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# THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER, 2012 EXAMINATION FOUNDATION LEVEL SUBJECT: 001.

PRINCIPLES OF ACCOUNTING
Model Solution Solution of Q. No.1. (c) 1. Ending capital balance Beginning capital balance Net income 2. Ending capital balance Beginning capital balance Deduct: Investment Net income (d) PLATINUM CORPORATION
Cash Balance 1. 2. 3. 4. 5. 6. \$ 18,000 - 6,200 11,800 + 2,600 14,400 - 1,600 12,800 + 5,000 17,800 - 1,200 16,600 - 3,400 + + + + + + + Accounts
Receivable

+ + + + + + +

Supplies

+ + + + + + +

Office Equipment

= = = = = = =

Notes Payable

## 12,000 12,000 12,000 + 4,200 16,200 16,200 16,200

Accounts Payable \$ 7,200 - 6,200 1,000 1,000 + 2,600 3,600 3,600 3,600

+ + + + + + +

Capital \$ 27,400 27,400 27,400 27,400 + 11,800 39,200 - 1,200 38,000 - 1,400 - 1,800 - 200 34,600 - 340 34,260 34,260

Fees Earned Drawings Salaries Exp. Rent Exp. Advtg. Exp. Utilities Exp.

+ + +

+ + +

+ + +

## 16,200 16,200 16,200

= = = + +14,000 14,000

+ + +

## SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Solution of Q. No.2. (c) 1 Sales Cost of goods sold: Inventory Jan. 1. ( 4,000 units @ \$ 40 ) Purchases : Jan. 7 10,000 units @ \$ 48 July. 7 20,000 units @ \$ 56 Dec. 21 12,000 units @ \$ 64 Cost of goods available for sale Less: inventory Dec. 31 ( 14,000 units ): Inventory, Jan.1. 4,000 units @ \$ 40 Purchases, Jan. 7. 10,000 units@\$48 Gross margin (c) 2
Sales Cost of goods sold : Inventory Jan. 1. ( 4,000 units @ \$ 40 ) Purchases : Jan. 7 10,000 units @ \$ 48 July. 7 20,000 units @ \$ 56 Dec. 21 12,000 units @ \$ 64 \$ 25,60,000 \$ 1,60,000 \$ 4,80,000 11,20,000 7,68,000

## \$ 25,60,000 \$ \$ 4,80,000 11,20,000 7,68,000 1,60,000

23,68,000 \$ 25,28,000

\$ 1,60,000 4,80,000

6,40,000

18,88,000 \$ 6,72,000

## 23,68,000 \$ 25,28,000 7,68,000 \$ 17,60,000 80,000 16,80,000 \$ 8,48,000 \$ 1,76,000

Cost of goods available for sale ( as above ) Less :Purchase of Dec. 21 (12,000 units @ \$64 ) Cost of goods available for sale Less: Inventory , Dec. 31 ( 2,000 units @ 40 ) Gross margin

## Increase in gross margin by delaying purchase (\$ 8,48,000 - \$ 6,72,000 )

(c) 3
Sales Cost of goods sold: Cost of goods available for sale (as above) Add: Cost of additional 6,000 units @ \$ 64 Cost of goods available for sale Less: Inventory Dec. 31 ( 20,000 units ): Inventory Jan. 1. ( 4,000 units @ \$ 40 ) \$ 25,60,000 \$ 25,28,000 3,84,000 29,12,000 \$ 1,60,000

Purchases July 7. 10,000 units @ \$ 48 \$ 4,80,000 Purchases July. 7. 6,000 units @ \$ 56 Gross margin 3,36,000 9,76,000 19,36,000 \$ 6,24,000

Decrease in gross margin if 18,000 units rather than 12,000 units were purchased on dec. 21 \$ 48,000. (\$ 6,72,000- \$6,24,000)

## SUBJECT: 001. PRINCIPLES OF ACCOUNTING

(c) 4
Gross margin from applying to part 1. Conditions: Sales Cost of goods sold Cost of goods available for sale from part 1. Less : Inventory ( 12,000 @ \$64 + 2,000 @ \$56 ) Jan. 1. Gross margin \$ 25,60,000 \$ 25,28,000 \$ 8,80,000 16,48,000 \$ 9,12,000

Gross margin from applying FIFO to conditions stated in 2 and 3 is the same \$ 9,12,000 . Changes in purchases (and cost of goods available for sale) are offset by equal changes in inventory, leaving gross margin undisturbed. Sales \$ 25,60,000 Cost of goods available for sale 17,60,000 Less : Inventory 1,12,000 Cost of goods sold 16,48,000 Gross margin 9,12,000 # 2,000@\$56 = \$ 1,12,000 # # 18,000 @ \$ 64 = \$ 11,52,000 2,000 @ \$ 56 = 1,12,000 \$ 12,64,000 \$ 25,60,000 29,12,000 12,64,000 16,48,000 9,12,000

## MONALISA COMPANY Bank Reconciliation May. 31 2011 \$ \$ 4,680.75 3,000.00 34,023.00

Cash balance per bank statement Add: Deposit in transit Bank errorTaher Company Less : Outstanding checks Adjusted cash balance per bank

## 7,680.75 41,703.75 6,381,25.00 \$ 35,322.50

Cash balance per books Add: Collection of note receivable ( 10,000 + 400 - 100 )

## 28,907.50 10,300.00 39,207.50

Less : NSF checks Error in May 12. Deposit (4,230.75 4,180.75) Error in recording check no 1181 (3,425.00 3,290.00) Check printing charges Adjusted cash balance per books

## SUBJECT: 001. PRINCIPLES OF ACCOUNTING

C(ii) May 31. Cash \$ 10,300.00 Misc. Expenses 100.00 N/R Int. Revenue 31 A/R W. Huda ( NSF check) Cash 31 Sales ( Error in depositMay 12 ) Cash 31 A/P M. Helal ( Error in recording check no 1181) Cash 31 Misc. Expenses (printing charges) Cash

10,000.00 4,00.00 3,500.00 3,500.00 50.00 50.00 135.00 135.00 200.00 200.00

## SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Solution of Q. No 4: Requirement (a): PHP Manufacturing Company Partial Balance Sheet December 31, 2011 Liabilities: Current liabilities: Accounts payable and accrued expenses Income tax payable Accrued bond interest payable Unearned revenue Current portion of long term debt Total Current liabilities Long-term liabilities: Notes Payable to HSBC Mortgage notes payable Bonds payable Premium on bonds payable Total Long-term liabilities Total liabilities

\$1,63,230 63,000 1,10,000 25,300 70,800 4,32,400 99,000 1,69,994 22,00,000 1,406 24,70,400 29,02,800

Requirement (b): 1. Although the notes payable to HSBC is due in 30 days. It is classified as a long-term liability as it will be refinanced on a long term basis. 2. The pending lawsuit is a loss contingency requiring disclosure, but it is not listed in the liability section of the balance sheet. 3. The \$70,870 of the mortgage note that will be repaid within next 12 months [ \$2,40,864-1,69,994] is a current liability; the remaining balance, due after December 31,2012, is a long term debt. 4. Although the bonds payable mature in seven months, they will be repaid from a sinking fund, rather than from current assets. Therefore, these bonds retain their long-term classification.

## SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Solution of Q. No 5(b): Requirement (a): Motor vehicles List price Less: 20% Add: sales tax 17.5% Add: Cost of painting name Amount to add to non-current-asset register Plant and machinery Cost (\$) Balance as per nominal ledger 120,000 Less: Disposal (30,000) 90,000 Office equipment Revised nominal ledger balances Motor vehicles Plant and machinery Office equipment Acc. Dep (\$) 30,000 (5,700)* [*i.e. (30000 \$24 300)] 24,300

## \$24,000 (4,800) 19,200 3,360 22,560 100 22,660

Cost Acc. Dep Carrying amount \$48,000 \$12,000 \$36,000 90,000 24,300 65,700 27,500 7,500 20,000 165,500 43,800 121,700 Revised non-current asset register (\$147,500 + \$22,660) 170,160 Therefore purchase of office equipment was 48,460 Requirement (b): Depreciation for 20X4 Motor vehicles 25% \$48,000 25% \$22,660 3/12 Plant and machinery 10% \$90,000 Office equipment 10% \$68,460

## \$12,000 1,416 (rounded) 13,416 \$9000 \$6,846

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER - 2012 EXAMINATION PROFESSIONAL LEVEL-I SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING. MODEL SOLUTION Solution to Question No. 1(C)(i) A provision should be made if (a) (b) (c) There is an obligation A transfer is probable There is a reliable estimate The legal costs of Tk. 10,000 should therefore be provided for since they will have to be paid whatever the outcome of the case. However the claim is not likely to succeed and so no provision should be made. A disclosure note should be made for the potential loss of Tk. 100,000. (ii) (iii) IAS 37 states that an obligation can be legal or constructive: In this case the policy of refunds has created a constructive obligation. A provision for Tk. 6,000 should be made. As the success of the claim for damages of Tk. 2,00,000 is probable, it constitutes a present obligation as a result of a past obligating event and would therefore be accounted for as a provision.

The success of the counter claim of Tk. 100,000 is also considered probable and would therefore need to be considered as a contingent asset (reimbursement). Only if it were virtually certain would the counter claim be recognized as an asset in the balance sheet. (d) Sales of Inventory : Adjusting event: (i) Closing inventory must be valued at the lower of cost and net realizable value. The post year end sale provides evidence of the net realizable value. Therefore closing inventory must be adjusted reflect the reduction in value. Share Issue: Non-adjusting event: Fire in warehouse: Non-adjusting event; but if this is the only and main warehouse and the fire affects going concern, the event will be reclassified as adjusting. Bankruptcy of major customer: Adjusting event: The bankruptcy of the customer provides evidence of their ability to pay the debt at the year end. The amount outstanding from the customer at June 30, 2011 should therefore be written off in the year and accounts (v) Acquisition of Shayon Ltd. Non-adjusting event.

## (ii) (iii) (iv)

Solution to Question No. 2. (a) Keya International Ltd. St Statement of Comprehensive Income for the year ended 31 March, 2012 Taka 2,010,000 (950,000) 1,060,000 (246,000) (440,000) 374,000 (10,000) 75,000 439,000 (74,000) 365,000 80,000 445,000

Revenue Cost of sales (W 1) Gross Profit Administrative expenses (W 2) Distribution cost [Tk. 420,000 + (40,000/2)] Profit from operations Finance cost: Investment income Profit before tax Income tax Profit for the period Other comprehensive income (revaluation reserve) Total comprehensive income

Solution to Question No. 2. (b) Keya International Ltd. 5t Statement of Changes in Equity for the year ended 31 March, 2012 Taka Opening balance Revaluation of non-current assets Profit for the year Final dividend paid for 2011 Interim dividend paid for 2012 Closing balance Solution to Question No. 2. (c) Keya International Ltd. 5t Statement of Financial Position as at 31 March, 2012 ASSETS Non-current assets Property, plant and equipment (W3) Investments Taka 610,000 560,000 1,170,000 Current asset Inventories (W1) Advance, deposit and prepayments Accounts receivables 160,000 200,000 470,000 830,000 Total assets EQUITY AND LIABILITIES Capital and reserve Ordinary share capital of Tk. 1 each Revaluation reserve Retained earnings 2,000,000 600,00 600 000 Taka 80,000 80,000 Taka 180,000 365,000 (65,000) (35,000) 445.000

## 600,000 80,000 445,000 1,125,000

Non-current liabilities Term loan Provision for warranty cost (Tk. 205,000 + 16,000) 200,000 221,000 421,000 Current liabilities Accounts payables (Tk. 260,000 + 40,000) Bank overdraft Income tax provision 300,000 80,000 74,000 454,000 Total equity and liabilities 2,000,000

