FINANCIALACCOUNTING

Timeallowed2hours
FullMarks100

[N.B.QuestionsmustbeansweredinEnglish.Figuresinthemarginindicatefullmarks.Allworkingsaretobe
submitted. Examiner will take account of the quality of language and of the manner in which the
answersarepresented.Differentparts,ifany,ofthesamequestionmustbeansweredinoneplacein
orderofsequence]
Marks
1. Answertothefollowingquestions:
a. Financial statements based on historical cost basis are meaningless and highly distorted
discuss the limitations of financial statements highlighting the conflicting principles in the
ConceptualFrameworkofAccounting. 5
b. Describe the following categories of financial instruments: (a) financial assets and financial
liabilitiesatfairvaluethroughprofitorloss,(b)heldtomaturityinvestments,(c)loansand 6
receivables,and(d)availableforsalefinancialassets.
c. Statethecircumstancesinwhichanentitymaychangeinaccountingpolicyandexplainhowa
changeinpolicyshouldbeaccountedforinaccordancewithIAS8. 5

2. Youhavebeenaskedtoadviseontheappropriateaccountingtreatmentforthefollowingsituations
arisinginthebooksofyourcompany.Theyearendofthecompanyis31December2010andyou
shouldassumethattheamountsinvolvedarematerialineachcase. 4x5= 20
(i) AttheyearendtherewasadebitbalanceinthebooksforTk.15,000,representinganestimate
oftheamountreceivablefromaninsurancecompanyforanaccidentclaim.InFebruary2011,
beforethedirectorshadagreedthefinaldraftofthepublishedaccounts,correspondencewith
lawyersindicatedthatTk.18,600mightbepayableoncertainconditions.
(ii) ThecompanyhasanitemofequipmentwhichcostTk.400,000in2007andwasexpectedtolast
fortenyears.Atthebeginningofthefinancialyear2010thebookvaluewasTk.280,000.Itis
nowthoughtthatthecompanywillsoonceasetomaketheproductforwhichtheequipment
wasspeciallypurchased.ItsrecoverableamountisonlyTk.80,000at31December2010.
(iii) On30Novemberthecompanyenteredintoalegalactiondefendingaclaimforsupplyingfaulty
machinery. The companys solicitors advise that there is a 20% probability that the claim will
succeed.TheamountoftheclaimisTk.500,000.
(iv) AnitemhasbeenproducedatamanufacturingcostofTk.1,800againstacustomersorderatan
agreed price of Tk. 2,300. The item was in inventory at the yearend awaiting delivery
instructions. In January 2011 the customer was declared bankrupt and the most reasonable
courseofactionseemstobetomakeamodificationtotheunit,costingapproximatelyTk.300,
whichisexpectedtomakeitmarketablewithothercustomersatapriceofaboutTk.1,900.
(v) At 31 December a company has total potential liability of Tk.1,000,400 for warranty work on
contracts.Pastexperienceshowsthat10%ofthesecostsislikelytobeincurred,that30%may
beincurredbutthattheremaining60%ishighlyunlikelytobeincurred.

Required:
Foreachoftheabovesituationsoutlinetheaccountingtreatmentyouwouldrecommendandgive
thereasoningofprinciplesinvolved.Theaccountingtreatmentshouldrefertoentriesinthebooks
and/ortheyearendfinancialstatementsasappropriate.

3. (a) BARCLAYSpurchasedamotorcaron1.1.2008fromIDLCLtd.forTk.1,000,000withInterestrate
of10%p.a.for5years.ItpaysyearlyinstalmentofTk.300,000inadvancetothelessor.Thefair
valueofthecarwasTk.1,500,000.BARCLAYSchargesleaserentaltothecomprehensiveincome
statement under operating lease as per practice. The management of the company has now
decidedtocomplywithBAS17Leasestotreatitasfinancelease.Companydepreciatesmotor
car on straight line method @20%. What are the steps to be followed for conversion of
operating lease into finance lease? Show the calculations for the effect of policy change and

extractbalancesheetason31.12.2010. 10
[Pleaseturnover]
 2

(b) Ahmeds foods Ltd. purchased machinery costing Tk.100 million on 112010. May Bank,
Hongkong sanctioned a foreign currency loan in USD repayable in five equal instalements
annually (official exchange rate as on 1.1.2010 was US $ 1=Tk.70). As on 31122010 the first
instalment was paid when US $ 1 fetched Tk.72.50. The company charges depreciation on

machineryat20%onWDVbasis. 10
Whatwillbetheaccountingtreatmentofexchangelossarisingoutoftheforeigncurrencyloan
representedbytherecentacquisitionoffixedassets.YouranswershouldbeinlinewithBSA21
The Effects of Change in Foreign Exchange Rates. Did you find any different accounting
treatmentintermsofcompaniesAct1994?HowcanyoualignthistreatmentwithBAS21The
EffectsofChangeinForeignExchangeRates?

