Certificate in Accounting and Finance Stage Examination

The Institute of 15 March 2022

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

Financial Accounting and Reporting-I

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

Section A

Q.1 Bulan Pakistan Limited (BPL) is planning to commence construction of a warehouse on

1 January 2023 and is expecting to complete it by 30 November 2023. The management
wants to ascertain the borrowing costs that can be included in the cost of warehouse.
Relevant details in this respect are as follows:

(i) Expected payments related to the construction of the warehouse will be as follows:

Description Date of payment Rs. in million

1st bill of contractor 1-Feb-23 40
2nd bill of contractor 1-Apr-23 120
3rd bill of contractor 1-Sep-23 100
Last bill of contractor 1-Dec-23 90
350

(ii) The project can be financed through the following sources:

 Specific loan of Rs. 350 million at the rate of 16% per annum to be obtained on
1 January 2023. The principal will be payable in 5 equal annual instalments along
with interest, from 1 January 2024.
 Withdrawals to be made from existing running finance facilities. These facilities
will also be used to finance other needs of BPL. Details of these facilities are as
follows:

Expected average
Limit
Name of bank balance for 2023 Interest rates
------ Rs. in million ------
Bank A 300 220 13.7%
Bank B 350 280 14.6%

(iii) The surplus funds available from the loan will be invested in a saving account at
10% per annum.
(iv) The construction work is expected to be suspended for the entire month of June 2023
due to usual monsoon rains.

Required:
Calculate the borrowing costs to be capitalised in the cost of warehouse in each of the
following independent cases:
(a) if all the payments will be made from the specific loan only. (04)
(b) if all the payments will be made from running finance facilities only. (04)
 Financial Accounting and Reporting-I Page 2 of 6

Q.2 Following information pertains to Dahl Limited (DL):

Summarised statement of financial position as at 31 December 2021

2021 2020 2021 2020
Rs. in million Rs. in million
Share capital 11.0 10.0 Property, plant and equipment 18.7 10.6
Retained earnings 32.9 33.8 Working capital other than cash 24.5 17.8
Revaluation surplus 4.0 - Cash 4.7 15.4
47.9 43.8 47.9 43.8

Additional information:
(i) Final dividend was paid in respect of year 2020 amounting to Rs. 3.4 million.
(ii) Additions to property, plant and equipment during the year amounted to
Rs. 14 million.
(iii) Tax expense for the year amounted to Rs. 2.4 million. Tax payable as at
31 December 2021 amounted to Rs. 1 million (2020: Rs. 0.2 million)

Required:
Prepare DL’s statement of cash flows for the year ended 31 December 2021. (08)

Q.3 Following is the trial balance of Mahtab Welfare Hospital (MWH) as on 31 December 2021:

Debit Credit
---- Rs. in million ----
Capital work in progress – hospital building 335
Cash at bank 60
Closing inventory – medicines and supplies 14
Contributions received 281
General fund as at 1 January 2021 332
Medical equipment 320 100
Medicines and supplies used 76
Other expenditures 19
Payables 17
Research cost 33
Restricted fund as at 1 January 2021 180
Salaries 53
Total 910 910

Additional information:
(i) The break-up of restricted fund balance is as follows:

Fund Description Rs. in million

Hospital building Contributions received for the construction of
120
fund hospital building.
As per the resolution of board of trustees,
Research fund MWH is required to allocate 20% of surplus 60
of each year to the research fund.

(ii) Contributions received include Rs. 55 million received for construction of hospital.
(iii) During the year, MWH also received construction materials having fair value of
Rs. 65 million for the hospital building which has not been recorded in books.
(iv) MWH has completed the construction of hospital building on 1 April 2021.
(v) Depreciation is to be charged as follows:
Hospital building 5% – straight line
Other fixed assets 10% – reducing balance
 Financial Accounting and Reporting-I Page 3 of 6

Required:
Prepare the following using deferral method:
(a) Statement of income and expenditure for the year ended 31 December 2021 (04)
(b) Statement of financial position as at 31 December 2021 (06)

Q.4 Both IAS 16 ‘Property, Plant and Equipment’ and IAS 40 ‘Investment Property’ deal with
tangible non-current assets of an entity. Discuss any four differences between IAS 16 and
IAS 40. (06)

Q.5 The trial balance of Moon Mart (MM) did not agree as at 31 December 2021 and the
shortage of Rs. 215,000 on the debit side was carried to suspense account. The financial
statements prepared from the trial balance showed net profit of Rs. 1,431,000.

