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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.1 Yasir Industries Limited Statement of Financial Position
As of June 30, 2009
Working 2009
Rupees in million Assets
Non Current AssetsProperty, plant and equipment 1 351.00Intangible assets (20-12) 8.00
359.00Current Assets
Stocks in trade 4 64.50Trade debtors (Rs. 66m - Rs. 27 m) 39.00
103.50
462.50
Equity and Liabilities
EquityIssued, subscribed and paid up capital 120.00
Retained earnings 87.10
207.10
Revaluation surplus 2 28.87
Non Current Liabilities
Redeemable preference shares 40.00Debentures (Rs. 80m - Rs. 8m × 2) 64.00Deferred tax (Rs. 30m × 30% + 12.75 – 0.37) 21.38
125.38Current Liabilities
Current portion of debentures (Rs. 8m × 2) 16.00
Trade creditors 30.40Accrued expenses 3 23.80Provision for taxation 16.50Dividend payable 1.20Bank overdraft 13.25
101.15
Total Equity and Liabilities 462.5
Yasir Industries Limited
Statement of Comprehensive IncomeFor the year ended June 30, 2009
Working 2009
Rupees in millionSales revenue (Rs. 472.4m - Rs. 27m) 445.40Cost of sales 4 (250.73)
Gross profit 194.67Selling and distribution expenses (Rs. 19.8 + Rs. 0.25m) (20.05)Administrative expenses (Rs. 40m + Rs. 0.37m) (40.37)
Financial charges 5 (9.10)
Profit before tax 125.15Income tax expense 6 (19.13)
Profit for the year 106.03Other comprehensive income
Revaluation surplus Incremental depreciation (1 25×70%) 0 88
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Yasir Industries Limited Statement of Changes in Equity
For the year ended June 30, 2009
Working
Issued,Subscribed
and Paid-up
Capital
Retained
Earnings
----Rupees in million----
Balance as of July 1, 2008 (previously reported) 7 120.00 22.20
Correction of prior year error - (30.00)
Balance as of July 1, 2008 (restated) 120.00 (7.80)
Total comprehensive income for the year 106.90
Dividend for the year ended June 30, 2008 (12.00)
120.00 87.1
2009
Rs. in million
1. Tangible Fixed Assets
Leasehold property [Rs. 238m – (238 ÷ 34)] 231
Machines (Rs. 168.6 – Rs. 48.6m) 120
351
Total useful life = 40 years
Less: utilized up to 2009 (40.25 ÷ 5.75) = (7) years
Add: current year i.e. 2009 = 1 year
34 yearsAllocation of Incremental depreciation
Allocated to:
Cost of sales (1.25 ×5/10) 0.63
Administrative expenses (1.25 ×3/10) 0.37
Selling and distributive expenses (1.25 × 2/10) 0.25
1.25
Depreciation on revalued amount (238 ÷ 34) 7.00
Already charged to P & L (230 ÷ 40) 5.75
Incremental depreciation 1.25
2.
Revaluation SurplusRevalued amount of leasehold property 238.00
Less: WDV of leasehold property at revaluation {230 – [40.25 – (230 ÷ 40)]} 195.50
Revaluation Surplus 42.50
Less: deferred tax impact (42.50 × 30%) (12.75)
Revaluation surplus 29.75
Less: Incremental depreciation [Rs. 7m – (Rs. 230m ÷ 40)] × 70% (0.88)
28.87
3. Accrued Expenses
As per trial balance 15.00
Accrued markup on debentures (Rs. 80m × 12% × 6/12) 4.80Dividend on preference shares (Rs. 40m × 10%) 4.00
23.80
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
2009
Rs. in million
4 - Cost of sales
Opening stock as of July 1, 2008 38.90
Purchases 175.70
Direct labour 61.00
Manufacturing overheads excluding incremental depreciation 39.00
Incremental depreciation 0.63
Less: Closing balance
As given in (i) 42.00
Add: Sales under sale or return agreement (Rs. 27m x 100/120) 22.50
64.50
Cost of sales 250.73
5 - Financial charges
Balance as per trial balance 0.30
Accrued interest on debentures (Rs. 80m × 12% × 6/12) 4.80
Preference dividend for the year (Rs. 40m × 10%) 4.00
9.10
6 – Income tax expense
Tax provision for current year 16.50
Less: Opening deferred tax liability (given) (6.00)
Add: Effect of timing difference (Rs. 30m × 30%) 9.00Less: Deferred tax effect of revaluation surplus (Rs. 1.25m × 30%) (0.37)
19.13
7 - Opening retained earnings
Balance as per trial balance 10.20
Dividend for the year ended June 30, 2008 (120 × 10%) 12.00
22.20
Ans.2 (a)Date Particulars
Debit
(Rupees)
Credit
(Rupees)
1-Jul-08 Motor Vehicle - Cost 1,600,000
Obligations under the finance lease 1,600,000(Capitalize the lease assets and recoding of corresponding liability)
1-Jul-08 Obligations under the finance lease 480,000
Bank 480,000
(Record the first lease payment made in advance)
30-Jun-09 Finance charges 153,451
Accrued finance charges 153,451(Accrue the finance charges for the year ended June 30, 2009)
Working:(Rs 1 600 000 480 000) 13 701% Rs 153 451)
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
30-Jun-09 Depreciation 400,000
Accumulated depreciation - Motor Vehicle 400,000(Charge the depreciation for the year ended June 30, 2009)
Working: Rs. 1,600,000 ÷ 4 = Rs. 400,000.Assuming that there is no reasonable certainty abouttransfer of ownership at the end of lease term.
30-Jun-09 Tax expense (W-1) 1,492,035
Tax payable 1,492,035(To record the tax expense for the year ended June 30, 2009)
30-Jun-09 Tax expense 22,035
Deferred tax (W-2) 22,035
(To raise the deferred tax asset)
W-1 Tax computation
Rupees
Accounting profit before tax 4,900,000
Add: Depreciation on leased assets 400,000
Add: Finance charges 153,451
Less: Lease payment (480,000)
Taxable profit 4,973,451
Tax @ 30% 1,492,035
W-2 Deferred tax computation
Carrying amount Tax base Difference
Taxable temporary difference
Leased assets 1,200,000 - 1,200,000
Deductible temporary difference
Obligations under finance lease (1,120,000) - (1,120,000)
Accrued finance charges (153,451) (153,451)
Net taxable temporary difference (73,451)
Deferred tax @ 30% (Asset) 22,035
(b) Liabilities against assets subject to finance lease (W-3)
2009
Rupees
Present value of minimum lease payments 1,120,000
Less: Current maturity shown under current liabilities (326,549)
793,451
Minimum lease payments (W-3)
Not later than 1 year 480,000
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
1,120,000
Present value of finance lease liabilities (W-3)
Not later than 1 year 326,549
Later than 1 year and not later than 5 years (371,289 + 422,162) 793,451
1,120,000
The minimum lease payment has been discounted at an interest rate of 13.701% to arrive at their present value. Rentals are paid in annual installments.
W-3: Repayment Schedule
YearsOpening
Balance
Principal
repayment
Interest
13.701%
Annual
payment
Closing
Balance
-------------------------------------- Rupees --------------------------------------
2009 1,600,000 480,000 480,000 1,120,000
2010 1,120,000 326,549 153,451 480,000 793,451
2012 793,451 371,289 108,711 480,000 422,1622013 422,162 422,162 57,838 480,000 -
320,000
Ans.3Date Particulars
Debit Credit
Rs. in 000 Rs. in 000
1-Jul-05 Building 200,000
Bank 200,000
(Record purchase of plant)
30-Jun-06 Depreciation 10,000
Accumulated depreciation – Building 10,000
(Record depreciation for the year 2005-6)
Working: Rs. 200,000 ÷ 20 = Rs. 10,000
1-Jul-06 Accumulated depreciation – Building 10,000
Building 10,000
(Reversal of prior year depreciation)
1-Jul-06 Building 40,000
Surplus on revaluation of fixed assets 40,000
(Increase in value through revaluation)
Working: Rs. 230,000 – Rs. 190,000 = Rs. 40,000
30-Jun-07 Depreciation 12,105
Accumulated depreciation – Building 12,105
(Record depreciation for the year 2006-7)
Working: Rs. 230,000 ÷ 19 = Rs. 12,105
30-Jun-07 Surplus on revaluation of fixed assets 2,105
R t i d i /P fit & l t 2 105
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Working: Rs. 40,000 ÷ 19 = Rs. 2,105
1-Jul-07 Accumulated depreciation – Building 12,105
Building 12,105
(Reversal of prior year depreciation)
1-Jul-07 Surplus on revaluation of fixed assets 37,895
Revaluation expense 10,000
Building 47,895
(Decrease in value through revaluation)
Working:
Reversal of Surplus balance (Rs. 40,000 – Rs. 2,105) Rs.
37,895.
Balancing figure of Rs. 10,000 charged to Profit and Loss
Building value decline: (Rs. 230,000 – Rs. 12,105) – Rs.
