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  1(a)On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of two new

  shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of

  Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the

  purchase consideration, although it does have other 10% loan notes already in issue.

  The market value of Paradigm’s shares at 1 October 2012 was $2 each.

  The summarised statements of financial position of the two companies as at 31 March 2013 are:

  Paradigm Strata

  Assets $’000 $’000

  Non-current assets

  Property, plant and equipment 47,400 25,500

  Financial asset: equity investments (notes (i) and (iv)) 7,500 3,200

  ––––––– –––––––

  54,900 28,700

  Current assets

  Inventory (note (ii)) 20,400 8,400

  Trade receivables (note (iii)) 14,800 9,000

  Bank 2,100 nil

  ––––––– –––––––

  Total assets 92,200 46,100

  ––––––– –––––––

  Equity and liabilities

  Equity

  Equity shares of $1 each 40,000 20,000

  Retained earnings/(losses) – at 1 April 2012 19,200 (4,000)

  – for year ended 31 March 2013 7,400 8,000

  ––––––– –––––––

  66,600 24,000

  Non-current liabilities

  10% loan notes 8,000 nil

  Current liabilities

  Trade payables (note (iii)) 17,600 13,000

  Bank overdraft nil 9,100

  ––––––– –––––––

  Total equity and liabilities 92,200 46,100

  ––––––– –––––––

  The following information is relevant:

  (i) At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made a

  net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the

  pre- and post-acquisition split of Strata’s profit for the year ended 31 March 2013.

  Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets which were

  equal to their carrying amounts (including Strata’s financial asset equity investments) with the exception of

  an item of plant which had a fair value of $3 million belowits carrying amount. The plant had a remaining

  economic life of three years at 1 October 2012.

  Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this

  purpose, a share price for Strata of $1·20 each is representative of the fair value of the shares held by the

  non-controlling interest.

  (ii) Each month since acquisition, Paradigm’s sales to Strata were consistently $4·6 million. Paradigm had

  marked these up by 15% on cost. Strata had one month’s supply ($4·6 million) of these goods in inventory

  at 31 March 2013. Paradigm’s normal mark-up (to third party customers) is 40%.

  (iii) Strata’s current account balance with Paradigm at 31 March 2013 was $2·8 million, which did not agree

  with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata on 28 March 2013,

  which was not received by Paradigm until 3 April 2013.

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  (iv) The financial asset equity investments of Paradigm and Strata are carried at their fair values as at 1 April

  2012. As at 31 March 2013, these had fair values of $7·1 million and $3·9 million respectively.

  (v) There were no impairment losses within the group during the year ended 31 March 2013.

  Required:

  Prepare the consolidated statement of financial position for Paradigm as at 31 March 2013. (20 marks)

  (b) Paradigm has a strategy of buying struggling businesses, reversing their decline and then selling them on at a

  profit within a short period of time. Paradigm is hoping to do this with Strata.

  Required:

  As an adviser to a prospective purchaser of Strata, explain any concerns you would raise about basing an

  investment decision on the information available in Paradigm’s consolidated financial statements and

  Strata’s entity financial statements. (5 marks)

  (25 marks)

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  2 The following trial balance relates to Atlas at 31 March 2013:

  $’000 $’000

  Equity shares of 50 cents each (note (v)) 50,000

  Share premium 20,000

  Retained earnings at 1 April 2012 11,200

  Land and buildings – at cost (land $10 million) (note (ii)) 60,000

  Plant and equipment – at cost (note (ii)) 94,500

  Accumulated depreciation at 1 April 2012: – buildings 20,000

  – plant and equipment 24,500

  Inventory at 31 March 2013 43,700

  Trade receivables 42,200

  Bank 6,800

  Deferred tax (note (iv)) 6,200

  Trade payables 35,100

  Revenue (note (i)) 550,000

  Cost of sales 411,500

  Distribution costs 21,500

  Administrative expenses 30,900

  Dividends paid 20,000

  Bank interest 700

  Current tax (note (iv)) 1,200

  –––––––– ––––––––

  725,000 725,000

  –––––––– ––––––––

  The following notes are relevant:

  (i) Revenue includes the sale of $10 million of maturing inventory made to Xpede on 1 October 2012. The cost of

  the goods at the date of sale was $7 million and Atlas has an option to repurchase these goods at any time within

  three years of the sale at a price of $10 million plus accrued interest from the date of sale at 10% per annum.

