FINANCIAL ACCOUNTING AND REPORTING

Nov-Dec 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 of 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) IAS 37 Provisions, Contingent Liabilities and Contingent Assets prescribes the accounting and
disclosures for those items named in its title. Define provisions and contingent liabilities as per IAS 37. 3
(b) Explain the qualitative characteristics of relevance and reliability and the potential for conflict
between them, giving an appropriate example. 4
(c) Evaluate the treatment of development expenditure set out in IAS 38 Intangible Assets against the
characteristics of relevance and reliability? 3
2. (a) ABC Limited is trying to determine the value of its ending inventory on February 28, 2021, the
company’s year-end. The accountant counted everything that was in the warehouse as of February 28,
which resulted in an ending inventory valuation of Tk 48,000. However, she did not know how to treat
the following transactions occurred during the first quarter of 2021. So she did not record them.
(i) On February 26, ABC shipped to a customer goods costing Tk 800. The goods were shipped FOB
shipping point, and the receiving report indicates that the customer received the goods on March 2.
(ii) On February 26, Shira Ltd shipped goods to ABC Ltd destination. The invoice price was Tk
350. The receiving report indicates that the goods were received by ABC Ltd on March 2.
(iii) ABC Ltd had Tk 620 of inventory at a customer’s warehouse “on approval”. The customer was
going to let ABC Ltd know whether it wanted the merchandise by the end of the week, March 4.
(iv) ABC Ltd also had Tk 400 of inventory on consignment at a Palatine craft shop.
(v) On February 26, ABC Ltd ordered goods costing Tk 780. The goods were shipped FOB
shipping point on February 27. ABC received the goods on March 1.
(vi) On February 28, ABC packaged goods and had them ready for shipping to a customer FOB
destination. The invoice price was Tk 350; the cost of the item was Tk 220. The receiving
report indicates that the goods were received by the customer on March 2.
(vii) ABC Ltd had damaged goods set aside in the warehouse on 28 February because they are no longer
saleable. These goods cost Tk 400 and ABC originally expected to sell these items for Tk 600.
Requirement:
For each of the preceding transactions, specify whether the item in the question should be included
in ending inventory and, if so, at what amount. For each item not included in ending inventory,
indicate who owns it and what account, if any, it should have been recorded in. 8
(b) Peter Limited reported the following income statement data for a 2-year period.
2019 2020
Tk Tk
Sales revenue 2,100,000 2,500,000
Cost of goods sold
Beginning inventory 320,000 440,000
Cost of goods purchased 1,730,000 2,040,000
Cost of goods available for sale 2,050,000 2,480,000
Ending inventory 440,000 520,000
Cost of goods sold 1,610,000 1,960,000
Gross profit 490,000 540,000
Peter uses a periodic inventory system. The inventories on January 1, 2019 and December 31, 2020
are correct. However, the ending inventory on December 31, 2019 was understated by Tk 60,000.
Requirements:
i) Prepare correct income statement data for the two years 5
ii) What is the cumulative effect of the inventory error on total gross profit for the two years? 4
iii) Explain in a letter to the CEO of Peter Ltd what has happened, i.e., the nature of the error and
its effect on the financial statements. 3
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3. (a) Lake Ltd. has the following results of operations on December 31, 2019:
• Pretax accounting income in 2019, its first year of operation, totals Tk 100,000. Taxable
income is Tk 90,000.
• Lake Ltd. has credit sales included in pretax accounting income totaling Tk 60,000, none of which
is included in taxable income. This amount will be included in taxable income in future years.
• The firm expensed in its financial statements Tk 50,000 as a provision for future warranty
costs in 2019. This amount was not deductible for tax purposes in 2019 but will be deductible
in future years.
• The enacted marginal tax rate for 2019 and all future years is 40%.
Requirement:
Determine income taxes payable and any deferred tax account amounts and show the journal entry
to record income tax expense for 2019. 10
(b) Lake Ltd. continues operation in 2020, with the following activities and results:
• Pretax accounting income in 2020 totals Tk 180,000. This includes Tk 100,000 of instalment
sales that are not included in taxable income. Collection during 2020 of prior year instalment
sales total Tk 30,000.
• Included in expenses for financial reporting are estimated warranty cost of Tk 120,000.
Warranty costs actually incurred during 2020 total Tk 10,000.
• On January 1, 2020 Lake Ltd. purchases machinery at a cost of Tk 100,000. The machinery
has a five-year estimated useful life with zero salvage value. Straight-line depreciation will be
used for financial reporting. For tax reporting, the machinery will be depreciated in the
amounts of Tk 45,000, Tk 35,000 and Tk 20,000 in 2020, 2021 and 2022 respectively (an
accelerated schedule).
• Lake Ltd. sublets a portion of its warehouse to another company and requires rent to be paid
in advance. Lake received an advance rent payment of Tk 20,000. This amount is included in
taxable income in 2020 but will be included in pretax accounting income of 2021.
• During 2020 a new tax law is enacted, decreasing the marginal tax rate to 35% beginning
January 1, 2021. (Taxable income in 2020 is taxed at the 40% rate).
• Management is confident the company will continue to be profitable in the future.
• Beginning 2020 deferred tax asset: Tk 20,000; deferred tax liability: Tk 24,000.
Requirement:
Determine income taxes payable and any deferred tax account amounts and show the journal entry
to record income tax expense for 2020. 10
4. The following trial balance relates to Ahmed Limited as at 30 June 2021:
Tk ‘000 Tk ‘000
Revenue (note (i)) 213,500
Cost of sales 136,800
Distribution costs 12,500
Administrative expenses (note (ii)) 19,000
Debenture interest and dividend paid (notes (ii) and (iii)) 20,700
Investment income 400
Equity shares of 25 paisa each 60,000
6% Debenture (note (ii)) 25,000
Retained earnings at 1 July 2020 18,500
Land and buildings at cost (land element Tk 10 million) (note (iv)) 50,000
Plant and equipment at cost (note (iv)) 83,700
Accumulated depreciation at 1 July 2020: buildings 8,000
Plant and equipment 33,700
Equity financial asset investments (note (v)) 17,000
Inventory at 30 June 2021 24,800
Trade receivables 28,500
Bank Balance 2,900
Current tax (note (vi)) 1,100
Deferred tax (note (vi)) 1,200
Trade payables 36,700
397,000 397,000
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 The following notes are relevant:
i) On 1 July 2020, Ahmed Limited sold one of its products for Tk 10 million (included in revenue
in the trial balance). As part of the sale agreement, Ahmed Limited is committed to the ongoing
servicing of this product until 30 June 2023 (i.e. three years from the date of sale). The value
of this service has been included in the selling price of Tk 10 million. The estimated cost to
Ahmed Limited of the servicing is Tk 600,000 per annum and Ahmed Limited’s normal gross
profit margin on this type of servicing is 25%. Ignore discounting.
ii) Ahmed Limited issued a Tk 25 million 6% debenture on 1 July 2020. Issue costs were Tk 1
million and these have been charged to administrative expenses. The debenture will be redeemed
on 30 June 2023 at a premium which gives an effective interest rate on the debenture of 8%.
iii) Ahmed Limited paid an equity dividend of 8 paisa per share during the year ended 30 June 2021.
iv) Non-current assets:
Ahmed Limited had been carrying land and buildings at depreciated cost, but due to a recent
rise in property prices, it decided to revalue its property on 1 July 2020 to market value. An
independent valuer confirmed the value of the property at Tk 60 million (land element Tk 12
million) as at that date and the directors accepted this valuation. The property had a remaining
life of 16 years at the date of its revaluation. Ahmed Limited will make a transfer from the
revaluation reserve to retained earnings in respect of the realization of the revaluation reserve.
Ignore deferred tax on the revaluation.
Plant and equipment is depreciated at 15% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30 June
2021. All depreciation is charged to cost of sales.
v) The investments had a fair value of Tk 15.7 million as at 30 June 2021. There were no
acquisitions or disposals of these investments during the year ended 30 June 2021.
vi) The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 June 2020. A provision for income tax for the year ended 30 June 2021 of Tk 7.4
million is required. At 30 June 2021, Ahmed Limited had taxable temporary differences of Tk
5 million, requiring a provision for deferred tax. Any deferred tax adjustment should be
reported in the income statement. The income tax rate of Ahmed Limited is 20%.
Requirements:
(a) Prepare a statement of profit or loss and other comprehensive income for Ahmed Ltd for the year
ended 30 June 2021. 11
(b) Prepare a statement of financial position for Ahmed Ltd as at 30 June 2021. 9
5. The draft statements of financial position of three companies as at 31 December 2020 are as follows:
Dhaka Ltd. Sylhet Ltd. Khulna Ltd.
Tk. Tk. Tk.
Non-current assets
Property, plant and equipment 697,210 648,010 349,400
Investment:
160,000 shares in Sylhet 562,000 - -
80,000 shares in Khulna 184,000 - -
1,443,210 648,010 349,400

