MGT225 MGT225 Turn Over 1 MGT225 Material Provided: Discount Factor Table is provided in page 10 MANAGEMENT SCHOOL Spring Semester 2018-2019 INTERMEDIATE FINANCIAL ACCOUNTING 2 hours 30 minutes There are two sections in this examination paper (section A and section B) and five questions in total. You must answer THREE questions in total as follows: Section A consists of ONE COMPULSORY question. Section B consists of four questions and you must answer TWO of these questions. All questions are worth equal marks. All workings must be shown clearly. Unless you are told otherwise, you should work to the nearest ￡1. MGT225 MGT225 Turn Over 2 SECTION A Question A (Compulsory question) The trial balance of Alpha Ltd at 31 December 2018 is as follows: ￡’000 ￡’000 Land at cost 2,100 Building at cost 4,680 Accumulated depreciation: building 554 Plant and machinery at cost 3,096 Accumulated depreciation: plant and machinery 1,238 Fixtures and fitting at cost 864 Accumulated depreciation: fixtures and fitting 173 Trade receivables 7,263 Trade payables 2,591 Inventory as at 1 Jan 2018 12,274 Bank balance 11,561 Government grant received 85 Sales 382,136 Purchases 321,379 General administration expenses 9,000 General distribution costs 35,100 Directors’ remuneration 540 Auditors’ fee 150 Sales commission 117 Loan interest 660 Dividend paid during the year 588 10% Loan 7,200 Share capital 5,400 Share premium 3,600 Retained earnings as at 1 Jan 2018 6,395 409,372 409,372 The following information is also available: 1) The land was revalued at the year-end at ￡2,500,000. This should be incorporated into the financial statements. 2) Alpha Ltd depreciates its assets on a straight-line basis at the following rate: Building: 5% per annum on cost Plant and machinery: 20% per annum on cost Fixtures and fittings: 10% per annum on cost Depreciation for the year ended 31 December 2018 has not yet been accounted for. 3) Plant and machinery are used for goods production. The buildings are used by the distribution and administration functions in equal proportions. Expenses related to MGT225 MGT225 Turn Over 3 fixtures and fitting are to be divided between distribution and administration costs in the ratio 3:2. 3) Government grants of ￡85,000 have been received in respect of a machine purchased during the year and are shown in the trial balance. The machine is depreciated over five years and has been recorded in the trial balance. Alpha uses deferred income method to recognise government grants related to assets. 4) The cost of inventory at 31 December 2018 is ￡11,794,000. It was found that ￡300,000 of the inventory is obsolete and has a net realisable value of ￡150,000. 5) The loan was raised on 1 January 2018 with an interest rate of 10% per annum, payable monthly. 6) Corporation tax for the year is estimated at ￡1,850,000. 7) Dividends of 5 pence per share were declared on 21 January 2019 in respect of the year ended 31 December 2018. Required: a) Prepare the Statement of Comprehensive Income (using format 1) and the Statement of Financial Position for Alpha Ltd, in accordance with International Financial Reporting Standards for the year ended 31 December 2018 (to the nearest ￡’000). (25 marks) b) Describe the qualitative characteristics of useful financial information as identified by the IASB’s Conceptual Framework for Financial Reporting. (81/3 marks) (331/3 marks in total) END OF SECTION A MGT225 MGT225 Turn Over 4 SECTION B (Answer TWO questions only) Question B1 Beta plc is a pharmaceutical company that has been carrying out a number of research and development projects. The following information related to the accounting year ended 31 December 2018. (i) Beta has conducted a general survey to investigate the long-term effects of a sleeping pill upon resistance to infection. The costs incurred for this project is ￡50,000 during the year. At the year-end the research is still at a basic stage and it is not clear what results and particular application would be obtained from the project. (ii) Beta started a project B for the enhancement of an existing drug X in December 2017. The directors of Beta were able to demonstrate that the project would be completed successfully in July 2019 and its completion will enable additional uses to be made of the drug X and generate substantial economic benefits. The cost incurred for product B during the year 2018 was ￡600,000, of which ￡250,000 were used for purchasing laboratory equipment (with a useful life of five years) to be used for the project B. (iii) Beta started a scientific enquiry from 1 March 2018 in order to identify new trends of antibiotics for future use. The cost incurred during the year ended 31 December 2018 for the investigation is ￡650,000, including ￡200,000 for specialised equipment, ￡150,000 for research staff cost and ￡300,000 research costs. If this proves effective then Beta may well obtain patents and copyrights and generate significant income in the future. (iv) Beta purchased 10 computers for the company’s research offices in May 2018. The total cost of the computers was ￡30,000, and an operating system that is used specifically for these computers was purchased separately at a cost of ￡1,000 per system. Required: a) Explain what is meant by research expenditure and development expenditure. Discuss how to recognise the research and development expenditures in accordance with the IASB Conceptual Framework and IAS38 Intangible assets. (121/3 