ACCA

Paper F7
Financial Reporting
Revision Mock Examination
March 2017
Question Paper

Time Allowed 3 hours 15 Reading, planning and

minutes writing

All questions are compulsory and MUST be attempted

This paper is divided into two sections:
Section A: ALL 15 questions are compulsory and MUST be
attempted.
Section B: ALL 15 questions are compulsory and MUST be
attempted.
Section C: BOTH questions are compulsory and MUST be
attempted.
Do NOT open this paper until instructed by the supervisor.
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 This is a blank page.

Section A starts on page 4.

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Section A – ALL 15 questions are compulsory and MUST be
attempted.

Each question is worth 2 marks.

1. AB sells computer equipment with a two-year service agreement for a total of $3,000
on 1 October 2014. The cost of providing the service guarantee is $200 per annum and
AB usually charges a 25% mark-up on cost when selling the service separately.

How much revenue should be recognised in the financial statements for the
year ended 31 March 2015?

A. $2,500
B. $2,625
C. $2,750
D. $3,000

2. On 1 January 2015, an entity issued a debt instrument with a coupon rate of 3.5% at
a par value of $6,000,000. The directly attributable costs of issue were $120,000. The
debt instrument is repayable of 31 December 2021 at a premium of $1,100,000.

What is the total amount of the finance cost associated with the debt
instrument?

A. $1,470,000

B. $1,590,000

C. $2,570,000

D. $2,690,000

3. GD enters into a four-year operating lease of a motor vehicle at $1,500 per annum
payable at the end of the year. The lease commenced on 1 December 2014 when GD
negotiated a one-year rent-free period.

Calculate the amounts to be recognised in the financial statements for the

year ended 31 March 2015.

Statement of financial Statement of profit

position – accrual or loss – expense
A. $1,125 $1,125
B. $nil $nil
C. $500 $500
D. $375 $375

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4. TD owns an investment property that cost $500,000 on 1 April 2013. Its fair value on
31 March 2014 was $600,000 and $550,000 on 31 March 2015. TD uses the fair value
model to account for its investment properties.

What amounts would appear in the financial statement for the year ended 31
March 2015?

Statement of financial Statement of profit

position – investment or loss
property
A. $550,000 $50,000 loss
B. $600,000 $100,000 gain
C. $550,000 $50,000 gain
D. $600,000 $100,000 loss

5. AM has a profit for the year ended 31 March 2015 of $500,000 and there were
$100,000 10% irredeemable preference shares in issue during the year. AM had
400,000 equity shares in issue at 1 April 2014 and made a 1-for-2 bonus issue on 1
May 2014.

Calculate the basic EPS figure for the year ended 31 March 2015.

A. 83.3 cents per share

B. 62.5 cents per share
C. 81.7 cents per share
D. 61.3 cents per share

6. JR has a deferred tax liability at 31 March 2014 of $175,000. At 31 March 2015 the
carrying value of its assets and liabilities was $800,000 and their tax base was
$700,000. The tax rate enacted at the year-end was 20%.

What is the effect on profit or loss for the year ended 31 March 2015?

A. $275,000 gain
B. $195,000 gain
C. $155,000 gain
D. $75,000 gain

7. TD acquired a 4% $500,000 debenture at a discount of 5% on 1 April 2014, incurring

directly attributable transaction costs of $5,000. The effective rate of interest on the
debenture is 7%.

What amounts should be shown in the statement of financial position of TD

at 31 March 2015?

A. $482,900
B. $489,250
C. $513,250
D. $515,000

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8. JD, a parent company, acquired AS, an unincorporated entity, for $1.8 million. A fair
value exercise was performed on AS's assets and liabilities and showed at the date of
purchase:

$'000
Property, plant and equipment 3,000
Identifiable intangible asset 500
Inventory 300
Trade receivables less payables 200
4,000

How should the purchase of AS be reflected in JD's consolidated statement of

financial position?

