THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANT OF BAGLADESH

CMA JUNE, 2018 EXAMINATION

PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING

MODEL SOLUTION
Solution to the question No. 2
(a) - i.

(a) December 31, 2015

Loss on Impairment ...................................................................................
1,000,000
Accumulated Depreciation—Equipment ......................................... 1,000,000

Cost ................................................................ Tk. 9,000,000

Accumulated depreciation ............................... (1,000,000)
Carrying amount ............................................. 8,000,000
Recoverable amount* ..................................... (7,000,000)
Loss on impairment ........................................ Tk. 1,000,000
*Larger of value in use and fair value less cost of disposal.

(b) December 31, 2016

Depreciation Expense ................................................................................
1,750,000
Accumulated Depreciation—Equipment ......................................... 1,750,000

New carrying amount ...................................... Tk. 7,000,000

Useful life ........................................................ ÷ 4 years
Depreciation per year...................................... Tk. 1,750,000

(c) Accumulated Depreciation—Equipment ............................................. 750,000

Recovery of Impairment Loss ........................................... 750,000
(Tk. 6,000,000 – [Tk. 7,000,000 – Tk. 1,750,000])
(a) - ii.
(a) Loss on Impairment ...................................................................................
3,600,000
Accumulated Depreciation—Equipment ......................................... 3,600,000

Cost ................................................................ Tk. 9,000,000

Accumulated depreciation ............................... (1,000,000)
Carrying amount ............................................. 8,000,000
Less: Recoverable amount ............................ 4,400,000
Loss on impairment ........................................ Tk. 3,600,000
(b) No entry necessary. Depreciation is not taken on assets intended to be sold.
(c) Accumulated Depreciation—Equipment ................................ 680,000
Recovery of Loss on Impairment ............................... 680,000

Fair value .............................................................................. Tk. 5,100,000

Less: Cost of disposal .......................................................... 20,000 5,080,000
Carrying amount ................................................................... (4,400,000*)
Recovery of impairment loss ................................................. Tk. 680,000
*(Tk. 9,000,000 – Tk. 1,000,000 – Tk. 3,600,000)

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Answer to the question no.2(b)

Req:i FORTUNE CORPORATION

Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2010
Balance at January 1, 2010 Tk.130,000
Provision for doubtful accounts (Tk.9,000,000 X 2%) 180,000
Recovery in 2010 of bad debts written off previously 15,000
325,000
Deduct write-offs for 2010 (Tk.90,000 + Tk.60,000) 150,000
Balance at December 31, 2010 before change in accounting estimate 175,000
Increase due to change in accounting estimate during 2010 (Tk.263,600 – 88,600
Tk.175,000)
Balance at December 31, 2010 adjusted (Schedule 1) Tk.263,600

Schedule 1:
Computation of Allowance for Doubtful Accounts at December 31, 2010
Aging Category Balance % Doubtful Accounts
Nov–Dec 2010 10,80,000 2 21,600

July–Oct 6,50,000 10 65,000

Jan–Jun 4,20,000 25 1,05,000
Prior to 1/1/10 90,000(i) 80 72,000
Tk.263,600
(i) Tk.150,000 – Tk.60,000

(ii)The journal entry to record this transaction is as follows:

Bad Debt Expense.......................................... Tk.88,600

Allowance for Doubtful Accounts............. Tk.88,600

(To increase the allowance for doubtful accounts at December 31, 2010, resulting from a
change in accounting estimate)

