august 2013 solution
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Page 1of 8
Solution to Q. No. 1. (a)CAMPS MUSIC STORE
Work SheetFor the Year Ended July 31, 2012
Account Ti tles Trial Balance Adj ustmen ts Adj usted Tr ialBalance
Incom e Statement Balance Shee
Debit Credit Debit Credit Debit Credit Debit Credit Debit Cred
Cash 34,780 34,780 34,780Accounts Receivable 4,600 4,600 4,600Merchandise Inventory 31,400 31,400 31,400 26,400 26,400
Prepaid Fire Insurance 720 (1) 240 480 480Prepaid Rent 4,800 (2)2,400 2,400 2,400Office Equipment 12,000 12,000 12,000Accumulated DepreciationOfficeEquipment
4,500 (3)1,500 6,000 6,0
Accounts Payable 8,000 8,000 8,0Clay Camp, Capital 22,000 22,000 22,0Clay Camp, Drawing 20,000 20,000 20,000Sales 300,000 300,000 300,000Sales Returns and Allowances 1,000 1,000 1,000Purchases 194,000 194,000 194,000Purchase Returns and Allowances 1,400 1,400 1,400Transportation-In 5,200 5,200 5,200Advertising Expense 1,000 1,000 1,000Supplies Expense 1,800 1,800 1,800Salaries Expense 23,200 23,200 23,200
Utilities Expense 1,400 1,400 1,400335,900 335,900
Fire Insurance Expense (1) 240 240 240Rent Expense (2)2,400 2,400 2,400Depreciation ExpenseOfficeEquipment
(3)1,500_______ _______
1,500_______ _______
1,500______ ______
4,140 4,140 337,400 337,400 263,140 327,800Net income 64,660 ______ _______ 64,66
327,800 327,800 100,660 100,6Adjustments: (1) Expiration of prepaid fire insurance ($720 X 4/12). (2) Expiration of prepaid rent ($4,800 X 6/12).
(3) Depreciation expense on office equipment for the fiscal year ended July 31, 2012.
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Solut ion to Q. No. 1. (b)
CAMPS MUSIC STOREIncome Statement
For the Year Ended July 31, 2012
Operating revenues:Gross Sales .. $300,000Less: Sales returns and allowances . 1,000Net Sales . $299,000
Cost of goods sold:Merchandise inventory, August 1, 2011. $ 31,400Purchases $194,000Less: Purchase returns and allowances .. 1,400
Net purchases . $192,600Add: Transportation-in .. 5,200Net cost of purchases . 197,800Cost of goods available for sale $229,200Merchandise inventory, July 31, 2012 .. 26,400
Cost of goods sold . 202,800Gross Margin $ 96,200
Operating expenses:Advertising $ 1,000Supplies . 1,800Salaries .. 23,200Utilities .. 1,400Fire insurance 240Rent ... 2,400Depreciation office equipment .. 1,500
Total operating expenses . 31,540Net income $ 64,660
=======
Solut ion to Q. No. 1. (c)
CAMPS MUSIC STORE
Statement of Owners EquityFor the Year Ended July 31, 2012
Clay Camp, capital, August 1, 2011 .. $ 22,000Net income for the year .. 64,660
Total ... $ 86,660Less: Drawings 20,000Clay Camp, capital, July 31, 2012 $ 66,660
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Solut ion to Q. No. 1. (d)
CAMPS MUSIC STOREBalance SheetJuly 31, 2012
Assets
Current assets:Cash ................ $ 34,780Accounts receivable .. 4,600Merchandise inventory . 26,400Prepaid fire insurance 480Prepaid rent 2,400
Total current assets $ 68,660
Property, plant, and equipment:
Office equipment .. $ 12,000Less: Accumulated depreciation .......... 6,000
Total property, plant, and equipment .. 6,000
Total assets .. $ 74,660=======
Liabilit ies and Owners Equity
Liabilities:Accounts payable . $ 8,000
Owners equity:Clay Camp, capital ... 66,660
Total liabilities and owners equity . $ 74,660=======
Solut ion to Q. No. 1. (e)
Closing entries:
1987July 31 Merchandise Inventory . . 26,400Sales ... 300,000Purchase Returns and Allowances . 1,400
Income Summary 327,800To close accounts with credit balances in theIncome Statement columns and to set up theending merchandise inventory.
31 Income Summary 263,140Merchandise Inventory 31,400Sales Returns and Allowances . 1,000
Purchases . 194,000Transportation-In . 5,200
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Advertising Expense 1,000Supplies Expense 1,800Salaries Expense . 23,200Utilities Expense . 1,400Fire Insurance Expense 240
Rent Expense 2,400Depreciation Expense Office Equipment .. 1,500
To close accounts with debit balances in theIncome Statement columns.
31 Income Summary 64,660Clay Camp, Capital .. 64,660
To close the Income Summary account to theowners capital account.
31 Clay Camp, Capital . 20,000Clay Camp, Drawing 20,000
To close drawing account.
Solut ion to Q. No. 2. (i)
XYZ CompanyBank Reconciliation
July 31, 2011Cash balance according to bank statement Tk. 93,644.80Add deposit of July 31 not recorded by bank 19,166.20Deduct outstanding cheques:No. 1244 9,178.60
1284 800.001223. 820.80
10,799.40Corrected bank balance... 102,011.60Cash balance according to depositors records.. 80,756.60Add: Proceeds of note collected by bank Tk. 38,000
less collection fee of Tk. 4037,960.00
Error in recording of a cheque correctly drawnbut entered in cash book as Tk. 6981
63.00 38,023.00
118,779.60Deduct: Check returned because of insufficient funds 1525.00
Discounted note dishonored 15,045.00
Cheque Printing charges 198.00 16,768.00Corrected cash balance 102,011.60
Q. No. 2. (i)
July 31, 2011
Cash 37,960Collection charge 40.00
Notes Receivable 38,000.00Cash .. 63.00
Accounts Payable 63.00
Accounts Receivable. 1525.00Cash .. 1525.00
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
General expenses.. 198.00Cash .. 198.00
Account Receivable 15,045.00
Notes Receivable Discounted. 15,000.00Cash . 15,045.00Note Receivable 15,000.00
Solut ion to Q. No. 3. (a)
1. 2012Dec. 31 Bad Debts Expense 7,500
Allowance for Doubtful Accounts 7,500To record estimated bad debts for theyear.
2. 2013Jan. 15 Allowance for Doubtful Accounts 500
Accounts Receivable James Ryan 500To write off the account of James Ryanas uncollectible.
3. 2013Feb. 12 Accounts Receivable James Ryan . 500
Allowance for Doubtful Accounts . 500To correct the write-off of James Ryansaccount on January 15.
12 Cash 500Accounts Receivable James Ryan ... 500
To record the collection of James Ryansaccount receivable.
Solut ion to Q. No. 3. (b)
1. 2012June 15 Notes Receivable Short Company . 15,000.00
Accounts Receivable ShortCompany ... 15,000.00
To record receipt of a note from ShortCompany.2. July 15 Cash 15,192.50
Notes Receivable Discounted ... 15,000.00Interest Revenue ... 192.50
To record the discounting of the ShortCompany note.
Computation of cash proceeds:Maturity value (Days until
maturity = 60) ..................... $15,450.00Discount = $15,450 X 10% X 60/360 257.50
$15,192.50=========
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
(To record retirement of the machinery(ii) 01/07/09: Depreciation Expense 9,000Accumulated Depreciation 9,000(To record depreciation to the date of disposal for6 months)
01/07/09 Cash 15,000Accumulated Depreciation 63,000Loss on Disposal of Machinery 6,000Machinery 84,000(To record the sale of the machinery01/01/09 Machinery (New) 36,000Accumulated Depreciation 54,000Machinery (Old) 84,000Cash 6,000(To record exchange of the machinery)
Workings: Fair market value of the Machinery Tk. 34,000Cash paid 6,000Cost of the New Machinery 40,000Gain on exchange adjustment (4,000)Value of the new machinery 36,000Cost value of the Machinery 84,000Less Accumulated depreciation (54,000)Book value of machinery 30,000
Fair market value of machinery Tk. 34,000Therefore the gain on exchange: Tk. 34,000-30,000 = Tk. 4,000.
Q. No. 4. (b)(i)
Depreciation for 2008 on Tk. 30,000 @ 10% 3,000Depreciation for 2009: (Tk. 30,000-3,000)* 10% 2,700Depreciation up to 31-12-2009 5,700Book value of machinery as on 01-07-2010 (Tk. 30,000 5,700)* 10% for 6 months
1,215
Total depreciation up to 01-07-2010 Tk. 6,915
Journal entries
01/07/10 Cash 15,000Accumulated Depreciation 6,915Loss on Disposal of Machinery 8,085Machinery 30,000(To record the sale of the machinery)
4. (b)(ii)Depreciation of the existing machinery:Book value on 01-01-2010: Tk. 1,75,000 24,300 1,50,700Depreciation @ 10% on Tk. 1,50,700 in 2010 15,070Depreciation of the new machinery (Tk. 35,000+2,500)* 10% for 6months
1,875
Total depreciation to be charged in 2010 Tk. 16,945
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013, EXAMINATION
PROFESSIONAL LEVEL-ISUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING.
Model SolutionAnswer to the Question No. 1.
XYZ CompanyStatement of Cash flow
For the year ended December 31, 2012
Amount(Tk.)
Amount(Tk.)
