THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALL

AC2091 ZB

BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN EDUCATION IN SOCIAL
SCIENCES

Financial Reporting

Tuesday 14 May 2019: 10.00 – 13.15

Time allowed: 3 hours 15 minutes

DO NOT TURN OVER UNTIL TOLD TO BEGIN

Candidates should answer FIVE of the following EIGHT questions: FOUR from
Section A and ONE from Section B. All questions carry equal marks.

Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

Extracts from compound interest tables are given after the final question on this
paper.

8-column accounting paper is provided at the end of this question paper. If used, it
must be detached and fastened securely inside the answer book.

A handheld calculator may be used when answering questions on this paper and it
must comply in all respects with the specification given with your Admission Notice.
The make and type of machine must be clearly stated on the front cover of the answer
book.

© University of London 2019

UL19/0066
Page 1 of 15
 SECTION A
Answer any four questions from Section A
1. The income statements for Dee Ltd, Bee Ltd and Tee Ltd for the year ended 31
December 2018 are given as follows:

Dee Ltd Bee Ltd Tee Ltd

£ £ £
Sales 9,000,000 5,100,000 3,600,000
Cost of sales (3,540,000) (1,770,000) (1,380,000)
Gross profit 5,460,000 3,330,000 2,220,000
Investment income- 228,000 - -
dividends receivable
Administration costs (558,000) (420,000) (210,000)
Distribution costs (312,000) (678,000) (255,000)
Interest receivable 30,000 15,000 -
Interest payable on bonds (6,000) (3,000) -
Profit before tax 4,842,000 2,244,000 1,755,000
Tax (300,000) (210,000) (60,000)
Profit after tax 4,542,000 2,034,000 1,695,000

Dee Ltd acquired 80 % of Bee Ltd on 1 January 2011 for £450,000 when Bee Ltd's
retained profits were £80,000. The share capital of Bee Ltd totals £75,000.

Dee Ltd also acquired 20% of the bonds of Bee Ltd on 1 January 2011. No goodwill
arose on the acquisition of the bonds.

Dee Ltd acquired 25% of Tee Ltd for £600,000 when Tee Ltd’s share capital and
reserves were £300,000 on 1 January 2012. The share capital of Tee Ltd is 30,000
50p shares.

During the year Bee Ltd sold goods to Dee Ltd for £225,000. These goods had cost
Bee Ltd £195,000. 20% of this inventory is included in Dee Ltd’s inventory at the
year end.

Goodwill is capitalised. Impairment of 50% of the value of the goodwill of Bee Ltd
was seen in 2015 and impairment of 50% of the value of the goodwill in Tee Ltd is
seen in 2018.

Dee Ltd charges a management fee of 5% of turnover to Bee Ltd and Tee Ltd.
None of these companies has recorded this management fee in 2018.

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 The dividend paid during the year and the retained earnings as at 1 January 2018
are given as follows:

Bee Ltd Dee Ltd Tee Ltd

£ £ £
Retained earnings as 4,800,000 5,400,000 3,600,000
at 1 January 2018
Dividends paid 270,000 150,000 -

Required:

Prepare the consolidated income statement for the year ended 31 December 2018
for Dee Ltd, showing the profit attributable to the holding company and the profit
attributable to the non-controlling interest.

Show the retained profit brought forward figure and the dividend figure either as
part of the income statement or as part of the retained earnings section of the
statement of changes in equity.

(Total 20 marks)

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2. Del Ltd started trading on 1 January 2018. The income statement and the
statement of financial position for the first year of trading are given as follows:

Income statement for the year ended 31 December 2018

£ £
Revenue 5,700,000
Cost of sales
Opening inventory 1,500,000
Purchases 3,600,000
Closing inventory (820,000)
(4,280,000)
Gross profit 1,420,000
Expenses (700,000)
Depreciation (240,000)
Profit for the year 480,000

Statement of Financial Position as at 31 December 2018

£ £ £
Non-current assets Cost Accum depn Net book value

Buildings 2,400,000 (240,000) 2,160,000

Non-current assets
Inventory 820,000
Cash 1,100,000
Total assets 4,080,000

Share capital 2,000,000

Retained profits 480,000
Trade payables 1,600,000
Capital, reserves and liabilities 4,080,000

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 The price change indices for the year were identified as follows:

RPI Non- current Inventory

assets
1 January 2018 105 150 180
Average 2018 108 200 210
15 December 2018 110 180 225
31 December 2018 120 220 230

All non-current assets and opening inventory were acquired on the first day of
trading.

