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THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA FINAL EXAMINATION DECEMBER 2009

(35)
Time: 3 hours

Advanced Financial Accounting

03-01-2010 Morning [9.00 12.00] No. of Pages: 07 No. of questions: 06

Instructions to candidates: (1) (2) (3) (4) (5)

All questions should be answered. Show all workings. State clearly assumptions made by you, if any. All answers should be in one language, in the medium applied for, in the booklets provided. Use of calculators is permitted. 100 marks.

01. Janasarana Ltd. is a limited liability company incorporated in Sri Lanka for manufacture and sale of processed food for domestic market. The following Trial Balance was extracted from its books of account as at 31st March 2009: Trial Balance as at 31st March 2009 Dr (Rs.'000) Stated Capital Ordinary shares 15% Preference shares Retained Earnings, as at 01st April 2008 Land & Buildings, at cost Machinery, at cost Furniture & Equipment, at cost Motor Vehicles, at cost Provision for Depreciation, as at 01st April 2008 Buildings Machinery Furniture & Equipment Motor Vehicles Investments, at cost Inventories, as at 31st March 2009 Cost of sales / Sales Trade Receivables / Trade Payables Provision for Doubtful debts as at 01st April 2008 Cash and Bank balances Tax paid Administration expenses Selling and Distribution expenses Other operating expenses Finance charges 15% Bank loan 1,400 800 450 1,800 8,000 1,250 8,730 2,245 720 1,360 1,330 1,580 525 300 2,000 44,290 The following additional information is provided:(1) The value of the inventories shown in the trial balance represents the cost of inventories ascertained by perusing the stock records. During stock taking carried out at the year end, it was observed that processed food items costing Rs.150,000/- had passed the expiry date and those items could be sold for Rs.45,000/- as animal food. Additional expense of Rs.8,000/- had to be incurred to dispose of these items. 44,290 Cr (Rs.'000) 12,000 5,000 2,500 9,000 3,500 1,250 4,500

15,860 2,395 85

(2)

The cost of land included in the item Land and Buildings was Rs.5,000,000/-. The company purchased machineries for Rs.1,300,000/- on 01st September 2008. The company sold a Motor Vehicle for Rs.1,600,000/- on 30th September 2008 which was purchased on 01st October 2006 at a cost of Rs.2,500,000/-. No adjustment had been made in this regard other than recording of cash proceeds received in the Motor Vehicle account. Depreciation should be provided on cost at the following rates: Buildings Machinery Furniture & Equipment Motor Vehicle 05% 20% 25% 25% per per per per annum annum annum annum

(3)

The provision for doubtful debts as at 01st April 2008 was made up as follows: Specific provision customer A General provision Rs. 75,000 10,000 85,000

It has been proved that dues from A cannot be recovered and therefore the amount should be written off. General provision was to be adjusted to represent 5% of outstanding Accounts Receivables. (4) Administration expenses include a license fee of Rs.240,000/- paid in advance for the calendar year 2009. Telephone, electricity and water bills of Rs.50,000/- in total for March 2009 were paid in April 2009. (5) Bank reconciliation statement prepared by the book keeper on 31st March 2009 was as follows: Balance as per bank statement Less: Un-presented cheques Add: unrealized deposits Bank charges and debit tax Rs. 855,000 (255,000) 110,000 10,000 720,000

(6)

The tax advisors have estimated an amount of Rs.1,100,000/- as the tax liability for the year of assessment 2008/09. Investments include both short-term and long-term investments valued at cost. The cost and the market values of the investments at the balance sheet date were as follows: Cost Rs. 5,000,000 3,000,000 8,000,000 Market value Rs. 5,100,000 4,400,000 9,500,000

(7)

Short-term Long-term

(8)

Bank loan was obtained on 01st January 2009. Loan Capital is re-payable in four(04) equal quarterly installments commencing from 01st April 2009 with the relevant accrued interest.

