FINANCIAL ACCOUNTING AND REPORTING

Time allowed- 3:30 hours

Total marks- 100

[N.B. - The figures in the margin indicate 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. Briefly explain the following statements:
(a) Profit is only earned in an accounting period if the equity at the end of the period is greater than it
was at the beginning. 4

(b) 'Backward-looking' is called one of the inherent limitations of financial statements. 4

(c) Within each individual country local regulations govern, to a greater or lesser degree, in preparing
and presenting financial statements. 4

2. You are the Finance Controller of a motor car producing company. The company has the following
non-current assets at 1 January 2019:
Amount in Tk. '000
Cost Accumulated Depreciation Carrying Amount
Freehold factory 1,440 144 1,296
Plant and equipment 1,968 257 1,711
Motor vehicles 449 194 255
Office equipment and fixtures 888 583 305
4,745 1,178 3,567

You are also given following information for the year ended on 31 December 2019:

a. The factory was acquired on 1 January 2014 and is being depreciated over 50 years.
b. Depreciation on other items is provided on cost on a straight-line basis. The rates used are 20%
for fixtures & fittings, 25% for cars and 10% for equipment.
c. On 1 January 2019, the factory was revalued to an open market value of Tk. 2.2 million and an
extension costing Tk. 500,000 became available for use. The directors wish to incorporate the
revaluation into the accounts.
d. The directors decided to change the method of depreciating motor vehicles to 30% on reducing
balance to give a more relevant presentation of the results and of the financial position.
e. Two cars costing Tk. 17,500 each were bought on 1 January 2019. Plant and fittings for the
factory extension cost Tk. 75,000 and Tk. 22,000 respectively.
f. When reviewing the expected lives of its non-current assets, the directors felt that it was
necessary to reduce the remaining life of a two old grinding machines to four years when it is
expected to be sold for Tk. 8,000 as scrap. The machine originally cost Tk. 298,000 and at 1
January 2019 had related accumulated depreciation of Tk. 58,000.

Requirement: Prepare the disclosure notes for property, plant and equipment for the year ended on 31
December 2019 as required by IFRSs. 15

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3. AB Limited operates in the pharmaceutical business. The following information relates to the
company's activities in research and development for the year ended on 31 October 2020.
a. Commercial production started on 1 June 2016 for Formula A. By 31 October 2019 Tk. 43,000 had
been capitalized in respect of development expenditure on this product. During the year a further
Tk. 10,000 was spent on development of this product.

AB Limited has taken out a patent in respect of Formula A which will last for ten years. Legal and
administrative expenses in relation to this of Tk. 2,000 were incurred on 1 November 2019.

In the current year, sales of Formula A amounted to Tk. 50,000. Sales are expected to be made over
the next three years of Tk. 150,000, Tk. 200,000 and Tk. 100,000 respectively.

b. The development of Formula B is at an earlier stage. Although the company believes it has a
reasonable expectation of future benefits from this project it has not yet been able to demonstrate
this with sufficient certainty. Expenditure on this project in the current year was Tk. 20,000.

Requirements: i) Calculate the total amount to be recognized in profit or loss in respect of the
above in the year ended on 31 October 2020. 4

ii) Draft the table showing the movement on intangible assets which should appear
in the notes to the Financial Statements of AB Limited for the year ended 31
October 2020. 6

4. Plato Corporation performs year end planning in November of each year before their calendar year
ends in December. The preliminary estimated net income is Tk 3 million. The CFO meets with the
company Chairman to review the projected numbers. He presents the following projected information.

Plato Corporation
Projected Income Statement
For the year ended December 31, 2021
Tk Tk
Net Sales 29,000,000
Cost of goods sold 14,000,000
Depreciation 2,600,000
Operating expenses 6,400,000 23,000,000
Income before income taxes 6,000,000
Income taxes 3,000,000
Net income 3,000,000
Plato Corporation
Projected
PlatoIncome Statement
Corporation
Selected Balance Sheet Information
Projected Income Statement
SelectedatBalance
December 31,Information
Sheet 2021
at December 31, 2021 Tk
Estimated cash balance Tk 5,000,000
Available
Estimatedfor
cashsale securities (at cost)
balance 10,000,000
5,000,000
Security fair value adjustment account
Available for sale securities (at cost) (1/1/21) 200,000
10,000,000
Security fair value adjustment account (1/1/21) 200,000

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 Estimated market value at December 31, 2021:

Estimated
Security Cost (Tk) Market
Value (Tk)
A 2,000,000 2,200,000
B 4,000,000 3,900,000
C 3,000,000 3,000,000
D 1,000,000 2,800,000
Total 10,000,000 11,900,000

Tk.
Equipment 3,000,000
Accumulated depreciation (5 year SL) 1,200,000
New robotic equipment (to be purchased 1/1/21) 5,000,000
Accumulated depreciation (5 year DDB) 2,000,000

The corporation has never used robotic equipment before, and CFO assumed accelerated method
because of the rapidly changing technology in robotic equipment. The company normally uses straight
line depreciation for production equipment.

