CMA MAY-2022 EXAMINATION MANAGEMENT LEVEL
SUBJECT: F2. FINANCIAL MANAGEMENT
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).
ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking.
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
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) Python obtained 30% of the equity shares of Cobra on 1 June 20X8 for $700,000. It is able to exercise significant influence over Cobra. During the year to 31 May 20X9 Cobra made sales of $200,000 to Python, priced at cost plus 25% mark-up. Python still had 50%
of these goods in inventory at the year end. Cobra’s statement of profit or loss for the year ended 31 May 20X9 shows profit for the year of $650,000.
Required:
What amount should be shown as 'investment in associate' in the consolidated statement of financial position of Python as at 31 May 20X9?
[2.5 Marks]
(b) An entity issues 3,000 convertible bonds at the start of year 1 at par. They have a three term and a face value of Tk.1,000 per bond. Interest is payable annually in arrears at 7%
per annum. Each bond is convertible at any time up to maturity into 250 common shares.
When the bonds are issued, the prevailing market interest rate for similar debt without conversion option is 9%.
Required:
How is it initially recorded?
[2.5 Marks]
(c) What is creative accounting? Explain.
[2.5 Marks]
(d) Demetrios disposed of Venus, an 80%-owned subsidiary, on 31 December 20X8. Sale proceeds were $1.5m. At the date of disposal Venus had 1 million $1 shares in issue and retained earnings of $460,000. Unimpaired goodwill relating to the acquisition of Venus was $76,000. Demetrios values non-controlling interest at share of net assets. What amount should be recognized as profit/(loss) on disposal in the consolidated financial statements of Demetrios?
[2.5 Marks]
(e) Explain how the requirements of IFRS 8 Operating segments assist entities in minimizing the costs of producing the operating segment disclosures required by the standard.
[2.5 Marks]
(f) “Environmental factors can contribute significantly to the effectiveness of accounting functioning, and the quality of accounting reporting.” Do you agree with this statement?
Justify your opinion with relevant examples.
[2.5 Marks]
(g) On 1 January 20X3 Deferred issued $600,000 loan notes. Issue costs were $200. The loan notes do not carry interest, but are redeemable at a premium of $152,389 on 31 December 20X4. The effective finance cost of the loan notes is 12%.
Required: What is the finance cost in respect of the loan notes for the year ended 31 December 20X4 [2.5 Marks]
(h) Discuss how both the available for sale investment and any associated derivative contract would be subsequently accounted for, assuming that the criteria for hedge accounting were met, in accordance with IAS 39.
[2.5 Marks]
END OF SECTION A SECTION B Starts on page 3
SECTION B– 30 MARKS
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 2
(a) The following amounts of profit after tax relate to the Alpha group of entities:
Alpha Inc. Tk.150,000
Beta Inc. 40,000
Charlie Inc. 25,000
Delta Inc. 60,000
Echo Inc. 80,000
(i) Alpha Inc. owns 75% of the voting power in Beta Inc. and 30% of the voting power in Charlie Inc.
(ii) Beta Inc. also owns 30% of the voting power in Charlie Inc. and 25% of the voting power in Echo Inc.
(iii) Charlie Inc. owns 40% of the voting power in Delta Inc.
Required:
What is the status of each entity in the group, and how is the non–controlling interest in the group after-tax profit calculated?
[Marks: 6]
(b)(i) Mammoth acquired 80% of the 100,000 $1 equity shares of Minor on 1 January 20X7. The consideration consisted of one Mammoth share for each two shares in Minor and
$300,000 cash. The market price of a Mammoth share at 1 January 20X7 was $2.50 and the market price of a Minor share on the same date was $1.75. Mammoth measure non- controlling interest at fair value based on share price. At the acquisition date Minor had retained earnings of $85,000 and $100,000 in revaluation surplus. Its head office building had a fair value $60,000 in excess of its carrying amount. What was the goodwill on acquisition?
