Accounting Financial

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FINANCIAL ACCOUNTING
Time allowed – 3 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. 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. (a) The principle of recording `the substance or economic reality of transactions rather than their
legal form’ lies at the heart of the Framework for the Preparation and Presentation of the
Financial Statements and several International Accounting Standards. The development of this
principle was partly in reaction to a minority of public interest companies entering into certain
complex transactions. These transactions sometimes led to accusation that company directors
were involved in ‘creative accounting’.
Requirements:
i) Explain with relevant examples, what is generally meant by the term ‘creative accounting’. 4
ii) Explain why it is important to record the substance rather than the legal form of
transactions and describe the features that may indicate that the substance of a transaction is
different from its legal form. 3
iii) Indicate why, for decision-making purposes, the financial statements alone are insufficient. 3
(b) At 31 December 2015 the carrying amount of a freehold property in the Nahiyan Company’s
financial statements was Tk.436,000, of which Tk.366,000 was attributable to the building
which had a remaining useful life of 36 years.
On 1 January 2016 Nahiyan sold the property to a financial institution for Tk.697,000 and
immediately leased it back under a 35-year lease at an annual rental of Tk.43,600 payable in
advance.
Other information available is as follows:
Land Building
Fair value of a 35-year interest Tk.90,000 Tk.607,000
The interest rate implicit in the lease is 6% per annum and the present value factor for a
constant amount annually in advance over 35 years is 15.368.
Requirements:
Determine the following amounts for inclusion in Nahiyan’s financial statements for the year
ended 31 December 2016 in accordance with BAS 17 Leases.
i) The profit on sale recognized in the year. 4
ii) Excluding any profit on sale, the total effect on profit or loss for the year of the building
element of the lease. 4
iii) The total liability to the financial institution at 31 December 2016. 2
2. Navana Ltd has the following non-current assets at 1 January 2015:
You are given the following information for the year ended 31 December 2015:
 The factory was acquired on 1 January 2010 and is being depreciated over 50 years.
 Depreciation is provided on cost on a straight line basis. The rates used are 20% for fixtures and
fittings, 25% for cars and 10% for equipment.
Cost Accumulated
depreciation
Carrying
amount
Tk'000 Tk'000 Tk'000
Freehold factory 1,440 144 1,296
Plant and equipment 1,968 257 1,711
Motor vehicles 449 194 255
Office equipment and fixtures 888 583 305
4,745 1,178 3,567

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 On 1 January 2015 the factory was revalued to an open market value of Tk.2.2 million and
extension costing Tk.500,000 became available for use.
 The directors decided to change the method of depreciation of motor vehicle to 30% reducing
balance to give a more relevant presentation of the results and of the financial position.
 Two cars costing TK 17,500 each were bought on 1 January 2015. Plant and fittings for the
factory extension cost Tk.75,000 and Tk.22,000 respectively.
 When reviewing the expected lives of its non-current assets, the directors felt that it was
necessary to reduce the remaining life of a two year old grinding machine to four years when it
is expected to be sold for Tk.8,000 as scrap. The machine originally cost Tk.298,000 and at 1
January 2015 had related accumulated depreciation of Tk.58,000.
Requirements:
a) Prepare the disclosure notes for property, plant and equipment for the year ended 31 December
2015 as required by the IFRS. 8
b) Briefly explain the qualitative characteristics of financial information contained in the IASB
Framework illustrating your answer with references to the provisions of IAS 16 Property, Plant
and Equipment. 7
3. You have been asked to advise on the appropriate accounting treatment for the following situations
arising in the books of your company. The year end in of the Company is 31 December 2015 and
you should assume that the amounts involved are material in each case.
(i) At the year-end there was a debit balance in the books for Tk.15,000, representing an estimate
of the amount receivable from an insurance company for an accident claim. In February 2016,
before the directors had agreed the final draft of the published accounts, correspondence with
lawyers indicated that Tk.18,600 might be payable on certain conditions.
(ii) The company has an item of equipment which cost Tk.400,000 in 2012 and was expected to last
for ten years. At the beginning of the financial year 2015 the book value was Tk.280,000. It is
now thought that the company will soon cease to make the product for which the equipment
was specially purchased. Its recoverable amount is only Tk.80,000 at 31 December 2015.
(iii) On 30 November the company entered into a legal action defending a claim for supplying
faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim
will succeed. The amount of the claim is Tk.500,000.
(iv) An item has been produced at a manufacturing cost of Tk.1,800 against a customer’s order at
an agreed price of Tk.2,300. The item was in inventory at the year-end awaiting delivery
instructions. In January 2016 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately Tk.300,
which is expected to make it marketable with other customers at a price of about Tk.1,900.
(v) At 31 December a company has total potential liability of Tk.1,000,400 for warranty work on
contracts. Past experience shows that 10% of these costs is likely to be incurred, that 30% may
be incurred but that the remaining 60% is highly unlikely to be incurred.
Requirement:
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the books
and/or the year-end financial statements as appropriate. 20
4. Hussein Ltd is a company which makes exclusive furniture to customers' precise specifications. An
extract from Hussein Ltd's general ledger at 31 December 2015 is as follows.
Taka Taka
Raw materials and consumables 1,570,000 -
Salaries and wages 1,250,500 -
Work in progress inventories at 1 January 2015 45,600 -
Finished goods inventories at 1 January 2015 13,400 -
Land and buildings at cost (cost of land Tk.2,000,000) 3,600,000 -
Plant and machinery at cost 520,000 -
Office furniture at cost 32,000 -
Accumulated depreciation on buildings at 1 January 2015 - 640,000
Accumulated depreciation on plant and machinery at 1 January 2015 - 375,000

