Assignment 05

Question No.1 (Marks 05)

BHS Company discovered that certain items had been included in inventory at 31st December 2006, valued at Rs.
2,000, which had been sold in fact before the year-end.
The following figures for 2006 and 2007 are available:
2006 2007
Rs. Rs.
Sales 75,000 80,000
Cost of goods sold (38,000) (59,050)
Profit before tax 37,000 20,950
Income tax (14,800) (8,380)
Net profit 22,200 12,570
Retained earnings 1st January, 2006 were Rs.40, 000. The cost of goods sold for 2007 included Rs. 40,000 as an error
in opening inventory.
The income tax rate was 40% for 2006 and 2007 respectively.
Required:
Show the income statement for 2007, with the 2006 comparatives and the statement of retained earnings under the
guidelines of IAS - 8.

Solution:
BHS Company
Extract from the Income Statement
2006 2007
Rs. Rs.
Sales 75,000 80,000
Cost of goods sold (40,000) (57,050)
Profit before tax 35,000 22,950
Income tax (14,000) (9180)
Net profit 21,000 13770
Question No.2 (Marks 05)
The Mediline Group is leading dealer and supplier of medical equipments in the region. The management of the
Mediline group completes draft financial statements for the year ended 30 June 2007 on 15 July 2007. The board of
directors reviews the financial statements and authorizes them for issue on 08 August 2007.
On 01 August 2007 one of its truck carrying Rs. 150,000/- worth of equipments supplying to the clients has been theft
partially and the remaining equipments have little damaged but the clients are ready to buy those damaged equipments
for Rs. 25,000/- less then of their Net realizable value (NRV) Rs. 95,000/-. You are required to identify an event type
and the accounting treatment after the Balance Sheet date under the guidelines of IAS-10.

Solution:

(i) This is non-adjusting event as the condition arose after the balance sheet date.
(ii) An entity shall not recognize such event in the financial statement. It shall only be disclosed.

Question No.3 (Marks 05)

Abbey Projects Ltd is a public limited company listed on stock exchange. Company has a capital project in process. It
has obtained a loan specifically for this project. In addition to this, the company has various financings obtained from
various banks. The details of the financing obtained by the company as at 30 June 2007 are as follows.
Amount in Rupees ‘000’ Mark-up rate
Specific loan for the project 10,500 9%
General purpose loan1 65,000 9.5%
General purpose loan 2 20,000 7.5%
General purpose loan 3 20,000 8%
All the loans have remained outstanding through out the year. Cost incurred on the project as at June 30, 2007 and 2006
stood at Rs. 15 million and Rs. 10 million respectively. The cost has been incurred evenly through out the year.
The company has a policy to capitalize interest on capital projects in accordance with the International Accounting
Standard 23. Kindly calculate the amount of interest to be capitalized on the project.

Solution:

Capitalization Rate.

Loan Amount Rate Interest

Rs. Rs.
Specific loan for the project 10500 9% 945
Loan – 1 65000 9.5% 6175
Loan – 2 20000 7.5% 1500
Loan – 3 20000 8% 1600
115500 10220

Capitalization rate = Total Interest / Total Loan x 100

= 10220 / 115500 * 100
Capitalization rate = 8.85%