dec-12 solution.pdf

8/13/2019 Dec-12 Solution.pdf

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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA DECEMBER, 2012 EXAMINATION

FOUNDATION LEVELSUBJECT: 001. PRINCIPLES OF ACCOUNTING

Model Solution

Solution of Q. No.1.(c) 1. Ending capital balance $ 3,96,000

Beginning capital balance 3,16,000 Net income $ 80,000

2. Ending capital balance $ 3,96,000Beginning capital balance 3,16,000

$ 80,000Deduct: Investment 26,000Net income $ 54,000

(d)PLATINUM CORPORATION

Cash + AccountsReceivable + Supplies +Office

Equipment =Notes

Payable + Accounts

Payable + Capital

Balance1.

$ 18,000- 6,200

+ 3,400 + 1,200 + 12,000 = $ 7,200- 6,200+ $ 27,400

2.11,800

+ 2,600+ 3,400

- 2,600+ 1,200 + 12,000 = 1,000 + 27,400

3.14,400- 1,600

+ 800 + 1,200 + 12,000+ 4,200 =

1,000+ 2,600

+ 27,400

4.12,800

+ 5,000+ 800

+ 6,800+ 1,200 + 16,200 = 3,600 + 27,400+ 11,800 Fees Earned

5.17,800- 1,200

+ 7,600 + 1,200 + 16,200 = 3,600 + 39,200- 1,200 Drawings

6.16,600- 3,400

+ 7,600 + 1,200 + 16,200=

3,600 + 38,000- 1,400 Salaries Exp.- 1,800

- 200Rent Exp.

Advtg. Exp.

7.13,200 + 7,600 + 1,200 + 16,200 = 3,600+ 340

+ 34,600- 340 Utilities Exp.

8.13,200

+ 14,000+ 7,600 + 1,200 + 16,200 = +14,000

+ 3,940 + 34,260

27,200 + 7,600 + 1,200 + 16,200 = 14,000 3,940 + 34,260


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SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Solution of Q. No.2.(c) 1 Sales $ 25,60,000

Cost of goods sold:Inventory Jan. 1. ( 4,000 units @ $ 40 ) $ 1,60,000

Purchases :Jan. 7 10,000 units @ $ 48 $ 4,80,000July. 7 20,000 units @ $ 56 11,20,000Dec. 21 12,000 units @ $ 64 7,68,000 23,68,000

Cost of goods available for sale $ 25,28,000Less: inventory Dec. 31 ( 14,000 units ):

Inventory, Jan.1. 4,000 units @ $ 40 $ 1,60,000Purchases, Jan. 7. 10,000 units@$48 4,80,000 6,40,000 18,88,000Gross margin $ 6,72,000

(c) 2 Sales $ 25,60,000Cost of goods sold :Inventory Jan. 1. ( 4,000 units @ $ 40 ) $ 1,60,000

Purchases :Jan. 7 10,000 units @ $ 48 $ 4,80,000July. 7 20,000 units @ $ 56 11,20,000Dec. 21 12,000 units @ $ 64 7,68,000 23,68,000

Cost of goods available for sale ( as above ) $ 25,28,000

Less :Purchase of Dec. 21 (12,000 units @ $64 ) 7,68,000

Cost of goods available for sale $ 17,60,000Less: Inventory , Dec. 31 ( 2,000 units @ 40 ) 80,000 16,80,000

Gross margin $ 8,48,000

Increase in gross margin by delaying purchase ($ 8,48,000 - $ 6,72,000 ) $ 1,76,000

(c) 3 Sales $ 25,60,000Cost of goods sold:Cost of goods available for sale (as above) $ 25,28,000Add: Cost of additional 6,000 units @ $ 64 3,84,000

Cost of goods available for sale 29,12,000Less: Inventory Dec. 31 ( 20,000 units ):

Inventory Jan. 1. ( 4,000 units @ $ 40 ) $ 1,60,000

Purchases July 7. 10,000 units @ $ 48 $ 4,80,000

Purchases July. 7. 6,000 units @ $ 56 3,36,000 9,76,000 19,36,000


Decrease in gross margin if 18,000 units rather than 12,000 units were purchased on dec. 21 $ 48,000.($ 6,72,000- $6,24,000)


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(c) 4 Gross margin from applying to part 1. Conditions:

Sales $ 25,60,000Cost of goods soldCost of goods available for sale from part 1. $ 25,28,000Less : Inventory ( 12,000 @ $64 + 2,000 @ $56 ) Jan. 1. $ 8,80,000 16,48,000


Gross margin from applying FIFO to conditions stated in 2 and 3 is the same $ 9,12,000 . Changes in purchases (and cost of goods availablefor sale) are offset by equal changes in inventory, leaving gross margin undisturbed.

Sales $ 25,60,000 $ 25,60,000 Cost of goods available for sale 17,60,000 29,12,000

Less : Inventory 1,12,000 12,64,000 Cost of goods sold 16,48,000 16,48,000 Gross margin 9,12,000 9,12,000

# 2,000@$56 = $ 1,12,000

# # 18,000 @ $ 64 = $ 11,52,0002,000 @ $ 56 = 1,12,000

$ 12,64,000

Solution of Q. No.3.(c) (i) MONALISA COMPANY

Bank ReconciliationMay. 31 2011

Cash balance per bank statement $ 34,023.00 Add: Deposit in transit $ 4,680.75Bank errorTaher Company 3,000.00 7,680.75

$ 41,703.75

Less : Outstanding checks 6,381,25.00 Adjusted cash balance per bank $ 35,322.50

Cash balance per books $ 28,907.50 Add: Collection of note receivable ( 10,000 + 400 - 100 )

39,207.5010,300.00

Less : NSF checks $ 3,500.00Error in May 12. Deposit 50.00(4,230.75 4,180.75)Error in recording check no 1181 135.00(3,425.00 3,290.00)

Check printing charges 200.00 3,885.00 Adjusted cash balance per books $ 35,322.50


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C(ii)May 31. Cash $ 10,300.00

Misc. Expenses 100.00

N/R 10,000.00Int. Revenue 4,00.0031 A/R W. Huda ( NSF check) 3,500.00

Cash 3,500.0031 Sales ( Error in depositMay 12 ) 50.00

Cash 50.0031 A/P M. Helal 135.00

( Error in recording check no 1181)Cash 135.00

31 Misc. Expenses (printing charges) 200.00Cash 200.00


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Solution of Q. No 4:Requirement (a):

PHP Manufacturing CompanyPartial Balance Sheet

December 31, 2011Liabilities:

Current liabilities: Accounts payable and accrued expenses $1,63,230Income tax payable 63,000

Accrued bond interest payable 1,10,000Unearned revenue 25,300Current portion of long term debt 70,800Total Current liabilities 4,32,400

Long-term liabilities:Notes Payable to HSBC 99,000

Mortgage notes payable 1,69,994Bonds payable 22,00,000Premium on bonds payable 1,406Total Long-term liabilities 24,70,400

Total liabi lit ies 29,02,800

Requirement (b):1. Although the notes payable to HSBC is due in 30 days. It is classified as a long-term liability as it will be

refinanced on a long term basis.2. The pending lawsuit is a loss contingency requiring disclosure, but it is not listed in the liability section of the

balance sheet.3. The $70,870 of the mortgage note that will be repaid within next 12 months [ $2,40,864-1,69,994] is acurrent liability; the remaining balance, due after December 31,2012, is a long term debt.

4. Although the bonds payable mature in seven months, they will be repaid from a sinking fund, rather thanfrom current assets. Therefore, these bonds retain their long-term classification.


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Solution of Q. No 5(b):Requirement (a):Motor vehicles

List price $24,000Less: 20%

19,200(4,800)

Add: sales tax 17.5%22,560

3,360

Add: Cost of painting name Amount to add to non-current-asset register

10022,660

Plant and machin eryCost ($)

Balance as per nominal ledger 120,000 30,000 Acc. Dep ($)

Less: Disposal (30,000) (5,700)* [*i.e. (30000 $24 300)]

90,000 24,300

Office equipmentRevised nominal ledger balances Cost Acc. Dep

Motor vehicles $48,000 $12,000 $36,000Carrying amount

Plant and machinery 90,000 24,300 65,700Office equipment 27,500 7,500

165,500 43,800 121,70020,000

Revised non-current asset register ($147,500 + $22,660)Therefore purchase of office equipment was

170,16048,460

Requirement (b):

Depreciation for 20X4Motor vehicles25% $48,000 $12,00025% $22,660 3/12 1,416 (rounded)

Plant and machinery13,416

10% $90,000Office equipment

$9000

10% $68,460 $6,846


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1

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA DECEMBER - 2012 EXAMINATION

PROFESSIONAL LEVEL-ISUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING.

MODEL SOLUTION

A provision should be made if

Solution to Question No. 1(C)(i)

(a) There is an obligation

(b) A transfer is probable

(c) There is a reliable estimate

The legal costs of Tk. 10,000 should therefore be provided for since they will have to be paidwhatever the outcome of the case. However the claim is not likely to succeed and so no provisionshould be made. A disclosure note should be made for the potential loss of Tk. 100,000.

(ii) IAS 37 states that an obligation can be legal or constructive: In this case the policy of refundshas created a constructive obligation. A provision for Tk. 6,000 should be made.

(iii) As the success of the claim for damages of Tk. 2,00,000 is probable, it constitutes a present

obligation as a result of a past obligating event and would therefore be accounted for as aprovision.

The success of the counter claim of Tk. 100,000 is also considered probable and would thereforeneed to be considered as a contingent asset (reimbursement). Only if it were virtually certain wouldthe counter claim be recognized as an asset in the balance sheet.

(d) Sales of Inventory : Adjusting event:

(i) Closing inventory must be valued at the lower of cost and net realizable value. The post yearend sale provides evidence of the net realizable value. Therefore closing inventory must beadjusted reflect the reduction in value.

(ii) Share Issue: Non-adjusting event:

(iii) Fire in warehouse: Non-adjusting event; but if this is the only and main warehouse and thefire affects going concern, the event will be reclassified as adjusting.

(iv) Bankruptcy of major customer: Adjusting event:

The bankruptcy of the customer provides evidence of their ability to pay the debt at the yearend. The amount outstanding from the customer at June 30, 2011 should therefore bewritten off in the year and accounts

(v) Acquisition of Shayon Ltd. Non-adjusting event.

