Answer ONE question from SECTION A and TWO questions from SECTION B.

Where
there is a word limit, it will be specified beside the question. Anything you write once
you have reached the word limit will not be marked.

SECTION A

You must answer all parts of this question

QUESTION 1

Guernsey plc (‘Guernsey’) is a manufacturer and distributor in the aerospace industry which
has been expanding. The managing director is very disappointed with the current year’s
results. Despite increasing export sales, profits have declined and, although additional capital
has been raised to support this expansion, the cash position has worsened. She also wishes
to compare performance with a US competitor but has been told that this is more difficult
because there are some differences between international accounting standards and US
GAAP.

Extracts from the financial statements for the two years ending 30 June 2020 are shown below:

Income statement for the period ending 30 June 2020

2019 2020
£m £m
Revenue
UK 2,000 2,100
Export 2,000 3,000
Total revenue 4,000 5,100
Cost of sales
UK (1,000) (1,100)
Export (1,250) (2,100)
Total cost of sales (2,250) (3,200)
Gross Profit 1,750 1,900
Distribution costs (300) (600)
Administration costs (450) (410)
Finance costs (50) (95)
Profit before tax 950 795
Taxation (150) (140)
Profit for the year 800 655

3 Continued Overleaf
Statement of financial position as at 30 June
2019 2020
£m £m
ASSETS
Non-current assets
Property, plant and equipment 3,000 3,100
Intangible assets 150 145
3,150 3,245
Current assets:
Inventory 410 800
Accounts receivables 490 850
900 1,650

Total assets 4,050 4,895

£m £m
EQUITY AND LIABILITIES
Equity
Ordinary share capital (£1 shares) 200 300
Retained earnings 2,600 3,200
2,800 3,500

Non-current liabilities
Loans 650 600

Current liabilities
Accounts payable 450 500
Tax payable 70 15
Interest payable 40 10
Bank overdraft 40 270
600 795

Total equity and liabilities 4,050 4,895

4 Continued Overleaf
Cashflow statement for the period ending 30 June 2020
£m
Cashflow from operating activities
Net profit before tax 795
Adjustments for:
Depreciation and amortisation 90
Interest expense 95
Increase in inventory (390)
Increase in accounts receivable (360)
Increase in accounts payable 50
Cash generated from operations 280
Interest paid (125)
Tax paid (195)
Net cashflow from operating activities (40)

Cashflow from investing activities

Purchase of property, plant and equipment (180)
Purchase of intangibles (5)
Net cashflow from investing activities (185)

Cashflow from financing activities

Proceeds from share issue 100
Loan repayment (50)
Dividends paid (55)
Net cashflow from investing activities (5)

Net increase in cash and cash equivalents (230)

Cash and cash equivalents at start of period (40)
Cash and cash equivalents at end of period (270)

Required:

• Calculate the following ratios for Guernsey for the years ending 30 June 2019 and 30
June 2020, showing your workings in each case:
o Gross Margin
o Net profit margin
o Return on capital employed
o Inventory holding period
o Accounts receivable collection period
o Accounts payable payment period
o Current ratio
o Gearing

NOTE: Marks will be given for correct workings and therefore all working notes
MUST be shown clearly.

5 Continued Overleaf
• Write a report for the Managing Director which analyses the financial performance of
Guernsey over the two-year period. Your report should use the ratios you have
calculated together with the information in the cashflow statement.

The maximum word count is 700 words

• First, identify the key differences between international accounting standards and US
GAAP with regard to the valuation of property, plant and equipment and inventory, and
the approach to any potential impairment of non-current assets. Subsequently,
assuming that Guernsey has adopted accounting policies that are not permitted under
US GAAP and, for some reason, they have to restate their financial statements under
US GAAP, the values of some items in its financial statements would have to be
restated. Write a brief report which evaluates the impact that the different recognition
and measurement requirements of these assets/items would have for the evaluation
of the company’s performance from a user’s perspective. To do so, you are expected
to refer to four financial ratios you have computed for this question.

The maximum word count is 900 words

TOTAL (40%)

6 Continued Overleaf
SECTION B

You must answer TWO questions from this section

QUESTION 2

On 30 June 2020, Perch plc (‘Perch’) declared its offer for the entire share capital of Salmon
plc (‘Salmon’) unconditional. The consideration was 6 new shares in Perch for every 3 shares
held in Salmon. The current market price for shares in Perch is €1.10.

During negotiations it has been established that the fair value of the non-current assets of
Salmon is €175 million more than book value and that Salmon’s brand has a fair value of €50
million.

The summary statements of financial position for Perch and Salmon as at 30 June 2020 are
shown overleaf and do not reflect the transaction.

Perch’s intangible assets includes development costs associated with its own website which
is expected to generate future economic benefits. The costs associated with the website are
shown below:

Perch
€000

Assessment of feasibility 25
Purchase of operating software 150
Design of website 25
Preparing and uploading content 15
Developing advertisements for the company’s products on the site 45
Website maintenance 20
280

Perch Salmon
€m €m
ASSETS
Non-current assets
Property, plant and equipment 3,250 950
Intangible assets 1,100 ___
4,350 950
Current assets:
Inventory 525 600
Accounts receivables 350 425
Bank 100 0
975 1,025

Total assets 5,325 1,975

7 Continued Overleaf
EQUITY AND LIABILITIES
Equity
Ordinary share capital (€1 shares) 2,500 900
Share premium 500
Reserves
Revaluation reserve 100 25
Retained earnings 1,050 625
4,150 1,550

Non-current liabilities
Loans 750 150

Current liabilities
Accounts payable 350 175
Tax payable 75 25
Bank overdraft 0 75
425 275

Total equity and liabilities 5,325 1,975

Required:

• Prepare the consolidated statement of financial position for the Perch group as at 30
June 2020. Ignore any depreciation effect of the fair value adjustment

NOTE: Marks will be given for correct workings and therefore all working notes
MUST be shown clearly.

