FINANCIAL ACCOUNTING AND REPORTING

Time allowed – 3:30 hours

Total marks – 100
[Note: The figures in the margin include full marks. Questions must be answered in English. Examiner will take account of the
quality of language and the manner in which the answers are presented. Different parts, if any, of the same question must
be answered in one place in order of sequence.]
Marks
1. BC Fruits Ltd, a fruit bottling and canning company, is planning to expand its operations. The directors are
hoping to increase the range of preserved fruit products and in doing so will need to invest in new equipment.
They are also hoping to open a new facility in the northern part of the country.
The CFO has been asked to prepare a report on the following issues of conceptual framework. You are the Finance
Controller of the company and your CFO wants to address all issues in his report and has asked for your assistance.
Requirements:
Prepare brief notes for the CFO, addressing each of the following and using the Conceptual Framework as a
source of reference:
a) Identify potential providers of finance for BC Fruits Ltd and their information requirements in respect
of financial statements. 4
b) Explain the terms 'performance' and 'position' and identify which of the financial statements will assist
the user in evaluating performance and position. 6
c) Indicate why, for decision-making purposes, the financial statements alone are insufficient. 5
2. You are the Finance Controller of PQS Limited that wholesales and distributes toys and provides services
to other companies. The following balances have been extracted from the company's books of accounts as
at 31 December 2018.
Amount in Tk.
Ordinary share 800,000
5% redeemable preference shares 200,000
Share premium account 350,000
Retained earnings at 1 January 2018 2,000,000
Revenue 11,899,000
Purchase 8,935,000
Inventories at 1 January 2018 974,000
Staff cost - distribution 270,000
Staff cost - administration 352,000
Depreciation charge for the year
Freehold land and buildings 30,000
Distribution equipment 116,000
Other plant and equipment 160,000
General expenses 432,000
Interest receivables 41,000
Interest payables 35,000
Taxation - charge for the year 336,000
Dividend paid
Ordinary shares - final regarding 2017 60,000
Ordinary shares - interim regarding 2018 30,000
5% redeemable preference shares - for 2018 10,000
Patent rights 200,000
Freehold land & buildings - cost 1,200,000
Distribution equipment - cost 800,000
Other plant & equipment - cost 1,400,000
Accumulated depreciation at 31 December 2018
Freehold land and buildings 130,000
Distribution equipment 320,000
Other plant and equipment 250,000
Trade receivables 1,600,000
Trade Payables 850,000
Cash and cash equivalents 300,000
Tax liability 400,000
Additional information
(a) Included in revenue are invoices totaling Tk. 120,000 in relation to distribution services rendered under a
contract to a customer who is very unhappy with the quality of the services provided. The overall outcome of
the contract is uncertain and management believes that of the Tk. 90,000 costs incurred to date under the
contract, probably only Tk. 65,000 will be reimbursed by this customer.
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 (b) The patent was acquired during the year. Amortization of Tk. 20,000 should be charged to
administration expenses.
(c) Inventories at 31 December 2018 were valued at Tk. 1,304,000
(d) Costs not specifically attributable to one of the profit or loss expenses headings should be split 50:50
between distribution costs and administrative expenses.
(e)' Inventories carried at Tk. 846,000 were purchased from France in Euros and payment is due on 2
March 2019. At the date of the transaction the exchange rate was Tk. 100 to €1. At 31 December 2018
the exchange rate was Tk. 95 to €1.
(f) A final ordinary share dividend for 2018 of Tk. 50,000 was proposed in May 2019, payable on 28 June 2019.
(g) Tk. 450,000 cash was received during the year as a result of a rights issue of ordinary shares. The
