A.

FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011

Clay Pakistan Limited Statement of changes in equity For the year ended 30 June 2011 Issued, subscribed and paid up share capital

General Reserves

Balance as at 1 July 2009 Effect of change in accounting policy as referred to in note __. [Rs. 20m x 70%] Balance as on 1 July 2009 - restated Total comprehensive income for the year Profit for the year after tax [Rs. 4,120m-Rs. 50mx70%] Other comprehensive income Distributions to the owners Final dividend for 2008-09 (Rs. 2.50 per ordinary share) Interim bonus shares issued for 2009 (10%)

9,400 -

9,400

3,210 -

3,210

750 120 120 -

750

8,905 1,236 -

8,905

Un-appropriated profit 5,410 (2,350) (940) (3,290) (1,236) 1,238 5,275 5,275 *4,085 4,085 14 5,424 6,221 (2,068) (1,034) (2,275) (5,377) (1,583) 1,038 5,574

Capital Reserve

Translation Reserve

Transfer to general reserves Transfer from surplus on revaluation of property, plant and equipment - net of deferred tax

940 940 10,340

Balance as at 30 June 2010 restated Total comprehensive income for the year Profit for the year after tax [Rs. 5,240m + Rs. 50m x 70%] Other comprehensive income Distributions to the owners Final dividend for 2009-10 (Rs. 2.00 per ordinary share) Final bonus shares issue for 2009-10 (10%) Interim dividend for 2010-11 (Rs. 2 per ordinary share)

3,210

155 155 -

870

10,141

1,034 1,034 -

A.2

Transfer to general reserves Transfer from surplus on revaluation of property, plant and equipment - net of deferred tax Balance as at 30 June 2011 Borrowing costs to be capitalized Commitment fee @ 1% Borrowing costs on specific loan Borrowing costs on running finance Less: Investment income

Workings 1 3 2

11,374

3,210 1,025

2011 6,987,500 1,381,625 (2,099,001) 6,720,124

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11,724

1,583

2010 700,000 3,033,333 (1,381,334) 2,351,999

Total 27,675 14 27,689 4,085 120 4,205 (2,350) (2,350) 30,782 5,275 155 5,430 1,238 (2,068) (4,343) (2,275) 1,038 32,907

Capital Reserves

Revenue Reserves

Rupees in million

Outstanding amount (Rs.)

From commencement on to June 30 Amount to be capitalized as on 30-Jun-10

From June 30 to first principal repayment After the 1st principal repayment After the 2nd principal repayment to completion Amount to be capitalized as on 30-Jun-11 W-2 : Investment income
Available Funds

70,000,000 70,000,000 65,000,000 60,000,000

4 2 6 3

0 0 1 0

Rs. 70m - Rs. 25m - Rs. 0.7m Investment income 2010 Rs. 70m - Rs. 25m - Rs. 0.7m Rs.44.3 - Rs. 5m - Rs. 4.55m Investment income 2011

44,300,000 44,300,000 34,750,000

O/s amount up to completion 4 2 5

Used to reduce running finance (14%) 10,000,000 10,000,000 10,000,000

Amount

Income

466,667

A.3

2nd payment to contractor (Rs. 65m - 34.75m) Payment of 2nd installment Principal Interest (Rs. 65m x 13% x 6/12) 3rd payment to contractor

30,250,000 5,000,000 4,225,000 10,000,000 49,475,000

No. of months outstanding

4 3 3 0

IN THE BOOKS OF METAL LIMITED 23 Transactions with Related Parties Related parties comprises of the companys subsidiaries. Transactions with related parties are as follows: 2011 2010 Rupees Subsidiaries Sale of machine (at carrying amount plus 20%) 19,200,000 Management fees income (Note 23.1) 12,000,000 Management fee receivable 1,000,000 Other receivables - Sale of machine 19,200,000 23.1

No management fee was charged during the year ended 30 June 2010. Except for this, all transactions have been carried out on arms length basis, as approved by the board of directors of the company.
Page 2 of 6

