Certificate in Accounting and Finance Stage Examination

The Institute of 1 March 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Introduction to Accounting
Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Following balances were extracted from the records of Power Mist, a sole trader:

31 December 2020 31 December 2019

Trade receivables Rs. 1,300,000 Rs. 1,000,000

The following adjustments need to be made at 31 December 2020:

(i) Abid Trader was unable to pay its balance of Rs. 120,000 due to the death of the
owner. The amount needs to be written off.
(ii) Cash of Rs. 70,000 was received from Ali Merchant whose balance had been fully
provided in 2019.
(iii) Mohsin Enterprises is facing severe financial difficulties and therefore a specific
provision at 80% is to be made against its balance of Rs. 140,000.
(iv) A general provision for doubtful receivables is always maintained at 7% of the
remaining receivables.

Required:
Prepare necessary journal entries for the year ended 31 December 2020. (Narrations are not
required) (07)

Q.2 Following information is available regarding Purix Limited’s inventory items as on

31 December 2020:

Items A B C
Estimated selling price 20% mark-up 15% margin 18% mark-up
Purchase price (Rs. per unit) 1,000 1,800 2,000
Freight-in (Rs. per unit) - 155 -
Freight-out (Rs. per unit) - 200 160
Packing cost upon sales (Rs. per unit) 100 150 -
Sales commission (% of selling price) 4% - 5%

Few units of C are slightly damaged and can be sold at purchase price after only incurring
repair cost of Rs. 240 per unit.

Required:
Calculate per unit amount at which each inventory item should be carried as on
31 December 2020 in accordance with IAS 2 ‘Inventories’. (08)
 Introduction to Accounting Page 2 of 6

Q.3 You are the accountant of Biossane Traders (BT), a sole proprietorship business owned by
Mr. Sanitizer. In view of the expansion of business, BT is going to raise long-term loan from
a bank. Mr. Sanitizer has asked you to make the following changes in the financial
statements to be submitted to the bank along with loan application:

(i) Rent earned from the personal property of Mr. Sanitizer should also be included in
BT’s statement of profit or loss.
(ii) Inventory at year-end should be valued at FIFO instead of weighted average basis as
this would result in higher profit.
(iii) Cost of repair and maintenance of the office building should be capitalised as the cost
incurred in the current year is higher as compared to last years.
(iv) Amount received in advance from customers should be included in revenues as the
customer has fulfilled his obligation.
(v) Shop building should not be depreciated due to rising market values.

Required:
Briefly explain with reasons whether the above changes should be made to the BT’s financial
statements or not? (08)

Q.4 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs).

(i) Determine the balance as per bank statement using the following information:
Rupees
Balance as per cash book 49,100
Cheques received and deposited into the bank, but
not yet credited in the bank statement 4,600
Unpresented cheques 6,300
Credit transfers appearing in the bank statement but
not entered in the cash book 3,400

(a) Rs. 52,500 (b) Rs. 54,200 (c) Rs. 58,800 (d) Rs. 50,800 (02)

(ii) Salary entitlement not withdrawn by a partner is:

(a) not recorded in books
(b) debited to Partner’s capital account
(c) debited to Partner’s current account
(d) debited to Profit and Loss appropriation account (01)

(iii) If a partner does not receive the minimum guaranteed profit by the normal sharing
mechanism, then the other partners must make up the shortfall out of their:
(a) personal assets equally
(b) capital in the capital investment ratio
(c) profit share in the profit-sharing ratio
(d) profit share in the capital investment ratio (01)

(iv) Which of the following statements is correct?

(a) Debit balance as per bank statement means a bank overdraft
(b) Debit balance as per cash book means a bank overdraft
(c) Credit balance as per bank statement means a bank overdraft
(d) Credit balance as per cash book means an asset (01)

(v) If a property, plant and equipment remains idle for whole year, the depreciation
expense for the year will be NIL under:
(a) straight line method (b) reducing balance method
(c) units of production method (d) all of the above methods (01)
 Introduction to Accounting Page 3 of 6

(vi) On 1 July 2019 a business acquired a shop on rent which is payable quarterly in
advance. Payments of rent were made as follows:

Date Rupees
1 July 2019 75,000
30 September 2019 75,000
31 December 2019 75,000
31 March 2020 75,000
30 June 2020 75,000

What will be the rent expense charged to statement of profit or loss for the year ended
31 August 2020?

