NATIONAL SCHOOL OF BUSINESS MANAGEMENT

BM (Hons) in Accounting & Finance (NSBM) - 20.2/20.3

Year 03 Semester 01
ACF 3131 – Advanced Financial Accounting
Revision

Instructions to Candidates

1) Answer all 4 questions

2) Non-programmable calculators are allowed

3) Time allocated for the examination is three (03) hours.

4) If a page or a part of this question paper is not printed, please inform the
Supervisor immediately.

5) Write your index number in all pages of answer script.

6) Attach all answer sheets at the end of the examination.

Question 1
Fiction Ltd’s trial balance as at 31 August 2020 is shown below.

Debit Credit

Rs. 000’s Rs. 000’s

Accruals 1,200

Administrative expenses 6,900

Bank loan 8,000

Cash at bank 7,600

Distribution cost 9,340

Dividends paid 2,500

Interest paid 160

Inventories as at 01 September 2019 14,600

Land and buildings – accumulated depreciation at 01

6,400
September 2019

Land and buildings – cost at 01 September 2019 62,700

Plant and equipment – accumulated depreciation at

14,600
01 September 2019

Plant and equipment – cost at 01 September 2019 46,800

Purchases 46,800

Retained earnings 12,300

Revenue 86,800

Share capital (Rs.7.00 shares) 69,000

Current tax liability 800

Deferred tax liability - at 01 September 2019 200

Trade payables 9,700

Trade receivables 11,600

 209,000 209,000

The following information is also available:

1. Fiction Ltd’s financial statements were authorised for issue by its directors on
15 November 2020.

2. Fiction holds two lines of inventory at 31 August 2020.

Details are as follows
Inventory Line 1 (Rs.) Line 2 (Rs.)
Total cost 7,360,000 8,600,000
Selling price 9,800,000 8,940,000
Selling cost 200,000 180,000
3. Depreciation has not been charged. There were no movements in non-current
assets during the year. Depreciation is to be provided for the year as follows:
Buildings 2% per annum straight line basis
Plant and Equipment 10% per annum reducing balance basis
Depreciation on plant and equipment charged to cost of sales. Depreciation on
buildings is charged to administrative expenses.
Land included in the trial balance at a cost of Rs.17,700,000.
The directors have obtained valuations for the land and buildings at 31 August
2020. Although the buildings values approximate to the fair values and do not
require adjusting, the land has been valued at Rs.19,500,000. The directors
wish to reflect this in the financial statements. Deferred tax applies to the
revaluation surplus at 20%. Similarly, Fiction usually makes a reserve transfer
in respect of the realization of the revaluation each year (where applicable) in
line with the current practice.
4. One of Fiction Ltd’s customers who owed Rs.425,000 at year end was declared
insolvent on 15 September 2020. The liquidator does not expect to pay any
money to creditors. The management advised that the total outstanding
balance of Rs.425,000 should be written off as irrecoverable debt. An
allowance for irrecoverable debts of 5% of remaining balances should be
accounted for. Irrecoverable debts and allowance for irrecoverable debts are
recorded as administrative expenses.
5. The bank loan was received on 1 March 2020 and is repayable in full in 10
years. Interest is charged at a fixed rate of 8% per annum. Fiction has no other
debt that attracts interest.

6. The balance on current tax liability represents the under/over provision of the
tax liability for the year ended 31 August 2020. The corporation tax on profits
for the year ended 31 August 2020 is estimated at Rs.2,800,000. On 31
August 2020, the tax base Fictions’s net assets was Rs. 800,000 less than
their carrying amounts. This does not include the effect of the revaluation in
Note 3 above. The income tax rate of Fiction is 20%.

7. During the year Fiction renewed its plant and equipment maintenance contract
with Repair Ltd. The contract commenced on 1 July 2020 and no payment has
been made to date. The annual contract fee is Rs.360,000 and it is to be
included in cost of sales.

8. The company paid Rs.48,000 insurance costs in May 2020, which covered the
period from 1 June 2020 to 31 May 2021. This is included in administrative
expenses in the trial balance.

9. One of Fiction’s products is produced and sold under a 12 moth warranty. Any
defect arising during that period is repaired free of charge. During the
accounting period the company sold 2,400 units of this product. Based on
earlier experience the company estimates that 70% of sales will have no
warranty claims. However, 20% of sales will require a Rs.600 repair and the
remaining 10% of sales will need to be repaired at a cost of Rs.900 per product.
Provisions are charged to other operating expenses.

