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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS
Time: Three hours Full Marks: 100
All questions are to be attempted.
Show computations, where necessary.
Answer must be brief, relevant, neat and clean.
Start answering each question from a fresh sheet.
Part – A: [Q. No. 1 – Q. No. 4] [20 Marks]
Q. No. 1
The draft financial statements for the year ended Dec 2017 for AAA include the following:
Tk.000
Statement of comprehensive income (extract)
Income tax expense 850
Notes to the accounts:
Over provision for the year to 31 Dec 2016 (50)
Estimate of tax due for the year to 31 Dec 2017 700 Increase in deferred tax provision for the year to 31 Dec 2017 200
850 Statement of cash flows (extract)
Tax paid in the year to 31 Dec 2017 600
Required:
(i) Explain how deferred tax arises.
Use the information given above to:
(ii) Identify the most likely reason for the increase of Tk.200,000 in the deferred tax provision for the year to 31 Dec 2017.
(iii) Explain what the over provision of Tk.50,000 in the income statement represents.
[Marks: 5]
Q. No. 2
BBB purchased machinery on 1 Jan 2015 for Tk.350,000.
BBB depreciates machinery over 10 years, using the straight line method assuming no residual value.
Required:
(i) Explain the meaning of “temporary difference” according to IAS 12 Income Taxes.
Include an example to illustrate your answer.
(ii) Calculate the amount of deferred tax provision that BBB should include in its statement of
financial position as at 31 Dec 2017.
[Marks: 5]
Q. No. 3
DPS received a salary of Tk.34,000 for the year ended 31 Dec 2017. DPS also received a bonus of Tk.1,700 and benefits in kind valued at Tk.2,150.
DPS was entitled to a personal tax allowance of Tk.5,750 for the year.
Personal taxation rates that apply to DPS are 20% for the first Tk.20,000 of taxable earnings and 40% on the balance
Required:
(i) Explain the meaning of “benefits in kind” for taxation purposes.
(ii) Prepare an income tax computation for DPS for the year ended 31 Dec 2017.
[Marks: 5]
Page 2 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 4
Mrs. Chowdhury, a professional accountant, is facing a dilemma. She is working on the preparation of a long term profit forecast required by the local stock market listing regulations prior to a new issue of equity shares.
At a previous management board meeting, her projections had been criticized by board members as being too pessimistic. She was asked to review her assumptions and increase the profit projections.
She revised her assumptions, but this had only marginally increased the forecast profits. At yesterday’s management board meeting the board members had discussed her assumptions and specified new values to be used to prepare a revised forecast. In her view the new values grossly overestimate the forecast profits.
The management board intends to publish the final revised forecasts.
Required:
Explain the ethical problems that Mrs. Chowdhury faces and identify her possible options. You should refer to CIMA’s Code of ethics for professional accountants i
[Marks: 5]
Part – B: [Q. No. 5 – Q. No. 7] [30 Marks]
Q. No. 5
Mrs. Zara works in a company as a Finance Manager. The particulars of her income during the income year 2015-16 are given bellow:
(a) Basic Pay TK.100,000 per month (b) House Rent @ 60% of the Basic (c) Medical allowance @ 20% of the Basic
(d) Employer’s contribution to the Recognizer Provident Fund @ 10% of the Basic (e) Festival Bonus – equivalent to 2 months Basic pay
(f) She has been provided a car for her personal and official use.
In addition to the salary income, she had following income:
(i) Dividend from a listed company Tk.45,000 (net). Tax deducted from dividend was Tk. 5,000.
(ii) Interest from FDR Tk.85,000 (net). Tax deducted from interest was Tk. 15,000.
(iii) Interest on debenture Tk.15,000.
(iv) Sale proceeds of agricultural crops Tk.1,50,000. She did not maintain any records for cost of production.
Mrs. Zara is the member of Recognizer Provident Fund where she contributed equal amount of the employer. She invested Tk.3,00,000 in buying the share of a listed company for the purposes of investment tax credit.
Based on the above particulars, compute her total income and tax liabilities thereon for the assessment year 2016-17. Also find out the tax she needs to pay with the return. Assume that no tax was deducted from her salary.
