Copyright Reserved

No. of Pages
No. of Questions

11
07

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

CERTIFICATE IN ACCOUNTING AND BUSINESS - II EXAMINATION

MARCH 2014

08204 - ACCOUNTING APPLICATIONS & TAXATION

This question paper consists of two sections
Section A
Section B

Accounting Applications
Taxation

60 marks
40 marks

A candidate will not be considered for a Pass in this paper unless required
minimum number of marks are obtained in each section.
Instructions to candidates:
(1)

Time allowed:
Reading and planning
Writing

: 15 minutes
: 3 hours

(2)

Marks : 100 marks

(3)

(a) Section A - Answer all questions.

(b) Section B - Answer question Nos. 4, 5 and one question from question
Nos. 6 and 7.

(4)

Submit all workings. Begin each answer on a separate page.

(5)

All answers should be in one language, in the medium applied for, in the answer
booklets provided.

S E C T I O N A ACCOUNTING APPLICATIONS
ANSWER ALL QUESTIONS IN SECTION A
Question No. 01
On 01 April 2012, Megamart PLC acquired 80% of the 500,000 equity shares of Minimart PLC
for a cash consideration of Rs. 18 million and allotting 100,000 of its own shares when
Minimarts retained earnings stood at Rs. 4.4 million. Relevant entries have not been passed for
this share allotment. There was no change in the stated share capital of Minimart PLC since the
acquisition by Megamart PLC.
As on 01 April 2012, fair value of identifiable net assets of Minimart PLC was Rs. 21.2 million.
On that date market price of the shares of Megamart PLC and Minimart PLC were Rs. 22 and
Rs.18.50 respectively. Any difference between the carrying amount and fair value of the
identifiable net assets of Minimart PLC as on 01 April 2012 is attributable to variation in the
value of plant and machinery which is depreciated at 10% per annum,
Megamart PLC adopts full goodwill method for consolidation purposes.
Statements of Financial Position as at 31 March 2013 and the Statements of Comprehensive
Income of the two companies for the year then ended are given below:
Statement of Financial Position as at 31 March 2013
Rs. 000s
Megamart PLC
Minimart PLC
Assets
Non-current Assets
Property, plant and equipment
Investment in Minimart PLC
Current Assets
Inventory
Trade and other receivables
Cash & Cash Equivalents

Equity & Liabilities

Equity & Reserve
Stated capital
Retained earnings
Revaluation Reserves
Current Liabilities
Trade and other payables

(2)

20,400
18,000

18,300
-

5,040
3,600
1,960
49,000

4,280
2,840
1,980
27,400

25,000
19,300
2,200

15,000
9,000
1,600

2,500
49,000

1,800
27,400

Statement of comprehensive income for the year ended 31 March 2013

Rs. 000s
Megamart PLC
Minimart PLC
56,800
24,800
(34,400)
(14,900)
22,400
9,900
1,240
1,300
(3,800)
(1,800)
(5,060)
(2,210)
(480)
( 260)
14,300
6,930
(4,860)
(1,830)
9,440
5,100

Revenue
Cost of sales
Gross profit
Other income
Distribution cost
Administration expenses
Financial charges
Profit before taxation
Income tax expense
Profit for the year

Following information is available:

1.

During the year ended 31 March 2013, Megamart PLC sold goods costing Rs. 4.4 million
to Minimart PLC at a mark-up of 25%. Of this, goods at an invoiced value of
Rs. 440,000 was in transit and not yet accounted for by Minimart PLC and another item
of stock at invoiced value of Rs. 1.65 million was included under the closing stock of
Minimart PLC as on 31 March 2013. Minimart PLC had settled all amounts due on these
purchases except for the goods in transit.

2.

During the year ended 31 March 2013, Megamart PLC received Rs.150,000 from
Minimart PLC, being management fees for the year.

3.

Revaluation reserve of Minimart PLC is made up as follows:

Revaluation of land on 30 November 2011
Rs. 1 million
Revaluation of buildings on 31 March 2013
Rs. 0.6 million

4.

During the year ended 31 March 2013, Minimart PLC paid a dividend of Rs.1 per share
to its shareholders out of post acquisition profits.

5.

Impairment test carried out on 31 March 2013 revealed that the goodwill on
consolidation had impaired by Rs. 200,000.

You are required to;

(a)
(b)
(c)
(d)

Calculate goodwill on consolidation.

