F2 WorkbookC Q PDF

F2 Financial Management Q
www.mapitaccountancy.com
CIMA F2 - Financial
Management
Workbook Questions
Group Accounts
Illustration 1
Almeria
Murcia
Tangible
100
100
Investment in Murcia
300
Non Current Assets
Current Assets
Inventory
40
200
Receivables
60
100
Cash
200
200
700
600
Ordinary Shares
160
100
Accumulated Profits
240
200
Equity
400
300
Non Current Liabilities
100
200
Current Liabilities
200
100
700
600
Additional Information
Almeria today acquired all the shares in Murcia for $300m.
The Fair Value of the NCI at acquisition was 0.
Required
Prepare the consolidated statement of financial position for the Almeria group
Pro-Forma
Working 1 - Group Structure
Almeria
Murcia
Date Acquired
Parent Share
NCI
Working 2 - Equity Table

At Acquisition
At Year End
Share Capital
Accumulated Profits
Working 3 - Goodwill
Cost of Parent Investment

Fair Value of NCI at acquisition
Less net assets at acquisition (W2)
Goodwill
Working 4 - NCI
$
NCI% of Sub Post-Acq Profits
Value of NCI at Year End
Working 5 - Accumulated Profits

$
Parents Accumulated Profits
Add: Parent % of the subsidiarys post acquisition profits
SFP for Almeria Group

Almeria
Murcia
Tangible
100
100
Investment in Murcia
300
Group
Non Current Assets

Goodwill
Current Assets
Inventory
40
200
Receivables
60
100
Cash
200
200
700
600
Ordinary Shares
160
100
Accumulated Profits
240
200
Equity
400
300
100
200
Current Liabilities
200
100
700
600
Non Controlling Interest
Illustration 2
Ant
Dec
Assets
500
500
Investment in Dec
350
850
500
Ordinary Shares
100
200
Accumulated Profits
250
100
Equity
350
300
Liabilities
500
200
850
500
Ant today acquired 160m of the 200m shares in Dec.
The Fair Value of the NCI was 50.
Required
Prepare the consolidated statement of financial position for the Ant group
Illustration 2 Pro-Forma
Working 1- Group Structure
Date Acquired
Parent Share
NCI
Working 2- Equity Table

At Acquisition
At Year End
Share Capital
Accumulated Profits

Goodwill
Working 4 - NCI
$

$
Statement of Financial Position for Ant Group

Ant
Dec
Assets
500
500
Investment in
Dec
350
Group
Goodwill
850
500
Ordinary
Shares
100
200
Accumulated
Profits
250
100
Equity
350
300
Liabilities
500
200
850
500
NCI
10
Illustration 3
Evan
Dando
Assets
200
350
Investment in Dando
500
Current Assets
200
300
900
650
Ordinary Shares ($1)
200
200
Accumulated Profits
250
100
Equity
450
300
280
200
Liabilities
170
150
900
650
Evan acquired 150m shares in Dando one year ago when the reserves of Dando were
$40m. The Fair Value of the NCI on the date of acquisition was $100m.
Required
Prepare the consolidated statement of financial position for the Evan group.
11
Solution
Working 1- Group Structure
Date Acquired
Parent Share
NCI
Working 2 - Equity Table

At Acquisition
At Year End
Share Capital
Accumulated Profits

Goodwill
12
Working 4 - NCI
$

$
13
Statement of Financial Position for Evan Group

Evan
Dando
Assets
200
350
Investment in
Dando
500
Current Assets
200
300
900
650
Ordinary
Shares ($1)
200
200
Accumulated
Profits
250
100
Equity
450
300
Non Current
Liabilities
280
200
Liabilities
170
150
900
650
Group
Goodwill
NCI
14
Illustration 4
Virtual
Insanity
Assets
1000
800
Investment in Insanity
600
Current Assets
400
200
2000
1000
800
100
Accumulated Profits
750
400
Equity
1550
500
250
300
Liabilities
200
200
2000
1000
Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were
$60m. The Fair Value of the NCI at that date was $120m.
Required
Prepare the consolidated statement of financial position for the Virtual group
15
Illustration 5
Jabba acquired 100% of the shares in Hutt two years ago.
The consideration was as follows:
1. Cash of $36,000.
2. 2000 Shares in Jabba (the share price is currently $3).
3. $30,000 to be paid four years after the date of acquisition. The relevant
discount rate is 12%
4. If the group meets certain targets there will be a further payment with fair
value of $60,000 at a later date.
Required:
(i) Calculate the fair value of the consideration which Jabba has given in
purchasing the investment in Hutt.
(ii)Show the value of the liability in the Statement of Financial Position
for the deferred consideration at the end of the current year.
(iii)What is the charge to the Statement of Profit or Loss in the current
period related to the deferred consideration?
Illustration 6
On 1 October 2012, Paradigm acquired 75% of Stratas 20,000 equity shares
by means of a share exchange of two new shares in Paradigm for every five
acquired shares in Strata. In addition, Paradigm issued to the shareholders of
Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. The
share price of Paradigm on the date of acquisition was $2.
Calculate the consideration paid for Strata.
16
Illustration 7
Jimmy acquired 80% of Gent 1 year ago. The following information relates to
Gent at the date of acquisition.
Accumulated
profits at
acquisition
Cost of investment
Fair Value of NCI

at acquisition
150
800
160
An item of plant was valued at $200 in the Gents Financial Statements but
had a Fair Value of $300, the plant had a remaining life of 5 yrs at the date of
acquisition. Goodwill is to be calculated gross.
Jimmy
Gent
Investment in Gent
800
Assets
700
700
1500
700
700
250
Accumulated Profits
500
350
Equity
1200
600
Liabilities
300
100
1500
700
17
Illustration 8
Devil acquired 90% of Detail 2 years ago. The following information relates to
Gent at the date of acquisition.
Accumulated
profits at
acquisition
Cost of
investment
Fair Value of NCI

at acquisition
250
1000
55
An item of plant was valued at $300 in the Gents Financial Statements but
had a Fair Value of $200.
The plant subject to the fair value adjustment had a remaining life of 4 yrs at
the date of acquisition. Goodwill is to be calculated Gross.
Devil
Detail
Investment in Detail
1000
Assets
600
800
1600
800
650
100
Accumulated Profits
250
500
Equity
900
600
Liabilities
700
200
1500
700
18
Illustration 9
Evaro Co. Acquired 80% of Stando Co. one year ago and the following detail
is relevant:
At Acquisition
$m
At Year End
$m
Share Capital
100
100
Accumulated Profits
250
500
At the date of acquisition the following was relevant:

