Financial Accounting and Reporting-I

Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.1 Mr. Razi

Income Statement
For the year ended 30 June 2015
Rupees
Net sales (W-1) 5,984,000
Opening stock 856,000
Purchases (balancing) 4,471,000
Closing stock (1,167,000)
Cost of goods sold [6,400,000(W-1)65%] 4,160,000
Adjustment for NRV on damaged stock (W-2) 13,800
4,173,800
Gross profit 1,810,200
Marketing expenses (W-6) (200,000)
Utility expenses (W-6) (250,000)
Salaries (W-6) (624,000)
Other misc. expenses [100,000(W-6)+150,000(W-5)+250,000(W-3)] (500,000)
Depreciation expense (600,00010%+250,00010%9÷12) (78,750)
Net profit 157,450

Mr. Razi
Balance Sheet
As at 30 June 2015
Rupees
Non-Current Assets
Land 450,000
Office equipment
Cost (600,000+250,000) 850,000
Accumulated depreciation (15,000+78,750) (93,750)
756,250
1,206,250
Current Assets
Stock [1,167,000-13,800(W-2)] 1,153,200
Debtors (W-3) 1,091,000
Bank (W-4) 291,000
2,535,200
Total Assets 3,741,450

Equity
Razi's capital opening 2,374,000
Profit for the year 157,450
Drawings (125,000)
2,406,450
Current Liabilities
Creditors (W-5) 1,195,000
Accrued expenses (W-6) 140,000
Total Equity and Liabilities 3,741,450

Rupees
Cash misappropriated in debtors (W-3) 250,000
Cash misappropriated in creditors (W-5) 150,000
Cash shortage 400,000
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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

Workings:

W-1: Determination of gross sales revenue and discount allowed

Net sales Discount allowed Gross sales
Cash sales 1,728,000 192,000 1,920,000
(Given) (1,728,0000.1/0.9 (1,728,000+192,000)
Credit sales 4,256,000 224,000 4,480,000
(4,480,000-224,000) (4,480,0005%) (1,920,00070÷30)
Total 5,984,000 416,000 6,400,000

W-2: Adjustment for NRV on damaged stock Rupees

Selling price of damaged stock (1,500 ÷ 0.65) 2,308
Net realizable value (2,308 – 900) 1,408
NRV expense per unit (1,500 – 1408) 92

Total NRV expense (92  150) 13,800

W-3: Debtors
Rupees Rupees
Opening balance 1,560,000 Sales discount (W-1) 224,000
Gross sales (W-1) 4,480,000 Receipts 4,475,000
Cash misappropriated 250,000
Closing balance 1,091,000
6,040,000 6,040,000

W-4: Bank
Rupees Rupees
Opening balance 389,000 Payments made to creditors 4,774,000
Receipts from cash sales 1,728,000 Payment for marketing exp. 205,000
Receipts from debtors 4,475,000 Payment for utility expenses 240,000
Payment for salaries 600,000
Payment for other misc. exp. 107,000
Drawing 125,000
Office equipment 250,000
Closing balance 291,000
6,592,000 6,592,000

W-5: Creditors
Rupees Rupees
Payments 4,774,000 Opening balance 1,348,000
Closing balance 1,195,000 Purchases (income statement) 4,471,000
Cash misappropriated 150,000
5,969,000 5,969,000

W-6: Accrued expenses

A B C A+B-C
Expense for Accruals Payment during Accruals
the year 01-07-2014 the year 30-06-2015
--------------------------- Rupees ---------------------------
Marketing expenses 200,000 30,000 205,000 25,000
Utility expenses 250,000 25,000 240,000 35,000
Salaries (52,000  12) 624,000 48,000 600,000 72,000
Other misc. expenses 100,000 15,000 107,000 8,000
118,000 140,000

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.2 Eagles Limited

Statement of Comprehensive Income
For the year 30 June 2015
Rupees
Revenue (10,706,000 – 390,000) 10,316,000
Cost of goods sold
Opening stock 1,500,000
Purchases 6,987,000
Closing stock (1,400,000 + 300,000) (1,700,000)
Cost of goods sold 6,787,000
Gross profit 3,529,000

Salaries & wages (843,000)

Repair and maintenance (500,000 + 56,000 – 45,000) (511,000)
Utilities expenses (400,000 + 67,000 – 55000) (412,000)
Insurance expenses (300,000)
Provision for stocks (40,000 + 51,000 – 45,000) (46,000)
Warehouse rent (740,000 – 150,000) (590,000)
Bad debt expense (30,000 + 910,000*5% – 48,000) (27,500)
Depreciation expense (W-1) (273,125)
Impairment loss - equipment (W-2) (147,500)
(3,153,125)
375,875
Other income (425–100+ 30+15) or (425-100)+(100-55) 370,000
Net profit before tax 745,875
Income tax expense (200,000)
Profit after tax 548,875

