Workings. (40,000 x 45)- (40,000 x 4.5)-320,000 =1,300,000

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1 Advanced Financial Accounting and Finance (AFF / OL 2) Operational Level Pilot Paper - Suggested Answer Scheme Section I Question No. Answer Segmental Learning Outcome (1) (D) Describe the structure, components and elements of financial statements. (2) (A) Apply the accounting treatment on inventories. (3) (D) Discuss the criteria to be satisfied to recognize revenue from sale of good and rendering of services Discuss the criteria to be satisfied to recognize revenue from interest, dividend and royalties (4) (B) Illustrate the accounting treatment for accounting policies, changes in accounting estimates and errors (5) (D) Apply the accounting treatment for events after the reporting period. (6) (C) Apply the accounting treatment on impairment of assets. (7) (B) Apply the accounting treatment on provisions, contingent liabilities and contingent assets. (8) (A) Apply the accounting treatment on property, Workings (40,000 x 45)- (40,000 x 4.5)-320,000 =1,300,000 Impairment loss = (28,000-2,800X3)- 16,800 = 2,800 Depreciation = 16,800/ 7 =2,400 Provision for warranty A/C Cash 350 B/F 410 C/F 625 P/L

2 plant and equipment. (9) (B) Apply the accounting treatment on intangible assets. (10) (D) Apply the accounting treatment on provisions, contingent liabilities and contingent assets (11) (C) Apply the accounting treatment on property, plant and equipment. (12) (B) Describe the elements of conceptual framework for financial reporting. (13) (C) Apply the accounting treatment on property, plant and equipment. (14) (C) Firm cost of capital can be used to evaluate new projects if the level of risk associated with the projects is similar to the risk of the firm. (LO A2) (15) (D) (16) (C) Initial Cash outlay (140,000) yr 1 35,000 yr 2 35,000 yr3 35,000 yr4 35,000 yr5 35,000 yr6 35,000 yr7 35,000 PV of cash flows 159,731 PI (PV of CF/ initial outlay) 1.14 (17) (D) See the working below. (18) (C) (19) (C) (20) (A) (02 marks x 20 = Total 40marks) 17. d. Project 1 and 2 only (LO A2) Based on PI and NPV, select Project 1 and d. Project 1 and 2 only (LO A2) Project 1 Project 2 Project 3 2

3 year 0 (900,000) (1,500,000) (2,500,000) year 1 450, ,000 1,600,000 year 2 600, ,000 1,320,000 year 3 550, ,000 1,220,000 COC 14% NPV 327, , ,671 PI Rank Based on PI NPV of Project 1 + project 2 786,883 (greater than project 3 alone) Question 1 Section II (a) Colombo PLC Statement of profit or loss and other comprehensive income for the year ending as at (Rs.000) Sales 12,000 Cost of sales (6,250) Gross Profit 5,750 Other Income 910 Distribution Exp (1,885) Administration Exp (2,070) Other Exp (230) Finance Exp (650) Profit before tax 1,825 Income Tax Exp (470) Profit for the year 1,355 OCI Revaluation Surplus 2,500 Total Comprehensive Income 3,855 Workings (Rs. 000) Distribution Exp. Administration Exp. Other Exp. TB 1,250 1, (07 Marks) 3

4 Inventory write off 50 Depn.-Build 250 Depn.-MV 725 Depn.-OE 680 Accrued exp Prepaid exp (150) 1,885 2, Segmental learning outcomes: Prepare financial statements of a company for publication. Apply the accounting treatment on inventories. Apply the accounting treatment on property, plant and equipment (b) Colombo PLC Statement of financial position as at (Rs.000) NCA (Rs.000) Property, plant and equipment 25,745 CA Inventory ( ) 3,400 Trade Receivables 2,500 Prepayment 150 Cash and CE 1,150 32,945 Equity Stated Capital -Ordinary Shares 13,000 Revaluation Reserves 2,500 Retained Earnings ( 4,500 +1, ) 5,255 NCL Bank loan 7,000 CL Trade Payables 3,500 Bank loan- current portion 1,480 Tax payable 110 Accrued Expenses 100 Workings (Rs. 000) 32,945 (08 Marks) PPE Cost Acc. Dept. Carrying Amount Land 12,500-12,500 Buildings 5,000 (1,750) 3,250 Motor Vehicles 9,500 (2,525) 6,975 Office equipment 4,600 (1,580) 3,020 4

5 31,600 (5,855) 25,745 Segmental learning outcomes: Prepare financial statements of a company for publication. Apply the accounting treatment on inventories. Apply the accounting treatment on property, plant and equipment Question 2 (Total 15 Marks) (a) Kandy PLC Statement of cash flows for the year ending (Rs. 000) Cash flows from operating activities Profit before tax 14,500 Adjustments for: Depreciation exp 5,000 Interest exp 1,000 Profit on deposal of PPE (700) 5,300 (Increase) in inventories (7,000) Decrease in trade receivable 3,500 19,800 Increase in trade payables 3,000 (500) Interest paid 19,300 Income tax paid (1,300) Net cash flows from operating activities 18,000 Cash flows from investing activities Disposal of property, plant and equipment 5,200 Purchase of property, plant and equipment (18,700) New investments made (15,300) Net cash flows from operating activities (28,800) Cash flows from financing activities Issue of shares 15,000 Dividend paid (4,750) Issue of debentures 3,250 Net cash flows from financing activities 13,500 Increase in cash and cash equivalents 2,700 Cash and cash equivalents ,050 Cash and cash equivalents ,750 (11 Marks) 5