i) An item of plant was valued at $100m in the Gents Financial Statements
but had a Fair Value of $50m, the plant had a remaining life of 10 yrs at the
date of acquisition.
ii)Stando Co. owns an internally generated brand worth $20m on the date of
acquisition that has a useful economic life of 20 years.
iii)At the date of acquisition a court case against Stando Co. is in process
which has resulted in a contingent liability of $25m being disclosed in their
financial statements. By the year end Stando Co. had won the court case
resulting with no payment as a result.
Required
Compete the Equity Table (W2) based on the above information for
Stando. Co.
19
Illustration 10
Brad acquires 80% of Angelinas share capital in a share for share exchange.
Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100
shares in issue with a nominal value of $1 Angelinas share price is $8. Brads
share price is $5. At the date of acquisition the net assets of Angelina are
$600.
Calculate the gross goodwill and the NCI.
Illustration 11
Brad acquires 80% of Angelinas share capital in a share for share exchange.
Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100
shares in issue with a nominal value of $1. Brads share price is $5. At the
date of acquisition the net assets of Angelina are $600.
Calculate the goodwill arising using the proportionate method and the NCI.
20
Illustration 12
(i)
Archie acquires 60% of Mitchells share capital with consideration of $900.
Mitchell has 200 shares in issue with a share price is $5. At the date of
acquisition the net assets of Mitchell were $800 and are $950 at the year end.
At the year end the retained earnings of Archie were $1,000.
An impairment review has been carried out on the goodwill at the year end
which has found it to be impaired by $40.
Calculate the gross goodwill, the retained earnings and the NCI at the year
end.
Illustration 12 (ii)
French acquired 75% of Shambles several years ago.
Cost of
Investment
Fair Value of
NCI at
acquisition
Net assets at
acquisition
Net assets at
year end
Goodwill
Impairment at
Y/E
1,000
300
800
3,000
200
If French has $1500 of retained earnings at the year end, calculate the gross
goodwill, retained earnings for the group and the NCI at the year end.
21
Illustration 12 (iii)
Pinky acquired 80% of Brain 4 years ago. The following information is
relevant:
Net Assets at
year end
Net Assets at
acquisition
Cost of
investment
Fair Value of
NCI at
acquisition
150
100
175
25
Goodwill is calculated gross and is subject to an annual impairment review. In

the current year goodwill has been impaired by $20.
Pinky
Brain
Investment in Pinky
175
Assets
100
100
Inventory
140
200
Receivables
160
100
Bank
125
200
700
600
160
50
Accumulated Profits
240
100
Equity
400
150
Non current liabilities
100
250
Liabilities
300
100
700
600
22
Illustration 13
George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a
proportionate basis and at acquisition was $400m.
During the impairment review in the current year it was found that the carrying value of the
goodwill has been impaired by $50m
What is the required treatment to deal with the impairment of goodwill?
23
Illustration 14
A Parent company has recorded an asset of $300 goods receivable with a subsidiary.
The subsidiary had recorded this as an initial liability payable of $300 but has just recorded
and sent a cheque payment to the parent of $50 leaving the payable balance of $250.
How should this be adjusted for on consolidation?
Illustration 15
Parent has been selling goods to subsidiary. The parent has recorded an asset of $500
receivable from the subsidiary.
The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has
not received them. As a result the subsidiary has a balance of $400 recorded as a liability
in payables.
How should this be treated on consolidation?
24
Illustration 16
Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below
Arctic
Monkeys
Inventory
300
100
Receivables
200
250
Bank
100
50
600
400
420
220
Current Assets
Current Liabilities
The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction
of $10m in respect of cash sent by Monkeys but not yet received by Arctic.
The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these
goods had been dispatched by Arctic, but were not yet received by Monkeys.
Show the treatment on consolidation.
25
Illustration 17
Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below
Sea
Lion
Inventory
400
250
Receivables
100
100
Bank
150
100
650
450
90
140
Current Assets
Current Liabilities
The trade payables of Lion includes $20m due to Arctic. This was after the deduction of
$15m in respect of cash sent by Lion but not yet received by Sea.
The receivables of Sea at the year end include $50m due from Lion. $15m of these goods
had been dispatched by Sea, but were not yet received by Lion.
Show the treatment on consolidation.
Illustration 18
Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At
the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.
I.
Calculate the PURP.
II.
Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the subsidiary company is the seller.
IV. Do parts I - III if the goods had been sold at a margin of 30%.
26
Illustration 19
Argentina owns an 80% share of Messi which it purchased one year ago.
The information below relates to Messi at the date of acquisition.
Ordinary
Share Capital
Reserves
Fair Value of
the net assets
Fair value of
the NCI
Cost of the
investment
$m
$m
$m
$m
$m
200
400
800
200
1900
The income statements for both are:

Argentina
Messi
Revenue
8000
3000
Cost of Sales
-4000
-1000
Gross Profit
4000
2000
Operating Costs
-1500
-1500
Finance Costs
-1000
-200
Profit Before Tax
1500
300
Tax
-700
-100
Profit for the year
800
200
Other information
I.
Argentina sold goods to Messi during the year at a margin of 40% and worth $100m.
Half of these goods have been sold on by Messi by the year end.
II.
The fair value of Messis net assets were equal to their book value at the date of
acquisition, with the exception of some machinery which had a useful life of 5 years.
III. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year
end an impairment review has found that the goodwill has been impaired by 10%.
Produce a consolidated Income Statement for the Argentina group.
27
Statement of Changes in Equity Pro-forma

Share
Capital
Share
Premium
Revaluation
Reserve
Accumulated
Profits
NCI
Total
OBalance
Share Issues
Revaluation
Gains
X
X
Profit for
period
Less
Dividends
ClBalance
(X)
(X)
(X)
28
Illustration 20
Nadal is a 90% subsidiary of Federer. It was acquired one year ago for $4000m. At that
time the accumulated profits were $800m.
Income Statements
Federer
Nadal
Revenue
20000
4000
Cost of Sales
-12000
-2000
Gross Profit
8000
2000
Distribution Costs
-2100
-300
Admin Expenses
-1400
-500
Operating Profit
1500
1200
Exceptional Gain
Nil
580
Investment Income
90
Nil
Finance Costs
-600
-150
Profit Before Tax
3990
1630
Tax
-700
-130
Profit for the year
3290
1500
Federer
Nadal
Statements of Financial Position
Investment in Nadal
4000
Assets
20000
5000
24000
5000
Share Capital
5000
1000
Accumulated Profits
15690
2200
Equity
20690
3200
Liabilities
3310
1800
24000
5000
29
Federer Statement of changes in Equity