(3 marks)
Prepare non-controlling interest account as on 31 March 2013.
(3 marks)
Prepare statement of Consolidated Comprehensive Income for the year ended 31 March
2013.
(7 marks)
Prepare statement of Consolidated Financial Position as at 31 March 2013.
(7 marks)
(Total 20 marks)
(3)

Question No. 02
Marga Apparel PLC (MAP), a company situated in a suburb of Colombo city, is involved with
manufacturing and selling of garments. Trial balance of Marga Apparel PLC as at 31 March
2013 is given below:

Stated Capital
Retained Earnings on 01 April 2012
Revaluation Reserve
Government Grant
Property, Plant & Equipment At Cost:
Land
Buildings
Plant & Machinery
Motor Vehicles
Furniture & Equipment
Accumulated Depreciation on 01 April 2012:
- Buildings
- Plant & Machinery
- Motor Vehicles
- Furniture & Equipment
Patent Right
Inventory on 31 March 2013
Trade Receivables / Trade Payables
Other Receivables / Other Payables
Cash & Bank Balances
Cost of Sales
Sales
Other Income
Provision for doubtful debts on 01 April 2012
Distribution Cost
Administration Expenses
Interim Dividend Paid
Income Tax Account

Rs.000s
Dr
-

Rs.000s
Cr
15,000
8,750
600
2,500

15,000
8,600
7,800
4,650
3,200

4,800
8,060
4,280
880
2,565
50,600
4,840
4,660
1,000
8,210
129,145

2,080
2,900
1,625
1,210
3,650
660
88,800
1,200
170
129,145

Following additional information is available:

1.

Revaluation of property, plant and equipment:

The revaluation reserve account balance reflected in the trial balance was due to
revaluation carried out on plant and machinery 2 years ago. On 31 March 2013, land was
re-valued at Rs. 15.5 million and necessary adjustments are yet to be made.

(4)

2.

New operating unit:

The government offered a grant to companies carrying out their operations in Bakamuna a
remote village in North-Central Province. A company will have to employ 15 youths from
that village for 5 years, for it to become entitled for this grant of Rs.5 million. With effect
from 1 October 2012, MAP started a new operating unit in this village employing 20
youths from this village and hoping to employ these youths for a minimum period of 5
years. During the period ended 31 March 2013 MAP received Rs.2.5 million as part
payment under this grant.
Assume that the company adopts income approach in accounting for government grants.

3.

Property, plant and equipment:

The only additions to property, plant and equipment during the year were as follows:
- Machinery at a cost of Rs. 1.2 million was purchased for its Bakamuna site on 30
September 2012.
-

Companys only vehicle was exchanged for a new vehicle having a fair value of
Rs. 3.2 million on 30 June 2012. In addition company received Rs. 150,000 as per the
terms of the exchange. In respect of this exchange the only accounting entry passed
was to credit the Rs. 150,000 received to motor vehicle account.

Depreciation is to be provided for, on the straight line method at following rates:

Buildings
- 5% per annum
Plant & Machinery
- 20% per annum
Motor Vehicle
- 25% per annum
Furniture & Equipment
- 20% per annum
4.

Patent right:
On 1 April 2012, MAP acquired a patent right for 5 years and the amount reflected in the
trial balance is made up as follows:
Full contractual payment to patent right holder
Rs. 3.5 million
Legal and other professional fees paid
Rs. 0.7 million
Cost of introductory and promotional advertisement
Rs. 0.6 million
Rs. 4.8 million

5.

Impairment of property, plant and equipment:

Impairment test carried out on 31 March 2013 showed that the plant and machinery other
than those purchased during the year had a recoverable amount of Rs. 2 million.

6.

Consignment goods:
Credit sales of the company included ready-made garments sent to an agent in Colombo on
a Sale or Return basis. The cost of these garments was Rs. 300,000 and selling value fixed
by the company was Rs. 390,000. These goods had not been sold by the agent as on 31
March 2013.

7.

Trade receivables:
An amount of Rs. 20,000 is to be written off as bad debts. Further, a specific doubtful debt
provision for Rs. 10,000 and a general provision of 5% have to be made as at the date of
the Statement of Financial Position.
(5)

8.

