SINGAPORE INSTITUTE OF MANAGEMENT

UNIVERSITY OF LONDON
PRELIMINARY EXAM 2021

MODULE CODE : AC2091

MODULE TITLE : Financial Reporting

DATE OF EXAM : 1 March 2021

TOTAL NUMBER : 9 pages + Eight (8)-column accounting paper

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THIS PAGE)
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INSTRUCTIONS TO CANDIDATES :-

Candidates will have FIFTEEN (15) minutes during which they may read the question paper and make
rough notes ONLY in their answer book. They then have remaining THREE (3) HOURS in which to
answer the paper.

Candidates should answer FIVE (5) of the following EIGHT (8) questions. Answer FOUR (4) questions
from Part A and ONE (1) question from Part 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 of this paper. EIGHT (8)-column
accounting paper is provided at the end of this question paper. If used, it must be fastened securely inside
the answer book.

A 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.

AC2091 - Financial Reporting Page 1 of 9

Part A: Answer FOUR (4) questions from this section.

Question 1

The statements of financial position for Apple Plc, Pear Ltd and Mulberry Ltd as at 31 December 2019 are given
below:
Apple Pear Mulberry
£ £ £
Non-current assets (land) 580,000 1,910,000 1,400,000
Investments 1,920,000
Inventory 200,000 400,000 1,000,000
Trade receivables 380,000 700,000 400,000
Cash 140,000 140,000 180,000
Inter-company receivable from Pear 80,000
Inter-company receivable from Mulberry 160,000
Total assets 3,460,000 3,150,000 2,980,000

Share capital 2,000,000 600,000 400,000

Retained profits 1,380,000 1,740,000 2,000,000
Bonds (10%) 20,000 80,000
Inter-company payable to Apple 80,000 160,000
Trade payables 60,000 650,000 420,000
Capital, reserves and liabilities 3,460,000 3,150,000 2,980,000

Apple Plc acquired 60% of Pear Ltd on 1 January 2014 for £920,000 when Pear Ltd's share capital and reserves
were £640,000. The fair value of Pear Ltd’s non-current assets (land) on 1 January 2014 was £2,000,000 and this
revaluation has not been incorporated into Pear Ltd’s accounts.

Apple Plc also acquired 70% of the bonds in Pear Ltd for £120,000 on 1 January 2014.

Apple Plc acquired 25% of Mulberry Ltd on 1 January 2015 for £800,000 when Mulberry Ltd’s share capital and
reserves were £600,000. The fair value of Mulberry Ltd’s non-current assets on 1 January 2015 was £1,600,000 and
this revaluation has not been incorporated into Mulberry Ltd’s accounts.

Apple Plc’s policy is to capitalise goodwill on shares. Impairment of 20% of the goodwill on the shares in Pear Ltd
and impairment of 20% of the goodwill on the shares of Mulberry Ltd arises in 2019. No goodwill impairment
arises on bonds.

In 2019, Apple Plc acquired inventory from Pear Ltd for £100,000 which had cost Pear Ltd £60,000 and inventory
from Mulberry Ltd for £200,000 which had cost Mulberry Ltd £100,000. This inventory remains unsold at the
statement of financial position date.

Bond interest of 10% per annum has not been paid by Apple Plc and Pear Ltd at the year end. Neither company has
accounted for this interest.

Required:
Prepare the consolidated statement of financial position for Apple Plc as at 31 December 2019.
(20 marks)

AC2091 - Financial Reporting Page 2 of 9

Question 2

On 1 January 2019, Big Ltd acquired 80% of the ordinary shares of a subsidiary, Small Org, which operates in the
currency ‘potts’, when Small Org was incorporated with share capital of 1,840,000 ‘potts’. No shares have been
issued by Small Org since acquisition.

The summary statements of financial position and income statements of Big Ltd and Small Org are as follows:

Statement of financial position

as at 31 December 2019 Big Ltd Small Org
£ 'potts'
Non-current assets 1,460,000 2,380,000
Investment in Small Org 736,000
Inter-company receivable from Small Org 48,000
Other net assets 776,000 400,000
Inter-company payable to Big Ltd (240,000)
Total assets 3,020,000 2,540,000

Share capital 2,120,000 1,840,000

Retained earnings 900,000 700,000
Capital and reserves 3,020,000 2,540,000

Income statements for the year

ended 31 December 2019 Big Ltd Small Org
£ 'potts'
Sales 6,376,000 4,000,000
Cost of sales (3,400,000) (2,000,000)
Gross profit 2,976,000 2,000,000
Depreciation (600,000) (600,000)
Other expenses (420,000) (200,000)
Profit before tax 1,956,000 1,200,000
Tax (1,056,000) (500,000)
Profit after tax 900,000 700,000

The following information is also available:

i. Opening inventory and non-current assets were acquired on 1 January 2019 and closing inventory was
acquired on 1 December 2019.

ii. Exchange rates were as follows:

Exchange rates £ 'potts'

1 January 2019 1 2
Average for the year 2019 1 4
1 December 2019 1 4.5
31 December 2019 1 5

AC2091 - Financial Reporting Page 3 of 9

Continued from Question 2:

Required:
a) State two main differences between the closing rate and temporal methods for translating the financial
statements of foreign subsidiaries. Outline the situations in which these methods should be used. (5 marks)

b) Translate the income statement and the statement of financial position for the year ended 31 December 2019
for Small Org using the closing rate method. (7 marks)

c) Show how the foreign exchange difference in part (b) arises. (5 marks)

d) Calculate the foreign exchange reserve and the non-controlling interest that would be seen in the consolidated
financial statements of Big Ltd as at 31 December 2019. (3 marks)

Question 3

Fermanagh Ltd started trading on 1 January 2019. The income statement and the statement of financial position for
the first year of trading are given as follows:

