FINANCIAL ACCOUNTING

Time allowed 3 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) An important requirement of the IASBs Framework for the preparation and presentation of financial
statements is that in order to be reliable, an entitys financial statements should represent faithfully the
transactions and events that it has undertaken. Explain what is meant by faithful representation and how it
enhances reliability. 4
(b) Product development costs are a material cost for many companies. They are either written off as an expense
or capitalized as an asset. Discuss the conceptual issues involved and the definition of an asset that may be
applied in determining whether development expenditure should be treated as an expense or an asset. 4
(c) (i) What is meant by an impairment review? Explain in reference to assets that may form a cash generating
unit. 4
(ii) Nuvista Limited acquired an item of plant at a cost of Tk. 800,000 on 1 April 2015 that is used to
produce and package pharmaceutical pills. The plant had an estimated residual value of Tk. 50,000 and
an estimated life of five years, neither of which has changed. Nuvista Limited uses straight-line
depreciation. On 31 March 2017, Nuvista Limited was informed by a major customer (who buys
products produced by the plant) that it would no longer be placing orders with Nuvista Limited. Even
before this information was known, Nuvista Limited had been having difficulty finding work for this
plant. It now estimates that net cash inflows earned from the plant for the next three years will be:
Tk000
Year ended 31 March 2018 220
31 March 2019 180
31 March 2020 170
On 31 March 2020, the plant is still expected to be sold for its estimated realizable value.
Nuvista Limited has confirmed that there is no market in which to sell the plant at 31 March 2017.
Nuvista Limiteds cost of capital is 10% and the following values should be used:
Tk
Value of Tk. 1 at End of year 1 0.91
End of year 2 0.83
End of year 3 0.75
(iii) Nuvista Limited owned a 100% subsidiary, Tilda, that is treated as a cash generating unit. On 31 March
2017, there was an industrial accident (a gas explosion) that caused damage to some of Tildas plant. The
assets of Tilda immediately before the accident were:
Tk000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
12,000
As a result of the accident, the recoverable amount of Tilda is Tk. 67 million
The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of
Tk. 500,000.
Tilda has an open offer from a competitor of Tk. 1 million for its patent. The receivables and cash are
already stated at their fair values less costs to sell (net realizable values).
Requirement:
Calculate the carrying amounts of the assets in (ii) and (iii) above at 31 March 2017 after applying any
impairment losses.
Calculations should be to the nearest Tk. 1,000. 5+5

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2. (a) NZU Ltd., in preparation of its December 31, 2016, financial statements, is attempting to determine the
proper accounting treatment for each of the following independent situations:
1) As a result of uninsured accidents during the year, personal injury suits for Tk 350,000 and Tk 60,000
have been filed against the company. It is the judgment of NZUs legal advisor that an unfavorable
outcome is unlikely in the case of Tk 60,000 but that an unfavorable verdict approximating Tk 225,000
will probably result in the case of Tk 350,000.
2) NZU Ltd. owns a subsidiary in a foreign country that has a book value of Tk 5,725,000 and an estimated fair
value of Tk 8,700,000. The foreign government has communicated to NZU its intention to expropriate the
assets and business of all foreign investors. On the basis of settlements other firms have received from this
same country, NZU expects to receive 40% of the fair value of its properties as final settlement.
3) NZUs chemical product division consisting of five plants is uninsurable for the special risk of injury to
employees and losses due to fire and explosion. The year 2016 is considered one of the safest (luckiest)
in the divisions history because no loss due to injury or casualty was suffered. Having suffered an
average of three casualties a year during the rest of the past decade (ranging from Tk 60,000 to Tk
700,000), management is certain that next year the company will probably not be so fortunate.
4) In August, 2016 a worker was injured in the factory in an accident, partially the result of his own
negligence. The worker has sued NZU Ltd. for Tk 800,000. Legal advisor believes it is reasonably
possible that the outcome of the suit will be unfavorable and that the settlement would cost the company
from Tk 250,000 to Tk 500,000.
5) A suit for breach of contract seeking damages of Tk 2,400,000 was filed by an author against NZU Ltd.
on October 4, 2016. NZU's legal advisor believes that an unfavorable outcome is probable. A reasonable
estimate of the award to the plaintiff is between Tk 600,000 and Tk 1,800,000. No amount within this
range is a better estimate of potential damages than any other amount.
6) NZU is involved in a pending court case. NZUs lawyers believe it is probable that NZU will be awarded
damages of Tk 1,000,000.
Requirement:
Discuss the proper accounting treatment and indicate what should be reported relative to each situation in the
financial statements and accompanying notes. Give the rationale for your answers. 12
(b) On 1 January 2016 RACO Ltd had only ordinary shares in issue. During the year ended 31 December 2016
RACO Ltd entered into the following financing transactions:
(1) On 1 January 2016 RACO Ltd issued 20 million 8% Tk 1 preference shares at par. The preference shares
are redeemable at par on 30 June 2021. The appropriate dividend in respect of these shares was paid on
31 December 2016.
(2) On 30 June 2016 RACO Ltd issued 10 million 12% Tk 1 irredeemable preference shares at par. The
appropriate dividend in respect of these shares was paid on 31 December 2016.
On 31 December 2016 RACO Ltd decided to change its accounting policy in respect of the capitalisation
of interest. Previously, RACO Ltd had capitalised interest within property, plant and equipment and
amortised those costs. It has now decided to write off such costs to cost of sales as incurred. The net book
value of such interest included in the draft balance sheet was as follows.
Taka in M
At 1 January 2016
Costs incurred 4.5
Amortisation charge 2.0
At 31 December 2016 (0.5)
6.0
The draft profit for 2016, before adjusting for capitalised interest, was Tk 15 million. Retained earnings
at 1 January 2016 were Tk 75 million.
Requirement:
Prepare extracts from the financial statements of RACO Ltd for the year ended 31 December 2016 to the
extent the information is available, showing how the above would be reflected in those financial statements.
Notes to the accounts are not required. Ignore taxation. 8

