Mock One

Financial

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Reporting

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F7FR-MK1-Z16-A

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Answers & Marking Scheme y
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 Question Answer Mark Question Answer Mark

Section A Section B
1 C 2 16 D 2
2 D 2 17 B 2
3 B 2 18 C 2
4 A 2 19 D 2
5 D 2 20 A 2

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6 C 2 21 B 2
7 B 2 22 C 2

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8 C 2 23 B 2
9 C 2 24 A 2
10 B 2 25 A 2

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11 C 2 26 B 2
12 C 2 27 C 2
13 B 2 28 D 2
14 B 2 29 C 2
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15 A 2 30 B 2
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Section A

Item Answer Justification

1 C This is a payment in advance and should not be recognised as revenue until the
contract between the two parties has been finalised and GY has satisfied any
performance obligation of the contract.

2 D

3 B There are 500,000 ÷ 0.50 = 1 million shares in issue. Dividends are accounted for

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only when declared for payment, not when they are merely proposed (as this does
not give rise to a liability). The statement of changes in equity will therefore
include dividends declared and paid in the year:

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$000
20X5 Final dividend (1m × 0.1) 100
20X6 Interim dividend (1m × 0.05) 50
–––
150

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4 A B is a change in estimate. IFRS 3 allows an entity to use either method for each
subsidiary separately and so C is acceptable. D is a change in business and would
therefore require a new policy on the change in business method; it is not a change
of accounting policy.
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5 D The gains of $125,000 and $12,000 are unrealised. Therefore they must be credited
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to a revaluation reserve. This is a component of total equity, but is not included in
retained profits.

If an asset which has previously been revalued suffers an impairment, the fall in
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value may be debited to the revaluation reserve, provided there is a credit balance –
relating to that asset – which exceeds the impairment.

Therefore, the revaluation reserve will have increased by $137,000 ($125,000 +

$12,000) over the first two years. The impairment of $30,000 in the most recent
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year will reduce this to $107,000.

6 C In the first action, Dash has been informed it is likely to lose and therefore a
provision for the loss should be made.
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The second action gives rise to a contingent asset and disclosure of the transaction
should be made.
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7 B $
Carrying amount 754,860
Tax base 543,875
–––––––
Taxable temporary difference 210,985
–––––––
Provision required at 20% 42,197
Brought forward 39,853
–––––––
Increase (charge to profit or loss) 2,344
–––––––

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8 C $
Operating loss (5,000)
Depreciation 20,000
Interest expense 12,000
Interest paid (10,000)
–––––––
17,000
–––––––

9 C Cash inflows from the continuing use of the asset, so this will included (3) revenue
based on items produced by the plant. It will also take into account cash outflows

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that are necessary to help generate any cash inflows, this will include the annual
labour costs (1) and the servicing cost (5). Item (2) is an enhancing cost and item
(4) is specifically excluded by IAS 36.

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10 B Unrealised profit = ($30,000 × 20/120) × 80% = $4,000
$
Able 427,000

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Cain post-acquisition
((151,000 – 107,000) – 4,000 (unrealised profit)) × 75% 30,000
–––––––
457,000
–––––––
The unrealised profit for 20X5 will have no effect on the calculation of retained
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earnings at 31 December 20X6. It will only affect the statement of profit or loss.
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11 C $
Initial proceeds (500,000 × 0.95) 475,000
Interest at 10.5% 49,875
Cash paid (500,000 × 6%) (30,000)
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Balance at 31 Dec 20X5 494,875
–––––––
20X6 Interest at 10.5% 51,962
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12 C Liability as at 31 December 20X6

= 12,000 + (12,000 × 12%) – 7,080 = 6,360

13 B IAS 40 gives examples of property that would be classified as investment property;

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it includes land with uncertain use (3). The standard states that owner occupied
property is not investment property, but if the occupied portion is insignificant, as in
(1) then the property will still be classed as investment property.
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14 B ROCE = Profit before interest and tax ÷ Capital employed (i.e. equity + non-current
liabilities)
PBIT = 17,600 + 6,270 + 9,465 = $33,335
Capital employed = 127,920 + 63,200 = $191,120

ROCE = 17.4%

15 A IAS 23 requires that all borrowing costs incurred in the construction of a qualifying
asset be capitalised into the cost of that asset. Any funds invested, the return on
those funds should be offset against the amount of borrowing costs capitalised.

