UNIVERSITY OF LONDON

PRELIMINARY EXAM 2017

PROGRAMME : University of London Degree and Diploma Programmes

MODULE CODE : AC3091

MODULE TITLE : Financial Reporting

DATE OF EXAM : XX February 2017

DURATION : 3 hours and 15 minutes (including 15mins reading time)

TOTAL NUMBER : 9 (nine)

OF PAGES
(INCLUDING
THIS PAGE)
-------------------------------------------------------------------------------------------------------

INSTRUCTIONS TO CANDIDATES: -

Candidates should answer FIVE of the following eight (8) questions. Answer FOUR (4) questions from
Part A and ONE (1) question from Part B. All questions carry equal marks.

Workings should be submitted for all questions requiring calculations. Any necessary assumptions
introduced in answering a question are to be stated.

Extracts from compound interest tables are given after the final question of this paper. 8-column
accounting paper is provided at the end of this question paper. If used, it must be detached and fastened
securely inside the answer book.

A calculator may be used when answering questions on this paper and it must comply in all respects
with the specification given with your Admission Notice. The make and type of machine must be clearly
stated on the front cover of the answer book.

DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

AC3091 Financial Reporting Page 1 of 9

Part A: Answer at least one question.

1. The Statement of Financial Position (Statement of financial positions) for Ashford PLC, Banbury Ltd and
Cambridge Ltd as at 31 December 2016 are given as follows:

Ashford PLC Banbury Ltd Cambridge Ltd

£ £ £
Fixed assets (land) 400,000 300,000 140,000
Investments 650,000
Inventories 25,000 165,000 9,000
Trade receivables 55,000 164,000 2,000
Inter-company receivables 30,000
from Banbury Ltd
Inter-company receivables 4,000
from Cambridge Ltd
Cash 11,000 112,000 500
Trade payables (225,000) (6,000) (1,500)
Inter-company payables (25,000) (4,000)
Net assets 950,000 710,000 146,000

Share capital (£1 nominal 500,000 200,000 50,000

value shares)
Revaluation reserve 150,000
Retained profits 450,000 360,000 96,000
Capital and reserves 950,000 710,000 146,000

Ashford acquired 75 % of Banbury for £500,000 on 1 January 2016. At the time of acquisition, the fair
value of Banbury’s fixed assets was £300,000 (historic cost £150,000) and Banbury Ltd included the
revaluation in its accounts. No other assets were re-valued at the date of acquisition. Banbury's share capital
and reserves on the date of acquisition were £420,000, after the revaluation had correctly been incorporated
into the company’s accounts.

Ashford acquired 20% of Cambridge on 1 January 2011 for £120,000 when Cambridge’s net assets at fair
value were £70,000.

Goodwill is capitalised and an impairment of £129,500 is charged against the value of Banbury and
£53,000 against the value of Cambridge in 2016.

The inventory in Ashford includes £10,000 of inventory purchased from Banbury Ltd. These goods had
cost Banbury Ltd £2,000. The inventory in Ashford also includes £5,000 of inventory purchased from
Cambridge Ltd. These goods had cost Cambridge Ltd, £3,000.

Any differences in inter-company balances between Ashford and Banbury are due to cash in transit.

At the end of the year, Ashford declares a dividend of 5p per share, Banbury Ltd declares a dividend of 20p
per share and Cambridge Ltd declares a dividend of 10p per share. These dividends have not been
accounted for by any of the companies.

Required
Prepare a consolidated Statement of Financial Position for Ashford group for the year ended 31 December 2016.
(Total: 20 marks)

AC3091 Financial Reporting Page 2 of 9

2. On 1 January 2016, McCarty Ltd.’s long-term budget showed anticipated net receipts of £24,000 and
thereafter £40,800 each year for the foreseeable future. The company’s cost of capital is 10% per annum
and this is not expected to change.

