august 2013 solution

8/13/2019 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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FOUNDATION LEVEL


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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FOUNDATION LEVEL


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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FOUNDATION LEVEL


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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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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FOUNDATION LEVEL


(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 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


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


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


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


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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(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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(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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(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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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


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


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


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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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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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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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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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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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


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%.


4(a)

A break point will occur each time a low cost type of capital is used up. We establish the breakpoints as follo

august 2013 solution

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