Financial Accounting: Partnership to Limited Company Transformation and Asset Valuation, Exams of Financial Accounting

Download Financial Accounting: Partnership to Limited Company Transformation and Asset Valuation and more Exams Financial Accounting in PDF only on Docsity! FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 D, E and F were partners in the firm DEF & Company and shared profit and loss in the ratio 5:3:2 respectively. On July 01, 2007, F informed the other partners that he has suffered heavy losses in one of his personal businesses and is unable to pay his debts. He therefore requested D & E to settle his account in the partnership. D & E agreed to continue the business without F but at the same time agreed to convert the partnership into a limited company named Paradise Limited. The trial balance of the firm as on June 30, 2007 appeared as follows: Debit Credit Rupees in thousands Cash in hand 8,000 Trade debts 7,000 Inventories 5,000 Trade creditors 9,000 Other liabilities 5,000 Partners’ capital – D 21,000 – E 13,000 – F 2,000 Land and building 10,000 Plant 20,000 50,000 50,000 All the partners agreed to the following: (i) On the basis of previous experience it was estimated that 4% of the trade debts will not be recovered. These shall be recorded in the new company accordingly. (ii) A creditor has left the country about five years ago and is not expected to claim his dues amounting to Rs. 50 thousand. (iii) A fully depreciated fixed asset costing Rs. 120 thousand was written off in March 2006. However the same is still in use and has a fair market value of Rs. 100 thousand. (iv) Goodwill of the firm is estimated at Rs. 1,120 thousand. However, it shall not be recorded in the books of the new company. (v) Expenses incurred on the incorporation of Paradise Limited amounting to Rs. 120 thousand were paid by E. The company will issue 6% preference shares in lieu of the above. (vi) Salaries of Rs. 300 thousand had been credited to each partner’s capital accounts while recording the distribution of profits for the year ended June 30, 2007. On the insistence of F, it was agreed that based on the amount of efforts put in by D & E, the salaries allowed to them should be reduced by 30%. docsity.com (2) (vii) The paid-up capital of the company shall comprise of 4.0 million shares of Rs. 10 each, which shall be contributed equally by D & E. Required: Prepare the following: (a) Partners' Capital Accounts (b) Realization Account (c) Opening Balance Sheet of Paradise Limited (20) Q.2 Naseer Distributors have sole distribution rights of different products. These rights were bought at substantial prices. According to the company’s policy the cost of distribution rights are amortized over a period of ten years at a rate of 15% per annum for the first five years and 5% per annum during the next five years. While reviewing the accounting policies the management concluded that the policy of amortization of distribution rights does not reflect the pattern in which benefits flow to the company. Accordingly, they decided to amortize such rights over a period of eight years at a rate of 20% per annum for the first four years and 5% per annum during the last four years. The relevant details are as follows: Rupees in ‘000’ Products S T U Cost of distribution rights 50,000 40,000 27,000 Accumulated amortization upto June 30, 2007 (Under the old policy) 15,000 32,000 24,300 Recoverable value 31,000 4,000 250 The management has been following a policy of recording gratuity on the basis of payments. From this year it decided to account for the liability, in accordance with the International Accounting Standards. A consultant was hired who had submitted his report, the extracts from which are as under: Rupees in ‘000’ Year Provision required Payment made 2005 1,500 200 2006 2,100 900 2007 2,500 700 Some of the extracts from the company’s trial balances after charging amortization under the existing policy are as follow: Rupees in ‘000’ June 30, 2007 June 30, 2006 Sales 813,000 718,000 Purchases 610,000 520,000 Amortization on intangible assets 18,250 22,250 Depreciation expenses 12,000 12,000 Salaries 46,000 45,000 Gratuity 700 900 Stocks 22,000 26,000 Other expenses 90,000 87,000 Wastage sales 2,000 2,700 Gain on sale of property 42,000 - docsity.com (5) 2007 before presentation to the board of directors for approval, you found that the following information has not been dealt with in the financial statements: (i) While constructing the factory building it was agreed with the Union Council of the area that any damage caused to a nearby school will be restored by the company. As a gesture of goodwill the company had also offered that a donation of Rs. 500,000 would be given to the school provided the Union Council also gives a similar grant. On the balance sheet date, it was almost certain that the Union Council would pay the grant. The damage caused by construction was restored at a cost of Rs. 650,000 in July 2007. The Union Council paid the grant of Rs. 500,000 to the school in July 2007. (ii) Within six months from the start of commercial production, the company was required to maintain an in-house workers' canteen and provide subsidized meals to its workers. The cost of construction of such canteen was Rs. 800,000; whereas cost for running the canteen was Rs. 142,000 per month. The company failed to comply with the requirement of the law. The concerned authority took a serious note of the situation and issued a show cause notice on July 18, 2007. To avoid adverse consequences the company decided to start construction of the canteen immediately. It was also decided that during the construction period, the company would reimburse the full amount of meal expenses of its workers. The construction is expected to be completed on August 30, 2007. (iii) The company allows full refund if the goods sold by it are returned within two months from the date of sale. According to the best estimate, the goods return ratio is 10 percent. The returned goods can be sold in second hand market at cost which is 60% of the selling price. The accounts were appropriately adjusted on June 30, 2007 based on the above estimates. The actual returns and the relevant information is summarized below: Returns during the month Amount of sales May, 07 June, 07 July, 07 Month of sales Rs. in million May, 07 28.00 - 0.20 2.10 June, 07 32.00 - - 0.40 Required: Discuss each event in the light of the relevant International Accounting Standards and suggest how these should be dealt in the financial statements for the year ended June 30, 2007. (15) Q.6 Focus Limited is engaged in manufacturing multimedia projectors. The company spends heavily on research and development to introduce improvements in the existing products. A free lance researcher Mr. Talent sent a conceptual paper to the company on development of a new type of projector which will significantly enhance the life and quality of the product. An agreement was reached between Mr. Talent and the company whereby Mr. Talent agreed to conduct and supervise the research and development process at a lump sum remuneration of Rs. 8 million. However, in case the research was unsuccessful, he agreed to reduce his remuneration to a time based salary of Rs. 2,000 per hour. docsity.com (6) The process of research commenced from July 2006 and the following costs were incurred upto June 30, 2007. Rs. In million Tools purchased 2.000 Furnishing of the new laboratory 0.800 Salaries paid to research associates 1.620 Cost of conducting tests in U.K. on a device which was ultimately used in the final product 0.400 Remuneration paid to Mr. Talent on successful completion of research 4.500 Expenses on preparing technical feasibility 0.250 Cost of manufacturing the samples before commencement of commercial production 0.240 Material imported for commercial production 1.700 Final payment to Mr. Talent 3.500 Product launching expenses 1.200 Required: Discuss the accounting treatment of each of the above costs incurred by the company in the light of International Accounting Standard 38 ‘Intangible Assets’. (15) (THE END) docsity.com