Professional Level

Paper FAR
Financial Accounting and Reporting
ACADEMIC SESSION – MARCH 2021

PROGRESS TEST 1 FOR ICAEW PAPER FAR

LECTURER: MS RUZLENA

GROUP: 202101 (G1 & G2)

EXAM DATE: 18/1/2021

EXAM TIME: 9.00AM – 12.00PM

Time allowed: 3 hours

All question are compulsory and must be attempted.

Do NOT open this paper until instructed by the supervisor.

1. The following list of account balances has been extracted from the nominal ledger of Barchetta
Ltd, on 31 March 2014:
£
Sales 4,521,000
Purchases 3,379,100
Administrative expenses 824,700
Finance costs 63,060
Ordinary share capital (£1 shares) (Note 5) 400,000
Share premium account at 31 March 2013 75,000
Retained earnings – 31 March 2013 321,370
Plant and machinery (Notes 1,2)
Cost 60,500
Accumulated depreciation at 31 March 2013 21,780
Land and buildings (Notes 1,3)
Cost (land £250,000) 2,230,000
Accumulated depreciation at 31 March 2013 144,950
Bank loans (repayable 31 March 2016) 900,000
Redeemable preference shares (Note 6) 200,000
Trade and other receivables 85,400
Trade and other payables 93,100
Cash at bank 6,800
Inventories at 31 March 2013 27,640

Additional information:
(1) Property, plant and equipment is measured under the cost model and depreciation is charged
on a straight-line basis over the following estimated useful lives:
• Buildings – 50 years
• Plant and machinery – 5 years (unless otherwise specified)
Following a review of useful lives, plant acquired on 1 April 2012 for £22,000 was estimated
to have a remaining useful life of eight years at 1 April 2013. Depreciation on property, plant
and equipment should be presented in cost of sales.
(2) On 1 April 2013 Barchetta Ltd began construction on its new head office building, which
was assessed as being a qualifying asset. Barchetta Ltd already had significant borrowings in
place at 1 April 2013 which funded the construction. £300,000 was paid in advance to the
contractor on 1 April 2013 and a second payment of £400,000 was paid on 1 January 2014.
Barchetta Ltd had the following bank loans at 31 March 2013:
• £600,000 at an interest rate of 6.4% pa
• £500,000 at an interest rate of 7.5% pa
Accounting entries made were to recognise payments to the contractor as part of buildings
costs and to charge interest on the loans to finance costs. Construction of the head office
building was completed on 31 May 2014.

(3) Inventories at 31 March 2014 have been valued at cost of £95,850. However, in April 2014
a review was carried out to assess customer demand. The review identified that sales of one
inventory line, the Camry, were extremely low because a competitor product had been
launched in February 2014 and had been selling very well at a lower price that the Camry.
 At 31 March 2014 Barchetta Ltd had 200 units of the Camry in its inventory. The unit cost
of the Camry was £315 and its sales price was £550. Barchetta Ltd incurs selling costs of
£25 per unit. It is now thought that the Camry will need to be considerably discounted and
that a realistic selling price is £320 with the same selling costs.
(4) On 1 January 2014 Barchetta Ltd made a 1 for 5 bonus issue of ordinary shares. No
accounting entries have been made to reflect this bonus issue. The share premium account
should be utilised for such issues wherever possible.
An interim ordinary dividend of 10p per share, based on the correct number of shares in
issue, was paid on 15 February 2014 and posted to administrative expenses.
(5) The income tax liability for the current year has been estimated at £84,500.
(6) On 1 April 2013, Barchetta Ltd issued 200,000 5% redeemable preference shares at their par
value of £1 per share. These shares are redeemable on 30 June 2018 at a premium. The
preference dividend is paid annually in arrears on 1 April and no accrual has been made for
this dividend. The effective interest rate of the preference shares is 5.6% pa.
(7) Barchetta Ltd sold some goods to an overseas customer on 1 March 2014 for €20,000.
Barchetta Ltd’s normal credit period is 60 days. The only accounting entries made for this
transaction were to recognise the sale and receivable at £15,600 on 1 March 2014.
The spot exchange rates are as follows:
1 March 2014 - €1: £0.78
31 March 2014 - €1: £0.72

Requirement
Prepare a statement of profit or loss for Barchetta Ltd for the year ended 31 March 2014 and a
statement of financial position as at that date in a form suitable for publication. (25 marks)
Notes: Notes to the financial statements are not required.
2. Rexford plc is a listed UK newspaper publisher with a portfolio of over 40 local and 5 national
brands, 2011 annual revenue of £60 million and profit from operations of £8 million.

