The Association of Business Executives

Diploma

FA1208

1.13FA

Financial Accounting
morning 2 December 2008

1 Time allowed: 3 hours.

2 SECTION A consists of one compulsory question.
3 Answer THREE questions from a choice of seven in SECTION B.
4 All questions carry 25 marks. Marks for subdivisions of questions are shown in brackets.
5 No books, dictionaries, notes or any other written materials are allowed in this
examination.
6 Calculators, including scientific calculators, are allowed providing they are not
programmable and cannot store or recall information. Electronic dictionaries and
personal organisers are NOT allowed. All workings should be shown.
7 Candidates who break ABE regulations, or commit any misconduct, will be disqualied
from the examinations.
8 Question papers must not be removed from the Examination Hall.

FA1208

ABE 2008

T/500/3691

SECTION A
Question 1 is compulsory.
Q1

The trial balance of Zen enterprise for the year ended 30 September 2008 is as follows:

Purchases
Revenue
Opening inventory (stock) 1 October 2007
Distribution expenses (note vi)
Administration expenses (note vii)
Dividends received from investment in Electra enterprise
Preference dividend paid
Ordinary dividend paid
Investment in Electra enterprise at cost
Trade receivables (debtors)
Trade payables (creditors)
Land and Property at valuation (note ii)
Plant and equipment at cost (note iii)
Plant and equipment accumulated depreciation as at 1 October 2007
Revaluation reserve
Retained earnings as at 1 October 2007
Ordinary share capital 1 shares
5% preference shares 1
6% Debentures (note iv)
Bank and cash
Bank interest paid

000s
Debits
54,200

000s
Credits
93,700

3,700
7,200
3,500
80
40
90
11,000
1,500
1,650
32,000
4,300
1,120
3,000
2,700
13,500
800
5,000
4,000
20

121,550

121,550

(Note that figures in the table above are in 000s.)

The following notes are applicable:
(i)
The inventory (stock) valuation as at 30 September 2008 is 3,900,000.
(ii) The land and property is revalued annually. The last revaluation was 30 September
2007. As at 30 September 2008 the land and property has not increased in value
above its book value of 32,000,000. The property, which was valued at 26,000,000
as at 30 September 2007, is estimated to have a useful life of 26 years as from
30 September 2007 and should be depreciated on a straight-line basis assuming no
residual value. Depreciation is to be charged half to distribution expenses and half to
administration expenses.
(iii) Plant and equipment is to be depreciated at 20% per annum on a reducing balance
basis and charged half to distribution expenses and half to administration expenses.
(iv) The interest on debentures for the year has not been paid and must be accrued.
(v) Tax for the year ended 30 September 2008 is chargeable at 30% of prots for the year
before receipt or payment of dividends.
(vi) Included in distribution expenses is an amount of 120,000, which is a vehicle rental
payment relating to the period 1 July 2008 to 31 December 2008.
(vii) Insurance amount due for the year, chargeable to administration expenses, has not
been paid or accounted for in the above trial balance as at 30 September 2008.

FA1208

Required:
Prepare the income statement (prot and loss account) for the year ended 30 September
2008 and the balance sheet as at that date for Zen enterprise in accordance with relevant
International Accounting Standards (IASs).
(25 marks)

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FA1208

SECTION B
Answer THREE questions only. All questions carry equal marks.
Q2

On 1 October 2000, Box enterprise acquired 3 million of the 4 million issued shares of Vox
enterprise. The retained earnings of Vox as at 1 October 2000, the date of acquisition, were
940,000 and the share premium 720,000. The draft balance sheets of the two enterprises
as at 30 September 2008 were as follows:
Balance sheets as at 30 September 2008

ASSETS
Non-current assets:
Land and buildings
Plant and equipment
Investment in Vox

Current assets:
Inventory
Trade receivables
Bank and cash

TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Ordinary 1 shares
Share premium
Retained earnings

Non-current liabilities:
Loans
Current liabilities:
Trade payables
Tax

TOTAL EQUITY AND LIABILITIES

(Note that figures in the table above are in 000s)

