Advanced Financial Accounting Assignment
Question 1 -
The following shows the final accounts of Alpha Ltd and Beta Ltd for the financial year ended 31 December 2015.
Statement of profit or loss for year ended 31 December 2015
|
|
$'000
|
$'000
|
|
Sales
|
145
|
85
|
|
Less cost of sales
|
88
|
64
|
|
Gross profit
|
57
|
21
|
|
Less distribution expenses
|
14
|
12
|
|
Less administrative expenses
|
8
|
6
|
|
Less finance costs
|
-
|
1
|
|
Profit before taxation
|
35
|
2
|
|
Less taxation
|
11
|
6
|
|
Profit after taxation
|
24
|
(4)
|
Statement of financial position as at 31 December 2015
|
|
Alpha Ltd $'000
|
Beta Ltd $'000
|
|
Plant and equipment
|
42
|
35
|
|
Investment in Beta Ltd
|
33
|
-
|
|
Investment in Chuck Ltd
|
25
|
-
|
|
Inventory
|
39
|
30
|
|
Trade receivables
|
29
|
14
|
|
Cash and cash equipments
|
8
|
19
|
|
|
176
|
98
|
|
|
|
|
|
Share capital
|
100
|
20
|
|
Retained earnings
|
15
|
30
|
|
Trade payables
|
35
|
20
|
|
Term loan
|
26
|
28
|
|
|
176
|
98
|
Additional information:
At 30 June 2015, Alpha Ltd acquired 20% of the ordinary shares of Chuck Ltd. For the year ended 31 December 2015, Chuck Ltd reported profit after tax of $4,000.
Alpha acquired 75% of Beta Ltd's issued share capital at 31 March 2015. At 1January 2015, Beta Ltd's retained earnings was $34,000.
The group's policy is to value the non-controlling interest at fair value on the date of acquisition. The fair value of the non-controlling interest (NCI) is $12,000 at the date of acquisition.
During the financial year 2015, Alpha Ltd had sold a batch of inventory worth $18,000 to Beta Ltd. The original cost of the inventory to Alpha Ltd was $13,500. At 31 December 2015, 20% of this inventory remained unsold in Beta's books.
The following reflects the intercompany balance:
- Receivable from Alpha Ltd in Beta Ltd's books : $20,000
- Owed to Beta in Alpha Ltd's books : $15,000
The difference between the balances is due to a tranche of cash payment which has not been received by Beta Ltd.
Taxation impact on the above transactions are to be treated as immaterial and should not be accounted for, where applicable.
Required:
(a) Illustrate the consolidation process by applying the principles underlying the elimination of intra group balances and transactions. All assumptions made have to be explicitly indicated in the workings.
(b) Prepare the consolidation worksheet for the year ended 31 December 2015, with regards to:
(i) Statement of profit or loss and other comprehensive income.
(ii) Statement of financial position.
(c) Discuss three (3) factors which limit the usefulness of the consolidated financial statements to users, with regards to providing "true and fair" view.
Question 2 -
On 1 January 2014, BCD Pte Ltd (BCD) had issued a 5% convertible bond for $1 million at par. The bond is convertible in 4 years' time, from date of issue. Otherwise, the bond holder has an option to choose to have a redemption at par in cash.
The coupon rate of a comparable straight bond is 8%.
This is the first time BCD has issued convertible bonds. The Accounting Manager, Bob Chan, would like to draft a memo to the Accounting Department to explain and standardise the accounting treatment of convertible bonds and has asked you to draft it on his behalf.
Required:
Draft a memo on behalf of the Accounting Manager to the BCD Accounting Department. Your memo should include the following:
(a) Explain the term "compound financial instrument" and its treatment.
(b) Prepare the necessary journal entries to record the above convertible bond issue as an example. Show all supporting workings.
(c) Explain how you derived your answer to (b). You should relate to any relevant accounting concepts and principles.
Question 3 -
XYZ Ltd is a trading company and closes its financial year at 31 December. On 1 January 2014, it had purchased a tranche of 500,000 shares in PQR Ltd at a price of $1.50 each. XYZ's management had strong views about the long term outlook of PQR Ltd and therefore had decided to go ahead to invest in these shares.
On 31 July 2014, the market had rallied and the shares of PQR Ltd surged to $4.00. This was mainly contributed by news that PQR Ltd had signed a major multibillion dollar contract to build a new logistics facility for the government.
On 31 December 2014, the share price of PQR Ltd closed at $2.00. In the subsequent year at 31 December 2015, the share price closed slightly higher at $2.20. XYZ Ltd continued to hold the shares of PQR Ltd at the same date.
Finally, on 3 February 2016, XYZ Ltd sold off its entire holding of PQR Ltd's shares at $2.30 per share.
Required:
(a) Describe the term "fair value through profit or loss" and suggest how it differs from the conventional recording of assets at historic cost.
(b) Illustrate the above transactions in the books of XYZ Ltd for the period from 1 January 2014 to 31 December 2015. Narratives are not necessary.
(c) You received the follow query from the newly appointed external auditor, BBB LLP. Draft an email to respond.
From: Jonny Lim Chee Sim (BBB LLP)
Sent: 10 February 2016 11:42 AM
To: (XYZ Ltd)
Cc: Billy Kong King King (BBB LLP)
Subject: Accounting for Investments
Dear
During the audit, we have come across the accounting treatment for the PQR shares bought on 1 January 2014. Could you explain the reasons for its treatment?
Thanks and best regards
Jonny Lim
Partner | Assurance
BBB LLP