FINANCIAL ACCOUNTING. Time allowed 3 hours Total marks 100

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1 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) Explain what is meant by elements of financial statements and the principles of recognition of those elements. 5 (b) ITC Solutions Ltd (ITC) is a company assembling and selling computers. You are the financial accountant of the company and you have prepared draft annual financial statements for the year ended 30 September 2017, for approval of the board. The CEO has challenged the figure for revenue as it is less than the figure he was expecting, based on his personal records. He asked you to provide an analysis of revenue from each client, which he compared to his own figures, and he has found three apparent discrepancies. These apparent discrepancies relate to the following transactions: (i) ITC entered into a fixed price contract for Tk.120,000 with Arial Ltd to build a computer. Work had been begun on this project; the costs incurred to date were Tk.60,000 and it was estimated to be two-thirds of works completed. However, the engineers have just discovered an incompatibility between two key components and the work on the computer to date will need major revisions. It is difficult to estimate the costs of completing the work because of the complexity of the new hardware. It is considered that Tk.50,000 of the costs incurred to date is recoverable from Arial Ltd. (ii) ITC acts as an agent for ProMarket Ltd, a marketing company. The arrangement is that ITC offers to its clients the services of ProMarket Ltd. If an ITC client uses ProMarket Ltd then the gross fee is paid to ITC, who then remits the fee, less l5% commission, to ProMarket Ltd. In the year ended 30 September 2017 ITC received gross fees of Tk.300,000 for marketing services provided by ProMarket Ltd. (iii) ITC is the exclusive retailer of computers manufactured by LapTop Ltd. LapTop Ltd have announced that its latest model, which has a very high specification, is now ready for sale and will be released to the market in mid-december ITC will buy the computers for Tk.60,000 and sell them for Tk.100,000. In the short term, demand for the computer will exceed supply and 500 customers of ITC have each paid a deposit of Tk. 15,000 in September 2017 to secure a computer. The CEO cannot understand your figures and he considers that the total revenue from these three Projects is: Taka (1) 120,000 (2) 300,000 (3) (500 x Tk. l5,000) 7,500,000 7,920,000 Explain the appropriate accounting treatment and show how you have calculated revenue in the financial statements for the year ended 30 September (a) The objective of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations specifies, amongst other things, accounting for and presentation and disclosure of discontinued operations. Define a discontinued operation and explain why the disclosure of such information is important to users of financial statements. 5 Page 1 of 5

2 (b) Rex s sole activity is the operation of hotels all over the world. After a period of declining profitability, Rex s directors made the following decisions during the year ended 30 June 2017: it disposed of all of its hotels in country A; it refurbished all of its hotels in country B in order to target the holiday and tourism market. The previous target market in country B had been aimed at business clients. Treating the two decisions separately, explain whether they meet the criteria for being classified as discontinued operations in the financial statements for the year ended 30 June (c) At a board meeting on 1 July 2016, Salta Group s directors made the decision to close down one of its factories on 31 March The factory and its related plant would then be sold. A formal plan was formulated and the factory s 250 employees were given three months notice of redundancy on 1 January Customers and suppliers were also informed of the closure at this date. The directors of Salta Group have provided the following information: Fifty of the employees would be retrained and deployed to other subsidiaries within the group at a cost of Tk.1,250,000; the remainder will accept redundancy and be paid an average of Tk.50,000 each. Factory plant has a carrying amount of Tk.2.2 billion, but is only expected to sell for Tk.500 million incurring Tk.50 million of selling costs; however, the factory itself is expected to sell for a profit of Tk.1.2 billion. The company rents several machines under operating leases which have an average of three years to run after 31 March The present value of these future lease payments (rentals) at 31 March 2017 was Tk.1 billion; however, the lessor has said they will accept Tk.850 million which would be due for payment on 30 April 2017 for their cancellation as at 31 March Penalty payments due to non-completion of supply contracts are estimated at Tk.200 million. Explain and quantify how the closure of the factory should be treated in Salta Group s financial statements for the year ended 31 March Note: The closure of the factory does not meet the criteria of a discontinued operation Leisure Bangladesh Limited is an internationally acclaimed real estate developer company based in Dhaka, Bangladesh. It is involved in construction of residential lands and housing in exclusive areas, catering to the premium segment of Dhaka. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract. One of Leisure Bangladesh Limited s contracts has an agreed price of Tk.250 billion and estimated total costs of Tk.200 billion. The cumulative progress of this contract is: Year ended: 30 September September 2017 Costs incurred Work certified and billed Billings received Based on the above, Leisure Bangladesh Limited prepared and published its financial statements for the year ended 30 September Relevant extracts are: Income statement Revenue (balance) 100 Cost of sales (80) Profit (50 x 80/200) 20 Page 2 of 5