Solution to Question No. 2. (d) Note 1: Tax is not considered for other comprehensive income since tax rate is not available in the question. Note 2: The profit from operations is arrived at after charging Taka Depreciation (Tk. 27,000 + 5,000) Employee benefits (Tk. 150,000 + 80,000 + 40,000) Note 3: A final dividend for 2012 of Tk. 60,000 (10 paisa per share) is proposed. Workings (W): (W1) Cost of sales Purchases Add: opening inventory Goods available for sale Less: Closing inventory Taka 960,000 150,000 1,110,00 160,000 950,000 (W2) Administrative expense Administrative expense as per trial balance Staff bonus (Tk. 40,000/2) Warranty expense Taka 210,000 20,000 16,000 246,000 (W3) Property, plant and equipment (PPE) Cost Revaluation reserve Total cost or revaluation Accumulated depreciation: Opening balance as at 1 April 2011 (balancing figure) Charge for the year (Tk. 27,000 + 5,000) Closing balance as at 31 March 2012 Carrying amount of PPE Land & Buildings 200,000 80,000 280,000 280,000 Plant & Equipment 550,000 550,000 188,000 32,000 220,000 330,000 Total 750,000 80,000 830,000 188,000 32,000 220,000 610,000 32,000 270,000

Solution of Question No. 3(a) Shaad Chemical Industries Ltd Cash flow statement for the year ended 30 June 2012 Taka Cash flows from operating activities Cash generated from operations (Note 1) Interest paid Income tax paid (W3) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W4) Proceeds from sale of property, plant and equipment Purchase of investments Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary shares (W5) Redemption of non-current liabilities (Tk 60,000-50,000) Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at 1 July 2011 Cash and cash equivalents at 30 June 2012
3

## Taka 71,000 (6,000) (3,000) 62,000

(57,000) 20,000 (50,000) (87,000) 45,000 (10,000) 35,000 10,000 10,000 20,000

Note: 1 Reconciliation's of profit/loss before tax to net cash generated from operations for the year ended 30 June 2012 Taka Profit/loss before tax (W1) 46,000 Interest expense (Tk 50,000*12%) Property, plant and equipment - depreciation charge (W2) Profit on disposal of property, plant and equipment (Tk 20,000-18,000) Change in inventories (Tk 11,000-12,000) Change in trade and other receivables (Tk 27,000-29,000) Change in trade and other payables (Tk 27,000-19,000-5,000) Change in provision (Tk 0-2000) Cash generated from operations Workings (W): WI: Calculation of Profit before tax Closing retained earnings Add: Bonus Share[ (50,000/10)*1] Corporate tax Total Less: Opening retained earnings Profit for the period (balancing figure) W2: Calculation of Depreciation on PPE Closing accumulated depreciation Add: Depreciation adjusted for disposal (Tk 40,000-18,000) Total Less: Opening accumulated depreciation Depreciation charged for the year (Balancing Figure) W3: Calculation of Tax Paid during the year Opening balance of tax liability Charge Tax in Income Statement for the year Total tax liability Less: closing balance of tax liability Tax paid during the year (Balancing figure) W4: Calculation of purchase of property, plant and equipment during the year Closing balance of PPE - cost Disposal of assets Total value of PPE - cost Less: Opening balance of PPE - cost Total addition of property, plant and equipment during the year Less: Credit purchase of PPE during the year Total cash purchase -of property, plant and equipment (Balancing figure) W5: Calculation of proceeds from issue of ordinary shares Opening balance of ordinary shares Issue of bonus shares from retained earnings [(50,000/10)* 1] Issue of shares for cash (balancing figure) Closing balance of ordinary shares Share premium (opening balance) Premium from issue of shares (balancing figures) Share premium (closing balance) Total proceeds from issue of ordinary shares
4

6,000 23,000 (2,000) (1,000) (2,000) 3,000 (2,000) 71,000 Taka 149,000 5,000 7,000 161,000 (115,000) 46,000 Taka 70,000 22,000 92,000 (69,000) 23,000 Taka 3,000 7,000 10,000 (7,000) 3,000 Taka 333,000 40,000 373,000 (311,000) 62,000 (5,000) 57,000 Taka 50,000 5,000 40,000 95,000 10,000 5,000 15,000 45,000

Solution to Question No. 4(a) Calculation of value of goods destroyed by fire : Memorandum Trading A/c Dr. Particulars T o Opening stock To Purchases To Gross Profit (25% of Sales) Goods destroyed by Fire =Tk.18,000 Solution to Question No. 4(b) Muttakeen Ltd. Inventory estimation: Retail Method 31" December - 2011 Particulars Beginning inventory ....................... Purchases .......................................... Purchases returns .............................. Cost / Retail Ratio: Tk.220,875 / Tk. 356,250 =0.62 Sales ............................ Tk. 316,148 Less: Sales Returns ........(3,198) Net sales .............................................. Ending inventory at retail ...................... Ending inventory at cost: (Tk.43,300 x 0.62) ... Calculation of cost of Machine Particulars Price of machine Less : Trade discount @ 2% Add : Truncated VAT on goods sold @ 4% Add: Transport Charges @0.25% on Tk. 380,44,000 Installation Charges @1% on Tk. 3 80,44,000 Calculation of borrowing cost 30.09.2010 to 01.12.2010 [(Tk. 3 10,00,000 x 15% )x (2 months / 12 months)] Add : Expenses on trial run Material .............. Tk. 35,000 Wages ................ Tk. 25,000 Overheads .......... Tk.15,005 Total cost of machine ......................................... Amounts (Tk.) 380,44,000 760,880 372,83,120 14,91,325 387,74,445 95,110 380,440 392,49,995 775,000 400,24,995 26,846 Cost (Tk.'000) 20,460 207,735 (7,320) 220,875 Retail (Tk.'000) 31,000 337,271 (12,021) 356,250 Amount (Tk.) 65,000 By Sales Particulars Cr. Amount (Tk.) 500,000 18,000 52,000 570,000

312,950 43,300

## 75,005 Tk. 401,00,000

The capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. And an asset is normally ready for its intended use or sale when its physical construction or production is complete even though routine administrative work might still continue.

Solution to Question No. 5(a) (1) FYR Ltd. should increase its allowance for doubtful debts to Tk.900,000 because the customer's bankruptcy is indicative of a financial condition that existed at the balance sheet date. This is an "adjusting event." (2) IAS 33, Earnings Per Share, requires a disclosure of transactions as "stock splits" or "rights issue," which are of significant importance at the balance sheet. This is a non-adjusting event, and only disclosure is needed. (3) This is an adjusting event because it relates to an asset that was recognized at the balance sheet date. However, as the insurance company's liability is zero, FYR Ltd. must adjust its receivable on the claim to zero.

Solution to Question No. 5(b) The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements. The framework suggests that the financial statements should observe and maintain the following four qualitative characteristics as far as possible within limits of reasonable cost/ benefit. 1. Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. It is not right to think that more disclosures are always better. A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure. No relevant information can be however withheld on the grounds of complexity. 2. Relevance: The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user. 3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless: (a) Transactions and events reported are faithfully represented. (b) Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. This principle is called the principle of 'substance over form'. (c) The reporting of transactions and events are neutral, i.e. free from bias. (d) Prudence is exercised in reporting uncertain outcome of transactions or events. 4. Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both inter-firm and intrafirm comparison. One essential requirement of comparability is disclosure of financial effect of change in accounting policies. 5. True and Fair View: Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The conceptual framework does not deal directly with this concept of true and fair view, yet the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise.

## Solution to Question No. 5(c)

Carrying Value (Tk.) Goodwill .................................. Property, plant, and equipment Inventories .................................. Financial assets ......................... Financial liabilities ..................... 60,00,000 180,00,000 100,00,000 70,00,000 (40,00,000) 370,00,000

## Impairment (Tk.) (60,00,000) (30,00,000) (90,00,000)

Carrying amount after impairment (Tk.) 130,00,000 90,00,000 70,00,000 (40,00,000) 250,00,000

IFRS 5 requires that, immediately before the initial classification of the disposal group as held for sale, the carrying amounts of the disposal group be measured in accordance with applicable IFRS and any profit or loss dealt with under those IFRS. The reduction in the carrying amount of property, plant, and equipment will be dealt with in accordance with IAS 16; the inventory will be dealt with in accordance with IAS 2. After the remeasurement, the entity will recognize an impairment loss of Tk.90,00,000. This loss is allocate in accordance with IAS 36. Thus goodwill will be reduced to zero and property, plant, and equipment to Tk. 130,00,000. The loss will be charged against profit or loss. If not separately presented on the face of the income statement, the caption in the income statement that includes the loss should be disclosed.

## THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA DECEMBER-2012 EXAMINATION MODEL SOLUTION PROFESSIONAL LEVEL-I SUBJECT: 102-COST ACCOUNTING Q. No. 1 (1) Predetermined Overhead Rate = TK.3,500,000/10,000 = TK.350 per MH Applied Factory Overhead = 9,500 MH @ TK.350 per MH = TK.3,325,000 Actual Factory Overhead = 3,385,000 Under applied Factory Overhead TK. 60,000 (2) Predetermined Overhead Rate = TK.3,500,000/15,000 = TK.233.33 per MH (3) Direct Material 350 Direct Labor 289 Manufacturing Overhead (1.5 233.33) 350 Total Cost 989 Mark-up 15% of 148 Price 1137 (4) Applied Factory Overhead Factory Overhead Control Cost of Goods Sold Factory Overhead Control (5) Work in Process Finished Goods Cost of Goods Sold Factory Overhead Control

Dr Cr Dr Cr Dr Dr Dr Cr

## TK.3,375,000 TK.3,375,000 TK.10,000 TK.10,000 TK.250 TK.500 TK.9,250 TK.10,000

Q. No. 2 (b) Purple Manufacturer Statement of Cost of Goods Sold For the month ended June 30, 2012 Workings

Flow of Costs

## Amount (TK.) nil

Amount (TK.)

1. Direct Material Consumed: Beginning Inventory Add: Purchase (-) Purchase Returns and Allowances Net Purchase Raw materials available Less: Ending Inventory Raw Materials Consumed 2. Direct Labor Prime Cost 3. Factory Overhead: Overtime Premium Indirect Material Indirect Labor Utility Cost Depreciation Factory Work Cost Add: WIP Beginning Less: WIP Ending COGM Add: FG Beginning COGAS Less: FG Ending COGS

## 45000 @ TK.7.8 = TK.351,000 1,000 @ TK.7.8 = 7,800

3,43,200 3,43,200 [44,000 (12,000 * 3.5)]*7.8 15,600 34,225 * TK.8 3,27,600 2,73,800 6,01,400 8,900 8,190 8,214 12,100 800

## 38,204 6,39,604 nil nil 6,39,604 nil 6,39,604 nil 6,39,604

Purple Manufacturer Income Statement For the month ended June 30, 2012 Particulars Amount (TK.) Sales (12000 units @ TK.100) Less: Cost of Goods Sold Gross Margin Less: Administrative Expense Salaries 20,000 Interest Expense 2,000 Property Tax 1,500 Depreciation - Office 700 Total Administrative Expenses Marketing Expense Sales Commission (2% of TK.12,00,000) 24,000 Salaries 12,000 Advertising Expense 1,000 Freight Out 600 Total Marketing Expenses Net Operating Income

## Amount (TK.) 12,00,000 6,39,604 5,60,396

24,200

37,600 4,98,596

Answer to Question # 3 (b) Anderson Company Cost of Production Report for October ___________________________________________________________________________ Item Materials Materials purchased Inventory (5,800x .25) Part X Inventory (5,000x.20) Part Y Inventory (6,000x .10) Paint & Enamel Direct Labor Factory Overhead Total Cost Tk.25,000 1,450 Tk.16,000 1,000 Tk.15,000 600 Equivalent Production 67,000 5,000 3,000 Unit Cost

Tk.23,550

75,000 75,000

## 72,000 67,000 73,250* 73,250

Transfer & out (67000xTk.1.69) Work in Process: (3000 units ready for nd 2 Assembly) Material K (3000x.314) Part X (3000x.200) Direct Labor (3000x 62.5%x .62) Overhead (3000x62.5%x.34) (5000 units assembled but not painted) Material K (5000x.314) Part X (5000x.200) Part Y (5000x.200) Direct Labor (5000x 87.5%x .62) Overhead (5000x87.5%x.34)