FA1208

Box
000s

Vox
000s

12,620
1,720
5,500

19,840

6,540
80

6,620

530
620
10

1,160

21,000

110
90
20

220

6,840

13,700
2,800
1,740

18,240

4,000
720
1,320

6,040

1,500

530

760
500

1,260

21,000

120
150

270

6,840

The following information is also relevant:

(i)
(ii)
(iii)

(iv)

When Box bought the shares in Vox it also made a loan to Vox of 130,000. This loan
is still outstanding.
A review of the consolidated goodwill has been carried out each year since acquisition
and no impairment has occurred.
The fair value of Voxs land and buildings at the date of acquisition was 0.2 million
and 1 million respectively in excess of the carrying values at that date. This fair value
has not been incorporated into the balance sheet of Vox as at 30 September 2008
and there has been no further increase in fair value of the land and buildings since
the acquisition date. The group policy is to depreciate property 2% per annum on a
straight-line basis.
During the year ended 30 September 2008, Box sold goods to Vox for 1.3 million. Box
adds a 25% mark-up on cost to all its sales. Goods with a transfer price of 155,000
were included in Voxs inventory as at 30 September 2008.

Required:
Prepare the consolidated balance sheet of the Box group as at 30 September 2008.
(25 marks)

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FA1208

Q3

The summarised balance sheets of three enterprises, X, Y and Z, in the same industry are
shown below as at the year ended 30 September 2008.

ASSETS
Non-current assets:
Intangible assets
Tangible assets

Current assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Share capital
Revaluation reserve
Retained prots

Non-current liabilities
Current liabilities
TOTAL EQUITY AND LIABILITIES

X
000s

Y
000s

Z
000s

150
1,329

1,479

1,380

2,859

873

873

870

1,743

16
870

886

1,424

2,310

300
120
1,584

2,004

150

705

2,859

60

1,275

1,335

30

378

1,743

450

1,056

1,506

75

729

2,310

The revenue and prot for the year ended 30 September 2008 for the three enterprises are
as follows:
X
Y
Z
000s
000s
000s
Revenue
3,150
2,250
2,625
Prot for the year after depreciation
and amortisation charges
423
291
222

The three enterprises have different accounting treatments for the intangible assets:
X amortises at 10% per annum and Z at 20% per annum; Y has written off all its intangible
assets of 60,000 against its operating prots for the year ended 30 September 2008.
Intangible assets of all three enterprises were acquired on 1 October 2007 and the standard
amortisation method of intangible assets in the industry is 10% per annum.
X revalued its tangible assets as at 1 October 2007, which gave rise to an extra depreciation
charge of 6,000 at 30 September 2008 over and above the historical cost depreciation
charge.

FA1208

Required:

Q4

(a)

Appraise the nancial performance and position of each enterprise as far as the
information mentioned above permits and after adjusting for the different accounting
treatments.
(15 marks)

(b)

List the further information, about the three enterprises, that you would like to receive
to help you in assessing the nancial performance and position of the
enterprises.
(10 marks)
(Total 25 marks)

An enterprise is seeking funds to expand and has asked you to advise the board of directors
on the advantages and disadvantages of each of the following methods of nancing the
expansion:
L
Overdraft
L
Long-term loans
L
Leasing
L
Raising further equity capital
Required:
Write a report to advise the board of directors as requested above.

(25 marks)

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FA1208

Q5

Identify and explain, in accordance with relevant International Accounting Standards (IASs),
the accounting entries to reect each of the following items in the nancial statements of Fox
for the year ended 30 September 2008.
(a)

Fox has spent 450,000 during the year ended 30 September 2008 on research aimed
at increasing the life of its products. The research has not yet led to an increase in the
life of its products. Fox has also spent 2 million on developing a new product A which
it is estimated will go into production on 1 July 2009 and will produce sufcient prots
to cover its costs. In addition, Fox capitalised 3 million at 30 September 2007 on the
development of product B, which it estimated at that time would go into production on
1 March 2008. Fox has now found that product B is not viable as costs of production
are excessive.
(6 marks)

