(ii) evaluates the relative performance of the four depots as indicated by the analysis in the summary table

prepared in (i); (5 marks)

(c) Explanatory notes, together with relevant supporting calculations, in connection with the loan. (8 marks)

Additional marks will be awarded for the appropriateness of the format and presentation of the schedules, the

effectiveness with which the information is communicated and the extent to which the schedules are structured in

a logical manner. (3 marks)

Notes: – you should assume that the tax rates and allowances for the tax year 2006/07 and for the financial year

to 31 March 2007 apply throughout the question.

– you should ignore value added tax (VAT).

Swim Co offers training courses to athletes and has prepared the following breakeven chart:

Required:

(a) State the breakeven sales revenue for Swim Co and estimate, to the nearest $10,000, the company’s profit if 500 athletes attend a training course. (2 marks)

(b) Using the chart above, explain the cost and revenue structure of the company. (8 marks)

(iii) A statement on the importance of confidentiality in the financing of the early stage working capital needs

and an explanation of how this conflicts with the duty of transparency in matters of corporate

governance. (6 marks)

Professional marks for layout, logical flow and persuasiveness of the statement. (4 marks)

Section B – TWO questions ONLY to be attempted

Perkin manufactures electronic components for export worldwide, from factories in Ceeland, for use in smartphones and hand held gaming devices. These two markets are supplied with similar components by two divisions, Phones Division (P) and Gaming Division (G). Each division has its own selling, purchasing, IT and research and development functions, but separate IT systems. Some manufacturing facilities, however, are shared between the two divisions.

Perkin’s corporate objective is to maximise shareholder wealth through innovation and continuous technological improvement in its products. The manufacturers of smartphones and gaming devices, who use Perkin’s components, update their products frequently and constantly compete with each other to launch models which are technically superior.

Perkin has a well-established incremental budgeting process. Divisional managers forecast sales volumes and costs months in advance of the budget year. These divisional budgets are then scrutinised by the main board, and revised significantly by them in line with targets they have set for the business. The finalised budgets are often approved after the start of the accounting year. Under pressure to deliver consistent returns to institutional shareholders, the board does not tolerate failure by either division to achieve the planned net profit for the year once the budget is approved. Last year’s results were poor compared to the annual budget. Divisional managers, who are appraised on the financial performance of their own division, have complained about the length of time that the budgeting process takes and that the performance of their divisions could have been better but was constrained by the budgets which were set for them.

In P Division, managers had failed to anticipate the high popularity of a new smartphone model incorporating a large screen designed for playing games, and had not made the necessary technical modifications to the division’s own components. This was due to the high costs of doing so, which had not been budgeted for. Based on the original sales forecast, P Division had already committed to manufacturing large quantities of the existing version of the component and so had to heavily discount these in order to achieve the planned sales volumes.

A critical material in the manufacture of Perkin’s products is silver, which is a commodity which changes materially in price according to worldwide supply and demand. During the year supplies of silver were reduced significantly for a short period of time and G Division paid high prices to ensure continued supply. Managers of G Division were unaware that P Division held large inventories of silver which they had purchased when the price was much lower.

Initially, G Division accurately forecasted demand for its components based on the previous years’ sales volumes plus the historic annual growth rate of 5%. However, overall sales volumes were much lower than budgeted. This was due to a fire at the factory of their main customer, which was then closed for part of the year. Reacting to this news, managers at G Division took action to reduce costs, including closing one of the three R&D facilities in the division.

However, when the customer’s factory reopened, G Division was unwilling to recruit extra staff to cope with increased demand; nor would P Division re-allocate shared manufacturing facilities to them, in case demand increased for its own products later in the year. As a result, Perkin lost the prestigious preferred supplier status from their main customer who was unhappy with G Division’s failure to effectively respond to the additional demand. The customer had been forced to purchase a more expensive, though technically superior, component from an alternative manufacturer.

The institutional shareholders’ representative, recently appointed to the board, has asked you as a performance management expert for your advice. ‘We need to know whether Perkin’s budgeting process is appropriate for the business, and how this contributed to last year’s poor performance’, she said, ‘and more importantly, how do we need to change the process to prevent this happening in the future, such as a move to beyond budgeting.’

Required:

(a) Evaluate the weaknesses in Perkin’s current budgeting system and whether it is suitable for the environment in which Perkin operates. (13 marks)

(b) Evaluate the impact on Perkin of moving to beyond budgeting. (12 marks)

Ms Huang, a shareholder of the Daqing Limited Liability Company (Daqing), found that the general manager, Mr Ding, had accepted bribes from several suppliers, which materially caused losses to Daqing, and adversely affected the interests of all shareholders.

Further examination, through a Certified Public Accountant firm, disclosed that there were a lot of affiliated transactions between Daqing and Everbright Co, which was the majority shareholder of Daqing. Mr Ding was recommended by Everbright Co and appointed by Daqing’s board of directors, which was substantially influenced by Everbright Co. With a series of such transactions Daqing transferred huge profits to Everbright Co and adversely affected Daqing.

Required:

(a) State whether Ms Huang was entitled to take legal action against Mr Ding for his illegal behaviour of accepting bribes which adversely affected all the shareholders. (2 marks)

(b) State TWO different legal actions Ms Huang was entitled to take to protect the rights of Daqing and its shareholders due to the affiliated transactions with Everbright Co. (4 marks)

(b) For this part, assume today’s date is 1 May 2010.

Bill and Ben decided not to sell their company, and instead expanded the business themselves. Ben, however,

is now pursuing other interests, and is no longer involved with the day to day activities of Flower Limited. Bill

believes that the company would be better off without Ben as a voting shareholder, and wishes to buy Ben’s

shares. However, Bill does not have sufficient funds to buy the shares himself, and so is wondering if the

company could acquire the shares instead.

The proposed price for Ben’s shares would be ￡500,000. Both Bill and Ben pay income tax at the higher rate.

Required:

Write a letter to Ben:

(1) stating the income tax (IT) and/or capital gains tax (CGT) implications for Ben if Flower Limited were to

repurchase his 50% holding of ordinary shares, immediately in May 2010; and

(2) advising him of any available planning options that might improve this tax position. Clearly explain any

conditions which must be satisfied and quantify the tax savings which may result.

(13 marks)

Assume that the corporation tax rates for the financial year 2005 and the income tax rates and allowances

for the tax year 2005/06 apply throughout this question.

(iii) Tyre has entered into two new long lease property agreements for two major retail outlets. Annual rentals are paid

under these agreements. Tyre has had to pay a premium to enter into these agreements because of the outlets’

location. Tyre feels that the premiums paid are justifiable because of the increase in revenue that will occur

because of the outlets’ location. Tyre has analysed the leases and has decided that one is a finance lease and

one is an operating lease but the company is unsure as to how to treat this premium. (5 marks)

Required:

Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended

31 May 2006.

(The mark allocation is shown against each of the above items)

(ii) Identify and explain the principal audit procedures to be performed on the valuation of the investment

properties. (6 marks)