Cash flow from Operating Activities:
Net Profit before interest and taxes 47,800
Adjustment for depreciation (W1) 36,500
Loss on sale of equipment 2,500
Loss on debenture redemption 800
Amortization of patent 8,000
Increase in inventory (9,000)
Increase in account receivable (8,000)
Decrease in prepaid expense 2,200
Decrease in accounts payable (W2) (11,700)
Decrease in outstanding expenses (1,200)
Cash generated from operations 67,900
Less: Interest paid 1,800
Income tax paid (W3) 19,960
(21,760)
Net cash generated from operating acti vities 46,140
Cash flow from Investing Activities:
Purchase of Freehold building (W4) (17,000)
Furniture purchase (W4) (12,700)
sale of equipment 18,000
purchase of equipment (W4) (65,500)
Net cash used in investing activit ies (77,200)
Cash flow from Financing Activities:
Sale of common stock (W5) 11,250
Sale of right share 51,750
Dividend paid (W6) (17,940)
Redemption of debenture (20,800)Net cash generated from f inancing activi ties 24,260
Net increase in cash and cash equivalents during the year (6,800)
Cash and cash equivalents at the beginning of the year 47,300
Cash and cash equivalents at the end of the year 40,500
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Workings:W1:Depreciation Furniture depreciation Tk. 6,200 plus Equipment depreciation Tk. 30,300 = Tk. 36,500
Acc Dep - Furniture Acc Dep - Equipment
b/d 22,500 Equipment (Sold) 24,500 b/d 55,500
c/d 28,700 Depreciation 6,200 c/d 61,300 Depreciation 30,300
W2:Decrease in accounts payable Ending accounts payable Tk. 20,500 Payable for furniture purchase Tk. 15,000Payable for operating activities Tk. 5,500 Beginning accounts payable Tk. 17,200Changes in accounts payable Tk. (11,700)
W3:Interest and Tax paid
Interest Payable Income Tax Payable
Cash 1,800 b/d 300 Cash 19,960 b/d 16,000
c/d 700 Int. expense 2,200 c/d 12,000 Income tax* 15,960
*(Profit before interest and taxes Interest expense) x 35% = (47,800 2,200) X 35% = Tk. 15,960
W4:Purchase and sale of property, plant and equipment
Freehold building Furniture
b/d 175,000 b/d 45,300
Rev. Res 8,000 Accounts payable 15,000
Cash 17,000 c/d 200,000 Cash 12,700 c/d 73,000
Equipment
b/d 125,000 sold 45,000
Cash pur 65,500 c/d 145,500
W5:Sale of common stock [New issue Tk. 10,000 + premium 1,250 = 11,250]
Common Stockb/d 225,000
Cash (right share)* 45,000
c/d 280,000 Cash (new issue) 10,000
*right share @ Tk. 10 will result increase in common stock [(225,000 10) 5 x 1] = 4,500 shares andshare premium will increase @ Tk. 1.50 for 4,500 shares.
W6:Dividend paid
Retained Earnings
Divided 17,940 b/d 111,800
c/d 123,500 Profit after tax* 29,640
*profit before interest and tax was Tk. 47,800 less, interest Tk. 2,200 and tax Tk. 15,960
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Answer to the Question No. 2.XYZ Company
Statement of comprehensive incomeFor the year ended December 31, 2012
Revenue 693,500
Less: Cost of goods sold (252,500+650) 253,100
Gross profit 440,350
Less: Operating expenses
Administrative expenses -
Admin exp 56,000
Depreciation [{125,000 (22,800+20,440)}@20%] 16,352 72,352
Selling expenses -
Distribution expense 36,000
Bad debt 748
Patent amortization 2,000
Patent impairment 1,000 39,748112,100
Net operating income 328,250
Other income and expenses -
Investment income 16,700
Losses from assets abandonment (3,800)
12,900
EBIT 341,150
Less: Finance cost 2,000
EBT 339,150
Less: Income tax @ 40% 135,660Profit from continuing operation 203,490
Less: Losses from discontinuing division (net of tax) 18,000
Profit before extraordinary items and cumulative effect ofchange in accounting principle 185,490
Extraordinary loss (net of tax) (15,000)
Cumulative effects on prior years of retroactive application ofnew depreciation method [(22,800+20,440) 24,000](net of tax) (11,544)
Net Income 158,946
Add: Other comprehensive income
Unrealized gain on available for sale securities (net of tax) 7,680Comprehensive income 166,626
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XYZ CompanyStatement of changes in equity
For the year ended December 31, 2012
ShareCapital
SharePremium
GeneralReserve
SinkingFund
Accu.OCI
RetainedEarnings
Balance b/d 350,000 72,950 28,200 21,000 - 60,300
Net income - - - - - 158,946
Transfer to General reserve - - 20,000 - - (20,000)
Transfer to Sinking fund - - (3,000) 3,000 - -
Comprehensive income - - - - 7,680 -
Balance c/d 350,000 72,950 45,200 24,000 7,680 199,246
XYZ CompanyStatement of Financial Position
As on December 31, 2012
Assets: Tk.Non-current Assets: 752,408
Property, Plant and Equipment (W2) 690,408
Patent (W3) 6,000
Long term investments 56,000
Current Assets: 89,052
Account Receivables (W1) 19,552
Short term investments (45,000 + 12,800) 57,800
Inventories (12,350 - 650) 11,700
Total Assets 841,460
Equity and LiabilityShareholder's Equity 699,076
Share Capital 350,000
Share Premium 72,950
General reserve 45,200
Accumulated OCI 7,680
Sinking fund 24,000
Retained earnings 199,246
Non-current liability
8% Bond payable 25,000
Current liability 117,384Accounts payable 4,300
Income tax payable (W4) 111,084
Interest payable 2,000
Total equity and liability 841,460
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W1: Allowance for bad debt Account Receivables:Balance b/d : Tk. 500 Balance b/d : Tk. 20,800Allowance @ 6% : Tk. 1,248 Less: Allowance for bad debt : Tk. 1,248Bad debt charge for the year : Tk. 748 Balance c/d : Tk. 19,552
W2: Property, plant and equipment:
Land Building Equipment TotalCost 400,000 225,000 125,000 750,000
Accumulated depreciation - b/d 24,000 24,000
Retroactive application 19,240 19,240
Depreciation for the year 16,352 16,352
Accumulated depreciation - c/d 59,592 59,592
Carrying value 400,000 225,000 65,408 690,408
W3: Patent Amortization and Impairment:Carrying value of patent : Tk. 9,000 Remaining life : 4.5 YearsAmortization for the year : Tk. 2,000 Book Value : Tk. 7,000
Net realizable value : Tk. 6,000 Impairment : Tk. 1,000
W4: Taxation Provision:
Tax on income from continuing operation 135,660
Tax benefit on losses from discontinued division (12,000)
Tax benefit on losses from earthquake (10,000)
Tax benefit on retroactive application of depreciation (7,696)
Tax on unrealized gain on securities 5,120
Net tax payable (receivable) 111,084
Answer to the Question no. 3(a):(i) Tk.1,000 rental revenue (Tk.12,000 6 = Tk.2,000 per month x 1/2 month); the balance (Tk.11,000)
should be deferred and recognized as earned during 1985.(ii) Tk.60,000 sales revenue (Tk.10,000 cash plus Tk.50,000 note is equal to FMV of asset); Tk.3,000
earned interest revenue ( 12% x Tk.50,000 x 1/2 year = Tk.3,000); the balance of interest revenue(Tk.3,000) to be earned during 1985.
(iii) Tk.104,000 net sales revenue; the Tk.8,000 special discount is a reduction in selling price andshould be offset with the Tk.112,000 normal selling price in recognizing the net realizable amount.
(iv) Tk.400,000 sales revenue. Tk.16,000 guarantee expense, (4% x Tk.400,000 = Tk.16,000 all ofwhich relates to the Tk.400,000 worth of sales this period).
(v) Tk.435,000 sales revenue. (All 5 tractors have been sold; the fact that 3 of the tractors have not yetbeen delivered, unless there are unusual circumstances, would ordinarily not preclude therecognition of the total sales revenue.)
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Answer to the Question no. 3(b):(i) The Allowance for Doubtful Accounts should have a balance of Tk. 50,000 at year-end. The
supporting calculations are shown below:
Days Account Outstanding Amount ExpectedPercentageUncollectible
EstimatedUncollectible
0-15 days Tk.300,000 0.02 Tk.6,00016-30 days 100,000 0.10 10,000
31-45 days 80,000 0.15 12,000
46-60 days 40,000 0.25 10,000
61-75 days 20,000 0.6 12,000
Balance for Allowance for Doubtful Accounts Tk.50,000
The accounts which have been outstanding over 75 days (Tk.15,000) and have zero probabilityof collection would be written off immediately and not be considered when determining the properamount for the Allowance for Doubtful Accounts.
(ii) Accounts Receivable Tk.540,000
Less: Allowance for doubtful accounts 50,000
Accounts Receivable(net) Tk.490,000
(iii) The year-end bad debt adjustment would decrease before-tax income Tk. 30,000 as computedbelow:Estimated amount required in the Allowance for Doubtful Accounts Tk.50,000
Balance in the account after write-off of uncollectible accounts but beforeadjustment (Tk.35,000-Tk.15,000)
20,000
Required charge to expense Tk.30,000
Answer of the Question No. 04(a):
G & H Pump Co.
Partial Balance SheetDecember 31, 2007
Liabilities: BDT
Current Liabilities:
Accounts payable and accrued expenses 163,230
Income taxes payable 63,000
Accrued bond interest payable 110,000
Unearned revenue 25,300
Current portion of low term debt 70,870
Total current liabilities: 432,400
Long term Liabilities:
Note payable to Prime Bank 99,000
Mortgage note payable 169,994
Bonds payable 2,200,000
Add: Premium on bonds payable 1,406 2,201,406
Total long term liabilities 2,470,400
Total liabilities 2,902,800
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Answer of the Question No. 04(b):
1. Although the note payable to Prime Bank is due in 30 days, it is classified as a long term liability asit 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 liabilitysection of the balance sheet.
3. The BDT 70,870 of the mortgage note that will be repaid within the next 12 months (BDT 240,864-
BDT 169,994) is a current liability; the remaining balance, due after December 31, 2008, is a longterm debt.
4. Although the bonds payable mature in seven months, they will be repaid from a sinking fund, ratherthen from current assets therefore, these bonds retain their long term classification.
Answer to the Question No. 5(a).
Cost Tk. 78,000Replacement cost Tk. 75,000Ceiling Tk. 90,000
= 2013 catalog selling price less sales commissions and estimated othercosts of disposal. (2013 catalogue prices are in effect as of 12/01/12.)
Floor Tk. 62,400= Ceiling less (30% X 2013 catalog selling price)
Designated Market price Tk. 75,000 [Middle value of Replacement cost, ceiling and floor]LMC Tk. 75,000
Answer to the Question No. 5(b).
Cost Retail
Beginning Inventory Tk. 30,000 Tk. 48,000Purchases 339,500 520,800Purchase returns (25,800) (36,480)Purchase discounts (7,590)Freight-in 8,920Markups Tk. 32,500Markup cancellations (8,320 ) 24,180
Totals 345,030 556,500Markdowns (12,000)Sales (412,000)Sales returns 28,300 (383,700)
Inventory losses due to breakage (2,400)Employee discounts (3,400 )
Ending inventory at retail 155,000
Cost-to-retail ratio = Tk. 345,030/Tk. 556,500 = 62%Ending inventory at cost (62% of Tk. 155,000) = Tk. 96,100
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Answer to the Question No. 5(c).
Alvi CorporationStockholders EquityDecember 31, 2012
Capital Stock Tk.