(9)

Dividends for Preference Shares were duly paid in April 2009. 2

You are required to prepare, for Janasarana Ltd. the following, in a form suitable for publication: (a) (b) (c) (d) Income Statement for the year ended 31st March 2009. Balance Sheet as at 31 March 2009. Notes to Property, Plant & Equipment showing its movements. Statement showing the changes in Equity and Reserves.
st

(10 marks) (10 marks) (05 marks) (02 marks) (Total 27 marks)

02.

A Com Ltd. acquired 70% of the stated capital in T Com Ltd. on 01st April 2007. The following are the balance sheets of the A Com Ltd. and T Com Ltd. as at 31st March 2009: A Com Ltd.
Rs.000

T Com Ltd.
Rs.000

Non-Current Assets Freehold property at cost Plant & Machinery at (written down value) Furniture and Fittings (written down value) Investments Current Assets Inventory Accounts Receivable Cash Share Capital & Reserves Stated capital Cumulative preference shares Retained earnings Non-Current Liabilities 15% Debentures Current Liabilities Accounts payable Tax payable

85,000 20,000 12,000 55,000 9,500 14,800 3,500 199,800 95,000 35,000 12,800 30,000 18,500 8,500 199,800

25,000 8,500 15,000 3,500 3,800 850 56,650 35,000 6,500 5,000 8,500 1,650 56,650

The following additional information is provided: (1) (2) The retained earnings of T Com Ltd. as on 01st April 2007 was Rs.1,750,000/-. The inventory balance of T Com Ltd. includes Rs.750,000/- worth of goods at invoice price which was purchased from A Com Ltd. A Com Ltd. invoices goods to T Com Ltd. at cost plus 20%. (3) Accounts payable of T Com Ltd. includes Rs.2,500,000/- payable to A Com Ltd. for the goods purchased during the year. (4) Investments in A Com Ltd. include Rs.30,000,000/- invested in T Com Ltd.

You are required to prepare, Consolidated balance sheet of the A Com Ltd. group as at 31st March 2009. 3 (14 marks)

03. (A) (B)

Briefly explain what is set out in Garner Vs Murray Rule.

(02 marks)

The following balance sheet was extracted from the partnership business carried out by P, Q and R sharing profits and losses equally. Balance Sheet as at 31st March 2009 Rs.000 Non-Current Assets Property, Plant and Equipment (written down Value) Land & Buildings Motor Vehicle Furniture & Fittings Current Assets Inventories at cost Accounts Receivables (-) Provision for doubtful debts Investments Cash at bank Equity & Liabilities Capital accounts P Q R Current accounts P Q R Current liabilities Accounts Payable 5,480 45,980 (2,000) 4,000 2,500 4,500 12,500 12,500 11,000 36,000 4,200 (210) 3,990 6,400 790 14,780 45,980 3,600 15,800 8,900 6,500 31,200

The partnership business was converted to a limited liability company as PQR Ltd. on 01st April 2009. PQR Ltd. acquired all assets and liabilities other than cash of the partnership business for a purchase consideration calculated as follows: (1) (2) (3) (4) (5) Land and buildings at a value of Rs.20,500,000/-. Motor Vehicle at a revalued amount of Rs.7,350,000/-. Furniture and Fittings at a value less than 10% of the book value. Accounts receivable subject to 10% provision from the book value for doubtful debts. All other assets and liabilities at their book values.

The purchase consideration was discharged by allotting 1,680,000 number of Ordinary Shares of PQR Ltd. (in the profit & loss sharing ratio of partners) at a value of Rs.25/per share. The partnership business incurred a cost of Rs.625,000/- as an expense on dissolution. Any surplus or deficit of the partners accounts should be adjusted by introducing / drawing cash by the partners. 4

You are required to prepare, (a) (b) All relevant accounts for the dissolution of the partnership. Opening balance sheet of PQR Ltd. (16 marks) (Total 18 marks)

04. Srina Ltd. has its Head office in Gampaha and Branch in Kuliyapitiya. The following trial balances have been extracted from the respective books of account of both the head office and branch as at 31st March 2009: Trial Balances as at 31st March 2009 Head Office Dr. Cr. Rs. Rs. Administration expenses Branch current account Stated capital Cash at bank and in hand Payables Receivables Distribution cost Goods sent to branch Head office current account Plant & Machinery net book value Retained earnings Provision for unrealized profit on stock at branch Purchases / goods received from Head Office Sales Stock / branch (at cost to branch) 01st April 2008
127,000

Branch Dr. Rs.

