H plc was established in 1996 to develop advanced computer software. The company was established with the financial backing of B Bank. B Bank invested £2 million in H plc’s share capital, buying 2 million £1 shares at par. The agreement was that B Bank would leave this investment in place for five years. At the end of that period, H plc would buy the shares back from B Bank at a price that reflected the company’s success during that period.

An independent accountant advised that B Bank’s 2 million shares in H plc were worth £4.5 million. The shares were repurchased on 30 April 2001 for that amount.

H plc’s balance sheet immediately before the repurchase was as follows:

H plc

Balance sheet at 30 April 2001 (before share repurchase)

The net assets figure includes £8.0 million cash.

Required:

(a) Prepare H plc’s balance sheet as it would appear immediately after the share repurchase.

(b) When a company repurchases its shares, it must normally make a transfer from its profit and loss account to its capital redemption reserve (CRR). It has been suggested that this transfer is necessary to protect the company’s lenders. Explain how the transfer to the CRR protects the interests of lenders when a company repurchases its shares.

(c) Explain why companies are permitted to buy back their own shares.

Shott, a public limited company, set up a wholly owned foreign subsidiary company, Hammer, on 1 June 1999 with a share capital of 400 000 ordinary shares of 1 dinar. Shott transacts on a limited basis with Hammer. It maintains a current account with the company but very few transactions are processed through this account. Shott is a multinational company with net assets of £1500 million and ‘normal’ profits are approximately £160 million. The management of Hammer are all based locally although Shott does have a representative on the management board. The prices of the products of Hammer are determined locally and 90% of sales are to local companies. Most of the finance required by Hammer is raised locally, although occasionally short term finance is raised through borrowing monies from Shott. Hammer has made profits of 80 000 dinars and 120 000 dinars after dividend payments respectively for the two years to 31 May 2001. During the financial year to 31 May 2001, the following transactions took place:

(i) On 30 September 2000, a dividend from Hammer of 0.15 dinars per share was declared. The dividend was received on 1 January 2001 by Shott.

(ii) Hammer sold goods of 24 000 dinars to Shott during the year. Hammer made 25% profit on the cost of the goods. The goods were ordered by Shott on 30 September 2000, were shipped free on board (fob) on 1 January 2001, and were received by Shott on 31 January 2001. Shott paid the dinar amount on 31 May 2001 and had not hedged the transaction. All the goods remain unsold as at 31 May 2001.

(iii) Hammer has borrowed 150000 dinars on 31 January 2001 from Shott in order to alleviate its working capital problems. At 31 May 2001 Hammer’s financial statements showed the amount as owing to Shott. The loan is to be treated as permanent and is designated in pounds sterling.

The directors of Shott wish to use the closing rate to translate the balance sheet of Hammer and the average rate to translate the profit and loss account of Hammer but are unsure as to whether this is possible under accounting standards. On 1 June 2001 Hammer was sold for 825 000 dinars, and the proceeds were received on that day.

Required

(a) (i) Advise Shott as to whether the temporal or closing rate/net investment method should be used to translate the financial statements of Hammer;

(ii) Discuss the claim by SSAP 20 Foreign Currency Translation, that the usage of the temporal or net investment/closing rate method is based upon the economic relationship between the holding company and its foreign subsidiary.

(b) Discuss how the above transactions should be dealt with in the consolidated financial statements of Shott, calculating the gain or loss on the disposal of Hammer on 1 June 2001 and stating how the cumulative exchange differences would be dealt with on the disposal.

Aztec plc was incorporated in 1968 as an importer of silver artefacts from South America which it customised for the UK market. The company had sold its products in the luxury market and traded profitably until 1989. Since that date it has suffered continuous losses which have resulted in a negative balance on the profit and loss account. The balance sheet as at 31 December 1993 showed the following:

Since 1989 the company has been developing an export market for its products in Europe and the directors forecast that the company will return to profit in 1994. They expect profits before tax and debenture interest to be in the range of £70 000 to £140 000 per annum over the next three years. As a result of developing the export market, they expect that the company will require warehouse premises on the Continent in 1996 at a forecast cost of £250000.

However, the directors are concerned that even if the company achieves a profit of £70 000 per year it will be a number of years before a dividend could be distributed to the ordinary shareholders and it would be difficult to raise fresh funds from the shareholders in 1996 if there were to be little prospect of a dividend until the year 2000.

