6010ACC
Corporate Reporting and Analysis
April 2023
Section A – Questions 1 and 2 are compulsory and must be attempted
Question 1 (35 marks)
As a plan to expand internationally, Rainbow Ltd. acquired 80 per cent share capital in Sunny Ltd on 1 January 2021. The following are the summarised Statements of Financial Position of both companies as at 31 December 2021 the end of their most recent accounting periods.
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Statements of Financial Position as at 31 December 2021
|
|
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Rainbow Ltd
£m
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Sunny Ltd
£m
|
|
Non-Current Assets
|
|
Property, Plant and Equipment
|
2,200
|
600
|
|
Investments:
|
|
|
|
- Ordinary shares in Sunny ltd
|
1,000
|
-
|
|
- £15% debentures in Sunny ltd
|
100
|
-
|
|
|
|
|
|
Current Assets
|
|
Inventory
|
1,320
|
240
|
|
Receivables
|
540
|
200
|
|
Cash and cash equivalents
|
400
|
140
|
|
|
|
|
|
Totals
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5,560
|
1,180
|
|
|
|
|
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Equity and Reserves
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|
Ordinary £1 Shares
|
2,500
|
400
|
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Share Premium
|
500
|
260
|
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Retained Earnings
|
1,420
|
300
|
|
|
|
|
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Non-Current Liabilities
|
|
15% debentures
|
800
|
150
|
|
|
|
|
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Current Liabilities
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Trade Payables
|
220
|
70
|
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Owed to Sunny Ltd
|
120
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-
|
|
|
|
|
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Totals
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5,560
|
1,180
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The following information is also available:
1. On 1st January 2021, Rainbow Ltd acquired share capital in Sunny Ltd. At that date the retained earnings of Sunny Ltd amounted to £200m
2. On 1st January 2021, the fair value of Sunny Ltd.’s Property, Plant and Equipment was £120m higher than the book value. This was mistakenly adjusted to the inventory value of the statement of financial position. No adjustment for depreciation is required.
3. On 31st December 2021, Rainbow Ltd.’s inventory includes £30m relating to goods purchased from Sunny Ltd. These goods had cost Sunny Ltd £10m.
Requirements for question 1:
a) Calculate the goodwill arising on the acquisition of Sunny Ltd at 1st January 2021. (7 Marks)
b) Calculate the consolidated retained earnings as at 31st December 2021. (6 Marks)
c) Calculate the non-controlling interest as at 31st December 2021. (6 Marks)
d) Prepare a consolidated statement of financial position for Rainbow Ltd as at 31st December 2021. (12 Marks)
e) Discuss the importance of the disclosure of related party relationships and transactions in financial reports. (4 Marks)
[Total marks 35 marks]
Question 2 (35 marks)
The following adjusted trial balance has been extracted from the accounting records of Skyfall Ltd. For the year ended 31 December 2021.
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£000
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£000
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Sales
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475,560
|
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Purchases
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178,950
|
|
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Property, plant and equipment – cost
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409,200
|
|
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Property, plant and equipment – accumulated depreciation as at 31 December 2021
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|
112,750
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Inventory – 1 January 2021
|
45,325
|
|
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Interest expense
|
1,200
|
|
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Accruals
|
|
2,450
|
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Distribution expenses
|
47,350
|
|
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Administrative expenses
|
36,450
|
|
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Retained earnings
|
|
119,565
|
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Trade receivables
|
57,895
|
|
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Cash at bank
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1,200
|
|
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8% Bank loan repayable in 2022
|
|
2,000
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Ordinary share capital (£1 nominal value per share)
|
|
34,500
|
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Share premium
|
|
13,000
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Trade payables
|
|
17,745
|
|
Total
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777,570
|
777,570
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Balances of the above accounts need to be adjusted before the preparation of Skyfall Ltd’ set of financial statements using the following information:
1. A sum of £2,300 was paid on 31 December 2021 as dividend.
2. A trainee accountant in the accounting department of Skyfall Ltd. has recorded credit sales amounting to £25,500,000 that belong to January 2022 by mistake.
3. The closing inventory cost £42,500,000. Due to fluctuation in market prices of materials that cost £3,200,000 can only be sold for £900,000.
4. Transportation out costs of £875,000 relating to December 2021 are not included in the trial balance as the invoice was received in January 2022.
5. Interest on the bank loan for the last six months of the year was not included in the trial balance.
6. The corporation tax charge for the year has been calculated as £2,120,000.
Requirements for question 2:
Prepare the following financial statements for Skyfall Ltd in accordance with the requirements of the IFRSs:
a) Income statement for the year ended 31 December 2021. (8 marks)
b) Statement of Changes in Equity for the year ended 31 December 2021. (5 marks)
c) Statement of Financial Position as at 31 December 2021. (14 marks)
d) Critically discuss the objectives of financial statements according to IAS1. (8 marks)
[Total marks 35 marks]
Section B – Attempt only one question in this section
Question 3 (30 marks)
The income statement and the statement of financial position for Propel Ltd for the year ended 31 December 2021 are provided below:
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Propel Ltd
Income statement for the year ending 31 December 2021
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|
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£000
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£000
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Sales
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5,700
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Less: Cost of sales
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(2,700)
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Gross profit
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|
3,000
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Distribution costs
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(350)
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|
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Administration expenses
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(570)
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(920)
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Operating profit
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|
2,080
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Debenture interest
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(70)
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Profit before tax
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2,010
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Taxation
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(505)
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Profit after tax
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1,505
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Additional Information:
1. Dividend payment disclosed in the Statement of Changes in Equity is £1,285,000.
2. There were no disposals of non-current assets during the current financial year.
Requirements for question 3:
a) Prepare a Statement of Cash Flows for the year ended 31 December 2021 in accordance with IAS 7 using the indirect method. (20 Marks)
b) Using the cash flow statement in requirement (a), comment briefly on the state of cash flows of Propel Ltd. Your comments should cover operating, investing and financing activities of the company. (6 Marks)
c) The marketing managers is curious why the cash and cash equivalent for the year is not equal to the £1,505 profit reported on the Income Statement. Please explain the reason for such difference to the marketing manager. (4 Marks)
[Total marks 30 marks]
Question 4 (30 marks)
Alpha plc leased a machine from Brown Ltd on 1 January 2021. On that date the fair value of the machine was £40,000 and its expected useful life was 6 years. Alpha plc agreed to pay Brown Ltd £10,000 per year for the next 5 years with payments commencing on 31 December 2021.
Alpha plc hired a forklift at a cost of £2,500 per month between 1 September 2021 and 31 December 2021. On 1 September 2020, the forklift had a fair value of £50,000 and a useful economic life of 6 years. The forklift is expected to have a residual value of £15,000 at the end of its expected useful life.
Requirements for question 4:
a) With reference to IFRS 16, show how these transactions would be recorded in the financial statements of Rainbow plc for the year ended 31 December 2021 using straight line method. (16 Marks)
b) With reference to IFRS16, differentiate between operating and finance leases for Alpha Plc. Your answer should clearly identify the assets used by Alpha Plc as operating and finance leases. (7 Marks)
c) IFRS16 Leases replaces IAS17 Leases for accounting periods beginning on or after 1 January 2019. The main aim of the new standard is to ensure that a lessee’s financial statements provide a faithful representation of the lessee’s financial position .
Critically discuss how IFRS16 ensures faithful representation. (7 Marks)
[Total marks 30 marks]