Ans.

6 (a)
Hadi Limited
Statement of comprehensive income
for the year ended 31 December 2016

Rs. In ‘000
Sales 201,407
Less: Cost of sales (W-1) (88,164)
Gross profit 113,243
Less: Administrative expenses (W-2) (47,382)
Less: Loss on sale of fixed assets [20,000-(25,000-3750)] (1,250)
Net profit before tax 64,611
Taxation: Current [req (b)] (17,527)
Deferred [req (b)] 2,643
Net profit after tax 49,727
Other comprehensive income -
Total comprehensive income 49,727

W-1: Cost of sales

Given 78,664
Less: R & D wrongly charged to cost of sales (20,000)
Depreciation expense [(305,000–25,000–15,000)×10%)
+(25,000×10%×6/12)+(35,000×10%×6/12)] 29,500
88,164
 W-2: Administrative expenses
As given 37,636
Add: Bad debts expense (W-3) 6,204
Provision for warranty (W-4) 1,542
Research expense (20,000×4/10) 8,000
Amortization of development cost
[20,000×6/10=12,000/20×2/12)] 100
Impairment of development cost (11,900– 10,000) 1,900
Less: Payment against warranty claim of the products sold
during previous year and wrongly charged to admin
expense (8,000)
47,382

W-3: Bad debts expense

Provision for doubtful debts - closing balance [(61,400–
8,000)×6%] 3,204
Amount written off (10,000×80%) 8,000
Less: Provision for doubtful debts - opening balance (5,000)
Bad debts expense for the year 6,204

W-4: Provision for warranty

Charge for the year (201,407×3%) 6,042
Less: Warranty expired (10,000 – 8,000) (2,000)
Payment of current year already charged off (2,500)
Net impact to be taken to SOCI 1,542
 (b) Computation of current tax

Rs. In ‘000
Profit before tax [req. (a)] 64,611
Add: Inadmissible expense/Admissible income
Accounting depreciation [req. (a)] 29,500
Accounting loss on disposal [req. (a)] 1,250
Tax gain on disposal (20,000–(25,000×0.75×0.85) 4,063
Accounting amortization [req. (a)] 100
Impairment on development expense [req. (a)] 1,900
Bad debts expense [req. (a)] 6,204
Provision for warranty (6,042–2,000) 4,042
Research expense [req. (a)] 8,000

Less: Admissible expense

Tax depreciation [{153–(25×0.75×0.85)} (33,247)
×0.15]+[35×0.25]+[35×0.75×0.15]
*Tax amortization (20,000/10) (2,000)
Bad debts written off (8,000)
Finance cost on long term loan (75,000×10%) (7,500)
Payment against warranty (2,500+8,000 ) (10,500)
Taxable profit 58,423

Current tax @ 30% 17,527

Computation of deferred tax Carrying Tax base Difference
(Balance sheet approach) amount
----------- Rs. in ‘000 --------------

Plant & machinery (W-1) 221,000 138,815 82,185

Development cost 10,000 18,000 (8,000)
Provision for bad debts (61,400– (3,204) - (3,204)
8,000)×6%
Finance cost capitalized 7,500 - 7,500
Provision for warranty (6,042–2,500) (3,542) - (3,542)
Total difference 74,939

Closing deferred tax liability 22,482

(74,939×30%)
Opening deferred tax liability (25,125)
Deferred tax income/reversal 2,643

W-1: Plant and machinery Rs. in '000

Carrying amount
Cost – given 305,000
Disposal of machine to be recorded (25,000)
Capitalisation of machine to be recorded 20,000
Less: Accumulated depreciation (53,250+29,500–3,750) (79,000)
221,000
Tax base
WDV - opening balance 153,000
WDV of machine disposed off (25,000×0.75×0.85) (15,938)
Cost of machine acquired 35,000
Tax depreciation for the year (33,247)
138,815