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Accumulated depreciation on furniture at 1 January 2015 - 28,500
Intangible assets 15,000 -
Operating expenses 10,000 -
Accounts and other receivables 37,500 -
Accounts and other payables - 25,400
Retained earnings at 1 January 2015 - 1,968,600
Ordinary share capital of Tk.10 each - 500,000
4% Redeemable preference share capital of Tk.10 each - 120,000
Share premium account - 200,000
Cash and cash equivalents 263,500 -
Revenue - 3,500,000
7,357,500 7,357,500
The following additional information is relevant:
(a) Closing inventories at cost amounted to work in progress of Tk.50,200 and finished goods of
Tk.15,000. The finished goods included a table with a cost of Tk.5,000. The customer who had
ordered this table has been declared bankrupt. He had paid a Tk.1,000 deposit (which has been
credited to revenue) and owed Tk.10,000 at the yearend in respect of other items. It is estimated
that the table can be sold for Tk.4,000.
(b) The old furniture were all scrapped. During the year the company used employees' idle time which
amounted to a cost to the company of Tk.20,500 to produce new furniture for the company's offices.
Raw materials costing Tk.54,000 were used. No adjustment has been made for these in the above.
(c) Land and buildings were revalued for the first time on 1 January 2015. The Surveyor performing the
valuation estimated a valuation of Tk.5 million (including Tk.4 million for the land). Buildings will
be continued to be depreciated on a straight line basis at a rate of 4%; but Hussein Ltd made no
transfer between the revaluation reserve and retained earnings in respect of this.
(d) Plant is depreciated at a reducing balance basis at a rate of 20%. Office furniture is depreciated
on a 15% straight line basis. Depreciation on the building and the plant should be charged to
cost of sales.
(e) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January
2015. This patent is considered to have a useful life of 20 years. The annual impairment review
has indicated that the patent has a recoverable value at 31 December 2015 of Tk.14,000.
(f) On 1 December 2015 the company made a 1 for 5 bonus issues of its ordinary shares against
the share premium account. No entries have been made in respect of this.
(g) The preference shares are redeemable in 2017. Dividends of Tk.1 per share on the ordinary
shares and at the coupon rate on the preference shares were declared on 31 December 2015 and
paid early in 2016. The income tax charge for the period has been estimated at Tk.250,000.
Requirements:
i) Prepare an income statement for Hussein Ltd for the year ended 31 December 2015. 10
ii) Prepare a balance sheet as at that date in a form suitable for publication. 10
5. H Ltd is a small publicly listed company. On 1 April 2015 it acquired 90% of the equity shares in S
Ltd, a private limited company. On the same day H Ltd accepted a 10% loan note from S Ltd for
TK 200,000 which was repayable at Tk.40,000 per annum (on 31 March each year) over the next
five years. S Ltd’s retained profits at the date of acquisition were Tk.2,200,000.

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The following information is relevant:
(i) Included in S Ltd’s property at the date of acquisition was a leasehold property recorded at its
depreciated historic cost of TK 400,000. The leasehold had been sublet for its remaining life of
only four years at an annual rental of TK 80,000 payable in advance on 1 April each year. The
directors of H Ltd are of the opinion that the fair value of this leasehold is best reflected by the
PV of its future cash flows. An appropriate cost of capital for the group is 10% per annum.
The PV of Tk. 1 annuity received at the end of each year where interest rates are 10% can be
taken as:
3 year annuity Tk.2.50
4 year annuity Tk.3.20
(ii) The software of S Ltd represents the depreciated cost of the development of an integrated
business accounting package. It was completed at a capitalized cost of Tk.2,400,000 and went
on sale on 1 April 2014. S Ltd’s directors are depreciating the software on a straight line basis
over an eight year life (i.e. Tk.300,000 per annum). However, the directors of H Ltd are of the
H Ltd S Ltd
Tk '000 Tk '000
Non Current Assets
Property plant and equipment 2,120 1,990
Intangible - Software - 1,800
Investment -
equity in S Ltd 4,110 -
10% loan note 200 -
others 65 210
Current assets
Inventories 719 560
Trade receivables 524 328
S Ltd current account 75 -
Cash 20 1,338 - 888
Total 7,833 4,888
Equity and liabilities
Capital and reserves
Equity shares of Tk1 each 2,000 1,500
Share premium 2,000 500
Retained earnings 2,900 6,900 1,955 3,955
Non-current liabilities
10% Loan note from H Ltd - 160
Government grant 230 230 40 200
Current liabilities
Trade payables 475 472
H Ltd current account - 60
Income tax payable 228 174
Operating overdraft - 703 27 733
Total equity and liabilities 7,833 4,888
Balance Sheet as at 31 March 2016

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opinion that a five year life would be more appropriate as sales of business software rarely
exceed this period.
(iii)The inventory of H Ltd on 31 March 2016 contains goods at a transfer price of Tk.25,000 that
were supplied by S Ltd who had marked them up with a profit of 25% on cost. Unrealized
profits are adjusted for against the profit of the company that made them.
(iv) On 31 March 2016 S Ltd remitted to H Ltd a cash payment of Tk.55,000. This was not received
by H Ltd until early April. It was made up of an annual repayment of the 10% loan note of Tk.
40,000 and Tk.15,000 of the current account balance.
(v) Goodwill has fallen in value by Tk.120,000 since the acquisition occurred.
Requirement:
Prepare the consolidated balance sheet of H Ltd as at 31 March 2016. 25