FINANCIAL ACCOUNTING & CORPORATE REPORTING

LONG QUESTIONS

Q1: E Limited signed a contract leasing a vehicle to excellent limited. Following are the details of terms
of lease contract:

 The lease commenced on January 1, 2019 for a period of four years.

 Rs. 500,000 are payable in arrears in respect of lease payments.
 There is no option of renewal of the lease agreement and its purchase.
 The interest rate in the lease is 10%.
 The fair value of the vehicle amounted to Rs. 1585,000 on January 1, 2019 and the useful life is
estimated to be 5 years.
 The lease does not transfer ownership of the vehicle to Excellent Limited.

Required:

Discuss whether the lease contract should be classified as a finance or operating lease.

Answer:

This transaction would be classified as an operating lease as Excellent Limited does not get to use the
asset for most of/all of the assets useful economic life and therefore it can be argued that they do not
enjoy all the rewards from this asset.

In addition to this, the present value of the minimum lease payments, would be substantially less than
the fair value of the asset.

Also, The lease does not transfer ownership of the vehicle to Excellent Limited.

Q2: On January 1, 2020, Meezan Limited (ML) acquired an oil platform at a cost of Rs. 60 million. The
estimated cost of removing the platform at the end of the asset’s useful life will be Rs. 30 million. The
present value Rs. 1 in 10 years’ time using ML’s cost of capital of 8% of 0.463. If ML makes the
provision what liability will be shown in its statement of financial position as at December 31, 2020?

Answer:

Provision is made for future anticipated losses and expenses, since machine is already acquired, hence
there will be no provision for the cost value.

Provision will be made for future anticipated expense of amount required at end of life for useful life, by
taking present value of future expense as follows:

Provision = 30 million x 0.463 = Rs. 13.89 million

Q3: Amroz Limited (AL), a subsidiary sold goods cost Rs. 10 million to its parent, Faiza Limited (FL) for
Rs. 11 million, and all of these goods were still held in the inventory at the year end of December 31,
2020, FL and AL are resident in the same tax jurisdiction where applicable tax rate is 29%. Explain the
deferred tax implications of the above transaction as per IAS 12.

Answer:

A locally incorporated holding company and subsidiary of a 100% owned group may be taxed as one
group by giving an irrevocable option for taxation as one fiscal unit. The adjustment of losses prior to
the formation of group are not available.

There is no tax on Provision for Unrealized profit (PURP) arising out of intra group transactions as per IAS
12.

Tax = (11,000,000 – 10,000,000) x 0.29 = Rs. 290,000.

Q4: On January 1, 2019, S Limited (SL) had property, plant and equipment with a carrying amount of
Rs. 1080 million. During the year, the company disposed off assets with a carrying amount of Rs. 360
million for Rs. 300 million. The company revalued the building from Rs. 450 million to Rs. 600 million
and charged depreciation for the year of Rs. 120 million. At the end of the year, the carrying amount
of property, plant and equipment was Rs. 1500 million.

Required: What amount would SL report in the statement of cash flows for the year ended December
31, 2019, under the heading “cash flows from investing activities”.

Answer:

Cash flow from investing activities:

PPE

Opening......... 1080 million Disposal.............. 360 million

Revaluation gain..... 150 Depreciation....... 120 million

million

Additions in PPE.... 750

Closing........... 1500 million.
million

Hence there is an outflow of Rs. 750 million as shown in above T-account, ,Moreover, the company sold
asset for sales proceeds of Rs. 300 million, hence net cash flow (outflow) from investing activities is Rs.
450 million.
Q5: On January 1, 2020, AL sold an item of inventory to Allied bank Limited for Rs. 5 million. At this
date the inventory had cost Rs. 2 million to produce but had a fair value of Rs. 9 million which was
expected to increase over the next year 3 years. At the end of year 3, AL have the option to
repurchase the inventory of Rs. 6655,000 at an effective interest rate of 10%. Discuss what items
should be recorded by AL in the statement of profit or loss in respect of the above transaction for the
year ended December 31, 2020.

Answer:

On January 1, 2020, the inventory will be shown at lower of cost or NRV, according to IAS 2, hence it will
be recorded at Rs. 2 million.

