THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF NIGERIA
MAY 2010 PROFESSIONAL EXAMINATION II & MDCS
Question Papers
Suggested
Solutions
Plus
Examiners‟
Reports
PROFESSIONAL EXAMINATION II – MAY 2010
PATHFINDER
FOREWORD
This issue of the PATHFINDER is published principally, in response to a growing
demand for an aid to:.
(i)
Candidates preparing to write future examinations of the Institute of Chartered
Accountants of Nigeria (ICAN).
(ii)
Unsuccessful candidates in the identification of those areas in which they lost
marks and need to improve their knowledge and presentation.
(iii)
Lecturers and students interested in acquisition of knowledge in the relevant
subjects contained herein, and
(iv)
The profession; in improving pre-examinations and screening processes, and so
the professional performance of candidates.
The answers provided in this publication do not exhaust all possible alternative
approaches to solving these questions. Efforts had been made to use the methods,
which will save much of the scarce examination time. Also, in order to facilitate
teaching, questions may be altered slightly so that some principles or application of
them may be more clearly demonstrated.
It is hoped that the suggested answers will prove to be of tremendous assistance to
students and those who assist them in their preparations for the Institute‟s
Examinations.
NOTES
Although these suggested solutions have been published
under the Institute‟s name, they do not represent the views of
the Council of the Institute. The suggested solutions are
entirely the responsibility of their authors and the Institute
will not enter into any correspondence on them.
PROFESSIONAL EXAMINATION II – MAY 2010
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TABLE OF CONTENTS
SUBJECT
PAGES
FINANCIAL REPORTING AND ETHICS
4-32
STRATEGIC FINANCIAL MANAGEMENT
33-63
ADVANCED TAXATION
64-96
MULTI-DISCIPLINARY CASE STUDY
PROFESSIONAL EXAMINATION II – MAY 2010
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ICAN/
EXAMINATION...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL EXAMINATION II – MAY 2010
FINANCIAL REPORTING AND ETHICS
Time allowed – 3 hours
SECTION A: Attempt All Questions
PART I
1.
Determining the acquirer
Amortizing the Value of assets acquired
Recognising and measuring goodwill or a gain from a bargain purchase
Separation of the two companies accounting policies
Ignoring goodwill or a gain from a bargain purchase.
According to SAS 26 (Business Combination), which ONE of the following
information should be disclosed by a reporting entity in a business
combination?
A.
B.
C.
D.
E.
3.
(20 Marks)
Which ONE of the following demonstrates the application of the acquisition
method in a business combination?
A.
B.
C.
D.
E.
2.
MULTIPLE-CHOICE QUESTIONS
Non-acquisition related costs
The post-acquisition date
The percentage of voting equity instruments not acquired
The bulk cost of the combination only
Acquisition related costs.
Which ONE of the following is not required to be disclosed separately by a
reporting entity in respect of the carrying amount of goodwill at the beginning
and end of the period?
(i)
(ii)
Impairment losses recognised during the period
Net exchange differences arising during the period
PROFESSIONAL EXAMINATION II – MAY 2010
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(iii)
4.
(iv)
(v)
The net amount and accumulated impairment losses at the beginning
and end of the period
Additional goodwill recognised during the period
Any other changes in the carrying amount during the period
A.
B.
C.
D.
E.
i & ii
iv & v
iv only
iii only
I, ii, iv & v.
Which ONE of these is NOT an example of cash flow from financing activities?
A.
B.
C.
D.
E.
5.
Proceeds from sale of shares
Dividend paid
Interest paid
Interest received
Proceeds from sale of investment.
Which ONE of these would a parent company that losses control of a subsidiary
not do?
A. Recognising the assets and liabilities of the subsidiary at their carrying
amounts at the date when control is lost
B. Recognising the carrying amount of any non-controlling interests in the
former subsidiary at the date when control is lost
C. Derecognising any resulting difference as a gain or loss in profit or loss
attributable to the parent
D. Derecognising the carrying amount of any non-controlling interests in the
former subsidiary at the date when control is lost
E. Derecognising the fair value of the considerations received, if any, from the
transaction, event or circumstances that resulted in the loss of control.
6.
Ethics is also referred to as
A. Psychological Ethics
B. Moral Ethics
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C. Behavioural Morality
D. Moral Physiology
E. Moral Philosophy
7.
Which ONE of the following is NOT identified as fundamental principle of ethics?
A.
B.
C.
D.
E.
8.
The following are Normative theories of ethics EXCEPT
A.
B.
C.
D.
E.
9.
Confidentiality of ethics
Objectivity
Professional misconduct
Integrity
Professional competence and due care.
Psychological Egoism
Ethical Egoism
Virtue Ethics
Kohlberg‟s theory of moral development
Divine command theory
Business ethics is NOT an attack on business but rather its first line of defence.
Which of the following do you consider as the major 3-C characteristics of
business ethics?
i.
ii.
iii.
iv.
v.
A.
B.
C.
D.
E.
Compliance
Care
Commitment
Contribution
Consequences
i, ii and iii
ii, iii and iv
iii, iv and v
i, iii and iv
i, iv and v.
PROFESSIONAL EXAMINATION II – MAY 2010
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10. All the ancient Ethicists hold that the part to happiness is ONE of the following:
A.
B.
C.
D.
E.
The part of Diligence
The part of Competence
The part of Virtue
The part of Altruism
The part of Trust.
11. Filade Investments Ltd. has 10% return on Total Assets of N300,000 and a Net
Profit Margin of 5%. What is its sales?
A.
N750,000
B.
N960,000
C.
N450,000
D.
N480,000
E.
N600,000
12.
The restructuring of a company should not be undertaken if
A.
B.
C.
D.
E.
13.
the restructuring can prevent an unwanted takeover
the restructuring is expected to create value for shareholders
the restructuring is expected to increase company‟s revenue
the restructuring will attract more customers into the business
the interests of bondholders are negatively affected.
In the long run, an unsuccessful acquisition is ONE that
A.
B.
C.
D.
E.
enables the acquirer to make all equity purchases and increasing
additional financial leverage
enables the acquirer to diversify its assets base
decreases the market price of the acquirer‟s stock over what it would
have been without the acquisition
enables the preference shareholders to have adequate claim on their
investment
increases financial leverage.
PROFESSIONAL EXAMINATION II – MAY 2010
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14.
The market price of company X is N60 per share and that of company Y is N30.
If X offers three-quarters share for each share of Y, the ratio of exchange of
market price would be
A.
B.
C.
D.
E.
15.
1:2
1 : 1.5
1 : 1.125
1 : 1.05
1:5
A Cash Flow Statement may provide considerable information about what is
really happening in a business beyond what is contained in either Income
Statement or the Balance Sheet. Therefore all of the following statements are
untrue of a Cash Flow Statement EXCEPT
A.
B.
C.
Debtors want to determine regularity of their purchases
Stockholders want to determine the level of business risk of the company
Suppliers want to know if their customers will be able to pay if offered
credit
Investors want to evaluate market price of the company share
Employers are interested in the overall productivity of their employees as
indicated by its ability to fund its operations.
D.
E.
16.
The characteristics of ethical leadership include all of the following EXCEPT
A.
B.
C.
D.
E.
17.
People oriented
Loyalty to Stockholders and other interested group
Modelled through visible unethical actions and traits
Focused on setting ethical standards and accountability
Based on broad ethical awareness.
The features of a compliance driven framework does not include the following:
A.
B.
C.
D.
E.
Judgement
Law based
Fear driven
Obedience/disobedience
Mandatory
PROFESSIONAL EXAMINATION II – MAY 2010
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18.
In this era of globalization, International Federation of Accountants (IFAC) has
focused on four key areas. Which of these is NOT ONE of them?
A.
B.
C.
D.
E.
19.
Which ONE of the following is NOT true of Corporate Governance?
A.
B.
C.
D.
E.
20.
Strengthening standards; setting and promoting ethical conduct
Achieving convergence with International Standards
Serving the needs of small and medium practices and those of
Professional Accountants in business
The global reawakening of ethical problems
Supporting the growth and development of the accountancy profession
worldwide.
It is designed to make managers internalise the welfare of all
stakeholders in the firm
It aligns shareholders' and managers' interests lead us to better corporate
performance
There is an important relationship between corporate governance
structures and the quality of decision-making particularly in relation to
takeovers and mergers
Good corporate governance system can guarantee public interest
protection
Good Corporate governance encourages corporate debacles.
In order to promote ethics in your organisation, it is imperative that you do the
following, EXCEPT
A.
B.
C.
D.
E.
Study Business Ethics
Clearly articulate the organisational philosophy and values
Become a member of ICAN
Provide visible top management support for high ethical
standards
Encourage formal and informal conversations about ethical
issues.
PROFESSIONAL EXAMINATION II – MAY 2010
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PART II: SHORT ANSWER QUESTIONS (20 Marks)
1.
Transactions involving entities or businesses under common control in which all
are ultimately controlled by the same party or parties but for which the control is
not transitory is known as ........................
2.
The amount for which an asset could be exchanged or a liability settled, between
knowledgeable willing parties in an arm‟s length transaction is referred to as
......................
3.
An entity for which there are users who rely on its financial statements for
information that will be useful to them for making decisions is ......................
4.
When a business combination is achieved in a single exchange transaction, the
date of exchange is the ........................
5.
In a business combination involving more than one exchange transaction, the
aggregate cost of the individual transactions is .........................
6.
Whatever an individual believes is right or wrong is right or wrong for that
individual. This is the official position of .......................
7.
The claim that human beings are by nature motivated purely by self-interest (in
all their actions they aim to benefit themselves) to secure something that they
consider good for themselves is ascribed to ………………..
8.
The tool that a company uses to communicate its financial performance to its
stakeholders is …………………..
9.
State any TWO of the public service values that accountants should uphold and
never compromise.
10. Morality requires people sometimes to follow the common good rather than their
own …………....................
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11. Basis of accounting where revenue is recognised when earned, and expenses are
recognised when obligations are incurred or to match the timing of revenue
earned is called ..................
12. The general set of customs, regulations, habits and laws that determine to what
extent an organization should be run is ................................
13. The assistance of government in the form of transfer of resources to an entity in
return for past or future compliance with certain conditions relating to the
operating activities of the entity is known as ................................................
14. When preparing Financial Statements, items that are normal to the activities of
an enterprise but are abnormal as a result of their occurrence and size are called
.................................................................
15. The Financial Statements of a group presented as those of a single economic
entity is ......................................................................
16. State any prominent ethical principle that is applied in professional ethics.
17. Ethical dilemma is a product of ............................
18. The rules that absolutely allow no exception are known as .....................
19. The rules that support the belief that other things being equal, one should keep
promises, tell the truth, obey the law and so on are referred to as
...............................
20. When an accountant does what is required by valid ethical principles, he/she is
applying ....................................
PROFESSIONAL EXAMINATION II – MAY 2010
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SECTION B – ATTEMPT ANY FOUR QUESTIONS (60 MARKS)
QUESTION 1- CASE STUDY
Mr. Dele is a non-executive director of SUPER NIGERIA LIMITED.
The company‟s
success and reputation rely on one core product. In order to manufacture the product,
it needs to source two main components A and B. Component A may be purchased
from either of two suppliers, OKOKO NIGERIA LIMITED or GOLD NIGERIA LIMITED. The
Board has agreed a strategy that both suppliers will be used, thereby enabling the
purchasing department to exercise bargaining power over its suppliers.
On the days that Mr. Dele attends monthly board meetings, he takes lunch in the staff
restaurant. One day he finds himself in conversation with Mrs. Oriyomi the purchasing
manager, who is unfamiliar with the concept of a non-executive director. As he
explains his role, Mrs. Oriyomi, seizes the opportunity to seek his opinion on a matter
that has been causing her some concern.
She is responsible for placing orders for stock, and orders of component A are usually
placed on a weekly basis. Prices are obtained from OKOKO NIGERIA LIMITED and
GOLD NIGERIA LIMITED on a regular basis, and confirmed prior to each order being
placed. However, in recent months the purchasing director, Mr. Oluwole, has been
taking a more active role in the ordering process. He has been directing the manager
to place almost every order with GOLD NIGERIA LIMITED, although the manager
believes that a better price could often have been obtained from OKOKO NIGERIA
LIMITED. The director told the manager that he has been building an effective
relationship with the sales director of GOLD NIGERIA LIMITED, which would lead to a
reduction in prices in the long term. This has involved regular business lunches and an
invitation for the purchasing director and his family to spend a weekend on the sales
director‟s private yacht.
The purchasing manager expresses her opinion to Mr. Dele that the purchasing
director is accepting bribes, as well as ignoring the company‟s agreed purchasing
strategy, which aims to limit the risk associated with exposure to just one supplier.
Required:
(a)
What are the relevant facts in this case?
PROFESSIONAL EXAMINATION II – MAY 2010
(2 Marks)
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(b)
(i)
What is the moral foundation of Mr. Oluwole‟s action if the claim of
Mrs. Oriyomi is true?
(5 Marks)
(ii)
Does Mrs. Oriyomi have any moral justification for reporting the case of
Mr. Oluwole‟s violation of the company‟s directive?
(4 Marks)
(iii) What advice should Mr. Dele give to the purchasing manager? (2 Marks)
(iv) What action should be taken in his role as a non-executive director?
(2 Marks)
(Total 15 Marks)
QUESTION 2
The net profit margin is an important ratio to all stakeholders of a reporting entity.
(a)
List FOUR accounting policies that will have effect on the net profit margin as a
measure of operational performance.
(2 Marks)
(b)
State any ONE effect of these policies on the net profit margin.
(c)
How is the effect of accounting policy changes treated in financial statements?
(1 Mark)
(d)
The Chairman‟s statement is a key report that accompanies the Financial
Statement presented to the members‟ of a company at its Annual General
Meeting (AGM). Identify and explain any FIVE important areas that the
Chairman‟s statement is expected to address.
(8 Marks)
(Total 15 Marks)
(4 Marks)
QUESTION 3
The Income Statement For The Year Ended 31 December 2008 relates to Goodway
Limited.
N
N
Profit Before Tax
121,900
Less: Taxation
52,900
69,000
PROFESSIONAL EXAMINATION II – MAY 2010
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Less: Transfer to General Reserve
Dividends:
Preference Shares
Ordinary Shares
5,750
1,380
2,070
Retained Profit
(92,00)
59,800
1 January 2008, the issued Share Capital of Goodway Ltd was 23,000 6% Preference
Shares of N1 each and 20,700 Ordinary shares of N1 each.
Required:
Calculate the Basic and Diluted Earnings Per Share for the year ended 31 December,
2008 under the following circumstances:
(i)
No change in the issued share capital.
(4 Marks)
(ii)
The company made a Bonus Issue of one Ordinary Share for every four shares in
issue at 30 September, 2008.
(2 Marks)
(iii)
The company made a Rights Issue of Shares on 1 October 2008 in the proportion
of 1 for every 5 shares held at a price of N1.20. The middle market price for the
shares on the last day of quotation cum rights was N1.80 per share. (9 Marks)
(Total 15 Marks)
QUESTION 4
There are four theoretical problems associated with the Principle-Based Ethical
approach to Business Ethics.
Discuss any THREE of them.
.
(15 Marks)
QUESTION 5
(a)
Explain the term “creative accounting”?
(b)
Discuss any FOUR likely reasons for creative accounting.
PROFESSIONAL EXAMINATION II – MAY 2010
(3 Marks)
(12 Marks)
(Total 15 Marks)
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QUESTION 6
Megida Plc is in the hospitality industry. The specified ratios and the average figures
for the industry as at 31 December 2009 are stated below:
Return on capital employed
Net assets turnover
Gross Profit Margin
Net profit before tax
Current ratio
Quick ratio
Stockholding period
Debtors‟ collection period
Creditors‟ payment period
Debt to Equity
Dividend yield
Dividend cover
1.8 times
30%
1.6:1
0.9:1
46 days
45 days
55 days
40%
6%
3 times
22.1%
12.5%
Megida‟s Income statements for the year ended 31 December 2009 are as follows:
Turnover
Cost of sales
Gross profit
Other operating expenses
Operating profit
Interest payable
Exceptional items (Note 2)
Profit Before Tax
Taxation
Profit after tax
Dividends
Retained profit for the year
Retained profit brought forward
Retained profit c/f
N‟000
2,425
(1,870)
555
(215)
340
(34)
(120)
186
(90)
96
(90)
6
179
185
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Balance Sheet
Fixed Assets (Note 1)
Current Assets
Stock
Debtors
Current Liabilities
Bank overdraft
Trade creditors
Proposed dividend
Taxation
N‟000 N‟000
540
275
320
595
35
350
30
85
(500)
Net Current Assets
95
635
(300)
335
8% Loan Stock
Capital and Reserves
Ordinary Shares (N0.5 each)
Profit and Loss Accounts
150
185
335
Notes to the Accounts
1.
Fixed Assets
Cost
Accum. Depreciation
Net Book Value
N‟000
3,600
(3,060)
540
2.
Exceptional items relate to losses on the sale of some equipment that had
become worthless.
3.
The Stock Exchange quotation of Megida shares throughout the year averaged
N6 per 50k share.
Required:
(a)
(b)
State THREE uses and THREE limitations of ratio analysis.
(6 Marks)
Comment briefly on the company‟s performance when compared with the
industry average in the areas of liquidity and gearing.
(9 Marks)
(Total 15 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
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SOLUTIONS TO SECTION A
PART I
MULTIPLE CHOICE QUESTIONS
1.
C
2.
E
3.
C
4.
C
5.
D
6.
E
7.
C
8.
D
9.
E
10. C
11. E
12. E
13. C
14. B
15. C
16. C
17. C
18. D
19. E
20. C
TUTORIALS
11.
Return on Total Assets is 10% of N300,000
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(10% x 300,000) = N30,000
Net Profit Margin = Return on Investment
To arrive at Sales figure, therefore, the Net Profit is grossed up by 5%:
(30,000 ÷ 0.05) = N600,000
14.
(3/4 x 60) = N45
(45 ÷ 30) = 1.5
Therefore Ratio of Exchange of Market Price = 1 : 1.5
EXAMINERS‟ REPORT
The questions test all aspects of the syllabus. Majority of the candidates performed
well.
However, a few candidates displayed poor understanding of ethics related questions.
Candidates should ensure proper coverage of all areas of the syllabus so as to avoid
loss of marks in future examinations.
PROFESSIONAL EXAMINATION II – MAY 2010
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PART II
SHORT ANSWER QUESTIONS
1. Business Combination
2. Fair Value
3. Reporting Entity
4. Acquisition Date or Date of Acquisition
5. Purchase Consideration or Consideration Transferred
6. Ethical or Moral Subjectivism
7. Psychological Egoism
8. Financial Statements or Annual Report
9. Objectivity; Integrity; Professionalism; Due Care; Confidentiality; Independence;
Accountability; Probity; Competence; Honesty; Openness; etc.
10. Self or Personal Interest; Private Good or Interest
11. Accrual Concept or Basis
12. Code of Conduct or Corporate Governance
13. Government Grant
14. Exceptional Items
15. Consolidated Financial Statements or Group Financial Statements
16. Principles of Utility; Utilitarianism; Deontologist; Care Ethics; Egoism; Justice
and Duty; Teleology
17. Conflict of Interests
18. Absolutism or Categorical Rules
19. Prima Facie Duty
20. Rule of Ethics or Code of Conduct
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The questions cover all aspects of the syllabus. Candidates‟ performance was
generally average.
The major pitfalls were candidates‟ inability to adequately understand basic theory
and principles on ethics.
Candidates are advised to ensure full coverage of all areas of the syllabus for good
performance in future.
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SOLUTIONS TO SECTION B
QUESTION 1
a. (i)
Contrary to the Company‟s strategic position to buy from either of two
suppliers, only one of the recommended companies supplies the needed
product.
(ii)
The Purchasing Director has directed the Purchasing Manager against the
strategic position.
(iii)
Mr. Oluwole‟s attachment to Gold Nigeria Limited is traceable to the
personal benefits and bribes he enjoys from the Company.
(iv)
Regular business lunches and an invitation to the Purchasing Director of
Super Nigeria Limited and his family to spend weekend in the private
yacht of the Sales Director of Gold Nigeria Limited
b.(i)
Mr. Oluwole‟s action can be analyzed within the framework of Ethical
egoism. Ethical egoism emphasizes satisfaction of one‟s self-interest in
the face of others‟ interests. There is a conflict between his personal
interest and the general interest of the organization. The company
intends to have viable relationship with the two firms, thus intends to
keep transacting business with them. Mr. Oluwole‟s action could be said
to be a form of disloyalty based on egoism basic tenet.
OR
The moral foundation of Mr. Oluwole‟s action is that he is operating at
level one stage two of Kohlberg theory of moral development where in
human action which is self interest driven espouses the “what is in it for
me”, which makes the Purchasing Director to go against the company‟s
policy.
(ii)
Mr. Oluwole‟s action is a violation of the company‟s strategic position
which could at the long run affect the corporate image of the
organization as a company that encourages bribes and kick back as the
basis of economic transaction. Mrs Oriyomi has the moral justification for
reporting him to his superiors in order to preserve the corporate image of
the organization.
PROFESSIONAL EXAMINATION II – MAY 2010
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(iii)
(iv)
Mr. Dele should advise the Purchasing Manager to report the matter to
the Managing Director/management/relevant authority, who are better
positioned to handle the matter.
What is expected of Mr. Dele is to discuss the issue of Mr. Oluwole‟s
violation of the company‟s directive with the Managing Director who will
decide on the appropriate ways of handling the matter. However, if the
Managing Director/management/relevant authority fails to act, he may
bring the matter up at the Board of Director‟s meeting.
EXAMINERS‟ REPORT
The question is a case study testing candidates‟ understanding of various ethical
issues adopting diverse approaches. Candidates were expected to identify relevant
facts of the case and the moral principles breached by both executive and nonexecutive directors of the company.
