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Paper 2.

(International Stream)




Time allowed 3 hours

This paper is divided into two sections

Section A This ONE question is compulsory and MUST be


Section B THREE questions ONLY to be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination


The Association of Chartered Certified Accountants

Section A – This ONE question is compulsory and MUST be attempted

1 Parentis, a public listed company, acquired 600 million equity shares in Offspring on 1 April 2006. The purchase
consideration was made up of:
a share exchange of one share in Parentis for two shares in Offspring
the issue of $100 10% loan note for every 500 shares acquired; and
a deferred cash payment of 11 cents per share acquired payable on 1 April 2007.
Parentis has only recorded the issue of the loan notes. The value of each Parentis share at the date of acquisition was
75 cents and Parentis has a cost of capital of 10% per annum.
The balance sheets of the two companies at 31 March 2007 are shown below:
Parentis Offspring
$ million $ million $ million $ million
Property, plant and equipment (note (i)) 640 340
Investments 120 nil
Intellectual property (note (ii)) nil 30
–––– ––––
760 370
Current assets
Inventory (note (iii)) 76 22
Trade receivables (note (iii)) 84 44
Bank nil 160 4 70
–––– –––– –––– ––––
Total assets 920 440
–––– ––––
Equity and liabilities
Equity shares of 25 cents each 300 200
Retained earnings – 1 April 2006 210 120
– year ended 31 March 2007 90 300 20 140
–––– –––– –––– ––––
600 340
Non-current liabilities
10% loan notes 120 20
Current liabilities
Trade payables (note (iii)) 130 57
Current tax payable 45 23
Overdraft 25 200 nil 80
–––– –––– –––– ––––
Total equity and liabilities 920 440
–––– ––––
The following information is relevant:
(i) At the date of acquisition the fair values of Offspring’s net assets were approximately equal to their carrying
amounts with the exception of its properties. These properties had a fair value of $40 million in excess of their
carrying amounts which would create additional depreciation of $2 million in the post acquisition period to
31 March 2007. The fair values have not been reflected in Offspring’s balance sheet.
(ii) The intellectual property is a system of encryption designed for internet use. Offspring has been advised that
government legislation (passed since acquisition) has now made this type of encryption illegal. Offspring will
receive $10 million in compensation from the government.
(iii) Offspring sold Parentis goods for $15 million in the post acquisition period. $5 million of these goods are included
in the inventory of Parentis at 31 March 2007. The profit made by Offspring on these sales was $6 million.
Offspring’s trade payable account (in the records of Parentis) of $7 million does not agree with Parentis’s trade
receivable account (in the records of Offspring) due to cash in transit of $4 million paid by Parentis.
(iv) Due to the impact of the above legislation, Parentis has concluded that the consolidated goodwill has been
impaired by $27 million.

Prepare the consolidated balance sheet of Parentis as at 31 March 2007.

(25 marks)

3 [P.T.O.
Section B – THREE questions ONLY to be attempted

2 The summarised draft financial statements of Wellmay are shown below.

Income statement year ended 31 March 2007:
Revenue (note (i)) 4,200
Cost of sales (note (ii)) (2,700)
Gross profit 1,500
Operating expenses (470)
Investment property rental income 20
Finance costs (55)
Profit before tax 995
Income tax (360)
Profit for the period 635
Balance sheet as at 31 March 2007:
$’000 $’000
Non-current assets
Property, plant and equipment (note (iii)) 4,200
Investment property (note (iii)) 400
Current assets 1,400
Total assets 6,000
Equity and liabilities
Equity shares of 50 cents each (note (vii)) 1,200
Revaluation reserve 350
Retained earnings (note (iv)) 2,850 3,200
–––––– –––––––
Non-current liabilities
8% Convertible loan note (2010) (note (v)) 600
Deferred tax (note (vi)) 180 780
Current liabilities 820
Total equity and liabilities 6,000
The following information is relevant to the draft financial statements:
(i) Revenue includes $500,000 for the sale on 1 April 2006 of maturing goods to Westwood. The goods had a cost
of $200,000 at the date of sale. Wellmay can repurchase the goods on 31 March 2008 for $605,000 (based
on achieving a lender’s return of 10% per annum) at which time the goods are estimated to have a value of
(ii) Past experience shows that in the post balance sheet period the company often receives unrecorded invoices for
materials relating to the previous year. As a result of this an accrued charge of $75,000 for contingent costs has
been included in cost of sales and as a current liability.

