Financial Accounting and Reporting-I

Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Note:
The suggested answers are provided for the guidance of the students. However, there are alternative
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Ans.1 FC Traders
Statement of profit or loss account for the year ended 30 June 2018
Rs. in '000
Sales:
50% cash sales at counter A×0.5×1.35 11,813
30% credit sales A×0.3×1.45 7,612
20% cash sales through riders A×0.2×1.40 4,900
24,325

Cost of sales:
Opening inventory 2,800
Purchases (14,640(W-1)+3,000) 17,640
Damaged stock (250)
Goods withdrawn (540)
Closing inventory 2,400–250 (2,150)
(A) (17,500)
Gross profit 6,825

Expenses:
Repair and maintenance 950
Shop rent 2,000+(400–200) 2,200
Misc. supplies used 800+(300–400) 700
Utilities 1,200
Staff salaries 1,800+165 1,965
Riders commission 4,900×3% 147
Depreciation – Equipment 4,000×10% 400
– Furniture & fixtures 2,500×10% 250
Damaged stock 250
(8,062)
Net loss (1,237)

W-1: Creditors Rs. in '000

Payment 13,600 Opening balance 1,850
Closing balance
[2,800+(320-230)] 2,890 Credit purchases (balancing) 14,640
16,490 16,490

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.2 Digital World

Stock as on 30 June 2018
Rs.
Physical inventory as on 10 July 2018 1,126,000

(i) Purchase invoices received during 1 July - 10 July 2018 (366,000)

Goods invoiced but not received 28,000
Goods received prior to year-end 20,000
(318,000)

(ii) Goods received on 8 July 2018 but invoice was not yet received (44,000)

(iii) Credit notes received after year-end for the goods returned on:
7-Jul-2018 9,000
9-Jul-2018 14,000
23,000

(iv) Cost of goods dispatched during 1 July - 10 July 2018 (375,000/1.25) 300,000

(v) Goods in transit as on 30-6-2018 received on 9 July 2018 (13,100)

(vi) NRV adjustment of goods damaged: Cost 150,000

NRV (110,000-26,000) (84,000)
Total loss 66,000
Loss pertains to 60% of the goods damaged prior to year-end (66,000×60%) (39,600)

(vii) Closing inventory items mistakenly valued at selling price (16,600×25/125) (3,320)

Physical inventory as on 30 June 2018 1,030,980

Stock-in-transit as on 30 June 2018 36,000
1,066,980

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans. 3 (a) Five steps involved in recognising revenue under IFRS 15:
(i) Identify the contract(s) with a customer
(ii) Identify the separate performance obligations
(iii) Determine the transaction price
(iv) Allocate the transaction price
(v) Recognize revenue when or as an entity satisfies performance obligations

(b) Ravi Limited

(i) General Journal
Debit Credit
Date Description
---- Rs. in million ----
1 Jun 18 Cash/Bank (500×200) 100,000
Refund liability [25(500×5%)×200] 5,000
Sales (475×200) 95,000

Cost of goods sold (475×150) 71,250

Right to recover product (25×150) 3,750
Inventory (500×150) 75,000

30 Jun 18 Refund liability 5,000

Sales (5×200) 1,000
Cash/Bank (20×200) 4,000

Cost of goods sold (5×150) 750

Inventory (20×150) 3,000
Right to recover product (25×150) 3,750

(ii) General Journal

Debit Credit
Date Description
---- Rs. in million ----
1 Jun 18 Cash/Bank (500×200) 100,000
Contract liability (500×200) 100,000

Right to recover product (500×150) 75,000

Inventory (500×150) 75,000

30 Jun 18 Contract liability (500×200) 100,000

Sales (480×200) 96,000
Cash/Bank (20×200) 4,000

Cost of goods sold (480×150) 72,000

Inventory (20×150) 3,000
Right to recover product (500×150) 75,000

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.4 Capital accounts - Royal Fashions

A Z A Z
Rs. in million Rs. in million
Quality Apparels (balancing) 28.90 19.26 Balance b/f 24.00 16.00
Realisation in 60:40 W.1 0.38 0.25
Goodwill in 60:40 W.2 4.52 3.01
28.90 19.26 28.90 19.26

Capital accounts - Imperial Garments

B G B G
Realisation loss in 45:55 W.1 3.54 4.32 Balance b/f 27.00 33.00
Quality Apparels (balancing) 29.10 35.58 Goodwill in 45:55 W.2 5.64 6.90
32.64 39.90 32.64 39.90

