2008年ACCAF4-F9真题答案

2008年ACCA F4-F9真题答案

1.(a) The Common Law

This term refers to the substantive law and procedural rules that have been created by the judiciary through the decisions in the cases they have heard, thus it is also referred to as case law. Central to the concept of the common law is the doctrine of precedent, which means that when a court has to decide an issue, it looks to the previous decisions contained in earlier cases for guidance on how to deal with the present case. Case law operates within the hierarchical structure of the courts system; with the decisions of higher courts binding those courts

lower than them in the structure. Courts at the same level are also usually bound, although since 1966 that is no longer the case with the House of Lords, which can now overrule its previous rulings. The actual part of the previous decision that is binding is the ratio decidendi of the case; that is the legal rule, which led to the decision in the earlier case. The ratio is an abstraction from the facts of the case. Everything else is termed obiter dictum and although of persuasive authority, does not have to be followed by the later court. As the ratio decidendi of any case is an abstraction from, and is based upon, the material facts of the case, this opens up the possibility that a later court may regard the facts of the case before it as significantly different from the facts of a cited precedent and thus consequentially it will not find itself bound to follow that precedent. Judges use this device of distinguishing cases on their facts where, for some reason, they are unwilling to follow a particular precedent.

Various law reports contain details of cases and decisions and it is to those books and cases that lawyers go to find out what the case law is on any particular issue.

There are numerous perceived advantages of the doctrine of precedent, amongst which are:

– Consistency. This refers to the fact that like cases are decided on a like basis and are not apparently subject to the whim of the individual judge deciding the case in question. This aspect of formal justice is important in justifying the decisions taken in particular cases.

– Certainty. This follows from, and indeed is presupposed by, the previous item. Lawyers and their clients are able to predict what the likely outcome of a particular legal question is likely to be in the light of previous judicial decisions.

Also, once the legal rule has been established in one case, individuals can orient their behaviour with regard to that rule relatively secure in the knowledge that it will not be changed by some later court.

– Efficiency. This refers to the fact that it saves the time of the judiciary, lawyers and their clients for the reason that cases do not have to be re-argued. In respect of potential litigants, it saves them money in court expenses because they can apply to their solicitor/barrister for guidance as to how their particular case is likely to be decided in the light of previous cases on the same or similar points. (It should of course be recognised that the vast bulk of cases are argued and decided on their facts rather than on principles of law, but that does not detract from the relevance of this issue).

– Flexibility. This refers to the fact that the various mechanisms by means of which the judges can manipulate the common law provide them with an opportunity to develop law in particular areas without waiting for Parliament to enact legislation.

In practice, flexibility is achieved through the possibility of previous decisions being either

overruled, or distinguished, or the possibility of a later court extending or modifying the effective ambit of a precedent.

It is sometimes claimed that judges exceed their constitutional role by making such law, but others would counter that it is both legitimate and necessary that judges should take an active part in developing the law.

(b) Legislation

Legislation, on the other hand, refers to law that has been created by the legislative body within a constitution. In the United Kingdom that body is Parliament, constituted by both the House of Commons and the House of Lords and Bills have to be considered in, and approved by, both houses before it becomes law subsequent to the formality of its receiving royal approval.

Since the Parliament Acts of 1911 and 1949, the blocking power of the House of Lords has been restricted as follows:

– a ‘Money Bill’, that is, one containing only financial provisions, can be enacted without the approval of the House of Lords after a delay of one month;

– any other Bill can be delayed by one year by the House of Lords.

Statutes take the form of Acts of Parliament or delegated legislation. Delegated legislation is of particular importance. Generally speaking, delegated legislation is law made by some person or body to whom Parliament has delegated its general law making power. A validly enacted piece of delegated legislation has the same legal force and effect as the Act of Parliament under which it is enacted but, equally, it only has effect to the extent that its enabling Act authorises it and anything done in excess of, or contrary to, that authority may be challenged in the courts as ultra vires through an action for judicial review.

Within countries with written constitutions there is usually a limitation placed on the power of the legislature to make law, in that it cannot make laws which are contrary to, or in conflict with, the fundamental provisions of the constitution. In the United Kingdom, due to the doctrine of Parliamentary Sovereignty, legislation is superior to the common law, and the courts cannot strike down primary legislation, although, under the Human Rights Act 1998, they can declare that such law is incompatible with the rights contained in the European Convention on Human Rights. Legislation is published in the form of individual Acts and collectively in annual volumes. The courts exercise the essential task of interpreting statutes in such a way as to give them effect. In so doing the courts make use of the three main rules of interpretation:

– the literal rule, (see R v Maginnis (1987) and AG’s Reference (No 1 of 1988) (1989))

– the golden rule (see Re Sigsworth (1935))

– the mischief rule (see Heydon’s case (1584) and Corkery v Carpenter (1950)).