170,000 =Rs. 47,895
30-Jun-08 Depreciation 9,444
Accumulated depreciation – Building 9,444
(Record depreciation for the year 2007-8)
Working: Rs. 170,000 ÷ 18 = Rs. 9,444
1-Jul-08 Accumulated depreciation – Building 9,444
Building 9,444(Reversal of prior year depreciation)
1-Jul-08 Building 19,444
Revaluation income 9,444
Surplus on revaluation of fixed assets (balancing) 10,000
(Reversal of prior year impairment)
Working:
Revaluation income = Rs. 10,000 – [ Rs. 10,000 – Rs. 9,444]
= Rs. 9,444
Building: [Rs. 170,000 – Rs. 9,444] – Rs. 180,000 =Rs. 19,444
30-Jun-09 Depreciation 10,588
Accumulated depreciation – Building 10,588
(Record depreciation for the year 2007-8)
Working: Rs. 180,000 ÷ 17 = Rs. 10,588
30-Jun-09 Surplus on revaluation of fixed assets 588
Retained earnings 588
(Reverse the excess depreciation)
Working: Rs. 10,000 ÷ 17 = Rs. 588
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.4 Rupees
Commitment fee 125,000Actual borrowing costs of specific loan (W-1) 2,050,000
General borrowing costs (W-1) 1,175,283
Less: Investment income (W-2) (137,500)
Interest costs to be capitalized 3,212,783
W-1
Outstanding
amount Months outstanding
Outstanding
month up to
completion
Rate of
interest
Borrowing
cost to be
capitalized
Rupees Rupees
Specific loanUtilized till first repayment 25,000,000 1-Sep-08 31-Jan-09 5 12% 1,250,000
Utilized after the first repayment 20,000,000 1-Feb-09 31-May-09 4 12% 800,000
2,050,000
General Borrowings (W-4)
Utilized after specific loan exhaustedon 2nd payment to contractor (W-3) 8,125,000 1-Dec-08 31-May-09 6 12.08% 490,750
Principal payment of specific loan 5,000,000 1-Feb-09 31-May-09 4 12.08% 201,3333r payment to contractor 12,000,000 1-Feb-09 31-May-09 4 12.08% 483,2004rd payment to contractor 9,000,000 1-Jun-09 31-May-09 0 12.08% -
1,175,283
W-2
Investment income Rupees Surplus fund available from 1-Sep-08 to 30-Nov-08 (Rs. 25m – Rs. 0.125m – Rs. 8m – Rs. 10m) × 8% × 3/12 137,500
W-3
Specific loan utilization Commitment fee 125,000
Payment for obtaining permit 8,000,0001
st payment to contractor 10,000,000
2n payment to contractor (balancing) 6,875,000
25,000,000
2n
payment to contractor (total) 15,000,000
Less: paid out of specific loan (as worked out above) 6,875,000Paid from general borrowing 8,125,000
W-4
Weighted average rate of borrowing
Weighted average amount of
loan RupeesInterest Rupees
From Bank A 25,000,000 Rs. 25,000,000× 13% × 9/12 = 2,437,500
From Bank B 20,000,000 3,000,000
45,000,000 5,437,500
Weighted average rate of borrowing (Rs. 5,437,500 / 45,000,000) 12.08%
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.5 (a) 2009 2008 2007*1
Trade debtors collection period (days) 81.00 75.00 60.00*2
Stock holding period (days) 110.40 104.00 89.60*3
Trade creditors payment period (days) 61.20 60.00 62.40*4Current ratio 3.31 : 1 3.26 : 1 3.10 : 1*5
Acid test ratio 1.64 : 1 1.60 : 1 1.67 : 1*1
Average debtors ÷ sales × 360*2 Average stocks ÷ cost of sales × 360*3
Average creditors ÷ cost of sales × 360*4
Current assets ÷ current liabilities*5
(Cash and bank + trade debtors) ÷ current liabilities
(b) The company’s liquidity position as evidenced by the current ratio and the acid test ratio appearsto be growing stronger. However, the ratios also indicate a change in the approach of workingcapital management as larger funds are tied up in non-interest bearing current assets, as discussed
below: Debtors are allowed longer period to pay which may be a result of more lenient credit terms
in order to improve sales, but it may also be a result of more lenient credit controls whichmay result in bad debts arising.
Inventory holdings period has increased to 110 days. Here again, increased volume ofinventory may be necessary for quicker delivery, but it may also be due to obsolete or slowmoving items.
Creditors days have remained steady around 60 days. It indicates company’s relationshipwith the vendors has been consistent.
Ans. 6 (a) The company should recognize the revenue at the date of sale based on meeting the recognitioncriteria, i.e. transfer of risks and rewards of ownership, no managerial involvement, measurement
of revenue, probable inflow of economic benefit and reliable measurement of cost of goods sold.Warranty will not affect any of these criteria.
(b) Some of the conditions for recognition of revenue have been met such as reliable estimate of cost
and revenue at the time of supply. However, company has retained significant risk of ownershipdue to non compliance with primary condition of sale i.e. the conditions of installation.Consequently, there is no transfer of ownership, managerial involvement exists, inflow ofeconomic benefit is not probable. Therefore, revenue will be recognized after satisfactoryinstallation.
(c) The completion of the sale transaction is uncertain because it is contingent upon purchaser beingawarded the contract. Therefore the company will recognize the revenue when it is certain thatthe purchaser will be granted the contract.
(d) Revenue form lay away sales are recognized when the goods are delivered. However, based onexperience, such revenue may be recognized when it is probable that sale will materialize andsignificant deposit is received. But in given case there is no history available and only two out ofseven installments have been received. Therefore, revenue will only be recognized when
machine has been delivered.(The End)
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
(a) A.1 Journal entries(i) Finance Lease:
Date ParticularsDebit Credit
----- Rupees -----
1-Jan-2009 Finance lease debtors 12,000,000
Unearned finance lease income 3,295,690Sale 8,704,310
(Record sale of vehicles on finance lease)
1-Jan-2009 Bank 2,000,000Finance lease debtors 2,000,000
(Installment received under finance lease)
31-Dec-2009 Unearned finance lease income 1,005,647
Finance lease income 1,005,647(Interest income earned at 15%)
(ii)
Operating lease:1-Jan-2009 Bank 4,000,000Unearned rental income 4,000,000
(Operating lease installment received in advance)
31-Dec-2009 Unearned rental income 3,803,333Rental income (11,410,000÷3)(W-2) 3,803,333
(Booking of operating lease income)
31-Dec-2009 Depreciation expenses (15,000,000÷6) 2,500,000Accumulated depreciation on machine. 2,500,000
(Yearly depreciation on machine)
Reason for choice of leases:
1. Lease A should be accounted for as a finance lease because the lease term covers theentire economic life.
2. Since none of the conditions specified in IAS-17 (Leases) for classification as a financelease is being met, Lease B shall be considered as an operating lease.
W-1 Finance lease:
YearOpening
BalanceInstallment
Income at
15%
Recovery of
Principal
Closing
balance
------------------ Rs. ------------------
2009 8,704,310 2,000,000 1,005,647 994,354 7,709,957
2010 (A) 7,709,957 2,000,000 856,493 1,143,507 6,566,450
2011 6,566,450 2,000,000 684,967 1,315,033 5,251,417
2012 5,251,417 2,000,000 487,713 1,512,287 3,739,130
2013 3,739,130 2,000,000 260,870 1,739,130 2,000,000
2014 2,000,000 2,000,000 0 2,000,000 0
(B) 8,000,000 1,433,550 6,566,450
(A)+(B) 10,000,000 2,290,043 7,709,957
W-2 Operating lease:
Rupees
Annual installment 2009 4,000,000
2010 (4,000,000 × 95%) 3,800,0002011 (3,800,000 × 95%) 3,610,000
11 410 000
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
(b) Neptune Limited Notes to the Financial Statements For the year ended December 31, 2009
(i) Investment in finance lease2009
Rupees
Present value of minimum lease payments 7,709,957Less: current maturity (1,143,507)
6,566,450
Rupees
Gross investment in
finance leases
Net investment in
leases
2009 2009
Less than one year 2,000,000 1,143,507One to five years 8,000,000 6,566,450
10,000,000 7,709,957
Less: unearned finance income (2,290,043)
Net investment in leases 7,709,957
The minimum lease payment has been discounted on interest rate of 15% per annum toarrive at their present value. Rentals are paid in annual installments.
(ii) Operating lease Rupees
Not later
than one
year
One to five
yearsTotal
Future minimum lease payments (W-2) 3,800,000 3,610,000 7,410,000
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
A.2 Golden LimitedNotes to the Financial Statements For the year ended December 31, 2009
Platinum Limited is the parent company which holds majority shares of the company.
20. Related party transactions
The transaction with related parties are carried out in the ordinary course of business atcommercial rates
except stated otherwise.
Parent
Company
Associated
Under-
takings
Key
Management
Personnel
Major
Share-
holders
-------- Rupees in '000 --------
Transactions:
Sales 18,000
Sales discount 1,500
Sale of property 10,000
Reimbursement of expenses on sale of property 500
Interest free loans granted 2,000
Short term borrowings acquired 25,000
Interest on short term borrowings 1,500
Balances:
Accounts receivable 6,500 5,000
Loans to staff 1,800
Loans payable 25,000
Interest payable on the loan at 12% 1,500
20.1 Sales to related parties have been made at 20% mark up as against GL's policy to sell at amarkup of 30%.
20.2 Administrative services are provided by the parent company free of cost as per the agreement.
Market value of these services is Rs. 350,000.20.3 In respect of sale of property, a buyer is required to bear all costs incurred on transfer. But in
this case the company has reimbursed the costs to SL20.4 The interest free loan has been granted to the executive director as per the terms of
employment.
