UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY 2018

BSc (Hons) Accounting (Minor: Finance)

BSc (Hons) Accounting (Minor: Business Informatics)
PROGRAMME
BSc (Hons) Accounting (Minor: Management)
Level II, III & Fee-Paying

MODULE NAME FINANCIAL REPORTING

DATE Monday 7 May 2018 MODULE CODE DFA2000Y (3)

TIME 13.30 – 16.30 Hours DURATION 3 Hours

NO. OF 4 NO. OF QUESTIONS 4

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 4 questions.

Answer ALL questions.
 Financial Reporting – DFA2000Y (3)

Answer ALL questions.

Question 1 (30 marks)

Graham Ltd acquired 80 million ordinary shares in HNY Ltd on 1 July 2015. The acquisition
was made through an exchange of three ordinary shares in Graham Ltd for every five
ordinary shares acquired in HNY Ltd and Graham Ltd paid Rs0.75 for every ordinary share
acquired in HNY Ltd. In addition Graham Ltd recorded only the cash consideration paid for
the acquisition of shares. The market price of each ordinary share of Graham Ltd and HNY
Ltd was Rs3.30 and Rs2.10 respectively on 1 July 2015.

The statements of financial position of Graham Ltd and HNY Ltd as at 30 June 2017 are as
follows.

Graham Ltd HNY Ltd

Rs’000 Rs’000 Rs’000 Rs’000
Non-current assets
Property, plant and equipment 246,500 205,540
Investment in HNY Ltd 60,000 306,500 Nil 205,540
Current assets
Inventory 50,095 75,110
Trade receivables 46,240 50,780
Other receivables 7,870 5,410
Cash in hand 2,110 106,315 870 132,170
Total Assets 412,815 337,710

Equity and Liabilities

Ordinary share capital of Rs1 150,000 100,000
Share Premium 52,500 20,000
Retained profits 125,410 327,910 92,525 212,525

Non-current liabilities
Long Term Loan 50,000 75,000
Current Liabilities
Trade payables 12,890 22,780
Interest payable 4,160 6,790
Tax payable 3,750 2,740
Dividend Payable 12,000 8,000
Bank overdraft 2,105 84,905 9,875 125,185
Total Equity & Liabilities 412,815 337,710

The following additional information is provided.

1. The share premium and retained profits of HNY Ltd were Rs20 million and Rs75.85
million respectively on 1 July 2015.

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 Financial Reporting – DFA2000Y (3)

2. The policy of the group is to value non-controlling interest at fair value.

3. An item of plant of HNY Ltd with a remaining useful life 10 years was undervalued
by Rs8 million on 1 July 2015. In addition, on that date the fair values of the
remaining assets of HNY Ltd were equal to their carrying amount.
4. Sales from Graham Ltd to HNY Ltd amounted to Rs1 million per month for the year
ended 30 June 2017 and goods amounting to Rs2.5 million were still in the inventory
of HNY Ltd at 30 June 2017. Graham Ltd sold goods to HNY Ltd at a mark-up of
25%.
5. For the year ended 30 June 2017, HNY Ltd sold goods amounting to Rs9 million to
Graham Ltd and half of the goods were still in the inventory of Graham Ltd at 30
June 2017. HNY Ltd sold goods to Graham Ltd at a mark-up of 20%.
6. HNY Ltd paid an interim dividend of Rs2 million for the year ended 30 June 2017
and the company has also proposed a final dividend of 8 cents per ordinary share.
Graham Ltd has recorded its share of dividends in its books of accounts.
7. On 31 December 2016, Graham Ltd sold an equipment to HNY Ltd at a price of Rs20
million when the carrying amount of the equipment before the sale was Rs18 million.
The remaining useful life of the equipment was 10 years at the date of sale.

Required:

(a) Prepare the consolidated statement of financial position as at 30 June 2017.

[22 marks]
(b) Explain the importance of regulating the financial accounting environment.
[4 marks]
(c) Explain the challenges that can be faced in the harmonization of accounting
standards. [4 marks]

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 Financial Reporting – DFA2000Y (3)

Question 2 (30 marks)

The following list of balances relates to Clavey Ltd for the year ended 31 March 2017.

Rs’000 Rs’000
7% Loan Notes 70,000
Cash in Hand 480
Equity Investments 35,050
Distribution costs 39,540
Property, Plant and Equipment at cost 350,000
Accumulated depreciation on property, plant and equipment at 1 72,500
April 2016
Prepayments 3,450
Cost of sales 80,520
Trade Receivables 45,270
Ordinary Share Capital of Rs2 each 125,000
Trade Payables 48,670
Accruals 2,180
Bank Overdraft 7,150
Other Income 890
Administrative expenses 74,125
Finance Cost 5,390
Sales revenue 260,150
Retained profits at 1 April 2016 72,125
Inventory at 31March 2017 24,840
Total 658,665 658,665

The following additional information is provided.