Candidates displayed good understanding of the case and performance was generally
above average.
Candidates‟ commonest pitfall was the provision of the same points for different subquestions.
Candidates need to properly identify relevant points for each question on the case
studies, in order to improve performance.
QUESTION 2
(a)
The following accounting policies will have effect on the net profit margin as a
measure of operational performance:
i.
Depreciation policy
ii.
Stock Valuation method
iii.
Income/Revenue recognition policy
iv.
Basis of Accounting
v.
Research & Development policy
vi.
Fixed assets Capitalization policy
PROFESSIONAL EXAMINATION II – MAY 2010
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(b)
(c)
One effect of these policies on the net profit margin:
i.
Depreciation policy – Straight-line depreciation compared to reducing
balance will reduce profit. The straight-line method will charge the
same amount over the life of the asset while reducing balance will
charge higher amount in the early years of the assets thereby reporting a
lower profit.
ii.
Stock Valuation method – The method adopted in valuing stock (raw
materials, work in progress, finished goods and spares parts) will impact
on net profit. For instance, valuation under the First In First Out (FIFO)
method will result in a different profit compared to Weighted Average
method.
iii.
Income/Revenue recognition policy – The way in which income/revenue is
recognized for sale of goods, rendering of services and in respect of
interest, royalty, dividend and long-term contract is capable of affecting
net profit for the period.
iv.
Basis of Accounting - The basis of accounting, whether cash or accrual
basis will affect the net profit figure.
v.
Research & Development policy – The policy to write off research and
development as incurred will reduce profit compared to where only
research cost is written off as incurred and development is capitalized.
vi.
Fixed Assets Capitalisation policy – Fixed Assets Capitalisation policy
varies from one organisation to the other. While some may capitalize all
fixed assets, others may have a minimum benchmark under the
materiality concept.
Accounting policy changes in financial statements should be reflected by
retrospective application to prior period, presented as if that policy had always
been applied; unless it is impracticable to do so.
In case of a change due to new enactment in the accounting standard e.g. IFRS,
the change should be accounted for based on the specific transitional provisions
set forth in the standard.
PROFESSIONAL EXAMINATION II – MAY 2010
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(d)
Important areas the Chairman‟s statement is expected to address:
i. Global environment – Addresses issues affecting global economy such as the
current global financial crisis and how it affected the company‟s operations
during the period.
ii. Domestic economy – This will highlight issues or development within the
local economic environment.
iii. Company‟s performance – It will cover major achievements of the company
during the period under review, including profitability, dividend and bonus.
iv. Company‟s strategy – This will cover how the company intends to compete
favourably, in view of the issues identified in the domestic economy and
global environment.
v. Future outlook – It will deal with future prospects of the company including
opportunities and challenges.
vi. Changes in the Board – It will highlight appointment and retirement of
directors during the year under review.
vii. Corporate Governance - This will indicate the measures adopted by the
company to protect the interest of all the company‟s stakeholders.
viii. Major Project(s) - This will enumerate the major project(s) embarked
upon or concluded by the company within the year under review.
EXAMINERS‟ REPORT
The question examines candidates‟ knowledge of accounting policies that impact on
net profit margin, highlighting the effect and treatment of changes in those policies on
operating results. They are also expected to identify and explain areas usually
covered in Chairman‟s Statement.
Candidates performance was just fair, as some candidates could not differentiate
between accounting policies and accounting basis and concepts; and some mixed-up
the contents of Directors‟ Report with that of Chairman‟s Statement.
Candidates are advised not to neglect any aspect of the syllabus in order to boost their
performance.
PROFESSIONAL EXAMINATION II – MAY 2010
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QUESTION 3
BASIC EPS
i.
ii.
iii
.
No change in share capital
= PAT – Pref Div x 100
No. of shares
Bonus issue on 30 Sept. 2008:
No. of shares before bonus issue
Bonus (1 for 4)
No. of shares after bonus issue
= PAT – Pref Div x 100
No. of shares
DILUTED
EPS
69,000 – 1,380
20,700
=
327k
N/A
20,700
5,175
25,875
69,000 – 1,380
25,875
=
261k
N/A
Rights issue on 1 Oct. 2008
Before rights issue
5 shares
Rights issue (1 for 5)
1 share
After rights issue
6 shares
Theoretical ex-right price (N10.20/6)
Bonus element of issue increases
shares to
Full price element of issue increases
shares to
Weighted Average No. of shares in
issue
EPS
= PAT – Pref Div x 100
No. of shares
1.80
1.20
3.00
20,700
4,140
24,840
1.70
9.00
1.20
10.20
37,260
4,968
42,228
1.70
20,000 x 1.8/1.7
=
21,918
20,700 x 6/5
=
24,840
/12 x 21,918
+ 3/12 x 24,840
=16,438+ 6,210
=
22,648
9
69,000 – 1,380
22,648
=
299k
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The question requests candidates to compute Basic and Diluted Earnings Per Share
(EPS) under circumstances of Bonus and Rights Issues. Most candidates displayed fair
understanding of the question.
Candidates‟ commonest pitfall was the use of wrong formulae for the calculation of
Basic and Diluted EPS.
Candidates will perform better if they acquaint themselves with the contents of the
Annual Reports of publicly quoted companies and practice with past questions and
other standard texts.
QUESTION 4
Preambles:
According to Virtue ethics, courses and writings in business ethics appear ineffective
due to the theoretical problems created by the dormant Principle-Based Ethics (BPE) of
Immanuel Kant‟s formalism and J.S Mill‟s Utilitarianism. These systems provide
guideline to help people evaluate whether acts are morally right or wrong. Although
these two systems differ in a number of areas, they both start with a group-centered
perspective as opposed to a self-centered one. Good people consider everyone, not just
themselves.
Both Kant and Mill claim that the reasonableness inherent in their respective systems
should be self-evident to rational people. Further, both believe rational people will
choose to follow these ethical guidelines in all aspects of their lives. In effect, both
theorists link rationality with goodness.
(a)
An exclusive reliance on PBE has created four recurring problem for business
ethicists:
(i)
Lack of Ethical Motivation - PBE does not adequately address the issue of
ethical motivation. It is argued that PBE does not provide the motivation
for ethical behaviour but rather provides what constitutes a moral action.
It lacks motivation which involves answering the question “why should I
be good or do right things?”
PROFESSIONAL EXAMINATION II – MAY 2010
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(b)
(ii)
The Problem of Generality – The failure of PBE involves its generality.
Neither formalism nor utilitarianism provides the basis for predictable
decisions to specific situations. PBE lacks specificity when applied to
business ethics‟ cases. In other words, PBE does not support business
persons with concrete solutions to ethical quandaries.
(iii)
Limited Applicability – The problem with PBE is that both formalism and
utilitarianism have peculiar problems that limit their applicability to
practical situations when we need to make moral decision.
(iv)
Emphasizes Ends rather than Means – PBE involves not so much a
theoretical weakness as a practical deficiency. Business ethics tends to be
predominantly utilitarian, but the modern form of utilitarianism is less
than what Beetham or Mill would accept. Rather than an enlightened
self-interest which disinterestedly accounts for the concerns of all,
utilitarianism has become a Machiavellian calculation of ends apart from
means.
(v)
The problem of adequate understanding - The effectiveness of a
principle is determined by the level of understanding of the principle.
The study of Business Ethics is necessary because of the following reasons:
i.
To ensure that business are carried out in accordance with ethical
standards.
ii. To increase the normal intensity in business and corporate decisions.
iii. To reduce the incidence of business misconducts and corporate debacles.
iv. To enhance the level of public trust in business organizations.
v. To reduce the negative impact of some sharp business practices in
societies.
vi. To enhance the welfare of stakeholders.
vii. To enhance business profitability in the long-term. (Ethical management
for profitability).
viii. To have an understanding of fundamental principles of business conduct.
ix. To facilitate the production/delivery of goods or services that will be in the
interest of the consumers.
x.
So that the organisation will be able to act in public interest and enhance
the level of public trust in business.
xi. Government will benefit from good business ethics because firms will pay
their taxes in full as and when due.
PROFESSIONAL EXAMINATION II – MAY 2010
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xii. Employee(s) will benefit because adherence to ethical behaviours ensures
that workers salaries/entitlements will be paid fully and as and when due.
xiii. Creditors and other stakeholders will also benefit from proper business
conduct because they will be paid according to terms of payment agreed
upon. The business will be properly managed and not run aground.
xiv. It will improve the level of fair competition in business and reduce the
incidence of unethical business conduct or sharp practices.
EXAMINERS‟ REPORT
The question expects candidates to discuss theoretical problems associated with
Principle-based Ethical approach to business and enumerate reasons for studying
Business Ethics.
Most of the candidates displayed poor understanding of the question. They were off
the mark on issues that were expected to be highlighted.
Candidates need to pay more attention to the Sections on Ethics in the syllabus to
improve their performance.
QUESTION 5
(a)
Creative Accounting
Creative accounting is a term in general use to describe the practice of applying
inappropriate accounting policies or entering into complex or „special purpose‟
transactions with the objective of making a company‟s financial statements
appear to disclose a more favourable position, particularly in relation to the
calculation of certain „key‟ ratios, than would otherwise be the case. Most
commentators believe creative accounting stops short of deliberate fraud, but is
nonetheless undesirable as it is intended to mislead users of financial
statements.
(b)
Likely reasons for creative accounting:
i.
Performance pressure – Companies are often under pressure to perform in
order to meet expectations of their stakeholders and the public at large.
Where such a company‟s performance is not up to their expectation,
PROFESSIONAL EXAMINATION II – MAY 2010
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management may be under immense pressure to embark on creative
accounting in order to present a better result.
ii.
Competition – The activities of competitors often put enormous pressure on
their peers to perform or out-perform. This was very common in the
Nigerian banking sector before the recent banking crisis. This led to some
banks manipulating their accounts in order to achieve the desired results.
iii.
Performance based executive rewards – Where the incentives and bonuses
of executives are based on performance such as meeting profit targets, it
could result in management manipulating financial results.
iv.
Business combination – To resist a take over bid or in an attempt to sell the
entity at a higher value than it would have been without creative
accounting.
v.
To meet or exceed forecast - This is very common in many countries and it
is now required by the Securities and Exchange Commission in Nigeria that
companies should publish their forecast financial statements. Where the
actual performance is significantly below the forecast earlier published,
management may result into creative accounting to meet expectation.
vi.
To satisfy shareholders who may be unhappy with the company‟s
performance.
vii. To manage and sustain share price and minimize volatility.
viii. To meet minimum standards especially regulatory requirements such as
minimum liquidity ratio for banks.
ix.
To avoid or reduce tax liability or other levies and regulatory fees.
x.
To attract or woo investors (local or foreign).
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The question requires candidates to explain the term “Creative Accounting” and
discuss the likely reasons for it. Majority of the candidates displayed good
understanding of the question and performed very well.
However, few candidates were unable to differentiate between the reasons for and the
process of creative accounting.
Candidates are advised to cover all aspects of the syllabus in their preparation for
future examinations.
QUESTION 6
(a)(i) Usefulness of Ratio Analysis
 Performance Measurement: It provides indication of a firm‟s performance and
near present financial position.
 Liquidation/Reorganisation Decisions: It helps in determining whether or not to
liquidate or reorganise a business in form of a business combination, merger,
acquisition or internal reconstruction.
 Investment/Divestment Decisions: It guides in investment decisions as to
whether to further invest or divest where such investment is not performing
satisfactorily.
 It aids in the construction of a pattern of a firm‟s behaviour and financial
position.
 It helps in predicting the firm‟s future performance.
 It facilitates the assessment of the efficiency with which the firm is utilising
assets for income generation.
 It helps to determine the ability of the firm to meet its current obligations as
they fall due.
 It facilitates inter firm comparison.
(a)(ii) Limitations of Ratio Analysis:
 Comparison of ratios can be misleading unless they are calculated from
financial statements prepared under uniform accounting policies.
 Due to impact of inflation, ratios calculated from financial statements prepared
on historic cost basis cannot give a true picture of yearly trends.
PROFESSIONAL EXAMINATION II – MAY 2010
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




Only items that can be measured in monetary terms are included in financial
statements. For instance, non-financial corporate strengths or weaknesses are
not incorporated.
For purposes of overall assessment of the financial strength or weakness of a
firm, the fact that there is no ideal ratio makes the task difficult. For example, a
current ratio of less than 2 could be dangerous for many firms, but quite
acceptable for others.
The factors influencing the performance of a firm in one year may change in
another, thus rendering horizontal analysis misleading.
The balance sheets prepared at different points in time at static in nature and
therefore cannot give much information about the pre and post balance sheet
events.
Incidence of creative accounting can give misleading results.
(b) Megida Plc‟s performance compared with industry average:
(i) Liquidity:
The company shows real cause for concern because:
 Its current and quick ratios are worse than the industry average and are far
below expected level.
 Current liquidity problems appear to be due to high level of trade creditors and
huge bank overdrafts.
 High level of stock contributes to the poor quick ratio.
 Debtors collection period is unreasonably long.
 It takes longer days for Megida Plc to pay its creditors than industry average,
which might damage relationship with suppliers leading to curtailment of
further credit.
(ii) Gearing:
Gearing (as measured by debt/equity) is higher than twice the level of the
sectoral/industry average. Whilst this may be an uncomfortable level, it is currently
beneficial to shareholders. The company is making an overall return of 34.6% but
only paying 8% (before tax) interest on its loan stock. The gearing level may
become a serious issue if Megida Plc becomes unable to maintain the finance costs.
The company already has an overdraft and the ability to make further interest
payments could be in doubt.
PROFESSIONAL EXAMINATION II – MAY 2010
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Summary
The company‟s liquidity and gearing position is quite poor and give cause for concern.
If it is to replace its old assets in the near future, it will need to raise finance. With the
current high level of borrowing, this may be a serious problem for the company.
Workings:
Ratio
Return on Capital Employed (ROCE)
Net Assets Turnover
Net Profit Margin
Gross Profit Margin
Current Ratio
Quick Ratio
Stock Holding Period
Debt Collection Period
Creditors Payment Period
Debt to Equity Ratio
Dividend Yield
Dividend Cover
Unit
Industry Average
%
Times
%
%
Ratio
Ratio
Days
Days
Days
%
%
Times
22.1
1.8
12.5
30
1.6:1
0.9:1
46
45
55
40
6
3
Megida
Plc‟s
16.0
3.8
8.0
23
1.19:1
0.64:1
54
48
68
90
27
1
EXAMINERS‟ REPORT
The question tests candidates understanding of the uses, limitations, computation and
interpretation of ratio analysis.
Candidates displayed good understanding of the computations but could not correctly
interprete the ratios in comparison to industry average.
Candidates will perform well if they familiarize themselves with the theory and
practice of interpretation of financial statement. They are also advised to study the
basic principles involving computation and interpretation of accounting ratios.
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
ICAN/101/V/3
EXAMINATION NO...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL EXAMINATION II – MAY 2010
STRATEGIC FINANCIAL MANAGEMENT
Time allowed – 3 hours
SECTION A: Attempt All Questions
PART I
1.
E.
Tax management
Development of long and short term strategic plans
Adequate investment in human resources
Right by the majority shareholders to remove directors that fails to
pay dividend
Pursuit of wealth maximization objective.
Which of the following is NOT a feature of a well functioning Capital Market?
A.
B.
C.
D.
E.
3.
(20 Marks)
The following are in line with good Corporate Governance EXCEPT
A.
B.
C
D.
2.
MULTIPLE-CHOICE QUESTIONS
Provision of timely and accurate information
Provision of liquidity
Selective provision of information about securities
Possession of good internal and external efficiency
Rapid adjustment of estimates of security prices by investors to reflect
their interpretation of the new information received.
Which of the following is NOT an area of application of spreadsheet packages
relevant to the financial manager?
A.
B.
C.
D.
E.
Sensitivity Analysis
“How-can” Analysis
“What-If” Analysis
Optimum level Analysis
Quantitative Analysis.
PROFESSIONAL EXAMINATION II – MAY 2010
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4.
Which of the following is NOT a factor to be considered in formulating
strategies?
A.
B.
C.
D.
E.
5.
If capital is to be rationed for a period of more than one year, the appropriate
technique for investment decision is
A.
B.
C.
D.
E.
6.
profitability index
net present value
linear programming
internal rate of return
cost benefit analysis.
Probability-tree analysis is best used when cashflows are expected to be
A.
B.
C.
D.
E.
7.
Organizational culture and value system
Protection of top management interests
Organizational competence and resources capabilities
Market share and penetration
Social obligations.
known with certainty
independent of previous periods cashflows
risk free
related to the cashflows in previous periods
unknown.
A restriction imposed on a borrower by a lender is referred to as
A.
B.
C.
D.
E.
covenant
fixed charge
accord
pledge
floating charge.
PROFESSIONAL EXAMINATION II – MAY 2010
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The following information relates to questions 8 and 9. The income statement of Cotton
Plc for the end of year 2009 is
N‟000
N‟000
Sales
1,800
Less: Variable costs
720
Fixed cost
480
1,200
Profit before interest and tax
600
Less: Interest on Debenture
200
Profit before tax
400
Less company tax @ 30%
120
Profit after tax
280
8.
Compute the Company‟s financial leverage
A.
B.
C.
D.
E.
9.
What is the Company‟s operating leverage?
A.
B.
C.
D.
E.
10.
1.8
1.5
3.8
0.9
2.7
3.8
1.5
1.8
2.7
0.9
Which of the following is NOT an assumption that underlies an efficient capital
market?
A.
B.
C.
Investors adjust their estimates of security prices slowly to reflect their
interpretation of the new information received
Expected return implicitly includes risk in the price of the security
New information comes to the market in a random fashion
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
D.
E.
11.
The Efficient Market Hypothesis (EMH) assumes that
A.
B.
C.
D.
E.
12.
B.
C.
D.
E.
meet its cash obligations before they occur and take advantage of
prompt payment discounts
meet its cash obligations as they occur and support the proper level of
sales
keep current and acid-test ratios at or above industry norms
support the proper level of sales and take prompt payment discounts
keep current and acid-test ratios below industry norms.
Receiving a required inventory item at the exact time needed describes the term
A.
B.
C.
D.
E.
14.
there are no transaction costs
there is perfect foresight
there are no levies
there are no taxes
the successive price changes are independent.
In relation to working capital, risk means that there is jeopardy to the firm for
not maintaining sufficient current assets to
A.
13.
A large number of profit-maximizing participants analyze and value
securities independent of each other
The timing of news announcement is independent.
Total Quality Management
Program Evaluation and Review Technique
Economic Order Quantity
Just-In-Time
Automated Teller Machine.
If the market price per share of company X is N90 while that of company Y is
N60, given that company X offers three quarters of its shares for Y, what is the
ratio of exchange in value terms?
A.
B.
C.
D.
E.
1.000
1.500
1.125
0.667
1.250
PROFESSIONAL EXAMINATION II – MAY 2010
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15.
Economies of scale, market share dominance and technological advances are
reasons most likely to justify a
A.
B.
C.
D.
E.
16.
Which of the following factors does not create problem of financing Small and
Medium Scale Enterprises?
A.
B.
C.
D.
E.
17.
Poor management
Inefficiency
Low business credibility
High risk of failure
Little access to new technology.
Which of the following is NOT an objective of the Small and Medium Enterprises
Investment Scheme?
A.
B.
C.
D.
E.
18.
strategic acquisition
divestiture
two-tier tender offer
shark repellant
financial acquisition.
Provision of financial advisory, technical and managerial support to the
entrepreneurs.
Stimulation of economic growth, development of local technology and
generation of job opportunities
Facilitation of the flow of funds for the establishment of new Small and
Medium Scale Enterprises projects, reactivation, expansion and
modernization or restructuring of on-going projects
Administration of micro-credit programmes of government and high
net-worth individuals
Elimination of the burden of interest and other financial charges for the
entrepreneurs.
The International financial institution that assists developing countries by
providing funds for long-term developmental programmes for the benefits of
the citizens of those countries is the
A.
B.
C.
African Export-Import Bank
World Bank Group
Bank for International Settlement
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
D.
E.
19.
The following are categories of risk coverage of the Multilateral Investment
Guarantee Agency EXCEPT
A.
B.
C.
D.
E.
20.
Paris Club
London Club.
Risk resulting from armed conflict or civil unrest
Repudiation of contracts with investors by government
Risk resulting from domestic business transaction
Transfer risk emanating from host country‟s policies on currency
conversion and transfer
Risk of loss resulting from legislative or administrative actions and
omissions of host government
Which of the following is NOT a special borrowing facility at the International
Monetary Fund?
A.
B.
C.
D.
E.
Ecology Fund
Infrastructural Development loan/grant
Deficit balance of payment/Trade Financing
Domestic loan Financing
Special Capital Project Financing.
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
PART II – SHORT ANSWER QUESTIONS
(20 MARKS)
1.
The fiduciary responsibility of corporate directors and officers towards a
company which states that a fiduciary must act in accordance with the interests
of the beneficiary, is known as ………………
2.
The market price of a firm‟s share represents the …………….. that the market
participants place on the company.
3.
The process of developing detailed, short-term decisions about what is to be
done, who is to do it, and how it is to be done is the responsibility of the
………….. management.
4.
The electronic worksheet that can be used for a variety of tasks and applications
is the ………………………….
5.
The selection of the combination of investment proposals that provides the
highest net present value, subject to the budget constraint for the period is the
objective of …………………………
6.
The technique of analyzing alternative sequential decisions and possible
outcome from them is known as ………………………….
7.
The optimal capital structure for a firm is that for which the overall cost of
capital is …………………..
8.
While preference share has prior claim on income and assets, ordinary share
has ………………….. claim.
9.
The following information relates to Game Plc:
EPS = 40 kobo
Market Price per Share = 110 kobo
Dividend Yield (DY)= 5 %
What is Game Plc‟s dividend cover?
10.