Tk.1,13,230

Tk.3,342.00

## Tk.1,570.00 1000.00 1000.00 2,712.50 1487.50

7,770.00

11,112 Tk.1,24,342.00

Computation Equivalent production for direct labor and factory overhead: Units finished and send to finished goods warehouse---------Units assembled but not painted : st 25% - 1 operation st 25% - 1 assembly 12-1/2% - Machining and cleaning nd 25% - 2 assembly 87-1/2% x 5000 units-------------------------------------Units ready for 2 assembly: st 25% - 1 operation st 25% - 1 assembly 12-1/2% - Machining and cleaning 62-1/2% x 3000 units-------------------------------------Equivalent Production Answer to Question # 4 4(c)-i The first stage allocation of costs: Activity Cost Pool Processing Supporting Order Customers 1,75,000 25,000 1,35,000 3,10,000 75,000 1,00,000
nd

--------------------- 67,000

## Total (Tk.) 5,00,000 3,00,000 8,00,000

4(c)- ii The Activity Rates A Total Cost (Tk.) 2,80,000 3,10,000 1,00,000 B Total Activity 1,000 units 250 orders 100 customers

Activity Cost Pools Assembling units Processing Order Supporting Customers 4(c)-iii

Activity Rates (A /B) Tk. 280 per unit Tk. 1,240 per order Tk. 1,000 per customer

The overhead cost for the four orders A Activity Cost Rates Activity Cost Pools Assembling units Processing Order Supporting Customers 4(c)-iv The Product and Customer Margin: Filing cabinet product margin Tk. Sales ( Tk. 595 X 80) Costs: Direct materials ( 180 X 80) Direct Labor ( 50 X 80) Volume related overhead (above) Order related overhead Total Costs Product Margin Customer Profitability Analysis- Office Mart Product Margin (above) Less: Customer support overhead (above) Customer Margin Tk. 1,408 Tk. 1,000 -----------Tk. 840 Tk. 47,600 Tk. 280 per unit Tk. 1,240 per order Tk. 1,000 per customer B Activity 80 units 4 orders N/A ABC Cots (A X B) Tk. 22,400 Tk. 4,960 N/A

## 14,400 4,000 22,400 4,960 45,760 1,840

Q. No. 5 (c) i) EOQ = 848.53 ii) [848.53/2 * 500 *0.15] + 3000*12 / 848.53 * 750 = 31,820 + 31,820 iii) SS = 6(150-100) = 300 iv) NMI = 848.53+300 v) AMI = 848.53+300+6(100-50) vi) Reorder Point = SS + Lead Time Usage = 300+6*100=900. When stock level reaches to 900 units, next order should be placed.

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER, 2012 EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I Model Solution Question No. 2. 2(b) Calculation of Deferred Tax Profit for the year 2011 Add: Accounting Depreciation Add: Non admissible item Less: Capital allowances Adjusted Taxable profit Tax at current rate of 35% Current Taxation Tax on current year Profit @35% Under provision in 2010 Million Tk. 90.00 60.00 2.50 152.50 100.00 52.50 18.375

## 18.375 0.50 18.875

Deferred Taxation account Opening Balance Transfer for current year timing difference Balance carried forward Current year timing difference Accounting Depreciation Capital allowances Difference Deferred tax @ 35%

## 60.00 100.00 40.00 14.00

Total tax charge for the year is Tk.32.875 million, out of which Tk.14 million has been deferred and Tk.18.875 million has been currently charged.

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Model Solution Q. No. 3. (c): (i) This is a finance lease to lessee and lessor since lease term covers major part of the economic life of the asset (IAS-17.10.c). Computation of present value of minimum lease payments: PV of annual payments: Tk.18,142.95x4.16986*= Tk.75,653.56 *Present value of an annuity due at 10% for 5 years. KKK Company Lease Amortization Schedule Date Annual Lease Interest (10%) on Reduction of Lease Liability Payment Liability Lease Liability 1/1/2008 Tk.75,653.56 1/1/2008 Tk.18,142.95 Tk.18,142.95 57,510.61 1/1/2009 18,142.95 Tk.5,751.06 12,391.89 45,118.72 1/1/2010 18,142.95 4,511.87 13,631.08 31,487.64 1/1/2011 18,142.95 3,148.76 14,994.19 16,493.45 1/1/2012 18,142.95 1,649.50 16,493.45 0 (ii) 1/1/2008: Leased Equipment Account . Tk.75,653.56 Lease Liability Account Tk.75,653.56 Lease Liability Account. Tk.18,142.95 Cash Account Tk.18,142.95 During 2008: Insurance Expense Account.. Tk.900 Cash Account Tk.900 31/12/2008 Depreciation Expense Tk.15,130.71 Accumulated Depreciation Tk.15,130.71 (Tk.75,653.56/5) Interest Expense .. Tk.5,751.06 Interest Payable. Tk.5,751.06 1/1/2009 Interest Payable Account.. TK.5,751.06 Interest Expense TK.5,751.06 Lease Liability Account . Tk.12,391.89 Interest Expense. 5,751.06 Cash18,142.95 During 2009: Insurance Expense Account.. Tk.900 Cash.. Tk.900 31/12/2009 Depreciation Expense Tk.15,130.71 Accumulated Depreciation.TK.15,130.71 Interest Expense Tk.4,511.87 Interest Payable.Tk.4,511.87

Page 2 of 5

Model Solution Question No. 4.(a) Combined Statements Work Paper Carew Income Statement Sales Opening Inventory Purchases Shipment from home office Shipment to Branch Ending inventory Cost of goods sold Other expenses Net Income Retained Earning Statement: Opening R.E. Net Income Divided Retained Earning Ending Balance sheet: Cash AIR Inventory Investment in Br. Plant & Eqp. H.O. Carew Plant & Eqp. Br. Other Assets Total Current Liabilities Long term Note Payable Carew Unrealized Profit in Shipment Capital Stock Retained Earnings Total 100,000 20,000 95,000 1,15,000 30,000 25,000 60,000 25,000 15,000 57,000 15,000 (10,000) 62,000 33,000 20,000 25,000 32,400 75,000 24,000 30,000 239,400 20,000 Branch 60,000 8,400 6,000 50,400 7,200 43,900 10,000 6,800 6,800 6,800 14,000 25,000 7,200 46,200 7,000 32,400 7,400 6,800 46,200 Enhancement Dr. (2) 30,000 (3) 1,200 31,200 31,200 31,200 (4) 32,400 (1) 1,400 (2) 6,000 31,200 71,000 Combined Balance Cr. (1) 1,400 37,400 37,400 37,400 1,200 (4) 32,400 37,400 71,000 1,60,000 27,000 1,01,000 1,28,000 31,000 97,000 35,000 28,000 57,000 28,000 (10,000) 75,000 47,000 45,000 31,000 75,000 24,000 30,000 252,000 27,000 50,000 1,00,000 75,000 2,52,000

## 1,00,000 62,000 2,39,400

Carew & Company Income Statement For the year ended December 31, 2011 Tk. Sales Cost of goods sold: Beginning inventory Purchases Goods Available Less ending Gross profit on sales Opening expenses Net Income Tk. 160,000

## 97,000 63,000 35,000 28,000

Page 3 of 5

Carew & Company Retained Earnings statement For the year ended December 31, 2011 Tk. 57,000 28,000 (10,000) 75,000

Opening Retained Earnings Add: Net income Less: dividend Ending retained earnings

Carew & Company Balance Sheet As of December 31, 2011 Assets Cash A/R Inventory Plant & Eqp (net of Acc. Dep.) Tk. 47,000 45,000 31,000 99,000 Liabilities Current liabilities Long term W/P Stock holders equity: Capital stock Retained Earnings Other assets Total assets 4(b) Disclosure requirements of Changes in accounting estimates as per IAS 8: An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect (39). If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. (40) 30,000 252,000 Tk. 27,000 50,000 100,000 75,000 175,000

252,000

Page 4 of 5

## Model Solution Question No. 5(b)

Consignment Account in the Books of Hannan Dr. Goods sent to Consignment A/C Cash A/C: Freight Loading Insurance Mannan (Consignee) A/C: Unloading Carrying Rent Mannan's Commission A/C: Profit on Consignment transferred to Profit and Loss A/C 150,000 50,000 10,000 210,000 Taka 500 X 1,000 Taka 500,000 Mannan's A/C (Sales) Goods lost in Transit Consignment Stock
300 X 2,000

## 24,000 16,000 20,000 60,000 30,000 18,000

818,000 Workings:Valuation of goods lost in Transit: Value of consignments Add: Expenses incurred by consignor (1,50,000+50,000+10,000)

818,000

(1)

500 X 1,000

## 500,000 210,000 710,000 142,000 568,000 40,000 608,000 76,000

Less: Amount of loss in transit of 100 units (7,10,000/ 500 X 100) Add: Expenses paid by Consignee after Loss (24,000+16,000) Value of 400 units (2) Value of Consignment Stock: (6,08,000/400 X 50)

Page 5 of 5

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER-2012 EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 202. MANAGEMENT ACCOUNTING

Model Solution
Model Solution Question No. 1. (a) The critic is right in saying that cost allocation is arbitrary. However it may be difficult to avoid this problem by simply not allocating any common costs to other cost objects. This is because cost allocation may be required in one or more of the following cases: * * * (b) Apportioning fixed costs to products for inventory valuation purposes in conformity with IFRSs and External Reporting requirements. Costs may be apportioned to departments or responsibility centers for performance evaluation purposes. Cost plus contracts and cost-based regulations require allocations of common costs.

The two options available to T Company are: A. Sell 80,000 units to the outside market and 20,000 units to the chain store: This option would require T Company to manufacture 80,000 units and the cost of 20,000 units would be irrelevant being a sunk cost. Sell 80,000 units to the outside market and nothing to the chain store: This option would require T Company to manufacture 60,000 units and the cost of 20,000 would be irrelevant being a sunk cost. Tk. 280,000 Tk. 320,000 Tk. 40,000

B.

On the assumption that Option A is chosen, the relevant revenues and costs are: Additional Revenue from 20,000 units sold to the chain store: 20,000 x Tk. 14 = Additional cost to manufacture 20,000 units 20,000 x Tk. 16 =

Option B. i.e. 20,000 units should not be sold to the Chain store and the full 80,000 units should be sold to the outside market. Model Solution Question No. 2. Particulars X Y (i) Offer price Tk. 22 Tk. 28 Variable cost 15 18 Contribution margin Tk. 7 Tk. 10 Machine hours 6 10 CM per Machine hour Tk. 1.1666 Tk. 1 Therefore, Y should be bought from outside due to its lowest CM per machine hour. Total machine hours per table = (6+10+12) or 28 hours. * Current production: 28,000/28 = 1,000 tables Increased production (with 50% more) 1,500 tables Additional production (50%) 500 tables Machine hours required for X Machine hours required for Z Machine hours available for Y Machine hours required for Y Less: Machine hours available Outside purchase of Y 1,500 x 10 6 x 1,500 = 12 x 1,500 =

## 9,000 18,000 27,000 1,000 15,000 1,000 14,000 1,400

(14,000/10)

units

Page 1 of 4

(ii)

Assuming X and Z are used at full capacity, the maximum possible production would be 28,000 / 18 = 1,555 As tables are made in batches of 20, the maximum possible production is 1,540 units. Machine hours required for X 6 x 1,540 = 9,240 Machine hours required for Z 12 x 1,540 = 18,480 27,720 Machine hours available for Y (28,000 27,720) 280 Equivalent units 28 units * The increased production requirement is 1,000 x 175% = 1,750 units The equivalent in batches of 20 1,740 units Required purchase of X and Z (1,740 1,540) 200 units Required purchase of Y (1,740 28) 1,712 units