Eagles Limited
Statement of Financial Position
As at 30 June 2015
Rupees
Non-current assets
Plant (1,650 – 825) 1,567,500
Office equipment (175 – 13.125) 161,875

Current assets
Stock (1,400,000 + 300,0000 – 51,000) 1,649,000
Debtors (1,300,000 – 390,000 – 45,500) 864,500
Prepaid rent 150,000
Cash & Bank 1,759,000
Total assets 6,151,875
Equity
Capital 2,500,000
Accumulated profits (960,000 + 548,875) 1,508,875
Revaluation surplus (W-2) 275,000
Current liabilities
Creditors 1,545,000
Provision for income tax 200,000
Accrued expenses (56 + 67) 123,000
Total equities and liabilities 6,151,875

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

W-1: Depreciation
Before revaluation After revaluation
Total
(6 months) (6 months)
Depreciation
Rate Cost less Depreciation Revalued Depreciation
(A+B)
disposal (A) amount (B)
--------------------------------- Rupees in ‘000’ ---------------------------------
Plant 10% 2,500 125.0 1,650 82.500 207.500
Equipment 15% 500 52.5 175 13.125 65.625
273.125

W-2: Revaluation surplus/impairment loss ------- Rs. in ‘000’-------

Revalued amount 1,650 175
Less: WDV at revaluation date
[2,500-1,000-125(W-1)]; [(700-200)-{270-(130+15)}-52.5] (1,375) (322.5)
Revaluation / (impairment) 275 (147.5)

A.3 (a) When items of property, plant and equipment are stated at revalued amounts, the following
additional disclosure should be made:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 for each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model; and
 the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

(b) Journal entries

Date Particulars Debit Credit
Rs. in million
30-Jun-14 Depreciation for the year (W-1) 1,390
Accumulated depreciation – Office building 500
Accumulated depreciation – Factory building 440
Accumulated depreciation – Warehouse 450
30-Jun-14 Accumulated depreciation – Office building (W-1) 1,000
Accumulated depreciation – Factory building (W-1) 880
Accumulated depreciation – Warehouse (W-1) 900
Office building 1,000
Factory building 880
Warehouse 900
30-Jun-14 Office building (W-1) 750
Loss on impairment – buildings and warehouse 450
Surplus on revaluation 750
Factory building (W-1) 200
Warehouse (W-1) 250
30-Jun-15 Depreciation expense (W-1) 1,507
Accumulated depreciation – Office building 719
Accumulated depreciation – Factory buildings 369
Accumulated depreciation – Warehouse 419

30-Jun-15 Surplus on revaluation (750÷8) 94

Retained earnings (incremental depreciation) 94

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

W-1:
Dep. for Revaluation
Revalued
Cost WDV the year Acc. Dep. surplus/ Dep. for the
amount
Assets (A) (B) 2014 D=A-B+C (impairment) year 2015
(E)
(C) F=E-(A-D)
---------------------------------- Rupees in million ----------------------------------
Office building 6,000 5,500 500 1,000 5,750 750 719
Factory building 4,400 3,960 440 880 3,320 (200) 369
Warehouse 4,500 4,050 450 900 3,350 (250) 419
1,390 1,507

A.4 (a) Diamond Limited

Statement of comprehensive Income
For the year ended 30 June 2015
Head Lahore Quetta
Adjustment Combined
office branch branch
----------------------Rs. in '000'----------------------
Sales 4,800 1,550 1,198 - - 7,548
Goods sent to branches 1,760 - - (1,760) - -
6,560 1,550 1,198 (1,760) - 7,548
Cost of sales
Inventories as at 1-Jul-2014 400 30 48 - (13) 465
Purchases 3,800 230 200 - - 4,230
Goods received from HO - 1,070 618 1,688 - -
4,200 1,330 866 1,688 (13) 4,695
Closing inventory (375) (28) (150) 72 42 583
3,825 1,302 716 1,760 29 4,112
Gross profit 2,735 248 482 - (29) 3,436
Expenses (500) (276) (202) - - (978)
Profit for the year 2,235 (28) 280 - (29) 2,458
Unrealized profit (29) - - - 29 -
2,206 (28) 280 - - 2,458

(b) Reconciliation of Head Office and Branch Balances

Head office books Lahore branch Quetta branch
Lahore branch Quetta branch
Head office current account
current account current account
----------------------Rs. in '000'----------------------
Opening balance 230 235 200 178
Less: Goods in transit - - 20 52
Less: Cash in transit (10) (5) - -
Branch Profit / loss (28) 280 (28) 280
192 510 192 510

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.5 (a) IAS 18 defines revenue as the gross inflow of economic benefits in a period arising in the
course of the ordinary activities of an entity when those inflows result in an increase in equity,
other than increases relating to contributions from equity participants.
In case of royalties, revenue shall be recognised on an accrual basis in accordance with the
substance of the relevant agreement.