Later the fair value was 9 million but NRV was 5 million, hence on the date of sale, the company will
record Profit of Rs. 3 million.

At the end of year 3, the inventory can be bought by paying Rs. 6655,000 whose present value is
calculated as follows:

PV = 6655,000 X (1.10^-3) = Rs. 5 million.

At that point, since it costs 2 million to manufacture and 5 million to purchase, so purchase decision
must be aborted.

Q6: On July 1, 2019, S Limited (SL) acquired a building for Rs. 5 million for investment purposes,
including refundable purchase taxes of Rs. 200,000. The purchase agreement provided for payment to
be made in full on June 30, 2020. Non-refundable property transfer taxes and direct legal cost
amounted to Rs. 25,000 and 180,000, respectively, paid on July 1, 2019, were incurred in acquisition.
The company uses 10% cost of capital (present value factor at 10% is 0.909). What will be the initial
cost of the building?

Answer:

Initial cost of machine:

Acquisition cost = Rs. 5000,000 x 0.909 = Rs. 4545000.

Less: Refundable taxes = Rs. 200,000 x 0.909 = Rs. (181,800)

Add: Non-refundable taxes = Rs. 25000.

Add: Direct legal cost = Rs. 180,000

Initial cost of machine = Rs.4568200.

Q7: During the year 2020, T Limited (TL) was sued by a competitor to Rs. 15 million for infringement of
a trade mark. Based on the advice of the company’s legal counsel. TL accrued the sum of Rs. 10 million
as a provision in its financial statements for the year ended December 31, 2020. Subsequent to the
statement of financial position date on February 15, 2021, the court decided in favor of the party
alleging infringement of the trademark and ordered the defendant to pay the aggrieved party a sum
of Rs. 14 million. The financial statements were prepared by the company’s management on January
31, 2021, and approved by the Board on February 20, 2021.

Required:

Should TL adjust its financial statements for the year ended December, 31, 2021.

Answer:

Yes TL should adjust its financial statements for the year ended December 31, 2021, according to IAS 10
“Events after the Reporting Period”, which states that Events after the reporting period are those
events, favorable and unfavorable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue.

Since, the competitor sued TL in preceding year and the court decision relates to that year, and the
court decided between the end of the reporting period and the date when the financial statements are
authorized for issue, hence it is an “adjusting event”.

Following adjustment is made:

Increase in provision and related expense = 14 million – 10 million = 4 million.

Q8: On January 1, 2019, PL entered into a lease agreement. The initial lease liability amounted to Rs.
3602,000 and a deposit of Rs. 1200,000 was payable on January 1, 2019, with three further
installments of Rs. 1000,000 payable on December 31, 2019, December 31, 2020 and December 31,
2021. The rate of interest implicit in the lease is 12%. What will be the amount of the finance charge
arising from this lease which will be charged to profit or loss for the year ended December 31, 2020?

Answer:

Lease amortization Schedule:

Date Annual rental Interest Principal paid Balance

January 1, 2019 1200,000 0 1200,000 2402,000

December 31, 2019 1000,000 2402,000 x 0.12= 288240 711760 1690,240

December 31, 2020 1000,000 1690,240 x 0.12= 202829 797171 893,069

Total finance cost charged to Profit and Loss is = 288,240 + 202829 = Rs. 491,069

Q9: FL issued Rs. 12 million 6% loan notes on July 1, 2019, incurring issue cost of Rs. 600,000. The loan
notes are redeemable at a premium giving them an effective interest rate of 9%. What expense should
be recorded in relation to loan notes in the financial statements of FL for the year ended June 30,
2020?

Answer:
Loan note expense:

Issue cost = Rs. 600,000.

Interest expense = (12,000,000 – 600,000) x 0.06 = Rs. 684,000

Total expense = 600,000 + 684,000 = 1284,000.

Q10: On January 1, 2021, SL acquired ZL for a cash payment of Rs. 7 million. At the time of purchase,
the fair value of net assets was Rs. 6.2 million. Compute the amount of goodwill acquired by SL.

Answer:

Goodwill = Fair value of net assets at acquisition – Price paid for acquisition.