nominal value of the shares issued was Tk. 100,000.
(h) On 1 June 2018 the company made the decision to sell its loss-making soft toy division as a result of
severe competition from the Far East. The company is confident that the closure will be completed by
30 April 2019. The division's operations represent in 2018 10% of revenue (after all adjustments), 15%
of cost of sales, 10% of distribution costs and 20% of administrative expenses. No disclosure are
necessary in the statement of financial position.
Requirements:
Prepare PQS Limited's statement of profit or loss and statement of changes in equity for the year 31
December 2018, a statement of financial position at that date and movement schedules and notes in
accordance with the requirements of IFRS, to the extent the information is available. 25
3. Pragati Limited has entered into the following transactions during the year ended 31 December 2018.
(a) On 1 October 2018, Pragati Limited received Tk. 400,000 in advance subscription. The subscriptions are for
20 monthly issues of a magazine published by Pragati Limited. Three issues of the magazine had been
dispatched by the year end. Each magazine is of the same value and cost approximately the same to produce.
(b) A batch of unseasoned timber, which had cost Tk. 250,000 was sold to BM Limited for Tk. 100,000 on 1
January 2018. Pragati Limited has an option to repurchase the timber in 10 years' time. The repurchase price
will be Tk. 100,000 plus interest charges @ 8% per anumn from January 2018 to the date of repurchase. The
market value of the timber is expected to increase as it seasons.
(c) Pragati Limited made a major sale on 1 January 2018 for a fee of Tk. 450,000 which related to a
completed sale and after-sales support for three years. The cost of providing the after-sales support is
estimated at Tk. 50,000 per anumn, and the mark-up on similar after sales only contracts is 20% on cost.
(d) The food division of Pragati Limited operates its retail outlets on a franchise basis. On 1 January 2018 a new
outlet was opened, the franchisee paying a fee of Tk. 500,000 to cover the initial services. The franchise is
for five years, and the franchisee will pay an additional fee of Tk. 60,000 commencing on 1 January 2018 to
cover marketing, managerial and other support services provided by Pragati Limited during the franchise
period. Pragati Limited has estimated that the cost of providing these services is Tk. 80,000 per anumn, and
has achieved a gross margin of 20% on providing similar services on other contracts.
Requirements:
(i) Prepare extracts from Pragati Limited's financial statements for the year ended 31 December 2018, clearly
showing how each of the above would be reflected. Notes to the financial statements are not required. 16
(ii) With reference to transaction (b) above, explain the concept of 'substance over form'. 4
4. Madina Ltd. has investments in two companies, a subsidiary, Beta Ltd, and an associate, Gama Ltd. You are
the in-charge of audit team for Madina Group. While reviewing the consolidated financial statements of the
Group, following issues came to your notice-
a) The draft consolidated statement of financial position at 31 December 2018 has been prepared by
simply adding together each line of the individual statements of financial position of Madina Ltd.
(parent company) and Beta Ltd.
b) The investment in Gama Ltd is being carried at cost.
The draft consolidated statement of financial position as at 31 December 2018 is shown below, together
with the individual statement of financial position of Gama Ltd at the same date:
Madina Group
(Draft consolidated)
Gama Ltd.
ASSETS BDT BDT
Non-current assets
Property, plant and equipment 4,000,000 350,000
Investments – 7,786,000 0
11,786,000 350,000
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 Current assets
Inventories 600,000 40,000
Trade and other receivables 1,295,000 50,000
Cash and cash equivalents 250,000 17,000
2,145,000 107,000
Total assets 13,931,000 457,000

