Income statement and statement of comprehensive income for Hansenpheet plc.

AC330 - Financial Accounting, Analysis and Valuation Class Exercise Pack 2012-13 Lent Term 2013 Professor Richard Macve The London School of Economics and Political Science Department of Accounting AC330: Financial Accounting, Analysis and Valuation Class Exercises 2012-13: Lent Term 2013 Term Week No. 1 Module Class No. Exercise Name [VanBuuren & VanDyk from Dr. Stefano Cascino's lectures] 2 1 Hansenpheet PLC RMv330EX2 3 2 Historical Cost and Standards Discussion Question RMv330EX3 4 3 Arfbilt Contracting PLC RMv330EX4 5 4 Income from Annuity Janus (2006) PLC RMv330EX5 RMv330EX6 6 5 Muniswerth Ltd RMv330EX7 7 6 Eyedeal Inc. RMv330EX8 8 7 Tricky Flying and Two Companies and A Manufacturing Company RMv330EX9 RMv330EX10 RMv330EX11 9 8 Letsleaseagen PLC RMv330EX12 10 9 Summer 1 10 Horsone, Callaghan & Rentier Intangibles RMv 330 EX13 RMv(330/20) Your class teachers will tell you which exercises are to be submitted (with coursework coversheets) for formative assessment. It is important that you prepare answers to all questions each week if you are to obtain proper benefit from the classes and to make the contribution to each class that is expected of you under the School's Code of Practice. It is essential that you answer the discussion parts of questions as well as the parts requiring numerical calculation. Remember also that individual examination questions may range across more than one lecture/class topic. NB: As explained in the lectures, for Ac330, you are not expected to know the detailed requirements of IFRS beyond the level covered in the lectures; nor are you required to use their precise terminology; and instructions (here or in exam questions) to prepare published accounts of listed companies in conformity with IFRS are to be interpreted in that sense. Whatever the dates in the questions, use the latest version of relevant IFRS (as well as the relevant provisions of the Companies Act 2006) with which you have been made familiar during the lectures. Specimen solutions will go up on the course website via Moodle after the last class each week, and hardcopies will be available, normally the following week, in SIC (OLD 3.20). RMv330EXLT1213 061212 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: HANSENPHEET PLC Hansenpheet plc has been trading for a number of years. The trial balance as at 30 June 2011, as extracted from the company's accounting records, shows the following balances: Dr 000 Share capital: ordinary shares of 50p Share premium account Retained earnings at 1 July 2010 Freehold land and buildings: cost provision for depreciation at 1 July 2010 Plant, machinery and equipment: cost provision for depreciation at 1 July 2010 Inventories at 1 July 2010 Trade receivables Cash at bank Trade payables Taxation account 8% Debenture Stock at par Issue costs and discount on debentures Sales less returns Purchases Distribution costs Wages and salaries Other administrative expenses Interest paid Interim dividend paid Suspense account Cr 000 2,100 400 1,074 1,500 120 2,400 1,080 1,359 3,139 1,610 2,125 50 2,000 152 25,925 17,916 1,847 2,775 1,826 160 210 34,894 20 34,894 The following information is relevant: (1) Inventories at 30 June 2011, at the lower of cost and net realisable value, totalled 1,425,000. (2) Depreciation is to be provided to write down non-current assets on a straight-line basis as follows: Freehold buildings to zero residual value over 50 years Plant, machinery and equipment to an estimated residual value of 240,000 at 12% per annum. No depreciation is provided in the year of disposal of a non-current asset. Included in the cost of freehold land and buildings is land to which a cost of 300,000 has been attributed. Rmv330Ex2 a [301111] 1 (3) The freehold land and buildings were professionally valued on 30 June 2011 at 1,800,000 (of which 400,000 was attributable to the land) and the revalued amount is to be included in the accounts at 30 June 2011. No change was made to the estimate of the buildings' useful lives. N.B. Depreciation for the year, in (2) above, is to be based on the cost of freehold buildings at 1 July 2010. (4) Provision is to be made for audit fees of 60,000. (5) The debentures were issued on 1 July 2010 and are redeemable at par on 30 June 2015. The net proceeds of issue were 1,848,000. The accountant of Hansenpheet has recorded the debentures in the books at their nominal value and debited the issue costs and discount on debentures to the account shown in the trial balance. Interest on the debentures is payable annually in arrears on 30 June, and was paid on the due date. (6) Included in purchases are some goods purchased on 15 April 2011 from a company in Forcurrencia, where the unit of currency is the FC. These goods cost FC 720,000 and they had not been paid for at 30 June 2011; the amount owing is included in trade payables at the cost in on 15 April 2011. The rate of exchange between the FC unit and the was 1= FC 4.5 at 15 April 2011 and 1= FC 5 at 30 June 2011. (7) The balance on the suspense account as at 30 