Question 2

Murgese Ltd is preparing its draft financial statements for the year ended 31 March 2020.
Draft profit for the year was £1,671,400. The following outstanding issues have been
identified.

(1) The draft financial statements for the year ended 31 March 2020 included the correct
figure for inventories of raw materials. However, no figure for inventories of finished
goods was included in the draft totals. The production manager made the following
notes:

Finished goods

Jaka 400 units counted. 4,000 were produced during the year although production
was expected to be 5,000 units. Production costs were:
£
Materials 32,000
Direct labour 20,000
Variable overheads 12,000
Fixed overheads 7,500

Azteca 150 units counted. Aztecas cost £20 per unit to produce. However, due to
technological advances by competitors they were being sold for only £12 per unit from
March 2020.

(2) On 1 April machinery

was carried out. One machine was identified as requiring significant maintenance work
to continue operating at the required level. This was because routine maintenance work
had not been carried out.

The work was carried out immediately at a cost of £5,000, crediting cash and debiting
property, plant and equipment. The machine remaining useful life was reassessed as
being 10 years at 1 April 2019 and was being depreciated on a straight-line basis. At
31 March 2020

The machine was assessed at 31 March 2020 as having a fair value of £30,000 with
costs to sell estimated at £1,000 and a value in use of £32,000.

(3) On 1 April 2019 Murgese Ltd signed a lease for a new head office building. The lease is
for three years and lease payments are £15,000 paid annually in arrears. The building is
estimated to have a useful life of 30 years.

As an incentive to enter into the lease, Murgese Ltd received £2,500 from the lessor on
1 April 2019. The only accounting entries made were to credit cash with the net £12,500
payment (£15,000 less the incentive), credit revenue with the £2,500 incentive and debit
operating expenses with £15,000. The interest rate implicit in the lease is 7% pa.

(4) A review of customer contracts during the year identified one customer, Pottok Ltd, has
significantly longer credit terms than On further
investigation, it was discovered that Pottok Ltd is owned by the daughter of Fallabella,

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 were made to Pottok Ltd during the
year and there was a balance of £9,000 due from Pottok Ltd at 31 March 2020.

At 1 April 2019 Murgese Ltd had 400,000 £1 ordinary shares in issue. On 1 July 2019 the
company made a 1 for 4 bonus issue.
On 1 January 2020, 50,000 ordinary shares were issued at full market price of £2.70 per
share.

Requirements

2.1 Explain the required IFRS financial reporting treatment of Issues (1) to (4) above in
Murgese Ltd financial statements for the year ended 31 March 2020, preparing all
relevant calculations. (21 marks)

2.2 Calculate Murgese Ltd :

revised profit for the year ended 31 March 2020; and

basic earnings per share. (5 marks)

2.3 Describe the differences between IFRS and UK GAAP in respect of the financial
reporting treatment of Issue (3) above. (3 marks)

Total: 29 marks

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 Question 3

On 1 April 2019 Freiberger Ltd had investments in subsidiary companies and one associate
company. On 1 October 2019 Freiberger Ltd purchased 70,000 of
ordinary shares.

31 March
2020 are set out below.

Consolidated statement of profit or loss for the year ended 31 March 2020 (extract)

£
Profit from operations 367,100
Share of profits from associate 53,650
Profit before tax 420,750
Income tax expense (72,000)
Profit for the year 348,750

Attributable to:
Owners of Freiberger Ltd 283,840
Non-controlling interest 64,910
348,750

Consolidated statement of financial position as at

31 March
2020 2019
ASSETS £ £
Non-current assets
Property, plant and equipment 834,500 768,900
Intangible assets 142,300 135,400
Investment in associate 268,000 227,500
1,244,800 1,131,800

Current assets
Trade and other receivables 53,400 61,300
Cash and cash equivalents 6,800 5,400
60,200 66,700
Total assets 1,305,000 1,198,500

EQUITY AND LIABILITIES

Equity
Ordinary share capital
(£1 shares) 500,000 400,000
Share premium account 100,000 50,000
Retained earnings 329,800 370,960
Attributable to the equity
holders of Freiberger Ltd 929,800 820,960
Non-controlling interest 229,000 235,540
1,158,800 1,056,500
Current liabilities
Trade and other payables 61,200 73,000

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 Income tax payable 85,000 69,000
146,200 142,000
Total equity and liabilities 1,305,000 1,198,500

Additional information:

(1) At the date of acquisition, the statement of financial position of Lokai Ltd showed the
following assets and liabilities.

£
Property, plant and equipment 235,700
Trade and other receivables 12,300
Cash and cash equivalents 1,300
Trade and other payables (18,700)
230,600

The carrying amounts of all assets and liabilities were equal to their fair values with the
exception of a piece of land, which had a fair value of £40,000 in excess of its carrying
amount.