Solution to Question No. 2. (a)

Keya International Ltd.Statement of Comprehensive Income for the year ended 31 St

March, 2012

Taka

Revenue 2,010,000

Cost of sales (W 1) (950,000)Gross Profit 1,060,000

Administrative expenses (W 2) (246,000)Distribution cost [Tk. 420,000 + (40,000/2)] (440,000)Profit from operations 374,000

Finance cost: (10,000)Investment income 75,000Profit before tax 439,000

Income tax (74,000)Profit for the period 365,000Other comprehensive income (revaluation reserve) 80,000Total comprehensive income 445,000


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2

Solution to Question No. 2. (b)

Keya International Ltd.Statement of Changes in Equity for the year ended 31 5t

March, 2012

Taka Taka Taka

Opening balance 600,00 - 180,000Revaluation of non-current assets - 80,000 -Profit for the year - - 365,000Final dividend paid for 2011 - - (65,000)Interim dividend paid for 2012 - - (35,000)Closing balance 600 000 80,000 445.000

Solution to Question No. 2. (c)

Keya International Ltd.Statement of Financial Position as at 31 5t

March, 2012

ASSETS TakaNon-current assets

Property, plant and equipment (W3) 610,000

Investments 560,000

1,170,000

Current asset

Inventories (W1) 160,000

Advance, deposit and prepayments 200,000

Accounts receivables 470,000

Total assets

830,000

2,000,000EQUITY AND LIABILITIESCapital and reserve

Ordinary share capital of Tk. 1 each 600,000

Revaluation reserve 80,000

Retained earnings 445,000

1,125,000

Non-current liabilities

Term loan 200,000

Provision for warranty cost (Tk. 205,000 + 16,000) 221,000421,000

Current liabilities

Accounts payables (Tk. 260,000 + 40,000) 300,000

Bank overdraft 80,000

Income tax provision 74,000

Total equity and liabilities

454,000

2,000,000


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3

Solution to Question No. 2. (d)

Note 1: Tax is not considered for other comprehensive income since tax rate is not available inthe question.

Note 2: The profit from operations is arrived at after charging

Depreciation (Tk. 27,000 + 5,000)

Taka

32,000

Employee benefits (Tk. 150,000 + 80,000 + 40,000) 270,000

Note 3: A final dividend for 2012 of Tk. 60,000 (10 paisa per share) is proposed.

Workings (W):(W1) Cost of sales

Purchases Add: opening inventoryGoods available for saleLess: Closing inventory

Taka960,000150,000

1,110,00160,000

950,000

(W2) Administrative expense Administrative expense as per trial balance

Staff bonus (Tk. 40,000/2)Warranty expense

Taka210,000

20,00016,000

(W3) Property, plant and equipment (PPE)

246,000

Land & Plant &Buildings Equipment

Cost

Total

200,000 550,000 750,000Revaluation reserve -80,000Total cost or revaluation

80,000280,000 550,000

Accumulated depreciation:830,000

Opening balance as at 1 April 2011 (balancing figure) - 188,000 188,000

Charge for the year (Tk. 27,000 + 5,000) - 32,000 32,000Closing balance as at 31 March 2012 - 220,000Carrying amount of PPE

220,000-

610,000330,000280,000

Shaad Chemical Industries LtdSolution of Question No. 3(a)

Cash flow statement for the year ended 30 June 2012Taka

Cash flows from operating activitiesTaka

Cash generated from operations (Note 1) 71,000Interest paid (6,000)Income tax paid (W3) (3,000)

Net cash from operating activities 62,000Cash flows from investing activities

Purchase of property, plant and equipment (W4) (57,000)Proceeds from sale of property, plant and equipment 20,000Purchase of investments (50,000)

Net cash used in investing activities (87,000)Cash flows from financing activities

Proceeds from issue of ordinary shares (W5) 45,000Redemption of non-current liabilities (Tk 60,000-50,000) (10,000)

Net cash used in financing activities 35,000Net change in cash and cash equivalents 10,000Cash and cash equivalents at 1 July 2011 10,000Cash and cash equivalents at 30 June 2012 20,000


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4

Note: 1 Reconciliation's of profit/loss before tax to net cash generated from operations for the yearended 30 June 2012

Profit/loss before tax (W1)Taka

46,000

Interest expense (Tk 50,000*12%) 6,000Property, plant and equipment - depreciation charge (W2) 23,000Profit on disposal of property, plant and equipment (Tk 20,000-18,000) (2,000)Change in inventories (Tk 11,000-12,000) (1,000)Change in trade and other receivables (Tk 27,000-29,000) (2,000)Change in trade and other payables (Tk 27,000-19,000-5,000) 3,000Change in provision (Tk 0-2000)Cash generated from operations

(2,000)

Workings (W):

71,000

WI: Calculation of Profit before taxClosing retained earnings

Taka

149,000

Add: Bonus Share[ (50,000/10)*1] 5,000Corporate tax

Total7,000

161,000

Less: Opening retained earnings (115,000Profit for the period (balancing figure)

)46,000

W2: Calculation of Depreciation on PPEClosing accumulated depreciation

Taka70,000

Add: Depreciation adjusted for disposal (Tk 40,000-18,000)Total

22,00092,000

Less: Opening accumulated depreciationDepreciation charged for the year (Balancing Figure)

(69,000)23,000

W3: Calculation of Tax Paid during the year

Opening balance of tax liability

Taka

3,000Charge Tax in Income Statement for the yearTotal tax liability

7,00010,000

Less: closing balance of tax liability (7,000Tax paid during the year (Balancing figure)

)3,000

W4: Calculation of purchase of property, plant and equipment during the yearClosing balance of PPE - costDisposal of assetsTotal value of PPE - costLess: Opening balance of PPE - costTotal addition of property, plant and equipment during the yearLess: Credit purchase of PPE during the yearTotal cash purchase -of property, plant and equipment (Balancing figure)

333,000Taka

40,000373,000

(311,000)

62,000(5,000)57,000

W5: Calculation of proceeds from issue of ordinary shares

Opening balance of ordinary shares

Taka

50,000

Issue of bonus shares from retained earnings [(50,000/10)* 1] 5,000Issue of shares for cash (balancing figure)Closing balance of ordinary shares

40,00095,000

Share premium (opening balance) 10,000

Premium from issue of shares (balancing figures)Share premium (closing balance)

5,00015,000

Total proceeds from issue of ordinary shares 45,000


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5

Solution to Question No. 4(a)

Calculation of value of goods destroyed by fire :

Memorandum Trading A/c

Dr. Cr.

ParticularsAmount

(Tk.) ParticularsAmount

(Tk.)T o Opening stock 65,000 By Sales 500,000

To Purchases 380,000 By Goods destroyed by fire (bal. 18,000To Gross Profit (25% of Sales) 125,000 By Closing stock 52,000

570,000 570,000

Goods destroyed by Fire =Tk.18,000

Muttakeen Ltd.Inventory estimation: Retail Method

31" December - 2011

Solution to Question No. 4(b)

Particulars Cost(Tk.'000)

Retail(Tk.'000)

Beginning inventory ....................... 20,460 31,000Purchases .......................................... 207,735 337,271Purchases returns .............................. (7,320) (12,021)Cost / Retail Ratio: Tk.220,875 / Tk. 356,250 =0.62Sales ............................ Tk. 316,148Less: Sales Returns ........ (3,198)

220,875 356,250

Net sales .............................................. 312,950

Ending inventory at retail ...................... 43,300

Ending inventory at cost: (Tk.43,300 x 0.62) ... 26,846

Calculation of cost of Machine -

Particulars Amounts(Tk.)

Price of machineLess : Trade discount @ 2%

Add : Truncated VAT on goods sold @ 4%

Add: Transport Charges @0.25% on Tk. 380,44,000Installation Charges @1% on Tk. 3 80,44,000

Calculation of borrowing cost 30.09.2010 to 01.12.2010[(Tk. 3 10,00,000 x 15% )x (2 months / 12 months)]

Add : Expenses on trial runMaterial .............. Tk. 35,000Wages ................ Tk. 25,000Overheads .......... Tk.15,005

Total cost of machine .........................................

380,44,000

372,83,120760,880

387,74,44514,91,325

95,110

392,49,995380,440

400,24,995775,000

Tk. 401,00,000

75,005

The capitalisation of borrowing costs should cease when substantially all the activities necessary toprepare the qualifying asset for its intended use or sale are complete. And an asset is normally ready forits intended use or sale when its physical construction or production is complete even though routineadministrative work might still continue.


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Solution to Question No. 5(a)

(1) FYR Ltd. should increase its allowance for doubtful debts to Tk.900,000 because the customer'sbankruptcy is indicative of a financial condition that existed at the balance sheet date. This is an"adjusting event."

(2) IAS 33, Earnings Per Share, requires a disclosure of transactions as "stock splits" or "rights issue,"which are of significant importance at the balance sheet. This is a non-adjusting event, and onlydisclosure is needed.

(3) This is an adjusting event because it relates to an asset that was recognized at the balance sheetdate. However, as the insurance company's liability is zero, FYR Ltd. must adjust its receivable on theclaim to zero.

The qualitative characteristics are attributes that improve the usefulness of information provided infinancial statements. The framework suggests that the financial statements should observe and maintainthe following four qualitative characteristics as far as possible within limits of reasonable cost/ benefit.

Solution to Question No. 5(b)

1. Understandability: The financial statements should present information in a manner as to be readilyunderstandable by the users with reasonable knowledge of business and economic activities. It is notright to think that more disclosures are always better. A mass of irrelevant information createsconfusion and can be even more harmful than non-disclosure. No relevant information can behowever withheld on the grounds of complexity.

2. Relevance: The financial statements should contain relevant information only. Information, which islikely to influence the economic decisions by the users, is said to be relevant. Such information mayhelp the users to evaluate past, present or future events or may help in confirming or correcting pastevaluations. The relevance of a piece of information should be judged by its materiality. A piece ofinformation is said to be material if its omission or misstatement can influence economic decisions ofa user.

3. Reliability: To be useful, the information must be reliable; that is to say, they must be free frommaterial error and bias. The information provided are not likely to be reliable unless:

(a) Transactions and events reported are faithfully represented.(b) Transactions and events are reported in terms of their substance and economic reality not

merely on the basis of their legal form. This principle is called the principle of 'substanceover form'.

(c) The reporting of transactions and events are neutral, i.e. free from bias.(d) Prudence is exercised in reporting uncertain outcome of transactions or events.

4. Comparability: Comparison of financial statements is one of the most frequently used and mosteffective tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison. One essential requirement of comparability is disclosure of financial effect ofchange in accounting policies.

5. True and Fair View: Financial statements are required to show a true and fair view of theperformance, financial position and cash flows of an enterprise. The conceptual framework does notdeal directly with this concept of true and fair view, yet the application of the principal qualitativecharacteristics and of appropriate accounting standards normally results in financial statementsportraying true and fair view of information about an enterprise.


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Solution to Question No. 5(c)

CarryingValue (Tk.)

Remeasured(Tk.)

