text: PROFESSIONAL EXAMINATION II
  PUBLIC SECTOR ACCOUNTING AND FINANCE
  3. The method which values stock at the end of an accounting period at the
  latest prices is called
  A. current market price method.
  B. last-in-first-out (LIFO) method.
  C. first-in-first-out (FIFO) method.
  D. weighted average method.
  E. simple average method.
  10. The instrument which is used to re-vote capital expenditure estimate which
  had lapsed over the years is known as
  A. development fund supplementary warrant.
  B. development fund (special) warrant.
  C. development fund general warrant.
  D. development fund virement warrant.
  E. development fund reserve expenditure warrant.
  11. All the following are marketable Federal Government debt instruments,
  EXCEPT
  A. Treasury bills.
  B. Promissory notes.
  C. Treasury bond.
  D. Treasury certificate.
  E. Federal government development stock.
  2
  12. Which of the following will lead to a reduction in aggregate disposable
  income in the economy?
  A. Increase in transfer payment
  B. Increase in external borrowing
  C. Reduction in company income tax
  D. Surplus budgeting
  E. Deficit budgeting.
  13. Which of the following is a tax on the supply of goods and services which is
  borne by the final consumer but collected at each stage of production and
  distribution chain?
  A. Value added tax (VAT).
  B. Petroleum profit tax.
  C. Capital transfer tax
  D. Excise duties
  E. Export duties.
  15. The deliberate manipulation of the extent and timing of taxes and revenue
  by the government to achieve certain economic objectives is
  called……………………………….
  A. discretionary fiscal policy.
  B. policy drag.
  C. built-in-stabilizer.
  D. fiscal responsibility.
  E. compensatory fiscal policy.
  16. Which of the following goods and services is NOT supplied by the public
  sector?
  A. National defence
  B. National health service
  C. Clothes
  D. Police protection
  E. Vehicle licensing.
  19. The policy initiative which emphasizes positive returns on public sector
  investment is called
  A. indigenization.
  B. privatization.
  C. commercialization.
  D. nationalization.
  E. industrialization.
  20. Public debts that are due for settlement each month are financed by the
  Federal Government through
  A. a reduction in expenditure.
  B. increasing the tax rate imposed on the public.
  C. asking corporate organizations for donations.
  D. selling new bonds to the public.
  E. asking States and Local Governments for donation.
  4
  PART II SHORT ANSWER QUESTIONS (20 MARKS)
  8. Section 35 of the Public Procurement Act 2007 put the mobilization fees
  payable to a supplier or contractor at not more than ………………………..%.
  9. An expenditure item whose benefits accrue for more than one year is
  ……………………
  10. What is the financial statement which shows the sources and uses of cash for
  a period called?
  12. Besides revenue sharing, the main mechanism for inter governmental
  transfer is ………………….. from higher to lower levels.
  13. A development plan which is always split into many short-term plans of
  three or five years, in order to achieve long-term objectives is
  called………………………
  14. Since the early 1970s, the primary engine for economic growth and
  development in Nigeria has been the revenue from ……………….. sector.
  5
  15. The divestment of the Federal Government shareholding in some public
  enterprises and the restructuring of designated ones to operate profitably on
  commercial basis is being executed under the programme of
  …………………. and ……………..
  17. A system of assessment of public projects which lays emphasis on the tests of
  actual performance of projects against their expected standards is called
  …………………………
  18. An arrangement in which the private sector is co-opted into financing socio-
  economic infrastructure that were usually exclusively provided by the
  government is known as ………………
  19. In the Discounted cash flow (DCF) method of project evaluation, the rate at
  which the net present value is zero for a given set of cashflows is called
  ……………………….
  20. A public debt management strategy which involves changing the maturity
  structure of the loan is referred to as…………………..
  6
  SECTION B
  He told the other council members and management staff present at the meeting
  that he was currently studying the following documents, which he bought about
  four months ago:
  (a) The Corrupt Practices and Other Related Offences Act, 2002;
  (b) The Public Procurement Act, 2007;
  (c) The 1999 Constitution of the Federal Republic of Nigeria;
  (d) The Independent Corrupt Practices and Other Related Offences Act; and
  (e) The Economic and Financial Crimes Commission Act.
  The Chairman is familiar with the published accounts of banks and companies in
  which he had invested money. He was, however, not conversant with the financial
  reports of government establishments.
  The Chairman has spent time going through the last few years‟ financial reports
  and statements of the Council and comparing them seriously with those of
  trading/commercial outfits.
  He kept his mind open at the meeting and specifically gave the new committee the
  following assignments to answer these following posers:
  (a) Why the Council did not prepare Profit and Loss Account;
  (b) Why the Council had not been declaring dividends;
  (c) Why the Council did not register with the Corporate Affairs Commission; and
  (d) Why the Council did not hold Annual General Meetings just as public quoted
  companies or profit making outfits.
  7
  QUESTION 2
  The following balances were extracted from the Head Ledgers of Rima State
  Treasury in December, 2008:
  In addition, the following pieces of information were derived from the Approved
  Capital Budget of the State:
  (N million) (N million)
  211 5,132,000 220 182,148
  212 4,782,000 225 223,160
  213 1,095,000 231 117,828
  214 1,521,000 233 215,032
  234 162,130
  239 43,000
  240 137,000
  245 650,000
  246 400,000
  QUESTION 3
  8
  distribution. The Central Bank of Nigeria renders the COMPONENT STATEMENTS of
  the Federation Account for the relevant month.
  (a) List any FOUR of the contents of the COMPONENT STATEMENTS rendered by
  the Central Bank. (4 Marks)
  (b) Describe Zero-Base Budgeting and briefly compare it with the traditional/
  incremental budgeting. (11 Marks)
  (Total 15 Marks)
  QUESTION 4
  (a) List TWO powers of the Fiscal Responsibility Commission as contained in the
  Act which established the Body. (4 Marks)
  (b) Section 8 (1) of the Act stipulates the conditions for cessation of membership
  of the Commission.
  Required:
  Enumerate any SIX of the conditions as spelt out in the Act. (6 Marks)
  With the aid of concrete examples, explain the reasons for Government‟s continued
  ownership of enterprises in Nigeria. (Total 15 Marks)
  QUESTION 6
  9
  SOLUTIONS TO SECTION A
  1. D
  2. E
  3. C
  4. C
  5. B
  6. A
  7. B
  8. A
  9. B
  10. A
  11. B
  12. D
  13. A
  14. E
  15. A
  16. C
  17. D
  18. B
  19. C
  20. D
  10
  SHORT ANSWER QUESTIONS
  11
  SOLUTIONS SECTION B
  (a) WHY THE COUNCIL DID NOT PREPARE PROFIT AND LOSS ACCOUNT
  The purpose/aim of a Local Government Council is not to make profit per se,
  but to provide social services to the people in the community. The costs of
  such services are borne by the tax payers.
  Dividend payment is just one of the means of rewarding the shareholders for
  their investments in the companies. A Local Government Council does not
  have shareholders. The Federal and State Governments make allocations to
  the Councils. The Local Government Councils source internally generated
  revenue from local taxes, rates, fines and proceeds of small scale commercial
  ventures such as farming.
  12
  There is a legal provision for the appropriation of company profit by way of
  dividend payment to shareholders. There is no such provision for a Local
  Government Council which has only stakeholders rather than shareholders.
  c. WHY THE COUNCIL DID NOT REGISTER WITH THE CORPORATE AFFAIRS
  COMMISSION
  Only public companies are required by law to register with the Corporate
  Affairs Commission. Local Government Councils are creations of the 1999
  Constitution of the Federal Republic of Nigeria. Unlike companies, they are
  the third tier of Government.
  d. WHY THE COUNCIL DID NOT HOLD ANNUAL GENERAL MEETINGS
  It is mandatory for companies or organizations registered under the
  Companies and Allied Matters Act to hold Annual General Meetings. There
  are specific statutory duties to be executed at such meetings, for example,
  the consideration and approval of the audited financial statements and
  auditors‟ reports. There is no law or regulation compelling or requiring Local
  Government Councils to hold such meetings.
  SOLUTION 2
  RIMA STATE
  DEVELOPMENT FUND STATEMENT OF ACCOUNTS FOR THE YEAR ENDED
  DECEMBER 31, 2008
  Head Item Estimates Actual
  N million N million
  211 Contribution from CRF 5, 132,000 1,727,331
  212 External Grant 4,782,000 1,600,000
  213 Internal Loans 1,095,000 2,549,600
  214 External Loans 1,521,000 3,246,700
  (a) 12,530,000 9,123,631
  220 Rural Development 182,148 120,000
  225 Mining and Quarrying 223,160 149,000
  231 Air Transport 117,828 129,000
  233 Education 215,032 253,824
  234 Health Care 162,130 170,000
  239 Environment 43,000 12,000
  240 Housing 137,000 139,000
  245 Defence 650,000 643,000
  246 General Administration 400,000 421,000
  (b) 2,130,298 2,036,824
  Surplus (c) = (a) – (b) 10,399,702 7,086,807
  SOLUTION 3
  (ii) Royalties, rent and other revenue from the Ministry of Petroleum
  Resources;
  (iii) Petroleum profits tax, Companies income tax collected by the Federal
  Inland Revenue Service;
  (iv) Import and Excise Duties collected by the Nigerian Customs Service;
  and
  (b) Zero Base Budgeting (ZBB) is a planning and budgeting tool which uses
  cost/benefit analysis of projects and functions to improve resource
  allocation, in an organization. The budget usually consists of decision
  packages which are analysed, evaluated and rated in the order of priority,
  on the basis of the cost/benefit analysis. Management can then evaluate
  possible activities for the coming period and select those which will best
  achieve the organization‟s goals.
  SOLUTION 4
  (iv) If the President is satisfied that it is not in the interest of the Council
  or the public for him to continue in office and thereby removes him;
  (vii) If in the case of a person who became a member by virtue of his office
  and he ceases to hold such office for whatever reason.
  (c)
  (i) Entity Concept
  This involves treating economic unit as a separate entity from the
  parties having proprietary interests in it.
  15
  (v) Historical Cost Concept
  This assumes that historical cost is the appropriate basis for initial
  accounting recognition of all transactions entered into.
  SOLUTION 5
  Arguments for government ownership of enterprises in Nigeria:
  16
  SOLUTION 6
  (a) The reasons for excessive dependence of State and Local Governments on
  statutory allocations for their finances include the following:
  (b) Measures to improve the present precarious fiscal dependence will include:
  17
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  PUBLIC SECTOR ACCOUNTING AND FINANCE
  18
  4. The document which shows the total salaries and allowances of staff in each
  ministry or department for a future period is called
  6. All but one of the following is NOT a method of preparing a public sector
  organization‟s annual budget.
  A. base estimate.
  B. capital estimate.
  C. revenue estimate.
  D. commitment growth estimate.
  E. revised estimate.
  A. leases.
  B. borrowing costs.
  C. consolidated financial statements.
  D. cash flow statements.
  E. construction contracts.
  19
  9. The fiscal year of public sector organizations is
  10. The statement which shows how the profit realized is shared between the
  providers of capital, employees and tax authorities is known as
  A. income statement.
  B. sources and application of funds.
  C. value–added statement.
  D. cash flow statement.
  E. working capital statement.
  11. The revenue source which generates the bulk of the revenue in the local
  government apart from statutory allocation is
  13. Fiscal policy measures to eliminate balance of payments deficit include all
  the following EXCEPT
  15. When a creditor nation decides to write off the liabilities of a debtor nation,
  it is called
  A. debt–equity swap.
  B. debt restructuring.
  C. ban on external loan.
  D. debt forgiveness.
  E. debt repudiation.
  I. Government expenditure
  II. Government Borrowing
  III. Taxation
  A. I
  B. II
  C. III
  D. I & II
  E. I, II & III
  A. licence fees.
  B. import duty.
  C. export duty.
  D. excise duty.
  E. expenditure tax.
  21
  19. A source of revenue that contributes the most to the coffers of the Federal
  government of Nigeria is
  20. If the government wishes to increase the level of Net National Product, it will
  22
  PART II - SHORT ANSWER QUESTIONS (20 MARKS)
  1. The Warrant that authorizes the release of funds included in the approved
  annual or supplementary estimates but excluded from the Annual General
  Warrant is called …………………….
  3. The use by several undertakings, within the public sector, of the same
  accounting principles and/or practices is called ………………
  4. The principal revenue-generating activities of the entity and others that are
  neither investing nor financing activities are called ……………………
  6. The documents used to transfer stock from one store to another is called
  ………………..
  7. Inflows and outflows of cash and cash equivalents are called ………………
  8. The acquisition and disposal of long-term assets and other investments not
  included in cash equivalents are known as …………………
  10. State any ONE accounting basis under which financial transactions are
  recorded in the private sector.
  11. The sale of external debt at a favourable discount for equity participation in
  domestic enterprise is described by the term ……………
  12. The share of the Federal, State or Local Governments from the Federation
  Accounts revenue is called …………………..
  13. The method by which resources are shared among the Federal, State and
  Local governments is based on the ……………….
  14. A technique of public sector project appraisal with emphasis on the least cost
  of achieving the specific objective of a project and choosing among
  alternative lines of action is known as …………………….
  23
  15. The sector of the Nigerian economy which employs the bulk of the nation‟s
  population is …………………..
  17. The institution that is entrusted with the issue and management of Federal
  Government loans publicly issued in Nigeria is ……………….
  19. The type of budget that can be used to stimulate a depressed economy is
  …………………..
  20. In external debt financing, International Institutions such as the World Bank
  and International Monetary Fund (IMF) are classified as ……………….
  24
  SECTION B (60 MARKS)
  The President of the Federal Republic of Utopia just presented the annual budget to
  the joint sitting of the country‟s National Assembly. The country derives the lion
  share of its revenue from the export of crude oil. In spite of the huge revenue
  derived from this source, the needs of the country are more. This is why the revenue
  estimates of the budget which the President presented are lower than the proposed
  expenditure. The President proposed that the excess of expenditure over revenue
  could be financed from an increase in taxation, instead of the removal of petroleum
  subsidy.
  During the debate of the President‟s budget speech in the upper house, the Senator
  representing Adah Federal constituency of Myopia State, wondered why the
  President was considering further erosion of the purchasing power of the people
  who were already suffering from low real income, due to the high rate of inflation.
  “Instead of putting more burden on the people,” a senator interjected, “let the
  Central Bank print more money to cover the difference in the proposed expenditure
  and revenue estimates”. He had hardly finished when another senator shouted him
  down. At this point, the Senate President frowned at the senator who humiliated his
  colleague. The Senator shouted down was too infuriated to continue his speech.
  Another Senator stood up to suggest the idea of taking loans from, according to
  him, “IMF, Paris Club and the London Club of Creditors”. The debate went on and
  on. At the end of the day, there was no agreement as to the source of financing for
  the difference in expenditure and revenue. The Senate then adjourned till the
  following week.
  Required:
  (a) Identify the type of budget presented by the President of the Federal
  Republic of Utopia. (3 Marks)
  (b) Identify the various sources of financing this type of budget highlighted in
  the passage. (6 Marks)
  (c) Examine the viability and economic implication of each source identified
  (6 Marks)
  (Total 15 Marks)
  QUESTION 2
  (b) The following summarized information has been obtained from UNIPET
  KONSULT, the consultancy outfit of the University of PETELE STATE, in respect of
  the year ended December 31, 2008.
  25
  N million
  Salaries 4,680
  Purchased material used in production 10,800
  Sales 19,700
  Corporate tax for the year 600
  Proposed dividend 330
  Services consumed 2,130
  Depreciation of fixed assets 360
  Loan interest paid 360
  QUESTION 3
  DR CR
  N N
  Cash 181,992
  Tenement Rate 3,898,908
  Interest and Penalties 7,800
  Licences 2,108,592
  Fines 928,500
  Water rates 841,350
  Sundry revenue 82,950
  Market fees 132,900
  Parks and recreation 1,480,740
  Pension contribution 382,800
  Health and welfare 2,191,260
  Administration 3,010,500
  Sundry expenses 29,640
  Investments (short-term) 4,500,000
  Staff advances 63,750
  Loans –Better Life Programme 75,000
  - Governors‟forum 37,500
  Fund balance 3,877,182
  11,915,682 11,915,682
  ii. The Reserve fund is 2% of the total internal revenue of the local government.
  You have just been recruited into Djabi Federal Civil Service and posted to the
  Consolidated Accounts Department. The Department is responsible for the
  preparation of all accounts of the service. The Accountant General has requested
  you to re-analyse the records below using the following bases:
  i) Budgetary;
  ii) Commitment;
  iii) Accrual; and
  iv) Cash.
