UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SPECIAL RETAKE EXAMINATIONS

JULY/AUGUST 2019

BSc (Hons) Accounting (Minor: Finance) [Fee Paying]

PROGRAMME BSc (Hons) Accounting (Minor: Management) [Fee Paying]

Level III

MODULE NAME FINANCIAL REPORTING

Monday
DATE 29 July 2019 MODULE CODE DFA2000Y (3)

TIME 09.30 – 12.30 Hours DURATION 3 Hours

NO. OF 4 NO. OF QUESTIONS 4

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 4 questions.

Answer ALL questions.
 Financial Reporting – DFA2000Y (3)

Answer ALL questions.

Question 1 (25 marks)

The following list of balances relates to Melwood Ltd for the year ended 30 June 2018.

Rs’000 Rs’000
Sales revenue 71,780
Equity Investments 22,400
Cost of sales 20,050
Distribution costs 10,620
Investment Income 620
Administrative expenses 26,420
Property, Plant and Equipment at cost 140,000
Accumulated depreciation on property, plant and equipment at 1 25,400
July 2017
Finance Cost 1,400
Trade Receivables 14,590
Cash at bank 6,080
Trade Payables 5,740
Equity shares of Rs1 each 90,000
7% Loan Notes 20,000
Retained earnings at 1 July 2017 35,020
Inventory at 30 June 2018 7,000
248,560 248,560

The following notes are relevant

1. A lease rental of Rs4 million was paid on 30 June 2018. It is the first of five annual
payments in respect of a leasing contract for the rental of a machine that has a cash
purchase price of Rs15million. The lease contract was entered on 1 July 2017. The rate
implicit in the lease has been computed to be 12% and the present value of an
annuity of Rs1 for 5 years at a discount rate of 12% is 3.605. The machine has a useful
economic life of 6 years. At the end of the lease term, the machine will be returned to
the lessor. The lease rental of Rs4 million was included in administrative expenses.
2. On 1 July 2017, goods with an invoice value of Rs5 million were sold to a long-
established customer on the following terms: five annual instalments of Rs1 million
due at the end of each financial year, 30 June. Based on the customer's credit rating,
the seller believes the buyer would be able to obtain finance at an interest rate of 10
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 Financial Reporting – DFA2000Y (3)

per cent. At 30 June 2018, the cash account had been debited with Rs1million and the
sales account had been credited with Rs1million. No other entries had been made.
The present value of an annuity of Rs1 for 5 years at a discount rate of 10% is 3.791.
3. On 12 June 2018, Melwood Ltd.’s share price stood at Rs1.80 per share. On this date,
the company proposed and paid a dividend, which was computed to generate a
dividend yield of 5%. The payment of dividend was included in administrative
expenses.
4. An employee of the Melwood Ltd is currently suing the company for damages in
respect of serious injuries sustained as a result of a breach of safety regulations.
Correspondence from Melwood Ltd.’s legal representatives indicate the following:

Outcome Probability Estimated damages

Contributory negligence 75% Rs275,000

Fully responsible 25% Rs500,000

In addition legal costs are estimated at Rs75,000

5. The equity investment had a fair value of Rs21.7 million on 30 June 2018.
6. A provision for income tax for the year ended 30 June 2018 is required. The
corporation tax rate on profits is 15%.
7. Property, plant and equipment include ‘land’ which initially cost Rs24 million is now
worth Rs26 million on 30 June 2018. This revised value is to be reflected in the books.
It is the policy of the company to depreciate property, plant and equipment at 10% on
cost. Depreciation is allocated as follows: 30% to cost of sales, 30% to distribution
costs and 40% to administrative expenses.

Required:
(a) Prepare the income statement for the year ended 30 June 2018 and a statement of
financial position as at that date in accordance with the provisions of relevant
international accounting standards. [25 marks]

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 Financial Reporting – DFA2000Y (3)

Question 2 (25 marks)

The summarised financial statements of Mersey Ltd for the years 31 December 2017 and
2018 are as follows:

Income statement for the year ended 31 December 2018

Rs’000
Sales 216,000
Cost of sales (144,000)
Gross profit 72,000
Operating expenses (35,496)
Profit on sale of land 2,880
Loss on sale of motor vehicles (1,944)
Profit before interest and tax 37,440
Finance cost (1,440)
Profit before tax 36,000
Income tax expense (14,400)
Profit after tax 21,600
Other Comprehensive Income
Revaluation gain 7,200
Total Comprehensive income 28,800

Statements of Financial Position as at 31 December

2018 2017
Rs’000 Rs’000 Rs’000 Rs’000
Assets
Non-Current Assets
Motor Vehicles (Note 1) 14,400 18,720
Buildings (Note 1) 21,456 14,976
Land (Note 1) 129,600 115,200
Intangible assets (Note 2) 12,960 178,416 30,240 179,136
Current Assets
Inventories 49,240 57,600
Trade receivables 98,360 48,960
Short-term treasury bills 620 564
Cash at bank 1,180 149,400 1,344 108,468
Total Assets 327,816 287,604

Equity and Liabilities

Equity
Ordinary share capital (Rs1) 63,900 60,000
Share premium account 8,280 3,000
Revaluation reserve 14,400 7,200
Accumulated profits 46,800 25,200
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 Financial Reporting – DFA2000Y (3)