Preferred stock, Tk. 100 par, 12%,105,000 shares issued and outstanding 10,500,000Common stock, Tk. 20 par,1,305,000 shares issued, 1,260,000 shares outstanding 26,100,000
Total capital stock 36,600,000Additional paid-in capital
In excess of parpreferred stock 2,225,000In excess of parcommon stock 23,500,000From treasury stock 70,000
25,795,000
Total paid-in capital 62,395,000Retained earnings 19,175,000*
Total paid-in capital and retained earnings 81,570,000
Less: Treasury stock (45,000 shares common) (4,050,000)Total stockholders equity 77,520,000
*(12,500,000 + Net income 8,250,000 Preferred dividend 1,260,000 Cash dividend 315,000) =19,175,000Cash dividend: [(800,000 shares + 70,000 shares) X split 3/2] 60,000 treasury shares + 15,000 treasuryshare] X 0.25 per share = 315,000)
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m) Work In Process Job Order Cost Sheets 26,880Factory Overhead Applied 26,880
n) Factory Overhead Applied 26,880Cost of Goods Sold 139
Factory Overhead Control 27,019
o) Finished Goods Inventory cards 81,750Work In Process Job Order Cost Sheets 81,750
p) Cost of Goods Sold 75,500Finished Goods Inventory cards 75,500
Accounts Receivable Customers Ledger 90,000Sales 90,000
(ii)Ledger Accounts
Materials Factory Overhead Control
Tk. Tk. Tk. Tk.
Nov:1 6,180 (b) 26,550 (b) 1,300 (f) 175(a) 35,600 (c) 200 (d) 850 (g) 175(g) 1,265 (e) 225 (i) 3,419 (m) * 26,880
(j) 12,400 (n)** 139(k) 7,800(l) 1,600
Balance 16,070
43,045 43,045 27,369 27,369
Work in Process Finished Goods
Tk. Tk. Tk. Tk.Nov:1 9,750 (g) 1,090 Nov:1 5,660 (p) 75,500
(b) 25,250 (o) 81,750 (o) 81,750(c) 200(j) 40,200 Balance 11,910(m) 26,880 Balance 19,440
1,02,280 1,02,280 87,410 87,410
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Answer to the Question No. 2(b) :
(i) Computation of economic order quantity (EOQ)D =Annual requirement = 54,000 castingsC = Cost per casting = Tk. 800Co = Ordering cost = Tk. 9,000 per orderC
c = Carrying cost per casting p.a = Tk.300
EOQ =
= 1,800 casting
(ii) Safety stock (Assuming a 15% risk of being out of stock)Safety stock for one day= 54,000/360 days = 150 castingsRe-order point =Minimum stock level + Average lead time Average consumption
= 150 + 6 150= 1,050 castings.
(iii) Total cost of ordering= (54,000 / 1,800) Tk. 9,000
= Tk.2,70,000Total cost of carrying = (450 + 1,800) xTk.300
= Tk. 4,05,000
(iv) (A) Computation of new EOQ:
= 300 castings
(v) (B) Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days(1 year = 360 days). Under old purchasing policy each order is placed after 12 days.
Answer to the Question No. 3
(a) A volume-based cost driver is a cost driver that reflects some measure of production volume, eitheproduction output (i.e. units produced) or production input (i.e. direct labour hours or machine hours)Conventional costing systems assume that manufacturing overhead costs are related to the volume ofproduction, usually measured by input measures such as direct labour hours. Thus, this approach assumesthat the more direct labour hours worked on a product, the greater its consumption of overhead resourcesYet, in a modern business environment, many manufacturing overhead costs may not behave in this way. Asignificant part of the overhead costs are likely to be driven by factors other than production volume. Forexample, some of the overhead costs, like setup costs, are incurred for each production batch regardless othe number of units in the batch. Others, like factory rent, are incurred each month regardless of the numbeof units produced. Still others are incurred because of overall production complexity. Products that aredifficult to make tend to use more overhead resources than those that are simple to make. Where non-volume based costs are significant, a conventional costing approach will result in distorted product costs.
(b)
(i) The regression equations intercept on the vertical axis is $200. It represents the portion of indirecmaterials cost that does not vary with machine hours, when operating within the relevant range. The slopeof the regression line is $4 per machine hour. For every machine hour, $4 of indirect material costs isexpected to be incurred.
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(ii) Estimated cost of indirect material at 900 machine hours of activity:
S = $200 + ($4 900)= $3 800
(iii) Several questions should be asked:
(a) Do the observations contain any outliers, or are they all representative of normal operations?
(b) Are there any mismatched time periods in the data? Are all of the indirect material cost observationsmatched properly with the machine hour observations?
(c) Are there any allocated costs included in the indirect material cost data?
(d) Are the cost data affected by inflation?
(iv) The choice of cost driver should reflect the nature of the production process. Other cost drivers couldinclude direct labour hours or direct labour cost if the production process is labour intensive and theconsumption of indirect materials is related to labour activities. Alternative the number of units producedcould be a suitable cost driver, if each unit uses much the same amount/cost of indirect material.
Answer to the Question No. 4.
(i) & (ii) Full cost and manufacturing cost, per unit, for Switch 3901:
Activity Full cost Manufacturing cost
Prepare purchase order $2,150 -
Process payables 1,350 -
Prepare payroll 3,000 -
Process sales orders 16,500 -
Pack and dispatch 8,500 -
Program solder robots 30,600 30,600
Solder circuits 144,000 144,000
Assemble circuit boards 75,000 75,000
Wire in switch 70,000 70,000
Insert fuse 50,000 50,000
Test switch 20,000 20,000
Design switch 5,000 -
Total annual cost $426,100 $389,600
Full cost per switch: $85.22 activity cost + $20 direct material = $105.22
Manufacturing cost per switch: $77.92 activity cost + $20 direct material = $97.92
(iii) The non-manufacturing costs are part of the cost of producing and selling Switch 3901. It is important themanagement considers these costs, as well as the manufacturing costs, when assessing the profitability ofSwitch 3901 and, therefore, when making decisions such as product mix, outsourcing and pricing.
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013, EXAMINATION
PROFESSIONAL LEVEL-IISUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I.
Model Solution
Solution No. 1(b).
(i) Yes, the lease is capital lease as the lease term is 8 years which is 80% of the economic life ofthe equipment.(ii) Lease Amortization Schedule:
Year Description Amount Interest Principal LeaseObligation
01.01.2008 InitialBalance
1,700,360
01.01.2008 Payment 250,000 - 250,000 1,450,360
01.01.2009 Payment 250,000 145,036 104,964 1,345,396
01.01.2010 Payment 250,000 134,540 115,460 1,229,936
01.01.2011 Payment 250,000 122,994 127,006 1,102,929
01.01.2012 Payment 250,000 110,293 139,707 963,22201.01.2013 Payment 250,000 96,322 153,678 809,544
01.01.2014 Payment 250,000 80,954 169,046 640,499
01.01.2015 Payment 250,000 64,050 185,950 454,549
31.12.2015 Payment 500,000 45,455 454,548 0
Minimum Lease Payment:
Rentals (250,000 x 5.86842) 1,467,105
Guaranteed Residual Value (500,00 x 0.46651) 233,255
1,700,360
(iii)01.01.2008 Leased Equipment 1,700,360
Obligation Under Capital Lease 1,700,360
01.01.2008 Obligation Under Capital Lease 250,000
Executory Cost 24,000
Cash 274,00031.12.2008 Interest Expenses 145,036
Accrued Interest on Obligation under CapitalLease
145,036
31.12.2008 Amortization Expenses 150,045
Accumulated Amortization on LeasedEquipment
150,045
(17,00,360-500,000)/8=150,045
01.01.2009 Obligation Under Capital Lease 104,964Accrued Interest on Obligation under Capital Lease 145,036
Executory Cost 24,000
Cash 274,000
31.12.2009 Interest Expenses 134,540Accrued Interest on Obligation under Capital
Lease134,540
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31.12.2009 Amortization Expenses 150,045
Accumulated Amortization on LeasedEquipment
150,045
(iv) Balance SheetAs on December 31, 2008
Assets:
Leased Equipment 1700360Less- Accumulated Amortization 150045 1550315
Liabilities:
Current Liabilities-Obligation Under Capital Lease(Current Portion) 104964
Accrued Interest on Obligation Under CapitalLease
145036 250000
Non Current Liabilities-
Obligation Under Capital Lease(Non CurrentPortion)
1345396
(v)01.01.2010 Accrued Interest on Obligation under CapitalLease
134,540
Obligation Under Capital Lease 1,345,396
Accumulated Amortization on LeasedEquipment
30,090
Equipment 1,530,334
Leased Equipment 1,700,360
Cash 1,340,000
Solution No. 2(i).
Head Office BranchJournal Entries:Branch 71,000 Cash 30,000Accu. Depre-Store Furniture 5,000 Merchandise Shipment from Head Office 36,000
Cash 30,000 Store Furniture & Fixture 10,000Merchandise Shipment to Branch 30,000 Accu. Depre-Store Furniture 5,000
Allow. For Overvaluation of Br. Merchandise 6,000 Head Office 71,000Store Furniture & Fixture 10,000
No Entry Store Furniture & Fixture 1,500Cash 1,500
Accounts Receivable 250,000 Accounts Receivable 175,000Sales 250,000 Sales 175,000
Cash 280,000 Cash 140,000Accounts Receivable 280,000 Accounts Receivable 140,000
Purchase 220,000 Purchase 120,000Accounts Payable 220,000 Accounts Payable 120,000
Accounts Payable 240,000 Accounts Payable 115,000Cash 240,000 Cash 115,000
Expenses 22,500 Expenses 11,000Accrued Expenses 1,500 Head Office 6,000Branch 6,000 Cash 5,000
Cash 30,000
Branch 60,000 Merchandise Shipment from Head Office 60,000Merchandise Shipment to Branch 50,000 Head Office 60,000
Allow. For Overvaluation of Br. Merchandise 10,000
Cash 25,000 Head Office 25,000Branch 25,000 Cash 25,000
Branch 12,000 Merchandise in Transit 12,000Merchandise Shipment to Branch 10,000 Head Office 12,000
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Allow. For Overvaluation of Br. Merchandise 2,000
Depreciation 3,800 Depreciation 1,300Accu. Depre.- Store Furniture & Fixture 3,800 Accu. Depre.- Store Furniture & Fixture 1,300
10,000 x 10%= 1,0001,500 x 1/5 = 300
1,300Expenses 1,800 Expenses 900
Accrued Expenses 1,800 Accrued Expenses 900Branch Income Statement 14,200 Head Office 14,200
Branch 14,200 Income Statement 14,200(Loss transferred) (Loss transferred)
Allow. For Overvaluation of Br. Merchandise 16,400Branch Income Statement 16,400
(Load on Br goods sold adjusted)Workings:Load on goods sent to Br. (6,000+10,000+2,000)= 18,000Less- Load on goods in br. Closing inventory(9,600 x 20/120)= 1,600
Load on goods sold by branch 16,400
Solution No. 2(ii).
