Assignment for Final Examination

Spring-2020

Course name: Corporate Financial Accounting

Course code:ACC-5512

Submitted To
Md. Musharof Hossain
Assistant Professor

Department of Business Administration

International Islamic University Chittagong

Submitted By

Name- Saleha kabir

Matric Number-R-191415
Semester-5th Major-Accounting
Contract Number-01798212249
Email Id-Tulictg11@gmail.com

Date of Examination-19.06.2020

Date of submission-21.06.2020
 Answer to the question no- 1(a)
An entity’s financial statement typically includes four basic components. These
are:
1. Statement of financial position/Balance Sheet.
2. Statement of profit or loss/ Income Statement.
3. Statement of Cash Flows/ Cash Flows Statement.
4. Statement of Changes in Shareholder’s Equity/Statement of Changes in Equity.

Answer to the question no-1(b)

The shortcomings of conventional accounting based on historical cost during
inflation:
(i) Failure to disclose current worth of the enterprise: The accounts presented on
the basis of historical concept do not show many effects which are due to
the inflation gap. Thus, the true and fair view is not shown.
(ii) Incomparable items in financial statements: Sometimes due to inflation, some
items in financial statements show higher value, it never means that the enterprise
is making progress. 
(iii) Difficult replacement of fixed assets: In historical cost concept, the depreciation
is charged on the original cost. While in inflation the cost of fixed assets is
increased, the rate of depreciation is not sufficient to replace fixed assets.
(iv) Inaccurate determination of profit: Historical cost accounting does not disclose
correct profit or loss in an inflationary situation. Inflation always shows more
profit due to over-valuation of closing stock, in such state of affair, the income tax
burden increases, the employees demand more salaries and perks. 

Answer to the question no-1(c)

The constraints of financial statements analysis :
• Incomplete Information-Generally, the financial statements are prepared for an
accounting period. Hence, there is a possibility of disclosing incomplete information.
The correct financial position and exact financial strength of the company can be
known when the business is closed down.

• No Brief Information-Accounting rules, methods and conventions are applied for

preparing financial statements. Sometimes experiences of the accountancy profession
is also used for preparation. These lead to detailed information included in the
financial statements.
 • Qualitative Information is Ignored-Only quantitative information are included in
the financial statements and are expressed in monetary terms. But, the qualitative
information such as efficiency of management executives, goodwill of the company,
employee and employer relationship, efficiency of workers, customer satisfaction,
loyalty of customers, competitive strength and the like are not expressed in monetary
terms.

• Disclose Wrong Financial Position-The financial position of a business concern is

affected by several factors such as economic, social and financial. But, the financial
statements include only financial factors. Both social and economic factors are not
recorded in the financial statements. This type of practice leads to disclosing wrong
financial position of the company.

• Shows only Historical Information-The financial statements are prepared taking

into account of recorded historical costing information. They do not consider present
value of money and cost of living index in the price level changes. Hence, historical
information has little scope for decision making.

Answer to the question no-1(d)

A balance sheet reports a company’s financial position on a specific date.
Typical line items included in the balance sheet these are:
Assets:

1. Cash.
2. Marketable securities.
3. Prepaid expenses.
4. Accounts receivable.
5. Inventory.
6. Fixed assets.

Liabilities:

1. Accounts payable.
2. Accrued liabilities.
3. Customer prepayments.
4. Taxes payable.
5. Short-term debt.
6. Long-term debt.
 Answer to the question no-02(a)
Statement of general purchasing power gain or loss
Particular Historical Adjusted Price Purchasing
Amount Factor Level Power
Adjusted Gain or
Amount Loss
Conversion of Monetary Assets:
Cash at Bank 15000 125/110 17045
Account Receivable 45000 125/110 51136
Add: Increase in monetary assets during year
Cash at Bank 6000 125/120 6250
Account Receivable (5000) 125/120 (5208)

Total 61000 69223

Purchasing Power Loss(69223-61000) 8223
Monetary liability at the beginning of the year:
Accounts Payable 85000 125/110 96591
Less: Decrease in accounts payable (25000) 125/120 (26042)
Total 60000 70549
Purchasing Power Gain 10549
Net Purchasing Power Gain 2326
 Answer to the question no-02 (b)
Inflation accounting refers to the adjustment of the financial statements during
the inflationary periods.
Advantages

 It reflects the current and not the historical cost of the balance sheet.

 It is highly effective in times of general inflation or hyperinflation.

