FINANCIAL ACCOUNTING

Suggested Answers
Intermediate Examinations – Spring 2010

A.1 (a) Journal entries

(i) Finance Lease:
Debit Credit
Date Particulars
----- 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 (11,410,000÷3)(W-2) 3,803,333
(Booking of operating lease income)
31-Dec-2009 Depreciation expenses (15,000,000÷6) 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 the
entire economic life.
2. 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.

W-1 Finance lease:

Opening Income at Recovery of Closing

Year Installment
Balance 15% Principal 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%) 3,800,000
2011 (3,800,000 × 95%) 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
Present value of minimum lease payments 7,709,957
Less: current maturity (1,143,507)
6,566,450

Rupees
Gross investment in Net investment in
finance leases leases
2009 2009
Less than one year 2,000,000 1,143,507
One 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
One to five
than one Total
years
year
Future minimum lease payments (W-2) 3,800,000 3,610,000 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.

Associated Key Major

Parent
Under- Management Share-
Company
takings Personnel 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.
 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 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 4,585
Payment 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 activities
Issue 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)
 FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

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
B capital account 529
C capital account 264 1,850
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) 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:
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
 FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

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 Limited

Notes 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
 FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

(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 use Discount Net cash Present

factor at flows value
10% ----- 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 17.49
Decommissioning 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)