Head Office Branch
Income Statement Income Statement
for the year ended December 31, 2012 for the year ended December 31, 2012
Sales 250,000 Sales 175,000
Less- Cost of Goods sold: Less- Cost of Goods sold:
Opening Merchandise 96,000 Opening Merchandise -
Add- Purchase 220,000 Add- Purchase 120,000316,000
Less- Shipment to Branch 90,000 Add- Shipment from Head Office 96,000
226,000 216,000
Less- ending merchandise 60,000 66,000 Less- ending merchandise 40,000 176,000
Gross Profit 84,000 Gross Profit (1,000)
Less- Other operating expenses: Less- Other operating expenses:
Expenses 24,300 Expenses 11,900
Depreciation 3,800 28,100 Depreciation 1,300 13,200
Net Profit 55,900 Net Profit (14,200)
Add- Branch Loss (14,200)
Load on goods sold by branch 16,400 2,200
Total Net profit 58,100
Head Office Branch
Balance Sheet Balance Sheet
As on December 31, 2012 As on December 31, 2012
Assets : Assets :
Cash 85,000 Cash 23,500
Accounts Receivable 130,000 Accounts Receivable 35,000
Merchandise Inventory 60,000 Merchandise Inventory 40,000
Branch 109,800 Merchandise in Transit 12,000
Less- Allowance for overvaluation of Br. Merchandise 1,600 08,200
Store Furniture & Fixture 38,000 Store Furniture & Fixture 11,500
Less- Accu Depreciation 14,400 23,600 Less- Accu Depreciation 6,300 5,200
406,800 115,700
Liabilities & Capital Liabilities & Capital
Accrued Expenses 1,800 Accrued Expenses 900
Accounts Payable 20,000 Accounts Payable 5,000
Capital Stock 250,000 Head Office A/C 109,800
Retained Earnings 135,000 Retained Earnings 115,700
406,800
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Solution No. 3(d)National Engineers Ltd
Contract Account
For the year ended December 31, 2011
Particulars Amount Particulars Amount Amount
Tk Tk Tk
Wages 1,400,000 Material sold 115,000
Plant 350,000 Sale of Plant 17,000
Materials 1,050,000
Sundry Expenses 65,000 Work in Process:
Head Office Charges 125,000 Work Certified 3,000,000
( 24,00,000x100/80)
Profit & Loss A/C (profit on sale of
Materials) 15,000 Work Uncertified 250,000 3,250,000
Notional Profit 487,000 Plant in hand 80,000
Material in hand 30,000
3,492,000 3,492,000
Profit & Loss A/C (profit transferred) 300,000 Notional Profit 487,000
Work in Process (Reserve) 187,000
487,000 487,000
Profit to be credited to Profit & Loss Account:
Cost to date 2,990,000
Less : Plant sold 17,000
Cost of material sold 100,000 117,000
2,873,000
Estimated further expenditure:
Wages 849,500
Plant 150,000
Materials 500,000
Sundry Expenses 35,000
Head Office Charges 62,500
Claims, temporary maintenance &
cintingencies 90,000 1,687,000
4,560,000
Less: Residual Value of Plant 60,000
Estimated total cost 4,500,000
Estimated Profit 500,000
Contract Price 5,000,000
Profit to be transferred: Estimated Profit x Work Certified / Contract Price
(5,00,000 x 30,00,000 / 50,00,000)= 300,000
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Solution No. 4(a)
Populer Life Assurance Co.
Revenue Account
For the year ended Dec 31, 2012
Dr. Cr
Expenditures Taka Taka Income Taka Taka
Claim paid 197,000 Life assurance fund at the beginning of theyear 2,900,300
Add: Oustanding 10,000 Premium Received 233,500
207,000 Add: Oustanding 10,000
Less: Claims covered underreinsurance 2,300 204,700 243,500
Surrenders 7,000Add: Bonus utilized in reductionof premium 6,000 249,500
Bonus to policy holders 30,500 Interest & dividend received 112,700
Add: Bonus utilized in reductionof premium 6,000 36,500 Add: Oustanding 21,300 134,000
Commission paid 9,300
Management Expenses 32,300
Add: Due 1,200 33,500
Dividend paid 16,000
Life assurance fund at the end ofthe year 2,976,800
3,283,800 3,283,800
Solution No. 4(b)
Populer Life Assurance Co.
Balance Sheet
As at 31 December 2012Dr. Cr.
Capital and Liabilities Taka Property and Assets Taka
Authorized Capital ? Mortgage in Bangladesh 492,200
Issued and subscribed capital 10,000 shares ofTk.15 each 150,000 Loans on companey's policies 178,600
Calledup and paidup capital 10,000 shares ofTk.10 each 100,000 Investments 2,300,000
Life assurance fund 2,976,800 Freehold premises 40,000
Claimed admitted but not paid 10,000 Agent's Balance 9,300
Management Expenses due 1,200Amount receivable under Re-insurance 2,300
Outstanding Premium 10,000Accrued Interest 21,300
Cash Deposit 27,000
Cash in hand 7,300
3,088,000 3,088,000
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Solution No. 5.
Emacol Limited
Statement of Affairs
As on 31 december 2012
BookValue Assets
RealizedValue
Assets pledged with fully securedcreditors
12,000 Notes Receivable 12,000
Bank Notes Payable 10,000
Interest payable 300 10,3001,700
13,250 Investment in stock 13,250
Bank Notes Payable 6,000
Interest payable 250 6,2507,000
21,000 land 20,000
99,000Building 50,000 70,000
Mortgage Note Payable 100,000
Interest Payable- Mortgage Note 4,250 104,250
Fixed Assets:
2,000 Cash in Hand 2,000
2,100 Cash at Bank 2,100
23,500 Accounts Receivable 14,000
28,000 Inventories-FG 30,240
12,000 Inventories-WIP 9,000
19,500 Inventories-Raw Materials 11,900
600Unpaid Insurance
30046,500 Plant and Machinary 19,000
Total Net Realizable Value 97,240Wages and Salaries due 6,750
Net free Assets 90,490Eatimated dificiency (balancing Figure) 41,260
279,450 131,750
BookValue
EquitiesUnsecured
Liabilities having priority
6,750 Wages and Salaries due 6,750
Fully Securied creditors16,000 Notes Payable 16,000
550 Interest Payable 550
Pertially secured creditors
100,000 Mortgage Notes Payable 100,000
4,250 Interest Payable- Mortgage Note 4,250
Total 104,250
Land and Building 70,000 34,250
Unsecured Creditors
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97,500 Accounts payable 97500
Stock holders' Equity
125,000 Capital Stock
(70,600) Retained Earnings (deficit)
279,450 131,750
Deficiency account
As on 31 December 2012
Estimated Losses Estimated Gains
Accounts Receivable 9,500 Inventories-FG 2,240
Inventories-WIP 3,000 Capital Stock 125,000
Inventories-Raw Materials 7,600 Retained Earnings (70,600)
Unpaid Insurance 300 Estimated deficiency 41,260
Land 1,000
Buildings 49,000
Plant and Machinery 27,500
Total 97,900 Total 97,900
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Answer to the Question No. 2
(a) This comment is occasionally heard from people who are experienced managers who have run theiown small business for a long period of time. These individuals may have great knowledge about theirbusiness and may be able to manage effectively without the assistance of formal systems, such asbudgets. They may feel they do not need to spend a great deal of time on the budgeting process,because they can essentially run the business by gut feeling. This approach can result in several
problems. First, if the person who is running the business is absent or leaves the business, there are noformal plans or budgets which may assist new managers to run the business. Second, budgeting canassist in the effective running of an organisation. Budgets facilitate communication and co-ordination,are useful in resource allocation and help in evaluating performance and providing incentives toemployees. It is difficult to achieve these benefits without a budgeting process.
(b)
Statement of Profit and Lossfor Expected Levels of Operations
Particulars 0% (Tk.) 50% (Tk.) 75% (Tk.)Sales Nil 49,500 90,000Less Marginal Costs Nil 40,500 60,750Contribution Nil 9,000 29,250Less Fixed Costs 11,000 19,000 19,000Special Costs (Working Note) 12,500 -- --Profit / Loss (23,500) (10,000) 10,250
Note: Special Cost:
Closing down Costs 7,500Maintenance of Plant 1,000Overhouling, training etc. 4,000
12,500
The amount of loss can be reduced by (23,500 10,000) i.e. 13,500 if the factory continuous to operate. Furtherin the second year the estimated profit is 10,250. Therefore, closing down is not desirable.
Workings:
(i) 50% operations:60% Tk. 67,60040% Tk. 51,400
Difference 20% Tk. 16,200 Variable Cost only
Variable Cost for 40% = Tk. 16,200 2 = Tk. 32,400
Fixed Cost (Tk. 51,400 Tk. 32,400) = Tk. 19,000.
Variable Cost for 50% = VC for 40% + VC for 10%
= 32,400 + 8,100 = Tk. 40,500.
(ii) 75% operations:80% Tk. 83,80060% Tk. 67,600
20% Tk. 16,200For 15% Tk. 12,150
VC at 60% = 16,200 3 = Tk. 48,600.
Fixed Cost = (67,600 48,600) = Tk. 19,000.
VC for 75% = VC for 60% + VC for 15%
= Tk. 48,600 + Tk. 12,150
= Tk. 60,750
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Answer to the Question No. 3
(a) The new budget system allows the managers to focus on those areas that need attention. By dividing the
annual budget into 12 equal parts, managers can take corrective action before the error is compounded
(frequent feedback is provided). Also, the company has segregated costs into fixed and variable
components, an essential step for good control. A major weakness of the budget is the failure to properly
define responsibility. Because of this, supervisors are being held accountable for areas over which they haveno control.
(b) The performance report should emphasize those items over which the manager has control. The repor
should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is
attempting to compare costs at two different levels: the original budget for 3000 units with the actual costs for
production of 3185 units. A flexible budgeting system needs to be employed.
(c) Berwin, Inc.
Machining Department Performance Report
For the Month Ended May 31, 2008
FlexibleBudget* Actual Variance
Volume in units 3185 3185 0
Variable manufacturing costs:
Direct materials $ 25 480 $ 24 843 $637 F
Direct labour 29 461 29 302 159F
Variable overhead 35 354 35 035 319 F
Total variable costs $ 90 295 $ 89 180 $1,115 F
Fixed manufacturing costs:
Indirect labour $ 3300 $ 3334 34 U
Depreciation 1500 1500 0Taxes 300 300 0
Insurance 240 240 0
Other 930 1027 97 U
Total fixed costs $ 6270 $ 6401 $131 U
Total costs $ 96 565 $ 95 581 $984 F
*For the variable costs: 3185 $24 000/3000; 3185 $27 750/3000; 3185 $33 300/3000
(d) Berwins budgetary system could also be improved by offering monetary and nonmonetary incentives to
reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the
budgetary process because they will be responsible for controlling the budget. The accountant needs to be
certain that the budget objectives are based on realistic conditions and expectations. The managers shouldbe held accountable only for costs over which they have control.
