This document provides instructions for a financial accounting exam consisting of 5 questions. Question 1 has 3 subparts asking about limitations of financial statements, categories of financial instruments, and accounting for changes in policy. Question 2 provides 5 situations and asks for the appropriate accounting treatment and reasoning. Question 3 has 2 subparts about accounting for a lease and foreign currency loan. Question 4 provides additional asset information and asks about depreciation definitions, preparing a long term assets note, and response to a suggestion about depreciation. Question 5 provides company balance sheets and acquisition details and asks to record the share exchange transaction.

1. FINANCIAL ACCOUNTING
Time allowed‐2½ hours
Full Marks‐100
[N.B.‐ Questions must be answered in English. Figures in the margin indicate full marks. All workings are to be
submitted. Examiner will take account of the quality of language and of the manner in which the
answers are presented. Different parts, if any, of the same question must be answered in one place in
order of sequence]
Marks
1. Answer to the following questions:
a. “Financial statements based on historical cost basis are meaningless and highly distorted”‐
discuss the limitations of financial statements highlighting the conflicting principles in the
Conceptual Framework of Accounting. 5
b. Describe the following categories of financial instruments: (a) financial assets and financial
liabilities at fair value through profit or loss, (b) held to maturity investments, (c) loans and 6
receivables, and (d) available for sale financial assets.
c. State the circumstances in which an entity may change in accounting policy and explain how a
change in policy should be accounted for in accordance with IAS‐8. 5
2. You have been asked to advise on the appropriate accounting treatment for the following situations
arising in the books of your company. The year end of the company is 31 December 2010 and you
should assume that the amounts involved are material in each case. 4x5= 20
(i) At the year end there was a debit balance in the books for Tk. 15,000, representing an estimate
of the amount receivable from an insurance company for an accident claim. In February 2011,
before the directors had agreed the final draft of the published accounts, correspondence with
lawyers indicated that Tk. 18,600 might be payable on certain conditions.
(ii) The company has an item of equipment which cost Tk. 400,000 in 2007 and was expected to last
for ten years. At the beginning of the financial year 2010 the book value was Tk. 280,000. It is
now thought that the company will soon cease to make the product for which the equipment
was specially purchased. Its recoverable amount is only Tk. 80,000 at 31 December 2010.
(iii) On 30 November the company entered into a legal action defending a claim for supplying faulty
machinery. The company’s solicitors advise that there is a 20% probability that the claim will
succeed. The amount of the claim is Tk. 500,000.
(iv) An item has been produced at a manufacturing cost of Tk.1,800 against a customer’s order at an
agreed price of Tk. 2,300. The item was in inventory at the yearend awaiting delivery
instructions. In January 2011 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately Tk. 300,
which is expected to make it marketable with other customers at a price of about Tk.1,900.
(v) At 31 December a company has total potential liability of Tk.1,000,400 for warranty work on
contracts. Past experience shows that 10% of these costs is likely to be incurred, that 30% may
be incurred but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the books
and/ or the yearend financial statements as appropriate.
3. (a) BARCLAYS purchased a motor car on 1.1.2008 from IDLC Ltd. for Tk.1,000,000 with Interest rate
of 10% p.a. for 5 years. It pays yearly instalment of Tk. 300,000 in advance to the lessor. The fair
value of the car was Tk. 1,500,000. BARCLAYS charges lease rental to the comprehensive income
statement under operating lease as per practice. The management of the company has now
decided to comply with BAS‐17‐ Leases to treat it as finance lease. Company depreciates motor
car on straight line method @20%. What are the steps to be followed for conversion of
operating lease into finance lease? Show the calculations for the effect of policy change and
extract balance sheet as on 31.12.2010. 10
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2. – 2 –
(b) Ahmeds foods Ltd. purchased machinery costing Tk.100 million on 1‐1‐2010. May Bank,
Hongkong sanctioned a foreign currency loan in USD repayable in five equal instalements
annually (official exchange rate as on 1.1.2010 was US $ 1=Tk.70). As on 31‐12‐2010 the first
instalment was paid when US $ 1 fetched Tk.72.50. The company charges depreciation on
machinery at 20% on WDV basis. 10
What will be the accounting treatment of exchange loss arising out of the foreign currency loan
represented by the recent acquisition of fixed assets. Your answer should be in line with BSA 21‐
The Effects of Change in Foreign Exchange Rates. Did you find any different accounting
treatment in terms of companies Act 1994? How can you align this treatment with BAS 21‐The
Effects of Change in Foreign Exchange Rates?
4. On 1 January 2010 the fixed asset balance of Unique, a quoted company, was made up as follows:
Original Cost Depreciation NBV
Tk. Tk. Tk.
Land and buildings 710,000 43,000 667,000
Plant and equipment 948,500 571,400 377,100
Motor vehicles 77,000 44,100 32,900
The Company charges depreciation on the straight line basis at the following rates.
