DRAFT

EXAMINATION PAPER: ACADEMIC SESSION 2019/2020

Campus Greenwich Maritime/International Partners

Faculty Business

Department Accounting and Finance

Course Code ACCO 1115

Course Title Advanced Financial Accounting

Level 6

Duration 3 HOURS

Date January 2020

Course co-ordinator: Dr Dawn Reilly

INSTRUCTIONS TO CANDIDATES
Answer FOUR questions as follows:
SECTION A = 10 marks
Compulsory question 1 = 10 marks
SECTION B = 90 marks
Answer three out of four option questions 2 to 5 = 30 marks each

This is a CLOSED book examination.

Non-programmable calculators are permitted.

THIS PAPER MUST NOT BE REMOVED

FROM THE EXAMINATION ROOM

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

SECTION A
QUESTION 1 IS COMPULSORY

Question 1

One of the aims of Integrated Reporting ( <IR> ) as stated in the <IR> Framework is to
“[e]nhance accountability and stewardship for the broad base of capitals (financial,
manufactured, intellectual, human, social and relationship, and natural) and promote
understanding of their interdependencies”.

Required:

a) Explain the nature of any three of the six capitals identified in the <IR> Framework
and discuss how the three capitals you have chosen can be created.
(6 marks)

b) Discuss the interdependencies between any of the six capitals using two examples to
illustrate your answer.
(4 marks)

Total = 10 marks

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

SECTION B
ANSWER THREE OUT OF FOUR QUESTIONS IN THIS SECTION

Question 2

a) Discuss the differences between a defined benefit pension scheme and a defined
contribution pension scheme.

Your answer should explain:

• the differences in the nature of the two types of scheme;

• whether it is the employee or the employer who bears the risk, and why that
is the case; and
• the accounting treatment in the employer’s financial statements.
(9 marks)

b) Williams Ltd have a defined benefit pension scheme and also a defined contribution
pension scheme. The accountant is currently preparing the company’s financial
statements for the year ended 31 December 2019.

Defined benefit scheme

Employees who joined Williams Ltd on or before 31 December 2010 are part of the
defined benefit scheme. Last year, the audited financial statements showed that the
scheme had plan assets at 31 December 2018 with a fair value of £967,600 and the
present value of the pension obligation was £927,500.
You have been provided with the following information in relation to the year ended 31
December 2019:

• The actuary estimates that an appropriate rate to accrue interest on the scheme
assets and liabilities is 4%
• Williams Ltd made cash contributions into the pension scheme of £231,800
• Retired employees were paid benefits of £62,400
• The current service cost is £45,800.
The actuary has confirmed that the fair value of the pension scheme assets on 31
December 2019 was £918,700 and the present value of the pension obligation was
£902,500.
The requirements for part b) are on the next page.
January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

Required:
i) Calculate the actuarial re-measurements to be included in Williams Ltd’s
financial statements in respect of the defined benefit pension scheme for the
year ended 31 December 2019 and provide the accounting entries to record
the movements on the pension scheme asset and obligation balances during
the year.

The accounting entries may be given either as journals or as ledger (T-)

accounts.
(15 marks)

ii) Produce the disclosure note that shows the breakdown of the balance to be
included in the Statement of Financial Position in respect of the defined
benefit pension scheme for the year ended 31 December 2019.
(2 marks)

Defined contribution scheme

All other employees who joined the company from 1 January 2011 onwards are not
eligible to be entered into the defined benefit scheme. Instead, Williams Ltd offer a
defined contribution scheme for these employees.
Under the defined contribution scheme, Williams pay contributions at a rate of 5% of
employees’ salaries. Staff costs in respect of these members of staff were £400,000 for
the year ended 31 December 2019. In 2019 Williams paid cash contributions of £24,000
into the defined contribution scheme.

Required:
iii) Explain, with journals, the accounting treatment of the defined contribution
scheme operated by Williams Ltd for the year ended 31 December 2019.

(4 marks)

Total 30 marks

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

Question 3

A. Operating segments

Lincoln plc has six operating segments. Financial information relating to the six segments is
reviewed each month by the executive directors in order to assess segmental performance and
allocate resources. There are no sales between segments.

The following segmental information relates to the year ended 31 December 2019:

Segment External revenue Assets Profit / (Loss)

£000 £000 £000

Aberdeen 800 530 30

Birmingham 1,800 5,900 70
Cardiff 6,200 7,500 480
Derby 600 900 (60)
Exeter 450 220 240
Falmouth 1,260 2,300 (90)
Total 11,110 17,350 670

Required:

a) Explain which of Lincoln plc’s operating segments are reportable segments

according to the requirements of IFRS 8: Operating segments.
(11 marks)

b) Comment on the performance of the Birmingham and Cardiff segments only

using the following ratios (rounded to 1 decimal place) to inform your analysis:
• profit margin
• asset turnover
• return on assets.
(11 marks)

Question 4 continues on the next page.

