SUGGESTED ANSWERS SET A QUESTION 1 Acquisition of Hobbit in Summer on 1 July 2009
Consideration Considerati on transferred FVNCI at date of acquisition acquisitio n FVNA at date of acquisition: Equity Retained earnings FV adjustment OCE
Parent RM million 100
125 9/ 8/ 6/ -------148
Goodwill Goodwill impaired
NCI RM million 80
Total RM million 100/ 80/
(88.8) 11.2 (1.8)/ 9.4
(59.2) 20.8 (1.2)/ 19.6
(148) 32 ( 3) 29
Parent RM million
NCI RM million
Total RM million
40/
84 40
(28.22) 11.78 (0.68)/ 11.1
(83) 41 (2) 39
Acquisition in Sunny on 1 July 2011
Consideration transferred � Direct � Indirect 40 x 60% FVNCI at date of acquisition acquisitio n FVNA at date of acquisition: Equity Retained earnings
Goodwill Goodwill impaired
60/ 24/
80 3/ ----83
(54.78) 29.22 (1.32)/ 27.9
Acquisition in Autumn on 1 January 2012 RM million Consideration transferred: 80 x 40% = 32 /4 x 2 x 3 FVNA at date of acquisition: Equity 80 Retained earnings PFY 26 x 6/12 = 13/ a + n b/f 20 113 x 40% Goodwill Impaired 10%
48//
(45.2) 2.8 (0.28)/ 2.52 RM million 48
Consideration transferred Share of post acquisition profits: 26 x 6/12 x 40% Goodwill impaired URP 1/125 x 25 x 40% Carrying value of investment in associate
5.2/ (0.28)/ (0.08)/ 52.84
Analysis of retained earnings
Balance b/d Pre acquisition profits Post acquisition profits URP Depreciation : 1.6 x 3 years Dividends proposed Dividends receivable : From Summer 3.75 x 60% Sunny 2.4 x 30% 2.4 x 60% Goodwill impaired: Summer Sunny Autumn Post acquisition profits Share of post acquisition profits: Summer 13.39 x 60%/ Sunny 24.6 x 66%/ Autumn 13 x 40%/ To CSFP
Hobbit RM million 41
(0.08)/ (12)/
Summer RM million 31 (9) 22 (1.5)/ (4.8)// (3.75)/
Sunny RM million 49 (3) 46
Autumn RM million 46 (33) 13
(2.4)/
2.25/ 0.72/ 1.44/ (1.8)/ (1.32)/ (0.28)/ 13.39 8.03 28.78 5.2 70.5
43.6
13
NCI - Summer 40% RM million 80
FVNCI at date of acquisition Share of post acquisition profits: 13.39 x 40% OCE Goodwill impaired Indirect investment 40 x 40% To CSFP NCI - Sunny
5.36/ 1.6/ (1.2)/ (16)/ 69.76
34% RM million 40
FVNCI at date of acquisition Share of post acquisition profits: 43.6 x 34% Goodwill impaired To CSFP
14.82/ (0.68/) 54.14
Analysis of OCE
Balance b/d Pre acquisition Share of post acquisition 4 x 60% To CSFP
Hobbit RM million 7
Summer RM million 10 (6) 4
2.4 9.4
Consolidated statement of financial position of Hobbit’s Group as at 30 June 2012
PPE Goodwill Investment in associate ITA
130 + 110 + 119 + FV 8 – depreciation 4.8 39 + 29
CA Total assets
58 + 56 + 34 – 1.5 /
Equity Share premium OCE Retained earnings
240 + shares issued 16/
NCI NCL CL Dividends proposed –Hobbit
69.76 + 54.14 20 + 10 + 15 45 + 35 + 9
7 + 2.4/
RM million 362.2// 68/ 52.84/ 5 146.5 634.54 256 32/ 9.4 70.5 123.9 45 84 12/
Dividends to NCI Total equity and liabilities
3.75 x 40% + 2.4 x 10%
1.74// 634.54
Consolidated statement of comprehensive income for the year ended 30 June 2012
Revenue COS
250 + 180 +125 -10 (80 + 60 + 40 – 10 + URP1.5 + URP depreciation 1.6
Gross profit Other income Operating expenses Share of net profit of associate Profit before tax Taxation Profit for the year OCI Total comprehensive income for the year
2+3 68 + 47 + 29 + goodwill impaired 3 + 2 26/2 x 40% - goodwill impaired 0.288 - URP 0.08 (25 + 16 + 10) 5+4
Profit for the year attributable to: NCI
: Summer Sunny
60 – 1.5(URP) – 1.6(Deprn) – goodwill impaired 3 x 40% 46 – goodwill impaired 2 x 34%
Parent /
Total comprehensive income attributable to: NCI : Summer Sunny
64 -1.5 (URP) – 1.6(Deprn) – goodwill impaired 3 x 40% 46 – goodwill impaired 2 x 34%
Parent/
Retained profit b / fwd Hobbit Summer (29 – preacq [9] – Deprn [1.6 x 2] x 6% PFTY Dividend (Hobbit) Retained profit c / fwd
RM million 545/ (173.1)///// 371.9 5/ (149)/ 4.84// 232.74 (51)/ 181.74 9/ 190.74 RM million 21.56// 14.96/ 145.22 181.74 RM million 23.16// 14.96/ 152.62 190.74 RM (38) (24.72) 145.22 (12) 70.5
