Financial Accounting and Reporting-I

Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.1 (a) (i) This is a change in accounting policy, which will be applied retrospectively.
(ii) This is a change in accounting estimate, which will be applied prospectively.
(iii) IAS 23 requires to capitalize all related borrowing costs incurred on qualifying
asset. PL cannot change this accounting policy so no effect on financial
statements.

(b) Puffer Limited

Statement of changes in equity
For the year ended 31 December 2022
Retained
earnings
Rs. in million
Balance as at 31 December 2020 928
Effect of change in accounting policy (W-1) 22
Balance as at 31 December 2020 (Restated) 950
Final cash dividend @ 10% for the year 2020 (114)
Profit for the year 2021(Restated) 258–62(W-1) 196
Balance as at 31 December 2021(Restated) 1,032
Profit for the year 2022 328–23+57(W-1) 362
Balance as at 31 December 2022 1,394

W-1: Effect on profit (change in policy)

2020 2021 2022
----------- Rs. in million -----------
Increase/(decrease) in closing inventory 22 (40) 17
(Increase)/decrease in opening inventory - (22) 40
22 (62) 57

A.2 Correcting Entries

Debit Credit
S. # Description
----- Rs. in '000 -----
(i) Trade payables 90
Inventory 90
(ii) Sales 460
Trade receivables 460
Drawings 460×75% 345
Cost of goods sold 345
(iii) Sales return / Return inward 540
Inventory 540×25% 135
Cost of goods sold 540×75% 405
(iv) Depreciation expense 90
Accumulated depreciation 250–120+8(120×20%×4/12) 138
Loss on disposal Bal. fig. 22
Equipment 250
Accumulated depreciation 16
Depreciation expense 120×20%×8/12 16
(v) Bank 240
Prepaid rent 240×10/12 200
Accrued expenses 240×2/12 40
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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.3 EPS for 2021:

⇒ (60)
Basic EPS = Rs. (4.0)/share
15

Diluted EPS ⇒ (60)+28(200×20%×70%) (32) Rs. (1.52)/share

= =
(including bonds) 15+6(2×3) 21 Anti-Dilutive

So, Diluted EPS for 2021 is Rs. (4.0)/share i.e loss per share of Rs. 4.

EPS for 2022:

⇒ 84–9.6(60×16%) 74.4
Basic EPS = = Rs. 4.96/share
15 15

74.4 74.4 Rs. 4.13/share

Diluted EPS (after including warrants) ⇒ = =
15+3(W-1) 18 Dilutive

⇒ 74.4+28(W-1) 102.4 Rs. 3.94/share

Diluted EPS (after including bonds) = =
18+8 (W-1) 26 Dilutive
Diluted EPS ⇒ 102.4+9.6(W-1) 112 Rs. 4.0/share
(after including preference shares) = = Anti-Dilutive
26+2(W-1) 28

So, Diluted EPS for 2022 is Rs. 3.94 /share

W-1: Ranking of potential ordinary shares 2022

Increase in Increase in
Incremental
Description earnings shares Rank
EPS
Rs. in million In million
Convertible bonds 28(200×20%×70%) 8(2×4) Rs. 3.5/share 2
Share warrants - 3[12×(28-21)÷ 28] - 1
Preference shares 9.6(60×16%) 2(6÷3×1) Rs. 4.8/share 3

A.4 Following is the list of information which would be required to compute the borrowing costs
to be capitalised:

Dates for capitalisation period:

(i) Date when started incurring expenditures for the plant.
(ii) Date when started incurring borrowings costs.
(iii) Date when activities to construct the plant started.
(iv) Any period of time during which BL suspends active construction of plant.
(v) Date when substantially all the activities necessary to construct the plant are completed.

Details of borrowings:
(i) Details of new specific loan obtained from bank i.e. amount, rate of interest, date
obtained and date of repayment.
(ii) Income earned on the temporary investment of unused funds of specific loan.
(iii) Details of existing general borrowings i.e. amount and rate of interest for computing
capitalisation rate.

Details of expenditures incurred:

(i) Amount of expenditures incurred directly for construction of plant and payments dates.

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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.5 Shark Limited

Extracts from statement of profit or loss for the year ended 31 December 2022
2022 2021
------- Rs. in million -------
Depreciation expense (300–30)÷6 (45) (45)
Government grant income (96–60)÷3 ; (160÷5) 12 32
Loss on repayment of government grant 100÷5×2 (40) -

Shark Limited
Extracts from statement of financial position as on 31 December 2022
2022 2021
------- Rs. in million -------
Non-current asset:
Desalination plant 300 300
Accumulated depreciation (45×4) ; (45×3) (180) (135)
120 165
Non-current liability:
Deferred government grant 96–(100–40)–12 ; 160–(32×2) 24 96

A.6 (i) (b) Faithful representation

(c) Relevance
(ii) (b) Land held by a company for undetermined future use
(d) Building held by a company for long-term capital appreciation
(iii) (d) retained earnings
(iv) (a) General fund
(v) (c) Rs. 1,900,000
(vi) (b) Dividend equalization reserve
(vii) (c) Recognise direct increase in the statement of changes in net assets
(viii) (d) None is correct
(ix) (b) Rs. 23 million

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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023
A.7 Dolphin Limited
Statement of cash flows
For the year ended 30 June 2023
Rs. in million
Cash flows from operating activities:
Profit before tax 750×100÷30 2,500

