UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY 2016

BSc (Hons) Accounting (Minor: Business Informatics)

BSc (Hons) Accounting (Minor: Finance)
PROGRAMME
BSc (Hons) Accounting (Minor: Management)
Level II / III

MODULE NAME FINANCIAL REPORTING

DATE Thursday MODULE CODE DFA2000Y (3)

26 May 2016

TIME 09.30 – 12.30 Hours DURATION 3 Hours

NO. OF 4 NO. OF QUESTIONS 4

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 4 questions.

Answer ALL questions.
 Financial Reporting – DFA2000Y (3)

Answer ALL questions.

Question 1 (36 marks)

On 1 April 2014 Prag Ltd acquired 4 million ordinary shares in Slate Ltd by an exchange of
one share in Prag Ltd for every 2 shares in Slate Ltd plus Rs1.00 per acquired share in Slate
Ltd. The market price of each share in Prag Ltd at the date of acquisition was Rs7.80 and the
market price of each share in Slate Ltd at the date of acquisition was Rs4.10.

It should be noted that in the books of Prag Ltd, only the cash consideration of the above
investment was recorded. The statements of financial position of both companies at 31
March 2016 are as follows:

Prag Ltd Slate Ltd

Rs’000 Rs’000 Rs’000 Rs’000
Non-current assets
Property, plant and equipment 77,400 42,500
Investment in Slate Ltd 4,000 nil
Equity Investments 3,000 84,400 nil 42,500
Current assets
Inventory 37,580 17,200
Trade receivables 33,800 16,120
Other receivables 5,800 1,050
Cash in hand 4,540 81,720 1,085 35,455
Total Assets 166,120 77,955

Equity and Liabilities

Ordinary share capital of Rs2 35,000 10,000
Share Premium 14,000 2,000
Retained profits 30,750 79,750 12,380 24,380

Non-current liabilities
11% Debentures 35,000 30,000
Current Liabilities
Trade payables 20,500 8,700
Interest payable 1,950 875
Tax payable 8,700 5,100
Dividend Payable 10,500 4,000
Bank overdraft 9,720 86,370 4,900 53,575
Total Equity & Liabilities 166,120 77,955

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 Financial Reporting – DFA2000Y (3)

The following additional information is provided.

1. Share premium and Retained Earnings of Slate Ltd on 31 March 2014 were
Rs2,000,000 and Rs7,260,000 respectively.

2. At the date of acquisition, the fair values of Slate’s assets were equal to their carrying
amount with the exception of an item of plant, with a remaining useful economic life
of 10 years, which was undervalued by Rs700,000.

3. On 1 October 2015, Prag Ltd sold a machine to Slate Ltd at an agreed fair value of
Rs8,000,000. Its carrying amount prior to sale was Rs7,200,000. The estimated
remaining useful economic life of the machine at the date of sale was 5 years.

4. During the current year, Prag Ltd sold goods to Slate Ltd amounting to Rs6,000,000 at
a mark-up of 25%. One third of these goods were still unsold and remained in the
inventory of Slate Ltd at 31 March 2016.

5. Sales from Slate Ltd to Prag Ltd during the current year amounted to Rs400,000 per
month. Slate Ltd made a mark-up of 20% and Prag Ltd had one quarter of these
goods in inventory at 31 March 2016.

6. For its financial year ended 31 March 2016, Slate Ltd paid an interim dividend of
Rs1,000,000 and proposed a final dividend of Rs4,000,000 (declared on 27 March
2016). Prag Ltd has recorded its share of all dividends in its books.

7. The fair value of investments of Prag Ltd in other equity instruments (other than in
Slate Ltd) was Rs3,500,000 at 31 March 2016.

8. There was no impairment of goodwill since acquisition. It is the policy of the group
to value non-controlling interest at fair value.

Required:

(a) Prepare the consolidated statement of financial position as at 31 March 2016.

[22 marks]

(b) IFRS 3 Business combinations permits a non-controlling interest at the date of

acquisition to be valued by one of two methods:
(i) at its proportionate share of the subsidiary’s identifiable net assets; or
(ii) at its fair value

Explain the difference that the accounting treatment of these alternative methods
could have on the consolidated financial statements, including where consolidated
goodwill may be impaired.
[4 marks]

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 Financial Reporting – DFA2000Y (3)

(c) In general terms, a conceptual framework is a statement of generally accepted

theoretical principles which form the frame of reference for a particular field of
enquiry. In terms of financial reporting, these theoretical principles provide the basis
for both the development of new reporting practices and the evaluation of existing
ones.

