Question 1
The following trial balance has been extracted from Capoeira Ltd’s cloud accounting package
at 31 December 2020.
Note £ £
Revenue 2,900,400
Purchases 1,906,850
Administrative expenses (4) 711,620
Inventories at 31 December 2019 56,200
Trade and other receivables 83,540
Land and buildings (1), (2)
Cost 550,000
Accumulated depreciation at 31 December 2019 375,500
Plant and equipment (1), (3)
Cost 505,800
Accumulated depreciation at 31 December 2019 206,300
Retained earnings at 31 December 2019 252,630
Ordinary share capital (£1 shares) 200,000
Trade and other payables 56,850
Zero coupon bond (4) 90,720
UK bank account 6,200
Euro bank account (5) 85,000
Income tax (6) 4,250
3,995,930 3,995,930
Notes:
(1) No adjustments have been made for depreciation for the year ended 31 December
- The straight-line method of depreciation is used. Plant and equipment has a 10-
year useful life. Buildings have historically been depreciated over a 40-year useful life.
All expenses associated with property, plant and equipment are recognised in cost of
sales.
(2) Capoeira Ltd has always measured its property, plant and equipment using the cost
model. However, on 1 January 2020 the directors decided to adopt the revaluation
model for the company’s freehold land and buildings. The remaining useful life was also
reviewed and revised at this date. The following figures were obtained from an
independent surveyor on that date.
Original cost Valuation on 1 January
2020
Remaining useful life on
1 January 2020
£ £
Land 90,500 250,000 N/A
Buildings 459,500 600,000 20 years
The revaluation is not reflected in the trial balance above. There were no additions to or
disposals of land and buildings during the year. Capoeira Ltd wishes to make an annual
transfer between the revaluation surplus and retained earnings.
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(3) Plant and equipment is still to be measured under the cost model. The following
information relates to the year ended 31 December 2020.
• New machines were purchased for cash of £167,000 on 1 October 2020. This was
debited to plant and equipment (cost) and credited to the UK bank account.
• On 1 October 2020 a machine which cost £50,600 on 1 October 2016 was sold for
cash of £15,000. The only entries made in respect of this sale were to debit the UK
bank account and credit plant and equipment (cost) with the £15,000.
• On 31 December 2020 the production director carried out an impairment review of
the plant and equipment. He concluded that one machine, which was not operating
efficiently, had become impaired. The machine had an original cost of £75,200. Its
carrying amount on 31 December 2019 was £52,600. On 31 December 2020 it was
assessed that the machine has a value in use of £32,000 and could be sold for
£36,000, if selling costs of £200 were incurred.
(4) On 1 January 2020 Capoeira Ltd purchased a zero coupon bond for £90,720, paying an
additional £2,500 in broker’s fees. The broker’s fees were debited to administrative
expenses and credited to the UK bank account. The nominal value of the bond was
£98,000. The bond is quoted in an active market and the company expects to hold it
until its redemption at a premium of 7% on 31 December 2022. The bond has an
effective interest rate of 4% pa.
(5) On 30 September 2020 Capoeira Ltd bought €100,000 using money from its UK bank
account, and placed these funds in a separate euro bank account. These funds are to
be used to pay for purchases it intends to make in euro next year. The euro bank
account balance was recognised at the spot exchange rate on 30 September 2020 of
€1: £0.85. The spot exchange rate on 31 December 2020 was €1: £0.80.
(6) The income tax figure in the trial balance relates to an overprovision for income tax for
the year ended 31 December 2019. The income tax liability at 31 December 2020 has
been appropriately estimated at £50,400.
(7) Inventories on 31 December 2020 were correctly valued at £75,400.
Requirements
1 Prepare the following for Capoeira Ltd, in a form suitable for publication in its financial
statements for the year ended 31 December 2020:
(a) a statement of profit or loss;
(b) a statement of financial position; and
(c) a note to the financial statements showing the movements on property, plant and
equipment. A total column is not required. (28 marks)
2 IAS 1, Presentation of Financial Statements, requires financial statements to be
prepared using the accrual basis of accounting. Explain this basis and illustrate it using
two examples from the financial statements of Capoeira Ltd for the year ended 31
December 2020. (4 marks)
Total: 32 marks
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Question 2
Darcey is an ICAEW Chartered Accountant and the financial controller of Sarabande Ltd.
She prepared the draft financial statements for the year ended 31 December 2020 as the
company does not currently have a finance director.
Yesterday evening Darcey sent a friend the following message via an instant messaging app:
“I’ve finally finished these draft accounts. But part way through my MD told me the company
is currently seeking finance and that I need to make sure the financial statements look as
good as possible.
I’ve done what I can, including doing what he asked for on a couple of issues, but now I’m not
sure if I should have done……though in my defence the MD said he’d promote me to FD if I
did a good job.”
The following describes four issues affecting the draft financial statements for the year ended
31 December 2020.
(1) On 1 May 2020 Sarabande Ltd purchased a licence for £252,000. This non-transferable
licence allows the company to use a new software development tool for five years. It is
expected that this software development tool will be superseded after the five years and
a licence for replacement software will need to be acquired.
The software development tool has proved to be very popular and successful. Darcey
initially recognised the licence at cost in property, plant and equipment. At 31 December
2020 it would have cost £312,000 to purchase the licence so Darcey increased the cost
by £60,000 and credited this to other income in the statement of profit or loss. No other
accounting entries have been made in relation to this licence.
(2) On 1 January 2020 Sarabande Ltd entered into a contract to lease a machine with a
four-year useful life, and received an incentive of £1,000 for signing the lease. Under
the terms of the contract four lease payments of £90,000 are due annually in arrears.
The first payment of £90,000 was made on 31 December 2020. Darcey debited £1,000
and credited £90,000 to cash and debited the net £89,000 to cost of sales. The interest
rate implicit in the lease is 4% pa and the present value of future lease payments is
£326,700. The contract constituted a lease under IFRS 16, Leases.
(3) During the year a significant proportion of Sarabande Ltd’s purchases were from Polka
Ltd, a company owned by the managing director’s wife. These purchases totaled
£890,600 and at 31 December 2020 trade payables included £104,000 due to Polka
Ltd.
Prices paid to Polka Ltd are higher than those paid to other suppliers, and therefore
Darcey believes that the purchases should be disclosed in the financial statements. The
managing director insists that the purchases were all made at arm’s length and has told
Darcey not to disclose anything about these transactions.
(4) In February 2021 Sarabande Ltd received a letter from an employee who was injured at
work in November 2020. The employee claimed that Sarabande Ltd failed to implement
the appropriate health and safety procedures, which would have prevented the
accident.
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Lawyers advised the directors to settle out of court and on 15 March 2021 a settlement
of £350,000 was agreed and paid to the employee. Darcey felt that this matter should
be included in the financial statements as a provision but the managing director told her
not to reflect the matter in any way.
Requirements
1 Explain the required IFRS financial reporting treatment of Issues (1) to (4) above in
Sarabande Ltd’s financial statements for the year ended 31 December 2020. You
should prepare all relevant calculations and state the impact of correcting each issue on
the profit for the year. (20 marks)
2 Describe the differences between IFRS and UK GAAP in respect of the financial
reporting treatment of leases in the financial statements of the lessee. (3 marks)
3 Discuss, with reference to the above scenario:
(a) which fundamental principles from the ICAEW’s Code of Ethics have been
breached by Darcey; and
(b) which types of threats to compliance with those principles have arisen. (6 marks)
Total: 29 marks
