ACCA

Paper F7
Financial Reporting
Revision Mock Examination
March 2017
Answer Guide

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2 w w w . s t ud yi nt e r a c t i ve . o r g
Section A

1. B
Total services revenue = 125/100 × $200 × 2 years = $500
Total goods revenue = $3,000 − $500 = $2,500
Total revenue (y/e 31 March 2015) = $2,500 + (6/24 × $500) = $2,625

2. D

$000
-v-
Net proceeds Total payments
Par value 6,000 Interest
Less: Issue costs (120) 3.5% × 6,000
= 210 × 7 years = 1,470
+ Final redemption
payment including
premium 7,100
5,880 8,570

Therefore finance cost

= 2,690 (D)

3. D
Annual expense = $1,500 × 3 (#payments) / 4 years = $1,125
Expense (4 months) = 4/12 × $1,125 = $375
DR Op. lease rental expense (SPL) $375
CR Accruals (SFP) $375

4. A
The IP is recognised at fair value at 31 March 2015 of $550,000 on the statement
of financial position.
It has fallen in value from its previous fair value at 31 march 2014 of $600,000 and
so a loss of $50,000 is recognised though profit or loss.

5. C
Profit attributable to the ordinary equity holders = $500,000 – (10% × $100,000) =
$490,000
Weighted average number of shares = 400,000 + (400,000/2) = 600,000
Basic EPS = $490,000/600,000 = 81.7 cents per share

w w w . s t ud y i nt e r a c t i v e . o r g 3
6. C
Temporary difference = $100,000
@20% = $20,000 DT liability (carrying value > tax base)
Current year liability = $20,000
Prior year liability = $175,000
Reduction in liability = $155,000 = gain

7. A
Opening Effective Interest Cash Paid Closing
@ 7%
$475,000 ($20,000) $482,900
= $500,000 × 95% $32,900 = $500,000 × 4%

$475,000 less
5,000 = $470,000

8. A
This is the correct treatment for a bargain purchase.

9. D
TK no longer controls Theta so it is no longer considered a subsidiary and does not
need consolidating.

10. D
Apples, lemons and pears are examples of agricultural produce but not biological
assets.

11. C
A is treated using split accounting and would have both a liability and equity element.
B is the purchase of a debenture so would give rise to a financial asset and not a
financial liability.
D is treated as equity as the preference shares are irredeemable and there is
therefore no obligation to pay cash.

12. B The Supervisory body is the IFRS Foundation.

13. B
The effective rate of interest is used to calculate the borrowing costs capitalised.
Total annual interest in the first year of the loan is $100,000 ($2,000,000 ×5%)
Borrowing costs can only be capitalised from 1 October 2014, when borrowing costs
are being incurred, and so only $50,000 is capitalised, being six months from 1
October to 31 March.

4 w w w . s t ud yi nt e r a c t i ve . o r g
14. C
Depreciation (1 July 2014 to 31 March 2015 – 9 months) = $500,000 / 10 years ×
9/12 = $37,500
Carrying value = $500,000 - $37,500 = $462,500
Amortisation of government grant = $100,000 / 10 year × 9/12 = $7,500
Deferred income = $100,000 - $7,500 = $92,500

15. D
Both (iii) and (iv) increase the capital employed and reduce the ROCE.
(i) Will reduce the capital employed and therefore increase the ROCE.
(ii) The tax bill will have no impact on the profits before interest and tax and so does
not reduce the ROCE.

w w w . s t ud y i nt e r a c t i v e . o r g 5
Section B

Primrose

16 A Valuation of Associate Agapanthus: $m

Investment at cost 20
Group share of Associate’s post-acqn Retained Earnings 1.8
(30% × 6m)
Less: Impairment (2.8)
Investment in Associate A (in CSFP) 19

