PROFESSIONAL STAGE APPLICATION EXAMINATION

TUESDAY 20 MARCH 2012

(2 hours)

FINANCIAL ACCOUNTING
This paper consists of FIFTEEN objective test (OT) questions (20 marks) and FOUR written
test questions (80 marks).
1. Ensure your candidate details are on the front of your answer booklet.
2. Answer each question in black ball point pen only.
Objective Test Questions (1 15)
3. Record your OT responses on the separate answer sheet provided: this must not be
folded or creased. Your candidate details are printed on the sheet.
4. For each of the FIFTEEN OT questions there are four options: A, B, C, D. Choose the
response that appears to be the best and indicate your choice in the correct box as
shown on the answer sheet.
5. Attempt all questions: you will score equally for each correct response. There will be no
deductions for incorrect responses or omissions.
Written Test Questions (1 4)
6. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.
7. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential Place your label here. If you do not have a label
information and must NOT be removed you MUST enter your candidate number in this
from the examination hall. box.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2012. All rights reserved Page 1 of 8

1. The following balances have been extracted from the nominal ledger of Giyani plc at
31 December 2011.

Revenue 768,000
Production costs 329,600
Administrative expenses 152,600
Other operating costs 21,300
Finance costs 30,650
Inventories at 31 December 2010 15,900
Retained earnings at 31 December 2010 159,050
Ordinary share capital (1 shares) 135,000
Preference share capital (Note 1) 240,000
Revaluation surplus 150,500
Plant and machinery (Note 2)
cost 76,900
accumulated depreciation at 31 December 2010 29,800
Land and buildings (Note 3)
valuation 872,000
accumulated depreciation at 31 December 2010 37,500
Investments (long-term) 25,000
Trade and other receivables 21,500
Trade and other payables 53,800
Cash at bank 28,200

The following additional information is available:

(1) On 1 January 2011 Giyani plc issued two different types of preference shares and these
form the 240,000 included in the nominal ledger balances above. The share issues
consisted of 120,000 4% irredeemable preference shares and 120,000
6% redeemable preferences shares (redeemable in 2016). Both types of preference
shares have a nominal value of 1 per share.

The dividends due for the year on both types of preference shares had not been
accrued at 31 December 2011, although they were paid shortly after the year end.

(2) Giyani plcs policy is to depreciate plant and machinery at 15% pa on cost. On
1 January 2011 a new machine was acquired for 7,000 and correctly included in the
cost of plant and machinery. This machine includes integrated tools that have to be
replaced every three years at a cost of 1,200. Depreciation on plant and machinery
should be presented in cost of sales.

(3) Giyani plc uses the revaluation model for land and buildings. The buildings were
acquired on 1 January 2005 and have a total useful life of 50 years. Depreciation on
buildings should be presented in other operating costs.

The nominal ledger balance of 872,000 (land 300,000, buildings 572,000)

represents the latest valuation on 1 January 2011, the previous valuation being
842,000. The only entry made to reflect the latest valuation was to increase the
nominal ledger account for valuation of land and buildings by 30,000 and to credit this
amount to the revaluation surplus. Giyani plc does not make annual transfers between
the revaluation surplus and retained earnings.

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(4) Early in 2011, the financial controller discovered invoices for 50,000 in relation to
electricity used in 2010. These invoices had not been recorded in the nominal ledger,
nor had they been accrued for, at 31 December 2010. As the 2010 financial statements
had already been published the financial controller decided to include the amount in
administrative expenses for 2011. The amount was paid in April 2011.

(5) The inventory count at 31 December 2011 showed that there were 1,500 finished units
held in Giyani plcs warehouse. 10,000 units were completed during the year, although
planned production was 12,000. Production had been halted for two weeks due to a
fault on the production line. Production costs incurred during the year and included in
the list of balances above were as follows (no adjustment is required to these figures):

Direct costs 176,000
Fixed production overheads 153,600

(6) A dividend of 15p per ordinary share was paid on 1 November 2011 and the amount
was recognised in finance costs.

(7) The income tax liability for the year has been estimated at 67,600.

Requirement

Prepare an income statement and statement of changes in equity for Giyani plc for the year
ended 31 December 2011 and a statement of financial position as at that date in a form
suitable for publication.
(23 marks)

NOTES: Notes to the financial statements are not required.

Expenses should be analysed by function.

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2. Bisho plc has a number of subsidiary companies, all of which it acquired several years ago.

