BEAM024J 1 Please Turn Over
BEAM024J
UNIVERSITY OF EXETER
BUSINESS SCHOOL
May 2021
ADVANCED FINANCIAL ACCOUNTING
Module Convenor: Adnan Isin
Duration: THREE HOURS + 30 minutes upload time
Answer:
The TWO COMPULSORY questions in Section A 50 marks
TWO out of THREE questions in Section B 30 marks
ONE out of TWO questions in Section C 20 marks
TOTAL 100 marks
This is an Open Book exam
There is NO word count
Additional Materials:
None
BEAM024J 2 Please Turn Over
SECTION A
TWO COMPULSORY questions
QUESTION 1
The draft statements of financial position of these two companies as at 31 January 2018 are
shown below:
The following information is also available:
? On 1 January 2016, P Co pays ￡600,000 cash to buy 60% of the ordinary shares of S Co. At
the time, S Co had retained earnings of ￡280,000. The fair value of the property, plant and
equipment (PP&E) of S Co on 1 January 2016 was ￡30,000 more than its carrying amount
This revaluation was not reflected on S Co’s financial statements at the time of the acquisition
(Ignore any depreciation related adjustments as a result of property, plant and equipment
revaluation).
? P Co also acquired 90% of the shares of A Co for ￡575,000 cash on 1 January 2017. At the
time of the acquisition, A Co had a revaluation reserve of ￡60,000 and retained earnings of
￡230,000. The fair value of A Co’s assets and liabilities on that date was equal to their book
value.
P Co S Co A Co
￡ 000 ￡ 000 ￡ 000
PP&E 4,761 521 411
Investment in S Co 600
Investment in A Co 575
5,936 521 411
Inventories 1,532 222 187
Trade receivables 1,947 258 202
Cash 239 30 13
3,718 510 402
9,654 1,031 813
Share Capital 5,000 500 300
Revaluation reserve 2,500 100
Retained earnings 547 320 250
8,047 820 650
Current liabilities
Trade payables 1,607 211 163
1,607 211 163
9,654 1,031 813
LIABILITIES
Non-Current Assets
Current Assets
EQUITY
TOTAL ASSETS
BEAM024J 3 Please Turn Over
? P Co, S Co and A Co have not issued additional shares during the period
? Goodwill arising on the purchase of S Co has suffered an impairment loss of 50% since
the date of the acquisition.
? Goodwill arising on the purchase of A Co has suffered an impairment loss of 25% since
the date of the acquisition.
? The following intra-group balances exist on 31 December 2017
o S Co owes P Co ￡15,000
o A Co owes P Co ￡25,000
o A Co owes S Co ￡8,000
All of these balances are included in trade receivables and payments
? Goods purchased for ￡8,000 from P Co are included in S Co’s inventory at 31 December
2017. P Co had invoiced these goods to S Co at cost plus 60%.
Required:
Prepare a consolidated statement of financial position as at 31 December 2017.
(Total 25 marks)
BEAM024J 4 Please Turn Over
QUESTION 2
On 30 June 2017, A Co acquired 40% of the shares in S Co for ￡220,000 cash. The draft
statements of financial positions of these two companies as at fiscal year-end of 30 June 2018
are shown below. These statements do not reflect A Co’s share of profits from I Co.
Statement of Comprehensive
Income A Co ￡ I Co ￡
Operating Profit 800,000 160,000
Dividend Received from I Co 8,000
Profit Before Tax 808,000 160,000
Tax Expense 120,000 20,000
Dividends Paid 20,000
Net Income 688,000 120,000
Retained Earnings A Co ￡ I Co ￡
Balance 30 June 2017 412,000 100,000
Profit 688,000 140,000
Dividends Paid 20,000
Balance 30 June 2018 1,100,000 220,000
Statement of Financial Position A Co ￡ I Co ￡
Property, plant and equipment 1,480,000 500,000
Investment in I Co (at cost) 220,000
Total Non-current Assets 1,700,000 500,000
Current Assets 800,000 400,000
Total Assets 2,500,000 900,000
Ordinary Share Capital (￡1 shares) 1,000,000 400,000
Retained Earnings 1,100,000 220,000
Total Equity 2,100,000 620,000
Trade Payables 400,000 280,000
Total Equity and Liabilities 2,500,000 900,000
The following information is also available:
? The retained earnings of I Co was ￡100,000 at the acquisition date of 30 June 2017.
? During the year, I Co paid ￡8,000 dividends to A Co which is 40% of the total ￡20,000
? Assume that tax expense for both firms are ￡120,000 and ￡20,000, respectively.
? Neither A Co nor I Co has issued any additional shares.