During 2016, the following occur:

I General economic conditions suggest that the budget for existing activities after 2016 should be
revised from net receipts of £40,800 per annum to net receipts of £34,200 per annum.

II A new three-year contract is undertaken which requires an initial outlay of £7,800 on 31 December
2016 and is expected to produce receipts of £4,080 on 31 December of each of the following years.
This contract has not been included in the budget in part I.

III The Company receives a grant of £3,600 for its environmental policies in 2016. This has not been
included in the budget in part I.

IV The cost of capital was 10% but is now expected to be 15% for the foreseeable future.

Otherwise everything proceeds to plan and other expectations are unchanged. You may assume that all cash
flows arise on 31 December each year. Ignore taxation and inflation.

Required
(a) Calculate Hicks’ income number 1 ex post version A and Hicks’ income number 1 ex post version B.
(9 marks)

(b) Calculate Hicks’ income number 2 ex post version A and Hicks’ income number 2 ex post version B.
(6 marks)

(c) Discuss how relevant is Hicks’ concepts of income for the purposes of Financial Reporting?
(5 marks)
(Total: 20 marks)

AC3091 Financial Reporting Page 3 of 9

3. Dronach, an 80% subsidiary of Trollhattan PLC set up on 1 January 2016, prepares its accounts in the
currency ‘Dollar D$’. The financial statements of Dronach as at 31 December 2016 are given as follows:

Statement of Financial Position as at Dronach Dronach

31 December 2016 Dollar D$ Dollar D$

Fixed assets 3,600,000

Less accumulated depreciation (800,000)
Net book value 2,800,000
Current assets
Inventory 8,000,000
Other net current assets 2,200,000
10,200,000
Long term liabilities
8% debentures (6,000,000)
7,000,000

Share capital 5,000,000

Profit for the year 2,000,000
7,000,000

Income Statement for the year ended 31 December Dronach Dronach

2016 Dollar D$ Dollar D$

Turnover 12,000,000
Cost of sales
Opening inventory 7,200,000
Purchases 7,000,000
Closing inventory (8,000,000)
(6,200,000)
Gross profit 5,800,000
General expenses (200,000)
Depreciation (800,000)
(1,000,000)
Profit before tax 4,800,000
Tax (1,800,000)
Profit after tax 3,000,000
Dividends (1,000,000)
2,000,000

The exchange rates are given as follows:

Date D$ to £

1 January 2016 10 When ordinary shares issued and opening inventory purchased
1 April 2016 15 When non-current assets purchased
1 September 2016 18 When closing inventory for 2016 bought
31 December 2016 25 When dividend paid
Average 2016 20
(Question continues on next page)

AC3091 Financial Reporting Page 4 of 9

Required
(a) Translate the Statement of Financial Position as at 31 December 2016 for Dronach using the closing rate
method.
(4 marks)

(b) Translate the Statement of Financial Position as at 31 December 2016 and the Income Statement for the
year ended 31 December 2016 using the temporal method.
(10 marks)

(c) Briefly discuss the advantages and disadvantages of the closing rate and temporal methods and outline the
situations in which each method should be used.
(6 marks)
(Total: 20 marks)

4. Bryne Ltd started trading on 1 January 2016. The income statement for the year ended 31 December 2016 and
the statement of financial position as at that date are as follows:

Income Statement for the year ended 31 December 2016

£ £
Sales revenue 4,050,000
Less: Cost of sales
Opening inventories 225,000
Purchases 2,700,000
Closing inventories -270,000
2,655,000
Gross profit 1,395,000

Expenses 450,000
Depreciation 126,000
Net profit 819,000

Statement of financial position as at 31 December 2016

£
Non-current assets
Property, Plant & Equipment (PPE) 3,888,000
Inventories 270,000
Other net current assets 1,161,000
Net Assets 5,319,000

Share capital (£1 shares) 4,500,000

Retained profits 819,000
Equity 5,319,000

The price change indices for the year are identified as follows (RPI = retail price index):

RPI PPE Inventories

1 January 2016 200 200 250
30 June 2016 220 240 270
30 November 2016 230 260 280
31 December 2016 240 300 290

AC3091 Financial Reporting Page 5 of 9

Closing inventory was acquired on 30 November 2016. All non-current assets and opening inventory were
acquired on the first day of trading. Sales and purchases accrue evenly throughout the year.

