Q1 Q2 December 2020

December 2020 questions
Question 1
The following trial balance at 30 June 2020 has been extracted from the cloud-based accounting
system used by Sentinel Ltd.
Notes £ £
Sales (1) 3,523,500
Purchases (1) 3,256,480
Administrative expenses (1) 896,420
Distribution costs (1) 206,850
Profit on disposal of manufacturing division’s assets (1) 25,400
Land and buildings (2)
Cost (land £200,000) 1,850,000
Accumulated depreciation at 30 June 2020 693,000
Plant and machinery (1), (2)
Cost 560,800
Accumulated depreciation at 30 June 2020 420,300
Redeemable preference shares (3) 50,000
Retained earnings at 30 June 2019 903,960
Ordinary share capital (£1 shares) (3) 660,000
Cash at bank 560
Inventories at 30 June 2019 101,300
Trade and other receivables 123,700
Trade and other payables 722,300
Income tax (4) 2,350 –––––––
6,998,460 6,998,460
Notes
1 Due to difficult trading conditions during the year, Sentinel Ltd made the decision to close its
manufacturing division. The division was classified as held for sale on 31 December 2019 when it
met the definition of a discontinued operation in accordance with IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations. The division was closed on 31 May 2020.
The results of the division, included in the appropriate figures in the trial balance above, for the
year ended 30 June 2020 were as follows:
£
Sales 1,230,500
Cost of sales 1,564,200
Administrative expenses 156,800
Distribution costs 78,350
A total profit of £25,400 was realised on the disposal of the manufacturing division’s assets.
2 Sentinel Ltd previously measured its property, plant and equipment under the cost model.
However, on 1 July 2019 the company decided to adopt the revaluation model for its freehold
December 2020 questions 1

land and buildings. Freehold land and buildings were valued at £450,000 and £2,100,000
respectively on that date. The buildings were estimated to have an unchanged remaining useful
life of 30 years (out of a total useful life of 50 years), at 1 July 2019.
Sentinel Ltd wishes to make an annual transfer between the revaluation surplus and retained
earnings in relation to the revaluation of freehold buildings.
All depreciation on property, plant and equipment is calculated on a straight-line basis.
Depreciation for the year ended 30 June 2020 on assets held at that date has been correctly
calculated on the cost figures included in the trial balance.
3 On 1 July 2019 Sentinel Ltd made the following share issues:
• 50,000 4% £1 redeemable preference shares at par. These shares are redeemable on 30 June
2026 at a premium. The effective interest rate is 4.8% pa.
• A 1 for 10 rights issue of ordinary shares at par. The proceeds were debited to cash at bank
and credited to ordinary share capital.
An ordinary dividend of 5 pence per share was paid on 30 April 2020. The dividend due on the
redeemable preference shares was paid on 30 June 2020. Both dividends were debited to
administrative expenses and credited to cash at bank.
4 The income tax figure in the trial balance relates to an underprovision for income tax for the year
ended 30 June 2019. The income tax refund due for the year ended 30 June 2020 has been
appropriately estimated at £79,500.
5 Inventories on 30 June 2020 have been correctly valued at £98,200.
Requirements
1 Prepare the following for Sentinel Ltd for inclusion in the published financial statements for the
year ended 30 June 2020:
• a single statement of profit or loss and other comprehensive income;
• a statement of financial position; and
• a statement of changes in equity (a total column is not required).
(23 marks)
2 Explain how the distributable profits of Sentinel Ltd at 30 June 2020 should be calculated,
clearly identifying which components of equity are distributable and stating the balance of
distributable profits at that date.
(3 marks)
3 Explain the going concern concept and the impact on Sentinel Ltd’s published statement of
financial position as at 30 June 2020 if the going concern concept cannot be adopted.
(5 marks)
4 Describe the differences between IFRS Standards and UK GAAP in respect of the treatment
and presentation of held for sale assets and discontinued operations.
(3 marks)
Total: 34 marks
Question 2
You are the financial controller of Thalia Ltd, a company owned by the Narcissi family. Relationships
between the family members have recently broken down. The finance director, Sally Narcissi, has
prepared draft financial statements for the year ended 30 June 2020. Sally has called you into her
office and said:
I am away from the office for the next couple of weeks on urgent family business, so I need you
to finalise the draft financial statements ready for our next board meeting. As you know I am
planning to sell my shares to my brother as soon as we have agreed a fair price. The price will no
doubt be influenced by the financial position and performance shown in the 2020 accounts. So I
am keen that the accounts look as good as possible. If you can help me with this then I will
recommend you as my successor as I will no longer be involved with the company once I have
sold my shares.
Financial Accounting and Reporting − IFRS Standards 2

Both you and Sally are ICAEW Chartered Accountants.
On reviewing the draft financial statements, you have discovered the following issues:
(1) Thalia Ltd has historically depreciated general plant and equipment on a reducing balance
basis, using a rate of 20%. In the draft financial statements Sally has changed to a straight-line
basis over a total useful life of five years.
The draft statement of changes in equity shows a prior period adjustment to reflect this change.
This has had the effect of decreasing the carrying amount of plant and equipment and retained
earnings at 1 July 2019 by £450,600. Sally then charged depreciation for the year ended 30
June 2020 based on one-fifth of the revised carrying amount, which gave a depreciation charge
for the year of £504,120. All of Thalia Ltd’s general plant and equipment was purchased on 1
July 2017.
(2) On 1 December 2019 Thalia Ltd received a government grant of £300,000, representing 50% of
the cost of a specialised asset, which was acquired on 1 October 2019. The asset has a four-year
useful life and has been correctly depreciated in the draft financial statements on a straight-line
basis.
Thalia Ltd’s stated accounting policy is to recognise government grants using the deferred
income method. Sally has credited the full grant of £300,000 to income in the draft statement of
profit or loss for the year ended 30 June 2020 on the grounds that she does not expect the grant
will have to be repaid, as all conditions attached to the grant have been met.
(3) In May 2020 legal proceedings commenced against Thalia Ltd’s catering division. The action was
taken by 10 people who were taken ill after eating food at an event in March 2020 catered for by
Thalia Ltd. Thalia Ltd’s lawyers have advised that it is unlikely that the company will be found
liable. The case is not due to come to court until after the financial statements for the year ended
30 June 2020 are published.
Sally has not recognised or disclosed anything in the draft financial statements in respect of this
matter.
Requirements
1 Explain the financial reporting treatment required by IFRS Standards of issues (1) to (3) in the
financial statements of Thalia Ltd for the year ended 30 June 2020. You should prepare all
relevant calculations.
(14 marks)
2 Discuss the ethical issues arising for yourself and Sally and set out the steps that you should
take to address them.
(5 marks)
Total: 19 marks
December 2020 questions 3

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December 2020 questions

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Financial Accounting and Reporting − IFRS Standards 2

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