A. Record the net assets at their values shown above and credit profit or loss with
$2.2 million
B. Record the net assets at their values shown above and credit JD's consolidated
goodwill with $2.2 million
C. Write off the intangible asset ($500,000), record the remaining net assets at their
values shown above and credit profit or loss with $1,700,000
D. Record the purchase as a financial asset investment at $1.8 million

9. TK owns 100% of the share capital of the following companies. The directors are unsure
whether the investments should be consolidated.

In which of the following circumstances would the investment not be

consolidated?

A. TK has decided to sell its investment in Omega as it is loss-making; the directors

believe its exclusion from consolidation would assist users in predicting the group's
future profits
B. Kappa is a bank and its activity is so different from the engineering activities of the
rest of the group that it would be meaningless to consolidate it
C. Rho is located in a country where local accounting standards are compulsory and
these are not compatible with IFRS used by the rest of the group
D. Theta is located in a country where a military coup has taken place and TK has lost
control of the investment for the foreseeable future

10. Which of the following are NOT examples of biological assets as per IAS 41
Agriculture?

A. Trees in a plantation forest

B. Plants for harvest
C. Sheep, pigs and cattle
D. Apples, lemons and pears

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11. Which of the following would be classified (only) as a liability in the financial
statements?

A. A 5% debenture that is convertible at the option of the holder into ordinary equity
shares at any point during the next five years
B. The purchase of a redeemable bond that is redeemable in three years' time
C. The issue of 6% loan notes that are redeemable in four years' time
D. The issue of irredeemable preference shares

12. The role of which supervisory accountancy body is described as "to develop,
in the public interest, a single set of high quality, understandable, enforceable
and globally accepted financial reporting standards based upon clearly
articulated principles"?

A. IFRS Advisory Council

B. IFRS Foundation
C. IFRS Interpretations Committee
D. IASB

13. NY began the construction of a children's centre on 1 July 2014. To finance the
construction of the centre NY issued loan notes of 4% $2,000,000 on 1 October 2014
redeemable in five years' time at a premium. The effective rate of interest on the loan
notes is 5%.

In accordance with IAS 23 Borrowing Costs how much interest should be

capitalised for the year ended 31 March 2015?

A. $40,000
B. $50,000
C. $60,000
D. $75,000

14. FC purchases an item of plant for $500,000 on 1 July 2014 and receives a grant of
$100,000 against the purchase. The asset has a useful life of 10 years with no residual
value. FC uses the deferred income method to account for government grants.

What amounts will appear in the statement of financial position for the year
ended 31 March 2015?

A. Plant $450,000 and total deferred income of $90,000

B. Plant $360,000 and deferred income of £92,500
C. Plant $462,500 and total deferred income of $92,500
D. Plant $346,667 and deferred income of $90,000

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15. The Return on Capital Employed (ROCE) for VJ has reduced from 21.6% to 15.4% in
the year to 31 March 2015.

Which of the following independent options would be a valid reason for this
reduction?

Repayment of a long term loan

A large tax bill accrued
Major investment in intangible assets just before the reporting date
An upwards revaluation of land in the year

A. (i) and (ii)

B. (i) and (iii)
C. (ii) and (iv)
D. (iii) and (iv)

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Section B – ALL 15 questions are compulsory and MUST be
attempted

Primrose, a public listed company, acquired 900 million ordinary shares in Sunflower on 1
December 2013. The purchase consideration is made up as follows:

An immediate cash payment of $180 million

A share exchange of two shares in Primrose for four shares in Sunflower

A deferred cash payment of 17 cents per share acquired, payable on 1 December 2014

Primrose has only recorded the cash payment. The value of each share in Primrose and
Sunflower at the date of acquisition was 90 cents and 59 cents respectively. The Primrose
cost of capital is 7% per annum (present value factor 0.9346).