Closing inventory was acquired on 15 December 2018.

Sales and purchases accrue evenly throughout the year.

Required:

(a) Discuss four advantages and four limitations of current purchasing power
accounting.
(8 marks)

(b) Prepare the current purchasing power income statement of Del Ltd for the
year ended 31 December 2018 and the current purchasing power
statement of financial position as at 31 December 2018.

(12 marks)

(Total 20 marks)

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3. Polo Limited promises a 60-year-old employee, Mrs Olive, who will
retire at 65, a lump-sum retirement package equal to 1% of final salary
multiplied by the number of years of service.

Mrs Olive’s 60th birthday is on 1 January 2015 and her 2015 yearly salary is
£50,000, to increase at 5% compound each year.

The discount rate is 10% per annum.

There is assumed to be a 20% probability that Mrs Olive will leave Polo
Limited before 1 January 2020.

On 1 January 2016, the company revises its actuarial assumptions,

so that Mrs Olive’s salary should increase by 15% per annum rather
than 5% and the probability of Mrs Olive leaving before her scheduled
retirement falls to 10%. The obligation is not funded.

Required

(a) What are defined contribution and defined benefit plans?

(4 Marks)

(b) Calculate the total pension cost that Polo Limited would recognise in the
profit and loss section of the income statement for the year ended 31
December 2016.
(11 marks)

(c) Calculate the actuarial loss for 2016 which would be recorded in other
comprehensive income
(5 marks)

(Total 20 marks)

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4.
(a) What is a share premium reserve and what can this reserve be used for in the
UK?
(5 marks)

(b) You are given the following information in relation to White Ltd and Black Ltd:

White Ltd Black Ltd

Sales £9,750,000 £13,500,000

Gross profit margin 10% 15%

General expenses £225,000 £1,275,000

Tax £675,000 £450,000

Number of shares issued at start of the

150,000 150,000
period

Number of shares issued at full market

price for cash, half way through the period 90,000 60,000

Share price £30.00 £30.00

Required:
Define and calculate the earnings per share and the price earnings ratio for
White Ltd and Black Ltd. Identify 2 limitations of ratio analysis.
(8 marks)

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(c) Daisy Ltd buys a new machine on 1 June 2018 from Rose International for
180,000 ‘blues’, the currency in which Rose International trades, on credit. This
is still outstanding at the year end, 31 December 2018.

Daisy Ltd also raised a five year loan of 600,000 “greens” on 1 January 2018.

The exchange rate at the date of purchase of the machine was 10 blues to £1
and the exchange rate at year end is 8 blues to £1. The exchange rate for
greens was 2 greens to £1 on 1 January 2018 and 4 greens to £1 on 31
December 2018.

Required:
(i) Show how the purchase of the machine and any subsequent exchange
gain or loss would be accounted for on 1 June 2018 and on 31
December 2018.

(ii) Show how the loan and any subsequent exchange gain or loss would be
accounted for on 1 January 2018 and on 31 December 2018.

(7 marks)

(Total 20 marks)

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5. Map Plc has provided you with the following information on research and
development projects:
Project A
Project A is a new project which has just been started in 2018 and the company
spent £200,000 on the new project during the year. The directors of Map Plc
are very excited by initial results and think that in 5 years’ time they will be able
to develop some new products based on the initial results.

