FR by muaz007


									                                                      Winter Exam-2010
                                            Financial Reporting [01-11-2010]
Duration: 3 hrs.                                                                                                    Marks-100
• 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.      On July 01, 2009 PARVEZ LTD purchased 60% shares of SADIQ LTD through share for
                share exchange by issuing its 4 shares for every 5 shares of SADIQ LTD. The fair
                value of one share of PARVEZ LTD was Rs. 140 and of SADIQ LTD was Rs. 110 on
                date of acquisition.
                The summarized statements of comprehensive income for the two companies for
                the year ended June 30, 2010 are:
                                                                               PARVEZ LTD. SADIQ LTD.
                                                                                  Rs. (000)  Rs. (000)
                                     Revenue                                        85,000     65,000
                                     Cost of sales                                (35,000)   (25,000)
                                     Gross profit                                   50,000     40,000
                                     Administrative expenses                      (10,500)    (1,500)
                                     Distribution expenses                        (12,500)   (15,500)
                                     Operating profit                               27,000     23,000
                                     Interest expense                              (1,500)    (4,500)
                                     Other income                                    2,500          --
                                     Profit before tax                              28,000     18,500
                                     Tax expense                                  (10,000)    (5,500)
                                     Profit for the year                            18,000     13,000

                     a) A fair value exercise was carried out for SADIQ LTD at July 01, 2009, the date
                        of acquisition with the following results: -
                                                                      Book value Fair value
                                                                        Rs. (000) Rs. (000)
                                                   Land                   20,000    20,500
                                                   Building               27,000    27,700
                                                   Inventory               5,000      5,300
                           The fair values of land and building have not changed materially from the
                           acquisition date and the assets still exist on current reporting date, however,
                           SADIQ LTD has not recorded the fair values in its separate books. The
                           remaining useful life of building at the date of acquisition was 10 years. The
                           inventories have been sold by SADIQ LTD before the year end.
                     b) The detail of each company’s share capital and reserves at July 01, 2009 are:
                                                                                         PARVEZ LTD SADIQ LTD
                                                                                            Rs. (000) Rs. (000)
                             Ordinary share capital of Rs. 10 each                            20,000     1,500
                             Share premium                                                    50,000     2,500
                             Accumulated profits                                              25,000     5,000

                                                                                                                  Contd. on Back

          c) On January 01, 2010 SADIQ LTD sold goods to PARVEZ LTD which has been
             treated as plant and equipment by PARVEZ LTD. The cost of goods to SADIQ
             was Rs 10 million but sold to PARVEZ at Rs. 15 million. PARVEZ depreciates
             such assets on four years using straight line depreciation method.
          d) On January 01, 2010 SADIQ LTD issued Rs. 90 million 10% loan notes of
             which PARVEZ LTD subscribed 40% loan notes. The other income includes
             interest received from SADIQ LTD.
          e) The group has the policy of measuring Non-Controlling Interest at fair value.
             The goodwill has been tested for impairment at the year end and Rs. 1
             million impairment losses on goodwill should be recognized in group
             financial statements.
          f) There has been no dividend payment by any company during the year.
       Ignore deferred taxation while consolidating the above financial statements.
          a) Calculate Goodwill at the date of acquisition?                                      (05)
          b) Prepare Consolidated Statement of Comprehensive Income for the year (15)
             ended June 30, 2010 for PARVEZ LTD Group?
Q.2.   National Corporate Leasing Limited (Leasing Company) is a listed company engaged
       in leasing of equipments. The equipments under lease some time are not available
       from the market therefore, it maintains a reasonable stock of these equipment by
       its own. During the year ended December 31, 2009 it had entered into many lease
       contracts with individual as well as corporate clients. The detail of its two contracts
       is as follows: -
           a) Sale Type Lease: Equipment costing Rs. 250,000 purchased by it two
                months back was leased to MB Limited on June 30, 2009. The fair value of
                this equipment is Rs. 300,000. The lease agreement is for three years and
                the rental due in advance, the first rental of Rs. 120,000 is received on
                June 30, 2009. The leasing company has also incurred Rs. 10,000 on
                commission to sales persons.

          b) Finance Type Lease: Equipment having fair value of Rs. 500,000 has been
             purchased by KD Limited and the leasing company has made payment on
             behalf of KD Limited on September 30, 2009. The rental will due in arrear
             but a deposit of Rs. 100,000 has been received in advance. The lease term
             is for five years and annual rental is Rs. 134,000. The commission of
             Rs. 20,000 has also been paid to sales persons.

