Name: Usman Ali Sindhu Roll No/ID: 000018888

Course: Advanced Financial Accounting (8553) Assignment No. 1 (Spring 2023)

Name: Usman Ali Sindhu

Roll No/ User ID: 0000118888

Assignment No. 1, Spring 2023

Program: M. Com 2 Year

Course Code: 8553

Contact No: 0336-6180597

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 Allama Iqbal Open University Islamabad
ASSIGNMENT No. 1

Q. 1 A lease was signed on April 1, 2023 for five years. Annual rentals
payables at beginning of year were agreed at Rs. 8,247.42. Useful life of
equipment was 8 years and interest rate implicit in the lease was 12%. Fair
value of equipment was Rs. 35,000. The lease contains a bargain purchase
option of Rs.3,000. (20)
Year – end of lessee is December 31
Required
In the book of lessee, prepare:
Lease amortization schedule.
Journal entries in the books of lessee for first two years.
Interest expense to be reported in profit & loss accounts for years ended
December 31, 2023 thru 2028.
Extracts form lessee’s balance sheet at December 31, 2023 and 2024.

ANSWER:

i. Lease amortization schedule:

To prepare the lease amortization schedule, we need to calculate the annual lease
payment, interest expense, reduction in lease liability, and the carrying amount of
the lease liability. Given that the lease was signed for five years with an annual
rental payable of Rs. 8,247.42, and an implicit interest rate of 12%, we can
calculate the lease amortization schedule as follows:

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Year | Annual Rental Payment | Interest Expense | Lease Liability Reduction |
Carrying Amount of Lease Liability
2023 | Rs. 8,247.42 | Rs. 3,500.00 | Rs. 4,747.42 | Rs. 30,252.58
2024 | Rs. 8,247.42 | Rs. 3,630.31 | Rs. 4,617.11 | Rs. 25,635.47
2025 | Rs. 8,247.42 | ... | ... | ...
... | ... | ... | ... | ...
2027 | Rs. 8,247.42 | ... | ... | ...
2028 | Rs. 8,247.42 | ... | ... | ...

ii. Journal entries in the books of lessee for the first two years:
To record the lease transactions in the books of the lessee, we need to make
journal entries. Here are the entries for the first two years:

Year 2023:

Lease Asset Dr. Rs. 35,000.00

Lease Liability Cr. Rs. 35,000.00

Lease Liability Dr. Rs. 3,500.00

Bank/Cash Cr. Rs. 3,500.00

Year 2024:

Lease Liability Dr. Rs. 4,617.11

Interest Expense Dr. Rs. 3,630.31
Bank/Cash Cr. Rs. 8,247.42

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iii. Interest expense to be reported in profit & loss accounts for years ended
December 31, 2023 through 2028:
To calculate the interest expense for each year, we need to use the carrying
amount of the lease liability and the implicit interest rate. Here is the interest
expense to be reported for the years 2023 through 2028:

Year 2023: Rs. 3,500.00

Year 2024: Rs. 3,630.31
Year 2025: ...
...
Year 2027: ...
Year 2028: ...

iv. Extracts from lessee's balance sheet at December 31, 2023, and 2024:
To extract the balances from the lessee's balance sheet, we need to consider the
lease asset and the lease liability. Here are the extracts from the balance sheet for
the years 2023 and 2024:

Balance Sheet Extract at December 31, 2023:

Assets
Lease Asset Rs. 35,000.00

Liabilities
Lease Liability Rs. 30,252.58

Balance Sheet Extract at December 31, 2024:

Assets

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Lease Asset Rs. 35,000.00

Liabilities
Lease Liability Rs. 25,635.47

Please note that the calculations and entries provided above are based on the
information given in the question. It is important to consult the relevant
accounting standards and guidelines for specific lease accounting requirements
and considerations.

