Osborne Books Tutor Zone
Financial Statements of Limited Companies Practice assessment 3 Important note to tutors
In order to provide further practice in the type of questions that may have to be answered in the Assessment there are alternative questions for Tasks 1 & 2 and Task 6 provided at the end of this Assessment.
© Osborne Books Limited, 2016
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financial statements of limited companies tutor zone
Tasks 1 and 2
You have been asked to help prepare the financial statements of Kyle plc for the year ended 31 March 20-1. The company’s trial balance as at 31 March 20-1 is shown below. Kyle plc
Trial balance as at 31 March 20-1
Share capital
Debit £000
Share premium
95,500
Plant & equipment – cost
50,000
Trade and other receivables
27,238
Plant & equipment – accumulated depreciation Accruals
Prepayments
2,220
Cash at bank
15,801
Interest paid
1,750
7% bank loan repayable 20-9 Retained earnings Sales
Purchases
73,899
Administrative expenses
21,056
Distribution costs Carriage in
Inventories as at 1 April 20-0 Tax
Dividends paid
70,000
15,000
Land & buildings – cost
Land & buildings – accumulated depreciation
£000
10,000
Revaluation reserve
Trade and other payables
Credit
9,372
11,640 24,400 1,450 30,000 7,580 152,473
23,922
2,340
15,559 2,850
332,135
220 332,135
practice assessment 3
3
Further information •
The inventories at the close of business on 31 March 20-1 cost £9,197,000. On 11 April 20-1, goods included in this total at a value of £740,000 were found to be damaged and were sold for £590,000.
•
Carriage inwards of £460,000 owing at 31 March 20-1 is to be provided for.
•
At the end of the year the company carried out an impairment test on machinery which had a carrying amount of £12,500,000. At present it could be sold for £13,000,000 and would incur disposal costs of £1,400,000. The company estimate that the machine will generate cash flows with a net present value of £11,900,000 over the remainder of its useful life. No adjustment has been made in respect of the impairment test. Any impairment losses are apportioned equally between distribution costs and administration expenses.
•
Land, which is non-depreciable, is included in the trial balance at a value of £34,200,000. This is to be revalued at £38,000,000 and this revaluation is to be included in the financial statements for the year ended 31 March 20-1.
•
Interest on the bank loan for the last two months of the year has not been included in the accounts in the trial balance.
•
The corporation tax balance of £220,000 included in the trial balance was the result of an overestimate of the tax liability for the previous year. The corporation tax charge in respect of the current year to 31 March 20-1 is estimated as £4,427,000.
•
All the operations are continuing operations.
Required (a)
Draft the statement of profit or loss and other comprehensive income for Kyle plc for the year ended 31 March 20-1.
(c)
Draft the statement of financial position for Kyle plc as at 31 March 20-1.
(b)
Draft the statement of changes in equity for Kyle plc for the year ended 31 March 20-1.
Kyle plc
Statement of profit or loss and other comprehensive income for the year ended 31 March 20-1 Continuing operations
Revenue
Cost of sales Gross profit
Distribution costs
Administration expenses Profit from operations Finance costs
Profit before tax Tax
Profit for the period from continuing operations
Other comprehensive income for the year Total comprehensive income for the year
£000
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financial statements of limited companies tutor zone
Kyle plc
Statement of changes in equity for the year ended 31 March 20-1 Share capital
Balance at 1 April 20-0
Changes in equity for the year
Total comprehensive income Dividends
Balance at 31 March 20-1
£000
Share Revaluation premium £000
£000
Retained earnings
£000
Total equity
£000
practice assessment 3 Kyle plc
Statement of financial position as at 31 March 20-1 Assets
Non-current assets Current assets
Total assets
Equity and liabilities
Equity
Total equity
Non-current liabilities Current liabilities
Total liabilities
Total equity and liabilities
£000
5
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financial statements of limited companies tutor zone
Task 3
You are an Accounting Technician employed by Amato Accountants and are currently working on preparing the first years financial statements of Brompton Ltd, a hotel and spa chain, for the year ended 31 March 20-1. Matter 1
One of the hotels purchases a new printer costing £130.00 for the administration office which is expected to have a useful life of five years. The IASB’s Conceptual Framework for Financial Reporting refers to preparers of the financial statements making judgements as to whether an item is material. (a)
(b)
Explain the term materiality and how it can impact on the users of financial statements.
With reference to the materiality concept, explain how the purchase should be treated in the financial statements.
Matter 2
You receive a phone call from a supplier of beauty products asking for financial information about Brompton Ltd who have requested to trade with them on credit. Identify the relevant fundamental principle in accordance with the AAT Code of Professional Ethics and explain the action that should be taken.