June 2011 consists of: 000 Cash received by the company in respect of a debt written off in 2009 as irrecoverable Loss arising on scrapping of obsolete plant and machinery: cost accumulated depreciation 255 200 000 75 55 20 (8) The company's authorised share capital is 5,000,000 in ordinary shares of 50p each. On 30 June 2011, the company received 840,000 as the proceeds of a Rights Issue of one ordinary share for every five already held at 1.00 per share. The cash was deposited in a special bank account. Expenses of the issue estimated at 35,000 will be paid in July 2011. No entries have yet been made for the Rights Issue in the company's accounting records. (9) An interim dividend of 5p per share was paid on 1 May 2011. (10) Provision is to be made for corporation tax on the profit for the year, estimated to be 300,000. The balance on taxation account represents an overprovision in the previous year. Ignore deferred taxation. Required: Prepare an income statement and statement of comprehensive income for Hansenpheet plc for the year ended 30 June 2011 and a statement of financial position (i.e. balance sheet) as at that date. These should be in good form and comply with international accounting standards, so far as the information given permits. Include also a 'statement of changes in equity' showing the reconciliation of opening and closing share capital, reserves and accumulated profit. Work to the nearest 000. 2 RMV330EX2b [301111] THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: HISTORICAL COST AND STANDARDS Prepare notes for a class discussion of the following questions. 1. It is sometimes claimed that one of the virtues of historical cost accounting is its objectivity. How far is this claim valid?1 2. It has been said that corporate financial statements are required to meet both the `economic' needs of users (for decision making) and their `legal' needs (i.e., providing information for legal-type purposes, and sometimes referred to as 'stewardship'). Identify the users of financial statements under each of these headings. How well does conventional historical cost accounting meet their needs? 3. "Accounting standards - boon or curse?" (W.T. Baxter). What is your view? RMv330EX3 [290909]: 221210 1 Hint: also consider when current market value (such as 'fair value') might be more objective than historical cost. THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: Arfbilt Contracting plc Arfbilt Contracting plc has 2 long-term contracts underway. Each began on 1 January 2011. The position on each contract at 31 December 2011 was as follows: A B '000 '000 Contract price 2,000 3,000 Cost of work certified 700 2,375 Cost of work not certified 50 50 Value of work certified 900 2,000 Estimated additional costs to completion 750 1,175 Progress billings 855 1,900 Advance towards future work 50 _______________________________________________ Labour hours to date 19,500 56,000 Total labour hours expected 50,000 70,000 Contract A provided for the client to pay an advance of 50,000 towards future work on 31 December 2011. This is shown above. The value of work certified is the value placed by the clients' surveyors on the work completed towards the end of the financial year (this is regarded as transferred to the customer's control). The cost of work certified represents the costs incurred in reaching the stage of development represented by the value of work certified. Costs of work not certified represent materials costs incurred relating to future activities on the contracts. Arfbilt's accounting policy is to recognise no profit on a contract until the contract is one-third complete according to the percentage of completion method adopted. Required: (i) Show how each of these contracts will be reflected in the income statement and balance sheet of Arfbilt Contracting plc at 31 December 2011, in accordance with international standard accounting practice, under each of the following percentage of completion methods: (a) surveys of work completed as reflected in the value of work certified; (b) the proportion that the cost of work certified bears to total estimated costs; (c) the proportion that labour hours to date bear to total expected labour hours. Continued...... RMvEX4a [221210 / 09.12.11] 1 (ii) In the past, some companies recognised no profit on construction contracts until the contract had been completed and some people would even now argue that it is imprudent to take profit before completion. Assess these alternative practices - i.e., standard practice in IAS 11 and profit recognition only on completion - in the light of the objectives of financial reporting, the qualitative characteristics of accounting information, the definitions of the elements of financial statements and the recognition criteria adopted in the IASB's Framework for the Preparation and Presentation of Financial Statements. (iii) Should IASB go further and require uncompleted contracts to be measured at 'fair value'? Outline briefly the potential advantages and disadvantages, bearing in mind the objectives of financial reporting for different users