College Of Accountancy and Professional Studies Mock Examination Autumn 2015 Attempt FINANCIAL ACCOUNTING AND REPORTING-II Question.1 Time Allowed: 3 hours Marks: 100 Torkham Limited is presently experiencing short term cash flow problems. The chief executive officer has approached you for advice on how to improve the present cash flow situation. The following amounts were extracted from the records of the company: 2009 2008 2007 Rupees in million Sales 400 360 300 Cost of sales 300 270 225 Average trade debtors 90 75 50 Average trade creditors 51 45 39 Average stocks in trade 92 78 56 Bank / (overdraft) (4) (2) 15 All sales are made on credit. a) Calculate the ratios that would be needed to analyse the working capital of the company. (Assume a 360 day year) b) Comment on the company s working capital management in the light of these ratios. (10) Question.2 The following information relates to Apricot Limited (AL), a listed company, for the financial year ended 31 December 2011: (i) The profit before tax for the year amounted to Rs. 60 million (2010: Rs. 45 million). (ii) The accounting and tax written down value of fixed assets as on 31 December 2010 was Rs. 95 million and Rs. 90 million respectively. Accounting depreciation for the year is Rs. 10 million (2010: Rs. 9 million) whereas tax depreciation for the year is Rs. 8 million (2010: Rs. 7 million). (iii) During the year, AL sold a machine for Rs. 3 million and recognized a profit of Rs. 0.5 million. The tax written down value of the machine as on 31 December 2010 was Rs. 2 million. There were no other additions/disposals of fixed assets in 2010 and 2011. (iv) AL earned capital gain of Rs. 6 million (2010:Nil) on sale of shares of a listed company. This income is exempt from tax. (v) Bad debt expenses recognized during the year was Rs. 5 million (2010: Rs. 7 million). (vi) Bad debts written off during the year amounted to Rs. 3 million (2010: Rs. 4 million). (vii) Deferred tax liability and provision for bad debts as on 31 December 2009 was Rs. 18.90 million and Rs. 9 million respectively. (viii) The company s assessed brought forward losses up to 31 December 2009 amounted to Rs. 19.25 million.
(ix) Applicable tax rate is 35%. Prepare a note on taxation for inclusion in AL s financial statements for the year ended 31 December 2011 giving appropriate disclosures relating to current and deferred tax expenses including comparative figures for 2010 and a reconciliation to explain the relationship between tax expense and accounting profit. (21 marks) Question.3 Quartz Auto Limited (QAL) is engaged in the business of manufacturing of trucks. Since a number of the prospective customers do not have adequate funds to purchase the vehicles against full payment, QAL provides lease financing facility to its customers. It expects to receive a return at the rate of 15% per annum on the amount of lease finance. On 1 July 2010, QAL sold seven trucks to Emerald Goods Transport Company (EGTC) on lease. The terms of the lease and related information is as follows: (i) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years. (ii) EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth year. However, the guarantee would lapse if the lease term is extended to the fifth year. EGTC will return the truck at the end of the lease term. (iii) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June. (iv) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck. (v) The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and Rs. 100,000 respectively. a) Assuming that QAL and EGTC intend to extend the lease for a period of five years, prepare: b) Journal entries to record the transactions for the year ended 30 June 2011. (08 marks) c) A note for inclusion in the financial statements, for the year ended 30 June 2011, in accordance with the requirements of IAS-17 Leases. (07 marks) Question.4 The following trial balance related to Yasir Industries Limited (YIL) for the year ended June 30, 2009: Debit Credit Rs. in million Ordinary share capital (Rs. 10 each) - 120.00 Retained earnings - 10.20 Sales - 472.40 Purchases 175.70 - Direct labour 61.00 Manufacturing overheads 39.00 Stock in trade (July 1, 2008) 38.90 -
