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Copyright © ICAEW 2023. All rights reserved. Page 1 of 9

Question 1

Kempton Ltd manufactures solar powered products and is currently preparing its financial
statements for the year ended 31 December 2022. The following balances have been
extracted from the company’s cloud-based nominal ledger at 31 December 2022.

Note £
Revenue 986,700
Administrative expenses 231,175
Purchases 596,000
Inventories at 31 December 2021 35,600
Trade receivables (1) 23,900
Trade payables 39,300
Income from government grant (2) 120,000
Land and buildings (4)
Cost (land £200,000) 575,000
Accumulated depreciation at 31 December 2021 112,500
Plant and equipment (3), (4), (5)
Cost 383,525
Accumulated depreciation at 31 December 2021 109,500
Retained earnings at 31 December 2021 131,000
Ordinary share capital (£1 shares) 350,000
Cash at bank (debit balance) 3,800

Additional information

(1) In January 2023 the trade receivables balances were reviewed and it was discovered that
a number of balances were more than four months overdue. These balances were
investigated and it was concluded that £2,700 of trade receivables were unlikely to be
recovered.

(2) On 1 January 2022 Kempton Ltd received a government grant of £120,000 towards the
cost of a new laser cutting machine for its solar panels. The machine was acquired on
1 January 2022 for £150,000, which is included in plant and equipment above, and has a 10-
year useful life. The machine is to be depreciated on a straight-line basis.

The government grant was recognised as income on receipt as there were no conditions
attached to the grant. However, Kempton Ltd has an accounting policy of netting-off
government grants.

(3) On 1 January 2022 Kempton Ltd entered into a four-year contract for the right to use an
electroluminescence (EL) testing machine, which checks for defects in solar glass cells. The
contract constituted a lease under IFRS 16, Leases. The EL testing machine is estimated to
have a useful life to Kempton Ltd of four years. The present value of the lease payments not
paid at the start of the lease was £15,500.

A payment of £4,525 is due on 31 December each year. The first payment was made on 31
December 2022, debiting plant and equipment (cost) and crediting cash. No other accounting
entries have been made in relation to the contract. The interest rate implicit in the lease
contract is 6.5% pa.

Copyright © ICAEW 2023. All rights reserved. Page 2 of 9

(4) Depreciation for the year ended 31 December 2022 has not yet been recognised.
Kempton Ltd depreciates buildings over 40 years on a straight-line basis and plant and
equipment at 15% pa on a reducing balance basis, unless stated otherwise.

All property, plant and equipment is measured using the cost model. All costs associated with
property, plant and equipment are recognised in cost of sales.

(5) On 31 December 2022, the directors decided to sell a machine which originally cost
Kempton Ltd £20,000 on 1 January 2019. No adjustments have been made to reflect this
decision and the machine meets the ‘held for sale’ criteria of IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations. The machine is expected to sell for £9,000 with
estimated selling costs of £400.

(6) Inventories at 31 December 2022 were correctly valued at £32,600.

(7) Kempton Ltd’s income tax liability for the year ended 31 December 2022 has been
appropriately estimated at £24,000.

Requirements

1. Prepare for Kempton Ltd, in a form suitable for publication, a statement of profit or loss
for the year ended 31 December 2022 and a statement of financial position as at that
date. (21 marks)

2. Describe the differences between IFRS® Standards and UK GAAP in respect of the
financial reporting treatment of government grants and non-current assets held for sale.
(4 marks)

3. (a) Identify and explain the inherent limitations of financial statements that may reduce
their usefulness to users.

(b) In relation to financial statements, explain the individual information needs for:

• employees of the organisation; and

• customers.
(5 marks)

Total: 30 marks

Copyright © ICAEW 2023. All rights reserved. Page 3 of 9

Question 2

Longhorn Ltd is a UK company which manufactures robotics equipment. Phoenix Tatton, the
financial controller, has prepared the draft consolidated financial statements for the year
ended 31 December 2022. You assist Phoenix. Phoenix has prepared notes on outstanding
issues (1) to (4) below to allow you to finalise these financial statements.

Phoenix is leaving Longhorn Ltd for a new job as a finance director in a pharmaceutical
company in two weeks’ time. You have noticed that Phoenix has been taking long lunch
breaks and going home early, leaving you with more work to do. You have had to work late
every night for the last two weeks to try to complete all of the work needed to finalise the
financial statements ahead of next week’s board meeting. Both you and Phoenix are ICAEW
Chartered Accountants.

Longhorn Ltd’s finance director, Isidore Valley, noticed that you were working late on the
financial statements. Isidore mentioned that the board needs the debt/equity ratio (total
debt/total equity) to be below 0.5 as they are hoping to finalise a loan following publication of
the financial statements. Isidore thanked you for your work on the financial statements and
mentioned to you that the financial controller role remains vacant and that you would be
considered for the role if you impressed the board.

The draft consolidated financial statements for the year ended 31 December 2022 show profit
for the year of £284,300, total equity of £623,400 and total debt of £300,000.