Share Capital
Accumulated
Profits
Total Equity
5000
12600
17600
Profits for the year
3290
3290
Less Dividends
-200
-200
15690
20690
Share Capital
Accumulated
Profits
Total Equity
1000
800
1800
Profits for the year
1500
1500
Less Dividends
-100
-100
2200
3200
Opening Balance
Closing Balance
5000
Nadal Statement of changes in Equity
Opening Balance
Closing Balance
1000
Other Information:
In the year Federer sold goods to Nadal at a margin of 20%. The total amount sold was
$100m, of which a quarter remain in inventory at the year end.
Also during the year Nadal sold $180m of goods to Federer. These goods were sold at a
mark up of 50%. Half of the goods remain in inventory at the year end.
At the date of acquisition the fair values of Nadals net assets were equal to their book
value with the exception of an item of plant that had a fair value of $200m in excess of its
carrying value and a remaining useful life of 4 years. Goodwill is to be calculated on a
proportionate basis.
Federer paid a dividend during the year of $200m while Nadal paid a dividend of $100m.
Federer has recognised the dividend received from Nadal as investment income.
Required
Prepare the consolidated Income Statement, consolidated Statement of Changes in Equity
and the consolidated Statement of Financial Position for the Federer group.
30
Associates
(IAS 28)
31
Illustration 1
3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of
$400,000. Since that time Wars Ltd.has had the following results:
Year
Profit
Dividend Paid By
Associate
$200,000
$160,000
$150,000
$30,000
Due to poor trading results and customer service issues, Star Ltd feel that in the current
year the investment in Wars Ltd. has been impaired by $20,000.
Show the treatment of War Ltd. in the statement of financial position of Star Group
and in the Income statement for the 3 years of the investment.
Illustration 2
Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%.
At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.
I.
Calculate the PURP.
II.
Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the Associate company is the seller.
32
Illustration 3
On 1 April 2009 Picant acquired 75% of Sanders equity shares in a share exchange of
three shares in Picant for every two shares in Sander. The market prices of Picants and
Sanders shares at the date of acquisition were $320 and $450 respectively.
In addition to this Picant agreed to pay a further amount on 1 April 2010 that was
contingent upon the post-acquisition performance of Sander. At the date of acquisition
Picant assessed the fair value of this contingent consideration at $42 million, but by 31
March 2010 it was clear that the actual amount to be paid would be only $27 million
(ignore discounting). Picant has recorded the share exchange and provided for the initial
estimate of $42 million for the contingent consideration.
On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in
cash per acquired share and issuing at par one $100 7% loan note for every 50 shares
acquired in Adler. This consideration has also been recorded by Picant.
Picant has no other investments. The summarised statements of financial position of the
three companies at 31 March 2010 are:
Picant
Sander
Alder
Property, plant & equipment
37,500
24,500
21,000
Investments
45,000
82,500
24,500
21,000
Inventory
10,000
9,000
5,000
Receivables
6,500
1,500
3,000
Total Assets
99,000
35,000
29,000
Ordinary Shares
25,000
8,000
5,000
Share Premium
19,800
Ret. Earnings B/F
16,200
16,500
15,000
For year to 31/3/10
11,000
1,000
6,000
72,000
25500
26000
7% Loan Notes
14,500
2,000
Contingent Consideration
4,200
Current Liabilities
8,300
7,500
3,000
Total Equity & Liabilities
99,000
35000
29000
33
(i) At the date of acquisition the fair values of Sanders property, plant and equipment was
equal to its carrying amount with the exception of Sanders factory which had a fair
value of $2 million above its carrying amount. Sander has not adjusted the carrying
amount of the factory as a result of the fair value exercise. This requires additional
annual depreciation of $100,000 in the consolidated financial statements in the postacquisition period.
(ii)Also at the date of acquisition, Sander had an intangible asset of $500,000 for software
in its statement of financial position. Picants directors believed the software to have no
recoverable value at the date of acquisition and Sander wrote it off shortly after its
acquisition.
(iii)At 31 March 2010 Picants current account with Sander was $34 million (debit). This
did not agree with the equivalent balance in Sanders books due to some goods-intransit invoiced at $18 million that were sent by Picant on 28 March 2010, but had not
been received by Sander until after the year end. Picant sold all these goods at cost
plus 50%.
(iv)Picants policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Sanders share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
(v)Impairment tests were carried out on 31 March 2010 which concluded that the value of
the investment in Adler was not impaired but, due to poor trading performance,
consolidated goodwill was impaired by $38 million.
(vi)Assume all profits accrue evenly through the year.
34
Increasing/Decreasing
Holding
35
Illustration 1
Vic purchased 10% of the shares in Bob several years ago. The investment cost $17,000
and Vic currently carries the investment at cost in the accounts. Vic has subsequently
purchased 45% of the shares in Bob for $120,000. The net assets of Bob have a fair value
of $60,000 and the fair value of the original investment is $45,000. The fair value of the
NCI is $90,000.
Calculate the gain or loss arising on the subsequent acquisition of shares
Illustration 2
Vic purchased 10% of the shares in Bob several years ago. The investment cost $17,000
and Vic currently carries the investment at cost in the accounts. Vic has subsequently
purchased 45% of the shares in Bob for $120,000. The net assets of Bob have a fair value
of $60,000 and the fair value of the original investment is $45,000. The fair value of the
NCI is $90,000.
Calculate the gross goodwill arising on the acquisition of Bob.
Illustration 3
Aldo purchased 15% of the shares in Giro several years ago. The investment cost $85,000
and they currently carry it at cost in the accounts. Aldo has subsequently purchased 75%
of the shares in Giro for $700,000. The net assets of Giro have a fair value of $750,000
and the fair value of the original investment is now $145,000. The fair value of the NCI on
acquisition was $180,000.
Calculate the gross goodwill arising on the acquisition of Giro.
Illustration 4
A parent has owned 70% of a subsidiary for a long period of time. The NCI in the
subsidiary is currently measured at $500,000. If the parent buys another 10% what will the
value of the NCI fall to?
36
Illustration 5
A parent has owned 90% of a subsidiary for a long period of time. The NCI in the
subsidiary is currently measured at $300,000.
I.
The parent acquires all of the remaining shares for consideration of $250,000.
II.
The parent acquires 3% of the shares for $200,000 reducing the NCI to 7%.
What is the difference taken to equity in both situations?
Illustration 6
Inter purchased 70% of the shares in Milan several years ago. At that time goodwill of
$80,000 arose. The net assets of Milan are currently $100,000 and the NCI is $18,000.
I.
Calculate the gain arising on disposal if Inter sells its entire holding for $350,000.
II.
Calculate the gain arising on disposal if Inter sells 30% for $250,000 and the fair value
of the residual value is $30,000
Illustration 7
For several years Jeremy has owned 70% of Richard. The net assets of Richard at this
time are $250,000. The NCI is $68,000 and the gross goodwill is $200,000.
Jeremy has just sold 15% to take the holding to 55% for consideration of $150,000.
Calculate the difference arising that will be taken to equity.
37
Vertical Groups
38
Illustration 1
Consider a group with the following structure and detail:
P
80% - 1 Year Ago
60% - 1 Year Ago
S1
Cost of
Investment
Net Assets on
Acquisition
FV NCI on
Acquisition
250
200
60
S1
220
150
100
Required
Calculate the Goodwill & the NCI at the acquisition date.
39
Illustration 2
Ozzy acquired a 70% holding in Sharon 2 years ago. Sharon purchased a 60%
shareholding in Jack one year ago. The following financial statements relate to the Ozzy
group.
Statements of Financial Position
Investment in Sharon
Ozzy
Sharon
Jack
50
Investment in Jack
Other assets
17
25
18
20
75
35
20
Ordinary Shares
50
20
Accumulated profits
20
12
Equity
70
32
16
Liabilities
75
35
20
Ozzy
Sharon
Jack
Revenue
400
60
85
Operating Costs
-395
55
-83
Operating Profit
Tax
-3
-2
-1
Profit for Year
Income Statements
Accumulated Profits
Sharon
Jack
One year ago
Two years ago
40
Fair Value of NCI based on effective shareholdings
Sharon
Jack
One year ago
10
Two years ago
Goods worth $8m were sold in the year by Jack to Sharon and by the year end all of these
had been sold to a third party.
An impairment review at the year end found the goodwill of Sharon to be impaired by $3m,
goodwill is to be calculated gross.
Prepare the consolidated statement of financial position and consolidated income
statement for the Ozzy group.
41
Indirect Associates
42
Illustration 1
The parent has an 60% holding in the subsidiary. The subsidiary has an associate in which
it holds 40%. The following information is relevant.
Subsidiarys cost of investment in associate
200
Fair value of net assets in associate at acquisition
120
Fair value of net assets in associate at year end
300
Show the treatment for the associate in the group financial statements.
43
Mixed Groups
44
Illustration 1
The statements of financial position for 3 companies are as follows:
John
Paul
Ringo
Investments
675
200
Assets
900
700
400
1575
900
400
Share Capital
300
200
100
Accumulated Profits
700
400
100
Equity
1000
600
200
Liabilities
575
300
200
1575
900
400
Other information:
I.
John acquired a 60% holding in Paul for $600
II.
Paul acquired a 60% holding in Ringo for $200
III. John acquired a 30% holding in Ringo for $75

