Financial Accounting - Professional Stage – June 2012

PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINER’S COMMENTS

The performance of candidates in the June 2012 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed less well on syllabus area LO2.

When practising OT items, care should always be taken to ensure that the principles underlying any particular
item are understood rather than rote learning the answer. In particular, candidates should ensure that they read
all items very carefully.

The following table summarises how well* candidates answered each syllabus content area.

Syllabus area Number of questions Well answered Poorly answered

LO1 4 4 0
LO2 6 3 3
LO3 5 5 0
Total 15 12 3

*If 50% or more of the candidates gave the correct answer, then the question was classified as ‘well answered’.

Comments on the two most poorly answered questions, both on LO2 (preparation of single company financial
statements) are given below:

Item 1

This item tested IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors by requiring figures
for restated opening retained earnings and total comprehensive income for the year, after adjusting for two
given events. Most candidates correctly identified that an underprovision for a legal claim previously provided for
should be dealt with as part of total comprehensive income for the year and that opening inventory overstated in
error should be dealt with as a prior period error. However, the most commonly selected incorrect answer
indicated that many candidates decreased total comprehensive income for the year in respect of overstated
opening inventory, instead of increasing it.

Item 2

This item tested the calculation of the amount of an impairment loss to be written off to the income statement in
the year under question, in accordance with IAS 36, Impairment of Assets. The asset had previously been
revalued and the company had a policy of making annual transfers between the revaluation surplus and
retained earnings. At the date of the impairment there was a balance left in relation to this asset on the
revaluation surplus, so only the excess needed to be written off to the income statement. The most commonly
selected incorrect answer indicated that many candidates wrote off the whole amount to the income statement.

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 Financial Accounting - Professional Stage – June 2012

MARK PLAN AND EXAMINER’S COMMENTARY

The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks
were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid
points which were made by candidates.

Question 1

Overall marks for this question can be analysed as follows: Total: 30

General comments
Part (a) of this question tested the preparation of an income statement, a separate statement of
comprehensive income and a statement of financial position from a trial balance plus a number of
adjustments. Adjustments included accrued interest, the valuation of year-end inventories, calculation of
the annual depreciation charge, a revaluation during the year (with a transfer between the revaluation
surplus and retained earnings) and adjustments to revenue to reflect IAS 18, Revenue. Part (b) required
an explanation of the meaning of the accrual basis and the cash basis of accounting, illustrated by
reference to matters in Part (a).

Sauvignon Ltd

(a) Income statement for the year ended 31 March 2012

£
Revenue (880,000 – 83,125 (OF) (W6) – (1,500 x £3)) 792,375
Cost of sales (W1) (424,625)
Gross profit 367,750
Distribution costs (23,500)
Administrative expenses (W1) (98,200)
Profit from operations 246,050
Finance cost (1,500 + (3% x 200,000)) (7,500)
Profit before tax 238,550
Income tax expense (42,000 – (35,000 – 32,000)) (39,000)
Profit for the year 199,550

Statement of comprehensive income for the year ended 31 March 2012

£
Profit for the year 199,550
Other comprehensive income:
Gain on property revaluation (W4) 340,000
Total comprehensive income for the year 539,550

Statement of financial position as at 31 March 2012

£ £
Assets
Non-current assets
Property, plant and equipment (W2) 1,299,875
Current assets
Inventories (W1) 56,600
Trade and other receivables (54,000 – 4,500 (OF)) 49,500
106,100
Total assets 1,405,975

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 Financial Accounting - Professional Stage – June 2012

Equity and liabilities

Equity
Ordinary share capital 200,000
Revaluation surplus (W4) 558,000
Retained earnings (W3) 264,950
1,022,950
Non-current liabilities
Borrowings 100,000

Current liabilities
Trade and other payables (26,500 + 6,000 (OF) + 83,125 (OF) 115,625
Taxation 42,000
Borrowings (50,000 + 75,400) 125,400
283,025
Total equity and liabilities 1,405,975

Workings

(1) Allocation of expenses

Cost of Distribution Administrative
sales costs expenses
£ £ £
Per Q 375,900 23,500 100,200
Opening inventories 20,200
Adj re income tax (32,000)
Closing inventories (W5) (56,600)
Loss on scrapped machine 8,500
Depreciation charges (W2) 76,625 30,000
424,625 23,500 98,200

(2) PPE
Plant and Land and
equipment buildings
£ £
B/f Cost 460,000
B/f Accumulated depreciation (145,000)
Scrapped (8,500)
306,500
Revaluation 1,100,000
Depreciation – plant @ 25% (76,625)
Depreciation – buildings (750,000 ÷ 25) (30,000)