and uses. RMvEX4 b [221210 / 091211] 2 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: INCOME FROM ANNUITY You pay 248.68 for an annuity of 100 a year for each of three years, receivable at the end of each year. The interest rate is expected to remain constant at 10% per annum. On the assumption that all of the income is spent and all of the capital receipts are reinvested in a bank account paying interest at 10% per annum, prepare a table showing your calculation of total income for each year in accordance with the principles developed by Sir John Hicks. RMv330Ex5 [290909] 221210 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: JANUS (2006) PLC Janus (2006) PLC was formed to invest in listed securities and in properties with very long lives, and to hold these investments long term for their income. At 1 January 2006 the directors of the company expected that the investments would generate indefinitely dividends and interest of 95,000 per annum and net rentals of 100,000 per annum; they anticipated that sundry expenses would be 26,500 for the first year and 18,250 per annum indefinitely thereafter, and that the rate of interest would remain constant at the prevailing rate of 10% per annum. During 2006 net rentals of 100,000 were received, but dividends and interest received amounted to 97,000. Sundry expenses were as predicted and the rate of interest was 10% per annum throughout the year. On 31 December 2006, as a result of changes in the economy and of certain other events not foreseen, the management of Janus estimated that from that date: - dividends and interest of 105,000 per annum and net rentals of 120,000 per annum would be received for the indefinite future; - sundry expenses would be 17,100 per annum for the indefinite future; - the rate of interest would be 14% per annum for the indefinite future. The company can borrow from, and lend to, the bank at the prevailing rate of interest. The directors of Janus wish to calculate the income of the company according to the principles laid down by Sir John Hicks in Value and Capital. Required: (a) Calculate the income for 2006 under the ex ante and both ex post versions of Hicks' 'number 1' and 'number 2' measures of income. Assume that all cash flows take place at the end of the years concerned. (b) The directors of Janus are considering which income measure to use for the payment of a dividend on 31 December 2006 and wish to know the effect of paying different amounts on the ex ante income for 2007. Take each of the incomes calculated in (a) in turn and assume it is paid as dividend; in each case, what then would be the 2007 ex ante income, assuming that Janus borrows from the bank as necessary and that any surplus cash is lent to the bank? Show the amount of borrowing/lending and the effect of this on future cash flows. (c) How useful is the Hicksian approach for profit measurement in practical situations? (d) Discuss the implications for financial reporting of Hicks' analysis of income, and that of Paish in his essay Capital Value and Income. RMv330EX6 [290909]: 221210 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: MUNISWERTH LTD On 1 January 2006 Muniswerth Ltd started business in Cordelia where the unit of currency is the . Muniswerth issued, for cash and at par, 130,000 ordinary shares of 1 and 40,000 of debentures (repayable in 2016) at an interest rate of 15%. 68,000 was immediately invested in factory premises and 35,000 in stock, and on 1 February plant and equipment costing 50,000 was purchased; all of these were paid for in cash. The following transactions occurred evenly throughout the year: Sales 300,000 Additional purchases Wages 72,000 172,000 Sundry expenses 40,000 All of these transactions took place in cash with the exception of one sale for 20,000 which took place on 30 June 2006; the debtor paid in full on 30 September 2006. In addition to the above, debenture interest for the year was paid in full on 31 December 2006. The plant and machinery has a useful economic life of ten years with no residual value, and is to be depreciated on a straightline basis with a full year's charge in the year of purchase. The factory premises are made up of freehold land, 28,000, and buildings, 40,000; the buildings are to be depreciated on a straightline basis at 2% per annum. On 30 September 2006 10,000 ordinary 1 shares were issued at a premium of 10%. At 31 December 2006 stocks at cost amounted to 60,000; they may be assumed to have been bought on average two months before the end of the year. During the year the Consumer Price Index in Cordelia moved as follows: 1 January 2006 100 1 February 2006 102 30 June 2006 (= average for year) 110 30 September 2006 115 30 October 2006 117 31 December 2006 121 RMv330EX7 a 221210 -2- Required: (a) Profit and loss account ('income statement') for the year ended 31 December 2006, and a balance sheet ('statement of financial position') at that date, both stabilised in s of 31 December 2006. (b) Profit and loss account ('income statement') for the year ended 31 December 2006, and a balance sheet ('statement of financial