Copyright Reserved Serial No Managerial Level November 2013 Examination Examination Date : 23 rd November 2013 Number of Pages : 05 Examination Time: 9.30 a:m. 12.30 p:m. Number of Questions: 05 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions in Part I and three (3) questions from Part II. 4. The answers should be in English Language. Subject Subject Code Corporate Reporting and Analysis (CRA / ML 2 302) PART I Answer all questions Question No. 01 (40 Marks) 1. Jaiz Lanka PLC has a subsidiary in Thailand where repatriation of dividends is severely restricted. Directors board of Jaiz has rejected the accountant s proposal to deconsolidate the subsidiary as these restrictions were not relaxed for several years. Evaluate the Directors decision. 2. Martin (Colombo) PLC uses revaluation method to value its property, plant & equipment. Its subsidiary Martin (India) Ltd., located in Chennai, India uses cost basis for valuation as it is impractical to revalue its property at the end of each financial year. Give your comments. (02 Marks) 3. Apple, Bends and Crown are public companies, their draft statements of financial position at 31 st March 2013 of are as follows: Apple Bends Crown Property, Plant & Equipments 5,000 4,100 2,400 Investment in Bends 4,500 - - Investments in Crown 1,200 2,200 - Other investments 2,400 0 340 Stocks 1,700 800 1,200 Receivables 1,400 600 1,000 Cash 300 800 1,060 16,500 8,500 6,000 1
Stated capital 8,000 3,000 3,000 Other equity components 4,500 1,550 200 Retained earnings 1,500 400 800 Term loans 0 1,500 600 Creditors 1,000 1,000 1,400 Bank balances 1,500 1,050-16,500 8,500 6,000 Consider the following information. (i) Apple acquired 15% of the equity of Crown for Rs.990,000/- on 01/04/2011 and 75% of the equity of Bends for Rs. 4.5 mn on 01/04/2012. Bends acquired 60% of the equity of Crown for Rs.2.2 mn on 01/04/2011. Bends Crown 01/04/2012 01/04/2011 01/04/2012 Rs. 000 Rs. 000 Fair value of the identifiable net assets 4,600 2,900 4,400 Other equity components 1,250 300 180 Retained earnings 250 120 560 (ii) The excesses in fair values and any impairment may be absorbed to lands and goodwill. (iii) The fair value of the 15% holding of Apple in Crown was Rs.1.1 mn at 31 st March 2012 and Rs.1.2 mn at 31 st March 2013. The fair value of Bends s interest in Crown had not changed since acquisition. (iv) Bends net assets had a recoverable value of Rs.6,300/- as at 31/03/2013. (v) Apple s receivables include Rs.500,000/- due from Bends and Rs. 300,000/- due from Crown. (vi) Apple has sold Rs. 1.5 mn goods to Bends during the year ended 31/03/2013. Apple made a mark-up on cost of 25% on these sales. Bends had Rs. 1.0 million of these goods in inventory as at 31/03/2013. You are required to prepare the group consolidated statement of financial position of Apple as at 31/03/2013. (25 Marks) 4. Blue Plc. acquired a 30% interest in Comet Plc. at a cost of Rs. 1 mn on 01/04/2012. Blue accounts for its investment in the associate under the equity method. Comet had net assets of Rs. 2 mn at the date of acquisition, of which the fair value was Rs. 2.4 mn. Comet reported a post-tax profit of Rs.500,000/- for the year ended 31/03/2013, and paid a dividend of Rs.100,000/-. Comet has recognized a foreign exchange loss of Rs.100,000/- in other comprehensive income. Blue did not participate in the rights issue of ordinary shares by Comet subscribed on 01/04/2013. The rights issue brought in an additional Rs.300,000/- in cash. Explain how should Blue account for the dilution of its investment in Comet? (05 Marks) 2
5. Manual PLC acquired 80% interest in Helma Ltd., Singapore for SGD 22,000 on 01/04/2012. Consider following information, for year ended 31 st March 2013. SGD Fair Value of identifiable net assets 01/04/2012 20,000 Profit for the year 10,000 Exchange rates Rs. /SGD are as follows: 01/04/2012 Rs. 101 = SGD1 Average for the year Rs. 104 = SGD1 31/03/2013 Rs. 102 = SGD1 Part II You are required to show the translation adjustments in other comprehensive income for the year ended 31/03/2013. Give your assumptions (if any). (05 Marks) (Total 40 Marks) End of Part I Answer any three (3) questions Question No. 02 (20 Marks) 1. (a) What are the conditions applicable in recognizing revenue on sale of goods? (b) A sports club charges Rs.2,000/- at entry, being Rs.500/- for enrolment and 1,500 annual membership. The club had 20,000 members by the end of 31 st march 2013. Explain the method of revenue recognition. (c) GoodSell & Co. is an importer