The theory which states that future patterns of share prices are a repetition of
the same pattern of price movements which have occurred in the past is known
as ……………………
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
11.
The implication of Efficient Market Hypothesis (EMH) is that the time at which
new shares are issued is …………………………..
12.
Holding cash for the purpose of taking advantage of discounts or investments
opportunity is called ………………. motive.
13.
The expression:
Re-order level - (Average Usage x Average Lead Time)
is used to calculate ………………….
14.
Merging with an unrelated company is referred to as ………………. merger.
15.
Conversion of a subsidiary to a company in which the shares of the company are
issued to the parent company is known as ………………..
16.
Retained earnings are the easiest source of funds to a small firm because the
firm has no access to …………..
17.
A major setback in the use of Accounting Rate of Return investment appraisal
technique by small and medium scale enterprises is ……………………
18.
An International Institution which addresses the balance of payment problem of
member countries is ………………
19.
The institution established to act as arbiter in the settlement of transactions
emanating from the services of Central Banks and International oriented
Commercial banks is the …………………………
20.
Which International Institution is established to provide financial support to the
less developed countries that cannot borrow on conventional terms due to debt
servicing costs?
PROFESSIONAL EXAMINATION II – MAY 2010
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SECTION B – ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks)
QUESTION 1 - CASE STUDY
GOODY-GOODY PLC
Goody-Goody Plc is a fast growing profitable company situated in a commercial city in
the southern part of the country. It specializes in the manufacture and distribution of
water reservoirs. The management of Goody-Goody Plc has just identified a niche
market in certain northern cities requiring a particular size of reservoir not currently
manufactured by the company.
The company‟s current facilities cannot be used to manufacture the new – size
reservoir, and it is imperative to buy a new machinery. Acquisition and installation
will cost N18million over the next 2 years, N9million in each year. Expected cash
inflows associated with the project from year 3 to 8 are N2.8million, N3.8million,
N6.5million, N6.2million, N5million and N1.5million respectively.
If the project is successful the company has an option to invest additional N15 million
to secure a wider market at the end of year 5. The probability of success is 60 percent
with an expected incremental cash flow from year 6 to 10 as follows:
Incremental Cash flow
(N‟m)
8.0
5.4
Probability
0.5
0.5
However, if not successful the company will not invest the N15million and there will
be no expected incremental cashflows. The required rate of return of Goody-Goody plc
is 10 per cent.
You are required to determine:
(a)
the net present value of the initial project and comment on its acceptability.
(5 Marks)
(b)
the worth of the project if the option to expand is considered. Comment on its
acceptability.
(10 Marks)
(Total 15 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
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QUESTION 2
“Good Corporate Governance can help manage the problems of conflicting interest of
the stakeholders of an organization.”
In the context of the statement above, you are required to:
(a)
define Corporate Governance
(b)
state FOUR key elements in Corporate Governance aimed at controlling the
ability of the directors to promote their own interest and ensure adequate
disclosure of their activities.
(4 Marks)
(c)
list SIX areas covered by the code of good Corporate Governance practice.
(6 Marks)
list THREE main characteristics of Decision Support System (DSS).
(3 Marks)
(Total 15 Marks)
(d)
(2 Marks)
QUESTION 3
(a)
List the THREE forms of capital market efficiency
(3 Marks)
(b)
A valued client of your stock broking firm has asked for your advice on his
investment portfolio. Details of his securities in the stock market (which is
regarded as efficient) with the associated risk characteristics are given below:
SECURITIES
Standard deviation (%)
Correlation coefficient (%)
Proportion of amount invested (%)
X
5
80
30
Y
15
40
30
Z
14
60
40
The expected return on shares in general and on the basis of past return and
inflationary expectation was estimated to be 20%. It is expected that the risk premium
will be about 5%. The risk of the market as measured by its standard deviation is 8%.
All the three securities lie on the Securities Market Line (SML).
PROFESSIONAL EXAMINATION II – MAY 2010
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You are required to prepare the following computations for a discussion with your
client, as a prelude to your advice:
(i)
(ii)
The expected portfolio return
The risk of the portfolio
(8 Marks)
(4 Marks)
(Total 15 Marks)
QUESTION 4
(a)
(b)
(c)
In relation to cash management, state THREE functions of the Treasury Manager
in an organization.
(3 Marks)
List FOUR symptoms of overtrading.
(4 Marks)
Extracts from the financial statements of TERMAC are given below:
Sales
Cost of sales
Purchases
Raw materials
Work in progress
Finished Goods stock
Debtors
Creditors
N
5,000,000
4,200,000
2,800,000
700,000
350,000
800,000
602,500
420,000
Assuming that all sales and purchases are on credit and a year of 365days, you are
required to calculate the length of the cash operating cycle of the company. (8 Marks)
(Total 15 Marks)
QUESTION 5
Beta Plc made an offer of 1 of its ordinary shares for every 2 shares in Ocean Plc on 5
June 2009. If the offer was successful Beta will use Ocean‟s distribution facilities to
expand its sales of fertilizers to farmers and this would result in an increased cash flow
of N4.5million per year after tax. Beta‟s financial analyst estimate that the capitalized
value of the cash flow is N45 million.
PROFESSIONAL EXAMINATION II – MAY 2010
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Extract from the accounts of the two companies are given below.
BALANCE SHEET AS AT 31 DECEMBER 2008
Fixed Assets
Current Assets
Less current liabilities
Total assets less curr. Liabilities
Less long term loans
Issued share capital and reserves:
Share capital
N1 each
50k each
Reserves
Note: Current Assets include stock of
Beta Plc
N‟m
750
900
(600)
1,050
(300)
750
300
450
750
300
Ocean Plc
N‟m
360
210
(210)
360
(180)
180
150
30
180
150
Income statement for the year ended 31/12/2008
N‟m
Profit after taxation
150
Dividends
60
Retained Profit
90
N‟m
30
21
9
Price per share of Beta Plc is N5 while that of Ocean Plc is N2.
You are required to:
(a)
(b)
(c)
calculate the price earnings ratios of Beta Plc and Ocean Plc before the Merger.
(3 Marks)
determine what the price earnings ratio of the group will be if the value of Beta
Plc‟s shares increases by 50k after the merger.
(4 Marks)
calculate the market capitalization of Beta Plc after the merger assuming that
the stock market is rational and that there are no events other than those which
would influence the share price. Ignore the 50k increase in Beta Plc‟s share
price mentioned in (b) above.
(3 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
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(d)
calculate the net dividend income the holder of 1 share in Ocean Plc would
receive before and after the merger assuming that Beta maintains the same
dividend per share as before the merger.
(5 Marks)
(Total 15 Marks)
QUESTION 6
(a)
In relation to overseas investment decision, distinguish between Foreign Direct
Investment and Foreign Portfolio Investment.
(4 Marks)
(b)
i.
ii.
(c)
List the THREE institutions that make up the World Bank Group.
State the THREE objectives of setting up the World Bank.
(3 Marks)
(3 Marks)
List FIVE special borrowing facilities at the International Monetary Fund (IMF).
(5 Marks)
(Total 15 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
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SOLUTIONS TO SECTION A
PART 1 - MULTIPLE CHOICE QUESTIONS
1.
D
2.
C
3.
E
4.
B
5.
C
6.
D
7.
A
8.
B
9.
C
10.
A
11.
E
12.
B
13.
D
14.
C
15.
A
16.
E
17.
D
18.
B
19.
C
20.
D
PROFESSIONAL EXAMINATION II – MAY 2010
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TUTORIALS
8.
PBIT
600
=
= 1.5
PBT
400
9.
CONTRIBUTION
1,800,000  720,000
1,080,000
=
=
=
EBIT
600,000
600,000
OR
14.
VARIABLECO ST
=
PBT
720,000
400,000
=
1.80
1.80
3 90
270
x
=
= 1.125
4 60
240
EXAMINERS‟ REPORT
The questions test candidates‟ knowledge of various aspects of the syllabus.
Virtually all the candidates attempted the questions and performance was average.
Some of the candidates showed good understanding of the questions while some had
problems in proffering appropriate solutions.
Candidates are advised to ensure adequate coverage of the syllabus for better
performance.
PROFESSIONAL EXAMINATION II – MAY 2010
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PART II - SHORT ANSWER QUESTIONS
1.
Agency relationship or Loyalty
2.
Value
3.
Middle level
4.
Spread sheet package
5.
Capital rationing
6.
Decision tree or Probability tree
7.
Minimum or Lowest
8.
Residual
9.
7.27 times
10.
Chartist or Technical
11.
Immaterial or Irrelevant or Not important
12.
Speculative
13.
Minimum stock level or Safety stock or Buffer stock
14.
Conglomerate
15.
Spin-off
16.
Capital market or Bank loan
17.
Ignoring the time value of money
18.
The International Monetary Fund (IMF)
19.
Bank for International Settlement
20.
International Development Association (IDA).
TUTORIAL
9.
Dividend cover
=
EPS
40
40
=
=
DYxMV
0.05 x110
5.50
= 7.27 times
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The questions test candidates‟ knowledge of the various aspects of the syllabus.
Almost all the candidates attempted the questions but performance was below
average. Many of the candidates did not have a good understanding of some of the
questions hence gave wrong answers or failed to answer them.
Candidates are advised to read wide and in-depth when preparing for the
examinations of the Institute for better result.
PROFESSIONAL EXAMINATION II – MAY 2010
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SOLUTIONS TO SECTION B
QUESTION 1 – CASE STUDY
(a)
GOODY-GOODY PLC
Computation of NPV of the initial project
Year
1
2
3
4
5
6
7
8
Cash flow
N‟000
(9,000)
(9,000)
2,800
3,800
6,500
6,200
5,000
1,500
DF
PV
10%
N‟000
0.9091 (8,181.90)
0.8264 (7,437.60)
0.7513
2,103.64
0.6830
2,595.40
0.6209
4,035.85
0.5645
3,499.90
0.5132
2,566.00
0.4665
699.75
(118.96)
Comment: The project should not be undertaken because it has a negative NPV of
N118,960
(b)
Incremental Cash Flow
Incremental cash flow
N‟m
8.0
5.4
Year
6
7
8
9
10
Outflow
N‟000
(15,000)
Probability
0.5
0.5
Inflow
N‟000
6,700
6,700
6,700
6,700
6,700
Expected value
N‟m
4.0
2.7
6.7
Net flow
N‟000
(8,300)
6,700
6,700
6,700
6,700
DF
PV
10%
N‟000
0.5645 (4,685.35)
0.5132 3,438.44
0.4665 3,125.55
0.4241 2,841.47
0.3856 2,583.52
7,303.63
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If the probability of success is 60 per cent, then the
NPV = 0.60 x N7,303,630 = N4,382,180
Since the initial project‟s net present value is negative i.e. (N118,960), then the overall
project‟s net present value will be:
N4,382,180 – N118,960
=
N4,263,220
From the calculations, investing an additional N15 million brings about a positive NPV
which wipes out the negative NPV of the initial project. Therefore, the additional N15
million and the incremental expected cash flows are worthwhile hence the option to
expand is recommended if the project is to be embarked upon.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of investment appraisal technique under
capital investment decisions aspect of the syllabus.
Almost all the candidates attempted the question but most of them understood only
the part (a) of the question and demonstrated lack of understanding of the (b) part,
hence performance was poor.
Candidates‟ commonest pitfalls were their inability to determine the timing of the cash
flows (inflows and outflows). Some candidates also failed to apply or use the given
probability in the question which will enable them to arrive at the expected value of
the cash inflow.
Candidates are advised to take time to read, understand and interprete questions
appropriately and note the specific requirements before attempting them.
QUESTION 2
(a)
Corporate Governance as defined by Dayton (1984) is the process, structures
and relationship through which the Board of Directors oversees what the
executives do to achieve the objective of the company.
It is the system by which companies are directed and managed in the best
interest of the owners and other stakeholders. It refers to the role of the Board
PROFESSIONAL EXAMINATION II – MAY 2010
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of Directors, executives and non-executives, shareholders right and to other
action taken by shareholders to influence corporate decisions.
(b)
Key elements in Corporate Governance aimed at controlling the ability of the
directors to promote their own interest and ensure adequate disclosure of their
activities include:
(i)
Allowance for a review of audit regulations, corporate disclosure
framework and shareholder‟s participation. This is to improve the
accountability and transparency of companies‟ compliance to statutory
regulation, best ethical practices, consumer protection and so on.
(ii)
Appointment of Audit Committee. This is to assist the Board of Directors
in managing the accuracy and integrity of the financial statements of the
company by making sure that the statements comply with the legal and
regulatory requirements and the efficiency of the company‟s internal
audit functions.
(iii)
Existence of a
entrepreneurship.
(iv)
Enhanced overall performance through good
management within set best practice guidelines.
(v)
Maximisation of corporate value through enhancement of transparency
and efficiency.
(vi)
Prevention of fraudulent practices through the mechanisms designed by
the Board and management.
(vii)
Prevention of exploitation of investors by the managers.
managerial
system
which
promotes
creative
supervision
and
(viii) Ensuring that the suppliers of finance to companies have their rewards.
(ix)
Provision of a framework for the pursuit of the organisation‟s strategy in
an ethical and effective way to safeguard against misuse of all resources.
PROFESSIONAL EXAMINATION II – MAY 2010
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(c)
Areas covered by the code of good Corporate Governance practice include:
(i)
The independent directors.
(ii)
Structuring the Board to add value.
(iii)
Promoting ethical and responsible decision making.
(iv)
Laying solid foundation for management.
(v)
Recognising and managing risk.
(vi)
Encouraging enhanced performance evaluation.
(vii)
Recognising the legitimate interest of stakeholders.
(viii) Remunerating fairly and responsibly.
(d)
(ix)
Respecting the rights of shareholders.
(x)
Safeguarding the integrity of financial reporting, and
(xi)
Adherence to the corporate governance code of conduct for company
directors published under the aegis of Securities and Exchange
Commission (SEC).
Characteristics of Decision Support System (DSS) include:
(i)
It is an information system used by senior managers to carry out analysis
of specific problems, opportunity and threats. It provides support but
neither replaces the manager‟s judgement nor provide predetermined
solutions.
(ii)
It is an information system that combines data, analytical tools and
models to support semi-structured and unstructured decision making.
(iii)
It allows for interactive enquiries and responses between financial
managers and the system, thereby enhancing problem solving process.
(iv)
It is intended to provide a wide range of alternative information
gathering and analytical tools with a major emphasis on flexibility and
user friendliness. There are no predetermined solutions or reporting
formats.
(v)
Information is produced by analytical modelling of financial data.
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of the meaning, elements and code of good
corporate governance. It also tests candidates‟ understanding of Decision Support
Systems (DSS).
Many candidates attempted the question but performance was poor. Most of them
performed well in part (a) of the question but did not quite understand the
requirements of parts (b) and (c) hence the interchange of some requirements of part
(b) with those of part (c). Also, candidates‟ understanding of part (d) was poor, as a
result, most of them avoided the question and those who attempted it, gave wrong
answers.
Candidates‟ commonest pitfall in parts (b) and (c) was their inability to differentiate
between the code and the key elements of corporate governance. However, their
commonest pitfall in part (d) of the question was their inadequate knowledge of
Information Technology (IT).
Candidates are advised to study extensively and understand the questions before
attempting them. They should also endeavour to improve their knowledge of
Information Technology (IT) as it is an important aspect of the syllabus.
QUESTION 3
(a)
The three forms of capital market efficiency are:
(i)
(ii)
(iii)
(b) i
Weak form
Semi-strong form and
Strong form.
Calculation of beta factors for each of the security:
x x Co x
=
Standard deviation x Correlation coefficient
m
Market standard deviation
Security:
X
=
0.05 x 0.8
0.08
=
0.5
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Y
=
Z
=
0.15 x 0.4
0.08
0.14 x 0.6
0.08
=
0.75
=
1.05
Expected Return for each security
=
E(Ri) = Rf +  (Rm –Rf)
where: E(Ri) is expected return on the security
Rf is the risk-free return
Rm is the expected market return
 is the beta (risk) of the security
X
Y
Z
=
=
=
15% + 0.5 (20−15)%
15% + 0.75 (20−15)%
15% + 1.05 (20−15)%
=
=
=
17.5%
18.75%
20.25%
Expected return on the portfolio is derived from the following formula.
E(Rp) = Wx E(Rx) + Wy E(Ry) + Wz E(Rz)
where:
X, Y, and Z are the securities
E(Rp) is the expected return on portfolio
E(Rx) is the expected return of security X and
Wx is the proportion of the available investment funds invested in
security X.
Therefore the expected return on the portfolio using the above formula is:
(0.3 x 17.50)% + (0.3 x 18.75)% + (0.4 x 20.25)%
=
5.250% + 5.625% + 8.100%
=
18.975% = 19%
(ii)
The risk of the portfolio is the addition of the Beta factor for each security X
proportion of the available investment funds invested in each security
PROFESSIONAL EXAMINATION II – MAY 2010
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i.e
 p =  x x Wx +  y x Wy +  z x Wz
which is:
=
=
=
(0.5 x 0.3) + (0.75 x 0.3) + (1.05 x 0.4)
0.150 + 0.225 + 0.420
0.795
79.5% = 80%.
Determination of Rf
i.e.
Rm –Rf
0.20 – Rf
−Rf
Rf
=
=
=
=
=
Premium
0.05
0.05 – 0.20
0.15
15%
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of portfolio management with particular
reference to Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis
(EMH).
Few candidates attempted the question and performance was poor. Some candidates
that attempted the question got the formula right and therefore did well. The
remaining candidates performed poorly.
Candidates‟ commonest pitfalls were their inability to get the formula right and where
they are able to state the formula correctly, they were unable to interprete and
identify the figures to use in solving the problems.
Candidates are advised to read wide and in-depth for the Institute‟s examinations.
They should also endeavour to understand the principles involved in the interpretation
of formulae.
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QUESTION 4
(a)
(b)
Functions of the Treasury Manager in relation to cash management include:
(i)
Cash planning.
budgets.
This is achieved through the preparation of cash
(ii)
Management of cash flows through the management of cash collections
and disbursements. This is achieved by acceleration of cash collection
and control of disbursements.
(iii)
Maintaining a sound cash position through determination of the
optimum cash balance by matching the cost of excess cash and danger of
cash deficiency.
(iv)
Investing surplus cash in marketable securities or short term investment
opportunities to earn profits. This is done through the selection of
investment opportunities taking into consideration the safety, maturity
and marketability of the investment.
(v)
Banking and custody of cash.
Symptoms of overtrading include:
(i)
Rapid growth in turnover (sales).
(ii)
Rapid increase in the volume of current assets and possibly fixed assets.
High stock turnover and low average collection period which means that
the rate of increase in stocks and debtors would be greater than the rate
of increase in sales.
(iii)
Increase in assets financed by a small increase in proprietors‟ capital
(e.g. retained profits) while most increases are financed by trade
creditors (repayment period to creditors become much slower).
(iv)
Substantial increase in overhead costs resulting in a fall in net profit
margins.
PROFESSIONAL EXAMINATION II – MAY 2010
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(v)
Decline in gross profit ratio as a result of higher purchase costs.
(vi)
Major decline in the debt and liquidity ratios, e.g.
-
(vii)
Decline in the ratio of working capital to sales
Decline in the ratio of debtors to trade creditors
Decline in the current and acid test ratios
Bank overdrafts reach or exceed the limit of the facilities agreed with the
banker.
(c)
Calculation of the length of the cash operating cycle
(i)
Raw material stock turnover period
=
Average stock of raw materials
Purchases
(ii)
Work-in-progress stock turnover period
=
Work-in-progress x 365 days =
Cost of goods sold
1
(iii)
Finished goods stock turnover period
=
Finished goods stock x 365 days =
Cost of goods sold
1
(iv)
Debtors‟ collection period
=
Debtors x 365 days =
Sales
1
(v)
x 365 days =
700,000 x 365 days
1
2,800,000 1
= 91.25 days
= 91 days
350,000 x 365 days
4,200,000 1
= 30.42 days = 30 days
800,000 x 365 days
4,200,000 1
= 69.52 days = 70 days
602,500 x 365 days
5,000,000 1
=
Creditors‟ payment period
=
Creditors
x 365 days =
Purchases
1
43.98 days = 44 days
420,000 x 365 days
2,800,000 1
= 54.75 days = 55 days
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Therefore, the length of the cash
Operating cycle
= 180.42 days = 180 days
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of the functions of the Treasury Manager
with respect to cash management. It also tests candidates‟ knowledge of overtrading
and calculation of cash operating cycle.
Most of the candidates attempted the question and performance was fair. The (c) part
of the question was well understood by many candidates. However, in part (a),
candidates failed to limit themselves to the question asked and therefore performed
poorly while the (b) part was not well attempted.
The commonest pitfall of the few candidates that performed poorly in part (c) of the
question was their inability to get the correct formula to use in calculating the
operating cycle for each of the working capital item. However, their commonest pitfall
in part (a) of the question was their inability to differentiate between the cash
management functions of the treasury manager and his general functions while the
(b) part was not well understood by most of the candidates.
Candidates are advised to take time to read, understand and interprete questions
appropriately and note the specific requirements to ensure that they answer questions
correctly.
QUESTION 5
(a)
BETA AND OCEAN PLC
Price Earnings, P/E ratio computation before merger:
EPS =
PAT
No of shares
=
Beta Plc
N‟m
Ocean Plc
N‟m
150
600
30
150
= 0.25
= 0.2
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P/E ratio = Share price =
EPS
(b)
N5
N0.25
N2
N0.20
= 20 times
= 10 times
P/E ratio computation for the group after merger
P/E ratio
=
Share Price
Earnings Per Share
EPS
=
Total Earnings
No of shares
Total market value
Total Earnings
No of shares = (600 + 75)m = 675 million shares.
