(b) Determine whether the factoring company’s offer can be recommended on financial grounds. Assume a

working year of 365 days and base your analysis on financial information for 2006. (8 marks)

1 Stuart is a self-employed business consultant aged 58. He is married to Rebecca, aged 55. They have one child,

Sam, who is aged 24 and single.

In November 2005 Stuart sold a house in Plymouth for ￡422,100. Stuart had inherited the house on the death of

his mother on 1 May 1994 when it had a probate value of ￡185,000. The subsequent pattern of occupation was as

follows:

1 May 1994 to 28 February 1995 occupied by Stuart and Rebecca as main residence

1 March 1995 to 31 December 1998 unoccupied

1 January 1999 to 31 March 2001 let out (unfurnished)

1 April 2001 to 30 November 2001 occupied by Stuart and Rebecca

1 December 2001 to 30 November 2005 used occasionally as second home

Both Stuart and Rebecca had lived in London from March 1995 onwards. On 1 March 2001 Stuart and Rebecca

bought a house in London in their joint names. On 1 January 2002 they elected for their London house to be their

principal private residence with effect from that date, up until that point the Plymouth property had been their principal

private residence.

No other capital disposals were made by Stuart in the tax year 2005/06. He has ￡29,500 of capital losses brought

forward from previous years.

Stuart intends to invest the gross sale proceeds from the sale of the Plymouth house, and is considering two

investment options, both of which he believes will provide equal risk and returns. These are as follows:

(1) acquiring shares in Omikron plc; or

(2) acquiring further shares in Omega plc.

Notes:

1. Omikron plc is a listed UK trading company, with 50,250,000 shares in issue. Its shares currently trade at 42p

per share.

2. Stuart and Rebecca helped start up the company, which was then Omega Ltd. The company was formed on

1 June 1990, when they each bought 24,000 shares for ￡1 per share. The company became listed on 1 May

1997. On this date their holding was subdivided, with each of them receiving 100 shares in Omega plc for each

share held in Omega Ltd. The issued share capital of Omega plc is currently 10,000,000 shares. The share price

is quoted at 208p – 216p with marked bargains at 207p, 211p, and 215p.

Stuart and Rebecca’s assets (following the sale of the Plymouth house but before any investment of the proceeds) are

as follows:

Assets Stuart Rebecca

￡ ￡

Family house in London 450,000 450,000

Cash from property sale 422,100 –

Cash deposits 165,000 165,000

Portfolio of quoted investments – 250,000

Shares in Omega plc see above see above

Life insurance policy note 1 note 1

Note:

1. The life insurance policy will pay out a sum of ￡200,000 on the death of the first spouse to die.

Stuart has recently been diagnosed with a serious illness. He is expected to live for another two or three years only.

He is concerned about the possible inheritance tax that will arise on his death. Both he and Rebecca have wills whose

terms transfer all assets to the surviving spouse. Rebecca is in good health.

Neither Stuart nor Rebecca has made any previous chargeable lifetime transfers for the purposes of inheritance tax.

Required:

(a) Calculate the taxable capital gain on the sale of the Plymouth house in November 2005 (9 marks)

(ii) Following on from your answer to (i), evaluate the two purchase proposals, and advise Bill and Ben

which course of action will result in the highest amount of after tax cash being received by the

shareholders if the disposal takes place on 31 March 2006. (4 marks)

4 (a) For this part, assume today’s date is 1 March 2006.

Bill and Ben each own 50% of the ordinary share capital in Flower Limited, an unquoted UK trading company

that makes electronic toys. Flower Limited was incorporated on 1 August 2005 with 1,000 ￡1 ordinary shares,

and commenced trading on the same day. The business has been successful, and the company has accumulated

a large cash balance of ￡180,000, which is to be used to purchase a new factory. However, Bill and Ben have

received an offer from a rival company, which they are considering. The offer provides Bill and Ben with two

alternative methods of payment for the purchase of their shares:

(i) ￡480,000 for the company, inclusive of the ￡180,000 cash balance.

(ii) ￡300,000 for the company assuming the cash available for the factory purchase is extracted prior to sale.

Bill and Ben each currently receive a gross salary of ￡3,750 per month from Flower Limited. Part of the offer

terms is that Bill and Ben would be retained as employees of the company on the same salary.

Neither Bill nor Ben has used any of their capital gains tax annual exemption for the tax year 2005/06.

Required:

(i) Calculate which of the following means of extracting the ￡180,000 from Flower Limited on 31 March

2006 will result in the highest after tax cash amount for Bill and Ben:

(1) payment of a dividend, or

(2) payment of a salary bonus.

You are not required to consider the corporation tax (CT) implications for Flower Limited in your

answer. (5 marks)

(iii) State the value added tax (VAT) and stamp duty (SD) issues arising as a result of inserting Bold plc as

a holding company and identify any planning actions that can be taken to defer or minimise these tax

costs. (4 marks)

You should assume that the corporation tax rates for the financial year 2005 and the income tax rates

and allowances for the tax year 2005/06 apply throughout this question.

19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events.

What figure should appear in the income statement for these items?

A $61,000

B $22,000

C $24,000

D $23,850

(b) Both divisions have recognised the need for a strategic alliance to help them achieve a successful entry into

European markets.

Critically evaluate the advantages and disadvantages of the divisions using strategic alliances to develop their

respective businesses in Europe. (15 marks)

(iii) State how your answer in (ii) would differ if the sale were to be delayed until August 2006. (3 marks)

(ii) Assuming the new structure is implemented with effect from 1 August 2006, calculate the level of

management charge that should be made by Bold plc to Linden Limited for the year ended 31 July

2007, so as to minimise the group’s overall corporation tax (CT) liability for that year. (2 marks)

5 GE Railways plc (GER) operates a passenger train service in Holtland. The directors have always focused solely on

the use of traditional financial measures in order to assess the performance of GER since it commenced operations

in 1992. The Managing Director of GER has asked you, as a management accountant, for assistance with regard to

the adoption of a balanced scorecard approach to performance measurement within GER.

Required:

(a) Prepare a memorandum explaining the potential benefits and limitations that may arise from the adoption of

a balanced scorecard approach to performance measurement within GER. (8 marks)

(c) State one advantage to a business of keeping its working capital cycle as short as possible.

(2 Marks)