IV. All of the investments were made on the same date
V.
Goodwill is to be calculated gross and no impairment has been recorded
VI. The carrying value of assets & liabilities were the same as the fair values on the date
of acquisition
VII. On the date of acquisition the following information was correct:
Paul
Ringo
Accumulated Profits
250
60
Fair value of the effective NCI
100
60
Prepare the consolidated statement of financial position for John Group.
45
IAS 21
Foreign Currency
46
Illustration 1
Which of the following statements relating to IAS 21 The effects of changes in foreign
exchange rates is correct?
A. The functional currency of a foreign subsidiary is the currency that the group financial
statements are presented in.
B. A foreign subsidiary must present its financial statements in the presentational currency
of the parent.
C. Consideration will be given to the currency of the costs and sales of the entity when
determining its functional currency.
D. The more autonomous a subsidiary, the more likely its functional currency is that of the
parent entity.
Illustration 2
Bulldog Ltd has a year end of 31 January.
On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.
On 24th November Bulldog settles the transaction in full.
Exchange rates
13th October 1 : $1.45
24th November 1 : $1.55
Show the accounting entries for these transactions.
Illustration 3
Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one months
credit for 100,000. Jeff is a US company.
Exchange rates
1st June
$ = 1.50
21st June
$ = 1.40
How will this transaction be dealt with in the accounts for the year to 21st June?
47
Illustration 4
Big Ltd. acquired 80% of Cahoona Inc. on 1st July 20X1.
Cahoona Inc are based in Burgerland where the functional currency is Francs (Fr).
The financial statements for the year to 30 June 20X2 are below.
SFP
Investment in Cahoonas
Big
$
Cahoona
Fr
5000
Non Current Assets
10,000
3,000
Current Assets
5,000
2,000
20000
5,000
Share Capital
6,000
1,500
Retained Earnings
4,000
2,500
Liabilities
10,000
1,000
20,000
5,000
Big
$
Cahoona
Fr
Revenue
25,000
35,000
Operating Costs
-15,000
-26,250
Profit Before Tax
10,000
8,750
Tax
-5,000
-7,450
Profit for the Year
5,000
1,300
Income Statement
There was no other comprehensive income for either entity in the period.
Other information:
I. The fair value of the net assets of Cahoona was Fr6,000 on the date of acquisition with
any increase being attributable to land held at historic cost.
II. Big sold goods to Cahoona during the year for $1,000 cash.
48
III.The NCI is valued using the Fair Value method at FR 2000 at acquisition.
IV. The Goodwill in Cahoona was impairment tested at the year end and was impaired by
FR200. The impairment was deemed to have accrued evenly over the year so the
average rate should be used to treat it.
Exchange rates to $1:
1 July 2001
Average rate
1 June
30 June
Fr
1.5
1.75
1.9
2
Prepare the group statement of financial position and statement of other comprehensive
income.
49
IFRS 2
Share Based Payments
50
Illustration 1
An entity grants 1 share option to each of its 100 employees on 1 January Year 1. Each
grant is conditional upon the employee working for the entity over the next three years.
The fair value of each share option as at 1 January Year 1 is $8
At the end of each year the number of employees expected to take up the options are:
Year 1:
Year 2:
95
97
When the rights are taken up in year 3, 98 employees actually receive the options.
Show the treatment for the employee benefits over the three years.
Illustration 2
An entity grants 1 share option to each of its 500 employees on 1 January Year 1. Each
grant is conditional upon the employee working for the entity over the next three years.
The fair value of each share option as at 1 January Year 1 is $10
On the basis of a weighted average probability, the entity estimates on 1 January that 100
employees will leave during the three-year period and therefore forfeit their rights to share
options.
The following actually occurs:
20 employees leave during Year 1 and the estimate of total employee departures over
the three-year period is revised to 70 employees
25 employees leave during Year 2 and the estimate of total employee departures over
the three-year period is revised to 60 employees
10 employees leave during Year 3
Illustration 3
Same question with additional information of share option price at the end of each year:
Year 1
Year 2
Year 3
10
12
14
51
Financial Instruments I
52
Illustration 1
VB acquired 40,000 shares in another entity, JK, in March 2011 for $2.68 per share. The
investment was classified as available for sale on initial recognition. The shares were
trading at $2.96 per share on 31 July 2011. Commission of 5% of the value of the
transaction is payable on all purchases and disposals of shares.
Calculate the amount recognised in the Financial Statements on initial recognition
of the Financial Asset.
Illustration 2
(i) VB acquired 40,000 shares in another entity, JK, in March 2012 for $2.68 per share.
The investment was classified as available for sale on initial recognition. The shares were
trading at $2.96 per share on 31 July 2012. Commission of 5% of the value of the
transaction is payable on all purchases and disposals of shares.
Show the treatment for the shares at 31 July 2012
(ii) VB subsequently sold the shares on 31 July 2013 when the share price was $3.00.
Show the treatment for the shares at 31 July 2013
53
Financial Instruments II
54
Illustration 1
A company invests $10,000 in a 3 year redeemable 10% bond which is redeemable at a
premium.
The bond consists of interest payments and principle only and the company intends to
hold it until it is redeemed.
The effective interest rate on the bond is 12%.
Show the treatment for the bond over the 3 year period.
Illustration 2
A company issues a $30,000 3 year 7% redeemable bond at a discount of 10% with issue
costs of $1,000.
The bond is redeemable at a premium of $1,297.
The effective interest rate is 14%.
Show the treatment for the bond over the 3 year period.
Illustration 3
Ambush loaned $200,000 to Bromwich on 1 December 2003. The effective and stated
interest rate for this loan was 8 per cent. Interest is payable by Bromwich at the end of
each year and the loan is repayable on 30 November 2007. At 30 November 2005, the
directors of Ambush have heard that Bromwich is in financial difficulties and is undergoing
a financial reorganisation. The directors feel that it is likely that they will only receive
$100,000 on 30 November 2007 and no future interest payment. Interest for the year
ended 30 November 2005 had been received. The financial year end of Ambush is 30
November 2005.
Required:
(i)
Outline the requirements of IAS 39 as regards the impairment of financial
assets.
(6 marks)
(ii)
Explain the accounting treatment under IAS39 of the loan to Bromwich in the
financial statements of Ambush for the year ended 30 November 2005. (4 marks)
55
Financial Instruments III
56
Illustration 1
QWE issued 10 million 5% convertible $1 bonds 2015 on 1 January 2010. The proceeds of
$10 million were credited to non-current liabilities and debited to bank. The 5% interest
paid has been charged to finance costs in the year to 31 December 2010.
The market rate of interest for a similar bond with a five year term but no conversion
terms is 7%. Show the treatment for the bond in year 1.
Illustration 2
Aron issued one million convertible bonds on 1 June 2006. The bonds had a term of three
years and were issued with a total fair value of $100 million which is also the par value.
Interest is paid annually in arrears at a rate of 6% per annum and bonds, without the
conversion option, attracted an interest rate of 9% per annum on 1 June 2006. The
company incurred issue costs of $1 million. If the investor did not convert to shares they
would have been redeemed at par. At maturity all of the bonds were converted into 25
million ordinary shares of $1 of Aron. No bonds could be converted before that date. The
directors are uncertain how the bonds should have been accounted for up to the date of
the conversion on 31 May 2009 and have been told that the impact of the issue costs is to
increase the effective interest rate to 938%.
57
IAS 33 EPS
58
Illustration 1
An entity issued 300,000 shares at full market price on 1st July 2009. The year end of the
entity is 31st December.
There were 900,000 shares in issue on 1st Jan 2009 and the profit for the year to 31st
December 2009 was $1,000,000.
Calculate the EPS at 31st December 2009.
Illustration 2
ABC Ltd. makes a bonus issue of 1 for 6 on 1st July 2009. The year end of the entity is
31st December.
December 2009 was $1,000,000.
Calculate the EPS at 31st December 2009.
Illustration 3
ABC Ltd. makes a rights issue of 1 for 3 on 1st July 2009. The current share price is $4
and the rights issue is at a price of $3 The year end of the entity is 31st December.
December 2009 was $1,000,000.
Last years earnings were $900,000
Calculate the EPS at 31st December 2009 and the new EPS for 2008.
59
Illustration 4
An entity issued a bonus issue of 1 for 5 of its shares on 1st July 2009. The year end of
the entity is 31st December.
There were 1,000,000 shares in issue on 1st Jan 2009 and the profit for the year to 31st
December 2009 was $1,000,000.
The entity also has convertible loan stock that if converted would create 100,000 new
shares.
The interest paid on the loan each year is $90,000 with tax benefits associated of $20,000
Calculate the EPS at 31st December 2009 and the Diluted EPS.
Illustration 5
An entity has a basic weighted average number of shares of 2m and earnings of $1.5m. It
also has in issue 300,000 share options with an exercise price of $5. The average market
value of the shares in the year was $6.
Calculate the basic EPS for the entity and the diluted EPS.
60
IAS 17
Leases
61
Illustration 1
An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay 3 annual
payments of $2,500, the first of which is payable on 31/12/X0.
The actuarial interest rate is 12% (annuity rate for 3 years 2.402) and the fair value of the
asset was $6,500.
Show the treatment in the lessees financial statements over the life of the asset.
Illustration 2
An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay 3 annual
payments of $2,500, the first of which is payable on 31/12/X0.
The actuarial interest rate is 12% (annuity rate for 3 years 2.402) and the fair value of the
asset was $6,500.
Calculate the interest payable each year over the term of the lease using the sum of digits
method.
Illustration 3
A company takes out a 6 year operating lease.
They pay $1,500 deposit up front on the first day of year one and $2,000 in arrears on the
last day of years 1, 2, 3, 4, 5 and 6.
How much will be recognised in the Income Statement and the SFP at the end of year 1 of
the lease?
62
Illustration 4
Arbie Co. has sold some plant and leased it back on a 5 year finance lease. The sale took
place at the beginning of the current accounting period.
Details were as follows:
Proceeds of Sale
200,000
Fair Value of Machine at date of sale
200,000
Carrying Value of plant at date of sale
150,000
Annual Lease Payments (in arrears)
52,760
UEL of machine
5 years
Annuity 5yrs at 10%
3.791
Implicit rate of Interest
10%
Show the treatment for the above in the financial statements in year 1.
63
Illustration 5
How would the following be treated in the financial statements for the next year?
Company A has sold 6 assets with the intention of leasing them back on 5 year operating
leases.
Item
Carrying Value
Proceeds
Fair Value
Annual Lease
Payments
360
300
400
50
400
300
360
50
300
360
400
66
300
400
360
70
360
400
300
70
400
360
300
66
64
Substance over form
65
Illustration 1
Slick Tony sells cars from his car dealership. The car manufacturer supplies him with cars
on which the purchase price is set on delivery. An element of finance is included in the
purchase price.
If the car is not sold within 4 months then it must be purchased by Tony. If Tony sells a car
he must pay the manufacturer the next day. Tony has to insure and maintain the cars and
has no right to return them.
Who should recognise the cars on their statement of financial position and when?
Illustration 2
Pinky Social Club has sold its building to an investment company for $300,000. They have
signed an agreement that they can buy back the building at any stage over the next 5
years for the original price plus interest accrued and paid at the end of the 5 years charged
at an effective rate of 5%.
The buildings current market value is $500,000.
How should Pinky show this transaction in their financial statements?
66
Related Parties
67
Revenue Recognition
68
Illustration 1
ABC Co. has sold a large item of plant to CD Co. for $10m on the first day of their
accounting period. They do not expect to receive payment for the plant for 24 months.
The relevant discount rate is 10% with rates:
Year
1
2
Rate
0.909
0.826
How should ABC Co treat the revenue on the plant over the next 2 years?
Illustration 2
A company sells an IT system to a customer on the first day of a new accounting period.
The package includes hardware delivered immediately and a contract for support over the
next 3 years with that support worth $50,000 p/a.
The total cost of the contract is paid up front and is $300,000.
How much should the company recognise as revenue from the transaction in the current
year?
69
IAS 37
Provisions
70
Illustration 1
ABC Co. does not offer warranties with the radios it sells to customers, however if a
customer is dissatisfied with the product for any reason they provide a refund with no
questions asked. This policy is generally known by customers to be the case.
Should any provision for refunds be made at the year end?
Illustration 2
A company has entered into a contract to pay for specialist engineering support over the
next 3 years for annual payments with a present value of 100,000. Unfortunately due to a
change in the trading environment the support is no longer needed but the contract
cannot be changed. The directors feel they may be able to sell the contract to another
business for $50,000 but are unsure whether this is possible.
How should this be treated in the financial statements?
Illustration 3
A company with a year end of 30th April has decided to re-organise trading in its UK
division closing several outlets. It made the decision on the 30th April 2010 at a board
meeting where the directors decided that a detailed plan for the re-structuring would be
created as soon as possible. Employees affected by the re-structuring were sent notice on
the 31st May 2010.
Should a provision for re-structuring be created in the financial statements at the
year ended 31 April 2010?
Illustration 4
A company sells radios with a warranty offering instant replacement of any defective goods
for the first year.
Sales in the year to date were $4,000,000 and past experience suggests that 1.7% of the
radios sold will be replaced in the first year by the company.
What provision should be included in the financial statements?
71
Illustration 5
A power generating company has just won a contract to build a new power station at a
cost of $12m. The terms of the contract state that the company is not responsible for any
environmental damage caused around the site such as pollution to the local environment.
It is estimated by the company that by the end of the useful economic life of the power
station in 25 years time it will cost $2m to rectify any environmental impact of the plant.
The company has a very clear environmental charter that has targets for limiting
environmental impact and a policy of rectifying any environmental damage caused by their
operations.
The company has a cost of capital of 10%
What entries should be included in the financial statements to deal with the above in
the first year?
72
Inventories & Construction