Adjustments for:
Interest expense 400(700–300)+140–195 345
Depreciation expense 14,300+550+600–350–13,835 1,265
Fair value loss on investment property 1,950+300–1,820 430
Gain on disposal of property, plant & equipment 400(600–200)–350 (50)
Increase in provision for doubtful receivables 312(3,588×8÷92)–215(4,085×5÷95) 97
Operating profit before working capital changes 4,587

Changes in working capital:

Increase in inventories 7,450–5,000 (2,450)
Decrease in trade receivables 3,900(3,588×100÷92)–4,300(4,085×100÷95) 400
Increase in trade and other payables (1,485–125)–935 425
(1,625)
Cash generated from operations 2,962
Tax paid 235+750+36 (1,021)
Net cash flows from operating activities 1,941

Cash flows from investing activities

Purchase of property, plant & equipment (200)
Addition to capital work in progress 3,485+550–2,500 (1,535)
Purchase of investment property 300–125 (175)
Net cash used in investing activities (1,910)

Cash flows from financing activities

Long term loan repaid 3,540–3,275 (265)
Issue of shares 16,000–14,300(13,000+1,300)+1,120 2,820
Interest paid 700–300 (400)
Dividend paid 1,100(10,800+1,750–10,150–1,300)+140–260 (980)
Net cash generated from financing activities 1,175
Net increase in cash and cash equivalents 1,206
Cash and cash equivalent at beginning of year 1,010
Cash and cash equivalents at end of year 2,216

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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.8 Ratios 2023 Reasons

Gross profit 30.0% 2022: 36.2%
margin (20,323÷67,851)×100  Reduced sale prices at new outlet to
attract customers.
Operating profit 18.8% 2022: 30.0%
margin 12,739(20,323–7,584)÷67,851×100  Increase in selling expenses due to
sales promotion activities to boost
the sales at new outlet.
 Reduced sale prices at new outlet to
attract customers.
 Increase in depreciation expense due
to inauguration of new outlet.
 Increase in sales due to new outlet.
 Decrease in gross profit margin.
Return on capital 21.9% 2022: 51.7%
employed 12,739(20,323–7,584)÷  Increase in borrowings due to
58,160(11,000+25,535+21,625)×100
additional loan borrowed to
refinance the new outlet.
 Decrease in the operating profit.
Average time to 76 days 2022: 35 days
pay (9,874÷47,528)×365  Increase in payables due to extended
credit period offered by supplier.
Quick ratio 0.6 times 2022: 1.1 times
9,532(6,874+2,658)÷15,414(9,874+5,540)  Increase in payables due to extended
credit offered by the supplier.
 Decrease in liquid funds utilised for
inventory build-up.
Interest cover 2.5 times 2022: 17.5 times
12,739(20,323–7,584)÷5,147  Increase in interest expense due to
additional loan borrowed to
refinance the new outlet.
 Increase in interest rates on existing
loan due to increase in discount rates.
 Decrease in the operating profit.
Asset turnover 1.2 times 2022: 1.7 times
67,851÷58,160(11,000+25,535+21,625)  Increase in borrowings due to
additional loan borrowed to
refinance the new outlet. OR
Increase in assets due to new outlet.
 Less than expected sales at new
outlet.
Inventory 4.1 times 2022: 9.0 times
turnover (47,528÷11,528)  Increase in inventory for availability
of stock at new outlet.
 Less than expected sales at new
outlet.

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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.9 Trout Limited (TL)

Notes to the financial statements for the year ended 31 December 2022
1. Property, plant and equipment
Office Building Equipment
------------- Rs. in million -------------
Gross carrying amount – opening 280.0 360.0
Accumulated depreciation (56.0) (110.0)
Opening carrying amount 224.0 250.0
Addition 60+50 110.0
Disposal 80–38.5(W-2) (41.5)
Depreciation for the year (280÷10) OR (224÷8) (28.0) (W-3)(56.4)
Revaluation
- P&L (W-1)(12.0) -
- Surplus (28.0) -
Closing carrying amount 156.0 262.1
Gross carrying amount - closing 156.0 390.0
Accumulated depreciation - (127.9)
Closing carrying amount 156.0 262.1

1.1 Office Building Equipment

Measurement base Revaluation Cost model
Useful life/depreciation rate 10 years 20%
Depreciation method Straight line Reducing balance

1.2 Had revaluations not been made, the carrying value of the office building as on
31 December 2022 would have been Rs. 168(156+12) million.

1.3 The last revaluation was performed on 31 December 2022 by an independent firm of
valuers.

2. Investment property Warehouse

Rs. in million
Transfer from inventory 73.0
Fair value adjustment 80–73 7.0
Closing carrying amount 80.0

2.1 The investment property is subsequently measured at fair value.

2.2 The rental income for the year ended 30 June 2022 is Rs. 6(8×9/12) million.

W-1: Revaluation of office building 2022 Rs. in million

Carrying value as on 31 December 2022 280–56–28 196.0
Revalued amount (156.0)
Revaluation loss 40.0
Revaluation surplus available from previous revaluation 32–4(32÷8) (28.0)
Revaluation loss taken to P&L 12.0

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 Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

W-2: Accumulated depreciation for old equipment Rs. in million

Depreciation for 2019 80×20%×(6÷12) 8.0
Depreciation for 2020 (80–8) ×20% 14.4
Depreciation for 2021 (72–14.4) ×20% 11.5
33.9
Depreciation for 2022 (57.6–11.5)×20%×(6÷12) 4.6
38.5

W-3: Depreciation expense for equipment 2022 Rs. in million

Old (W-2) 4.6
New 110 ×20%×(6÷12) 11.0
Remaining [280(360–80)–76.1(110–33.9)(W-2)]×20% 40.8
56.4

(The End)

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