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CMA MAY-2022 EXAMINATION OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS
Time Allocated: Three hours Total Marks: 100
Instructions to Candidates
There are three sections (that is A, B & C) in this paper. You are required to answer ALL questions.
Answers should be properly structured, relevant and computations need to be shown wherever necessary.
You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or sub-questions).
Start answering each question from a fresh sheet. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering.
Section No of questions in the Section
No of sub-questions in the Section
Marks allocation
A 01 08 20%
B 01 05 30%
C 02 50%
TURN OVER
Page 2 of 8 SECTION A – 20 MARKS
This section consists of 1 question and 8 sub-questions.
You are advised to spend no longer than 36 minutes on this section. Section will carry 20 marks and one sub-question will carry 2.5 marks each.
QUESTION 01
(a) The accounting records of Tiger Ltd for 20X6 show the following amounts.
CU Carrying amount of property, plant and equipment at 31 December 20X5 330,000
Proceeds of sales of property, plant and equipment 60,000
Depreciation charged on property, plant and equipment 90,000
Profit on sale of property, plant and equipment 15,000
Carrying amount of property, plant and equipment at 31 December 20X6 270,000 In accordance with BAS 7 Cash Flow Statements, what amount would appear in Tiger Ltd’s cash flow statement for 20X6 for purchase of property, plant and equipment?
(2 ½ Marks) (b) P Construction Company enters into a contract with a customer to build a warehouse for
$100,000, with a performance bonus of $50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that P has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 60%
probability that the contract will be completed by the agreed-upon completion date, a 30%
probability that it will be completed 1 week late, and only a 10% probability that it will be completed 2 weeks late. How should P account for this revenue arrangement?
(2 ½ Marks) (c) What is the accounting treatment of “loss carryback” and “loss carry forward” as per IAS 12?
(2 ½ Marks) (d) An asset has a carrying amount of $1.2m. Its replacement cost is $1m, its fair value is
$800,000 and its value in use is $950,000. The legal expenses involved in selling the asset are estimated at $20,000. What is the amount of the impairment loss suffered by the asset?
(2 ½ Marks) (e) Identify the criteria used to account for contingent liabilities according to IAS 37.
(2 ½ Marks) (f) List three possible reasons why government set deadlines for filling returns and for paying
taxes.
(2 ½ Marks) (g) Identify some situations in which the auditor might include an emphasis of matter
paragraph in the auditor’s report.
(2 ½ Marks) (h) What are the different types of depreciation allowance as per third schedule of Income Tax
Ordinance 1984?
(2 ½ Marks) END OF SECTION A
SECTION B Starts on page 3
Page 3 of 8 SECTION B
This section consists of 1 question and 5 sub-questions.
You are advised to spend no longer than 9 minutes on each sub-question in this section.
Section will carry 30 marks and one sub-question will carry 6 marks each.
QUESTION 02
(a) Assume that on January 1, 2015, Peking Duck Co. sells a computer system to Liquidity Finance Co. for ¥510,000 and immediately leases the computer system back. The relevant information is as follows.
1. The computer system was carried on Peking’s books at a value of ¥450,000.
2. The term of the non-cancelable lease is 10 years; title will transfer to Peking.
3. The lease agreement requires equal rental payments of ¥83,000.11 at the end of each year.
4. The incremental borrowing rate for Peking is 12%. Peking is aware that Liquidity Finance Co. set the annual rental to ensure a rate of return of 10%.
5. The computer system has a fair value of ¥510,000 on January 1, 2015, and an estimated economic life of 10 years.
6. Peking pays executory costs of ¥9,000 per year.
Required:
Prepare the journal entries for the lessee for 2015 to reflect the sale-leaseback agreement.