[Marks: 10]
Q. No. 6
(a) Mannan Traders, an importer, imported 200 of AC at CIF price @ Tk.100,000 per piece.
The clearing and other incidental charges amounted to Tk.100,000 for the total consignment. He sold 80 pieces of AC to a whole seller at a markup of 10% (exclusive of VAT). The whole seller charged 10% markup to sell it to retailers. The retailers incurred a cost @ Tk.2,000 for maintenance and other expenses and added 10% markup to the price.
Required:
Compute VAT assuming that the retailers sold 60 pieces of AC in a trade fair among various customers in the month of June, 2017.
Page 3 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 6 (cont’d……)
(b) Transactions of K.C. Company during 2016 included the following:
January 20- Purchased 400 shares of R & S Co. at Tk.75 plus brokerage charges of Tk.600.
June 10- Received a 50% stock dividend.
November 01- Received stock rights permitting the purchase of one share at Tk.60 for every 4 shares held. On this date rights were being traded at Tk.3 each and stock was being traded at Tk.72 per share.
November 18- Exercised 400 rights which pertained to the stock acquired on January 20 and sold remaining rights at Tk.2 each less brokerage charges of Tk.6.
December 28- Sold 100 shares from the holdings acquired on January 20 at Tk.68.25 less brokerage charges of Tk.53.
Required: Give journal entries to record the foregoing transactions.
[Marks: (5+5) = 10]
Q. No. 7
(a) Explain the roles of the following in relation to International Financial Reporting Standards.
- The IFRS Interpretations Committee - The IFRS Advisory Council
(b) Explain the term ‘Events after the Reporting Period’, defining clearly the period of time within which IAS 10 requires events to occur in order to be considered as such.
[Marks: (5+5) = 10]
Part – C: [Q. No. 8 – Q. No. 10] [50 Marks]
Q. No. 8
Tommy and Associates manufactures and sells international quality toys across the country. It also provides franchise right to manufacture globally where it controls the quality and price of the toys. The company charges agreed royalty fees for these services. The following draft Financial Statements were prepared the Finance Manager for the year ended 31 December 2016 and placed before you for advice:
Tommy and Associates Comprehensive Income Statement For the year ended 31 December 2016
(Amount in Lac Taka)
Sales 3,500
Less: Cost of Goods Sold (1,780)
Gross Profit 1,720
Other Income 350
Total Income 2,070
Less: Operating expenses including depreciation (870)
Operating Profit 1,200
Profit on sale of property 200
1,400
Less: Interest expenses (300)
Profit before tax 1,100
Less: Taxation @35% (385)
Net Profit for the year 715
Opening balance of profit 350
Profit carried to Balance Sheet 1,065
Page 4 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 8 (cont’d……)
Tommy and Associates Balance Sheet As at 31 December 2016
(Amount in Lac Taka)
Liability & Equity Taka Assets Taka
Capital 3,000 Office equipment 4,000
General Reserve 550 Work in progress 1,400
Profit and Loss A/C 1,065 Stock 1,000
Long-Term Loan 2,000 Debtors 1,460
Accumulated Depreciation 1,000 Royalty receivables 100
Current Liabilities Advance tax 200
Creditors 240 Cash in hand 20
Provision for Tax 385 Cash at bank 60
8,240 8,240
The following financial information need to be considered:
(i) Royalty fees receivable from a customer in Abidjan equivalent of Tk.100 lac. It was accounted for being allowing license for manufacturing toys under the same brand name.
The amount is receivable in USD from the customer. However, exchange permission was denied to the company in Abidjan for remitting the same.
(ii) The company sold some of its office equipment on 1 April 2016 for Tk.100 lacs (written down value Tk.250 lacs). These assets were re-valued earlier. As on 1 April 2016, the revaluation reserve corresponding to these assets stood at Tk.200 lacs. The profit on sale of property as shown in the comprehensive Income Statement represented the transfer of this amount. Loss on sale of the asset was included in the operating expenses.
(iii) The company board has decided to change the method of depreciation from straight line method to reducing balance method. The rate of depreciation will remain unchanged at 20% per annum.
