SUNWAY UNIVERSITY BUSINESS SCHOOL SAMPLE FINAL EXAMINATION FOR ACC3014 CORPORATE REPROTING THEORY AND PRACTICE

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1 SUNWAY UNIVERSITY BUSINESS SCHOOL SAMPLE FINAL EXAMINATION FOR ACC3014 CORPORATE REPROTING THEORY PRACTICE

2 Answer FOUR (4) questions only. All questions carry equal marks. Question 1 (a) Corporate Social Responsibility is open and transparent business practice that is based on ethical practice and respect for the community, employees, the environment, shareholders. It is designed to deliver sustainable value to society at large. Bursa Malaysia s CSR Framework. Critically evaluate this definition by using Positive Accounting theory (PAT), Legitimacy theory, Stakeholder theory and Institutional theory. (10 marks) (b) Darby Berhad has obtained a contract from the government to build a large hydro dam. The initial agreed contract price is RM100 million. Darby Berhad estimates that the contract costs will be RM80 million. It will take 3 years to build the dam and construction commenced on the 1 July By 30 June 2010 the government approved a variation order for increased revenue of RM10 million and Darby estimated additional contract costs of RM 6 million. By 30 June 2011 an additional variation order resulted in an increase in revenue of RM6 million with attached costs of RM 4 million. Darby Berhad determines the stage of completion based on costs incurred to total estimated costs. The financial information related to the dam project is as follows: 30 June June June 2012 Revenue RM million RM million RM million Initial revenue agreed Cumulative variation Costs Contract costs incurred to date Contact costs to complete Estimated profits Required i. Determine the percentage stage of completion of the dam project for the years ended 30 June 2010, 2011 and (3 marks) ii. Prepare the statement of comprehensive income extracts for revenue, expenses and profit for the three years above. (6 marks) (c) Critically discuss the nature of and incentives for earnings management. Give examples to support your answer. (6 marks) 2

3 Question 2 (a) IPP Bhd was granted land by TN Berhad to build an independent power plant many years ago. The carrying value of the plant in the accounts of IPP Berhad is RM3.5 billion as at 30 June TN Berhad requires IPP Berhad to remove the plant and return the land if the plant ceases operations. This will cost RM 0.5 billion. The cost of capital for IPP Berhad is 5%. Due to oversupply to the grid and a low demand for electricity IPP Berhad has to revise its profit and cash flow forecasts. The current forecast is that net cash inflows for the next five years will be RM500 million per annum. At the end of five years the estimated value of the plant is RM2.5 billion. EG Berhad, another independent power producer, under a similar arrangement has just disposed of a similar plant for net cash proceeds of RM2 billion last month. (i) Applying MFRS 136 determine the impairment loss, if any, required in the accounts of IPP Berhad. Explain your answer. (6 marks) Briefly discuss whether accounting for impairment losses improves the quality of financial reporting information. (3 marks) (b) Historical cost accounting has in the past been the dominant approach to financial accounting. Why do you think that historical cost accounting has been the principal method of accounting? Critically discuss the current trend towards the use of fair values in accounting standards. (10 marks) (c) Salleh Sdn Bhd is in the business of cattle breeding. The company was incorporated on 1 July 2011 and at that time acquired 100 immature calves and 50 adult cows. It is assumed that it takes the calves one year to mature. The following information is available. 1 July June 2012 RM RM Fair value per cow 2,500 2,800 Fair value per calf 1,600 1,700 Costs to sell: Auctioneer s fees Transport costs 5% of selling price RM100 per head 5% of selling price RM100 per head 3

