STUDENT ID:

MID-TERM EXAMINATION, TRI 2, 2016/2017 SESSION

BAC 4634 – CORPORATE ACCOUNTING II

INSTRUCTION: ANSWER ALL QUESTIONS.

QUESTION 1

Tiffany Blue Berhad (TBB) engages in the business of furniture supply. The financial year-end is 31
December. TBB has the following statement of financial statement and tax bases at 31 December 2016:

Carrying amount Tax base

RM’000 RM’000
Land 15,000 10,000
Building 67,000 15,000
Plant and equipment 104,000 56,000
Inventory 13,000 13,000
Trade receivables 5,400 6,000
Bank 12,000 12,000
Trade payable 9,000 9,000
10% loan 10,000 11,000
Provision for deferred tax liability 1 January 2016 8,100 8,100
Revaluation reserve (land) 5,000
Revaluation reserve (plant and equipment) 30,000
Share capital 70,000 70,000
Retained earnings 104,300 13,900

Additional information:

i) On 31 December x3, TBB revalued land and some of the plant. Fair value of the land was RM5
million more than its carrying amount and the plant was RM30 million more than the carrying amount.
The land is the non-depreciable property. Real property gain tax is 5%. TBB does not intend to dispose
the land.
ii) TBB provides for general provision for doubtful debts of 10%. Tax rule recognises bad debts only.
iii) TBB raised a loan during the year and recorded it net of transaction costs. The transaction costs are
allowable for tax in the year in which the loan is raised.
iv) Income tax had changed from 30% to 25%.

Required:

In accordance with MFRS 112: Income Taxes;

a) Prepare a table showing the temporary differences for each of the items above as at 31 December
2016.
(13 marks)
b) Calculate the amount of tax expense as charged in the statement of profit or loss and other
comprehensive income and the amount disclosed in the deferred tax liability in the statement of
financial position as at 31 December.
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 (14 marks)
c) Prepare the journal entries to record the movements of deferred tax.
(12 marks)
ANSWER

a)
TTD DTD
RM RM
Land 5,000
Building 52,000
Plant and equipment 48,000
Inventory -
Trade receivables 600
Bank -
Trade payable -
10% Loan 1,000
106,000 600

b)
Revaluation surplus on land at 5% on 250
5,000
Others at 25% on 101,000 and 150 25,250 150
DTL 25,500 150
DTA (150)
25,350
Less b/f 8,100
17,250
Tax rate adjustment 8,100 x 5/30 1,350
Less Direct to equity (Land) 5% (250)
Less Direct to equity (Plant) 25% (7,500)
Charge in profit or loss 10,850

c)
Deferred Tax Liability
RM RM
Profit or loss 1,350 B/d 8,100
Profit or loss 10,850
c/d 25,350 Revaluation reserve 7,750
26,700 26,700

Dr Tax expense RM10,850

Cr Deferred tax liability RM10,850

Dr Revaluation reserve RM7,750

Cr Deferred tax liability RM7,750

Dr Retained earnings/tax expense√ RM1,350√

Cr Deferred tax liability√ RM1,350√

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QUESTION 2

Ozzy Orange Berhad sells food and grocery products through wholesale and retail operations in two
geographical markets in Europe and North America. There is discrete financial information available for
each selling activity, for each product in each country in each geographical region.

The Chief Operating Decision Maker (CODM) reviews a monthly management pack that contains a
summary of the wholesale and retail operating results each region. More detailed breakdowns of the sales
and operating results by product-line and by country is available but is only reviewed by the CODM by
exception.

For each of the wholesale and retail operations, there is a global sales director who is responsible for all
worldwide sales and to whom each regional sales manager reports. There are also global operating
directors responsible for each of the wholesale and retail activities worldwide. The sales directors report
to these operating directors, who in turn report directly to the CODM, which in this case is the chief
executive officer.

The management reporting structure reflects the entity’s priority to improve the profitability of individual
product-lines. The CODM believes that improving and maintaining product quality is the key to
achieving this and that different geographical markets will respond similarly to product improvements,
but the wholesale and retail sales will react differently.

Required:
In compliance with MFRS8: Operating Segments, identify the operating segments for Ozzy Orange
Berhad.
(11 marks)

ANSWER

In this situation, both sales markets and the geographic areas may meet the criteria for operating segments
set out in MFRS8. They are components of the entity that engage in business activities for which there is
discrete financial information and whose operating results are reviewed regularly by the CODM.
Therefore, other factors need to be taken into account and judgement applied to determine which
components should be reported as operating segments.