Contracts
73
Illustration 1
ABC Co. has the following items in inventory:
i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy
has meant that these goods will now sell for $42,000 with costs to sell of $2,500.
ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The
manufacturer of the materials has just announced that from now on they will sell these
materials to you at a lower price of $28,000 per tonne.
iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the
customer of $60,000. New health and safety requirements mean that the plant will need
to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.
At what value should each of the above be included in the inventory of ABC Co.
Illustration 2
ABC Co. is building a football stadium under a construction contract.
The estimated costs to complete the stadium are $400,000.
The costs to date have been $350,000.
The total estimated revenue is $1,000,000.
It is estimated that the contract is 50% complete.
(i) What amounts of revenue, costs and profit will be recognised in the income
statement?
(ii) If the expected revenue from the contract was $500,000 show the amounts of
revenue, costs and profit that would be recognised in the income statement?
74
Illustration 3
ABC Co. is building a football stadium under a construction contract.
The estimated costs to complete the stadium are $400,000.
The costs to date have been $350,000.
It is estimated that the contract is 50% complete.
The company is not able to reliably estimate the outcome of the contract but believes it will
recover all costs from the customer.
What amounts of revenue, costs and profit will be recognised in the income
statement?
Illustration 4
A construction company has the following contracts in progress:
X
Costs Incurred to Date
300
200
600
Costs to complete
100
800
900
Work Certified to date
400
300
1000
Contract Price
500
600
2000
Progress billings
25
80
90
Profit is accrued on the contracts as a percentage of completion derived by comparing