The statements of the financial position of the two companies at 30 November 2014 are
shown below:

Primrose Sunflower
$m $m $m $m
Non-current assets
Property, plant and equipment 960 510
Intangible: Software Nil 48
Investments
In Sunflower 180 Nil
In Agapanthus 20 Nil
Current assets
Inventory 94 30
Trade receivables 126 66
Bank Nil 6
220 102
Total assets 1,380 660

Equity and liabilities

Equity
Equity shares of 25 cents each 450 300
Retained earnings
1 Dec 2013 315 180
year ended 30 Nov 2014 135 30
450 210
900 510
Non-current liabilities
10% loan notes 180 30
Current liabilities
Trade payables 195 86
Income taxes payable 68 34
Operating overdraft 37 Nil
300 120
Total equity and liabilities 1,380 660

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The following information is relevant:

On the 1 December 2013 the fair value of Sunflower’s property, plant and equipment
exceeded their carrying value by $90 million. The property, plant and equipment
had a remaining useful life of 18 years at this date.
The software of Sunflower represents the amortised development cost of an
integrated electronic reporting package. It requires a reduction of $4 million at
acquisition and a reduction of $8 million at consolidation date (ie $48 million less $8
million, or $40 million at consolidation).
Sunflower sold goods to Primrose for $12 million in the post-acquisition period. One
third of these goods remain in inventory at 30 November 2014. Sunflower applies a
25% gross profit margin on all sales.
Sunflower’s trade receivables account balance includes $11m due from Primrose at
the year-end. However this does not agree with the current account balance included
within Primrose’s trade payables account due to cash-in-transit of $7 million paid by
Primrose.
Primrose bought 10 million shares in Agapanthus on 1 June 2014; this represents a
holding of 30% of Agapanthus’ equity. Agapanthus’ profit is subject to seasonal
variation. Its profit for the year ended 30 November 2014 is $18 million; $12 million
was made from 1 December 2013 to 31 May 2014. Primrose uses equity accounting
in its consolidated financial statements for its investment in Agapanthus.
Goodwill is reviewed for impairment annually. At 30 November 2014 there had been
an impairment loss of $40 million in the value of consolidated goodwill since
acquisition. Due to the difficult economic conditions as evidenced by falling profits,
the value of the investment in Agapanthus was impaired by $2.8 million.
It is group policy to value the non-controlling interest at acquisition at full (or fair)
value (59¢ × 300 shares ie $177 million).

16. What is the year-end value for the investment in associate?

A. $19m
B. $9m
C. $1m
D. $9.1m

17. The year-end value of goodwill is:

A. $290m
B. $299m
C. $309m
D. $390m

18. The year-end non-controlling interest on the CSFP is:

A. $127m
B. $271m
C. $172m
D. $217m

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19. The year-end Group Retained Earnings / Consolidated Reserves are:

A. $424m
B. $242m
C. $244m
D. $442m

20. The year-end Non-current Asset value is:

A. $1,155m
B. $1,555m
C. $1,115m
D. $1,111m

w w w . s t ud y i nt e r a c t i v e . o r g 11
Jennie Mae, a public company, is a national clothing retailer that sells luxury designer
clothing. The company has recently expanded its operations and commissioned a famous
supermodel to endorse its women’s clothing line. This has led to increased sales, however;
overall profits of the company are down.

The managing director of the company has expressed her extreme disappointment with
the current year’s results and would like an explanation as to why these increased sales
has not led to increased profitability.

Details of Jennie Mae’s financial statements for the two years to 31 March 2015 are shown
below.