  Amount for
  which Value of Value of
  Budgeted contracts job job paid
  Head Item Amounts were issued executed for
  N‟000 N‟000 N‟000 N‟000
  5.01 Construction of J.S Tarka 900,000 1,600,000 1,400,000 1,300,000
  Way
  5.02 Extension to the secretariat 500,000 480,000 480,000 440,000
  5.03 Purchase of stationery 600,000 560,000 560,000 540,000
  5.04 Supply of granite stones 400,000 540,000 520,000 500,000
  5.05 Treasury books printed 100,000 120,000 120,000 200,000
  5.06 Drugs/Equipment 1,000,000 960,000 900,000 800,000
  purchased
  (Total 15 Marks)
  QUESTION 5
  (a) Describe the terms „domestic debt‟ and „external debt‟. (6 Marks)
  (b) Explain three sources of each of the above two types of debt available to the
  government. (9 Marks)
  (Total 15 Marks)
  27
  QUESTION 6
  Highlight five ways by which the Federal Government of Nigeria finances her
  development plans. (Total 15 Marks)
  28
  SOLUTIONS TO SECTION A
  1. C
  2. B
  3. B
  4. C
  5. D
  6. B
  7. E
  8. D
  9. B
  10. C
  11. B
  12. B
  13. A
  14. B
  15. D
  16. A
  17. E
  18. A
  19. B
  20. B
  29
  PART II - SHORT ANSWER QUESTIONS
  30
  SOLUTIONS TO SECTION B
  (a) The type of budget presented by the President of the Federal Republic of
  Utopia is a deficit budget.
  i. increases in taxation.
  ii. removal of petroleum subsidy.
  iii. printing of more money by the Central Bank.
  iv. loan from the International Monetary Fund (IMF).
  v. loan from London Club.
  vi. loan from the Paris Club.
  31
  be prohibitive. Moreover, the club grants loans for mainly trade
  arrears.
  SOLUTION 2
  „Value Added‟ is the amount by which the sales value of production was
  enhanced by the effort of the organization and its employees. It is the
  wealth created by the combined efforts of both the organization and the
  employees.
  N million N million
  Sales 19,770
  Less
  Purchased material used in production 10,800
  Salaries 4,680
  Services consumed 2,130
  Depreciation of fixed assets 360
  Loan interest 360 (18,330)
  Profit Before Tax (PBT) 1,440
  Taxation (600)
  Profit After Tax (PAT) 840
  Dividend proposed (330)
  Profit carried forward 510
  32
  (ii) UNIPET KONSULT
  VALUE –ADDED STATEMENT FOR THE YEAR ENDED DECEMBER 31,2008.
  N
  million %
  Sales 19,770
  Bought out materials and services used in production (12,930)
  Value added 6,840 100
  Applied to:
  Employees 4,680 69
  Government (Corporate tax) 600 9
  Providers of capital:
  Interest of loan 360 5
  Proposed dividend 330 5
  For expansion/maintenance of assets:
  Retained earnings 510 7
  Depreciation 360 5
  6,840 100
  SOLUTION 3
  33
  (7,106,190)
  902,310
  Less: Reserve fund (2% of N8,008,500) 160,170
  Surplus 742,140
  Fund balance b/f 3,877,182
  Fund balance c/f 4,619,322
  (b)
  TINUBA LOCAL GOVERNMENT
  STATEMENT OF ASSETS AND LIABILITIES AS AT 31 DECEMBER 2008
  Assets N
  Investments 4,500,000
  Cash 181,992
  Loans 75,000
  Market fees o/s 7,500
  Staff Advances 63,750
  4,828,242
  Liabilities
  SOLUTION 4
  34
  ANALYSIS USING THE COMMITMENT, ACCRUAL AND CASH BASES
  Tutorial
  It is only under the budgetary basis that estimated figures are compared with
  actual cash paid out.
  SOLUTION 5
  Multilateral Creditors
  These are international institutions funded by member nations.
  They include the World Bank and its affiliates, International
  Monetary Fund (IMF), African Development Bank (ADB),
  European Investment Bank (EIB) and International Fund for
  Agricultural Development (IFAD) that provides credit for
  development purposes, balance of payments support and private
  ventures.
  SOLUTION 6
  The Federal Government of Nigeria finances her development plan through the:
  (a) money realized through the exportation of crude oil to her international
  customers like the United States of America accounts for over ninety percent
  of her total revenue;
  (b) deficit budgeting backed by printing of more money by the Central Bank of
  Nigeria;
  (c) revenue generated from duties collected on imported goods like drugs,
  motor vehicles, etc. The proceeds collected by government from import
  duties account for a reasonable percentage of internally generated revenue
  which are used to finance some items like the construction of roads, dams,
  etc included in the development plan of the government;
  36
  (d) revenue from petroleum profit tax imposed on forms involved in the
  exploration of crude oil in Nigeria e.g Shell oil, Mobil oil etc is another
  source;
  (f) internal borrowing from commercial banks or sale of bonds to the public;
  and
  (g) External borrowing from some international financial institutions like IUMF,
  ADB, etc.
  37
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  FINANCIAL REPORTING AND ETHICS
  38
  5. IAS 37 requires that Contingent Liabilities should be disclosed in the
  financial statements rather than being recognized. Which of these is NOT a
  disclosure requirement according to the standard?
  6. A Company acquires the Net Assets of a business for which it issues 400,000
  of its Ordinary Shares of ₦1 each. The business acquired has an overdraft of
  ₦100,000 but no long term debt.What is the impact on the Gearing and the
  Net cash position of the company?
  7. The table below shows information from the Balance Sheets of two
  Companies, X and Y.
  X Y
  N‟000 N‟000
  Ordinary Shares 800 900
  10% Debentures 600 150
  Profit and Loss Account 300 650
  A. Relevant facts
  B. Ethical issues involved
  C. External review by legal practitioner
  D. Fundamental principles related to the matter
  E. Established internal procedures
  40
  13. The professional accountant should make which one of the following users of
  his services to be aware of the limitation inherent in his services to avoid the
  misrepresentation of an expression of opinion as an assertion of fact?
  A. Clients, employers, investors and government.
  B. Professional colleagues, employers, investors and government.
  C. Employees, investors and government.
  D. Tax authority and employees.
  E. Internal auditors, tax authority and employer.
  14. The people within a company operate from two major ethical dimensions.
  These are:
  A. Particular individual‟s ethical framework guiding his behaviour and the
  organisations‟ official ethical policies and culture.
  B. Particulars of individual‟s ethical framework guiding their behaviour
  and the management staff ethical views.
  C. The individual and community ethical perspectives.
  D. The organisations‟ culture and ethical perspective.
  E. The behaviour of clients and managements ethical values.
  15. The Code of Best Practice on Corporate Governance in Nigeria is divided into
  which one of the following three parts?
  A. Descriptive
  B. Proscriptive
  C. Prescriptive
  D. Protective
  E. Operative
  17. The triple bottom line position states that a Corporation can and should be
  evaluated not only in terms of its financial bottom line, but also in terms of
  its………..
  A. Environmental and social bottom line
  B. Environmental and ethical bottom line
  C. Ethical and social bottom line
  D. Environmental and ethical/social bottom line
  E. Social and legal bottomline
  41
  18. Rest‟s components of framework for ethical behaviour include the following
  EXCEPT moral………
  A. sensitivity
  B. judgements
  C. motivation
  D. psychology
  E. character
  20. The following are ethical issues for Professional Accountants EXCEPT:
  A. Under-reporting income
  B. Creative accounting
  C. Falsifying accounts
  D. Avoidance of Tax
  E. Integrity
  42
  PART II SHORT ANSWER QUESTIONS (20 MARKS)
  1. The theory in ethics which holds that an action is morally right if the
  consequences of that action are more favourable than unfavourable only to
  the agent performing the action, is known as..........................
  6. Set of procedures, customs, policies, laws and institutions affecting the way
  a Corporation or Company is directed, administered or controlled is called
  ……………..
  8. A form of applied ethics that examines ethical principles and moral or ethical
  problems that arise in a business environment is called ……………...
  12. According to SAS 5, how are costs relating to aspects of a contract that are
  not immediately certifiable, treated?
  13. When assessing whether an entity has the power to govern the financial and
  operating policies of another entity, it usually considers the existence and
  effect of ………..
  43
  14. A Parent Company might lose control of a Subsidiary in multiple
  transactions. Those transactions should be accounted for as …………..
  19. The interest expense that is not explicitly recognised in a loan agreement is
  referred to as ………………………..
  44
  SECTION B - ATTEMPT QUESTION 1 AND ANY OTHER THREE (60 MARKS)
  As a young Branch manager at a relatively small retail office within a large Bank
  holding company. Sara has been challenged by her superiors to increase Loan and
  Deposit volumes within her local Banking market. In Sara‟s first year on the job,
  she has designed and implemented an aggressive calling program in which she
  visits local businesses soliciting for new Corporate accounts for the Bank. Her initial
  efforts have been most successful. Inspite of strong competition from other local
  financial institutions, Sara has managed to attract a new N320 million funds
  deposit from a local Estate Management firm, Silver Valley Estates, and she is
  currently negotiating with Silver Valley‟s President to provide a N48 million
  mortgage loan for his new personal residence.
  It seems a number of cheques worth N3.2 million deposited into Silver Valley‟s
  Rental Collection Account two months earlier were returned to the Bank for reasons
  of insufficient funds. Instead of promptly deducting the bounced cheques from
  Silver Valley‟s account and returning them to the firm, one of the Deposit
  Operations clerks at the Bank, inadvertently placed the cheques in his bottom desk
  drawer and forgot about them. After several weeks, the Bank‟s Auditors located the
  Cheques, and now Sara must debit Silver Valley‟s account and return the Cheques
  to the firm.
  Sara protests to her boss that this action would clearly be wrong, because the
  Bank‟s written policy states that cheques accepted for Deposit cannot be returned
  after the tenth business day following their date of Deposit. In addition, Sara
  explains that one condition of the Bank‟s mortgage loan approval to Silver Valley‟s
  President is that the firm must maintain a major Deposit account with Sara‟s
  Branch. She knows that if she charges the Silver Valley account for the bounced
  cheques, she will anger Silver Valley‟s President, lose the N320 million Deposit
  accounts and the new mortgage loan, and sacrifice all future businesses from Silver
  Valley to competing financial institutions in her local market.
  Sara‟s boss claimed that he understands her dilemma, but he is adamant in his
  instruction to her. The bank cannot afford a N3.2 million loss to a new Corporate
  45
  Depositor, and she must debit Silver Valley‟s account to cover the bounced cheques.
  Moreover, Sara was quietly warned that discussing this matter with any other
  senior officers of the Bank will prove most damaging to her career.
  Required:
  (a) Bearing in mind that the Bank‟s written policy states that cheques accepted
  for deposit cannot be returned after the tenth business day following their
  date of deposit, evaluate the ethical implications of debiting Silver Valley‟s
  account and returning the cheques to the firm. (5 Marks)
  (c) Advise Sara on the next line of action, bearing in mind that she has been
  quietly warned that discussing this matter with any other senior officers of
  the Bank will prove most damaging to her career. (5 Marks)
  QUESTION 2
  SUPERCOM LIMITED.
  Balance Sheet as at 31 May, 2009
  Fixed Assets:
  Intangible: Goodwill - - -
  Tangible: Freehold premises 800 - 800
  Plant and Machinery 400 180 220
  Motor Vehicle 120 90 30
  1,320 270 1,050
  Current Assets:Stock 196
  Debtors 81
  277
  46
  Creditors: Amount falling due within one year:
  Bank Overdraft 18
  Trade Creditors 53
  Ordinary Dividend 20 ( 91) 186
  1,236
  Creditors: Amount falling due after one year:
  10% Debentures 2010/2012 (80)
  1,156
  Share Capital and Reserve:
  Ordinary Shares of N1 each 500
  Share Premium 180
  Revaluation Reserve 340
  General Reserve 120
  Retained Profit 16
  1,156
  Extract from Profit and Loss Account for the year ended 31 May 2009
  N‟000 N‟000
  Operating Profit 65
  Interest on Debentures (12)
  53
  Transfer to General Reserve 20
  Ordinary Dividends 30 (50)
  Retained profit for the year 3
  Required:
  (a) Prepare SUPERCOM Ltd‟s Balance Sheet as at 31 May 2008 (10 Marks)
  (b) Write a report to the management of SUPERCOM Ltd showing the purposes of a
  Cash Flow Statement and explain its advantanges to the Managing Director
  who still prefers the use of Funds Flow Statement. (5 Marks)
  (Total 15 Marks)
  QUESTION 3
  Toritel is concerned that its maket share and competitive position may suffer if it
  discloses the volume and profitability of its new product line in its annual financial
  statements. Management is not sure of how SAS 24 applies in this case.
  Required:
  (a) State THREE purposes of requiring segment information in financial
  statements (3 Marks)
  48
  (b) Identify SIX factors that should be considered when attempting to decide on
  how products should be grouped to determine a single business segment.
  (6 Marks)
  (c) What options, if any, does Toritel Ltd. have with the disclosure of its new
  antihistamine product line? Explain your answer. (6 Marks)
  (Total 15 Marks)
  QUESTION 4
  Patience Ventures has misplaced her Final Accounts for the year ended 31
  December 2009. The Company has decided to reconstruct the Accounts from the
  available data.
  At 31 December 2009, Stock was valued at N162,000. (This was 20% more than the
  stock at 1 January 2009)
  For the year ended 31 December 2009
  Stock Turnover 10 times
  Gross profit margin 35%
  Net profit margin 22%
  Fixed asset turnover 4 times
  Debtors‟ days 34 ( based on 365 days in the year)
  Creditors‟ days 42 (based on 365 days in the year)
  Current ratio 2.5 : 1
  The current assets consist of stock, trade debtors and bank balance. All sales and
  purchases were made on credit. The Proprietor drew N420,000 from the business
  during the year.
  Required:
  (a) Prepare, in as much detail as possible , Patience‟s Venture Trading and Profit
  and Loss Account for the year ended 31 December 2009 and the Balance
  Sheet at that date. Make all calculations to the nearest Naira. (8 Marks)
  49
  (b) Compare Hurry Enterprises‟ performance with that of Patience Ventures and
  indicate THREE Ratios that show which business is more efficient and profitable.
  (7 Marks)
  (Total 15 Marks)
  QUESTION 5
  QUESTION 6
  (b) State SEVEN safeguards that may reduce to an acceptable level the threats
  faced by Professional Accountants in the work environment. (7 Marks)
  (Total 15 Marks)
  50
  SOLUTIONS TO SECTION A
  1. D
  2. D
  3. E
  4. E
  5. C
  6. B
  7. C
  8. C
  9. C
  10. E
  11. C
  12. A
  13. A
  14. A
  15. D
  16. C
  17. D
  18. D
  19. A
  20. D
  51
  PART II: SHORT ANSWER QUESTIONS
  1. Ethical egoism
  2. Utilitarianism
  3. Social responsibile
  4. Morally Responsible
  5. Ethical Leader
  6. Corporate Governance
  7. Etiquette
  8. Business Ethics
  9. Life, Play, Knowledge and Harmony with other people
  10. Principles of Integrity,, professional competence and due care, objectivity
  and confidentiality.
  11. The Completed Contract Method
  12. Not charged to revenue and deferred till certifiable
  13. Existing Potential voting rights currently exercisable or convertible.
  14. A single Transaction
  15. Carrying amount
  16. Financing Activities
  17. Repayment and armortisation
  18. Restructuring
  19. Implicit interest
  20. Liquidity; Solvency
  52
  SOLUTIONS TO SECTION B
  SOLUTION 1
  (a) The main source of the dilemma in this case is the fact that a number of
  cheques worth N3.2 million deposited into Silver Valley‟s rental collection
  account two months earlier were returned to the Bank for reason of
  insufficient funds. But the cheques were not promptly deducted from Silver
  Valley‟s account and returned to the firm, rather one of the Deposit
  Operations clerks at the Bank inadvertently placed the cheques in his bottom
  desk drawer and forgot about them. In addition to that is the Bank‟s written
  policy which states that cheques accepted for deposit cannot be returned
  after the tenth business day following their date of deposit, there is the
  question of responsibility.
  Going by the explanations above, one can infer that debiting Silver Valley‟s
  account and returning the cheques to the firm two months after they were
  deposited would be unfair and an act of insincerity motivated by selfish
  interest and shrouded in subjectivity. It in fact, shows lack of integrity and
  responsiveness. It totally breaches the Bank‟s policy.
  One can absolve Silver Valley of responsibility in this matter because they
  probably did not know the account had no sufficient funds, but for the Bank,
  they ought to be held accountable for the unfortunate mistake that occurred
  in the Bank‟s Deposit Operations Centre. It would therefore be a great
  injustice if Silver Valley is made to bear the consequences.
  This will have a further implication on the Bank‟s relationship with Silver
  Valley‟s other corporate customers and the stakeholders generally. For
  Sarah, it would be a big blow to her career as the act according to her will
  anger Silver Valley‟s President, make them lose the N320 million deposit
  accounts and the new mortgage loan, and sacrifice all future business from
  Silver Valley to competing financial institutions in her local market. This will
  mean loss of business for herself, her Branch and the Bank as a whole.
  53
  Sara‟s boss insisted that Sara must debit Silver Valley‟s account to cover the
  bounced cheque loss because the Bank cannot afford a N3.2 million loss.
  He is clearly insensitive to Sara‟s fear that the Bank might lose the N320
  million Deposit accounts and the new mortgage loan, and in fact sacrifice all
  future business from Silver Valley to competing financial institutions in her
  local market. It is not very clear why her boss will prefer a greater loss of
  N320 million Deposit and N48 million mortgage loan to a N3.2 million loss.
  However one can deduce that he is primarily concerned with his own
  personal interest which explains why he quietly warned Sara with a threat,
  not to discuss the issue with any other senior officer of the bank.
  (b) Sara‟s boss position on the matter contravenes the Business Ethical principle
  which justifies only the actions, decisions and policies that are intended to
  produce the greatest happiness for the greatest number of people known as
  Utilitarianism and the Stakeholders Theory as a model of business morality.