Solution to the question No.03

Req.: (a)
Himu Incorporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Particulars Tk. Tk.
Cash flows from operating activities
Net Income .......................................................... 14,750(a)
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on sale of equipment ......................... 5,200(b)
Gain from flood damage ............................ (13,250)*
Depreciation expense ................................. 800(c)
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 Copyright amortization .............................. 1,250
Gain on sale of equity investment ............. (1,500)
Increase in accounts receivable (net) ....... (3,750)
Increase in inventory .................................. (3,000)
Increase in accounts payable .................... 2,000 (12,250)
Net cash flow provided by operating activities ... 2,500
Cash flows from investing activities
Sale of equity investments ................................ 4,500
Sale of equipment .............................................. 2,500
Purchase of equipment (cash) .......................... (15,000)
Proceeds from flood damage to building ......... 37,000
Net cash provided by investing activities ........ 29,000
Cash flows from financing activities
Payment of dividends ........................................ (5,000)
Payment of short-term note payable ................ (1,000)
Net cash used by financing activities ............... (6,000)
Increase in cash ...................................................... 25,500
Cash at the beginning of the year 13,000
Cash at the end of the year 38,500
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................... Tk.2,000
Income taxes ................................. Tk.5,000
Tk.7,000
Non-cash investing and financing activities:**
Retired notes payable by issuing ordinary shares ..... Tk.10,000
Purchased equipment by issuing notes payable ........ Tk.16,000
Tk.26,000
Workings:
1) Net Income= Ending R/E – Beginning R/E = Tk.20,750-Tk.6,000 =Tk.14,750
2) (Loss) /Gain on disposal =Sales Proceeds- Book value
= Sales Proceeds – (Cost- Accumulated depreciation)
=Tk.2,500- [11,000-(11,000*30%)]
= Tk.2,500-Tk.7,700
=(Tk.5,200)
3) Depreciation expenses= Accum. Dep. On equipment sold-Decrease in depreciation
= Tk.3,300-Tk.2,500
= Tk.800
Req.: (b)
1) For a severely financially troubled firm:
Operating: Probably a small cash inflow or a cash outflow.
Investing: Probably a cash inflow as assets are sold to provide needed cash.
Financing: Probably a cash inflow from debt financing (borrowing funds) as a
source of cash at high interest cost.
2) For a recently formed firm which is experiencing rapid growth:

Operating: Probably a cash inflow.

Investing: Probably a large cash outflow as the firm expands.
Financing: Probably a large cash inflow to finance expansion.

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Solution to the question No. 4

(b)
Cost Retail
Beginning inventory .................................................. Tk. 30,000 Tk. 46,500
Purchases ................................................................ 55,000 88,000
Purchase returns ...................................................... (2,000) (3,000)
Freight on purchases ................................................ 2,400 _______
Totals ............................................................ 85,400 131,500
Add: Net markups
Markups ....................................................... Tk. 10,000
Markup cancellations ................................... (1,500)
Net markups ............................................................. _______ 8,500
Totals ............................................................ Tk. 85,400 140,000

Deduct: Net markdowns

Markdowns.................................................... 9,300
Markdown cancellations ................................ (2,800)
Net markdowns......................................................... 6,500
Sales price of goods available .................................. 133,500
Deduct: Net sales (Tk. 95,000 – Tk. 2,000) ............... 93,000
Ending inventory, at retail ......................................... Tk. 40,500

Tk. 85,400
Cost-to-retail ratio = = 61%
Tk. 140,000

Ending inventory at cost = 61% X Tk. 40,500 = Tk. 24,705

(i)
ABC CO.
Bank Reconciliation
June 30, 2015
Balance per bank, June 30 .......................................................................... $4,150.00
Add: Deposits in transit ............................................................................... 3,390.00
Deduct: Outstanding checks ....................................................................... 2,136.05
Correct cash balance, June 30 .................................................................... $5,403.95

Balance per books, June 30......................................................................... $3,969.85

Add: Error in recording deposit ($90 – $60) ............................................$ 30.00
Error on check no. 747
($582.00 – $58.20) ......................................................................
523.80
Note collection ($1,200 + $36) ........................................................
1,236.00 1,789.80
5,759.65
Deduct: NSF check .....................................................................................
253.20
Error on check no. 742 ($491 – $419)......................... 72.00
Bank service charges ($25 + $5.50) .........................................30.50 355.70

Correct cash balance, June 30 .................................................................... $5,403.95

(ii)

Cash ..............................................................................................1,789.80
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 Accounts Receivable ................................................................ 30.00*
Accounts Payable .................................................................... 523.80**
Notes Receivable ..................................................................... 1,200.00
Interest Revenue ...................................................................... 36.00

Accounts Receivable...................................................................... 253.20

Accounts Payable .......................................................................... 72.00***
Office Expense (Bank Charges) ..................................................... 30.50
Cash ........................................................................................ 355.70

*Assumes sale was on account and not a cash sale.

**Assumes that the purchase of the equipment was recorded at its proper price. If a straight
cash purchase, then Equipment should be credited instead of Accounts Payable.
***If a straight cash purchase, then Equipment should be debited instead of Accounts Payable.