Impairment(Tk.)

Carrying amountafter

impairment (Tk.)

Goodwill .................................. 60,00,000 60,00,000 (60,00,000) -Property, plant, and equipment 180,00,000 160,00,000 (30,00,000) 130,00,000Inventories .................................. 100,00,000 90,00,000 - 90,00,000Financial assets ......................... 70,00,000 70,00,000 - 70,00,000Financial liabilities ..................... (40,00,000) (40,00,000) - (40,00,000)

370,00,000 340,00,000 (90,00,000) 250,00,000

IFRS 5 requires that, immediately before the initial classification of the disposal group as held for sale,the carrying amounts of the disposal group be measured in accordance with applicable IFRS and anyprofit or loss dealt with under those IFRS. The reduction in the carrying amount of property, plant, andequipment will be dealt with in accordance with IAS 16; the inventory will be dealt with in accordance withIAS 2.

After the remeasurement, the entity will recognize an impairment loss of Tk.90,00,000. This loss isallocate in accordance with IAS 36. Thus goodwill will be reduced to zero and property, plant, andequipment to Tk. 130,00,000. The loss will be charged against profit or loss. If not separately presentedon the face of the income statement, the caption in the income statement that includes the loss should bedisclosed.


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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA DECEMBER-2012 EXAMINATIONMODEL SOLUTION

PROFESSIONAL LEVEL-I

SUBJECT: 102-COST ACCOUNTING

Q. No. 1(1)Predetermined Overhead Rate = TK.3,500,000/10,000 = TK.350 per MHApplied Factory Overhead = 9,500 MH @ TK.350 per MH = TK.3,325,000Actual Factory Overhead = 3,385,000Under applied Factory Overhead TK. 60,000

(2) Predetermined Overhead Rate = TK.3,500,000/15,000 = TK.233.33 per MH(3)

Direct Material 350Direct Labor 289Manufacturing Overhead (1.5 233.33) 350Total Cost 989Mark-up 15% of 148Price 1137

(4)Applied Factory Overhead Dr TK.3,375,000

Factory Overhead Control Cr TK.3,375,000Cost of Goods Sold Dr TK.10,000

Factory Overhead Control Cr TK.10,000(5)Work in Process Dr TK.250Finished Goods Dr TK.500Cost of Goods Sold Dr TK.9,250

Factory Overhead Control Cr TK.10,000


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Q. No. 2 (b) Purple Manufacturer

Statement of Cost of Goods SoldFor the month ended June 30, 2012

Flow of Costs Workings Amount

(TK.)

Amount

(TK.)1. Direct Material Consumed:Beginning Inventory nilAdd: Purchase 45000 @ TK.7.8 =

TK.351,000(-) Purchase Returns and

Allowances 1,000 @ TK.7.8 = 7,800 Net Purchase 3,43,200Raw materials available 3,43,200

Less: Ending Inventory [44,000 (12,000 * 3.5)]*7.8 15,600Raw Materials Consumed 3,27,600

2. Direct Labor 34,225 * TK.8 2,73,800Prime Cost 6,01,400

3. Factory Overhead:Overtime Premium [34,225 (200*40*4)]*TK.4 8,900Indirect Material 2.5% of 3,27,600 8,190Indirect Labor 3% of 2,73,800 8,214Utility Cost TK.2,500 + TK.0.8*12,000 12,100Depreciation Factory 800 38,204

Work Cost 6,39,604Add: WIP Beginning nilLess: WIP Ending nil

COGM 6,39,604Add: FG Beginning nil

COGAS 6,39,604Less: FG Ending nil

COGS 6,39,604


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Purple Manufacturer

Income StatementFor the month ended June 30, 2012

Particulars Amount

(TK.)

Amount

(TK.)Sales (12000 units @ TK.100) 12,00,000Less: Cost of Goods Sold 6,39,604Gross Margin 5,60,396Less: Administrative Expense

Salaries 20,000Interest Expense 2,000Property Tax 1,500Depreciation - Office 700

Total Administrative Expenses 24,200Marketing ExpenseSales Commission (2% of TK.12,00,000) 24,000Salaries 12,000Advertising Expense 1,000Freight Out 600Total Marketing Expenses 37,600

Net Operating Income 4,98,596

Answ er to Ques ti on # 3 (b) Ander son Co mp any

Cost of Production Report for October ___________________________________________________________________________

ItemMaterials

Total Cost Equivalent Production Unit Cost

Materials purchased Tk.25,000 67,000Inventory (5,800x .25) 1,450 Tk.23,550 5,000

3,000 75,000 Tk..314Part X Tk.16,000Inventory (5,000x.20) 1,000 15,000 75,000 .200Part Y Tk.15,000 67,000Inventory (6,000x .10) 600 14,400 5,000 72,000 .200Paint & Enamel 1,072 67,000 .016Direct Labor 45,415 73,250* .620Factory Overhead 24,905 73,250 .340

1,24,342 1.690


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Transfer & out (67000xTk.1.69) Tk.1,13,230Work in Process: (3000 units ready for2nd

Assembly)

Material K (3000x.314) Tk.942.00Part X (3000x.200) 600.00Direct Labor (3000x 62.5%x .62) 1162.50Overhead (3000x62.5%x.34) 637.50 Tk.3,342.00(5000 units assembled but notpainted)Material K (5000x.314) Tk.1,570.00Part X (5000x.200) 1000.00Part Y (5000x.200) 1000.00Direct Labor (5000x 87.5%x .62) 2,712.50Overhead (5000x87.5%x.34) 1487.50 7,770.00 11,112

Tk.1,24,342.00

Computation

Equivalent production for direct labor and factory overhead:

Units finished and send to finished goods warehouse---------- --------------------- 67,000Units assembled but not painted :25% - 1 st operation25% - 1 st assembly12-1/2% - Machining and cleaning25% - 2 n assembly87-1/2% x 5000 units-------------------------------------- ------ --------------- 4,375

Units ready for 2 n assembly:25% - 1 st operation25% - 1 st assembly12-1/2% - Machining and cleaning

62-1/2% x 3000 units-------------------------------------- ----------------------- 1,875

Equivalent Productio n 73,250 unit s

Answ er to Ques ti on # 4

4(c)-i

The first stage allocation of costs:

Acti vi ty Cos t Po ol Assembling

unitsProcessing

OrderSupportingCustomers

Other Total (Tk.)

ManufacturingOverhead 2,50,000 1,75,000 25,000 50,000 5,00,000

Selling & AdminOverhead

30,000 1,35,000 75,000 60,000 3,00,000

Total 2,80,000 3,10,000 1,00,000 1,10,000 8,00,000


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4(c)- ii

The Activit y Rates

Acti vi ty Cos t Po ols

A B Acti vi ty Rates

(A /B)Total Cost

(Tk.)

Total Activity

Assembling units 2,80,000 1,000 units Tk. 280 per unitProcessing Order 3,10,000 250 orders Tk. 1,240 per orderSupporting Customers 1,00,000 100 customers Tk. 1,000 per customer

4(c)-iii

The overhead cost for the four orders

Acti vi ty Cos t Po ols

A Acti vi ty Cost Rates

B Acti vi ty

ABC Cot s(A X B)

Assembling units Tk. 280 per unit 80 units Tk. 22,400

Processing Order Tk. 1,240 per order 4 orders Tk. 4,960Supporting Customers Tk. 1,000 per customer N/A N/A

4(c)-ivThe Product and Customer Margin:

Filing cabinet pr oduct margin

Tk. Tk.Sales ( Tk. 595 X 80) 47,600Costs:Direct materials ( 180 X 80) 14,400Direct Labor ( 50 X 80) 4,000

Volume related overhead (above) 22,400Order related overhead 4,960Total Costs 45,760

Product Margin 1,840

Customer Profitability Analysis- Office Mart

Product Margin (above) Tk. 1,408Less: Customer support overhead (above) Tk. 1,000

------------Customer Margin Tk. 840

Q. No. 5 (c)

i) EOQ = 848.53ii) [848.53/2 * 500 *0.15] + 3000*12 / 848.53 * 750 = 31,820 + 31,820iii) SS = 6(150-100) = 300iv) NMI = 848.53+300v) AMI = 848.53+300+6(100-50)vi) Reorder Point = SS + Lead Time Usage = 300+6*100=900. When stock level reaches to 900units, next order should be placed.


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Page 2 of 5

Model Solution Q. No. 3. (c):

(i) This is a finance lease to lessee and lessor since lease term covers major part of the economic life of the asset(IAS-17.10.c).Computation of present value of minimum lease payments:

PV of annual payments: Tk.18,142.95x4.16986*= Tk.75,653.56*Present value of an annuity due at 10% for 5 years.

KKK CompanyLease Amortization Schedule

Date Annual LeasePayment

Interest (10%) onLiability

Reduction ofLease Liability

Lease Liability

1/1/2008 Tk.75,653.561/1/2008 Tk.18,142.95 Tk.18,142.95 57,510.611/1/2009 18,142.95 Tk.5,751.06 12,391.89 45,118.721/1/2010 18,142.95 4,511.87 13,631.08 31,487.641/1/2011 18,142.95 3,148.76 14,994.19 16,493.451/1/2012 18,142.95 1,649.50 16,493.45 0

(ii) 1/1/2008: Leased Equipment Account . Tk.75,653.56

Lease Liability Account Tk.75,653.56Lease Liability Account. Tk.18,142.95Cash Account Tk.18,142.95

During 2008: Insurance Expense Account.. Tk.900Cash Account Tk.900

31/12/2008 Depreciation Expense Tk.15,130.71 Accumulated Depreciation Tk.15,130.71(Tk.75,653.56/5)

Interest Expense .. Tk.5,751.06Interest Payable. Tk.5,751.06

1/1/2009 Interest Payable Account.. TK.5,751.06Interest Expense TK.5,751.06

Lease Liability Account . Tk.12,391.89Interest Expense. 5,751.06

Cash18,142.95During 2009: Insurance Expense Account.. Tk.900

Cash.. Tk.90031/12/2009 Depreciation Expense Tk.15,130.71

Accumulated Depreciation.TK.15,130.71Interest Expense Tk.4,511.87

Interest Payable.Tk.4,511.87


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Model Solution Question No. 4.(a)

