MAY-JUNE' 2014

FINANCIAL ACCOUNTING
ଵ
Time Allowed – 2 hours
ଶ
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) “Standard of professional ethics of a professional accountant working in a large listed company should be
higher than that of a professional accountant working in a small size private company”. Would you agree
with the above statement? Comment. 5
(b) Briefly explain what you understand by triple bottom line accounting. 4
(c) You are the financial controller for Purbachal Ltd. a company listed on the Dhaka Stock Exchange.
The Chairman has asked you to explain a number of matters relating to the substance of transactions and
the reporting of lease transaction in financial statements. He has approached you as you have recently
attended a number of training courses on BFRS and are in the process of preparing the daft financial
statements for the year ended 31 May 2014 in accordance with BFRS.
Purbachal Ltd. recently entered into a lease contract for a new piece of machinery. The new machine
could have been purchased for a cash price of Tk. 150,000. The terms of the lease are:
i. the lease is for four years.
ii. an initial deposit of Tk. 30,000 was payable on 1 June 2013 followed by eight half-yearly payment
thereafter of Tk. 20,000 payable on the 1 December and 1 June each year, commencing on 1
December 2013.
The estimated useful life of the equipment is four years. Purbachal Ltd. uses the sum of the digits method
to allocate finance lease.
Purbachal Ltd’s factory premise is held on a 25 year lease. The period of the lease is expected to be
similar to the life of the factory building and at the end of the 25 years the land reverts back to the lessor.
Required
Prepare financial statement extracts and supporting disclosure notes that show how the machinery lease
transaction should be presented in the financial statements of Purbachal Ltd for the year ended 31 May
2014. 10
(d) ABC Ltd is organised into several divisions. The following events relate to the year ended 31 December 2013.
i) The computer division supplied a computer to a customer during the year that exploded, causing a
fire. ABC 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 Sonali
Ltd.contributed to the fire. Lawyers have estimated that Sonali Ltd.’s contributory negligence
amounted to 40% of the total damages. Negotiations have started with Sonali Ltd. and the lawyers
believe that a claim in likely to succeed.
ii) On 15 December 2013, the directors of ABC 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
2014, has an estimated date for completion, including the sale of the non-current assets of the
division, of 30 June 2014. The costs associated with the closure include the following:

Tk.’000
Employee redundancy costs ………………………………………………….. 12,000
Lease termination costs ………………………………………………………. 4,000
Reallocating continuing staff to other divisions ………………………………. 3,000
Impairment losses ……………………………………………………………... 2,000
Tk. 21,000
iii) ABC Ltd.’s retail division provides two-year warranties to its customers. Experience has shown that,
on average, 10% of sales from this division result in warranty claim. Revenue from this division in
2013 was Tk. 8 million. At 1 January 2013 ABC Ltd has a warranty provision in place of Tk. 1
million. During the year claims of Tk. 600,000 were settled by the company.

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 Required
Prepare the provision and contingencies notes for the financial statements of ABC Ltd for the year ended
31 December 2013. 10

2. (a) The Finance Manager (FM) of Padma Bank Ltd. is in the process of preparing its financial statements for
the year ended 31 December 2013. The FM has made the following suggestions. You are required to
evaluate the appropriateness of the accounting treatments suggested by the FM.
(i) The Bank has invested Tk.1 billion in treasury bonds with 5 years maturity period. The head of
treasury of the Bank has confirmed based on the Bank’s future strategies, the Bank may not be able
to hold the instrument till their maturity. Therefore, FM is of the view that the instrument can be
classified as loans and receivables. 4
(ii) The Bank has invested Tk.750 million in quoted ordinary shares of BATBC Ltd. These shares were
classified as available for sale at the beginning of the year. According to the Bank’s future business
strategy, the head of treasury has suggested that it expects to trade these shares frequently.
Therefore, the FM is of the view that these shares can be classified as fair value through profit or
loss as at 31 December 2013. 4
(iii) The Bank has invested Tk.50 million in 15% unquoted corporate debentures with 3 year maturity
period. According to the Bank’s business strategy these investments are managed and their
performance is evaluated on a fair value basis as per the Bank’s documented risk management
procedures. The FM is of the view that these instruments can be designated as fair value through
profit or loss instruments.
(iv) The Bank has invested in 6-year corporate bonds of Bengal Ltd. that earn interest at 14% and it
contains an early redemption option that allows Bengal Ltd. to redeem it any time after the third year
of issue date if the volume-weighted average price of equity shares of Bengal Ltd. is not less than
30% of its share price at the date of issue of bond. The FM is of the view that this instrument can be
classified as loans and receivables. 4
(b) The following information is provided with regard to Genetic Ltd. employee benefits plan:
Balance as at 31.12.2013 as follows: Taka
Present value of obligation 15,000,000
Present value of asset 25,000,000
Unrecognized actuarial losses 3,000,000
Unrecognized past service cost 1,000,000
Computed net asset 14,000,000
The actuary has confirmed that the present value of the available reduction in future contribution as a
result of the plan, surplus is Tk.5,000,000. The Company does not have unconditional right to refund.
Required: Calculate the ceiling on the asset that may be recognized. 4

