N1612 Intermediate Financial Accounting 2021/22 Week 7 Workshop Answers:
MCQ on control and investment in associates
1. On 1st October 20X8 Pacemaker Co acquired 30 million of Vardine Co's 100 million shares in exchange for 75 million of its own shares. The fair value of Pacemaker Co's shares at the date of this share exchange was £1.60 each.
Vardine Co's profit is subject to seasonal variation. Its profit for the year ended 31st March 20X9 was £100 million. £20 million of this profit was made from 1st April 20X8 to 30th September 20X8.
Pacemaker Co has one subsidiary and no other investments apart from Vardine Co.
What amount will be shown as ‘investment in associate’ in the consolidated statement of financial position of Pacemaker Co as at 31st March 20X9?
A. £144 million
B. £150 million
C. £126 million
D. £78 million
2. Which of the following investments owned by Indigo Co should be accounted for using the equity method in the consolidated financial statements?
1. 30% of the non-voting preference share capital in Yellow Co
2. 18% of the ordinary share capital in Blue Co with directors of Indigo Co having two of the five places on the board of Blue Co
3. 45% of the ordinary share capital of Red Co, with directors of Indigo Co having four of the six places on the board of Red Co
A. 1 and 2
B. 2 only
C. 1 and 3 only
D. 2 and 3 only
3. Jarvis Co owns 30% of McLintock Co During the year to 31 December 20X4 Mclintock Co sold £2 million of goods to Jarvis Co, of which 40% were still held in inventory by Jarvis at the end of year. McLintock Co applies a mark-up of 25% on all goods sold.
What effect would the above transactions have on group inventory at 31 December 20X4?
A. Debit group inventory £48,000
B. Debit group inventory £160,000
C. Credit group inventory £48,000
D. No effect on group inventory
4. Ulysses Co owns 25% of Grant Co, which it purchased on 1 May 20X8 for £5 million. At that date Grant Co had retained earnings of £7.4 million. At the year-end date of 31 October 20X8 Grant Co had retained earnings of £8.5 million after paying out a dividend of £1 million. On 30 September 20X8 Ulysses Co sold £600,000 of goods to Grant Co, on which it made 30% profit. Grant Co had not resold these goods by 31 October.
At what amount will Ulysses Co record its investment in Grant Co in its consolidated statement of financial position at 31 October 20X8?
A. £5,000,000
B. £5,275,000
C. £5,230,000
D. £4,855,000
5. Foster Co has built a new factory incurring the following costs:
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£’000
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Land
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1,200
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Materials
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2,400
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Labour
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3,000
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Architect’s fees
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25
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Surveyor’s fees
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15
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Site overheads
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300
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Apportioned administrative overheads
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150
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Testing of fire alarms
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10
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Business rates for first year (tax)
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12
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7,112
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What will be the total amount capitalised in respect of the factory?
A. 7,102
B. 7,112
C. 7,100
D. 6,950
E. 6,650
Question on accounting for tangible non-current assets
6. Gunn Ltd acquired a printing machine on 1 July 2013 for £100,000. It is expected to have a useful life of 10 years, with the benefits being derived on a straight-line basis. The residual is expected to be nil. On 1 July 2015 the machine is deemed to have a fair value of £96,000 and a revaluation is undertaken in accordance with Gunn Ltd.'s policy of measuring PPE at fair value. The asset is sold for £89,000 on 1 July 2017.
Provide journal entries necessary to account for the above transactions and events on 1 July 2013, 2015 and 2017.
7. Briefly explain one example of accounting judgement exercised when accounting for property, plant and equipment.
8. Wetherby Co purchased a machine on 1 July 20X7 for £500,000. It is being depreciated on a straight-line basis over its useful life of ten years. Residual value is estimated at £20,000. On 1st January 20X8, following a change in legislation, Wetherby Co fitted a safety guard to the machine. The safety guard cost £25,000 and has a useful life of five years with no residual value.
What amount will be charged to profit or loss for the year ended 31 March 20X8 in respect of depreciation on this machine?
A. £37,250
B. £36,000
C. £53,000
D. £49,250
E. £41,000
9. What amount will be charged to profit or loss for the year ended 31 March 20X9 in respect of depreciation on this machine?
A. £48,000
B. £36,000
C. £53,000
D. £5,000
E. £41,000
10. Auckland Co purchased a machine for £60,000 on 1st January 2017 and assigned it a useful life of 15 years. On 31st March 2019 it was revalued to £64,000 with no change in useful life.
What will be depreciation charge in relation to this machine in the financial statements of Auckland Co for the year ending 31st December 2019?
A. £4,000
B. £4,765
C. £ 5,020
D. £4,267
E. £8,000
11. On 1st October 20X5 Dearing Co acquired a machine under the following terms.
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£
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Cost
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1,050,000
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Trade discount (applying to cost only)
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20%
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Freight charges
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30,000
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Electrical installation cost
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28,000
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Staff training in use of machine
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40,000
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Pre-production testing
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22,000
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Purchase of a three-year maintenance contract
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60,000
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On 1st October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of £200,000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine.
What amount should be recognised under non-current assets as the cost of the machine on 1st October 20X5?
A. £840,000
B. £920,000
C. £898,000
D. £870,000
12. How should the £200,000 worth of new components be accounted for?
A. Added to the carrying amount of the machine
B. Charged to profit or loss
C. Capitalised as a separate asset
D. Debited to accumulated depreciation
13. Every five years the machine will need a major overhaul in order to keep running. How should this be accounted for?
A. Set up a provision at year 1
B. Build up the provision over years 1-5
C. Capitalise the cost when it arises and amortise over five years
D. Write the overhaul off to maintenance costs
Self-study exercises
14. Several accounting standards require or allow firms to use fair value to report the value of the assets in the balance sheet. Summerise the debate about the relevance and reliability around fair value accounting (maximum 200 words).
15. An associate is an entity in which an investor has significant influence over the investee.
Which TWO of the following indicate the presence of significant influence?
A. The investor owns 330,000 of the 1,500,000 equity voting shares of the investee.
B. The investor has representation on the board of directors of the investee.
C. The investor is able to insist that all of the sales of the investee are made to a subsidiary of the investor.
D. The investor controls the votes of a majority of the board members.
16. Ruby Co owns 30% of Emerald Co and exercises significant influence over it. Emerald Co sold goods to Ruby Co for £160,000. Emerald Co applies a one-third mark-up on cost. Ruby Co still had 25% of these goods in inventory at the year end.
What amount should be deducted from consolidated retained earnings in respect of this transaction?
A. 53,333
B. £10,000
C. £3,000
D. 13,333
E. £3,333
17. A company purchased a building and converted it into offices for its own use. It incurred the following costs:
£000
Building 300
Legal fees (relating to purchase) 5
Alterations (labour & materials) 50
The cost of alterations included £5,000 relating to general overheads
Calculate the amount that should be capitalised in respect of the new offices?
A. £355
B. £300
C. £360
D. 345
E. £350
18. On 1 January 20X1 a company purchased a building for £300,000. The useful life of that building was 50 years from that date.
On 1 January 20X4, the building was revalued to £500,000. The useful life of the building was deemed to be 50 years from the date of the valuation. On 31 December 20X7, the building was sold for £700,000. Calculate the gain on disposal.
A. £442,000
B. £240,000
C. £360,000
D. £400,000
E. £200,000