The financial controller of Bisho plc has supplied an extract from the companys consolidated
income statement for the year ended 31 December 2011, its consolidated statement of
financial position as at that date and some additional information.

Consolidated income statement for the year ended 31 December 2011 (extract)

Continuing operations
Profit from operations 383,870
Finance costs (11,200)
Profit before tax 372,670
Income tax expense (111,800)
Profit for the year from continuing operations 260,870
Discontinued operations
Profit from discontinued operations 21,901
Profit for the year 282,771
Attributable to:
Owners of Bisho plc 231,850
Non-controlling interest 50,921
282,771

Consolidated statement of financial position as at 31 December

2011 2010
ASSETS
Non-current assets
Property, plant and equipment 981,970 834,500
Intangibles 181,800 31,950
1,163,770 866,450
Current assets
Trade and other receivables 15,790 8,920
Cash and cash equivalents 10,364 4,754
26,154 13,674
Total assets 1,189,924 880,124

EQUITY AND LIABILITIES

Equity
Ordinary share capital (1 shares) 437,000 359,000
Share premium account 179,000 56,000
Retained earnings 200,374 88,524
Attributable to the equity holders of Bisho plc 816,374 503,524
Non-controlling interest 101,600 94,800
917,974 598,324
Non-current liabilities
Bank loan 225,000 200,000

Current liabilities
Trade and other payables 20,450 49,800
Income tax payable 26,500 32,000
46,950 81,800
Total equity and liabilities 1,189,924 880,124

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Additional information:

(1) On 1 July 2011 Bisho plc sold its entire 70% interest in Okiep Ltd for 70,800 cash. The
profit for the period from discontinued operations in the draft consolidated income
statement above relates to this sale and can be analysed as follows:

Profit before tax 27,650
Income tax expense (9,100)
Profit on disposal 3,351
21,901

(2) The net assets of Okiep Ltd at the date of disposal were as follows:

Property, plant and equipment 87,800
Trade and other receivables 5,900
Cash and cash equivalents 2,350
Trade and other payables (3,980)
92,070

(3) The intangibles balance at 1 January 2011 related wholly to goodwill arising on the
acquisition of subsidiaries, including 3,000 in respect of Okiep Ltd. No impairment of
goodwill was recognised during 2011.

On 1 July 2011 a brand was acquired for consideration of 20,000 in cash and 10,000
1 ordinary shares in Bisho plc, which had a market value of 1.20 each at that date. The
brand is being amortised over ten years. Development expenditure was incurred and
capitalised in the period, in respect of which amortisation of 12,000 has been
recognised.

(4) Depreciation of 125,030 was recognised during the year ended 31 December 2011.
No property, plant and equipment was disposed of other than through the disposal of
Okiep Ltd.

(5) There was 5,000 of unpaid interest due on the bank loan at 31 December 2011.
All outstanding interest had been paid at 31 December 2010.

(6) Bisho plc paid an interim dividend during the year and also made a second issue of
shares for cash.

Requirement

Prepare a consolidated statement of cash flows for Bisho plc for the year ended
31 December 2011, including a note reconciling profit before tax to cash generated from
operations, using the indirect method. A note showing the effects of the disposal of Okiep Ltd
is not required.
(20 marks)

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3. At 1 January 2011 Tazel plc held 80% of the 1 ordinary share capital of Saldan Ltd, its sole
subsidiary. On 1 April 2011 Tazel plc acquired 30% of the ordinary share capital of Umtata Ltd,
giving Tazel plc significant influence over Umtata Ltd. The profits and losses of Umtata Ltd
accrued evenly over the year ended 31 December 2011.

Extracts from the draft financial statements of the three companies for the year ended
31 December 2011 are shown below:

Income statements for the year ended 31 December 2011

Tazel plc Saldan Ltd Umtata Ltd

Revenue 1,105,000 864,900 763,200
Cost of sales (353,600) (389,200) (305,300)

Gross profit 751,400 475,700 457,900

Operating expenses (290,400) (98,650) (168,300)

Profit from operations 461,000 377,050 289,600

Investment income 96,000

Profit before tax 557,000 377,050 289,600

Income tax expense (167,000) (110,000) (85,000)

Profit for the year 390,000 267,050 204,600

Statements of financial position as at 31 December 2011 (extracts)

Tazel plc Saldan Ltd Umtata Ltd

Equity
Ordinary share capital (1 shares) 3,000,000 1,100,000 500,000
Retained earnings 468,400 395,300 276,200

Total equity 3,468,400 1,495,300 776,200

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Additional information:

(1) Tazel plc acquired its holding in Saldan Ltd on 1 January 2009. The fair values of all
assets and liabilities of Saldan Ltd at the date of acquisition were the same as their
carrying amounts, with the exception of an intangible asset which was estimated to have
a fair value of 10,000 in excess of its carrying amount.