(b)

Fox acquired a piece of machinery from Rats enterprise on 1 October 2007 under a
lease agreement. The agreement was for a lease period of 5 years, requiring 5 annual
rentals payable in advance of 10,500. The fair value of the machine, if purchased
outright, is estimated to be 46,370 and the interest rate implicit in the lease is 6.625%.
The only entries in the books of Fox at the year-end 30 September 2008 have been to
credit cash and charge the rst rental payment of 10,500 to the income statement.
Fox depreciates machinery over its useful life on a straight-line basis.
(8 marks)

(c)

Fox sells products under warranty. Past experience indicates that 85% of products
sold will have no defects, 10% will have minor defects and 5% major defects. If minor
defects occurred in all products sold, the cost of repairs would be 3 million and if
major defects occurred in all products sold, the cost of repairs would be 17 million.
Fox has recorded the full value of all products sold under warranty as part of revenue
and made no allowance for the costs of any warranties.
(7 marks)

(d)

Fox sold products to Rex for 500,000 on 1 January 2008 and at the same time
agreed to buy them back for 536,000 on 1 December 2008. Under the terms of the
agreement of sale, Rex cannot sell the products on to anyone else and must on
1 December 2008 sell them back to Fox. As at 30 September 2008, Fox has recorded
the 500,000 as revenue in its income statement.
(4 marks)
(Total 25 marks)

FA1208

Q6

Within nancial accounting there is general agreement that there are twelve traditional
accounting concepts. Four of these concepts are:
L
L
L
L

Matching (accruals)
Going concern
Business entity
Prudence

Required:
Using suitable examples, explain in detail each of the four concepts above.

Q7

(a)

(25 marks)

Within the International Accounting Standards Boards Framework for the preparation
and presentation of nancial statements, assets and liabilities are dened and criteria
identied for their recognition.

Required:
Dene assets and liabilities and explain why these denitions are important in the
preparation of an enterprises balance sheet and income statement.
(12 marks)
(b)

During the year ended 30 September 2008, Cat enterprise acquired 80% of the share
capital of Mouse enterprise at a cost of 5 million. The fair value of Mouses net assets
at the date of acquisition was 4 million giving rise to goodwill on consolidation of 1.8
million. As at 30 September 2008, the value of Cats goodwill was estimated at
2 million. The directors of Cat wish to incorporate both the consolidated goodwill of
1.8 million and Cats individual goodwill of 2 million in the balance sheet as at
30 September 2008.

Required:
Advise the directors of Cat on the treatment of goodwill in their nancial statements as at
30 September 2008.
(8 marks)
(c)

Cat has paid 1 million in interest costs in connection with the borrowing of funds
during the year ended 30 September 2008. The directors of Cat wish to capitalise
these borrowing costs.

Required:
Advise the directors of Cat on the treatment of the borrowing costs in their nancial
statements as at 30 September 2008.
(5 marks)
(Total 25 marks)

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FA1208

Q8

The following information is available in respect of Zebra enterprise.

Income statement for the year ended 30 September 2008
000s
1,500
(879)

621
(396)

225
(30)

195
(75)

120

Revenue
Cost of sales
Gross prot
Operating expenses

Finance costs
Prot before tax
Tax
Prot after tax

Balance sheet as at year ended 30 September

ASSETS
Non-current assets
Current assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity:
Ordinary share capital
Share premium
Retained prots

Non-current liabilities
Current liabilities:
Tax
Bank overdraft
Other

TOTAL EQUITY AND LIABILITIES

(Note that figures in the table above are in 000s.)

FA1208

10

2007
000s

2008
000s

996
390

1,386

1140
510

1,650

240

576

816

120

300
60
696

1,056

195

90
15
345

450

1,386

75

324

399

1,650

The following notes are also relevant:

(1)
(2)
(3)

As at 30 September 2008 the current assets of 510,000 include bank balance of

45,000.
Depreciation charged as part of cost of sales for the year ended 30 September 2008
was 105,000.
During the year ended 30 September 2008, a non-current asset with a carrying amount
of 120,000 was sold at a loss of 36,000. The loss was charged as part of cost of
sales.