(ii) On 1 April 20X5 Thames Co acquired 80% of Avon Co’s 100,000 $1 ordinary shares.
Goodwill acquired in the business combination was $50,000, of which 40% had been written off by 31 March 20X7. NCI was measured at full fair value. At the disposal date, NCI was measured at $58,000. On 1 April 20X7 Thames Co sold all of its shares in Avon Co for $200,000, when Avon Co’s retained earnings amounted to $140,000.
What is the loss on disposal that should be recognised in the consolidated statement of profit or loss of Thames Co for the year ended 31 March 20X7?
[Marks: 6]
(c) Lemon Ltd. prepares its financial statements to 31 December each year. On 1 January 2013, Lemon had 1 million Tk.10 per share in issue and on 1 July 2013 made 1 for 5 rights issue at price of Tk.12 per share. The market price of a Lemon share immediately before the rights issue was Tk.15. Earnings for the year ended 31 December 2013 were Tk.4,697,000. Lemon Ltd. also has in issue Tk.3,200,000 of 8% convertible redeemable loan stock with the following terms of conversion for every Tk.100 of loan stock.
(a) Conversion at December 2014 12 hares (b) Conversion at December 2015 11 shares
SECTION B Continues on page 4
The liability component of the convertible redeemable loan stock was carried in the Balance Sheet on 1 January 2013 at Tk. 3 million and the effective interest rate is 9%.
Lemon Ltd. pays tax at a rate of 35%.
The basic EPS for the year ending 2012 was Tk.4.5 Required:
(i) Calculate the basic EPS for 2013 and provide the adjusted comparative EPS for 2012.
(ii) Calculate the diluted EPS for the year ending 31 December 2013.
[Marks: 6]
(d) An entity granted 1,000 share options at an exercise price of £50 to each of its 30 key management personnel on 1 January 20X4. The options only vest if the managers were still employed on 31 December 20X7. The fair value of the share options was estimated at
£20 and the entity estimated that the options would vest with 20 managers. This estimate was confirmed on 31 December 20X4.
The entity's share price collapsed early in 20X5. On 1 July 20X5 the entity modified the share options scheme by reducing the exercise price to £15. It estimated that the fair value of an option was £2 immediately before the price reduction and £11 immediately after. It retained its estimate that options would vest with 20 managers.
Required: How should the modification be recognized?
[Marks: 6]
(e) XYZ, a UK based company with sterling as its functional currency has created a new subsidiary in the US. On 1 January 20X5 with a share capital of US $55,000 subscribed in cash. The amount in its 20X5 US DOLLAR functional currency financial statement are shown bellows.
Statement of comprehensive income
US $
Revenue 500,000
Costs (200,000)
Profits 300,000
There was no other comprehensive income.
Statement of financial position
Initial share capital 55,000
Retained earnings(as above) 300,000
Equity=Net asset 355,000
The entity owns no non-current assets (so there are no assets or depreciation charge to be translated at the rate when the asset was acquired) and all transaction took place on 30 June (so that a single rate can be used for income statement transactions, rather than the various rates ruling when the transactions took place)
Assume that the following exchange rates are relevant-
1 January 20X5 1=$2.75 30 June 20X5 1=$2.5 31December 20X5 1=$2
The entity translates share capital at the rate ruling when the capital was raised.
Required:
Translate the financial statement of the subsidiary into the pound sterling presentation currency.
[Marks: 6]
END OF SECTION B SECTION C Starts on the page 5
Section C– 50 MARKS
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 3
Parable Ltd is a holding company with a number of subsidiaries. The consolidation for the year ended 31 December 20X8 has been carried out to include all subsidiaries except Story Ltd.
Story Ltd has been 80% owned by Parable Ltd since 20X2, at which date Story Ltd's retained earnings amounted to CU50,000, but on 30 June 20X8 Parable Ltd sold all of its shares in Story Ltd.
Details are as follows.
