Financial

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FINANCIAL ACCOUNTING
Time allowed – 3 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. 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. (a) The IASB’s Conceptual Framework identifies relevance and faithful representation as the two
fundamental qualitative characteristics. Explain how these and the enhancing characteristics
are applied in IAS 38, Intangible Assets. 6
(b) Briefly explain how BAS 17,Leases provides information that is relevant, reliable and
comparable to an entity. 6
(c) Symphony Ltd. sells computer hardware and develops unique software. The following matter
is outstanding in the preparation of the financial statements for the year ended 30 April 2015.
The software division of the company entered into a Tk 3 million contract on 1 May 2013 to
develop a unique product for a customer. At 30 April 2014 the contract was estimated at 25%
complete. However, as the costs to complete could not be estimated reliably, only the costs
incurred of Tk 200,000 were recognized as revenue. During the year to 30 April 2015 a further
Tk 2 million of costs have been incurred and included within inventory. The contract is now
thought to be 75% complete, which has been confirmed by an independent expert assessor
who has also estimated the costs to complete as Tk 400,000 and has confirmed the feasibility
of the product. No invoice has yet been rendered to the customer.
Prepare relevant extracts from income statement for the year ended 30 April 2015 and the
balance sheet as at that date. 6
2. Padma Ltd. is organized into several divisions. The following events relate to the year ended 31
December 2014.
(i) A number of customers have initiated legal proceedings relating to the supply of electrical
transformer units during 2014. Two thousand units were installed during the year. A number
of units proved to be faulty. Following adverse publicity, substantially all of the customers are
claiming that the units are faulty. Padma Ltd.’s lawyers have confirmed that they believe 25%
of the claims are defendable at no cost. The average level of damages per successful claim is
estimated at Tk.1,000. A similar provision was in place at 31 December 2013 disclosed in the
balance sheet at Tk.1 million. Tk.800,000 was paid out in similar claims during 2014.
(ii) A mechanical transformer unit supplied to Meghna Ltd. during the year exploded, causing a fire.
Meghna Ltd. has initiated legal proceedings for damages of Tk 10 million against Padma Ltd. A
legal expert has advised Padma Ltd. that there is only 30% chance of defending the claim
successfully. The present value of this claim has been estimated at Tk.9 million. The expert has
investigated the cause of the problem with a team of accident consultants. Together they have
concluded that parts supplied by Rahman Ltd. to Padma Ltd. for inclusion in the transformer unit
were defective and contributed to the explosion. They have estimated that Rahman Ltd.’s
negligence is 40% of any final settlement. Negotiations have commenced with Rahman Ltd. and
the legal expert believes that this claim is likely to succeed.
(iii) On 1 January 2014 Padma Ltd. installed a new electric machine. The electric machine cost
Tk.200,000 and has an expected life of 20 years. The machine is lined with a special
compound. The lining needs replacing every four years. The cost of the lining included within
the machine cost is Tk.40,000. The financial controller proposes to capitalize the machine at
Tk.200,000 and depreciate over 20 years, while building up a replacement provision over four
years for the relining of the machine.
(iv) Padma Ltd. has begun the extraction of metal ore in an overseas country, Phiphiland. On 1
January 2014 Padma Ltd. erected some infrastructure on the site at a cost of Tk.200,000.
Padma Ltd. has a five year operating license issued by Phiphiland government for the site.
Phiphiland has no environmental clean-up law enacted. Padma Ltd. made public statements
during the license negotiations that as a responsible company it would restore the environment
at the end of the license. At the end of five years the cost of removing the infrastructure has
been estimated at Tk.100,000. In addition, further clean-up costs will be progressively created
as the ore is extracted. On the basis of the planned extraction, the total cost of cleaning up the

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extracted ore hole will be Tk.400,000 at the end of five years. Extraction commenced on 1
January 2014 and is currently at planned level.
(v) On 1 July 2014 Padma Ltd. entered into a two-year fixed price, long run manufacturing
contract with Apollo Ltd. Padma Ltd. is manufacturing 1,000 processor units per month. The
forecast profit per unit was Tk.10 but, due to unforeseen cost increase and production
problems, each unit is anticipated to make a loss of Tk.7. The compensation payable for not
fulfilling the contract is Tk.2 million.
