BS 3039: Financial Reporting and Forecasting
Aberdeen Business School
BA (Honours) Accounting and Finance
BA (Honours) Accounting and Management
MSc Accounting and Finance
2, 3 and PG
17th December 2020
Time (main cohort)
Time (AEA Student)
No. of Pages (including cover sheet)
Instructions to Candidates
Students should answer:
Section A: THREE compulsory questions (80%)
Section B: ONE question from a choice of TWO (20%)
- All answers should be completed using the word document provided. This contains a template for question 1 c).
- The word limit for narrative questions in Section B is 1,000.
- You may make use of a non-programmable calculator in this exam.
Special Stationery (if applicable)
Please answer all questions on the word document provided, using the template provided for question 1c).
SECTION A: Answer all 3 questions
As the accountant of Winter plc, you are preparing the company’s financial statements for the year ended 30 November 2020. The financial statements must comply with all relevant International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). You are considering the accounting treatment of the following transactions, none of which have been recorded.
- On 2 November 2020 the company sold goods to a German customer. The goods were invoiced in euros, €180,000. The customer paid its invoice on 3 December 2020. Neither the initial sale nor the receipt have been recorded by Winter plc. Exchange rate were as follows:
- 2 November 2020 £1 = €1.15
- 30 November 2020 £1 = €1.17
- 3 December 2020 £1 = €1.18
- On 31 October 2020, the company had a 1 for 4 bonus issue of ordinary shares.
Nominal value £0.50 per share
Market value £3.50 per share
Prior to the issue the company had £2,000,000 of issued ordinary share capital.
- At a Board of Directors’ meeting on 1 November 2020, a dividend of £0.05 per share issued at that date was declared. The dividend will be paid at the end of December 2020.
- On 10 December 2020, the company received notification that one of its customers had filed for insolvency. At 30 November 2020 the balance in the sales ledger related to this customer was £450,000. It is anticipated the customer will only be able to pay 10% of amounts owing to its creditors. A further sale of £60,000 was made to this customer on 3 December 2020.
- One of the company’s products is sold with a 6 month warranty. If minor defects were to be detected in the products sold in the last 6 months of the financial year, the estimated repair costs would be £600,000. If major faults were detected in these machines, the estimated repair costs would be £1,200,000. Based on its past experience of actual warranty claims on these particular products, the company estimates the chances of there being no defects to be 70%, minor defects 25% and major defects 5%.
(Question 1 continued on next page)
(Question 1 continued from previous page)
- At a Board Meeting in November 2020, the directors discussed restructuring part of the business which might result in closing a factory in France. The company is looking at alternative courses of action and no final decision has been made. If the factory is closed the costs of restructure are estimated to be approximately £1,500,000.
- The company is being sued by a customer for breach of contract. The case is complicated but the company’s legal counsel has advised that the customer’s chances of winning the case to be around 25%. The amount involved is £1,000,000 and the case is due to be resolved in the first quarter of 2021.
- During the year the company made a sale comprising physical goods and a 24 month maintenance plan. The total price of the contract was £96,000 and the customer paid in full upon delivery of the goods. The goods were delivered on 1 June 2020 and the maintenance plan runs for a 24 month period from that date. The company sells the goods without maintenance for £80,000 and sells a stand-alone maintenance plan for £20,000.
- Prepare journal entries to record the above transactions in the financial statements for the year ended 30 November 2020, complying with all relevant IAS and IFRS. Assume that any pre-tax Income Statement adjustments should be recorded as Other Expenses.
- Making reference to the relevant IAS or IFRS, explain the reasons for the accounting treatment you have used in a) above and outline any disclosure required for each of the transactions 1-8.
- Using the proforma table provided, for each of the transactions 1-8 note the impact on the following elements of the financial statements of Reporting plc.
- Total comprehensive income for the year ended 30 November 2020
- Total assets as at 30 November 2020
- Total equity as at 30 November 2020
- Total liabilities as at 30 November 2020
Question Total 40 marks
You are an assistant accountant for Autumn plc, a company which prepares its financial statements to 31 October each year. You have been asked to update the trial balance to reflect various transactions and to prepare information for use in the financial statements. At 31 October 2019, the company’s trial balance showed the following cost and accumulated depreciation balances for the property, plant and equipment:
Land and Buildings*
Plant and machinery
*Includes land which cost £1,000,000. Land is not depreciated. The company’s depreciation policy for its other non current assets is as follows:
Over 25 years straight line
Plant and machinery
20% per annum reducing balance
25% per annum straight line
A full year’s depreciation is charged in the year an asset is acquired, with no depreciation charged in the year of disposal. For the purposes of the financial statements, depreciation on buildings is classed as an administrative expense, depreciation on plant and machinery as cost of sales and depreciation on vehicles as a distribution expense.