       The interest rate leasing company normally use for sale type lease is 21.5% and for
       finance type lease is 20%. The market interest rate for sale type lease is 20%.
       Required:                                                                                 (15)
       Prepare extract of financial statements for both the contracts?


Q.3.   QUTAB Limited is a listed company, whose shares are trading on all the three stock
       exchanges of the country. The financial year end of the company is June 30, 2010.
       The financial statements of the company have been approved on September 05,
       2010. The chief accountant of the company has come across the following events
       occurring after the reporting date.
         a)   During a board meeting held on July 15, 2010 the board decided to dispose
              off a location which is identified cash generating unit located in KHYBER
              PAKHTUNKHA badly affected by the recent flood. The carrying value of the
              cash generating unit is Rs. 15.5 million but the recoverable is now
              significantly lower than the carrying value. The flood came in first week of
              June 2010.
         b) During the month of August a local distributor of Chinese Company
            launched a new product at very low price, which forced the company to
            reduce its selling price even below cost to dispose of the entire stock. In the
            monthly meeting of board of directors, they decided to discontinue the
            production of said product. The discontinuation of production will result in
            redundancy payments of Rs. 2 million to employees currently involved in the
            production of said product.
         c)   During the year 2010, the company was sued by a large multinational
              company dealing in software development for using pirated soft ware on its
              Information Technology equipments. The case was pending with the Court
              and the legal advisor of the company has advised for a provision of Rs. 5
              million at the reporting date. The decision of the court came on August 20,
              2010 and penalty of Rs. 10 million was confirmed by the court. On August
              25, 2010 the company filed appeal against the court verdict in Higher Court.
              The legal advisor is still of the opinion the penalty should not exceed Rs. 5
         d)   During audit for the year ended June 30, 2010, the auditors detected that
              some tangible assets of Rs. 500,000 are not traceable physically. The enquiry
              was initiated which concluded on August 31, 2010 that these assets were
              stolen by someone and are not recoverable. The company was however,
              insured against theft and claim was lodged with the insurance company. The
              insurance company has not confirmed the amount of claim; however, there
              is a possible chance that 50% of the claim will be accepted by the insurance
       Required:                                                                               (12)
       Discuss the accounting treatment of above events in the financial statements of
       QUTAB Limited?

Q.4.   On 1 July 2009 a company held a freehold building in its books with a net book
       value of Rs. 18 million and a remaining useful life of 30 years. On the same date, it
       entered into an agreement to sell the building to a bank for Rs. 35 million, but
       continues to occupy it for the next 5 years at an annual rental of Rs. 5 million per
       annum payable in advance. The market value of the building at the date of sale was
       approximately Rs. 20 million and an 'arm's length' rental would be approximately
       Rs. 3 million per annum.
       Required:                                                                               (10)
       Describe how the above transaction should be treated in the financial statements of
       the company for the year ended 30 June 2010?

                                                                                   Contd. on back

Q.5. You are presented with the statement of financial position of Sajjad Ltd. for the year
     ended 30 June 2010, together with comparative figures for the previous year.
                                           Sajjad Ltd.
                        Statement of Financial Position as at June 30, 2010
       Fixed assets                                   2010       2010        2009        2009
                                                  Rs. (000)   Rs. (000)   Rs. (000)   Rs. (000)
       Tangible assets                               2,900                   2,000
       Less: depreciation                             (700)      2,200        (470)      1,530
       Goodwill                                                    500                     650
                                                                 2,700                   2,180
       Current assets
          Stock                                                    550                     450
          Trade debtors                                            450                     250
          Bank                                                      50                       --
                                                                 1,050                     700
                                                                 3,750                   2,880