Current assets
Inventories 495,165 388,619 286,925
Trade receivables 415,717 320,540 251,065
Cash and cash equivalents 101,274 95,010 80,331
Total assets 2,455,366 1,452,179 967,721

Equity
Ordinary share capital 600,000 200,000 200,000
Retained earnings 1,015,000 820,000 463,000
Total equity 1,615,000 1,020,000 663,000
Non-current liabilities 400,000 150,000 100,000
Current liabilities:
Trade payables 440,366 282,179 204,721
Total equity and liabilities 2,455,366 1,452,179 967,721

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You are given the following additional information:
i) Dhaka Ltd. purchased the shares in Sylhet Ltd. on 1 January 2015 when the retained earnings
of Sylhet Ltd. was Tk. 500,000. The goodwill and non-controlling interest arising on the
acquisition of Sylhet Ltd. should be measured using the proportionate method.
ii) The shares in Khulna Ltd. were acquired on 1 January 2017 when its retained earnings was
Tk. 242,000.
iii) An item of inventory included in the inventory figure for Dhaka Ltd. is valued at Tk. 20,000
which had been purchased from Sylhet Ltd. at cost plus 25%.
iv) An item of payable included in the trade payable figure for Dhaka Ltd. is Tk. 18,000 payable to
Khulna Ltd, the amount receivable being recorded in the trade receivables figure of Khulna Ltd.
v) Impairment reviews to date have revealed a total of Tk. 1,000 to be written off against goodwill in
respect of Sylhet Ltd and Tk. 2,000 written off in respect of Dhaka Ltd's investment in Khulna Ltd.
Requirements:
(a) Prepare the consolidated statement of financial position for Dhaka Ltd as at 31 December 2020. 20
(b) Identify the required accounting treatment for different levels of investment in undertaking for
consolidated accounts purpose, explaining why these are appropriate. 5
(c) Set out a brief explanatory note of how subsidiaries and associates are accounted for in the
consolidated statement of financial position. 5

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