During the year ended 31 October 2020, the following transactions took place:
- On 1 January 2020 the company acquired a new machine for use in its production process. The total outlay was as follows:
Cost of machine £104,000 (£108,000 less prompt payment discount of £4,000)
Installation costs £3,000
Delivery costs £1,200
During the installation, the factory floor was damaged. Repair costs were £1,500.
- On 30 September 2020, the company sold a machine for £40,000. The machine had originally cost £120,000 when it was purchased in March 2017. Any gain or loss on disposal should be recorded within other expenses.
- As a result of new safety legislation, the company has had to install some screening to some of its machinery. This was done in August 2020 at a cost of £45,000.
- During the year, one of the company’s delivery vans failed its MOT. Repair costs were £3,000.
(Question 2 continued on next page)
(Question 2 continued from previous page)
In accordance with the provisions of IAS 16: Property, plant and equipment:
- Prepare the journal entries to account for all the transactions during the year ended 31 October 2020. With the exception of depreciation, assume that all transactions are cash based.
- Prepare the property, plant and equipment table as it would appear in Autumn plc’s Notes to the Financial Statements for the year ended 31 October 2020.
- Show how the information contained in the table in b) above would be presented in the Statement of Financial Position as at 31 October 2020.
- Explain by reference to the definitions contained within IAS 16, why, and at what £amount, the machine referred to in note1 of this question can be recognised as property, plant & equipment.
Question Total 20 marks
You are the financial accountant for Summer plc, a company which prepares its financial statements at 31 August each year. An extract from the company’s trial balance as at 31 August 2020 is shown below:
5% Bank loan
Bank loan interest
Current tax payable (31.8.19)
Legal provisions (31.8.19)
Other current liabilities
In finalising the financial statements for the year ended 31 August 2020 you should consider the following:
- After the year end the company received an invoice for electricity for the 3 month period ended 30 September 2020. The invoice was for £18,000 and the amount accrued in the trial balance was £10,000.
- Tax on profits for the year ended 31 August 2020 is estimated at £125,000. The trial balance contains a balance of £105,000 which relates to the tax on profits for the year ended 31 August 2019. The tax computation for that year has recently been agreed with HMRC at an amount of £108,000 and will be settled in September 2020.
- An additional deferred tax liability of £15,000 is required.
- The bank loan is payable in 3 equal annual instalments, the first instalment being due on 31 December 2020.
(Question 3 continues on next page)
(Question 3 continued from previous page)
- The legal provision at 31.8.19 relates to an issue which was heard in the courts in July 2020. The case was settled, the company lost and the amount to be paid was agreed at £45,000. This will be paid in October 2020.
- The company is being sued by a former employee for unfair dismissal. It is probable that he will win his case although the case is not due to be heard until 2022. The amount of damages being claimed is £75,000. Nothing has been provided in the figures above.
Prepare an extract of the Statement of Financial Position drawn up in accordance with IAS 1: Presentation of Financial Statement, showing liabilities as at 31 August 2020.
There is no need to present journal entries but you should show full workings in arriving at your answer. You may choose to use journals as part of these workings.
Question Total 20 marks
Total Marks for Section A: 80 marks
END OF SECTION A
PLEASE TURN TO NEXT PAGE FOR SECTION B
SECTION B: Answer EITHER Question 4 or Question 5
Question 4 (total wordcount restriction of 1,000 words)
The financial statements for Venus plc for the year ended 30 June 2020 were finalised and published in September 2020. These financial statements show total comprehensive income of £3.8 million. When preparing the internal accounts for the quarter ended September 2020, the chief accountant discovered the following:
- The accrual at 30 June 2020 for electricity and telephone was estimated based on prior year invoices. The invoice received after finalisation of the financial statements showed the amount was understated by £7,000.
- In June 2020, a purchase invoice for €10,000 was posted as £10,000 in error. The exchange impact was £790.
- A major error involving the overvaluation of inventory was discovered after the year end. It is estimated that the corresponding overvaluation of closing inventory at 30 June 2020 would have been £700,000.
- Outline how each of the above matters will be reflected in the financial statements for the current year, the year ended 30 June 2021, under IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors.
- Explain, by reference to IAS 8, the factors a company should consider when establishing and reporting its accounting policies.
Question Total 20 marks
Question 5 (total wordcount restriction of 1,000 words)
- Explain the difference between adjusting and non-adjusting events according to IAS 10: Events after the Reporting Period, and illustrate this by giving 2 examples of each. For each example given, explain why it is an adjusting or non-adjusting event.
- Explain the treatment of both monetary and non-monetary items in accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates.
Question Total 20 marks
END OF SECTION B and END OF PAPER