Copyright Reserved Serial No. Institute of Certified Management Accountants of Sri Lanka. Operational Level May 2015 Examination

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Copyright Reserved Serial No Operational Level May 2015 Examination Examination Date : 16 th May 2015 Number of Pages : 09 Examination Time: 9.30 a:m. 12.30 p:m.

1 Copyright Reserved Serial No Operational Level May 2015 Examination Examination Date : 16 th May 2015 Number of Pages : 09 Examination Time: 9.30 a:m p:m. Number of Questions: 07 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks 3. Answer all questions in Part I and four (4) questions from Part II selecting two (2) questions from each of the Sections A and B. 4. The answers should be in English Language. PART I Subject Subject Code Financial Accounting and Reporting (FAR / OL 2 202) Question No. 01 (20 Marks) Answer all parts of Question No.1. Select the most suitable answer to each part of the question. Write the number of the part of the question and the selected answer by stating the relevant English letter, in your answer booklet. E.g. (1) (relevant English letter), (2) (relevant English letter) etc (1) Which of the following should not be included in the cost of inventory? Import duties Trade discounts VAT Transport cost incurred for finished goods (2) Which of the following statement is true? (i) Non-adjusting events are those that are indicative of conditions that arose after the balance sheet date. (ii) Adjusting events are those events that provide evidence of conditions that existed after the balance sheet date. (iii) Decline in market value of investments between the balance sheet date and the date when the financial statements are authorized for issue is an example for adjusting event. (iv) Discovery of fraud or errors that show that the financial statements are incorrect is an example for non-adjusting event. (i) only (ii) only (iii) only (iv) only 1

2 (3) Which of the following costs could be treated as directly attributable costs for property, plant and equipment? (i) Cost of site preparation (ii) Installation and assembly cost (iii) Initial delivery and handling cost (iv) Cost of employee benefits arising directly for the acquisition of the item of property, plant and equipment (i), (ii) & (iii) only (ii), (iii) & (iv) only (i), (iii) & (iv) only (4) What are the factors to be considered in determining the useful life of an asset? (i) Expected usage of the asset (ii) Expected physical wear and tear (iii) Technical or commercial obsolescence (iv) Legal limits on the use of the asset (i), (ii) & (iv) only (i) & (ii) only (i), (ii) & (iii) only (5) Which of the following statements are true? (i) Fundamental Accounting assumptions must be disclosed in the financial statements when those have not been complied with. (ii) Income Statement, Financial Position and Cash flow Statement are prepared on accrual basis. (iii) Provision should be recognized even a reliable estimate cannot be made of the obligation. (iv) Financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. (i), (ii) & (iv) only (i), (iii) & (iv) only (ii), (iii) & (iv) only (6) Select the true statement/(s) (i) Interest income should be recognized on a time proportion basis that takes into account the effective yield on the asset. (ii) Royalties should be recognized on an accrual basis in accordance with the substance of the relevant agreement. (iii) Dividends should be recognized when the shareholders right to receive payment is established (i) only (ii) only (iii) only 2

3 (7) Examples of borrowing costs are: Amortization of goodwill Trade discounts Exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs. Cheque book charges (8) Which of the following statement is false? Provision should be recognized when an enterprise has a present obligation as a result of a future event. A past event that leads to a present obligation is called an obligating event. For each class of provision an enterprise should disclose the carrying amount at the beginning and end of the period. statements are true. (9) A related party transaction is a transfer of resources services or obligations between a reporting entity and a related party regardless of whether a price is charged. Which of the following can be considered as a related party? (i) Associates (ii) Joint ventures (iii) Key management personnel (iv) Parties with control, joint control or significant influence (i) & (ii) only (ii) & (iii) only (iii) & (iv) only (10) Select the true statements. (i) Contingent liability should not be recognized in the financial statements. (ii) Contingent asset should not be recognized in the financial statements. (iii) Accrual basis is that the revenue and expenses are recognized as and when they are earned or incurred regardless of whether the cash or cash equivalent is received or paid. (iv) Onerous contract is a contract in which the economic benefits expected to be received exceeds the unavoidable costs of meeting the obligations under the contract. (ii) & (iii) only (i) & (iii) only (i) & (ii) only (10 2 Marks = Total 20 Marks) End of Part I 3

4 PART II Section A Answer any two (2) questions Question No. 02 (20 Marks) Trial balance of Revolve PLC as at 31 st March 2014 is given below: Dr. (Rs.000) Land and Building ( cost of building Rs.12,000,000) 20,000 Computers 500 Motor Vehicle 9,000 Furniture and Fixtures 2,000 Accumulated Depreciation as at 01/04/2013 Cr. (Rs.000) Building 7,200 Motor Vehicle 5,400 Computer 375 Furniture and Fixtures 1,200 Trade Receivables 6,000 Trade payables 8,850 Other receivables 150 Other payables 357 Cash and bank overdraft Stated Capital- Ordinary share capital 20,000 Revaluation Reserve 3,296 Retained Earnings 01/04/2013 4,297 General Reserve 1,854 Sales 100,334 Purchases 63,650 Inventory as at 01/04/ ,670 Administration Expenses 740 Distribution Expenses 355 Other Operating Expenses 247 Finance Charges 75 Income tax provision as at 01/04/2013 1,200 Income tax paid 160 Dividend Paid , ,639 4

