ACCA

Financial Reporting

MOCK EXAM – ANSWERS

 Section A
1. B

Given that the chances of employee’s victory are less than probable, the issue should be disclosed
in notes. The 2nd issue results in a constructive obligation for Strength Co. Therefore, a provision
is required.

2. D

To be capitalised, all development costs must meet certain conditions listed by IAS 38. The first
project fails the condition of commercial viability. Although Technology Co can use the findings
in other projects, this specific project cannot be capitalised. Project 2 cannot be capitalised as the
business lacks sufficient financial resources to complete the project.

3. C

$60,000 + $4,000 + $2,000 = $66,000

The cost of the fixed asset and any costs incurred to bring the asset to location and workable
condition are included in the initial carrying amount. Training provided to the employees cannot
be capitalised as the business cannot control the knowledge of employees. Maintenance cost will
be expensed out each year.

4. C

Bearer plants and land related to agricultural activity are both excluded from the scope of IAS
41. Unlike biological assets, agricultural produce must always be measured at fair value.

5. B

Disclosures related to IAS 37 have been added to F7 syllabus from 2016. Disclosures for prior year
reconciliations are not required under IAS 37.
6. A

Cost (500,000 x 20% x $4) $400,000

Share of profit for 20X7 ($100,000 x 6 /12 x 20%) $10,000

Share of profit for 20X8 ($250,000 x 20%) $50,000

Less: Dividend received ($20,000 x 20%) ($4,000)

Carrying value of Beta Co $456,000

Dividends are considered to be received when they are declared. The actual receipt of the cheque
is irrelevant.

7. A

Retained earnings of Huge Co $400,000

Share of Tiny Co ($200,000 - $150,000) x 60% $30,000

Unrealised profit ($10,000 - $8,000) / 2 ($1,000)

Total retained earnings $429,000

8. D

The CGU has suffered a total loss of $750,000 - $500,000 = $250,000

The goodwill of $100,000 should be written off in full. The remaining loss, after the allocation to
goodwill, will be $150,000.

Inventory cannot be written off further as it is already valued at net realisable value. Therefore,
the combined value of equipment and furniture after the impairment will be: $400,000 +
$200,000 - $150,000 = $450,000

9. C

Under IFRS 10, entities meeting the definition of 'investment entity' are granted special
exemption from consolidation.
10. B

Although percentage of ownership is important in deciding the relationship between two

companies, the critical factors are level of control and decision-making influence. Only the 2nd
and 3rd investment meet this criteria to be classified as subsidiaries.

11. A

Inventories, deferred tax assets, non-current assets held for sale and financial assets are all
excluded from the scope of IAS 36. Their valuation is dealt with by the respective accounting
standard.

12. D
Profit before interest and tax $70,000
Depreciation ($100,000 x 20%) $20,000
Increase in account receivable ($5,000)
Foreign exchange loss $5,000
Decrease in inventory $4,000
Increase in payable $3,000
Cash generated from operations $97,000
13. C
Cost of sales – P Co $90,000
Cost of sales – S Co ($60,000 / 12 x 9) $45,000

Intra-group sales ($10,000)

Unrealised profit ($10,000 / 100 x 20) / 2 $1,000

14. A

Lease is defined as “A contract, or part of a contract, that conveys the right to use an asset,
referred to as the underlying asset, for a period of time in exchange for a consideration.”

15. D

Capitalising the repair expense will result in overstated profits. Overstated profits will overstate
EPS and ROCE.
 Section B
16. C

Depreciation for first six months ($200,000 / 10 x 6 / 12) = $10,000

Depreciation for last six months ($195,000 / 7.5 x 6 / 12) = $13,000

Total charge for the year = $23,000

Note: Remaining useful life of 7.5 years can be calculated by utilising the information for
accumulated depreciation.

17. B

Grant 1 - Grants related to taxable income are excluded from the scope of IAS 20.

Grant 2 - $100,000 can be recognised.

Grant 3 - Reduced rate loans can be recognised under IAS 20.

Total Grant Income: $200,000 + $100,000 (7% - 3%) = $204,000

18. A

The evidence of the claim existed before the reporting date. It was simply not received by White
Co. Therefore, Issue 1 needs to be adjusted. No evidence of Issue 2 existed at the reporting date.
It needs not to be adjusted.
19. A

The assets are impaired only when their carrying amount exceeds the recoverable amount.
Recoverable amount is higher of value in use and fair value less costs to sell.