229,875 1,070,000

Total PPE 1,299,875

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 Financial Accounting - Professional Stage – June 2012

(3) Retained earnings

£
At 31 March 2011 43,400
Transfer from revaluation surplus (W4) 22,000
Profit for the period 199,550
At 31 March 2012 264,950

(4) Revaluation surplus

£ £
At 31 March 2011 240,000
Valuation in the year (1,100,000 – (800,000 – 40,000)) 340,000
Transfer to retained earnings
Depreciation charge based on revalued amount (W2) 30,000
Depreciation charge based on HC ((400,000 x 20/40) ÷ 25) (8,000)
(22,000)
At 31 March 2012 558,000

(5) Inventory valuation

£
Raw materials – Grade A (4,000 x £5) 20,000
– Grade B (1,000 x £3) 3,000
Finished goods (20,000 x £1.68) 33,600
56,600

Cost per unit

£
Variable costs ((129,400 + 121,000 + 73,000) ÷ 220,000) 1.47
Fixed costs (52,500 ÷ 250,000) 0.21
1.68

(6) Revenue adjustment

£
Cash received ((850 + 1,200) x £42) 86,100
Less: Relating to current year ((850 x £42) ÷ 12) (2,975)
83,125

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 Financial Accounting - Professional Stage – June 2012

Most candidates produced a good answer to this question with the vast majority preparing a complete
statement of financial position and income statement. Presentation was generally good, although a
significant number of candidates lost marks by failing to include a sub-total for profit from operations in
their income statement, as shown in all the examples in the learning materials.

Although most candidates also attempted a statement of comprehensive income a significant number did
not show this as a separate statement (as required) but rather as a continuation of the income statement –
which lost them presentation marks. The other common errors with regard to the statement of
comprehensive income was to take the revaluation gain net of the reserves transfer to this statement, as
opposed to the gross figure, or to take the total comprehensive income figure from this statement to
retained earnings (as opposed to the profit for the year). Both of these errors indicate that some
candidates do not completely understand the relationship between the three statements.

The adjustments to revenue, accrual for bank interest and calculation of the depreciation expense were all
well dealt with and many candidates did calculate a completely correct figure for closing inventory. By far
the most common errors were the failure to include the loss on scrapped machinery as an expense in cost
of sales and the incorrect calculation of the annual transfer between the revaluation surplus and retained
earnings. The latter was mainly because candidates did not adjust the historical cost depreciation charge
to reflect the change in useful life.

Other common errors included the following.

- Failing to deduct the prior year tax overestimate from the current year tax estimate and/or showing
the wrong figure in current liabilities.
- Not correcting administrative expenses to remove the tax payment incorrectly posted to this
account.
- Failing to split the outstanding loan between current and non-current liabilities.
- Calculating the value of raw materials but then excluding it from the final inventory figure shown in
cost of sales and current assets.
- Incorrectly calculating deferred income by failing to appreciate that customers on the subscription
scheme did not receive their first issue of the magazine until the month after they had taken out
their annual subscription.
- Treating the resultant deferred income as a current asset rather than as a current liability or failing
to complete the double entry with the calculated amount.
- Failing to apportion the costs of production correctly by not using units made/normal capacity
appropriately.
- In respect of the returned magazines, showing the relevant amount as a liability rather than
deducting it from receivables (when the question specified that the relevant sales invoices
remained unpaid at the year end).

There are still a number of candidates who do not leave an adequate “audit trail” (particularly for property,
plant and equipment) making it impossible to reconcile the figure on the face of their financial statements
to a working. There are also still some candidates wasting a considerable amount of time by writing out
lengthy journals/explanations rather than simply posting the adjustments straight onto the face of the
financial statements or into the relevant working. Pleasingly, almost all candidates did use the
recommended “costs matrix” when allocating costs between the three expense categories.

Total possible marks 26½

Maximum full marks 25

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 Financial Accounting - Professional Stage – June 2012

(b) Accrual basis of accounting compared to cash basis

Under the accrual basis of accounting transactions are recognised when they occur, not when the related
cash is received or paid. The IASB Conceptual Framework makes it clear that information in an entity’s
financial statements should be prepared on the accrual basis.

The cash basis of accounting is not used in the preparation of company statements of financial
position or performance as it is not allowed by IFRS or UK GAAP, although the cash effect of
transactions is presented in the form of a statement of cash flows (IAS 7).