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
A.3 Apollo Industry Limited Statement of cash flows For the year ended December 31, 2009
Rs. in ‘000
Cash used in operating activities
Profit before taxation 6,500
Adjustment for: (non cash items / separately disclosed items)
Depreciation for the year (7,000-90-1,000) 5,910
Amortization for the year (1140+50-1100) 90
Provision for staff gratuity (1,400+300-1,190) 510
Profit on sale of fixed assets (2,800-1,000) (1,800)
Mark-up on short term placement (1,000)
Operating profit before working capital changes
10,210
Increase in working capital (12,125 – 15,700 + 4,200 – 6,250) (5,625)
Cash generated from operations 4,585Payment for staff gratuity (300)
Payment for taxation (950 + 4,660 – 800) (4,810)
(525)
Cash used in investing activities
Capital expenditure incurred Note 1 (13,110)
Proceeds from sale of PPE (1,200 + 1,800) 3,000
Acquisition of intangible assets (50)
Mark-up received on short term placement 1,000
Long term deposits (400-300) (100)
(9,260)
Cash used in financing activities Issue of ordinary share capital (25,000-2,000-20,000) 3,000
Net decrease in cash and cash equivalents (6,785)
Opening balance: cash and cash equivalents 7,225
Closing balance: cash and cash equivalents 440
Note 1 Capital expenditure incurred: Rs. in ‘000
Opening book value for PPE 25,500
Opening book value for CWIP 10,000
Book value of assets sold during the year (1,200)
Depreciation for the year (7,000-90-1,000) (5,910)
Revaluation reserve adjustment (1,000)
Closing book value for PPE (35,000)
Closing book value for CWIP (5,500)
(13,110)
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
A.4 Realization Account Rupees in ‘000
Long term loan 300
Land and building 1,800 Trade payables 1,400
Machineries and equipment 1,400 Other liabilities 450
Vehicles 650 Sales proceed (AIM Industries) 6,100
Stocks 900 A capital account (vehicle) 900
Trade debts 2,000
C capital account (Trade payables) 250
Cash & bank - 300
Realization gain:
A capital account 1,057
1,850
B capital account 529
C capital account 264
9,150 9,150
(a) Partners’ capital accounts A B C
--- Rupees in ‘000 ---
Balance - December 31, 2009 2,400 1,700 850
Vehicle taken over by A (900)
Trade payable settled by C 250
Realization gain in P&L sharing ratio (4:2:1) 1,057 529 264
2,557 2,229 1,364
Shares distribution in P&L sharing ratio (6,100-1,900) (2,400) (1,200) (600)
Balance settled in cash (350+1,900-300) (157) (1,029) (764)
0 0 0
(b) AIM Industries (Private) Limited
Statement of Financial Position as on January 1, 2010 Rupees in ‘000
Share Capital Non Current Assets
Issued and paid up capital 4,380 Land and building 3,000
Share premium 876 Machineries and equipment 1,100
Goodwill 1,006
Current Liabilities Current Asset
Other liabilities 450 Stock in trade 700
Bank overdraft 1,900 Trade receivables 2,000
Less: provision for doubtful debts (200)
1,800
7,606 7,606
Goodwill to be recorded by the company Assets and liabilities took over by AIM Industries:
Rs. in ‘000
Land and building 3,000
Machinery and equipment 1,100
Stock in trade (at lower of cost and NRV) 700
Trade receivable (2,000,000 × 90%) 1,800
Trade payable (88,000 share @ Rs.12) (1,056)
Other liabilities (450)Value of net assets 5,094
Purchase consideration 6 100
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
Share capital Rs. in ‘000
Share capital (including premium) issued as purchase consideration (6,100-1,900) 4,200
Share capital (including premium) issued to creditors (88,000 ×12) 1,056
5,256
Less: share premium (5,256 ×2/12) 876
4,380
A.5 (a) Computation of current taxation Rs. in million
Profit before tax 50.000
Add: Accounting depreciation 10.000
Financial charges on lease liability (1.00 – 0.3) × 13.701% 0.096
Amortization of research and development cost for the year 1.000
Less: Tax depreciation (7.000)Annual installment of lease payment (0.300)
Amortization of research and development cost (15 × 0.9/10) (1.350)
Current year taxable income 52.446
Tax liability for the year (52.446 × 35%) 18.356
Tax liability for prior periods (0.100 × 35%) 0.035
18.391
Deferred taxation
Accounting depreciation 10.000
Tax depreciation (7.000) 3.000
Financial charges on finance lease liability(1.00 – 0.3) × 13.701% 0.096
Annual installment of lease payment allowed under tax (0.300) (0.204)
Amortization charged in accounts 1.000
Amortization cost claimed in tax (1.350) (0.350)
Excess of taxable income over accounting profit due to time differences 2.446
Deferred tax credit at 35% (0.856)
Total tax expenses (current and deferred) 17.535
(b) Bilal Engineering LimitedNotes to the Financial Statementsfor the year ended December 31, 2009
1.1 Relationship between tax expense and accounting profit 2009
Rs. in million
Accounting profit before tax 50.000
Tax on accounting profit at 35% 17.500
Tax on expenses disallowed (Permanent Difference) 0.035
Effective tax rate/tax charge 17.535
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Spring 2010
(c) Journal entries Debit Credit
----- Rs. in million -----
1 Income tax expenses 18.391
Provision for taxation 18.391
(Tax provision for 2009)
2 Deferred tax asset 0.856
Tax expenses – deferred 0.856
(Deferred tax credit for 2009)
A.6 Rs. inmillion
Carrying value of plant as on 31-12-2009: Cost (27+3) 30.00
Depreciation for the year 2008 (30/8) (3.75)
WDV as of December 31, 2008 26.25
Depreciation for the year 2009 based on revised estimated life [26.25/(7+2 years)] (2.92)
23.33
Net realizable value (NRV) on 31-12-2009:
Selling price 15.00
Plant decommissioning cost (0.20)
14.80
Value in use Discountfactor at
10%
Net cash
flows
Present
value
----- Rs. in million -----
Year 2010 0.9091 5.00 4.55
Year 2011 0.8264 4.00 3.31
Year 2012 0.7513 3.50 2.63
Year 2013 0.683 3.20 2.19
Year 2014 0.6209 3.00 1.86
Year 2015 0.5645 2.50 1.41
Year 2015- Overhauling cost 0.5645 (1.00) (0.56)
Year 2016 0.5132 2.30 1.18
Year 2017 0.4665 2.00 0.93
24.50 17.49Decommissioning cost at the end of 2017 1.0000 (0.20) (0.20)
24.30 17.29
Impairment (excess of carrying value over recoverable amount)
Carrying value 23.33Recoverable amount (Higher of NRV and value in use) (17.29)
Impairment loss 6.04
(THE END)
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
A.1 (i) Since the event which caused the inventory to be sold at a loss occurred after the year end, it is non-adjusting event. However, the effect of the event should be disclosed in the financial statements forthe year ended June 30, 2010.
(ii) It is an adjusting event in accordance with the requirement of IAS-10. The debtor’s balance should bewritten down by 80% amount.
(iii) It is non-adjusting event as the subsequent reduction in price is due to an event, introduction ofcompetitive product, occurred after the reporting period.
(iv) Since this change was not enacted before the reporting date, it is a non-adjusting event. However, adisclosure should be made for this change.
(v) Since the declaration was announced after the year-end and there was no obligation at year-end it is a
non-adjusting event. Details of the dividend declaration must, however, be disclosed.
A.2 Scientific Pharma LimitedJournal entries for the year ended June 30, 2010
Rupees in ‘000
Debit Credit
30-6-10 Repair and maintenance expenses 1,500
Account payable / Bank 1,500(Repair cost of major break down of the plant)
30-6-10 Depreciation expense (45,000-2,000)/10.5 years 4,095
Accumulated depreciation 4,095
(Depreciation expense for the year)
30-6-10 Revaluation surplus (10,380/10.5) 989
Retained earnings 989
(Incremental depreciation credited to retained earnings)
30-6-10 Impairment loss W-1 5,296
Property, plant and equipment 5,296
(Impairment of plant due to break down)
30-6-10 Revaluation surplus 5,296Impairment loss W-1 5,296
(Impairment loss adjusted against revaluation)
W-1: Impairment lossNet cash inflows
Discounting at
10%
Present value in
use
2010-11 9,000 0.9091 8,182
2011-12 7,000 0.8264 5,785
2012-13 5,000 0.7513 3,757
2012-13 Salvage value 2,000 0.7513 1,503
Value in use 19,227
Recoverable amount (“value in use” since there is no “fair value less costs to sell”) 19,227
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
W-2: WDV of the plant on impairment date Rs. in '000
FOB price (US$ 800,000 at Rs. 52) 41,600Other charges including installation cost 7,000
48,600Accumulated depreciation (1-1-2001 to 30-6-2005) {(48,600-2,000)/15*4.5} (13,980)
WDV as on 30-6-2005 34,620Revaluation surplus (45,000-34,620) 10,380
Revalued amount as of July 1, 2005 45,000
Accumulated depreciation (1-7-2005 to 30-6-2010) {(45,000-2,000)/10.5*5) (20,476)
WDV as on 30-6-2010 24,523
W-3: Revaluation surplus on impairment dateRevaluation surplus W-2 10,380
Transferred to retained earnings(1-7-2005 to 30-6-2010) (10,380/10.5*5) (4,943)
Revaluation surplus balance on impairment date 5,437
Since impairment loss is less then the revaluation surplus on impairment date, the full amount ofimpairment would be adjusted against the revaluation surplus.