The draft financial statements have been prepared by the financial controller for the year ended 30
September 2012 and include the following information:

Profit after tax £2,300,000

Total assets £3,450,700
Total liabilities £1,896,000

(1) On 1 January 2012 Rexford plc purchased a customer list from the liquidator of a competitor.
The price paid was £100,000 and was based on the list having a useful life of two years. At 30
September 2012, the directors of Rexford plc commissioned a report on the value of the customer
list from a firm of independent valuers. The firm has valued the customer list at £150,000. The
customer list is currently included in intangible assets at a carrying amount of £100,000 but the
directors wish to revalue the list if at all possible.

(2) On 1 January 2012 Rexford plc acquired a new freehold factory (land and buildings) for £4
million to provide additional printing facilities. The land element of the cost was £1 million and
the useful life of the buildings was estimated at 30 years. Rexford plc needed to adapt the factory
to accommodate a new printing press which cost £1 million. Both the factory and the printing
press were recognised in property, plant and equipment. The printing press was installed on 1
February 2012 and following a period of testing received an operating permit on 1 April 2012.
The press was not utilized until it began printing on 1 June 2012. To comply with local law, the
press will need dismantling and disposing of at the end of its ten year life at an estimated cost of
£200,000. The pre-tax rate of interest that represents risks specific to the dismantling liability is
10%.

(3) Rexford plc expanded its customer profile and gained a number of overseas clients. Sales were
made on 1 July 2012 for €75,000 and a 120-days credit period was given to the customers as an
incentive. Revenue and receivables were recognised at the date of sale at £56,250.

The spot exchange rates are as follows:

1 July 2012 - €1: £0.75
30 September 2012 - €1: £0.83

Requirements

(a) Explain the required IFRS financial reporting treatment of points (1) to (3) above, quantifying
the effects on the 30 September 2012 financial statements where possible and setting out the
required adjustments in the form of journal entries
(21 marks)
(b) For the year ended 30 September 2012 calculate revised figures for Rexford plc’s revenue, profit
after tax, total assets and total liabilities (4 marks)
(25 marks)
3. Prase Ltd is a company operating in the retail sector. The following information relates to Prase
Ltd’ property, plant and equipment. The following extracts are from the notes to the 30 June 2017
financial statements:
£
Land and buildings
Cost – freehold land 650,000
Cost – buildings 1,075,000
Accumulated depreciation 172,000

Plant and machinery

Cost 160,000
Accumulated depreciation 48,000

Fixtures and fittings

Cost 75,000
Accumulated depreciation 36,000

The finance department has provided the following information for the year ended 30 June 2018:
(1) A new building was constructed on a site that Prase Ltd had owned for a number of years. The
total building costs were:
Architect’s fees 23,000
Legal costs 7,000
Project management fees 30,000
Building costs 375,000
Management costs 72,000

Project management fees represent amounts paid to an independent project management

company whereas management costs are internal costs reallocated to the project. Included in the
building costs is the cost of buying and installing a goods lift. The total cost of the lift was
£15,000 and it was thought that it would need replacing every ten years. The lift should be
classified as plant and machinery.
The building was completed on 31 March 2018 and was ready for use on 1 May 2018. At the end
of the building’s estimated useful life of 25 years, Prase Ltd is obliged to clear the site and
restore the environment. Estimated restoration costs are £100,000. The rate at which reflects the
time value of money and the risks specific to the liability is 8%.
(2) Prase Ltd acquired new fixtures and fittings for an existing property which were installed on 1
October 2017 at a cost of £20,000
(3) Prase Ltd decided at the beginning of the accounting period that an old machine would be retired
from service. The machine was used until 31 December 2017 and then scrapped. The machine
had originally cost £18,000 and was acquired on 1 January 2013.
(4) Annual depreciation rates are:
• Buildings 4% straight-line
• Plant and machinery 15% straight-line
• Fixtures and fittings 25% reducing balance
Requirement
Prepare extracts from Prase Ltd’s statement of profit or loss for the year ended 30 June 2018 and its
statement of financial position as at that date in respect of the transactions above
Note: notes to the financial statements are not required (Total: 20 marks)
4. (i) At 1 July 2009 the equity section of Gandalf plc’s statement of financial position showed the
following.

£
Ordinary share capital (£1 shares) 500,000
Share premium 120,000
Revaluation surplus 420,000
Retained earnings 347,500
1,387,500

The accountant of Gandalf plc has prepared a draft statement of profit or loss for the year ended 30
June 2010 which shows a profit for the period of £135,500. However, there are certain matters which
he is unsure how to deal with and these are set out below. He has also asked for your assistance in
preparing the statement of changes in equity for that year. It is Gandalf plc’s policy to maintain as
high as possible the balance on retained earnings, whilst following IFRS.

(1) During the year Gandalf plc issued a further 300,000 ordinary shares at a price of £1.25 per share.
It also issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p
redeemable preference shares at a price of 70p per share.

(2) During the year an ordinary interim dividend of £30,000 was paid. The accountant has debited
this to finance charges. The accountant has made no entries in respect of the two preference
dividends which had been declared by the year end and are due to be paid shortly.

