Q-2 BONNETI COMPANY

The following notes are relevant:

(i) Bonetti’s revenue includes $6 million of revenue for credit sales made on a ‘sale or return’ basis. At
30 September, customers who had not paid for the goods had the right to return $2 million of them.
Bonetti make a margin of 30% on all these sales. In the past, Bonetti’s customers have sometimes
returned goods under this type of agreement.

(ii) Bonetti issued two types of loan notes at the start of the year. The first is an $11 million 5% loan
note which allows for a large premium on redemption. This gives the loan note an effective interest
rate of 9% per annum. The second is a $10 million 4% convertible loan note, which is repayable on
30 September 2016. Bonetti chose to issue the convertible as it meant that there would be a lower
finance than the 8% interest rate charged on similar loan notes. The present value of $1 payable at
the end of each year, based on discount rates of 4% and 8% are:

(iii) On 1 July 2013, Bonetti entered into a contract to build a new football stadium for Fenty Ltd for
a fixed price of $40 million. Bonetti initially estimated that the total costs would be $35 million,
and has spent $7.5 million to date. At year end, Bonetti has estimated that the costs to
complete will be $35 million. Based on this, Bonetti asked Fenty Ltd to increase the price to $45
million, but Fenty Ltd has not agreed so far. Due to the sensitive ongoing negotiations, Bonetti is
yet to invoice Fenty for any of the work performed so far.

(iv) During the inventory count, it was discovered that some items had become damaged due to a
leak in the warehouse. These items cost $800,000 and could still be sold for $1 million, but only
after remedial work costing $350,000.

(v) The land and buildings were bought on 1 Oct 2002 and are depreciated over a 50 year life. The
plant and equipment is depreciated at 20% per annum on the reducing balance basis. No
depreciation has been charged on any asset for the year. Buildings depreciation is charged to
administrative expenses, whereas depreciation on plant and equipment is charged to cost of
sales.

(vi) A provision for income tax for the year ended 30 September 2013 of $13 million is required. The
balance on income tax represents the under/over provision of the tax liability for the year ended
30 September 2012. At 30 September 2013 the tax base of Bonetti’s net assets was $42 million
less than their carrying amounts. The movement on deferred tax should be taken to the
statement of profit or loss. The income tax rate of Bonetti is 26%.

Required:
(a) Prepare the statement of profit or loss for Bonetti for the year ended 30 September
2013. (11 marks)
(b) Prepare the statement of financial position of Bonetti as at 30 September 2013.
(14 marks)
A statement of changes in equity, and notes to the financial statements are not required.
(Total: 25 marks)
3 – Gardening Toolz Plc
 Additional information:
(i) Property with a carrying amount of $1.3 million was sold for a profit of $3.7 million during the year and this
gain has been taken to operating expenses, along with depreciation for the year of $625,000.
(ii) The gain on revaluation of property is net of a deferred tax charge of $300,000, based on a tax rate of 30%.
(iii) The investment income includes dividend income of $45,000 plus a gain on re-measurement of financial
assets (measured at fair value through profit or loss).
Gardening Toolz plc acquired some additional investments during the year, however there were no
disposals.
(iv) Operating expenses include a credit of $430,000 in respect of amortisation of government grants. New grant
income was received during the year for the purchase of property, plant and equipment.

Required :Prepare a statement of cash flows for Gardening Toolz plc for the year ended 30 September 2013 in
accordance with IAS 7 Statement of Cash Flows using the indirect method.
(20 marks)
Q.4 (a) Shahzeb company had a deferred tax balance of Rs. 6 million at the beginning of its financial year, on 1st
January 2014.

At 31st December, 2014 there were Rs. 45 million of taxable temporary differences, of which Rs.10 million
related to a gain on the revaluation of non-current asset. The income tax rate is 20%

Required: How should deferred tax be treated in the financial statements for the year ? (5 marks)

(b) (i) In light of IAS 24, what is related party transaction ? (2 marks)
(ii) What are the criteria of Reporting segments as per IFRS # 8 (5 marks)

(c) On 1 October 20Y0 Pine Ltd entered into a lease agreement with Cone Plc for use of a new needle machine
with a fair value of $22.3 million at inception of the lease. The machine was modified slightly for Pine Ltd’s use,
the cost of which was incorporated into the rentals. The lease requires four annual payments of $6.4 million
with the first being due on 1 October 20Y0. Pine Ltd is expected to return the machine at the end of the four
year period. Pine Ltd is responsible for insuring the machine over the lease term and will undertake regular
maintenance checks. It is expected that the machine has a useful economic life of five years. This type of lease
has an implicit interest rate of 10% per annum. The finance assistant is unsure if this is an operating lease or a
finance lease.
Required:
(a) Explain the five criteria of leases being classified as finance leases (3 marks)

(b) Provide extracts of Pine Ltd’s statement of profit or loss and statement of financial position in respect of
the leased asset for the year ended 31 March 20Y1. (5 marks)

Q-5 (a) Explain the meaning of following terms:

Substance over form (2 marks)
Consistency concept (2 marks)

The extract from statement of financial position of a company at year end June 30, 2008
reflects following status:
Rs. (000)
Plant under installation 5,000
Loans
Bank loan 15% 10,000
Bank loan 20% 3,000
Bank loan 13% 4,000
A loan of Rs. 1,000,000 was taken on July 01, 2008 specifically to finance the project at 16.5%.

Expenditure incurred on plant under installation Rs. (000)

July 1, 2008 700
October 1, 2008 700
February 1, 2009 1,000
June 1, 2009 500
An interest income of Rs. 50,000 has also been earned on temporary investment of specific funds borrowed
at the start of the year.
Required:
(i) Capitalization rate of the company (03)
(ii) Total borrowing cost to be capitalized during the year 2009. (05)
(iii) Cost of plant at June 30, 2009 and impact if any if the carrying value of asset exceeds its recoverable
value. (03)