4. On1January2010thefixedassetbalanceofUnique,aquotedcompany,wasmadeupasfollows:
OriginalCost Depreciation NBV
Tk. Tk. Tk.
Landandbuildings 710,000 43,000 667,000
Plantandequipment 948,500 571,400 377,100
Motorvehicles 77,000 44,100 32,900
TheCompanychargesdepreciationonthestraightlinebasisatthefollowingrates.
Pa
Buildings 2%
Plantandequipment10%
Motorvehicles 20%
Afullchargeismadeintheyearofpurchaseandnoneintheyearofsale.
Youaregiventhefollowingadditionalinformation.
(i) Anitemofplantwhichwaswaspurchasedin2000forTk.200,000isnowrecognizedtohavea
usefullifeofanother16years.
(ii) ThebuildingsownedbyUniquecostTk.430,000,5yearsago.
(iii) During 2004 a lada which cost Tk. 10,000 in 2002 was traded at a value of Tk. 4,300 in part
exchangeforaskodacostingTk.15,400
(iv) On 1 July Unique acquired the use of a new machine under a finance lease. The contract
specified that Unique must pay a non returnable deposit of Tk. 15,000 immediately and then
annual instalments of Tk.10,000 for 4 years starting on 1 January 2005. The cash price of the
machinewasTk.45,000
(v) Included within the equipment is an item which originally cost Tk.173,000 and is already fully
depreciated.Itisnotexpectedtolastverymuchlonger.

Required:
(a) Definedepreciationandidentifytwosituationswherebythedepreciationchargedonanassetisnot
shownasanexpenseintheincomestatementbutisinsteadcapitalizedinthebalancesheet. 7
(b) Preparealongtermassetsnote,suitableforinclusioninUniquesfinancialstatementsforthe
yearended31December2004. 7
(c) TheFinanceDirectorsuggeststhattomakeachangeintheannualdepreciation foritem(i)is
againsttheaccountingconventionsofprudenceandconsistency. 5
Setoutyourresponse.

5. HSacquiredsixmillionofMKsordinaryshareson1April2010foranagreedconsiderationofTk.25
million.TheconsiderationwassettledbyashareexchangeoffivenewsharesinHSforeverythree
shares acquired in MK, and a cash payment of Tk. 5 million. The cash transaction have been
recorded,buttheshareexchangehasnot.

Thedraftbalancesheetsofthetwocompaniesat30September2010are:
HS MK
000Tk 000Tk. 000Tk. 000Tk
Assets
Noncurrentassets
Property,plant&equipment 78,540 27,180
InvestmentinMk 5,000 Nil
83,540 27,180

[Pleaseturnover]
 3
Currentassets
Inventory 7,450 4,310
AccountsReceivable 12960 4,330
Cashatbank nil 520
20,410 9,160
Totalassets 103,950 36,340
EquityandLiabilities
CapitalandReserves
OrdinarysharesofTk1each 20,000 8,000
Reserves
SharePremium 10,000 2,000
AccumulatedProfits:
At1October2009 51,260 6,000
Fortheyearto30Sep10 12,000 8,000
73,260 16,000
93,260 24,000
Noncurrentliabilities
8%loannotes2014 nil 6,000

Currentliabilities
Accountspayable&
Accruals 5,920 4,160
Bankoverdraft 1,700 nil
Provisionoftaxation 1,870 1,380
Proposedfinaldividend 1,200 800
Totalequityandliabilities 10,690 6,340
103,950 36,340
Thefollowinginformationisrelevant:
(i) ThefairvalueofMKslandatthedateofacquisitionwasTk.4millionisexcessofitscarrying
value.MKsfinancialstatementscontainanoteofacontingentassetforaninsuranceclaimof
Tk. 800,000 relating to some inventory that was damaged by a flood on 5 March 2010. The
insurancecompanyisdisputingthatclaim.Hehastakenlegaladviceontheclaimandbelieves
thatitishighlylikelythattheinsurancecompanywillsettleitinfullinthenearfuture.
ThefairvalueofMKsothernetassetsapproximatedtotheircarryingvalues.
(ii) AtthedateofacquisitionHSsoldanitemofplantthathadcostofTk.2milliontoMKforTk.2.4
million.MKhaschargeddepreciationofTk.240,000onthisplantsinceitwasacquired.
(iii) HSscurrentaccountdebitbalanceofTk.820,000withMKdoesnotagreewiththecorresponding
balanceinMKsbooks.Investigationsrevealedthaton26September2010HSbilledMKTk.200,000
for its share of central administration costs. MK has not yet recorded this invoice. Intercompany
currentaccountsareincludedinaccountsreceivableorpayableasappropriate.
(iv) MK paid an interim dividend of Tk.400,000 on 1 March 2010. The profit and total dividends
(interimplusfinal)ofMKaredeemedtoaccrueevenlythroughouttheyear.MKsretainedprofit
of Tk. 8 million for the year to 30 September 2010 as shown in its balance sheet is after the
deductionofbothitsinterimandfinaldividends.HSspolicyistocredittoincomeonlythose
dividends received or receivable from post acquisition profits. He has not yet received or
accounted for any dividends from MK. All proposed dividends were declared by the directors
beforetherelevantyearends.
(v) At30September2010thevalueofgoodwillinrespectoftheacquisitionofMKhasfallenby10%.

Required:
(a) PreparetheconsolidatedbalancesheetofHSat30September2010. 20
(b) Suggestreasonswhyaparentcompanymaynotwishtoconsolidateasubsidiarycompany,and
describe the circumstances in which nonconsolidation of subsidiaries is permitted by
InternationalAccountingStandards. 5


TheEnd