FINANCIAL ACCOUNTING

Suggested Answers
Intermediate Examination - Spring 2012
(a)

Realization Account
Rs. in million
Vehicle (22.3-11.5)
Equipment (14-5)
Land
Building (14-5.5)
Trade debtors
Cash at bank
Stock-in-trade
Partners A/c - Trade creditors
Partners A/c - Realization profit

10.80
9.00
50.00
8.50
38.00
12.00
48.00
23.00
16.60
215.90

(b)

Trade creditors
Partners' A/c Vehicle (1.4+1.2+0.9)
Transfer to DFC (W-1)

53.00
3.50
159.40

215.90

1.20
12.00
35.82
9.45

0.90
10.00
23.88
9.75

91.90

58.47

44.53

Balance b/d
Interest for the year (10%)
*1
Profit for the year
*2
Realization profit
*3
Trade creditors

36.00
3.60
33.65
8.30
10.35
91.90

24.00
2.40
20.19
4.98
6.90
58.47

Almond

Almond

1.40
18.00
59.70
12.80

Cashew

Cashew

Vehicle
Debentures (W-1)
Ordinary shares (W-1)
Cash settlement (Bal.)

Pistachio

Partners Capital Account

Pistachio

A.1

20.00
2.00
13.46
3.32
5.75
44.53

*1

67.3 (W-2) 5/10, 3/10, 2/10

*2
16.6 5/10, 3/10, 2/10
*3
23 36/80, 24/80, 20/80

(c)

DF Company (Private) Limited

Statement of Financial Position as at 31 December 2011
EQUITY AND LIABILITIES

Rs. in
million

Shareholder equity
Ordinary share capital (119.4 x 10 12)
Share premium (119.4 x 2 12)

99.50
19.90

Long term loan

20% Debentures

40.00

Current liabilities
Trade creditors

30.00
189.40

ASSETS
Fixed assets
Land and building
Equipment
Vehicles

Total purchase consideration

Given to partners in the form of debentures

Pistachio
Cashew
Almond

78.50
9.00
7.70

Current assets
Stock in trade
Trade debt
Cash at bank

WORKINGS
W-1: Purchase consideration
Equipment
Land
Building
Vehicle (22.3-11.5-1.2-1.1-0.8)
Trade debtors (38 90%)
Cash at bank
Stock-in-trade
Trade creditors

36 x 10% 20%
24 x 10% 20%
20 x 10% 20%

Balance to be distributed in the form of shares

Rs. in
million

48.00
34.20
12.00
189.40

Rs. in million
9.00
70.00
8.50
7.70
34.20
12.00
48.00
(30.00)
159.40
Rs. in million
159.40
18.00
12.00
10.00
40.00
119.40
Page 1 of 7

FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012
Distribution of shares among partners
Pistachio 119.40 x 5 10
Cashew
119.40 x 3 10
Almond
119.40 x 2 10

59.70
35.82
23.88
119.40

W-2: Profit for the year

Sales
Less: Cost of sales (42.7+325-48)
Less: Admin expenses
Less: Interest on capital (3.6+2.4+2)

A.2

Rs. in
million
515.00
(319.70)
(120.00)
(8.00)
67.30

Figs Pakistan Limited

Statement of Comprehensive Income
For the year ended 31 December 2011

Sales
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other operating expenses
Other operating income
Profit from operations
Finance costs
Profit before tax
Taxation
Profit after tax
Other comprehensive income
Total comprehensive income for the year

Note
1
2
3
4
5
6
7
8

Earnings per share (8,305 274)

2011
Rs. in million
44,758
(26,203)
18,555
(6,431)
(752)
(399)
30
11,003
(166)
10,837
(2,532)
8,305
8,305
30.32

Figs Pakistan Limited

Notes to the financial statements
For the year ended 31 December 2011
1

Sales
Manufactured goods
Gross sales
Sales tax
Imported goods
Gross sales
Sales tax
Sales discounts

Note

Rs. in million
56,528
(10,201)
46,327
1,078
(53)
1,025
(2,594)
44,758

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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012
2

Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125)
Stores and spares consumed
Salaries, wages and benefits (2,367 55%)
Utilities (734 85%)
Depreciation and amortizations (1.287 70%)
Stationery and office expenses (230 25%)
Repairs and maintenance (315 85%)

2.1

Opening work in process

Closing work in process
Opening finished goods (manufactured)
Closing finished goods (manufactured)
Finished goods (imported)
Opening stock
Purchases

Rs. in million
22,229
180
1,302
624
901
58
268
25,562
73
(125)
25,510
1,210
(1,153)
25,567
44
658
702
(66)
636
26,203

Closing stock

2.1

Salaries, wages and benefits include Rs. 30 million (54 55%) and Rs. 24 million (44 55%) in
respect of defined contribution plan and defined benefit plan respectively.

Distribution costs
Advertisement and sales promotion
Outward freight and handling
Salaries, wages and benefits (2,367 30%)
Utilities (734 5%)
Depreciation and amortization (1,287 20%)
Stationery and office expenses (230 40%)
Repairs and maintenance (315 5%)

3.1
4

3.2

4,040
1,279
710
37
257
92
16
6,431

Salaries, wages and benefits include Rs. 16 million (54 30%) and Rs. 13 million (4430%) in
respect of defined contribution plan and defined benefit plan respectively.
Administrative expenses
Rs. in million
Salaries, wages and benefits (2,367 15%)
4.1
355
Utilities (734 10%)
73
Depreciation and amortization (1,287 10%)
129
Stationery and office expenses (230 35%)
80
Repairs and maintenance (315 10%)
31
Legal and professional charges
71
Auditor's remuneration
4.2
13
752

4.1

Salaries, wages and benefits include Rs. 8 million (54 15%) and Rs. 7 million (4415%) in
respect of defined contribution plan and defined benefit plan respectively.