  It states that the concern of business managers should go beyond profit to
  include helping society gain a greater sense of the meaning of community by
  honouring individual dignity and promoting overall welfare and
  accommodate wider stakeholders‟ interests.
  (c) Based on the information provided in the case, Sara has to either lose Silver
  Valley or her job. If she must retain Silver Valley as a customer, then she
  must protect their interest and thereby go against her boss‟ instruction.
  Steinmann and Lohr argued that ethical reflections have to start from real-
  life experiences rather than belief systems which could be too diverse. They
  contend that the ultimate goal of ethical issues in business should be the
  peaceful settlement of conflicts, and “peace in society”, where “Peace” refers
  to general free consensus among all parties concerned. The theory does not
  try to set out the conditions that make an act ethical; rather, this approach
  sets out a procedure for arriving at ethical conclusions based on reasoned
  agreement among participants. With this goal in mind, different parties in a
  conflict are expected to sit together and engage in a discourse about the
  settlement of the conflict, and ultimately provide a solution that is
  54
  acceptable to all. This ideal discourse is expected to “answer certain
  philosophical criteria such as impartiality, non persuasiveness, non-coercion
  and expertise of the participants”.
  Such a discourse would lead to norms for a special situation which would be
  an expression of the rational consensus of all affected persons or represented
  parties. In establishing a rational „ideal discourse‟ about specific problems,
  this approach is thus supposed to be norm-generating.
  In other words, Sara should either inform everybody affected or get them to
  discuss what has happened with the aim of settling what might appear as a
  conflict between the parties. This is particularly advisable since her boss is
  not comfortable with Sara discussing with any other senior staff of the
  organization. To my mind, this would mean that he does not have the final
  say and therefore cannot sack Sara. Moreso, if the issue is discussed, Sara‟s
  interest will not just be protected, the actual culprit will be disciplined and
  trust will be sustained in the organization and between their stakeholders.
  SOLUTION 2
  (a) In this question it is necessary to work back from the Balance Sheet at 31
  May 2009 to arrive at the position of Supercom Ltd. at 31 May 2008.
  SUPERCOM LTD
  BALANCE SHEET AS AT 31 MAY 2008
  55
  Creditors:Amount fallen due within one year:
  Trade Creditors (53+18) 71
  Preference Dividend 4
  Ordinary Dividend 20 95 181
  823
  Creditors:Amount falling due after more than one year:
  10% Debentures 2010/2012 (85+50) 130
  693
  Share Capital and Reserve:
  Ordinary Shares of N1 each (500-100) 400
  6% Preference sharesof N1 each 100
  Share Premium (180-100) 80
  Revaluation Reserve -
  General Reserve (120-20) 100
  Retained Profit (16-3) 13
  693
  Working Note:
  1.Freehold premises at cost (given) N600,000. The Revaluation Reserve has been
  made up as follows:
  5. Include the Revaluation Reserve in the Balance Sheet at 31 May 2008, although
  it did not exist at that date. Examiners require a positive response if a mark is to be
  56
  awarded for correct recognition of the situation. Omission of the item from the
  answer could suggest that the candidate had overlooked it or had not understood
  how to deal with it.
  A cash flow statement provides information about the cash receipts and cash
  payments of an Enterprise over a given period. It indicates the pattern of cash
  generation and utilization.
  Cash flow statement can assist the Management in the following areas:
  (i) To assess the impact of its current transactions on its performance and
  financial position.
  (ii) To assess the ability of the company to meet its debt obligations, pay
  dividends and meet other claims.
  (iii) To reconcile Profit/Loss and cash flow. A business may be making profit but
  have lesser liquid funds at the end of the period when compared with the
  beginning of the period.
  Thank you.
  ER and Associates
  Signed.
  SOLUTION 3
  (a) Purpose of segment information in financial statements.
  57
  (i) It provides effective analysis and comparison of entities whose operation
  cuts across different classes of business and geographical boundaries.
  (ii) It provides better understanding of the entity‟s past performances.
  (iii) It provides better assessment of the entity‟s risks and returns.
  iv) It provides more informed judgements about the entity as a whole.
  SOLUTION 4
  (a) PATIENCE VENTURES
  TRADING PROFIT AND LOSS ACCOUNT FOR THE YEAR
  ENDED 31 DECEMBER 2009
  N N
  Sales (N1,485,000 x 100/65) 2,284,615
  Cost of sales:
  Opening stock (N162,000 x 5/6) 135,000
  Purchases (balancing figure) 1,512,000
  (balancing figure) 1,647,000
  Closing stock (given) (162,000)
  (65% of Sales) 1,485,000
  Gross Profit (35% of N2,284,615) 799,615
  Expenses (balancing figure) 297,000
  Net Profit (22% of N2,284,615) 502,615
  58
  BALANCE SHEET AS AT 31 DECEMBER 2009
  N N
  Fixed assets (N2,284,615/4) 571,154
  Current assets:
  Stock 162,000
  Trade Debtors(N2,284,615*34/365 212,813
  Bank (balancing figure) 60,147
  (balancing figure) 434,960
  Trade Creditors(N1,512,000*42/365) 173,984
  260,976
  832,130
  ii. Hurry‟s gross profit margin of 40% is more than Patience‟s 35% which
  indicates that the company earns a higher margin on their sales. The
  company may have cheaper sources of supply. Patience‟s mark up
  may be lower than Hurry‟s. Without more information about their
  individual circumstances,further comment is not possible.
  iii. Hurry‟s net profit margin (20%) is 2% lower than Patience‟s (22%). This
  shows that Patience‟s overheads are comparatively lower than
  Hurry‟s. Not all overheads are easily controllable, and Hurry may have
  to pay higher rent, for example,because of the situation or size of its
  premises.
  iv. Hurry‟s turnover is 5 times its fixed assets but Patience‟s turnover is
  only 4 times. Hurry is using its fixed assets more efficiently and
  making them more profitable.
  59
  vi. Hurry Ltd pays their creditors 6 days earlier than Patience ltd (36 days
  compared to 42 days). No information is provided regarding the credit
  terms each receives. If Hurry Enterprises obtains their goods more
  cheaply than Patience,as suggested in (ii), the period of credit the
  company is allowed may be less than Patience receives. On the other
  hand, if Hurry is not taking the full period of credit they are
  allowed,the company is not managing their cash flow to the best
  advantage.
  SOLUTION 5
  iii. Roles and responsibility of the Board: The Board members have
  various range of skills and understanding to be able to deal with
  various business issues and the ability to review and challenge
  management performance. It needs to be of sufficient size and have
  an appropriate level of commitment to fulfil its responsibilities and
  duties. There are issues about the appropriate mix of executive and
  non-executive Directors.
  SOLUTION 6
  (ii) Objectivity: A Professional Accountant should not allow for bias, conflict
  of interests or undue influence of others to override his Professional or
  business judgements.
  61
  (v) Professional Behaviour: A Professional Accountant should comply with
  relevant laws and regulations and should avoid any action that can
  discredit the profession.
  (iv) Leadership that stresses the importance of ethical behaviour and the
  expectations that employees will act in an ethical manner.
  62
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  FINANCIAL REPORTING AND ETHICS
  1. A Company buys a business by paying cash of N12.5m and issuing shares for
  the balance in full payment. The Shares have a par value of N1.00 each and
  an agreed market value of N2.50 each. The Assets and Liabilities of the
  business together with the agreed values are as follows:
  How many shares will be issued to satisfy the purchase of the business?
  A. 15,000,000
  B. 20,100,000
  C. 20,400,000
  D. 20,000,000
  E. 50,000,000
  A. (i) only
  B. (iv) only
  C. (i), (ii) & (iii)
  D. (i), (ii) & (iv)
  E. (iii) & (iv)
  63
  3. For what purpose would management undertake sensitivity analysis? To
  A. calculate employees´ bonuses.
  B. determine levels of depreciation.
  C. determine the effect of profit on dividends.
  D. determine the selling price of a product.
  E. determine level of sensitivity.
  4. A company wishes to reduce its Gearing. Which of the following actions will
  achieve this?
  A. A Bonus issue of Ordinary Shares
  B. An issue of Debentures
  C. An issue of Convertible Loan Stock
  D. A rights issue of Ordinary Shares
  E. Issuance of Ordinary Shares and Debentures
  64
  7. Chartered Accountants sub-consciously make ethical decisions in every
  aspect of the daily performance of their professional role. In most instances,
  the thought process and the decision made is instinctive- a simple
  recognition of right and wrong. The key steps for an Accountant making
  ethical decisions are the following EXCEPT:
  65
  11. What gain should Okoro Enterprises recognise in its Financial Statements ?
  A. ₦2.2million
  B. ₦0.1million
  C. ₦0.2million
  D. ₦2.0million
  E. ₦0.3million
  12. What loss should be recognised if the fair value of Inventory is recorded as
  N1.8million instead of N2.2million?
  A. ₦1.8million
  B. ₦2.0million
  C. ₦1.0million
  D. ₦0.1million
  E. ₦0.2million
  14. International Accounting Standards (IAS) No. 24 lists all these as not
  necessarily related parties EXCEPT:
  A. A Joint Venture in which the entity is a venturer.
  B. Two Venturers sharing joint control in a Joint Venture.
  C. Two Entities having common Directors or key management.
  D. Any single customer, supplier, franchisor, distributor or general agent.
  E. Entities such as trade unions, public utilities, providers of finance,
  government department/agencies in their normal business dealings.
  15. Under the revised International Accounting Standards (IAS) No. 1, the
  alternative to the Statement of Changes in Equity is Statement of
  A. total recognised Gains and Losses
  B. total Income and Expenses
  C. recognised Income and Expenses
  D. recognised Gains and Losses
  E. Affairs.
  16. “In trying to promote human fulfilment, good intentions are not enough; we
  must endeavour to use effective means”. This is known as the Principle of
  A. Efficiency
  66
  B. Fairness
  C. Role Responsibility
  D. Rationality
  E. Impartiality.
  17. The act of divulging, either within the Company or publicly, a Corporation‟s
  unethical practice is called
  A. Ethical complaining.
  B. Whistle blowing.
  C. Fraud alert.
  D. Unethical practice alarm.
  E. Corporate scandal alarm.
  18. Which of the following is NOT true as regards the responsibility of a business
  firm?
  A. The firm is to keep the law and increase its profit.
  B. The firm is not to pursue only survival and growth of the business.
  C. The firm is to pursue programmes that should maximize shareholder
  wealth.
  D. The firm should pay its workers living wage.
  E. Economic surplus generated by a Company belongs exclusively to the
  Shareholders.
  19. Which of the following is NOT one of the circumstances that may create self
  interest threats for a Professional Accountant?
  A. Financial interest, loan or guarantee.
  B. Concern for employment security.
  C. Appropriate personal use of the Corporate asset.
  D. Incentive compensation arrangements.
  E. Commercial pressure from outside the employing organisation.
  20. Some of the issues involved in Corporate Governance are as follows, EXCEPT:
  A. Interest control.
  B. Taxation policy.
  C. Dividend policy.
  D. Oversight and management risk.
  E. The resources made available in carrying out their duties.
  67
  PART II SHORT ANSWER QUESTIONS (20 Marks)
  1. When managers take responsibility for the consequences of their decisions
  not only for their own short term profits but also for the natural environment
  for society generally and for all groups that may be affected by those
  decisions, they are said to be involved in........................................
  8. State any TWO factors that must be considered in ethical conflict resolution.
  9. The approach in managing ethics which combines a concern for the law with
  the emphasis on managerial responsibility is ...................................
  10. A reporting system which includes economic elements, core financial, social,
  economic performance data and measures, is ......................................
  68
  15. A liability of uncertain timing or amount is a ……………………………
  16. The disclosure of information of the effect that the operations of an entity
  has on the natural environment is ………………………………………
  17. Chukwu Plc has in issue 1,000,000 15% Cumulative Preference Shares, which
  it issued many years ago. In the year ended 31 October 2009, the Directors
  were unable to pay all the Preference Share dividend but paid N120,000 and
  were negotiating with the holders to waive the balance. How much
  Preference dividend will be considered when calculating Earnings Per
  69
  SECTION B – ATTEMPT QUESTION 1 AND ANY OTHER THREE (60 MARKS)
  Palm Oil Plc is a company which produces Palm Oil. It has two factories located in
  Ilu Ogbon in Ondo State and New Town in Cross River State, which are
  predominantly oil palm producing communities. The Company‟s factory is the only
  major business organisation in Ilu Ogbon, whereas in New Town, there are a few
  other factories that produce other commodities. The Company has no Oil Palm
  Plantation of its own. The Palm Oil factories are being fed by the palm produce of
  Oil Palm farmers in both Ilu Ogbon and New Town environs. The establishment of
  the factories in these two towns has really helped the farmers in concentrating on
  production of Fresh Fruits Bunches (FFB) rather than dissipating energy in
  processing them. They just sell their FFB to Palm Oil Plc.
  The pricing of the FFB is adequate as far as the farmers are concerned, because the
  price the Company pays compares favourably with those obtainable for other Oil
  Palms produced in other towns. Palm Oil Plc realised that Corporate and Social
  Responsibility has to be an integral part of its Corporate agenda. The company, is
  aware of the environmental, social, and economic impact caused by a business of
  its scale and, therefore, it has decided to implement a wide range of initiatives to
  improve the quality of life of its customers and the society at large. The company
  over the years has been granting scholarships to indigenes of the locality in which
  its factories are located and engaging in other community work, such as, the
  building of town halls for the communities. The company, apart from the
  community development projects, has been law abiding in paying its taxes and
  complying with necessary environmental laws.
  The financial results of the Company for the last five years have been very
  impressive and the Shareholders have been having good returns on their
  Investment. Despite the fact that the Company is making sufficient profits, it has
  not been meeting the obligations to its Creditors. The Company has been making
  some unnecessary Capital restructuring to the detriment of its Creditors. The
  Company‟s workforce in Ilu Ogbon comprises casual labourers who account for 55%
  of the total workforce and the remaining are permanent workers. The situation is,
  however, different in New Town where 80% of the workforce are permanent
  workers. In Ilu Ogbon factory, 60% of the casual workers have served the Company
  for between 5 to 10 years and those that are in permanent employment are laid off
  at the slightest misbehaviour without giving them fair hearing. The workers in the
  Company are forbidden from forming a Workers‟ Union.
  The company is currently considering closing the factory at Ilu Ogbon and
  concentrating on New Town factory. The Company intends to move the plant and
  machinery in Ilu Ogbon to New Town for more expansion. In the opinion of the
  70
  Board of Directors of the Company, the decision will lead to cost savings. Closing
  the Ilu Ogbon factory will lead to retrenchment of the entire workforce with the
  exception of very few managerial staff that will be moved to New Town factory.
  Seventy percent of the staff on permanent employment in Ilu Ogbon have been in
  the employment of the company for an average of 20 years and they have served
  the company meritoriously for this period. The Company‟s conditions of service only
  stipulate one month notice or a month salary in lieu of notice for staff whose
  services are no longer required and there is no further benefit. The casual workers
  could be laid off anytime without notice or any payment in lieu of notice.
  The Board of Palm Oil Plc is now considering these alternatives in carrying out their
  decisions to close down the Ilu Ogbon factory.
  (a) Retrench the workers in line with the company‟s conditions of service.
  Required:
  (i) Outline any FIVE ethical issues in this case. (5 Marks)
  (ii) Comment on the alternatives the Board is considering in closing down the Ilu
  Ogbon factory. (10 Marks)
  (Total 15 Marks)
  QUESTION 2
  On 1 April 2007, ADISA PLC owned 65% of the Equity Share Capital of DOTUN LTD
  and 70% of the Equity Shares of TADE COY. LTD. On 1 April 2008, ADISA PLC
  purchased the remaining 35% of the Equity Shares of DOTUN LTD. In the two years
  ended 31 March 2008 and 31 March 2009, the following transactions occurred
  between the three companies.
  (a) On 30 June 2007, ADISA PLC manufactured a machine for use by DOTUN
  LTD. The cost of production was ₦2million. The machine was delivered to
  DOTUN LTD at an invoiced price of ₦2.5million. DOTUN LTD paid the invoice
  on 31 August 2007. DOTUN LTD depreciated the machine over its
  anticipated useful life of 5 years, charging a full year‟s depreciation in the
  year of purchase.
  71
  (b) On 30 September 2008, DOTUN LTD sold some goods to TADE COY. LTD at an
  invoiced price of ₦1.5million. TADE COY. LTD settled the invoice on 30
  November 2008. The goods had cost DOTUN LTD ₦1.2million to
  manufacture. By 31 March 2009, TADE COY. LTD had sold all the goods
  outside the group.
  (c) For each of the years ended 31 March 2008 and 31 March 2009, ADISA PLC.
  provided management services to DOTUN LTD and TADE COY. LTD. ADISA
  Plc did not charge for these services in the year ended 31 March 2008 but in
  the year ended 31 March 2009, decided to impose a charge of ₦1million per
  annum on TADE COY. LTD. The amount of ₦1million is due to be paid by
  TADE COY. LTD on 31 May 2009.
  Required:
  Summarise the related party disclosures which will be required in respect of
  transactions in (a) to (c) above, for both of the years ended 31 March 2008
  and 31 March 2009 in the financial statements of ADISA PLC., DOTUN LTD
  and TADE COY. LTD. (15 Marks)
  Note: You may assume that ADISA PLC presented consolidated financial
  statements for both of the years.