Required
(a) Define fully stabilised current value accounting (FSCVA) and briefly discuss its advantages and limitations.
(5 marks)

(b) Prepare a statement of financial performance for Boris Ltd for the year ended 31 December 2016 and a
statement of financial position as at 31 December 2016 using current value (replacement cost) accounting and
using the financial capital maintenance concept. Base depreciation on the year-end value of non-current
assets.
(8 marks)

(c) Calculate the ‘real realised holding gains and losses’ and the ‘real unrealised holding gains and losses’ on
inventory and non-current assets that would appear in a set of FSCVA, stabilised in pounds (£) as at 31
December 2016. Where would these items be recorded on the financial statements for 2016?
(7 marks)
(Total: 20 marks)

5. Widget Co. owns a manufacturing plant that cost £2,000,000 on 1 January 2015. The plant has a useful
economic life of five years from this date and it is used to manufacture a product called the Whirl. There is no
second-hand market for the plant except as scrap and it is estimated that at the end of its useful life, or at any other
time, it will cost £80,000 net of scrap proceeds, to dismantle and remove it. Annual operating costs are £800,000.
The plant requires an overhaul costing £60,000 during the third year of its life. It produces a constant annual
output, all of which can be sold, with an annual selling value of £1,600,000.

During February 2016, a new model of the plant used to manufacture the Whirl is brought out. The directors of
the company now intend to replace the existing Whirl plant with the new plant at the end of the existing plant’s
useful life. The new plant costs £2,200,000 and has a six-year useful life at the end of which its scrap value is
expected to be £40,000. It incurs constant annual operating costs of £720,000 and produces a constant annual
output, all of which can be sold for £60,000 per annum higher than the output of the existing plant. When the new
plant is installed for the first time the company will incur one off costs of £100,000 adapting the building housing
the new plant.

Any replacement plant together with the cost of adapting the building would be paid for at the time of
replacement. All other cash flows occur at the end of the years concerned. The company’s cost of capital is 10%
per annum.

Required

(a) Calculate the deprival value of the company’s Whirl making plant at 31 December 2016.
(13 marks)

(b) Briefly discuss the main limitations of using deprival value for the purposes of financial reporting.
(7 marks)
(Total: 20 marks)

AC3091 Financial Reporting Page 6 of 9

6. Please answer all sections of the question.

a) Mechatronix plc is considering whether to (i) issue share capital of £400,000 (£1 nominal value shares) or (ii)
issue £200,000 (£1 nominal value shares) and raise £200,000 from a long-term loan with an interest rate of
15% per annum. The future is uncertain and if Mechatronix plc has a good year, profit before interest and tax
will be £200,000 but if it has a poor year, profit before interest and tax will be £40,000. Calculate profit after
tax and earnings per share in both scenarios and comment on your results. Assume the tax rate is 35%.
(7 marks)

b) What are two reasons for, and a further two reasons against, the use of deferred tax?
(6 marks)

c) Ben the Builder Company entered into a construction contract with the following information:

Date commenced 1 January 2016

Expected completion date 31 December 2017
Final contract price £4,000,000
Costs to 31 December 2016 £1,200,000
Value of work certified to 31 December 2016 £1,240,000
Progress payments invoiced to 31 December 2016 £220,000
Estimated costs to completion £1,000,000

Required
Show how the construction contract would be accounted for in the financial statements for the year ended
31 December 2016 under International Accounting Standards IAS 11.
(7 marks)
(Total: 20 marks)

Part B Answer only 1 question

7. Discuss the issues in accounting for goodwill and critically assess accounting standards in this area.
(Total: 20 marks)

