· Web viewP acquired 80% of S on 1 December 2004 paying GHC4.25 in cash per share. At this date...

EXCEL PROFESSIONAL INSTITUTE

WEEKLY ASSIGNMENT

WEEK 8

ASSIGMENT SET 7

PRINT, WORK AND SUBMIT YOUR ASSIGNMENT AT NEXT LECTURE(Ignore assignment for courses you have not registered)

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No Assignments for Quantitative Methods, Law and MIS this week

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2.1 FINANCIAL REPORTING

P acquired 80% of S on 1 December 2004 paying GHC4.25 in cash per share. At this date the balance on S’s retained earnings was GHC870,000. On 1 March 2007 P acquired 30% of A’s ordinary shares. The consideration was settled by share exchange of 4 new shares in P for every 3 shares acquired in A. The share price of P at the date of acquisition was GHC5.00. P has not yet recorded the acquisition of A in its books.The Statements of Financial Position of the three companies as at 30November 2007 is as follows:

P S A Non-current assets GHC000 GHC000 GHC000

Property 1,300 850 900Plant & Equipment 450 210 150Investments 1,825 – –Current assetsInventory 550 230 200Receivables 300 340 400Cash 120 50 140TOTAL ASSETS 4545 1680 1790

Share capital GHC1 2,050 580 25Retained earnings 1,145 400 1,200

EQUITY 3,195 980 1,450Non-current liabilities10% Loan notes 500 300 –Current liabilitiesTrade Payables 520 330 250Income tax 330 70 90

EQUITY AND LIABILITIES 4,545 1,680 1,790

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The following information is relevant:

(i)As at 1 December 2004, plant in the books of S was determined to have a fair value of GHC50,000 in excess of its carrying amount. The plant had a remaining life of 5 years at this time.

(ii) During the post acquisition period, S sold goods to P for GHC400,000at a markup of 25%. P had a quarter of these goods still in inventory at the year end.

(iii) In September A sold goods to P for GHC150,000. These goods had cost A GHC100,000. P had GHC90,000 (at cost to P) in inventory at the year end.

(iv) As a result of the above intercompany sales, P’s books showed GHC50,000 and GHC20,000 as owing to S and A respectively at the year end.These balances agreed with the amounts recorded in S’s and A’s books.

(v) Non-controlling interests are measured using the fair value method.The fair value of the non-controlling interest at the date of acquisition was GHC368,000. Goodwill has impaired by GHC150,000 at the reporting date. An impairment review found the investment in the associate was to be impaired by GHC15,000 at the year end.

(vi) A’s profit after tax for the year is GHC600,000

Required:a. Prepare Consolidated statement of Profit and Loss for the year ending Nov 30 2007

10marks

b. Prepare Consolidated Statement of financial position as at Nov 30, 2007 10 marks

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2.2 MANAGEMENT ACCOUNTINGQ1(a) Two products (Y and Z) are jointly produced in a single process. Joint costs for a period

totalled GHS52,000. Output of the two products in the period was:

Product Y 2,000 units Product Z 3,500 units

There was no opening or closing work-in-progress or finished goods stock (inventory).

Both products are currently sold without further processing for:

Product Y GHS12.00 per unit Product Z GHS16.00 per unit

Sales values are used as the basis for apportioning joint costs.

Required Prepare a statement showing the gross profit (in total and per unit) for each product in the period. (9 marks)

(c) In another process operation joint products A and B are produced. Joint costs, apportioned on the basis of weight of output, are GHS9.80 per kg. Product A can be sold at the split-off point for GHS9.00 per kg. Alternatively the product can be processed further, at an incremental cost of GHS2.10 per kg, and sold as Product AA at a price of GHS11.50 per kg.

Required Comment on each of the following statements concerning Product A:

(i) The product should be processed further because if sold as Product A the selling price is below cost. (2 marks)

(ii) The product should be processed further because profit would increase. (Show calculations

clearly to support your comment.) (3 marks)

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Q 2

OWL has been measuring the performance of its divisions using traditional profit measures. Whilst the divisions all make differing products all the products do have limited shelf lives.

