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Q1.
Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of$1 50.000 and ¡interest on a finance lease of $250.000. Extracts from the equity and liabilities section of the statement of financial position of Monty at 31 March 20X3 are as follows:Total equity 12,550
Non-current liabilities
8% loan notes 1,400
Deferred tax 1,500
Finance lease obligation 1,200Current liabilities
Finance lease obligation 750
Trade payables 2,650
Current tax 1,250What is the ROCE?
The Answer is: Return (3000+150+250) = 3400 (I Agree)
Capital Employed (12,550 + 1,400 + 1,200 + 750) = 15,900
3,400/15,900 = 21.4%Why in the Capital Employed there is an addition of 750 and Deferred tax of 1,500 is not included please?
Q.2
Raycroft operates a nuclear power station. The power station is due to be decommissioned on 31 December 20X8 but will be fully operational up to that date. It has been estimated that the cost of
decommissioning the power station and cleaning up any environmental damage, as required by legislation, will be $60 million. Raycroft recognised a provision for the present value of this expenditure at 31 December 20X0. A suitable discount rate for evaluating costs of this nature is 12%, equivalent to a present value factor after eight years of 0.404. The decommissioning cost will be depreciated over eight years.What Is the total charge to profit or loss In respect of this provision for the year ended 31 December 20X1?
Unwinding of discount (24,240,000* x 12%) = 2,908,800
Depreciation (24,240,000/8) = 3,030,000 + 2908800 = 5,938,800
* 60 million x 0.404 = 24,240,000
Can you kindly explain why is there the unwinding of discount charge and what does it mean exactly please?Q3.
Wetherby purchased a machine on 1 July 20X7 for $500,000. It is being depreciated on a straight line basis over its expected life of ten years. Residual value is estimated at $20,000. On 1 January 20X8, following a change in legislation, Wetherby fitted a safety guard to the machine. The safety guard cost $25.000 and has a useful life of five years with no residual value.What amount will be charged to profit or loss for the year ended 31 March 20X8 in respect of depreciation on this machine?
BPP Ans: Machine ((500,000-20,000)/10 x 9/12) = 36,000
Safety guard ((25,000/5) x 3/12 = 1,250+36,000 = 37,250 ANS BPPIn my answer I followed the same working as the online Practice Questions Chapter 23, Question 3 and arrived to the below calculation:
10 x 12 = 120 months: ((500,000-20,000)/120 x 6 = 24,000
((500,000 – 24,000 + 25,000 – 20,000)/114months x 3 months = 12,658 + 24,000 = 36,658 My AnsCan you tell me what principle should I apply when calculation this? Since the answers are totally different.
Q.4
On 1 January 20X6 Fellini hired a machine under a finance lease. The cash price of the machine was $3.5 million and the present value of the minimum lease payments was $3.3 million. Instalments of $700,000 are payable annually in advance with the first payment made on 1 January 20X6. The interest rate implicit in the lease is 6%.What amount will appear under non-current liabilities in respect of this lease in the statement of financial position of Fellini at 31 December 20X7?
BPP Ans My Ans
$.000
PVMLPs 3,300
Payment (700)
2,600
Interest 6% 156
Balance 31.12.X6 2,756
Payment (700)
2,056
Interest 6% 123
Balance 31.12.X7 2,179 2,179
Payment (700)
1,479
Interest 6% (888)
Balance 31.12.X8 1,568BPP Ans
Current = 700
Non-current = 1,479My Ans
Current = (2,179 – 1,568) = 611
LTL = 1,568Can you explain where I went wrong please?
Thank you in advance,
Marylise
No, sorry
This is too overpowering
Please break this post down into single questions – it’s going to take me half an hour going backwards and forwards up and down the screen otherwise
And remember this for future too
I lived through it last time, but not again and, please, remember that I don’t have a BPP revision kit (nor study text) so if you’re referring to a specific question you can either make sure that you give me FULL details or you can give me an exam reference (eg June 2012) so I have a chance of finding the question
Q1.
Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of$1 50.000 and ¡interest on a finance lease of $250.000. Extracts from the equity and liabilities section of the statement of financial position of Monty at 31 March 20X3 are as follows:Total equity 12,550
Non-current liabilities
8% loan notes 1,400
Deferred tax 1,500
Finance lease obligation 1,200Current liabilities
Finance lease obligation 750
Trade payables 2,650
Current tax 1,250What is the ROCE?
The Answer is: Return (3000+150+250) = 3400 (I Agree)
Capital Employed (12,550 + 1,400 + 1,200 + 750) = 15,900
3,400/15,900 = 21.4%Why in the Capital Employed there is an addition of 750 and Deferred tax of 1,500 is not included please?
Q.2
Raycroft operates a nuclear power station. The power station is due to be decommissioned on 31 December 20X8 but will be fully operational up to that date. It has been estimated that the cost of
decommissioning the power station and cleaning up any environmental damage, as required by legislation, will be $60 million. Raycroft recognised a provision for the present value of this expenditure at 31 December 20X0. A suitable discount rate for evaluating costs of this nature is 12%, equivalent to a present value factor after eight years of 0.404. The decommissioning cost will be depreciated over eight years.What Is the total charge to profit or loss In respect of this provision for the year ended 31 December 20X1?
Unwinding of discount (24,240,000* x 12%) = 2,908,800
Depreciation (24,240,000/8) = 3,030,000 + 2908800 = 5,938,800
* 60 million x 0.404 = 24,240,000
Can you kindly explain why is there the unwinding of discount charge and what does it mean exactly please?Q3.
Wetherby purchased a machine on 1 July 20X7 for $500,000. It is being depreciated on a straight line basis over its expected life of ten years. Residual value is estimated at $20,000. On 1 January 20X8, following a change in legislation, Wetherby fitted a safety guard to the machine. The safety guard cost $25.000 and has a useful life of five years with no residual value.What amount will be charged to profit or loss for the year ended 31 March 20X8 in respect of depreciation on this machine?
BPP Ans: Machine ((500,000-20,000)/10 x 9/12) = 36,000
Safety guard ((25,000/5) x 3/12 = 1,250+36,000 = 37,250 ANS BPPIn my answer I followed the same working as the online Practice Questions Chapter 23, Question 3 and arrived to the below calculation:
10 x 12 = 120 months: ((500,000-20,000)/120 x 6 = 24,000
((500,000 – 24,000 + 25,000 – 20,000)/114months x 3 months = 12,658 + 24,000 = 36,658 My AnsCan you tell me what principle should I apply when calculation this? Since the answers are totally different
Q.4
On 1 January 20X6 Fellini hired a machine under a finance lease. The cash price of the machine was $3.5 million and the present value of the minimum lease payments was $3.3 million. Instalments of $700,000 are payable annually in advance with the first payment made on 1 January 20X6. The interest rate implicit in the lease is 6%.What amount will appear under non-current liabilities in respect of this lease in the statement of financial position of Fellini at 31 December 20X7?
BPP Calculation
PVMLPs 3,300
Payment (700)
2,600
Interest 6% 156
Balance 31.12.X6 2,756
Payment (700)
2,056
Interest 6% 123
Balance 31.12.X7 2,179 ..Note BBP Answer for calculation stopped here, I Continued…
Payment (700)
1,479
Interest 6% (888)
Balance 31.12.X8 1,568BPP Ans
Current = 700
Non-current = 1,479My Ans
Current = (2,179 – 1,568) = 611
LTL = 1,568Can you explain where I went wrong please?
Thank you in advance and let me know if you meant to post them like this or creating four new forum topics. Thanks for your help, hope I’ll pass :/ I’m really trying hard, and your help is superb.
Marylise
“Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of$1 50.000 and ¡interest on a finance lease of $250.000”
Think about the expression “capital employed” This surely means “funds that are available to the company and which the company can use (employ?) in furtherance of their profit making objectives”
Deferred tax is a probable liability in the future. There were no funds involved, no cash received in the creation of this liability. So, ask yourself, is it capital employed?
