FINANCIAL ACCOUNTING

Time allowed – 2½ hours

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) Why is the lower of cost and net realizable value (NRV) rule used in the accounting standard?
Is it permissible to revalue inventory upwards? If so, when? Is there any limitation? Give an
example in support of your answer. 6
(b) “Financial Accounting usually emphasises on the economic substance of events even though
the legal form may differ and suggest different treatments. “Do you agree? If so, state the
circumstances and give example in each case. 6
(c) The following figures are extracted from the financial statements of Seam Ltd. as at 31 March 2012:
(i) Investment in Bibu Ltd.
Figure in ‘000 Taka
2012 2011 2010
(a) Acquired 35% shares on 31 Mar 2010 120 120 120
(b) Acquired 25% shares on 31 Mar 2011 150 150 ---
(c) Sale of 25% shares on 15 Mar 2012 (at cost) (86) --- ---
(shares acquired on 31 Mar 2010) .
Total cost of investment 184 270 120
Sales proceeds of 25% share sold on 15 March 2012 100
Extract figures of net assets from the financial statements of Bibu Ltd:
Equity:
Share Capital 100 100 100
Revaluation surplus --- 20 20
Retained earnings 250 300 130
Requirement:
(i) Calculate the investment in Bibu Ltd applying equity method as per BAS 28 for the year ended
31 March 2012. 7
(ii) Calculate the carrying value of goodwill at 31 March 2011 7
2. Tazrian and Associates manufactures and sells international quality toys across the country. It also
provides franchise right to manufacture globally where it controls the quality and price of the toys.
The company charges agreed royalty fees for these services. The following draft financial
statements were prepared by the Finance Manager for the year ended 31 December 2011 and
placed before you for advise:
Tazrian and Associates
Comprehensive Income Statement
For the year ended 31 December 2011
Amount in Lakh Taka
Sales 3,500
Less: Cost of goods sold ( 1,780)
Gross profit 1,720
Other income 350
Total income 2,070
Less: Operating expenses including depreciation ( 870)
Operating profit 1200
Profit on sale of property 200
1400
Less: Interest expenses ( 300)
Profit before tax 1100
Less: taxation @35% ( 385)
Net profit for the year 715
Opening balance of profit 350
Profit carried to Balance sheet 1065
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Tazrian and Associates
Balance Sheet
As at 31 December 2011
(Taka in lakh)
Liabilities & Equity Taka Assets Taka
Capital 3,000 Office equipment 4,000
General reserve 550 Work in progress 1,400
Profit and loss a/c 1,065 Stock 1,000
Long-term loan 2,000 Debtors 1,460
Accumulated depreciation 1,000 Royalty receivables 100
Current liabilities Advance tax 200
Creditors 240 Cash in hand 20
Provision for tax 385 Cash at bank 60
8,240 8,240
The following financial information need to be considered:
(i) Royalty fees receivable from a customer in Abidjan equivalent of Tk.100 lakh. It was accounted
for being allowing license for manufacturing toys under the same brand name. The amount is
receivable in USD from the customer. However, exchange permission was denied to the
company in Abidjan for remitting the same.
(ii) The company sold some of its office equipment on 1 April 2011 for Tk.100 lakhs (written down
value Tk.250 lakhs). These assets were re-valued earlier. As on 1 April 2011, the revaluation
reserve corresponding to these assets stood at Tk.200 lakhs. The profit on sale of property as
shown in the comprehensive Income Statement represented the transfer of this amount. Loss
on sale of the asset was included in the operating expenses.
(iii) The company board has decided to change the method of depreciation from straight line method
to reducing balance method. The rate of depreciation will remain unchanged at 20% per annum.
(iv) A new product has been developed during the year. The expenditure totals Tk.12 lakh, of
which Tk.7.50 lakh was incurred prior to 31 December 2011, the date on which it became clear
the product was technically feasible. The new product will be launched in the next three
months and its recoverable amount is estimated at Tk.6 lakh.
(v) The company started construction of its own office building at Dhaka on 1 January 2010. The
company obtained term loan facilities from HBFC. Company management has decided to
capitalize borrowing cost in accordance with BAS 23 – Borrowing cost.
(vi) The company has entered into a lease agreement for 5 years for its office building on 1st
January 2010. The monthly rent is Tk.50,000 for first 2 years and then Tk.80,000 per month for
next 3 years. Finance Manager charged Tk.50,000 per month for the year 2011 and included in
operating expenses. Finance Manager didn’t comply with BAS 17 – Leases.
Requirement:
Re-draft the financial statements for the year ended on 31 December 2011 in accordance with the
relevant provisions of Bangladesh Accounting Standards (BAS) and BFRS. State the notes and
disclosure to the financial statements clearly. 25

