Acra Exam Solution

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Fundamentals Level – Skills Module, Paper F7 (SGP) Financial Reporting (Singapore) 1 (a) Cost of control in Sardonic: Consideration Shares (18,000 x 2/3 x $5·75) Deferred payment (18,000 x 2·42/1·21 (see below)) Less Equity shares Pre-acquisition reserves: At 1 April 2007 To date of acquisition (13,500 x 4/12) Fair value adjustments (4,100 + 2,400) $’000

June 2008 Answers $’000 69,000 36,000 –––––––– 105,000 24,000 69,000 4,500 6,500 –––––––– 104,000 x 75%

Goodwill $1 compounded for two years at 10% would be worth $1·21. The acquisition of 18 million out of a total of 24 million equity shares is a 75% interest. (b) Patronic Group Consolidated income statement for the year ended 31 March 2008 Revenue (150,000 + (78,000 x 8/12) – (1,250 x 8 months intra group)) Cost of sales (w (i)) Gross profit Distribution costs (7,400 + (3,000 x 8/12)) Administrative expenses (12,500 + (6,000 x 8/12)) Finance costs (w (ii)) Impairment of goodwill Share of profit from associate (6,000 x 30%) Profit before tax Income tax expense (10,400 + (3,600 x 8/12)) Profit for the year Attributable to: Equity holders of the parent Minority interest (w (iii))

(78,000) –––––––– 27,000 ––––––––

$’000 192,000 (119,100) ––––––––– 72,900 (9,400) (16,500) (5,000) (2,000) 1,800 ––––––––– 41,800 (12,800) ––––––––– 29,000 ––––––––– 26,900 2,100 ––––––––– 29,000 –––––––––

(c)

An associate is defined by FRS 28 Investments in Associates as an investment over which an investor has significant influence. There are several indicators of significant influence, but the most important are usually considered to be a holding of 20% or more of the voting shares and board representation. Therefore it was reasonable to assume that the investment in Acerbic (at 31 March 2008) represented an associate and was correctly accounted for under the equity accounting method. The current position (from May 2008) is that although Patronic still owns 30% of Acerbic’s shares, Acerbic has become a subsidiary of Spekulate as it has acquired 60% of Acerbic’s shares. Acerbic is now under the control of Spekulate (part of the definition of being a subsidiary), therefore it is difficult to see how Patronic can now exert significant influence over Acerbic. The fact that Patronic has lost its seat on Acerbic’s board seems to reinforce this point. In these circumstances the investment in Acerbic falls to be treated under FRS 39 Financial Instruments: Recognition and Measurement. It will cease to be equity accounted from the date of loss of significant influence. Its carrying amount at that date will be its initial recognition value under FRS 39 and thereafter it will be carried at fair value. Workings (i) Cost of sales Patronic Sardonic (51,000 x 8/12) Intra group purchases (1,250 x 8 months) Additional depreciation: plant (2,400/ 4 years x 8/12) property (per question) Unrealised profit in inventories (3,000 x 20/120) $’000 $’000 94,000 34,000 (10,000) 600 500 –––––––– 119,100 ––––––––

400 200 ––––

Note: for both sales revenues and cost of sales, only the post acquisition intra group trading should be eliminated.

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(ii)

Finance costs Patronic per question Unwinding interest – deferred consideration (36,000 x 10% x 8/12) Sardonic (900 x 8/12)

$’000 2,000 2,400 600 –––––– 5,000 –––––– 9,000 (600) –––––– 8,400 x 25% = 2,100

(iii) Minority interest Sardonic’s post acquisition profit (13,500 x 8/12) Less post acquisition additional depreciation (w (i))

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(a) Retained profit for period per question Dividends paid (w (i)) Draft profit for year ended 31 March 2008 Discovery of fraud (w (ii)) Goods on sale or return (w (iii)) Depreciation (w (iv)) – buildings (165,000/15 years) – plant (180,500 x 20%) Increase in investments ((12,500 x 1,296/1,200) – 12,500) Provision for income tax Increase in deferred tax (w (v)) Recalculated profit for year ended 31 March 2008 (b)

$’000

$’000 96,700 15,500 –––––––– 112,200 (2,500) (600) (47,100) 1,000...
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