8. Discuss the objectives of conceptual frameworks. Outline the qualitative characteristics of financial
statements and discuss any problems with applying these to financial accounting.
(Total: 20 marks)

AC3091 Financial Reporting Page 7 of 9

Present Value interest factor per £1.00 due at the end of n years for interest rate of:
% 1 2 3 4 5 6 7 8 9 10
n
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092

% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
21 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010

AC3091 Financial Reporting Page 8 of 9

Present Value interest factor for an annuity of £1.00 for a series of n years for interest rate of:
% 1 2 3 4 5 6 7 8 9 10
n
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077

% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
21 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948

AC3091 Financial Reporting Page 9 of 9

 Ashford PLC Banbury Ltd Cambridge Ltd
Parent P Subsidiary S Associate A Notes Full consol.
£ £ £ £
Non-current assets(land) 400,000 300,000 140,000 700,000
Investments 650,000 1 30,000
Note that the current IFRS 3 standard requires the
Investment in Associate 7 80,800 indirect method of calculating Investment in Associate
Goodwill (S only) 2 55,500 Cost of investment 120,000
Inventories 25,000 165,000 9,000 3 182,000 Less: goodwill impair (53,000)
Trade receivables 55,000 164,000 2,000 219,000 67,000
Inter company receivables from S 30,000 Post-acq profits of A 76,000
Inter company receivables from A 4,000 4,000 Adjust for PURP (A) (2,000)
Dividend receivable from A 4 1,000 Dividends (5,000)
Cash 11,000 112,000 500 5 128,000 69,000
Trade payables -225,000 -6,000 -1,500 -231,000 P share of adj. profits 13,800
Inter company payables -25,000 -4,000 Net Investment of P in Associate A 80,800
Dividend payable 6 -35,000
Net assets 950,000 710,000 146,000 1,134,300

Share capital (£1 nominal value) 500,000 200,000 50,000 500,000

Revaluation reserve 150,000
Retained earnings 450,000 360,000 96,000 8 468,800
Non-controlling interest 7 165,500
Capital and reserves 950,000 710,000 146,000 1,134,300

Extra information:
P acquired 75% of S for £ 500000 FV of S is £ 300000
(HCA = £) 150000
S share of capital and reserves at acquisition = £ 420000
P acquired 20% of A for £ 120000 when A's net assets were FV 70000
Impairment: Goodwill S £ 129500 Goodwill A £ 53000
P inventory of £ 10000 includes from S worth £ 2000
P inventory of £ 5000 includes from A worth £ 3000
Dividends P - £/share 0.05 S - £/share 0.2 A - £/share 0.1
Total div: 25000 40000 5000

Notes on calculations:
1 Investment in non-group companies (P less S less A) = £ 30,000

2 Goodwill net goodwill

P share of S Net A @ acq. £ 185000 less impairm. 129500 55500
P share of A Net A @ acq. £ 106000 less impairm. 53000 53000
Total 291000 108500
Charge against Retained earnings 182500

3 inventory = P + S - provision for unrealised profit (S only) = 182,000

Unrealised profit S = £ 8000
Unrealised profit A = £ 2000

4 P share of dividends receivable from A =£ 1000

5 Cash in transit = difference of inter-co. receivables v payables = 5,000

Cash = P + S + cash in transit = £ 128,000

6 P dividends 25000
S share of dividends to non-controlling interest (i.e., P) 10000
Dividend payable = P dividends + S dividends to non-control interest= 35000

7 Adjustments for retained earnings

P S A
Retained earnings 450,000 360,000 96,000
Provision for unrealised profit on inventory -8,000 -2,000
Dividend payable -25,000 -40,000 -5,000
Dividend receivable: S 30,000
Dividend receivable: A 1,000
Retained earnings (adjusted) 456,000 312,000 89,000
Share capital 500,000 200,000 50,000
Revaluation 150,000
Net assets / Equity (adjusted) 956,000 662,000 139,000

Non-controlling interest (NCI) = £

NCI's share of S net assets at B/S date = 165500

P share in A = 27800

8 S A
Share capital (£1 nominal value) 200000 50000
Revaluation reserve 150000
Retained earnings 70000 20000
Pre-acquisition net assets / equity = 420000 70000

Share of S post-acq.res. = 181500

Share of A post-acq.res. = 13800

Retained earnings (consol.) = P + share of S post-acq. res. + share of A post-acq. res.

