CONFIDENTIAL 1 AC/JUL 2021/FAR570

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE : FINANCIAL ACCOUNTING & REPORTING 4

COURSE CODE : FAR570
EXAMINATION : JULY 2021
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. i) Answer ALL questions. Start each answer on a new page.

ii) Show your workings (if any) for each of the question.

3. The answers must be in HANDWRITTEN.

4. Answer ALL questions in English

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 7 printed pages
© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
CONFIDENTIAL 2 AC/JUL 2021/FAR570

QUESTION 1

DRT Cement Bhd is a one of the largest cement producers in Malaysia. At the beginning of
2019, the company had issued RM40,000,000 ordinary shares at RM2 each, RM10,000,000
of 10% cumulative preference shares at RM1 each and RM5,000,000 of 5% convertible
debentures. The convertible debentures can be converted into 20 ordinary shares for every
RM100 debentures.

The Extract Statement of Profit or Loss of DRT Cement Bhd for the financial year ended 31
December 2019 and 31 December 2020 are as follows:

31 December 2019 31 December 2020

Profit before interest and taxation 25,000,000 30,000,000
Less: Interest (250,000) (300,000)
Profit before tax 24,750,000 29,700,000
Less: Taxation (5,940,000) (7,128,000)
Profit after tax 18,810,000 22,572,000

On 1 July 2019, the company converted 20% of its convertible debentures into ordinary
shares. There was no further issuance of ordinary and preference shares in 2019.

On 1 January 2020, the company had granted 900,000 options to its employees that entitle
them to subscribe for ordinary shares of the company at an exercise price of RM1.50 each.
As at the end of the year, no options were subscribed. On 1 June 2020, the company
announced a bonus issue of 1 for every 4 shares held which will take effect at the end of the
accounting period. On 30 September 2020, another 20% of remaining convertible debentures
were converted with new conversion rate of 25 ordinary shares for every RM100 debentures.

The average market price of one ordinary share of the company for the year ended 31
December 2019 and 31 December 2020 was RM2.20 and RM2.50 respectively.

Tax rate in 2019 and 2020 was 24%.

Required:

a. Explain the effect of changes on capital for bonus issue in calculating basic EPS in
accordance to MFRS 133 Earnings per share.
(6 marks)

b. Compute the basic EPS for the year ended 31 December 2019 and 31 December
2020.
(7 marks)

c. Assess the effect of diluted EPS for the year ended 31 December 2020. (show all
workings)
(7 marks)
(Total: 20 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 3 AC/JUL 2021/FAR570

QUESTION 2

A. Deferred tax is an accounting concept (also known as future income taxes), meaning
a future tax liability or asset, resulting from temporary differences.

Required:

Briefly explain how temporary difference would arise from assets and liabilities in
accordance with MFRS 112 Income Taxes.
(6 marks)

B. Iris Bhd accounts for deferred tax under the liability method by providing for all
temporary differences. The following items relate to the accounts of Iris Bhd for the
financial year ended 31 December 2020:

i. On 1 January 2018, Iris Bhd acquired a machine for RM200,000. The machine
is to be depreciated at 15% per annum on a straight-line method. For income
tax purpose, the machine qualifies for an initial allowance of 5% and an annual
allowance of 20%. On 1 January 2020, the company acquired an additional
machine for RM180,000.

ii. Iris Bhd maintains a provision for warranty costs in relation to warranties given
for products sold. As at 31 December 2020, the balance in the provision
account were RM72,000.

iii. In June 2020, the company took out 12% bank loan amounting RM100,000. At
the end of the year, the accrued interest expenses were amounting to
RM6,000,000.

iv. An allowance for doubtful debts of 10% is to be made for the year. As at 31
December 2020, the company’s account receivables amounting to RM70,000.

v. Research cost of RM120,000 was written off to the Statement of Profit or Loss,
whilst the development cost of RM400,000 that met the criteria for capitalisation
was recognised in the Statement of Financial Position as at 31 December 2020.

Additional information:

1. The corporate tax rate is 24% for the year of assessment 2019 and 2020.
2. Profit before tax for the year 2020 was RM300,000.
3. Taxable temporary difference at 1 January 2020 was RM312,500.
4. The tax treatment is in accordance to Income Tax Act 1967.

Required:

a. Calculate the carrying amount and tax base of the machine for the year ended
31 December 2020.
(3 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 4 AC/JUL 2021/FAR570

b. Calculate the deferred tax asset or deferred tax liability as at 31 December

2020 arising from the above transactions.
(7 marks)

c. Construct an extract of the Statement of Profit or Loss for the year ended 31
December 2020 to disclose the tax information as required by MFRS 112
Income Taxes.
(4 marks)
(Total: 20 marks)

QUESTION 3

A. Explain the following scenarios with reference to MFRS 2 Share Based Payment.

i. Bina Bhd grants 20 shares to its employees with a condition that they remain
in the service for the next 12 months.

ii. Teguh Bhd grants employees a cash bonus equal to Teguh’s share price
growth with a condition that they remain in service over the next 12 months.
(6 marks)

B. On January 2018, Mellow Bhd granted the share options to its employees. The details
are as follows:

Number of employees 200

Numbers of option for each employee 150 shares
Vesting period 3 years
Fair value at grant date RM4 per share
Expected employee turnover 15%

On 31 December 2019, due to the unfavorable economic condition, the entity has to
revise its estimates of employee turnover to 30% for the three-year vesting period. At
the end of 31 December 2020, 25% of the employees left Mellow Bhd.

