All Rights Reserved

THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

FINAL EXAMINATION – DECEMBER 2009

(35) Advanced Financial Accounting 03-01-2010

Morning
[9.00 – 12.00]
Time: 3 hours

• Instructions to candidates: No. of Pages: 07

No. of questions: 06
(1) All questions should be answered.
(2) Show all workings. State clearly assumptions made by you, if any.
(3) All answers should be in one language, in the medium applied for, in the booklets provided.
(4) Use of calculators is permitted.
(5) 100 marks.

01. Janasarana Ltd. is a limited liability company incorporated in Sri Lanka for
manufacture and sale of processed food for domestic market. The following Trial
Balance was extracted from its books of account as at 31st March 2009:
Trial Balance as at 31st March 2009
Dr Cr
(Rs.'000) (Rs.'000)
Stated Capital
Ordinary shares 12,000
15% Preference shares 5,000
Retained Earnings, as at 01st April 2008 2,500
Land & Buildings, at cost 9,000
Machinery, at cost 3,500
Furniture & Equipment, at cost 1,250
Motor Vehicles, at cost 4,500
Provision for Depreciation, as at 01st April 2008
Buildings 1,400
Machinery 800
Furniture & Equipment 450
Motor Vehicles 1,800
Investments, at cost 8,000
Inventories, as at 31st March 2009 1,250
Cost of sales / Sales 8,730 15,860
Trade Receivables / Trade Payables 2,245 2,395
Provision for Doubtful debts – as at 01st April 2008 85
Cash and Bank balances 720
Tax paid 1,360
Administration expenses 1,330
Selling and Distribution expenses 1,580
Other operating expenses 525
Finance charges 300
15% Bank loan 2,000
44,290 44,290

The following additional information is provided:-

(1) The value of the inventories shown in the trial balance represents the cost of
inventories ascertained by perusing the stock records. During stock taking carried
out at the year end, it was observed that processed food items costing
Rs.150,000/- had passed the expiry date and those items could be sold for
Rs.45,000/- as animal food. Additional expense of Rs.8,000/- had to be incurred
to dispose of these items.
(2) The cost of land included in the item Land and Buildings was Rs.5,000,000/-. The
company purchased machineries for Rs.1,300,000/- on 01st September 2008. The
company sold a Motor Vehicle for Rs.1,600,000/- on 30th September 2008 which
was purchased on 01st October 2006 at a cost of Rs.2,500,000/-. No adjustment
had been made in this regard other than recording of cash proceeds received in
the Motor Vehicle account.

Depreciation should be provided on cost at the following rates:

Buildings - 05% per annum
Machinery - 20% per annum
Furniture & Equipment - 25% per annum
Motor Vehicle - 25% per annum

(3) The provision for doubtful debts as at 01st April 2008 was made up as follows:
Rs.
Specific provision – customer A 75,000
General provision 10,000
85,000

It has been proved that dues from A cannot be recovered and therefore the
amount should be written off. General provision was to be adjusted to represent
5% of outstanding Accounts Receivables.

(4) Administration expenses include a license fee of Rs.240,000/- paid in advance for
the calendar year 2009. Telephone, electricity and water bills of Rs.50,000/- in
total for March 2009 were paid in April 2009.

(5) Bank reconciliation statement prepared by the book keeper on 31st March 2009
was as follows:
Rs.
Balance as per bank statement 855,000
Less: Un-presented cheques (255,000)
Add: unrealized deposits 110,000
Bank charges and debit tax 10,000
720,000

(6) The tax advisors have estimated an amount of Rs.1,100,000/- as the tax liability
for the year of assessment 2008/09.

(7) Investments include both short-term and long-term investments valued at cost.
The cost and the market values of the investments at the balance sheet date
were as follows:
Cost Market value
Rs. Rs.
Short-term 5,000,000 5,100,000
Long-term 3,000,000 4,400,000
8,000,000 9,500,000

(8) Bank loan was obtained on 01st January 2009. Loan Capital is re-payable in
four(04) equal quarterly installments commencing from 01st April 2009 with the
relevant accrued interest.

(9) Dividends for Preference Shares were duly paid in April 2009.