After attending a recent conference on throughput accounting the finance manager decided to look at the divisions performance on the basis of throughput accounting The results for the last year (2016) were as follows: O W L Net profit margin 20% 5% 30% TPAR 1.8 0.9 1.5 Required (a) Suggest one key reason why the relative performance is different using the two approaches. (2 marks) (b) Explain the significance of W's TPAR and suggest how it may be improved. (3 marks) (c) Explain why the TPAR may be a better measure of performance than profit for OWL. (3 marks)

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2.3 AUDIT AND ASSURANCEGarcia Co is a manufacturing company with a large number of customers. The sales ledger is managed by Amy Jones, who prepares invoices on the basis of orders passed to her by Joe Jones, the Sales Manager. Amy is also in charge of credit control. You are an audit senior observing and recording the system during the external audit. Amy has told you about the system in detail. It is obvious that staff members are intent on keeping the controls that are in place. The system is as follows: Orders are taken by Joe Jones or his assistant, Mary Smith and recorded on a two part document, one of which is sent to production and the other they keep in an outstanding orders tray until the order is fulfilled. When the order is fulfilled, production send a goods outward note to the customer with the order and send a copy to Joe and Mary. Joe or Mary then file the order in an orders fulfilled file and send the second copy of the order to Amy. Amy raises invoices on the basis of the orders sent to her and enters the details on the sales ledger and daybook. Post is opened by Jane Goose, the receptionist, with Amy in attendance and receipts are listed. Amy then lodges the cheques in the safe while she posts the receipts to the sales and cash ledgers. Amy reviews the ledger monthly and rings customers who have debts building up. If a debt has been on the ledger more than one year, Amy writes it off. During the time you were observing, you saw Amy amend the address of a customer on the master file as a result of a phone conversation with that customer. In addition, you saw the printer spoil an invoice print run. The spoilt invoices were thrown into the recycling bin. Required (a) Identify four inherent limitations of any internal control system. (2 marks) (b) (i) Identify and explain four deficiencies in Garcia Co’s system of internal control over

revenue and receivables. (ii) For each deficiency, suggest an internal control to overcome that deficiency. (8 marks)

(c) Describe the control environment at Garcia Co and explain how it will affect your audit approach. (4 marks) (d) Describe three substantive procedures the auditor of Garcia Co should perform at the year end in confirming each of the following areas: (i) The completeness of sales revenue (3 marks) (ii) The valuation of receivables (3 marks)

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2.4 FINANCIAL MANAGEMENT

Entity Green has GHS2,000,000 of long-term capital, consisting of 800,000 shares worth GHS800,000 and GHS1,200,000 of 10% debt capital. The company has budgeted annual sales of GHS800,000, and its expected total earnings and EPS are as follows:

GHS GHSSales 800,000Variable costs 200,000Fixed costs 400,000Total costs 600,000Profit before interest and tax 200,000Interest (GHS1,200,000 × 10%) 120,000Profit before tax 80,000Tax at 40% 32,000Earnings 48,000Number of shares 800,000 800,000EPS GHS0.06Now suppose that the budgeted sales figure is revised to GHS1,000,000, an increase of 25%.

Required(a) Calculate the operational gearing, measured as the ratio of the percentage increase in profit before interest and tax the percentage increase in sales.(b) Calculate the financial gearing, measured as the ratio of the percentage change in total earnings (or EPS) to the percentage increase in profit before interest and tax.(c) Calculate the overall gearing, measured as the ratio of the percentage change in total earnings (or EPS) to the percentage increase in sales.(d) Confirm that your answer in (c) is your answer in (a) multiplied by your answer in (b).

