Financial Accounting and Reporting-I

Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

A.1 (a) Working capital cycle days:

Trade receivables Average debtors 87.5[(95+80)÷2]

A = ×360 = ×360 ⇒ 63 days
collection period Credit sales 500

Inventory holding Average inventory 84[(93+75)÷2]

B = ×360 = ×360 ⇒ 80 days
period Cost of sales 378

Trade payables Average creditors 66[(72+60)÷2]

C = ×360 = ×360 ⇒ 60 days
payment period Credit purchases(W-1) 396

Working capital =A+B − C = 63 + 80 ‒ 60 ⇒ 83 days

cycle

W-1: Calculation of purchases Rs. in million

Cost of goods sold 378
Add: Closing inventory 93
Less: Opening inventory (75)
Purchases (on credit) 396

(b) Measures to improve working capital cycle days:

 Give incentives to customers to pay on time
 Do not transact with customers who have a history of defaulting/late payments
 Automate the monitoring of accounts receivables
 Resolve disputes with customer as early as possible

A.2 Impairment loss: ------ Rs. in million ------

Carrying value 400.0
Recoverable amount
Value in use (W-1) 333.6
Fair value less cost of sell 250‒7 243.0
Higher of above (333.6)
66.4

W-1: Value in use 2021 2022 2023 2024 Total

--------------- Rs. in million ---------------
Inflows from sale 200 180 162 145.80
Operational cost (80) (84) (88.2) (92.61)
Disposal value - - - 100
Cash flows undiscounted 120 96 73.8 153.19
Discount factor @ 12% 0.8929 0.7972 0.7118 0.6355
PV of cash flows /value in use 107.2 76.5 52.5 97.4 333.6

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

A.3 Succulent Limited

General Journal
Debit Credit
S. No. Description
---- Rs. in million ----
(i) Raw Materials Inventory 2.5
Accounts Payable 2.5×40% 1.0
Cash 1.5
(ii) Factory Payroll 4.0
Wages Payable 4×10% 0.4
Cash 3.6
(ii) Work in Process Inventory 4×80% 3.2
Manufacturing Overhead 4×20% 0.8
Factory Payroll 4.0
(iii) Manufacturing Overhead 3.6
Accumulated depreciation 0.9
Cash / Payable 2.7
(iv) Work in Process Inventory 4.8
Manufacturing Overhead 3.2×150% 4.8
(v) Work in Process Inventory 1.4
Raw Materials Inventory (2.5×80%)‒0.6 1.4
(v) Manufacturing Overhead 0.4
Raw Materials Inventory (2.5×20%)‒0.1 0.4
(v) Finished Goods Inventory 3.2+4.8+1.4‒1 8.4
Work in Process Inventory 8.4

A.4 (i) (c) Rs. 20 million

(ii) (d) Variable cost Stepped cost
(iii) (a) any restrictions on the distribution of the revaluation surplus to shareholders
(iv) (a) Physical capital maintenance
(v) (d) Property transfer taxes
(vi) (b) Gain of Rs. 8 million Loss of Rs. 2 million
(vii) (c) Profit for the year
(viii) (a) Over-statement of closing inventories
(c) Inclusion of disposal proceeds of non-current assets in sales

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

A.5 Parodia Motor Limited

Correcting entries for the year ended 30 June 2021
Debit Credit
S. Description
------ Rs. in '000 ------
(i) Receivable - AL 4,189(W-1)‒3,500 689
Revenue 689
Receivable - AL 3,189×12%×(8÷12) 255
Interest income 255
(ii) Receivable - BL 3,400‒(100×10) 2,400
Contract / Refund liability- BL 100×10 1,000
Revenue 3,400
(iii) Revenue (W-2) 152
Contract / Refund liability- GL 152
(iv) Contract / Refund liability - DL 2,211
Revenue 3,411(W-4)‒1,200 2,211

W-1: Revenue to be recognized - AL Rs. in '000

Amount received 1,000
Present value of remaining balance 4,000×(1.12)-2 3,189
Total revenue 4,189

W-2: Price allocation – GL

Standalone price Price
Car-C 3,000 3,000×3,000÷3,160 2,848
Discount voucher 160 160×3,000÷3,160 152
(80%×200)
3,160 3,000

W-3: Price allocation – DL

Standalone price Price
Car-D 3,500 3,500×3,600÷3,800 3,316
Annual maintenance 300 300×3,600÷3,800 284
3,800 3,600

W-4: Revenue to be recognized – DL

Car-D (W-3) 3,316
Annual maintenance 284×4/12 95
Total revenue to be recognized 3,411

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

A.6 Saguaro Limited

Statement of cash flows for the year ended 30 June 2021

Indirect method
Rs. in million
Cash flows from operating activities
Loss for the year 315–50(500×10%)–220 (45)
Adjustments for:
Depreciation on property, plant and equipment 300+40(75–35)–262 78
Interest expense 45–21 24
Gain on disposal of property, plant and equipment (17)
Operating profit before working capital changes 40
Changes in working capital:
Increase in inventory 274–245 (29)
Decrease in trade receivables 177–204 27
Increase in advance to supplier 78–60 (18)
Increase in accrued expenses 48–43 5
Increase in trade payables (180–14) –130 36
21
Cash generated from operations 61

Interest paid 1+24–5 (20)

Net cash flows from operating activities 41

Cash flows from investing activities

Purchase of property, plant and equipment 70(84–14)+47(820+75–848) (117)
Proceeds from disposal of property, plant & equipment 31+52(35+17) 83
Net cash flows used in investing activities (34)

Cash flows from financing activities

Proceeds from issue of shares (700-500)–40 160
Repayment of long term loan (175+43–5)– (210+40–1) (36)
Dividend paid 500×10% (50)
Net cash flows from financing activities 74
Net increase in cash and cash equivalents 81
Cash and cash equivalents at beginning of the year 112
Cash and cash equivalents at the end of the year 193

W-1: Cash paid to suppliers Rs. in million

Cost of goods sold 485
Increase in inventories 274–245 29
Purchases 514
Increase in Advances to suppliers 78–60 18
Increase in Trade payables 180–14–130 (36)
496

W-2: Cash paid to other vendors Rs. in million

Operating expenses net of depreciation 310–78 232
Increase in Accruals 48–43 (5)
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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

227

A.7 Bunny Ear Limited

Extracts from statement of profit or loss for the year ended 31 December 2020
2020 2019
------ Rs. in million ------
Depreciation:
 Factory building 625÷25×6÷12 12.5 -
 Manufacturing plant 420÷10×5÷12 17.5 -

Income from saving account 1.3+2.3(W-2) - 3.6

Grant income:
 Land 100÷25×6÷12 2.0 -
 Factory building 200÷25×6÷12 4.0
 Manufacturing plant 240÷10×5÷12 10.0

Interest expense (36+21–19); (22–6) 38.0 16.0

Extracts from statement of financial position as on 31 December 2020

2020 2019
------ Rs. in million ------
Non-current assets:
Property, plant and equipment
 Land 100.0 100.0
 Factory building 625(W-1)–12.5 612.5 -
 Manufacturing plant 420–17.5 402.5 -
 Capital work-in-process (W-1) - 326.0

Non-current liabilities:
Deferred government grant
 Land 100–2 98.0 100.0
 Factory building 200–4 196.0 200.0
 Manufacturing plant (forgivable loan) 240–10 230.0

Current liabilities:
 Running finance 350+200 550.0 250.0

W-1: Cost of factory building Rs. in million

Payments in 2019 (130+190) 320.0
Borrowing cost capitalized in 2019 (W-2) 6.0
Balance as at 31 December 2019 326.0

Payments in 2020 (180+100) 280.0

Borrowing cost capitalized in 2020 (W-2) 19.0
625.0

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

W-2: Utilisation of fund

No. of
Date Description Amount Balance Rate Amount
months
1-Feb-19 Grant 200 200 8.00% 1 1.3
1-Mar-19 1st payment 130 70 8.00% 5 2.3
1-Aug-19 2nd payment 190 (120) 12.00% 5 6.0
1-Jan-20 3rd payment 180 (300) 12.67% 6 19.0

W-3: Capitalization rate

36 + 21
× 100 = 12.67%
300 + 150

A.8 Cereus Golf Club

(a) Income and expenditure account for the year ended 31 December 2020
Rs. in '000
Income:
Subscription income (W-1) 10,750
Rent on golf kits 650
Sale of golf kits 3,000×140% 4,200
15,600
Expenditures:
Insurance expense 660–220(660÷12×4) (440)
Salaries expense 2,800–350 (2,450)
Cost of Golf kits sold [6,000(4,800÷0.8)×(2÷3)]–1,000 (3,000)
Loss on golf kits transferred 500×0.7 (350)
Depreciation 300(2,000×15%)+3,750(25,000×15%) (4,050)
Other expenses (2,320)
Loss on misappropriation 4,620(W-2) –2,000 (2,620)
(15,230)
Excess of income over expenditure 370

(b) Statement of financial position as on 31 December 2020

Rs. in '000
Non-current assets:
Fixed assets 25,000–3,750 21,250
Golf kits on rent (6,000×1÷3)+150(500×30%)–300(2,000×15%) 1,850
23,100
Current assets:
Golf kits (1,000–500) 500
Insurance claim 2,000
Prepaid insurance I/E 220
Subscription in arrears (W-1) 300
Cash & bank 4,200
7,220
30,320
General funds:
Opening balance (W-3) 12,350
Excess of income over expenditure I/E 370
12,720
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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

Repair and maintenance fund 5,800-2,800 3,000

Liabilities:
Creditors - golf kits (4,800÷0.8)–4,800 1,200
Subscription in advance (W-1) 13,400
30,320

Workings
W-1: Subscription Rs. in '000
Opening advance
2018: (100×60×1÷3) 2,000
Income (Bal fig) 10,750 2019: (140×75×2÷3) 7,000

Closing advance Receipts (160×90)+(5×90) 14,850

2019: (140×75×1÷3) 3,500
2020: (165×90×2÷3) 9,900 Closing arrears (10×90×1÷3) 300
24,150 24,150

W-2: Bank/cash Rs. in '000

Opening balance 2,500 Repair & maintenance expense 2,800
Subscriptions (W-1) 14,850 Golf kits purchases 4,800
Rent of golf kits 650 Insurance premium paid 660
Sale of golf kits 4,200 Salaries paid 2,800
Other expenses paid 2,320
Misappropriation (bal. fig.) 4,620
Closing balance 4,200
22,200 22,200

W-3: Opening accumulated fund: Rs. in '000

Cash and bank balance 2,500
Fixed assets 25,000
Subscription in advance (W-1) (9,000)
Accrued salaries (350)
Repair and maintenance fund 8,000–2,200 (5,800)
Accumulated fund – opening balance 12,350

(THE END)

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