position') at that date, both stabilised in s of 1 January 2006. (c) How would your reported profit under (a) differ if, instead of all transactions having been settled in cash by the balance sheet date, the balance sheet at 31 December 2006 included debtors in respect of the credit sale made on 30 June and creditors in respect of the closing stock? (d) Consider the case for and against the use of Current Purchasing Power accounting. RMv330EX7 b 221210 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: EYEDEAL INC. Eyedeal Inc. has been trading for several years in Sweeneyland where the unit of currency is the Swene. At 31 December 2006 its balance sheet, prepared under the historical cost convention, was as follows: Swenes Fixed assets, at cost Swenes 90,000 Current assets Stock, at cost Trade debtors Cash Creditors: amounts falling due within one year Trade creditors 15,800 25,800 20,400 62,000 15,000 47,000 137,000 Creditors: amounts falling due after more than one year 10% Debentures 2016 64,000 73,000 Share capital Retained profit 50,000 23,000 73,000 Additional Information (1) Stock at 31 December 2006 had been purchased on that date. (2) The fixed assets were all purchased on 31 December 2006 and brought into use for the first time on 1 January 2007. The fixed assets are to be written off to zero scrap value on a straight-line basis over five years from the date they are first used. RMv330EX8a [290909]: 221210 1 -2- (3) Transactions during 2007 occurred as follows. (i) Sales amounting to 135,000 swenes took place evenly throughout the year. (ii) Purchases costing 79,200 swenes took place evenly throughout the year. (iii) Stock at cost at 31 December 2007 amounted to 21,450 swenes and may be presumed to have been purchased on average on 30 September 2007. (iv) Wages of 21,000 Swenes were paid in cash evenly throughout the year. (v) The debenture interest was paid in equal instalments on 30 June and 31 December. (4) At 31 December 2007 trade debtors amounted to 38,500 swenes and trade creditors to 24,000 swenes. (5) Until 31 December 2006 all prices in Sweeneyland had remained constant for many years. During 2007 relevant price indices moved as set out below: 31 December 2006 Fixed assets (replacement cost) Wholesale stock (replacement cost) General price level 30 June 2007 30 September 2007 (average for year) 31 December 2007 100 105 107 110 100 120 130 140 100 110 115 121 RMv330EX8b [290909]: 221210 2 -3Required: (a) Profit and loss account ('income statement') for year ended 31 December 2007, and balance sheet ('statement of financial position') at that date, prepared under the historical cost convention. (b) A current value profit and loss account ('income statement') for the year ended 31 December 2007 and balance sheet ('statement of financial position') at that date, incorporating replacement costs for assets sold, consumed and held, on a physical capital maintenance basis. (c) A current value 'comprehensive income statement' for the year ended 31 December 2007, and balance sheet ('statement of financial position') at that date, on a financial capital maintenance basis, incorporating replacement costs for assets sold, consumed and held, stabilised in purchasing power units of 31 December 2007 (i.e. fully stabilised current value accounts). Show clearly, and explain the significance of, current operating profit, the elements of real holding gains and losses, and gains and losses on monetary items. (d) A current value 'comprehensive income statement' for the year ended 31 December 2007 (but not a balance sheet) on a financial capital maintenance basis, incorporating replacement costs for assets sold, consumed and held, and including an adjustment to maintain the purchasing power of opening shareholders' funds. In (b) (c) and (d) depreciation is to be based on the year-end gross replacement cost of fixed assets. (e) Examine the case for physical capital maintenance as the basis for measuring income in corporate financial reports. RMv330EX8c [290909]: 221210 3 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: TRICKY FLYING LTD Tricky Flying Ltd., a small airline company, has decided in future to account for assets on a current value basis, using the deprival value of the assets as the definition of current value. The table and notes below give management estimates relating to three of the company's aircraft, the X2, the Z and the ZX1. X2 Z ZX1 Book value (original cost less depreciation) 140,000 700,000 25,000 Net realisable value in market 170,000 720,000 30,000 Current purchase price of a machine in similar condition 185,000 750,000 45,000 Notes 1. X2 if retained would have in its best use an expected flying life with the company of 5 years. It would then sell for 50,000 net of all expenses. Its net cash contribution (revenue less operating and maintenance costs) during the five years would be 30,000 per annum. 2. Z if retained would have in its best use an expected flying life of 10 years with the company, at the end of which its net selling value would be 300,000. Its annual net contribution to the cash flow during the 10 years would be 120,000. 