Crane 1

Carrying amount = $600,000 - $120,000 = $480,000

Recoverable amount = $500,000

Impairment = Nil

Crane 2

Carrying amount = $750,000 - $250,000 = $500,000

Recoverable amount = $490,000

Impairment = $10,000

Crane 3

Carrying amount = $800,000 - $160,000 = $640,000

Recoverable amount = $300,000

Impairment = $340,000

Total impairment

$10,000 + $340,000 = $350,000

20. D

Initial recording ($10,000 x 90%) - 500 = $8,500

Interest charged ($8,500 x 12%) = $1,020

Cash paid ($10,000 x 8%) = ($800)

21. A
Profit before interest and tax $540,000
Depreciation $90,000
Loss on disposal $20,000
Increase in inventory ($10,000)
Decrease in receivables $5,000
Decrease in payables ($30,000)
Cash generated from operations $615,000

22. A
Cash generated from operations $615,000
Interest paid ($30,000)
Dividends paid ($55,000)
Tax paid (50 + 160 - 80) (130,000)
Net cash from operating activities $400,000

23. C

Payment for purchase of NCA ($100,000)

Disposal of NCA (W1) ($20,000)

Net cash used in investing activities ($120,000)

Working 1

Cost of NCA disposed (1,400 + 100 – 1,460) = $40,000

Accumulated depreciation of NCA disposed (200 + 90 - 250) = $40,000

Net book value of asset disposed = $0

Therefore, entire loss on disposal relates to price actually paid for dismantling of NCA
24. D

Issue of share capital (310 + 125 – 300 – 120) $15,000

Loan repaid (380 – 90) (290,000)

Net cash used in financing activities ($275,000)

25. A

This can simply be calculated by subtracting open cash balance from closing cash balance:

$25,000 - $20,000 = $5,000

26. D

Only public limited companies, or those in the process of issuing securities to public, are required
to present EPS. There is no need to calculate EPS separately for each company in the consolidated
accounts.

27. B

Redeemable preference shares are treated as debt. Therefore, the dividend paid on such shares
is already deducted when arriving at net profit.

EPS = ($200,000 – 10,000) / 5,000

EPS = $38.00
28. A

Gross profit $1,000,000

Operating expenses ($200,000)

Preference dividends ($20,000)

Profit before tax $780,000

Tax at 30% (234,000)

Net profit $546,000

EPS = $546,000 / 200,000

EPS = $2.73

29. A

The first step is to calculate theoretical ex-rights price:

Value of 5 shares before issue @ $3.20 $16.00

Value of rights issue @2.00 $2.00

Total value of 6 shares $18.00

Theoretical ex-rights price ($18/6) $3.00

EPS for 2016

Before rights issue = $500,000 / 100,000 = $5.00

Corresponding EPS with rights issue = $5.00 x $3.20 / $3.00 = $5.33

 EPS for 2017

Before rights issue (100,000 / 12 x 3) x $3.20 / $3.00 = 26,667

After rights issue (120,000 / 12 x 9) = 90,000

Total weighted average shares = 116,667

EPS = $400,000 / 116,667 = $3.43

30. C
Theoretical ex-rights price is simply a fraction used in the calculation of EPS. No separate
disclosure is required for it.
 Section C

31. Hydrogen

Consolidated statement of financial position as at 31 December 2016:

$’000
Non-current assets
Property, plant and equipment (19,000 + 11,400) 30,400
Goodwill (W3) 6,400
Investment in associate (W6) 6,750
Investment – Fair value through profit or loss 8,000
Current assets
Inventory (8,500 + 5,500 – 500 PURP) (W7) 13,500
Trade receivables (3,500 + 800) 4,300
Cash and bank (1,000 + 500) 1,500
Total assets 70,850

Equity and liabilities

Equity shares of $1 each (10,000 + 1,500 ) (W1) 11,500
Share premium (W3) 8,250
Retained earnings (W5) 27,925
Non-controlling interest (W4) 3,975
Total equity 51,650
Loan notes 7% (5,000 + 2,000) 7,000
Trade payables (9,000 + 3,200) 12,200
Total equity and liabilities 70,850

W1 – Group structure
Sulphur = 3,000,000 / 4,000,000 = 75% holding
Argon = 25% holding
W2 – Net assets of Sulphur
Acquisition ($’000) Reporting date ($’000) Post acquisition ($’000)
Share capital 4,000 4,000 0
Retained earnings 7,000 9,000 2,000
Fair value adjustment (400) 0 400
PURP on inventory (W7) (500) (500)
10,600 12,500 1,900
W3 – Goodwill
Cost of investment of Hydrogen
Cash (3,000 x $1.25) $3,750
Shares (3,000 / 2 x $6.5) $9,750
$13,500
NCI at acquisition $3,500
$17,000
Less: Fair value of net assets (W2) (10,600)
Goodwill $6,400

In addition, share consideration needs to be recorded.

Share capital (3,000 / 2 x $1) = $1,500
Share premium (3,000 / 2 x $5.5) = $8,250

W4 – Non-controlling interest
NCI value at acquisition $3,500
Share of post-acquisition profits (1,900 x 25%) $475
Value of non-controlling interest $3,975

W5 – Consolidated Reserves
Hydrogen (15,000 + 8,000) $23,000
Professional cost of acquisition ($500)
Increase in fair value of investment (8,000 – 5,000) $3,000
Share of Sulphur (1,900 x 75%) $1,425
Share of Argon (W6) $1,000
Consolidated reserves $27,925

W6 – Investment in Associate
Cost of investment (4,000 x 25% x 5.75) $5,750
Share of profit (4,000 x 25%) $1,000
Value of Argon $6,750
W7 – Provision for unrealised profit on inventory
Amount of profit = $3,000,000 / 150 x 50 = 1,000
5% unsold = 1,000 x 50% = 500
32. Delta Part
(a)