Required:
(a)

Prepare a cash ow statement for Zebra enterprise for the year ended 30 September
2008 in accordance with IAS 7 Cash Flow Statements. (Notes to the cash ow
statement are not required.)
(20 marks)

(b)

Comment on the nancial position of Zebra as shown by the cash ow statement you
have prepared.
(5 marks)
(Total 25 marks)

End of Question Paper

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11

FA1208

Diploma
Financial Accounting
Examiners Suggested Answers
Section A
Q1

Income statement for Zen enterprise for the year ended 30 September 2008
000s
Revenue
Opening inventory
Purchases

3,700
54,200

57,900
3,900

Closing inventory
Gross prot
Dividends received

Distribution expenses (7,200-60 hire

prepayment + 500 property dep. + 318 P&E dep.)
Administration expenses (3,500 + 80 insurance
accrual + 500 prop dep. + 318 P&E dep.)
Interest on debentures (5,000 * 6%)
Bank interest

Tax (30% * (27,374-80))

Prot for the year
Extract from statement of changes in equity
Ordinary dividend paid
Preference dividend paid

Plant and equipment at cost

Accumulated depreciation
Net book value

FA1208

54,000

39,700
80

39,780

7,958
4,398
300
20

12,676

27,104
8,107

18,997

90
40

18,867

Retained earnings for the year

Depreciation calculations
Property valuation
Useful life
Depreciation

000s
93,700

26,000,000
26 years
26,000,000/26 = 1,000,000 charged 500,000 to
distribution and 500,000 to administration.
4,300,000
1,120,000

3,180,000 * 20% = 636,000 charge 318,000 to distribution

and 318,000 to administration

12

Balance sheet for Zen enterprise as at 30 September 2008

ASSETS
Non-current assets
Land and property
Plant and equipment

000s
Cost or
Valuation

000s
Depreciation

000s
NBV

32,000
4,300

36,300

1,000
1,120 + 636

2,756

31,000
2,544

33,544

Investment in Electra

11,000

44,544

Current assets
Inventory
Trade receivables
Payments in advance
Bank and cash

3,900
1,500
60
4,000

TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Ordinary share capital 1
Preference share capital 1
5%
Revaluation reserve
Retained earnings (2,700 + 18,867)

9,460

54,004

13,500
800
3,000
21,567

38,867

Non-current liabilities
Debentures 6%
Current liabilities
Trade payables
Accrued insurance
Accrued interest
Taxation

5,000
1,650
80*
300
8,107

TOTAL EQUITY AND LIABILITIES

10,137

54,004

* Due to a typographical error, the gure of 80,000 did not appear in the notes to the
accounts. An appropriate allowance was made in marking the answer.

[Turn over
13

FA1208

Q2

Cost of control
Paid (5,500-130)

Minority interest 25%

5,370

3,000
540
705
900

5,145

225

Bought shares (75%)

Share premium 75% * 720
Retained earnings 75% * 940
Revaluation 75% * 1,200

Goodwill

Pre acquisition earnings 1320-940

Depreciation adjustment 1 million * 2% * 8 years

Allocated group 75% * 220

1,000
180
235
300

380
160

220

165

55

1,770

Consolidated balance sheet of Box group as at 30 September 2008

000s
ASSETS
Non-current assets
Land and buildings (12,620 + 6,540 + 1,200-160)
Plant and equipment (1,720 + 80)
Goodwill

Current assets
Inventory (530 + 110-31 unrealised prot)
Trade receivables (620 + 90)
Bank and cash

609
710
30

1,349

23,574

TOTAL ASSETS

EQUITY AND LIABILITIES

Equity
Share capital
Share premium
Retained earnings (1,740-31up + 165)
Minority interest