Under the cash basis, sales are recorded in the period in which the seller receives full payment. By
crediting the whole of the subscription receipts of £86,100 to revenue Sauvignon Ltd had originally
accounted for them on a cash basis. However, on the accrual basis (and in accordance with IAS 18,
Revenue) the amounts need to be matched to the periods in which the sales are made. This means that
one-twelfth of each annual subscription of £42 needs to be credited to each of the twelve months sales,
commencing with the month in which the first magazine is received. Hence, in Part (a), an adjustment is
made to take out that part of the receipts of £86,100 which do not relate to the current financial year.

Under the cash basis, purchases/expenses are recorded in the period in which payment is made. Under
the cash basis, Sauvignon Ltd would not account for the £6,000 interest on the bank loan until the next
financial year, when the interest is paid on 1 April 2012. However, this interest relates to the current
financial year (it is interest on the loan from 1 April 2011 to 31 March 2012) and hence, in accordance with
the accrual basis, an accrual is made for the whole of the £6,000 due in the current year financial
statements.

Under the cash basis, the whole of a capital asset is treated as a cash outflow at the point that the cash
consideration is paid. For example, if Sauvignon Ltd had purchased a machine for £100,000 cash on 1
April 2011, the whole of this amount would have been an “expense” in the current year. Under the accrual
basis the cost of the asset is “matched” to the period which will benefit from its use, via and as indicated
by an entity’s depreciation policy – so for Sauvignon Ltd under the accrual basis, only £25,000 (£100,000
x 25%) would have been recognised as an expense (depreciation) for such an asset in the current year.
Depreciation does not exist under the cash basis.

Most candidates gave a reasonable explanation of the accruals and cash basis and also attempted, as
required, to illustrate these using examples from Part (a). This was an improvement from many previous
written questions, where general, rather than relevant, examples have been given. However, many
candidates failed to go into specific depth in their explanations.

Total possible marks 6

Maximum full marks 5

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 Financial Accounting - Professional Stage – June 2012

Question 2

Overall marks for this question can be analysed as follows: Total: 13

General comments
This question mixed three discrete topics then brought them together to require the calculation of a revised
single entity profit figure in Part (c). Part (a) required the calculation of two figures for inclusion in the
consolidated income statement: profit from discontinued operations for a subsidiary disposed of during the
year and share of profit of associate figure for an associate acquired at the start of the year. The latter
figure needed to be adjusted by a provision for unrealised profit. Part (b) required extracts from the single
entity statement of financial position in respect of debt and equity, most of which was issued during the
year.

Grenache Ltd
(a) Figures for consolidated income statement for the year ended 31 March 2012
(i) Profit from discontinued operations (Muscadet Ltd)

£ £
Sale proceeds 506,000
Less: Carrying amount of goodwill at date of disposal
Cost 220,000
Net assets acquired (100,000 + 125,600) (225,600)
Non-controlling interest at acquisition (225,600 x 20%) 45,120
39,520
Less: Impairments to date (10,000)
(29,520)
Less: Net assets at date of disposal (100,000 + 495,800 + (6/12 x 123,700) – 457,650
200,000)
Add back: Attributable to NCI (x 20%) (91,530)
(366,120)
110,360
Profit for the period (6/12 x 123,700) 61,850
Profit from discontinued operation 172,210

(ii) Share of profit of associate (Riesling Ltd)

£
Share of profit for the year (35% x 56,000) 19,600
Less: Share of PURP (35% x 15,000) (5,250)
Less: Impairment (5,000)
9,350

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 Financial Accounting - Professional Stage – June 2012

Answers to this part were generally a little disappointing, with far fewer candidates than usual managing to
calculate the profit from discontinued operations completely correctly. Although most did manage to
correctly calculate the carrying amount of goodwill at the date of disposal, far fewer arrived at the correct
figure for net assets at disposal, with the most common errors being a failure to deduct the dividends paid
prior to the disposal and deducting, rather than adding the profit for the six months to the date of disposal.
Most candidates did remember to include the profit for the year up to disposal as part of the total figure for
discontinued operations but many multiplied this by the group percentage rather than including 100%.

It was also noticeable that a minority of candidates seemed to be attempting to calculate this figure in a
completely different way than that shown in the learning materials. Where this was the case the
candidates invariably got the figures wrong and often seemed to be confusing two completely different
methods. It is far safer for candidates to always follow the method/pro forma used in the learning
materials.