 Profit and loss will reflect the true condition of the company.

 Financial ratios based on figures, adjusted to the current value, are more meaningful.

Disadvantage

 Changing in price is a never-ending process hence it becomes difficult every time to

reinstate the figures of the company and present the financial statements.

 Inflation accounting is a complicated process and it involves too much calculation and

the data gathering process.

 In times of deflation, the depreciation cost will be on a lower side hence it does not

reflect the true picture.

 Answer to the question no –2 (c)

X Ltd

Statement of purchasing power gain or loss on monetary items

Particular Unadjusted amount Conversion Adjusted amount

factors
TK. TK.
Issue of share capital 3,00,000 150/100 4,50,000
Bank loan 2,00,000 150/125 2,40,000
Sales (320X2000) 6,40,000 150/125 7,68,000
Total 11,40,000 14,58,000
Less:
Purchase of plant 60,000 150/100 90,000
Purchase of goods 4,60,000 150/100 6,90,000
Expenses 20,000 150/125 24,000
Bank 21,000 150/140 22,500

Interest(2,00,000X14%X9/12

)
Total 5,61,000 8,26,500
Net Monetary items on (11,40,000- (14,58,000-

December 31,2019 5,61,000)=5,79,000 8,26,500)=6,31,500

Purchasing power loss(6,31,500-5,79,000) 52,500

X Ltd

Income statement

For the year ended December 31,2019.

 Particular Unadjusted amount Conversion factors Adjusted amount

TK. TK.
Sales 6,40,000 150/125 7,68,000
Less- Cost of goods 4,60,000 150/100 6,90,000

sold
Expenses 20,000 150/125 24,000
Interest on bank loan 21,000 150/140 22,500
Depreciation(60,000/10 6,000 150/100 9,000

)
Total 5,07,000 7,45,500
Net income 1,33,000 22,500

X Ltd

Balance sheet as at December 31, 2019

Particular Unadjusted Conversion Adjusted amount

TK. TK.
Issue of share capital 3,00,000 150/100 4,50,000
Bank loan 2,00,000 150/125 2,40,000
Accumulated profit 1,33,000 22,500
Total Liabilities 6,33,000 7,12,500
 Asset
Plant 60,000 150/100 90,000
Less: Depreciation 6,000 150/100 9,000
Cash at bank 54,000 81,000
Purchasing power 5,79,000 150/150 5,25,000

loss
Total Asset 6,33,000 7,12,500

Answer to the question no-3 (a)

From the standpoint of the lessor, leases may be classified for accounting

purposes as:

(a) Operating Leases,

(b) Capital Leases

Leases that meet one or more of the following four criteria:

1. The lease transfers ownership

2. The lease contains a bargain purchase option

3. The lease term is equal to 75% or more of the estimated economic life of

the property
 4. The present value of the minimum lease payments (excluding executory

costs) equals or exceeds 90% of the fair value of the property.

And meet both of the following criteria:

1. Collectability of the payments required from the lessee is reasonably predictable

2. No important uncertainties surround the amount of reimbursable costs yet to be

incurred by the lessor.

Answer to the question no-3(b)

1. Current Purchasing Power Technique: Current Purchasing Power Technique of

accounting requires the companies to keep their records and present the financial

statements on conventional historical cost basis but it further requires presentation of

supplementary statements in items of current purchasing power of currency at the end

of the accounting period.

2. Replacement Cost Accounting Technique (RCA) is an improvement over current

purchase power (CPP) as it suffers from that it does not take into the individual price

index related to the particular assets of a company. The RCA technique uses the index

directly relevant to the companies individual assets and not the general price index.

Therefore RCA technique is considered to be improved over the current purchasing

power technique. While using the Replacement Cost Accounting Technique will

 mean using a number of price indexes for conversion of financial statement and may

not be difficult to find out the relevant price index to be used in a particular case.

3. Current Value Accounting Technique Current value accounting is the concept

that assets and liabilities be measured at the current value at which they could be

sold or settled as of the current date. This varies from the historically-used

method of only recording assets and liabilities at the amounts at which they were

originally acquired or incurred

4. Current Cost Accounting Technique The Current Cost Accounting (CCA)

method is based on the concept that a business enterprise is a going concern which is

continuously replacing its assets. The method uses current dollars/ rupees and values

assets at their acquisition costs and hence no adjustment for inflation is done in the

accounts.