Statements of profit or loss and other comprehensive income for the year ended:

31 March 31 March
2015 2014
$000 $000
Revenue 57,500 49,000
Cost of sales (48,125) (39,250)
Gross profit 9,375 9,750
Operating expenses (6,875) (4,750)
Operating profit 2,500 5,000
Interest expense (750) (200)
Profit before tax 1,750 4,800
Taxation expense (625) (1,300)
Profit for the year 1,125 3,500

12 w w w . s t ud yi nt e r a c t i ve . o r g
Statements of Financial Position as at:

31 March 2015 31 March 2014

$000 $000 $000 $000

Non-current assets
Property, plant and equipment
(note i) 30,000 16,250

Current assets
Inventory 7,250 3,750
Trade receivables 250 125
Bank Nil 1,125
7,500 5,000
Total assets 37,500 21,250

Equity and liabilities

Equity
Ordinary share capital ($1) 12,500 7,500
Share premium 2,500 Nil
Retained Earnings 4,375 4,750
19,375 12,250
Non-current liabilities
Long-term loans 7,500 2,500

Current liabilities
Bank overdraft 2,325 Nil
Trade payables 7,750 5,375
Income tax payable 550 1,125
10,625 6,500
Total equity and liabilities 37,500 21,250

The following information is relevant:

Property, plant and equipment can be analysed as follows:

2015 2014
$000 $000
Cost 42,500 23,750
Accumulated depreciation (12,500) (7,500)
Carrying amount 30,000 16,250

The increase in property, plant and equipment was due to the acquisition of six new
stores in the London area and the refurbishment of existing stores in the regions.
Because of the refurbishment, some fixtures and fittings were scrapped which has a
book value of $3.125 million and had originally cost $7.5 million. These fixtures had
no scrap value.

Dividends paid by the company to ordinary shareholders were $1.5 million in both
2014 and 2015. The directors have signalled their intention to maintain the annual
dividend at $1.5 million for the foreseeable future.

w w w . s t ud y i nt e r a c t i v e . o r g 13
ALL IN $000s

21. Calculate the Return on Capital Employed for 2015 and 2014. Are they:

A. 6.5% & 32.5%

B. 9.3% & 33.9%
C. 12.9% & 40.8%
D. 3% & 16.5%

22. Calculate the Interest Cover for 2015 and 2014. Are they:

A. 1.5 times & 17.5 times

B. 2.3 times & 24 times
C. 12.5 times & 48.8 times
D. 3.3 times & 25 times

23. Calculate the Inventory (holding) days for 2015 and 2014. Are they:

A. 46 days & 28 days

B. 0.15 days & 0.10 days
C. 55 days & 35 days
D. 42 days & 35 days

24. The depreciation expense is, and the PPE acquired in the year, for 2015, is:

A. 3.975 & 26,650

B. 9,375 & 26,250
C. 3,735 & 26,560
D. 3,357 & 26,550

25. The tax paid figure is:

A. 2,100
B. 2,000
C. 1,200
D. 1,900

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Summarised draft Statement of Financial Position of Carter, as at 30 September 2014.

$000 $000
Non-current assets
Freehold property at valuation (note (i)) 189,000
Plant and machinery (note (iii)) 165,000
Investments at fair value through profit or loss 22,500
(note (v))
376,500
Current assets
Inventory (note (vi)) 90,600
Trade receivables 46,800
Bank 20,700
158,100
Total assets 534,600

Equity and liabilities

Equity
Ordinary shares of 25c each 225,000
Share premium 25,000
Revaluation reserve 20,000
Retained earnings
- 1 October 2013 88,750
- for the year ended 30 September 2014 51,250
410,000
Non-current liabilities
Deferred tax – at 1 October 2013 (note (viii)) 28,050
8% Redeemable preference shares (note (vii)) 21,150

Current liabilities 75,400

Total equity and liabilities 534,600

The following information is relevant:

Carter has a policy of revaluing its freehold property at the end of each
accounting period. The value in the above Statement of Financial Position is as
at 1 October 2013 when the property had a remaining life of 20 years. A
professional valuer has valued the freehold property at 30 September 2014 at
$200 million.

Carter’s Statement of Profit or Loss includes $4 million charged as an operating

expense being the first of six annual rental payments in arrears for an item of
specialised machinery. This first payment was made on 30 September 2014.
Carter has been advised that this is a finance lease with an interest rate implicit
on the lease at 10% per annum. On the date of inception of the lease, 1 October
2013, the fair value of the machine was $17.4 million.

