PROFESSIONAL LEVEL EXAMINATION

TUESDAY 14 MARCH 2017

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING

UK GAAP
This paper consists of four questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest £.

All references to UK GAAP are to FRS 102, The Financial Reporting Standard
applicable in the UK and Republic of Ireland and the Companies Act 2006.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2017. All rights reserved. Page 1 of 8

1. The financial controller is preparing the financial statements of Ashgill Ltd for the year ended
30 September 2016. There are a number of outstanding issues which need to be accounted
for. At 30 September 2016 Ashgill Ltd had the following nominal ledger balances.

Note £
Purchases 496,700
Administrative expenses 278,400
Other operating costs 126,000
Land and buildings (1)
Valuation (land £320,000) 819,800
Accumulated depreciation at 30 September 2015 23,800
Plant and machinery (1)
Cost 380,000
Accumulated depreciation at 30 September 2015 118,750
Profit and loss account reserve at 30 September 2015 20,890
6% Irredeemable preference share capital (2) 100,000
Called up share capital (£1 shares) 450,000
Share premium account (3) 132,500
Revaluation reserve (land £20,000) 176,000
Cash at bank 15,860
Stocks at 30 September 2015 67,600
Trade debtors (4) 65,320
Trade creditors 41,340
Sales (4) 1,186,400

Outstanding issues:

(1) Ashgill Ltd uses the revaluation model for its land and buildings and makes an annual
transfer between the revaluation reserve and the profit and loss account reserve in
accordance with best practice. Buildings are depreciated on a straight-line basis and
have an estimated useful life of 50 years. The land and buildings were originally
acquired on 1 October 2005 for £700,000 (land £300,000).

An independent valuation was carried out on 1 October 2015 which gave a value of
£270,000 for land and £510,000 for buildings. This latest valuation has not yet been
reflected in the nominal ledger.

On 1 October 2015 a machine was disposed of for cash of £16,000. The only
accounting entry made was to debit cash and credit other operating costs with the cash
received. The machine was originally acquired on 1 October 2013 for £20,000.
Plant and machinery is held under the cost model and is depreciated using the reducing
balance method at 15% pa.

No depreciation charges have yet been recognised for the year ended 30 September
2016. All expenses relating to tangible fixed assets should be recognised in cost of
sales.

(2) On 1 October 2015 Ashgill Ltd issued 100,000 6% £1 irredeemable preference shares
at par. The payment of the dividend is mandatory and cumulative. The annual
preference share dividend was paid on 30 September 2016 and was debited to the
profit and loss account reserve and credited to cash.

Copyright © ICAEW 2017. All rights reserved. Page 2 of 8

(3) On 1 March 2016 Ashgill Ltd made a 1 for 5 rights issue at £1.35 per share. The market
price of one Ashgill Ltd ordinary share immediately before the rights issue was £1.95.
The entire proceeds were debited to cash and credited to the share premium account.

(4) Ashgill Ltd made a sale to an overseas customer on 1 July 2016 for €40,000. The
customer was given a 120-day credit period and the invoice was unpaid at the year end.
The only accounting entries made were to recognise the sale and debtor on 1 July 2016
at £31,600.

The spot exchange rates were:

1 July 2016 €1:£0.79

30 September 2016 €1:£0.76

(5) A stock count was carried out on 30 September 2016 at four of the five warehouses and
stock at those warehouses was correctly valued at £56,800. However, the warehouse
supervisor at the fifth warehouse was ill on 30 September 2016 and therefore stock at
that warehouse was not counted until 2 October 2016.

The count from the fifth warehouse showed stock which had a cost of £8,400 on
2 October 2016. On 1 October 2016 there had been two transactions affecting stock in
the fifth warehouse. The first was a delivery into the warehouse which had a cost of
£2,300, the second was for items leaving the warehouse for a customer order with an
invoice value of £3,600. A standard 20% mark-up is made on all sales. Both of these
transactions have been correctly recorded as a purchase and sale in the year ended
30 September 2017.

(6) Ashgill Ltd’s tax liability for the year ended 30 September 2016 has been correctly
calculated at £29,400. However an underpayment of tax of £7,000 for the previous year
has recently been determined following an HMRC investigation. Neither of these two
amounts has been paid or included in the nominal ledger balances above.