Task 4
Trenchard Ltd is preparing the financial statements for the year ending 31 March 20-1. During April 20-1 the following information becomes available: •
•
An impairment review was carried out on a fleet of vehicles and it was found that an impairment loss of £40,000 had occurred. A proposed dividend totalling £2,000,000 was declared.
Prepare brief notes explaining the following: (a)
What is meant by an event after the reporting period according to IAS 10?
(c)
How will the proposed dividend be treated in the financial statements in accordance with IAS 10?
(b)
How will the impairment loss be treated in the financial statements in accordance with IAS 10?
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practice assessment 3 Task 5 (a)
Amato plc acquires an asset with a fair value of £51,400 under a finance lease on 1 April 20-0. Four annual payments of £18,000 are paid on 31 March each year. The actuarial method is used to allocate the interest rate of 15% to the accounting periods over the term of the lease. What is the lease obligation at the end of the first year at 31 March 20-1?
You may wish to use the following table to make the required calculations.
1 (a)
£25,690
(c)
£38,410
(b) (d)
(b)
Lease outstanding
Interest @ 15%
Total
Repayment on 31/03
After repayment
£33,400 £41,110
Amato plc purchases an item of machinery that will be used to produce a new product. The following costs are incurred. List price of machinery Delivery cost
280,000
Installation cost
Pre-production testing
Start-up costs for introducing the new product Warranty cost
Annual insurance
What are the total attributable costs which can be included in the cost of the machinery? (a)
£286,900
(c)
£305,200
(b) (d)
£292,600
£313,400
£
2,800
4,100
5,700
12,600
8,200
3,900
8 (c)
financial statements of limited companies tutor zone Percy’s Plants Ltd provides plants and their continued care on a 12 month contract to business offices. The company prepares its financial statements to 31 March each year.
During the year to 31 March 20-1, Percy’s Plants entered into a 12 month contract to provide plants and their care in the reception of Arbery’s Accountants. The contract was for £22,200 and commenced on 1 September 20-0.
What is the amount of revenue, if any, which should be recognised in the financial statements for the year ending 31 March 20-1 in respect of the contract with Arbery’s Accountants? (a)
Nil
(c)
£12,950
(b) (d)
(d)
£22,200
Buxton plc has held 30% of the ordinary share capital of Robin Ltd for three years and includes the investment under the heading of non-current assets using the equity method. How will Buxton value the investment in the statement of financial position? (a)
At the original price paid
(c)
At the proportionate share of Robin Ltd net assets plus the original value of goodwill on acquisition
(b) (d)
(e)
£11,100
At the proportionate share of Robin Ltd net assets
At the proportionate share of Robin Ltd net assets plus the carrying value of goodwill
Retro plc purchased for its own use a factory on 1 March 20-1 for £750,000. The factory is depreciated over its estimated useful life of 40 years using the straight line method. At 1 March 20-5 the building is valued at £800,000 and the directors decide to incorporate this valuation into the books of account from this date. What is the amount to be transferred to the revaluation surplus? (a)
£50,000
(c)
£125,000
(b) (d)
£106,250
£143,750
practice assessment 3 Task 6
9
The Managing Director of Walker plc has asked you to prepare the consolidated statement of financial position for the group. Walker plc has one subsidiary undertaking, Quaver Ltd. The statement of financial position of the two companies as at 31 March 20-1 are set out below. Statements of financial position as at 31 March 20-1
Non-current assets
Investment in Quaver Ltd
Property, plant and equipment Current assets Inventories
Trade and other receivables Cash and cash equivalents Total assets
Walker plc
£000
31,800
Quaver Ltd £000
57,000
36,200
26,145
12,466
3,347
259
88,800 18,218
47,710
36,200 7,386
20,111
136,510
56,311
Share capital
54,000
15,000
Retained earnings
41,398
20,260
15,000
8,400
8,995
5,276
12,112
7,451
Equity and liabilities
Equity
Share premium
Non-current liabilities
Long-term loans
Current liabilities
Trade and other payables Tax liabilities
Total liabilities Total equity and liabilities
14,000
109,398
3,117
5,200
40,460
2,175
27,112
15,851
136,510
56,311
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financial statements of limited companies tutor zone
Further information •
•
•
• •
•
The share capital of Quaver Ltd consists of ordinary shares of £1 each. Ownership of these shares carries voting rights in Quaver Ltd. There have been no changes to the balances of share capital and share premium during the year. Walker plc acquired 10,500,000 shares in Quaver Ltd on 1 April 20-0.
At 1 April 20-0 the balance of retained earnings of Quaver Ltd was £12,600,000.
On 1 December 20-0 Walker plc made an interest-free long-term loan of £3,000,000 to Quaver Ltd and classified it as part of its investment in Quaver Ltd. Quaver Ltd has classified the loan as a non-current liability in its financial statements. No loan repayments have been made.