  At 31 March 2013 the option had not been exercised, but it is highly likely that it will be before the date it lapses.

  (ii) Non-current assets:

  On 1 October 2012, Atlas terminated the production of one of its product lines. From this date, the plant used

  to manufacture the product has been actively marketed at an advertised price of $4·2 million which is considered

  realistic. It is included in the trial balance at a cost of $9 million with accumulated depreciation (at 1 April 2012)

  of $5 million.

  On 1 April 2012, the directors of Atlas decided that the financial statements would show an improved position

  if the land and buildings were revalued to market value. At that date, an independent valuer valued the land at

  $12 million and the buildings at $35 million and these valuations were accepted by the directors. The remaining

  life of the buildings at that date was 14 years. Atlas does notmake a transfer to retained earnings for excess

  depreciation. Ignore deferred tax on the revaluation surplus.

  Plant and equipment is depreciated at 20% per annum using the reducing balance method and time apportioned

  as appropriate.

  All depreciation is charged to cost of sales, but none has yet been charged on any non-current asset for the year

  ended 31 March 2013.

  (iii) At 31 March 2013, a provision is required for directors’ bonuses equal to 1% of revenue for the year.

  (iv) Atlas estimates that an income tax provision of $27·2 million is required for the year ended 31 March 2013 and

  at that date the liability to deferred tax is $9·4 million. The movement on deferred tax should be taken to profit

  or loss. The balance on current tax in the trial balance represents the under/over provision of the tax liability for

  the year ended 31 March 2012.

  (v) On 1 July 2012, Atlas made and recorded a fully subscribed rights issue of 1 for 4 at $1·20 each. Immediately

  before this issue, the stock market value of Atlas’s shares was $2 each.

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  Required:

  (a) (i) Prepare the statement of profit or loss and other comprehensive income for Atlas for the year ended

  31 March 2013;

  (ii) Prepare the statement of changes in equity for Atlas for the year ended 31 March 2013;

  (iii) Prepare the statement of financial position of Atlas as at 31 March 2013.

  Note: Notes to the financial statements are not required.

  The following mark allocation is provided as guidance for this requirement:

  (i) 9 marks

  (ii) 4 marks

  (iii) 9 marks

  (22 marks)

  (b) Calculate the basic earnings per share for Atlas for the year ended 31 March 2013.

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  3 Monty is a publicly listed company. Its financial statements for the year ended 31 March 2013 including comparatives

  are shown below:

  Statements of profit or loss and other comprehensive income for the year ended:

  31 March 2013 31 March 2012

  $’000 $’000

  Revenue 31,000 25,000

  Cost of sales (21,800) (18,600)

  ––––––– –––––––

  Gross profit 9,200 6,400

  Distribution costs (3,600) (2,400)

  Administrative expenses (2,200) (1,600)

  Finance costs – loan interest (150) (250)

  – lease interest (250) (100)

  ––––––– –––––––

  Profit before tax 3,000 2,050

  Income tax expense (1,000) (750)

  ––––––– –––––––

  Profit for the year 2,000 1,300

  Other comprehensive income (note (i)) 1,350 nil

  ––––––– –––––––

  3,350 1,300

  ––––––– –––––––

  Statements of financial position as at:

  31 March 2013 31 March 2012

  $’000 $’000 $’000 $’000

  Assets

  Non-current assets

  Property, plant and equipment 14,000 10,700

  Deferred development expenditure 1,000 nil

  ––––––– –––––––

  15,000 10,700

  Current assets

  Inventory 3,300 3,800

  Trade receivables 2,950 2,200

  Bank 50 6,300 1,300 7,300

  –––––– ––––––– –––––– –––––––

  Total assets 21,300 18,000

  ––––––– –––––––

  Equity and liabilities

  Equity

  Equity shares of $1 each 8,000 8,000

  Revaluation reserve 1,350 nil

  Retained earnings 3,200 1,750

  ––––––– –––––––

  12,550 9,750

  Non-current liabilities

  8% loan notes 1,400 3,125

  Deferred tax 1,500 800

  Finance lease obligation 1,200 4,100 900 4,825

  –––––– ––––––

  Current liabilities

  Finance lease obligation 750 600

  Trade payables 2,650 2,100

  Current tax payable 1,250 4,650 725 3,425

  –––––– ––––––– –––––– –––––––

  Total equity and liabilities

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  Notes:

  (i) On 1 July 2012, Monty acquired additional plant under a finance lease that had a fair value of $1·5 million. On

  this date it also revalued its property upwards by $2 million and transferred $650,000 of the resulting revaluation

  reserve this created to deferred tax. There were no disposals of non-current assets during the period.