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Section B

Item Answer Justification

16 D IAS 36 defines recoverable amount as the higher of value in use and fair value less
costs of disposal

17 B Lower of:
Cost $120,000 and
Net realisable value (SP – cost to sell) (117 – 5) $112,000

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18 C Impairment loss is $100,000, of which $50,000 will be written off against goodwill
leaving a further $50,000 to be allocated to remaining assets other than inventory.

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Factory building ÷ Total assets (excluding inventory) = (260 ÷ 530) × 50 = $24,528

19 D A decrease in market rates of interest will increase value in use and output
significantly below budget is an internal indicator of impairment

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20 A PV of future cash flows using effective interest rate of 8%:

$000
20X7 (($260 – $60) × 0.93) 186
20X8 ($320 × 0.86) 275.2
20X9 (($140 + $10) × 0.79) 118.5
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579.7
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21 B Total cash flow from the contract is $720; this must be allocated to the stand-alone
selling prices of the handset and airtime (300 and 600). Therefore revenue earned
from handset is 720 × (300 ÷ 900) = $240; this is the amount of revenue recognised
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from the sale of the handset.

Airtime is a performance indicator fulfilled over time, in this case 12 months.

Revenue allocated to airtime is $480 (720 – 240) leading to revenue of $40 per
month.
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Revenue earned in 20X6 is therefore $240 + $120 (40 × 3) = $360

22 C An agent earns commission and they sell goods on behalf of the principal, who is
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the party that will bear any inventory risk

23 B $
Revenue is the selling price discounted 2 years (7,497 ÷ 1.052) 6,800
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Finance income is interest (5% × 6,800 × 6/12) 170

–––––
Total credit to profit or loss 6,970
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Tutorial note: The question asks for the total credit to profit or loss, not just
revenue.

24 A IFRS 15 specifically states (1) to be an indicator that performance obligation is

fulfilled over a period of time. Whereas, that the customer has significant risks and
rewards of ownership of an asset is an indicator that the performance obligation is
satisfied at a point in time.

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25 A Revenue will be recognised for the full $100.

Tutorial note: A provision will be recognised to reflect the 5% probability that

customers will ask for a refund within the six month time frame.

26 B $000
Balance 1 January (trial balance) 18,937
Interest at 8% (effective rate) 1,515
Cash paid (1,000)
––––––
Balance at 31 December 19,452

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27 C $000

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Deferred tax 31 December (26,000 × 30%) 7,800
Deferred tax 1 January (6,070)
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Increase in deferred tax 1,730

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Current tax for period 1,480
Under-provision prior year 200
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Tax expense for year 3,410
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28 D Theoretical ex-rights price $

4 shares @ $1.60 6.40
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1 share @ $1.20 1.20
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5 shares 7.60
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Therefore 1 share (7.60 ÷ 5) 1.52
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29 C IAS 12 requires recognition of all taxable temporary differences even if an entity

does not intend to sell the revalued asset; the standard does not allow any
discounting of deferred tax balances. As the asset has been revalued with any gain
going through other comprehensive income the deferred tax consequences will also
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be recognised in other comprehensive income

30 B Convertible preference shares and share options are both examples of potential
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ordinary shares and will be included in the diluted earnings per share calculation
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Section C

31 BIGWOOD CO

(a) Statement of cash flows for the year to 30 September 20X6

Note: figures in brackets are in $000 $000 $000

Profit before tax 700 ½
Adjustments for:
depreciation – non-current assets (W1) 3,800 1
loss on disposal of fixtures (W1) 1,250 ½

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interest expense 300 5,350 ½
––––– –––––
Operating profit before working capital changes 6,050

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increase in inventory (2,900 – 1,500) (1,400) ½
increase in trade receivables (100 – 50) (50) ½
increase in trade payables (3,100 – 2,150) 950 ½
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Cash generated from operations 5,550

