest free loan made by the parent to a subsidiary
 Cash in transit between a subsidiary and a parent
 Loan notes issued by the parent to lenders to finance the acquisition of a subsidiary
 Profit on sales made by a subsidiary to the parent where none of the goods remain in
inventory at the period end

18 Ponto acquired 100% of the equity share capital of Sonto on 1 January 20X7. A fair value
exercise conducted at this date identified two issues:
Issue 1 – Sonto owned the rights to a brand which it had developed internally. The fair value of
the brand at 1 January 20X7 was reliably measured at $20,000.
Issue 2 – Sonto was defending a legal claim brought against it by a former employee. The fair
value of the potential liability for damages payable was reliably measured at $85,000 on
1 January 20X7. Sonto’s legal team had advised that there was only a 30% chance that they
would lose the court case.
Both of these issues had been treated correctly in the separate financial statements of Sonto at
1 January 20X7.
The purchase consideration paid by Ponto had already been agreed and will not be adjusted for
the above issues.
What effect will these issues have on the calculation of the goodwill arising on the acquisition
of Sonto in the consolidated financial statements of Ponto?
 Both issues will increase goodwill
 Both issues will decrease goodwill
 Issue 1 will increase goodwill and issue 2 will have no effect on goodwill
 Issue 1 will decrease goodwill and issue 2 will increase goodwill

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10 P a r t 1 q u e s t i o n s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

19 Patula Co acquired 80% of Sanka Co on 1 October 20X5. At this date, some of Sanka Co's
inventory had a carrying amount of $600,000, but a fair value of $800,000. By 31 December
20X5, 70% of this inventory had been sold by Sanka Co.
The individual statements of financial position at 31 December for both companies show the
following:
Patula Co Sanka Co
$’000 $’000
Inventories 3,250 1,940
What will be the total inventories figure in the consolidated statement of financial position of
Patula Co as at 31 December 20X5?
 $5,250,000
 $5,330,000
 $5,130,000
 $5,238,000

20 On 1 October 20X8, Picture Co acquired 60% shares in Frame Co. At 1 April 20X8, the credit
balances on the revaluation surpluses relating to Picture Co and Frame Co’s equity financial
asset investments stood at $6,400 and $4,400 respectively.
The following extract was taken from the financial statements for the year ended 31 March
20X9:
Picture Co Frame Co
$ $
Other comprehensive income: loss on fair value of equity financial (1,400) (800)
investments
Assume the losses accrued evenly throughout the year.
What is the amount of the revaluation surplus in the consolidated statement of financial
position of Picture Co as at 31 March 20X9?
 $4,520
 $4,760
 $5,240
 $9,160

21 A 60% owned subsidiary sold goods to its parent for $150,000 at a mark-up of 25% on cost
during the year ended 30 June 20X5. One fifth of these goods remained unsold as at 30 June
20X5.
What is the debit adjustment to be made to group retained earnings to reflect the unrealised
profit in inventory at 30 June 20X5?
 $6,000
 $3,600
 $2,400
 $4,500

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 11

22 On 1 January 20X5, Pratt Co acquired 80% of the equity shares of Sam Co. Pratt Co values non-
controlling interests at fair value and, at the date of acquisition, goodwill was valued at $20,000.
At 31 December 20X5, the goodwill was fully impaired.
In conducting the fair value exercise of Sam Co’s net assets at acquisition, Pratt Co concluded
that property, plant and equipment, with a remaining life of five years, had a fair value of
$5,000 in excess of its carrying amount.
What is the total charged to group retained earnings at 31 December 20X5 as a result of these
consolidation adjustments?
 $16,800
 $21,000
 $17,000
 $20,800

23 Platt Co has owned 60% of the issued equity share capital of Serpi Co for many years. At
31 October 20X7, the individual statements of financial position included the following:
Platt Co Serpi Co
$ $
Current assets 700,000 500,000
Current liabilities 300,000 200,000
Neither company had a bank overdraft at 31 October 20X7.
During the year ended 31 October 20X7, Platt Co made $100,000 sales on credit to Serpi Co.
Serpi Co had one-quarter of these goods in inventory at 31 October 20X7. Platt Co makes a 20%
gross profit margin on all sales.
On 31 October 20X7, Serpi Co sent a cheque for $50,000 to pay all of the outstanding balance
due to Platt Co. Platt Co did not receive this cheque until 2 November 20X7.
Platt Co’s policy for in-transit items is to adjust for them in the parent company.
In respect of current assets and current liabilities, what amounts will be reported in Platt Co’s
consolidated statement of financial position at 31 October 20X7?
 Current Assets $1.197m and current liabilities $0.5m
 Current Assets $1.145m and current liabilities $0.45m
 Current Assets $1.195m and current liabilities $0.45m
 Current Assets $1.195m and current liabilities $0.5m

24 Boat Co acquired 60% of Anchor Co on 1 January 20X4. At the date of acquisition, the carrying
amount of Anchor Co’s net assets were the same as their fair values, with the exception of an
item of machinery which had a carrying amount of $90,000, a fair value of $160,000 and a
remaining useful life of five years. Non-controlling interests are valued at fair value.
What is the journal entry required to reflect this fair value adjustment in the consolidated
statement of financial position of Boat Co as at 31 December 20X6?
 Dr Retained earnings $25,200; Dr Non-controlling interest $16,800: Dr Property, plant
and equipment $28,000; Cr Goodwill $70,000
 Dr Retained earnings $8,400; Dr Non-controlling interest $5,600: Dr Property, plant and
equipment $56,000: Cr Goodwill $70,000
 Dr Retained earnings $57,600; Dr Non-controlling interest $38,400: Dr Property, plant
and equipment $64,000: Cr Goodwill $160,000
 Dr Retained earnings $42,000; Dr Property, plant and equipment $28,000: Cr Goodwill
$70,000

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12 P a r t 1 q u e s t i o n s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

25 Platinum Co acquired 80% of the ordinary share capital of Palladium Co on 1 April 20X0 by
means of cash and contingent consideration. At this date, Platinum Co assessed the fair value of
contingent consideration at $250,000.
Platinum Co calculates non-controlling interest, using the fair value at the date of acquisition,
which was estimated to be $100,000 and the goodwill arising on acquisition was $300,000.
The following figures for Palladium Co are relevant:
$'000
Ordinary shares of $1 each at acquisition 500
Retained earnings at 1 January 20X0 (300)
Profit for the year ended 31 December 20X0 120
The profits for Palladium Co have accrued evenly throughout the year.
What was the cash consideration paid by Platinum Co for the investment in Palladium Co?

$
(2 marks)
[MJ21]

26 Pater Co acquired 80% of the issued equity share capital of Sono Co on 1 May 20X1, when the
balance on Sono Co's retained earnings was $520,000.
On 15 November 20X8, Sono Co made $240,000 sales of goods to Pater Co, on which Sono Co
made a mark-up (on cost) of 20%. Pater Co subsequently sold one-quarter of these goods to
external parties prior to 31 December 20X8.
At 31 December 20X8, the retained earnings of Pater Co and Sono Co were $4m and $3.4m
respectively.
What retained earnings should be reported in Pater Co's consolidated statement of financial
position as at 31 December 20X8 (to the nearest $'000)?

$ ,000
(2 marks)
[SD20]

27 Green Co acquired 70% of Blue Co on 1 January 20X4. At 31 December 20X4 the equity of both
companies was as follows:
Green Co Blue Co
$m $m
Share capital 20 20
Retained earnings 116 30
136 50

At the date of acquisition, the fair value of Blue Co's net assets is $40m and goodwill is
calculated to be $25m. At 31 December 20X4, 20% of this goodwill is to be written off due to
impairment. Non-controlling interests are measured at fair value.
What amount should be shown for consolidated retained earnings in the statement of
financial position as at 31 December 20X4 (to one decimal place)?

$ m
(2 marks)
[J20]

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ACCA FR Question Bank Part 1 questions: 3: Consolidated statement of profit or loss and OCI 13

3: Consolidated statement of profit or loss and other

comprehensive income

1 Beaumont acquired 80% of the voting power in Fletcher many years ago. An extract from the
statement of profit or loss of Fletcher for the year ended 31 December 20X3 is shown below.
$
Profit before tax 110,000
Taxation (40,000)
Net profit for the year 70,000

Calculate the profit attributable to the non-controlling interest in the consolidated statement
of profit or loss.

$ (2 marks)

2 Wye acquired 100% of the equity share capital of Derwent on 1 July 20X3. For the year ended
30 June 20X4, the cost of sales of Wye was $250,000 and the cost of sales of Derwent was
$130,000.
During the year ended 30 June 20X4, Wye sold goods costing $25,000 to Derwent for $35,000.
At the year-end, half these goods were still in inventory.
What is the consolidated cost of sales for the year ended 30 June 20X4?
 $340,000
 $345,000
 $350,000
 $360,000 (2 marks)

3 On 1 October 20X3, Marlowe acquired 90% of the voting power of Spenser. The following
information has been extracted from the statements of profit or loss of the two companies for
the year ended 31 March 20X4:
Marlowe Spenser
$ $
Revenue 800,000 650,000
During February 20X4, Marlowe sold goods costing $50,000 to Spenser for $80,000. At
31 March 20X4, all of these goods had been sold to third parties.
What figure for revenue should appear in the consolidated statement of profit or loss for the
year ended 31 March 20X4?
 $1,012,500
 $1,045,000
 $1,075,000
 $1,370,000 (2 marks)

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14 P a r t 1 q u e s t i o n s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t o r l o s s a n d O C I ACCA FR Question Bank

4 Hayes Co owns 80% of the equity shares in Smith Co. For the year ended 30 June 20X9 Hayes Co
made a profit of $400,000 and Smith Co made a profit of $250,000.
During the year, Smith Co sold goods to Hayes Co for $180,000. Smith Co makes a mark-up on
cost of 20% on all sales. At the end of the year, half these goods were still in Hayes Co’s
inventory.
What is the profit attributable to the owners of the parent for the year ended 30 June 20X8?
 $576,000
 $585,000
 $585,600
 $588,000 (2 marks)

5 Paprika Co purchased 75% of the equity share capital of Salt Co on 30 April 20X4. Non-
controlling interests are measured at fair value.
The cost of sales of both companies for the year ended 30 April 20X6 are as follows:
Paprika Salt
$ $
Cost of sales 60,000 100,000
The following additional information is provided:
1 Salt Co had machinery included in its net assets at acquisition with a carrying amount of
$120,000 but a fair value of $200,000. The machinery had a remaining useful life of eight
years at the date of acquisition. All depreciation is charged to cost of sales.
2 During the year, Salt Co sold some goods to Paprika Co for $32,000 at a margin of 25%.
Three-quarters of these goods remained in inventory at the year end.
What is the cost of sales in Paprika Co’s consolidated statement of profit or loss for the year
ended 30 April 20X6?
 $144,000
 $132,000
 $176,000
 $140,000

6 On 1 July 20X5, Pull Co acquired 80% of the equity of Sat Co. At the date of acquisition, goodwill
was valued at $10,000 and the non-controlling interest was measured at fair value. In
conducting the fair value exercise on Sat Co’s net assets at acquisition, Pull Co concluded that
property, plant and equipment with a remaining life of ten years had a fair value of $300,000 in
excess of its carrying amount. Sat Co had not incorporated this fair value adjustment into its
individual financial statements. At the reporting date of 31 December 20X5, the goodwill was
fully impaired. For the year ended 31 December 20X5, Sat Co reported a profit for the year of
$200,000.
What is the Pull Group profit for the year ended 31 December 20X5 that is attributable to
non-controlling interests?
 $16,000
 $12,000
 $35,000
 $15,000

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ACCA FR Question Bank Part 1 questions: 3: Consolidated statement of profit or loss and OCI 15

7 Partridge Co acquired 75% of the equity of Snipe Co on 1 January 20X1. The consolidated
statement of profit or loss and other comprehensive income of the Partridge Group shows the
following information for the year ended 31 December 20X1:
$000
Profit attributable to the owners of the parent 284,000
Profit attributable to non-controlling interests 7,800
Profit for the year 291,800

During the year, Partridge Co had other comprehensive income of $4.3 million and Snipe Co had
other comprehensive income of $3.6 million.
Calculate the total comprehensive income attributable to the owners of the parent that will
be presented in the consolidated statement of profit or loss and other comprehensive
income.

$ (2 marks)

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16 P a r t 1 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4: Accounting for associates

1 Which of the following indicates that an investing entity has significant influence over an
investee?
 The investor has the ability to direct the main operating activities of the investee
 The investor has the right to appoint three of the four directors of the investee
 The investor is able to participate in decisions about the dividend policies of the investee
 The investor owns 300,000 of the 2,000,000 equity voting shares of the investee
(2 marks)

2 Iona, a company with subsidiaries, acquired 350,000 of Bede’s 1,000,000 equity shares for cash
consideration of $2.6 million on 1 January 20X4. Bede’s profit after tax for the year ended
30 September 20X4 was $800,000. At 30 September 20X4, Iona’s investment in Bede was found
to have suffered an impairment loss of $300,000. Iona is represented on the Board of Directors
of Bede and there are no other major shareholders.
What is the carrying amount of the investment in Bede in the consolidated statement of
financial position of Iona as at 30 September 20X4?
 $2,300,000
 $2,510,000
 $2,580,000
 $2,810,000 (2 marks)

3 Which of the following statements is TRUE?

 L is presumed to be an associate of X if X holds 25% of the share capital of L
 M cannot be a subsidiary of X if X holds less than 50% of the voting rights in M
 N is a subsidiary of X if X has the power to govern the financial and operating policies of N
 P is an associate of X if X has the right to appoint or remove all the directors of P
(2 marks)

4 On 1 February 20X8, Penge, a company with subsidiaries, acquired 25% of the equity shares of
Anerley.
Anerley had retained earnings of $19.5 million as at 1 October 20X7and made a profit of
$2.4 million for the year ended 30 September 20X8.
Impairment tests were carried out on 30 September 20X8 which concluded that the value of the
investment in Anerley was impaired by $500,000.
What is the NET effect of the investment in Anerley on the consolidated retained earnings of
the Penge group for the year ended 30 September 20X8?
 Decrease of $100,000
 Increase of $100,000
 Increase of $275,000
 Increase of $400,000 (2 marks)

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ACCA FR Question Bank Part 1 questions: 4: Accounting for associates 17

5 Pushkin has invested in 25% of the voting shares of Alcott and as a result, Pushkin can exercise
significant influence over Alcott.
What amount should Pushkin recognise in its consolidated statement of financial position in
respect of its investment in Alcott?
 The fair value of the investment
 The group share of the net assets of Alcott, measured at fair value
 The original cost of the investment, plus the group share of Alcott’s post-acquisition
profits
 The original cost of the investment, plus Alcott’s post-acquisition profits, plus goodwill
(2 marks)

6 An associate is an entity in which an investor has significant influence over the investee.
Which TWO of the following indicate the presence of significant influence?
 The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
 The investor has representation on the board of directors of the investee
 The investor is able to insist that all of the sales of the investee are made to a subsidiary
of the investor
 The investor controls the votes of a majority of the board members (2 marks)

7 Under certain circumstances, profits made on transactions between members of a group need
to be eliminated from the consolidated financial statements.
Which of the following statements about intra-group profits in consolidated financial
statements is/are correct?
(i) The profit made by a parent on the sale of goods to a subsidiary is only realised when the
subsidiary sells the goods to a third party
(ii) Eliminating intra-group unrealised profits never affects non-controlling interests
(iii) The profit element of goods supplied by the parent to an associate and held in year-end
inventory must be eliminated in full
 (i) only
 (i) and (ii)
 (ii) and (iii)
 (iii) only

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18 P a r t 1 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

8 Identify TWO associate companies of Zuckal Co (one from each group of three)
Group 1 Associate
Acquisition of 10% of Arties Co. Zuckal Co has no
representation on the board of Arties Co. All decisions
are made at board level.
Acquisition of 40% of Bandoka Co. Due to an agreement
with other shareholders, Zuckal Co effectively holds 52% Associate 1
of the voting rights.
Acquisition of 50% of Castur Co. Zuckal has appointed
two of the five board members.

Group 2
Acquisition of 21% of Dunnatonn Co. However, the
other 79% of Dunnatonn Co is owned by Yentee Co, a
company with no links to Zuckal Co.
Acquisition of 70% of Eahnn Co. Zuckal Co has been able
to direct the operating policies of Eahnn Co for many Associate 2
years, and has exercised that right.
Acquisition of 15% of Furnitt Co. Zuckal Co can appoint
one of Furnitt Co’s five board members. No party can
appoint more than two.

(2 marks)
[SD20]

9 Root Co acquired 30% of the 100,000 equity shares in Branch Co for $7.50 per share on
1 January 20X7, when Branch Co had retained earnings of $460,000 and a balance on the
revaluation surplus of $50,000.
At the year end date of 31 December 20X7, Branch Co had retained earnings of $370,000 and a
balance of $70,000 on the revaluation surplus. Root Co considered that its investment in Branch
Co had suffered an impairment loss of $40,000.
Calculate the carrying amount of the investment in Branch Co in the consolidated statement
of financial position of Root Co as at 31 December 20X7.
(2 marks)
[M20]

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ACCA FR Question Bank Part 1 questions: 4: Accounting for associates 19

CLUB, GREEN AND TEE

The following scenario relates to questions 10 – 14.
The draft statements of financial position at 31 March 20X3 for three entities, are given below:
Statements of financial position as at 31 March 20X3
Notes Club Green Tee
$000 $000 $000
Non-current assets
Property, plant and equipment 50,050 30,450 28,942
Investments:
13,896,000 ordinary shares
in Green at cost (1);(2) 35,610
3,980,000 ordinary shares
in Tee at cost (3) 8,000
93,660 30,450 28,942

Current assets (4) 78,710 27,320 5,558

Total assets 172,370 57,770 34,500

Equity and liabilities

Equity shares of $1 each 112,620 17,370 15,920
Share premium 0 3,470 0
Retained earnings 15,630 10,650 3,590
128,250 31,490 19,510

Non-current liabilities 32,000 15,000 9,140

Current liabilities 12,120 11,280 5,850
Total equity and liabilities 172,370 57,770 34,500

Additional information:
(1) Club acquired 80% of Green’s equity shares on 1 April 20X1 in a share for share exchange. The
agreed purchase consideration was $35,610,000. Green’s retained earnings were $3,000,000 on
1 April 20X1. Club’s policy is to value non-controlling interests at their fair values. The directors
of Club assessed the fair value of the non-controlling interest in Green to be $5,000,000 at the
date of acquisition. Green made a profit of $4,650,000 for the year ended 31 March 20X3.
(2) Club carried out an impairment review of the goodwill arising on acquisition of Green and found
that as at 31 March 20X3 the goodwill had NOT been impaired but had actually increased in
value by $50,000.
(3) Club purchased its shareholding in Tee on 1 April 20X2 for $8,000,000. Club exercises significant
influence over all aspects of Tee’s financial and operating policies. Tee made a profit of
$2,290,000 for the year ended 31 March 20X3.
(4) Club occasionally trades with Green. During February 20X3 Club sold Green goods for $960,000.
Green had not paid for the goods by 31 March 20X3.

10 What is the amount of goodwill that arose on the acquisition of Green on 1 April 20X1?
 $11,770,000
 $16,538,000
 $16,770,000
 $21,538,000

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20 P a r t 1 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

11 In respect of the increase in the value of the goodwill relating to Green, which of the following
statements is correct?
 Club can only recognise the increase if it represents the reversal of a previous loss
 Club should treat the increase in the same way as a gain on revaluation of property, plant
and equipment
 The $50,000 increase represents internally generated goodwill
 The $50,000 increase should be recognised immediately in profit or loss as a gain

12 Calculate the amount for non-controlling interest that should be included in the consolidated
statement of financial position as at 31 March 20X3 (to the nearest $’000).

$ 000

13 Which of the following is the correct value that should be included for current liabilities in the
consolidated statement of financial position as at 31 March 20X3?
 $22,440,000
 $23,400,000
 $23,902,500
 $24,360,000

14 Calculate the amount for investment in associate that should be included in the consolidated
statement of financial position as at 31 March 20X3 (to the nearest $’000).

$ 000

Checkpoint 1
Now you have completed these questions in the question bank, there are additional questions to try
on your online course. Please log into your course using the instructions that were on your joining
instructions e mail and attempt Checkpoint 1 at the end of Chapter 4.

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ACCA FR Question Bank Part 1 questions: 5: Interpreting financial statements 21

5: Interpreting financial statements

1 The gross profit margin of Forage has fallen from 46.9% to 33.6% during the last year.
Which of the following factors is NOT directly relevant in explaining this fall?
 A change in the sales mix from higher margin sales to lower margin sales
 A change in the way in which depreciation is presented in the statement of profit or loss
 An increase in interest rates
 An increase in sales prices (2 marks)

2 The following information has been extracted from the financial statements of Coleshill:
Statement of profit or loss for the year ended 31 March
20X4 20X3
$000 $000
Revenue:
Cash 10,200 21,500
Credit 63,000 34,500
73,200 56,000
Statement of financial position as at 31 March
20X4 20X3
$000 $000
Trade receivables 9,300 3,400

During the year, Coleshill has increased its credit period to its customers in the hope of
encouraging higher sales. However, the directors are now concerned that this policy has had an
adverse effect on the company’s cash flow.
By what amount would the company’s bank balance have increased if Coleshill’s trade
receivables collection period had remained the same as for the previous year?
 $1,695,000
 $3,104,000
 $4,848,000
 $11,300,000 (2 marks)

3 Which of the following statements about a not-for-profit entity is valid?

 There is no requirement to calculate an earnings per share figure as it is not likely to have
shareholders who need to assess its earnings performance
 The current value of its property, plant and equipment is not relevant as it is not a
commercial entity
 Interpretation of its financial performance using ratio analysis is meaningless
 Its financial statements will not be closely scrutinised as it does not have any investors

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22 P a r t 1 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

4 At 31 March 20X5, Jasim had shareholders’ funds (equity) of $200,000 and debt of $100,000.
Which of the following transactions would increase Jasim’s gearing compared to what it
would have been had the transaction NOT taken place?
Gearing should be taken as debt/(debt + equity). Each transaction should be considered
separately.
 During the year a property was revalued upwards by $20,000
 A bonus issue of equity shares of 1 for 4 was made during the year using other
components of equity
 A provision for estimated damages was reduced during the year from $21,000 to $15,000
based on the most recent legal advice
 An asset with a fair value of $25,000 was acquired under a lease on 31 March 20X5

5 Which of the following current year events would explain a fall in a company’s operating profit
margin compared to the previous year?
 An increase in gearing leading to higher interest costs
 A reduction in the allowance for uncollectible receivables
 A decision to value inventory on the average cost basis from the first in first out (FIFO)
basis. Unit prices of inventory had risen during the current year
 A change from the amortisation of development costs being included in cost of sales to
being included in administrative expenses

6 The following is an extract from the financial statements of SJ for the year to 31 December 20X3:

EQUITY AND LIABILITIES 20X3 20X2

Equity $m $m
Share capital 400 200
Share premium 100 150
Revaluation surplus 140 150
Retained earnings 500 450
Total equity 1,140 950
Non-current liabilities
Long-term borrowings 550 600
Which TWO of the following statements about the changes in the capital structure of SJ could
be realistically concluded from the extract provided above?
 Gearing in SJ has decreased due to the increase in total equity
 Property, plant and equipment has suffered an impairment of $10 million during the year
 SJ must have made a profit of $50 million for the year
 SJ has repaid long term borrowings of $50 million during the year
 There may have been a bonus issue of shares during the year

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ACCA FR Question Bank Part 1 questions: 5: Interpreting financial statements 23

7 The following information is available for two potential acquisition targets. The entities have
similar capital structures and both operate in the same business sector.
WX YZ
Revenue $550m $750m
Gross profit margin 28% 19%
Net/operating profit margin 10% 8%
Which of the following is a realistic conclusion that can be drawn from the above
information?
 WX may have lower finance costs than YZ because it is financed mainly by equity rather
than by debt
 The price of a key component used by WX has increased during the year
 YZ may have sold its products at a discount in order to achieve a higher volume of sales
than WX
 YZ has incurred abnormally high administrative expenses during the year

8 Place the following tokens into the highlighted boxes in the table below to correctly reflect the
formulae used to calculate BOTH price earnings (P/E) ratio and dividend cover.
Dividend per share
Dividend yield
Earnings per share
Profit for the year attributable to equity shareholders
Share price
P/E ratio Dividend cover

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24 P a r t 1 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

9 Vista Co is considering the purchase of a 100% subsidiary, Vantage Co. Extracts from the
statement of profit or loss for Vantage Co for the year ended 31 December 20X7 are shown
below:
$000
Revenue 9,400
Cost of sales (including management fees) (5,800)
Gross profit 3,600

Vista Co expects that Vantage’s revenue and cost of sales for the year ended 31 December 20X8
will be very similar to those for 20X7 except for the effects of the following changes which will
be made as a result of the acquisition:
(i) Vista Co will supply Vantage Co with goods which Vista Co will sell at a mark up of 20% on
cost. These goods will cost Vantage Co $3 million and will replace identical goods that it
has previously purchased from another supplier at a mark up of 40%.
(ii) Vantage Co will pay an annual management fee of $400,000 to Vista Co.
Based on the figures above adjusted for the expected changes as a result of the acquisition,
what is the estimated gross profit margin for Vantage Co for the year ended 31 December
20X8?
 37.2%
 39.4%
 43.6%
 46.8%

10 Fifer Co has a current ratio of 1.2:1 which is below the industry average. Fifer Co wants to
increase its current ratio by the year end.
Which of the following actions, taken before the year end, would lead to an increase in the
current ratio?
 Return some inventory which had been purchased for cash and obtain a full refund on
the cost
 Make a bulk purchase of inventory for cash to obtain a large discount
 Make an early payment to suppliers, even though the amount is not due
 Offer early payment discounts in order to collect receivables more quickly

11 Which of the following ratios are likely to DECREASE due to a significant revaluation gain on a
depreciating asset at the start of the year?
(1) Return on capital employed (ROCE)
(2) Gearing (debt/equity)
(3) Operating profit margin
(4) Net asset turnover
 1, 2, 3 and 4
 1, 2 and 3 only
 2, 3 and 4 only
 1 and 4 only (2 marks)
[SD20]

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ACCA FR Question Bank Part 1 questions: 6: Statement of cash flows 25

6: Statement of cash flows

1 Flax made a profit before tax of $588,000 for the year ended 30 September 20X4, after charging
depreciation of $79,000. The following information was included in the statement of financial
position as at 30 September 20X4:
20X4 20X3
$000 $000
Inventories 390 280
Trade receivables 480 520
Trade payables 230 310
What is cash generated from operations for the year ended 30 September 20X4?
 $438,000
 $517,000
 $598,000
 $817,000 (2 marks)

2 The following balances were extracted from N’s financial statements:

Statement of financial position (extract)
As at As at
31 December 31 December
20X7 20X6
$000 $000
Non-current liabilities
Deferred tax 38 27
Current liabilities
Current tax payable 119 106
Statement of profit or loss for the year ended 31 December 20X7 (extract)
$000
Income tax expense 122
What amount for tax paid should be included in N’s statement of cash flows for the year
ended 31 December 20X7?
 $98,000
 $109,000
 $122,000
 $241,000 (2 marks)

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26 P a r t 1 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

3 The following information has been extracted from the statements of financial position of
Chambers as at 30 September:
20X4 20X3
$000 $000
Non-current liabilities:
Lease liability 960 720
Current liabilities:
Lease liability 600 480
During the year, Chambers acquired additional plant with a fair value of $1.2 million under a
lease. Interest on leases was $200,000 for the year.
In respect of lease liabilities, what amount should appear under financing activities in the
statement of cash flows?
 $360,000 inflow
 $840,000 inflow
 $840,000 outflow
 $1,040,000 outflow (2 marks)

4 The following information has been extracted from the financial statements of Borlotti:
Statement of financial position for the year ended 31 March
20X4 20X3
$000 $000
Property, plant and equipment 2,590 1,670

Revaluation surplus 360 120

An item of plant with a carrying amount of $210,000 was sold at a loss of $80,000 during the
year. Depreciation of $250,000 was charged to cost of sales for property, plant and equipment
in the year ended 31 March 20X4.
Calculate the amount that should be included in the statement of cash flows for the year
ended 31 March 20X4 in respect of purchase of property, plant and equipment

$ 000 (2 marks)

5 Which THREE of the following items meet the definition of cash and cash equivalents?
 A bank account denominated in foreign currency
 A bank loan that is repayable within three months
 A bank overdraft
 A fixed term deposit that matures within three months
 Equity shares measured at fair value through profit or loss (2 marks)

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ACCA FR Question Bank Part 1 questions: 6: Statement of cash flows 27

6 The following information has been extracted from the financial statements of Tarsal:
Statement of financial position for the year ended 30 June
20X4 20X3
Equity: $000 $000
Equity shares of $1 each 9,000 6,000
Share premium 2,000 3,000
Retained earnings 6,500 4,400
17,500 13,400

During the year there was a bonus issue of shares from share premium of one new share for every
six held, followed by a fully subscribed cash issue of shares at par. Tarsal made a profit after tax for
the year of $2.6 million. The directors of Tarsal view dividends as a cost of obtaining finance.
What is the net cash flow from financing activities for the year ended 30 June 20X4?
 Inflow of $1,500,000
 Inflow of $2,000,000
 Inflow of $4,100,000
 Outflow of $2,500,000 (2 marks)

7 The following information is available for the property, plant and equipment of Fry as at
30 September:
20X4 20X3
$000 $000
Carrying amounts 23,400 14,400
The following items were recorded during the year ended 30 September 20X4:
I Depreciation charge of $2.5 million
II An item of plant, with a carrying amount of $3 million, was sold for $1.8 million
III A property was revalued upwards by $2 million
IV Environmental provisions of $4 million relating to property, plant and equipment were
capitalised during the year
What amount would be shown in Fry’s statement of cash flows for purchase of property,
plant and equipment for the year ended 30 September 20X4?
 $8.5 million
 $12.5 million
 $7.3 million
 $10.5 million

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28 P a r t 1 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

8 The following is an extract from the statement of cash flows of UJ for the year ended 30 June 20X4:
$m
Cash flows from operating activities 1,300
Cash flows from investing activities (800)
Cash flows from financing activities (400)
100

Based on the information provided, which of the following independent statements would be
a reasonable conclusion about the cash flows of UJ for the year to 30 June 20X4?
 UJ’s financial position is strong, because there is still a net cash inflow, despite cash
outflows from investing and from financing
 UJ is in danger of becoming insolvent, because its net cash inflow is very small compared
to the cash generated from operating activities
 UJ’s management may have made poor investment decisions, because there is a negative
cash flow relating to investing activities
 UJ may have paid a large dividend to equity shareholders during the year

AWX
The following scenario relates to questions 9 – 13.
The financial statements of AWX for the year ended 31 March 20X2 and 31 March 20X3 are given below:
AWX Statement of Financial Position as at:
31 March 20X3 31 March 20X2
Notes $000 $000 $000 $000
Non-current Assets
Property, plant and equipment (1) (2) 4,191 4,500
Intangible assets (4) 156 315
4,347 4,815
Current Assets
Inventories 738 805
Trade receivables 564 480
Cash and cash equivalents 515 265
1,817 1,550
Total Assets 6,164 6,365
Equity and Liabilities
Equity shares of $1 each 2,180 2,180
Share premium 968 968
Revaluation reserve 469 353
Retained earnings 901 727
4,518 4,228
Non-current liabilities
Long term borrowings 925 1,320
925 1,320
Current liabilities
Trade payables 625 500
Tax payable 84 218
Interest payable 12 99
721 817
Total Equity and Liabilities 6,164 6,365

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ACCA FR Question Bank Part 1 questions: 6: Statement of cash flows 29

Statement of Profit or Loss for the year ended 31 March 20X3

Notes $000
Revenue 6,858
Cost of sales (3) (3,552)
Gross profit 3,306
Administrative expenses (2,042)
Distribution costs (816)
448
Finance cost (40)
408
Income tax expense (124)
Profit for the year 284
Notes:
(1) Property, plant and equipment includes properties which were revalued upwards by $116,000
during the year.
(2) Property, plant and equipment disposed of in the year had a carrying amount of $70,000; cash
received on their disposal was $92,000.
(3) Depreciation charged for the year was $675,000.
(4) There were no additions or disposals of intangible assets during the year.

9 Place the correct values from the options listed below in each of the highlighted boxes in the table.
Values
(40)
(99)
(127)
(124)
(218)
(258)
Statement of cash flows (extract) for year ended 31 March 20X3:
Cash flows from operating activities (extract): $000
Cash generated from operations
Interest paid
Income taxes paid

10 A statement of cash flows classifies cash inflows and outflows under three main headings: cash
flows from operating activities; cash flows from investing activities; and cash flows from
financing activities.
Classify each of the following items by placing one of the three headings into the right-hand
column below.
Operating Investing Financing
Increase in trade receivables
Movement in intangible assets
Movement in long-term borrowings
Proceeds from sale of property, plant and equipment

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30 P a r t 1 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

11 What is the gain or loss on disposal of property, plant and equipment and where is it included in
the statement of cash flows?
 Gain of $22,000; under operating activities
 Loss of $22,000; under operating activities
 Gain of $22,000; under investing activities
 Loss of $22,000; under investing activities

12 In the statement of cash flows for the year ended 31 March 20X3, what is the amount of cash
paid to purchase property, plant and equipment (to the nearest $)?

13 What is the total cash flow from financing activities for the year ended 31 March 20X3?
 $63,000 outflow
 $110,000 outflow
 $505,000 outflow
 $395,000 inflow

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ACCA FR Question Bank Part 1 questions: 7: Principles and concepts 31

7: Principles and concepts

1 What are the characteristics of faithful representation?

 Comparability, verifiability, and freedom from error
 Comparability, completeness, and verifiability
 Completeness, neutrality, and freedom from error
 Completeness, neutrality, and verifiability (2 marks)

2 Which TWO of the following characterise the relevance of financial information to users of
financial statements?
 It cannot be used to predict future outcomes.
 It confirms or changes previous evaluations.
 It is prepared on the accruals basis.
 Omitting it could influence decisions made by users. (2 marks)

3 Which of the following measurement bases may be used for assets and liabilities in a statement
of financial position?
I Current cost
II Fair value
III Value in use
IV Historical cost
 I and II
 I, II and III
 II and III
 I, II, III and IV (2 marks)

4 Which TWO of the following characteristics are fundamental to the preparation of financial
statements?
 Relevance
 Verifiability
 Faithful representation
 Comparability (2 marks)

5 Which of the following is NOT part of the process of developing a new International Financial
Reporting Standard (IFRS)?
 Issuing a discussion paper that sets out the possible options for a new standard.
 Publishing clarifications where conflicting interpretations have developed.
 Drafting an IFRS for public comment.
 Analysing the feedback received on a discussion paper. (2 marks)

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32 P a r t 1 q u e s t i o n s : 7 : P r i n c i p l e s a n d c o n c e p t s ACCA FR Question Bank

6 Which of the following is a change in accounting policy?

 The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years.
 The depreciation method of vehicles was changed from straight line depreciation to
reducing balance.
 The provision for warranty claims was changed from 10% of sales revenue to 5%.
 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. (2 marks)

7 Which of the following is NOT a qualitative characteristic of financial information?

 Materiality
 Relevance
 Understandability
 Comparability (2 marks)

8 Which TWO of the following are changes in an accounting estimate?

 A change in the residual value of an asset
 The correction of a mathematical mistake
 A loss recognised because a contingent liability has become an actual liability
 A change from the cost model to the revaluation model of accounting for property, plant
and equipment

9 Which of the following would be a change in accounting policy?

 Adjusting the financial statements of a subsidiary prior to consolidation as its accounting
policies differ from those of its parent
 A change in reporting depreciation charges as cost of sales rather than as administrative
expenses
 Depreciation charged on reducing balance method rather than straight line
 Reducing the value of inventory from cost to net realisable value due to a valid adjusting
event after the reporting period (2 marks)

10 How is an asset measured using the current cost basis?

 At the amount of cash paid to acquire it
 At the price that would be received to sell it in an orderly transaction between market
participants at the measurement date
 At the cost of an equivalent asset at the measurement date
 At the present value of the cash flows that the entity expects to obtain from the asset
(2 marks)

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ACCA FR Question Bank Part 1 questions: 7: Principles and concepts 33

11 Which of the following statements regarding general purpose financial reports is true?
 None of the potential users of general purpose financial reports can require reporting
entities to provide information directly to them
 General purpose financial reports cannot provide all the information that primary users
need
 General purpose financial reports provide all the information that investors need to
verify the value of a reporting entity
 Users other than investors and lenders are unlikely to be able to make decisions based on
the information in general purpose financial reports, because they are not primary users
(2 marks)

12 XY is measuring the fair value of an asset.

Which TWO of the following must XY take into account?
 The amount XY would have to pay to buy a similar asset
 The condition and location of the asset
 The principal market for the asset
 The way in which XY has been using the asset (2 marks)

13 An entity measures an asset at the present value of the cash flows expected to derive from its
use and ultimate disposal.
What measurement basis does this describe?
 Current cost
 Fair value
 Net realisable value
 Value in use (2 marks)

14 Drexler acquired an item of plant on 1 October 20X2 at a cost of $500,000. It has an expected
life of five years (straight-line depreciation) and an estimated residual value of 10% of its
historical cost or current cost as appropriate.
As at 30 September 20X4, the manufacturer of the plant still makes the same item of plant and
its current price is $600,000.
What is the correct carrying amount to be shown in the statement of financial position of
Drexler as at 30 September 20X4 under historical cost and current cost?
Historical cost Current cost
$ $
 320,000 600,000
 320,000 384,000
 300,000 600,000
 300,000 384,000

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34 P a r t 1 q u e s t i o n s : 7 : P r i n c i p l e s a n d c o n c e p t s ACCA FR Question Bank

15 Recognition is the process of including within the financial statements items which meet the
definition of an element.
Which of the following items should be recognised as an asset in the statement of financial
position of a company?
 A skilled and efficient workforce which has been very expensive to train. Some of these
staff are still in the employment of the company
 A highly lucrative contract signed during the year which is due to commence shortly after
the year end
 A government grant relating to the purchase of an item of plant several years ago which
has a remaining life of four years
 A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the company for any losses

16 Comparability is an enhancing qualitative characteristic of financial information.

Which of the following does NOT improve comparability?
 Restating the financial statements of previous years when there has been a change of
accounting policy
 Prohibiting changes of accounting policy unless required by a standard or to provide
more relevant and reliable information
 Disclosing discontinued operations in financial statements
 Applying an entity’s current accounting policy to a transaction which an entity has not
engaged in before

17 ‘Recognition’ is the process of incorporating in the financial statements an item which meets
the definition of an element and satisfies certain criteria.
Which of the following elements should be recognised in the financial statements as
described?
 As a non-current liability: a provision for possible hurricane damage to property for a
company located in an area which experiences a high incidence of hurricanes
 In equity: irredeemable preference shares
 As a trade receivable: an amount of $10,000 due from a customer which has been sold
(factored) to a finance company with no recourse to the seller
 In revenue: the whole of the proceeds from the sale of an item of manufactured plant
which has to be maintained by the seller for three years as part of the sale agreement

18 Tynan’s year end is 30 September 20X4.

Which of the following should Tynan recognise as liabilities as at 30 September 20X4?
 The signing of a non-cancellable contract in September 20X4 to supply goods in the
following year on which, due to a pricing error, a loss will be made
 The cost of a reorganisation which was approved by the board in August 20X4 but has not
yet been implemented, communicated to interested parties or announced publicly
 An amount of deferred tax relating to the gain on the revaluation of a property during
the current year. Tynan has no intention of selling the property in the foreseeable future
 The balance on the warranty provision which relates to products for which there are no
outstanding claims and whose warranties had expired by 30 September 20X4

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ACCA FR Question Bank Part 1 questions: 7: Principles and concepts 35

19 Which of the following are required to meet the comparability characteristic of useful
financial information?
1 Entities are required to disclose their accounting policies
2 Corresponding information is required to be provided in financial statements
3 Entities must use the same accounting policies from period to period
4 All assets within a class should be depreciated at the same rate
 1 and 2
 2 and 3
 3 and 4
 1 and 4

20 Which of the following statements regarding the characteristic of comparability is/are .true?
1 Permitting alternative accounting treatments for the same economic phenomenon
enhances comparability.
2 Comparability requires uniformity
 Both 1 and 2
 Neither 1 nor 2
 1 only
 2 only

21 Which of the following should be recognised as an asset or a liability in the statement of

financial position of Green Co?
1 Green Co spent $100,000 providing health and safety training to its staff.
2 Green Co has been told by a brand consultancy that the value of its internally created
brands is $2,000,000.
3 Green Co is suing a supplier for $450,000 for losses that it suffered due to faulty goods.
Green Co is likely, though not certain, to win the court case.
4 Green Co has sold goods subject to a five-year warranty on which it expects some claims
will be made.
 1 and 2
 3 and 4
 2 only
 4 only

22 According to the Conceptual Framework for Financial Reporting of the International Accounting
Standards Board (IASB), verifiability means that ‘different knowledgeable and independent
observers could reach a consensus of faithful representation…’
Which of the following procedures directly verifies that the relevant balances are faithfully
represented?
 Confirming the cash balance by conducting a physical count of cash
 Confirming the inventory by reviewing the year end list of inventory
 Confirming a revaluation of land by agreeing the revaluation surplus to a minute of the
board meeting where the directors agreed its estimate
 Confirming the carrying amount of receivables by reviewing the year end statements
issued to customers at that date

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36 P a r t 1 q u e s t i o n s : 7 : P r i n c i p l e s a n d c o n c e p t s ACCA FR Question Bank

23 Which of the following is NOT included in the International Accounting Standards Board’s
(IASB) definition of an asset in the Conceptual Framework for Financial Reporting?
 The asset is controlled by the entity
 The asset is a present economic resource
 The economic resource can be reliably measured
 The asset exists as a result of past events (2 marks)
[MJ21]

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ACCA FR Question Bank Part 1 questions: 9: Tangible non-current assets 37

9: Tangible non-current assets

1 Which THREE of the following items should be capitalised within the initial carrying amount of
an item of plant?
 A deduction from the full purchase price in respect of a trade discount
 Cost of strengthening the factory floor so that the plant can be safely installed
 Cost of training staff to operate the plant
 Cost of testing whether the plant is operating properly
 Cost of advertising the new product line to be produced by the plant (2 marks)

2 BN has an asset that was classified as held for sale at 31 March 20X8. The asset had a carrying
amount of $900 and a fair value of $800. The cost of disposal was estimated to be $50.
At what amount should the asset be included in BN’s statement of financial position as at
31 March 20X8?
 $750
 $800
 $850
 $900

3 Heron purchased a property for $2.5 million on 1 October 20X9. The property had a useful life
of twenty years. On 1 October 20Y3, the property was revalued to $4 million. Its useful life
remained unchanged. On 30 September 20Y4, the property was sold for $4.5 million.
Calculate the profit on disposal that should be included in profit or loss for the year ended 30
September 20Y4.

$ (2 marks)

4 Rosewood has the following four assets:

Carrying Fair value less Value in
amount costs of disposal use
$ $ $
I 5,000 4,000 7,000
II 8,000 10,000 6,000
III 9,000 11,000 10,000
IV 10,000 5,000 9,000
Which of the above assets is impaired?
 I
 II
 III
 IV (2 marks)

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38 P a r t 1 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

5 Alton purchased an item of plant for $440,000 on 1 October 20X4. The useful life was
anticipated as being eight years and the residual value was estimated as $120,000. Alton
depreciates plant on a straight line basis. The residual value was still considered to be $120,000
at 1 October 20X8 but the remaining useful life was reassessed to be five years.
Calculate the depreciation charge for the item of plant for the current year to 30 September
20X9

$ (2 marks)

6 Courgette has reviewed four items of plant for impairment. The following data relates to each
item:
Fair value
Carrying less costs Value in
amount of disposal use
$ $ $
I 250,000 230,000 240,000
II 190,000 210,000 220,000
III 160,000 200,000 150,000
IV 420,000 390,000 360,000
What is the total impairment loss that Courgette should recognise in profit or loss?
 $40,000
 $50,000
 $80,000
 $90,000 (2 marks)

7 A cash generating unit (CGU) has assets with the following carrying amounts:
$000
Goodwill 500
Other intangible assets 250
Property, plant and equipment 1,750
2,500

The recoverable amount of the CGU has been assessed at $1,800,000. The other intangible
assets have a combined fair value less costs of disposal of $220,000.
How much of the impairment loss should be allocated to property, plant and equipment?
 $Nil
 $170,000
 $175,000
 $490,000 (2 marks)

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ACCA FR Question Bank Part 1 questions: 9: Tangible non-current assets 39

8 Chasm issued a $10 million unsecured loan with an effective finance cost of 9% per annum in
order to finance the building of a new store, which meets the definition of a qualifying asset.
Construction of the store commenced on 1 April 20X3 and it was completed and ready for use
on 31 January 20X4, but did not open for trading until 1 March 20X4. During the year, trading at
Chasm’s other stores was below expectations, so Chasm suspended the construction of the new
store during June 20X3.
What is the amount of the finance cost relating to the loan that should be recognised in profit
or loss for the year ended 31 March 20X4?
 $Nil
 $75,000
 $150,000
 $225,000

9 On 1 October 20X9 Bamford purchased an office building for $1.4 million. At that date it had an
estimated useful life of 25 years. During 20Y1 Bamford began to let the building to a third party,
reclassifying it as an investment property and adopting the fair value model. On 1 July 20Y4,
Bamford began to use the office block for its own operations again. An independent valuer
estimated that useful life of the building was 25 years from 1 July 20Y4 and provided the
following additional information:
Fair value of the property: $000
At 1 October 20Y3 2,100
At 1 July 20Y4 1,900
At 30 September 20Y4 1,950
Bamford has adopted the cost model for all other items of property, plant and equipment.
What is the total charge to profit or loss in respect of the office building for the year ended
30 September 20Y4?
 $19,000
 $150,000
 $214,000
 $219,000 (2 marks)

10 On 1 January 20X4 Howe purchased an asset for $30,000. It had a useful life of 5 years and was
depreciated on a straight-line basis. On 31 December 20X5 an impairment review showed that
the recoverable amount of the asset was $12,000. Its useful life was unchanged.
On 31 December 20X6, a further review showed that the recoverable amount of the asset had
increased to $15,000.
What is the credit to profit or loss following the reversal of the impairment?

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40 P a r t 1 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

11 On 1 April 20X7, Haven Co received a government grant of $320,000 to help to fund new
computer equipment. This equipment was purchased for $800,000 on the same day. The
equipment has an expected useful life of four years after which Haven Co expects to be able to
sell it for $50,000.
Haven Co offsets grant income against the cost of assets.
What is the carrying amount of the equipment at 31 March 20X8?

12 Riley acquired a non-current asset on 1 October 20X9 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 20Y4. At that date the asset was damaged and an impairment review was
performed. On 30 September 20Y4, 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 year
ended 30 September 20Y4?
 $17,785
 $20,000
 $30,000
 $32,215 (2 marks)

13 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
300,000

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?
 $154,545
 $170,000
 $160,000
 $133,333

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ACCA FR Question Bank Part 1 questions: 9: Tangible non-current assets 41

14 As at 30 September 20X3 Dune’s property in its statement of financial position was:

Property at cost (useful life 15 years) $45 million
Accumulated depreciation $6 million
On 1 April 20X4, Dune decided to sell the property. The property is being marketed by a
property agent at a price of $42 million, which was considered a reasonably achievable price at
that date. The expected costs to sell have been agreed at $1 million. Recent market transactions
suggest that actual selling prices achieved for this type of property in the current market
conditions are 10% less than the price at which they are marketed.
At 30 September 20X4 the property has not been sold.
At what amount should the property be reported in Dune’s statement of financial position as
at 30 September 20X4?
 $36 million
 $37.5 million
 $36.8 million
 $42 million

15 Which of the following is NOT an indicator of impairment?

 Advances in the technological environment in which an asset is employed have an
adverse impact on its future use
 An increase in interest rates which increases the discount rate an entity uses
 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
 The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount

16 Metric owns an item of plant which has a carrying amount of $248,000 as at 1 April 20X4. It is
being depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in
sales. Metric has estimated that the plant will be retired from use on 31 March 20X8. The
estimated net cash flows from the use of the plant and their present values are:
Net cash
flows Present values
$ $
Year to 31 March 20X6 120,000 109,200
Year to 31 March 20X7 80,000 66,400
Year to 31 March 20X8 52,000 39,000
252,000 214,600

On 1 April 20X5, Metric had an alternative offer from a rival to purchase the plant for $200,000.
At what value should the plant appear in Metric’s statement of financial position as at 31 March
20X5?
 $248,000
 $217,000
 $214,600
 $200,000

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42 P a r t 1 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

17 Tibet acquired a new office building on 1 October 20X4. Its initial carrying amount consisted of:
$000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
16,000

The estimated lives of the building structure and air conditioning system are 25 years and
10 years respectively. When the air conditioning system is due for replacement, it is estimated
that the old system will be dismantled and sold for $500,000. Depreciation is time apportioned
where appropriate.
At what amount will the office building be shown in Tibet’s statement of financial position as
at 31 March 20X5?
$000
 15,625
 15,250
 15,585
 15,600

18 The following trial balance extract relates to a property which is owned by Veeton as at 1 April
20X4:
Dr Cr
$000 $000
Property at cost (20-year original life) 12,000
Accumulated depreciation as at 1 April 20X4 3,600
On 1 October 20X4, following a sustained increase in property prices, Veeton revalued its
property to $10.8 million
Calculate the depreciation charge in Veeton’s statement of profit or loss for the year ended
31 March 20X5?

19 Which TWO of the following statements about accounting for government grants are true?
 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
 A government grant related to the purchase of an asset should be recognised in profit or
loss over the life of the asset
 Free marketing advice provided by a government department is excluded from the
definition of government grants
 Any required repayment of a government grant received in an earlier reporting period is
treated as prior period adjustment

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ACCA FR Question Bank Part 1 questions: 9: Tangible non-current assets 43

20 At 1 April 20X4, Tilly owned a property with a carrying amount of $800,000 which had a
remaining estimated life of 16 years. The property had not been revalued. On 1 October 20X4,
Tilly decided to sell the property and correctly classified it as being ‘held-for-sale’. A property
agent reported that the property’s fair value less costs to sell at 1 October 20X4 was expected
to be $790,500 which had not changed at 31 March 20X5.
What should be the carrying amount of the property in Tilly’s statement of financial position
as at 31 March 20X5?
 $775,000
 $790,500
 $765,000
 $750,000

21 Oriel Co acquired a property on 1 January 20X4. The property cost $5.5m of which $2.2m
related to land. On 1 January 20X9, the property was revalued to $7.6m of which $3.1m related
to land. On 1 January 20X4 the property had a useful life of 25 years and this did not change as a
result of the revaluation.
What is the depreciation charge for the year ended 31 December 20X9?
 $180,000
 $225,000
 $304,000
 $380,000

22 Which of the following statements regarding the impairment of assets are correct?
I An asset is not impaired if its value in use is higher than its carrying amount
II At the end of each reporting period, an entity should test all its intangible assets for
impairment
 I only
 II only
 Both I and II
 Neither I nor II

23 On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to equipment

which cost $90,000 and had a useful life of six years. The grant was netted off against the cost of
the equipment. On 1 January 20X7, when the equipment had a carrying amount of $50,000, its
use was changed so that it was no longer being used in accordance with the grant. This meant
the grant needed to be repaid in full, but by 31 December 20X7 this had not yet been done.
Which journal entry is required to reflect the correct accounting treatment of the government
grant and the equipment in the financial statements of Gardenbugs Co for the year ended
31 December 20X7?
 Dr Property, plant and equipment $10,000; Dr Depreciation expense $20,000: Cr Liability
$30,000
 Dr Property, plant and equipment $15,000; Dr Depreciation $15,000; Cr Liability $30,000
 Dr Property, plant and equipment $10,000; Dr Depreciation expense $15,000: CR
Retained earnings $5,000; Cr Liability $30,000
 Dr Property, plant and equipment $20,000; Dr Depreciation expense $10,000: Cr Liability
$30,000

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44 P a r t 1 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

24 Which of the following statements regarding property, plant and equipment is true?
 If an entity decides to use the revaluation model, then all of its non-current assets must
be revalued.
 An entity must transfer excess depreciation from the revaluation surplus to retained
earnings on an annual basis in respect of any property which it revalues.
 If an entity decides to revalue property annually, then this property will not need to be
depreciated.
 There is no requirement for an entity to revalue property on an annual basis

25 An entity has decided to adopt the revaluation model for the first time from 31 December 20X6.
At that date, details relating to two properties were as follows:
Asset at 31 December 20X6 Carrying amount Fair value
$’000 $’000
Head office 10,200 10,800
Factory 7,875 7,500
What is the total gain to be recorded in the revaluation surplus at 31 December 20X6?
 $0
 $225,000
 $375,000
 $600,000

26 Pootle Co received a government grant of $60,000 on 1 September 20X4. The conditions of the
grant state that Pootle Co must employ a local worker on a full-time contract over a five-year
period. Pootle Co expects to meet the conditions of the grant.
The full grant has been recorded as Other Income for the year ended 31 December 20X4.
What is the adjustment required to account correctly for the grant as at 31 December 20X4?
Account name Value
Debit  
Credit  

Options
Account name Value
Total accrued income $4,000
Total deferred income $48,000
Other income $56,000
Bank $57,000

(2 marks)
[MJ21]

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ACCA FR Question Bank Part 1 questions: 9: Tangible non-current assets 45

27 Millhouse Co received a government grant on 1 October 20X8. The grant was to help fund rental
costs of a factory in an urban regeneration area. The conditions of the grant were that the
factory must be rented and used for at least one year. Millhouse Co rented a factory from
1 July 20X9 and was confident that the conditions of the grant would be met. Millhouse Co
owns other factories in different areas.
Which TWO of the following correctly reflect the accounting treatment for the government
grant that could be adopted by Millhouse Co in its financial statements for the year to
30 September 20X9?
 Recognise the grant in full as other income in the statement of profit or loss
 Deduct the full amount of the grant from the cost of factories in the statement of
financial position
 Recognise three months of grant income as other income in the statement of profit or
loss
 Deduct three months of grant income from the factory rental expense in the statement
of profit or loss
 Deduct the full amount of the grant from the factory rental expense in the statement of
profit or loss
(2 marks)
[J20]

DELTA
The following scenario relates to questions 28 – 32.
The following details relate to two items of property, plant and equipment (A and B) owned by Delta
which are depreciated on a straight-line basis with no estimated residual value:
Item A Item B
Estimated useful life at acquisition 8 years 6 years
$000 $000
Cost on 1 April 20X0 240,000 120,000
Accumulated depreciation (two years) (60,000) (40,000)
Carrying amount at 31 March 20X2 180,000 80,000

Revaluation on 1 April 20X2:

Revalued amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalised on 1 April 20X3 nil 14,400
At 31 March 20X4 item A was still in use, but item B was sold (on that date) for $70 million.
Notes:
 Delta makes an annual transfer from its revaluation surplus to retained earnings in respect of
excess depreciation.
 Assume that the subsequent expenditure relating to Item B has been correctly accounted for.

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46 P a r t 1 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

28 Which TWO of the following statements regarding property, plant and equipment are correct?
 An entity can choose whether to measure assets at cost or fair value on an item by item basis.
 Once an asset has been revalued, a further revaluation must be carried out whenever the
carrying amount of the asset differs significantly from its fair value.
 An entity is required to make an annual transfer from the revaluation surplus to retained
earnings corresponding to the ‘excess depreciation’.
 The estimated useful life of an asset should be reviewed annually irrespective of whether it
has been revalued.

29 What is the balance on the revaluation surplus at 31 March 20X3?

 $13,600
 $20,000
 $25,600
 $32,000

30 In respect of Item A, what is the depreciation charge for the year ended 31 March 20X4?
 $30,000
 $32,000
 $34,286
 $36,000

31 In respect of Item B, what is the profit or loss on disposal?

$ 000 profit/loss

32 Which of the following cannot be recognised as part of the cost of an item of plant and
equipment?
 Modifications to the item to increase its capacity
 The cost of a major overhaul that the entity is legally obliged to carry out at regular
intervals
 The cost of routine maintenance and servicing of the item
 Upgrading the item to improve the quality of its output

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ACCA FR Question Bank Part 1 questions: 10: Intangible assets 47

10: Intangible assets

1 Thompson commenced the development stage of a project to produce a new type of building
insulation on 1 February 20X4. On 1 April 20X4 the directors obtained the additional finance
without which it would have been impossible to complete the project. Expenditure of $30,000
per month was incurred until the project was completed on 31 August 20X4. The new material
went into immediate production on 1 September 20X4 and is expected to be profitable for at
least four years. Thompson time-apportions depreciation and amortisation charges where
applicable.
What amount will Thompson charge to profit or loss for development costs, including any
amortisation, for the year ended 30 September 20X4?
 $3,125
 $4,375
 $37,500
 $63,125 (2 marks)

2 Which of the following CANNOT be recognised as an intangible non-current asset in GHK’s

statement of financial position at 30 September 20X8?
 GHK spent $12,000 researching a new type of product. The research is expected to lead
to a new product line in three years’ time.
 GHK purchased another entity, BN on 1 October 20X7. Goodwill arising on the acquisition
was $15,000.
 GHK purchased a brand name from a competitor on 1 November 20X7, for $65,000.
 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 20X8 and is expected to be profitable.
(2 marks)

3 Which of the following could be recognised as an intangible asset in M’s statement of financial
position as at 31 March 20X8?
 $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
 A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques
 $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
 $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 (2 marks)

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48 P a r t 1 q u e s t i o n s : 1 0 : I n t a n g i b l e a s s e t s ACCA FR Question Bank

4 Dempsey’s year end is 30 September 20X4. Dempsey commenced the development stage of a
project to produce a new pharmaceutical drug on 1 January 20X4. Expenditure of $40,000 per
month was incurred until the project was completed on 30 June 20X4 when the drug went into
immediate production. The directors became confident of the project’s success on 1 March
20X4. 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 20X4?
 $12,000
 $98,667
 $48,000
 $88,000 (2 marks)

5 Only one of the following four statements is true. Identify that statement, and mark the
remaining ones as false.
True False
All intangible assets must be carried at amortised cost or at an  
impaired amount; they cannot be revalued upwards
The development of a new process which is not expected to  
increase sales revenues may still be recognised as an intangible
asset
Expenditure on the prototype of a new engine cannot be classified  
as an intangible asset because the prototype has been assembled
and has physical substance
Impairment losses for a cash generating unit are first applied to  
goodwill and then to other intangible assets before being applied to
tangible assets

6 Pink Co is a company which is not part of a group. It has the following intangible assets:
1 A licence to distribute a particular product. This was purchased on 1 January 20X3 for
$100,000 and is for 5 years.
2 The right to use a trademark on its products for 10 years for which Pink Co paid $40,000
on 1 January 20X4. Pink Co also spent $30,000 on the same date constructing a concrete
representation of the trademark for display at its premises which is expected to last for
15 years.
3 A customer list which has been independently valued at $15,000 at 31 December 20X4.
Pink Co is negotiating with several companies interested in buying the customer list.
What carrying amount should appear in Pink Co's statement of financial position for
intangible assets as at 31 December 20X4?
 $96,000
 $124,000
 $111,000
 $139,000

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ACCA FR Question Bank Part 1 questions: 10: Intangible assets 49

7 Zayn Co spent $500,000 on 1 January 20X6 sending its key staff on a one-day training course
which took place at the beginning of the current financial year. Zayn Co is expected to benefit
from this training for the next two years.
This training course was partly funded by a government scheme and Zayn Co received $50,000
from the government before the training commenced. The remaining balance of $50,000 is due
to be received on 31 December 20X7. Current circumstances indicate that the receipt of the
second instalment is virtually certain.
What amount should be charged to Zayn Co’s statement of profit or loss for the year ended 31
December 20X6 to reflect the above transactions?
 $150,000
 $200,000
 $450,000
 $400,000

8 New Designs Co is considering the following potential assets for inclusion in its statement of
financial position.
Indicate which of the options below should be recognised as intangible assets by dragging and
dropping the appropriate options into the grey target boxes.
Intangible Assets

Options
$2m spent on an
Brand name developed $2.5m spent on new
advertising campaign
by New Designs Co worth equipment to develop a new
expected to increase
$10m successful product
revenue by $20m

$3m spent on a licence to $1m spent on the

$3m paid to acquire the
operate a production construction of a product
brand name Fast Designs
facility for six years prototype before its launch

$1.5m spent on training

customer service staff $2m paid as goodwill when
expected to increase acquiring Unique Co
revenue by $5m
(2 marks)
[M20]

Checkpoint 2
Now you have completed these questions in the question bank, there are additional questions to try
on your online course. Please log into your course using the instructions that were on your joining
instructions e mail and attempt Checkpoint 2 at the end of Chapter 10.

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50 P a r t 1 q u e s t i o n s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

11: Preparation of single company accounts

DFG
The following scenario relates to questions 1 – 5.
DFG’s trial balance at 31 March 20X8 is shown below.
Notes $000 $000
Administrative expenses 180
Amortisation of patent at 1 April 20X7 27
Cash and cash equivalents 56
Cost of sales 554
Distribution costs 90
Equity dividend paid 1 September 20X7 55
Income tax (1) 10
Inventory at 31 March 20X8 186
Land and buildings at cost (2) 948
Loan interest paid 7
Long-term borrowings (redeemable 20Y6) 280
Ordinary shares $1 each, fully paid at 1 April 20X7 550
Patent (7) 90
Plant and equipment at cost (2) 480
Accumulated depreciation: buildings at 1 April 20X7 (4) 33
Accumulated depreciation: plant and equipment at 1 April 20X7 (5) 234
Retained earnings at 1 April 20X7 184
Sales revenue 1,200
Share premium 110
Trade payables 61
Trade receivables 135
2,735 2,735

Additional information:
(1) The income tax balance in the trial balance is a result of the under-provision of tax for the year
ended 31 March 20X7.
(2) There were no sales of non-current assets during the year ended 31 March 20X8.
(3) The tax due for the year ended 31 March 20X8 is estimated at $52,000.
(4) Depreciation is charged on buildings using the straight-line method at 3% per annum. The cost
of land included in land and buildings is $248,000. Buildings depreciation is treated as an
administrative expense.
(5) Up to 31 March 20X7 all plant and equipment was depreciated using the straight-line method at
12.5%. However, DFG management has decided that from 1 April 20X7 the expected useful life
of certain items of plant and equipment should be changed to a total of six years from
acquisition. The plant and equipment affected was purchased on 1 April 20X3 and had an
original cost of $120,000 and a carrying amount of $60,000 at 1 April 20X7 after charging four
years’ depreciation. This plant and equipment is estimated to have no residual value. All plant
and equipment depreciation should be charged to cost of sales.
(6) The long-term borrowings incur annual interest at 5% per year paid six monthly in arrears.

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ACCA FR Question Bank Part 1 questions: 11: Preparation of single company accounts 51

(7) On 1 April 20X4 DFG purchased a patent. Due to recent world economic difficulties DFG has
carried out an impairment review of its patent. At 31 March 20X8 the patent was found to have
the following values:
 Value in use $50,000
 Fair value less costs of disposal $47,000
All amortisation of intangible assets is charged to administrative expenses.

1 Calculate the carrying amount of land and buildings as at 31 March 20X8 (to the nearest $’000).

2 In the statement of profit or loss for the year ended 31 March 20X8, what is the amount of cost
of sales (to the nearest $’000)?

3 Place the correct values from the options listed on the right in each of the highlighted boxes in
the table.
Values
(7)
(14)
(42)
(52)
(62)
Statement of profit or loss for the year ended 31 March 20X8 (extract):
$000
Profit from operations
Finance cost
Profit before tax
Income tax expense
Profit for the period

4 In the statement of financial position as at 31 March 20X8, what will be the amount reported
under current liabilities?
 $113,000
 $120,000
 $176,000
 $193,000

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52 P a r t 1 q u e s t i o n s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

5 In respect of the patent, what will be the amounts reported in the statement of profit or loss for
the year ended 31 March 20X8?
 Amortisation $9,000 and impairment loss $3,000
 Amortisation $9,000 and impairment loss $4,000
 Amortisation $9,000 and impairment loss $7,000
 Impairment loss $13,000

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ACCA FR Question Bank Part 1 questions: 12: Leasing 53

12: Leasing

1 On 1 October 20X3, Piazza acquired an item of plant under a four-year lease agreement. The
agreement had an implicit finance cost of 8% per annum and required an immediate deposit of
$3 million and annual rentals of $8 million paid on 30 September each year for four years. The
present value of the future lease payments, excluding the deposit, was $26,500,000.
Calculate the non-current liability for the leased plant in Piazza’s statement of financial
position as at 30 September 20X4 (to the nearest $000).

$ 000 (2 marks)

2 On 1 April 20X3, Dauntless entered into a lease agreement for an item of plant. Lease rentals
are an initial deposit of $6,000 plus $30,000 per annum payable at the end of each year and the
term of the lease is five years. At the inception of the lease, the cost of the leased asset (the
‘right-of-use’ asset) is $119,700. The leased asset has an estimated useful life of 6 years. The
rate of interest implicit in the lease is 10%.
At what amount should the right-of-use asset be included in the statement of financial
position of Dauntless as at 31 March 20X4?
 $90,960
 $94,750
 $95,760
 $99,750 (2 marks)

3 In which TWO of the following situations could a lessee elect to recognise lease payments as
an expense?
 At the commencement date, the lease term is twelve months or less
 The lease term is for a very small proportion of the useful life of the underlying asset
 The underlying asset or assets being leased are individually of low value
 The underlying asset is of a specialised nature (2 marks)

4 During the year ended 30 September 20X4 Hyper entered into two lease transactions:
On 1 October 20X3, a payment of $90,000 being the first of five equal annual payments in
advance of a lease for an item of plant. The lease has an implicit interest rate of 10%. On 1
October 20X3 (at the beginning of the lease) the present value of the future amount payable
was $285,300.
On 1 January 20X4, a payment of $18,000 for a one-year lease of an item of excavation
equipment. The lease does not contain an option to purchase the equipment.
What amount in total would be charged to Hyper’s statement of profit or loss for the year
ended 30 September 20X4 in respect of the above transactions?
 $108,000
 $121,590
 $117,090
 $126,090

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54 P a r t 1 q u e s t i o n s : 1 2 : L e a s i n g ACCA FR Question Bank

5 Cornet Co entered into an eight year lease agreement on 1 July 20X4. The lease requires annual
payments of $750,000 in arrears. The present value of the lease payments at 1 July 20X4,
discounted at a rate of 6% is $4,657,500. Additionally, Cornet Co paid directly attributable costs
of $37,500 on 1 July 20X4.
What is the total charge to the statement of profit or loss for the year ended 30 June 20X5 in
respect of the right-of-use asset?
 $586,875
 $866,325
 $279,450
 $1,029, 450

6 Jetsam Co entered into a lease for an item of plant on 1 April 20X0 which required payments of
$15,000 to be made annually in arrears. The present value of the lease payments was estimated
to be $100,650 at the inception of the lease and the rate of interest implicit in the lease was 8%.
Both the lease term and the plant’s estimated useful life was ten years.
What is the total amount that should be charged to profit or loss for the right-of-use asset for
the year ended 31 December 20X0?
 $11,250
 $6,039
 $7,549
 $13,588

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ACCA FR Question Bank Part 1 questions: 13: Revenue and inventory 55

13: Revenue and inventory

1 Linen sells three products – A, B and C. The following information was available at 30 September
20X4:
A B C
$ $ $
Original cost per unit 10 8 16
Estimated selling price per unit 15 12 14
Selling and distribution costs per unit 3 5 2
A B C
Units Units Units
Closing inventory 2,000 1,500 1,000
At what amount should inventories be stated in the statement of financial position at
30 September 20X4?
 $42,500
 $46,000
 $46,500
 $52,000 (2 marks)

2 IT has 300 items of product ABC2 in inventory at 31 March 20X8. The items were found to be
damaged by a water leak. The items can be repaired and repackaged for a cost of $1.50 per
item. Once repackaged, the items can be sold at the normal price of $3.50 each.
The original cost of the items was $2.20 each. The replacement cost at 31 March 20X8 is $2.75
each.
What value should IT put on the inventory of ABC2 in its statement of financial position at
31 March 20X8?
 $600
 $660
 $810
 $825 (2 marks)

3 How should a biological asset be measured at the end of a reporting period?

 At cost
 At fair value
 At fair value less costs to sell
 At the lower of cost and net realisable value (2 marks)

4 OC signed a contract to provide office cleaning services for an entity for a period of one year
from 1 October 20X4 for a fee of $500 per month.
The contract required the entity to make one payment to OC covering all twelve months’
service in advance. The contract cost to OC was estimated at $300 per month for wages,
materials and administration costs.
OC received $6,000 on 1 October 20X4.

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56 P a r t 1 q u e s t i o n s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

How much profit/loss should OC recognise in its statement of profit or loss and other
comprehensive income for the year ended 31 March 20X5?
 $600 loss
 $1,200 profit
 $2,400 profit
 $4,200 profit (2 marks)

5 On 28 September 20X4, GY received an order from a new customer, ZZ, for products with a
sales value of $750,000. ZZ enclosed a deposit with the order of $75,000.
On 30 September 20X4, GY had not completed the credit referencing of ZZ and had not
despatched any goods.
Which of the following will correctly record this transaction in GY’s financial statements for
the year ended 30 September 20X4?
 Debit Cash $75,000; Credit Revenue $75,000
 Debit Cash $75,000; Debit Trade receivables $675,000; Credit Revenue $750,000
 Debit Cash $75,000; Credit Deferred revenue $75,000
 Debit Trade receivables $750,000; Credit Revenue $750,000 (2 marks)

6 CF, a contract cleaning entity, signed a contract to provide 12 months’ cleaning of an office
block. The contract for $12,000 commenced on 1 June 20X4. The terms of the contract provided
for payment six monthly in advance on 1 June and 1 December 20X4. CF received $6,000 and
started work on 1 June 20X4.
How should CF account for the contract in its financial statements for the year ended 30 June
20X4?
 Debit Cash $6,000; credit Revenue $6,000
 Debit Cash $6,000; credit Revenue $1,000 and credit Deferred income $5,000
 Debit Cash $6,000, debit Receivables $6,000; credit Revenue $12,000
 Debit Cash $6,000; credit Deferred income $6,000 (2 marks)

7 On 1 April 20X5, Winchmore, a telecommunications company, entered into a contract to supply

internet services to Horniman, for two years from that date. On 1 April 20X5, Winchmore also
supplied Horniman with routers and other equipment. The charge for internet services is $6,000
per month. The equipment was supplied at no extra charge. Horniman can receive the internet
services using its existing equipment, which has been supplied by another company.
The normal selling price of the equipment supplied to Horniman would be $20,000, if it had
been supplied separately. The standard charge for internet services without any additional
equipment is also $6,000 per month.
What amount of revenue should Winchmore recognise in respect of this contract for the year
ended 31 December 20X5?
 $54,000
 $64,976
 $66,500
 $73,220 (2 marks)

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ACCA FR Question Bank Part 1 questions: 13: Revenue and inventory 57

8 On 1 January 20X5 Mechanic entered into a contract to manufacture a machine and some spare
parts for the same machine. The selling price of the machine was $1.2 million and the selling
price of the spare parts was $650,000. On 1 February 20X5, the customer paid a deposit of
$120,000, 10% of the selling price of the machine.
On 30 September 20X5 the customer paid the balance of the amount due for the machine and
for the spare parts in full. The machine was installed on its premises on the same date. The
customer inspected the spare parts and obtained legal title to them, but asked Mechanic to
store them until they were needed.
Between 1 October 20X5 and 30 June 20X6, the spare parts were kept in Mechanic’s stores, in a
specially designated area that was completely separate from Mechanic’s own inventories. The
spare parts have been specially manufactured for the specific model of the machine and it is
extremely unlikely that Mechanic could sell them to another customer.
What amounts should Mechanic recognise as revenue in respect of this contract?
 Year ended 30 April 20X5 $Nil; Year ended 30 April 20X6 $1,850,000
 Year ended 30 April 20X5 $120,000; Year ended 30 April 20X6; $1,730,000
 Year ended 30 April 20X5 $Nil; Year ended 30 April 20X6 $1,200,000; Year ended 30 April
20X7 $650,000
 Year ended 30 April 20X5 $120,000; Year ended 30 April 20X6 $1,080,000; Year ended
30 April 20X7 $650,000 (2 marks)

9 Match the following statements to the appropriate category based on whether the conditions
would normally indicate that a selling entity should recognise revenue from a contract over
time or at a point in time.
Statements
The customer has the significant risks and rewards of ownership of the asset.
The customer simultaneously receives and consumes the benefits provided by the entity’s
performance over the period of the contract.
The entity does not have an enforceable right to payment for performance completed to date.
The entity’s performance creates an asset that the customer controls during the period of the
contract.
Revenue recognised over time

Revenue recognised at a point in time

(2 marks)

10 Amber sells theatre tickets to customers. Amber obtains the tickets from the theatres at prices
that are lower than the price at which the tickets are normally sold directly to the public. Amber
has to pay for the tickets in advance. The tickets cannot be returned or the money refunded if
Amber cannot resell them. Amber is free to set its own selling price for the tickets and it
currently charges customers the price for which it purchased the tickets, plus 10%.
During the year ended 30 September 20X5, Amber purchased theatre tickets for resale at a total
cost of $20 million and made sales to the public of $20.9 million.