(vi) During the year a restructuring of the Kapothakho division began. The aim of the plan was to
reduce costs and improve business efficiency. The division has not been separately reported
as a business segment, and accounts for only 2% of group revenue. The plan was
implemented on 1 September 2014, when the main attributes were announced to the
workforce.
At 31 December 2014 the anticipated further costs to be incurred are as follows:
Tk’000
Redundancy costs 1,000
Lease termination 2,300
Retaining 1,100
Relocation 2,100
Marketing relaunch 1,400
Investment in new systems 1,000
Total 8,900
Requirements:
(a) Prepare the provisions for the financial statements for the year ended 31 December 2014,
including narrative commentary. 15
(b) Prepare the contingency note including narrative comments. 3
3. (a) At 1 February 2014, the beginning of its financial year, Arif has in issue 5,700,000 ordinary
shares of Tk 1 each. On 30 September 2014, the entity raises a further Tk 1,200,000 in capital
by the issue of further ordinary shares at par.
Extract from Arif’s consolidated income statement and statement of changes in equity at 31
January 2015 shows the following:
Consolidated profit before taxation Tk. 2,500,000
Tax (750,000)
1,750,000
Preference dividend (200,000)
Ordinary dividend (690,000)
Requirement: 6
Calculate Arif’s EPS for the year ending 31 January 2015.
(b) Z has 3,000,000 shares in issue at 1 April 2013. On 1 October 2013 the entity makes a bonus
issue of one shares for every four held. On 1 October 2014 Z makes a further bonus issue of
one share for every three held.
Earnings attributable to ordinary shareholders for the year ending 31 March, 2014 were
Tk.810,000 and for the year ending 31 March 2015 were Tk.903,000.
Requirement: 6
In the entity’s financial statements for the year ending 31 March 2015, what is the restated
EPS comparative figure for 2014?
(c) H has 3,000,000 shares in issue at 1 October 2014. On 1 February 2015 a rights issue of 1 for 6
is made at Tk.1.62 per share. The market price of one share immediately prior to the rights
issue was Tk.1.90.
Earnings attributable to ordinary shareholders for the year ending 30 September 2015 were
Tk.1,585,000.
Requirement: 7
Calculate the EPS to be reported in the financial statements for the year ending 30 September
2015.

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4. Set out below are extracts from Maxim Co. Ltd.’s draft financial statements for the year ended 31
March 2015 which have been prepared by the assistant accountant.
Extract from draft statement of cash flows for the year ended 31 March 2015
Tk
Net cash from operating activities (42,235)
Cash flows from investing activities
Proceeds from disposal of property, plant and equipment 46,000
Cash flows from financing activities
Dividends paid (96,750)
Extract from statement of financial position as at 31 March
2015 2014
Tk Tk
Non-current assets
Property, plant and equipment 808,440 621,500
Equity
Ordinary share capital (Tk1 shares) 342,000 120,000
Share premium account 165,000 –
Current liabilities
Bank overdraft 34,000 24,700
After reviewing the draft financial statements it became clear that although the figures in the
statement of financial position are calculated correctly, the statement of cash flows is incomplete
and contains a number of errors. Relevant information to correct and complete the statement of
cash flows is given below:
(a) During the year ended 31 March 2015 the following occurred in relation to property, plant and
equipment:
 Machinery which had a carrying amount of Tk 38,700 was sold for Tk 46,000. In the
reconciliation of profit before tax to cash generated from operations the only adjustment
the assistant accountant made relating to this transaction was to deduct the sale proceeds.
 A number of new items of plant and equipment were acquired during the year. Cash was
paid for these new items except for one item of plant which was purchased on credit and
cost Tk 8,000.
 Total depreciation of Tk 111,475 was charged and has been correctly added back in
calculating net cash from operating activities.
 An impairment of an item of equipment was identified and was correctly recognized in the
income statement for the year ended 31 March 2015. The equipment’s carrying amount at
31 March 2015 was Tk 9,200 and its recoverable amount was Tk 4,700. No adjustments
have been made in the draft statement of cash flows for this impairment.