• Explain the accounting treatment for research and development expenditure under IAS
38.

• Identify how each of the costs associated with the website shown above relate to the
recognition criteria for development costs’ capitalisation under IAS 38 and evaluate
which of these costs can be capitalised and which must be expensed. Show the total
value of development costs capitalised.

TOTAL (30%)

8 Continued Overleaf
QUESTION 3

Galaxy plc (‘Galaxy’) is a business that distributes computer equipment and provides software
services for customers. The following transactions took place during the year ending 31 July
2020:

• Total invoiced sales were £650 million (all credit sales) and sales returns were £5
million. £625 million was collected from customers during the year.
• Galaxy estimates that 2% of accounts receivable may not be paid by customers and
no doubtful debt provision was recognised in the previous year.
• Inventory of £450 million was purchased during the year with £75 million still owed to
suppliers at the year end.
• The closing inventory counted at the year-end was £30 million but £4 million of this
was assessed as obsolete due to technical advances so it cannot be sold and has no
scrap value.
• Employee costs of £100 million was paid during the year which included the annual
bonus for the year ending 31 July 2019 which was paid in August 2019. The annual
bonus of £2 million for year ending 31 July 2020 has been achieved and will be paid in
August 2020.
• The insurance premiums for the business are paid on 1 May and cover the period 1
May to 30 April each year. The premium paid on 1 May 2019 was £6 million but the
payment on 1 May 2020 increased to £8 million.
• Invoices for energy costs of £20 million were received and paid but the meter readings
indicated £1.5 million of energy had been consumed at 31 July 2020 but not yet
invoiced.
• Other expenses of £83 million were paid as incurred during the year and the
depreciation expense was £16 million.
• The corporation tax rate is 20% and is paid the following year.
• A loan repayment of £25 million was made during the year together with interest of £2
million which was due for the period.

Depreciation, employee and energy costs are allocated 50% to distribution costs and 50% to
administration costs with other expenses allocated to administration costs.

The following summary extract from the statement of financial position at 31 July 2019 is also
available:

£m
Current assets:
Inventory 65.0
Accounts receivables 80.0
Prepayments (insurance) 4.5
Bank 26.5
Total 176.0
9 Continued Overleaf
 Current liabilities
Accounts payable 70.0
Accrual (wages) 1.5
Accrual (energy) 1.0
Tax payable 11.0
82.5

Galaxy entered into a contract with Andromeda Ltd on 1 August 2019 to supply computer
hardware, install specialist software and provide technical support for three years. Galaxy
provides these services separately charging £0.5 million for software installation and £0.25
million per year for technical support. The overall contract value is £4 million although
Andromeda Ltd could have purchased the equipment alone for £3.75 million.

Required:

NOTE: Marks will be given for correct workings and therefore all working notes MUST
be shown clearly.

• Prepare the income statement for the year ended 31 July 2020 using the appropriate
format. Clearly show your workings to 1 decimal place.

• Prepare the cashflow statement for the year ending 31 July 2020 using the direct
method and identify the cash balance at 31 July 2020.

• Explain step by step how to apply IFRS15 to the contract with Andromeda Ltd and
calculate the revenue included in the period ending 31 July 2020 arising from this
contract.

TOTAL (30%)

10 Continued Overleaf
QUESTION 4

You have recently joined an accounting firm and have been asked to advise a client, Auto
plc (‘Auto’), on accounting for inventory and accounts receivable. You have been told that
Auto’s financial statements are prepared on the assumption of a going concern basis.

Auto refurbishes old vehicles and the following information has been provided in respect of
the year ending 31 March 2020.

Inventory

The following vehicles are at different stages of completion:

Vehicle Purchase price Costs incurred Expected Expected

to date further costs selling price
before sale
£ £ £ £
A 18,940 3,920 - 28,000
B 25,660 4,960 300 38,600
C 7,100 4,020 1,200 12,000
D 15,360 920 4,400 23,600

Selling expenses are 5% of the selling price and 10% of the costs incurred to date relate to
abnormal wastage due to poor quality materials.

Accounts receivable

£000
Total sales for year ending 31 March 2020 (of which 90% are credit 4,500
sales)
Accounts receivable balance 1 April 2019 500
Cash collected on accounts receivable during year ending 31 March 3,250
2020
Accounts written off as bad debts during year ending 31 March 2020 100
Allowance for doubtful debt at 1 April 2019 150

The allowance for doubtful debts is based on the ageing of accounts receivable as shown
below:

Days outstanding Proportion Probability of collection %

0 – 30 days 50% 95
31 – 60 days 35% 90
61 – 90 days 10% 85
Over 90 days 5% 80

11 Continued Overleaf
Required:

• To help Auto prepare its financial statements for the period ending 31 March 2020,
calculate the value of the inventory under IAS2, and the bad debt expense which will
be included in the income statement.

NOTE: Marks will be given for correct workings and therefore all working notes
MUST be shown clearly.

• The finance team at Auto recognise that the concepts of going concern, substance
over form, accruals, matching, prudence and neutrality underlie the preparation of the
company’s financial statements. You have been asked to explain what is meant by the
following concepts and how these impact the preparation of Auto’s financial statements
in particular, with reference to the transactions and items presented in this question.

The maximum word count is 900 words and some calculation numbers are
expected
TOTAL (30%)

12 End of Paper