Finance lease obligation – ask yourself the same question. During this coming year we shall be paying another 750 off the finance lease obligation but, until we do, and for the whole of the time since that lease was signed, we shall have had the benefit of the use of that non-current asset to help us generate profits
So now ask yourself, if we’re going to include the current element of the finance lease obligation, why not include all the current liabilities?
Good question! However, those current liabilities tend to be mostly trade creditors for goods purchased or services received and are consumed in the ordinary day-to-day activities of the company
Is that ok?
“Raycroft operates a nuclear power station. The power station is due to be decommissioned on 31 December 20X8 but will be fully operational up to that date. It has been estimated that the cost of
decommissioning the power station and cleaning up any environmental damage, as required by legislation, will be $60 million.”This is fully explained in the video lecture on Provisions and Contingencies!!! 🙁
There is an obligation involved here where Raycroft has undertaken to decommission the power station many years into the future
Whenever we have payments (or receipts) that will take place in the future (remember deferred consideration in consolidations) we discount that payment to arrive at its present value and, in the situation of a decommissioning exercise, we debit the PRESENT value to the affected asset and credit a provision account
Then, as each year rolls by, we unroll that discounted obligation and effect the double entry Dr Finance Costs Cr Provision
I don’t believe that you’ve asked this! This is exactly what we do with deferred consideration in consolidations – we unroll the discounted deferred consideration and account for the amount unrolled by Dr Finance Costs Cr Deferred Consideration account
This, incidentally, is an F3 topic covered by John Moffat in his F3 video lectures and in the F3 course notes
OK?
“In my answer I followed the same working as the online Practice Questions Chapter 23, Question 3 and arrived to the below calculation:
10 x 12 = 120 months: ((500,000-20,000)/120 x 6 = 24,000
((500,000 – 24,000 + 25,000 – 20,000)/114months x 3 months = 12,658 + 24,000 = 36,658 My AnsCan you tell me what principle should I apply when calculation this? Since the answers are totally different”
The safety guard has a life of only 5 years but you’re depreciating it over 114 months
“…. + 25,000 – 20,000)/114months x 3 months”
OK?
“What amount will appear under non-current liabilities in respect of this lease in the statement of financial position of Fellini at 31 December 20X7?”
The tricky bit here is the payments on 1 January so, to find the capital amount outstanding on the day before the next instalment is paid, we need to go back to the amount outstanding immediately after the previous instalment was paid
Capital outstanding at 31 December 207 is the figure that remained after the 700 was paid on 1 January, 2007 and that figure is, according to my calculations, 2,056
Follow that through for another year and the capital outstanding immediately after the next 700 payment is 1,479
So my figures for capital outstanding are……
Full amount 2,056
Full amount next year 1,479
Therefore current (2,056 – 1,479) 577
and long term is 1,479There is also a further current liability in the accrued finance lease interest that will be paid off in the 700 paid on 1 January, 2008 amounting to 123
You appear to have gone a year too far
It helps if you put dates on your schedule of the lease amounts paid and accrued. That way you can see more clearly where you’re up to
OK?
All ok, Thanks for the excellent explanation. Keep up the good work.
Re OT Notes under Practice Questions:
Pg256 Q8: bi) shouldn’t the impairment of $25,000 be accounted as a deduction from Ret Ears please?
biii) Why didn’t we recognise $4000 profit on disposal in P&L (60,000 – 56,000) please? Is it because it is already included in $792 in profit from operations?
Thanks in advance and I really wish to know how can I pay you for all your help. Since if I pass, it would all be with your help.
Regards,
Marylise
“bi) shouldn’t the impairment of $25,000 be accounted as a deduction from Ret Ears please?”
– can only assume that it’s accounted for in arriving at 792
“Why didn’t we recognise $4000 profit on disposal in P&L (60,000 – 56,000) please? Is it because it is already included in $792 in profit from operations?”
– again, can only assume that it’s accounted for in arriving at 792
“how can I pay you for all your help. Since if I pass, it would all be with your help.”
– two points here
1) It’s not me in that exam room. The person writing for 3 hours is you and all the credit goes to you
2) you want to know how to repay me (and opentuition)? Make sure that there are NO ACCA students in Malta that have not heard of us!
And make sure you pass – that will be reward enough 🙂
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