Many candidates correctly calculated the share of profit from the associate. Where errors were made the
most common ones were to reduce that amount by the parent’s share of the associate’s dividends or to
misuse percentages (for example not taking the group share of the unrealised profit and/or multiplying the
impairment by the group share).

A significant number of candidates wasted time by writing out their answers to the calculations in (i) and
(ii) in the form of extracts from the consolidated income statement, when this was not required.
Total possible marks 7
Maximum full marks 7

(b) Extracts from single entity statement of financial position as at 31 March 2012

£
Equity
Ordinary share capital ((200,000 + 100,000) x 50p) 150,000
Preference share capital (irredeemable) 100,000

Non-current liabilities
Preference share capital (redeemable) 50,000

Current liabilities
Dividends payable ((100,000 x 5% x 6/12) + (50,000 x 3% x 6/12)) 3,250

Answers to this part were mixed with few candidates giving all the relevant figures. Although most
candidates did prepare the equity and non-current liability extracts from the statement of financial position,
and correctly included all three types of share capital, a significant number did not recognise the need to
accrue for preference dividends in current liabilities. Even those candidates who did so usually failed to
time apportion to reflect the fact that both types of preference shares were issued half way through the
year. A significant number of candidates also calculated the figure for the ordinary shares based on a
nominal value of £1 per share instead of 50p.

Total possible marks 4

Maximum full marks 4

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 Financial Accounting - Professional Stage – June 2012

(c) Revised single entity profit

£
Draft profit 345,600
Profit on sale of shares in Muscadet Ltd (506,000 – 220,000) 286,000
Dividends from Muscadet Ltd (200,000 x 80%) 160,000
Dividends from Riesling Ltd (20,000 x 35%) 7,000
Dividend on ordinary shares (300,000 (OF) x 5p) 15,000
Less: Dividend on redeemable preference shares (b) (750)
812,850

This was the most poorly answered part of this question. It appeared that most candidates either misread
the question (attempting to prepare the revised consolidated profit instead of the revised single entity
profit) or simply do not understand the difference between the entries that would be made in the parent’s
individual financial statements compared to the consolidated financial statements.

As a result, a significant number of candidates adjusted for the figures calculated in Part (a), instead of
including the parent’s share of the dividends paid by both the subsidiary and the associate and the
parent’s individual profit on the sale of the shares in the subsidiary (ie the difference between the cost and
the selling price of those shares), which are what should be reflected in the parent’s own income
statement.

Only a minority of candidates adjusted for the parent’s own interim dividend that had been wrongly
charged as an expense in the income statement and even fewer adjusted the profit figure by the correct
amount. The error here was caused partly by candidates not identifying that the parent’s ordinary shares
were 50p ordinary shares and also by them not registering that the new ordinary shares were issued prior
to the date of payment of the interim ordinary dividend (such that the interim dividend was payable on both
the existing ordinary shares brought forward and the new ones that were issued at the start of the year).

Total possible marks 2½

Maximum full marks 2

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 Financial Accounting - Professional Stage – June 2012

Question 3

Overall marks for this question can be analysed as follows: Total: 21

General comments
This was a consolidated statement of financial position question, featuring one subsidiary and one associate
(acquired during the year). Adjustments included fair value adjustments on acquisition (for both the
subsidiary and the associate), intra-group transactions of both inventory and property, plant and equipment
and impairment write-downs.

Shiraz plc

Consolidated statement of financial position as at 31 March 2012

£ £
Assets
Non-current assets
Property, plant and equipment (660,700 + 635,300 + 24,000 (W1) – 1,000 (W1) – 3,000 1,316,000
(W7))
Intangibles (101,300 + 144,475 (W2)) 245,775
Investment in associate (W6) 94,300
1,656,075
Current assets
Inventories (235,400 + 195,900 – 2,400) 428,900
Trade and other receivables (174,900 + 78,800) 253,700
Cash and cash equivalents (23,700 + 11,900) 35,600
718,200
Total assets 2,374,275

Equity and liabilities

Equity attributable to owners of Shiraz plc
Ordinary share capital 500,000
Revaluation surplus 125,000
Retained earnings (W4) 1,141,250
1,766,250
Non-controlling interest (W3) 190,025
Total equity 1,956,275
Current liabilities
Trade and other payables (151,200 + 101,800) 253,000
Taxation (85,000 + 80,000) 165,000
418,000
Total equity and liabilities 2,374,275