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Answer to the Question No. 4
(a)
CM per Unit $1.60
CM Ratio 0.4
BEP in Quantity 275,000 Candy
BEP in $ $1100,000
Profit $ 184,000
Margin of Safety in Quantity 115,000 Candy
Margin of Safety in % 29.49%
DOL 3.3913
Profit Increase $93,600
Current CMR = 0.4
CMR =
After 15% increase in the cost of Candy, V will be $ 2.7
Therefore,
0.4 =
0.4P = P 2.7
0.6P = 2.7
P = $4.5
Price will be $ 4.5 per unit.
(b)
Snap Crackle Pop Total
Sales $4,000 $2,000 $1,000 $ 7,000
Variable Manufacturing Costs 1,600 600 500 $ 2,700
Total Contribution Margin 2,400 1,400 500 $ 4,300
Fixed Manufacturing Costs 1,200 600 100 $ 1,900
Controllable Profit 1,200 800 400 $ 2,400.00
Fixed Operating expenses 800 600 800 $ 2,200.00
Income $400 $200 ($400) $ 200.00
Snap Crackle Total
Sales $4,000 $2,000 -- $ 6,000Variable Manufacturing Costs 1,600 600 -- $ 2,200
Total Contribution Margin 2,400 1,400 -- $ 3,800
Fixed Manufacturing Costs 1,200 600 -- $ 1,800
Controllable Profit 1,200 800 -- $ 2,000.00
Fixed Operating expenses $ 2,200.00
Income $ (200.00)
The Pop should not be eliminated.
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(b)Slim and Trim Ltd
Variable Costing Income StatementFor the Year Ended 30 June
Sales revenue (125,000 units sold at $27 per unit) $3,375,000Less: Variable expenses:
Variable manufacturing costs at $18 per unit (2,250,000)Variable selling and administrative costs at $2 per unit (250,000)
Contribution margin 875,000Less: Fixed expenses:
Fixed manufacturing overhead (600,000)Fixed selling & administrative expenses (100,000)
Net profit $175,000
(iii) Difference in reported profits under absorption costing and variable costing= Changes in inventory in units predetermined fixed overhead rate per unit
= 25,000 units $4 per unit
= $100,000As shown in requirement (ii), reported profit under variable costing is $100,000 lower than absorptioncosting.
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IISUBJECT: 204. TAXATION
Model SolutionSolution Question No. 3.
Mr. XComputation of Total Income
For the year ended on 30/06/2013 (Assessment year: 2013-2014)
(a) Income from Salary:(1) Basic Salary (Tk. 20,000 X 12) = 2,40,000/-(2) Entertainment Allowance @ 20% = 48,000/-(3) Bonus (Tk. 20,000 X 2 months) = 40,000/-(4) Free accommodation (25% of Basic salary, or rental value
Tk. 72,000, lower one)60,000/-
(5) Medical Allowance (Tk. 500 X 12 month) = 6,000/-Less: exempted up to actual expenditure = 8,000/-
Nil
(6) Conveyance Allowance (Tk. 3,000 X 12) = 36,000/-Less: Exempted up to -- 30,000/-
6,000/-
(7) Employers contribution to Recognised Provident Fund 10%
24,000/-
Total Salary Income 4,18,000/-
(b) Income from Interests on Securities:(1) Interests on Debentures Tk. 10,000/-(2) Interests on Govt. Securities Tk. 70,000/-
Interest Income 80,000/-
(As there is no exemption from such interest with effect from the assessment
year 2011-2012. so it is fully taxable. Moreover no tax credit will be allowedon TDS Tk. 7,000/- as it was deducted 3 years before which is not to be adjustedwith this years assessment)
(c) Income from House Property:Annual Value ( Tk. 50,000 X 12 months)(Assuming it as reasonable)
Tk. 6,00,000/-
Less: allowance deduction:(1) Repairs and maintenance th of A.V
(2) Municipal tax (Tk. 20,000 / 2)=
(As 50% of the house is self occupied)
(3) Insurance Premium (Tk. 12,000 / 2) =(4) Int. on House Building loan ( 1,47,000 / 2)=
Tk. 1,50,000/-
Tk. 10,000/-
Tk. 6,000/-Tk. 73,500/-
Tk. 2,39,500/-House Property Income Tk. 3,60,500
(d) Income from Partnership Firm:50% share income from Partnership Firm (before tax) Tk. 1,50,000
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(e) Capital Gain (from sale of shares of listed companies):As it is tax free as per SRO No. 269 dated 01/07/2011so it is not added with income ---
Nil
f) Income from other sources:
(1) Cash dividend ---- (45,000 100/90) = Tk. 50,000/-Less: exempted up to = Tk. 10,000/- Tk. 40,000/-
(2) Stock dividend { tax free as per section 2(26)} -- Nil(3) Bank Interest (5,600 100/90)= Tk. 6,000/-(4) Income From Sub-let (Tk. 3,000 X 12) = Tk. 36,000/- Tk. 82,0
Total Income = Tk. 10,90,5
Investment Allowance:(1) Contribution to Recognized P.F (both) -- (24,000 X 2) =
(2) Life Insurance Premium ( not allowable as it is in the
name of old father)
(3) Donation to Prime Ministers relief fund is not an item of
6thschedule (Part-B). So it cannot be considered as
investment allowance.(4) Investment in secondary share
Tk. 48,000/-
Nil
Nill
Tk. 1,00,000/-
Tk. 1,48,000/-
Tax Computation:-On first Tk. 2,20,000/- NilOn next Tk. 3,00,000/- Tax @ 10% Tk. 30,000/-On next Tk. 4,00,000/- Tax @ 15% Tk. 60,000/-On balance Tk. 1,70,500/- Tax @ 20% Tk. 34,100/-
Tk. 10,90,500/- Tk 1,24,100/-Less: Investment tax credit 1, 48,000 X 15% Tk. 22,200/-
Tk.1,01, 900/-Less: Tax on Taxed Share income of Firm 1,01,900 X 1,50,000
10,90,500 Tk. 14,017/-Tk. 87,883/-
Less: Tax deducted at sources:-(1) TDS from cash dividend
(2) TDS from Bank Interest
Tk. 5,000/-Tk. 600/-
Tk.5,600/-
Net tax payment Tk. 82,283/-
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Solution of question No. 4.X Limited
Computation of Total IncomeFor the year ended on 30thjune-2013
(Assessment Year: 2013-14)
(1) Income from trading business: (Sec. 28)
Net profit as per P/L :- Tk. 2,32,300/-Less: Non business income included in P/L for consideration at
appropriate head of income:
(a) Dividend Income (considering income from other sources) Tk. 30,000/-
(b) Share premium (considering income u/s 82C) Tk. 30,000/-
(c) Sundry Income (considering income from other sources) Tk. 13,000/-
(d) Capital Gain from sale of machine (considering at
under Capital Gain head) Tk. 40,000/-
Tk. 1,13,000/-Tk. 1,19,300/-
Add:- Expenditure to be considered as per tax law afterwards:-
(1) Entertainment (to be considered as per rule-65) Tk. 9,500/-
(2) Deprecation (to be considered as per 3rdSchedule) Tk. 46,600/-
Tk. 56,100/-
Tk. 1,75,400/-
Add:- Inadmissible Expense:-
(1) Rent and Taxes Tk. 24,500/-
As VAT Tk. 4,200 paid for importing machineries is
charged at P/L , so disallowed Tk. 4,200 being part
of capital expenditure. As the machine is not used
during the year, so no tax deprecation is allowable. Tk. 4,200/-
(2) Repairs and operating expenditure Tk. 27,300/-
Tk. 6,000 disallowed from here as it is not business
expenditure rather personal expenditure of M.D Tk. 6,000/-
(3) Legal Expenditure Tk. 14,500/-
Income tax related legal expenditure is allowable
up to appeal to the Taxes Appellate Tribunal. So as it isallowable expenditure nothing to add back from here Nil
(4) Type Writer Tk. 5,948/-
Type writer machine is capital nature expenditure.
As it is charged at P/L as revenue expenditure, so
Disallowed fully. Tk. 5,948/-
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(5) Bad debit Provision Tk. 4,400/-
Disallowed fully being to provision (other than actual
bad debit) is allowable as per Sec. 29 Tk. 4,400/-
(6) Compensation for termination of staff Tk. 10,000/-
Assuming compensation paid for violation of job
agreement by the employer, so disallowed fully Tk. 10,000/-
Tk. 2,05,948/-
Add:- Demand income u/s 19Bad debit recovered is to be treated as business income as
per provision of section 19 (15) of ITO 1984 Tk. 2,000/-
Tk. 2,07,948/-
Less: Tax Depreciation (as per 3rdSchedule) Tk. 58,400/-Profit before charging entertainment Tk. 1,49,548/-
Less: Entertainment (as per Rule.65)Tk. 1,49,548 X 4% = Tk. 5,982/-
But restricted up to actual expenditure. Here the actual expenditureclaimed Tk. 9,500/-. Out of which Tk. 2000/- is unexplained and Tk.5,276/- is personal expenditure. So after deducting these two, claimrenains (Tk. 9,500 - 2,000-5,276/-)= 2,224/- As it is lower than thecelling of Rule-65, so it is allowed Tk. 2,224/-
Tk. 1,47,324/-Income u/s 82C (Share Premium) :
Tax @ 3% was collected by SEC and it is final settlement of tax liability.Tax rate is also 3% as per Sec. 16E Tk. 30,000/-
Capital Gain:Capital Gain from sale of machineries Tk. 40,000/-
Income From other source:
(1) Dividend Income Tk. 30,000/-
(2) Sundry Income Tk. 13,000/-
Tk. 43,000/-
Total Income = Tk. 2,60,324/-
Tax Computation
(1) On Income other than Capital gain, share premium and
dividend income @ 37.5 % (being non publicly traded company)
(Tk. 2,60,324- 40,000-30,000-30,000)= 1,60,324 X 37.5% Tk. 60,122/-(2) On share premium Tk. 30,000 @ 3% Tk. 900/-
(3) On Capital Gain @ 15% (40,000 X 15%) Tk. 6,000/-
(4) On Dividend @ 20% (30,000 X 20%) Tk. 6,000/-
Tk. 73,022/-Less: Tax credit on TDS on dividend @ 20% Tk. 6,000/-
Tax Credit on Premium @3% Tk. 900/-(Assuming TDS was made as per law) Tk. 6,900/-
Net Tax Liability Tk. 66,122/-
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Page 1 of 8
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 301. ADVANCED FINANCIAL ACCOUNTING-II
Model SolutionSolution of question: 1
1(a):MUTTAKEEN LTD
Computation of Basic and Diluted EPS
Particulars For Basic EPS Adjustment for Dilution For Diluted EPS1 2 3 4 = (2+3)
(i) Net Profit for theperiod attributable forShareholders
EPS Tk.2 50,00,000Shares
= Tk.100,00,000
Tax Adjusted Interest onConvertible Debentures
= Interest (100% TaxRate)
= (10,00,000 10 12%)
(100% 37.50%)
= 12,00,000 62.50%
=Tk. 750,000
=Tk. 107,50,000
(ii) Weighted AverageNo. of Ordinary Shares
Given 50,00,00010,00,000 1
= 10,00,000 60,00,000
(iii) EPS = (i) (ii) Basic EPS = Tk. 2.00 Diluted EPS =Tk. 1.79
1(b):MONYEM PHARMA AID LTD.