Goodwill = 7 million – 6.2 million = 0.8 million.

Q11: During the year ended December 31, 2020, RL spent Rs. 600,000 in developing a new product.
Those costs meet the definition of an intangible asset under IAS 38 and have been recognized in the
statement of financial position. Local tax legislation allows these costs to be deducted for tax
purposes when they are incurred. Therefore, they have been recognized as an expense for tax
purposes. At the year end the intangible asset is deemed to be impaired by Rs. 50,000.

Required:

Discuss what will be the tax base of the intangible asset as at December 31, 2020.

Answer:

A tax base is defined as the total value of assets, properties, or income in a certain area or jurisdiction.

Tax base = Asset value – impairment loss

Tax base = 600,000 – 50,000 = Rs. 550,000

Q12: On January 1, 2020, CL borrowed Rs. 10 million from a local bank. What information the
company will present in its Statement of financial position, statement of comprehensive income and
statement of cash flows regarding the borrowing cost for the year ended December 31, 2020?

Answer:

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalized. Other
borrowing costs are recognized as an expense.

 Since borrowing cost is capitalized, the capitalization amount of 10 million is shown in statement
of financial position.
  The interest is capitalized if it is qualifying asset otherwise, it is shown in statement of profit or
loss.
 Cash borrowed is inflow shown as Rs. 10 million inflow in financing activities of cash flow
statement.

Q13: On January 1, 2020 RL entered into an agreement to lease a plant. The terms of the lease are as
follow:

Lease payment amounted to Rs. 320,000 are payable

annually on December 31st each year.

The present value of the lease payment is Rs. 913,600.

The interest rate implicit in the lease is 15%.

Required:

What amount of finance cost would be reported on the statement of profit or loss of RL for the year
ended December 31,2020.

Answer:

Finance cost = 913,600 x 0.15 = Rs. 137,040

Q14: NL has only two items of inventory on hand as at December 31, 2020:

Item 1: Materials costing Rs. 2400,000 bought for processing and assembly for a customer under a
one-off order which is expected to produce a high profit margin. Since buying this material, the cost
price has fallen to Rs. 2000,000.

Item 2: A machine constructed for another customer for a contracted price of Rs. 3600,000. This has
recently been completed at a cost of Rs. 3360,000. It has now been discovered that in order to meet
certain health and safety regulation modification at an extra cost of Rs. 840,000 will be required. The
customer has agreed to meet half of the extra cost.

Required:

Calculate the total value of these two items of inventory as at December 31, 2020.

Answer:

As per IAS 2, “Inventory”, the inventory is hown at lower of cost or NRV.

Item 1 has cost of Rs. 2400,000, while its Net realizable value (Fair value less cost to sell) is Rs. 2000,000.
Hence, Its value is Rs. 2000,000.

Item 2 has cost of construction and necessary expenditure amounting to Rs. 3360,000 + Rs. 840,000 =
Rs. 4200,000, while customer is willing to pay contract price plus half of extra charges that amounts to
Rs. 3600,000 + 0.50 x Rs. 840,000 = 4020,000 , Hence NRV is less than cost, so it will be shown at NRV of
Rs. 4020,000.

Q15: CL had the following balances in its statement of financial position as at December 31, 2019 and
2020.

2020 2019

Rupees

Share capital 255,000 225,000

Share premium 157,500 142,500

10% Debenture 255,000 285,000

Required:

Calculate the amount that will be reported in the statement of cash flows of CL for the year ended
December 31, 2020, under the heading, “Cash flows from financing Activities”.

Answer:

Cash flow from financing Activities: Amount in “Rs.”

Increase in Share Capital.................................................................................. 30,000

Increase in share premium............................................................................... 15000.

Payment of Debentures.................................................................................... (30,000)

Net cash flow (inflows) from financing Activities 15000.

