AAT L4 Financial Statements of Limited Companies 2 — Questions and Answers
Question 1: A limited company acquired 80% of a subsidiary for £640,000. At acquisition, the subsidiary's net assets had a fair value of £700,000. What is the goodwill arising on consolidation?
- £80,000 (Correct answer)
- £60,000
- £200,000
- £640,000
Correct answer: £80,000
The parent's share of net assets is 80% x £700,000 = £560,000. Goodwill = consideration paid - parent's share of fair value of net assets = £640,000 - £560,000 = £80,000.
Question 2: Under FRS 102, how should a government grant related to the purchase of a non-current asset be presented in the statement of financial position?
- As revenue in the statement of comprehensive income immediately
- As deferred income and released to profit over the asset's useful life
- As a reduction from the cost of the asset only
- Either as deferred income or deducted from the asset's carrying amount (Correct answer)
Correct answer: Either as deferred income or deducted from the asset's carrying amount
FRS 102 Section 24 permits two approaches for government grants relating to assets: recognise as deferred income and release systematically, or deduct the grant from the asset's carrying amount. Both methods are acceptable.
Question 3: A company has the following items. Which should be classified as a current liability? I. Bank overdraft repayable on demand II. Trade payables due in 45 days III. 5-year bank loan (next instalment due in 3 months) IV. Debentures maturing in 18 months
- I, II, and III only (Correct answer)
- I and II only
- I, II, III, and IV
- II and III only
Correct answer: I, II, and III only
Current liabilities are those due within 12 months or payable on demand. The bank overdraft (on demand), trade payables (45 days), and the next instalment of the bank loan (3 months) are all current. The debentures maturing in 18 months are non-current.
Question 4: When preparing consolidated financial statements, intra-group sales of £120,000 were made during the year. At the year end, £30,000 of these goods remained in the subsidiary's inventory. The parent applies a mark-up of 25% on cost. What is the provision for unrealised profit?
- £7,500
- £6,000 (Correct answer)
- £30,000
- £24,000
Correct answer: £6,000
Mark-up of 25% on cost means profit is 25/125 of selling price. PUP = £30,000 x 25/125 = £6,000. Only goods remaining in inventory at year end contain unrealised profit.
Question 5: Which of the following would appear in the statement of changes in equity?
- Revenue from contracts with customers
- Purchase of property, plant and equipment
- Total comprehensive income for the year (Correct answer)
- Cash received from issuing a bank loan
Correct answer: Total comprehensive income for the year
The statement of changes in equity shows movements in equity during the period, including total comprehensive income, dividends paid, share issues, and reserve transfers. Revenue appears in the income statement; PPE purchases and loan proceeds appear in the cash flow statement.
Question 6: Under the Companies Act 2006, a small company qualifying under the small companies regime:
- Is exempt from preparing any financial statements
- Must still prepare full accounts but may file abridged accounts
- Need not have its accounts audited if it meets the audit exemption thresholds
- Both B and C (Correct answer)
Correct answer: Both B and C
Small companies under the Companies Act 2006 may prepare and file abridged accounts. They are also exempt from mandatory audit if they meet the size thresholds (turnover not exceeding £10.2m, assets not exceeding £5.1m, not more than 50 employees - meeting two of three).
AAT L4 Financial Statements of Limited Companies 2
A limited company acquired 80% of a subsidiary for £640,000.
At acquisition, the subsidiary's net assets had a fair value of £700,000.
What is the goodwill arising on consolidation?