Combined Statements Work Paper

Carew Branch Enhancement Combined BalanceIncome Statement Dr. Cr.Sales 100,000 60,000 - - 1,60,000Opening Inventory 20,000 8,400 - (1) 1,400 27,000Purchases 95,000 6,000 - - 1,01,000Shipment from home office 1,15,000 50,400 1,28,000Shipment to Branch 30,000 - (2) 30,000 - -Ending inventory 25,000 7,200 (3) 1,200 31,000Cost of goods sold 60,000 43,900 - - 97,000Other expenses 25,000 10,000 - - 35,000Net Income 15,000 6,800 31,200 37,400 28,000Retained Earning Statement:Opening R.E. 57,000 - - - 57,000Net Income 15,000 6,800 31,200 37,400 28,000Divided (10,000) - - - (10,000)Retained Earning Ending 62,000 6,800 31,200 37,400 75,000Balance sheet:Cash 33,000 14,000 - - 47,000

AIR 20,000 25,000 - - 45,000Inventory 25,000 7,200 - 1,200 31,000Investment in Br. 32,400 - - (4) 32,400 -Plant & Eqp. H.O. Carew 75,000 - - - 75,000Plant & Eqp. Br. 24,000 - - - 24,000Other Assets 30,000 - - - 30,000Total 239,400 46,200 - - 252,000Current Liabilities 20,000 7,000 - - 27,000Long term Note Payable 50,000Carew 32,400 (4) 32,400 - -

(1) 1,400Unrealized Profit in Shipment 7,400 (2) 6,000 - -Capital Stock 1,00,000 - - - 1,00,000Retained Earnings 62,000 6,800 31,200 37,400 75,000Total 2,39,400 46,200 71,000 71,000 2,52,000

Carew & CompanyIncome Statement

For the year ended December 31, 2011

Tk. Tk.Sales 160,000

Cost of goods sold:Beginning inventory 27,000Purchases 101,000Goods Available 128,000Less ending 31,000 97,000Gross profit on sales 63,000Opening expenses 35,000Net Income 28,000


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Carew & CompanyRetained Earnings statement

For the year ended December 31, 2011

Tk.Opening Retained Earnings 57,000

Add: Net income 28,000Less: dividend (10,000)Ending retained earnings 75,000

Carew & CompanyBalance Sheet

As of December 31, 2011

Assets Tk. Liabilities Tk.Cash 47,000 Current liabilities 27,000

A/R 45,000 Long term W/P 50,000Inventory 31,000 Stock holders equity:Plant & Eqp

(net of Acc. Dep.)

99,000 Capital stock 100,000

Retained Earnings 75,000 175,000

Other assets 30,000Total assets 252,000 252,000

4(b)

Disclosure requirements of Changes in accounting estimates as per IAS 8:

An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the currentperiod or is expected to have an effect in future periods, except for the disclosure of the effect on future periods whenit is impracticable to estimate that effect (39).

If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shalldisclose that fact. (40)


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Model Solution Question No. 5(b)

Consignment Account in the Books of HannanDr. Cr.

Taka Taka Taka

Goods sent to Consignment A/C

500 X 1,000500,000

Mannan's A/C(Sales)

300 X 2,000600,000

Cash A/C: Goods lost in Transit 142,000

Freight 150,000 Consignment Stock 76,000

Loading 50,000

Insurance 10,000 210,000Mannan (Consignee) A/C:

Unloading 24,000

Carrying 16,000

Rent 20,000 60,000Mannan's Commission A/C: 30,000Profit on Consignmenttransferred to Profit and Loss

A/C

18,000

818,000 818,000

Workings:-

(1) Valuation of goods lost in Transit:Value of consignments 500 X 1,000 500,000

Add: Expenses incurred by consignor(1,50,000+50,000+10,000) 210,000

710,000Less: Amount of loss in transit of 100 units (7,10,000/ 500 X100) 142,000

568,000 Add: Expenses paid by Consignee after Loss (24,000+16,000) 40,000

Value of 400 units 608,000

(2) Value of Consignment Stock: (6,08,000/400 X 50) 76,000


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Page 1 of 4

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA DECEMBER-2012 EXAMINATION

PROFESSIONAL LEVEL-IISUBJECT: 202. MANAGEMENT ACCOUNTING

Model Solution

Model Solution Question No. 1.

(a) The critic is right in saying that cost allocation is arbitrary. However it may be difficult to avoid thisproblem by simply not allocating any common costs to other cost objects. This is because costallocation may be required in one or more of the following cases:

* Apportioning fixed costs to products for inventory valuation purposes in conformity with IFRSsand External Reporting requirements.

* Costs may be apportioned to departments or responsibility centers for performanceevaluation purposes.

* Cost plus contracts and cost-based regulations require allocations of common costs.

(b) The two options available to T Company are: A. Sell 80,000 units to the outside market and 20,000 units to the chain store: This option would

require T Company to manufacture 80,000 units and the cost of 20,000 units would beirrelevant being a sunk cost.

B. Sell 80,000 units to the outside market and nothing to the chain store: This option wouldrequire T Company to manufacture 60,000 units and the cost of 20,000 would be irrelevantbeing a sunk cost.

On the assumption that Option A is chosen, the relevant revenues and costs are:

Additional Revenue from 20,000 units sold to the chain store: 20,000 x Tk. 14 = Tk. 280,000 Additional cost to manufacture 20,000 units 20,000 x Tk. 16 =

(i)

Tk. 320,000Tk. 40,000

Option B. i.e. 20,000 units should not be sold to the Chain store and the full 80,000 units should besold to the outside market.

Model Solution Question No. 2.Particulars X Y ZOffer price Tk. 22 Tk. 28 Tk. 32Variable cost 15 18 18Contribution margin Tk. 7 Tk. 10 Tk. 14Machine hours 6 10 12CM per Machine hour Tk. 1.1666 Tk. 1 Tk. 1.1166Therefore, Y should be bought from outside due to its lowest CM per machine hour.Total machine hours per table = (6+10+12) or 28 hours.

Current production: 28,000/28 = 1,000 tables * Increased production (with 50% more) 1,500 tables

Additional production (50%) 500 tables

Machine hours required for X 6 x 1,500 = 9,000Machine hours required for Z 12 x 1,500 = 18,000

27,000Machine hours available for Y 1,000

Machine hours required for Y 1,500 x 10 15,000Less: Machine hours available 1,000

14,000Outside purchase of Y (14,000/10) 1,400 units


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Page 2 of 4

(ii) Assuming X and Z are used at full capacity, the maximum possible production would be28,000 / 18 = 1,555

As tables are made in batches of 20, the maximum possible production is 1,540 units.Machine hours required for X 6 x 1,540 = 9,240Machine hours required for Z 12 x 1,540 = 18,480

27,720Machine hours available for Y (28,000 27,720) 280Equivalent units 28 unitsThe increased production requirement is 1,000 * =x 175% 1,750 unitsThe equivalent in batches of 20 1,740 unitsRequired purchase of X and Z (1,740 1,540) 200 unitsRequired purchase of Y (1,740 28) 1,712 units


(a) Sales budget is the detailed schedule showing the expected sales for the budget period expressedin terms of taka and units. On the other hand, in determining the sales budget the sale forecast isrequired. Budget is prepared on the basis of past sales information, pricing, policy, marketing plan,industry trends, inflation etc.

(b) A sales forecast is a technical projection of the potential customers demand for a specified timehorizon and with specified underlying assumptions. A sales forecast is connected to a sales planwhen management has brought to bear on its judgment, planned strategy, commitments ofresources, and managerial commitment to aggressive actions to attain the sales goals. Typically,sales forecasts are prepared at the staff level by technically trained individuals employing numeroussophisticated analyses, such as trend fitting, correlation, mathematical models, exponentialsmoothing and other operation research techniques.

Sales forecasting takes into consideration of the both financial and nonfinancial information. Basedon the sales forecast, the budget for the sales are prepared. As such the sales budget is thequantified estimated sales as per the sales forecast. Accordingly, the more accurate the salesforecast, the more accurate is the sales budget. As we know, in the whole budgeting process, the

first step is the sales budget, the more accurate the sales budget, the more accurate is the masterbudget.

(c) Workings:

P Q TotalBudgeted production and sales 40,000 80,000Sales price per unit 25 50Total cost per unit 20 40Machine hours (MHR) per unit 2 1Demand (Sales potential) Units 60,000 100,000

Fixed cost 960,000MHR is used for fixed cost absorptionConstraint resources is machine hours

Available MHR 80,000 80,000 160,000

Fixed cost Tk. 960,000 allocated 480,000 480,000 960,000Fixed cost per unit 12 6Total Cost 20 40

Variable Cost 8 34Sales per unit 25 50Variable cost per unit 8 34Contribution per unit 17 16

Contribution per MHR 8.5 16Preference of production mix 2 1n st


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Required (i)

Calculation of Profit

Product P Q TotalUnit 40,000 80,000

Per Unit Total Per Unit TotalSales 25 1,000,000 50 4,000,000 5,000,000Variable cost (8) (320,000) (34) (2,720,000) (3,040,000)Contribution per unit 17 680,000 16 1,280,000 1,960,000

Fixed Cost (960,000)Profit 1,000,000

Required (ii)

As product Q yields higher contribution per MHR so Q should be produced as much as candemand of product Q is 100,000 required 100,000 MHR

Total available MHR 160,000Needed for product Q (100,000)

Available for product P 60,000With 60,000 MHR, 30,000 of product P can be produced

So optimal mix is as below Unit MHR /Unit Total MHRProduct Q 100,000 1 100,000Product P 30,000 2 60,000

130,000 160,000Profit under optimum production schedule:

Product P Q

TotalUnit 30,000 100,000

Per Unit Total Per Unit TotalSales 25 750,000 50 5,000,000 5,750,000Variable cost per unit (8) (240,000) (34) (3,400,000) (3,640,000)Contribution per unit 17 510,000 16 1,600,000 2,110,000Fixed cost (960,000)Profit (1,150,000)Required (iii)

New Product C requires MHR per unit 1.5Installation cost, Capital nature Tk. 200,000Fixed cost for C (monthly) Tk. 60,000Variable cost per unit for C Tk. 21

As evident from the requirement (ii), Product P can be discontinuedLost contribution by discontinuance of Product P Tk. 510,00015% yield on BDT 200,000 Tk. 30,000Fixed cost for product C Tk. 60,000Required contribution from sale of Product C Tk. 600,000Number of MHR available for Product C 60,000Units that can be produced (1.5 MHR per unit) 40,000Variable cost Tk. 21Contribution per unit Tk. 15Selling price per unit of Product C Tk. 36The income statement under new product mix is as below:

Product P QUnit 40,000 100,000

Per Unit Total Per Unit Total TotalSales 36 1,440,000 50 5,000,000 6,440,000Variable cost per unit (21) (840,000) (34) (3,400,000) (3,240,000)Contribution per unit 15 600,000 16 1,600,000 2,200,000Fixed Cost (960,000)

Additional Fixed Cost (60,000)Profit 1,180,000


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Contribution from Economy Class: Average fare Tk. 50,000Less: Variable costs:

Meal cost Tk. 2,500Baggage handling 1,000 3,500

46,500

Required contribution from Business Class:46,500 x 1.5 Tk. 69,750

Add: Variable cost:Meal cost Tk. 4,500Baggage handling 1,000Business class fare

5,50075,205


(a) The company should accept orders first for R, second for P, and third for Q. The computations are:

Sl. DETAILS P Q R

1. Direct materials required per unit Tk. 32 Tk. 20 Tk. 122. Cost per pound 4 4 43. Pounds required per unit [(1) (2)] 8 5 34. Contribution margin per unit Tk. 48 Tk. 24 Tk. 335. Contribution margin per pound of materials used [(4) (3)] Tk. 6 Tk. 4.80 Tk. 11

(b) Sales value if processed further(7,000 units Tk. 12 per unit)

Tk. 84,000

Sales value at the split-off point(7,000 units Tk. 8.55 per unit)

Tk. 59,850

Incremental revenue Tk. 24,150Less cost of processing further Tk. 25,380Net disadvantage of processing further Tk. (1,230)

Target selling price per unit to earn additional Tk. 11,510:(P Tk. 8.55) x 7,000 Tk. 25,380 = Tk. 11,510

P = Tk. 13.82.