3. ZX1 is rarely used, but is kept as a stand-by machine. If it were not available it is estimated that average annual cash outlay on rental of 8,500 would have to be spent on hire of a machine from another company. The annual expenditure on keeping ZX1 airworthy is set at 5,000. Stand-by facilities will continue to be required as long as can be foreseen. 4. The company expects to earn 10% per annum on all capital invested, and this discount rate should be used in your calculations. RMv330EX9 a [290909]: 221210 1 Required a. b. State whether, on the data given, the company should retain respectively the X2, the Z and the ZX1. Give reasons. State, for each machine, what is the appropriate current value for the purposes of its statement of financial position ('balance sheet'), as defined by the company. Ignore tax, inflation, and uncertainty. RMv330EX9b [290909]: 221210 2 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: Two Companies 1. A company, which is a subsidiary company in a group, depreciates its plant on the discounted present value basis; its cost of capital is 10% per annum. The company purchased some plant costing 25,000 at the beginning of 2007. It has an expected useful life of 5 years, at the end of which its estimated residual value is 3,000. The plant generates a constant annual cash flow just sufficient to show the required return on the capital remaining invested and recover the original investment. Required a. Calculate the annual cash flow. b. Show the company's summarised income statement ('profit and loss account') for each of the five years on the assumptions that: the plant is the only asset; the whole net profit is paid out in dividend to the parent company; and all surplus cash (equal to the amount of the annual depreciation provision) is deposited with the parent company which credits the subsidiary company with an annual net interest of 10% on the deposit. Work to the nearest . 2. Another company has some equipment which has an expected life of 20 years. The company expects the equipment to generate a constant annual output and has sought your advice as to the appropriate method of depreciating it. Required b. For equipment costing 2,000,000 and bought at the beginning of 2007, with an expected residual value of zero, show the difference between the charge for depreciation on a straight-line basis and the charge for depreciation on a discounted present value basis, assuming the annual cash flow to be earned is constant, using an 8% cost of capital rate, in (i) year 1, i.e., 2007 (ii) year 10 and (iii) year 20. Work to the nearest 1,000. b. Comment briefly on your results in relation to the company's stated aim of setting its prices at a level sufficient to earn a return of 8% on capital employed. Ignore inflation. RMv330EX10 [290909]: 221210 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting AC330: A MANUFACTURING COMPANY (a) On 1 January 2005 a manufacturing company purchased a new plant. It cost 500,000 and has a useful economic life (which cannot be extended) of five years. Estimated annual outlays are 32,000 per annum for each of the first two years, 35,000 per annum for each of the next two years and 40,000 in the final year of its useful life. Its estimated net realisable value at the end of its useful life, or at any other time, is 10,000. There is no market for used plant of this type except as scrap. The plant produces a constant annual output, all of which can be sold, with gross sales revenues of 200,000 per annum. The company values assets in its balance sheet at deprival value. Its cost of capital is 10% per annum. Payment for a replacement plant would be made at the time of replacement; all other cash flows may be assumed to occur at the end of the years concerned. (i) (ii) (b) Calculate the deprival value of the plant at 31 December 2006, assuming no knowledge at that date of the price change or technological change referred to below. Calculate the deprival value of the plant at 31 December 2006 on the assumption that, on that date, it was announced that the purchase price of the plant had been increased to 520,000 but that operating costs and net realisable value were expected to be unchanged. At the end of 2007, following a technological breakthrough, a new model of the plant was announced, and the directors of the company now intend to replace the existing plant with the new model at the end of the existing plant's useful life. The new model costs 510,000, has a six year useful economic life, and constant annual operating costs of 25,000. It requires an overhaul costing 10,000 at the end of the third year of its life and has an expected scrap value of 12,000. It produces the same annual output as the existing plant except that, because of the time taken to install the new model, in the year in which replacement takes place revenue will be 30,000 less than in other years; as no further technological change is expected, this reduced revenue will occur in every year that replacement with the new model takes place. Continued ... RMv330EX11a [290909]: 