Accounting Financial

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FINANCIAL ACCOUNTING
Time Allowed – 21
/2 hours
Total Marks – 100
[N.B- Questions must be answered in English. Figures in the margin indicate full marks. Examiner will take
account of the quality of language and of the manner in which the answers are presented. Different
part, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. (a) Rupali Ltd is a company operating in media and communications. It owns a number of
newspapers and monthly magazine, which were acquired by acquisition of the assets of
Newsmedia. The consideration totalled Tk. 130 million, of which Tk. 100 million was attributed
to identifiable net assets (Tk. 60 million specifically for the newspaper and magazine titles). The
acquisition occurred on 1 January 2013. The newspaper and magazine titles are assumed to have
indefinite lives. Goodwill arising on the acquisition is estimated to have an useful life of 20 years.
However, an impairment review at 31 December 2013 showed that goodwill had fallen in value
by Tk. 1 million during 2013.
The newspapers and magazines have all shown increasing circulation since the acquisition.
Accordingly, in considering the financial statements to 31 December 2013 the directors wish to
revalue the titles to Tk. 133 million which represents the sum of amounts it is estimated could be
realized if each title and its associated rights were sold separately in the market at 31 December
2013. The directors estimate that this approximates closely to current cost.
On 1 January 2013, the company decided to expand its printing capacity by investing in new high
tech machinery costing Tk. 20 million. This machinery had been developed by a French company
and Rupali Ltd had to pay Tk. 20 million to acquire the patent allowing it sole use of the
technology for ten years. In addition, Rupali Ltd has also developed a range of greeting cards to
be sold alongside, and advertised in, the monthly magazines. These cards will all be sold under a
newly developed brand name for which Rupali Ltd has spent Tk. 6 million.
Required
(a) Assuming that BAS 38 Intangible Assets and BFRS 3 Business Combinations are complied
with, prepare the table of movements and accounting policy notes for intangible assets for
inclusion in the financial statements of Rupali Ltd for the year ended 31 December 2013. 7
(b) Comment on your treatment of Rupali Ltd’s intangible assets in (a) above in the light of
BFRS Framework. 4
(b) FS Ltd. purchased a warehouse in a downtown district where land values are rapidly increasing.
Ahmed Saif, Financial Controller, and Wahiduzzaman Babor, Financial Vice President, are trying
to allocate the cost of the purchase between the land and the building. Noting that depreciation can
be taken only on the building, Saif favours placing a very high proportion of the cost on the
warehouse itself, thus reducing taxable income and income taxes. Babor, his supervisor, argues that
the allocation should recognize the increasing value of the land, regardless of the depreciation
potential of the warehouse. Besides, he says, net income is negatively impacted by additional
depreciation and will cause the company’s stock price to go down.
Required:
i) Discuss the issue of stakeholders’ interests in the above scenario.
ii) What ethical issues does Saif face?
iii) How should these costs be allocated?
9
2. You are an articled student of MM Ahmed, Chartered Accountants. The following issues have been
raised for your suggestion on following circumstances:
(a) FS Ltd. sells and fits prefabricated replacement windows for houses. The standard sale
includes a 15-year warranty. FS Ltd. will repair the window during the warranty period if there
is a defect in the product or the installation. The warranty does not cover damage caused by
other causes, for example if there was a fire in the property. FS Ltd. does not sell the
windows without the warranty and does not sell warranties for other manufacturers’ products.

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(e) J&J, is the largest and most diversified health care organization in Bangladesh. Information related to
its property, plant and equipment in its 2012 annual report is shown in the notes to the financial
statements as follows:
Note: 3: Property, Plant and Equipment
At the end of 2012 and 2011, property, plant and equipment at costs and accumulated depreciation
were:
Figure in million Taka 2012 2011
Land and improvements 459 427
Building and building equipment 3,911 3,659
Machinery and equipment 6,805 6,312
Construction in progress 1,283 1,468
12,458 11,866
Accumulated depreciation 4,739 4,457
7,719 7,409
The company capitalizes interest expenses as part of the cost of construction of facilities and
equipment. Interest expenses capitalized in the year 2012, 2011 and 2000 was Tk. 95 million, Tk. 97
million and Tk. 84 million respectively.
Upon retirement or disposal of fixed assets, the costs and related amount of accumulated depreciation
or amortization are eliminated from the assets and accumulated depreciation accounts respectively.
The difference, if any between the net asset value and the proceeds is adjusted to earnings. In J&J’s
cash flow statement for the year 2012 is given below:
Each window sells for Tk. 1,000 and FS Ltd. typically repairs 2% of windows under the
warranty. The average cost of a warranty repair is Tk. 350.