10. Fiction declared an ordinary dividend of 10 cents per ordinary share on 30

August 2020. The dividend still needs to be paid out and accounted for.

Required:
(a) Prepare the Statement of Profit or Loss and Other Comprehensive Income for
Fiction Ltd for the year ended 31 August 2020.

(b) Prepare the Statement of Financial Position for Fiction Ltd as at 31 August
2020.
 (c) Prepare the Statement of Changes in Equity for the year ended 31 August
2020.

(d) Prepare Notes to the Financial Statements for the year ended 31 August
2020.

Round your calculations to the nearest thousand

Question 2
a) Bandara Properties PLC constructs residential and commercial properties
throughout Sri Lanka. On 1 March 2014 it commenced work constructing a new
head office property. The work was completed on time on 31 December 2014,
despite work being halted throughout the month of August due to a combination of
strike action and inclement weather. Costs incurred in constructing the property
were as follows.
Site selection – Rs.800,000
Cost of acquiring site (Including Rs. 1m legal fees) – Rs 25,000,000
Site levelling and preparation – Rs. 1,600,000
Architects' fees – Rs. 2,700,000
Materials- Rs. 6,700,000
Labour costs (including Rs. 900,000 pension costs) – Rs. 12,300,000
Proportion of administration department costs - Rs. 700,000

The project was mainly financed by way of a specific loan for Rs. 40m with an
interest rate of 8% per annum. This was arranged and received on 1 February
2014 and was due to be repaid in 2018.

Required:
Calculate the carrying amount of the head office property at 31 December 2014.
b) On 1 January 20X8, a company began to construct a new factory which had an
estimated useful life of 30 years. The construction of the building cost £12 million
and the fixtures and fittings cost £6 million. The construction of the factory was
completed on 30 September 20X8 and it was brought into use on 1 January 20X9.
The company borrowed £15 million on 1 January 20X8 in order to finance this
project. The loan carried interest at 10% pa. It was repaid on 30 June 20X9.
Required:
Calculate the total amount to be included as cost in PPE in respect of the
development at 31 December 20X8.

c) A special equipment acquired on 1 January 20X1 for £15,000. Estimated useful

economic life of 15 years, no residual value. After 5 years the asset is valued at
£18,000 and it is expected that useful economic life will be another 10 years.

Required:
Explain the accounting treatment concerning the revaluation as per LKAS 16
Property, Plant and Equipment for the year ended 31 December 20X6 (after 5
years from the purchase). (You are required to record the revaluation, revaluation
transfer and depreciation charge for the year)

d) The following information is available for a particular asset owned by ABC Ltd.

Carrying Value :£20,000

The Amount of the Impairment Loss: £6,000 of Plant & Machinery
Revaluation Surplus :£30,000

Required:
Record the impairment loss in the books of accounts and calculate the carrying
value of the asset after the impairment.

e) What are the causes of impairment?

Question 3
a) The following information relates to UGC company.
UGC Co Statement of Profit or Loss for the Year Ended 31 December
Notes 2015 2014
Rs'000 Rs'000
Revenue 1 3,095,576 1,909,051

Operating Profit 1 359,501 244,229

Interest 2 17,371 19,127

Profit Before taxation 342,130 225,102

Income Tax 74,200 31,272

Profit for the year 267,930 193,830

Earnings per share 12.8 9.3

UGC Co Stateemnt of financail Position as as 31 December

Notes 2015 2014
Rs'000 Rs'000
Assets
Non current Assets

PPE 802,180 656,071

Current Assets

Inventory 64,422 86,550

Receivables 3 1,002,701 853,441

Cash at bank and in hand 1,327 68,363

1,068,450 1,008,354
Total assets 1,870,630 1,664,425
Equity and Liabilities
Equity
Stated Capital 258,178 258,178

Retained Earnings 651,721 410,591

909,899 668,769
Non Current Liabilities

10% loan stock 100,000 100,000

Current Liabilities

Current Liabilities 4 860,731 895,656

Total equity and liabilities 1,870,630 1,664,425
Notes to the accounts
2015 2014
Rs'000 Rs'000
Sales revenue and profit
Sales revenue 3,095,576 1,909,051
Cost of sales 2,402,609 1,441,950