  QUESTION 3
  CURRENT ASSETS
  Inventories 186
  Trade Accounts Receivable 49
  Cash and Cash Equivalents 20
  255
  72
  CURRENT LIABILITIES
  73
  Notes
  The following balances were extracted from the Company‟s books as at 31
  December, 2008
  ₦‟m
  Inventories 152
  Trade Account Receivables 36
  Trade Account Payables 3
  The loan interest rate was 19% per annum and Richco Company Ltd can invest any
  surplus funds at 6%.
  Required:
  Calculate the borrowing costs which may be capitalised for each of the assets and
  consequently the cost of each asset as at 31 December 2009. Ignore compound
  interest. (10 Marks)
  74
  QUESTION 5
  (a) Ethics is the study of values and customs of a people or a group the analysis
  of moral beliefs and concepts. What is Business Ethics? (5 Marks)
  (b) Explain the following classifications of ethical theories: Teleology and
  Deontology. (10 Marks)
  (Total 15 Marks)
  QUESTION 6
  (a) Explain briefly any THREE ways to encourage ethical behavior in the
  financial services sector. (9 Marks)
  75
  SOLUTIONS TO SECTION A
  1. A
  2. D
  3. D
  4. D
  5. B
  6. C
  7. D
  8. E
  9. C
  10. D
  11. B
  12. E
  13. D
  14. A
  15. C
  16. A
  17. B
  18. E
  19. C
  20. B
  76
  PART II SHORT ANSWER QUESTIONS
  Tutorial
  (a) Some ethical issues that can be deduced from the case are as follows:
  (i) The company is not expected to put its creditors at risk. Unnecessary
  restructuring of capital that put the creditors into risk is a breach of
  corporate responsibility to the creditors;
  (v) Keeping casual workers for as long as five to ten years without being
  absorbed into permanent employment is not ethical for the company;
  and
  (b) (i) The proposal to close the company‟s factory in Ilu Ogbon could be
  seen as a way of relinquishing Palm Oil Plc‟s Social Responsibility to
  Ilu Ogbon community. This is because the closure will cause
  unemployment in the community since the factory is the major source
  of employment in the locality.
  (ii) The Company is more concerned with cost savings and increased
  profitability without considering the social implications of moving the
  only factory in Ilu Ogbon to New town where there are other
  companies that provide employment to people in the locality.
  (iv) A business is not supposed to exist only for the Shareholders. The
  interest of other stakeholders is also paramount.
  78
  (v) The casual labourers ought to be given adequate notice of the plan to
  close the factory and at least reasonable compensation should be given
  to them.
  SOLUTION 2
  RELATIONSHIP
  ADISA PLC. has a 65% subsidiary (DOTUN LTD) and a 70% subsidiary (TADE Co. Ltd)
  ADISA PLC. is a related party of DOTUN LTD and TADE COY. LTD and vice versa.
  DOTUN LTD and TADE COY. LTD are also related parties because they are subject to
  “common control”. Thus, any transactions between ADISA Plc. DOTUN LTD and
  TADE Co. Ltd need not be disclosed in ADISA Plc consolidated accounts as they are
  eliminated.
  DISCLOSURES
  ADISA PLC.
  (a) Intra-group sale of machine for ₦2.5million at a profit of N500,000. No
  balance is outstanding.
  DOTUN LTD.
  For all transactions, the nature of the related party relationship ( i.e parent,
  subsidiary, fellow subsidiary), should be disclosed.
  79
  YEAR ENDED 31 MARCH 2009
  RELATIONSHIP
  ADISA PLC. has a 100% subsidiary (DOTUN LTD) and a 70% subsidiary (TADE COY.
  LTD)
  ADISA PLC is a related party of DOTUN LTD. and TADE COY. LTD and vice versa.
  DOTUN Ltd. and TADE COY. LTD are related because they remain under common
  control. Any transactions between ADISA PLC., DOTUN LTD., and TADE COY. LTD
  need not be disclosed in ADISA PLC consolidated accounts as they are eliminated.
  DISCLOSURES
  ADISA PLC.
  DOTUN LTD.
  (a) Sale of inventories to TADE COY. LTD for ₦1.5million (original cost
  ₦1.2million) all sold. No amount outstanding at year end.
  (b) Purchase of inventories from DOTUN LTD. for ₦1.5million (original cost
  ₦1.2million) all sold, no amount outstanding at year end.
  (c) Purchase of management services from ADISA PLC. costing ₦1million are
  outstanding at year end.
  For all transactions, the nature of the related party relationship (i.e. parent,
  subsidiary, fellow subsidiary) should be disclosed.
  80
  SOLUTION 3
  (a) Cash conversion circle is one which combines information from the
  receivable turnover, the inventory turnover, and the accounts payable
  turnover. The argument here is that, cash is tied up in assets for a certain
  number of days. Specifically, cash is committed to receivables for the
  collection period and is also tied up for a number of days in inventory – the
  inventory processing period. At the same time, the firm receives an offset to
  this capital commitment from its own suppliers, who provide interest-free
  loans to the firm by carrying the firm‟s payables.
  A firm‟s payables payment period is the inverse of its Payable Turnover Ratio
  ie:
  81
  Shac Flow Plc. has too long inventory processing period of about 507 days. It
  also pays its bills 10 days earlier than when cash is received from its credit
  customers. This leads to too long cash conversion cycle of 517 days. This
  company needs to re-examine its credit policies with a view to encouraging
  early payment by the credit customers. The firm‟s long term trend and
  comparison with other firms is desirable in this instance.
  (b) The market liquidity of a firm is the firm‟s ability to buy or sell an asset quickly
  with little or no price change from a prior transaction given no new information.
  The above definition must be well noted as one can still sell an illiquid stock
  quickly, but the price would be significantly different from the prior price. In the
  alternative, the Broker might be able to get a specified price but could take
  several days to do so.
  The more shares outstanding, the more stockholders buy or sell at any time for
  numerous purposes. Numerous buyers and sellers provide liquidity.
  SOLUTION 4
  (a) ASSETS
  A B
  ₦ ₦
  BORROWING COSTS
  To 30 June 2009 316,350 633,650
  To 31 Dec 2009 632700 1,267,300
  949,050 1,900,950
  Less: Investment Income
  To June 2009 99,900 200,100
  849,150 1,700,850
  Cost of Assets ₦‟m ₦‟m
  Expenditure Incurred 6.66 13.34
  Cost of Borrowing 0.85 1.70
  7.51 15.04
  Workings ASSETS
  Borrowing Costs
  To June 2009 A B
  ₦3.33m x 19% x 6/12 316,350
  ₦6.67m x 19% x 6/12 633,650
  82
  To Dec., 2009
  ₦6.66m x 19% x 6/12 632,700
  ₦13.34 x 19% x 6/12 1,267,300
  Investment Income
  ₦3.33m x 6% x 6/12 99,900
  ₦6.67m x 6% x 6/12 200,100
  SOLUTION 5
  (a) The field of Business Ethics deals with questions about the acceptability of
  certain business practices. For example, should a salesman omit facts about
  a product‟s poor safety record in a sales presentation to a client? Should an
  Accountant report inaccuracies discovered in an audit of a client, knowing
  that his firm will probably be fired by the client for doing so? Should an
  automobile producer avoid adopting a new safety device that could save
  thousands of lives simply because it would make the car too expensive for
  many consumers to afford? Regardless of the legality of these actions,
  whatever decision anyone makes in such situations will surely be judged by
  others as right or wrong.
  Business Ethics is the branch of ethics that examines ethical rules and
  principles within a commercial context; the various moral or ethical
  problems that can arise in a business setting; and any special duties or
  obligations that apply to persons engaged in commerce. It is the study of the
  nature and grounds of business morality. Business ethics seeks to provide an
  explicit ethical framework within which to evaluate business and, especially,
  Corporate activities.
  (b) (i) Teleological theories determine the ethics of an act by looking at the
  probable outcome or consequences of the decision (the ends). It
  judges the rightness or wrongness of an action based on its
  consequences. Actions are, therefore, not good in themselves; their
  moral values are totally based on the effects that follow from them.
  Actions have no intrinsic value, but merely, serve as means to attain
  that which has value. In considering the consequences of an action,
  the good effect should be weighed against the bad effect on all the
  people affected by it. If the good effect outweighs the bad effect, then
  it tends to be a good action, but if the bad outweigh the good, then it
  tends to be a bad action, hence not morally right.
  SOLUTION 6
  (a) Enron, WorldCom, Tyco, Adelphia, Cendant, Rite Aid, Sunbeam, Waste
  Management, HealthSouth, Andersen, Ernst &Young, KPMG, Deloitte &
  Touche, PricewaterhouseCoopers, J.P. Morgan, Merrill, Morgan Stanley and
  in Nigeria, Afribank Nigeria Plc, Cadbury Nigeria Plc and Akintola Williams
  84
  Deloitte, Union Dicon Salt, Oni Olasebikan etc, are some of the names of
  Companies, Accounting Firms and Investment Firms that have all been
  implicated in some ethically questionable activities in the past few years;
  activities that have resulted in fines or criminal convictions. The challenge is
  how to encourage ethical behaviour in the financial services sector.
  The following are some of the ways that can encourage ethical behaviour in
  the sector:
  (b) (i) The principle of Solidarity states that we must be concerned with the
  well being of all human beings, not only with ourselves, since if we
  fail to do so, we undermine our own fulfilments.
  85
  (ii) The principle of Rationality states that one should always strive to act
  intelligently. Acting rationally, means guiding oneself by an
  intelligent consideration of the way in which our actions are likely to
  help or harm the fulfilment of human beings. In acting rationally one
  should not allow emotions or feelings to derail one from the paths
  dictated by one‟s intelligence.
  (iii) The principle of Role Responsibility states that one does not have
  equal responsibility for all the aspects of the well being of all human
  beings. A person‟s special circumstance, capacity, role and
  commitment gives him a priority responsibility for certain aspects of
  the well being of others.
  (v) The principles of Fairness states that one should apply the same
  standards for judging one‟s own actions, those of people who are dear
  to one and those of strangers.. The principle indicates that one must
  avoid discriminatory tendencies in dealing with people of diverse
  backgrounds.
  86
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  STRATEGIC FINANCIAL MANAGEMENT
  1. Which of the following is NOT the reason why maximization of Earnings Per
  Share is not considered a fully appropriate objective of an organisation?
  2. The following are the major decision areas of the finance function of an
  organization EXCEPT
  A. credit management
  B. financing
  C. dividend
  D. investment
  E. share – repurchase
  A. Business Strategy
  B. Operational Strategy
  C. Competitive Strategy
  D. Tactical Strategy
  E. Corporate Strategy
  A. Marketing
  B. Business
  C. Dividend
  D. Financial
  E. Investment
  87
  5. Assume that the interest rate is greater than zero, which of the following
  cash –inflow streams would you prefer?
  A. Bank overdraft
  B. Commercial papers
  C. Loans
  D. Trade credit
  E. Factoring
  A. maintenance Right
  B. deal Right
  C. pre-emptive Right
  D. shareholders Right
  E. voting Right
  A. employees
  B. the interests of the company
  C. shareholders
  D. bondholders
  E. mortgagees
  9. A company refunds its bonds for any of the following reasons EXCEPT to
  88
  10. Mafia Plc makes a right issue at an issue price of N8 per share. The cum-
  rights price is N10 per share. The theoretical ex-rights price is N9.50 per
  share. What are the terms of the rights issue?
  A. 1 for 3
  B. 1 for 2
  C. 2 for 1
  D. 3 for 1
  E. 1 for 1
  12. Which of the following is NOT the aim of Mergers and Acquisitions?
  A. Reducing cost of lending
  B. Industry sanitization
  C. Gaining monopoly power
  D. Raising capital base
  E. Eliminating inefficiencies and business failures.
  13. The following are suitable bases for the valuation of a firm for Merger and
  Acquisition EXCEPT:
  A. realizable value method
  B. net assets method
  C. benefit/cost method
  D. cash flow technique
  E. price earning ratio.
  15. Small and Medium Enterprises Equity Investment Scheme covers the
  following activities EXCEPT
  A. Solid Minerals
  B. Tourism and Leisure
  C. Services
  89
  D. Agro – Allied
  E. Schooling
  A. translation risk/exposure
  B. economic risk/exposure
  C. political risk/exposure
  D. taxation risk/exposure
  E. transaction risk/exposure
  18. If the Japanese YEN is selling at a forward discount in the foreign exchange
  market, this implies that
  20. The price at which new issues are made in the primary market is determined
  by the:
  Therefore the terms would be 1 rights issue for every 3 shares presently held
  92
  PART II – SHORT ANSWER QUESTIONS (20 MARKS)
  2. The acceptance of a project whose Net Present Value (NPV) is positive, and in
  consonance with the objective of the organization is termed ……………..
  3. The area of strategy concerned with decisions relating to the sources from
  which funds are obtained and the amount to be paid out by a company as
  dividends is ……………..
  4. What will be the value of N1,000 after 8½ years if, invested at 4 per cent
  interest p.a. compounded semi-annually?
  6. Yombo Plc has N1 ordinary share in issue. The company‟s Earnings Per Share
  (EPS) for the year just ended is 25 kobo. The dividend payout ratio for the year
  is 60% and Price Earnings (PE) ratio is 20 times. What is the dividend yield ratio
  of the company?
  7. The percentage change in earnings per share that results from a percentage
  change in operating income is called ……………..
  8. The process of selling securities and also assuring the seller a specified amount
  is known as ………………….
  9. When a firm commits excessive capital into the company‟s trading activities,
  such that there are excessive stocks, debtors and cash, and very few creditors,
  then we have ……………
  10. Debtors conversion period increases by 10 days and creditors conversion period
  decreases by 7 days. All other things being equal, the operating cycle will be
  increased by ……………
  14. When determining discount rates for project appraisal by the SMEs, the
  ………… associated with SMEs must be factored in.
  15. The situation whereby the exporter or importer arranges with a bank to sell or
  buy a quantity of foreign currency at a future date at a rate that is determined
  „now‟ is known as ……………..
  16. A company has a nominal (money) cost of capital of 18% p.a. If inflation rate is
  6% each year, what is the real cost of capital?
  17. If annual risk free rate in Ghana is 25% and the annual interest rate in Nigeria is
  5%, using interest rate parity, what is the expected rate of appreciation or
  depreciation of the Cedi relative to the Naira?
  18. State the type of relationship which exists between the shareholders and the
  management of a company.
  19. Which concept stipulates that the management of a company should act in the
  best interest of the owners of the business?
  20. In determining the weighted average cost of capital, state the value that should
  be used for each component of the capital structure.
  94
  SOLUTIONS
  PART II SHORT ANSWER QUESTIONS
  1. Strategic Planning
  2. Wealth Maximization
  3. Financial Strategy
  4. N1,400
  5. An Annuity
  6. 3.0%
  7. Degree of financial leverage
  8. Underwriting
  9. Overcapitalization/Under trading
  10. 17 days.
  11. Conglomerate
  12. Green mail
  13. Business Angels
  14. Risk
  15. Forward exchange contract
  16. 11.32%
  17. 16%
  18. Agency relationship (Principal-Agent)
  19. Corporate governance
  20. Market value
  Workings
  4. A = P (1+r)nm = N1000 (1+0.04) 8.5x2 = N1,400
  m 2
  6. Dividend Per Share = 25k x 0.6 = 15k
  Market Value = EPS X PE = 25K x 20 = N5 or 500k
  :. Dividend yield ratio = 15k x 100 = 3.0%
  95
  500k
  16. Real rate = (1+m) - I i.e. 1.18 – 1
  (1+i) 1.06
  = 11.32%.
  17. Percentage change in the foreign currency relative to the domestic currency is
  given by:
  I + Domestic interest rate - I i.e. 1.05 - I = -16%
  I + Foreign interest rate 1.25
  96
  SECTION B
  QUESTION I - CASE STUDY
  JIGAWA PLC
  Mallam Abdullahi, the Financial Officer of Jigawa plc is concerned about the
  forthcoming negotiations with the Company‟s Bankers, Super Bank Plc, to renew a
  lending arrangement with the Bank as he has to change the current policy with its
  major credit customers, Arakale Plc.
  Jigawa Plc maintains an overdraft account with its Bankers - Super Bank Plc. The
  account has become somewhat sticky, causing its overdrawn balance to remain
  unchanged for a long period of time except for interest charges. The Bank‟s General
  Manager is getting worried hence a letter of warning was sent to the Company for an
  improved operation of the account. In order to reduce the balance on the account and
  improve on its operation, Jigawa plc decided to change its credit policy with Arakale
  plc, a major customer with a yearly credit sales of N280million spread evenly, over
  each of the 50 weeks, which Jigawa plc operates yearly.
  Credit sales to Arakale plc is such that sales on Mondays and Tuesdays are twice those
  for the rest of the week, i.e. Wednesdays, Thursdays and Fridays. Lodgements to the
  account of Jigawa plc with Super Bank plc are to be made by Arakale plc twice weekly
  i.e. Tuesdays and Thursdays.
  Interest of 22% per annum is charged daily by Jigawa plc on any outstanding credit
  and administrative cost of N7,500 is incurred per lodgement.
  In view of the problem with its bankers, Jigawa plc is considering a change in the
  lodgement arrangement with Arakale plc. It is being proposed that lodgement be
  made either on a daily basis or once in a week, that is every Friday of the week.
