CHAPTER 14 ETHICAL ISSUES IN FINANCIAL REPORTING
3.1 Provision for bad debts
Balance as at July 1, 2014 3.4
Provision made during the year 1.0
Amount written off during the year (1.4)
Balance as at June 30, 2015 (Rs. 30 million x 10%) 3.0 4 Advances, Deposits, Prepayments and Other Receivables
Advances
- suppliers - considered good 12
- staffs 6
18
Deposits 11
Prepayments 4
Sales tax receivable 12
45
5 Cash at banks
Cash at banks - current accounts 7
saving accounts 5.1 22
29 5.1: It carries interest / mark up ranging from 3% to 7% per annum.
6 Accounts and other payables
Accounts payable 75
Accrued liabilities 7
82 2.8 YASIR INDUSTRIES LIMITED
Yasir Industries Limited
Statement of Financial Position as at June 30, 2015
Assets Rs. in
million Non-current assets
Property, plant and equipment (W2) 351.00
Intangible assets (20 – 12) 8.00
359.00 Current assets
Inventories (W6) 64.50
Trade receivables (W5) 39.00
103.50 462.50 Equity and Liabilities
Equity
Issued, subscribed and paid up capital 120.00
Retained earnings (W4) 87.10
207.10
Revaluation surplus 41.25
Non-current liabilities
Redeemable preference shares 40.00
Debentures 80.00
Deferred taxation (W 10) 9.00
129.00 Current liabilities
Trade payables 30.40
Accrued expenses (W3) 25.00
Taxation 16.50
Bank overdraft 13.25
85.15
Total equity and liabilities 462.50
Yasir Industries Limited
Statement of profit or loss for the year ended June 30, 2015
Rs. in million
Sales revenue (W5) 445.40
Cost of sales (W7) (250.72)
Gross profit 194.68
Distribution costs (W8) (20.05)
Administrative expenses (W8) (40.38)
Financial charges (W9) (9.10)
125.15
Loss due to fraud (30.00)
Profit before tax 95.15
Income tax expense (W10) (19.50)
Profit for the year 75.65
Workings
(W1) Leasehold property
Annual depreciation before the revaluation (230 ÷ 40 years) = Rs. 5.75 million per annum.
Depreciation this year has been charged incorrectly on cost (whereas it should have been on the revalued amount).
This year’s charge must be added back
Dr Cr
Accumulated depreciation 5.75
Cost of sales (50%) 2.88
Administrative expenses (30%) 1.72
Distribution costs (20%) 1.15
Rs. in million Carrying amount at the 30 June (as per trial balance)(230.00 – 40.25) 189.75 Add back depreciation incorrectly charged (see above) 5.75 Carrying amount of property at the start of the year 195.5
Revaluation surplus Rs. in
million
Revalued amount of leasehold property 238.00
Less: WDV of leasehold property at revaluation 195.50
Revaluation surplus arising in the year 42.50
Transfer to retained earnings in respect of incremental depreciation
(Rs. 7 million – Rs. 5.75 million) (1.25)
41.25 Depreciation of revalued property
Number of years depreciation by the year end: (40.25 ÷ 5.75) = 7 years.
Therefore, remaining useful life as at the year-end = 33 years Revaluation was at the start of the year
Remaining useful life at the start of the year = 34 years
Depreciation charge based on the revalued amount (238/34 years) = Rs. 7 million
Dr Cr
Cost of sales (50%) 3.5
Administrative expenses (30%) 2.1
Distribution costs (20%) 1.4
Accumulated depreciation 7.00
(W2) Property, plant and equipment
Rs. in million
Leasehold property (Rs. 238m – 7) 231
Machines (Rs. 168.6 – Rs. 48.6m) 120
351 (W3) Accrued Expenses
Rs. in million
As per trial balance 15.00
Accrued interest on debentures (Rs. 80m × 12% × 6/12) 4.80 Dividend on preference shares (Rs. 40m × 10%) 4.00 23.80 (W4) Retained earnings
Rs. in million
Balance as per trial balance 10.20
Profit for the year 75.65
Transfer from revalution surplus 1.25
87.10 (W5) Sales and receivables
Sales. Rec.
