CMA APRIL, 2019 SPECIAL EXAMINATION

PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING

Time: Three hours Full Marks: 100

 All questions are to be attempted.
 Show computations, where necessary.
 Answer must be brief, relevant, neat and clean.
 Start answering each question from a fresh sheet.

Q. No. 1
(a) IFRS usually require the use of accrual accounting to “fairly present” income. If the cash
receipts and disbursements method of accounting will “clearly reflect” taxable income, why
does this method not usually also “fairly present” income?
(b) Indicate whether the following statements about the Conceptual Framework are true or false.
If false, provide a brief explanation supporting your position.
(i) General-purpose financial reports are most useful to company insiders in making
strategic business decisions.
(ii) Accounting standards based on individual conceptual frameworks generally will result
in consistent and comparable accounting reports.
(iii) Capital providers are the only users who benefit from general-purpose financial
reporting.
(iv) Accounting reports should be developed so that users without knowledge of economics
and business can become informed about the financial results of a company.
(v) The fundamental qualitative characteristics that make accounting information useful are
relevance and verifiability.
(vi) Conservatism, a prudent reaction to uncertainty, is considered a constraint of financial
reporting.
(vii) Information that is a faithful representation is characterized as having predictive or
confirmatory value.
(viii) Comparability pertains only to the reporting of information in a similar manner for
different companies.
(c) Gatco Company Ltd. reported the following amounts in 2017: Net income, Tk.15,00,000;
Unrealized gain related to revaluation of buildings, Tk.1,00,000; Unrealized loss related to
non-trading equity securities, (Tk.3,50,000). Determine the Gatco Company’s total
comprehensive income for 2017.
[Marks: (5+12+3) = 20]
Q. No. 2
(a) Your classmate is puzzled. During the last year, the company in which she is a shareholder
reported a net loss of Taka 675,000, yet its cash increased by Taka 321,000 during the same
period of time. Explain to your classmate how this situation could occur.
(b) Comparative balance sheet accounts of MMZ Company presented below:
December 31
Debit Accounts
2016 2017
Cash 51,000 70,000
Accounts Receivable 130,000 155,000
Merchandise Inventory 61,000 75,000
Investments 85,000 55,000
Equipment 48,000 70,000
Buildings 145,000 145,000
Land 25,000 40,000
545,000 610,000

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CMA APRIL, 2019 SPECIAL EXAMINATION
PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING

Q. No. 2(cont’d...)
December 31
Credit Accounts
2016 2017
Allowance for doubtful accounts 8,000 10,000
Accumulated depreciation- Equipment 14,000 21,000
Accumulated depreciation- Buildings 28,000 37,000
Accounts Payable 60,000 66,000
Income Tax Payable 10,000 12,000
Long term note payable 70,000 62,000
Common Stock 2,60,000 310,000
Retained Earnings 95,000 92,000
545,000 610,000
Additional data:
(1) Common stock was issued in exchange for land.
(2) Equipment that cost Tk. 10,000 and was 60% depreciated was sold in 2017.
(3) Cash dividends were declared and paid during the year.
(4) Investment that cost Tk. 35,000 was sold during the year.
(5) There were the no write offs of uncollectible accounts during the year.
MMZ 2017 income statement follows:
Tk.
Sales 9,50,000
Less: Cost of goods sold 6,00,000
Gross Margin 350,000
Less: Operating Expenses (includes depreciation and bad debts) 250,000
Income from Operations 1,00,000
Other: Gain on sale of investments 15,000
Loss on sale of machinery (3000) 12,000
Income before taxes 1,12,000
Income Tax 45,000
Net Income 67,000
Required:
(i) Prepare a statement of Cash Flow using the indirect method according to IAS 7
(ii) Compute net cash flow from operating activities using the direct method according to IAS 7.
[Marks: 5+(10+5) = 20]
Q. No. 3
(a) The board of directors is considering either a stock split or a stock dividend. They understand
that total stockholders’ equity will remain the same under either action. However, they are not
sure of the different effects of the two types of actions on other aspects of stockholders’
equity. Explain the differences to the directors.
(b) S Company sold Taka 3,500,000, 8%, 10-year bonds on July 1, 2014. The bonds were dated
July 1, 2014, and pay interest July 1 and January 1. S Company uses the straight-line
method to amortize bond premium or discount. Assume no interest is accrued on June 30.
Required:
(i) Prepare all the necessary journal entries to record the issuance of the bonds and bond
interest expense for 2014, assuming that the bonds sold at 104.
(ii) Prepare journal entries as in part (a) assuming that the bonds sold at 98.
(iii) Show balance sheet presentation for the bonds at December 31, 2014.
(c) On January 1, 2014, D Corporation had the following stockholders’ equity accounts.
Common Stock (no-par value, 100,000 shares issued and outstanding) Taka 2,800,000
Retained Earnings Taka 1,000,000
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CMA APRIL, 2019 SPECIAL EXAMINATION
PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING
Q. No. 3(cont’d...)
During the year, the following transactions occurred.
Feb. 1 Declared a Taka 1 cash dividend per share to stockholders of record on
February 15, payable March 1.
Mar. 1 Paid the dividend declared in February.
Apr. 1 Announced a 4-for-1 stock split. Prior to the split, the market price per share
was Taka 36.
July 1 Declared a 5% stock dividend to stockholders of record on July 15, distributable
July 31.On July 1, the market price of the stock was Taka 13 per share.
July 31 Issued the shares for the stock dividend.
Dec. 1 Declared a Taka 0.50 per share dividend to stockholders of record on
December 15, payable January 5, 2015.
Dec. 31 Determined that net income for the year was Taka 700,000.
Required:
Prepare the stockholders’ equity section of the balance sheet at (i) March 31, (ii) June 30,
(iii) September 30, and (iv) December 31, 2014.
[Marks: (4+8+8) = 20]
Q. No. 4
(a) Explain the difference between the proportional method and the incremental method of
allocating the proceeds of lump-sum sales of capital stock.
(b) This comment appeared in the annual report of MacCloud Inc.: “The Company could pay cash or
property dividends on the Class A common stock without paying cash or property dividends on the
Class B common stock. But if the Company pays any cash or property dividends on the Class B
common stock, it would be required to pay at least the same dividend on the Class A common
stock.” How is a property dividend accounted for in the financial records?
(c) Runner Inc. had the following long-term receivable account balances at December 31, 2014.
Note receivable from sale of division Tk.15,00,000
Note receivable from officer 4,00,000
Transactions during 2015 and other information relating to Runner’s long-term receivables
were as follows.
(1) The Tk.15,00,000 note receivable is dated May 1, 2014, bears interest at 9%, and
represents the balance of the consideration received from the sale of Runner ’s
electronics division to New York Company. Principal payments of Tk. 5,00,000
plus appropriate interest are due on May 1, 2015, 2016, and 2017. The first
principal and interest payment was made on May 1, 2015. Collection of the note
instalments is reasonably assured.
(2) The Tk.4,00,000 note receivable is dated December 31, 2014, bears interest at 8%,
and is due on December 31, 2017. The note is due from Sean May, president of
Runner Inc. and is collateralized by 10,000 shares of Runner’s common stock. Interest
is payable annually on December 31, and all interest payments were paid on their due
dates through December 31, 2015. The quoted market price of Runner’s common
stock was Tk. 45 per share on December 31, 2015.
(3) On April 1, 2015, Runner sold a patent to Pennsylvania Company in exchange for a
Tk.1,00,000 zero interest- bearing note due on April 1, 2017. There was no established
exchange price for the patent, and the note had no ready market. The prevailing rate of
interest for a note of this type at April 1, 2015, was 12%. The present value of Tk.1 for
two periods at 12% is 0.797 (use this factor). The patent had a carrying value of
Tk.40,000 at January 1, 2015, and the amortization for the year ended December 31,
2015, would have been Tk. 8,000. The collection of the note receivable from
Pennsylvania is reasonably assured.

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CMA APRIL, 2019 SPECIAL EXAMINATION
PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING
Q. No. 4(cont’d...)
(4) On July 1, 2015, Runner sold a parcel of land to Splinter Company for Tk. 2,00,000
under an instalment sale contract. Splinter made a Tk. 60,000 cash down payment on
July 1, 2015, and signed a 4-year 11% note for the Tk.1,40,000 balance. The equal
annual payments of principal and interest on the note will be Tk. 45,125 payable on
July 1, 2016, through July 1, 2019. The land could have been sold at an established
cash price of Tk. 2,00,000. The cost of the land to Runner was Tk.1,50,000.
Circumstances are such that the collection of the instalments on the note is reasonably
assured.
Required:
(i) Prepare the long-term receivables section of Runner’s balance sheet at December 31, 2015.
(ii) Prepare a schedule showing the current portion of the long-term receivables and accrued
interest receivable that would appear in Runner’s balance sheet at December 31, 2015.
(iii) Prepare a schedule showing interest revenue from the long-term receivables that would
appear on Runner’s income statement for the year ended December 31, 2015.6
[Mark: (2+3+15) = 20]
Q. No. 5
(a) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana
Kingston Company and Mary Ann Benson Company. Each has assets totalling Tk.4,200,000.
Jana Kingston Mary Ann Benson
Current liabilities Tk.300,000 Tk.600,000
Long-term debt, 10% 1,200,000 -
Common stock ($20 par) 2,000,000 2,900,000
Retained earnings (Cash dividends, $220,000) 700,000
Retained earnings (Cash dividends, $328,000) - 700,000
4,200,000 4,200,000
For the year, each company has earned the same income before interest and taxes.
Jana Kingston Mary Ann Benson
Income from operations Tk.1,200,000 Tk.1,200,000
Interest expense 120,000 –0–
Income before taxes 1,080,000 1,200,000
Income taxes 4,32,000 4,80,000
Net income 6,48,000 7,20,000
At year end, the market price of Kingston’s stock was Tk.101 per share, and Benson’s was Tk.63.50.
Instructions:
(i) Which company is more profitable in terms of return on total assets?
(ii) Which company is more profitable in terms of return on common stock equity?
(iii) Which company has the greater net income per share of stock? Neither company issued or
reacquired shares during the year.
(iv) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston
Co. to have the long-term debt outstanding? Why?
(v) What is the book value per share for each company?
(b) Basic Builder Ltd specializes in building high quality executive flats in Dhaka city. On 1
March 2006 it sells a plot of building land to Finance plc, an unconnected company, for Tk.
1.5m. Basic Builder Ltd retains rights of access and supervision over the plot, the right to
build on this land until 28 February 2008 and the right to buy the plot back again on that date
for Tk. 1.9m. On 1 March 2006 the plot is valued at Tk. 2.5m.
Explain how this sale transaction would be dealt with in Basic Builder Ltd’s financial
statements for the year ended 28 February 2007 as per IAS-16.
[Marks: (10+10) = 20]
= THE END =
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