ADVANCED ACCOUNITNG & FINANCIAL REPORTING

Suggested Answers
Final Examination ‐ Winter 2013

Ans.1 (a) Alpha Industries Limited

Extracts of consolidated statement of financial position as of 30 September 2013

Rs. in
1 Goodwill
million
Purchase consideration
- AIL shares (150,000×160) 24.00
- Cash payable on 31 March 2014 (42÷1.12) 37.50
- Acquisition-date fair value of 15% holding 25.00
86.50
NCI at fair value at the acquisition date 32.00
Net assets acquired (100.00)
18.50
2 Consolidated retained earnings
Profit – AIL:
AIL - Retained earnings balance at 30 September 2012 35.00
AIL - profit for the year 58.00
Dividend paid by AIL for the year ended 30 Sept. 2012 (100×15%) (15.00)
Profit on deemed disposal of 15% equity in BPL (25–20) 5.00
Other comprehensive income transferred to retained earnings 6.00
Finance cost on deferred cash consideration [(37.5–(1.12)0.5–37.5] (2.19)
Unearned profit on inter-co. stock held by BL [(65×20%)÷1.3×0.3] (3.00)
83.81
Post-acquisition profit from the subsidiary (BPL) Apr-Sept 2013:
Profit for the year ended 30-9-2013 40.00
Net assets as of 1-4-2013 100.00
Dividend paid for the year ended 30-9-2012 (60×20%) 12.00
Net assets as of 30-9-2012 (90.00)
Pre-acquisition profit (October 2012 - March 2013) 22.00
Post acquisition profit share [(40–22) ×70%] 18.00 12.60
Profit from the associate - DPL
Profit for the year ended 30 September 2013 (30×35%) 10.50
Unearned profit on inter-co. stock purchased from DPL (20×0.2×35%) (1.40) 9.10

105.51
3 Investment in associate - DPL
Carrying value as of 30-9-2012 43.00
Dividend received from DPL for the year ended 30-9-2012 (50×12%)×35% (2.10)
Share of profit for the year ended 30-9-2013 (10.5-1.4) 9.10
50.00

(b) Separate statement of financial position as at 30 September 2013

According to IAS 27, when an entity prepares separate financial statements, it shall account
for investments in subsidiaries , joint ventures and associates either:
 at cost, or
 at fair value in accordance with IFRS 9.
The entity shall apply same accounting for each category of investments.
Since fair value as of 30 September 2013 for the investments in BPL and DPL is not
available, these investments can be valued at cost as under:
Investments at cost
- Beta (Private) Limited - subsidiary 18+(0.150×160)+(42÷1.12) 79.50
- Delta (Private) Limited - associate 40.00
119.50

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.2 Mega Super Stores

Accounting entries for the customer incentive scheme
Debit Credit
Date Description
-----Rupees-----
30-Sep-2013 Sales revenue (1,500,000×70%×200÷500) 420,000
Deferred revenue 420,000
(To record points granted under the scheme)

30-Sep-2013 Deferred revenue [500,000×(200÷500)] 200,000

Sales revenue 200,000
(To record redemption of the points granted)

30-Nov-2013 Deferred revenue (420,000–200,000) 220,000

Sales revenue (1,500,000– 500,000–470,000) × 200÷500 212,000
P& L account [470,000-(1,500,000×30%)×200÷500] 8,000
(To record redemption and lapsing of the unutilised points)

Ans.3 Bravo Limited

Amounts as they would appear in the statements of financial position and comprehensive income
For the year ended 30 September 2013

--------------Rs. in million--------------
1. Decrease in decommissioning liability: Finance/
Decommission-
Depreciation P. P. & E
ing liability
expenses
Carrying value as at 30.09.2012 (130+19)÷20×(20–4.5) 115.48
[19×(1.1)4.5] 29.18
Deprecation: Oct. 2012-Mar. 2013 [(130+19)÷20×0.5] 3.73 (3.73)
Finance cost: Oct. 2012-Mar. 2013 [19×(1.1)5]- [19×(1.1)4.5] 1.42 1.42
Decrease due to revision in liability (30.6–25) (5.60) (5.60)
Revised balance as at 1-4-2013 106.15 25.00
Deprecation: Apr-Sept. 2013 (106.15÷15×0.5) 3.54 (3.54)
Finance cost: Apr-Sept. 2013 {[25×(1.1)0.5]-25} 1.22 1.22
9.91 102.61 26.22