2.Chaff Co

(a) When assessing variances it is important to consider the whole picture and the interrelationships that exist. In Chaff there appears to be doubt about the wisdom of some of the decisions that have been made. Favourable variances have been applauded and adverse variances criticised and the managers in charge dispute the challenge to their actions.

Purchasing manager. The purchasing manager has clearly bought a cheaper product, saving $48,000. The cause of this is not specified and it could be due to good buying or negotiation, reductions in quality or changes in overall market conditions.

We are told the market for buying seeds is stable, so there is more likely to be an internal reason

for the problem. The material usage variance is significantly adverse, indicating much more waste than is normal has occurred in month 1. This suggests that the quality of the seed bought was poor and as a result a $52,000 excess loss has occurred. It is possible that the waste was caused by the labour force working poorly or too quickly and this has to be considered.

The sales price achieved is also well down on standard with the sales price variance showing an $85,000 loss of revenue and (therefore) profit. We are told that the market for sales of brown rice is stable and so it is reasonable to presume that the fall in sales price achieved is as a result of internal quality issues rather than general price falls. The purchasing manager of the only ingredient may well be responsible for this fall in quality. This may have also led to a fall in the volume of sales,

another $21,000 of adverse variance.

In conclusion the purchasing manager appears mainly responsible for a loss of $110,000* taking the four variances above together.

* ($85,000 + $52,000 + $21,000 – $48,000)

Production director. The production director has increased wage rates and this has cost an extra $15,000 in month 1.

However one could argue that this wage increase has had a motivational effect on the labour force. The labour efficiency variance is $18,000 favourable; and so it is possible that a wage rise has encouraged the labour force to work harder.

Academic evidence suggests that this effect might only be temporary as workers get used to the new level of wages.

Equally the amount of idle time has reduced considerably, with a favourable variance of $12,000 resulting. Again it is possible that the better motivated labour force has been more willing to work than before. Idle time can have many causes, including,material shortages or machine breakdowns. However, we are told the machines are running well and the buyer has bought enough rice seeds. In conclusion the increase in the wage rate did cost more money but it may have improved morale and enhanced productivity.

The total of the three variances above is $15,000* Fav. *($18,000 + $12,000 – $15,000) Maintenance manager. The maintenance manager has decided to delay the annual maintenance of the machines and this has saved $8,000. This will increase profits in the short term but could have disastrous consequences later. In this case only time will tell. If the machines breakdown before the next maintenance then lost production and sales could result.

The maintenance manager has only delayed the spend and not prevented it altogether. A saving of $8,000 as suggested by the variance has not been made. It is also possible that the adverse variable overhead expenditure variance has been at least partly caused by poor machine maintenance.

The variance calculated is not the saving made as it represents a timing difference only. The calculation also ignores the risks involved.

(b) The standard contribution is given, but could be calculated as follows (not required by the question but shown as a proof):

The standard labour charge needs to be adjusted to reflect the cost to the business of the idle time. It is possible to adjust the time spent per unit or the rate per hour. In both cases the adjustment would be to multiply by 10/9 – a 10% adjustment.

In the case above the rate per hour has been adjusted to $18 x 10/9 = $20/hr. (Both approaches would gain full marks.)

In order to reconcile the budget profit to the actual profit, both these profits need to be calculated and an operating statement prepared.

Budget profit statement for month 2

Actual profit for month 2.

Operating statement for month 2

Workings for the variances in month 2

Alternative calculations if standard hours adjusted for expected idle time and not the rate. Standard cost (2 hours x 10/9) x $18 = $40 per tonne

Or 2·222 hours x $18 = $40 per tonne

Rate variance as above = 18,960 Adv

Idle time: (800 – 1,580)18 = 14,040 Fav

Efficiency variance: (15,000 – 16,197·77777*)18 = 21,560 Fav

* (standard time allowed less standard idle time)

Standard time is 8,000 tonnes x 2·222 hours = 17,777·777 hours

Standard idle time is 10% of 15,800 = 1,580 hours

Therefore expected working hours is 17,777·777 – 1,580 = 16,197·777 hours

(Note – there are many alternative methods of dealing with this issue, any reasonable attempt was accepted.)

3.(a) Sam White – Trading profit for the year ended 5 April 2008

(1) Of the 25,000 miles driven by Sam during the year ended 5 April 2008, 20,000 (5,000 + 15,000 (25,000 – 5,000

= 20,000 x 75%)) were for business journeys. The business proportion is therefore 80% (20,000/25,000 x 100).

