UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY/JUNE 2014

BSc (Hons) Accounting (Minor: Business Informatics)

BSc (Hons) Accounting (Minor: Finance) Level (F/T & P/T)
PROGRAMME
BSc (Hons) Accounting (Minor : Management)

MODULE NAME F INANCIAL REPORTING

DATE Thursday MODULE CODE
DFA2000Y(3)
15 May 2014

13:30 – 16:30
TIME DURATION 3 Hours
Hours
NO. OF NO. OF
QUESTIONS SET 4 QUESTIONS TO BE 4
ATTEMPTED
INSTRUCTIONS TO CANDIDATES

Answer ALL Questions

 FINANCIAL REPORTING

Question 1

On 1 January 2012, Parent Ltd acquired 3 million Rs1 shares in Subsidiary Ltd at a cost of Rs5
million when the profit and loss account of Subsidiary Ltd showed a balance of Rs2 million. At the
time of acquisition, an item of plant, with a remaining useful life of 5 years, was undervalued by
Rs500,000 The statements of financial position of both companies at 31 December 2013 are as
follows:

Parent Ltd Subsidiary Ltd

Rs’000 Rs’000 Rs’000 Rs’000
Non-current assets
Property, plant and equipment 20,745 13,710
Equity Investments 6,000 -
26,745 13,710

Current assets
Stock 14,000 5,000
Trade debtors 8,000 4,500
Other debtors 1,125 -
Cash in hand 500 200
23,625 9,700
Total Assets 50,370 23,410

Capital and reserves

Ordinary share capital of Rs1 10,000 4,000
Accumulated profits 13,920 3,460
23,920 7,460

Non-current liabilities
10% Debentures 10,000 8,000
Provision for liabilities and charges 2,500 1,000
12,500 9,000

Current Liabilities
Trade creditors 4,600 1,700
Interest payable 350 250
Corporation tax 3,000 2,000
Proposed dividend 2,000 1,500
Bank overdraft 4,000 1,500
13,950 6,950

Total Equity & Liabilities 50,370 23,410

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 FINANCIAL REPORTING

Additional information:

(a) For its financial year ended 31 December 2013, Subsidiary Ltd pays an interim
dividend of Rs500,000 and proposes a final dividend of Rs1,500,000 (declared on
30 December 2013). Parent Ltd has recorded its share of all dividends in its books.

(b) Parent Ltd provides Subsidiary Ltd with a component which Subsidiary Ltd uses
in its production process. Parent Ltd adds 25% to its cost to arrive at the intra-
group selling price. Sales of the product for the year ended 31 December 2013
totalled Rs5,000,000. The amount of the product included in the stocks of
Subsidiary Ltd at 31 December 2013 was Rs1,000,000.

(c) At 31 December 2013, the debtors of Parent Ltd showed Rs1,500,000 receivable
from Subsidiary Ltd, whilst the creditors of Subsidiary Ltd showed Rs1,050,000
payable to Parent Ltd. These figures do not include any accrued interest and
proposed dividends.

Further investigation revealed the following:

(i) On 30 December 2013, Parent Ltd dispatched a consignment of goods

Subsidiary Ltd having an invoice value of Rs250,000. The consignment
was received and recorded by Subsidiary Ltd on 3 January 2014.

(ii) On 31 December 2013, Subsidiary Ltd sent Parent Ltd a cash payment of
Rs200,000. This payment was received and recorded by Parent Ltd on 4
January 2014.

(d) There was no impairment of goodwill. It is the policy of the group to value non-
controlling interest at full fair value. At the time of acquisition (1 January 2012),
the share price of Subsidiary Ltd was Rs1.65. Equity investments in companies
other than subsidiary Ltd. have a fair value of Rs1.5m at 31 December 2013 and
this value has not yet been incorporated in the books.

Required:

Prepare the consolidated statement of financial position of Parent Ltd and its subsidiary as
at 31 December 2013 in line with relevant international accounting standards.
[25 marks]

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 FINANCIAL REPORTING

Question 2

The following list of balances relates to Wilson Ltd for the year ended 30 June 2013.