Workings

(1) Net assets – Merlot Ltd

Year end Acquisition Post acq
£ £ £
Share capital 500,000 500,000 -
Retained earnings
Per Q 312,100 206,700
Less: Intangible (72,000 + 18,000) (72,000) (90,000)
Fair value adj re PPE (120,000 – (92,000 x 48/46)) 24,000 24,000
Dep thereon (24,000 x 2/48) (1,000) -
PPE PURP (W7) (3,000) -
760,100 640,700 119,400

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 Financial Accounting - Professional Stage – June 2012

(2) Goodwill – Merlot Ltd

£
Consideration transferred 650,000
Non-controlling interest at acquisition (640,700 (W1) x 25%) 160,175
Net assets at acquisition (W1) (640,700)
169,475
Impairment to date (25,000)
144,475

(3) Non-controlling interest – Merlot Ltd

Share of net assets (760,100 (W1) x 25%) 190,025

(4) Retained earnings

£
Shiraz plc 1,084,800
Less: PURP (W5) (2,400)
Merlot Ltd (119,400 (W1) x 75%) 89,550
Tempranillo Ltd (W6) 4,300
Less: Impairments to date (25,000 + 10,000) (35,000)
1,141,250

(5) Inventory PURP

% £
SP 100 24,000
Cost (80) (19,200)
GP 20 4,800
(OF) X ½ 2,400

(6) Investments in associates – Tempranillo Ltd

£ £
Cost 100,000
Add: Share of post acquisition increase in net assets
Share of post acquisition profits ((15,000 – 3,000) x 40%) 4,800
Less: Share of additional depreciation based on FV (50,000 ÷ 30 x 9/12 x 40%) (500) 4,300
104,300
Less: Impairment to date (10,000)
94,300

(7) PPE PURP – Merlot Ltd

£
Asset now in Shiraz plc’s books at 15,000 x 1/3 5,000
Asset would have been in Merlot Ltd’s books at 10,000 x 1/5 (2,000)
3,000

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 Financial Accounting - Professional Stage – June 2012

Most candidates made a good attempt at this question. Presentation of the consolidated statement of
financial position was generally good, although only a very small minority of candidates correctly presented
the non-controlling interest line with the necessary sub-totals. Frequently, however, there was a lack of “audit
trail”, often on the property, plant and equipment figure. With multiple adjustments to property, plant and
equipment in this question, this was a high risk strategy. However, where workings were provided, they were
generally clear and easy to follow. Almost all candidates did produce a separate net assets table (rather than
workings on the face of the consolidated statement of financial position).

Almost all candidates were able to produce a set of standard consolidation workings, with most candidates
producing correct goodwill and non-controlling interest calculations, using own figures. Most correctly
calculated the inventory PURP. However, the non-current assets calculations and adjustments discriminated
between the weak and strong candidates and led to very varied net assets tables. Even where candidates
were able to calculate these adjustments (such as a fair value adjustment with subsequent additional
depreciation on a building, and a provision for unrealised profit on an intra-group sale of plant), many of them
lost marks due to poor double entry. For example, the vast majority of candidates calculated a provision for
unrealised profit in respect of the sale of a machine by the subsidiary to the parent, but very few both correctly
debited the subsidiary’s post-acquisition retained earnings (via the net assets working) and credited property,
plant and equipment with that figure.

The investment in associate calculation was mixed; a good number of candidates correctly identified that an
adjustment for movement in post-acquisition profits needed to be made to cost and a deduction for the
impairment made. A significant number of candidates went on to make a further adjustment for additional
depreciation on the fair value adjustment, although less produced a complete calculation. Others adjusted for
the fair value adjustment itself as well as or instead of the additional depreciation. Many candidates calculated
a figure for share of post-acquisition profits in their investment in associate working, but then took a different
figure to their retained earnings working.

Other common errors included the following:

- Including the goodwill held by the subsidiary in the consolidated intangibles figure.
- Where an attempt was made to remove this goodwill from the subsidiary’s net assets at both
acquisition and at the year end, miscalculating the carrying amount at acquisition by deducting the
cumulative impairments of £18,000, instead of adding them back, thereby arriving at a figure of
£54,000, instead of £90,000, at acquisition. Others deducted this impairment from the goodwill arising
on the subsidiary itself.
- Calculating the depreciation on the fair value adjustment over 50 years rather than 48 years, or not
taking two years’ worth of depreciation.
- Calculating the PURP on the machine sold by the subsidiary to the parent as the difference between
the original purchase cost and the sale proceeds. Alternatively, calculating the profit on disposal but
then neglecting to adjust for the depreciation.
- Taking the wrong figures from the net assets table to the goodwill, non-controlling interest and/or
consolidated retained earnings workings. The most common error was to take the difference between
the subsidiary’s unadjusted opening and closing retained earnings to consolidated retained earnings,
instead of taking the movement on net assets.
- Including a revaluation surplus for the subsidiary on the consolidated statement of financial position
when all fair value adjustments were pre-acquisition.
Total possible marks 22
Maximum full marks 21