Model Solution Question No. 3. (a) Sales budget is the detailed schedule showing the expected sales for the budget period expressed in terms of taka and units. On the other hand, in determining the sales budget the sale forecast is required. Budget is prepared on the basis of past sales information, pricing, policy, marketing plan, industry trends, inflation etc. A sales forecast is a technical projection of the potential customers demand for a specified time horizon and with specified underlying assumptions. A sales forecast is connected to a sales plan when management has brought to bear on its judgment, planned strategy, commitments of resources, and managerial commitment to aggressive actions to attain the sales goals. Typically, sales forecasts are prepared at the staff level by technically trained individuals employing numerous sophisticated analyses, such as trend fitting, correlation, mathematical models, exponential smoothing and other operation research techniques. Sales forecasting takes into consideration of the both financial and nonfinancial information. Based on the sales forecast, the budget for the sales are prepared. As such the sales budget is the quantified estimated sales as per the sales forecast. Accordingly, the more accurate the sales forecast, the more accurate is the sales budget. As we know, in the whole budgeting process, the first step is the sales budget, the more accurate the sales budget, the more accurate is the master budget. (c) Workings: P 40,000 25 20 2 60,000 960,000 Q 80,000 50 40 1 100,000 Total

(b)

Budgeted production and sales Sales price per unit Total cost per unit Machine hours (MHR) per unit Demand (Sales potential) Units Fixed cost MHR is used for fixed cost absorption Constraint resources is machine hours Available MHR Fixed cost Tk. 960,000 allocated Fixed cost per unit Total Cost Variable Cost Sales per unit Variable cost per unit Contribution per unit Contribution per MHR Preference of production mix

## 80,000 480,000 12 20 8 25 8 17 8.5 nd 2

80,000 480,000 6 40 34 50 34 16 16 st 1

160,000 960,000

Page 2 of 4

Required (i) Calculation of Profit Product Unit Sales Variable cost Contribution per unit Profit Required (ii) As product Q yields higher contribution per MHR so Q should be produced as much as can demand of product Q is 100,000 required 100,000 MHR Total available MHR 160,000 Needed for product Q (100,000) Available for product P 60,000 With 60,000 MHR, 30,000 of product P can be produced So optimal mix is as below Product Q Product P Unit MHR /Unit 100,000 1 30,000 2 130,000 Profit under optimum production schedule: Product Unit Sales Variable cost per unit Contribution per unit Fixed cost Profit Required (iii) P 30,000 Per Unit Total 25 750,000 (8) (240,000) 17 510,000 Total MHR 100,000 60,000 160,000 P 40,000 Per Unit Total 25 1,000,000 (8) (320,000) 17 680,000 Fixed Cost Q 80,000 Per Unit 50 (34) 16 Total 4,000,000 (2,720,000) 1,280,000 Total

## Total 5,750,000 (3,640,000) 2,110,000 (960,000) (1,150,000)

New Product C requires MHR per unit Installation cost, Capital nature Fixed cost for C (monthly) Variable cost per unit for C As evident from the requirement (ii), Product P can be discontinued Lost contribution by discontinuance of Product P 15% yield on BDT 200,000 Fixed cost for product C Required contribution from sale of Product C Number of MHR available for Product C Units that can be produced (1.5 MHR per unit) Variable cost Contribution per unit Selling price per unit of Product C The income statement under new product mix is as below: Product Unit Sales Variable cost per unit Contribution per unit Fixed Cost Additional Fixed Cost Profit P 40,000 Per Unit Total 36 1,440,000 (21) (840,000) 15 600,000

1.5 Tk. 200,000 Tk. 60,000 Tk. 21 Tk. 510,000 Tk. 30,000 Tk. 60,000 Tk. 600,000 60,000 40,000 Tk. 21 Tk. 15 Tk. 36

## Total 6,440,000 (3,240,000) 2,200,000 (960,000) (60,000) 1,180,000

Page 3 of 4

Model Solution Question No. 4. Contribution from Economy Class: Average fare Less: Variable costs: Meal cost Baggage handling Required contribution from Business Class: 46,500 x 1.5 Add: Variable cost: Meal cost Baggage handling Business class fare

## Tk. 4,500 1,000

5,500 75,205

Model Solution Question No. 5. (a) The company should accept orders first for R, second for P, and third for Q. The computations are: Sl. 1. 2. 3. 4. 5. (b) DETAILS Direct materials required per unit Cost per pound Pounds required per unit [(1) (2)] Contribution margin per unit Contribution margin per pound of materials used [(4) (3)] P Tk. 32 4 8 Tk. 48 Tk. 6 Q Tk. 20 4 5 Tk. 24 Tk. 4.80 R Tk. 12 4 3 Tk. 33 Tk. 11

Sales value if processed further (7,000 units Tk. 12 per unit) Sales value at the split-off point (7,000 units Tk. 8.55 per unit) Incremental revenue Less cost of processing further Net disadvantage of processing further Target selling price per unit to earn additional Tk. 11,510: (P Tk. 8.55) x 7,000 Tk. 25,380 = Tk. 11,510 P = Tk. 13.82.

Tk. 84,000 Tk. 59,850 Tk. 24,150 Tk. 25,380 Tk. (1,230)

Page 4 of 4

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER-2012 EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 204. TAXATION

## Solution Solution of Question No. 2.

(c) Profit as per audited accounts Add: CSR expenditure (inadmissible) Total Income Income Tax @ 37.5% Less: Tax Rebate on CSR expenditure @10% on Tk. 10,000,000 Tax payable Lower of: 22,000,000 Tk. 100,000,000 10,000,000 110,000,000 41,250,000 1,000,000 40,250,000

20% of Total income or Tk. 80,000,000 or Actual expenditure i.e., allowed amount

## Solution of Question No.3.

1. Commission (brokerage) paid for placing the shares of the company Tk. 100,000. Not deductible due to being Capital Expenditure. 2. Compensation to forcedly retired official Tk. 200,000. Not deductible due to being non-recurring and not in the nature of salary 3. Capital expenditure on hospital for employees. Deductible as per section 29(1) (XXIII). 4. Trade penalties and law expenses (for infringement of the customs law) Not deductible due to being spent for violation of laws. 5. Anticipated loss written off. Not deductible, since unrealized. Even realized capital loss not allowed for setting off. Page 1 of 6

## Solution of Question No.4(c).

Written down value = Cost Tk. 180,000 Tax depreciation Tk. 50,000 = Tk. 130,000 (i) (ii) (iii) Sale proceeds of the machine Tk. 150,000 Tk. 210,000 Tk. 260,000 Written down value 130,000 130,000 130,000 Capital Gain * 20,000 80,000 130,000 Income under other heads 150,000 150,000 150,000 Total income 170,000 230,000 280,000 Tax computation: Tax on first Tk. 235,000 @ 0% Nil Nil Nil Tax on next amount up to Tk. 300,000 @ 10% Nil 500 5,500 Total Tax Nil 3,000** 5,500 * Capital gain arises on machine disposed before the expiry of five years from the date of acquisition and hence, no separate is applicable [para 2(b) 9i), 2nd Sch.] Minimum tax for total income exceeding exemption limit of Tk. 225,000.

**

## Solution of Question No. 5.

A. Computation of Total Income: Statement of income of the Assessee Statement of income during the income year ended on 30 June 2012 Heads of Income Income from business or profession: u/s 28 Income from ICMAB as Examiner Tk. 307,300; Income from business Tk. 58,212 Income from Fisheries Tk. 100,000 Share of profit in a firm: (Tax paid by the firm) Capital Gains: u/s 31 Sale of Shares of publicly listed company Tk. 69,032 (tax exempted as per SRO 269) Income from other source: u/s 33 Bank interest Tk. (539,380+49,056) Int. from leasing company Tk. 1,227,085 Cash dividend Tk. 1,500 (6,500 less exempted up to 5,000) Govt. prize bond lottery u/s 82C Tk. 10,000 Total (serial no. 1 to 4) Foreign income: Income from House at London and not remitted to Bangladesh GBP 10,000 equivalent to BDT1,300,000 Total Income Amount in Taka 465,512

Sl. No. 1.

2. 3.

499,454 -

4.

1,827,021

5. 6.

2,691,987 1,300,000

7.

4,091,987

Page 2 of 6

Investment Tax Rebate Calculation Schedule-3 (Investment tax credit): (Section 44(2)(b) read with part B of Sixth Schedule) Sl. No. 1. 2. Particulars Life insurance premium Others, if any (give details) Bangladesh Sanchaypatra Tk. 200,000 Secondary (Share of Ananda Shipyard & Shipways Ltd. Tk. 800,000) Total Amount in Taka 28,200 1,000,000

1,028,200

Investment Tax Rebate Calculation Sl. No. I. II. Particulars Total Income applicable for calculating investment tax rebate Income not permitted for calculating income base Employers contribution to Provident Fund Tk. N/A [u/s 44(2); 6th Schedule Part B, para 5 read with 1st Schedule Part B, para 4 proviso.] Any Income u/s 82C Tk. 10,000 Any income with reduced tax rate as per SRO Tk. 100,000 [Income from Fisheries] Income base for computing investment allowance [u/s 44(3)] 20% of Income Base (20% of III) Taka 10,000,000 (Maximum Limit of Income base) Actual investment during the period (Schedule 3) Lower of 20% of Income base or Tk. 10,000,000 or Actual Investment Tax rebate u/s 44(2)(b) as per schedule 3 [10% x VII] Amount in Taka 4,091,987 110,000

## 3,981,987 796,397 10,000,000 1,028,200 796,397 79,640

B. Computation of Tax Payable (a) Total Income considered for tax liability under regular tax slab: Sl. No. I. II. Particulars Total Income from all sources Less, Income NOT considered for tax liability under regular tax slab Govt. prize bond lottery u/s 82C Tk. 10,000 Income from Fisheries Tk. 100,000 Total Income considered for tax liability under regular tax slab Amount in Taka 4,091,987 110,000

III.

3,981,987

Page 3 of 6

b) Calculation of Tax Leviable on Total Income considered for regular tax slab: [u/s 16(1) read with Finance Act/ordinance (applicable for the Assessment Year) Schedule 2 or 3] Tax Slab 200,000 300,000 400,000 300,000 2,781,987 on the 1st Tk. on the 1st Tk. on the 1st Tk. on the 1st Tk. on balance Tk. Total Income 200,000 300,000 400,000 300,000 2,781,987 3,981,987 Rate @ 0% @ 10% @ 15% @ 20% @ 25% Tax Liability (Taka) 30,000 60,000 60,000 695,497 845,497

(c) Tax Leviable on Income for separate consideration other than regular tax slab Sl. No. I. II. III. Particulars Tax Leviable on Income form Govt. prize bond lottery u/s 82C Tax Leviable on Income form Income from Fisheries Tax Leviable on Income for separate consideration other than regular tax slub (I+II) Amount in Taka 2,000 5,000 7,000

(d) Total tax Leviable on Income from all sources: Sl. No. I. II. III. Particulars T ax Leviable on Total Income under considered for regular tax slab T ax leviable on Income for separate consideration other than regular tax slab (c) Total tax Leviable on Income from all sources (I+II) Amount in Taka 845,497 7,000 852,497

(e) Proportionate tax credit on taxed Share of profit in a firm(s) and Foreign Tax Credit: e1: Proportionate tax credit on taxed Share of profit in a firm(s) Calculation Sl. No. I. II. III. Iv. Particulars Total Income from all sources Share of profit in a firm Total tax Leviable on Income form all sources less Investment tax Rebate (considered as base for tax credit calculation) Proportionate tax credit applicable on taxed share of profit in a firm (s) (III I x II) [Sixth schedule Part B, Para 16] Amount in Taka 4,091,987 499,454 772,857 94,332

