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Institute of Certified Management Accountants of Sri Lanka Managerial Level

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Institute of Certified Management Accountants of Sri Lanka Managerial Level
Serial No………………
© Copyright Reserved
Institute of Certified Management Accountants of Sri Lanka
Managerial Level
May 2014 Examination
10th May 2014
9.30 a:m. – 12.30 p:m.
Examination Date :
Examination Time:
Number of Pages
:
Number of Questions:
05
05
Instructions to Candidates
1.
2.
3.
4.
Time allowed is three (3) hours.
Total: 100 Marks.
Answer all questions in Part I and three (3) questions from Part II.
The answers should be in English Language.
Subject
Subject Code
Corporate Reporting and Analysis
(CRA / ML 2 – 302)
PART I
Answer all questions
Question No. 01 (40 Marks)
(a)
Explain the meaning of ‘consideration’ given by a parent company for the shares in a subsidiary.
(03 Marks)
(b)
Cross Ltd. is a wholly-owned subsidiary of Ace Plc. Cross Ltd. holds 5% of the shares issued by
Ace. How should these shares be presented in Cross’s separate financial statements? (03 Marks)
(c)
Holmes Plc acquired 16% of issued ordinary shares of Colonel Plc on 01/01/2009 for Rs. 13 million
and carried at cost. Holmes made a further acquisition of 36% of ordinary shares of Colonel Plc on
01/01/2014 for Rs. 120 million. Consider additional information given below:
Fair value of net assets of Colonel
Fair value of Non-Controlling Interest
Fair value of 16% investment
01/01/2009
Rs. Million
52.0
15.0
01/01/2014
Rs. Million
140.0
120.0
30.0
(i)
Calculate the goodwill arising on the acquisition of Colonel Plc.
(03 Marks)
(ii)
Give the impact to the income statement of Holmes based on the acquisition on 01/01/2014.
(02 Marks)
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Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Reporting & Analysis (CRA / ML 2 - 302) – May 2014 Examination
(d)
The summarized financial information of public companies, Anon, Bell, and Cell as at 31/03/2014
are given below:
Anon
Bell
Cell
Rs. Million
Rs. Million
Rs. Million
Statements of Financial Position
Property, Plant & Equipment
900
800
600
Investment in Bell
920
Investments in Cell
300
Inventories
470
216
30
Receivables
330
260
58
Cash and Bank
80
24
12
3,000
1,300
700
Ordinary shares issued at Rs. 100 each
Retained earnings
1,750
1,140
750
510
400
290
20
20
1,300
0
10
700
Revenue
Cost of Sales
0
110
3,000
Income Statements
5,000
3,000
2,000
800
1,000
400
Expenditure
1,000
600
200
Income Tax
Profit
250
750
100
500
40
360
Bank balances
Creditors
Additional information:
1.
Anon acquired 6 mn ordinary shares in Bell on 01/04/2010 when Bell’s retained earnings
were Rs.250 million. The fair value of Bell’s Property, which had a remaining useful life of
10 years, exceeded the book value by Rs.50 million on the date of acquisition. The fair value
of the non-controlling interest at acquisition was estimated at Rs.234 mn.
2.
Anon sold one quarter of Bell’s shares owned for Rs.330.8 million on 31/03/2014. This has
not been accounted by Anon, as the payment is due on 31/03/2014.
3.
Anon also acquired 1.2 mn ordinary shares in Cell on 01/04/2012 when Cell’s retained
earnings were Rs.150 million. The fair value of Cell’s Property, which had a remaining useful
life of 5 years, exceeded the book value by Rs.20 million on the date of acquisition.
4.
Goodwill to be calculated gross and has not been impaired since acquisition.
5.
The impairment review reveals the recoverable amount of Cell as at 31/03/2014 to be
Rs.1,030 mn.
6.
Anon’s trade receivables as at 31/03/2014 include Rs.120 mn due from Bell and Rs.60 mn
due from Cell.
7.
Anon sells goods to Bell and Cell at a margin of 10% on cost. The Revenue of Anon includes
sales of Rs. 200 million to Bell and Rs. 120 million to Cell.
You are required to prepare the followings for Anon group.
(i) The consolidated income statement for the year ended 31st March 2014.
(ii) The consolidated statement of financial position as at 31st March 2014.
(09 Marks)
(20 Marks)
(Total 40 Marks)
End of Part I
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Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Reporting & Analysis (CRA / ML 2 - 302) – May 2014 Examination
Part II
Answer any three (3) questions
Question No. 02 (20 Marks)
(a)
(i)
Revenue recognition criteria emphasize on transfer of significant risks and rewards of
ownership of the goods to the buyer.
Explain the meaning of ‘significant’ with examples.
(ii)
(03 Marks)
Colombo Engineers & Co. shipped swimming pool equipment and machinery to Maldives, to
a destination specified by a hotel company in that country. As the goods have been
dispatched from Colombo port on 20th March 2014, the accountant has recognized the invoice
value of Rs. 30 million in the financial year 2013/2014. The transaction involves installation
of the equipment and machinery that has not yet been fulfilled. The customer has not yet paid
the invoice and the accountant is of the view that the settlement is irrelevant for recognition
of revenue.
Give your opinion.
(03 Marks)
(iii) UNACO supermarket has implemented a new customer policy; if a customer has made
purchases more than Rs. 3 million for the year ended 31/12/2014, the customer is entitled for
a rebate of 5% retrospectively (i.e. rebate on all purchases for the year). UNACO has
observed that there are 10 customers who have made average purchases of Rs.300,000/- per
month for the 1st quarter of the year 2014.
