Copyright Reserved Serial No Intermediate Stage September 2008 Examination Examination Date : 20 th September 2008 Number of Pages : 07 Examination Time: 9.30a:m.-12.30p:m. Number of Questions: 05 Instructions to candidates: 1. Time allowed is three (3) hours 2. Answer all questions. 3. Answers should be entirely in the English language. Subject Subject Code Financial Accounting & Reporting (FAR / 601) Question No.1 (18 Marks) The Balance sheets of P Ltd. and Q Ltd. as at 31 st March 2008 are given below. Both companies prepare their Financial Statements for the financial year ended 31 st March 2008. P Ltd. (Rs. 000) Q Ltd. (Rs. 000) ASSETS Non Current Assts Property, Plant and Equipment Lands - At cost 800 300 Other Property, Plant & Equipment - At cost 1,200 900 Other Property, Plant & Equipment - Accumulated Depreciation (450) (375 ) 1,550 825 Investments Ordinary Shares in Q Ltd 1,390 - Preference Shares in Q Ltd 160 - Other Investments 100 215 1,650 215 Current Assts Stocks 340 373 Receivables 390 300 Cash and Cash Equivalents 460 265 Total Assets 4,390 1,978 Equity & Liabilities Stated Capital & Reserves Stated Capital Ordinary Shares 2,250 800 Preference Shares 400 200 2,650 1,000 Reserves General Reserves 240 130 Retained Profits 360 250 600 380 Non Current Liabilities Debentures 300 150 Bank Loans 100 60 Current Liabilities Payables 320 240 Income Tax 110 100 Dividends 310 48 1
Total Equity & Liabilities 4,390 1,978 The following additional information is available (1) Stated Capital of Q Ltd. is comprised as below. No. of Shares Value (Rs.'000) Ordinary Shares 50,000 800 Preference Shares 16,000 200 (2) P Ltd. acquired 40,000 Ordinary Shares and 9,000 Preference Shares of Q Ltd. on 1 st April 2006. The balances in reserve accounts of Q Ltd. were, on 01/04/2006 as follows. General Reserve Rs. 40,000/- Retained Profits Rs.160,000/- (3) During the year 2007/2008 Q Ltd. has paid a Dividend of Rs.2/- per Ordinary Share of the company utilizing the profits earned prior to 01/04/2006. Proposed Dividends shown in the Balance Sheet of Q Ltd represent the proposed Dividends for preference Shareholders for the year 2007/2008. (4) At the time of acquisition of shares for consideration purpose, P Ltd. has revalued the Assets of Q Ltd. as at 1 st April 2006 at the value given below; Lands Rs. 450,000/- Other Property, Plant & Equipment Rs. 660,000/- Q Ltd. depreciates its other property, plant and equipment at the rate of 12 ½% per annum on the Straight Line method. (5) P Ltd.'s stocks as at 31/03/2008 included stocks at an invoice value of Rs.90,000/- sold by Q Ltd. Q Ltd. sells goods to P Ltd. at a markup of 25% on cost. (6) Payables of P Ltd. include Rs. 150,000/- in the name of Q Ltd. whereas the receivables of Q Ltd. shows as Rs.210,000/- receivable from P Ltd. A reason for the difference between these two accounts was Rs.30,000/- goods in transit and another reason is cash in transit as at the Balance Sheet date. (7) P Ltd.'s portion of goodwill on acquisition of Q Ltd. was identified to be impaired by Rs.20,000/- as at March 2008. You are required to prepare the consolidated balance sheet of P Ltd. Group as 31 st March 2007. (Total 18 Marks) 2
Question No.2 (16 Marks) respect of the following transactions (i) and (ii), the accounting treatment that should be adopted in compliance with Sri Lanka Accounting Standards (SLAS) and compute balances relating to the income statement, balance sheet and notes to the financial statements of Green Lanka Ltd. for the year ended 31 st March 2008. Give reference to the relevant SLAS. (i) (ii) The company has purchased 200,000 kg of local rice at Rs.90/- per kg during the month of March 2008, out of which 180,000 kg were in stocks of the company as at 31 st March 2008. However the government has introduced a upper price for selling local rice at Rs.65/- during the month of April. (2 Marks) Plant costing Rs.720,000/- on 1 st April 2005 was initially estimated to have a useful life of ten years with no residual value, and was depreciated accordingly. During the year 2007/2008 the company's experience has shown that an estimate of total eight years useful life would be more appropriate and as a result Rs.9,000/- depreciation has been charged in the current year, 2007/2008. (2 Marks) (b) Discuss the following terms. (i) Fair value (ii) (iii) (iv) Net realizable value Holding company Subsidiary Marks) (6 (c) The current investment portfolio of an investment company as at 31 st March 2008 is as follows. Field Cost (Rs.) Trade Value (Rs.) Plantation 320 300 Plantation 280 330 Manufacture 60 70 Manufacture 70 65 Tourism 112 69 Tourism 130 141 You are required to value the above current investment under two different methods in accordance with SLAS 22. (4 Marks) (d) "Comparability" is one of the qualitative characteristics expected from financial statements. You are required to; (i) (ii) Identify two needs for comparability and State and explain three measures taken to enhance comparability in the financial statements. (2 Marks) (Total 16 Marks) 3