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PROFESSIONAL LEVEL-IISUBJECT: 204. TAXATION

Profit as per audited accounts

SolutionSolution of Question No. 2.(c)

Tk.100,000,000

Add: CSR expenditure (inadmissible) 10,000,000Total Income 110,000,000Income Tax @ 37.5% 41,250,000Less: Tax Rebate on CSR expenditure @10% on Tk. 10,000,000 1,000,000

Tax payable 40,250,000 Lower of:

20% of Total incomeorTk. 80,000,000or

Actual expenditure

22,000,000

Tk. 10,000,000i.e., allowed amount Tk. 10,000,000

Solution of Question No.3.

1. Commission (brokerage) paid for placing the shares of the company Tk. 100,000.

Not deductible due to being Capital Expenditure.

2. Compensation to forcedly retired official Tk. 200,000.

Not deductible due to being non-recurring and not in the nature of salary

3. Capital expenditure on hospital for employees.

Deductible as per section 29(1) (XXIII).

4. Trade penalties and law expenses (for infringement of the customs law)

Not deductible due to being spent for violation of laws.

5. Anticipated loss written off.

Not deductible, since unrealized.Even realized capital loss not allowed for setting off.


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Solution of Question No.4(c).

Written down value = Cost Tk. 180,000 Tax depreciation Tk. 50,000 = Tk. 130,000(i) (ii) (iii)

Sale proceeds of the machineWritten down value

Tk. 150,000130,000

Tk. 210,000130,000

Tk. 260,000130,000

Capital Gain *Income under other heads

20,000150,000

80,000150,000

130,000150,000

Total income 170,000 230,000 280,000Tax computation:Tax on first Tk. 235,000 @ 0%Tax on next amount up to Tk. 300,000 @ 10%

NilNil

Nil500

Nil5,500

Total Tax Nil 3,000** 5,500

* Capital gain arises on machine disposed before the expiry of five years from the date ofacquisition and hence, no separate is applicable [para 2(b) 9i), 2 nd

Sl. No.

Sch.]

** Minimum tax for total income exceeding exemption limit of Tk. 225,000.

Solution of Question No. 5.

A. Computation of Total Income:Statement of income of the Assessee

Statement of income during the income year ended on 30 June 2012

Heads of Income Amount in Taka1. Income from business or profession: u/s 28

Income from ICMAB as Examiner Tk. 307,300; Income from business Tk. 58,212 Income from Fisheries Tk. 100,000

465,512

2. Share of profit in a firm: (Tax paid by the firm) 499,4543. Capital Gains: u/s 31

Sale of Shares of publicly listed company Tk. 69,032(tax exempted as per SRO 269)

-

4. Income from other source: u/s 33 Bank interest Tk. (539,380+49,056) Int. from leasing company Tk. 1,227,085 Cash dividend Tk. 1,500

(6,500 less exempted up to5,000)

Govt. prize bond lottery u/s 82C Tk. 10,000

1,827,021

5. Total (serial no. 1 to 4) 2,691,9876. Foreign income: Income from House at London and not

remitted to Bangladesh GBP 10,000 equivalent toBDT1,300,000

1,300,000

7. Total Income 4,091,987


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Investment Tax Rebate CalculationSchedule-3 (Investment tax credit):(Section 44(2)(b) read with part B of Sixth Schedule)

Sl.No.

Particulars Amount inTaka

1. Life insurance premium 28,2002. Others, if any (give details)

Bangladesh Sanchaypatra Tk. 200,000 Secondary (Share of Ananda Shipyard & Shipways Ltd. Tk.

800,000)

1,000,000

Total 1,028,200

Investment Tax Rebate Calculation

Sl. No. Particulars Amount inTaka

I. Total Income applicable for calculating investment tax rebate 4,091,987II. Income not permitted for calculating income base

Employers contribution to Provident Fund Tk. N/A [u/s 44(2); 6 th Schedule Part B, para 5 read with 1 st

Any Income u/s 82C Tk. 10,000Schedule Part B, para 4 proviso.]

Any income with reduced tax rate as per SRO Tk.100,000 [Income from Fisheries]

110,000

III=(I-II) Income base for computing investment allowance [u/s 44(3)] 3,981,987IV. 20% of Income Base (20% of III) 796,397V. Taka 10,000,000 (Maximum Limit of Income base) 10,000,000VI. Actual investment during the period (Schedule 3) 1,028,200

VII. Lower of 20% of Income base or Tk. 10,000,000 or Actual 796,397VIII. Investment Tax rebate u/s 44(2)(b) as per schedule 3 [10% xVII]

79,640

B. Computation of Tax Payable(a) Total Income considered for tax liability under regular tax slab:

Sl.No.


I. Total Income from all sources 4,091,987II. Less, Income NOT considered for tax liability under regular tax

slab Govt. prize bond lottery u/s 82C Tk. 10,000 Income from Fisheries Tk. 100,000

110,000

III. Total Income considered for tax liability under regular tax slab 3,981,987


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b) Calculation of Tax Leviable on Total Income considered for regular tax slab:[u/s 16(1) read with Finance Act/ordinance (applicable for the Assessment Year) Schedule 2 or 3]

Tax Slab Income Rate Tax Liability(Taka)

200,000 on the 1 st 200,000Tk. @ 0% -300,000 on the 1 st 300,000Tk. @ 10% 30,000400,000 on the 1 st 400,000Tk. @ 15% 60,000300,000 on the 1 st 300,000Tk. @ 20% 60,000

2,781,987 on balance Tk. 2,781,987 @ 25% 695,497Total 3,981,987 845,497

(c) Tax Leviable on Income for separate consideration other than regular tax slab

Sl.No.


I. Tax Leviable on Income form Govt. prize bond lottery u/s 82C 2,000II. Tax Leviable on Income form Income from Fisheries 5,000III. Tax Leviable on Income for separate consideration other than

regular tax slub (I+II)7,000

(d) Total tax Leviable on Income from all sources:

Sl.No.


I. T ax Leviable on Total Income under considered for regular tax slab 845,497II. T ax leviable on Income for separate consideration other than

regular tax slab (c)7,000

III. Total tax Leviable on Income from all sources (I+II) 852,497

(e) Proportionate tax credit on taxed Share of profit in a firm(s) and Foreign Tax Credit:

e1: Proportionate tax credit on taxed Share of profit in a firm(s) Calculation

Sl.No.


I. Total Income from all sources 4,091,987II. Share of profit in a firm 499,454III. Total tax Leviable on Income form all sources less Investment

tax Rebate (considered as base for tax credit calculation)772,857

Iv. Proportionate tax credit applicable on taxed share of profit in a

firm (s) (III I x II) [Sixth schedule Part B, Para 16]

94,332


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ABC Bank Limited Assessment Year 2012-2013

Computation of Taxable Income and Tax Liability

Particulars Taka TakaNet profit as per audited accountsLess: Income to be considered separately

Income from Investment

258,000

100,000 Add: Expenses to be considered separately 158,000 Accounting Depreciation 50,000Provision for Bad and Doubtful Debt 42,000Entertainment Expenses 65,000 157,000

315,000 Add: Inadmissible ExpensesPerquisites 50,000Printing and Advertisement 40,000Other Expenses 10,000 100,000

415,000Less: Expenses admissible but underseparate rates Tax Depreciation 80,000Bad Debt. (accepted by Tax authority) 5,000 85,000

330,000 Add: Income from Investments 100,000

430,000Less: Entertainment Expenses (Note 1) 17,200Total Taxable Income 412,800

Calculation of Tax Liability:

Taxable Income: Tk. 412,800 @ 45% Tk. 185,760Tax on Excess Profit @ 15% (Note 2) nil

Paid up Capital

Net Tax Liability Tk. 185,760

Notes:1. The rate for allowable entertainment expenses is 4% on income of first Tk. 1,000,000 and

2% on rest, if any. Thus, in this case entertainment expense will be Tk. 17,200 (4% of Tk.430,000).

2. Calculation of Excess profit under section 16 C of the IT Ordinance 1984:

Capital and Reserve:

Tk.2,000,000

Statutory Reserve 750,000Retained Earnings 250,000Dividend Equalization Fund 200,000Total Capital 3,200,000Profit: 50% thereof 1,600,000

Actual ProfitExcess Profit

412,800nil


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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA DECEMBER 2012 EXAMINATION

PROFESSIONAL LEVEL-IIISUBJECT: 301.ADVANCED FINANCIAL ACCOUNTING-II.

Batman Ltd Robin Ltd Batman Ltd 80%

MI 20%

A.