The directors have been considering various possible courses of action available under the Companies Act 1985 and the Insolvency Act 1986 and have had initial discussions with their auditors.

As a result of these discussions it was agreed that the finance director would produce a draft proposal for reorganisation; the auditors would let the finance director have their comments on the draft proposal: and the finance director would then submit a proposal to the board of directors for their consideration.

The following additional information was obtained by the finance director concerning the assets and liabilities at 31 December 1993 and estimated costs of liquidating or reorganising:

(a) Fair values and liquidation values of assets were:

(b) Preference dividends are four years in arrears.

(c) Wages, VAT and PAYE would be preferential creditors in a liquidation.

(d) The costs of liquidating Aztec plc were estimated at £55 000.

(e) The costs of reorganisation were estimated at £40 000; these would be paid by Aztec (Europe) plc and treated as part of the purchase consideration.

The finance director prepared the following draft proposal:

(i) A new company was to be formed, Aztec (Europe) plc with a share capital of £270 000 in 10p shares to acquire the assets and liabilities of Aztec plc as at 31 December 1993.

(ii) The ordinary shareholders were to receive less than 25% of the ordinary shares in Aztec (Europe) plc so that the existing preference shareholders and debenture holders each had a significant interest and acting together had control of the new company.

(iii) The arrears of preference dividends were to be cancelled.

(iv) The new company was to issue:

– 900 000 ordinary shares and £70 000 of 13% debentures to the existing preference shareholders;

– 1 200 000 ordinary shares and £200 000 of 13% debentures to the existing 11% debenture holders;

– 600000 ordinary shares to the existing ordinary shareholders.

(v) The variation of the rights of the shareholders and creditors was to be effected under s. 425 of the Companies Act 1985 which requires that the scheme should be approved by a majority in number and 75% in value of each class of shareholders, by a majority in number and 75% in value of each class of creditor affected and by the court.

(vi) The transfer of the assets to Aztec (Europe) plc was to be effected under s. 427 of the Companies Act 1985 which would ensure that the court dealt with the transfer of the assets and liabilities and the dissolution of Aztec plc to avoid the costs of winding up that company.

Assume a corporation tax rate of 35% and an income tax rate of 25%. Ignore ACT.

Required

(a) Assuming that the necessary approvals have been obtained for assets and liabilities to be transferred on the proposed terms on 31 December 1993:

(i) Prepare journal entries to close the books of Aztec plc; and

(ii) Prepare the balance sheet of Aztec (Europe) plc after the transfer of assets and liabilities.

(b) Draft a memo to the finance director commenting on his draft proposals for a scheme of capital reduction and reorganisation.

(c) Advise the directors as to the course of action they should take in order to be able to proceed with their plans for reorganisation if they learn that a creditor has obtained a judgment against the company and is considering seeking a compulsory winding-up order.

Ayr plc acquired holdings in two companies as follows:

The draft profit and loss accounts of the companies for the year ended 30 November 2001 were:

Additional information

(1) The reserves of Brodick Ltd and Carluke Ltd were:

The ordinary dividends of Carluke Ltd all relate to the post-acquisition period.

(2) There have been no changes in the companies’ share capitals since acquisition. These

are:

The preference dividends of Brodick Ltd were paid in two equal instalments on 31 May 2001, and 30 November 2001.

(3) On 1 December 1999, the value of the tangible fixed assets of Brodick Ltd was £200 000 higher than their net book value. This was due to the land element of freehold property.

(4) On 30 June 2001, Carluke Ltd sold £200 000 of goods to Ayr plc. Carluke Ltd operates a standard mark up of 25% on all sales. On 30 November 2001, Ayr Ltd still had 75% of these goods in stock.

(5) It is group policy to amortise goodwill over ten years with a full year’s charge in the year of acquisition.

(6) Ayr plc has not yet accounted for any dividends receivable.

Requirements

(a) Calculate the following amounts as they would appear in the consolidated profit and loss account of Ayr plc for the year ended 30 November 2001:

(i) Income from investment in associated undertakings

(ii) Minority interests

(iii) Profit after taxation.

Note: Make all calculations to the nearest £000.

(b) Explain the rationale for the accounting treatment in (a) (i) and (ii) above.

Ardrossan plc acquired holdings in two companies as follows:

The draft balance sheets of the companies as at 31 July 2002 were:

Additional information

(1) The reserves of Barmulloch Ltd and Cumbernauld Ltd at the following dates were:

Assume profits accrued evenly in the year ended 31 July 2002.

(2) On 1 February 2002, Ardrossan plc sold its entire holding of shares in Cumbernauld Ltd for £1.3 million cash. This transaction has not yet been recorded in the accounts of Ardrossan plc. For any tax due on this transaction, assume a corporation tax rate of 30% and ignore indexation allowance.

(3) It is group policy to amortise any goodwill arising on consolidation over ten years with a full year’s charge in the year of acquisition and none in the year of disposal.

(4) The trade creditors of Ardrossan plc include £25 000 payable to Barmulloch Ltd. The trade debtors of Barmulloch record the same amount as a debt receivable. None of these transactions. resulted in any stock at the year end.

Requirements

(a) Calculate any profit or loss arising on the disposal of Cumbernauld Ltd to be included in the consolidated accounts of Ardrossan plc.

(b) Prepare the consolidated balance sheet of Ardrossan plc as at 31 July 2002.

(c) Explain the basis of your calculations in (a), making appropriate reference to accounting standards and concepts.

Inclusion in Property, Plant, and Equipment – Which of the following does a company include in property, plant, and equipment on the balance sheet?

1. Idle equipment awaiting sale

2. Land held for future use as a plant site

3. Land held for investment

4. Deposits on machinery not yet received

5. Progress payments on building being constructed by a contractor

6. Fully depreciated assets still being used

7. Leasehold improvements

8. Assets leased to others

Acquisition Costs – The Voiture Company manufactures compact, energy efficient cars. On April 1, it purchased a machine for its assembly line at a contract price of $200,000 with terms of 2/10, n/30. The company paid the contract price on April 8 and also incurred installation and transportation costs of $5,000, sales tax of $10,000, and testing costs of $2,000. During testing the machine was accidentally damaged, so the company had to pay $1,000 to repair it.

Required

Prepare the journal entry to record the acquisition of the machine.

Balance sheet relations. Selected data based on the balance sheet amounts for Metso Corporation, a Finnish paper company, for four recent years appear in the following table. Metso applies IFRS and reports its results in millions of euros (€). Compute the missing balance sheet amounts for each of the four years.

Asset recognition and measurement. The following hypothetical transactions relate to Nestlé S.A., the Swiss chocolate manufacturer. Indicate whether each transaction immediately gives rise to an asset of the company under U.S. GAAP and separately, under IFRS. If Nestlé recognizes an asset, state the account title, the amount, and the classification of the asset on the balance sheet as either a current asset or a noncurrent asset. Nestlé reports its results in millions of Swiss Francs (CHF).

a. Nestlé invests CHF800 million in a government bond. The bond has a maturity value of CHF1,000 million in five years, and Nestlé intends to hold the bond to maturity.

b. Two months prior to its year-end, Nestle pays its insurer CHF240 million to cover annual premiums on its European plants.

c.Nestlé pays a developer in the Czech Republic CHF6 million for an option to purchase a tract of land on which it intends to build a warehouse to serve the eastern European markets. The price of the land is CHF450 million.

d.Nestlé signs a four-year employment agreement with its chief executive officer for a package valued at CHF17.4 million per year. Of this amount, CHF3.1 million is base salary; the rest is expected bonus and deferred compensation arrangements. The contract period begins next month.

e.Nestlé spends CHF80 million on research and development related to a new, lowcalorie chocolate; 60% of the total amount was spent on pure research, the rest on development. The R&D is successful, and the firm is able to acquire a patent on the new formula. The cost of filing the paperwork and other procedures to obtain the

patent is CHF0.5 million.

f.Nestlé received notice that a cocoa supplier had shipped by freight cocoa beans invoiced at CHF700 million with payment due in 30 days. The supplier retains title to the cocoa beans until received by Nestlé.

Balance sheet relations. Selected balance sheet amounts for Kajima Corporation, a Japanese construction firm, are shown in the following table for four recent years. Kajima applies Japanese accounting standards and reports its results in billions of yen (¥). Compute the missing balance sheet amounts for each of the four years. In answering this question, assume that Kajima uses IFRS.

Balance sheet relations. Genting Group, a Malaysian investment management company, reported the following data for four recent years. Genting Group applies Malaysian accounting standards and reports its results in millions of ringgit (RM). Compute the missing balance sheet amounts for each of the four years. In answering this question, assume that Genting Group uses U.S. GAAP.