Financial Accounting and Reporting-I

Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.1 Partners' capital

X Y Z X Y Z
---- Rs. in '000 ---- ---- Rs. in '000 ----
Revaluation loss 28 21 21 Balance 502 358 400
Goodwill written off (380 in 11:9) 209 171 Goodwill (380 in 4:3:3) 152 114 114
General reserve (250 in
Settlement with Z: 4:3:3) 100 75 75
Cash 150 Investment by Y (balancing) 68
Vehicle 120
Furniture 35
Loan (balancing) 263
Closing balance X 517
Closing balance Y (517×9÷11) 423
754 615 589 754 615 589

Revaluation
Rs. in '000 Rs. in '000
Machine (400×0.15) 60 Equipment (180×20%) 36
Provision for doubtful debts 10
Trade debtors 100 (100×10%)
Accruals 41 Vehicle (120–70) 50
Furniture 35
Revaluation loss of 70
X 28
Y 21
Z 21
201 201

W-1: Ratios X Y Z
Old profit share 4/10 3/10 3/10
Share of Z divided equally between X and Y 3/20 3/20 –3/10
New profit share 11/20 9/20 -

Ans.2 (a) Regression analysis and high-low analysis compared

Following are the important differences between linear regression analysis and the high-
low method.

Regression analysis High low method

Regression analysis uses as many sets of data High-low analysis uses just two sets of
for x and y as are available. data for x and y, the highest and the
lowest values for x and the corresponding
values of y.
Regression analysis can be used to assess the High low method cannot be used to
extent to which values of y depend on values assess the extent to which values of y
of x. depend on values of x.
Regression analysis uses complex arithmetic High low method uses simple
and a calculator or small spreadsheet model mathematics.
is normally needed.
Effect of extreme values is minimal on High low method is highly affected by
regression analysis. extreme values in the data.

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

(b)

Ans.3 (a) Working capital cycle 2018 2017

------------- Number of days -------------
Average days to collect debtors W-1 50.0 37.4
Average inventory holding period W-2 72.8 70.5
Less: Average time to pay creditors W-3 (69.3) (75.1)
53.5 32.8

Liquidity ratios: 2018 2017

8,200 8,500
Current assets
Current Ratio = 5,900 5,300
Current liabilities
𝟏. 𝟑𝟗 ∶ 𝟏 𝟏. 𝟔𝟎 ∶ 𝟏

8,200 − 4,000 8,500 − 4,500

Current assets − inventory
Quick Ratio = 5,900 5,300
Current liabilities
𝟎. 𝟕𝟏 ∶ 𝟏 𝟎. 𝟕𝟓 ∶ 𝟏

[(4,200 + 3,200) ÷ 2] [(3,200 + 1,800) ÷ 2]

Debtors collection period Average debtors × 365 × 365
W-1: = × 365 27,000 24,400
(in days) Credit sales
50 days 37.4 days

Average inventory [(4,000 + 4,500) ÷ 2] [(4,500 + 3,000) ÷ 2]

Inventory holding period × 365 × 365
W-2: (in days)
= × 365 21,300 19,400
Cost of sales
72.8 days 70.5 days

Average Creditors [(3,500 + 4,400) ÷ 2] [(4,400 + 4,200) ÷ 2]

Creditors payment period × 365 × 365
W-3: = × 365 [21,300 + 4,000 − 4,500] [19,400 + 4,500 − 3,000]
(in days) Credit purchases
69.3 days 75.1 days

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

(b) Measures to improve working capital cycle days:

 Give incentives to customers to pay on time
 Do not transact with customers who have a history of defaulting/late payments
 Automate the monitoring of accounts receivables

Ans.4 (a) The general IFRS 15 model applies only when all of the following conditions are met:

 the parties to the contract have approved the contract.

 the entity can identify each party’s rights.
 the entity can identify the payment terms for the goods and services to be
transferred.
 the contract has commercial substance.
 it is probable that the entity will collect the consideration.

(b) (i) The contract contains two distinct performance obligations i.e. selling the machine
and providing the maintenance services as:

 the customer can separately benefit from the machine without the
maintenance services from GW (or GW sells maintenance services separately)
and
 the machine and maintenance services are separately identifiable in the
contract.

Thus GW will allocate the transaction price between the two performance
obligations as follows:

Standalone price Proportion Transaction price

Machine 1,700,000 85 1,530,000
Maintenance 300,000 15 270,000
(Rs. 25,000×12) (Rs. 22,500×12)
2,000,000 100 1,800,000

Revenue related to sale of machine would be recognized at a point in time i.e. upon
delivery on 1 August 2018.

While revenue related to maintenance service would be recognized over time i.e. as
the services are rendered.

Till 31 December 2018, revenue would be recognized in respect of:

 Sale of machine Rs. 1,530,000

 Maintenance service Rs. 112,500 i.e Rs. 22,500 for 5 months

Remaining amount of Rs. 157,500 would appear in liabilities as deferred revenue.

(ii) The contract contains two distinct performance obligations i.e. selling the machine
and providing the maintenance services.

The contract includes a significant financing component in respect of sale of

machine which is evident from the difference between the amount of promised
consideration of Rs. 1.95 million and the cash selling price of Rs. 1.7 million.

Revenue related to machine would be recognized upon delivery on 1 October 2018.

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Revenue related to maintenance service would be recognized as the services are

rendered each month.