(iii) Non-current assets:
Wellmay owns two properties. One is a factory (with office accommodation) used by Wellmay as a production
facility and the other is an investment property that is leased to a third party under an operating lease. Wellmay
revalues all its properties to current value at the end of each year and uses the fair value model in IAS 40
Investment property. Relevant details of the fair values of the properties are:
Factory Investment property
$’000 $’000
Valuation 31 March 2006 1,200 400
Valuation 31 March 2007 1,350 375
The valuations at 31 March 2007 have not yet been incorporated into the financial statements. Factory
depreciation for the year ended 31 March 2007 of $40,000 was charged to cost of sales. As the factory includes
some office accommodation, 20% of this depreciation should have been charged to operating expenses.
(iv) The balance of retained earnings is made up of:
balance b/f 1 April 2006 2,615
profit for the period 635
dividends paid during year ended 31 March 2007 (400)
(v) 8% Convertible loan note (2010)
On 1 April 2006 an 8% convertible loan note with a nominal value of $600,000 was issued at par. It is
redeemable on 31 March 2010 at par or it may be converted into equity shares of Wellmay on the basis of 100
new shares for each $200 of loan note. An equivalent loan note without the conversion option would have carried
an interest rate of 10%. Interest of $48,000 has been paid on the loan and charged as a finance cost.
The present value of $1 receivable at the end of each year, based on discount rates of 8% and 10% are:
8% 10%
End of year 1 0·93 0·91
2 0·86 0·83
3 0·79 0·75
4 0·73 0·68
(vi) The carrying amounts of Wellmay’s net assets at 31 March 2007 are $600,000 higher than their tax base. The
rate of taxation is 35%. The income tax charge of $360,000 does not include the adjustment required to the
deferred tax provision which should be charged in full to the income statement.
(vii) Bonus/scrip issue:
On 15 March 2007, Wellmay made a bonus issue from retained earnings of one share for every four held. The
issue has not been recorded in the draft financial statements.

Redraft the financial statements of Wellmay, including a statement of changes in equity, for the year ended
31 March 2007 reflecting the adjustments required by notes (i) to (vii) above.
Note: Calculations should be made to the nearest $’000.

(25 marks)

5 [P.T.O.
3 (a) A trainee accountant has been assisting in the preparation of the financial statements of Toogood for the year
ended 31 March 2007. He has observed that the corresponding figures (i.e. for the year ended 31 March 2006)
in the financial statements for the year ended 31 March 2007 do not agree in several instances with the
equivalent figures that were published in the company’s financial statements for year ended 31 March 2006. In
consolidated goodwill (gross figure before impairment) appears to have been recalculated,
several other non-current assets have been revised,
the brought forward retained earnings have been restated and;
several income statement line items are also different.
The trainee accountant has also noted that even when the revised earnings figure for the year ended 31 March
2006 is divided by the weighted average number of shares in issue during that year, it still does not agree with
the comparative earnings per share figure (i.e. for the year ended 31 March 2006) reported in the financial
statements for the year ended 31 March 2007.

Explain three circumstances where accounting standards require previously reported financial statement
figures to be amended when they are reproduced as corresponding amounts.
Note: It may help to consider, among other things, the items mentioned by the trainee accountant.
(12 marks)

(b) The trainee accountant has been reading some literature written by a qualified surveyor on the values of leasehold
property located in the area where Toogood owns leasehold property. The main thrust is that historically, annual
increases in property prices more than compensate for the fall in the carrying amount caused by annual
amortisation until a leasehold property has less than 10 years of remaining life. Therefore the trainee accountant
suggests that the company should adopt a policy of carrying its leasehold properties at cost until their remaining
lives are 10 years and then amortising them on a straight-line basis over 10 years. This would improve the
company’s reported profit and cash flows as well as showing a faithful representation of the value of the leasehold

Comment on the validity and acceptability of the trainee accountant’s suggestion. (7 marks)

(c) The trainee accountant notes that Toogood acquired the Trilogy group during the year ended
31 March 2007. The Trilogy group consists of Trilogy itself and two wholly owned subsidiaries. Toogood has only
consolidated Trilogy and one subsidiary with the other subsidiary being shown as a current asset. The trainee
accountant wonders if this is because the non-consolidated subsidiary is making losses.

Explain why the two subsidiaries may require the different treatments that Toogood has applied. (6 marks)

(25 marks)

This is a blank page.
Question 4 begins on page 8.

7 [P.T.O.
4 Greenwood is a public listed company. During the year ended 31 March 2007 the directors decided to cease
operations of one of its activities and put the assets of the operation up for sale (the discontinued activity has no
associated liabilities). The directors have been advised that the cessation qualifies as a discontinued operation and
has been accounted for accordingly.
Extracts from Greenwood’s financial statements are set out below.
Note: the income statement figures down to the profit for the period from continuing operations are those of the
continuing operations only.
Income statements for the year ended 31 March: 2007 2006
$’000 $’000
Revenue 27,500 21,200
Cost of sales (19,500) (15,000)
–––––––– ––––––––
Gross profit 8,000 6,200
Operating expenses (2,900) (2,450)
–––––––– ––––––––
5,100 3,750
Finance costs (600) (250)
–––––––– ––––––––
Profit before taxation 4,500 3,500
Income tax expense (1,000) (800)
–––––––– ––––––––
Profit for the period from continuing operations 3,500 2,700
Profit/(Loss) from discontinued operations (1,500) 320
–––––––– ––––––––
Profit for the period 2,000 3,020
–––––––– ––––––––
Analysis of discontinued operations:
Revenue 7,500 9,000
Cost of sales (8,500) (8,000)
–––––––– ––––––––
Gross profit/(loss) (1,000) 1,000
Operating expenses (400) (550)
–––––––– ––––––––
Profit/(loss) before tax (1,400) 450
Tax (expense)/relief 300 (130)
–––––––– ––––––––
(1,100) 320
Loss on measurement to fair value of disposal group (500) –
Tax relief on disposal group 100 –
–––––––– ––––––––
Profit/(Loss) from discontinued operations (1,500) 320
–––––––– ––––––––