In case of dividends, revenue shall be recognised when the shareholder’s right to receive
payment is established.

(b) (i) Where goods are subject to installation and inspection, revenue is normally recognized
only when installation and inspection are complete. However, where the installation
process is simple in nature, revenue is recognised immediately upon the buyer
accepting the goods.

This means that revenue of Rs. 500,000 from sale of machine can be recognized in the
year ended 30 June 2015.

(ii) AL should recognizes the revenue in the year ended 30 June 2015 as:
 ST takes the title;
 It is probable that delivery will be made in August 2015;
 The item is on hand, identified and ready for delivery to ST at the time the sale is
recognized;
 ST specifically acknowledges the deferred delivery instructions; and
 The usual payment terms apply and ST agrees to make the payment on 7 July
2015.

(c) (i) Date Particulars Debit (Rs.) Credit (Rs.)

31 March 2015 Bank/Receivable 50,000
Sale 40,000
Deferred revenue 10,000
30 June 2015 Deferred Revenue (10,000÷2) × 3 ÷ 12 1,250
Service fee income 1,250
30 June 2015 Cost of sales – service (4,000  1÷ 4) 1,000
Bank/Payable 1,000

(ii) Date Particulars Debit (Rs.) Credit (Rs.)

1 July 2014 Receivable (W-1) 278,912
Sales 278,912
1 January 2015 Bank 150,000
Receivable (W-1) 136,054
Interest income 13,946
30 June 2015 Accrued income 7,142
Interest income 7,142

W-1: Determination of interest amount

Present Interest for 6
Installment Due on Payment Balance
Value months at 5%
1st Installment 1 January 2015 278,912 13,946 150,000 142,858
2nd Installment 30 June 2015 142,858 7,142 150,000 -
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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.6 2015
Rs. in ‘000’
20 – Closing inventory
Finished goods (W-1) 43,680
20.1 Closing inventory includes items costing Rs. 50,015,000 valued at net realisable value of
Rs. 43,680,000.
20.2 The inventory expenses (cost of sales) for the year is Rs. 190,254,000(W-4)
20.3 Damaged inventory of Rs. 1,116,000(W-1) has been written off.

W-1: Determination of value of closing inventory under perpetual inventory system

Value
Date Description QTY Price/unit
(Rs. in '000')
1-Jul-14 Opening 2,450 20,000 49,000
31-Jul-14 Issue 2,100 20,000 42,000
Balance 350 20,000 7,000
30-Sep-14 Purchase 4,200 20,832 (W-2) 87,494
Balance 4,550 20,768 94,494
31-Oct-14 Issue 2,050 20,768 42,574
28-Feb-15 Issue 2,300 20,768 47,766
Balance 200 20,768 4,154
31-Mar-15 Purchase 4,350 22,400 (W-2) 97,440
Balance 4,550 22,328 101,594
15-May-15 Issue 2,260 22,328 50,462
Balance 2,290 22,328 51,132
30-Jun-15 Units w/off 50 22,328 1,116
2,240 22,328 50,015
30-Jun-15 NRV adjustment (W-3) - - 6,335
30-Jun-15 2,240 19,500 43,680

W-2: Purchase cost per unit September March

Purchase price/unit 18,600 20,000
Non-refundable import costs - 12% (29 – 17) 2,232 2,400
20,832 22,400

W-3: NRV of SP Rs. in ‘000’

Cost 22,328
Selling price 22,000
Less: Cost of modification (2,500)
NRV per unit 19500
Decline in value (22,328 – 19,500) 2,828

Expense (2,240  2,828) 6,335

W-4: Cost of sales Rs. in ‘000’

Opening stock 49,000
Purchases 184,934
233,934
Less closing stock (43,680)
190,254

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.7 Machine Rs. in

hours million (xy) (x2)
(x) (y)

264 50 13,200 69,696

390 90 35,100 152,100
280 70 19,600 78,400
355 85 30,175 126,025
375 100 37,500 140,625
330 75 24,750 108,900
300 70 21,000 90,000
290 60 17,400 84,100
2584 600 198,725 849,846

∑ ∑ ∑
∑
∑

∑ ∑

Estimated regression equation is

If machine works 365 hours, then production expense would approximate:

(THE END)

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