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58 P a r t 1 q u e s t i o n s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

What is the amount of revenue that Amber should recognise in its financial statements for the
year ended 30 September 20X5?
 $1 million
 $1.9 million
 $2 million
 $20.9 million (2 marks)

11 On 31 December 20X4, Barnard won a contract to supply services to a customer. In order to

obtain this contract, it incurred the following costs:
$000
External legal fees 12,000
Employee costs 15,000
27,000

Barnard would have incurred the legal fees even if it had not won the contract. The employee
costs are bonuses that are payable as a reward for winning the contract. Barnard expects to
recover the employee costs through fees for the services that it will provide to the customer.
What amount should be recognised as a contract asset as at 31 December 20X4?
 $Nil
 $12,000
 $15,000
 $27,000 (2 marks)

12 Which of the following costs of fulfilling a contract with a customer should be recognised as a
contract asset?
 Cost of computer hardware that will not be transferred to the customer, but which will
be used to provide services to the customer
 General and administrative costs
 Initial costs of designing a product that the entity does not expect to recover.
 Travel expenses that are rechargeable to the customer under the terms of the contract
(2 marks)

13 Overs is a car dealership and prepares its financial statements to 30 June. In the year to 30 June
20X4, it held a number of vehicles at a number of different sites. The vehicles were supplied by
GH Cars, a car manufacturer, which is Overs’s main supplier. Under the trading terms agreed
with GH Cars, Overs is entitled to hold up to a maximum of 1,000 vehicles.
Which one of the following would indicate that Overs has obtained control of the vehicles and
that GH should recognise revenue from their sale?
 Overs can use the cars for demonstration purposes, provided the mileage on any
individual vehicle does not exceed 1,500 miles.
 Legal title remains with GH Cars until the vehicle is sold to a third party.
 Overs is free to return any vehicle free of charge within six months.
 Overs is responsible for insuring the vehicles while at its premises. (2 marks)

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ACCA FR Question Bank Part 1 questions: 13: Revenue and inventory 59

14 Repro, a company which sells photocopying equipment, has prepared its draft financial
statements for the year ended 30 September 20X4. It has included the following transactions in
revenue at the stated amounts below.
Which of these has been correctly included in revenue?
 Agency sales of $250,000 on which Repro is entitled to a commission
 Sale proceeds of $20,000 for motor vehicles which were no longer required by Repro
 Sales of $150,000 on 30 September 20X4. The amount invoiced to and received from the
customer was $180,000, which includes $30,000 for ongoing servicing work to be done
by Repro over the next two years
 Sales of $200,000 on 1 October 20X3 to an established customer which (with the
agreement of Repro) will be paid in full on 30 September 20X5. Repro has a cost of
capital of 10%

15 Yling entered into a contract with a customer on 1 January 20X4 which is expected to last
24 months. The performance obligations under the contract are satisfied over time. The agreed
price for the contract is $5 million. At 30 September 20X4, the costs incurred on the contract
were $1.6 million and the estimated remaining costs to complete were $2.4 million. On
20 September 20X4, Yling received a payment from the customer of $1.8 million which was
equal to the full amount invoiced to date. Yling calculates the stage of completion of the
contract on the basis of costs incurred to date as a proportion of total contract costs.
Calculate the amount that would be reported in Yling’s statement of financial position as at
30 September 20X4 for the contract asset (the amount due from the customer) for the above
contract.

16 On 30 September 20X4, 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 20X4) 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 20X4?
 $1 million
 $790,000
 $180,000
 $970,000

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60 P a r t 1 q u e s t i o n s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

17 Hindberg is a car retailer. On 1 April 20X4, Hindberg sold a car to Latterly on the following
terms:
The selling price of the car was $25,300. Latterly paid $12,650 (half of the cost) on 1 April 20X4
and would pay the remaining $12,650 on 31 March 20X6 (two years after the sale). Hindberg’s
cost of capital is 10% per annum.
What is the total amount which Hindberg should credit to profit or loss in respect of this
transaction in the year ended 31 March 20X5?
 $23,105
 $23,000
 $20,909
 $24,150

18 Inventory may be measured on a first in, first out (FIFO) or a weighted average cost (WAC) basis.
For property, plant and equipment (PPE) the choice is between the cost and revaluation models.
In a period of rising prices, which of the following combinations would lead to higher
profitability ratios?
 Inventory FIFO/PPE Revaluation model
 Inventory FIFO/PPE Cost model
 Inventory WAC/PPE Revaluation model
 Inventory WAC/PPE Cost model

19 At 31 December 20X4, Litch Co had, in inventory, 100 items of work in progress which had cost
$14,900 to produce. It estimated that the work in progress would cost $13 per unit to complete,
and that each unit would then sell for $166.
Direct selling costs are estimated at 2% of revenue.
In accordance with IAS 2 Inventories, what is the correct value of Litch Co’s inventory as at
31 December 20X4?
 $14,900
 $16,268
 $16,200
 $14,968 (2 marks)
[SD20]

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ACCA FR Question Bank Part 1 questions: 14: Financial instruments 61

14: Financial instruments

1 On 1 January 20X4 a company issues 7% redeemable preference shares with a maturity date of
31 December 20X8.
How should the preference shares and the preference dividend be presented in the financial
statements for the year ended 31 December 20X4?
 Shares are equity; dividend is deducted from retained earnings in the statement of
changes in equity
 Shares are equity; dividend is a finance cost in profit or loss
 Shares are a non-current liability; dividend is a finance cost in profit or loss
 Shares are a non-current liability; dividend is deducted from retained earnings in the
statement of changes in equity (2 marks)

2 Cross issued 200,000 $10 redeemable 5% preference shares at par on 1 April 20X7. Issue costs
amounted to $193,000. The effective rate of interest is 10%. The preference shares are
measured at amortised cost.
What is the carrying amount of the preference shares at 31 March 20X8?
 $1,888,000
 $1,988,000
 $2,100,000
 $2,312,000 (2 marks)

3 Trotwood has invested surplus cash in some 10% loan stock that will mature in three years’
time. The entity has no other significant financial asset investments. Trotwood wishes to
maximise its return on its investment and will either hold the loan stock to maturity or sell it
and use the proceeds to buy another financial asset with a higher return.
How should Trotwood classify and measure the loan stock in its financial statements?
 At amortised cost
 At fair value through profit or loss
 At fair value through other comprehensive income
 At amortised cost initially, then reclassify to fair value through profit or loss (2 marks)

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62 P a r t 1 q u e s t i o n s : 1 4 : F i n a n c i a l i n s t r u m e n t s ACCA FR Question Bank

4 On 1 October 20X3, Bertrand issued $10 million convertible loan notes which carry a nominal
interest (coupon) rate of 5% per annum. The loan notes are redeemable on 30 September 20X6
at par for cash or can be exchanged for equity shares. A similar loan note, without the
conversion option, would have required Bertrand to pay an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and
8%, can be taken as:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
How would the convertible loan appear in Bertrand’s statement of financial position on initial
recognition (1 October 20X3)?
Equity Non-current liability
$000 $000
 810 9,190
 nil 10,000
 10,000 nil
 40 9,960

5 Which TWO of the following items would be classified as financial instruments?

 Inventories
 Long-term borrowings
 Patents
 Trade receivables

6 Melia Co enters into a factoring arrangement for a receivable balance of $15m. The agreement
states that Melia Co will receive cash from the factor equal to 90% of the value of the
receivable. The remaining 10% (minus an administration fee) will be received when the
customer settles the balance.
If the receivable remains unpaid after 6 months, Melia Co will have to return the cash advance
and pay the administration fee.
Which of the following statements is correct in respect of the above agreement?
 Melia Co should not recognise any administration fee until is it paid.
 Melia Co has transferred control of the receivables balance as soon as the cash is
received from the factor.
 The initial double entry to record this transaction would be:
Dr Cash $13.5m
Cr Liability $13.5m
 An initial expense of $1.5m would be recognised

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ACCA FR Question Bank Part 1 questions: 14: Financial instruments 63

7 Tonton Co acquired 9,000 shares in Pogo Co on 1 August 20X3 at a cost of $6.40 per share.
Tonton Co incurred transaction costs of $9,000 for this transaction. Tonton Co elected to hold
these shares at fair value through other comprehensive income.
At 31 December 20X3, the fair value of the Pogo Co shares was $7.25 per share and selling costs
were expected to be 4%.
What is the value of the Pogo Co shares in Tonton Co’s individual financial statements at
31 December 20X3?
 $65,250
 $74,250
 $62,640
 $66,600

PINGWAY
The following scenario relates to questions 8 – 12.
Pingway issued a $10 million 3% convertible loan note at par on 1 April 20X6 with interest payable
annually in arrears. Three years later, on 31 March 20X9, the loan note is convertible into equity
shares on the basis of $100 of loan note for 25 equity shares or it may be redeemed at par in cash at
the option of the loan note holder. A similar loan note, without the conversion option, would have
required Pingway to pay an interest rate of 8%.
The present value of $1 receivable at the end of the year, based on discount rates of 3% and 8% can be
taken as:
3% 8%
$ $
End of Year 1 0.97 0.93
2 0.94 0.86
3 0.92 0.79
Pingway also issued a $40 million (non-convertible) loan note at par on 1 April 20X6. Interest of 8% per
annum will be paid on the loan. The loan note will be redeemed on 31 March 20Y0 at a premium
which gives the loan note an effective finance cost of 10% per annum.
On 1 April 20X6 Pingway acquired a financial asset debt instrument at its nominal value of $12 million.
The instrument carries a fixed coupon interest rate of 7%, which is receivable annually in arrears.
Transaction costs associated with the acquisition were $240,000.

8 Which of the following meet the definition of a financial liability?

 A contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities
 A contract to deliver cash or another financial asset to another entity
 A contract to exchange financial instruments with another entity under conditions which are
potentially favourable
 A contract to exchange financial instruments with another entity under conditions which are
potentially unfavourable
 An equity instrument of another entity

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64 P a r t 1 q u e s t i o n s : 1 4 : F i n a n c i a l i n s t r u m e n t s ACCA FR Question Bank

9 In respect of the 3% convertible loan note, what is the value that will be credited to debt (non-
current liabilities) on the issue of the instrument?

$ 000

10 Which TWO of the following types of financial instrument should normally be measured at
amortised cost after initial recognition?
 Financial assets held within a business model whose objective is to collect contractual cash
flows
 Financial liabilities at fair value through profit or loss
 Financial liabilities other than those held for trading
 Financial assets that are equity investments in other entities
 Financial assets held in order to realise a short-term gain

11 In respect of the 8% (non-convertible) loan note, what is the finance cost that will be recognised
in the statement of profit or loss for the year ended 31 March 20X7?
 $800,000
 $3,200,000
 $3,680,000
 $4,000,000

12 In respect of the financial asset debt instrument, what is the correct adjustment to record the
instrument on initial recognition?
 DR Financial asset $11,760,000
CR Bank $11,760,000
 DR Financial asset $12,000,000
DR Profit or loss $240,000
CR Bank $12,240,000
 DR Financial asset $12,240,000
CR Bank $12,240,000
 DR Financial asset $11,760,000
DR Profit or loss $240,000
CR Bank $12,000,000

Checkpoint 3
Now you have completed these questions in the question bank, there are additional questions to try
on your online course. Please log into your course using the instructions that were on your joining
instructions e mail and attempt Checkpoint 3 at the end of Chapter 14.

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ACCA FR Question Bank Part 1 questions: 15: Provisions and events after the reporting period 65

15: Provisions and events after the reporting period

1 MN obtained a government licence to operate a mine from 1 April 20X7. The licence requires
that, at the end of the mine’s useful life, all buildings must be removed from the site and the
site landscaped. MN estimates that the cost of this decommissioning work will be $1,000,000 in
ten years’ time (present value at 1 April 20X7 $463,000) using a discount factor of 8%.
Calculate the amount that MN should include in provisions in its statement of financial
position as at 31 March 20X8.

2 Classify the following events as adjusting or non-adjusting events after the reporting period.
WDC’s year end is 30 September 20X7.
Adjusting Non-
adjusting
WDC was notified on 5 November 20X7 that one of its customers  
was insolvent and was unlikely to repay any of its debts. The balance
outstanding at 30 September 20X7 was $42,000
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 20X7 for damages awarded against it of
$22,000. On 29 October 20X7 the court awarded damages of
$18,000
On 5 October 20X7 a serious fire occurred in WDC’s main production  
centre and severely damaged the production facility.
The year-end inventory balance included $50,000 of goods from a  
discontinued product line. On 1 November 20X7 these goods were
sold for a net total of $20,000.
(2 marks)

3 At the year-end, a company has a contingent liability and a contingent asset. In both cases, the
directors have been advised that it is possible that there will be an outflow of economic benefits
(for the liability) and an inflow of economic benefits (for the asset).
Which is the correct accounting treatment for these two items?
 Disclose both the contingent liability and the contingent asset
 Disclose the contingent liability; do not disclose the contingent asset
 Recognise the contingent liability; disclose the contingent asset
 Recognise the contingent liability; do not disclose the contingent asset (2 marks)

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66 P a r t 1 q u e s t i o n s : 1 5 : P r o v i s i o n s a n d e v e n t s a f t e r t h e r e p o r t i n g p e r i o d ACCA FR Question Bank

4 P Co guarantees to rectify, free of charge, any faults that arise in its products that occur within
the first twelve months after purchase. At the year-end of 31 March 20X4, management has
prepared the following estimates relating to the goods sold during the year ended 31 March
20X4:
Scenario % of sales under warranty Estimated cost of repair
Major faults 5% $500,000
Minor faults 15% $50,000
No faults 80% $nil
Calculate the amount that should be recognised for provisions in the financial statements for
the year ended 31 March 20X4

$ (2 marks)

5 Which TWO of the following are adjusting events after the reporting period?
 A flood that destroyed a major production plant after the year-end
 An issue of equity shares at market value after the year-end
 A property valuation that showed that the property was impaired at the year-end
 The insolvency of a customer who owed a debt at the year-end which is still outstanding
(2 marks)

6 V Co prepares its financial statements to 30 June each year. The following events took place
between 30 June and the date on which the financial statements were authorised for issue.
(i) The company made a major purchase of plant and machinery
(ii) The company declared a dividend to holders of equity shares
Which of the above are adjusting events after the reporting period?
 Item (i) only
 Item (ii) only
 Both items (i) and (ii)
 Neither item (i) nor item (ii) (2 marks)

7 Which of the following statements are correct?

(i) Adjusting events are indicative of conditions that arose after the reporting period
(ii) An entity should disclose information about all material non-adjusting events after the
reporting period
(iii) Events after the reporting period are events that occur before the financial statements
are authorised for issue
 (i) and (ii)
 (i) and (iii)
 (ii) and (iii)
 (i), (ii) and (iii) (2 marks)

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ACCA FR Question Bank Part 1 questions: 15: Provisions and events after the reporting period 67

8 F Co prepared financial statements for the year ended 31 December 20X3.

These financial statements were authorised for issue on 1 March 20X4. The following events
took place.
(i) On 5 January 20X4 a number of valuable items of plant and equipment and some
inventories were destroyed by a fire at the company’s premises.
(ii) On 14 February 20X4, F settled a claim from a customer by agreeing to pay compensation
of $200,000. The customer had made the claim on 11 December 20X3.
(iii) On 25 February 20X4, a sudden general fall in share prices reduced the fair value of F’s
investment portfolio by more than 50%.
Assuming that all three items are material, how should they be treated in the financial
statements for the year ended 31 December 20X3?
Item (i) Item (ii) Item (iii)
 Adjust Disclose Adjust
 Adjust Adjust Disclose
 Disclose Adjust Disclose
 Disclose Disclose Disclose

9 Which of the following events after the reporting period is an adjusting event?
 Announcing a plan to discontinue an operation
 Changes in tax rates announced after the year-end
 Determining the proceeds received from assets sold before the year-end
 Selling material items of property, plant and equipment (2 marks)

10 Which TWO of the following events occurring after the reporting date but before the financial
statements are authorised for issue, are classified as ADJUSTING events?
 A change in tax rate announced after the reporting date, but affecting the current tax
liability
 The discovery of a fraud which had occurred during the year
 The determination of the sale proceeds of an item of plant sold before the year end
 The destruction of a factory by fire (2 marks)

11 Each of the following events occurred after the reporting date of 31 March 20X5, but before the
financial statements were authorised for issue.
Which would be treated as a NON-adjusting event?
 A public announcement in April 20X5 of a formal plan to discontinue an operation which
had been approved by the board in February 20X5
 The settlement of an insurance claim for a loss sustained in December 20X4
 Evidence that $20,000 of goods which were listed as part of the inventory in the
statement of financial position as at 31 March 20X5 had been stolen
 A sale of goods in April 20X5 which had been held in inventory at 31 March 20X5.
The sale was made at a price below its carrying amount at 31 March 20X5

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68 P a r t 1 q u e s t i o n s : 1 5 : P r o v i s i o n s a n d e v e n t s a f t e r t h e r e p o r t i n g p e r i o d ACCA FR Question Bank

12 Cumla’s assistant accountant has reviewed the company’s accounting provisions for the year
ended 31 March 20X5.
Identify which of the following suggested treatments are permitted in the financial
statements and mark the remaining treatments as not permitted.
Permitted Not
permitted
Making a provision for a constructive obligation of $400,000; this  
being the sales value of goods expected to be returned by retail
customers after the year end under the company’s advertised 30-
day returns policy
Based on past experience, a $200,000 provision for unforeseen  
liabilities arising after the year end
The partial reversal (as a credit to the statement of profit or loss) of  
the accumulated depreciation provision on an item of plant because
the estimate of its remaining useful life has been increased by three
years
Providing $1 million for deferred tax at 25% relating to a $4 million  
revaluation of property during March 20X5 even though Cumla has
no intention of selling the property in the near future

13 At 31 December 20X6, its year end, Laurel Co had a potential liability as the result of a claim for
damages from a customer. According to Laurel Co’s legal advisers, the claim is almost certain to
succeed. The maximum amount payable is $5 million, but it is highly likely that the customer will
settle for $3 million.
Laurel Co is insured against this type of liability and in theory should receive up to 50% of any
amount payable in damages. It is not certain that the insurance claim will succeed, but
management has been advised that the insurer is more likely than not to meet the claim.
Assuming that all payments and receipts will occur within twelve months, how should Laurel
Co treat the claims in its financial statements for the year ended 31 December 20X6?
 Recognise a liability for $1.5m
 Recognise a liability for $3m; disclose a contingent asset
 Recognise a liability for $3m; do not recognise or disclose any amount receivable
 Recognise a liability for $5m; disclose a contingent asset

14 Flute Co undertakes drilling activities and has a widely publicised environmental policy stating
that it will incur costs to restore land to its original condition once drilling activities have been
completed.
Drilling commenced on a particular piece of land on 1 July 20X8. At this time, Flute Co estimated
that it would cost $3m to restore the land when drilling was completed in five years’ time. Flute
Co’s cost of capital is 7% and the appropriate present value factor is 0.713.
At what amount will the provision for restoration costs be measured in Flute Co’s statement
of financial position as at 31 December 20X8?
 $2.14m
 $3m
 $2.29m
 $2.21m

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ACCA FR Question Bank Part 1 questions: 16: Taxation 69

16: Taxation

1 An item of equipment cost $60,000 on 1 April 20X5. The equipment is depreciated at 20% per
annum on a reducing balance basis.
Tax depreciation is deductible as follows:
I 50% of additions to property, plant and equipment in the accounting period in which
they are recorded;
II 25% per year of the written-down value (i.e. cost minus previous allowances) in
subsequent accounting periods except that in which the asset is disposed of.
The income tax rate is 25%.
What amount of deferred tax relating to this asset should be recognised in the statement of
financial position as at 31 March 20X8?
 $1,781
 $3,461
 $3,975
 $13,845 (2 marks)

2 Which TWO of the following statements regarding deferred taxation are correct?
 A gain on the revaluation of an asset only gives rise to a deferred tax liability to the
extent that the entity expects to realise the gain by selling the asset in a future period
 A temporary difference arises when the carrying amount of an asset is different from its
value for tax purposes
 If an entity makes a tax loss which is carried forward to future periods, it recognises a
deferred tax asset
 Non-current deferred tax liabilities cannot be measured at their present value
(2 marks)

3 A company purchased an item of plant for $40,000 on 1 September 20X1. The plant had an
estimated life of five years and an estimated residual value of $5,000. The plant is depreciated
on a straight-line basis. Local tax law does not allow depreciation as an expense, but a tax
allowance of 60% of the cost of the asset can be claimed in the year of purchase and 20% per
annum on a reducing balance basis in the following years. The rate of income tax is 30%.
What charge or credit for deferred taxation should be recorded in the company’s profit or loss
for the year to 31 August 20X2?
 $17,000 charge
 $5,100 charge
 $5,100 credit
 $17,000 credit

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70 P a r t 1 q u e s t i o n s : 1 6 : T a x a t i o n ACCA FR Question Bank

4 A company’s statement of financial position at 31 December 20X4 included land at a cost of

$200,000 and a deferred tax liability of $60,000.
On 1 March 20X5, the land was professionally valued at $250,000. This valuation was
incorporated into the financial statements for the year to 31 December 20X5. No other
non-current assets have been revalued. Other taxable temporary differences increased during
the year to 31 December 20X5 by $40,000. The relevant rate of tax is 20%.
What are the balances at 31 December 20X5 on the revaluation surplus and the deferred tax
liability?
 Revaluation surplus of $50,000 and deferred tax liability of $68,000
 Revaluation surplus of $50,000 and deferred tax liability of $78,000
 Revaluation surplus of $40,000 and deferred tax liability of $78,000
 Revaluation surplus of $40,000 and deferred tax liability of $62,000

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ACCA FR Question Bank Part 1 questions: 17: Foreign currency transactions 71

17: Foreign currency transactions

1 On 1 January an entity purchased goods from a foreign country for B$24,300. On 10 March the
goods were paid in full.
The exchange rates were: 1 January $1=B$4.9 and 10 March $1=B$5.2
What is the exchange difference to be included in profit or loss?
 $286.10 profit
 $286.10 loss
 $7,290 profit
 $7,290 loss

2 On 1 June 20X4 XL purchased some goods for resale from a foreign entity for H$60,000. The
goods were not sold to third parties until 20 August 20X4. Exchange rates were:
1 June 20X4 $1=H$9.3
30 June 20X4 $1=H$9.6
20 August 20X4 $1=H$9.9
At what amount should the goods be included in inventories in the statement of financial
position as at 30 June 20X4 (to the nearest $)?

3 On 1 April 20X4 an entity purchased goods from a foreign country for X$45,000. The goods were
paid in full on 15 May 20X4. Exchange rates were:
1 April 20X4 $1=X$8.2
30 April 20X4 $1=X$8.4
15 May 20X4 $1=X$8.5
What exchange difference should be recognised in profit or loss for the year ended 30 April
20X4?
 $130.66 loss
 $130.66 profit
 $193.86 loss
 $193.68 profit

4 On 1 June 20X4 YN purchased some goods for resale from a foreign entity for F$30,000.
The supplier was not paid in full until 10 July 20X4. Exchange rates were:
1 June 20X4 $1=F$10.5
30 June 20X4 $1=F$10.2
10 July 20X4 $1=F$10.0
At what amount should the amount payable be included in trade payables in the statement of
financial position as at 30 June 20X4 (to the nearest $)?

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72 P a r t 1 q u e s t i o n s : 1 7 : F o r e i g n c u r r e n c y t r a n s a c t i o n s ACCA FR Question Bank

5 On 1 January 20X8, Nash Co purchased an equity instrument for 450,000 Crowns (Cr). Nash Co
classifies and measures the equity instrument at fair value with gains and losses recognised in
other comprehensive income.
Exchange rates relating to the instrument were:
1 January 20X8 $1 = Cr0.75
31 December 20X8 $1 = Cr0.8
31 December 20X9 $1 = Cr0.8
The fair value of the instrument was 460,000 Crowns at 31 December 20X8 and 470,000 Crowns
at 31 December 20X9.
What is the total gain or loss on remeasurement of the equity instrument for the years ended
31 December 20X8 and 31 December 20X9?
 20X8: $25,000 gain; 20X9: $12,500 loss
 20X8: $25,000 loss; 20X9: $12,500 gain
 20X8: $30,500 gain; 20X9: $8,000 gain
 20X8: $30,500 loss; 20X9: $8,000 loss

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ACCA FR Question Bank Part 1 questions: 18: Earnings per share 73

18: Earnings per share

1 Arran made a profit after tax of $2,300,000 for the year ended 30 September 20X4.
At that date, Arran had $2 million of equity shares of 25 cents each in issue. There had been no
changes to issued share capital for many years.
At 30 September 20X4, there were outstanding share options to purchase 3 million equity
shares at $1.60 each. The average market value of Arran’s equity shares during the year ended
30 September 20X4 was $4 per share.
What is Arran’s diluted earnings per share for the year ended 30 September 20X4?
 20.9 cents
 23.5 cents
 28.8 cents
 60.5 cents (2 marks)

2 Faringdon made a profit after tax of $20 million for the year ended 30 September 20X4.
At 30 September 20X4, Faringdon had in issue 50 million equity shares and a $15 million
convertible loan note. The loan note will mature in 20X6 and will be redeemed at par or
converted to equity shares on the basis of 25 shares for each $100 of loan note at the loan-note
holders’ option. The effective rate of interest on the loan note is 8%. Faringdon’s income tax
rate is 25%.
Calculate Faringdon’s diluted earnings per share for the year ended 30 September 20X4

$ cents (2 marks)

3 Many commentators believe that the trend of earnings per share (EPS) is a more reliable
indicator of underlying performance than the trend of the net profit for the year.
Which of the following statements supports this view?
 Net profit can be manipulated by the choice of accounting policies but EPS cannot be
manipulated in this way
 EPS takes into account the additional resources made available to earn profit when new
shares are issued for cash, whereas net profit does not
 The disclosure of a diluted EPS figure is a forecast of the future trend of profit
 The comparative EPS is restated where a change in accounting policy affects the previous
year’s profits

Final checkpoint
Now you have completed these questions in the question bank, there are additional questions to try
on your online course. Please log into your course using the instructions that were on your joining
instructions e mail and attempt the final checkpoint at the end of Chapter 18.

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74 P a r t 1 q u e s t i o n s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

PART 1 QUESTIONS: Section C

2: More group accounts

PARADIGM (Q1, JUNE 2013 AMENDED)

On 1 October 20X2, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of
two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to
the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm
has not recorded any of the purchase consideration, although it does have other 10% loan notes
already in issue.
The market value of Paradigm’s shares at 1 October 20X2 was $2 each.
The summarised statements of financial position of the two companies as at 31 March 20X3 are:
Paradigm Strata
Assets $000 $000
Non-current assets
Property, plant and equipment 47,400 25,500
Financial asset: equity investments (notes (i) and (iv)) 7,500 3,200
54,900 28,700
Current assets
Inventory (note (ii)) 20,400 8,400
Trade receivables (note (iii)) 14,800 9,000
Bank 2,100 nil
Total assets 92,200 46,100

Equity and liabilities

Equity
Equity shares of $1 each 40,000 20,000
Retained earnings/(losses) – at 1 April 20X2 19,200 (4,000)
– for year ended 31 March 20X3 7,400 8,000
66,600 24,000
Non-current liabilities
10% loan notes 8,000 nil
Current liabilities
Trade payables (note (iii)) 17,600 13,000
Bank overdraft nil 9,100
Total equity and liabilities 92,200 46,100

The following information is relevant:

(i) At the date of acquisition, Strata produced a draft statement of profit or loss which showed it
had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the
basis for calculating the pre- and post-acquisition split of Strata’s profit for the year ended
31 March 20X3.
Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets
which were equal to their carrying amounts (including Strata’s financial asset equity
investments) with the exception of an item of plant which had a fair value of $3 million below
its carrying amount. The plant had a remaining economic life of three years at 1 October 20X2.

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ACCA FR Question Bank Part 1 questions: 2: More group accounts 75

Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, a share price for Strata of $1.20 each is representative of the fair value of the
shares held by the non-controlling interest.
(ii) Each month since acquisition, Paradigm’s sales to Strata were consistently $4.6 million.
Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4.6 million) of
these goods in inventory at 31 March 20X3. Paradigm’s normal mark-up (to third party
customers) is 40%.
(iii) Strata’s current account balance with Paradigm at 31 March 20X3 was $2.8 million, which did
not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata
on 28 March 20X3, which was not received by Paradigm until 3 April 20X3.
(iv) At 1 April 20X2, the financial asset equity investments of Paradigm and Strata are measured at
fair value through profit or loss. As at 31 March 20X3, these had fair values of $7.1 million and
$3.9 million respectively.
(v) There were no impairment losses within the group during the year ended 31 March 20X3.
Required:
Prepare the consolidated statement of financial position for Paradigm as at 31 March 20X3.

(20 marks)

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76 P a r t 1 q u e s t i o n s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t o r l o s s a n d O C I ACCA FR Question Bank

3: Consolidated statement of profit or loss and other

comprehensive income

PINARDI CO (SEPTEMBER/DECEMBER 2021)

The Pinardi group operates in the fragrance and cosmetics industry. On 1 January 20X7 Pinardi Co
disposed of one of its subsidiaries, Silva Co, for cash of $42m. Silva Co manufactures jewellery and was
sold because the Pinardi group wanted to exit this particular sector.
Extracts from the consolidated financial statements of the Pinardi group for the years ended
31 December 20X6 and 20X7 are as follows:
Statement of profit or loss 20X7 20X6
$'000 $'000
Revenue 98,300 122,400
Cost of sales (47,600) (71,800)
Gross profit 50,700 50,600
Operating expenses (33,700) (37,400)
Profit from operations 17,000 13,200
Finance costs (3,200) (5,500)
Profit before tax 13,800 7,700

Statement of financial position

Inventories 13,300 22,400
Cash 31,400 14,600

Non-current liabilities 42,000 61,000

The following information is relevant.
(1) The accounting assistant has not accounted for Silva Co as a discounted operation because the
disposal occurred on 1 January 20X7. No figures from Silva Co have been included in the 20X7
financial statements extracts above. The proceeds from the disposal have been recorded in
cash, with all net assets and goodwill derecognised. The balancing figure was held in a suspense
account.
(2) Pinardi Co acquired 100% of Silva Co on 1 January 20X1 and goodwill was calculated as $6m.
The goodwill had been impaired by 30% in 20X5. The net assets at 1 January 20X7 were $35m.
(3) As part of the sales agreement, the Pinardi group will receive an annual fee of $2m for the use
of the Silva Co brand. The 20X7 annual fee has been included in the Pinardi group revenue for
the year ended 31 December 20X7.
(4) Results obtained from Silva Co's individual published financial statements show the following
key information:
20X7 20X6
$'000 $'000
Revenue 39,000 36,000
Gross profit 18,800 12,600
Profit from operations 8,000 6,000
(5) Prior to the disposal Silva Co used to use some property belonging to the Pinardi group.
Following the disposal, the Pinardi group moved its cosmetic division into this property.
Previously the cosmetic division had leased external facilities for $2.5m a year. At 1 January
20X7 the lease had ten years remaining. To exit the lease, the Pinardi group made a one-off
payment of $3m to the lessor and recorded it as operating expenses.

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ACCA FR Question Bank Part 1 questions: 3: Consolidated statement of profit or loss and OCI 77

(6) The Pinardi group acquires raw materials from overseas. In 20X6 the group recorded foreign
exchange gains of $3m, and in 20X7 the group made a foreign exchange loss of $1m. Both items
were recognised within operating expenses.
Required:
(a) Calculate the gain on disposal of Silva Co that would need to be included in the consolidated
statement of profit or loss for the Pinardi group for the year ended 31 December 20X7.
(2 marks)
(b) Explain whether or not the disposal of Silva Co is likely to constitute a discontinued operation,
and the correct accounting treatment for this. (3 marks)
(c) Calculate the following ratios, using the pre-formatted table, for the Pinardi group for 20X7 and
20X6:
– Gross profit margin;
– Operating profit margin;
– Interest cover; and
– Inventory turnover days.
(4 marks)
Ratio Working 20X7 Working 20X6
Gross profit margin
Operating profit margin
Interest cover
Inventory turnover days

(d) Analyse the performance and position for the Pinardi group for the year ended 31 December
20X7 compared to the year ended 31 December 20X6. (11 marks)

(20 marks)

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78 P a r t 1 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4: Accounting for associates

PUMICE (Q1, 2007 PILOT PAPER, AMENDED)

On 1 October 20X5 Pumice acquired the following non-current investments:
 80% of the equity share capital of Silverton at a cost of $13.6 million
 50% of Silverton’s 10% loan notes at par
 1.6 million equity shares in Amok at a cost of $6.25 each.
The summarised draft statements of financial position of the three companies at 31 March 20X6 are:
Pumice Silverton Amok
$000 $000 $000
Non-current assets
Property, plant and equipment 20,000 8,500 16,500
Investments 26,000 nil 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 and liabilities
Equity
Equity shares of $1 each 10,000 3,000 4,000
Retained earnings 37,000 8,000 20,000
47,000 11,000 24,000
Non-current liabilities
8% loan note 4,000 nil nil
10% loan note nil 2,000 nil
Current liabilities 10,000 3,500 5,000
Total equity and liabilities 61,000 16,500 29,000
The following information is relevant.
(a) The fair values of Silverton’s assets were equal to their carrying amounts with the exception of
land and plant. Silverton’s land had a fair value of $400,000 in excess of its carrying amount and
plant had a fair value of $1.6 million in excess of its carrying amount. The plant had a remaining
life of four years (straight-line depreciation) at the date of acquisition.
(b) Pumice’s policy is to value non-controlling interests at their fair values. The directors of Pumice
assessed the fair value of the non-controlling interest in Silverton at the date of acquisition to
be $2.5 million.
(c) In the post-acquisition period Pumice sold goods to Silverton at a price of $6 million. These
goods had cost Pumice $4 million. Half of these goods were still in the inventory of Silverton at
31 March 20X6. Silverton had a balance of $1.5 million owing to Pumice at 31 March 20X6
which agreed with Pumice’s records.
(d) The net profit after tax for the year ended 31 March 20X6 was $2 million for Silverton and
$8 million for Amok. Assume profits accrued evenly throughout the year.
(e) An impairment test at 31 March 20X6 concluded that the goodwill of Silverton was impaired by
$400,000 and the investment in Amok was impaired by $200,000.
(f) No dividends were paid during the year by any of the companies.
Required:
Prepare the consolidated statement of financial position for Pumice as at 31 March 20X6.
(20 marks)

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ACCA FR Question Bank Part 1 questions: 5: Interpreting financial statements 79

5: Interpreting financial statements

QUARTILE (Q3, DECEMBER 2012)

Quartile sells jewellery through stores in retail shopping centres throughout the country. Over the last
two years it has experienced declining profitability and is wondering if this is related to the sector as
whole. It has recently subscribed to an agency that produces average ratios across many businesses.
Below are the ratios that have been provided by the agency for Quartile’s business sector based on a
year end of 30 June 20X2.
Return on year-end capital employed (ROCE) 16.8%
Net asset (total assets less current liabilities) turnover 1.4 times
Gross profit margin 35%
Operating profit margin 12%
Current ratio 1.25:1
Average inventory turnover 3 times
Trade payables’ payment period 64 days
Debt to equity 38%
The financial statements of Quartile for the year ended 30 September 20X2 are
Statement of profit or loss
$000 $000
Revenue 56,000
Opening inventory 8,300
Purchases 43,900
52,200
Closing inventory (10,200) (42,000)
Gross profit 14,000
Operating costs (9,800)
Finance costs (800)
Profit before tax 3,400
Income tax expense (1,000)
Profit for the year 2,400

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80 P a r t 1 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

Statement of financial position

$000 $000
Assets
Non-current assets
Property and shop fittings 25,600
Deferred development expenditure 5,000
30,600
Current assets
Inventory 10,200
Bank 1,000 11,200
Total assets 41,800

Equity and liabilities

Equity
Equity shares of $1 each 15,000
Property revaluation reserve 3,000
Retained earnings 8,600
26,600
Non-current liabilities
10% loan notes 8,000
Current liabilities
Trade payables 5,400
Current tax payable 1,800 7,200
Total equity and liabilities 41,800

Note: The deferred development expenditure relates to an investment in a process to manufacture

artificial precious gems for future sale by Quartile in the retail jewellery market.
Required:
(a) Prepare for Quartile the equivalent ratios that have been provided by the agency. (9 marks)
(b) Assess the financial and operating performance of Quartile in comparison to its sector
averages. (11 marks)

(20 marks)

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ACCA FR Question Bank Part 1 questions: 6: Statement of cash flows 81

6: Statement of cash flows

MOCHA (Q3, DECEMBER 2011, AMENDED)

The following information relates to the draft financial statements of Mocha.
Summarised statements of financial position as at 30 September:
20X1 20X0
$000 $000 $000 $000
Assets
Non-current assets
Property, plant and equipment (note 1) 32,600 24,100
Financial asset: equity investments (note 2) 4,500 7,000
37,100 31,100
Current assets
Inventory 10,200 7,200
Trade receivables 3,500 3,700
Bank nil 1,400
13,700 12,300
Total assets 50,800 43,400

Equity and liabilities

Equity
Equity shares of $1 each (note 3) 14,000 8,000
Share premium (note 3) nil 2,000
Revaluation reserve (note 3) 2,000 3,600
Retained earnings 13,000 15,000 10,100 15,700
29,000 23,700
Non-current liabilities
Lease obligations 7,000 6,900
Deferred tax 1,300 8,300 900 7,800
Current liabilities
Tax 1,000 1,200
Bank overdraft 2,900 nil
Provision for product warranties (note 4) 1,600 4,000
Lease obligations 4,800 2,100
Trade payables 3,200 13,500 4,600 11,900
Total equity and liabilities 50,800 43,400

Summarised statements of profit or loss for the years ended 30 September:

20X1 20X0
$000 $000
Revenue 58,500 41,000
Cost of sales (46,500) (30,000)
Gross profit 12,000 11,000
Operating expenses (8,700) (4,500)
Investment income (note 2) 1,100 700
Finance costs (500) (400)
Profit before tax 3,900 6,800
Income tax expense (1,000) (1,800)
Profit for the year 2,900 5,000

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82 P a r t 1 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

The following additional information is available:

(1) Property, plant and equipment:
Accumulated Carrying
Cost depreciation amount
$000 $000 $000
At 30 September 20X0 33,600 (9,500) 24,100
New 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 20X1 43,600 (11,000) 32,600

The property disposed of was sold for $8.1 million.

(2) 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:
Year to 30 September: 20X1 20X0
$000 $000
Dividends received 200 250
Profit on sale of investment 400 Nil
Increases in fair value 500 450
1,100 700

(3) On 1 April 20X1 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 20X1 by an issue of shares for
cash at par.
(4) 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 20X1.

(20 marks)

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ACCA FR Question Bank Part 1 questions: 11: Preparation of single company accounts 83

11: Preparation of single company accounts

1 SANDOWN (Q2, DECEMBER 2009)

The following trial balance relates to Sandown at 30 September 20X9.
$000 $000
Revenue (note (1)) 380,000
Cost of sales 246,800
Distribution costs 17,400
Administrative expenses (note (2)) 50,500
Loan interest paid (note (3)) 1,000
Investment income 3,500
Current tax (note (5)) 2,100
Freehold property – at cost 1 October 20X0 (note (6)) 63,000
Plant and equipment – at cost (note (6)) 42,200
Brand – at cost 1 October 20X5 (note (6)) 30,000
Accumulated depreciation – 1 October 20X8 – building 8,000
– plant and equipment 19,700
Accumulated amortisation – 1 October 20X8 – brand 9,000
Investments in equity instruments (note (4)) 26,500
Inventory at 30 September 20X9 38,000
Trade receivables 44,500
Bank 8,000
Trade payables 42,900
Equity shares of 20 cents each 50,000
Equity option 2,000
Other reserve (note (4)) 5,000
5% convertible loan note 20Y2 (note (3)) 18,440
Retained earnings at 1 October 20X8 26,060
Deferred tax (note (5)) 5,400
570,000 570,000
The following notes are relevant:
(1) Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 20X8. The
terms of the sale are that Sandown will supply ongoing service and support for three years after
the sale. Sandown normally sells goods of this type and quantity for $12.5 million and the
normal stand-alone price of the servicing and support is $2.5 million per annum. Ignore the time
value of money.
(2) Administrative expenses include an equity dividend of 4. 8 cents per share paid during the year.
(3) The 5% convertible loan note was issued for proceeds of $20 million on 1 October 20X7. It has
an effective interest rate of 8% due to the value of its conversion option.
(4) The investments in equity instruments (the $26.5 million in the trial balance) have a fair value of
$29 million at 30 September 20X9. The other reserve in the trial balance represents the net
increase in the value of the investments in equity instruments as at 1 October 20X8. Sandown
has made an irrevocable election to recognise all changes in fair value through other
comprehensive income. Ignore deferred tax on this transaction.
(5) The balance on current tax represents the under-/over-provision of the tax liability for the year
ended 30 September 20X8. The directors have estimated the provision for income tax for the
year ended 30 September 20X9 at $16.2 million. At 30 September 20X9 the carrying amounts of
Sandown’s net assets were $13 million in excess of their tax base. The income tax rate of
Sandown is 30%.

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(6) Non-current assets:

The freehold property has a land element of $13 million. The building element is being
depreciated on a straight-line basis.
Plant and equipment is depreciated at 40% per annum using the reducing balance method.
Sandown’s brand in the trial balance relates to a product line that received bad publicity during
the year, which led to falling sales revenues. An impairment review was conducted on 1 April 20X9
which concluded that, based on estimated future sales, the brand had a value in use of $12 million
and a remaining life of only three years. However, on the same date as the impairment review,
Sandown received an offer to purchase the brand for $15 million. Prior to the impairment
review, it was being depreciated using the straight-line method over a 10-year life.
No depreciation/amortisation has yet been charged on any non-current asset for the year
ended 30 September 20X9. Depreciation, amortisation and impairment charges are all charged
to cost of sales.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Sandown for the
year ended 30 September 20X9. (13 marks)
(b) Prepare the statement of financial position of Sandown as at 30 September 20X9. (12 marks)
Notes to the financial statements are not required.
A statement of changes in equity is not required.

(25 marks)

2 TRIAGE CO (Q31, SEPTEMBER 2016)

EXAM SMART
This question can also be found on the ACCA practice platform. We recommend that you
attempt a number of questions within the platform in order that you get used to the
software.

After preparing a draft statement of profit or loss (before interest and tax) for the year ended
31 March 20X6 (before any adjustments which may be required by notes (1) to (4) below), the
summarised trial balance of Triage Co as at 31 March 20X6 is:
$’000 $’000
Equity shares of $1 each 50,000
Retained earnings as at 1 April 20X5 3,500
Draft profit before interest and tax for year ended 31 March 20X6 30,000
6% convertible loan notes (note (1)) 40,000
Leased property (original life 25 years) – at cost (note (2)) 75,000
Plant and equipment – at cost (note (2)) 72,100
Accumulated amortisation/depreciation at 1 April 20X5:
leased property 15,000
plant and equipment 28,100
Trade receivables (note (3)) 28,000
Other current assets 9,300
Current liabilities 17,700
Deferred tax (note (4)) 3,200
Interest payment (note (1)) 2,400
Current tax (note (4) 700
187,500 187,500

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ACCA FR Question Bank Part 1 questions: 11: Preparation of single company accounts 85

The following notes are relevant:

(1) Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is payable
annually in arrears on 31 March each year. The loans can be converted to equity shares on the
basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on
the same date. An equivalent loan without the conversion rights would have required an
interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 6% and
8%, are:
6% 8%
End of year 1 0.94 0.93
2 0.89 0.86
3 0.84 0.79
(2) Non-current assets:
The directors decided to revalue the leased property at $66.3m on 1 October 20X5. Triage Co
does not make an annual transfer from the revaluation surplus to retained earnings to reflect
the realisation of the revaluation gain; however, the revaluation will give rise to a deferred tax
liability at the company’s tax rate of 20%.
The leased property is depreciated on a straight-line basis and plant and equipment at 15% per
annum using the reducing balance method.
No depreciation has yet been charged on any non-current assets for the year ended
31 March 20X6.
(3) In September 20X5, the directors of Triage Co discovered a fraud. In total, $700,000 which had
been included as receivables in the above trial balance had been stolen by an employee.
$450,000 of this related to the year ended 31 March 20X5, the rest to the current year. The
directors are hopeful that 50% of the losses can be recovered from the company’s insurers.
(4) A provision of $2.7m is required for current income tax on the profit of the year to 31 March
20X6. The balance on current tax in the trial balance is the under/over provision of tax for the
previous year. In addition to the temporary differences relating to the information in note (2), at
31 March 20X6, the carrying amounts of Triage Co’s net assets are $12m more than their tax
base.
Required:
(a) Prepare a schedule of adjustments required to the draft profit before interest and tax (in the
above trial balance) to give the profit or loss of Triage Co for the year ended 31 March 20X6 as a
result of the information in notes (1) to (4) above. (5 marks)
(b) Prepare the statement of financial position of Triage Co as at 31 March 20X6. (12 marks)
(c) Calculate the diluted earnings per share for Triage Co for the year ended 31 March 20X6 (there
is no need to calculate the basic EPS). (3 marks)
Note: A statement of changes in equity and the notes to the statement of financial position are not
required.

(20 marks)

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ACCA FR Question Bank Part 1 answers: 1: An introduction to group accounts 87

PART 1: Objective test and Scenario

1: An introduction to group accounts

1  Carried at cost, with an annual impairment review.

2  Gamma is located in a country where a military coup has taken place and Petre has lost
control of the investment for the foreseeable future
The investment no longer meets the definition of a subsidiary (ability to control) and therefore
would not be consolidated.

3  1, 2 and 3

EXAMINER’S COMMENTS
The options are exercisable immediately in (1), control is established in (2), and in (3), Preece
still has control even though it is considering the sale of the subsidiary.
Most candidates ignored the options even though they were exercisable immediately.

4  The ability to use its power over the investee to affect the amount of the investor’s
return
 Exposure, or rights, to variable returns from its involvement with the investee
 Power over the investee
Acquisition of 50% or more of the share capital: the standard does not mention a percentage
shareholding. In practice, holding more than 50% of the voting rights usually results in control.
But this is not bound to be the case; there may be other factors involved. Holding more than
50% of the share capital does not always give a majority of the voting rights; some classes of
shares may not give voting rights at all. There may also be clauses in the contract that restrict
ability to use these voting rights.

5
TRUE FALSE
Where a parent company is satisfied that there has been a gain on a 
bargain purchase (negative goodwill), it should be recognised in the
consolidated statement of profit or loss immediately.
If the liabilities of the acquired entity are overstated, then goodwill 
will also be overstated.

A gain on bargain purchase will be credited to the consolidated statement of profit or loss
immediately. It is not recognised in the consolidated statement of financial position.

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88 P a r t 1 a n s w e r s : 1 : A n i n t r o d u c t i o n t o g r o u p a c c o u n t s ACCA FR Question Bank

If liabilities are overstated, then the net assets would be understated. This would cause any
goodwill recognised to be overstated.
Illustration: A parent acquires 100% of the share capital of a subsidiary for $100,000 cash. The
correct fair value of the net assets acquired were $75,000. In one calculation, the liabilities have
been overstated by $30,000, causing the net assets to be incorrectly included in the calculation
at $45,000 ($75,000 - $30,000). In the second calculation, the liabilities are not overstated, and
the net assets are included at their correct fair value of $75,000:
Liabilities Liabilities
overstated NOT overstated
$'000 $'000
Fair value of consideration transferred 100 100
Less net assets acquired (45) (75)
Goodwill at acquisition 55 25

Overstating the liabilities causes the goodwill to be overstated.

EXAMINER’S COMMENTS
Where did candidates go wrong?
Many candidates knew that statement 1 was true but thought that statement 2 was false.
Approaching this question by using some invented numbers in a basic goodwill calculation
may have helped candidates to visualise the fact that overstating liabilities reduces net
assets and consequently will overstate goodwill.

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 89

2: More group accounts

1 Reduce inventories and retained earnings by $ 7200

and

Reduce payables and receivables by $ 48000

48,000 × 33.33/133.33 × 60% = $7,200

2  $15,000
$ $
Fair value of consideration 110,000
Fair value of NCI at acquisition date 30,000
Less: subsidiary’s net assets at date of acquisition:
Share capital 100,000
Retained earnings 25,000
(125,000)
15,000

3  $1,050,000
$
Non-controlling interest at acquisition 900,000
Add: NCI share of subsidiary’s post-acquisition reserves
25% x (3,400,000 – 2,800,000) 150,000
1,050,000

4 $ 220000
$ $
Fair value of consideration 850,000
Fair value of NCI at acquisition date 120,000
Less: subsidiary’s net assets at date of acquisition:
Share capital 500,000
Retained earnings 250,000
(750,000)
220,000

5  $100,000
$
Fair value of consideration:
Cash 800,000
Shares (50,000 x $1.50 fair value at date of acquisition) 75,000
875,000
Fair value of NCI at acquisition date 225,000
Less: subsidiary’s net assets at date of acquisition: (1,000,000)
100,000

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90 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

6  $250,000
$ $
Fair value of consideration 1,250,000
Fair value of NCI at acquisition date 300,000
Less: subsidiary’s net assets at date of acquisition:
Share capital 500,000
Retained earnings 700,000
Fair value adjustment (600,000 – 500,000) 100,000
(1,300,000)
250,000

7  $1,245,000
Tennyson Browning
$ $
Retained earnings at reporting date 1,200,000 600,000
Less: retained earnings at acquisition date
500,000 + (100,000 × 3/12) (525,000)
75,000
Group share of Browning (60% × 75,000) 45,000
1,245,000

8  1,205,000
Pater Scott
$ $
Retained earnings at reporting date 950,000 940,000
Provision for unrealised profit (PUP)
(1/2 × 150,000 – 100,000) (25,000)
Less: retained earnings at acquisition date (660,000)
280,000
Group share of Scott (100%) 280,000
1,205,000

9  Inventories $800,000; trade and other receivables $740,000

Inventories: 530,000 + 310,000 – 40,000
Trade and other receivables: 480,000 + 290,000 – 30,000

10  $51.5 million
$000
Prime 33,000
Sext 16,000
Fair value adjustment (see below) 2,500
51,500

Retained
Acquisition earnings Year end
$000 $000 $000
Plant (dep’n 3,000/5 × 10/12) 3,000 (500) 2,500

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 91

11  $22 million
$000 $000
Consideration transferred:
Cash (10,000 x 80% x $4.50) 36,000
Deferred consideration (6,600 × 1/1.1) 6,000
42,000
Non-controlling interest at fair value (10,000 × 20% × $4) 8,000
Fair value of net assets:
Share capital 10,000
Retained earnings at 1 October 20X3 18,000
(28,000)
Goodwill 22,000

12  Record the net assets at their values shown above and credit profit or loss with $1.2 million
Is the correct treatment for a bargain purchase (negative goodwill).

13  $56,000
Market price of Sact’s shares at acquisition was $2.50 (3.00 – (3.00 × 20/120)), therefore NCI at
acq was $50,000 (100,000 × 20% × $2.50). NCI share of the post-acq profit is $6,000 (40,000 ×
9/12 × 20%). Therefore, non-controlling interest as at 31 March 20X5 is $56,000.

14  $546,000
Retained earnings:
Wilmslow Zeta
$000 $000
Per question 450,000 340,000
URP in inventory (320,000 × ¼ × 25/125) (16,000)
Pre-acquisition 200,000
140,000
Zeta (80% × 140,000) 112,000
546,000

15  Increase by $20,000
The statement of financial position shows 100% of the subsidiary’s assets and liabilities, so the
full amount (100%) of the fair value adjustment is made; not just the group share (75%).
This fair value adjustment increases liabilities, so it reduces net assets and increases goodwill.

EXAMINER’S COMMENTS
Tip: if candidates are unsure of the direction of the adjustment, then use fake figures to
calculate a fake goodwill figure and then account for the fair value adjustment to see what
happens to goodwill.

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92 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

16  Dr Retained earnings $280,000: Dr Non-controlling interests $70,000; Cr Goodwill

$350,000
Where non-controlling interests are measured at fair value, any impairment of goodwill is split
between the group and the non-controlling interests (in this case, retained earnings 80% ×
$350,000; non-controlling interests 20% × $350,000).
Goodwill is an asset (a debit) in the consolidated statement of financial position, therefore an
impairment (reduction) in goodwill must be a credit entry. Retained earnings and non-
controlling interests are equity (credits), so any reduction in these must be a debit entry.

17  A long-term interest free loan made by the parent to a subsidiary

 Cash in transit between a subsidiary and a parent
A group cannot make a loan to itself.
The existence of cash in transit means that there will be intra-group balances in the individual
accounts of the parent and the subsidiary (normally trade receivables and trade payables
resulting from intra-group sales). These should be eliminated and cash in transit should be
speeded through to its final destination (after which intra-group balances will normally agree).
Loan notes issued by the parent to third party lenders are not a transaction between the parent
and its subsidiaries, so are not eliminated on consolidation.
Unrealised profits on intra-group sales should be eliminated from the consolidated statement of
financial position. But if all goods have been sold to third parties, there is no unrealised profit.

18  Issue 1 will decrease goodwill and issue 2 will increase goodwill

EXAMINER’S COMMENTS
Once the purchase consideration for an acquisition has been agreed, then the recognition of
an asset or an increase in the fair value of an asset will act to decrease the calculated
goodwill figure. This is because goodwill is equal to the purchase consideration less the fair
value of the net assets at the date of acquisition The opposite of this is also true; where a
liability is recognised as part of the fair value exercise, this will increase the calculated
goodwill.
The question amounts to understanding whether issue 1 and 2 create assets or liabilities (or
neither).
In the subsidiary's own financial statements the legal claim would correctly be treated as a
contingent liability and disclosed in a note rather than be provided for. This is because the
probability of a liability (losing the court case) is only 30%. However, on acquisition, where
the fair value of a contingent liability of a subsidiary can be reliably measured, it should be
recognised in the consolidated financial statements. On this basis issue 2 creates a liability
on acquisition and would act to increase the calculated goodwill (the opposite of issue 1).

19  $5,250,000
$000
Patula 3,250
Sanka 1,940
Fair value adjustment (30% × (800 – 600)) 60
5,250

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 93

EXAMINER’S COMMENTS
The inventory of the subsidiary, Sanka Co, should be included at fair value at the date of
acquisition. The inventory in the individual accounts of Sanka Co will be at cost and therefore
an adjustment is needed to include the fair value of the unsold inventory.
Answer $5,330,000 is incorrect as it adds $140,000 (fair value excess of inventory sold)
(3,250 + 1,940 + (70% x 200) = 5,330).
Answer $5,130 is incorrect as it deducts the fair value excess of the inventory not sold (3,250
+ 1,940 - 60 = 5,130).
Answer $5,238,000 is incorrect as it adds 80% of the fair value excess of inventory not sold
(3,250 + 1,940 + 48 (80% x 60) = 5,238) and proportional consolidation, reflecting the
parent's ownership interest in assets, is not an appropriate consolidation technique as it
does not reflect control of those assets.

20  $4,760
Revaluation reserve:
Picture Co Frame Co
$ $
At 1 April 20X8 6,400
Other comprehensive income for year to 31 March 20X9 (1,400)
At 31 March 20X9 5,000
Post acquisition loss (800 × 6/12) (400)
Frame (60% × (400)) (240)
4,760

EXAMINER’S COMMENTS
A high number of candidates opted for $5,240, showing they understood the principle but
had added the $240 rather than deducting. This highlights the importance of reading the
question carefully as these candidates knew the rule but had been unable to spot that the
post-acquisition movement was a loss.
The candidates opting for $4,520 had also missed some information. In this case they had
deducted a full year’s loss, rather than time apportioning it to reflect the post-acquisition
loss.
Any candidate selecting $9,160 had added the total revaluation surplus of both companies
together, before adjusting for the post-acquisition movement.

21  $3,600
Mark-up = sales $150,000 × 25/125 = $30,000
PUP = $30,000/5 = $6,000
The sale is from the subsidiary to the parent, so the adjustment is:
Dr Retained earnings (60%) $3,600; Dr NCI (40%) $2,400; Cr Inventories $6,000.

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94 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

EXAMINER’S COMMENTS
Why the correct answer is none of the other options:
$6,000 does not take account of the 40% NCI adjustment.
$2,400 uses a 60% NCI adjustment
$4,500 uses a margin as opposed to a cost-plus approach
Most candidates did not take account of the 40% NCI adjustment. Candidates need to be
able to think about these consolidation adjustments in isolation i.e. not necessarily as part of
a full set of consolidated financial statements.

22  $16,800
Impairment of goodwill $20,000 + additional depreciation on FV adjustment $1,000 (5,000/5) =
$21,000.
Group share = 80% × $21,000 = $16,800.

EXAMINER’S COMMENTS
Unfortunately, the majority of candidates failed to restrict the write-offs to the group share
(80%) and most wanted to charge 100% of both adjustments against retained earnings.
Why the correct answer is none of the other options.
$21,000 – no adjustment to either adjustment for group share
$17,000 – 80% of the goodwill impairment + 100% of the additional depreciation
$20,800 – 100% of the goodwill impairment + 80% of the additional depreciation

23  Current Assets $1.195m and current liabilities $0.5m

Current Assets = $700,000 + $500,000 – PUP $5,000 = $1,195,000
Unrealised profit in inventory = $100,000 × 20% × ¼ = $5,000.
Current Liabilities = $300,000 + $200,000 = $500,000

EXAMINER’S COMMENTS
(In respect of the unrealised profit held in inventory) both inventory and retained earnings
are reduced by the same amount – no impact on NCI as sale is from parent to subsidiary.
As the cash-in-transit is adjusted in the parent, one asset (receivables) is merely exchanged
for another (cash) which means that the net effect on current assets is zero.
Why the correct answer is none of the other options.
Current assets $1.197m and current liabilities $0.5m: this option adjusts the inventory by
$3,000 ($5,000 × 60%)

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 95

Current assets $1.145m and current liabilities $0.45m: this option adjusts the correct
unrealised profit in inventory but also deducts the $50,000 cash-in-transit from both current
assets and liabilities.
Current assets $1.195m and current liabilities $0.45m: this option adjusts the correct
unrealised profit in inventory but also deducts the $50,000 cash-in-transit from current
liabilities only.

24  Dr Retained earnings $25,200; Dr Non-controlling interest $16,800: Dr Property, plant

and equipment $28,000; Cr Goodwill $70,000
Retained
Acquisition earnings Year end
$000 $000 $000
PPE (160,000 – 90,000) 70,000 (42,000) 28,000
Cr Goodwill (See below) Dr PPE
The increase in fair value at acquisition reduces goodwill by $70,000 (credit).
At 31 December 20X6 the net increase in the carrying amount of property, plant and equipment
is $28,000 (70,000 less additional depreciation $42,000 (70,000 × 3/5) (debit).
NCI is measured at fair value, so the additional depreciation is split between group retained
earnings $25,200 (60%) (debit) and NCI $16,800 (40%) (debit).

EXAMINER’S COMMENTS
Why the correct answer is none of the other options:
The second option charges only one year’s depreciation instead of three.
The third option allocates the full fair value of $160,000 instead of the difference between
fair value and carrying amount.
The fourth option ignores the fact that NCI are valued at fair value and allocates 100% of the
additional depreciation to retained earnings.

25 $ 180,000
$'000 $'000
Fair value of consideration transferred (balancing figure):
Cash consideration 180
Contingent consideration 250
Plus fair value of NCI at acquisition 100
Less fair value of net assets acquired:
Shares 500
Retained earnings/(losses) at acquisition (W1) (270) (230)
Goodwill at acquisition 300

(W1) Retained earnings at acquisition $'000

Retained earnings/(losses) at 1 January 20X0 (300)
Profit to the date of acquisition (120 × 3/12 months) 30
Retained earnings/(losses) at acquisition (270)

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96 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

EXAMINER’S COMMENTS
Where did candidates go wrong?
Many candidates answered with $150,000 instead of $180,000. This comes from only
including the $500,000 shares in the list of net assets acquired and ignoring the retained
losses brought forward and profit to the date of acquisition.
Although candidates may be more used to seeing a positive value for retained earnings, they
would be expected to recognise that retained losses should be included as part of the net
assets acquired and to calculate this appropriately.

26 $ 6,280,000
The correct answer is calculated as follows:
PUP on sales made by Sono Co to Pater Co $240,000 × 20/120 × ¾ unsold = $30,000
Consolidated retained earnings at 31 December 20X8 are:
For Pater Co $4,000,000
For Sono Co (3,400,000 – 520,000 pre-acquisition (given in question) – 30,000 PUP) × 80% share
= $2,280,000
This gives a total of $4,000,000 + $2,280,000 = $6,280,000

EXAMINER’S COMMENTS
The common errors were:
(i) Using margin – so calculating PUP as $240,000 × 20% × ¾ unsold = $36,000 so arrived
at $4,000,000 + (3,400,000 – 520,000 – 36,000 PUP) × 80% share = $6,275,200
Or
(ii) Not adjusting for 80% so $4,000,000 + (3,400,000 – 520,000 – 30,000 PUP) =
$6,850,000
Or
(iii) Not adjusting for pre-acquisition retained earnings so $4,000,000 + (3,400,000 –
30,000 PUP) × 80% = $6,696,000

27 $ 119.5 m
The correct answer is calculated as follows:
The consolidated retained earnings includes 100% of the parents + groups share (70%) of the
subsidiaries post acquisition earnings less groups share of goodwill impairment.
$116m + (70% × [$50m – $40m)) – (£25m × 20% × 70%) = $119.5m

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 97

EXAMINER’S COMMENTS
Where did students go wrong?
The most common error was to include the groups share of the subsidiary’s net assets at
31 December 20X4 rather than only consolidating the post-acquisition share of the
subsidiary’s increase in net assets. The candidates were provided with the fair value of the
subsidiary’s net assets at acquisition and therefore should ask why they have been given this
information. Almost all candidates adjusted for the groups share of the goodwill impairment.

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98 P a r t 1 a n s w e r s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t o r l o s s a n d O C I ACCA FR Question Bank

3: Consolidated statement of profit or loss and other

comprehensive income

1 $ 14000

20% × $70,000

2  $350,000
250,000 + 130,000 – 35,000 sale + PUP of 5,000 ((35,000 – 25,000) × ½)
Remember to DEDUCT the value of sale/purchase and ADD the PUP adjustment to the cost of
sales in the consolidated statement of profit and loss.

3  $1,045,000
800,000 + (650,000 × 6/12) – 80,000
Remember to eliminate the ENTIRE sale from the consolidated revenue in the consolidated
statement of profit and loss regardless of when the subsidiary was acquired. PUPs don’t affect
the revenue figure.

4  $588,000
Hayes Smith
$000 $000
Year ended 30 June 20X9 400 250
PUP ((180,000 × 20/120) ÷ 2) (15)
Smith Co (80% × 235) 188 235
588

5  $144,000
$
Cost of sales
Paprika 60,000
Salt 100,000
Additional depreciation (FV adjustment) (200,000 – 120,000)/8 10,000
Intra-group purchases (32,000)
URP in inventory (32,000 × 25% x 3/4) 6,000
144,000

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ACCA FR Question Bank Part 1 answers: 3: Consolidated statement of profit or loss and OCI 99

EXAMINER’S COMMENTS
Why the correct answer is none of the other options:
$132,000 deducts the unrealised profit instead of adding it on.
$176,000 omits to cancel the intra-group sales.
$140,000 calculates unrealised profit assuming ¾ of goods sold to third parties (instead of ¾
remaining in inventory).

6  $15,000
$
Subsidiary profits ($200,000 × 6/12) 100,000
Write-off of goodwill (10,000)
Additional depreciation (300,000/10 × 6/12) (15,000)
75,000

NCI @ 20% 15,000

EXAMINER’S COMMENTS
Why the correct answer is none of the other options:
$16,000: The write-off of goodwill is time apportioned in error (100 – 5 – 15) × 0.2 = 16
$12,000: The depreciation is not time apportioned in error (100 – 10 – 30) × 0.2 = 12
$35,000: The profits are not time apportioned in error (200 – 10 – 15) × 0.2 = 35.

7 $ 291000

$000
Profit attributable to the owners of the parent 284,000
Other comprehensive income: parent 4,300
Other comprehensive income: subsidiary (75% × 3,600) 2,700
Total comprehensive income attributable to the owners of the parent 291,000

Note: the consolidated statement of profit and loss and other comprehensive income will
present the following information:
$000
TCI attributable to the owners of the parent 291,000
TCI attributable to non-controlling interests (7,800 + (25% × 3,600)) 8,700
Total comprehensive income for the year 299,700

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4: Accounting for associates

1  The investor is able to participate in decisions about the dividend policies of the investee
Ownership of 15% (300/2,000) of the equity voting shares indicates that the investor has a
simple investment. The ability to direct the main operating activities of the investee and the
right to appoint a majority of the directors indicate control (a parent-subsidiary relationship).

2  $2,510,000
$000
Cost 2,600
Share of associate’s profit (800 × 9/12 × 35%) 210
Less impairment loss (300)
2,510

For group questions always double check the dates provided as the examiner likes to sneak in
mid-year acquisitions. Remember we are only entitled to the subsidiary’s profits AFTER
acquisition.

3  N is a subsidiary of X if X has the power to govern the financial and operating policies of N
L may be an associate of X, but this is not normally presumed unless X holds at least 20% of the
voting power i.e. equity shares of L.
Although X holds less than 50% of the voting power of M, there are still circumstances in which M
may be a subsidiary of X (e.g. X may have power over the Board of Directors of M).
If X has the right to appoint or remove all the directors, this suggests that P is not an associate,
but a subsidiary (because X can control P).

4  Decrease of $100,000
The loss is made up of the group share of Anerley’s post-acquisition profits of $400,000, less the
impairment loss of $500,000.
The group share of Anerley’s post acquisition profits is $2.4 million x 8/12 × 25%.

5  The original cost of the investment, plus the group share of Alcott’s post-acquisition
profits.

6  The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
 The investor has representation on the board of directors of the investee

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ACCA FR Question Bank Part 1 answers: 4: Accounting for associates 101

7  (i) only
(i) is the only correct statement
(ii) is incorrect. Non-controlling interests are affected if the subsidiary sells goods to the parent.
(iii) is incorrect. Only the group share of unrealised profit on goods supplied by the parent to an
associate is eliminated.

8 Group 1
The 50% owned in Castur Co will give significant influence as Zuckai Co will not have the power
to direct operating decisions but will be able to have significant influence over Castur Co
through being able to participate in the financial and operating decisions.
Group 2
The 15% owned in Fumitt Co will also give significant influence as no individual party will have
control or the ability to appoint 2 board members. It is important that candidates understand
the 20% holding is a rebuttable presumption and candidates need to read all of the information
provided and not merely concentrate on the % holdings given.

EXAMINER’S COMMENTS
Artles Co should be treated as a trade investment as there is neither significant influence nor
control – most candidates correctly identified this was not an associate
Bandoka Co should be accounted for as a subsidiary as Zuckai Co controls the majority of the
voting rights in the company – this was a common error as the candidates were only
considering the shares owned (40%)
Dunnatonn Co should be treated as a trade investment as despite owning 21%, the other
79% is owned by Yentee Co which gives them control. Again, candidates often got this
incorrect as they were focussing on the 21% rather than considering the wider information.
Eahnn Co will be accounted for as a subsidiary and most candidates identified this correctly.

9
$
Cost of investment (30,000 × $7.50) 225,000
Post-acquisition loss in retained earnings (($370,000-$460,000) × 30%) (27,000)
Post-acquisition increase in revaluation surplus (($70,000-$50,000) × 30%) 6,000
Impairment (40,000)
164,000

EXAMINER’S COMMENTS
Many candidates ignored the post-acquisition increase in the revaluation surplus and some
also ignored the post-acquisition loss in retained earnings. Some treated the post-acquisition
loss in retained earnings as a gain and adjusted for it the wrong way and others only wrote
off 30% of the impairment. This suggests that candidates are either not comfortable with
equity accounting or were careless in their workings.

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CLUB, GREEN AND TEE

10  $16,770,000
Fair value of net assets of Green at acquisition
$000
Equity shares 17,370
Share premium 3,470
Retained earnings 3,000
23,840
Goodwill
$000
Cost 35,610
Non-controlling interest (per question) 5,000
Fair value of net assets acquired: (23,840)
Goodwill 16,770

11  The $50,000 increase represents internally generated goodwill

If an impairment review indicates that goodwill has increased in value, the increase is deemed
to be internally generated goodwill. Internally generated goodwill is not allowed to be
recognised in the financial statements. Club will therefore not recognise the increase in goodwill
and will include goodwill in its statement of financial position at its original value.

12 $ 6530 000

Non-controlling interest
$000
At acquisition 5,000
Post-acquisition retained earnings (10,650 – 3,000) × 20%)) 1,530
6,530

13  $22,440,000
Consolidated current liabilities
Club 12,120
Green 11,280
Less intra-group sales (960)
22,440

14 $ 8573 000
Investment in associate
Acquired 3,980,000 shares out of 15,920,000 shares = 25%
$000
Cost 8,000
Add group share of post-acquisition profits (2,290 × 25%) 573
Investment at 31 March 20X3 8,573

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ACCA FR Question Bank Part 1 answers: 5: Interpreting financial statements 103

5: Interpreting financial statements

1  An increase in interest rates

Finance costs do not affect gross profit.

2  $3,104,000
Trade receivables collection period in 20X3:
3,400/34,500 × 365 = 35.9 days
Applying the 35.9 days collection period to the credit sales made in 20X4, receivables in 20X4
should be X, where:
X/63,000 × 365 = 35.9 days
Therefore X = 63,000 × 35.9/365
X = 6,196. So receivables in 20X4 should be 6,196.
Actual receivables are 9,300. Therefore, the company’s bank balance would increase by
3,104 if these “extra” receivables paid.

3  There is no requirement to calculate an earnings per share figure as it is not likely to have
shareholders who need to assess its earnings performance
A not-for-profit entity is not likely to have shareholders or ‘earnings’.

4  An asset with a fair value of $25,000 was acquired under a lease on 31 March 20X5
Is correct as it will increase debt but have no effect on equity.

5  A decision to value inventory on the average cost basis from first in first out (FIFO) basis.
Unit prices of inventory had risen during the current year
Is correct as use of average cost gives a higher cost of sales (and in turn lower operating profit)
than FIFO during rising prices.

6  Gearing in SJ has decreased due to the increase in total equity

 There may have been a bonus issue of shares during the year
The revaluation surplus has decreased, so it is possible that there has been an impairment loss,
but the movement could also have been caused by a disposal of a previously revalued asset, or
by a transfer of excess depreciation to retained earnings.
Retained earnings have increased, so SJ almost certainly did make a profit for the year, but it
was not necessarily a profit of $50 million. SJ may have paid a dividend (which would come out
of retained earnings) and there may have been other transfers to or from the retained earnings
reserve.
Long-term borrowings have fallen, so overall the company has less debt, but it is not possible to
know for certain whether $50 million has actually been repaid. If long-term borrowings include
debt instruments that are measured at amortised cost, the fall of $50 million will be the net of
the finance cost for the year and the actual cash paid.

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7  YZ may have sold its products at a discount in order to achieve a higher volume of sales
than WX
None of the other conclusions could realistically have been drawn from the information
supplied: finance costs are not included in operating profit and so do not affect the net profit
margin; there are no comparative figures for the previous year, so it is impossible to tell
whether costs of sales and/or overheads have increased for either company.

8
P/E ratio Dividend cover

Share price Earnings per share

Earnings per share Dividend per share

9  39.4%
$000
Gross profit per question 3,600
Less goods from Vantage (3,000)
Add back goods that would have been purchased from previous supplier (W) 3,500
Less management fee (400)
Adjusted gross profit 3,700

GP%: 3,700/9,400 = 39.4%

Working: goods purchased from previous supplier:
Cost to Vista/previous supplier is $2.5m ($3m × 100/120)
Therefore Vantage would have purchased goods from its previous supplier at $3.5 m ($2.5m ×
140/100)

10  Make an early payment to suppliers, even though the amount is not due

EXAMINER’S COMMENTS
The lack of numbers in the question was deliberate as it meant that candidates were
required to think of how the ratio was constructed and the way in which transactions can
influence it.
Making an early payment to suppliers would cause an equivalent decrease in both current
assets and liabilities, so numerous candidates discounted this thinking it would therefore
have no impact on the ratio. By applying simple figures to this, candidates could have seen
that it had decreased. For example, if current assets were $120,000 and current liabilities
were $100,000, this would give the original current ratio of 1.2:1. If an entity paid $20,000 to
suppliers, this would make current assets $100,000 and current liabilities $80,000, giving a
current ratio of 1.25:1.

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ACCA FR Question Bank Part 1 answers: 5: Interpreting financial statements 105

Many candidates opted for ‘make a bulk purchase of inventory’ here, thinking that the
discount would affect things. This would lead to an increase in inventory but equivalent
decrease in cash, meaning that current assets (and therefore the current ratio) was
unchanged.
Returning inventory would cause an equivalent movement in inventory and cash, again
leaving current assets unchanged.
Offering early payment discounts would actually cause a decrease in the current ratio, as the
receivables would decrease more than the cash would increase due to the discount being
offered.

11  1, 2, 3 and 4
The correct answer is 1, 2, 3 and 4, as the revaluation of a significant asset will cause all 4 ratios
to decrease. The revaluation is at the beginning of the year and will affect the depreciation for
the year and therefore operating profit:
ROCE – increased depreciation will reduce profit and capital employed will increase due to the
revaluation surplus but the denominator (including the revaluation surplus) will increase more.
Gearing – increase in equity due to the revaluation surplus will decrease the ratio as debt will
not be affected.
Operating profit margin – reduction in profit due to increased depreciation.
Asset turnover – increase in assets (PPE) due to revaluation even if the asset has one year’s
worth of depreciation.

EXAMINER’S COMMENTS
Where did candidates go wrong?
A significant number of candidates focussed on the impact of the revaluation surplus
without considering the impact of increased depreciation on the operating profit and
therefore chose 1 and 4 only. It is important that candidates have a deep understanding of
how ratios are calculated and how adjustments to the financial statements can impact the
numerator and/or the denominator. Rote learning ratios is not useful for section C where
they need to interpret these ratios.

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106 P a r t 1 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

6: Statement of cash flows

1  $517,000
$000
Profit before tax 588
Add back depreciation 79
Increase in inventories (390 – 280) (110)
Decrease in trade and other receivables (520 – 480) 40
Decrease in trade payables (310 – 230) (80)
Cash generated from operations 517

2  $98,000
$000 $000
Balance 1 January 20X7
Current tax 106
Deferred tax 27
133
Tax expense per profit or loss 122
Balance = tax paid (98)
Balance 31 December 20X7
Current tax 119
Deferred tax 38
157

3  $840,000 outflow
Leases:
$000
Balances b/f – current 480
– non-current 720
New lease 1,200
Cash repayment (balance) (840)
Balances c/f – current 600
– non-current 960

Remember to include leases payable for both > 1 year and < 1 year from the SFP to arrive at the
cash paid for the lease in the year.
The lease interest does NOT feature in this working as it relates to operating activities.

4 $ 1140 000
Property, plant and equipment:
$000
Carrying amount b/f 1,670
Revaluation (360 – 120) 240
Cash acquisition (balance) 1,140
Depreciation for period (250)
Disposal (Carrying amount) (210)
Carrying amount c/f 2,590

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ACCA FR Question Bank Part 1 answers: 6: Statement of cash flows 107

5  A bank account denominated in foreign currency

 A bank overdraft
 A fixed term deposit that matures within three months
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. An investment normally qualifies as a cash equivalent only
when it has a short maturity (e.g., of three months or less from the date of acquisition). Bank
loans other than overdrafts (which are normally repayable on demand) are part of an entity’s
financing activities.
Equity shares are excluded from cash equivalents unless they are cash equivalents in substance;
not the case here as the shares are subject to changes in fair value.

6  Inflow of $1,500,000
Shares issued for cash inflow 2,000 less dividends paid outflow 500.
Share issue:
Share Share
capital premium
$000 $000
b/f 6,000 3,000
Bonus issue (1 for 6 from share premium) 1,000 (1,000)
Issued at par for cash (balance) 2,000 nil
c/f 9,000 2,000

Equity dividends paid:

Retained earnings b/f 4,400
Profit for period 2,600
Dividends paid (balance) (500)
Retained earnings c/f 6,500

Remember that bonus issues are the issue of free shares and therefore there is no cash inflow
into the business.
These can be issued using either the share premium account or, if there is no share premium,
then via retained earnings.