Administrative expenses 40.00 - Selling and distribution expenses 19.80 - Financial charges 0.30 - Cash and bank - 13.25 Trade creditors - 30.40 Accrued expenses - 15.00 Dividend payable - 1.20 10% redeemable preference shares - 40.00 Debentures - 80.00 Deferred tax (July 1, 2008) - 6.00 Suspense account 30.00 - Leasehold property - at cost 230.00 - Machines - at cost 168.60 - Software - at cost 20.00 - Acc. depreciation - Leasehold property (June 30, 2009) - 40.25 Acc. depreciation - Machines (June 30, 2009) - 48.60 Acc. amortization - Software (June 30, 2009) - 12.00 Trade debtors 66.00-889.30 889.30 Following relevant information is available: (i) Sales include an amount of Rs. 27 million, made to a customer under sale or return agreement. The sale has been made at cost plus 20% and the expiry date for the return of these goods is July 31, 2009. (ii) The value of stock in trade at June 30, 2009 was Rs. 42 million. (iii) A fraud of Rs. 30 million was discovered in October 2008. A senior employee of the company who left in June 2008, had embezzled the funds from YIL s bank account. The chances of recovery are remote. The amount is presently appearing in the suspense account. (iv) On January 1, 2009 YIL issued debenture certificates which are payable in 10 equal semi-annual installments of Rs. 8.0 million plus mark up @ 12% per annum. The first installment will be due on December 31, 2009. (v) Financial charges comprise bank charges and bank commission. (vi) The provision for current taxation for the year ended June 30, 2009 after making all the above adjustments is estimated at Rs. 16.5 million. (vii) The carrying value of YIL s net assets as on June 30, 2009 exceeds their tax base by Rs. 30 million. The income tax rate applicable to the company is 30%. (viii) On July 28, 2009, the board of directors proposed final dividend @ 15% for the year ended June 30, 2009 (2008: @10%). (ix) On July 1, 2008, the leasehold property having a useful life of 40 years was revalued at Rs. 238 million. No adjustment in this regard has been made in the books. The company s accounting policy as regard leasehold property is summarized below: Depreciation is charged on straight line method.
50% of depreciation is allocated to manufacturing, 30% to administration and 20% to selling and distribution. Incremental deprecation on account of revaluation is chargeable to surplus on revaluation. In accordance with the requirements of the Companies Ordinance, 1984 and International Accounting Standards, prepare the: a) Statement of financial position as of June 30, 2009. b) Statement of comprehensive income for the year ended June 30, 2009. c) Statement of changes in equity for the year ended June 30, 2009. (26) (Comparative figures and notes to the financial statements are not required.) Question.5 You are one of the partners at the audit firm Manna & Co. and a number of situations have arisen amongst your clients. Manna & Co is a small firm with two partners. For each scenario below, explain the ethical threats in each case: Your brother has been just appointed finance director at your client Jaggu Ltd. The finance director of Pappu Ltd. has broken his leg playing gulli danda and will be unable to work for six weeks. The financial year-end is next week and the managing director has asked if the audit team manager will help to prepare the corporate tax calculations. The audit junior has just informed you that his close friend has just accepted a role at Kaka Ltd., A client of Manna Ltd. the audit junior is member of this audit team and his friend has just joined the marketing department as an assistant. Question.6 On 1 April 2008, P.ltd acquired 60% of the equity share capital of S. ltd in ashare exchange of two shares in P ltd for three shares in S ltd. the issue of shares has not yet been recorded by P. ltd. At the date of acquisition shares in P ltd. had market value of Rs. 6 each. Below are the summarized draft financial statements of both companies. STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2008 P. LTD S. LTD Rs.,000 Rs.,000 Revenue 85,000 42000 Cost of sales (63,000) (32000) Gross profit 22,000 10000 Distribution expenses (2000) (2000) (9)
Admin. Exp (6000) (3200) Finance cost (300) (400) Profit before tax 13700 4400 Tax 4700 (1400) Profit after tax 9000 3000 STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2008 P. LTD S. LTD ASSETS Rs.,000 Rs.,000 Non current assets: Property, plant & equipments 40600 12600 Current assets 16000 6600 Total assets 56600 19200 Equity and liabilities: Equity shares of Rs. 1 each 10000 4000 Retained earnings 35400 6500 45600 10500 Non current liabilities 10% loan 3000 4000 Current liabilities 8200 4700 Total equity and liabilities 56600 19200 The following information is relevant: 1. At the date of acquisition, the fair values of S. ltd s assets were equal to their carrying amounts with the exception of an item of plant, which had a fair value of Rs. 2 million in excess of carrying amount. It had a remaining life of 5 years at that date. S Ltd has not adjusted the carrying amount of it s plant. 2. Sales of S Ltd to P Ltd in the post acquisition period were 8 million. S. Ltd made a mark up of 40 %. P had sold Rs. 5.2million (at cost to P ) of these goods by 30 September 2008. 3. P had policy of accounting for NCI at full fair value. The fair value of the NCI is Rs. 5.9 million. Consolidated goodwill was not impaired. Prepared consolidated financial statements as at 30 September 2008. (19)