Asset sale – NBC Institute

FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

Question

Yinko plc operates in the hospitality and leisure industry. The board of directors met recently to discuss several financial proposals:

Proposal 1: Increase the company’s debt by borrowing an additional N100 million and use the funds raised to buy back its shares.
Proposal 2: Increase the company’s debt by borrowing an additional N100 million to invest in expanding available rooms in one of its hotels.
Proposal 3: Sell excess non-current assets in another hotel with a net book value of ₦100 million for N135 million. The funds from the sale will be used to reduce the company’s debt.

Yinko plc Financial Information:

	Amount (N Million)
Non-current assets	1,410
Current assets	330
Total assets	1,740
Equity and liabilities
Share capital (40 kobo per share par value)	240
Retained earnings	615
Total equity	855
Non-current liabilities	700
Current liabilities	185
Total liabilities	885
Total liabilities and capital	1,740

Additional Information:

Yinko’s forecasted after-tax profit for the coming year, without implementing the proposals, is N130 million.
Current share price: N3.20 per share.
Non-current liabilities include a 6% medium-term loan redeemable in seven years. Any increase in borrowing raises the coupon rate by 25 basis points on the total amount borrowed, while a reduction lowers it by 15 basis points.
Effective tax rate: 20%
Expected after-tax return on investment: 15% for new or reduced investments.

Required:

a. Estimate the impact of each proposal on the forecast statement of financial position, earnings per share, and financial gearing (Total Debt/Total Assets) of Yinko Plc. Show all calculations. (16 Marks)

b. Discuss your results. (4 Marks)

Answer

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Tags: Asset sale, debt level, EPS, Financial Gearing, Financial restructuring, Non-current Assets, share buyback
Level: Level 3

Topic: Financial strategy formulation

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

Question

As a result of privatisation and commercialisation exercise currently going on in the country, the Ministry of Transport sold the assets and liabilities of the newly constructed standard gauge railway to a private company known as Stalus Rail Limited (SRL) to ensure smooth operations of the railway services by freeing it from government bureaucracy.

The summarised extracts of the statement of financial position at fair value of SRL on January 1, 2019, reflecting the terms and conditions of the sales agreement of the Transport Ministry are as follows:

N’m	Assets
Goodwill	150,000
Operating licence	900,000
Property – Train stations and land	225,000
Rail tracks and coaches	225,000
Two (2) train engines	750,000
Total Assets	2,250,000

Liabilities:

Sundry liabilities: Nil

The operating licence is for a ten-year period issued on January 1, 2019, by the Transport Ministry and is stated at cost. The carrying value of the property and rail track and coaches is based on value in use, while the engines are valued at their net selling prices.

On February 1, 2019, one of the train engines got damaged due to a technical fault from the manufacturer and was completely destroyed. The sale of the assets to SRL was without recourse to the Transport Ministry or the manufacturer of the engines.

In view of this, it was estimated that there would be reduced passenger capacity, and the estimated value in use of the whole train service business of SRL was assessed at N1,500 billion.

The number of passengers after one of the engines was damaged was below expectation, even allowing for the reduced capacity. Consequently, the value in use of SRL rail services was re-assessed on March 31, 2019, at N1,350 billion. On this date, SRL received an offer of N675 billion from Papaya Railway Services Limited (PRSL) for the operating licence (since it is transferable). The realisable value of the other assets has not changed significantly.

Required:

a. Draft a memo addressed to the MD of Stalus Rail Limited (SRL) explaining the basis of allocating an impairment loss to the assets of a cash-generating unit in accordance with IAS 36 on impairment of assets.
(6 Marks)

b. Calculate the carrying amount of the assets of SRL Limited as at February 1, 2019, and March 1, 2019.
(10 Marks)

c. Explain TWO conditions that must exist before an impairment loss can be reversed.
(4 Marks)

Answer

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Tags: Asset sale, Fair Value, Impairment, Privatization, Public Finance, Railway
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2021

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

Question

A receiver of XX Bank intends to sell assets of the bank. The receiver wants your guidance on the VAT implications on the sale of the bank’s assets.

Required:
What is the VAT implication on the sale of the bank’s assets?