(iv) A new product has been developed during the year. The expenditure totals Tk.12 lacs, of which Tk.7.50 lacs was incurred prior to 31 December 2016, the date on which it became clear the product was technically feasible. The new product will be launched in the next three months and its recoverable amount is estimated at Tk.6 lacs.
(v) The company started construction on its own office building at Dhaka on 1 January 2015.
The company obtained term loan facilities from HSBC. Company management has decided to capitalize borrowing cost in accordance with BAS 23 – Borrowing cost.
(vi) The company has entered into a lease agreement for 5 years for its office building on 1st January 2015. The monthly rent is Tk.50,000 for first 2 years and then Tk.80,000 per month for next 3 years. Finance Manager charged Tk.50,000 per month for the year 2016 and included in operating expenses. Finance Manager didn’t comply with BAS 17 – Lease.
Required:
Re-draft the Financial Statements for the year ended on 31 December 2016 in accordance with the relevant provisions of Bangladesh Accounting Standards (BAS) and BFRS. State the notes and disclosure to the Financial Statements clearly.
[Marks: 15]
Page 5 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 9
INTEL Ltd is a public listed manufacturing company. Its summarized consolidated financial statements for the year ended 31 Dec 2017 (and 2016 comparatives where relevant) are as follows:
INTEL Ltd : Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2017:
Tk. million
Revenue 310
Cost of sales (270)
Gross profit 40
Distribution costs (10)
Administrative expenses (29)
Share of profit for year from associate 14
Finance costs (6)
Profit (loss) before taxation 9
Income tax expense (3)
Profit for the year 6
Other comprehensive income (net of tax)
Items that will not be reclassified to profit or loss:
Revaluation gains on group property 13
Share of revaluations gains from associate’s property 4 17
Total comprehensive income for the year 23
Profit for the year attributable to:
Owners of the parent 5
Non-controlling interest 1
6 Total comprehensive income for the year attributable to:
Owners of the parent 22
Non-controlling interest 1
23 INTEL Ltd: Consolidated Statements of Financial Position as at 31 Dec:
2017 2016
Tk. million Tk. million Non-current assets:
Property, plant and equipment 290 245
Goodwill 6 –
Investments in associates 64 40
360 285
Current assets:
Inventory and work-in-progress 22 19
Trade receivables 42 28
Cash & cash equivalents 18 1
82 48
Total assets 442 333
Page 6 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 9 (cont’d……)
Equity:
Equity shares of Tk.1 each 160 106
Share premium 39 ---
Revaluation reserve 62 45
Retained earnings 68 65
329 216
Non-controlling interests 23 14
352 230
Non-current liabilities:
12% Debentures 2016 50 50
Long term provisions 12 7
62 57
Current liabilities:
Trade payables 23 33
Current tax payable 5 13
28 46
Total equity and liabilities 442 333
The following additional information is available:
(i) The group acquired an 80% interest in Sacker plc during the year on the following terms:
• Cost of purchase of 80% of the equity shares of COCKTEL Ltd was Tk.45 million.
• The agreed payment for the purchase was settled by issuing 25 million equity shares valued at Tk.35 million plus cash of Tk.10 million.
• The non-controlling interest was fair-valued at Tk.11 million on the acquisition date.
The net assets of COCKTEL Ltd at the acquisition date consisted entirely of the following:
o Property plant & equipment Tk.33 million o Inventory Tk. 8 million
o Cash Tk. 6 million
COCKTEL Ltd was correctly accounted for and fully consolidated in the above financial statements.
(ii) No disposals of non-current assets took place during the year.
(iii) Depreciation charged to cost of sales during the year amounted to Tk. 41 million.
(iv) The group purchased an interest in an associate company for cash of Tk. 13 million during the year.
(v) Equity dividends were paid during the year out of retained earnings.
(vi) Goodwill was tested for impairment at the reporting date. An impairment loss was recognized and charged to expenses.
Required:
(a) Prepare a consolidated statement of cash flows for year ended 31 Dec 2017 in accordance with IAS 7.