Rs Rs
Sales revenue (note 1) 358,450
Cost of sales 185,050
Distribution costs 28,700
Administrative expenses 15,000
Lease rentals (note 2) 20,000
Property at cost (note 3) 700,000
Accumulated depreciation on property at 1 July 2012 60,000
Trade accounts receivable 85,000
Inventories at 30 June 2013 28,240
Cash at bank 38,460
Trade accounts payable 29,400
Equity shares of Rs1 each 400,000
8% debentures 50,000
Retained earnings at 1 July 2012 202,600
1,100,450 1,100,450

The following notes are relevant:

Note 1
On 1 July 2012, goods with an invoice value of Rs10,000 were sold to a long-
established customer on the following terms: annual instalments of Rs2,000 are due
each year on 30 June for 5 years from date of sale. The normal cash price of the asset
is Rs10,000. Based on the customer's credit rating, the seller believes the buyer would
be able to obtain finance at an interest rate of 10 per cent. As at 30 June 2013, the cash
account had been debited with Rs2,000 and sales had been credited with Rs2,000. No
other entries had been made.

Note 2
A lease rental of Rs20,000 was paid on 30 June 2013. It is the first of five annual
payments in respect of a leasing contract for the rental of equipment that has a cash
purchase price of Rs75,000 The lease contract was entered on 1 July 2012. The rate
implicit in the lease has been computed to be 12% and the present value of an
annuity of Rs1 for 5 years at a discount rate of 12% is 3.605. At the end of the lease
term, the equipment will be returned to the lessor and the residual value at that
time is not guaranteed by the lessee. The equipment has an economic life of 6
years.

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 FINANCIAL REPORTING

Note 3

Two years ago the company started the construction of an administrative building
and incurred costs totalling Rs500,000, of which Rs100,000 related to the land. The
new building is an addition to the existing administrative building which had cost
Rs200,000 and on which there exists an accumulated depreciation of Rs60,000. The
new building was brought into use on 1 July 2012. The cost of the building includes
Rs100,000 for the air conditioning system and Rs45,000 for the lifts.
The air conditioning system and the lifts have a useful life of 10 years and 15 years
respectively. However, the air conditioning system will be subject to a major
inspection every 3 years to ensure its continued use. The inspection is expected to
cost Rs15,000 in three years time.

The existing building will be revalued to Rs150,000 as at 1 July 2012. It is the

company policy to depreciate all buildings over a useful life of 50 years.

Note 4

A provision for income tax for the year ended 30 June 2013 is estimated by levying a
25% charge on accounting profits.

Note 5

An employee of Wilson is currently suing the company for damages in respect of

serious injuries sustained as a result of a breach of safety regulations.
Correspondence from Wilson’s legal representatives indicate the following:

Outcome Probability Estimated damages

Contributory negligence 70% Rs30,000
Fully responsible 30% Rs60,000
In addition legal costs are estimated at Rs5,000.

Required:

Prepare the income statement for the year ended 30 June 2013 and a statement of
financial position as at that date in accordance with the provisions of relevant
international accounting standards.

[25 marks]

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 FINANCIAL REPORTING

Question 3

The summarised financial statements of Bruce Ltd for the years 31 March 2012 and
2013 are given below:

Statement of Financial Position 2013 2012

Rs’000 Rs’000 Rs’000 Rs’000

Non- current assets
Tangible assets (Note 1) 4,596 4,136
Intangible assets (Note 2) 360 4,956 840 4,976

Current assets
Inventories 2,400 1,600
Short-term investments (30-day treasury
bills, considered as cash equivalent) 30 -
Trade Receivables 1,800 1,360
Cash at bank 30 4,260 20 2,980

9,216 7,956
Equity and liabilities
Ordinary shares (Rs1 each) 2,000 1,600
7% preference shares 2,000 2,000
Share premium account 400 100
Revaluation surplus 400 200
Retained Earnings 1,300 700
6100 4600
Non current liabilities
10% debentures 300 400