of a special washing machine from China. The machine costs Rs.45,000/- to GoodSell and the normal cash price is fixed at Rs.65,000/- with a credit period of one month or with a Rs.5,000/- discount for cash on delivery. GoodSell has sold 4,000 units during the year ended 31/03/2013, at Rs.80,000/- each with a credit period of six months, 3,000 machines at Rs.65,000/- with a credit period of one month and 2,000 units at Rs.60,000/- with discount on cash at delivery. Explain the measurement of income from machine sales. (04 Marks) 2. DIGI PLC reports results of Machinery & Insurance segments in its financial statements. However, DIGI reports four divisional results in its internal accounts; machinery leasing, machinery sales, investments and insurance. The results of these as at 31 st March 2013 are given below. External Revenue Internal profit/loss assets liabilities Machinery: Leasing 180 20 32 194 50 Sales 110 15 (4) 24 22 Total 290 35 28 218 72 Investment and insurance: Investment 120 130 80 192 65 Insurance 60 8 (53) 116 95 Total 180 138 27 308 160 You are required to explain the segment information required to be disclosed in the financial statements for the year ended 31/03/2013. (10 Marks) 3
Question No. 03 (20 Marks) 1. (a) MI PLC issued a perpetual bond (does not have a maturity date) in 2012 at an interest rate of 12% p.a. The bond has been classified as a financial liability in the statement of financial position as at 31/03/2013. Discuss the appropriateness of classification. (b) LANKA PLC issued 1 million convertible bonds with a maturity of six (6) years, each at Rs.1,000/- par on 31/03/2013. The bond carries an interest rate of 15% p.a. and is convertible into 100 million ordinary shares of the company. The company s share is currently traded at Rs. 20/-. It has estimated that a similar bond (i.e. with similar maturity value and interest cash flow) but without a conversion option can be issued at Rs.900/- each. (i) Give the accounting treatment on initial recognition. (04 Marks) (ii) Explain the method of recognition in the statement of financial position as at 31/03/2014. 2. KLUD PLC gives you the following information. Salaries and allowances paid to the Managing Director during the year ended 31.3.2013: Salary Rs. 2.4 million, Contributions to retirement benefit plan Rs. 900,000, Foreign travelling reimbursement Rs.1.2 million. Sales made during the year 2013 to parent company: Rs.100 million and amounts due to parent company as at 31.3.2013 Rs.12 million. A loan amount due from Spring & Co., an associate of KLUD, is Rs. 10 million. This loan has been fully secured against the property of the associate company. Raw materials purchased during the year from Spring & Co. were amounted to Rs. 50 million. These are at normal commercial terms and accounted for 25% of KLUD s total purchases for the year. You are required to: (a) List the items that are not required to be disclosed as related party transactions. (b) Draft a sample related-party transactions footnote to be included in the financial statements of the company. (07 Marks) 4
Question No. 04 (20 Marks) (a) Small and medium enterprises take no notice of corporate social responsibility frequently, is it impossible for them? Discuss. (10 Marks) (b) Financial reporting frauds effectuated through the intentional misuse of fair value accounting standards. Explain how fair value accounting rules can be improperly applied to fraudulently present the financial condition or results of operations of an entity. (10 Marks) Question No. 05 (20 Marks) Harsh Ltd. and TwoTrees Ltd. are retailers operating in the same market. The board of directors of Harsh plans for an expansion through a right issue of 2 for every 4 shares held as at 31/03/2013. The following financial information is available for the year ended 31/03/2013. Harsh Rs. TwoTrees Rs. Sales 17,622,000 21,480,000 Gross profit 6,512,120 7,904,300 Net profit 1,192,900 1,249,800 Stated capital 3,360,000 (Issued at Rs. 10 each) 3,600,000 (Issued at Rs. 9 each) Sector Information Total assets 16,200,000 17,008,000 Market Value per share 31/03/2013 17.5 19.2 Debt 980,000 2,560,000 Dividends declared 1,600,000 1,130,000 Dividend Pay-out 29.5% Dividend yield 7.44% Price Earnings 12.40 GP Ratio 36% NP Ratio 9% Leverage 40% Based on the above information, you are required to write a report to the board of directors of Harsh Ltd. on its performance and market rating. Include limitations to your recommendations. End of Part II End of Question Paper 5