FINANCIAL ACCOUNTING AND REPORTING

March-April 2021

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. (a) The presentation and classification of items in the Financial Statements should be the same from one
period to the next - what are the exceptions of this statement? 4
(b) IAS 1 ends by listing some specific disclosures which will always be required if they are not shown
elsewhere in the financial statements - explain those specific disclosures. 4
(c) Rahim's sole activity is the operation of hotels all over the world. After a period of declining
profitability, Rahim's directors made the following decisions during the year ended 30 June 2020:
 it disposed of all of its hotels in country A;
 it refurbished all of its hotels in country B in order to target the holiday and tourism market. The
previous target market in country B had been aimed at business clients.
Requirement:
Treating the two decisions separately, explain whether they meet the criteria for being classified as
discontinued operations in the financial statements for the year ended 30 June 2020. 3
2. On March 2021, you were hired by HX Ltd, a family owned company as a staff member of its newly
created internal auditing department. While reviewing the company’s records for 2019 and 2020, you
discovered that no adjustments have yet been made for the items listed below.
a) Interest income of Tk 14,100 was not accrued at the end of 2019; it was recognized when received in
February 2020.
b) A computer costing Tk 4,000 was expensed when purchased on July 1, 2019. It was expected to have
a 4 years’ life with no residual value. The company typically uses straight line depreciation for all
fixed assets.
c) Research costs of Tk 33,000 were incurred early in 2019. They were capitalized and were to be
amortized over a 3-year period. Amortization of Tk 11,000 was recorded for 2019 and Tk 11,000 for
2020.
d) On January 2, 2019, HX Ltd leased a building for 5 years at a monthly rental of Tk 8,000. On that
date, the company paid the following amounts which were expensed when paid.
Security deposit Tk 20,000
First month’s rent 8,000
Last month’s rent 8,000
e) The company received Tk 6,000 from a customer at the beginning of 2019 for services that it is to
perform evenly over a 3-year period beginning in 2019. None of the amount received was reported as
unearned revenue at the end of 2019.
f) Merchandise inventory costing Tk 18,200 was in the warehouse at December 31, 2019 but was
incorrectly omitted from the physical count at that date. The company uses the periodic inventory
method.
Requirement:
Indicate the effect of any errors on the net income figure reported on the income statement for the year
ending December 31, 2019 and the retained earnings figure reported on the statement of financial
position at December 31, 2020. Assume all amounts are material and ignore income tax effects. Using
the following format, enter the appropriate Taka amount in the appropriate columns. Consider each
item as independent of the other items. 15
Item Net income for 2019 Retained earnings at 31 December 2020
Understated Overstated Understated Overstated

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3. The Desh Company began operations in 2015, engaging in a number of business activities ranging from
manufacturing and marketing durable goods to writing technical business textbooks on which the firm
collects royalty income. The accounting for these many activities resulted in a number of differences
between reporting for book and tax purposes. For financial reporting purposes, the company accrued
estimated warranty costs when it sold products under warranty, deferred advance royalty payment it
received and prepaid many operating expenses. For tax purposes, it recognized warranty costs when paid,
royalty income when cash was received and operating expenses when cash was paid. The opening and
closing balances in these accounts for 2020 were:
Amount Taka
Balance: Debit (credit) 1-Jan 31-Dec Changes during the year
Accrued warranty costs (50,000) (40,000) 10,000
Deferred royalty income (10,000) (40,000) (30,000)
Prepaid expenses 33,000 25,000 (8,000)

All three accounts are classified as current items on the balance sheet. The company depreciates its
manufacturing equipment using an accelerated method for tax purposes and a straight-line method for
financial reporting. The schedule of book and tax depreciation for 2020 and all remaining years for the
company’s existing equipment is:
Book Tax
Year (Taka) Depreciation Depreciation
2020 (current year) 90,000 14,000
Future Years
2021 9,000 9,000
2022 9,000 6,000
2023 9,000 3,000
27,000 18,000
The Company’s 2020 pretax accounting income was Tk 8,000. This includes Tk 2,000 of interest income
on municipal bonds that is not taxable. The history of taxable income reported by the company since it
began operations is:
Year Taxable income
(loss) Taka
2015 2,000
2016 17,000
2017 (59,000)
2018 24,000
2019 9,000

The company elected the carryforward option for the 2017 loss. As of January 1, 2020 Tk 52,000 of the
NOL had been used, leaving a carryforward balance of Tk 26,000.
The marginal tax rate the company expected to be effective in 2020 and 2021 ( and for all prior years) is
34%. However, during 2020 a tax law was enacted that will change the tax rate to 40% for 2022 and
subsequent years.
There are no prior taxes currently payable or any prior tax refunds currently receivable. At January 1,
2020, there are opening balances in the deferred tax assets account of TK 29,240, in the valuation
allowance of Tk 5,100 and in the deferred tax liability account of Tk 15,980.

