ET-BM-20

Financial Reporting
End-term Examination
Important instructions

i) It’s an open book examination.

ii) There are four questions in total. Answer ALL Questions.
iii) Show your workings clearly.
iv) Use excel sheet only for answering the questions. After you finish
writing, upload the excel sheet in the link sent to your e-mail id.
v) Time allowed is 3 hours. You get extra 10 minutes to upload the excel
sheet.

(10)

1. Following accounts have been extracted from the books of X Ltd. for the year
ending 31st March, 2020.

Particulars Amount(Rs. ’000)

Cash 15700
Prepaid insurance 450
Inventory 250
Plant & Machinery(P&M) 50000
Accumulated depreciation-P&M 5000
Furniture 12000
Accumulate depreciation-Furniture 1400
Accounts payable 6500
Unearned revenue 9500
Loan payable 2000
Equity share capital 10000
Retained earnings 40000
Dividend paid 2500
Sales revenue 17650
Selling & distribution expense 2300
Salaries expense 7400
Advertising expense 1450
 Additional Information:
a) Cost of Insurance expired during the year Rs. 300
b) Inventory on hand as at 31st March, 2020 Rs. 180
c) Plant & Machinery was purchased on 1st April, 2018. On that date, it had an
estimated useful life of ten years
d) Furniture was purchased on 1st September, 2018. On that date, it had an
estimated useful life of five years
e) Salaries unpaid at the end of the year amount to Rs. 2500

Required:

Prepare Balance Sheet, Income statement for the period ended 31st March,
2020. Ignore taxes.

(12)

2. Y Ltd., a manufacturing unit, is planning to diversify and add a new product line.
The company can buy the required machinery or get it on lease. The machine
can be purchased for Rs. 15,00,000. It is expected to have a useful life of 5 years
with a salvage value of Rs. 100,000 after the expiry of 5 years. The purchase can
be financed by 20% loan repayable in 5 equal annual installments becoming due
at the end of each year.
Alternatively, the machine can be taken on lease for which the company would
need to pay lease rentals of Rs. 450,000 for 5 years at the end of each year.
The company follows written down value method of depreciation, the rate of
depreciation being 25%. The company will have to bear maintenance charges of
Rs. 30,000 per year whether it buys the machine or takes it on lease. Corporate
tax rate is 30%.

Required
Advise Y Ltd, which option it should choose.

(12)
3. Following are the balance sheet and income statement of Z Ltd. for the year
ended December 31, 2019

Balance sheet as at 31st December

2019(Rs.) 2018(Rs.)
Assets
Cash 49,800 73,500
Accounts receivable 65,810 50,625
Inventory 275,656 251,800
Prepaid expense 1,250 1,875
Equipment 157,500 108,000
Accumulated depreciation (36,625) (46,000)
--------------- ------------------
Total Assets 513,391 439,800
======== ==========
Liabilities and Equity
Accounts payable 53,141 114,675
Short-term loan 10,000 6,000
Long-term loan 65,000 48,750
Equity share capital(Rs. 5 par value) 162,750 150,250
Securities premium 37,500 0
Retained earnings 185,000 120,125
---------------- -----------------
Total liabilities and equity 513,391 439,800
========= ==========

Income statement

Sales 582,500
Cost of goods sold 285,000
---------------
Gross profit 297,500
Operating expenses 132,400
Depreciation expense 20,750
Loss on sale of equipment 5,125
Income before tax 139,225
Income tax expense 24,250
----------------
Net income 114,975
=========
Additional information:
a) Sold equipment costing Rs. 46,875, with accumulated depreciation of Rs.
30,125 for Rs. 11,625 cash
b) Purchased equipment costing Rs. 96,375 by paying Rs. 30,000 cash and
signing a long-term loan for the balance.
c) Paid cash to reduce the long-term loan balance
d) Issued 2,500 equity shares for Rs. 20 cash per share
 e) Declared and paid dividend in cash
f) Borrowed short-term loan in cash

Required:

Prepare a complete Statement of Cash Flows for the period ending 31st December,
2019.

(6)

4. XYZ Ltd. had purchased a machine on 1st April 2017 costing Rs. 500,000. The
estimated useful life and residual value are 10 years and Rs. 20,000 respectively.
Due to COVID-19 affecting the business, the management thinks that the
performance of the machine will be severely affected in the coming financial
year. The management estimates that it will realize Rs. 200,000 from the sale
transaction and commission and brokerage expense payable on the transaction
would be around 10% of the sale value. The present value of future cash flows to
be generated from the asset for the remaining useful life is estimated to be Rs.
220,000.

Required:
Should the management assess the asset for Impairment loss for the FY ending
31st March, 2020? Advise the management with proper justification.