2. Classification of debentures from 'held to maturity' to (Non-current

'available for sale' Interest assets)
Fair value
income and FV Investment
reserve
increase ‘available for
sale’
Debentures at fair value as at 30-9- 2013 [16× (104÷100)] 16.64
Interest income for the year – Statement of Profit or Loss 2.22
FV increase - Other comprehensive income for the year
[IFRS 9, Para 5.6.1] (W.1) 0.02
FV reserve for investment available for sale
(W.1) (0.02+0.56) 0.58
2.24 16.64 0.58

Working -1 (W.1): 2013 2012

Opening balance 16.32 15.50
Interest earned at 14.09% (15.76×14.09%), (15.5×14.09%) 2.22 2.18
Interest received at 12% (16×12%) (1.92) (1.92)
16.62 15.76
Debentures at fair value at Rs. 102 and 104 (16×104÷100) (16×102÷100) 16.64 16.32
Other comprehensive income - AFS reserve 0.02 0.56

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Final Examination ‐ Winter 2013

3. Reclassification of owner-occupied property to investment Investment

Operating
property: property/ Revaluation
lease
other surplus
income
receivable
Investment property
At fair value as of 30-9-2013 66.00
Revaluation surplus (IAS 40, Para 61) (70–55) 15.00
Revaluation surplus adjusted by decrease in FV (66–70) (4.00)
Operating lease
Lease rent to be received over the lease period [(6+6.3+6.62)=18.92]
Lease rent income for Apr-Sept. 2013 (18.92÷6) 3.15
Operating lease rent receivable at year end (3.15–3) 0.15
3.15 66.15 11.00

Ans.4 (i) Global Air Group Limited

Extracts of consolidated statement of financial position
As at 30 September 2013 2013
Rs. in million
Current Assets
Assets directly associated with the subsidiary classified as held for sale (IFRS 5, 8A) W.1 209.70

Equity and liabilities

Retained earnings W.1 153.70

Current liabilities
Liabilities directly associated with the subsidiary classified as held for sale W.1 56.00

(ii) Global Air Group Limited

Extracts of consolidated statement of comprehensive income
For the year ended 30 September 2013

Loss from operations of the subsidiary held for sale (30+18.3) 48.30

W-1: Equity balances and impairment

Adjusted
Balance Adjustments Balance
equity Impairment Transactions
Description as at as at as at
as at allocation Jul-Sep. 2013
30-6-2013 30-6-2013 30-9-2013
30-6-2013
Goodwill 15.00 15.00 (15.00) -
Non-current assets 195.00 195.00 Bal. (3.30) 191.70
Current assets 50.00 (6.00) 44.00 (26.00) 18.00
209.70
Liabilities (90.00) 8.00 (82.00) 26.00 (56.00)
Net equity 170.00 2.00 172.00 (18.30) - 153.70
Net equity at 90% (172×90%) 154.80
Sales price net of cost to sell (140-3.5) 136.50
Impairment loss 18.30

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.5 Zee Bank Limited

Notes to the Financial Statements for the year ended 30 June 2013
2013
Rs. in million
6. CASH AND BLANCES WITH TREASURY BANKS
In hand including National Prize Bonds
Local currency 10,000+100 10,100
Foreign currency 2,000
12,100
With State Bank of Pakistan in
Local currency current account 30,000
Foreign currency current account 3,000
Foreign currency deposit account 10,000
43,000
With other central banks in
Foreign currency current account 9,800
Foreign currency deposit account 12,000
21,800
With National Bank of Pakistan in
Local currency current account 8,000
84,900

The above balances include remunerative accounts amounting to Rs. 10.8 million.