Chairman explains to CFO that it is important for the corporation to show a Tk 8 million net income
before taxes because Chairman receives a TK 1 million bonus if the income before taxes and bonus
reaches Tk 8 million. He also cautions that he will not pay more than Tk 3 million in income taxes to
the government.
Requirements:
i) What can CFO do within IFRS to accommodate the Chairman’s wishes to achieve Tk 8
million income before taxes and bonus? Present the revised income statement based on your
decision. 9
ii) Are the actions ethical? Who are the stakeholders in this decision, and what effect does
CFO’s actions have on their interests? 9

5. MidLand Ltd constructs and operates private power generation facilities throughout Bangladesh. On
July 1, 2019 the company issued Tk 5 million of par value 10 years bonds to finance construction of a
new power plant at its newest site in Narayangonj. The bonds pay interest semiannually (on December
31 and June 30) at an annual rate of 8% and are callable by MidLand at 102% of par value. The bonds
were issued at a price that yields 10% annually to maturity.
Requirements: 3x5=15
i) Compute the issue price of the bonds.
ii) Compute the amount of interest expense on the bonds for 2019. MidLand Ltd uses the effective
interest method for amortizing bond discounts and premiums.
iii) MidLand uses the indirect method of computing cash flows from operations on its cash flow
statement. Indicate how much will be added to (or subtracted from) the 2019 accrual basis net
income figure that is related to the bonds to obtain cash flows from operations.
iv) Assume that the market yield on the bonds had fallen to 9% by July 1, 2021 and that MidLand
decided to retire the debt on that date either by purchasing the bonds on the open market or by
exercising its 102% call option. Which method of debt retirement is the least expensive for
MidLand?
v) Produce the journal entry that MidLand Ltd would record on July 1, 2021 when it retired the
bonds through an open market purchase.

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6. Dhaka Lilimted acquired its 80% interest in the ordinary shares and 25% interest in the redeemable
preference shares of Khulna Limited for Tk. 9,000 and Tk. 1,000 respectively on 1 April 2013 when
Khulan Limited's retained earnings were Tk. 4,000. There were no other reserves at that date. The
preference shares carry no votes.

The following are the draft statement of profit & loss of Dhaka Limited and Khulna Limited for the
year ended on 31 March 2019:

Dhaka Limited Khulna Limited

Amount in Tk. Amount in Tk. Amount in Tk. Amount in Tk.
Revenue 274,500 181,250
Dividend from Khulna Limited
Ordinary 4,800 -
Preference 150 -
Interest on Bank Deposit 250 100
279,700 181,350
Less:
Cost of sales 126,480 86,520
Distribution cost 67,315 42,885
Administrative cost 25,555 17,295
Preference dividend paid - 600
219,350 147,300
Profit before tax 60,350 34,050
Income tax 29,000 15,100
Profit for the year 31,350 18,950

The following information are also available:

a. The inventory of Dhaka Limited at 31 March 2019 includes goods purchased from Khulna
Limited at a profit to that company of Tk. 700. Total intra-group sales for the year amounted to
Tk. 37,500.
b. On 1 April 2018, Dhaka Limited sold plant costing Tk. 7,000 to Khulna Limited for Tk.
10,000. The profit on sale has been taken to cost of sales. Depreciation has been provided by
Khulna Limited at 10% per anumn on the cost of Tk. 10,000.
c. Included in Khulna Limited's administrative cost is an amount for Tk. 3,500 in respect of
management charges invoiced and included in revenue by Dhaka Limited.
d. Khulna Limited's issued share capital comprises 10,000 at Tk. 0.50 ordinary shares and 4,000
at Tk. 1 15% redeemable preference shares.
e. Four years ago a goodwill impairment loss was recognized in Dhaka Limited's consolidated
financial statements leaving goodwill in the consolidated statement of financial position at Tk.
1,200. A further Tk. 180 impairment loss needs to be recognized in the current year.
f. Retained earnings at 1 April 2018 were Tk. 576,000 for Dhaka Limited and Tk. 72,600 for
Khulna Limited. Non-controlling interest is measured on the proportionate basis.
Requirements:
i) Prepare the consolidated statement of profit & loss for the year ended on 31 March 2019 and
calculate the retained earnings brought forward attributable to the owners of Dhaka Limited
and to the non-controlling interest. 15
ii) For each adjustment you have made in the consolidation schedule explain why you have made
it (include in your answer the journal adjustment and the impact on consolidated profit). 15

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