3. You are an articled student of MM Ahmed, Chartered Accountants and responsible for finalizing
audit assignments of various clients of the firm. The following issues have been raised for your
suggestion on how to disclose/ account for the items in the financial statements:
(a) May Flower Ltd. has entered into a contract for the provision of services over a two-year
period. The total contract price is Tk.150,000. In the first year costs of Tk.60,000 have been
incurred and 50% of the work has been completed. The contract has not progressed as
expected and May Flower Ltd. is not sure of the ultimate outcome, but believes that the costs
incurred to date will be recovered from the customer. May Flower Ltd. initially expected to
earn a profit of Tk.20,000 on the contract. Company is struggling with the amount of revenue
to be recognized as per BAS 18 – Revenue in the first year of contract. Accounting year of the
company ends on 31 December. 6
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(b) As at 01 January 2011, MK Ltd. re-valued its Dhaka office building. It’s net book value as at
31.12.2010 was Tk.15,00,000 and it was re-valued at Tk.1,12,00,000. The valuation was
conducted by a professional company. Two years earlier, the company had reduced the useful
economic life of its Dhaka office building from 20 years to 5 years as the local City Corporation
had indicated they would condemn it as unsafe when a new inner city motor way was built.
This had caused the company to charge an unusual depreciation write-off to that year’s
accounts. The plan to build the inner-city motor way was scrapped during the year. Company
Accountants didn’t comply with BAS 16 – Property, Plant & Equipment to recognize
revaluation in Comprehensive Income Statement for the year ended on 31 December 2011. 6
(c) Arnold Ltd. bought an asset on 01 October 2005 for Tk.200,000. It was being depreciated over 20
years on the straight line basis. On 01 October 2007, the asset was re-valued to Tk.270,000.
Subsequently, on 30 September 2011, the asset was classified as held for sale. Its fair value was
estimated at Tk.190,000 with costs to sell of Tk.5,000. In accordance with BFRS 5 – Non-Current
Assets Held for Sale and Discontinued Operations, what loss should be recognized in the income
statement for the year ended 30 September 2011 on classification as held for sale? 6
(e) Proxima Ltd. holds 3000 of the 10,000 Tk.1.00 ordinary shares in CMS Limited. These were
recently acquired, as the directors of Proxima Ltd. believe that CMS Ltd. has excellent growth
potential in the future. However, the market in which CMS Limited operates is very specialized
and Proxima Ltd. decided to take no part in the running of CMS Ltd. Proxima Ltd. intends to
hold its shares for several years, but not to influence the board in any way. 6
4. H Ltd. prepares its consolidated financial statements in accordance with BFRS. H Ltd. has
investment in two companies, W Ltd. and S Ltd. The draft summarized balance sheets of the three
companies at 30 June 2011 are shown below:

H Ltd. W Ltd. S Ltd.

Taka Taka Taka
Assets:
Non-current assets
Property, Plant & Equipment 1,280,000 1,800,000 5,995,000
Investments 10,950,000 - -
Total non-current assets 12,230,000 1,800,000 5,995,000
Current assets:
Inventories 785,000 290,000 90,000
Trade and other receivables 240,000 440,000 394,000
Cash and cash equivalents 57,600 - 300,000
Total current assets 1,082,600 730,000 784,000
Total Assets 13,312,600 2,530,000 6,779,000

H Ltd. W Ltd. S Ltd.

Taka Taka Taka
Equity and Liabilities:
Capital and reserves
Issued capital – Tk.1.00 ordinary shares 9,000,000 2,000,000 4,000,000
Retained earnings 2,734,600 (367,000) 2,396,000
Total Equity 11,734,600 1,633,000 6,396,000
Non-current liabilities
Provisions 300,000 - 187,000
Loans 620,000 550,000 -
Total non-current liabilities 920,000 550,000 187,000
Current liabilities
Trade and other payables 378,000 255,000 72,000
Bank overdrafts - 47,000 -
Taxation 280,000 45,000 124,000
Total current liabilities 658,000 347,000 196,000
Total equity and liabilities 13,312,600 2,530,000 6,779,000

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Additional information:
(i) On 01 July 2007, H Ltd. acquired 1.7 million Tk.1.00 ordinary shares in W Ltd. for Tk.1.50 cash
per share. The retained earnings of W Ltd. at that date were Tk.0.25 million.
(ii) H Ltd. acquired 2.8 million Tk.1.00 ordinary shares in S Ltd. on 31 March 2011 for Tk.3 cash per
share. The retained earnings of S Ltd. at 31 March 2011 were Tk.2.0 million. The fair value of the
land held by S Ltd. at the date of acquisition was Tk.2.50 million in excess of its carrying amount.
(iii) At the date of acquisition, S Ltd. has disclosed in the notes to its financial statements a
contingent liability in relation to a customer claim for Tk.100,000. H Ltd. legal advisers
estimated the fair value of the claim at Tk.150,000. The claim was settled on 10 June 2011 for
a final figure of Tk.160,000 and is payable on 10 September 2011. S Ltd. recognized a provision
for the final claim in its draft balance sheet at 30 June 2011.
(iv) W Ltd. has been developing a new product based on revolutionary technology. No other
similar products currently exist in the market. At 1 September 2010 W Ltd. determined that
the product development was at a stage where the criteria for capitalization in accordance
with BAS 38 Intangible Assets had been met. During the year W Ltd. incurred Tk.720,000 of
development costs, accrued evenly through the year. These costs have been included in the
income statement as operating expenses. The product is still under development at 30 June
2011. An independent valuer has examined the recoverable amount of the technology at Tk1
million at 30 June 2011.
(v) W Ltd. sold goods to H Ltd. for Tk.170,000 during the year. At the year-end half of these goods
remained in inventory. W Ltd. sold the goods based on a transfer price of cost plus 25%. W Ltd.’s
receivables included an amount for the goods at the year end, however, H Ltd. sent a cash
payment for Tk.170,000 to W Ltd. on 26 June 2011. W Ltd. received the payment on 2 July 2011.
(vi) H Ltd. has undertaken annual impairment reviews of goodwill. At 30 June 2011 an impairment
loss of Tk.300,000 in respect of W Ltd. needs to be recognized.

Requirement:
Prepare a consolidated balance sheet of H Ltd. as at 30 June 2011. 25

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