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Q1. GUII

Q2. Alpha, a parent company with one subsidiary, Beta, is preparing the consolidated statement of profit or loss and other comprehensive income for the year ending 31 March 20X5. The draft statements of profit or loss and other comprehensive income are as follows: Alpha Beta $000 $000 Revenue (Note 2) 64,800 39,000 Cost of sales (Notes 2 and 4) (26,000) (16,000) Gross profit 38,800 23,000 Distribution costs (5,000) (2,000) Administrative expenses (9,000) (3,500) Investment income (Notes 1 and 3) 7,000 0 Finance costs (Note 1) (4,000) (2,500) Profit before tax 27,800 15,000 Income tax expense (7,000) (4,000) Profit for the year 20,800 11,000 Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation (Note 4) 5,000 3,000 Other comprehensive income for the year: 5,000 3,000 Total comprehensive income for the year 25,800 14,000 Note 1 Alphas investment in Beta On 1 April 20X3, Alpha acquired 180 million equity shares in Beta. On that date Beta had 200 million equity shares in issue. Alpha made a cash payment of $60 million to the former shareholders of Beta on 1 April 20X3 and agreed to make a further payment of $2662 million on 31 March 20X6. Alpha had correctly accounted for the deferred payment in its financial statements for the year ended 31 March 20X4 but has made no further entries in its financial statements for the year ended 31 March 20X5. An appropriate annual rate to use in any discounting calculations is 10%. At a discount rate of 10% per annum the present value of $1 payable in three years is $07513. On 31 December 20X4, Beta paid a dividend of $5 million. This was the only dividend paid by Beta in the year ended 31 March 20X5 and was appropriately recognised by Alpha. On 1 April 20X3, Alpha made a long-term loan to Beta of $25 million. The loans are included in the financial statements of Beta at this amount. These long-term loans attract interest at an annual rate of 8%. Both Alpha and Beta have correctly accounted for this interest in their individual financial statements for the year ended 31 March 20X5. No impairments of the goodwill on acquisition of Beta have been evident up to and including 31 March 20X5. Note 2 Intra-group trading Alpha supplies Beta with a raw material which it uses in its production process. Alpha applies a mark-up of one-third to its cost. Sales of the raw material by Alpha to Beta in the year ended 31 March 20X5 totalled $10 million. On 31 March 20X4 and 20X5, the inventories of Beta included goods costing $2 million and $3 million respectively which had been purchased from Alpha. Note 3 Alphas other investments Apart from its investments in the equity shares and loans of Beta, Alpha has a portfolio of equity investments which are correctly classified as fair value through profit or loss. The investment income of Alpha for the year ended 31 March 20X5 currently correctly includes dividend income from this portfolio. However, the carrying amount of the portfolio has not yet been adjusted to its fair value at 31 March 20X5. On 31 March 20X5, the carrying amount of the portfolio was $32 million and its fair value $335 million.

On 1 October 20X4 Gamma began to lease a machine. The lease gave Gamma the sole right to direct the use of the machine and receive all the economic benefits arising from its use. The lease was for a five-year term, with annual rentals of $200,000 being payable in advance. The first rental was paid on 1 October 20X4 and the final rental is due for payment on 1 October 20X8. The total estimated useful life of the machine on 1 October 2004 was ten years. There are no terms in the lease agreement that allow the lease to be extended beyond the five-year term. The annual rate of interest implicit in the lease is 8%. On 1 October 20X4 when the first rental was paid Gamma debited $200,000 to profit or loss. Gamma has made no other entries regarding this lease in its draft financial statements for the year ended 31 March 20X5. 8% discount factors which may be relevant are as follows: Cumulative present value of $1 payable in: $ year 0.926 1.783 2.577 4 years 3-312 3.993 1 2 years 3 years 5 years On 1 April 20X4 Gamma purchased an overseas property on credit for 4-4 million crowns. Of the initial carrying amount, 60% of the value of the property was attributed to the buildings element. On 1 April 20X4 Gamma estimated that the useful life of the buildings element was 40 years. On 30 June 20X4 Gamma paid 4-4 million crowns to the seller. Gamma uses the revaluation model to measure property. On 31 March 20x5 Gamma estimated that the fair value of the property was 4-8 million crowns. The only entries made by Gamma in its draft financial statements regarding the purchase of the property were to record the cash paid on 30 June 20X4 as an operating expense in the statement of profit or loss. Relevant exchange rates are: Date Exchange Rate 1 April 20X4 2 crowns to $1 30 June 20X4 1.76 crowns to $1 31 March 20X5 1-60 crowns to $1 1. 2. The draft financial statements of Gamma for the year ended 31 March 20x5 show a profit after tax of $10 million. This amount is before taking account of the implications of the information in exhibits 1 and 2. On 1 April 20X4 Gamma had 70 million ordinary shares and 50 million preference shares in issue. The preference shares are irredeemable, and any preference dividends are discretionary. On 1 October 20X4 Gamma made a 1 for 4 rights issue. The shares were issue price of $1 per share. On 1 October 20X4 the shares of Gamma had a listed price of $1-50 immediately before the rights issue. The rights issue was fully taken up. On 31 December 20X4 Gamma paid a dividend of $3 million to its ordinary shareholders and $2 million to its preference shareholders. These were the only dividends paid by Gamma in the year ended 31 March 20X5. 3. at a 4. (a) Using the information in exhibits 1 and 2, explain and show how the lease of machine and purchase of property would be reported in the financial statements of Gamma for the year ended 31 March 20X5. Marks will be awarded for BOTH calculations AND explanations. Note: The mark allocations are indicated in each exhibit. (b) Using the information in exhibit 3 and the adjustments for the lease and purchase of property in part (a), compute the earnings per share of Gamma for the year ended 31 March 20X5. Comparative figures and explanations of your calculations are not required