Advanced Financial Accounting

Time allowed – 3 hours

Maximum marks – 100

N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All workings
are to be submitted. 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. The timing of revenue recognition has long been an area of debate and inconsistency in
accounting. Industry practice in relation to revenue recognition varies widely. The following
are examples of different points in the operating cycle of businesses when revenue and profit
can be recognized:

• on acquisition of goods
• during the manufacture or production of goods
• on delivery/acceptance of goods
• on satisfaction of certain conditions after the goods have been delivered
• receipt of payment for credit sales
• on the expiry of a guarantee or warranty.

In the past the ‘critical event’ approach has been used to determine the timing of revenue
recognition. The International Accounting Standards Board (IASB) in its “Framework for the
Preparation and Presentation of Financial Statements” (Framework) has defined the ‘elements’
of financial statements, and it uses these to determine when a gain or loss occurs.

Required:
(a) Explain what is meant by the critical event in relation to revenue recognition and discuss
the criteria used in the Framework for determining when a gain or loss arises. 3
(b) For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognize revenue and, where possible, give a practical example of an
industry where it occurs. 9
(c) FS Ltd. has entered into the following transactions/agreements in the year to 31 March
2008:
(i) Goods, which had a cost of Tk.2,000,000 were sold to wholesaler for Tk.3,500,000 on
1 June 2007. FS Ltd. has option to repurchase the goods from wholesaler at any time within
the next two years. The repurchase price will be Tk.3,500,000 plus interest charged at 12%
p.a. from the date of sale to the date of repurchase. It is expected that FS Ltd. will
repurchase the goods.
(ii) FS Ltd. owns the rights to a fast food franchise. On 1 April 2007 it sold the right to
open a new outlet to Mr. Chowdhury. The franchise is for five years. FS Ltd. received an
initial fee of Tk.5,000,000 for the first year and will receive Tk.500,000 p.a. thereafter. FS
Ltd. has continuing service obligations on its franchise for advertising and product
development that amount to approximately Tk.800,000 p.a. per franchise outlet. A
reasonable profit margin on the provision of the continuing services is deemed to be 20% of
revenue received.
(iii) On 1 September 2007 FS Ltd. received total subscriptions in advance of
Tk.24,000,000. The subscriptions are for 24 monthly publications of a magazine produced
by FS Ltd., At the year end FS Ltd. had produced and dispatched six of the 24 publications.
The total cost of producing the magazine is estimated at Tk.19,200,000 with each
publication costing a broadly similar amount.

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Required:
Describe how FS Ltd. should treat each of the above examples in its financial statements in
the year to 31 March 2008. 8

2. Buildview specializes in construction contracts. One of its contracts, with Better Houses, is to
build a complex of luxury flats. The price agreed for the contract is Tk.400 crore and its
scheduled date of completion is 31 December 2008. Details of the contract to 31 March 2007
are:

Commencement date 1 July 2006

Contract costs: Tk.’00,000
Architects’ and surveyors’ fees 500
Materials delivered to site 3,100
Direct labour costs 3,500
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete (excluding depreciation – see below) 14,800
Plant and Machinery used exclusively on the contract cost Tk.36 crore on 1 July 2006. At the
end of the contract it is expected to be transferred to a different contract at a value of Tk.6
crore. Depreciation is to be based on a time apportioned basis.
Inventory of materials on site at 31 March 2007 is Tk.3 crore. Better Houses made a progress
payment of Tk.128 crore to Buildview on 31 March 2007.
At 31 March 2008 the detailed for the construction contract
have been summarized as: Tk’.00,000
Contract costs to date (i.e. since the start of the contract)
excluding all depreciation 20,400
Estimated cost to complete (excluding depreciation) 6,600
A further progress payment of Tk.162 crore was received on 31 March 2002.
Buildview accrues profit on its construction contracts using the percentage of completion basis
as measured by the percentage of the cost to date compared to the total estimated contract cost:
Required:
(a) Prepare extracts of the financial statements of Buildview for the construction contract with
Better Houses for:

(i) the year to 31 March 2007 8

(ii) the year to 31 March 2008 7
(b) Buildview conducts its activities from two properties, a leased office in the city centre and
a property in the countryside where staff training is conducted. Both the properties were
acquired on 1 April 2005 and had estimated lives of 25 years with no residual value. The
company has a policy of carrying its land and buildings at current values. However, until
recently property prices had not changed for some years. On 1 October 2007 the properties
were revalued by a firm of surveyors. Details of this and the original costs are:
Land Buildings
Tk.’00,000 Tk.’00,000
Head office – cost 1 April 2005 500 1,200
– revalued 1 October 2007 700 1,350
Training premises – cost 1 April 2005 300 900
– revalued 1 October 2007 350 600

