Posted: June 3rd, 2023

Kurung Sdn. Bhd. is a company located in Kajang,

Assessment 1 (Quiz) Sem-3 (15/16): ExecQUESTION 1 (37 Marks)Kurung Sdn. Bhd. is a company located in Kajang, which nature of business is primarilyselling high quality fabrics, thread, needles and stuffs related to sewing. The owner, PuanLeha has been approached by Puan Sari who owns Kebaya Sdn. Bhd. whose companyengages in the production of premium Malay clothing in Putrajaya. The latter proposed tothe former for a business venture involving business combination for a win-win situationgiven the shrinking market for Malay clothing in Selangor, KL and Putrajaya. Balances oftheir accounts are given below.(NBV: Net book Value)Property, Plant & Equipment (PPE)InvestmentsBankTrade ReceivablesInventoriesPreliminary ExpensesTrade PayablesTax PayableOrdinary Shares (OS) @ RM1 par8% Pref. Shares (PS) @ RM1 par10% Loan Stocks (LS)Retained EarningsKurung(RM’000)NBV2,000260859311210160402,000360Kebaya(RM’000)NBVFair Value76215% higher8030505% lower7320% lower5753250020010093-Both Puan Leha and Puan Sari agreed to the following salient terms for the proposedbusiness combination:i)Kurung will take over the net assets of Kebaya excluding:1) Bank;2) Preliminary expenses;3) Tax liability: Settled with an additional 25% charges.4) Investment assets: Sold off for 12.5% lossii)Upon the closing-off of Kebaya, Kurung will:a. Issue new “X” units of PS at 20% premium each, which total units are 20% lessthan the units available in Kebaya. The new PS will carry a new dividend ratewhich is 25% higher than the existing rate.b. Issue new “Y” units of LS at 10% premium each, which total units are 10% morethan the units available in Kebaya. The new LS will carry new interest rate whichis 20% higher than the existing rate.1Assessment 1 (Quiz) Sem-3 (15/16): Execc. Issue new “6-for-every-10” units of OS available in Kebaya (“Z” units) at 25%premium each.d. Absorb the liquidation expenses of RM30,000 only.e. Classify the 5% lower in Trade Receivables as bad debt.Required:(a)Identify and explain the most appropriate type of business combinationbased on facts presented above.2 marks(b)Calculate:(i) (X), (Y), and (Z) respectively.(ii) The new issue price of PS and LS in Kurung respectively.(iii) The new dividend and interest rates for PS and LS in Kurungrespectively.8 marks(c)Calculate the value (in RM) of the purchase consideration transferred2 marks(d)Calculate the value and identify the type of goodwill arising from theabove business combination process.3 marks(e)Assuming the ratio in (ii)(c) above is “3-for-every-1”, will and how youranswer in (d) above would be different ?4 marks(f)Prepare the realization account for Kebaya, showing clearly the gainsor losses on realization.6 marks(g)Construct the initial Statement of Financial Position for Kurungimmediately after the business combination.10 marks(h)Identify and discuss the type of synergistic benefits accruing to Kurungfollowing the above corporate exercise.2 marks2Assessment 1 (Quiz) Sem-3 (15/16): ExecQUESTION 2 (50 Marks)Mr. Wan Emdibi owns both firms of Karung Sdn. Bhd. and Kebayan Sdn. Bhd. Thefinancial information of both firms is presented below.AssetsLiabilitiesEquity & ReservesEarningsHighest earnings (past 5 years)Lowest earnings (past 5 years)Dividend paidShareholder’ Required Rate of ReturnPE RatioKarung (RM’000)570170400202220154%13Kebayan (RM’000)50010040012131284%12Additional Information(1)RM50,000 of assets are intangibles in both firms.(2)Preference shares constitute 20% of the total equity & reserves in both firms.(3)Retained earnings are RM40,000 and RM20,000 respectively for each Karung andKebayan.(4)The par value of ordinary share is RM1 and RM0.50 respectively for each Karungand Kebayan.Required:(a)Discuss the timing and reasons as to when and why Mr. Wan Emdibiwould be interested to conduct business valuation exercise.5 marks(b)Identify and explain potential factors that might affect Mr. Wan Emdibi’sbusiness valuation exercise and hence his investment decision.4 marks(c)Calculate the firm value per share for both companies using:(i) The asset based model;(ii) The cash flow based model using dividend valuation approach,6 marks6 marksassuming that the additional risk premium is 1% and 2% respectivelyfor each Karung and Kebayan.