Solution to the question No. 5

(b)
(i) Treasury shares should not be classified as an asset since a corporation cannot own itself.
(ii) The “gain” or “loss” on sale of treasury shares should not be treated as additions to or
deductions from income. If treasury shares are carried in the accounts at cost, these so-called
gains or losses arise when the treasury shares are sold. These “gains” or “losses” should be
considered as additions to or reductions of equity. In some instances, the “loss” should be
charged to Retained Earnings. “Gains” or “losses” arising from treasury shares transactions are
not included as a component of net income since dealings in treasury shares represent equity
transactions.

(iii) Dividends on treasury shares should never be included as income, but should be credited
directly to Retained Earnings, against which they were incorrectly charged. Since treasury
shares cannot be considered an asset, dividends on treasury shares are not properly included in
net income.

(c)
(i) January 1, 2015
Cash ..........................................................................................................
860,651.79
Bonds Payable ............................................................................... 860,651.79

(ii) Schedule of Interest Expense and Bond Premium Amortization

Effective-Interest Method
12% Bonds Sold to Yield 10%
Cash Interest Premium Carrying Amount of
Date Paid Expense Amortized Bonds
1/1/15 — — — £860,651.79
12/31/15 £96,000.00 £86,065.18 £ 9,934.82 850,716.97
12/31/16 96,000.00 85,071.70 10,928.30 839,788.67
12/31/17 96,000.00 83,978.87 12,021.13 827,767.54

(iii) December 31, 2015

Interest Expense ........................................................................................
86,065.18
Bonds Payable ...........................................................................................
9,934.82
Cash ............................................................................................... 96,000.00
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(iv) December 31, 2017
Interest Expense ........................................................................................
83,978.87
Bonds Payable ...........................................................................................
12,021.13
Cash ............................................................................................... 96,000.00

(d)
Report on the effects of a share dividend and a share split

INTRODUCTION
As financial advisor to the Board of Directors for Ortago S.A., I have been asked to report on the
effects of the following options for creating interest in Ortago S.A. shares: a 20% share dividend, a
100% share dividend, and a 2-for-1 share split. The board wishes to avoid adjustments to equity
balances, while stimulating interest in the shares. The Board also thinks that a cash dividend at this
point would be unwise.

RECOMMENDATION
In order to meet the needs of Ortago S.A. the board should choose a
2-for-1 share split. The share split is the only option which would not change the dollar balances in the
equity section of the company’s statement of financial position.

DISCUSSION OF OPTIONS
The three above-mentioned options would all result in an increased number of ordinary shares
outstanding. Because the shares would be distributed on a pro rata basis to current shareholders,
each shareholder of record would maintain his/her proportion of ownership after the declaration. All
three options would probably generate significant interest in the shares.

A 20% SHARE DIVIDEND

This option would increase the shares outstanding by 20 percent, which translates into 800,000
additional shares of €10 par value.

The problem with this type of share dividend is that IFRS requires these shares to be accounted for at
their par value.

The following journal entry must be made to record this dividend.

Retained Earnings (€10 X 800,000) ................................................... 8,000,000

Ordinary Share Dividend Distributable ..................................... 8,000,000
Although the Ordinary Share Dividend Distributable account increases, Retained Earnings also
decreases. This reduction in Retained Earnings may hinder Ortago S.A.’s success with the subsequent
share offer.

A 100% SHARE DIVIDEND

This option would double the number of €10 par value ordinary shares currently issued and
outstanding. While this type of dividend is considered, in substance, a share split, Retained Earnings
is nonetheless reduced by the par value of the additional shares, while Ordinary Share Dividend
Distributable and, later, Share Capital—Ordinary are increased for that same amount. However, when
4,000,000 shares are already issued and outstanding, the reduction in Retained Earnings reflecting
the share dividend is still great: €40,000,000.

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The following journal entry would be made to record the declaration of this dividend:

Retained Earnings (€10 X 4,000,000) ................................................ 40,000,000

Ordinary Share Dividend Distributable ..................................... 40,000,000

A 2-FOR-1 SHARE SPLIT

This option doubles the number of shares issued and outstanding; however, it also cuts the par value
per share in half. No accounting treatment beyond a memorandum entry is required for the split
because the effect of splitting the par value cancels out the effect of doubling the number of shares.
Therefore, Retained Earnings remains unchanged as does the Share Capital—Ordinary and Share
Premium—Ordinary accounts. In addition, the decreased market value will encourage investors who
might otherwise consider the shares too expensive.

CONCLUSION
To generate the greatest interest in Ortago S.A. shares while maintaining the present balances in the
equity section of the statement of financial position, you should opt for the 2-for-1 share split.

= THE END =

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