Income tax
Income Tax for the year has been estimated at Rs. 8.8 million. The income tax account
reflected in the trial balance is made up as follows:
Rs.
Over provision for year of assessment 2011/2012 (220,000)
Payments made during the year
8,430,000
Balance
8,210,000
For tax purposes, machinery purchased during the year for the Bakamuna site would be
entitled to claim depreciation allowances at 50%. Company tax rate is 35%. You have to
provide for deferred tax on this asset.

You are required to prepare, for publication purposes:

(a)
(b)
(c)
(d)

Statement of Comprehensive Income for the year ended 31 March 2013

Statement of Financial Position as at 31 March 2013
Statement of Changes in Equity for the year ended 31 March 2013
A statement showing movements in Property, Plant and Equipment

(10 marks)
(8 marks)
(2 marks)
(5 marks)
(Total 25 marks)

Question No 03
(i)

(a)

State how a provision differs from trade payables and accrued expenses.

(2 marks)
Company A has filed a legal suit against Company B claiming Rs. 2 million
compensation for infringement of its patent rights. The case was pending as at 31
March 2013. State how you would treat this in the financial statements of
Company A for the year ended 31 March 2013.
(2 marks)
A car dealer in his inventory, had some cars lying unsold for more than 2 years. The
book-keeper of the company is of the view that these stocks should be categorised as
non-current assets.

(b)

(ii)

(iii)

You are required to state the recognition criteria for current assets and comment on the
book-keepers view.
(4 marks)
Following details have been extracted from the accounting records of Globe (Pvt.) Ltd, a
trading company:
Rs.000s
12,840
3,240
220
1,980
1,396
4,420
2,160
1,780
5,060
2,320
1,920
12,560

Year 2013
Sales
Gross profit
Interest expenses
Profit before tax
Profit after tax
Opening inventory
Opening debtors balance
Opening creditors balance
Closing inventory
Closing debtors balance
Closing creditors balance
Capital employed
(6)

Based on the above information you are required to:

(a)

(b)

Calculate the following:

- Average Profit mark-up (as a percentage of cost)
- Return on Capital Employed
- Average Inventory Resident period
- Average Trade Receivable Collection period
- Average Trade Payable Settlement period

(5 marks)

Comment on working capital management and the implication of Working Capital

Cycle for Globe Ltd.
(2 marks)
(Total 15 marks)

(7)

S E C T I O N B- TAXATION
ANSWER QUESTION NOs. 04, 05 & ONLY ONE QUESTION FROM QUESTION
NOs. 6 & 7
Question No.04

Mr. Chaminda Kularatna , a Chartered Accountant is working for Ceylon Paper Products
(Pvt) Ltd. as Director Finance since 2005. The following payments were made and
benefits were provided during the year of assessment 2012/13.

Gross salary - Rs. 150,000 per month.

Vehicle allowance - Rs. 65,000 per month
Bonus Rs.170,000. This payment was made out of the profits for the year
2011/12.
Private telephone bills amounting to Rs. 72,000 were reimbursed by the employer
during the above year of assessment.
Medical reimbursement received in respect of surgery performed on his childs
injured head is Rs. 306,000.
As the employer does not provide a house, Mr. Kularatna lives in a rented house.
He pays Rs.20,000 per month and the total amount is reimbursed by his employer.
Mr. Kularatna was on 7 days compulsory leave and went on a trip to Nuwara
Eliya, and entire cost amounting to Rs.143,000 was reimbursed by his employer.
Deduction from salary to a provident fund which has been approved by the
Commissioner General of Inland Revenue is 8% of the gross salary. Employers
contribution to the fund is at 12%.
PAYE deduction - Rs. 255,000.

Mr. Kularatna has made investments in banks; the relevant information is as follows:
Deposit in a bank in Australia out of his foreign currency earned when he was
working abroad. The annual interest received was US $ 2,170, and it was remitted
to his Sri Lankan bank account.
Deposits have been made out of such foreign currency in his NRFC account in a
Sri Lankan commercial bank as well and the total interest received from the
NRFC account is US $ 650.
One US dollar is equal to Sri Lankan rupees 128.
Interest received from the savings account in a local private commercial bank is
Rs.34,000, and no withholding tax has been deducted.

He has made investments in public listed companies. One such company has distributed
dividends without deducting dividend tax even though it is required to deduct dividend
tax within the law. Amount of such dividend is Rs.68,000.
Profit on sale of listed shares is Rs. 14,000.
A house which has a floor area of 3000 sq.ft. and constructed by him in 2009, has been
let to a company to be used as a residence of one of the directors, at a monthly rent of
Rs.60,000. Rating assessment is Rs. 200,000 and the rates paid is Rs. 60,000. The rates
are borne by the owner.

