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financial reporting
International Financial Reporting A Practical Guide 2nd Edition Alan Melville - Solutions
The following draft financial statements are available for Sipfalor plc for the year ended 31 May 2010:Statement of financial position at 31 May 2010 2010 2009£ £ £ £Assets Non-current assets at cost or valuation 81,535,730 57,754,170 Less: Accumulated dep'n 16,677,788
The statement of financial position of Aadvaark Trading Ltd at 30 November 2010 (with comparatives for 2009) is as follows:Statement of financial position at 30 November 2010 2010 2009£000 £000 £000 £000 Assets Non-current assets Property, plant and equipment at cost or valuation 2,470 1,790
The statement of financial position of Urban plc at 31 July 2010 (with comparatives for the previous year) is shown below:Statement of financial position at 31 July 2010 2010 2009£000 £000 £000 £000 Assets Non-current assets Property, plant and equipment at cost 490 450 Less: Accumulated
An extract from the statement of comprehensive income of Trieste Ltd for the year to 31 May 2010 is shown below, together with the company's statement of financial position at that date (with comparatives for the previous year).Statement of comprehensive income (extract) for the year to 31 May
The summarised statement of comprehensive income of Shap Ltd for the year to 30 June 2010 is shown below, together with the company's statement of financial position at that date (with comparatives for the previous year).Statement of comprehensive income for the year to 30 June 2010£Operating
Explain the effect (if any) of each of the following transactions on an entity's profit or loss and on its cash flows:(a) the purchase of new equipment which is then depreciated over its useful life(b) the payment of a supplier's invoice(c) accounting for an accrued expense at the end of an
(a) Distinguish between the direct method and the indirect method of calculating the amount of cash generated from an entity's operations.(b) List the main steps in the accounting work required if the indirect method is used.
Explain each of the following terms which are defined in international standard IAS7:(a) cash (b) cash equivalents(c) operating activities (d) investing activities(e) financing activities.
Petersfield plc prepares accounts to 31 December each year. On 1 January 2006, the company acquired a non-current asset at a cost of £256,000 and decided to depreciate this asset on the straight-line basis over a five-year period, assuming a residual value of£nil. Depreciation allowed for tax
The draft statement of comprehensive income of Harrington, a public company, for the year to 31 March 2010 shows an income tax expense of £55,000. The draft statement of financial position shows a non-current liability of £280,000 for deferred tax but does not show a current tax liability.Tax on
Consider each of the following assets and liabilities which appear in a company's statement of financial position at 30 April 2010:(a) A motor lorry which cost £100,000 is shown at its written down value of £20,000.For tax purposes, its written down value is £30,000.(b) A loan payable is shown
Explain the concept of the "tax base" of an asset or liability. Explain how this concept helps to identify situations in which deferred tax adjustments are required.
The pre-tax profits of Radford Ltd for the last three years have been as follows:£year to 31 August 2007 125,000 year to 31 August 2008 130,000 year to 31 August 2009 135,000 In the year to 31 August 2007, there was a taxable temporary difference of £50,000 between accounting profits and taxable
(a) Distinguish between current tax and deferred tax.(b) Distinguish between permanent differences and temporary differences.(c) Explain how temporary differences between accounting profits and taxable profits would affect the tax expense shown in an entity's financial statements unless deferred
Otley Ltd prepares accounts to 31 July each year. The company's financial statements for the year to 31 July 2009 showed a liability for current tax of £120,000. This was an estimate of the current tax due for the year to 31 July 2009. The following information is also available:(a) The current
Prentice plc operates a defined benefit pension plan and prepares financial statements to 31 March each year. The financial statements for the year to 31 March 2009 showed that the defined benefit obligation on 31 March 2009 was £140m and plan assets on that date were £147m. The following
With regard to defined benefit pension plans, outline the accounting treatments that are permitted by IAS19 for actuarial gains and losses.