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 Financial Accounting - Professional Stage – June 2012

Question 4

Overall marks for this question can be analysed as follows: Total: 16

General comments
This question tested the provisions of IAS 17, Leases. It required the preparation of full financial statement
extracts for two lease liabilities; one finance and one operating. The finance lease featured an initial
deposit and payments in arrears and a lease term different to useful life. The operating lease featured a
payment holiday.

Chardonnay plc
Extracts from the financial statements for the year ended 31 March 2012
Income statement for the year ended 31 March 2012 (extracts)
£
Depreciation (78,400 ÷ 6) (13,067)
Operating lease payments ((4,500 x 3) ÷ 4) (3,375)
Finance costs (W) (3,360)

Statement of financial position as at 31 March 2012 (extracts)

£
Non-current assets
Property, plant and equipment (78,400 – 13,067) 65,333

Non-current liabilities
Finance lease liabilities (W) 35,880
Trade and other payables 2,250

Current liabilities
Finance lease liabilities (W) 16,680
Trade and other payables 1,125

Statement of cash flows for the year ended 31 March 2012 (extracts)
£
Cash flows from operating activities
Interest paid (3,360)

Cash flows from financing activities

Payment of finance lease liabilities (10,000 + 19,200 – 3,360) (25,840)

Notes to the financial statements (extracts)

(1) Analysis of finance lease liabilities

Gross basis

Finance lease liabilities include:

Gross payments due within

One year 19,200
Two to five years 38,400
57,600
Less: Finance charges allocated to future periods (8,400 – 3,360) (5,040)
52,560
Net basis

Finance lease liabilities include:

Amounts due within

One year 16,680
Two to five years 35,880
52,560

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 Financial Accounting - Professional Stage – June 2012

(2) Commitments under operating leases

The minimum lease payments under non-cancellable operating leases are:

Within one year

Within two to five years 4,500
9,000
Workings

Deposit 10,000
Instalments (4 x £19,200) 76,800
Fair value of asset (78,400)
Finance charges 8,400

SOTD = (4 x 5) ÷ 2 = 10

Year ended B/f Interest Payment C/f

£ £ £ £
31 March 2012 (78,400 – 10,000) 68,400 (4/10 x £8,400) 3,360 (19,200) 52,560
31 March 2013 52,560 (3/10 x £8,400) 2,520 (19,200) 35,880

Answers to this question were mixed. This question asked for extracts to the financial statements,
including some notes and therefore a number of presentation marks were available. A significant number
of candidates tackled this question in a scatter-gun manner, with random calculations written across
several pages of their answer booklet.

The finance lease working was well done by the majority of candidates, the most common error here being
to use the wrong opening figure, often taking the total instalments instead of the fair value of the asset,
and/or omitting to deduct the deposit paid. A small minority of candidates calculated the sum of digits
incorrectly. Most candidates went on to correctly split the current and non-current liability elements.

However, candidates struggled with the operating lease calculations. A significant number were able to
work out the annual charge in the income statement but the correct split in the statement of financial
position was almost non-existent.

Most candidates appreciated that an item of property, plant and equipment should be recognised for the
finance leased asset, and that depreciation should be charged. However, some made errors in calculating
the depreciation (usually by either using the initial period of the lease of four years, or by taking the total
period of the lease of seven years (rather than the useful economic life which was only six years)) and
others failed to complete double entry by debiting a different amount to property, plant and equipment than
they had credited to their lease table. A significant minority of candidates also treated the lease on the
photocopier as a finance lease, when its terms clearly made it an operating lease.

Presentation of the notes to the finance lease was mixed; a good number of candidates made some
attempt at these, although they were often rather scruffily presented. The operating lease commitment
note was less well done or simply was not shown. Most of those candidates who did show this note clearly
did not appreciate that it shows a cash commitment for the company rather than a statement of financial
position liability.

Another area that was less well done was the extracts from the statement of cash flows. A significant
number of candidates simply did not show these extracts and many of those that did were clearly quite
confused as to where items should be shown and/or omitted to denote cash outflows by the use of
brackets.

Total possible marks 17½

Maximum full marks 16

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