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									                                               Summer Exam-2011
                                                                (Final)
                                         Financial Reporting [02-05-2011]
Duration: 3 hrs.                                                                                                      Marks-100
                                                       [Instructions]
•    Ensure that the question paper delivered to you is the same, in which you intend to appear.
•    Read the instructions given on the title page of Answer Copy.
                                                 Attempt all Questions
    Q.1.   The Real Estate Developers Limited is a well reputed company mainly involved in the development of                      (10)
           expensive luxury flats. It also sells and rent these flats. The detail of its flats given on rent or held for sale in
           the ordinary course of business is as under: -

             a) There are forty flats in the DHA Lahore given on rent to various tenants, the cost of these flats when
                developed was Rs. 200 million completed in 2006. The company uses fair value model under IAS 40
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                for investment properties. The fair value on July 01 , 2009 was Rs. 250 million and at June 30 ,
                2010 is Rs. 210 million.
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             b) The company started the development of a housing society in the year ended June 30 , 2009. The
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                cost of development was Rs. 1,500 million on the June 30 , 2009. The development cost incurred
                during the current year was Rs. 1,100 million. The plots of land developed are held for sale in the
                ordinary course of business. Due to recent law and order situation and economic recession in the
                country the prices of property have fallen and the management of the company estimated that the
                sale price of the property is only Rs. 3,500 million. The management of the company also estimated
                that the further cost to complete the development work will be Rs. 2,000 million and commission
                and other selling expenses will be Rs. 200 million.
           Required:
           Discuss the accounting treatment of above issues?
    Q.2.   D Limited acquired 80% shares of C Limited on July 01, 2009. The cost of investment paid was                            (10)
           Rs. 270 million. The fair value of net assets at the date of acquisition of C Limited was Rs. 300 million. The fair
           value of Non Controlling Interest (NCI) was Rs. 75 million at the date of acquisition. It is the group policy to
           value NCI at fair value at the date of acquisition. One year later on June 30, 2010, the goodwill was tested for
           impairment as per requirements of IAS 36.
           The carrying value of net assets of C Limited based on fair value of net assets at the date of acquisition was
           Rs. 420 million. However, the value in use of C Limited is Rs. 430 million and value in sale is not available. The
           C Limited is a cash generating unit in its own and whole of the goodwill is attributable to C Limited.
           Required:
           Calculate goodwill and pass necessary double entry for impairment loss to be recognized at the end of
           Year 2010?
    Q.3.   You have been appointed the Chief Accountant of a limited liability Company which has the plan to go for
           listing in the next year. As the listed companies are required to follow IFRS while presenting external financial
           statements, you have been asked to give a presentation to the Board of Directors on the salient features of
           IFRS explaining the basic principles on which IFRS are based. The directors are also worried that certain
           assets/liabilities recognized by the company may not qualify for recognition under IFRS.


           Required:
               a)   Provide recognition criteria under IASB’s Framework?                                                           (05)
               b) Explain the following terms with at least one example:                                                           (10)
                         i)   Prudence
                         ii) Substance over form
                         iii) Consistency
                         iv) Materiality
                         v) Going Concern
    Q.4.   ‘B’ Limited is a listed company on all three stock exchanges in Pakistan. After the year end but                        (15)
           before the authorization of financial statements the Chief Accountant has come across the
           following events occurring after the year end.
               a) B has been sued by a competitor for Rs. 10 million for infringement of a trade mark. The
                  case was pending with the Honorable Court at the year end. The legal advisors of B Limited
                  proposed a provision of Rs. 5 million to be recognized at the year end. The court has given
                  the verdict and confirmed a penalty of Rs. 8 million.
               b) B Limited carries its inventory at lower of cost and net realizable value (NRV). At the year
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               end B Limited carried its inventory at cost of Rs. 10 million. Due to severe negative trends
               and worst economic conditions inventory could not be sold month after the year end. After
               one month B Limited decided to sell the inventory to a competitor for Rs. 5.5 million.
           c) Due to heavy floods in the country after the reporting date the Government decided to
              increase the tax rate by 5% on all corporate entities. B Limited has recognized a provision
              for taxation in its financial statements at the rate applicable at the reporting date.
           d) After the year end the Board of Directors proposed a final dividend of Rs. 10 per share.
              During the year the company has also declared two interim dividends on the end of first and
              third quarter.
       Required:
       Discuss the implication of above events on the financial statements of B Limited?
Q.5.   Kamal Limited is a newly formed company engaged in the production of electric panels for (10)
       industrial and commercial buildings. The company is preparing its first financial statements and has
       come across the following issues.
           a) During the year the company manufactured two electric panels costing Rs. 200,000 and
              having sale price of Rs. 250,000. Out of these two one was installed in its head office
              building and the other in its factory. The management is unsure about the accounting
              treatment and included these panels in the inventory.
           b) The company purchased a plot of land in Islamabad Industrial area for establishing a second
              manufacturing unit for Rs. 20 million. But after the purchase of plot considering the
              economic turmoil in the country the management decided not to go for expansion. The plot
              is now held for un-determined purpose and still reported at cost in the books of accounts.
              The fair value of plot at the year end is now Rs. 18 million.
       Required:
       Discuss the accounting treatment of the above issues in the financial statements?
Q.6.   NKL Enterprises produces a single product. On July 31st, 2010, the finished goods stock consisted of
       4,000 units valued at Rs. 220 per unit and the stock of raw materials was worth Rs. 540,000. For
       the month of August 2010, the books of account show the following:
                                                                              Rs.
                               Raw material                                 845,000
                               Direct labor cost                            735,000
                               Selling costs                                248,000
                               Depreciation on plant and machinery            80,000
                               Distribution costs                             89,560
                               Factory manager ‘s salary                      47,600
                               Indirect labor costs                         148,000
                               Indirect material consumed                     45,000
                               Other production overheads                     84,000
                               Other accounting costs                         60,540
                               Other administrative overheads               188,600
                                                                                                              Contd…..
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       Other information is as under:
            (i) 8,000 units of finished goods were produced during August 2008.
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            (ii) The value of raw materials on August 31 , 2008 amounted to Rs. 600,000.
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            (iii) There was no work-in-progress at the start of the month. However, on August 31 , the
                value of work-in-progress is approximately Rs. 250,000.
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            (iv) 5,000 units of finished goods were available in stock as on August 31 , 2008.

