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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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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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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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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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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)


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)


Surplus on revaluation of fixed assets 40,000

(Increase in value through revaluation)

Working: Rs. 230,000 – Rs. 190,000 = Rs. 40,000




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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Working: Rs. 40,000 ÷ 19 = Rs. 2,105


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




Working: Rs. 170,000 ÷ 18 = Rs. 9,444


Building 9,444(Reversal of prior year depreciation)


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




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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Suggested Answers


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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Suggested Answers


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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(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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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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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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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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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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(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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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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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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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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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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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


21/53



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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


(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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Suggested Answers


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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Suggested Answers


(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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


IN THE BOOKS OF COPPER LIMITED


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



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


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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Suggested Answers


(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





30-Jun-10 Acc. depreciation & impairment losses 6,000,000

I i t l d (W 1) 6 000 000


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Suggested Answers





30-Jun-10 Plant 6,000,000


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


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 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 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 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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Suggested Answers


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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Suggested AnswersIntermediate Examination - Spring 2012

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



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



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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


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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Suggested Answers


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

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