Explain whether they are classed as related parties to Tree Plc.

How might you have addressed it differently if you had thought more about audience and style?
November 27, 2020
Organizational culture.
November 27, 2020

Question 1

The relationships of Tree Ltd are summarised as follows:

  • Tree Plc owns 70% of equity shares of Leaf Plc and 15% of equity shares in Branch Plc.
  • Bryan owns 25% of equity shares of Tree Plc and Gill is his wife.
  • Ruth is a director of Tree Plc. She owns 60% of the equity shares in Root Plc.  Paul is her partner and owns 10% of equity shares in Twig Plc.
  • Hannah works for Tree Plc as a manager, but she is not a director, and Bill is her son.
  • Tree Plc has a pension scheme for its employees.
  • Tree Plc buys approximately 35% of its main product from one overseas supplier.

Requirement:

For each of the organisations and individuals above, explain whether they

are classed as related parties to Tree Plc according to IAS 24.

(maximum word count 300 words)

Total 15 Marks

Question 2

Table Plc is currently preparing financial statements for the year ended 31 March 2019.

The accounting team discover that the sales figure for 31 March 2018 was understated by £200,000. The Trade Receivables at 31 March 2018 was also understated by the same amount.

This error is regarded as material.

Table Plc’s draft Profit or Loss Comprehensive Income Statement for the year to 31 March 2019, before correction of the error,is as follows:

2018                                 2019

£000                                 £000

Revenue                                    1,660                       1,740

Cost of Sales                                  (670)(730)

Gross Profit                                         990                                 1,010

Expenses                                        (590)(560)

Profit before taxation                           400                                   450

Income tax expense                         (80)(90)

Profit for the year                                 320 360

Retained earnings at 1 April 2017 were £950,000. No dividends were paid during the two years to 31 March 2019.  It should be assumed that Table Plc’s tax liability is always 20% of its profit before tax.

Requirement:

  1. Prepare a Profit or Loss Statement of Comprehensive Income for the year ended 31 March 2019, including the restated comparative figures for the year ended 31 March 2018.

(5 Marks)

  1. Calculate Table Plc’s restated retained earnings at 31 March 2019, after correcting the above error.

(5 Marks)

Total 10 Marks

Question 3

Lace Plc is a UK company and needs to be IAS compliant.  Lace Plc has recently been purchased by Shoe Inc, a US company.

Mr Sole, the finance director of Shoe Inc, has come to Lace Plc to evaluate their accounts.  He notes that Lace Plc is using the FIFO method of inventory valuation. This is not comparable to Shoe Inc’s inventory valuation as they have adopted the LIFO system of valuation.  Mr Sole suggests that Lace Plc should change their system of valuation to the US LIFO system adopted by Shoe Inc.

Lace Plc has the following inventory transactions:-

Day 1 Opening inventory nil

Day 2 Purchased 50 units at £15 per unit

Day 3 Sold 20 units at £35 per unit

Day 4 Purchased 60 units at £17 per unit

Day 5 Purchased 80 units at £30 per unit

Day 5 Sold 30 units at £40 per unit

Requirement:

  1. Apply the Average costing method to each transaction and calculate the closing valueofinventory.

(5 Marks)

  1. Evaluate the LIFO and FIFO inventory valuation methods and advise Mr Sole which method Lace Plc should use to remain IAS compliant.

(maximum word count 300 words)

(7 Marks)

Total 12 Marks

Question 4

Frank Plc received a grant in the sum of £200,000in 2015 as a contribution towards the £600,000 paid for plant and machinery purchased in 2015.  The machine has a life expectancy of 5 years.

The Financial Director of Frank Plc has asked for your advice in respect of why it is necessary to distinguish between research and development expenditure and how this distinction affects the accounting treatment.

Requirement:

  1. Calculate the amount of annual depreciation charge to be shown within the depreciation expense shown in the 2020 Income Statement.

(7 Marks)

  1. Write an explanation of the accounting standards approach in relation to research and development expenditure addressing the Financial Director’s concerns.(maximum word count 120 words)

(6 Marks)

Total 13 Marks

Question 5

On 31 December 2018, Sela Plc acquired Lomo Plc which had a separately identified brand, valued at £7,600,000. In addition to this, SelaPlc also estimated at the end of 2019 that their own internally generated brand is worth £12,000,000.

A director has suggested that both figures should be recorded in the statement of financial position as intangible assets, as brands would strengthen their financial position.

Sela Plc is currently working towards a target gearing ratio in order to secure external funds for expansion. Both brands described have an indefinite life.

Requirement:

  1. i) With reference to the above scenario, explain how these brands would be accounted for in the financial statements of Sela Plc for year ending 31 December 2019. (maximum word count 140 words)

(7 marks)

  1. ii) How does the recognition and accounting treatment of goodwill differ from that used for brands? Explain any three differences.

(maximum word count 120 words)

(6 marks)

iii) Explain any two justifications for reporting brands as assets.(maximum word count 40 words)

(2 marks)

Total 15 Marks

Question 6

Castle Plc, a leading printing company, has offered you a placement as a trainee accountant. Castle Plc holds Annual General Meetings (AGMs) six months following the reporting period.

The following information becomes available to you in the preparation of the financial reports for the year ended 30 September 2019.

The profit for the year amounted to £570,000.

  1. A quarter of the reported inventory figure relates to diaries printed for the year 2019. Diaries outside the usual inventory cycle are sent for recycling at an insignificant cost to Fosse Ltd.
  2. The revenue figure is inclusive of sales to a customer on 20 September 2019. £400 worth of these goods was returned on 29 September 2019 for defects but this was not adjusted in the accounts.
  • The chief accountant has suggested the financial reports would not be ready until May 2020 this year due to staff illness.
  1. The financial report was shown to the new managing director who is a trained journalist. She felt the terminology used in the financial reports was not friendly to her and would surely not be clear to a large section of the shareholders.
  2. Castle Plc was undergoing the implementation of a computerised filing system which was halted for the Christmas break. During the break a fire in a nearby facility caused a loss of approximately half of the paper records of invoices which were yet to be stored.

Requirement:

In each of the above scenarios, discuss any qualitative characteristics which have been compromised. Where there is no compromise, state this clearly. Make clear references to the scenario to justify your answer.

(maximum word count 200 words)

Total 10 Marks

Question 7

The profit figure is an objective measure with some subjective estimates. It has been argued that it does not reflect current value. For example in a period of high inflation, Casi Plc decided to use replacement cost accounting.  Closing inventory was purchased for £35 per unit. The general price increases during the period meant the purchase price had increased by 30% by the end of the period.

The Finance manager of Casi Plc is interested in how Positive accounting, Normative accounting, Public interest and Capture theories impact on the accounting theory.

Caspi Plc has implemented IAS 36 impairment of assets. All the assets were reviewed for impairment where appropriate and the impairment loss has been included within the financial statements.

Requirement:

  1. Explain any two criticisms of the accountant’s measure of profit.(maximum word count 60)

(4 Marks)

  1. What is the value per unit of closing inventory of Casi Plc at the end of the period?

(2 Marks)

iii)        Explain the following in relation to accounting theory.

  • Positive accounting theories
  • Normative accounting theories
  • Public interest theory
  • Capture theory

(maximum word count 160)

(8 Marks)

  1. iv) Describe what is meant by ‘impairment’ and briefly explain the procedures that must be followed when performing an impairment review.(maximum word count 220)

(11 Marks)

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