FA1208

20,200
1,800
225

22,225

13,700
2,800
1,874
1,770

20,144

14

Non-current liabilities
Loans (1,500 + 530-130 inter co. loan)

1,900

Current liabilities
Trade payables (760 + 120)
Tax (500 + 150)

880
650

1,530

23,574

TOTAL EQUITY AND LIABILITIES

Q3

(a)

Before calculating ratios for the three enterprises the difference in accounting
treatments needs to be eliminated as follows:

Intangible assets
Tangible assets

Operating prot

Capital employed
RATIOS
Prot/sales
Sales/capital employed
Prot/capital employed
Sales/tangible assets
CA:CL
Gearing

(b)

X
000s
150
1,329-120
revaluation + 6
excess dep = 1,215
423 + 6 dep = 429
(1/2)

Y
000s
54
873

Z
000s
18
870

2,154-114 = 2,040

291 + 60
intangible wo
-6 amortisation = 345
1,365 + 54 = 1,419

222 + 2 diff in
amortisation =
224
1,581 + 2 = 1,583

429/3,150 = 13.6%
3,150/2,040 = 1.54
429/2040 = 21%
3,150/1,215 = 2.6
1,380/705 = 1.96
150/2,040 = 7.4%

345/2,250 = 15.3%
2,250/1,419 = 1.59
345/1419 = 24.3%
2,250/873 = 2.6
870/378 = 2.3
30/1,419 = 2.1%

224/2,625 = 8.5%
2,625/1,583 = 1.66
224/1583 = 14.2%
2,625/870 = 3.0
1,424/729 = 1.95
75/1,583 = 4.7%

From the above ratios enterprise Y achieves the best return on capital employed
due to a higher margin ration.
Enterprise Z achieves more volume than either X or Y but at a cost of lower
margins.
Y is the most liquid of the three enterprises
Y displays the lowest gearing
Previous years balance sheets and income statements
Cash ow statements
Forecast budgets and cash ows, business plans
Information in respect of quality of goods and services and other factors affecting
the assessment of goodwill in the business
Industrial average ratios
Stock market valuations

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15

FA1208

Q4

To: Board of directors of X enterprise

From:
Date:
Subject: Advantages and disadvantages of methods of funding expansion
Introduction
This report identies the advantages and disadvantages of four methods of raising nance to
fund a proposed expansion of your enterprise.
Overdraft
Advantages

Disadvantages

Easy to arrange and relatively cheap.

Security may be required.

Useful as a method of easing cash ow

strains during peak periods.

Can be withdrawn by the bank at any

time or may not be renewed when it is
required in future.

Interest charges are only incurred whilst

the facility is overdrawn and only the
exact amount of funding required is
utilised.

Banks may require management gures

at regular intervals in order to monitor
progress.

Long term loans

Advantages

Disadvantages

Can be structured so that repayments

can be met out of future income deriving
from the expansion.
Cannot technically be withdrawn as long
as the borrower honours all of the terms
of the facility.

Security will generally be required which

adds to the initial costs and puts the
business at a degree of risk.

Repayments can be structured to meet

the needs of the business.

Management gures may be required at

regular intervals.
An agreed sum of money is lent and this
may be more than is actually needed for
the expansion.
Can be expensive for a small company.

Leasing
Advantages

Disadvantages

Can be on-balance sheet - the nance

lease - or off-balance sheet - the
operating lease.

In an operating lease the benet of any

residual value in the asset is lost to the
lessor (owner).
Costs may be higher than those of a
bank, but this may be outweighed by the
absence of fees.
Capital allowances are lost to the lessor
but the rentals will usually be taxdeductible.

The period can match the life of the

expansion assets.
There are usually no set-up costs
Repayments can be structured to suit the
cash ow of the business.

FA1208

16

Only the actual amount of cash is

advanced - there are no surpluses on
which charges accrue.

Early settlement of the facility is usually

expensive.

Additional security is not often required.

The facility cannot be withdrawn whilst
the enterprise honours its commitments.
Additional equity capital
Advantages

Disadvantages

Can be a cheaper form of raising capital

and dividends will only have to be paid
when the enterprise can afford it.