Required: How should management recognise the sales revenue and the warranty cost? 4
(b) An undertaking sells canned food and has 100 customers. The delivery of the goods is made
on the last day of each month. Standard payment terms require settlement within 45 days of
delivery. The undertaking’s policy is to grant a settlement discount of 2% to customers that
pay within 15 days of delivery. Past experience shows that 45% of the customers normally
pay within 15 days, while the remaining 55% pay after the early settlement period. The
undertaking will deliver the next batch of canned foods to its customers on 31 January 2013.
The total invoiced selling price for all deliveries amounted to Tk.1,000.
Required: How should management treat settlement discounts at the date of sale? 6
(c) Undertaking A manufactures clothing and has one major dealer, undertaking B. Undertaking A
provides undertaking B with an extended credit line whereby A supplies merchandise to B that
can be sold on to third parties. B stores the merchandise in its warehouse. Transfer of the
legal title of ownership passes to B when it receives the clothes. Undertaking B does not have
to pay for the merchandise until it receives the payment from the third party. After three
months, undertaking B can either return the clothes to A if they are not sold, or pay
undertaking A for the merchandise and keep it.
Required: When should the revenue be recognised? 4
(d) On February 1, 2013, one of the huge storage tanks of JMI Chemical Ltd. exploded. Windows
in houses and other buildings within a one mile radius of the explosion were severely
damaged, and a number of people were injured. As of February 15, 2013 (when the
December 31, 2012, financial statements were completed and sent to the publisher for
printing and public distribution), no suits had been filed or claims asserted against the
company as a consequence of the explosion. The company fully anticipates that suits will be
filed and claims asserted for injuries and damages. Because the casualty was uninsured and
the company considered at fault, JMI Chemical will have to cover the damagers from its own
resources.
Required: Advise accounting treatment & disclosure, highlighting the impact of above
mentioned event, in the financial statements dated December 31, 2012.
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Consolidated Financial Statements (excerpts)
Net cash flows from operating activities 8,864
Cash flow from investing activities
Additions to property, plant and equipment (1,731)
Proceeds from disposal of assets 163
Acquisition of businesses, net of cash acquired (225)
Purchases of investments (8,188)
Sales of investments 5,967
Other (79)
Net cash used by investing activities (4,093)
Cash flows from financing activities
Dividends to shareholders (2,047)
Repurchase of shares (2,570)
Proceeds from short term debt 338
Retirement of short term debt (1,109)
Proceeds from long term debt 14
Retirement from long term debt (391)
Proceeds from the exercise of share options 514
Net cash used by financing activities (5,251)
Effect of exchange rate changes on cash and cash equivalents (40)
(Decrease)/Increase in cash and cash equivalents (520)
Cash and cash equivalents at the beginning of the year 4,278
Cash and cash equivalents at the end of the year 3,758
Supplemental cash flow data:
Cash paid during the year for interest Tk. 185 million and income taxes Tk. 2,090 million.
Required:
(i) What was the actual interest expense incurred by the company in 2012? 4
(ii) What is J&J’s free cash flow? From the information provided, comment on J&J’s
financial flexibility. 6
3. ABC Ltd is a company which publishes a single textbook and provides tuition courses relating to the
text. An extract from ABC Ltd’s nominal ledger at 31 March 2013 is as follows:
Tk.
Manufacturing costs 4,450,000
Administrative salaries 410,500
Selling and distribution costs 375,000
Inventories at 1 April 2012 113,400
Freehold land and buildings
Cost (land Tk. 1,750,000) 2,550,000
Accumulated depreciation at 1 April 2012 480,000
Plant and machinery
Cost 620,000
Accumulated depreciation at 1 April 2012 337,000
Borrowings 200,000
Trade and other receivables 37,500
Trade and other payables 25,400
Retained earnings at 1 April 2012 212,500
Ordinary share capital – Tk. 5 nominal value 500,000
Preference share capital – 5% irredeemable Tk. 10 shares 200,000
Cash and cash equivalents 63,500
Revenue 6,700,000
Finance costs 35,000
The following additional information are relevant.
(1) The borrowings are repayable in ten installments, commencing on 1 April 2013.
(2) Revenue is made up of the following:
Tk.
Tuition fees 1,500,000
Book sales 5,100,000
Advances 100,000
6,700,000

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The tuition fees all relate to courses held during the year except for fees of Tk. 300,000 which relate
to a ten-week course. Five weeks of this course had already been held by the year end. The
remainder is to be held in June 2013.The advances relate to a new publication which ABC Ltd. has
commissioned and advertised heavily but which is not yet in production.
(3) There were no movements of non-current assets during the year. However, on 28 February 2013, ABC
Ltd decided to sell a major item of plant for which it no longer has any use. This plant cost Tk. 120,000
on 1 April 2008 and was advertised for sale on 1 March 2013 at a price of Tk. 5,000. In April 2013 a
buyer was identified at the advertised price. The sale is expected to be completed in May 2013.