Requirements

1.1 Prepare the profit and loss account and a separate statement of comprehensive income
for Ashgill Ltd for the year ended 30 September 2016 and a balance sheet as at that
date, in a form suitable for publication. (20 marks)

1.2 Set out the journal entries required to reflect the accounting adjustments for land and
buildings (Issue (1)) for the year ended 30 September 2016 and explain the impact of
the revaluation on distributable profits. (4 marks)

1.3 Calculate basic earnings per share for the year ended 30 September 2016. (3 marks)

1.4 Explain the rationale for your treatment of the irredeemable preference shares in
Issue (2) above. (3 marks)

Total: 30 marks

Copyright © ICAEW 2017. All rights reserved. Page 3 of 8

2. The financial controller of Brisco Ltd, a company which manufactures engines for industrial
use, is preparing its consolidated financial statements for the year ended 30 September
2016. There are a number of outstanding issues which need to be resolved before the
consolidated financial statements can be finalised. Figures extracted from the draft
consolidated financial statements are set out below along with the outstanding issues:

£
Profit for the financial year 786,200
Tangible fixed assets 984,500

Outstanding issues:

(1) On 1 October 2015 Brisco Ltd sold an engine, which was made to the customer’s
specification, for £80,000 on an interest-free credit basis. The customer initially paid a
deposit of £20,000 on 1 October 2015 and the remaining balance will be paid on
30 September 2017. The relevant discount rate has been assessed as 7% pa. The
financial controller recognised the full amount, of £80,000, payable by the customer as
income for the year ended 30 September 2016. £20,000 was debited to cash and the
remaining balance of £60,000 was recognised as a debtor.

(2) On 1 October 2015 Brisco Ltd entered into a non-cancellable lease for a machine,
which is used in the manufacturing process and had a list price of £36,000. An initial
deposit of £6,000 was paid on 1 October 2015. Three annual lease payments of
£11,600 are then payable in arrears, the first of which was paid on 30 September 2016.
The financial controller recognised the payments made by Brisco Ltd during the period
as part of “other operating costs”. The machine has an estimated useful life of three
years and Brisco Ltd is responsible for the machine’s insurance and maintenance. The
interest rate implicit in the agreement is 7.8% pa.

(3) On 1 January 2016 Brisco Ltd and two unrelated trading entities entered into an
agreement to each subscribe for 40,000 £1 ordinary shares at par in Cardew Ltd.
Cardew Ltd is a newly-incorporated company with 120,000 £1 ordinary shares in issue.
The three investing entities in Cardew Ltd are entitled to an equal share of its profits and
losses. A contractual agreement was set up at the time of subscribing for the shares
which includes a statement that unanimous consent is required by all three investors for
all key operating decisions.

For the period ended 30 September 2016 Cardew Ltd reported a profit after tax of
£72,000 and paid a dividend of 15p per share on 1 September 2016.

Brisco Ltd recognised the cash investment in current assets. The dividend income
received from Cardew Ltd was recognised in cash and as part of profit for the period.

(4) On 1 January 2016 Brisco Ltd acquired a factory for £420,000 (including land of
£120,000). The factory has an estimated useful life of 25 years and is being depreciated
on a straight-line basis.

Brisco Ltd subsequently applied for a government grant of £100,000 towards the cost of
the factory and this was received on 1 April 2016. As there are no conditions attached to
the grant the financial controller credited the full £100,000 to other income. Depreciation
was recognised in the period based on the full cost of the factory building. Brisco Ltd’s
accounting policy is to recognise government grants based on the accrual model.

Copyright © ICAEW 2017. All rights reserved. Page 4 of 8

Requirements

2.1 Explain the required UK GAAP financial reporting treatment of Issues (1) to (4) above in
the consolidated financial statements for the year ended 30 September 2016, preparing
all relevant calculations. (21 marks)

2.2 Calculate revised figures for Brisco Ltd’s consolidated financial statements for the year
ended 30 September 2016 for profit for the financial year and tangible fixed assets.
(5 marks)

2.3 Describe how the treatment of the government grant in Issue (4) above might differ if it
was recognised in accordance with IFRS. (3 marks)

2.4 The financial position of an entity is the relationship of its assets, liabilities and equity as
of a specific date as presented in the balance sheet. Explain, in relation to finance
leases, how the definitions of an asset, liability, and equity in FRS 102 Section 2
Concepts and Pervasive Principles are applied in Section 20 Leases. (4 marks)

Total: 33 marks

Copyright © ICAEW 2017. All rights reserved. Page 5 of 8

3. On 1 October 2015 Greystoke Ltd had a number of investments, including 85% and 75% of
the ordinary shares of Hincaster Ltd and Nateby Ltd respectively. All other investments held
by Greystoke Ltd at that date were below a 5% shareholding.

On 1 April 2016 Greystoke Ltd sold its investment in Nateby Ltd for £260,000 and acquired a
30% investment in Shap Ltd for £45,000.

The individual profit and loss accounts for the year ended 30 September 2016 for Greystoke
Ltd and its two subsidiary entities are set out below:

Profit and loss accounts for the year ended 30 September 2016

Greystoke Hincaster Nateby

Ltd Ltd Ltd
£ £ £
Turnover 764,200 361,500 255,700
Cost of sales (312,700) (138,650) (96,400)
Gross profit 451,500 222,850 159,300
Operating expenses (96,000) (74,350) (42,300)
Profit from operations 355,500 148,500 117,000
Interest receivable and similar income 356,300 – –
Profit on ordinary activities before tax 711,800 148,500 117,000
Tax on profit on ordinary activities (92,000) (50,000) (35,000)
Profit for the financial year 619,800 98,500 82,000

An extract from the individual draft balance sheets at 30 September 2016 for these three
companies shows:

Greystoke Ltd Hincaster Ltd Nateby Ltd

£ £ £
Fixed assets 976,430 347,200 312,650

Called up share capital (£1 shares) 500,000 300,000 250,000

Additional outstanding information:

(1) Greystoke Ltd acquired its investment in Hincaster Ltd on 1 October 2010 for £310,000.