Statement of operation in different industry segments as per IFRS-8
Amount (Tk. in millions)
ParticularsFood
Products
Plasticand
Packing
Healthand
ScienceOther
Inter SegmentElimination
Consolidated
External Sales ..Inter Segment Sales
Total ..Segment Expenses ..
Operating Profit ..
5,59555
55372
32421
1557
-(155)
6,627-
5,650(3,335)
625(425)
345(222)
162(200)
(155)122
6,627(4,060)
2,315 200 123 (38) (33) 2,567(562)
132
(65)
General Expenses Income from Investments
Interest Income from continuing operations 2,072
Identifiable Assets .. 7,320 1,320 1,050 665 -- 10,355Corporate Assets 72
Total Assets 11,077
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(3) Cost of salesMMH Ltd
(Tk.)Muaz Ltd
(Tk.)Mahran
Ltd (Tk.)Total (Tk.)
Cost of sales 210,000 252,000 185,000 647,000Adjustment:Pre-acquisitionAt 1 July 2012: Inventory (cr.)Tk. 286
At 30 June 2013: Cost of Sales (cr.) Tk. 286
(286)
Unrealized profit in ending inventory:Muaz Ltd to Mahran Ltd
Sales.. Dr Tk. 20,000Cost of Sales.....Cr 27,000Inventory... Cr 3,000Deferred Tax Asset .............. Dr 900Income Tax Expense (30% x Tk.3,000).Cr.900
(27,000)
Unrealized profit in ending inventory:Mahran Ltd to MMH Ltd
Sales.. Dr 10,000
Cost of Sales.. Cr 9,500Inventory. Cr 500Deferred Tax Asset .. Dr 150Income Tax Expense (30% x Tk.500) Cr 150
(9,500)
Tk.610,214
(4) Expenses from operating activities: OtherMMH Ltd
(Tk.)Muaz Ltd
(Tk.)Mahran
Ltd (Tk.)Total (Tk.)
Other operating expenses 180,000 141,800 165,000 486,800Adjustment:
Pre-acquisition: Muaz Ltd - Mahran LtdAt 30 June 2013: Amortization Expense 760Depreciation on machinery
Depreciation Exp. (10% x Tk.1,500 p.a. ) / 2 75Pre-acquisition: At 30 June 2013:Accumulated Depreciation-Plant (171)Pre-acquisition: At 30 June 2013:Accumulated Depreciation-vehicles (114)Sale of machinery: Mahran Ltd to MMH Ltd
Proceeds of Sale/Other Revenue.. Dr 42,000Machinery Dr 1,500
Carrying Amount of Machinery Sold Cr 43,500Income Tax Expense Dr 450Deferred Tax Liability Cr 450
(43,500)
Tk.443,850
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(5) Tax ExpensesMMH Ltd
(Tk.)Muaz Ltd
(Tk.)Mahran
Ltd (Tk.)Total (Tk.)
Tax expense. 22,000 8,700 9,000 39,700Adjustment:Pre-acquisition:At 30 June 2013: Income Tax Expense 86
Pre-acquisition:At 30 June 2013: Income Tax Expense 51Pre-acquisition:At 30 June 2013: Income Tax Expense 34Sale of machinery: Mahran Ltd to MMH LtdIncome Tax Expense 450Unrealized profit in ending inventory:Muaz Ltd to Mahran Ltd
Sales.. Dr 20,000Cost of Sales Cr 27,000Inventory Cr 3 000Deferred Tax Asset.. Dr 900
Income Tax ExpenseCr 900(30% xTk.3,000) (900)Unrealized profit in ending inventory:Mahran Ltd to MMH Ltd
Sales. Dr 10,000Cost of Sales.. Cr 9,500Inventory.. Cr 500Deferred Tax Asset Dr 150Income Tax Expense.Cr 150(30% x Tk.500) (150)Depreciation on machinery
Depreciation Expense Dr 75Accumulated Depreciation Cr 75(10% x Tk. 500 p.a.) / 2Deferred Tax Liability.Dr 23Income Tax Expense.. Cr 23(30% x Tk.75 = Tk.23 rounded)
(23)
Tk.39,248
Solution 3(a).
H. Ltd. (Tk. 000)Consideration 750Plus non controlling interest (2000 x 30%) 600
1350Less Net identifiable assets of F. Ltd. 2000Gain on bargain purchase 650
The abridged consolidated statement of financial position at the date of acquisition will appear as follows:(Tk. 000)
Assets = (8200 + Fair value of F. Ltd. 2800) Tk. 11,000Share holders equity (6000+650 gain included in P/L 6650Non controlling interest 600Liabilities = (2950 + 800) 3750Total equities & liabilities Tk. 11,000
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3(b)(ii) The first step in indentifying the reportable segments of in entity is to identify those which representat least 10% of any of the entitys sales profit or assets.
Exceeds of 10% of QualityNature of business Total Sales
$ 1975Total Profit/ absoluteloss = $ 232
Total assets =2303
Beer Yes Yes Yes YesBeverage No No Yes Yes
Hotel Yes Yes Yes YesRetail Yes No No YesPackaging Yes Yes Yes YesGeographical AreasFind land Yes Yes Yes YesFrame No No Yes YesUnited Kingdom Yes Yes Yes YesAustralia Yes Yes Yes Yes
* The second step would be to check if total external revenue attributable to reportable segmentsconstitutes at least 75% of the total consolidated or entity revenue of $ 13,613,000.
* As all operating segments qualify as reportable segments, the external revenue requirement of 75% ismet.
* If that had not been the case, IFRS-8 would have required that additional operating segments beidentified as reportable even they do not meet the 10% thresholds in step one.
Solution Question No. 4:
Required(i): Tk. in million
GDP at Market Price 37,250Less Indirect taxes (6,550)Add: Subsidy 2,500Add: Capital Grant 1,500 (2,550)GDP at factor cost 34,700
Required(ii): GDP at factor cost 34,700Add the followings:-Property from abroad 1,730Export 6,350 8,080Less the followings:-Property from domestic 6,970 (8,200)NNP at factor cost 34,580 34,580
Required(iii): National Income (NI)NNP at factor costs 34,580Less Capital Consumption (depreciation) 2,720National Income 31,860
Solution No. 5(a)
Journal entries recorded by R & Co, for investment in S & Co. ordinary shares during 2012:
(1) Cash 4,000
Investment in S & Co. ordinary shares 4,000
(To record equity method dividend received from Subsidiary
Tk. 5,000*0.8)
(2) Investment in S & Co. ordinary shares 6,400
Income from Subsidiary 6,400
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(To record equity method income of subsidiary
Tk. 8,000*0.8)
(3) Income from Subsidiary 800
Investment in S & Co. ordinary shares 800
(To amortize differential related to building
and equipment depreciation)
Additional computation:
Investment in S & Co. Ordinary Shares
Balance, January 1, 2012 59,200
Reported income 6,400
Dividend Declared (4,000)
Depreciation Expense (800)
Balance, December 31, 2012 60,800
Solution 5(b)
Eliminating Journal Entries needed to prepare consolidated financial statements.
(a) Income from Subsidiary 5,600
Dividend declared 4,000
Investment in S & Co. ordinary shares 1,600
(To eleminate income from subsidiary)
(b) Income to Noncontrolling Interest 1,620
Dividend declared 1,000
Noncontrolling Interest 620
(To assign income to noncontrolling interest:
Subsidiary net income 8,000
Less: Ending inventory unrealized profit (2,000)
Add; Beginning inventory realized profit 1,600
Add: Realized excess depreciation 500
8,100
Noncontrolling interest (20%) 1,620
('c) Ordinary Shares - S & Co. 20,000
Share Premium 4,000
Retained Earnings, January 1 43,000
Differentials 5,600
Investment in S &Co. ordinary shares 59,200
Noncontrolling Interest 13,400
(To eleminate beginning investment
in S & Co. ordinary shares)
(d) Building & Equipment 8,000
Differential 5,600
Accumulated Depreciation 2,400
(To eleminate differential)
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(e) Depreciation expense 800
Accumulated Depreciation 800
(To amortize differential for depreciation)
(f) Retained Earnings, January 1 1,280
Noncontrolling Interest 320
Cost of goods sold 1,600
(To eliminate beginning inventory profit:
1,600 x 80% = 1,280; and
1,600 x 20% = 320.)
(g) Sales 9,000
Cost of goods sold 7,000
Inventory 2,000
(To eliminate upstream sale of inventory.)
(h) Building & Equipment 5,000
Retained Earnings, January 1 4,000
Accumulated Depreciation 9,000
(To eliminate unrealized gain on equipment.)
(i) Accumulated Depreciation 1,000
Retained Earnings, January 1 500
Depreciation & amortization 500
(To eliminate excess depreciation on equipment.)
(J) Accounts Payable 2,000
Accounts Receivable 2,000
(To eleminate inter company receivable/payable)
Solution 5(c)
R & Co. with its subsidiary S & Co.
Equity-Method Work Paper for Consolidated Financial Statements
For the year ended December 31, 2012
Holding Subsidiary Eliminations Group
Items R &Co. S & Co. Debit Credit ConsolidateTk. Tk. Tk. Tk. Tk.