3. The following trial balance relates to Aziz & Co as at 31 March 2017:

Tk000 Tk000
Equity shares of Tk. 1 each 25,000
Other equity 11,800
Retained earnings at 1 April 2016 8,000
5% convertible loan notes (note (iii)) 30,000
Land and buildings at cost (land element Tk. 14 million) (note (iv)) 64,000
Plant and equipment at cost (note (iv)) 82,700

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Patent at cost (ten-year life) (note (iv)) 7,500
Accumulated depreciation/amortization at 1 April 2016:
Buildings 5,000
Plant and equipment 36,700
Patent 3,000
Inventory at 31 March 2017 32,100
Trade receivables 38,500
Bank 2,700
Current tax (note (v)) 1,550
Deferred tax (note (v)) 4,800
Revenue (note (i)) 267,900
Cost of sales 166,600
Distribution costs 20,000
Administrative expenses 22,000
Contract asset (note (ii)) 5,000
Loan note interest paid (note (iii)) 1,500
Bank interest 150
Other operating income from royalties 300
Trade payables . 46,400
441,600 441,600

The following notes are relevant:

(i) Revenue includes an amount of Tk. 16 million for a sale made on 1 April 2016. The sale relates to a single
product and includes ongoing servicing from Aziz & Co for four years. The normal selling price of the
product and the servicing would be Tk. 18 million and Tk. 500,000 per annum (Tk. 2 million in total)
respectively.
(ii) The contract asset is comprised of contract costs incurred at 31 March 2017 of Tk. 15 million less a payment
of Tk. 10 million from the customer. The agreed transaction price for the total contract is Tk. 30 million and
the total expected costs are Tk. 24 million. Aziz & Co uses an input method based on costs incurred to date
relative to the total expected costs to determine the progress towards completion of its contracts.
(iii) Aziz & Co issued 300,000 Tk. 100 5% convertible loan notes on 1 April 2016. The loan notes can be
converted to equity shares on the basis of 25 shares for each Tk. 100 loan note on 31 March 2019 or
redeemed at par for cash on the same date. An equivalent loan note without the conversion rights would have
required an interest rate of 8%.
The present value of Tk. 1 receivable at the end of each year, based on discount rates of 5% and 8%, are:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
(iv) Non-current assets:
Due to rising property prices, Aziz & Co decided to revalue its land and buildings on 1 April 2016 to their
market value. The values were confirmed at that date as land Tk. 16 million and buildings Tk. 522 million
with the buildings having an estimated remaining life of 18 years at the date of revaluation. Aziz & Co
intends to make a transfer from the revaluation surplus to retained earnings in respect of the annual realization
of the revaluation surplus. Ignore deferred tax on the revaluation.
Plant and equipment is depreciated at 15% per annum using the reducing balance method.
During the current year, the income from royalties relating to the patent had declined considerably and the
directors are concerned that the value of the patent may be impaired. A study at the year-end concluded that
the present value of the future estimated net cashflows from the patent at 31 March 2017 is Tk. 325 million;
however, Aziz & Co also has a confirmed offer of Tk. 34 million to sell the patent immediately at that date.
No depreciation/amortization has yet been charged on any non-current asset for the year ended 31 March
2017. All depreciation/amortization is charged to cost of sales.
There were no acquisitions or disposals of non-current assets during the year.
(v) The directors estimate a provision for income tax for the year ended 31 March 2017 of Tk. 114 million is
required. The balance on current tax in the trial balance represents the under/over provision of the tax liability
for the year ended 31 March 2016. At 31 March 2017, Aziz & Co had taxable temporary differences of Tk.
185 million requiring a provision for deferred tax. Any deferred tax movement should be reported in profit or
loss. The income tax rate applicable to Aziz & Co is 20%.