17 B Goodwill in subsidiary Sunflower

Investment in Sunflower: $m
Cash consideration 180
Primrose shares (900/4 × 2 × 0.90c) 405
Note: $112.5m share capital / $292.5m share premium
Deferred cash (900m × 17c = $153m × 1/1.07 ie 143
0.9346)
728
Therefore calculation of Goodwill in Sunflower: $m
Investment at cost
CI 728
Fair value of NCI at acq’n given 177
Less: Fair value of net assets at acq’n (566)
Goodwill at aquisition 339
Less: goodwill impairment (40)
Goodwill at net book value (in CSFP) 299

18 C Non-controlling interest
$m

Fair value of NCI at acq’n given 177

NCI % post acquisition reserves of sub (25% × 20m) 5
NCI % goodwill impairment (25% × 40) (10)
NCI (CSFP) 172

19 A Consolidated reserves
$m
Primrose 450
Group share of S’s post acquisition (75% × $20m) 15
A’s post acquisition (30% × $6m) 1.8
Less: Group share of goodwill impairment in Sunflower (30)
Impairment of Associate (2.8)
Less: Discount unwound ($143m × 7%) (10)
Total to CSFP 424

6 w w w . s t ud yi nt e r a c t i ve . o r g
 20 B Property, plant and equipment (960 + 510 + 90 – 5 1,555
[W])

Primrose
75%
900m
______
1,200m

Sunflower
Subsidiary

30% Associate Agapanthus acquired mid-year

Working – Consolidation Adjustments and Net assets

Per Q

Fair value adjustment for PP+E in S:

$m
Fair value adjustment at acquisition 90
Post-acquisition depreciation (90/18 yrs × 1 yr) (5)
Fair value adjustment at consolidated SFP date 85

Unrealised profit adjustment:

1/3 of inventory left within the group at the year-end:

$m
Transfer price ($12m × 1/3) 4
Cost ($4m × 75%) (3)
Unrealised profit 1

Dr Retained earnings - Sunflower (subsidiary is the seller) $1m

Cr Group inventory $1m

Elimination of current account (intra-group trading):

Cash in transit:
Dr Bank (C I T) $7m
Cr Receivables (Sunflower) $7m

Elimination of current accounts:

Dr Payables (Primrose) $4m

Cr Receivables (Sunflower) $4m

w w w . s t ud y i nt e r a c t i v e . o r g 7
Net Assets list

Sunflower
At acq'n At CSFP
$m $m

Share capital 300 300

Retained earnings 180 210
PP+E (FV adj) 90 90
Post acq’n depreciation - (5)
Software (FV adj: given in (ii)) (4) (8)
PUP adj - (1)
566 586
For G/W

Difference of $20m to NCI

and Consolidated Reserves

8 w w w . s t ud yi nt e r a c t i ve . o r g
 Jennie Mae

21 ROCE $000 2015 2014

PBIT 2,500 5,000
divided by divided by divided by
Equity 19,375 12,250
+
LT Loans 7,500 2,500
26,875 14,750
Answer B = 9.3% = 33.9%

22 Interest Cover 2015 2014

PBIT 2,500 5,000
Divided by
Interest 750 200
Answer D = 3.3 times = 25 times

23 Inventory (holding) days 2015 2014

Closing Inventory 7,250 x 365 3,750 x 365
C.O.S. 48,125 39,250
Answer C = 55 days = 35 days

24 B Depreciation (W1) 9,375

Purchase of PP+E (W1) 26,250

25 C Taxation paid (1,125 + 625 − 550) 1,200

W1 – PPE

Cost
Opening 23,750
Less: Disposals (7,500)
Opening has become 16,250
But Closing is 42,500
Therefore additions = balancing figure 26,250

Accum Dep’n

Opening 7,500
Less: Disposals (7,500 – 3,125) (4,375)
Opening has become 3,125
But Closing is 12,500
Therefore Dep’n charged for year = 9,375

