QUESTION 3 (37 marks) Rupert (Pty) Ltd ("RUPERT") is a motor engineering firm that manufactures engines for vintage cars. Rupert's financial year end is 31 December. 1. RUPERT manufactures the custom engines for vintage cars on a contract basis and recognises contract revenue based on the percentage of completion method. At 31 December 2016 there is only one contract that has not been completed. This contract is for a vintage car that is being built for a car museum in Franschhoek. The contract price is R63 million, was entered into on 1 January 2015 and is expected to be completed on 31 December 2018. The estimated contract costs are as follows: Financial Cost Year (R'000) 2015 13 050 2016 12 150 2017 11 250 2018 5 700 2. In addition to vintage car engines, RUPERT's wholesale operations also sells engines to general motor car manufacturers. The wholesale operations processed the following. transactions during the 2016 financial year: Date Transaction Quantity Cost price per unit (Rands) 10 500 13 500 87 1 January 2016 1 February 2016 Opening inventory Purchase 62 30 May 2016 Sell (30) 1 September 2016 Purchase 18 000 93 (174) 30 November 2016 Sell RUPERT measures inventory at the lower of cost and net realisable value on the first-in-first- out basis. The selling price of the engines was R27 000 per unit since 2012, but increased by 20% on 1 January 2015. 3. On 1 January 2015 RUPERT entered into a lease agreement for a 20-ton flat-bed truck to transport the vintage engines to customers. The terms of the lease were as follows: Four annual lease payments of R1 275 567.83 payable on 31 December each year The useful life of the truck is five years and becomes the property of RUPERT once all four lease payments have been paid. RUPERT has consequently decided to treat the lease as a finance lease. The residual value of the truck is expected to be 10% of the cost price after five years and RUPERT's accounting policy stipulates that depreciation should be calculated using the diminishing balance method with an acceleration factor of 150%. 4. Other operating expenses for the 2015 financial year amounted to R2 775 000 and is expected to increase by inflation of 7% per annum. 5. RUPERT issued five year convertible bonds on 1 January 2015 with a face value of R12 000 000 and a coupon interest rate of 12%. The first payment of the five equal annual payments will commence on 31 December 2015. The bonds are convertible into 1 200 000 ordinary shares of RUPERT at any time or redeemable at the face value on 31 December 2019. At 31 December 2016 none of these bonds have been converted. The 1 200 000 shares are the number of shares after the share split of 1 December 2016 described under (6) below. 6. The share register of RUPERT showed the following for the 2012 financial year: Date Transaction Number of shares 400 000 1 January 2016 30 June 2016 Opening balance outstanding Issue shares Repurchase shares 120 000 30 September 2016 (80 000) 440 000 31 December 2016 Closing balance outstanding On 1 December 2016 RUPERT split the shares 4 for 1 to increase the liquidity of the shares. 7. RUPERT issued non-redeemable preference shares of R3 million on 1 January 2012 that pays dividend of 9.5%. Additional information: 1. Assume the market-related interest rate of debt for RUPERT is 10.5% for the foreseeable future. 2. RUPERT's effective tax rate is 28% per annum for the foreseeable future. 3. You can assume there were no other income and expenses during any of the years mention in the information above. REQUIRED 1. Calculate the market value of the bond as at 31 December 2016. (3 marks) 2. Briefly explain why the market rate and the coupon rate of the bond is not the same. (2 marks) 3. Calculate the net profit after tax for the year ending 31 December 2016 by preparing an income statement. (18 marks) 4. Calculate basic and diluted earnings per share for the year ended 31 December 2016. (10 marks) QUESTION 3 (37 marks) Rupert (Pty) Ltd ("RUPERT") is a motor engineering firm that manufactures engines for vintage cars. Rupert's financial year end is 31 December. 1. RUPERT manufactures the custom engines for vintage cars on a contract basis and recognises contract revenue based on the percentage of completion method. At 31 December 2016 there is only one contract that has not been completed. This contract is for a vintage car that is being built for a car museum in Franschhoek. The contract price is R63 million, was entered into on 1 January 2015 and is expected to be completed on 31 December 2018. The estimated contract costs are as follows: Financial Cost Year (R'000) 2015 13 050 2016 12 150 2017 11 250 2018 5 700 2. In addition to vintage car engines, RUPERT's wholesale operations also sells engines to general motor car manufacturers. The wholesale operations processed the following. transactions during the 2016 financial year: Date Transaction Quantity Cost price per unit (Rands) 10 500 13 500 87 1 January 2016 1 February 2016 Opening inventory Purchase 62 30 May 2016 Sell (30) 1 September 2016 Purchase 18 000 93 (174) 30 November 2016 Sell RUPERT measures inventory at the lower of cost and net realisable value on the first-in-first- out basis. The selling price of the engines was R27 000 per unit since 2012, but increased by 20% on 1 January 2015. 3. On 1 January 2015 RUPERT entered into a lease agreement for a 20-ton flat-bed truck to transport the vintage engines to customers. The terms of the lease were as follows: Four annual lease payments of R1 275 567.83 payable on 31 December each year The useful life of the truck is five years and becomes the property of RUPERT once all four lease payments have been paid. RUPERT has consequently decided to treat the lease as a finance lease. The residual value of the truck is expected to be 10% of the cost price after five years and RUPERT's accounting policy stipulates that depreciation should be calculated using the diminishing balance method with an acceleration factor of 150%. 4. Other operating expenses for the 2015 financial year amounted to R2 775 000 and is expected to increase by inflation of 7% per annum. 5. RUPERT issued five year convertible bonds on 1 January 2015 with a face value of R12 000 000 and a coupon interest rate of 12%. The first payment of the five equal annual payments will commence on 31 December 2015. The bonds are convertible into 1 200 000 ordinary shares of RUPERT at any time or redeemable at the face value on 31 December 2019. At 31 December 2016 none of these bonds have been converted. The 1 200 000 shares are the number of shares after the share split of 1 December 2016 described under (6) below. 6. The share register of RUPERT showed the following for the 2012 financial year: Date Transaction Number of shares 400 000 1 January 2016 30 June 2016 Opening balance outstanding Issue shares Repurchase shares 120 000 30 September 2016 (80 000) 440 000 31 December 2016 Closing balance outstanding On 1 December 2016 RUPERT split the shares 4 for 1 to increase the liquidity of the shares. 7. RUPERT issued non-redeemable preference shares of R3 million on 1 January 2012 that pays dividend of 9.5%. Additional information: 1. Assume the market-related interest rate of debt for RUPERT is 10.5% for the foreseeable future. 2. RUPERT's effective tax rate is 28% per annum for the foreseeable future. 3. You can assume there were no other income and expenses during any of the years mention in the information above. REQUIRED 1. Calculate the market value of the bond as at 31 December 2016. (3 marks) 2. Briefly explain why the market rate and the coupon rate of the bond is not the same. (2 marks) 3. Calculate the net profit after tax for the year ending 31 December 2016 by preparing an income statement. (18 marks) 4. Calculate basic and diluted earnings per share for the year ended 31 December 2016. (10 marks)