3 Statement of financial position Current assets Amounts due from customers Contract costs to date 80 Profit recognised Progress billings (75) 25 Contract receivables (75 70) 5 Leisure Bangladesh Limited has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of Leisure Bangladesh Limited s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price. (a) Assuming Leisure Bangladesh Limited changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts to the above for the year ended 30 September 2017; 8 (b) Explain why the above represents a change in accounting estimate rather than a change in accounting policy The following trial balance relates to ABC Limited as at 30 June 2017: Tk. 000 Tk. 000 Revenue (note (i)) 213,500 Cost of sales 136,800 Distribution costs 12,500 Administrative expenses (note (ii)) 19,000 Loan note interest and dividend paid (notes (ii) and (iii)) 20,700 Investment income 400 Equity shares of 25 paisa each 60,000 6% loan note (note (ii)) 25,000 Retained earnings at 1 July ,500 Land and buildings at cost (land element Tk.10 million) (note (iv)) 50,000 Plant and equipment at cost (note (iv)) 83,700 Accumulated depreciation at 1 July 2016: buildings 8,000 plant and equipment 33,700 Equity financial asset investments (note (v)) 17,000 Inventory at 30 June ,800 Trade receivables 28,500 Bank 2,900 Current tax (note (vi)) 1,100 Deferred tax (note (vi)) 1,200 Trade payables 36, , ,000 The following notes are relevant: (i) On 1 July 2016, ABC Limited sold one of its products for Tk.10 million (included in revenue in the trial balance). As part of the sale agreement, ABC Limited is committed to the ongoing servicing of this product until 30 June 2019 (i.e. three years from the date of sale). The value of this service has been included in the selling price of Tk.10 million. The estimated cost to ABC Limited of the servicing is Tk.600,000 per annum and ABC Limited s normal gross profit margin on this type of servicing is 25%. Ignore discounting. Page 3 of 5

4 (ii) ABC Limited issued a Tk.25 million 6% loan note on 1 July Issue costs were Tk.1 million and these have been charged to administrative expenses. The loan will be redeemed on 30 June 2019 at a premium which gives an effective interest rate on the loan of 8%. (iii) ABC Limited paid an equity dividend of 8 paisa per share during the year ended 30 June (iv) Non-current assets: ABC Limited had been carrying land and buildings at depreciated cost, but due to a recent rise in property prices, it decided to revalue its property on 1 July 2016 to market value. An independent valuer confirmed the value of the property at Tk.60 million (land element Tk.12 million) as at that date and the directors accepted this valuation. The property had a remaining life of 16 years at the date of its revaluation. ABC Limited will make a transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation reserve. Ignore deferred tax on the revaluation. Plant and equipment is depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged on any non-current asset for the year ended 30 June All depreciation is charged to cost of sales. (v) The investments had a fair value of Tk.15 7 million as at 30 June There were no acquisitions or disposals of these investments during the year ended 30 June (vi) The balance on current tax represents the under/over provision of the tax liability for the year ended 30 June A provision for income tax for the year ended 30 June 2017 of Tk.7 4 million is required. At 30 June 2017, ABC Limited had taxable temporary differences of Tk.5 million, requiring a provision for deferred tax. Any deferred tax adjustment should be reported in the income statement. The income tax rate of ABC Limited is 20%. (a) Prepare the statement of comprehensive income for ABC Limited for the year ended 30 June (b) Prepare the statement of changes in equity for ABC Limited for the year ended 30 June (c) Prepare the statement of financial position for ABC Limited as at 30 June Notes to the financial statements are not required. 5. NHN Ltd holds 72% of the ordinary share capital of Kia Ltd (acquired on 1 March 2017) and 60% of the ordinary share capital of Kiran Ltd (acquired on 1 October 2015). NHN Ltd paid Tk. 2 million and Tk. 3 million respectively for these investments. Retained earnings of Kiran Ltd on acquisition were Tk.450,000. NHN Ltd has no other investments and none of the companies has any preference share capital. Kia Ltd has share capital of Tk. 1 million and Kiran Ltd of Tk. l.5 million. The income statements for the year ended 30 September 2017 are set out below. NHN Ltd Kia Ltd Kiran Ltd Revenue 151,360 32,400 95,040 Cost of sales and expenses (after crediting dividends received from Kia Ltd and Kiran Ltd) (134,904) (28,750) (83,750) Profit from operations 16,456 3,650 11,290 Income tax expense (5,436) (1,250) (3,820) Profit for the period 11,020 2,400 7,470 The following additional information is relevant. 1) The three companies paid interim dividends of Tk.2,820,000, Tk.336,000 and Tk.2,460,000 respectively on 1 May Retained earnings at 1 October 2016 were as follows. Tk. 000 NHN Ltd 11,820 Kia Ltd 5,430 Kiran Ltd 8,210 Page 4 of 5

5 2) On 30 June 2017 NHN Ltd sold half of its shares in Kiran Ltd for Tk. 5 million but retained significant influence over that company. No impairments in the value of the investment have ever been identified. NHN Ltd has credited the sales proceeds to a suspense account. 3) Included in the inventories of Kia Ltd at 30 September 2017 was Tk.240,000 for goods purchased in June 2017 from NHN Ltd, which the latter company had invoiced at a 20% gross profit margin. These were the only goods sold by NHN Ltd to Kia Ltd. During the year, prior to the sale of shares in Kiran Ltd, NHN Ltd made sales of Tk.345,000 to Kiran Ltd, none of which were included in inventory at the year end. (a) Prepare a consolidated income statement of NHN Ltd for the year ended 30 September (b) Extracts from the statement of changes in equity for NHN Ltd (retained earnings and noncontrolling interests columns only) for the year ended 30 September Assume that the partial disposal of Kiran Ltd does not constitute a discontinued operation in accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (Note: Work to the nearest Tk. '000.) 8 (c) Explain your accounting treatment of the following items in the consolidated income statement of NHN Ltd, referring to the principles underlying the preparation of group accounts. (i) Consolidation of Kia Ltd (ii) Dividends received by NHN Ltd (iii) Intra-group trading (iv) Unrealised profits in inventories 6 Page 5 of 5

Paper F7. Financial Reporting. Specimen Exam applicable from September Fundamentals Level Skills Module

Paper F7. Financial Reporting. Specimen Exam applicable from September Fundamentals Level Skills Module Fundamentals Level Skills Module Financial Reporting Specimen Exam applicable from September 2016 Time allowed: 3 hours 15 minutes This question paper is divided into three sections: Section A ALL 15 questions