Northern plc prepares accounts to 31 December each year and has operated a defined benefit pension scheme for many years. At 31 December 2008, the present value of the defined benefit obligation was calculated to be £22.5 million and the fair value of plan assets was £21.9 million. The following
(a) With regard to defined benefit pension plans, explain each of the following terms:- defined benefit obligation- current service cost- interest cost- actuarial gains and losses.(b) Identify the main components of the defined benefit expense which should be shown in an employer's statement of
(a) Distinguish between defined contribution pension plans and defined benefit pension plans.(b) A company's agreed contributions to a defined contribution plan for 2009 are£350,000. Of this sum, the company had paid £320,000 by the end of the year. It is becoming clear that the pension fund
A company has 10,000 employees. Each employee is entitled to twenty days of paid holiday per calendar year. Up to five days of this entitlement may be carried forward and taken in the following year but cannot be carried forward any further. Employees are not paid for any holidays which they fail
List the four main categories of employee benefits which are identified by international standard IAS19 and give examples of each category.
Triangle, a public listed company, is in the process of preparing its draft financial statements for the year to 31 March 2010.On 1 April 2009, Triangle sold maturing inventory that had a carrying value of £3m (at cost) to Factorall, a finance house, for £5m. Its estimated market value at this
On 1 July 2009, Ashford Ltd sells goods worth £800,000 to Baker plc for £500,000. The sales agreement states that Ashford Ltd is entitled to repurchase the goods on 30 June 2012 for £500,000 plus compound interest calculated at 10% per annum and it is expected that repurchase will in fact
A company sells goods to a customer on the understanding that the customer will pay£5,000 immediately and will then pay two further instalments of £5,000 each at annual intervals. Assuming an effective interest rate of 10% per annum, calculate the amount of revenue which should be recognised at
Identify whether (and when) the "significant risks and rewards" of ownership pass from seller to buyer in each of the following situations:(a) A retailer has a "no questions asked" returns policy. Customers may return goods for any reason within one month of purchase and obtain a full refund.
(a) State the conditions which must be satisfied in order for the revenue relating to the rendering of services to be recognised.(b) Explain when revenue should be recognised in each of the following situations:(i) A company which prepares financial statements to 31 December each year has a
(a) State the conditions which must be satisfied in order for the revenue relating to a sale of goods to be recognised.(b) Explain when revenue should be recognised in each of the following situations:(i) A company sells goods on "sale or return" terms. The customer is entitled to return the goods
(a) Define the term "revenue" and explain how revenue should be measured in accordance with the requirements of international standard IAS18.(b) Identify the amount of revenue arising in each of the following cases:(i) A company sells goods for £1,000 plus VAT at 17.5%, so that the customer is
(a) Sparkling Pictures plc is a company which specialises in video production. The company is preparing its financial statements for the financial year ended 30 April 2010.During the financial year ended 30 April 2009 Sparkling Pictures plc was responsible for videoing an important prize awards
Triangle, a public listed company, is in the process of preparing its draft financial statements for the year to 31 March 2010. The following matters have been brought to your attention:(i) On 1 April 2009 the company brought into use a new processing plant that had cost£15 million to construct
A company prepares financial statements to 31 December each year. The following events occurred after 31 December 2009 but before the financial statements for the year to 31 December 2009 were authorised for issue:(a) Inventory held at 31 December 2009 was sold to a customer.(b) The company made a
The annual accounting date of Lawson plc is 31 May. The following matters need to be dealt with before the financial statements for the year to 31 May 2010 can be finalised:(a) The company is currently suing one of its suppliers for failure to supply goods according to contract. Legal advice
Kenton Ltd prepares financial statements to 30 April each year. At 30 April 2010, the company is being sued by a customer who claims to have been harmed by one of the company's products. The case will come before the courts in late 2010. Explain how this matter should be dealt with in the financial
At the end of an accounting period, a company has each of the following:(a) a present obligation which will probably require an outflow of resources(b) a present obligation which will probably not require an outflow of resources(c) a possible obligation arising from a disputed past event; the
(a) Explain how the amount of a provision should be measured.(b) A company needs to make a provision for the cost of repairing a faulty product supplied to a customer some weeks previously. The company estimates that there is a 60% chance that this repair will cost £100,000. However, there is a
Hillman Ltd prepares financial statements to 31 March each year. Consider each of the following situations and determine in each case whether or not a provision should be recognised in the company's financial statements for the year to 31 March 2010.(a) On 23 January 2010, the board of directors
Quark plc prepares financial statements to 31 December each year. On 1 January 2009 the company bought £500,000 of 6% loan stock for £490,420. Interest is receivable on 31 December each year and the loan stock will be redeemed at a 15% premium on 31 December 2013. The effective rate of interest
On 1 May 2009, a company which prepares financial statements to 30 April each year issues £750,000 of 3% loan stock at a discount of 5%. Issue costs are £13,175. Interest is payable on 30 April each year and the stock is redeemable on 30 April 2013 at a premium of 10%. The effective rate of
(a) Explain the terms "credit risk", "liquidity risk" and "market risk" which are used in international standard IFRS7.(b) List the main disclosures required by IFRS7 in relation to each of these risks.