(3) On 1 July 2009 Gandalf plc revalued its freehold land and buildings which were carried in the
books at that date at a cost of £500,000 (land £300,000 and buildings £200,000) and accumulated
depreciation of £50,000. Depreciation is charged on a straight-line basis over an original
estimated useful life of 40 years. The valuation showed a fair value for the land of £600,000 and
for the buildings of £400,000. The estimated remaining useful life of the buildings was reassessed
at the same date and is believed to be 50 years. Depreciation for the year on freehold land and
buildings has not yet been charged.

(4) On 1 July 2009 Gandalf plc decided to change its depreciation policy for plant and machinery
from 20% straight-line to 25% reducing balance. Prior to charging depreciation for the year ended
30 June 2010 the plant and machinery account showed a cost of £357,800 and accumulated
depreciation of £125,700. There were no movements on the plant and machinery account during
the year. The accountant has not yet calculated the depreciation charge for the year as he is unsure
how to do this.

(5) Whilst preparing the draft financial statements the accountant discovered an error in the previous
year’s financial statements. Expenditure of £42,500 had been capitalised as an intangible asset
whereas in fact this was in contravention of IAS 38. This expenditure has been subject to an
amortisation charge of 10% in the current year.
Requirements
(a) Calculate a revised profit for the year reflecting the above matters and prepare a statement of
comprehensive income (6 marks)

(b) Prepare the statement of changes in equity for Gandalf plc for the year ended 30 June 2010. (A
total column is not required) (10 marks)

(c) Explain the difference between financial statements prepared using the accrual basis and those
prepared using the cash accounting or break-up bases, illustrating your answers with simple
calculations. (7 marks)

(ii) You are the assistant accountant at Copeland plc. The financial controller has asked you to
complete the company’s statement of cash flows for the year ended 31 May 2012. A draft statement
has already been prepared by a colleague. However, there is a significant discrepancy between the
cash and cash equivalents figure at 31May 2012 arrived at by adding down the statement of cash
flows and the figure in the statement of financial position which has been agreed to the cash book.
Following further investigation some additional information has been found.

Extract from draft statement of cash flows for the year ended 31 May 2012
£ £
Net cash from operating activities 5,964,000
Cash flows from investing activities
Purchase of intangible assets (260,000)
Purchase of property, plant and equipment (1,880,000)
Net cash used in investing activities (2,140,000)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 922,000
Movement in borrowings (3,781,000)
Retained earnings balance 2,556,000
Net cash from financing activities (303,000)
Net decrease in cash and cash equivalents 3,521,000
Cash and cash equivalents at beginning of period 322,000
Cash and cash equivalents at end of period 3,843,000
Extract from the statement of financial position as at 31 May 2012
2012 2011
Non-current assets
Property, plant and equipment 2,966,000 2,346,000
Intangible assets 5,670,000 5,930,000
Current assets
Cash and cash equivalents 1,052,000 322,000
Equity
Ordinary share capital (£1 shares) 1,800,000 1,000,000
Share premium 1,543,000 1,421,000
Revaluation surplus 1,880,000 1,256,000
Retained earnings 3,302,000 746,000

The statement of financial position above has been correctly prepared and does not need adjusting for
the additional information below:
1) Profit for the year ended 31 May 2012 is £3,299,000.

(2) A share issue at market price was made on 1 March 2012. In preparing the statement of cash
flows it was assumed that this was the only movement in shares during the period. However, a 1 for 2
bonus issue of ordinary shares, out of retained earnings, was made prior to the cash share issue and
this was missed.

(3) “Purchase of property, plant and equipment” had been calculated by taking the movement
between the opening and closing balances in the statement of financial position and correctly
adjusting this for the depreciation charged in the year. However, it was later discovered that there had
also been a disposal of plant, although no other disposals were made. It has now been calculated that a
loss on disposal of £189,000 was made based on the plant’s carrying amount of £496,000. As at 31
May 2012 £165,000 of the sale proceeds had yet to be received and is included within trade and other
receivables. As at 31 May 20X1 the corresponding figure in respect of disposals made during the year
the ended was £79,000, which was received in full in June 20X1.

(4) On 31 May 20X2 property which was originally purchased for £734,000 (and which had
previously been revalued) was revalued to £1,000,000. There were no other movements on the
revaluation surplus during the year.

(5) As in the previous year, all acquisitions of property, plant and equipment made during the year
were paid for in cash at the date of acquisition. However, included in trade and other payables as at 31
May 20X2 is £376,000 (20X1 - £nil) relating to the acquisition of intangible assets. There were no
disposals of intangible assets during the year. The impairment loss of £975,000 was correctly
calculated and adjusted for in the reconciliation.

Requirement
Prepare a revised extract from Copeland plc’s statement of cash flows for the year ended 31 May
2012. (12 marks)

(Total: 35 marks)