Disposals

Cost 7,500
Less: Accumulated Dep’n (4,375)
NBV 3,125
(Scrapped, therefore Loss on Disposal = NBV of 3,125)

w w w . s t ud y i nt e r a c t i v e . o r g 9
Carter

26 A Freehold Property

$000
Valuation at 1/10/13 189,000
Depreciation (189,000/20 years × 1 year) (9,450)
Carrying value at 30/9/14 179,550
Valuation at 30/9/14 200,000
Carrying value at 30/9/14 (179,550)
Gain 20,450
Dr Freehold property $20,450
Cr Revaluation reserve $20,450

Therefore, freehold property in SFP shown as $200,000

27 C Grant

Add back grant deduction from plant and machinery:

Dr Plant and machinery $10,000

Cr Deferred grant income $10,000

Release (amortise) 1 year of income to profit:

Dr Deferred grant income $1,000

Cr Income $1,000

$9,000 Deferred income at year end:

$000
Non-current 8,000
Current 1,000
9,000

28 C FVTPL

$000
Value at 1/10/13 22,500
Gain to profit (Bal fig) 7,500
Value at 30/9/14 30,000

10 w w w . s t ud yi nt e r a c t i ve . o r g
29 D Redeemable preference shares

$000
Par value 22,500
Discount (5%) (1,125)
21,375
Direct issue costs (225)
Balance at 1/4/2014 21,150

Year O/Bal Finance cost (12%)* Interest C/Bal

Sep-14 21,150 1,269 (900) 21,519

* finance cost (21,150 × 12% × 6/12)

* interest (22,500 × 8% × 6/12)

$000
Finance cost 1,269
Preference share liability 21,519
Accrual 900

30 A Deferred tax

$000
Balance at 1/10/13 28,050
Increase to P/L (Bal fig) 5,650
Balance at 30/9/14 33,700

w w w . s t ud y i nt e r a c t i v e . o r g 11
Section C

31. Kasabian

(a) Kasabian’s Statement of Profit or Loss and other comprehensive income for
the year ended 31 March 2015

$000
Revenue 315,700
Cost of sales (W1) (184,800)
Gross Profit 130,900
Investment income (3,850 + 3,710 [W3]) 7,560
Distribution costs (W1) (21,000)
Administration expenses (W1) (23,625)
Operating profit 93,835
Finance costs (W4) (4,155)
Profit before tax 89,680
Taxation (W5) (32,000)
Profit for the year 57,680

(b) Kasabian’s Statement of Financial Position as at 31 March 2015

$000 $000
Non-current assets
Property, plant and equipment (W2) 356,300
Investment property (46,375 + 3,710 [W3]) 50,085
406,385
Current assets
Inventory 66,325
Receivables 61,425
127,750
Total assets 534,135

Equity and liabilities

Equity
Share capital (105,000 + 35,000 [W6]) 140,000
Share premium (W6) 7,000
Revaluation reserve (24,500 - 7,000 [W2]) 17,500
Retained earnings (44,625 + 57,680) 102,305
266,805

Non-current liabilities
2% Loan notes (W4) 141,255
Deferred tax (W5) 20,000
161,255
Current liabilities
Payables 60,725
Current tax (W5) 32,300
Bank (11,550 + 1,500) 13,050
106,075
Total equity and liabilities 534,135

12 w w w . s t ud yi nt e r a c t i ve . o r g
 Workings

Costs
Cost of Distribution Admin
Sales Costs Expenses
$000 $000 $000
Per trial balance 19,250 21,875
Opening inventory 33,100
Carriage inwards 125
Purchases 189,200
Closing inventory (66,325)
Depreciation (W2)
Buildings 3,500 1,750 1,750
Plant 25,200
Total to income statement 184,800 21,000 23,625

PP+E
Land Buildings Plant Total
$000 $000 $000 $000
Valuation/Cost 52,500 175,000 224,000 451,500
Accumulated depreciation (56,000) (56,000)
Carrying value at 1 April 2014 52,500 175,000 168,000 395,500

Depreciation for the year

Buildings (175,000/25 years) (7,000) (7,000)
Plant (168,000 × 15%) (25,200) (25,200)
CV prior to year-end revaluation 52,500 168,000 142,800 363,300
Revaluation loss (Bal. figure) (7,000) (7,000)
Carrying value at 31 March 2015 52,500 161,000 142,800 356,300

Investment property
$000
Fair value per trial balance 46,375
Gain on change in fair value (46,375 x 8%) 3,710
Fair value at 31 March 2015 50,085
Note: The gain on the increase in FV on investment property is recognised as
income in the P & L per IAS 40.

