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(c) State the specific inquiries you should make of Robson Construction Co’s management relevant to its
accounting for construction contracts. (6 marks)
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2 Traditionally, the only objective of a business was to make a profit. However, some writers have suggested that this idea is simplistic and that profitability is only one objective amongst many.Required:State and explain Drucker’s eight classifications of objectives.(15 marks)
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5 Ambush, a public limited company, is assessing the impact of implementing the revised IAS39 ‘Financial Instruments:Recognition and Measurement’. The directors realise that significant changes may occur in their accounting treatmentof financial instruments and they understand that on initial recognition any financial asset or liability can bedesignated as one to be measured at fair value through profit or loss (the fair value option). However, there are certainissues that they wish to have explained and these are set out below.Required:(a) Outline in a report to the directors of Ambush the following information:(i) how financial assets and liabilities are measured and classified, briefly setting out the accountingmethod used for each category. (Hedging relationships can be ignored.) (10 marks)
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2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is currently preparing its financialstatements for the year ended 31 May 2006 and has asked for advice on how to deal with the following items:(i) Tyre requires customers to pay a deposit of 20% of the purchase price when placing an order for a vehicle. If thecustomer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled byTyre, the company repays the full amount of the deposit to the customer. The balance of the purchase pricebecomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognisethe revenue from the deposits immediately and the balance of the purchase price when the goods are deliveredto the customer. The cost of sales for the vehicle is recognised when the balance of the purchase price is paid.Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on thetransaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option whichentitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normaleconomic life of the vehicles is five years and the buyback option is expected to be exercised. (8 marks)Required:Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended31 May 2006.(The mark allocation is shown against each of the above items)
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(b) Discuss FOUR factors that distinguish service from manufacturing organisations and explain how each ofthese factors relates to the services provided by the Dental Health Partnership. (5 marks)
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3 You are the manager responsible for the audit of Keffler Co, a private limited company engaged in the manufacture ofplastic products. The draft financial statements for the year ended 31 March 2006 show revenue of $47·4 million(2005 – $43·9 million), profit before taxation of $2 million (2005 – $2·4 million) and total assets of $33·8 million(2005 – $25·7 million).The following issues arising during the final audit have been noted on a schedule of points for your attention:(a) In April 2005, Keffler bought the right to use a landfill site for a period of 15 years for $1·1 million. Kefflerexpects that the amount of waste that it will need to dump will increase annually and that the site will becompletely filled after just ten years. Keffler has charged the following amounts to the income statement for theyear to 31 March 2006:– $20,000 licence amortisation calculated on a sum-of-digits basis to increase the charge over the useful lifeof the site; and– $100,000 annual provision for restoring the land in 15 years’ time. (9 marks)Required:For each of the above issues:(i) comment on the matters that you should consider; and(ii) state the audit evidence that you should expect to find,in undertaking your review of the audit working papers and financial statements of Keffler Co for the year ended31 March 2006.NOTE: The mark allocation is shown against each of the three issues.
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A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single standardised product. Division L makes component L, which is supplied to both Division M and external customers.Division M makes product M using one unit of component L and other materials. It then sells the completedproduct M to external customers. To date, Division M has always bought component L from Division L.The following information is available:Division L charges the same price for component L to both Division M and external customers. However, it does not incur the selling and distribution costs when transferring internally.Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the group was $42 per unit.It is head office policy to let the divisions operate autonomously without interference at all.Required:(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the new supplier’soffer and recommend how many components Division L should sell to Division M if group profits are to bemaximised. (3 marks)(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual profits of each division and the group as a whole. (6 marks)(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the divisions on a suitable alternative transfer price for component L. (6 marks)
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