Page 4 of 6

e2: Foreign Tax Credit Calculation Sl. No. I. II. III. IV. V. VI. Particulars Total Income from all sources Foreign Income as per return Total tax Leviable on Income from all sources less Investment tax Rebate (considered as base for tax credit calculation) Foreign tax Credit at Average Rate (III I x II) Foreign tax Actually Paid GBP 1,000 equivalent BDT 130,000 Foreign Tax Credit applicable at Average Rate not exceeding Actual Payment [Seventh Schedule Para 4] Particulars Investment Tax Rebate (B) Proportionate tax on taxed Share of profit in a firm (s) (e1) Foreign Tax Credit at Average Rate not exceeding Actual Payment (e2) Total Tax Rebate and Tax Credit Particulars Tax Leviable of Total Income from all sources (d) Total Tax Rebate and Tax Credit (f) Tax Liability of Total Income less Tax rebate Wealth Surcharge @ 10% on Tax Liability after deducting Tax Rebate as Net Wealth exceeds Tk. 2 crore Particulars Tax Liability of Total Income from all sources (d) Less, total Tax Rebate and Tax Credit (f) Add, Wealth Surcharge (g) Tax Payable including Wealth Surcharge (I II + III) Less, Tax payments: Tax deducted/collected at source Tk. 184,203 Interest income from leasing company Tk. 1,227,09 Bank interest income Tk. 58,844 Cash dividend income Tk. 650 Income from Govt. Prize bond u/s 82C Tk. 2,000 Advance tax u/s 64/68 Tk. 99,800 Balance Tax need to be paid u/s 74 before submitting the return (IV-V) Amount in Taka 4,091,987 1,300,000 772,857 245,532 130,000 130,000

f) Total Tax Rebate and Tax Credit: Sl. No. I. II. III. IV. Sl. No. I. II. III. IV. Amount in Taka 79,640 94,332 130,000 303,972 Amount in Taka 852,497 303,972 548,525 54,852

g) Wealth Surcharge:

h) Tax Payable Calculation: Sl. No. I. II. III. IV. V. Amount in Taka 852,497 303,972 54,852 603,377 284,003

VII.

319,374

Page 5 of 6

## Solution of Question No. 6.

ABC Bank Limited Assessment Year 2012-2013 Computation of Taxable Income and Tax Liability Particulars Net profit as per audited accounts Less: Income to be considered separately Income from Investment Add: Expenses to be considered separately Accounting Depreciation Provision for Bad and Doubtful Debt Entertainment Expenses Add: Inadmissible Expenses Perquisites Printing and Advertisement Other Expenses Less: Expenses admissible but under separate rates Tax Depreciation Bad Debt. (accepted by Tax authority) Add: Income from Investments Less: Entertainment Expenses (Note 1) Total Taxable Income Calculation of Tax Liability: Taxable Income: Tk. 412,800 @ 45% Tax on Excess Profit @ 15% (Note 2) Net Tax Liability Tk. 185,760 nil Tk. 185,760 Taka Taka 258,000 100,000 158,000 50,000 42,000 65,000

157,000 315,000

100,000 415,000

80,000 5,000

## 85,000 330,000 100,000 430,000 17,200 412,800

Notes: 1. The rate for allowable entertainment expenses is 4% on income of first Tk. 1,000,000 and 2% on rest, if any. Thus, in this case entertainment expense will be Tk. 17,200 (4% of Tk. 430,000). 2. Calculation of Excess profit under section 16 C of the IT Ordinance 1984: Capital and Reserve: Paid up Capital Statutory Reserve Retained Earnings Dividend Equalization Fund Total Capital Profit: 50% thereof Actual Profit Excess Profit Tk. 2,000,000 750,000 250,000 200,000 3,200,000 1,600,000 412,800 nil

Page 6 of 6

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER 2012 EXAMINATION PROFESSIONAL LEVEL-III SUBJECT: 301.ADVANCED FINANCIAL ACCOUNTING-II. SOLUTION
Solution to Question 1 BATMAN LTD ROBIN LTD 80% Batman Ltd Robin Ltd Batman Ltd 80% MI 20% A. Consolidation worksheet entries Acquisition analysis At 1 July 2010: Net fair value of identifiable assets, liabilities and contingent liabilities of Robin Ltd = (\$250 000 + \$10 000 + \$10 000) (equity) + \$10 000 (1 30%) (inventory) + \$20 000 (1 30%) (land) + \$20 000 (1 30%) (plant) + \$10 000 (1 30% ) (patent) - \$25 000 (goodwill) = \$287 000 Net fair value acquired = 80% x \$287 000 = \$229 600 Cost of combination = \$264 800 Goodwill acquired = \$35 200 Unrecorded goodwill acquired = \$35 200 (80% x \$25 000) = \$15 200 1. Business combination valuation entries at 30 June 2011 Cost of Sales Dr 10 000 Income Tax Expense Cr 3 000 Transfer from Business Combination Valuation Reserve Cr 7 000 Carrying Amount of Land Sold Income Tax Expense Transfer from Business Combination Valuation Reserve Trademark Deferred Tax Liability Business Combination Valn Reserve Accumulated Depreciation - P&E Plant and Equipment Deferred Tax Liability Business Combination Valn Reserve Dr Cr Cr Dr Cr Cr Dr Cr Cr Cr 20 000 6 000 14 000 10 000 3 000 7 000 130 000 110 000 6 000 14 000

Page 1 of 8

Depreciation Expense - P&E Accum. Depreciation - P&E (\$20 000 /5) Deferred Tax Liability Income Tax Expense 2. Pre-acquisition entry 30/6/11 Retained Earnings (1/7/05) Dr Transfer from General Reserve Transfer from Business Combination Valuation Reserve Interim Dividend Paid Share Capital General Reserve Business Combination Valuation Reserve Goodwill Shares in Robin Ltd 3. MI share of equity at 1 July 2010 Retained Earnings (1/7/05) Share Capital General Reserve Business Combination Valuation Reserve MI 4. MI share of equity: 1/7/10 30/6/11

Dr Cr

4 000 4 000

Dr Cr

1 200 1 200

8 000 Dr Dr Cr Dr Dr Dr Dr Cr

6 400 16 800 4 000 200 000 1 600 16 800 15 200 260 800

Dr Dr Dr Dr Cr

## 2 000 50 000 2 000 8 400 62 400

MI Share of Profit Dr 2 440 MI Cr (20% (\$36 000 (\$10 000 - \$3 000) (\$20 000 - \$6 000) (\$4 000 \$1 200))) Transfer from General Reserve General Reserve (MI share of reserve transfer) Transfer from Business Combination Valuation Reserve Asset Revaluation Reserve (20% (\$7 000 + \$14 000)) MI Dividend Paid (20% x \$10 000) MI Final Dividend Declared (20% x \$4 000) Dr Cr 1 600

2 440

1 600

Dr Cr

4 200 4 200

Dr Cr

2 000 2 000

Dr Cr

800 800

Page 2 of 8

5. Interim dividend paid Dividend Revenue Dr 4 000 Interim Dividend Paid Cr (80% x \$5 000) 6. Final dividend declared Dividend Payable Dr 3 200 Final Dividend Declared Cr (80% x \$4 000) Dividend Revenue Dr 3 200 Dividend Receivable Cr 7. Inter-entity sales of inventory: Robin Ltd Batman Ltd Sales Dr 8 000 Cost of Goods Sold Cr Inventory Cr Deferred Tax Asset Dr 300 Income Tax Expense Cr 8. MI adjustment MI Dr MI Share of Profit Cr (20% x \$700) 9. Transfer of plant to inventory: Robin Ltd Batman Ltd Proceeds on Sale of Plant Dr 15 000 Carrying Amount of Plant Sold Cr Inventory Cr Deferred Tax Asset Income Tax Expense 10. MI adjustment MI MI Share of Profit (20%(\$5 000 - \$1 500)) (b) Dr Cr 1 500

4 000

3 200

3 200

## 7 000 1 000 300 140 140

10 000 5 000

1 500

Dr Cr

700 700

BATMAN LTD Consolidated Income Statement for financial year ended 30 June 2011 Income: Sales revenue Other income Expenses: Cost of sales Other Profit before income tax Income tax expense Profit for the period Attributable to: Parent shareholders Minority interest

\$364 000 97 800 461 800 293 000 98 000 391 000 70 800 26 000 \$44 800 \$43 200 \$1 600 Page 3 of 8

## Solution of Question No. 2.

Required (a): Sun-Moon Ltd. Income Statement For the year ended 31st December, 2010 Home Office Tk. Tk. Revenue from Sales: Sales Shipment to Branch Less: Cost of Goods Sold: Opening Inventory (+) Purchases (+) Shipment from Home Office (+) Freight-in (-) Ending Inventory (-) Goods in Transit Gross Margin on Sales Less: Operating Expenses: Administrative Expense Salary Expense Accrued Salary Expense Rent Expense Insurance Expense Store Supplies Expense (W-ii) Depreciation Expense (W-iii) Net Income Required (b): Sun-Moon Ltd. Consolidated Balance Sheet 31st December, 2008 Tk. Assets: Current Assets: Cash: Home Office Branch Office Cash in Transit (W-iv) Merchandise Inventory: Tk. 148,228 35,700 183,928 110,250 87,850 6,467 204,575 (84,700) (5,950) (113,925) 70,003 9,975 14,875 910 9,450 9,100 1,960 2,975 (49,245) 20,750 2,800 8,225 400 5,250 2,450 980 1,260 (21,365) 5,440 50,400 14,350 29,50 3,675 98,175 (51,100) (47,075) 15,925 63,000 Branch Office Tk. Tk.

## 28,175 7,000 3,970

39,145
Page 4 of 8

Home Office 84,700 Branch Office 51,100 Goods in Transit (W-i) 5,950 Accounts Receivable: Home Office 99,750 Branch Office 47,250 Store Supplies: Home Office 1,330 Branch Office 1,050 Non-Current Assets: Furniture: Home Office 29,750 (-) Accumulated Depreciation (8,750+2,975) (11,725) Branch Office 12,600 (-) Accumulated Depreciation (1,890+1,260) (3,150) Total Assets Liabilities and Shareholders Equity: Current Liabilities: Accounts Payable: Home Office 122,897 Branch Office 14,700 Accrued Salaries: Home Office 910 Branch Office 400 Stockholders Equity: Common Stock (Tk. 10) 227,500 Retained Earnings (23,975) Net Income (20,758 5,440) 15,318 Total Liabilities and Shareholders Equity Working Notes: (i) Goods in Transit: Shipment to Branch = 35,700 (-) Shipment to H. O. = 29,750 5,950 (ii) Store Supplies Expense: Home Office = (3,290 1,330) = 1,960 Branch Office = (2,030 1,050) = 980 (iii) Depreciation Expense on Furniture: Home Office = 29,750 x 10% = 2,975 Branch Office = 12,600 x 10% = 1,260 (iv) Cash in Transit: Branch Office Current A/c = 110,160 (-) Home Office Current A/c = 106,190 3,970

141,750

147,000

2,380

## 18,025 9,450 357,750

137,597

1,310

218,843 357,750

Page 5 of 8

Solution of Question 3(a) and 3(b) Basic information Profit after interest after tax Loan stock interest net of 20% tax Profit adjusted for net of tax interest savings Ordinary shares Bonus issue 1 for 4 Rights issue one for 5 31/10/12 Tk.62,800 Tk.10,000 Tk.72,800 1,000,000 250,000 1,250,000 250,000 30/10/11 Tk.50,000 (Tk.10,000) Tk.40,000 1,000,000 250,000 1,250,000

Weighted average shares in current period incorporating the rights issue Computation of theoretical ex rights price Issue price of one share was Market value of 5 shares prior to rights issue 5 x Tk.1.40 Six shares total value of Theoretical ex rights price of a share (Tk.7.70 divided by 6) Tk.0.70 Tk.7.00 Tk.7.70 Tk.1.28 rounded

Computation of the weighted average number of shares for current year (Cum Rights/Ex Rights) x Share in existence pre-rights x proportion of the year Plus Total Post rights shares x proportion of the year (1.40/1.28) x 1,250,000 x 9/12 months Plus 1,500,000 x 3/12 months Total weighted average Basic EPS Profit after interest after tax Number of Wt. Ordinary shares in issue Previous year basis EPS adjusted for R.I. Basic [rounded] Diluted EPS for current year 31/10/12 Profit net of tax interest savings Weighted average shares outstanding (1,400,390 + 130,000) Diluted EPS is The EPS is fact anti-dilutionary Tk.72,800 1,530,390 Tk.0.048 Tk.0.045 31/10/12 Tk.62,800 1,400,391 x 1.28/1.40 Tk.0.037 = = 1,025,391 375,000 1,400,391 31/10/11 Tk.50,000 1,250,000

Note both years are adjusted for bonus without pro-rata as no funds involved.