Current Liabilities
Bank overdraft 1,116 1,356
Trade payables 1,360 1,080
Dividends - 140
Income tax 340 380
2,816 2,956
9,216 7,956

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 FINANCIAL REPORTING

Income statement for the year ended 31 March 2013

Rs’000

Sales 6,000
Cost of sales (4,000)
Gross profit 2,000
Net operating expenses (986)
Profit on sale of land 80
Loss on sale of plant (54)
Profit before interest and tax 1,040
Finance cost (40)
Profit before tax 1,000
Income tax expense (400)
profit for period 600
Other Comprehensive Income
Revaluation gain 200
Total Comprehensive income 800

Note 1 Property, plant and equipment schedule

Office Motor Total

Land Buildings Plant Vehicles
R’000s Rs’000 Rs’000 Rs’000
Cost
At 1 April 2012 3,200 800 840 200 5,040
Additions 800 200 120 1,120
Revaluations 200 200
Disposal (600) (240) (840)
At 31 March 2013 3,600 1,000 720 200 5,520

Depreciation
At 1 April 2012 - 384 400 120 904
Charge for the year - 20 144 40 204
Disposal -
Adjustment - - (184) (184)
At 31 March 2013 - 404 360 160 924

Net Book Values

At 31 March 2013 3,600 596 360 40 4,596

At 31 March 2012 3,200 416 440 80 4,136

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 FINANCIAL REPORTING

Note 2
R & D (intangible assets) of Rs480,000 has been written off during the year ended 31 March
2013.

Required:
Prepare the statement of cash flows for the year ended 31 March 2013 in accordance with
IAS 7.

[25 marks]

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 FINANCIAL REPORTING

Question 4

Mrs Jumbo is interested in investing in one of the two restaurants listed below. The
companies operate in an industry where margins are constantly under pressure due to
fierce competition. Their recent financial statements are as follows:

Income Statements
Stanmore Neilsons
Rs’000 Rs’000
Sales 11,500 13,000
Cost of sales 4,800 7,100
Gross profit 6,700 5,900
Operating expenses 3,300 4,700
Profit from operations 3,400 1,200
Interest cost nil nil
Profit before tax 3,400 1,200
Income tax expense 1,100 550
Net profit for period 2,300 650

Balance sheets
Stanmore Neilsons

Rs’000 Rs’000 Rs’000 Rs’000

ASSETS

Non-current assets
Property, plant and 2,000 1,400
equipment

Current assets
Inventories 1,300 1,300
Trade receivables 7000 2,300
Cash at bank 50 2,200
8,350 5,800
Total assets 10,350 7,200

EQUITY AND LIABILITIES

Capital and reserves

Issued share capital (Rs1) 2,000 750

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 FINANCIAL REPORTING

Accumulated profit 4,450 2,650

6,450 3,400

Current liabilities
Trade creditors 2,600 2,950
Taxation payable 1,100 550
Dividend payable 200 300
3,900 3,800
10,350 7,200

Required :

a) Compute for Stanmore and Nielsons, the ratios listed in the template below
[12 marks]

Profitability Formula Stanmore Neilsons

1. ROTA PBIT/total assets X100
2. Operating profit PBIT/sales x 100
margin
3. Asset turnover Sales/total assets
4 Gross profit margin Gross profit/sales x 100
5 Expenses margin Operating expenses/sales x100

Liquidity and efficiency Formula Stanmore Neilsons

1 Current ratio Current assets/current liabilities
2 Quick asset ratio (Current assets – stock) / Current
liabilities
3 Cash ratio Cash/current liabilities
4. Period of inventory Closing stock/cost of sales *365
turnover
5. Debtors collection debtors/sales * 365
period
6. Creditors payment Creditors/cost of sales * 365
period
7. Cash operating (4) + (5) – (6)
cycle
b) Based on your ratios computed in (a) above, briefly comment on the profitability and
efficiency of each company and advise Mrs Jumbo which company she should invest
in. [13 marks]

[Total marks 25]

END OF QUESTION PAPER

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