(a) Rs. 375,000 (b) Rs. 300,000 (c) Rs. 75,000 (d) Rs. 225,000 (02)

Section B

Q.5 Septica Enterprise (SE) is in the business of the plastic bags. The summary of existing
depreciation methods and rates used for different assets is as follows:

Description Depreciation method Rate

Building Straight line 4%
Plant Reducing balance 20%
Machine Straight line 10%
Equipment Reducing balance 25%
Truck Straight line 12.5%

Following additional information regarding property, plant and equipment is also available:
(i) SE commenced construction of an extension to its building on 1 April 2020 which
completed on 1 July 2020 at a cost of Rs. 1,000,000. The building was originally
purchased on 1 July 2015 at Rs. 10,000,000 of which 40% was attributed to land
element.
(ii) A plant met an unfortunate accident on 31 March 2020 and was declared as full loss
by insurance company. The cost of the plant was Rs. 8,000,000 and book value was
Rs. 3,600,000 at the start of the year. The insurance company paid Rs. 3,200,000 in
full settlement on 31 May 2020.
(iii) The estimated useful life and residual value of a machine were reviewed in 2020 due
to technological changes. Revised residual value and remaining useful life of the
machine were determined as Rs. 75,000 and 5 years respectively. The machine was
purchased on 1 July 2017 at a cost of Rs. 1,200,000 with an original residual value of
Rs. 60,000.
(iv) In view of significant changes in the expected pattern of economic benefits, it has been
decided during 2020 to change the depreciation method of equipment from reducing
balance to straight line. The equipment was purchased on 1 January 2017 at a cost of
Rs. 780,000 having estimated useful life of 8 years and residual value of Rs. 78,000.
(v) On 1 April 2020, a truck having cost and book value of Rs. 8,000,000 and
Rs. 6,000,000 respectively was exchanged for another truck. The remaining useful life
and fair value of the new truck were estimated at 6 years and Rs. 9,000,000
respectively. This transaction lacks commercial substance.

Required:
Prepare necessary journal entries to record the above information for the year ended
31 December 2020. (Narrations are not required) (17)
 Introduction to Accounting Page 4 of 6

Q.6 Following books of prime entry are available for Derma International for the month of
February 2021:

SALES DAY BOOK

Date Name of customer Rs. in '000
03-Feb Mercury Limited (ML) 2,400
14-Feb Mars Brothers (MB) 1,500
25-Feb Jupiter & Sons (JS) 3,600
7,500

SALES RETURN DAY BOOK

Date Name of customer Rs. in '000
09-Feb Mercury Limited (ML) 480
20-Feb Mars Brothers (MB) 120
600

CASH BOOK
Cash Bank Cash Bank
Date Description Date Description
--- Rs. in '000 --- --- Rs. in '000 ---
01-Feb Balance 140 490 02-Feb Inventory – net of 2%
05-Feb Sales 780 discount 980
08-Feb JS 1,090 07-Feb Repair & maintenance 130
10-Feb ML – net of 5% discount 1,710 11-Feb Inventory 500 2,000
13- Feb Sales 480 18-Feb Return inward 120
14-Feb Inventory 300 19-Feb Inventory 1,200
20-Feb MB 1,700 22-Feb Inventory – net of 5%
27-Feb JS 1,300 discount 760
26-Feb Salaries 250
27-Feb Drawings 1,452
28-Feb Accrued rent 420
28-Feb Balance 352 28-Feb Balance 530
1,700 6,642 1,700 6,642

Additional information
(i) All sales are made at cost plus 20%.
(ii) All purchases are made in cash. Records are maintained using perpetual inventory
system.
(iii) Fixed assets having book value of Rs. 225,000 have been withdrawn by the owner
during the month. Accumulated depreciation on these fixed assets was Rs. 25,000.
(iv) Cheque received from JS on 27 February 2021 is deposited into bank but cleared in
March 2021.
(v) A debit for Rs. 10,000 is appearing in the bank statement for bank charges.
(vi) Other assets and liabilities as at 1 February 2021 are as under:

Rs. in '000
Fixed assets - net (Cost of Rs. 1,500,000) 1,290
Trade debtors 1,320
Inventory 2,400
Accrued rent 500

Required:
Prepare trial balance for the month ended 28 February 2021. (Preparation of ledger accounts is
not necessary) (15)
 Introduction to Accounting Page 5 of 6

Q.7 Following is the summarized trial balance of Valsafe Traders (VT) for the year ended
31 December 2020:

Debit Credit
-------- Rs. in '000 --------
Property, plant and equipment 32,500
Accumulated depreciation at 31 December 2020 - 8,750
Inventory at 1 January 2020 34,300 -
Trade receivables 36,800 -
Prepayments 780 -
Advances 240 -
Cash and bank balances 5,550 -
Capital - 60,395
Drawings 8,480 -
14% Loan - 17,500
Trade and other payables - 28,740
Revenues - 181,100
Purchases 149,800 -
Selling expenses 12,450 -
Distribution expenses 8,800 -
Administrative expenses 7,460 -
Rent income - 1,125
Interest on bank overdraft 450 -
297,610 297,610

Additional information:
(i) Cost of closing inventory in hand on 31 December 2020 amounted to Rs. 46,300,000.
Physical inventory count revealed that goods costing Rs. 950,000 were returned by a
customer for which no entry has been made. These goods were sold for Rs. 1,300,000
on credit in last week of December 2020. VT determined that these goods are out of
fashion and can be sold at 40% of original selling price.
(ii) During the year, goods having cost and selling price of Rs. 500,000 and Rs 800,000
were withdrawn by the owner for personal use but were not recorded.
(iii) Prepayments represent fire insurance premium amounting to Rs. 480,000 and
Rs. 300,000 paid for office and owner's personal premises respectively. These annual
policies are valid upto 31 March 2021.
(iv) On 1 June 2020, a machine was given at a quarterly rent of Rs. 375,000, receivable in
advance.
(v) Advances represent three months advance salary taken by a salesman on
1 November 2020.
(vi) The loan was acquired on 1 July 2020 and the entire principal along with interest is
repayable on 30 November 2021.
(vii) Depreciation of property, plant and equipment has been incorrectly calculated at 5%
on reducing balance method instead of 10% on straight line method. The incorrect
depreciation has been included in distribution expenses though depreciation should
have been equally divided between selling and administrative expenses.
(viii) A balance of Rs. 320,000 included in trade and other payables needs to be written
back as it is no more payable.
(ix) Cash and bank balances include bank overdraft of Rs. 1,490,000.

Required:
(a) Prepare statement of profit or loss for the year ended 31 December 2020. (10)
(b) Prepare statement of financial position as at 31 December 2020. (10)
 Introduction to Accounting Page 6 of 6

Q.8 Following information has been extracted from the draft financial statements of Lather
Establishment (LE) for the year ended 31 December 2020:

Statement of profit or loss

Rs. in '000
Revenue 3,500
Cost of sales (2,000)
Gross profit 1,500
Administrative expenses (800)
Selling expenses (550)
Operating profit 150
Other expenses (60)
Other income 200
Net profit 290

Summarised financial position

Rs. in '000
Total assets (including balance of suspense Rs. 132,000) 8,000
Total liabilities (3,000)
Net assets / equity 5,000

During the review following matters were identified:

(i) Inventory costing Rs. 440,000 received on 30 December 2020 were included in the
closing inventory. The invoice for the same was not received till year end.
(ii) Selling expenses include freight-in of Rs. 200,000. 75% of the freight relates to goods
sold and remaining relates to inventories in hand.
(iii) A selling expense amounting to Rs. 35,000 has been posted in the other expenses
account as Rs. 53,000.
(iv) Sales include an amount of Rs. 145,000 received from a customer on
20 December 2020. Goods were dispatched on 6 January 2021.
(v) Payment of office rent expense amounting to Rs. 120,000 was recorded as a credit
entry in the cash book and also credited to rent income account.
(vi) A purchase of Rs. 352,000 was entered in the purchase day book as Rs. 325,000 and
posted to the creditor’s account as Rs. 235,000.
(vii) Rent payable for owner’s residence amounting to Rs. 250,000 was recorded as
accrued office rent.
(viii) Laptop costing Rs. 120,000 purchased on 1 January 2019 was sold on 1 October 2020
for Rs. 65,000 to a supplier with agreement that supplier’s outstanding balance will be
adjusted against the sale proceed. No entry was posted for disposal. Depreciation
expense was recorded on the laptop for full year and included in administrative
expenses. LE has a policy of depreciating laptop at straight line method over a useful
life of 3 years.

LE uses periodic inventory method to record the inventory. Control accounts are not
maintained for debtors and creditors.

Required:
Prepare corrected statement of profit or loss for the year ended 31 December 2020. Also
determine the correct amounts of total assets and total liabilities as at that date. (17)

(THE END)