A degree of control over the enterprise

will be lost.

Capital is raised in the long-term.

Possibility of takeover is increased when

the shares are widely held.

Increasing the equity capital should

increase the ability of the enterprise to
borrow in the market.

Q5

(a)

The 450,000 should be debited to the income statement as expenses during the year
as it does not meet the criteria for capitalisation as no feasible product has been found.
The 2 million spent on product A can be capitalised, debit intangible assets, as it
meets all criteria. Amortisation will commence, on a suitable basis, as from 1 July 2009.
The 3 million spent on product B, previously capitalised, must now be debited to
the income statement, credit intangible assets, as it no longer meets the criteria for
capitalisation.
Relevant standard is IAS 38.

(b)

Relevant standard is IAS 17.

Finance lease commencing 1 October 2007 as present value of total rentals is greater
than 90% of the fair value.
Total interest in the lease is 5 10,500-46,370 = 6,130.
Liability at
start of period

Rental paid

1.10.07

46,370

10,500

35,870

2,376

1.10.08

38,246

10,500

27,746

1,838

1.10.09

29,584

10,500

19,084

1,264

1.10.10

20,348

10,500

9,848

652

1.10.11

10,500

10,500

52,500

Liability
Interest charge
during period
6.625%

6,130

The asset is capitalised and the loan raised by debiting tangible non-current assets and
crediting loans both with 46,370.
The asset is depreciated over 5 years and therefore 9,274 is debited to income
statement and credited to depreciation provision.
The interest due for the year ended 1.1.08 of 2,376 is debited to income statement.
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17

FA1208

The loan raised for the fair value of the asset will be reduced by the principal payments
made. In the year ended 30.9.08 the principal payment is 10,500 and therefore the
loan will be reduced to 35,870 of which 8,124 will be payable in less than one year
and 27,726 greater than one year. The interest payment of 2,376 will also need
accruing at the year end.
(c)

Fox needs to make a provision for the probable cost of warranties based on past
experience as there is:

A present obligation as a result of an obligating event;

A probable outow;
A reliable estimate.

Relevant standard is IAS 37.

Estimate is 85% * 0 + 10% * 3m + 5% * 17m = 1.15m
Debit income statement 1.15m provision for warranties.
Credit warranty provision account.
(d)

This is a sale and buy back agreement.

The stock remains a current asset of Fox.
Fox needs to raise a loan in its books 536,000 as at 1.1.08 by crediting loan less than
one year and debiting income statement.
Interest due for the agreement is 36,000 of which 9/12ths is due as at 30.0.08 =
27,000. Thus debit 27,000 to income statement as at 30.9.08 and credit accruals.
Relevant standard is IAS 18.

Q6

(a)

Matching:
Matching requires that revenue earned in a period be matched with related costs.
The concept gives rise to accruals and prepayments in the balance sheet and
accounts for some of the difference between cash and prot.

The reasoning behind the concept is that prot for the period should represent
fairly the earnings of the period covered matched with all costs.

Matching requires us to move from receipts (receipts of cash or cheques in a

period) to revenue (recognised when goods pass to a customer not when the
customer pays).

Matching requires us to move from payment (payment of cash or cheques for

goods or services) to expenses (all expenses incurred by an enterprise during a
period) irrespective of when they are paid for.
Example: telephone bill 200 paid January year 2 relating to previous quarter equals
payment year 2 but expense year 1. An accrual is required of 200.

(b)

Going concern:

FAT1208

Going concern infers that the business is carrying on steadily trading from year to
year without reducing its operations.
Going concern directly inuences values placed on, for example, non-current
assets such as plant and equipment.
Going concern also allows for the principle of depreciation; if we depreciate an
item of plant over 10 years then we are assuming that the plant will have a useful
life to the enterprise of 10 years. This assumption can only be made if we rst
assume that the enterprise will continue for 10 years.