221210 -2- Demand for the output of the plant is expected to continue at its existing level for the foreseeable future. Payment for a replacement plant would be made at the time of replacement; all other cash flows may be assumed to occur at the end of the years concerned. Calculate the deprival value of the existing plant at 31 December 2007. (c) How would your answer to (b) above differ if, as a result of changing tastes, sales revenue from the output of the plant was expected to fall to 125,000 per annum from 1 January 2008 and there was no prospect of it ever rising above that level again? (d) Discuss the case for deprival value as the basis of valuing assets in corporate financial reports. RMv330EX11 b [290909]: 221210 The London School of Economics and Political Science Department of Accounting Richard Macve: Ac330 Letsleasagen plc (A) On 1 January 2007 Letsleasagen plc entered into the following lease agreements with LaLaLeasing Limited: i) The rental of plant 'YI' for five years at a quarterly rental, payable in arrears, of 2,420, the first payment being due on 31 March. The plant has a useful economic life of five years, with no residual value, and Letsleasagen is responsible for all repairs and maintenance. The interest rate implicit in the lease is 3% per quarter. ii) The rental of plant 'ER'. The lease was for four years, with a quarterly rental of 3,864 payable in advance, the first payment being due on 1 January 2007. The fair value of the plant is 50,000. Letsleasagen is responsible for all repairs and maintenance of the plant, which has a useful economic life of four years with no residual value. On 1 March Letsleasagen plc hired a delivery van for twelve months from a local van hire company at a monthly rental payable in advance of 400, the first payment being on 1 March 2007. Letsleasagen depreciates all non-current assets on a straight-line basis. Required: Show how the above transactions will be reflected in the income statement of Letsleasagen plc for the year ended 31 December 2007 and its statement of financial position ('balance sheet') at that date in accordance with current international standard accounting practice.1 (B) On 1 January 2007 Letsleasagen plc established five wholly owned subsidiary companies, all in the same line of business. North was financed entirely by issued share capital of 70,000. South had issued share capital of 20,000 and in addition raised 50,000 from the issue of 12% debentures at par, interest on which was payable annually on 31 December. East, West and Centre were each financed by 20,000 issued share capital. As well as initial working capital of 20,000 all of the companies required the use of a widget-making machine. The machines cost 50,000 each, and have a ten-year useful economic life with no residual value. North and South purchased a machine each. East, West and Centre each leased a machine for an annual rental payment of 8,850 over ten years, payable in arrears on 31 December. Continued......RMv330EX12a [221210] 17.12.11 1 i.e. not reflecting the Exposure Draft proposals of August 2010 or the Board's subsequent deliberations: http://www.ifrs.org/Current+Projects/IASB+Projects/Leases/Leases.htm 1 The cost of capital for each of the five companies is 12% per annum. Each company earns annual gross revenues of 18,000 and incurs annual operating costs (before any interest, rental charges and depreciation) of 6,750. Interest and rentals were all paid on the due dates. Required: For each subsidiary prepare an income statement for the year ended 31 December 2007 and a statement of financial position ('balance sheet') at that date and show the reported return on Letsleasagen's initial equity investment in each subsidiary, on the following assumptions: i) that North and South each use straight-line depreciation over the asset's useful economic life; ii) that East treats the lease as an operating lease. (Note that it is unlikely to be regarded as an operating lease under IAS 17 but for present purposes treat it as such) iii) that West treats the lease as a finance lease, and depreciates the asset on a straight-line basis; iv) that Centre treats the lease as a finance lease and depreciates the asset using the annuity method. Comment on the results shown by your accounts and in particular on the depreciation policies chosen. (C) Explain briefly the conditions under which you would expect the use of any of the alternative accounting policies in (B) (ii) - (iv) above by all three of Letsleasagen's subsidiaries, East, West and Centre: (a) to show the same total (i.e. 