重庆2022ACCA考试报名时间及注意事项

(c) Wader is reviewing the accounting treatment of its buildings. The company uses the ‘revaluation model’ for its

buildings. The buildings had originally cost $10 million on 1 June 2005 and had a useful economic life of

20 years. They are being depreciated on a straight line basis to a nil residual value. The buildings were revalued

downwards on 31 May 2006 to $8 million which was the buildings’ recoverable amount. At 31 May 2007 the

value of the buildings had risen to $11 million which is to be included in the financial statements. The company

is unsure how to treat the above events. (7 marks)

Required:

Discuss the accounting treatments of the above items in the financial statements for the year ended 31 May

2007.

Note: a discount rate of 5% should be used where necessary. Candidates should show suitable calculations where

necessary.

(b) The marketing director of CTC has suggested the introduction of a new toy ‘Nellie the Elephant’ for which the

following estimated information is available:

1. Sales volumes and selling prices per unit

Year ending, 31 May 2009 2010 2011

Sales units (000) 80 180 100

Selling price per unit ($) 50 50 50

2. Nellie will generate a contribution to sales ratio of 50% throughout the three year period.

3. Product specific fixed overheads during the year ending 31 May 2009 are estimated to be $1·6 million. It

is anticipated that these fixed overheads would decrease by 10% per annum during each of the years ending

31 May 2010 and 31 May 2011.

4. Capital investment amounting to $3·9 million would be required in June 2008. The investment would have

no residual value at 31 May 2011.

5. Additional working capital of $500,000 would be required in June 2008. A further $200,000 would be

required on 31 May 2009. These amounts would be recovered in full at the end of the three year period.

6. The cost of capital is expected to be 12% per annum.

Assume all cash flows (other than where stated) arise at the end of the year.

Required:

(i) Determine whether the new product is viable purely on financial grounds. (4 marks)

(ii) Illustrate the benefit of revising the corporate structure by calculating the corporation tax (CT) payable

for the year ended 31 March 2006, on the assumptions that:

(1) no action is taken; and

(2) an amended structure as recommended in (i) above is implemented from 1 June 2005. (3 marks)