CONFIDENTIAL AC/OCT 2010/FAR430

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : PRINCIPLES AND APPLICATION OF REPORTING

STANDARDS 2
COURSE CODE FAR430
EXAMINATION OCTOBER 2010
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

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

2. i) Answer ALL questions in the Answer Booklet. Start each answer on a new page,
ii) Show your workings (if any) for each of the question.

3. Do not bring any materials into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the Faculty

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

This examination paper consists of 7 printed pages
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CONFIDENTIAL 2 AC/OCT 2010/FAR430

QUESTION 1

A. Given below is the income summary of Harapan Bhd for the years ended 31
December 2009 and 2008
2009 2008
RM'000 RM'000
Profit before tax 500 450
Taxation (150) (140)
Profit after taxation from continuing operation 350 310
Loss from discontinued operation (100) -
Profit after tax 250 310

Ordinary dividends (50) (50)

Additional information:

1. On 1 January 2008, the issued share capital consisted of 2 million ordinary

shares of 50 sen each.

2. On 1 July 2008, one (1) million ordinary shares were issued at a premium of
50 sen each for cash. The shares were issued at fair market value.

3. On 1 January 2008, options were granted to employees to subscribe for

500,000 ordinary shares at 80 sen each. These options were exercisable on
or before 1 July 2010.

4. A rights issue of one ordinary share for every three held was made on 1 April
2009 at 90 sen. The market price of each share immediately before the issue
was RM1.10.

5. On 1 October 2009, the company bought back 500,000 ordinary shares.

6. The average market price of one ordinary share for the years ended 31
December 2008 and 2009 was RM1.00 and RM1.20 respectively.

Required:

For the years 2008 and 2009, calculate the:

(i) Basic EPS

(ii) Basic EPS from continuing operation
(iii) Diluted EPS
(iv) Diluted EPS from continuing operation
(15 marks)

B. FRS 133 Earnings Per Share requires entities to calculate and disclose the diluted
earnings per share. In the context of FRS 133, explain the term "diluted earnings per
share" and explain two (2) factors to show the significance of calculating diluted
earnings per share.
(5 marks)
(Total: 20 marks)
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CONFIDENTIAL 3 AC/OCT 2010/FAR430

QUESTION 2

Ace Contractor Sdn Bhd, a construction company, is currently involved in two

projects. Details of the contracts for the year ended 31 December 2010 are:

Contract Stadium Town Hall

Date started 1 January 2009 1 July 2010
Estimated duration of contract 3 years 18 months

RM million RM million
Fixed contract price 40 15.5
Estimated contract costs 30 15 (note 3)
Cost to date:
31 December 2009 10 nil
31 December 2010 25 (note 2) 4
Progress payment received at:
31 December 2009 (note 1) 10.8 nil
31 December 2010 (note 1) 25.2 5.4

Notes:

1. The percentage of completion is based on the value of work invoiced to date

compared to the contract price. Progress payment received represents 90%
of the work invoiced.

2. The cost to date of RM25 million at 31 December 2010 for the contract on
construction of the stadium includes RM2 million of unplanned rectification
costs incurred during the current year. There is a high probability that the
customer would not pay for the rectification costs.

3. At the start of the construction of the town hall, a landslide caused by

persistent heavy downpour resulted in an additional cost of clearing the site
and building of retaining walls to the sum of RM1 million. This unexpected
cost was not included in the estimated contract costs of RM15 million. The
customer has agreed to reimburse the relevant costs required to get the site
ready for construction.

Required:

(i) Explain the treatment of the additional cost of building the retaining wall for
the town hall. Justify your answer.
(2 marks)

(ii) Determine the contract revenues, contract expenses and contract profits to be
recognised in the income statement for the years ended 31 December 2009
and 31 December 2010 for both contracts.
(11 marks)

(iii) Determine the amount due from (to) customer as at 31 December 2009 and
31 December 2010 for the construction of the stadium.
(3 marks)
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B. Revenue on construction contracts is normally recognised by reference to the stage

of completion of the contract. However, in certain circumstances, revenue is only
recognised to the extent that it does not exceed the recoverable contract costs.

Required:

Discuss the principles that underlie each of the two methods of recognising contract
revenue and describe the circumstances in which their use is appropriate.
(4 marks)
(Total: 20 marks)

QUESTION 3

Energy Focus Bhd established a defined benefit retirement plan for its employees in year
2002. The following are the relevant information for the two (2) years ending on 31
December 2008 and 31 December 2009:

2008 2009
RM'000 RM'000
Present value of obligation at 1 January 72,000 ?
Present value of obligation at 31 December 84,000 86,000
Fair value of plan asset at 1 January 60,200 ?
Fair value of plan asset at 31 December 66,800 68,400
Net cumulative unrecognised actuarial gain at 1 January 15,400 ?

Current service costs, contributions and benefits incurred and paid by the company for the
two years are as follows:

2008 2009
RM'000 RM'000
Current service cost 230 280
Contributions paid 190 220
Benefits paid 4,800 5,200

The yearly average expected remaining working lives of the employees participating in the
defined benefit plan remained at 10 years. During the year ended 2009, there was a review
done on the defined benefit payable and resulted in past service cost of RM 100,000 on
vested employees. The company used the following annual discount rates and expected
rates of return for the future benefit obligation and for the plan assets, respectively.