5 Following additional information is also available: (1) Inventory as at 31 st March 2014 was Rs.32,000,000/-. (2) Motor vehicle purchased for Rs.2,000,000/- on 1 st October 2011 was sold for Rs.1,450,000/- on the 31 st March Sale proceeds have been taken as sales and no other entries were recorded. (3) On 31 st March 2014 buildings were revalued and a revaluation surplus of Rs.750,000/- was identified but this has not been recorded. (4) On 31 st March 2014, a computer was purchased for Rs.95,000/- and the cost is included in the administration expenses. (5) Proposed ordinary dividend for 2013/2014 amounts to Rs.85,000/-. (6) Income tax of Rs.160,000/- has been paid under self -assessment basis for 2013/2014. Rs.400,000/- has been estimated as the total income tax liability for 2013/2014. (7) During the year Rs.75,000/- has been paid to settle the 2012/2013 audit fees and Rs.80,000/- has to be provided as the annual audit fees for 2013/2014. (8) Property, plant and equipment are depreciated on straight-line method. Useful lives of the assets are given below. Building 20 years Motor Vehicle 5 years Computer 4 years Furniture and Fixtures 5 years You are required to prepare the following for Revolve PLC for publication purposes: Statement of Comprehensive Income for the year ended 31 st March (06 Marks) Statement of Financial Position as at 31 st March (05 Marks) Statement of Changes in Equity for the year ended 31 st March (04 Marks) A statement showing movement in Property, Plant and Equipment for the year ended 31 st March (05 Marks) Question No. 03 (20 Marks) Sumalee Plc has prepared its draft financial statements for the year 31 st March 2014 on 30 th May The board of directors have authorized the financial statements for issue on the 10 th June Financial statements were made available for shareholders on 20 th June The following events were occurred after the balance Sheet date. (i) On 18 th June 2014, it was declared that a debtor who owed Rs. 2.5 million to Sumalee Plc was bankrupt. (ii) Warehouse was destroyed by fire on the 12 th April 2014 and the estimated loss was Rs.35 million. (iii) Part of the inventory that was recorded at cost for Rs.3.5 million on the balance sheet date was sold for Rs.4 million on 1 st May (iv) On 30 th April 2014 it was identified that the sales account had been overstated by Rs.1 million with regard to a credit sale made in March

6 You are required to state how you would treat each of these events in the financial statements. Justify your answer based on LKAS-10 events after the reporting period. (4 2 Marks = 08 Marks) Explain the following terms in line with the LKAS-16: Property, Plant and Equipment (i) Fair value of Property Plant and Equipment (ii) Impairment loss of an asset (iii) Recoverable amount of an asset (iv) Residual value of an asset (v) Carrying amount of an asset (vi) De-recognition of an asset (6 2 Marks = 12 Marks) Question No. 04 (20 Marks) As per LKAS-2: Inventories, define what is meant by inventory? (02 Marks) What does constitute for the cost of inventory? (02 Marks) State four (4) disclosure requirements with regard to inventories in the financial statements. (02 Marks) Following information is available for Product Y. As per LKAS-2, you are required to compute the cost per unit of product Y. (04 Marks) Normal production capacity (Units) 70,000 Actual production (Units) 85,000 Fixed production overhead cost (Rs.) 420,000 Variable production overhead cost (Rs.) 170, 000 Raw material cost (Rs.) 900,000 Direct labour cost (Rs.) 350,000 (e) The Statement of Financial Position of Beetle PLC as at 31 st March 2014 is given below together with comparative figures. Beetle PLC Statement of Financial Position as at 31 st March /03/ /03/2013 (Rs.'000) (Rs.'000) Non- current Assets Motor vehicles 5,000 4,000 Computers Investments Current Assets Trade Receivables 4,000 2,000 Inventory 3,000 2,000 Cash in hand Bank balance Total Assets 13,800 9,000 6