Outstanding issues

(1) On 1 January 2022 Longhorn Ltd sold a mobile robotics device for £90,000 on an interest-
free credit basis. The robotics device was delivered to the customer on 1 January 2022 and a
deposit of £16,000 was received on that date. The remaining balance is due to be received
on 31 December 2023. The relevant discount rate is 7% pa. Phoenix recognised the full
amount of £90,000 as revenue for the year ended 31 December 2022. £16,000 was debited
to cash and the remaining balance of £74,000 was recognised as a receivable.

(2) On 29 December 2022 equipment used in the manufacture of mobile robotics devices
developed a systems fault. The fault required the software engineer to carry out maintenance
work before the equipment can be used again.

On 30 December 2022 the software engineer successfully carried out the maintenance work
at a cost of £2,000 which has been debited to a separate account within property, plant and
equipment. An impairment review was carried out on 31 December 2022. On that date the
equipment’s fair value was assessed as £15,000 with selling costs of £200 and its value in
use as £16,500.

The equipment originally cost £50,000 on 1 January 2018 and had an estimated useful life of
eight years at that date. Depreciation is charged on a straight-line basis.

(3) On 1 April 2022 Longhorn Ltd purchased 35% of Garstang Ltd’s ordinary shares, which
gave Longhorn Ltd significant influence over Garstang Ltd. Longhorn Ltd paid £49,000 for the
shares.

Garstang Ltd made a profit for the year ended 31 December 2022 of £132,000 which arose
evenly over the year. During December 2022 Longhorn Ltd made sales of £6,000 to

Copyright © ICAEW 2023. All rights reserved. Page 4 of 9

Garstang Ltd at a gross margin of 20%. Garstang Ltd still held these goods in inventories at
31 December 2022 although the invoice had been paid.

Longhorn Ltd’s draft consolidated financial statements for the year ended 31 December 2022
show Garstang Ltd as an investment, at cost of £49,000, within non-current assets.
Longhorn Ltd also recognised £6,000 in revenue from the sale of the goods to Garstang Ltd.

(4) On 1 April 2022 Longhorn Ltd repurchased 150,000 of its £1 ordinary shares for £1.45
each. The only accounting entries made were to credit cash and debit investments.

Requirements

1. Explain the required IFRS® Standards financial reporting treatment of the outstanding
issues (1) to (4) above in Longhorn Ltd’s consolidated financial statements for the year
ended 31 December 2022, preparing all relevant calculations. (25 marks)

2. Calculate revised figures for inclusion in Longhorn Ltd’s consolidated financial

statements for:

• profit for the year ended 31 December 2022; and

• equity as that date.
(3 marks)

3. Discuss the ethical issues arising from the above scenario for you and Phoenix and set
out the actions you should take to address them. (5 marks)

Total: 33 marks

Copyright © ICAEW 2023. All rights reserved. Page 5 of 9

Question 3

As assistant to Pendine Ltd’s financial controller, you are helping with the preparation of the
financial statements for the year ended 31 December 2022. A new member of the accounts
department has prepared a draft statement of cash flows. The financial controller has given
the draft statement to you along with some additional information.

Draft statement of cash flows for year ended 31 December 2022

Notes £ £
Cash flows from operating activities
Cash generated from operations 213,600
Interest paid (7,665)
Income tax paid (6) (44,900)
Net cash from operating activities 161,035

Cash flows from investing activities

Purchase of property, plant and equipment (2) (169,700)
Net cash used in investing activities (169,700)

Cash flows from financing activities

Proceeds from issue of ordinary shares (3) 135,000
Dividends paid (5) (56,825)
Proceeds from issue of bonds (7) 92,335
Net cash from financing activities 170,510
Net increase in cash and cash equivalents 161,845
Cash and cash equivalents at 1 January 2022 11,330
Cash and cash equivalents at 31 December 2022 (4) 173,175

Additional information

(1) Profit for the year ended 31 December 2022 was correctly calculated as £141,175.

(2) The figure for the purchase of property, plant and equipment is the increase between the
opening balance and the closing balance for property, plant and equipment from the
statement of financial position.

The following transactions took place during the year in respect of property, plant and
equipment. These were correctly accounted for in the statements of financial position and
profit or loss. However, no adjustments were made for these items in the reconciliation of
profit before tax to cash generated from operations.

• Depreciation was £58,900.

• A machine was sold for cash of £15,000, making a loss on disposal of £7,200. There were
no other disposals.

• A number of acquisitions were made for cash.

• Equipment with a carrying amount of £9,200 was scrapped.

Copyright © ICAEW 2023. All rights reserved. Page 6 of 9

(3) The figure for proceeds from issue of ordinary shares is the increase from the opening
balances to the closing balances on ordinary share capital and share premium from the
statement of financial position, which correctly reflects the shares issued during the year.
There were 200,000 £1 ordinary shares in issue at 1 January 2022.

There were three ordinary share issues during the year:

• On 1 March 2022 a 1-for-5 bonus issue out of retained earnings.

• On 1 July 2022 an issue at market price.