Answer

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Tags: Asset sale, Receivership, VAT
Level: Level 2

Topic: Value-Added Tax (VAT), Customs, and Excise Duties
Series: MAY 2021

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

Question

b) Bossman Ltd acquired assets for GH¢10,000 from outside Ghana but failed to claim Value Added Tax (VAT) on imports of the assets in accordance with the Value Added Tax provisions and later sold the assets for GH¢12,000.

Required:
What is the tax implication of the transaction (if any) in the light of the provisions of the VAT Act 2013 (Act 870)?
(5 marks)

Answer

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Tags: Asset sale, Input Tax, Output Tax, Tax implications, VAT, VAT Act 2013
Level: Level 3

Topic: Business income - Corporate income tax
Series: MAY 2017

FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

Question

Yinko plc operates in the hospitality and leisure industry. The board of directors met recently to discuss several financial proposals:

Proposal 1: Increase the company’s debt by borrowing an additional N100 million and use the funds raised to buy back its shares.
Proposal 2: Increase the company’s debt by borrowing an additional N100 million to invest in expanding available rooms in one of its hotels.
Proposal 3: Sell excess non-current assets in another hotel with a net book value of ₦100 million for N135 million. The funds from the sale will be used to reduce the company’s debt.

Yinko plc Financial Information:

	Amount (N Million)
Non-current assets	1,410
Current assets	330
Total assets	1,740
Equity and liabilities
Share capital (40 kobo per share par value)	240
Retained earnings	615
Total equity	855
Non-current liabilities	700
Current liabilities	185
Total liabilities	885
Total liabilities and capital	1,740

Additional Information:

Yinko’s forecasted after-tax profit for the coming year, without implementing the proposals, is N130 million.
Current share price: N3.20 per share.
Non-current liabilities include a 6% medium-term loan redeemable in seven years. Any increase in borrowing raises the coupon rate by 25 basis points on the total amount borrowed, while a reduction lowers it by 15 basis points.
Effective tax rate: 20%
Expected after-tax return on investment: 15% for new or reduced investments.

Required:

b. Discuss your results. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset sale, debt level, EPS, Financial Gearing, Financial restructuring, Non-current Assets, share buyback
Level: Level 3

Topic: Financial strategy formulation

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

Question

N’m	Assets
Goodwill	150,000
Operating licence	900,000
Property – Train stations and land	225,000
Rail tracks and coaches	225,000
Two (2) train engines	750,000
Total Assets	2,250,000

Liabilities:

Sundry liabilities: Nil

In view of this, it was estimated that there would be reduced passenger capacity, and the estimated value in use of the whole train service business of SRL was assessed at N1,500 billion.

Required:

b. Calculate the carrying amount of the assets of SRL Limited as at February 1, 2019, and March 1, 2019.
(10 Marks)

c. Explain TWO conditions that must exist before an impairment loss can be reversed.
(4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset sale, Fair Value, Impairment, Privatization, Public Finance, Railway
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2021

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

Question

A receiver of XX Bank intends to sell assets of the bank. The receiver wants your guidance on the VAT implications on the sale of the bank’s assets.

Required:
What is the VAT implication on the sale of the bank’s assets?

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset sale, Receivership, VAT
Level: Level 2

Topic: Value-Added Tax (VAT), Customs, and Excise Duties
Series: MAY 2021

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

Question

Required:
What is the tax implication of the transaction (if any) in the light of the provisions of the VAT Act 2013 (Act 870)?
(5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset sale, Input Tax, Output Tax, Tax implications, VAT, VAT Act 2013
Level: Level 3

Topic: Business income - Corporate income tax
Series: MAY 2017

Question Tag: Asset sale

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FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

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FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

You're reporting an error for "FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation"

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

You're reporting an error for "FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)"

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

You're reporting an error for "PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties"

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

You're reporting an error for "AT – May 2017 – L3 – Q4b – Business income – Corporate income tax"

FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

You're reporting an error for "FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation"

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

You're reporting an error for "FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)"

PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the VAT implications on the sale of assets by a receiver.

You're reporting an error for "PT – May 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties"

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

You're reporting an error for "AT – May 2017 – L3 – Q4b – Business income – Corporate income tax"

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