4 Required i. How would the acquisition of the cattle be recorded in the financial accounts on 1 July 2011? Explain. (3 marks) ii. Salleh Sdn Bhd acquired another 105 calves during the year and sold 50 cows. A further 10 calves were born and 100 matured and were transferred to mature livestock. Determine the value of the livestock in the financial statements for the year ended 30 June 2012 and explain how the changes in fair value should be disclosed. (3 marks) Question 3 (a) HB Bank Bhd (HB) grants a 3 year loan of RM100,000 to SPG Sdn Bhd on 1 July HB charges interest at 5% per annum to be paid at the beginning of each year. This special rate was granted to SPG as it has a favourable business relationship with the bank. The current market lending rate of a similar loan with similar credit profile is 7% per annum (i) Discuss how the initial measurement of the loan should be recorded in HB s accounts based on the relevant financial reporting standard. (3 marks) Calculate the initial measurement of the loan on HB s books and state the initial journal entry. (4 marks) (b) Model Industries Bhd (Model) purchases a five-year debt instrument with a principal amount of USD 10 million that is indexed to the share price of Johnston Plc, USA (Johnston). At maturity, Model will receive the principal amount plus or minus the change in the fair value of 1 million shares of Johnston Plc. The current share price of Johnston is USD 80. No separate interest payments are made for the debt instruments. Johnston currently classifies the entire purchase price of the debt instrument of USD10 million as an available for sale investment. (i) Discuss the nature of the debt instrument and the equity indexed maturity value Assuming the market interest rate is 10%, calculate the initial measurement of the debt instrument. (3 marks) 4

5 (c) Assam Finance Berhad has disposed of its debt instruments issued by HL Berhad to Sundown Group at RM3.5 million and provided a guarantee to Sundown for any default losses on the transferred debt. i. Discuss with reference to relevant accounting pronouncements the implications of this transaction for Assam Finance Berhad. (d) In their ongoing revision of the Conceptual Framework, the IASB and the FASB have tentatively adopted the following working definition for a liability, a present economic obligation for which the entity is the obligor. Discuss the possible reasons for the suggested change in the definition of a liability. Question 4 (a) On 1 April 2012, Jaya Berhad increased the operating capacity of its manufacturing plant. However, due to lack of liquid funds it was unable to buy outright the required machinery for the expansion. The cost of the machinery was RM350,000. Jaya Berhad entered into an agreement to lease the machinery from the supplier. The lease required four annual payments in advance of RM100,000 commencing 1 April The machinery had a useful life of four years and was to be scrapped at the end of this period. The Finance Director was of the opinion that the lease agreement would improve the company s return on capital compared with an outright purchase of the machine. The implicit rate of interest in the lease is 10%. (i) Critically discuss the validity of the Finance Director s opinion and explain how MFRS 117 would ensure that this lease is faithfully represented in the financial statements of Jaya Berhad. Prepare the extracts of Jaya Berhad s income statement and statement of financial position for the year ended 30 September 2012 assuming the lease is : a. an operating lease (3 marks) b. a finance lease (4 marks) 5

6 (b) Madoff Bhd borrows funds generally and uses them to finance the development of housing projects. On 1 July 2011, the carrying amount of the qualifying asset, including borrowing costs capitalised previously is nil. Expenditures incurred for the construction of the qualifying asset during 2011 and 2012 are as follows: RM million 1 September February The capitalisation rate for interest on general borrowings is 6.5%. i. Explain what is meant by a qualifying asset and determine the carrying amount of the qualifying asset as at 30 June (c) Many accounting academics argue that the current financial accounting and reporting framework is inadequate to deal with sustainable development as espoused by the Brundtland Commission. Critically evaluate this view. (8 marks) Question 5 (a) Classy Hotels and Resorts Group (Classy) owns and operates over 50 hotels and resort properties in the Europe, the Americas, China and other regions. The segmental revenue, profit/(loss), assets and liabilities are shown below. Revenue Segment Segment Segment Region External Internal Profit/(Loss) Assets Liabilities RM m RM m RM m RM m RM m Europe (25) Americas China , Others (10) (i) Determine the reportable segments of Classy Group based on MFRS 8 - Operating Segments. 6

7 Critically discuss why entities which are outside the scope of MFRS 8 might prepare and disclose segmental information on a voluntary basis. (b) The cumulative effects of global warming may require all governments to introduce regulations to mitigate the impact of business activities on the environment. Using the various theories of regulation, critically discuss why governments may introduce regulations and whether such regulations will result in changes to how current business activities are carried out. (10 marks) (c) IFRIC 15 applicable to property developers is now in effect from 1 January Identify and evaluate the key economic and social consequences of this particular accounting interpretation. ~ END OF PAPER~ 7

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