SOLUTIONSolution to Question 1

BATMAN LTD ROBIN LTD80%

Consolidation worksheet entriesAcquisition analysis

At 1 July 2010:Net fair value of identifiable assets,liabilities and contingent liabilities

of Robin Ltd = ($250 000 + $10 000 + $10 000) (equity)+ $10 000 (1 30%) (inventory)+ $20 000 (1 30%) (land)+ $20 000 (1 30%) (plant)+ $10 000 (1 30% ) (patent)- $25 000 (goodwill)

= $287 000Net fair value acquired = 80% x $287 000

= $229 600Cost of combination = $264 800Goodwill acquired = $35 200Unrecorded goodwill acquired = $35 200 (80% x $25 000)

= $15 2001. Business combination valuation entries at 30 June 2011

Cost of Sales Dr 10 000Income Tax Expense Cr 3 000Transfer from Business CombinationValuation Reserve Cr 7 000

Carrying Amount of Land Sold Dr 20 000Income Tax Expense Cr 6 000

Transfer from Business CombinationValuation Reserve Cr 14 000Trademark Dr 10 000

Deferred Tax Liability Cr 3 000Business Combination Valn Reserve Cr 7 000

Accumulated Depreciation - P&E Dr 130 000Plant and Equipment Cr 110 000Deferred Tax Liability Cr 6 000Business Combination Valn Reserve Cr 14 000


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Depreciation Expense - P&E Dr 4 000 Accum. Depreciation - P&E Cr 4 000

($20 000 /5)

Deferred Tax Liability Dr 1 200Income Tax Expense Cr 1 200

2. Pre-acquisition entry 30/6/11Retained Earnings (1/7/05) Dr 8 000Transfer from General Reserve Dr 6 400Transfer from Business CombinationValuation Reserve Dr 16 800

Interim Dividend Paid Cr 4 000Share Capital Dr 200 000General Reserve Dr 1 600Business Combination Valuation Reserve Dr 16 800Goodwill Dr 15 200

Shares in Robin Ltd Cr 260 800

3. MI share of equity at 1 July 2010Retained Earnings (1/7/05) Dr 2 000Share Capital Dr 50 000General Reserve Dr 2 000Business Combination Valuation Reserve Dr 8 400

MI Cr 62 400

4. MI share of equity: 1/7/10 30/6/11

MI Share of Profit Dr 2 440MI Cr 2 440(20% ($36 000 ($10 000 - $3 000) ($20 000 - $6 000) ($4 000 $1 200)))

Transfer from General Reserve Dr 1 600General Reserve Cr 1 600

(MI share of reserve transfer)

Transfer from Business CombinationValuation Reserve Dr 4 200

Asset Revaluation Reserve Cr 4 200(20% ($7 000 + $14 000))

MI Dr 2 000Dividend Paid Cr 2 000

(20% x $10 000)

MI Dr 800Final Dividend Declared Cr 800

(20% x $4 000)


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5. Interim dividend paidDividend Revenue Dr 4 000

Interim Dividend Paid Cr 4 000(80% x $5 000)

6. Final dividend declaredDividend Payable Dr 3 200

Final Dividend Declared Cr 3 200(80% x $4 000)Dividend Revenue Dr 3 200

Dividend Receivable Cr 3 2007. Inter-entity sales of inventory: Robin Ltd Batman Ltd

Sales Dr 8 000Cost of Goods Sold Cr 7 000Inventory Cr 1 000

Deferred Tax Asset Dr 300Income Tax Expense Cr 300

8. MI adjustmentMI Dr 140

MI Share of Profit Cr 140(20% x $700)

9. Transfer of plant to inventory: Robin Ltd Batman LtdProceeds on Sale of Plant Dr 15 000

Carrying Amount of Plant Sold Cr 10 000Inventory Cr 5 000

Deferred Tax Asset Dr 1 500Income Tax Expense Cr 1 500

10. MI adjustmentMI Dr 700MI Share of Profit Cr 700

(20%($5 000 - $1 500))(b)

BATMAN LTDConsolidated Income Statement

for financial year ended 30 June 2011

Income:Sales revenue $364 000Other income 97 800

461 800Expenses:

Cost of sales 293 000Other 98 000

391 000Profit before income tax 70 800Income tax expense 26 000Profit for the period $44 800

Attributable to:

Parent shareholders $43 200Minority interest $1 600


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Page 5 of 8

Home Office 84,700Branch Office 51,100Goods in Transit (W-i) 5,950 141,750

Accounts Receivable:Home Office 99,750Branch Office 47,250 147,000

Store Supplies:Home Office 1,330Branch Office 1,050 2,380

Non-Current Assets:Furniture:

Home Office 29,750(-) Accumulated Depreciation (8,750+2,975) (11,725) 18,025Branch Office 12,600(-) Accumulated Depreciation (1,890+1,260) (3,150) 9,450

Total Assets 357,750Liabilities and Shareholders Equity:

Current Liabilities:Accounts Payable:

Home Office 122,897Branch Office 14,700 137,597

Accrued Salaries:Home Office 910Branch Office 400 1,310

Stockholders Equity:Common Stock (Tk. 10) 227,500

Retained Earnings (23,975) Net Income (20,758 5,440) 15,318 218,843

Total Liabilities and Shareholders Equity 357,750Working Notes:(i) Goods in Transit:

Shipment to Branch = 35,700(-) Shipment to H. O. = 29,750

5,950(ii) Store Supplies Expense:

Home Office = (3,290 1,330) = 1,960Branch Office = (2,030 1,050) = 980

(iii) Depreciation Expense on Furniture:Home Office = 29,750 x 10% = 2,975Branch Office = 12,600 x 10% = 1,260

(iv) Cash in Transit:Branch Office Current A/c = 110,160(-) Home Office Current A/c = 106,190

3,970


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Page 7 of 8

(c) Importance of EPS

Comments should include reference to use EPS as an input for both Price Earning and EarningYield and which quoted regularly on the business pages in respect of listed companies.

The dangers of comparing P/E ratios with other companies where alternative accountingapproaches are permitted for the same transactions example IAS 23 alternative treatment for

borrowing costs

Differences in P.E ratio of similar type and scale of companies arising because one entity islisted and the other is private.

The need for other ratios and other factors to be incorporated in any assessment for example thecurrent cash squeeze the greater emphasis may be on liquidity and the need to meet day to daycommitments


(a) A share option is an instrument giving the holder the right to buy or sell a set number ofshares in the company by a set date at a set price. Options can be issued for a price or at nocost to the recipient.

If issued for a price, an options ledger account is used. On expiry of the exercise date, thisaccount balance is transferred to share capital (for the number of options exercised x theoptions price) and to lapsed options reserve (for the number of options lapsed x the options

price).

Where options are issued at a cost, then the amount received is disclosed in the balancesheet as an increase in equity and shown below the companys share capital.

(b) On issuing the options

Cash Tk. 180,000

Share Options Tk. 180,000

(Being the issue of 36,000 options at Tk.5 each)

At the time of exercising options:

Cash Tk. 450,000

Share Options Tk. 450,000(Being issue of 30,000 shares on payment ofof Tk.15 per share)

Share Options Tk. 180,000

Share Capital Tk.150,000

Lapsed options Reserve Tk. 30,000(Being write-off of share options, reflecting thoseoptions exercised and those lapsed,)


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Page 8 of 8

(c) Facts:

Kurashiki Ltd holds 1/3 of ordinary shares of Saga Ltd

Sasebo Ltdholds 1/3 of ordinary shares of Saga Ltd

Kanzawa Ltd holds 1/3 of ordinary shares of Saga Ltd

Kurashiki Ltd owns call options that would give it 100% of the voting rights of Saga Ltd.

Management do not intend to exercise the options

The existence of the potential voting rights, as well as the other factors described in paragraph 13 of BAS 27 and paragraphs 6 and 7 of IAS 28, are considered and it isdetermined that Kurashiki Ltd controls Saga Ltd. The intention of Kurashiki Ltdsmanagement does not influence the assessment.

However, there is some debate over whether this is the correct answer.

- Kurashiki Ltd has not at balance date exercise the options

- Kurashiki Ltd may never exercise the options

- It may not be in Kurashiki Ltds economic interest to exercise the options

- There may be no parent of Saga Ltd


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SUBJECT: 302. ADVANCED COST ACCOUNTING

Model solution of question no. 2(b)

Markup percentage = Required ROI x Investment + SG & A/Volume of units x Units productcost

Requirement (i):

= {(12% x Tk. 7,50,000) + Tk. 50,000}/(14,000 units x Tk. 25)= Tk. 1,40,000/ Tk.3,50,000= 40%

Unit product cost Tk. 25Requirement (ii):

Markup 40% x Tk. 25Target selling price per unit

Tk. 10Tk. 35

2 (c)

Time rate to be used:Requirement (i)

Technicians wages including fringes benefits [(tk. 120,000+ Tk.30,000 = Tk. 150,000)/10,000 hours] Tk. 15Prorata share of selling and other costs ( Tk. 90,000/10,000 hours)

Tk. 9Desired profits per hour of technicians time

Total charging rate per hour for serviceTk. 6

Tk. 30

Material loading charge:Ordering, handling and storing cost 20% of invoice costDesired profit on partsMaterial loading charge

40% of invoice cost60% of invoice cost

The cost of the job would beRequirement (ii)

Time charge (Tk. 30 x 2.5 hours) Tk. 75Material charge:Invoice cost of parts Tk. 80Material loading charge (60% of Tk. 80) Tk. 48Billed cost of the job Tk. 203

Tk. 128


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Model solution of question no. 3

(a)

The performance of the production director could be looked at considering each decision in turn. Thenew wood supplier: The wood was certainly cheaper than the standard saving Tk. 5,100 on the standardthe concern though might be poor quality. The usage variance shows that the waste levels of wood areworse than standard. It is possible that the lower grade labour could have contributed to the waste levelbut since both decisions rest with the same person the performance consequences are the same. Theoverall effect of this is an adverse variance of Tk. 2,400, so taking the two variances together it looks likea poor decision. As the new labour is trained it could be that the wood usage improves and so we willhave to wait to be sure.

The impact that the new wood might have had on sales cannot be ignored. No one department within abusiness can be viewed in isolation to another. Sales are down and returns are up. This could easily bedue to poor quality wood inputs. If SW operates at the high quality end of the market then sourcingcheaper wood is risky if the quality reduces as a result.

The lower grade of labour used: Reebok uses traditional manual techniques and this would normallyrequire skilled labour. The labour was certainly paid less, saving the company Tk. 43,600 in wages.However, with adverse efficiency and idle time of a total of Tk. 54,200 they actually cost the businessmoney overall in the first month. The effi ciency variance tells us that it took longer to produce the batsthan expected. The new labour was being trained in April 2012 and so it is possible that the situation willimprove next month. The learning curve principle would probably apply here and so we could expect theaverage time per bat to be less in May 2010 than it was in April 2012.

3 (b)

Variance for May 2012:Material price variance (Tk. 196,000/40,000 5) x 40,000 = Tk. 4,000 FavMaterial usage variance (40,000 (19,200 x 2)) x Tk. 5/kg = Tk. 8,000 AdvLabour rate variance (Tk. 694,000/62,000 12) x 62,000 = 50,000 FavLabour effi ciency variance (61,500 57,600) x 12 = 46,800 AdvLabour idle time variance 500 x 12 = 6,000 AdvSales price variance (68 65) x 18,000 = 54,000 AdvSales volume contribution variance (18,000 19,000) x 22 = 22,000 Adv


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Model solution of question no. 04.

