Certificate in Accounting and Finance Stage

Examinations
Rise February 14, 2022
School of 3 hours – 100 marks
Accountancy Additional reading time – 15 minutes

Financial Accounting and Reporting-II

MOCK PAPER
Section A
Question- 1
On 1 January 2015, French Limited (FL) entered into following transactions:
Quantity Face value Purchase Transaction Coupon Effective Market
In per /Issue cost in Rs. Rate rate rate of
thousand debenture/ price (including (Interest similar
share in Rs. 20% internal in security
admin cost) arrears)
Purchased 12 1,000 At 103,200 12% 13.67% 13%
debentures in discount
company A of 40%
Purchased 15 100 At 108,000 N/A N/A N/A
equity premium
investments in of 20%
company B
Issued 8 500 At 144,000 10% 14.56% 9%
debentures to premium
Company M of 30%
- Investments in Debentures of company A is held to collect contractual cash flows and to
sell it if a better opportunity arises. At initial recognition it is not designated at FVTPL.
- Investments in shares of company B is held for long term purposes to earn dividend. (An
irrevocable election is made at initial recognition to use alternative treatment)
- Debentures issued by us are to be kept at amortised cost.
- Fair values are as follows:
Fair value per debenture/share in Rs. 31 December 2015 31 December 2016
Company A debentures 1,200 800
Company B shares 105 97
Debentures issued by us 600 632
Required: Pass journal entries for the year ended 31 December 2016. (10)

Question- 2
Almira Ltd has investments in three companies, Fauji Ltd, Pink Ltd and Taco Ltd. A draft
consolidated statement of financial position as at 31 March 2014 has been prepared by an interim
manager, a Chartered Accountant, who has little recent experience of consolidation. Goodwill was
not calculated for any acquisitions and ‘Investments’ consists of the purchase consideration for all
three acquisitions. Figures for Taco Ltd were not available at the date the manager prepared the
financial statements, therefore Taco Ltd was excluded from the draft consolidation (Fauji Ltd’s
figures were included). The only figure included for Pink Ltd in the draft consolidation is the
acquisition cost.
Mr. Zeeshan, the financial controller, who is also a Chartered Accountant, is concerned that
impairments in relation to all three investments have been identified. Zeeshan was involved in the
investment decisions and is reluctant to show the impact of impairment in financial statements.
Required: Briefly explain how interim manager and Zeeshan may be in breach of the fundamental
principles of ICAP’s code of ethics. (4)

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Question-3
Delta is a farming entity specializing in milk production. Cows are milked on a daily basis. Milk is
kept in cold storage immediately after milking and sold to retail distributors on a weekly basis.
1. On 1 April 20X4, Delta had a herd of 500 cows which were all three years old.
2. During the year, some of the cows became sick and on 30 September 20X4 20 cows died. On
1 October 20X4, Delta purchased 20 replacement cows at the market for Rs. 2,100 each.
These 20 cows were all one year old when they were purchased.
Information relating to fair value is given below:
Date Fair value of a dairy cow
1 year old 1½ years old 3 years old 4 years old
Rs. Rs. Rs. Rs.
1 April 20X4 2,000 2,200 2,700 2,500
1 October 20X4 2,100 2,300 2,800 2,600
31 March 20X5 2,150 2,350 2,900 2,650
Information relating to costs to buy and cost to sell is given below:
Cost to buy Cost to sell
Transportation cost 1% of fair value 2.5% of fair value
Commission to broker 5% of fair value 4% of fair value
Transfer duties 2% of fair value 3% of fair value
Finance cost Rs. 2,500 on buying 200 cows -
Required: Prepare journal entries for year ended 31 March 20X5. (8)

Question-4
You are the Finance Manager of Action Limited (AL). Your assistant is preparing financial
statements of AL for year ended 31.12.2019. He has brought following matters for you:
a) At a board meeting on 1 September 2019, AL directors made the decision to close down one
of its factories at start of next year. A formal plan was formulated. There are 250 employees
in factory. Customers and suppliers were informed of the closure at this date.
The directors of AL have provided the following information:
1. Fifty of the employees would be retrained and deployed to other subsidiaries within the
group at a cost of Rs. 125,000; the remainder will accept redundancy and will be paid an
average of Rs. 5,000 each.
2. The company has rented a number of machines under operating leases which have an
average of three years to run after 31 December 2019. The present value of these future
lease payments (rentals) at 31 December 2019 was Rs. 600,000; however, the lessor has
said they will accept 350,000 for their cancellation as at 31 December 2019.
3. Penalty payments due to non-completion of supply contracts are estimated at Rs.
200,000.
b) A provision of Rs. 400,000 is included in financial statements in relation to a claim for
wrongful dismissal of a former director in April 2018. The case is due to come to court
shortly after the AGM. Action Ltd’s lawyers believe that the former director has a strong
case and that the claim is likely to be settled in his favour. You have established that the
probabilities of given levels of damages payable are:
Damages payable Probability
None 10%
Rs. 550,000 60%
Rs. 750,000 20%
Rs. 1,000,000 10%
The provision of Rs. 400,000 made at 31 December 2018 was based on the information
available at that date. Assistant has yet not adjusted the provision because the lawyers
cannot be certain at what amount the claim will be settled.
Required: Discuss how the above issues should be dealt with in the financial statements of WL
for the year ended 31 December 2019. Support you answer in the context of relevant IFRSs.
(8)