A.3 Shaheen Limited Statement of Financial Position
As of June 30, 2010 2010Rs. in ‘000
Assets
Non Current AssetsProperty, plant and equipment (86,000-12,000-4,500) 69,500Intangible assets (6,000-600) 5,400
74,900
Current Assets
Stock in trade 30,000Trade receivables (37,800-10,000) 27,800Other receivables and prepayments (14,000+6,000) 20,000Cash and bank balances 4,725
82,525
157,425
Equity and Liabilities Share Capital and Reserves
issued, subscribed and paid up capital 60,000
Un-appropriated profit 35,372
95,372
Non Current Liabilities
Long term borrowings (31,525-6,000) 25,525Deferred taxation (5,000-1,470) 3,530
29,055Current Liabilities
Trade payables 12,000
Current portion of long term borrowings 6,000Provision for litigation 5,000Provision for taxation (2,000+9,988-2,000) 9,998
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
Shaheen Limited Statement of Comprehensive income 2010For the year ended June 30, 2010 R.s. in ‘000Sales revenue 200,000Cost of sales W-2 (104,708)
Gross profit 95,292
Selling and distribution expenses W-2 (36,275)Administrative expenses W-2 (30,450)
(66,725)Financial charges (5,000)
Profit before taxation 23,567Taxation W-3 (6,528)
Profit after taxation 17,039Other comprehensive income – net of tax -
Total comprehensive income 17,039
Shaheen Limited
Statement of Changes in Equity 2010
For the year ended June 30, 2010 Rupees in ‘000
Issued,
subscribed &
paid up
capital
Retained
earnings
Balance July 1, 2009 60,000 32,000*
Correction of prior years error (10,000/120*20) (1,667)
Balance July 1, 2009 (restated) 60,000 30,333
Comprehensive income for the year 17,039
Dividend for the year ended June 30, 2009 (60,000*0.20) (12,000)
Balance June 30, 2010 60,000 35,372
• Retained earning as at 01-07-09 = 20,000+ (20% of 60,000)=32,000
W-1 Depreciation for the yearOn building (36,000/20) 1,800On plant and equipments (30,000-3,000)/10 2,700
Total 4,500
W-2 CostsCost of sales
Selling anddistribution
costs
Administrative
costs
Opening inventory 23,000
Costs as per Trial balance 100,000 35,000 30,000
Closing inventory (30,000)
Depreciation (75%, 15%, and 10% of Rs. 4,500) 3,375 675 450
Adjustment for goods sent on sale or return,erroneously booked as sales last year now returnedduring the year. (10,000/1.2) 8,333
Amortization of export license (6,000/5*0.5) 600
104,708 36,275 30,450
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
W-3:Taxation profit before tax 23,567
Disallowances and add backs 5,000
Taxable income 28,567
Current For the year (28,567*0.35) 9,998For prior years (7,000-5,000) (2,000)
Deferred For the year (5,000-800)*0.35 (1,470)
6,528
A.4 Capital work in progress – Factory building Rs. in ‘000Progress invoices received from the contractor (30,000+20,000+10,000+15,000) 75,000.00(Rain damages paid would be chargeable to profit and loss account/ insurance claim)
Borrowing costs to be capitalised: Loan processing charges 500.00Interest on bank loan W-1 1,841.67Interest on running finance W-2 2,730.00Interest income from surplus loan amount W-4 (395.00)
Capital work in progress – June 30, 2010 79,676.67
W-1: Interest on bank loan:
Rupees in ‘000
Interest amount Outstanding loan
amount
Interest at 13%
From To Months01-12-2009 31-05-2010 6 25,000 1625.00
01-06-2010 30-06 -2010 1 20,000 216.67
1,841.67
W-2: Interest on running finance
Rupees in ‘000
Payments
dateDescription
Invoice
amount
Payments
net of
deductions
Payments from Months
outstanding
up to 30-6-10
Interest at 15% per
annum (W-3)Right
issue
Bank
loan
Running
finance
01-07-09 Advanced payment 10,000 10,000 10,000 12.00 1,500
15-10 -09 1st 30,000 progress bill 25,500 15,000 10,500 8.50 1,116
15-01 -10 2nd 20,000 progress bill 17,000 17,000 - - -
15-04 -10 3rd 10,000 progress bill 8,500 7,500 1,000 2.50 31
31-05 -10 Loan interest 1,625 1,625 1.00 20
31-05 -10 Loan instalment 5,000 5,000 1.00 63
15,000 *24,500 29,125 2,730
*Loan amount of Rs. 25,000,000 less processing charges of Rs. 500,000
W-3: Average rate of interest for running finance facility (9,000/60,000) 15%
W-4: Interest income from surplus loan amounts: Rupees in ‘000
Interest incomeSurplus loanamounts Interest income at8% From To Months
01-12-09 15-01-10 1.5 24,500 (245)
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
A.5 Journal entries
Date DescriptionDebit Credit
Rupees in '000
1-Jul-2009 Bank 20,000
Accumulated depreciation (18,750-15,000) 3,750
Property, plant and equipment 18,750
Deferred gain on disposal (20,000-15,000) 5,000
(Disposal of plant under sale and finance lease back)
1-Jul-2009 Property, plant and equipment 20,000
Long term finance lease liability 20,000
(Plant acquired under sale and lease back)
31-Dec-2009 Long term finance lease liability W.1 1,127
Interest expense W.1 1,373Bank 2,500
(Payment of 1st. Instalment of lease liability)
30-Jun-2010 Long term finance lease liability 1,204
Interest expense 1,296
Bank 2,500
(Payment of 2nd. Instalment of lease liability)
30-Jun-2010 Deferred gain on disposal (5,000/6) 833
Gain on disposal 833
(Deferred gain on amortised over the life of the plant)
30-Jun-2010 Depreciation expense (20,000/6) 3,333
Accumulated depreciation 3,333
(Depreciation for the year for plant)
Note: If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease
term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
W-1:Liability against finance lease
Instalment
payments
Interest at
13.731%
Principal
balance
Balance 1-Jul-2009 20,000
Payments made on 31-Dec-2009 2,500 1,373 (1,127)
30-Jun-2010 2,500 1,296 (1,204)
5,000 2,669 (2,331)
Balance 30-6-2010 17,669
A.6 (i) Provision must be made for estimated future claims by customers for goods already sold.
The expected value i.e. Rs. 10 million ([Rs. 150m x 2%] + [Rs. 70m x 10%]) is the best estimate ofthe provision.
(ii) Warehouse A: It is an onerous contract. as the warehouse has been sublet at a loss of Rs. 200,000
per month. QIT should therefore create a provision for the onerous contract that arises on vacatingthe warehouse. This is calculated as the excess of unavoidable costs of the contract over theeconomic benefits to be received from it Therefore QIL should immediately provide for the
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FINANCIAL ACCOUNTINGSuggested Answers
Intermediate Examinations – Autumn 2010
Warehouse B: It is not an onerous contract because the warehouse has been sublet at profit. Hencethis would require no adjustment.
(iii)
A provision is to be made by QIL against a contingent liability as:(i) There is a present obligation (legal or constructive) as a result of a past event; i.e. accident
occurred on June 15, 2010.(ii) It is probable that outflow of resources will be required to settle the obligation; and(iii) A reliable estimate can be made of the amount of the obligation.
The amount of provision shall be Rs. 2.0 million i.e. the most probable amount as determined by thelawyer.
(iv) A provision of Rs. 0.4 million is required in relation to penalty for March 1 to June 30, 2010 becauseat the reporting date there is a present obligation in respect of a past event.
The reimbursement of penalty amount from the vendor shall be recognized when and only when it isvirtually certain that reimbursement will be received if the entity settles the obligation. Thereimbursement should be treated as a separate asset in the balance sheet. However, in profit and lossstatement, the expense relating to a provision may be netted off with the amount recognized asrecoverable, if any.
(THE END)
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011
A.1 (a) Earth, Jupiter and Mars
Realization Account
Rs. in million
Machine and equipment 90.00 Trade creditors 45.00
Vehicles 17.00 Other payable 12.00
Furniture 15.00 Jupiter (Machines) 23.00
Stocks in trade 62.00 Bank overdraft 6.00
Trade Debtors 70.00 UL - Purchase consideration W-1) 267.00
Short term investments 48.00
Earth (Other liabilities) 10.00
Profit transferred to:
Earth (5/12) 17.08
Jupiter (4/12) 13.67
Mars (3/12) 10.25
353.00 353.00
b) Partners’ capital accounts
Earth Jupiter Mars
Rs. in million
Balance as on January 1, 2011 100.00 79.00 60.00
Other liabilities paid 10.00
Machine acquired (23.00)
Realization gain in P&L sharing ratio (5:4:3) 17.08 13.67 10.25
127.08 69.67 70.25
Debentures issued (60.00)
Share distribution in the final capital balance
proportion (103.04) (56.96)Balance settled in cash (Balancing) (24.04) (9.67) (13.29)
Universe Limited
Statement of Financial Position
as on January 1, 2011
Rs. in million
Shareholder Equity Non Current Assets
Share capital (160+20) 180 Freehold premises 40
11% preference shares 40Machine and equipment (90-
25)65
Vehicles 17
220 Furniture 15
137
12% debentures 60 Goodwill 50
Current Liabilities Current Assets
Trade creditors 45 Stocks in trade 60
Bank overdraft (6-20+47) 33 Trade debtors 63
78 Short term investments 48
171
358 358
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011
W-1: Purchase consideration
Assets and liabilities taken over Rs. in millionGoodwill 50
Equipment (90-25) 65Vehicles 17Furniture 15Stocks in trade 60
Trade debtors 63Short term investments 48
Bank overdraft (6)Trade creditors (45)
267
A.2 (a) Moonlight Pakistan Limited
Statement of Financial PositionAs at December 31, 2010
Rs. in million
ASSETS
Non-Current Assets
Property, plant and equipment W-2) 3,472
Current Assets
Stocks in trade 758Trade receivables 702Cash and bank 354
1,814
5,286
EQUITY
Issued, subscribed and paid-up capital W-3) 1,750Share premium (420 x 2/12) 70Retained earnings W-3) 876
2,696
Surplus on revaluation of fixed assets 240
LIABILITIES
Non-current liabilities
Long term loan 1,600Deferred tax (22 + 80 x 35%) 50Provision for gratuity 23
1,673Current liabilities
Creditor and other liabilities (544 + 96) 640
Income tax payable 37
677
5,286
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011
(b) Moonlight Pakistan Limited
Income StatementFor the year ended December 31, 2010
Rs. in million
Sales 3,608Cost of sales W-1) (2,149)
Gross profit 1,459
Selling expensesW-1)
252Administrative expenses W-1) 270
522
937Financial charges (210 + 1,600 x 12% x 6/12) 306
Profit before taxation 631Taxation (37 + 80 x 35%) 65
Profit after taxation 566
W–1: Cost of sales/selling expenses/admin expenses
Cost of
sales
Selling
expenses
Admin.
