Department of Accounting & Information Systems

BBA 27th Batch (Section A & C)

2 Year 2 Semester 2nd Mid Term Examination 2023
nd nd

Advanced Financial Accounting – II (2201)

9th May 2023
Course Instructor: Ms. Bilkis Akhter

Square Ltd acquired two subsidiaries as follows:

1 July 2011 80% of Ethos Ltd for TK 10 million when the carrying amount of the net assets of
Ethos Ltd was TK 8 million (represented by share capital of TK 76,00,000 and
retained earnings of TK 400,000).
30 November 2017 65% of Pathos Ltd for TK 4 million when the carrying amount of the net assets
of Pathos Ltd was TK 3.2 million (represented by share capital of TK 24,00,000
and retained earnings of TK 800,000).
The income statements of the companies for the year ended 31 March 2018 were as follows.

Square Ethos Pathos

Ltd Ltd Ltd
TK '000 TK '000 TK '000

Revenue 10,000 6,000 5,820

Cost of sales (6,000) (4,600) (5,640)
Gross profit 4,000 1,400 180
Net operating expenses (2,000) (1,000) (300)
Finance cost – (100) (420)
Investment income 460 – –
Profit/(loss) before tax 2,460 300 (540)
Income tax expense (600) (100) –
Profit/(loss) for the year 1,860 200 (540)

Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for theyear
ended 31 March 2018 were as follows.
Square Ethos Pathos
Ltd Ltd Ltd
TK '000 TK '000 TK '000
Net profit/(loss) for the year 1860 200 (540)
Interim dividends on ordinary shares (400) (100) –
1,460 100 (540)
Balance brought forward 3,000 480 1.160
Balance carried forward 4,460 580 620

Additional information
(i) On 1 April 2017 Pathos Ltd issued TK 4.2 million 10% loan stock to Square Ltd. Interest is
payable twice yearly on 1 October and 1 April. Square Ltd has accounted only for the interest
received on 1 October 2017.
(ii) On 1 April 2017 Ethos Ltd sold a freehold property to Square Ltd for TK 16,00,000 (land element
TK 600,000). The property originally cost TK 18,00,000 (land element TK 200,000) on 1 April
2007. The property's total useful life was 50 years on 1 April 2007 and there has been no change in the
useful lifesince that time. Ethos Ltd has credited the profit on disposal to 'Net operating expenses'.
(iii) The property, plant and equipment of Pathos Ltd on 30 November 2017 was valued at TK 10,00,000

Answered – Nurun Nabi Mahmud, A&IS 26th

 (carrying amount TK 7,00,000) and was all acquired in April 2017. Those assets have a total useful life
of ten years. Pathos Ltd has not adjusted its accounting records to reflect fair values.
(iv) Square Ltd charges Ethos Ltd an annual fee of TK 170,000 for management services. This has been
recognised by Square Ltd in 'Investment income'.
(v) Square Ltd has recognised its dividend received from Ethos Ltd in 'Investment income'.
(vi) In 2012 the impairment review revealed a loss of TK 21,60,000 in relation to Ethos Ltd. A further loss
of TK 360,000 has been identified in the current year. In addition, the impairment review in relationto
the acquisition of Pathos Ltd has revealed a loss of TK 204,000.

Requirement
Prepare the consolidated income statement for Square Ltd for the year ended 31 March 2018 and
the movement on retained earnings and minority interest (Non-Controlling Interest) as they
would appear in the consolidated statement of changes in equity for the year ended 31 March
2018.

Answer

Consolidated income statement for the year ended 31 March 2018 TK '000
Revenue (W2) 17,940
Cost of sales (W2) (12,480)
Gross profit 5,460
Net operating expenses (W2) (3,632)
Finance cost (W2) (100)
Investment income (W2) 280
Profit before tax 2,008
Income tax expense (W2) (700)
Profit after tax 1,308

Attributable to equity holders of Square Ltd (β) 1,360

Minority interest (W3) (52)
1,308

Consolidated statement of changes in equity for the year ended 31 March 2018 (extract)

Retained Minority
earnings Interest
TK '000 TK '000

Profit/(loss) for the period 1,360 (52)

Interim dividends on ordinary shares (50 × 20%) (400) (20)
960 (72)
Arising on acquisition of subsidiary (W9) – 1,225
Balance brought forward (W7 and W8) 904 1,616
Balance carried forward 1,864 2,769

Answered – Nurun Nabi Mahmud, A&IS 26th

WORKINGS

1) Group structure

Square Ltd

Ethos Ltd Pathos Ltd

80% 65% 4 /12 (30 November 2017)

2) Consolidation schedule

Square Ethos Pathos

Ltd Ltd Ltd 4/12 Adj Consol

TK '000 TK '000 TK '000 TK '000 TK '000

Revenue 10,000 6,000 1,940 17,940

C of S (6,000) (4,600) (1,880) (12,480)
Op expenses
Per question (2,000) (1,000) (100) 170
PURP (W4) (128)
Dep adj (W5) (10)
Impairment of GW (360 + 204) (564) (3,632)
Finance cost (W6) (100) (140) 140 (100)
Inv income
Per question (460 – (80% × 100)) 380 (170)
Accrued loan stock interest 210 (140) 280
(W6)
Tax (600) (100) (700)
PAT/(loss) 72 (190)

3) Minority Interest (NCI)

Ethos Ltd (20% × 72 (W2)) 14
Pathos Ltd (35% × (190) (W2)) (66)
(52)

4) PURP on freehold property – Ethos Ltd

i) Profit on sale TK’ 000 TK’ 000 TK’ 000

Proceeds 1600
Less: Carrying amount of land and property at
disposal
Land 200
Property:
Cost 1600
Less: Accum dep [(1600/50)*10] (320) 1280 (1480)
120

Answered – Nurun Nabi Mahmud, A&IS 26th

 ii) Depreciation adjustment
Annual depreciation
Without transfer (1600  50) 32
Actual depreciation with transfer ((1600 – 600)  40) (24)
8
128

5) Depreciation adjustment – Pathos Ltd

Fair value adjustment [(1000 – 700)/10]*(4/12) 10

6) Interest on loan stock

Loan of TK 4.2m with interest @ 10%

Annual interest 420,000

Split: Pre-acquisition 8 /12 280,000
Post-acquisition 4 /12 140,000

Square Ltd has accounted for six months only = TK 210,000 (6 /12  420,000)

Adjustment:
i) Include TK 210,000 in Square Ltd
ii) Remove TK 140,000 as post-acquisition intra-group transaction

7) Retained earnings b/f

Square Ltd 3,000

Ethos Ltd (80% × (480 – 400)) 64
Pathos Ltd –
Impairment of goodwill (2,160)
904

8) Minority interest b/f – Ethos Ltd

Share capital 7,600

Retained earnings b/f 480
Net assets b/f 8,080
× 20% 1,616

9) Minority interest arising on acquisition of subsidiary – Pathos Ltd

Share capital 2,400

Retained earnings at 1 April 2017 1,160
Loss to date of acquisition (800 – 1,160) (360)
800
Fair value adjustment (1,000 – 700) 300
3,500
× 35% 1,225

Answered – Nurun Nabi Mahmud, A&IS 26th