Goodwill arising on the acquisition of Lokai Ltd was £23,400.

(2) The consideration to acquire the shares in Lokai Ltd consisted of both cash and an
issue of shares at a premium. No other share issues were made during the year.

(3) The following is relevant to the movements on property, plant and equipment for the
year ended 31 March 2020:

A depreciation charge of £235,600 was recognised.

Equipment was disposed of when its carrying amount was £74,200. A profit of £2,700
was made on the disposal.

As well as the additions from the acquisition of Lokai Ltd, a machine was acquired for
cash.

(4) Intangible assets comprise the goodwill arising on the acquisition of subsidiaries. There
were no additions or disposals of intangible assets during the year ended
31 March 2020 other than the goodwill arising on the acquisition of Lokai Ltd.

(5) During the year ended 31 March 2020 ordinary dividends were paid to both the
shareholders of Freiberger Ltd and to the non-controlling interest.

Requirement

Prepare a consolidated statement of cash flows for Freiberger Ltd for the year ended 31
March 2020, including a note reconciling profit before tax to cash generated from operations,
using the indirect method.

A note showing the effects of the acquisition of Lokai Ltd is not required.
Total: 15 marks

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 Question 4

At 1 April 2019 Lusitano Ltd had an investment in two subsidiaries: a 65% holding in Tawleed
Ltd and an 80% holding in Campolina Ltd. Lusitano Ltd measures goodwill and the non-
controlling interest using the proportionate method.

On 1 January 2020 Lusitano Ltd sold all of its holding in Tawleed Ltd for £385,000. The
retained earnings of Tawleed Ltd at 1 April 2019 were £173,000. The only accounting entries
made in respect of the disposal of Tawleed Ltd were to debit cash and recognise the disposal

The individual draft statements of profit or loss of the three companies for the year ended
31 March 2020 are shown below. All profits and losses accrued evenly throughout the year.

Draft statements of profit or loss for the year ended

31 March 2020
Lusitano Campolina Tawleed Ltd
Ltd Ltd
£ £ £
Revenue 978,400 348,500 283,400
Cost of sales (390,600) (156,800) (72,100)
Gross profit 587,800 191,700 211,300
Operating expenses (169,500) (58,700) (43,300)
Profit from operations 418,300 133,000 168,000
Investment income 500,000
Profit before tax 918,300 133,000 168,000
Income tax expense (184,000) (26,000) (32,000)
Profit for the year 734,300 107,000 136,000

Extracts from the draft statements of financial position as at

31 March 2020
Lusitano Ltd Campolina Ltd
£ £
Non-current assets 857,400 472,000

Current assets 114,600 36,800

Additional information:

(1) Lusitano Ltd acquired its holding in Tawleed Ltd on

1 April 35,400. Tawleed Ltd has
and always has had 150,000 £1 ordinary shares in issue. The fair values of Tawleed
assets, liabilities and contingent liabilities were equal to their carrying amounts.

The consideration for the acquisition of Tawleed Ltd was cash of £150,000 paid on
1 April 2012 and a further cash payment of £63,000, deferred until 1 April 2013. An
appropriate discount rate was 5% pa. Lusitano Ltd accounted for the deferred
consideration correctly in its financial statements.

(2) Lusitano Ltd acquired its holding in Campolina Ltd on 1 April 2015 for £280,000.
Goodwill arising on the acquisition was correctly calculated at £47,800.

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 The fair values of Campolina
to their carrying amounts, with the exception of a machine which had a fair value of
£20,000 in excess of its carrying amount. The machine was assessed as having a
remaining useful life of eight years on 1 April 2015. Depreciation on plant and
machinery is recognised in operating expenses.

(3) During the year ended 31 March 2020 Lusitano Ltd sold goods to Campolina Ltd for
£28,000 earning a gross margin of 20%. At the year-end Campolina Ltd still held half of
these goods in inventories and the invoice for the full amount remained unpaid.

(4) Campolina Ltd has and always has had 200,000 £1 ordinary shares in issue. It paid a
dividend of 70p per share during the year ended 31 March 2020.

(5) Lusitano Ltd has undertaken its annual impairment review of goodwill and identified that
an impairment of £4,000 in relation to Campolina Ltd needs to be recognised. At
31 March 2019 cumulative impairments of £9,500 and £7,200 had been recognised in
respect of Campolina Ltd and Tawleed Ltd respectively.

Requirements

Prepare, for Lusitano Ltd:

(a) a consolidated statement of profit or loss for the year ended 31 March 2020; and

(b) an extract from the consolidated statement of financial position as at 31 March 2020,
showing separately totals for:

non-current assets; and

current assets.

You should assume that the disposal of Tawleed Ltd constitutes a discontinued operation in
accordance with IFRS 5, Non-current
Assets Held for Sale and Discontinued Operations.
Total: 22 marks

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