The intangible asset was assessed as having a remaining useful life of eight years at
1 January 2009. Amortisation of intangibles is presented in operating expenses.
Saldan Ltds retained earnings at the date of acquisition were 160,700. During the
current year Saldan Ltd paid an interim dividend of 50,000.

(2) At 1 April 2011, the date of acquisition by Tazel plc, the fair value of Umtata Ltds assets
and liabilities were the same as their carrying amounts.

(3) Since 1 April 2011 Umtata Ltd has invoiced 90,000 of sales to Tazel plc, all at a mark-
up of 20%. One quarter of these goods were still in Tazel plcs inventories at the year
end.

(4) On 1 January 2011 Tazel plc sold a machine to Saldan Ltd for 120,000. The machine
had a carrying amount in Tazel plcs books of 95,000 at the date of sale. The estimated
remaining useful life of the machine was reassessed at the date of sale as five years.
Depreciation on plant and machinery is presented in cost of sales.

(5) At 31 December 2011 Saldan Ltd had received 45,000 in deposits from customers to
secure the purchase of its latest electronic game which went on sale on 1 February 2012.
Saldan Ltd recognised the amount in revenue for the year ended 31 December 2011 and
deposited the money in a separate deposit account.

(6) At 31 December 2010 an impairment loss of 15,000 in respect of goodwill arising on the
acquisition of Saldan Ltd was recognised. An impairment loss of 8,000 needs to be
recognised in respect of Tazel plcs investment in Umtata Ltd for the year ended
31 December 2011.

Requirements

Prepare Tazel plcs:

(i) consolidated income statement for the year ended 31 December 2011; and

(ii) an extract from its consolidated statement of financial position at the same date,
presenting all figures that would appear as part of equity, including the non-controlling
interest.
(21 marks)

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4. Rusten Ltd is preparing its financial statements for the year ended 31 December 2011,
extracts from which are shown below.

Draft income statement for the year ended 31 December 2011 (extract)

Revenue 975,000
Operating expenses (180,500)
Finance costs (17,900)

Draft statement of financial position as at 31 December 2011 (extract)

Property, plant and equipment 650,000
Current liabilities 121,960
Non-current liabilities 150,000

However, there are a number of outstanding issues, as detailed below.

(1) Rusten Ltd sold a new computer system to a third party on 1 July 2011 for 180,000. The
sale included technical after-sales support for the next three years, which is estimated to
cost Rusten Ltd 8,000 each year. Rusten Ltd normally earns a gross profit margin of
20% on such support services.

On receipt of the cash in August 2011 Rusten Ltd recognised the full amount of 180,000
as revenue. The cost of the after-sales support incurred in the year is already included in
operating expenses.

(2) Rusten Ltd sold a piece of land, which houses its warehousing facilities, to a finance
company on 1 January 2011 for 1 million. Rusten Ltd will continue to use the land and
has the right to buy it back on 31 December 2015 for 1 million plus interest of 6% pa.
On 1 January 2011 the market value of the land was estimated to be 2 million and its
carrying amount was 700,000.

On 1 January 2011, Rusten Ltd derecognised the land and included the profit on disposal
as revenue in its income statement.

(3) Rusten Ltd entered into a 45 year lease for buildings on 1 January 2011. The buildings
had an estimated useful life of 50 years. The present value of the minimum lease
payments is 873,000, which is equivalent to the fair value of the leasehold interest. The
interest rate implicit in the lease is 5% pa and the annual lease payment is 49,120
commencing on 31 December 2011.

Rusten Ltd dealt with this transaction by crediting cash and debiting the 49,120 cash
lease payment to operating expenses (where all costs and expenses relating to buildings
are recognised). No other accounting entries were made.

Requirements

(a) Using all the information above, prepare revised extracts from the financial statements of
Rusten Ltd for the year ended 31 December 2011. (11 marks)

(b) Explain the concept of substance over form and illustrate this concept with reference to
Rusten Ltd. (5 marks)
(16 marks)

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