(a) If the analysis focuses on the gross margin the Country Wear appears most profitable under the

conventional approach in terms of net profit and return on sale. However the promotion anddistribution cost can be traced to each product and after taking these costs into account the CountryWear still appears most profitable, although the Evening Wear has a higher return on sales.

Evening Wear Country Wear

Sales revenue Tk.350,000 Tk.650,000Cost of goods sold 250, 000Gross margin Tk.100,000 Tk.200,000

450,000

Promotion costs 2,000 20,000Distribution costs 3,000Net profit Tk.95,000 Tk.120,000

60,000

(b) Under the life cycle approach, the Evening Wear appears more profitable as it requires much lessnon-manufacturing support.

YEAR 1 Evening Wear Country Wear

Design costs Tk.20,000Net loss Tk.20,000 Tk.100,000

Tk.100,000

YEAR 2 & 3 Evening WearSales revenue Tk.350,000 Tk.650,000

Country Wear

Cost of goods sold 250,000Gross margin Tk.100,000 Tk.200,000

450,000

Promotion costs 2,000 20,000Distribution costs 3,000Net profit Tk.95,000 Tk.120,000

60,000

Profit over the life cycle* Tk.170,000 Tk.140,000* The life cycle profit = Year 1 + 2 x Year 2/3

A complete life cycle analysis reports revenues and costs for each year of the products life. It couldalso require information on the volume of production and sales.

(c) The life cycle cost will be more useful as it ensures that products cover all their costs over their(often short) life cycles.

(d) In order to undertake a complete profitability analysis for the two product lines, a complete list ofrevenues and costs for each year of the products life is required. It could also require informationon the volume of production and sales. In addition, a more accurate analysis recognising time valueof money can be performed by discounting three years estimated cash flows using the firmsrequired rate of return.


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PROFESSIONAL LEVEL-IVMODEL SOLUTION

SUBJECT: 401-FINANCIAL MANAGEMENT

Solution to Q. No. 2(a)

Model Solution

Calculation of Duration of the Bond

Year Cash flow (Tk.) PV factor (8%) Present value of CF PV multiplied by year1 60 0.9259 55.55 55.552 60 0.8573 51.44 102.883 60 0.7938 47.63 142.894 60 0.7350 44.10 176.405 60 0.6806 40.84 204.205 1050 0.6806 714.63 3,573.15

Total 954.19 4,255.07

Duration =19.954

07.4255= 4.46 years.

The duration of this bond is 4.46 years.

Answer to the Question No.2(b)

Requirement-(i). Differential return as per Jensen ratio is calculated as

p = R p E (R pThe expected return of the portfolio E(R

)

pE(R) can be calculated using the CAPM formula:

p) = R f + p (R m R f Expected Return of Gold Fund: 5+0.72 (10 -5) = 5+3.60 = 8.60 per cent

)

Expected Return of Platinum Fund: 5+1.33 (10-5) = 5+6.65 = 11.65 percent

Differential returnGold Fund : P

Platinum Fund : = 7-8.60= - 1.60 percent

P

= 16-11.65 = 4.35 percent

Requirement-(ii).

We have the following information with respect to Platinum Fund (P) and others.

R P = 16 percent PR

= 35 percentm = 10 percent m

R = 24 percent

f = 5 percent P

= 1.33

Famas decomposition may be stated asR P = R f + R 1+R 2 +R 3R

f

R = 5 percent

1 = P (R m R f R

) = 1.33 (10-5) = 6.65 percent2 = [( P / m) P ] ( Rm R f

= (1.46 -1.33) (5) = 0.65) = [(35/24) -1.33] (10-5)

R 3 = net selectivity = R P (R + R 1 + R 2Thus, R

) = 16 (5+6.65+0.65) = 16-12.3 = 3.70 percentP

Alternatively, Famas net selectivity can be directly calculated as follows:= 5+6.65+0.65 + 3.70 = 16 percent

Famas net selectivity= R P [R f + ( P / m) ( R m R f = 16 (5+7.30) = 16 12.30 = 3.70 percent

) = 16 [5+(35/24) (10-5)


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Solution of Question No. 3.Requirement (i):Capital Budgeting Analysis: Wolverine Corporation

Year 0 Year 1 Year 2 Year 31. Demand (units) 40,000 50,000 60,000

NZ$ NZ$ NZ$2. Price per unit 500 511 5303. Total revenue = (1) x (2) 20,000,000 5,550,000 31,800,0004. Variable cost per unit 30 35 405. Total Variable cost = (1) x (4) 1,200,000 1,750,000 2,400,0006. Fixed cost 6,000,000 6,000,000 6,000,0007. Interest expense of New Zealand loan 2,800,000 2,800,000 2,800,0008. Noncash expense (depreciation) 5,000,000 5,000,000 5,000,0009. Total expenses = (5)+(6)+(7)+(8) 15,000,000 15,550,000 16,200,00010. Before-tax earnings of subsidiary = (3)-(9) 5,00,000 10,000,000 15,600,00011. Host government tax (30%) 1,500,000 3,000,000 4,680,00012. After-tax earnings of subsidiary 3,500,000 7,000,000 10,920,00013. Net cash flow to subsidiary = (12)+(8) 8,500,000 12,000,000 15,920,00014. NZ$ remitted by sub. (100% of CF) 8,500,000 12,000,000 15,920,00015. Withholding tax imposed on remitted funds (10%) 850,000 1,200,000 1,592,00016. NZ$ remitted after withholding taxes 7,650,000 10,800,000 14,328,000

17. Salvage value 52,000,00018. Exchange rate of NZ$ $52 $54 $5619. Cash flows to parent $3,978,000 $5,832,000 $37,143,68020. PV of parent cash flows (20% of discount rate) $3,315,000 $4,050,000 $21,495,18521. Initial investment by parent -$25,000,00022. Cumulative NPV of cash flows -$21,685,000 -$17,635,000 $3,860,185The net present value of this project is $3,860,185. Therefore, Wolverine should accept this project.Requirement (ii):This alternative financing arrangement will have the following effects. First, it will increase the dollar

amount of the initial outlay to $35 million. Second, it avoids the annual interest expense of NZ$2,800,000.Third, it will increase the salvage value from NZ$52,000,000 to NZ$70,000,000. The capital budgetinganalysis is revised to incorporate these changes.

Capital Budgeting Analysis with an AlternativeFinancing Arrangement: Wolverine Corporation

Year 0 Year 1 Year 2 Year 31. Demand (units) 40,000 50,000 60,000

NZ$ NZ$ NZ$2. Price per unit 500 511 5303. Total revenue = (1) x (2) 20,000,000 5,550,000 31,800,0004. Variable cost per unit 30 35 405. Total Variable cost = (1) x (4) 1,200,000 1,750,000 2,400,0006. Fixed cost 6,000,000 6,000,000 6,000,0007. Interest expense of New Zealand loan 0 0 08. Noncash expense (depreciation) 5,000,000 5,000,000 5,000,0009. Total expenses = (5)+(6)+(7)+(8) 12,200,000 12,750,000 13,400,000

10. Before-tax earnings of subsidiary = (3)-(9) 7,800,000 12,800,000 18,400,00011. Host government tax (30%) 2,340,000 3,840,000 5,520,00012. After-tax earnings of subsidiary 5,460,000 8,960,000 12,880,00013. Net cash flow to subsidiary = (12)+(8) 10,460,000 13,960,000 17,880,00014. NZ$ remitted by sub. (100% of CF) 10,460,000 13,960,000 17,880,00015. Withholding tax imposed on remitted funds (10%) 1,046,000 1,396,000 1,788,00016. NZ$ remitted after withholding taxes 9,414,000 12,564,000 16,092,00017. Salvage value 70,000,00018. Exchange rate of NZ$ $52 $54 $5619. Cash flows to parent $4,895,280 $6,784,560 $48,211,52020. PV of parent cash flows (20% of discount rate) $4,079,4000 $4711,500 $27,900,18521. Initial investment by parent -$35,000,00022. Cumulative NPV of cash flows -$30,920,600 -$26,209,100 $1,691,085

The analysis present value than the original financing arrangement shows that this alternative financingarrangement is expected to generate a lower net


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Requirement (iii):

The NPV would be more sensitive to exchange rate movements if the parent uses its own financing tocover the working capital requirements. If it used New Zealand financing, a portion of NZ$ cash flowscould be used to cover the interest payments on debt. Thus, there would be less NZ$ to be converted todollars and less exposure to exchange rate movements.

Requirement (iv):

The effects of the blocked funds are shown below:Year 0 Year 1 Year 2

13.Year 3

Net cash flow to subsidiary= (12)+(8) NZ$8,500,000 NZ$12,000,000 NZ$15,920,000

NZ$12,720,000 NZ$

14.9,550,600

NZS remitted by subsidiary NZ$0 NZ$0 NZ$38,190,60015. Withholding tax imposed on

Remitted funds (10%) NZ$16.

3,819,060NZS remitted after withholding tax NZ$34,371,540

17. Salvage value NZ$52,000,00018. Exchange rate of NZ$ $.5619. Cash flows to parent $48,368,06220. PV of parent cash flows

(20% discount rate) NZ$0 NZ$021. Initial investment by parent -S25,000,00022. Cumulative NPV of cash flows $0 $0 $2,990,777

Requirement (v):

First, determine the present value of cash flows excluding salvage value.

End of Present Value of Cash FlowsYear

1(excluding salvage value)

S 3,315,0002 4,050,0003 4,643,333*

S 12,008,333*This number is determined by converting the third year NZ$ cash flows excluding salvage value (NZ$14,328,000) into dollars at the forecasted exchange rate of $.56 per New Zealand dollar.

NZ$14,328,000 x $.56 S8,023,680The present value of the $8,023,680 received 3 years from now is $4,643,333.

Then determine the break-even salvage value:Break-evenSalvage value = [IO (present value of cash flows)] (1+k) = [$25,000,000 $12,008,333] (1+.20)

n

= $22,449,601

3

Since the NZ$ is expected to be $.56 in Year 3, this implies that the break-even salvage value in terms ofNew Zealand dollars is:

$22,449,601/$.56 = NZ$40,088,573Requirement (vi):

Divestiture Analysis One Year AfterThe project Began

End of Year 2 End of Year 3(one year from now)

Cash flows to parent(two years from now)

$5,832,000 $37,143,650PV of parent cash flows forgone if project is divested $4,860,000 $25,794,222The present value of forgone cash flows is $30,654,222. Since this exceeds the $27,000,000 in proceeds

from the divestiture, the project should not be divested.