Capital accounts - Quality Apparels

A Z B G A Z B G
Goodwill
(4.52+3.01+5.64+6.9)/4 5.02 5.02 5.02 5.02 Transferred 28.90 19.26 29.10 35.58
Cash and Bank - 5.56 Cash & Bank 1.12 10.76 0.92 -
Balance c/f 25.00 25.00 25.00 25.00
30.02 30.02 30.02 35.58 30.02 30.02 30.02 35.58

W-1: Gain/(loss) on valuation of assets and liabilities on merger of the firms

RF IG
--- Rs. in million ---
Land (16–14); (17–18) 2.00 (1.00)
Machines (15–17); (15–20) (2.00) (5.00)
Inventory (10–9)(12.6–12) 1.00 0.60
Provision for doubtful debts (12/0.98×0.03) (0.37) -
Provision for doubtful debts (15/0.98×0.03) - (0.46)
Accruals and other payables (6–8) - (2.00)
0.63 (7.86)

W-2: Goodwill of the old firms RF IG

--- Rs. in million ---
Net assets prior to merger (24+16); (27+33) 40.00 60.00
Net increase/(decrease) in assets & liabilities on revaluation (W-1) 0.63 (7.86)
40.63 52.14
Cash and bank balances (3.00) (2.00)
Net assets (excluding cash) 37.63 50.14
Goodwill at 20% and 25% C 7.53 12.54

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.5 Cost - Machines

Date Description Rs. Date Description Rs.
1 Jan 17 Opening balance 800,000 30 Apr 17 Gain/loss on disposal 52,000
[31,935÷(0.85)3]
1 Jul 17 Gain/loss on disposal 40,000 1 Jul 17 Gain/loss on disposal 65,000
1 Jul 17 Bank 80,000 31 Dec 17 Closing balance 803,000
920,000 920,000

Accumulated depreciation - Machines

Date Description Rs. Date Description Rs.
30 Apr 17 Gain/loss on disposal(W-1) 21,662 1 Jan 17 Opening balance 333,000
1 Jul 17 Gain/loss on disposal(W-2) 15,810 Depreciation exp. (W-3) 71,868
31 Dec 17 Closing balance 367,396
404,868 404,868

Gain/Loss on disposals
Date Description Rs. Date Description Rs.
30 Apr 17 Cost 52,000 30 Apr 17 Accumulated dep. (W-1) 21,662
30 Apr 17 Bank (Cost of disposal) 5,000 30 Apr 17 Bank (Sale proceeds) 34,000
1 Jul 17 Cost 65,000 1 Jul 17 Accumulated dep. (W-2) 15,810
1 Jul 17 Cost (Trade in at fair value) 40,000
31 Dec 17 Loss on disposal (P&L) 10,528
122,000 122,000

W-1: Accumulated depreciation - machine sold Rs.

Till 31-12-2016 (52,000–31,935) 20,065
For 1-1-2017 to 30-4-2017 (52,000–20,065)×15%×4÷12 1,597
21,662

W-2: Accumulated depreciation - machine exchanged Rs.

For 1-10-2015 to 31-12-2015 (65,000 – 0)×15%×3÷12 2,438
For the year ended 31-12-2016 (65,000 – 2,438)×15% 9,384
11,822
For 1-1-2017 to 30-6-2017 [65,000 – 11,822]×15%×6÷12 3,988
15,810

W-3: Depreciation for the year Rs.

On opening balance of:
- Machine sold (52,000 – (W-1)20,065) × 15%×4÷12 1,597
- Machine exchanged (65,000 – (W-2)11,822) × 15%×6÷12 3,988
- Other assets (Balancing) (683,000 – 301,113) × 15% 57,283
Balance 1-1-2017 800,000 333,000
On additions during the year (40,000+80,000)×15%×6÷12 9,000
71,868

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.6 Omega Limited

Statement of profit or loss for the year ended 30 June 2018
Rs. in million
Sales revenue 235+2.7 237.70
Cost of sales (W-1) (179.00)
Gross profit 58.70
Selling and administrative expenses (W-2) (38.88)
Operating profit 19.82
Gain on disposal of office block 30–10– 15.3(18×17÷20) 4.70
Profit before tax 24.52
Taxation 24.52×30% (7.36)
Profit after tax 17.16