Finance costs

The loan note is a financial liability, which is held to maturity, the standard
states that issue costs must be deducted from the proceeds when initially
measuring the liability.

$000
Opening liability (net proceeds) at 1 October 2014
(140,000 − 1,500) 138,500

Interest (6% × 6/12) 4,155 To P/L

Interest paid (1,400)
Closing liability at 31 March 2015 141,255

w w w . s t ud y i nt e r a c t i v e . o r g 13
 Taxation

$000
Taxation in the P & L:
Current Tax 32,300
Over provision (700)
DT movement* 400
32,000

$000
Deferred tax in the statement of financial position:
At 1 April 2014 19,600
Movement (Bal fig)* 400
At 31 March 2015 (80,000 × 25%) 20,000

Share issue

No. of shares eligible for rights issue ($105,000/50c = 210,000/3 x 1) 70,000

Dr Suspense $42,000
Cr Share capital (70,000 × 50c) $35,000
Cr Share premium (70,000 × 10c) $7,000

14 w w w . s t ud yi nt e r a c t i ve . o r g
32. Oliver

(a) Oliver Consolidated Statement of Profit or Loss for the year ended 31
December 2014

Oliver Jacob Adjustments Group

$000 $000 $000 $000
Revenue 143,000 40,000 (15,000) 168,000
Cost of Sales (81,000) (23,000) 15,000
PUP (W2) (200) (89,600)
Depreciation (W2) (400)
Gross Profit 61,800 16,600 78,400
Distribution Costs (5,000) (750) (5,750)
Administrative (30,000) (8,250)
Expenses (40,750)
Goodwill impairment - (2,500)
Profit Before Tax 26,800 5,100 31,900
Income Tax expense (11,200) (4,000) (15,200)
Profit for the year 15,600 1,100 16,700
Attributable to:
Non-controlling Interest (20% × $1,100) 220
Equity holders of the parent (Bal fig) 16,480
16,700

Note: Jacob was acquired part way through the current year; therefore the existing
income and expense lines have been pro-rated to reflect the post-acquisition results
(6/12) only.

w w w . s t ud y i nt e r a c t i v e . o r g 15
 Oliver Consolidated Statement of Financial Position as at 31 December 2014

$000 $000
Non-current Assets
Property, Plant and Equipment (25,000 + 27,000 + 3,600
(W2)) 55,600
Goodwill (W3) 20,900
76,500
Current Assets
Inventory (15,000 + 9,000 + 800 (W2)) 24,800
Trade Receivables (10,000 + 10,000 - 1,000 (W2)) 19,000
Bank (14,000 + 13,000) 27,000
70,800
Total Assets 147,300
Equity and Liabilities
Equity
Equity Share Capital (30,000 + 3,200 (W3)) 33,200
Share Premium (W3) 28,800
Retained Earnings (W3) 21,680
83,680
Non-controlling Interest (W3) 10,620
Current Liabilities (17,000 + 36,000 + 1,000 - 1,000 (W2)) 53,000
Total Equity and Liabilities 147,300

Working 1 - Group structure

Oliver buys Jacob mid year 1-7- 2014

16,000/20,000 = 80%

Working 2 - Net assets and Consolidation Adjustments

Per Q

Fair value adjustment for PP+E in S:

$000
Fair value adjustment at acquisition 4,000
Post acquisition depreciation (4,000/5 yrs × 6/12) (400)
Fair value adjustment at consolidated SFP date 3,600