18

(c)

Business entity:

(d)

This states that the enterprise has an identity and existence distinct from its
owner/s.
This contrasts with the legal position, particularly for a sole trader and partnership.
The accountant can always speak of the enterprise owing the owner money e.g.
dividends, interest on capital within a partnership or borrowing money from the
owner e.g. share capital, capital invested by a sole trader.
This concept also ensures that salaries etc. paid to owners are classied as
expenses.

Prudence or conservatism:
This refers to the accounting concept of recognising all possible losses but not
anticipating possible gains.

However the accountant must NOT be overly pessimistic but free from bias.

The IASB framework refers to prudence as the inclusion of a degree of caution

in the exercise of judgement needed in making the estimates required under
conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated.
Examples could be stocks carried at cost or net realisable value whichever is the lower,
or accounting for provisions such as provision for bad debts or provision for warranties.

Q7

(a)

The IASBs framework denes assets as a resource controlled by an enterprise as a

result of past events and from which future economic benets are expected to ow to
the enterprise.
The rst part of the denition puts the emphasis on control rather than ownership. This
is done so that the balance sheet reects the substance of transactions rather than
their legal form.
Common examples of this would be nance leased assets.
The reference to past events prevents assets that may arise in the future from being
recognised early.
The IASBs framework denes liabilities as a present obligation of the enterprise
arising from past events, the settlement of which is expected to result in an outow
from the enterprise of resources embodying economic benets.
Obligations generally arise under a legally enforceable contract but can also arise
where there is expectation by a third party of an enterprise assuming responsibility for
costs where there is no legal requirement to do so. These are constructive obligations
such as repairing or replacing faulty goods or incurring environmental costs.

(b)

Whilst it is acceptable to value the goodwill of 1.8 million of the subsidiary on the
basis described in the question and include it in the consolidated balance sheet, the
same treatment cannot be afforded to Cats own goodwill.
The calculation may indeed give a realistic value of 2 million for Cats own goodwill
but this is internal goodwill.
IFRS prohibit such internal goodwill appearing in the nancial statements. The main
reason for this is the unreliability of the measurement.
The purchased goodwill in the acquisition is measured reliably at the point in time of
purchase.

[Turn over
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(c)

IAS 23 only permits the capitalisation of borrowing costs if they are directly attributable
to the acquisition, construction or production of a qualifying asset.
A qualifying asset is one that takes a substantial amount of time to get ready for
its intended use or sale. Examples of qualifying assets are long term construction
contracts, ships or aircraft being built and inventory being matured such as wine or
spirits.
In this case the interest payable appears to be on the borrowing of general funds and
therefore cannot be capitalised.

Q8

(a)

Zebra cash flow statement for the year ended 30.09.08

000s
Cash flow from operating
activities
Prot before tax
Adjustments for:
Depreciation of non-current assets
Loss on sale of non-current assets
Interest costs

195

Increase in current assets (510-45-390)

Decrease in current liabilities (345-324)
Cash generated from operations
Interest paid
Tax paid (75 + 90-75)
Net cash flow from operating activities
Cash flow from investing activities
Purchase of non-current assets
(1140-996 + 120 assets sold + 105 dep)
Sale of non-current assets (120-36)
Net cash used in investing activities
Cash flow from financing activities
Issue of ordinary shares
(360-240 + 60 share premium)
Issue of loans (195-120)
Net cash flow from financing activities
Net increase in cash

Cash at beginning of period

Cash at end of period
(b)

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000s

105
36
30

366
(75)
(21)

270
(30)
(90)

150
(369)
84

(285)
120
75

195

60

(15)
45

Zebra has expanded its non-current assets by 369,000 which has only partly been
nanced from long term sources of equity 120,000 and loans 75,000.
The remaining nance has come from sale of non-current assets and the use of
operating activities cash.

20

Zebra after paying interest on loans and tax has improved its cash balance by 60,000
during the year.
The cash ow shows a comfortable position although the gearing has increased as
follows;

Non-current liabilities/equity

30.09.07
120/816 = 14.7%

30.09.08
195/1,056=18.5%

This gearing is not too high.

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