8,000

Cr. Rs.

46,000 350,000 19,000 22,000 15,000 38,000 166,000 24,000 383,000 28,000 2,000 225,000 300,000 15,000 868,000 868,000 12,000 244,000 244,000 154,000 217,000 38,000 18,000 12,000 2,000 3,000

The following additional information is provided. (1) Stock as at 31st March 2009 was valued as follows: Rs. Head office at cost Branch at cost to branch Goods in transit to branch at cost to branch 20,000 24,000 12,000

(2)

Goods purchased by the head office and sent to the branch are transferred at cost plus 20%. On 31st March 2009, the branch had transferred Rs.10,000/- to the head office bank account but as at that date no record had been made in the head office books of account about that transfer.

You are required to prepare the following: (a) (b) (c) The Head Office, the Branch and the entire organizations income statement for the year ended 31st March 2009 in columnar form. Head office current account in the Branch books and Branch current account in the Head office books. The Head Office, the Branch and the entire organizations balance sheets as at 31st March 2009 in columnar form. (15 marks)

05. (A) (B)

State four(04) uses of preparing cash flow statements.

(02 marks)

Set out below are Income Statement and Balance Sheets of Cashino Ltd. Income Statement for the year ended 31st March 2009 Rs. Rs. (000) (000) Turnover 9,800 (-) Cost of sales (4,350) 5,450 Less: Expenses Salaries & Wages 1,500 Other operating expenses 2,350 (3,850) Profit before finance costs 1,600 Interest cost (135) Profit before tax 1,465 Tax (615) Profit for the year 850 Retained earnings 400 1250 Less dividends (400) Retained earnings 850 Balance Sheets as at 31st March 2009 Rs. (000) Non-Current Assets Property, Plant and Equipment 5,050 - at cost Less: Accumulated depreciation (2,100) 2,950 Current Assets Inventories at cost 550 Trade receivables 125 Cash 135 810 3,760 Equity & Liabilities Ordinary share capital 2,000 Debentures 500 Retained earnings 850 3,350 Current Liabilities Trade payables 190 Accrued wages 85 Tax payable 85 Interest payable 50 410 3,760 6

2008 Rs. (000) 3,600 (1,350) 2,250 500 200 100

800 3,050 1,500 850 400 2,750

140 50 75 35

300 3,050

The following additional information is provided. (1) (2) Both sales and purchase transactions were carried out exclusively on credit basis. Equipment bought for Rs.250,000/- during last year was disposed off this year for Rs.200,000/-. The accounting loss incurred on this transaction was Rs.35,000/- and the same is included in other operating expenses. Depreciation charge for the year also included in other operating expenses. The company paid dividends in cash during the year.

(3) (4)

You are required to prepare, Cash Flow Statement using of direct method for the year ended 31st March 2009. (12 marks) (Total 14 marks)

06. (A) (B)

State two(02) uses and two(02) limitations of accounting ratios.

(02 marks)

The following information was extracted from the books of two listed companies engaged in the same industry: A Ltd. Net Profit after tax Dividend for preference shares Average number of ordinary shares issued Market price per ordinary share Dividend per ordinary share Rs.11,500,000 Rs.400,000 200,000 Rs.150 Rs.16.50 B Ltd. Rs.12,300,000 Rs.400,000 200,000 Rs.200 Rs.19.32

You are required to: (a) Compute the following ratios for the companies A Ltd. and B Ltd. based on the information given above: (i) (ii) (iii) (iv) Earnings per Share (EPS). Price earning ratio (P/E) ratio. Dividend yield. Dividend cover.

(b)

Comment on which of the above companies is more suitable in an investors point of view. (10 marks) (Total 12 marks)

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