Required:
a) Prepare statement of comprehensive position for A Co as at 30 June 2018.
(12.5 marks)
b) Prepare statement of financial position for A Co as at 30 June 2018.
(12.5 marks)
(Total 25 marks)
BEAM024J 5 Please Turn Over
SECTION B
Answer any TWO questions from the THREE in this section
QUESTION 3
Part A:
R Co sold a product to a customer for ￡120 that is payable 24 months after delivery, with the
customer obtaining the control of the product at contract inception. The contract permits the
customer to return the product within 90 days. The product is new and R Co has no relevant
historical evidence of product returns or other available market evidence. The cash selling price
of the product is ￡100 for another customers that would instead pay upon delivery. The cost of
the product for R Co is ￡80. The customer has not returned the product in the right-to-return
period.
Required:
Explain how R Co should account for the product sale to the credit customer in accordance with
IFRS 15 Revenue from Contracts with Customers.
(7 marks)
Part B:
R Co issued 5,000 convertible bonds at par in 2002. The bonds have a 3-year term and are issued
at par with a face value of ￡1,000 per bond, giving total proceeds of ￡5,000,000. Interest is
payable annually at a nominal annual interest rate of 6% in arrears, that is at the end of each
year. Each bond is convertible at any time up to maturity into 250 ordinary shares.
When bonds are issued, the prevailing market interest rate for similar debt without conversion
options is 8%.
Discount factors are given below:
Year 6% 8%
1 0.94 0.93
2 0.89 0.86
3 0.84 0.77
Required:
What is the value of the equity component of the bond?
(8 marks)
(Total 15 marks)
BEAM024J 6 Please Turn Over
QUESTION 4
Part A
The following information relates to a company that prepares accounts to 30 June each year.
? The company estimates that current tax for the year ended 30 June 2018 is ￡780,000. This
figure takes into account new tax rates which were announced in March 2018 and are
confidently expected to be enacted in August 2018. If the company disregards the new tax
rates, the amount due would be ￡810,000.
? Payments on account totalling ￡390,000 have been made during the year to 30 June 2018 in
relation to the current tax for the year.
? Current tax for the year ended 30 June 2017 was overestimated by ￡30,000.
Required:
i) Calculate the amount of current tax expense in the statement of comprehensive income for
the year ended 30 June 2018.
(5 marks)
ii) Calculate the amount of current tax liability in the statement of financial position as at 30 June
2018.
(5 marks)
Part B
Define “finance” and “operating” leases and how the two differ from the lessor’s (financing
company) perspective under the IFRS 16. Explain the situations which would lead to a lease
being classified as a finance lease from the lessor’s perspective under the IFRS 16
(5 marks)
(Total 15 marks)
BEAM024J 7 Please Turn Over
QUESTION 5:
On 1 January 2019 USE Co enters into a 5-year lease of production equipment with LEASE Co.
As part of the lease agreement, the company is required to make 5 lease payments of
￡20,711.11 and lease payments occur at the beginning of each of the next following years
starting at the lease agreement date on 1 January 2019, and each 1 January for the following
years 2020, 2021, 2022 and 2023.
The following information is also available:
? The lease in non-cancellable and carries no residual (after-lease) value.
? USE Co prepares its financial statements in December each year.
? USE Co’s incremental borrowing rate is 5% per year
? The implicit interest rate in the lease is 4% per year
? The legal title to the production equipment will be transferred to USE Co at the end of the
lease terms
? USE Co uses straight-line depreciation
? The first payment on 1 January 2019 will include no interest payment and just the principle
payment of
Required:
a) Explain how this lease should be accounted by USE Co in accordance with the
requirements of IFRS 16 as the beginning of the lease commencement date of 1 January
2019.
(6 marks)
b) Explain how should USE Co account for the depreciation of this asset as of 31 December
2019
(2 marks)
c) Explain and present the necessary accounting entries USE Co needs to make in its
Statement of Financial Position and Income Statement as of 31 December 2019.
(7 marks)
(Total 15 marks)
BEAM024J 8 END OF PAPER
SECTION C
Answer any ONE question from the TWO in this section
QUESTION 6
Drawing from academic literature, discuss the issue of conservative reporting. In your answer:
? Incorporate academic and practitioner discussion on relevant stakeholders of financial
statement information users and different incites that may alter management financial
reporting goals.
? Present your discussion objectively but do attain critical perspective of the concepts
(Total 20 marks)
QUESTION 7
Discuss the concept of “Efficient Securities Markets”. In your answer:
? Incorporate academic and practitioner discussion on the implications of “Efficient Securities
Markets” in relation to firm-level financial reporting quality.
? Present your discussion objectively but do attain critical perspective of the concepts
(Total 20 marks)