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Interest paid (300) ½
Income tax paid (W2) (480) 1
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Net cash from operating activities 4,770
Cash flow from investing activities
Purchase of property, plant and equipment (W1)
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Disposal costs of fixtures (W1) (50) (10,550) ½
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(5,780)
Cash flows from financing activities
Issue of ordinary shares (2,000 + 1,000) 3,000 1
Long term loans (3,000 – 1,000) 2,000 1
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Equity dividend paid (600) 4,400 ½

––––– –––––
Net decrease in cash and cash equivalents (1,380)
Cash and cash equivalents at beginning of period 450 ½
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Cash and cash equivalents at end of period (930) ½

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max 10
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WORKINGS (all figures in $000)

(1) Property, plant and equipment – cost

Balance b/f 9,500 ½ for bals and

Disposal (3,000) ½ for disposal
Balance c/f (17,000)
––––––
Difference cash purchase (10,500)
––––––
Depreciation

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Balance b/f (3,000) ½ for bals and
Disposal (3,000 – 1,200) 1,800 ½ for disposal
Balance c/f 5,000

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Difference charge for year 3,800
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Disposal

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Cost 3,000
Depreciation (1,800)
––––––
Net book value 1,200
Cost of disposal 50
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Total loss on disposal
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(2) Income tax paid

Provision b/f (450) ½ for bals and

Tax charge (profit or loss) (250) ½ for P or L
Provision c/f 220
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Difference cash paid (480)
––––––

(b) Analysis of performance

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Operating performance 1 mark per relevant

comment to max 5
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Bigwood’s overall performance as measured by the return on capital employed has

deteriorated markedly. This ratio is effectively a composite of the company’s profit margins
and its asset utilisation. The expansion represented by the acquisition of the five new stores
has considerably increased investment in net assets. Asset turnover (a measure of asset
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utilisation) has fallen from 3·3 times to just 2·1 times. This is a relatively large fall and is
partly responsible for the deteriorating performance. However, it often takes some time
before new investment generates the same level of sales as existing capacity so it may be that
the situation will improve in future years.

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 Of more concern in the current year is the deteriorating gross profit margin of Bigwood’s
clothes sales. This has fallen from 18·6% to 9·4%. The effect of this is all the more marked
because clothes sales (in the current year) represent nearly 70% of turnover. It should also be
noted that the inventory holding period of clothes has also increased significantly from 39
days in 20X5 to 68 days in the current year. This may be a reflection of a company policy to
increase inventory levels in order to attract more sales, but it may also be an indication that
there is some slow-moving or obsolete inventory. The clothes industry is notoriously
susceptible to fashion changes, the new designs may not have gone down well with the
buying public. By contrast, the profit margin on food sales has increased substantially (from
25% to 32·1%) as indeed have sales (up 75% on last year). These improvements have helped
to offset the weaker performance of clothes sales.

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Comparing the profit margins of clothes and food it can be seen that food retailing has been
far more profitable than clothes retailing and the gap in margins has increased during the

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current year.

This deterioration in trading margins has continued through to net profit margins (falling from
7·1% to only 2·0%). It can be observed that operating expenses have increased considerably,

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but this is to be expected and is probably in line with the increase in the number of stores.

In summary, the increase in capacity has focused on clothes rather than food retailing. This
seems misguided as the performance of food retailing was better than that of clothes (in
20X5) and this has continued (even more so) during the current year.
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Liquidity/solvency 1 mark per relevant comment to max 3
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The increase in the investment in new stores and the refurbishment of existing stores has been
largely financed by increasing long term loans by $2 million and issuing $3 million of equity.
The effect of this is an increase in gearing from 17% to 28%. Although the level of gearing is
still modest, the interest cover has fallen from a very healthy 25 times to a worrying low 3·3
times. The investment has also taken its toll on the bank balance falling from $450,000 in
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hand to an overdraft of $930,000. This probably explains why Bigwood has stretched its
payment of accounts payable to 59 days in 20X6 from 50 days in 20X5.

