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Financial Accounting

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University of Bath

SCHOOL OF MANAGEMENT

MN50325

Financial Accounting 2

Wednesday 28 May 2014

09:30 to 11:30

2 hours

 Answer TWO of the four questions in Section A

Each question in Section A is worth 33 marks

AND

Answer ONEof the threequestions in section B

Section B is worth 34 marks

Start each new question on a new page

Present value and annuity tables are supplied

Only calculators provided by the University may be used

PLEASE FILL IN THE DETAILS ON THE FRONT OF YOUR ANSWER BOOK/COVER AND SIGN IN THE SECTION ON THE RIGHT OF YOUR ANSWER BOOK/COVER, PEEL AWAY ADHESIVE STRIP AND SEAL

TAKE CARE TO ENTER THE CORRECT CANDIDATE NUMBER AS DETAILED ON YOUR DESK LABEL

DO NOT TURN OVER YOUR QUESTION PAPER UNTIL INSTRUCTED TO BY THE CHIEF INVIGILATOR

                

Section A – Answer TWO of the four questions in this section

Question 1

On 1st July 2013, Sue plc took control of Ridge Ltd when 65% of Ridge’s ordinary shareholdersaccepted a takeover offer. The offer consisted of £3 cash and one share in Sue for every three shares in Ridge. Shares in Sue were trading at £4 each when the takeover offer was accepted.A further payment of £2 per sharewas payable on 30th June 2015 if certain profit targets were met. Early indications are that these profit targets will be met. Sueplc has yet to account for this deferred payment in its individual accounts. Sue has a cost of capital of 10%. The directors have assessed and would like to use a fair value of the non-controlling interest in Ridge as at 1st July 2013 of £120,000.

Both companies prepare their financial statements to 31st December each year, and their statements of financial position at the end of 2013are shown below.  The profit after tax of Sue plc and Ridge Limited for the year ended 31stDecember 2013 amounted to £100,000 and £22,000 respectively.

[pic 1]

Additional Information:

  1. On 1st July 2013Sue plc assessed that the fair value of Ridge Limited’s property, plant and equipment was £80,000 higher than its carrying amount. Depreciation is charged at 10% per annum on average.
  1. In November 2013, Ridge Limited sold£120,000 of goods to Sue plc. Ridge always sells goods at a 20% mark-up. One half of these goods remained in Sue plc’s inventory at 31stDecember 2013.
  1. On 29thDecember 2013, Sue plc sent a cheque for £9,000 to Ridge Ltd. The cheque was received and lodged to the bank by Ridge Ltd on 4thJanuary 2014.
  1. The directors of Sue plc estimate that the goodwill arising on the acquisition of Ridge Limited had been impaired by £11,605as at 31stDecember 2013.
  1. In July 2013Ridge paid a dividend of 30p per share. Sue plc has credited this dividend receipt to income. The dividend had been included as a liability in Ridge’s statement of financial position as at 31st December 2012.

Required:

Prepare the consolidated statement of financial position of Sue Group plc as at 31stDecember 2013.

(33 marks)

Question 2

On 1stJanuary 2013, Pom plc acquired all of the ordinary share capital of a French company, Jerry Limited. Pom plc’s presentation currency is the pound sterling (£). Jerry Limited operates independently of Pom plc and its functional currency is the Euro (€). At the time of acquisition, there were no differences between Jerry’s fair values and  book values. The draft statements of comprehensive income of Pom plc and Jerry Limited for the year ended 31stDecember 2013 and their statements of financial position as that date are as follows:

[pic 2]

[pic 3]

Additional Information

1.         All of Jerry Limited’s property, plant and equipment were acquired on or before 1st January 2013. On 31stDecember 2013 both Pom and Jerry revalued their properties and the revaluation reserves relate to the revaluation of these properties in accordance with group policy.

2.        Exchange rates were as follows:

£1 = €

1stJanuary 2013

1.5

31stDecember 2013

0.5

Average for 2013

1.0

3.         Pom plc financed the investment in Jerry Ltd with a €150,000 long-term loan. This has been retranslated at 31stDecember 2013 with the corresponding loss taken to finance costs.

4.        Assume that opening inventories were purchased on 31stDecember 2012 and closing inventories were purchased on 31stDecember 2013.

5.         Both firm’s loan interest and tax were paid on 31st December 2013.

6.         On 31stDecember 2013, the directors estimate that the goodwill arising on the acquisition of Jerry Limited has been impaired by €10,000.

Required:

Prepare the consolidated statement of comprehensive income of PomGroup plc for the year ended 31stDecember 2013 and the consolidated statement of financial position as at that date.        (33marks)

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