- goodwill impairment
Retained earnings (consol.)= 468800
Mock Examination 2017: Examiner’s Commentary

University of London International Programmes Preliminary Exam 2017

BSc degrees and Diplomas for Graduates in Economics, Management, Finance
and the Social Sciences, the Diplomas in Economics and Social Sciences and
Access Route
March-April 2017
Dr Danny Chow
AC3091 Financial Reporting [University of London International Programmes]

Commentary on Mock Exam

Note: Please use this in conjunction with the worked solutions in the excel spreadsheet

Question 1: Consolidation
Main issue here is the ability to construct the consolidated retained profit, which requires
the ability to calculate the parents share of post-acquisition profits. Some students also
faced difficulties in calculating the non-controlling interest.

The biggest issue in this question is in not calculating dividends payable, as some infer that
dividends are only proposed (even though the question did indicate that they were declared
dividends).

Question 2: Hicks’
Some students struggled with understanding what the various formulae on how the various
capitals (V0 and V1) and dividends (d1) at the original (t0) and revised (t1) dates affect the
incomes ex post.

Other challenges also include the need to carefully construct the revised budget so that
revised V0 and V1 can be calculated.

Question 3: Foreign currency translation

Main issues here is that students are unfamiliar with the rationales behind the different
treatment of exchange differences. For foreign enterprises closely aligned with the
operations of the parent or investing company, the exchange difference is recognised in the
income statement under the temporal rate method to reflect the costs/benefits that such
transactions can have on the parent/investing company’s consolidated income.

For foreign enterprises that are quasi-independent from the operations of the parent,
however, the exchange difference is recognised in the statement of financial position as a
reserve under the closing rate method. This is to reflect the fact that the parent does not
have significant involvement in the day to day operations of the foreign enterprise and that
any exchange differences is treated as a gain/loss in the equity reserves.
Question 4:
Main issues here is recognising the different ways in which ratios are used to calculate cost
of sales in Current Value Accounting (CVA) terms, as compared to Current Purchasing Power
(CPP) terms.

Other issues with the calculation is understanding the difference between CVA on a financial
capital maintenance basis (holding gains in the income statement) and CVA on a physical
capital maintenance basis (holding gains in the statement of financial position).

Question 5:
Students generally struggle with understanding:
1. What are the implications (i.e., cost/benefits) of making alternative decisions
2. Relate to the annual equivalent cost concept with the expected revenue streams
(present value in use of the asset) and deciding whether replacement is worthwhile
(or not as the case may be)
3. Understanding that IF a decision is made to replace an asset, should the business
subsequently be deprived of the asset, the deprival value therefore reflects the
present value of the incremental cost (not the total cost) of losing and having to
replace the asset (the HAVE NOT budget) with being able to continue making full use
of the original asset if they have not been deprived of it (the HAVE budget).

Question 6:
These are questions based on current accounting standards and students should be able to
work on these questions if they have understood standards on earnings per share and the
implications of leveraged versus unleveraged models (part A); rehearse basic arguments for
and against deferred tax (part B); and work out the part balances for construction contracts
on the statement of financial position and income statements (part C).

Questions 7 and 8:
These are standard essay questions requiring detailed knowledge of goodwill standards and
problems (Q7) and the objective of conceptual frameworks (Q8). For Q8, it is important for
students to be able to actually describe a real, working model of a conceptual framework,
not just discuss issues in the abstract.