Discuss the importance of a conceptual framework in financial reporting.

[10 marks]

Question 2 (32 marks)

The following list of balances relates to Brentley Ltd for the year ended 30 June 2015.

Rs’000 Rs’000
Sales revenue 71,780
Equity Investments 22,400
Cost of sales 20,050
Distribution costs 10,620
Investment Income 620
Administrative expenses 26,420
Property, Plant and Equipment at cost 140,000
Accumulated depreciation on property, plant and equipment at 1 25,400
July 2014
Finance Cost 1,400
Trade Receivables 14,590
Cash at bank 6,080
Trade Payables 5,740
Equity shares of Rs1 each 90,000
7% Loan Notes 20,000
Retained earnings at 1 July 2014 35,020
Inventory at 30 June 2015 7,000
248,560 248,560

The following notes are relevant

1. A lease rental of Rs4 million was paid on 30 June 2015. It is the first of five annual
payments in respect of a leasing contract for the rental of a machine that has a cash
purchase price of Rs15million. The lease contract was entered on 1 July 2014. The rate
implicit in the lease has been computed to be 12% and the present value of an
annuity of Rs1 for 5 years at a discount rate of 12% is 3.605. The machine has a useful
economic life of 6 years. At the end of the lease term, the machine will be returned to
the lessor. The lease rental of Rs4 million was included in administrative expenses.
2. On 1 July 2014, goods with an invoice value of Rs5 million were sold to a long-
established customer on the following terms: five annual instalments of Rs1 million
due at the end of each financial year, 30 June. Based on the customer's credit rating,

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 Financial Reporting – DFA2000Y (3)

the seller believes the buyer would be able to obtain finance at an interest rate of 10
per cent. At 30 June 2015, the cash account had been debited with Rs1million and
sales account had been credited with Rs1million. No other entries had been made.
The present value of an annuity of Rs1 for 5 years at a discount rate of 10% is 3.791.
3. On 12 June 2015, Brentley Ltd.’s share price stood at Rs1.80 per share. On this date,
the company proposed and paid a dividend, which was computed to generate a
dividend yield of 5%. The payment of dividend was included in administrative
expenses.
4. An employee of the Brentley Ltd is currently suing the company for damages in
respect of serious injuries sustained as a result of a breach of safety regulations.
Correspondence from Brentley Ltd.’s legal representatives indicate the following:

Outcome Probability Estimated damages

Contributory negligence 75% Rs275,000

Fully responsible 25% Rs500,000

In addition legal costs are estimated at Rs75,000.

5. The equity investment had a fair value of Rs21.7 million on 30 June 2015.
6. A provision for income tax for the year ended 30 June 2015 is required. The
corporation tax rate on profits is 15%.
7. Property, plant and equipment include ‘land’ which initially cost Rs24 million is now
worth Rs26 million on 30 June 2015. This revised value is to be reflected in the books.
It is the policy of the company to depreciate property, plant and equipment at 10% on
cost. Depreciation is allocated as follows: 30% to cost of sales, 30% to distribution
costs and 40% to administrative expenses.

Required:
(a) Prepare the income statement for the year ended 30 June 2015 and a statement of
financial position as at that date in accordance with the provisions of relevant
international accounting standards.
[22 marks]

(b) IAS 37 Provisions, contingent liabilities and contingent assets prescribes the accounting
and disclosure for those items named in its title.

Define provisions and contingent liabilities and briefly explain how IAS 37 improves
consistency in financial reporting. [5 marks]

(c) The objective of IAS 10 Events after the Reporting Period is to prescribe the treatment of
events that occur after an entity’s reporting period has ended. Define the period to
which IAS 10 relates and distinguish between adjusting and non-adjusting events.

[5 marks]

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 Financial Reporting – DFA2000Y (3)

Question 3 (17 marks)

The summarized financial statements of Pigma Ltd for the years 31 December 2014 and
2015 are given below:

Income statement for the year ended 31December 2015

Rs’000

Sales 3,870
Cost of sales (2,620)
Gross profit 1,250
Operating expenses (300)
Loss on sale of plant (50)
Profit before interest and tax 900
Finance cost (78)
Profit before tax 822
Income tax expense (270)
Profit after tax 552
Other Comprehensive Income
Revaluation gain 200
Total Comprehensive income 752