Bigwood’s current liquidity position has deteriorated slightly from 0·77 : 1 to 0·71 : 1. No
quick ratios have been given, nor would they be useful. Liquidity ratios are difficult to assess
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for retailers. Most of the sales generated by retailers are for cash (thus there will be few trade
receivables) and normal liquidity benchmarks are not appropriate. The cash flow statement
reveals cash flows generated from operating activities of $5,550,000. This is a far more
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reliable indicator of Bigwood’s liquidity position. $5,550,000 is more than adequate to

service the tax and the dividend payments. Indeed the operating cash flows have contributed
significantly to the financing of the expansion programme.

Share price and dividends

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1 mark per relevant comment to max 2

Bigwood’s share price has halved from $6·00 to $3·00 during the current year. The dilution
effect of the share issue at $1·50 per share (2 million shares for $3 million) would account for
some of this fall (to approximately $4·20), but the further fall probably represents the
market’s expectations of Bigwood’s performance. It is worth noting that Bigwood has
maintained its dividends at $600,000 despite an after tax profit of only $450,000. Although
this dividend policy cannot be maintained indefinitely (at the current level of profits), the
directors may be trying to convey to the market a feeling of confidence in the future
profitability of Bigwood. It may also be a reaction designed to support the share price. It
should also be noted that although the total dividend has been maintained, the dividend per
share will have decreased due to the share issue during the year.

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 Summary 1 mark for good summary

The above analysis of performance seems to give mixed messages; Bigwood has invested
heavily in new and upgraded stores, but operating performance has deteriorated and the
expansion may have been mis-focused. This appears to have affected the share price
adversely. Alternatively, it may be that the expansion will take a little time to bear fruit and
the deterioration may be a reflection of the current state of the economy. Cash generation
remains sound and if this continues, the poor current liquidity position will soon be
reversed. max 10
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32 GOLD CO

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(a) Goodwill on acquisition of Silver
$000 $000

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Cost of investment 5,020 ½

Non-controlling interest (400 ÷ 0.50) × 40% × $10.40 3,328 1½

Net assets on acquisition

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Share capital 400
Share premium 900 ½
Retained earnings 6,740
Fair value adjustment 60 1
______
(8,100)
______
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Silver was acquired two years ago and goodwill has been impaired by $68,000 in the year
ended 30 September 20X5, leaving a value of $180,000. The value of goodwill at 30 1
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September 20X6 is given as $120,000 meaning that the impairment charge against profits
for 20X6 is $60,000. max 4
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The fair value adjustment relates to plant and equipment which has a remaining life of
four years at the date of acquisition. This additional $60,000 is depreciated in the
consolidated financial statements, giving a charge to the current year’s statement of profit
or loss of $15,000 and an adjustment against the opening consolidated retained earnings (see (b))
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of $15,000.

(b) Value of investment in Bronze

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$000
Cost of investment
Share for share exchange (400 × 30%) × $3 360 ½+½
Cash payment 83.4 ½
______
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443.4
Post-acquisition profit
Profit for year (96 × 8/12 × 30%) 19.2 1
______
462.6 ½
______
__
As the recoverable amount of the investment in Bronze is greater than its year-end carrying
amount there is no impairment of the investment to charge to the statement of profit or loss. 3
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(c) Consolidated statement of profit or loss for the year ended 30 September 20X6

$000
Revenue 5,312 1½*
Cost of sales (4,233) 3½*
______
Gross profit 1,079
Operating expenses (444) 3*
Dividend income 40 1½
Income from associated companies 19.2 2½
______

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Profit before tax 694.2
Tax (225) ½
______

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Profit after tax 469.2
______

Non-controlling interest 64.4 ½

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Shareholders of Gold 404.8
______
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Profit for year 469.2
______ 13
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*Includes ½ for adding together Gold and Silver = 1½

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Do not double count the following marks
Consolidation schedule
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Gold Silver Adjustments Total
$000 $000 $000 $000
Revenue (W1) 3,016 2,636 (120) 5,312 ½+½
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(220)
Cost of sales (W1) (2,413) (2,108) 120 ½+½
220
Unrealised profit (W2) (8) (44) (4,233) 1+1
______
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Gross profit 1,079