W-1: Cost of sales Rs. in million

Opening stock 16.00
Purchases 180.00
Freight-in 4+0.5 4.50
Damaged inventory (3.00)
Closing stock 19–(2.7÷1.35) –3+4.5 (18.50)
179.00

W-2: Selling and administrative expenses Rs. in million

Selling and administrative expenses 39.00
Inventory claim short received 3–(3×80%) 0.60
Bad debt - Balance written-off during the year 2.00
- Excess provision written back (2.28(BS)-4) (1.72)
- Recovery of balance written-off in 2016 (1.00)
38.88

Omega Limited
Statement of financial position as on 30 June 2018
Rs. in million
Non-current assets:
Property, plant and equipment (W-3) 84.70

Current assets
Stock-in-trade PL 18.50
Trade receivables (W-4) 16.72
Advances and other receivables 6+30+(3×0.8) 38.40
Cash and bank balances 3+1.8 4.80
78.42
Total assets 163.12
Equity
Share capital 40.00
Retained earnings 18+7+4.25+17.16(PL) 46.41
Revaluation surplus 43– 7(10–3)–4.25[(18–13)×(17÷20)] 31.75
118.16
Current liabilities
Trade and other payables 29+9+0.5+1.8–2.7 37.60
Tax liability PL 7.36
44.96

Total equity and liabilities 163.12

W-3: Property, plant and equipment Rs. in million
Land 30–10 20.00
Buildings 60–9–15.30(PL)[18–2.7(18×3÷20)] 35.70
Equipment and other assets 47–18 29.00
84.70

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

W-4: Trade receivables Rs. in million

Trade receivables 21-2 19.00
Provision for doubtful receivables (3.4–2)+[(19–1.4)×0.05] (2.28)
16.72

Ans.7 (a) SK Traders

Computation of ratios
2017 2016
(i) Gross profit margin 26.42% 30.00%
(98÷371)×100 (90÷300)×100

(ii) Net profit margin 8.09% 7.33%

(30÷371)×100 (22÷300)×100

(iii) Return on assets 8.60% 6.82%

(30+13)÷500×100 (22+8)÷440×100

(iv) Return on capital employed 9.56% 8.33%

(30+13)/(280+170)×100 (22+8)÷(260+100)×100

(v) Debt equity ratio 0.38 0.28

170÷(280+170) 100÷(260+100)

(vi) Current ratio 1.80 2.50

90÷50 200÷80

(b) (i) Profitability:

In 2017, gross profit margin of SKL has reduce from 30% to 26.42%. however,
gross and net profits amounts have been increased by Rs. 8 million mainly due to:
 Increase in sales volume as a result of 5% decrease in selling price. This
resulted in increase in gross profit by 8.89%[(98-90)÷90×100].
 Acquisition of building has resulted in savings in expenses as rent saved
(Rs. 15 million) is higher than the depreciation (Rs. 5 million) and increased in
finance cost (Rs. 5 million).
 Since 75% of selling and administrative cost was fixed, expenses did not
increase due to increase in sales volume (economies of scale).

(ii) Liquidity:
The decrease in current ratio from 2.5 to 1.8 is net effect of the following:
 Cash payment for purchase of building which significantly decreased current
assets.
 Prompt payment to suppliers which decreased the current liabilities.

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.8 (a) Financial accounting system Cost accounting system

(i) Requirement
Prepared to meet a legal or regulatory Prepared to meet the needs of management.
requirement.

(ii) Utilisation
Used to prepare financial statements for Used to prepare information for management
shareholders and other external users. (Might (internal use only).
also provide some information for
management but this is not their primary
purpose).

(iii) Time frame

Prepared within a time frame specified by a Prepared within a time frame specified by
legal or regulatory framework. management.

(iv) Activities
Records revenues, expenditure, assets and Records costs of activities and used to
liabilities. provide detailed information about costs,
revenues and profits for specific products,
operations and activities.

(v) Convention
Used mainly to provide a historical record of Provides historical information, but also used
performance and financial position. extensively for forecasting (forward-looking).

(b) Describing cost behaviour graphically:

(i) Factory building rent - Fixed amount (ii) Direct labour cost - Fixed per unit
per month

(iii) Supervision cost - One supervisor is (iv) Machine rental cost - Fixed monthly
required for every 20 direct workers rent and an additional cost of Rs. 100
per unit for the production exceeding
certain limit.

(THE END)

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