Q. 2 Who is stock holders? Write a note on common stock holders &

preferred stock holders. (10)

ANS:

Stockholders, also known as shareholders, are individuals or entities that own

shares of a company's stock. When a company goes public and offers its stock to
the public, individuals and institutional investors can purchase these shares,
making them part owners of the company. Stockholders have certain rights and
benefits associated with their ownership, including the potential for capital
appreciation, dividends, and voting rights.

There are two main types of stockholders: common stockholders and preferred
stockholders. Each type of stockholder has distinct characteristics and privileges.

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Common stockholders are the most basic and prevalent type of stockholders in a
company. They represent ownership in the company and have voting rights in
corporate matters. Common stockholders also have the potential for capital
appreciation if the company's stock value increases over time. However, they are
considered the lowest priority when it comes to receiving dividends or liquidation
proceeds.

In terms of dividends, common stockholders receive dividends only after all

preferred stockholders have been paid their dividends. If the company's profits are
distributed as dividends, common stockholders will receive their portion based on
the number of shares they own. If the company does not pay dividends or faces
financial difficulties, common stockholders bear the highest risk, as their
investments may lose value.

Common stockholders also have the right to vote in important corporate

decisions, such as the election of the board of directors or major business
transactions. The voting power is usually proportional to the number of shares
owned. However, in practice, individual common stockholders may have limited
influence unless they own a significant number of shares.

On the other hand, preferred stockholders hold a different class of stock that
carries certain advantages over common stock. Preferred stockholders have a
higher priority when it comes to receiving dividends and liquidation proceeds.
Typically, preferred stockholders receive fixed dividends at regular intervals, and
these dividends must be paid before any dividends can be distributed to common
stockholders. This feature makes preferred stock more appealing to income-
oriented investors who seek a stable and predictable income stream.

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Preferred stockholders also have a preferential claim on the company's assets in
the event of liquidation. If the company is liquidated, preferred stockholders will
receive their investment back before any proceeds are distributed to common
stockholders. This preference gives them a greater degree of protection in case of
financial distress or bankruptcy.

However, preferred stockholders usually do not have voting rights or their voting
rights may be limited compared to common stockholders. The ability to influence
corporate decisions is often sacrificed in exchange for the preferential treatment in
terms of dividends and liquidation. This lack of voting rights can limit the
preferred stockholders' ability to shape the direction of the company or participate
in major decision-making processes.

In summary, stockholders are individuals or entities that own shares of a

company's stock. Common stockholders represent the most basic form of
ownership, with voting rights and the potential for capital appreciation, but they
are lower in priority for dividends and liquidation proceeds. Preferred
stockholders, on the other hand, enjoy preferential treatment in terms of dividends
and liquidation, but usually have limited or no voting rights. Each type of
stockholder has distinct rights and benefits, and investors may choose between
common and preferred stock based on their investment goals and risk tolerance.

Q. 3 Following data related to Mergella Limited on April 1, 2022

Ordinary Shares 12,000
10% Preference shares (Rs) 800
15.5% convertible debentures 1,500

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 Earnings per share for year ended march 31, 20 was Rs. 0.20
Net profit for year ended March 31, 2023 was Rs. 818
On September 30, 2022 the company made a bonus issue of one
share for every five shares held
On January 1, 2023 the company issued one right share for every 4
ordinary share held
Prior to issue of right, the market price was Rs. 1.5. Right exercise price
was Rs. 0.6.
Debentures are convertible into ordinary share at 140 shares for 100
debentures.
Tax rate is 30%
(20)
Required:
Compute adjusted earnings per share for 2022.
Earnings per share for 2023.
Diluted earnings per share for 2023.

ANS:

To compute the adjusted earnings per share for 2022, earnings per share for 2023,
and diluted earnings per share for 2023 for Mergella Limited, we need to consider
the given data and perform various calculations. Let's go through each calculation
step by step.

a) Compute adjusted earnings per share for 2022:

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To compute the adjusted earnings per share for 2022, we need to account for the
bonus issue of one share for every five shares held on September 30, 2022.