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The fall in the value of the training premises is due mainly to damage done by the use of
heavy equipment during training. The surveyors have also reported that the expected life of
the training property in its current use will only be a further 10 years from the date of
valuation. The estimated life of the head office remained unaltered.
Note: Buildview treats its land and buildings as separate assets. Depreciation is based on
the straight-line method from the date of purchase or subsequent revaluation.
Required:
Prepare extracts of the financial statements of Buildview in respect of the above properties
for the year to 31 March 2008. 8

3. (a) In what circumstances a parent need not present consolidated financial statements? 5
(b) Following are the summarized balance sheets of Groom Ltd. and Green Ltd. at 30
September 2008:
Groom Ltd. Green Ltd.
Share capital:
10% preference share of Tk.100 each 400,000 100,000
Ordinary share of Tk.100 each 1,000,000 800,000
General reserve 580,000 304,000
Profit and loss account 470,000 468,000
2,450,000 1,672,000
Creditors 870,000 835,000
3,320,000 2,507,000
Fixed assets 1,595,000 1,217,000
Investment in shares of subsidiary company 700,000 -
Current assets 1,025,000 1,290,000
3,320,000 2,507,000
You are also given the following additional information:
(i) On 1 October 2004, Groom Ltd. acquired 2,000 ordinary shares in Green Ltd. The
account balances as relevant for the said investment were as follows:
Paid by Groom Ltd. – cost of investment 200,000
Total equity of Green Ltd.:
Share capital 800,000
General reserve 250,000
Profit and loss account (150,000)
900,000
(ii) On 30 September 2005, Groom Ltd. acquired another 4,000 ordinary shares in Green
Ltd. The account balances as relevant for the said investment were as follows:
Paid by Groom Ltd. – cost of investment 500,000
Total equity of Green Ltd.:
Share capital 800,000
General reserve 200,000
Profit and loss account 135,000
1,135,000
(iii) Both companies proposed to pay dividends @10% on preference share capital and
@15% on ordinary share capital in respect of the year ended 30 September 2008. The
amounts of proposed dividends were included in the creditors.
Required:
Prepare the consolidated balance sheet of Groom Ltd. as at 30 September 2008. 15

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4. (a) Define taxable temporary differences and deductible temporary differences with examples. 4

(b) The following figures are related to Zahid Ltd.:

Balance at 1 January 2007: Taka
- Deferred tax liability as at 1 January 2007 5,000,000
- Current tax payable as at 1 January 2007 400,000
- Property plant and equipment – written down value
Land (cost Tk.10 million plus revaluation surplus 35 million, 45,000,000
Building 75,000,000
Motor vehicle (1 Mitsubishi Pajero) 25,000,000
145,000,000

Balance at 31 December 2007: Taka

Property plant and equipment – written down value:
Land (cost Tk.10 million plus revaluation surplus 35 million) 45,000,000
Building 70,000,000
Motor Vehicle (1 Mitsubishi Pajero) 20,000,000
135,000,000
Tax written down value:
Land 10,000,000
Building 50,000,000
Motor vehicle (1 Mitsubishi Pajero) 1,000,000
61,000,000

Computer software-SAP:
Accounting written down value 12,000,000
Tax written down value Nil

Inventories (cost Tk.15 million and net realizable value Tk.12 million):
Accounting base/carrying value 12,000,000
Tax base value 15,000,000

Liability for gratuity:

Accounting base/carrying value 5,000,000
Tax base value Nil
Other figures during the year 2007 are:
Profit before tax 23,560,000
Accounting depreciation and amortization 15,460,000
Tax depreciation and allowances 22,500,000
Excess perquisites 3,450,000
Unexplained expenditures 5,350,000
Gratuity expense 3,300,000
Gratuity paid to outgoing employees 5,354,000
Accounting loss on sale of furniture 2,355,000
Tax loss on sale of furniture 1,255,000

Required:
(i) Calculate deferred tax liability/assets as at 31 December 2007. 6
(ii) Calculate current tax expense for the year 2007. 6
(iii) Pass necessary journal entries for recording deferred tax and current tax expenses for
the year 2007. 4

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5. (a) What is Proforma Account? Why is it prepared? Who maintains this account? 7

(c) You are given the following information:

Taka in crore
Personal consumption expenditures 191.0
Gross private domestic investment 54.1

Fixed investment 47.3

Change in business inventories 6.8

Exports 13.8
Imports 12.0
Government purchases of goods and services 37.9
Wages and salaries 146.8
Supplements to wages and salaries 7.8
Proprietors’ income 37.5
Rental income of persons 9.4
Corporate profits before tax 42.6
Profits tax liability 17.8
Profits after tax 24.8
Dividends 8.8
Undistributed profits 16.0
Inventory valuation adjustment 5.0
Net interest 2.0
Capital consumption allowances 18.3
Indirect business tax and non-tax liability 23.3
Business transfer payments 0.8
Statistical discrepancy 1.5
Subsidies less current surplus of Govt. enterprises 0.2
Government transfer payments 14.3
Net interest paid by Govt. and consumers 7.2

Required:
Calculate the following:
(i) GNP; (ii) NNP; (iii) GDP; (iv) NDP; (v) NI. 10

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