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Question-5
Select/write down the most appropriate answer:
1. A US company has paid up capital equivalent of Rs. 500 million, turnover of Rs. 990 million
and 825 employees. How it shall be classified according to Companies Act, 2017?
(a) Pubic Interest Company
(b) Large Sized Company
(c) Medium Sized Company
(d) Small Sized Company
(1)

2. Enok LLP, a fuel exporting company incorporated in United Arab Emirates, is an associated
company of Pakistan Refinery Limited (an unlisted public company) incorporated in Pakistan.
Which of the following should be separately disclosed in respect of Enok LLP in Financial
Statements of Pakistan Refinery Limited as per the requirements of Companies Act 2017?
(a) Name
(b) Country of incorporation
(c) Registered address
(d) Aggregate percentage of shareholding
(1)

3. Which of the following would not be included within the initial measurement of lease
liability?
(a) Payments made to the lessor before commencement of the lease
(b) Initial direct cost borne by lessor
(c) Guaranteed residual value
(d) Unguaranteed residual value
(1)
4. How does IFRS 9 Financial Instruments require investments in debentures to be measured
and accounted for which only satisfy the business model test but do not pass Cash flow
characteristics test?
(a) Fair value with changes going through profit or loss
(b) Fair value with changes going through other comprehensive income
(c) Amortised cost with changes going through profit or loss
(d) Amortised cost with changes going through other comprehensive income
(1)

5. In arriving at its profit before tax for the year ended 31 December 2017, the Rumal Company
has accrued royalties receivable of Rs. 200,000 and interest payable of Rs. 250,000. Both
royalties and interest are dealt with on a cash basis in tax computations.
What are Rumal’s net temporary differences at 31 December 2017, according to IAS 12
Income taxes?
(2)

6. On 1 July 2019, TL acquired an investment property for Rs. 100 million. The fair value
of property as on 31 December 2019 was Rs. 115 million. TL follows fair value model
for accounting purposes. Tax authorities allow depreciation at 10% per annum. Further,
full year’s tax depreciation is allowed in the year of purchase. What amounts will be
added or deducted in current tax working? (1)
7. The directors of Hudson wish to recognise a material deferred tax asset in relation to Rs. 250
million of unused trading losses which have occurred in 20X2. Hudson has budgeted profits for
Rs. 80 million for the year ended 31 December 20X3. The directors have forecast that profits will
grow by 20% each year. For how much amont of loss can deferred tax be created at 31 December
20X2. (1)

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Section B

Question-6
You are the Finance Manager of Dirham Limited (DL) which is involved in multiple businesses.
Your assistant has prepared draft financial statements of DL for the year ended 31 December 2018.
(i) The following extract is from the trial balance of DL at 31 December 2018.
-----Rs. in million----
Dr Cr
Revenue 175
Cost of sales 75
Operating expenses 36
Investment income 12
Fair value loss on investments classified under FVTOCI 11
Fair value gain on investment properties held under fair value model 3
(ii) Following adjustments need to be incorporated:
1. Animals born on 1 July 17 and 1 Jan 18 were not recorded in financials. Gain is to be
recorded in other income as it is not entity’s main source of income. Details of fair value less
cost to sell is as below:
Date Description Rs. in Date Description Rs. in
million million
01/07/17 New born animals 20 01/01/18 New born animals 25
31/12/17 0.5 year old 30 31/12/18 1 year old animals born 28
animals born on on 1/1/18
1/7/17
31/12/18 1.5 year old animals born 35
on 1/7/17
2. During 2018, it was discovered that inventory at 31 December 2017 was overstated by Rs. 50
million.
3. DL is being sued for Rs. 20 million for breach of contract in 2018. There is 20% chance that
DL will lose the case. Accordingly, DL has recorded provision Rs. 4 million in respect of the
claim. The unrecoverable legal costs of defending the action are estimated at Rs. 1 million.
These have not been provided for as the legal action will not go to court until next year.
4. DL sold goods to an overseas customer on 1 December 2018 for 2 million Kromits (Kr). No
entries have yet been made to record this sale. The amount remains unpaid at 31 December
2018. Relevant exchange rates are:
1 December 2018 Kr 1 : Rs. 6·0 31 December 2018 Kr 1 : Rs. 6·4
5. DL acquired Rs. 9 million 5% bonds at par value on 1 January 2018 to be classified under
amortized cost model. The interest is receivable on 31 December each year. DL incurred Rs.
0·4 million broker fees when acquiring the bonds, which has been expensed to operating
expenses. These bonds are repayable at a premium so have an effective rate of 8%. DL has
recorded the interest received on 31 December 2018 in investment income.
6. On 31 December 2018, DL revalued its head office for the first time, resulting in an increase
in value of Rs. 12 million which is not incorporated.

