Discuss CIMA CIMAPRA19-F02-1 Exam Topic 2 Question 120

LM and JK operatein the same countryand prepare their financial statements to30 June 20X6 in accordance with International Accounting Standards. On 27 June 20X6 both entities raised $1 million cashby issuing debt instruments with identical terms and conditions. Prior to this issue both entities were financed entirely by equity.

At 30 June 20X6 the gearing ratios,calculatedasDebt/Equity x 100%, wereas follows:

LM: 30%

JK: 65%

Which of the following independent options would explain the difference between LM and JK's year-end gearing?

ALM revalued its land and buildings upwards in the year; JK has performed no revaluations.

BLMmade a bonus issue from retained earnings in the year; JK issued no shares in the year.

CLM had 100,000 $1 shares at the year end; JKhad 200,000 50c shares in issue at the year end.

DLM held no investments in other entities; JK revalued its available for sale investments upwards in the year.

Suggested Answer: A

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26 comments · newest first

Nydia 6 months ago

D is interesting, but I feel it’s less relevant to gearing differences.

Therese 6 months ago

C makes sense too. The number of shares can change the gearing ratio.

Cherry 6 months ago

I lean towards B. A bonus issue affects retained earnings and equity.

Chaya 6 months ago

I think A is the best choice. Revaluations can significantly impact equity.

Frank 6 months ago

JK's higher gearing is surprising, especially with the same debt terms!

Walker 7 months ago

I doubt it's just about the shares; there must be more to it.

Dolores 7 months ago

Wait, how does a bonus issue affect gearing?

Providencia 7 months ago

Totally agree, A makes the most sense here.

Sueann 7 months ago

LM's gearing is way lower because of the revaluation!

Rozella 7 months ago

I'm going with C. The different share structures are the most plausible explanation here.

Mammie 7 months ago

Option B is interesting, but a bonus issue wouldn't change the debt-to-equity ratio, would it?

Earlean 8 months ago

Haha, looks like JK really loaded up on that debt! 65% gearing, yikes!

Rosina 8 months ago

I'm not sure about the revaluation options. Wouldn't that affect both companies equally?

Lonna 8 months ago

Option C seems the most likely explanation. The difference in the number of shares and their par value would definitely impact the gearing ratio.

Estrella 9 months ago

I’m a bit confused about option D. I thought investments would only affect gearing if they were debt-related, but maybe revaluations can play a role too?

Jolene 9 months ago

I recall a practice question where share structure affected ratios. Option C seems plausible since having more shares at a lower value could increase JK's gearing.

Aileen 9 months ago

I'm not entirely sure, but I think a bonus issue could dilute equity, which might affect gearing. So option B could be relevant, but I need to think it through more.

Tu 9 months ago

I remember studying how revaluations can impact equity, so option A makes sense to me. If LM revalued its assets, that could lower its gearing ratio compared to JK.

Merilyn 9 months ago

This is a good test of our understanding of gearing ratios and how they are calculated. I'm going to carefully work through the calculations for each option to see which one aligns with the given information.

Lazaro 9 months ago

I'm a bit confused by the wording of the question. Are we supposed to choose the option that best explains the difference, or the one that is the actual reason? I want to make sure I understand the task correctly before I commit to an answer.

Sheridan 10 months ago

I think I've got it! The difference in the number of shares and their par values between the two companies must be the reason for the different gearing ratios. Option C seems to be the correct answer.

Marti 10 months ago

Okay, let's see. The key details are that both companies raised $1 million in debt and were previously financed entirely by equity. So the difference in gearing must be due to something else. I'll need to analyze each option closely.

Katina 10 months ago

Hmm, this seems like a tricky one. I'll need to carefully review the information provided and think through the different options to determine which one best explains the difference in gearing ratios.

Julieta 4 months ago

↳ replying to Katina

Don't forget option C! The number of shares can change the gearing ratio significantly.

Val 4 months ago

↳ replying to Katina

True, but option B could also explain it. A bonus issue affects retained earnings.

Lashawn 6 months ago

↳ replying to Katina

I think option A makes sense. Revaluations can really impact equity.

CIMAPRA19-F02-1 Exam - Topic 2 Question 120 Discussion