Pa
Buildings 2%
Plant and equipment 10%
Motor vehicles 20%
A full charge is made in the year of purchase and none in the year of sale.
You are given the following additional information.
(i) An item of plant which was was purchased in 2000 for Tk. 200,000 is now recognized to have a
useful life of another 16 years.
(ii) The buildings owned by Unique cost Tk.430,000, 5 years ago.
(iii) During 2004 a lada which cost Tk. 10,000 in 2002 was traded at a value of Tk. 4,300 in part
exchange for a skoda costing Tk. 15,400
(iv) On 1 July Unique acquired the use of a new machine under a finance lease. The contract
specified that Unique must pay a non returnable deposit of Tk. 15,000 immediately and then
annual instalments of Tk.10,000 for 4 years starting on 1 January 2005. The cash price of the
machine was Tk. 45,000
(v) Included within the equipment is an item which originally cost Tk.173,000 and is already fully
depreciated. It is not expected to last very much longer.
Required:
(a) Define depreciation and identify two situations whereby the depreciation charged on an asset is not
shown as an expense in the income statement but is instead capitalized in the balance sheet. 7
(b) Prepare a long term assets note, suitable for inclusion in Unique’s financial statements for the
year ended 31 December 2004. 7
(c) The Finance Director suggests that to make a change in the annual depreciation for item (i) is
against the accounting conventions of prudence and consistency. 5
Set out your response.
5. HS acquired six million of MK’s ordinary shares on 1 April 2010 for an agreed consideration of Tk. 25
million. The consideration was settled by a share exchange of five new shares in HS for every three
shares acquired in MK, and a cash payment of Tk. 5 million. The cash transaction have been
recorded, but the share exchange has not.
The draft balance sheets of the two companies at 30 September 2010 are:
HS MK
‘000 Tk ‘000Tk. ‘000 Tk. ‘000 Tk
Assets
Non‐current assets
Property, plant & equipment 78,540 27,180
Investment in Mk 5,000 Nil
83,540 27,180
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3. – 3 –
Current assets
Inventory 7,450 4,310
Accounts Receivable 12960 4,330
Cash at bank nil 520
20,410 9,160
Total assets 103,950 36,340
Equity and Liabilities
Capital and Reserves
Ordinary shares of Tk 1 each 20,000 8,000
Reserves
Share Premium 10,000 2,000
Accumulated Profits:
At 1 October 2009 51,260 6,000
For the year to 30 Sep ’10 12,000 8,000
73,260 16,000
93,260 24,000
Non‐current liabilities
8% loan notes 2014 nil 6,000
Current liabilities
Accounts payable &
Accruals 5,920 4,160
Bank overdraft 1,700 nil
Provision of taxation 1,870 1,380
Proposed final dividend 1,200 800
Total equity and liabilities 10,690 6,340
103,950 36,340
The following information is relevant:
(i) The fair value of MK’s land at the date of acquisition was Tk. 4 million is excess of its carrying
value. MK’s financial statements contain a note of a contingent asset for an insurance claim of
Tk. 800,000 relating to some inventory that was damaged by a flood on 5 March 2010. The
insurance company is disputing that claim. He has taken legal advice on the claim and believes
that it is highly likely that the insurance company will settle it in full in the near future.
The fair value of MK’s other net assets approximated to their carrying values.
(ii) At the date of acquisition HS sold an item of plant that had cost of Tk. 2 million to MK for Tk.2.4
million. MK has charged depreciation of Tk.240,000 on this plant since it was acquired.
(iii) HS’s current account debit balance of Tk. 820,000 with MK does not agree with the corresponding
balance in MK’s books. Investigations revealed that on 26 September 2010 HS billed MK Tk. 200,000
for its share of central administration costs. MK has not yet recorded this invoice. Intercompany
current accounts are included in accounts receivable or payable as appropriate.
(iv) MK paid an interim dividend of Tk.400,000 on 1 March 2010. The profit and total dividends
(interim plus final) of MK are deemed to accrue evenly throughout the year. MK’s retained profit
of Tk. 8 million for the year to 30 September 2010 as shown in its balance sheet is after the
deduction of both its interim and final dividends. HS ‘s policy is to credit to income only those
dividends received or receivable from post acquisition profits. He has not yet received or
accounted for any dividends from MK. All proposed dividends were declared by the directors
before the relevant year ends.
(v) At 30 September 2010 the value of goodwill in respect of the acquisition of MK has fallen by 10%.
Required:
(a) Prepare the consolidated balance sheet of HS at 30 September 2010. 20
(b) Suggest reasons why a parent company may not wish to consolidate a subsidiary company, and
describe the circumstances in which non‐consolidation of subsidiaries is permitted by
International Accounting Standards. 5
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