c6-spring 2010

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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 3,295,690

Sale 8,704,310

(Record sale of vehicles on finance lease)

1-Jan-2009 Bank 2,000,000

Finance 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 4,000,000

Unearned rental income 4,000,000

(Operating lease installment received in advance)

31-Dec-2009 Unearned rental income 3,803,333

Rental income (11,410,0003)(W-2) 3,803,333

(Booking of operating lease income)

31-Dec-2009 Depreciation expenses (15,000,0006) 2,500,000

Accumulated 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 LimitedNotes to the Financial Statements

For the year ended December 31, 2009

(i) Investment in finance lease2009

RupeesPresent value of minimum lease payments 7,709,957

Less: 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 to

arrive 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 Limited

Notes to the Financial Statements


Platinum Limited is the parent company which holds majority shares of the company.

20. Related party transactionsThe transaction with related parties are carried out in the ordinary course of business at

commercial 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 a

markup 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 SL

20.4 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


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 activitiesIssue 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) LimitedStatement 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 companyAssets 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

Goodwill to be recorded by the company 1,006

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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 Statements

for 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. in

million

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 useDiscountfactor 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 23.33

Recoverable amount (Higher of NRV and value in use) (17.29)

Impairment loss 6.04

(THE END)

c6-spring 2010

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