Balance Sheets as at 31 March 2007 2006
$’000 $’000 $’000 $’000
Non-current assets 17,500 17,600
Current assets
Inventory 1,500 1,350
Trade receivables 2,000 2,300
Bank nil 50
Assets held for sale (at fair value) 6,000 9,500 nil 3,700
–––––– ––––––– –––––– –––––––
Total assets 27,000 21,300
––––––– –––––––
Equity and liabilities
Equity shares of $1 each 10,000 10,000
Retained earnings 4,500 2,500
––––––– –––––––
14,500 12,500
Non-current liabilities
5% loan notes 8,000 5,000
Current liabilities
Bank overdraft 1,150 nil
Trade payables 2,400 2,800
Current tax payable 950 4,500 1,000 3,800
–––––– ––––––– –––––– –––––––
Total equity and liabilities 27,000 21,300
––––––– –––––––
Note: the carrying amount of the assets of the discontinued operation at 31 March 2006 was $6·3 million.

Analyse the financial performance and position of Greenwood for the two years ended 31 March 2007.
Note: Your analysis should be supported by appropriate ratios (up to 10 marks available) and refer to the effects
of the discontinued operation.

(25 marks)

9 [P.T.O.
5 (a) The following is an extract of Errsea’s balances of property, plant and equipment and related government grants
at 1 April 2006.
accumulated carrying
cost depreciation amount
$’000 $’000 $’000
Property, plant and equipment 240 180 60
Non-current liabilities
Government grants 30
Current liabilities
Government grants 10
Details including purchases and disposals of plant and related government grants during the year are:
(i) Included in the above figures is an item of plant that was disposed of on 1 April 2006 for $12,000 which
had cost $90,000 on 1 April 2003. The plant was being depreciated on a straight-line basis over four years
assuming a residual value of $10,000. A government grant was received on its purchase and was being
recognised in the income statement in equal amounts over four years. In accordance with the terms of the
grant, Errsea repaid $3,000 of the grant on the disposal of the related plant.
(ii) An item of plant was acquired on 1 July 2006 with the following costs:
Base cost 192,000
Modifications specified by Errsea 12,000
Transport and installation 6,000
The plant qualified for a government grant of 25% of the base cost of the plant, but it had not been received
by 31 March 2007. The plant is to be depreciated on a straight-line basis over three years with a nil
estimated residual value.
(iii) All other plant is depreciated by 15% per annum on cost
(iv) $11,000 of the $30,000 non-current liability for government grants at 1 April 2006 should be reclassified
as a current liability as at 31 March 2007.
(v) Depreciation is calculated on a time apportioned basis.

Prepare extracts of Errsea’s income statement and balance sheet in respect of the property, plant and
equipment and government grants for the year ended 31 March 2007.
Note: Disclosure notes are not required.
(10 marks)

(b) In the post balance sheet period, prior to authorising for issue the financial statements of Tentacle for the year
ended 31 March 2007, the following material information has arisen.
(i) The notification of the bankruptcy of a customer. The balance of the trade receivable due from the customer
at 31 March 2007 was $23,000 and at the date of the notification it was $25,000. No payment is expected
from the bankruptcy proceedings. (3 marks)
(ii) Sales of some items of product W32 were made at a price of $5·40 each in April and May 2007. Sales
staff receive a commission of 15% of the sales price on this product. At 31 March 2007 Tentacle had
12,000 units of product W32 in inventory included at cost of $6 each. (4 marks)
(iii) Tentacle is being sued by an employee who lost a limb in an accident while at work on 15 March 2007.
The company is contesting the claim as the employee was not following the safety procedures that he had
been instructed to use. Accordingly the financial statements include a note of a contingent liability of
$500,000 for personal injury damages. In a recently decided case where a similar injury was sustained, a
settlement figure of $750,000 was awarded by the court. Although the injury was similar, the circumstances
of the accident in the decided case are different from those of Tentacle’s case. (4 marks)

(iv) Tentacle is involved in the construction of a residential apartment building. It is being accounted for using
the percentage of completion basis in IAS 11 Construction contracts. The recognised profit at 31 March
2007 was $1·2 million based on costs to date of $3 million as a percentage of the total estimated costs of
$6 million. Early in May 2007 Tentacle was informed that due to very recent industry shortages, building
materials will cost $1·5 million more than the estimate of total cost used in the calculation of the percentage
of completion. Tentacle cannot pass on any additional costs to the customer. (4 marks)

State and quantify how items (i) to (iv) above should be treated when finalising the financial statements of
Tentacle for the year ended 31 March 2007.
Note: The mark allocation is shown against each of the four items above.
(25 marks)

End of Question Paper