CU Cost of original investment (80,000 out of 100,000 CU1 ordinary shares 150,000 Goodwill acquired in the business combination fully recognized as an
expense as a result of impairment reviews 30,000
Sales proceeds 500,000
Because Parable Ltd is unsure how to deal with its investment in Story Ltd in the 20X8 consolidation, it has not yet consolidated Story Ltd into the group financial statements.
Income statements for the year ended 31 December 20X8 are set out below.
Parable Ltd group Story Ltd
CU CU
Profit from operations 875,500 325,600
Sales proceeds on disposal of Story Ltd
500,000 –
Profit before tax 1,375,500 325,600
Income tax expense (405,000) (102,500)
Profit for the year 970,500 223,100
Attributable to
Equity holders of Parable Ltd 870,300
Minority interest 100,200
970,500
The Parable Ltd group and Story Ltd had retained earnings brought forward of CU 1,926,300 and CU 326,400 respectively. Other minority interests brought forward were CU 507,500.
Required:
(a) Prepare the consolidated income statement and the retained earnings and minority interest columns for the statement of changes in equity for the Parable Ltd group for the year ended 31 December 20X8 in so far as the information is available.
(b) Redraft the above on the basis that
(i) Parable Ltd sells only a quarter of its shares in Story Ltd for CU 200,000 and that the disposal does not constitute a discontinued operation in accordance with BFRS 5.
(ii) Parable Ltd sells all but a 20% holding of its shares in Story Ltd, for CU 400,000, retains significant influence and that the disposal does not constitute a discontinued operation in accordance with BFRS 5.
[Marks: (9+8+8) = 25]
SECTION C Continues on page 6
QUESTION 4
Below are the consolidated financial statements of the Linford Group for the year ended 30 September 2009:
Consolidated income statement for the year ended 30 September 2009
Particulars $’m
Revenue 600
Cost of sales (300)
Gross Profit 300
Operating expenses (150)
Finance cost (50)
Income from associate 17
Investment income 6
Profit before tax 123
Tax (35)
Profit after tax 88
Profit attributable to:
Parent shareholders 78
NCI shareholders 10
88 Consolidated statements of financial position
Particulars 30 September 2009 30 September 2008
$‘m $‘m $‘m $‘m Non-Current Assets
Goodwill 25 19
PPE 240 280
Investment in Associate 80 70
Total Non-Current Assets 345 369
Current Assets
Inventories 105 90
Receivables 120 100
Cash and Cash equivalents 30 255 75 265
Total assets 600 634
Share Capital($1 shares) 100 100
Retained Earnings 194 142
Non-controlling interest 70 40
364 282
Non-current liabilities
Obligations under finance leases 80 70
12% Loan stock - 90
Deferred tax 30 110 24 184
Current liabilities
Trade payables 65 55
Income tax 10 8
Obligations under finance leases 25 20
overdraft 26 126 85 168
Total liabilities and equity 600 634
SECTION C Continues on page 6
Additional Information:
(1) Acquisition of Subsidiary:
During the year ended, Linford acquired 80% of the equity share capital of Christie paying cash consideration of $100 million. The fair value of Christie’s net assets at acquisition was made up as follows:
Particulars $’m
PPE 60
Inventory 30
Receivables 25
Cash and Bank 10
Trade payables (15)
Taxation (5)
Net assets at acquisition 105
It is group policy to measure NCI at the proportionate share of the fair value of net assets at acquisition.
(2) Goodwill: Goodwill suffered an impairment loss during the year.
(3) Property, Plant and Equipment:
The only disposal in the year was of land with a carrying value of $90m the profit on disposal of $10m is included within operating expenses. During the year the group entered into new finance leases in respect of some items of plant and the amount debited to PPE in respect of these leases was $40m. Depreciation of $58m was charged on PPE in the year.
(4) Dividends: Dividends paid to parent shareholders of Linford in the current year amounted to $26m.
Required:
Prepare the consolidated statement of cash flows for the Linford Group for the year ended 30 September 2009.
[Marks: 25]
*END OF THE EXAM PAPER*