  (ii) Depreciation of property, plant and equipment was $900,000 and amortisation of the deferred development

  expenditure was $200,000 for the year ended 31 March 2013.

  Required:

  (a) Prepare a statement of cash flows for Monty for the year ended 31 March 2013, in accordance with IAS 7

  Statement of Cash Flows, using the indirect method. (15 marks)

  (b) Comment on the comparative performance of Monty in terms of its return on capital employed, profit

  margins, asset utilisation and gearing.

  Note: Up to 4 marks are available for the calculation of the ratios.

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  4(a)The objective of IFRS 5 Non-current Assets Held for Sale and Discontinued Operationsspecifies, amongst other

  things, accounting for and presentation and disclosure of discontinued operations.

  Required:

  Define a discontinued operation and explain why the disclosure of such information is important to users of

  financial statements. (5 marks)

  (b) Radar’s sole activity is the operation of hotels all over the world. After a period of declining profitability, Radar’s

  directors made the following decisions during the year ended 31 March 2013:

  – it disposed of all of its hotels in country A;

  – it refurbished all of its hotels in country B in order to target the holiday and tourism market. The previous

  target market in country B had been aimed at business clients.

  Required:

  Treating the two decisions separately, explain whether they meet the criteria for being classified as

  discontinued operations in the financial statements for the year ended 31 March 2013. (4 marks)

  (c) At a board meeting on 1 July 2012, Pulsar’s directors made the decision to close down one of its factories on

  31 March 2013. The factory and its related plant would then be sold.

  A formal plan was formulated and the factory’s 250 employees were given three months’ notice of redundancy

  on 1 January 2013. Customers and suppliers were also informed of the closure at this date.

  The directors of Pulsar have provided the following information:

  Fifty of the employees would be retrained and deployed to other subsidiaries within the group at a cost of

  $125,000; the remainder will accept redundancy and be paid an average of $5,000 each.

  Factory plant has a carrying amount of $2·2 million, but is only expected to sell for $500,000 incurring $50,000

  of selling costs; however, the factory itself is expected to sell for a profit of $1·2 million.

  The company rents a number of machines under operating leases which have an average of three years to run

  after 31 March 2013. The present value of these future lease payments (rentals) at 31 March 2013 was

  $1 million; however, the lessor has said they will accept $850,000 which would be due for payment on 30 April

  2013 for their cancellation as at 31 March 2013.

  Penalty payments due to non-completion of supply contracts are estimated at $200,000.

  Required:

  Explain and quantify how the closure of the factory should be treated in Pulsar’s financial statements for the

  year ended 31 March 2013.

  Note: The closure of the factory does not meet the criteria of a discontinued operation.

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  5(a)The accounting treatment of investment properties is prescribed by IAS 40 Investment Property.

  Required:

  (i) Define investment property under IAS 40 and explain why its accounting treatment is different from that

  of owner-occupied property;

  (ii) Explain how the treatment of an investment property carried under the fair value model differs from an

  owner-occupied property carried under the revaluation model.

  The following mark allocation is provided as guidance for this requirement:

  (i) 3 marks

  (ii) 2 marks

  (5 marks)

  (b) Speculate owns the following properties at 1 April 2012:

  Property A: An office building used by Speculate for administrative purposes with a depreciated historical cost of

  $2 million. At 1 April 2012 it had a remaining life of 20 years. After a reorganisation on 1 October 2012, the

  property was let to a third party and reclassified as an investment property applying Speculate’s policy of the fair

  value model. An independent valuer assessed the property to have a fair value of $2·3 million at 1 October 2012,

  which had risen to $2·34 million at 31 March 2013.

  Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a fair value of

  $1·5 million which had risen to $1·65 million at 31 March 2013.

  Required:

  Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive income and

  statement of financial position for the year ended 31 March 2013 in respect of the above properties. In the

  case of property B only, state how it would be classified in Speculate’s consolidated statement of financial

  position.

  Note: Ignore deferred tax. (5 marks)

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