  Required :
  (a) Advise the company, Arakale plc, on the best policy amongst the three
  alternatives for the lodgement arrangement with Jigawa plc. Show your
  workings. (13 Marks)
  (b) Indicate the annual amount by which the company will be worse off if it
  pursues the worst, rather than the best of the three alternatives for the
  lodgement arrangement. (2 Marks)
  Please note that interest will be paid on the amount not lodged on a daily basis.
  Assume 365 days for a year. (Total 15 Marks)
  97
  QUESTION 2
  Required:
  (a) Give THREE justifications for Shareholders‟ wealth maximization, as a
  company‟s primary objective. (3 Marks)
  (b) Discuss FIVE other desirable but non-financial corporate objectives of business
  organizations. (10 Marks)
  QUESTION 3
  Annual sales of the product would be 5,000 units at a selling price of N32 per
  unit.
  Unit costs would be: N
  Direct labour (4 hours @ N2) 8
  Direct materials 7
  Fixed costs including depreciation 9
  24
  The project would have a 5-year life, after which the new machine would have a net
  residual value of N10,000. Because direct labour is continually in short supply,
  labour resources would have to be diverted from other work which currently earns a
  contribution of N1.50 per direct labour hour. The fixed overhead absorption rate
  would be N2.25 per hour (i.e. N9 per unit). The actual expenditure on fixed overhead
  would not alter.
  Working capital requirements would be N10,000 in the first year, rising to N15,000 in
  the second year and remaining at this level until the end of the project, when it will
  all be recovered.
  Dopemu Plc and Demurin Plc are Subsidiary Companies of Ketu Investments Plc. The
  companies have in issue 4 million ordinary shares of 50k each.
  Dopemu Plc has 250,000 units of Convertible Debenture each with a nominal value of
  N100 and a coupon interest rate of 12% payable annually. Each N100 unit may be
  converted into 40 ordinary shares at anytime until the expiry date and any Debentures
  remaining unconverted will be redeemed that day at N105.
  Demurin Plc has 5,000,000 warrants, each of which provides the holder with an option
  to subscribe for 2 ordinary shares at a price of N2.50 per share. Each warrant holder
  can exercise his option before the expiry date.
  NOTE:
  Ordinary Shares, Convertibles and the Warrants of the companies, are all actively
  traded in the stock market.
  Required:
  (a) Give FOUR factors which influence the value of Warrants and Convertibles.
  (3 Marks)
  (b) Determine the value of each N100 unit of Convertible Debentures and each
  Warrant on the date of expiry and advise Ketu Investments Plc whether or not to
  exercise its conversion and option rights if the share prices of each Company
  immediately prior to the latest time for conversion and exercise were to be:(i)
  N2.20 (ii) N2.60 (iii) N3.00 (iv) N3.40 (6 Marks)
  (c) Determine the likely current market price, or likely range of current market
  price of each N100 unit of Convertible Debentures, if they have a further 5 years
  before expiry and if the current price for each Share is:
  99
  (i) N2.20 (ii) N2.60 (iii) N3.00 (iv) N3.40 (6 Marks)
  QUESTION 5
  (a) With reference to international currency market, explain the term “currency futures”.
  (1 Mark)
  (b) Igiowo Plc processes and exports wood to foreign countries. In 60 days time, the
  company is due to receive a sum of US $150,000 (One Hundred and Fifty Thousand
  US Dollars) from processed wood recently shipped to USA. Igiowo also has financial
  obligation to some major suppliers of timber in the South Western part of Nigeria. The
  total amount of indebtedness is N12.45 million. The Finance Director of Igiowo Plc is
  relying on the proceeds of the exportation for the settlement of the whole debt. To
  ensure that the company is not exposed to any foreign exchange risk, the company
  decides to take cover in the currency futures market.
  (i) Advise whether the company should enter the currency futures market as a
  “buyer” or “seller” of U.S Dollars. (2 Marks)
  (ii) Calculate the opportunity gain or loss the company would make in each case
  assuming the spot rates 60 days later are:
  Buying/Selling
  138.008/138.346
  140.005/140.323
  142.050/142.399
  c. State SIX special financial problems which a multinational company faces but a
  domestic company does not face. (6 Marks)
  (Total 15 Marks)
  100
  QUESTION 6
  (a) Discuss briefly FOUR reasons responsible for the failure of a Merger or Acquisition.
  (8 Marks)
  (b) Akwanga Plc, a successful engineering company, made a bid for Oloibiri Plc. The
  following information is available for the two companies.
  Akwanga made both Cash and a Share bid to Oloibiri Plc as follows:
  (i) 2 of its Shares for every one in Oloibiri Plc, or
  (ii) A Cash offer of N30 per share.
  Akwanga Plc expects that the take-over will generate savings of N25m in present
  value terms.
  Required:
  Determine the new value per share in Akwanga Plc after the announcement of
  the merger plan, and advise the shareholders of Oloibiri Plc on which offer to
  accept, assuming:
  101
  SOLUTIONS TO SECTION B
  SOLUTION 1 - CASE STUDY
  ARAKALE PLC
  (a) Workings
  (i) Computation of daily receipts:
  Annual Cash Sales = N280million
  Total No. of Weeks = 50 weeks
  Sales per Week = N280m ÷ 50 = N5.6 million
  Given that daily receipts on Mondays and Tuesdays are twice those of the
  remaining three(3) days, then a weight can be attached to each day. A
  proportion of the total weight can also be attached to the weekly sales to obtain
  each day‟s receipts as follows:
  = N409,863.01
  - Daily Lodgement
  The best policy option among the three alternatives is to adopt Friday
  lodgement only. This is because total cost is least with this policy.
  b. The worst of the alternatives is daily lodgement because the cost is highest with
  this option, while the best is banking on Friday only.
  The company will be worse off, if it pursues the worst alternative by
  N(1,875,000 – 784,863.01) = N1,090,136.99
  103
  SOLUTION 2
  (b) Apart from pursuit of financial objectives, companies also consider non-
  financial and operational objectives which are essential for the achievement of
  the overall strategic objectives.
  These include:
  104
  (v) Organizational Structure: Each Company must create organizational
  structure that encourages appropriate delegation of authority, adequate
  motivation and good participation.
  SOLUTION 3
  (b) The additional Working Capital in the second year to cause a zero NPV is to be
  calculated as follows
  = N10,364
  0.8333 – 0.4019
  = N10,364
  0.4314
  = N24,024
  (c) The typical DSS model that could be used to support the Financial Manager in
  solving questions (i) and (ii) above is the Capital Budgeting model in the form of
  105
  electronic spreadsheet packages such as EXCEL which have in-built NPV and IRR
  functions in their application programs.
  The Capital Budgeting models (Discounted Cash Flows) are used to support the
  Financial Manager in the financial analysis and evaluation of different capital
  investments alternatives. The relevant data in the decision making process is
  semi-structured and the models help in making certain analysis such as „what-if-
  analysis‟, sensitivity analysis and so on.
  SOLUTION 4
  (a) Factors influencing the value of Warrants and Convertibles include:-
  (i) Current equity / share prices
  (ii) Conversion prices
  (iii) Date of conversion or exercise
  (iv) Trend in equity value
  (v) Market rates of interests
  (vi) Flexibility of conversion terms and dates
  Share Price Conversion Ratio Value of Equity Value of Debt Gain (Loss) Comment
  N No N N N
  2.20 40 88 105 (17) do not convert
  2.60 40 104 105 (1) do not convert
  3.00 40 120 105 15 convert
  3.40 40 136 105 31 convert
  For Warrants
  Share Price No of share/option Value of Equity Option Price Gain (Loss) Comment
  exercise
  N Units N N N
  2.20 2 4.40 5 (0.60) do not exercise
  2.60 2 5.20 5 0.20 exercise
  3.00 2 6.00 5 1.00 exercise
  3.40 2 6.80 5 1.80 exercise
  (c) The market price of the convertible is the higher of the present value of the
  interest and redemption price of the debt and equity value.
  106
  Year Interest Redemption Price Total Cash flow DF(8%) PV
  % N N N
  1 12 - 12.00 0.926 11.11
  2 12 - 12.00 0.857 10.28
  3 12 - 12.00 0.794 9.53
  4 12 - 12.00 0.735 8.82
  5 12 105 117.00 0.681 79.68
  NPV = N119.42
  Market Value of the Convertible.
  Share Price Conversion Ratio Equity Value Debt Value Value of Convertible
  N % N N N
  2.20 40 88 119.42 119.42
  2.60 40 104 119.42 119.42
  3.00 40 120 119.42 120.00
  3.40 40 136 119.42 136.00
  SOLUTION 5
  (a) Currency futures are contracts to buy or sell foreign currency in future at an exchange
  rate agreed upon now.
  (b)(i) Igiowo Plc should enter the market as a seller of US dollars. If it entered the currency
  futures market, the results of its hedging policy would be as shown below;
  At a rate of N142.050 to $1 N
  Sales in the spot market of $150,000 (N140.005) = 21,000,750
  Receipt from forward transaction (N142.050) = (21,307,500)
  Opportunity loss (306,750)
  (c) Financial problems that a multinational Company faces which a domestic company
  does not face include:
  107
  (i) Managing exchange rate risk arising from the use of different currencies whose
  relative values are subject to unexpected change.
  (iv) Technicalities involved when raising Capital from the international Capital
  Market.
  (v) Country or Sovereign risk arising from economic, political or social factors.
  SOLUTION 6
  (a) Reasons responsible for failure of a Merger or Acquisition are:
  (i) Excess premium: an acquirer may pay a value exceeding the benefits for
  acquiring its target Company. This happens when acquirer is too eager to
  acquire for prestige or increasing the size of its empire.
  (iii) Lack of research: A lot of data and information gathering and analysis is
  involved in Mergers or Acquisition. Extensive research is required. A shoddily
  conducted research is bound to cause destruction of the acquirer‟s wealth.
  (iv) Failure to manage post-merger integration: More often than not, acquirers are
  unable to integrate the acquired companies in their business. Organizational
  and cultural issues are always overlooked. Lack of adequate understanding of
  the culture of the acquired companies creates problem of integration and
  synergy.
  108
  (v) Lack of experience: Lack of prior acquisition experience.
  N
  Existing value of Oloibiri Plc (50m x N25) 1,250.0m
  Existing value of Akwanga Plc (125m x N15.50) 1,937.5m
  Present Value of savings 25.0m
  3,212.5m
  Evaluation of Offer:
  No. of Shares of Akwanga Plc offered per Share of Oloibiri plc 2
  New Value per Share of Akwanga Plc N14.28
  New value per Share of Oloibiri Plc (N14.28x2) N28.56
  Cash offered per Share of Oloibiri Plc N30.00
  109
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  STRATEGIC FINANCIAL MANAGEMENT
  4. The right given by a Company to an Investor, allowing him to buy new Shares
  at a future date at a fixed and pre-determined price is called
  A. Warrants.
  B. Share option.
  C. Rights issues.
  D. Theoretical rights.
  E. Conversion rights.
  110
  5. Which of the following aptly describes the difference between today's market
  price of Convertible Stock and today's market price of its equivalent number of
  Shares? Conversion ...........
  A. Price
  B. Value
  C. Ratio
  D. Premium
  E. Discount
  What is the cash flow arising as a result of the tax implications on the sale of
  the machine at the end of the four years?
  A. Inflow of N22,500
  B. Outflow of N75,000
  C. Outflow of N68,500
  D. Outflow of N22,500
  E. Inflow of N75,000
  9. The Nominal Cost of Capital is 10%. The expected annual rate of inflation is 4%.
  What is the Real Cost of Capital?
  A. 10.58%
  B. 5.80%
  C. 11.44%
  D. 14.40%
  E. 9.45%
  111
  10. Which of the following is LEAST likely to be a reason for a Company to seek a
  Stock Market floatation? To
  A. improve the existing owner's control over the business.
  B. have access to a wider pool of finance.
  C. enhance the company's image.
  D. transfer capital to other uses.
  E. improve marketability of shares.
  13. Which of the following sources of finance is the most widely used by small
  companies?
  A. Debenture issue
  B. Bank borrowing
  C. Rights issue
  D. New Share issue
  E. Retained earning
  112
  15. When calculating the Weighted Average Cost of Capital (WACC), which of the
  following weighting methods is preferred?
  A. Book values of debt and equity
  B. Average levels of the market values of debt and equity (ignoring
  reserves)
  C. Current market values of debt and equity (ignoring reserves)
  D. Current market values of debt and equity (plus reserves)
  E. Average levels of the market values of debt and equity (plus reserves)
  16. Which of the following does NOT explain the failure of Acquisitions to enhance
  the Shareholders' wealth?
  A. Bloated egos
  B. Market irrationality
  C. Pre-emptive action
  D. Window dressing
  E. Managerial incompetence
  18. All the following are characteristics of Microfinance Bank Clients EXCEPT
  A. Small businesses usually employing 1 – 10 staff
  B. Informal, usually owner operated
  C. Do not keep formal records
  D. Limited or no access to formal bank loans
  E. Inactive poor
  19. Which of the following does NOT explain the need for Microfinance Banks ?
  A. Improving on the social economic conditions of the poor.
  B. Providing available long term capital to be used in microeconomic
  activities
  C. Providing credit to the low income earners.
  D. A development strategy-one of the tools for meeting the Millenium
  Development Goals (MDGs)
  E. Providing microfinance services to the low income clients for income
  generating activities
  113
  20. Which of the following is NOT a factor to consider in cross-border Investment
  appraisal?
  A. Taxation
  B. Expected rate of return
  C. Exchange risk
  D. Other undefined risks
  E. Life of investment
  114
  SOLUTIONS TO SECTION A
  1. E
  2. A
  3. B
  4. A
  5. D
  6. B
  7. B
  8. D
  9. B
  10. A
  11. E
  12. C
  13. E
  14. C
  15. C
  16. E
  17. E
  18. E
  19. B
  20. D
  TUTORIALS
  115
  1.10
  9. - 1 = 1.058 – 1 = 0.058 = 5.80%
  1.04
  PART II SHORT ANSWER QUESTIONS (20 MARKS)
  1. The current Market Price per Share of a Company‟s Ordinary Shares times the
  number of Shares into which the security is convertible is referred to as
  .........................
  3. If cash flows are expressed in terms of the actual number of Naira that will be
  received or paid on various future dates, which rate should be used for
  discounting?
  6. The most appropriate criterion for ranking projects when there is a fund
  constraint is known as ...............................
  7. The process of paying and receiving Dividends through the use of Electronic
  System is called ............................
  8. A company offers to pay a Dividend in the form of new Shares which are worth
  more than the alternative cash offer. What is this form of Dividend called?
  10. State the Beta Factor of a portfolio consisting entirely of risk-free securities.
  11. The entire flexible structures and processes by which financial services are
  delivered to small entrepreneurs on a sustainable basis is called ...................
  116
  Use the following information to answer questions 13 and 14.
  The risk-free rate is 7% and the market return is 14% while the share‟s beta co-efficient
  is 1.25.
  KUBWA Plc issued a N1,000 Bond at par. The company's Ordinary Share has a Market
  Price of N45, while the Conversion Price is N58.
  17. The gain or loss that results from restating Foreign Subsidiaries' financial
  statements in the home currency is an example of ...................
  18. Brother Plc. wants to acquire Sister Ltd. Brother Plc's Share sells for N135 per
  unit. Sister Ltd's Share sells for N67.50 per unit.
  The acquisition is accomplished by an exchange of securities. What is the
  exchange ratio?
  19. The mathematical relationship between changes in exchange rates and changes
  in the price level is called ........................
  20. The acronym “EDI” normally used in a computer environment stands for
  ..................
  117
  PART II SHORT ANSWER QUESTIONS
  1. Conversion value
  2. Decision Support System (DSS)
  3. Money Cost of Capital
  4. 15.5%
  5. Diversification
  6. Benefit to Cost Ratio OR Profitability Index
  7. e-dividend
  8. An Enhanced Scrip Dividend
  9. Signalling
  10. Zero
  11. Microfinance
  12. Bail-out or Foreclosure
  13. r = rf + β (rm - rf) or Ri = Rf + β (Rm – Rf)
  14. 15.75%
  15. N776
  16. N224
  18. 1 for 2
  Tutorials
  4. (1.05 x 1.10) – 1
  = 1.155 – 1
  = 0.1555
  = 15.5%
  118
  14. Ri = Rf + β (Rm – Rf)
  = 7% + 1.25(14 – 7)
  = 7% + (1.25)(7)
  = 7% + 8.75%
  = 15.75%
  67.5
  18. Exchange Ratio is or 67.5 for 135
  135
  119
  SECTION B – ANSWER QUESTION 1 AND ANY OTHER THREE (60 MARKS)
  SUNNEC PLC
  SUNNEC Plc, a medium-sized engineering firm has just reported profits of N1,125,000
  after tax, interest, preference dividends, and declared an ordinary dividend of 15
  percent. Despite the record profits, which maintain the previous pattern of overall
  growth, but with cyclical fluctuations, the company has been faced with liquidity
  problems which have restricted its operational flexibility. SUNNEC Plc has received a
  suggestion for a Merger from MOONLIGHT Plc which is a relatively new company –
  formed six years previously – and which has had a spectacular and consistent growth
  in profit and whose products complement those of SUNNEC Plc.
  The most recent profits of MOONLIGHT Plc were N1,687,500 after tax and interest, with
  an ordinary dividend of 10 per cent.
