CONFIDENTIAL 1 AC/FEB 2022/FAR570

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE : FINANCIAL ACCOUNTING AND REPORTING 4

COURSE CODE : FAR570
ASSESSMENT : FEBRUARY 2022
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. i) Answer ALL questions. Start each answer on a new page.

ii) Show your workings (if any) for each of the question.

3. The answers must be in HANDWRITTEN.

4. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 7 printed pages
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QUESTION 1

In December 2019, Berren Tech Bhd had issued RM1 million 6% convertible debentures.
Every RM100 debentures can be converted into 20 ordinary shares. As of 31 December
2019, Berren Tech Bhd has RM12 million ordinary shares issued at RM2 each and RM5
million 6% cumulative preference shares of RM1 each. The company's financial year end is
at 31 December each year.
The following events took place throughout the year 2020:

1. On 1 April 2020, 20% of the 6% convertible debentures were converted into ordinary
shares.

2. Berren Tech Bhd made a right issue of 1 for every 5 ordinary shares on 1 June 2020.
The rights issue was given to the existing shareholders at RM2.50 per share. The
market price of the shares before the rights issue was RM3 per share.

3. The company bought back 500,000 ordinary shares on 1 August 2020.

4. On 30 September 2020, Berren Tech Bhd issued RM1 million 10% convertible
debentures. Each lot of RM1,000 convertible debentures is convertible into 200
shares. As of 31 December 2020, none of the 10% convertible debentures were
converted.

5. Net profit after tax attributable to the ordinary shareholders for the year ended 31
December 2020 was RM5.5 million.

6. The earnings per share (EPS) for the year ended 31 December 2019 was RM0.80.

7. The tax rate for 2020 was 24%.

Required:

a. MFRS 133 Earnings per Share prescribes that, in the case of changes in the capital
structure, the numbers of ordinary shares used in the denominator shall be the
weighted average numbers of ordinary shares outstanding during the period. Briefly
explain the treatment of EPS in each of the conditions of changes in the capital
structure as follows:

i. Issue of new shares at full market price

ii. Bonus Issue
iii. Share split
(6 marks)

b. Compute the basic EPS of Berren Tech Bhd for the year ended 31 December 2020
and its comparative earnings per share.
(9 marks)

c. Calculate the diluted EPS of Berren Tech Bhd for the year ended 31 December 2020.
(Round your answer to three decimal places).
(5 marks)
(Total: 20 marks)
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QUESTION 2

A. As of 1 January 2020, the brought forward amount of deferred tax liability of Jade Bhd
was RM5,000. As of 31 December 2020, the amount of taxable temporary difference
and profit before tax for the year for the company amounted to RM50,000 and
RM500,000 respectively. Income tax rate for the current year is 28%.

Due to of the effect of the COVID-19 pandemic, many companies were forced to
suspend their operation. Thus, the government decided to reduce the income tax rate
from 28% to 25% for 2021.

Required:

Explain the effect of changes in the income tax rate on Jade Bhd in relation to MFRS
112 Income Taxes for year 2020.
(6 marks)

B. Glory Glove Bhd is involved in manufacturing of gloves. Since 2017, the company has
acquired few machineries. One of the machineries is Machine R which was bought on
1 January 2017 at a cost of RM500,000. Machine R has an expected useful life of 10
years.

Due to increase in glove demands during the Covid-19 pandemic, the company bought
a Machine S on 1 May 2020 for RM1,000,000. Machine S has a useful life of 5 years
and is expected to produce three times higher than the normal production capacity.

It is the policy of the company to depreciate all its assets using the straight-line method
on a yearly basis. The initial allowance for both machineries is 20% whilst the annual
allowance for Machine R and Machine S are 14% and 40% respectively.

The research and development expenditure incurred during the year amounted to
RM500,000, of which,20% of the costs was incurred during the research phase.

The sales for the current year are RM10,000,000 and the company provides 2%
warranty for damages during carriage outwards. As of 31 December, the company has
incurred replacement costs of the broken goods amounting to RM60,000.

The company also has trade receivables of RM100,000 and a general provision for
doubtful debts of 5% is to be made.

As of 31 December 2020, the deferred tax liability was RM50,000. Profit before tax
recorded for the financial year ended 31 December 2021 was RM4,200,000. The
current tax rate is at 24%.

Required:

a. Construct the schedule of temporary difference for the year ended 31 December
2021.
(10 marks)

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b. Compute the deferred tax liability (or deferred tax asset) as at 31 December
2021.
(2 marks)

c. Prepare an extract statement of profit and loss for the year ended 31 December
2021.
(2 marks)
(Total: 20 marks)

QUESTION 3

A. SMA Bhd granted 1,000 share options to each of its 10 employees on 1 January 2019.
The share options will vest on 31 December 2023 provided that the share price
reaches RM32. The company anticipated that all the 10 employees would remain with
the company throughout the vesting period.

The fair value of each option was RM27 at the grant date and the share price as at 31
December 2019 was RM28.70. However, due to COVID-19 pandemic, it is expected
that the share prices will not rise in the future starting from the year 2020.

