Financial Accounting and Reporting-II

Suggested Answers
Certificate in Accounting and Finance – Spring 2020

A.1 Debit Credit

Date Description
Rs. in '000
Biological Assets
1-May-19 750×52,640(56,000×94%) 39,480
P & L / Loss on initial recognition 3,780
Cash / Bank 750×56,000×1.03 43,260

1-May-19 Carriage expense 2,000

Cash / Bank 2,000

1-Aug-19 Food expense / Food inventory 150,000×164×1.05 25,830

Payable 150,000×30%×164 7,380
Cash/Bank (Bal.) 18,450

31-Dec-19 Biological Assets (W-1) 24,205

P & L / Gain on re-measurement 24,205

31-Dec-19 Payable 150,000×30%×(164–152) 540

P & L / Exchange gain 540

31-Dec-19 Food inventory 25,830×40% 10,332

Food expense 10,332

W-1: Gain on re-measurement of Biological assets Rs. in '000

Closing carrying value 2,750×57,340(61,000×94%) 157,685
Opening 2,000×47,000(50,000×94%) 94,000
Purchase on 1-May-2019 39,480
(133,480)
24,205

A.2 Amortized Cost F.V through OCI F.V through P/L

Business model Hold to collect Hold to collect and Hold to sell
sell
Cash flows Solely payment of Solely payment of No condition
principal and interest principal and interest
Categories Only debt securities Debt and equity Debt and equity
securities securities
Initial Fair value plus Fair value plus Fair value
measurement transaction cost transaction cost
Subsequent Amortized cost Fair value Fair value
measurement

A.3 (a) Change in net profit: Rs. in million

Increase in depreciation expense 22.82(W-1)÷4.5 (5.07)
Increase in finance cost 22.82(W-1)×12% (2.74)
Decrease in net profit (7.81)

Change in assets:
Increase in property, plant and equipment 22.82–5.07 17.75

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Change in liabilities:
Increase in decommissioning liability 22.82+2.74 25.56

W-1: PV of change in decommissioning liability

22.82[(88–50) ×1.12‒4.5]

(b) In the given scenario, Jamal may be in breach of the following fundamental principles
of Code of Ethics for Chartered Accountants:

(i) Principle of integrity:

Chartered Accountant should be straight forward and honest in all professional
and business relationships. It seems that the decision to defer incorporation of
new decommissioning cost would make financial statements misleading.

(ii) Principle of professional behaviour:

This principle imposes an obligation on all chartered accountants to comply with
the relevant laws and regulation and avoid any action that discredits the
profession. Jamal has breached this principle as his decision to defer
incorporation of new decommissioning cost is not in accordance with IFRSs.

A.4 (i) (c) Income tax payable

(ii) (c) only when the conditions are met
(iii) (b) IFRS and Fifth Schedule
(iv) (c) No change in sales revenue and increase in finance income
(v) (c) capitalized and amortized over 15 years
(vi) (a) IAS 16 as a combined asset
(vii) (a) only in the consolidated financial statements

A.5 Lessor (FVLL)

Debit Credit
Date Description
Rs. in million
1-Jan-19 Machine 200
Cash/Bank 200
30-Nov-19 Cash 12
Rental income 12
31-Dec-19 Receivable 32(12×8×1÷2.5×10÷12)–
12 20
Rental income 20
31-Dec-19 Depreciation expense (200–16)÷8 23
Accumulated depreciation 23

Lessee (CCL)
Debit Credit
Date Description
Rs. in million
1-Mar-19 ROU 12×6.7327(1–1.04–8÷0.04)× (1.04)‒2 74.69
Lease obligation 74.69
1-Apr-19 ROU 4
Cash/Bank 4
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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

30-Nov-19 Interest expense 2.99+3.11+3.23 (W-1) 9.33

Lease obligation 2.67
Cash/Bank 12.00

31-Dec-19 Interest expense 2.89(W-1)÷3 0.96

Interest payable 0.96
31-Dec-19 Depreciation expense (74.69+4)×(1÷2.5)
×(10÷12) 26.23
Accumulated depreciation 26.23

W-1: Amortization schedule Rs. in million

Date Interest Instalments Balance
1-Mar-19 74.69
30-May-19 2.99 - 77.68
31-Aug-19 3.11 - 80.79
30-Nov-19 3.23 12.00 72.02
29-Feb-20 2.89 12.00 62.91

A.6 (a) Pistachio Limited

Consolidated statement of financial position
As on 31 December 2019
Rs. in million
Non-current assets:
Property, plant and equipment 850+750–88–9 1,503.0
Goodwill 120(W-1)–12 108.0
Investment in associate (W-5) 203.8
Current assets:
Inventories 300+340+10(50–40) 650.0
Trade receivables 240+200 440.0
Cash and bank balances 60+170 230.0
3134.8
Equity & liabilities:
Share capital (Rs. 10 each) 1,400
Consolidated retained earnings (W-3) 836.0
Non-controlling interest (W-4) 263.8
Other liabilities 340+180 520.0
Contingent consideration 70+45 115.0
3,134.8

W-1: Computation of goodwill

Cash consideration 900.0
Land at fair value 108.0
Contingent consideration 70.0
Fair value of NCI 70×20%×18 252.0
1,330.0
Fair value of net assets (W-2) (1,210.0)
Goodwill 120.0

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

W-2: Net assets of ML At acquisition At reporting

date date
-------- Rs. In million --------
Share capital 700.0 700.0
Share premium 100.0 100.0
Retained earnings 360.0 480.0
Fair value adjustment 50×20% 50.0 10.0
Unrealised gain on disposal 10×4.5÷5 (9.0)
1,210.0 1,281.0
Post-acquisition 71.0