Total earnings
N‟m
Beta
Ocean
Increased cash flow
150.0
30.0
4.5
184.5
Therefore EPS
=
184,500,000
675,000,000
=
N0.27
If EPS
=
N0.27 and
Share price =
N5.50 (given)
Then, the Price Earning (P/E) Ratio of the group would be:
N5.50
0.27
=
20.37 times
PROFESSIONAL EXAMINATION II – MAY 2010
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(c)
Calculation of market capitalisation of Beta Plc (after merger)
Capitalisation of Beta Plc (pre-merger)
= 600m x N5.0
Capitalisation of Ocean Plc (pre-merger)
= 150m x N2.0
Value of merger benefit (given)
Therefore, capitalisation of group after merger
(d)
Nmillion
=
3,000
=
=
=
300
45
3,345
Calculation of dividend income of the holder of 1 share in Ocean Plc before and
after merger assuming Beta maintains the same dividend per share as before
the merger.
Dividend per share (DPS) of holder of 1 share in Ocean Plc:
Before merger:
DPS
=
N21,000,000
150,000,000
=
N0.14
After merger: assuming Beta Plc maintains the same dividend per share as before the
merger:
DPS
=
60,000,000
600,000,000
=
N0.10
Therefore, a holder of 1 share in Ocean Plc will now get 10k ÷2 = 5k since the ratio of
offer is 2:1.
Comment:
The shareholders of Ocean Plc would be losing 9k, that is, (14k −5k) on each of their
shareholding since they were earning 14k on each holding, before the merger.
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EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of mergers and acquisition with special
emphasis on evaluation of financial performance of merged companies.
Most candidates attempted the question and performance was above average.
Candidates had fair knowledge of the question. They performed well in part (a) of the
question while parts (b) and (d) were fairly attempted but they displayed a very poor
understanding of part (c).
Candidates‟ commonest pitfalls in answering the question were their lack of an indepth knowledge of the principles involved in mergers and acquisitions; and their
inability to sift and properly obtain the correct figures to use for the calculations
demanded in the questions.
Candidates are advised to ensure adequate coverage of all sections of the syllabus and
note the specific requirements of a question before attempting it.
QUESTION 6
(a)
Foreign Direct Investment (FDI) refers to a lasting interest in an enterprise in
another economy where the investor‟s purpose is to have an effective voice in
the management of the enterprise. Such direct investment usually involves
acquisition of a controlling interest in an overseas branch or subsidiary. Firms
which invest overseas are examples of multinational corporations.
On the other hand, Foreign Portfolio Investment (FPI) refers to participation in
overseas investment without any control over the running of the business. It
involves the purchase of shares or loan stock in an overseas business
organisation.
(b)(i) The three financial institutions that make up the World Bank Group are:
*
*
*
The International Bank for Reconstruction and Development (IBRD);
The International Development Association (IDA) and
The International Finance Corporation (IFC).
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(ii) The objectives of setting up the World Bank include:
(c)

Assisting in the reconstruction and development of the territories of
members by facilitating investment of capital for productive purposes.

Promoting long-range balanced growth of International trade and the
maintenance of equilibrium in the balance of payments by encouraging
international investment for the development of the productive resources
of member countries.

Ensuring, in so far as it makes or guarantees loans, that the most urgent
needs are satisfied first.
The special borrowing facilities at the International Monetary Fund (IMF)
include:
(i)
(ii)
(iii)
(iv)
(v)
Ecology Fund
Infrastructural Development loan/grant
Deficit balance of payment/Trade Financing
Budget Deficit Financing
Special Capital Project Financing.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of international financial management with
emphasis on the major international financial institutions such as the World Bank
Group, IMF, ADB and so on. It also tests candidates‟ understanding of Foreign Direct
Investment (FDI) and Foreign Portfolio Investment (FPI).
Many candidates attempted the question but performance was below average.
Candidates‟ understanding of the question, particularly the parts (a) and (b) was poor
while the part (c) of the question was fairly attempted.
Candidates‟ commonest pitfall in part (a) of the question was their non-understanding
of the meaning of Foreign Direct Investment (FDI) and Foreign Portfolio Investment
(FPI). They were therefore unable to define the two types of Foreign investments. In
part (b) of the question, candidates were unable to list the three institutions that made
up the World Bank Group.
Candidates are advised to always cover the syllabus adequately for better result. They
should also give consideration to International Finance in their preparations.
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ICAN/
EXAMINATION NO...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL EXAMINATION II – MAY 2010
ADVANCED TAXATION
Time allowed – 3 hours
SECTION A: Attempt All Questions
PART I
1.
Which ONE of the following details is disclosed in the Tax Clearance Certificate
of a limited liability company?
A.
B.
C.
D.
E.
2.
Total profit
Tax withheld
Tax paid
Total expenses
Adjusted profit.
What is the expiry date of an unrestricted Tax Clearance Certificate?
A.
B.
C.
D.
E.
3.
MULTIPLE-CHOICE QUESTIONS (20 Marks)
31st August of the year of issue
30th September of the year of issue
31st December of the year of issue
30th November of the year of issue
31st October of the year of issue.
Why are penalties imposed by tax authorities?
A.
B.
C.
D.
E.
To punish tax payers
To encourage prompt collection of taxes
To discourage collection of taxes
To punish tax defaulters
To punish tax payers.
PROFESSIONAL EXAMINATION II – MAY 2010
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4.
Which ONE of the following does a Tax Clearance Certificate show?
A.
B.
C.
D.
E.
5.
Seismic survey
Systemic survey
Systematic survey
Systems survey
Systems review and survey.
Which one of the following is not included in the chargeable profit of a
petroleum company?
A.
B.
C.
D.
E.
7.
The date of appointment of the directors
The date of change in accounting date.
In which ONE of the following services does an oil service company engage?
A.
B.
C.
D.
E.
6.
The date of issue
The names of the directors
The names of the shareholders
Proceeds of sale of chargeable oil sold by the company in that period
Value of all chargeable oil disposed of by the company in that period
Value of chargeable natural gas
All income incidental to and arising from anyone or more of its petroleum
operations
Cost of extraction of oil.
Which one of the following represents the assessable profit of a company for
any accounting period under Petroleum Profits Tax Act CAP P13 LFN 2004?
A.
B.
C.
D.
E.
Adjusted profit after adjusting for capital allowances of the current
period
Adjusted profit after adjusting for balancing allowances and previous
years losses
Adjusted profit after adjusting for losses and balancing charges
Adjusted profit after adjusting for losses and capital allowances
Adjusted profit after adjusting for losses from previous accounting
periods.
PROFESSIONAL EXAMINATION II – MAY 2010
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8.
What is chargeable profit under Petroleum Profits Tax Act CAP P13 LFN 2004?
A.
B.
C.
D.
E.
9.
What is the accounting period for all companies engaged in petroleum
operations?
A.
B.
C.
D.
E.
10.
A period from 1 August to 31 July of the same year
A period from 1 September to 31 August of the same year
A period of one year preceding the year of operation
A period of one year from 1 January to 31 December of the same year
A period of one year from the date a company first makes a sale of bulk
disposal of chargeable oil.
Which ONE of the following determines a dispute as to the date of the first sale
of chargeable oil?
A.
B.
C.
D.
E.
11.
Assessable profit less the capital allowances and balancing allowance
Assessable profit less the balancing allowance
Assessable profit less the capital allowances allowed by the Act
Assessable profit less the losses for the previous period
Assessable Profit after deduction of allowance expenses.
Federal Inland Revenue Service Board
Joint Tax Board
Department of Petroleum Resources
Director of Petroleum Resources
Director of Petroleum services.
Which ONE of the following is to kept by a vatable person?
A.
B.
C.
D.
E.
Creditors ledger
Sales Day Book
Debtors ledger
Nominal ledger
Payroll.
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12.
Which of the following is VAT exempt?
A.
B.
C.
D.
E.
13.
Which ONE of the following, under Capital Gains Tax, are connected persons?
A.
B.
C.
D.
E.
14.
Spouse of the person making the disposal
Trustee of a unit trust
A Partnership
A company
A legal practitioner.
Which ONE of the following is not a case of computing chargeable gains using
open market values?
A.
B.
C.
D.
E.
15.
Computers
Motor vehicles
Books and educational materials
Shredding machines
Cement.
Assets transferred to trustees by the settler
Termination of a life interest in a settlement
Where transaction is between connected person
Transactions were not done at arms‟ length
Transactions done at arms‟ length.
Which ONE of the following is not ground for which a pioneer certificate can be
revoked?
A.
B.
C.
D.
E.
Where there is no contravention of the provisions of the Act governing
pioneer industries
Where production day is less than one year
When qualifying expenditure is more than N50,000 for an indigenous
controlled company
Where qualifying expenditure is less than N150,000 for company not
indigenously controlled
Where there is an application from the pioneer company.
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16.
Which ONE of the following does not qualify as a pioneer industry?
A.
B.
C.
D.
E.
17.
How is the fine paid by a company on behalf of a drunken driver treated for
drunk driving in computing adjusted profit?
A.
B.
C.
D.
E.
18.
Allowable expense
Non allowable expense
Partly allowable expense
Relief allowable expense
Non reliable expense.
When are monies received after cessation of business deemed to have been
paid?
A.
B.
C.
D.
E.
19.
The Manufacture of motor vehicles
The Manufacture of salt
The Manufacture of iron and steel
The Manufacture of glass and glassware
The Manufacture of pharmaceuticals.
On the last day before the cessation occurred
On the day of the cessation
On the day such monies were collected
On the day such monies were banked
On the day such monies were received for.
XYZ Ltd paid N300,000 as its tax liability for 2008 year of assessment. What is
the adjusted profits assuming a tax rate of 30%?
A.
B.
C.
D.
E.
N1,200,000
N1,100,000
N1,000,000
N 900,000
N 800,000
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20.
The adjusted profit of a company is N6,000,000, if the Depreciation not included
in the adjusted profit is N300,000, what is the new adjusted profit?
A.
B.
C.
D.
E.
N6,300,000
N5,700,000
N5,700,300
N6,600,000
N6,300,500
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PART II: SHORT ANSWER QUESTIONS (20 Marks)
1.
What is an Original Assessment?............................
2.
The information circulars or departmental instructions, issued by the Federal
Inland Revenue Service Board are for ………………….
3.
What is the maximum period covered by a Tax Audit?
4.
Minimum Tax applies to companies that have been in business for
………….years and beyond.
5.
How will the profits of a non-resident company carrying on the business of
shipping in and outside Nigeria be taxed?
6.
Tax can be ……………………by converting sole proprietorship to a limited
liability company.
7.
What do you mean in taxation when you say an expense is an allowable
deduction?
8.
How will you determine the assessable profit for the third year of assessment
under commencement provisions?
9.
Eru Nigeria Limited paid N6,000,000 in a given year as company tax. What was
the total profit using a tax rate of 30%?
10.
Why is Value Added Tax (VAT) described as an indirect tax?
11.
What is the penalty for failure to collect VAT under the VAT law?
12.
Dividend distributed by unit trust are profits………….from tax.
13.
In which way is Investment Allowance in Petroleum Profit Tax Act Cap P13 LFN
2004 similar to Initial Allowance under Companies Income Tax Act Cap C21 LFN
2004?
14.
What is the tax holiday granted as an incentive to companies engaged in
downstream sector in the gas industry?
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15.
Dividends distributed during the tax holiday period by companies engaged in
the downstream sector of the gas industry and where the investment is in
foreign currency attract an incentive. What is this incentive?
16.
Petroleum profits are assessed to tax on…………………..
17.
All non-productive rents incurred by a company are known as……………..
18.
Sec.11 of Petroleum Profits Tax Act Cap P13 LFN 2004 as amended provides that
gifts and donations are not……in ascertaining the adjusted profit of a
petroleum company.
19.
What is paid to confer legal approval on an instrument of apprenticeship?
20.
Who is empowered by law to appoint the State Commissioner for Stamp Duties?
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SECTION B – ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks)
QUESTION 1 - CASE STUDY
You have been invited by a Club of young Nigerian Business Executives to give a talk
on the topic “commencing a thriving business in Nigeria and the tax implications”.
Your talk is expected to address the following issues with emphasis on the tax
implications of each:
(a)
Legal form of the proposed business:
(i)
(ii)
(iii)
Registering as a Business Name
Registering the business as a Partnership
Incorporating a Limited Liability Company.
(b)
How the profits of the business will be taxed on commencement.
(c)
How the profits of the business will be taxed on cessation.
(d)
Options of election by a Taxpayer and Revenue.
Note: Your talk should be presented in a Report format to the Club.
(15 Marks)
QUESTION 2
Empire Nigeria Limited is owned by Nigerians and has been in business since year
2003. The results of the company as at 31 December 2008 are as follows:
Assets employed
N
N
Fixed Assets
Current Assets
Less: Current Liabilities
Net Current Assets
Net Assets
550,000,000
360,000,000
180,000,000
190,000,000
370,000,000
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FINANCED BY:
Share Capital
Statutory Reserves
General Reserves
Long Term Loans
140,000,000
60,000,000
100,000,000
70,000,000
370,000,000
You are provided with the following additional information:
(a)
(b)
(c)
(d)
(e)
The turnover of the company during the year ended 31 December, 2008 was
N240,000,000.
Gross Profit was N35,000,000.
Assessable Profit was N2,100,000.
Unrelieved capital allowances brought forward from 2007 year of assessment
was N600,000.
Capital allowances for 2008 year of assessment amounted to N950,000.
You are required to:
(a)
(b)
(c)
Compute the company‟s minimum tax liability for 2009 year of assessment.
(5 Marks)
Compute the company‟s income tax liability for 2009 year of assessment.
(5 Marks)
Note: Ignore restriction on capital allowance that can be relieved.
Differentiate between Direct and Indirect Taxes. Give THREE examples of each.
(5 Marks)
(Total 15 Marks)
QUESTION 3
Pee Dee Concept Limited is into advertising business. The company agrees to
advertise a product on a one metre by one metre sheet poster board at six different
sites. The cost of advertising per site is 1,500 at a commission of 5½%.
You are required to:
(a)
Calculate the VAT due to the relevant tax authority on this transaction. (4 Marks)
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(b)
(c)
Who is a VATable person under the VAT enabling law? Give FIVE examples.
(6 Marks)
List any FIVE details to be furnished in a VAT Invoice.
(5 Marks)
(Total 15 Marks)
QUESTION 4
The estimated tax liability of Integrity Petroleum Limited was N84,000,000 for 2008
tax year. The actual tax liability as per the audited accounts of the company filed at
the tax office by its auditors was finally agreed at N89,500,000.
Required:
(a)
Prepare the schedule of stream of payments to the tax authority for 2008 tax
year, assuming the company was served notice of assessment in November
2008.
(5 Marks)
(b)
What are tax offsets under the Petroleum Profits Tax Act Cap P13 LFN 2004 as
amended?
(4 Marks)
(c)
Explain briefly the Joint Venture Contracts (JVCs) Tax Regime.
(d)
Under the Production Sharing Contracts (PSC), what are the Royalties‟ Rates?
(3 Marks)
(Total 15 Marks)
(3 Marks)
QUESTION 5
(a)
Date
1/4/01
Lazarus Company Limited purchased the following assets:
Type
Plant and Machinery
Amount
N1,200,000
Part of the plant and machinery was sold on 31 December, 2005 for N1,850,000. The
company spent N250,000 as expenses incidental to the sale. The market value of the
remaining plant and machinery was N750,000 on 31 December, 2005.
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You are required to compute:
(i)
(ii)
(iii)
The chargeable gain on the asset sold.
The capital gains tax.
The new cost of the remaining asset.
(b)
With respect to Capital Gains Tax Act Cap C1 LFN 2004.
(i)
(ii)
(4 Marks)
(2 Marks)
(2 Marks)
Explain briefly what is meant by “Roll Over Relief”.
What are allowable expenditure?
(3 Marks)
(4 Marks)
QUESTION 6
Barabas Airline Limited is a foreign company incorporated in Ghana. Its core business
is carriage of passengers, mails and livestock into and out of Nigeria. You are given its
financial results for the year ended 31 December, 2006 as follows:
Income from passengers flight on other routes
Income from cargo loaded into aircraft on other routes
Income from passengers flight from Nigeria
Income from cargo loaded into aircraft from Nigeria
Deduct:
Depreciation
Staff salaries
General provision
Other expenses
N
464,500
3,382,110
50,600
136,450
Net profit
N
50,275,000
51,360,000
12,800,300
11,750,160
126,185,460
4,033,660
122,151,800
You are given the following additional information:
(a)
Capital allowances were agreed with the relevant authority at 110% of
depreciation charged.
(b)
Other expenses include disallowable expenses of N100,000.
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You are required to:
(a)
(i)
(ii)
(iii)
(b)
(4 Marks)
Calculate the income tax liability for the relevant year of assessment.
(1 Mark)
Calculate the education tax liability.
(1 Mark)
Explain briefly tax incentives to the following lines of businesses:
(i)
(ii)
(iii)
(c)
Compute the total profits of company for Nigerian Tax purposes.
Small Companies
Wholly Export Business
Unit Trust
(1 Mark)
(1 Mark)
(1 Mark)
State any FOUR powers and functions of the Federal Inland Revenue Service
Board.
(6 Marks)
(Total 15 Marks)
1.
2.
3.
TAX RATES
CAPITAL ALLOWANCES
Office Equipment
Motor Vehicles
Office Building
Furniture & Fittings
Industrial Building
Non-Industrial Building
Plant and Machinery - Agricultural
Production
- Others
INVESTMENT ALLOWANCE
TAX-FREE ALLOWANCE:
Rent
Transport
Utility
Meal Subsidy
Initial %
50
50
15
25
15
15
Annual %
25
25
10
10
10
10
95
50
NIL
25
10%
Maximum Per Year
N
150,000
20,000
10,000
5,000
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Entertainment
Leave
6,000
10% of Annual Basic Salary
4.
PERSONAL INCOME TAX RELIEF/ALLOWANCES
(a) Personal Allowance
- N5,000 plus 20% of Earned Income
(b) Children Allowance
- N2,500 per annum per unmarried child subject
to a maximum of four children
(c) Dependent Relative
- N2,000 each
(d) Disabled Persons
- N5,000 or 10% of Earned Income (whichever is higher)
(e) Life Assurance
- Actual premium paid
5.
RATES OF PERSONAL INCOME TAX:
6.
COMPANIES INCOME TAX RATE
30%
7.
EDUCATION TAX
2%
8.
CAPITAL GAINS TAX
10%
9.
VALUE ADDED TAX
5%
Taxable Income
Rate of Tax
N
%
First
30,000
5
Next
30,000
10
Next
50,000
15
Next
50,000
20
Over
160,000
25
Note: Annual income of N30,000 and below is exempted from tax but a minimum tax of
0.5% will be charged on the total income.
10. WITHHOLDING TAXES
Type of Payment
Dividend, Interest, Rent
Royalties
Contract supplies
Building construction activities
Consultancy/Professional services
Management services
Commissions
Technical services
Directors‟ fees
Rates
(Companies)
10%
15%
5%
5%
10%
10%
10%
10%
10%
PROFESSIONAL EXAMINATION II – MAY 2010
Rates
(Non-corporate)
10%
15%
5%
5%
5%
5%
5%
5%
10%
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SOLUTION TO SECTION A
PART 1
1.
C
2.
C
3.
D
4.
A
5.
A
6.
E
7.
E
8.
C
9.
D
10.
D
11.
B
12.
C
13.
A
14.
E
15.
A
16.
A
17.
B
18.
A
19.
C
20.
A
MULTIPLE-CHOICE QUESTIONS
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EXAMINERS‟ REPORT
The questions test candidates‟ knowledge of virtually all parts of the syllabus; tax
administration, assessable and chargeable profits on Oil and Gas, VAT, Capital Gains
Tax, connected persons, pioneer industry, commencement and cessation of businesses.
The questions were well attempted by the candidates.
Candidates‟ performance was good.
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PART II SHORT ANSWER QUESTIONS
1.
This is an assessment raised by the tax authority to which no objection has been
raised by the taxpayer.
2.
Guidance of stakeholders.
3.
Six years. However, where tax evasion is involved, there is no time limit for reopening tax assessment/tax audit.
4.
Four.
5.
Profit is calculated thus:
Profit = (a/c) - (b/c)
c
c
a=
b=
c=
Profit and Loss of the company before depreciation
Allowance claimable by way of depreciation
Total sums receivable in respect of the carriage of passengers, mails,
livestock and goods
Tax is now charged on the Profit
Tax Payable must not be less than 2% of c above for any accounting period.
6.
Managed/mitigated.
7.
The expense is wholly, reasonably, exclusively and necessarily incurred and can
be deducted from income in arriving at the assessable profit.
8.
(i) Preceding year basis (PYB), that is, the profit of 12 months‟ period ending in
the second tax year. Where there is no 12 months account, the basis shall be
the 1st 12 months as in the second tax year.
(ii) Option based on actual
(iii) Where the basis period is less than 12months, the preceeding year basis
(PYB)
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9.
10.
N6,000,000 x 100 =
N20,000,000.
30
1
Because it is a consumption tax that devolves in successive stages such that at
the end, it is the final consumer of the goods and services that bears the
burden.
11.
150% of the amount not collected plus 5% interest above CBN rediscount rate.
12.
Exempted.
13.
Investment allowance under PPTA Cap P13 LFN 2004 as amended is similar to
initial allowance under CITA Cap C21 LFN 2004 as amended, in that, it is
claimable in the year the asset is first put into use and only once in the life of
the asset to the business.
14.
Initial tax-free period of three (3) years which may be renewed for an additional
period of two(2) years subject to satisfactory performance of the business.
15.
The dividend is tax-exempt.
16.
Actual year.
17.
Dead rents.
18.
Allowable.
19.
Stamp Duty.
20.
State Civil Service Commission.
Tutorials
5. (i) The tax authority of the country in which the company that chartered or owns
the ship is domiciled, computes and assesses on a basis not materially different
from the provisions of Companies Income Tax Act Cap C21 LFN 2004 as
amended.