Net outstanding months 1 0 0 0 3 3 3 0

Suspension

Description

Amount

Borrowing cost to be capitalized (Rs.) @ 14% 1,058,750 175,000 147,875 1,381,625

W-3 : Interest on running finance

233,333 583,335

34,300,000 34,300,000 24,750,000

Amount

Invested in saving account @ 8%

All amounts in Rupees

Income

2 5 3

914,667 457,333 825,000

2011

Borrowing cost to be capitalized (Rs.) @ 13% 3,033,333 3,033,333 1,516,667 3,520,833 1,950,000 6,987,500
Total Income 1,381,334 1,381,334 690,666 1,408,335 2,099,001

Outstanding month

Net outstanding months

Suspension

W-1 : Actual borrowing costs on specific loan

FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011

IN THE BOOKS OF COPPER LIMITED 23 Transactions with Related Parties Related parties comprise of Metal Limited (parent company) and its subsidiaries. Transaction with related parties can be summarized as follows: 2011 2010 Rupees Parent Company Purchase of machine 19,200,000 Management fees (Note 23.1) 6,000,000 Management fee payable 500,000 Other payables - Sale of machine 19,200,000 23.1 IN THE BOOKS OF ZINC LIMITED 23 Transactions with Related Parties Related parties comprise of Metal Limited (parent company) and its subsidiaries. Transaction with related parties can be summarized as follows: 2011 2010 Rupees Parent Company Contract for factory extension project (Note 23.1) 15,000,000 Management fees (Note 23.2) 6,000,000 Management fee payable 500,000 23.1 23.2 The contract has been awarded to Iron Builders and Developers in which one of the directors of the parent company is a partner. No management fee was charged for the year ended 30 June 2010. Except for this, all transactions have been carried out on arms length basis, as approved by the board of directors of the company. No management fee was charged for the year ended 30 June 2010. Except for this, all transactions have been carried out on arms length basis, as approved by the board of directors of the company.

FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011

A.4

IN THE BOOKS OF STEEL LIMITED Related parties comprise of Metal Limited (parent company) and its subsidiaries. However, there was no related party transaction during the year. (a) Entries to record the lease in books of Quartz Auto Limited Description Lease receivable (2,715,224 5) + 700,000 Cost of goods sold [(900,000 7) - (100,000 7 0.49718)] Inventory (900,000 x 7) Sales (Note 1) Unearned finance income Bank Lease receivable Unearned finance income Finance income Debit 14,276,120 5,951,974 2,715,224 Credit

6,300,000 9,101,974 4,826,120 1,417,500

Note 1 Lower of fair value i.e. 9,450,000 (Rs. 1,350,000 x 7) and PV of minimum lease payment (2,715,227 x 3.35219 = 9,101,974)

1,417,500

2,715,224

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FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011 (b) Disclosure in the financial statements 1- Net investment in lease

1.1 Details of investment in finance lease

Lease receivable (2,715,227 x 4) Unguaranteed residual amount Gross investment in lease Less: Unearned finance income (4,826,120 1,417,500)

(W-1)

Not later than one year Later than one year but not later than five years Later than five years Installment at year end Interest Principal

Gross investment in lease 2,715,224 8,845,672 11,560,896 Net Investment in Lease

2011 (Rupees) 10,860,896 700,000 11,560,896 (3,408,620) 8,152,276

Year ended

A.5

(a) Journal Entries Date 30-Jun-07 30-Jun-08 30-Jun-08 30-Jun-09 30-Jun-10

31/06/2011 31/06/2012 31/06/2013 31/06/2014 31/06/2015

2,715,224 2,715,224 2,715,224 2,715,224 2,715,224

Tax expense Deferred tax Deferred tax Tax expense

Deferred tax adjustment (W-2)

Description

1,417,500 1,222,841 998,984 741,548 445,247

1,297,724 1,492,383 1,716,240 1,973,676 2,269,977

9,450,000 8,152,276 6,659,893 4,943,653 2,969,977 700,000

Gross Investment in Lease

Net investment in lease 1,492,383 6,659,893 8,152,276

Impairment loss Acc. depreciation & impairment losses

Impairment loss on revaluation (W-2) Deferred tax adjustment (W-2)