Statement of Financial Position as at 31 December

2015 2014
Rs’000 Rs’000 Rs’000 Rs’000
Non- current assets
Property Plant and Equipment (Note 1) 2,290 1,830
Intangible assets (Note 2) 250 2,540 300 2,130
Current assets
Inventories 1,390 905
Short-term investments 30 35
Trade Receivables 1,050 680
Cash at bank 70 2,540 nil 1,620
Total Assets 5,080 3,750
Equity and liabilities
Ordinary share capital (Rs2 each) 750 500
Share premium account 350 100
Revaluation surplus 200 nil
Retained Earnings 1,610 1,400
Total Equity 2,910 2,000
Non-current liabilities
9% Loan Notes 870 540
Current Liabilities
Bank overdraft nil 115
Trade payables 890 735
Dividend payable 280 200
Income tax payable 130 1,300 160 1,210
Total Equity and Liabilities 5,080 3,750

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 Financial Reporting – DFA2000Y (3)

Note 1 Property, plant and equipment

Office Motor Plant Total

Land Buildings Vehicles
R’000s Rs’000 Rs’000 Rs’000 Rs’000
Cost
At 1 Jan 2015 960 1,240 252 1,060 3,512
Additions 400 200 50 650
Revaluations 200 200
Disposal (100) (100)
At 31 Dec 2015 1,560 1,440 252 1,010 4,262

Accumulated
Depreciation
At 1 Jan 2015 868 180 634 1,682
Charge for the 72 35 193 300
year
Disposal
Adjustment (10) (10)
At 31 Dec 2015 940 215 817 1,972

Net Book
Values
At 31 Dec 2014 960 372 72 426 1,830

At 31 Dec 2015 1,560 500 37 193 2,290

Note 2
Intangible Assets has been written off during the year ended 31 Dec 2015 by Rs 50,000
Note 3
Equity dividend paid during the year ended 31 Dec 2015 amounted to Rs 262,000

Required:

Prepare the statement of cash flows for the year ended 31 Dec 2015 in accordance with IAS 7
for Pigma Ltd.
[17 marks]

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 Financial Reporting – DFA2000Y (3)

Question 4 (15 marks)

Ago Ltd, a computer hardware manufacturer, has obtained accounting ratios relating to
averages for organisations in the industry.

The industry average ratios for the year ended 31 December 2015 are as follows:

Ratios
Return on capital employed 21.6%
Assets turnover 1.6 times
Gross profit margin 25%
Operating profit margin 10.5%
Current ratio 1.5:1
Quick ratio 0.8:1
Period of inventory turnover 42 days
Trade receivable collection period 41 days
Trade payables payment period 59 days
Cash operating cycle 24 days

The recent financial statements of Ago Ltd are as follows:

Income Statement for the year ended 31 Dec 2015

Ago Ltd
Rs’000
Sales 4,850
Cost of sales (3,740)
Gross profit 1,110
Operating expenses (670)
Profit from operations 440
Finance cost (68)
Profit before tax 372
Income tax expense (180)
Profit after tax 192

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 Financial Reporting – DFA2000Y (3)

Statement of financial position as at 31 Dec 2015

Rs’000 Rs’000
Assets
Non-current assets
Property, plant and equipment 1,080

Current assets
Inventories 500
Trade receivables 640
Cash at bank 50
1,190
Total assets 2,270

Equity and Liabilities

Equity
Ordinary share capital (Rs1) 300
Retained Earnings 370
670

Non Current liabilities

10% loan notes 600

Current liabilities
Trade payables 830
Taxation payable 170
1,000
Total Equity and Liabilites 2,270
Required:
a) Calculate the ratios listed below for Ago Ltd. [5 marks]
Profitability Formula
1. Return on capital employed (Profit before interest and tax /capital employed) x 100%
2. Asset turnover Sales/total assets
3. Gross profit margin (Gross profit/sales) x 100%
4. Operating profit margin (Profit before interest and tax /sales) x 100%

Liquidity and efficiency Formula

1 Current ratio Current assets/current liabilities
2 Quick ratio (Current assets – Closing Inventory) / Current
liabilities
3. Period of inventory turnover (Closing inventory/cost of sales) x 365days
4. Trade receivables collection period (Trade Receivables/credit sales) x 365days
5. Trade payables payment period (Trade payables/credit purchases) x 365days
6. Cash operating cycle (3) + (4) – (5)
Assume that all sales and purchases were on credit.
b) Based on your ratios computed in (a) above, comment on the profitability, liquidity and
efficiency of Ago Ltd with respect to the industry averages. [10 marks]
END OF QUESTION PAPER

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