[Marks: 6]
(b) You purchase an automobile from H Auto for Taka 30,000 on January 2, 2014. H estimates the assurance-type warranty costs on the automobile to be Taka 700 (H will pay for repairs for the first 36,000 miles or three years, whichever comes first). You also purchase for Taka 900 a service-type warranty for an additional three years or 36,000 miles. H incurs warranty costs related to the assurance-type warranty of Taka 500 in 2014 and Taka 200 in 2015. H records revenue on the service-type warranty on a straight-line basis.
Required: What entries should H make in 2014 and 2017?
[Marks: 6]
(c) You are the Ethics Partner at Stewart Brice, a firm of chartered accountants. The following situations exist.
Teresa is the audit manager assigned to the audit of Recreate, a large quoted company.
The audit has been ongoing for one week. Yesterday, Teresa's husband inherited 1,000 shares in Recreate. Teresa's husband wants to hold on to the shares as an investment.
The Stewart Brice pension scheme, which is administered by Friends Benevolent, an unconnected company, owns shares in Tadpole Group, a listed company with a number of subsidiaries. Stewart Brice has recently been invited to tender for the audit of one of the subsidiary companies, Kermit Co. Stewart Brice has been the auditor of Kripps Bros, a limited liability company, for a number of years. It is a requirement of Kripps Bros' constitution that the auditor owns a token £1 share in the company.
Required:
Comment on the ethical and other professional issues raised by the above matters.
Identify the ethical and professional issues Stewart Brice would need to consider.
[Marks: 6]
SECTION B Continues on page 4
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(d) The following information is available from the books of ABC plc. on 31 December 2020.
10,00,000 Ordinary shares of Tk.1 each 10,00,000 Share premium 4,00,000 General Reserve 1,40,000 Retained earnings 5,96,600 Further information are as follows:
(i) The draft profit for the year ended 31 December 2021, was Tk.2,45,600 (ii) On 1 January 2021, property was revalued from Tk.10,40,000 to Tk.15,60,000
(iii) On 31 January 2021 a right issue of 1 share for every 5 held was made at a premium of Tk.0.25 each.
(iv) On 30 June 2021 an interim dividend of Tk.0.08 per share was paid.
(v) On 31 October 2021 a bonus share of 1 for every 4 held was made. The director decided to keep the reserve in their most flexible form.
(vi) On 31 December 2021, Tk.80,000 was transferred to General Reserve and a final dividend of Tk.0.12 per share was proposed.
(vi) On 5 January 2022, it was discovered that a customer who had owned Tk.8,400 at the year-end had been declared bankrupt. It was also discovered that goods in inventory at the year end with a cost of Tk.6,000 had been damaged and could now only be sold for Tk.1,200.
(vii) On 20 January 2022, a burglary at the business premises resulted in the loss of computer equipment Tk.31,400.
Required:
(i) What is meant by keeping reserves in their most flexible form?
(ii) Prepare the statement of changes in equity for ABC plc. for the year ended 31 December 2021.
[Marks: (1+5) = 6]
(e) Kohinoor Chemical Company (KCC) Bangladesh Ltd is the largest national soap, cosmetics and toiletries manufacturer and marketer of Bangladesh. Following information has been provided by the CFO of the company for the year ended 31 December 2021.
Inventory 1 Jan.2021 Inventory 31 Dec.2021 Raw Materials 180,000 120,000 Work in process 360,000 200,000 Finished goods 520,000 420,000 Other relevant data for the year are as follows: Taka (i) Purchase of Raw materials ……….………... 15,00,000 (ii) Prime cost………... 18,60,000 (iii) Total manufacturing cost………..………... 31,40,000 (iv) Administrative expenses ……….... 5,40,000 (v) Selling expenses………... 2,80,000 (vi) KCC Ltd. sells its products by adding 20% profit on cost.
(vii) VAT rate is 15%.
Required:
(i) What is the difference between VAT (Value added tax) and sales tax?
(ii) Determine the amount of VAT payable by KCC Ltd. at the end of the period.
[Marks: (2+4) = 6]
END OF SECTION B SECTION C Starts on page 5
Page 5 of 8 Section C
This section consists of 2 questions.