7  $8.5 million
Cash flow is (in $ million):
23.4 – 14.4 b/f + 2.5 dep + 3 disposal – 2 revaluation – 4 non-cash acquisition = 8.5

8  UJ may have paid a large dividend to equity shareholders during the year
There is a net outflow from financing activities. This could be the result of repaying long-term
borrowings, but a dividend payment is also a possible explanation.
There is no information about the actual cash position or financial position of the entity, only
the cash flows during the period.
The most likely explanation of the net cash outflow from investing activities is that UJ has
purchased property, plant and equipment during the year.

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108 P a r t 1 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

AWX
9 Statement of cash flows (extract) for year ended 31 March 20X3:
Cash flows from operating activities (extract): $000
Cash generated from operations
Interest paid (127)
Income taxes paid (258)

Interest paid
$000
Balance b/fwd 99
Profit or loss 40
Balance c/fwd (12)
Interest paid 127
Income Taxes paid
$000
Balance b/fwd 218
Profit or loss – total 124
342
Tax paid (balance) (258)
Balance c/fwd 84

10
Increase in trade receivables Operating
Movement in intangible assets Operating
Movement in long-term borrowings Financing
Proceeds from sale of property, plant and equipment Investing

There were no additions or disposals of intangible assets during the year, so the decrease of
$159,000 must either be amortisation or (more probably) an impairment. Neither of these is a
cash flow. The amount of $159,000 would have been an expense in profit or loss, so it is
included in the adjustments (added back) to profit before tax in the first part of the statement.
(This is very similar to the adjustment for the depreciation expense for the year.)

11  Gain of $22,000; under operating activities

The gain is an adjustment to profit before tax. Disposal proceeds of $70,000 are included as a
cash inflow from investing activities.
Gain on disposal of property plant and equipment
$000
Net carrying amount of assets sold 70
Cash received (92)
Gain 22

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ACCA FR Question Bank Part 1 answers: 6: Statement of cash flows 109

12 $ 320000

Purchase of property, plant and equipment

$000
Balance b/fwd 4,500
Disposals (net carrying amount) (70)
4,430
Revaluation (469 – 353) 116
4,546
Depreciation for year (675)
3,871
Balance c/fwd 4,191
Total PPE purchased in year 320

13  $505,000 outflow
Repayment of long-term borrowings ($395,000 outflow) plus equity dividends paid ($110,000
outflow; see below).
Retained earnings
$000
Balance b/fwd 727
Profit for the year 284
Dividends paid (balancing figure) (110)
Balance c/fwd 901

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7: Principles and concepts

1  Completeness, neutrality and freedom from error

2  It confirms or changes previous evaluations

 Omitting it could influence decisions made by users
Relevant financial information has both predictive value (i.e. it can be used to predict future
outcomes), confirmatory value, or both. Materiality is also an aspect of relevance (information
is material if omitting it might make a difference in the decisions made by users).

3  I, II, III, and IV

All four of these measurement bases have application to assets and liabilities in financial
statements.

4  Relevance
 Faithful representation
These are the two fundamental qualitative characteristics. Verifiability and comparability are
enhancing qualitative characteristics.

5  Publishing clarifications where conflicting interpretations have developed.

Publishing an Interpretation is not part of the standard-setting process.

6  The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in current and future years.
The other three items are all changes in an accounting estimate.

7  Materiality
Materiality is an aspect of the characteristic of relevance.

8  A change in the residual value of an asset

 A loss recognised because a contingent liability has become an actual liability
A mathematical mistake is an error, not a change in accounting estimate.
A loss that is recognised on the outcome of a contingency is a change in an accounting estimate,
rather than an error.
A change from the cost model to the revaluation model is a change in an accounting policy.

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ACCA FR Question Bank Part 1 answers: 7: Principles and concepts 111

9  A change in reporting depreciation charges as cost of sales rather than as administrative

expenses

10  At the cost of an equivalent asset at the measurement date

The other three options describe historical cost, fair value and value in use.

11  General purpose financial reports cannot provide all the information that primary users
need
In practice, a large institutional investor or a lender might be able to require an entity to provide
information directly to them, for example, as a condition for making a loan.

12  The condition and location of the asset

 The principal market for the asset
Fair value is an exit price (i.e. the price received to sell an asset, rather than the price paid to
acquire an asset). An entity must base fair value on the use that would maximise the value of
the asset (highest and best use), which may be different from the way in which the asset is
actually being used.

13  Value in use

14
Historical cost Current cost
$ $
 320,000 384,000
Historical cost annual depreciation = $90,000 ((500,000 × 90%)/5 years).
After two years carrying amount would be $320,000 (500,000 – (2 × 90,000)).
Current cost annual depreciation = $108,000 ((600,000 × 90%)/5 years).
After two years carrying amount would be $384,000 (600,000 – (2 × 108,000)).

15  A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the company for any losses.
As the receivable is ‘sold’ with recourse it must remain as an asset on the statement of financial
position; it is not derecognised.

16  Applying an entity’s current accounting policy to a transaction which an entity has not
engaged in before
As it is a new type of transaction, comparability with existing treatments is not relevant.

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17  In equity: irredeemable preference shares

By definition irredeemable preference shares do not have a contractual obligation to be repaid
and thus do not meet the definition of a liability; they are therefore classed as equity.

18  The signing of a non-cancellable contract in September 20X4 to supply goods in the

following year on which, due to a pricing error, a loss will be made
 An amount of deferred tax relating to the gain on the revaluation of a property during
the current year. Tynan has no intention of selling the property in the foreseeable future
The first of these is an onerous contract and the provision for deferred tax is still required if
there is no intention to sell.

19  1 and 2

EXAMINER’S COMMENTS
It seems a number of candidates simply learn the accounting concepts, without actually
understanding them or being able to apply them.
The concept of comparability can be applied in two circumstances. First there is internal
comparability where an entity's current year results are compared with its past results. However,
comparability can also be extended to the comparison of one entity's results to that of another
entity's results (for entities of a similar size, in a similar industry sector and for the same accounting
period).
Item (1): Not all entities use the same accounting policies. In these circumstances the disclosure of
accounting policies allows users to identify when the financial statements of entities differ because
they have used different accounting policies. From this information, users may be able to make
notional adjustments (if appropriate) to achieve a form of comparability when assessing relative
performance.
Item (2): To compare current year performance to past performance, users need to be provided
with past (comparative) results.
Item (3): Entities are permitted to change their accounting policies. Also, if it were applied, this
statement would not provide comparability but rather uniformity. It is widely recognised that
uniformity is not necessarily the same as comparability because different accounting policies are
appropriate to entities that have different operating conditions.
Item (4): Assets should be depreciated over their estimated useful lives (straight-line or
reducing balance as appropriate) and clearly different assets, even of the same class, have
different lives (and perhaps also different usage patterns).
From this, items (1) and (2) are relevant to comparability and items (3) and (4) are not.

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ACCA FR Question Bank Part 1 answers: 7: Principles and concepts 113

20  Neither 1 nor 2

EXAMINER’S COMMENTS
Alternative accounting treatments for the same economic phenomenon diminishes
comparability. Comparability is not uniformity (which is not required).
Why the correct answer is none of the other options:
Unfortunately, most candidates recognised that the first statement was incorrect but
thought that comparability required uniformity. Candidates should read the question
carefully and rationalise each of the options individually

21  4 only
A legal obligation (the warranty) has been created as a result of the sales contract.
To be recognised in the financial statements, an item must meet the definition of an asset or a
liability and provide useful information to users: relevant information about the item and a
faithful representation of the item.
Item 1: The $100,000 expenditure on the health and safety training does not meet the
definition of an asset. Green Co does not control its staff (i.e. they could leave their jobs at any
time) and it is not certain that the health and safety training will produce economic benefits
(and therefore it is not an economic resource).
Item 2: The brand has been internally generated and so it cannot be faithfully represented (it
cannot be measured reliably).
Item 3: The court case is not certain to produce economic benefits and therefore it may not be
an economic resource. It may be a contingent asset which is not recognised but disclosed in the
notes to the financial statements.

22  Confirming the cash balance by conducting a physical count of cash

EXAMINER’S COMMENTS
The question provides candidates with the definition of verifiability which refers specifically
to independence. The correct answer is the only option that objectively verifies the
existence of cash.
All other options verify the asset against an internal document, e.g. a ‘list of inventory’, a
‘board minute’ and a ‘receivable statement’. Often, as in this case, the question stem
contains some guidance for candidates. It is important therefore that candidates read the
question stem and try to make the best use of any guidance provided.

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23  The economic resource can be reliably measured

The Conceptual Framework defines an asset as follows:
‘An asset is a present economic resource controlled by the entity as a result of past events.’
Therefore, the only statement that is NOT included in the definition of an asset is ‘The economic
resource can be reliably measured’.

EXAMINER’S COMMENTS
Where did candidates go wrong?
The most common options selected were either ‘The asset is a present economic resource’
or ‘The asset exists as a result of past events’. This implies that many candidates are not
familiar with the terminology from the Conceptual Framework regarding the definitions of
the elements of financial statements.
Although individual IFRS Standards may require an entity to be able to reliably measure an
asset before recognising it, this is not part of the definition of an asset.

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ACCA FR Question Bank Part 1 answers: 9: Tangible non-current assets 115

9: Tangible non-current assets

1  A deduction from the full purchase price in respect of a trade discount

 Cost of strengthening the factory floor so that the plant can be safely installed
 Cost of testing whether the plant is operating properly
Remember all directly attributable costs in bringing the asset to its present location and
condition can be capitalised.
Costs of training staff CANNOT be capitalised as it is not probable that future economic benefits
will be generated from this expense as the staff could leave the business.
Costs of advertising CANNOT be capitalised as again it is not probable that the advertising will
generate future economic benefit.

2  $750
The asset must be written down to the fair value less costs to sell as this is lower than the
carrying amount.

3 $ 750000

$000
Fair value at 1 October 20Y3 4,000
Depreciation (4,000/16) (250)
Carrying amount at 30 September 20Y4 3,750
Sale proceeds (4,500)
Profit on disposal 750

4  IV
An asset is impaired if its carrying amount is higher than its recoverable amount. Recoverable
amount is the higher of fair value less costs of disposal and value in use.

5 $ 32000

$000
Cost 440
Depreciation (440 – 120/8 × 4) (160)
280

Depreciation y/e 30/9/X9 (280 – 120/5 yrs) 32

If a question changes the useful life of an asset or increases or decreases its value, use the
following formula to calculate the correct depreciation charge in the statement of profit or loss:
Depreciation charge = Remaining carrying amount – residual value
Remaining useful life

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6  $40,000
Items I and IV are impaired.
$000
Item I (CA 250 – value in use 240) 10
Item IV (CA 420 – fair value less costs of disposal 390) 30
40

7  $175,000
The impairment loss of $700,000 (2,500,000 – 1,800,000) is allocated first to goodwill and then
to the other assets pro-rata. Therefore, goodwill is written down to zero and the remaining
$200,000 is allocated between other intangible assets and property, plant and equipment:
Other intangibles: 200,000 x 250/2,000 = $25,000
Property, plant and equipment: 200,000 x 1,750/2,000 = $175,000

8  $225,000
The total finance cost for the year ended 31 March 2X14 is $900,000 ($10 million × 9%).
As the loan relates to a qualifying asset, the finance cost (or part of it in this case) must be
capitalised (i.e. recognised as part of the cost of the asset).
Capitalisation begins when expenditure is being incurred (1 April 20X3) and must cease when
the asset is ready for its intended use (31 January 20X4); in this case a 10-month period.
However, interest cannot be capitalised during a period where development activity is
suspended; in this case, the month of June 20X3. Thus only nine months of the year’s finance
cost can be capitalised = $675,000 ($900,000 × 9/12).
The remaining three months’ finance costs of $225,000 must be expensed.

9  $219,000
$000
Loss on investment property to 30 June (2,100 – 1,900) 200
Depreciation of office building (1,900/25 years × 3/12) 19
When a property is transferred from investment property carried at fair value to owner-
occupied property, its deemed cost for subsequent accounting is its fair value at the date of the
change in use.
When a property is classified as an investment property the gains and losses in fair value are
taken to the statement of profit and loss and no depreciation is charged in the period. Once the
property is returned to use by the business it has to be depreciated like any other item of
property, plant and equipment.

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10 $ 4000

$
Cost at 1 January 20X4 30,000
Depreciation for 20X4 and 20X5 (30,000 x 2/5) (12,000)
Carrying amount at 31 December 20X5 18,000
Impairment (6,000)
Recoverable amount at 31 December 20X5 12,000
Depreciation for 20X6 (12,000/3) (4,000)
Carrying amount at 31 December 20X6 8,000

When an impairment loss is reversed, the carrying amount of the asset cannot be increased
above the lower of its recoverable amount and its depreciated carrying amount had no
impairment loss been recognised. Although the recoverable amount has increased to $15,000, if
the impairment loss had not been recognised the carrying amount would only have been
$12,000 (18,000 less depreciation of 6,000). Therefore the credit to profit or loss is $4,000
(12,000 – 8,000).

11 $ 372500

$
Cost at 1 April 20X7 800,000
Less government grant (320,000)
480,000
Depreciation ((480,000 – 50,000)/4) (107,500)
Carrying amount at 31 March 20X8 372,500

12  $17,785
$
Cost 1 October 20X9 100,000
Depreciation 1 October 20X9 to 30 September 20Y4 (100,000 × 5/10) (50,000)
Carrying amount 50,000
fair value less costs of disposal value in use
30,000 32,215 (8,500 × 3.79) (is higher)
the recoverable amount is therefore $32,215
$
Carrying amount 50,000
Recoverable amount (32,215)
Impairment to profit or loss 17,785

13  $154,545
Goodwill should be written off in full and the remaining loss is allocated pro rata to property
plant and equipment and the product patent.
B/f Loss Post loss
$ $ $
Property, plant and equipment 200,000 (45,455) 154,545
Goodwill 50,000 (50,000) nil
Product patent 20,000 (4,545) 15,455
Net current assets (at NRV) 30,000 nil 30,000
300,000 (100,000) 200,000

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14  $36.8 million
At 30 September 20Y4:
Carrying amount = $37.5 million (45,000 – 6,000 b/f – 1,500 for 6 months; no further
depreciation when classified as held for sale).
Recoverable amount = $36.8 million ((42,000 × 90%) – 1,000).
Therefore, included at $36.8 million (lower of carrying amount and fair value less cost to sell).

15  The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount
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.

16  $214,600
Is the lower of its carrying amount ($217,000) and recoverable amount ($214,600) at 31 March
20Y5.
Recoverable amount is the higher of value in use ($214,600) and fair value less (any) costs of
disposal ($200,000)).
Carrying amount = $217,000 (248,000 – (248,000 × 12.5%))
Value in use is based on present values = $214,600

17  15,625
Six months’ depreciation is required on the building structure and air conditioning system.
$000
Land (not depreciated) 2,000
Building structure (10,000 – (10,000/25 × 6/12)) 9,800
Air conditioning system (4,000 – (3,500/10 × 6/12)) 3,825
15,625

18 $ 700000

Six months’ depreciation to the date of the revaluation will be $300,000 (12,000/20 years ×
6/12); six months’ depreciation from the date of revaluation to 31 March 20X5 would be
$400,000 (10,800/13.5 years remaining life × 6/12). Total depreciation is $700,000.

19  A government grant related to the purchase of an asset should be recognised in profit or

loss over the life of the asset
 Free marketing advice provided by a government department is excluded from the
definition of government grants

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20  $775,000
The property would be depreciated by $25,000 (800,000/16 x 6/12) for six months giving a
carrying amount of $775,000 (800,000 – 25,000) before being classified as held-for-sale. This
would also be the value at 31 March 20X5 as it is no longer depreciated and is lower than its fair
value less cost to sell.

21  $225,000
Total $7.6 m less land element $3.1m = buildings $4.5 m.
Depreciation = $4.5m ÷ 20 years = $225,000.

22  I only
The recoverable amount of an asset is the higher of its value in use and its fair value less costs of
disposal. If value in use is higher than carrying amount, that means that recoverable amount is
higher than carrying amount and that therefore the asset is not impaired.
Certain intangible assets must be tested for impairment annually. These are goodwill acquired
in a business combination, intangible assets with indefinite lives, and intangible assets not yet
available for use. Other intangible assets need only be tested for impairment if there is any
indication that they may be impaired.

23  Dr Property, plant and equipment $10,000; Dr Depreciation expense $20,000: Cr Liability

$30,000
At 1/1/X7 At 31/12/X7 Adjustment
(with grant) (without grant)
$ $ $
Property, plant and equipment (net cost/cost) 60,000 90,000
Less: Depreciation ($10,000/$15,000 p.a.) (10,000) (30,000) Dr 20,000
Net carrying amount 50,000 60,000 Dr 10,000

Liability (to repay grant) 0 30,000 Cr 30,000

EXAMINER’S COMMENTS
The liability at 31 December 20X7 of $30,000 is clearly not an issue as all four alternatives
recognise this balance as being the grant due for repayment.
The repayment of the grant should be treated as a change in accounting estimate. We must
increase the cost of the asset as we can no longer offset the grant and there will be a
resulting change in depreciation.
Without the grant the cost of the asset would have been $90,000 and depreciation would
have been $15,000 a year ($90,000/6 years).
The carrying amount at 31 December 20X7 should be $60,000 ($90,000 cost - $30,000
accumulated depreciation).
We are required to increase the carrying amount by $10,000 debit to restore the plant's
carrying amount from its opening carrying amount ($50,000) to the corrected carrying
amount ($60,000).

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The $20,000 ($30,000 - $10,000) depreciation expense is the charge to profit or loss to
reflect the amount of extra depreciation that should have been charged for the first two
years.

24  There is no requirement for an entity to revalue property on an annual basis

EXAMINER’S COMMENTS
Revaluations should be made with "sufficient regularity" to ensure the carrying amount does
not differ materially from the fair value. There is therefore no automatic requirement for an
annual revaluation of non-current assets.
Why the correct answer is none of the other options.
"The entire class" to which an asset belongs is required to be revalued. Examples of separate
classes are land and buildings (property) and machinery (plant). An entity could revalue its
property, but does not have to also revalue its plant.
Transferring excess depreciation from the revaluation surplus to retained earnings is an
option. The excess depreciation on the revaluation surplus may be transferred annually OR
on the derecognition of the asset.
Any asset with a finite life (which includes the building component of property) should be
depreciated on a systematic basis over its useful life.
Future candidates are advised to read the question carefully before answering it.

25  $600,000

EXAMINER’S COMMENTS
A revaluation deficit should be recognised in the statement of profit or loss (unless the asset
has been revalued upwards before which, in this case, it has not).
As the fair value of the Head Office is given as $10,800,000 there is a revaluation surplus on
this asset of $600,000 (10,800,000 - 10,200,000) and this should be credited to the
revaluation surplus and recognised as other comprehensive income
As the fair value of the factory is $7,500,000 there is a revaluation deficit on this asset of
$375,000 (7,875,000 - 7,500,000) and this should be written off in the statement of profit or
loss.
Why the correct answer is none of the other options:
$0 is incorrect as it suggests no adjustments. However, the question states the entity has
decided to adopt the revaluation model for the first time and so surpluses should be
recognised.
$225,000 (the most popular choice) is incorrect as it nets off the revaluation surplus
($600,000) with the deficit ($375,000).
$375,000 is incorrect as it is the deficit only (which would not be recognised in the
revaluation surplus).

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Future candidates need to be aware that the full breadth of the syllabus will be examined in
both sections A and B of the exam and that, over several diets, most of the examinable
standards will be tested in some depth.

26 $60,000 / (5 years × 12 months) = $1,000 per month

So, Pootle Co should have only recognised $4,000 ($1,000 × 4 months) of income in the
statement of profit or loss for the year ended 31 December 20X4, with the remaining $56,000
recognised as deferred income in the statement of financial position.
The correcting journal entry required is therefore:
Account name Value
Debit Other income $56,000
Credit Total deferred income $56,000

EXAMINER’S COMMENTS
Where did candidates go wrong?
There are effectively three elements that candidates must do correctly here:
(1) Select the correct accounts to adjust;
(2) Identify which account should be debited and which should be credited; and
(3) Calculate the amount required for the correcting journal
Other income must be adjusted as too much income has been recognised in the statement
of profit or loss. To reduce a credit account such as other income, it must be debited.
Candidates should realise that no adjustment is required to bank as this has already been
accounted for correctly on receipt of the cash. Therefore, they must establish that it is
deferred income (liability) that should be adjusted by crediting total deferred income rather
than adjusting total accrued income (asset).
The value to be included in the journal will be the same for both debit and credit.
The values available to be selected were:
(1) $4,000 – this is the amount of income that should have been recognised, rather than
the $56,000 adjustment required to correct the error
(2) $48,000 – this figure meant that a full year’s worth of income was recognised, rather
than just four months
(3) $56,000 – this is the correct response and means that only four months of income are
recognised
(4) $57,000 – this figure recognised three months of income rather than four months

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27  Recognise three months of grant income as other income in the statement of profit or
loss
 Deduct three months of grant income from the factory rental expense in the statement
of profit or loss
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance allows for
two alternative presentations of grants related to income – either separately or under a heading
such as ‘Other income’ or they can be deducted from the related expense.

EXAMINER’S COMMENTS
Why the other options are not correct
‘Recognise the grant in full as other income in the statement of profit or loss’ and ‘Deduct
the full amount of the grant from the factory rental expense in the statement of profit or
loss’ recognise the full amount of the grant however the question sets out the requirements
of the grant and that includes the requirement that the factory must be rented – this only
occurred on 1 July 20X9 and therefore the students should have time apportioned and only
recognised in profit or loss 3 months of the 12 month grant.
‘Deduct the full amount of the grant from the cost of factories in the statement of financial
position’ would have been correct if it was a capital grant however Millhouse Co were
renting not purchasing a factory. This was a common error.

DELTA
28  Once an asset has been revalued, a further revaluation must be carried out whenever the
carrying amount of the asset differs significantly from its fair value
 The estimated useful life of an asset should be reviewed annually irrespective of whether it
has been revalued
Where an item of property, plant and equipment is revalued, the whole class of assets to which
it belongs must also be revalued. This is to prevent what is known as ‘cherry picking’ where an
entity might only wish to revalue items which have increased in value and leave other items at
their (depreciated) cost.
Entities are not required to make an annual transfer for ‘excess depreciation’. They can choose
to do so, or they can transfer all of the relevant surplus at the time of the asset’s disposal.

29  $25,600
$000
As at 31 March 20X3
Revaluation surplus
Revaluation of item B at 1 April 20X2 (112,000 – 80,000) 32,000
Transfer to retained earnings (32,000/5 years) (6,400)
Balance at 31 March 20X3 25,600

The impairment loss of $20,000 (180,000 – 160,000) on Item A must be recognised in profit or
loss; it cannot be offset against the gain on Item B.

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30  $32,000
160,000/5 = $32,000

31 $ 8000 000 loss

See working below.

32  The cost of routine maintenance and servicing of the item

The other ‘subsequent costs’ all improve or enhance the economic benefits associated with the
plant, or, in the case of the major overhaul, are unavoidable if the entity is to continue to
operate the plant.

Workings (figures in brackets in $000): for information only

Item A Item B
$000 $000
Carrying amounts at 31 March 20X2 180,000 80,000
Balance = loss to statement of profit or loss (20,000)
Balance = gain to revaluation surplus 32,000
Revaluation on 1 April 20X2 160,000 112,000
Depreciation year ended 31 March 20X3
(160,000/5 years) (32,000) (22,400) (112,000/5 years)
Carrying amount at 31 March 20X3 128,000 89,600
Subsequent expenditure capitalised on
1 April 20X3 nil 14,400
104,000
Depreciation year ended 31 March 20X4
(unchanged) (32,000) (26,000) (104,000/4 years)
78,000
Sale proceeds on 31 March 20X4 (70,000)
Loss on sale (8,000)
Carrying amount at 31 March 20X4 96,000 nil

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10: Intangible assets

1  $63,125
$
Write off to 1 February 20X4 to 31 March 20X4 (2 × $30,000) 60,000
Amortisation 150,000 (i.e. 5 × 30,000)/4 years × 1/12 3,125
63,125

Development expenditure can only be capitalised if it meets ALL of the PIRATE criteria. In this
question it is from 1 April 20X4 that Resources (the “R” in the PIRATE criteria) are available to
complete the project to give it certainty that it will be completed and therefore it is from then
that the costs can be capitalised.
Therefore, 5 months of costs (1 April through to 31 August) are capitalised = $150,000.
Amortisation commences when the asset is READY for use. In this question this is when the
material goes into production (1 September), giving just one month of amortisation this period.

2  GHK spent $12,000 researching a new type of product. The research is expected to lead
to a new product line in three years’ time.

3  $65,000 spent on developing a special type of new packaging for a new energy-efficient
light bulb. The packaging must be expected to be used by M for many years and is
expected to reduce M’s distribution costs by $35,000 a year
Research costs must be written off as an expense so this cannot be correct
To meet the capitalisation criteria, the development must be technically and economically
viable (which rules out both the first and third options).

4  $88,000
$
Write off to 1 January 20X4 to 28 February 20X4 (2 × $40,000) 80,000
Amortisation 160,000 (i.e. 4 × 40,000)/5 years × 3/12 (March to June) 8,000
88,000

Amortisation will commence on 1 July and will cover the 3 month period for July, August and
September.

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5
True False
All intangible assets must be carried at amortised cost or at an  
impaired amount; they cannot be revalued upwards
The development of a new process which is not expected to  
increase sales revenues may still be recognised as an intangible
asset
Expenditure on the prototype of a new engine cannot be classified  
as an intangible asset because the prototype has been assembled
and has physical substance
Impairment losses for a cash generating unit are first applied to  
goodwill and then to other intangible assets before being applied to
tangible assets

A new process may produce benefits (and therefore be recognised as an asset) other than
increased revenues, e.g. it may reduce costs.

EXAMINER’S COMMENTS
It seems most candidates assumed that, because the process would not generate additional
sales revenues, it could not deliver future economic benefits (the core definition of an asset,
intangible or otherwise). This is not the case, many development processes are intended to
save costs, such as new cheaper and better materials or more efficient production methods.
These too can deliver future economic benefits and so can be capitalised (subject to other
criteria being favourable).
The most frequent incorrect answer was the final option (the application of impairment
losses), followed by penultimate option (the prototype). After applying impairment losses
to goodwill, there is no distinction between intangible and tangible assets, they are both
written down pro rata (subject to other factors). With the penultimate option, candidates
did not seem to realise that it is the technology involved in the prototype that is the real
asset, not the physical components of it.

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6  $96,000

EXAMINER’S COMMENTS
The licence is recognised at cost less two year's amortisation ($100,000 – $40,000
[100,000/5 × 2] = $60,000.
The trademark is recognised at cost less one year's amortisation ($40,000 – 4,000
[40,000/10] = $36,000.
The concrete replica would be separately recognised as a part of property, plant and
equipment (tangible assets).
The customer list would not be recognised as an asset as it is not possible to distinguish this
from the costs of developing the business as a whole and, at the reporting date, there is no
transaction to say it is probable the expected future economic benefit (of $15,000) will flow
to Pink Co.
An answer of $124,000 incorrectly includes the concrete representation at cost less one
year's depreciation ($30,000 - $2,000 [30,000/15] = $28,000); an answer of $111,000
incorrectly includes the customer list at $15,000 and an answer of $139,000 incorrectly
includes both the concrete representation and the customer list.

7  $400,000
The staff training is not an asset because an employer does not control its employees; they may
choose to leave the company. An asset is a present economic resource controlled by the entity.
As the staff training is not an asset, $500,000 should be charged to profit or loss. Because the
second instalment of the government grant is virtually certain then the full amount of $100,000
is also recognised in profit or loss (it can be offset against the training costs).

EXAMINER’S COMMENTS
Why is the correct answer none of the other options?
 $150,000: Staff training costs (treated as an intangible asset amortised over 2 years)
$500,000/2 years = $250,000 less $100,000 (revenue grant received and receivable)
 $200,000: Staff training costs (treated as an intangible asset amortised over 2 years)
$500,000/2 years = $250,000 less $50,000 (revenue grant received
 $450,000: Total staff training costs $500,000 less $50,000 (revenue grant received)

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ACCA FR Question Bank Part 1 answers: 10: Intangible assets 127

8
Intangible Assets
$3m paid to acquire the brand name Fast Designs
$3m spent on a licence to operate a production facility for six years
$1m spent on the construction of a product prototype before its launch
$2m paid as goodwill when acquiring Unique Co

The other answers are incorrect for the following reasons:

 $10m brand developed by New Designs Co – internally developed and therefore
capitalisation is prohibited
 $2m advertising campaign – this expenditure cannot be controlled therefore it does not
meet the definition of an asset
 $2.5m spent on equipment – this may be a tangible asset but it is definitely not an
intangible asset
 $1.5m staff training – this expenditure cannot be controlled therefore it does not meet
the definition of an asset

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11: Preparation of single company accounts

DFG

1 $ 894 000
Cost $948,000 less accumulated depreciation $54,000
Depreciation: Land and buildings $000
Charge for year 948 – 248 = 700 × 3% = 21
Balance b/fwd 33
Balance c/fwd 54

2 $ 629 000

EXAM SMART
The change in the useful life of the plant and equipment is a change in an accounting estimate,
not a change in an accounting policy, so it is applied prospectively (no prior year adjustment).

Cost of sales per T.B. $554,000 + plant and equipment depreciation $75,000.
Depreciation: Plant and equipment $000 $000
Cost balance b/f 480 – 120 360
Year’s depreciation 360 × 12.5% = 45

P&E with revised UEL

Carrying amount at 1 April 20X7 (per question) 60
Annual depreciation (over two years) 30

Year’s depreciation P&E 45 + 30 = 75

3 Statement of profit or loss for the year ended 31 March 20X8 (extract):

$000
Profit from operations
Finance cost (14)
Profit before tax
Income tax expense (62)
Profit for the period

Finance cost
$000
Due for year (280 × 5%) 14

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Income tax expense

$000
Last year adjustment 10
Current year 52
62

4  $176,000
$000 $000
Current liabilities
Trade payables 61
Bank overdraft 56
Tax payable 52
Interest payable (280 x 5% - 7) 7
Total current liabilities 176

EXAM SMART
When working through the trial balance it is important to look out for situations where an
interest accrual is required. Where you see borrowings you should calculate the annual
interest expense based on the percentage given and compare it to the finance cost. If there
is a difference, then an accrual is needed. This adjustment is tested frequently in exams but
is not always spotted by candidates.

5  Amortisation $9,000 and impairment loss $4,000

EXAM SMART
Notice that the trial balance only includes amortisation of the patent up to 1 April 20X7. The
impairment review was carried out at 31 March 20X8, so remember to include the
amortisation charge for the current year in the carrying amount.
The patent was purchased on 1 April 20X4 (three years ago) so the charge for the current
year must be $9,000 (27,000/3).

An impairment occurs where the asset’s carrying amount is more than the higher of its value in
use and its fair value less costs of disposal. The patent’s carrying amount at 31 March 20X8,
$54,000 (after annual amortisation of $9,000) is more than the higher of its value in use of
$50,000 and its fair value $47,000. Therefore, an impairment has occurred and the patent must
be written down by $4,000 to $50,000.
Patent
$000
Balance b/fwd – cost 90
– amortisation 27
63
Annual amortisation to 31 March 20X8 9
Carrying amount 31 March 20X8 54
Value in use 50
Impairment 4

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12: Leasing

1 $ 14270 000
The non-current liability is the amount payable at 30 September 20X5.
Workings
$’000
Liability at start of lease (present value of future lease payments) 26,500
Interest 8% 2,120
Payment 30 September 20X4 (8,000)
Lease liability 30 September 20X4 20,620
Interest 8% 1,650
Payment 30 September 20X5 (8,000)
Lease liability 30 September 20X5 14,270

Initial double entry

Dr Right-of-use asset (26,500, + 3,000) $29,500,000
Cr Lease liability (PV of future lease payments) $26,500,000
Cr Cash $3,000,000

2  $95,760
The asset should be depreciated from the start of the lease to the earlier of the end of its useful
life or the end of the lease term, therefore ‘cost’ of $119,700 less depreciation of $23,940
(119,700/5).

3  At the commencement date, the lease term is twelve months or less

 The underlying asset or assets being leased are individually of low value

EXAMINER’S COMMENTS
The most common error was answer $108,000 which simply treated both lease payments as
the annual charge.
Selecting the incorrect answer of $121,590 meant a candidate had treated the lease of plant
and the lease of excavation equipment (a short-term lease) correctly in principle, but forgot
to time apportion the short-term lease (which would give $103,590 + $18,000 =$121,590).
The last incorrect answer of $126,090 meant the candidate, again understood the principles
correctly, but had treated the $90,000 lease payment in respect of the lease of plant as
occurring at the end of the year (in arrears) rather at the beginning of the lease (in advance).
Thus the finance charge would have been calculated as $37,530 ($375,300 × 10%) instead of
$28,530 ((375,300 - 90,000) × 10%) giving an answer $9,000 more than the correct answer.
Choosing either of these two options meant that although the candidate got most of the question
correct, neither gained any marks which is a feature of multiple choice questions in general.

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ACCA FR Question Bank Part 1 answers: 12: Leasing 131

4  $117,090
Rental of excavation equipment $13,500 (18 × 9/12)
Depreciation of leased plant $75,060 (375,300/5 years) *
Finance cost $28,530 (285,300 × 10%)
Total $117,090
*Note: asset value = 285,300 + 90,000 = 375,000

5  $866,325

EXAM SMART
Notice here that the question asks for the total charge to profit or loss. This is made up of
two elements:
 depreciation of the asset; and
 a finance charge relating to the lease liability

$
Depreciation (4,657,500 + 37,500) ÷8 years 586,875
Finance charge (6% × 4,657,500) 279,450
Total expense in SOPL 866,325

The amount recognised as a right-to-use asset includes any initial direct costs (directly
attributable costs/incremental costs of obtaining the lease).

6  $13,588
Depreciation for the year: $100,650/10 = $10,065
Finance cost for the year: $100,650 × 8% = $8,052
Total charge for the year: $10,065 + $8,052 = $18,117
1 April – 31 December 20X0 = 9 mths so 9/12 × $18,117 = $13,588

EXAMINER’S COMMENTS
Why the correct answer is none of the other options.
$11,250 is 9/12 x $15,000. This option uses the lease repayment as the basis of the
statement of profit or loss charge. It therefore fails to recognise that the asset has, in
substance, been purchased and financed by a loan.
$6,038 is 9/12 x $8,052 and so recognises the finance cost only, thereby ignoring the
depreciation.
$7,549 is 9/12 x $10,065 and so recognises the depreciation only, thereby ignoring the
finance cost.
Future candidates are advised to read the question carefully before answering it.

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132 P a r t 1 a n s w e r s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

13: Revenue and inventory

1  $42,500
$
A (2,000 × $10) (cost) 20,000
B (1,500 × $12 - $5) (NRV) 10,500
C (1,000 × $14 - $2) (NRV) 12,000
42,500

Remember: inventories must be valued on a line-by-line basis, at the lower of cost and NRV.

2  $600
Cost $2.20
Selling price $3.50
Repair costs $1.50
Net realisable value $2.00
Use lower of cost and net realisable value = $2.00 × 300 units = $600

3  At fair value less costs to sell

4  $1,200 profit
Revenue of $3,000 (500 × 6 months) less costs of $1,800 (300 × 6 months). The cash received is
irrelevant in determining profit.

5  Debit Cash $75,000; Credit Deferred revenue $75,000

At 30 September 20X4, GY had not yet delivered the goods to the customer (i.e. GY had not yet
satisfied its performance obligation under the contract). Therefore, no sales revenue should be
recognised.

6  Debit Cash $6,000; credit Revenue $1,000 and credit Deferred income $5,000
Under this contract, the performance obligation is satisfied over time. The customer
simultaneously receives and consumes the benefits as the performance takes place. CF has only
provided services for one month, therefore only $1,000 can be recognised as revenue.

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ACCA FR Question Bank Part 1 answers: 13: Revenue and inventory 133

7  $64,976
Revenue for year ended 31 December 20X5 $
Equipment (144,000 × 20,000/164,000) 17,561
Internet services ((144,000 × 144,000/164,000) × 9/24) 47,415
64,976

Stand-alone selling prices: $

Equipment 20,000
Internet services (24 × $6,000) 144,000
164,000

8  Year ended 30 April 20X5 $Nil; Year ended 30 April 20X6 $1,850,000
This is a bill-and-hold arrangement. Mechanic recognises revenue for the machine and the
spare parts on 30 September 20X5, the date on which it has performed its obligations under the
contract and on which control of both the machine and the spare parts passes to the customer.

9
Revenue recognised over time

The customer simultaneously receives and The entity’s performance creates an asset that
consumes the benefits provided by the entity’s the customer controls during the period of the
performance over the period of the contract contract

Revenue recognised at a point in time

The customer has the significant risks and The entity does not have an enforceable right to
rewards of ownership of the asset payment for performance completed to date

10  $20.9 million
Amber acts as a principal, not as an agent. Amber’s performance obligation is to provide theatre
tickets that give customers the right to see plays and other entertainments, even though it is
not directly responsible for providing the entertainments themselves. Amber bears the risk of
purchasing the tickets (it cannot return them if it cannot sell them) and is free to set whatever
price it chooses. The 10% added to the cost of the tickets is not commission, but a profit margin.

11  $15,000
An entity should recognise the incremental costs of obtaining a contract as a contract asset if it
expects to recover those costs. Incremental costs are costs that would not have been incurred if the
entity had not won the contract. The legal fees are not incremental costs.

12  Travel expenses that are rechargeable to the customer under the terms of the contract
General and administrative costs should normally be recognised as expenses when they are
incurred. The cost of computer hardware is recognised as property, plant and equipment and
depreciated. The initial design costs cannot be recognised as a contract asset because the entity
does not expect to recover them.

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134 P a r t 1 a n s w e r s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

13  Overs is responsible for insuring the vehicles while at its premises

GH (the ‘seller’) cannot recognise the revenue from the sale of the vehicles unless Overs has
obtained control of the vehicles.
The other factors all indicate that GH Cars retains control of the vehicles and that Overs holds
the vehicles under a consignment arrangement:
 Overs is free to return any vehicle free of charge within six months. This suggests that
Overs does not have an unconditional obligation to pay for the vehicles.
 GH Cars, by setting a mileage limit, is still effectively in control of the vehicles.
 Legal title remains with GH Cars, hence should a dispute arise GH Cars should be able to
recover the vehicles.

14  Sales of $150,000 on 30 September 20X4. The amount invoiced to and received from the
customer was $180,000, which includes $30,000 for ongoing servicing work to be done
by Repro over the next two years.
Although the invoiced amount is $180,000, $30,000 of this has not yet been earned and must
be deferred until the servicing work has been completed.
Agency sales: only the commission should be included in revenue.
Proceeds from the sale of motor vehicles is not included in revenue because it does not arise
from the ordinary activities of the entity.
Sales of $200,000 to an established customer: the fair value of the amount receivable is less
than $200,000 because the consideration is deferred (the amount receivable should be
discounted to its present value).

15 $ 200000

The contract is 40% complete (1,600/(1,600 + 2,400)).

At 30 September 20X4 the revenue recognised would be $2,000 (5,000 × 40%).
Therefore the contract asset (amount due from the customer) would be:
$000
Revenue recognised to date 2,000
Less amounts invoiced to date (1,800)
Contract asset 200

16  $970,000
The normal selling price of damaged inventory is $300,000 (210/70%).
This will now sell for $240,000 (300,000 × 80%), and have a NRV of $180,000 (240 – (240 ×
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).

17 $24,150
At 31 March 20X5, the deferred consideration of $12,650 would need to be discounted by 10%
for one year to $11,500 (effectively deferring a finance cost of $1,150). The total amount
credited to profit or loss would be $24,150 (12,650 + 11,500).

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ACCA FR Question Bank Part 1 answers: 13: Revenue and inventory 135

EXAMINER’S COMMENTS
At 31 March 20X5 (one year after the initial sale), the deferred consideration of $12,650
would need to be discounted by 10% for one year to $11,500 (effectively deferring a finance
cost of $1,150). The total amount credited to profit or loss would be $24,150 (12,650 +
11,500 or 25,300 – 1,150).
Over half of candidates arrived at $23,105 as their (incorrect) answer which discounted the
finance for two years (but only one year remained at 31 March 20X5). The other possible
explanation of this error is that this figure of £23,105 is the sales revenue to be reported, but
the question asked for the total amount credited to profit and loss (which must include the
interest receivable for one year). The distracters of $23,000 and $20,909 discount the whole
of the proceeds (rather than half) for one year and two years respectively

18  Inventory FIFO/PPE Cost model

EXAMINER’S COMMENTS
FIFO would give a lower cost of sales than WAC and therefore higher profits and profitability
ratios (such as gross and operating profit margins).
The PPE cost model would give lower depreciation charges than the revaluation model and
therefore higher profits and lower capital employed (both combining to give a higher return
on capital employed).

19  $14,900
The correct answer is calculated as follows:
Cost (given in question) $14,900.
NRV = Realisable value (selling price) less costs of completion less costs to make the sale
100 units × ($166 – $13 – ($166 × 2% = $3.32)) = $14,968.
Therefore, cost is lower and the correct answer is $14,900.

EXAMINER’S COMMENTS
Where did candidates go wrong?
The most common error was to add the costs to complete (100 × $13) to the cost to produce
and therefore choose $16,200.

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136 P a r t 1 a n s w e r s : 1 4 : F i n a n c i a l i n s t r u m e n t s ACCA FR Question Bank

14: Financial instruments

1  Shares are a non-current liability; dividend is a finance cost in profit or loss

If preference shares are redeemable they are classed as a liability as they have similar
characteristics to that of debt. The dividend paid to these shareholders is classed as interest in
the statement of profit and loss.
If the preference shares are irredeemable they are classed as equity and the dividend paid is
shown in the statement of changes in equity and deducted from retained earnings as this is an
appropriation of profit.

2  $1,888,000
$000
Initial cost (200 × $10) 2,000
Less transaction costs (193)
Carrying amount at 1 April 20X7 1,807
Finance cost (10%) 181
Cash (2,000 × 5%) (100)
Carrying amount at 31 March 20X8 1,888

For an amortised cost working remember to ADD the effective interest to and DEDUCT the
coupon rate x principal amount to the b/f liability to arrive at the c/f liability.
For financial assets and liabilities held for the long term remember to add transaction costs to
the asset and deduct from the liability.

3  At fair value through other comprehensive income

This investment meets the two conditions for being classified and measured at fair value
through other comprehensive income:
 It is held within a business model whose objective is achieved by both collecting
contractual cash flows and by selling financial assets; and
 The contractual terms give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding.

4 Equity Non-current liability

$000 $000
 810 9,190
Discount Discounted
Year ended 30 September Cash flow rate cash flows
$’000 at 8% $’000
20X4 500 0.93 465
20X5 500 0.86 430
20X6 10,500 0.79 8,295
Value of debt component 9,190
Difference – value of equity option component 810
Proceeds 10,000

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ACCA FR Question Bank Part 1 answers: 14: Financial instruments 137

5  Long-term borrowings
 Trade receivables
Financial instruments consist of: cash; equity instruments; contractual rights to receive cash;
and contractual obligations to deliver cash.
Physical assets (inventories and property, plant and equipment), and intangible assets are not
financial instruments. They can be used to generate cash inflows, but do not give rise to the
right to receive cash.

6  The initial double entry to record this transaction would be

Dr Cash $13.5m
Cr Liability $13.5m
The factor is able to recover the cash advance if the customer does not pay after 6 months
(factoring arrangement with recourse). This means that Melia Co has not transferred the risks
and rewards of ownership and should not remove the receivable from its statement of financial
position.
The cash advance should be recognised as a liability as the substance of the arrangement is akin
to a loan secured on the receivables balance. The administration fee is a cost to Melia Co and
should be recognised as an expense.

7  $65,250
9,000 shares × $7.25 = $65,250
Transaction costs should not be added to the fair value of an asset on subsequent
measurement.
The other answers all either include transaction costs ($65,250 + $9,000 = $74,250) or deduct
selling costs (9,000 shares × (96% × $7.25) = $62,640) or use cost as opposed to fair value
((9,000 shares × $6.40) + $9,000 = $66,600).

PINGWAY
8  A contract to deliver cash or another financial asset to another entity
 A contract to exchange financial instruments with another entity under conditions which are
potentially unfavourable
A contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities is an equity instrument.
An equity instrument of another entity and a contract to exchange financial instruments with
another entity under conditions which are potentially favourable are both financial assets.

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138 P a r t 1 a n s w e r s : 1 4 : F i n a n c i a l i n s t r u m e n t s ACCA FR Question Bank

9 $ 8674 000

EXAM SMART
Common mistakes in this type of calculation include:
 projecting the cash flows using an interest rate of 8% (rather than 3%)
 using a discount factor of 3% (rather than 8%)

Working (figures in brackets in $000)

Cash flows Factor at 8% Present value
$000
Year 1 interest 300 0.93 279
Year 2 interest 300 0.86 258
Year 3 interest and capital 10,300 0.79 8,137
Total value of debt component 8,674
Proceeds of the issue 10,000
Equity component (residual amount) 1,326

10  Financial assets held within a business model whose objective is to collect contractual cash
flows
 Financial liabilities other than those held for trading

11  $4,000,000
$000
On initial recognition 40,000
Interest @ 10% 4,000
Less : interest paid at 8% (3,200)
Carrying amount c/f 40,800

12  DR Financial asset $12,240,000

CR Bank $12,240,000
Initial cost = Price paid + Acquisition costs = $12,000,000 + $240,000 = $12,240,000

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ACCA FR Question Bank Part 1 answers: 15: Provisions and events after the reporting period 139

15: Provisions and events after the reporting period

1 $ 500000

$1,000,000 × discount rate at 8% in nine years (0.500) = $500,000

Alternative calculation: 463 × 1.08 = 500

2
Adjusting Non-
adjusting
WDC was notified on 5 November 20X7 that one of its customers  
was insolvent and was unlikely to repay any of its debts. The balance
outstanding at 30 September 20X7 was $42,000
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 20X7 for damages awarded against it of
$22,000. On 29 October 20X7 the court awarded damages of
$18,000
On 5 October 20X7 a serious fire occurred in WDC’s main production  
centre and severely damaged the production facility.
The year-end inventory balance included $50,000 of goods from a  
discontinued product line. On 1 November 20X7 these goods were
sold for a net total of $20,000.

The insolvency, the legal claim and the sale of inventory all provide evidence of conditions that
existed at the end of the reporting period, so these are adjusting events.

3  Disclose the contingent liability; do not disclose the contingent asset

A contingent liability is disclosed unless the likelihood of an outflow of economic benefits is
remote. A contingent asset is only disclosed if an inflow of economic benefits is probable.

4 $ 32500

5% × $500,000 + 15% × $50,000 + 80% × $nil. Where the provision relates to a large population
of items, it should be measured by calculating the ‘expected value’.

5  A property valuation that showed that the property was impaired at the year-end
 The insolvency of a customer who owed a debt at the year-end which is still outstanding
Both these provide evidence of conditions that existed at the reporting date. The other two
events are indicative of conditions that arose after the reporting period.

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140 P a r t 1 a n s w e r s : 1 5 : P r o v i s i o n s a n d e v e n t s a f t e r t h e r e p o r t i n g p e r i o d ACCA FR Question Bank

6  Neither item (i) nor item (ii)

Both items are non-adjusting events.

7  (ii) and (iii)

Adjusting events provide evidence of conditions that existed at the end of the reporting period.

8
Item (i) Item (ii) Item (iii)
 Disclose Adjust Disclose

The settlement of the claim establishes that the company had a liability (an obligation) at the
year-end and should recognise a provision.

9  Determining the proceeds received from assets sold before the year-end.
All the others are non-adjusting events (they relate to conditions after the year-end).

10  The discovery of a fraud which had occurred during the year

 The determination of the sale proceeds of an item of plant sold before the year end

11  A public announcement in April 20X5 of a formal plan to discontinue an operation which

had been approved by the board in February 20X5
A board decision to discontinue an operation does not create a liability. A provision can only be
made on the announcement of a formal plan (as it then raises a valid expectation that the plan
will be carried out). As this announcement occurs during the year ended 31 March 20X6, this a
non-adjusting event for the year ended 31 March 20X5.

12
Permitted Not
permitted
Making a provision for a constructive obligation of $400,000; this  
being the sales value of goods expected to be returned by retail
customers after the year end under the company’s advertised 30-
day returns policy
Based on past experience, a $200,000 provision for unforeseen  
liabilities arising after the year end
The partial reversal (as a credit to the statement of profit or loss) of  
the accumulated depreciation provision on an item of plant because
the estimate of its remaining useful life has been increased by three
years
Providing $1 million for deferred tax at 25% relating to a $4 million  
revaluation of property during March 20X5 even though Cumla has
no intention of selling the property in the near future

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ACCA FR Question Bank Part 1 answers: 15: Provisions and events after the reporting period 141

Deferred tax relating to the revaluation of an asset must be provided for even if there is no
intention to sell the asset.
The constructive obligation should be measured at the estimated cost of repairs, not the sales
value of the goods expected to be returned.

13  Recognise a liability for $3m; disclose a contingent asset

For a single obligation, the best estimate of the liability is normally the most likely outcome, in
this case, $3m.
It is probable, but not certain that Laurel Co will receive money from the insurer, so it has a
contingent asset. The amount and the details of the claim are disclosed, but no asset is
recognised.
Recognition of a reimbursement is prohibited unless it is virtually certain to be received.

14  $2.21m
$
Provision at 1 July 20X8 ($3m x 0.713) 2,139,000
Interest to 31 December 20X8 (7% x 2,139 x 6/12) 74,865
Provision at 31 December 20X8 2,213,865

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142 P a r t 1 a n s w e r s : 1 6 : T a x a t i o n ACCA FR Question Bank

16: Taxation

1  $3,461
Carrying
amount Tax base
$ $
Cost 60,000 60,000
Depreciation at 20%/tax depreciation at 50% (12,000) (30,000)
Balance at 31 March 20X6 48,000 30,000
Depreciation at 20%/tax depreciation at 25% (9,600) (7,500)
Balance at 31 March 20X7 38,400 22,500
Depreciation at 20%/tax depreciation at 25% (7,680) (5,625)
Balance at 31 March 20X8 30,720 16,875

Deferred tax = 25% × (carrying amount of 30,720 – tax value of 16,875) = $3,461

2  A temporary difference arises when the carrying amount of an asset is different from its
value for tax purposes
 Non-current deferred tax liabilities cannot be measured at their present value.
Deferred tax balances are not discounted.
A revaluation gain results in a taxable temporary difference even if the entity has no intention
of selling the asset in the foreseeable future. Therefore a deferred tax liability is recognised.
If an entity has unused tax losses it can only recognise a deferred tax asset to the extent that it
is probable that future taxable profit will be available against which the losses can be used.

3  $5,100 charge

EXAMINER’S COMMENTS
To answer this question, candidates need to calculate the amount of deferred tax required
by taking the difference between the carrying amount and the tax base of the asset at 31
August 20X2 and multiplying it by the appropriate tax rate. They then need to establish the
direction of the adjustment required. The calculations required are as follows:
Carrying amount Tax Base
$ $
Cost at 1 Sep 20X1 40,000 Cost at 1 Sep 20X1 40,000
Depreciation year 1 (7,000) Depreciation year 1 (24,000)
(40,000 – 5,000)/5 40,000 x 60%
Carrying amount at 31 Aug 20X2 33,000 Tax base at 31 Aug 16,000
20X2

Temporary difference (33,000 - 16,000) = 17,000 x 30% = $5,100

As the tax allowances are in advance of the depreciation, a deferred tax provision is
required. Therefore, a charge of $5,100 will be required to the statement of profit or loss.

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ACCA FR Question Bank Part 1 answers: 16: Taxation 143

Candidates need to understand both how to calculate the deferred tax amount and how to
adjust for it.
Why the correct answer is none of the other options:
$17,000 charge: this option does not take account of the rate of tax but the direction of the
adjustment is correct.
$5,100 credit: this option is the correct amount of deferred tax but it has been adjusted for
the wrong way in.
$17,000 credit: this option does not take account of the rate of tax and the direction of the
adjustment is incorrect.

4  Revaluation surplus of $40,000 and deferred tax liability of $78,000

Revaluation surplus:
$
Gain on revaluation of land 50,000
Deferred tax (20%) (10,000)
Closing balance on revaluation surplus 40,000

Deferred tax:
$
Opening balance 60,000
Land revaluation 10,000
Increase in taxable temporary differences (40,000 x 20%) 8,000
Closing balance 78,000

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144 1 7 : F o r e i g n c u r r e n c y t r a n s a c t i o n s ACCA FR Question Bank

17: Foreign currency transactions

1  $286.10 profit
$
At 1 January (24,300/4.9) 4,959.18
At 10 March (24,300/5.2) 4,673.08
Exchange gain (profit) 286.10

2 $ 6452

$
Translated at date of purchase (60,000/9.3) 6,451.61

Inventories are non-monetary assets and therefore are not retranslated at the period end.

3  $130.66 profit
$
At 1 April (45,000/8.2) 5,487.80
At 30 April (45,000/8.4) 5,357.14
Exchange gain (profit) 130.66

4 $ 2941

$
At 30 June 20X4 (30,000/10.2) 2,941.18

Trade payables are monetary assets and therefore are retranslated at the period end.

5  20X8: $25,000 loss; 20X9: $12,500 gain

$ $
At 1 January 20X8 (450,000/0.75) 600,000
At 31 December 20X8 (460,000/0.8) 575,000
25,000 loss
At 31 December 20X9 (470,000/0.8) 587,500
12,500 gain

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ACCA FR Question Bank Part 1 answers: 18: Earnings per share 145

18: Earnings per share

1  23.5 cents
($2,300,000 PAT/((2,000,000 × 4 + 1,800,000 free shares - see below)
3 million shares at $1.60 exercise price = $4.8 million receivable
This could buy 1,200,000 shares at full price of $4.
Therefore, dilution element (free shares) is 1,800,000 (3,000,000 actually issued – 1,200,000
paid for).

2 $ 38.9 cents
Basic EPS for the year ended 30 September 20X4
($20 million/50 million × 100) 40.0 cents
Diluted EPS for the year ended 30 September 20X4
($20.9 million/53.75 million × 100) 38.9 cents

Adjusted earnings
20 million basic earnings + (15 million × 8% × 75% after tax) $20.9 million

Adjusted number of shares

50 million basic no. of shares + (15 million × 25/100) 53.75 million

3  EPS takes into account the additional resources made available to earn profit when new
shares are issued for cash, whereas net profit does not.

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146 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

PART 1 ANSWERS: Section C

2: More group accounts

PARADIGM
EXAMINER’S COMMENTS
This question included a fair value adjustment for plant which was below its carrying amount
that many candidates treated as a surplus.
Consolidated goodwill:
There were a number of errors in the calculation of the loan notes issued. The main error
was NOT basing the loan note issue on the shares acquired by the parent (instead it was
often based on the number of shares issued by the parent).
The other area that caused several problems was the calculation of the (unadjusted) post-
acquisition profits of the subsidiary. The profit for the full year was $8 million and there were
pre-acquisition losses of $2 million, this meant the post-acquisition profit was $10 million;
many candidates calculated this as a net $6 million.
Other consolidation errors:
Cash in transit (CIT) of $900,000 from the subsidiary to the parent meant that the payable of
the subsidiary ($2.8 million) was $900,000 less than the receivable of the parent.

Paradigm – Consolidated statement of financial position as at 31 March 20X3

$000 $000
Assets
Non-current assets:
Property, plant and equipment (47,400 + 25,500 – 3,000 FV + 500 dep’n) 70,400
Goodwill (w (iii)) 8,500
Financial asset: equity investments (7,100 + 3,900) 11,000
89,900
Current assets
Inventory (20,400 + 8,400 – 600 URP (w (iv))) 28,200
Trade receivables (14,800 + 9,000 – 3,700 intra-group (w (v))) 20,100
Bank (2,100 + 900 CIT (w (v))) 3,000 51,300
Total assets 141,200
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each (40,000 + 6,000 (w (iii))) 46,000
Share premium (w (iii)) 6,000
Retained earnings (w (vi)) 34,000 40,000
86,000
Non-controlling interest (w (vii)) 8,800
Total equity 94,800
Non-current liabilities
10% loan notes (8,000 + 1,500 (w (iii))) 9,500
Current liabilities
Trade payables (17,600 + 13,000 – 2,800 intra-group (w (v))) 27,800
Bank overdraft 9,100 36,900
Total equity and liabilities 141,200

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ACCA FR Question Bank Part 1 answers: 2: More group accounts 147

Workings (figures in brackets are in $000)

EXAM SMART
Again, look carefully at the dates. In this question, the subsidiary was acquired on 1 October
20X2, six months into the year. This means that:
 Retained profit for the year is time-apportioned; 50% is pre-acquisition (goodwill) and
50% is post-acquisition (group retained earnings and non-controlling interest).
 The depreciation relating to the fair value adjustment is for six months only.
This is a reasonably straightforward question, but there are several potentially tricky ‘twists’.
Make sure that you read the information very carefully.
 The subsidiary has made pre-acquisition losses; add back the pre-acquisition losses to
the profit for the year. (Please see the Examiner’s Comments above.)
 The fair value adjustment is negative; this means that the depreciation adjustment is
added back to consolidated retained earnings, not deducted (see workings (ii) and (vi)).
 Consideration transferred is in the form of shares and loan notes issued to the
shareholders of Strata. Paradigm has not made a loan to Strata. The loan notes are a
financial liability of Paradigm and are recognised in non-current liabilities in the
statement of financial position.
 Both companies have equity investments; these are financial assets of each of the
companies. Because they are equity investments, they are measured at fair value
through profit or loss. Remember to adjust the investments to their fair values and to
include the loss and the gain in consolidated retained earnings.

(i) Group structure

Paradigm

75%

Strata
(ii) Fair value adjustment
Retained
Acquisition earnings Year end
$000 $000 $000
Plant (depreciation 3,000 × 6/36) (3,000) 500 (2,500)

(iii) Goodwill in Strata

$000 $000
Controlling interest
Share exchange ((20,000 × 75%) × 2/5 × $2) 12,000
10% loan notes (15,000 × 100/1,000) 1,500
Non-controlling interest at fair value (20,000 × 25% × $1.20) 6,000
19,500
Equity shares 20,000
Pre-acquisition retained losses:
– at 1 April 20X2 (4,000)
– 1 April to 30 September 20X2 (2,000)
Fair value adjustment – plant (w(ii)) (3,000) (11,000)
Goodwill arising on acquisition 8,500

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148 P a r t 1 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

The market value of the shares issued of $12 million would be recorded: $6 million share
capital and $6 million share premium as the shares have a nominal value of $1 each and
their issue value was $2 each.
(iv) Unrealised profit (URP) in inventory
Strata’s inventory (from Paradigm) at 31 March 20X3 is $4.6 million (one month’s supply).
At a mark-up on cost of 15%, there would be $600,000 of URP (4,600 × 15/115) in the
inventory.
(v) Intra-group current accounts
$000
Current account balance of Strata per question 2,800
Cash-in-transit (CIT) not yet received by Paradigm 900
Current account balance of Paradigm 3,700

(vi) Consolidated retained earnings

Paradigm Strata
$000 $000
At 1 April 20X2 19,200 –
Year ended 31 March 20X3 as reported 7,400 8,000
Fair value adjustment (depreciation) (w (ii)) 500
Unrealised profit on intra-group sale (w (iv)) (600)
Loss on equity investments (7500 – 7,100) (400)
Gain on equity investments (3,900 – 3,200) 700
Pre-acquisition losses for the year to 31/3/X3 2,000
11,200
Strata (75% × 11,200) 8,400
34,000

(vii) Non-controlling interest

$000
Fair value on acquisition (w (i)) 6,000
Post-acquisition profit (11,200 (w (iv)) × 25%) 2,800
8,800

Marking guide Marks

Statement of financial position:
property, plant and equipment 1½
goodwill 5
equity investments 1
inventory 1
receivables 1
bank 1
equity shares 1½
share premium ½
retained earnings 3½
non-controlling interest 1½
10% loan notes 1
trade payables 1
bank overdraft ½
Maximum marks available 20

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ACCA FR Question Bank Part 1 answers: 3: Consolidated statement of profit and loss and OCI 149

3: Consolidated statement of profit or loss and other

comprehensive income

PINARDI CO
EXAMINER’S COMMENTS: PART (a)
Most candidates failed to score high marks on this question. The reason for this seemed to
be poor exam technique such as not addressing the requirements or not adequately using
the information in the scenario. The focus for this detailed commentary will be on getting
the most out of the question, rather than simply recreating the suggested solution, and will
highlight the importance of using the scenario when constructing an answer to an
interpretation question.
Many candidates were able to score full marks on part (a). However, there were some
candidates who omitted this part of the answer entirely and others who demonstrated a lack
of knowledge of this syllabus area.
To calculate a gain on the disposal of a subsidiary, the disposal proceeds should be
compared to the carrying amount of the subsidiary at the date of disposal (subsidiary net
assets and carrying amount of goodwill at disposal). Many candidates were able to identify
the disposal proceeds as part of the calculation, even where the remainder of the calculation
was confused. of the calculation was confused.
Candidates did not need to calculate net assets at disposal in this question as these were
provided in note (2). The goodwill at disposal however did need to be determined. The
goodwill at acquisition was already calculated and provided in the question, however, note
(2) advised that goodwill had been impaired by 30% in 20X5 and this needed to be applied.

(a) Gain on disposal:

$'000
Proceeds 42,000
Less: Net assets at disposal (35,000)
Less: Goodwill at disposal (W1) (4,200)
Gain on disposal 2,800

(W1) Goodwill at disposal

$'000
Goodwill at acquisition 6,000
Less: Impairment (6,000 × 30%) (1,800)
Unimpaired goodwill at disposal 4,200

EXAMINER’S COMMENTS: PART (b)

Numerous candidates ignored this part of the question altogether which was both surprising
and disappointing.
Note (1) of the question informed candidates that “the accounting assistant has not
accounted for Silva Co as a discontinued operation because the disposal occurred on 1
January 20X7”. The marking team noted that many candidates simply agreed with this
statement before moving on to answer part (c). This was not correct, and as such, did not

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150 P a r t 1 a n s w e r s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t a n d l o s s a n d O C I ACCA FR Question Bank

attract any marks. A large number of answers simply stated that the current treatment was
not correct, and that the disposal of Silva Co was a discontinued operation. Whilst this did
attract some credit, without further explanation, candidates were not able to score well.
It was pleasing to see that there were some candidates who were able to not only identify
that the disposal was a discontinued operation, but to support this with the definition of a
discontinued operation from the IFRS Standard. A good answer identified that the activities
of Silva Co manufacturing jewellery represented a separate major line of operations to the
Pinardi Group that operates in the fragrance and cosmetics industry. Only a small number of
candidates fully addressed the requirement by explaining the accounting treatment of a
discontinued operation. This is an important area of the syllabus and candidates are advised
to ensure they are familiar with the accounting treatment for a discontinued operation.

(b) Explanation of Silva Co disposal

Silva Co is likely to meet the criteria as it is a separate major line of operations which has been
disposed of during the year.
As a discontinued operation, the results would be removed and presented separately on the
face of the statement of profit or loss together with the gain (post-tax) on disposal of $2.8m.
As Silva Co was sold on 1 January 20X7, there are no results to incorporate for the current year.
However, the results of 20X6 should be shown as a discontinued operation for comparative
purposes.

EXAMINER’S COMMENTS: PART (C)

It was pleasing to see that many candidates were able to score full marks on this part of the
question. The examining team continue to recommend that candidates show not only the
relevant formula for the ratios, but also fully show their workings. An incorrect answer
without workings will not be awarded any marks, but where workings are provided markers
are able to award marks despite any ‘calculation errors’ where relevant.
It was clear that for those candidates who did not score well on this part of the question,
their knowledge of ratio formulae was limited. This is an integral part of the syllabus and
features at every examination sitting and as such candidates should have a working
knowledge of financial ratios.

(c) Ratio calculations:

Ratio Working 20X7 Working 20X6
Gross profit margin (50,700/98,300) × 100 51.6% (50,600/122,400) × 100 1.3%
Operating profit margin (17,000/98,300) × 100 17.3% (13,200/122,400) × 100 0.8%
Interest cover (17,000/3,200) 5.3 times (13,200/5,500) 2.4 times
Inventory turnover days (13,300/47,600) × 365 102 days (22,400/71,800) × 365 114 days

EXAMINER’S COMMENTS: PART (d)

The examinations team noted that many scripts continue to provide superficial, ‘textbook’
answers that do not draw on any of the information from the scenario. Candidates should
note that these types of answers will attract little, if any, marks. To earn marks in this type of
question it is essential that candidates use the scenario to provide a rationale for the
changes in the performance and position. This scenario was not short of clues, one of the
biggest being the disposal of Silva Co, so it was surprising that many answers failed to
consider this at all.

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ACCA FR Question Bank Part 1 answers: 3: Consolidated statement of profit and loss and OCI 151

A good answer would discuss the immediate impact of the disposal such as the reduction in
both revenue and costs, but then would aim to develop this further. For example, despite
the reduction in revenue following the disposal of Silva Co, gross profit and operating
margins improved. If candidates calculated the gross profit and operating profit margins for
Silva Co using the information provided in note (4), candidates could go on to explain that
Silva Co has good results on a standalone basis, but these were below group results,
suggesting that better margins are earned in the fragrance and cosmetics industry compared
to jewellery manufacturing. Reasons for this could have been explored, such as higher costs
of raw materials, production etc.
The highest-level candidates would then develop their answers further by drawing on the
information that has been included in the scenario. For example, operating expenses include
a one-off payment as a result of exiting the lease, which distorts the current year profit. By
excluding this one-off cost, operating profit margin would improve, and this would continue
to be expected in 20X8.
Some candidates recalculated the 20X6 results for the Pinardi Group excluding the results of
Silva Co and went on to explain that these results would assist with a more accurate
comparison, and this was well received by the marking team.

(d) Analysis
Performance
The overall revenue is down by $24m, which may be largely due to the disposal of Silva Co
which is in the 20X6 results but contributed no revenue in 20X7.
Last year, Silva Co contributed $36m in revenue. Removing this from the 20X6 results shows
that there has been a like-for-like increase of $11.9m (($122.4m – $36m) – $98.3m) from the
fragrance and cosmetics divisions.
The gross profit margin is up significantly from 20X6 to 20X7, from 41% to 52%. We can see that
the gross profit margin of Silva Co in 20X6 was only 35% ($12.6m/$36m), so the other parts of
the group were able to generate higher gross profit margins historically.
The operating profit margin has increased, although not quite as dramatically as the increase in
gross profit margin. In fact, the operating expenses have only decreased by $3.7m, despite the
$24.1m decrease in revenue. There are some factors to consider within the operating expenses
for 20X7. There is a one-off exit fee of $3m for the cosmetics division to exit the lease. While
this is expensive, the division would have been paying $25m over 10 years so will ultimately
save a significant amount of money.
In addition to this, the effects of foreign exchange gains and losses are included in the operating
expenses line. In 20X6, there was a gain of $3m but in 20X7 there was a loss of $1m which will
have reduced operating profit. This shows that the Pinardi group have quite large exposure to
foreign currency risk.
The interest cover has increased from 2.4 to 5.3 during the year, which is a combination of both
an increase in operating profits and a decrease in finance costs. The finance costs are likely to
have decreased due to the exit from the lease.
Position
The decrease in non-current liabilities is likely to be partly due to the removal of the lease
liability for the cosmetics division, which had 10 years remaining.
Some of the non-current liabilities may also have been paid off from the proceeds from the sale
of Silva Co. Silva Co was sold for $42m, but cash has only increased by around $17m. Therefore,
the Pinardi group may have used some of the cash to reduce the non-current liabilities in the
group.

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152 P a r t 1 a n s w e r s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t a n d l o s s a n d O C I ACCA FR Question Bank

It is also worth noting that in 20X6 the assets and liabilities would have included the Silva Co
figures. It may have been that Silva Co had significant non-current liabilities which were
removed when it was sold.
The inventory turnover figure shows that the Pinardi group is able to turn over inventory more
quickly than previously. The inventory days are high, but the nature of the Pinardi group
products will mean that they are not immediately perishable so this is unlikely to be a significant
concern.
In 20X6, the Pinardi group inventory turnover period would have included the figures relating to
Silva Co. The removal of this seems to show that the inventory turnover period relating to
cosmetics and fragrance is lower than that of the jewellery sector.
Conclusion (marks awarded for sensible conclusion)
Whilst Silva Co does generate profits, the disposal seems to have been a good move. Silva Co’s
results have actually improved since disposal, showing it is not a struggling business. The
additional focus on the remaining divisions has generated more profits for the Pinardi group,
particularly now the cosmetics division is utilising the group property and no longer requiring
leased premises.
Other comments which candidates may produce which could be given credit
It should be noted that there is now $2m revenue relating to the use of the Silva Co name which
will be there each year. Removing this for comparability shows that the like-for-like increase in
revenue is $10m.
The inclusion of the $2m income from Silva Co with no cost of sales will have increased the
gross profit margin. Even removing this reduces it to 50.6% so has not accounted for a
significant movement.
Whilst cash has only increased by $17m despite the $42m sale, it may have been that Silva Co
had a significant amount of cash in the bank, which was removed from the group when Silva Co
is disposed of.
The exclusion of the $36m revenue and $6.6m operating expenses of Silva Co from the
‘continuing operations’ consolidated statement of profit or loss for 20X6 suggests that
operating expenses as a % of revenue in 20X6 were 35.6% (30,800 [37,400 – 6,600]/86,400
[122,400 – 36,000]), which is actually higher than that for 20X7 (34.2%). On a like-for-like basis
this, along with the improvement in the gross profit margin, suggests a better financial
performance for the Pinardi group without Silva Co.

EXAMINER’S COMMENTS
Overall, the analysis on these questions continues to be disappointing with only a minority of
candidates using the scenario to form their answer. Answers were either far too brief or too
generic. The golden rules for candidates to think about for producing a good answer are:
 Use the scenario – any answer not based on this will not score well • One mark per well
explained point
 Talk about all areas provided in the scenario
 Always say WHY things have moved, not just that they have
If a candidate follows these rules, they will be able to score well in this question. Sadly, far
too many seem content with learning ratio definitions and trying to repeat these in the
exam.

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ACCA FR Question Bank Part 1 answers: 3: Consolidated statement of profit and loss and OCI 153

(a) Calculations 2
(b) Explanation 3
(c) Ratios 4
(d) Analysis 11
Maximum marks available 20

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154 P a r t 1 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4: Accounting for associates

PUMICE
Consolidated statement of financial position of Pumice at 31 March 20X6
$000 $000
Non-current assets:
Plant, property and equipment (W (viii)) 30,300
Goodwill (W (iii)) 3,700
Investments
– associate (W (v)) 11,400
– other (26,000 – 13,600 – 10,000 – 1,000 intra-group loan note) 1,400
46,800
Current assets (15,000 + 8,000 – 1,000 (W (ix)) – 1,500 current account) 20,500
Total assets 67,300
Equity and liabilities
Equity attributable to owners of the parent
Share capital 10,000
Retained earnings (W (vi)) 37,720
47,720
Non-controlling interest (W (vii)) 2,580
Total equity 50,300
Non-current liabilities
8% Loan note 4,000
10% Loan note (2,000 – 1,000 intra-group) 1,000 5,000
Current liabilities (10,000 + 3,500 – 1,500 current account) 12,000
67,300

Workings

EXAM SMART
Always look carefully at the dates. Group accounts questions often feature a subsidiary or an
associate that is acquired part-way through the year. In this question, both the subsidiary
(Silverton) and the associate (Amok) were acquired on 1 October 20X5, six months into the
year. This means that:
 Retained profit for the year is time-apportioned; 50% is pre-acquisition (goodwill) and
50% is post-acquisition (group retained earnings and non-controlling interest).
 The additional depreciation on the fair value adjustment is for six months only.

(i) Group structure

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ACCA FR Question Bank Part 1 answers: 4: Accounting for associates 155

(ii) Fair value adjustments

Retained
Acquisition earnings Year-end
$000 $000 $000
Land 400 – 400
Plant (additional depreciation 1,600/4 × 6/12) 1,600 (200) 1,400
2,000 (200) 1,800

(iii) Goodwill in Silverton

$000 $000
Consideration transferred 13,600
Non-controlling interest at fair value 2,500
Fair value of identifiable net assets acquired
Share capital 3,000
Pre-acquisition retained earnings (W (iv)) 7,000
Fair value adjustments (W (ii)) 2,000
(12,000)
4,100
Impairment (400)
3,700

(iv) Pre-acquisition retained earnings

Silverton Amok
$000 $000
At 31 March 20X6 8,000 20,000
Post-acquisition: Silverton (2,000 × 6/12) (1,000)
Post-acquisition: Amok (8,000 × 6/12) (4,000)
7,000 16,000

EXAM SMART
Be careful with the impairment losses. The question says that the goodwill of Silverton is
impaired by $400,000 and the investment in Amok is impaired by $200,000.
 Non-controlling interest is measured at fair value, so the goodwill of Silverton belongs
to both the group and the non-controlling interest. Therefore the impairment loss must
also be split between the Group (reducing goodwill and consolidated retained earnings)
and the non-controlling interest.
 The investment in Amok is the Group’s share of Amok, so 100% of the loss ‘belongs’ to
the group (it reduces both the investment in the associate and consolidated retained
earnings).

(v) Investment in associate

$000
Cost (1,600 × $6.25) 10,000
Share post-acquisition profit (8,000 × 6/12 × 40%) 1,600
11,600
Impairment (200)
11,400

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156 P a r t 1 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

(vi) Consolidated retained earnings

Pumice Silverton Amok
$000 $000 $000
Per question 37,000 8,000 20,000
Additional depreciation on fair value
adjustment (W (ii)) (200)
Unrealised profit (PUP) (W (ix)) (1,000)
Pre-acquisition retained earnings (W (iv)) (7,000) (16,000)
800 4,000
Silverton (800 × 80%) 640
Amok (4,000 × 40%) 1,600
38,240
Impairment: Silverton (400 × 80%) (320)
Amok (200)
37,720

(vii) Non-controlling interests

$000
Fair value at acquisition 2,500
Share of post-acquisition retained earnings (800 × 20%) (W (vi)) 160
Share of impairment (400 × 20%) (80)
2,580

(viii) Property, plant and equipment

$000
Pumice 20,000
Silverton 8,500
Fair value adjustment (W (ii)) 1,800
30,300

(ix) The unrealised profit (PUP) in inventory is calculated as:

Intra-group sales are $6 million of which Pumice made a profit of $2 million. Half of these
are still in inventory, thus there is an unrealised profit of $1 million.
Marking guide Marks
Statement of financial position:
property, plant and equipment 2½
goodwill 3½
investments – associate 3
– other 1
current assets 2
equity shares 1
retained earnings 3
non-controlling interest 1½
8% loan notes ½
10% loan notes 1
current liabilities 1
Maximum marks available 20

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ACCA FR Question Bank Part 1 answers: 5: Interpreting financial statements 157

5: Interpreting financial statements

QUARTILE
EXAMINER’S COMMENTS: PART (a)
It was common to see a calculation of the return on equity (ROE) rather than the return on
capital employed (ROCE) and many other errors:
 Calculating the profit after tax margin (rather than the operating profit margin)
 Inventory days rather than inventory turnover or using closing inventory instead of
average inventory or inventory turnover based on revenue rather than of cost of sales
 Trade payables period based on cost of sales rather than purchases
 Debt/(debt + equity) instead of debt/equity
Whilst many of the incorrectly given ratios may be useful ratios in themselves, it invalidates
the comparison to the sector average ratios (required in part (b)) if precisely the same ratios
are not used.