(b) Evaluate the liquidity position of INTEL Ltd as portrayed by the above financial statements and the statement of cash flows you have prepared.
[Marks: (10+5) = 15]
Page 7 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 10
The draft statements of financial position at 31 December 2017 and statements of comprehensive income for the year ended 31 Dec 2017 for three entities, BBB, CCC and DDD are given below:
Statements of Financial Position as at 31 Dec 2017:
Notes BBB CCC DDD Tk.000 Tk.000 Tk.000 Non-current Assets
Property, plant and equipment (iv) 1,193 767 670
Investments:
Loan to CCC (iii) 300 0 0
156,000 Ordinary shares (vi)
in DDD at cost 223 0 0
1,716 767 670
Current Assets
Inventory (vii) 1,107 320 87
Trade receivables 1,320 570 90
Current a/c with CCC (viii) 101 0 0
Cash and cash equivalents 62 58 14
2,590 948 191
Total Assets 4,306 1,715 861
Equity and Liabilities
Equity shares of Tk.1 each 3,500 600 520
Retained earnings 413 385 125
3,913 985 645
Non-current liabilities
Loan from BBB (iii) 0 300 0
Current liabilities
Trade payables 393 340 216
Loan interest payable (ix) 0 15 0
Current a/c with BBB (viii) 0 75 0
393 430 216
Total Equity and Liabilities 4,306 1,715 861
Statements of Comprehensive Income for the year ended 31 Dec 2017:
BBB CCC DDD
Tk.000 Tk.000 Tk.000
Revenue 1,500 693 227
Cost of sales (865) (308) (84)
Gross profit 635 385 143
Expenses (124) (70) (35)
511 315 108
Finance cost (80) (40) (12)
431 275 96
Income tax expense (118) (20) (16)
Profit for the year 313 255 80
Page 8 of 8 CMA DECEMBER, 2017 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS Q. No. 10 (cont’d……)
Additional information:
(i) BBB holds shares in two other entities, CCC and DDD.
(ii) BBB acquired all of CCC’s equity shares on 1 Jan 2017 in a share for share exchange. The agreed purchase consideration was Tk.950,000, however BBB has not yet recorded the acquisition in its accounting records. On the 1 Jan 2017 BBB’s shares had a market value of Tk.2.00 each. CCC’s retained earnings were Tk.130,000 on 1 Jan 2017.
(iii) On 1 Jan 2017 BBB advanced CCC a 10 year loan of Tk.300,000.
(iv) The fair value of CCC’s property, plant and equipment on 1 Jan 2017 exceeded its carrying value by Tk.144,000. The excess of fair value over carrying value was attributed to buildings owned by CCC. At the date of acquisition these buildings had a remaining useful life of 12 years. BBB’s accounting policy is to depreciate buildings using the straight line basis with no residual value.
(v) BBB carried out an impairment review of the goodwill arising on acquisition of CCC and found that as at 31 Dec 2017 the goodwill had been impaired by Tk.20,000.
(vi) BBB purchased its shareholding in DDD on 1 Jan 2017 for Tk.223,000 when DDD’s retained earnings were Tk.45,000. The fair value of DDD’s net assets was the same as its carrying value at that date. BBB exercises significant influence over all aspects of DDD’s financial and operating policies.
(vii) BBB occasionally trades with CCC. During July 2016 BBB sold CCC goods for Tk.220,000. BBB uses a mark-up of 50% on cost. At 31 Dec 2017 all the goods remained in CCC’s closing inventory.
(viii) CCC posted a cheque to BBB for Tk.26,000 on 29 Dec 2017 which did not arrive until 7 Jan 2018.
(ix) At 31 Dec 2017 Tk.15,000 loan interest was due and had not been paid. CCC had accrued the loan interest due at the year end but BBB had not accrued any interest income.
Required:
(a) Prepare the journal entry to record the purchase of CCC in BBB’s accounting records.
(b) Prepare the consolidated statement of comprehensive income for BBB for the year ended 31 Dec 2017 and a consolidated statement of financial position for BBB as at 31 Dec 2017, in accordance with the requirements of International Financial Reporting Standards.
[Marks: (5+15) = 20]
= THE END =