(8)

He has an audit firm and provides accounting, auditing and consultancy services. He
employs well trained staff. The following is a summary of his income statement for the
year ended 31 March 2013.
Rs.
Salaries and wages

1,332,000 Fees collected

Travelling expenses
Bonus
Rent
Stationery
Entertainment expenses
Depreciation - computers
Water
Postage
Other expenses
Net income

470,000
244,000 Profit on sale of a computer
240,000
271,000
67,000
50,000
18,000
45,000
330,000
2,222,000
5,289,000

Rs.
5,254,000
35,000

5,289,000

A new computer was purchased in May 2012 for Rs.100,000. The old computer,
purchased in July 2008 for Rs.90,000 has been sold for Rs 35,000 in July 2012.
His office is located in the house in which he lives and the floor area of the office
is one fourth (1/4th) of the area of the entire house .
Other expenses are wholly allowable for tax purposes.

Mr. Kularatna has made the following payments:

He has paid Rs. 58,000 as interest on a loan taken from a bank to purchase a
motor car. Capital repayment is Rs.34,000.
The payment made during this year of assessment (2012/2013) to the Insurance
company on a life policy is Rs. 86,000.
Rs. 100,000 has been donated to the Api Wenuwen Api fund.
Tax paid on self assessment is Rs. 350,000.

Based on the above information you are required to prepare the following computations for the
year of assessment 2012/2013:
(a)
(b)
(c)

Gross income tax payable

Applicable tax credit
Balance tax payable/(Refund due)

(25 marks)

(9)

Question No. 05
Ruwan Designers is an architectural firm providing services to Sri Lankan clients only. The
partners of this firm are Ruwan and Shantha who share profits and losses equally. The income
statement for the year ended on 31 March 2013 is as follows:
Rs.
Turnover
Add: other income
Interest on a fixed deposit (net)
Rent received
Total income
Expenses
Salaries paid to partners Ruwan
Rs. 1,600,000
Shantha Rs. 1, 600,000
Salaries to structural engineers
Salaries to civil engineers
Draftsmans charges
Salaries to other staff
Vehicle expenses
Depreciation - building
Construction of a new office room
Rates paid for the entire building
Tracing papers
Telephone charges
Site visiting expenses
Staff welfare expenses
Interest paid to Ruwan on a loan granted by him to
the partnership
NBT paid
Other expenses
Net income
Notes
1.

2.
3.
4.

Rs.
47,475,000
130 ,000
960,000
48,565,000

3,200,000
6,295,000
5,580,000
1,266,000
2,274,000
4,984,000
450,000
789,000
44,000
302,500
986,000
5,897,000
274,000
100,000
949,500
365,000

33,756,000
14,809,000

During this year of assessment, a two storied building which had not been used for any
business by the previous owner has been purchased for Rs.4,500,000. Its floor area is
3000 square feet.
Half of the building has been let to a company.
Vehicles are used solely for the purpose of the business.
All other expenses are allowable for the purpose of taxation.

You are required to prepare the following computations for the year of assessment 2012/2013.
(a)
(b)
(c)

Total divisible profits and other income.

Partnership tax.
Distribution of divisible profits and other income among partners.
(10 marks)
(10)

Question No. 06
The assessable income of Mr. Gunasekera, a resident individual, for year of assessment
2012/2013 is Rs.1,000,000. The gross tax payable for year of assessment 2011/2012 was
Rs. 24,000. He made the following tax payments for year of assessment 2012/2013.
Date
12.07.2012
13.10.2012
11.01.2013
12.04.2013

Amount
Rs. 6000
Rs. 6000
Rs. 6000
Rs. 6000

Calculate balance tax payable, if any, by Mr. Gunasekera or refund due to him in respect of the
year of assessment 2012/2013.
(5 marks)
Question No. 07
Collettes Rubber Industries (Pvt.) Ltd manufactures bicycle tyres for export and for the local
market. During the month of March 2013 its exports were Rs. 20,000,000 and supplies to the
local market was Rs.10,000,000. VAT paid to the Director General of Customs on import of raw
materials was Rs.1,200,000. VAT paid on other supplies locally was Rs.300,000. Calculate the
VAT payable by the Company for the month of March 2013.
(5 marks)

(11)