讲解 ACF518/ACF566 ADVANCED FINANCIAL ACCOUNTING / CORPORATE REPORTING JANUARY 2022辅导数据结构程序

UNIVERSITY EXAMINATIONS: JANUARY 2022

Module Code: ACF518/ACF566

CRN: 10071/16832

Module Title: ADVANCED FINANCIAL ACCOUNTING / CORPORATE REPORTING

SECTION A – Answer BOTH questions

Question 1

Ballina Plc (Ballina) drew up the following trial balance as at 31/12/21

Additional information:

1. Two major customers of Ballina were declared bankrupt in February 2022 and consequently will not pay their debts owing at 31 December 2021.

• Easkey owed Ballina £9,000 at 31 December 2021. They had been trading profitably with no cash flow issues but a fire at their premises in January 2022 destroyed the business and their insurance had not been renewed due to a clerical error. The £9,000 had been owed for 7 days at 31 December 2021.

• Rathlee owed Ballina £24,000 at 31/12/21. They had been having cash flow difficulties for quite some time. The £24,000 had been owed for 90 days at 31/12/2021 and Ballina had made numerous attempts to collect it. 5 marks

2 On 01/01/21 Ballina acquired an item of plant under a 3 year lease agreement. The agreement had an implicit finance cost of 8%. Ballina made an initial payment of £100,000 at the inception of the agreement and pays further annual payments of £80,000 on the 31 December each year. Ballina incurred expenses of £25,000 re shipping and installation of the plant. The only entries in the accounts are as follows:

Plant and equipment is depreciated at 20% reducing balance.

10 marks

3 Due to a downturn in the property market the recoverable amount of one of Ballinas properties has fallen below its net book value. The property currently has a fair value less costs of disposal of £500,000. It has been included in the financial statements as follows:

4 marks

4 During the year, Ballina made one inventory purchase from a foreign supplier. The inventory was purchased on 31 October 2021 for €750,000. Ballina still held this inventory at 31 December 2021, the inventory’s net realisable value at this date is £800,000.

Due to an administrative error the purchase was recorded in GBP Sterling as follows:

It was also included in closing inventory at £750,000

The relevant rates of exchange were:

6 marks

5 On 01/01/2021 Ballina took out a £5million loan at a rate of 5% to finance construction of a new manufacturing facility. Due to delays with planning work did not commence on site until 01/03/2021, during this time Ballina invested the funds earning interest of £8k. Ballina continued to invest any unspent loan funds for the remainder of the year, earning a further £20k interest. Construction of the facility is still ongoing at the year end, all interest paid on the loan has been charged to Interest expense, all interest received on surplus funds has been posted to Investment income. 5 marks

Required:

Explain the required treatment of items 1 to 5 above. Your explanation should refer to relevant accounting standards and include any journal entries necessary to correct the trial balance. (30 Marks)

[Total: 30 Marks]

Question 2

The financial statements of BROWN Plc (BROWN), SQUIRE Ltd (SQUIRE) and MANNI Ltd (MANNI) are presented below.

Additional information:

1. BROWN acquired a 20% shareholding in MANNI on 01/01/2021. The Directors of BROWN do not have a role in the day-to-day running of MANNI.

2. BROWN acquired 22.5 million £0.50 ordinary shares in SQUIRE on 01/01/2019. The retained earnings at that date were £25,000,000; the fair value of SQUIRE’s net assets was the same as their book value, with the exception of property. The market value of property was £4,000,000 above the book value. At acquisition, the property had a remaining useful life of 25 years, depreciation is charged to administrative expenses. The fair value of the remaining 7.5 million shares was £25,000,000 on 01/01/2019. BROWN values non-controlling interests at fair value when calculating goodwill on acquisition of subsidiaries.

3. Since acquisition BROWN has become a customer of SQUIRE. SQUIRE’s Trade receivables include £2,200,000 owed by BROWN; total sales to BROWN since acquisition, were £12,000,000. SQUIRE sells goods to BROWN at a mark-up of 25%. At 31/12/2021, BROWN still held 30% of these goods in inventory.

4. An impairment test on the goodwill of SQUIRE, conducted on 31/12/2021, concluded that goodwill on acquisition is now impaired by 4%. The value of the investment in MANNI was not impaired.

5. SQUIRE paid dividends of £ 1,200,000 relating to the period from 01/01/2021 to 31/12/2021. MANNI paid dividends of £400,000 during the year ended 31/12/2021. All dividends receivable by BROWN have been credited to other income in the statement of profit or loss above.

6. All items in the above income statements are deemed to accrue evenly over the year.

Required:

Prepare the consolidated statement of profit or loss for the BROWN Group for the year ended 31/12/2021 and a consolidated statement of financial position as at that date. (Show workings including ALL JOURNAL ENTRIES REQUIRED) (30 marks)

[Total: 30 Marks]

Question 3

IFRS 15 Revenue from Contracts with Customers has applied for accounting periods starting after 01 January 2018.