The difference between promised consideration and cash selling price of Rs.
250,000 would be recognized as interest revenue over two years using the implicit
rate of 7.1% [(1.95÷1.7)1/2–1].

Till 31 December 2018, revenue would be recognized in respect of:

 Sale of machine Rs. 1,700,000

 Maintenance service Rs. 75,000 i.e Rs. 25,000 for 3 months
 Interest revenue Rs. 30,175 (Rs. 1.7 million × 7.1% × 3/12)

Ans.5 (a) Plant Equipment

----- Rs. in million -----
Cost 500 360
[(500–60)/10],
Depreciation 2015 [(360/12)×(6/12)] (44) (15)
456 345
Depreciation 2016 [(456–78)/9], [345/15] (42) (23)
414 322
Revaluation–surplus/(loss) 2016 (balancing) 112 (42)
Fair value 526 280
Depreciation 2017 [(526–78)/8], [280/14] (56) (20)
470 260
Depreciation 2018 [(470–64)/7], [260/10] (58) (26)
412 234

(b) Piano Limited

Accounting entries for revaluation

Debit Credit
Date Description
------ Rs. in million ------
31-Dec-2018 Revaluation loss (P&L account) 18.00
Revaluation surplus 84.00
Plant 102.00

31-Dec-2018 Equipment 41.00

Revaluation gain (P&L account) 35.10
Revaluation surplus 5.90

W-1: Revaluation surplus/(impairment): Plant Equipment

----- Rs. in million -----
Fair value 310 275
Book value [From part(a)] (412) (234)
Increase / (Decrease) in asset (102) 41
Adjustment for previous:
Revaluation surplus 112–(112÷8)– (112÷8) 84
Revaluation loss 42–(42÷14)–(39÷10) (35.1)
Revaluation surplus/(Revaluation loss) (18) 5.9

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.6 Violin Family Club

(a) Income and expenditure account for the year ended 31 December 2018
Rs. in '000
Income
Subscription (W-1) 995
Gain on disposal of table 212–960÷5 20
Profit from canteen 57
Life membership (W-2) 228
1,300
Expenditures
Rent [36(24×3÷2)+36+37.5+37.5]+[24–25(37.5×2÷3)] 146
Salaries 285
Electricity 263+(35–23) 275
Depreciation – snooker tables (960–192)×(12.5÷75) 128
Depreciation – furniture & equipment (720+220)×20% 188
Subscription written off 45
(1,067)
Excess of income over expenditure 233

Canteen trading account for the year ended 31 December 2018

Rs. in '000
Sales 504×110÷80 693
Cost of goods sold
Opening stock 215
Purchases 512+142–118 536
Closing stock (247)
504
Gross profit 189
Expenses
Wages 11×12 (132)
Profit from canteen 57

W-1: Subscription Rs. in '000

Opening arrears: Opening advance 2018 45
2016 15 Receipts (60+920+75) 1,055
2017 90 Write off (15+30) 45
Income balance 995 Closing arrears 30
Closing advance 75
1,175 1,175

W-2: Life membership Rs. in '000

Income
[(5+8+6)×120÷10] 228 Opening balance
(5×120×8÷10)+(
Closing balance 1,836 8×120×9÷10) 1,344
Receipt (6×120) 720
2,064 2,064
(b) Violin Family Club
Statement of financial position as on 31 December 2018 Rs. in '000
Assets
Non-current assets
Snooker table (960–192–128) 640
Furniture & equipment (720+220–188) 752
1,392

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 Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Current assets:
Canteen stock 247
Prepaid rent 25
Subscriptions in arrears 30
Bank (W-3) 1,094
1,396
2,788

General funds
Opening balance (2,024–378)–1,344(W-2) 302
Excess of income over expenditure 233
535

Life membership fund (W-2) 1,836

Liabilities
Canteen creditors 142
Accrued electricity 35
Subscription in advance (W-1) 75
Creditors for equipment (220–66) 154
Canteen wages payable 11
417
2,788

W-3: Bank/cash Rs. in '000

Subscriptions 1,055 Opening balance 181
Life membership (W-2) 720 Rent 147
Sale proceeds from table 212 Salaries 285
Canteen receipts 693 Electricity 263
Canteen creditors 512
Canteen salaries 132
Equipment 66
Closing balance 1,094
2,680 2,680

Ans.7 Drum Limited

Statement of cash flows for the year ended 31 December 2018
Rs. in ‘000
Cash flows from operating activities
Profit before tax 1,360+700+200+650 2,910
Adjustment for:
Depreciation 480+810 1,290
Gain on disposal (130)
Increase in provision of doubtful debts 140
Interest expense 378
4,588
Working capital change
Decrease in inventory 400
Increase in trade receivables –100–140 (240)
Decrease in trade payable 600–950 (350)
(190)
Cash generated from operations 4,398
Interest paid –378+50 (328)
Tax paid –650–60 (710)
3,360
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 Financial Accounting and Reporting-I
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Certificate in Accounting and Finance – Spring 2019

Cash flows from investing activities

Purchase of land and building –2,600–480+950 (2,130)
Purchase of equipment –1,550–810–310 (2,670)
Disposal of equipment 440
(4,360)
Cash flows from financing activities
Issuance of shares 2,350
Loan repaid (1,000)
Dividend paid (700)
650
Decrease in cash during the year (350)
Opening cash 450
Closing cash 100

(THE END)

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