(a) International standard IAS39 classifies financial assets into four categories.Identify and explain each of these categories. Also explain the way in which each category of financial asset should be measured subsequent to initial recognition.(b) On 1 January 2010, a company which prepares
(a) Explain what is meant by a "compound" financial instrument. Also explain the required accounting treatment of such an instrument.(b) On 1 April 2008, a company issues a £500,000 4% convertible bond at par. Interest is payable on 31 March each year. The bond is redeemable at par on 31 March
(a) Define the terms "financial instrument", "financial asset", "financial liability" and"equity instrument".(b) Explain how international standard IAS32 distinguishes between financial liabilities and equity instruments.(c) Explain the accounting treatment of redeemable preference shares required
Beetie is a construction company that prepares its financial statements to 31 March each year. During the year ended 31 March 2010 the company commenced two construction contracts that are expected to take more than one year to complete. The position of each contract at 31 March 2010 is as
Parsons Ltd is a manufacturing company. The company's inventory at 30 June 2010 includes the following items of work in progress:Product X Product Y Number of units held at 30 June 2010 6,400 3,800 Costs incurred per unit to date £8 £12 Estimated further costs per unit to completion £7 £8
- -Work on both the Tees contract and the Wear contract commenced during the financial year ended 31 October 2010. The Tyne contract commenced during the financial year ended 31 October 2009.Klinibild plc accounts for its contracts in accordance with IAS11 Construction Contracts using a revenue
- -Profit
9.45 5.27 Recognised in previous financial year:Turnover
1.33 12.93 Estimated future costs to complete
1.00 9.00 Costs to date
1.00 10.00 Payments received
1.25 10.00 Value of work invoiced
24.83 15.50 Certified value of work completed
Klinibild plc has three contracts to build new clinics for NHS trusts. The three projects are the Tyne, the Tees and the Wear. The following information as at 31 October 2010 is available for each of the three contracts:Tyne Tees Wear£m £m £m Contract price
Ludlow plc is a construction contractor and prepares financial statements to 31 May each year. The following information relates to a contract which began during the year to 31 May 2010 and which was still in progress on that date:£000 Contract price 600 Costs incurred to date:- for work performed
Kedleston Ltd buys used machines which it reconditions and sells on to customers. The company's inventory at the end of its most recent accounting period included the following machines:Purchase Reconditioning Expected further Expected price costs incurred costs before selling to date sale price£
Mapperley plc prepares financial statements to 31 December each year. The company began work on a construction contract on 21 June 2008 and completed the contract work on 13 August 2010. The contract price was initially set at £500,000 and this figure did not change throughout the duration of the
(a) Explain why international standard IAS2 does not apply to construction contracts.(b) Explain how the stage of completion of a construction project can be determined.
(a) Identify the circumstances in which a cost formula may be used to establish the cost of inventories.(b) The inventory of Jackson plc at 30 April 2010 includes 11,000kg of a chemical which is used in the company's manufacturing processes. Purchases and issues of this chemical during the year to
(a) Explain the term "inventories" as defined by international standard IAS2.(b) List the costs which should be included when measuring the cost of inventories and identify any costs which should be excluded.(c) Explain the term "net realisable value" in relation to inventories.