Rs. in million
Rs. m
Given in the trial balance 478.40 66.00
Deduct revenue incorrectly recognised (sale or return) (27.00) (27.00)
Cost of sales 451.40 39.00
(W6) Closing inventory
Rs. in million
Given in the question 42.00
Add back inventory held by customer on sale or return (100/120 27) 22.50
Cost of sales 64.50
(W7) Cost of sales
Rs. in million
Opening inventory as of July 1, 2014 38.90
Purchases 175.70
Direct labour 61.00
Manufacturing overheads excluding incremental depreciation 39.00
Less: Closing inventory (64.50)
Deduct depreciation incorrectly charged on cost (2.88)
Add depreciation charged on revalued amount 3.50
Cost of sales 250.10
(W8) Administrative expenses and distribution costs
Admin. DIst/
Rs. in million
Rs. m
Given in the trial balance 40.00 19.80
Deduct depreciation incorrectly charged on cost (1.72) (1.15) Add depreciation charged on revalued amount 2.10 1.40
Cost of sales 40.38 20.05
(W9) Financial charges
Rs. in million
Balance as per trial balance 0.30
Accrued interest on debentures (Rs. 80m × 12% × 6/12) 4.80 Preference dividend for the year (Rs. 40m × 10%) 4.00 9.10 (W10) Taxation
Deferred taxation Rs. in
million
Balance b/f 6.00
Charge for the year (balancing figure) 3.00
Balance c/f (30% Rs. 30 million temporary difference) 9.00
Tax expense Rs. in
million
Current tax 16.50
Deferred tax (see above) 3.00
19.50
2.9 SHAHEEN LIMITED Shaheen Limited
Statement of financial position As of June 30, 2015
Assets Rs. in ‘000
Non-current assets
Property, plant and equipment (86,000 12,000 4,500) 69,500
Intangible assets (6,000 600) 5,400
74,900 Current assets
Stock in trade 30,000
Trade receivables (37,800 10,000) 27,800
Other receivables and prepayments (14,000 + 6,000) 20,000
Cash and bank balances 4,725
82,525 157,425 Equity and liabilities
Share capital and reserves
issued, subscribed and paid up capital 60,000
Unappropriated profit 35,372
95,372 Non-current liabilities
Long term borrowings (31,525 6,000) 25,525
Deferred taxation (5,000 1,470) 3,530
29,055 Current liabilities
Trade payables 12,000
Current portion of long term borrowings 6,000
Provision for litigation 5,000
Provision for taxation (2,000 + 9,988 2,000) 9,998
32,998 157,425 Shaheen Limited
Statement of profit or loss and other comprehensive income
As of June 30, 2015 Rs. in ‘000
Sales revenue 200,000
Cost of sales (W2)
(104,708 )
Gross profit 95,292
Selling and distribution expenses (W2) (36,275)
Administrative expenses (W2) (30,450)
(66,725)
Financial charges (5,000)
Profit before taxation 23,567
Taxation (W3) (6,528)
Profit after taxation 17,039
Other comprehensive income – net of tax -
Total comprehensive income 17,039
Shaheen Limited
Statement of changes in equity 2015
As of June 30, 2015 Rs.000
Issued, subscribed &
paid up capital
Retained earnings
Balance July 1, 2014 60,000 32,000*
Correction of prior year error (10,000 20/120) (1,667)
Balance July 1, 2014 (restated) 60,000 30,333
Comprehensive income for the year 17,039
Dividend for the year ended June 30, 2014
(60,000*0.20) (12,000)
Balance June 30, 2015 60,000 35,372
*Retained earnings as at 01-07-09 = 20,000+ (20% of 60,000)=32,000 Workings
W1 Depreciation for the year
On building (36,000/20) 1,800
On plant and equipment (30,000 3,000)/10 2,700
Total 4,500
W2 Costs
Cost of sales
Selling and distribution
costs
Administrative costs
Opening inventory 23,000
Costs as per Trial balance 100,000 35,000 30,000
Closing inventory (30,000)
Depreciation (75%, 15%, and 10% of
Rs. 4,500) 3,375 675 450
Adjustment for goods sent on sale or return, erroneously booked as sales last year now returned during the year.