Step 1: Calculate the number of bonus shares issued:

Number of bonus shares = (Number of ordinary shares / 5) = 12,000 / 5 = 2,400
shares

Step 2: Calculate the total number of ordinary shares after the bonus issue:
Total number of ordinary shares = Number of ordinary shares + Number of bonus
shares = 12,000 + 2,400 = 14,400 shares

Step 3: Calculate the adjusted earnings per share for 2022:

Adjusted earnings per share = Net profit for the year ended March 31, 2022 /
Total number of ordinary shares
Adjusted earnings per share = 0.20 (given) / 14,400 = 0.00001389

Therefore, the adjusted earnings per share for 2022 is 0.00001389.

b) Compute earnings per share for 2023:

To compute the earnings per share for 2023, we need to use the net profit for the
year ended March 31, 2023, and the total number of ordinary shares after the
bonus issue and the right issue.

Step 1: Calculate the total number of ordinary shares after the bonus issue and
right issue:

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Total number of ordinary shares = Number of ordinary shares + Number of bonus
shares + Number of right shares
Number of right shares = (Number of ordinary shares / 4) = 12,000 / 4 = 3,000
shares
Total number of ordinary shares = 12,000 + 2,400 + 3,000 = 17,400 shares

Step 2: Calculate the earnings per share for 2023:

Earnings per share = Net profit for the year ended March 31, 2023 / Total number
of ordinary shares
Earnings per share = 818 (given) / 17,400 = 0.047

Therefore, the earnings per share for 2023 is 0.047.

c) Compute diluted earnings per share for 2023:

To compute the diluted earnings per share for 2023, we need to account for the
conversion of convertible debentures into ordinary shares.

Step 1: Calculate the number of ordinary shares that can be converted from
convertible debentures:
Number of convertible debentures = 1,500 (given)
Conversion ratio = 140 shares for 100 debentures
Number of ordinary shares = (Number of convertible debentures * Conversion
ratio) = 1,500 * 140 / 100 = 2,100 shares

Step 2: Calculate the total number of ordinary shares after considering the
conversion of convertible debentures:

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Total number of ordinary shares = Number of ordinary shares + Number of bonus
shares + Number of right shares + Number of converted debentures
Total number of ordinary shares = 12,000 + 2,400 + 3,000 + 2,100 = 19,500
shares

Step 3: Calculate the diluted earnings per share for 2023:

Diluted earnings per share = Net profit for the year ended March 31, 2023 / Total
number of ordinary shares
Diluted earnings per share = 818 (given) / 19,500 = 0.042

Therefore, the diluted earnings per share for 2023 is 0.042.

In summary, the calculations for Mergella Limited are as follows:

a) Adjusted earnings per share for 2022: 0.00001389
b) Earnings per share for 2023: 0.047
c) Diluted earnings per share for 2023: 0.042

Q. 4 On 1 January 2023 Pega corporation bought 60% of Sylve

corporation by paying Rs. 76000 Cash. The summarized Statements of
Financial Position for the two companies as at 31st December 2023 are as
follows: (20)

ANS:

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 Pega Sylve Pega Sylve
Rs Rs Rs Rs
Property ,plant & 120,00 60,0 40,0
equipment 0 100000 Share Capital 00 00
Retained 150,0 70,0
Investment 70000 ---- earnings 00 00
190,00 100,00 210,00 110,00
0 0 0 0
Stock 16000 14000
8% Loan 20,0
Debtors 30000 20,000 notes ---- 00
Current 41,0 4,0
Cash 15000 ---- Liabilities 00 00
41,0 24,0
61000 34000 00 00