Operating expenses (212) (168)
Goodwill (60) ½ per (a)
Depreciation on fair value (15) (444)
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Depreciation on intra-group sale 11 1
Dividends from non-group companies (W4) 30 10 40 1+½
Income from investment in associate (W3) 19.2 19.2 2½
______
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Profit before tax 694.2

Tax (135) (90) (225)
______ ______
Profit after tax 161 469.2
Non-controlling interest 40% (64.4) ½ method
______
Profit for year 404.8
______

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WORKINGS

(1) Intra-group sales

Reduce both revenue and cost of sales for intra-group sales between Gold and Silver,
$120,000 and $220,000. Do not adjust for transaction with Bronze; the revenue and costs of
associates are not included in the consolidated statement of profit or loss.

(2) Unrealised profit

Gold sells to Silver

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$120,000 × 25/125 = 24,000 × 1/3 = $8,000
Increase Gold’s cost of sales by $8,000

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Silver sells to Gold and Gold treats the goods as non-current assets

$220,000 × 25/125 = $44,000

Increase Silver’s cost of sales by $44,000

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As Gold treats the goods as non-current assets which are being depreciated over 4 years there
is a need to reduce Gold’s operating expenses to the extent of one year’s depreciation of
$11,000.

(3) Income from associate

y Do not double count these marks

Profit after tax ($96,000 × 8/12) 64,000 1½

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Gold’s share 30% 1
______
19,200
______
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(4) Dividend income

Silver paid a dividend of $150,000 during the year of which $90,000 would have been
included in Gold’s profit or loss. This would leave dividend income from non-group
companies of $30,000; adding this to the $10,000 income in Silvers’ profit or loss gives
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dividend income from non-group companies to be included in the consolidated profit or loss
of $40,000.
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 MOCK EXAM FEEDBACK SUMMARY – PAPER F7 MOCK 1 SECTION C

Q Topic Study RQB Commentary

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Text ref coverage

31(a) Cash flow 26 Q55  Ensure you gain the easy marks, many of the numbers to be entered are a lift from the question

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statement Crosswire
 The format is important, you could lose marks if you do not produce a statement of cash flows in
Q56 Deltoid
good format
 When it comes to movement in working capital items ensure that you have the correct sign for the
number, the examiner has stated in the past that if the sign is wrong, then no marks will be earned

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even if the figure is correct.
 Reconstruct NCA and find the missing figures, in this question it is the cost of purchase and
depreciation charge that is missing.
 Issue of share capital doesn’t need to be split into nominal value and share premium, one
combined figure will do.

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 The starting point for a cash flow statement is the profit before tax; this is then adjusted for any

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non-cash items included in that profit figure.

31(b) Interpretation 25 Q51 Harbin  Do not waste time calculating ratios; they have been done for you.
of financial Q52 Victular
 Comment on both the food and the clothing sectors, as well as the company as a whole.
statements

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


Make comments relevant, it is no good saying the ratio has gone up.
Refer back to the cash flow statement in your analysis, as required by the question.
It will be useful to include a summarising statement.
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 Use information that has been given in the question, you are informed that share price has fallen
from $6 to $3 per share – comment on why this might have happened.
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 MOCK EXAM FEEDBACK SUMMARY – PAPER F7 MOCK 1 SECTION C

Q Topic Study RQB Commentary

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Text ref coverage

32 Consolidated 21-23 Q38 Patronic  Take account of fair value adjustment when calculating net assets on acquisition.

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SOCI, with Q41 Pandar
 If goodwill is incorrect in (a) marks will still be awarded for the correct follow through treatment
goodwill
in the profit or loss.
calculation
 Time apportion Bronze profit for year in net asset on acquisition calculation.

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 Question gives mark-up on cost to find unrealised profit; do not use a margin calculation.
 Gold is treating goods purchased as non-current assets; take account of depreciation adjustment.
 Do not include any revenue or expenses of associate; use equity accounting to reflect single one
line entry.

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 NCI calculation is based on adjusted profit after dealing with unrealised profit and goodwill
impairment. As NCI are valued at fair value on acquisition and credited with goodwill, any
impairment loss must be shared between parent and NCI.

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