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Solution to Q. No. 5.Requirement (a): If the companies merge:

Recession Show growth Rapid growth Expected valueProbability 0.15 0.65 0.20Total value 105 135 195 142.5Of whichEquity 50 80 140 87.50Debt 55 55 55 55.00

Without merger:PENDEN:Total value 42 55 75 57.05Of whichEquity 0 10 30 12.50Debt 42 45 45 44.55TULEN:Total value 63 80 120 85.45Of whichEquity 53 70 110 75.45Debt 10 10 10 10.00In the case of recession, the shares of Penden are expected to be worthless and the value of thecompany insufficient to repay all of the debt. The merger will eliminate the risk that full repayment to thedebt holders will not made through what is known as the Coinsurance effect. In the absence of anyoperational synergy, that value of the companies remains uncharged but the wealth of the debt holders ofPenden will increase Tk.0.45 million at the expense of the shareholders of the two companies.

The merger might also result in a gain for shareholders and bond holders if the merged companys cashflow are perceived to be less risky. This might lead to small reduction in both the cost of equity and makeit easier for the company to raise new external finance.

Requirement (b):

Features of growth by acquisition versus organic growth:

The advantages of growth by acquisition or merger are:-

Much quicker method of increasing market share than growing originally If the two companies do not have perfectly correlated cash flows, combining them together will

offer diversification opportunity and a reduction in the cost of capital. This should increase thevalue of the group and therefore increase shareholders wealth.

Buying out or merging with ones competitors reduce the competition faced in the market, therebystrengthening ones price setting ability.

The disadvantages of growth by acquisition or merger are:

Acquisition is usually more expensive for the purchasing company. Research continually showsthat in contested acquisition it is the shareholders of the target company who gain the greatestshare of the benefits arising.

Many acquisitions and mergers are planned in anticipation of generating synergistic cost savings,but in practice these synergies often fail to appear.

There may be cultural clashes following the acquisition or merger between the two sets ofemployees. If skilled employees become demotivated and leave, then much of the skill sets havebeen lost.


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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA DECEMBER 2012 EXAMINATION

PROFESSIONAL LEVEL-IVSUBJECT: 402.STRATEGIC MANAGEMENT ACCOUNTING.

(a) The performance of a business unit manager should be assessed differently from the performance of abusiness unit, because there are revenues and costs that are attributable to a business unit butuncontrollable by a business unit manager. The performance measurement of a business unit manageris meaningful only if the manager has influence and control over the revenues and costs affecting his orher performance or else the managers would not be motivated to achieve the performance target. Forexample, the corporate advertising expenses and senior level personnel salaries may be decided at thecorporate level and allocated to business units, but it might be considered unreasonable to holdbusiness unit managers accountable for these expense.

Solution

Solution to Question No.1

(b) Three performance measures are used: throughput, inventory and operating expense. Throughput isdefined as the rate at which a business generates money through sales. Inventory is defined as all themoney that the business spends in buying things that it intends to sell. Operating expense covers all themoney that the business spends in turning inventory into throughput.

Advantages: These measures help managers to identify and eliminate constraints. Because of theirclearly defined relationship with profitability, these measures can be used to guide decision-making andassess performance. The problem of linking operational measures to business profitability does notexist because the operational measures are financial.Disadvantages: Throughput accounting concentrates on the short term. Performance should not beguided and assessed solely by short-term considerations. To survive, a business must identify strategicobjectives, which should form the basis for identifying key success factors and related performance

measures.

(c) In a post-completion audit of an investment project, the management accountant gathers informationabout the actual cash flows generated by the project and compares these with the cash flows projectedin the capital budget proposal. Then the projects actual NPV or IRR is computed. Finally, theprojections made for the project are compared with the actual results. If the project has not metexpectations, an investigation may be made to consider the reasons. Was the estimated life too short?Were cash flows too optimistic? Were some important cash flows omitted?

Not all businesses actually undertake post-completion audits of their capital expenditure decisions. Onereason is that it is difficult to isolate the actual cash flows that relate to specific projects. Another reasonis that there may be little incentive for management to review the quality of the initial analysis andsubsequent implementation of the project. However, in situations where there are massive cost

overruns or other negative outcomes then the audit can provide valuable learning for management.


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Solution to Question No. 2.Canarias Group Ltd.

Part (a):

Full cost per unit in LZ Ltd. = Tk.27 + (Tk.100,000 / 12,500) = Tk.35 per unit.

Transfer price = Tk.35 * 140% = Tk.49. Net revenue to TR Ltd. (before cost of transfer) = Tk.60 - Tk.15 = Tk.45. LZ would agree to the transfer: Tk.49 > Tk.27. The transfer would benefit Canarias Group Ltd.: Tk.60 > (Tk.27 + Tk.15). However, TR would not agree to the transfer: Tk.45 < Tk.49. The proposed transfer pricing rule can allow sub-optimisation, since the divisions are

autonomous and are therefore free to reject transfers which would impact negatively on theirreported profits.

In this case, the transfer would benefit Canarias Group Ltd. However, the transfer will not take place because TR Ltd. will reject it.

Part (b): Marginal cost up to the point of transfer = Tk.27. Opportunity cost of making the point of transfer = Zero. Hence: Transfer price = Tk.27. TR would agree to the transfer: Tk.45 > Tk.27. As shown in part (a), the transfer would benefit Canarias Group Ltd.: Tk.60 > (Tk.27 + Tk.15). However, the problem is that LZ Ltd. would be indifferent to the transfer and therefore could

not be relied upon to take part in it. The price offered would only equal the marginal cost.

Part (c):

One possible solution is two-step transfer pricing:- Step 1: For each unit transferred, the buying division pays a transfer price to the sellingdivision equal to the standard marginal cost of production.

- Step 2: Each month, the buying division pays a lump sum to the selling division to cover As aconstant fair share of the latters fixed costs (e.g., Tk.100,000 in the case of the transfer in part[a]) plus a profit element.

- This two-step transfer pricing system is likely to be goal congruent, since the buying divisionhas an incentive to request transfers. The marginal cost of the transferred item to the buyingdivision is the same as the marginal cost of the transferred item to Canarias Group Ltd. as awhole, so there is a significant likelihood of goal congruence.

- Also, the buying division will recognize that, to earn a profit, it must earn sufficient net

revenues to cover all fixed costs (including fixed costs transferred to it from the sellingdivision).- The selling division is able to make a profit through its markup on the monthly fixed costs

transfer.- The proportion of the selling divisions capacity which is reserved for meeting the buying

divisions needs must be fixed. Otherwise, it would be impossible to arrive at the applicablefixed costs figure for Step 2 above.

A second possible solution is dual-rate transfer pricing: Description:

- The selling division is credited with the external selling price of the finished product;

- The buying division is charged with the standard cost of the transferred product;


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- The difference is eliminated on consolidation in preparing the company financialstatements.

Advantages:- Ensures that the division managers take goal-congruent decisions about whether to make

transfers.- Provides proper information for performance evaluation purposes.

Disadvantages:- Company Profits < Combined Business Unit Profits division managers must be told

that their reported division profit significantly overstates how much profit they areearning for the company as a whole.

- Business units can come to regard internal transfers as sheltered markets, instead offocusing on doing business in the real world. For performance evaluation purposes, onesolution is to use a composite performance measure in which each Tk.1 of profits fromexternal transactions is weighted more heavily than Tk.1 of profits from intra-companysales.

Solution to Q. No. 3 (a)

(i) Calculation of NPV

Year 0 1 2 3 4Tk. Tk. Tk. Tk. Tk.

Investment (2,000,000)Income 1,236,000 1,485,400 2,622,000 1,012,950Operating costs _________ 676,000 789,372 1,271,227

Net cash flow620,076

(2,000,000) 560,000 696,028 1,350,773 392,874Discount at 10% 1.000 0.909 0.826 0.751Present values

0.683(2,000,000) 509,040 574,919 1,014,430

Net present value

268,333

Tk. 366,722

Workings

Calculation of incomeYear 1 2 3 4Inflated selling price (Tk. /unit) 20.60 21.22 21.85 22.51Demand (units/year) 60,000 70,000 120,000 45,000Income (Tk. /year) 1,236,000 1,485,400 2,622,000 1,012, 950

Calculation of operating costs

Year 1 2 3 4Inflated variable cost (Tk. /unit) 8.32 8.65 9.00 9.36Demand (units/year) 60,000 70,000 120,000 45,000Variable costs (Tk. /year) 499,200 605,500 1,080,000 421,200Inflated fixed costs (Tk. /year) 176,800 183,872 191,227Operating costs (Tk. /year)

198,876676,000 789,372 1,271,227 620,076


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Alternative calculation of operating costs

Year 1 2 3 4Variable cost (Tk. /unit) 8 8 8 8Demand (units/year) 60,000 70,000 120,000 45,000Variable costs (Tk. /year) 480,000 560,000 960,000 360,000Fixed costs (Tk. /year) 170,000 170,000 170,000

Operating costs (Tk. /year)

170,000

650,000 730,000 1,130,000 530,000Inflated costs (Tk. /year) 676,000 789,568 1,271,096 620,025

(ii) Calculation of internal rate of returnYear 0 1 2 3 4

Tk. Tk. Tk. Tk. Tk. Net cash flow (2,000,000) 560,000 696,028 1,350,773 392,874Discount at 20% 1.000 0.833 0.694 0.579Present values

0.482(2,000,000) 466,480 483,043 782,098

Net present value189,365

(Tk. 79,014)

Internal rate of return = 10 + ((20 - 10) x 366,722)/(366,722 + 79,014) = 10 + 8.2 = 18.2%(iii) Calculation of return on capital employed

Total cash inflow = 560,000 + 696,028 + 1,350,773 + 392,874 = Tk. 2,999,675Total depreciation and initial investment are same, as there is no scrap value

Total accounting profit = 2,999,675 - 2,000,000 = Tk. 999,675Average annual accounting profit = 999,675/4 = Tk. 249,919Average investment = 2,000,000/2 = Tk. 1,000,000

Return on capital employed = 100 x 249,919/1,000,000 = 25%

(iv) Calculation of discounted payback

Year 0Tk.

1Tk.

2Tk.

3Tk.

4Tk.

PV of cash flows (2,000,000) 509,040 574,919 1,014,430 268,333Cumulative PV (2,000,000) (1,490,960) (916,041) 98,389 366,722

Discounted payback period = 2 + (916,041/1,014,430) = 2 + 0.9 = 2.9 years

M The investment proposal has a positive net present value (NPV) of Tk. 366,722 and is therefore financiallyacceptable. The results of the other investment appraisal methods do not alter this financial acceptability, asthe NPV decision rule will always offer the correct investment advice.

The internal rate of return (IRR) method also recommends accepting the investment proposal, since the IRRof 18.2% is greater than the 10% return required by PV Co. If the advice offered by the IRR method differedfrom that offered by the NPV method, the advice offered by the NPV method would be preferred.

The calculated return on capital employed o

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