(a) Below are the specified ratios for Quartile and (for comparison) those of the business sector
average.
Sector
Quartile average
Return on year-end capital employed ((3,400 + 800)/(26,600
+ 8,000) × 100) 12.1% 16.8%
Net asset turnover (56,000/34,600) 1.6 times 1.4 times
Gross profit margin (14,000/56,000 × 100) 25% 35%
Operating profit margin (4,200/56,000 × 100) 7.5% 12%
Current ratio (11,200:7,200) 1.6:1 1.25:1
Average inventory (8,300 + 10,200/2) = 9,250) turnover
(42,000/9,250) 4.5 times 3 times
Trade payables’ payment period (5,400/43,900 × 365) 45 days 64 days
Debt to equity (8,000/26,600 × 100) 30% 38%

EXAMINER’S COMMENTS: PART (b)

A good answer requires candidates to identify comparative strengths or weakness and give a
plausible explanation of why they may have occurred. As mentioned earlier, several
candidates did not read the question properly and thought that the sector average ratios
given in the question were the previous year’s ratios of the company under assessment.
Common errors were to attribute a fall in the operating profit margin to the high finance
costs (which is not the case as this ratio does not include finance costs) and arguing that an
increase in the average inventory turnover was an indicator of a deteriorating situation
(possibly obsolete inventory, etc) due to high inventory levels. The opposite of this is the
case; I assume candidates confused the increase in inventory turnover with an increase in
inventory holding period which would indicate higher inventory levels. Many candidates
commented that the lower gross profit margin was a consequence of the high level of

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purchases, when what, I suspect, they really meant was that the cost of the purchases was
high. Very few candidates noticed that the company's operating costs, as a % of revenue,
were lower than the sector average as they did not take into account the lower gross
margin. It was the case that the company’s operating margin was below the sector average,
but this was due to poor gross margins and not poor control of operating costs.

EXAM SMART
As well as looking at the numbers, always pay attention to the scenario and the supporting
information, for example:
 What the company does (it is a retailer, so there are no trade receivables, so possibly a
low current ratio is ‘normal’).
 Any particular problems it is facing (declining profitability, so look carefully at the
profitability ratios, the margins, the make-up of gross and operating profit and what
this might suggest about the company’s strategy).
 Any unusual items in its financial statements (development expenditure relating to a
possible new line of business; this is highlighted in a separate note).
Be prepared to adjust your calculations to reflect the circumstances of the company. For
example, assets include development expenditure which is not yet generating revenue, so
take this into account when interpreting asset turnover.
Think about the relationships between ratios, particularly ROCE, profit margins and asset turnover,
but also efficiency ratios: a low inventory turnover should mean that payables days are also low.

(b) Assessment of comparative performance

Profitability
The primary measure of profitability is the return on capital employed (ROCE) and this shows
that Quartile’s 12.1% is considerably underperforming the sector average of 16.8%. Measured
as a percentage, this underperformance is 28% ((16.8 – 12.1)/16.8).
The main cause of this seems to be a much lower gross profit margin (25% compared to 35%). A
possible explanation for this is that Quartile is deliberately charging a lower mark-up in order to
increase its sales by undercutting the market.
There is supporting evidence for this in that Quartile’s average inventory turnover at 4.5 times is
50% better than the sector average of three times. An alternative explanation could be that
Quartile has had to cut its margins due to poor sales which have had a knock-on effect of having
to write down closing inventory.
Quartile’s lower gross profit percentage has fed through to contribute to a lower operating
profit margin at 7.5% compared to the sector average of 12%. However, from the above figures,
it can be deduced that Quartile’s operating costs at 17.5% (25% – 7.5%) of revenue appear to be
better controlled than the sector average operating costs of 23% (35% – 12%) of revenue. This
may indicate that Quartile has a different classification of costs between cost of sales and
operating costs than the companies in the sector average or that other companies may be
spending more on advertising/selling commissions in order to support their higher margins.
The other component of ROCE is asset utilisation (measured by net asset turnover). If Quartile’s
business strategy is indeed to generate more sales to compensate for lower profit margins, a
higher net asset turnover would be expected. At 1.6 times, Quartile’s net asset turnover is only
marginally better than the sector average of 1.4 times. While this may indicate that Quartile’s
strategy was a poor choice, the ratio could be partly distorted by the property revaluation and

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ACCA FR Question Bank Part 1 answers: 5: Interpreting financial statements 159

also by whether the deferred development expenditure should be included within net assets for
this purpose, as the net revenues expected from the development have yet to come on stream.
If these two aspects were adjusted for, Quartile’s net asset turnover would be 2.1 times
(56,000/(34,600 – 5,000 – 3,000)) which is 50% better than the sector average.
In summary, Quartile’s overall profitability is below that of its rival companies due to
considerably lower profit margins, although this has been partly offset by generating
proportionately more sales from its assets.
Liquidity
As measured by the current ratio, Quartile has a higher level of cover for its current liabilities
than the sector average (1.6:1 compared to 1.25:1). Quartile’s figure is nearer the ‘norm’ of
expected liquidity ratios, often quoted as between 1.5 and 2:1, with the sector average (at
1.25:1) appearing worryingly low.
The problem of this ‘norm’ is that it is generally accepted that it relates to manufacturing
companies rather than retail companies, as applies to Quartile (and presumably also to the
sector average). In particular, retail companies have very little, if any, trade receivables as is the
case with Quartile.
This makes a big difference to the current ratio and makes the calculation of a quick ratio largely
irrelevant. Consequently, retail companies operate comfortably with much lower current ratios
as their inventory is turned directly into cash. Thus, if anything, Quartile has a higher current
ratio than might be expected. As Quartile has relatively low inventory levels (deduced from high
inventory turnover figures), this means it must also have relatively low levels of trade payables
(which can be confirmed from the calculated ratios).
The low payables period of 45 days may be an indication of suppliers being cautious with the
credit period they extend to Quartile, but there is no real evidence of this (e.g. the company is
not struggling with an overdraft). In short, Quartile does not appear to have any liquidity issues.
Gearing
Quartile’s debt to equity at 30% is lower than the sector average of 38%. Although the loan note
interest rate of 10% might appear quite high, it is lower than the ROCE of 12.1% (which means
shareholders are benefiting from the borrowings) and the interest cover of 5.25 times ((3,400 +
800)/800) is acceptable. Quartile also has sufficient tangible assets to give more than adequate
security on the borrowings, therefore there appear to be no adverse issues in relation to gearing.
Conclusion
Quartile may be right to be concerned about its declining profitability. From the above analysis,
it seems that Quartile may be addressing the wrong market (low margins with high volumes).
The information provided about its rival companies would appear to suggest that the current
market appears to favour a strategy of higher margins (probably associated with better quality
and more expensive goods) as being more profitable. In other aspects of the appraisal, Quartile
is doing well compared to other companies in its sector.
Marking guide Marks
(a) ROCE 2 marks, all others 1 mark 9
(b) Profitability 5
Liquidity 3
Gearing 2
Conclusion 1
Maximum marks available 20

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160 P a r t 1 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

6: Statement of cash flows

MOCHA
EXAMINER’S COMMENTS

Common errors included:

 Incorrect adjustment for depreciation (this surprised me as the charge for the year was
given in note (2) of the question and did not need calculating).
 The disposal proceeds of a property was often shown as the profit on disposal (and
vice versa).
 The decrease in product warranties provision was treated as an increase (other
elements of the cash flows also were often incorrectly signed).
 Several problems in the calculation of the tax paid (often ignoring the effect of the
deferred tax).
 Many treated the new lease additions ($6.7 million) as a cash outflow, perhaps
confusing this with the repayment of the leases (which was also often calculated
incorrectly).
 All of the investment income ($1.1 million) was treated as a cash flow when in fact only
the dividend received of $200,000 was a cash flow.
 Various incorrect figures for the shares issued; the increase in the share capital of $6 million
should have been reduced by $3.6 million for the effect of a bonus issue (which is not a
cash flow).
Although this is a long list, most candidates only made two or three of these errors, such
that it was a good-scoring question.

EXAM SMART
In the exam, you will be asked to prepare extracts from the statement of cash flows, rather
than a full statement. But this question will help you to revise the format of the statement
and to appreciate which cash flows appear under each heading.

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ACCA FR Question Bank Part 1 answers: 6: Statement of cash flows 161

Mocha – Statement of cash flows for the year ended 30 September 20X1
$000 $000
Cash flows from operating activities:
Profit before tax 3,900
Adjustments for
depreciation 2,500
profit on the disposal of property (8,100 – 4,000) (4,100)
investment income (1,100)
interest expense 500
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)
decrease in warranty provision (4,000 – 1,600) (2,400)
Cash generated from operations (4,900)
Interest paid (500)
Income tax paid (W1) (800)
Net cash deficit from operating activities (6,200)

Cash flows from investing activities:

Purchase of property (8,300)
Disposal of property 8,100
Disposal of investment 3,400
Dividends received 200
Net cash from investing activities 3,400

Cash flows from financing activities:

Shares issued (W2) 2,400
Payment of lease liabilities (W3) (3,900)
Net cash from financing activities (1,500)
Net decrease in cash and cash equivalents (4,300)
Cash and cash equivalents at the beginning of the year 1,400
Cash and cash equivalents at the end of the year (2,900)

Workings
1 Income tax paid
$000
Balance b/f (inc tax 1,200 + def tax 900) 2,100
Profit or loss tax charge 1,000
Difference cash paid (800)
Balance c/f (inc tax 1,000 + def tax 1,300) 2,300

2 Share issues
SC SP
$000 $000
b/f 8,000 2,000
Bonus Issue (no cash) 3,600 (2,000)
Issue at par (balance) 2,400 Nil
c/f 14,000 Nil

Note that the bonus issue came out of the share premium account and the revaluation
reserve. As the revaluation reserve has gone down by $1.6 million, the double entry must
have been:
Dr Share premium (down to nil) $2 million
Dr Revaluation reserve $1.6 million
Cr Share capital $3.6 million

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3 Lease liabilities
$000
Balance b/f (current 2,100 + non-current 6,900) 9,000
New leases in year 6,700
Difference cash paid (3,900)
Balance c/f (current 4,800 + non-current 7,000) 11,800

Tutorial note (not needed to gain full marks):

Reconciliation of investments / investment income
$000
Balance b/f 7,000
Carrying amount sold (3,000)
Balance c/f (4,500)
Difference: increase in fair value 500

Carrying amount sold 3,000

Proceeds (3,400)
Profit on sale in profit or loss 400

EXAM SMART
As the retained earnings at 30 September 20X0 (10,100) plus the profit for the period (2,900)
equal the retained earnings at 30 September 20X1 (13,000) there was no equity dividend
paid.

Marking guide Marks

Profit before tax 1
Depreciation 1
Profit on disposal of property (deducted) 1
Investment income adjustment (deducted) ½
Interest expense adjustment (added back) ½
Working capital items 1½
Decrease in warranty provisions 1½
Interest paid (cash flow) 1
Income tax paid 2
Purchase of property, plant and equipment 1
Disposal of property, plant and equipment 1
Disposal of investment 1
Investment income (dividends received) 1
Share issue 3
Payment of lease liabilities 2
Cash b/f ½
Cash c/f ½
Maximum marks available 20

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ACCA FR Question Bank Part 1 answers: 11: Preparation of single company accounts 163

11: Preparation of single company accounts

1 SANDOWN
EXAMINER’S COMMENTS
Some of the adjustments created difficulties:
 Few candidates correctly calculated the amount of revenue to be deferred in relation to
a sale (of $16 million) with ongoing service support. Most candidates deferred the
whole of the revenue rather than the amount relating to the remaining two years of
service support.
 Many candidates applied the effective rate of interest (8%) to the nominal amount
($20 million) of a convertible loan rather than its carrying amount of $18.44 million.
 Most candidates correctly calculated the gains on the equity investments but had
difficulty in knowing where they should appear in the financial statements.
 Most candidates got the taxation aspects correct, but there were still some basic errors
such as charging the whole of the deferred tax provision to profit or loss (rather than
the movement) and treating the underpayment of tax in the previous period as a credit.
A number of candidates are still incorrectly treating dividends as part of the statement of
profit or loss and other comprehensive income. Note that dividends are NOT an expense and
should NOT be included in the statement of profit or loss, anywhere.

(a) Statement of profit or loss and other comprehensive income for the year ended
30 September 20X9
$000
Revenue (380,000 – 4,000) (W1) 376,000
Cost of sales (W2) (265,300)
Gross profit 110,700
Distribution costs (17,400)
Administrative expenses (50,500 – 12,000 dividend error (W4) (38,500)
Investment income 3,500
Finance costs (W5) (1,475)
Profit before tax 56,825
Income tax expense (16,200 estimate + 2,100 TB – 1,500 def tax(W6)) (16,800)
Profit for the year 40,025

Other comprehensive income

Items that will not be reclassified to profit or loss:
Gain on investments in equity instruments (29,000 – 26,500 TB) 2,500
Total other comprehensive income 2,500

Total comprehensive income 42,525

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(b) Statement of financial position as at 30 September 20X9

$000 $000
Assets
Non-current assets
Property, plant and equipment (W7) 67,500
Intangible – brand (W3) 12,500
Investments in equity instruments (at fair value) 29,000
109,000
Current assets
Inventory 38,000
Trade receivables 44,500
Bank 8,000 90,500
Total assets 199,500

Equity and liabilities

Equity
Share capital (20 c) 50,000
Equity option 2,000
Other reserve (W8) 7,500
Retained earnings (26,060 + 40,025 – 12,000 dividend (W4)) 54,085
113,585
Non-current liabilities
Deferred tax (W6) 3,900
Deferred income (W1) 2,000
5% convertible loan note (W5) 18,915 24,815

Current liabilities
Trade payables 42,900
Deferred income (W1) 2,000
Current tax payable 16,200 61,100
Total equity and liabilities 199,500

Workings (figures in brackets in $000)

1 Where sales revenue includes an amount for after-sales servicing and support costs then,
provided that the after sales servicing is capable of being sold independently of the goods
(which appears to be the case here), the total revenue receivable (the transaction price)
should be allocated between the goods and the servicing in proportion to their
stand-alone selling prices.
$000
Goods (12.5/20 × 16,000) 10,000
Service and support (2.5 × 3/20 × 16,000) 6,000
Total transaction price 16,000

As the servicing and support is for three years and the date of the sale was 1 October
20X8, revenue relating to two years’ servicing and support is a liability: ($6 million × 2/3)
= $4 million. This is shown as $2 million in both current and non-current liabilities.
2 Cost of sales
$000
Per question 246,800
Depreciation – building (50,000/50 years – see below) 1,000
– plant and equipment (42,200 – 19,700) × 40%)) 9,000
Amortisation – brand (1,500 + 2,500 – see below) 4,000
Impairment of brand (see below) 4,500
265,300

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ACCA FR Question Bank Part 1 answers: 11: Preparation of single company accounts 165

The cost of the building of $50 million (63,000 – 13,000 land) has accumulated
depreciation of $8 million at 30 September 20X8, which is eight years after its acquisition.
Thus the life of the building must be 50 years.
3 Brand
$000
Cost 30,000
Accumulated amortisation b/f (9,000)
21,000
Amortisation to 1.4.09 (30,000 / 10 years x 6/12) (1,500)
19,500
Therefore impairment loss (balance) (4,500)
Recoverable amount (higher of FV less costs of disposal and VIU) 15,000
Amortisation to 30.9.09 (15,000 / 3 years x 6/12) (2,500)
Carrying amount at 30.9.09 12,500

4 Dividend
A dividend of 4.8 cents per share would amount to
(250 million shares (i.e. shares are 20 cents each) × 4.8 cents) = $12 million.
This is not an administrative expense but a distribution of profits that should be
accounted for through equity.
5 Convertible loan note
$000
Balance per TB 18,440
Effective interest (8% x 18,440) 1,475
Interest paid: per TB (1,000)
Bal c/f 18,915

An interest accrual of $475,000 (1,475 – 1,000 interest paid) is needed :

Dr Finance costs $475,000
Cr Convertible loan (SFP) $475,000
6 Deferred tax
$000
Credit balance required at 30 September 20X9 (13,000 × 30%) 3,900
Balance at 1 October 20X8 (5,400)
Credit (reduction in balance) to profit or loss 1,500

7 Non-current assets
$000
Freehold property (63,000 – (8,000 + 1,000)) (W2) 54,000
Plant and equipment (42,200 – (19,700 + 9,000)) (W2) 13,500
Property, plant and equipment 67,500

8 Other reserve (re investments in equity instruments)

$000
At 1 October 20X8 5,000
Increase in year (29,000 – 26,500) 2,500
7,500

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Marking guide Marks

(a) Statement of profit or loss and other comprehensive income
Revenue 2
Cost of sales 4
Distribution costs ½
Administrative expenses 1
Investment income ½
Finance costs 1
Income tax expense 2
Other comprehensive income 2
13
(b) Statement of financial position
Property, plant and equipment 2
Brand 1
Investments 1
Inventory/trade receivables ½
Bank ½
Equity shares/equity option ½
Other equity reserve 1
Retained earnings (1 for dividend) 2
Deferred tax 1
Non-current deferred income ½
5% loan note 1
Current deferred income ½
Trade payables/current tax payable ½
12
Maximum marks available 25

2 TRIAGE CO
EXAMINER’S COMMENTS: PART (a)
A significant number of candidates were either not prepared to, or did not know how to,
present the required schedule of adjustments. The starting point is the draft profit before
interest and tax for the year given in the trial balance, followed by a series of relevant
additions or subtractions to arrive at a figure of profit for the year. Frustratingly for markers,
many candidates prepared a series of workings but did not attempt to either summarise
these or state their effect on the statement of profit or loss, which restricted the number of
marks that could be awarded.
Future candidates should ensure that they avoid the common errors noted in this session.:
 Some candidates did not attempt to calculate the debt component of the convertible
loan note and a few calculated interest at the underlying rate rather than the "coupon"
rate.
 A number of candidates did not correctly split the amortisation of the leased property
between the two halves of the year and often used an incorrect remaining useful life to
determine the amortisation charge for the second half of the year.
 Many candidates did not correctly split the fraud between the amount related to the
current year and the remainder which related to the previous year and therefore was
not relevant to profit or loss.

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ACCA FR Question Bank Part 1 answers: 11: Preparation of single company accounts 167

 Some candidates included the estimated amount the directors hoped could be
recovered from insurers (this was a contingent asset and, as many candidates correctly
noted, should be ignored).
 Candidates’ understanding of current and deferred tax issues seems to have been a
particular problem. In this case, the tax charge for the current year and the under-
provision (a debit balance) for the previous year both reduce the profit for the year.
Many candidates, in calculating the movement on the deferred tax provision, included
the deferred tax element of the leased property revaluation in part (a). Both this
amount, and the surplus to which it related, are reported under other comprehensive
income and this was not required as part of the answer to part (a). The overall increase
(in this case) in the deferred tax provision should have been split between the tax on
the revaluation surplus and the balance (a credit in this case) which was part of the
income tax expense.

(a) Triage Co – Schedule of adjustments to profit for the year ended 31 March 20X6
$’000
Draft profit before interest and tax per trial balance 30,000
Adjustments re:
Note (i)
Convertible loan note finance costs (w (1)) (3,023)
Note (ii)
Amortisation of leased property (1,500 + 1,700 (w (2))) (3,200)
Depreciation of plant and equipment (w (2)) (6,600)
Note (iii)
Current year loss on fraud (700 – 450 see below) (250)
Note (iv)
Income tax expense (2,700 + 700 – 800 (w (3))) (2,600)
Profit for the year 14,327

The $450,000 fraud loss in the previous year is a prior period adjustment (reported in the
statement of changes in equity). The possible insurance claim is a contingent asset and should
be ignored.

EXAMINER’S COMMENTS: PART (b)

Common errors noted were:
 Some candidates did not include the equity component of the convertible loan note
(even where this had been calculated) as an "other component of equity" and
sometimes included it as a liability rather than equity.
 A number of candidates did not reduce the revaluation surplus by the deferred tax
element or did not report the revaluation surplus at all.
 Candidates also incorrectly showed an incomplete (or omitted to show) deferred tax
provision
 Some candidates included the convertible loan note as if at the end of the second year
even though it was issued on the first day of the current year
 Some candidates omitted the current tax liability or incorrectly adjusted it by the
underprovision for the previous year.
 Disappointingly, a few candidates showed interest paid as a current liability which
demonstrates a clear lack of understanding of basic principles.

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(b) Triage Co – Statement of financial position as at 31 March 20X6

$’000 $’000
Assets
Non-current assets
Property, plant and equipment (64,600 + 37,400 (w (2))) 102,000
Current assets
Trade receivables (28,000 – 700 fraud) 27,300
Other current assets (per trial balance) 9,300 36,600
Total assets 138,600
Equity and liabilities
Equity
Equity shares of $1 each 50,000
Other component of equity (w (1)) 2,208
Revaluation surplus (7,800 – 1,560 (w (2))(w (3))) 6,240
Retained earnings (w (4)) 17,377 25,825
75,825
Non-current liabilities
Deferred tax (w (3)) 3,960
6% convertible loan notes (w (1)) 38,415 42,375
Current liabilities
Per trial balance 17,700
Current tax payable 2,700 20,400
Total equity and liabilities 138,600

EXAMINER’S COMMENTS: PART (C)

This required the profit for the year (using the candidate's own figure) to be increased by the
after-tax saving of interest on the convertible loan note and the number of shares to be
increased by the (maximum) number that could be issued on the conversion of the loan
note. Many candidates either did not attempt this part of the question or made neither of
the adjustments noted above. As the question did not ask for the basic earnings per share no
marks were awarded for calculating it - the marks were specifically for the adjustments
noted.

(c) Diluted earnings per share (w (5)) 29 cents

Workings (monetary figures in brackets in $’000)
(1) 6% convertible loan notes
The convertible loan notes are a compound financial instrument having a debt and an
equity component which must both be quantified and accounted for separately:
Year ended 31 March outflow 8% present value
$’000 $’000
20X6 2,400 0.93 2,232
20X7 2,400 0.86 2,064
20X8 42,400 0.79 33,496
Debt component 37,792
Equity component (= balance) 2,208
Proceeds of issue 40,000

The finance cost will be $3,023,000 (37,792 × 8%) and the carrying amount of the loan
notes at 31 March 20X6 will be $38,415,000 (37,792 + (3,023 – 2,400)).

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ACCA FR Question Bank Part 1 answers: 11: Preparation of single company accounts 169

(2) Non-current assets: Leased property

The gain on revaluation and carrying amount of the leased property is:
$’000
Carrying amount at 1 April 20X5 (75,000 – 15,000) 60,000
Amortisation to date of revaluation (1 October 20X5) (75,000/25 × 6/12) (1,500)
Carrying amount at revaluation 58,500
Gain on revaluation = balance 7,800
Revaluation at 1 October 20X5 66,300
Amortisation to year ended 31 March 20X6 (66,300/19.5 years × 6/12) (1,700)
Carrying amount at 31 March 20X6 64,600

Annual amortisation is $3m (75,000/25 years); therefore the accumulated amortisation

at 1 April 20X5 of $15m represents five years’ amortisation. At the date of revaluation
(1 October 20X5), there will be a remaining life of 19.5 years.
Of the revaluation gain, $6.24m (80%) is credited to the revaluation surplus and $1.56m
(20%) is credited to deferred tax.
Plant and equipment
$’000
Carrying amount at 1 April 20X5 (72,100 – 28,100) 44,000
Depreciation for year ended 31 March 20X6 (15% reducing balance) (6,600)
Carrying amount at 31 March 20X6 37,400

(3) Deferred tax

$’000
Provision required at 31 March 20X6:
Revalued property and other assets (7,800 + 12,000) × 20%) 3,960
Provision at 1 April 20X5 (3,200)
Increase in provision 760
Revaluation of land and buildings (7,800 × 20%) (to OCI) (1,560)
Balance credited to profit or loss 800

(4) Retained earnings

$’000
Balance at 1 April 20X5 3,500
Prior period adjustment (fraud) (450)
Adjusted profit for year (from (a)) 14,327
Balance at 31 March 20X6 17,377

(5) The maximum additional shares on conversion is 8 million (40,000 x 20/100), giving total
shares of 58 million.
The loan interest ‘saved’ is $2.418m (3,023 (from (w (1)) above × 80% (i.e. after tax)),
giving adjusted earnings of $16.745m (14,327 + 2,418).
$16,745,000 × 100
Therefore diluted EPS is = 29 cents
58 million shares

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Marking guide Marks

(a) Schedule of adjustments to profit for year ended 31 March 20X6
profit before interest and tax b/f ½
loan finance costs 1
depreciation charges 1½
fraud loss ½
income tax expense 1½
5
(b) Statement of financial position
property, plant and equipment 2½
trade receivables 1
other current assets (per trial balance) ½
equity shares ½
equity option 1
revaluation surplus 1
retained earnings 1½
deferred tax 1
6% loan note 1½
current liabilities (per trial balance) ½
current tax payable 1
12
(c) Diluted earnings per share 3
Maximum marks available 20

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ACCA FR Question Bank Part 2 questions: 3: Consolidated statement of profit or loss and OCI 171

PART 2 QUESTIONS: Objective test and Scenario

3: Consolidated statement of profit or loss and other

comprehensive income

1 RW
The following scenario relates to questions 1 – 5.
RW purchased 800,000 of the 1,000,000 ordinary $1 shares of SX in 20X3 for $3.2 million, when SX’s
reserves were $2.4 million. Goodwill of $480,000 arose on this acquisition and there has been no
subsequent impairment. The group policy is to value non-controlling interests at acquisition at their
proportionate share of the fair value of the net assets acquired.
Summarised statements of profit or loss of both entities for the year ended 31 December 20X4 are
shown below:
RW SX
$000 $000
Revenue 6,000 2,500
Operating costs (4,500) (1,700)
Profit before tax 1,500 800
Income tax expense (300) (250)
Profit for the period 1,200 550

On 1 July 20X4, RW disposed of its entire shareholding in SX for $4 million. SXs reserves at 1 January
20X4 were $2.9 million, and its profits accrued evenly throughout the year. RW is liable to income tax
at 30% on any accounting profits made on the disposal of investments.
The effects of the disposal are not reflected in the statements of profit or loss shown above.

1 Which of the following are requirements for the preparation of group accounts? Select ALL that
apply.
 All companies within a group should adopt the same reporting date.
 All inter-group assets and liabilities should be eliminated from the consolidated financial
statements.
 For the purpose of preparing the consolidated financial statements, a subsidiary’s
financial statements should be adjusted so that they conform to the group’s accounting
policies.
 The group statement of financial position should present non-controlling interests within
equity, but separately from the equity of the owners of the parent.

2 In the consolidated statement of profit or loss for the year ended 31 December 20X4, gross
profit will be:

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3 In the consolidated statement of profit or loss for the year ended 31 December 20X4, the
income tax expense is:
 $425,000
 $665,000
 $790,000
 $1,625,000

4 In the consolidated statement of profit or loss for the year ended 31 December 20X4, the profit
or loss on disposal of the investment in SX Co will be:
 Loss of $40,000
 Profit of $180,000
 Loss of $655,000
 Profit of $660,000

5 What is the profit attributable to the non-controlling interest for the year ended 31 December
20X4?
 $55,000
 $110,000
 $141,500
 $283,000

2 BYCOMB
The following scenario relates to questions 6 – 10.
On 1 July 20X4 Bycomb acquired 80% of Cyclip’s equity shares on the following terms:
 a share exchange; and
 a cash payment due on 30 June 20X5 of $1.54 per share acquired (Bycomb’s cost of capital is
10% per annum).
At the date of acquisition, shares in Bycomb and Cyclip had a stock market value of $3.00 and $2.50
each respectively.
Statements of profit or loss for the year ended 31 March 20X5:
Bycomb Cyclip
$’000 $’000
Revenue 24,200 10,800
Cost of sales (17,800) (6,800)
Gross profit 6,400 4,000
Distribution costs (500) (340)
Administrative expenses (800) (360)
Finance costs (400) (300)
Profit before tax 4,700 3,000
Income tax expense (1,700) (600)
Profit for the year 3,000 2,400

Equity in the separate financial statements of Cyclip as at 1 April 20X4:

$’000
Equity
Equity shares of $1 each 12,000
Retained earnings 13,500

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ACCA FR Question Bank Part 2 questions: 3: Consolidated statement of profit or loss and OCI 173

The following information is also relevant:

 Sales from Bycomb to Cyclip in the post-acquisition period were $3 million at a mark-up on cost
of 20%. Cyclip had $420,000 of these goods in inventory as at 31 March 20X5.
 Bycomb’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Cyclip’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
 On 31 March 2X15, Bycomb carried out an impairment review which identified that the goodwill
on the acquisition of Cyclip was impaired by $500,000. Impaired goodwill is charged to cost of
sales.

6 In the consolidated statement of profit or loss for the year ended 31 March 20X5, revenue will
be:
 $29,300,000
 $32,300,000
 $32,000,000
 $27,680,000

7 What amount for cost of sales will be included in the consolidated statement of profit or loss for
the year ended 31 March 20X5?
 $19,970,000
 $20,330,000
 $20,470,000
 $20,540,000

8 What amount should be included in the goodwill calculation in respect of the cash payment due
on 30 June 20X5?

$ 000

9 What is the profit or loss for the year ended 31 March 20X5 attributable to the non-controlling
interest?
 $260,000
 $412,000
 $246,000
 $346,000

10 What was the amount of the non-controlling interest in Cyclip as at 1 July 20X4 (the date of
acquisition)?
 $5,100,000
 $5,220,000
 $6,000,000
 $7,200,000

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174 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4: Accounting for associates

1 PYRAMID
The following scenario relates to questions 1 – 5.
On 1 October 20X3, Pyramid acquired 80% of Square’s equity shares by means of a share exchange of
two shares in Pyramid for every three acquired shares in Square. Pyramid has not recorded any of the
consideration. The market value of Pyramid’s shares at 1 October 20X3 was $6.
The following information is available for the two companies as at 30 September 20X4:
Pyramid Square
Assets $’000 $’000
Non-current assets
Property, plant and equipment 38,100 28,500
Equity and liabilities
Equity
Equity shares of $1 each 50,000 9,000
Other components of equity 8,000 nil
Retained earnings – at 1 October 20X3 16,200 19,000
– for the year ended 30 September 20X4 14,000 8,000
The following information is relevant:
(a) At the date of acquisition, Square’s net assets were equal to their carrying amounts with the
exception of an item of plant which had a fair value of $3 million above its carrying amount. At
the date of acquisition, it had a remaining life of five years (straight-line depreciation).
(b) Pyramid’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, a share price of $3.50 each is representative of the fair value of the shares in
Square held by the non-controlling interest at the acquisition date.
(c) Pyramid bought 1.5 million shares in Cube on 1 April 20X4 for $6 million in cash; this represents
a holding of 30% of Cube’s equity. At 30 September 20X4, Cube’s retained profits had increased
by $2 million over their value at 1 April 20X4. Pyramid uses equity accounting in its consolidated
financial statements for its investment in Cube.
(d) Consolidated goodwill has not been impaired.

1 What was the total consideration transferred by Pyramid in order to acquire its controlling
interest in Square?

$ 000

2 What is the carrying amount of property, plant and equipment in the consolidated statement of
financial position as at 30 September 20X4?
 $62,820,000
 $66,600,000
 $69,000,000
 $69,600,000

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 175

3 The retained earnings of Square to be included in the consolidated retained earnings of the
Pyramid Group as at 30 September 20X4 are:
 $5,920,000
 $6,400,000
 $7,400,000
 $21,120,000

4 Which TWO of the following statements are TRUE in respect of the non-controlling interest to
be included in the consolidated statement of financial position of the Pyramid Group for the
year ended 30 September 20X4? Select ALL that apply.
 20% of Square’s post-acquisition earnings will be debited to it.
 It will be included at its fair value on acquisition plus share of post-acquisition earnings of
Square.
 It will be included as a separate component of equity.
 It will be included in the non-current liabilities of the Pyramid Group.

5 Calculate the carrying amount of Pyramid’s investment in Cube in the consolidated statement of
financial position as at 30 September 20X4

$ 000

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176 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

2 TX AND SX
The following scenario relates to questions 6 – 10.
The draft statements of financial position at 31 December 20X7 for two entities, TX and SX are given
below:
Statements of Financial Position as at 31 December 20X7:
Notes TX SX
$000 $000
Non-current assets
Property, plant and equipment 545 480
Investments at cost:
SX (1),(2) 530 0
LW (150,000 equity shares) (3) 190 0
1,265 480
Current assets
Inventory (4) 221 55
Trade receivables 98 75
Cash and cash equivalents (5) 72 0
391 130
Total assets 1,656 610

Equity and liabilities

Equity shares of $1 each 800 360
Share premium 400 0
Retained earnings 300 140
1,500 500
Current liabilities
Trade payables 156 47
Bank overdraft 0 63
156 110
Total equity and liabilities 1,656 610

Additional information:
(1) TX acquired all of SX’s equity shares on 1 January 20X7 for an agreed purchase consideration of
$530,000. At that date, the fair value of SX’s net assets was $542,000.
(2) The fair value of SX’s property on 1 January 20X7 exceeded its carrying amount by $72,000.
The excess of fair value over carrying amount was attributed to buildings with a remaining
useful life of 18 years. TX’s accounting policy is to depreciate buildings using the straight-line
basis with no residual value.
(3) TX purchased 30% of the equity shares in LW on 1 January 20X7 for $190,000 when LW’s
retained earnings were $70,000. TX exercises significant influence over all aspects of LW’s
financial and operating policies. At 31 December 20X7, LW’s retained earnings were $120,000.
(4) During September 20X7 TX sold SX goods for $44,000 at a mark-up of 33⅓ % on cost.
At 31 December 20X7 all the goods remained in SX’s closing inventory. At 31 December 20X7 TX
had not recorded any payment for the goods.
(5) SX made a part payment to TX for $15,000 on 29 December 20X7 which was not recorded by TX
until 4 January 20X8.

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 177

6 In the consolidated statement of financial position at 31 December 20X7, property, plant and
equipment will be:

7 How should TX treat the difference between the purchase consideration and the fair value of
the net assets acquired in its consolidated financial statements?
 Recognise an asset in the consolidated statement of financial position
 Recognise a liability in the consolidated statement of financial position
 Recognise an immediate gain in the consolidated statement of profit or loss
 Recognise an immediate expense in the consolidated statement of profit or loss

8 The consolidated retained earnings of the TX group should include an amount relating to TX’s
investment in LW.
For the year ended 31 December 20X7, this amount will be:

9 In respect of the transaction in Note 4 above, what adjustments will be required to the
consolidated statement of financial position?
Complete the following journal entries by placing one of the following tokens in each of the
boxes below.
Account names
Consolidated inventories
Consolidated retained earnings
Consolidated trade receivables
Consolidated trade payables
Consolidated cash and cash equivalents
Debit $11,000
Credit $11,000
Debit $44,000
Credit $44,000

10 In the consolidated statement of financial position, the figure for cash and cash equivalents will be:
 $9,000
 $24,000
 $57,000
 $87,000

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178 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

3 POPLAR
The following scenario relates to questions 11 – 15.
For many years Poplar has owned 75% of Sycamore’s equity shares and 30% of the equity shares in
Alder. The following issues are relevant to the consolidated financial statements:
(a) Poplar sells goods to Sycamore at cost plus 30%. Sycamore had $2.6 million of goods in its
inventory at 30 June 20X5 which had been supplied by Poplar. At 30 June 20X5, Poplar had a
trade receivable balance of $2.4 million due from Sycamore which differed from the equivalent
balance in Sycamore’s books due to a payment of $800,000 made by Sycamore on 28 June 20X5
but not received by Poplar until 2 July 20X5.
(b) At 30 June 20X5 the other equity shares (70%) in Alder were owned by many separate investors.
On 1 August 20X5 Spekulate (a company unrelated to Poplar) accumulated a 60% interest in
Alder by buying shares from the other shareholders. In August 20X5 a meeting of the board of
directors of Alder was held at which Poplar lost its seat on Alder’s board.
(c) On 1 January 20X6 Poplar disposed of its entire investment in another subsidiary, Sapling, for
$9.6 million. Poplar had acquired its original 75% investment for $5.2 million some years ago,
and goodwill of $1.4 million arose on the transaction. There was no evidence of goodwill having
been impaired since the date of acquisition. On 1 January 20X6 the net assets of Sapling were
$11.3 million and non-controlling interests were $3.8 million.

11 Which TWO of the following are conditions that need to be satisfied if a parent is to be exempt
from preparing consolidated financial statements?
 The parent is itself a wholly owned subsidiary of another entity
 The parent only has one subsidiary
 The parent’s debt or equity instruments are not traded in a public market
 The parent does not hold more than 60% of its subsidiary’s equity shares
 The parent’s control is obtained through an agreement with its subsidiary rather than an
equity share holding

12 What is the amount of the adjustment required to inventory in the consolidated statement of
financial position as at 30 June 20X5?

$ 000

13 What adjustment should be made to current assets and current liabilities in the consolidated
statement of financial position as at 30 June 20X5?
 Deduct $2.4 million from both consolidated receivables and consolidated payables
 Deduct $1.8 million from both consolidated receivables and consolidated payables
 Deduct $2.4 million from consolidated receivables and $1.6 million from consolidated
payables, and include cash in transit of $800,000
 Deduct $2.4 million from consolidated receivables and $1.6 million from consolidated
payables and include inventory in transit of $800,000

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 179

14 How should Poplar account for its investment in Alder in its consolidated financial statements
for the year ended 30 June 20X6?
 As an associate, using the equity method
 As a financial asset equity investment, at the original (historic) cost of the investment
 As a financial asset equity investment, at fair value
 As a subsidiary, using full consolidation

15 In relation to the investment in Sapling, what is the profit or loss on disposal which will be
recorded in Poplar’s consolidated statement of profit or loss for the year ended 30 June 20X6?
(Ignore tax).

$ 000 profit/loss

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180 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

5: Interpreting financial statements

1 JG
The following scenario relates to questions 1 – 5.
JG is a privately owned entity operating in the fashion wholesale business. During the last year the
management team has been concerned about the liquidity of JG, and about its working capital
management.
The following information is available from the financial statements of JG for the year ended
30 September 20X8.
6 months to 6 months to
30 September 20X8 31 March 20X8
$000 $000
Revenue for the period 2,250 2,000
Inventories turnover period 128 days 77 days
Receivables collection period 89 days 87 days
Trade payables payment period 170 days 112 days
Cash and cash equivalents at period end 150
Short-term borrowings at period end 250
Current ratio 1.3 2.1
Quick ratio 0.7 1.4

1 Which of the following are realistic conclusions that can be drawn from the above information?
Select ALL that apply.
 Although the quick ratio has fallen below 1, the company is in no immediate danger,
because management has been able to secure borrowings of $250,000.
 JG has insufficient resources to meet its short term liabilities.
 Revenue has increased by 12.5% compared with the previous six months, so the
company is in a healthy position.
 The management of JG has been acting prudently to safeguard the entity’s cash.
 Trade payables have increased significantly over the six-month period.

2 The inventories turnover period has increased from 77 days to 128 days.
Which of the following could NOT have contributed to the increase?
 The company has entered into a ‘bill and hold’ arrangement with a major customer.
 The company has been taking advantage of bulk buying discounts.
 There are a significant number of product lines that are moving very slowly.
 There has been a large sales order shortly before the period end.

3 In addition to the ratios provided above, which TWO other ratios would provide particularly
relevant information about the liquidity and solvency of JG?
 Earnings per share
 Gearing
 Interest cover
 Non-current asset turnover

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 181

4 Place the following options into the highlighted boxes in the table below to correctly reflect the
formulae used to calculate the inventories turnover period, the receivables collection period,
and the trade payables payment period.
Cost of sales
Inventories
Payables
Receivables
Revenue

Inventories turnover Receivables collection Trade payables payment

period period period

_____________ × 365 days _____________ × 365 days _____________ × 365 days

5 Which THREE of the following options would be considered realistic next steps for management
to take in order to improve the situation of JG?
 Approach the provider of the short – term loan and request an extension of the current
borrowing facilities
 Dispose of any surplus items of plant and equipment urgently, in order to pay suppliers
 Improve credit control and debt collection procedures with the aim of reducing the
average collection period to 60 days
 Raise additional finance by issuing debt instruments that can be redeemed or converted
at a future date at the option of the holder
 Review the company’s inventory control and buying procedures
 Safeguard the company’s cash position by continuing to delay payments to suppliers

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182 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

2 MONTY
The following scenario relates to questions 6 – 10.
Monty is a publicly listed company. Its financial statements for the year ended 31 March 20X3
including comparatives are shown below:
Statements of profit or loss and other comprehensive income for the year ended:
31 March 20X3 31 March 20X2
$000 $000
Revenue 31,000 25,000
Cost of sales (21,800) (18,600)
Gross profit 9,200 6,400
Distribution costs (3,600) (2,400)
Administrative expenses (2,200) (1,600)
Finance costs – loan interest (150) (250)
– lease interest (250) (100)
Profit before tax 3,000 2,050
Income tax expense (1,000) (750)
Profit for the year 2,000 1,300
Other comprehensive income (note (i)) 1,350 Nil
3,350 1,300

Statements of financial position as at:

31 March 20X3 31 March 20X2
$000 $000 $000 $000
Assets
Non-current assets
Property, plant and equipment 14,000 10,700
Deferred development expenditure 1,000 nil
15,000 10,700
Current assets
Inventory 3,300 3,800
Trade receivables 2,950 2,200
Bank 50 6,300 1,300 7,300
Total assets 21,300 18,000

Equity and liabilities

Equity
Equity shares of $1 each 8,000 8,000
Revaluation reserve 1,350 nil
Retained earnings 3,200 1,750
12,550 9,750
Non-current liabilities
8% loan notes 1,400 3,125
Deferred tax 1,500 800
Lease 1,200 4,100 900 4,825
Current liabilities
Lease 750 600
Trade payables 2,650 2,100
Current tax payable 1,250 4,650 725 3,425
Total equity and liabilities 21,300 18,000

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 183

Notes:
 On 1 July 20X2, Monty acquired additional plant under a lease that had a fair value of $1.5
million.
 On 31 March 20X3 it also revalued its property upwards.
 Amortisation of the deferred development expenditure was $200,000 for the year ended
31 March 20X3.
The following ratios have been calculated from the financial statements:
20X3 20X2

Return on capital employed (ROCE) 21.4% 16.7%

Margins:
Gross profit margin 29.7% 25.6%
Utilisation:
Net asset turnover 1.95 times 1.74 times
Gearing 26.7% 47.4%

6 Which TWO of the following statements about return on capital employed (ROCE) are correct?
 A ROCE of less than 20% is normally a sign that the entity is performing poorly
 In the case of Monty, it might be appropriate to include lease obligations in the
calculation
 It can be calculated by multiplying operating profit margin by net asset turnover
 It is calculated as profit before interest and tax divided by shareholders’ equity

7 Which of the following could have contributed to the increase in ROCE in the current year?
 Decrease in loan interest
 Expenditure on research and development
 Increase in sales revenue
 Revaluation of property at the year-end

8 Which of the following could not be the ONLY reason for the increase in the gross profit margin
during the year?
 Sales revenue has increased
 Selling prices have increased
 The company has negotiated a discount with suppliers
 The sales mix has changed

9 What is the operating profit margin for the year ended 31 March 20X3 and the year ended
31 March 20X2? (Give your answer to one decimal place.)

20X3 %

20X2 %

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184 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

10 Which TWO of the following events have had a favourable effect on the company’s gearing
during 20X3?
 Upwards revaluation of properties
 Issue of share capital
 Payment of a dividend to equity investors
 Repayment of 8% loan notes
 Entering into a lease

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ACCA FR Question Bank Part 2 questions: 6: Statement of cash flows 185

6: Statement of cash flows

OP
The following scenario relates to questions 1 – 5.
Extracts of OP’s financial statements for the year ended 31 March 20X8 are as follows.
OP Statements of financial position as at
31 March 20X8 31 March 20X7
$000 $000 $000 $000
Non-current assets
Property, plant and equipment 977 663
Development expenditure 60 65
Brand name 30 1,067 40 768
Current assets
Inventory 446 450
Trade receivables 380 310
Cash and cash equivalents 69 895 35 795
Total assets 1,962 1,563

Equity and liabilities

Equity shares of $1 each 400 200
Share premium 200 100
Revaluation surplus 30 95
Retained earnings 652 1,282 423 818

Non-current liabilities
Long-term borrowings 230 370
Current liabilities
Trade payables 190 95
Current tax 250 260
Accrued interest 10 450 20 375
Total equity and liabilities 1,962 1,563

OP Statement of profit or loss and other comprehensive income for the year ended 31 March 20X8
$000 $000
Revenue 10,400
Cost of sales (4,896)
5,504
Administrative expenses (2,510)
Distribution costs (1,890) (4,400)
1,104
Finance cost (15)
1,089
Taxation (280)
Profit for the year 809
Other comprehensive income
Loss on revaluation of property (65)
Total comprehensive income 744

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186 P a r t 2 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

Additional information:
(1) All land was revalued on 31 March 20X8, the decrease in value of $65,000 was deducted from
the revaluation surplus.
(2) Cost of sales includes $15,000 for development expenditure amortised during the year.
(3) OP paid a dividend during the year.

1 In the statement of cash flows, which of the items listed below will NOT be an adjustment to
profit before tax to arrive at operating profit before working capital adjustments?
 Brand name impairment
 Depreciation
 Interest paid
 Loss on disposal of property, plant and equipment

2 Place the correct values from the options listed below in each of the highlighted boxes in the
table.
Values
4
(4)
70
(70)
95
(95)
Statement of cash flows (extract) for year ended 31 March 20X8:
Cash flows from operating activities (extract): $000
Change in inventories
Change in trade receivables
Change in trade payables

3 In the statement of cash flows for the year ended 31 March 20X8, what will be cash spent on
development (to the nearest $)?

4 What amount should be included in the statement of cash flows for dividends paid (to the
nearest $)?

5 In the statement of cash flows, the loss on revaluation of property:

 is included in cash flows from investing activities
 is included in cash flows from operating activities
 is not included in the statement of cash flows
 is one of the adjustments to profit before taxation

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ACCA FR Question Bank Part 2 questions: 9: Tangible non-current assets 187

9: Tangible non-current assets

1 LINETTI CO
The following scenario relates to questions 1 – 5.
During the year ended 31 December 20X8, Linetti Co built an extension to its head office. The costs
associated with the construction of the head office extension are as follows:
$m
Land acquisition 10.0
Fees for environmental certifications and building permits 0.5
Architect and engineer fees 1.0
Construction material and labour costs (including unused materials) 6.6

At 30 September 20X8, the date that the head office extension became available for use, the cost of
unused materials on site amounted to $0.5m. At that date, the total borrowing costs incurred on a
loan which was used to specifically finance the head office extension amounted to $0.8m.
Linetti Co also acquired 100% of a subsidiary, Scully Co, on 1 January 20X8. The carrying amount of the
assets of Scully Co in the consolidated financial statements of the Linetti group at 31 December 20X8,
immediately before an impairment review, were as follows:
$m
Goodwill 1.4
Brand name 2.0
Property, plant and equipment 6.0
Current assets (at recoverable amount) 2.4
11.8

The recoverable amount of Scully Co was estimated at $9.6m at 31 December 20X8 and the
impairment of the investment in Scully Co was deemed to be $2.2m.
1 For the year ended 31 December 20X8, how much should be capitalised in respect of the
construction of the extension to the head office building?
 $18.4m
 $17.6m
 $18.9m
 $18.1m (2 marks)

2 Linetti Co incurred further expenditure on the head office extension after it had been
completed.
Which of the following would qualify as asset expenses?
 Property insurance premiums incurred
 Installation of new office fixtures and fittings
 Marketing costs telling the public that the head office extension is operational
 Maintenance and relocation of computers and related office equipment (2 marks)

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188 P a r t 2 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

3 At 31 December 20X9, the directors of Linetti Co decide to adopt the revaluation model of IAS
16 ®Property, Plant and Equipment for Linetti Co's property.
In accordance with IAS 16 Property, Plant and Equipment, which of the following statements is
FALSE?
 In subsequent years, the depreciation will be based on the revalued amount of the head
office building as opposed to its cost
 Any revaluation gain on the head office building is recognised in other comprehensive
income and any revaluation loss is recognised in profit or loss
 Each component part of the head office building is revalued separately
 The residual value and the useful life of the head office building must be reviewed each
year (2 marks)

4 Assuming Scully Co represents a cash generating unit, what is the carrying amount of the brand
at 31 December 20X8 following the impairment review?
 $1.2m
 $1.45m
 $1.73m
 $1.8m (2 marks)

5 Which, if any, of the following statements regarding impairment reviews is/are correct?
(1) At the end of each reporting period, an entity should assess if there is any indication that
assets have been impaired
(2) Annual impairment reviews are required on all intangible assets with indefinite lives
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2 (2 marks)

(10 marks)

2 FUNDO
The following scenario relates to questions 6 – 10.
Fundo is preparing its financial statements for the year ended 31 March 20X3. The following issues are
relevant:
(a) Owned property
Fundo owns the following properties at 1 April 20X2.
Property A: An office building used by Fundo for administrative purposes with a depreciated
historical cost of $2 million. At 1 April 20X2 it had a remaining life of 20 years. After a
reorganisation on 1 October 20X2, the property was let to a third party and reclassified as an
investment property applying Fundo’s policy of the fair value model. An independent valuer
assessed the property to have a fair value of $2.3 million at 1 October 20X2, which had risen to
$2.34 million at 31 March 20X3.
Property B: Another office building sub-let to a subsidiary of Fundo. At 1 April 20X2, it had a fair
value of $1.5 million which had risen to $1.65 million at 31 March 20X3.

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ACCA FR Question Bank Part 2 questions: 9: Tangible non-current assets 189

(b) Alterations to leased property

Fundo entered into a lease for a property some years ago. The lease has a remaining life of eight
years at 1 April 20X2.
Prior to 1 April 20X2, Fundo obtained permission from the owner of the property to make some
internal alterations to the property so that it can be used for a new manufacturing process which
Fundo is undertaking. The cost of these alterations was $7 million and they were completed on
1 April 20X2 (the time taken to complete the alterations can be taken as being negligible).
A condition of being granted permission was that Fundo would have to restore the property to its
original condition before handing back the property at the end of the lease. The estimated
restoration cost on 1 April 20X2, discounted at 8% per annum to its present value, is $5 million.

6 Which THREE of the following would meet the definition of investment property?
 A building intended for sale in the ordinary course of business
 A building occupied by employees
 A building that is vacant but held to be rented out
 A building that is being constructed for use as a future investment property
 Land being developed on behalf of a third party
 Land held for long-term capital appreciation

7 How should the expenses and gains relating to Property A be reported in the statement of profit
or loss and other comprehensive income for the year ended 31 March 20X3?
 Gain of $40,000 in profit or loss; gain of $300,000 in other comprehensive income
 Depreciation expense of $50,000 and gain of $390,000 in profit or loss
 Depreciation expense of $50,000 and gain of $40,000 in profit or loss; gain of $350,000 in
other comprehensive income
 Depreciation expense of $50,000 in profit or loss; gain of $390,000 in other
comprehensive income

8 Which of the following statements are correct?

I Property B cannot be classified as an investment property in the separate financial
statements of Fundo
II Property B cannot be classified as an investment property in the consolidated financial
statements of the Fundo Group.
III The fair value model for investment properties is the same as the revaluation model for
owner-occupied properties.
 I only
 II only
 II and III
 I, II and III

9 What is the carrying amount of property, plant and equipment in respect of the alterations to
the leased property, as at 31 March 20X3?

$ 000

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190 P a r t 2 q u e s t i o n s : 9 : T a n g i b l e n o n - c u r r e n t a s s e t s ACCA FR Question Bank

10 What amount should be recognised as a provision in the statement of financial position in

respect of the alterations to the leased property, as at 31 March 20X3?
 Nil
 $5,000,000
 $5,400,000
 $12,960,000

3 FLIGHTLINE
The following scenario relates to questions 11 – 15.
Flightline is an airline which treats its aircraft as complex non-current assets. The cost and other details
of one of its aircraft are:
$000 Estimated life
Exterior structure – purchase date 1 April 20W2 120,000 20 years
Interior cabin fittings – replaced 1 April 20X2 25,000 5 years
Engines (2 at $9 million each) – replaced 1 April 20X2 18,000 36,000 flying hours
No residual values are attributed to any of the component parts.
At 1 April 20X5 the aircraft log showed it had flown 10,800 hours since 1 April 20X2. In the year ended
31 March 20X6, the aircraft flew for 1,200 hours for the six months to 30 September 20X5 and a
further 1,000 hours in the six months to 31 March 20X6.
On 1 October 20X5 the aircraft suffered a ‘bird strike’ accident which damaged one of the engines
beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $10.8 million. The
other engine was also damaged, but was repaired at a cost of $3 million; however, its remaining
estimated life was shortened to 15,000 hours. The accident also caused cosmetic damage to the exterior
of the aircraft which required repainting at a cost of $2 million. As the aircraft was out of service for some
weeks due to the accident, Flightline took the opportunity to upgrade its cabin facilities at a cost of $4.5
million. This did not increase the estimated remaining life of the cabin fittings, but the improved facilities
enabled Flightline to substantially increase the air fares on this aircraft.
Note: the post-accident changes are deemed effective from 1 October 20X5.

11 What is the carrying amount of the exterior structure of the aircraft as at 31 March 20X6?

$ 000

12 What is the depreciation charge relating to the cabin fittings for the year ended 31 March 20X6?
 $5,000,000
 $5,450,000
 $5,900,000
 $6,500,000

13 What amount should be included in profit or loss in respect of the write off of the engine that
was completely destroyed by the ‘bird strike’ accident on 1 October 20X5?

$ 000

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ACCA FR Question Bank Part 2 questions: 9: Tangible non-current assets 191

14 In respect of the engine that was damaged by the accident and then repaired, what is the
depreciation charge for the year ended 31 March 20X6?
 $600,000
 $649,000
 $700,000
 $900,000

15 What is the carrying amount of the new engine as at 31 March 20X6?

$ 000

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192 P a r t 2 q u e s t i o n s : 1 0 : I n t a n g i b l e a s s e t s ACCA FR Question Bank

10: Intangible assets

WILROB CO (MARCH / JUNE 2021)

Wilrob Co has the following research projects at 31 March 20X7:
Project 324 – The project commenced on 1 April 20X6 and incurred total costs of $15m during the
period to 31 December 20X6 on a pro-rata basis. On 30 June 20X6, the directors were confident that
the project met the capitalisation criteria of IAS 38 Intangible Assets. The project was completed and
began to generate revenue from 1 January 20X7. It is estimated that the project will generate revenue
for five years.
Project 325 – The project commenced on 1 September 20X6. Costs of $20,000 per month were
incurred until 31 January 20X7 when the project was abandoned. The specialist equipment that had
been purchased for Project 325 was transferred for use in another of Wilrob Co's research projects.
Project 326 – The project commenced on 1 January 20X7. Costs of $40,000 per month were incurred
until 31 August 20X7 when the directors increased the spend to $60,000 to complete the project
quickly as a potential buyer had been identified on 20 July 20X7. The directors had not been confident
of the success of the project until this point.
1 Which TWO of the following are required by IAS 38 Intangible Assets in relation to the
amortisation of intangible assets (excluding goodwill)?
 Intangible assets should be amortised over the expected useful life or not at all if the
useful life is deemed to be indefinite
 Intangible assets should not be amortised but instead reviewed for impairment losses
only
 Intangible assets should be amortised on the basis of the expected pattern of
consumption of the expected future economic benefits
 Intangible assets should not be amortised or impaired and instead simply carried forward
at their original cost until sold or scrapped

2 Which TWO of the following statements are true in relation to IAS 38 Intangible Assets?
 IAS 38 requires the revaluation of intangible assets where a company has chosen to
revalue its tangible non-current assets
 IAS 38 does not permit the revaluation of any intangible assets in any circumstances
 IAS 38 permits the revaluation of intangible assets only if there is an active market for
such assets
 IAS 38 requires that the initial recognition of intangibles must be at cost

3 In accordance with IAS 38 Intangible Assets, what is charged to the statement of profit or loss
for the year ended 31 March 20X7 in respect of project 324?
 $5.5m
 $6.5m
 $7m
 $10m

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ACCA FR Question Bank Part 2 questions: 10: Intangible assets 193

4 In accordance with IAS 38 Intangible Assets, which of the following is/are true or false in
respect of the accounting treatment of projects 325 and 326?
TRUE FALSE
The cost for project 325 should be expensed in the statement of  
profit or loss for the year ended 31 March 20X7
The specialist equipment which was purchased for project 325  
should not be depreciated as it has only been used in abandoned or
research projects
The costs for project 326 should be included as an asset in the  
statement of financial position as at 31 March 20X7

5 During the year ended 31 March 20X8, Wilrob Co incurred the following costs:
(1) $400,000 in staff costs incurred in updating a computerised record of potential
customers
(2) $800,000 for the purchase of a domain name for the website of a company making
substantial online sales
(3) $4m for a patent purchased to improve the production process, with an expected useful
life of three years
Which of the above costs would be capitalised as intangible assets in accordance with IAS 38
Intangible Assets?
 1 only
 3 only
 2 and 3 only
 1, 2 and 3

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194 P a r t 2 q u e s t i o n s : 1 3 : R e v e n u e a n d i n v e n t o r y ACCA FR Question Bank

13: Revenue and inventory

CAMPBELL CO (SEPTEMBER/DECEMBER 2020)

The following details relate to three of Campbell Co's contracts:
Contract 1 has a total price of $9m and commenced in 20X7. Total costs are expected to be $7m. The
progress towards completion is assessed at 90% at 31 December 20X8. Progress was measured at 20%
for the year ended 31 December 20X7.
Contract 2 commenced in December 20X8 and is expected to generate a profit of $3m. It is too early in
the contract to assess progress towards completion. Campbell Co has spent $0.2m so far, all of which
is expected to be recoverable from the customer when Campbell Co sends its first invoice in 20X9.
Contract 3 relates to the sale of equipment to a customer for $2.36m on 1 July 20X8. The sale included
$0.4m for installation of the equipment and $0.2m relating to 12 months after-sales support. The
equipment was installed on 1 July 20X8.
1 Which of the following correctly reflects how revenue should be recognised in accordance
with IFRS 15 Revenue from Contracts with Customers?
Correct Not correct
(1) Revenue should be recognised as an entity satisfies a  
performance obligation
(2) Progress towards completion on a contract should be  
measured solely on an input basis

2 What revenue should be recognised in respect of Contract 1 in Campbell Co's statement of

profit or loss for the year ended 31 December 20X8?

$ m

3 Which of the following items would NOT be recorded in the financial statements for 20X8 of
Campbell Co in respect of Contract 2?
 Revenue $0.2m
 Cost of sales $0.2m
 Contract asset $0.2m
 Contract liability $0.2m

4 What revenue should be recognised in respect of Contract 3 in Campbell Co’s statement of

profit or loss for the year ended 31 December 20X8?
 $2.06m
 $2.16m
 $2.26m
 $2.36m

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ACCA FR Question Bank Part 2 questions: 13: Revenue and inventory 195

5 Campbell Co offers its customers an accessory for the equipment that it sells in contract 3.
Campbell Co does not manufacture the accessory itself, but has an agreement with the
manufacturer to sell the accessory on the manufacturer's behalf. Campbell Co places the order
with the manufacturer and the manufacturer delivers the accessory direct to the customer. The
customer pays Campbell Co for the accessory and Campbell Co then deducts 3% commission
before paying the manufacturer.
An accessory is delivered to one of Campbell Co's customers on 10 December 20X8, which the
customer has accepted and will pay $50,000.
Which of the following correctly describes how Campbell Co should recognise this
transaction?
 $50,000 should be recognised as revenue by Campbell Co when the accessory has been
delivered and accepted by the customer
 $1,500 should be recognised as revenue by Campbell Co when the accessory has been
paid for by the customer
 $1,500 should be recognised as revenue by Campbell Co when the accessory has been
delivered and accepted by the customer
 $50,000 should be recognised as revenue by Campbell Co when the accessory has been
paid for by the customer

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196 P a r t 2 q u e s t i o n s : 1 4 : F i n a n c i a l i n s t r u m e n t s ACCA FR Question Bank

14: Financial instruments

DIAZ CO
The following scenario relates to questions 1 – 5.
The following is an extract from Diaz Co's trial balance as at 31 December 20X8:
Debit Credit
$m $m
Inventory at 31 December 20X8 8.6
Trade receivables 6.2
5% loan notes 9.0
The inventory count was completed on 31 December 20X8, but two issues have been noted. Firstly,
products with a sales value of $0.6m had been incorrectly excluded from the count. Secondly, items
costing $0.2m which had been included in the count were damaged and could only be sold for 50% of
the normal selling price. Diaz Co makes a mark-up of 50% on both of these items.
Diaz Co entered into a factoring agreement with Finaid Co on 31 December 20X8. In accordance with
the agreement, Diaz Co sold trade receivables with a carrying amount of $6.2m to Finaid Co for $6m.
Under the terms of the factoring agreement, after six months, Finaid Co will return any unpaid
receivables to Diaz Co for collection. Finaid Co will also charge Diaz Co a fee of 5% of any uncollected
balances at the end of each month.
The 5% loan notes were issued for $9m on 1 July 20X8. Diaz Co incurred issue costs of $0.5m
associated with this, which have been expensed within finance costs. The loan note interest is payable
each 30 June and the loan note is repayable at a premium, giving them an effective interest rate of 8%.
1 In accordance with IAS 32 Financial Instruments: Presentation, which of the items in the trial
balance would be classified as financial instruments?
 Closing inventory and trade receivables only
 5% loan notes only
 Trade receivables and 5% loan notes only
 Closing inventory, trade receivables and 5% loan notes (2 marks)

2 What is the correct carrying amount of inventory to be recognised in Diaz Co's financial
statements as at 31 December 20X8?
 $8.95m
 $9.0m
 $8.9m
 $9.15m (2 marks)

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ACCA FR Question Bank Part 2 questions: 14: Financial instruments 197

3 In an attempt to improve reported profit, the directors of Diaz Co want to change the valuation
method of inventory from first in first out (FIFO) to an average cost method.
Which, if any, of the following statements regarding the potential change in inventory valuation
is/are correct?
(1) The change will represent a change in accounting estimate
(2) The financial statements will be adjusted prospectively
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2 (2 marks)

4 Which of the following statements regarding the factoring arrangement is NOT true?
 $6m received should be recorded in the liabilities of Diaz Co at 31 December 20X8
 $0.2m should be expensed in Diaz Co's statement of profit or loss for the year ended 31
December 20X8
 A total of the 5% monthly fee should be expensed in Diaz Co's statement of profit or loss
for the year ended 31 December 20X9
 The receivables will remain as an asset in the financial statements of Diaz Co at
31 December 20X8 (2 marks)

5 In respect of the 5% loan notes, how much should be expensed within Diaz Co's statement of
profit or loss for the year ended 31 December 20X8?
 $0.68m
 $0.45m
 $0.72m
 $0.34m (2 marks)

(10 marks)

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15: Provisions and events after the reporting period

1 JEFFERS CO
The following scenario relates to questions 1 – 5.
Jeffers Co prepares financial statements for the year ended 31 December 20X8. The financial
statements are expected to be authorised for issue on 15 March 20X9.
The following three events have occurred in January 20X9:
(1) Health and safety fine
A health and safety investigation of an incident that occurred in 20X8 was concluded in January
20X9, resulting in a $1.5m fine for Jeffers Co. A provision for $1m had been recognised in Jeffers
Co's financial statements for the year ended 31 December 20X8.
(2) Customer ceased trading
Notice was received on 10 January 20X9 that a customer owing $1.2m at 31 December 20X8
had ceased trading. It is unlikely that the debt will be recovered in full.
(3) Acquisition of a competitor
The acquisition of a competitor was finalised on 10 January 20X9, being the date Jeffers Co
obtained control over the competitor. Negotiations in respect of the acquisition commenced in
May 20X8.
In addition to this, there is an outstanding court case at 31 December 20X8 relating to faulty goods
supplied by Jeffers Co. Legal advice states that there is a small chance that they will have to pay out
$6m, but the most likely outcome is believed to be a payout of $5m. Either way, Jeffers Co will have to
pay legal fees of $0.2m. All payments are expected to be made on 31 December 20X9. Jeffers Co has a
cost of capital of 10% (discount factor 0.909).
Jeffers Co believes the fault lies with the supplier, and is pursuing a counter-claim. Legal advice states
that it is possible, but not likely, that this action will succeed.
1 Which, if any, of the following statements regarding IAS 10 Events after the Reporting Period
is/are correct?
(1) 'Events after the reporting period' are deemed to be all events from the date the
financial statements are authorised for issue up until the date of the annual meeting with
the shareholders
(2) Non-adjusting events do not need to be reflected in any part of an entity's financial
statements or annual report
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2 (2 marks)

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ACCA FR Question Bank Part 2 questions: 15: Provisions and events after the reporting period 199

2 Which of the three events that occurred in January 20X9 would be classified as adjusting events
in accordance with IAS 10 Events after the Reporting Period?
(1) Health and safety fine
(2) Customer ceased trading
(3) Acquisition of a competitor
 1 and 2 only
 1 and 3 only
 2 and 3 only
 1, 2 and 3 (2 marks)

3 What amount should be recorded as a provision in respect of the outstanding court case against
Jeffers Co as at 31 December 20X8 (to the nearest hundred thousand)?
 $5.6m
 $5.5m
 $4.7m
 $4.5m (2 marks)

4 At 31 December 20X8, which of the following represents the correct accounting treatment of
the counter-claim made by Jeffers Co against the supplier?
 Nothing is recognised or disclosed in the financial statements
 Disclose as a contingent asset
 Recognise a receivable from the supplier
 Net the possible counter-claim proceeds from the supplier against the provision for legal
claim (2 marks)

5 In February 20X9, a major fire broke out in Jeffers Co's property and warehouse. Jeffers Co has
no insurance, and now the management of the company believe it is unable to continue trading.
How should this be reflected in Jeffers Co's financial statements for the year ended 31
December 20X8?
 No adjustment should be made to the figures in the financial statements, however this
event must be disclosed in the notes
 The financial statements can no longer be prepared on a going concern basis
 No disclosure is required in the financial statements, however this event must be
reflected in the financial statements for the year ended 31 December 20X9
 The financial statements should continue to be prepared using the going concern basis,
with an impairment loss recognised against the non-current assets (2 marks)

(10 marks)

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2 BOROUGH
The following scenario relates to questions 6 – 10.
The following items have arisen during the preparation of Borough’s draft financial statements for the
year ended 30 September 20X6.
(a) On 1 October 20X5, Borough Co commenced the extraction of crude oil from a new well on the
seabed. The cost of a 10-year licence to extract the oil was $50 million. As a condition of
granting the licence, Borough Co has an obligation to make good the damage the extraction has
caused to the seabed environment. The cost of this will be in two parts: a fixed amount of
$20 million and a variable amount of 2 cents per barrel extracted. Both of these amounts are
based on their present values, as at 1 October 20X5 (discounted at 8%), of the estimated costs
in 10 years’ time. In the year to 30 September 20X6 Borough extracted 150 million barrels of oil.
(b) During the current year Borough Co started the building of a new factory complex. The
company issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on
1 October 20X5. 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 complex, which meets the definition of a qualifying asset. Construction of the store
commenced on 1 November 20X5 and it was completed and ready for use on 31 August 20X6,
but production did not begin until 1 October 20X6.

6 Which of the following statements regarding provisions and contingent liabilities is NOT
correct?
 A provision is recognised only if a reliable estimate can be made of the amount of the
obligation
 If an entity has a present obligation as a result of a past event, it recognises a provision
 If the amount of an obligation cannot be precisely measured, an entity discloses a
contingent liability
 A present obligation can result in a provision being recognised, even where it is not
legally binding

7 In respect of the licence to extract oil, what is the carrying amount of the non-current asset as
at 30 September 20X6?

$ 000

8 What amount should Borough Co recognise as an environmental provision in the statement of

financial position as at 30 September 20X6?
 $21,160,000
 $21,600,000
 $23,000,000
 $24,840,000

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ACCA FR Question Bank Part 2 questions: 15: Provisions and events after the reporting period 201

9 In respect of borrowing costs, what amount should Borough Co include in the cost of the factory
complex as at 30 September 20X6?
 $500,000
 $600,000
 $625,000
 $750,000

10 Which TWO of the following statements regarding borrowing costs are correct?
 Finance costs cannot be capitalised unless they relate to a property that is being constructed.
 A qualifying asset is an asset that takes a substantial period of time to get ready for its
intended use or sale.
 Income earned from the temporary investment of funds borrowed specifically to finance
the construction of an asset should be recognised as a gain in profit or loss.
 Borrowing costs must be capitalised if they are directly attributable to the acquisition,
construction, or production of a qualifying asset.
 Only borrowing costs incurred on funds borrowed specifically to finance the construction
of an asset can be capitalised.

3 SKEPTIC
The following scenario relates to questions 11 – 15.
The following issues have arisen during the preparation of Skeptic’s draft financial statements for the
year ended 31 March 20X4:
(a) From 1 April 20X3, the directors have decided to reclassify research and amortised development
costs as administrative expenses rather than its previous classification as cost of sales. They
believe that the previous treatment unfairly distorted the company’s gross profit margin.
(b) Skeptic has two potential liabilities to assess. The first is an outstanding court case concerning a
customer claiming damages for losses due to faulty components supplied by Skeptic. The
second is the provision required for product warranty claims against 200,000 units of retail
goods supplied with a one-year warranty.
The estimated outcomes of the two liabilities are:
Court case Product warranty claims
10% chance of no damages awarded 70% of sales will have no claim
65% chance of damages of $4 million 20% of sales will require a $25 repair
25% chance of damages of $6 million 10% of sales will require a $120 repair
(c) On 1 April 20X3, Skeptic received a renewal quote of $400,000 from the company’s property
insurer. The directors were surprised at how much it had increased and believed it would be
less expensive for the company to ‘self-insure’. During the year, the company incurred $250,000
of expenses relating to previously insured property damage.

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(d) On 1 April 20X3, Skeptic received a government grant of $8 million towards the purchase of new
plant with a gross cost of $64 million. The plant has an estimated life of 10 years and is
depreciated on a straight-line basis. One of the terms of the grant is that the sale of the plant
before 31 March 20X7 would trigger a repayment on a sliding scale as follows:
Sale in the year ended: Amount of repayment
31 March 20X4 100%
31 March 20X5 75%
31 March 20X6 50%
31 March 20X7 25%
Skeptic accounts for government grants as a separate item of deferred credit in its statement of
financial position. Skeptic has no intention of selling the plant before the end of its economic
life.

11 In relation to the reclassification of research and development expenditure, which THREE of the
following statements are correct?
 Skeptic should restate its comparative results for the year ended 31 March 20X3 to reflect the
change in presentation
 Skeptic can only reclassify the expenditure if this would result in the financial statements
becoming more reliable and relevant
 Skeptic cannot reclassify its expenditure, because the change is not required by an IFRS
 The reclassification is not a change in accounting policy, because it does not change the way
in which assets and liabilities are measured
 The reclassification will not affect the company’s return on capital employed

12 How should Skeptic treat the potential liability for losses due to faulty components in its
financial statements for the year ended 31 March 20X4?
 Disclose a contingent liability
 Recognise a provision of $4 million
 Recognise a provision of $4.1 million
 Recognise a provision of $6 million

13 What is the amount of the provision for product warranty claims as at 31 March 20X4?

$ 000

14 In respect of the directors’ decision to ‘self-insure’, which of the following statements is

correct?
 The company should not recognise a provision
 The company should recognise a provision of $400,000 at 31 March 20X4 and an expense
in profit or loss for the year
 At 31 March 20X4 the company should recognise a provision based on the directors’ best
estimate of the expenditure required for future property damage, discounted to present
value
 The company should recognise a provision of $150,000 at 31 March 20X4, which is the
cost of the insurance, less the amount that would have been claimed for property
damage during the year

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ACCA FR Question Bank Part 2 questions: 15: Provisions and events after the reporting period 203

15 In respect of the government grant, what amount should Skeptic recognise as a non-current
liability as at 31 March 20X4?
 $4 million
 $6 million
 $6.4 million
 $7.2 million

4 MANCO
The following scenario relates to questions 16 – 20.
Manco has been experiencing substantial losses at its furniture-making operation, which is treated as a
separate operating segment. The company’s year-end is 30 September. At a meeting on 1 July 20X5
the directors decided to close down the furniture-making operation on 31 January 20X6 and then
dispose of its non-current assets on a piecemeal basis. Affected employees and customers were
informed of the decision and a press announcement was made immediately after the meeting. The
directors have obtained the following information in relation to the closure of the operation.
(a) On 1 July 20X5, the factory had a carrying amount of $3.6 million and is expected to be sold for
net proceeds of $5 million. On the same date, the plant had a carrying amount of $2.8 million,
but it is anticipated that it will only realise net proceeds of $500,000.
(b) Of the employees affected by the closure, the majority will be made redundant, at cost of
$750,000; the remainder will be retrained at a cost of $200,000 and given work in one of the
company’s other operations.
(c) Trading losses from 1 July to 30 September 20X5 are expected to be $600,000 and, from this
date to the closure on 31 January 20X6, a further $1 million of trading losses are expected.

16 An entity can only recognise a provision for restructuring costs if it has a constructive obligation
to carry out the restructuring.
Which TWO of the following must apply if an entity has a constructive obligation?
 There is a detailed formal plan which identifies the business or part of a business affected
 The business affected has been sold or terminated
 The business affected is a separate operating segment
 The entity has raised a valid expectation that it will carry out the restructuring
 The restructuring is planned to take place within the next six months

17 Which TWO conditions must apply before an asset can be classified as ‘held-for-sale’?
 The asset must be available for immediate sale in its present condition
 The company’s shareholders must have formally approved the sale
 The asset must be actively marketed at a reasonable price
 The asset must be part of a disposal group

18 In respect of the planned sale of the factory and the plant, what is the total loss or expense that
Manco should recognise in profit or loss for the year ended 30 September 20X5?

$ 000

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19 In respect of employee costs resulting from the restructuring, what amount should Manco
recognise as a provision as at 30 September 20X5?

