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ACC 207 Examination Corporate Accounting and Financial Statement Analysis




Question;S & L Ltd imports construction machinery and lease them out to local small medium- sized enterprises. Its accounting year end is 31 December.The machinery is imported at a cost of $100,000 per piece. The useful life of the machinery is five years and the residual value at the end of the useful life is expected to be immaterial in amount.The fair market selling price of the machinery is $125,000 per piece, and the fair market interest rate is 6% per annum.On 1 January 2001, S & L enters into a sales-type lease agreement with a customer. The agreement provides for:Lease period: 5 yearsLease payments: 5 annual lease payments, commencing 31 December 2001Required:Apply the lease classification criteria to distinguish between a finance lease and an operating lease. Then demonstrate the accounting for leases by doing the following:(a) Determine the gross minimum lease payments for the whole lease period. (2 marks)(b) What is the total interest income for the lessor (S & L Ltd)? (1 mark) (c) Determine the gross profit on sale by the lessor. (2 marks) (d) Do a amortisation schedule for the lessor. (4 marks)(e) Prepare journal entries for the recording of the sales-type lease for the first two years, namely 2001 and 2002.(9 marks)(f) Explain how leases are to be accounted in the books of the lease under IAS 17 leases.(7 marks)The directors of ABC Ltd are reviewing the impact of IRFS 2 Share-based payment on the financial statements for the year ended 31 May 2005 as they will be adopting the IFRS. However, the directors of ABC Ltd disliked having to apply the standard and have put forward the following arguments as to why they should not recognise an expense for share-based payments.1. They feel that share options have no cost to the company and therefore, there should be no expense charged in the income statement2. They do not feel that the expense arising from share options under IRFS2 actually meets the definition of an expense under the Frameworkdocument.3. The directors are worried about the dual impact of IFRS on earnings per share as an expense is shown in the income statement and the impact of the share option is recognised in the diluted earnings per share calculation.4. They feel that accounting for share-based payment may have an adverse impact on their company and may discourage it from introducing new share option plans.The following share option schemes were in exercise at 31 May 2005:Director?sname Grant date Optionsgranted Fair value ofoptions at grant date Exerciseprice Criteria Vestingdate ExercisedateJoe 1/6/2003 20000 $5 $4.50 A 6/2005 6/2006Ryan 1/6/2004 50000 $6 $6.00 B 6/2007 6/2008The price of the company?s shares at 31 May 2005 is $12 per share and at 31 May 2004 was $12.50 per share.The performance conditions (or criteria in the above table) which apply to the exercise of executive share options are as follows:Performance Condition AThe share options do not vest if the growth in the company?s earnings per share (EPS)for the year is less than 4%.The rate of growth of EPS for the three years is:2003 4.5 04 4.1 05 4.2%The directors must still work for the company on the vesting date. Performance Condition BThe share options do not vest until the share price has increased from its value of$12.50 at the grant date (1 June 2004) to above $13.50.The directors must still work for the company on the vesting date.No directors have left the company since the issue of the share options and none are expected to leave before June 2007. The share vest and can be exercised on the first day of the due month.Required:(a) Draft a report to the directors of ABC Ltd demonstrating the reasons why share- based payment should be recognised in financial statements and why the directors? arguments are unacceptable.(9 marks)(b) Demonstrate the accounting for ABC Ltd?s share-based compensation explaining how much expense to recognise and why.(9 marks)(c) With reference to the company that you are working in currently or one that you are familiar with, determine how important is it for employee to acquire and hold shares in the company. In your opinion, what level of staff should be covered under ?employee stock ownership plan ? ESOP?? Give your arguments.(7 marks) Question 3Suppose you are the chief accountant of Marks & Spencer, a UK company. The managing director has given you the below financial statements of its main competitor, Carrefour, a French company. He finds it difficult to review these statements in their non-UK format, presented below.CarrefourStatement of financial position as at 31 March 2005 (in Euro Millions)31.3.2005 31.3.2004 31.3.2005 31.3.2004Assets ??mil ??mil Capital andliabilities ??mil ??milTangible non-currentassets Capital andreserves Land 1,000 750 Share capital 850 750Buildings 750 500 Share premium 100 0Plant 200 150 Legal reserve 200 2001,950 1,400 1,150 950Current assets Inventory 150 120 Profit & loss b/f 590 300Tradereceivables 180 100 Net profit 185 290Cash 20 200 Profit & loss c/f 775 590350 420 Net worth 1,925 1,540Prepaidments 50 70 Liabilities Trade payable 170 150Taxation 180 150Other payable 75 50425 3502,350 1,890 2,350 1,890CarrefourStatement of comprehensive income for the year ended 31 March 2005 & 2004 (inEuro Million)Required:Prepare a report for the managing directors:(a) Calculate the following ratios for the two years 2004 & 2005: (i) Account receivable turnover in days(ii) Current ratio(iii) Quick ratio(12 marks)(b) Analyse with commentary on the performance of Carrefour from the findings in part (a) and other data from the financial statements provided.You are to give possible reasons for the improvement or deterioration of the performance as part of your recommendation.(13 marks)Question 4At the beginning of 2010, Swatow Pte Ltd raised $200 million of equity capital. The bulk of these proceeds were used to invest in a big project. The cost of equity is 5%.Beginning book value Net profit Dividends Ending book value$ m $ m $ m $ mYear 2010 200 60 25 235Year 2011 235 70 30 275Year 2012 275 80 155 200Required:(a) Discuss the discounted dividend model and use it to compute the value of equity at Year 2009.(5 marks)(b) Assume the normal earnings for each of the years as follows:Year 2010 30 million Year 2011 35 million Year 2012 30 millionDiscuss the discounted abnormal earnings model and use it to compute the value of equity at year 2009.(7 marks)(c) Discuss and calculate the equity value-to-book multiple.(7 marks)(d) Discuss and compare the three valuation methods under (a), (b) and (c).(6 marks)


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