Answer to the question no-3 (c)

Requirement-(i)

This is a capital lease to Flynn since the lease term is 78% (7/9) of the asset’s economic life.

In addition, the present value of the minimum lease payment is more than 90% of the fair

value of the asset.

This is a capital lease to Bensen since collectability of the lease payment is reasonable

predictable, there are no important uncertainties surrounding the economic life. Because the

fair value of the equipment (160000) exceeds the lessor’s cost (130000). The lease is a sales

type lease.

Requirement – (ii)
Here,

Present Value = 1/ (1+.11)^7 = 0.481658

Present Value of Annuity = [1-{1/(1+.11)^7}] /.11 X (1+.11) = 5.230537863

Calculation of annual rental payment: 160000-(10000X0.481658)/5.230537863

=29668.73084 Answer

Requirement- (iii)

Here,

Present value of annuity = [1-{1/(1+.12)^7}] /.12 X (1+.12) =5.111407327

=5.111407327X29669=151650

01/01/2019

Leased equipment under capital lease ----------Dr 151650

Lease Liability-------------------------------------Cr 151650

Lease Liability ------------------Dr 29669

 Cash--------------Cr 29669

12/31/2019

Depreciation Expenses----------Dr 29664

Accumulated Depreciation-----Cr 21664

[ 151650/7=21664]

Interest Expenses------Dr 14638

Interest Payable-------Cr 14638

[(151650-29669)X0.12)=14638]

Requirement- (iv)

Workings:

*(29669X5.23053786)+(10000X0.481658)=160000

*130000-(10000X0.481658)=125183

*29699X5.23053786=155185

01/01/2019

Lease Receivable-----Dr 160000

Cost of goods sold-----Cr 125183

Sales-----------Cr 155185
 Inventory-----Cr 129998

Cash-----Dr 29669

Lease Receivable-------Cr 29669

12/31/2019

Interest Receivable-----Dr 14336

Interest Revenue-------Cr 14336

[(160000-29669)X.11]=14336

Answer to the question no-4 (a)

Particular Amount
Current Tax (160000X35%) 56000
Less- Over Provision 3000
Add-Deferred Tax Liabilities(8000X35%) 2800
Tax Changes for the Period 55800

Answer to the question no – 4 (b)

Requirement-a

ABC Company Current Tax

Particular 2013 2014 2015 2016 2017

Accounting Profit 30,000 30,000 30,000 30,000 30,000
 Add-Accounting depreciation 20,000 20,000 20,000 20,000 20,000

(1,00,000/5)
Total Accounting Profit 50,000 50,000 50,000 50,000 50,000
Less-Tax Depreciation (1,00,000X25%) (25,000 (25,000 (25,000 (25,000 ------

) ) ) )
Taxable Income 25,000 25,000 25,000 25,000 50,000
Current Tax (40%) 10,000 10,000 10,000 10,000 50,000

Requirement-(b)

ABC Company Deferred Tax

Particular 2013 2014 2015 2016 2017

Carrying Amount at year end 80000 60000 40000 2000 ------

0
Less-Tax Base at year end (75000) (50000) (25000) ----- ------
Taxable Temporary Difference 5000 10000 15000 2000 -------

0
Deferred Tax (40%) 2000 4000 6000 8000 ------

Deferred Tax Adjustment

Particular 2013 2014 2015 2016 2017

Accounting Depreciation 20000 2000 2000 20000 2000

0 0
Less: Tax Depreciation 25000 2500 2500 25000

0 0
Differences 5000 5000 5000 5000 (20000)
Deferred Tax 40% adjustment 2000 2000 2000 2000 (8000)

Requirement-(c)
 ABC Company

Profit & Loss Account

Particular 2013 2014 2015 2016 2017

Current Tax 10000 1000 1000 1000 20000

0 0 0
Deferred Tax Adjustment 2000 2000 2000 2000 (8000)
Total 12000 1200 1200 1200 12000

0 0 0

Answer to the question no -4 (c)

Requirement-a

X Company

Tax Profit

Particular Amount
Income Tax on Profit (1100000X25%) 275000
Add-Deferred taxation 160000
Add-Under Provision (400000-380000) 20000
Tax on Profit for 2019 455000

Requirement –(b)

Tax payable for 2019=275000

X Company

Balance Sheet

Particular Amount
(Current Liability)

Tax payable 275000

(Long term Liability)

Deferred Tax Liability 160000

Total Liabilities 435000