4.2

Auditor's remuneration
Audit fees
Taxation services
Out of pocket expenses

Rs. in million
8
4
1
13
Page 3 of 7

FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012
5

5.1

Other operating expenses

Donation
Worker's Profit Participation Fund
Worker Welfare Fund
Loss on disposal of property, plant and equipment

5.1

34
257
98
10
399

Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the
companys directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in which a director or
his spouse had any interest at any time during the year.

A.3

(i)

Other operating income

Income from financial assets
Dividend income
Return on savings account
Income from non-financial assets
Scrap sales
Finance costs
Finance charges on short term borrowings
Exchange loss
Finance charges on lease
Taxation
Current - for the year
Deferred (3,120 35%)

Rs. in million
12
2
16
30
133
22
11
166
1,440
1,092
2,532

This is an adjusting post reporting event as it provides evidence of conditions that existed at the
end of the reporting period. The reasons for the competitors price reduction will not have arisen
overnight, but will normally have occurred over a period of time, may be due to superior
investment in technology.
An inventory write down of Rs. 2.5 million should be recognized and the amount included as
inventory on the Statement of Financial Position reduced to Rs. 12.5 million.

(ii) The provision should be recognized because the obligating event is the communication of event
to the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognized to the extent of redundancy costs. IAS
prohibits the recognition of future operating losses, staff training and profits on sale of assets.
(iii) This is a non-adjusting event because the burglary and theft of consumable stores occurred after
reporting date. However, if the event is material, it should be disclosed in the financial
statements unless the loss is recoverable from the insurance company.
(iv) The drop in value of investment in shares is a non-adjusting event. Since the legislation was
announced after the reporting date, the event is not a past event. However, if the amount is
material, it should be disclosed in the financial statements.

Page 4 of 7

FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012
(v)

This is an adjusting event as it provides evidence of conditions that existed at the end of the
reporting period. The insolvency of a debtor and the inability to pay usually builds up over a
period of time and it can therefore be assumed that it was facing financial difficulty at year-end.
A bad debts expense of Rs. 1.5 million should be recognized in SOCI.

(vi) It is a non-adjusting event because the declaration was announced after the year-end and there
was no obligation at year end. Details of the bonus shares declaration must, however, be
disclosed.
A.4

(a)

Following are the criteria that should be used while recognizing intangible assets from research
and development work.
(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if , an entity can
demonstrate all of the following:
the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset.
the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the intangible asset during
its development.

(b) (i)

Since the product met all the criteria for the development of the product, it should be
recognized as an intangible in the statement of financial position (SOFP) of the company.
However, RI should capitalize only the development work (i.e. Rs. 9 million) as intangible
asset. IAS-38 does not allow capitalization of cost relating to the research work, training of
staff and cost of trial run.
Since the product has a useful life of 7 years, the amortization expense amounting to Rs.
0.32 million (Rs. 9 million 3/12 7 years) should be recorded in the statement of
comprehensive income (SOCI).

(ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP
because:
it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful life
will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years. The amortization
to be recorded in SOCI is Rs. 2.83 million (Rs. 17 million 10/12 5).
(iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition
price is a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12
million (Rs. 2 million 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs. 10 million in the
SOFP. Since there is an indefinite useful life of the intangible assets, it should not be
amortized. Instead, RI should test the intangible asset for impairment by comparing its
recoverable amount with its carrying amount.
Page 5 of 7

FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

A.5

Taxation
Current (W-1)
Deferred (W-2)
Relationship between tax expense and accounting profit
Profit before taxation
Tax at the applicable rate of 35%
Less: Tax effect of exempt income
W-1: Computation of Current Tax
Profit before tax as per books
Add: Allowable income / Disallowed expenses
Accounting depreciation
Tax profit on sale of fixed assets
Bad debt expense
Less: Disallowed income / Allowable expenses
Tax depreciation
Accounting profit on sale of fixed assets
Capital gain
Bad debts written off

2011
2010
Rs. in million
20.48
10.76
(1.58)
(21.35)
18.90
(10.59)
2011
60.00
21.00
(2.10)
18.90
60.00

45.00

10.00
1.00
5.00

9.00

(8.00)
(0.50)
(6.00)
(3.00)

7.00
(7.00)
(4.00)

58.50

50.00

Tax losses to be brought forward

Taxable income

58.50

(19.25)
30.75

Tax liability (@ 35%)

20.48

10.76

2011
2010
Rs. in million
W-2: Computation of Deferred Tax
Fixed assets (2010: 95-90, 2011: 82.5-80) (W-2.1)
Provision for bad debts (2010: 1235%, 2011: 1435%) [W-2.2]
Closing balance of deferred tax
Less: Opening balance
Charge for the year
W-2.1 Movement of Fixed Assets
Opening balance
Disposal during the year
Depreciation for the year - 2011
Closing balance
W-2.2 Movement of provision for bad debts
Opening balance
Provision for the year
Write off during the year
Closing balance

0.87
(4.90)
(4.03)
(2.45)
(1.58)

1.75
(4.20)
(2.45)
(18.90)
(21.35)

Accounting
95.00
(2.50)
(10.00)
82.50

Tax

2011
12.00
5.00
(3.00)
14.00

2010

90.00
(2.00)
(8.00)
80.00

9.00
7.00
(4.00)
12.00

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FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012
(THE END)

Page 7 of 7