During review, following matters were noted:

(i) A return outward of Rs. 18,000 was posted to the debit of return inward account in
general ledger.
(ii) A sales invoice of Rs. 42,000 was posted twice in sales ledger.
(iii) Balance of accumulated depreciation of equipment was brought forward as
Rs. 641,000 instead of Rs. 461,000 on 1 January 2021.
(iv) Following entries in cash book were not posted to general ledger:
 Receipt of annual rent for the period ending 31 March 2022 amounting to
Rs. 336,000.
 Payment of Rs. 220,000 for equipment purchased on 1 May 2021.
 Cash purchases of Rs. 50,000.

Additional information:
(i) After passing all the adjustments, the remaining amount of suspense account is to be
considered as loss from embezzlement.
(ii) MM uses periodic inventory method. Control accounts are not maintained for trade
receivables and payables. Equipment are depreciated at 15% using reducing balance
method.

Required:
(a) Prepare suspense account. (04)
(b) Compute the corrected net profit. (04)

Q.6 Select the most appropriate answer(s) from the options available for each of the following
Multiple Choice Questions.

(i) A plant has a carrying amount of Rs. 3.3 million as at 31 December 2021. Its fair value
is Rs. 2.4 million and costs of disposal are estimated at Rs. 0.1 million. Cash flows
from the plant for the next 4 years are estimated at Rs. 0.7 million per annum. It will
be disposed of at the end of the 4th year for Rs. 0.6 million. Applicable discount rate is
10% per annum.

What is the approximate impairment loss on the plant to be recognized in the financial
statements for the year ended 31 December 2021?
(a) Rs. 1 million (b) Rs. 2.6 million
(c) Rs. 0.7 million (d) Rs. 1.1 million (02)

(ii) The forgivable loan from government is accounted for as _______________ if there is
no reasonable assurance that the entity will meet the terms for forgiveness of loan.
(a) a liability (b) an income
(c) a government assistance (d) a government grant (01)
 Financial Accounting and Reporting-I Page 4 of 6

(iii) Which of the following statements is/are correct?

(I) Cash flows information cannot be manipulated easily, as compared to profit or

loss because it is not affected by different accounting policies.
(II) Cash flows information can be manipulated easily, as compared to profit or loss
because it is affected by different accounting estimates.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)

(iv) On 1 January 2019, a company purchased an asset for Rs. 5 million against which it
received the government grant of Rs. 0.5 million. The company deducted the grant
from the cost of asset. It is the policy of the company to depreciate such assets using
straight line method over ten years. On 1 January 2021, the government grant became
repayable due to non-fulfilment of conditions. Repayment of grant will result in
increasing:
(a) carrying value by Rs. 0.5 million (b) carrying value by Rs. 0.4 million
(c) expense by Rs. 0.4 million (d) expense by Rs. 0.5 million (02)

(v) As per IAS 20 ‘Accounting for Government Grants and Disclosure of Government
Assistance’, presenting the whole grant as other income in the statement of
comprehensive income or deducting it from a related expense, is the correct treatment
of:
(a) grant related to income
(b) forgivable loan expected to be received in next year
(c) government assistance in the form of free technical advice
(d) grant related to assets (01)

(vi) Which of the following statements is/are correct?

(I) The Conceptual Framework is not an IFRS and nothing in the Conceptual
Framework overrides any specific IFRS.
(II) One of the purpose of Conceptual Framework is to assist IASB to develop IFRSs
that are based on consistent concepts.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)

(vii) Which of the following may be presented in both statement of comprehensive income
and statement of cash flows?
(a) Purchase of non-current assets (b) Issuance of shares
(c) Repayment of loan (d) Depreciation (01)

(viii) Which TWO of the following are internal sources of assessing whether there is an
indication of impairment?
(a) An expected decline in the asset’s market value
(b) An increase in interest rates
(c) Evidence that the asset is damaged
(d) Evidence that the entity’s performance is worse than expected (01)
 Financial Accounting and Reporting-I Page 5 of 6

