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Hi Kath,
I am delighted to say with your help i finally passed my P2 OTQ exam. Now i am preparing for the November case study and i would appreciate if you could help with this question i am currently struggling with. It reads as follow:
Let say the board of ZX now wants to move aggressively and surprise the competition and open around five showrooms throughout Kordia in quick succession. The idea is to open the first showroom this month with one more following before the end of 2017. The remaining three showrooms would be opened by mid-2018. So let’s say given the recent decline in property prices in the last few years in Kordia they will be purchasing the properties rather than renting the spaces. The total cost including property purchases, showroom installations,marketing etc is likely to be between K$6 million and K$8 million.
The other board members have asked to provide figures and they want a clear and credible project proposal.
Q1: What are the difficulties relating to predicting cash flows with this particular project and how would you propose dealing with them?
Q2: How is this project likely to impact the year-end financial statements for 2017 and which accounting ratios are likely to be affected and in what ways?
Your help will be most appreciated
Hi,
Great news with regards the F2 exam. Congratulations!
I don’t give much attention/time to the MCS but I can suggest the following:
1. If we are buying the properties in the future and, presumably they’re in a foreign currency, then the difficulty would be ensuring the correct amount of finding given that changes in exchange rate could impact the payment. This could be managed by taking out a forward contract with the bank for the amounts of currency proposed.
2. It would impact the value of PPE (asset or non-current asset turnover?), whilst the extra depreciation would impact the profitability (margins? interest cover? ROCE?)
Hope that helps.
Thanks
Hi. My question is not related to MCS above.
AB acquired investment in debt instrument(debenture) of BC on 1 January 20X0 at its par value of $3 million. Transaction costs relating to the acquisition were $200000. The investment earns a fixed annual return of 6%, received in arrears. The principle amount will be repaid to AB in 4 Years’ time at a premium of $400000. The effective interest rate of 7.05%.
Show the amount to be recorded in the statement of financial position and Statement of profit/loss for Both AB and BC.I know how to calculate from the perspective of AB, where the Transaction costs is capitalized, and the opening balance in year 1 will be $3,200,000 and the coupon payment is $180,000, 6% of $3 million. Effective interest of $225600(7.05%*3200000) charge to P&L.
I don’t know how BC will deal with that since it is a liability to him but an Asset to AB.
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