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INTI INTERNATIONAL UNIVERSITY


BACHELOR OF ACCOUNTANCY (HONS) PROGRAMME
ACC3201: FINANCIAL REPORTING 1
FINAL EXAMINATION: MAY 2014 SESSION

This paper consists of TWO (2) sections. Answer ALL the questions in SECTION A and
any TWO (2) questions in SECTION B in the answer booklet provided.

SECTION A: Answer ALL questions

Section A

Question 1

The preliminary trial balance of Big Star Bhd, a manufacturer of children’s toy for the year ended 31
December x9 is as follows:

Debit Credit
RM’000 RM’000
Sales 1,000,000
Cost of sales 600,000
Administrative expenses 110,840
Sales and distribution expenses 120,000
Directors’ remuneration 760
Provision for retirement benefits 1,000
Finance expenses 8,000
Dividend income 1,680
Non-current assets – at cost
Land 200,000
Building 300,000
Plant and machinery 146,000
Accumulated depreciation
Building 50,000
Plant and machinery 72,000
Investment 8,400
Research and development 7,600
Inventory 30,000
Trade receivable 38,000
Bank balance 9,500
Trade payable 34,000
Tax paid 45,000
Bank overdraft (unsecured) 12,000
Share capital 200,000
Share premium 60,000
Retained earnings 169,420
10% debentures (secured on building) 16,000
Deferred tax liability ________ ____8,000
1,624,100 1,624,100
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Additional information:

(a) Credit sales worth RM 2 million were delivered on 10 January x10. Inventory amounting to
RM 2.35 million was ascertained to be damaged and was not provided for in the accounts.
(b) Out of RM 8 million of finance expenses, RM 5 million was lease rental on plant (50% used
for administrative purposes and balance for distribution); the lease of which expired during
the year. The balance of RM 3 million was made up of debenture interest and interest on
draft.
(c) On 1 June x9 the company issued 20 million shares at a premium of RM 1 each. The
authorized capital was made up of RM400 million ordinary shares of par value RM 1 each.
(d) Out of the total investments of RM 8.4 million, RM 6 million was classified as held for
trading with market value of RM 7.5 million. The balance was classified as available and the
fair value was RM 3 million. The fair values have not been incorporated in the accounts.
(e) The current year’s tax expense was RM 50 million inclusive of the increase in deferred tax
provision of RM 6 million.
(f) The research and development expenses shown in the list of balances were for a project which
was completed and brought into use during the current year. Its economic life was estimated
to be four years.
(g) The land was re-valued to RM 300 million and the directors wanted to incorporate the fair
value in the accounts.
(h) The directors proposed a dividend for the year of 20% on the issued capital as at the end of
the year.
(i) The depreciation expenses charged and included in the accounts for the year were:
Building - 2% on cost
Plant and machinery - 10% on cost

During the year, a fully depreciated plant costing RM 40 million was scrapped and a new
plant costing RM 100 million was acquired.

(j) The company is facing a court case on wrongful dismissal of one of its senior employees. The
lawyers for the company are of the opinion that the company will lose the case and estimate
the compensation to be RM 1 million. Expected legal costs are RM400,000.
(k) The company acquired a piece of land on 21 December x9 by issuing 12% convertible
debentures of RM 10 million. Legal costs incurred were RM 500,000. The cost of
demolishing the old building, regarding and levelling the land amounted to RM 1 million.
Both costs incurred had not yet been paid. The transaction had not been recorded in the
books. (Ignore interest cost on the issue of these debentures for x9).

Required:
From the information given, you are required to prepare the Statement of comprehensive income for
the year ended 31 December x9, statement of changes in equity and the statement of financial position
as at that date.

(Total 25 marks)
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Question 2
Part A

(a) Distinguish between research and development within the context of MFRS138,
Intangible Assets.
(6 marks)
(b) State, with reasons, how the following expenditure would be dealt with in the
financial statements of Prebnex plc to confirm with MFRS 138:
(i) Money spent on a joint project with a university investigating the
potential use of carbon nanotubes for the storage of digital data. No
previous study has been done on this area before.
(4 marks)
(ii) Expenditure on developing a new high speed hard disk which, in the
opinion of Prebnex plc, has an assured and profitable market. Work
has been suspended pending the development of a new glue suitable
for the construction of the disk drives.
(4 marks)

Part B

There are two international standards which deal with goodwill. MFRS 138 does not
allow internally generated goodwill to be recognised as an asset. Goodwill acquired in a
business combination is dealt with by IFRS 3.