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2.5 PUBLIC SECTOR ACCOUNTINGQuestion 1

a. State four (4) ways in which the Internally Generated Funds [IGF] of Local Governments can be improved. (5 marks)

b. The Constitution and the Local Government Act 1993, designates MMDAs as a rating authority and empowers them to levy and collect local rates. Identify and explain five (5) revenue sources derived from the operation of these laws.

c. Outline two responsibilities of the following with regard to administration of Local Assemblies:i. The Chief executiveii. RCCiii. Parliamentarian

Question 2.

Highlight five (5) returns to be submitted by the following Department of the Government.

a. Revenue collection Departmentb. Spending Department.

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2.6 CORPORATE STRATEGY, ETHICS AND GOVERNANCE

1. CSEG Ltd is a multidivisional company well established in the Logistics Industry. In the last financial year, earnings per share for CSEG Ltd was GH¢2.12 producing a dividend cover of 1.15 times. The dividend per share paid by CSEG Ltd has remained at the same level for five years. Comparative values for divisional revenue and operating profit are shown in table 1.

Table 1: Divisional Financial Data Cruise Ferry

Container Bulk Shipping

GH¢000 GH¢000 GH¢000 GH¢000 Current year’s revenue

5,136 4,002 7,572 750

Previous year’s revenue

4,410 3,756 6,306 672

Current year’s operating Profit

780 650 252 (30)

Previous year’s operating profit

528 480 240 (18)

Assets/Capital Employed

2,800 2,500 3,200 3,800

During the year, general inflationary levels in the shipping industry was 14% per annum. The company’s cost of capital is 25% after tax. The current exchange and tax rate in the industry is reported as 20% and 30% respectively.

i) Evaluate the dividend policy adopted by CSEG. (5 marks)ii) Calculate the current return on investment (ROI) and residual income (RI) for each

division for the current year. (4 marks) iii) Assess the performance of each division and advise the management of CSEG Ltd. (8

marks)

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2) Professional accountants face many threats in the performance of their duties that may negatively affect accountants’ objectivity and independence. One of such threats is intimidation threat which may arise from close business relationships, family and personal relationships, and assurance staff members moving to employment with client as well as actual and threatened litigation.

Required:

Explain FOUR safeguards you will consider to deal with actual and threatened litigation as a professional accountant. (6 marks)

3) There are a number of approaches that are used to explain ethical conduct of employees.

Required:

Explain the three (3) basic approaches to ethical behaviour. (9 marks)

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3.1 CORPORATE REPOTING

The draft consolidated financial statements of LGR Group for the year ended 31 May 20X7 are being finalised. The non-executive directors have asked for expert advice in relation to the accounting treatment of certain transactions, and in particular, whether a summary of financial indicators presented to them is reliable.

SUMMARISED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7

GHS’000 Non-current assets

Property, plant and equipment 27,480 Intangible assets 9,400

Investment in joint venture 320

Current assets 41,900 79,100

Equity

Stated capital 39,900 Income surplus 8,700

48,600 Non-current liabilities Long-term loans 21,100

Current liabilities 9,400

79,100

Key ratios

Return on capital employed = Profit before interest and tax/ Equity+ long term interest bearing debt)

8,360,000/69,700,000 = 12% Gearing= (Equity + Long term Interest bearing debt)/Equity

21,100,000/48,600,000 = 43%

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37,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,2037,20


(a) One of LGR’s subsidiaries LCO, has opened up a new retail superstore selling climbing equipment. The building has been leased on the following terms:

Start date: 1 June 20X6 Lease term: Five years

Rentals: Eight six-monthly payments of GHS200,000 commencing on 1 June 20X7

No expense has been recognised in respect of this lease. A six-monthly market rate of interest for borrowing with a similar risk would be 4%. LCO also plans to sell goods over the internet. GHS350,000 of start-up costs been capitalised as an intangible non-current asset. (3 marks)