  The reason for the suggestion of a Merger given by MOONLIGHT Plc is that they have
  also been having liquidity problems and that an enlarged size could help overcome
  these. MOONLIGHT‟S initial approach did not go into any detail but simply suggests
  that exploratory talks should be opened and that to make these talks purposeful they
  should assume that both Company‟s profits will increase by 10 percent Price–Earnings
  in the next period and that for amalgamation purposes a fair Price–Earnings ratio
  would be 15 for MOONLIGHT Plc and 10 for SUNNEC Plc.
  The summary of the most recent Balance Sheets of MOONLIGHT Plc and SUNNEC Plc
  are as follows:
  MOONLIGHT Plc SUNNEC Plc
  N N
  Net Assets 13,500,000 11,250,000
  Share Capital:
  Ordinary Shares 3,375,000 1,800,000
  6% Pref. Shares - 450,000
  Reserves 6,750,000 9,000,000
  10% Loan Stock 3,375,000 -
  13,500,000 11,250,000
  Required:
  (a) Analyse the implications of the suggestion made by MOONLIGHT Plc.
  (11 Marks)
  120
  (b) List FOUR factors that should be considered at this stage in respect of this
  analysis. (4 Marks)
  (Total 15 Marks)
  QUESTION 2
  (a)(i) According to Carroll, what are the four main responsibilities faced by Companies
  when developing an ethical framework and;
  (b) Discuss any TWO considerations, and how each will impact on each of the main
  functional areas of a firm. (7 Marks)
  (Total 15 Marks)
  QUESTION 3
  Two companies – Kano plc and Kaduna plc are in the same Industry, with identical
  Earnings per Share (EPS) for the last five years. Kano plc has a policy of paying 40 per
  cent of Earnings as Dividends, while Kaduna plc pays a constant amount of Dividend
  per Share (DPS). There is disparity between the market prices of the shares of the two
  companies. The price of Kano Plc‟s Share is generally lower than that of Kaduna plc,
  even though in some years, Kano Plc paid more Dividends than Kaduna plc.
  The data on Earnings, Dividends and Market Price for the two Companies are as
  follows:
  Required:
  (a) Calculate for each of the two Companies:
  (i) Payout Ratio
  (ii) Dividend Yield
  (iii) Earnings Yield (3 Marks)
  121
  (b) What are the reasons for the differences in the Market prices of the two
  Companies‟ Shares? (10 Marks)
  (c) What can Kano Plc do to increase the market price of its Shares? (2 Marks)
  (Total 15 Marks)
  QUESTION 4
  Banjil sells a fixed quantity of 300 bottles of „Super‟ per week. The estimated storage
  cost per bottle of Super is N3 per annum. Delivery from Banjil‟s current supplier takes
  two weeks and the purchase price per bottle delivered is N30. The supplier charges a
  fixed N112.50 order processing charge for each order, regardless of the Order Size.
  Banjil has recently been approached by another supplier of „Super‟ with the following
  offer:
  (i) The cost to Banjil per bottle will be N28.50 each
  (ii) There will be a fixed order processing charge of N375, regardless of Order Size.
  (iii) Delivery time will be one week
  (iv) Banjil estimates that due to packaging differences, the storage cost per bottle
  will be N2.70 per annum.
  Required:
  (a)(i) Calculate the Economic Order Quantity if Banjil changes to the new supplier
  and (3 Marks)
  (ii) determine if it would be financially viable to change to this new supplier.
  (2 Marks)
  QUESTION 5
  (a) Jolade plc is an all Equity Company with a Beta of 0.8, the risk rate is 10%
  and the expected return on the market is 18%. Jolade plc increases its gearing
  to a Debt /Equity ratio of 0.5.
  Income tax rate is 35%.
  122
  Required:
  (i) Compute Jolade plc‟s Cost of Equity when Ungeared;
  (ii) Compute Jolade plc‟s Equity Beta when Geared up;
  (iii) Compute Jolade plc‟s Cost of Equity when Geared,
  (iv) Check the answers to (i) & (iii) using the M-M formula
  keg = keu + (I-t) (keu -kd) D/E (8 Marks)
  (b) The two Companies below are identical in every respect except for their Capital
  structures.
  N‟000 N‟000
  Market Value of Equity 3,900 6,500
  Market Value of Debt 4,000 -
  Total Market value of Company 7,900 6,500
  The total value of Geared plc is higher than the total value of Ungeared plc which is
  consistent with M & M‟s proposition that Vg = Vu + DT
  All profits after tax are paid out as Dividends and so there is no Dividend growth. The
  Beta of Ungeared plc is 1.0. The Debt Capital of Geared plc can be regarded as risk
  free.
  Required:
  Calculate:
  (i) The Cost of Equity of Geared plc.
  (ii) The Market Return.
  (iii) The Beta Value of Geared plc. (5 Marks)
  (c) Akin plc is an all Equity Company whose Beta value is 0.85. Bukky plc is a
  Geared Company which in all other respects has the same risk and operating
  characteristics as Akin plc.
  123
  The Capital structure of Bukky plc is as follows
  Nominal value Market value
  N N
  Equity 12 25
  Debt Capital 8 10
  20 35
  The Debt Capital of Bukky plc is virtually risk free. The rate of Income Tax is 40%.
  What would be the predicted Beta Value of Bukky plc‟s Equity Capital? (2 Marks)
  (Total 15 Marks)
  QUESTION 6
  DAREX Plc plans to build a new plant at a cost of N1,000,000. The cost is made up of
  the lending cost of the necessary machinery and the cost of installation. The plant is
  expected to last 4 years.
  Assume that all expenses are tax deductive and that the company is a manufacturing
  concern.
  Cost of Capital is 10% and tax rate is 30%. Assume one year delay in tax. For Capital
  Allowances purposes, assume an Initial Allowance of 20% and an Annual Allowance of
  10% straight line, over ten years. Darex is a very profitable Company and can utilise all
  Capital Allowances in full at the earliest opportunity.
  Required:
  (a) Calculate the Net Present Value (NPV) of the project. (10 Marks)
  (b) By paying a single lump sum now, the Company would obtain the services of a
  Credit Consultant who would ensure that all sales revenues were received in
  cash in the year of sale.
  Ascertain the maximum amount it would be left with for paying for the services
  of the Credit Consultant if such payments were tax deductive expenses.
  (5 Marks)
  (Total 15 Marks)
  124
  SOLUTIONS TO SECTION B
  EPS:
  N
  Moonlight Plc: Most Recent = N1,687,500 = 0.50
  N3,375,000
  Forecast = N1,856,250 = 0.55
  N3,375,000
  Sunnec Plc: Most Recent = N1,125,000 = 0.63
  N1,800,000
  Forecast = N1,237,500 = 0.69
  N1,800,000
  The suggested P/E ratio gives MOONLIGHT Plc a higher value despite a poorer EPS.
  Again, the company is valued at 23/4 times net asset value whereas Sunnec is valued at
  just over 1 time (1.15). The earnings potential of Moonlight must be considerably
  greater – either in terms of consistency and/or certainty than Sunnec Plc.
  Unless the Directors of Sunnec believe this, then the company would appear to be
  undervalued. In addition, Sunnec has Preference Shares better Gearing potential – as
  125
  it has no loan. This does not seem to be reflected in the suggested amalgamation
  terms.
  (iii) How realistic is the 10 per cent forecast increase in profits for both
  Companies?
  SOLUTION 2
  Economic
  Legal
  Ethical
  Philanthropic
  ECONOMIC
  Management should always be acting in the best interests of the Company‟s
  Shareholders, and should therefore always be actively taking decisions that will
  increase Shareholders‟ wealth.
  Projects that have positive NPV‟s should be pursued as far as funds will allow,
  as such projects will increase the value of the company and thus Shareholders‟
  wealth.
  Whilst Management may have a different attitude towards risk than the
  Shareholders, they should always manage risk according to Shareholders‟
  requirements.
  126
  Dividends – there is no legal obligation to pay Dividends to Ordinary
  Shareholders, but the reasons for withholding Dividends must be in the
  interests of the Company as a whole.
  LEGAL
  Companies must ensure that they are abiding by the rules and regulations that
  govern how they operate. Company law, health and safety, and environmental
  standards are examples of these boundaries.
  Failure to abide by the rules can cost Companies dearly. One only has to look at
  the fate of WorldCom and Enron bosses, as well as Nick Leeson of Barings Bank,
  as examples of how failure to operate within the legal framework can cause
  Companies to collapse, taking with them the jobs (and often pension funds) of
  thousands of employees.
  ETHICAL
  Ethical responsibilities arise from a moral requirement for Companies to act in
  an Ethical manner.
  PHILANTHROPIC
  Anything that improves the welfare of employees, the local community or the
  wider environment.
  HUMAN RESOURCES
  Provision of minimum wage. The introduction of the minimum wage is
  designed to show that Companies have an Ethical approach to how they treat
  127
  their employees and are prepared to pay them an acceptable amount for the
  work they do.
  MARKETING
  Marketing campaigns should be truthful and should not claim that products or
  services do something that they in fact cannot. This is why such campaigns
  have to be very carefully worded to avoid repercussions under Trades
  Descriptions Acts etc.
  Campaigns should avoid creating artificial wants. This is particularly true with
  children‟s toys, as children are very receptive to aggressive advertising.
  MARKET BEHAVIOUR
  Companies should not exploit their dominant market position by charging vastly
  inflated prices.
  Large Companies should also avoid exploiting suppliers, if these suppliers rely
  on large Company business for survival. Unethical behaviour could include
  refusing to pay a fair price for the goods and forcing suppliers to provide goods
  and services at uneconomical prices.
  PRODUCT DEVELOPMENT
  Companies should strive to use ethical means to develop new products.
  SOLUTION 3
  (a) The following table shows Payout, Dividend Yield and Earnings Yield for the two
  Companies.
  (b) It seems that investors evaluate the Shares of these two Companies in terms of
  Dividend payments. The average Dividend Per Share over a period of 5 years for
  both firms is N2.70. But the average market price for Kano Plc (N19.80) has
  been 10 percent higher than the average market price for Kaduna Plc (N18).
  The market has used a higher capitalisation rate to discount the fluctuating
  Dividend Per Share of Kano Plc at a lower price than that of Kaduna Plc.
  (c) It is obvious that the market evaluates these firms in terms of Dividends. A
  higher market price might be obtained for the Shares of Kano Plc, if it increases
  its Dividend Payout Ratio. The Company should evaluate this option in light of
  fund requirement.
  129
  SOLUTION 4
  CURRENT COST:
  2C o D
  (a)Economic Order Quantity Q =
  Ch
  (ii) Demand is fixed at 300 bottles per week, and delivery from the Supplier takes
  two weeks.
  Banjil must therefore reorder when stocks fall to 600 units (2 weeks demand).
  The present total cost of stocking „Super‟ for one year will be:
  Purchase Cost N
  15, 600 units @ N30 each 468,000
  Ordering Cost
  Annual Demand (Units) 15,600
  Order Size (Units) 1,082
  Number of Orders Per Year 14.42
  Cost of Placing One Order N112.5
  Annual Ordering Cost 1,622
  Holding Cost
  Average Inventory (1082/2) 541
  Holding Cost Per Unit Per Annum N3
  Annual Holding Cost 1,623
  Total Annual Cost 471,245
  130
  New Supplier
  Q= 2 × 375 × 15,600
  2.70
  = 4,333,333
  = 2,082 Units
  √
  To determine whether or not it is financially viable to change to new supplier, we must
  compare the total cost of the two.
  Ordering Cost
  Annual Demand (Units) 15,600
  Order Size (Units) 2,082
  Number of Order Per Year 7.49
  Cost of Placing One Order N375
  Annual Ordering Cost 2,809
  Holding Cost
  Average Inventory (2082/2) 1,041
  Holding Cost Per Unit Per Annum N2.70
  Annual Holding Cost 2,809
  Total Annual Cost 450,218
  This is N21, 027 less than the existing annual purchasing cost, and therefore, it
  would be financially beneficial to switch to new supplier.
  131
  (ii) The main features of a JIT system include the following:
  Deliveries will be small and frequent, rather than in bulk. Production
  runs will also be shorter.
  SOLUTION 5
  (ii) β g = β u [1 + (1 - T)D/E]
  = 0.8 (1 + (1-0.35(0.5)
  = 1.06
  Rate of debenture is not given. When this is so, we use risk free rate = 10%
  (iv) ke g = 16.4 + (1- 0.35) x (16.4 - 10) 0.5
  = 18.48%
  132
  (ii) Ke of Ungeared plc = 650/6500
  = 10%
  Since the Beta factor of Ungeared plc is one, it means that the risk of
  Ungeared plc is the same as the market risk, and therefore, must earn
  the same return. This means that 10% is the market return (R m =
  10%).
  (iii) β g = β u (1 + (1 - T) D/E)
  = 1 (1 + (1-0.35) x N4,000
  N3,900
  = 1.67
  (c) β g = β u (1 + (1 - T) D/E)
  = 0.85 (1 + (1-0.40) x 10
  25
  = 1.054
  SOLUTION 6
  (b) If the credit consultant is recruited, there will be the following incremental cash
  flows:
  Yr 1 2 3 4 5
  N N N N N
  Revenue 700,000 700,000 700,000 700,000 -
  Cash collected (525,000) (700,000) (700,000) (700,000) (175,000)
  175,000 - - - 175,000
  133
  The maximum sum payable is the PV of these incremental cash flows.
  Yr CF DF(10%) PV
  N N
  1 175,000 0.91 159,250
  2 (175,000) 0.62 (108,500)
  50,750
  Workings:
  1. Computation of Capital Allowance
  N
  Cost 1,000,000 Total C/A
  Yr. 1 (I.A) (200,000)
  (A.A) (80,000) 280,000
  720,000
  Yr. 2 (A.A) (80,000) 80,000
  640,000
  Yr. 3 (A.A) (80,000) 80,000
  560,000
  Yr. 4 (A.A) 560,000 560,000
  Year 1 2 3 4
  N N N N
  Sales 700,000 700,000 700,000 700,000
  Expenses (200,000) (200,000) (200,000) (200,000)
  Profits 500,000 500,000 500,000 500,000
  Less: C.A (280,000) (80,000) (80,000) (560,000)
  220,000 420,000 420,000 (60,000)
  Tax (Payable) @ 30% (66,000) (126,000) (126,000) 18,000
  Year (Payable) Receivable 2 3 4 5
  134
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  ADVANCED TAXATION
  1. The Tax Clearance Certificate obtained in respect of any Company for the last
  three years of assessment shall disclose the following EXCEPT:
  A. Chargeable Income.
  B. Name of Directors.
  C. Tax payable.
  D. Tax paid.
  E. Tax outstanding.
  3. Which one of the persons listed below is NOT a member of the Federal Inland
  Revenue Service (FIRS)?
  A. Directors and Heads of Department of FIRS.
  B. A Director from the National Planning Commission.
  C. A Director from the National Population Commission.
  D. The Legal Adviser of the FIRS.
  E. Registrar General of the Corporate Affairs Commission.
  135
  5. Under the Personal Income Tax Act CAP. P8 LFN 2004, schedule 2, there are
  persons that are entitled to benefit from the income of an Estate. They include
  all but ONE of the following. Which one?
  A. Trustees
  B. Legatees and Annuitants
  C. Testator
  D. Settlor
  E. Estator
  7. Value Added Tax ACT CAP VI LFN 2004 provides for the setting up of a Technical
  Committee that will consider all Tax matters that require professional and
  technical expertise and make recommendations to the Board. Who among the
  following is NOT a member?
  A. A Chairman who is the Chairman of Federal Inland Revenue Service
  (FIRS).
  B. All Directors in the FIRS.
  C. The Legal Adviser of the FIRS.
  D. A Director in the Nigeria Customs Services.
  E. The Registrar General of Corporate Affairs Commission.
  8. What is the penalty for knowingly accepting, receiving or using any document
  counterfeited or falsified for the purpose of transacting business with the
  Federal Inland Revenue Service?
  A. N2,000,000 and a term of 3 years imprisonment, on conviction.
  B. N200,000 or a maximum term of 3 years of imprisonment or both, on
  conviction.
  C. N20,000 or a maximum term of 3 years of imprisonment or both, on
  conviction.
  D. N200,000 or a maximum term of 3 years of imprisonment, on conviction.
  E. N20,000 or a maximum term of 3 years of imprisonment on, conviction.
  136
  Under Capital Gains Tax Act CAP C1 LFN 2004, when an asset is partly disposed
  A
  of, the cost of Partial disposal is computed as x C. Use this formula to
  A B
  answer questions 9 and 10.
  11. Losses are allowed to be carried forward for a maximum period of............. years
  for trading Companies after which it lapses.
  A. Two
  B. Three
  C. Four
  D. Five
  E. Six.
  12. The following are the conditions necessary for an expense to qualify as
  allowable for tax purposes under Corporate taxation EXCEPT
  A. Exclusively
  B. Necessarily
  C. Wholly
  D. Carefully
  E. Reasonably.
  138
  19. Duties that are based on Instruments otherwise called Written Documents, are
  called..................