Ratio Formula 2017 2016

Gross profit margin Gross profit / Revenue 40.35% 33.06%

Net profit margin Net profit / Revenue 2.11% 10.74%

Operating profit /
ROCE 10.26% 14.03%
(Total assets - Current liabilities)

Gearing Debt / (Debit + Equity) 33.58% 14.29%

Interest cover Operating profit / Interest 1.38 times 3.6 times

Current ratio Current assets / Current liabilities 6.1 : 1 8.8 : 1

Quick ratio Quick assets / Current liabilities 3.5 : 1 4.9 : 1

Receivables days Trade receivables / Revenue x 365 236.93 days 66.36 days

Payables days Trade payables / Cost of sales x 365 115.94 days 36.05 days

EPS Net profit / Number of shares 0.06 c 0.26 c

Part (b)

The performance of Delta can be assessed with the help of calculated ratios. Although the
revenue and the gross profit of the business have improved, there are many other alarming areas.
They are explained here in the light of each individual ratio.

Gross profit margin

Gross profit margin of Delta has improved from 33.06% in 2016 to 40.35% in 2017. The growth of
revenue has outperformed the growth of cost of sales. It indicates the efficiency of sales
departments in accelerating revenues as well as the efficiency of production and procurement
department in controlling the direct costs.

Net profit margin

Net profit margin of Delta has deteriorated from 10.74% in 2016 to 2.11% in 2017. The major
cause for this decline is the unusual increase in administration expense and finance costs. Net
profit margin, also known as the bottom line figure, is extremely important from investor’s
perspective. Unless these costs are controlled in the future, Delta may struggle to keep its
investors satisfied.

Return on capital employed (ROCE)

Return on capital employed (ROCE) has fallen from 14.03% in 2016 to 10.26% in 2017. ROCE is
yet another important ratio from the perspective of investors. Although operating profit, the
numerator of the ratio, has slightly improved, Delta has used greater amount of finance to
generate it.

Gearing

Incorporation of debt in the capital structure increases the risk profile of a business. Gearing has
increased from 14.29% to 33.58%. This is principally because of the loan that Delta has acquired
during the year. Although no industry benchmarks about the acceptable level of gearing are
provided, Delta needs to be cautious with the inclusion of debt in its capital

structure.

Interest cover

The interest cover ratio has declined from 3.6 times to 1.38 times. Interest cover ratio illustrates
the ability of a business to repay interest as it falls due. Failing to make the interest payments on
time may result in liquidation from Delta. Unless, the ratio is improved, Delta needs to monitor it
closely.
Current ratio

The current ratio of Delta has also declined from 8.81: 1 to 6.11: 1. This ratio depends entirely on
the nature of the industry. The ratio varies significantly from one industry to another. In the
absence of any information about the industry, the appropriateness of these results cannot be
assessed. However, the ratio appears not to be a major cause of concern for Delta.

Quick ratio

Quick ratio has also declined from 4.94: 1 to 3.52: 1. This ratio, once again, depends on the nature
of the industry. Nevertheless, there is no major cause of concern as Delta can easily repay its
current liabilities from its liquid assets.

Receivables days

The most dramatic change from 2016 to 2017 is evident from receivable days. The average period
of collection from the customers has increased from 66 days to 237 days. It indicates the inability
of Delta to recover the cash from its customers. Perhaps, it is also the root cause for deteriorating
liquidity condition. The lack of recovery has forced Delta into cash crisis which, in turn, has forced
Delta to take loan, thereby leading to higher finance costs, lower net profits and low interest
cover ratio.

Payables days

Payable period have also increased from 36 days to 116 days. This is a serious cause of concern
has holding the suppliers’ payments may force them to stop supplying. Delta needs to, somehow,
make timely payments to suppliers in order to safeguard the business relations.

Earnings per share (EPS)

Earnings per share have reduced from 0.26 cents to 0.06 cents. This is again alarming and is simply
because of the poor net profitability of the business.

Conclusion

The performance of Delta has significantly deteriorated in 2017. Almost every ratio was healthy
in 2016 and alarming in 2017. The most problematic area is working capital management as it
appears to be the root cause behind all other business problems.
Marking scheme:

Section A 15 questions all 2 marks each 30

Section B 15 questions all 2 marks each 30
Section C
Q31: Hydrogen Co

Consolidated statement of financial position

Property, plant and equipment 1 Goodwill 3 Investment in Argon 2
Investment – Fair value 1
Inventory 1.5
Trade receivables 1
Cash and bank 1
Equity and share premium 1.5
Retained earnings 4
NCI 2
Loan notes 1
Trade payables 1
Total 20
Q32: Delta
Part (a)

Calculation of each ratio for 2016 - 0.5 marks per ratio 5

Calculation of each ratio for 2017 - 0.5 marks per ratio 5
Part (b)

Proper interpretation of each ratio – 1 mark per ratio 10

Total 20