(ii) Explain the accounting treatment under IAS39 of the loan to Bromwich in the financial statements of
Ambush for the year ended 30 November 2005. (4 marks)
(ii) Explain the accounting treatment under IAS39 of the loan to Bromwich in the financial statements of
Ambush for the year ended 30 November 2005. (4 marks)
2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is currently preparing its financial
statements for the year ended 31 May 2006 and has asked for advice on how to deal with the following items:
(i) Tyre requires customers to pay a deposit of 20% of the purchase price when placing an order for a vehicle. If the
customer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled by
Tyre, the company repays the full amount of the deposit to the customer. The balance of the purchase price
becomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognise
the revenue from the deposits immediately and the balance of the purchase price when the goods are delivered
to the customer. The cost of sales for the vehicle is recognised when the balance of the purchase price is paid.
Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on the
transaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option which
entitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normal
economic life of the vehicles is five years and the buyback option is expected to be exercised. (8 marks)
Required:
Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended
31 May 2006.
(The mark allocation is shown against each of the above items)
(ii) The property of the former administrative centre of Tyre is owned by the company. Tyre had decided in the year
that the property was surplus to requirements and demolished the building on 10 June 2006. After demolition,
the company will have to carry out remedial environmental work, which is a legal requirement resulting from the
demolition. It was intended that the land would be sold after the remedial work had been carried out. However,
land prices are currently increasing in value and, therefore, the company has decided that it will not sell the land
immediately. Tyres uses the ‘cost model’ in IAS16 ‘Property, plant and equipment’ and has owned the property
for many years. (7 marks)
Required:
Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended
31 May 2006.
(The mark allocation is shown against each of the above items)
(b) On 31 May 2007, Leigh purchased property, plant and equipment for $4 million. The supplier has agreed to
accept payment for the property, plant and equipment either in cash or in shares. The supplier can either choose
1·5 million shares of the company to be issued in six months time or to receive a cash payment in three months
time equivalent to the market value of 1·3 million shares. It is estimated that the share price will be $3·50 in
three months time and $4 in six months time.
Additionally, at 31 May 2007, one of the directors recently appointed to the board has been granted the right to
choose either 50,000 shares of Leigh or receive a cash payment equal to the current value of 40,000 shares at
the settlement date. This right has been granted because of the performance of the director during the year and
is unconditional at 31 May 2007. The settlement date is 1 July 2008 and the company estimates the fair value
of the share alternative is $2·50 per share at 31 May 2007. The share price of Leigh at 31 May 2007 is $3 per
share, and if the director chooses the share alternative, they must be kept for a period of four years. (9 marks)
Required:
Discuss with suitable computations how the above share based transactions should be accounted for in the
financial statements of Leigh for the year ended 31 May 2007.
(b) Explain the matters you should consider before accepting an engagement to conduct a due diligence review
of MCM. (10 marks)
(ii) the strategy of the business regarding its treasury policies. (3 marks)
(Marks will be awarded in part (b) for the identification and discussion of relevant points and for the style. of the
report.)
(c) Discuss the ways in which budgets and the budgeting process can be used to motivate managers to
endeavour to meet the objectives of the company. Your answer should refer to:
(i) setting targets for financial performance;
(ii) participation in the budget-setting process. (12 marks)
1 Oliver Hoppe has been working at Hoopers and Henderson accountancy practice for eighteen months. He feels that
he fits in well, especially with his colleagues and has learnt a lot from them. However, he feels that the rules and
regulations governing everyday activities and time keeping are not clear.
Oliver does not get on well with his line manager, David Morgan. There appears to be a clash of personalities and
reluctance on David Morgan’s part to deal with the icy atmosphere between them after David was asked by one of
the accounting partners to give Oliver a job. For the past three months Oliver has gone to lunch with his fellow workers
and always returned to work with them or before them. In fact they all have returned to work about ten minutes late
on several previous occasions. After the third time, Oliver was called into David Morgan’s office and given an oral
warning about his time keeping.
Oliver was not permitted to argue his case and none of the other staff who returned late were disciplined in this way.
On the next occasion the group was late returning from lunch, David Morgan presented Oliver with a written warning
about his time keeping.
Yesterday, Oliver was five minutes late returning to work. His colleagues returned after him. David Morgan gave Oliver
notice and told him to work until the end of the week and then collect his salary, the necessary paperwork and to
leave the practice.
There is a partner responsible for human resources. Oliver has come to see the partner to discuss the grievance
procedures against David Morgan for his treatment and about what Oliver regards as unfair dismissal.
Required:
(a) Describe the six stages of a formal disciplinary procedure that an organisation such as Hoopers and
Henderson should have in place. (12 marks)
(b) Advise on the capital gains implications should Trent Limited’s old building be sold as proposed. Support your
advice with relevant calculations. (4 marks)
(ii) the directors agree to disclose the note. (4 marks)
4 (a) ISA 701 Modifications to The Independent Auditor’s Report includes ‘suggested wording of modifying phrases
for use when issuing modified reports’.
Required:
Explain and distinguish between each of the following terms:
(i) ‘qualified opinion’;
(ii) ‘disclaimer of opinion’;
(iii) ‘emphasis of matter paragraph’. (6 marks)