       Required:
           a) Compute the value of closing stock of finished goods as on August 31st, 2008 based on
                                                                                                           (10)
              weighted average cost method?
         b) Define the term Net Realizable Value (NRV) and comment why the entities follow the rule        (05)
             cost or NRV whichever is lower?
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Q.7. The statement of financial positions of Jungle and its subsidiary Forest at 30 June, 2010 are given
     below:

                                                                         Jungle                Forest
                                                                   Rs. 000     Rs. 000   Rs. 000 Rs. 000
            Assets:
            Non-current assets
            Property, plant and equipment                            45,000              18,000
            Franchise right                                              Nil              2,000
            Financial assets                                         20,000    65,000     1,000   21,000
            Current assets:
            Inventories                                              18,000              10,000
            Trade and other receivables                              15,000    33,000     9,000   19,000
            Total assets                                                       98,000             40,000
            Equity and liabilities
            Capital and reserves:
            Issued ordinary share capital (Re. 1 share)              25,000              10,000
            Share premium account                                    10,000               4,000
            Other reserves                                            4,000               1,300
            Accumulated profits                                      20,000    59,000     8,000   23,300
            Non-current liabilities
            Interest bearing borrowings                              20,000               4,000
            Deferred tax                                              2,000               1,500
                                                                               22,000              5,500
            Current liabilities
            Trade payable                                            10,000               6,000
            Tax payable                                               2,000               1,000
            Bank overdraft                                            5,000               3,000
            Provision                                                    Nil   17,000     1,200   11,200
            Total equity and liabilities                                       98,000             40,000

       Notes to the statement of financial positions:
       1. On July 01st, 2009, Jungle purchased 8 million Re. 1 shares in Forest. The terms of the
          purchase consideration were as follows:
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           1.1. On 01 , July 2009, Jungle issued 3 Re. 1 ordinary shares for every 4 shares purchased in
               Forest. The fair value of the ordinary shares of Jungle on July 01st, 2009 was Rs. 5 per
               share.
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    1.2. On 30 June 2012, Jungle will pay the former shareholders of Forest Re. 1 in cash for
         every share in Forest they have purchased. This payment is contingent on the cumulative
         profits after tax of Forest for the 3 years ending 30th June being at least Rs. 3 million. The
         fair value of contingent consideration was Rs. 6.5 million on the date of acquisition and
         on current reporting date has a fair value of Rs. 7.5 million.
    1.3. No entries in respect of the purchase of shares in Forest have been made in the
         statement of financial position of Jungle.
2. Following the acquisition of Forest, the directors of Jungle carried out a fair value exercise as
   required by IFRS 3 – Business combinations. The following matters are relevant and all
   potential fair value adjustments are material:
    2.1. Property, plant and equipment comprise land and building and plant and machinery. At
         July 01st, 2009, the land and buildings had a carrying value of Rs. 10 million and a market
         value of Rs. 18 million. The land portion and building portions are considered to be 50%
         each. The building has remaining useful life of 10 years at the date of acquisition. The
         plant and machinery had a carrying value Rs. 8 million. All the plant and machinery was
         purchased on 30 June 2008 and was being depreciated on a straight-line basis over 8
         years. No reliable estimate was available of the current market value of the plant and
         machinery, but at July 01, 2009, the plant would have cost Rs. 12 million to replace with
         new plant. The remaining useful life of plant is 5 years at the date of acquisition.
    2.2. The other provision of Forest comprise:

         •   Rs. 400,000 in respect of the closure of various retail orders to which the directors of
             the Forest became committed prior to entering into acquisition negotiations with the
             directors of Jungle.
         •   Rs. 800,000 in respect of the estimated cost of interacting Forest into the Jungle
             group. No detailed integration plans had been formulated by July 01st, 2009.
    2.3. The additional deferred tax that needs to be provided on the adjustments that are
         necessary as a result of the fair value exercise is a liability of Rs. 3 million.
3. The inventory of Forest at the date of acquisition include goods having carrying value of Rs. 2
   million but fair value of Rs. 2.2 million. These goods stand sold by the current reporting date.
4. The other reserves and accumulated profits on July 01st, 2009 were Rs. 1.3 million and
   Rs. 6.5 million respectively.
5. The Fair value of NCI at the date of acquisition was Rs. 4.5 million.
6. There is no impairment loss on goodwill by the current reporting date.

Required:

 a) Compute the goodwill on consolidation of Forest that will be shown in the consolidated (10)
    statement of financial position of Jungle at 30th June, 2010. Provide justification for your
    figures where you consider this is needed?

 b) Prepare the consolidated statement of financial position of Jungle at 30th June, 2010?                (15)

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