Q1: The following information relates to Entrepreneurial Enterprises plc.
(i) Purchased a brand in 1995 for £2 million. The directors believe the brand is
now worth £7 million.
(ii) Acquired a patent in January 2007, with ten years left to run, for £350,000.
(iii) Bought a fishing quota to catch 1,000 tonnes of fish for £1,000 per tonne on
1 January 2012. The market value for the quota, for which there is an active
market, was £1,400 per tonne on 31 December 2012.
(iv) A major advertising campaign was carried out in the autumn of 2012. The
directors believe the main benefits of this will arise in 2013.
(v) The accounting policy of the company in respect of intangible assets is as
On a straight-line basis over:
Quota 20 years
Brands 20 years
Patents, licences, etc. remaining legal life when acquired
? Intangible assets for which there is an active market are revalued
Explain how each of the above items should be dealt with in the accounts of
Entrepreneurial Enterprises plc for the year to 31 December 2012, and prepare
the journal entries to show the adjustments for each of the items in preparing the
accounts to 31 December 2012.
Purchases of a certain product during July were:
July 1 100 units @ £10.00
12 100 units @ £9.80
15 50 units @ £9.60
20 100 units @ £9.40
Units sold during the month were:
July 10 80 units
14 100 units
30 90 units
Assuming no opening inventories:
a) Determine cost of goods sold for July under three different valuation methods
(FIFO, LIFO and WAC/AVCO).
b) Discuss advantages and disadvantages of each method.
(Total 20 marks)
Q3: Benzo Ltd commenced two projects on 1 January 2014. The following details
relate to them as at 31 December 2014:
Contract 1 Contract 2
Contract price 16,000 36,000
Progress billings invoiced 6,300 21,400
Progress billings received 4,850 20,000
Costs incurred to date 4,300 25,000
Estimated costs to complete 10,100 13,000
Benzo Ltd uses the percentage completion method based on the proportion of costs
incurred to account for construction contracts. The policy of Benzo Ltd is that project
outcomes can only be reliably measured when at least 40% complete.
Prepare extracts from the Income Statement for the year ended 31 December 2014
and the Statement of Financial Position as at that date for the above contracts in
accordance with IAS 11 ‘Construction Contracts’.
Q4: Ditcot Ltd entered into a lease agreement with Samson Ltd on 1 January 2014.
The following information is available:
The leased asset was purchased by Samson Ltd for £190,000 on 1 January 2014. It
has a useful economic life of four years. Ditcot Ltd will pay Samson Ltd four annual
installments of £60,000 each, payable at the end of each financial year. The cost of
capital for Ditcot Ltd is 7% per annum.
The accounting year-end for Ditcot Ltd is 31 December. For the purpose of allocating
interest from finance leases, Ditcot Ltd uses the sum of the digits method.
a. Show how the above lease agreement should be accounted for, in
accordance with IFRS, in Income Statement and Statement of Financial
Position of Ditcot ltd over the period of the lease agreement. Show Statement
of Financial Position extracts and Income Statement entries for the year
ending 31 Dec 2014. Ignore taxation and show your answers to the nearest £.
b. State the factors that indicate that a lease is a finance lease in accordance
with IAS 17 – Leases.
(Total 20 marks)
Q5: As the financial director of Bellrock plc, you have the following to consider in the
accounts for the year to 31 December 2014.
(i) A customer has made a claim against Bellrock for defective goods sold during the
current year. The claim is nearing settlement and Bellrock’s legal advisers think it is
probable that a sum of £300,000 will be paid by Bellrock in settlement, in addition to
all legal costs.
(ii) Bellrock sells goods with a warranty. If minor defects arose in all products sold,
repair costs of £2 million would arise. If major defects arose in all products sold,
repair costs of £8 million would arise. Bellrock’s experience is that 20% of sales lead
to claims for minor defects and 5% lead to claims for major defects.
(iii) In September 2014 Bellrock relocated to new office premises. The lease on the
old premises runs to 31 December 2016 at a rent of £180,000 per year. Bellrock has
been unable to find a tenant to sub-let the old office premises.
(iv) Bellrock has a provision of £200,000 brought forward at 1 January 2014 against
a legal claim. During the year to 31 December 2014, Bellrock won this court action
and therefore the provision is no longer needed. However, environmental penalties
of some £200,000 have been threatened by the Health & Safety Executive and it is
probable that this cost will have to be paid. The directors have therefore proposed
that the provision be carried forward.
(v) In October 2014, a member of staff was injured while demonstrating a mountain
bicycle. The Health & Safety Executive has alleged that the company was at fault.
Bellrock Plc’s solicitors believe the company will lose this case brought against it.
Explain, quantifying your answer where possible, how the above should be
accounted for in accordance with IAS 37.
(Total 18 marks)
Q6: A company prepares financial statements to 31 December each year. The
following events occurred after 31 December 2013 but before the financial
statements for the year to 31 December 2013 were authorised for issue:
(a) Inventory held at 31 December 2013 was sold to a customer.
(b) The company made a major investment in plant and equipment.
(c) The company made a take-over bid for another company.
(d) A customer who owed an amount of money to the company on 31 December
2013 was declared bankrupt.
(e) The company announced a major restructuring plan.
(f) It was discovered that cash shown as an asset in the statement of financial
position at 31 December 2013 had been stolen on 28 December 2013.
(g) It was discovered that a item of equipment shown as an asset in the statement of
financial position at 31 December 2013 had been stolen on 12 January 2014.
Classify each of these events as either an adjusting event or a non-adjusting
event and explain how each event should be dealt with in the company’s financial
statements for the year to 31 December 2013. It may be assumed that all of the
events are material.
(Total 12 marks)
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