(b) Another subsidiary, PSN, completed the construction of a new manufacturing facility on 28 February 20X7. The project was financed through the issue of a GHS4,000,000 6% four-year bond. This was issued on 1 June 20X6 at a discount of 3⅓%. The internal rate of return of the debt is 7%. Market interest rates on debt with the same risk profile were 7% during the accounting period, but increased to 8% at the year end. The bond has been accounted for at fair value though profit or loss (fair value measured as the present value of the future cash flows with fair value changes recognised as financing items) and the finance costs for the year have been capitalised as part of the building cost. The building is being depreciated over 30

years. (6 marks)

(c) LGR owns 50% of the equity stated capital of ISL. The other 50% is owned by an unrelated company, ZCF. All of the equity shares carry the same votes and rights to dividends. ISL was incorporated on 1 June 20X6 and acquired 10 shops from LGR. A contractual agreement between LGR and ISL grants LGR the right to make key management decisions regarding the operation of the ten shops. During the year ISL raised loans from ZCF carrying interest at market rates to fund expansion of the business.

The loans have been guaranteed by LGR. The investment in ISL has been equity accounted as a joint venture under IAS 28 Investments in associates and joint ventures.

The following information relates to ISL for the year ended 31 May 20X7.

STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7

GHS’000 Non-current assets

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Property, plant and equipment 2,600

Current assets

640 Non-current liabilities Long-term loans 2,200 Current liabilities 960 3,800

(d) JEB, another subsidiary of LGR, runs a national chain of garden centres. In June 20X6 the company paid GHS2,000,000 to acquire two leasehold properties, on leases of 40 years. The accounting policy which has been adopted – as it is believed to be followed by other companies in this sector – is not to provide any depreciation until the last ten years of the lease from which point the depreciable amount will be written off over the remainder of the useful

life of the lease.

Required Prepare a report for the non-executive directors explaining the appropriate accounting treatment and/or disclosure under current requirements for each of the issues identified above.

Your report should also contain a revised schedule of ratios in line with best current practice.

(20 marks)

Notes.

Cumulative discount factors:

8 periods at 4% 6.733

3 periods at 8% 2.577

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Equity Stated capital 800 Retained losses (160)


3.2 ADVANCED AUDIT AND ASSURANCE

(a) You are the manager responsible for the audit of the Lance Group, which comprises a parent company and six subsidiaries. The audit of all individual companies' financial statements is almost complete, and you are currently carrying out the audit of the consolidated financial statements. One of the subsidiaries, Poe Co, is audited by another firm, Portia & Co. Your firm has fulfilled the necessary requirements of ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) and is satisfied as to the competence and independence of Portia & Co.

You have received from Portia & Co the draft audit report on Poe Co's financial statements, an extract from which is shown below.

Basis for Qualified Opinion (extract) The company is facing financial damages of GHS2m in respect of an ongoing court case, more fully explained in Note 12 to the financial statements. Management has not recognised a provision but has disclosed the situation as a contingent liability. Under International Financial Reporting Standards, a provision should be made if there is an obligation as a result of a past event, a probable outflow of economic benefit, and a reliable estimate can be made. Audit evidence concludes that these criteria have been met, and it is our opinion that a provision of GHS2m should be recognised. Accordingly, net profit and shareholders' equity would have been reduced by GHS2m if the provision had been recognised.

Qualified Opinion (extract) In our opinion, except for effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of the financial position of Poe Co as at 31 March 20X16

Note 12 to Poe Co's financial statements (extract) The company is the subject of a court case concerning an alleged breach of planning regulations. The plaintiff is claiming compensation of GHS2 million. The management of Poe Co, after seeking legal advice, believe that there is only a 20% chance of a successful claim being made against the company.

Figures extracted from the draft financial statements for the year ending 31 March 20X1 are as follows. Lance Group

GHSm Poe Co

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GHSm Profit before tax 20 4 Total assets 85 20

Required

Identify and explain the matters that should be considered, and actions that should be taken by the group audit engagement team, in forming an opinion on the consolidated financial statements of the

Lance Group. (11 marks)

(b) A trainee accountant, Jo Castries, is assigned to your audit team. This is the first group audit that Jo has worked on. Jo made the following comment regarding the group audit:

'I understand that in a group audit engagement, one of the requirements is to design and perform audit procedures on the consolidation process. Please explain to me the principal audit procedures that are performed on the consolidation process.'