Sales 100,000 50,000 g) 9,000 141,000
Other income 4,080 6,000 10,080
Income from Subsidiary 5,600 a) 5,600 -Credits 109,680 56,000 151,080
Cost of Goods Sold 83,200 40,400 (f) 1,600
(g) 7,000 115,000
Depreciation & Amortization 6,000 4,000 e) 800 (i) 500 10,300
Other Expenses 4,800 3,600 8,400
Debits 94,000 48,000 133,700
Income to Noncontrolling interests b) 1,620 (1,620)
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Net income c/f 15,680 8,000 17,020 9,100 15,760
Retained Earnings, January 1 69,180 43,000 c) 43,000
f) 1,280
h) 4,000 (i) 500 64,400
Net income b/f 15,680 8,000 17,020 9,100 15,760Dividend Declared 10,000) (5,000) (a) 4,000
(b) 1,000 (10,000)Retained Earnings, December, 31 c/f 74,860 46,000 65,300 14,600 70,160
Cash 26,060 2,000 28,060
Accounts Receivable 16,000 14,000 (j) 2,000 28,000Inventory 34,000 22,000 (g) 2,000 54,000
Buildings & Equipments 120,000 80,000 (d) 8,000
h) 5,000 213,000
Investment in S & Co. Ordinary Shares 60,800 (a) 1,600
(c) 59,200 -
Differential c) 5,600 (d) 5,600 -
Debits 256,860 118,000 323,060
Accumulated Depreciation 62,000 24,000 i) 1,000 (d) 2,400
(e) 800
(h) 9,000 97,200
Accounts Payable 20,000 3,040 j) 2,000 21,040
Bonds Payable 60,000 20,000 80,000
Bond Premium 960 960
Ordinary Shares 40,000 20,000 (c) 20,000 40,000
Share Premium 4,000 (c) 4,000 -
Retained Earnings 74,860 46,000 65,300 14,600 70,160
Noncontrolling Interests (f) 320 (b) 620
(c) 13,400 13,700
Credits 256,860 118,000 111,220 111,220 323,060
= THE END =
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 302. ADVANCED COST ACCOUNTING
Page | 1
Model solution of question no. 01
Requirement 1(a):
Costs computed in a cost of production report are useful in determining inventory costsand in computing the cost of goods sold. Unit costs should compare with standard unit costs orprevious data to determine whether they represent efficient operations. Also, materials, laborand overhead must be reported by items of materials used, type of labor operations involvedand overheads incurred information is to be reported in a cost of production report arenecessary but reports must also be designed to assist control of costs.
Requirement 1.b (1):Western Corporation
Particulars Materials Units Conversion Cost(Units)
Transferred out 19000 19000
Less: Beginning Inventory (all units) 3000 3000Started and finished this period 16000 16000
Add: Beginning Inventory (work thisperiod)
1000 1500
Add: Ending Inventory 6000 4500Equivalent Production 23000 22000
Working in process- Beginning Inventory Tk. 52,000Cost added by department
Materials Tk. 92,000Direct labour Tk. 1,54,000Factory overhead Tk. 1,98,000
Total cost to be accounted for Tk. 4,96,000
Miracle Mix:
Particulars Units Unit Cost Amount
Beginning Inventory 62,000 Tk. 1.00 Tk. 62,000From December 12 purchase 21,200 Tk. 1.25 Tk. 26,500
Total December usage 83,200 Tk. 88,500Bypro- from Beginning 50,000 Tk. 0.07 Tk. 3,500Cost of materials added duringDecember
Tk. 92,000
Fabricating Department Factory Overhead Tk. 1,32,000Allocation of service department factory overhead:Maintenance Tk. 30,000Time keeping and personnel Tk. 16,500Others Tk. 19,500 Tk. 66,000Cost of factory O/H during December Tk. 1,98,000
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 302. ADVANCED COST ACCOUNTING
Page | 2
Requirement 1.b (2-ii):
Materials (Tk. 92000/23000) Tk. 4.00 per unitDirect labour (Tk. 154000/22000) Tk. 7.00 per unit
Factory Overhead (Tk. 198000/22000) Tk. 9.00 per unitTotal Unit Cost Tk. 20.00 per unit
Requirement 1.b (2-iii):
Transferred to Finishing Department:From beginning inventory:Inventory, December 1 Tk. 52,000Material added (3000 x 1/3x Tk. 4.00) Tk. 4,000Direct labour added (3000 x 1/2x Tk. 7.00) Tk. 10,500Factory Overhead added (3000 x 1/2x Tk. 9.00) Tk. 13,500 Tk. 80,000From current production:
Units started and finished (16000 x 20) Tk. 3,20,000
Total cost of units transferred to Finishing Department Tk. 4,00,000Work in process inventory, December 31:Material (6000 x Tk. 4.00) Tk. 24,000Direct labour added (6000 x 3/4x Tk. 7.00) Tk. 31,500Factory Overhead added (6000 x 3/4x Tk. 9.00) Tk. 40,500Total Cost of Work in process inventory Tk. 96,000
Requirement 1.b (3):
Equivalent Production:
Material units Conversion cost unitsTransferred out 19,000 19,000Ending Inventory 6,000 4,500
25,000 23,500
The total fabricating department cost to be accounted for is the same as shown in answer
Unit cost for materials labor and factory overhead:Material :Tk. 13,000 + TK. 92,000 = Tk. 1,05,000; Tk. 1,05,000/25,000 = Tk. 4.20 per unitLabor :Tk. 17,500 + Tk. 1,54,000 = Tk. 1,71,500: Tk. 1,71,500/23,500 = Tk. 7.30 per unitFactory O/H:Tk. 21,500 + Tk. 1,98,000 = Tk. 2,19,500: Tk. 2,19,500/23,500 = Tk. 9.34 per unit
Total Unit Cost = Tk. 20.84 per unit
Cost of units transferred to Finishing Department:19000 x Tk. 20.84 per unit = Tk. 395960. To avoid a decimal discrepancy, the costtransferred to the Finishing Department is computed as follows:Tk. 496000- Tk. 100080 (Ending Work in Process inventory cost)= Tk. 395920
Cost of ending work in process inventory in the Fabricating Department:Work in Process Inventory, December 31:Material : (6000 x Tk. 4.20) Tk. 25,200Labor : (6000 x 3/4 x 7.30) Tk. 32,850
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 302. ADVANCED COST ACCOUNTING
Page | 3
Factory O/H : (6000 x 3/4 x 9.34) Tk. 42,030Tk. 1,00,080
Solution to Question No. 2(b):Required:
(i) Finishing is a bottleneck operation. Therefore, producing 1,000 more units will generateadditional throughput contribution and operating income.Increase in throughput contribution (720 320) x 1,000 Tk. 4,00,000Incremental costs of Jigs and Tools Tk. 3,00,000
Net benefit of investing in Jigs and Tools Tk. 1,00,000
Ottobi should invest in the modern Jigs and tools because the benefit of higher throughputcontribution Tk. 4,00,000 exceeds the cost of Tk. 3,00,000.
(ii) The Machining Department has excess capacity and is not a bottleneck operation.Increasing its capacity further will not increase throughput contribution. Therefore nobenefit from spending Tk. 50,000 to increase the Machining Departments capacity by
10,00 units. Ottobi should not implement the change to do setups faster.
(iii) Finishing is a bottleneck operation. Therefore getting an outside contractor to produce12,000 units will increase contribution:Increase contribution (720 320) x 12,000 Tk. 48,00,000Incremental contracting cost 12,00,000
Net benefit Tk. 36,00,000
Ottobi should contract with an outside contractor to do 12,000 units for finishing at Tk. 100per unit because the benefit of higher throughput contribution of Tk. 48,00,000 exceedsthe cost of Tk. 12,00,000. The fact that the cost of Tk. 100 per unit is double Ottobisfinishing cost of Tk. 50 per unit is irrelevant.
(iv) Operating costs in the Machining Department of Tk. 64,00,000 or Tk. 80 per unit, are fixedcosts. Ottobi will not save any of these cost by subcontracting machining of 4,000 units toMumbai Corporation. Total cost will be greater by Tk. 1,60,000 (Tk. 40 x 4,000) under thesubcontracting alternative. Machining more filling cabinets will not increase throughputcontribution, which is constraints by the finishing capacity. Ottobi should not acceptMumbais offer. The fact that Mumbai Corporations cost of Machining per unit are half ofwhat is costs Ottobi in house is irrelevant.
Model solution of the question no. 2(c)
To record actual conversion costs:
Conversion Costs Tk. 435,000Various Accounts Tk. 435,000
To record finished goods:
Finished Goods (7,900 x Tk. 200) Tk. 1,580,000
Inventory Materials and In Process Control(7,900 x 115)
Tk. 9,08,500
Conversion cost allocated(7,900 x 85) Tk. 6,71,500
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 302. ADVANCED COST ACCOUNTING
Page | 4
To record sale of 7,600 units:
Cost of Finished Goods Sold (7,600 x 200) Tk. 1,520,000
Finished Goods Tk. 15,20,000
Solution to Question No. 3(b):
Required:(i) A statement showing allocation of Joint Cost applying NRV method).
Product Output (InGallon)
SellingPrice (PerGallon)
GrossSalesValue
FurtherCost
NRV Share ofJoint Cost
Gasoline 2,80,000 2.30 6,44,000 1,08,000 5,36,000 1,07,594
Heating Oil 3,40,000 2.00 6,80,000 62,000 6,18,000 1,24,054Jet Fuel 2,00,000 2.80 5,60,000 80,000 4,80,000 96,352
16,34,000 3,28,000
(ii)Eastern Refinery Co.
Product Line Income Statement
Particulars Gasoline Heating Oil Jet Fuel Total Costs
Actual Sales 6,44,000 6,80,000 5,60,000 18,84,000
Joint cost 1,07,594 1,24,054 96,352 3,28,000+ Cost incurred 1,00,000 60,000 70,000 2,30,000+ Disposable cost 8,000 2,000 10,000 20,000Total costs 2,15,594 1,86,054 1,76,352 5,78,000Profit 4,28,406 4,93,946 3,83,648 13,06,000
Model solution of the question no. 3(c)
Cost reduction whenproduced
Revenue when sold
Sales: Lumber Tk.480,000
480,000
shavings(500 x 0.6) 3,000
Total Sales: 480,000 483,000Cost of Good Sold:Total manufacturing costsBy-product
332,000
4,080
332,000
0
Total COGS 327,920 332,000Gross Margin 152,080 151,000
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IIISUBJECT: 302. ADVANCED COST ACCOUNTING
Page | 5
Model solution of the question no. 4(b)
Requirement b(i):
Total Revenue of the life cycle product sales:
1stYear-2ndYear-3rdYear-4thYear-5thYear-
3000X250=4500X250=4800X250=5000X175=1500X175=
Tk. 7,50,000Tk. 11,25,000Tk. 12,00,000Tk. 8,75,000Tk. 2,62,500
Total Tk. 42,12,500
Less desired profit:-1stYear =2ndYear =3rdYear =
4th
Year =5thYear =
3000 (250 X 20%) =4500 (250 X 20%) =4800 (250 X 20%) =
5000 (175 X 20%) =1500 (175 X 20%) =
Tk. 1,50,000Tk. 2,25,000Tk. 2,40,000
Tk. 1,75,000Tk. 52,500 Tk. 8,42,500
Total Life Cycle Cost of the product - Tk.33,70,000Less variable selling expenses = (18,800 X 30) = 5,64,000
Fixed selling expenses (3,50,000 X 5) = 17,50,000 23,14,000Cost assigned to manufacture of 18,800 units- Tk. 10,56,000Manufacturing cost per unit = (10,56,000 18,800) = Tk. 56.17
Requirement b(ii):
Cost to manufacturing of productions in 1styear = (3000 X 65) = Tk. 1,95,000.Cost remaining to last 4 years = (10,56,000 1,95,0000 = Tk. 8,61,000.