Required:

(a) Explain why there was a need for a new standard on revenue and what impact on the financial statements IFRS 15 is has had. (3 marks)

FWD Plc (FWD) is a conglomerate business with a year end of 31/12/2021 working across many different industries. Details of their revenue for the year are provided below:

1. FWD run an online bike store. Bicycle and accessory sales for the year came to £8,500,000 spread evenly throughout the year. Customers have a 3 month period in which they may return items, based on past-experience, FWD expect 30% of sales to be returned. All goods are sold at a 40% profit margin, all returns are returned to the warehouse and sold at a later date. (5 marks)

2. FWD operate a chain of garden centre’s with total revenue of £2,500,000. Included in this revenue is £ 100,000 from the sale of gift cards which have not been redeemed yet. Gift cards expire after 12 months, based on past experience, 15% of gift cards will expire unused. FWD has no requirement to remit any unused funds to the customer when the gift card expires unused. (3 marks)

3. FWD also operate a construction company. They entered into a contract to build a large office block on 01/01/2021. The contract is to be treated as a single performance obligation to be satisfied over time. The contract price is dependent on completion date, with £8m payable if completed by 31/12/2022 and £12m if completed by 30/06/2022. FWD are confident of completing the contract by 30/06/2022.

The total construction costs for 2021 were £4m, excluding inventory of building materials of £200k. FWD estimate the further costs to complete the contract at £1m. The customer made stage payments of £3m on 30/06/2021 and £2m on 31/12/2021, with the balance to be paid on completion. (9 marks)

Required:

(b) Explain how FWD should account for the above under IFRS 15 Revenue from Contracts, along with any journal entries necessary to correct the financial statements for the year ended 31/12/2021.

Question 4

Baileys Plc (Baileys) manufacture and install heat pumps. They are in the process of finalising their financial statements for the year ended 31/12/2021. They have made a number of provisions during the year as follows:

(i) Baileys has sophisticated machinery which requires a major overhaul every five years, costing £2m each time. The company has decided to spread this cost over the five years preceding the overhaul, the first year’s provision has been recognised as follows:

Journal Debit

Credit

Cost of sales

200,000

Provision for machinery replacement

200,000

(3 marks)

(ii) Baileys offers warranties on goods which are not performing to the customers’ satisfaction. From past experience, 70% of customers make no warranty claim, 20% make claims which cost Baileys £200 to repair each unit and 10% make claims which cost Baileys £500 to repair each unit. Total sales for the year ended 31/12/2021 were 20,000 units. Baileys has no current provision for warranty claims, expensing each claim as it is received. (5 marks)

(iii) The company has had recent difficulties with its Republic of Ireland factory and have decided to close it down on 30/06/2022, production will continue until this date. The Board of Directors approved this action at a meeting on 30/11/2021, they will inform staff of the closure and associated redundancies three months in advance of closure on 01/04/2022. The company estimates the cost of winding up operations at £600,000. No provision has been made as the factory will continue production until 30/06/2022. (4 marks)

(iv) Baileys recently moved into energy production. It developed a wind farm at a capitalised cost of £2,000,000, commissioning it on 01/01/2021. As part of the planning conditions the wind farm must be decommissioned at the end of its 5-year life and returned to a green field site. It is estimated the decommissioning and site clean-up costs will be £250,000. There have been no entries made in the financial statements regarding site clean-up. The wind farm is to be depreciated straight line over 5 years, with a full year’s depreciation charged in the current year.

Baileys has calculated a pre-tax discount rate of 5% on long term provisions. (8 marks)

Required:

Applying the principles set out in IAS 37, determine if the above items have been treated correctly, provide an explanation for your decision and, where necessary, indicate the correct treatment and any journal entries required. In the case of part (iv), prepare a schedule detailing the treatment of the site clean-up costs and associated provision (if any) over the life of the wind farm. (20 Marks)

[Total: 20 Marks]

Question 5

“In a future society, successful firms are going to be those that can link together the environment, society and their economic prosperity. They will look to the long term and find resources that are sustainable and assurance that those costs are not going to skyrocket. ”

Michael Radcliffe, KPMG Director Global Sustainability Network (2002) Required:

Explain what is meant by the green revolution in financial reporting and critically evaluate the attempts by the accounting profession to achieve greater transparency in reporting of environmental issues. (20 Marks)

[Total: 20 Marks]

Examinable accounting standards

IAS1 Presentation of financial statements

IAS2 Inventories

IAS8 Accounting policies, changes in accounting estimates and errors

IAS10 Events after the reporting period

IAS16 Property, plant and equipment

IAS19 Employee benefits

IAS20 Accounting for government grants and disclosure of government assistance

IAS21 The effect of changes in foreign exchange rates

IAS23 Borrowing costs

IAS27 Consolidated and separate financial statements