(c) Illustrate how:

(i) inquiry; and (4 marks)

10 Which of the following factors would cause a company’s gearing ratio to fall?

1 A bonus issue of ordinary shares.

2 A rights issue of ordinary shares.

3 An issue of loan notes.

4 An upward revaluation of non-current assets.

A 1 and 3

B 2 and 3

C 1 and 4

D 2 and 4

3 Seejoy is a famous football club but has significant cash flow problems. The directors and shareholders wish to take

steps to improve the club’s financial position. The following proposals had been drafted in an attempt to improve the

cash flow of the club. However, the directors need advice upon their implications.

(a) Sale and leaseback of football stadium (excluding the land element)

The football stadium is currently accounted for using the cost model in IAS16, ‘Property, Plant, and Equipment’.

The carrying value of the stadium will be $12 million at 31 December 2006. The stadium will have a remaining

life of 20 years at 31 December 2006, and the club uses straight line depreciation. It is proposed to sell the

stadium to a third party institution on 1 January 2007 and lease it back under a 20 year finance lease. The sale

price and fair value are $15 million which is the present value of the minimum lease payments. The agreement

transfers the title of the stadium back to the football club at the end of the lease at nil cost. The rental is

$1·2 million per annum in advance commencing on 1 January 2007. The directors do not wish to treat this

transaction as the raising of a secured loan. The implicit interest rate on the finance in the lease is 5·6%.

(9 marks)

Required:

Discuss how the above proposals would be dealt with in the financial statements of Seejoy for the year ending

31 December 2007, setting out their accounting treatment and appropriateness in helping the football club’s

cash flow problems.

(Candidates do not need knowledge of the football finance sector to answer this question.)

(c) Briefly outline the corporation tax (CT) issues that Tay Limited should consider when deciding whether to

acquire the shares or the assets of Tagus LDA. You are not required to discuss issues relating to transfer

pricing. (7 marks)

19 At 30 June 2004 a company’s allowance for receivables was $39,000. At 30 June 2005 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events.

What figure should appear in the income statement for these items?

A $61,000

B $22,000

C $24,000

D $23,850

JOL Co was the market leader with a share of 30% three years ago. The managing director of JOL Co stated at a

recent meeting of the board of directors that: ‘our loss of market share during the last three years might lead to the

end of JOL Co as an organisation and therefore we must address this issue immediately’.

Required:

(b) Discuss the statement of the managing director of JOL Co and discuss six performance indicators, other than

decreasing market share, which might indicate that JOL Co might fail as a corporate entity. (10 marks)

(b) Discuss the relevance of each of the following actions as steps in trying to remedy performance measurement

problems relating to the ‘365 Sports Complex’ and suggest examples of specific problem classifications that

may be reduced or eliminated by each action:

(i) Focusing on and improving the measurement of customer satisfaction

(ii) Involving staff at all levels in the development and implementation of performance measures

(iii) Being flexible in the extent to which formal performance measures are relied on

(iv) Giving consideration to the auditing of the performance measurement system. (8 marks)