F7 2015 June Q3

Q3
The following trial balance relates to Clarion as at 31 March 2015:
$’000 $’000
Equity shares of $1 each (note (i)) 30,000
Retained earnings – 1 April 2014 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 2014 19,000
Investments through profit or loss – value at 1 April 2014 (note (iv)) 6,000
Inventory at 31 March 2015 11,700
Trade receivables 18,500
Bank 1,900
 Q3
$’000 $’000
Deferred tax (note (vi)) 2,700
Trade payables 9,400
Environmental provision (note (iii)) 4,000
Finance lease obligation (note (iii)) 4,200
Revenue 132,000
Cost of sales 88,300
Operating lease payments (note (v)) 2,000
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 (vi)) 400
237,700 237,700
 Q3
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 2014. The market
value of Clarion’s shares was $2·50 on 1 October 2014.
II. On 31 March 2015, 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.
 Q3
III. Property, plant and equipment:
Included in property, plant and equipment are two major items of
plant acquired on 1 April 2014:
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 2014 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.
 Q3
Item 2 was plant acquired with a fair value of $8 million under a
five-year finance lease. This required an initial deposit of $2·3
million and annual payments of $1·5 million on 31 March each
year. The finance lease obligation in the trial balance above
represents the fair value of the plant less both the deposit and the
first annual payment. The lease has an implicit interest rate of
10% and the asset has been correctly capitalised in plant and
equipment.
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.
 Q3
IV. The investments through profit or loss are those held at 31
March 2015 (after the sale below). They are carried at
their fair value as at 1 April 2014, however, they had a fair
value of $6·5 million on 31 March 2015. 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.
 Q3
V Clarion renewed an operating lease on a property on 1
April 2014. The operating lease payments represent an
annual payment (in advance) of $1 million and a lease
premium of $1 million. The lease is for four years and
operating lease expenses should be included in cost of
sales.
 Q3
VI A provision for current tax for the year ended 31 March
2015 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
2014. At 31 March 2015, the tax base of Clarion’s net assets
was $12 million less than their carrying amounts.
The income tax rate of Clarion is 25%.
 Q3
Required:
a) Prepare the statement of profit or loss for Clarion for the year ended 31
March 2015.
b) Prepare the statement of changes in equity for Clarion for the year
ended 31 March 2015.
c) Prepare the statement of financial position for Clarion as at 31 March
2015.
Notes to the financial statements are not required.

d) Calculate the basic earnings per share of Clarion for the year ended 31
March 2015. (3 marks)
e) Prepare extracts from the statement of cash flows for Clarion for the
year ended 31 March 2015 in respect of cash flows from investing
(ignore investment income) and financing activities. (4 marks)
(30 marks)
 Answer
a) Clarion – Statement of profit or loss for the year ended 31 March 2015
$’000
Revenue 132,000
Cost of sales (w (i)) (106,550)
Gross profit 25,450
Distribution costs (7,400)
Administrative expenses (8,000)
Finance costs (w (ii)) (2,790)
Investment income (w (iii)) 1,000
Profit before tax 8,260
Income tax expense (3,500 – 400 + 300 (w (iv))) (3,400)
Profit for the year 4,860
 Answer
b) Clarion – Statement of changes in equity for the year ended 31 March 2015
Share Share Retained Total
capital premium earnings equity
$’000 $’000 $’000 $’000
Balance at 1 April 2014 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 4,860 4,860
Balance at 31 March 2015 30,000 5,000 9,560 44,560

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).
 Answer
c) Clarion – Statement of financial position as at 31 March 2015
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
Unamortised lease premium (1,000 – 250 (w (i)) – 250 current asset below) 500
56,000
Current assets
Inventory 11,700
Trade receivables 18,500
Lease premium prepayment 250 30,450
Total assets 86,450
 Answer
Equity and liabilities
Equity (see (b) above)
Equity shares of $1 each 30,000
Other equity component – share premium 5,000
Retained earnings 9,560
44,560
Non-current liabilities
8% loan notes 15,000
Deferred tax (w (iv)) 3,000
Environmental provision (4,000 + 320 (w (ii))) 4,320
Finance lease obligation (w (v)) 3,747 26,067
Current liabilities
Trade payables 9,400
Finance lease obligation (4,770 – 3,747 (w (v))) 1,023
Bank overdraft 1,900
Current tax payable 3,500 15,823
Total equity and liabilities 86,450
 Answer
d) Clarion – Basic earnings per share for the year ended 31 March 2015
Profit per statement of profit or loss 4·86 million
Weighted average number of shares (w (vi)) 28·3 million
Earnings per share 17·2 cents
 Answer
e) Clarion – Extracts from the statement of cash flows for the year ended
31 March 2015
$’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 finance lease (2,300 + (1,500 – 570)) (3,230)
Equity dividends paid (3,900)
 Answer
Workings (figures in brackets in $’000)
(i) $’000
Cost of sales (per question) 88,300
Property rental (1,000 + (1,000/4 years) – see below) 1,250
Depreciation of plant and equipment (85,000 x 20%) 17,000
106,550
The lease premium must be amortised, on a straight-line basis, over the length
of the lease (four years).

(ii) Finance costs

8% loan notes (800 trial balance + 800 suspense account (w (vii))) 1,600
Finance lease (w (v)) 570
Bank interest 300
Environmental provision (4,000 x 8%) 320
2,790
 Answer
(iii) Investment income
Dividends received (500 – 200 profit on sale) 300
Profit on sale 200
Gains on fair value (6,500 – 6,000) 500
1,000

(iv) Deferred tax

Provision required as at 31 March 2015 (12,000 x 25%) 3,000
Balance at 1 April 2014 (2,700)
Charge to profit or loss 300
 Answer
(v) Leased plant/finance lease obligation
Fair value of plant/initial obligation (4,200 + 2,300 + 1,500) 8,000
Less deposit (2,300)
5,700
Interest at 10% to 31 March 2015 570
Less first annual payment (1,500)
Liability at 31 March 2015 4,770
Interest at 10% to 31 March 2016 477
Less second annual payment (1,500)
Liability at 31 March 2016 3,747
 Answer
(vi) 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 2014 to 30 September 2014 25 million×$2·50/$2·35×6/12 = 13·3 million
1 October 2014 to 31 March 2015 30 million×6/12 = 15·0 million
Weighted average for year 28·3 million

(vii) 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
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