Gross proft 692,967 467,101

Administration expenses 333,466 222,872

Operating Profit 359,501 244,229

Depreciation Charged 151,107 120,147

Interest
Payable on bank overdrafts and other
loans 8,115 11,909

Payable on loan stock 10,000 10,000

18,115 21,909

Receivable on short-term deposits 744 2,782

Net payable 17,371 19,127

Receivables
Amounts falling due within one year
 Trade receivables 905,679 807,712

Payments and accrued income 97,022 45,729

1,002,701 853,441
Current liabilities

Trade payables 627,018 545,340

Accruals and deferred income 81,279 280,464

Corporate taxes 108,000 37,200

Other taxes 44,434 32,652

860,731 895,656

Dividends paid 20,000 -

Required:
Calculate Profit Margin, Assets Turnover ratio, and Return on Capital Employed for the
year 2015 and interpret your results

b) An entity sells goods with a warranty under which customers are covered for the cost of
repairs of any manufacturing defects that become apparent within the first six months after
purchase If minor defects were detected in all products sold, repair costs of 1 million would
result If major defects were detected in all products sold, repair costs of 4 million would
result. The entity's past experience and future expectations indicate that, for the coining
year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will
have minor defects and 5 per cent of the goods sold will have major defects. In accordance
with paragraph 24, an entity assesses the probability of an outflow for the warranty
obligations as a whole.

Required:
Calculate the expected value of the cost of repairs
c)
Lushious Laminated Limited
Statement of Profit or Loss for the year ended 31 December 2021
Revenue 120,000
Cost of sales (49,000)
Gross Profit 71,000
Distribution cost (12,000)
Administrative Expenses (20,000)
Operating Profit 39,000
Finance cost (Debenture interest) (1,500)
Profit before tax 37,500
Tax expense (10,000)
Profit for the year 27,500

Lushious Laminated Limited

Statement of Financial Position as at 31 December 2021
2021 2020
Non-current assets 100,000 85,000

Current Assets
Inventory 30,000 20,000
Trade receivables 15,000 16,000
Cash and cash equivalents 3,500 4,000
48,500 40,000

Total assets 148,500 125,000

Equity and liabilities

Equity
Share capital 32,000 29,000
Share Premium 3,500 -
Retained Earnings 77,500 62,000
113,000 91,000
Non-Current Liabilities
Debenture 15,000 15,000

Current Liabilities
Tarde payables 9,000 11,500
debenture interst 1,000 1,500
Current tax 10,500 6,000
20,500 19,000

Total liabilities 35,500 34,000

Total equity and liabilities 148,500 125,000
 Notes:
1. Included in administrative expenses is an amount of $6,000 charged in
respect of depreciation.
2. There were no disposals of non-current assets during the year.
3. Dividends paid during the year amounted to $12,000

Required:
Prepare the statement of Cash Flows for the year ended 31 December 2021, as
per LKAS 07.

Question 4

c) What is corporate governance?

d) The audit of ABC PLC for the year ended 31 March 2021 was completed on 25 May
2021. The financial statements were authorised for issue by the management on 27
May 2021, and approved by the shareholders on 18 June 2021. The following matters
have been bought to your attention:

• On 15 May 2021, a customer owing ABC PLC Rs 165,000 was declared

bankrupt. The financial statements include a Rs 5,000 allowance for
doubtful debts for this customer
• The company announced a bonus issue of 25,000 shares on 25 April
2021.
• An item of equipment costing Rs 600,000 purchased on 01 February
2021, was destroyed by fire on 20 March 2021. On 31 March 2021 ABC
PLC has recorded a receivable of Rs 400,000 from the insurance
company pertaining to this claim. However, after the insurance company
completed its investigation, it was discovered that the fire took place due
to the negligence of one of the company’s employees. As a result, the
insurer’s liability was zero on this claim (letter arrived from the insurer
on 22 May 2021).
 • Inventory which cost Rs 350,000 at 31 March 2021 was sold to one of
the company’s major customer for Rs 250,000 on 29 April 2021.

Required:
i) Define the period covered by LKAS 10 and explain why we need to study
events after the reporting period.
ii) Classify each of these events as either an adjusting or a non-adjusting event
and explain how each event should be dealt with in the company’s financial
statements for the year ended 31 March 2021. You should assume that all
of the events are material.

-End of Paper-