75/3 = 25 marks
QUESTION 2 Petroco Bhd Statement of Comprehensive Income for the year ended 30 June 2012
RM 22,425,000 (12,987,000) 9,438,000 260,000 (2,128,100) (1,860,000) (2,281,300) 3,428,600 (125,650) 3,302,950 (495,000) 2,807,950
Revenue Cost of sales (W1) Gross profit Income from investments Administrative expenses (W1) Distribution expenses Other operating expense (W1) Profit from operations Finance expense (W1) Profit before tax Taxation (435,000 + 60,000) Profit for the year Other Comprehensive Income Revaluation surplus - land Total comprehensive Income √
500,000 3,307,950 20
x ½ = 10 marks
Petroco Bhd Statement of changes in equity for the year ended 30 June 2012
As at 1 July 2011
Share capital
Share premium
Revaluation reserve
Retained earnings
RM 7,650,000
RM 827,000
RM -
RM 1,182,000
100,000
(100,000)
PYA Profit for the year
2,807,950
Interim dividend Revaluation surplus
-
As at 30 June 2012
7,650,000
827,000
(90,000)
500,000 600,000
3,799,950
Total Reserves: 5,226,950 8
x ½ - 4 marks
Petroco Bhd√ Statement of financial position as at 30 June 2012 RM
RM
Non - Current Assets: Property, plant and equipment (W2) Investments Intangibles: license Patents and trademarks Current Assets: Inventories Trade receivables (1,883,000 – 200,000) Bank and cash (1,750,000 – 77,500)
7,228,400 3,250,000 8,745,200 555,000 19,753,600 1,240,000 1,683,000
1,672,500
11
4,595,500
Non-Current Assets Held For Sale (1,150,000 x 95%)
1,092,500 25,446,600
Equity and Liabilities Share capital Reserves
7,650,000 5,226,950
12,876,950 Non Current Liabilities Long term loan deferred tax liability lease creditor Current Liabilities Trade payables Accruals and provisions (14,000 + 931,500 + 93,150) lease creditor Other payables
500,000 560,000 77,500
246,000 1,038,650
167,500 10,000,000
1,137,500
11,452,150 25,466,600 33
x 1/3 = 11 (Total 25 marks) Note: The ticks (√) are counted based on the face of financial statements. The ticks ( √) in the workings are only for reference. Workings:
(W1) Allocation of expenses cost of sales
admin
12,735,000
1,682,000
As per question Interim dividend Lease interest – see below Depreciation - building Depreciation - machinery Depreciation - vehicles Depreciation- leased machinery Amortisation - licence Impairment - NCAHFS Bad debt written off Interest – unwinding cost
others
finance 100,000 (90,000) 22,500
83,100 192,000 163,000 60,000 2,186,300 95,000 200,000 93,150
12,987,000
2,128,100
2,281,300
125,650
(W2) Leased Machinery Year 1 July 2011 30 June 2012 1 July 2012
Cash (-) payment Balance c/f (+) Interest (10% x 222,500)
30 June 2013
(-) payment Balance c/f
RM 300,000 (77,500) 222,500 22,500 245,000 (77,500) 167,500
(W3) Property, Plant and equipment
Cost/Valuation As at 1 July 2011 Reclassification to NCAHFS Revaluation surplus Addition As at 30 June 2012 Accumulated depreciation As at 1 July 2011 √ Eliminations to NCAHFS Charge for the year–see below As at 30 June 2012 Carrying amount as at 30 June 2012
Total PPE = 7,228,400
Land
Building
1,500,000
4,780,000 (1,250,000)
Plant & Machinery 1,920,000
Motor Vehicles
Leased Machinery
815,000
√ 500,000
2,000,000
2,000,000
3,530,000
1,920,000
815,000
191,000 (62,500)
384,000
326,000
83,100 211,600
192,000 576,000
3,318,400
1,344,000
163,000 489,000 326,000
300,000 300,000
60,000 60,000 240,000 11
Depreciation charge – building NCAHFS – before classification (1,250,000 x 6/12) 50 Remaining: 3,530,000 50
=
12,500
=
70,600 83,100
Acc. Depreciation eliminated due to reclassification to NCAHFS: 1,250,000 x 21/2 = 62,500 50 (W4) Intangible NCA: License and Provision for restoration landscape: The PV of RM1,500,000 discounted at 10% over 5 years: RM1,500,000 x 0.621 = 931,500 Intangible NCA: License = RM10,000,000 + 931,500
= RM10,931,500
Amortisation
= RM 2,186,300
= RM10,931,500 5 Carrying amount at 30 June 2012
= RM8,745,200
Finance cost: Unwinding discount (931,500 x 10%)
= RM93,150
QUESTION 3 1.
