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BSC Hons Accounting with Finance


  Instructions to Candidates: 1.        This question paper consists of two questions. 2.        Both questions are compulsory 3.        Total Marks: 30  


Question 1 – 15 Marks

Epsilon prepares financial statements to 31 March each year. The following events have occurred which are relevant to the year ended 31 March 2018:

(i)    On 1 April 2017, Epsilon loaned $30 million to another entity. The interest of $1·5 million is payable annually in arrears. An additional final payment of $35·3 million is due on 31 March 2020. Epsilon incurred direct costs of $250,000 in arranging this loan. The annual rate of interest implicit in this arrangement is approximately10%. Epsilon has no intention of assigning this loan to a third party at any time.                                            (5 marks)

(ii)   On 1 April 2017, Epsilon purchased 500,000 shares in a key supplier – entity X. The shares were purchased in order to protect Epsilon’s source of supply and Epsilon has no intention of trading in these shares. The shares cost $2 per share and the direct costs of purchasing the shares were $100,000. On 1 January 2018, the supplier paid a dividend of 30 cents per share. On 31 March 2018, the fair value of a share in an entity X was $2·25.                                                                                                                       (5 marks)

(iii) On 1 January 2018, Epsilon purchased 100,000 call options to purchase shares in entity Y – an unconnectedthird party. Each option allowed Epsilon to purchase shares in entity Y on 31 December 2018 for $6 pershare. Epsilon paid $1·25 per option on 1 January 2018. On 31 March 2018, the fair value of a share inentity Y was $8 and the fair value of a share option purchased by Epsilon was $1·60. This purchase of calloptions is not part of a hedging arrangement.                                                                                    (5 marks)


Explain and show how the three events should be reported in the financial statements of Epsilon for the yearended 31 March 2018. You should assume that Epsilon only measures financial assets at fair valuethrough profit or loss when required to do so by IFRS 9.

Question 2 – 15 Marks

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordancewith International Financial Reporting Standards (IFRS). The chief executive officer (CEO) of Omega has reviewed thedraft consolidated financial statements of the Omega group and of a number of the key subsidiary companies for theyear ended 31 March 2018. None of the subsidiaries are listed entities but all prepare their financial statements inaccordance with IFRS. The CEO has sent you an email with the following queries:

Query One

When reading the accounting policies note in the consolidated financial statements, I notice that we measure all ofour freehold properties using a fair value model but that we measure our plant and equipment using a cost model. Ifurther notice that both of these asset types are shown in the ‘property, plant and equipment’ figure which is a singlecomponent of non-current assets in the consolidated statement of financial position. It makes no sense to me thatassets which are shown as property, plant and equipment are measured inconsistently. If it’s OK to measure differentparts of property, plant and equipment using two different measurement models, why not use the fair value model forthe more readily accessible properties and use the cost model for the properties in remote locations to save on time andcost?            (7 marks)

Query Two

When I read, the disclosure notes relating to intangible non-current assets in the consolidated financial statements,I notice that this figure includes brand names associated with subsidiaries which we’ve acquired in recent years.However, the brand names which are associated directly with products sold by Omega (the parent entity) are notincluded within the non-current assets figure. This is another inconsistency that I don’t understand. Please explain

how this practice can be in line with IFRS requirements. One final question: would I be right in thinking that, as withproperty, plant and equipment, we can use the fair value model to measure intangible assets?                                                                                               (8 marks)


Provide answers to the two queries raised by the chief executive officer. Your answers should refer to relevant provisions of International Financial Reporting Standards.

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