You have recently been appointed as the group financial controller of the Crosse Group. Crosse & Hook plc (Crosse) is the parent company in the group and holds investments in Saltire Handling Ltd (Saltire) and Dragon Connectors Ltd (Dragon). You are preparing the group financial statements for the year ended 31 October 2022, in accordance with International Financial Reporting Standards. There are a number of matters in Crosses individual accounts that require to be addressed before you can complete the preparation of the group financial statements.

Firstly, you have identified that no accounting entries have been made in respect of properties owned by Crosse during the year ended 31 October 2022. Relevant information is in Appendix 1.

Your assistant has also provided you with information on an arrangement which gives Crosse the right to use a machine. Your assistant is unsure how to deal with this as Crosse has not previously entered into any such arrangements. This information is in Appendix 2.

The draft statements of financial position of Crosse, Saltire and Dragon as at 31 October 2022 are included in Appendix 3. Other information relevant to the group financial statements is included in Appendix 4.

Dragon is planning on issuing 1,800,000 1 4% convertible bonds in early 2023. Crosses board of directors are considering whether Crosse should purchase all 1,800,000 of the bonds. On conversion, three bond units would convert into one 1.00 ordinary share of Dragon. Crosses board understands that the bonds will be convertible at any time from 1 January 2025 to 31 March 2025 at the holder's option. All existing and potential shares will carry equal voting rights. No contractual arrangement exists giving another entity the ability to direct the relevant activities. The group finance director has asked you to provide notes for the board explaining how this would affect the accounting for Dragon in Crosses group financial statements in the financial years ending 31 October 2023, 2024 and 2025.

QUESTIONS:

Prepare, showing all workings, any journal entries necessary to account correctly for the properties in Appendix 1 in Crosses individual accounts for the year ended 31 October 2022.

(11 marks)

In respect of the arrangement in Appendix 2:

analyse, with explanations, whether the arrangement is a lease or not; and

prepare, showing all workings, any journal entries necessary to account correctly for the arrangement in Crosses accounts for the year ended 31 October 2022.

(8 marks)

Prepare, showing all workings, the journal entries necessary for the preparation of Crosses group financial statements for the year ended 31 October 2022.

(11 marks)

Construct, showing all workings, the Crosse group statement of financial position as at 31 October 2022. (This question must be submitted in Microsoft Excel.)

(6 marks)

Select, with explanations, the appropriate accounting treatment for Dragon in Crosses group financial statements for the years ending 31 October 2023, 2024 and 2025 if Crosse is to purchase the convertible bonds.

(4 marks)

(40 marks)

Note:

Ignore taxation effect.

Question 4 must be submitted in Microsoft Excel.

APPENDIX 4 (SECTION 1)

Information relevant to the group financial statements

Crosse acquired 700,000 of Saltires 1.00 ordinary shares on 1 November 2020 for a consideration of 3,000,000 when Saltires Retained earnings were

3,050,000. There were no fair value adjustments required at the date of acquisition.

Crosse acquired 360,000 of Dragons 1.00 ordinary shares on 1 June 2021 for a consideration of 1,600,000 when Dragons Retained earnings were

4,560,000. There were no fair value adjustments required at the date of acquisition.

Since Crosse acquired its shareholdings in the companies, there has been no change to the share capital of either Saltire or Dragon and no impairment to any goodwill arising.

On 31 October 2022, Dragon revalued its properties for the first time and recorded a revaluation surplus of 437,000.

The draft statements of profit or loss for the year ended 31 October 2022 show a profit for the year of 750,000 for Saltire and a loss for the year of 140,000 for Dragon.

There were no intercompany transactions between any of the three companies during the year ended 31 October 2022.

You are not required to prepare the final journal entry to transfer any consolidation adjustments from the group statement of profit or loss to the group statement of financial position.