expenses
Rs. in million
As per trial balance 1,784 220 250
Depreciation – building (60% : 25% : 15%)W-2)
69 29 17
Depreciation – plant 287 - -
Provision for gratuity (23-8) x 60%:20%:20% 9 3 3
2,149 252 270
W–2: Property, plant and equipment
Land Building Plant Total
------------------- Rs. in million -----------------
Cost as at January 1, 2010 600 2,000 2,104 4,704
Accumulated depreciation - (400) (670) (1,070)
Revaluation (1,840 - (2,000 - 400 )) - 240 - 240
Current year depreciation - (115)
(1,840 ÷ 16) (287) (402)
600 1,725 1,147 3,472
W-3: Share Capital/Retained Earnings
Share Capital Retained Earnings
As per trial balance 1,200 510
Bonus issue (1200 ÷ 6) 200 (200)
Right issue (420 x 10/12) 350 -
Profit for the year - 566
1,750 876
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011
A.3 2010 2009
28 : TAXATION Rs. in million
Current - for the year W – 1) 0.84 -Deferred W – 2) 6.95 (0.96)
7.79 (0.96)
28.1 : Relationship between tax expense and accounting profit
Profit/(Loss) before taxation 23.50 (1.75)
Tax at the applicable rate of 35% 8.23 (0.61)
Tax effect of exempt income (1.25 x 35%) (0.44) (0.35)
7.79 (0.96)
W-1 : Computation of Current Tax
(Loss) / profit before tax as per books 23.50 (1.75)Add: Allowable income / Disallowed expenses
Accounting depreciation 15.00 15.00Provision for gratuity 2.20 1.70
Accrued expenses - 2.00
Less: Disallowed income / Allowable expenses
Tax depreciation (6.00) (45.00)Interest income from SIBs (Exempt) (1.25) (1.00)
Accrued expenses (2.00)
Taxable income / (loss) 31.45 (29.05)
Tax liability (@ 35% 11.01 -Tax loss to be brought forward (29.05 x 35%) (10.17) -
Tax payable 0.84 -
W -2: Computation of Deferred Tax
Timing differences (cumulative) on account of:Depreciation (2010: 30-51, 2009: 15-45) 21.00 30.00Accrued expenses - (2.00)Provision for gratuity (3.90) (1.70 )
Tax losses - (29.05)
17.10 (2.75)
Deferred tax @ 35% 5.99 (0.96)Add: Opening deferred tax (dr.) 0.96 -
Charge/(Reversal) for the year 6.95 (0.96)
A.4 Date Particulars Dr. Cr.
Rupees
(a) Cash / bank / Receivable 1,800,000
Franchise fee receivable 7,200,000
Deferred financial income on installment plan W-1) 1,499,820
Revenue from Franchise Fees W-1) 6,720,180
Unearned Franchise Fees – discount in setup W-1) 240,000
Unearned franchise fees – advertising W-1) 540,000
(b) Cash / bank / Receivable 1,800,000
Revenue from Franchise Fees 1,800,000
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011
(ii) Amount withdrawn before year end i.e. Rs. 1.5 million is an adjusting event as it existed at yearend but discovered after year end. However, since 60% has been recovered subsequently, Rs.0.6 million would be provided.
Further withdrawal of Rs. 6.0 million is a non-adjusting event as it occurred after year end.However, if considered material following disclosures should be made:
Nature of the event
The gross amount of contingency The amount recovered subsequently
(iii) SL should not recognize the contingent gain until it is realized. However, if recovery ofdamages is probable and material to the financial statements, SL should disclose the following
facts in the financial statements:
Brief description of the nature of the contingent asset
An estimate of the financial effect.
(iv) SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0 million x 60% +Rs. 1.5 million x 40%) because
it is a present obligation as a result of past event;
it is probable that an outflow of resources embodying economic benefits will be requiredto settle the obligations; and
a reliable estimate can be made of the amount.
In addition, SL should disclose the following in the notes to the financial statements:
Brief nature of the contingent liability The amount of contingency
An indication of the uncertainties relating to the amount or timing of any outflow.
THE END)
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011
A.1Clay Pakistan Limited
Statement of changes in equity
For the year ended 30 June 2011
upees in million
I
s
u
s
u
b
a
p
d
u
s
h
e
c
a
Capital
Reserves
Revenue
Reserves
T
a
C
a
R
v
T
a
a
o
R
v
G
a
R
v
U
a
o
a
e
p
o
Balance as at 1 July 2009 9,400 3,210 750 8,905 5,410 27,675
Effect of change in accounting policy as referred to in
note __. [Rs. 20m x 70%] - - - - 14 14
Balance as on 1 July 2009 - restated 9,400 3,210 750 8,905 5,424 27,689
Total comprehensive income for the year
Profit for the year after tax [Rs. 4,120m-Rs. 50mx70%] - - - - *4,085 4,085
Other comprehensive income - - 120 - - 120
- - 120 - 4,085 4,205
Distributions to the owners
Final dividend for 2008-09 (Rs. 2.50 per ordinary
share)- - - -
(2,350) (2,350)
Interim bonus shares issued for 2009 (10%) 940 - - - (940) -
940- - -
(3,290) (2,350)
Transfer to general reserves- - -
1,236 (1,236)-
Transfer from surplus on revaluation of property,
plant and equipment - net of deferred tax - - - - 1,238 1,238
Balance as at 30 June 2010 – restated 10,340 3,210 870 10,141 6,221 30,782
Total comprehensive income for the year
Profit for the year after tax [Rs. 5,240m + Rs. 50m x 70%] - - - - 5,275 5,275
Other comprehensive income - - 155 - - 155
- - 155 - 5,275 5,430
Distributions to the owners
Final dividend for 2009-10 (Rs. 2.00 per ordinary
share)- - - -
(2,068) (2,068)
Final bonus shares issue for 2009-10 (10%) 1,034 (1,034)-
Interim dividend for 2010-11 (Rs. 2 per ordinary
share) - - - - (2,275) (2,275)
1,034- - -
(5,377) (4,343)
Transfer to general reserves- - -
1,583 (1,583)-
Transfer from surplus on revaluation of property,
plant and equipment - net of deferred tax - - - - 1,038 1,038
Balance as at 30 June 2011 11,374 3,210 1,025 11,724 5,574 32,907
A.2 Borrowing costs to be capitalized
Workings 2011 2010
Commitment fee @ 1% - 700,000
Borrowing costs on specific loan 1 6,987,500 3,033,333Borrowing costs on running finance 3 1,381,625 -
Less: Investment income 2 (2,099,001) (1,381,334)
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011
W-1 : Actual borrowing costs on specific loan
O
s
a
n
a
m
(
R
)
O
s
a
n
m
h
S
p
o
N
o
s
a
n
m
h
B
o
w
n
c
o
t
o
b
c
a
z
(
R
)
@
1
From commencement on to June 30 70,000,000 4 0 3,033,333
Amount to be capitalized as on 30-Jun-10 3,033,333
From June 30 to first principal repayment 70,000,000 2 0 2 1,516,667
After the 1st principal repayment 65,000,000 6 1 5 3,520,833
After the 2nd principal repayment to completion 60,000,000 3 0 3 1,950,000
Amount to be capitalized as on 30-Jun-11 6,987,500
W-2 : Investment income All amounts in Rupees
Available
Funds
O/s
amount
up to
comp-
letion
Used to reduce running
finance (14 )
Invested in saving
account @ 8
Total
Income
Amount Income Amount Income
Rs. 70m - Rs. 25m - Rs. 0.7m 44,300,000 4 10,000,000 466,667 34,300,000 914,667 1,381,334
Investment income – 2010
1,381,334
Rs. 70m - Rs. 25m - Rs. 0.7m 44,300,000 2 10,000,000 233,333 34,300,000 457,333 690,666
Rs.44.3 - Rs. 5m - Rs. 4.55m 34,750,000 5 10,000,000 583,335 24,750,000 825,000 1,408,335
Investment income – 2011
2,099,001
W-3 : Interest on running finance
Description Amount
2011
B
o
w
n
c
o
t
o
b
c
a
z
(
R
)
@
1
N
o
m
h
o
s
a
n
S
p
o
N
o
s
a
n
m
h
2nd payment to contractor (Rs. 65m - 34.75m) 30,250,000 4 1 3 1,058,750
Payment of 2nd installment
Principal 5,000,000 3 0 3 175,000
Interest (Rs. 65m x 13% x 6/12) 4,225,000 3 0 3 147,875
3rd 10,000,000payment to contractor 0 0 0 -
49,475,000 1,381,625
A.3 IN THE BOOKS OF METAL LIMITED
23 – Transactions with Related Parties
Related parties comprises of the company’s subsidiaries. Transactions with related
parties are as follows:
2011 2010
Rupees
Subsidiaries
Sale of machine (at carrying amount plus 20%) - 19,200,000
Management fees income (Note 23.1) 12,000,000 -
Management fee receivable 1,000,000Other receivables - Sale of machine - 19,200,000
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011
IN THE BOOKS OF COPPER LIMITED
23 – Transactions with Related Parties
Related parties comprise of Metal Limited (parent company) and its subsidiaries.