You are advised to spend no longer than 45 minutes on each question in this section. Section will carry 50 marks (each question carries 25 marks) and allocation of marks for each sub- question is indicated next to the sub-question.
QUESTION 03
(a) The following is Sullivan Corp.’s comparative statement of financial position accounts at December 31, 2015 and 2014, with a column showing the increase (decrease) from 2014 to 2015.
COMPARATIVE STATEMENTS OF FINANCIAL POSITION
2015 2014 Increase
(Decrease) Property, plant and equipment $3,307,000 $2,967,000 $340,000 Accumulated depreciation (1,165,000) (1,040,000) (125,000) Equity investment (Myers Co.) 310,000 275,000 35,000
Inventory 1,850,000 1,715,000 135,000
Accounts receivable 1,128,000 1,168,000 (40,000)
Debt investment 250,000 - 250,000
Cash 815,000 700,000 115,000
Total assets $6,495,000 $5,785,000 $710,000
Share capital—ordinary, $1 par $ 500,000 $ 500,000 —
Share premium—ordinary 1,500,000 1,500,000 —
Retained earnings 2,970,000 2,680,000 $290,000
Finance lease obligation 400,000 — 400,000
Accounts payable 1,015,000 955,000 60,000
Income taxes payable 30,000 50,000 (20,000)
Dividends payable 80,000 100,000 (20,000)
Total equity and liabilities $6,495,000 $5,785,000 $710,000 Additional information:
(1) On December 31, 2013, Sullivan acquired 25% of Myers Co.’s ordinary shares for
$275,000. On that date, the carrying value of Myers’ assets and liabilities, which approximated their fair values, was $1,100,000. Myers reported income of $140,000 for the year ended December 31, 2015. No dividend was paid on Myers’ ordinary shares during the year.
(2) During 2015, Sullivan loaned $300,000 to TLC Co., an unrelated company. TLC made the first semiannual principal repayment of $50,000, plus interest at 10%, on December 31, 2015.
(3) On January 2, 2015, Sullivan sold equipment costing $60,000, with a carrying amount of $38,000, for $40,000 cash.
(4) On December 31, 2015, Sullivan entered into a finance lease for an office building.
The present value of the annual rental payments is $400,000, which equals the fair value of the building. Sullivan made the first rental payment of $60,000 when due on January 2, 2016.
SECTION C Continues on page 6
Page 6 of 8 (5) Net income for 2015 was $370,000.
(6) Sullivan declared and paid cash dividends for 2015 and 2014 as shown below.
2015 2014
Declared December 15, 2015 December 15, 2014
Paid February 28, 2016 February 28, 2015
Amount $80,000 $100,000
Required:
Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2015, using the indirect method (Show the necessary workings).
(b) Wise Company began operations at the beginning of 2015. The following information pertains to this company.
1. Pretax financial income for 2015 is €100,000.
2. The tax rate enacted for 2015 and future years is 40%.
3. Differences between the 2015 income statement and tax return are listed below:
(a) Warranty expense accrued for financial reporting purposes amounts to €7,000.
Warranty deductions per the tax return amount to €2,000.
(b) Income on construction contracts using the percentage-of-completion method per books amounts to €92,000. Income on construction contracts for tax purposes amounts to €67,000.
(c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to €60,000. Depreciation of these assets amounts to €80,000 for the tax return.
(d) A €3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.
(e) Interest revenue recognized on an investment in tax-exempt bonds amounts to
€1,500.
4. Taxable income is expected for the next few years.
Required:
(i) Compute taxable income for 2015.
(ii) Compute the deferred taxes at December 31, 2015, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability.
(iii) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2015.
(iv) Draft the income tax expense section of the income statement, beginning with
“Income before income taxes.”
[Marks: 12 + (3+3+4+3) = 25]
SECTION C Continues on page 7
Page 7 of 8 QUESTION 4
The following trial balance has been extracted from the books of XYZ Limited as at 30 June, 2021.