The change in the useful lives of the asset and a change in accounting method of depreciation is a change in accounting estimates. The effect of the change in the accounting estimate should be included in the determination of the net profit or loss in:
� �
The period of the change, if the change affects only that period; or The period of the change and future periods, if the change affects both.
The change in the useful life of the equipment will affect both the current period and the future depreciation charge. Therefore the depreciation charged for the current year should be calculated as below: 300/10 x 2 years = 60 p.a NBV at 1 July 2011 = 240/5 years = 48 p.a for current year and future period/ The change in depreciation method from straight line method to reducing balance method is allowed and be treated as a change in accounting policy only if the change will result in a more appropriate presentation of events or transactions in the financial statements of the company. The accounting treatment is to apply the change retrospectively. However, if the company is unable to determine the cumulative effect, then it can apply the new method prospectively and adjust the comparative information from the earliest date practicable//.
2.
A non-current asset held for sale is measured at the lower of carrying amount and fair value less cost to sell and classify under current assets. No depreciation is charged on these assets and the company is not allowed to make use of the asset as it must be available for immediate sale. (MFRS 5)/ Since the economy has improved and the company is using the plant to help cope with the demand, there is a change of plan and therefore the plant must be re classify as a non current asset (PPE) subject to depreciation as required by MFRS 116./ On re classification, the asset should be measured at the lower of: Carrying amount before classification as held for sale less depreciation, as if the asset were never classified as “held for sale”, and / Its recoverable value/ •
•
The above adjustment to the carrying amount of the non current asset may result in a gain or loss. This amount will be included in profit or loss from continuing operations./ 3.
The sale of goods and the sale of the car are related party transactions. MFRS 124 requires disclosure of transactions with key personnel and sales of assets to directors where control exists. An important aspect of MFRS124 is the assessment of both the materiality and significance of the transactions to the reporting company. Transactions need only be disclosed if they are material. Transactions are material where the users of financial statements might reasonably be influenced by such transactions/// In this case, Johan has purchased RM360,000 of goods from the company and a car for RM50,000 with a market value of RM60,000. Johan effectively controls Wellness. Although neither of these transactions is material or significant to the company or the directors, in the spirit of good corporate governance, transactions with directors are extremely sensitive and therefore disclosure would be recommended.//
4.
The cost of an item comprises of the initial purchase price, including taxes, duties after deducting trade discounts, and any other directly attributable costs incurred in bringing the asset into working condition and intended location and use and decommissioning costs./ Finance expenses of RM30,000 should be expensed to statement of comprehensive income. It cannot be capitalized as it is not related to a qualifying asset. The deferred payment has to be discounted to present value.