3. Eastern Enterprises Ltd. wholesales and distributes toys and models and provides distribution services to other
orgnizations. The following balances have been extracted from its books of accounts as at 31 December 2013.
Heading Tk.(in 000)
Ordinary shares 800
5% redeemable preference shares 200
Share premium account 350
Revaluation reserve 400
Retained earnings at 1 January 2013 2,000
Revenue 11,899
Purchases 8,935
Inventories at 1 January 2013 974
Staff costs – distribution 270
Staff costs – administration 352
Depreciation charge for the year:
Freehold land and buildings 30
Distribution equipment 116
Other plant and equipment 160
General expense 432
Interest receivable 41
Interest payable 35
Taxation – charge for the year 336
Paid dividends:
Ordinary shares – final for 2012 60
2
 Ordinary shares – interim for 2013 30
5% redeemable preference shares – for 2013 10
Patent rights 200
Freehold land and buildings 1,500
Distribution equipment – cost 800
Other plant and equipment – cost 1,400
Accumulated depreciation at 31 December 2013:
Freehold land and buildings 30
Distribution equipment 320
Other plant and equipment 250
Trade receivables 1,600
Trade payables 850
Cash and cash equivalents 300
Tax liability 400
Additional Information
1) Included in revenue are invoices totaling Tk. 120,000 in relation to distribution services rendered
under a contract to a customer who is very unhappy with the quality of the services provided. The
overall outcome of the contract is uncertain and management believes that of the Tk. 90,000 costs
incurred to date under the contract, probably only Tk. 65,000 will be reimbursed by this customer.
2) The patent was acquired during the year. Amortisation of Tk. 20,000 should be charged to
administrative expenses.
3) Inventories at 31 December 2013 were valued at Tk. 1,304,000.
4) Costs not specifically attributable to one of the income statement expense headings should be split
50:50 between distribution costs and administrative expenses.
5) The freehold land and buildings were revalued on 1 January 2013 and the surplus of Tk. 400,000
over its previous carrying amount of Tk. 1,100,000 (cost Tk. 1,200,000 and accumulated
depreciation Tk. 100,000) has been recognized in the revaluation reserve. The depreciation charge
for the year increased by Tk. 8,000 as a result of the revaluation.
6) General expenses include a material bad debt write off of Tk. 100,000.
7) A final ordinary share dividend for 2013 Tk. 50,000 was proposed in May 2014, payable on 28 June 2014.
8) Tk. 450,000 cash was received during the year as a result of a rights issue of ordinary shares. The
nominal value of the shares issue was Tk. 100,000.
9) On 1 June 2013 the company made the decision to sell its loss-making soft toy division as a result of
severe competition from the Far East. The company is confident that the closure will be completed
by 30 April 2014. The division’s operations in 2013 represent 10% of revenue (after all
adjustments), 15% of cost of sales, 10% of distribution costs and 20% of administrative expenses.
No balance sheet disclosures are necessary.
Required:
Prepare Eastern Enterprises Ltd.’s Statement of Comprehensive Income and Statement of Changes in
Equity for the year to 31 December 2013, a Statement of Financial Position at that date and movements
schedules and notes in accordance with the requirements of BASs, to the extent the information is
available. 25
4. On 1 July 2013, Dragan Ltd. acquired 80% of the equity share capital of Sowdagar Ltd. The consideration
consisted of two elements. i.e. a share exchange of three shares in Dragan Ltd. for every five acquired shares
in Sowdagar Ltd. and the issue of a Tk.100 loan note at 6% for every 500 shares acquired in Sowdagar Ltd.
The share issue has not yet been recorded by Dragan Ltd., but the issue of the loan notes has been recorded.
At the date of acquisition, shares in Dragan Ltd. had a market value of Tk.5 each and the shares of Sowdagar
Ltd. had a stock market price of Tk.3.50 each. Below are the summarized draft financial statements of both
the companies.
Statement of comprehensive income for the year ended 31 December 2013
Dragan Ltd. Sowdagar Ltd.
Tk.’000 Tk.’000
Revenue 92,500 45,000
Cost of Sales (70,500) (36,000)
Gross Profit 22,000 9,000
Distribution cost (2,500) (1,200)
Administrative expenses (5,500) (2,400)
Finance Cost (100) -
Profit before tax 13,900 5,400
Income tax (3,400) (1,500)
Profit after tax 10,500 3,900
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Statement of Financial Position as at 31 December 2013
Dragan Ltd. Sowdagar Ltd.
Tk.’000 Tk.’000
Assets:
Non Current Assets
Property, Plant and Equipment 25,500 13,900
Investment 1,800 -
Current Assets 12,500 2,400
Total Assets 39,800 16,300
Equity and Liability:
Equity
Stated Capital (equity share of Tk.1 each) 12,000 5,000
Other equity reserves 2,500 -
Retained earnings 12,300 4,500
Non-current Liabilities
Loan notes 3,000 4,000
Current Liabilities 10,000 2,800
Total Equity & Liabilities 39,800 16,300