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 Requirements:
(a) Prepare the statement of profit or loss and other comprehensive income for Aziz & Co for the year ended 31
March 2017. 10
(b) Prepare the statement of changes in equity for Aziz & Co for the year ended 31 March 2017. 3
(c) Prepare the statement of financial position of Aziz & Co as at 31 March 2017. Notes to the financial
statements are not required. Work to the nearest Tk. 1,000. 10

4. Hussein Ltd is a furniture manufacturing company and during the year ended 31 March 2017 the following
transactions relating to property, plant and equipment took place.
1) New factory premises were finally completed and were ready for occupation on 1 September 2017.
Production was not transferred to the factory until 28 February 2017 due to a dispute with the labour force
arising from proposed redundancies.
Capitalised costs relating to the factory were Tk 1.1 million (including land of Tk 600,000) at 1 April 2016
and the following costs have been incurred since then.
Taka (000)
Further construction costs 125
Additional legal fees 25
Management and supervision costs (allocation) 75
2) On 1 September 2017, plant and machinery for a new highly computerised production and assembly line
became available for use in the factory. The external costs relating to this were Tk 800,000 and in addition the
company also incurred the following.
Labour costs of Tk 80,000 in installing the line (these were 20% higher than budgeted because of the
impact of industrial disputes).
Management and supervision costs (allocation) of Tk 15,000.
Start-up costs of Tk 30,000 incurred in testing the new process. Tk 20,000 of these were necessary to
ensure the line operated correctly. The remaining Tk 10,000 was incurred when the directors held an
'open day' for their bankers to demonstrate the efficiency of the new system.
3) The company still owns and uses part of the old factory but on 31 March 2017 it was classified as held for
sale. It is expected to be sold by 30 June 2017 for Tk 200,000 (after spending Tk 25,000 to generally improve
the property). The carrying amount of the factory at 1 April 2016 is Tk 310,000 (cost Tk 500,000).
Depreciation rates are:
Freehold buildings 2% per annum
Plant and machinery 20% per annum
Requirements:
i) Prepare balance sheet extracts in relation to the above as at 31 March 2017 and draft the note showing the
movements on property, plant and equipment for the year (working to the nearest Tk 000). 11
ii) Calculate the impairment loss arising on classifying the old facility as held for sale. 4

5. The statements of financial position for Polo Ltd and Golf Ltd as at 31 December 2016 are provided below:
ASSETS Polo Ltd Golf Ltd
Tk in '000 Tk in '000
Non-current assets
Property, plant and equipment (Net) 72,500 10,625
Investment (available for sale) 8,750 -
81,250 10,625
Current assets
Cash and cash equivalents 3,750 938
Accounts and other receivables 20,625 5,937
Closing inventories 19,375 2,500
Advance, deposits and prepayments 5,500 1,500
49,250 10,875
Total assets 130,500 21,500
EQUITY AND LIABILITIES
Equity
Share capital (Tk 10 ordinary shares) 62,500 3,125
Retained earnings 23,718 8,125
Reserve and surplus 1,283 -
Total equity 87,500 11,250
Non-current liabilities 12,188 2,500
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 Current liabilities
Short term borrowings 5,312 250
Accounts and other payables 25,500 7,500
30,812 7,750
Total liabilities 43,000 10,250
Total equity and liabilities 130,500 21,500

Additional information
1) The profit for the year of Golf was Tk 3,125,000 and profits are assumed to accrue evenly throughout the year.
2) Golf sold goods to Polo for Tk 1,250,000. Half of these goods remained in Polo's inventories at 31 December
2016. Golf earns 25% margin on all sales.
3) Neither entity paid a dividend in the year ended 31 December 2016.
4) Polo Ltd acquired a 15% investment in Golf Ltd on 1 June 2014 for Tk 1,000,000. The investment was
classified as available for sale with any associated gains or losses recorded within reserve and surplus in Polo's
individual financial statements.
5) On 1 July 2016, Polo acquired an additional 55% of the equity share capital of Golf at a cost of Tk 6,470,000.
6) The fair value of the original 15% investment at 1 July 2016 was Tk 1,250,000. In its own financial statements,
Polo continues to hold the investment in Golf as an available for sale asset and it is recorded at its fair value of
Tk 8,750,000 as at 31 December 2016.
7) At 1 July 2016, the fair value of the net assets acquired was assessed to be the same as their carrying value, with
one exception, property, plant and equipment. Property, with a carrying value of Tk 4,000,000, had a fair value
of Tk 5,000,000. The remaining useful life of this asset is 10 years from the date of acquisition. Depreciation on
property, plant and equipment is charged on a monthly straight line basis.
8) It is the group policy to value non-controlling interest at fair value at the date of acquisition. The fair value of
the non-controlling interest at 1 July 2016 was Tk 3,375,000.
Requirement:
Prepare the consolidated statement of financial position as at 31 December 2016 for the Polo Group. 20

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