Gross cost: Less discount
RM’000 2,000 (200) 1,800 RM’000
Initial cost of machinery:Site preparation Rectification cost Payment on delivery: 1,800 x 6%
60 15
1,080
Deferred payment 720 x 0.909 =
654/ 1,809
SCI (extract) for year ended 30.6.2012 Finance expenses Depreciation 1809/5 Financial cost
30/ 361.8/ 65.4/
SFP (extract) as at 30.6.2012 PPE Acc deprn
1,809 (361.8) 1,447.2
Current liability Deferred payment: 654 + 65.4 =
720/ (9/3 = 3 marks)
5. This a sale and leaseback arrangement and cannot be treated as a sale as in substance Wellness still enjoy the economic benefits of using the asset .The proceeds from the sale should be treated as a secured loan as it is a financing arrangement . As the lease back is an operating lease and the selling price is greater than the fair value, the gain is not recognised immediately but is defer and amortize // Dr Bank Accumulated depreciation Cr Machine Deferred gain Statement of comprehensive income
800,000/ 150,000/ 800/ 50/ 100
Dr Lease rental expense Cr Bank
200,000/ 200,000/
Dr Deferred gain Cr Statement of comprehensive income
10,000/ 10,000/ (Total: 9/3 = 3 marks)
QUESTION 4 (a)
(i)
The two accounting concepts: •
Accruals – The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial statements in the period to which they relate. •
(ii)
Prudence – In the preparation of financial statements, prepare need to be cautious in the exercise of judgement to ensure that income and assets are not overstated and expenses and liabilities are not understated. (1 ½ each: total 3 marks) Accounting inventory by adjusting purchases for the opening and closing inventories is a classic example of the application of the accruals principle whereby revenues earned are matched with costs incurred. Closing inventory is by definition an example of goods that have been purchased, but not yet consumed. In other words the entity has not yet had the ‘benefit’ (i.e. the sales revenue they will generate) from the closing inventory; therefore the cost of the closing inventory should not be charged to the current year’s income statement. At the year end, the value of an entity’s closing inventory is, by its nature, uncertain. In the next accounting period it may be sold at a profit or a loss. Accounting standards require inventory to be valued at the lower of cost and net realisable value. This is the application of prudence. If the inventory is expected to sell at a profit, the profit is deferred (by valuing inventory at cost) until it is actually sold. However, if the goods are expected to sell for a (net) loss, then that loss must be recognized immediately by valuing the inventory at its net realisable value. Note: other appropriate examples would be acceptable. (5 marks)
(b)
(i)
Calculation of impairment loss for the machine as at 30 June 2012
Cost 1 July 2010 Acc. Depreciation (1 July 2010–30 June 2012) Carrying amount 30 June 2012 Recoverable amount: higher of: Net selling price RM525,000 Value in use RM443,224 Impairment loss
RM 880,000 176,000 704,000
525,000 179,000
Value in Use as at 30 June 2012 Year
2013 2014 2015 2016 2017
Estimated Cash flow RM 123,660 122,300 115,350 112,330 107,000
Discount rate (10%) 0.909 0.826 0.751 0.683 0.621 VIU
Discounted Amount RM 112,407 101,020 86,628 76,722 66,447 443,224
Statement of Financial Position as 30 June 2012 Machine Cost Accumulated depreciation. Impairment loss Carrying amount
RM 880,000 (176,000) 179,000) 525,000
(10 x ½ = 5 marks)
(c)
(ii)
Any 4 indicators of impairments: (a) Market value declines (b) Negative changes in technology, markets, economy, or laws (c) Obsolescence or physical damage (d) Worse economic performance than expected and other relevant indicator
(i)
Initial recognition of the HFT investment is at cost and the transaction costs are charged to the Income Statement: Dr.
HFT Investment Cr. Bank
RM5,600,000 RM5,600,000
(Being recognition of investment: 1,000,000 shares x RM5.60) Dr.
Income Statement Cr. Bank
RM28,000 RM28,000
(Being transaction costs (RM5,600,000 x 0.5%) taken through profit and loss because the investment is classified as HFT)
Subsequent measurement is at fair value with gain or loss taken to profit and loss: HFT Investment RM400,000 Cr. Income Statement RM400,000 (Being the gain on HFT investment recognized in profit for the year) 8 x ½ = 4 marks Dr.
(ii)
The investment made by LBS should be classified as held to maturity investment since LBS would like to hold it until redemption date. Initial measurement of the investment will be at fair value (which is its cost) any associated issue costs . The journal entry will be: DR.
Investment in HTM investment
RM8,400,000
plus
RM8,400,000
Cr. Bank
Subsequent measurement will be based on amortised cost basis: Year end
30 June 2011 30 June 2012
Opening balance RM000 8,400 8,474
Effective interest 8.5% RM000 714 720
Interest received (8% x RM8m) RM000 (640) (640)
Closing balance RM000 8,474 8,554
The investment will be recorded at RM8,554,000 in the statement of financial position as at 30 June 2012. 12 x ½ = 6 marks