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

c) £1,500,000 of Lincoln plc’s revenue comes from a single customer, York Ltd. The
two companies are not connected. The revenue is earned by the Cardiff segment.

Required:

Explain the disclosures required in relation to the revenue receivable from York
Ltd.
(4 marks)

B. Purchase of property

On 1 August 2019 Lincoln plc purchased a property for £1,000,000 from the company’s
Chief Executive Officer.

Required:

Explain the disclosures required in Lincoln plc’s financial statements in relation to the
purchase of the property. Your answer should include a brief discussion of whether this
is a related party transaction.

(4 marks)

Total = 30 marks

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

Question 4

A. Earnings per share

a) Elm plc is a listed company. At 1 January 2019 Elm had in issue 800,000 ordinary £1
shares.

During the year ended 31 December 2019 the following issues then took place:

• on 1 March 2019, a 1 for 5 rights issue at £4.20 per share. The pre-rights market
price was £6.00 per share; and

• on 1 October 2019, a 1 for 12 bonus issue. The bonus issue applied to all ordinary
shares in existence on 1 October 2019.

Earnings for the year ended 31 December 2019 were £300,000.

Required:

i. Calculate basic earnings per share (BEPS) for the year ended 31 December
2019.
(8 marks)

ii. Elm plc’s BEPS for the year ended 31 December 2018 was shown in last year’s
financial statements as 32.0 pence (£0.32).

Required:

Calculate the revised BEPS for the year ended 31 December 2018 and
explain why this information is useful to Elm plc’s investors.
(6 marks)

b) In 2015, Elm had issued 250,000 4% convertible preference shares of £1. The shares
remain in existence at 31 December 2019 and are convertible in 2025 on the basis of 60
ordinary £1 shares for every 100 convertible preference shares.

Required:

Calculate the diluted earnings per share (DEPS) for the year ended 31 December
2019.

(4 marks)
Question 4 continues on the next page.

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

B. Intangible assets

Hazel Ltd design and manufacture jewellery. On 1 January 2019, the company successfully
patented a new technology to manufacture their designs. The costs directly attributable to the
patent were £60,000 in total and the patent is valid for the 20 years commencing 1 January
2019. At 31 December 2019 the patent would sell to a third party for a market value of
£100,000.

Required:
a) Explain, with journals, the accounting treatment of the patent in the year ended
31 December 2019, assuming that Hazel Ltd use the Cost Model under IAS 38:
Intangible assets.

Your answer should include a discussion of the recognition criteria for the
patent.
(9 marks)

b) Explain whether it would be possible for Hazel Ltd to incorporate the market
value of the patent into their financial statements through the use of the
Revaluation Model under IAS 38: Intangible Assets.
(3 marks)

Total = 30 marks

January 2020
Advanced Financial Accounting
ACCO 1115
DRAFT

Question 5

a) Convertible bonds

On 1 January 2019, Packham plc issued 5,000 8% £100 convertible bonds for £100 each (at
par). Interest is payable in arrears on 31 December each year. Each bond can be redeemed for
cash (at par) or converted into 8 ordinary shares on 31 December 2021 at the choice of the
bondholder. The equivalent effective interest rate on similar bonds without conversion rights
is 12% pa.

Required:

Explain, with journals, the treatment of the convertible bonds:

i) on initial recognition; and

(9 marks)

ii) in Packham plc’s financial statements for the year ended 31 December 2019.
(9 marks)

b) Foreign currency transaction

Packham plc’s functional currency is the £ (GBP). On 1 March 2019, Packham bought an
item of plant from a supplier based in the United States. The purchase invoice was for
$100,000. The supplier’s balance remained unpaid at 31 December 2019.
Packham’s policy is to measure property, plant and equipment (PPE) using the cost model.
Depreciation is charged on plant at a rate of 25% per annum on a straight line basis.
You are provided with exchange rates as follows:
1 March 2019 (spot rate) $1.30 : £1
31 December 2019 (spot rate) $1.36 : £1
1 January – 31 December 2019 (average rate) $1.32 : £1

Required:

Explain, with journals, the treatment of the transaction in Packham plc’s financial
statements for the year ended 31 December 2019.
(12 marks)

Total = 30 marks

End of paper.
January 2020
Advanced Financial Accounting
ACCO 1115