Q16: FL is engaged in selling fire houses to fire fighters. FL discovered that a part of its hoses were
defective and failed when fire fighters were using them to extinguish fires. FL has a warranty policy
against defective hoses and it anticipates that thousands of hoses will return to the company. FL has
determined that it needs to recognize a provision relating to the faulty fire hoses they sold.
Management has assembled the following data:

Fire hoses sold 100,000

Hoses anticipated to have no defects 75%

Hoses anticipated to have minor defects 15%

Hoses anticipated to have major defects 10%

Required:

Determine how FL will record the provision relating to the faulty fire hoses as at December 31, 2020.
Answer:

Provision relating to faulty fire hoses = [100,000 x 0.15] + [100,000 x 0.10]

Provision relating to faulty fire hoses = Rs. 25,000.

Q17: ALT acquired a bus license in exchange for Rs. 200,000 cash and a taxi license with a carrying
amount of Rs. 950,000 (cost Rs. 1250,000). In this case management believes that the exchange lacks
commercial substance and the fair value of neither the asset received nor the asset given up cannot
be reliably measured.

Required:

Show how the above transaction will be recorded in the books of ALT.

Answer:

If the asset lacks commercial substance, then its fair value cannot be reliably measures and it will be
shown at carrying value. Hence the intangible asset will be shown at exchange value of Rs. 200,000 plus
the book value of license exchanged that is, Rs. 950,000. Bus license will be Rs. 1150,000.

Q18: On July 5, 2020, TL received a contract to print large number of magazines in the month of
August 2020. The customer has not defined the number of copies to be printed. On July 12, 2020, the
company received Rs. 80,000 deposit that will be set-off against the contract price but is non-
refundable in the event that the contract is cancelled. The contract is cancelled on August 30, 2020.

Required:

Discuss how TL would account for the above transaction.

Answer:

At July 12, 2020, TL received cash deposit but the work is yet to be performed hence the transaction is
recorded as unearned revenue as follows:

TL will debit cash Account by Rs. 80,000 and credit unearned client revenue by Rs. 80,000.

ON August 30 2020, the contract was cancelled but the amount was non refundable, hence TL will
record it as revenue earned due to breach of contract as follows:

TL will debit unearned client revenue Account by Rs. 80,000 and credit revenue earned by Rs. 80,000.

Q19: On January 5, 2021, before LL’s financial statements for the year ended December 31, 2020 were
authorized for issue, a fire destroyed the company’s warehouse which was valued at Rs. 10 million.
Inventories on hand with a carrying amount of Rs. 800,000 were also damaged. Destroyed warehouse
will be replaced at Rs. 15 million. LL insure its inventories up to a maximum loss of Rs. 500,000. The
company remains a going concern. Explain how LL would disclose the above event in its financial
statements for the year ended December 31, 2020.

Answer:

LL should adjust its financial statements for the year ended December 31, 2020, according to IAS 10
“Events after the Reporting Period”, which states that Events after the reporting period are those
events, favorable and unfavorable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue.

Since the inventory is destroyed after the reporting period and before the authorization date, hence the
inventory will be revalued according to IAS 2, at lower of cost or NRV after adjusting it for insurance of
Rs. 500,000, (800,000 – 500,000 = Rs. 300,000 loss).

Destroyed warehouse will be shown at 15 million cost and a loss of 10 million will be recorded in
statement of profit or loss.

Since entity is still going concern, the going concern review will be performed and disclosure of going
concern will be shown in notes to the accounts.

Q20: On January 1, 2020 S Limited sold a property having carrying amount of Rs. 6400,000 which had a
remaining useful life of 20 years at its fair value amounted to Rs. 8 million and transfer title of
property to the buyer. The company leased it back under a five year lease, paying Rs. 600,000 per
annum on December 31st each year. The present value of rentals payable was Rs. 2400,000 and the
rate implicit in the lease is 8%.

Required:

What amount would be reported in respect of depreciation, finance cost and profit on disposal in the
statement of profit or loss of SL for the year ended December 31, 2020.

Answer:

Depreciation expense for the year ended December 31, 2020:

= Fair value at disposal / remaining useful life

= Rs. 8000,000/20 years.

= Rs. 400,000.

Profit on disposal at January 1, 2020:

= Fair value at disposal – Carrying value.

= Rs. 8000,000 – Rs. 6400,000

= Rs. 1600,000.

Finance cost for the year ended December 31, 2020:

= present value of lease rentals x rate implicit in lease.

= 2400,000 x 8%.