During the year Walker plc sold goods costing £600,000 to Quaver plc for £840,000. At 31 March 20-1 half of these goods were still included in the inventories of Quaver Ltd.
The directors of Walker plc have concluded that goodwill has been impaired by 20% during the year.
Required
Draft the consolidated statement of financial position for Walker plc and its subsidiary undertaking as at 31 March 20-1 Goodwill
Consideration
£000
NCI at acquisition
Net assets acquired Impairment Goodwill
Non-controlling interest
Share capital attributable to NCI
£000
Share premium attributable to NCI
Retained earnings attributable to NCI Non-controlling interest
Retained earnings Parent
Inter-company adjustment
Subsidiary – attributable to Parent Impairment
Group retained earnings
£000
practice assessment 3 Walker plc
Consolidated statement of financial position as at 31 March 20-1 Assets
Non-current assets Goodwill
Property, plant and equipment Current assets Inventories
Trade and other receivables Cash and cash equivalents Total assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings
Non-controlling interest Total equity
Non-current liabilities
Loan
Current liabilities
Trade and other payables Tax liabilities
Total liabilities
Total equity and liabilities
£000
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financial statements of limited companies tutor zone
Task 7
You have been asked you to calculate ratios for Bradford Ltd in respect of its financial statements for the year ending 31 March 20-1 to assist your manager in his analysis of the company. Bradford Ltd’s statement of profit or loss and statement of financial position are set out below. Bradford Ltd statement of profit or loss for the year ended 31 March 20-1 Continuing operations
Revenue
Cost of sales Gross profit
Distribution costs
Administration expenses Profit from operations Finance costs
£000
31,602
(17,730) 13,872
(5,867)
(3,913) 4,092
(645)
Profit before tax
3,447
Profit for the year
2,729
Tax
(718)
practice assessment 3 Statement of financial position as at 31 March 20-1 Non-current assets
Property, plant and equipment Current assets Inventories
Trade and other receivables Cash and cash equivalents Total assets
Equity and liabilities
Equity
£000 43,422 10,570
3,781
1,453
15,804 59,226
Share capital
18,000
Retained earnings
26,845
Share premium
3,400
Total equity
48,245
Bank loans
8,000
Non-current liabilities Current liabilities
Trade and other payables Tax liability
Total liabilities
Total equity and liabilities
8,000 2,231
750
2,981
10,981
59,226
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14 (a)
financial statements of limited companies tutor zone Identify the formulae that are used to calculate each of the following ratios. Return on shareholders’ funds
Profit from operations / Total equity x 100 Profit from operations / Share capital Profit after tax / Total equity x 100
Profit after tax / (Total equity + Non-current liabilities) x 100 Acid test ratio
Total assets / Total liabilities
Current assets / Current liabilities
(Total assets – inventories) / Current liabilities
(Current assets – inventories) / Current liabilities
Asset turnover (net assets)
Revenue / Non-current assets
Revenue / (Total assets – Current liabilities) Profit from operations / Non-current assets
Profit from operations / (Total assets – Current liabilities)
Gearing
Non-current liabilities / (Total equity + Non-current liabilities) x 100 Total liabilities / Total equity x 100
Total liabilities / (Total equity + Non-current liabilities) x 100 Total equity / Non-current liabilities x 100
Interest cover
Profit after tax / Finance costs
Profit from operations / Finance costs Finance costs / Profit after tax
Finance costs / Profit from operations
practice assessment 3 (b)
15
Calculate the following ratios (to the nearest one decimal place where appropriate). Return on shareholders’ funds
%
Asset turnover (net assets)
times
Acid test ratio
:1
Gearing
%
Interest cover
times
Task 8
The directors of Ashanti Ltd have concerns about the liquidity and cash flow of the company following a significant reduction in the cash balances during the year. The company has invested in plant and machinery during the year. Ashanti Ltd is highly profitable and had no problem in raising the additional funds through a loan and issuing some shares. The directors have provided you with the following information for the past two years. 20-1
Bank balance Reconciliation of profit from operations to net cash flow (extract)
20-0
£000
£000
20-1
20-0
(1,805)
630
Increase in inventories
(6,050)
(4,508)
Decrease in trade payables
(3,025)
(1,650)
Increase in trade receivables Ratios Current ratio
Quick (acid test) ratio
Trade receivables collection period
(3,300)
20-1
(1,510)
20-0
4.6:1
2.5:1
67 days
41 days
2.8:1
1.1:1
Prepare notes for the directors that: (a)
(b)
Comment on the movements in working capital shown in the reconciliation of operating profit to net cash flow from operating activities extract between 20-0 and 20-1.
Comment on the liquidity and use of resources based on the information provided and what this tells you about the company.