Goodwill arising on the acquisition of Hincaster Ltd was correctly calculated as £25,100.
The fair values of all of Hincaster Ltd’s assets and liabilities at the date of acquisition
were the same as their carrying amounts, with the exception of a machine which was
estimated to have a fair value of £40,000 in excess of its net book value. The machine
had a remaining estimated useful life of eight years at 1 October 2010. Depreciation on
plant and machinery is recognised in operating expenses.

During the current year Hincaster Ltd paid an ordinary dividend of 35p per share.

Copyright © ICAEW 2017. All rights reserved. Page 6 of 8

(2) Greystoke Ltd acquired its investment in Nateby Ltd a number of years ago for
£215,000. Nateby Ltd’s profit and loss account reserve was £17,200 at acquisition and
£113,400 at 30 September 2016. The fair values of all of Nateby Ltd’s assets and
liabilities at the date of acquisition were the same as their carrying amounts.

Accumulated amortisation of goodwill of £5,840 had been recognised at 30 September

2015 in respect of the acquisition of Nateby Ltd. An additional £730 should be
recognised in the current year up to the date of disposal. Nateby Ltd’s profits accrued
evenly over the year ended 30 September 2016. The only accounting entry made by
Greystoke Ltd in respect of its disposal of Nateby Ltd was to debit cash and credit
interest receivable and similar income with the disposal proceeds.

(3) Shap Ltd’s profit and loss account reserve was £32,400 at acquisition and £39,300 at
30 September 2016.

(4) During July 2016 Greystoke Ltd sold goods to Hincaster Ltd and Shap Ltd for £16,000
and £8,500 respectively at a mark-up of 25%. At 30 September 2016 both Hincaster Ltd
and Shap Ltd still held these goods in their stocks.

(5) Greystoke Ltd has estimated the useful life of the goodwill arising on the acquisition of
Hincaster Ltd at ten years. Greystoke Ltd amortises goodwill on a straight-line basis.

Requirements

3.1 Prepare, for Greystoke Ltd:

 a consolidated profit and loss account for the year ended 30 September 2016; and

 an extract from the consolidated balance sheet as at that date, showing total fixed
assets.

You should assume that the disposal of Nateby Ltd constitutes a discontinued operation
in accordance with FRS 102 Section 5 Statement of Comprehensive Income and
Income Statement. (24 marks)

3.2 Describe any differences between UK GAAP and IFRS in respect of the financial
reporting treatment of the disposal of Nateby Ltd. (2 marks)

Total: 26 marks

PLEASE TURN OVER FOR QUESTION 4

Copyright © ICAEW 2017. All rights reserved. Page 7 of 8

4. Fletch is an ICAEW Chartered Accountant on secondment to Tebay Ltd, helping to prepare
the financial statements for the year ended 30 September 2016. There are a number of
outstanding issues which need to be resolved. The secondment is for six months whilst the
financial controller is on maternity leave.

Fletch is preparing the missing figures for the statement of cash flows for the year ended
30 September 2016. An extract from Tebay Ltd’s draft financial statements for the year
ended 30 September 2016 show:
2016 2015
£ £
Fixed assets
Tangible assets 631,600 674,300

Capital and reserves

Called up share capital (£1 shares) 531,000 400,000
Share premium account 40,000 40,000
Profit and loss account 153,600 194,600

 Tebay Ltd’s profit for the financial year ended 30 September 2016 was £121,500 and
the company paid an interim dividend in May 2016.

 The movement on the tangible fixed assets account showed that new equipment was
acquired on 1 April 2016. The correctly calculated depreciation charge for the year
ended 30 September 2016 was £72,300. A machine with a net book value of £21,700
was disposed of during the period with a profit of £2,300 being recognised on its
disposal.

 Tebay Ltd made two issues of ordinary shares during the year.

o On 1 December 2015 there was a bonus issue. Tebay Ltd has a policy of utilising the
share premium account as far as possible, although in error the full amount was
debited to the profit and loss account reserve. The correct number of shares was
credited to the share capital account.
o On 1 June 2016 an issue of 60,000 ordinary shares was made at a market price of
£1.35 per share. The full cash proceeds were credited to the share capital account.

Requirements

4.1 Prepare an extract from Tebay Ltd’s statement of cash flows for the year ended
30 September 2016, showing:

 Cash flows from investing activities; and

 Cash flows from financing activities. (6 marks)

4.2 Explain how the five fundamental principles set out in ICAEW’s Code of Ethics relate to
Fletch’s secondment to Tebay Ltd. (5 marks)

Total: 11 marks

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