AC2091 Financial Reporting

Answer any FOUR questions from Section A.

Question 1

Pudding Ltd has two group companies, Cream Ltd and Custard Ltd. The income statements for Pudding Ltd, Cream Ltd and Custard Ltd for the year ended 31 December 2019 are given as follows:

Required:

Prepare the consolidated income statement for Pudding Ltd for the year ended 31 December 2019, showing retained earnings brought forward, dividend expense and retained earnings carried forward either on the face of the income statement or in the consolidated retained earnings section of the statement of changes in equity. 

Question 2

An asset which could be purchased outright for £383,720 is instead leased by Lessee Ltd for three years at the end of which the asset will have no residual value. The lease provides for half-yearly payments in advance of £72,000, the first payment being made on 1 January 2018. The asset is to be depreciated using the straight line method.

Required:

(a) Show how the asset will be accounted for in the financial statements for the year ended 2018 under IAS 17 if:
(i) Lessee Ltd is responsible for all maintenance and insurance costs;
(ii) Lessee Ltd is not responsible for the maintenance and insurance costs. (14 marks)
(b) IFRS 16 Leases has changed how leases will be recognised in financial statements. Outline the key changes to lease accounting contained in IFRS 16 and discuss why these changes were considered to be needed.

Question 3

Answer all parts of this question.

(a) You are given the following information in relation to Percussion Ltd:
Sales £29,250,000
Gross profit margin 10%
General expenses £675,000
Tax £450,000

Number of shares issued at start of the period 400,000
Number of shares issued at full market price of £190
per share for cash, half way through the period 320,000

Required:

(i) Calculate the price earnings ratio and the earnings per share for Percussion Ltd.
(ii) If a company has a high price earnings ratio, what might this indicate about the company? How might the price earnings ratio change if a company increased its gearing?

Your answer to this part of the question should not be more than 100 words.(8 marks)

(b) Discuss 5 differences between merger accounting and acquisition accounting and the reasons why merger accounting is no longer in use.
Your answer to this part of the question should not be more than 150 words.

(c) The board of Purple Plc have taken the decision to restructure the business and close one of Purple Plc’s factories. The impact of this will be material for Purple Plc. A detailed plan is being prepared and will be implemented in the following year. No detailed announcements of the plan have been made by the end of the financial year. Purple Plc must train its staff in changes to health and safety regulation which occurred at the end of the financial year.

Required:

(i) What are events after the balance sheet date and how should they be accounted for?

(ii) How would the decision to restructure be accounted for by Purple Plc?

(iii) Would the company need to make a provision for the future training costs?

Your answer to this question should not be more than 200 words.