Advanced Financial Accounting-p Ii - Nov 08

Advanced Financial Accounting Time allowed – 3 hours Maximum marks – 100 N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All workings are to be submitted. 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. The timing of revenue recognition has long been an area of debate and inconsistency in accounting. Industry practice in relation to revenue recognition varies widely. The following are examples of different points in the operating cycle of businesses when revenue and profit can be recognized: • • • • • •

on acquisition of goods during the manufacture or production of goods on delivery/acceptance of goods on satisfaction of certain conditions after the goods have been delivered receipt of payment for credit sales on the expiry of a guarantee or warranty.

In the past the ‘critical event’ approach has been used to determine the timing of revenue recognition. The International Accounting Standards Board (IASB) in its “Framework for the Preparation and Presentation of Financial Statements” (Framework) has defined the ‘elements’ of financial statements, and it uses these to determine when a gain or loss occurs. Required: (a) Explain what is meant by the critical event in relation to revenue recognition and discuss the criteria used in the Framework for determining when a gain or loss arises. 3 (b) For each of the stages of the operating cycle identified above, explain why it may be an appropriate point to recognize revenue and, where possible, give a practical example of an industry where it occurs. 9 (c) FS Ltd. has entered into the following transactions/agreements in the year to 31 March 2008: (i) Goods, which had a cost of Tk.2,000,000 were sold to wholesaler for Tk.3,500,000 on 1 June 2007. FS Ltd. has option to repurchase the goods from wholesaler at any time within the next two years. The repurchase price will be Tk.3,500,000 plus interest charged at 12% p.a. from the date of sale to the date of repurchase. It is expected that FS Ltd. will repurchase the goods. (ii) FS Ltd. owns the rights to a fast food franchise. On 1 April 2007 it sold the right to open a new outlet to Mr. Chowdhury. The franchise is for five years. FS Ltd. received an initial fee of Tk.5,000,000 for the first year and will receive Tk.500,000 p.a. thereafter. FS Ltd. has continuing service obligations on its franchise for advertising and product development that amount to approximately Tk.800,000 p.a. per franchise outlet. A reasonable profit margin on the provision of the continuing services is deemed to be 20% of revenue received. (iii) On 1 September 2007 FS Ltd. received total subscriptions in advance of Tk.24,000,000. The subscriptions are for 24 monthly publications of a magazine produced by FS Ltd., At the year end FS Ltd. had produced and dispatched six of the 24 publications. The total cost of producing the magazine is estimated at Tk.19,200,000 with each publication costing a broadly similar amount. Please turn over

–2– Required: Describe how FS Ltd. should treat each of the above examples in its financial statements in the year to 31 March 2008. 8 2. Buildview specializes in construction contracts. One of its contracts, with Better Houses, is to build a complex of luxury flats. The price agreed for the contract is Tk.400 crore and its scheduled date of completion is 31 December 2008. Details of the contract to 31 March 2007 are: Commencement date Contract costs: Architects’ and surveyors’ fees Materials delivered to site Direct labour costs Overheads are apportioned at 40% of direct labour costs Estimated cost to complete (excluding depreciation – see below)

1 July 2006 Tk.’00,000 500 3,100 3,500 14,800

Plant and Machinery used exclusively on the contract cost Tk.36 crore on 1 July 2006. At the end of the contract it is expected to be transferred to a different contract at a value of Tk.6 crore. Depreciation is to be based on a time apportioned basis. Inventory of materials on site at 31 March 2007 is Tk.3 crore. Better Houses made a progress payment of Tk.128 crore to Buildview on 31 March 2007. At 31 March 2008 the detailed for the construction contract have been summarized as: Contract costs to date (i.e. since the start of the contract) excluding all depreciation Estimated cost to complete (excluding depreciation)

Tk’.00,000 20,400 6,600

A further progress payment of Tk.162 crore was received on 31 March 2002. Buildview accrues profit on its construction contracts using the percentage of completion basis as measured by the percentage of the cost to date compared to the total estimated contract cost: Required: (a) Prepare extracts of the financial statements of Buildview for the construction contract with Better Houses for: (i) the year to 31 March 2007 (ii) the year to 31 March 2008

8 7

(b) Buildview conducts its activities from two properties, a leased office in the city centre and a property in the countryside where staff training is conducted. Both the properties were acquired on 1 April 2005 and had estimated lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current values. However, until recently property prices had not changed for some years. On 1 October 2007 the properties were revalued by a firm of surveyors. Details of this and the original costs are:

Head office – cost 1 April 2005 – revalued 1 October 2007 Training premises – cost 1 April 2005 – revalued 1 October 2007

Land Tk.’00,000 500 700 300 350

Buildings Tk.’00,000 1,200 1,350 900 600

Please turn over

–3– The fall in the value of the training premises is due mainly to damage done by the use of heavy equipment during training. The surveyors have also reported that the expected life of the training property in its current use will only be a further 10 years from the date of valuation. The estimated life of the head office remained unaltered. Note:

Buildview treats its land and buildings as separate assets. Depreciation is based on the straight-line method from the date of purchase or subsequent revaluation.