       Share capital and reserves
          Ordinary share capital of Rs. 10 each                  2,000                   1,500
          Share premium                                            250                       --
          Retained earnings                                        405                     460
                                                                 2,655                   1,960
       Non-current liabilities
         Deferred tax                                              100                     150
         Long term loans                                           150                      50
                                                                   250                     200
       Current liabilities
          Trade creditors                                          400                     370
          Current tax                                              245                     200
          Dividends-interim                                        200                     120
          Bank overdraft                                             --                     30
                                                                   845                     720
                                                                 3,750                   2,880

      Additional information:
         • A Plant which cost Rs. 130,000 on July 01, 2006 being depreciated at 10% per
             annum on reducing balance basis was sold for profit of Rs. 55,000 at the start
             of current year.
         • The interim dividend for the year is Rs. 170,000.
         • Interest paid was Rs. 33,000 during the year ended June 30th, 2010.
         • There was an over provision of tax amounting to Rs. 50,000 has been
             reversed in the year 2010.
           a) Calculate the operating profit of Sajjad Ltd. for the year ended                     (05)
              30th June 2010?
           b) Prepare a cash flow statement for Sajjad Ltd. for the year ended                     (10)
              30th June 2010?


Q.6.   The extract of statement of financial position of MN Limited for the year ended June
       30th, 2010 and 2009 as comparative is as under: -
                                                          2010          2009
                                                      Rs. (000)     Rs. (000)
                Property, plant and equipment         135,000           150,000
                Advance income                              --            2,000
                Accrued expenses                        1,500                 --
                Prepaid expenses                            --            3,500
                Development cost                        4,000             5,000
                Loan                                    9,100                 --
       The following notes are also relevant for the computation of current and deferred tax:
           (i)  The property, plant and equipment is being depreciated under tax laws at
                15% per annum while under IAS 16 it is being depreciated at 10% per
                annum under reducing balance basis. The tax base of property, plant and
                equipment was Rs. 109 million on June 30, 2009.
          (ii) The profit before tax is Rs. 450 million for the year ended June 30, 2010.
          (iii) Un-used tax losses brought forward at the start of year 2010 are Rs. 250
          (iv) The advance income has been taxed in the year of receipt.
          (v) The expenses under tax laws are allowed when paid.
          (vi) The development cost of Rs. 6 million has been incurred in 2009 and was
                being amortized over six years; however, the whole amount was claimed
                as an expense under tax laws in 2009.
         (vii) The loan has been issued on last day of year 2010 for Rs. 10 million and
                issuance cost of Rs. 0.1 million was incurred. The issuance cost is an
                allowable expense under tax laws in the year of incurrence but is
                amortized under IAS 23 over the loan term.
         (viii) The tax rate has been 35% in the current year and in the previous years.

          a) Calculate current tax and taxable profit?                                              (07)
          b) Calculate deferred tax?                                                                (08)

Q.7.   Mega Contractors (Private) Limited is a developer of commercial properties. During
       the year ended June 30, 2010 it started to develop a commercial plaza. Considering
       the volume of work and forecasted cash flows, it borrowed Rs. 500 million from Fin
       Solutions Bank Limited at six month average Kibor+3 percent, however, the total
       project cost will be Rs. 1,200 million. The loan was borrowed on September 30, 2009
       but the project started on October 31st, 2009. The loan was utilized on the asset as
                                      October 31, 2009            200
                                      January 31, 2010            150
       The project is still in progress and will take at least one year to complete. The loan was
       also temporarily invested to earn Rs. 12 million as interest income of which 5 million
       earned in October 2009.
       The kibor+3 in first six months of the loan were 15% and 17.5% thereafter. During the
       year Mega Contractors also received Rs. 175 million as booking fee for space from
       customers on March 31, 2010.
       Required:                                                                             (13)
       Calculate the cost of work in progress and amount of borrowing cost to be capitalized
       in the cost of the asset?


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