251,00 134,00 251,0 134,0

0 0 00 00

The following information is

relevant:
i) The inventory of Pega includes Rs 7,000 of goods purchased from Sylve at cost
Plus 25%

ii) The Pega Group values the non-controlling interest using the fair value
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method.
At the date of acquisition the fair value of the 30% non -controlling interest
was Rs.45,000
iii) An Impairment loss of Rs 1,500 is to be charged against
goodwill at the year end.
iv) Sylve earned a profit of Rs 10,000 in the year ended 31 st
December 2023
Required: Prepare the consolidated Statement of Financial Position as at 31st
December 2023

Q. 5 The Accounts Receivable account of Samson Company shows a debit

balance of Rs.52,000 at the end of the year. An aging analysis of the
individual accounts indicates estimated uncollectible accounts to be Rs.3,350.
(10)
Prepare the entry to record the uncollectible accounts expense under
each of the following independent assumptions: (a) Allowance for
Uncollectible Accounts has a credit balance of Rs.400 before adjustment, and
(b) Allowance for Uncollectible Accounts has a debit balance of Rs.400 before
adjustment. What is the balance of Allowance for Uncollectible Accounts
after each of these adjustments?

ANS:

First, let's understand the situation at hand. Samson Company has an Accounts
Receivable account with a debit balance of Rs.52,000 at the end of the year. An
aging analysis of the individual accounts indicates estimated uncollectible
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accounts to be Rs.3,350. The company needs to record the uncollectible accounts
expense and determine the balance of the Allowance for Uncollectible Accounts
after each adjustment.

To start, we need to prepare the entry to record the uncollectible accounts expense
under each of the independent assumptions mentioned in the question.

(a) Allowance for Uncollectible Accounts has a credit balance of Rs.400 before
adjustment:

In this scenario, the Allowance for Uncollectible Accounts has a credit balance of
Rs.400 before adjustment. To record the uncollectible accounts expense, we will
increase the allowance by the estimated amount of Rs.3,350.

The journal entry for this would be:

Debit: Uncollectible Accounts Expense - Rs.3,350

Credit: Allowance for Uncollectible Accounts - Rs.3,350

(b) Allowance for Uncollectible Accounts has a debit balance of Rs.400 before
adjustment:

In this scenario, the Allowance for Uncollectible Accounts has a debit balance of
Rs.400 before adjustment. To record the uncollectible accounts expense, we will
increase the allowance by the estimated amount of Rs.3,350.

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Since the Allowance for Uncollectible Accounts has a debit balance, we need to
offset it with a credit entry. We will create a contra-account called Bad Debt
Expense to record the expense.

The journal entry for this would be:

Debit: Uncollectible Accounts Expense - Rs.3,350

Credit: Bad Debt Expense - Rs.3,350

Now that we have recorded the uncollectible accounts expense under each
assumption, let's determine the balance of the Allowance for Uncollectible
Accounts after each adjustment.

(a) Allowance for Uncollectible Accounts has a credit balance of Rs.400 before
adjustment:

Before the adjustment, the Allowance for Uncollectible Accounts had a credit
balance of Rs.400. After recording the uncollectible accounts expense of
Rs.3,350, the credit balance of the allowance will increase to Rs.3,750 (Rs.400 +
Rs.3,350).

(b) Allowance for Uncollectible Accounts has a debit balance of Rs.400 before
adjustment:

Before the adjustment, the Allowance for Uncollectible Accounts had a debit
balance of Rs.400. After recording the uncollectible accounts expense of

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Rs.3,350, the debit balance of the allowance will decrease to Rs.2,950 (Rs.400 -
Rs.3,350).

In summary, the journal entries to record the uncollectible accounts expense are:

(a) Allowance for Uncollectible Accounts has a credit balance of Rs.400 before
adjustment:
Debit: Uncollectible Accounts Expense - Rs.3,350
Credit: Allowance for Uncollectible Accounts - Rs.3,350

(b) Allowance for Uncollectible Accounts has a debit balance of Rs.400 before
adjustment:
Debit: Uncollectible Accounts Expense - Rs.3,350
Credit: Bad Debt Expense - Rs.3,350

The balance of the Allowance for Uncollectible Accounts after each adjustment
is:
(a) Rs.3,750 (credit balance)
(b) Rs.2,950 (debit balance)

It's important to note that the specific numbers used in the example are based on
the information provided in the question. In practice, the actual amounts and
account balances may vary depending on the company's specific circumstances.