2008 2009
Discount rate at 1 January 12% 10%
Expected rate of return on plan assets at 1 January 13% 12%

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CONFIDENTIAL 5 AC/OCT 2010/FAR430

Required:

For the years ended 31 December 2008 and 2009:

(i) compute the actuarial gain or loss from Plan Asset and Present Value of Obligation.
(10 marks)

(ii) determine the amount of actuarial gain or loss that should be recognised in the
Income Statement.
(8 marks)

(iii) determine the amount of retirement benefit liability that should be recognised in the
Statement of Financial Position.
(4 marks)
(Show all workings)
(Total: 22 marks)

QUESTION 4

A. Happy Bhd is in the business of wholesaling office equipments. On 1 August 2009, a

customer, Yuppy, placed an order for 20 units of equipments at RM40,000 per unit.
The equipments were delivered on 15 September 2009. By 31 December 2009,
Yuppy has paid RM500.000 of the amount owed.

Happy Bhd has a legal obligation to donate RM300,000 each year to a charitable
body, XYZ Charity. On 6 September 2010, Happy Bhd and Yuppy came to an
agreement for Yuppy to remit the remaining amount owed directly to XYZ Charity.
XYZ Charity was informed of this agreement which also stated that, in the event
Yuppy failed to deliver the said amount, Happy Bhd has no obligation whatsoever to
deliver the cash. XYZ Charity agreed to the arrangement.

The company's financial year ends on 31 December.

Required:

In the context of FRS 139 Financial Instruments: Recognition and Measurement:

(i) Identity the financial instrument involved and state the date at which initial
recognition took place. Show journal entries for the initial recognition.
(4 marks)

(ii) Explain whether or not Happy Bhd should derecognise the financial
instrument related to the donation on 6 September 2010. Show the related
journal entries.
(6 marks)

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CONFIDENTIAL 6 AC/OCT 2010/FAR430

B. On 1 January 2007, Mobile Bhd entered into a share-based payment contract with
one of its key personnel. The contract gave Mobile Bhd the choice of paying the
personnel either 8,000 shares or cash which is equivalent to 5,000 shares. The
vesting period under the agreement was two years. If the personnel were to be paid
using the equity option, he has to keep the shares for two years. The general practice
of the company is to settle its obligation in cash unless requested otherwise by the
counterparty. On the vesting date, Mobile Bhd settled its obligation by cash upon the
request of the key personnel.

The fair values of the shares are as follows:

Date Fair value (RM)

1.1.2007 5
31.12.2007 8
31.12.2008 12
31.12.2009 15

The fair value of the share alternative on grant date was estimated at RM4 per share,
after taking into account the effects of post-vesting transfer restrictions.

Required:

(i) Analysed the above share-based payment transaction and determine the
treatment of the transaction.
(5 marks)

(ii) Calculate the amount recognised as expense and liability for each relevant
year.
(5 marks)
(Total: 20 marks)

QUESTION 5

A. SLA Bhd prepares half-yearly interim report and its financial year ends on 30 June of
each year. The following transactions took place during the year ended 30 June
2010.

1. SLA Bhd purchased inventories at a total cost of RM1.3 million during the first
half of the year. The net realisable values at 31 December 2009 and 30 June
2010 were RM1.2 million and RM1.4 million respectively.

2. In August 2009, SLA Bhd planned a major maintenance or overhaul of factory

plant and equipment that was expected to occur in May 2010 at an expected
expenditure of RM0.6 million.

Required:

For each of the above transactions, explain the recognition and measurement
principles applicable in the preparation of the interim report for the six months ending
on 31 December 2009 and 30 June 2010.
(4 marks)
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CONFIDENTIAL 7 AC/OCT 2010/FAR430

B. Malimar Resources Bhd is engaged in diverse operations consisting of hardware,

furniture, petrol stations and restaurants which are located within Malaysian and
neighbouring ASEAN countries. The results of these business segments for the year
ended 31 July 2010 are as follows:

Revenue (RM million)

Business Segment Inter-segment External
Hardware 3 20
Furniture 4 3.9
Petrol station 5 8
Restaurant 5 30

Required:

(i) Identify the reportable segments that meet the requirements of FRS 114
Segment Reporting. Justify your answer.
(5 marks)

(ii) Discuss one (1) factor that should be considered in identifying a geographical
segment.
(2 marks)

Abeezed Bhd has the following asset and liability in its statement of financial position
as at 30 September 2010.

Carrying amount
Property RM580,000
Warranty RM10,000

The property was acquired three (3) years ago at a cost of RM650,000. Under the tax
rules, it qualifies for an initial capital allowance of 15% and an annual capital
allowance of 17%.

Required:

(i) Determine the tax base and temporary difference for the property and
warranty in accordance to FRS 112 Income Taxes.
(5 marks)

(ii) Explain whether the temporary differences determined in (a) above result in
deferred tax asset or deferred tax liability.
(2 marks)
(Total: 18 marks)

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