Question No.3 (32 Marks) Maduranga Ltd. has been incorporated on 1 st April 2004. This company has been re registered and a new registration number has been obtained under the requirements of the New Companies Act No. 07 of 2007. You are given below the trial balance extracted from the books of Maduranga Ltd. as at 31 st March 2008. Debit (Rs.'000) Credit (Rs.'000) Stated Capital Ordinary Shares (250,000 Shares) - 8,000 Stated Capital Preference Shares (80,000 Shares) - 4,500 Lands, Buildings (At cost) 10,000 2,200 Machinery 6,000 500 Net Interim Dividends paid - Ordinary Shares 720 - - Preference Shares 288 - Interest Received - 36 Cash 220 - Rates 110 - Electricity 150 - Retained Profit as at 01/04/2007 450 - Bank Loan - 18% - 400 Loan Interest 60 - Insurance 150 - General Reserves - 600 Preliminary Expenses 80 - Donations 86 - Motor Vehicles 1,800 590 Income Tax 500 - Provision for Income tax as at 01/04/2007-180 Investment 600 - Money received on sale of investments - 210 Customs Duty 880 - Purchase 4,200 - Re Registration Fees 30 - Sales - 13,000 Bank Balance 14 - Bad Debts 70 - Payables / Receivables 1,460 1,080 Provision for doubtful Debts 10% as at 01/04/2007-220 Bank Charger & Debit Tax 54 - Administration Cost 1,424 - Distribution Cost 1,000 - Stocks as at 01/04/2007 870 - Intangible Assets 300-31,516 31,516 4
The following additional information is available. (1) The stocks as at 31 st March 2008 have been valued at a cost of Rs.1,140,000/-. This includes a redundant stock at a cost of Rs.400,000/- which could be sold at an estimated amount of Rs.260,000/- after incurring Rs.8,000/- as selling expenses. (2) The company has issued 50,000 Ordinary Shares at Rs.50/- each and 20,000 Preference Shares at Rs.25/- each on 1 st October 2007. The total consideration received on share issue has been credited to Preference Shares account. The number of Preference Shares stated in the trial balance represents the number of shares which have been issued as at 1 st April 2007. (3) Accrued Expenses - Rates Rs.10,000/- Electricity Rs.25,000/- Pre Payments - Insurance Rs.70,000/- Advertising Rs.80,000/- (4) During the year the motor vehicle used by the Managing Director of the company had been sold for Rs.700,000/- on 30/09/2007. The sale price has been credited to the motor vehicle account. This vehicle has been purchased by the company on 01/01/2005. During the year a lorry for the transportation of goods has been purchase for Rs.500,000/- on 01/04/2007. (5) Property, Plant and Equipment except land are depreciated in accordance with SLAS 18 using the Straight Line method from the commencement of usage of the asset. Buildings (at cost) 5% Motor Vehicles (at cost) 20% Machinery (at cost) 25% (6) Income Tax liability for the year 2007/2008 has been estimated as Rs.800,000/- based on the computation prepared by the tax consultants. The company has agreed with department of Inland Revenue that the final tax liability for the year 2006/2007 is Rs.200,000/-. (7) Interim Dividends shown in the trial balance is after the deduction of 10% dividend tax. (8) Investment account represents 20,000 shares of Isuru Ltd. at Rs.30/- each acquired by the company. During the year 2007/2008 the company has sold 7,000 shares of Isuru Ltd. and the sale proceeds have been credited to money received on sale of investment account. (9) Analysis of Intangible Asset is as follows; Copy right Purchased 100,00 0 Research Cost 40,000 Development Cost 160,00 0 300,00 0 Copy right is valid for a period of 5 years commencing from 01/10/2007. Development cost to be amortized for a period of 4 years from 1 st January 2008. (10)The Board of Directors has resolved the following; - To write-off the company re registration fees and preliminary expenses. 5