2
 You are required to prepare, for Janasarana Ltd. the following, in a form suitable
for publication:
(a) Income Statement for the year ended 31st March 2009. (10 marks)
st
(b) Balance Sheet as at 31 March 2009. (10 marks)

(c) Notes to Property, Plant & Equipment showing its movements. (05 marks)

(d) Statement showing the changes in Equity and Reserves. (02 marks)
(Total 27 marks)

02. A Com Ltd. acquired 70% of the stated capital in T Com Ltd. on 01st April 2007. The
following are the balance sheets of the A Com Ltd. and T Com Ltd. as at 31st March
2009:
A Com Ltd. T Com Ltd.
Rs.’000 Rs.’000
Non-Current Assets
Freehold property – at cost 85,000 25,000
Plant & Machinery at (written down value) 20,000 -
Furniture and Fittings (written down value) 12,000 8,500
Investments 55,000 15,000
Current Assets
Inventory 9,500 3,500
Accounts Receivable 14,800 3,800
Cash 3,500 850
199,800 56,650
Share Capital & Reserves
Stated capital 95,000 35,000
Cumulative preference shares 35,000 -
Retained earnings 12,800 6,500
Non-Current Liabilities
15% Debentures 30,000 5,000
Current Liabilities
Accounts payable 18,500 8,500
Tax payable 8,500 1,650
199,800 56,650

The following additional information is provided:

(1) The retained earnings of T Com Ltd. as on 01st April 2007 was Rs.1,750,000/-.

(2) The inventory balance of T Com Ltd. includes Rs.750,000/- worth of goods at
invoice price which was purchased from A Com Ltd. A Com Ltd. invoices goods
to T Com Ltd. at cost plus 20%.

(3) Accounts payable of T Com Ltd. includes Rs.2,500,000/- payable to A Com Ltd.
for the goods purchased during the year.

(4) Investments in A Com Ltd. include Rs.30,000,000/- invested in T Com Ltd.

You are required to prepare, Consolidated balance sheet of the A Com Ltd. group
as at 31st March 2009. (14 marks)

3
03. (A) Briefly explain what is set out in “Garner Vs Murray Rule”. (02 marks)

(B) The following balance sheet was extracted from the partnership business carried
out by P, Q and R sharing profits and losses equally.
Balance Sheet as at 31st March 2009
Rs.’000
Non-Current Assets
Property, Plant and Equipment
(written down Value)
Land & Buildings 15,800
Motor Vehicle 8,900
Furniture & Fittings 6,500
31,200
Current Assets
Inventories – at cost 3,600
Accounts Receivables 4,200
(-) Provision for doubtful debts (210) 3,990
Investments 6,400
Cash at bank 790 14,780
45,980
Equity & Liabilities
Capital accounts
P 12,500
Q 12,500
R 11,000 36,000
Current accounts
P (2,000)
Q 4,000
R 2,500 4,500
Current liabilities
Accounts Payable 5,480
45,980

The partnership business was converted to a limited liability company as PQR Ltd. on
01st April 2009. PQR Ltd. acquired all assets and liabilities other than cash of the
partnership business for a purchase consideration calculated as follows:

(1) Land and buildings at a value of Rs.20,500,000/-.

(2) Motor Vehicle at a revalued amount of Rs.7,350,000/-.
(3) Furniture and Fittings at a value less than 10% of the book value.
(4) Accounts receivable subject to 10% provision from the book value for doubtful
debts.
(5) All other assets and liabilities at their book values.

The purchase consideration was discharged by allotting 1,680,000 number of Ordinary

Shares of PQR Ltd. (in the profit & loss sharing ratio of partners) at a value of Rs.25/-
per share.

The partnership business incurred a cost of Rs.625,000/- as an expense on

dissolution. Any surplus or deficit of the partners accounts should be adjusted by
introducing / drawing cash by the partners.

4
 You are required to prepare,

(a) All relevant accounts for the dissolution of the partnership.