Required:
Prepare a statement of profit or loss and other comprehensive income for the year ended 31
December 2018. (Ignore tax) (comparatives are not required) (14)

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Question-7
Marmalade Limited (ML) is a manufacturer of Industrial machines. During 2020, ML launched a
new machine with model name Alpha. Each unit of Alpha is being sold for Rs. 10 million.
Sales of Alpha have remained below expectation so far. The following were the contracts entered into
with various customers:

Customer A
On 12 May 2020 ML received 20% non-refundable advance payment and made a contract to deliver
Alpha on 30 November 2020 however on 30 June 2020 customer cancelled the contract.

Customer B
ML sold 5 units of Alpha at Rs. 10 million. However after delivery of 3 units contract was amended
to include the delivery of one machine Gamma also at a consideration of Rs. 7 million. The stand-
alone selling price of Gamma is the same as that of Alpha.

Customer C
Sold 2 units of Alpha and the customer is provided with an option to purchase another unit of Alpha
within 12 months at a material discount of 25%. ML estimates a 40% likelihood of the customer
availing the option.

Customer D
The customer is given an option to get a customized version of Alpha for Rs. 13 million. The
manufacturing of customized Alpha might take an average of 2 years. The entity has no alternative
use of this unit of Alpha and has no right to payment for performance completed to date. The
commission paid to sales employees on winning contract is Rs. 200,000 and expected cost to fulfill
contract are Rs. 11 million. The machine is 20% complete at year end.

Customer E
The customer is given an option to get a customized version of Alpha for Rs. 13 million. The
manufacturing of customized Alpha might take an average of 2 years. The entity has no alternative
use of this unit of Alpha and has right to payment for performance completed to date. The
commission paid to sales employees on winning contract is Rs. 200,000 and expected cost to fulfill
contract are Rs. 11 million. The machine is 20% complete at year end.

Customer F
ML promises to deliver Alpha and Beta for 15 million payable up-front (1 January 2020). Alpha will
be delivered after two years and Beta after five years. ML allocates the 15 million to Alpha and Beta
at an amount of 10 million and 5 million respectively – i.e., based on their relative stand-alone selling
prices.
ML concludes that a financing rate of 10% is appropriate based on ML’s credit-standing at contract
inception.

Customer G
ML would deliver Alpha at mid of year however unconditional right to receive money is established
on signing of contract at the start of year. At contract inception, entity feels that it may not be able to
collect the full amount from the customer and estimates that it may collect 80% of the consideration.

Required: Discuss the recognition and amount of revenue under each of the above contracts with
customers assuming year end is 31 December 2020. Compute the amount of revenue, wherever
possible.

(15)

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Question-8
Following are Extracts from the draft financial statements of three companies Tiger Ltd (TL), Panther
Ltd (PL) and Leopard Ltd (LL) for the year ended 30 June 2020:
STATEMENT OF COMPREHENSIVE INCOME
TL PL LL
---------------------- Rs. in million ----------------------
Revenue 5,000 3,000 1,000
Cost of sales (2,900) (2,000) (820)
Gross profit 2,100 1,000 180
Operating expenses (500) (550) (113)
Other income 200 - 50
Finance cost - (50) -
Profit before taxation 1,800 400 117
Income tax expense (540) (120) (37)
Profit for the year 1,260 280 80

STATEMENT OF CHANGES IN EQUITY

Share Capital of Rs. 10 each Retained Earnings
TL PL LL TL PL LL
---------------------- Rs. in million ----------------------
As on 1 July 2019 5,000 1,000 500 890 595 175
Dividend - - (300) (200)
Profit for the year – 2020 - - - 1,260 280 80
As on 30 June 2020 5,000 1,000 500 1,850 675 255