Section B

Q.7 Qamar Limited (QL) is in the business of consumer goods. Following are the summarized
financial statements of QL for 2021:

Statement of financial position as at 31 December 2021

Assets Rs. in million Equity and liabilities Rs. in million
Fixed assets 550 Share capital 600
Retained earnings 319
Current assets: Long-term loan 350
Inventory 440 Current liabilities:
Trade debtors 350 Trade creditors 150
Short term investment 160 Other payables 70
Cash and bank balances 39 Current maturity of loan 50
1,539 1,539

Statement of profit or loss for the year ended 31 December 2021

Rs. in million
Sales 2,150
Cost of goods sold (1,900)
Gross profit 250
Selling and administrative expenses (93)
Other income 40
Finance cost (35)
Net profit 162

Extracts from management reports submitted to the board of directors:

(i) Ratios for the year 2020:

Gross profit margin 9.5% Net profit margin 3.9%

Interest cover 2.4 times Inventory holding period 90.4 days
Return on non-current assets 16.8% Debtors turnover 7.3 times
Creditor payment period 55.1 days Acid test 0.9 times

(ii) Important financial and operating decisions taken during the year 2021:
 QL renewed a large contract with a customer. In the renewed contract, extended
credit terms were given to the customer.
 A major supplier agreed to reduce the prices by 10% on the condition of cash
purchases only. This reduction helped QL to avoid increase in prices of its
products despite increase in prices by competitors.
 Increasing working capital demands were met by making a share issue. A part of
the proceeds from the issue were also used to prepay a significant portion of the
long term loan.
 QL disposed of its main warehouse in the last month of the year at a gain of
Rs. 25 million. The sale proceeds are temporarily invested in a short term
investment.

Required:
(a) Compute QL’s ratios for 2021 for comparison with 2020. (06)
(b) Keeping in view the financial and operating decisions extracted from management
reports, provide reasons for variation in the ratios computed in (a) above. (09)
 Financial Accounting and Reporting-I Page 6 of 6

Q.8 Chand Limited (CL) was incorporated on 1 January 2020 with an authorized share capital of
Rs. 500 million comprising of 50 million shares.
(i) Details of shares issued are as follows:
 On 1 March 2020, CL issued 20 million shares at Rs. 18 each.
 On 1 October 2020, CL issued 15% bonus shares. The market price per share
immediately before the announcement of bonus was Rs. 24 per share.
 On 1 September 2021, CL issued 40% right shares at a premium of
Rs. 12.5 per share. The market price per share immediately before the entitlement
date was Rs. 33 per share.
(ii) Following information has been extracted from CL’s draft financial statements:
2021 2020
Draft Audited
--- Rs. in million ---
Net profit 66 48
Revaluation surplus arising during the year - 20
Transfer of incremental depreciation 4 -

Final cash dividend - 10%

(iii) After the preparation of draft financial statements for the year ended
31 December 2021, it was discovered that installation cost of Rs. 12 million relating to
a plant capitalized on 1 August 2020 was wrongly expensed out. The plant is
subsequently measured using cost model and is being depreciated @ 20% per annum
on reducing balance method.

Required:
(a) Prepare CL’s statement of changes in equity for the year ended 31 December 2021
along with comparative figures. (Column for total is not required) (09)
(b) Compute CL’s basic and diluted earnings per share to be disclosed in the statement of
profit or loss for the years ended 31 December 2021 and 2020. (08)

Q.9 Following information pertains to property, plant and equipment of Tsuki Limited (TL):
Office building Warehouse
Acquisition:
 Date of acquisition 1 July 2017 1 July 2018
 Cost (Rs. in million) 96 156
 Estimated useful life (in years) 16 12
Revalued amount:
 1 January 2019 (Rs. in million) 116 138
 1 January 2021 (Rs. in million) 80 143
Revised useful life on 1 January 2020 (in years) 9 14
Additional information:
(i) TL uses revaluation model for subsequent measurement and accounts for revaluation
on net replacement value method.
(ii) TL transfers maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iii) The revalued amounts were determined by Sagheer Valuers (Private) Limited, an
independent valuation company.

Required:
In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ (including
comparative information) for inclusion in TL’s financial statements for the year ended
31 December 2021. (Column for total is not required) (18)
(THE END)