Chester Ltd. has several investments. On 01/01/2021 Chester Ltd.

Question 1 (25 points). Chester Ltd. has several investments. On 01/01/2021 Chester Ltd. acquired 70% of the ordinary shares of Company A, 10% of the ordinary shares of Company B and 30% of the ordinary shares of Company C. The Statement of Financial Position on 31/12/2021 of the different companies is as follows:

On the acquisition date, Company C had general reserve of £4,500 and retained earnings of 6,000. For the other companies, consider that there are not changes in the value of equity between the acquisition and the reporting date.

Required:

1. Explain which type of investment Company A, Company B and Company C represent for Chester

Ltd. (2 points)

1. Explain the accounting treatment characteristics that Chester Ltd. needs to follow for each of its three investments. (5 points)
2. Prepare the consolidated statement of financial position for Chester Ltd. on 31/12/2021. (10 points)
3. Do you think that Chester Ltd. made a good decision acquiring the ordinary shares from

Company

A? Explain your answer. (5 points)

1. Assume that Chester Ltd. enters into an agreement with Dolphin Plc. to manufacture and sell a new product. They set up an entity which carries out these activities. The new entity is equally owned by the two firms. Indicate the appropriate accounting treatment of the agreement that Chester Ltd. should apply. (3 points)

Question 2 (25 points). On 01/01/2019, Flowers Ltd. entered into a contract with Daisy Ltd. to lease a non-current asset for 3 years. To obtain the lease, Daisy Ltd. incurs in initial direct costs of £7,000 that are paid in credit.

Daisy Ltd. must pay £10,000 each year with the lease payments commencing on 31/12/2019. Daisy Ltd. can borrow at a rate of 8% each year. At the end of the lease contract, the ownership of the non-current asset will be transferred to Daisy Ltd. The useful life of the non-current asset is 10 years.

Required:

1. After doing the necessary calculations, draw all the journal entries for years 2019, 2020 and 2021 for Daisy Ltd. considering the accounting treatment of the leasing contract from the point of view of Daisy Ltd. (12 points)
2. Describe the accounting treatment for Flowers Ltd (calculations and journal entries are not required for this question). (5 points)
3. How would the accounting treatment change for Daisy Ltd and Flowers Ltd if, at the end of the contract, the ownership of the non-current asset is not transferred to the lessee (calculations and journal entries are not required for this question). (5 points)
4. Describe what the non-lease components are and provide an example to support your answer (3 points)

Question 3 (35 points). Lancaster Ltd. produces two types of products: Blue and Red.

Each product requires the incorporation of a difficult-to-handle special part:  § 4 of them for one unit of Blue; and  § 1 of them for one unit of Red.

Both products are produced by Lancaster Ltd. and separated in different batches. Each new batch requires that production facilities are set-up.

Details for Blue and Red are as follows:

An analysis of overhead costs for Lancaster Ltd. has provided the following information:

Required:

1. Calculate and explain the profit per unit and the return on sales for Blue and Red using both:
   • The traditional costing method assuming that the overheads are charged to each type of product on the basis of direct machine hours. (5 points)
   • The activity-based costing method. (15 points)
2. Considering the previous results in section a), assume that, in recent months, managers of Lancaster Ltd. have been trying to persuade customers who buy Blue to purchase Red instead. Is this decision correct? Explain in detail. (8 points)
3. Imagine you are the CEO of an imaginary company. Which is the main activity of such company? Based on the characteristics of this company, which method should the management prefer between the ABC and the traditional costing method? Explain in detail. (7 points)

Question 4 (15 points) 

Northern Ltd. has two operating divisions: Land and Forest. Land produces wood boards used in making bedside tables. The budgeted cost of one m² of wood board is made up as follows:

The budgeted output for Land is 200,000 m² each year. Forest makes bedside tables and uses 1.5 m² of this wood board to make one bedside table. The manager of Northern Ltd. has decided the following:

• Land must sell to Forest as much of the wood as it is required to meet its needs and any surplus can be sold to outside businesses at the market price of £30 per m²;
• Forest must buy all its requirements for the bedside tables from Land. The budgeted output for Forest is 120,000 bedside tables each year.
• Forest sells its output for £75 per unit and, additionally to the cost of the wood, incurs in fixed and variable costs of £10 per unit at the budgeted output.

Required

1. Calculate the budgeted profit for each operating division assuming a transfer price policy based on (i) variable cost; (ii) full cost; (iii) market price. (9 points)
2. Assuming that Land is operating at full capacity, which transfer pricing methods would be the most appropriate? Motivate your answer (3 points)

Assuming that Forest can purchase the required amount of wood from external supplier at £33, what would the acceptable range of transfer prices in this case be? Motivate your answer (3 points)