Tk.000 Tk.000
Share Capital-Preference shares 5,400
Share Capital-Ordinary shares 8,100
Retained Earnings 9,546
Inventory 17,691
Cash at Bank 17,342
Goodwill 720
Trade Receivable 10,895
Trade payable 3,977
Freehold land 3,150
Freehold Building at cost 7,020
Plant & Machinery at cost 4,644
Fixtures and Fittings 1,296
Accumulated dep. on Freehold Building 831
Accumulated dep. on Plant and Machinery 1,857
Accumulated dep. on Fixtures and Fittings 260
Sales Revenue 572,400
Administrative expenses 14,746
Cost of Sales 478,469
Distribution cost 52,650
Patent 180
Amortization of patent at 1 July 2020 90
Hire of Plant and Machinery 3,600
9% loan 10,800
Loan interest 908
Development grant received 128
Gain on sale of Freehold land 804
Dividend paid during the year-Preference 243 Dividend paid during the year-Ordinary 639
614,193 614,193 The following information is to be taken into account:
(i) The authorized share capital is 2,000,000 9% preference share Tk.2 each and 9,000,000 ordinary shares Tk.1 each.
(ii) Inventory amounting Tk.7,50,000 is obsolete which has a realizable value of Tk.375,000.
(iii) Acquisition of non-current fixed assets were as follows:
Plant and Machinery …… Tk.259,500 Fixtures and Fittings…….. Tk.216,000
(iv) During the year freehold land costing Tk. 1,170,000 was sold for Tk.1,974,000.
(v) The patent was purchased on 1 July 2016. It was estimated to have a useful life of 10 years with no residual value. At 30 June 2021 the fair value of the patent was Tk.65,000.
Amotization should be included in cost of sales.
SECTION C Continues on page 8
Page 8 of 8 (vi) Depreciation was provided as follows:
Plant and Machinery 20% on cost Charged to cost of sales
Freehold Buildings 2% on cost Charged to Administrative expenses Fixtures and Fittings 10% on cost Charged to cost of sales
(vii) The loan was raised during the year and no outstanding interest accrued at the year end.
(viii) Grants from Government amounting Tk.128,000 have been received in respect of Plant purchased during the year and are shown in the trial balance. 20% is to be taken as profit in the current year.
(ix) Provide Tk.8,022,000 for Income tax.
(x) The freehold land was revalued at the year-end at Tk.3,750,000
(xi) During the year a fire took place at one of the company depots, involving losses of Tk.300,000. These losses have already been written off to cost of sales shown in the trial balance. Since the end of the financial year a settlement of Tk.225,000 has been agreed with the company’s insurers.
(xii) Prepaid and accruals are as follows:
Taka
Administrative expenses prepaid 10,000
Distribution cost accrued 13,000
(xiii) Trade debtors include Tk.50,000 from Talukder traders who has been declared bankrupt.
It is unlikely that any money will be received for this debts. Management decided that provision for doubtful debts to be provided for this Tk.50,000 plus 1% on the remainder debts and this item to be treated as administrative expenses.
(xiv) A final ordinary dividend of Tk.0.06 per share is declared and was an obligation before the year end together with the balance of the preference share dividends. Neither dividend was paid at the year end.
(xv) On 20 December 2021, it is XYZ limited received a letter from one of their customers Roxy traders stating that it is taking a legal action for a breach of contract. The lawyers indicated that there are 80% probability that XYZ will lose the case. Estimated amount to settle the case will be Tk.38,000.
(xvi) The Goodwill has not been impaired.
Required:
(i) As a CMA justify the issue of redeemable shares when a company has a positive view of its trading prospects.
(ii) The statement of comprehensive income and a statement of changes in equity for the year ended 30 June 2021.
(iii) A statement of financial position at that date, in accordance with the requirements of IFRS.
[Marks: (5+10+10) = 25]
*End of the Exam Paper*