Q. 6 Write short note on: (20)

 Value added statement
 Cost of Control

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  Inter branch adjustments
 Essential of financial report
 Pre-acquisition profit

ANS:

i. Value Added Statement:

A value-added statement is a financial statement that provides information on the

value added by an organization to its products or services. It focuses on the wealth
created by the company through its operations and helps stakeholders understand
how the company generates value. The statement outlines the sources of value,
such as sales, services, and other activities, and how these contribute to the
organization's profitability.

The value-added statement includes various components that show the

distribution of value within the organization. These components typically include:

Revenue: The total sales or revenue generated by the organization during a

specific period.

Operating Costs: The costs directly associated with the production or delivery of
goods and services, including raw materials, labor, and overhead expenses.

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Value-Added: This represents the wealth created by the organization through its
operations. It is calculated by subtracting the cost of purchased goods and services
from the revenue.

Employee Costs: The amount spent on employee compensation, including

salaries, benefits, and training expenses.

Government Share: The taxes paid by the organization to the government, such as
income tax, sales tax, and other levies.

Financing Costs: The interest paid on loans or other financing methods used by
the organization.

Retained Earnings: The portion of the value added that is retained within the
organization for reinvestment or distribution to shareholders.

A value-added statement provides insights into how an organization creates value

and how this value is distributed among various stakeholders. It helps in
understanding the profitability, efficiency, and sustainability of the business.
Additionally, it can be used to compare the performance of different organizations
within the same industry and identify areas of improvement.

ii. Cost of Control:

The cost of control refers to the expenses incurred by an organization to

implement and maintain internal controls and risk management systems. Internal
controls are processes and procedures designed to safeguard assets, ensure

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accurate financial reporting, and comply with laws and regulations. The cost of
control includes both direct costs, such as salaries of internal control personnel,
and indirect costs, such as potential loss of flexibility and additional time required
to complete tasks.

Implementing internal controls involves several activities, including risk

assessment, control environment establishment, control procedures development,
monitoring, and evaluation. These activities require resources and personnel
dedicated to ensuring the effectiveness and efficiency of the control systems. The
cost of control can vary depending on the size and complexity of the organization,
the industry it operates in, and the regulatory requirements it needs to comply
with.

While the cost of control is an essential investment to mitigate risks and prevent
fraud, it should be balanced with the benefits gained from having strong internal
controls. Organizations need to evaluate the cost-effectiveness of control
measures and implement controls that provide reasonable assurance without
imposing an unnecessary burden on operations. This requires a thorough
understanding of the risks faced by the organization and a cost-benefit analysis of
different control options.

iii. Inter-branch Adjustments:

Inter-branch adjustments are accounting entries made to reconcile the transactions

and balances between different branches or divisions of a company. In
organizations with multiple branches or divisions, each unit may maintain its own
accounting records to track its transactions and financial position. However, for

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the preparation of consolidated financial statements, it is necessary to eliminate
inter-branch transactions and balances to avoid duplication and provide an
accurate picture of the organization as a whole.

Inter-branch adjustments typically involve the following:

Inter-branch Sales: If one branch sells goods or services to another branch, the
transaction is eliminated by reducing the sales and corresponding accounts
receivable in the selling branch and reducing the purchases and accounts payable
in the buying branch.

Inter-branch Expenses: If one branch incurs expenses on behalf of another branch,

the expenses are allocated or charged to the respective branches involved to
ensure accurate recording and reporting of expenses.