(b)
(i)
(ii)
Advice UNACO on revenue recognition for the year ended 31/03/2014.
(04 Marks)
Explain the followings in accordance with related reporting standards.
1. Operating segments
2. Reportable segments
(04 Marks)
Sihin Air Plc operates a domestic airline from Colombo to Mattala in addition to its
international operations. The domestic airline operations are based on contracts awarded by
the government in a competitive tender and fees for services are paid by the government. The
local air ticket fees are determined by and paid to the government. The company reports these
two operations as two segments. Evaluate and give your explanation.
(06 Marks)
(Total 20 Marks)
3
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Reporting & Analysis (CRA / ML 2 - 302) – May 2014 Examination
Question No. 03 (20 Marks)
(a)
(b)
Briefly explain the following terms in relation to the insurance contracts.
(i) Liability adequacy test
(ii) Reinsurance contracts
(04 Marks)
A machine with a carrying value of Rs. 1 million produces an electronic chip. The work done by
the machine costs Rs. 12 per unit, for which a supply contract exists for 90,000 units over next
3 months. Machine will be scrapped at the end of 3 month period. Currently, the machine has a net
resale value of Rs.975,000/-.
Calculate the impairment loss, if any.
(c)
(03 Marks)
(i)
Ash Plc has issued a convertible bond that gives the holder the choice of payment by cash or
in shares. The directors suggest it to be presented as a debt. How do you solve the problem of
classification as to debt or equity?
(03 Marks)
(ii)
What do you mean by a ‘derivative’?
(04 Marks)
(iii) Determine whether each of the followings should be reported as derivatives as at 31/03/2014.
Give the reasons.
1. GK Plc entered into a forward contract on 1st March 2014 to purchase 100,000 shares in
BM Plc in one year forward. Currently, the share is traded at Rs.100/- and the one year
forward price is Rs.140/-. GK paid Rs. 10 mn on 1st March 2014.
2. GL Plc. sells products in the United States. GL entered into a contract on 01/01/2014
with a local bank to convert Dollars in to LKR at a fixed exchange rate. The contract
requires GL to remit US sales in Dollars in exchange for LKR at a fixed exchange rate of
Rs.132/-.
3. GM Plc has signed a contract on 01/03/2014; contract requires payment of Rs. 2 mn if JK
Plc's share price increases by Rs.50/- or more during the next six month period. GM will
receive Rs. 2 mn if the share price decreases by Rs.50/- or more during the same period.
There will be no payment if the price swing is less than Rs.50/- up or down.
(06 Marks)
(Total 20 Marks)
Question No. 04 (20 Marks)
(a)
(i)
Related party relationships are a normal feature of business throughout the world. What is the
purpose of disclosure of such relations?
(02 Marks)
(ii)
Dr. Heman, an architect, serves in the director board of Just Plc. Just Plc pays a monthly fee
of Rs.50,000/- to the government department where Dr. Heman is a permanent employee. It
is not known to Just Plc whether Dr. Heman collects the fee from the government
department.
Explain the disclosure requirements for Just Plc.
(03 Marks)
(b)
Explain the difference between the two different accounting treatments for joint ventures in the
group accounts, as allowed by the standard for interest in joint ventures.
(05 Marks)
(c)
What are the methods a business could discharge its ‘Corporate Social Responsibility’?
(d)
Explain the need for good governance in the corporate sector today.
(05 Marks)
(05 Marks)
(Total 20 Marks)
4
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Reporting & Analysis (CRA / ML 2 - 302) – May 2014 Examination
Question No. 05 (20 Marks)
(a)
‘In case of firm comparisons, ratio analysis would draw false conclusions’. Discuss.
(b)
Giant Plc acquired Summer Ltd. and Everise Ltd. acquired Jaya Ltd. in 2013. The directors of
Everise are concerned with differences in post-acquisition financial indicators compared with Giant
who acquired a similar company.
Giant
Number of Shares
Earnings after tax (Rs.)
Share price (Rs.)
Pre-acquisition Post-acquisition
10 million
15 million
100 million
150 million
100
100
Everise
Number of Shares
Earnings after tax (Rs.)
Share price (Rs.)
Pre-acquisition Post-acquisition
10 million
12.5 million
100 million
150 million
200
200
You are required to state your key observations and give suggestions to Everise.
(c)
(04 Marks)
(06 Marks)
Hill Ltd’s directors are evaluating an option of issuing commercial papers in order to finance its
expected sales growth based on the new business policy implemented in 2012. Company’s revenue
in 2013 shows a growth of about 50% compared to 2012, and net profit margin has increased by
4%.
Revenue
Cost of sales
Average Inventory
Trade receivables
Cash
Overdraft
Trade payables
Long-term finance
Current ratio
Quick ratio
Inventory days
Trade receivables days
working capital turnover
2013
Rs.
43,400
30,300
5,100
5,900
200
2,600
6,800
48,250
2012
Rs.
29,000
18,400
1,250
3,100
1750
600
2,920
44,000
Sector
Information
1.8
1.4
28
40
10
You are required to write a report to the directors on its performance, giving your suggestions.
(10 Marks)
(Total 20 Marks)
End of Part II
End of Question Paper
5
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Corporate Reporting & Analysis (CRA / ML 2 - 302) – May 2014 Examination
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