（i）Cavern has accounted for a fully subscribed rights issue of equity shares made on 1 April 2010 of one new share for every four in issue at 42 cents each.The company paid ordinary dividends of 3 cents per share on 30 November 2009 and 5 cents per share on 31 May 2010.The dividend payments are included in administrative expenses in the trial balance.

　　（ii）The 8% loan note was issued on 1 October 2008 at its nominal（face）value of $30 million.The loan note will be redeemed on 30 September 2012 at a premium which gives the loan note an effective fi nance cost of 10% per annum.

　　（iii）Non-current assets:

　　Cavern revalues its land and building at the end of each accounting year.At 30 September 2010 the relevant value to be incorporated into the fi nancial statements is $41·8 million.The building‘s remaining life at the beginning of the current year（1 October 2009）was 18 years.Cavern does not make an annual transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation surplus.

　　Plant and equipment includes an item of plant bought for $10 million on 1 October 2009 that will have a 10-year life（using straight-line depreciation with no residual value）.Production using this plant involves toxic chemicals which will cause decontamination costs to be incurred at the end of its life.The present value of these costs using a discount rate of 10% at 1 October 2009 was $4 million.Cavern has not provided any amount for this future decontamination cost.All other plant and equipment is depreciated at 12·5% per annum using the reducing balance method.

　　No depreciation has yet been charged on any non-current asset for the year ended 30 September 2010.All depreciation is charged to cost of sales.

　　（iv）The available-for-sale investments held at 30 September 2010 had a fair value of $13·5 million.There were no acquisitions or disposals of these investments during the year ended 30 September 2010.

　　（v）A provision for income tax for the year ended 30 September 2010 of $5·6 million is required.The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 2009.At 30 September 2010 the tax base of Cavern‘s net assets was $15 million less than their carrying amounts.The movement on deferred tax should be taken to the income statement.The income tax rate of Cavern is 25%.

　　Required:

　　（a）Prepare the statement of comprehensive income for Cavern for the year ended 30 September 2010.

　　（b）Prepare the statement of changes in equity for Cavern for the year ended 30 September 2010.

　　（c）Prepare the statement of fi nancial position of Cavern as at 30 September 2010.

　　Notes to the financial statements are not required.

　　The following mark allocation is provided as guidance for this question：

　　（a）11 marks

　　（b）5 marks

　　（c）9 marks

　　（25 marks）

　　3 Hardy is a public listed manufacturing company.Its summarised financial statements for the year ended 30 September 2010（and 2009 comparatives）are:

　　Income statements for the year ended 30 September:

　　Statements of fi nancial position as at 30 September:

　The following information has been obtained from the Chairman's Statement and the notes to the financial statements:

　　'Market conditions during the year ended 30 September 2010 proved very challenging due largely to difficulties in the global economy as a result of a sharp recession which has led to steep falls in share prices and property values. Hardy has not been immune from these effects and our properties have suffered impairment losses of $6 million in the year.'

　　The excess of these losses over previous surpluses has led to a charge to cost of sales of $1·5 million in addition to the normal depreciation charge.

　　'Our portfolio of investments at fair value through profi t or loss has been 'marked to market' （fair valued） resulting in a loss of $1·6 million（included in administrative expenses）.'

　　There were no additions to or disposals of non-current assets during the year.

　　'In response to the downturn the company has unfortunately had to make a number of employees redundant incurring severance costs of $1·3million（included in cost of sales）and undertaken cost savings in advertising and other administrative expenses.'

　　'The difficulty in the credit markets has meant that the finance cost of our variable rate bank loan has increased from 4·5% to 8%.In order to help cash flows,the company made a rights issue during the year and reduced the dividend per share by 50%.'

　　'Despite the above events and associated costs,the Board believes the company's underlying performance has been quite resilient in these diffi cult times.'

　　Required:

　　Analyse and discuss the financial performance and position of Hardy as portrayed by the above financial statements and the additional information provided.

　　Your analysis should be supported by profitability,liquidity and gearing and other appropriate ratios（up to 10 marks available）.

　　（25 marks）

　　4 （a）IAS 8 Accounting Policies,Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates.

　　Required:

　　Explain the basis on which the management of an entity must select its accounting policies and distinguish,with an example,between changes in accounting policies and changes in accounting estimates.（5 marks）

　　（b）The directors of Tunshill are disappointed by the draft profit for the year ended 30 September 2010.The company's assistant accountant has suggested two areas where she believes the reported profi t may be improved:

　　（i）A major item of plant that cost $20 million to purchase and install on 1 October 2007 is being depreciated on a straight-line basis over a fi ve-year period （assuming no residual value）.The plant is wearing well and at the beginning of the current year（1 October 2009）the production manager believed that the plant was likely to last eight years in total（i.e. from the date of its purchase）.The assistant accountant has calculated that,based on an eight-year life（and no residual value）the accumulated depreciation of the plant at 30 September 2010 would be $7·5 million（$20 million/8 years x 3）.In the fi nancial statements for the year ended 30 September 2009,the accumulated depreciation was $8 million （$20 million/5 years x 2）.Therefore,by adopting an eight-year life,Tunshill can avoid a depreciation charge in the current year and instead credit $0·5 million（$8 million – $7·5 million）to the income statement in the current year to improve the reported profi t.（5 marks）

　　（ii）Most of Tunshill's competitors value their inventory using the average cost（AVCO）basis,whereas Tunshill uses the first in first out（FIFO）basis.The value of Tunshill's inventory at 30 September 2010（on the FIFO basis）is $20 million,however on the AVCO basis it would be valued at $18 million.By adopting the same method （AVCO）as its competitors,the assistant accountant says the company would improve its profi t for the year ended 30 September 2010 by $2 million.Tunshill‘s inventory at 30 September 2009 was reported as $15 million,however on the AVCO basis it would have been reported as $13·4 million.（5 marks）

　　Required:

　　Comment on the acceptability of the assistant accountant‘s suggestions and quantify how they would affect the financial statements if they were implemented under IFRS.Ignore taxation.

　　Note:the mark allocation is shown against each of the two items above.

　　（15 marks）

　　5 Manco has been experiencing substantial losses at its furniture making operation which is treated as a separate operating segment.The company‘s year end is 30 September.At a meeting on 1 July 2010 the directors decided to close down the furniture making operation on 31 January 2011 and then dispose of its non-current assets on a piecemeal basis.Affected employees and customers were informed of the decision and a press announcement was made immediately after the meeting.The directors have obtained the following information in relation to the closure of the operation:

　　（i）On 1 July 2010,the factory had a carrying amount of $3·6 million and is expected to be sold for net proceeds of $5 million.On the same date the plant had a carrying amount of $2·8 million,but it is anticipated that it will only realise net proceeds of $500,000.

　　（ii）Of the employees affected by the closure,the majority will be made redundant at cost of $750,000,the remainder will be retrained at a cost of $200,000 and given work in one of the company's other operations.

　　（iii）Trading losses from 1 July to 30 September 2010 are expected to be $600,000 and from this date to the closure on 31 January 2011 a further $1 million of trading losses are expected.

　　Required：

　　Explain how the decision to close the furniture making operation should be treated in Manco‘s fi nancial statements for the years ending 30 September 2010 and 2011. Your answer should quantify the amounts involved.（10 marks）