The following information is relevant:

1) At the date of acquisition, the fair values of Sowdagar Ltd.’s assets were equal to their carrying amounts
with the exception of its freehold property. The freehold property had a fair value of Tk.1.0 million
above its carrying value. Freehold property would lead to an increase in the depreciation charge (in cost
of sales) of Tk.50,000 in the post-acquisition period. Sowdagar Ltd. has not incorporated this value
change into its separate financial statements.
2) The Sowdagar Ltd. has developed its brand name internally over the past years. The fair value of the
brand name as of the date of acquisition was Tk.1.2 million. The management is confident that the brand
name is capable of providing competitive advantage at least for next 5 years.
3) Dragan Ltd. has incurred legal charges of Tk.1.5 million in arranging the acquisition of Sowdagar Ltd.,
This cost is not recorded in Dragan Ltd.’s financial statements.
4) Sowdagar Ltd. has announced right issue of 1 share for every 5 shares held and the right was exercisable
at Tk.3 per share. Minority shareholders fully subscribed for the right issue and it was closed on 31
December 2013. Dragan Ltd. did not participate in right issue and it was closed on 31 December 2013.
Right issue has not been recorded in the Sowdagar Ltd. Financial Statements.
5) Dragan Ltd.’s group policy is to revalue all properties to current value at each year end. On 31 December
2013, the value of Sowdagar Ltd.’s property was unchanged from its value at acquisition, but the
building element of Dragan Ltd.’s property had increased in value by Tk.500,000. This has not been
incorporated in the Dragan Ltd.’s financial statements.
6) Dragan Ltd.’s investments include some available-for-sale investments that have increased in value by
Tk.300,000 during the year. The other equity reserve relates to these investments and is based on their
value as at 31 December 2012. There were no acquisitions or disposals of any of these investments
during the year ended 31 December 2013.
7) Current liabilities of Sowdagar Ltd. include Tk.1 million five year bank loan which is required to be
settled in a lump sum on 30 June 2013. In March 2014, just before the financial statements are authorized
for issue, Sowdagar Ltd. negotiated with the bank and new agreement was signed extending loan period
for another five years.
8) There has been no impairment of consolidated goodwill.
9) The Sowdagar Ltd.’s profits are evenly distributed and there are no exceptional material transaction in
the pre-acquisition period.
10) The tax rate is 30%.
Required:
(a) Prepare the Consolidated Statement of Comprehensive Income for Dragan Ltd. for the year ended 31
December 2013; and 15
(b) Prepare the Consolidated Statement of Financial Position for Dragan Ltd. as at 31 December 2013. 15
Detailed workings are to be shown separately.
– The End –