Cost per unit = 8,61,000 15,800 = Tk. 54.49
Requirement b(iii):
Expected total manufacturing cost (18,800 X 70) = 13,16,000Less calculated life cycle manufacturing cost = 10,56,000Excess cost to be increased Tk. 2,60,000
Expected profit will = (8,42,500 2,60,000) = Tk. 5,82,500
Comment:- The company should reduce the variable cost by (5,64,000 2,60,000) = Tk.3,04,000 to maintain the target profit margin or to increase the selling price in 4 thand 5thyear by
the same amount Tk. 2,60,000 i.e. per unit sale price would Tk. 215 per unit.
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Page 1 of 8
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESHCMA AUGUST 2013 EXAMINATION
PROFESSIONAL LEVEL-IVSUBJECT: 401. FINANCIAL MANAGEMENT
Solution
Solution Question No. 1.MN Ltd.
Required-(a): Determination of for each project. [ jCorjm m]Project (j) SD( ) Correlation with market (Corjm) SD( m) Beta ()
1 15 0.55 13 0.63
2 20 0.75 13 1.15
3 14 0.84 13 0.904 18 0.62 13 0.86
or (20 x .75)/13 = 1.15
Return of the project by applying CAPM [Kef+ (Km Krf) ]Project 1. 5% + (14% - 5%) x .63 = 10.67%
2. 5% + (14% - 5%) x 1.15 = 15.35%
3. 5% + (14% - 5%) x .90 = 13.10%4. 5% + (14% - 5%) x .86 = 12.74%
Return of the combined projects representing MN Ltd.s total returnExpected return* = (10%x.28)+(18%x.17)+(15%x.31)+(13%x.24) = 13.63%Return as per CAPM = (10.67%x.28)+(15.35 x.17)+(13.10x.31)+(12.74%x.24) = 12.72%* MN Ltd. Share price is currently based on assumption that the last five years experience
of returns will continue for the foreseeable future.The Shares are over valued because the return as per CAPM is less than the expected return.Required-(b):For the following reasons the results in (or) above might not correctly identify whether or not theshare price of MN Ltd. is under valued or over valued.(i) The above required returns of the four projects are determined by applying Capital Asset
Pricing Model. CAPM is based on some unrealistic assumptions which are not alwaysvalid in the real world.
(ii) Beta is not always able to measure the risk of an investment and that the above there issignificant correlation between beta and the expected return. Sometime, the empiricalresult gives a mixed result.
(iii) Most of the time beta is based on historical data due to unavailability of future data.(iv) Investor can use historical beta as the measure of future risk only if it is stable over time.
But in practice, the betas of individual securities are not stable over time. This implies thathistorical betas are poor indicator of the future risk of securities.
Solution Question No. 2.Required (i):
Swap ratio:- Efficient Ltd. Healthy Ltd.(1) Market price per share(Market Capitalization/Nos. of Shares 50 100
(2) Earning per share = (Market price/P/E Ratio) 5 20(3) Book value per share:-
Share Capital (Tk. in lacs) 100 75Reserves and surplus (Tk. in lacs) 300 165Earnings for the year. (EPS x Nos. of Shares) 50 150
450 390(4) Value for acquisition purpose:-
Earnings = (5 x 40%); (20 x 40%) = 2 8
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Book value = (45 x 25%); (52 x 25%) = 11 13Market price = (50 x 35%); (100 x 35%) = 18 35
31 56(5) Total value of the company = (Nos. of shares x value of acquisition per share).(6) Nos. of shares to be given to Healthy Ltd. Shareholders = (750,000 x 56)/31 = 13,54,839
Swap ratio = Efficient Ltd. 13,54,839 = Healthy Ltd. 750,000 shares.
Promoters holders% Efficient Ltd. Healthy Ltd. Total
Promoters share
000,750
839,54,13000,500 x
4.75,000 9,03,226 13,78,226
Other share holders 525,000 4,51,613 9,76,61310,00,000 13,54,839 23,54,839
Promoters holding % 47.50% 66.67% 58.53%
Required (ii): EPS of Efficient Ltd. after acquisitionEarning per share before acquisition = (Market price / P/E Ratio)[(500 / 10) 10] 5
Earnings:- Efficient Ltd. (before acquisition) 50,00,000Healthy Ltd. 1,50,00,000
2,00,00,000Nos. of shares out standing 23,54,839EPS Tk. 8.49 per share
Required (iii): Expected market price per share = EPS x P/E ratio = (8.49x10) = Tk. 84.9Expected market capitalization = [23,54,839 x 8,493] = Tk. 200,00,000.
Answer to the Question No. 3(a)Calculation of EpS, DpS and gearing at both book values and market values
EpS Notes/workings
Share in issue(million) 350Earnings in year ended31.03.13(Tkm)
280
EpS 0.800 =280/350
DpSShare in issue(million) 350Dividend paid in year (Tkm) 89.6DpS 0.256 = 89.6/350Gearing at book valuesDebt(Tkm) 550Less: Surplus cash(Tkm) (110.40) =215-89.6-15
Net Debt(Tkm) 439.60 =550-110.4Equity(Tkm0 1,210.40 =350+950-89.6Gearing at Book Value 26.60% =439.60/(439.6+1210.40)
Gearing at matket valuesDebt(Tkm) 550Less: Surplus cash(Tkm) (110.40) =215-89.6-15Net Debt(Tkm) 439.60 =550-110.4Equity(Tkm) 1,583.4 =(350 x 4.78)-89.6
Or 350 x ex-div share price of 4.524
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(Where 4.524 = 4.78-0.256)Gearing at Market Value 21.70% =439.60/(439.6+1,583.40)
(b)Calculation of likely impact of the three proposed strategies for dealing with surpluscash
AssumptionAll the surplus cash of Tk 110.40 million is used either to repurchase shares or to pay bonuses.(Alternative assumptions were also acceptable)
Preliminary workings
Based on an ex div share price of 4.524 (=4.78-0.256), the number of share to be repurchasedis 24.40 million ( = 110.4m/4.524), leaving 325.60 million shares in issue.
1.Holding ontoCash
2. RepurchaseShares
Pay Bonuses
EpS No Change 280.00 169.60 (=280-110.4)
Number of Shares(m) 325.60(Workings) 350.00New EpS 0.800 0.860 0.485(single year
impact)Previous EpS 0.800 0.800 0.800
Impact Nil Up 0.06 long term Down 0.315 in that year
DpSDividend(Tkm) No Change 89.60 No Change
Number of Shares(m) 325.60New DpS 0.256 0.275 0.256
Previous DpS 0.256 0.256 0.256
Impact Nil Up 0.02 Nil
Gearing at Book Value
Net Debt (Tkm) No Change 550.0
(No surplus cash)
As for share repurchase
Equity (Tkm) 1100.00=350+950-89.6-110.4
New gearing 26.60% 33.30% 33.30%
Previous gearing 26.60% 26.60% 26.60%
Impact Nil Up by 6.70% Up by 6.70%
Gearing at MarketValue
Net Debt (Tkm) No Change 550.0 As for share repurchase
Equity (Tkm) 1,473.00=(350 x4.78)-89.6-110.4)
New gearing 21.70% 27.20% 27.20%Previous gearing 21.70% 21.70% 21.70%
Impact Nil Up by 5.5% Up by 5.5%
(C)Evaluate impact on attainment of financial objectives and on shareholder wealth
1. Retain CashThree reasons or motives have been advanced for individuals and companies to holdcash transaction, speculative and precautionary. Each is commented on briefly below:
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The transaction reason if SRP has sufficient cash to meet day to daytransactions it has no need of additional cash for this reason.
The speculative motive would allow the company to take advantage ofopportunities such as buying assets at temporarily favourable prices or makingan investment. This would be a logical reason for SRP to hold cash even if it hasno potential immediate investment opportunities.
The precautionary motive would allow SRP to maintain a safety cushion or buffer
to meet unexpected cash needs. Given the long term nature of SRPs contracts,its cash flow is fairly predictable so less cash is needed for precautionary needs.However, the surplus cash is approximately equivalent to just one years dividendpayment and so may not seem to be an excessive cash buffer.
On the downside, shareholders are missing out on the income that they could obtain byinvesting the funds elsewhere. With 5.3% of total assets held in the form of surplus cash(where 5.3% = Tk 110.4 million/ Tk. 2,075 million x 100%) and therefore earning little orno return, shareholders will prefer to be given the cash back so that they can invest itelsewhere and enhance their returns.
However, if SRP thinks investment opportunities might be available in the not too distantfuture; shareholders may be willing to forego receiving the cash now in the expectationof even greater returns in the future.
2. Share repurchaseThe advantage to shareholders is that selling shares back to the company allows themto raise cash with no transaction costs. Not all will want to sell, but SRP is only aiming topurchase around 7% of the shares in issue.
The make-up of the shareholders is relevant here in terms of the potential success ofany repurchase scheme, as institutional investors are far less likely to participate in ashare repurchase than smaller scale investors as they tend to be more concerned withregular income. However, 30% of the shares are held by small investors who mightwelcome the chance to realise their investment.
The advantage to the company in the long term is an opportunity to increase DpS at thesame total level of dividend payment or, alternatively, keep DpS at the same level andreduce total dividend payments, retaining cash for future investment. EpS will similarlyincrease due to the lower number of shares. Shareholder wealth should not be affected,their share holding will be worth less (reflecting fewer shares) but they are now holdingadditional cash. If this cash can be invested profitably, this should lead to an increase inshareholder wealth in the medium term. However, there is an almost inevitable trade-offbetween risk and reward here. The riskiness of the equity will increase due to the highergearing levels. Gearing will increase from 26.7% to 33.3% based on book values.
The share repurchase is unlikely to have much effect on the overall cost of capital as theincreased use of lower cost debt is likely to be offset by higher returns required onequity. The tax benefit of debt is not relevant as there is no impact on gross debt here.
On a practical note, the companys articles of association must be checked to ensurethey permit a share repurchase.
3. Bonuses to directors and employeesThe payment of bonuses reduces shareholder wealth (and reserves) by the amount paidout. It is of little benefit to shareholders unless it leads to the retention of key employeesor leads to higher profits as a result of more highly motivated staff in the future. In either
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case, a long term bonus plan is likely to be of more benefit to the company than largeone-off payments at this time.
The directors bonuses need to be referred to a remuneration committee before amountsare determined. Indeed, director bonuses need also to be approved by shareholders,something that is not always guaranteed, as has been seen in the UK in the recent past.Gearing would increase to 33.3% (based on book values and using 31 March 2013figures) due to an increase in net debt and a decrease in reserves the same effect asfor under the share repurchase. But for a manufacturing company with substantial assetsthis is still a modest rate. SRP should consider amending its gearing objective from 30%to, say, 35%.
Answer to the Question No. 4
4(a)
A break point will occur each time a low cost type of capital is used up. We establish the breakpoints as follo
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