(iii) The cash flow based model using dividend growth approach,assuming that the growth rate is 0.1% and 0.2% respectively for eachKarung and Kebayan.36 marksAssessment 1 (Quiz) Sem-3 (15/16): Exec(iv) The income based model using PE Ratio approach6 marks(v) The income based model using earnings yield approach.6 marks(d)Assuming that the fair value of assets is RM80,000 higher and RM50,000lower for each Karung and Kebayan respectively. Recalculate the firmvalue per share for both companies using the asset based model.6 marks(e)Explain to Mr. Wan Emdibi as to the relative strength and weaknessesof each valuation method applied above.5 marksQUESTION 3 (25 Marks)Kurung Sdn. Bhd. is a company located in Kajang, which nature of business is primarilyselling high quality fabrics, thread, needles and stuffs related to sewing. The owner, PuanLeha has been approached by Puan Sari who owns Kebaya Sdn. Bhd. whose companyengages in the production of premium Malay clothing in Putrajaya. The latter proposed tothe former for a business venture involving business combination for a win-win situationgiven the shrinking market for Malay clothing in Selangor, KL and Putrajaya. Balances oftheir accounts are given below.Property, Plant & EquipmentGoodwillInventoriesTrade ReceivablesTrade PayablesBankOrdinary Shares @ RM1 par10% Pref. Shares @ RM1 parRetained Profits/(Losses)Kurung(RM’000)NBV Fair Value3404302080608080600(100)-Kebaya(RM’000)NBV Fair Value3805401060803060200200160-Both Puan Leha and Puan Sari agreed to the following salient terms for the proposedbusiness combination:iii)The formation of a new entity named KurungKebaya Sdn. Bhd. with an authorizedordinary share capital of 2 million at RM1 par.4Assessment 1 (Quiz) Sem-3 (15/16): Execiv)KurungKebaya Sdn. Bhd. will:a. Issue 6% preference shares at RM1 each for an amount equivalent to the 20%of its authorized ordinary share capital.b. Acquire ALL assets and liabilities of both firms except for 50% of the inventories(each company) and cash equivalent to 12.5% in Kurung and RM10,000 inKebaya. The remaining cash is meant for liquidation expenses.c. Issue an additional RM25,000 worth of Ordinary Shares at par to each PuanLeha and Puan Sari being founders of each company to register the new entity.The issued shares are paid cash by both founders.v)The business combination process will be satisfied by the issuance of shares inKurungKebaya Sdn. Bhd. as follows:(1) Ordinary Shares: To Kurung (an amount equivalent to 40,000 units less than itsexisting ordinary shares)(2) Ordinary Shares: To Kebaya (an amount equivalent to 330,000 units more thanits existing ordinary shares)(3) Preference shares: To Kebaya (an amount equivalent to 20% more than itsexisting preference shares), meant to discharge its existing preference shares.Required:(a)Identify and explain the most appropriate type of business combinationbased on facts presented above.2 marks(b)Calculate the value (in RM) of the consideration transferred1 mark(c)Calculate the value and identify the type of goodwill arising from theabove business combination process.3 marks(d)Assuming the value of preference shares in (iii)(3) above is only 50% ofKebaya’s existing preference shares value, will and how your answer in(c) above would be different ?2 marks(e)Prepare the realization account for both Kurung and Kebaya, showingclearly the gains or losses on realization.6 marks(f)Construct the initial Statement of Financial Position for KurungKebayaimmediately after the business combination.5 marks5Assessment 1 (Quiz) Sem-3 (15/16): Exec(g)Identify and discuss other products or services which KurungKebayacould offer in further diversifying the business in the combined entity.3 marks(h)Suggest and explain the main difference between the accountingtreatment for absorption and amalgamation.3 marksQ123Total6Full Scored37502511210%

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