133,380 95,400
10% Preference shares 73,760 207,140 70,200 165,600

Non-Current Liabilities
8% Debentures 18,300 10,800
Loan 2,800 3,600
Current Liabilities
Trade payables 47,160 38,880
Interest payable 360 -
Taxation payable 11,880 13,680
Dividend payable 360 5,040
Bank Overdraft 39,816 50,004
Total Liabilities 120,676 122,004
Total Equity and Liabilities 327,816 287,604

Note 1

Motor Vehicles Buildings Land

Rs’000 Rs’000 R’000s
Cost
At 1 January 2018 37,440 28,800 115,200
Additions 4,320 7,200 28,800
Revaluations 7,200
Disposal (8,640) (21,600)
At 31 December 2018 33,120 36,000 129,600

Depreciation
At 1 January 2018 18,720 13,824 -
Depreciation for the year 6,624 720 -
Disposal Adjustment (6,624) -
At 31 December 2018 18,720 14,544 -

Note 2

The fall in intangible assets is due to amortization expense for the year ended 31 December
2018.

Required:

(a) Prepare the statement of cash flows for the year ended 31 December 2018 in
accordance with IAS 7 for Mersey Ltd. [20 marks]

(b) Explain the extent to which a cash flow statement may be useful to users of
accounting information. [5 marks]

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 Financial Reporting – DFA2000Y (3)

Question 3 (25 marks)

Consider the following information regarding Knight Ltd and Rider Ltd. Both companies
operate in the garment retail industry where competition is fierce.

Income Statements for the year ended 31 December 2018

Knight Ltd Rider Ltd
Rs’000 Rs’000
Sales 45,190 52,680
Cost of sales 18,275 28,390
Gross profit 26,915 24,290
Operating expenses 14,100 18,595
Profit from operations 12,815 5,695
Finance cost 190 76
Profit before tax 12,625 5,619
Income tax expense 4,760 2,215
Net profit for period 7,865 3,404

Balance Sheets as at 31 December 2018

Knight Ltd Rider Ltd
Rs’000 Rs’000 Rs’000 Rs’000
Assets
Non-Current Assets
Property, plant and equipment 7,890 5,650
Current Assets
Inventories 5,180 4,100
Trade receivables 28,125 8,995
Cash at bank 195 33,500 8,760 21,855
Total Assets 41,390 27,505

Equity and Liabilities

Equity
Ordinary share capital (Rs1) 7,850 3,160
Accumulated profits 17,895 25,745 7,980 11,140

Non-Current Liabilities
Debentures 2,375 950
Current Liabilities
Trade creditors 9,285 12,135
Taxation payable 3,200 2,000
Dividend payable 785 1,280
Total Liabilities 15,645 16,365
Total Equity and Liabilities 41,390 27,505

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 Financial Reporting – DFA2000Y (3)

Required :

Profitability Formula
1. Return on Assets (Profit before interest and tax/total assets) x 100%
2. Operating profit margin (Profit before interest and tax/sales) x 100%
3. Gross profit margin (Gross profit/sales) x 100%
4. Expenses margin (Operating expenses/sales) x 100%

Liquidity and efficiency Formula

1. Quick asset ratio
2. Cash ratio
3. Period of inventory turnover
4. Debtors collection period
5. Creditors payment period
6. Cash operating cycle
(Current assets – closing stock) / current liabilities
Cash/current liabilities
(Closing stock/cost of sales) x 365days
(debtors/ credit sales) x 365days
(Creditors/credit purchases) x 365days
(3) + (4) – (5)

Assume that all sales and purchases were on credit.

(a) Calculate the ratios listed below for Knight Ltd and Rider Ltd. [10 marks]

(b) Mrs Leone is interested in investing in one of the two companies. Based on your
ratios computed in (a) comment on the profitability, efficiency and liquidity of each
company and advise Mrs Leone which company he should invest in.

[10 marks]

(c) Explain the limitations of financial ratio analysis. [5 marks]

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Question 4 (25 marks)

On 1 July 2018, Summer Ltd entered into a lease agreement with Indica Ltd in which
Summer Ltd agreed to lease a machine from Indica Ltd for 5 years. Details of the lease are as
follows:

Fair Value of machine at inception of lease $435,000

Guaranteed residual value at end of lease term (expected fair $40,000
value at the end of lease term)
Initial direct costs incurred by Summer Ltd $5,000
Annual payments (1st payment due on 30 June 2019) $100,000
Implicit interest rate 8%

Summer Ltd prepares financial statements to 30 June each year.

Required:

(a) Draft the journal entries for Summer Ltd on 1 July 2018. [4 marks]

(b) Prepare a schedule of lease payments for Summer Ltd. [5 marks]

(c) Prepare extracts of the income statement and the statement of financial position for
the years to 30 June: 2019, 2020 and 2021. [10 marks]

(d) Draft the journal entry for the payment of the guaranteed residual amount.
[2 marks]

(e) By reference to the IASB conceptual framework, explain how the above leasing
arrangement meets the definition and recognition criteria of assets and liabilities.
[4 marks]

END OF QUESTION PAPER

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