(2) Patent royalties are allowed as a deduction when calculating the trading profit, so no adjustment is required.

(3) Gifts to customers are an allowable deduction if they cost less than ￡50 per recipient per year, are not of food, drink,

tobacco or vouchers for exchangeable goods and carry a conspicuous advertisement for the company making the gift.

(b) Sam White – Income tax computation 2007–08

Kim White – Income tax computation 2007–08

(c) Individual savings accounts

(1) Both Sam and Kim can invest a maximum of ￡3,000 each tax year into either a Mini cash ISA or the cash component

of a Maxi ISA.

(2) Interest received from ISAs is exempt from income tax, so Sam will save tax at the rate of 40% whilst Kim will save tax

at the rate of 20% on gross interest of ￡180 (1,500 x 3,000/25,000).

Transfer to Kim’s sole name

(1) Sam pays income tax at the rate of 40%, whilst Kim’s basic rate tax band is not fully utilised.

(2) Transferring the building society deposit account into Kim’s sole name would therefore save tax of ￡150 (750 x 20%(40% – 20%)).

4.

(b) Patronic Group

(c) An associate is defined by IAS 28 Investments in Associates as an investment over which an investor has significant influence. There are several indicators of significant influence, but the most important are usually considered to be a holding of 20% or more of the voting shares

and board representation. Therefore it was reasonable to assume that the investment in Acerbic (at 31 March 2008) represented an associate and was correctly accounted for under the equity accounting method.

The current position (from May 2008) is that although Patronic still owns 30% of Acerbic’s shares, Acerbic has become a subsidiary of Spekulate as it has acquired 60% of Acerbic’s shares. Acerbic is now under the control of Spekulate (part of the definition of being a subsidiary), therefore it is difficult to see how Patronic can now exert significant influence over

Acerbic. The fact that Patronic has lost its seat on Acerbic’s board seems to reinforce this point. In these circumstances the investment in Acerbic falls to be treated under IAS 39 Financial Instruments: Recognition and Measurement. It will cease to be equity accounted from the date of loss of significant influence. Its carrying amount at that date will be its initial recognition value under IAS 39 and thereafter it will be carried at fair value.

Workings

5.(a) – Prior year internal control questionnaires

– Obtain the audit file from last year’s audit. Ensure that the documentation on the sales system is complete. Review the audit file for indications of weaknesses in the sales system and note these for investigation this year.

– Obtain system documentation from the client. Review this to identify any changes made in the last 12 months.

– Interview client staff to ascertain whether systems have changed this year and to ensure that the internal control questionnaires produced last year are correct.

– Perform walk-through checks. Trace a few transactions through the sales system to ensure that the internal control questionnaires on the audit file are accurate and can be relied upon to produce the audit programmes for this year.

– During walk-through checks, ensure that the controls documented in the system notes are actually

working, for example, verifying that documents are signed as indicated in the notes.

(b) – Tests of control

(c) Assertions – receivables

(d) (i) Receivables circularisation – procedures

– Obtain a list of receivables balances, cast this and agree it to the receivables control account total at the end of the year. Ageing of receivables may also be verified at this time.

– Determine an appropriate sampling method (cumulative monetary amount, value-weighted selection, random, etc.)using materiality for the receivable balance to determine the sampling interval or number of receivables to include in the sample.

– Select the balances to be tested, with specific reference to the categories of receivable noted below.

– Extract details of each receivable selected from the ledger and prepare circularisation letters.

– Ask the chief accountant at Seeley Co (or other responsible official) to sign the letters. – The auditor posts or faxes the letters to the individual receivables.

(ii) Specific receivables for selection:

1. Large or material items. These will be selected partly to ensure that no material error has occurred and partly to increase the overall value of items tested.

2. Negative balances. There are 15 negative balances on Seeley’s list of receivables. Some of these will be tested to ensure the credit balance is correct and to ensure that payments have not been posted to the wrong ledger account.

3. Receivables in the range $0 to $20,000. This group is unusual because it has a relatively higher proportion of older debts. Additional testing may be necessary to ensure that the receivables exist and to confirm that Seeley is not overstating sales income by including many smaller receivables balances in the ledger.

4. Receivables with balances more than two months old. Receivables with old balances may indicate

a provision is required for non-payment. The lack of analysis in Seeley Co’s receivable information indicates a high risk of nonpayment as the age of many debts is unknown.

