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MN20501

Intermediate Accounting

Question 1 – You must answer this question

Lizard Plc is a large company listed on a major stock exchange. In recent years, the board of Lizard Plc has been criticised for weak corporate governance and two of the company’s non-executive directors have just resigned. A recent story in the financial media has criticised the performance of Lizard Plc and claims that the company is failing to satisfy the objectives of its key stakeholders.

Lizard Plc is appraising an investment project, which it hopes will boost its performance. The project will cost £20m, payable in full at the start of the first year of operation. The project life is expected to be four years. Forecast sales volumes, selling price, variable cost and fixed costs are as follows:

Selling price and cost information are in current price terms, before applying selling price inflation of 5% per year, variable cost inflation of 3.5% per year and fixed cost inflation of 6% per year.

Lizard Plc pays corporation tax of 26%, with the tax liability being settled in the year in which it arises. The company can claim tax-allowable depreciation on the full initial investment of £20m on a 25% reducing balance basis. The investment project is expected to have zero residual value at the end of four years.

Lizard Plc has a nominal after-tax cost of capital of 12% and a real after-tax cost of capital of 8%.

Required:

(a) Calculate the nominal net present value of Lizard Plc’s investment project.

[25 marks]

(b) Discuss THREE ways to encourage managers to achieve stakeholder objectives.

[15 marks]

[Total 40 marks]

Section B – Answer 2 (TWO) Questions

Question 2

The following standard cost information relates to manufacturing company Pomelo Ltd.

Production and sales budget: 6,000 units

Actual production and sales: 6,400 units

Required:

a) Calculate the following variances: [16 marks]

i. Selling price

ii. Sales volume profit

iii. Direct materials price

iv. Direct materials usage

v. Direct labour rate

vi. Direct labour efficiency

vii. Fixed production overhead expenditure

viii. Fixed production overhead volume.

b) Prepare the standard cost operating statement for the period. [4 marks]

c) Discuss how standard costs can be derived by a company [10 marks]

[Total 30 marks]

Question 3

Leicester plc is a publicly listed company. The following financial statements of Leicester are available:

Statement of comprehensive income for the year ended 31 December 2019