1. Clavey Ltd paid dividends to its ordinary shareholders on 25 March 2017 which was
equivalent to a dividend yield of 8% and the market price of one ordinary share of
Clavey Ltd was Rs2.50 on that date. The payment of ordinary dividends was
included in administrative expenses.
2. The depreciation policy of Clavey Ltd is to depreciate its Property Plant and
Equipment (PPE) at 10% on cost on a proportionate basis and to allocate depreciation
expenses as follows: 40% to cost of sales, 30% to distribution costs and 30% to
administrative expenses. PPE of Clavey Ltd includes an item of ‘Land’ which initially
cost Rs40 million and is worth Rs45 million on 31 March 2017. The revised value of
‘Land’ has not yet been included in the books of Clavey Ltd.
3. The company pays tax on profits at the rate of 15% per year and a provision for
income tax is required for the year ended 31 March 2017.

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 Financial Reporting – DFA2000Y (3)

4. Clavey Ltd is currently being sued by a supplier and the top management of the
company has been informed by the company’s lawyer that Clavey Ltd has only 20%
chance of winning the case. The lawyer has also informed the top management that
Clavey Ltd will have to pay Rs700,000 as damages to the supplier if the company
loses the case and the company can claim Rs500,000 to the supplier if the company
wins the case. The lawyer also mentioned that the company will have to incur legal
costs amounting to Rs100,000 whichever be the outcome of the court case.
5. The market value of the equity investments of Clavey Ltd was Rs34 million on
31 March 2017.
6. Clavey Ltd sold goods amounting to Rs10 million to HYT Ltd on 1 April 2016. Clavey
Ltd provided a credit facility of five years to HYT Ltd. The customer was required to
pay an equal amount of Rs2 million at the end of each financial year over the five
year time period to settle the debt. After considering the credit rating of HYT Ltd, the
top management of Clavey Ltd believes that HYT can obtain finance at an interest
rate of 7% per year. The first payment of Rs2 million made by HYT Ltd was on
31 March 2017 and on that date Clavey Ltd debited the cash account and credited the
sales account with an amount of Rs2 million. The annuity factor at a discount rate of
7% for five years is 4.100.
7. Clavey Ltd entered into a leasing contract with Hugson Ltd on 1 April 2016 for the
rental of a machine for six years. The useful economic life of the machine at the start
of the lease was eight years and Clavey Ltd will return the machine to Hugson Ltd at
the end of the lease term. The market price of the machine on 1 April 2016 was Rs32
million. According to the leasing contract, Clavey Ltd will have to pay a lease rental
of Rs7 million at the end of each year since start of the lease, over the six year time
period. Clavey Ltd paid the first lease rental of Rs7 million on 31 March 2017 and it
was included in cost of sales. The rate implicit in the leasing contract is 10% and the
annuity factor at a discount rate of 10% for six years is 4.355.

Required:
(a) Prepare the income statement for the year ended 31 March 2017 and a
statement of financial position as at 31 March 2017 for Clavey Ltd, in
accordance with relevant international accounting standards.
[23 marks]

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 Financial Reporting – DFA2000Y (3)

(b) Explain the accounting treatment of a change in accounting policy and a

change in accounting estimate according to IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors. [4 marks]

(c) Explain the accounting treatment of borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset
according to IAS 23 Borrowing Costs. [3 marks]

Question 3 (25 marks)

Part A

You are provided with the summarised statement of comprehensive income and statement
of financial position for Gold Ltd and Platinum Ltd. Both companies operate in the same
industry.

Statement of Comprehensive Income for the year ended 31 March 2017

Gold Ltd Platinum Ltd
Rs’000 Rs’000
Turnover 48,000 54,000
Opening stock 4,000 3,000
Purchases 20,500 24,200
Closing stock (4,500) (3,200)
Cost of sales (20,000) (24,000)
Gross profit 28,000 30,000
Other income 150 20
Operating expenses (17,000) (20,000)
Profit from operations 11,150 10,020
Finance cost (200) (80)
Profit before tax 10,950 9,940
Income tax expense (2,190) (1,988)
Net profit for year 8,760 7,952

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 Financial Reporting – DFA2000Y (3)

Statement of Financial Position as at 31 March 2017

Gold Ltd Platinum Ltd
Rs’000 Rs’000 Rs’000 Rs’000
Non-Current Assets
Property, plant and equipment 8,000 6,000
Current Assets
Inventories 4,500 3,200
Trade receivables 18,000 9,000
Cash at bank 300 22,800 8,500 20,700
Total Assets 30,800 26,700
Equity and Liabilities
Equity
Ordinary share capital (Rs1) 6,000 3,000
Retained Earnings 15,760 21,760 10,960 13,960
Non-Current Liabilities
10% Loan notes 2,000 800
Current Liabilities
Trade Payables 4,850 9,952
Taxation payable 2,190 1,988