work certified to the total sales value.
Calculate the figures to be included in the financial statements in relation to the
above contracts.
75
Illustration 5
On 1 October 2009 Mocca entered into a construction contract that was expected to take
27 months and therefore be completed on 31 December 2011.
Details of the contract are:
Agreed contract price
Estimated total cost of contract (excluding plant)
$000
12,500
5,500
Plant for use on the contract was purchased on 1 January 2010 (three months into the
contract as it was not required at the start) at a cost of $8 million. The plant has a four-year
life and after two years, when the contract is complete, it will be transferred to another
contract at its carrying amount. Annual depreciation is calculated using the straight-line
method (assuming a nil residual value) and charged to the contract on a monthly basis at
1/12 of the annual charge.
The correctly reported income statement results for the contract for the year ended 31
March 2010 were:
Revenue recognised
Contract expenses recognised
Profit recognised
$000
3,500
(2,660)
840
Details of the progress of the contract at 31 March 2011 are:

Contract costs incurred to date (excluding depreciation)
Agreed value of work completed and billed to date
Total cash received to date (payments on account)
$000
4,800
8,125
7,725
The percentage of completion is calculated as the agreed value of work completed as a

percentage of the agreed contract price.
Required:
Calculate the amounts which would appear in the income statement and statement
of financial position of Mocca, including the disclosure note of amounts due to/from
customers, for the year ended/as at 31 March 2011 in respect of the above contract.
(10 marks)
76
IAS 12
Deferred Tax
77
Illustration 1
An entity has profit before tax of $10,000 in its financial statements in each of years 1, 2, 3
and 4.
Tax allowances are allowed on an item of plant purchased for $1,000 at the start of year 1
over 3 years straight line.
The company charges depreciation on the asset at a rate of 25% straight line.
The tax rate is 30%
Illustration 2
At the year end ABC Co. has non current assets that have a carrying amount of
$2,000,000 but a tax base of $1,400,000.
There is currently a deferred tax liability carried forward of $250,000 and the tax rate is
30%.
Tax for the year has been estimated as $500,000.
Show the treatment for deferred tax in the period and the effect this has on the
financial statements.
78
Interpretation of Financial
Statements
79
Illustration 1
2011
2010
ASSETS
$000
$000
Non Current Assets
1000
1000
Inventory
300
400
Receivables
200
300
Cash
300
200
1800
1900
Ordinary Shares
800
800
Reserves
200
100
Long term Liabilities
700
900
Payables
100
100
Overdraft
LIABILITIES
1800
1900
$000
$000
Revenue
1000
1200
COS
800
1100
Gross Profit
200
100
Other Costs
100
90
Net Profit
100
10
All sales are made on credit.