EQUITY AND LIABILITIES

Equity
Ordinary share capital (BDT 1 shares) 3,400,000 300,000
Share premium account 1,000,000 15,000
Revaluation surplus 750,000 0
Retained earnings 1,450,000 -325,000
6,600,000 -10,000
Current liabilities
Trade and other payables 7,206,000 400,000
Income tax 125,000 67,000
7,331,000 467,000
Total equity and liabilities 13,931,000 457,000
Additional information:
a) Madina Ltd. acquired 80% of Beta Ltd on 1 January 2018 when Beta Ltd’s equity was as follows:
Equity-Beta Ltd. BDT
Ordinary share capital (BDT 1 shares) 1,400,000
Share premium account 100,000
Revaluation surplus 500,000
Retained Earnings 350,000
Equity 2,350,000

On 31 December 2018 Beta Ltd’s retained earnings were BDT 1,250,000 and its revaluation surplus was
BDT 350,000. All other components of equity were unchanged.
The consideration for the equity stock was paid in below manner-
i) Madina Ltd. had taken over an overdue loan of BDT 7,600,000, which Madina Ltd. had immediately paid off.
ii) Madina Ltd. handed over a sedan car with carrying amount of BDT 200,000. The car had a fair value of
BDT 1,000,000. No entry was passed in the books of Madina Ltd.
b) The fair values of the assets and liabilities of Beta Ltd. at the date of acquisition were equal to their
carrying amounts, with the exception of inventory. On 1 January 2018 the fair value of Beta Ltd’s
inventories was BDT 125,000 but their carrying amount was BDT 108,000. At 31 December 2018 half
of these inventories were still held by Beta Ltd.
c) Madina Ltd has decided to measure goodwill and the non-controlling interest using the proportionate method.
d) Madina Group acquired 40% of Gama Ltd on 30 June 2018 for BDT 186,000 when the retained
earnings of Gama Ltd were BDT 150,000. Gama Ltd. had declared 50% cash dividend, on 30
September 2018.
e) Gama Ltd. had a disaster in operation during the 4th quarter, which had led to negative retained earnings
at the end of the year.
f) On 1 January 2018 Madina Ltd. sold a machine to Beta Ltd for BDT 180,000. The machine had a
carrying amount in Madina Ltd’s books of BDT 156,000. The estimated remaining useful life of the
machine was reassessed on the date of sale at six years.
g) In October 2018, Madina Ltd. sold goods to Gama Ltd. for BDT 20,000, making a gross profit margin
of 30%. At 31 December 2018 Gama Ltd held one-third of these goods in its inventories.
h) Inventories in the statements of financial position of all three companies at 31 December 2018 were
based on physical inventory counts carried out on 31 December 2018.
i) However, on 10 January 2019 Beta Ltd received a report from one of its customers, showing that on 31
December 2018 the customer held BDT 23,600 (at cost to the customer) of Beta Ltd’s inventories on a
sale or return basis. Beta Ltd makes a gross profit margin of 25% on all sales but has not yet raised any
invoices for this transaction.
Requirement:
Prepare the consolidated statement of financial position of Madina Ltd. as at 31 December 2018. 25

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5. (a) CB Ltd. is a reputed multinational company in Bangladesh. The company was initially registered as a private
limited company, but very recently the company was converted to a Public Limited Company. In the
process, the company had issued shares to a number of new investors.
The Head of Reporting of CB Ltd. has just completed preparing the consolidated financial statements of
the company. During the audit kick-off meeting, the newly appointed audit manager had asked if all the
related party disclosures have been properly made. The audit junior has raised question about adequacy
of related party disclosure in below circumstances:
i. Mr. C, who owns 51% share in the company has acquired 20% stake in BZ Limited. The audit
managers view is BZ Limited should be treated as a related party of CB Limited.
ii. CX is the only importer of raw material for the company. CB has a significant amount of dues to
CX. Mr. X, the Chair of CX, often visits CB Premises. During his last visit, he had visited company
warehouse and had warned management about the working environment at factory premises. The
audit manager asked why CX or Mr. X has not been considered as a related party.
iii. Mr. Z is appointed as the Chief Operating Officer. His wife, Mrs. P, has a raw material supply
contract with the company since long. However, upon appointment, Mr. Z, stopped ordering further
material from her company, lest it should be questioned by the board. The audit manager is
convinced that the contract needs to be disclosed. Mr. Z will not like to disclose such dormant
contract as a related party disclosure.
Requirements:
You, as a newly appointed professional accountant, were asked to advise if related party disclosure
would be needed in above cases. Share your advice and underlying justification. 2x3=6
(b) A Limited has prepared below Profit or Loss Statement for the year ended 30 June 2019.
A Limited
Statement of Profit or Loss
For the year ended 30 June 2019
Taka
Revenue 1,000,000
Cost of goods sold (250,000)
Gross profit 750,000
Operating expenses
Selling expense (120,000)
Advertisement, Promotion expense (270,000)
Administrative expense (300,000)
Total operating expenses (690,000)
Operating profit 60,000
Finance income, net 24,000
Profit before tax 84,000
Income tax expense -25,000
Net profit after tax 59,000
You are the engagement partner for the audit of the company. Your Engagement Manager is having a
review meeting with you where he has asked for your opinion on below matters:
a) One of the suppliers of A Limited has imposed penal interest of USD 10,000 due to delay in payment of
annual maintenance fees. The bank has denied to remit the amount without permission from the
Government. Historically, the Government has never allowed remittance against penal interest.
b) On September 30, the Government enacted a new environment law, by virtue of which local environment
office would be able to levy Taka 200 per Kg. of by-products from its manufacturing plant. Until 30 June
2019, the company had produced 1,000 KG of such by-product. No provision was made.
c) An item has been produced at a manufacturing cost of Taka 18,000 against a customer’s order at an
agreed price of Taka 23,000. The item was in inventory at the year-end awaiting delivery instructions.
In July 2019 the customer was declared bankrupt and the most reasonable course of action seems to be
to make a modification to the unit, costing approximately Taka 3,000, which is expected to make it
marketable to other customers at a price of about Taka 19,000.
Requirements:
Please give your opinion in each of the above cases, in light of IFRS. Also assist your manager in re-
constructing the Profit or Loss account. 3x3=9

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