(ii) Where at the time of assessment, the ratios cannot for any reason be
satisfactorily applied, the deemed profits to be derived from Nigeria may be
PROFESSIONAL EXAMINATION II – MAY 2010
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computed on a fair percentage on the full sum receivable in respect of the
carriage of passengers, mails, livestock and goods shipped or loaded in Nigeria.
EXAMINERS‟ REPORT
The questions test candidates‟ knowledge of various aspects of the syllabus.
The questions were well attempted by the candidates.
Many of the candidates did not really understand the concepts of indirect tax,
similarities between Investment allowance in Petroleum Profits Tax Act Cap P13 LFN
2004 and Initial allowance under Companies Income Tax Act C21 LFN 2004,and
period covered by a Tax audit.
Candidates should endeavour to go through the syllabus thoroughly.
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SOLUTIONS TO SECTION B
QUESTION 1
Ladies and Gentlemen,
Commencing A Thriving Business in Nigeria And The Tax Implications.
It is my honour to be invited by your club to give a talk on the above subject matter,
which will be addressed as follows:
(a)
Legal Form of The Proposed Business.
(i)
Registering a business name confers on your business the sole
proprietorship status. It means that there is no distinct difference
between the owner and the management. The tax law recognises this as
such as the Total Taxable Income of the sole proprietor represents that of
the business name. However, the business name must be registered with
the Federal Inland Revenue Service for VAT purposes.
For the employees of the business, the business name must be registered
with the relevant State Internal Revenue Service for the purpose of Pay
As You Earn scheme. Withholding Tax is also expected to be deducted
and remitted by the business to the relevant tax authority.
(ii)
Registering the business as a partnership recognizes that the coming
together of the partners is for profit purposes. The position of the tax law
is that of recognition of the partners as separate individuals for tax
purposes. The issues of VAT, PAYE and Withholding Tax are also
applicable here.
(iii)
Incorporating a Limited Liability Company confers the status of a
separate entity on the business. In other words, it recognizes a
separation between the company, its owners and the management. The
tax laws recognize a separate life for the company compared with the
promoters of the company. The company is thus assessed to tax in its
name and not on the income of the promoters. The issues of VAT, PAYE
and Withholding Tax are also applicable here.
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(b)
How the profits of the business will be taxed on commencement.
(i)
The profits of a business name operator or a sole trader are taxed under
the Personal Income Tax Act Cap P8 LFN2004 as amended.
The basis of taxing the assessable profits of a business name operator or
a sole trader are as follows:
 In the first year of assessment, in which a trade or business is
carried on in Nigeria, the assessable profit is the amount of the
profits from the date of commencement to 31 December of that
year,
 For the second year of assessment the assessable income (if the
tax payer does not give notice of election in writing), is the
amount of the income of one year from the date of the
commencement in Nigeria of the trade or business, profession or
vacation;
 For the third and subsequent years, the assessable income is the
income of the preceding year provided the person does not give
notice of election in writing. Where the accounting period ending
in the second tax year is less than 12 months, the basis period
shall be the first twelve months of trade.
With commencement rule, it is possible for profit of the first
accounting period to be assessed to tax more than once, which is
referred to as overlap profit. No relief is available for overlap
profit in Nigeria.
(ii)
Profits made by a partnership are taxed as income in the hands of the
individual partners under the Personal Income Tax Act Cap P8 LFN 2004
as amended. Commencement provisions are also applicable.
(iii)
The Profits made by a limited liability company are taxed under the
Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria
(LFN) 2004 as amended to date. The commencement provisions are also
applicable here.
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(c)
How the profits of the business will be taxed on cessation
(i)
Where an individual permanently ceases to carry on a trade or business,
profession or vocation in Nigeria, the assessable income therefrom shall
be as regards the amount of the income of that year. As for the
penultimate year of assessment, the income will be either the actual
income of that year or the assessable income computed under the
general rules of the preceding year basis (PYB), whichever is higher.
The individual shall not however be deemed to derive assessable income
from such trade, business, profession or vocation for the year of
assessment following that in which the cassation occurs. The revenue
office has the option of choosing whichever is higher of the two.
(ii)
The same rules as above are applicable in taxation of profits of
partnership on cessation. The provision of option is also the same here.
(iii)
The same rules as in (1) are applicable to limited liability companies.
The provision of option is also the same here.
Where after the date on which a company has permanently ceased to
carry on a trade or business, any sum which would have been included
in or deducted from the profits of that trade or business if it had been
received or paid prior to that date, such sum shall be deemed to have
been received or paid by the company on the last day before cessation
occurred.
(d)
Option of Election by a Taxpayer and Revenue
This topic is being discussed separately to emphasise the major differences
between commencement rules and cessation provisions.
Under commencement rules, the taxpayer can elect to be assessed on actual
basis in the second and third years of assessment provided the notice is given in
writing. The election should be made within two years after the end of second
assessment year or within one year of the end of the third assessment year. The
tax payer can revoke the earlier election within one year of the end of the third
assessment year, where necessary.
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Under cessation, the Revenue has the option of choosing the assessable profits
of the penultimate year between the higher, of the assessable profits based on
the actual and preceding year basis.
Ladies and Gentlemen, I am most grateful to be privileged to be with you on
this occasion. While thanking you for your patience and understanding, I do
hope that you have gained tremendously from today‟s talk. Questions are
however welcome on issues not too clear to you.
Thank you.
EXAMINERS‟REPORT
The question tests the ability of candidates to talk on professional issues in a social
gathering.
It also tests candidates‟ ability on legal form of business concerns, the tax
implications of the different businesses and taxation of profits with special emphasis
on commencement and cessation rules. Options between taxpayers and Revenue
Offices are also tested.
Most of the candidates attempted the question.
Candidates‟ performance was below average.
Some of the candidates were unable to distinguish between registration of different
forms of businesses and their tax implications.
Candidates are advised to have a better understanding of the different forms of
businesses and their tax implications.
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QUESTION 2
Empire Nigeria Ltd.
(a) Computation of Minimum Tax Liability
2009 Assessment Year
(a) (i) 0.5% of Gross Profit i.e .5% of N35,000,000
(ii) 0.5% of Net Assets i.e .5% of N300,000,000
(iii) 0.25% of Paid up capital i.e 25% of N140,000,000
(b)
N
N
175,000
1,500,000 1,500,000
350,000
0.25% of Turnover i.e N500,000
0.125% of N240,000,000 – N500,000
1,250
Note:
The highest above is N1,500,000,which will be added to the
figure using turnover.
(b)
Computation of Company‟s Income Tax Liability
2009 Assessment Year
Assessable Profit
Deduct
Unrelieved capital allowances bfd
Current year capital allowance
N
600,000
950,000
Total Profits
Tax on N550,000 at 30%
Education Tax 2% of N2,100,000
Total Tax Liability
(c)
299,375
1,799,375
N
2,100,000
(1,550,000)
550,000
165,000
42,000
207,000
Direct Tax This form of tax is assessable profit directly on the tax payer who is
required to pay tax on his property, income or. They are paid mainly on income,
capital and property.
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Indirect Taxes. These taxes are imposed on commodities before they reach the
consumer, and are paid by those upon whom they ultimately fall, not as taxes,
but as part of the selling prices of the commodities.
Direct Taxes
Personal Income Tax
Capital Gains Tax
Petroleum Profit Tax
Companies Income Tax
Education Tax
Withholding Tax
Indirect Taxes
Value Added Tax
Sales Tax,
Customs Excise Duties
Goods and Services Tax
Customs Import Duties
Stamp Duties.
Tutorials
There was no need for limiting capital allowances to 2/3 because the question
was specific on this.
EXAMINERS‟REPORT
This question tests candidates‟ knowledge of minimum tax liability, computation of
assessable profits and understanding of Direct and Indirect taxes.
The question was attempted by many candidates.
Candidates‟ performance was below average.
Most of the candidates display lack of understanding of minimum tax and indirect
taxes. Some disregarded the instruction on restriction of capital allowance.
Candidates should endeavour to understand issues involved in the computation of
assessable profits and other related issues thoroughly.
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QUESTION 3
(a)
PEE DEE CONCEPT LIMITED
COMPUTATION OF VAT PAYABLE
Cost of the site (1500 x 6 )
Add: Commission 5½% of N9,000
VAT @ 5% to FIRS
(b)
9,000
495
9,495
475
VATABLE PERSON
A person that deals in Vatable Goods and Services
Examples of Vatable persons are:
(i)
(ii)
(iii)
(iv)
(v)
(c)
N
A limited liability company
A partnership
A sole trader
An individual
A club dealing in vatable goods.
DETAILS TO BE FURNISHED IN A VAT INVOICE
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
Suppliers Tax identification Number (TIN)
Name and address of purchaser
Vat registration number
Amount payable before Vat
The date of invoice
Tax charged
Rate applied
Goods supplied
Net amount payable after Vat
Gross amount of the Transaction.
EXAMINERS‟ REPORT
The question tests the candidates‟ understanding of VAT, Vatable person, Vat invoice,
relevant authority in VAT.
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It was attempted by many candidates.
Candidates‟ performance was average.
Some candidates that attempted the question could not get the computation
right. Many did not understand the issue of Vatable person whom they described as
agents of VAT.
Candidates are advised to get acquainted with the provisions of the ACTS.
QUESTION 4
(a)
(b)
INTEGRITY PETROLEUM LIMITED
Schedule of Stream of Payments of the Tax Liability of N89,500,000 for 2008 Tax
Year.
Date
Basis of Computation
March 2008
April 2008
May 2008
June 2008
July 2008
August 2008
September 2008
October 2008
November 2008
December 2008
1
/12 of N84,000,000
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
1
/12 of N84,000,000
Final tax i.e actual
Tax already paid i.e
N89,500,000 – N63,000,000
1
Amount Paid
N
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
26,500,000
N89,500,000
The expenses generally referred to as tax offsets are:
(i)
(ii)
(iii)
Investment tax credit
Royalties on chargeable oil won and locally disposed off
Non-Productive Rents, that is, any rent which is deductible but it
is not deducted from any royalties under an oil prospecting license
or oil mining lease
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(iv)
All sums whose liability was incurred by the Company during the
period to the Federal Government of Nigeria by way of Customs
and Excise Duties levied in respect of plant storage tanks,
pipelines, tools, machinery and equipment, essential for use in the
company‟s operations.
They have become part of S. 10 and S.17 of Petroleum Profits Tax
Act deductions.
(c)
Joint Venture Contracts
Under the Petroleum Profit Tax Act Cap P13 LFN 2004 as modified by MOU 2000
and the letters from the minister of Petroleum Resources, this is a joint venture
between the NNPC and the operators for which NNPC meets its equity
contribution through the “Cash Calls” and the companies provide the
counterpart funding.
The Companies lift the crude in the ratio of their equity participation. A “tax
inversion penalty” clause was introduced because of criticism on the fact that
this regime is disincentive to cost minimization. Savings by the Government are
countered by the Transfer Pricing and Avoidance Scheme introduced.
(d)
Royalties‟ Rates Under The Production Sharing Contract
Up to 200 metres water depth
162/3%
201 – 500 metres water depth
12%
501 – 800 metres water depth
8%
801 – 1,000 metres water depth
4%
Above 1,000 metres water depth
0%
EXAMINERS‟REPORT
The question tests candidates‟ understanding of Petroleum Profits Tax Payments
schedule, Joint Venture Contracts (JVC) and Royalties under Production Sharing
Contract.
Many candidates attempted the question.
Candidates‟ performance was average.
Candidates are advised to have a better understanding of the areas tested.
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QUESTION 5
(a) i
LAZARUS COMPANY LIMITED
COMPUTATION OF CHARGEABLE GAIN
N
1,850,000
(250,000)
1,600,000
Sales proceed
Less: Selling expenses
Net sales proceed
Less: Cost A x C
A+B
1,850,000
x 1,200,000
1,850,000+750,000
Chargeable gain
(ii)
LAZARUS COMPANY LIMITED
COMPUTATION OF CAPITAL
GAINS TAX
Chargeable gains
Capital Gain Tax @ 10%
(iii) Cost of remaining asset
=
=
(853,846)
746,154
N
746,154
74,615
1,200,000 - 853,846
N346,154
Note: Where A = Value of part disposed of
B = Value of part not disposed of
C = Total cost of the asset.
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(b)i
Rollover Relief
Where a company carrying on a trade or business disposes an asset used in the
business and applies the proceeds in acquiring new assets of the same class as
the old ones which are to be used in the business, a relief is granted. The
company will be entitled to deduct the gains arising on disposal from the cost of
the new asset. Full relief is obtained only when the total consideration for the
sale of the old asset is applied in the acquisition of the new asset or assets of
the same class, in full. Partial relief is obtained where part of the sales
consideration of the old asset is applied in the acquisition of the new asset. The
amount is restricted to the applied amount.
(ii)
Allowable expenditure:
 Any expenditure wholly and exclusively incurred on an asset for the
purpose of enhancing its value and reflected in its state or nature at the
time of disposal
 Any expenditure that has not wasted away before disposal, hence
extensions and improvements to property are allowable but repairs,
maintenance and redecoration are not. Cleaning a picture is allowable
but insurance cost is not.
 Any expenditure wholly and exclusively incurred in establishing,
preserving or defending the title or right over an asset.
EXAMINERS‟REPORT
The question tests candidates‟ understanding of Capital Gains Tax, market value in
calculating gains, allowable expenses and Rollover relief.
The question was well attempted by the candidates and the performance was average.
The candidates did not exhibit good awareness of the specific provisions of the Acts.
Candidates are advised to endeavour to understand the specific issues in the ACTS.
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QUESTION 6
BARABAS AIRLINE LIMITED
(a)
(i)
Computation of Total Profits of the Non-Resident Company
Income Derived in Nigeria
Passengers flight from Nigeria
Cargo loaded into aircraft from Nigeria
Total
Computation of Global Adjusted Profit of the
Company
Net Profit
Add Back:
Depreciation
General Provision
Disallowable expenses
N
464,500
50,600
100,000
Adjusted Profit
N
12,800,300
11,750,160
24,550,460
N
122,151,800
615,100
122,766,900
Note:
ii
Adjusted Profit Ratio 122,766,900 x 100 = 97.3%
126,185,460
Calculation of Tax Liability
Assessable profit = 97.3% x 24,550,460 =
Less capital allowance 110% x 464,500
Total Income
Income Tax Liability at 30%
iii
23,887,598
(510,950)
23,376,648
7,012,994
Calculation of Education Tax
Education Tax
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NIL
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Education Tax Being a non-resident company, it is not liable to education tax.
Education tax is payable only by companies registered in Nigeria according to
Section 1(2) of the Education Tax Act 2004 CAP E4 LFN as amended.
b. i
Small Companies – Small companies with turnover of not more than N1 million
in the first three years shall be taxed at reduced corporate tax rate of 20%. Also,
dividends received from small companies in the first five years shall be
exempted from tax.
ii
Wholly Export Business – Dividends from investments in wholly export oriented
businesses are exempted from tax. Also, the profit of a company whose
products are exclusive input for the manufacturing of goods for export are
exempted from tax.
iii.
Unit Trust – Dividends received from a Unit trust are exempted from tax. Also,
gains on disposal of investments in a unit trust are exempted from Capital Gains
Tax, provided the proceeds are reinvested.
(c)
(i)
Powers and functions of the Federal Inland Revenue Service Board are to :
Provide the general policy guidelines relating to the functions of the Service;
(ii)
Manage and superintend the policies of the Service on matters relating to the
administration of the revenue assessment, collection and accounting system
under the Act or any enactment of the law;
(iii)
Review and approve the strategic plans of the Service;
(iv)
Employ and determine the terms and conditions of service including
disciplinary measures of the employees of the Service;
(v)
Stipulate remuneration, allowances, benefits and pensions of staff and
employees in consultation with the National Salaries, Income and Wages
Commission; and
(vi)
Do such other things, which in its opinion, are necessary to ensure the efficient
performance of the functions of the service under the Act.
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EXAMINERS‟REPORT
The question tests candidates‟ understanding of the computation of Total Profits of a
Non-Resident Company in the Airline business with emphasis on income tax and
education Tax.
The questions was well attempted by the candidates.
Candidates‟ performance was below average.
The candidates displayed lack of understanding of computation of the income tax of
non-resident companies in the Airline industry.
Candidates are advised to read and understand the contents of the syllabus very well.
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ICAN/101/Z/4
EXAMINATION NO...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL EXAMINATION III – MAY 2010
MULTI-DISCIPLINARY CASE STUDY
Time allowed – 2 hours
SECTION B – READ & DIGEST
CASE STUDY
ACENCO TEA PLC
BACKGROUND
Acenco Tea Limited was incorporated in 2000 with a share capital of 750,000 ordinary
shares N1.00 each. The company imported and marketed tea brands: Life safe, Life
sure, and Life secure. The directors of the company were Messrs Bamidele and Korede.
They considered themselves as good “Jolly friends” and not as employees of the
company.
For this reason, there were no job descriptions, administrative procedure or
segregation of duties. The company grew considerably and by 2006, brand loyalty to
its products had been achieved, and it had established a strong market share in the
country. The sales revenue had reached N20 million within five years when three
different brands of tea from different countries had been imported and blended to
make its products. Due to the tremendous growth, the corporate structure had become
more elaborate as more professional managers were employed to meet the
management requirements and other needs of the company.
Bamidele and Korede were the only shareholders and Executive Directors of the
company and they related as friends and decisions were taken at informal meetings.
This process had always taken most of their time, while other issues were denied
serious consideration before decisions were taken.
Mr. Simon, a friend of Bamidele, who came to visit him in his office, met the duo in a
meeting and he had to wait for some hours before getting their attention. When Simon
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met him, he could not hide his opinion about the time spent at meetings and he said
“sometime, along the line, both of you have to make a decision as to whether you
would continue to run this company like a real live and profitable business or you are
going to continue to hold eight-hour staff or friendly meetings every Wednesday and
dwell on philosophical attributes of tea bags”. This opinion expressed, described the
problem of informal organizational structure of the company.
In 2006, Korede left the company for other business ventures but remained a
shareholder and director. The structural development in the company had grown
beyond the directors and each had to make a decision about his interest in the
company. Korede had become disenchanted with the changing corporate structure.
Bamidele, however, adjusted better to Acenco‟s elaborate structure and blended his
role of corporate executive with his free spirited outlook to life.
Acenco Tea Ltd became the largest Nigerian importer of branded tea in the country by
2005. The number of employees had risen to 200 and the company has relocated its
office to Ogba Industrial Area, Lagos. It offered its employees a profit-sharing plan and
health insurance package. It sought to relieve boredom in the production department
through participation in quality circles and job rotation. This was just a way of
appreciating the loyalty and spirit of devotion of the workers. Bamidele was concerned
with designing an organization that has good intention for almost everybody without
discrimination between management and workforce. Bamidele also left the company
two years later to devote his personal time to a number of non-profit, and socially
conscious organizations.
Fehinbu, a financial specialist, was employed to replace Bamidele and he promised to
effect few changes in the company. He said, Brisko Plc bought the best small
companies in Nigeria. The only thing I intend to change is “the small”. However,
Brisko Plc pushed Acenco Tea Ltd into new product lines and sought to expand the
company‟s activities into international markets and the other changes were not
successful. Acenco‟s diversification into coffee drinks was also not successful. Brisko
Plc‟s approach to employees also angered long-serving employees, who objected to
Brisko Plc hiring an undercover agent to investigate suspected drug use in Acenco Tea
Ltd. Following an aborted buyout by Tinton Tea Ltd in 2008, the management of
Acenco Tea Ltd acquired the former.
In 2010, Bamidele returned to the company confessing that he missed the corporate
world that he had worked so hard to build. He promised to concentrate on marketing
and product development and to use environmentally appropriate product designs
that would eliminate the use of strings and tags on most tea bags. He truly did his best
to restore the previous “hang loose” atmosphere of the workers by installing showers
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for employees who biked to work and a track for noon time runners and roller bladers.
He encouraged a return to the corporate uniform of old-jeans and T-shirts.
It has become necessary from early “family and friends” days to the present day to
effect drastic changes in the company‟s structure. The founders realized the links of
“hands-on” management quite early in the company‟s history, and after Brisko Plc‟s
acquisition of Acenco Tea Ltd, more changes occurred. The company was divided into
more units when it became larger. Managers and other specialists were employed and
responsibilities were divided among them and new levels and sub-units were created
to handle specialized functions in the organization. The company established
methods, procedures and structures that differed from those of other subunits because
each subunit had a different task to perform.
The structures of the company as reviewed, have been completed and the
management was determined to continue to control the larger part of the market. It
also planned to expand its operations to the neighbouring countries in which its
brands of tea could be marketed. This corporate policy was based on the belief that an
organization‟s size determines the number of persons employed. Sales volume,
financials or physical assets and geographical spread are also indications of an
organization‟s size.
MANAGEMENT STRUCTURE AND THE EXECUTIVES
Since Bamidele resumed at Acenco Tea Ltd after its acquisition by Brisko Plc, and
Fehinbu had earlier been hired as the Chief Executive, there was a problem as to who
should be in charge of the implementation of the planned structural development. It
was believed in some quarters that since Acenco Tea Ltd had been acquired by Brisko
Plc, Bamidele had no business being its Chief Executive again.
Fehinbu, therefore, sent a memo to Kekereowo, Chief Executive of Brisko Plc, to clear
the issue. In reply, Kekereowo explained that Brisko Plc acquired only 49 percent of
the share capital of Acenco Tea Ltd, which belonged to Korede. Bamidele refused to
sell his own shares representing 51 percent of Acenco Tea Ltd capital. Kekereowo and
Bamidele were friends and Bamidele did not object to the acquisition of 49 per cent
when Korede decided to sell his shares. Fehinbu was however advised to relinquish
the position of Chief Executive to Bamidele, which he did, and became the Deputy.