$ 000

20 Which of the following statements is NOT correct?

 In the year ended 30 September 20X6, the restructuring costs actually incurred will be
offset against the provision recognised at 30 September 20X5
 The closure will be reported as a discontinued operation in the year ended 30 September
20X5
 The expected trading losses from 1 October 20X5 to the closure on 31 January 20X6
cannot be provided in the year ended 30 September 20X5
 The factory and the plant cannot be classified as held-for-sale at 30 September 20X5

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ACCA FR Question Bank Part 2 questions: 16: Taxation 205

16: Taxation

NORWOOD
The following scenario relates to questions 1 – 5.
The following trial balance extracts (i.e. it is not a complete trial balance) relate to Norwood as at 30
September 20X3:
$000 $000
Lease rental paid on 30 September 20X3 (note (a)) 9,200
Leased plant at initial carrying amount (note (a)) 35,000
Accumulated depreciation at 1 October 20X2:
leased plant 7,000
Deferred tax (note (b)) 8,000
Lease liability at 1 October 20X2 (note (a)) 29,300
Current tax (note (b)) 1,050
The following notes are relevant:
(a) The leased plant was acquired on 1 October 20X1 under a five-year lease which has an implicit
interest rate of 10% per annum. The rentals are $9.2 million per annum payable on
30 September each year.
No depreciation has yet been charged on any non-current asset for the year ended
30 September 20X3.
(b) A provision for income tax for the year ended 30 September 20X3 of $3.4 million is required.
The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 September 20X2. At 30 September 20X3, the tax base of Norwood’s net assets was
$24 million less than their carrying amounts. This does not include the effect of a revaluation of
property that took place on 1 October 20X2 and which resulted in a gain of $4.4 million. The
income tax rate of Norwood is 25%.

1 In which of the following situations could a lessee elect not to recognise a right-of-use asset and
a lease liability?
 The leased asset can be transferred to another user in its present condition
 The leased asset is of low value
 The lease term is 3 years, and has less than 12 months remaining at the end of the
reporting period
 The lease term is 12 months and there is an option to purchase the asset during this time

2 What is the carrying amount of the leased plant at 30 September 20X3?

$ 000

3 What is the amount of the non-current lease liability in the statement of financial position as at
30 September 20X3?
 $12,910,000
 $16,133,000
 $20,100,000
 $23,030,000

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4 The trial balance of Norwood includes a balance in respect of current tax. How should this be
treated in the financial statements for the year ended 30 September 20X3?
 Add the balance to the current tax liability
 Deduct the balance from the current tax liability
 Add the balance to the income tax expense
 Deduct the balance from the income tax expense

5 The tax charge in Norwood’s statement of profit or loss for the year ended 30 September 20X3
will include which entry in respect of the movement on the deferred tax liability?
 Credit of $900,000
 Debit of $900,000
 Credit of $2,000,000
 Debit of $2,000,000

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ACCA FR Question Bank Part 2 questions: 2: More group accounts 207

PART 2 QUESTIONS: Section C

2: More group accounts

1 PARTY CO & STREAMER CO (Q32, SEPTEMBER/DECEMBER 2017)

The following are the draft statements of financial position of Party Co and Streamer Co as at 30
September 20X5:
Party Co Streamer Co
$’000 $’000
ASSETS
Non-current assets
Property, plant and equipment 392,000 84,000
Investments 120,000 Nil
512,000 84,000
Current assets 94,700 44,650
Total assets 606,700 128,650

EQUITY AND LIABILITIES

Equity
Equity shares 190,000 60,000
Retained earnings 210,000 36,500
Revaluation surplus 41,400 4,000
441,400 100,500
Non-current liabilities
Deferred consideration 28,000 Nil
Current liabilities 137,300 28,150
606,700 128,650
Total equity and liabilities
The following information is relevant:
 On 1 October 20X4, Party Co acquired 80% of the share capital of Streamer Co. At this date the
retained earnings of Streamer Co were $34m and the revaluation surplus stood at $4m. Party
Co paid an initial cash amount of $92m and agreed to pay the owners of Streamer Co a further
$28m on 1 October 20X6. The accountant has recorded the full amounts of both elements of
the consideration in investments. Party Co has a cost of capital of 8%. The appropriate discount
rate is 0.857.
 On 1 October 20X4, the fair values of Streamer Co’s net assets were equal to their carrying
amounts with the exception of some inventory which had cost $3m but had a fair value of
$3.6m. On 30 September 20X5, 10% of these goods remained in the inventories of Streamer Co.
 During the year, Party Co sold goods totalling $8m to Streamer Co at a gross profit margin of
25%. At 30 September 20X5, Streamer Co still held $1m of these goods in inventory. Party Co’s
normal margin (to third party customers) is 45%.
 The Party group uses the fair value method to value the non-controlling interest. At acquisition
the non-controlling interest was valued at $15m.
Required:
(a) Prepare the consolidated statement of financial position of the Party group as at 30 September
20X5. (15 marks)

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(b) Party Co has a strategy of buying struggling businesses, reversing their decline and then selling
them on at a profit within a short period of time. Party Co is hoping to do this with Streamer Co.
As an adviser to a prospective purchaser of Streamer Co, explain any concerns you would raise
about making an investment decision based on the information available in the Party Group’s
consolidated financial statements in comparison to that available in the individual financial
statements of Streamer Co. (5 marks)

(20 marks)

2 PALISTAR (Q3, SEPTEMBER 2015 AMENDED)

On 1 January 20X5, Palistar acquired 75% of Stretcher’s equity shares by means of an immediate share
exchange of two shares in Palistar for five shares in Stretcher. The fair value of Palistar and Stretcher’s
shares on 1 January 20X5 were $4.00 and $3.00 respectively. In addition to the share exchange,
Palistar will make a cash payment of $1.32 per acquired share, deferred until 1 January 20X6. Palistar
has not recorded any of the consideration for Stretcher in its financial statements. Palistar’s cost of
capital is 10% per annum.
The summarised statements of financial position of the two companies as at 30 June 20X5 are:
Palistar Stretcher
$000 $000
Assets
Non-current assets (note (ii))
Property, plant and equipment 55,000 28,600
Financial asset equity investments (note (iv)) 11,500 6,000
66,500 34,600

Current assets 33,500 27,500

Total assets 100,000 62,100
Equity and liabilities
Equity
Equity shares of $1 each 20,000 20,000
Other component of equity 4,000 nil
Retained earnings – at 1 July 20X4 26,200 14,000
– for year ended 30 June 20X5 24,000 10,000
74,200 44,000
Current liabilities 25,800 18,100
Total equity and liabilities 100,000 62,100

The following information is relevant:

(i) Stretcher’s business is seasonal and 60% of its annual profit is made in the period
1 January to 30 June each year.
(ii) At the date of acquisition, the fair value of Stretcher’s net assets was equal to their
carrying amounts with the following exceptions:
An item of plant had a fair value of $2 million below its carrying amount. At the date of
acquisition, it had a remaining life of two years.
The fair value of Stretcher’s investments was $7 million (see also note (v)).
Stretcher owned the rights to a popular mobile (cell) phone game. At the date of
acquisition, a specialist valuer estimated that the rights were worth $12 million and had
an estimated remaining life of five years.

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ACCA FR Question Bank Part 2 questions: 2: More group accounts 209

(iii) Following an impairment review, consolidated goodwill is to be written down by

$3 million as at 30 June 20X5.
(iv) At 30 June 20X5, the fair values of the financial asset equity investments of Palistar and
Stretcher were $13.2 million and $7.9 million respectively.
(v) Palistar’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Stretcher’s share price at that date is representative of the
fair value of the shares held by the non-controlling interest.
Required:
Prepare the consolidated statement of financial position for Palistar as at 30 June 20X5.

(20 marks)

3 PLASTIK (Q3, DECEMBER 2014 AMENDED)

On 1 January 20X4, Plastik acquired 80% of the equity share capital of Subtrak. The consideration was
satisfied by a share exchange of two shares in Plastik for every three acquired shares in Subtrak. At the
date of acquisition, shares in Plastik and Subtrak had a market value of $3 and $2.50 each respectively.
Plastik will also pay cash consideration of 27.5 cents on 1 January 20X5 for each acquired share in
Subtrak. Plastik has a cost of capital of 10% per annum. None of the consideration has been recorded
by Plastik.
Below are the summarised draft financial statements of both companies.
Statements of financial position as at 30 September 20X4 Plastik Subtrak
$000 $000
Assets
Non-current assets
Property, plant and equipment 18,700 13,900
Investments: 10% loan note from Subtrak (note (2)) 1,000 nil
19,700 13,900
Current assets
Inventory (note (3)) 4,300 1,200
Trade receivables (note (4)) 4,700 2,500
Bank nil 300
9,000 4,000
Total assets 28,700 17,900

Equity and liabilities

Equity
Equity shares of $1 each 10,000 9,000
Revaluation surplus (note (1)) 2,000 nil
Retained earnings (Subtrak’s profit for the year: $2,000) 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (note (2)) 2,500 1,000
Current liabilities
Trade payables (note (4)) 3,400 3,600
Bank 1,700 nil
Current tax payable 2,800 800
7,900 4,400
Total equity and liabilities 28,700 17,900

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210 P a r t 2 q u e s t i o n s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

The following information is relevant:

(1) At the date of acquisition, the fair values of Subtrak’s assets and liabilities were equal to their
carrying amounts with the exception of Subtrak’s property which had a fair value of $4 million
above its carrying amount. For consolidation purposes, this led to an increase in depreciation
charges (in cost of sales) of $100,000 in the post-acquisition period to 30 September 20X4.
Subtrak has not incorporated the fair value property increase into its entity financial
statements.
The policy of the Plastik group is to revalue all properties to fair value at each year end. On
30 September 20X4, the increase in Plastik’s property has already been recorded, however, a
further increase of $600,000 in the value of Subtrak’s property between its value at acquisition
and 30 September 20X4 has not been recorded.
(2) On 30 September 20X4, Plastik accepted a $1 million 10% loan note from Subtrak.
(3) Plastik sold goods to Subtrak throughout the year ended 30 September 20X4. Plastik made a
mark-up on cost of 25% on all these sales. $600,000 (at cost to Subtrak) of Subtrak’s inventory
at 30 September 20X4 had been supplied by Plastik in the post-acquisition period.
(4) Plastik had a trade receivable balance owing from Subtrak of $1.2 million as at 30 September
20X4. This differed to the equivalent trade payable of Subtrak due to a payment by Subtrak of
$400,000 made in September 20X4 which did not clear Plastik’s bank account until 4 October
20X4. Plastik’s policy for cash timing differences is to adjust the parent’s financial statements.
(5) Plastik’s policy is to value the non-controlling interest at fair value at the date of acquisition. For
this purpose, Subtrak’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
(6) Due to recent adverse publicity concerning one of Subtrak’s major product lines, the goodwill
which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30 September
20X4.
Required:
(a) Prepare the consolidated statement of financial position for Plastik as at 30 September 20X4.
(17 marks)
(b) Plastik is in the process of recording the acquisition of another subsidiary, Dilemma, and has
identified two items when reviewing the fair values of Dilemma’s assets.
The first item relates to $1 million spent on a new research project. This amount has been
correctly charged to profit or loss by Dilemma, but the directors of Plastik have reliably assessed
the fair value of this research to be $1.2 million.
The second item relates to the customers of Dilemma. The directors of Plastik believe Dilemma
has a particularly strong list of reputable customers which could be ‘sold’ to other companies
and have assessed the fair value of the customer list at $3 million.
Required:
State whether (and if so, at what value) the two items should be recognised in the consolidated
statement of financial position of Plastik on the acquisition of Dilemma. (3 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 2: More group accounts 211

4 POLESTAR (Q1, DECEMBER 2013 AMENDED)

On 1 April 20X3, Polestar acquired 75% of the equity share capital of Southstar. Southstar had been
experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s
difficulties, Polestar made an immediate cash payment of only $1.50 per share. In addition, Polestar
will pay a further amount in cash on 30 September 20X4 if Southstar returns to profitability by that
date. The value of this contingent consideration at the date of acquisition was estimated to be
$1.8 million, but at 30 September 20X3 in the light of continuing losses, its value was estimated at only
$1.5 million. The contingent consideration has not been recorded by Polestar. Overall, the directors of
Polestar expect the acquisition to be a bargain purchase leading to negative goodwill.
At the date of acquisition shares in Southstar had a listed market price of $1.20 each. Below are the
summarised draft financial statements of both companies.
Statements of profit or loss for the year ended 30 September 20X3
Polestar Southstar
$000 $000
Revenue 110,000 66,000
Cost of sales (88,000) (67,200)
Gross profit (loss) 22,000 (1,200)
Distribution costs (3,000) (2,000)
Administrative expenses (5,250) (2,400)
Finance costs (250) nil
Profit (loss) before tax 13,500 (5,600)
Income tax (expense)/relief (3,500) 1,000
Profit (loss) for the year 10,000 (4,600)
Statements of financial position as at 30 September 20X3
Assets
Non-current assets
Property, plant and equipment 41,000 21,000
Financial asset: equity investments (note (c)) 16,000 nil
57,000 21,000
Current assets 16,500 4,800
Total assets 73,500 25,800

Equity and liabilities

Equity
Equity shares of 50 cents each 30,000 6,000
Retained earnings 28,500 12,000
58,500 18,000
Current liabilities 15,000 7,800
Total equity and liabilities 73,500 25,800

The following information is relevant:

(a) At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying
amounts with the exception of a right-of-use asset in respect of a leased property. This had a
fair value of $2 million above its carrying amount and a remaining lease term of 10 years at that
date. All depreciation is included in cost of sales.
(b) Polestar has recorded its investment in Southstar at the cost of the immediate cash payment;
other equity investments are carried at fair value through profit or loss as at 1 October 20X2.
The other equity investments have fallen in value by $200,000 during the year ended
30 September 20X3.

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(c) Polestar’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Southstar’s share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(d) All items in the above statements of profit or loss are deemed to accrue evenly over the year
unless otherwise indicated.
Required:
(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended
30 September 20X3. (11 marks)
(b) Prepare the consolidated statement of financial position for Polestar as at 30 September 20X3.
(9 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 3: Consolidated statement of profit or loss and OCI 213

3: Consolidated statement of profit or loss and other

comprehensive income

1 PENKETH (Q1, JUNE 2014 AMENDED)

On 1 October 20X3, Penketh acquired 90 million of Sphere’s 150 million $1 equity shares. The
acquisition was achieved through a share exchange. Additionally, Penketh will pay $1.54 cash on
30 September 20X4 for each share acquired. Penketh’s finance cost is 10% per annum.
The retained earnings of Sphere brought forward at 1 April 20X3 were $120 million.
The summarised statements of profit or loss and other comprehensive income for the companies for
the year ended 31 March 20X4 are:
Penketh Sphere
$000 $000
Revenue 620,000 310,000
Cost of sales (400,000) (150,000)
Gross profit 220,000 160,000
Distribution costs (40,000) (20,000)
Administrative expenses (36,000) (25,000)
Investment income (note (3)) 5,000 1,600
Finance costs (2,000) (5,600)
Profit before tax 147,000 111,000
Income tax expense (45,000) (31,000)
Profit for the year 102,000 80,000
Other comprehensive income
Gain/(loss) on revaluation of land (notes (1) and (2)) (2,200) 3,000
Total comprehensive income for the year 99,800 83,000

The following information is relevant:

(1) A fair value exercise conducted on 1 October 20X3 concluded that the carrying amounts of
Sphere’s net assets were equal to their fair values with the following exceptions:
– the fair value of Sphere’s land was $2 million in excess of its carrying amount
– an item of plant had a fair value of $6 million in excess of its carrying amount. The plant
had a remaining life of two years at the date of acquisition. Plant depreciation is charged
to cost of sales.
– Penketh placed a value of $5 million on Sphere’s good trading relationships with its
customers. Penketh expected, on average, a customer relationship to last for a further
five years. Amortisation of intangible assets is charged to administrative expenses.
(2) Penketh’s group policy is to revalue land to market value at the end of each accounting period.
Prior to its acquisition, Sphere’s land had been valued at historical cost, but it has adopted the
group policy since its acquisition. In addition to the fair value increase in Sphere’s land of
$2 million (see note (i)), it had increased by a further $1 million since the acquisition.
(3) On 1 October 20X3, Penketh also acquired 30% of Ventor’s equity shares. Ventor’s profit after
tax for the year ended 31 March 20X4 was $10 million and during March 20X4 Ventor paid a
dividend of $6 million. Penketh uses equity accounting in its consolidated financial statements
for its investment in Ventor.
Sphere did not pay any dividends in the year ended 31 March 20X4.

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(4) After the acquisition Penketh sold goods to Sphere for $20 million. Sphere had one fifth of these
goods still in inventory at 31 March 20X4. In March 20X4 Penketh sold goods to Ventor for
$15 million, all of which were still in inventory at 31 March 20X4. All sales to Sphere and Ventor
had a mark-up on cost of 25%.
(5) All items in the above statements of profit or loss and other comprehensive income are deemed
to accrue evenly over the year unless otherwise indicated.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income of Penketh for
the year ended 31 March 20X4.

(20 marks)

2 PREMIER (Q1, DECEMBER 2010, AMENDED)

On 1 June 20X0, Premier acquired 80% of the equity share capital of Sanford. The consideration
consisted of two elements: a share exchange of three shares in Premier for every five acquired shares
in Sanford and the issue of a $100 6% loan note for every 500 shares acquired in Sanford. The share
issue has not yet been recorded by Premier, but the issue of the loan notes has been recorded. At the
date of acquisition, shares in Premier had a market value of $5 each and the shares of Sanford had a
stock market price of $3.50 each. Below are the summarised draft financial statements of both
companies.
Statements of profit or loss and other comprehensive income for the year ended 30 September 20X0
Premier Sanford
$000 $000
Revenue 92,500 45,000
Cost of sales (70,500) (36,000)
Gross profit 22,000 9,000
Distribution costs (2,500) (1,200)
Administrative expenses (5,500) (2,400)
Finance costs (100) nil
Profit before tax 13,900 5,400
Income tax expense (3,900) (1,500)
Profit for the year 10,000 3,900

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ACCA FR Question Bank Part 2 questions: 3: Consolidated statement of profit or loss and OCI 215

Statements of financial position as at 30 September 20X0

Assets
Non-current assets
Property, plant and equipment 25,500 13,900
Investments 1,800 nil
27,300 13,900
Current assets 12,500 2,400
Total assets 39,800 16,300

Equity and liabilities

Equity
Equity shares of $1 each 12,000 5,000
Revaluation reserve 2,500 nil
Retained earnings 12,300 4,500
26,800 9,500
Non-current liabilities
6% loan notes 3,000 nil
Current liabilities 10,000 6,800
Total equity and liabilities 39,800 16,300

The following information is relevant:

(1) At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying
amounts with the exception of its property. This had a fair value of $1.2 million below its
carrying amount. This would lead to a reduction of the depreciation charge (in cost of sales) of
$50,000 in the post-acquisition period. Sanford has not incorporated this value change into its
entity financial statements.
(2) Sales from Sanford to Premier throughout the year ended 30 September 20X0 had consistently
been $1 million per month. Sanford made a mark-up on cost of 25% on these sales. Premier had
$2 million (at cost to Premier) of inventory that had been supplied in the post-acquisition period
by Sanford as at 30 September 20X0.
(3) Premier’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Sanford’s share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(4) There has been no impairment of consolidated goodwill.
Required:
(a) Prepare the consolidated statement of profit or loss for Premier for the year ended
30 September 20X0. (7 marks)
(b) Prepare the consolidated statement of financial position for Premier as at 30 September 20X0.
(13 marks)

(20 marks)

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4: Accounting for associates

1 PLANK CO (Q32, MARCH/JULY 2020)

This scenario relates to two requirements.
Plank Co has owned 35% of Arch Co since 1 June 20X7 and it acquired 85% of Strip Co on 1 April 20X8.
The statements of profit or loss and other comprehensive income for the year ended 31 December
20X8 are:
Plank Co Strip Co Arch Co
$’000 $’000 $’000
Revenue 705,000 218,000 256,000
Cost of sales (320,000) (81,000) (83,500)
Gross profit 385,000 137,000 172,000
Distribution costs (58,000) (16,000) (18,500)
Administrative expenses (92,000) (28,000) (29,000)
Investment income 46,000 2,000 –
Finance costs (12,000) (14,000) (11,000)
Profit before tax 269,000 81,000 114,000
Income tax expense (51,500) (15,000) (21,430)
Profit for the year 217,500 66,000 92,570
Other comprehensive income
Gain on revaluation of land 2,800 3,000
Total comprehensive income for the year 220,300 69,000 92,570
The following information is relevant:
(i) A fair value exercise conducted on 1 April 20X8 concluded that the carrying amounts of
Strip Co’s net assets were equal to their fair values with the exception of an item of
machinery which had a fair value of $8m in excess of its carrying amount. At 1 April 20X8,
the machinery had a remaining life of three years. Depreciation is charged to cost of
sales.
(ii) Since acquisition, Plank Co has sold goods to Strip Co totalling $39m. Strip Co had one
quarter of these goods in inventory at 31 December 20X8. During the year, Plank Co also
sold goods to Arch Co for $26m, all of which Arch Co held in inventory at 31 December
20X8. All of these goods had a mark-up on cost of 30%.
(iii) The investment income of Plank Co for the year 31 December 20X8 includes dividends
from Strip Co and Arch Co (see note (iv)). It also includes $5m interest receivable on a
loan made to Strip Co on 1 April 20X8.
(iv) Strip Co paid a dividend to shareholders of $18m on 31 December 20X8. Arch Co paid a
dividend on 31 December 20X8 of $35m.
(v) In Plank Co’s consolidated statement of financial position at 31 December 20X7, the
carrying amount of Plank Co’s investment in Arch Co was $145,000. This was calculated
using equity accounting.
(vi) All other comprehensive income occurred after 1 April 20X8. Unless otherwise indicated,
all other items in the above statements of profit or loss and other comprehensive income
are deemed to accrue evenly over the year.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of Plank
Co for the year ended 31 December 20X8. (18 marks)

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 217

(b) Calculate the carrying amount of the investment in Arch Co in the consolidated statement of
financial position of Plank Co as at 31 December 20X8. (2 marks)

(20 marks)

2 RUNNER CO (Q32, SEPTEMBER/DECEMBER 2019)

This scenario relates to two requirements.
On 1 April 20X4, Runner Co acquired 80% of Jogger Co's equity shares when the retained earnings of
Jogger Co were $19.5m. The consideration consisted of cash of $42.5m paid on 1 April 20X4 and a
further cash payment of $21m, deferred until 1 April 20X5. No accounting entries have been made in
respect of the deferred cash payment. Runner Co has a cost of capital of 8%. The appropriate discount
rate is 0.926.
The draft, summarised statements of financial position of the two companies at 31 March 20X5 are
shown below:
Runner Co Jogger Co
$'000 $'000
ASSETS
Non-current assets
Property plant and equipment 455,800 44,700
Investments 55,000 –
510,800 44,700
Current assets
Inventory 22,000 16,000
Trade receivables 35,300 9,000
Bank 2,800 1,500
60,100 26,500
Total assets 570,900 71,200

Equity and liabilities

Equity
Equity shares of $1 each 202,500 25,000
Retained earnings 286,600 28,600
489,100 53,600
Current liabilities
Trade Payables 81,800 17,600
Total equity and liabilities 570,900 71,200

(i) Runner Co’s policy is to value the non-controlling interest at fair value at the date of
acquisition. The fair value of the non-controlling interest in Jogger Co on 1 April 20X4 was
estimated at $13m.
The fair values of Jogger Co's other assets, liabilities and contingent liabilities at 1 April 20X4
were equal to their carrying amounts with the exception of a specialised piece of plant which
had a fair value of $10m in excess of its carrying amount. This plant had a ten year remaining
useful life on 1 April 20X4.
(ii) In December 20X4 Jogger Co sold goods to Runner Co for $6.4m, earning a gross margin of 15%
on the sale. Runner Co still held $4.8m of these goods in its inventories at 31 March 20X5.
Jogger Co still had the full invoice value of $6.4m in its trade receivables at 31 March 20X5,
however, Runner Co’s payables only showed $3.4m as it made a payment of $3m on
31 March 20X5.

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218 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

Required:
(a) Prepare the consolidated statement of financial position for Runner Co as at 31 March 20X5.
(16 marks)
(b) Runner Co acquired 30% of Walker Co's equity shares on 1 April 20X5 for $13m, Walker Co had
been performing poorly over the last few years and Runner Co hoped its influence over Walker
Co would help to turn the company around. In the year ended 31 March 20X6 Walker Co made
a loss of $30m. Runner Co has no contractual obligation to make good the losses relating to
Walker Co.
Explain how Walker Co should be accounted for in the consolidated Statement of financial
position of Runner Co for the year ended 31 March 20X6. Your answer should also include a
calculation of the carrying amount of the investment in the associate at that date. (4 marks)

(20 marks)

3 DARGENT CO (Q32, MARCH/JUNE 2017)

On 1 January 20X6, Dargent Co acquired 75% of Latree Co’s equity shares by means of a share
exchange of two shares in Dargent Co for every three Latree Co shares acquired. On that date, further
consideration was also issued to the shareholders of Latree Co in the form of a $100 8% loan note for
every 100 shares acquired in Latree Co. None of the purchase consideration, nor the outstanding
interest on the loan notes at 31 March 20X6, has yet been recorded by Dargent Co. At the date of
acquisition, the share price of Dargent Co and Latree Co is $3.20 and $1.80 respectively.
The summarised statements of financial position of the two companies as at 31 March 20X6 are:
Dargent Co Latree Co
$000 $000
Assets
Non-current assets
Property, plant and equipment (note (1)) 75,200 31,500
Investment in Amery Co at 1 April 20X5 (note 4) 4,500 –
79,700 31,500
Current assets
Inventory (note (3)) 19,400 18,800
Trade receivables (note (3)) 14,700 12,500
Bank 1,200 600
35,300 31,900
Total assets 115,000 63,400

Equity and liabilities

Equity
Equity shares of $1 each 50,000 20,000
Retained earnings – at 1 April 20X5 20,000 19,000
– for year ended 31 March 20X6 16,000 8,000
86,000 47,000
Non-current liabilities
8% loan note 5,000 Nil
Current liabilities (see note (3)) 24,000 16,400
29,000 16,400

Total equity and liabilities 115,000 63,400

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 219

The following information is relevant:

(1) At the date of acquisition, the fair values of Latree Co’s assets were equal to their carrying
amounts. However, Latree Co operates a mine which requires to be decommissioned in five
years’ time. No provision has been made for these decommissioning costs by Latree Co. The
present value (discounted at 8%) of the decommissioning is estimated at $4m and will be paid
five years from the date of acquisition (the end of the mine’s life).
(2) Dargent Co’s policy is to value the non-controlling interest at fair value at the date of
acquisition. Latree Co’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
(3) The inventory of Latree Co includes goods bought from Dargent Co for $2.1m. Dargent Co
applies a consistent mark-up on cost of 40% when arriving at its selling prices.
On 28 March 20X6, Dargent Co despatched goods to Latree Co with a selling price of $700,000.
These were not received by Latree Co until after the year end and so have not been included in
the above inventory at 31 March 20X6.
At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3m, this
differed to the equivalent payable in Latree Co’s records due to the goods in transit.
The intra-group reconciliation should be achieved by assuming that Latree Co had received the
goods in transit before the year end.
(4) The investment in Amery Co represents 30% of its voting share capital and Dargent Co uses
equity accounting to account for this investment. Amery Co’s profit for the year ended
31 March 20X6 was $6m and Amery Co paid total dividends during the year ended 31 March
20X6 of $2m. Dargent Co has recorded its share of the dividend received from Amery Co in
investment income (and cash).
(5) All profits and losses accrued evenly throughout the year.
(6) There were no impairment losses within the group for the year ended 31 March 20X6.
Required:
Prepare the consolidated statement of financial position for Dargent Co as at 31 March 20X6.

(20 marks)

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220 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4 VIAGEM (Q1, DECEMBER 2012 AMENDED)

On 1 January 20X2, Viagem acquired 90% of the equity share capital of Greca in a share exchange in
which Viagem issued two new shares for every three shares it acquired in Greca. Additionally, on
31 December 20X2, Viagem will pay the shareholders of Greca $1.76 per share acquired. Viagem’s cost
of capital is 10% per annum.
At the date of acquisition, shares in Viagem and Greca had a stock market value of $6.50 and $2.50
each, respectively.
Statements of profit or loss for the year ended 30 September 20X2
Viagem Greca
$000 $000
Revenue 64,600 38,000
Cost of sales (51,200) (26,000)
Gross profit 13,400 12,000
Distribution costs (1,600) (1,800)
Administrative expenses (3,800) (2,400)
Investment income 500 nil
Finance costs (420) nil
Profit before tax 8,080 7,800
Income tax expense (2,800) (1,600)
Profit for the year 5,280 6,200

Equity as at 1 October 20X1

Equity shares of $1 each 30,000 10,000
Retained earnings 54,000 35,000
The following information is relevant.
(a) At the date of acquisition, the fair values of Greca’s assets were equal to their carrying amounts
with the exception of two items:
(i) An item of plant had a fair value of $1.8 million above its carrying amount. The remaining
life of the plant at the date of acquisition was three years. Depreciation is charged to cost
of sales.
(ii) Greca had a contingent liability which Viagem estimated to have a fair value of $450,000.
This has not changed as at 30 September 20X2.
Greca has not incorporated these fair value changes into its financial statements.
(b) Viagem’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Greca’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
(c) Sales from Viagem to Greca throughout the year ended 30 September 20X2 had consistently
been $800,000 per month. Viagem made a mark-up on cost of 25% on these sales. Greca had
$1.5 million of these goods in inventory as at 30 September 20X2.
(d) Viagem’s investment income is a dividend received from its investment in a 40% owned
associate which it has held for several years. The underlying earnings for the associate for the
year ended 30 September 20X2 were $2 million.
(e) Although Greca has been profitable since its acquisition by Viagem, the market for Greca’s
products has been badly hit in recent months and Viagem has calculated that the goodwill has
been impaired by $2 million as at 30 September 20X2.

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ACCA FR Question Bank Part 2 questions: 4: Accounting for associates 221

Required:
(a) Calculate the consolidated goodwill at the date of acquisition of Greca. (7 marks)
(b) Prepare the consolidated statement of profit or loss for Viagem for the year ended
30 September 20X2. (13 marks)

(20 marks)

5 GOLD CO (MARCH/JUNE 2021)

On 1 January 20X2, Gold Co acquired 90% of the 16 million $1 equity share capital of Silver Co. Gold Co
issued three new shares in exchange for every five shares it acquired in Silver Co. Additionally Gold Co
will pay further consideration on 31 December 20X2 of $2.42 per share acquired. Gold Co's cost of
capital is 10% per annum and the discount factor at 10% per annum and the discount factor at 10% for
one year is 0.9091. At the date of acquisition, shares in Gold Co and Silver Co had fair values of $8.00
and $3.50 respectively.
Statement of profit or loss for the year ended 30 September 20X2:
Gold Co Silver Co
$'000 $'000
Revenue 103,360 60,800
Cost of sales (81,920) (41,600)
Gross profit 21,440 19,200
Distribution costs (2,560) (2,980)
Administrative expenses (6,080) (3,740)
Investment income 800 –
Finance costs (672) –
Profit before tax 12,928 12,480
Income tax expense (4,480) (2,560)
Profit for the year 8,448 9,920
The following information is relevant:
(1) At 1 October 20X1, the retained earnings of Silver Co were $56m.
(2) At the date of acquisition, the fair value of Silver Co's assets were equal to their carrying
amounts with the exception of two items:
– An item of plant had a fair value of $2.6m above its carrying amount. The remaining life
of the plant at the date of acquisition was three years. Depreciation is charged to cost of
sales.
– Silver Co had a contingent liability which Gold Co estimated to have a fair value of
$850,000. This has not changed as at 30 September 20X2.
Silver Co has not incorporated these fair value changes into its financial statements.
(3) Gold Co's policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Silver Co's share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(4) Sales from Gold Co to Silver Co in the post-acquisition period had consistently been $600,000
per month. Gold Co made a mark-up on cost of 25% on these sales. Silver Co had $1.2m of these
goods in inventory as at 30 September 20X2.
(5) Gold Co's investment income is a dividend received from its investment in a 40% owned
associate which it has held for several years. The associate made a profit of $3m for the year
ended 30 September 20X2.

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222 P a r t 2 q u e s t i o n s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

(6) On 1 October 20X1 Gold Co issued 100,000 $100 6% convertible loan notes at par value, with
interest payable annually in arrears over a five-year term. The equivalent rate for
non-convertible loan notes was 8%. Gold Co has recorded the loan notes as a liability at par
value and charged the annual 6% interest to finance costs.
Discount factors in year 5: Annuity factors for 5 years:
6% 0.747 6% 4.212
8% 0.681 8% 3.993
(7) At 30 September 20X2 no impairment to goodwill is required.
(8) Profits accrue evenly throughout the year unless otherwise stated.
Required:
(a) Calculate the goodwill arising on the acquisition of Silver Co. (6 marks)
(b) Prepare the consolidated statement of profit or loss for Gold Co for the year ended
30 September 20X2. (14 marks)
Note: All workings should be done to the nearest $'000.

(20 marks)

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 223

5: Interpreting financial statements

1 FIT CO (Q31, MARCH/JULY 2020)

This scenario relates to two requirements.
Fit Co and Sporty Co both operate in the sportswear sector.
Extracts from the draft financial statements for the companies for the year ended 31 December 20X0
are as follows:
Draft statement of profit or loss for the year ended 31 December 20X0:
Fit Co Sporty Co
$’000 S’000
Revenue 250,000 220,000
Cost of Sales (190,000) (150,000)
Gross profit 60,000 70,000
Profit on disposal (note (iii)) 5,000
Operating expenses (40,000) (38,000)
Profit from operations 25,000 32,000
Finance costs (7,500) (1,000)
Profit before tax 17,500 31,000

Draft statement of financial position as at 31 December 20X0:

Fit Co Sporty Co
$’000 $’000
Cash 5,000 10,000
Total equity 90,000 60,000
Non-current liabilities 45,000 15,000
Trade payables 35,000 12,000
The following information is also relevant:
(i) Fit Co is a manufacturer and retailer of premium sportswear, which it sells online and in
its own international chain of branded stores.
(ii) Sporty Co sells mid-market sportswear in department stores and online. It sources its
good directly from the manufacturer and does not make international sales. Sporty Co
plans to expand into the international market during the next financial year.
(iii) On 31 December 20X0, Fit Co disposed of its investment in the Active division for
consideration of $10m. The cash proceeds have been recorded as a receivable at the date
the financial statements were prepared and the gain on disposal is included in the
statement of profit or loss above. The Active division had the following ratios for the year
ended 31 December 20X0:
Gross profit margin is 40%
Operating profit margin is 5%
(iv) Fit Co also charged $100,000 per month to the Active division for central services, which
was deducted from operating expenses in the financial statements.

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224 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

Required:
(a) Using the financial statement extracts provided, calculate the following ratios for both Fit Co
and Sporty Co:
(i) Gross Profit margin;
(ii) Operating profit margin;
(iii) Trade payables days;
(iv) Return on Capital Employed; and
(v) Gearing (debt/equity). (6 marks)
(b) Comment on the performance and position of both companies for the year ended
31 December 20X0. (14 marks)

(20 marks)

2 BUN CO (Q31, SEPTEMBER/DECEMBER 2019)

This scenario relates to three requirements.
Bun Co is a bakery which also owns two shops/cafés. Over the last two years, the company has
experienced declining profitability due to increased competition and so the directors wish to
investigate if this is a sector-wide problem. Consequently, they have acquired equivalent ratios for the
sector, some of which have been reproduced below.
Sector averages for the year ended 30 June 20X7:
Return on capital employed 18.6%
Operating profit margin 8.6%
Net asset turnover 2.01
Inventory holding period 4 days
Debt to equity 80%
The following information has been extracted from the draft financial statements of Bun Co for the
year ended 31 December 20X7:
Statement of profit or loss for the year ended 31 December 20X7:
$’000
Revenue 100,800
Cost of sales (70,000)
Gross profit 30,800
Operating expenses (17,640)
Profit from operations 13,160

Statement of financial position as at 31 December 20X7:

$’000
Non-current assets 55,000
Inventory 3,960
Equity:
Equity shares of $1 each 17,000
Revaluation surplus 5,400
Retained earnings 10,480
32,880
Non-current liabilities: 10% bank loan 14,400

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 225

Other relevant information to Bun Co:

(1) In 20X6, Bun Co acquired a popular brand name. At 31 December 20X7, the brand represented
20% of non-current assets. The remaining 80% of non-current assets comprises of the property
from which Bun Co operates its bakery and shops. This property is owned by Bun Co and has no
directly associated finance. The property was revalued in 20X4.
(2) In the year ended 31 December 20X7, Bun Co began offering discounted meal deals to
customers. Bun Co hoped this strategy would help to reduce perishable inventory and reduce
inventory holding periods.
(3) In January 20X8, it was decided to discount some slow-moving seasonal inventory which had a
selling price of $1.5m. Under normal circumstances, these products have a gross profit margin
of 20%. The inventory was sold in February 20X8 for 50% of what it had cost Bun Co to produce.
The financial statements for the year ended 31 December 20X7 were authorised for issue on
15 March 20X8.
Required:
(a) Adjust for the information in note (3) and calculate the 20X7 sector average equivalent ratios
for Bun Co. (7 marks)
(b) Assess the financial performance and position of Bun Co for the year ended 31 December 20X7
in comparison with the sector average ratios. (10 marks)
(c) Explain three possible limitations of the comparison between Bun Co and the sector average
ratios provided. (3 marks)

(20 marks)

3 PIRLO CO (Q31, MARCH/JUNE 2019)

The consolidated statements of profit or loss for the Pirlo group for the years ended 31 December
20X9 and 20X8 are shown below.
20X9 20X8
$’000 $’000
Revenue 213,480 216,820
Cost of sales (115,620) (119,510)
Gross profit 97,860 97,310
Operating expenses (72,360) (68,140)
Profit from operations 25,500 29,170
Finance costs (17,800) (16,200)
Investment income 2,200 2,450
Profit before tax 9,900 15,420
Share of profit of associate 4,620 3,160
Tax expense (2,730) (3,940)
Profit for the year 11,790 14,640
Attributable to:
Shareholders of Pirlo Co 8,930 12,810
Non-controlling interest 2,860 1,830
The following information is relevant:
(i) On 31 December 20X9, the Pirlo group disposed of its entire 80% holding in Samba Co, a
software development company, for $300m. The Samba Co results have been fully
consolidated into the consolidated financial statements above. Samba Co does not
represent a discontinued operation.

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226 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

(ii) The proceeds from the disposal of Samba Co have been credited to a suspense account
and no gain/loss has been recorded in the financial statements above.
(iii) Pirlo Co originally acquired the shares in Samba Co for $210m. At this date, goodwill was
calculated at $70m. Goodwill has not been impaired since acquisition, and external
advisers estimate that the goodwill arising in Samba Co has a value of $110m at
31 December 20X9.
(iv) On 31 December 20X9, Samba Co had net assets with a carrying amount of $260m. In
addition to this, Samba Co’s brand name was valued at $50m at acquisition in the
consolidated financial statements. This is not reflected in Samba Co’s individual financial
statements, and the value is assessed to be the same at 31 December 20X9.
(v) Samba Co is the only subsidiary in which the Pirlo group owned less than 100% of the
equity. The Pirlo group uses the fair value method to value the non-controlling interest.
At 31 December 20X9, the non-controlling interest in Samba Co is deemed to be $66m.
(vi) Until December 20X8, Pirlo Co rented space in its property to a third party. This
arrangement ended and, on 1 January 20X9, Samba Co’s administrative department
moved into Pirlo Co’s property. Pirlo Co charged Samba Co a reduced rent. Samba Co’s
properties were sold in April 20X9 at a profit of $2m which is included in administrative
expenses.
(vii) On 31 December 20X9, the employment of the two founding directors of Samba Co was
transferred to Pirlo Co. From the date of disposal, Pirlo Co will go into direct competition
with Samba Co. As part of this move, the directors did not take their annual bonus of
$1m each from Samba Co. Instead, they received a similar ‘joining fee’ from Pirlo Co,
which was paid to them on 31 December 20X9. These individuals have excellent
relationships with the largest customers of Samba Co, and are central to Pirlo Co’s future
plans.
(viii) Samba Co’s revenue remained consistent at $26m in both 20X9 and 20X8 and Samba Co
has high levels of debt. Key ratios from the Samba Co financial statements are shown
below:
20X9 20X8
Gross profit margin 81% 80%
Operating profit margin 66% 41%
Interest cover 1.2 times 1.1 times
Required:
(a) Calculate the gain/loss on the disposal of Samba Co which will be recorded in:
– The individual financial statements of Pirlo Co; and
– The consolidated financial statements of the Pirlo group. (5 marks)
(b) Calculate ratios equivalent to those provided in note (viii) for the Pirlo group for the years
ended 31 December 20X9 and 20X8. No adjustment is required for the gain/loss on disposal
from (a). (3 marks)
(c) Comment on the performance and interest cover of the Pirlo group for the years ended
31 December 20X9 and 20X8. Your answer should comment on:
– The overall performance of the Pirlo group;
– How, once accounted for, the disposal of Samba Co will impact on your analysis; and
– The implications of the disposal of Samba Co for the future results of the Pirlo group.
(12 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 227

4 DUKE CO (Q31,SEPTEMBER/DECEMBER 2018)

Duke Co is a retailer with stores in numerous city centres. On 1 January 20X8, Duke Co acquired 80% of
the equity share capital of Smooth Co, a service company specialising in training and recruitment. This
was the first time Duke Co had acquired a subsidiary.
The consideration for Smooth Co consisted of a cash element and the issue of some shares in Duke Co
to the previous owners of Smooth Co.
Duke Co has begun to consolidate Smooth Co into its financial statements, but has yet to calculate the
non-controlling interest and retained earnings. Details of the relevant information is provided in notes
(i) and (ii).
Extracts from the financial statements for the Duke group for the year ended 30 June 20X8 and Duke
Co for the year ended 30 June 20X7 are provided below:
Duke Group Duke Co
30 June 20X8 30 June 20X7
$’000 $’000
Profit from operations 14,500 12,700
Current assets 30,400 28,750
Share capital 11,000 8,000
Share premium 6,000 2,000
Retained earnings Note (i) and (ii) 9,400
Non-controlling interest Note (i) and (ii) Nil
Long term loans 11,500 7,000
Current liabilities 21,300 15,600
The following notes are relevant:
(i) The fair value of the non-controlling interest in Smooth Co at 1 January 20X8 was
deemed to be $3.4m. The retained earnings of Duke Co in its individual financial
statements at 30 June 20X8 are $13.2m.
Smooth Co made a profit for the year ended 30 June 20X8 of $7m. Duke Co incurred
professional fees of $0.5m during the acquisition, which have been capitalised as an asset
in the consolidated financial statements.
(ii) The following issues are also relevant to the calculation of non-controlling interest and
retained earnings:
– At acquisition, Smooth Co’s net assets were equal to their carrying amount with
the exception of a brand name which had a fair value of $3m but was not
recognised in Smooth Co’s individual financial statements. It is estimated that the
brand had a five-year life at 1 January 20X8.
– On 30 June 20X8, Smooth Co sold land to Duke Co for $4m when it had a carrying
amount of $2.5m.
(iii) Smooth Co is based in the service industry and a significant part of its business comes
from three large, profitable contracts with entities which are both well-established and
financially stable.
(iv) Duke Co did not borrow additional funds during the current year and has never used a
bank overdraft facility.

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(v) The following ratios have been correctly calculated based on the above financial
statements:
20X8 20X7
Receivables collection period 52 days 34 days
Inventory holding period 41 days 67 days
Other than the recognition of the non-controlling interest and retained earnings, no adjustment
is required to any of the other figures in the draft financial statements. All items are deemed to
accrue evenly across the year.
Required:
(a) Calculate the non-controlling interest and retained earnings to be included in the consolidated
financial statements at 30 June 20X8. (6 marks)
(b) Based on your answer to part (a) and the financial statements provided, calculate the following
ratios for the years ending 30 June 20X7 and 30 June 20X8:
Current ratio;
Return on capital employed;
Gearing (debt/equity). (4 marks)
(c) Using the information provided and the ratios calculated above, comment on the comparative
performance and position for the two years ended 30 June 20X7 and 20X8.
Note: Your answer should specifically comment on the impact of the acquisition of Smooth Co
on your analysis. (10 marks)

(20 marks)

5 PERKINS CO (Q31, MARCH/JUNE 2018)

Below are extracts from the statements of profit or loss for the Perkins group and Perkins Co for the
years ending 31 December 20X7 and 20X6 respectively.
20X7 20X6
(Consolidated) (Perkins Co individual)
$000 $000
Revenue 46,220 35,714
Cost of sales (23,980) (19,714)
Gross profit 22,240 16,000
Operating expenses (3,300) (10,000)
Profit from operations 18,940 6,000
Finance costs (960) (1,700)
Profit before tax 17,980 4,300

The following information is relevant:

On 1 September 20X7, Perkins Co sold all of its shares in Swanson Co, its only subsidiary, for $28.64m.
At this date, Swanson Co had net assets of $26.1m. Perkins Co originally acquired 80% of Swanson Co
for $19.2m, when Swanson Co had net assets of $19.8m. Perkins Co uses the fair value method for
valuing the non-controlling interest, which was measured at $4.9m at the date of acquisition. Goodwill
in Swanson Co has not been impaired since acquisition.

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 229

In order to compare Perkin Co’s results for the years ended 20X6 and 20X7, the results of Swanson Co
need to be eliminated from the above consolidated statements of profit or loss for 20X7. Although
Swanson Co was correctly accounted for in the group financial statements for the year ended
31 December 20X7, a gain on disposal of Swanson Co of $9.44m is currently included in operating
expenses. This reflects the gain which should have been shown in Perkins Co’s individual financial
statements.
In the year ended 31 December 20X7, Swanson Co had the following results:
$m
Revenue 13.50
Cost of sales 6.60
Operating expenses 2.51
Finance costs 1.20
During the period from 1 January 20X7 to 1 September 20X7, Perkins Co sold $1m of goods to
Swanson Co at a margin of 30%. Swanson Co had sold all of these goods on to third parties by
1 September 20X7.
Swanson Co previously used space in Perkins Co’s properties, which Perkins Co did not charge
Swanson Co for. Since the disposal of Swanson Co, Perkins Co has rented that space to a new tenant,
recording the rental income in operating expenses.
The following ratios have been correctly calculated based on the above financial statements:
20X7 20X6
(Consolidated) (Perkins Co individual)
Gross profit margin 48.1% 44.8%
Operating margin 41% 16.8%
Interest cover 19.7 times 3.5 times
Required:
(a) Calculate the gain on disposal which should have been shown in the consolidated statement of
profit or loss for the Perkins group for the year ended 31 December 20X7. (5 marks)
(b) Remove the results of Swanson Co and the gain on disposal of the subsidiary to prepare a
revised statement of profit or loss for the year ended 31 December 20X7 for Perkins Co only.
(4 marks)
(c) Calculate the equivalent ratios to those given for Perkins Co for 20X7 based on the revised
figures in part (b) of your answer. (2 marks)
(d) Using the ratios calculated in part (c) and those provided in the question, comment on the
performance of Perkins Co for the years ended 31 December 20X6 and 20X7. (9 marks)

(20 marks)

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6 FUNJECT CO (Q31, MARCH/JUNE 2017)

Funject Co has identified Aspect Co as a possible acquisition within the same industry. Aspect Co is
currently owned by the Gamilton Group and the following are extracts from the financial statements
of Aspect Co:
Extract from the statement of profit or loss for the year ended December 20X4
$000
Revenue 54,200
Cost of sales 21,500
Gross profit 32,700
Operating expenses 11,700
Operating profit 21,000

Statement of financial position as at 31 December 20X4

$000 $000
Assets
Non-current assets 24,400
Current assets
Inventory 4,900
Receivables 5,700
Cash at bank 2,300 12,900
Total assets 37,300

Equity and liabilities

Equity
Equity shares 1,000
Retained earnings 8,000
9,000
Liabilities
Non-current liabilities
Loan 16,700
Current liabilities
Trade payables 5,400
Current tax payable 6,200 11,600
Total equity and liabilities 37,300
Additional information:
(1) On 1 April 20X4, Aspect Co decided to focus on its core business and so disposed of a non-core
division. The disposal generated a loss of $1.5m which is included within operating expenses.
The following extracts show the results of the non-core division for the period prior to disposal
which were included in Aspect Co’s results for 20X4:
$000
Revenue 2,100
Cost of sales (1,200)
Gross profit 900
Operating expenses (700)
Operating profit 200
(2) At present Aspect Co pays a management charge of 1% of revenue to the Gamilton Group which
is included in operating expenses. Funject Co imposes a management charge of 10% of gross
profit on all of its subsidiaries.
(3) Aspect Co’s administration offices are currently located within a building owned by the
Gamilton Group. If Aspect Co were acquired, the company would need to seek alternative
premises. Aspect Co paid rent of $46,000 in 20X4. Commercial rents for equivalent office space
would cost $120,000.

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 231

(4) The following is a list of comparable industry average key performance indicators (KPIs) for 20X4:
KPI
Gross profit margin 45%
Operating profit margin 28%
Receivables collection period 41 days
Current ratio 1.6:1
Acid test (quick) ratio 1.4:1
Gearing (debt/equity) 240%
Required:
(a) Redraft Aspect Co’s statement of profit or loss for 20X4 to adjust for the disposal of the
non-core division in note (1) and the management and rent charges which would be imposed
per notes (2) and (3) if Aspect Co was acquired by Funject Co. (5 marks)
(b) Calculate the 20X4 ratios for Aspect Co equivalent to those shown in note (4) based on the
restated financial information calculated in part (a).
Note: You should assume that any increase or decrease in profit as a result of your adjustments
in part (a) will also increase or decrease cash. (5 marks)
(c) Using the ratios calculated in part (b), comment on Aspect Co’s 20X4 performance and financial
position compared to the industry average KPIs provided in note (iv). (10 marks)
(20 marks)

7 GREGORY CO (Q32, SEPTEMBER 2016)

EXAM SMART
This question can also be found on the ACCA practice platform. We recommend that you
attempt a number of questions within the platform in order that you get used to the
software.

Gregory Co is a listed company and, until 1 October 20X5, it had no subsidiaries. On that date, it
acquired 75% of Tamsin Co’s equity shares by means of a share exchange of two new shares in
Gregory Co for every five acquired shares in Tamsin Co. These shares were recorded at the market
price on the day of the acquisition and were the only shares issued by Gregory Co during the year
ended 31 March 20X6.
The summarised financial statements of Gregory Co as a single entity at 31 March 20X5 and as a group
at 31 March 20X6 are:
Gregory Co
Gregory group single entity
Statements of profit or loss for the year ended 31 March 20X6 31 March 20X5
$’000 $’000
Revenue 46,500 28,000
Cost of sales (37,200) (20,800)
Gross profit 9,300 7,200
Operating expenses (1,800) (1,200)
Profit before tax (operating profit) 7,500 6,000
Income tax expense (1,500) (1,000)
Profit for the year 6,000 5,000
Profit for year attributable to:
Equity holders of the parent 5,700
Non-controlling interest 300
6,000

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232 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

Gregory Co
Gregory group single entity
Statements of financial position as at 31 March 20X6 31 March 20X5
Assets
Non-current assets
Property, plant and equipment 54,600 41,500
Goodwill 3,000 nil
57,600 41,500
Current assets 44,000 36,000
Total assets 101,600 77,500
Equity and liabilities
Equity
Equity shares of $1 each 46,000 40,000
Other component of equity (share premium) 6,000 nil
Retained earnings 18,700 13,000
Equity attributable to owners of the parent 70,700 53,000
Non-controlling interest 3,600 nil
74,300 53,000
Current liabilities 27,300 24,500
Total equity and liabilities 101,600 77,500
Other information:
(1) Each month since the acquisition, Gregory Co’s sales to Tamsin Co were consistently $2m.
Gregory Co had chosen to only make a gross profit margin of 10% on these sales as Tamsin Co is
part of the group.
(2) The values of property, plant and equipment held by both companies have been rising for
several years.
(3) On reviewing the above financial statements, Gregory Co’s chief executive officer (CEO) made
the following observations:
 I see the profit for the year has increased by $1m which is up 20% on last year, but I
thought it would be more as Tamsin Co was supposed to be a very profitable company.
 I have calculated the earnings per share (EPS) for 20X6 at 13 cents (6,000/46,000 × 100)
and for 20X5 at 12.5 cents (5,000/40,000 × 100) and, although the profit has increased
20%, our EPS has barely changed.
 I am worried that the low price at which we are selling goods to Tamsin Co is
undermining our group’s overall profitability.
 I note that our share price is now $2.30, how does this compare with our share price
immediately before we bought Tamsin Co?
Required:
(a) Reply to the four observations of the CEO. (8 marks)
(b) Using the above financial statements, calculate the following ratios for Gregory Co for the years
ended 31 March 20X6 and 20X5 and comment on the comparative performance:
(i) Return on capital employed (ROCE)
(ii) Net asset turnover
(iii) Gross profit margin
(iv) Operating profit margin
Note: Four marks are available for the ratio calculations. (12 marks)
Note: Your answers to (a) and (b) should reflect the impact of the consolidation of Tamsin Co during
the year ended 31 March 20X6.
(20 marks)

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ACCA FR Question Bank Part 2 questions: 5: Interpreting financial statements 233

8 PASTRY CO (MARCH/JUNE 2021)

Pastry Co is considering the acquisition of a subsidiary in the catering industry. Two companies have
been identified as potential acquisitions and extracts from the financial statements of Cook Co and
Dough Co have been reproduced below:
Statements of profit or loss for the year ended 30 September 20X7:
Cook Co Dough Co
$'000 $'000
Revenue 21,500 16,300
Cost of sales (15,545) (8,350)
Gross profit 6,955 7,950
Operating expenses (1,940) (4,725)
Finance costs (650) (200)
Profit before tax 4,365 3,025
Income tax (1,320) (780)
Profit for the year 3,045 2,245
Extracts from the statements of financial position as at 30 September 20X7:
Cook Co Dough Co
$'000 $'000
Non-current assets
Property 22,250 68,500
Equity
Equity shares of $1 each 1,000 1,000
Revaluation surplus – 30,000
Retained earnings 18,310 2,600
Non-current liabilities
Loan notes 7,300 5,200
Notes:
(1) Both companies are owner-managed. Dough Co operates from expensive city centre premises,
selling to local businesses and the public. Cook Co is a large wholesaler, selling to chains or
coffee shops. Cook Co operates from a number of low-cost production facilities.
(2) On 1 October 20X6, Dough Co revalued its properties for the first time, resulting in a gain of
$30m. The properties had a remaining useful life of 30 years at 1 October 20X6. Dough Co does
not make a transfer from the revaluation surplus in respect of excess depreciation. Cook Co
uses the cost model to account for its properties. Dough Co and Cook Co charge all depreciation
expenses to operating expenses.
(3) Cook Co charges the amortisation of its research and development to cost of sales, whereas
Dough Co charges the same costs to operating expenses. These costs amounted to $1.2m for
Cook Co and $2.5m for Dough Co.
(4) The notes to the financial statements show that Cook Co paid its directors total salaries of
$110,000 whereas Dough Co paid its directors total salaries of $560,000.
(5) The following ratios have been correctly calculated in respect of Cook Co and Dough Co for the
year ended 30 September 20X7:
Cook Co Dough Co
Gross profit margin 32.3% 48.8%
Operating margin 23.3% 19.8%
Return on capital employed 18.8% 8.3%

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234 P a r t 2 q u e s t i o n s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

Required:
(a) Adjust the relevant extracts from Dough Co's financial statements to apply the same accounting
policies as Cook Co and re-calculate Dough Co's ratios provided in note (5). (6 marks)
This table should be used to answer part (a):
Adjustment Adjusted
Dough Co (if required) Dough Co
Statement of Profit of Loss for the
year ended 30 September 20X7 $'000 $'000
Revenue 16,300
Cost of sales (8,350)
Gross profit 7,950
Operating expenses (4,725)
Finance costs (200)
Profit before tax 3,025
Income Tax (780)
Profit for the year 2,245

Statement of Financial Position at

30 September 20X7
Non-current assets
Property 68,500
Equity
Equity shares of $1 each 1,000
Revaluation Surplus 30,000
Retained Earnings 2,600
Non-current liabilities
Loan notes 5,200

(b) Based on these adjusted accounting ratios, compare the performance of the two companies.
Your answer should comment on the difficulties of making a purchase decision based solely on
the extracts of the financial statements and the information provided in notes (1) to (5).
(14 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 6: Statement of cash flows 235

6: Statement of cash flows

1 MINSTER
Minster is a publicly listed company. Details of its financial statements for the year ended
30 September 20X6, together with a comparative statement of financial position, are:
Statements of financial position at 30 September 20X6 30 September 20X5
$000 $000 $000 $000
Non-current assets (note (a)) Property, plant and 1,280 940
equipment
Software 135 nil
Investments at fair value through profit or loss 150 125
1,565 1,065
Current assets
Inventories 480 510
Trade receivables 270 380
Contract assets 80 55
Bank nil 830 35 980
Total assets 2,395 2,045

Equity and liabilities

Equity shares of 25 cents each 500 300
Reserves
Share premium (note (b)) 150 85
Revaluation reserve 60 25
Retained earnings 950 1,160 965 1,075
1,660 1,375
Non-current liabilities
9% loan note 120 nil
Environmental provision 162 nil
Deferred tax 18 300 25 25
Current liabilities
Trade payables 350 555
Bank overdraft 25 40
Current tax payable 60 435 50 645
Total equity and liabilities 2,395 2,045

Statement of profit or loss for the year ended 30 September 20X6

Revenue 1,397
Cost of sales (1,110)
Gross profit 287
Operating expenses (125)
162
Finance costs (note (a)) (40)
Investment income and gain on investments 20
Profit before tax 142
Income tax expense (57)
Profit for the year 85

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236 P a r t 2 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

The following supporting information is available.

(a) Included in property, plant and equipment is a coal mine and related plant that Minster
purchased on 1 October 20X5. Legislation requires that in ten years’ time (the estimated life of
the mine) Minster will have to landscape the area affected by the mining. The future cost of this
has been estimated and discounted at a rate of 8% to a present value of $150,000. This cost has
been included in the carrying amount of the mine and, together with the unwinding of the
discount, has also been treated as a provision. The unwinding of the discount is included within
finance costs in the statement of profit or loss.
Other land was revalued (upward) by $35,000 during the year.
Depreciation of property, plant and equipment for the year was $255,000.
There were no disposals of property, plant and equipment during the year.
The software was purchased on 1 April 20X6 for $180,000.
The market value of the investments had increased during the year by $15,000. There have
been no sales of these investments during the year.
(b) On 1 April 20X6 there was a bonus (scrip) issue of equity shares of one for every four held
utilising the share premium reserve. A further cash share issue was made on 1 June 20X6.
No shares were redeemed during the year.
(c) A dividend of 5 cents per share was paid on 1 July 20X6.
Required:
(a) Prepare a statement of cash flows for Minster for the year to 30 September 20X6. (15 marks)
(b) Comment on the financial performance and position of Minster as revealed by the above
financial statements and your statement of cash flows. (10 marks)

(25 marks)

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ACCA FR Question Bank Part 2 questions: 6: Statement of cash flows 237

2 DELTOID CO
The following information relates to the draft financial statements of Deltoid Co.
Summarised statements of financial position as at:
31 March 20X6 31 March 20X5
$000 $000 $000 $000
Assets
Non-current assets
Property, plant and equipment (note 1) 19,000 25,500
Current assets
Inventory 12,500 4,600
Trade receivables 4,500 2,000
Tax refund due 500 nil
Bank nil 1,500
Total assets 36,500 33,600

Equity and liabilities

Equity
Equity shares of $1 each (note 2) 10,000 8,000
Share premium (note 2) 3,200 4,000
Retained earnings 4,500 7,700 6,300 10,300
17,700 18,300
Non-current liabilities
10% loan note (note 3) nil 5,000
Lease liabilities 4,800 2,000
Deferred tax 1,200 6,000 800 7,800
Current liabilities
10% loan note (note 3) 5,000 nil
Tax nil 2,500
Bank overdraft 1,400 nil
Lease liabilities 1,700 800
Trade payables 4,700 12,800 4,200 7,500
Total equity and liabilities 36,500 33,600

Summarised statements of profit or loss for the years ended:

31 March 31 March
20X6 20X5
$000 $000
Revenue 55,000 40,000
Cost of sales (43,800) (25,000)
Gross profit 11,200 15,000
Operating expenses (12,000) (6,000)
Finance costs (note 4) (1,000) (600)
Profit (loss) before tax (1,800) 8,400
Income tax relief/(expense) 700 (2,800)
Profit (loss) for the year (1,100) 5,600

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238 P a r t 2 q u e s t i o n s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

The following additional information is available:

(1) Property, plant and equipment is made up of:
As at 31 March 20X6 31 March 20X5
$000 $000
Property nil 8,800
Owned plant 12,500 14,200
Leased plant 6,500 2,500
19,000 25,500

During the year Deltoid Co sold its property for $8.5 million and entered into an arrangement to
rent it back from the purchaser for a period of twelve months. There were no additions to, or
disposals of, owned plant during the year. The depreciation charges (to cost of sales) for the
year ended 31 March 20X6 were:
$000
Property 200
Owned plant 1,700
Leased plant 1,800
3,700

(2) On 1 July 20X5 there was a bonus issue of shares from share premium of one new share for
every 10 held.
On 1 October 20X5 there was a fully subscribed cash issue of shares at par.
(3) The 10% loan note is due for repayment on 30 June 20X6. Deltoid Co is in negotiations with the
loan provider to refinance the same amount for another five years.
(4) The finance costs are made up of:
For year ended:
31 March 20X6 31 March 20X5
$000 $000
Lease charges 300 100
Overdraft interest 200 nil
Loan note interest 500 500
1,000 600

Required:
(a) Prepare the following extracts from the statement of cash flows for Deltoid Co for the year
ended 31 March 20X6:
(i) Cash flows from operating activities; and
(ii) Cash flows from financing activities. (10 marks)
(b) Based on the information available, advise the loan provider on the matters you would take into
consideration when deciding whether to grant Deltoid Co a renewal of its maturing loan note.
(10 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 239

11: Preparation of single company accounts

1 VERNON CO (Q32, MARCH/JUNE 2019)

The following extract is from the trial balance of Vernon Co at 31 December 20X8:
$’000 $’000
Cost of sales 46,410
Finance costs 4,050
Investment income (note (iii)) 1,520
Operating expenses (note (iii)) 20,640
Revenue (notes (i) and (ii)) 75,350
Tax (note (vi)) 130
The following notes are relevant:
(i) Vernon Co made a large sale of goods on 1 July 20X8, which was also the date of delivery.
Under the terms of the agreement, Vernon Co will receive payment of $8m on 30 June
20X9. Currently, Vernon Co has recorded $4m in revenue and trade receivables. The
directors intend to record the remaining $4m revenue in the year ended 31 December
20X9. The costs of this sale have been accounted for correctly in the financial statements
for the year ended 31 December 20X8. Vernon Co has a cost of capital of 8% at which an
appropriate discount factor would be 0.9259.
(ii) Vernon Co also sold goods to an overseas customer on 1 December 20X8 for 12m Kromits
(Kr). They agreed a 60-day payment term. No entries have yet been made to record this
sale, although the goods were correctly removed from inventory and expensed in cost of
sales. The amount remains unpaid at 31 December 20X8.
Relevant exchange rates are:
1 December 20X8: 6.4 Kr/$
31 December 20X8: 6.0 Kr/$
(iii) Vernon Co acquired $9m 5% bonds at par value on 1 January 20X8. The interest is
receivable on 31 December each year. Vernon Co incurred $0.4m broker fees when
acquiring the bonds, which has been expensed to operating expenses. These bonds are
repayable at a premium so have an effective rate of 8%. Vernon Co has recorded the
interest received on 31 December 20X8 in investment income.
(iv) During the year, Vernon Co revalued its head office for the first time, resulting in an
increase in value of $12m at 31 December 20X8. Deferred tax is applicable to this gain at
25%.
(v) Vernon Co values its investment properties using the fair value model. The investment
properties increased in value by $4m at 31 December 20X8.
(vi) The tax figure in the trial balance represents the under/over provision from the previous
year. The current tax liability for the year ended 31 December 20X8 is estimated to be
$3.2m.
(vii) At 1 January 20X8, Vernon Co had 30 million $1 equity shares in issue. On 1 April 20X8,
Vernon Co issued an additional 5 million $1 equity shares at full market value. On 1 July
20X8, Vernon Co performed a 2 for 5 rights issue, at $2.40 per share. The market value of
a Vernon Co share at 1 July 20X8 was $3.10 per share.

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240 P a r t 2 q u e s t i o n s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

Required:
(a) Produce a statement of profit or loss and other comprehensive income for Vernon Co for the
year ended 31 December 20X8. (15 marks)
(b) Calculate the earnings per share for Vernon Co for the year ended 31 December 20X8. (5 marks)

(20 marks)

2 DUGGAN CO (Q32, SEPTEMBER/DECEMBER 2018)

The following extracts from the trial balance have been taken from the accounting records of Duggan
Co as at 30 June 20X8:
$’000 $’000
Convertible loan notes (note (iv)) 5,000
Cost of sales 21,700
Finance costs (note (iv)) 1,240
Investment income 120
Operating expenses (notes (ii) and (v)) 13,520
Retained earnings at 1 July 20X7 35,400
Revenue (note (i)) 43,200
Equity share capital ($1 shares) at 1 July 20X7 12,200
Tax (note (iii)) 130
The following notes are relevant:
(i) Duggan Co entered into a contract where the performance obligation is satisfied over
time. The total price on the contract is $9m.
Progress towards completion was measured at 50% at 30 June 20X7 and 80% on 30 June
20X8. Contract costs of $1.5 million were incurred during the year.
The correct entries were made in the year ended 30 June 20X7, but no entries have been
made for the year ended 30 June 20X8.
(ii) On 1 January 20X8, Duggan Co was notified that an ex-employee had started court
proceedings against them for unfair dismissal. Legal advice was that there was an 80%
chance that Duggan Co would lose the case and would need to pay an estimated
$1.012m on 1 January 20X9.
Based on this advice, Duggan Co recorded a provision of $800k on 1 January 20X8, and
has made no further adjustments. The provision was recorded in operating expenses.
Duggan Co has a cost of capital of 10% per annum and the discount factor at 10% for one
year is 0.9091.
(iii) The balance relating to tax in the trial balance relates to the under/over provision from
the prior period. The tax estimate for the year ended 30 June 20X8 is $2.1m.
In addition to this, there has been a decrease in taxable temporary differences of $2m in
the year. Duggan Co pays tax at 25% and movements in deferred tax are to be taken to
the statement of profit or loss.

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 241

(iv) Duggan Co issued $5m 6% convertible loan notes on 1 July 20X7. Interest is payable
annually in arrears. These bonds can be converted into one share for every $2 on
30 June 20X9. Similar loan notes, without conversion rights, incur interest at 8%. Duggan
Co recorded the full amount in liabilities and has recorded the annual payment made on
30 June 20X8 of $0.3m in finance costs.
Relevant discount rates are as follows:
Present value of $1 in: 6% 8%
1 year 0.943 0.926
2 years 0.890 0.857
(v) Duggan Co began the construction of an item of property on 1 July 20X7 which was
completed on 31 March 20X8. A cost of $32m was capitalised. This included $2.56m,
being a full 12 months’ interest on a $25.6m 10% loan taken out specifically for this
construction. On completion, the property has a useful life of 20 years.
Duggan Co also recorded $0.4m in operating expenses, representing depreciation on the
asset for the period from 31 March 20X8 to 30 June 20X8.
(vi) It has been discovered that the previous financial controller of Duggan Co engaged in
fraudulent financial reporting. Currently, $2.5m of trade receivables has been deemed to
not exist and requires to be written off. Of this, $0.9m relates to the year ended 30 June
20X8, with $1.6m relating to earlier periods.
(vii) On 1 November 20X7, Duggan Co issued 1.5 million shares at their full market price of
$2.20. The proceeds were credited to a suspense account.
Required:
(a) Prepare a statement of profit or loss for Duggan Co for the year ended 30 June 20X8. (12 marks)
(b) Prepare a statement of changes in equity for Duggan Co for the year ended 30 June 20X8.
(5 marks)
(c) Calculate the basic earnings per share for Duggan Co for the year ended 30 June 20X8.
(3 marks)
Note: All workings should be done to the nearest $’000.

(20 marks)

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242 P a r t 2 q u e s t i o n s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

3 CLARION (Q3, JUNE 2015, AMENDED)

The following trial balance relates to Clarion as at 31 March 20X5:
$’000 $’000
Equity shares of $1 each (note (i)) 30,000
Retained earnings – 1 April 20X4 8,600
Other component of equity – share premium (note (i)) 5,000
8% loan notes (note (ii)) 20,000
Plant and equipment at cost (note (iii)) 85,000
Accumulated depreciation plant and equipment – 1 April 20X4 19,000
Investments through profit or loss – value at 1 April 20X4 (note (iv)) 6,000
Inventory at 31 March 20X5 11,700
Trade receivables 18,500
Bank 1,900
Deferred tax (note (v)) 2,700
Trade payables 9,400
Environmental provision (note (iii)) 4,000
Lease liability (note (iii)) 4,200
Revenue 132,000
Cost of sales 90,300
Administrative expenses 8,000
Distribution costs 7,400
Loan note interest paid 800
Suspense account (note (ii)) 5,800
Bank interest 300
Dividends paid 3,900
Investment income (note (iv)) 500
Current tax (note (v)) 400
237,700 237,700

The following notes are also relevant:

(i) The equity shares and share premium balances in the trial balance above include a fully
subscribed 1 for 5 rights issue at $1.60 per share which was made by Clarion on 1 October 20X4.
The market value of Clarion’s shares was $2.50 on 1 October 20X4.
(ii) On 31 March 20X5, one quarter of the 8% loan notes were redeemed at par and six months’
outstanding loan interest was paid. The suspense account represents the double entry
corresponding to the cash payment for the capital redemption and the outstanding interest.
(iii) Property, plant and equipment:
Included in property, plant and equipment are two major items of plant acquired on
1 April 20X4:
Item 1 had a cash cost $14 million, however, the plant will cause environmental damage which
will have to be rectified when it is dismantled at the end of its five-year life. The present value
(discounting at 8%) on 1 April 20X4 of the rectification is $4 million. The environmental
provision has been correctly accounted for, however, no finance cost has yet been charged on
the provision.
Item 2 was plant acquired with a fair value of $8 million under a five-year lease. This required an
initial deposit of $2.3 million and annual payments of $1.5 million on 31 March each year. The
lease liability in the trial balance above represents the present value of the outstanding lease
payments less both the deposit and the first annual payment. The lease has an implicit interest
rate of 10% and the right-of-use asset has been correctly capitalised in plant and equipment.

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 243

No depreciation has yet been charged on plant and equipment which should be charged to cost
of sales on a straight-line basis over a five-year life (including leased plant). No plant is more
than four years old.
(iv) The investments through profit or loss are those held at 31 March 20X5 (after the sale below).
They are carried at their fair value as at 1 April 20X4, however, they had a fair value of
$6.5 million on 31 March 20X5. During the year an investment which had a carrying amount of
$1.4 million was sold for $1.6 million. Investment income in the trial balance above includes the
profit on the sale of the investment and dividends received during the year.
(v) A provision for current tax for the year ended 31 March 20X5 of $3.5 million is required. The
balance on current tax in the trial balance above represents the under/over provision of the tax
liability for the year ended 31 March 20X4. At 31 March 20X5, the tax base of Clarion’s net
assets was $12 million less than their carrying amounts. The income tax rate of Clarion is 25%.
Required:
(a) Prepare the statement of profit or loss for Clarion for the year ended 31 March 20X5. (10 marks)
(b) Prepare the statement of changes in equity for Clarion for the year ended 31 March 20X5.
(3 marks)
(c) Prepare the statement of financial position for Clarion as at 31 March 20X5. (10 marks)
Notes to the financial statements are not required.
(d) Calculate the basic earnings per share of Clarion for the year ended 31 March 20X5. (3 marks)
(e) Prepare extracts from the statement of cash flows for Clarion for the year ended 31 March 20X5
in respect of cash flows from investing (ignore investment income) and financing activities.
(4 marks)

(30 marks)

4 MIMS CO (SEPTEMBER/DECEMBER 2021)

The following is an extract from the trial balance of Mims Co for the year ended 31 December 20X5:
$'000 $'000
Revenue 24,300
Cost of sales 11,600
Administrative expenses 10,900
Distribution costs 7,300
Income tax (note (3)) 140
Deferred tax liability 1 January 20X5 (note (3)) 7,700
Provision at 1 January 20X5 (note (2)) 4,600
Retained earnings at 1 January 20X5 43,200
Equity share capital ($1) at 1 January 20X5 60,000
Intangible assets (note (6)) 3,300
Investment property (note (5)) 19,000
Finance costs 1,400
Investment income 500
Suspense account 46,500
The following information is relevant:
(1) Mims Co noted there was an error in the inventory count at 31 December 20X4, meaning that
the closing inventory balance in the 20X4 financial statements was overstated by $0.7m. No
entries have yet been made to correct this error.