Transaction with related parties can be summarized as follows:2011 2010
Rupees
Parent Company
Purchase of machine - 19,200,000
Management fees (Note 23.1) 6,000,000 -
Management fee payable 500,000 -
Other payables - Sale of machine 19,200,000
23.1 No management fee was charged for the year ended 30 June 2010. Except for this,all transactions have been carried out on arm’s length basis, as approved by the
board of directors of the company.
IN THE BOOKS OF ZINC LIMITED
23 – Transactions with Related Parties
Related parties comprise of Metal Limited (parent company) and its subsidiaries.
Transaction with related parties can be summarized as follows:
2011 2010
Rupees
Parent Company
Contract for factory extension project (Note 23.1) 15,000,000 -
Management fees (Note 23.2) 6,000,000 -
Management fee payable 500,000 -
23.1 The contract has been awarded to Iron Builders and Developers in which one of the
directors of the parent company is a partner.
23.2 No management fee was charged for the year ended 30 June 2010. Except for this,all transactions have been carried out on arm’s length basis, as approved by theboard of directors of the company.
IN THE BOOKS OF STEEL LIMITED
Related parties comprise of Metal Limited (parent company) and its subsidiaries.
However, there was no related party transaction during the year.
A.4 (a) Entries to record the lease in books of Quartz Auto Limited
Description Debit Credit
Lease receivable (2,715,224 × 5) + 700,000 14,276,120
Cost of goods sold [(900,000 × 7) - (100,000 ×7 × 0.49718)] 5,951,974
Inventory (900,000 x 7) 6,300,000
Sales (Note – 1) 9,101,974
Unearned finance income 4,826,120
Bank 2,715,224
Lease receivable 2,715,224
Unearned finance income 1,417,500
Finance income 1,417,500
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(b)
Disclosure in the financial statements
1-
Net investment in lease 2011
(Rupees)
Lease receivable (2,715,227 x 4) 10,860,896Unguaranteed residual amount 700,000
Gross investment in lease 11,560,896 Less: Unearned finance income (4,826,120 – 1,417,500) (3,408,620)
8,152,276
1.1 Details of investment in finance lease
Gross
investment in
lease
Net
investment in
lease
Not later than one year 2,715,224 1,492,383Later than one year but not later than five years 8,845,672 6,659,893
Later than five years - -
11,560,896 8,152,276
(W-1)
Year ended
Installment
at year end
Interest Principal
Net
Investment
in Lease
Gross
Investment in
Lease
9,450,000 14,276,120
31/06/2011 2,715,224 1,417,500 1,297,724 8,152,276 11,560,896
31/06/2012 2,715,224 1,222,841 1,492,383 6,659,893 8,845,672
31/06/2013 2,715,224 998,984 1,716,240 4,943,653 6,130,448
31/06/2014 2,715,224 741,548 1,973,676 2,969,977 3,415,224
31/06/2015 2,715,224 445,247 2,269,977 700,000 700,000
A.5 (a) Journal Entries
Date Description Debit Credit
30-Jun-07 Tax expense 3,600,000
Deferred tax 3,600,000
Deferred tax adjustment (W-2)
30-Jun-08 Impairment loss 8,000,000
Acc. depreciation & impairment losses 8,000,000
Impairment loss on revaluation (W-2)
30-Jun-08 Deferred tax 1,040,000
Tax expense 1,040,000
Deferred tax adjustment (W-2)
30-Jun-09 Tax expense 1,408,000
Deferred tax 1,408,000
Deferred tax adjustment (W-2)
30-Jun-10 Acc. depreciation & impairment losses 6,000,000
I i t l d (W 1) 6 000 000
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30-Jun-10 Tax expense 2,886,400
Deferred tax 2,886,400
Deferred tax adjustment (W-2)
30-Jun-10 Plant 6,000,000
Deferred tax 2,400,000
Revaluation surplus 3,600,000Revaluation of plant at fair value (6m x 70%) (6m x
30%)
30-Jun-11 Revaluation surplus 600,000
Retained earnings 600,000
Realized portion of revaluation surplus (Rs.3.6m ÷6)
30-Jun-11 Deferred tax 1,050,880
Tax expense 1,050,880
Deferred tax adjustment (W-2)
W-1: Revaluation calculations Rupees
Actual carrying amount (90m – (9m × 2) – (8m × 2) - 8m) 48,000,000Fair value 60,000,000
Increase in value 12,000,000Less: Reversal of impairment loss [48m - {90m - (90m × 4 ÷ 10)}] (6,000,000)
Revaluation surplus 6,000,000
W-2: Deferred tax calculations
Date Description
Actual
carrying
amount
Tax base Temporary
difference
Deferred
tax @ 40
Deferred
tax charge/
(reversal)
1-Jul-06 Cost 90,000,000 90,000,000
30-Jun-07 Depreciation (9,000,000) (18,000,000)
30-Jun-07 81,000,000 72,000,000 9,000,000 3,600,000 3,600,000
30-Jun-08 Depreciation (9,000,000) (14,400,000)
30-Jun-08 Impairment loss (8,000,000) -
30-Jun-08 64,000,000 57,600,000 6,400,000 2,560,000 (1,040,000)
30-Jun-09 Depreciation (8,000,000) (11,520,000)
30-Jun-09 56,000,000 46,080,000 9,920,000 3,968,000 1,408,000
30-Jun-10 Depreciation (8,000,000) (9,216,000) - -30-Jun-10 Reversal of imp. loss 6,000,000 - -
54,000,000 36,864,000 17,136,000 6,854,400 2,886,400
30-Jun-10 Revaluation surplus 6,000,000 - 6,000,000 2,400,000
30-Jun-10 60,000,000 36,864,000 - 9,254,400
30-Jun-11 Depreciation (10,000,000) (7,372,800)
30-Jun-11 50,000,000 29,491,200 20,508,800 8,203,520 (1,050,880)
(b) Taxation
2011 2010
Current (W-3) 33,050,880 21,113,600
Deferred (1,050,880) 2,886,400
32,000,000 24,000,000
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W-3: Current tax computation
Profit before taxation 80,000,000 60,000,000
Add: Accounting depreciation 10,000,000 8,000,000Less: Tax depreciation (7,372,800) (9,216,000)
Less: Impairment loss reversed - (6,000,000)
82,627,200 52,784,000
Tax at 40% 33,050,880 21,113,600
A.6 (a)
Days of inventories turnover 30/150*360 72
Days of debtors turnover 50/300*360 60
Days of creditors turnover 21/140*360 (54)
Cash operating cycle 78 days
The above calculation signifies that the period of time that elapses between the
payment for purchase of inventories and the collection of cash from customers inrespect of their sale is 78 days. SDL has to finance the investment in inventories for
that time period.
(b) LIMITATIONS OF RATIO ANALYSIS(i)
Limited Comparability:
Different firms apply different accounting policies. Therefore the ratio of one
firm cannot always be compared with the ratio of other firm. Some firms may
value the closing stock on weighted average basis while some other firms may
value on FIFO basis. Similarly there may be difference in providing depreciationof fixed assets or certain of provision for doubtful debts etc.
(ii)
False Results:
Accounting ratios are based on data drawn from accounting records. In case
that data is incorrect, then the ratios will also be incorrect.
(iii) Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period
of time. Changes in price affect the cost of production, sales and also the valueof assets. Therefore, it is necessary to make proper adjustment for price-level
changes, for a good comparison.
(iv)
Qualitative factors are ignored:
Ratio analysis is a technique of quantitative analysis and thus, ignoresqualitative factors, which may be important in decision making.