  A. Excise Duties.
  B. Import Duties.
  C. Stamp Duties.
  D. General Duties.
  E. Instrument Duties.
  20. Which tier of Government collects Slaughter Slab Fees?
  A. Federal Government
  B. State Government
  C. Local Government
  D. A & B only
  E. B & C only.
  139
  PART II SHORT ANSWER QUESTIONS (20 Marks)
  2. The Federal Inland Revenue Service Board, the State Board of Internal Revenue
  and the Local Government Revenue Committee, are levels of ………………
  3. Section 85(1) of Personal Income Tax Act Cap P8 LFN 2004 (PITA) provides for
  the establishment of a body known as the ...................
  5. According to PITA 2004, Schedule 2, when a person dies and leaves no Will or
  leaves a Will but has not disposed of all his property by the Will, he is said to
  have died ..................
  8. The profit realised from the sale of any asset under the Capital Gains Tax Act, is
  referred to as ........................ gain.
  10. Roll-over relief is not granted when the amount re-invested is .............than the
  cost of the old asset.
  13. Under which law will Total Nigeria Plc be assessable to tax?
  14. With respect to a body Corporate, what transactions are expected to be reported
  by every Bank in Nigeria in the quarterly returns to the relevant authority?
  140
  15. What is the Petroleum Profits Tax rate applicable to Companies in Production
  Sharing Contracts with the Federal Government of Nigeria?
  16. Casing Head Petroleum Spirit and Crude Oil won or obtained by a Company
  from Petroleum Operations is known as .............
  17. What is the full word for the acronym „„G-Factor‟‟ in Petroleum Profits Tax Act
  P13 LFN 2004 (PPTA)?
  19. What is the title of the Administrative and Technical Head of the Stamp Duties
  office?
  20. List TWO categories of transactions that are exempt from Stamp Duties.
  141
  SECTION B – ANSWER QUESTION 1 AND ANY OTHER THREE (60 Marks)
  Larbrisse Investment Ltd., a Company located in Lokoja, Kogi State of Nigeria, started
  operations on 1 November 2004. The accounting year end was 30 September. As a
  result of the economic situation, the going concern of the company became threatened
  and the Board contemplated cessation of business on 31 October 2008.
  The adjusted profits for the years to cessation date are as follows:
  N
  Period 1/1/04 to 30/09/05 1,100,000
  Year ended 30/09/06 2,400,000
  Year ended 30/09/07 2,640,000
  Year ended 30/09/08 3,960,000
  An additional adjusted profit for the month of October 2008 was N340,000. As a Tax
  Consultant, you have been requested by the Board of Larbrisse Investment Ltd.
  through a letter dated 15 August 2009, to advise on the tax liability up to cessation
  date, giving all the options available. (18 Marks)
  QUESTION 2
  (b) Briefly describe the Self Assessment Scheme, stating FIVE advantages.
  (5 Marks)
  (c) Distinguish between Tax Evasion and Tax Avoidance. (3 Marks)
  QUESTION 3
  Segun Ojo lived in Imo State for many years and died in 2002. He was survived by a
  widow and three children – two sons and a daughter.
  142
  Mr. Segun Ojo left a Will appointing Iyabo as his Executor to administer his Estate.
  Iyabo obtained the necessary powers under the Will and has, since 2002, been
  administering the Estate.
  The Executor‟s account showed the following income and expenses for the year ended
  31 December 2005.
  Income N
  Expenses:
  Under the will, Iyabo has discretion to make an ex-gratia payment in case of need to
  any of the beneficiaries which should not exceed N1,500,000 in any one year. During
  the year ended 31 December 2005, Iyabo paid N600,000 to the two sons in equal
  amounts.
  You are required to show the amounts which the beneficiaries would include in their
  respective Income Tax Returns for the 2006 year of assessment in respect of their
  Income from the Estate. (14 Marks)
  QUESTION 4
  (a) Under the Capital Gains Tax, state FOUR allowable deductions? (4 Marks)
  (b) Mr. Ejiro bought a piece of land at Mokola, Ibadan, for N280,000 in 1993 and
  because of the swampy nature of the area, he had to spend N100,000 to put the
  land in proper shape. In January 1997, Mr. Ejiro sold part of the land to his
  143
  brother Osas for N180,000 and in September of the same year, another portion
  was sold to someone unknown for N120,000.
  On valuation, a professional Valuer put the land sold to his brother at N220,000 while
  the other was valued at N120,000. The remaining parcel of land was also valued at
  N880,000.
  Calculate the Capital Gains Tax payable and by whom. (10 Marks)
  (Total 14 Marks)
  QUESTION 5
  Under the Industrial Development (Income Tax Relief) Act 1990, Industries and
  Products are granted Tax Relief Periods.
  Required:
  QUESTION 6
  The estimated tax liability of an Oil Producing Company was N60,000,000 for the 1996
  tax year. The actual tax liability as computed per the Audited accounts of the Company
  was finally agreed to be N79,500,000.
  Required:
  In accordance with the provisions of Section 42 of PPT Act CAP P13 LFN, 2004,
  (a) Prepare the schedule of streams of payments to tax authority by the Company
  for 2004 tax year (assuming the Company was served notice of assessment in
  November 2004.) (6 Marks)
  (b) Briefly state the rules governing the time the payments of undisputed tax
  liability of an Oil Company should be made. (8 Marks)
  (Total 14 Marks)
  144
  SOLUTIONS TO SECTION A
  1. B
  2. D
  3. C
  4. A
  5. B
  6. C
  7. E
  8. B
  9. B
  10. D
  11. C
  12. D
  13. A
  14. A
  15. C
  16. E
  17. C
  18. B
  19. C
  20. C
  145
  PART II SHORT ANSWER QUESTIONS
  1. Direct, Indirect
  2. Tax Authority
  4. 0.125%
  5. Intestate
  6. Five (5)
  7. Consumption
  8. Chargeable
  10. Less
  11. Chargeable
  146
  SOLUTIONS TO SECTION B
  0909976854
  victojiba@yahoo.com
  Ref. No. 25th September 2009
  The Directors
  Larbrisse Investment Ltd
  P.O. Box 10, Adamawa Road
  Kogi State
  Nigeria
  Dear Sir,
  We refer to your letter dated 15 August 2009 regarding the above subject matter and
  hereby advise as follows:
  Having considered all the facts of the situation along with an analysis of the attached
  computations, we summarize below the tax implications underlying your proposed
  line of action.
  On Cessation of Operations
  Based on computations and as shown in Appendices I and II, liability to tax for the
  respective years are as follows:
  (a) For the year of Cessation i.e. 2008, the Assessable Profit is N4,300,000 (based
  on the actual year of cessation); and
  (b) For the Penultimate Year, i.e. the year preceding that of cessation two amounts
  are relevant, the amount computed based on the preceding year and the one
  computed based on the actual year.
  147
  It is pertinent to state that the Federal Inland Revenue Service has the right to assess
  your company on the higher amount, hence the assessable amount will be
  N2,970,000.
  In respect of the above, your company has the option of electing in the two years
  immediately after commencement i.e. assessment years 2005 and 2006, in which you
  can elect to pay the lower of the amounts computed on normal rate and that based on
  election (Appendix III). You would therefore not need to elect for this purpose. Your
  company will be saving N1,360,000 for this decision.
  It is pertinent to emphasise that on failure to file the Returns within the time
  stipulated by law, your Company will be liable to pay N25,000 (Twenty five thousand
  Naira) for the first month of the failure and N5,000 for subsequent months until the
  Returns are filed.
  We thank you most sincerely for your understanding and cooperation on this issue,
  and should you have any other issues concerning this, please do not hesitate to
  Yours faithfully,
  For VICFOJIB TAX CONSULTANTS
  O. Enissoband
  APPENDIX 1
  Cessation
  Assessment year 2007 – N2,970,000
  Assessment year 2008 – N4,300,000
  148
  Assessable profit on commencement
  Normal Election
  Basis Basis
  Amount Amount
  Year N N
  2004 200,000 200,000
  2005 1,300,000 1,500,000
  2006 1,300,00 2,460,000
  2,800,00 4,160,000
  APPENDIX II
  Calculations
  N
  Assessment Year 2004 Actual (1/11/04 – 31/12/04) /11 x N1,100,000 = 200,000
  2
  The Assessment Year 2007 on Preceding Year Basis (PYB) 1/10/05 – 30/09/06
  = N2,400,000
  Since the assessment on PYB is less than that on Actual basis the Revenue office will
  decide to elect and assess on N2,970,000
  149
  Commencement Rule – Election
  Two Years 2005 and 2006
  SOLUTION 2
  (ii) The amount of the total profits has been agreed, after a revised
  assessment has been raised, on the objection raised by a Company.
  (iii) The amount of such total profits has been determined on objection raised
  by a company.
  (iv) The amount of such total profits has been determined on objection,
  revision or on appeal over the assessment made, agreed or determined
  on appeal.
  150
  B. Self–Assessment Scheme
  This is a system in which a taxpayer is required to make a Return of his income
  and the tax liability based on such income. The taxpayer is expected to forward
  the Returns with the Cheque for tax due to the relevant tax authority.
  With this Scheme, the taxpayer is made to assess himself instead of the
  traditional method of the Inland Revenue Office raising the assessment. Thus,
  the Revenue Office is only to verify the authenticity of such Returns.
  (iii) It reduces the job load on the part of the Revenue staff.
  (iv) The taxpayer can pay the tax in SIX equal monthly instalments.
  (v) Since it is now mandatory for Companies with turnover of N1.0m and
  above to file Self-assessment Returns, this will surely reduce the number
  of tax defaulters.
  C. Tax Evasion
  This is a criminal offence in which a taxpayer does not pay or want to pay tax at
  all. A tax evader may sometimes be charged to court, fined and/or imprisoned.
  Tax Avoidance
  This is a situation in which the taxpayer plans his/her affairs in a way that
  would make him/her pay the least possible amount of tax. This is perfectly
  within the law.
  151
  SOLUTION 3
  Less:
  Executor‟s discretionary payments (600,000) - 300,000 300,000 -
  Amount available for
  distribution in the ratio
  2:3:3:2 7,500,000 1,500,000 2,250,000 2,250,000 1,500,000
  Amount to be shown in 2006 Tax 1,500,000 2,550,000 2,550,000 1,500,000
  Note:
  The With-Holding Tax of 15 percent on the individuals, amounting to N587,500 will be
  borne by the beneficiaries in the ratio of 2:3:3:2.
  SOLUTION 4
  A. Allowable deductions under Capital Gains Tax.
  (i) Cost of acquisition or purchase price including all costs incidental to
  the purchase.
  152
  establishing, preserving or defending the owner‟s title to or rights over
  the assets.
  B. Total cost of the land = N280, 000 + N100, 000 = N380, 000.
  153
  Capital Gains Tax @ 10% of N83,226 = N8,323, payable by Mr. Ejiro
  N.B
  (i) Since Mr. Ejiro sold land worth N220, 000 to his brother (Transaction not done
  at arm‟s length) at N180,000, then N220,000 is deemed to be the effective sales
  value.
  (ii) Since the other sale was made to an unknown person, it is deemed to have been
  at arm‟s length, and the sales value of N120,000 will be regarded as the
  appropriate sales value.
  SOLUTION 5
  154
  B. CONDITIONS FOR GRANTING A PIONEER CERTIFICATE.
  The Act empowers the Federal Executive Council from time to time to publish a
  list of Industries or Products as Pioneer Industries Products, if it is satisfied that:
  (i) The Industry is carried on in Nigeria on a scale suitable to the economic
  development of Nigeria.
  (v) The Company can export 50% of its products. This is according to the
  1995 Federal Budget.
  (i) State whether the Company is, or the proposed Company when incorporated
  shall be, an indigenously – controlled Company.
  (ii) Give particulars of the Assets on which Qualifying Capital Expenditure will be
  incurred by the company including their source and estimated cost on or before
  Production Day and during a period of 3 years following Production Day.
  (iii) Specify the place in which the assets in respect of which Qualifying Expenditure
  will be incurred by the Company or proposed Company are to be situated.
  (iv) Estimate and state the probable Production Day of the Company or proposed
  Company.
  (v) Specify any product and by-product (not being a pioneer product) proposed to
  be produced by the Company or proposed Company and give a reasonable
  155
  estimate of the quantities and value of such product and by-product during a
  period of one year from Production Day.
  (vi) Give particulars of the Loan and Share Capital, of the proposed Company,
  including the amount and date of each issue or proposed issue, and source from
  which the Capital is to be or has been raised.
  (vii) In the case of a Company already incorporated, give the name, address and
  nationality of each Director of the Company and the number of Shares held by
  him.
  (viii) In the case of a proposed Company, give the name, address and nationality of
  each promoter of the Company.
  (ix) The application shall contain a declaration signed by the applicant, that all the
  particulars contained in the application are true.
  SOLUTION 6
  A. Schedule of Streams of Instalments of the Tax
  Liability of N79,500,000
  March 2004 1
  /12 x N60,000,000 5,000,000
  April 2004 1
  /12 x N60,000,000 5,000,000
  May 2004 1
  /12 x N60,000,000 5,000,000
  June 2004 1
  /12 x N60,000,000 5,000,000
  July 2004 1
  /12 x N60,000,000 5,000,000
  August 2004 1
  /12 x N60,000,000 5,000,000
  September 2004 1
  /12 x N60,000,000 5,000,000
  October 2004 1
  /12 x N60,000,000 5,000,000
  November 2004 1
  /12 x N60,000,000 5,000,000
  156
  December 2004 Final Tax (actual tax minus already paid)
  N79,500,000
  (ii) The first monthly payment shall be due and payable not later than the
  third month of the accounting period and shall be equal to one-twelfth‟s
  of the estimated Tax.
  (iii) Each of the following monthly instalments is due and payable not later
  than the end of each subsequent month.
  (iv) The final instalment of tax shall be due and payable within twenty-one
  (21) days after the service of notice of assessment of tax for such
  accounting period.
  (v) The amount of tax payment shall be the total assessed for that
  accounting period less all instalments paid on account.
  157
  THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
  PROFESSIONAL EXAMINATION II
  ADVANCED TAXATION
  1. Which of the following is the relevant tax authority that collects taxes of
  individuals and sole proprietors?
  A. Federal Inland Revenue Service.
  B. Joint Tax Board.
  C. State where the individual is resident in that year.
  D. State of origin of the individual.
  E. State Capital of the individual.
  2. The relevant tax authority that collects taxes of Companies and members of the
  Armed Forces is
  A. Federal Inland Revenue Service Board.
  B. Central Bank of Nigeria.
  C. Consolidated Fund of the Federal Republic of Nigeria.
  D. State Board of Internal Revenue.
  E. Federal Ministry of Finance.
  158
  5. New Companies are required to file tax returns within
  A. 14 months from date of Incorporation or not later than 6 months
  after the end of its first accounting period.
  B. 15 months from date of Incorporation or not later than 6 months after the
  end of its first accounting period.
  C. 16 months from date of Incorporation or not later than 6 months after the
  end of its first Accounting period.
  D. 17 months from date of Incorporation or not later than 6 months after the
  end of its first Accounting period.
  E. 18 months from date of Incorporation or not later than 6 months after the
  end of its first Accounting period.
  6. Profit of which of the following businesses is EXEMPT from tax under Companies
  Income Tax Act Cap C21 LFN 2004?
  A. Upstream Petroleum Operations.
  B. Manufacturing Operations.
  C. Property and Investment Operations.
  D. Shipping business.
  E. Aviation business.
  9. Depreciation Relief Ratio under the Companies Income Tax Act Cap C21 LFN
  2004, is not used in calculating Gross Adjusted Ratio for the following EXCEPT
  A. Manufacturing companies
  B. Insurance companies
  C. Banks
  D. Telecommunication companies
  E. Airlines.
  159
  10. No tax shall be payable by Pioneer companies during
  A. and after the Pioneer period.
  B. and subsequent to the pioneer period.
  C. the pioneer period.
  D. and later into the period after the pioneer status.
  E. and long after the pioneer period.
  11. Companies that service oil producing companies provide the following technical
  services EXCEPT
  A. Seismic survey
  B. Drilling of well
  C. Laying of pipes
  D. Hiring of vessels for transportation
  E. Marketing of Diesel, Engine oil and Grease.
  12. Companies engaged in upstream activities are not taxed under the following
  EXCEPT
  A. Companies Income Tax Act CAP C21 LFN 2004
  B. Petroleum Profits Tax Act CAP P13 LFN 2004
  C. Capital Gains Tax Act CAP C1 LFN 2004
  D. Value Added Tax CAP V1 LFN 2004
  E. Petroleum Profits Tax Act Cap P13 LFN 2007.
  14. A Licence granted to a Company under the Mineral Act 1999 (as amended) for
  mining Petroleum is known as
  A. Prospecting Licence
  B. Interim Prospecting Licence
  C. Oil Prospecting Licence
  D. Oil Mining Licence
  E. On and Off Licence.
  16. A Capital Gain is a Gain arising from the disposal outside the ordinary course of
  business, of …….
  A. stocks and shares.
  B. liquid assets.
  C. goods and resources.
  D. goodwill assets.
  E. capital assets.
  17. A Capital Gains Tax of N622 was paid on an asset that cost N50,000 when the
  owner sold it after incurring an incidental cost of disposal amounting to
  N15,000. What is the disposal value of the asset?
  A. N71,220
  B. N72,622
  C. N82,622
  D. N71,622
  E. N71,620
  19. The basis period for the first year of assessment under Commencement rule is
  date of commencement to ………..