'consolidated') annual net income for Letsleasagen plc as the use of any of the others; and (b) to lead to stockmarket analysts placing the same value on Letsleasagen plc's shares. (Assume that Letsleasagen has no other activities than those described in (B) above; further calculations are not required.) RMv330EX12 b [221210] 17.12.11 2 18.12.12 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting Course AC330: FINANCIAL ACCOUNTING, ANALYSIS AND VALUATION 2012/2013 Exercise for Week 10 Summer Term 2013: Horsone, Callaghan and Rentier In each case below assume: complete and perfect markets; certainty; constant interest rate ('r') of 10%pa; no inflation; all cash flows at year-ends; firm is wholly equity financed; Hicksian income paid out as dividends at year-ends; any spare cash is invested on bank deposit at 10%pa. a) Horsone plc, which has a share capital of 2000 1 shares, invests in just one machine with the following cash flows. Asset cost: 2000. Life 2 years. Zero residual value. Cash flows: t1: 1200 t2: 1100 Required: 1) Calulate Horsone's accounting income and balance sheet under the following alternative accounting policies: a) cash flow accounting (i.e. no capitalisation of assets or accruals) b) market value accounting. c) 'historical cost accounting' with chosen depreciation pattern of: Yr 1 930 Yr 2 1070 2) Calculate the 'residual income' for each year 3) Show the relationship between your answers to 1) and 2) and the stock market value of the firm b) Assume the data as given in a) above for Horsone, but that Callaghan plc always invests 2000 each year in machines that are identical to Horsone's, so at each year-end it always has two machines, one 'new' and one one-year 'old' Required: Revise your answers in a) above accordingly c) Assume the data as given in b) above for Callaghan, but that Rentier plc's two machines each earn 100 more each year than Callaghan's. Required: Revise your answers in b) above accordingly d) 'Choice of accounting policies (and therefore accounting standards) is irrelevant to firm valuation and therefore to investors' Comment in the light of your answers to a), b) and c) above and of the objective of financial reporting set out in standard setters' conceptual frameworks. RMv AC330 Ex 13 18.12.12 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting Course AC330: FINANCIAL ACCOUNTING, ANALYSIS AND VALUATION 2012/2013 Intangibles Essay Questions Write an essay on accounting for one of the following topics for Week 1 Summer Term: (a) Goodwill; (b) Research and Development; (c) Brands. For your chosen topic, define and describe the item and explain the accounting issues involved. Summarise current UK Generally Accepted Accounting Practice for listed companies under IFRS, and comment critically on it, for example by comparing the treatment of similar or related items, and by making reference to the ASB's Statement of Principles and/or the IASB's Framework and your studies earlier in this course. Hint: UK GAAP changes all the time so reference sources such as text books and academic articles may be out of date in this respect. Make sure that you correctly identify the current treatment required under IFRS as well as discussing any particularly important changes from previous UK GAAP under ASB standards where you consider relevant. If your class teacher wants this assignment submitted for formative assessment, your essay should not exceed three sides of A4 (handwritten). If typing your essay (which is preferred) the wordlimit is 1000 words. Please use a font size no smaller than 12 points, double spaced, and leave plenty of space in the margins and between paragraphs to improve readability and provide room for any detailed comments from your teacher. Remember that sub-headings can be very useful to structure your discussion, an introduction and conclusion is vital, and you must clearly identify all your sources. The dictionary definition of plagiarism is to 'Take and use another person's (thoughts, writing, inventions...) as one's own.' The most obvious form is using someone else's words without any acknowledgement, but there are other kinds of plagiarism, for example, using a verbatim passage without quotation marks would be plagiarism even if the source was acknowledged in a precise reference. If you use verbatim material from other sources it must be in quotation marks and precisely referenced. When the work of other people is referred to, there should always be an acknowledgement. Proper citation of sources is an elementary but critical mark of the presentation of scholarly work, and you should observe the standards used in journals and academic articles. Continued RMv(330/20) a 22.12.10 [18.12.12] 1 Additional (advanced) sources: APB. 1970. Intangible Assets. Accounting Principles Board Opinion No. 17. New York, NY.: AICPA. ASB. 1997. Goodwill and Intangible Assets. Financial Reporting Standard 10. London, U.K. Accounting Standards Committee U.K. (ASC). 1984. Accounting for Goodwill. Statement of Standard Accounting Practice 22. London, U.K. J. Arnold, D. Egginton, L. Kirkham, R. Macve, and K. Peasnell (1992) Goodwill and Other Intangibles: Theoretical Considerations and Policy Issues. Research Monograph, (ICAEW Research Board, September) 93 pp. Papers in Accounting & Business Research, 2008 Special Issue, Vol. 38 Issue 3 (International Accounting Policy Forum). ICAEW (2009) Developments in New Reporting Models http://www.icaew.com/index.cfm/route/169547/icaew_ga/en/Faculties/Financial_Reporting/Inform ation_for_better_markets/IFBM_reports/Developments_in_new_reporting_models_report RMv(330/20) b 22.12.10 [18.12.12] 2