- To declare a dividend for Preference Shares at Rs. 4/- per share per annum. - Declare a final dividend of Rs.1.50 per ordinary share. - Transfer Rs.300,000/- to the general reserve. You are required to prepare for publication purpose. (a) Income Statement (b) The Balance Sheet of the company as at 31st March 2008 (c) The Statement of Changes in Equity for the year ended 31st March 2008 (d) The Statement of Property, Plant & Equipment (e) The relevant notes (11 Marks) (10 Marks) (4 Marks) (3 Marks) (4 Marks) (Total 32 Marks) Question No. 4 (20 Marks) Pushpa, Renu and Sandamali have been in partnership for several years sharing profits and losses in the ratio 2:1:1 respectively. Partners have now decided to convert the partnership to a limited liability company, Star (Pvt.) Ltd. with effect from 1 st January 2008. The new company will take over all the assets except the Investment, Cash Balance and all Liabilities of the partnership. Partnership Financial Statements are prepared for a year commencing from 1 st April of each year. Summarized Balance Sheet of the partnership as at 31 st December 2007 is given below. ASSETS Rs.'00 0 Office Equipment 900 Furniture & Fittings 520 Motor Vehicles 2,800 Investment 600 Stocks 1,060 Receivables 1,220 Cash / Bank 300 7,400 CAPITAL & LIABILITIES Partners Capital A/c Pushpa 1,600 Renu 800 Sandamali 600 Partners Current A/c Pushpa 80 Renu 40 Sandamali 80 Profit available for appropriation 3,220 Payables 980 7,400 (1) The partners are entitled for interest on capital accounts at 10% per annum. Pushpa, Renu and Sandamali are paid nominal salaries of Rs.30,000/-, Rs.24,000/- and Rs.22,000/- per month respectively. (2) The car used by Pushpa will be taken over by her for Rs.1,200,000/-, and the investment of the partnership has been sold for Rs.700,000/-. (3) The other vehicles and the other property and equipment will be taken over by Star (Pvt.) Ltd. on the following basis. Rs. Other Vehicles 2,500,000 Office Equipment 940,000 6
Furniture & Fittings 400,000 (4) A debtor for Rs.100,000/- was identified as irrecoverable. All other debtors will be taken over by Star (Pvt.) Ltd. with a 10% provision for doubtful debts. Liabilities will be taken over as well with a provision of Rs.150,000/- for any unaccounted liabilities. (5) The purchase consideration will be paid by the new company, Star (Pvt.) Ltd. by issuing 300,000 Ordinary Shares at the consideration at Rs.25/- each to Pushpa, Renu and Sandamali in the proportion of 40%, 30% and 30% respectively. (6) The partners have agreed to bring in cash if it is required to settle any outstanding obligations. You are required to: (a) Prepare the necessary accounts to close the books of the partnership. (b) Prepare the opening Balance Sheet of Star (Pvt.) Ltd. as at 1 st January 2008. (14 Marks) (6 Marks) (Total 20 Marks) Question No. 5 (14 Marks) Builders Ltd., a construction company has accepted the contract of constructing a new bridge with a fixed price of Rs.9,000 Million. You are given below the details of the contract for the 3 years. In accordance with the contract agreement, the contract value was Rs.9,000 Million and as per the estimates prepared by the consultants the total cost estimation was Rs.8,000 Million. The expected period of the project was 3 years. After considering the general price increases which prevailed in the country, by the end of year 1, the contractor's estimate of contract costs was increased to Rs.8,050 Million. In year 2, the customer has approved an increase in contract value by Rs.200 Million. The contractor has estimated contract costs would increase by an additional Rs.150 Million. At the end of year 2 costs incurred include Rs.100 Million for standard materials stored at the site, to be used in year 3 to complete the project. The contractor determines the stage of completion of the contract by calculating the proportion of the contract costs incurred for work performed to date, bone to the latest estimated total contract costs. A summary of the financial data during the construction period are as follows; Year 1 Year 2 Year 3 Rs. Mn. Rs. Mn. Rs. Mn. Initial amount of revenue agreed in contract 9,000 9,000 9,000 Variation agreed in contract revenue - 200 200 Total contract revenue 9,000 9,200 9,200 Contract costs incurred to date 1,932 6,068 8,200 Further contract costs to complete 6,118 2,132 - Value of Invoices issued during the year 4,000 2,000 3,200 Progress payments received during the year 3,600 1,800 2,800 You are required to: (a) Compute the contract profit for the each year. (6 Marks) (b) Prepare relevant entries in the Financial Statements of each year. (8 Marks) (Total 14 Marks) 7
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