(b) Opening balance sheet of PQR Ltd. (16 marks)

(Total 18 marks)

04. Srina Ltd. has its Head office in Gampaha and Branch in Kuliyapitiya. The following
trial balances have been extracted from the respective books of account of both the
head office and branch as at 31st March 2009:

Trial Balances as at 31st March 2009

Head Office Branch

Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.
Administration expenses 127,000 8,000
Branch current account 46,000
Stated capital 350,000
Cash at bank and in hand 19,000 2,000
Payables 22,000 3,000
Receivables 15,000 18,000
Distribution cost 38,000 12,000
Goods sent to branch 166,000
Head office current account 24,000
Plant & Machinery net book value 383,000 38,000
Retained earnings 28,000
Provision for unrealized profit on stock
2,000
at branch
Purchases / goods received from Head
225,000 154,000
Office
Sales 300,000 217,000
Stock / branch (at cost to branch)
15,000 12,000
01st April 2008
868,000 868,000 244,000 244,000

The following additional information is provided.

(1) Stock as at 31st March 2009 was valued as follows:

Rs.
Head office at cost 20,000
Branch at cost to branch 24,000
Goods in transit to branch at
12,000
cost to branch

(2) Goods purchased by the head office and sent to the branch are transferred at
cost plus 20%. On 31st March 2009, the branch had transferred Rs.10,000/- to
the head office bank account but as at that date no record had been made in
the head office books of account about that transfer.

5
 You are required to prepare the following:
(a) The Head Office, the Branch and the entire organization’s income statement for
the year ended 31st March 2009 in columnar form.
(b) Head office current account in the Branch books and Branch current account in
the Head office books.
(c) The Head Office, the Branch and the entire organization’s balance sheets as at
31st March 2009 in columnar form. (15 marks)

05. (A) State four(04) uses of preparing cash flow statements. (02 marks)

(B) Set out below are Income Statement and Balance Sheets of Cashino Ltd.
Income Statement for the year ended 31st March 2009
Rs. Rs.
(‘000) (‘000)
Turnover 9,800
(-) Cost of sales (4,350)
5,450
Less: Expenses
Salaries & Wages 1,500
Other operating expenses 2,350 (3,850)
Profit before finance costs 1,600
Interest cost (135)
Profit before tax 1,465
Tax (615)
Profit for the year 850
Retained earnings 400
1250
Less dividends (400)
Retained earnings 850

Balance Sheets as at 31st March

2009 2008
Rs. (‘000) Rs. (‘000)
Non-Current Assets
Property, Plant and Equipment
5,050 3,600
- at cost
Less: Accumulated depreciation (2,100) (1,350)
2,950 2,250
Current Assets
Inventories at cost 550 500
Trade receivables 125 200
Cash 135 810 100 800
3,760 3,050
Equity & Liabilities
Ordinary share capital 2,000 1,500
Debentures 500 850
Retained earnings 850 400
3,350 2,750
Current Liabilities
Trade payables 190 140
Accrued wages 85 50
Tax payable 85 75
Interest payable 50 410 35 300
3,760 3,050

6
 The following additional information is provided.

(1) Both sales and purchase transactions were carried out exclusively on credit basis.

(2) Equipment bought for Rs.250,000/- during last year was disposed off this year
for Rs.200,000/-. The accounting loss incurred on this transaction was
Rs.35,000/- and the same is included in other operating expenses.

(3) Depreciation charge for the year also included in other operating expenses.

(4) The company paid dividends in cash during the year.

You are required to prepare, Cash Flow Statement using of direct method for the
year ended 31st March 2009. (12 marks)
(Total 14 marks)

06. (A) State two(02) uses and two(02) limitations of accounting ratios. (02 marks)

(B) The following information was extracted from the books of two listed companies
engaged in the same industry:
A Ltd. B Ltd.
Net Profit after tax Rs.11,500,000 Rs.12,300,000
Dividend for preference shares Rs.400,000 Rs.400,000
Average number of ordinary shares issued 200,000 200,000
Market price per ordinary share Rs.150 Rs.200
Dividend per ordinary share Rs.16.50 Rs.19.32

You are required to:

(a) Compute the following ratios for the companies A Ltd. and B Ltd. based
on the information given above:

(i) Earnings per Share (EPS).

(ii) Price earning ratio (P/E) ratio.
(iii) Dividend yield.
(iv) Dividend cover.

(b) Comment on which of the above companies is more suitable in an investor’s

point of view. (10 marks)
(Total 12 marks)

– o0o –