16 w w w . s t ud yi nt e r a c t i ve . o r g
 Goods-in-transit (All $000)

Dr Group inventory $1,000

Cr Payables $1,000

Unrealised profit adjustment:

All $1 million of inventory left within the group at the year-end:

$000
Transfer price 1,000
Cost (Original cost to parent) (800)
Unrealised profit 200

Dr Retained earnings - Oliver (parent is the seller) $200

Cr Group inventory $200

Elimination of current account (intragroup trading):

Dr Payables $1,000
Cr Receivables $1,000

Net assets list

Jacob
At acq’n At CSFP
$000 $000
Share capital 10,000 10,000
Retained earnings 9,000 13,000
PP+E (FV adj) 4,000 4,000
Post acq’n depreciation - (400)
23,000 26,600
used in
G/W
Difference of $3,600
used in NCI & Consolidated
Reserves

Working 3 - Goodwill, NCI and Consolidated Reserves

Investment in Jacob:

$000
Cash consideration 4,000
Oliver shares (16,000/5 × 2 × $5) 32,000
Note: $3,200 share capital/$28,800 share premium
Total 36,000

w w w . s t ud y i nt e r a c t i v e . o r g 17
 Goodwill in Jacob

$000
Investment at cost : CI 36,000
Fair value of NCI at acq’n (4,000 shares × $2.60) 10,400
Less: Net assets at acq’n (23,000)
23,400
Less: Goodwill Impairment (2,500)
Goodwill at net book value 20,900

Non-controlling Interest

$000
Fair Value of NCI at acq’n (4,000 shares × $2.60) 10,400
Post acq’n growth (20% × $3,600) 720
Less: Impairment (20% × $2,500) (500)
NCI (CSFP) 10,620

Consolidated Reserves

$000
Oliver 21,000
Group share of S’s post acquisition ($3,600 × 80%) 2,880
Less: Group share of goodwill impairment in Jacob (2,000)
Less: PUP (W2) (200)
Total to CSFP 21,680

(b) Please note: Additional points have been included for tutorial purposes
only.

If the Subsidiary is acquired in the middle of the year, as Jacob has been here, only
6 months’ profits are included in the numerator for ratios like Return on Capital
Employed, but the denominator Capital Employed is from the CSFP which is as at
the year end, and is of course never time-apportioned. When this is compared to
the following year when a full year’s profit is included in the CSPL there will be a
distortion.

Also it typically takes time to fully integrate the activities of an incoming subsidiary
with the rest of the group, and more savings and other synergies (the value of the
whole being worth more than the sum of the parts) may occur in the future (eg
bulk-buying, etc)
Consolidated financial statements are of very little use to certain users. A lender to
one subsidiary, for example is likely to have no legal claim on the assets of the
parent company or other group companies. Therefore information about group
ability to service debts is of little use.

18 w w w . s t ud yi nt e r a c t i ve . o r g
 In addition, it is important that a user understands the concept of the non-
controlling interest and take this into account when analysing and interpreting
financial statements. For example, it must be remembered that reported net
assets are within the control of the reporting group, but they are in-part the
net assets of the NCI in subsidiaries. Equally, depending on the purpose of
analysis, in the consolidated statement of profit or loss, profit attributable to
owners of the parent may be more relevant than total profits.
It is particularly important to ensure that like is being compared with like when
performing ratio analysis. For example dividends in the consolidated financial
statements are those payable to external parties ie the owners of the parent
company and the NCI in any subsidiaries. It therefore follows that the correct
profit figure to use for the calculation of dividend cover is the total profit after
tax (rather than the amount attributable to the owners of the parent only). This
may not be obvious to some users of financial statements.

When comparing the results of one entity with another, a general limitation is
the fact that entities are unique. This is even more of a problem when
considering a group rather than a company, since groups grow to include
companies operating in a wide variety of industries.

w w w . s t ud y i nt e r a c t i v e . o r g 19