At the start of the current year, Carter received a capital grant from the local
government to help finance the acquisition of plant in the year, which had a cost
price of $50 million (this has been accounted for in the above Statement of
Financial Position).

The grant received was $10 million and has been accounted for in the above
Statement of Financial Position by way of a deduction from the carrying value of

w w w . s t ud y i nt e r a c t i v e . o r g 15
 plant and machinery. Carter’s policy for the accounting treatment of grants is to
amortise the grant income on a straight-line basis over 10 years.

None of the tangible non-current assets have been depreciated for the year
ended 30 September 2014. Plant and machinery, with the exception of leased
machinery, is depreciated 10% reducing balance basis.

The value of the investments held at fair value through profit or loss in the above
statement of financial position is its fair value at 1 October 2013. At 30
September 2014 the fair value has been assessed as $30 million.

Included in the inventory balance at 30 September 2014 is some inventory with

a cost of $15.4 million which was sold after the Statement of Financial Position
date for $12.3 million, with selling expenses amounting to $1.2 million.

The 8% redeemable preference shares were issued on 1 April 2014 at par $22.5
million with a discount of 5%. Issue costs relating directly to the issue were
$225,000. It is redeemable on 31 March 2015 at a large premium, which gives
them an effective finance cost of 12% per annum.

The required deferred tax provision at 30 September 2014 is $33.7 million.

No dividends were paid in the year.

ALL in $000s

26. The carrying value of freehold property is:

A. 200,000
A. 179,550
B. 189,000
C. 200,450

27. The value of the government grant at the year end is:

A. 8,000
B. 10,000
C. 9,000
D. 1,000

28. The fair value financial asset has a year-end value of:

A. 22,500
B. 7,500
C. 30,000
D. 37,500

29. The redeemable preference shares have a year-end value of:

A. 21,519
B. 21,375
C. 21,195
D. 21,150

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30. The year-end deferred tax liability is:

A. 33,700
B. 28,050
C. 5,650
D. 25,080

w w w . s t ud y i nt e r a c t i v e . o r g 17
Section C – BOTH questions are compulsory and MUST be attempted

31. The following trial balance relates to Kasabian, a listed company, at 31 March 2015:

$000 $000
Ordinary shares 50 cents each 105,000
Retained earnings at 1 April 2014 44,625
Revaluation reserve (from land and buildings) 24,500
2% Loan Note 2018 140,000
Revenue 315,700
Investment properties at valuation 1 April 2014 46,375
Land and buildings at valuation 1 April 2014 227,500
Plant at cost 1 April 2014 224,000
Plant - accumulated depreciation 1 April 2014 56,000
Distribution costs 19,250
Administration expenses 21,875
Inventory at 1 April 2014 33,100
Debenture interest paid 1,400
Income tax 700
Carriage inwards 125
Investment income 3,850
Purchases 189,200
Trade receivables 61,425
Trade payables 60,725
Bank 11,550
Deferred tax 19,600
Suspense account 42,000

824,250 824,250

The following information is relevant:

The 2% Loan Note was issued on 1 October 2014 under terms that provide for a
large premium upon redemption in 2018. The finance department has calculated
that the effective interest rate of this type of debt instrument is 6% per annum.
Kasabian also paid in cash issue costs of $1.5 million; these have yet to be
accounted for. Kasabian intends to hold these loan notes to maturity.
Kasabian has a policy of revaluing its land and buildings to their fair value at each
year-end. The valuation of land and buildings includes a land element of $52.5
million. On 31 March 2015 a professional valuer valued the buildings at $161
million with no change to the value of land. The estimated remaining life of
buildings at 1 April 2014 was 25 years. Depreciation is charged 50% to cost of
sales, 25% to distribution costs and 25% to administration expenses.
Later, the valuers informed Kasabian that investment property of the type
Kasabian owned had increased in value by 8% in the year to 31 March 2015.
Plant is depreciated at a rate of 15% per annum using the reducing balance
method and charged to cost of sales.
The directors of Kasabian have estimated the income tax liability for the year
ended 31 March 2015 at $32.3 million. The balance of the income tax account
in the trial balance represents under/over provision of the previous year’s
estimate. At 31 March 2015 there were $80 million of taxable temporary