Required

Respond to the trainee accountant's question. (9 marks)

Note. Assume it is 7 June 2017. (Total = 20 marks)

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3.4 TAXATION AND FISCAL POLICY

The information below relates to PURE JOY Manufacturing Company Ltd, producers of Fruit

Juice for both the local and export markets.

You are required to determine the chargeable income and tax payable for the respective years.

The company commenced business on 1st May 2015

The company acquired the following chargeable assets for use in the business which is located at

Agona Nkwanta in the Western Region

Assets Date of Purchased Cost GHC

Land & Building

Office equipment

Computers/Software

Toyota saloon car

Office furniture

Nissan bus

Toyota Land Cruiser

Data Handling Machines

Toyota bus

Office equipment

May 2014

June 2014

July 2014

Sept. 2014

Feb. 2014

April 2015

May 2016

July 2016

Oct. 2017

Nov. 2017

200,000

15,000

400,000

80,000

8,000

150,000

80,000

90,000

250,000

45,000

The Toyota saloon car was sold on 1st September 2016 for GHC52,000.

The land component of land and building was GHC 40,000.00 which was bought in 2010. The

current value of the land at that locality is GHC 120,000.

The Nissan Bus was involved in an accident in October 2017, and on 15th December 2017.

GHC85000.00 compensation was received from the insurance company.

Some of the office equipment bought in 2014 were sold in July 2017 for GHC17, 000, and

GHC50, 000.00 was paid in December 2017 for extension works on the building.

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Additional information

1. The company’s sales and adjusted profits during the period were as follows:

Period Profit

GHC

Export Sales

GHC

Local Sales

GHC

Period to 31/12/16

Year to 31/12/17

Year to 31/12/18

200,000

180,000

208,571

309,000

450,000

600,000

3,000,000

4,500,000

6,000,000

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3.3 ADVANCED FINANCIAL MANAGEMENTQUESTION 1A company prepares a forecast of future free cash flow at the end of each year. A period of 15 years is used as this is thought to represent the typical time horizon of investors in this industry.It is assumed that the planning horizon is three years – i.e. returns are likely to grow each year for the first three years after which they will reach a steady state.The following data is available:Free cash flows are expected to be GHC2.5 million in the first year, GHC4.5 million in the second year and GHC6.5 million in year 3. The stock market value of debt is GHC5m and the company’s cost of capital is 10%.Find the current value of the firm and the value of the equity.

QUESTION 2The company in the previous illustration now believes that earnings after the planning horizon will:A. continue at the year 3 level into perpetuity orB. grow at 0.9% pa after the planning horizon period with the overall time horizon remaining at 15 years.

Recalculate the current value of the firm and the value of the equity.

QUESTION 3A company is preparing a free cash flow forecast in order to calculate the value of equity.The following information is available:Sales: Current sales are GHC500m. Growth is expected to be 8% in year 1, falling by 2% pa (e.g. to 6% in year 2) until sales level out in year 5 where they are expected to remain constant in perpetuity.The operating profit margin will be 10% for the first two years and 12% thereafter.Depreciation in the current year will be GHC7m increasing by GHC1m pa over the planning horizon before leveling off and replacement asset investment is assumed to equal depreciation. Incremental investment in assets is expected to be 8% of the increase in sales in year 1, 6% of the increase in sales in each of the following two years, and 4% of the increase in year 4.Tax will be charged at 30% pa.The WACC is 15%.The market value of short term investments is GHC4m and the market value of debt is GHC48m.

Required: Calculate the value of equity.

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· Web viewP acquired 80% of S on 1 December 2004 paying GHC4.25 in cash per share. At this date...

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Transcript of · Web viewP acquired 80% of S on 1 December 2004 paying GHC4.25 in cash per share. At this date...