5. Random sample of remaining balances to provide an overall view of the accuracy of the receivables balance.

6.(a) Calculation of weighted average cost of capital (WACC)

Cost of equity

Cost of equity using capital asset pricing model = 4·7 + (1·2 x 6·5) = 12·5%

Cost of convertible debt

Annual after-tax interest payment = 7 x (1 – 0·3) = $4·90 per bond

Conversion value = 7·80 x 15 = $117·00 per bond

Conversion appears likely, since the conversion value is much greater than par value.

The future cash flows to be discounted are therefore six years of after-tax interest payments and the conversion value received

in year 6:

Using linear interpolation, after-tax cost of debt = 5 + [(5 x 5·04)/(5·04 + 19·77)] = 6·0%. (Note that other after-tax costs of debt will arise if different discount rates are used in the linear interpolation calculation.)

We can confirm that conversion is likely and implied by the current market price of $107·11 by noting that the floor value of

the convertible debt at an after-tax cost of debt of 6% is $93·13 (4·9 x 6·210 + 100 x 0·627). Cost of bank loan

After-tax interest rate = 8 x (1 – 0·3) = 5·6%

This can be used as the cost of debt for the bank loan.

An alternative would be to use the after-tax cost of debt of ordinary (e.g. not convertible) traded debt, but that is not available here.

Market values

Market value of equity = 20m x 5·50 = $110 million

Market value of convertible debt = 29m x 107·11/100 = $31·06 million

Book value of bank loan = $2m

Total market value = 110 + 31·06 + 2 = $143·06 million

WACC = [(12·5 x 110) + (6·0 x 31·06) + (5·6 x 2)]/143·06 = 11·0%

(b) The weighted average cost of capital (WACC) can be used as a discount rate in investment appraisal provided that the risks of the investment project being evaluated are similar to the current risks of the investing company. The WACC would then reflect these risks and represent the average return required as compensation for these risks.

WACC can be used in investment appraisal provided that the business risk of the proposed investment is similar to the business risk of existing operations. Essentially this means that WACC can be used to evaluate an expansion of existing business. If the business risk of the investment project is different from the business risk of existing operations, a projectspecific discount rate that reflects the business risk of the investment project should be considered. The capital asset pricing model (CAPM) can be used to derive such a project-specific discount rate.

WACC can be used in investment appraisal provided that the financial risk of the proposed investment is similar to the financial risk of existing operations. This means that financing for the project should be raised in proportions that broadly preserve the capital structure of the investing company. If this is not the case, an investment appraisal method called adjusted present value (APV) should be used. Alternatively, the CAPM-derived project-specific cost of capital can be adjusted to reflect the financial risk of the project financing.

A third constraint on using WACC in investment appraisal is that the proposed investment should be small in comparison with the size of the company. If this were not the case, the scale of the investment project could cause a change to occur in the perceived risk of the investing company, making the existing WACC an inappropriate discount rate.

(c) The dividend growth model has several difficulties attendant on its use as a way of estimating the cost of equity. For example,the model assumes that the future dividend growth rate is constant in perpetuity, an assumption that is not supported by the way that dividends change in practice. Each dividend paid by a company is the result of a dividend decision by managers,

who will consider, but not be bound by, the dividends paid in previous periods. Estimating the future dividend growth rate is also very difficult. Historical dividend trends are usually analysed and on the somewhat risky assumption that the future will repeat the past, the historic dividend growth rate is used as a substitute for the future dividend growth rate. The model also assumes that business risk, and hence business operations and the cost of equity, are constant in future periods, but reality shows us that companies, their business operations and their economic environment are subject to constant change. Perhaps the one certain thing about the future is its uncertainty.

It is sometimes said that the dividend growth model does not consider risk, but risk is implicit in the share price used by the model to calculate the cost of equity. A moment’s thought will indicate that share prices fall as risk increases, indicating that increasing risk will lead to

an increasing cost of equity. What is certainly true is that the dividend growth model does not consider risk explicitly in the same way as the capital asset pricing model (CAPM). Here, all investors are assumed to hold diversified portfolios and as a result only seek compensation (return) for the systematic risk of an investment. The CAPM represent the required rate of return (i.e. the cost of equity) as the sum of the risk-free rate of return and a risk premium reflecting the systematic risk of an individual company relative to the systematic risk of the stock market as a whole. This risk premium is the product of the company’s equity beta and the equity risk premium. The CAPM therefore tells us what the cost of equity should be, given an individual company’s level of systematic risk.

The individual components of the CAPM (the risk-free rate of return, the equity risk premium and the equity beta) are found by empirical research and so the CAPM gives rise to a much smaller degree of uncertainty than that attached to the future dividend growth rate in the dividend growth model. For this reason, it is usually suggested that the CAPM offers a better estimate of the cost of equity than the dividend growth model.

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