Page 6 of 8

(c) Importance of EPS Comments should include reference to use EPS as an input for both Price Earning and Earning Yield and which quoted regularly on the business pages in respect of listed companies. The dangers of comparing P/E ratios with other companies where alternative accounting approaches are permitted for the same transactions example IAS 23 alternative treatment for borrowing costs Differences in P.E ratio of similar type and scale of companies arising because one entity is listed and the other is private. The need for other ratios and other factors to be incorporated in any assessment for example the current cash squeeze the greater emphasis may be on liquidity and the need to meet day to day commitments Solution of Question No. 4. (a) A share option is an instrument giving the holder the right to buy or sell a set number of shares in the company by a set date at a set price. Options can be issued for a price or at no cost to the recipient. If issued for a price, an options ledger account is used. On expiry of the exercise date, this account balance is transferred to share capital (for the number of options exercised x the options price) and to lapsed options reserve (for the number of options lapsed x the options price). Where options are issued at a cost, then the amount received is disclosed in the balance sheet as an increase in equity and shown below the companys share capital. (b) On issuing the options Cash Share Options (Being the issue of 36,000 options at Tk.5 each) At the time of exercising options: Cash Tk. 450,000 Tk. 450,000 Tk. 180,000 Tk. 180,000

Share Options (Being issue of 30,000 shares on payment of of Tk.15 per share)

## Tk. 180,000 Tk.150,000 Tk. 30,000

Lapsed options Reserve (Being write-off of share options, reflecting those options exercised and those lapsed,)

Page 7 of 8

(c)

Facts: Kurashiki Ltd holds 1/3 of ordinary shares of Saga Ltd Sasebo Ltdholds 1/3 of ordinary shares of Saga Ltd Kanzawa Ltd holds 1/3 of ordinary shares of Saga Ltd Kurashiki Ltd owns call options that would give it 100% of the voting rights of Saga Ltd. Management do not intend to exercise the options The existence of the potential voting rights, as well as the other factors described in paragraph 13 of BAS 27 and paragraphs 6 and 7 of IAS 28, are considered and it is determined that Kurashiki Ltd controls Saga Ltd. The intention of Kurashiki Ltds management does not influence the assessment. However, there is some debate over whether this is the correct answer. Kurashiki Ltd has not at balance date exercise the options Kurashiki Ltd may never exercise the options It may not be in Kurashiki Ltds economic interest to exercise the options There may be no parent of Saga Ltd

Page 8 of 8

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER, 2012 EXAMINATION PROFESSIONAL LEVEL-III SUBJECT: 302. ADVANCED COST ACCOUNTING Model Solution Model solution of question no. 01(d) Requirement (i): Quantity Schedule for three departments Particulars Units started in process Units received in preceding dept. Units transferred to next dept. Units transferred to finished goods room Units still in process Units lost in process Total Requirement (ii): Blending Department Materials Labour & FOH 5,400 5,400 2,400 800 7,800 6,200 Testing Department Prior Deptt. Labour & & Materials FOH 3,200 3,200 1,800 600 5,000 3,800 Terminal Testing Prior Deptt. Labour & & Materials FOH 2,100 2,100 900 600 3,000 2,700 Blending 8,000 5,400 2,400 200 8,000 Testing 5,400 3,200 1,800 400 5,400 Terminal 3,200 2,100 900 200 3200

## Particulars Transferred out Units still in process

Requirement (iii): Units Cost of FOH in the Blending Department: Tk. 5,580/6,200 = Tk. 0.90 per unit Requirement (iv): Lost unit cost adjustment in Testing Department: Tk. 5.35X5,400= Tk. 28,890 cost transferred in from Blending Department Tk. {28,890/(5,400-400 lost units)} Tk. 5.778 new unit cost Tk. 5.778 new unit cost Tk. 5.350 old unit cost Tk. 0.428 lost unit cost adjustment

## SUBJECT: 302. ADVANCED COST ACCOUNTING

Model solution of question no. 2(b) Requirement (i): Markup percentage cost

= Required ROI x Investment + SG & A/Volume of units x Units product = {(12% x Tk. 7,50,000) + Tk. 50,000}/(14,000 units x Tk. 25) = Tk. 1,40,000/ Tk.3,50,000 = 40%

Requirement (ii): Unit product cost Markup 40% x Tk. 25 Target selling price per unit

## Tk. 25 Tk. 10 Tk. 35

2 (c) Requirement (i) Time rate to be used: Technicians wages including fringes benefits [(tk. 120,000+ Tk.30,000 = Tk. 150,000)/10,000 hours] Tk. 15 Prorata share of selling and other costs ( Tk. 90,000/10,000 hours) Tk. 9 Desired profits per hour of technicians time Tk. 6 Total charging rate per hour for service Tk. 30 Material loading charge: Ordering, handling and storing cost Desired profit on parts Material loading charge Requirement (ii) The cost of the job would be Time charge (Tk. 30 x 2.5 hours) Material charge: Invoice cost of parts Tk. 80 Material loading charge (60% of Tk. 80) Tk. 48 Billed cost of the job

Tk. 75

## Tk. 128 Tk. 203

SUBJECT: 302. ADVANCED COST ACCOUNTING Model solution of question no. 3 (a)

The performance of the production director could be looked at considering each decision in turn. The new wood supplier: The wood was certainly cheaper than the standard saving Tk. 5,100 on the standard the concern though might be poor quality. The usage variance shows that the waste levels of wood are worse than standard. It is possible that the lower grade labour could have contributed to the waste level but since both decisions rest with the same person the performance consequences are the same. The overall effect of this is an adverse variance of Tk. 2,400, so taking the two variances together it looks like a poor decision. As the new labour is trained it could be that the wood usage improves and so we will have to wait to be sure. The impact that the new wood might have had on sales cannot be ignored. No one department within a business can be viewed in isolation to another. Sales are down and returns are up. This could easily be due to poor quality wood inputs. If SW operates at the high quality end of the market then sourcing cheaper wood is risky if the quality reduces as a result. The lower grade of labour used: Reebok uses traditional manual techniques and this would normally require skilled labour. The labour was certainly paid less, saving the company Tk. 43,600 in wages. However, with adverse efficiency and idle time of a total of Tk. 54,200 they actually cost the business money overall in the first month. The effi ciency variance tells us that it took longer to produce the bats than expected. The new labour was being trained in April 2012 and so it is possible that the situation will improve next month. The learning curve principle would probably apply here and so we could expect the average time per bat to be less in May 2010 than it was in April 2012.
3 (b)

Variance for May 2012: Material price variance (Tk. 196,000/40,000 5) x 40,000 = Tk. 4,000 Fav Material usage variance (40,000 (19,200 x 2)) x Tk. 5/kg = Tk. 8,000 Adv Labour rate variance (Tk. 694,000/62,000 12) x 62,000 = 50,000 Fav Labour effi ciency variance (61,500 57,600) x 12 = 46,800 Adv Labour idle time variance 500 x 12 = 6,000 Adv Sales price variance (68 65) x 18,000 = 54,000 Adv Sales volume contribution variance (18,000 19,000) x 22 = 22,000 Adv

## SUBJECT: 302. ADVANCED COST ACCOUNTING

Model solution of question no. 04. (a) If the analysis focuses on the gross margin the Country Wear appears most profitable under the conventional approach in terms of net profit and return on sale. However the promotion and distribution cost can be traced to each product and after taking these costs into account the Country Wear still appears most profitable, although the Evening Wear has a higher return on sales. Evening Wear Country Wear Sales revenue Cost of goods sold Gross margin Promotion costs Distribution costs Net profit (b) Tk.350,000 250, 000 Tk.100,000 2,000 3,000 Tk.95,000 Tk.650,000 450,000 Tk.200,000 20,000 60,000 Tk.120,000

Under the life cycle approach, the Evening Wear appears more profitable as it requires much less non-manufacturing support. YEAR 1 Design costs Net loss YEAR 2 & 3 Sales revenue Cost of goods sold Gross margin Promotion costs Distribution costs Net profit Evening Wear Tk.20,000 Tk.20,000 Evening Wear Tk.350,000 250,000 Tk.100,000 2,000 3,000 Tk.95,000 Country Wear Tk.100,000 Tk.100,000 Country Wear Tk.650,000 450,000 Tk.200,000 20,000 60,000 Tk.120,000

Profit over the life cycle* Tk.170,000 Tk.140,000 * The life cycle profit = Year 1 + 2 x Year 2/3 A complete life cycle analysis reports revenues and costs for each year of the products life. It could also require information on the volume of production and sales. (c) The life cycle cost will be more useful as it ensures that products cover all their costs over their (often short) life cycles. In order to undertake a complete profitability analysis for the two product lines, a complete list of revenues and costs for each year of the products life is required. It could also require information on the volume of production and sales. In addition, a more accurate analysis recognising time value of money can be performed by discounting three years estimated cash flows using the firms required rate of return.

(d)

SUBJECT: 302. ADVANCED COST ACCOUNTING Model solution of question no. 05(a).

Target costing process Target costing begins by specifying a product an organisation wishes to sell. This will involve extensive customer analysis, considering which features customers value and which they do not. Ideally only those features valued by customers will be included in the product design. The price at which the product can be sold at is then considered. This will take in to account the competitor products and the market conditions expected at the time that the product will be launched. Hence a heavy emphasis is placed on external analysis before any consideration is made of the internal cost of the product. From the above price a desired margin is deducted. This can be a gross or a net margin. This leaves the cost target. An organisation will need to meet this target if their desired margin is to be met. Costs for the product are then calculated and compared to the cost target mentioned above. If it appears that this cost cannot be achieved then the difference (shortfall) is called a cost gap. This gap would have to be closed, by some form of cost reduction, if the desired margin is to be achieved.
05(b) a Cost per check-in: Total cost No. of passengers processed Cost per check-in b International \$42 000 3 500 \$12 Domestic \$99 000 11 000 \$9

Although the domestic terminal has the higher cost level, it also has a higher throughput. Many of the costs are fixed, and they are also the most significant ones: managerial and staff salaries, depreciation on various types of equipment and allocated rent. As these fixed costs are spread over a larger number of passengers, their impact becomes less. Also, the check-in procedures for domestic passengers will be simpler than those for international passengers. They have no passports to check, they frequently have only cabin baggage (especially business passengers) and there are no complications of passengers who are disembarking at different locations along the way most domestic flights are direct and one-stop. Process costing is used (and is relatively accurate) when products or services are homogeneous. While mass service entities such as the one under consideration display some of the characteristics of homogeneity, it is almost certain that the check-in processes differ between passengers. The services described in (2) above, such as the number of locations and the amount of luggage, may vary from one passenger to the next. Anybody who has ever stood in an airport check-in queue has observed that some passengers have a highly-developed capacity for creating problems at check-in for a variety of reasons! The cost per check-in calculated above has limited value for Airport Services Ltd management. It cannot be used for setting fees or determining profitability, since there are no fees charged. The service cannot be promoted or withdrawn as it is an essential component of the entire service of passenger transport. It may have some use in controlling costs by comparing actual costs with budgeted costs, or similar costs from previous periods, or for benchmarking with other airports.