W-3: Consolidated retained earnings Rs. in million

PL 780.0
Post-acquisition of ML 71 (W-3)×80% 56.8
Gain on transfer of land 108–88 20.0
Impairment of goodwill 120×10%×80% (9.6)
Increase in contingent consideration 115–70 (45.0)
Share in post - acquisition JL (340–200)×25% 35.0
Unrealised profit on inventory stock 72×20÷120×40%×25% (1.2)
836.0

W-4: Non-controlling interest

At acquisition 252.0
Post-acquisition of ML 71(W-2)×20% 14.2
Impairment of goodwill 120×10%×20% (2.4)
263.8

W-5: Investment in associate - JL

At cost 170.0
Share in post-acquisition (340–200)×25% 35.0
Unrealised profit in closing inventory (W-3) (1.2)
203.8

(b) Information to be ignored:

 (vi) Dividend received from JL
 (viii) Receivable from JL
 (xi) Discount rate

A.7 (a) Mint Lemonade Limited

Statement of comprehensive income for the year ended 31 December 2019

Rs. in million
Sales 2,500.00
Cost of sales (1,320.00)
Gross profit 1,180.00
Selling and distribution expenses 200+40+14 [(1,200–40)×5%–44] (254.00)
Administrative expenses (W-1) (391.00)
Operating profit 535.00
Finance cost (48.00)
Other income 30+50+20 (36‒16) 100.00
Profit before tax 587.00
Taxation [req.(b)] (167.24)
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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Profit for the year 419.76

Other comprehensive income:

Revaluation surplus 300.00
Related deferred tax 300×32% (96.00)
204.00
Total comprehensive income for the year 623.76

W-1: Administrative expense

Given 302.00
R&D expense 180×3÷9 60.00
Amortisation of intangible asset 120÷5×2÷12 4.00
Additional depreciation on office building 300÷12 25.00
391.00

(b) Mint Lemonade Limited

Notes to the financial statements for the year ended 31 December 2019
Rs. in million
1 Taxation
Current tax (W-1) 106.68
Deferred tax (W-2) 60.56
167.24

1.1 Relationship between tax expense and accounting profit

Accounting profit before tax 587.00
Tax @ 32% 187.84
Effect of low rate on dividend:
20×17%(32%–15%)+10×12%(32%–20%) (4.60)
Exempt income 50×32% (16.00)
Average effective tax rate 167.24

W-1: Current tax liability

Profit before tax[req.(a)] 587.00
Increase in provision for doubtful debts 58–44 14.00
R&D expense 60.00
Accounting amortization 4.00
Tax amortization (180÷10)* (18.00)
Capital gain exempt (50.00)
Borrowing cost (84.00)
Investment income deducted from borrowing cost 16.00
Tax depreciation exceeding accounting depreciation 200–25 (175.00)
Dividend income taxable at different rate (30.00)
Taxable business income 324.00
Tax on business income 324×32% 103.68
Tax on dividend income 20×15% 3.00
106.68

W-2: Deferred tax expense / (credit)

Provision for doubtful debts 14×32% (4.48)
For the year tax depreciation exceeded acc. dep. 175×32% 56.00
Intangible (60+4–18)×32% (14.72)
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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Borrowing cost capitalised (84–16)×32% 21.76

Dividend receivable 10×20% 2.00
60.56

A.8 (i) The treatment of each of item would be as follows:

1. Cost of replacement chargers to customers, wholesaler and retailers would be
provided in 2019 due to the constructive obligation arising out of the announcement
made on 25 December 2019.

Cost of replacement chargers would be included as deduction in calculating NRV of

the closing stock of Champ and would be compared with the cost of the stock in books
for assessing potential NRV adjustment.
2. Reimbursement from BL would be recognized in 2019 only when it is virtually
certain as at 31 December 2019 that BL would reimburse the cost which does not
seems to be the case here due to subsequent agreement of BL on 20 January 2020 for
the reimbursement.
3. WL has no obligation as 31 December 2019 to give USBs to the customers. As giving
of USBs has not been announced. Therefore, provision need not be made at 31
December 2019.
4. Provision for expected litigation and settlement cost in respect of all claim of Rs. 25.9
million should be made in 2019.

Sale of defective laptop is the obligating event in this respect which were made in
2019. The filing of claims in 2020 would be considered as adjusting event for 2019
financial statements.
5. The loss would not be recorded in WL’s book as market of company’s shares is not
reflected in the books of accounts.
6. Marketing cost to be incurred in 2020 would not be recorded in 2019 as it is a
discretionary cost and there is no obligation to incur marketing cost at 31 December
2019.
7. No entry needs to be made for decrease in gross profit for 2020 due to reduction in
selling price. However, the effect of decrease in selling price should be considered for
calculating NRV of the closing stock of Champ as at 31 December 2019.

(ii) In respect of claim received till year end of Rs. 32 million, WL should record an expense.

Further claim of Rs. 12 million received during January 2020 would be considered as an
adjusting event and should be recorded as an expense in 2019.

In respect of remaining claims which have not yet been received:

 WL has a present obligation to honor the claim for prizes as a result of past event i.e.
sale of product;
 It is probable that an outflow of economic benefits will be required to settle the
obligation;
 As cards of higher amount were printed and issued as compared to original plan, but
amount could not be determined due to absence of human intervention in printing the
cards.

It should be disclosed as contingent liability along with description that the amount is not
measurable due to the circumstances discussed above.

(THE END)
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