Financial Accounting and Reporting-II

Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.1 Nonagon Leasing

Notes to the financial statements
For the year ended 30 June 2022
Rs. in million
(a) Maturity analysis - contractual undiscounted cash flows
Less than one year 6.00
One to two year 6.00
Two to three years 6.00
Three to four years 6.00
Four to five years 4+8 12.00
36.00
Reconciliation
Undiscounted lease payments 36.00
Unguaranteed residual value 2.00
Gross investment in lease 38.00
Unearned finance income (bal.) (10.82)
Net investment in lease (W-1) 27.18
Current portion of net investment in lease 6–2.99(27.18×11%) (3.01)
24.17

W-1: Net investment in lease Rs. in million

PV of Rs. 6 million annually over 5 years [6×3.1024{(1–1.11 )÷0.11}]
–4
18.61
PV of Rs. 4 million on 6th extended year 4×1.11–4 2.63
PV of Rs. 8 million of GRV 8×1.11–5 4.75
PV of Rs. 2 million of UGRV 2×1.11–5 1.19
Net investment in lease 27.18

A.2 (i) The license should be recognised as intangible asset at initial cost of Rs. 52 million (50+2).
The transfer fee being directly attributable cost should be included while refundable tax
of Rs. 1 million should not be included in cost.

The useful life of license will be restricted to the original five years as the renewal cost of
Rs. 40 million is significant which should be considered separate intangible at the time of
renewal. The residual value of license at the end of five years as zero because there is no
commitment by 3rd party to purchase the license and there is no active market for the
license. The amortization for the year should be Rs. 10.4 million (52/5).

(ii) As per IAS 38, Rs. 5 million (2+3) for planning and content development should be
expensed out. Website is developed primarily for promoting and advertising SL’s
products and services. So, SL will not be able to demonstrate how it will generate probable
future economic benefits.
Rs. 7 million incurred for acquisition of the web servers should be capitalized under
property, plant and equipment and depreciated over useful life.
Since webhosting fees is paid for one year, Rs. 0.42 (1/12×5) million will be expensed
out while Rs. 0.58 million will be recorded as prepayment.

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.3 Arrow Limited

Notes to the financial statements
For the year ended 31 December 2021

3. Share Capital

3.1: Authorised share capital

2021 2020 2021 2020
Shares in million Rs. in million
90 90 Ordinary shares of Rs. 10 each 900 900

3.2: Issued, subscribed and paid-up capital

2021 2020 2021 2020
Shares in million Rs. in million
Ordinary shares of Rs. 10 each
31 25 310 250
Fully paid in cash.
Ordinary shares of Rs. 10 each
23 15 Issued for consideration other than 230 150
cash.
Ordinary shares of Rs. 10 each
17 7 170 70
Issued as fully paid bonus shares.
71 47 710 470

3.3: Shares issued for consideration other than cash were issued against plant and machinery.

3.4: All ordinary shares rank equally with regard to the AL’s residual assets. Holders of the
shares are entitled to dividends from time to time and are entitled to one vote per share
at the general meetings of the AL.

A.4 (i) CML’s management view is incorrect as per IAS 21. Foreign currency trade payables are
monetary item, which need to be retranslated at closing rate of Rs. 240 per USD
i.e. Rs. 744 million which should result in an exchange loss of Rs. 106 million to be taken
to profit or loss. However, advance to other foreign suppliers being a non-monetary item
should not be retranslated at the closing rate. The decline in exchange rate on
31 August 2022 should be a non-adjusting event as no condition existed on 31 July 2022.

(ii) CML’s management view is incorrect as per IAS 37. This is an onerous contract because
the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received under it. The unavoidable costs under the contract reflect
the least net cost of exiting from the contract which is the lower of the cost of fulfilling it
i.e. Rs. 150 million and any penalties arising from failure to fulfil it i.e. Rs. 85 million. So
CL should recognize a provision of Rs. 85 million irrespective of the management’s
decision of fulfilling the contract.

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.5 Hexagon Industries

Correcting entries
(i) Debit Credit
S. No. Description
----- Rs. in '000 -----
(i) Investment / Financial asset 2,000
Transaction cost (P&L) 2,000
(ii) Investment / Financial asset 12,882(97,000×13.28%) –
12,000(100,000×12%) 882
Interest Income (P&L) 882
(iii) Gain on FV adj. (P&L) 1,000×4[99–95(100–5)] 4,000
Investment / Financial asset 4,000

(ii) Debit Credit

S. No. Description
----- Rs. in '000 -----
(i) Dividend income (P&L) 500×3 1,500
Investment / Financial asset 1,500
(ii) Investment / Financial asset 15,000×20%×10/12 2,500
Share of Profit (P&L) 2,500
(iii) Fair value reserve (OCI) 500 ×7(67–60) 3,500
Investment / Financial asset 3,500

A.6 (i) (a) IFRS and Fifth schedule

(ii) (a) Profit/incentive based compensation
(d) Accepting gift of significant value
(iii) (d) None is correct
(iv) (b) Confidentiality
(v) (c) Both are correct
(vi) (a) Extent of reliance on major customers
(d) Non-current assets located in Pakistan and in all foreign countries
(vii) (d) Agricultural produce at the end of each reporting period
(viii) (a) Only (I) is correct
(ix) (d) Rs. 800,000