7 Equity and Liabilities Stated Capital 3,500 3,000 Retained earnings 2,800 (800) Non-current Liabilities Debentures 1,200 2,000 Bank Loans 1,200 1,600 Current Liabilities Trade Payables 3,500 1,500 Accrued Administration expenses Proposed dividends Accrued bank loan interest Accrued debenture interest Income Tax Bank Overdraft Additional Information available: (1) Annual audit fee of Rs.75,000/- has not been provided for. (2) Written down value of the Property, plant and equipment sold are: Computers Rs.200,000/- Motor vehicle Rs.600,000/- You are required to prepare cash flow statement of Beetle PLC as at 31 st March 2014 under the direct method. (10 Marks) End of Section A 7 13,800 9,000 (3) Depreciation charge for the year amounts to Rs.232,678/- and charged to the Income statement. (4) Current year s proposed dividends have been erroneously accounted in the financial statements. (5) Cash transactions occurred during the financial year are as follows: Rs 000 Cash received from trade receivables 8,000 Cash sales 6,000 Proceeds from sale of computers 280 Proceeds from sale of motor vehicle 700 Interest income from investment 120 Proceeds from issue of ordinary shares 500 Cost of acquisition of motor vehicle 2,000 Payments made to Trade payables 3,000 Administration expenses 2,000 Cash purchases 4,000 Income tax paid 1,000 Interest paid to bank loans 100 Debenture interest paid 400 Dividends paid 300 Redemption of debentures 800 Repayment of bank loans 400 Investments 600

8 Section B Answer any two (2) questions Question No. 05 (20 Marks) Alu Plc is a diversified holding company that has acquired following long- term investments. Blue Plc Crest Plc Date of acquisition 1 st April st April 2012 No. of shares acquired 1,200,000 1,000,000 Reserves at acquisition 50 million 40 million Alu Plc has acquired 80% shares of Blue in a share exchange of 2 shares in Alu Plc for 5 shares in Blue Plc. This share issue has not yet been recorded in the books of Alu Plc. At the date of acquisition the market prices of Alu and Blue were Rs.150/- and Rs.60/- respectively. The stated capital of Crest Plc represents 1,000,000 shares. The draft statements of financial position of the companies are given below as at 31 st March Alu (Rs. 000) Blue (Rs. 000) Crest (Rs. 000) Non-Current Assets Property, plant and equipment 488,000 90,000 75,000 Investment in Crest Plc 100, Current Assets Inventory 38,000 12,000 18,000 Trade receivables 22,000 10,000 12,000 Cash 6,000 8,000 11,000 Total Assets 654, , ,000 Equity Stated Capital 128,000 20,000 40,000 Reserves 489,000 82,000 59,000 Non-Current Liabilities Debentures 25,000 10,000 5,000 Current Liabilities Trade payables 12,000 8,000 12,000 Total Equity and Liabilities 654, , ,000 Additional information is as follows: (1) For consolidation purposes Alu Plc revalued the property, plant and equipment of Blue Plc. The revaluation indicated that fair value of the PPE of Blue Plc was Rs.10 million over its carrying amount. As on that date the economic life of blue Plc s PPE was 5 years. (2) As on the date of acquisition the fair value of the net assets of Crest Plc was equal to their carrying amount with the exception of Crest Plc s PPE which had a fair value of Rs.15 million over its carrying amount. The economic life of those PPE, as on the date of acquisition was 5 years. (3) The impairment tests made on 31 st March 2014 indicated that goodwill of Crest Plc has been impaired by Rs.2 million. You are required to prepare the Consolidated Statement of Financial Position as at 31 st March (15 Marks) As per LKAS-11, state five disclosure requirements for contract revenue accounting. (05 Marks) 8

9 Question No. 06 (20 Marks) As per LKAS-23: Accounting for borrowing costs; what are the conditions to be satisfied to commence capitalizing borrowing costs? (03 Marks) As per LKAS-23: Accounting for borrowing costs; what is the benchmark treatment for borrowing costs? (03 Marks) As per LKAS-23, what is the allowed alternative treatment for accounting for borrowing costs? (03 Marks) What are the disclosure requirements for borrowing costs specified in LKAS-23? (03 Marks) (e) Define qualifying asset according to LKAS-23. (03 Marks) (f) As per LKAS-18: Accounting for Revenue, what are the conditions to be satisfied to recognize revenue from sale of goods? (05 Marks) Question No. 07 (20 Marks) Define the following terms as per LKAS-17: Accounting for leases. (i) Finance Lease (ii) Operating Lease (iii) Non-cancellable Lease (3 2 Marks = 06 Marks) State four (4) disclosure requirements for Finance Leases specified in LKAS-17: Accounting for leases. (05 Marks) State four (4) disclosure requirements for Operating Leases specified in LKAS-17: Accounting for leases. (05 Marks) As per LKAS-17: Accounting for leases, explain he accounting treatment for sale and lease back transaction under Finance lease arrangement. (04 Marks) End of Section B End of Part II End of Question Paper 9

Institute of Certified Management Accountants of Sri Lanka Operational Level May 2018 Examination

Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Operational Level May 2018 Examination Examination Date : 12 th May 2018 Number of Pages : 08 Examination Time: 9.30