Required:
Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the
2 years
80
Illustration 2
X1
X2
X3
Non Current Assets
500
700
1000
Current Assets
150
200
300
650
900
1300
300
300
300
Reserves
100
280
430
Loan Notes
150
200
300
Payables
100
120
270
650
900
1300
Revenue
3000
3500
4200
COS
2000
2400
3200
Gross Profit
1000
1100
1000
Admin Costs
300
350
400
Distribution Costs
200
250
300
PBIT
500
500
300
Interest
100
150
220
Tax
120
90
50
Profit After Tax
280
260
30
Dividends
100
110
30
Retained Earnings
180
150
$3.30
$4.00
$2.20
Share Price
81
Using the information on the previous page calculate and comment on the following
Ratios:
I. Return on Capital Employed
II. Return on Equity
III. Gross Margin
IV. Net Margin
V. Operating Margin
VI. Revenue Growth
VII. Gearing
VIII. Interest Cover
IX. Dividend Cover
X. Dividend Yield
XI. P/E Ratio
82
Cash Flow Statements I
83
Illustration 1
An entity has the following results in their financial statements:
2011
2010
ASSETS
$000
$000
Non Current Assets
1000
1000
Inventory
300
400
Receivables
200
300
Cash
300
200
1800
1900
Ordinary Shares
800
800
Reserves
200
199
Long term Liabilities
700
801
Payables
100
100
1800
1900
$000
$000
Revenue
1000
1200
COS
800
1100
Gross Profit
200
100
Profit on Sale of Non Current Asset
30
Other Costs
70
90
PBIT
100
10
Interest Cost
10
PBT
90
Tax
30
PAT
60
LIABILITIES
84
Other Information:
I.
II.
Within cost of sales is depreciation of $40,000 and amortisation of an intangible asset

of $30,000.
Within other costs is an increase in accrued admin expenses of $5,000.
Perform the reconciliation of Profit Before Tax to Cash Generated From Operations
for 2011.
Illustration 2
An entity has the following information in their financial statements:
PPE
Intangible Assets
2011
2010
2,000
1,100
500
400
Other information:
I.
II.
The entity disposed of a piece of plant during the year with a carrying value of $300
for a profit of $50.
Intangible assets are made up of qualifying development expenditure on a product
currently being sold, with amortisation in 2011 of $100.
What cash flows will appear in the statement of cash flows for the entity in the year
2011?
85
Illustration 3
Statement of Financial Position
2011
2010
PPE (note (i))
32,600
24,100
Financial Assets (note (ii))
4,500
7,000
37,100
31,100
Inventory
10,200
7,200
Receivables
3,500
3,700
Non Current Assets
Current Assets
Bank
Total Assets
1,400
13,700
12,300
50,800
43,400
14,000
8,000
Equity & Liabilities

Ordinary Shares of $1 (note (iii))
Share Premium (note (iii))
2,000
Revaluation Reserve (note (iii))
2,000
3,600
Retained Earnings
13,000
10,100
Finance Lease Obligations
7,000
6,900
Deferred Tax
1,300
900
Tax
1,000
1,200
Bank Overdraft
2,900
Provn for warranties (note (iv))
1,600
4,000
Finance Lease Obligations
4,800
2,100
Trade Payables
3,200
4,600
Total Equity & Liabilities
50,800
43,400
Current Liabilities
86
Income Statement
2011
2010
$000
$000
Revenue
58,500
41,000
Cost of Sales
-46,500
-30,000
Gross Profit
12,000
11,000
Operating Activities
-8,700
-4,500
Investment Income (note (ii))
1,100
700
Finance Costs
-500
-400
Profit Before Tax
3,900
6,800
Income Tax
-1,000
-1,800
Profit For the year
2,900
5,000
Note (i) - Property Plant & Equipment

Cost
$000
Accumulated
Depreciation
$000
Carrying
Amount
$000
At 30 September 2010
33,600
-9,500
24,100
New finance lease additions
6,700
6,700
Purchase of new plant
8,300
8,300
Disposal of property
-5,000
Depreciation for the year

At 30 September 2011
43,600
1,000
-4,000
-2,500
-2,500
-11,000
32,600
The property disposed of was sold for $8.1 million.
Note (ii) - Investments/Investment Income

During the year an investment that had a carrying amount of $3 million was sold for $3.4
million. No investments were purchased during the year.
Investment income consists of:
87
Year to 30 September
2011
2010
$000
$000
Dividends received
200
250
Profit on sale of investment
400
Increases in fair value
500
450
1100
700
Note (iii)
On 1 April 2011 there was a bonus issue of shares that was funded from the share
premium and some of the revaluation reserve. This was followed on 30 April 2011 by an
issue of shares for cash at par.
Note (iv)
The movement in the product warranty provision has been included in cost of sales.
Required:
Prepare a statement of cash flows for Mocha for the year ended 30 September 2011,
in accordance with IAS 7 Statement of cash flows, using the indirect method.
(19 marks)
88
Cash Flow Statements II
89
Illustration 1
The group financial statements for Nasser Ltd. show the following information:
X1
X0
NCI on Statement of Financial Position
820
700
NCI share of Profit after Tax
220
130
What was the dividend paid to the NCI in the year X1?
90
Illustration 2
Indigo Ltd, took up a 40% holding in Violet Ltg. for consideration of $120 in 20X1. The
group financial statements for Indigo Ltd. show the following information:
X1
X0
Post tax Income from Associate (Income Statement)
50
Investment in Associate (SFP)
150
Loan to Associate
20
What amounts will be included in the group cash flow statement in the year X1?
91
Illustration 3
Extracts from the group SFP of Express Ltd are outlined below:
X1
X0
Property Plant & Equipment
50,600
44,050
Inventory
33,500
28,700
Receivables
27,130
26,300
Trade Payables
33,340
32,810
During the period Express Ltd purchased 75% of Delivery Ltd. At the date of acquisition
the fair value of the following assets and liabilities were determined:
4,200
Inventory
1,650
Receivables
1,300
Payables
1,950
Show the movements in cash for the 4 items outlined above.
Illustration 4
Using the information in illustration 3 show the movements in cash if Express Ltd. Had
already owned the subsidiary and sold it during the period.
92
Illustration 5
A Group has a foreign subsidiary which had the following FX Gains & Losses on
translation into the Group presentational currency:
$m
PPE
30
Inventory
Receivables
18
Payables
(7)
The Balances on these accounts in the Group Financial Statements were:

2011
2010
PPE
335
240
Inventory
70
50
Receivables
72
40
Payables
-35
-25
Depreciation in the period was $25m.