On 1 December 2009, Gebouw plc entered into a finance lease requiring the payment of five annual rental payments of £785,000 payable in advance on 1 December 2009, 2010, 2011, 2012 and 2013.The fair value of the leased asset on 1 December 2009 was £3,500,000 and it was expected to have a
International standard IAS17 defines the term "lease" and distinguishes between finance leases and operating leases. The standard also prescribes the accounting treatment of each type of lease, both by the lessor and by the lessee.(a) Define the terms "lease", "finance lease" and "operating
Lees Ltd is about to lease an assembly machine on a finance lease. The terms of the lease require Lees Ltd to make five rental payments of £18,000 annually in advance. The fair value of the assembly machine is £75,000 and its economic life is five years with no residual value. The rate of
Grasmere Ltd prepares accounts to 31 December each year. On 1 January 2009, the company acquired an asset by means of a finance lease. Details of the lease agreement are as follows:Cash price of leased asset £27,500 Lease term 5 years Payments due annually in advance £6,595 each Useful life of
On 1 July 2009, Grant & Co Ltd entered into a finance lease to acquire a machine. The cash price of the machine would have been £132,000. The lease agreement specified that the company would make four lease payments, each of £45,303, on 30 June 2010, 2011, 2012 and 2013. The interest rate
Ennerdale Ltd prepares accounts to 31 March each year. On 1 April 2009, the company acquired an asset by means of a finance lease. The fair value of the asset on this date was£40,000 and the company was required to make six half-yearly lease payments of £7,674 each. The first payment was payable
On 1 January 2010, Crummock Ltd leases a machine from Derwent plc. The lease is for a term of three years and lease payments of £1,000 per month are required. The machine has a useful life of eight years and would cost £50,000 if bought for cash.(a) Explain why this lease is an operating
International standard IAS17 distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease.(a) Define the terms "finance lease" and "operating lease".(b) List the main situations in which a lease would normally be classified as a finance
Bakewell Ltd prepares annual financial statements to 31 December. On 1 August 2009 the company closed down one of its operations and classified the corresponding cashgenerating unit (CGU) as held for sale. All of the assets in this CGU were within the scope of the measurement requirements of IFRS5.
An extract from the draft statement of comprehensive income of Anderson Ltd for the year to 30 April 2010 is as follows:£000 £000 Sales revenue 558 Cost of sales 184–––Gross profit 374 Other income 12–––386 Distribution costs 59 Administrative expenses 148 207––– –––Profit
Young and Sons Ltd prepares annual financial statements to 31 May. On 25 January 2009, the company classified a disposal group as held for sale. This disposal group was eventually sold in August 2009. The carrying amounts of the assets and liabilities in the disposal group at 25 January 2009 and
Varney Ltd is a manufacturing company which prepares annual financial statements to 31 December. In November 2008, the company announced a plan to close down one of its manufacturing operations and to sell off the assets of that operation. The operation will be closed down over a period of
(a) Explain what is meant by a "discontinued operation".(b) Explain why IFRS5 requires the results of discontinued operations to be presented separately in the financial statements.
Wilberforce plc prepares annual financial statements to 30 June. On 1 March 2009, the company classifies a non-current asset as held for sale. The asset is eventually sold in July 2009. Calculate:(i) any impairment losses or gains that should be recognised in the financial statements for the year
(a) Explain what is meant by a non-current asset "held for sale" and list the criteria which must be satisfied in order for an asset to be classified as held for sale.(b) Explain why it is not appropriate to measure non-current assets held for sale in the same way as non-current assets held for
Stenberg plc is preparing its financial statements for the year ended 30 November 2010.On 1 May 2010, the company purchased a factory for the manufacture of optical disks, paying £24,000,000. The factory will be depreciated over its estimated life of 10 years using the straight line method on a
An asset which cost £200,000 on 1 January 2008 is being depreciated on the straight line basis over a five year period with an estimated residual value of £40,000. The company which owns the asset has conducted an impairment review at 31 December 2009 and estimates that the asset will generate
IAS36 Impairment of Assets was issued in June 1998 and subsequently amended in March 2004. Its main objective is to prescribe the procedures that should ensure that an entity's assets are carried at no more than their recoverable amounts. Where an asset is carried at an amount in excess of its
The carrying amounts of the assets of a cash-generating unit are as follows:£m Goodwill 25 Patents and copyrights 50 Property, plant and equipment 200––––275––––There are indications that this CGU is impaired and therefore its recoverable amount has been determined. The CGU's
(a) Define the term "cash-generating unit" (CGU).(b) Explain the circumstances in which a CGU should be tested for impairment.