Both worked together amicably and the cooperation between them enabled the
expansion policy of the company to be implemented successfully. Bamidele said to
Fehinbu “You are the Chief Executive in practical reality because you will see to the
effective implementation of the expansion policy of the company and I trust, you will
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not disappoint us.” Fehinbu said in reply “I sincerely appreciate the confidence you
repose in my ability, and I promise not to disappoint you and Kekereowo.” Now that
the management problem had been resolved, the following proposals for
developmental and expansion programmes were submitted by the management to the
Board of Directors of Acenco Tea Limited.
FINANCIAL POLICY
Acenco Tea Ltd planned to raise funds from the Capital Market to finance its expansion
and structural development. As a prelude to the implementation of the proposal, the
company applied to the Corporate Affairs Commission for approval to change its name
to Acenco Tea Plc as a public limited liability company. This process was completed
without much delay and the application was approved. The present share capital of
750,000 ordinary shares of N1.00 each was altered to 1,500,000 ordinary shares of
50kobo each. The appropriate resolution was passed at the Board of Directors‟
meeting.
The number of shares later was increased to 10 million ordinary shares of 50kobo
each. It also applied to the Securities and Exchange Commission and Nigerian Stock
Exchange for approval to issue 10 million ordinary shares at N8.00 each. Appropriate
approvals were granted to the company to issue a prospectus for the public offer of the
shares. The shares were oversubscribed by 20% and the issue cost was agreed to be 5%
of the total amount realized.
PRODUCTION OF LIFE RICH BEVERAGE
Acenco Tea Plc proposed to develop, produce and market beverage drink by producing
Life Rich, a kind of beverage that enriches the life of the consumers. Life Rich has been
developed from the Acenco Tea Plc Research and Development department under the
company‟s Chief Nutritionist, Mrs. Jemgbo. The pilot market test was successful, based
on the acceptance rate of 85 percent. Earlier, the market survey had been carried out
and the response was equally encouraging. The cost of implementation of the
production of Life Rich Beverage was given as follows.
Plant and Machinery
Advertising/Marketing
Research and Development
Registration of Life Rich Drink
Market Survey
N100 million
N 25 million
N 15 million
N 5 million
N 5 million
N150 million
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EXPANSION OF OPERATIONS
Acenco Tea Plc planned to expand its marketing operations to neighbouring countries
and to market its brands of Life Tea in those countries. The countries of Benin, Togo
and Ghana were selected. To implement this proposal, it incorporated three companies
with share capital subscribed by the citizens of those countries with Acenco Tea Plc as
the parent company.
In furtherance of the proposal to expand its market to the neighbouring countries, the
management appointed Babakekere & Co (Solicitors) who have branch offices in each
of the selected countries to incorporate subsidiaries in the respective countries. The
following companies were accordingly incorporated, Acenco Tea (Benin) S.A., Acenco
Tea (Togo) S.A and Acenco Tea (Ghana) Plc.
The subsidiary companies imported tea brands and Life Rich Beverages (see Appendix
II). Acenco Tea Plc could not receive the full export value due to unexpected bill of
exchange problems which occurred from the initial order documents. It was difficult to
transfer all the proceeds into Nigeria. The group‟s management, therefore, instructed
the Chief Executives of the subsidiary companies to consider the amount that could not
be transferred as a loss. Total amount to be considered as a loss was shown in
Appendix III based on the standard cost of production (Appendix V).
MARKETING EXPANSION IN NIGERIA
Acenco Tea Plc opened more branches in major cities and towns in the six
geographical zones of the country. Each branch is managed by a branch manager and
a regional manager controls three branch managers. Implementing this proposal
required an effective organization structure and adequate capacity building.
In view of this, management recruited twelve branch managers and four regional
managers. They were sent for training in information technology, because they would
do more of electronic transactions, tele-conferencing and less travelling between
branches, regional offices and group office, as soon as the branches and regional
offices had been established. Each branch activity or performance would be by
electronic transactions and would be linked to the regional offices by computer
systems. All transactions, including sales, orders, stock level, personnel and other
transactions would automatically and simultaneously be in the branch and the
regional offices, while all regional offices transactions would be captured by computer
central information systems.
Expansion proposals of the company included the acquisition of some important
marketing companies in the beverage industry, which would enable the marketing
team to push into market, the quantities of Life Rich Tea Beverage that would be
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required and which would also enable consumers to have access to the product
without difficulties.
Management, therefore, needs to identify companies that would be acquired without
much difficulties. Fehinbu and Marketing Director, Ojulowo, had a meeting to compile
a list of possible companies for acquisition that could be presented to the Board of
Directors. They concluded on two major distribution and marketing companies that
were distributing the products of the competitors. The companies have distribution
networks that Acenco Tea Plc would need for marketing its products. The companies
were: (a) Distribution Network PLC and (b) Central Distribution Limited. Insider
information concerning performances and operations were collected and analysed.
They recommended Distribution Network Plc as the appropriate candidate for
acquisition. Management, therefore, recommended Distribution Network Plc to be
taken over. The Board of Directors met and decided to go ahead with the acquisition of
the company. The Board‟s decisions were communicated in a letter of offer to the
Board of Distribution Network Plc. The offer was five shares of Distribution Network Plc
for three shares of Acenco Tea Plc. The Board of Distribution Network Plc accepted the
offer and recommended that the shareholders should accept the offer. The Balance
Sheet of Distribution Network Plc is on Appendix IV.
For the implementation of the Information technology project, Tunder, Kehinde &
Associates (Information Technology Consultants) were contracted to link all computer
systems to a reputable internet service provider, which would enable the managers to
become more efficient and save the travelling time from branch offices, regional
offices and group head office for information that could be supplied or obtained
through computer systems.
An innovation was introduced into the systems by which managers would participate
in tele-conferencing without leaving their locations or offices. Tele-conferencing can
be “closed” or “open.” “Closed” tele-conferencing is for selected persons that are
connected to the system to participate while “open” teleconferencing entails
participating with a password to the computer.
OPERATIONAL CONTROL
The management had reviewed the developmental and expansion policies as
illustrated in the previous paragraphs and was satisfied with the results and would
want effective control systems to be established to ensure efficiency in the
performance of all units in the group.
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It was decided that Director, Group Operations, should be responsible for operational
controls that involved production, sales volume, distribution, shareholding,
information technology systems, efficient utilization of workers‟ time or hours at work
and other cost related operational problems.
The usual motivation for designing operational systems is to increase the efficiency,
accuracy and quality of job performance. Achieving these objectives depends on
effective communication. Communication systems include the use of telephone, fax
machine, electronic mail and tele-conferencing.
The installation of these
communication systems was to increase the transmission, speed, accuracy and reduce
human traffic.
Advanced Manufacturing Technology (AMT), a part of the communication system as
envisaged, is a family of technologies that include computer-assisted design and
engineering systems, material resource planning systems, automated material
planning systems, automated materials handling system, flexible manufacturing
systems and computer integrated manufacturing systems. Just-In-Time (JIT) system
and Total Quality Management are two such systems. JIT is a fundamental principle
that can be applied anywhere in the cycle of material flow within any manufacturing
environment. Inventory also requires space and insurance. A classic problem in
manufacturing is to balance the cost of carrying inventory against the cost of being cut
off stock. JIT approach to the inventory problem is to ensure that the needed materials
arrive at the place they are needed just-in-time to be used in the production of
finished products. In view of its importance, the Production Director of Acenco Tea Plc
group instructed all Production Managers in the group to adopt Just-In-Time system.
Inventory must neither be too high nor too low, but must ensure that orders are of
optimum sizes and must arrive just-in-time for production.
Based on the above instruction, Jeff Mosetan, the Production Manager, requested for
the purchase of 7,200,000 units of product A. The ordering cost was N1,250 per order
and the carrying cost of inventory was 20% of the ordering cost. He, however, was
mindful of the optimum quantities that could be ordered. The cost price of product A
was N150 per unit.
REPLACEMENT OF EXISTING MACHINE
The successful acquisition of Distribution Network Plc and the establishment of
subsidiary companies in the neighbouring countries opened a wider market
opportunity for the distribution and sales of the branded tea and beverages of Acenco
Tea Plc nationally and internationally. It was realized that the major machine
currently in use for production would be due for replacement if the expansion was to
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be undertaken by the company. The equipment/machine was ZK105 which was
purchased ten years ago and its performance may not meet the projected demand.
ZK105 machine had become expensive to maintain and Fukoye the Chief Engineer was
determined to replace it. The components of the equipment were a collection of
electronic components which were “attached” to a printed circuit board and when
tested, the process produced, not only a component, but a report on its characteristics.
It required little labour for its operation but its input and output materials handling
systems had often caused problems. The Chief Engineer, had proposed to replace it
with the latest equipment, the ZK107. This equipment would save on materials
handling and labour and would produce a more consistent output for a wider product
range. Engineer Fukoye did his homework and also the analysis on the proposed new
equipment and though he knew the likely reaction of Mosetan, he dared not present
the proposal to him without proper analysis and appraisal.
Engineer Fukoye decided to pre-empt Mosetan‟s reaction by asking for his opinion on
the proposal to replace ZK105 machine. He, therefore, went to his office and after the
usual social chat, he raised the issue of the replacement of the equipment again.
Mosetan was not surprised because Fukoye‟s predecessor had unsuccessfully tried to
convince him on two occasions to replace ZK105 equipment with ZK107. He reached
out for a piece of paper and in a studious mood, wrote on it, the cost of equipment,
installation, etc which were estimated to be N3,850,000.
Fukoye was surprised and felt that he had been outsmarted by the Production
Manager and decided to explain the benefits that would be derived, if the equipment
should be replaced. Fukoye did not argue, but wrote and listed the benefits and these
included:
N
(i)
Annual savings in maintenance and downtime
400,000
(ii)
Annual savings in labour costs
350,000
(iii) Annual scrap and quality non-conformance savings
300,000
On further interrogation, Fukoye opined that the payback period would be less than
five years which Mr. Mosetan wanted to be convinced of its practicability.
Mosetan then replied “I am not bothered about all you have submitted because it
would be your responsibility to justify the forecasts and projections and you will be
held accountable for your failure.”
“In view of your insistence to replace the equipment, I will advise that you prepare the
capital expenditure budget, if you are confident about the proposal and submit to the
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Divisional Finance Director for approval and then, we will see what would be the
outcome.”
Fukoye has discovered from the conversation he had with the Production Manager that
he had to do his homework well if he wanted to succeed.
He completed the capital expenditure budget as advised and submitted to the
Divisional Finance office for consideration and approval. He was welcomed by the
Divisional Finance Director like a stranger from a distant land, creating a certain
curiosity. He eventually found Mr. Poko, a young-looking Chartered Accountant who
specialized in project analysis and appraisal and they settled down to a real discussion
about the capital expenditure budget.
Poko, after due observation, said “I am sure, this is a good job with good idea but you
have missed a few tricks in setting out the argument”. He went further and said” the
payback period is only a rough guide and for this reason, we usually use the net
present value to appraise capital projects”. Poko explained and continued, “as you
have not built inflation into your forecasts, we can use an inflation free rate of 20% for
this class of capital expenditure and a ten year planning horizon”. “You will however
defend the costs and the benefits of the estimates” he warned Fukoye. Poko further
observed and said “I noticed that you have not found savings in inventory or
disadvantage in energy consumption which in my opinion were also important”. If the
observations of Poko were carefully taken into consideration, it would be necessary to
justify whether the rate of 20% compares favourably with the likely internal rate of
return on the project.
In conclusion, no decision could be taken on the replacement of ZK105 machine with
ZK107 until all the above facts have been taken into consideration.
CASH MANAGEMENT AND CONTROL
Mr. Fehinbu, Deputy Chief Executive and a financial specialist was disturbed by the
incidence of financial mis-statements that were discovered in the accounts of
Distribution Network Plc. He decided to reorganize the cash management control
system in the group‟s operations and accordingly instructed Mr. Kingsley, the Group
Finance Manager, to design a cash management control system in the group‟s
operations that would ensure efficient cash management in the organization.
Kingsley, in his memo to all financial managers in the group, explained to them what
cash management control system would involve and how it would operate. Cash
management is an important function of the Financial Manager. He has responsibility
PROFESSIONAL EXAMINATION II – MAY 2010
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to establish efficient cash management team that would work with business to obtain
good results, and avoid dealing with any bank with poor customer services. Inefficient
cash management would result into loss of revenue through excessive bank charges,
inefficient services by the banks, idle cash which would reduce the profits of the
company.
It is therefore necessary to monitor cash management portfolio and always review the
services provided by the banks at intervals or at least once in a year, in order to find
and evaluate answers to some key questions that could lead to improvement in
services and reduction in bank charges.
It is equally important to give adequate information about the problems and
complexity of the business or activities as well as the operations management of the
company. You must ensure that banks could offer the company the full range of
banking services at competitive charges.
The Financial Manager has the responsibility to ensure that fund transfers are handled
carefully and that the outgoing funds transfers would appropriately be timed to allow
for maximum use. He should consistently ensure that all cheques deposited in the
banks are cleared within the shortest business working days to improve the liquidity of
the company. It should be realized that, if any of the company bankers makes frequent
or repetitive errors in processing electronic transfers, cheques, drafts, or handling of
documentation, it would be necessary to inform the appropriate bank management to
avoid undue charges to the company‟s account.
In order to ensure efficient management of funds, an efficient cash management
system should be established for the company by its management through the
following actions:
-
Make accurate forecasts of cash inflows and outflows and where appropriate,
apply the excess funds to the needs of the company.
Set and monitor the borrowing limits for the branches, subsidiaries and
associate companies and determine the financial parameters of high and low
financial funding.
Due to large amount of sales that would result from the expansion programmes, a new
cash management control system would be established to ensure that all sales receipts
are paid into one main receiving bank account, which would be opened in all
nominated banks. The accounts would be designated A, B and C. Accounts B and C
would only be used for expenses to be incurred by the Group office, subsidiaries and
branches.
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The new cash management control system requires that approval of transfer of funds
from Account A to any account would be effected by a letter signed by the Chief
Executive with Group Finance Officer or Group Finance Director and Group Treasurer.
The letter would be delivered to the Manager of the bank concerned instructing him to
transfer the amount in question from Account A to B in case of Acenco Tea Plc or from
Account B to C in case of Distribution Network Plc and branches of Acenco Tea Plc.
As a rule, no cheque should be drawn on Account A, but all withdrawals from Accounts
B and C should be by cheques. Each company or branch in the group must therefore
prepare its monthly cash forecast not later than two weeks before the 1 st day of the
month following and it must be received by the Group Treasurer not later than 25th of
each month to ensure smooth operations in the following month. For efficient
operations, it had been recommended that the Cash Management Control System be
computerised.
STRUCTURAL AND DEVELOPMENTAL PROGRAMMES
Acenco Tea PLC had completed the structural and developmental programmes and
was ready to initiate a strategic development plan that would make the company one
of the largest tea and beverage producers in Africa. For this purpose, it would require
a restructuring of its share capital through the appropriate financing programme. The
Managing Director therefore set up a committee which had the Group Finance Director
as Chairman, Director of Operations and Production Manager as members. The
committee, after several meetings, recommended the following financing options for
the group‟s expansion:
(a)
(b)
(c)
(d)
Rights Issue;
Issue of 5% Preference Shares;
Issue of 5% Debenture Stock; and
Increase in the production of Life Rich Beverage to 300,000 tons per annum.
(Appendix II).
Option (d) above, would require the purchase of two new ZK 108 machines that would
make production more efficient with the following benefits per month in standard cost
of production of Life Rich Beverage.
(i)
(ii)
(iii)
(iv)
Reduction in divisional expenses
Savings in direct material usage
Savings in group office overhead
Savings in direct labour
25.5%
10%
20%
25%
PROFESSIONAL EXAMINATION II – MAY 2010
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(v)
(vi)
Savings in scrap value
Savings in indirect labour
5%
25%
Life expectancy of the machines:
Expected rate of return
10 years
20%
Cost of ZK108 machine was estimated to be N4,500,000 each. The committee
recommended that the proposed new factory should be built along the Lagos-Sagamu
Express way. The cost of the factory was estimated at N150 million. The land was
leased for 99 years from Ogun State Government and the following payments would be
made to the government and its agencies:
* Factory building plans approval fee
* Surveyor General Office
(Delineation of plot fee)
* Governor‟s Consent fee
* Lease Rent for 25 years
* Miscellaneous expenses
N5.0 million
N1.5 million
N0.5 million
N2.75 million
N1.2 million
The management accepted the recommendation by the committee and in order to
finance the projects, it recommended to the Board of Directors, the following financing
options for approval:
(a)
Increase share capital to 100,000,000 ordinary shares of 50 kobo each;
(b)
Offer a Rights Issue of 75 million ordinary shares at N5.00 each;
(c)
Issue N10 million 15% Preference shares of N1.00 each; and
(d)
Issue N5 million 7½% Debenture stocks.
The cost of issue of 15% Preference shares and 7½% Debenture Stock would be 5% on
the amount realized and 5½% on the Rights Issue. The recommendations were
accepted and approved by the Board of Directors and the appropriate resolutions were
passed at its meeting. It also approved the estimated cost of the factory buildings as
N150 million. The relevant approved fees were to be paid to government and other
agencies.
Acenco Tea PLC decided to build its new factory on the plots allocated by the Ogun
State Government along Lagos–Sagamu Express way. It applied for the approval of the
factory building plans from the Building Approval Department of the Ministry of Lands
and Housing. Sebikan was the Third party officer of Acenco Tea Plc and he was
appointed to follow and see through the eventual approval of the building plans. He
submitted the building plans and other relevant documents for approval to Owonimo,
the officer in charge. On the receipt of the building plans; he said “good soup requires
PROFESSIONAL EXAMINATION II – MAY 2010
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money” and your company must be prepared to spend money before approval can be
granted. Sebikan replied, “It would not be a problem as long as all the money spent
will be covered by official receipts.”
Owonimo collected the factory building plans and other documents, and advised
Sebikan to call him later to know the progress. Sebikan had a serious responsibility to
discharge which was the approval of the factory building plans.
He called Owonimo a week later to know the progress on the application he submitted
the previous week. He replied and said “I told you earlier, you have to grease palms
before processing the building plans and I have been waiting for you to respond”
Sebikan then asked him to name his price and Owonimo said “N1.5 million will not be
too much for your company”. Sebikan then replied and said “I will report to the
management for appropriate action”.
Acenco Tea PLC was a pioneer member of the “Don‟t Give and Don‟t Take Bribe
Initiative”, a Non–Governmental Organization (NGO) that was established to fight
corruption in the business sector. Sebikan was not sure whether the management
would accede to paying bribe to Owonimo. However, he reported the demand to the
Fehinbu, Deputy Chief Executive Officer, who said “I doubt whether the Board of
Directors would approve payment of bribe, because the company is a pioneer member
of “Don‟t Give and Don‟t Take Bribe Initiative.” He said, “The Board of Directors would
have to choose between paying bribe and allowing the job to take off in good time or
be delayed, while the cost would be mounting daily”. He brought it up at the Board
meeting and it was discussed and agreed not to be recorded as discussed. It was
agreed that the interest of the company was paramount and it has to be protected,
and in view of this situation, the bribe should be paid but it should be entered in the
books as miscellaneous expenses.
The construction of the factory building was temporarily stopped because the
community protested against the company‟s lack of social responsibility. The
community claimed that the earthen road was destroyed by the contractor‟s heavy
equipment and consequently, farmers could not bring their products to the market.
Furthermore, the community wanted assurance that their environment would be
protected against effluent waste.
Sebikan was asked to meet with the representatives of the community. The meeting
was held and the community agreed to allow the construction to continue on the
conditions that:
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(a) third party insurance would be taken out to compensate any one that might suffer
from the effluent wastes;
(b) the company would reconstruct the roads damaged by the heavy equipment;
(c) a scholarship scheme would be introduced for the villages‟ brilliant indigent
students in secondary and tertiary institutions; and
(d) the company would sponsor Ilosiwaju Day festival each year.
Sebikan reported the decision of the meeting to the Chief Executive who in turn
reported to the Board of Directors. The Board of Directors, at one of its meetings,
approved the demands by the community because they felt socially responsible to
them. This would cost the company about N10 million each year.
Acenco Tea Plc completed the factory buildings and all machines and equipment were
installed. Production commenced as planned and capacity increased by 80 percent.
The increased capacity created marketing problems which had to be resolved as
quickly as possible to avoid a glut of finished products which would occupy the
warehouse and might necessitate hiring additional warehouses outside the factory
premises with the consequence of increasing the carrying cost of finished products.
MARKET LEADERSHIP
Acenco Tea Plc being the largest tea and beverage manufacturing company in Nigeria
and West Africa, aimed at market leadership of the tea and beverage market. It
therefore needs to provide a marketing strategy by which it could dictate the trends in
the market in terms of price and supply.
Market leadership is a position where it would directly or indirectly dictate or effect a
change in demand or supply in a market on its own through the manipulation of price,
quantity and marketing strategies. It could dictate the price of its products or
condition the behavior of the consumers in the product market.
Absolute market leadership could be possible if absolute monopoly could be achieved
in the case of a large-scale company like Acenco Tea Plc. In view of its bid to assume
market leadership, it planned to consolidate its control in the market by acquiring
Tesco Tea Plc. When the acquisition had been effected, Acenco Tea Plc group would be
able to control between 85% and 90% of the tea and beverage market in Nigeria and
West Africa. It therefore appointed Success Bank Plc as its financial adviser for the
takeover bid that would be considered.
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Tesco Tea Plc controlled 90% of the Ghana region market of tea and beverage. The
takeover bid, if successful, would enable the group to predetermine production and
sales of a given quantity and marketing same to yield an aggregate net profit for the
group. Effective market leadership through the control of the market, could be
achieved and effect change in demand and price at will.
The Board of Directors decided on the takeover bid of Tesco Tea Plc after careful
analysis and consideration of the financial and management data that were
considered relevant to the takeover bid.
