FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
A.1 (a) Journal entries
(i) Finance Lease:
Date
Particulars
1-Jan-2009
1-Jan-2009
31-Dec-2009
Finance lease debtors
Unearned finance lease income
Sale
(Record sale of vehicles on finance lease)
Bank
Finance lease debtors
(Installment received under finance lease)
Unearned finance lease income
Finance lease income
(Interest income earned at 15%)
(ii) Operating lease:
1-Jan-2009 Bank
Unearned rental income
(Operating lease installment received in advance)
31-Dec-2009 Unearned rental income
Rental income (11,410,000÷3)(W-2)
(Booking of operating lease income)
31-Dec-2009 Depreciation expenses (15,000,000÷6)
Accumulated depreciation on machine.
(Yearly depreciation on machine)
Debit
Credit
----- Rupees ----12,000,000
3,295,690
8,704,310
2,000,000
2,000,000
1,005,647
1,005,647
4,000,000
4,000,000
3,803,333
3,803,333
2,500,000
2,500,000
Reason for choice of leases:
1.
2.
W-1
Lease A should be accounted for as a finance lease because the lease term covers the
entire economic life.
Since none of the conditions specified in IAS-17 (Leases) for classification as a finance
lease is being met, Lease B shall be considered as an operating lease.
Finance lease:
Opening
Balance
Year
2009
2010
2011
2012
2013
2014
(A)
8,704,310
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000
(B)
(A)+(B)
W-2
Income at
Recovery of
15%
Principal
------------------ Rs. -----------------2,000,000
1,005,647
994,354
2,000,000
856,493
1,143,507
2,000,000
684,967
1,315,033
2,000,000
487,713
1,512,287
2,000,000
260,870
1,739,130
2,000,000
0
2,000,000
8,000,000
1,433,550
6,566,450
10,000,000
2,290,043
7,709,957
Installment
Closing
balance
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000
0
Operating lease:
Annual installment
2009
2010
2011
(4,000,000 × 95%)
(3,800,000 × 95%)
Rupees
4,000,000
3,800,000
3,610,000
11,410,000
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
(b) Neptune Limited
Notes to the Financial Statements
For the year ended December 31, 2009
(i)
Investment in finance lease
2009
Rupees
7,709,957
(1,143,507)
6,566,450
Present value of minimum lease payments
Less: current maturity
Less than one year
One to five years
Less: unearned finance income
Net investment in leases
Gross investment in
finance leases
2009
2,000,000
8,000,000
10,000,000
(2,290,043)
7,709,957
Rupees
Net investment in
leases
2009
1,143,507
6,566,450
7,709,957
The minimum lease payment has been discounted on interest rate of 15% per annum to
arrive at their present value. Rentals are paid in annual installments.
(ii)
Operating lease
Rupees
Future minimum lease payments (W-2)
Not later
than one
year
3,800,000
One to five
years
3,610,000
Total
7,410,000
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
A.2 Golden Limited
Notes 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 at
commercial rates except stated otherwise.
Parent
Company
Key
Associated
Under- Management
Personnel
takings
Major
Shareholders
-------- Rupees in '000 -------Transactions:
Sales
Sales discount
Sale of property
Reimbursement of expenses on sale of property
Interest free loans granted
Short term borrowings acquired
Interest on short term borrowings
Balances:
Accounts receivable
Loans to staff
Loans payable
Interest payable on the loan at 12%
20.1
20.2
20.3
20.4
18,000
1,500
10,000
500
2,000
25,000
1,500
6,500
5,000
1,800
25,000
1,500
Sales to related parties have been made at 20% mark up as against GL's policy to sell at a
markup of 30%.
Administrative services are provided by the parent company free of cost as per the agreement.
Market value of these services is Rs. 350,000.
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 SL
The interest free loan has been granted to the executive director as per the terms of
employment.