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.7 Heptagon Limited

Consolidated statement of financial position as on 30 June 2022

Non-current assets: Rs. in million

Property, plant and equipment
1,820+840+650–50(650–600)–10[(600÷30)×6/12](W-3)+30 3,280
Goodwill 107(W-1)–15 92
Investment in associate (W-4) 112
Inventories 490+330–1(20÷1.2×20%×30%)(W-3) 819
Other current assets 360+260–4–0 616
4,919
Equity & liabilities:
Share capital (Rs. 10 each) 1,400+130(13×10)(W-1) 1,530
Share premium 750+572[13×44(54–10)](W-1) 1,322
Consolidated reserves (W-3) 779
Non-controlling interest (W-5) 452
Liabilities 450+240+150–4–0 836
4,919

W-1: Computation of goodwill Rs. in million

Consideration paid - shares 13(65×60%÷3)×54 702
- contingent 143
Fair value of NCI 26(65×40%)×17 442
Fair value of EL’s net assets (W-2) (1,180)
Goodwill 107

W-2: Net assets of ML Acquisition Reporting

date date
Share capital 650 650
Share premium 200 200
Retained earnings 300 340
Fair value adjustment 80–50 30 30
1,180 1,220

W-3: Consolidated reserves Rs. in million

HL 820
Fair value increase in investment property (50)
Depreciation expense (10)
Share of profit for associate - OL (W-4) 18
Dividend wrongly recorded (W-4) (6)
Unrealised profit in inventory (1)
11
Post-acquisition profit of EL 40(1,220–1,180)×60% 24
Increase in fair value of contingent consideration 150–143 (7)
Impairment on goodwill 15×60% (9)
779

W-4: Investment in associate Rs. in million

At cost 100
Share of profit 60×30% 18
Dividend received 20×30% (6)
112
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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

W-5: Non-controlling interest Rs. in million

At acquisition (W-1) 442
Impairment on goodwill 15×40% (6)
Post-acquisition profit of EL 40(1,220–1,180)×40% 16
452

A.8 Rhombus Limited

Accounting entries for the year ended 31 August 2022
Debit Credit
Date Description
------ Rs. in '000 ------
(i) 20-Jul-22 Receivable 10,000
Revenue 10,000÷50×25 5,000
Contract Liability 5,000
31-Jul-22 Cash 10,000
Receivable 10,000
7-Aug-22 Revenue 190
Contract Liability 190
15-Aug-22 Contract Liability {5,000+5,700(30×190)}÷55×25 4,864
Revenue 4,864
25-Aug-22 Contract Asset / Receivable 190×29 5,510
Contract Liability 326
Revenue 5,836
(ii) 1-Jan-22 Cash 40,000×30% 12,000
Contract Liability 12,000
1-Mar-22 Cash 40,000×50% 20,000
Contract Liability 12,000
Contract Asset / Receivable Bal. fig. 730
Revenue (W-1)3,273×10 32,730
31-Aug-22 Contract Asset / Receivable (273×10)2,730÷12×6 1,365
Revenue 1,365

No revenue will be recorded for software upgrade.

W-1: Allocation of transaction price

Stand-alone price Price per unit
3D printer and software 3,600 3,600÷4,400×4,000 3,273
Software upgrade 500 500÷4,400×4,000 454
Maintenance 300 300÷4,400×4,000 273
210÷(100-30%(W-2)
4,400 4,000

W-2: Estimated markup

Markup on 3D printer and software (1800+720–3600)1080÷3600 30%

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.9 (a) Tax expense Rs. in million

Current tax (W-1) 25.97
Deferred tax 14.70(30.38–15.68)5.25(15×35%) 9.45
35.42

Reconciliation between tax expense and accounting profit

Profit before tax 105.0
Tax @ 35% 36.75
Effect of change in tax rate 15.68÷32×3 1.47
Decrease in tax due to exempt dividend income 8×35% (2.80)
35.42

W-1: Current tax Rs. in million

Profit before tax 105.00
Fair value gain on investment property 6555 (10.00)
Tax depreciation on investment property 50×10% (5.00)
Exchange gain deducted from cost in tax (16.00)
Tax depreciation on license 100(116–16) ×10% (10.00)
Interest on decommissioning cost 16.16[40×(1.12)–8] ×12% 1.94
Accounting depreciation 226.16(210+16.16) /8 28.27
Tax depreciation on plant 210×10% (21.00)
Exempt dividend income (8.00)
Other taxable item 39–30 9.00
Taxable profit 74.21
Tax @ 35% 25.97

(b) Deferred tax liability / (assets) as at 31 December 2021:

Carrying DTL /(A)
Tax base Difference
value @35%
-------------- Rs. in million --------------
Investment property 65.00 40.00 25.00 8.75
(45–5)
License 116.00 90.00 26.00 9.10
(100–10)
Plant 197.89 189 8.89 3.11
(226.16–28.27) (210–21)
Provision for decommissioning (18.1) - (18.1) (6.33)
16.16+1.94
Fair value gain on investment - OCI 90 75 15 5.25

Other taxable item 30 10.50

30.38

Deferred tax liability / (assets) as at 31 December 2020:

Carrying DTL/(A)
Tax base Difference
value @32%
---------------- Rs. in million ----------------
Investment property 55 45 10 3.20
(50–5)
Other taxable item 39 12.48
15.68

(The End)
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