  A. 30th day of June of each year.
  B. 30th September of the year of commencement
  C. 31st day of December.
  D. 31st day of the commencement month.
  E. 31st day of the accounting year.
  20. The basis period for the last year of assessment under Cessation rule is ………..
  A. 1st January to the date of cessation.
  B. 1st February to the date of cessation.
  C. 1st March to the date of cessation.
  D. 1st April to the date of cessation.
  E. 1st May to the date of cessation.
  161
  PART II SHORT ANSWER QUESTIONS
  1. The funding of the Joint Tax Board is a joint responsibility of both the
  ………………. and ……………….
  5. Tax Evasion and Tax Avoidance touch on Tax administration. Identify which is
  legal and illegal.
  6. Indigenous Companies that engage in the Petroleum Industry are also known as
  the sole risk operators. Why are they so described?
  9. Crude Oil obtained under the Production Sharing Contracts are divided into
  „cost oil‟, „tax oil‟, and „profit oil‟. What is „cost oil‟?
  10. What is Assessable profit under the Petroleum Profits Tax Act CAP P13 LFN
  2004?
  11. What are the particulars required for assets on which Qualifying Expenditure
  will be considered incurred, by a “Pioneer Company”?
  12. When is the tax withheld on Dividends, Interests or Rents, due for payment?
  13. How should “Bad Debts Written Off” be treated for tax purposes?
  14. The Adjusted Profit of a Company is N100,000 while the Total Tax liability
  amounted to N77,000. What is the Total Profit assuming 30% as Tax Rate under
  the Companies Income Tax Act Cap C21 LFN 2004.
  162
  15. The expenditure incurred on Fixed Assets used for trade or business which
  qualifies for Capital Allowance in a basis period is called ……………..
  16. What is the time limit for a “taxable person” to register for Value Added Tax?
  17. For purposes of Minimum Tax Computation, how will you compute the Tax on
  Turnover?
  18. What is the position, where a transaction is between Connected Persons under
  the Capital Gains Tax Act CAP C1 LFN 2004?
  19. How is the Incidental Cost of making a disposal treated under the Capital Gains
  Tax Act CAP C1 LFN 2004.
  163
  SECTION B - ANSWER QUESTION 1 AND THREE OTHERS (60 MARKS)
  Required:
  State clearly as Tax Consultants to the company what advice you will give to
  deal with:
  NB
  Your answer should be in Report format, addressed to the Financial Controller of
  the Company. (Total 18 Marks)
  QUESTION 2
  The following information were extracted from the books of accounts of Kamikaz
  Petroleum Limited for the year ended 31 December 2004.
  164
  Required:
  (a) Calculate the Chargeable profits and Assessable Tax for the 2005 Assessment
  year. (10 Marks)
  3(a) Ojo Lander Limited makes up its accounts to 31 October each year. It
  commenced business on 1 August 2004. You were given the operating results of
  the Company for the following periods:
  .
  N
  3 months to 31 October 2004 30,000
  12 months to 31 October 2005 450,000
  12 months to 31 October 2006 650,000
  12 months to 31 October 2007 900,000
  (i) Determine the basis periods for all the relevant years of assessment.
  (5 Marks)
  NB:
  Ignore Elections provisions.
  (b) Adamu commenced trading in 2001 and his adjusted profits for the first five
  years of trading are as follows:
  N
  Year ended 30 September 2002 10,400
  30 September 2003 16,200
  30 September 2004 13,200
  30 September 2005 19,200
  30 September 2006 14,000
  165
  You have been appointed as a tax consultant by Adamu, to advise him on whether his
  present accounting date should be maintained or be changed to 31 December or 31
  January. (7 Marks)
  (Total 15 Marks)
  QUESTION 4
  4(a) In the context of Capital Gains Tax Act CAP C1 LFN 2004, explain the following
  terms:
  (b) Bia Nigeria Ltd is not into development of Properties. It however sold a building
  on 1 July 2007 in Lagos for N5,800,000. The building sold was acquired in 2005
  for the sum of N2,588,000.
  Required:
  Compute the Capital Gains Tax payable arising from the above transactions.
  (14 Marks)
  QUESTION 5
  5(a) (i) State the members of the Technical Committee of the Federal
  Inland Revenue Service Board.
  (ii) What are the functions of the Technical Committee?
  (iii) Enumerate the allowable deduction with respect to the following
  classes of Insurance Companies for tax purpose.
  166
  (b) Equity Ltd is a life Assurance company incorporated under the Companies and
  Allied Matters Act 2004 has its Head Office abroad and Branches in Kenya and
  Liberia.
  Its Profit and Loss Account for the year ended 31 December 2006 is shown
  below:
  N(000) N(000)
  Life fund at 1/1/06 2,750,000
  Premium 3,650,000
  Investment income 860,000
  7,260,000
  Deduct:
  Claims paid 345,000
  Reserve for outstanding claims 520,000
  Surrenders 32,000
  Bonuses 45,000
  Commissions 576,000
  Other expenses 100,000
  Life fund at 31/12/05 4,500,000 (6,118,00)
  1,142,000
  The following additional information is provided:
  You are required to compute the Chargeable Profit or Loss for the year. (6 Marks)
  (Total 14 Marks)
  QUESTION 6
  (a) Under the Value Added Tax Act CAP VI LFN 2004, how do you determine the
  value of taxable Goods and Services? (4 Marks)
  (b) Mr. Emeka Gladstone has lived abroad for many years. In pursuit of the cliché
  “home will always be home” he decided to invest part of his savings from
  abroad, in Nigeria. He faces constraints to his plan. He said “In other climes you
  167
  see what taxes are used for, but this is not the case in some parts of Nigeria”.
  He is aware of the Value Added Tax provisions, but tells you he does not want to
  pay this tax. He poses the question “What line of business can I engage in, for
  which I will not need to pay Value Added Tax?”
  Required:
  As a Tax expert, point out any TEN provisions within the VAT Act that will enable him
  achieve his aim, without running foul of the Tax Law. (10 Marks)
  (Total 14 Marks)
  168
  SOLUTIONS TO SECTION A
  1. C
  2. A
  3. E
  4. C
  5. E
  6. A
  7. D
  8. C
  9. E
  10. C
  11. E
  12. B
  13. A
  14. D
  15. D
  16. E
  17. A
  18. E
  19. C
  20. A
  Tutorial
  Question 17
  169
  N622 = 0.1 x Gains
  N 622
  G - = N6220
  0.1
  Since G = Disposal Value – Total Cost
  N6220 = DV – (N50,000 + N15,000)
  = DV – N65,000
  DV = N65,000 + N6,220
  = N71,220
  170
  PART II SHORT ANSWER QUESTIONS
  2. Identifiable, known.
  3. It resolves the question of Relevant Tax Authority to which the tax is payable.
  6. They are described as such because they provide the funds, bear all the risks
  and take all the Crude produced.
  9. „Cost Oil‟ is the term given to the production sharing contract operator, to cover
  cost of production.
  10. Assessable profit is the Adjusted profit or loss after deduction of Education Tax
  and adjusting for losses brought forward.
  11. The particulars are the costs, source, on or before Production Day.
  12. Within thirty (30) days of the deduction or when the duty to deduct arises.
  14. N250,000
  16. Within six (6) months from the commencement of the Act or within six (6)
  months from the commencement of business.
  171
  19. It is treated as an allowable expense.
  TUTORIALS
  172
  SOLUTIONS TO SECTION B
  SOLUTION 1
  Dear Sir,
  Our initial job is to proffer advice on the above subject matter. We therefore confirm
  as follows:
  173
  company in the immediate preceeding year, in this case, 2007 assessment year.
  The question that arises is what was the tax paid in 2007? Since the tax paid in
  2007 was N1,200,000 we can make a case for N1,500,000 being excessive.
  We thank you for your co-operation and look forward to a long and beneficial
  relationship with you.
  Yours faithfully,
  for: OJB Tax Consultants
  O. LABANDE
  SOLUTION 2
  KAMIKAZ PETROLEUM LIMITED
  Calculation of Chargeable Profit and Assessable Tax – 2005 Assessment Year
  N
  Fiscal value of chargeable oil 136,181,500
  Other income 4,823,630
  141,005,130
  Less: (see 10 deductions) N
  Royalty 20,427,225
  Administrative expenses 5,592,500
  Production expenses 2,943,150
  Intangible drilling expenses 10,400,000
  Education Tax 1,992,985 (41,355,860)
  Assessable profit 99,649,270
  Deduct:
  Capital allowances (27,236,300)
  Chargeable profits 72,412,970
  Tax @ 85% of N72,412,970 61,551,024.50
  WORKINGS
  (b) Failure to deduct Withholding tax or having deducted, failure to remit to the
  Federal Inland Revenue Service under the Petroleum Profits Tax Act within 30
  days from the date the amount was deducted or the time the duty to deduct
  arose, shall be guilty of an offence and liable on conviction to a fine of 200% of
  the withholding tax not withheld, or withheld but not remitted.
  SOLUTION 3
  175
  (b)
  ABC CONSULTANTS
  LAGOS NIGERIA
  5 December 2009
  The Managing Director
  C
  /O Adamu
  Ijora, Iganmu,
  Lagos.
  Dear Sir,
  We acknowledge with thanks your letter appointing our firm as tax consultants to your
  company.
  Please find attached, appendices A & B as part of our advice in respect of your choice
  between two accounting dates as different from that presently in use.
  The choice of accounting date is important because it determines the interval between
  earning the profit and paying the tax on the profits. With respect to the tax due on the
  profit earned in 2002, on the basis of a 31 December accounting date, the last due
  date in personal taxation is 14 December 2003 (Interval of 11½ Months) for 2003
  assessment year. By shifting the accounting date to 31 January, the tax due in respect
  of the bulk of the profits earned in 2002, will be due for payment by 14 December
  2004 (i.e. interval of 23½ months), when commencement provisions are applied. The
  choice of accounting date also affects the degree of overlap between basis periods and
  consequently the amount of assessments that will be raised by the revenue office.
  It should be noted that in taxation law and practice, profits or losses are considered
  earned or incurred equally day by day with no regard to seasonal fluctuations, thus
  whatever is the accounting date, the tax liability will be the same, in aggregate over
  the year.
  It is advisable from the figure in the appendix, that the 31 January accounting date
  will be a more favourable election because it gives a lower figure of Adjusted Profits in
  aggregate terms, and also gives a longer interval to pay the tax arising.
  Once again, we thank you for the opportunity of this service while our bill for
  professional services will be forwarded in due course.
  Yours faithfully,
  ABC Tax Consultants.
  176
  Appendix A: 31 December Accounting Date
  N
  3 months to 31/12/2001 3
  /12 x N10,440 2,610
  12 months to 31/12/2002 9
  /12 x N10,440 x 3/12 x N16,200 11,880
  12 months to 31/12/2003 9
  /12 x N16,200 x 3/12 x N13,200 15,450
  12 months to 31/12/2004 9
  /12 x N13,200 x 3/12 x N19,200 14,700
  12 months to 31/12/2005 9
  /12 x N19,200 x 3/12 x N24,000 20,400
  Assessments
  2001 1st Year – Actual 2,610
  2002 1st 12 months 2,610 + 4/12 x N11,880 11,520
  2003 Preceding year Y/E 31/12/2002 11,880
  2004 Preceding year Y/E 31/12/2003 15,450
  2005 Preceding year Y/E 31/12/2004 14,700
  2006 Preceding year Y/E 31/12/2005 20,400
  Assessments
  N
  2001 1 Year- Actual ¾ x N3,480
  st
  2,610
  2002 1st 12month N3,480 x 8/12 x N12,360 11,720
  2003 As for year 2 11,720
  2004 Preceding Year 31/01/2003 12,360
  2005 Preceding Year 31/01/2004 15,200
  2006 Preceding Year 31/01/2005 68,810
  Election for actual is not considered in view of rising trend of profits. The assessments
  on the basis of the two accounting dates are then considered, to determine which of
  them will be more favourable to the tax payer. From the above results, his new
  accounting date should be 31 January.
  177
  This gives a lower total Assessable profits of N68,810 as against N76,560, if the 31
  December accounting date was chosen. The 31 January accounting date also gives a
  longer interval to pay the tax arising.
  SOLUTION 4
  Where a consideration received on disposal of an old asset used only for the
  purposes of a trade is applied in acquiring a new asset in replacement, to be
  used for the purposes of the trade, and both the old and new assets are within
  the same class of assets as listed in the Act, the person carrying on the trade
  shall, on making a claim with respect to the consideration which has been so
  applied, be treated for Capital Gains Tax purposes.
  (i) as if the consideration for the disposal of the old asset were (if otherwise
  of a greater amount or value of such amount as would secure that on the
  disposal neither a loss nor a gain accrues to him.
  (ii) as if the value of the consideration for the acquisition of the new asset
  were reduced by the excess of the value of the actual consideration for
  the disposal of the old asset over the amount of the consideration which
  he is treated as receiving as per above.
  Transactions made between persons one of whom either has control over the
  other or is related to the other or between persons both of whom are controlled
  by some other persons, or if the transaction has not been entered into on the
  terms which fairly have been expected of independent persons engaged in the
  same or similar activities, dealing with one another at arms length.
  (i) the same person has control of both, or a person has control of one and a
  person connected with him or her have control of the other.
  (ii) A group of two or more persons has control of each company and the
  group either consists of the same persons or could be regarded as
  consisting of the same persons by treating (in one or more cases) a
  178
  member of either group as replaced by a person with whom he is
  connected.
  (iii) A company is connected with another person if that person has control of
  it or if that person and persons connected with him together have control
  of it.
  (iv) Any two or more persons acting together to secure or exercise control of a
  company, shall be treated in relation to that company as connected with
  one another and with any person acting on the directions of any of them
  to secure or exercise control of the company.
  N N
  Sales proceeds 1 July 2007 5,800,000
  Less: Cost of acquisition (2,588,000)
  Capital Gain 3,212,000
  Less: Roll over relief
  Amount re-invested (5,200,000)
  Cost of old building 2,588,000
  (2,612,000)
  Rollover Gain 600,000
  Capital Gains Tax thereon @ 10% 60,000
  SOLUTION 5
  (a)(i) There shall be a Technical Committee of the Federal Inland Revenue Service
  Board which shall consist of:
  179
  The Executive Chairman of the Service as Chairman
  All the Directors and Heads of Department of the service
  The Legal Adviser of the Service and
  The Secretary to the Board
  For Expired Risks – 45% of the total premium for General Insurance
  other than Marine 25% of its total premium for Marine Cargo Insurance.
  For other Reserves, Claims and Outgoings – 25% of the total premium so that
  after allowance as stipulated by the Act as may be restricted has been allowed
  for, in any year of assessment not less than an amount equal to 15% of the total
  profit for tax purpose.
  The following deductions from its Investment Incomes and other Incomes
  shall apply:
  All normal allowable business outgoings except that after allowing for all
  the outgoings and allowances under the Act as may be restricted under
  the Act for any year of assessment, not less than an amount equal to 20%
  of the gross incomes shall be available as Total Profit of the company for
  tax purposes.
  180
  Re-Insurance Companies
  An amount not more than 5% of the Gross Profits of the re-insurer for the
  year, where the General Reserve Fund is less than the initial statutory
  minimum Authorized Share Capital.
  An amount not more than 25% of the Gross Profit of the insurer for
  the year where the Fund is equal to or exceed initial statutory minimum
  Authorized Share Capital.
  N(000) N(000)
  Nigerian income
  Less:
  Claims paid 345,000
  Reserve for outstanding claims 520,000
  Surrenders 32,000
  Bonuses 45,000
  Commission(N576,000- N176,000) 400,000
  Expenses (N100,000,000 – N15,000,000) 85,000
  Life fund at end (31/12/05) 4,500,000
  (5,927,000)
  Profit for the year 239,027
  SOLUTION 6
  (a) The values of taxable goods and services shall be determined at two levels:
  Local and Imported.
  (a) Local
  i. If the supply is for money consideration, its value shall be deemed to be
  an amount which with the addition of the tax chargeable, is equal to the
  consideration.
  181
  ii. If the supply is for a consideration not consisting of money, the value of
  the supply shall be deemed to be its market value.
  iii. Where the supply of a taxable good or service is not the only matter to
  which a consideration in money relates, the supply shall be deemed to
  be such part of the consideration as is properly attributable to it.
  (b) Imported
  i. The value of imported taxable goods for this purpose shall be the amount
  which is equal to the price of the goods so imported and shall include:
  - all taxes, duties and other charges levied either outside or by reason
  of importation into Nigeria, other than the tax imposed.
  Note:
  The open market value of supply of taxable goods or services shall be taken to
  be the amount that would fall to be taken as its value, if the supply were for
  such consideration in money as could be payable by a person in a transaction at
  Arms Length.
  (b) The issue raised by Mr. Emeka Gladstone is one that touches on tax planning. It
  is not exactly trying to evade tax.
  He can achieve his aim of not paying VAT by engaging in the business of Goods
  and Services exempted from VAT.
  182
  7. Plant and machinery and equipment purchased for utilization of Gas in
  Downstream Petroleum Operations.
  8. Plant and Machinery imported for use in Export Processing Zones (EPZ).
  9. Commercial vehicles and related spare parts.
  1. Medical services.
  2. Services provided by Community Banks and Mortgage Institutions.
  3. Plays and performances conducted by educational institutions as part of
  learning.
  4. Exported services.
  5. Religious services.
  However, if the proposed industry will be based in Lagos State, he may not escape
  payment of Sales Tax and the latest import charge.
  183