Required: Prepare extracts of the financial statements of Buildview in respect of the above properties for the year to 31 March 2008. 8 3. (a) In what circumstances a parent need not present consolidated financial statements? 5 (b) Following are the summarized balance sheets of Groom Ltd. and Green Ltd. at 30 September 2008: Groom Ltd. Green Ltd. Share capital: 10% preference share of Tk.100 each 400,000 100,000 Ordinary share of Tk.100 each 1,000,000 800,000 General reserve Profit and loss account Creditors Fixed assets Investment in shares of subsidiary company Current assets

580,000 470,000 2,450,000 870,000 3,320,000

304,000 468,000 1,672,000 835,000 2,507,000

1,595,000 700,000 1,025,000 3,320,000

1,217,000 1,290,000 2,507,000

You are also given the following additional information: (i) On 1 October 2004, Groom Ltd. acquired 2,000 ordinary shares in Green Ltd. The account balances as relevant for the said investment were as follows: Paid by Groom Ltd. – cost of investment 200,000 Total equity of Green Ltd.: Share capital 800,000 General reserve 250,000 Profit and loss account (150,000) 900,000 (ii) On 30 September 2005, Groom Ltd. acquired another 4,000 ordinary shares in Green Ltd. The account balances as relevant for the said investment were as follows: Paid by Groom Ltd. – cost of investment 500,000 Total equity of Green Ltd.: Share capital 800,000 General reserve 200,000 Profit and loss account 135,000 1,135,000 (iii) Both companies proposed to pay dividends @10% on preference share capital and @15% on ordinary share capital in respect of the year ended 30 September 2008. The amounts of proposed dividends were included in the creditors. Required: Prepare the consolidated balance sheet of Groom Ltd. as at 30 September 2008.

15 Please turn over

–4– 4. (a) Define taxable temporary differences and deductible temporary differences with examples. (b) The following figures are related to Zahid Ltd.: Balance at 1 January 2007: - Deferred tax liability as at 1 January 2007 - Current tax payable as at 1 January 2007 - Property plant and equipment – written down value Land (cost Tk.10 million plus revaluation surplus 35 million, Building Motor vehicle (1 Mitsubishi Pajero)

Balance at 31 December 2007: Property plant and equipment – written down value: Land (cost Tk.10 million plus revaluation surplus 35 million) Building Motor Vehicle (1 Mitsubishi Pajero) Tax written down value: Land Building Motor vehicle (1 Mitsubishi Pajero)

Computer software-SAP: Accounting written down value Tax written down value

4

Taka 5,000,000 400,000 45,000,000 75,000,000 25,000,000 145,000,000 Taka 45,000,000 70,000,000 20,000,000 135,000,000 10,000,000 50,000,000 1,000,000 61,000,000

12,000,000 Nil

Inventories (cost Tk.15 million and net realizable value Tk.12 million): Accounting base/carrying value 12,000,000 Tax base value 15,000,000 Liability for gratuity: Accounting base/carrying value Tax base value Other figures during the year 2007 are: Profit before tax Accounting depreciation and amortization Tax depreciation and allowances Excess perquisites Unexplained expenditures Gratuity expense Gratuity paid to outgoing employees Accounting loss on sale of furniture Tax loss on sale of furniture

5,000,000 Nil 23,560,000 15,460,000 22,500,000 3,450,000 5,350,000 3,300,000 5,354,000 2,355,000 1,255,000

Required: (i) Calculate deferred tax liability/assets as at 31 December 2007. (ii) Calculate current tax expense for the year 2007. (iii) Pass necessary journal entries for recording deferred tax and current tax expenses for the year 2007.

6 6 4

Please turn over

–5– 5. (a) What is Proforma Account? Why is it prepared? Who maintains this account?

7

(c) You are given the following information: Taka in crore 191.0 54.1

Personal consumption expenditures Gross private domestic investment Fixed investment Change in business inventories Exports Imports Government purchases of goods and services Wages and salaries Supplements to wages and salaries Proprietors’ income Rental income of persons Corporate profits before tax Profits tax liability Profits after tax Dividends Undistributed profits Inventory valuation adjustment Net interest Capital consumption allowances Indirect business tax and non-tax liability Business transfer payments Statistical discrepancy Subsidies less current surplus of Govt. enterprises Government transfer payments Net interest paid by Govt. and consumers Required: Calculate the following: (i) GNP; (ii) NNP; (iii) GDP; (iv) NDP; (v) NI.

– The End –

47.3 6.8 13.8 12.0 37.9 146.8 7.8 37.5 9.4 42.6 17.8 24.8 8.8 16.0 5.0 2.0 18.3 23.3 0.8 1.5 0.2 14.3 7.2

10