18 w w w . s t ud yi nt e r a c t i ve . o r g
 differences due to capital allowances exceeding depreciation. The applicable tax
rate is 25%.
The suspense account in the trial balance represents the credit entry for the
proceeds of a one for three rights issue of ordinary shares made on 1 February
2015. The issue was for 60 cents per share. The issue was fully subscribed.
Inventory on 31 March 2015 was $66,325,000.

Required:

Prepare for Kasabian

(a) a Statement of Profit or Loss and other comprehensive income

statement for the year ended 31 March 2015; (8 marks)

(b) a Statement of Financial Position as at that date. (12 marks)

(20 marks)

w w w . s t ud y i nt e r a c t i v e . o r g 19
32. Oliver, a public listed company, acquired 16 million ordinary shares in Jacob on 1 July
2014. The purchase consideration is made up as follows:

An immediate cash payment of $4 million.

A share exchange of two shares in Oliver for every five shares in Jacob.

Oliver has only recorded the cash payment. The value of each share in Oliver and Jacob
at the date of acquisition was $5 and $2.60 respectively.

The summarised draft Statements of Financial Position and Statements of Profit or Loss
of the two companies at 31 December 2014 are shown below:

Statements of Financial Position as at 31 December 2014

Oliver Jacob
$000 $000 $000 $000
Non-current assets
Property, plant and equipment 25,000 27,000
Investments 4,000 Nil

Current assets
Inventory 15,000 9,000
Trade receivables 10,000 10,000
Bank 14,000 13,000
39,000 32,000
Total assets 68,000 59,000

Equity and liabilities

Equity
Equity shares of 50 cents each 30,000 10,000
Retained earnings 21,000 13,000
51,000 23,000
Current liabilities 17,000 36,000
Total equity and liabilities 68,000 59,000

Statements of Profit or Loss for the year ended 31 December 2014

Oliver Jacob
$000 $000
Revenue 143,000 80,000
Cost of sales (81,000) (46,000)
Gross profit 62,000 34,000
Distribution costs (5,000) (1,500)
Administrative expenses (30,000) (16,500)
Profit before tax 27,000 16,000
Income tax expense (11,200) (8,000)
Profit for the year 15,800 8,000

The following information is relevant:

(i) At the date of acquisition the fair value of Jacob’s property, plant and equipment
were equal to their carrying value with the exception of an item of plant, which
had a fair value of $4 million in excess of its carrying value. The plant had a
remaining useful life of 5 years at this date.

20 w w w . s t ud yi nt e r a c t i ve . o r g
 (ii) Oliver sold goods to Jacob for $15 million in the post-acquisition period. On 3
January 2015 Jacob received goods at an original cost to Oliver of $800,000 and
an invoice price of $1 million. Jacob has not yet recorded the receipt of these
goods.

(iii) Goodwill is reviewed for impairment annually. At 31 December 2014 there had
been an impairment loss of $2.5 million in the value of goodwill since acquisition.

(iv) Assume all profits accrue evenly over the year.

(v) It is group policy to value the non-controlling interest at acquisition at full (or
fair) value.

Required:

(a) Prepare the Consolidated Statement of Financial Position and

Consolidated Statement of Profit or Loss for Oliver as at 31 December
2014. (17 marks)

(b) Explain how the use of consolidated financial statements might limit
interpretation techniques. (3 marks)

(20 marks)

w w w . s t ud y i nt e r a c t i v e . o r g 21