• On 1 October 2022 an issue of 10,000 shares as consideration for the acquisition of an

investment. The market value of Pendine Ltd’s shares at 1 October 2022 was £1.50 per
share.

(4) The opening figure for cash and cash equivalents was correctly taken from the statement
of financial position at 31 December 2021. The closing figure at 31 December 2022 shown
above is the total arrived at by adding up the amounts in the draft statement of cash flows.
The closing figure should be £32,100.

(5) The figure for dividends paid is the decrease from the opening balance to the closing
balance on retained earnings from the statement of financial position.

(6) The figure for income tax paid has been taken from the statement of profit or loss. The
only income tax paid during the period was the balance due from the previous year of
£29,800.

(7) On 1 January 2022 bonds with a nominal value of £100,000 were issued for £90,170. The
coupon interest rate is 5.5% pa and the effective interest rate is 8.5% pa. Interest is paid
annually in arrears, with the first payment being made on 31 December 2022. Redemption is
at par on 31 December 2025.

The figures shown in the draft statement of cash flows in respect of the bonds are the closing
carrying amount shown in the statement of financial position of £92,335 and the finance costs
of £7,665 shown in the statement of profit or loss.

Requirement

Prepare a revised statement of cash flows for Pendine Ltd for the year ended 31 December
2022.
Total: 13 marks

Copyright © ICAEW 2023. All rights reserved. Page 7 of 9

Question 4

At 1 January 2022 Oultone Ltd had an investment in a subsidiary, Dorny Ltd, as well as a
number of other insignificant investments. On 1 July 2022 Oultone Ltd acquired 75% of the
ordinary share capital of Wimpole Ltd.

The draft summarised statements of financial position of Oultone Ltd, Dorny Ltd and Wimpole
Ltd as at 31 December 2022 are shown below.

Oultone Ltd Dorny Ltd Wimpole Ltd

ASSETS £ £ £
Non-current assets
Property, plant and equipment 580,400 275,000 324,000
Investments 365,000 – –
945,400 275,000 324,000
Current assets
Inventories 95,400 25,400 36,750
Trade and other receivables 89,600 38,200 28,550
Cash and cash equivalents 12,900 7,900 4,600
197,900 71,500 69,900
Total assets 1,143,300 346,500 393,900

EQUITY AND LIABILITIES

Equity
Ordinary share capital (£1 shares) 550,000 125,000 240,000
Share premium account 275,000 50,000 –
Retained earnings 148,700 96,500 98,280
973,700 271,500 338,280
Current liabilities
Trade and other payables 111,800 42,500 31,620
Income tax 57,800 32,500 24,000
169,600 75,000 55,620
Total equity and liabilities 1,143,300 346,500 393,900

Additional information

Dorny Ltd Wimpole Ltd

Acquisition date 1 January 2019 1 July 2022
Percentage holding acquired 80% 75%
Cash consideration (note (2)) £235,000 £120,000
Retained earnings at acquisition date £28,450 £67,500
Measurement of non-controlling interests Proportionate Fair value
Cumulative goodwill impairment losses to 31 £4,500 –
December 2022

(1) The fair values of Dorny Ltd’s identifiable assets acquired and liabilities assumed at the
acquisition date were equal to their carrying amounts with the exception of an internally-
generated brand which was not recognised in Dorny Ltd’s own financial statements.
However, at 1 January 2019, the date that Oultone Ltd acquired Dorny Ltd, an independent
expert valued this brand at £60,000, with a remaining useful life of five years.

Copyright © ICAEW 2023. All rights reserved. Page 8 of 9

(2) The consideration for the acquisition of Wimpole Ltd was made up of the following:

• Cash of £120,000 paid on 1 July 2022.

• A further cash payment of £100,000 payable on 31 December 2023 if Wimpole Ltd

meets a certain profit target. On 1 July 2022 the probability of that target being met
was such that the fair value of the possible cash payment was £85,000. At 31
December 2022 the probability had risen such that the fair value of the possible cash
payment was estimated to be £92,000.

• 20,000 ordinary shares in Oultone Ltd. The market value of one ordinary share in
Oultone Ltd on 1 July 2022 was £1.60. This had risen to £1.65 by 31 December 2022.

Oultone Ltd debited the £120,000 cash paid to investments but has not yet accounted for the
other elements of the consideration.

(3) The fair values of Wimpole Ltd’s identifiable assets acquired and liabilities assumed at the
acquisition date were equal to their carrying amounts.

The fair value of the non-controlling interest in Wimpole Ltd on 1 July 2022 was £91,000.

(4) On 31 December 2022 Wimpole Ltd held inventories purchased in December 2022 from
Dorny Ltd. Dorny Ltd sold these goods to Wimpole Ltd for £23,000 at a mark-up of 15%. The
invoice was unpaid at 31 December 2022.

Requirement

Prepare the consolidated statement of financial position of Oultone Ltd as at 31 December

2022.
Total: 24 marks

Copyright © ICAEW 2023. All rights reserved. Page 9 of 9