However, the takeover bid plan leaked and the management of Tesco Tea Plc prepared
in advance to resist it. The takeover bid was launched on 20 June, 2009 with an all
cash bid, which valued Tesco Tea Plc at N70.5 million. The main producers in the
industry can be divided into categories as shown in Appendix VI. The businesses
remain largely independent and there was limited sharing of skills and expertise.
Tesco Tea Plc was the second largest producer of tea and beverage in West Africa with
a total of 46,100 tons in 2009. Tesco Tea Plc was the parent company of an
international group of companies, whose core business was the production and
marketing of tea and beverage. Tea contributed more to the group sales and operating
profit. The company was quoted on both the Nigerian and Ghanaian Stock Exchanges
and its market capitalization as at 21 May, 2009 was N63 million. Tesco Tea Plc. had
attained market leadership position in Ghana as shown in Appendix VI. In addition,
the beverage division was disposed of in 2008.
Mr. Brown, a Chartered Accountant, became Chief Executive Officer of Tesco Tea Plc.
He was recently employed at the time of the take-over bid. He had previously held a
number of positions in Pacific Oil and had been a director of Premier Tea Plc in South
Africa in 2007. He had initial responsibility for tea production, marketing and
distribution in Ghana where he was the initiator of the establishment of Sisco Tea Ltd,
an associate company of Tesco Tea Plc in Lagos, Nigeria. He became the Chief
Executive Officer designate in December 2008 and finally, became the substantive
Chief Executive Officer in January 2009.
The first rumour that Tesco Tea Plc might be a potential bid target occurred in April
2009 after Tesco Tea Plc group issued a profit warning. This came only six weeks after
the announcement of half year results and this seriously undermined Mr. Brown‟s
credibility as the new Chief Executive. Temidire, Chairman of Acenco Tea Plc
telephoned Brown and asked him for time to discuss a possible takeover. The price of
N4.20 per share was mentioned but this did not go down well with him and it was
dismissed by Brown.
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ACENCO TEA PLC
In 2009, Acenco Tea Plc was the largest producer of tea and beverage in West Africa
with a total of 51,700 tons (Appendix VI). Acenco Tea PLC market share and major
competitors by country was as shown in Appendix VI. Tea contributed approximately
68.6% of sales and more than 50% of operating profit as shown in Appendix IX.
TAKEOVER BID
On 29 April, 2009, Acenco Tea Plc announced a pre conditional offer for Tesco Tea Plc
of N4.70 per share. The offer represented a premium of 14% over Tesco Tea Plc as at
Thursday closing price on Ghana Stock Exchange before any significant speculation in
the market concerning a possible bid for Tesco Tea Plc. It was acknowledged by
analysts that the two groups were strategically a good fit. They can be described as
two elephants but the consensus was that the price would have to be close to N5.0 per
share for the bid to succeed.
ACENCO TEA PLC ATTACKED TESCO TEA PLC
Acenco Tea Plc attacked Tesco Tea Plc primarily for mistakes made in the past on
investments and diversification strategy which had effect on its international
operations and results and had made Tesco Tea Plc to fall behind its international
competitors.
TESCO TEA PLC‟S RESPONSE
The initial response of Tesco Tea Plc was to dismiss the bid as significantly
undermining the company. The first significant document that was issued by Tesco Tea
Plc was the early release of the group‟s 2008 results on 25 April, 2009.
The document stated that:
“Acenco Tea Plc‟s chairman has congratulated our management for doing all the right
things” He was right to say so:



“We have a business that is fundamentally changed, refocused on our strength in
tea packaging and tea branding”;
“We have invested carefully, building leading positions in our chosen markets;”
“We have exciting growth prospects;” and
PROFESSIONAL EXAMINATION II – MAY 2010
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
“We will deliver substantial performance improvement and cost savings in the near
future.”
The document also showed that the net dividend for 2008 would be N1.50 per share
which was an increase compared with internal plan (Appendix IX).
Tesco Tea Plc announced its operational improvements programme. The document
announced details of the projected benefits arising from such cost savings and
included forecast of the benefits to be achieved and would be of the order of N5.20 per
share by year 2012. The document also reiterated that Acenco Tea Plc‟s bid undervalued the company. The final blow in Tesco Tea Plc‟s defence was launched on 27
April, 2009 when it promised to deliver the benefits as indicated in the document.
TAKE-OVER BID DEFENCE PLAN
Tesco Tea Plc‟s financial advisers at the time of the bid were Solid Planners Bank Plc.
They had been heavily involved in producing the defence plan in 2009. They steered
the conduct of the defence itself. Solid Planners Bank PLC had access to Tesco Tea
Plc‟s. financial information including accounts, forecasts and budgets. Their valuation
presented to the Board in April 2009 was prepared based on the Business Plan for
2009-2012.
The valuation which seemed to be a reasonable estimate, provided the profit forecasts
in the Business Plan and were considered achievable. Tesco Tea Plc however intended
to achieve actual results lower than planned and profit projections were sometimes too
optimistic – (Appendix VI). Solid Planners Bank was instructed to reduce the profit
forecast in the 2009-2012 plan to bring them down to more achievable levels.
The discounted cash flow analysis that was prepared for the Board of Tesco Tea Plc
valued the business at N4.80 per share which was seen as relatively conservative. The
valuation supported the claim that the Acenco Tea Plc‟s bid of N4.70 per share
undervalued the Tesco Tea Plc group.
DESPERATE MOVE
Acenco Tea PLC in its desperate move bought shares from the stock exchange floor
through its broker. The total shares bought represented 44.5% of total shareholdings.
Early in the defence process, shareholders were indifferent and did not want to talk to
the management of Tesco Tea Plc until the final offer from Acenco Tea PLC had been
made and no further information could be realized. During the last ten days of the
offer period, Brown and the Finance Director, Mr. Olade, held a number of meetings
PROFESSIONAL EXAMINATION II – MAY 2010
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with the institutional investor in an attempt to persuade them to back the
management and reject the bid offer.
As the final days of the bid approached, the lobbying by Tesco Tea Plc management
paid off, when Sentel Assurance publicly backed the decisions of the management of
Tesco Tea Plc. This was followed by other shareholders and the bid was finally
rejected. Acenco Tea Plc then announced that it had received acceptances that
represented 44.5% of the shareholders of Tesco Tea Plc.
The takeover bid of Tesco Tea Plc finally failed, because the total shareholdings in
Tesco Tea Plc that was acquired by Acenco Tea Plc were less than 51% of the whole
shareholdings in Tesco Tea Plc.
SUCCESS BANK PLC IN CRISIS
Banks in Nigeria went through share capital consolidation exercise in 2005 and
Success Bank PLC was one of the 25 banks that were successfully re-energized and recapitalized during this period. The share capital was initially increased to N25 billion
and few other banks subsequently increased share capital and also raised further
funds from the capital market. These banks had solid capital base and in general
terms, they were solid and financially strong banks. Success Bank Plc was considered
as one of the strong banks in Nigeria.
Acenco Tea Plc was one of the most valuable customers of Success Bank Plc. It had
different accounts with the bank. Each account could be used to obtain facilities
including overdrafts and loans, and is considered independent for the purpose of
obtaining facilities. Acenco Tea Plc negotiated and obtained facilities from Success
Bank Plc on different accounts which in total amounted to N12.5 billion as at 25,
March 2010. As an important and most valued customer, the management of the bank
had no doubt about the repayment of the facilities and furthermore all facilities were
secured on the assets of the company. The company also serviced the loans according
to the terms of the contracts as and when due and for this reason, there was no
unnecessary pressure on the customer by the bank.
The world‟s financial and economic crisis had begun to take its toll on the banks in
Nigeria but this had not yet manifested to the general public, however the financial
and economic indicators had exposed the financial sectors to liquidity problems.
The Central Bank of Nigeria, the financial watchdog, initially expressed confidence in
the banking sector and assured that the banks in the country were financially solid to
withstand the effects of the economic downturn. However, the tone changed when a
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new governor of the Central Bank of Nigeria assumed office and he accused few
banks‟ Chief Executive Officers of financial misdeeds. He ordered that the bank‟s
accounts be audited. The audit reports revealed that all was not well with some of the
banks and confirmed that their liquidity was in great danger.
Further investigations and analysis were carried out and serious financial crisis was
discovered which confirmed the recklessness of some of the Executive Directors of the
banks concerned. They were accused of financial mismanagement and abuse of their
official positions. In order to accelerate the recovery of loans and facilities outstanding
and funds mismanaged by the bank officials, the Central Bank Governor invited the
Economic and Financial Crimes Commission to assist the Central Bank and the banks.
In addition, the Central Bank had to go to court to obtain the order and permission for
such recovery actions.
In order to establish the exact amount misappropriated by the Executive Directors of
the banks, an investigation was ordered to be carried out on the finances of the banks
concerned. The investigation was to establish the amounts that customers owed the
banks and establish which persons or organizations had not been servicing their loans
or facilities. It was clear that the report might be used as evidence against each
customer and executive directors of the banks.
Gbenro & Co (Chartered Accountants) was one of the firms that were appointed to
carry out the investigation and establishment of the list of debtors. Acenco Tea PLC
was reported to owe Success Bank Plc N16 billion while Acenco Tea Plc confirmed
owing N12.6 billion. The EFCC officials called on Fehinbu, the Chief Executive of
Acenco Tea Plc, to demand for terms of repayment of N16 billion facilities owed to
Success Bank Plc. Fehinbu informed them that Acenco Tea Plc owed N12.6 billion and
in view of this disagreement, it had appointed Dede & Co (Chartered Accountants) to
investigate its bank accounts with Success Bank PLC to confirm its claim of N12.6
billion or N16billion claimed by the Success Bank PLC during the investigation.
It was discovered that N1.5 million was paid to Mr. Owonimo and this was included in
miscellaneous cost of the factory building which was financed partly through bank
loans. The Chief Investigator asked for the purpose for which the amount was
disbursed. Sebikan was called to explain and after a long pause, he said “the amount
was paid to grease the palms of an official in the Ministry of Land and Housing for the
approval of the factory building plans. The Chief Investigator then said “this was a
bribe you paid to the official”. Sebikan replied and said “yes”. The investigator
completed their assignments and submitted their reports to the management which
confirmed the amount owed to Success bank Plc to be N12.65 billion.
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PATHFINDER
On the receipt of the investigators‟ report, the Chief Executive Officer of Acenco Tea
Plc, Fehinbu, thanked Dede & Co and said “Acenco Tea Plc is a responsible company
that appreciates accountability and financial prudence in its dealings with third
parties.” He further said “you might be called upon to justify the correctness of the
amount before a court of law”. The Chief Investigator replied “we stand by our report
and we will be ready to defend it even before any court of the land”.
PROFESSIONAL AND BUSINESS ETHICS
The management of Acenco Tea Plc was informed that one of the consumers of Life
Rich Beverage had complained about stomach pains after consuming the beverage.
The remaining portion of the beverage and the tin were recalled and tested and it was
confirmed that the content was contaminated through the water used in the factory.
The customer was treated and adequate compensation was paid without going to
court.
The management thereafter set up a committee to examine the manufacturing process
in order to avoid reoccurrence in future. It was discovered that the Chemist, Mrs. Jare,
who was in charge of water quality was careless in the discharge of her professional
responsibility and thereby made the company liable to public ridicule which was
against business ethics and values. Mrs Jare, the Chemist, in charge was also charged
for lack of professional ethics and she was relieved of her position in the company.
PROFESSIONAL EXAMINATION II – MAY 2010
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APPENDIX 1: ACENCO TEA PLC: BALANCE SHEET AS AT 31 DECEMBER
2009
N
71,350,000
2008
N
1,774,000
2007
N
1,650,000
2006
N
1,350,000
3,050,000
2,740,000
11,255,000
17,045,000
1,010,700
902,700
992,600
2,906,000
962,600
1,062,000
789,400
2,814,000
820,000
1,035,000
1,250,000
3,105,000
Creditors
Taxation
Loan
1,800,000
1,250,000
2,700 ,000
5,750,000
948,200
297,900
539,700
1,785,800
862,000
331,000
635,000
1,828,000
800,000
250,000
720,000
1,770,000
Net Current Assets
11,295,000
1,120,200
986,000
1,335,000
Net Assets
82,645,000
2,894,200
2,636,000
2,685,000
5,000,000
750,000
750,000
750,000
Fixed Assets
Current Assets:
Stock
Debtor
Bank
Current Liabilities:
Share Capital
10,000,000 ordinary shares
of 50 kobo each
Share Premium
75,000,000
-
-
-
General Reserves
1,420,000
Revenue Reserves
1,120,800
934,000
1,000,000
1,225,000
82,645,000
1,023,400
2,894,200
952,000
2,636,000
935,000
2,685,000
Notes
10,000,000
1,500,000
1,500,000 ord. 1,500,000
ord. shares of ord. shares of shares of 50 ord. shares of
50 kobo each
50 kobo each kobo each
50 kobo each
EPS
12.2 kobo
68 kobo
Dividend per share
63 kobo
62 kobo
8.5 kobo
41 kobo
Net Assets per share
38 kobo
37 kobo
N8.26
N1.929
N1.757
N1.79
PROFESSIONAL EXAMINATION II – MAY 2010
117
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APPENDIX II
EXPORT RECORD
ACENCO TEA (BENIN)
Products
Qty of
export
(tons)
Export
price
N
ACENCO TEA
(TOGO) S.A
Qty of export
(tons)
Life Sure Tea
500 tons
100
600 tons
Life Secure Tea
300 tons
120
400 tons
Life Safe Tea
600 tons
140
800 tons
Life Rich Beverage
80 tons
400
100 tons
1,480 tons
ACENCO TEA
(GHANA) PLC
Export
price
N
Qty of
export
(tons)
Export
price
N
Total
(tons)
120
800 tons
140
1900 tons
140
600 tons
160
1300 tons
160
1200 tons
180
2600 tons
500
200 tons
600
380 tons
1,900 tons
2,800 tons
6,180 tons
NOTE:
1 (one) packet of tea bags contains 100 grams
1 (one) tin of Life Rich Beverage contains 500 grams
EXCHANGE RATE: N1.00 = 260 CFA, N1.00 = 5 Cedis
PROFESSIONAL EXAMINATION II – MAY 2010
118
APPENDIX III
EXPORT SALES LIFE RICH SUBSIDIARIES OF ACENCO TEA PLC; (showing transfers)
ACENCO TEA (BENIN) S.A
Product
Quantities
Tons
ACENCO TEA (TOGO) S.A
Grain
per
packet
Price
per
packet
100
N
100
Amount
(N‟000)
Quantities
Grain per
packet
Price
per
packet
ACENCO TEA (GHANA) PLC
Amount
N‟000
Grain
per
packet
Price
per
packet
Amount
N‟000
Tons
Grams
500,000
600
(000)
600,000
100
N
120
720,000
800
800,000
100
N
140
1,120,000
600
600,000
100
160
960,000
1200 1,200,000
100
180
2,160,000
500
600
240,000
Life Sure tea
500
Grams
(000)
500,000
Life secure tea
300
300,000
100
120
360,000
400
400,000
100
140
560,000
Life safe tea
600
600,000
100
140
840,000
800
800,000
100
160
1280,000
80
80,000
500
400
64,000
100
100,000
500
500
100,000
Life rich
Quantities
Tons
Grams
(000)
200
200,000
(beverage)
1,764,000
CALCULATION OF AMOUNT TRANSFERRED
1764000,000
260
AMOUNT TRANSFERED
= 6784615
AMOUNT NOT TRANSFERED
= 5766923
1017692
2,660,000
CFA
CFA
CFA
2,660,000
260
= 10,230769 CFA
8696154 CFA
1534615 CFA
PROFESSIONAL EXAMINATION II – MAY 2010
4,480,000
4480,000,000
5
= 896,000,000 C
761,600,000 C
13,440,000 C
APPENDIX IV
DISTRIBUTION NETWORK PLC: BALANCE SHEET AS AT 31 DECEMBER 2009
N
FIXED ASSETS
Current Assets:
Stock
Debtors
Bank
N
45,645,000
4,225,000
2,500,000
1,500,000
8,225,000
Current Liabilities:
Creditors
Taxation
Dividend
3,592,000
855,000
1,500,000
5,947,000
Net Assets
Share capital:
8,000,000 ordinary shares of
50kobo each
General Reserve
Revenue Reserves
Shareholders‟ Funds
Loan Account
2,278,000
47,923,000
4,000,000
8,663,000
33,760,000
42,423,000
46,423,000
1,500,000
47,923,000
PROFESSIONAL EXAMINATION II – MAY 2010
APPENDIX V
ACENCO TEA PLC: STANDARD COST OF PRODUCTION OF LIFE RICH BEVERAGE
N
Direct labour
98,000
Direct materials
700,000
Indirect labour
48,000
Electricity
25,000
Maintenance/repairs
16,200
Supplies
4,000
Supervision
40,000
Division admin. Expenses
25,000
Group office Overhead
35,000
Depreciation
130,000
TOTAL
1,121,200
Production batch volume
400 batch
Number of tins
800,000 tins
PROFESSIONAL EXAMINATION II – MAY 2010
DIAGRAM OF CASH MANAGEMENT CONTROL
The schematic diagram will be as shown below:
ORIGINATOR
ACENCO TEA PLC
MOVEMENTS BANK A
All
sales
receipts and
other income
BN
TRANSFER FOR
EXPENSES AND
PAYMENTS
DISTRIBUTION
All
sales
NETWORK PLC
receipts and
other income
BANK B
BANK C
All sales receipts
and other income
are paid to Bank
TRANSFER FOR
PAYMENT
ALL BRANCHES
All
sales
receipts and
other income
TRANSFER FOR
PAYMENTS
PROFESSIONAL EXAMINATION II – MAY 2010
FROM A
TO B
FROM B
TO C
FROM B
TO C
PATHFINDER
APPENDIX VI
PRODUCERS BY COUNTRY
Nigeria
Togo
Benin
Tea Bev.
Tea
Bev.
Ghana
Total
Tea Bev.
Tea Bev.
Tea
Bev.
Acenco
16.2
5.5
5.5
2.5
4.4
1.6
10.5
5.5
36.6
15.1
Tesco
10.4
6.0
4.4
2.2
3.7
2.0
13.4
4.0
31.9
14.2
APPENDIX VII
TEA AND BEVERAGE MARKET IN WEST AFRICA
2006
Production
% Change
Export
% Change
Consumption
% Change
Tea
(000)
131.10
4.5
28.4
12.7
100.9
5.8
Bev.
(000)
56.6
4.4
11.0
8.9
43.6
7.4
2007
Tea
Bev.
(000)
(000)
140.9
60.8
7.5
7.4
32.8
13.5
15.5
22.7
108.5
47.4
7.5
8.7
2008
Tea
Bev.
(000)
(000)
115.0
66.9
(18.4)
51.2
35.5
14.6
8.2
8.1
120.9
52.2
11.4
10.1
PROFESSIONAL EXAMINATION II – MAY 2010
2009
Tea
Bev.
(000)
(000)
174.4
74.9
12.5
12.0
40.2
15.8
13.2
8.2
132.0
57.7
9.2
10.5
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PATHFINDER
APPENDIX VIII
TESCO TEA PLC
FINANCIAL DATA
2006
N(000)
2007
N(000)
2008
N(000)
2009
N(000)
Group Turnover
190,000
194,000
202,000
230,000
Operating Profit
30,000
36,000
35,000
33,000
16.3
18.6
17.3
14.3
29,800
34,200
31,200
26,700
Earnings per share (k)
1.90
2.20
2.30
2.60
Net dividend (kobo)
1.12
1.30
1.40
(1.50)
Net Assets
2.90
3.40
4.00
4.70
Operating margin (%)
Profit before tax
APPENDIX IX
ACENCO TEA PLC
FINANCIAL DATA
2006
N(000)
2007
N(000)
2008
N(000)
2009
N(000)
Group Turnover
352,600
420,700
642,940
685,000
Operating profit
77,550
91,780
102,380
107,250
22.0
21.82
28.4
15.6
53,300
56,470
67,200
80,750
Earnings per share (k)
62 kobo
63 kobo
68 kobo
12 kobo
Net dividend
37 kobo
38 kobo
41 kobo
8.5 kobo
N1.79
N1.757
N1.929
N8.26
Operating margin %
Profit before tax
Net Assets per share
PROFESSIONAL EXAMINATION II – MAY 2010
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APPENDIX X
TESCO TEA PLC
BALANCE SHEET AS AT DECEMBER
FIVE YEAR FINANCIAL DATA
Fixed Assets
Current Assets:
Stock
Debtors
Bank
Current Liabilities:
Creditors
Taxation
Dividend
Net Current Assets
Net Assets
Share Capital
15,000,000 share of 50k each
General Reserves
Revenue Reserves
2009
2008
2007
2006
N
N
N
N
65,175,000 55,398,750 46,257,960 40,475,710
6,041,750
5,588,610
5,113,580
3,575,000
3,342,620
3,058,500
2,145,000
2,134,270
2,006,210
11,761,750 11,065,500 10,178,290
4,678,920
2,829,110
1,885,840
9,393,870
5,136,560
1,222,650
202,500
6,561,710
4,567,840
1,121,480
162,820
5,852,140
5,008,150
1,204,310
192,370
6,404,830
4,783,080
1,162,160
176,980
6,122,220
5,200,040
4,660,670
4,056,070
3,541,730
70,375,040 60,059,420 50,314,030 44,017,440
Loan Account
7,500,000
7,500,000
7,500,000
7,500,000
13,051,040 11,194,300
9,308,090
8,010,940
38,824,000 34,165,120 33,005,940 28,006,500
59,375,040 52,859,420 49,814,030 43,517,440
11,000,000
7,200,000
500,000
500,000
Dividend per share
Earnings per share
Net Assets per share
70,375,040
N1.50
N2.60
N4.70
60,059,420
N1.40
N2.30
N4.00
50,314,030 44,017,440
N1.30
N1.12
N2.20
N1.90
N3.40
N2.90
PROFESSIONAL EXAMINATION II – MAY 2010
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SCHEDULE OF APPENDICES
APPENDIX I
Acenco Tea Plc: Four-Year Balance sheet
APPENDIX II
Export record
APPENDIX III
Export sales of Life Rich to subsidiaries of Acenco Tea Plc (Showing
Transfers)
APPENDIX IV
Distribution Network Plc – Balance Sheet as at 31 December, 2009
APPENDIX V
Acenco Tea Plc: Standard cost of production of Life Rich Beverage
APPENDIX VI
Producers of Tea and Beverage by country
APPENDIX VII
Tea and Beverage Market in West Africa
APPENDIX VIII
Tesco Tea Plc – Four-Year Financial Data
APPENDIX IX
Acenco Tea Plc – Four-Year Financial Data
APPENDIX X
Tesco Tea Plc Four-Year Balance Sheet
PROFESSIONAL EXAMINATION II – MAY 2010
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ICAN/101/Z/4
EXAMINATION NO...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL EXAMINATION III – MAY 2010
MULTI-DISCIPLINARY CASE STUDY
SECTION A – PART I
Time allowed – 3 hours
MULTIPLE CHOICE QUESTIONS
(10 MARKS)
1. Option pricing methods in evaluating Information Technology investments include
all EXCEPT
A.