marks) MGT225 MGT225 Turn Over 5 b) For Beta plc, explain how each of the items shown above should be treated in the financial statements for the year ended 31 December 2018. You should explain your rationale in each case. (4 marks for item (i), 6 marks for item (ii), 6 marks for item (iii) and 5 marks for item (iv)) (21 marks) (331/3 marks in total) MGT225 MGT225 Turn Over 6 Question B2 On 1 May 2016 Gamma Ltd acquired 96,000 shares in Sigma Ltd for ￡168,000,000 in cash when the retained earnings of Sigma Ltd were ￡16,000,000 and the balance on Sigma’s general reserve was ￡32,000,000. The summarized statements of financial positions of the two companies at 31 December 2018 were as follows. Gamma ￡’000 Sigma ￡’000 Non-current assets Property, plant and equipment 160,000 116,000 Investment in Sigma Ltd 168,000 328,000 116,000 Current assets Inventories 36,000 24,000 Trade and other receivables 125,400 50,600 Cash at bank 20,000 9,000 181,400 83,600 Total assets 509,400 199,600 Equity Ordinary share capital of ￡1 each 240,000 120,000 Share premium 36,000 General reserves 46,000 40,000 Retained earnings 112,000 26,000 434,000 186,000 Current liabilities Trade and other payables 75,400 13,600 Equity and liabilities 509,400 199,600 The following information is relevant: The closing inventory of Gamma Ltd includes ￡8,000,000 of goods purchased from Sigma Ltd and invoiced to Gamma Ltd at cost plus 25%. These goods were still in Gamma Ltd’s inventory at 31 December 2018. Gamma Ltd owed Sigma Ltd ￡6,400,000 at 31 December 2018 for goods supplied during the year. An impairment review at 1 January 2018 revealed that goodwill in respect of Sigma Ltd had been impaired by ￡2,800,000. By 31 December 2018 this goodwill had fallen in value by a further ￡1,600,000. MGT225 MGT225 Turn Over 7 The fair value of a freehold land owned by Sigma Ltd on 1 May 2016 exceeded its carrying amount by ￡2,000,000. This valuation has not been reflected in the books of Sigma Ltd. The fair values of Sigma’s other net assets were estimated to be approximately the same as their carrying values. Required: (a) Prepare the consolidated statement of financial position of Gamma group as at 31 December 2018 (to the nearest ￡’000). (251/3 marks) (b) Briefly outline in which situations an investor has control over an investee, in accordance with IFRS 10. (8 marks) (331/3 marks in total) MGT225 MGT225 Turn Over 8 Question B3 Kappa plc bought an asset for ￡100,000 on 1 January 2014. Capital allowances are/will be 50 percent on the cost of the asset for the first two years that the asset is owned. The company depreciates such assets on a straight-line basis over its useful life of five years. Kappa then bought a similar asset for ￡120,000 on 1 January 2018 with an estimated useful life of five years. The depreciation method and the capital allowances for the new asset remained the same as for the old one. The rate of corporation tax is 30 percent. The recorded profits (after deduction of depreciation but before tax) are as follows: Year 2014 2015 2016 2017 2018 Profit (￡000) 1,160 930 1,360 1,450 1,620 Required: a) Explain the difference(s) between accounting profit and taxable profit, and discuss why it is desirable for companies to account for deferred tax. (9 marks) b) For Kappa plc, calculate the temporary differences as at 31 December for each of the years ended 31 December 2014 to 31 December 2018, inclusive. (7 marks) c) In accordance with IAS12, calculate the deferred tax charge that Kappa plc makes in the statement of comprehensive income and the deferred tax provision shown in the statement of financial position for each of the years ended 31 December 2014 to 31 December 2018, inclusive. (5 marks) d) Calculate the tax payable and show the total tax charge that should appear in the statement of comprehensive income for Kappa plc for each of the years ended 31 December 2014 to 31 December 2018, inclusive. (8 marks) e) Discuss briefly the limitations of accounting for deferred tax. (41/3 marks) (331/3 marks in total) MGT225 MGT225 Turn Over 9 Question B4 Delta plc prepares financial statements to 31 December each year. On 1 January 2016 it entered an agreement to lease a special machine on the following terms: The agreement, which may not be terminated by either party to it, runs for 10 years. A lease rental of ￡50,000 is payable annually in arrears, with the first payment being made on 31 December 2016. The rate of interest implicit in the lease is 5% per annum. The machine has a useful economic life of 12 years and has no residual value. Delta plc depreciates its plant and machinery using the straight-line method. Required: a) In accordance with the requirements of IFRS 16, show the cost of the right-of-use asset and lease liability on 1 January 2016. (3 marks) b) For each of the five accounting years ended 31 December 2016 to 31 December 2020, inclusive, calculate the finance cost and show the annual capital repayment on the lease. (8 marks) c) Show the effect of this lease on the income statements and statement of financial position of Delta plc in each of the four years from 31 December 2016 to 31 December 2019, inclusive. (9 marks) d) Explain the term off-balance sheet financing and its relevance to the issue of accounting for leases. Critically discuss the effectiveness of IAS 17 in preventing off-balance sheet financing. (131/3 marks) (331/3 marks in total) END OF SECTION B END OF QUESTION PAPER MGT225 MGT225 Turn Over 10