Income statement for 2019 £ £

Sales 950,000
Cost of sales:
Opening inventory 150,000
Purchases 600,000
Closing inventory (120,000)
(630,000)
Gross profit 320,000
Depreciation (40,000)
Other expenses (180,000)
Net profit 100,000

Statement of financial position

as at 31 December 2019 £
Non-current assets
Buildings - net book value 360,000
Current assets
Inventory 120,000
Cash 200,000
Total assets 680,000

Share capital 500,000

Profit and loss account reserve 100,000
Trade payables 80,000
Capital, reserves and liabilities 680,000

Continued overleaf:

AC2091 - Financial Reporting Page 4 of 9

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

Retail price Non-current Inventory

index (RPI) assets
1 January 2019 150 200 180
Average for 2019 160 210 190
30 November 2019 170 220 215
31 December 2019 190 230 250

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

Closing inventory was acquired on 30 November 2019.

Sales and purchases accrue evenly throughout the year.

Required:
a) Describe two advantages and two limitations of historical cost accounting and compare and contrast these with
the advantages and limitations of replacement cost accounting. (8 marks)

b) What are realised and unrealised holding gains on non-current assets within current value (replacement cost)
financial statements? (2 marks)

c) Prepare the current value (replacement cost) income statement for the year ended 31 December 2019 and the
current value (replacement cost) statement of financial position as at 31 December 2019 for Fermanagh Ltd,
using the physical/operating capital maintenance basis. (10 marks)

Question 4

Aaron Plc has the following projected information:

Year ended Profit before Capital Depreciation

31 December Depreciation £ Allowances £ £
2020 60,000 19,200 3,840
2021 57,600 3,840 15,360
2022 52,800 3,840 11,520
2023 48,000 26,880 7,680

The tax rate for Aaron Plc is 35%. There is no deferred tax balance brought forward as at 1 January 2020.

Required:
a) What is deferred tax and why is it needed? (4 marks)

b) What are permanent and temporary differences within deferred tax and how are they treated for deferred tax
purposes? (6 marks)

c) Show the current tax and deferred tax in the income statements and the deferred tax in the statements of financial
position for Aaron Plc for the years 2020 to 2023 under the flow through and full provision methods. (10 marks)

AC2091 - Financial Reporting Page 5 of 9

Question 5

Answer ALL parts to the question.

a) Forge Plc has entered into a construction contract, contract X and Amalgamate Plc has entered into a
construction contract, contract Y. Contracts X and Y started on 1 January 2019. The position on each contract
at 31 December 2019 was as follows:
Contract X Contract Y
£ £
Contract price 48,000 9,000
Value of work certified to date 40,000 4,500
Cost of work to date 30,420 3,600
Estimated additional costs to completion 8,580 13,200
Payments on account 37,200 4,320

Forge Plc uses the ‘cost method’ for assessing percentage completion and Amalgamate Plc uses the ‘value of
work certified method’ for assessing percentage completion.

Required:
Show how Contracts X and Y will be reflected in the income statement and statement of financial position of
Forge Plc and Amalgamate Plc at 31 December 2019. (8 marks)

b) Define ordinary shares, preference shares, share premium and bonus shares. State two permissible uses for the
share premium account. (6 marks)

c) A non-current asset (building) has been acquired by a company and it wishes to account for this as an investment
property. The non-current asset cost £1,400,000 on 1 January 2019 and its market value on 31 December 2019
is £1,800,000. The company’s depreciation policy for similar non-current assets is the reducing balance method
using a rate of 10%.

Required:
What are investment properties and how are they accounted for? (2 marks)

Show how the non-current asset would be accounted for in the income statement for the year ended 31
December 2019 and in the statement of financial position as at 31 December 2019 if it could be classed as an
investment property using:

 the fair value model (2 marks)

 the cost model (2 marks)

More questions overleaf

AC2091 - Financial Reporting Page 6 of 9

Question 6

On 1 January 2019, Henry Ltd issued a convertible debenture for £200 million carrying a coupon interest rate of
5%. The debenture is convertible at the option of the holders into 10 ordinary shares for each £100 of debenture
stock on 31 December 2023. Henry Ltd considered borrowing the £200 million through a conventional debenture
that repaid in cash; however, the interest rate that could be obtained was estimated at 7%, therefore Henry Ltd
decided on the issue of the convertible.

Required:
a) What are financial instruments and how these should be accounted for under current accounting standards?
How should convertible financial instruments be recognised under current accounting standards? (10 marks)

b) Show how the convertible bond issue will be recognised on 1 January 2019 and determine the interest charges
that are expected in the statement of comprehensive income over the life of the convertible bond. (10 marks)

Part B: Answer only 1 question

Question 7

Define intangible assets and discuss how they should be accounted for in accordance with international accounting
standards. Discuss the accounting treatment of two intangible assets of your choice and the impact that accounting
for these intangibles has on financial statements. Discuss the areas of difficulty in accounting for intangible assets.
(20 marks)

Question 8

Discuss the concepts of substance over form, off balance sheet finance and the impact of these concepts on financial
statements. Illustrate your answers with three examples.
(20 marks)

END OF PAPER

AC2091 - Financial Reporting Page 7 of 9

Present Value interest factor per £1.00 due at the end of n years for interest rate of:
% 1 2 3 4 5 6 7 8 9 10
n
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
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092

% 11 12 13 14 15 16 17 18 19 20
n
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
21 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010

AC2091 - Financial Reporting Page 8 of 9

Present Value interest factor for an annuity of £1.00 for a series of n years for interest rate of:
% 1 2 3 4 5 6 7 8 9 10
n
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
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077

% 11 12 13 14 15 16 17 18 19 20
n
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
21 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948

AC2091 - Financial Reporting Page 9 of 9