Inter-branch Transfers: When goods or assets are transferred between branches,

the transfers are eliminated by reducing the inventory and accounts receivable in
the sending branch and increasing the inventory and accounts payable in the
receiving branch.

Inter-branch Loans: If one branch lends money to another branch, the loan
balances are adjusted to reflect the inter-branch borrowing and lending
relationships.

Inter-branch adjustments are crucial to ensure that the consolidated financial

statements present a true and fair view of the organization's financial position and
performance. They help eliminate any double counting or misrepresentation of

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transactions that occur between different branches. By removing inter-branch
transactions and balances, the consolidated financial statements provide a
comprehensive view of the organization's overall financial health.

iv. Essentials of Financial Reports:

Financial reports are important tools that provide information about the financial
performance, position, and cash flows of an organization. They help stakeholders,
such as investors, creditors, employees, and regulators, make informed decisions
based on the organization's financial health. The essential components of financial
reports include:

Balance Sheet: The balance sheet provides a snapshot of an organization's

financial position at a specific point in time. It includes assets (such as cash,
inventory, and property), liabilities (such as loans and accounts payable), and
shareholders' equity (the residual interest in the organization's assets after
deducting liabilities).

Income Statement: The income statement, also known as the profit and loss
statement, summarizes an organization's revenues, expenses, gains, and losses
over a specific period. It shows the organization's net income or loss, which is the
difference between revenues and expenses.

Cash Flow Statement: The cash flow statement presents the cash inflows and
outflows of an organization during a particular period. It provides insights into the
organization's operating, investing, and financing activities and helps assess its
ability to generate cash and meet its financial obligations.

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Statement of Changes in Equity: This statement shows the changes in
shareholders' equity during a specific period. It includes the net income or loss for
the period, dividends paid to shareholders, additional investments made by
shareholders, and other equity transactions.

Notes to the Financial Statements: The notes provide additional details and
explanations about the organization's accounting policies, significant transactions,
contingent liabilities, and other relevant information. They help users of financial
reports understand the underlying assumptions and factors affecting the reported
financial figures.

Management Discussion and Analysis: This section, often included in annual

reports, provides management's perspective on the organization's financial
performance, results of operations, and future prospects. It offers insights into the
organization's strategies, risks, and challenges.

The essentials of financial reports include accuracy, relevance, comparability, and

understandability. Financial reports must be prepared in accordance with
generally accepted accounting principles or international financial reporting
standards to ensure consistency and comparability. They should provide relevant
and reliable information that is free from material errors or omissions.
Additionally, financial reports should be presented in a clear and understandable
manner, using language and formats that facilitate comprehension by users.

v. Pre-acquisition Profit:

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Pre-acquisition profit refers to the earnings generated by a subsidiary or an
acquired company before it is acquired by another entity. When one company
acquires another, it needs to account for the pre-acquisition profit to ensure
accurate reporting of the combined financial statements.

The accounting treatment of pre-acquisition profit depends on the method used

for the acquisition. There are two primary methods:

Purchase Method: Under the purchase method, the acquiring company treats the
acquired company as a new purchase. The pre-acquisition profit is not recognized
in the consolidated financial statements. Instead, the acquiring company records
the acquired company's assets and liabilities at their fair values as of the
acquisition date. Any difference between the purchase price and the fair value of
net assets acquired is recognized as goodwill.

Pooling of Interests Method: The pooling of interests method, which is no longer

allowed under most accounting standards, involved combining the financial
statements of the acquiring and acquired companies as if they had always been
one entity. In this method, the pre-acquisition profit is recognized in the
consolidated financial statements as if it had been earned by the acquiring
company during the pre-acquisition period.

It's important to note that the accounting treatment of pre-acquisition profit may
vary depending on the applicable accounting standards and regulations in a
particular jurisdiction. Companies need to carefully follow the accounting
guidelines and consult with professional accountants or auditors to ensure
compliance.

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