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(2) The provision relates to a court case in existence since December 20X4. Mims Co settled this
case on 31 December 20X5 for $6m. The full amount was credited correctly to cash, with a
corresponding debit entry being made in the suspense account.
(3) The income tax figure in the trial balance relates to the under/over provision from the previous
year. The current year tax is estimated to be a tax refund of $1.2m. In addition to this, the
deferred tax liability at 31 December 20X5 is estimated to be $8.2m.
(4) On 30 September 20X5, Mims Co made a 1 for 4 rights issue. The exercise price was $3.50 per
share. The proceeds were correctly accounted for in cash, with a corresponding credit entry
being made in the suspense account.
(5) Mims Co acquired an investment property for $20m cash on 1 January 20X5 and decided to use
the fair value model to account for investment properties. As the property is expected to have a
20 year useful life, depreciation was recorded on this basis. The fair value of the property at
31 December 20X5 has been assessed at $22m but no accounting has taken place in relation to
this. All depreciation and amortisation is charged on a pro-rata basis to administrative expenses.
There were no other acquisitions or disposals of non-current assets.
(6) Mims Co incurred a number of expenses in relation to brands during the year and has
capitalised the following costs as intangible assets:
– $1.3 cash was paid on 1 April 20X5 to promote one of its major brands which is deemed
to have an indefinite life.
– $2m cash was paid on 1 October 20X5 to acquire a brand from one of its competitors.
Mims Co expect the brand to have useful life of five years. Mims Co intends to sell it after
five years. At the point of sale, it is estimated that the value of the brand will have
increased and so no amortisation has been accounted for in the current year.
(7) Mims Co paid a dividend of $0.04 per share on all existing shares 31 December 20X5, recording
the dividend paid in administrative expenses.
Required:
(a) Prepare the statement of profit or loss for Mims Co for the year ended 31 December 20X5.
(12 marks)
(b) Prepare the statement of changes in equity for Mims Co for the year ended 31 December 20X5.
(5 marks)
(c) Prepare the following extracts from the statement of cash flows for Mims Co for the year ended
31 December 20X5:
(i) Cash flows from investing activities; and
(ii) Cash flows from financing activities.
(3 marks)

(20 marks)

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 245

5 XTOL (Q2, JUNE 2014 AMENDED)

The following trial balance relates to Xtol at 31 March 20X4:
$000 $000
Revenue (note (1)) 490,000
Cost of sales 290,600
Distribution costs 33,500
Administrative expenses 36,800
Loan note interest and dividends paid (notes (4) and (5)) 13,380
Bank interest 900
Property at cost (note (2)) 100,000
Plant and equipment at cost (note (2)) 155,500
Accumulated amortisation/depreciation at 1 April 20X3:
Property 25,000
Plant and equipment 43,500
Inventory at 31 March 20X4 61,000
Trade receivables 63,000
Trade payables 32,200
Bank 5,500
Equity shares of 25 cents each (note (3)) 56,000
Share premium 25,000
Retained earnings at 1 April 20X3 26,080
5% convertible loan note (note (4)) 50,000
Current tax (note (6)) 3,200
Deferred tax (note (6)) 4,600
757,880 757,880

The following notes are relevant:

(1) Revenue includes an amount of $20 million for cash sales made through Xtol’s retail outlets
during the year on behalf of Francais. Xtol, acting as agent, is entitled to a commission of 10% of
the selling price of these goods. By 31 March 20X4, Xtol had remitted to Francais $15 million (of
the $20 million sales) and recorded this amount in cost of sales.
(2) Property is depreciated over 20 years on a straight line basis. Plant and equipment is
depreciated at 12½% per annum on the reducing balance basis.
All amortisation/depreciation of non-current assets is charged to cost of sales.
(3) On 1 August 20X3, Xtol made a fully subscribed rights issue of equity share capital based on two
new shares at 60 cents each for every five shares held. The market price of Xtol’s shares before
the issue was $1.02 each. The issue has been fully recorded in the trial balance figures.
(4) On 1 April 20X3, Xtol issued a 5% $50 million convertible loan note at par. Interest is payable
annually in arrears on 31 March each year. The loan note is redeemable at par or convertible
into equity shares at the option of the loan note holders on 31 March 20X6. The interest on an
equivalent loan note without the conversion rights would be 8% per annum.
The present values of $1 receivable at the end of each year, based on discount rates of 5% and
8%, are:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
(5) An equity dividend of 4 cents per share was paid on 30 May 20X3 and, after the rights issue, a
further dividend of 2 cents per share was paid on 30 November 20X3.

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(6) The balance on current tax represents the under/over provision of the tax liability for the year
ended 31 March 20X3. A provision of $28 million is required for current tax for the year ended
31 March 20X4 and at this date the deferred tax liability was assessed at $8.3 million.
Required:
(a) Prepare the statement of profit or loss for Xtol for the year ended 31 March 20X4. (8 marks)
(b) Prepare the statement of financial position for Xtol as at 31 March 20X4. (9 marks)
(c) Calculate the basic earnings per share (EPS) for Xtol for the year ended 31 March 20X4.
(3 marks)
Note: Answers and workings (for parts (a) and (b)) should be presented to the nearest $’000; notes to
the financial statements are not required.

(20 marks)

6 ATLAS (Q2, JUNE 2013 AMENDED)

The following trial balance relates to Atlas at 31 March 20X3:
$000 $000
Equity shares of 50 cents each (note (e)) 50,000
Share premium 20,000
Retained earnings at 1 April 20X2 11,200
Land and buildings – at cost (land $10 million) (note (b)) 60,000
Plant and equipment – at cost (note (b)) 94,500
Accumulated depreciation at 1 April 20X2: – buildings 20,000
– plant and equipment 24,500
Inventory at 31 March 20X3 43,700
Trade receivables 42,200
Bank 6,800
Deferred tax (note (d)) 6,200
Trade payables 35,100
Revenue (note (a)) 550,000
Cost of sales 411,500
Distribution costs 21,500
Administrative expenses 30,900
Dividends paid 20,000
Bank interest 700
Current tax (note (d)) 1,200
725,000 725,000

The following notes are relevant.

(a) Revenue includes the sale of $10 million of maturing inventory made to Xpede on 1 October
20X2. The cost of the goods at the date of sale was $7 million and Atlas has an option to
repurchase these goods at any time within three years of the sale at a price of $10 million plus
accrued interest from the date of sale at 10% per annum. At 31 March 20X3 the option had not
been exercised, but it is highly likely that it will be before the date it lapses.
(b) Non-current assets:
On 1 October 20X2, Atlas terminated the production of one of its product lines. From this date,
the plant used to manufacture the product has been actively marketed at an advertised price of
$4.2 million which is considered realistic. It is included in the trial balance at a cost of $9 million
with accumulated depreciation (at 1 April 20X2) of $5 million.

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 247

On 1 April 20X2, the directors of Atlas decided that the financial statements would show an
improved position if the land and buildings were revalued to market value. At that date, an
independent valuer valued the land at $12 million and the buildings at $35 million and these
valuations were accepted by the directors. The remaining life of the buildings at that date was
14 years. Atlas does not make a transfer to retained earnings for excess depreciation. Ignore
deferred tax on the revaluation surplus.
Plant and equipment is depreciated at 20% per annum using the reducing balance method and
time apportioned as appropriate.
All depreciation is charged to cost of sales, but none has yet been charged on any non-current
asset for the year ended 31 March 20X3.
(c) At 31 March 20X3, a provision is required for directors’ bonuses equal to 1% of revenue for the
year.
(d) Atlas estimates that an income tax provision of $27.2 million is required for the year ended
31 March 20X3 and at that date the liability to deferred tax is $9.4 million. The movement on
deferred tax should be taken to profit or loss. The balance on current tax in the trial balance
represents the under/over provision of the tax liability for the year ended 31 March 20X2.
(e) On 1 July 20X2, Atlas made and recorded a fully subscribed rights issue of 1 for 4 at $1.20 each.
Immediately before this issue, the stock market value of Atlas’s shares was $2 each.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Atlas for the year
ended 31 March 20X3; (8 marks)
(b) Prepare the statement of changes in equity for Atlas for the year ended 31 March 20X3.
(3 marks)
(c) Prepare the statement of financial position of Atlas as at 31 March 20X3. (9 marks)
Note: Notes to the financial statements are not required.

(20 marks)

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248 P a r t 2 q u e s t i o n s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

7 KEYSTONE (Q2, DECEMBER 2011, AMENDED)

The following trial balance relates to Keystone at 30 September 20X1.
$000 $000
Revenue 380,000
Material purchases (note 1) 64,000
Production labour (note 1) 124,000
Factory overheads (note 1) 80,000
Distribution costs 14,200
Administrative expenses 46,400
Finance costs 350
Investment income 800
Property – at cost (note 1) 50,000
Plant and equipment – at cost (note 1) 44,500
Accumulated depreciation at 1 October 20X0
– property 10,000
– plant and equipment 14,500
Financial asset: equity investments (note 3) 18,000
Inventory at 1 October 20X0 46,700
Trade receivables 33,550
Trade payables 27,800
Bank 5,700
Equity shares of 50 cents each 55,000
Share premium 3,000
Retained earnings at 1 October 20X0 33,600
Deferred tax (note 4) 2,700
527,400 527,400

The following notes are relevant.

(1) Non-current assets:
During the year Keystone manufactured an item of plant for its own use. The direct materials
and labour were $3 million and $4 million respectively. Production overheads are 75% of direct
labour cost and Keystone determines the final selling price for goods by adding a mark-up on
total cost of 40%. These manufacturing costs are included in the relevant expense items in the
trial balance. The plant was completed and put into immediate use on 1 April 20X1.
All plant and equipment is depreciated at 20% per annum using the reducing balance method
with time apportionment in the year of acquisition.
The directors decided to revalue the property in line with recent increases in market values. On
1 October 20X0 an independent surveyor valued the property at $48 million, which the
directors have accepted. The property was being depreciated over an original life of 20 years,
which has not changed. Keystone does not make a transfer to retained earnings in respect of
excess amortisation. The revaluation gain will create a deferred tax liability (see note 4).
All depreciation is charged to cost of sales. No depreciation has yet been charged on any
non-current asset for the year ended 30 September 20X1.
(2) The inventory on Keystone’s premises at 30 September 20X1 was counted and valued at cost of
$54.8 million.
(3) The equity investments had a fair value of $17.4 million on 30 September 20X1. There were no
purchases or disposals of any of these investments during the year.

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ACCA FR Question Bank Part 2 questions: 11: Preparation of single company accounts 249

(4) A provision for income tax for the year ended 30 September 20X1 of $24.3 million is required.
At 30 September 20X1, the tax base of Keystone’s net assets was $15 million less than their
carrying amounts. This excludes the effects of the revaluation of the property. The income tax
rate of Keystone is 30%.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Keystone for the
year ended 30 September 20X1. (11 marks)
(b) Prepare the statement of financial position for Keystone as at 30 September 20X1. (9 marks)
Notes to the financial statements are not required.

(20 marks)

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ACCA FR Question Bank Part 2 answers: 3: Consolidated statement of profit or loss and OCI 251

PART 2 ANSWERS: Objective test and Scenario

3: Consolidated statement of profit or loss and other

comprehensive income

EXAM SMART
Always look carefully at the dates if there are changes to a group during the period.
RW disposed of its investment in SX exactly half way through the year.
 Include only 6/12 of SX’s revenue, operating expenses and income tax expense in the
consolidated statement of profit or loss
 Calculate non-controlling interest as 6/12 of SX’s profit for the period
 Remember to include the tax on the profit on disposal. This is based on the profit for
the parent (in RWs own accounts), not the profit for the group.

1 RW
1  All inter-group assets and liabilities should be eliminated from the consolidated financial
statements.
 For the purpose of preparing the consolidated financial statements, a subsidiary’s
financial statements should be adjusted so that they conform to the group’s accounting
policies.
 The group statement of financial position should present non-controlling interests within
equity, but separately from the equity of the owners of the parent.
When the end of the reporting period of the parent is different from that of a subsidiary, the
subsidiary prepares, for consolidation purposes, additional financial information as of the same
date as the financial statements of the parent. The separate financial statements of subsidiaries
do not have to be prepared at the same date of those of the parent.

2 $ 1900000
$000
RW 1,500
SX (800 × 6/12) 400
1,900

3  $665,000
$000
RW 300
SX (250 × 6/12) 125
On disposal of the investment in SX (see below) 240
665

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Profit on disposal (RW’s own accounts)

$000
Sale proceeds 4,000
Cost of investment (3,200)
Profit on disposal before tax 800
Income tax [$800 × 30%] (240)
Profit on disposal after tax 560

4  Profit of $180,000
Consolidated profit on disposal
$000
Fair value of consideration received 4,000
Less: Net assets at date control lost
[$1,000 + ($2,900 + {550/2})] × 80% (3,340)
Less: Goodwill at date control lost (per question) (480)
180

5  $55,000
Non-controlling interest
$000
To 1 July 20X4: (550 × 6/12) × 20% 55

RW: Consolidated statement of profit or loss for the year ending 31 December 20X4 (for
information only)
$000
Revenue [6,000 + (2,500 × 6/12)] 7,250
Operating costs [4,500 + (1,700 × 6/12)] (5,350)
1,900
Profit on disposal of investment (W3) 180
Profit before tax 2,080
Income tax [300 + (250 × 6/12) + 240 (W2)] (665)
1,415

$000
Attributable to:
Owners of the parent 1,360
Non-controlling interest (W4) 55
1,415

Workings
(W1) Goodwill on consolidation (proof)
$000
Consideration transferred 3,200
Non-controlling interest (20% × 3,400) 680
Net assets acquired (1,000 + 2,400) (3,400)
Goodwill 480

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ACCA FR Question Bank Part 2 answers: 3: Consolidated statement of profit or loss and OCI 253

(W2) Profit on disposal (RW’s own accounts)

$000
Sale proceeds 4,000
Cost of investment (3,200)
Profit on disposal before tax 800
Income tax [$800 × 30%] (240)
Profit on disposal after tax 560
(W3) Consolidated profit on disposal
$000
Fair value of consideration received 4,000
Less: Net assets at date control lost
[$1,000 + ($2,900 + {550/2})] × 80% (3,340)
Less: Goodwill at date control lost (W1) (480)
180
(W4) Non-controlling interest
$000
To 1 July 20X4: (550 × 6/12) × 20% 55

EXAM SMART
Group accounts questions often feature a subsidiary that is acquired part-way through the
year. In this question, Cyclip was acquired on 1 July 20X4, three months into the year. This
means that:
 Cyclip’s retained profit for the year is time-apportioned with 3/12 being pre acquisition
to include in the goodwill working.
 The statement of profit or loss only includes the subsidiary’s results for the nine months
from 1 July 20X4.

2 BYCOMB
6  $29,300,000
Revenue (24,200 + (10,800 × 9/12) – 3,000 intra-group sales)

7  $20,470,000
$000
Bycomb 17,800
Cyclip (6,800 × 9/12) 5,100
Intra-group purchases (3,000)
URP in inventory (420 × 20/120) 70
Impairment of goodwill per question 500
20,470

8 $ 13440 000

Deferred consideration (12,000 × 80% × $1.54/1.1)

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9  $260,000
Profit for year attributable to non-controlling interest: (1,300 × 20% (w))
$000
Profit per question time apportioned (2,400 × 9/12) 1,800
Impairment of goodwill (per question) (500)
1,300

10  $6,000,000
Non-controlling interest (12,000 × 20% × $2.50)

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 255

4: Accounting for associates

1 PYRAMID

1 $ 28800 000
Pyramid acquired 7.2 million (9 million × 80%) shares in Square. On the basis of a share
exchange of two for three, Pyramid would issue 4.8 million (7.2 million/3 × 2) shares. At a value
of $6 each, this would amount to $28.8 million and be recorded as $4.8 million share capital and
$24 million (4.8 million × $5) other components of equity.

2  $69,000,000
$’000
Pyramid 38,100
Square 28,500
Fair value adjustment – plant (3,000 – 600 depreciation) 2,400
69,000

3  $5,920,000
Consolidated retained earnings Square
$000
At 1 October 20X3 –
Year ended 30 September 20X4 8,000
Additional depreciation on plant (3,000/5) (600)
7,400

Square (80% × 7,400) 5,920

4  It will be included at its fair value on acquisition plus share of post-acquisition earnings of
the Pyramid Group.
 It will be included as a separate component of equity.

5 $ 6600 000
$000
Cost 6,000
Share post-acquisition profit (2,000 × 30%) 600
6,600

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256 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

2 TX AND SX

6 $ 1093000

Consolidated property, plant and equipment

$000
TX 545
SX 480
Fair value adjustment 72
Excess depreciation (72/18) (4)
1,093

7  Recognise an immediate gain in the consolidated statement of profit or loss

EXAM SMART
Here there is negative goodwill (a ‘gain on a bargain purchase’). Negative goodwill is not
recognised in the statement of financial position but instead it is recognised immediately in
profit or loss as a gain. The adjustment also increases consolidated retained earnings.

$000
Cost 530
Fair value of net assets acquired 542
Goodwill (12)

8 $ 15000

The group share of post-acquisition profits increases both the investment in the associate and
consolidated retained earnings.
$000
Group share of post-acquisition profits
(120 – 70) = 50 × 30% = 15

9
Debit Consolidated retained earnings $11,000
Credit Consolidated inventories $11,000
Debit Consolidated trade payables $44,000
Credit Consolidated trade receivables $44,000

Intra-group trading
Mark up on cost 33⅓% = 25% margin on selling price.
Selling price 44; unrealised profit = 44 × 25% = 11
All goods remain in inventories

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 257

10  $87,000
TX $72,000 plus cash in transit $15,000. SX’s bank overdraft is not netted off against cash and
cash equivalents.

EXAM SMART
When there is cash in transit you should speed the transaction through to its final
destination: the cheque in transit is deducted from consolidated trade receivables and
added to consolidated cash and cash equivalents.

3 POPLAR
11  The parent is itself a wholly owned subsidiary of another entity
 The parent’s debt or equity instruments are not traded in a public market
Remember that if control exists, even if it is through an agreement rather than shareholding, there is
a parent-subsidiary relationship and consolidated financial statements must be prepared.

12 $ 600 000
$2.6 million × 30/130 = $600,000

13  Deduct $2.4 million from consolidated receivables and $1.6 million from consolidated
payables, and include cash in transit of $800,000

14  As a financial asset equity investment, at fair value

An associate is an entity over which an investor has significant influence. There are several
indicators of significant influence, but the most important are usually considered to be a holding
of 20% or more of the voting shares and board representation. Therefore, it is reasonable to
assume that the investment in Alder was an associate until August 20X5.
Although Poplar still owns 30% of Alder’s shares, Alder has become a subsidiary of Spekulate as
it has acquired 60% of Alder’s shares. Poplar has also lost its seat on Alder’s board. Alder is now
under the control of Spekulate so Poplar can no longer exert significant influence over Alder.
Alder should be treated as a financial asset (IFRS 9) from the date of loss of significant influence.
The investment will be measured at fair value.

15 $ 700 000 profit

$000
Sales proceeds 9,600
Net assets at disposal 11,300
Goodwill at disposal 1,400
Less: carrying amount of NCI (3,800) (8,900)
700

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258 P a r t 2 a n s w e r s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

5: Interpreting financial statements

1 JG
1  JG has insufficient resources to meet its short term liabilities
 Trade payables have increased significantly over the six-month period
The borrowings of $250,000 are short-term borrowings, so JG will need to repay them
sometime within the next twelve months. At present, it would be unable to do so.
The fact that inventories days and payables days have both increased significantly over the
period suggests that working capital has not been well managed.
Despite the fact that revenue has increased, the company has liquidity problems, so it is not in a
healthy position.

2  The company has entered into a ‘bill and hold’ arrangement with a major customer
Under a ‘bill and hold’ arrangement, the customer normally obtains control of the goods, even
though they are still held on the seller’s premises. Therefore, they should not be included in JG’s
inventories.

3  Gearing
 Interest cover

4
Inventories turnover Receivables collection Trade payables payment
period period period
Inventories Receivables Payables
× 365 days × 365 days × 365 days
Cost of sales Revenue Cost of sales

5  Approach the provider of the short – term loan and request an extension of the current
borrowing facilities
 Improve credit control and debt collection procedures with the aim of reducing the
average collection period to 60 days
 Review the company’s inventory control and buying procedures
JG is a fashion wholesaler, so it is unlikely to have a significant amount of plant and equipment
to dispose of.
JG is a privately owned company, so it cannot raise finance by issuing financial instruments.
Suppliers already have to wait, on average, nearly six months to be paid. Unless the situation
improves quickly there is a danger that some or all of them will stop supplying the company,
which would be damaging to the business.

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 259

Notes on working capital and liquidity position of JG (for information only)

Quick ratio indicates JG has liquidity problems.
Inventory days have increased by 51 days in the last six months, indicating potential management
issues. It could be that excessive inventories have been ordered, either in error or in anticipation of a
sales push or that a bulk order has been processed at the end of the year to take advantage of bulk
buying discounts. Either way, given that JG operates in the fashion wholesale sector there must be a
considerable risk of inventory obsolescence. Conversely it could be that there is poor inventory control
as a result of a lack of financial controller direction.
Payable days have also increased by 58 days. This could be due to a large order at the year-end or
more likely, could be the result of not being able to pay suppliers as quickly as required. The issue,
however, is that suppliers are unlikely to be willing to wait an extra two months for their money and
therefore could stop supply at any time.
Receivables days have increased slightly and in a period of cash shortage this shows poor
management control. Debt collection should be a priority.
Although the current ratio indicates that current assets can still cover current liabilities, this may not
be the case if there is a write-down of obsolete inventory. Furthermore, the quick ratio indicates that
in its current state, JG is unable to cover its short term liabilities.

EXAM SMART
Look carefully at the financial statements and the notes. Things to notice that should help
you to answer this question: additions to property, plant and equipment; development
expenditure coming on stream; the effects of the repayment of the loan notes and the
increase in lease obligations.

2 MONTY
6  In the case of Monty, it might be appropriate to include lease obligations in the
calculation
 It can be calculated by multiplying operating profit margin by net asset turnover
ROCE is calculated as profit before interest and tax/shareholders’ equity plus long-term debt (or
total assets less current liabilities). Monty’s liabilities include lease obligations, so technically
these should be included in the calculation. (In this case, capital employed has been taken as
equity + loan notes + lease obligations (current and non-current)).

7  Increase in sales revenue

An increase in sales may lead to an increase in profits and therefore to an increase in ROCE.
The immediate effect of an upwards revaluation is to increase assets and capital employed
without generating any additional profit. This will decrease ROCE.
Similarly, the company’s expenditure on development has increased its assets and decreased
ROCE and the amortisation charge also reduces profits. (However, the fact that the
development expenditure is being amortised suggests that the project has begun to generate
economic benefits during the year, meaning that profits, and ROCE, could well increase in future
years.)

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The decrease loan interest does not affect operating profit (the numerator in the ROCE
calculation) but does increase net assets therefore ROCE will decrease. (However, the
repayment of the loan is a positive sign and will reduce gearing).

EXAM SMART
The most striking feature of Monty’s performance is the increase in its ROCE; whilst this is
4.7% percentage points (21.4% – 16.7%), it represents an increase in return of 28.1%
(4.7%/16.7% × 100) which is an excellent performance during a period of apparent
expansion. Indeed, had Monty not revalued its property, the return would have been even
higher.

8  Sales revenue has increased

If revenue increases, it does not necessarily mean that gross profit (or gross profit margin) will
increase. It is possible to increase revenue and decrease the gross profit percentage, for
example if an entity changes the type of goods it sells from high value, low volume items to low
value, high volume items.

9 20X3 11.0 %

20X2 9.6 %
20X3 20X2
Operating margin (3,400/31,000 × 100) / (2,400/25,000 × 100) 11.0% 9.6%

10  Upwards revaluation of properties

 Repayment of 8% loan notes
An issue of share capital would improve gearing, but the company has not made an issue of
share capital in the year.
The company has paid a dividend to equity investors (see working below), but this has reduced
equity and increased gearing.
$000
Retained earnings b/f 1,750
Profit for the year 2,000
Retained earnings c/f (3,200)
Balance – dividend paid (550)

Entering into a lease has increased non-current liabilities and will have increased gearing.

EXAM SMART
The capital structure changes of repaying $1,725,000 of the 8% loan less a net increase in
lease obligations of $450,000 (1,950 – 1,500) have reduced debt by $1,275,000.
This, coupled with an increase in equity of $2.8 million (albeit that nearly half of this came
from the revaluation reserve of $1.35 million), has acted to reduce gearing markedly from
47.4% in 20X2 to only 26.7% in 20X3.

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ACCA FR Question Bank Part 2 answers: 6: Statement of cash flows 261

6: Statement of cash flows

OP
1  Interest paid
Interest paid is the cash outflow, which is deducted from cash generated from operations to
arrive at net cash from operating activities, further down the statement of cash flows. This is
different from the finance cost (presented in the statement of profit or loss). The finance cost is
one of the adjustments to profit before taxation; it is added back to profit before taxation to
arrive at operating profit.

2 Statement of cash flows (extract) for year ended 31 March 20X8:

Cash flows from operating activities (extract): $000

Change in inventories 4
Change in trade receivables (70)
Change in trade payables 95

3 $ 10000

$000
Balance b/f 65
Amortised in year (15)
Therefore, new expenditure (bal) 10
Balance c/f 60

4 $ 580000

$000
Retained earnings balance b/f 423
Profit for year 809
1,232
Therefore, dividends paid (bal) (580)
Retained earnings balance c/f 652

5  is not included in the statement of cash flows

The loss on revaluation is not a cash flow.

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9: Tangible non-current assets

1 LINETTI CO
6  $18.4m

The correct answer is $18.4m. This is calculated as $10m + $0.5m + $1m + $6.6m less unused
materials of $0.5m plus borrowing costs of $0.8m.

7  Installation of new office fixtures and fittings

8  Each component part of the head office building is revalued separately

9  $1.8m

The impairment loss for the CGU is $2.2m ($11.8m – $9.6m). The impairment loss is initially
allocated to the goodwill balance of $1.4m. The unallocated impairment loss is $0.8m. This is
allocated to the brand and PPE based on their carrying amounts:
Brand 2
PPE 6
Total 8

2/8 × 0.8 = 0.2 loss to be allocated to brand so new carrying amount = $2m – $0.2m = $1.8m

10  Both 1 and 2

EXAM SMART
There are three main things to remember here:
 Property A: When a property is reclassified from owned-occupied to investment
property, any gain or loss is treated as a revaluation at the date of the change.
Therefore, the company recognises a gain in other comprehensive income at 1 October
20X2. The gain for the six months to 31 March 20X3 (after A has become an investment
property) is recognised in profit or loss.
 Property B: In Fundo’s separate financial statements the property is an investment
property, but in the consolidated financial statements it must be treated as owner-
occupied.
 The cost of the alterations to the leased property is an asset because it is expected to
result in future economic benefits for the company: revenue from the new
manufacturing process. The cost of an asset should include any costs of dismantling and
removing items or restoring the site where there is an obligation to do so (as is the case
here).

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ACCA FR Question Bank Part 2 answers: 9: Tangible non-current assets 263

2 FUNDO
EXAM SMART
There are three main things to remember here:
 Property A: When a property is reclassified from owned-occupied to investment
property, any gain or loss is treated as a revaluation at the date of the change.
Therefore, the company recognises a gain in other comprehensive income at 1 October
20X2. The gain for the six months to 31 March 20X3 (after A has become an investment
property) is recognised in profit or loss.
 Property B: In Fundo’s separate financial statements the property is an investment
property, but in the consolidated financial statements it must be treated as owner-
occupied.
 The cost of the alterations to the leased property is an asset because it is expected to
result in future economic benefits for the company: revenue from the new
manufacturing process. The cost of an asset should include any costs of dismantling and
removing items or restoring the site where there is an obligation to do so (as is the case
here).

11  A building that is vacant but held to be rented out

 A building that is being constructed for use as a future investment property
 Land held for long-term capital appreciation

12  Depreciation expense of $50,000 and gain of $40,000 in profit or loss; gain of $350,000 in
other comprehensive income
When a property is reclassified from owned-occupied to investment property, any gain or loss is
treated as a revaluation at the date of the change. Therefore, the company recognises a gain in
other comprehensive income at 1 October 20X2. The gain for the six months to 31 March 20X3
(after A has become an investment property) is recognised in profit or loss.
$000
Statement of profit or loss and other comprehensive income
Depreciation of office building (2,000/20 years × 6/12) (50)
Gain on investment property: (2,340 – 2,300) 40

Other comprehensive income (2,300 – (2,000 – 50)) 350

13  II only
In Fundo’s separate financial statements Property B is an investment property, but in the
consolidated financial statements it must be treated as owner-occupied, because it is let to a
subsidiary.
Both the fair value model (investment property) and the revaluation model (owner-occupied
property) require properties to be valued at their fair value. However, under the fair value
model any gain (or loss) over a previous valuation is taken to profit or loss, whereas for an
owner-occupied property, any gain is taken to a revaluation reserve (via other comprehensive
income and the statement of changes in equity). A further difference is that owner-occupied
property continues to be depreciated after revaluation, whereas investment properties are not
depreciated.

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14 $ 10500 000
Statement of financial position as at 31 March 20X3
Non-current assets
Alterations to leased property (7,000 + 5,000) 12,000
Accumulated depreciation (12,000/8) (1,500)
Carrying amount 10,500

15  $5,400,000
Provision for property restoration costs (5,000 x 1.08) 5,400

EXAM SMART
The cost of repainting the exterior of the aircraft is an expense item and should not be
capitalised.
The upgrade to the cabin fittings should be capitalised (it results in additional economic
benefits in the form of increased revenue from higher fares). Be careful with the
depreciation calculation. Depreciation for the second half of the year is based on the new
carrying amount, rather than on the total cost.

3 FLIGHTLINE

16 $ 36000 000
$000
Cost 120,000
Depreciation (120,000/20 × 14 years) 84,000
36,000

17  $6,500,000
$000
Cabin fittings – six months to 30 September 20X5 (5,000 × 6/12) 2,500
– six months to 31 March 20X6 (see below) 4,000
6,500

At 1 October 20X5 the carrying amount of the cabin fittings is $7.5 million (10,000 – 2,500). The
cost of improving the cabin facilities of $4.5 million should be capitalised as it led to enhanced
future economic benefits in the form of substantially higher fares. The cabin fittings would then
have a carrying amount of $12 million (7,500 + 4,500) and an unchanged remaining life of 18
months. Thus depreciation for the six months to 31 March 20X6 is $4 million (12,000 × 6/18).

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ACCA FR Question Bank Part 2 answers: 9: Tangible non-current assets 265

18 $ 6000 000
$000
Cost 9,000
Depreciation to 30 September 20X5 (12,000 hours at $250 per hour) (3,000)
NCA written off 6,000

19  $700,000
$000
Engine – six months to 30 September 20X5 (9,000/36 × 1,200) 300
– six months to 31 March 20X6 (6,000/15 × 1,000) 400
700

20 $ 10500 000
$000
Cost 10,800
Depreciation for six months to 31 March 20X6 (10,800/36 × 1,000) (300)
10,500

Flightline – Statement of profit or loss for the year ended 31 March 20X6 (for information only)
$000
Depreciation (W (a)) 13,800
Loss on write off of engine (see above) 6,000
Repairs – engine 3,000
– exterior painting 2,000
Statement of financial position as at 31 March 20X6
Accumulated Carrying
Non-current asset – Aircraft Cost depreciation amount
$’000 $’000 $’000
Exterior (78,000 + 6,000) (W (a)) 120,000 84,000 36,000
Cabin fittings (25,000 + 4,500)/(15,000 + 2,500 29,500 21,500 8,000
+ 4,000) (see above)
Engines (W (b)) 19,800 3,700 16,100
169,300 109,200 60,100

Workings (figures in brackets in $000)

(a) The carrying amount of the aircraft at 1 April 20X5 is:
Accumulated Carrying
Cost depreciation amount
$000 $000 $000
Exterior (13 years old) 120,000 78,000 42,000
Cabin (3 years old) 25,000 15,000 10,000
Engines (used 10,800 hours) 18,000 5,400 12,600
163,000 98,400 64,600

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Depreciation for year to 31 March 20X6:

$000
Exterior (no change) 6,000
Cabin fittings – six months to 30 September 20X5 (5,000 × 6/12) 2,500
– six months to 31 March 20X6 4,000
Engines – six months to 30 September 20X5 (2 × $250 × 1,200 hours) 600
– six months to 31 March 20X6 ((400 + 300) w (b)) 700
13,800

(b) Engines – before the accident the engines (in combination) were being depreciated at a
rate of $500 per flying hour. At the date of the accident each engine had a carrying
amount of $6 million ((12,600 – 600)/2). This represents the loss on disposal of the
written off engine. The repaired engine’s remaining life was reduced to 15,000 hours.
Thus future depreciation on the repaired engine will be $400 per flying hour, resulting in
a depreciation charge of $400,000 for the six months to 31 March 20X6. The new engine
with a cost of $10.8 million and a life of 36,000 hours will be depreciated by $300 per
flying hour, resulting in a depreciation charge of $300,000 for the six months to 31 March
20X6. Summarising both engines:
Accumulated Carrying
Cost depreciation amount
$000 $000 $000
Old engine 9,000 3,400 5,600
New engine 10,800 300 10,500
19,800 3,700 16,100

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ACCA FR Question Bank Part 2 answers: 10: Intangible assets 267

10: Intangible assets

WILROB CO
1  Intangible assets should be amortised over the expected useful life or not at all if the
useful life is deemed to be indefinite
 Intangible assets should be amortised on the basis of the expected pattern of
consumption of the expected future economic benefits
‘Intangible assets should not be amortised but instead reviewed for impairment losses only’ is
not correct as this would only apply to intangible assets with an indefinite useful life (such as
goodwill). It does not apply to intangible assets as a whole and the question specifically
excluded goodwill.
‘Intangible assets should not be amortised or impaired and instead simply carried forward at
their original cost until sold or scrapped’ is not correct and would lead to intangible assets being
overstated in the accounts.

EXAMINER’S COMMENTS
Where did candidates go wrong?
Most candidates got this question right and, in particular, candidates tended to know that
‘Intangible assets should be amortised over the expected useful life or not at all if the useful
life is deemed to be indefinite’ was correct, even if they did not also select ‘Intangible assets
should be amortised on the basis of the expected pattern of consumption of the expected
future economic benefits’.
The second most common answer was to select the ‘Intangible assets should be amortised
over the expected useful life or not at all if the useful life is deemed to be indefinite’ and
‘Intangible assets should not be amortised but instead reviewed for impairment losses only’
together. This implies that some candidates were rushing or did not read the question
carefully enough, perhaps not examining each option available or whether their selections
make sense together. It is important to read each question carefully and to realise that
’Intangible assets should not be amortised but instead reviewed for impairment losses only’
could not be the correct response as IAS 38 does not apply this rule to all intangible assets
and ‘Intangible assets should be amortised over the expected useful life or not at all if the
useful life is deemed to be indefinite’ already identifies that intangible assets with an
indefinite useful life should not be amortised.

2  IAS 38 permits the revaluation of intangible assets only if there is an active market for
such assets
 IAS 38 requires that the initial recognition of intangibles must be at cost
Intangible assets must be measured initially at cost, but subsequently it is possible to measure
certain intangible assets under the revaluation model where, after initial recognition, intangible
assets will be carried at a revalued amount. However, it is only possible to hold intangible assets
under the revaluation model where an active market exists for such assets.
In practice, this means that most intangible assets will not be measured under the revaluation
model. IAS 38 states that it is uncommon for an active market to exist for an intangible asset,

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although it may happen (e.g. for freely transferable intangible assets such as taxi licences,
fishing licenses or production quotas). An active market cannot exist for intangible assets such
as brands, patents or trademarks because each asset is unique and the price paid for one asset
may not provide sufficient evidence of the fair value of another. Such prices are also often not
available to the public.

EXAMINER’S COMMENTS
Where did candidates go wrong?
Selecting ‘IAS 38 requires the revaluation of intangible assets where a company has chosen
to revalue its tangible non-current assets’ was a common mistake. Candidates should take
care to realise that tangible non-current assets and intangible assets are entirely different.
Different IFRS Standards apply to each and revaluing intangible assets is actually quite
uncommon. There is certainly no requirement to revalue intangible assets simply because
tangible non-current assets are revalued.

3  $5.5m
The $15m of project costs incurred between 1 April 20X6 and 31 December 20X6 cover a nine-
month period.
As the project did not meet the capitalisation criteria of IAS 38 until 30 June 20X6, this means
that any costs related to the first three months of the year (1 April 20X6 – 30 June 20X6) were
research expenditure which should be charged to the statement of profit or loss:
$15m × 3/9 months = $5m
Therefore, the remaining $10m ($15m x 6/9 months) would be capitalised as development
expenditure. As the project was completed and began to generate revenue from 1 January
20X7, the capitalised development expenditure should then be amortised from that date over
its useful life of five years. This requires an amortisation expense for three months (1 January
20X7 – 31 March 20X7) which should be charged to the statement of profit or loss:
$10m / 5 years × 3/12 months = $0.5m
Therefore, the total charge to the statement of profit or loss in respect of project 324 for the
year ended 31 March 20X7 consists of:
Research expense $5m
Amortisation expense $0.5m
Total charge to statement of profit or loss $5.5m

EXAMINER’S COMMENTS
Where did candidates go wrong?
Candidates who selected $6.5m charged nine months of amortisation to the statement of
profit or loss rather than three months (i.e. charged $1.5m of amortisation from the date
that the development expenditure criteria was met rather than from when the asset was
available for use on 1 January 20X7).
Candidates who selected $7m charged a full year of amortisation with no pro-rating at all.

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ACCA FR Question Bank Part 2 answers: 10: Intangible assets 269

Candidates who selected $10m ignored the initial research expense which should have been
charged to the statement of profit or loss and wrote off the entire $10m of development
expenditure.

4
TRUE FALSE
The cost for project 325 should be expensed in the statement of 
profit or loss for the year ended 31 March 20X7
The specialist equipment which was purchased for project 325 
should not be depreciated as it has only been used in abandoned or
research projects
The costs for project 326 should be included as an asset in the 
statement of financial position as at 31 March 20X7

EXAMINER’S COMMENTS
Where did candidates go wrong?
Candidates needed to select the correct option for all three statements to be awarded
credit.
Most candidates knew that statement 1 was true – if the cost were not expensed to the
statement of profit or loss it would be capitalised on the statement of financial position as
an asset, which would not be appropriate for an abandoned research project.
Although most candidates selected the correct response for each of the three statements,
the second most common response was to select statement 2 as being true which is
incorrect. IAS 16 Property, Plant and Equipment would apply to the specialist equipment
used in project 325. In accordance with IAS 16, depreciation of the asset would begin when it
was available for use. As it was being used for this project, then it should be depreciated and
it makes no difference that the project was abandoned.
Statement 3 tested how well candidates know the requirements for the development phase
of an internally generated intangible asset (i.e. when it meets the criteria to be capitalised as
an asset on the statement of financial position). The requirements for this are quite strict
and prescriptive, including being able to demonstrate how the intangible asset will generate
probable future economic benefits. Since the directors were not confident of the success of
the project at the year end, it would not have been possible to recognise this project as an
intangible asset and any costs incurred should instead be expensed to the statement of
profit or loss.

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5  2 and 3 only
An intangible asset can be recognised when it meets:
(1) the definition of an intangible asset; and
(2) the recognition criteria.
An intangible asset is an identifiable non-monetary asset without physical substance. An
intangible asset can only be recognised if it is probable that the expected future economic
benefits that are attributable to the asset will flow to the entity and the cost of the asset can be
measured reliably.
Both the domain name and the patent meet the definition of being intangible assets and the
cost of each can clearly be measured reliably. Based on the information available, it appears
that economic benefits will flow to the entity through revenue from online sales (domain name)
and production cost savings (patent).
Internally generated customer lists are specifically excluded by IAS 38 from being recognised as
intangible assets (along with other items such as internally generated brands). This is because
any expenditure incurred on such items cannot be distinguished from the cost of developing the
business as a whole.

EXAMINER’S COMMENTS
Where did candidates go wrong?
The most common error was to select that only the patent should be capitalised. Therefore,
while most candidates recognised that the costs relating to the customer list should not be
capitalised, many also thought that the website domain name should also not be capitalised.
The costs incurred on developing this website would be subject to the requirements of
IAS 38, which would include the $800,000 spent to purchase the domain name. Although
certain costs relating to web design may be expensed to the statement of profit or loss in
accordance with IAS 38, any costs incurred in purchasing a domain name should be
capitalised as an intangible asset.

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ACCA FR Question Bank Part 2 answers: 13:Revenue and inventory 271

13: Revenue and inventory

CAMPBELL CO
1
Correct Not correct
(1) Revenue should be recognised as an entity satisfies a 
performance obligation
(2) Progress towards completion on a contract should be 
measured solely on an input basis

Statement (1) is correct but statement (2) is not correct as progress can be measured using
input or output methods

EXAMINER’S COMMENTS
Where did candidates go wrong?
Most candidates got the correct answer but many thought statement (2) was also correct.
We suspect they saw the term ‘input method’ and recognised it as relating to IFRS 15
without reading carefully the whole statement. The crucial point was ‘solely’ – they should
have known there were alternative acceptable methods.

2 $ 6.3 m

As the contract is 90% complete (given in question), cumulative revenue of $8.1m (90% × $9m)
should be recognised by 31 December 20X8. However, $1.8m (20% × $9m) will have been
recognised in 20X7 so only $6.3m can be recognised in the current year ($8.1 – 1.8m)

EXAMINER’S COMMENTS
Where did candidates go wrong?
A significant number of candidates calculated $8.1m – these candidates had not taken
account of the fact that this contract was in its second year and that they needed to deduct
the revenue already recognised in the prior year

3  Contract liability $0.2m

The candidates were asked what will NOT be recorded. Revenue will be recognised to the level
of recoverable costs where the progress cannot be measured (IFRS 15 para 45). Therefore
$0.2m should be recognised as Revenue and cost of sales. As no invoice has yet been issued a
contract asset will be recognised for $0.2m.

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EXAMINER’S COMMENTS
Where did candidates go wrong?
This was the question within the case that candidates found most challenging with a range
of options although the most common option chosen was Revenue $0.2m – which would be
not to recognise revenue. This suggests candidates again were not reading the requirement.

4  $2.26m
The after sales support will be recognised over the 12-month period. As Campbell Co has
already provided 6 months of support, $0.1m can be recognised meaning that $2.26m can be
recognised overall ($2.36m – $0.1m).

EXAMINER’S COMMENTS
Where did candidates go wrong?
The most common errors were either to remove all the after sales support or not adjusting
for it (perhaps not reading the dates carefully).

5  $1,500 should be recognised as revenue by Campbell Co when the accessory has been
delivered and accepted by the customer
Campbell Co is acting as an agent as the equipment accessory is delivered directly to the
customer from the manufacturer. Only the 3% commission should be recognised as revenue
(3% × $50,000 = $1,500). As the customer has taken delivery and accepted the price of $50,000,
the revenue can be recognised at that point.

EXAMINER’S COMMENTS
Where did candidates go wrong?
The most common error was delaying recognition of the revenue until payment would have
taken place (second option).

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ACCA FR Question Bank Part 2 answers: 14: Financial instruments 273

14: Financial instruments

DIAZ CO
1  Trade receivables and 5% loan notes only

2  $8.95
This is the $8.6m plus the $0.4m missing items ($0.6m x 100/150) less the write down of
$0.05m ($200,000 – $150,000 – would normally be sold for $300,000 but actually being sold at
$150,000).

3  Neither 1 nor 2
This is a change in accounting policy, rather than a change in accounting estimate. A change in
accounting policy is accounted for retrospectively, not prospectively.

4  $0.2m should be expensed in Diaz Co's statement of profit or loss for the year ended
31 December 20X8
Finaid Co will return any unpaid receivables to Diaz Co after six months and will charge a fee
(effectively interest) on any uncollected balances at the end of each month. This means that
Diaz Co has not transferred the risks of non-payment and therefore should still hold the
receivables as an asset – this is accounted for as a financing arrangement only, not a sale.

5  $0.34m.
The loan notes should initially be recorded at the net proceeds of $8.5m. The effective interest
rate of 8% would then be expensed in relation to this, being $0.68m. As the loan notes were
only issued on 1 July 20X8, the expense for the year would be $0.34m ($0.68m × 6/12).

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15: Provisions and events after the reporting period

1 JEFFERS CO
1  Neither 1 nor 2
Statement 1: Events after the reporting period are events that occur between the year-end and
the date on which the financial statements are authorised for issue.
Statement 2: Non-adjusting events should be disclosed in the notes to the financial statements,
if they are material.

2  1 and 2 only
The acquisition of a competitor does not reflect conditions that existed at the end of the
reporting period. The other two events can be presumed to provide evidence of conditions that
did exist at the reporting date (they took place in January 20X9, very soon after the year end).

3  $4.7m

The provision should be recorded at the most likely outcome. This will be $5.2m discounted at
10% for one year which is $4.7m.

4  Nothing is recognised or disclosed in the financial statements

The counter-claim against the supplier represents a contingent asset. Contingent assets are not
disclosed unless they are probable (more likely than not), which is not the case here.

5  The financial statements can no longer be prepared on a going concern basis

If an entity is no longer a going concern, the financial statements must be prepared on the
break-up basis.

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ACCA FR Question Bank Part 2 answers: 15: Provisions and events after the reporting period 275

2 BOROUGH
6  If the amount of an obligation cannot be precisely measured, an entity discloses a
contingent liability
A present obligation that is probable, but where the outflow of economic benefits cannot be
reliably measured is treated as a contingent liability.

7 $ 63000 000
$000
Licence for oil extraction (50,000 + 20,000) 70,000
Amortisation (10 years) (7,000)
Carrying amount 63,000

8  $24,840,000
The obligation for the fixed element of the cost arose as soon as the extraction commenced,
whereas the variable element accrues in line with the extraction of oil.
$000
Non-current liability
Environmental provision ((20,000 + (150,000 × 0.02 cents)) × 1.08 finance cost) 24,840

9  $625,000
As the loan relates to a qualifying asset, the finance cost (or part of it in this case) must be
capitalised.
The finance cost of the loan must be calculated using the effective rate of 7.5%, so the total
finance cost for the year ended 30 September 20X6 is $750,000 ($10 million × 7.5%).
Capitalisation begins when expenditure is being incurred (1 November 20X5) and must cease
when the asset is ready for its intended use (31 August 20X5); in this case a 10-month period =
$625,000 ($750,000 × 10/12).
The remaining two months’ finance costs of $125,000 must be expensed.

10  A qualifying asset is an asset that takes a substantial period of time to get ready for its
intended use or sale
 Borrowing costs must be capitalised if they are directly attributable to the acquisition,
construction, or production of a qualifying asset
A qualifying asset is any asset that takes a substantial period of time to get ready for its
intended use or eventual sale.
Any income earned from the temporary investment of specifically borrowed funds would
normally be deducted from the amount to be capitalised.
Borrowing costs can include interest on specifically borrowed funds or on general borrowings.

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276 P a r t 2 a n s w e r s : 1 5 : P r o v i s i o n s a n d e v e n t s a f t e r t h e r e p o r t i n g p e r i o d ACCA FR Question Bank

3 SKEPTIC
11  Skeptic should restate its comparative results for the year ended 31 March 20X3 to
reflect the change in presentation
 Skeptic can only reclassify the expenditure if this would result in the financial statements
becoming more reliable and relevant
 The reclassification will not affect the company’s return on capital employed (ROCE)
Changing the classification of an item of expense is an example of a change in accounting policy.
Gross profit margin will be affected as the expenses will no longer be included in cost of sales
(this is the reason why the directors want to change the policy), but operating profit margin
(based on profit before interest and tax) and therefore ROCE will remain the same.

12  Recognise a provision of $4 million

The two provisions in part (b) must be calculated on different bases because the court case is a
single obligation, whereas the product warranty claims give rise to a number of similar
obligations.
For the court case the most probable single likely outcome is normally considered to be the best
estimate of the liability, i.e. $4 million. This is particularly the case as the possible outcomes are
either side of this amount. The $4 million will be an expense for the year ended 31 March 20X4
and recognised as a provision.

13 $ 3400 000
The provision for the product warranty claims should be calculated on an expected value basis
at $3.4 million (((75% × nil) + (20% × $25) + (10% × $120)) × 200,000 units). This will also be an
expense for the year ended 31 March 20X4 and recognised as a current liability (it is a one-year
warranty scheme) in the statement of financial position as at 31 March 20X4.

14  The company should not recognise a provision

The company has chosen to ‘self-insure’ (to retain the risk of claims and to meet them as they
are incurred). It does not have a present obligation to meet claims relating to future events and
therefore it cannot recognise a provision. Instead it must charge the actual cost of claims as an
expense in profit or loss.

15  $6.4 million
Government grants related to non-current assets should be credited to the statement of profit
or loss over the life of the asset to which they relate, not in accordance with the schedule of any
potential repayment. The directors’ proposed treatment is implying that the government grant
is a liability which decreases over four years. This is not correct as there would only be a liability
if the directors intended to sell the related plant, which they do not. Thus in the year ended 31
March 20X4, $800,000 (8 million/10 years) should be credited to the statement of profit or loss
and $7.2 million should be shown as deferred income ($800,000 current and $6.4 million non-
current) in the statement of financial position.

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ACCA FR Question Bank Part 2 answers: 15: Provisions and events after the reporting period 277

4 MANCO
16  There is a detailed formal plan which identifies the business or part of a business affected
 The entity has raised a valid expectation that it will carry out the restructuring
The closure of the furniture-making operation is a restructuring and, due to the timing of the
decision, a provision for the closure costs will be required in the year ended 30 September
20X5.
Although a board of directors’ decision to close an operation is, alone, not sufficient to trigger a
provision, the other actions of the management, informing employees, customers and a press
announcement, indicate that this is an irreversible decision and that therefore there is an
obligating event.

17  The asset must be available for immediate sale in its present condition
 The asset must be actively marketed at a reasonable price

18 $ 2300 000

The closure would create an expected profit on the disposal of a factory and a loss on the sale of
the plant. The profit on the sale of the factory should only be reported when it arises, in the
year ended 30 September 20X6.
The plant is impaired. Based on its carrying amount of $2.8 million an impairment charge of
$2.3 million ($2.8 million – $0.5 million) is required (subject to any further depreciation for the
three months from July to September 20X5).
The expected gain on the sale of the factory cannot be recognised or used to offset the
impairment charge on the plant. The impairment charge is not part of the restructuring
provision (it is not part of the direct expenditure arising from the restructuring), but should be
reported with the depreciation charge for the year.

19 $ 750 000
At 30 September 20X5 – a provision for the redundancy costs of $750,000 should be made, but
the retraining costs relate to the ongoing activities of Manco and cannot be provided for.

20  The closure will be reported as a discontinued operation in the year ended 30 September
20X5
The trading losses to 30 September 20X5 will be reported as part of the results for the year
ended 30 September 20X5. The expected losses from 1 October 20X5 to the closure on
31 January 20X6 cannot be provided in the year ended 30 September 20X5, as they relate to
ongoing activities and will therefore be reported as part of the results for the year ended
30 September 20X6 as they are incurred.
As there is a co-ordinated plan to dispose of a separate major line of business, (it is treated as
an operating segment) the closure probably meets the definition of a discontinued operation.
However, the timing of the closure means that it is not a discontinued operation in the year
ended 30 September 20X5; rather it is likely that it will be such in the year ended 30 September
20X6.

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278 P a r t 2 a n s w e r s : 1 6 : T a x a t i o n ACCA FR Question Bank

16: Taxation

NORWOOD
1  The leased asset is of low value
The other exemption covers short-term leases: leases that have a term of 12 months or less at
the commencement date, and which do not contain a purchase option.

2 $ 21000 000

Leased plant (right-of-use asset) $000

Carrying amount 1 October 20X2 (35,000 – 7,000) 28,000
Depreciation for year (35,000/5 years) (7,000)
Carrying amount at 30 September 20X3 21,000

3  $16,133,000

EXAM SMART
Notice that the lease liability is payable in arrears (the TB states that the lease rental was
paid on 30 September 20X3). This means that the current portion of the liability is the
difference between the liability at 30 September 20X3 and the liability at 30 September
20X3.

$000
Liability at 1 October 20X2 29,300
Interest at 10% for year ended 30 September 20X3 2,930
Rental payment 30 September 20X3 (9,200)
Liability at 30 September 20X3 23,030
Interest at 10% for year ended 30 September 20X4 2,303
Rental payment 30 September 20X4 (9,200)
Liability at 30 September 20X4 16,133

4  Deduct the balance from the income tax expense

A credit balance brought forward means that the company ‘overprovided’ in the previous year
and that the actual amount of tax paid was less than the amount recognised as a liability for
current tax. The current tax expense for the year is $2,350,000 (3,400 – 1,050).

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ACCA FR Question Bank Part 2 answers: 16: Taxation 279

5  Credit of $2,000,000
$000 $000
Provision b/f at 1 October 20X2 (8,000)
Provision c/f required at 30 September 20X3
Taxable differences: per question 24,000
on revaluation of land and buildings 4,400
28,400
× 25% 7,100
Net reduction in provision (900)
Charged to other comprehensive income on revaluation gain
(4,400 × 25%) (1,100)
Credit to profit or loss 2,000

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280 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

PART 2 ANSWERS: Section C

2: More group accounts

1 PARTY CO & STREAMER CO

EXAMINER’S COMMENTS: PART (a)
Many candidates scored full marks for the goodwill calculation. Other than the fair value
adjustment, the deferred consideration was the most common problem.
A few candidates omitted the NCI (or tried to calculate the amount at acquisition for
themselves) or tried to calculate the parent’s share of goodwill only.
Some candidates incorrectly included the pre-acquisition amount of the revaluation surplus
in the consolidated revaluation surplus – it should of course have been included in the
goodwill calculation.
Although many candidates suggested otherwise, there were no other investments by Party
Co other than the two reported elements of investment in Streamer Co.
Several candidates confused mark-up with margin for the unrealised profit element of the
intra-group trading.
A very small number of candidates used proportional consolidation in their answer by taking
80% of the carrying amounts of the assets and liabilities of Streamer Co.
Although many candidates provided full and clear workings, the importance of explaining
where all numbers not already given in the question have come from cannot be over-
emphasised. This allows markers to determine whether an incorrect figure has been used in
a calculation or whether the final total is wrong but the supporting figures are correct.

EXAM SMART
Things to watch out for:
 There is a fair value adjustment to the subsidiary’s inventory at the date of acquisition.
However, 90% of this inventory had been sold by the year-end, meaning that 90% of
the related profit has been realised (see W5 Retained earnings). Only $60,000 (10%) of
the original fair value uplift should be added to current assets in the group statement of
financial position.
 Deferred consideration is payable on 1 October 20X6, two years after the acquisition
date. The deferred consideration should be discounted to its present value at the date
of acquisition (see W3 Goodwill). The discount rate (0.857) is given in the question. At
30 September 20X5, the year-end, there is an adjustment of $1,920,000 ($23,996,000 ×
8%) for the unwinding of the discount: Dr Retained earnings (finance cost); Cr Non-
current liabilities (deferred consideration).
 Intra-group sales: adjust for the provision for unrealised profit which is 25% × $1m
(goods not yet sold to third parties at the year-end), not $8m (the total amount of sales
made by Party to Streamer during the year). The parent is selling to the subsidiary so
there is no effect on the NCI. Notice also that the question does not mention any intra-
group payables or receivables or amounts owed to Party at the year-end, so there are
no other adjustments to current assets or current liabilities.

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 281

(a) Consolidated statement of financial position for Party Co as at 30 September 20X5

$’000
Assets
Non-current assets:
Property, plant and equipment (392,000 + 84,000) 476,000
Investments (120,000 – 92,000 – 28,000) 0
Goodwill (w3) 32,396
508,396
Current assets: (94,700 + 44,650 + 60 FV – 250 URP) 139,160
Total assets 647,556

Equity and liabilities

Equity:
Share capital 190,000
Retained earnings (w5) 209,398
Revaluation surplus 41,400
440,798
Non-controlling interest (w4) 15,392
Total equity 456,190
Non-current liabilities:
Deferred consideration (23,996 + 1,920) 25,916
Current liabilities: (137,300 + 28,150) 165,450
Total equity and liabilities 647,556

Working 1 – Group structure

Party Co owns 80% of Streamer Co.
Party Co has owned Streamer Co for the whole year.
Working 2 – Fair value adjustments
Retained
Acquisition earnings Year-end
$’000 $’000 $’000
Fair value adj inventory ($3.6m – $3m) 600 (540) 60

Working 3 – Goodwill
$000 $000
Consideration transferred
Cash 92,000
Deferred consideration (28m × 0.857) 23,996
Non-controlling interest at acquisition 15,000
130,996
Equity shares 60,000
Retained earnings 34,000
Revaluation surplus 4,000
Fair value adjustments – inventory (W2) 600 (98,600)
Goodwill at acquisition 32,396

Working 4 – Non-controlling interest

NCI at acquisition 15,000
NCI % of Streamer post acquisition (1,960 × 20%) 392
15,392

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282 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

Working 5 – Retained earnings

Party Streamer
$000 $000
Per question 210,000 36,500
URP in inventory (1,000 × 25%) (250)
Fair value adj inventory (600 × 90%) (540)
Unwinding discount on deferred consideration (23,996 × 8%) (1,920)
Pre-acquisition profit (W2) (34,000)
1,960
Streamer Co (1,960 × 80%) 1,568
209,398

EXAMINER’S COMMENTS: PART (b)

The main point to be made was that the subsidiary’s post-acquisition results had been
improved due to favourable pricing of the intra-group trading originated by the parent based
on the terms stated in the question. This is an example of the possible effect of related party
transactions but very little of this was mentioned by the vast majority of candidates. Only a
very small proportion of answers made reference to any numbers in this part of the
question.

(b) The consolidated financial statements of the Party Group are of little value when trying to
assess the performance and financial position of its subsidiary, Streamer Co. Therefore the main
source of information on which to base any investment decision would be Streamer Co’s
individual financial statements. However, where a company is part of a group, there is the
potential for the financial statements (of a subsidiary) to have been subject to the influence of
related party transactions. In the case of Streamer Co, there has been a considerable amount of
post-acquisition trading with Party Co and, because of the related party relationship, there is
the possibility that this trading is not at arm’s length (i.e. not at commercial rates). Party Co sells
goods to Streamer Co at a much lower margin than it does to other third parties. This gives
Streamer Co a benefit which is likely to lead to higher profits (compared to what they would
have been if it had paid the market value for the goods purchased from Party Co). Had the sales
of $8m been priced at Party Co’s normal prices, they would have been sold to Streamer Co for
$10.9 million (at a margin of 25% these goods cost $6m; if sold at a normal margin of 45% they
would have been sold at $6m/55% × 100). This gives Streamer Co a trading ‘advantage’ of
$4.9 million ($10.9 million – $6 million).
There may also be other aspects of the relationship where Party Co gives Streamer Co a benefit
which may not have happened had Streamer Co not been part of the group, e.g. access to
technology/research, cheap finance, etc.
The main concern is that any information about the ‘benefits’ Party Co may have passed on to
Streamer Co through related party transactions is difficult to obtain from published sources. It
may be that Party Co has deliberately ‘flattered’ Streamer Co’s financial statements specifically
in order to obtain a high sale price and a prospective purchaser would not necessarily be able to
determine that this had happened from either the consolidated or entity financial statements.

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 283

Marking guide Marks

(a) Property, plant and equipment 0.5
Goodwill 4
Current assets 2.5
Share capital 0.5
Retained earnings 3.5
Revaluation surplus 0.5
NCI 1.5
Deferred consideration 1.5
Current liabilities 0.5
15
(b) Limitations of interpretation using consolidated financial statements 5
Maximum marks available 20

2 PALISTAR
EXAMINER’S COMMENTS
With respect to the goodwill calculation, the common problems were: (i) missing one or
more elements of the calculation of the controlling or non-controlling interest at the date of
acquisition; (ii) not correctly determining the pre-acquisition element of the retained
earnings from the year of acquisition (a seasonal or a time-apportioned adjustment);
(iii) adding the fair value adjustment of an asset where its fair value was less than its carrying
amount; (iv) ignoring the intangible asset to be recognised by the parent on acquisition
although this asset would not be separately recognised by the subsidiary in its own financial
statements; and (v) ignoring the fair value adjustment (at acquisition) of the subsidiary's own
financial asset investments.
For the consolidation itself common problems were: (i) not increasing the carrying amount
of property, plant and equipment by the reduced depreciation charge from the fair value
adjustment noted above (if the fair value of the asset is decreased then the post-acquisition
depreciation charge should also be reduced); (ii) not amortising the intangible asset
recognised separately in the goodwill calculation; (iii) not correctly adjusting share capital
and share premium from the purchase consideration calculated at the goodwill stage; (iv)
not accounting for the deferred consideration or the outstanding interest (as a deduction
from post-acquisition profits and an addition to the liability); and (v) not accounting for the
acquisition taking place part way through the year, thus requiring several items to be time
apportioned.

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284 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

(a) Palistar – Consolidated statement of financial position as at 30 June 20X5

$000
Assets
Non-current assets:
Property, plant and equipment (W(iii)) 82,100
Goodwill (W(iv)) 5,000
Game rights (W(ii))) 10,800
Financial asset equity investments (13,200 + 7,900) 21,100
119,000
Current assets (33,500 + 27,500) 61,000
Total assets 180,000

Equity and liabilities

Equity attributable to owners of the parent
Equity shares of $1 each (20,000 + 6,000 (W(iii))) 26,000
Other component of equity (share premium) (4,000 + 18,000 (W(iii))) 22,000
Retained earnings (W(v)) 53,400
101,400
Non-controlling interest (W(vi)) 15,800
Total equity 117,200
Current liabilities
Deferred consideration (18,000 + 900 finance cost (W(iv))) 18,900
Other current liabilities (25,800 + 18,100) 43,900
62,800
Total equity and liabilities 180,000

Workings (figures in brackets are in $000)

(i) Group structure
Palistar

75%

Stretcher
(ii) Fair value adjustment
Retained
Acquisition earnings Year end
$000 $000 $000
Plant (dep’n 2,000/2 × 6/12) (2,000) 500 (1,500)
Game rights (12,000/5 × 6/12 12,000 (1,200) 10,800
Investments 1,000 1,000
11,000 (700) 10,300

(iii) Property, plant and equipment

$000
Palistar 55,000
Stretcher 28,600
Fair value adjustment (w(ii)) (1,500)
82,100

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 285

(iv) Goodwill in Stretcher

$000 $000
Controlling interest
Share exchange (20,000 × 75% × 2/5) = (6,000 × $4.00) 24,000
Deferred consideration (20,000 × 75% × $1.32/1.1) 18,000
Non-controlling interest (20,000 × 25% × $3.00) 15,000
57,000
Equity shares 20,000
Pre-acquisition retained earnings:
at 30 June 20X4 14,000
from 1 July to 31 December 20X4 (10,000 × 40%) 4,000
Fair value adjustments (w(ii)) 11,000 (49,000)
Goodwill on acquisition 8,000
Impairment (3,000)
Goodwill at 30 June 20X5 5,000

The shares issued by Palistar (6 million at $4 – see above) would be recorded as share
capital of $6 million (6,000 × $1.00) and share premium in other components of equity of
$18 million (6,000 × $3.00).
(v) Consolidated retained earnings
Palistar Stretcher
$000 $000
Per question at 1 July 20X4 26,200 14,000
Year ended 30 June 20X5 24,000 10,000
Finance cost on def. consideration (18,000 × 10% × 6/12) (900)
Gain on investments (13,200 – 11,500)/(7,900 – 7,000) 1,700 900
Reduced depreciation of plant (2,000 × 6/24) 500
Amortisation of game rights (12,000/5 years × 6/12) (1,200)
Pre-acquisition (14,000 + 4,000) (W ii) (18,000)
6,200
Stretcher (75% × 6,200) 4,650
Share of goodwill impairment (75% × 3,000) (2,250)
53,400

(vi) Non-controlling interest

$000
Fair value on acquisition (W(i)) 15,000
Post-acquisition profit (6,200 × 25% (W(iii)) 1,550
Share of goodwill impairment (25% × 3,000) (750)
15,800

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286 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

Marking guide Marks

Consolidated statement of financial position:
– property, plant and equipment 2
– goodwill 6
– game rights 1
– financial asset investments 1
– current assets ½
– equity shares 1
– other components of equity 1
– retained earnings 4½
– non-controlling interest 1½
– deferred consideration 1
– other current liabilities ½
Maximum marks available 20

3 PLASTIK
EXAMINER’S COMMENTS
The calculation of goodwill generally scored well, but errors were made in the calculation of
the consideration mainly due to using incorrect share prices, and the previously mentioned
determination of the pre-acquisition retained earnings.
There was some confusion over the cancellation of intra-group trading and cash in transit
(CIT); the elimination of the payables/receivables was often reversed and the CIT added to
inventory or receivables, also the bank balances were sometimes incorrectly netted off
(which is not allowed as the parent and subsidiary are separate legal entities). A significant
number of candidates adjusted the subsidiary's bank balance for the CIT although the
question stated that all cash timing differences should have been adjusted in the parent's
financial statements (thus reducing the parent's reported bank overdraft).
Several candidates did not account correctly (or at all) for the share exchange increasing
share capital and share premium. The non-controlling interest in the statement of financial
position was often confused with the non-controlling interest in total comprehensive
income.
Many candidates missed marks on retained earnings by not deducting on retained earnings
by not deducting URP on inventory and/or the finance cost on the deferred consideration.
The question asked candidates to consider if a subsidiary's in-process research costs and a
list of customers were intangible assets that should be recognised separately (to goodwill)
on consolidation. The short answer to this is they both should be, however most candidates
thought the first shouldn't be.
In-process research is an example of where its treatment in the entity financial statements
(it should be expensed) differs to that on consolidation, where it should be recognised if its
fair value can be reliably measured.

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 287

(a) Plastik – Consolidated statement of financial position as at 30 September 20X4

$000
Assets
Non-current assets
Property, plant and equipment (w (1)) 37,100
Intangible asset: goodwill (w (2)) 5,200
42,300
Current assets
Inventory (4,300 + 1,200 – 120 URP (w (3))) 5,380
Trade receivables (4,700 + 2,500 – 1,200 intra-group) 6,000
Bank 300
11,680
Total assets 53,980

Equity and liabilities

Equity attributable to owners of the parent
Equity shares of $1 each ((10, 000 + 4,800) w (2)) 14,800
Other component of equity (share premium) (w (2)) 9,600
Revaluation surplus (2,000 + (600 × 80%)) 2,480
Retained earnings (w (3)) 6,765
33,645
Non-controlling interest (w (4)) 4,800
Total equity 38,445
Non-current liabilities
10% loan notes (2,500 + 1,000 – 1,000 intra-group) 2,500
Current liabilities
Trade payables (3,400 + 3,600 – 800 intra-group) 6,200
Current tax payable (2,800 + 800) 3,600
Deferred consideration (1,800 + 135 w (3)) 1,935
Bank (1,700 – 400 cash in transit) 1,300
13,035
Total equity and liabilities 53,980

(b) Both the items which the directors of Plastik have identified in the acquisition of Dilemma
should be recognised as separate intangible assets on the acquisition of Dilemma (IFRS 3). In-
process research in a business combination is separately recognised at its fair value provided
this can be reliably measured ($1.2 million in this case).
The recognition of the customer list as an intangible asset is a further example of an asset that
is recognised in a business combination that is not recognised in the financial statements of the
business acquired. This should also be recognised at fair value (i.e. $3 million).

EXAM SMART
Look carefully at the dates. The subsidiary was acquired on 1 January 20X4, three months
into the year. This means that:
 Retained profit for the year is time-apportioned; 3/12 is pre-acquisition (goodwill) and
9/12 is post-acquisition (group retained earnings and non-controlling interest).
 The depreciation relating to the fair value adjustment is given for the post-acquisition
period so does not have to be time apportioned.

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Workings (note figure in brackets are in $000)

(1) Non-current assets
$000
Plastik 18,700
Subtrak 13,900
Fair value increase at acquisition 4,000
Additional depreciation on property (100)
Fair value increase since acquisition 600
37,100

(2) Goodwill in Subtrak

Consideration transferred (investment at cost) $000 $000
Shares (9,000 × 80% × 2/3 × $3) 14,400
Deferred consideration (9,000 × 80% × 27.5 cents × 1/1.1) 1,800
Non-controlling interest (9,000 × 20% × $2.50) 4,500
20,700
Net assets (equity) of Subtrak at 1 January 20X4:
Share capital 9,000
Retained earnings (3,500 – (2,000 × 9/12)) 2,000
Fair value adjustment: property 4,000
(15,000)
Goodwill on consolidation 5,700
Impairment as at 30 September 20X4 (500)
5,200

Note: The 4.8 million (9,000 × 80% × 2/3) shares issued by Plastik at $3 each would be
recorded as share capital of $4.8 million (4,800 × $1) and share premium of $9.6 million
(4,800 × $2).
(3) Consolidated retained earnings
Plastik Subtrak
$000 $000
Per question 6,300 3,500
Pre-acquisition (3,500 – (2,000 × 9/12)) (2,000)
Fair value adjustment (depreciation) (100)
Unrealised profit on intra-group sale (600 × 25/125) (120)
Finance costs on def. consideration (1,800 × 10% × 9/12) (135)
1,400
Subtrak (80% × 1,400) 1,120
Share of goodwill impairment (80% × 500) (400)
6,765

(4) Non-controlling interest in statement of financial position

$000
At date of acquisition (w (2)) 4,500
Post-acquisition retained earnings (20% × 1,400) (w (3)) 280
Share of goodwill impairment (20% × 500) (100)
Post-acquisition other comprehensive income (20% × 600) 120
4,800

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 289

Marking guide Marks

(a) Consolidated statement of financial position:
property, plant and equipment 2
goodwill 2½
inventory 1
trade receivables 1
bank ½
equity shares 1
other component of equity (share premium) 1
revaluation surplus 1
retained earnings 1½
non-controlling interest 1
10% loan notes 1
trade payables 1
taxation ½
deferred consideration 1
bank overdraft 1
17
(b) Recognition of:
research 2
customer list 1
3
Maximum marks available 20

4 POLESTAR
EXAM SMART
Group accounts questions often feature a subsidiary or an associate that is acquired part-
way through the year. In this question, the subsidiary was acquired on 1 April 20X3, six
months into the year. This means that:
 The statement of profit or loss only includes the subsidiary’s results for the six months
from 1 April 20X3.
 The depreciation relating to the fair value adjustment is for six months only.
 The subsidiary’s retained profit for the year is time-apportioned; 50% is pre-acquisition
(goodwill) and 50% is post-acquisition (group retained earnings and non-controlling
interest).
Notice that the subsidiary has made a loss for the year to 30 September 20X3, so to calculate
pre-acquisition retained earnings you must add back the loss for the first six months of the
year (the pre-acquisition portion).
Notice also that both companies have equity shares of 50c each, so there are 12,000 shares,
not 6,000. This affects the calculation of consideration transferred and the fair value of the
non-controlling interest at acquisition.

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290 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

(a) Polestar
Consolidated statement of profit or loss for the year ended 30 September 20X3
$000
Revenue (110,000 + (66,000 × 6/12)) 143,000
Cost of sales (w (iii)) (121,700)
Gross profit 21,300
Distribution costs (3,000 + (2,000 × 6/12)) (4,000)
Administrative expenses (5,250 + (2,400 × 6/12) – 3,400 negative goodwill (w (v))) (3,050)
Loss on equity investments (200)
Decrease in contingent consideration (1,800 – 1,500) 300
Finance costs (250)
Profit before tax 14,100
Income tax expense (3,500 – (1,000 × 6/12)) (3,000)
Profit for the year 11,100

Profit for year attributable to:

Equity holders of the parent 11,700
Non-controlling interest losses (25% × (2,400) (w (vi))) (600)
11,100

Note: ‘Negative’ goodwill (i.e. any ‘gain from a bargain purchase’ ) should be credited to the
acquirer, thus none of it relates to the non-controlling interests.
(b) Consolidated statement of financial position as at 30 September 20X3
$000
Assets
Non-current assets
Property, plant and equipment (w (iv)) 63,900
Financial asset: equity investments (16,000 – (13,500 cash consideration) – 200 loss) 2,300
66,200
Current assets (16,500 + 4,800) 21,300
Total assets 87,500
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of 50 cents each 30,000
Retained earnings (w (vi)) 30,200
60,200
Non-controlling interest (w (vii)) 3,000
Total equity 63,200
Current liabilities
Contingent consideration 1,500
Other (15,000 + 7,800) 22,800
Total equity and liabilities 87,500

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ACCA FR Question Bank Part 2 answers: 2: More group accounts 291

Workings in $000
(i) Group structure
Polestar

75%

Southstar
(ii) Fair value adjustment
Retained
Acquisition earnings Year end
$000 $000 $000
Property (dep’n 2,000/10 × 6/12) (2,000) 100 (1,900)

(iii) Cost of sales

$000
Polestar 88,000
Southstar (67,200 × 6/12) 33,600
Additional depreciation on property (2,000/10 years × 6/12) 100
121,700

(iv) Property, plant and equipment

$000
Polestar 41,000
Southstar 21,000
Fair value adjustment 1,900
63,900

(v) Goodwill in Southstar

$000 $000
Consideration transferred
Immediate cash consideration
(6,000 × 2 (i.e. shares of 50 cents) × 75% × $1.50) 13,500
Contingent consideration 1,800
Non-controlling interest at fair value (12,000 × 25% × $1.20) 3,600
18,900
Less: net assets acquired at fair value
Equity shares 6,000
Retained earnings at 30 September 20X3 12,000
Add back: post-acquisition losses (4,600 × 6/12) 2,300
Fair value adjustment for property 2,000
Net assets at date of acquisition (22,300)
Bargain purchase – credited directly to profit or loss (3,400)

EXAM SMART
If you end up with a negative goodwill figure (a “bargain purchase”), it is always worth
double-checking your figures as this is quite rare. This “bargain” is recorded in profit or loss
and retained earnings (below).

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292 P a r t 2 a n s w e r s : 2 : M o r e g r o u p a c c o u n t s ACCA FR Question Bank

(vi) Consolidated retained earnings

Polestar Southstar
$000 $000
Per question 28,500 12,000
Fair value adjustment (depreciation) (w (ii)) (100)
Loss on equity investments (200)
Pre-acquisition (12,000 + 2,300) (14,300)
(2,400)
Southstar (75% × 2,400) (1,800)
Negative goodwill (w (iv)) 3,400
Decrease in contingent consideration (1,800 – 1,500) 300
30,200

(vii) Non-controlling interest in statement of financial position

$000
At date of acquisition 3,600
Post-acquisition loss from statement of profit or loss (25% × 2,400) (w (vi)) (600)
3,000

Marking guide Marks

(a) Consolidated statement of profit or loss
revenue ½
cost of sales 1½
distribution costs ½
administrative expenses – (other than negative goodwill) ½
– negative goodwill 5
loss on equity investments ½
decrease in contingent consideration ½
finance costs ½
income tax expense ½
non-controlling interest 1
Max 11
(b) Consolidated statement of financial position
property, plant and equipment 2
equity investments 1
current assets ½
equity shares ½
retained earnings 2½
non-controlling interest 1½
contingent consideration ½
other current liabilities ½
Max 9
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 3: Consolidated statement of profit or loss and OCI 293

3: Consolidated statement of profit or loss and other

comprehensive income

1 PENKETH
Penketh – Consolidated statement of profit or loss and other comprehensive income for the year
ended 31 March 20X4
$000
Revenue (620,000 + (310,000 × 6/12) – 20,000 intra-group sales) 755,000
Cost of sales (w (i)) (458,200)
Gross profit 296,800
Distribution costs (40,000 + (20,000 × 6/12)) (50,000)
Administrative expenses (36,000 + (25,000 × 6/12) + (5,000/5 years × 6/12)) (49,000)
Investment income: Share of profit from associate (10,000 × 30% × 6/12) 1,500
Other ((5,000 – 1,800 dividend from associate) + (1,600 × 6/12)) 4,000
Finance costs (2,000 + (5,600 × 6/12) + (126,000 × 10% × 6/12 re deferred consideration)) (11,100)
Profit before tax 192,200
Income tax expense (45,000 + (31,000 × 6/12)) (60,500)
Profit for the year 131,700
Other comprehensive income
Loss on revaluation of land (2,200 – (3,000 – 2,000) gain for Sphere) (1,200)
Total comprehensive income for the year 130,500
Profit attributable to:
Owners of the parent 116,500
Non-controlling interest (w (ii)) 15,200
131,700
Total comprehensive income attributable to:
Owners of the parent 114,900
Non-controlling interest (w (ii)) 15,600
130,500

Workings (figures in brackets in $000)

(i) Cost of sales
$000
Penketh 400,000
Sphere (150,000 × 6/12) 75,000
Intra-group purchases (20,000)
Additional depreciation of plant (6,000/2 years × 6/12) 1,500
Unrealised profit in inventory:
Sales to Sphere (20,000 × 1/5 × 25/125) 800
Sales to Ventor (15,000 × 30% × 25/125) 900
458,200

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294 P a r t 2 a n s w e r s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t o r l o s s a n d O C I ACCA FR Question Bank

(ii) Non-controlling interest in profit for the year

$000
Sphere’s post-acquisition profit (80,000 × 6/12) 40,000
Less: Additional depreciation of plant (w (i)) (1,500)
Additional amortisation of intangible (5,000/5 years × 6/12) (500) (2,000)
38,000
× 40% =
15,200
Non-controlling interest in total comprehensive income:
Non-controlling interest in statement of profit or loss (above) 15,200
Other comprehensive income ((3,000 – 2,000) × 40%) 400
15,600

Marking guide Marks

Consolidated statement of profit or loss and other comprehensive income
revenue 2
cost of sales 5
distribution costs ½
administrative expenses 1½
investment income: associate 2
other 2
finance costs 1½
income tax expense 1
other comprehensive income 1½
non-controlling interest in profit for year 2
non-controlling interest in other comprehensive income 1
Maximum marks available 20

2 PREMIER
EXAMINER’S COMMENTS
Consolidated statement of profit or loss
Intra-group sales should only be eliminated for the post-acquisition period (four months);
many deducted $12 million (being for 12 months).
Several candidates calculated the PUP as $500,000 ($2 million × 25%), but the 25% was a
stated as a mark-up on cost, which gave $400,000 ($2 million × 25/125).
The fair value reduction in the depreciation charge was often added to, rather than
deducted from, cost of sales.
Most candidates understood the principle of calculating the non-controlling interest (NCI);
however, the adjustments to the subsidiary’s post-acquisition profit for the unrealised profit
(PUP) and/or reduced depreciation were frequently omitted from the calculation.
Consolidated statement of financial position
Problem areas included treating the fair value reduction of the property as an increase.
The majority of candidates did not eliminate the loan notes given as part of the purchase
consideration from the carrying amount of the equity investments.
Many did not attempt to record the increase in the parent’s share capital and premium as a
result of the share exchange.