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER-2012 EXAMINATION PROFESSIONAL LEVEL-IV MODEL SOLUTION SUBJECT: 401-FINANCIAL MANAGEMENT

Model Solution
Solution to Q. No. 2(a)
Calculation of Duration of the Bond Year 1 2 3 4 5 5 Total Cash flow (Tk.) 60 60 60 60 60 1050 PV factor (8%) 0.9259 0.8573 0.7938 0.7350 0.6806 0.6806 Present value of CF 55.55 51.44 47.63 44.10 40.84 714.63 954.19 PV multiplied by year 55.55 102.88 142.89 176.40 204.20 3,573.15 4,255.07

Duration =

## Answer to the Question No.2(b)

Requirement-(i). Differential return as per Jensen ratio is calculated as
p = R p E (R p ) The expected return of the portfolio E(R p ) can be calculated using the CAPM formula: E(R p ) = R f + p (R m R f ) Expected Return of Gold Fund: 5+0.72 (10 -5) = 5+3.60 = 8.60 per cent Expected Return of Platinum Fund: 5+1.33 (10-5) = 5+6.65 = 11.65 percent

Differential return Gold Fund : P = 7-8.60= - 1.60 percent Platinum Fund : P = 16-11.65 = 4.35 percent Requirement-(ii). We have the following information with respect to Platinum Fund (P) and others. R P = 16 percent R m = 10 percent R f = 5 percent P = 35 percent m = 24 percent = 1.33

Famas decomposition may be stated as R P = R f + R 1 +R 2 +R 3 R f = 5 percent R 1 = P (R m R f ) = 1.33 (10-5) = 6.65 percent R 2 = [( P / m ) P ] ( R m R f ) = [(35/24) -1.33] (10-5) = (1.46 -1.33) (5) = 0.65 R 3 = net selectivity = R P (R + R 1 + R 2 ) = 16 (5+6.65+0.65) = 16-12.3 = 3.70 percent Thus, R P = 5+6.65+0.65 + 3.70 = 16 percent Alternatively, Famas net selectivity can be directly calculated as follows: Famas net selectivity = R P [R f + ( P / m ) ( R m R f ) = 16 [5+(35/24) (10-5) = 16 (5+7.30) = 16 12.30 = 3.70 percent

## Solution of Question No. 3.

Requirement (i): Capital Budgeting Analysis: Wolverine Corporation Year 0 1. Demand (units) Year 1 40,000 NZ\$ 500 20,000,000 30 1,200,000 6,000,000 2,800,000 5,000,000 15,000,000 5,00,000 1,500,000 3,500,000 8,500,000 8,500,000 850,000 7,650,000 Year 2 50,000 NZ\$ 511 5,550,000 35 1,750,000 6,000,000 2,800,000 5,000,000 15,550,000 10,000,000 3,000,000 7,000,000 12,000,000 12,000,000 1,200,000 10,800,000 Year 3 60,000 NZ\$ 530 31,800,000 40 2,400,000 6,000,000 2,800,000 5,000,000 16,200,000 15,600,000 4,680,000 10,920,000 15,920,000 15,920,000 1,592,000 14,328,000 52,000,000 \$54 \$56 \$5,832,000 \$37,143,680 \$4,050,000 \$21,495,185

2. Price per unit 3. Total revenue = (1) x (2) 4. Variable cost per unit 5. Total Variable cost = (1) x (4) 6. Fixed cost 7. Interest expense of New Zealand loan 8. Noncash expense (depreciation) 9. Total expenses = (5)+(6)+(7)+(8) 10. Before-tax earnings of subsidiary = (3)-(9) 11. Host government tax (30%) 12. After-tax earnings of subsidiary 13. Net cash flow to subsidiary = (12)+(8) 14. NZ\$ remitted by sub. (100% of CF) 15. Withholding tax imposed on remitted funds (10%) 16. NZ\$ remitted after withholding taxes 17. Salvage value 18. Exchange rate of NZ\$ \$52 19. Cash flows to parent \$3,978,000 20. PV of parent cash flows (20% of discount rate) \$3,315,000 21. Initial investment by parent -\$25,000,000 22. Cumulative NPV of cash flows -\$21,685,000 -\$17,635,000 \$3,860,185 The net present value of this project is \$3,860,185. Therefore, Wolverine should accept this project. Requirement (ii): This alternative financing arrangement will have the following effects. First, it will increase the dollar amount of the initial outlay to \$35 million. Second, it avoids the annual interest expense of NZ\$2,800,000. Third, it will increase the salvage value from NZ\$52,000,000 to NZ\$70,000,000. The capital budgeting analysis is revised to incorporate these changes. Capital Budgeting Analysis with an Alternative Financing Arrangement: Wolverine Corporation Year 0 Year 1 Year 2 Year 3 1. Demand (units) 40,000 50,000 60,000 NZ\$ NZ\$ NZ\$ 2. Price per unit 500 511 530 3. Total revenue = (1) x (2) 20,000,000 5,550,000 31,800,000 4. Variable cost per unit 30 35 40 5. Total Variable cost = (1) x (4) 1,200,000 1,750,000 2,400,000 6. Fixed cost 6,000,000 6,000,000 6,000,000 7. Interest expense of New Zealand loan 0 0 0 8. Noncash expense (depreciation) 5,000,000 5,000,000 5,000,000 9. Total expenses = (5)+(6)+(7)+(8) 12,200,000 12,750,000 13,400,000 10. Before-tax earnings of subsidiary = (3)-(9) 7,800,000 12,800,000 18,400,000 11. Host government tax (30%) 2,340,000 3,840,000 5,520,000 12. After-tax earnings of subsidiary 5,460,000 8,960,000 12,880,000 13. Net cash flow to subsidiary = (12)+(8) 10,460,000 13,960,000 17,880,000 14. NZ\$ remitted by sub. (100% of CF) 10,460,000 13,960,000 17,880,000 15. Withholding tax imposed on remitted funds (10%) 1,046,000 1,396,000 1,788,000 16. NZ\$ remitted after withholding taxes 9,414,000 12,564,000 16,092,000 17. Salvage value 70,000,000 18. Exchange rate of NZ\$ \$52 \$54 \$56 19. Cash flows to parent \$4,895,280 \$6,784,560 \$48,211,520 20. PV of parent cash flows (20% of discount rate) \$4,079,4000 \$4711,500 \$27,900,185 21. Initial investment by parent -\$35,000,000 22. Cumulative NPV of cash flows -\$30,920,600 -\$26,209,100 \$1,691,085 The analysis present value than the original financing arrangement shows that this alternative financing arrangement is expected to generate a lower net

Requirement (iii): The NPV would be more sensitive to exchange rate movements if the parent uses its own financing to cover the working capital requirements. If it used New Zealand financing, a portion of NZ\$ cash flows could be used to cover the interest payments on debt. Thus, there would be less NZ\$ to be converted to dollars and less exposure to exchange rate movements. Requirement (iv): The effects of the blocked funds are shown below: Year 0 13. Net cash flow to subsidiary = (12)+(8) Year 1 Year 2 Year 3 NZ\$15,920,000 NZ\$12,720,000 NZ\$ 9,550,600 NZ\$38,190,600 NZ\$3,819,060 NZ\$34,371,540 NZ\$52,000,000 \$.56 \$48,368,062 NZ\$0 \$0 NZ\$0 \$0 \$2,990,777

## 14. 15. 16. 17. 18. 19. 20. 21. 22.

NZS remitted by subsidiary Withholding tax imposed on Remitted funds (10%) NZS remitted after withholding tax Salvage value Exchange rate of NZ\$ Cash flows to parent PV of parent cash flows (20% discount rate) Initial investment by parent -S25,000,000 Cumulative NPV of cash flows

## NZ\$8,500,000 NZ\$12,000,000 NZ\$0 NZ\$0

Requirement (v): First, determine the present value of cash flows excluding salvage value. Present Value of Cash Flows (excluding salvage value) S 3,315,000 4,050,000 4,643,333* S 12,008,333 *This number is determined by converting the third year NZ\$ cash flows excluding salvage value (NZ\$ 14,328,000) into dollars at the forecasted exchange rate of \$.56 per New Zealand dollar. NZ\$14,328,000 x \$.56 S8,023,680 The present value of the \$8,023,680 received 3 years from now is \$4,643,333. Then determine the break-even salvage value: Break-even n Salvage value = [IO (present value of cash flows)] (1+k) 3 = [\$25,000,000 \$12,008,333] (1+.20) = \$22,449,601 Since the NZ\$ is expected to be \$.56 in Year 3, this implies that the break-even salvage value in terms of New Zealand dollars is: \$22,449,601/\$.56 = NZ\$40,088,573 Requirement (vi): Divestiture Analysis One Year After The project Began End of Year 2 End of Year 3 (one year from now) (two years from now) Cash flows to parent \$5,832,000 \$37,143,650 PV of parent cash flows forgone if project is divested \$4,860,000 \$25,794,222 The present value of forgone cash flows is \$30,654,222. Since this exceeds the \$27,000,000 in proceeds from the divestiture, the project should not be divested. End of Year 1 2 3

## [Note: Be careful about assumption on Cash Requirement]

Net working capital estimate of a company (A) Current Assets Amount (Tk.) (i) Raw materials in stock, 2 months : ( Tk. 8,40,000 x 2) 12 (ii) Raw materials in stock, 2 months : 1,26,000 Amount (Tk.)

1,40,000

(a) ( Tk. 8,40,000 x 15) 100 (b) Other Expenses (Wages & Manufact. Expenses) ( Tk. 6,25,000x 40x15) 100x100 (iii)Stock of finished goods [ 1,70,0000- 23,500(10% of Tk. 2,35,000 depreciation)] (iv)Debtors 2 months credit Cost of goods sold Less: Depreciation Add : Selling & Adm Expneses Credit Sales : 4/5 of 15,88,000 = Tk. 12,70,800 ( 12,70,800 x 2) 12 (v) Cash requirement (assumed) Total current assets (B) Current Liabilities (i) Lag in payments of expenses( 1 month) (a) (b) Wages and manufacturing expenses Selling & adm. expenses

2,11,800
*

40,000 7,01,800

(ii)

Creditors (1

1/2

## months credit) 1,05,000 1,79,583 5,22,217 52,222 5,74,439

(8,40,000 x 3) 24 Total current liabilities (C) Working Capital = (Current Assets Current Liabilities) Add: 10% Unseen Required Working Capital Assumptions and working notes:

(1) Cash is required to meet day to day needs of business transactions. It is assumed the company will require Tk. 40,000 in cash (2) Depreciation is not cash expense and therefore, excluded from the cost of goods sold. (3) Selling and administrative expenses are excluded from the computation of WIP. (4) As profit is not taken, obviously in our calculation, as a source of working capital, the income tax has been excluded to be paid out of the profits.

Since it is assumed figure, answer will vary based on assumption. The figure may be assumed from zero to any figure.

Solution to Q. No. 5.
Requirement (a): If the companies merge: Recession Show growth Rapid growth Expected value Probability 0.15 0.65 0.20 Total value 105 135 195 142.5 Of which Equity 50 80 140 87.50 Debt 55 55 55 55.00 Without merger: PENDEN: Total value 42 55 75 57.05 Of which Equity 0 10 30 12.50 Debt 42 45 45 44.55 TULEN: Total value 63 80 120 85.45 Of which Equity 53 70 110 75.45 Debt 10 10 10 10.00 In the case of recession, the shares of Penden are expected to be worthless and the value of the company insufficient to repay all of the debt. The merger will eliminate the risk that full repayment to the debt holders will not made through what is known as the Coinsurance effect. In the absence of any operational synergy, that value of the companies remains uncharged but the wealth of the debt holders of Penden will increase Tk.0.45 million at the expense of the shareholders of the two companies. The merger might also result in a gain for shareholders and bond holders if the merged companys cash flow are perceived to be less risky. This might lead to small reduction in both the cost of equity and make it easier for the company to raise new external finance. Requirement (b): Features of growth by acquisition versus organic growth: The advantages of growth by acquisition or merger are: Much quicker method of increasing market share than growing originally If the two companies do not have perfectly correlated cash flows, combining them together will offer diversification opportunity and a reduction in the cost of capital. This should increase the value of the group and therefore increase shareholders wealth. Buying out or merging with ones competitors reduce the competition faced in the market, thereby strengthening ones price setting ability.