(THE END)
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A.1 (a) Realization Account Rs. in million
Vehicle (22.3-11.5) 10.80 Trade creditors 53.00
Equipment (14-5) 9.00 Partners' A/c – Vehicle (1.4+1.2+0.9) 3.50
Land 50.00 Transfer to DFC (W-1) 159.40
Building (14-5.5) 8.50Trade debtors 38.00
Cash at bank 12.00
Stock-in-trade 48.00
Partners’ A/c - Trade creditors 23.00
Partners’ A/c - Realization profit 16.60
215.90 215.90
(b) Partners’ Capital Account
P i s t a c h i o
C a s h e w
A l m o n d
P i s t a c h i o
C a s h e w
A l m o n d
Vehicle 1.40 1.20 0.90 Balance b/d 36.00 24.00 20.00
Debentures (W-1) 18.00 12.00 10.00 Interest for the year (10%) 3.60 2.40 2.00
Ordinary shares (W-1) 59.70 35.82 23.88 *1Profit for the year 33.65 20.19 13.46
Cash settlement (Bal.) 12.80 9.45 9.75 *2Realization profit 8.30 4.98 3.32*3Trade creditors 10.35 6.90 5.75
91.90 58.47 44.53 91.90 58.47 44.53*1 67.3 (W-2) × 5/10, 3/10, 2/10*2
16.6 × 5/10, 3/10, 2/10
*3
23 × 36/80, 24/80, 20/80
(c) DF Company (Private) LimitedStatement of Financial Position as at 31 December 2011
EQUITY AND LIABILITIESRs. in
millionASSETS
Rs. inmillion
Shareholder equity Fixed assets Ordinary share capital (119.4 x 10 ÷ 12) 99.50 Land and building 78.50
Share premium (119.4 x 2 ÷ 12) 19.90 Equipment 9.00
Vehicles 7.70
Long term loan
20% Debentures 40.00 Current assets Stock in trade 48.00
Current liabilities Trade debt 34.20
Trade creditors 30.00 Cash at bank 12.00
189.40 189.40
WORKINGS
W-1: Purchase consideration Rs. in million
Equipment 9.00Land 70.00
Building 8.50
Vehicle (22.3-11.5-1.2-1.1-0.8) 7.70
Trade debtors (38 × 90%) 34.20
Cash at bank 12.00
Stock-in-trade 48.00
Trade creditors (30.00)
159.40
Rs. in million
Total purchase consideration 159.40
Given to partners in the form of debentures
Pistachio 36 x 10% ÷ 20% 18.00Cashew 24 x 10% ÷ 20% 12.00
Almond 20 x 10% ÷ 20% 10.00
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Distribution of shares among partners
Pistachio 119.40 x 5 ÷ 10 59.70
Cashew 119.40 x 3 ÷ 10 35.82
Almond 119.40 x 2 ÷ 10 23.88
119.40
W-2: Profit for the year
Rs. inmillion
Sales 515.00
Less: Cost of sales (42.7+325-48) (319.70)
Less: Admin expenses (120.00)
Less: Interest on capital (3.6+2.4+2) (8.00)
67.30
A.2 Figs Pakistan LimitedStatement of Comprehensive IncomeFor the year ended 31 December 2011
2011
Note Rs. in million
Sales 1 44,758
Cost of sales 2 (26,203)
Gross profit 18,555
Distribution costs 3 (6,431)
Administrative expenses 4 (752)
Other operating expenses 5 (399)
Other operating income 6 30
Profit from operations 11,003Finance costs 7 (166)
Profit before tax 10,837
Taxation 8 (2,532)
Profit after tax 8,305
Other comprehensive income -
Total comprehensive income for the year 8,305
Earnings per share (8,305 ÷ 274) 30.32
Figs Pakistan LimitedNotes to the financial statements
For the year ended 31 December 2011
1 Sales Note Rs. in million
Manufactured goods
Gross sales 56,528
Sales tax (10,201)
46,327
Imported goods
Gross sales 1,078
Sales tax (53)
1,025
Sales discounts (2,594)
44,758
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2 Cost of sales Rs. in million
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 × 55%) 2.1 1,302
Utilities (734 × 85%) 624
Depreciation and amortizations (1.287 × 70%) 901
Stationery and office expenses (230 × 25%) 58
Repairs and maintenance (315 × 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567
Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636
26,203
2.1 Salaries, wages and benefits include Rs. 30 million (54 × 55%) and Rs. 24 million (44 × 55%) inrespect of defined contribution plan and defined benefit plan respectively.
3 Distribution costs
Advertisement and sales promotion 4,040
Outward freight and handling 1,279Salaries, wages and benefits (2,367 × 30%) 3.2 710
Utilities (734 × 5%) 37
Depreciation and amortization (1,287 × 20%) 257
Stationery and office expenses (230 × 40%) 92
Repairs and maintenance (315 × 5%) 16
6,431
3.1 Salaries, wages and benefits include Rs. 16 million (54 × 30%) and Rs. 13 million (44×30%) inrespect of defined contribution plan and defined benefit plan respectively.
4 Administrative expenses Rs. in million
Salaries, wages and benefits (2,367 × 15%) 4.1 355Utilities (734 × 10%) 73
Depreciation and amortization (1,287 × 10%) 129
Stationery and office expenses (230 × 35%) 80
Repairs and maintenance (315 × 10%) 31
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
4.1 Salaries, wages and benefits include Rs. 8 million (54 × 15%) and Rs. 7 million (44×15%) inrespect of defined contribution plan and defined benefit plan respectively.
4.2 Auditor's remuneration Rs. in millionAudit fees 8
Taxation services 4
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5 Other operating expenses
Donation 5.1 34
Worker's Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10399
5.1 Donations Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of thecompany’s directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in which a director orhis spouse had any interest at any time during the year.
6 Other operating income Rs. in million
Income from financial assets
Dividend income 12
Return on savings account 2 Income from non-financial assets
Scrap sales 16
30
7 Finance costs
Finance charges on short term borrowings 133
Exchange loss 22
Finance charges on lease 11
166
8 Taxation
Current - for the year 1,440
Deferred (3,120 × 35%) 1,0922,532
A.3 (i) This is an adjusting post reporting event as it provides evidence of conditions that existed at theend of the reporting period. The reasons for the competitor’s price reduction will not have arisenovernight, but will normally have occurred over a period of time, may be due to superiorinvestment in technology.
An inventory write down of Rs. 2.5 million should be recognized and the amount included asinventory on the Statement of Financial Position reduced to Rs. 12.5 million.
(ii)
The provision should be recognized because the obligating event is the communication of eventto the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognized to the extent of redundancy costs. IASprohibits the recognition of future operating losses, staff training and profits on sale of assets.
(iii) This is a non-adjusting event because the burglary and theft of consumable stores occurred afterreporting date. However, if the event is material, it should be disclosed in the financialstatements unless the loss is recoverable from the insurance company.
(iv) The drop in value of investment in shares is a non-adjusting event. Since the legislation was
announced after the reporting date, the event is not a past event. However, if the amount ismaterial, it should be disclosed in the financial statements.
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(v) This is an adjusting event as it provides evidence of conditions that existed at the end of thereporting period. The insolvency of a debtor and the inability to pay usually builds up over aperiod of time and it can therefore be assumed that it was facing financial difficulty at year-end.
A bad debts expense of Rs. 1.5 million should be recognized in SOCI.
(vi) It is a non-adjusting event because the declaration was announced after the year-end and therewas no obligation at year end. Details of the bonus shares declaration must, however, bedisclosed.
A.4 (a) Following are the criteria that should be used while recognizing intangible assets from researchand development work.(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if , an entity candemonstrate all of the following
:
the technical feasibility of completing the intangible asset so that it will be available foruse or sale.
its intention to complete the intangible asset and use or sell it. its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among otherthings, the entity can demonstrate the existence of a market for the output of theintangible asset or the intangible asset itself or, if it is to be used internally, the usefulnessof the intangible asset.
the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset. its ability to measure reliably the expenditure attributable to the intangible asset during
its development.
(b) (i) Since the product met all the criteria for the development of the product, it should berecognized as an intangible in the statement of financial position (SOFP) of the company.However, RI should capitalize only the development work (i.e. Rs. 9 million) as intangibleasset. IAS-38 does not allow capitalization of cost relating to the research work, training ofstaff and cost of trial run.Since the product has a useful life of 7 years, the amortization expense amounting to Rs.0.32 million
(Rs. 9 million × 3/12 ÷ 7 years) should be recorded in the statement ofcomprehensive income (SOCI).
(ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP because: it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful lifewill be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years. The amortizationto be recorded in SOCI is Rs. 2.83 million
(Rs. 17 million × 10/12 ÷ 5).
(iii) The acquired brand should be recognized as an intangible in the SOFP because acquisitionprice is a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12million
(Rs. 2 million ÷ 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs. 10 million in theSOFP Since there is an indefinite useful life of the intangible assets it should not be
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A.5 Taxation 2011 2010
Rs. in million
Current (W-1) 20.48 10.76Deferred (W-2) (1.58) (21.35)
18.90 (10.59)
Relationship between tax expense and accounting profit 2011
Profit before taxation 60.00
Tax at the applicable rate of 35% 21.00
Less: Tax effect of exempt income (2.10)
18.90
W-1: Computation of Current Tax
Profit before tax as per books 60.00 45.00 Add: Allowable income / Disallowed expenses
Accounting depreciation 10.00 9.00
Tax profit on sale of fixed assets 1.00 -
Bad debt expense 5.00 7.00
Less: Disallowed income / Allowable expenses
Tax depreciation (8.00) (7.00)
Accounting profit on sale of fixed assets (0.50) -
Capital gain (6.00) -
Bad debts written off (3.00) (4.00)
58.50 50.00
Tax losses to be brought forward - (19.25)
Taxable income 58.50 30.75
Tax liability (@ 35%) 20.48 10.76
2011 2010
Rs. in million
W-2: Computation of Deferred Tax
Fixed assets (2010: 95-90, 2011: 82.5-80) (W-2.1) 0.87 1.75
Provision for bad debts (2010: 12×35%, 2011: 14×35%) [W-2.2] (4.90) (4.20)
Closing balance of deferred tax (4.03) (2.45)
Less: Opening balance (2.45) (18.90)
Charge for the year (1.58) (21.35)
W-2.1 Movement of Fixed Assets Accounting Tax
Opening balance 95.00 90.00
Disposal during the year (2.50) (2.00)
Depreciation for the year - 2011 (10.00) (8.00)
Closing balance 82.50 80.00