STATEMENT OF FINACIAL POSITION (EXTRACTS)

TL PL LL
---------------------- Rs. in million ----------------------
Current assets 4,000 2,500 1,500
Current liabilities 2,000 1,500 850
Additional information:
1) On 1 July 2019, TL acquired 60% shares in PL for an immediate cash payment and will issue
its 30 million shares after two years of acquisition. Total cash paid is Rs. 870 million out of
which Rs. 20 million relates to professional fee which is included in cost of investment. No
accounting has been done for shares issuance.
The market share price of TL and PL on 1 July 2019 were Rs. 16.50 and Rs. 11.50 respectively
which subsequently increased to Rs. 18 and Rs. 12 per share at 1 January 2020.
2) PL received a Rs. 50 million 8% long term loan from TL at the date of its acquisition. Interest is
payable per annum at start of next year.
3) At acquisition date, there was no difference in carrying value and fair value of PL’s net assets
except:
a) Fair value of PL’s inventory exceeded carrying value by Rs. 25 million. It was sold before
year end.
b) PL financial statements disclosed a contingent liability of Rs. 10 million however its fair
value at acquisition date was Rs. 4 million. Subsequently at year end, PL’s lawyers
estimated that there is 80% chance of losing the case thus PL recorded the provision of Rs.
9 million in its books.
4) On 1 January 2020, TL acquired 15 million shares in LL by share exchange of 1 share of TL for
every 2 shares of LL. This transaction has not yet been recorded in TL’s financial statements.
5) During the year, PL sold goods costing Rs. 350 million to TL for Rs 500 million. Rs.160
million of these goods were held by TL on 30 June 2020. Payment for the full invoice value is
outstanding at the year end.

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6) TL supplies a component to LL at cost plus a mark-up of 20%. At 30 June 2020, the inventories
of LL included Rs. 1.5 million in respect of this component. Balance outstanding in respect of
these goods at year end is Rs. 0.7 million.
7) TL started providing a management service to PL from 1 February 2020 at an annual fee of Rs.
24 million payable annually in arrears. No accrual has been booked by PL. TL has credited the
income in sales.
8) TL declared final dividends for the year ended June 30, 2019 on 30 September 2019. PL
declared an interim dividend on 28 June 2020 which is yet not paid at year end but was
properly recorded by TL and PL.
9) Due to seasonal nature of business, LL earns 40% of its profits in first quarter of the financial
year.
10) Group policy is to measure non-controlling interests at acquisition date fair value.
Required:
a) Prepare a Consolidated Statement of Comprehensive Income (SOCI) for the year ended 30
June 2020.
b) Prepare relevant extracts from Statement of financial position as on 30 June 2020 showing
consolidated retained earnings, Non-controlling interest, Investment in associate, Goodwill,
Current assets, Current liabilities and Purchased consideration payable.
(20)
Question-9
For year ended 31 December 2022 X Company has entered into following lease transactions as a
lessee:

Machine A 1. Lease commenced on 1 October 2022

leased from 2. The lease term is 4 years with semi annual rental of Rs. 50,000 payable
MCB Bank in arrears.
3. The lease contains an option to extend the lease term by 1.5 years with
semi annual rental of Rs. 2,000 only.
4. Interest rate implicit in the lease is 10.9%. Lessee incremental borrowing
rate is 12%.
5. The residual value of the machine at the end of 5.5 years is estimated at
Rs. 6,000 out of which lessee has guaranteed Rs.2,200.
6. Fee paid to lawyer is Rs. 1,500.
Machine B 1. Lease commenced on 1 September 2022
from SILK 2. The lease term is 9 months with quarterly rental of Rs. 10,000 payable in
bank arrears.
3. Interest rate implicit in the lease is 12%.
4. The entity has elected to record right of use asset.
5. Fee paid to lawyer is Rs. 600.
Machine C 1. Lease commenced on 1 January 2022
from NBP 2. Fair value of asset is Rs. 900,000
3. The lease term is 15 years with annual rental paid in arrears.
4. Initial direct cost paid by lessor is 10,000 and lessee has reimbursed 20%.
5. Interest rate implicit in the lease is 13%.
6. GRV and UGRV at end of lease is Rs. 30,000 and Rs. 50,000.
Car 1. Lease commenced on 1 September 2022
2. The lease term is 9 years with annual rental of Rs. 100,000 payable in
arrears.
3. The lessor can substitute the car at any time in these 9 years.
4. Discount rate is 8%.

Required:
Prepare journal entries for the year ended 31 December 2022 in the books of X Co. (13)

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