= Rs. 192,000.

Q1: A company owns a number of nuclear plants. The company is obliged to dismantle one of these
plants in 3 year’s time. The last nuclear plant is dismantled by the company cost Rs. 2 million dismantle,
but the company expects to dismantle this nuclear plant at a reduced cost of Rs. 1.6 million due to
increased experience.

There is also a chance that completely new technology may be available at the time of dismantling,
which could lead to a further cost saving of Rs. 400,000.

Required: Discuss the measurement of the above provision.

Answer:

Q2: On January 1, 2019, IL received a government grant of Rs. 2 million in order to facilitate purchase on
the same day of an asset which cost of Rs. 3 million. The asset has a useful life of five years and is
depreciated on a 25% reducing balance basis. IL has a policy to account for all grants received as
deferred income. What amount of income will be recognized in respect of the grant for the year ended
December 31, 2020?

Answer:
Q3: On July 1, 2019, AL sold out its factory having a carrying value of Rs. 12 million to KL to Rs. 16
million. At this date the factory had a fair value of Rs. 30 million. AL continued to use the factory and
was responsible for the insurance and maintenance of the factory. Al has the right to repurchase the
factory for Rs. 19.6 million on July 1, 2022, representing a 7% growth in value each year.

Required: Discuss how the above transaction would be treated in the financial statement of AL for the
year ended June 30, 2020.

Answer:

Q4: The following information has been extracted from the records of A Limited, pertaining to financial
year ended March 31, 2020.

1. The company has been sued for the non-payment of end service compensation and gratuity to 6
employees who were terminated without giving any notice . The claim amounts to Rs. 3 million. The
lawyer of the company is of the view that the company would have to pay to the displaced employees,
but the estimate of the amount that would be payable if plaintiff succeeds against the company is Rs. 2
million.

2. The company is facing litigation due to an alleged breach of contract. The contract contains a clause
that prescribes damages of Rs. 4 million in case of default. The management has assessed 60%
probability that the damages will have to be paid.

Required:

Discuss how each of the above matter should be dealt with in the financial statements of A Limited for
the year ended March 31, 2020.

Answer:
Q5: Extracts from SL’s statement of financial position are as follows:

2020 2019

Rupees.

Non-current Assets

Right of use asset 6500,000 2500,000

Non-current Liabilities

Lease obligations 4800,000 2000,000

Current Liabilities

Lease obligations 1700,000 800,000

During the year ended December 31, 2020, depreciation charged on leased plant amounted to Rs.
1800,000.

Required:

Calculate the amount that will be shown in the statement of cash flows of SL for the year ended
December 31, 2020 in respect of payments made under leases.

Answer:

Q6: On January 1, 2019, B Limited received Rs. 2500,000 from the government on the condition that
they employee at least 100 staff each year for the next four years. On this date, it was almost certain
that BL would meet these requirements. However, on January 1, 2020 due to downturn and reduced
consumer demand. BL could not manage to employ 100 staff. The conditions of the grant required full
payment.

Required:
Explain how the above event will be dealt in the financial statements of B Limited?

Answer:

Q7: During the year ended December 31, 2019, SL exchanged an automobile from FL which has a
carrying amount of Rs. 1.2 million. (Rs. 3 million cost less accumulated depreciation of Rs. 1.8 million) for
a tooling machine which has a fair market value of Rs. 1.5 million. No cash is exchanged in the
transaction. The fair value of the auto mobile is not readily determinable.

Required:

Determine the gain or loss that SL would record in its financial statements in respect of the above
transaction for the year ended December 31, 2019.

Answer:

Q8: ML, a construction company, entered into a contract with NL for the construction of a building of
NL’s new branch office.

ML agrees to complete the project within eight month period. Project manager has provided following
data:

Material cost Rs. 4000,000.

Labor cost Rs. 6400,000 (out of which Rs. 400,000 was paid when labor was on strike).

Other land preparation cost amounted to Rs. 2650,000.

Rs. 1200,000 paid to government authorities in order to obtain approval for the design of building.

Annual depreciation of machine amounted to Rs. 1200,000. It is used for months in project.

General and administration cost amounted to Rs. 100,000.