Requirements:

(a) Determine the 2020 income tax expense assuming that the company expects taxable income
exclusive of temporary differences to be Tk 20,000 in 2021 but cannot support a forecast of taxable
income for subsequent years. 5

(b) Prepare the journal entry to record the company’s income tax expense for 2020 and determine the net
current and non-current deferred tax asset and deferred tax liability to be reported in the balance 7
sheet.

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4. Hamid Ltd is a company which makes exclusive furniture to customers’ precise specifications. An extract
from Hamid Ltd’s general ledger at 31 December 2020 is as follows:

Particulars Taka Taka

Raw materials and consumables 1,570,000 -
Salaries and wages 1,250,500 -
Work in progress inventories at 1 January 2020 45,600 -
Finished goods inventories at 1 January 2020 13,400 -
Land and buildings at cost (cost of land Tk 2,000,000) 3,600,000 -
Plant and machinery at cost 520,000 -
Office furniture at cost 32,000 -
Accumulated depreciation on buildings at 1 January 2020 - 640,000
Accumulated depreciation on plant and machinery at 1 January 2020 - 375,000
Accumulated depreciation on furniture at 1 January 2020 - 28,500
Intangible assets 15,000 -
Operating expenses 10,000 -
Accounts and other receivables 37,500 -
Accounts and other payables - 25,400
Retained earnings at 1 January 2020 - 1,968,600
Ordinary share capital of Tk 10 each - 500,000
4% redeemable preference share capital of Tk 10 each - 120,000
Share premium account - 200,000
Cash and cash equivalents 263,500 -
Revenue - 3,500,000
7,357,500 7,357,500

Additional information to be considered:

i) The old furniture were all scrapped. During the year the company used employees’ idle time which
amounted to a cost to the company of Tk 20,500 to produce new furniture for the company’s offices.
Raw materials costing Tk 54,000 were used. No adjustment has been made for these in the above.
ii) Plant is depreciated at a reducing balance basis at a rate of 20%. Office furniture is depreciated on a
15% straight line basis. Depreciation on the building and the plant should be charged to cost of sales.
iii) On 1 December 2020 the company made a 1 for 5 bonus issues of its ordinary shares against the share
premium account. No entries have been made in respect of this.
iv) Closing inventories at cost amounted to work in progress of Tk 50,200 and finished goods of Tk
15,000. The finished goods included a table with a cost of Tk 5,000. The customer who had ordered
this table has been declared bankrupt. He had paid a Tk 1,000 deposit (which has been credited to
revenue) and owed Tk 10,000 at the year end in respect of other items. It is estimated that the table can
be sold for Tk 4,000.
v) Land and buildings were revalued for the first time on 1 January 2020. The surveyor performing the
valuation estimated a valuation of Tk 5 million (including Tk 4 million for the land). Buildings will be
continued to be depreciated on a straight line basis at a rate of 4%; but Hamid Ltd made no transfer
between the revaluation reserve and retained earnings in respect of this.
vi) The intangible asset relates to patent acquired on the purchase of a sole trader on 1 January 2020. This
patent is considered to have a useful life of 20 years. The annual impairment review has indicated that
the patent has a recoverable value of Tk 14,000 on 31 December 2020.
vii) The preference shares are redeemable in 2022. Dividends of Tk 1 per share on the ordinary shares and
at the coupon rate on the preference shares were declared on 31 December 2020 and paid early in
2021. The income tax charge for the period has been estimated at Tk 250,000.