In this case, the management structure reflects the CODM’s emphasis on product-lines (or business units
responsible for those products) rather than geographical locations. The wholesale and retail operating
directors report directly to the CODM, and are likely to be classed as ‘segment managers’.

The regional sales managers and global sales directors do not report direct to the CODM so would
probably not be regarded as segment managers.

Changes in product quality are not expected to result in different reactions in different geographic
regions, suggesting the economic environment in the wholesale and retail markets are more significant
than those of geographic regions.

Therefore, it is likely that for Ozzy Orange Berhad, the operating segments would be identified as the
wholesale and retail segments.

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QUESTION 3
Mint Green Berhad (MGB) set up Soft Pink Limited as a wholly owned subsidiary in High Land on 1 January
2015. The local currency is H$. The summarised financial statements of the two companies are as follows:

Statement of Financial Position as at 31 December 2016

Mint Green Soft Pink
Berhad Limited
RM’000 H$’000
Non-current assets 1,200 2,800
Accumulated depreciation (500) (400)
700 2,400
Investment in Soft Pink Limited 750 -
Current assets
Inventory 450 400
Bank 300 200
Trade payables (200) (220)
Loans (100) (220)
1,900 2,560

Ordinary shares 600 2,000

Profit and loss balance 1,300 560
2,560 2,560

‘000 ‘000
Number of ordinary shares of 600 2,000

Statement of profit or loss and other comprehensive income for the year ended 31 December 2016
Mint Green Soft Pink
Berhad Limited
RM’000 H$’000
Profit before tax 400 320
Taxation (200) (160)
200 160

Additional information:
The following exchange rates are relevant:
Date of incorporation of Soft Pink Limited H$4:RM1
Date when non-current assets were acquired by Soft Pink Limited H$2.5:RM1
1 January 2016 H$2: RM1
31 December 2016 H$1: RM1
Average rate for year 2016 H$1.6:RM1

Required:

i) Translate the financial statement of Soft Pink Limited using net investment method.
(30 marks)
ii) Reconcile the exchange difference
(10 marks)
iii) Compute the goodwill on consolidation.
(10 marks)

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ANSWER
a)
Step 1: Reconstruct the statement of financial position.
31 December 2015 1 January 2015
H$’000 H$’000
Non-current assets 2,400 400 2,800
Non-monetary - Balancing (400)
lisbilities amount
2,400 2,400

Ordinary shares 2,000 2,000

Retained profit 560 Bal. 400
2,560 2,400

Step 2: Translate the reconstructed statement of financial position and arrive at the retained profit brought
forward.
1 January
2015
H$000 Rate RM’000
Non-current assets 2,800 2 1,400
Non-monetary liabilities (400) 2 (200)
2,400 1,200

Ordinary shares 2,000 4 500

Retained profit 400 Balancing 700
amount
2,400 1,200

Step 3: Translate the closing statement of financial position.

Statement of Financial Position as at 31 December 2016
Soft Soft
Pink Pink
Limited Limited
H$’000 Rate RM’000
Non-current assets 2,800 1 2,800
Accumulated depreciation (400) 1 (400)
2,400 1 2,400

Current assets
Inventory 400 1 400
Bank 200 1 200
Trade payables (220) 1 (220)
Loans (220) 1 (220)
2,560 2,560

Ordinary shares 2,000 4 500

Profit and loss balance 400 Step 2 700

Profit for the year 160 Bal. 1,360
2,560 2,560

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Step 4: Translate the closing statement of profit or loss.
Positive Ltd
H$000 Rate RM’000
Profit before tax 320 1.6 200
Taxation (160) 1.6 (100)
160 100

Step 5: Find the exchange difference.

RM’000
Retained profit as per statement of financial position 1,360
Retained profit as per statement of profit or loss 100
1,260

b)
Reconcile the exchange difference.
W$’000 Rate RM’000 RM’000
Opening net assets (1 January 2015) 2,400 2 1,200
Opening net assets (31 December 2015) 2,400 1 2,400 1,200
Statement of profit or loss at average rate 160 1.6 100
Statement of profit or loss at closing rate 160 1 160 60
1,260
c)
Translate the goodwill.
W$000 Rate RM’000 RM’000
Cost of acquisition (RM750x4) 3,000
Net assets of Positive Ltd as at 1 January 2015 2,000
1,000
At historical date 4 250
At closing rate 1 1,000
Difference to reserve 750