7. BALANCES WITH OTHER BANKS

In Pakistan
On current account 700

Outside Pakistan
On current account 4,000
On deposit account 25,000
29,000
29,700

The above balances include remunerative accounts amounting to Rs. 27.5 million.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.6 New Horizon (Private) Limited

Analysis of financial and operating performance for the year ended 30 September 2013

(i) Relevant accounting ratios

Description 2013 2012

Gross profit margin 186÷720 26% 44÷234 19%
Return on capital employed 66÷(675-112) 12% (1.0)÷(416-30) (0.26)
Current ratio 88÷112 0.79 37÷30 1.23
Quick ratio (88-30)÷112 0.52 (37-18)÷30 0.63
Inventory turnover days (30×360)÷534 20 days (18×360)÷190 34 days
Debt/equity ratio 198÷365 0.54 40÷346 0.12
Interest cover 66÷35 1.89

(ii) Total sales for the current year have increased by 208% because of sales of imported drugs
from Malaysia that accounted for 70% of the total sales. Whereas sale of local
pharmaceutical products has shown declining trend as there is approximately 8%
[(720×30%-234)÷234] decline in sales of local products.

(iii) Gross profit has improved from 19% to 26%. However, the management needs to analyse
the GP ratios of local and imported products separately, to evaluate the performance
objectively.

(iv) Operating expenses have increased by 167% as against the increase in sales revenue by
208%. However, operating costs do not include all the costs associated with sales promotion
campaign. It is to be noted that IFRS does not allow capitalisation of advertising costs. If
advertising expenses were charged in accordance with the requirements of IFRS, the net
profit after tax would convert into loss after tax of Rs. 1 million.

(v) The improved profitability of NHPL is largely dependent on imported life saving drugs.
Consequently, the company is susceptible to the foreign currency risk. Any adverse
movement in foreign exchange rates may erode the profitability.

(vi) The company's liquidity position may be a matter of concern for the banks as current ratio
has declined from 1.23 to 0.79 and quick ratio has declined from 0.63 to 0.52.
(vii) Though inventory turnover days have decreased from 34 days to 20 days, the inventory at
year end represents only 20 days of sale which is quite low considering the fact that 70% of
the drugs are imported and therefore, failure to keep adequate safety stock may result in
stock-outs.
(viii) There is a need to determine reasons for a very low contribution from the sales of local
pharma products and steps be taken to increase sales and profitability of local products.
(ix) The company is highly geared and interest cover is 1.89 times only. However, return on
equity is very low at 5%, which may not be compatible with the market rate.
(x) In short, the company is in need of more funds to survive, particularly, as further expansion
is being negotiated.
(xi) In view of the above analyses, investment in NHPL will be regarded as high risk and
investors will therefore, expect a high return.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Final Examination ‐ Winter 2013

Ans.7 Dynamic Steel Limited

Accounting entries pertaining to forward contract

Debit Credit
Date Particulars
---Rs. in million---
1-Jun-2013 The fair value of the forward-exchange contract at inception is
– –
Zero; therefore, no accounting entry is required.
30-Sep-2013 Other comprehensive income [IAS 39, Para 95] 125.00
Profit and loss account (130.5–125.0) 5.50
Financial liability (Forward contract) 130.50
(To record loss on the forward contract since 1 June 2013)
1-Nov-2013 Other comprehensive income [IAS 39, Para 95] 42.50
Profit and loss account (52.0–42.5) 9.50
Financial liability (Forward contract) 52.00
(To record loss on the forward contract since 30 September 2013)
1-Nov-2013 Property, plant and equipment (Balancing) 725.00
Other comprehensive income (125.0+42.5) 167.50
Account payable (50×11.15) 557.50
(To record delivery of the equipment and liability at delivery date spot rate)
1-Dec-2013 Profit and loss account 67.50
Financial liability (Forward contract) 67.50
(To record loss on the forward contract since 1 November 2013)
1-Dec-2013 Account payable 557.50
Financial liability (Forward contract)
(130.5+52+67.5) 250.00
Profit and loss account (557.5–500) 57.50
Bank (50×15) 750.00
(To record settlement of account payable and the forward contract)

Working
30-Sep-2013 Loss on forward contract at forward rates (12.39–15.00)×50 (130.50)
Effect on expected cash flow at spot rates (12.00–14.50)×50 125.00
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 125.0÷130.5 96%

1-Nov-2013 Loss on forward contract at forward rates (11.35–12.39)×50 (52.00)

Effect on expected cash flow at spot rates (11.15–12.00)×50 42.50
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 42.5÷52.0 82%

1-Dec-2013 Loss on forward contract at forward rates (10.00–11.35)×50 (67.50)

Effect on expected cash flow at spot rates (10.00–11.15)×50 57.50
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 57.5÷67.5 85%

(The End)

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