Question 1

Hyflux Ltd acquired 2.4 million shares of Sunny Ltd on 1 Oct 2009, by issuing two of its own shares for
every three shares in Sunny Ltd and a deferred payment of $1.00 for every eight Sunny Ltd shares
payable on 1 Oct 20011. Hyflux Ltd’s share was trading at a market price of $2.00 on 1 Oct 2009; the
present value of the cash consideration is equal to $0.80 at a discount rate of 12% per annum. The
deferred cash consideration has not been recorded as part of the investment.

The following profit statements have been prepared for Hyflux Ltd and Sunny Ltd for the year ended 31
Dec 2009.

Hyflux Ltd Sunny Ltd

$‘000 $‘000
Sales 700 300
Cost of sales (306) (188)
____ ____
Gross profit 394 112
Operating expenses (27) (20)
Finance costs (15) (12)
____ ____
Profit before tax 352 80
Taxation (92) (24)
_____ _____
Profit after tax 260 56
Dividends (100) 0
_____ _____
Retained profit for the year 160 56
______ _____

Balance Sheet
As at 31 Dec 2009

Hyflux Ltd Sunny Ltd

$‘000 $‘000 $‘000 $‘000

Assets
Non Current Assets
Property, plant and equipment 3,100 3,000
Investments 3,300 30
____ ____
6,400 3,030

Current assets
Stock 1,200 500
Debtors 1,300 240
Bank and cash 800 105
____ ____
Total assets 9,700 3,875
____ ____
Equity and liabilities
Equity shares 6,000 3,000
Accumulated profits 620 340
______ _____
6,620 3,340
Non current liabilities
10% loan 2,000 300

Current liabilities
Creditors 980 235
Dividend payable 100 0
_____ _____
Total equity and liabilities 9,700 3,875
______ ______

Notes

i) Hyflux Ltd made sales of $30,000 to Sunny Ltd during the year. These goods originally cost
Hyflux Ltd $20,000.Only 50% of these goods had been resold by Sunny Ltd by 31 Dec 2009.

ii) Inter company balance were:

Owed to Sunny in Hyflux’s book 30
Receivable from Hyflux in Sunny’s book 50
The difference is due to a cash in transit, not yet received by Sunny Ltd

iii) The fair value of a plant in Sunny Ltd was $160,000 higher than the book value at the date of
acquisition, it has a four years remaining life with straight line depreciation.

iv) It is estimated that the consolidated goodwill is valued at $600,000 on 31 Dec 2009 following the
FRS 103 requirement.

v) There are currently 3 million shares in Sunny Ltd.

Required

a) Prepare a consolidated Income Statement for Hyflux Ltd for the year ended 31 Dec 2009.
(11 marks)

b) Prepare a consolidated statement of financial position for Hyflux Ltd as at 31 Dec 2009.
(14 marks)
Question 2

The trial balance of Baka Ltd, a publicly listed company, at 31 March 2009 is as follows:

$000 $000
Investment property 2,000
Building 8,000
Plant and equipment – at cost 3,250
Accumulated depreciation 1 April 2008
- building 3,200
- plant 2,200
Accumulated profits 1 April 2008 3,050
Sales revenues 27,080
Purchases 17,000
Construction contract costs to 31 March 2008 1,600
Construction contract progress billings received 1,500
Trade Debtors 7,520
Inventory 1,700
Cash in bank 3,170
10% preference share 1,200
Trade creditors 3,340
Equity shares 4,000
6% Loan Note (issued in 2006) 2,000
Property rental 110
Distribution cost 340
Interim dividend 2,000
Administration expenses 1,000
Loan interest paid 100
_______ ______
47,680 47,680
_______ ______

The following notes are relevant:

i) On 31 March 2009, the company’s only remaining building was revalued at $6 million. The
building had an estimated life of 25 years when it was acquired on 1 April 1998 and this has not
changed as a result of the revaluation. The directors of Angelo wish to incorporate this value in the
financial statements for the year ended 31 March 2009.
Plant is depreciated at 20% per annum on net book value.

ii) The investment property was revaluated at $1.7 million on 31 Mar 2009.

iii) Included in the sales revenue is an amount of $1 million relating to sales made under a sales or
return basis. These goods were subsequently returned in good condition after 31 Mar 2009. These
goods were sold at a mark up of 25%.
iv) The figures in respect of contract balances relate to a three-year contract entered into on 1 July
2008. Details relating to this contract are:
$000
Contract price 10,000
Estimated total contract costs 6,000
Agreed value of work completed and billed at 31 March 2009 3,000

Baka Ltd’s policy is to recognise profits on long-term construction contracts from the point that
they become more than 20% complete. The percentage of completion is deemed to be the agreed
value of the work completed to date as a percentage of the total contract price. Contract revenue is
taken as the agreed value of the work completed to date.

v) A provision for income tax for the year to 31 March 2009 of $400,000 is required. The directors
declared a final dividend of 7c per share for 20 million ordinary shares in issue on 25 March 2009.

vi) Closing Inventory as at 31 March 2009 was stated at a cost of $3.1 million.

Required :

a) Prepare the statement of comprehensive income for Baka Ltd for the year ended 31 March
2009.
(10 marks)

b) Prepare the statement of changes in equity and

(5 marks)

c) The statement of financial position for Baka Ltd as at 31 March 2009.

(10 marks)
Question 3

The directors of Holden Ltd wish to compare the company’s most recent financial statements with those
of the previous year. The company’s financial statements are given below:

Holden Ltd
Income Statements
Year ended
31 March 2009 31 March 2010
$000 $000

Sales revenue (80% on credit and 20% cash) 1,800 2,500

Cost of sales (see note below) (1,200) (1,800)
Gross Profit 600 700
Distribution costs (160) (250)
Administrative expenses (200) (200)
Profit from operations 240 250
Finance cost (50) (50)
Profit before tax 190 200
Income tax expense (44) (46)
Net profit for the period 146 154

Note : Cost of sales figures are made up as follows:

Year ended
31 March 2009 31 March 2010
$000 $000

Opening inventory 180 200

Purchases (all on credit) 1,220 1,960
1,400 2,160
Less closing inventory (200) (360)
Cost of sales 1,200 1,800
 Balance Sheets As at

31 March 2009 31 March 2010

$000 $000 $000 $000

Non-current assets – cost 3,100 3,674

Less accumulated depreciation 1,214 1,886 1,422 2,252

Current assets
Inventory 200 360
Trade receivables 400 750
Cash at bank 100 700 120 1,230
2,586 3,482
Capital and reserves
Issued ordinary share capital* 1,000 1,200
Share premium account * 400 600
Accumulated profits 168 322
1,568 2,122

Non-current liabilities
10% loan notes 500 500

Current liabilities
Trade payables 210 380
Sundry 260 430
Income tax 48 50
518 860
2,586 3,482
* The additional share capital was issued on 1 April 2009

Required:

(a) Calculate, for each of the two years, eight accounting ratios which should assist the directors in
their comparison, using closing figures for balance sheet items concerned.
(12 marks)

(b) Suggest possible reasons for the changes in the ratios between the two years.
(8 marks)

(c) Explain the problems in using financial ratios.

(5 marks)
Question 4

The following accounting issues were identified for ABC Trading while closing the accounts for the
financial year ended 31 Dec 2009.

You are required to advise on the accounting treatments in accordance to current accounting standards:

i) As at 31 Dec 2009, there was $500,000 of goods sold on a “sale or return” basis.
The cost of these goods were $340,000, the customers were invoiced when the
goods were delivered.

ii) Shortly after the financial year end on 4 Jan 2010, a flood at the company’s
warehouse caused a loss of $600,000 losses of building and $400,000 of stock.
The losses are 80% insured.

iii) ABC Trading is planning to restructure a division that has been making losses for
the past two years, the following costs are expected:
Redundancy and retrenchment $200,000
Future losses before turning profitable $300,000
Compensation for contracts $100,000
The plan to restructure has been approved by the Board of Directors and it has
been communicated to the employees concerned.

Required:

For each of the above cases, recommend and discuss the appropriate accounting treatment.
(15 marks)
Question 5

The IASB’s framework for the preparation and presentation of financial statements sets out the concepts
that underlies the preparation and presentation of financial statements that external users are likely to rely
on when making economic decisions about an enterprise.

a) Discuss the extent that the formulation of a “conceptual framework” by IASB had aided in the
process of setting accounting standards?
(5 marks)

On 1 January 2008 Lawson Ltd issued an 8% $10 million convertible loan at par. The loan is convertible
in three year time to ordinary shares or redeemable at par in cash.The directors decided to issue the
convertible loan because a non convertible loan would have required an interest rate of 10%. The
directors intend to show the loan at $10 million under the non current liabilities. The following discount
rates are available:

8% 10%
Year 1 0.93 0.91
Year 2 0.86 0.83
Year 3 0.79 0.75

Required:
Describe how Lawson Ltd should treat the items in its financial statements for the year ended 31 Dec
2008
(5 marks)