Show the cash flows arising from the above information to be included in the Group
Statement of Cash-flows.
93
Illustration 6
Consolidated Financial Statements for Group.
Group Income Statement
$m
Revenue
4,000
COS
-2,200
Gross Profit
1,800
Other Expenses
-789
Profit from operations
1011
Gain on sale of sub (Note i)
50
Finance cost (Note ii)
-200
PBT
861
Tax
-180
Profit after tax
681
Foreign Currency Translations
62
Total Comprehensive Income
743
Attributable to Parent
600
Attributable to NCI
143
Group Statement of Changes in Equity

Balance B/F
$m
3,307
Profit Attributable to Parent
600
Dividends Paid
-240
Issue of Shares
1000
Balance C/F
4667
94
20X2
20X1
52
72
5,900
4,100
Inventories
950
800
Receivables
1,000
900
80
98
7982
5970
Share Capital
3,500
2,500
Retained Earnings
1,167
807
543
500
225
140
1,554
1,200
278
218
Trade Payables
450
400
Accrued Interest
25
20
Income Tax
130
120
Obligations under Finance Leases
45
25
Overdraft
65
40
7982
5970
Goodwill
Cash
NCI
Non-Current Liabilities
Obligations under Finance Leases
Long term borrowings
Deferred Tax
Current Liabilities
(i) On 1 April 20X2 the parent disposed of a 75% subsidiary for $250m in cash which had
the following net assets at the time:
$m
200
Inventory
100
95
Receivables
Cash
Payables
Income Tax
Interest bearing borrowings
110
10
(80)
(25)
(75)
240
The subsidiary had been purchased several years ago for a cash payment of $110m when
its net assets had been $120m.
(ii) Goodwill is measured using the proportionate method
(iii)The following currency differences occurred
Total
$m
Parent Share
$m
25
20
Inventories
20
15
Receivables
20
16
Payables
-9
-6
56
45
Retranslation of Profit for period
16
12
Offset exchange losses on borrowings (see

below)
-10
-10
62
47
On retranslation of net assets:
The exchange losses on borrowings relate to foreign loans taken out to finance
investments in subsidiaries. The accounts assistant has offset these against the
retranslation of the net investments in the subsidiaries. The exchange gain on retranslation
of the income statement (from average rate for the year to the closing rate) relates to
operating profit excluding depreciation.
(iv) Depreciation for the year was $320m and the group disposed of PPE with a net book
value of $190m for cash of $198m. the profit on this disposal has been credited to Other
operating expenses.
The group entered into a significant number of new finance leases in the period of which
$250m related to additions to property, plant & equipment.
Prepare the consolidated cash flow statement for the period.
96
Sources of Finance I
97
Illustration 1
XYZ Ltd. intends to raise capital via a rights issue.
The current share price is $8.
They are offering a 1 for 4 issue at a price of $6.
Calculate the Theoretical Ex-rights Price.
Illustration 2
ABC Ltd. has decided to raise capital via a rights issue.
The share price is currently $5.50 and ABC intends to raise $5m.
There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue.
Calculate the Theoretical Ex-Rights Price.
98
Sources of Finance II
99
Weighted Average Cost of

Capital
100
Illustration 1
ABC Company has just paid a dividend of 35c.
The current share price is $3.25.
Calculate the Cost of Equity (Ke) using DVM.
Illustration 2
ABC Company has just paid a dividend of 35c.
The dividend paid has grown by 4% per year for the past 5 years.
Calculate the Cost of Equity (Ke) using DVM.
Illustration 3
A company has issued 10% irredeemable debt.
The market value of the debt is $90.
The tax rate is 30%
Calculate the cost of debt (Kd).
Illustration 4
A company has a bank loan of $2m at an interest rate of 10%.
The tax rate is 30%.
Calculate the cost of debt (Kd).
101
Illustration 5
A Company has issued debt which is redeemable in 5 years time.
Interest is payable at 8%.
The current market value of the debt is $102.
Ignore taxation.
Calculate the Cost of Debt (Kd).
Illustration 6
A Company has issued debt which is redeemable in 5 years time.
Tax is payable at 30%.
102
Illustration 7
A Company has issued debt which is convertible in 5 years time.
On conversion, investors will have a choice of either:
I.
Cash at a 15% premium; or
II.
18 shares per loan note.
The current share price is $6 and it is expected to grow in value by 4% per year.
Tax is payable at 30%.
Illustration 8
Company A is funded as follows:
Item
Capital Structure
Cost
Equity
85%
15%
Debt
15%
7%
Calculate the Weighted Average Cost of Capital.
103
Illustration 9
Balance Sheet Extract
Ordinary Shares (50c)
3000
Loan Notes
2000
Bank Loan
1000
The cost to the company of each of the above items has been calculated as:
Ordinary Shares
13%
Loan Notes
8%
Bank Loan
5%
The Loan notes are currently trading at $94.

The current share price is $1.50
104
Illustration 10
Balance Sheet Extract
Ordinary Shares (50c)
2000
12% Redeemable Loan Notes
1500
8% Irredeemable Loan Notes
500
Bank Loan
750
Details on these are as follows.

They have just paid a dividend of 15c and the dividend has grown by 5% per year for the
past 5 years.
The redeemable loan notes are currently trading at $106 and are redeemable at par in 5
years time.
The irredeemable loan notes are currently trading at $92
The bank loan has an interest rate of 10%.
The tax rate is 30%.
105

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F2 Financial Management Q

Non Current Assets

Non Current Liabilities

Working 2 - Equity Table

Cost of Parent Investment

Working 5 - Accumulated Profits

SFP for Almeria Group

Non Current Assets

Non Current Liabilities

Non Controlling Interest

Working 2- Equity Table

Cost of Parent Investment

Working 5 - Accumulated Profits

Statement of Financial Position for Ant Group

Ordinary Shares ($1)

Non Current Liabilities

Working 2 - Equity Table

Cost of Parent Investment

Working 5 - Accumulated Profits

Statement of Financial Position for Evan Group

Ordinary Shares ($1)

Non Current Liabilities

Fair Value of NCI

Ordinary Shares ($1)

Fair Value of NCI

Ordinary Shares ($1)

At the date of acquisition the following was relevant:

Goodwill is calculated gross and is subject to an annual impairment review. In

Ordinary Shares ($1)

Non current liabilities

Calculate the PURP.

Show the accounting treatment if the parent company is the seller.

The income statements for both are:

Profit Before Tax

Profit for the year

Statement of Changes in Equity Pro-forma

Profit Before Tax

Profit for the year

Statements of Financial Position

Federer Statement of changes in Equity

Profits for the year

Profits for the year

Nadal Statement of changes in Equity

Calculate the PURP.

Show the accounting treatment if the parent company is the seller.

Property, plant & equipment

Ret. Earnings B/F

For year to 31/3/10

Total Equity & Liabilities

What is the difference taken to equity in both situations?

80% - 1 Year Ago

60% - 1 Year Ago

Profit for Year

One year ago

Two years ago

Fair Value of NCI based on effective shareholdings

One year ago

Two years ago

Fair value of net assets in associate at acquisition

Fair value of net assets in associate at year end

John acquired a 60% holding in Paul for $600

Paul acquired a 60% holding in Ringo for $200