B.
C.
D.
E.
Making ICT Investments without expectation of immediate payback
Taking action that creates opportunity for later operational ICT projects
Considering the opportunities in the option underlying asset
Choosing among various ICT investments and rejecting non-relevant ICT
programs
Designing ICT prototyping that maximizes the value of an application
development project.
2. Software assets include all EXCEPT
A.
B.
C.
D.
E.
Enterprise systems software
Middle ware
Internally written enterprise applications
Laptop computers
Software licensing agreements.
3. A rational decision making process will operate where the following assumptions subsist
EXCEPT
A.
B.
C.
D.
E.
The existence of perfect information
Clearly defined problems dampened by an ambiguous system
Clearly identified criteria that could be objectively weighted
Existence of clear goals and preferences which are stable over time
Existence of a unique chance, the alternative that will yield the maximum
pay-off.
PROFESSIONAL EXAMINATION II – MAY 2010
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4. Companies embark on training and development programmes for the following
reasons, EXCEPT
A.
B.
C.
D.
E.
Increased productivity
Reduced employee turnover
Decreasing need for supervision
Reducing employee turnover
Creation of a pool of readily available replacement for personnel who may
leave.
5. The immediate priorities of a checklist of investigation in a case of fraud case
include all EXCEPT ONE of the following:
A.
B.
C.
D.
E.
Securing the assets
Prevention of further fraud
Curtailing authorization
Initiating possible civil/criminal proceedings
Beginning interviews of employees suspected of involvement immediately.
6. The marketing mix describes the specific combination of marketing elements used
to achieve the marketing objectives and satisfy the target market. It consists of the
following major factors EXCEPT
A.
B.
C.
D.
E.
Product
Distribution
Customers‟ taste
Promotion
Price .
7. ONE of the following is NOT the objective of management accounting information
A.
B.
C.
D.
E.
To analyse the profitability of the business
To prepare accurate financial statements useful for management decision
making
To put a value on stocks
To plan for the future
To control the business.
8. The major bases of cost classification are all but ONE of the following:
A.
Reaction to changes in activity
PROFESSIONAL EXAMINATION II – MAY 2010
128
PATHFINDER
B.
C.
D.
E.
Responsibility – by Plant, Department, Process or Cost Centre
The magnitude of the expenditure in Naira value
Natural characteristics
Economic characteristics.
9. When some people pretend to be someone who they are not or to be doing something they
cannot do or selling something they don‟t possess, they are committing:
A. Fraud by failing to disclose information
B. Fraud by impersonation
C. Fraud by false representation
D. Fraud by abuse of position
E. Fraud by duress .
10. Jide, an attendant at Mr. Small Restaurant, can serve 30 customers in one hour
while customers arrive at the eating joint at the rate of 40 people per hour. What is
the traffic intensity of the eatery?
A.
B.
C.
D.
E.
0.75
1.42
0.25
1.75
1.25
PROFESSIONAL EXAMINATION II – MAY 2010
129
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PART II
SHORT-ANSWER QUESTIONS
(30 MARKS)
1.
A system designed to compare projected (forecast) results with future objectives
so that corrective action may be taken in advance is described as ……………
2.
The Fraud Risk Triangle proposes that risk is predicated on the existence of
three factors, these are …………………………………, …………………………
and ………………………
3.
VAT incurred by a business on purchased goods and services is known as
……………………
4.
The strategies of cost leadership and differentiation are ways in which a firm
can find, get and keep its clients. What are these strategies called?
5.
A flexible budget is one which by recognizing different cost behavior patterns,
is designed to change as …………… changes.
6.
What is the systematic and detailed comparison of the performance of different
companies generally operating in a common industry called?
7.
The benefits produced by an investment which are immediately obvious and
measurable are known as ……………….
8.
The joining together of a number of personal computers or other devices in a
network that operates within a limited geographical area is referred to as
…………………..
9.
Research engineering is the decomposition and analysis of competitor‟s
products in order to determine how they are made ……………….. and the way
in which future development may proceed.
10.
An increase in value which would be created by having available one
additional unit of a limiting resource at its original cost is known as …………….
11.
The measure of the firm‟s ability to meet its current obligation is measured by
………………
12.
The profits of oil marketing companies are assessed under ……………… Act.
PROFESSIONAL EXAMINATION II – MAY 2010
130
PATHFINDER
13.
Undercover deals in the capital market are known as …………………..
14.
A mode of offer of existing shares by a divestor to the public is known as
…………….
15.
A marketing strategy by which a firm observes what others are doing to
improve its own product is known as ……………….
16.
A method of budgeting which requires each cost element to be specifically
justified, as though the activities to which the budget relates were being
undertaken for the first time is ……………….
17.
Complete the following Claxton (1998) decision process model
Real world
Opinions
Facts
External filter
Interior filter
18.
Total ICT costs involve the following: ……….. costs, software cost and ……….
costs.
19.
Plant, equipment, fixtures and fittings which are subjects of financial leases are
dealt with in the financial statements by debiting “Equipment on Lease” and
crediting ……………………………………….
20.
A concept in law in which someone can be deemed to have, or to be able to
infer, knowledge from the facts available is referred to as ……………….
PROFESSIONAL EXAMINATION II – MAY 2010
131
PATHFINDER
21.
In government accounting system, the memorandum accounts book used for
monitoring government expenditure to ensure that there is no extra-budgetary
spending is known as ……………
22.
Gains from disposal of stocks and shares, gains by ecclesiastical, charitable or
educational institutions are ………. from Capital Gains Tax.
23.
Ethics is the behaviour or conduct in business transactions that are considered
to be right or …………, good or ………….
24.
A situation where a master is made responsible for the torts or wrongs
committed by his servant while engaged in the course of his employment is
called …………
25.
What is the most unique and common characteristic of nearly all the techniques
of operations research?
26.
The term that best describes moving away company business from identifiable
risk is …………….
27.
The aim of ………….. is to find out about customers‟ wants and where they
want them.
28.
A chart on which activities and their durations are represented by lines drawn
to a time scale is known as ………………
29.
Job Analysis is a systematic ……………. to collect all information pertinent to
each task performed by an employee.
30.
Geographical spread is one of the methods of market ……………..
PROFESSIONAL EXAMINATION II – MAY 2010
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SECTION B - ATTEMPT ALL QUESTIONS
(60 MARKS)
QUESTION 1
From the extract of relevant data from the books of Acenco Tea Plc with respect to Life
Rich Beverage, calculate:
(a)
(b)
(c)
(d)
Standard cost per batch.
(4 Marks)
Standard cost per tin.
(2 Marks)
Describe how Just-In-time system operates to achieve optimum inventory.
(4 Marks)
Calculate the Economic Order Quantity of product A required.
(4 Marks)
(Total 14 Marks)
QUESTION 2
(a)
Describe tele-conferencing System and how it operates.
(5 Marks)
(b)
Which of the costs of investment on Life Rich Beverages qualifies for capital
allowances?
(4 Marks)
(c)
Calculate the capital allowances due on the investment for Life Rich Beverage.
(3 Marks)
(Total 12 Marks)
QUESTION 3
(a)
Bamidele returned to claim the position of Chief Executive of Acenco Tea Plc
after the acquisition by Brisko Plc and created management problems.
Comment on the development with reference to Companies and Allied Matters
Act 2004.
(6Marks)
(b)
How will Brisko Plc treat Acenco Tea Plc in its books?
QUESTION 4
(2 Marks)
(Total 8 Marks)
(a)
Calculate acquisition value of Distribution Network Plc.
(b)
Calculate the Net Value of the public share offer by Acenco Tea Plc.
(4 Marks)
(Total 9 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
(5 Marks)
133
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QUESTION 5
Determine whether the export sales of Life Rich Beverage to subsidiary companies was
profitable.
(6 Marks)
QUESTION 6
(a)
Describe the type of organization structure of Acenco Tea Plc.
(b)
Advise the Director (Operations), whether ZK107 machine should be purchased
to replace ZK105 machine.
(6 Marks)
(Total 11 Marks)
PROFESSIONAL EXAMINATION II – MAY 2010
(5 Marks)
134
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SOLUTIONS TO SECTION A
MULTIPLE CHOICE QUESTIONS
1.
C
2.
D
3.
B
4.
B
5.
C
6.
C
7.
C
8.
C
9.
B
10.
A
TUTORIAL
10.
Service rate
Arrival rate
= Traffic Intensity
= 30/40
= 0.75
EXAMINERS‟ REPORT
The ten questions test IT, SFM, Auditing, Business Environment, Management
Accounting, law and operations research.
The performance of candidates was average.
PROFESSIONAL EXAMINATION II – MAY 2010
135
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SHORT-ANSWER QUESTIONS
1.
Business Plan.
2.
Will, Opportunity, Escape.
3.
Input VAT
4.
Marketing Strategies
5.
Variable Cost
6.
Inter firm comparison
7.
Returns
8.
Local Area Network (LAN)
9.
Operational or functional
10.
Marginal Revenue (MR)
11.
Short term solvency/Liquidity/ Acid test
12.
Companies Income Tax
13.
Insider trading
14.
Offer for sale
15.
Benchmarking
16.
Zero-Based
17.
Decision process
18.
Hardware, Maintenance
PROFESSIONAL EXAMINATION II – MAY 2010
136
PATHFINDER
19.
Lessor‟s account
20.
Ratio decidendi
21.
Vote book
22.
Exempted
23.
Wrong, Bad
24.
Vicarious liability
25.
Mathematical model/modeling
26.
Hedging
27.
Marketing research
28.
Critical path analysis/Critical path
29.
Study
30.
Segmentation or identification.
EXAMINERS‟ REPORT
The thirty questions test all the courses in the professional examinations syllabus of
the Institute.
The performance of the candidates was average.
PROFESSIONAL EXAMINATION II – MAY 2010
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SOLUTIONS TO SECTION B
QUESTION 1
(a)
STANDARD COST OF PRODUCTION
Direct Materials
Direct Labour
Overheads:
Indirect Labour
Electricity
Maintenance/Repairs
Supplies
Supervision
Depreciation
Total Standard Cost of Production
Standard Cost Per batch 1,061,200
400
N
700,000
98,000
48,000
25,000
16,200
4,000
40,000
130,000
=
263,200
1,061,200
N2,653
(b)
Standard cost of production per tin = 1,061,200 ÷ 800,000
= N1.327
N1.33
(c)
JIT System
The goals of a Just-In-Time system are to eliminate non-value added practices,
continuously improve efficiency, and reduce costs while increasing quality. A
characteristic of the Just-In-Time system is its continuous focus on eliminating
all waste from a system e.g waste of assets, excessive inventory, waste of time
and waste of materials.
A complete JIT system begins with production, includes deliveries to a
company‟s production facilities, continues through the manufacturing plant and
even includes the types of transactions processed by the accounting system.
PROFESSIONAL EXAMINATION II – MAY 2010
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PATHFINDER
A company must ensure that it receives products/spare parts/materials from its
suppliers on the exact date and at the exact time when they are needed. For
this reason, the purchasing staff must investigate and evaluate every supplier,
eliminate those which could not keep up with the delivery dates. In addition,
deliveries should be sent straight to the production floor for immediate use in
manufacturing products, so that there is no time to inspect incoming parts for
defects.
As soon as suppliers certify their delivery and quality, the company must install
system, which may be as simple as a fax machine or as advanced as an
electronic data interchange system or linked computer system through what
tests are to be sent to the company. Drivers then bring small deliveries of
product to the company possibly going to the extreme of dropping them off at
the specific machines that will use them first.
Next, the set up times for concerns machinery is shortened.
(d)
Economic Order Quantity (EOQ)
2QO
=
where
C
Q
=
estimated annual quantity used in units (can be found in the
annual purchases budget)
O
=
ordering cost
C
=
estimated cost to carry one unit in stock for one year.
Economic Order Quantity (EOQ) is an estimate of the number of
units per order that will be the least costly and provide the
optimal balance between the costs of ordering and the costs of
carrying inventory
Working I
EOQ
=
2(7,200,000)1250
250
= 8,485 Units
20% of N1.250
N250
PROFESSIONAL EXAMINATION II – MAY 2010
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EXAMINERS‟ REPORT
The question tests candidates‟ Knowledge of Standard Cost, Just-In-Time system and
Economic Order Quantity in Cost and Management Accounting.
The candidates‟ understanding of l (a) and I (b) of the question was very poor but they
demonstrated good knowledge and understanding of part I (c) and I (d).
The major pitfall was the use of administrative overhead cost in calculating standard
cost per batch and standard cost per tin.
Candidates are advised to improve their knowledge of costing system and the
difference between direct, indirect, marginal and absorption costing.
QUESTION 2
Teleconferencing is a system of video conferencing that uses a restricted band of
frequencies and allows participants to be connected by telephone lines.
Teleconferencing system also makes use of television that uses point-to-multipoint
technology that is broadcast to any use within the range of the transmitter. It is also a
system in which television picture links two physically separated parties, is a
convenient way for business people to meet and communicate without the expense or
inconvenience of travel. Video cameras (web cam) on computers now allow personal
computer users to teleconference over the internet. Video phones, which use tiny
video cameras and rely on satellite technology, can also send private or public
television images and have been used in news reporting in remote locations.
(b)
(c)
The of investment on life Rich Beverages which
qualifies for Capital Allowances is
N
100,000,000
Plant and machinery
-
Computation of Capital Allowance
Initial allowance
Annual allowance
Investment allowance
-
Cost of Plant and Machinery
- N100,000,000
PROFESSIONAL EXAMINATION II – MAY 2010
50%
25%
10%
140
PATHFINDER
N
Cost
Initial allowance @ 50% (W.I)
Annual allowance (W.II)
Tax Written Down Value
50,000,000
12,500,000
Investment allowance
10% of Cost = 10/100 x 100,000,000
1
Note: Investment allowance is not taken into
consideration in determining the Tax Written
Down Value of Qualifying Capital Expenditure
Summary of Capital allowance
Initial allowance
Annual allowance
Investment allowance
I
II
Workings
Initial allowance:
50 x 100,000,000
100
1
Annual allowance:
Cost
Initial allowance
=
N
100,000,000
(62,500,000)
37,500,000
10,000,000
N
50,000,000
12,500,000
10,000,000
72,500,000
N50,000,000
N
100,000,000
(50,000,000)
50,000,000
Annual allowance
=
=
25% p.a
= 100 = 4
25
50,000,000 = 12,5000,000 p.a
4
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of Information Technology, especially
conferencing system and computation of capital allowances in taxation.
PROFESSIONAL EXAMINATION II – MAY 2010
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Candidates‟ performance was above average.
There was a mix-up. The pitfall was the inability of candidates to identify investment
cost qualifying for capital allowances and ascertaining the basis of computation of
capital allowances and applicable rates of each category of qualifying capital
expenditure. Candidates are advised to study and understand the basis of capital
allowances.
QUESTION 3
(a)
The seeming management problem that could have been created was resolved
amicably between Bamidele and Fehinbu.
However, having consideration for Bamidele‟s majority holding in the shares of
Acenco Tea Limited, he is right to reclaim the Chief Executive position in line
with Section 263(s) of CAMA 2004.
(b)
Associated Company
Brisko Plc will trust Acenco Plc as an associated company since its owns only
49% of Acenco Tea Plc‟s share capital.
The profits attributable to Brisko Plc will be consolidated in the Company‟s
Group accounts.
EXAMINERS‟ REPORT
The question tests the candidates‟ understanding of CAMA LFN 2004 on appointment
of directors. Many candidates approached the question from the point of ethical issues
involved and/or corporate politics which was not required by the examiner.
Additionally, candidates could not interprete the issues involved.
Candidates‟ performance was below average. Candidates are advised to study widely
for future examinations.
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QUESTION 4
(a) Acquisition Value of Distribution
Network Plc
i
Fixed Assets
Current Assets:
Stocks
Debtors
Bank
Less:
Current Liabilities:
Creditors
Taxation
Dividend
Price per share
i.e 8,000,000 ordinary shares
N
N
45,645,000
4,225,000
2,500,000
1,500,000
8,225,000
3,592,000
855,000
1,500,000
5,947,000
=
=
2,278,000
47,923,000
N47,923,000
8,000,000
N5.99
(b) Net value of the public shares offered by Acenco Tea Plc.
The total issue cost is N8 per share x 10m
=
80,000,000
Issue cost was agreed at 5% of the total cost
= 0.05 x 80,000,000
= N4,000,000
PROFESSIONAL EXAMINATION II – MAY 2010
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The Net value of the offer is:
N
80,000,000
4,000,000
76,000,000
Total Issue Value
Less Issuing Cost

The Net Value of the Public Shares offered by Acenco Tea Plc is
N76,000,000
EXAMINERS‟ REPORT
This question tests candidates‟ knowledge of mergers and acquisition as well as the
valuation of acquisition cost of new companies and the valuation of shares issued.
The candidates‟ performance was very poor as there was lack of understanding of the
question by the majority of the candidates. Candidates were able to identify the data
but failed to use the data appropriately.
Candidates are advised to read widely to improve their knowledge of basic accounting
and financial management concepts.
QUESTION 5

a. The amount transferred in appendix II should read amount transferable while
amount not transferred shared read amount transferred, and the last column is
assured loss on transfer which be treated as loss to HQ.
Conversion to Naira
Amount transferred to HQ:
(5,766,923 cfa x 260)
(8,696,154 x 260)
(761,600,000 cedi x 5)
Total revenue transferred to HQ Nigeria
BENIN
N‟000
TOGO
N‟000
GHANA
N‟000
1,499,400
2,261,000
1,499,400
2,261,000
PROFESSIONAL EXAMINATION II – MAY 2010
3,808,000
3,808,000
Total
N‟000
1,499,400
2,261,000
3,808,000
7,568,400
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b.
Standard cost of production of life Rich Beverage
Total as per appendix‟ v
Less:
Division admin. expenses
Group price/QH
N
N
1,121,200
25,000
35,000
Number of tins = 800,000 tins
Standard cost for tin
=
=
c.
Actual Amount transferred (2) above
Less cost of tins transferred
(6.180 tons x 2000 tons/500gm)
(12,360,000 x standard cost per tin)
(12,360,000 x 1.33)
Loss
60,000
1,061,200
N
1,061,200
800,000
N1.33
N‟000
7,568,400
(16,438,800)
(8,870,400)
In view of the above, export sales of life Rich Beverage to subsidiary companies was
not profitable.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of the financial relationship between
parents and subsidiary companies.
As simple as the question is, over 90% of the candidates did not understand it.
The commonest pitfall was the lack of understanding of the concept and appropriate
technique to use in answering the question.
Candidates are advised to pay more attention to their studies.
PROFESSIONAL EXAMINATION II – MAY 2010
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QUESTION 6
(a)
Organisation structure of Acenco Tea Plc is described as follows:
(i)
A public limited liability company capable of being listed on the stock
exchange.
(ii)
It is a Holding Company which will have:

The Group Managing Director reporting to the Board of Directors
Chief Executives of subsidiary companies reporting to the Group
Managing Director.

Line Managers reporting to the Chief Executives of subsidiary companies.
PROFESSIONAL EXAMINATION II – MAY 2010
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ACENCO TEA PLC
Board of Directors
Group Managing Director
Chief Executive
Acenco Tea (Togo)
Sales
Manager
Financial
Accountant
Chief Executive
Acenco Tea (Benin)
Manager
Financial
Accountant
Chief Executive
Acenco Tea (Ghana)
Financial
Accountant
PROFESSIONAL EXAMINATION II – MAY 2010
Manager
147
b.
PURCHASE OF ZK107 MACHINE
Year Cost
Factor
0
3,850,000 1.000
1
1,050,000 0.8333
2
1,050,000 0.6944
3
1,050,000 0.5787
4
1,050,000 0.4823
5
1,050,000 0.4019
6
1,050,000 0.3349
7
1,050,000 0.2791
8
1,050,000 0.2326
9
1,050,000 0.1938
10
1,050,000 0.1615
NPV
OR
Initial cost
Savings - 10 years
PV
-3,850,000
874,965
729,120
607.635
506,415
421.995
351,645
293,055
244,230
203,490
169,575
N552,125
= (1,050,000 x 4.1925)
NPV
N
- 3,850,000
4,402,125
552,125
The machine, 2K107 should be purchased.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of organisational structure and replacement
theory.
Many of the candidates criticised the organizational structure instead of describing it
as required by the question.
The candidates‟ performance was below average.
Candidates are advised to study widely on other subjects which are linkages especially
management concepts.
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