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financial statements of limited companies tutor zone
TA S K S 1 & 2 ( A LT E R N AT I V E ) You have been asked to prepare the statement of cash flow and statement of changes in equity for Amato Ltd for the year ended 31 March 20-1.
The most recent statement of profit or loss and the statements of financial position of Amato Ltd for the past two years are set out below. Amato Ltd
Statement of profit or loss for the year ended 31 March 20-1 Continuing operations
Revenue
Cost of sales Gross profit
Dividends received
Loss on disposal of property, plant and equipment Distribution costs
Administrative expenses Profit from operations Finance costs
Profit before tax Tax
Profit for the period from continuing operations
Other comprehensive income for the year – gain on revaluation Total comprehensive income for the year
£000
61,298
(32,483) 28,815
500
(679)
(12,548)
(7,991) 8,097
(250)
7,847
(1,061) 6,786
1,500
practice assessment 3
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Amato Ltd
Statements of financial position as at 31 March
Non-current assets
Property, plant and equipment Current assets Inventories
Trade and other receivables Cash and cash equivalents
20-1
20-0
£000
£000
35,162
27,530
10,870
9,638
0
217
9,726
9,983
20,596
19,838
Share capital
15,300
13,600
Revaluation
2,500
1,000
Total assets
Equity and liabilities
Equity
Share premium Retained earnings Total equity
Non-current liabilities
Bank loans
Current liabilities
Trade and other payables Tax liability
Bank overdraft Total liabilities
Total equity and liabilities
55,758
5,100
47,368
4,300
25,932
20,946
2,160
2,420
3,474
3,932
214
0
48,832 2,160 1,078
4,766
6,926
55,758
39,846 2,420 1,170
5,102
7,522
47,368
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financial statements of limited companies tutor zone
Further information •
The total depreciation charge for the year was £3,940,000.
•
All sales and purchases were on credit. Other expenses were paid for in cash.
•
Property, plant and equipment costing £2,098,000 with accumulated depreciation of £1,250,000 was sold in the year.
•
A dividend of £1,800,000 was paid during the year.
(a)
Prepare a reconciliation of profit before tax to net cash from operating activities for Amato Ltd for the year ended 31 March 20-1.
(c)
Draft the statement of changes in equity for the year ended 31 March 20-1.
(b)
Using the pro-forma in your answer booklet, prepare the statement of cash flows for Amato Ltd for the year ended 31 March 20-1.
Reconciliation of profit before tax to net cash from operating activities
Adjustments for:
Cash generated from operations Net cash from operating activities
£000
practice assessment 3 Amato Ltd statement of cash flows for the year ended 31 March 20-1
19
£000
Net cash from operating activities Investing activities
Net cash used in investing activities Financing activities
Net cash from financing activities
Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
Amato Ltd
Statement of changes in equity for the year ended 31 March 20-1 Share capital
Balance at 1 April 20-0
Changes in equity for the year Total comprehensive income Dividends
Balance at 31 March 20-1
£000
Share Revaluation premium £000
£000
Retained earnings
£000
Total equity
£000
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financial statements of limited companies tutor zone
TA S K 6 ( A LT E R N AT I V E ) Graff plc acquired 80% of the ordinary share capital of Wade Ltd on 1 April 20-0.
The statements of profit or loss of the two companies for the year ended 31 March 20-1 is set out below. Statements of profit or loss for the year ended 31 March 20-1
Continuing operations
Revenue
Graff plc
Wade Ltd
65,383
18,064
£000
Cost of sales
(42,678)
Other income
2,200
Gross profit
Distribution costs
Administrative expenses Profit from operations Finance costs
Profit before tax Tax
Profit for the period from continuing operations
22,705
£000
(7,586) 10,478
(10,221)
(4,481)
7,912
2,744
(6,772) (800)
(3,253) (355)
7,112
2,389
5,677
1,900
(1,435)
(489)
Further information •
•
During the year Graff plc sold goods which had cost £2,580,000 to Wade Ltd for £3,300,000. A third of the goods that Graff plc had sold to Wade Ltd remained in the inventories of Wade Ltd. Wade Ltd paid dividends of £2,500,000 during the year.
Required
Draft a consolidated statement of profit or loss for Graff plc and its subsidiary for the year ended 31 March 20-1.
practice assessment 3 Revenue Graff
21
£000
Wade
Total inter-company adjustment Consolidated revenue
Cost of sales Graff
£000
Wade
Total inter-company adjustment Consolidated cost of sales
Consolidated statement of profit or loss for the year ended 31 March 20-1 Continuing operations
Revenue
Cost of sales Gross profit
Other income
Distribution costs
Administration expenses Profit from operations
Finance costs
Profit before tax Tax
Profit for the year Attributable to:
Equity holders of the parent Non-controlling interest
£000