Plant is depreciated on a 10% straight line basis, taking into account the month of sale or purchase.
Freehold buildings are depreciated over their useful life of 40 years. Depreciation on plant is charged to
cost of sales. Depreciation on freehold land and buildings is charged to administrative expenses.
(4) At the year end the company was in the process of a legal action by one of its competitors which
claims that ABC’s textbook has breached copyright. The case is not due to be decided until June
2013 but ABC Ltd’s legal advisors think that the company has a 60% chance of losing the case and
estimates that this would cost ABC Ltd Tk. 100,000.
(5) One of ABC Ltd’s customers who owed Tk. 10,000 at the year-end was declared bankrupt on 1
May 2013
(6) Closing inventories at cost amounted to Tk. 120,000. Within this valuation is an amount of Tk.
50,000 relating to fixed overheads, being a share of total fixed overheads of Tk. 1 million. ABC Ltd
had expected to produce one million books during the year but, due to production difficulties only
800,000 were produced. Overheads have been allocated on the basis of Tk. 1.25 per book.
(7) The following should be provided for at the year end.
Income tax of Tk. 350,000
An ordinary dividend of Tk. 2.00 per share
The preference dividend
Requirements
(a) Prepare the income statement for ABC Ltd for the year ended 31 March 2013 and a balance sheet
as at that date in a form suitable for publication. You should classify expenses by function. 18
(b) Explain the considerations underlying the accounting requirements for not-for-profit entities,
including the possible relevance of BFRSs and IPSASs. 7
4. A Ltd has investments in two companies, B Ltd and C Ltd. The draft summarised balance sheets of the
three companies at 31 December 2012 are shown below:
ASSETS A Ltd
Tk. (‘000)
B Ltd
Tk. (‘000)
C Ltd
Tk. (‘000)
Non-current assets
Property, Plant and equipment 20,200 15,100 8,600
Investments in B Ltd 20,000 − −
Investments in C Ltd 4,000 −
Current assets
Inventories 3,500 2,700 1,400
Trade receivables 2,300 1,600 900
Cash and cash equivalents 200 300 100
Total assets 50,200 19,700 11,000
EQUITY & LIABILITIES
Capital and reserves
Issued Tk. 10 ordinary shares 35,000 15,000 8,000
Retained earnings 6,000 2,300 1,900
Non-current liabilities
Debentures 6,000 1,000 500
Current liabilities
Trade payables 3,200 1,200 600
Dividends – 200 –
Total equity and liabilities 50,200 19,700 11,000

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Additional information:
(1) A Ltd acquired 75% of the shares in B Ltd on 1 October 2010. At that date the balance on B Ltd’s
retained earnings was Tk. 1,800,000.
(2) On 1 October 2012 A Ltd acquired 30% of the shares in C Ltd. The profit for C Ltd for the
year ended 31 December 2012 was Tk. 600,000 , and this profit accumulated evenly over the year.
C Ltd paid no dividends in the year ended 31 December 2012. C Ltd should be accounted for as an
associated company of A Ltd.
(3) A Ltd has calculated that the costs incurred in acquiring C Ltd were Tk. 200,000 and this sum
has been charged to the income statement of A Ltd. This comprises Tk. 120,000 allocated
overheads from the acquisitions department and Tk. 80,000 of directly attributable costs.
(4) The fair value of the land in B Ltd was Tk. 1 million in excess of carrying amount at the date
of acquisition.
(5) A Ltd has not recognized the dividend receivable from B Ltd in its draft balance sheet at 31
December 2012.
(6) At 1 October 2010 B Ltd had a contingent liability relating to a legal claim against the
company of Tk. 400,000, for which the fair value was estimated at Tk. 300,000. An out of court
settlement was agreed on 30 June 2012 and Tk. 300,000 was paid to settle the case.
(7) A Ltd has carried out annual impairment reviews on goodwill. On 31 December 2011 an
impairment loss of Tk. 100,000 was recognized on the goodwill relating to B Ltd but, there have
been no further impairment losses identified.
(8) B Ltd sold goods to A Ltd valued at Tk. 800,000 during the year ended 31 December 2012 and
a quarter of these goods have been re-sold by A Ltd. B Ltd calculated the transfer price of the
goods at cost plus a mark-up of 25%.
(9) A Ltd’s draft financial statements at 31 December 2012 included a note explaining a
contingent asset of Tk. 200,000. This sum was received on 31 January 2013. This should now
be accounted for as an adjusting event after the balance sheet date.
Required:
(a) Prepare the consolidated balance sheet for A Ltd at 31 December 2012, showing detailed
workings (Work to the nearest Tk. ‘000). 17
(b) Explain in what circumstances, if any, C Ltd could have been considered to be an
associated company of A Ltd if the shareholding had been 15%, rather than 30%. 8