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
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
Adjustment for: (non cash items / separately disclosed items)
Depreciation for the year (7,000-90-1,000)
Amortization for the year (1140+50-1100)
Provision for staff gratuity (1,400+300-1,190)
Profit on sale of fixed assets (2,800-1,000)
Mark-up on short term placement
Operating profit before working capital changes
Increase in working capital (12,125 – 15,700 + 4,200 – 6,250)
Cash generated from operations
Payment for staff gratuity
Payment for taxation (950 + 4,660 – 800)
Cash used in investing activities
Capital expenditure incurred
Proceeds from sale of PPE (1,200 + 1,800)
Acquisition of intangible assets
Mark-up received on short term placement
Long term deposits (400-300)
Cash used in financing activities
Issue of ordinary share capital (25,000-2,000-20,000)
Net decrease in cash and cash equivalents
Opening balance: cash and cash equivalents
Closing balance: cash and cash equivalents
Note 1
Capital expenditure incurred:
Opening book value for PPE
Opening book value for CWIP
Book value of assets sold during the year
Depreciation for the year (7,000-90-1,000)
Revaluation reserve adjustment
Closing book value for PPE
Closing book value for CWIP
6,500
5,910
90
510
(1,800)
(1,000)
10,210
(5,625)
4,585
(300)
(4,810)
(525)
Note 1
(13,110)
3,000
(50)
1,000
(100)
(9,260)
3,000
(6,785)
7,225
440
Rs. in ‘000
25,500
10,000
(1,200)
(5,910)
(1,000)
(35,000)
(5,500)
(13,110)
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
A.4
Land and building
Machineries and equipment
Vehicles
Stocks
Trade debts
C capital account (Trade payables)
Cash & bank Realization gain:
A capital account
B capital account
C capital account
Realization Account
Rupees in ‘000
Long term loan
300
1,800 Trade payables
1,400
1,400 Other liabilities
450
650 Sales proceed (AIM Industries)
6,100
900 A capital account (vehicle)
900
2,000
250
300
1,057
529
264
1,850
9,150
(a) Partners’ capital accounts
Balance - December 31, 2009
Vehicle taken over by A
Trade payable settled by C
Realization gain in P&L sharing ratio (4:2:1)
Shares distribution in P&L sharing ratio (6,100-1,900)
Balance settled in cash (350+1,900-300)
9,150
A
B
C
--- Rupees in ‘000 --2,400
1,700
850
(900)
250
1,057
529
264
2,557
2,229
1,364
(2,400) (1,200)
(600)
(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:
Land and building
Machinery and equipment
Stock in trade (at lower of cost and NRV)
Trade receivable (2,000,000 × 90%)
Trade payable (88,000 share @ Rs.12)
Other liabilities
Value of net assets
Purchase consideration
Goodwill to be recorded by the company
Rs. in ‘000
3,000
1,100
700
1,800
(1,056)
(450)
5,094
6,100
1,006
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
Share capital
Share capital (including premium) issued as purchase consideration (6,100-1,900)
Share capital (including premium) issued to creditors (88,000 ×12)
Less: share premium (5,256 ×2/12)
A.5 (a) Computation of current taxation
Profit before tax
Add: Accounting depreciation
Financial charges on lease liability (1.00 – 0.3) × 13.701%
Amortization of research and development cost for the year
Less: Tax depreciation
Annual installment of lease payment
Amortization of research and development cost (15 × 0.9/10)
Current year taxable income
Rs. in ‘000
4,200
1,056
5,256
876
4,380
Rs. in million
50.000
10.000
0.096
1.000
(7.000)
(0.300)
(1.350)
52.446
Tax liability for the year (52.446 × 35%)
Tax liability for prior periods (0.100 × 35%)
18.356
0.035
18.391
Deferred taxation
Accounting depreciation
Tax depreciation
10.000
(7.000)
3.000
Financial charges on finance lease liability(1.00 – 0.3) × 13.701%
Annual installment of lease payment allowed under tax
0.096
(0.300)
(0.204)
Amortization charged in accounts
Amortization cost claimed in tax
Excess of taxable income over accounting profit due to time differences
Deferred tax credit at 35%
1.000
(1.350)
Total tax expenses (current and deferred)
(0.350)
2.446
(0.856)
17.535
(b) Bilal Engineering Limited
Notes to the Financial Statements
for the year ended December 31, 2009
1.1
Relationship between tax expense and accounting profit
Accounting profit before tax
Tax on accounting profit at 35%
Tax on expenses disallowed (Permanent Difference)
Effective tax rate/tax charge
2009
Rs. in million
50.000
17.500
0.035
17.535
FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010
(c) Journal entries
1
2
Debit
Credit
----- Rs. in million ----18.391
18.391
Income tax expenses
Provision for taxation
(Tax provision for 2009)
Deferred tax asset
Tax expenses – deferred
(Deferred tax credit for 2009)
0.856
0.856
A.6
Rs. in
million
Carrying value of plant as on 31-12-2009:
Cost (27+3)
Depreciation for the year 2008 (30/8)
WDV as of December 31, 2008
Depreciation for the year 2009 based on revised estimated life [26.25/(7+2 years)]
Net realizable value (NRV) on 31-12-2009:
Selling price
Plant decommissioning cost
Value in use
15.00
(0.20)
14.80
Discount
factor at
10%
0.9091
0.8264
0.7513
0.683
0.6209
0.5645
0.5645
0.5132
0.4665
Year 2010
Year 2011
Year 2012
Year 2013
Year 2014
Year 2015
Year 2015- Overhauling cost
Year 2016
Year 2017
Decommissioning cost at the end of 2017
1.0000
Impairment (excess of carrying value over recoverable amount)
Carrying value
Recoverable amount (Higher of NRV and value in use)
Impairment loss
(THE END)
30.00
(3.75)
26.25
(2.92)
23.33
Net cash
Present
flows
value
----- Rs. in million ----5.00
4.55
4.00
3.31
3.50
2.63
3.20
2.19
3.00
1.86
2.50
1.41
(1.00)
(0.56)
2.30
1.18
2.00
0.93
24.50
17.49
(0.20)
(0.20)
24.30
17.29
23.33
(17.29)
6.04