Requirements:
(a) Prepare a statement of profit or loss and other comprehensive income for the year ended 31
December 2020. 12
(b) Prepare a statement of financial position as at that date in an appropriate form. 10
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5. Cosmo Ltd is organized into several divisions. The following events relate to the year ended on 31
December 2020.
i) The computer division supplied a computer to a customer during the year that exploded, causing a fire.
Cosmo Ltd is being sued for damages. Lawyers have advised that there is a 30% chance of
successfully defending the claim. Otherwise the damages are expected to cost Tk. 10 million (present
value Tk. 9.5 million). The lawyers have investigated the cause of the problem with a team of accident
consultants. They have concluded that parts supplied to the computer division by Moon Ltd
contributed to the fire. Lawyers have estimated that Moon Ltd's contributory negligence amounted to
40% of the total damages. Negotiations have started with Moon Ltd and the lawyers believe that a
claim is likely to succeed.
ii) On 15 December 2020, the directors of Cosmo Ltd minuted their decision to close the operations of
the loss making space technology division. The decision and an outline of a plan were immediately
announced to employees and a press release was issued. The closure, which began on 4 January 2021,
has an estimated date for completion, including the sale of the non-current assets of the division, of 30
June 2021. The costs associated with the closure include the following:
Tk. '000
Employee redundancy costs 12,000
Lease termination costs 4,000
Relocating continuing staff to other divisions 3,000
Impairment losses 2,000
iii) Cosmo Ltd's retail division provides one-year warranties to its customers. Experience has shown that,
on average, 10% of sales from this division result in a warranty claim. Revenue from this division in
2020 was Tk. 8 million. At January 1, 2020 Cosmo Ltd had a warranty provision in place of Tk. 1
million. During the year claims of Tk. 600,000 were settled by the company.
Requirement:
Prepare the provisions and contingencies notes for the financial statements of Cosmo Ltd. for the year
ended 31 December 2020. 10

6. The draft summarized statements of financial position of Home Ltd, School Ltd and Airlines Ltd at 31
March 2020 are shown below:
Home Ltd School Ltd Airlines Ltd
Tk ‘000 Tk ‘000 Tk ‘000 Tk ‘000 Tk ‘000 Tk ‘000
Assets:
Non-Current Assets:
Property, plant and equipment 12,600 15,900 12,200
Investments 23,500 - -
36,100 15,900 12,200
Current Assets:
Inventories 7,800 4,930 2,700
Trade Receivables 6,550 4,650 3,840
Cash and cash equivalents 3,450 150 50
17,800 9,730 6,590
Total assets 53,900 25,630 18,790
Equity and Liabilities:
Shareholders’ equity:
Issued Tk 1 ordinary shares 12,000 10,000 5,000
Retained earnings 9,740 8,200 9,000
21,740 18,200 14,000
Non-current liabilities:
3.5% secured bank debt 25,500 1,500 -

Current liabilities:
Trade payables 5,110 5,150 4,300
Taxation 1,250 580 490
Dividends 300 200 -
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 6,660 5,930 4,790
Total equity and liabilities 53,900 25,630 18,790

Additional information:

i) Home Ltd acquired 8,000,000 Tk 1 ordinary shares in School Ltd on 1 April 2018 for Tk 2.50 cash
per share. At that date balance on School Ltd’s retained earnings was Tk 5,000,000. On 1 October
2019 Home Ltd acquired 1,500,000 Tk 1 ordinary shares in Airlines Ltd for Tk 4 cash per share.
Airlines Ltd should be accounted for as an associate.
ii) Home Ltd has undertaken annual review of goodwill for impairment. At 31 March 2019 an
impairment loss of Tk 1,680,000 was recognized in respect of School Ltd.
iii) School Ltd sold goods valued at Tk 3,300,000 to Home Ltd during the year; half of these goods
remained in the inventories of Home Ltd at the year end. School Ltd calculated the transfer price of
the goods at cost plus a mark-up of 10%.
iv) On 30 September 2019 Home Ltd sold 1,000,000 of its 8,000,000 shares in School Ltd for Tk
3,500,000. Home Ltd recorded the profit on sale correctly in its own financial statements.
v) The profits of School Ltd and Airlines Ltd for the year of Tk 3,000,000 and Tk 4,000,000
respectively accrued evenly over the year.
vi) The fair value of the plant of School Ltd was Tk 2,000,000 in excess of its carrying amount at the
date of acquisition. The group policy is to depreciate plant over ten years.
vii) At the acquisition date the financial statements of School Ltd disclosed a contingent liability for an
environmental damage claim. An independent expert quantified the fair value of the claim as Tk
200,000 at that date.
viii) Home Ltd has not recognized the dividend receivable from School Ltd in its draft balance sheet.

Requirements:
(a) Prepare the consolidated statement of financial position of Home Ltd as at 31 March 2020. 25
5
(b) Calculate the group profit on the disposal of the share in School Ltd.

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