6 Segmental learning outcomes: Prepare financial statements of a company for publication. Apply the accounting treatment on inventories. Apply the accounting treatment on property, plant and equipment (b) (i) Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. (ii) Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. (iii)income is increase in economic benefits during the accounting period in the form of inflows or enhancements of the assets or decreases of liabilities that result in increases in equity, other than those relating to contribution from equity participants. (iv) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Segmental learning outcome: Define the elements of financial statements. (02 marks for any two definitions = 04 Marks) Question 3 (a) Taxable temporary difference (Rs.000) Carrying amount of buildings (24,000-1,200) 22,800 Tax base of buildings (24,000-2,400) 21, (Total 15 Marks) Deductible temporary difference (Rs.000) Carrying amount of office equipments (24,000-8,000) 16,000 Tax base of office equipment (24,000-4,800) 19,200 3,200 Rs.000 Deferred tax liability (600 x 30%) 180 6

7 Deferred tax asset (3,200 x 30%) 960 Segmental learning outcome: Compute deferred tax assets and deferred tax liabilities. (05 Marks) (b) Statement of profit or loss and OCI for year ending (Rs.) Other Expenses Depreciation expense Motor vehicle 850,000 Interest expense 525,000 Statement of financial Position as at (Rs.) Non-current Assets Motor vehicle-cost 4,250,000 - accumulated depreciation (850,000) - carrying amount 3,400,000 Non-current liabilities Lease creditor 2,383,926 Current Liabilities Lease creditor 596,970 Segmental learning outcome: Apply the accounting treatment for leases (06 Marks) (c) (i) An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the assets. Other borrowing costs shall be recognized as an expense in the relevant period. (ii) Revision of useful life represents a change in accounting estimates and should be accounted prospectively as per LKAS 08 (iii)an entity shall measure intangible assets subsequent to recognition using either cost model or revaluation model. However the revaluation model is allowed only when 7

8 there is an active market to determine the fair value. Accordingly the intangible asset will measured at cost/ revalued amount less any accumulated amortization less accumulated impairment loss. (iv) An entity shall recognized the impairment loss of an asset as an expense in profit or loss during the period it incurs and the acuminated impairment loss is deducted when arriving the carrying amount of an asset. When the carrying amount of an asset exceeds its recoverable amount the deference is recognized as an impairment loss. (02 marks for any two definitions = 04 Marks) Segmental learning outcome: Apply the accounting treatment for borrowing costs Illustrate the accounting treatment for accounting policies, changes in accounting estimates and errors Apply the accounting treatment for property, plant and equipment Apply the accounting treatment for impairment loss Question 4 1) (Learning Outcome A2) Initial Cash Flow New Old Difference Purchase Cost 20,000,000 7,000,000 13,000,000 Tax associated with the sale of existing machine Comment [s1]: 01 Mark (Working 300,000 01) Comment [s2]: 01 Mark 13,300,000 Annual Operating Cash Flow Old New Difference Operating Saving from the current Volume Labor 12,000,000 12,000,000 - Material 40,000,000 36,000,000 4,000,000 Overheads (Not applicable) 60,000,000 54,000,000 Comment [s3]: 01 Mark - Comment [s4]: 01 Mark 4,000,000 Contribution from Additional Volume Sales 25,000,000 Less Labour - Material 9,000,000 Selling and Promotional 7,900,000 Comment [s5]: 01 Mark 8,100,000 Total Savings and Contribution 12,100,000 Differential Depreciation 500,000 1,000,000 Comment [s6]: 01 Mark (500,000) Taxable Operating Improvements 11,600,000 Tax 1,740,000 After Tax Improvement 9,860,000 8

9 Add Back Depreciation 500,000 After tax operating CF 10,360, Annual Cash Flows (13,300,000.00) 10,360,000 10,360,000 10,360,000 10,360,000 10,360,000 Comment 10,360,000 [s7]: 01 Mark 10,360,000 10,360 NPV 35,169,379 Comment [s8]: 01 Mark Decision: Since the NPV is positive the new machine should be purchased Comment [s9]: 01 Mark Working one Tax Associated with the sale of the existing machine Selling Price 7,000,000 Book Value 5,000,000 Profit 2,000,000 Tax 300,000 2) Learning Outcome (B 4) There are three working capital financing policies Conservative Approach Long term debt or equity is used for financing all fixed assets, permanent current assets, and some temporary current assets. Short term financing is used for the remaining temporary current assets. Moderate Approach Long term debt or equity is used for financing all fixed assets and permanent current assets. Short term financing is used for the temporary current assets. Aggressive Approach Short term financing is used for financing all temporary current assets, part of permanent current assets. 3) Learning Outcome (B1) Gross Operating Cycle = ICP+ DCP = = 146 Days Net Operating Cycle = GOC CDP = = 100 Days Comment [s10]: 0.5 Mark for each point 0.5 Marks for each explanation Comment [s11]: 01 Mark Comment [s12]: 02 Mark 9

10 End of Answer Scheme 10

SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME

All Rights Reserved No. of Pages - 12 No of Questions - 05 SCHOOL OF ACCOUNTING AND BUSINESS BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME YEAR III SEMESTER I (Intake I) END SEMESTER EXAMINATION