W-2.2 Movement of provision for bad debts 2011 2010
Opening balance 12.00 9.00
Provision for the year 5.00 7.00
W i ff d i h (3 00) (4 00)
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(THE END)
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A.1 Marvel Engineering Limited Cash Flow StatementFor the year ended 30 June 2012
Workings 2012
Cash flows from operating activities Rs. in millionProfit before taxation 88.00
Adjustment for non cash charges and other items:Depreciation 50.00
Impairment of plant and machinery 11.00
Financial charges 75.00
Provision for bad debts 1 10.00
Gain on sale of fixed assets (2.00)
Gain on sale of investments (3.00)
Dividend income (30.00)
Provision for Gratuity payable (55 - 50 + 6) 11.00
Working capital changes Decrease / (increase) in current assets:
Stock-in-trade (97 - 68) (29.00)
Trade debts 1 (86.00)
Other current assets (100 - 120) 20.00
Increase / (decrease) in current liabilities:
Trade and other payables ([73 - 7] - [56 - 3]) 13.00
Cash generated from operations 128.00
Financial charges paid (3 + 75 - 7) (71.00)
Income tax paid (5 + 21 + 21 - 12 - 15) (20.00)
Gratuity paid (6.00)
Net cash generated from operating activities 31.00
Cash flows from investing activities
Capital expenditure 2 (289.00)
Proceeds from sale of property, plant and equipment (5+2) 7.00
Proceeds from sale of investments (10+3) 13.00
Purchase of long term investments (130-100+10) (40.00)
Dividend received 30.00
Net cash used in investing activities (279.00)
Cash flows from financing activities
Insurance of ordinary shares 3 40.00Proceeds from long term loan (330 - 110) 220.00
Payment of dividend (2 + (440 × 5%) - 4) (20.00)
Net cash from financing activities 240.00
Net decrease in cash and cash equivalents (8.00)
Cash and cash equivalent at the beginning of the year 39.00
Cash and cash equivalent at the end of the year 31.00
WORKINGS (All amount in million rupees)
W-1:Provision
for bad debts
Trade
debtorsClosing balance (133 ÷ 0.95) - 133 7.00 (133 ÷ 0.95) 140.00
Add: Bad debts written off 6.00 6.00
O i b l ( 0 9 ) (3 00) ( 0 9 ) (60 00)
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W-2: Capital expenditure Rs. in million
Closing balance 633.00
Add: Depreciation for the year 50.00
Add: Impairment against plant 11.00
Add: Disposal during the year 5.00
Less: Opening balance (410.00)
289.00
W-3: Issuance of ordinary shares Closing balance of share capital 494.00
Closing balance of share premium 8.00
Less: Bonus shares issued (440 × 5%) (22.00)
Less: Opening balance of share capital (440.00)
40.00
A.2 Miracle Textile LimitedStatement of financial position (Extracts)As at 30 June 2012
Note 2012 2011
ASSETS --------Rupees-------- Non-current assets
Property, plant and equipment 4 16,000,000 18,000,000
LIABILITIES
Non-current liabilities Obligation under finance lease 9 6,505,219 10,633,074
Current liabilities
Current portion of obligation under finance lease 9 4,127,856 3,566,925
Miracle Textile Limited Notes to the financial statements (Extracts)As at 30 June 2012
4- Property, plant and equipment 2012 2011
Leased assets --------Rupees--------Cost
Opening balance 20,000,000 -
Addition during the year - 20,000,000
20,000,000 20,000,000
Accumulated depreciation
Opening balance (2,000,000) -
Depreciation for the year (2,000,000) (2,000,000)
(4,000,000) (2,000,000)
Balance as at 30 June 16,000,000 18,000,000
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9- Obligations under finance lease (W-1) 30-Jun-12 30-Jun-11
Minimumlease
payment
Financialcharges for
future periods
Principal
outstanding
Minimumlease
payment
Financialcharges for
future periods
Principal
outstanding
-------------------------------------------------R u p e e s ----------------------------------------------
Not later thanone year 5,800,000 1,672,144 4,127,856 5,800,000 2,233,075 3,566,925
Later than oneyear but notlater than fiveyears 7,800,000 1,294,781 6,505,219 13,600,000 2,966,926 10,633,074
Later than fiveyears - - - - - -
13,600,000 2,966,926 10,633,074 19,400,000 5,200,000 14,200,000
9.1 The Company has entered into a finance lease agreement with a bank in respect of a
machine. The finance lease liability bears interest at the rate of 15.725879% perannum. The company has the option to purchase the machine by paying an amountof Rs. 2 million at the end of the lease term. The lease rentals are payable in annualinstallments ending in June 2013. There are no financial restriction in the leaseagreement.
W-1: Lease Schedule
Payment
date
Opening
principalInstallment
Principal
repayment
Interest @
15.725879%
Closing
principal
01-Jul-10 20,000,000 5,800,000 5,800,000 - 14,200,000
01-Jul-11 14,200,000 5,800,000 3,566,925 2,233,075 10,633,075
01-Jul-12 10,633,075 5,800,000 4,127,856 1,672,144 6,505,21901-Jul-13 6,505,219 5,800,000 4,776,997 1,023,003 1,728,222
30-Jun-14 1,728,222 2,000,000 1,728,222 271,778 -
20,000,000 5,200,000
A.3 (a) This transaction involves two type of revenue:
Revenue from sale of goods
Interest income
Revenue from sale of goods will be recognized, as all the required criteria are met:(i) The significant risks and rewards of ownership are transferred to STML on the
date of delivery, i.e. 5 July 2012.(ii) BL’s managerial involvement and control associated with the ownership
ceased on 5 July 2011 when STML accepted the delivery.(iii) The revenue from the sale can be reliably measured as it is the fair value being
the net selling price that was agreed to at the time of transaction i.e. Rs. 4.0million (net of trade discount).
(iv) STML is a regular customer of BL and no such evidence has been given tosuggest that the customer may be a bad debt. Therefore we may assume theinflow of future economic benefits associated with the transactions will flow toBL.
(v) The cost incurred in respect of this transaction can be reliably measured, as Rs.3.6 million.
Conclusion:
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Interest income should be recognized when the following criteria are met:
• Since there is no indication of bad debts, therefore it may be assumed that theeconomic benefits will flow to BL.
•
The amount of revenue can be measured reliably that will be done by usingthe effective interest rate method over the period for which the finance isoffered. Effective interest rate can be worked on the basis of informationgiven in the question.
Conclusion:The interest should be recognized over the three year period of the financing.
(b) Since the newspapers are sold on consignment therefore the risks of ownershipare transferred when the unsold newspapers are returned.
SL’s managerial involvement continues until all unsold newspapers are returnedto the SL.
The amount of revenue can only be reliably measured once SL knows thenumber of newspaper sold.
A reliable estimate of the cost of the newspapers is possible because the returnednewspapers would have very insignificant value.
Conclusion:Revenue should only be recognized when SL is certain of the number of papers soldon their behalf. Prior to this stage the probability of an inflow of benefits is uncertain based on the unpredictability of newspaper sales.
(c) (i) Revenue may only be recognized when all the following criteria
are met:
The revenue can be measured reliably which is stipulated in the agreement i.e.
Rs. 22 million. The costs can be reliably measured which is worked out at year end as follows:
Incurred to date Rs. 10 million
Future costs Rs. 7 million
It is probable that the economic benefits will flow to Fabulous Enterprise.Since the customer is a well established company, it is unlikely that thecustomer will default on payment.
The stage of completion can be reliably measured. A variety of methods ofcalculating the stage of completion are allowed, of which either the ‘percentageof completion method’ or the ‘number of services method’ would be suitable.
Conclusion:A portion of the revenue should therefore be recognized at 30 June 2012 since allrecognition criteria are met.
(ii) Fabulous Enterprises can recognize the revenue on the basis of cost method as thecosts are reliably measureable. It can use number of services method if each buildingis similar, since we know that 6 of the 10 buildings have been completed.
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2012
A.4 Wonder LimitedExtracts of Statement of financial positionFor the year ended 30 June 2012
20122011
(Restated)
Rs. in million
Property, plant and equipment 178.50 111.50
Retained earnings 158.65 95.05
Deferred tax liability 41.85 21.45
PPE: Year 2012 : 189 - [20 - (20 × 10% × 1.75)] + [56/4 – 56/7] PPE: Year 2011: 130 - 18.5 (Note X)
DTL: Year 2012 : [(21.45 + (45 - 27) + {(6+2) × 30%}] DTL: Year 2011: 27 - 5.55 (Note X)
Wonder Limited
Extracts of Income StatementFor the year ended 30 June 2012
20122011
(Restated)
Rs. in million
Profit before taxation 98.00 101.50
Taxation (34.40) (36.45)
Profit after taxation 63.60 65.05
PBT : Year 2012 : 90 + (20 × 10% ) + [(56/4) - (56/7)] PBT : Year 2011 : 120 - 18.5 (Note X) Tax : Year 2012 : 32 + [(6+2) × 30%] Tax : Year 2011 : 42 - 5.55 (Note X)
Wonder LimitedExtracts of statement of changes in equityFor the year ended 30 June 2012
Retained earnings
Rs. in million
Balance as on 1 July 2010 (108-78) 30.00
Profit for the year ended 30 June 2011 (78 - 12.95 (Note X))- restated 65.05
Balance as at 30 June 2011 - restated 95.05Profit for the year ended 30 June 2012 63.60
Balance as at 30-June 2012 158.65
Wonder LimitedNotes to the financial statementsFor the year ended 31 December 2012
X Correction of error During the year ended 30 June 2010, the repair works was erroneously debited tomachinery account. The effect of this error is as follows:
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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2012
2011
Rs. in million
Effect on the income statement (Increase) / decrease in expenses or losses
Repairs and maintenance (20.00)
Depreciation (20 × 10% × 9 ÷ 12) 1.50
Tax expenses (30% × (20-1.5)) 5.55
Decrease in profit for the year (12.95)
Effect on the statement of financial position
Increase / (decrease) in assets
Property, plant and equipment (20 – 1.5) (18.50)
(Increase) / decrease in liabilities
Deferred tax liability (Rs. 18.5 × 30%) 5.55
(Increase) / decrease in equity
Retained earnings (18.50 - 5.55) (12.95)
A.5 (a) Property, plant and equipment (extract)
2012 2011Plant – Revalued Rs. in millionOpening balance
Gross carrying amount 108 180
Accumulated depreciation and impairment (36) (45)Net carrying amount 72 135
Additions - -Depreciation (44) (36)
Revaluation surplus increase / (decrease) (W-1) 8 (15)
Revaluation income / (expense) (W-1) 8 (12)
(28) (63)
Closing net book value 44 72
Closing net book value compris