3,600,000 8,000,000 1,040,000 1,408,000 6,000,000

Debit

14,276,120 11,560,896 8,845,672 6,130,448 3,415,224 700,000

3,600,000 8,000,000 1,040,000 1,408,000 6,000,000

Credit

Tax expense Deferred tax

Deferred tax adjustment (W-2)

Acc. depreciation & impairment losses Impairment loss reversed (W-1)

Reversal of impairment loss up to historical carrying amount

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30-Jun-10 30-Jun-10 30-Jun-11 30-Jun-11

Tax expense Deferred tax

FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011

Deferred tax adjustment (W-2)

Plant Deferred tax Revaluation surplus Revaluation surplus Retained earnings Deferred tax Tax expense

2,886,400 6,000,000 600,000

2,886,400 2,400,000 3,600,000 600,000

Revaluation of plant at fair value (6m x 70%) (6m x 30%)

Realized portion of revaluation surplus (Rs.3.6m 6) Deferred tax adjustment (W-2)

W-1: Revaluation calculations Actual carrying amount (90m (9m 2) (8m 2) - 8m) Fair value Increase in value Less: Reversal of impairment loss [48m - {90m - (90m 4 10)}] Revaluation surplus W-2: Deferred tax calculations
30-Jun-07 30-Jun-07 30-Jun-08 30-Jun-08 30-Jun-08 30-Jun-09 30-Jun-09 30-Jun-10 30-Jun-10 30-Jun-10 30-Jun-10 30-Jun-11 30-Jun-11 1-Jul-06

1,050,880

Date

Cost

Depreciation

Description

Depreciation Impairment loss Depreciation Depreciation Reversal of imp. loss Revaluation surplus Depreciation

(9,000,000) (18,000,000) 81,000,000 72,000,000 (9,000,000) (14,400,000) (8,000,000) 64,000,000 57,600,000 (8,000,000) (11,520,000) 56,000,000 46,080,000 (8,000,000) 6,000,000 54,000,000 6,000,000 60,000,000 (9,216,000) 36,864,000 36,864,000

Actual carrying amount

90,000,000

90,000,000

Tax base

Temporary difference

Deferred tax @ 40%

3,600,000 2,560,000 3,968,000 6,854,400 2,400,000 9,254,400 8,203,520

Rupees 48,000,000 60,000,000 12,000,000 (6,000,000) 6,000,000

Deferred tax charge/ (reversal)

1,050,880

9,000,000 6,400,000 17,136,000 6,000,000 9,920,000

(1,040,000)

3,600,000

1,408,000 2,886,400

(b) Taxation

Current (W-3) Deferred

(10,000,000) 50,000,000

(7,372,800) 29,491,200

Tax rate reconciliation Profit before taxation

2011 33,050,880 (1,050,880) 32,000,000 80,000,000 32,000,000

20,508,800

2010 21,113,600 2,886,400 24,000,000 60,000,000

(1,050,880)

Tax at the applicable rate of 40%

Page 5 of 6

24,000,000

FINANCIAL ACCOUNTING Suggested Answers Intermediate Examinations Autumn 2011 W-3: Current tax computation Profit before taxation Add: Accounting depreciation Less: Tax depreciation Less: Impairment loss reversed A.6 (a) Days of inventories turnover Days of debtors turnover Days of creditors turnover Cash operating cycle Tax at 40% 80,000,000 10,000,000 (7,372,800) 82,627,200 30/150*360 50/300*360 21/140*360 33,050,880 60,000,000 8,000,000 (9,216,000) (6,000,000) 52,784,000 72 60 (54) 78 days 21,113,600

(b) LIMITATIONS OF RATIO ANALYSIS (i) Limited Comparability: Different firms apply different accounting policies. Therefore the ratio of one firm cannot always be compared with the ratio of other firm. Some firms may value the closing stock on weighted average basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc. (ii) (iii) Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes, for a good comparison. (iv) Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. (THE END) False Results: Accounting ratios are based on data drawn from accounting records. In case that data is incorrect, then the ratios will also be incorrect.

The above calculation signifies that the period of time that elapses between the payment for purchase of inventories and the collection of cash from customers in respect of their sale is 78 days. SDL has to finance the investment in inventories for that time period.

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