Required:

Calculate ML’s cost of fulfilling the contract as per IFRS 15.

Answer:

Q9: On January 1, 2020, TL purchased 70% share capital of RL. TL agreed to pay Rs. 9 million on
December 31, 2021, TL has a cost of capital of 8%.

Following are the extracts of statement of profit or loss for the year ended June 30, 2020 for both TL and
RL.

TL Limited RL Limited

Rs. 000

Cost of sales (478,800) (264,600)

Operating expenses (75,915) (49,680)

Required:

Calculate the liability that should be recorded in respect of the deferred consideration in TL’s
consolidated statement of financial position as at June 30, 2020.

Answer:
Q10: Shapuntala Limited signed a contract with a customer to sale the car for Rs. 2 million, consider, the
following scenarios and explain whether the additional term is explicit or implicit and whether this fact
would affect how the transaction price is allocated.

1. During the last five years, all customers have been given a maintenance plan for free. This is not
stated in the contract. Similar maintenance plans are currently valued at Rs. 50,000.

2. The contract specifically mentions that a 3 year maintenance plan will be provided for free. The
maintenance plan is currently valued at Rs. 50,000.

Answer:

Q11: As at December 31, 2020, a company had the following inventories:

Name Original cost Selling price Estimated cost to

sell

Rupees

Cold paper cups 640,000 656,000 48,000

Food container 320,000 288,000 16,000

Folding cartons 480,000 496,000 8000

Paper plates 240,000 256,000 8000

Paper bags 288,000 240,000 16,000

Required:

Determine the amount at which company will record the above transaction in its financial statements as
per IAS 2.

Answer:
Q12: ML developed a new online platform during the year ended December 31, 2020, and spent Rs.
500,000 per month evenly from February 1, 2020 to October 31, 2020. ML became sure for the success
of the project on May 1, 2020 and was expected to last five years. Calculate the amount that should be
recorded in ML’s statement of profit or loss for the year ended December 31, 2020, in relation to the
development of the online platform.

Answer:

Q13: Extracts from SL statement of financial position are as follows:

Rupees.

Nom-current liabilities

2020 2019

8% loan notes 4080,000 4000,000

Deferred tax 1500,000 800,000

Current liabilities

Trade payables 2650,000 2100,000

Current tax payables 1250,000 725,000

Additional Information:
  SL recorded finance cost on loan notes in its statement of profit or loss amounted to Rs.
400,000.
 Income tax expense for the year amounted to Rs. 1 million.

Required:

Calculate the amount that will be recorded in respect of loan notes and tax payment in the statement of
cash flows of SL for the year ended December 31, 2020.

Answer:

Q14: AL owns 80% shares of SL. In the year ended June 30, 2020. AL reported total revenues of Rs. 5.5
million and SL of Rs. 2.1 million. SL sold goods to AL during the year for an amount of Rs. 1 million,
earning a margin of 20%. Half of the goods remained in the inventory at the year end.

Required:

Calculate the consolidated revenue amount of AL for the year ended June 30, 2020.

Answer:

Q15: Mr. Rehan, a customer, sues Diamond Hotels for providing him with raw food that resulted in his
sickness. The holder’s lawyer is of the view that it is unlikely (but not remote) that the company will
have any obligation under his lawsuit. Management estimated that the hotel would have to pay rs.
300,000 if it were to lose the lawsuit. Discuss how the above event should be dealt by diamond Hotels as
per IAS 37, Provisions, contingent asset and contingent liabilities.
Answer:

Q16: A company owns a machine that has a carrying value of Rs. 8500,000 at the year end of December
31, 2020. Its market value is Rs. 7800,000 and costs of disposal are estimated at Rs. 250,000. A new
machine would cost Rs. 15000,000. LL expects its existing machine to produce net cash flows of Rs.
3000,000 per annum for the next three years. The cost of capital of LL is 8%. Calculate the impairment
loss on the machine to be recognize in the financial statements as at December 31, 2020. (Presnt value
factor at 8% for year 1 = 0.926, year 2 = 0.857, year 3 = 0.794).

Answer:

Q16:

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Q17:

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Q18:

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Q19:

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Q20:

Answer: