CAF-7

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Financial Accounting and Reporting - IISuggested Answers

Certificate in Accounting and Finance Autumn 2015

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A.1 (a) Himalaya Woods Limited

Statement of financial position as at 30 June 20152015

2014

(Restated)

------- Rs. in million -------

Equity and liabilitiesShare capital (Rs. 100 each) 2,500 2,500

Retained earnings 2,442 2,052

4,942 4,552

Current liabilities

Trade and other payables 740 560

Taxation W.2 66 49

806 609

5,748 5,161

Assets

Non-current assets

Property, plant and equipment 4,261 3,773

Current assetsStock in trade [2014 : 795+(351.4)] 835 820

Trade debts W.1 638 551

Cash and bank balances 14 17

1,487 1,388

5,748 5,161

(b) Statement of comprehensive income for the year ended 30 June 2015

20152014

(Restated)

---- Rs. in million ----

Sales (20,000+35), (15,52035) 20,035 15,485

Cost of sales [14,000+(351.4)], [10,000(351.4)] (14,025) (9,975)

Gross profit 6,010 5,510

Operating expenses

2015: [5,406+12+{(3512)4%}] 2014:[4,764(354%)] (5,419) (4,763)

Profit before tax 591 747

Taxation at 34% (201) (254)

Profit for the year 390 493

Other comprehensive income for the year, net of tax - -

Total comprehensive income for the year 390 493

(c) Statement of changes in equity for the year ended 30 June 2015

Share capitalRetainedearnings

Total

------------- Rs. in million -------------Balance as at 30 June 2013 2,500 1,559 4,059

Profit after taxation restated - 493 493

Balance as at 30 June 2014 - restated 2,500 2,052 4,552Profit after taxation - 390 390

Balance as at 30 June 2015 2,500 2,442 4,942

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W.1: Trade debts 2,015 2,014Trade debts after provision 650 585

Provision for doubtful debts at 4%(6500.960.04), (5850.960.04) 27 24

Trade debts before provision 677 609

Change in opening balance (574609) (35) -

Correction of July 2014 sales booked in June 2014 35 (35)

Customer declared bankrupt on 1 August 2015 (2060%) (12) -

665 574Provision for doubtful debts at 4% (6654%), (5744%) (27) (23)

638 551

W.2: Tax liability

Balance prior to adjustments 70 52

Change in opening balance (4952) (3) -

Decrease in tax liability (201202), (254257) (1) (3)

66 49

A.2 Fortune Limited

Categories of threats:The given situation may create following threats to the fundamental principles of objectivity orprofessional competence and due care:

Self-interest

Intimidation

Safeguards available to the CFO:If, these threats are significant, the CFO should consider and apply the following safeguards toeliminate or reduce them to an acceptable level:

Consultation with superiors within the employing organization, for example audit committee.

Consultation with other body responsible for governance

Consultation with a relevant professional body.

Where it is not possible to reduce the threats to an acceptable level, a CFO:

should refuse to remain associated with information which is or may be misleading.

if issuance of misleading information is either significant or persistent, he should considerinforming appropriate authorities keeping in view the confidentiality and the legalrequirements.

may seek legal advice or resign.

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A.3 Quality Pharma Limited

Accounting entries for the year ended 30 Jun 2015

Date DescriptionDebit Credit

Rs. in million

16-Jul-2014 Account payable 10.00

Bank 10.00

(Payment of the 4th. progress bill liability)

30-Sep-2014 Capital work in progress 890% 8.89

Advance payment 8.8910% 0.89

Account payable 8.00

(Accrual of the 5th. progress bill)

16-Oct-2014 Account payable 8.00

Bank 8.00

(Payment of the 5th progress bill liability)

31-Dec-2014 Capital work in progress (3010%)2+(4012%)2 3.90

Bank/Interest payable 3.90

(Finance cost for Jul-Dec 2014 paid and capitalised)

31-Dec-2014 Capital work in progress 1390% 14.44

Advance payment 14.4410% 1.44

Account payable 13.00

(Accrual of the final bill)

31-Dec-2014 Bank 0.74

Capital work in progress W.1 0.74(Finance income from surplus funds: 1-7-2014 to 31-12-2014)

31-Dec-2014 Property plant and equipment - Warehouse 78.55

Capital work in progress W.2 78.55

(Transfer of CWIP cost to property, plant and equipment)

16-Jan-2015 Account payable 13.00

Bank 13.00

(Payment of the 5th. progress bill liability)

16-Jan-2015 Bank/Interest receivable 0.04

Finance income / PL account W.1 0.04

(Finance income from surplus funds: 1-1-2015 to 16-1-2015)

30-Jun-2015 Finance cost (3010%)2+(4012%)2 3.90

Bank/Interest payable 3.90

(Finance cost for Jan-Jun 2015)

30-Jun-2015 Depreciation expense 78.55252 1.57

Accumulated depreciation 1.57

Depreciation on warehouse from the date of availability of

use - (1 Jan to 30 Jun 2015)

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W.1: Finance income at 8% from the surplus funds

Payment

DatesDescription

Loans

utilisation

Surplus

funds No. of days

Finance income from surplusfunds at 8%

CWIP PL account

(Rs. in million) Rs. in million

1-Jul-2013 Proceeds from loan A 30.00 30 15 0.1016-Jul-2013 10% advance (7.00) 23 90 0.46

16-Oct-2013 1st progress bill (6.00) 17 75 0.28

1-Jan-2014 Proceeds from loan B 40.00 57 15 0.19

16-Jan-2014 2nd progress bill (14.00) 43 90 0.86

16-Apr-2014 3rd progress bill (12.00) 31 75 0.52 To 30-6-2014

For the year ended 30 Jun 2014 2.41 -

16-Jul-2014 From 1-7-2014 - 31 15 0.10

16-Jul-2014 4th progress bill (10.00) 21 90 0.42

16-Oct-2014 5th progress bill (8.00) 13 75 0.22

31-Dec-2014 Completion date - 13 15 - 0.04

16-Jan-2015 Final bill (13.00) - - -

For the year ended 30 Jun 2015 0.74 0.04

3.15 0.04

W.2: Capital work in progress as at 30 June 2015 Rs. in millionCost incurred prior to construction (1.45+0.95) 2.40

Construction cost 70.00

Finance Cost - Loan A (1 Jul 2013 - 31 Dec 2014) (3010%)1218 4.50

Finance Cost - Loan B (1 Jan - 31 Dec 2014) (4012%) 4.80

Finance income from investment of the surplus funds(for the construction period) (W.1) (3.15)

Total 78.55

A.4 Industrial Chemicals Limited

Accounting treatment and disclosures for the year ended 30 June 2015

Provisions and contingent liability:According to IAS 37, a provision shall be recognized when all of the following conditions are met:

There is a present obligation (legal or constructive) as a result of past event.

It is probable that outflow of resources will be required to settle the obligation.

A reliable estimate can be made of the amount of the obligations.

In view of the above, a provision shall be made to the extent the above conditions are met asexplained under:

(i) Rs. 12 million [ORRs. 10.4 million (1260%+840%)] for the pending claim of the worker asit is most likely that ICL would require to pay this amount as advised by ICLs lawyers. For

the remaining amount of Rs. 13 million (2512) [OR Rs. 14.6 million (2510.4)], it is notprobable that an outflow of economic benefits will be required. Therefore, a contingent

liability would be disclosedgiving information as under: A brief nature of the contingent liability.

Where practicable an estimate of finance liability and indication of uncertainties; and

The possibility of any reimbursement

(iii) As regards the additional compensation of Rs. 1.5 million under consideration of the

management, neither provision nor disclosure shall be made as the obligation is neither

legal nor constructive as the matter is still under consideration and no formal intimation was

made that may create a valid expectation in this respect.

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(ii) Reimbursements:According to IAS 37, where some or all of the expenditure required to settle a provision isexpected to be reimbursed by another party:

The reimbursement shall be recognized where it is virtually certain that reimbursementwill be received.

The amount recognized in respect of the reimbursement shall not exceed the amount ofprovision.

The reimbursement receivable shall be treated as a separate asset.

In view of the above, accounting treatment and disclosure in respect of insurance claim will beas under:

Insurance claim to the extent of Rs. 14 million is accepted in principle by the insurance

company; therefore, it will be taken as virtually certain to be received. However, the

insurance claim to be recognized as receivable shall be restricted to Rs. 12 million (ORRs. 10.4 million) for which the provision is recorded.

Recovery of the insurance claim to the extent of Rs. 2.0 million isprobable, therefore, acontingent asset would be disclosed for this amount giving information as under:

A brief nature of the contingent asset; and

An estimate of financial effect and indication of uncertainties.

A.5 (i) Return on capital employed Rs. in millionAverage capital employed as at 30 June 2015:

Average equity W.1 (275+320)2 297.50

Average long term loan (9.612%) 80.00

A 377.50Profit before interest and tax (100+9.6+506) B 153.60

Return on capital employed BA 40.69%

(ii) Return on shareholders' equity

Average shareholders' equity C 297.50Profit after interest and tax D 100.00

Return on shareholders' equity DC 33.61%

W.1: Average equity

Share

capital

Share

premium

Retained

earningsTotal equity

Balance as at 1 July 2013 200.00 20.00 40.00 260.00

Profit after tax for the y.e. 30 Jun 2014 - - 75.00 75.00

Final cash dividend for 2013 at 30% - - (60.00) (60.00)

10% Interim bonus issue 20.00 - (20.00) -

Balance as at 30 June 2014 220.00 20.00 35.00 275.00

Profit after tax for the y.e. 30 Jun 2015 - - 100.00 100.00Final cash dividend for 2014 at 25% - - (55.00) (55.00)

12% Interim bonus issue 26.40 - (26.40) -

Balance as at 30 June 2015 246.40 20.00 53.60 320.00

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A.6 Galaxy Limited

Amounts as would appear in the consolidated statement of financial position as at 30 June 2015

1 Goodwill

Controlling interest 0.3(50100)100 60%

Rs. in million

GL cost of investment 50.00

NCI at fair value on the date of acquisition 35.00

85.00

Less:BL's net assets on acquisition date of 1 July 2014

Book value of BL's net assets 50+18 68.00

FV increase in land 20.00

Impairment of BL's plant (10.00)

78.00

Goodwill as at 30 June 2014 7.00

Impairment by 10% (0.70)

Goodwill after impairment as at 30 June 2015 6.302 Consolidated retained earnings

GL retained earnings as at 30 June 2015 40+20 60.00

Share of BL's post acquisition profit (W.1)14.5060% 8.70

Unearned profit on goods sold by GL to BLand remained in BL's inventory as at 30 June 2015 51.220% (0.83)

Unearned profit on goods in transit sold by GL to BL (74)1.220% (0.50)

Goodwill impairment 0.7060% (0.42)

66.95

3 Non-controlling interest

NCI at fair value on the date of acquisition 35.00

Share of BL's post acquisition profit (W.1)14.5040% 5.80

Goodwill impairment 0.7040% (0.28)

40.52

W.1: Post acquisition profit of BL

BLs profit for the year ended 30 June 2015 6.00

Impairment of the plant as determined on 1 July 2014 adjusted by GL against

goodwill 10.00

Unearned profit on goods sold by BL to GL and remained in GL's inventoryas at 30 June 2015 91.220% (1.50)

14.50

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A.7 (a) Zeta Limited

Accounting entries for the year ended 30 June 2015

Date ParticularsDebit Credit

Rs. in million

1-Jul-2014 Pre-paid operating lease expense 2.63Bank 2.63

(Payment of lease rent in advance)

31-Dec-2014 Onerous loss W.1 1.97

Provision for onerous loss 1.97

(Recording of onerous loss on becoming the mixer

surplus and sub-letting it on a lower rent)

1-Jan-2015 Bank 2.00

Un-earned rent income 2.00

(Receipt of rent for sub-letting of the mixer)

30-Jun-2015 Lease rent expense (2.7-1-0.31) 1.39Un-earned rent income 2 2 1.00

Provision for onerous loss 1.311 0.31

Pre-paid operating lease expense 2.63

lease rental payable 0.07

(Recording of lease rent expense for the year ended 30

June 2015)

Gross lease exp. 2.5+2.63+2.77+2.9 = 10.79/4 =

2.70

W.1: Loss on onerous contract (outflows exceeded economic benefits)

payment period workingOperating

lease payments

Receipts

from sub-

letting

Onerous

loss

Six months ended 30 Jun 2015 (2.51.05)2 1.31 1.00 0.31

Year ended 30 Jun 2016 2.631.05 2.76 2.00 0.76

Year ended 30 Jun 2017 2.761.05 2.90 2.00 0.90

Total 6.97 5.00 1.97

(b) Zeta Limited

Notes to the financial statements for the year ended 30 June 2015

1 Reconciliation between the total of future minimum

lease payments and their present valueFuture minimum

lease payments

Present

Value

-------- Rs. in million --------

Not later than one year 7.00 (W.1) 6.23

Later than one year and not later than five years 14.00 (W.1) 10.47

Later than five years - -

21.00 16.70

Lease finance charges allocated to future periods (4.30)

16.70

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1.1 The minimum lease payments have been discounted at interest rate of 12.38% per annum toarrive at the present value. Lease instalments are paid annually in arrears.

W.1: Repayment schedule:

Date

Finance costInstalments Balance PV of future

instalments12.38%

------------------- Rs. in million -------------------

1-Jul-2013 25.00

30-Jun-2014 3.10 (7.00) 21.10

30-Jun-2015 2.61 (7.00) 16.71

30-Jun-2016 2.07 (7.00) 11.77 (71.1238) 6.23

30-Jun-2017 1.46 (7.00) 6.23 (6.231.1238) 5.54

30-Jun-2018 0.77 (7.00) 0.00 (5.541.1238) 4.93

2.23 (14.00) 10.47

Total 10.00 (35.00) 16.70

A.8 Opal Limited

Accounting treatment for research and development expenses

Development cost recognition as intangible asset:Since the new product met all the criteria for the development of a product, an intangible asset

should be recognized at Rs. 13 million (12+0.4+0.6) as detailed under:

Cost of Rs. 12 million incurred during the development phase that is 1 July 2014 to31 December 2014.

Depreciation of Rs. 0.4 million (4.050.5) on laboratory equipment for the developmentphase of six months from 1 July 2014 to 31 December 2014.

Cost of trial run amounted to Rs. 0.6 million

Amortization of intangible asset:Since the product has a shelf life of 10 years, the amortization expense amounting to Rs. 0.65million (13106/12) should be charged to profit and loss account for the period of six monthsi.e. 1 January to 30 June 2015.

Laboratory equipment cost recognition as tangible asset:

Laboratory equipment cost should be capitalized as a tangible asset as it is having usefullife of more than one year and to be depreciated over its useful life of five years.

Research and other costs:(i) IAS-38 does not allow capitalization of costs pertaining to research work. Therefore,these

costs should be charged to profit and loss account in the period in which they incurred.However, research cost of Rs. 8 million. and depreciation for the research phase of Rs. 0.4

million (450.5) pertained to last year, therefore, comparative figures for the year ended30 June 2014 should be restated and retained earnings be adjusted for these amounts.

(ii) Cost for training of staff is also not allowed for capitalization and should be charged toprofit and loss account for the year ended 30 June 2015.

(iii) Depreciation of Rs. 0.4 million on laboratory equipments for the period from thecommencement of the commercial production i.e. 1 January to 30 June 2015 should becharged to profit and loss account for the year ended 30 June 2015.

(THE END)

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CAF-7