Project B
Project B has been running for several years and accumulated costs on this
project at the start of 2018 are £5,000,000. The project relates to the
development of a new product which is in the final stages of testing before
being manufactured for sale to customers. The prototype product has worked
well and the directors of Map Plc are sure that the product is technically
feasible. The directors expect that the product will be very successful and are
happy to provide technical and financial resources to complete the project. The
costs of the project during the year can be reliably measured and include the
following:

Research staff £300,000

Testing Equipment £100,000
Overheads allocated to the project £50,000

The testing equipment is depreciated using a rate of 20% on the straight line
basis.

Required:
(a) Define research and development and discuss the accounting treatment
of research and development.
(9 marks)
(b) Show how project A and B will be treated in the financial statements. Give
reasons for your answers.
(11 marks)
(Total 20 marks)

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6. A company acquired a machine as follows:

Manufacturer’s base price £5,000,000

Trade discount 20%
Early settlement discount taken (on 4%
payable amount of the base cost only)
Foreign (carriage) charges £60,000
Installation cost £104,000
Staff training in use of machine £170,000
Pre-production testing £90,000
Purchase of 3 year maintenance contract £240,000
Estimated residual value £100,000
Estimated life in machine hours
Total machine hours used 15,000
– year ended 31 March 2016
st 3,000
– year ended 31st March 2017 3,600
– year ended 31st March 2018 1,500

On 1 April 2017, the machine was upgraded at a cost of £820,000, increasing

the remaining life of the machine to 9,000 hours and its estimated residual
value was increased to £150,000.

Required:
(a) Define non-current assets and depreciation. Discuss three areas of
judgement in relation to depreciation within financial statements.
(8 marks)

(b) Show how the company would account for its machine for the years
ended 31 March 2016, 2017 and 2018. Depreciation is based on machine
hours used.
(12 marks)
(Total 20 marks)

UL19/0066
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 SECTION B
Answer any one question from Section B

7. Discuss the concepts of substance over form and off balance sheet finance in
relation to leases. Discuss the impact of accounting for leases on the financial
statements and the intended effect of introducing IFRS 16 to replace IAS 17.

(Total 20 marks)

8. What are accounting standards? Discuss the different forms accounting

standards may take and critically evaluate the arguments for and against
accounting standards.

(Total 20 marks)

END OF PAPER

UL19/0066
Page 11 of 15
 Compound interest factors over n periods at rate i per period.

Table 1: Present value factors

To determine the present value of a single payment of 1 received ‘n’ periods
from the present at a constant discount rate of x% per period

discount rate % 1 2 3 4 5 6 7 8 9 10

period

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909

2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826

3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751

4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683

5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564

7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513

8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467

9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424

10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350

12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319

13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290

14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263

15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218

17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198

18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180

19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164

20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

UL19/0066
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 Table 1 (continued)
Present value factors
To determine the present value of a single payment of 1 received ‘n’ periods
from the present at a constant discount rate of x% per period

discount rate % 11 12 13 14 15 16 17 18 19 20

Period

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833

2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694

3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579

4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482

5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335

7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279

8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233

9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194

10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162

11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135

12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112

13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093

14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078

15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054

17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045

18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038

19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031

20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

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 Table 2: Cumulative present value factors (‘annuity factors’)
The table gives the present value of ‘n’ annual payments of 1 received for the
next ‘n’ years with a constant discount rate of x% per year. For example, with a
discount rate of 8% and with six annual payments of £1 the present value is
£4.6229

discount rate 1 2 3 4 5 6 7 8 9 10
%

period

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909

2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736

3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487

4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170

5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355

7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868

8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335

9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759

10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495

12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814

13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103

14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367

15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824

17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022

18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201

19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365

20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514

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 Table 2 continued
Cumulative present value factors (‘annuity factors’)
The table gives the present value of ‘n’ annual payments of 1 received for the
next ‘n’ years with a constant discount rate of x% per year. For example, with a
discount rate of 8% and with six annual payments of £1 the present value is
£4.6229
discount rate % 11 12 13 14 15 16 17 18 19 20

period

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833

2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528

3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326

7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837

9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031

10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439

13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533

14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730

17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775

18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843

20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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