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ACCA FR Question Bank Part 2 answers: 3: Consolidated statement of profit or loss and OCI 295

(a) Consolidated statement of profit or loss for the year ended 30 September 20X0
$000
Revenue (92,500 + (45,000 × 4/12) – 4,000 intra-group sales) 103,500
Cost of sales (W2) (78,850)
Gross profit 24,650
Distribution costs (2,500 + (1,200 × 4/12)) (2,900)
Administrative expenses (5,500 + (2,400 × 4/12)) (6,300)
Finance costs (100)
Profit before tax 15,350
Income tax expense (3,900 + (1,500 × 4/12)) (4,400)
Profit for the year 10,950

Profit for year attributable to:

Owners of the parent 10,760
Non-controlling interest
((1,300 see below – 400 PUP + 50 reduced depreciation) × 20%) 190
10,950

Sanford’s profits for the year ended 30 September 20X0 of $3.9 million are $2.6 million (3,900 ×
8/12) pre-acquisition and $1.3 million (3,900 × 4/12) post-acquisition.
(b) Consolidated statement of financial position as at 30 September 20X0
$000
Assets
Non-current assets
Property, plant and equipment (25,500 + 13,900 – 1,150 (W3)) 38,250
Goodwill (W4) 9,300
Investments in equity instruments (1,800 – 800 consideration) 1,000
48,550
Current assets (12,500 + 2,400 – 400 PUP) 14,500
Total assets 63,050

Equity and liabilities

Equity attributable to owners of the parent
Share capital ((12,000 + 2,400) (W4) ) 14,400
Share premium (W4) 9,600
Revaluation surplus 2,500
Retained earnings (W5) 13,060
39,560
Non-controlling interest (W6) 3,690
Total equity 43,250
Non-current liabilities
6% loan notes 3,000
Current liabilities (10,000 + 6,800) 16,800
Total equity and liabilities 63,050

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296 P a r t 2 a n s w e r s : 3 : C o n s o l i d a t e d s t a t e m e n t o f p r o f i t o r l o s s a n d O C I ACCA FR Question Bank

EXAM SMART
Make sure that you master the main consolidation workings: goodwill; consolidated retained
earnings; non-controlling interests. Set these basic workings out neatly and clearly and
reference them to your final answer. By doing this, you will gain some marks for
demonstrating that you understand the principles of consolidation, even if your final figures
are wrong.
Beware of the negative fair value adjustment here.

Workings
1 Group structure
Premier
80% owned for
4 months (4/12)
Sanford
2 Cost of sales
$000
Premier 70,500
Sanford (36,000 × 4/12) 12,000
Intra-group sales (4,000)
Unrealised profit (2,000 × 25/125) 400
Reduced depreciation on fair value adjustment (property) (50)
78,850

3 Fair value adjustments

At acquisition Movement At year end
$000 $000 $000
Property (1,200) 50 (1,150)
4 Goodwill
$000 $000
Consideration transferred:
Shares (5,000 × 80% × 3/5 × $5) (Note) 12,000
6% loan notes (5,000 × 80% × 100/500) 800
12,800
Non-controlling interests at fair value (5,000 × 20% × $3.50) 3,500
Less fair value of net assets at acquisition:
Share capital 5,000
Retained earnings (4,500 – (3,900 × 4/12)) 3,200
Fair value adjustments (W3) (1,200)
(7,000)
9,300

Note: The issue of 2.4 million shares is recorded as:

$’000
Share capital (5,000 × 80% × 3/5 × $1) 2,400
Share premium (5,000 × 80% × 3/5 × $4) 9,600
12,000

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ACCA FR Question Bank Part 2 answers: 3: Consolidated statement of profit or loss and OCI 297

5 Retained earnings
Premier Sanford
$000 $000
Per question 12,300 4,500
FV movement (W3) 50
Unrealised profit in inventory (W2) (400)
Pre-acquisition (W4) (3,200)
950
Group share (950 × 80%) 760
13,060

6 Non-controlling interests (Statement of financial position)

$’000
At acquisition (W4) 3,500
NCI share of post-acquisition retained earnings (950 (W5) × 20%) 190
3,690

Marking guide Marks

(a) Statement of profit or loss
Revenue 1½
Cost of sales 2½
Distribution costs ½
Administrative expenses ½
Finance costs ½
Income tax ½
Non-controlling interest – profit for year 1
7
(b) Statement of financial position:
Property, plant and equipment 1½
Goodwill 3½
Investments in equity instruments 1
Current assets 1
Equity shares 1
Share premium 1
Revaluation surplus ½
Retained earnings 1½
Non-controlling interest 1
6% loan notes ½
Current liabilities ½

13
Maximum marks available 20

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298 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

4: Accounting for associates

1 PLANK CO
EXAMINER’S COMMENTS
Some candidates failed to time apportion the results of the subsidiary to represent the nine
month post acquisition period.
Surprisingly, there continue to be a minority of candidates that proportionately consolidate
the results of subsidiary (e.g. including 85% of Strip Co’s income and expenses).
This question required candidates to make adjustments for common consolidation
transactions. The nine month post acquisition period continued to be a problem here, with
some candidates forgetting to time apportion the fair value depreciation while others
incorrectly time apportioned unrealised profit or the dividend.
Many candidates recognised that the dividend received from Strip Co was to be removed
from investment income. However, there were a considerable number of candidates that
removed the entire $18 million. As Plank Co only owns 85% of the shares in Strip Co it was
necessary to adjust the dividend by this percentage before removing.
Note (iii) required an adjustment in respect of intra-group loan interest. To correctly adjust
for this transaction, candidates needed to recognise that the loan interest was both payable
by Strip Co and receivable by Plank Co. This interest therefore needed to be eliminated from
both finance costs and investment income. The interest of $5 did not need to be time
apportioned as the loan to Strip Co was made on 1 April 20X8 (the same as the acquisition
date).
A number of candidates attempted to incorrectly consolidate the results of Arch Co on a
line-by-line basis. Again, this treatment is considered to be a fundamental error that does
not follow the equity accounting method and should be discouraged.
When preparing a SPLOCI candidates must remember to split both the profit for the year
and total comprehensive income between the amount attributable to the parent’s
shareholders and the amount attributable to the non-controlling interest. This continues to
be the most commonly omitted part of the statement and often represents a significant
portion of the total marks.

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 299

(a) Consolidated statement of profit or loss and other comprehensive income for the year ended
31 December 20X8
$’000
Revenue 705,000 + (9/12 × 218,000) – 39,000 829,500
Cost of sales Working 1 (348,100)
Gross profit 481,400
Distribution costs 58,000 + (9/12 × 16,000) (70,000)
Administrative expenses 92,000 + (9/12 × 28,000) (113,000)
Share of profit of associate Working 2 32,400
Investment income Working 3 14,950
Finance costs 12,000 + (9/12 × 14,000) – 5,000 int (17,500)
Profit before tax 328,250
Income tax expense 51,500 + (9/12 × 15,000) (62,750)
Profit for the year 265,500
Other comprehensive income:
Gain on revaluation of land 2,800 + 3,000 5,800
Total comprehensive income for the year 271,300

Profit attributable to Parent 258,375

Profit attributable to NCI Working 4 7,125
265,500

Total comprehensive income attributable to Parent 263,725

Total comprehensive income attributable to NCI Working 4 7,575
271,300

Workings

EXAM SMART
The parent (Plank) has sold goods to the associate (Arch) during the year and none of these
goods have yet been sold to third parties. Plank has made the unrealised profit and Arch has
the unsold inventories.
The adjustment is:
 DR Cost of sales
 CR Investment in associate
with the group share (35%) of the unrealised profit on the sale.

(W1) Cost of sales

$’000
Plank Co 320,000
Strip Co 81,000 × 9/12 60,750
Intercompany purchases (39,000)
Additional depreciation on plant $8 million / 3 years × 9/12 2,000
Unrealised profit adjustment Plank to Strip $39 million × 1/4 × 30/130 2,250
Unrealised profit adjustment Plank to Arch $26 million × 35% × 30/130 2,100
348,100

(W2) Income from associate

Share of profit after tax $92.57million × 35% 32,400

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300 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

(W3) Investment income

$’000
Plank Co 46,000
Strip Co 2,000 × 9/12 1,500
Intercompany interest (Strip) (5,000)
Dividend: Strip (85% × $18 million) (15,300)
Dividend: Arch (35% × $35 million) (12,250)
14,950
(W3) Share of profit/total comprehensive income to parent and NCI
Strip post acquisition profit 9/12 × 66,000 49,500
Less: Additional depreciation on machinery (2,000)
47,500
× 15% 7,125
Profit as above 7,125
Other comprehensive income 3000 × 15% 450
7,575

(b) Investment in Associate

$000
Carrying amount of investment at 31 December 20X7 145,000
Share of post-acquisition profits $92.57 million × 35% (W2) 32,400
Dividends paid $35 million × 35% (SOPL) (12,250)
Unrealised profit adjustment $26 million × 30/130 × 35% (W2) (2,100)
Carrying amount at 31 December 20X8 163,050

Marking guide Marks

(a) Revenue to admin exp 6
Inv inc/associate 6
Fin tax OCI split 6
Max 18
(b) Inv in associate Max 2
Maximum marks available 20

2 RUNNER CO
EXAMINER’S COMMENTS: PART (a)
The fair value adjustment for specialised plant was generally well done, however, there were
still errors made by some candidates. For example, the fair value depreciation was often
adjusted in the subsidiary net assets at the acquisition date. Fair value depreciation will
affect post-acquisition profit and therefore should not be adjusted at the date of acquisition.
Some candidates failed to update property, plant and equipment for the fair value
depreciation which had been calculated whereas others often incorrectly added the
depreciation onto property, plant and equipment rather than deducting it.
An adjustment for unrealised profit was required because of trading between Jogger Co and
Runner Co. Some candidates calculated the adjustment incorrectly by using mark-up instead
of margin to find the unrealised profit whereas others calculated profit on the original sale
rather than the amount left in inventory at the reporting date. Other errors noted by the
marking team included incorrectly adding the adjustment onto inventory in current assets

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 301

and mistaking the selling company as the parent company so only adjusting group retained
earnings.
Unrealised profit is a common adjustment which is present in many consolidation questions
and therefore is something that should be practised by candidates.
The intra-group receivables and payables attracted many variations in candidate responses.
This type of intra-group adjustment has been tested on numerous occasions. Candidates
were required to adjust the cash in-transit before removing the reconciled receivable and
payable balances. The more common errors included candidates deducting the incorrect
amounts, not adjusting cash and adding the $3m in-transit item to inventory.
It is surprising to note that there continues to be a number of candidates who use
proportionate consolidation in their answer, i.e. they add 100% of the parent’s assets and
liabilities to the group share of the subsidiary’s assets and liabilities. The use of this method
(which is not shown in any of the approved learning materials) is considered a fundamental
error and the basic consolidation marks cannot be awarded when used.

EXAM SMART
Deferred consideration is often examined, so make sure that you know how to deal with it.
In this question, the acquisition takes place on 1 April 20X4, but some of the cash
consideration is not payable until 1 April 20X5. The goodwill calculation includes deferred
consideration of $19.446m ($21m x 0.926).
Remember that at 31 March 20X5 the discount is unwound:
 Consolidated retained earnings is decreased by $1.554m ($21m – $19.446m)
 Consolidated liabilities are increased by $1.554m

(a) Runner Co consolidated statement of financial position as at 31 March 20X5

$’000 $’000
Assets
Non-current assets
Property plant and equipment (455,800 + 44,700+ 9,000 (w1)) 509,500
Investment (55,000 – 42,500) 12,500
Goodwill (w2) 20,446
542,446
Current assets
Inventory (22,000 + 16,000 – 720 (w4)) 37,280
Trade receivables (35,300 + 9,000 – 3,000 – 3,400) 37,900
Bank (2,800 + 1,500 + 3,000) 7,300 82,480
Total assets 624,926
Equity and liabilities
Equity attributable to the owners of the parent
Equity shares of $1 each 202,500
Retained earnings (w5) 290,950
493,450
Non-controlling interest (w3) 14,476
Total equity 507,926
Current liabilities (81,800 + 17,600 – 3,400) 96,000
Deferred consideration (19,446 + 1,554) 21,000 117,000
Total equity and liabilities 624,926

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302 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

Workings
(1) Fair value adjustment - Jogger Co
Acquisition Retained earnings Year-end
$’000 $’000 $’000
Fair value adjustment 10,000 (1,000) 9,000

(2) Goodwill in Jogger Co

$’000 $’000
Cost of investment: Cash 42,500
Deferred consideration (21,000 × 0.926) 19,446
61,946
Non-controlling interest 13,000
74,946
Less: Net assets acquired
Share capital 25,000
Pre-acquisition retained earnings 19,500
Fair value adjustment (w1) 10,000
(54,500)
Goodwill 20,446

(3) Non-controlling interest

$’000
NCI at acquisition 13,000
NCI share of post-acquisition reserves (7,380 × 20%) 1,476
14,476

(4) Intercompany transaction

$’000
Inventory held at year end 4,800
Unrealised profit (4,800 × 15%) 720
(5) Retained earnings
Runner Jogger
$000 $000
Per question 286,600 28,600
Unwinding discount on deferred consideration (21,000 –
19,446 (w1)) (1,554)
Fair value adjustment (depreciation) (w1) (1,000)
Provision for unrealised profit (w4) (720)
Pre-acquisition profit (19,500)
7,380
Jogger Co (7,380 × 80%) 5,904
290,950

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 303

EXAMINER’S COMMENTS: PART (b)

Many candidates calculated the carrying amount of the investment in the associate only and
ignored the requirement to explain how Walker Co should be accounted for. Candidates who
achieved full marks on this question were those who were also able to explain that a 30%
investment in the equity shares of another entity should be treated as an associate if
significant influence exists and, where this is the case, the equity method of accounting
should be applied.
Disappointingly, a large number of candidates failed to attempt this part of the question at all.

(b) Runner Co has significant influence over Walker Co, therefore Walker Co should be treated as
an associate in the consolidated financial statements, using the equity method.
In the consolidated statement of financial position, the interest in the associate should be
presented as ‘investment in associate’ as a single line under non-current assets. The associate
should initially be recognised at cost and subsequently adjusted each period for the parent’s
share of the post-acquisition change in net assets (retained earnings). This figure should be
reviewed for impairment at each year end which given the fall in value of the investment due to
the loss would be most likely.
Calculation:
$’000
Cost of investment 13,000
Share of post-acquisition change in net assets ((30,000 × 30%) = 9,000) (9,000)
4,000

Marking guide Marks

(a) PPE and investments 2
Goodwill 3
Current assets 3½
Share capital and NCI 1½
Retained earnings 4
Current liabilities 2
Max 16

(b) Explanation of equity accounting 2

Calculation of investment in associate 2
Max 4
Maximum marks available 20

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304 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

3 DARGENT CO
Consolidated statement of financial position as at 31 March 20X6
$000 $000
Assets
Non-current assets
Property, plant and equipment (75,200 + 31,500 + 3,800 re mine (W2) 110,500
Goodwill (W3) 11,000
Investment in associate (4,500 + 1,200 (W5)) 5,700
127,200
Current assets
Inventory (19,400 + 18,800 + 700 GIT – 800 URP (W4)) 38,100
Trade receivables (14,700 + 12,500 – 3,000 intra group) 24,200
Bank (1,200 + 600) 1,800 64,100
Total assets 191,300

Equity and liabilities

Equity attributable to owners of the parent
Equity shares of $1 each (50,000 + 10,000 ((W3) 60,000
Other equity reserves (share premium) (W 3) 22,000
Retained earnings (W5) 37,390 59,390
119,390
Non-controlling interest (W6) 9,430
Total equity 128,820
Non-current liabilities
8% loan notes (5,000 + 15,000 consideration) 20,000
Accrued loan interest (W5) 300
Environmental provision (4,000 + 80 interest (W2)) 4,080 24,380
Current liabilities (24,000 + 16,400 – (3,000 – 700 GIT) intra group (W4)) 38,100
Total equity and liabilities 191,300

EXAM SMART
There are two potentially tricky aspects of this question: the fair value adjustment; and the
goods in transit.
 Fair value adjustment: Applying the group policy to the environmental provision means
adding $4 million to the carrying amount of the mine and recognising a corresponding
liability (the provision) at the date of acquisition. This has no overall effect on goodwill,
but it does affect the consolidated statement of financial position and post-acquisition
profit. Remember to recognise interest on the provision (the unwinding of the discount
of 8%) and to time apportion both interest and additional depreciation on the asset;
Latree Co has only been a subsidiary for the last three months of the year.
 Goods in transit: as usual, speed the goods through to their final destination and
remember to include them in the provision for unrealised profit.

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 305

Workings (figures in brackets are in $000)

(1) Group structure

Dargent Co
75% (3/12) 30% (full year)

Latree Co Amery Co

(2) Fair value adjustments

Retained
Acquisition earnings Year end
$000 $000 $000
Asset re mine (depreciation (4,000/5 years × 3/12) 4,000 (200) 3,800
Provision re mine (interest (4,000 × 8% × 3/12) (4,000) (80) (4,080)
– (280) (280)

(3) Goodwill in Latree Co

$000 $000
Controlling interest
Share exchange (20,000 × 75% × 2/3 = 10,000 × $3.20) 32,000
8% loan notes (20,000 × 75% × $100/100) 15,000
Non-controlling interest (20,000 × 25% × $1.80) 9,000
56,000
Equity shares 20,000
Retained earnings at 1 April 20X5 19,000
Earnings 1 April 20X5 to acquisition (8,000 × 9/12) 6,000
Fair value adjustments – asset and provision re mine (W2) – (45,000)
Goodwill arising on acquisition 11,000

The share exchange of $32 million would be recorded as share capital of $10 million (10,000 ×
$1) and share premium of $22 million (10,000 × ($3.20 – $1.00)).
(4) The inventory of Latree Co includes unrealised profit (URP) of $600,000 (2,100 × 40/140).
Similarly, the goods-in-transit sale of $700,000 million includes URP of $200,000 (700 × 40/140).
(5) Consolidated retained earnings:
Dargent Co Latree Co
$000 $000
Per question 36,000 27,000
Outstanding loan interest at 31 March 20X6 (15,000 × 8% × 3/12) (300)
URP in inventory (W4) (800)
Additional depreciation re mine (4,000/5 years × 3/12) (200)
Interest on environmental provision (4,000 × 8% × 3/12) (80)
Pre-acquisition profit (19,000 + 6,000) (W2) (25,000)
1,720
Latree Co (1,720 × 75%) 1,290
Amery Co ((6,000 – 2,000) × 30%) 1,200
37,390

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306 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

(6) Non-controlling interest

$000
Fair value on acquisition (W1) 9,000
Post-acquisition profit (1,720 × 25% (W4)) 430
9,430

Marking guide Marks

Property, plant and equipment 2
Goodwill: consideration 2½
Goodwill: fair value net assets 2
Investment in associate 1
Inventory 1½
Receivables 1
Bank ½
Equity shares and share premium 1
Retained earnings: post-acquisition sub 2
Retained earnings: other 2
Non-controlling interests 1½
8% loan notes ½
Environmental provision 1½
Current liabilities 1
Maximum marks available 20

4 VIAGEM
EXAMINER’S COMMENTS
Most candidates scored very well on the calculation of the goodwill, many scored full marks.
Where problems arose, they were mainly not discounting the deferred consideration (and
consequently not charging an additional finance cost in the statement of profit or loss),
ignoring the non-controlling interest and not taking account of the pre-acquisition
movement in profit since the beginning of the year. On this latter point a number of
candidates took the retained earnings at the start of the year as being the year end retained
earnings despite the fact that the start of the year date was typed in bold in the question.
Also a significant number of candidates incorrectly included post - acquisition items
(additional depreciation and URP) and omitted (or incorrectly signed) the contingent liability
as a fair value adjustment in the calculation of goodwill.
As might be expected, it was the more complex aspects where errors occurred:
 Incorrect calculation of the URP and additional depreciation adjustments (particularly
not time apportioning the depreciation)
 Not eliminating the dividend of the associate
 Time apportioning the investment income from the associate (the question stated this
had been held for several years)
 Not time apportioning the additional finance cost or ignoring it altogether
 Not adjusting the non-controlling interest calculation for the additional depreciation
and goodwill impairment.

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 307

EXAM SMART
Always show your workings clearly. If a figure is wrong but the marker can see how and why
you have calculated it, you will probably still receive some marks.
On the other hand, the Examiner has commented that candidates often waste time by
providing separate workings for very simple calculations. Many of the workings can be done
much more quickly on the face of the statement of profit or loss.
In questions involving the group statement of profit or loss, it is very common to have a mid-
year acquisition, so be prepared to time-apportion the figures relating to the subsidiary.

(a) Viagem: Consolidated goodwill on acquisition of Greca as at 1 January 20X2

$000 $000
Investment at cost
Shares (10,000 × 90% × 2/3 × $6.50) 39,000
Deferred consideration (9,000 × $1.76/1.1) 14,400
Non-controlling interest (10,000 × 10% × $2.50) 2,500
55,900
Net assets (based on equity) of Greca as at 1 January 20X2
Equity shares 10,000
Retained earnings b/f at 1 October 20X1 35,000
Earnings 1 October 20X1 to acquisition (6,200 × 3/12) 1,550
Fair value adjustments: plant 1,800
contingent liability recognised (450)
Net assets at date of acquisition (47,900)
Consolidated goodwill 8,000

(b) Viagem: Consolidated statement of profit or loss for the year ended 30 September 20X2
$000
Revenue (64,600 + (38,000 × 9/12) – 7,200 intra-group sales) 85,900
Cost of sales (working) (64,250)
Gross profit 21,650
Distribution costs (1,600 + (1,800 × 9/12)) (2,950)
Administrative expenses (3,800 + (2,400 × 9/12) + 2,000 goodwill impairment) (7,600)
Finance costs (420 + (14,400 × 10% × 9/12 re deferred consideration)) (1,500)
Share of profit of associate (2,000 × 40%) 800
Profit before tax 10,400
Income tax expense (2,800 + (1,600 × 9/12)) (4,000)
Profit for the year 6,400

Profit for year attributable to:

Owners of the parent 6,180
Non-controlling interest ((6,200 × 9/12) – 450 depreciation – 2,000
goodwill impairment) × 10%)) 220
6,400

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Workings
Group structure

Viagem

90% (9/12) 40% (throughout

year)
Greca Associate

Cost of sales $000

Viagem 51,200
Greca (26,000 × 9/12) 19,500
Intra-group purchases (800 × 9 months) (7,200)
PUP in inventory (1,500 × 25/125) 300
Additional depreciation (1,800/3 years × 9/12) 450
64,250

Marking guide Marks

(a) Consolidated goodwill:
consideration – share exchange 1½
– deferred 1½
– NCI 1
net assets – equity ½
– retained at acquisition 1
– fair value adjustments 1½

(b) Consolidated statement of profit or loss:

revenue 1½
cost of sales 2½
distribution costs ½
administrative expenses 2
income from associate 1½
finance costs 1½
income tax 1
profit for year – parent ½
– NCI 2

Maximum marks available 20

5 GOLD CO
EXAMINER’S COMMENTS: PART (a)
The calculation of goodwill is a standard adjustment in consolidated financial statements.
When candidates are asked to prepare a consolidated statement of financial position, the
calculation of goodwill is generally dealt with very well. When it is part of a standalone
requirement, some candidates appear to struggle with its preparation. It is important to
note that you could be asked to prepare any of the adjustments typically associated with a
consolidated statement of financial position as a standalone requirement (e.g. goodwill,
non-controlling interest (NCI), consolidated retained earnings and the investment in

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 309

associate). It is therefore important that you understand the make-up of these workings
rather than rote-learning an approach to a consolidated statement of financial position.
While many candidates calculated the share exchange correctly, there were common errors
made by some. These errors typically arose where candidates used the incorrect number of
shares in their calculation or, more commonly, the incorrect share price. You are told in the
question that Gold Co acquired 90% of Silver Co’s 16 million $1 equity shares, therefore they
have purchased 14.4 million equity shares. It is this number of shares that should be used in
the share exchange calculation. Some candidates incorrectly used the full 16 million equity
shares in the exchange calculation.
The deferred cash payment was generally dealt with very well. There were some surprising
calculations though that made use of both the discount factor of 0.9091 that was given in
the question followed by a further application of the discounting formula. This part of the
calculation should have been straightforward and candidates simply needed to multiply
$34.848 million (14.4 million shares × $2.42) by 0.9091 to get the fair value of the deferred
consideration at the acquisition date of $31.680 million. Some candidates used the
discounting formula instead which was also acceptable ($34.848 million × 1/1.11) and marks
were awarded accordingly by the marking team.
The NCI at acquisition is to be measured at fair value in the Gold group. Often candidates will
be given this fair value, however in this question, NCI needed to be calculated. There were
numerous mistakes made by candidates when arriving at this amount. Remember, the fair
value of NCI at acquisition is found by taking the number of shares the NCI still own,
multiplied by the subsidiary share price at acquisition. In this question this was found as
1.6 million shares (16 million shares × 10%) × $3.50.
before Gold Co took control of Silver Co. There were two net asset fair value adjustments in
this question, and details for these were outlined in note (2). The adjustment to plant was
generally dealt with well, although some candidates incorrectly tried to adjust fair value
depreciation within the calculation of goodwill. Again, this would not be necessary as you
are using the fair values that exist at the date Gold Co takes control. Surprisingly, despite
being tested before, many candidates omitted the fair value adjustment in respect of the
contingent liability entirely.

(a) Goodwill
Consideration: $’000 $’000 $’000
Deferred cash (90% × 16,000 × $2.42 × 0.9091) 31,680
Shares (90% × 16,000 × 3/5 × $8.00) 69,120
100,800
Non-controlling interest (NCI) (10% × 16,000 × $3.50) 5,600
106,400
Less: FV of net assets at acquisition
Equity shares 16,000
Retained earnings:
At 1 October 20X1 56,000
1 October 20X1–1 January 20X2 (9,920 × 3/12) 2,480 58,480
Fair value adjustments:
Plant 2,600
Contingent liability (850)
(76,230)
Goodwill 30,170

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310 P a r t 2 a n s w e r s : 4 : A c c o u n t i n g f o r a s s o c i a t e s ACCA FR Question Bank

EXAMINER’S COMMENTS: PART (b)

This requirement is fairly lengthy and would take up the majority of the time for this
question. Candidate performance on a consolidated statement of profit or loss is usually
weaker than when a consolidated statement of financial position is examined, and this
question was no exception. From an exam technique point of view, you may find it useful to
layout the consolidated statement of profit or loss (and other comprehensive income if
there is any) immediately. In doing this, it is highly recommended that you also head up the
split between the profit that is attributable to the parent and that of the NCI (you will also
need a split for total comprehensive income (TCI) if there is any other comprehensive
income in the question) at the bottom of the consolidation.
In Gold Co, many candidates failed to complete the split of profit for the period, with many
omitting it altogether. By not completing the split, candidates immediately lost marks. If you
spend a small amount of time laying out the split in the early part of your answer, this will
act as a reminder to attempt to complete this later on and in doing so score valuable marks.
When completing the consolidated statement of profit or loss, ensure you get the ‘easy’
marks out of the question early on. These marks are earned in the initial consolidation
process. You should add together all income and expenses (and other comprehensive
income if there is any) for the parent and subsidiary. Be careful though, if control of the
subsidiary was acquired mid-way through the period it will be necessary to time apportion
the subsidiary’s income and expenses. This will almost always be the case in the FR exam
and in Gold Co the post-acquisition period is nine months. This is vital in a consolidated
profit or loss question and is an area that many candidates often forget. It is disappointing to
note that despite guidance in previous reports from the examining team, many candidates
often forget.
It is disappointing to note that despite guidance in previous reports from the examining
team, many candidates attempted to take 90% of the subsidiary results in their answers.
This is fundamentally incorrect and the basic consolidation marks will be lost so please DO
NOT proportionately consolidate the results of the subsidiary.
Having completed the initial consolidation process, candidates should turn their attention to
the consolidation adjustments that may be required. In this question there is an intra-group
sale and purchase that needs to be eliminated, with a further adjustment for unrealised
profit on the goods that remain in inventory at the reporting date. There is also an additional
group expense in respect of fair value depreciation and an associate company. These are
standard consolidation adjustments for the FR exam and on the whole were well attempted,
although there were some common errors or omissions noted by the marking team.
Note (4) of the question informs candidates that sales made between Gold Co and Silver Co
in the post-acquisition period had consistently been $600,000 per month. These are internal
sales and purchases within the group and will need to be removed from both revenue and
cost of sales (purchases). Often candidates removed $5.4 million ($600,000 × 9 months)
from revenue but a different amount from cost of sales. This is an error. The adjustment to
cost of sales should be the same as the adjustment to revenue, in this case, $5.4 million.
Once you have eliminated this internal transaction, you will then need to consider any
unrealised profit that remains on the transaction. Where unrealised profit in inventory
exists, the adjustment should be made to cost of sales.
The fair value adjustment for plant will require an additional consolidation expense in
respect of fair value depreciation. This was generally done well by the majority of
candidates. However, some candidates omitted this adjustment all together, while others
failed to time apportion the depreciation charge for the post acquisition period (9 months).

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ACCA FR Question Bank Part 2 answers: 4: Accounting for associates 311

Gold Co’s investment income currently includes a dividend from an investment in a 40%
owned associate company. This dividend should be removed and replaced with a 40% share
of the associates profit for the year of $1.2 million ($3 million × 40%). This is in accordance
with IAS 28 Investments in Associates and Joint Ventures. Many candidates successfully
adjusted for the share of profit but failed to remove the dividend income. In this instance,
only partial marks were available.
The unwinding of the discount on the deferred consideration was an adjustment often
overlooked by candidates. In part (a) the deferred consideration was discounted to a present
value of $31.680 million using a cost of capital of 10%. This is another example of where
‘own figure’ marks will be awarded. Most candidates who attempted to unwind the discount
correctly applied 10% to the deferred consideration calculated in part (a) and added this on
to finance costs. To score full marks however, candidates need to time apportion this
adjustment (nine months) and many candidates did not do this.
Finally, note (6) contained an accounting adjustment in respect of a convertible loan note
that was issued by Gold Co on 1 October 20X1. The marking team noted that this adjustment
caused confusion for some candidates. This appeared to be because this was an individual
company adjustment rather than a traditional group accounting adjustment. You must be
prepared for adjustments such as this to be contained within a group accounting question. In
this situation, think about the appropriate accounting treatment, show your workings
accordingly and most importantly make the adjustment in the parent company’s accounts.
Those candidates who attempted to deal with this adjustment generally earned some marks
but relatively few got the full marks available for this transaction. The most common error
when the liability was calculated correctly was where the full finance costs for the year at 8%
were added onto the consolidated finance costs. Candidates needed to adjust finance costs
for the difference between interest at the effective rate and the nominal rate of interest that
had already been included in Gold Co’s accounts.
Overall, consolidations are an integral part of the FR syllabus. Candidates spend most of their
time, it would appear, preparing for a consolidated statement of financial position. There is
an equal likelihood that a consolidated statement of profit or loss and other comprehensive
income may be tested and therefore it is vital that you prepare for all aspects of the syllabus

(b) Consolidated statement of profit or loss for the year ended 30 September 20X2
$’000
Revenue (103,360 + (60,800 × 9/12) – 5,400 (W1)) 143,560
Cost of sales (81,920 + (41,600 × 9/12) – 5,400 (W1) + 240 (W1) + 650 (W2)) (108,610)
Gross profit 34,950
Distribution costs (2,560 + (2,980 × 9/12)) (4,795)
Administrative expenses (6,080 + (3,740 × 9/12)) (8,885)
Share of profit from associate (3,000 × 40%) 1,200
Finance costs (672 + 136 (W3) + 2,376 (W4)) (3,184)
Profit before tax 19,284
Income tax expense (4,480 + (2,560 × 9/12)) (6,400)
Profit for the year 12,886
Profit attributable to:
Owners of the parent 12,207
NCI (W5) 679
12,886

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Workings
W1 – Intercompany and PUP
Post-acquisition sales = ($600 × 9) = $5,400
PUP = (1,200 × 25/125) = $240
W2 – FV depreciation on plant = ($2,600/3 × 9/12) = $650
W3 – Convertible loan – calculate liability component
$’000 DF 8% $’000
Liability:
Interest (10,000 × 6%) = 600 3.993 2,396
Principal 10,000 0.681 6,810
Liability 9,206

$’000
Interest charge to PL:
($9,206 × 8%) = 736
Interest already charged (600)
136

W4 – Deferred cash consideration

Unwinding of discount on deferred consideration (see goodwill calculation): $31,680 × 10% ×
9/12 = $2,376
W5 – NCI
$’000
Silver’s profit for the year ($9,920 × 9/12) 7,440
FV Depreciation (W2) (650)
6,790
NCI share 10% 679

Marking guide Marks

(a) Goodwill 6
(b) Revenue/COS 5½
Other including NCI 8½
14
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 313

5: Interpreting financial statements

1 FIT CO
EXAM SMART
Some ratios, such as gearing, can be calculated in different ways. Here, the question
specifically asks you to calculate it as debt/equity; this means that if you use any other
formula for calculating gearing you will not get the mark.

(a) Ratio calculations

Ratios Fit Co Sporty Co
Gross Profit 60,000/250,000 × 100% 24.0% 70,000/220,000 × 100% 31.8%
Operating profit 25,000/250,000 × 100% 10.0% 32,000/220,000 × 100% 14.5%
Trade payables days 35,000/190,000 × 365 67 days 12,000/150,000 × 365 29 days
Return on Capital 25,000/(90,000 + 32,000/(60,000 +
Employed 45,000) × 100% 18.5% 15,000) × 100% 42.7%
Gearing 45,000/90,000 × 100% 50% 15,000/60,000 × 100% 25%
(b)

EXAMINER’S COMMENTS
Those candidates that link their commentary to the scenario tend to score very well.
There was plenty of information in the scenario of this question that could act as a prompt
for a more detailed commentary.
For example, both companies operate in the same sector. However, one company is a
manufacturer and retailer of premium branded sportswear, while the other sources mid-
market sportswear from its suppliers and retails them separately. Based on this information
it is likely that both sales prices, costs etc. will be significantly different for each company
and could be used to explain the differences in performance.
Both companies sell online, but one sells through its own branded stores and one sells
through department stores. Again, this would give rise to differences not only in the costs
incurred by each business but the structure of the statement of financial position is likely to
be different (Fit would be expected to have more assets due to its manufacturing facilities
and premises for its stores) and this in turn would impact return on capital employed.
Candidates are encouraged to look at the information provided in the scenario and to use it
to add depth and meaning to their analysis.
Whilst some candidates did attempt to provide a conclusion on this question, there were
many that did not. In this particular question for example, candidates could summarise their
findings to determine which company is considered to be the best performing based on the
limited information available.

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Performance and position

Performance
As can be seen from the ratio calculations, Sporty Co has a higher gross profit margin than Fit Co, even
though it has lower revenue overall. The reason for this could be that Sporty Co sources its items
direct from the manufacturer, and so does not incur manufacturing costs.
Indeed, it is surprising that Fit Co has a lower GPM than Sporty Co given that it is selling premium
branded goods – it would be expected that such goods would be sold at a higher margin.
The difference could also be a result of the competition suffered by Fit Co in the year, which may have
led Fit Co to decrease its selling prices.
The gross profit margin of Fit Co may also fall further, as the gross profit margin of the Active division
is 40%, which is much higher than Fit Co overall. Therefore, the underlying gross profit margin of the
remaining Fit Co business would be expected to be lower than that shown for the current year.
The operating profit for Sporty Co is 4% higher than Fit Co. This is not surprising given that Sporty Co’s
GPM is higher than that of Fit Co. On closer inspection, Fit Co’s OPM is inflated because of the non-
recurring $5m gain on disposal. In addition to this, Fit Co profit for 31 December 20X0 includes central
services income of $1.2m which will not recur following the disposal of the Active division. It is also
worth noting that Fit Co will have a higher cost base, which would be expected as it operates its own
stores, whereas Sporty Co uses department stores.
Sporty Co has a much higher return on capital employed than Fit Co, as it has a higher operating profit,
and lower long-term debt and equity
Position
Fit Co has a gearing ratio twice that of Sporty Co, as it has much higher long-term debt. This makes Fit
Co a riskier business than Sporty Co, as it must meet these debt repayments or would face insolvency.
As the gearing for Sporty Co is much lower than that of Fit Co, Sporty Co should be able to secure debt
finance if needed for its planned international expansion.
Fit Co will incur much higher finance costs on its debt than Sporty Co, which is equity financed. Both
companies can currently cover interest payments from operating profits however the cash balance for
Fit Co is much lower than Sporty Co, which applies further pressure to Fit Co as it must meet high
interest payments. The current year interest payments for Fit Co exceed the cash balance at year-end,
therefore Fit Co must ensure that its cash interest payments are sustainable in the long term.
Trade payables days are 67 for Fit Co and 29 for Sporty Co. This is consistent with the fact that Fit Co
has a much lower cash balance than Sporty Co and shows that Fit Co are unable to pay suppliers
quickly. This could lead to future problems with suppliers and shows that Fit Co needs to monitor its
cash balance to ensure it can continue to trade in the long term.
Conclusion
Overall, it would appear that Sporty Co is in a better financial position than Fit Co, as it is more
profitable, has lower debt, and should be able to access additional resources for its planned expansion.
Marking guide Marks
(a) Ratio calculations Max 6
(b) Performance 9
Position & conclude 5
Max 14
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 315

2 BUN CO
EXAMINER’S COMMENTS: PART (a)
Many candidates correctly identified the adjustment of $0.6 million, however, the marking
team commented on numerous incorrect calculations being demonstrated. The calculation
of the adjustment was only a small part of the question, as subsequent use of this amount to
adjust the financial statements was awarded marks under the own figure rule. Some
candidates did attempt to adjust cost of sales but many incorrectly deducted the inventory
write down, which would further increase the inventory value in profit or loss. It was very
disappointing to note that most candidates did not attempt to adjust retained earnings for
the inventory write down despite there being a clear impact on the profit reported for the
period.
Despite having attempted the adjustments, many candidates continued to calculate the
ratios using the unadjusted financial statement figures and therefore were unable to score
the full marks available. The marking team noted that despite numerous past examiner
reports, candidates continue to provide ratio calculations without the supporting workings.
Markers are unable to award own figure marks for incorrect calculations if the workings are
not provided.
Interestingly, many candidates calculated ‘gearing’ using the debt to debt plus equity
formula, even though the question specifically stated debt to equity. This resulted in a
relatively easy mark being lost. It is vital that you read the information in the question
carefully and provide your answers accordingly.

(a) Inventory adjustment

The disposal of the inventory at a discounted price would be classified as an adjusting event in
accordance with IAS® 10 Events After the Reporting Period.
Retail price of the inventory $1.5 million; GP margin 20% = $0.3 million
Closing inventory (currently credited to SOPL) $1.2 million
A write down to NRV would require a $0.6m charge to cost of sales thereby increasing it to
$70.6 million and reducing profit from operations to $12.56 million. In the statement of
financial position, inventory is written down to $3.36 million, retained earnings will be adjusted
to $9.88 million and total equity will be adjusted to $32.28 million.
Sector
Bun Co average
Return on year-end capital employed (12,560/(32,280 + 14,400) × 100) 26.9% 18.6%
Operating profit margin (12,560/100,800 × 100%) 12.5% 8.6%
Inventory holding period (days) (3,360/70,600 × 365) 17.4 days 4 days
Debt to equity (debt/equity) (14,400/32,280 × 100) 44.6% 80%
Asset turnover (100,800/46,680) 2.16 2.01

EXAMINER’S COMMENTS: PART (b)

Performance on this question was disappointing compared to previous analysis questions.
Typical comments simply cited the movements in the ratios, some then provided ‘textbook
responses’ as a reason for the change and ignored the scenario to aid the analysis. Such
responses continue to attract relatively few, if any, marks and candidates are once again
reminded that the scenario given in the question MUST be used to earn the marks available.

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The marking team were pleased to note that many candidates continued to attempt a
conclusion to their analysis. This is something that candidates should be encouraged to
continue to do.

(b) Analysis of financial performance

Profitability
The primary measure of profitability is the return on capital employed (ROCE) and this shows
that Bun Co (26.9%) is outperforming the sector (18.6%). The ROCE measures the operating
profit relative to the equity employed in the business. As a percentage, it would appear that Bun
Co is 31% ((26.9 – 18.6)/26.9) more efficient that its competitors. However, this ratio should be
treated with caution because Bun Co’s capital employed includes its revaluation surplus
associated with the property. If Bun Co’s competitors did not revalue their property, then the
ratio is not directly comparable; for example, if Bun Co’s revaluation surplus were to be
excluded from capital employed, it would increase ROCE to be even higher than the sector
average.
As there is little difference between the asset turnover of Bun Co and that of the sector, it
would appear that the main cause of ROCE over-performance is due to a significantly higher
operating profit margin (12.5% compared to 8.6%). Offering meal deals is advisable, as the
company can still afford to reduce its prices and still make a high operating profit margin
compared to the industry sector average. By offering meal deals at reduced prices, Bun Co
would look to increase their sales volume and therefore this may help them to control and
reduce inventory days.
Alternatively, it may be that Bun Co has better control over its costs (either direct or indirect
costs or both) than its competitors; for example, Bun Co may have lower operating costs. As
Bun Co owns 80% of its non-current assets in the form of property, this means that it is not
paying any rent, whereas its competitors may be. Bun Co’s competitors may prefer to lease
premises which could be a more flexible basis on which to run a business, but often more costly.
Financial position (limited to inventory and gearing)
In a company like Bun Co, it is expected that inventory would be turned into cash in a relatively
short period of time. Bun Co is taking significantly longer than its competitors to sell its
inventory which is being held on average for 17 days instead of four days as per the sector
average. The main worry is that the inventory is largely perishable. It may be that, since the
acquisition of the brand, Bun Co pursued a higher pricing strategy but this may be having a
detrimental impact on the company’s ability to move its inventory.
Bun Co’s debt to equity at 44.6% is lower than the sector average of 80%. This could be because
Bun Co acquired its property which has no associate finance. This also means that there will be
smaller amounts of interest charged to the statement of profit or loss but this is difficult to
confirm as the extract provided is only to profit from operations. There is a bank loan of $14.4m
and, although the bank loan interest rate of 10% might appear quite high, it is lower than the
ROCE of 26.9% (which means shareholders are benefiting from the borrowings). Finally, Bun Co
also has sufficient tangible non-current assets to give more than adequate security on any
future borrowings. Therefore there appears to be no adverse issues in relation to gearing.
Conclusion
Bun Co is right to be concerned about its declining profitability compared to previous years, but
from the analysis compared to the industry sector averages, it seems that Bun Co may be in a
strong position. The information shows that Bun Co has a much better profitability compared to
the industry, but the worrying issue which could become a long-term problem is the length of
time Bun Co is holding inventory. Bun Co should seriously consider the strategy of reducing their

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 317

prices to enable them to sell more inventory and reduce wastage. Should Bun Co wish to raise
finance in the future, it seems to be in a strong position to do so.

EXAMINER’S COMMENTS: PART (c)

Many candidates were able to identify some limitations such as different accounting policies,
but often, these were presented as a list rather than explained as per the requirement. In
some instances, candidates gave generic limitations of ratio analysis rather than relating to
industry specific limitations and markers were unable to award marks. Responses must
relate to the question asked.

EXAM SMART
What the Examiner is looking for here are comments that show that you have thought about
the nature of Bun Co’s actual business relative to the industry sector. Look carefully at the
scenario. For example:
 Bun Co has revalued its property (different accounting policies)
 Bun Co owns the shop; other companies may rent their premises.
 Bun Co has a year end of 31 December; the sector averages are for the year to 30 June;
(seasonal trading).
 Bun Co operates cafes as well as a bakery; what types of business do the sector
averages include?
Notice that you are only asked for three possible limitations (one mark each); the answer
below is more detailed than you would be expected to produce in the exam.

(c) Factors which may limit the usefulness of the comparison with business sector averages
It is unlikely that all the companies which have been included in the sector averages will use the
same accounting policies. In the example of Bun Co, it is apparent that it has revalued its
property; this will increase its capital employed and (probably) lower its gearing (compared to if
it did not revalue). Other companies in the sector may carry their property at historical cost.
There could also be differences as Bun Co owns the shop, and yet other companies in the sector
may not own the freehold and may just rent the shop space. Dependent on how the
depreciation compares to the equivalent rate would lead to differences in the margins
experienced by each company.
The accounting dates may not be the same for all the companies. In this example the sector
averages are for the year ended 30 June 20X7, whereas Bun Co’s are for the year ended 30
December 20X7. If the sector is exposed to seasonal trading (which could be likely if there are
cakes made for Christmas orders, large bread orders for Christmas and New Year parties), this
could have a significant impact on many ratios, in particular working capital based ratios. To
allow for this, perhaps Bun Co could prepare a form of adjusted financial statements to 30 June
20X7.
It may be that the definitions of the ratios have not been consistent across all the companies
included in the sector averages (and for Bun Co). This may be a particular problem with ratios
like gearing as there are alternative methods used to calculate it (inventory days used costs of
sales in the calculation, but industry could use purchases). Often agencies issue guidance on
how the ratios should be calculated to minimise these possible inconsistencies. Of particular
relevance in this example is that it is unlikely that other bakery stores will have a purchased
trademark.

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Sector averages are just that: averages. Many of the companies included in the sector may not
be a good match to the type of business and strategy of Bun Co. This company not only has
bakery stores but cafés too and this may cause distortions if comparing to companies within the
sector who do not have the same facilities. Also, some companies may adopt a strategy of high-
end specialist loaves, cakes and patisserie goods which have high mark-ups, but usually lower
inventory turnover, whereas other companies may adopt a strategy of selling more affordable
bread and cakes with lower margins in the expectation of higher volumes.
Marking guide Marks
(a) Inventory adjustment 2
Ratios 5
Max 7
(b) Profitability 5
Financial position 4
Conclusion 1
Max 10
(c) Sector comparison limitations Max 3
Maximum marks available 20

3 PIRLO CO
EXAMINER’S COMMENTS: PART (a)
On the whole, candidates demonstrated a sound knowledge of calculating a disposal
gain/loss for a group but often struggled with the relatively straightforward calculation for
the parent company gain.
The most common mistake made by candidates was the inclusion of goodwill in the disposal
calculation at its closing value.

EXAM SMART
Remember that goodwill should be valued at the date of acquisition and reviewed annually
for impairment. Any increases in goodwill are not accounted for in the group financial
statements.

(a) Gain/loss on disposal

(i) Individual financial statements of Pirlo Co
$000
Sales proceeds 300,000
Cost of investment (210,000)
Gain on disposal 90,000

(ii) Consolidated financial statements of the Pirlo group

$000
Sales proceeds 300,000
Less: goodwill (70,000)
Less: net assets ($260m + $50m FV) (310,000)
Add: NCI 66,000
Loss on disposal (14,000)

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 319

EXAMINER’S COMMENTS: PART (b)

Candidates were specifically told not to adjust for the disposal calculation in part (a), yet
many still attempted to adjust the profit figures. This resulted in incorrect ratio calculations.
If the same error was made to profit more than once, then candidates were given the
benefit of the own figure marking rule provided that the calculation was visible.
Other errors noted by the marking team on the calculation of ratios included some
candidates using profit before tax when calculating operating profit margin and the inverse
of the fraction was often used for interest cover. It is likely that you will be required to
perform some ratio calculations in every financial reporting exam and therefore you must
ensure that you are familiar with the formula.

EXAM SMART
Always support your calculations with clear workings. Even if your final answer is wrong, the
Examiner may still be able to give you some marks for using the correct method or for
picking up some of the right figures.

(b) Key ratios

20X9 20X8
Gross profit margin 45.8% 44.9%
(97,860/213,480) × 100% (97,310/216,820) × 100%
Operating margin 11.9% 13.5%
(25,500/213,480) × 100% (29,170/216,820) × 100%
Interest cover 1.43 1.8
(25,500/17,800) (29,170/16,200)

EXAMINER’S COMMENTS: PART (c)

Those candidates who used the requirements to give their analysis structure generally
tended to score well. Some candidates used the requirements as headings in their analysis
which was pleasing to see, as this often led to sensible comments being made. However,
many candidates overlooked this prompt in the requirement and as a result provided some
superficial analysis. This was disappointing to see as previous examiner’s commentary has
expressed the importance of using the requirement to structure an answer.
The marking team noted that, unfortunately, many candidates continue to provide a weak
analysis of the performance of an entity by simply stating that one ratio is bigger or smaller
than another. These types of comments are likely to score relatively few marks as there is no
actual analysis of the company being provided.
The marking team commented on an increase in the number of candidates attempting to
provide a conclusion to their analysis which was particularly pleasing to see. This is
something that candidates should be encouraged to continue to do.

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EXAM SMART
It is important that you use the scenario in the question.
For example, Samba’s operating profit margin looks extremely high at 81%. However, the
notes state that:
 Pirlo has been renting property to Samba at a reduced rate; and
 Samba has disposed of properties during the year.
Both these events will have increased Samba’s profit from operations for the current period,
but they will not be repeated in future periods, meaning that Samba’s profit margins will
probably fall.

(c) Comment on performance and interest cover

The revenue for the group for the year has actually declined in the year. The scenario states that
the Samba Co revenue has remained the same in both years, so this decrease appears to
represent a decline from the remaining companies in the group.
Whilst there has been an overall decline in revenue, the gross profit margin has improved in
20X9 (44.9% increased to 45.8%). Samba Co has a significantly higher gross profit margin (81%)
in relation to the rest of the group, suggesting that the rest of the Pirlo group operates at a
lower gross profit margin.
The operating profit margin of the group has deteriorated in 20X9 (13.5% has decreased to
11.9%). This is initially surprising due to the significant increase in the operating profit margin of
Samba Co (41% has increased to 66%). However, the increase in Samba Co’s operating profit
margin may not represent a true increase in performance in Samba Co due to the following:
– Samba Co has recorded a $2m profit on disposal of its properties, which will inflate its
profit from operations in 20X9.
– In addition to this, Samba Co has been charged a lower rate of rent by Pirlo Co, which
may also have the impact of making the profit from operations in 20X9 higher than the
previous period if the rent is lower than the depreciation Samba Co would have recorded.
This concern is further enhanced when the share of the profit of the associate is considered.
This has contributed $4.6m to the profit for the year, which is nearly 40% of the overall profit of
the group.
The combination of these factors raises concerns over the profitability of Pirlo Co and any other
subsidiaries in the group, as it appears to be loss making. Some of these losses will have been
made through the loss of rental income through the new arrangement.
The joining fee paid to Samba Co’s previous directors is a one-off cost paid by Pirlo Co.
Consequently, it is included in the consolidated statement of profit or loss for the year ended
31 December 20X9. A similar amount was paid by Samba Co in the form of an annual bonus in
the year ended 20X8. Therefore, 20X8 and 20X9 are comparable but the joining fee represents a
cost saving for Pirlo Co in future years.
The decline in interest cover appears to be driven by both the decrease in profit from
operations and an increase in finance costs. As Samba Co has a large amount of debt, and much
lower interest cover than the group, this should increase in future periods.
The disposal of Samba Co appears to be surprising, given that it generates high margins
compared to the rest of the group. The loss on disposal of Samba Co should be brought into the
consolidated statement of profit or loss. This would reduce profit from operations by a further
$14m and would reduce the operating profit margin further to 5.4%.

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 321

The sale of Samba Co at a loss is very surprising given that it appears to contribute good results
and has a history of strong performance.
Whilst selling Samba Co at a loss may be a strange move, Pirlo Co may believe that the real
value of the Samba Co business has been secured by employing the two founding directors.
Conclusion
The disposal of Samba Co does not appear to be a good move, as the Pirlo group seem to be
losing its most profitable element. The Pirlo Co directors seem to have made a risky decision to
move into the software development industry as a competitor of Samba Co.
Marking guide Marks
(a) Disposal 5
Max 5
(b) Ratios 3
Max 3
(c) Revenue/margins 6
Other and conclusion 6
Max 12
Maximum marks available 20

4 DUKE CO
EXAMINER’S COMMENTS: PART (a)
Many candidates treated the professional fees incurred by Duke Co as an expense in
Smooth Co’s calculation of profit. Professional fees (acquisition costs) are not included in the
calculation of goodwill but should instead be expensed as incurred. This cost would need to
be deducted from Duke Co’s profit within the retained earnings working rather than Smooth
Co’s profit.
When looking at the detail in the question, Duke Co acquired Smooth Co on 1 January 20X8.
The acquisition therefore took place six months into the accounting year. As a result, when
looking to identify Smooth Co’s post-acquisition profit, the profit for the year of $7 million
needed to be time apportioned 6/12. Similarly, fair value amortisation on the brand also
needed to be time apportioned and this was often omitted by candidates.
Finally, for those candidates who calculated unrealised profit on the non-current asset
transfer correctly, many included this as a deduction against Duke Co. It was Smooth Co that
transferred the asset and made the profit on disposal and therefore the unrealised profit
needed to be split between both non-controlling interests and retained earnings according
to the percentage of ownership.

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(a) Calculation of NCI and retained earnings

$000
Non-controlling interest (W1) 3,740
Retained earnings (W2) 14,060

(W1): Non-controlling interest

NCI at acquisition 3,400
NCI at S post acq – 20% × ($7m × 6/12) 700
NCI at FV depn – 20% × ($3m/5 × 6/12) (60)
NCI × URP – 20% × $1.5m (sale of land) (300)
Total 3,740

Alternative presentation:
$000
NCI at acquisition 3,400
Profit – ($7m × 6/12) 3,500
FV depn – ($3m/5 × 6/12) (300)
URP – ($4,000 - $2,500) (1,500)
1,700
× 20% 340
3,740

(W2): Retained earnings

Duke Smooth
$000 $000
Per question 13,200 7,000
Professional fees (500)
Additional depreciation on FV adj ($3m/5 × 6/12) (300)
Unrealised profit on sale of land (1,500)
At acquisition ($7m × 6/12) (3,500)
1,700
Smooth (80% × 1,700) 1,360
14,060

EXAMINER’S COMMENTS: PART (b)

Most candidates correctly calculated current ratio for both 20X7 and 20X8 but for many,
calculating return on capital employed and gearing correctly proved to be more challenging.
Many candidates calculated gearing incorrectly by using the formula debt / (debt + equity).
This is an allowed calculation if the question requirement was non-specific. Candidates must
be sure to read the requirement carefully as the question specifically asked for gearing to be
calculated as debt/equity.
Candidates are reminded to provide workings for their ratio calculations. This is because an
incorrect answer that has no supporting workings will be awarded no marks. However, the
same response may have been awarded full marks if the incorrect balance was found using
the candidates ‘own figures’ from part (a).

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(b) Ratios
20X8 Working 20X7 Working
Current 1:4:1 30,400/21,300 1:8:1 28,750/15,600
ROCE 31.3% 14,500 (11,000 + 6,000 + 14,060 + 3,740 + 11,500) 48.1% 12,700/(19,400 + 7,000)
Gearing 33% (11,500/11,000 + 6,000 + 14,060 + 3,740) 36.1% (7,000/19,400)

EXAMINER’S COMMENTS (C)

Despite the requirement being very clear, many candidates failed to refer to the acquisition
at all.
For some candidates, the analysis was very weak with many simply noting that a ratio had
increased or decreased in the year. This approach will continue to secure limited marks as it
is not providing an analysis of why there was a change in performance during the year.
Many candidates stated that the current ratio was very poor, and that the company faced
going concern issues as the ratio was below the ‘norm’ of 2:1. These comments received
few, if any marks.
Candidates are encouraged to provide a conclusion for any analysis requirement, pulling
together the key findings from the scenario and the analysis performed.

EXAM SMART
Before you start writing, read through the scenario carefully. The Examiner expects you to
use the scenario to suggest possible reasons why a ratio may have changed.
As usual, there are several important things to notice:
 Duke Co is a retailer. Smooth Co is in the service industry. Duke will have large
inventories and probably relatively few receivables (most sales are likely to be for cash).
Smooth will hold very little (if any) inventory; on the other hand it may have quite
significant receivables (because it is has a small number of large clients – see note (iii)).
You are also given the receivables collection period (which has increased significantly)
and the inventory holding period for both years (which has fallen) (see note (v)). This
may help to explain why the current ratio has fallen.
 The consideration for acquiring Smooth Co was partly cash and partly shares. This
means that Duke’s cash and therefore its liquidity have probably reduced (not included
in the answer below, but one possible reason for the fall in the current ratio). It also
means that share capital and share premium have both increased (see the extracts
from the financial statements). This affects both ROCE (reducing it) and gearing (also
reducing it – see below)).
 There has been an increase in long-term loans, but Duke has not increased its
borrowings during the year (see note (iv)). This means that the increase must have been
due to the acquisition.
 An increase in long-term loans increases gearing. Therefore the reason why gearing has
reduced (improved) slightly must be the increase in share capital and share premium.
 Smooth Co was acquired six months into the year. This means that Smooth Co’s profit
has only been consolidated for six months. All Smooth’s contracts are profitable (see
note (iii). This suggests that profits will be higher in future (when a full year of Smooth’s
profits will be included). Therefore ROCE is likely to improve in the following year.

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(c) Analysis
Performance
The ROCE has declined significantly from 20X7. However, rather than being due to a reduction
in profit from operations which has increased slightly ($14.5m from $12.7m), it is due to a
significant increase in capital employed which has gone from $26.4m to nearly $50m. This will
be partly due to the fact that Smooth Co was acquired through the issue of shares in Duke Co.
The ROCE will look worse in the current period as it will only contain six months’ profit from
Smooth, but the entire liabilities and non-controlling interest at the reporting period.
As Smooth Co made a profit after tax of $7m in the year, six months of this would have made a
significant increase in the overall profit from operations. If excluded from the consolidated
SOPL, it suggests that there is a potential decline (or stagnation) in the profits made by Duke Co.
Position
The current ratio has decreased in the year from 1.8:1 to 1.4:1. Some of this will be due to the
fact that Smooth Co is based in the service industry and so is likely to hold very little inventory.
The large fall in inventory holding period would also support this.
An increase in trade receivables is perhaps expected given that Smooth Co is a service based
company. This is likely to be due to Smooth Co’s customers having significant payment terms,
due to their size.
This increase in receivables collection period could mean that Smooth Co has a weaker cash
position than Duke Co. While the size of the customers may mean that there is little risk of
irrecoverable debts, Smooth Co may have a small, or even overdrawn, cash balance due to this
long collection period.
The gearing has reduced in the year from 36.1% to 33%. This is not due to reduced levels of
debt, as these have actually increased during the year. This is likely to be due to the
consolidation of the debt held by Smooth Co, as Duke Co has not taken out additional loans in
the year.
This increase in debt has been offset by a significant increase in equity, which has resulted from
the share consideration given for the acquisition of Smooth Co.
Conclusion
Smooth Co is a profitable company and is likely to have boosted Duke Co profits, which may be
slightly in decline. Smooth Co may have more debt and have potentially put pressure on the
cash flow of the group, but Duke Co seems in a stable enough position to cope with this.
Marking guide Marks
(a) Non-controlling interests 3
Retained earnings 3
Max 6
(b) Ratios 4
Max 4
(c) Performance 4
Position 5
Conclusion 1
Max 10
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 325

5 PERKINS CO
EXAMINER’S COMMENTS: GENERAL
The Examiner has highlighted this question as an example of how your knowledge of
consolidations might be tested in future.

(a) Gain on disposal in Perkins group consolidated statement of profit or loss

$000
Proceeds 28,640
Less: Goodwill (w1) (4,300)
Less: Net assets at disposal (26,100)
Add: NCI at disposal (w2) 6,160
4,400
(w1) Goodwill
$000
Consideration 19,200
NCI at acquisition 4,900
Less: Net assets at acquisition (19,800)
4,300
(w2) NCI at disposal
$000
NCI at acquisition 4,900
NCI% × S post acquisition
20% × (26,100 – 19,800) 1,260
6,160

EXAMINER’S COMMENTS: PART (B)

The question required an adjustment to the statement of profit or loss for the parent
following the disposal of the subsidiary mid-way through the year. Many candidates
incorrectly eliminated a full year’s revenue and expenses to find the balances relating to the
parent only. It is important to remember that a statement of profit or loss is a summary of
the performance of a business for an accounting period and therefore the candidates should
time apportion as appropriate.

(b) Adjusted P/L extracts:

$000
Revenue (46,220 – 9,000 (S × 8/12) + 1,000 (intra-group)) 38,220
Cost of sales (23,980 – 4,400 (S × 8/12)) [see note] (19,580)
Gross profit 18,640
Operating expenses (3,300 – 1,673 (S × 8/12) + 9,440 profit on disposal) (11,067)
Profit from operations 7,573
Finance costs (960 – 800 (S × 8/12)) (160)
Note: In the separate financial statements of Perkins, the intra-group sale resulted in $1m
revenue and $0.7m costs of sales. The consolidation adjustment would have been:
Dr Revenue (Perkins) $1m
Cr Cost of Sales (Swanson) $1m

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Therefore we need to add back the $1m revenue that was eliminated. There is no adjustment to
cost of sales because this relates to the financial statements of Swanson. (The revenue and
expenses of Swanson are being eliminated anyway/do not relate to Perkins).
There would have been no PUP adjustment because all the goods had been sold to third parties
by 1 September 20X7 (the date on which Swanson was sold).

EXAM SMART
Notice that the $9.44m profit on disposal of Swanson is added back to operating expenses
(i.e. removed from profit). The question states that $9.44m is the gain to Perkins and that it
is the correct amount that should be shown in the individual financial statements.
There are two reasons for this:
 The question requirement specifically states that the gain on disposal of the subsidiary
should be removed
 The gain has been presented in the wrong place. It is not an operating expense. (As it is
a material amount, it would be presented as a separate line item in the statement of
profit or loss.)

(c) Ratios of Perkins Co, eliminating impact of Swanson Co and the disposal during the year
20X7 Working 20X7
recalculated (see P/L above) original 20X6
Gross profit margin 48.8% 18,640/38,220 48.1% 44.8%
Operating margin 19.8% 7,573/38,220 41% 16.8%
Interest cover 47.3 times 7,573/160 19.7 times 3.5 times

EXAM SMART
In this type of question there are normally only a very small number of marks available for
ratio calculations (in this case, 2 marks out of 20 for three ratios). Only calculate the ratios
you have been asked to calculate. Even if you do have enough information to calculate any
others, this will not get you any additional marks.

(d) Analysis of Perkins Co

EXAMINER’S COMMENTS: PART (D)

The analysis was often very poor. Many candidates did not actually mention the
comparability issues despite this being a clear requirement. Weaker discussions also often
omitted any mention of the disposal of the subsidiary and the impact this might have had on
the ratios and performance of the company

Gross profit margin

In looking at the gross margin of Perkins Co, the underlying margin made by Perkins Co is higher
than in 20X6.
After the removal of Swanson Co’s results, this continues to increase, despite Swanson Co
having a gross margin of over 50%.

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It is possible that Swanson Co’s gross profit margin was artificially inflated by obtaining cheap
supplies from Perkins Co. Perkins Co makes a margin of 48.8%, but only sold goods to Swanson
at 30%.
Operating margin
The operating margin appears to have increased significantly on the prior year. It must be noted
that this contains the profit on disposal of Swanson Co, which increases this significantly.
Removing the impact of the Swanson Co disposal still shows that the margin is improved on the
prior year, but it is much more in line.
Swanson Co’s operating margin is 32.6%, significantly higher than the margin earned by Perkins
Co, again suggesting that a profitable business has been sold. This is likely to be due to the fact
that Swanson Co was able to use Perkins Co’s facilities with no charge, meaning its operating
expenses were understated compared to the market prices.
It is likely that the rental income earned from the new tenant has helped to improve the
operating margin, and this should increase further once the tenant has been in for a full year.
Interest cover
Initially, the interest cover has shown good improvement in 20X7 compared to 20X6, as there
has been a significant increase in profits. Even with the profit on disposal stripped out, the
interest cover would still be very healthy.
Following the removal of Swanson Co, the interest cover is improved further. This may be
because the disposal of Swanson Co has allowed Perkins Co to repay debt and reduce the
interest expense incurred.
Conclusion
Swanson Co seems to have been a profitable company, which raises questions over the
disposal. However, some of these profits may have been derived from favourable terms with
Perkins Co, such as cheap supplies and free rental. It is worth noting that Perkins Co now has
rental income in the year. This should grow in future periods, as this is likely to be a full year’s
income in future periods.
Marking guide Marks
(a) Proceeds ½
Goodwill 2½
Net assets ½
NCI 1½
5
(b) Revenue and COS 2
Other costs 2
4
(c) Ratios 2
(d) Gross profit margin 2
Operating profit margin 5
Interest cover 1
Conclusion 1
9
Maximum marks available 20

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6 FUNJECT CO
EXAMINER’S COMMENTS: PARTS (a) AND (b)
Marks are awarded using the “own figure rule” i.e. if candidates use the correct formula to
calculate a ratio but it is based on the incorrect adjusted figure and they subsequently use
that ratio to provide an analysis, appropriate credit will be given for the ratio calculation and
the analysis, although not for the adjustment. This is why it is so important to provide
workings.
Sometimes the question will state how the overall adjustment to profit should be made
thereby testing candidates’ understanding of double-entry. However, candidates do not
always read the question carefully and so do not make the correct adjustment. This can
mean that a number of ratios are calculated incorrectly. However, candidates can be assured
that, due to the “own figure rule”, they will not lose all of the marks available. Future
candidates should ensure that they continue to answer the remainder of the question, even
if they think they have calculated an adjustment or a ratio incorrectly. Markers are unable to
award marks to an empty answer space.
Future candidates are also advised to review the logic of their ratio calculations; for
example, sometimes the receivables collection period (days) is calculated as trade
receivables/cost of sales × 365. There is no underlying logic to this calculation; the use of
credit sales gives the most logical denominator, but total revenue is an acceptable
substitute.

EXAM SMART
The adjustments and ratio calculations are not difficult in themselves, but you need to take
care with the restatement of operating expenses, particularly the adjustments for
management charges:
 The current management charge (paid to Gamilton) is calculated on the unadjusted
revenue figure
 The future management charge (payable to Funject) is calculated on the adjusted gross
profit figure (because it would be based on the estimated gross profit for future
periods, without the division that has been sold).
When you are calculating the current ratio and the acid test (quick) ratio, remember to
reduce the cash balance by $1,412,000 (see the note to requirement (b) of the question).

(a) Restated financial information

Statement of profit or loss
20X4
$000
Revenue (54,200 – 2,100 (note (1)) 52,100
Cost of sales (21,500 – 1,200 (note (1)) (20,300)
Gross profit 31,800
Operating expenses (W1) (12,212)
Profit before tax 19,588

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Restatement of operating expenses

20X4
$000
As per question 11,700
Less: expenses relating to non-core division (note (1)) (700)
Less: loss on disposal of non-core division (note (1)) (1,500)
Less: Gamilton management charge (54,200 × 1%) (note (2)) (542)
Add: Funject management charge (31,800 × 10%) (note (2)) 3,180
Less: rent charged by Gamilton (note (3)) (46)
Add: commercial rent (note (3)) 120
Restated operating expenses 12,212

Profit has decreased from $21,000,000 to $19,588,000 and the resulting journal entry will be
($000s):
Dr Retained earnings (21,000 – 19,588) $1,412
Cr Cash $1,412
Ratio calculations
Workings 20X4
Gross profit margin 31,800/52,100 × 100 61%
Operating profit margin 19,588/52,100 × 100 38%
Receivables collection period (days) 5,700/52,100 × 365 40
12,900 – 1,412
Current ratio 11,600 1:1
Acid test (quick) ratio 12,900 – 4,900 – 1,412/11,600 0.57 : 1
16,700
Gearing (debt/equity) 9,000 – 1,412 220%

EXAMINER’S COMMENTS: PART (C)

The analysis often shows little insight into the scenario provided in the question. Most
answers confine themselves to giving an explanation of whether the entity's ratio was higher
or lower than its comparative. Very few answers provide any further analysis as to why this
increase or decrease might be the case. Better answers often make use of the information in
the scenario; for example, comment on the differing performance of a division that has been
disposed of or the likely implications if a company was acquired. Although a formal report is
not often required, many candidates provide a short conclusion to their analysis which is
encouraged.

Commentary on performance
Profitability
The discontinued operation had a gross profit % (GP%) of 43% (900/2,100 × 100) and an
operating profit % (OP%) of 10% (200/2,100 × 100). Before adjusting for the disposal, Aspect Co
has a GP% of 60%. After an adjustment has been made to reflect the disposal, Aspect Co’s GP%
is 61% which is higher than the industry average of 45%. Thus, it would appear that the disposal
of the non-core division has had a positive impact on the GP% of Aspect Co. Such a positive
comparison of the GP% to the industry average would suggest that Aspect Co has negotiated a
very good deal with its suppliers for the cost of goods in comparison to its competitors; the GP%
is 16% (61 – 45) higher than the industry average.
However, when considering the OP%, the financial statements have been adjusted to reflect:
(i) the disposal of the discontinued operation; (ii) a new management charge which would be
imposed by Funject Co; and (iii) commercial rent charges. These adjustments result in an OP% of

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38%. So, although the OP% is still 10% (38 – 28) higher than the industry average, it would
appear that some of the advantage of having such a good deal with its suppliers is lost when
operating costs are incurred. The OP% does not outperform the industry average to the same
extent that GP% did. Although the management charge will be eliminated as an intra-group
transaction on consolidation, it will still have an impact in the individual financial statements of
Aspect Co. However, there is no indication of what this charge is for and whether or not it
represents a market value for these costs. The rent of $120,000 is deemed to be a fair market
value which would indicate that the previous rent charge of $46,000 was artificially low. If
Funject Co acquires Aspect Co, it may wish to capitalise on the relationship which Aspect Co has
with its supplier of goods but it might also need to investigate the composition of operating
costs other than those described above to see if any of these can be avoided/reduced.
Liquidity
Aspect Co’s receivables collection period appears to be comparable with the KPIs provided
(40 days in comparison to 41 days). Terms of trade of 30 days are quite reasonable (though this
usually depends on the type of business) and so there are no causes for concern here.
Given that Aspect Co’s receivables collection period is comparable to the industry average, the
difference in the current ratio (1.1:1 in comparison to 1.6:1) can only be explained by either
lower current assets other than receivables (for example, cash) or higher current liabilities. As
Aspect Co’s cash balance does not appear to be low ($2.3m as reported or $0.9m after the
notional adjustment). This suggests that its liabilities might be higher than average. Perhaps
Aspect Co’s favourable relationship with its suppliers also extends to longer than average credit
terms. As Aspect Co’s acid (quick) ratio (0.57:1) is much less than the industry average (1.4:1),
this would also suggest that Aspect Co is holding a higher than average level of inventory. This
may raise a concern about Aspect Co’s ability to sell its inventory. There is also a current tax bill
to consider. Indeed, if Aspect Co were asked to settle its current liabilities from merely its
receivables and bank, it would be unable to do so. Perhaps Funject Co may wish to further
investigate the procedures associated with the purchase and holding of Aspect Co’s inventory
prior to a takeover. As a parent, Funject Co should be able to influence these procedures and
have more control over the levels of inventory held.
Gearing
Aspect Co appears to be highly geared but perhaps this is not a huge cause for concern because
it appears to be a highly geared industry (220% compared to 240%). It may be that the proceeds
from the sale of the non-core division can be/were used to repay loans. As the gearing for the
industry is higher than that of Aspect Co, it may be that Aspect Co could still increase
borrowings in future. If so, Aspect Co may need to increase working capital efficiency and
reduce costs in order to generate enough cash to service higher borrowings.
Conclusion
Overall, Aspect’s statement of financial position gives little cause for concern; the profitability
margins appear to be healthy although further investigations of operating costs and working
capital efficiency may be required. More information also needs to be obtained about the
nature of the business and perhaps the financial statements of several years (as opposed to
one) might also be beneficial.