Total Liabilities 9,040 12,740

Total Equity and Liabilities 30,800 26,700

Required:

(i) Calculate the following ratios for Gold Ltd and Platinum Ltd. [10 marks]

Profitability Formula
1. Gross profit margin (Gross profit/sales) x 100%
2. Gross profit mark-up (Gross profit/cost of sales) x 100%
3. Net profit margin (Net profit before interest and tax /sales) x 100%
4. Return On Assets (Net profit before interest and tax/Total Assets) x 100%

Liquidity and efficiency Formula

1. Current ratio (Current assets/current liabilities)
2. Acid test ratio (Current assets – closing inventory) / current liabilities
3. Period of inventory turnover (Closing inventory/cost of sales) x 365days
4. Trade Receivables collection (Trade Receivables/ credit sales)x 365days
period
5. Trade Payables payment (Trade Payables/credit purchases) x 365days
period
6. Cash operating cycle Inventory Period + Trade Receivables Period – Trade
Payables Period

Assume that all sales and purchases were on credit.

(ii) Using the ratios calculated in part (i) comment on the profitability, liquidity and
efficiency of both companies. [10 marks]

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 Financial Reporting – DFA2000Y (3)

Part B

Pops Ltd acquired an item of equipment on 1 July 2015 by paying cash Rs160,000 and
decided to use the cost model for equipment. The useful life and residual value of the item
of equipment were estimated to be five years and Rs10,000 respectively. The management
decided to depreciate the equipment on a straight-line basis.

Pops Ltd’s management then decided to adopt the revaluation model for equipment on
30 June 2016. They determined at that date that the fair value of this item of equipment was
Rs140,000. This equipment was expected to have a remaining useful life of four years, and
the estimated residual value was reassessed from Rs10,000 to Rs20,000.

At 30 June 2017, Pops Ltd’s management estimated that the fair value of the item of
equipment was not materially different from its carrying amount.

Required:

Prepare the necessary journal entries for the period 1 July 2015 to 30 June 2017 to record the
above transactions. Show all relevant dates and workings. Narrations are not required.
[5 marks]

Question 4 (15 marks)

The summarized financial statements of Albert Ltd for the years 31 December 2016 and 2017
are as follows:

Income statement for the year ended 31 December 2017

Rs’000

Sales 5,450
Cost of sales (2,700)
Gross profit 2,750
Profit on sale of Plant 40
Administrative expenses (1,230)
Depreciation and amortisation (255)
Profit before interest and tax 1,305
Finance cost (90)
Profit before tax 1,215
Income tax expense (206)
Profit after tax 1,009
Other Comprehensive Income
Revaluation gain 500
Total Comprehensive income 1,509

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 Financial Reporting – DFA2000Y (3)

Statement of Financial Position as at 31 December

2017 2016

Rs’000 Rs’000 Rs’000 Rs’000

Non- current assets
Property Plant and Equipment (Note 1) 4,450 3,800
Intangible assets (Note 2) 300 4,750 400 4,200
Current assets
Inventories 450 505
Trade Receivables 750 680
Treasury Bills 50 20
Cash at bank 120 1,370 50 1,255
Total Assets 6,120 5,455

Equity and liabilities

Ordinary share capital (Rs1 each) 1,200 1,000
Share premium account 200 100
Revaluation surplus 700 200
Retained Earnings 1,619 850
Total Equity 3,719 2,150
Non-current liabilities
Borrowings 1,370 2,260
Current Liabilities
Bank overdraft 10 90
Trade payables 720 540
Interest payable 20 15
Dividend payable 101 150
Income tax payable 180 1,031 250 1,045
Total Equity and Liabilities 6,120 5,455

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 Financial Reporting – DFA2000Y (3)

Note 1 Property, plant and equipment

Land Office Motor Plant Total
Buildings Vehicles
R’000s Rs’000 Rs’000 Rs’000 Rs’000
Cost
At 1 Jan 2017 1,960 1,300 252 1,970 5,482
Additions 300 65 30 395
Revaluations 500 500
Disposal (100) (100)
At 31 Dec 2017 2,760 1,365 252 1,900 6,277

Accumulated
Depreciation
At 1 Jan 2017 868 180 634 1,682
Charge for the year 35 40 80 155
Disposal Adjustment (10) (10)
At 31 Dec 2017 903 220 704 1,827

Net Book Values

At 31 Dec 2016 1,960 432 72 1,336 3,800

At 31 Dec 2017 2,760 462 32 1,196 4,450

Note 2
There have been no additions or disposals of Intangible Assets.

Required:
(a) Prepare the statement of cash flows for the year ended 31 Dec 2017 in accordance
with IAS 7 Statement of Cash Flows for Albert Ltd.
[15 marks]

END OF QUESTION PAPER

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