Required:

a. Explain the vesting condition for the above transaction with reference to MFRS 2
Share Based Payment.
(4 marks)

b. Compute the fair value of the share option for the year ended 31 December
2020.
(2 marks)

B. HCCC Bhd granted 5,000 share options to each of its 15 new-appointed managers on
1 July 2019. The share options will vest on 30 June 2022. The company anticipated
that all managers would remain with the company throughout the vesting period.

The fair value of the option is as follows:

RM
1 July 2019 21.00
30 June 2020 22.50
30 June 2021 23.00
30 June 2022 23.80

Required:

Explain the differences of the accounting treatment for the year ended 30 June 2021 if:

a. The share option is an equity-settled share-based payment.

(5 marks)
b. The share option is a cash-settled share-based payment.
(5 marks)
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C. MFRS 2 Share Based Payment provides that if the fair value of the equity instruments
granted at the measurement date cannot be estimated reliably, the company shall
measure the equity instruments at their intrinsic value.

Required:

Explain on the accounting treatment to be applied if a company settles a grant of

equity instruments using the intrinsic value method.
(4 marks)
(Total: 20 marks)

QUESTION 4

A. On 1 January 2020, Mentari Bhd acquired 15% out of the 1 million units of the ordinary
shares of Persada Bhd at RM40 per shares. The transaction costs incurred on the
share acquisition was RM2 per share. These shares were classified as fair value
through profit or loss.

On 1 March 2020, the entity acquired another investment in Chenta Bhd for RM10
million and incurred RM500,000 commission costs. These shares were classified as
fair value through other comprehensive income.

As of 30 June 2020, the market value of the investments in Persada Bhd and Chenta
Bhd were RM7.2 million and RM12 million respectively. On 31 October 2020, the
investment in Persada Bhd was sold for RM7.5 million.

Required:

a. Financial Assets can be either classified as an equity instrument or a debt

instrument. Explain the classification of financial asset in Mentari Bhd with
reference to the MFRS 9 Financial Instrument.
(6 marks)

b. Prepare the journal entries to record the acquisition, the change in fair value and
the disposal of the shares for Mentari Bhd.
(6 marks)

B. Prezy Bhd is a public listed company involve with manufacturing textiles for worldwide
markets. As of 31 December 2020, the company has a net asset valued at RM800
million.

Apart from the 40 million ordinary shares, Prezy Bhd also has 1 million 8% redeemable
preference shares and 1 million 5% non-redeemable non-cumulative preference
shares. The redeemable preference shares are redeemable for cash at a premium of
2% on 31 December 2025.

On 1 January 2020, the company issued two types of convertible bond:

i. RM2 million, 0% (Zero percent) bond repayable at par on 31 December 2023.

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ii. RM2 million, 4% bond was issued at a discount to reflect the prevailing cost of
capital. This bond is repayable at par on 31 December 2023 with interest
payable at the end of each year.

The prevailing cost of capital for the duration of the borrowing period is estimated at
6% per annum.

The present value of RM1 at 4% and 6% are as follows:

Year 4% 6%
1 0.9615 0.9434
2 0.9246 0.8910
3 0.8891 0.8396
4 0.8548 0.7921

Required:

Calculate the amount of liability and equity components of the convertible bonds for
initial recognition.
(8 marks)
(Total: 20 marks)

QUESTION 5

Over the years, MLKK Bhd provides defined benefit plan for its employees. As at 30 June
2020, the retirement benefit liability disclosed in the Statement of Financial Position of the
company was RM3.54 million whilst the fair value of the plan asset was RM 12.32 million.
For the year ended 30 June 2021, MLKK Bhd has contributed RM8.5 million to the benefit
plan and paid RM5.78 million to its employees from the plan.

For the year ended 30 June 2021, the company has incurred RM800,000 of service cost.
The expected return on the plan asset is 15% and the interest rate is 10%.

As at 30 June 2021, the fair value of plan asset and present value of obligation on the
defined benefit plan were RM18.681 million and RM14.75 million respectively. It is the
company’s policy to impose an asset ceiling of RM3 million on its plan asset.

MLKK Bhd decided to discontinue one of its departments and as a result, few of its
employees have to be terminated. Subsequently, on 1 June 2021, the company offered a
voluntary separation scheme to the affected employees. However, the management has yet
to determine the benefits to be made to the terminated employees at the settlement date.

Required:

a. Calculate the actuarial gain or loss on the fair value of the plan asset and present
value of obligation on the defined benefit plan of MLKK Bhd for the year ended 30
June 2021.
(5 marks)

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b. Calculate the defined benefit cost to be recognised in the statement of profit or loss for
the year ended 30 June 2021.
(3 marks)

c. Prepare an extract of the statement of financial position and statement of profit or Loss
and other comprehensive income of MLKK Berhad for the year ended 30 June 2021
showing the defined benefit plan.
(6 marks)

d. Advise the management on the treatment to recognise the voluntary separation

scheme in the account of MLKK Bhd.
(6 marks)
(Total: 20 marks)

END OF QUESTION PAPER

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