An asset (which has never been revalued) has a carrying amount of £100,000. The asset is being depreciated on the straight-line basis, with a remaining useful life of three years and a residual value of £10,000.The asset is expected to generate net cash inflows of £20,000 per year for the next
Determine the recoverable amount of each of the following four assets and state the amount of any impairment loss which should be recognised in each case:Carrying Fair value less Value in amount costs to sell use£ £ £Asset 1 25,000 22,500 27,500 Asset 2 6,500 3,750 4,800 Asset 3 18,250 17,500
(a) Define the term "impairment loss".(b) List the main indications which would suggest that an asset might be impaired.(c) Identify the two types of asset which must always be tested for impairment, even if there are no indications that impairment has occurred.(d) Explain how the recoverable
There are two international standards which deal with goodwill. IAS38 does not allow internally generated goodwill to be recognised as an asset. Goodwill acquired in a business combination is dealt with by IFRS3.(a) Define the term "goodwill" and explain why internally generated goodwill may not be
The following information relates to three companies that use the revaluation model in relation to intangible assets and prepare annual financial statements to 31 December:(a) Company W acquired an intangible asset for £250,000 on 31 December 2008. This asset was revalued at £225,000 on 31
(a) Distinguish between research and development within the context of IAS38 Intangible Assets.(b) State, with reasons, how the following expenditure would be dealt with in the financial statements of Prebnez plc to conform with IAS38:(i) Money spent on a joint project with a university
On 1 January 2010, Alpha plc bought all of the assets and liabilities of Beta Ltd for an agreed price of £500,000. Beta Ltd then went into liquidation. The statements of financial position of the two companies just before this purchase were as follows:Alpha plc Beta Ltd£000 £000 £000 £000
(a) Define the term "goodwill" and distinguish between internally generated goodwill and goodwill acquired in a business combination.(b) Identify the main features of goodwill which distinguish it from other intangible assets and which warrant a special accounting treatment.(c) Why is not logical
Distinguish between the cost model and the revaluation model for the measurement of intangible assets subsequent to their initial recognition.
A company has purchased the following intangible assets in separate transactions:(a) a patent which expires after ten years; the company expects to make use of this patent for six years and then dispose of it(b) a copyright which expires after 40 years; the company intends to use this copyright for
(a) Distinguish between research expenditure and development expenditure.(b) Explain the accounting treatment required by IAS38 in relation to each of these types of expenditure.(c) During the year to 31 July 2010, a pharmaceuticals company spent a total of£830,000 on research and development. Of
(a) Define the term "intangible asset" and explain the main features of this definition.(b) Explain how an intangible asset should be measured at its initial recognition if it is acquired in a separate transaction.(c) Explain how an intangible asset should be measured at its initial recognition if
(a) Define the term "investment property" and explain why it is not appropriate to charge depreciation in relation to such a property.(b) Give three examples of properties (land or buildings) that should be classified as investment properties.(c) Explain the "fair value model" which is permitted by
Accounting standard IAS16 Property, Plant and Equipment makes a number of recognition, measurement and disclosure requirements with regard to tangible noncurrent assets. The term "non-current asset" is defined in accounting standard IAS1 Presentation of Financial Statements. The information given
Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 2001. Details of the cost of the ship's components and their estimated useful lives are:component original cost depreciation basis(£million)ship's fabric (hull, decks etc)
(a) Define the term "investment property" and explain the two models permitted by international standard IAS40 for the measurement of investment property after its initial recognition.(b) How do these two models differ from the two models permitted by IAS16 in relation to the measurement of
(a) Define the term "borrowing costs" and explain the accounting treatment of such costs which is required by international standard IAS23.(b) During the year to 31 December 2009, a company started work on the construction of a manufacturing plant and incurred expenditure as follows:£000 1 April
(a) In relation to property, plant and equipment, define the terms "depreciation","depreciable amount", "useful life" and "residual value".(b) On 1 July 2009, a company which prepares financial statements to 30 June each year acquires an item of equipment at a cost of £59,500. The item's useful
(a) Distinguish between the cost model and the revaluation model for the measurement of property, plant and equipment subsequent to its initial recognition.(b) If the revaluation model is used, explain how revaluation gains and losses should be accounted for.(c) A company which uses the revaluation
(a) Define the term "property, plant and equipment".(b) When should an item of property, plant and equipment be recognised as an asset and when should it be derecognised?(c) Which of the following costs should be included in the cost of an item of property, plant and equipment at initial
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