(b) After preparing the draft statement of cash flows it was discovered that trade and other
payables at 31 March 2015 included accrued interest of Tk 4,900 (2014: Tk Nil) and the cost
of the plant purchased on credit.
(c) The assistant accountant did not have details of the share issues which had been made during the year
so could not calculate the relevant figure for inclusion in the statement of cash flows. On further
investigation it was discovered that in addition to 165,000 ordinary shares being issued for cash at a
price of Tk 2 per share, a bonus issue was subsequently made out of retained earnings.
(d) The only dividend paid by Maxim Co. Ltd. in the year was an interim dividend. The assistant
accountant calculated the interim dividend of Tk 96,750 included in the draft statement of cash
flows by simply adjusting opening and closing retained earnings by the loss for the year.
Requirement:
Prepare Maxim Co. Ltd.’s statement of cash flows for the year ended 31 March 2015 15
5. Summit Ltd. prepares its consolidated financial statements in accordance with BFRS. Summit Ltd.
has investments in two companies, Apex Ltd. and Zenith Ltd.

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Extracts from the draft financial statements of the three companies at 30 September 2015 are
shown below:
Extracts from statements of changes in equity
Retained earnings
Summit Ltd. Apex Ltd. Zenith Ltd.
Tk’000 Tk’000 Tk’000
Balance brought forward 2,500 6,400 2,000
Net profit for period 560 120 320
Ordinary share dividends (600) (100) -
Balance carried forward 2,460 6,420 2,320
Additional Information:
1. The issued share capital of each company is:
Tk 1 Ordinary shares
Summit Ltd. 2 million
Apex Ltd. 1 million
Zenith Ltd. 3 million
2. Summit Ltd. acquired 80% of the Tk 1 Ordinary shares in Apex Ltd. on 30 September 2011
for Tk 6 million. The retained earnings of Apex Ltd. on that date were Tk 6 million.
3. On 1 November 2012, Summit Ltd. acquired 60% of the Tk 1 ordinary shares in Zenith Ltd.
for Tk 4 million. The retained earnings of Zenith Ltd. at that date were Tk 3 million.
4. Summit Ltd. disposed of its entire holdings in Zenith Ltd. for Tk 3 million on 31 March 2015. It has
not yet accounted for this disposal. Profits in Zenith Ltd. have accrued evenly throughout the year.
5. The fair value of the plant and equipment of Apex Ltd. was Tk 200,000 in excess of its
carrying amount at the date of acquisition. The remaining useful life of the plant and
equipment was assessed at four years from that date.
6. Apex Ltd. sold goods to Summit Ltd. at a transfer price of Tk 180,000 during the year ended
30 September 2015. The transfer price was based on a markup of 50% on cost. One third of
the goods remained in the inventory of Summit Ltd. at the year end.
7. Summit Ltd.’s inventory includes 5,000 finished goods items with a carrying amount of Tk
100 each. The normal selling price of these items is Tk 120 per item and selling commissions
are Tk 30 per item. Summit Ltd. had a contract in place to sell 2,000 items to a customer at Tk
70 per item in October 2015. No selling commissions will be incurred under the contract.
8. Summit Ltd. has undertaken annual impairment reviews of goodwill. At 30 September 2014
impairment losses of Tk 120,000 and Tk 50,000 for Apex Ltd. and Zenith Ltd. respectively
needed to be recognized. A further impairment loss of Tk 30,000 has been identified in respect
of Apex Ltd. for the year ended 30 September 2015.
Requirements:
(a) Prepare the consolidated income statement of Summit Ltd. for the year ended 30 September 2015. 15
(b) Prepare the movements on retained earnings and minority interest that would appear in the
consolidated statement of changes in equity for the year ended 30 September 2015. 10
(c) Set out the principles you have applied in accounting for the disposal of Zenith Ltd. 5
Income Statements:
Summit Ltd. Apex Ltd. Zenith Ltd.
Tk’000 Tk’000 Tk’000
Revenue 10,040 7,500 4,600
Cost of sales (8,760) (6,900) (3,000)
Gross profit 1,280 600 1,600
Operating expenses (400) (420) (1,120)
Profit from operations 880 180 480
Dividends received 80 - -
Profit before taxation 960 180 480
Income tax expense (400) (60) (160)
Net profit for the year 560 120 320