During its accounting year ending on December 31, 2007 the Zeal PakCompany had the cash sales Rs. 280,000, the cost of goods sold Rs.145,000 and the operating expenses of Rs. 50,000. The company paidthe Rs. 5,000 interest on debentures and tax @ 35%. The companyfurther reported that the debtors on January 01, 2007 was Rs.110,000, cash received from debtor during the year Rs.60,000 andthe debtor at December 31st 2007 was Rs. 270,000.
At the year ending on 31st December, 2006 the company had the netProfit after tax Rs. 155,000 and 20,000 ordinary shares in issue.On January 1, 2007, Zeal Pak Co. issued 10% preference shares ofRs. 150,000. On June 30, 2007 it proposed to make a 1 for 5 rightsissue at a price of Rs. 4 per share. The market value of existingshares on June 30,2007, before the issue is made, was Rs. 6.
You are required to:
a) Prepare the Income statement for the year ending on 31stDecember 2007.
b) Profit available for distribution to the ordinary share holderat the year ending on 31st December 2007.
c) Calculate theoretical ex-rights price
d) Identify the bonus element in rights issue
e) Calculate the weighted average number of shares in the year 2006and 2007.
f) Earning per share for the year 2007 and its corresponding figurefor 2006.
Question # 2
Aftab Company limited realized itself as a social responsiblecompany and decided to construct an employees housing society forits employees working in the company, which was destroyed by anearth quake few years ago in the region. It was estimated byconstruction experts that this project would take three years tocomplete and capital needed for the construction would not be lessthen Rs. 3 million. For the purpose of safety, the Aftab limitedborrowed Rs. 3.4 million from different sources and used the extra0.4 million for the purpose of working capital needs.
Aftab Company Limited borrowed the loans as the followings:
Loan from American Bank: Rs. 1 million at 7% per annum
Loan from MCB: Rs. 1.5 million at 6% per annum
Loan from Mezaan Bank: 0.9 million at 8% per annum
At the initial stage of the project, there were idle funds of Rs. 1million which the Aftab Limited invested for a period of ninemonths. The income from this investment was Rs.60,000.
If the Aftab limited adopted Allowed alternative treatmentthen:
1. How the Aftab Company Limited would it treat the borrowingcosts.
2. How would it capitalize the borrowing cost?
3. What would be the treatment of the investment income?