On June 30, 2007, when Strong Co.'s stock was selling at ￥65 per share, its capita

(d) Wader has decided to close one of its overseas branches. A board meeting was held on 30 April 2007 when a

detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. Letters

were sent out to customers, suppliers and workers on 15 May 2007 and meetings were held prior to the year

end to determine the issues involved in the closure. The plan is to be implemented in June 2007. The company

wish to provide $8 million for the restructuring but are unsure as to whether this is permissible. Additionally there

was an issue raised at one of the meetings. The operations of the branch are to be moved to another country

from June 2007 but the operating lease on the present buildings of the branch is non-cancellable and runs for

another two years, until 31 May 2009. The annual rent of the buildings is $150,000 payable in arrears on

31 May and the lessor has offered to take a single payment of $270,000 on 31 May 2008 to settle the

outstanding amount owing and terminate the lease on that date. Wader has additionally obtained permission to

sublet the building at a rental of $100,000 per year, payable in advance on 1 June. The company needs advice

on how to treat the above under IAS37 ‘Provisions, Contingent Liabilities and Contingent Assets’. (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.

A.每月装运两批货物，每批数量相等

B.分两批装运货物

C.每月装运一批货物

D.每月装运一批，每批数量相等

(c) At 1 June 2006, Router held a 25% shareholding in a film distribution company, Wireless, a public limited

company. On 1 January 2007, Router sold a 15% holding in Wireless thus reducing its investment to a 10%

holding. Router no longer exercises significant influence over Wireless. Before the sale of the shares the net asset

value of Wireless on 1 January 2007 was $200 million and goodwill relating to the acquisition of Wireless was

$5 million. Router received $40 million for its sale of the 15% holding in Wireless. At 1 January 2007, the fair

value of the remaining investment in Wireless was $23 million and at 31 May 2007 the fair value was

$26 million. (6 marks)

Required:

Discuss how the above items should be dealt with in the group financial statements of Router for the year ended

31 May 2007.Required:

Discuss how the above items should be dealt with in the group financial statements of Router for the year ended

31 May 2007.

A.每月装运两批货物，每批数量相等

B.分两批装运货物

C.每月装运一批货物

D.每月装运一批，每批数量相等

equally. On 28 February 2007 the partners sold the business to Razor Ltd, in exchange for shares in Razor Ltd, with

each former partner owning one third of the new company.

The recent, tax adjusted, trading profits of the Stiletto Partnership have been as follows:

￡

Year ended 30 June 2006 92,124

1 July 2006 to 28 February 2007 81,795

Clint, who was 65 on 5 October 2006, retired when the business was sold to Razor Ltd. He is now suggesting that

if the sale of the partnership, and his retirement, had been delayed until 30 April 2007, his total tax liability would

have been reduced. Clint’s only other income is gross pension income of ￡6,100 per year, which he began receiving

in the tax year 2005/06. Clint did not receive any salary or dividends from Razor Ltd. It is estimated that the

partnership’s tax adjusted trading profits for the period from 1 March 2007 to 30 April 2007 would have been

￡20,760. Clint has overlap profits of ￡14,250 brought forward from when the partnership began trading.

Razor Ltd manufactures industrial cutting tools. On 1 July 2007, Razor Ltd will subscribe for the whole of the ordinary

share capital of Cutlass Inc, a company newly incorporated in the country of Sharpenia. It is intended that Cutlass

Inc will purchase partly finished tools from Razor Ltd and customise them in Sharpenia. It is anticipated that Cutlass

Inc’s annual profits chargeable to corporation tax will be approximately ￡120,000.

Ben and Amy will be the directors of Cutlass Inc, although Ben will not be involved in the company’s business on a

day-to-day basis. Amy intends to spend one or two weeks each month in the country of Sharpenia looking after the

company’s affairs. The remainder of her time will be spent in the UK. Amy has employment contracts with both Razor

Ltd and Cutlass Inc and her duties for Cutlass Inc will be carried out wholly in Sharpenia. Cutlass Inc will pay for

Amy’s flights to and from Sharpenia and for her husband and baby to visit her there twice a year. Amy is currently

UK resident and ordinarily resident.

The system of income tax and corporation tax in the country of Sharpenia is broadly similar to that in the UK although

the rate of corporation tax is 38% regardless of the level of profits. There is a double tax treaty between the UK and

Sharpenia based on the OECD model treaty. The clause in the treaty dealing with company residency states that a

company resident in both countries under domestic law will be regarded under the treaty as being resident only in the

country where it is effectively managed and controlled. Sharpenia is not a member of the European Union.

Required:

(a) (i) Calculate Clint’s taxable trading profits for the tax years 2006/07 and 2007/08 for both of the

alternative retirement dates (28 February 2007 and 30 April 2007). (3 marks)

rate taxpayer who has realised taxable capital gains in 2007/08 in excess of his capital gains tax annual exemption.

Clifford moved into Amanda’s house in London on the day they were married. Clifford’s own house in Oxford, where

he had lived since acquiring it for ￡129,400 on 1 August 1996, has been empty since that date although he and

Amanda have used it when visiting friends. Clifford has been offered ￡284,950 for the Oxford house and has decided

that it is time to sell it. The house has a large garden such that Clifford is also considering an offer for the house and

a part only of the garden. He would then sell the remainder of the garden at a later date as a building plot. His total

sales proceeds will be higher if he sells the property in this way.

Amanda received the following income from quoted investments in 2006/07:

￡

Dividends in respect of quoted trading company shares 1,395

Dividends paid by a Real Estate Investment Trust out of tax exempt property income 485

On 1 May 2006, Amanda was granted a 22 year lease of a commercial investment property. She paid the landlord

a premium of ￡6,900 and also pays rent of ￡2,100 per month. On 1 June 2006 Amanda granted a nine year

sub-lease of the property. She received a premium of ￡14,700 and receives rent of ￡2,100 per month.

On 1 September 2006 Amanda gave quoted shares with a value of ￡2,200 to a registered charity. She paid broker’s

fees of ￡115 in respect of the gift.

Amanda began working for Shearer plc, a quoted company, on 1 June 2006 having had a two year break from her

career. She earns an annual salary of ￡38,600 and was paid a bonus of ￡5,750 in August 2006 for agreeing to

come and work for the company. On 1 August 2006 Amanda was provided with a fully expensed company car,

including the provision of private petrol, which had a list price when new of ￡23,400 and a CO2 emissions rate of

187 grams per kilometre. Amanda is required to pay Shearer plc ￡22 per month in respect of the private use of the

car. In June and July 2006 Amanda used her own car whilst on company business. She drove 720 business miles

during this two month period and was paid 34 pence per mile. Amanda had PAYE of ￡6,785 deducted from her gross

salary in the tax year 2006/07.

After working for Shearer plc for a full year, Amanda becomes entitled to the following additional benefits:

– The opportunity to purchase a large number of shares in Shearer plc on 1 July 2007 for ￡3·30 per share. It is

anticipated that the share price on that day will be at least ￡7·50 per share. The company will make an interestfree

loan to Amanda equal to the cost of the shares to be repaid in two years.

– Exclusive free use of the company sailing boat for one week in August 2007. The sailing boat was purchased by

Shearer plc in January 2005 for use by its senior employees and costs the company ￡1,400 a week in respect

of its crew and other running expenses.

Required:

(a) (i) Calculate Clifford’s capital gains tax liability for the tax year 2007/08 on the assumption that the Oxford

house together with its entire garden is sold on 31 July 2007 for ￡284,950. Comment on the relevance

to your calculations of the size of the garden; (5 marks)

Complaints caused by not delivering according to the time and quantity

In the fall of 2006 ,one of our trading companies concluded a substantial rice business with an old customer in Africa. The terms of delivery are : shipment is to be made in equal monthly lots beginning from December,2006 to June,2007 and payment is to be made by irrevocable letter of credit 60 days after the date of the bill of lading. The customer established the L/C in time and all particulars of the rice, such as the name , specifications , unit price,total price and total quantity are in conformity with the contract. But the terms of shipment only stated " the latest date of shipment is June 30 ,to be shipped in several lots".

The staff in our trading company made the first shipment in December according to the quantity stated in the contract. However in order to export more and eam more foreign exchange earlier, they advanced the time of shipment regardless the shipment terms stipulated in the contract. In January 2007 , our company shipped the quantity of the first quarter once , and in February made the third shipment for the rest quantity that should be delivered in the second quarter, since our staff had not found any specifications "shipment is to be made in equal lots" in the L/C. At the same time our bank negotiated against presentation of the stipulated documents and subsequently asked the opening bank to pay for the goods. The opening bank examined the L/C and confirmed that the L/C had no error in it.

After receiving the shipping advice, the African customer found that the delivered quantity of the rice both in the second lot and third lot were not in accordance with the shipment terms stipulated in the contract, so a claim was filed by the customer against our trading company for default shipment. The amount claimed involved the added fees of chartering warehouse for the delivered goods, the interest and other charges etc. The two parties negotiated the compensation for several times, finally our company accepted the opposing party's opinion and agreed that the purchase price for the last two lots was to be paid four months later, that meant our company would receive the payment a few months later than che original stated time. According to Lhe current price in the international market at that time, our trading company suffered the loss equivalent to 10 percent of the original selling price.

Questions :

(1) What is the relationship between the letter of credit and the transaction contract？

(2) Which proof must the two parties concerned base on when they perform their obligations？

(Translate the case into Chinese and then answer the question)

Helpful hint: It is stipulated in Article 4 of the Uniform Customs and Practice for Documentary Credits that "in credit operations all parties concerned deal in documents and not in goods , service and/or other performance to which the documents may relate" .

the audit of the financial statements for the year ended 30 November 2007. The draft financial statements show

revenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and total

assets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June

2007.

Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%

is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successful

installation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised until

the final installation.

At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputed

stage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, is

running at 100% efficiency.

One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages for

injuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. Kate

Shannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally known

that Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which were

placed by Sawyer Co in October 2007 have been cancelled.

Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on

17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of the

major components included in the coal extracting machinery is now being sourced from overseas. The new supplier,

Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to Locke

Co recorded within current liabilities.

All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at

$2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported by

customers, and this estimate forms the basis of the provision.

Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office to

Island Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the audit

to be finished by that time.

Required:

(a) Using the information provided, identify and explain the principal audit risks, and any other matters to be

considered when planning the final audit for Island Co for the year ended 30 November 2007.

Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.

Requirement (a) includes 2 professional marks. (13 marks)

3 (a) Leigh, a public limited company, purchased the whole of the share capital of Hash, a limited company, on 1 June

2006. The whole of the share capital of Hash was formerly owned by the five directors of Hash and under the

terms of the purchase agreement, the five directors were to receive a total of three million ordinary shares of $1

of Leigh on 1 June 2006 (market value $6 million) and a further 5,000 shares per director on 31 May 2007,

if they were still employed by Leigh on that date. All of the directors were still employed by Leigh at 31 May

2007.

Leigh granted and issued fully paid shares to its own employees on 31 May 2007. Normally share options issued

to employees would vest over a three year period, but these shares were given as a bonus because of the

company’s exceptional performance over the period. The shares in Leigh had a market value of $3 million

(one million ordinary shares of $1 at $3 per share) on 31 May 2007 and an average fair value of

$2·5 million (one million ordinary shares of $1 at $2·50 per share) for the year ended 31 May 2007. It is

expected that Leigh’s share price will rise to $6 per share over the next three years. (10 marks)

Required:

Discuss with suitable computations how the above share based transactions should be accounted for in the

financial statements of Leigh for the year ended 31 May 2007.