The disadvantages of growth by acquisition or merger are: Acquisition is usually more expensive for the purchasing company. Research continually shows that in contested acquisition it is the shareholders of the target company who gain the greatest share of the benefits arising. Many acquisitions and mergers are planned in anticipation of generating synergistic cost savings, but in practice these synergies often fail to appear. There may be cultural clashes following the acquisition or merger between the two sets of employees. If skilled employees become demotivated and leave, then much of the skill sets have been lost.

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER 2012 EXAMINATION PROFESSIONAL LEVEL-IV SUBJECT: 402.STRATEGIC MANAGEMENT ACCOUNTING.

Solution
Solution to Question No.1

(b)

(c)

In a post-completion audit of an investment project, the management accountant gathers information about the actual cash flows generated by the project and compares these with the cash flows projected in the capital budget proposal. Then the projects actual NPV or IRR is computed. Finally, the projections made for the project are compared with the actual results. If the project has not met expectations, an investigation may be made to consider the reasons. Was the estimated life too short? Were cash flows too optimistic? Were some important cash flows omitted? Not all businesses actually undertake post-completion audits of their capital expenditure decisions. One reason is that it is difficult to isolate the actual cash flows that relate to specific projects. Another reason is that there may be little incentive for management to review the quality of the initial analysis and subsequent implementation of the project. However, in situations where there are massive cost overruns or other negative outcomes then the audit can provide valuable learning for management.

Solution to Question No. 2. Canarias Group Ltd. Part (a): Full cost per unit in LZ Ltd. = Tk.27 + (Tk.100,000 / 12,500) = Tk.35 per unit. Transfer price = Tk.35 * 140% = Tk.49. Net revenue to TR Ltd. (before cost of transfer) = Tk.60 - Tk.15 = Tk.45. LZ would agree to the transfer: Tk.49 > Tk.27. The transfer would benefit Canarias Group Ltd.: Tk.60 > (Tk.27 + Tk.15). However, TR would not agree to the transfer: Tk.45 < Tk.49. The proposed transfer pricing rule can allow sub-optimisation, since the divisions are autonomous and are therefore free to reject transfers which would impact negatively on their reported profits. In this case, the transfer would benefit Canarias Group Ltd. However, the transfer will not take place because TR Ltd. will reject it. Marginal cost up to the point of transfer = Tk.27. Opportunity cost of making the point of transfer = Zero. Hence: Transfer price = Tk.27. TR would agree to the transfer: Tk.45 > Tk.27. As shown in part (a), the transfer would benefit Canarias Group Ltd.: Tk.60 > (Tk.27 + Tk.15). However, the problem is that LZ Ltd. would be indifferent to the transfer and therefore could not be relied upon to take part in it. The price offered would only equal the marginal cost.

Part (b):

Part (c): One possible solution is two-step transfer pricing: Step 1: For each unit transferred, the buying division pays a transfer price to the selling division equal to the standard marginal cost of production. Step 2: Each month, the buying division pays a lump sum to the selling division to cover As a constant fair share of the latters fixed costs (e.g., Tk.100,000 in the case of the transfer in part [a]) plus a profit element. This two-step transfer pricing system is likely to be goal congruent, since the buying division has an incentive to request transfers. The marginal cost of the transferred item to the buying division is the same as the marginal cost of the transferred item to Canarias Group Ltd. as a whole, so there is a significant likelihood of goal congruence. Also, the buying division will recognize that, to earn a profit, it must earn sufficient net revenues to cover all fixed costs (including fixed costs transferred to it from the selling division). The selling division is able to make a profit through its markup on the monthly fixed costs transfer. The proportion of the selling divisions capacity which is reserved for meeting the buying divisions needs must be fixed. Otherwise, it would be impossible to arrive at the applicable fixed costs figure for Step 2 above. A second possible solution is dual-rate transfer pricing: Description: The selling division is credited with the external selling price of the finished product; The buying division is charged with the standard cost of the transferred product;

The difference is eliminated on consolidation in preparing the company financial statements. Advantages: Ensures that the division managers take goal-congruent decisions about whether to make transfers. Provides proper information for performance evaluation purposes. Disadvantages: Company Profits < Combined Business Unit Profits division managers must be told that their reported division profit significantly overstates how much profit they are earning for the company as a whole. Business units can come to regard internal transfers as sheltered markets, instead of focusing on doing business in the real world. For performance evaluation purposes, one solution is to use a composite performance measure in which each Tk.1 of profits from external transactions is weighted more heavily than Tk.1 of profits from intra-company sales.

Solution to Q. No. 3 (a) (i) Calculation of NPV Year Investment Income Operating costs Net cash flow Discount at 10% Present values Net present value Workings Calculation of income Year Inflated selling price (Tk. /unit) Demand (units/year) Income (Tk. /year) 0 Tk. (2,000,000) _________ (2,000,000) 1.000 (2,000,000) Tk. 366,722 1 Tk. 1,236,000 676,000 560,000 0.909 509,040 2 Tk. 1,485,400 789,372 696,028 0.826 574,919 3 Tk. 2,622,000 1,271,227 1,350,773 0.751 1,014,430 4 Tk. 1,012,950 620,076 392,874 0.683 268,333

## 4 22.51 45,000 1,012, 950

Calculation of operating costs Year Inflated variable cost (Tk. /unit) Demand (units/year) Variable costs (Tk. /year) Inflated fixed costs (Tk. /year) Operating costs (Tk. /year) 1 8.32 60,000 499,200 176,800 676,000 2 8.65 70,000 605,500 183,872 789,372 3 9.00 120,000 1,080,000 191,227 1,271,227 4 9.36 45,000 421,200 198,876 620,076

Alternative calculation of operating costs Year Variable cost (Tk. /unit) Demand (units/year) Variable costs (Tk. /year) Fixed costs (Tk. /year) Operating costs (Tk. /year) Inflated costs (Tk. /year) 1 8 60,000 480,000 170,000 650,000 676,000 2 8 70,000 560,000 170,000 730,000 789,568 3 8 120,000 960,000 170,000 1,130,000 1,271,096 4 8 45,000 360,000 170,000 530,000 620,025

(ii) Calculation of internal rate of return Year 0 Tk. Net cash flow (2,000,000) Discount at 20% 1.000 Present values (2,000,000) Net present value (Tk. 79,014)

## 4 Tk. 392,874 0.482 189,365

Internal rate of return = 10 + ((20 - 10) x 366,722)/(366,722 + 79,014) = 10 + 8.2 = 18.2% (iii) Calculation of return on capital employed Total cash inflow = 560,000 + 696,028 + 1,350,773 + 392,874 = Tk. 2,999,675 Total depreciation and initial investment are same, as there is no scrap value Total accounting profit = 2,999,675 - 2,000,000 = Tk. 999,675 Average annual accounting profit = 999,675/4 = Tk. 249,919 Average investment = 2,000,000/2 = Tk. 1,000,000 Return on capital employed = 100 x 249,919/1,000,000 = 25% (iv) Calculation of discounted payback

## 4 Tk. 268,333 366,722

Discounted payback period = 2 + (916,041/1,014,430) = 2 + 0.9 = 2.9 years M The investment proposal has a positive net present value (NPV) of Tk. 366,722 and is therefore financially acceptable. The results of the other investment appraisal methods do not alter this financial acceptability, as the NPV decision rule will always offer the correct investment advice. The internal rate of return (IRR) method also recommends accepting the investment proposal, since the IRR of 18.2% is greater than the 10% return required by PV Co. If the advice offered by the IRR method differed from that offered by the NPV method, the advice offered by the NPV method would be preferred. The calculated return on capital employed of 25% is less than the target return of 30%, but as indicated earlier, the investment proposal is financially acceptable as it has a positive NPV. The reason why PV Co has a target return on capital employed of 30% should be investigated. This may be an out-of-date hurdle rate that has not been updated for changed economic circumstances. The discounted payback period of 2.9 years is a significant proportion of the forecast life of the investment proposal of four years, a time period which the information provided suggests is limited by technological change. The sensitivity of the investment proposal to changes in demand and life-cycle period should be

analysed, since an earlier onset of technological obsolescence may have a significant impact on its financial acceptability. (c) NPV is still a valid method for evaluating projects of strategic significance. However, attempts should be made, to include seemingly 'non-quantifiable' factors into the analysis, or greater weight should be placed on strategic aspects of the investment.

remaining employees ever work hard to improve quality in the future? For these reasons, HPs management should first focus on using the newly available capacity to sell more products. If it cannot do so and must downsize, management should try to downsize in a way that would not hurt employee morale, such as through retirements and voluntary severance.

Solution Question 5: Navarre Ltd. Part (a): Existing divisional ROI : Division A : Tk.125,000 / Tk.1,100,000 = 11.36%. Division B : Tk.80,000 / Tk.900,000 = 8.89%. Division C : Tk.37,000 / Tk.210,000 = 17.6%. Total profit : Tk.125,000 + Tk.80,000 + Tk.37,000 = Tk.242,000. Total investment : Tk.1,100,000 + Tk.900,000 + Tk.210,000 = Tk.2,210,000 Corporate ROI : Tk.242,000 / Tk.2,210,000 = 11.0%. Division A
Profit before depreciation Depreciation Profit Working capital Book value of fixed assets at 31st December Total Project ROI 19% * Tk.160,000 = Tk.30,400 Nil Tk.30,400 Tk.225,000 Nil Tk.225,000 13.5%

## New project ROIs for 2010 : Division B

30% * Tk.130,000 = Tk.39,000 Tk.200,000 / 8 = Tk.25,000 Tk.14,000 Tk.60,000 Tk.200,000 - Tk.25,000 = Tk.175,000 Tk.235,000 6.0%

Division C
25% * Tk.64,000 = Tk.16,000 Tk.40,000 * 30% = Tk.12,000 Tk.4,000 Tk.10,000 Tk.40,000 - Tk.12,000 = Tk.28,000 Tk.38,000 10.5%

## Part (b): New project ROIs for 2011 : Division A

Profit before depreciation Depreciation Profit Working capital Book value of fixed assets at 31st December Total Project ROI 19% * Tk.200,000 = Tk.38,000 Nil Tk.38,000 Tk.225,000 Nil

Division B
30% * Tk.140,000 = Tk.42,000 Tk.25,000 Tk.17,000 Tk.60,000 Tk.175,000 - Tk.25,000 = Tk.150,000 Tk.210,000 8.1%

Division C
Tk.16,000 Tk.28,000 * 30% = Tk.8,400 Tk.7,600 Tk.10,000 Tk.28,000 - Tk.8,400 = Tk.19,600 Tk.29,600 25.7%

Tk.225,000 16.9%

Part (c): Division A extra project Likely to be accepted by the divisional manager. In both 2010 and 2011, this project has a return higher than the divisions existing projected ROI, and would thus increase average divisional ROI. To determine whether this decision would be in the shareholders interests, we would need to know the companys cost of capital. However, assuming that the companys existing ROI (11%) equals or exceeds the cost of capital, this investment seems to be in the shareholders interests. Likely to be rejected by the divisional manager, since in both 2010 and 2011 this project has a return less than the divisions existing projected ROI (and would thus reduce average divisional ROI). However, the effect of the depreciation will be to increase ROI further in future years, so if the divisional manager has a very decision making long time horizon then he may wish to accept the project. As with Division As project, to determine whether this decision would be in the shareholders interests, we would need to know the companys cost of capital. This has an ROI which is substantially below the divisions existing ROI in 2010 and substantially above it in 2011 (and subsequent years) because of the effect of the diminishing balance depreciation. Hence, the divisional managers decision is likely to depend on his time horizon e.g., if he plans to leave his existing job before the end of 2011 then he is unlikely to accept the project. As with Division A and Bs projects, to determine whether this decision would be in the shareholders interests, we would need to know the companys cost of capital.