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 331

Marking guide Marks

(a) Adjustment to revenue and cost of sales 1
Disposal of non-core division 1
Management charge (remove old, add new) 2
Rent expense (remove current, add commercial) 1
5
(b) Calculation of ratios 5
(c) Profitability comments 5
Liquidity comments 3
Gearing comments 1
Conclusion 1
10
Maximum marks available 20

7 GREGORY CO
EXAMINER’S COMMENTS: PART (a)
The comments required in response to the Chief Executive Officer (CEO)'s four observations
were not at the expected standard. Most candidates launched into irrelevant detail
regarding ratio movements and did not step back and consider the reason for the difference
between the two years' financial statements, specifically that the statement of profit or loss
for the second year included the consolidated results of the newly-acquired subsidiary but,
crucially, only for six months. In the statement of financial position, at the end of the second
year, the subsidiary’s assets were included on the basis of their fair values and those of the
parent were at historical cost (in the absence of a revaluation surplus).
The inclusion next year of a full year's results for the subsidiary should improve the reported
profitability of the group. There were two corrections to the CEO's calculation of earnings
per share (EPS) (using the profit for the year attributable to the equity holders of the parent
and the weighted average for the shares issued mid-year) but a majority of candidates
missed both these adjustments although many did point out that the EPS had barely
changed as although more shares had been issued, profit had increased. The low margin on
inter-company sales was seen by many candidates as, correctly, not affecting the
consolidated financial statements or the overall profitability of the group. Some candidates
did mention the impact of any unrealised profit on inventories held from such trading, but
this was not likely to have a material effect. The final observation was rarely addressed:
candidates needed to work out the price at which the shares were issued by the parent (they
were the only shares issued during the year) using the share capital and share premium
figures and compare this with the 15% increase in the share price since acquisition as an
indicator of the market's favourable view of the acquisition.

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(a) Note: References to 20X6 and 20X5 are to the years ending 31 March 20X6 and 20X5
respectively.
Comment (1)
I see the profit for the year has increased by $1m which is up 20% on last year, but I thought it
would be more as Tamsin Co was supposed to be a very profitable company.
There are two issues with this statement: first, last year’s profit is not comparable with the
current year’s profit because in 20X5 Gregory Co was a single entity and in 20X6 it is now a
group with a subsidiary. A second issue is that the consolidated statement of profit or loss for
the year ended 31 March 20X6 only includes six months of the results of Tamsin Co, and,
assuming Tamsin Co is profitable, future results will include a full year’s profit. This latter point
may, at least in part, mitigate the CEO’s disappointment.
Comment (2)
I have calculated the EPS for 20X6 at 13 cents (6,000/46,000 × 100 shares) and at 12.5 cents for
20X5 (5,000/40,000 × 100) and, although the profit has increased 20%, our EPS has barely
changed.
The stated EPS calculation for 20X6 is incorrect for two reasons: first, it is the profit attributable
to only the equity shareholders of the parent which should be used and second the 6 million
new shares were only in issue for six months and should be weighted by 6/12. Thus, the correct
EPS for 20X6 is 13.3 cents (5,700/43,000 × 100). This gives an increase of 6% (13.3 – 12.5)/12.5)
on 20X5 EPS which is still less than the increase in profit. The reason why the EPS may not have
increased in line with reported profit is that the acquisition was financed by a share exchange
which increased the number of shares in issue. Thus, the EPS takes account of the additional
consideration used to generate profit, whereas the trend of absolute profit does not take
additional consideration into account. This is why the EPS is often said to be a more accurate
reflection of company performance than the trend of profits.
Comment (3)
I am worried that the low price at which we are selling goods to Tamsin Co is undermining our
group’s overall profitability.
Assuming the consolidated financial statements have been correctly prepared, all intra-group
trading has been eliminated, thus the pricing policy will have had no effect on these financial
statements. The comment is incorrect and reflects a misunderstanding of the consolidation
process.
Comment (4)

EXAM SMART
This looks difficult on a first glance, but the Examiner would not have asked for it without
providing the information, somewhere in the question. In the first paragraph, we are told
that the share issue to acquire Tamsin Co was (a) the only share issue during the year, and
(b) the shares were recorded at market price.
Once you know that, it is quite simple to work out the share price at the date of acquisition.

I note that our share price is now $2.30, how does this compare with our share price
immediately before we bought Tamsin Co?
The increase in share capital is 6 million shares, the increase in the share premium is $6m, thus
the total proceeds for the 6 million shares was $12m giving a share price of $2.00 at the date of
acquisition of Tamsin Co. The current price of $2.30 presumably reflects the market’s favourable
view of Gregory Co’s current and future performance.

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ACCA FR Question Bank Part 2 answers: 5: Interpreting financial statements 333

EXAMINER’S COMMENTS: PART (b)

The four ratio calculations were generally well done although: for ROCE, capital employed
should include the non-controlling interest as this is part of equity (those who took total
assets less current liabilities had no problem with this) and the calculation of net asset
turnover (revenue/capital employed) was either omitted or the figures inverted. A minority
of candidates attempted to adjust for the inter-company transactions before calculating
ratios which was not required as we must assume that inter-company sales (and purchases)
had already been correctly eliminated on consolidation.
In many cases the impact of the acquisition (as answered in part (a)) was completely ignored
and candidates compared this year and last year results as if they were directly comparing
like with like. An example of this is the impact of reporting just six months’ results for the
subsidiary in the second year; this was often commented on in part (a) and then ignored in
part (b).
The gross profit margin fell between the two years; this was the ultimate cause of the fall in
the ROCE but, as was mentioned quite often, it is not enough to say gross margin fell
because cost of sales increased without also suggesting prices may have fallen. The
relationship between gross and operating profit margin was often misunderstood. Many
candidates stated that the decrease in the operating margin was caused by increased
operating costs when in fact operating costs were a lower % of revenue in the second year
(despite any one-off costs of the acquisition) and the cause of the decrease was the
reduction in the gross profit margin.
Very few candidates used the information in the question regarding the non-controlling
interest in the subsidiary's profit to determine the subsidiary's possible contribution to the
group's profit for the year and thus determine that there could have been a decline in the
profit earned by the parent alone in the second year. Also the subsidiary's net assets
(including goodwill) are included in the statement of financial position at their fair value (this
was the reason the question said values of property, plant and equipment had been rising)
but the parent's assets are still at their (lower) historical cost and this could distort
comparison between the ROCE and asset turnover of both years.

EXAM SMART
This question features a set of consolidated financial statements, but the ratios are
calculated in exactly the same way as for a single company.
As you interpret a set of consolidated financial statements, remember the basic
consolidation adjustments and try to think about the ways in which these might affect the
final figures:
 The subsidiary’s assets are measured at their fair value at the date of acquisition
 Only post-acquisition profits of the subsidiary are included
 Intra-group transactions and balances are eliminated
Always pay attention to any additional information you are given. In this question, note (2)
states that the values of property, plant and equipment have been rising for several years,
but the statements of financial position do not include a revaluation surplus. Therefore,
Gregory Co must be measuring its assets at historic cost, meaning that that they are
probably significantly understated, meaning that the individual ROCE for Gregory Co will be
artificially high compared with that of Tamsin Co (assets at fair value).
Notice the way in which the non-controlling interest is used to do a rough calculation of
Tamsin Co’s profit for the year. Be prepared to do similar calculations in the real exam.

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Read through this answer carefully. It is probably more detailed than the Examiner would
realistically expect from a candidate in the time available, but it provides very useful
guidance on what to expect in future papers.

20X6 20X5
(i) Return on capital employed (ROCE)
(7,500/74,300 × 100)/(6,000/53,000 × 100) 10.1% 11.3%
(ii) Net asset turnover
(46,500/74,300)/(28,000/53,000) 0.63 times 0.53 times
(iii) Gross profit margin
(9,300/46,500 × 100)/(7,200/28,000 × 100) 20.0% 25.7%
(iv) Operating profit margin
(7,500/46,500 × 100)/(6,000/28,000 × 100) 16.1% 21.4%
Looking at the above ratios, it appears that the overall performance of Gregory Co has declined
marginally; the ROCE has fallen from 11.3% to 10.1%. This has been caused by a substantial fall
in the gross profit margin (down from 25.7% in 20X5 to 20% in 20X6); this is over a 22%
(5.7%/25.7%) decrease. The group/company has relatively low operating expenses (at around
4% of revenue), so the poor gross profit margin feeds through to the operating profit margin.
The overall decline in the ROCE, due to the weaker profit margins, has been mitigated by an
improvement in net asset turnover, increasing from 0.53 times to 0.63 times. Despite the
improvement in net asset turnover, it is still very low with only 63 cents of sales generated from
every $1 invested in the business, although this will depend on the type of business Gregory Co
and Tamsin Co are engaged in.
On this analysis, the effect of the acquisition of Tamsin Co seems to have had a detrimental
effect on overall performance. But this may not necessarily be the case; there could be some
distorting factors in the analysis. As mentioned above, the 20X6 results include only six months
of Tamsin Co’s results, but the statement of financial position includes the full amount of the
consideration paid to acquire Tamsin Co, plus the full fair value of the 25% non-controlling
interest at acquisition. [The consideration has been calculated (see comment (4) above) as
$12m for the parent’s 75% share. The fair value of the non-controlling interest at the date of
acquisition would have been $3.3m (3,600 – 300 share of post-acquisition profit) for the
non-controlling interest’s 25%, giving a total amount of $15.3m.] The above factors
disproportionately increase the denominator of ROCE which has the effect of worsening the
calculated ROCE. This distortion should be corrected in 20X7 when a full year’s results for
Tamsin Co will be included in group profit. Another factor is that it could take time to fully
integrate the activities of the two companies and more savings and other synergies may be
forthcoming such as bulk buying discounts.
The non-controlling interest share in the profit for the year in 20X6 of $300,000 allows a rough
calculation of the full year’s profit of Tamsin Co at $2.4m (300,000/25% × 12/6, i.e. the $300,000
represents 25% of 6/12 of the annual profit). This figure is subject to some uncertainty such as
the effect of probable increased post-acquisition depreciation charges. However, a profit of
$2.4m on the investment of $15.3m represents a return of 16% (and would be higher if the
profit was adjusted to a pre-tax figure) which is much higher than the current year ROCE (at
10.1%) of the group. This implies that the performance of Tamsin Co is much better than that of
Gregory Co (as a separate entity) and that Gregory Co’s performance in 20X6 must have
deteriorated considerably from that in 20X5 and this is the real cause of the deteriorating
performance of the group.
Another issue potentially affecting the ROCE is that, as a result of the consolidation process,
Tamsin Co’s net assets, including goodwill, are included in the statement of financial position at
fair value, whereas Gregory Co’s net assets appear to be based on historical cost (as there is no
revaluation surplus). As the values of property, plant and equipment have been rising, this

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effect favourably flatters the 20X5 ratios. This is because the statement of financial position of
20X5 only contains Gregory Co’s assets which, at historical cost, may considerably understate
their fair value and, on a comparative basis, overstate 20X5 ROCE.
In summary, although on first impression the acquisition of Tamsin Co appears to have caused a
marginal worsening of the group’s performance, the distorting factors and imputation of the
non-controlling interest’s profit in 20X6 indicate the underlying performance may be better
than the ratios portray and the contribution from Tamsin Co is a very significant positive. Future
performance may be even better. `Without information on the separate financial statements of
Tamsin Co, it is difficult to form a more definite view.
Marking guide Marks
(a) 2 marks for each reply to the CEO’s observations 8
(b) 1 mark for each pair of ratios 4
1 mark per relevant comment on performance up to 8
12
Maximum marks available 20

8 PASTRY CO
EXAMINER’S COMMENTS: PART (a)
In a single entity interpretation question, it is not uncommon for candidates to be asked to
make some adjustments to figures before calculating ratios. These adjustments could be to
alter financial statements for an accounting policy (e.g. to remove a revaluation, as in this
question) or to correct errors in order to make financial statements more comparable. This is
done to test a candidate’s knowledge of double-entry and IFRS Standards, in addition to
providing the analysis required. The adjustments in (a) had mixed results. Some candidates
applied another revaluation, rather than removing the revaluation to prepare the results as
if Dough Co had used the cost model. Other candidates omitted the adjustments completely,
scoring no marks on the section.
A trickier area that candidates struggled with was to adjust for the extra depreciation that
would no longer be incurred if the cost model had been used. Also, only a minority of
candidates remembered that any adjustment they made to the statement of profit or loss
would also be reflected within the retained earnings.
Candidates were then required to recalculate ratios based on their adjustments in (a). As
always, the ‘own figure’ rule was applied here. This means that if candidates had made
errors on the earlier adjustments of their financial statements they were given the marks for
using their own adjusted figures, even if they were incorrect.
The use of the ‘own figure’ rule means that the only candidates who would not score full
marks on the ratio calculations were those who either did not know the formulae for those
ratios or those who did not provide workings. If a candidate made an error in adjusting their
figures and then did not provide a working for their adjusted ratio, it was difficult to see how
they had arrived at the calculations. Markers will not try to guess or assume what the
candidate has done, so it is essential that detailed workings are shown.

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(a) Adjusted financial statement extracts and ratios for Dough Co

As per
question Adjustment Adjusted
$’000 $’000 $’000
SOPL:
Revenue 16,300 16,300
Cost of sales 8,350 +2,500 10,850
Gross profit 7,950 5,450
Operating expenses 4,725 –1,000 1,225
Profit from operation 3,225 –2,500 4,225

SOFP:
Property 68,500 –30,000 39,500
+1,000
Equity shares 1,000 1,000
Revaluation surplus 30,000 –30,000 nil
Retained earnings 2,600 +1,000 3,600
Loan notes 5,200 5,200

Cook Co Dough Co Workings Dough Co

(original) (restated)
Gross profit margin 32.3% 48.8% 5,450/16,300 × 100 33.4%
Operating profit margin 23.3% 19.8% 4,225/16,300 × 100 25.9%
ROCE 18.8% 8.3% 4,225/(4,600 + 5,200) × 100 43.1%

EXAM SMART
The explanations below were not part of the requirement but are included to assist
candidates in understanding how the adjustments were determined.

If Dough Co accounted for properties under the cost model:

 Depreciation would reduce by $1,000,000 ($30 million/30 years) making operating
expenses $3,725,000, and profit from operations $4,225,000.
 Retained earnings would increase by $1,000,000 to $3,600,000.
 Revaluation surplus of $30 million would be removed.
 Property would decrease by $29 million ($30 million less extra depreciation).
If Dough Co accounted for amortisation in cost of sales:
 Cost of sales would increase by $2.5 million, making gross profit $5,450,000.
 Operating expenses would decrease by $2.5 million, but profit from operations would
remain at $4,225,000.

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EXAMINER’S COMMENTS: PART (b)

The FR examinations team have mentioned this in most of the examiners’ reports which
have been written, but it is absolutely essential that candidates use the information in the
scenario in answering the question. Far too many candidates are still trying to answer
analysis questions with explanations rote learned from a textbook. This means that answers
are often generic and bear no relevance to the scenario in front of them. It is important that
candidates understand possible reasons for the movements in ratios but then use the
scenario to fully explain the performance of the entities.
Candidates can approach this in any way they see fit, although candidates working their way
from top to bottom generally seem to score higher. These candidates discuss movements in
revenue, gross profit margin, operating profit margin and then go on to ROCE.
Candidates who tended to score the highest marks were able to discuss how the results
looked dramatically different when Dough Co’s accounting policies were brought in line with
Cook Co, showing how the choice of accounting policy from a company can significantly
affect its results. Overall, the standard of narrative was disappointing in responses to this
question. Answers were either too brief or too generic. The golden rules for candidates to
think about to produce a good answer are:
 Use the scenario – any answer not based on this will not score well
 One mark per well explained point
 Talk about all key areas (revenue in particular), even if it’s not in a ratio calculation
 Always say WHY ratios or figures have changed or are different
If a candidate follows these rules, they will be able to score well in this type of question.
Unfortunately, far too many candidates seem to be content with learning ratio definitions
and trying to repeat these in the exam

(b) Margins
Cook Co may be a slightly larger company, having made more sales and profits during the year.
Initially, it appears that Dough Co makes a significantly higher margin than Cook Co (48.8%
compared to 32.3%), which suggests that it is much more profitable to sell as a retailer rather
than wholesale.
However, this is misleading as the higher gross profit margin is largely due to the accounting
policy of where amortisation is charged. Once the figures are adjusted to make the two
companies comparable, the two gross profit margins are much closer (33.4% and 32.3%).
Even with this adjustment, Dough Co still makes a higher gross profit margin, suggesting that
the relatively high cost properties are still producing a good return.
Looking at the operating profit margin, it appears that Cook Co makes a significantly higher
margin, suggesting a greater cost control (23.3% compared to 19.8%). Once the adjustments for
the different accounting policies are taken into account, it can be seen that the margins are
much more comparable (23.3% and 25.9%).
Without further information on the operating expenses, it is difficult to draw too many
conclusions about the cost management of the two companies.
The one thing which can be noted is the higher payment of salaries in Dough Co compared to
Cook Co. As both companies are owner managed, it may be that Cook Co’s management are
taking a lower level of salaries in order to show increased profits.
Alternatively, it could be that the Dough Co management are taking salaries which are too high,
at the expense of the growth of the business. The low level of retained earnings suggests that
Dough Co’s owners may not leave much money in the business for growing the company.

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338 P a r t 2 a n s w e r s : 5 : I n t e r p r e t i n g f i n a n c i a l s t a t e m e n t s ACCA FR Question Bank

ROCE
When looking at the return on capital employed, the initial calculations show that Cook Co is
making a much more impressive return from its long-term funding (18.8% compared to 8.3%).
This is completely reversed when the revaluation surplus is removed from Dough Co’s figures,
as Dough Co makes a return of almost twice that of Cook Co (18.8% and 43.1%).
This return is not due to high operating profits, as the margins of the two companies are similar,
with Dough Co actually making lower profits from operations.
The reason for the high return on capital employed is that Dough Co has a much better asset
turnover than Cook Co. This is not because Dough Co is generating more sales, as these are
lower than Cook Co. The reason is that Dough Co has a significantly lower equity balance, due to
having extremely low retained earnings relative to Cook Co.
Difficulties
Without examining the market value of Cook Co’s properties, it will be difficult to assess which
company is likely to cost more to purchase.
Basing any investment decision on a single year’s financial statements is difficult, as the impact
of different accounting policies is difficult to assess.
From the information provided, it is unclear whether Cook Co’s directors are taking an
unrealistically low salary, or whether Dough Co’s directors are taking vastly greater salaries than
average.
Conclusion (marks awarded for sensible conclusion):
Overall, both companies appear to be profitable and have performed well. Looking at previous
years’ financial statements of both entities will enable us to make a much clearer investment
decision, as will looking at the notes to the accounts to assess the accounting policies applied by
each company.
Other comments which candidates may produce which could be given credit
Comments that Cook Co’s operating profit margin would be lower if equivalent salaries to
Dough Co were paid. Comment on the relative size or cost of premises of the two companies.
Discussion of potential reasons for low retained earnings in Dough Co.
Discussion of the relative level of debt and relative interest charges.
Dough Co being highly geared but owning property.
Dough Co having much lower rate of interest with sensible suggestion of why this may be the
case (e.g. possibly due to loan being new or from parent).
Lack of prior year financial statements included as a difficulty.
Marking guide Marks
(a) Restated ratios 6
(b) Margins discussion 6
ROCE discussion 4
Difficulties and conclusion 4
14
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 6: Statement of cash flows 339

6: Statement of cash flows

1 MINSTER
Statement of cash flows of Minster for the year ended 30 September 20X6
Cash flows from operating activities $000 $000
Profit before tax 142
Adjustments for:
Depreciation of property, plant and equipment 255
Amortisation of software (180 – 135) 45 300
Investment income (20)
Finance costs 40
462
Working capital adjustments
Decrease in trade receivables (380 – 270) 110
Increase in contract assets (80 – 55) (25)
Decrease in inventories (510 – 480) 30
Decrease in trade payables (555 – 350) (205) (90)
Cash generated from operations 372
Interest paid (40 – 12 re unwinding of environmental provision) (28)
Income taxes paid (w (ii)) (54)
Net cash from operating activities 290

Cash flows from investing activities

Purchase of – property, plant and equipment (w (i)) (410)
– software (180)
– investments (150 – (15 + 125)) (10)
Investment income received (20 – 15 gain on investments) 5
Net cash used in investing activities (595)

Cash flows from financing activities

Proceeds from issue of equity shares (w (iii)) 265
Proceeds from issue of 9% loan note 120
Dividends paid (500 × 4 × 5 cents) (100)
Net cash from financing activities 285
Net decrease in cash and cash equivalents (20)
Cash and cash equivalents at beginning of period (40 – 35) (5)
Cash and cash equivalents at end of period (25)

Note: interest paid may be presented under financing activities and dividends paid may be presented
under operating activities.
Workings
Property, plant and equipment:
$000
carrying amount b/f 940
non-cash environmental provision 150
Revaluation 35
depreciation for period (255)
carrying amount c/f (1,280)
difference is cash acquisitions (410)

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340 P a r t 2 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

Taxation:
$000
current tax b/f (50)
deferred tax b/f (25)
profit or loss (57)
current tax c/f 60
deferred tax c/f 18
difference is cash paid (54)

Equity shares
$’000
balance b/f (300)
bonus issue (1 for 4) (75)
balance c/f 500
difference is cash issue 125
Share premium
balance b/f (85)
bonus issue (1 for 4) 75
balance c/f 150
difference is cash issue 140

Therefore, the total proceeds of cash issue of shares are $265,000 (125 + 140).
Report on the financial position of Minster for the year ended 30 September 20X6
To:
From:
Date:
Operating activities:
Minster shows healthy operating cash inflows of $372,000 (prior to finance costs and taxation). The
operating cash inflow compares well with the underlying profit before tax of $142,000. This is mainly
due to depreciation charges of $300,000 being added back to the profit as they are a non-cash
expense.
The cash inflow generated from operations of $372,000 together with the reduction in net working
capital of $90,000 is more than sufficient to cover the company’s taxation payments of $54,000,
interest payments of $28,000 and the dividend of $100,000 and leaves an amount to contribute to the
funding of the increase in non-current assets. It is important that these short term costs are funded
from operating cash flows; it would be of serious concern if, for example, interest or income tax
payments were having to be funded by loan capital or the sale of non-current assets.
There are a number of points of concern. The dividend of $100,000 gives a dividend cover of less than
one (85/100 = 0.85) which means the company has distributed previous year’s profits. This is not a
tenable situation in the long-term. The size of the dividend has also contributed to the lower cash
balances (see below). There is less investment in both inventory levels and trade receivables. This may
be the result of more efficient inventory control and better collection of receivables, but it may also
indicate that trading volumes may be falling. Also of note is a large reduction in trade payable balances
of $205,000. This too may be indicative of lower trading (i.e. less inventory purchased on credit) or
pressure from suppliers to pay earlier. Without more detailed information it is difficult to come to a
conclusion in this matter.
Investing activities:
The statement of cash flows shows considerable investment in non-current assets, in particular
$410,000 in property, plant and equipment. These acquisitions represent an increase of 44% of the
carrying amount of the property, plant and equipment as at the beginning of the year. As there are no
disposals, the increase in investment must represent an increase in capacity rather than the

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ACCA FR Question Bank Part 2 answers: 6: Statement of cash flows 341

replacement of old assets. Assuming that this investment has been made wisely, this should bode well
for the future (most analysts would prefer to see increased investment rather than contraction in
operating assets).
The statement of financial position at 30 September 20X6 includes $150,000 of non-current assets (the
discounted cost of the environmental provision), which does not appear in the cash flow figures as it is
not a cash ‘cost’.
Financing activities:
The increase in investing activities (before investment income) of $600,000 has been largely funded by
an issue of shares at $265,000 and raising a 9% $120,000 loan note. This indicates that the company’s
shareholders appear reasonably pleased with the company's past performance (or they would not be
very willing to purchase further shares). The interest rate of the loan at 9% seems quite high, and
virtually equal to the company’s overall return on capital employed of 9.1% (162/(1,660 + 120)).
Provided current profit levels are maintained, it should not reduce overall returns to shareholders.
Cash position:
The overall effect of the year’s cash flows has worsened the company’s cash position by an increased
net cash liability of $20,000. Although the company’s short term borrowings have reduced by $15,000,
the cash at bank of $35,000 at the beginning of the year has now gone. In comparison to the cash
generation ability of the company and considering its large investment in non-current assets, this
$20,000 is a relatively small amount and should be relieved by operating cash inflows in the near
future.
Summary
The above analysis shows that Minster has invested substantially in new non-current assets suggesting
expansion. To finance this, the company appears to have no difficulty in attracting further long-term
funding. At the same time there are indications of reduced inventories, trade receivables and payables
which may suggest the opposite i.e. contraction. It may be that the new investment is a change in the
nature of the company’s activities (e.g. mining) which has different working capital characteristics. The
company has good operating cash flow generation and the slight deterioration in short term net cash
balance should only be temporary.
Marking guide Marks
(a) Cash flow from operating activities
profit before tax adjusted for investment income and finance cost 1
depreciation/amortisation 2
working capital items 2
finance costs 2
income taxes paid 2
investing activities (including 1 for investment income) 4
financing – issue of ordinary shares 1
– issue of 9% loan 1
dividend paid 1
cash and cash equivalents b/f and c/f 1
available 17
Max 15
(b) 1 mark per relevant point 10
Maximum marks available 25

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342 P a r t 2 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

2 DELTOID CO
EXAMINER’S COMMENTS:
There were a couple of tricky areas that confused candidates: non-current assets had only
increased by new lease agreements (which candidates did not take into account when
calculating the payment of the lease liability); and the taxation cash flow involved tax relief
and a future refund to compute the tax paid during the year. A surprising error was that
several candidates did not think the interest on the leases was a cash outflow.
An analysis of retained earnings would have shown that a dividend had been paid, however
only a tiny minority of candidates picked this up.
Although there were a few really good answers to part (b), by those who focused on the
requirement, many candidates answered this as if it were a general interpretation of
financial performance giving little regard to addressing the issue of whether they would
advise that the loan renewal be granted.
The answer should have concentrated on the expectations of a lender: does the company
have good liquidity, interest cover, acceptable gearing. Good answers referred to the
company selling its property and renting it back as a sign of an inability to generate cash
flows from trading activity and that there was a year-end overdraft despite selling the
property and issuing shares.
Another problem was not understanding that the loan had ‘moved’ from non-current to
current liabilities: many candidates thought that the non-current loan had been paid off and
a new loan taken out.

EXAM SMART
You may find it helpful to calculate the ‘missing figures’ by drawing up columnar workings.
You may also find it helpful to make notes on the question paper:
 How does each adjustment impact cash flow?
 Where does each item appear in the statement?
You were not asked to prepare the extract for cash flows from investing activities, but you
should have realised that there would only have been one item under this heading: the
proceeds of $8.5 million from the sale of the property.
It should be clear from looking at the statement of financial position that there has been a
decrease in cash and cash equivalents: a positive cash balance of $1.5 million has become an
overdraft of $1.4 million (net decrease of $2.9 million).
Be careful with the tax element in this question. The examiner has given you an amount for
income tax receivable in the statement of financial position and income tax relief (as
opposed to an expense) in the statement of profit or loss.
Also, don’t forget to include both the interest expense AND the interest paid figures (here,
the interest expense of 1,000 is the same as the interest paid as there is no “interest
payable” at the year-end on the statement of financial position).

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ACCA FR Question Bank Part 2 answers: 6: Statement of cash flows 343

(a) Deltoid Co Statement of cash flows for the year ended 31 March 20X6 (extracts):
Cash flows from operating activities
$000 $000
Loss before tax (1,800)
Adjustments for:
depreciation of non-current assets 3,700
loss on sale of property (8,500 proceeds – (8,800 – 200)) 100
interest expense 1,000
increase in inventory (12,500 – 4,600) (7,900)
increase in trade receivables (4,500 – 2,000) (2,500)
increase in trade payables (4,700 – 4,200) 500
Cash deficit from operations (6,900)
Interest paid (1,000)
Income tax paid (W1) (1,900)
Net cash deficit from operating activities (9,800)

Cash flows from financing activities

$000 $000
Shares issued (W3) 1,200
Payment of lease liabilities (W2) (2,100)
Equity dividends paid (W4) (700)
Net cash from financing activities (1,600)

Workings
1 Income tax payable
$000
Balance b/f (current of 2,500 + deferred 800) 3,300
Profit or loss tax relief (700)
Difference – cash paid (balance) (1,900)
Balance c/f (current RECEIVABLE (500) + deferred 1,200) 700

2 Leased plant
Balance b/f 2,500
Depreciation (1,800)
New lease during year (balance) 5,800
Balance c/f 6,500

Lease liabilities
Balance b/f – (current of 800 + non-current of 2,000) 2,800
New leases (from above) 5,800
Repayment during year (balance) (2,100)
Balance c/f (current of 1,700 + non-current of 4,800) 6,500

3 Share issue
Share Share
capital premium
$000 $000
b/f 8,000 4,000
Bonus issue (1 for 10 from share premium) 800 (800)
Issued at par for cash (balance) 1,200 nil
c/f 10,000 3,200

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344 P a r t 2 a n s w e r s : 6 : S t a t e m e n t o f c a s h f l o w s ACCA FR Question Bank

4 Equity dividends paid

Retained earnings b/f 6,300
Loss for period (1,100)
Dividends paid (balance) (700)
Retained earnings c/f 4,500

(b) The main concerns of a loan provider would be whether Deltoid Co would be able to pay the
servicing costs (interest) of the loan and the eventual repayment of the principal amount.
Another important aspect of granting the loan would be the availability of any security that
Deltoid Co can offer.
Deltoid Co’s interest cover has fallen from a healthy 15 times (9,000/600) to be negative in
20X6. Although interest cover is useful, it is based on profit whereas interest is actually paid in
cash. It is usual to expect interest payments to be covered by operating cash flows (it is a bad
sign when interest has to be paid from long-term sources of funding such as from the sale of
non-current assets or a share issue).
Deltoid Co’s position in this light is very worrying; there is a cash deficit from operations of
$6.9 million and, after interest and tax payments, the deficit has risen to $9.8 million.
When looking at the prospect of the ability to repay the loan, Deltoid Co’s position is
deteriorating as measured by its gearing (debt including lease liabilities/equity) which has
increased to 65% (5,000 + 6,500/17,700) from 43% (5,000 + 2,800/18,300).
What may also be indicative of a deteriorating liquidity position is that Deltoid Co has sold its
property and rented it back. This has been treated as a disposal and the very short rental period
means that Deltoid Co has been able to avoid recognising a right of use asset and a lease liability
for the leaseback. Depending on the length of the rental agreement (which may include an
option to extend the lease term) and other conditions of the tenancy agreement (which are not
specified in the question) it may well be that the true lease term is longer and that therefore
Deltoid Co should have recognised a right-of-use asset and a lease liability.
If this were the case the company’s gearing would increase even further. Furthermore, there is
less value in terms of ownership of non-current assets which may be used as security (in the
form of a charge on assets) for the loan.
It is also noteworthy that, in a similar vein, the increase in other non-current assets is due to
leased plant. Whilst it is correct to include leased plant on the statement of financial position
(applying substance over form), the legal position is that this plant is not owned by Deltoid Co
and offers no security to any prospective lender to Deltoid Co.
Therefore, in view of Deltoid Co’s deteriorating operating and cash generation performance, it
may be advisable not to renew the loan for a further five years.
Marking guide Marks
(a) Loss before tax ½
Depreciation 1
Loss on sale of property 1
Interest expense adjustment (added back) ½
Working capital items 1½
Interest paid (outflow) ½
Income tax paid 1½
Share issue 1
Repayment of lease liability 1½
Equity dividends paid 1
10
(b) 1 mark per valid point 10
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 345

11: Preparation of single company accounts

1 VERNON CO
EXAM SMART
Points to note:
 Sale of goods (Note (i)) The five steps of revenue recognition have been met, so you
should have recorded the full $8 million and should also have discounted this to present
value to take into account the time value of money. The adjustment required is the
difference between the discounted total revenue and the amount recorded so far to
date (see working 1)
 Overseas sale (Note (ii)): Remember that the amount receivable from the overseas
customer is a monetary item – at the year end it should be retranslated at the closing
rate and the exchange difference should be recognised in profit or loss.
 Broker fees on bonds (Note (iii)): Transaction costs are added to the cost of a financial
asset, so the fees need to be removed from operating expenses and taken into account
in the calculation of amortised cost (Working 3)
 Deferred tax on revaluation gain (Note (iv)): Remember that this does not go through
profit or loss but instead is recognised in other comprehensive income.

EXAMINER’S COMMENTS
Common errors and weaknesses:
Sale of goods with significant financing component: There were several variations noted by
the marking team including adjustments which ignored discounting all together, some
candidates added on the remaining $4 million to ultimately show a total of $8 million
revenue, and some only discounted the $4 million recorded so far and adjusted revenue in
various ways. For those candidates who attempted to discount the revenue to present value,
only a few then proceeded to unwind the discount for the first 12 months. Many who did
attempt to unwind incorrectly recorded the unwinding within finance costs rather than in
finance income.
Generally, the investment in bonds was dealt with reasonably well, although a significant
number of candidates recorded the adjustment to bonds as if they were financial liabilities
rather than financial assets. Many candidates were able to correctly reverse the initial direct
cost of acquiring the bonds from administrative expenses but did not then go on to capitalise
as part of the bond total at acquisition. Another common error for this adjustment arose
when candidates included the full 8% interest in the statement of profit or loss rather than
recognising the difference between this amount and the cash received so far to date.
On the whole investment properties were dealt with well, however, a minority of candidates
failed to deal with this adjustment at all which was surprising as it is a relatively
straightforward adjustment. The gain on investment properties was included in investment
income within the model answer but markers were able to award marks if included
elsewhere within the statement of profit or loss. Many candidates, however, took the gain
and recorded this incorrectly within other comprehensive income which was disappointing
to see.

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346 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

(a) Statement of profit or loss and other comprehensive income

$000
Revenue 75,350 + 3,407 (w1) + 1,875 (w2) 80,632
Cost of sales (46,410)
Gross profit 34,222
Operating expenses 20,640 – 125 (w2) – 400 (w3) (20,115)
Profit from operations 14,107
Finance costs (4,050)
Investment income 1,520 + 296 (w1) + 302 (w3) + 4,000 (w4) 6,118
Profit before tax 16,175
Tax expense 130 + 3,200 (w5) (3,330)
Profit for the year 12,845
Other comprehensive income
Gain on revaluation 12,000 – 3,000 (w4) 9,000
Total comprehensive income 21,845

Working 1 – Sale with significant financing component

As the sale has a significant financing component, the initial revenue should be recorded at
present value, with the discount unwound and recorded as finance income.
Therefore, the initial revenue should be $7.407m ($8m/1.08), which is taken to revenue and
receivables. As $4m has been already taken, a further $3.407m must be added to revenue and
receivables.
The receivable of $7.407m is then increased by 8% over the year to get to the $8m in June 20X9.
As Vernon Co has a reporting date of 31 December 20X8, six months’ interest should be added.
$7.407m × 8% × 6/12 = $296k, which is added to receivables and finance income.
Working 2 – Overseas sale
The sale should initially be recorded at the historic rate at the date of the transaction, which is
$1.875m (12m Kr/6.4). This should be recorded in revenue and receivables.
At 31 December 20X8, the unsettled receivable must be retranslated at the closing rate.
12m Kr/6 = $2m. Therefore the receivable must be increased by $125k, with the increase going
through the profit or loss (although not through revenue).
Working 3 – Bonds
The professional fees on the bonds must be added to the bond asset, and not expensed,
resulting in a $0.4m decrease to operating expenses.
If the bonds are held at amortised cost, the following calculation will take place:
b/f Int 8% Payment c/f
$000 $000 $000 $000
9,400 752 (450) 9,702

Vernon Co should record $752k in investment income. As only $450k has been recorded, a
further $302k must be added into investment income.
Working 4 – Revaluations
The $12m gain on the property used by Vernon Co must be shown in other comprehensive
income, net of the $3m deferred tax liability applicable to it.
The $4m gain on investment properties must go through the statement of profit or loss, not
other comprehensive income.

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 347

Working 5 – Tax
The tax of $130k in the trial balance will represent an under-provision, as it is a debit balance.
The $3.2m tax estimate for the year should be added to this in order to calculate the tax
expense for the year.

EXAMINER’S COMMENTS: PART (b)

Some candidates made some basic mistakes by not using profit after tax in their calculation
or by time apportioning the shares incorrectly. Some candidates made more significant
errors such as not being able to deal correctly with the weighted average of shares following
a rights issue and omitted the rights issue bonus fraction altogether. Others incorrectly
calculated the theoretical ex-rights price by using the nominal value of the share capital
rather than the market value and issue price.

(b) Earnings per share

12,845,000/41,870,689 (w1) = $0.307, or 30.7c
Working 1 – Weighted average number of shares
Weighted
Date Number Rights fraction Period average
1 January 30,000,000 3.10/2.9 (w2) 3/12 8,017,241
1 April 35,000,000 3.10/2.9 (w2) 3/12 9,353,448
1 July 49,000,000 – 6/12 24,500,000
41,870,689

Working 2 – Theoretical ex-rights price

5 at $3.10 $15.50
2 at $2.40 $4.80
7 $20.30
TERP = $20.30/7 = $2.90
The rights fraction is market value before issue/TERP (3.10/2.9 OF) and should be applied to all
periods up to the date of the rights issue.
Marking guide Marks
(a) Revenue/cost of sales 3.5
Operating expenses 3
Finance cost/investment income 5
Tax/other comprehensive income 3.5
Max 15
(b) Earnings per share 5
Max 5
Maximum marks available 20

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348 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

2 DUGGAN CO
EXAMINER’S COMMENTS
Several candidates recorded the contract profit for the year as revenue instead of
recognising the revenue and costs separately. Some marks were awarded for this, but
candidates needed to record both the revenue and the costs to achieve the full marks
available. Some candidates also failed to spot that this contract was in the second year and
recorded the total revenue and costs to date.
Generally, the convertible loan was dealt with well. The most common mistake was where
the market rate of interest was taken to finance costs in full and candidates did not deduct
the interest already paid. Some candidates incorrectly split the convertible loan between the
debt and equity components using the coupon rate of interest at 6%, this was then generally
accounted for correctly thereafter earning ‘own figure’ marks. For those candidates who
dealt with the convertible loan correctly, only a minority transferred the equity component
into the statement of changes in equity. Many candidates failed to discount the liability to
present value at all and made no attempt to split it.

(a) Duggan Co Statement of profit or loss for the year ended 30 June 20X8
$000
Revenue (43,200 + 2,700 (W1)) 45,900
Cost of sales (21,700 + 1,500 contract costs) (23,200)
Gross profit 22,700
Operating exp (13,520 + 120 (W2) – 8 (W5) + 900 (W6)) (14,532)
Profit from operations 8,168
Finance costs (1,240 + 46 (W2) + 86 (W4) + 640 (W5)) (2,012)
Investment income 120
Profit before tax 6,276
Income tax expense (2,100 – 500 – 130 (W3)) (1,470)
Profit for the year 4,806

(b) Statement of changes in equity for the year ended 30 June 20X8
Share Share Retained Convertible
capital premium earnings option
$000 $000 $000 $000
Balance at 1 July 20X7 12,200 35,400
Prior year error (1,600)
Restated balance 33,800
Share issue 1,500 1,800
Profit (from (a)) 4,806
Convertible issue 180
Balance at 30 June 20X8 13,700 1,800 38,606 180

(c) Basic earnings per share:

EXAM SMART
Remember that the share issue also affects the earnings per share calculation. You will need
to calculate the weighted average number of shares (see W7).

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 349

4,806 Profit from (a)

13,200 (W7)
= $0.36 per share
Working 1 – Contract
$000
Revenue (80% × $9m = $7.2m. As $4.5m (50%) in X7, X8 = $2.7m) 2,700
Working 2 – Court case

EXAM SMART
To account for the unfair dismissal:
 Recognise the liability in full: $1.021 million, rather than $800,000.
 Discount to present value ($920,000)
 Then unwind the discount and recognise a finance cost. Notice that the provision is
recognised on 1 January, so the finance cost is for six months only.
Always read dates carefully.

As the most likely outcome is that $1.012m will be paid, this must be included in full. This is
discounted to present value as the payment was not expected for 12 months. The initial entry
on 1 January 20X8 in operating expenses should be $920,000 (rounded), being $1.012m × 1/1.1
(or $1.012m × 0.9091). As $800,000 has been included, an adjustment of $120,000 is required.
This discount should then be unwound for six months, resulting in an increase in finance costs
of $46,000 ($920,000 × 10% × 6/12).
Working 3 – Tax
$000
Current estimate - add to expense and current liabilities 2,100
Decrease in deferred tax - $2m decrease in temporary differences × 25% (500)
Prior year overprovision - credit balance in trial balance (130)
1,470

Working 4 – Convertible loan notes

Payment Discount Present
($000) factor value
Year ended 30 June 20X8 300 0.926 278
Year ended 30 June 20X9 5,300 0.857 4,542
Liability element 4,820
Equity element (SOCIE) 180
5,000
Interest needs to be applied to the liability element. $4,820 × 8% = $386,000. As $300,000 has
been recorded, an adjustment of $86,000 is required.
Working 5 – Capitalised interest

EXAM SMART
Notice that there are two adjustments here: reduce PPE/increase finance costs and reduce
depreciation (because it has been based on the incorrect amount).

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Of the $2.56m capitalised, 3/12 of this was after the construction was complete and so should
be expensed. This will lead to an increase in finance costs of $640,000.
An adjustment must also be made to the depreciation, being $640,000/20 × 3/12 = $8,000
reduction in the depreciation charge for the year.
Working 6 – Fraud
The $1.6m must be taken to retained earnings as a prior year error. The remaining $0.9m will be
taken to operating expenses.
Working 7 – Weighted average number of shares
Fraction Weighted average
Date No. of shares of year number of shares
(‘000) (‘000)
1 July 20X7 12,200 4/12 4,067
1 November 20X7 13,700 8/12 9,133
13,200

Marking guide Marks

(a) Revenue and COS 2½
Operating costs 3½
Finance costs 3½
Investment income and tax 2½
Max 12
(b) Opening balances (incl error) 2
Share issue, profit, loan notes 3
Max 5
(c) EPS calculation 3
Max 3
Maximum marks available 20

3 CLARION
EXAMINER’S COMMENTS: GENERAL AND PART (a)
Most well-prepared candidates were expecting this type of question and scored very well on
it, even if they weren't able to complete it. However, a significant number of candidates did
not attempt the earnings per share and cash flow extracts of parts (d) and (e). Both of these
topics have been examined many times, were not difficult, and thus represented a lost
opportunity to gain some relatively easy marks.
In part (a) (statement of profit or loss):
 Depreciation as part of cost of sales should have been straightforward (85 million ×
20%), however many candidates separated two new acquisitions of plant (one under a
lease) when the question clearly stated that these items were already included in
property plant and equipment. A significant number of candidates applied reducing
balance depreciation although the question clearly stated the straight line basis should
be used.
 Finance costs often excluded the second-half of the loan note interest (which was part
of the suspense account), showed incorrect lease interest (some marks were given for
incorrect figures here), and omitted the finance cost on the unwinding of the
environmental provision.

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 351

 In the calculation of the investment income, candidates sometimes incorrectly

deducted sales of $1.4 million from the investment's carrying amount before calculating
the fair value gain at $1.9 million instead of the correct figure of $500,000 (the sale
proceeds had already been deducted from the investment's carrying amount in the trial
balance). A minority of candidates showed the gain (of $1.9 million or $500,000) as
other comprehensive income when the question clearly stated the investments were at
fair value through profit or loss.
 The most common mistake on taxation was to get either the adjustment for the
previous year's overprovision or the movement on deferred tax the wrong way around
although overall there was a marked improvement in the treatment of taxation items
compared to recent diets.

Clarion – Statement of profit or loss for the year ended 31 March 20X5
$’000
Revenue 132,000
Cost of sales (w (i)) (107,300)
Gross profit 24,700
Distribution costs (7,400)
Administrative expenses (8,000)
Finance costs (w (ii)) (2,790)
Investment income (w (iii)) 1,000
Profit before tax 7,510
Income tax expense (3,500 – 400 + 300 (w (iv))) (3,400)
Profit for the year 4,110

EXAMINER’S COMMENTS: PART (b)

Several candidates did not realise that the figures for share capital and share premium in the
trial balance already included the 1 for 5 rights issue; thus they showed opening share
capital of $30 million and calculated the rights issue at $6 million, whereas the correct
answer was to work back from the closing share capital of $30 million to calculate the rights
issue had been for 5 million $1 shares (with an equivalent effect on the share premium).
'Own figures' were marked as correct for the profit for the year but some candidates forgot
to deduct the dividends paid. Some candidates showed the dividends received from the
investments in this statement rather than in the statement of profit or loss and many
candidates either showed the dividends paid as a deduction from profit after tax or (worse
still) as a finance cost in the statement of profit or loss.

Clarion – Statement of changes in equity for the year ended 31 March 20X5
Share Share Retained Total
capital premium earnings equity
$’000 $’000 $’000 $’000
Balance at 1 April 20X4 25,000 2,000 8,600 35,600
Rights issue (see below) 5,000 3,000 8,000
Dividends paid (3,900) (3,900)
Profit for the year 4,110 4,110
Balance at 31 March 20X5 30,000 5,000 8,810 43,810

Prior to the 1 for 5 rights issue there were 25 million (30,000 × 5/6) shares in issue. Therefore, the
rights issue was 5 million shares at $1.60 each ($8 million), giving additional share capital of $5 million
and share premium of $3 million (5 million × 60 cents).

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EXAMINER’S COMMENTS: PART (C)

Many errors in the statement of financial position were the knock-on effects from previous
calculations. This point particularly applied to non-current assets as nearly all errors here
related to previous errors made in the calculation of profit or loss account items, the most
common being depreciation charges. Some candidates accrued six months’ interest on the
loan notes whereas it had already been paid, but included in the suspense account.
Some candidates included the trial balance figure for deferred tax rather than the closing
balance, this was usually because they had not calculated the movement on deferred tax.
Where candidates had not calculated a finance cost for the environmental provision, it was
also omitted from the liability and often the environmental provision itself was completely
omitted. Most candidates had a good attempt at dealing with the lease, the most common
error was to treat the annual payment as occurring at the beginning rather than the end of
the year. This is a relatively minor error, and as long as the principles were still followed,
such an answer attracted most of the marks available. Worryingly, some candidates treated
the overdraft as cash in hand whilst some forgot to include the current tax payable in
current liabilities.

EXAM SMART
Note that the share capital and share premium balances in the trial balance already include
the rights issue. Therefore, these are the closing balances in the SOCIE and you need to work
backwards to find the opening balances.

Clarion – Statement of financial position as at 31 March 20X5

Assets $’000 $’000
Non-current assets
Property, plant and equipment (85,000 – 19,000 – 17,000) 49,000
Investments through profit or loss 6,500
55,500
Current assets
Inventory 11,700
Trade receivables 18,500 30,200
Total assets 85,700

Equity and liabilities

Equity (see (b) above)
Equity shares of $1 each 30,000
Other equity component – share premium 5,000
Retained earnings 8,810
43,810
Non-current liabilities
8% loan notes 15,000
Deferred tax (w (iv)) 3,000
Environmental provision (4,000 + 320 (w (ii))) 4,320
Lease liability (w (v)) 3,747 26,067
Current liabilities
Trade payables 9,400
Lease liability (4,770 – 3,747 (w (v))) 1,023
Bank overdraft 1,900
Current tax payable 3,500 15,823
Total equity and liabilities 85,700

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 353

EXAMINER’S COMMENTS: PART (d)

This part was often not answered at all. Of those that did answer it, many gained most, if not
all, of the marks. Most of the errors related to an incorrect profit figure or using the
incorrect amounts for share capital pre- and post- the rights issue, but, provided candidates
were consistent with the use of the figures that they had calculated in parts (a) and part (b)
for these figures, they were given the appropriate marks. Most of the marks lost on this
section were mainly due to the incorrect calculation of the theoretical ex-rights value of the
shares (or inverting the diluting effect of this calculation).

Clarion – Basic earnings per share for the year ended 31 March 20X5
Profit per statement of profit or loss $4.11 million
Weighted average number of shares (w (vi)) 28.3 million
Earnings per share 14.5 cents

EXAMINER’S COMMENTS: PART (e)

Several candidates did not seem to know the contents of investing and financing activities,
instead these candidates often (tried to) reproduce the cash flows from operations or even a
full statement of cash flows. By contrast, some candidates that did know the contents of the
required sections, produced a 'pro forma' extract which contained no figures. This may have
been in the mistaken belief that such an answer would attract some format marks, this is not
the case; the marks available are for the figures. It is also possible in this situation that the
candidates were running out of time, if this is so, it is better to give some of the figures for
the cash flows (which will gain some marks) rather than the whole of a cash flow extract
with no figures (this gains no marks).
Most of the figures required to answer this section were available either directly from the
question (e.g. the cash price purchase of plant (item 1) and sale of investments) or from
calculations made in answering the previous parts (e.g. the issue of shares, redemption of
loan notes and equity dividends). Thus an answer should have been very quick to prepare.
The only calculation necessary was for the repayment of the lease which required the
deduction of the interest charge from the total of the deposit and the first annual payment
of the lease. Again the marks in this section would have been given for 'own figures'.

Clarion – Extracts from the statement of cash flows for the year ended 31 March 20X5
$000
Cash flows from investing activities
Purchase of plant and equipment (14,000)
Sale of investments 1,600
Cash flows from financing activities
Issue of shares (see part (b)) 8,000
Redemption of loan notes (w (vii)) (5,000)
Repayment of lease (2,300 + (1,500 – 570)) (3,230)
Equity dividends paid (3,900)
Workings (figures in brackets in $000)
Cost of sales
$000
Cost of sales (per question) 90,300
Depreciation of plant and equipment (85,000 × 20%) 17,000
107,300

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Finance costs
$000
8% convertible loan notes (800 trial balance + 800 suspense account (w (vii))) 1,600
Lease (w (v)) 570
Bank interest 300
Environmental provision (4,000 × 8%) 320
2,790

Investment income
$000
Dividends received (500 – 200 profit on sale) 300
Profit on sale 200
Gains on fair value (6,500 – 6,000) 500
1,000

Deferred tax
$000
Provision required as at 31 March 20X5 (12,000 × 25%) 3,000
Balance at 1 April 20X4 (2,700)
Charge to profit or loss 300

EXAM SMART
Notice that the lease liability is payable in arrears (the TB states that the lease rental was
paid on 31 March 20X5). This means that the current portion of the liability is the difference
between the liability at 31 March 20X5 and the liability at 31 March 20X6. The deposit is not
interest bearing so must be deducted from the initial obligation before calculating the
interest to 31 March 20X5.

Leased plant/lease liability

$000
Present value of lease payments (4,200 + 2,300 + 1,500) (right-of-use asset) 8,000
Less deposit (2,300)
Lease liability at start of lease (PV of future lease payments) 5,700
Interest at 10% to 31 March 20X5 570
Less first annual payment (1,500)
Liability at 31 March 20X5 4,770
Interest at 10% to 31 March 20X6 477
Less second annual payment (1,500)
Liability at 31 March 20X6 3,747

Theoretical ex-rights value

Shares $ $
Holding (say) 100 2.50 250
Rights take up (1 for 5) 20 1.60 32
120 282
Theoretical ex-rights value 2.35 ($282/120)

Weighted average number of shares:

1 April 20X4 to 30 September 20X4 25 million × $2.50/$2.35 × 6/12 = 13.3 million
1 October 20X4 to 31 March 20X5 30 million × 6/12 = 15.0 million
Weighted average for year 28.3 million

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 355

Elimination of suspense account

$000
Cash cost of loan note redemption (20,000 × 25%) 5,000
Six months’ interest on loan note (20,000 × 8% × 6/12) 800
5,800

Marking guide Marks

(a) Statement of profit or loss
revenue 1
cost of sales 1
distribution costs ½
administrative expenses ½
investment income 2
finance costs 3
income tax expense 2
10
(b) Statement of changes in equity
balances b/f 1
rights issue 1
equity dividends paid ½
profit for the year ½
3
(c) Statement of financial position
property, plant and equipment 1
investments through profit or loss 1
inventory ½
trade receivables ½
8% loan notes 1
deferred tax 1
environmental provision 1
non-current lease liability 1
trade payables ½
current lease liability 1
bank overdraft ½
current tax payable 1
10
(d) Basic earnings per share
earnings per statement of profit or loss ½
theoretical ex-rights value 1
calculation of weighted average number of shares 1½
3
(e) Extracts from statement of cash flows
purchase of property, plant and equipment 1
sale of investments ½
issue of shares ½
redemption of loan notes ½
repayment of lease 1
equity dividends paid ½
4
Maximum marks available 30

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4 MIMS CO (SEPTEMBER/DECEMBER 2021)

EXAMINER’S COMMENTS
From an exam technique perspective, it is advised that you set up the answer/layout for the
requirements first. For example, for Mims Co, lay out the working for the statement of profit
or loss, the statement of changes in equity and the statement of cash flow extracts within
the spreadsheet. Leave a couple of rows between each statement so that it is easy for the
marker to distinguish between where one statement ends, and another begins.
As a general comment, you must ensure that all trial balance items are included either in the
relevant working or within the financial statements themselves. It is often noted by the
marking team that some balances are not transferred from the trial balance into the answer
and therefore, what are considered to be easy marks, are lost. In this question, revenue,
distribution costs and finance costs did not require adjustment as a result of the additional
information and could be transferred directly to the statement of profit or loss. Including
these balances in this statement attracted marks from the marking scheme. Similarly, the
share capital and retained earnings in the trial balance at 1 January 20X5 could have been
included in the opening balances on the statement of changes in equity.
It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach and will ensure you do not miss
out any required adjustments. However, in this question you may, for example, be most
confident in adjusting for income tax and deferred tax at note (3) and be less confident with
intangible assets in note (6). Dealing with the adjustments that you are most familiar with
first may ease you into the question and help to stop panic setting in.

(a) Statement of profit or loss for the year ended 31 December 20X5
$’000
Revenue 24,300
Cost of sales (11,600 – 700 inventory) (10,900)
Gross profit 13,400
Administrative expenses (10,900 + 1,400 provision + 1,300 promoting brand +
100 amortisation – 1,000 investment property depreciation – 3,000 dividend) (9,700)
Distribution costs (7,300)
Loss from operations (3,600)
Finance costs (1,400)
Investment income (500 + 2,000 investment property gain) 2,500
Loss before taxation (2,500)
Taxation (140 – 1,200 current + 500 movement in deferred tax) 560
Loss for the year (1,940)

(b) Statement of changes in equity for the year ended 31 December 20X5
Share Share Retained
capital premium earnings
$’000 $’000 $’000
Balance at 1 January 20X5 60,000 – 43,200
Prior period error – – (700)
Restated balance 1 January 20X5 60,000 – 42,500
Share issue 15,000 37,500 –
Profit for the year – – (1,940)
Dividends paid (75,000 × $0.04) – – (3,000)
Balance 31 December 20X5 75,000 37,500 37,560

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 357

(c) Extracts from statement of cash flows for the year ended 31 December 20X5
$’000
Cash flows from investing activities
Purchase of brand (2,000)
Purchase of investment property (20,000)
Net cash used in investing activities (22,000)

Cash flows from financing activities

Proceeds from issue of share capital 52,500
Dividends paid (3,000)
Net cash from financing activities 49,500

Marking guide Marks

(a) Statement of profit or loss 12
(b) Statement of changes in equity 5
(c) Extracts from statement of cash flows 3
Maximum marks available 20

5 XTOL
EXAMINER’S COMMENTS
The effect of the agency sale was generally well understood in the statement of profit or loss
(although some calculated the commission on the remittances rather than the actual sales),
however, surprisingly few candidates accounted for the net payable ($3 million) owed to the
principal in the statement of financial position. Markers accepted the agency income of
$2 million in either revenue or as other income.
The rights issue caused several problems and the most common was that candidates applied
the rights issue to the share capital and share premium in the trial balance. However the
question stated the rights issue had already been recorded indicating that the trial balance
figures already included the issue. Another error candidates made was taking the shares as
denominated at $1 whereas they were actually denominated at 25 cents (this also affected
the dividend calculations).
Most candidates had a reasonable attempt at recording the split between debt and the
equity option of the convertible loan note, but there were several common errors:
 using a 5% discount rate rather than the effective (interest) rate of 8%
 charging the interest paid of $2.5 million (at 5%) to profit or loss (even where the
candidate had used the correct 8% when discounting)
 some candidates worked on the basis that the reporting date was two years after issue
(it was one year)
Most candidates handled the taxation adjustment well, but there were some errors in
identifying whether the previous year’s tax provision and the movement in deferred tax
were debits or credits and incorrect figures thus appeared in both the statement of profit or
loss and the statement of financial position.
The last part of the question asked for a calculation of the basic EPS which was complicated
by the rights issue. This seemed a familiar topic and most scored well. There were some
errors in the calculation of the theoretical ex-rights price (TERP), incorrect application of the

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dilution factor and some candidates miscalculated the date of the issue at three months (or
five months) into the financial year (it was four months).
Other errors included:
 the application of the plant depreciation rate (12 ½% per annum) to the property,
followed by depreciating plant and equipment at 12½% based on cost (rather than
reducing balance).
 no attempt to properly account for the loan note (or its finance cost), leaving it at
$50 million (and $2.5 million)
 including the bank overdraft incorrectly in current assets and/or showing bank interest
as income
 showing dividends (however calculated) as an expense

Xtol – Statement of profit or loss for the year ended 31 March 20X4
$000
Revenue (490,000 – 20,000 agency sales (w (i))) 470,000
Cost of sales (w (i)) (294,600)
Gross profit 175,400
Distribution costs (33,500)
Administrative expenses (36,800)
Other operating income – agency sales 2,000
Finance costs (900 overdraft + 3,676 (w (ii))) (4,576)
Profit before tax 102,524
Income tax expense (28,000 + 3,200 + 3,700 (w (iii))) (34,900)
Profit for the year 67,624

Xtol – Statement of financial position as at 31 March 20X4

$000 $000
Assets
Non-current assets
Property, plant and equipment ((100,000 – 30,000) + (155,500 – 57,500)) 168,000
Current assets
Inventory 61,000
Trade receivables 63,000 124,000
Total assets 292,000

Equity and liabilities

Equity
Equity shares of 25 cents each 56,000
Share premium 25,000
Other component of equity – equity option 4,050
Retained earnings (26,080 – 10,880 + 67,624) 82,824
167,874
Non-current liabilities
Deferred tax 8,300
5% convertible loan note (w (ii)) 47,126 55,426

Current liabilities
Trade payables (32,200 + 3,000 re Francais (w (i))) 35,200
Bank overdraft 5,500
Current tax payable 28,000 68,700
Total equity and liabilities 292,000

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 359

Xtol – Basic earnings per share for the year ended 31 March 20X4
Profit per statement of profit or loss $67.624 million
Weighted average number of shares (w (v)) 209.7 million
Earnings per share ($67.624m/209.7m) 32.2 cents
Workings (figures in brackets in $000)
Cost of sales (including the effect of agency sales on cost of sales and trade payables)
$000
Cost of sales per question 290,600
Remove agency costs (15,000)
Depreciation of property (100,000/20 years) 5,000
Depreciation of plant and equipment ((155,500 – 43,500) x 12½%) 14,000
294,600

The agency sales should be removed from revenue (debit $20 million) and their ‘cost’ from cost of
sales (credit $15 million). Instead, Xtol should report the commission earned of $2 million (credit) as
other operating income (or as revenue would be acceptable). This leaves a net amount of $3 million
((20,000 – 15,000) – 2,000) owing to Francais as a trade payable.
5% convertible loan note
The convertible loan note is a compound financial instrument having a debt and an equity component
which must be accounted for separately:
Year ended 31 March Outflow 8% Present value
$’000 $000
20X4 2,500 0.93 2,325
20X5 2,500 0.86 2,150
20X6 52,500 0.79 41,475
Debt component 45,950
Equity component (= balance) 4,050
Proceeds of issue 50,000

The finance cost for the year will be $3,676,000 (45,950 x 8%) and the carrying amount of the loan as
at 31 March 20X4 will be $47,126,000 (45,950 + (3,676 – 2,500)).
Deferred tax
$000
Provision at 31 March 20X4 8,300
Balance at 1 April 20X3 (4,600)
Charge to statement of profit or loss 3,700

Dividends
The number of shares prior to the 2 for 5 rights issue was 160 million (56,000 × 4 (i.e. 25 cents shares)
× 5/7). Therefore, the rights issue was 64 million shares at 60 cents each, giving additional share
capital of $16 million (64 million × 25 cents) and share premium of $22.4 million (64 million × (60 cents
– 25 cents)).
The dividend paid on 30 May 20X3 was $6.4 million (4 cents on 160 million shares ($40 million × 4,
i.e. 25 cents shares)) and the dividend paid on 30 November 20X3 (after the rights issue) was
$4.48 million (2 cents on 224 million shares (56 million × 4)). Total dividends paid in the year were
$10.88 million.

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Number of shares outstanding (including the effect of the rights issue)

Theoretical ex-rights fair value:
Shares $ $
Holding (say) 100 1.02 102
Rights issue (2 for 5) 40 0.60 24
140 126
Theoretical ex-rights fair value 0.90 ($126/140)

Weighted average number of shares:

1 April 20X3 to 31 July 20X3 160 million × $1.02/$0.90 × 4/12 = 60.4 million
1 August 20X3 to 31 March 20X4 224 million × 8/12 = 149.3 million
Weighted average for year 209.7 million

Tutorial note: Xtol – Statement of changes in equity for the year ended 31 March 20X4 (for
information only; not required)
Share Share Equity Retained Total
capital premium option earnings equity
$’000 $’000 $’000 $’000 $’000
Balance at 1 April 20X3 40,000 2,600 nil 26,080 68,680
Rights issue (see below) 16,000 22,400 38,400
5% loan note issue (w (ii)) 4,050 4,050
Dividends paid (w (iv)) (10,880) (10,880)
Profit for the year 67,624 67,624
Balance at 31 March 20X4 56,000 25,000 4,050 82,824 167,874

Marking guide Marks

(a) Statement of profit or loss
Revenue 1
Cost of sales 2
Distribution costs ½
Administrative expenses ½
Operating income agency sales 1
Finance costs 1½
Income tax expense 1½
8
(b) Statement of financial position
Property, plant and equipment 1½
Inventory ½
Trade receivables ½
Share capital and share premium ½
Retained earnings 1
Deferred tax 1
5% loan note 2
Trade payables ½
Bank overdraft ½
Current tax 1
9
(c) Basic earnings per share
Theoretical ex-rights price 1
Calculation of weighted average number of shares 1½
Calculation of EPS using profit per statement of profit or loss ½
3
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 361

6 ATLAS (Q2, JUNE 2013 AMENDED)

EXAMINER’S COMMENTS
Statement of profit or loss and other comprehensive income
Most candidates correctly deducted the in substance loan from revenue, but did not make
an adjustment to the cost of sales or closing inventory to bring the goods back into
inventory. It was also very common for the finance cost of the in substance loan to be
omitted (or not time apportioned).
There were several errors in the calculation of the depreciation of property, plant and
equipment, partly due to incorrect revaluation techniques and partly by not treating the
held-for-sale plant correctly. Some of those that did separate the held-for-sale plant still
classed it as non-current, some revalued it to its market value rather than leaving it at its
(lower) carrying amount and many failed to depreciate it up to, but not beyond, the date of
reclassification.
There were the usual errors in the tax charge: adjusting the prior year balance the wrong
way and charging the whole of the provision for deferred tax rather than the movement in
the provision. Similar tax calculations are examined nearly every diet.
Statement of changes in equity
The most common error was not realising that the share capital and premium in the trial
balance were stated after accounting for the rights issue, thus in the statement of changes in
equity it was necessary to ‘work backwards’ to the opening figures.
Statement of financial position
This was generally well prepared with most errors being a ‘knock on’ from errors made when
calculating profit or loss items e.g. incorrect carrying amounts of property, plant and
equipment, not accruing for loan interest (or omitting the loan completely), incorrect
deferred and current tax provisions. Generally such errors are not penalised as ACCA adopt a
'method marking' principle which means the same error is not penalised twice. A surprisingly
common and worrying error was that the bank overdraft was shown as a current asset.
Many candidates did not show the (accrued) directors' bonus as an expense and a current
liability and seemed unable to distinguish between 1% and 10% (the latter amount often
being used to incorrectly compute the bonus).

EXAM SMART
One of the trickier parts of this question is dealing with the transaction with Xpede (note (a)
in the question). Atlas has the right to repurchase the inventory and it is highly likely that it
will exercise this right; the repurchase price is higher than the original selling price of the
inventory. The transaction should be treated as a financing agreement (in other words, the
substance of the transaction is that Xpede has made a loan to Atlas).
 The $10 million ‘sales proceeds’ are removed from revenue
 Atlas continues to recognise the inventory as an asset (at cost of $7 million)
 Atlas also recognises a liability for the loan of $10 million
 The accrued interest at 10% is recognised as a finance cost

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362 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

Atlas – Statement of profit or loss and other comprehensive income for the year ended 31 March
20X3
(Monetary figures in brackets are in $000.)
$000
Revenue (550,000 – 10,000 in substance loan) 540,000
Cost of sales (w (i)) (420,600)
Gross profit 119,400
Distribution costs (21,500)
Administrative expenses (30,900 + 5,400 re directors’ bonus of 1% of sales made) (36,300)
Finance costs (700 + 500 (10,000 × 10% × 6/12 re in substance loan)) (1,200)
Profit before tax 60,400
Income tax expense (27,200 – 1,200 + (9,400 – 6,200) deferred tax) (29,200)
Profit for the year 31,200
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation gain on land and buildings (w (ii)) 7,000
Total comprehensive income for the year 38,200

Atlas – Statement of changes in equity for the year ended 31 March 20X3
Share Share Revaluation Retained Total
capital premium reserve earnings equity
$000 $000 $000 $000 $000
Balances at 1 April 20X2 40,000 6,000 nil 11,200 57,200
Share issue (see below) 10,000 14,000 24,000
Total comprehensive income (see (i)
above) 7,000 31,200 38,200
Dividend paid (20,000) (20,000)
Balances at 31 March 20X3 50,000 20,000 7,000 22,400 99,400

The rights issue of 20 million shares (50,000/50 cents each × 1/5) at $1.20 has been recorded as
$10 million equity shares (20 million × $0.50) and $14 million share premium (20 million × ($1.20 –
$0.50)).

EXAM SMART
Because the share issue has already been recorded by Atlas, the amounts in the trial balance
for share capital and share premium are closing balances. You will need to subtract the
effects of the rights issue to arrive at the opening balances.

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 363

Atlas – Statement of financial position as at 31 March 20X3

Assets $000 $000
Non-current assets
Property, plant and equipment (44,500 + 52,800 (w (ii))) 97,300
Current assets
Inventory (43,700 + 7,000 re in substance loan) 50,700
Trade receivables 42,200 92,900
Plant held for sale (w (ii)) 3,600
Total assets 193,800

Equity and liabilities

Equity (see (ii) above)
Equity shares of 50 cents each 50,000
Share premium 20,000
Revaluation surplus 7,000
Retained earnings 22,400 49,400
99,400
Non-current liabilities
In substance loan from Xpede (10,000 + 500 accrued interest) 10,500
Deferred tax 9,400 19,900
Current liabilities
Trade payables 35,100
Income tax 27,200
Accrued directors’ bonus 5,400
Bank overdraft 6,800 74,500
Total equity and liabilities 193,800

Workings (figures in brackets are in $000)

Cost of sales
$000
Per question 411,500
Closing inventory re in substance loan (7,000)
Depreciation of buildings (w (ii)) 2,500
Depreciation of plant and equipment (w (ii)) 13,600
420,600
Non-current assets

EXAM SMART
Remember to depreciate the plant ‘held for sale’ for the first half of the year (it is classified
as ‘held for sale’ on 1 October 20X2).

$000
Land and buildings
The gain on revaluation and carrying amount of the land and buildings will be:
Carrying amount at 1 April 20X2 (60,000 – 20,000) 40,000
Revaluation at that date (12,000 + 35,000) 47,000
Gain on revaluation 7,000
Buildings depreciation (35,000/14 years) (2,500)
Carrying amount of land and buildings at 31 March 20X3 (47,000 – 2,500) 44,500

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364 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

$000
Plant
The plant held for sale should be shown separately and not be depreciated after 1 October 20X2.
Other plant
Carrying amount at 1 April 20X2 (94,500 – 24,500) 70,000
Plant held for sale (9,000 – 5,000) (4,000)
66,000
Depreciation for year ended 31 March 20X3 (20% reducing balance) (13,200)
Carrying amount at 31 March 20X3 52,800

Plant held for sale:

At 1 April 20X2 (from above) 4,000
Depreciation to date of reclassification (4,000 × 20% × 6/12) (400)
Carrying amount at 1 October 20X2 3,600

Total depreciation of plant for year ended 31 March 20X3 (13,200 + 400) 13,600
As the fair value of the plant held for sale at 1 October 20X2 is $4.2 million, it should continue to be
carried at its (lower) carrying amount (and no longer depreciated).
Marking guide Marks
(a) Statement of profit or loss and other comprehensive income
revenue 1
cost of sales 2½
distribution costs ½
administrative expenses 1
finance costs 1
income tax 1
other comprehensive income 1
Max 8
(b) Statement of changes in equity
balances b/f ½
rights issue 1
total comprehensive income 1
dividend paid ½
Max 3
(c) Statement of financial position
property, plant and equipment 2½
inventory 1
trade receivables ½
plant held for sale (at 3,600) 1
in substance loan 1
deferred tax 1
trade payables ½
current tax ½
directors’ bonus ½
bank overdraft ½
Max 9
Maximum marks available 20

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 365

7 KEYSTONE (Q2, DECEMBER 2011, AMENDED)

EXAMINER’S COMMENTS
Statement of profit or loss and other comprehensive income
Point (1) of the notes to the trial balance said that, normally, the company adds a profit
margin of 40% to cost to arrive at a selling price. Many candidates proceeded to add 40% to
the manufactured cost of the plant to arrive at the capitalised value. This is not permitted; a
company cannot make a profit out of itself.
Many candidates did not include production labour and factory overheads as part of cost of
sales. A surprising number of candidates did not appreciate that the cost of sales calculation
required the inclusion of opening and closing inventories – the former was often ignored
completely.
There were a lot of problems in calculating the deferred tax, particularly in relation to the
deferred tax on the revaluation of property. This lack of understanding also fed through to
the statement of financial position figures and the revaluation figure in other comprehensive
income.
The loss on fair value of a financial asset (equity investment) should have been charged to
profit or loss, but it was often shown in other comprehensive income.
Statement of financial position
A very common error (more than 50%) was to take the date of the revaluation of the
property as being at the end of the year rather than the beginning.

EXAM SMART
As with all trial balance questions, this question contains some straightforward elements and
some more difficult elements.
To pass, you need to:
 Learn the proformas for the statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position;
 Work through the information given methodically;
 Don’t worry if you don’t understand every part of the question – this style of question is
time-pressured. You don’t need to attempt all of it to gain a pass.
 Practise elements such as non-current assets and tax. The non-current assets element
will almost always require you to depreciate and/or revalue an asset. The tax element
will generally involve a deferred tax calculation and/or an under/overprovision of
income tax.
The deferred tax part of this question is tricky in that the double entry for deferred tax on a
revaluation is to:
Dr Revaluation surplus (not profit or loss)
Cr Deferred tax liability

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366 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

Keystone Statement of profit or loss and other comprehensive income for the year ended
30 September 20X1
$000 $000
Revenue 380,000
Cost of sales (W1)) (259,900)
Gross profit 120,100
Distribution costs (14,200)
Administrative expenses (46,400)
Investment income 800
Loss on fair value of investments (18,000 – 17,400) (600)
Finance costs (350)
Profit before tax 59,350
Income tax expense (24,300 + 1,800 (W3) (26,100)
Profit for the year 33,250
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of property 8,000
Transfer to deferred tax (W3) (2,400) 5,600
Total comprehensive income for the year 38,850

Keystone Statement of financial position as at 30 September 20X1

$000 $000
Assets
Non-current assets
Property, plant and equipment (W2) 78,000
Investments in equity instruments 17,400
95,400
Current assets
Inventory 54,800
Trade receivables 33,550
Cash and cash equivalents 5,700 94,050
Total assets 189,450
Equity and liabilities
Equity
Share capital 55,000
Share premium 3,000
Revaluation surplus (W2) 5,600
Retained earnings (33,600 + 33,250) 66,850 75,450
130,450
Non-current liabilities
Deferred tax (W3) 6,900
Current liabilities
Trade payables 27,800
Current tax payable 24,300 52,100
Total equity and liabilities 189,450

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ACCA FR Question Bank Part 2 answers: 11: Preparation of single company accounts 367

Workings
1 Cost of sales
$000
Opening inventory 46,700
Materials (64,000 – 3,000 own use) 61,000
Production labour (124,000 – 4,000 own use) 120,000
Factory overheads (80,000 – (4,000 × 75% own use)) 77,000
Depreciation of property (W2) 3,000
Depreciation of plant (1,000 + 6,000 (W2)) 7,000
Closing inventory (54,800)
259,900

The cost of the self-constructed plant is $10 million (3,000 + 4,000 + 3,000 for materials, labour
and overheads respectively, that have also been deducted from the above items in cost of
sales). As these goods are not being sold, the cost of manufacture cannot be included in “cost of
goods sold”. The costs are, instead, included in the cost of non-current assets (see W4).
2 Non-current assets:
The property has been depreciated at $2.5 million per annum (50,000/20 years).
The accumulated depreciation of $10 million therefore represents four years. Thus its remaining
life at the date of revaluation is 16 years.
$000
Carrying amount at date of revaluation (50,000 – 10,000) 40,000
Revalued amount 48,000
Gross gain on revaluation 8,000
Transfer to deferred tax (at 30%) (2,400)
Net gain to revaluation surplus 5,600

The revalued amount of $48 million will be depreciated over its remaining life of 16 years at
$3 million per annum.
The self-constructed plant will be depreciated for six months by $1 million (10,000 × 20% ×
6/12) and have a carrying amount at 30 September 20X1 of $9 million.
The plant in the trial balance will be depreciated by $6 million ((44,500 – 14,500) × 20%) for the
year and have a carrying amount at 30 September 20X1 of $24 million.
In summary:
$000
Property (48,000 – 3,000 depreciation for 1 year) 45,000
Plant (9,000 + 24,000) 33,000
Property, plant and equipment 78,000

3 Deferred tax
Provision required at 30 September 20X1 ((15,000 + 8,000 revaluation (W4)) × 30%) 6,900
Provision at 1 October 20X0 per TB (2,700)
Increase required 4,200
Transferred from revaluation surplus (W4) (2,400)
Balance: charge to profit or loss 1,800

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368 P a r t 2 a n s w e r s : 1 1 : P r e p a r a t i o n o f s i n g l e c o m p a n y a c c o u n t s ACCA FR Question Bank

Marking guide Marks

(a) Statement of profit or loss and other comprehensive income
Revenue ½
Cost of sales 5
Distribution costs ½
Administrative expenses ½
Investment income ½
Loss on fair value of investment 1
Finance costs ½
Income tax expense 1
Other comprehensive income 1½
11
(b) Statement of financial position
Property, plant and equipment 2½
Equity investments ½
Inventory ½
Trade receivables ½
Equity shares ½
Revaluation reserve 1
Retained earnings 1
Deferred tax 1
Trade payables ½
Bank overdraft ½
Current tax payable ½
9
Maximum marks available 20

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