Advanced Financial Accounting

Time allowed – 3 hours

Maximum marks – 100
[N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All
workings are to be submitted. Examiner will take account of the quality of language and of
the manner in which the answers are presented. Different parts, if any of the same
question must be answered in one place in order of sequence.]

Marks
1. (a) The Companies Act 1994, section 135(1) requires that every prospectus issued by a company
shall set out certain reports as specified in part II of schedule III of the said Act. You are required
to write down the contents of the report(s) as prescribed under (i) para 24(1) and (ii) para 25 and
26 of part II of the said schedule III. 6+4

(b) The Balance Sheet of X Ltd. as at 31st December, 2007 is as under:-

Liabilities Tk. Assets Tk.

Share Capital: Fixed Assets:
30,000 Equity Shares of Goodwill 10,000
Tk. 10 each fully paid. 3,00,000 Machinery 2,50,000
Furniture
5,000 10% Cumulative Current Assets:
Preference Shares of Tk. Stock 1,32,000
10 each. 50,000 Debtors 40,000
Unsecured Loan: Bank 10,000
12% Debentures 1,00,000 Misc. Expenditure
Interest Accrued on Debentures 12,000 Preliminary Expenses 10,000
Current Liabilities: Profit & Loss A/c 1,00,000
Creditors. 1,00,000
------------ ------------

5,62,000 5,62,000
----------- -----------
----------- -----------

The following scheme is passed and sanctioned by the Court:-

(1) A New Company X Y Ltd. is formed with Share Capital of Tk. 5,00,000 divided into
50,000 Equity Shares of Tk. 10 each.

(2) The New Company will acquire the assets and liabilities of X Ltd. on the following terms:-
(a) Old Company’s Debenture holders are satisfied by issuing similar Debentures in New
Company and for outstanding accrued interest, shares of equal amount are issued at
par.
(b) The creditors are paid for every Tk. 100-Tk. 20 in cash and 10 equity shares issued at
par.
(c) Preference Shareholders are to get equal number of Equity shares at par. For arrear
dividend amounting Tk. 15,000, 6 shares are issued at par for each Tk. 100 in full
satisfaction.
(d) Equity Shareholders are issued one share at par for 3 shares held.
(e) Expenses Tk. 10,000 are to be borne by the New Company as part of purchase
consideration.

(3) Current assets are to be taken at book value except stock which is to be reduced by Tk.
10,000. Goodwill to be eliminated, balance of purchase consideration being attributed to
Machinery.

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(4) Remaining shares of the New Company are issued at par to the public and are fully paid.

Required: Prepare-

(a) In the Old Company’s books:

(i) New Company’s Account. 2

(ii) Realisation and Reconstruction Account (Combined) 5
(iii) Equity Shareholders Account 2

(b) In the New Company’s books:

(i) Bank Account 2

(ii) Summarised Balance Sheet 5

2. Following are the summarized balance sheet of Paragon Ltd. and Perfume Ltd. at 31 December
2007.
Paragon Ltd. Perfume Ltd.
Share capital:
10% preference share of Tk.100 each 1,000,000 500,000
Ordinary share of Tk.100 each 5,000,000 500,000
Profit and loss account 4,000,000 1,000,000
10,000,000 2,000,000

Unsecured debenture - 2,000,000

10,000,000 4,000,000

Fixed assets 7,000,000 2,500,000

Net current assets 3,000,000 1,500,000
10,000,000 4,000,000

Following have been extracted from their profit and loss account for the year ended 31 December
2007:
Paragon Ltd. Perfume Ltd.

Balance at 1 January 2007 2,500,000 1,300,000

Net profit for the year 3,000,000 700,000
5,500,000 2,000,000
Dividends:
Preference 100,000 50,000
Ordinary:
Interim 700,000 700,000
Final 700,000 250,000
1,500,000 1,000,000
4,000,000 1,000,000
Paragon Ltd. acquired 4,000 preference shares and 4,000 ordinary shares in Perfume Ltd. on 30
June 2007 for Tk.1,000,000 and Tk.900,000 respectively. It is estimated that during first half of
the year, Perfume Ltd. incurred loss of Tk.450,000 and profit for the second half accrued evenly
throughout the period.
You are required to prepare the consolidated financial statements of Paragon Ltd., at 31
December 2007 assuming that Paragon credited full amount of interim dividend received from
Perfume Ltd. Before consolidation, the Board wants to put the revalued amounts of Perfume’s
fixed assets at Tk.2,00,000. 20

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3. Assume you are the Finance Controller of Federal Telecom Limited. Your assistant calculated
“Tax expense” in the following manner:

Federal Telecom Limited

Income tax assessment year 2007-08
Income year ended 30 June 2007

Manufacturing Trade products Total

Sales 60,000,000 40,000,000 100,000,000

Accounting profit 3,000,000 1,300,000 4,300,000

-
Add: Excess perquisites 400,000 400,000
Entertainment expenses 90,000 90,000
Gratuity expense 350,000 350,000
Accounting depreciation 2,340,000 2,340,000
Accounting profit on sale of assets 24,500 24,500
-
Less: Entertainment allowance (first 10 lakh 4%
And balance 2%) (80,000) (80,000)
Gratuity paid (400,000) (400,000)
Tax depreciation allowance (3,580,000) (3,580,000)
Tax income on sale of assets (9,000) (9,000)
Taxable profit (i) 2,135,500 2,000,000 5,000,000
Tax rate 40%

Current tax expense 854,200 800,000 1,654,200

(i) Taxable profit – trade products:

During the year total tax deducted at sources on Trade products were Tk.800,000. He applied
section 82C of the Income Tax Ordinance 1984 (withholding tax amount is the final discharge of
tax liability) and calculated taxable income in the following manner.

Taxable profit 800,000 x 100/40 = 2,000,000

(ii) He also calculated deferred tax expense in the following manner:

Total accounting profit 4,300,000

Total income tax expense (Tk.4,300,000 x 40%) 1,720,000

Less: Current tax expense 1,654,200
Deferred tax expense (balance figure) 65,800

(iii) As per your instruction, he calculated following figures:

30 June 07 30 June 06
Accounting Tax base Accounting Tax base
Property, plant and equipment 95,300,000 75,650,000 97,664,500 79,239,000
Provision for gratuity 4,500,000 - 4,550,000 -

Required:
(i) Do you think his calculations are correct? If not, identify his mistakes. 5
(ii) Re-calculate current tax and deferred tax expenses for the year ended 30 June 2007. 10
(iii) Also, calculate deferred tax liability or asset as at 30 June 2006 and 2007 in compliance
with BAS 12. 5

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4. A and B carried on business in partnership. It became necessary to call the creditors together and
on 31st March 2006 they filed insolvency petitions.

Their position on that date was follows: Taka

Liabilities:
Loan Creditors 4,000
Trade Creditors (including a creditor for Tk.32,000
who holds as security stock costing Tk.10,000
now valued at Tk.8,000) 2,35,000
Mortgage on Land and Buildings 48,000
Interest accrued thereon 930
Bank Overdraft 52,500
The security held by the Bank consists of a second mortgage on
Land and buildings; B’s life policy at Tk.15,000; and title
Deeds of A’s house valued at Tk.10,000
Wages owing (Tk.200 preferential) 700
Income tax due 3,140
Assets: Estimated to Produce
Taka
Stock on hand in godown (Book value Tk.86,500) 47,000
Plant and Machinery (Book value Tk.20,000) 8,000
Furniture (Book value Tk.4,000) 1,000
Book Debts: Good 69,000
Bad and Doubtful Tk.85,000 7,500
Surplus from the separate estate of B 5,000
Land and Buildings (Book value Tk.60,000) 54,000
Cash in hand 400
Bills receivable amounting to Tk.4,500 had been discounted and had not matured. It was
anticipated that with the exception of one bill for Tk.800, these would be met.
On 31st March, 2004 the books showed a surplus of assets over liabilities amounting to
Tk.25,000. The trading results for the succeeding two years had been:
Year to 31st March 2005 Profit Tk.5,750
2006 Loss Tk.12,120
and the total drawings of the partners in the two years had been Tk.18,000 and Tk.10,000.
From the foregoing particulars prepare the Statement of Affairs and Deficiency Account of the
firm. 8+6

5. (a) What are the problems facing the introduction of performance budgeting in Bangladesh?
How could they be overcome? 6
(b) What are meant by Journal and Ledger in Government Account? How is the Ledger posted
and proved? 4
(c) Business produces Tk.60 of goods for personal consumption, Tk.10 for government
consumption, and Tk.5 for domestic investment. It pays taxes of Tk.2, sets aside Tk.1 for
depreciation, distributes Tk.55 to factors of production, and retains the rest as undistributed
profits. Household pays Tk.6 in taxes.
Some households consume more than their income; to do so, they borrow Tk.20 from the
banks. Other households save; they buy Tk.7 of corporate securities (new issues) with their
savings and put the rest in the bank. The government sells Tk.3 of securities to commercial
banks. Business enterprises pay Tk.16 of old debt to the banks. All transactions, other than
those indicated, are settled by payment of currency and deposits. The government keeps its
money on deposit with the central bank; other sectors keep their money in currency or on
deposit with commercial banks.
Prepare a set of National Product Accounts and a set of Flow-of-Fund Accounts, covering the
above information. 10

THE END