(10,000/1.2) 8,333
Amortization of export license
(6,000/5*0.5) 600
104,708 36,275 30,450
W3:Taxation
profit before tax 23,567
Disallowances and add backs 5,000
Taxable income 28,567
Current For the year (28,567*0.35) 9,998
For prior years (7,000 5,000) (2,000)
Deferred For the year (5,000 800)*0.35 (1,470)
6,528
2.10 MOONLIGHT PAKISTAN LIMITED (a) Moonlight Pakistan Limited
Statement of Financial Position As at December 31, 2015
Rs. in million ASSETS
Non-current assets
Property, plant and equipment (W2) 3,472
Current assets
Stocks in trade 758
Trade receivables 702
Cash and bank 354
1,814 5,286 EQUITY
Issued, subscribed and paid-up capital (W3) 1,750
Share premium (420 x 2/12) 70
Retained earnings (W3) 876
2,696
Surplus on revaluation of fixed assets 240
LIABILITIES
Non-current liabilities
Long term loan 1,600
Deferred tax (22 + 80 x 35%) 50
Provision for gratuity 23
1,673 Current liabilities
Creditor and other liabilities (544 + 96) 640
Income tax payable 37
677 5,286
(b) Moonlight Pakistan Limited Statement of profit or loss
For the year ended December 31, 2015
Rs. in million
Sales 3,608
Cost of sales (W1) (2,149)
Gross profit 1,459
Selling expenses (W1) 252
Administrative expenses (W1) 270
522 937
Financial charges (210 + 1,600 x 12% x 6/12) 306
Profit before taxation 631
Taxation (37 + 80 x 35%) 65
Profit after taxation 566
W1: Cost of sales/selling expenses/admin expenses Cost of
sales
Selling expenses
Admin.
expenses Rs. in million
As per trial balance 1,784 220 250
Depreciation – building (60% : 25% : 15%) (W2) 69 29 17
Depreciation – plant 287 - -
Provision for gratuity (23-8) x 60%:20%:20% 9 3 3
2,149 252 270
W2: Property, plant and equipment
Land Building Plant Total Rs. in million
Cost as at January 1, 2015 600 2,000 2,104
4,704
Accumulated depreciation - (400) (670) (1,070)
Revaluation (1,840 - (2,000 - 400 )) - 240 -
240
Current year depreciation - (287) (402)
(1,840/16) (115)
600 1,725 1,147
3,472 W3: Share Capital/Retained Earnings
Share capital Retained earnings Rs. in million
As per trial balance 1,200 510
Bonus issue (1200 ÷ 6) 200 (200)
Right issue (420 x 10/12) 350 -
Profit for the year - 566
1,750 876
2.11 FIGS PAKISTAN LIMITED Figs Pakistan Limited
Statement of profit or loss and other comprehensive income For the year ended 31 December 2015
2015 Note
Rs. in million
Sales 1 44,758
Cost of sales 2 (26,203)
Gross profit 18,555
Distribution costs 3 (6,431)
Administrative expenses 4 (752)
Other operating expenses 5 (399)
Other operating income 6 30
Profit from operations 11,003
Finance costs 7 (166)
Profit before tax 10,837
Taxation 8 (2,532)
Profit after tax 8,305
Other comprehensive income -
Total comprehensive income for the year 8,305
Figs Pakistan Limited
Notes to the financial statements For the year ended 31 December 2015
1 Sales Note
Rs. in million Manufactured goods
Gross sales 56,528
Sales tax (10,201)
46,327 Imported goods
Gross sales 1,078
Sales tax (53)
1,025
Sales discounts (2,594)
44,758 2 Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 × 55%) 2.1 1,302
Utilities (734 × 85%) 624
Depreciation and amortizations (1.287 × 70%) 901
Stationery and office expenses (230 × 25%) 58
Repairs and maintenance (315 × 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567 Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636 26,203 2.1 Salaries, wages and benefits include Rs. 30 million (54 × 55%) and Rs. 24
million (44 × 55%) in respect of defined contribution plan and defined benefit plan respectively.
3 Distribution costs
Rs. in million
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Salaries, wages and benefits (2,367 × 30%) 3.2 710
Utilities (734 × 5%) 37
Depreciation and amortization (1,287 × 20%) 257
Stationery and office expenses (230 × 40%) 92
Repairs and maintenance (315 × 5%) 16
6,431
3.1
Salaries, wages and benefits include Rs. 16 million (54 × 30%) and Rs. 13 million (44×30%) in respect of defined contribution plan and defined benefit plan respectively.
4 Administrative expenses
Rs. in million Salaries, wages and benefits (2,367 × 15%) 4.1 355
Utilities (734 × 10%) 73
Depreciation and amortization (1,287 × 10%) 129
Stationery and office expenses (230 × 35%) 80
Repairs and maintenance (315 × 10%) 31
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
4.1
Salaries, wages and benefits include Rs. 8 million (54 × 15%) and Rs. 7 million (44×15%) in respect of defined contribution plan and defined benefit plan respectively.