(a) Define the term “goodwill” and explain why internally generated goodwill may not be
recognised as an asset.
(6 marks)
(b) Explain the accounting treatment which should be applied if goodwill acquired in a
business combination appears to have a negative value.
(5 marks)
(Total 25 marks)
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Section B: Answer any TWO questions

Question 3

Tommy operates a low cost air transport system. One of its aeroplanes was acquired on 1
January x2 for a total cost of RM740 million. The plane’s components are as follows:

Components Cost (RM Useful life


Million)
Engine 120 3 years
Body 500 10 years
Furniture & fittings 120 5 years

On 1 January x4, it was discovered that there was an unexpected level of engine trouble and
the company decided to replace the engine with a new engine at a cost of RM150 million.
The expected life of the new engine was determined to be four years.
At the same time the company did a limited upgrade to its furniture and fittings at a cost of
RM50 million. The remaining life of the furniture and fitting was revised to eight years as at
1 January x4. It completed repainting the aeroplane at a cost of RM5 million.

Required:

Calculate the depreciation charge for the year ended 31 December x4 and disclose the
carrying amount of the plane. (Note: State the carrying value of both the old and new engine
as at 31/12/x4 as part of your answer).

(Total 25 marks)

Question 4

Cragg Cycles Ltd sells goods with an outdoor pursuits company operating a number of retail
outlets. The finance director is unsure how the following should be dealt with under MFRS
137 in the preparation of the financial statements for the year to 31 December 2012.

(a) At a board of directors meeting on 30 November 2012, it was decided to close one of
the company’s three outlets in Inverness. Redundancies and other costs will arise. The
staff and customers have been advised of the closure by 31 December 2012 and the
company has informed the landlord that the lease of the property will not be renewed
at the end of its current term (March 2013)
(b) Cragg Cycles Ltd has a subsidy company, Hangliders 4U Ltd. Cragg Cycles Ltd has
guaranteed the borrowings of its subsidiary, which is currently profitable and in sound
financial state.
(c) In October 2012 a member of staff was injured while demonstrating a mountain
bicycle. The Health & Safety Executive has alleged that the company was at fault.
Cragg Cycles Ltd’s solicitors believe the company will lose this case if brought
against it.
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(d) A customer has made a claim against Cragg Cycles Ltd for defective goods. The
claim is nearing settlement and Cragg Cycles Ltd’s legal advisers think it is probable
that a sum of RM300,000 will be paid warranty. If minor defects arose in all products
sold, repair costs of RM2 million would arise. If major defects arose in all products
sold, repair costs of RM8 million would arise. Cragg Cycles Ltd’s experience is that
20% of sales lead to claims for minor defects and 5% lead to claims for major defects.

Required:

Advise the finance director on the status of the above situation in relation to the accounts of
Cragg Cycles Ltd for the year to 31 December 2012.

(Total 25 marks)

Question 5

Part A

RHS owns a building of which 75% of the floor space is tenanted to third parties. The remaining 25%
is being used by RHS as an administration office.

RHS changes from cost model to the valuation/fair value model in respect of its investment property.

Required:

(a) Does the building qualify as an investment property as per MFRS140? What are the
conditions that must be met for the building to be an Investment property?
(6 marks)
(b) Assume that the building qualify as an Investment Property, how would you now
value the building?

(6 marks)

Part B

Rolling Berhad has borrowed RM400 million from a finance company to start a cruise ship
business. Part of this loan will be used to construct a cruise ship which cost around RM240
million. The ship will take approximately three years to complete. The balance of the
borrowing is required to set up the business operations. Below is the breakdown of the
various sources of financing:

Types of financing RM millions


8% redeemable preference shares 120
10% loan stock 80
7% term loan 200
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Assume the construction on the ship starts on 1 April x8 and the financing is obtained on the
same date.

Required:

Compute the finance cost that qualifies for capitalization and that which should be expensed
in the income statement.

(13 marks)

-THE END-
ACC3201 / Mary.M / Final / May 2014

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