ATTEMPT ALL QUESTIONS EOSA - IFRS

QUESTION 1 (CLO 2 & 3) (Total 40 marks)

The following is an extract from the trial balance of Big Tyme Company Ltd for the year ended 31 December 2005.

	$000	$000
Revenue		30,000
Cost of Sales	12,000
Administrative expenses	11,000
Distribution Cost	8,500
Income Tax (note 3)	150
Deferred tax liability 1 January 2005 (note 3)		8,000
Provision at 1 January 2005 (note 2)		4,500
Retained earnings at 1 January 2005		44,000
Equity share capital ($1) at 1 January 2005		50,000
Intangible assets (note 6)	4,000
Investment property (note 5)	20000
Finance cost	2,000
Investment Income		750
Suspense account		50,000

The following information is relevant:

1. The inventory manager made an error in the inventory count at 31 December 2004, hence the closing inventory balance in the 2004 financial statements was overstated by $800,000. No entries have been made to correct this error.

1. The provision relates to a court case in existence since December 2004. Big Tyme Company settles the case on 31 December 2005 for $7,000,000. The full amount was credited correctly to cash, with a corresponding debit entry being made in the suspense account.

1. The income tax figure in the trial balance relates to the under/over provision from the previous year. The current year tax is estimated to be a tax refund of $1,500,000. In addition, the deferred tax liability at 31 December 2005 is estimated to be $8,500,000.

1. On 30 September 2005, Big Tyme Company made a 1 for 4 right issue. The exercise price was $2.00 per share. The proceeds were correctly accounted for in cash, with a corresponding credit entry being made in the suspense account.

1. Big Tyme acquired an investment property for $25,000,000 cash on January 2005 and decided to use the fair value model to account for investment properties. As the property is expected to have a 25 year useful life, depreciation was recorded in this basis. The fair value of the property at 31 December 2005 has been assessed at $27,000,000 but no accounting has taken place in relation to this. All depreciation and amortization is charged on a pro-rata basis to administrative expenses. There were no other acquisitions or disposals of non-current assets.

1. Big Tyme Co incurred a number of expenses in relation to branding during the year and has capitalized the following costs as intangible assets.

$1,500,000 cash was paid on 1 April 2005 to promote one of its major

brands which is deemed to have an indefinite life.

$1,000,000 cash was paid on 1 October 2005 to acquire a brand from

one of its competitors. Big Tyme Co expect the brand to have a useful

life of four years. Big Tyme Co intends to sell it after four years. At the

point of sale, it is estimated that the value of the brand will have

increased and so no amortization has been accounted for in the current

year.

7. Big Tyme Co paid dividend of $0.05 per share on all existing shared 31 December 2005, recording the dividend paid in administrative expenses.

Required:

1. Prepare the statement of profit or loss for Big Tyme Co for the year ended 31 December 2005. (Show the necessary adjustments for each line item based on the notes) (20 marks).
2. Prepare the statement of changes in equity for Big Tyme Co for the year ended 31 December 2005 (12 marks).
3. Prepare the following extracts from the statement of Cash Flows for Bug Tyme
4. Co for the year ended 31 December 2005:
5. Cash flows from investing activities (4 marks)
6. Cash Flows from financing activities (4 marks)

(Total 40 marks)

QUESTION 2 (CLO 2 & 4) (Total 40 marks)

The Bat Group operates in the Consumer Electronics and Appliances industry. On 1 January 2022 Bat Co disposed of one of its subsidiaries, Cat Co, for cash of $63m. Cat Co manufactures household appliances and was sold because the Bat Group wanted to exit this particular sector.

Extracts from the consolidated financial statements of the Bat Group for the years ended 31 December 2021 and 2022 are as follows:

Statements of profit or loss	2022	2021
	$000	$000
Revenue	150,000	170,000
Cost of Sales	(71,400)	(107,700)
Gross Profit	76,050	75,900
Operating expenses	(50,550)	(56,100)
Profit from operations	25,500	19,800
Finance Costs	(4,800)	(8,250)
Profit before tax	20,700	11,550
Statement of financial position
Inventories	5,000	15,000
Cash	23,550	10,950

The following information is relevant;

1. The accounting assistant has not accounted for Cat Co as a discontinued operation because the disposal occurred on 1 January 2022. No figures form Cat Co have been included in the 2022 financial statements extracts above. The proceeds from the disposal have been recorded in cash, with all net assets and goodwill derecognised. The balancing figure was held in a suspense account.

1. Bat Co acquired 100% of Cat Co on 1 January 2016 and goodwill was calculated as $9m. The goodwill had been impaired 40% in 2020. The net assets at 1 January 2022 were $50m.

1. As part of the sales agreement, the Bat group will receive an annual fee of $3m for the use of the Cat Co brand. The 2022 annual fee has been included in the Bat group revenue for the year ended 31 December 2022.
2. Results obtained from Cat Cos individual published financial statements show the following key information:

	2022	2021
	$000	$000
Revenue	48,400	50,000
Gross Profit	18,200	18,900
Profit form operations	12,000	9,000

1. Prior to the disposal Cat Co used to use some property belonging to the Bat group. Following the disposal, the Bat group moved its electronics division into this property.

Previously the electronics division had leased external facilities for $3.74m a year. At 1 January 2022 the lease had ten years remaining. To exist the lease, the Bat group made a one-off payment of $4.5m to the lessor and recorded it as operating expenses.

1. The Bat group acquires raw materials form overseas. In 2021 the group recorded foreign exchange gains of $4.5m, and in 2022 the group made a foreign exchange loss of $1.5m. Both items were recognised within operating expenses.

Required:

1. Calculate the gain on disposal of Cat Co that would need to be included in the consolidated statement of profit or loss for the Bat Group for the year ended 31 December 2022. (6 marks) (Show all workings)
2. Explain whether or not the disposal of Cat Co is likely to constitute a discontinued operation, and the correct accounting treatment for this. (3 marks)
3. Calculate the following ratios, for the Bat Group for 2022 and 2021(Show all workings):

-Gross profit margin (3 marks)

- Operating profit margin (3 marks)

- Interest cover (3 marks)

- Inventory turnover days (3 marks)

1. Analyse the Bat Group for the year ended 31 December 2022 compared to the year ended 31 December 2021 based on the ratios mentioned above. (State one possible reason for the change in each ratio) (12 marks)
2. Briefly comment on the effect that note 5 would have on Operating expenses and Finance Cost for the Group. (2 marks)
3. Based on note 6, briefly comment the group exposure to foreign currency risk. (2 marks)
4. Give your overall conclusion for the Bat Group since the disposal. (3 marks)

(Total 40 marks)