Required:

Calculate the employees benefit expenses to be recognized by Mellow Bhd for the
year ended 31 December 2018, 2019 and 2020.
(8 marks)

C. Discuss the recognition and measurement on the acquisition of the machinery by

Mellow Bhd for the following scenarios:

i. On 1 June 2019, Mellow Bhd acquired a machinery that had a fair value of
RM150,000 from Puncak Dania Bhd. The agreement with the vendor was to
settle the amount due by issuing share options for 50,000 shares of Mellow
Bhd. The fair value of the options as at 31 December 2020 was RM3 per share.

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 5 AC/JUL 2021/FAR570

ii. On 1 June 2019, Mellow Bhd acquired a machinery from Puncak Levin Bhd.
The fair value on the date of acquisition of the machine cannot be estimated
reliably. Mellow Bhd made an agreement with the vendor to settle the amount
due by issuing share options for 50,000 shares of Mellow Bhd. The fair value
of the share options on 1 June 2019 was RM2.
(6 marks)
(Total: 20 marks)

QUESTION 4

A. Lime Bhd had the following items disclosed in its Statement of Financial Position as at
30 June 2020:

i. Prepaid rental income

ii. Prepaid commission expense
iii. 5% Convertible debentures
iv. Copyright
v. Investment in Kasturi Bhd (ordinary shares)
vi. Tax recoverable

Lime Bhd issued 500,000 5-year term 5% convertible debentures on 1 July 2019. The
debentures were issued with a total fair value of RM50,000,000, equivalent to its par
value. Interest is paid annually in arrears at a rate of 5% per annum. Similar bonds,
without the conversion option, attract an interest rate of 8% per annum on 1 July 2019.

The following table shows the present value of RM1 at 5% and 8%.

Year 5% 8%
1 0.952 0.923
2 0.907 0.857
3 0.864 0.794
4 0.823 0.735
5 0.783 0.681

Required:

a. Determine whether the items listed from (i) to (vi) above is a financial instrument
or non-financial instrument.
(3 marks)

b. Provide your justification for your given answer in (a) above for the following
items:

i. Prepaid rental income

ii. Prepaid commission expense
iii. Investment in Kasturi Bhd (ordinary shares)
(3 marks)

c. Prepare the Statement of Financial Position (extract) as at 1 July 2019 to

recognize the convertible debentures. (show all relevant workings)
(6 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 6 AC/JUL 2021/FAR570

B. Para 3.2.6 of MFRS 9 Financial Instruments stated that, when an entity transfers
(derecognition) a financial asset, it shall evaluate the extent to which it retains the risks
and rewards of ownership of the financial asset.

a. Discuss the above statement by giving TWO (2) examples when an entity has
transferred substantially all the risks and rewards of ownership.
(2 marks)

b. Sunho Manufacturing Bhd sold one of its receivables amounting RM1,200,000

to YS Credit by signing an agreement stating a condition in that if the debtor
fails to pay YS Credit, Sunho Manufacturing Bhd will cover the losses. YS
Credit has paid Sunho Manufacturing Bhd RM800,000 in advance and manage
the debtor including the debt collection.

Required:

Justify whether the arrangement meets the derecognition as set by MFRS 9 Financial
Instruments.
(6 marks)
(Total: 20 marks)

QUESTION 5

Taupo White Bhd operates a defined benefit scheme for its employees. As at 1 January 2020,
the present value of the defined benefit obligation and the fair value of the plan assets are
RM23,000,000 and RM22,000,000 respectively. During the year ended 31 December 2020,
the following transactions took place:

i. The current service for the year amounting to RM1,980,000.

ii. The entity incurred past service cost due to plan amendment amounting to
RM1,100,000.
iii. The contribution made to the fund was RM2,800,000.
iv. The plan paid benefit of RM3,580,000 to the retired employees.

The expected rate of return on investment is 8% while the interest rate on the market yield of
corporate bonds is 6%.

As at 31 December 2020, the fair value of the plan asset was RM24,500,000 and the present
value of the defined benefit obligation was RM24,000,000.

Required:

a. Compute the actuarial gain or loss on the defined benefit obligation and plan assets
for the year ended 31 December 2020.
(6 marks)

b. Determine the amount of defined benefit asset or liability to be disclosed in the

Statement of Financial Position as at 31 December 2020 assuming the asset ceiling is
RM600,000.
(2 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 7 AC/JUL 2021/FAR570

c. Calculate the defined benefit costs that should be recognized in the Statement of Profit
or Loss and Other Comprehensive Income for the year ended 31 December 2020.
(6 marks)

d. DNeez Holdings Bhd is planning to introduce a post-employment benefit plan to its

loyal employees. However, the CEO of the DNeez Holdings Bhd, Encik Cassano is
undecided whether to operate a defined contribution plan or defined benefit plan for
the company to minimize any related risks. As a newly appointed accountant, advise
Encik Cassano on which plan should he choose to meet his requirement to operate
the plan with lower risk.
(6 marks)
(Total: 20 marks)

END OF QUESTION PAPER

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL