Certificate in Accounting and Finance Stage Examination

The Institute of 4 March 2020

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(i) Answer all EIGHT questions.

(ii) Answer in black pen only.

Section A

Q.1 Rakaposhi Traders (RT) was unable to retrieve complete information required to prepare its
statement of profit or loss due to a computer virus attack. In order to compute profit for the year
ended 31 December 2019, RT has gathered the following information:

(i) List of all assets and liabilities as on 1 January 2019:

Liabilities Rs. in '000 Assets Rs. in '000

Creditors 310 Furniture - net 460

Accrued rent 33 Inventories 200

Debtors 170

Cash in hand 37

Cash at bank 85

343 952

(ii) Inventories increased by 30% during the year.

 (iii) Credit sales during the year amounted to Rs. 2,500,000. Collections from debtors amounted
to Rs. 2,400,000 out of which Rs. 300,000 were received in cash. A debtor’s balance of Rs.
15,000 is irrecoverable.

(iv) Balance as per bank statement as on 31 December 2019 amounted to Rs. 90,000. However, it
does not include a cheque of Rs. 40,000 deposited on 31 December 2019.

(v) Following information has been collected from the counterfoils of cheque books:

Rs. in '000

Payment to creditors 1,375

Drawings 275

Salaries 600

Cash withdrawn for office use 120

(vi) Cash in hand as at 31 December 2019 amounted to Rs. 50,000. Details of cash sales and
cash payments (expenses, payment to creditors and cash purchases) are not available.

(vii) On 1 April 2019, the owner brought into the business a vehicle having a market value of Rs.
360,000.

(viii) Creditors’ closing balance of Rs. 425,000 was determined from account statements obtained
from the creditors.

(ix) Rent amounting to Rs. 23,000 was outstanding as on 31 December 2019.

(x) Depreciation is charged at 10% on fixed assets.

Required:

Compute the net profit or net loss for the year ended 31 December 2019. (08)

Financial Accounting and Reporting-I Page 2 of 6

Q.2 You are working as Finance Manager in Broad Peak Limited (BPL). Faraz has recently joined
BPL as an internee for three months. You have asked him to develop an understanding of the
statement of cash flows. After going through few statements, he has raised the following
queries:

(i) Depreciation is not a cash flow but was still appearing as an addition in the statement of
cash flows.

(ii) In the statement of cash flows of a competitor, interest paid was shown as a financing
activity but BPL showed it in operating activities.

(iii) BPL purchased inventories throughout the year but total purchases of inventory were
not shown in the statement. However, only decrease in inventory was added.

(iv) Cash and bank balance in the statement of financial position was not in agreement with
the opening and closing balances at the end of statement of cash flows.

Required:

Briefly answer the queries raised by Faraz. (08)

 Q.3 Briefly describe the measurement bases that may be used to measure the value of assets in
the financial statements.
(06)

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

(i) Which of the following companies is most likely to face cash flow problems?

(a) A loss making government organisation

(b) A company which has recently sold part of its operations so as to concentrate on
its core areas

(c) A reasonably profitable and long established company with no expansion plans

(d) A profitable retailer about to embark on ambitious expansion plans (01)

(ii) A plant has a carrying amount of Rs. 1,500,000 as at 31 December 2019. Its fair value is
Rs. 900,000 and costs of disposal are estimated at Rs. 50,000. A new plant would cost
Rs. 2,500,000. Cash flows from the plant for the next four years are estimated at Rs.
350,000 per annum. Applicable discount rate is 10%.

What is the approximate impairment loss on the plant to be recognised in the financial
statements as at 31 December 2019?

(a) Rs. 650,000 (b) Rs. 390,000

(c) Rs. 1,000,000 (d) Nil (02)

(iii) A debit balance on the retained earnings account indicates that the company has:

(a) made more dividend payments than the profit earned

(b) redeemed some of its share capital

(c) accumulated losses

(d) issued bonus shares (01)

(iv) The correct accounting treatment of initial operating losses incurred during the
commercial production due to under-utilization of the plant would be to:

(a) capitalise as a directly attributable cost

(b) defer and charge to profit or loss account when profit is earned from the plant

(c) charge directly to retained earnings since these are not considered to be normal
operating losses

(d) charge to profit or loss account (01)

Financial Accounting and Reporting-I Page 3 of 6

(v) A manufacturing company has four types of cost (identified as A, B, C and D). The total cost of each type
at two different production levels is:
 Cost type Total cost for 100 units Total cost for 150 units

----------------------- Rupees -----------------------

A 1,500 2,250

B 1,800 2,400

C 2,000 3,000

D 3,000 4,200

Which two types of cost would be classified as semi-variable?

(a) A and C (b) A and D

(c) B and C (d) B and D (02)

(vi) In measuring value in use, the discount rate used for discounting the cash flows should be
the:

(a) pre-tax rate that reflects the market assessment of time value of money and risks
specific to the asset

(b) pre-tax rate that reflects the market assessment of time value of money and risks
specific to the entity

(c) post-tax rate that reflects the entity’s assessment of time value of money and risks
specific to the asset

(d) pre-tax rate that reflects the entity’s assessment of time value of money and risks
specific to the asset (01)

(vii) Which of the following is NOT considered as an item of property, plant and equipment?

(a) A standby generator expected to be used for seven years

(b) A plot of land held for resale

(c) A bus for pick and drop of staff members

(d) A generator for rental to others (01)

(viii) Capitalisation of borrowing costs should be suspended:

(a) when substantially all the activities necessary to prepare a qualifying asset for its
intended use or sale are complete

(b) during a temporary delay which is a necessary part of the process of getting an asset
ready for its intended use or sale

(c) during extended periods in which active development of a qualifying asset is interrupted

(d) all of the above (01)

Financial Accounting and Reporting-I Page 4 of 6

Section B
Q.5 Following is the trial balance of Chongtar International Hospital as on 31 December 2019:

Debit Credit

---- Rs. in million ----

Burns ward - capital work in progress 55.3

Cafeteria sales 24.4

Cash and bank balances 8.4

Donations for burns ward 75.1

Expenses and gifts for ‘walk on diabetes day’ 2.6

Fees from patients 125.0

General donations 82.6

General fund 195.6

Inventory – cafeteria 4.7

Inventory – medicines 19.4

Inventory - hospital supplies 8.5

Medical equipment 185.4 64.2

Miscellaneous expenses 8.5

Other fixed assets 110.7 54.7

Payables 38.9

Purchases – cafeteria 16.4

Purchases – medicines 60.5

Purchases - hospital supplies 18.7

Receivables - panel corporates 31.4

Rent 19.6

Sponsorship for ‘walk on diabetes day’ 2.2

Salaries - administrative staff 24.0

Salaries - doctors and nursing staff 38.2

Short term investments 38.0

Utilities 12.4

662.7 662.7

Additional information:

(i) Cost of closing physical inventory of medicines and hospital supplies was Rs. 25.8
million and Rs. 13.8 million respectively. Medicines costing Rs. 3.1 million were found
expired. Medicines are only used to treat the admitted patients and are not sold separately.
 (ii) Year-end physical count of cafeteria inventory could not take place. Goods are sold in
cafeteria at a gross margin of 25% on sales.

(iii) Rent outstanding at year-end was Rs. 1.4 million.

(iv) 15% of salaries and 10% of rent are related to cafeteria.

(v) Hospital facilities of Rs. 48.6 million were provided free of charge to the patients.

(vi) ‘Walk on diabetes day’ was organised in December 2019. Expenses relating to the event
amounting to Rs. 1.2 million were outstanding and unrecorded at year end.

(vii) Medical equipment having fair value of Rs. 36.8 million were received as donation. These have
been brought into use but have not been recorded in the books.

(viii) Depreciation is charged on reducing balance method at 15% per annum.

Required:

(a) Prepare income and expenditure account for the year ended 31 December 2019 (12)

(b) Prepare statement of financial position as on 31 December 2019 (06)

Financial Accounting and Reporting-I Page 5 of 6

Q.6 Following are the summarised financial statements of Shispare Limited (SL) and its competitor Trivor
Limited (TL) for the year ended 31 December 2019:

Statement of financial position

Assets SL TL Equity & liabilities SL TL

Rs. in million Rs. in million

Fixed assets 5,400 7,800 Capital and reserves 8,400 9,450

Current assets: Long-term loan 1,900 4,600

Inventory 4,800 7,100 Current liabilities:

Debtors 2,700 3,200 Creditors 2,900 4,500

Cash 1,200 800 Accrued expenses 900 350

8,700 11,100 3,800 4,850

14,100 18,900 14,100 18,900

Statement of profit or loss

SL TL

--- Rs. in million ---

Sales 16,700 35,400

Cost of goods sold (11,400) (27,800)

Gross profit 5,300 7,600

Operating expenses (3,500) (4,900)

 Finance cost (250) (600)

Net profit 1,550 2,100

Required:

Compute relevant ratios for SL and TL to assess which company seems to:

(i) give more incentives to its customers to pay on time

(ii) avail extended credit terms from its suppliers

(iii) be more efficient in the use of capital

(iv) keep lower selling prices to gain the market share

(v) have better liquidity position

(vi) have higher ability to convert its assets into profit

(vii) control operating expenses more efficiently

(viii) have higher ability to raise bank loan in future (16)

Q.7 Financial statements of Trich Mir Limited (TML) for the year ended 31 December 2019 are under
preparation. While reviewing revenues from contract with customers, following matters have been
identified:

(i) On 1 October 2019, TML sold Machine C to Chan Limited for Rs. 25 million. As per the
contract, payment would be made after 2 years. The accountant recognised sales revenue of
Rs. 25 million upon delivery on 1 October 2019. Further, commission paid to sales employees
for winning the contract of Rs. 1.6 million was capitalised and is being amortised over 2 years
period. Applicable discount rate is 10% per annum.

(ii) TML entered into a contract to manufacture a specialised machine for Dhan Limited at a price
of Rs. 30 million. The contract meets the criteria of recognition of revenue over time. At the
year end, the machine was 60% complete and it was estimated that a further cost of Rs. 10
million would be incurred. Cost of Rs. 15 million incurred till year end has been included in
closing inventory and receipts of Rs. 11 million have been credited to revenues.

(iii) TML entered into a contract to sell one unit of Machine A and Machine B for a total price of Rs.
16 million. Machine A was delivered in December 2019 to the customer while Machine B was
delivered in January 2020. The consideration of Rs. 16 million is due only after TML transfers
both the machines to the customer. TML sells machines A and B at standalone prices of Rs.
12 million and Rs. 8 million respectively. The accountant recognised receivable and revenue
of Rs. 12 million upon delivery of Machine A.

Financial Accounting and Reporting-I Page 6 of 6

Required:

Prepare correcting entries for the year ended 31 December 2019 in accordance with IFRS 15 (14)
‘Revenue from Contracts with Customers’.

Q.8 Following information pertains to non-current assets of Distaghil Limited (DL):

 (i) DL purchased specialised vehicles for Rs. 370 million on 1 July 2017. The vehicles have
an estimated useful life of 10 years with residual value of Rs. 30 million.

The revalued amounts of the vehicle as at 31 December 2018 and 2019 were
determined at Rs. 302 million and Rs. 290 million respectively. There was no change in
useful life or residual value.

(ii) DL setup a manufacturing plant in a remote area at a cost of Rs. 280 million. The plant
had a useful life of 8 years. The plant was purchased on 1 January 2018 and was
available for use on 1 April 2018. The commercial production started on 1 June 2018.

On 1 July 2018, DL received a government grant of Rs. 120 million towards the cost of
the plant. The sanction letter states that if DL ceases to use the plant in the remote area
before 31 December 2021, DL would be required to repay the grant in full.

(iii) A warehouse was given on rent on 1 January 2018. Previously, the warehouse was in use
of DL.

On 1 January 2018, carrying value and remaining useful life of the warehouse was Rs. 80
million and 16 years respectively. Fair value of the warehouse on various dates are as
follows:

Rs. in million

01 January 2018 104

31 December 2018 96

31 December 2019 115

Other information:

 DL uses cost model for subsequent measurement of property, plant and equipment

except for specialised vehicles for which revaluation model is used.

 DL transfers the maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.

 Government grant is recorded as deferred income and a part of it is transferred to

income each year.

 Investment property is carried at fair value model.

Required:

Prepare relevant extracts from DL’s statement of profit or loss and other comprehensive
income for the year ended 31 December 2019 and statement of financial position as on that
(20)
date. (Show comparative figures)

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 23 September 2020

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(iii) Answer all EIGHT questions.

(iv) Answer in black pen only.

(v) Multiple Choice Questions must be answered in answer script only.

Section A

Q.2 Following information pertain to Katas Industries Limited for the year ended 30 June 2020:

(i) Purchase of raw material:

Rs. in '000

Purchase price 96,100

Discount on bulk purchases 3,290

Early settlement discounts 1,580

(xi) Cost incurred at various locations:

Warehouse

Description Factory Head office Sales office Raw Finished

material goods
 ------------------------------ Rs. in '000 ------------------------------

Salaries & wages 9,200* 2,000 3,800 860 640

Depreciation 3,500 1,250 750 150 120

Rent 3,640 - 2,360 380 160

Utilities 2,780 940 1,230 450 235

*75% of factory salaries & wages vary with the level of production

(xii) Breakup of inventories:

1 July 2019 30 June 2020

--------- Rs. in '000 ---------

Raw material 6,800 8,500

Work in progress 1,980 1,600

Finished goods 8,960 12,000

(xiii) Due to a machine break down, raw material costing Rs. 1,560,000 was lost during the
production process.

Required:

Prepare statement of cost of goods manufactured for the year ended 30 June 2020. (Also show

total prime cost) (08)

(e) Ratios are computed by using numerical values from financial statements to gain
meaningful information about an entity. However, due to inherent limitations of ratio
analysis, it may not reflect the correct financial situation.

Required:

Briefly explain any four limitations of ratio analysis. (06)

Financial Accounting and Reporting-I Page 2 of 6

Q.3 On 1 July 2014, Indus Pharma Limited (IPL) received a government grant of Rs. 280 million to
setup a plant in an under-developed rural area. The grant is repayable in full if the conditions
attached to the grant are not met for a period of five years from the date of commencement of
the production. At the inception, it was highly probable that IPL would comply with the
conditions for the required period.

IPL incurred total cost of Rs. 630 million on plant and it started production on 1 January 2015. Useful life
of the plant was estimated at 7 years. IPL deducted government grant in arriving at the carrying amount of
the asset.

In January 2019, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant was
repaid by IPL.
 In view of repayment of the grant, IPL carried out an impairment review of the plant on 31 December 2019.
Net annual cash inflows for the remaining life of the plant have been estimated at Rs. 90 million and Rs.
80 million for 2020 and 2021 respectively. These cash inflows are net of annual interest and maintenance
cost of Rs. 10 million and Rs. 6 million respectively for both years. Applicable discount rate is 12%.

On the date of impairment review, the existing plant can be sold in the local market for Rs. 160 million.
Estimated cost of disposal would be Rs. 5 million.

Required:

Prepare journal entries for the year ended 31 December 2019 in respect of the above (08)
information. (Show all necessary workings. Narrations are not required)

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

(i) Which of the following statements is correct about financial statements based on
historical cost in times of rising prices?

(a) Profits will be overstated and assets will be understated

(b) Assets will be overstated

(c) Profits as well as assets will be understated

(d) Depreciation will be overstated (01)

(ii) Under IAS 40 ‘Investment property’, which of the following disclosures is NOT

required to be made under cost model?

(a) Fair value of the property

(b) Depreciation method

(c) Reconciliation of carrying amounts at the beginning and end of a period

(d) Residual value of the property (01)

(iii) Which of the following would cause negative net cash flow from operating activities?

(a) Decrease in depreciation expense

(b) A substantial investment in fixed assets

(c) A significant increase in credit sales

(d) Repayment of a long-term loan (01)

(iv) A company pays to its salesman a minimum salary plus commission based on sales.
Salesman’s total remuneration is the example of:

(a) fixed cost (b) semi-variable cost

(c) stepped cost (d) variable cost (01)

Financial Accounting and Reporting-I Page 3 of 6

(v) Alpha Club’s financial year ends on 31 December. Following information pertain to its
members’ subscription:
Rupees

Subscription received in 2018 for 2019 180,000

Subscription received in 2019 for 2018 90,000

Subscription received in 2019 for 2019 1,400,000

Subscription received in 2019 for 2020 200,000

Subscription for 2018 outstanding as on 31 December 2018 150,000

Subscription for 2019 outstanding as on 31 December 2019 325,000

Subscription income for the year ended 31 December 2019 is:

(a) Rs. 1,845,000 (b) Rs. 1,705,000 (c) Rs. 1,905,000 (d) Rs. 1,665,000 (02)

(vi) A company has current ratio and quick ratio of 2.0 and 0.8 respectively. If the company
uses its positive cash balance to pay a creditor, it will:

(a) increase current ratio as well as quick ratio

(b) increase current ratio and decrease quick ratio

(c) have no effect on current ratio as well as quick ratio

(d) decrease current ratio as well as quick ratio (01)

(vii) Which of the following would increase gearing ratio?

(a) Issuance of shares at premium

(b) Issuance of shares at discount

(c) Issuance of bonus shares

(d) Declaration and payment of cash dividend (01)

(viii) Which of the following statements is correct in the context of capitalisation of

borrowing costs?

(a) If funds have been arranged from various general borrowings, the amount to be
capitalised is based on the weighted average cost of borrowings

(b) Capitalisation always commences as soon as expenditure for the asset is incurred

(c) Capitalisation always continues until the asset is brought into use

(d) Capitalisation always commences as soon as borrowing costs are incurred (01)

Section B

Q.5 (a) Stupa Limited (SL) sells electrical products at following standalone prices:
 Products Rupees

E-1 30,000

E-2 30,000

E-3 50,000

Required:

Calculate transaction price to be allocated to each product under each of the following
independent situations:

(i) SL offered to sell one unit of each of the above products for Rs. 90,000. SL regularly
sells one unit each of E-2 and E-3 together for Rs. 70,000.
(04)

(ii) SL offered to sell one unit of E-1 and two units of E-3 for Rs. 104,000. (02)

Financial Accounting and Reporting-I Page 4 of 6

(ix) On 1 October 2018, Kushan Construction Limited (KCL) entered into a contract to construct a
commercial building for a customer for Rs. 50 million and a bonus of Rs. 10 million if the
building is completed on or before 31 December 2019.

Till 30 June 2019, KCL expected that the building will be completed within time at a total cost of Rs. 40 million.
However, due to bad weather and time involved in regulatory approvals, the building was completed on 28
February 2020 at a total cost of Rs. 42 million of which Rs. 26 million was incurred till 30 June 2019.

Required:

Compute profit to be recognized for the years ended 30 June 2019 and 2020, if:

(a) performance obligation under the contract is satisfied over time. (04)

(b) performance obligation under the contract is satisfied at a point in time. (01)

(x) The nature, timing and amount of consideration promised by a customer affect the estimate of
the transaction price.

Define the term ‘transaction price’ and list down the factors that may affect determination of the transaction
price. (04)

Q.6 Statement of financial position of Taxila Limited (TL) as on 30 June 2020 is as follows:

Assets 2020 2019 Equity & liabilities 2020 2019

Rs. in million Rs. in million

 Property, plant and equipment 1,619 1,200 Share capital (Rs. 100 1,200 800
each)

Investment property 290 120 Share premium 290 150

Inventories 205 180 Retained earnings 260 90

Trade receivables 342 291 Revaluation surplus 215 200

Prepayments and other 14 20 Long-term loans 367 445

receivables

Short-term investments 60 48 Trade and other payables 144 120

Cash and bank balances 24 6 Current portion of long-

term loans
78 60

2,554 1,865 2,554 1,865

Additional information:

• Equipment having fair value of Rs. 240 million was acquired by issuing 2 million shares.

• As a result of revaluation carried out on 30 June 2020, property, plant and equipment was
increased by Rs. 80 million out of which Rs. 35 million was credited to profit and loss
account.

• During the year, fully depreciated items of property, plant and equipment costing Rs. 36
million were sold for Rs. 8 million out of which Rs. 3 million is still outstanding.

• Depreciation on property, plant and equipment for the year amounted to Rs. 290
million.

• An investment property was acquired for Rs. 180 million. TL applies cost model for
subsequent measurement of its investment property.

• Financial charges for the year amounted to Rs. 45 million. Trade and other payables
include accrued financial charges of Rs. 12 million (2019: Rs. 17 million).

• Short-term investments amounting to Rs. 35 million are readily convertible to cash (2019:
Rs. 20 million). Investment income for the year amounted to Rs. 6 million.

Required:

Prepare TL’s statement of cash flows for the year ended 30 June 2020 in accordance with the requirements of
IFRSs. (17)

Financial Accounting and Reporting-I Page 5 of 6

Q.7 You have been appointed as accountant of Gandhara Enterprises (GE) to replace Nasim who was
terminated on suspicion of fraud. Following information has been compiled for preparation of GE’s financial
statements for the year ended 30 June 2020:

(i) Summarised bank statement:

 Receipts Rs. in '000 Payments Rs. in '000

Opening balance 600 Creditors 8,300

Cheques from debtors 7,420 Salaries 900

Cash 2,400 Repair and maintenance 450

Rent 980 Utilities 500

Office furniture 150

Drawings 640

Closing balance 460

11,400 11,400

(iv) Other balances worked out from the available records:

Particulars 30-Jun-2020 30-Jun-2019

------- Rs. in '000 -------

Fixed assets – WDV 3,400 3,460

Inventories 750 715

Goods in transit 140 -

Debtors 900 730

Unearned rent 300 450

Cash in hand 48 36

Creditors 895 690

Salaries payable 86 120

(v) All debtors settle their accounts through cheques. All payments are made through cheques
except for average monthly petty expenses of Rs. 25,000.

(vi) Cheques of Rs. 950,000 issued to creditors in the last week of June 2020 were presented in July
2020. Cheques from debtors amounting to Rs. 860,000 deposited on 30 June 2020 were
cleared in July 2020.

(vii) Goods are sold on cash and credit at cost plus 25% and 30% respectively.

(viii) Apart from misappropriating amounts from cash sales, the following matters were also noted in
respect of Nasim’s fraud:

• Physical cash count revealed that cash in hand was Rs. 20,000.

• Fixed assets having written down value of Rs. 65,000 were sold for Rs. 120,000 which
was not recorded in the books.

• Goods in transit represent goods purchased in May 2020. However, in actual there
were no goods in transit.

• Goods costing Rs. 130,000 appearing in the closing inventory sheets were not found
physically.
 • All the debtors confirmed their balances except for an amount of Rs. 260,000. It was
found that the related goods had been issued against fake invoices.

Required:

(a) Determine the amount of suspected fraud. (06)

(b) Prepare GE’s statement of profit or loss for the year ended 30 June 2020. (11)

Financial Accounting and Reporting-I Page 6 of 6

Q.8 Following information pertain to property, plant and equipment of Harappa Industries Limited (HIL) for
the year ended 30 June 2020:

Balance as on 30 June 2019

Cost/revalued Accumulated Revaluation Depreciation Useful
Assets
amount depreciation surplus method life/rate
----------- Rs. in '000 -----------
Land* 100,000 - - - Infinite
Buildings 70,000 14,000 16,000 Straight line 20 years
Plant 180,000 60,000 - Straight line 15 years
Vehicles 8,800 4,000 - Reducing balance 20%

(i)

*An amount of Rs. 12 million had been charged to profit or loss upon previous revaluation

(ii) On 30 June 2020, the revalued amounts of the land and buildings were assessed by Smart
Consultant at Rs. 120 million and Rs. 35 million respectively.

(iii) Setting up of a new plant was commenced on 1 July 2019 and substantially completed on 29
February 2020. The plant was available for use on 1 April 2020 and immediately put into use.
Useful life of the plant was estimated at 10 years. Details of the cost incurred are as under:

Description Payment date Rs. in '000

1st payment 1 August 2019 12,000

2nd payment 1 October 2019 48,000

3rd payment 29 February 2020 48,000

4th payment 31 July 2020 12,000

120,000

The cost of the plant was financed through an existing running finance facility with a limit of Rs. 200 million
carrying mark-up of 12% per annum. A government grant of Rs. 20 million related to the plant was received
on 1 January 2020. The grant amount was used for repayment of the running facility.
 (iv) One of the vehicles had an engine failure on 1 January 2020 and its engine had to be sold as
scrap for Rs. 0.1 million. The vehicle had been acquired on 1 January 2018 at a cost of Rs. 2.5
million. 40% of the cost is attributable to its engine. Though the engine of similar capacity
was available at a cost of Rs. 1.2 million, the old engine was replaced on 1 January 2020 with
a higher capacity engine at a cost of Rs. 1.8 million.

(v) HIL uses cost model for subsequent measurement of property, plant and equipment except
for land and buildings.

(vi) HIL accounts for revaluation on net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.

(vii) HIL deducts government grant in arriving at the carrying amount of the asset.

Required:

In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ for inclusion in

HIL’s financial statements for the year ended 30 June 2020. (20)

(Comparatives figures and column for total are not required)

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 3 March 2021

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(vi) Answer all EIGHT questions.

(vii) Answer in black pen only.

(viii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.3 Following information pertains to Astrazenca Limited (AL):

(i) Shareholders' equity as on 1 January 2020:

Rs. in million

Share capital (Rs. 100 each) 250

Share premium 138

Retained earnings 142

Revaluation surplus: Land 25

Buildings 20

(xiv) Profit and transfer of incremental depreciation as per the draft financial statements for the
year ended 31 December 2020 amounted to Rs. 45 million and Rs. 5 million respectively.

(xv) Dividends for the last two years:

 For the year ended *Interim cash dividend Final bonus dividend

31 December 2019 10% 20%

31 December 2020 12% 15%

*Declared with half yearly accounts

(xvi) AL uses revaluation model for subsequent measurement of its land and buildings only. The
revalued amounts of land and buildings have been assessed at 31 December 2020 but
not incorporated in draft financial statements. The relevant details are as under:

Land Buildings

--- Rs. in million ---

Balances as on 31 December 2020 before revaluation:

Cost 75 240

Accumulated depreciation - 60

Revalued amounts assessed at 31 December 2020 65 158

Required:

Prepare AL’s statement of changes in equity for the year ended 31 December 2020. (08)

(Column for total and comparative figures are not required)

Financial Accounting and Reporting-I Page 2 of 6

(f) Describe the behavior of each of the following costs graphically by denoting ‘Per unit
cost’

on vertical axis and ‘Level of activity’ on horizontal axis:

• Depreciation expense – Depreciation on plant is computed using units of production

method.

• Depreciation expense – Depreciation on plant is computed using straight line method.

• Direct material cost – Bulk discount is available on additional purchases once the total
purchases exceed a certain level.

• Generator rent – A generator has been acquired on rent at an hourly rate; however,
minimum rent for certain hours is payable irrespective of actual usage.

• Machine rent – Machines are acquired on a fixed monthly rent. One machine is required
for every 1 million units.

• Direct labour cost – Factory workers are paid at fixed rate per unit. In case production
exceeds target in any month, then workers are paid with double rate for additional

units. (08)
 (g) On 1 January 2021, Covaxin Telecom (CT) announced a new annual promotional
package for its customers. The package comprises of a mobile phone, full year
unlimited on-net calls and 1,000 minutes per month on other networks. Package price
is Rs. 11,550 per quarter payable in advance on the first day of each quarter. At the end
of the contract, the phone would not be returned to CT.

On the first day of the promotional announcement, CT sold 1,000 packages. Based on the data available
with CT, it is expected that each customer would utilize 10,000 minutes of other networks with quarterly
break-up as under:

Quarter ending Minutes

31 March 2021 2,700

30 June 2021 2,000

30 September 2021 2,900

31 December 2021 2,400

The mobile phone has a retail value of Rs. 34,000, if sold separately. A monthly subscription for unlimited
on-net calls is Rs. 500 while every call on other networks is charged at Rs. 1.5 per minute, if billed
separately.

Required:

Compute the quarterly revenue to be recognised for the quarters ending 31 March 2021 and

30 June 2021. (08)

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

(xi) Which of the following future cash flows should NOT be included in the calculation of value in
use of an asset?

(a) Cash flows on maintaining the asset’s performance

(b) Cash flows on enhancing the asset’s performance

(c) Cash flows from continuing use of the asset

(d) Cash flows from disposal of the asset (01)

(xii) When an impairment review is carried out, an impaired asset is measured at:

(a) fair value less cost to sell (b) value in use

(c) cost (d) recoverable amount (01)

Financial Accounting and Reporting-I Page 3 of 6

 (iii) Which of the following would be an external indicator that an asset of an entity may be
impaired?

(a) Increase in central bank discount rates

(b) Decline in economic performance of an asset

(c) Physical obsolescence of an asset

(d) Future restructuring plan of an asset (01)

(iv) Which of the following is NOT a measurement base for assets as referred in the
Conceptual Framework?

(a) Value in use (b) Fulfilment value

(c) Current cost (d) Fair value (01)

(v) The accounting principle applied by IFRS 15 when determining whether or not revenue
should be recognized in respect of a repurchase agreement is:

(a) prudence (b) matching

(c) verifiability (d) faithful representation (01)

(vi) An entity recognises revenue over time if:

(a) entity’s performance does not create an asset with an alternative use

(b) entity’s performance creates an asset whose control will be transferred at the end
of contract

(c) customer simultaneously receives and consumes the benefit provided by the
entity’s performance

(d) entity has an enforceable right to payment for performance completed to-date (01)

(vii) An entity made a profit of Rs. 550,000 for the year 2020 based on historical cost
accounting principles. It had opening capital of Rs. 1,500,000. During 2020, specific
prices indices increased by 15% while general price indices increased by 10%. How
much profit should be recorded for 2020 under physical capital maintenance concept?

(a) Rs. 325,000 (b) Rs. 400,000

(c) Rs. 467,500 (d) Rs. 495,000 (01)

(viii) In order to survive in the long run, a business must generate positive net cash flow
from:

(a) investing activities

(b) operating activities

(c) financing activities

(d) both (a) and (b) (01)

Financial Accounting and Reporting-I Page 4 of 6

Section B

Q.5 A fire broke out in the office of Moderna Sports Club (MSC) and burnt all the accounting records. The
accountant was able to retrieve a burnt copy of financial statements of MSC for the year ended 31
December 2020. However, few information (as indicated by capital alphabets) were unreadable. The
retrieved copy is as follows:

Balance sheet as on 31 December 2020

Funds and liabilities Rs. in '000 Assets Rs. in '000

2020 2019 2020 2019

General fund: Fixed assets - net 1,403 1,300

Opening balance A 1,586 Members’ subscription 270 158

Excess of income over B C Misc. supplies 13 10

expenditure

Tuck-shop rent E 37

Tennis court fund 260 200 Advance salaries 18 15

Bank F 530

Liabilities:

Members’ subscription 20 25

Salaries 52 41

Utilities 25 D

Annual sports event 10 -

Income and expenditure account for the year ended 31 December 2020

Expenditure Rs. in '000 Income Rs. in '000

Salaries G Members’ subscriptions 919

Utilities 221 Tuck-shop rent 252

Misc. supplies H Donation - sports equipment 70

Members’ subscription written off 12 L M

Annual sports event I

J K

Disposal of fixed assets 8

Repair and maintenance 40

Excess of income over expenditure B

Receipts and payments account for the year ended 31 December 2020

Receipts Rs. in '000 Payments Rs. in '000

Opening balance 530 Salaries 560

N O Fixed assets 92

Tennis court fund P Annual sports event 180

Contribution for annual sports 49 Misc. supplies 132

event

Entrance fee - annual sports event 86 Utilities 214

Sale of fixed assets 21 Repair and maintenance Q

Tuck-shop rent 248 Construction of tennis court 131

Scrap sale 15 Closing balance F

Required:

Determine the missing information as indicated by capital alphabets.

(Redrafting of above financial statements is not required) (18)

Financial Accounting and Reporting-I Page 5 of 6

Q.6 Epivac Limited is considering to take some of the following measures during the last week of
the year ending 31 March 2021 in order to show better financial performance;

(i) Pay balance of a major supplier from bank overdraft facility and avail 5% discount.

(ii) Sell slow moving stock items at a price equal to cost.

(iii) Recover debtors’ balances by offering cash discounts of 10%.

(iv) Offer extended credit terms of 90 days which would increase sales at existing
margins.

(v) Dispose-off some non-current assets at gain.

Required:

State the effect (increase, decrease, no effect) of each of the above measure on the financial ratios as per
following format:

Ratios (i) (ii) (iii) (iv) (v)

(17)
 (ix) Gross profit margin

(x) Net profit margin

(xi) Current ratio

(xii) Stock turnover (times)

(xiii) Return on non-current assets

(xiv) Quick ratio

Q.7 You have recently joined as the finance manager of Corv Limited (CL). While reviewing the
draft financial statements for the year ended 31 December 2020 prepared by the junior
accountant, you have noted the following:

(i) In January 2020, Government allotted an industrial plot to CL at a prime location

subject to the condition that CL will establish a factory. CL constructed the factory
building which was available for use on 1 October 2020. Due to delay in recruitment
of key factory employees, the production activities will commence on 15 March 2021.

The accountant has not recorded the land as it was given free of cost. While the
factory building is still appearing in capital work in progress as production activities
(06)
will commence on 15 March 2021.

(ii) CL acquired a three story building on 1 March 2020. CL uses the ground floor for its
marketing department while remaining two floors were in excess of CL’s need and
therefore were rented out. The first floor was rented out on 1 June 2020 and the
second floor was rented out on 1 December 2020.

The accountant has recorded the building as property, plant and equipment. The
depreciation on ground, first and second floors has been computed from 1 March
(05)
2020, 1 June 2020 and 1 December 2020 respectively.

(iii) CL is constructing a power generation plant for its factory. The project started on 1
February 2020 and would complete on 30 November 2021. The work remained
suspended for 3 months. The project is financed through long term loan, acquired
specifically on 1 January 2020. The unutilised amount of loan is kept in a separate
saving account.

The accountant has deducted income of separate saving account from full year’s
interest on loan and presented the net amount as finance cost in the statement of
(05)
profit or loss.

The accounting policy of CL is to carry land and building at fair value (wherever permitted by
IFRS).

Required:

Discuss how the above issues should be dealt in the financial statements of CL for the year

ended 31 December 2020 in accordance with the requirements of IFRSs.

Financial Accounting and Reporting-I Page 6 of 6

Q.8 Sputnik Sea Limited (SSL) runs a cruise business across oceans. Following information in respect of one
of SSL’s cruise ship is available:

(c) SSL bought a cruise ship on 1 March 2018. After completing all the required formalities, the
ship was ready to sail on 1 April 2018.

(d) Details regarding components of the ship are as under:

Cost Estimated
residual value (Rs.
Component (Rs. in million) Useful life
in million)

Engine 840 50,000 hours 40

Body 535 25 years 35

Dry-docking (overhaul) 60 5 years -

(xiii) On 1 May 2019, the ship suffered an accident which damaged its body. Repair work took 2
months and costed Rs. 26 million. The repair work did not change useful life and residual
values of the components.

(xiv) The average monthly sailing of the ship during the last three years are as under:

Year Hours

2018 360

2019 480

2020 600

(xv) SSL uses revaluation model for subsequent measurement. SSL accounts for revaluation on net
replacement value method and transfers the maximum possible amount from the revaluation
surplus to retained earnings on an annual basis.

(xvi) The revalued amounts of the ship as at 31 December 2019 and 2020 were determined as Rs.
1,400 million and Rs. 1,000 million respectively. Revalued amounts are apportioned between
the components on the basis of their book values before the revaluation.

Required:

Prepare necessary journal entries to record the above transaction from the date of acquisition

of the ship to the year ended 31 December 2020. (17)

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 8 September 2021

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(ix) Answer all EIGHT questions.

(x) Answer in black pen only.

(xi) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Following amounts have been extracted from the financial statements of Lithops Limited:

2020 2019

----- Rs. in million -----

Sales 500 450

Cost of sales 378 300

Trade receivables 95 80

Trade payables 72 60

Inventory 93 75

Cash at bank 12 16

All sales and purchases are made on credit.

Required:
 R Calculate working capital cycle days for 2020. (Assume a 360 day year) (04)

S Suggest four possible measures that can be taken to reduce working capital cycle days. (03)

• The draft financial statements of Barbary Cement Limited (BCL) for the year ended 31
December 2020 include a plant having a carrying value of Rs. 400 million. Due to
technological change, the remaining useful life of the plant has been reduced to 4
years.

Following information has been gathered for impairment testing of the plant:

• Inflows from sale of product to be manufactured by the plant for the year
2021 are estimated at Rs. 200 million. These inflows are subject to 10%
decrease in each subsequent year due to declining demand.

• Outflows from operational cost for 2021 are estimated at Rs. 80 million.
These outflow would increase by 5% in each subsequent year despite
decline in demand due to inflation and increase in plant’s wear and tear.

• BCL’s net profit is subject to income tax of 20%.

• Depreciation on plant is calculated using straight line method.

• The plant’s net disposal proceeds at the end of the useful life is estimated at
Rs. 100 million.

• Pre-tax and post-tax discount rates are 12% and 9.6% per annum
respectively.

• A technologically advanced plant with similar capacity can be purchased at

Rs. 350 million. BCL has received an offer to buy the existing plant for Rs.
250 million. BCL will have to incur shipping cost of Rs. 7 million, to dispatch
the existing plant to the purchaser.

Required:

Compute the impairment loss to be recognised as at 31 December 2020. (07)

Financial Accounting and Reporting-I Page 2 of 6

Q.3 On 1 August 2021, Succulent Limited started its manufacturing business. Following
information related to its manufacturing activities for the month of August is available:

(i) Raw materials of Rs. 2.5 million (including 20% indirect material) were acquired, out of
which 40% is still unpaid.

(ii) Total factory payroll for the month amounted to Rs. 4 million, out of which 10% is still

unpaid. 20% of the payroll relates to the indirect labor.

(iii) Other manufacturing overheads were Rs. 3.6 million which included depreciation of Rs.
0.9 million.

(iv) Manufacturing overheads are applied at the rate of 150% of direct labor.

(v) Cost of physical inventory at month end was as follows:

Rs. in million
Direct material 0.6

Indirect material 0.1

Work in process 1.0

Required:

Prepare necessary journal entries in order to record the production and inventory cost in a (08)
manufacturing environment. (Narrations are not required)

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

(i) An asset was purchased on 1 January 2017 for Rs. 100 million with useful life of 6 years
and residual value of Rs. 10 million. On 1 January 2020, it is revalued to Rs. 120 million
with remaining useful life of 3 years and expected residual value of Rs. 15 million. How
much excess depreciation will be charged for the year ended 31 December 2020?

(a) Rs. 15 million (b) Rs. 35 million

(c) Rs. 20 million (d) Rs. 25 million (01)

(ii) A company used to pay its salesman a salary of Rs. 35,000 per month plus 2%
commission based on sales. Now he is promoted as assistant manager sales with a
salary of Rs. 50,000 per month plus commission of Rs. 100,000 if sales are Rs. 5 million,
Rs. 200,000 if sales are Rs. 10 million and so on.

Salesman’s commission is the example of:

Before promotion After promotion

(a) Fixed cost Variable cost

(b) Variable cost Fixed cost

(c) Stepped cost Variable cost

(d) Variable cost Stepped cost

(02)

(iii) When items of property, plant and equipment are stated at revalued amounts, which of
the following disclosures shall be made?

(a) Any restrictions on the distribution of the revaluation surplus to shareholders

(b) The carrying amount of temporarily idle property, plant and equipment

(c) The gross carrying amount of any fully depreciated property, plant and equipment
that is still in use

(d) All of the above (01)

(iv) Which of the following concepts measures profit in terms of an increase in the
productive capacity of an entity?

(a) Physical capital maintenance

 (b) Historical cost accounting

(c) Financial capital maintenance (money terms)

(d) Financial capital maintenance (real terms) (01)

Financial Accounting and Reporting-I Page 3 of 6

(v) Which of the following should be included in the initial cost of investment property?

(a) Cost incurred on opening ceremony to celebrate completion of property

(b) Operating losses incurred before the property achieves the planned level of
occupancy

(c) Abnormal waste of materials incurred in construction of property

(d) Property transfer taxes (01)

(vi) An entity purchased an investment property on 1 January 2018 for Rs. 35 million. The
property had an estimated useful life of 35 years with no residual value. At 31 December
2020, the property had a fair value of Rs. 42 million. On 1 January 2021, the property was
sold for net proceeds of Rs. 40 million. Calculate the profit or loss on disposal under
both the cost and fair value models.

Cost model Fair value model

(a) Gain of Rs. 2 million Gain of Rs. 2 million

(b) Gain of Rs. 8 million Loss of Rs. 2 million

(c) Gain of Rs. 7 million Loss of Rs. 2 million

(d) Gain of Rs. 8 million Gain of Rs. 5 million

(02)

(vii) Which of the following is not considered as transaction with owners with reference to
statement of changes in equity?

(a) Issuance of shares at par (b) Issuance of shares at premium

(c) Profit for the year (d) Bonus issue of shares (01)

(viii) Which two of the following factors could cause a company’s gross profit percentage on
sales to be above the expected level?

(a) Over-statement of closing inventories

(b) Sales were higher than expected

(c) Inclusion of disposal proceeds of non-current assets in sales

(d) Decrease in carriage charges borne by the company on goods sent to customers (01)

Section B
 Q.5 Financial statements of Parodia Motors Limited (PML) for the year ended 30 June 2021 are
under preparation. While reviewing revenues from contract with customers, following matters
have been identified:

(i) On 1 November 2020, PML sold Car-A to Alpha Limited (AL) for Rs. 5 million. As per the
contract, Rs. 1 million would be paid immediately and the balance would be paid after 2
years. The accountant has recognized revenue to the extent of the cost of Car-A

i.e. Rs. 3.5 million and remaining revenue would be recognized upon receipt of balance
from AL.

(ii) On 1 January 2021, PML entered into six months’ contract with Beta Limited (BL) to sell
Car-B for Rs. 3.5 million per unit. As per the contract, if BL purchases more than

10 units during the contract period, the price will be retrospectively reduced to Rs. 3.4
million per unit. At the inception of the contract, PML concluded that BL will meet the
threshold for the discount. BL purchased 11th unit of Car-B on 28 June 2021 for which no
revenue has been recorded. BL has made payments of all units except 11th unit which
will be settled in July 2021.

(iii) On 1 February 2021, PML sold Car-C to Gamma Limited (GL) for Rs. 3 million and
recognized the entire amount as revenue. PML also provided GL a Rs. 0.2 million
discount voucher for any future purchases of spare parts within one year. There is 80%
likelihood that GL will redeem the discount voucher and will purchase spare parts within
one year. By the end of the year, no spare parts were purchased by GL. PML normally

sells Car-C for Rs. 3 million with no discount voucher.

Financial Accounting and Reporting-I Page 4 of 6

(iv) On 20 February 2021, PML sold Car-D to Delta Limited (DL) with one-year free maintenance services at a
lumpsum payment of Rs. 3.6 million. Payment was made on 1 March 2021 upon delivery of Car-D to DL. The
revenue of Rs. 1.2 million (i.e. 4/12 of Rs. 3.6 million) has been recognized. PML normally sells Car-D and
annual maintenance services separately for Rs. 3.5 million and Rs. 0.3 million respectively.

Discount rate of 12% per annum may be used wherever required.

Required:

Prepare correcting entries for the year ended 30 June 2021 in accordance with

IFRS 15 ‘Revenue from Contracts with Customers’. (16)

Q.6 Following are the extracts from the financial statements of Saguaro Limited (SL) for the year ended 30
June 2021:

Statement of financial position as on 30 June 2021

Assets 2021 2020 Equity & liabilities 2021 2020

Rs. in million Rs. in million

 Operating fixed assets 820 848 Share capital (Rs. 10 each) 700 500

Accumulated depreciation (300) (262) Share discount (40) -

Capital work in progress 84 - Retained earnings 220 315

Inventories 274 245 Long-term loans 175 210

Trade receivables 177 204 Trade payables 180 130

Insurance claim - 31 Accrued expenses 48 43

Advance to supplier 78 60 Current portion of long-

term loans
Cash and bank balances 193 112 43 40

1,326 1,238 1,326 1,238

Statement of profit or loss for the year ended 30 June 2021

Rs. in million

Sales 757

Cost of sales (485)

Gross profit 272

Operating expenses (310)

Gain on disposal of equipment 17

Loss before interest (21)

Other information:

(ix) SL declared a final dividend of 10% on 30 September 2020 which was paid in December 2020.

(x) 20 million shares were issued in May 2021.

(xi) Insurance claim was related to plant and machinery destroyed in April 2020. The plant had cost
and book value of Rs. 63 million and Rs. 42 million respectively.

(xii) During the year, SL disposed of equipment having cost and net book value of Rs. 75 million and
Rs. 35 million respectively.

(xiii) Current portion of long-term loans include accrued interest of Rs. 5 million. (2020: Rs. 1
million)

(xiv) Trade payables include an amount of Rs. 14 million payable against capital work in progress.

Required:

Prepare SL’s statement of cash flows for the year ended 30 June 2021. (16)

Financial Accounting and Reporting-I Page 5 of 6

Q.7 Following information pertains to non-current assets of Bunny Ear Limited (BEL):

Land:
In January 2019, the government allotted a piece of land to BEL subject to the condition that BEL will
establish a factory building on it. The land was recorded at its fair value of Rs. 100 million.

Factory building:

On 1 March 2019, BEL started construction of the factory building. The construction work was completed on
30 June 2020. Payments related to the construction of the factory were as follows:

Description Date of payment Rs. in million

1st bill of contractor 1-Mar-2019 130

2nd bill of contractor 1-Aug-2019 190

3rd bill of contractor 1-Jan-2020 180

Last bill of contractor 1-Jul-2020 100

The project was financed through:

(xvii) government grant of Rs. 200 million received on 1 February 2019. Unused funds from
government grant were invested in a saving account @ 8% per annum.

(xviii) withdrawals from the following running finance facilities obtained from Bank A and Bank B. The
relevant details are:

Bank A Bank B

Obtained on 1 January 2019 1 January 2020

Markup rate 12% 14%

-------- Rs. in million --------

Balance on 31 December 2019 250 -

Markup for 2019 22 -

Balance on 31 December 2020 350 200

Average balance during 2020 300 150

Markup for 2020 36 21

Manufacturing plant:

The manufacturing plant was purchased on 1 August 2020 at cost of Rs. 420 million. Rs. 240 million was
financed through an interest free loan from government. The loan will be forgiven if the plant is operated for
atleast 4 years by BEL. Upon acquisition, there is a reasonable assurance that BEL will comply with this
condition.

Other information:

(a) BEL uses cost model for subsequent measurement of property, plant and equipment.

(b) All government grants are recorded as deferred income and a part of it is transferred to income
each year.

(c) Useful life of the factory building and manufacturing plant has been estimated at 25 years and
10 years respectively.
 Required:

Prepare relevant extracts (including comparative figures) from BEL’s statement of profit or loss for the year
ended 31 December 2020 and statement of financial position as on that date. (Notes to the financial
statements are not required. Borrowing costs are to be calculated on the basis

of number of months) (16)

Financial Accounting and Reporting-I Page 6 of 6

Q.8 The accountant of Cereus Golf Club (CGC) was terminated on charges of fraud and you have
been assigned the task of preparing the accounts for the year ended 31 December 2020. You
have found that the proper books had not been maintained. The management of CGC has
given you the following information:

(i) Cash and bank balances at 1 January 2020 amounted to Rs. 0.5 million and Rs. 2
million respectively. However, as on 31 December 2020, there was no cash balance
and Rs. 4.2 million in the bank.

(ii) The members are required to pay 3 years’ subscription in advance upon
admission/renewal. Full year subscription is charged from members joining during the
year. Number of subscriptions received are as under:

Year No. of memberships 3 years’ subscription

per member

2018 100 Rs. 60,000

2019 140 Rs. 75,000

2020 160 Rs. 90,000

During 2020, 10 members were awarded membership on special permission but they
had not paid the subscription till year-end.

After year-end, 5 more members informed that they had paid the 3 years’ subscription
amount in 2020. It was found out that the amount was misappropriated by the
accountant.

(iii) CGC had received a donation of Rs. 8 million in 2019 to meet the repair and
maintenance expenditure of its golf course. Out of total donation, the club has spent
Rs. 2.2 million and Rs. 2.8 million in 2019 and 2020 respectively.

(iv) CGC started purchasing golf kits in 2020 for sales as well as for rent purposes. 20% of
the purchases were unpaid at year-end. Two third of the golf kit purchases made in
2020 had been added to inventory of golf kits for sale and remaining had been added
directly to golf kits for rent.
 (v) Golf kits are sold for cash at cost plus 40%. Cost of closing inventory of golf kits for sale
amounted to Rs. 1 million. It was decided to transfer half of these kits into golf kits for
rent at 30% of their original cost.

(vi) Some of the receipts and payments during the year were as follows:

Rupees

Rent of golf kits 650,000

Golf kits purchases 4,800,000 Annual insurance (paid till April 2021) 660,000
Salaries (including Rs. 350,000 for 2019) 2,800,000

Other expenses 2,320,000

(vii) CGC has a fidelity insurance policy and any cash deficiency upto a maximum of Rs. 2
million is recoverable under the policy.

(viii) Fixed assets at 1 January 2020 had a book value of Rs. 25 million. All fixed assets are to
be depreciated at 15% per annum.

Required:

(a) Prepare income and expenditure account for the year ended 31 December 2020. (11)

(b) Prepare statement of financial position as on 31 December 2020. (09)

(THE END)
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:

(xii) Answer all NINE questions.

(xiii) Answer in black pen only.

(xiv) Multiple Choice Questions must be answered in answer script only.

Section A

S.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

(xvii) 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:

Limit Expected average

balance for 2023
Name of bank Interest rates
------ Rs. in million ------

Bank A 300 220 13.7%

Bank B 350 280 14.6%

(xviii) The surplus funds available from the loan will be invested in a saving account at 10% per
annum.

(xix) 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:

(xv) if all the payments will be made from the specific loan only. (04)

(xvi) 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 24.5 17.8
cash

Revaluation surplus 4.0 - Cash 4.7 15.4

47.9 43.8 47.9 43.8

Additional information:

(a) Final dividend was paid in respect of year 2020 amounting to Rs. 3.4 million.
 (b) Additions to property, plant and equipment during the year amounted to Rs. 14
million.

(c) 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)

(d) 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.

Research fund As per the resolution of board of trustees, MWH 60

is required to allocate 20% of surplus

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:

(xv) 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

(xvi) 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:

(e) Compute QL’s ratios for 2021 for comparison with 2020. (06)

(f) 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.

(iv) 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.

(v) 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%

(xvii) 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:

(viii) 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)

(ix) 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)
Certificate in Accounting and Finance Stage Examination

The Institute of 13 September 2022

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(xv) Answer all NINE questions.

(xvi) Answer in black pen only.

(xvii) Multiple Choice Questions must be answered in answer script only.

Section A

S.2 Consider the following statements with reference to ‘Conceptual framework for financial reporting’:

(i) Physical capital maintenance measures profit in terms of increase in the productive capacity
of an entity.

(ii) In times of rising prices, profits will be overstated and assets will be understated when
financial statements are prepared on the basis of historical cost.

(iii) Income represents all increases in assets or decreases in liabilities that result in increase in
equity.

(iv) To be a perfectly faithful representation, a depiction would have three characteristics. It

would be complete, relevant and verifiable.

(v) In value in use method, assets are measured at the amount that would be paid to purchase
the same or a similar asset currently.

(vi) Current cost and fair value are exit values.

(vii) Requirements of a standard overrides the requirements of conceptual framework.

(viii) Financial capital maintenance is likely to be the most relevant to investors as they are
interested in maximizing the return on their investment and purchasing power.
Required:

Identify whether each of the above statements is TRUE or FALSE. Give reasons for statements identified as
FALSE. (07)

S.3 Discuss how the following should be dealt with in the current year’s financial statements of relevant
entities in accordance with IAS 20.

(xx) Xero Limited (XL) received a government grant to setup a plant in an under-developed rural
area three years ago. One of the conditions of the grant was that XL will maintain a minimum
of 200 employees during the next five years. However, due to worsening economic conditions,
XL failed to maintain 200 employees and the full grant became repayable immediately in the
current year.

XL has been presenting the grant in statement of financial position by deducting the

grant in arriving at the carrying value of the plant. (04)

(xxi) One Limited received a loan from government in the current year at an interest rate of 5% per
annum. The prevailing market interest rate is 12% per annum. The only condition attached to
the loan is that it should be used for acquisition of textile

machinery. (03)

Financial Accounting and Reporting-I Page 2 of 6

Q.3 Oracle Family Club (OFC) was formed in January 2021. The following information is available in respect
of the first year of operations:

Receipt and payment account for the year ended 31 December 2021

Receipts Rs. in '000 Payments Rs. in '000

Subscriptions for: Salaries 640

(xvii) 2021 2,800 Rent 990

(xix) 2022 1,360 Equipment 2,560

Joining fees 2,100 10% Fixed deposit 2,020

Canteen sales 720 Construction of building 1,500

Life-time memberships 1,840 Canteen purchases 700

Closing balance 410

8,820 8,820

Income and expenditure account for the year ended 31 December 2021
 Expenditures Rs. in '000 Incomes Rs. in '000

Salaries 700 Subscription 3,450

Rent 760 Interest on fixed deposit 150

Depreciation of equipment 200 Life-time memberships 360

Surplus 2,330 Profit from canteen 30

3,990 3,990

Additional information:

(xviii) OFC also operates a canteen. All sales and purchases of canteen are made for cash.

(xix) Salary of canteen’s salesman amounted to Rs. 90,000 is included in payments.

Required:

Prepare OFC’s statement of financial position as on 31 December 2021. (10)

Q.4 During the review of accounting records and financial statements for the year ended 30 June 2022 of
Tally Traders, following errors were highlighted:

(g) Sales included an outstanding balance of Rs. 500,000 for which a customer would need to
pay Rs. 485,000 only if payment is made within 30 days. The customer is expected to pay
within 30 days.

(h) An item was included in closing inventory at its net realizable value of Rs. 490,000. However,
the item had a cost of Rs. 450,000.

Periodic inventory method is used to record the inventory transactions.

(i) A sub-total of Rs. 234,000 was carried forward in the purchase day book as Rs. 432,000.
Control accounts are not maintained for Debtors and Creditors.

(j) A credit note issued to a customer of Rs. 128,000 was recorded as credit note received from
supplier.

(k) An office machine costing Rs. 3,540,000 with a carrying value of Rs. 2,040,000 as on 1 July
2021 was disposed of on 28 February 2022 for Rs. 1,860,000. The sale proceeds were
credited to accumulated depreciation account and full year’s depreciation was provided on
the machine.

Office machines are depreciated at 10% per annum using reducing balance method.

Required:

Prepare journal entries to correct the above errors. (Narrations are not required) (08)

Financial Accounting and Reporting-I Page 3 of 6

Q.5 On 1 March 2017, Zarmoney Limited imported an automatic plant for Rs. 130 million. The
commissioning of the plant was completed on 1 January 2018 at a cost of Rs. 10 million. The economic life
of the plant was estimated as 12 years and useful life of the plant was estimated as 8 years. The plant is
being depreciated at 20% per annum using reducing balance method.

Due to declining demand for the product manufactured from this plant, an impairment test was carried out
at 31 December 2021. Following information has been gathered for impairment testing of the plant:

(vi) The current selling price of a similar plant in the local market is Rs. 50 million. The present
decommissioning cost of the plant is estimated at Rs. 2 million.

(vii) The plant’s net disposal proceeds at the end of the useful life is estimated at Rs. 4 million.

(viii) The current market risk-free rate of interest is 8% per annum, however, an investor would ask
additional return of 2% for bearing the uncertainty inherent in such a plant.

(ix) A junior accountant has calculated following net cash flows from operating the plant:

Year 2022 2023 2024 2025

Net cash inflow (Rs. in million) 11 7 3 1

However, a review of accountant’s working has revealed the following:

• Depreciation of the plant has been included as an outflow in each year.

• Tax payments of Rs. 2 million has been included as an outflow in each year.

• Inflows from plant in 2022 include receipts from sale of existing inventory
amounting to Rs. 3 million

Required:

Compute the impairment loss (if any) in the value of the plant to be recognised on

31 December 2021. (Show all necessary workings) (08)

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

(x) Which of the following is NOT a limitation of ratio analysis?

• Use of different accounting policies and estimates

• Use of different formulas for calculating ratios

• Different inflation rates in different years

• Companies pursuing different strategies (01)

(xi) If the existing current ratio of a company is more than 1, what would be the impact of a credit
purchase of inventory on the current ratio?

• Current ratio would increase

• Current ratio would decrease

• Current ratio would decrease but would remain higher than 1

• Current ratio would remain same (01)

(xii) Which of the following statements are correct?

  Giving incentives to customer to pay on time would result in decrease in debtor’s turnover in times.

 If all debtors pay their debts within the credit period, the average collection period would be Nil.

(a) Only (I) is correct (b) Only (II) is correct

(c) Both are correct (d) None is correct (01)

Financial Accounting and Reporting-I Page 4 of 6

(iv) Which TWO of the following would improve gearing ratio of a company?

(a) Issuance of shares at discount

(b) Repayment of a bank loan

(c) Issuance of bonus shares

(d) Disposal of a land at its carrying value (01)

(v) Which of the following changes would be considered as change in accounting policy?

(I) Changing the subsequent measurement model for property, plant and equipment
from cost model to revaluation model.

(II) Changing the inventory valuation method from FIFO to Weighted average.

(a) Only (I) is change in accounting policy

(b) Only (II) is change in accounting policy

(c) Both are change in accounting policy

(d) None is change in accounting policy (01)

(vi) On 1 January 2021, a company borrowed Rs. 20 million @ 9% per annum for the
purpose of constructing an asset. The company started construction on 1 February
2021 and paid Rs. 8 million on 1 March 2021 and Rs. 12 million on 1 July 2021. The
asset was ready to use on 1 September 2021. Surplus funds were invested @ 6% per
annum.

The borrowing cost that can be capitalized is:

(a) Rs. 660,000 (b) Rs. 710,000

(c) Rs. 900,000 (d) Rs. 1,050,000 (02)

(vii) Which of the following statements are correct?

(I) Investment income on the temporary investment of unused funds of general

borrowings is taken to profit or loss.

(II) Capitalisation of borrowing cost always commences as soon as construction of a

qualifying asset begins.

(a) Only (I) is correct (b) Only (II) is correct

(c) Both are correct (d) None is correct (01)

(viii) Which TWO of the following would be shown as a deduction from the column of
retained earnings in statement of changes in equity?
 (a) Transfer of incremental depreciation

(b) Issuance of shares at discount

(c) Cash dividend

(d) Transfer to general reserves (01)

(ix) Which TWO of the following situations would require prior year adjustment as per IAS
8?

(a) Changing the depreciation method from straight line basis to the reducing
balance basis in respect of a building held for the last 10 years.

(b) Changing the measurement model for Investment property from cost model to
fair value model.

(c) Incorporating the effects of a material understatement found in last year closing
inventories due to incorrect formula in excel sheet.

(d) Adopting the requirements of IAS 20 for a government grant received by an entity
for the first time.
(01)

Financial Accounting and Reporting-I Page 5 of 6

Section B

Q.7 Following is the statement of financial position of Quicken Limited (QL) as at 30 June 2022:

2022 2021 2022 2021

Rs. in million Rs. in million

Share capital 480 400 Land and building 748 526

Revaluation surplus 135 - Vehicles 118 96

Retained earnings 337 325 Inventories 365 444

Long-term loan 335 460 Trade and other receivables 212 185

Trade and other payables 160 142 Cash and bank balances 73 111

Advance from customers 69 35

1,516 1,362 1,516 1,362

Additional information:

 During the year, land and building were revalued for the first time, resulting in a surplus of Rs. 150
million and incremental depreciation of Rs. 15 million.

 Depreciation on building charged to profit or loss amounted to Rs. 72 million.

  During the year, vehicles having book value of Rs. 8 million were sold for Rs. 11 million received in
cash. Further, sale proceeds of Rs. 6 million of another vehicle (book value Rs. 7 million) disposed of
in May 2021 were received in August 2021.

 Vehicles costing Rs. 51 million were purchased during the year of which Rs. 12 million is still unpaid.

 Inventories as at 30 June 2022 included work in process inventories of Rs. 96 million (2021: Rs. 80
million) which are not available for sale.

 Interest on loan for the year amounted to Rs. 48 million of which Rs. 14 million was capitalised in the
cost of a building constructed during the year.

 Following dividends were announced for the year ended 30 June 2022 and 2021:

2022 20% interim bonus shares and 15% final cash dividend

2021 5% interim bonus shares and 10% final cash dividend

Required:

Prepare QL’s statement of cash flows for the year ended 30 June 2022. (15)

Q.8 Peach Tree Limited (PTL) was incorporated on 1 July 2020. Following information has been extracted
from its financial statements for the year ended 30 June 2022:

2022 2021

---- Rs. in million ----

Net profit 250 210

Revaluation surplus arising during the year 30 50

Total comprehensive income 280 260

Details of shares and bonds issued by PTL since incorporation are as follows:

 On 1 July 2020, 50 million ordinary shares having par value of Rs. 10 each were issued at Rs. 14 each.

 On 1 July 2020, 10 million 12% redeemable preference shares having par value of Rs. 50 each were
issued at Rs. 64 each. Each preference share is convertible into 3 ordinary shares after 5 years.

 On 1 February 2021, further 20 million ordinary shares having par value of Rs. 10 each were issued at
prevailing market price of Rs. 16 each.

 On 1 October 2021, 40% right shares were issued at a premium of Rs. 10 per share. The market price
per share immediately before the entitlement date was Rs. 30 per share.

 On 1 November 2021, 3 million convertible bonds having par value of Rs. 100 each were issued. The
bonds carry interest @ 10% per annum payable on 31 October each year. Each bond is convertible
into 7 ordinary shares after 3 years.

Financial Accounting and Reporting-I Page 6 of 6

Required:
 Compute basic and diluted earnings per share to be disclosed in PTL’s financial statements (15)
for the years ended 30 June 2021 and 2022. (Show comparative figures)

Q.9 Following information pertains to non-current assets of GnuCash Limited (GL):

(i) GL purchased a manufacturing plant for Rs. 340 million on 1 January 2021. On that
date, the plant had an estimated useful life and residual value of 13 years and Rs. 60
million respectively. The revalued amounts and residual value were as follows:

Revalued amount Residual value

----------- Rs. in million -----------

30 June 2021 304 54

30 June 2022 315 44

(ii) A warehouse owned by GL was given on rent on 1 January 2022. Previously, the
warehouse was in use of GL.

The warehouse was acquired by GL on 1 July 2019 at a cost of Rs. 200 million and is
being depreciated @ 10% per annum on reducing balance method.

Fair value of the warehouse on various dates are as follows:

Rs. in million

1 January 2022 206

30 June 2022 214

Rentals earned for the year ended 30 June 2022 amounted to Rs. 10 million out of
which Rs. 6 million is still outstanding.

(iii) GL acquired a property comprising of three similar showrooms at a total cost of Rs. 900
million on 1 October 2021. 40% of the cost of property is attributable to the value of
land. Each of the showroom can be leased out separately and has a useful life of 15
years with no residual value.

GL is using one showroom for its own products while the other showrooms were held to
be leased out. On 1 March 2022, the two showrooms were given on monthly rent of Rs.
4 million.

The fair value of each showroom is increasing by Rs. 3 million each month.

Other information:

 Cost model is used for subsequent measurement of all property, plant and equipment

except for manufacturing plant for which revaluation model is used.

 Maximum possible amount is transferred from the revaluation surplus to retained

earnings on an annual basis.

 Fair value model is used for subsequent measurement of all investment properties.

Required:
 Prepare notes on ‘Property, Plant and Equipment’ and ‘Investment Property’, for inclusion in
GL’s financial statements for the year ended 30 June 2022.
(20)
(Comparative figures and column for total are not required)

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 14 March 2023

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(xviii) Answer all NINE questions.

(xix) Answer in black pen only.

(xx) Multiple Choice Questions must be answered in answer script only.

Section A

S.4 Following information relating to Akkadian Limited (AL) has been gathered for the purpose of
calculating earnings per share:

(i) Outstanding ordinary, preference and potential shares of AL as at 1 January 2021:

• 6 million ordinary shares having par value of Rs. 10 each.

• 2 million irredeemable preference shares having par value of Rs. 20 each

carrying cumulative dividend of 14% per annum.

• 3 million share options for ordinary shares having exercise price of Rs. 36
each.

(ii) On 1 September 2021, AL announced 40% right shares to its ordinary shareholders at Rs. 18
per share. The entitlement date of right shares was 1 October 2021. The market price per
share immediately before the announcement date and entitlement date were Rs. 30 and Rs.
32 respectively.

(iii) The average market price of ordinary shares during the years 2021 and 2022 were Rs. 30 and
Rs. 45 per share respectively.

(iv) Profits for the years 2021 and 2022 amounted to Rs. 24 million and Rs. 34 million respectively.

(v) No dividend was declared in the years 2021 and 2022.

 (vi) Share options were not exercised in the years 2021 and 2022.

Required:

Compute AL’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 2022. (10)

S.5 Discuss how the following should be dealt with in the financial statements of relevant entities
according to IAS 20:

(xxii) A government grant of Rs. 25 million was received by an entity in 2022 for the damage to its
head office building caused by the flood in December 2021. As a result of damage,

an impairment loss of Rs. 21 million was recognised in 2021. (02)

(xxiii) A manufacturing entity established a plant in an area with high illiteracy rate and received a
government grant of Rs. 40 million. The grant received was equivalent to two years’ salaries of
the 50 local persons employed by the entity. The grant is repayable in full if the number of
these employees falls below 50 at any time during the next five years. It is highly probable that
the entity will comply with the condition attached

to the grant. (03)

(xxiv) Government built an alternate road to the industrial zone, in which an entity’s factory is
situated. The new road has reduced the distance to the market and would result in an

annual saving of transportation costs of Rs. 3 million for the entity. (03)

Financial Accounting and Reporting-I Page 2 of 6

(a) You are working as the finance manager of Hittite Limited (HL). A new CFO has joined
HL and has recommended changes to accounting policies related to assets to improve
HL’s financial ratios in the next financial statements. The CFO has suggested the
following changes to the policies:

• Subsequent measurement of investment property from cost model to fair value model.

• Subsequent measurement of property, plant and equipment from cost model to

revaluation model.

• Cost formula for inventory from weighted average to FIFO method.

You may assume that:

• fair values / cost / prices of all assets would increase over the time.

• the maximum possible amount from the revaluation surplus to retained

earnings would be transferred on an annual basis.

• periodic inventory system is followed by HL.

Required:
State the effect (increase, decrease, no effect) of each of the above changes on the ratios in the next
financial statements. (Note: Use the following format)

(10)

Change in policy of

Ratios investment property, plant inventory

property and equipment

Net profit to sales ratio

Return on assets

Return on capital employed

Debt equity ratio

Current ratio

Q.4 On 1 July 2019, Sumerian Limited (SL) purchased a manufacturing plant for Rs. 570 million. The plant is
being depreciated at a rate of 15% per annum using the reducing balance method. On 31 December 2021,
the remaining life of the plant was estimated at 4 years resulting in an increase of 5% in depreciation rate.

SL carried out impairment testing of the plant on 31 December 2021 and also on 31 December 2022 using
the following estimates:

31 Dec 2021 31 Dec 2022

----- Rs. in million -----

Annual inflows from the sale of product 245 263

Annual outflows for operations 167 174

Annual interest on loan obtained for plant acquisition 14 14

Net sales proceeds at the end of useful life in current 142 140
condition

Additional sale proceeds at the end of useful life if plant is 125 125
modified at cost of Rs. 50 million

Current fair value less cost to sell 300 280

Applicable discount rate 12% 10%

Required:

Calculate the carrying value of the manufacturing plant as at 31 December 2021 and 2022. (08)

Financial Accounting and Reporting-I Page 3 of 6

Q.5 On 1 March 2022, Inca Empire Limited (IEL) commenced business with a capital of Rs. 60,000
which was used to purchase two items of inventory. Details of their cost and sales for the year
ended 28 February 2023 are as follows:

Cost Sale

----------- Rupees -----------

Product A 25,000 55,000

Product B 35,000 70,000

Additional information:

(i) General inflation during the year is 8%.

(ii) Inflation specific to product A during the year is 12%.

(iii) Replacement cost of the product B at the end of the year is Rs. 45,000.

Required:

Prepare the statement of profit or loss and the statement of financial position (equity portion (04)
only) of IEL according to the concept of ‘Physical Capital Maintenance’.

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

(i) Alpha Limited made a profit before tax of Rs. 80,000 in the year just ended after
charging depreciation of Rs. 75,000. There was a gain of Rs. 25,000 on disposals of
property, plant and equipment. Net working capital excluding cash increased by Rs.
19,000. Income tax paid during the year was Rs. 24,000.

What is the amount of cash generated from operations?

(a) Rs. 87,000 (b) Rs. 111,000 (c) Rs. 125,000 (d) Rs. 148,000 (02)

(ii) A company’s cash balances have increased from last year. Which of the following
events could account for this?

(a) Delayed payments by debtors

(b) Shortening of the credit period by the creditors

(c) Acquisition of a long-term loan at high interest rate

(d) A decrease in final dividend proposed by the directors (01)

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

(I) Statement of cash flows is useful in assessing the ability of the entity to generate
cash and cash equivalents.

(II) Historical cash flows are often a fairly reliable indicator of the amount, timing and
certainty of the future cash flows.

(a) Both are correct (b) Only (I) is correct

(c) Only (II) is correct (d) None is correct (01)

 (iv) An entity reported a positive earnings per share in previous year. Which of the following
would result in increase in earnings per share of previous year due to restatement?

(a) Right issue (b) Bonus issue

(c) Share split (d) Share consolidation (01)

(v) Quick and current ratios of a business as on 31 December were 1:1 and 1.25:1. If
inventories at that date amounted to Rs. 45 million, then current liabilities were:

(a) Rs. 144 million (b) Rs. 225 million

(c) Rs. 180 million (d) Rs. 135 million (01)

Financial Accounting and Reporting-I Page 4 of 6

(vi) After the preparation of the draft financial statements, it was discovered that inventory items lost in a
fire incident were ignored altogether. If the entity follows periodic inventory system, what would be the
effect of the correction?

(01)

(xx) Which of the following falls under the definition of investment property?

(a) Owner occupied property awaiting disposal

(b) Property occupied by an employee

(c) Land held for undetermined use

(d) Property held for future development and subsequent use as owner-occupied

Gross profit Net profit

(a) Increase No impact

(b) Decrease Decrease

(c) No impact No impact

(d) Increase Decrease

property (01)

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

• Earnings per share amounts should not be presented if they are negative i.e. losses
per share.

• Earnings per share amounts calculated for discontinued operations must be

presented on the face of the statement of profit or loss.
 (a) Both are correct (b) Only (I) is correct

(c) Only (II) is correct (d) None is correct (01)

(l) Which TWO of the following may appear in the operating cash flows?

• Increase in depreciation expense

• Interest received

• Dividend paid

• Sale proceeds from disposal of property, plant and equipment (01)

Section B

Q.7 Roman Limited (RL) has extracted the following information for the purpose of preparation of statement
of changes in equity for the year ended 31 December 2022:

2022 2021 2020

Draft Audited Audited

--------- Rs. in million ---------

Net profit 285 195 177

Revaluation surplus arising during the year - 115 (78)

Transfer of incremental depreciation 30 26 28

Additional information:

(x) On 1 February 2021, a bonus issue of 10% was made as final dividend for 2020.

(xi) On 15 May 2021, RL issued right shares for Rs. 20 per share. Right shares were issued in a
proportion of 1 right share for every 4 ordinary shares held. Transaction cost of Rs. 0.5 per
share was also incurred.

(xii) On 1 May 2022, an item of property, plant and equipment was disposed of at its carrying
value. An amount of Rs. 75 million was remaining in the revaluation surplus account in
respect of this item’s previous revaluations.

(xiii) On 1 July 2022, 50 million irredeemable preference shares having par value Rs. 10 each were
issued at Rs. 15 per share.

(xiv) In October 2022, an interim 5% cash dividend on all shares was made.

Financial Accounting and Reporting-I Page 5 of 6

 (xiii) The revalued amount of RL’s head office building was determined as Rs. 400 million as on 31
December 2021. However, revaluation was not incorporated as the change in revalued
amount was considered to be temporary by RL’s management. The head office building had a
carrying value of Rs. 350 million on 31 December 2021 and had a remaining useful life of 10
years. A revaluation loss of Rs. 24 million was recorded on 31 December 2019 on its previous
revaluation.

(xiv) Share capital and reserves as at 1 January:

2021 2020

------ Rs. in million ------

Ordinary share capital (Rs. 10 each) 800 800

Retained earnings 715 510

Revaluation surplus 399 505

Required:

Prepare RL’s statement of changes in equity for the year ended 31 December 2022 along with comparative
figures. (Column for total is not required) (15)

Q.8 Aztec Sports Club (ASC) was formed on 1 January 2021 when a founding member sold a piece of land
to ASC having fair value of Rs. 4,000,000 for the purpose of establishing a sports club, for Rs. 1,000,000
only. The following information is available for the preparation of financial statements of ASC for the year
ended 31 December 2022:

 Balances of some assets and liabilities as on 1 January 2022:

Rs. in '000

Cash and bank balances 223

Fixed assets (other than land) 6,450

Prepaid insurance 274

Accrued other expenditures 865

 Payments made during the year:

Rs. in '000

Fixed assets (on 1 May 2022) 6,000

Annual insurance (valid till 31 March 2023) 1,404

Other expenditures 2,788

 Annual membership fee for the years 2021, 2022 and 2023 was Rs. 8,000, Rs. 10,000 and Rs. 12,000
respectively. However, members joining in second half of year are charged only half fee for that year.
Each member is required to pay the membership fee for the current year and the next year at the time
of admission. The numbers of members admitted during the years 2021 and 2022 are as follows:

2021 2022

1st half 2nd half 1st half 2nd half

150 270 220 105

  Contributions received during the year:

• A member contributed Rs. 1,400,000 for the purchase of a tractor for ground’s maintenance. The
tractor will be purchased in the year 2023.

• Another member contributed Rs. 1,100,000 without specifying any restriction.

 On 1 April 2021, an area was given on rent for operating a canteen in the club at an annual rent of Rs.
840,000. However, to facilitate the tenant for setting up the canteen, it was agreed that the rent for 2
years will be paid in 2023.

 On 1 September 2022, some fixed assets having book value of Rs. 3,000,000 on 1 January 2022 were
disposed of for Rs. 3,300,000.

 Depreciation is charged on all fixed assets (other than land) using reducing balance method at a rate
of 20% per annum.

Financial Accounting and Reporting-I Page 6 of 6

Required:

Prepare the following using the deferral method:

(a) Statement of income and expenditure for the year ended 31 December 2022 (09)

(b) Statement of financial position as at 31 December 2022 (09)

Q.9 Following information pertains to non-current assets of Mesopotamia Limited (ML):

(i) On 1 July 2019, ML acquired a warehouse at a cost of Rs. 300 million and was
immediately given on rent to a third party. On 1 January 2022, ML commenced the
development work on its warehouse with a view to put it in own use. The development
work was completed on 31 March 2022 at a cost of Rs. 50 million. ML started using the
warehouse for its inventory on 1 May 2022. Fair value of the warehouse on various
dates are as follows:

31 Dec 2020 31 Dec 2021 31 Mar 2022 31 Dec 2022

Rs. in million 316 344 352 366

Depreciation is charged on warehouse at a rate of 10% per annum using the reducing
balance method.

(ii) On 1 January 2020, ML purchased a heavy duty vehicle for Rs. 360 million. On purchase
date, the vehicle had an estimated useful life and residual value of 5 years and Rs. 72
million respectively.

During 2022, ML has decided to change the depreciation method for vehicles from
reducing balance to straight line.

(iii) On 1 June 2021, ML started construction of an office building. The building was
available for use on 1 October 2022 and was immediately put into use. Details of the
construction costs incurred are as under:
 Payment date Rs. in million Sources (See below)

1 May 2021 140 A

1 January 2022 *100 A&B

1 April 2022 70 C

1 August 2022 160 D

470

*The bill from the contractor was received on 1 December 2021.

These payments were financed through the following sources:

(A) A short term loan of Rs. 200 million obtained on 1 April 2021 from Bank A at the
rate of 16% per annum. The surplus funds available from the loan were invested
in a saving account at 10% per annum. On 1 March 2022, ML repaid the loan

using the proceeds received from a right issue of shares.

(B) Excess cash available with ML in current bank accounts.

(C) Withdrawals from its short term investments earning a profit of 12% per annum.

(D) Withdrawals from a running finance facility from Bank B carrying interest at 14%
per annum. The facility is also used for working capital needs.

Depreciation is charged on office building using straight line method over the estimated
useful life of 20 years.

Additional information:

 Cost model is used for subsequent measurement of all property, plant and equipment.

 Fair value model is used for subsequent measurement of all investment properties.

Required:

Prepare relevant extracts (including comparative figures) from ML’s statement of profit or (17)
loss for the year ended 31 December 2022 and statement of financial position as on that
date.

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 12 September 2023

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(xxi) Answer all NINE questions.

(xxii) Answer in black pen only.

(xxiii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 The retained earnings column, extracted from the draft statement of changes in equity of Puffer Limited
(PL) for the year ended 31 December 2022, is as follows:

Rs. in million

Balance as at 31 December 2020 928

Final cash dividend @ 10% for the year 2020 (114)

Profit for the year 2021 258

Balance as at 31 December 2021 1,072

Profit for the year 2022 328

Balance as at 31 December 2022 1,400

The following changes have not been incorporated into the draft financial statements of PL:

T PL has decided to change the method for valuation of inventory from ‘first-in, first-out’ (FIFO) to the
weighted average. The value of inventory under each method has been determined as follows:
 FIFO Weighted average

------- Rs. in million -------

As at 31 December 2020 438 460

As at 31 December 2021 560 520

As at 31 December 2022 601 618

U In view of increasing bad debts, PL has decided to double the provision for doubtful receivables.
The balance of provision for doubtful receivables prior to this change were as follows:

Rs. in million

As at 31 December 2020 15

As at 31 December 2021 19

As at 31 December 2022 23

V PL has also decided to recognise all borrowing costs incurred in a year as an expense. Previously,
borrowing costs related to qualifying assets were capitalised as part of the cost of that asset. Total
borrowing costs incurred during the years 2022 and 2021 amounted to Rs. 87 million and Rs. 95
million, respectively. Of these, Rs. 53 million and Rs. 38 million were capitalised in the cost of head
office building in 2022 and 2021, respectively. The construction of the building is expected to
complete in 2023.

Required:

V.1 Briefly discuss how the above changes should be incorporated in PL’s financial statements.
(03)

V.2 Prepare the retained earnings column as would appear in PL’s statement of changes in equity for
the year ended 31 December 2022, in accordance with IFRSs. (06)

Financial Accounting and Reporting-I Page 2 of 6

Q.2 During the review of accounting records and financial statements of Jelly Traders (JT) for the
year ended 30 June 2023, the following errors were highlighted:

(i) A payment of Rs. 90,000 to a supplier was recorded as purchase of inventory on cash.

(ii) Inventory withdrawn by owner for personal use was recorded as a credit sale for Rs.
460,000.

(iii) Inventory returned by a customer, with a selling price of Rs. 540,000, were debited to
inventory and credited to receivables at the selling price.

(iv) On 1 November 2022, an item of equipment was sold for Rs. 90,000. The disposal was
not recorded, and the amount received was credited to depreciation expense. On 1 July
2022, the equipment had a written down value of Rs. 120,000, while its original cost
was Rs. 250,000.

(v) A cheque issued for one year’s rent from 1 May 2023 to 30 April 2024, amounting to Rs.
240,000, was dishonoured due to a mistake in the name of the party. No entry was
made upon the return of the cheque, and a new cheque was issued by JT after the year-
end.

Other information:
  JT uses the perpetual inventory method. JT makes a profit of 25% on sales.

 All fixed assets are depreciated at a rate of 20% using the reducing balance method.

Required:

Prepare journal entries to correct the above errors. (Narrations are not required) (08)

Q.3 The following information pertains to Ray Limited (RL):

(i) The profit for the year ended 31 December 2022 amounted to Rs. 84 million (2021: loss
of Rs. 60 million).

(ii) The outstanding weighted average number of ordinary shares was 15 million during the
years 2022 and 2021.

(iii) On 1 January 2021, 2 million convertible bonds having a par value of Rs. 100 each were
issued. The bonds carry interest @ 20% per annum, payable on 31 December each
year. Each bond is convertible into 3 ordinary shares if converted after three years, or 4
ordinary shares if converted after five years.

(iv) On 1 January 2021, 12 million share warrants were issued, which can be exercised after
two years at an exercise price of Rs. 21 per share. The average market price of each of
RL’s share during the years 2022 and 2021 was Rs. 28 and Rs. 21, respectively.

(v) On 1 January 2022, 6 million 16% cumulative irredeemable preference shares having a
par value of Rs. 10 each were issued. Every 3 preference shares are convertible into 1
ordinary share after four years.

(vi) Applicable tax rate is 30%.

Required:

Compute RL’s diluted earnings per share for the years ended 31 December 2021 and 2022. (10)

Q.4 You are the accountant of Betta Limited (BL). BL has commenced construction of a
manufacturing plant to expand its production line, which will take two years to complete. The
cost of the plant will be financed through a new loan specifically obtained for this purpose.
Remaining cost will be financed through the existing borrowings.

You have pointed out that a portion of borrowing costs needs to be capitalised in the cost of
plant. The management is interested in determining the estimated borrowing costs that will
be capitalised in the future and has requested you to prepare a working.

Required:

List the information (key dates, amounts, etc.) that you will need to gather in order to (06)
calculate the estimated borrowing costs to be capitalised.

Financial Accounting and Reporting-I Page 3 of 6

Q.5 Shark Limited (SL) established a desalination plant at a total cost of Rs. 300 million in a
coastal area to provide clean drinking water. The plant started commercial production on

1 January 2019 and had an estimated useful life and residual value of six years and Rs. 30
million, respectively.
On 1 January 2020, SL received a government grant of Rs. 160 million towards the cost of the plant. The
sanction letter stated that SL should also operate the plant for atleast 300 days in each of the next three
years. At inception, there was a reasonable assurance that condition of the grant shall be complied with.
SL recorded the grant as deferred income.

In 2022, the plant was not operated for 120 days. Owing to this, the government issued a notice to SL for
repayment of Rs. 100 million. Accordingly, the amount was repaid by SL immediately.

Required:

Prepare relevant extracts from SL’s statement of profit or loss for the year ended 31 December
2022, and statement of financial position as at that date.
(07)
(Show comparative figures)

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

(i) Which TWO of the following characteristics are considered fundamental qualitative
characteristics according to the IASB’s conceptual framework for financial reporting?

(a) Timeliness (b) Faithful representation

(c) Relevance (d) Comparability (01)

(ii) Which TWO of the following properties owned by a company would be classified as
investment properties?

(a) Property occupied by an employee paying market rent

(b) Land held by a company for undetermined future use

(c) Machinery held for short-term sale in the ordinary course of business

(d) Building held by a company for long-term capital appreciation (01)

(iii) When there is no balance in the share premium account, transaction costs relating to
issue of shares are debited to:

(a) profit or loss (b) share capital

(c) revaluation surplus (d) retained earnings (01)

(iv) Which of the following is a self-balancing set of accounts that reports all unrestricted
revenue and restricted contributions for which no corresponding restricted fund is
presented?

(a) General fund (b) Restricted fund

(c) Endowment fund (d) Balancing fund (01)

(v) Annual membership subscription income of Rs. 1,800,000 was shown in the statement
of income and expenditure. Out of this, Rs. 300,000 was receivable at the year-end.
During the year, an amount of Rs. 400,000 was received pertaining to the previous year.
Calculate the total amount of subscription received during the year.

(a) Rs. 1,100,000 (b) Rs. 1,700,000 (c) Rs. 1,900,000 (d) Rs. 2,500,000 (01)

(vi) Which of the following is a specific reserve created out of retained earnings to ensure
that dividends remain stable irrespective of changes in earnings?

(a) General reserve (b) Dividend equalization reserve

(c) Revenue reserve (d) Capital reserve (01)

Financial Accounting and Reporting-I Page 4 of 6

(xxv) A non-profit organisation earns income on funds that are externally restricted to be held for
endowment. How should such income be recognised under the deferral method?

• Recognise revenue in the current year immediately

• Defer and recognise revenue over the years

• Recognise direct increase in the statement of changes in net assets

• Deduct from the related capital asset (01)

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

(xviii) It is always necessary to determine both an asset’s fair value less costs of disposal and its
value in use.

(xix) An entity shall estimate the recoverable amount of the asset at each year-end.

(a) Only (I) is correct (b) Only (II) is correct

(c) Both are correct (d) None is correct (01)

(xxi) The carrying value of a plant at 30 June 2023 is Rs. 26 million. The fair value of the plant is
estimated at Rs. 25 million, while its disposal costs are estimated to be Rs. 3 million. The
plant’s cash flows for the next five years are estimated to be Rs. 7 million per annum. The pre-
tax and post-tax discount rates per annum are 16% and 12%, respectively.

What is the approximate recoverable amount of the plant in the above case?

(a) Rs. 3 million (b) Rs. 23 million (c) Rs. 25 million (d) Rs. 26 million (02)

Section B

Q.7 The following is the statement of financial position of Dolphin Limited (DL) as at 30 June 2023:

Equity & liabilities 2023 2022 Assets 2023 2022

Rs. in million Rs. in million

Share capital 16,000 13,000 Property, plant and 13,835 14,300

equipment

Share premium 1,120 - Capital work-in-progress 3,485 2,500

Retained earnings 10,150 10,800 Investment properties 1,820 1,950

Long-term loan 3,275 3,540 Inventories 7,450 5,000

Trade and other payables 1,485 935 Trade receivables - net 3,588 4,085
 Accrued interest 140 195 Advance tax 36 -

Dividend payable 260 140 Cash and bank balances 2,216 1,010

Tax payable - 235

32,430 28,845 32,430 28,845

Additional information:

(xxi) The interest payment for the year amounted to Rs. 700 million, of which Rs. 300 million has
been capitalised in capital work-in-progress.

(xxii) The transfer from capital work-in-progress to property, plant and equipment amounted to Rs.
550 million.

(xxiii) An old machine costing Rs. 520 million with a book value of Rs. 350 million was traded-in for
a new machine costing Rs. 600 million on payment of Rs. 200 million.

(xxiv) DL acquired an investment property costing Rs. 300 million, of which Rs. 125 million is still
unpaid. DL applies fair value model for subsequent measurement of its investment
properties.

(xxv) The provision for doubtful trade receivables at 30 June 2023 was estimated at 8% (2022: 5%).

Financial Accounting and Reporting-I Page 5 of 6

(m) During the year, DL issued 10% bonus shares. Subsequently, a right issue was also made.

(n) The tax charge for the year amounted to Rs. 750 million at 30% of profit before tax.

(o) DL classifies dividends and interest payments in a way that keeps ‘cash flows from operating
activities’ higher.

Required:

Prepare DL's statement of cash flows for the year ended 30 June 2023. (18)

Q.8 Whale Limited (WL) is a growing business in the electronic items industry and operates two owned
outlets. Below are the summarized financial statements of WL for 2023:

Statement of financial position as at 31 March 2023

Assets Rs. in '000 Equity and liabilities Rs. in '000

Fixed assets 52,514 Share capital 11,000

Inventory 11,528 Retained earnings 25,535

Trade receivables 6,874 Long-term loan 21,625

Cash 2,658 Trade payables 9,874

Accrued expenses 5,540

73,574 73,574

Statement of profit or loss for the year ended 31 March 2023

 Rs. in '000

Sales 67,851

Cost of sales (47,528)

Gross profit 20,323

Selling and administrative expenses (7,584)

Interest expenses (5,147)

Net profit 7,592

Extracts from management reports:

(xv) Ratios for the year ended 31 March 2022:

Gross profit margin 36.2% Quick ratio 1.1 times

Operating profit margin 30.0% Interest cover 17.5 times

Return on capital employed 51.7% Asset turnover 1.7 times

Average time to pay 35 days Inventory turnover 9.0 times

(xvi) Key events during the year:

• A new outlet was inaugurated. The cost of purchasing the outlet was financed
through another long-term loan from a bank. The sales prices at the new outlet are
kept lower to attract customers.

• Despite an increase in sales promotional activities, the sales at the new outlet were
below expectation but are expected to increase from next year.

• Inventory at the new outlet was build-up by utilising liquid funds available with WL
and the extended credit facility from suppliers.

• The interest rate on existing bank loans has increased due to rise in the market
interest rate.

Required:

(xv) Compute WL’s ratios for 2023 in comparison with 2022. (06)

(xvi) Keeping in view the key events during the year, provide possible reasons for the variation(s) in
the ratios computed in (a) above. (09)

Financial Accounting and Reporting-I Page 6 of 6

Q.9 The following information pertains to non-current assets of Trout Limited (TL):

(i) Details of the property, plant and equipment as at 1 January 2022 are as follows:
 Cost/revalued Accumulated Depreciation Rate/ Subsequent
amount depreciation method life measureme
Assets
nt
------- Rs. in million -------

Equipment 360 110 Reducing 20% Cost

balance

Office 280 56 Straight line 10 years* Revaluation

building

*Remaining life at the date of last revaluation

As at 1 January 2022, the revaluation surplus related to the office building amounted to Rs. 32 million.
However, on 31 December 2022, due to a slump in the market, the building was again revalued by an
independent valuer, and this time, the office building was valued at only Rs. 156 million.

 On 1 July 2022, a new equipment was acquired by making payment of Rs. 50 million to the supplier. In
addition, an old equipment was given in exchange to the supplier. The fair values of the old and new
equipment were assessed at Rs. 60 million and Rs. 105 million, respectively. The old equipment had
been acquired at a cost of Rs. 80 million on 1 July 2019.

 On 1 January 2022, TL completed construction of the warehouse at a cost of Rs. 55 million for
subsequent sale to customer. However, warehouse was given on rent at an annual rent of Rs. 8
million on 1 April 2022. The fair value of the warehouse on various dates are as follows:

Rs. in million

1 January 2022 65

1 April 2022 73

31 December 2022 80

Other information:

• TL accounts for revaluation using the net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.

• The fair value model is used for the subsequent measurement of all investment properties.

Required:

Prepare the notes on ‘Property, plant and equipment’ and ‘Investment property’ to be included in TL’s
financial statements for the year ended 31 December 2022.

(Comparative figures and a column for the total are not required) (17)

(THE END)
Certificate in Accounting and Finance Stage Examination

The Institute of 12 March 2024

Chartered Accountants 3 hours – 100 marks

of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Instructions to examinees:

(xxiv) Answer all NINE questions.

(xxv) Answer in black pen only.

(xxvi) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Gemini Club (GC) prepared its complete financial statements for 2023; however, the excel sheet
containing statement of income and expenditure was inadvertently deleted. The following comparative
balance sheet, along with the receipts and payments account, is available:

Balance sheet as on 31 December 2023

Funds and liabilities Rs. in '000 Assets Rs. in '000

2023 2022 2023 2022

General fund: Fixed assets - net 1,403 1,300

Opening balance 1,766 1,586 Members’ subscription 270 158

Excess of income over expenditure 62 180 Miscellaneous supplies 13 10

1,828 1766 Tuck-shop rent 41 37

Tennis court fund 260 200 Advance salaries 18 15

Bank 450 530

 Liabilities:

Members’ subscription 20 25

Salaries 52 41

Utilities 25 18

Annual sports event 10 -

2,195 2,050 2,195 2,050

Receipts and payments account for the year ended 31 December 2023

Receipts Rs. in '000 Payments Rs. in '000

Opening balance 530 Salaries 560

Members’ subscription received 790 Fixed assets 92

Tennis court fund 60 Annual sports event 180

Contribution for annual sports event 49 Miscellaneous supplies 132

Entrance fee - annual sports event 86 Utilities 214

Tuck-shop rent 248 Repair and maintenance 40

Scrap sale 15 Construction of tennis court 110

Closing balance 450

1,778 1,778

Required:

Prepare GC’s statement of income and expenditure for the year ended 31 December 2023.

(Comparative figures are not required) (09)

Financial Accounting and Reporting-I Page 2 of 7

V.3 The accountant of Midjourney Enterprises (ME) prepared the draft statement of profit or loss for the
year ended 31 December 2023, which showed gross profit and net profit of Rs. 1,360,000 and Rs.
590,000 respectively. The following errors were found on a detailed review of the draft financial
statements:

(i) Purchase returns of Rs. 20,000 were recorded as sales returns of Rs. 2,000.

(ii) Free samples of goods costing Rs. 30,000 were distributed to potential customers, but were
mistakenly recorded as credit sales at a mark-up of 30% on cost.

(iii) Proceeds from the disposal of office equipment on 31 December 2023, amounting to Rs.
382,000, were credited to sales. The equipment had cost and carrying amount on 31
December 2023 of Rs. 500,000 and Rs. 320,000 respectively. ME depreciates office

equipment at 20%.
 (iv) Transportation outward, amounting to Rs. 240,000, was recorded as transportation inward.
This also resulted in overstatement of closing inventory by Rs. 36,000.

(v) While recording impairment for an item of property, plant and equipment, its value in use of
Rs. 1,200,000 was ignored. The item had a carrying value (before impairment) of Rs.
1,800,000 and fair value less costs of disposal of Rs. 1,000,000.

ME uses periodic inventory system for recording its inventory.

Required:

Compute the corrected gross profit and net profit of ME for the year 2023. (08)

V.4 The following information pertains to Dall-E Limited (DL) for the year ended 31 December 2023:

Sales during the year (25% mark up on cost) Rs. 100 million

Average current assets Rs. 49 million

Average quick assets Rs. 21 million

Receivables turnover 7 times

Payables turnover 9 times

Credit period usually allowed to customers 30 days

Credit period usually allowed by suppliers 60 days

Required:

(xxvii) Compute operating cycle days of DL for 2023. (Assume 365 days a year) (04)

(xxviii) Suggest one potential action for each component of the operating cycle to assist DL in
decreasing its operating cycle days. (03)

Q.4 You are the finance manager of Paradox Limited (PL). The financial statements of PL for the year ended
31 December 2023 are under preparation. In the beginning of 2023, PL adopted the revaluation model for
the subsequent measurement of property, plant and equipment. A new CEO has recently joined PL. He has
pointed out the following non-compliances of IFRSs after reviewing the draft financial statements of PL:

(xx) IAS 16 does not allow selective revaluation, so all classes of property, plant and equipment
should have been revalued.

(xxi) The adoption of the revaluation model has been accounted for as a ‘Change in estimate’ (i.e.
prospectively) though it is a ‘Change in accounting policy’.

(xxii) IAS 16 requires that incremental depreciation must be transferred from revaluation surplus to
retained earnings but the transfer has not been made in the draft financial statements.

(xxiii) Some vehicles have been given on rent by PL; these should have been included in investment
property, but instead, they are included in property, plant and equipment.

Required:

Briefly respond to the non-compliances pointed out by the CEO. (08)

Financial Accounting and Reporting-I Page 3 of 7

Q.5 On 1 January 2023, Textio Limited (TL) commenced construction of its factory building. Below is the
breakdown of the payments made to the contractor:

Date of payments Rs. in million

1 February 2023 200

1 April 2023 350

1 September 2023 180

1 February 2024 160

890

These payments were financed through the following sources:

Date Descriptions Rs. in million

1 January 2023 17% long term loan 250

1 March 2023 Right shares (Expected annual dividend is 24%) 300

1 August 2023 19% short term loan (Payable in June 2024) 340

890

Additional information:

(xxii) Surplus funds available from both the loans and right shares were invested in a savings
account earning interest at a rate of 10% per annum.

(xxiii) The construction work was suspended from 1 July to 31 July 2023; however, substantial
technical and administrative work was carried during July 2023.

(xxiv) The construction of the factory building was completed on 30 November 2023, but due to
minor modifications, it was not available for use until 31 December 2023.

Required:

Calculate the borrowing costs to be capitalized in the cost of factory building. (08)

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

(xxvi) Which TWO of the following are correct in accordance with IAS 36?

• If impairment indicators are present, the entity shall estimate the recoverable
amount of the asset.

• While computing impairment loss, the asset’s carrying value is compared with the
lower of its fair value less costs of disposal and its value in use.

• If the recoverable amount is lower than the carrying value, an impairment loss is
always charged to the statement of profit or loss.

• An impairment loss only arises if the fair value less costs of disposal as well as
the value in use are lower than the carrying amount. (01)

(xxvii) Alpha company issued 4 million ordinary shares of Rs. 10 par value for purchasing land
having a fair value of Rs. 50 million. How should this transaction be reported by Alpha in its
statement of cash flows?

• It should be reported as financing cash flows.

• It should be reported as investing cash flows.

• It should not be presented in the statement of cash flows but it will be presented in
the notes to the financial statements.

• It should be reported as investing cash flows as well as financing cash flows. (01)

(xxviii) Beta Limited reported a net loss of Rs. 70,000 after charging depreciation expense of Rs.
81,000. If the working capital (other than cash) has increased by Rs. 8,100, then what is the
amount of net cash provided (used) by operating activities?

• (Rs. 159,100) (b) (Rs. 142,900) (c) Rs. 2,900 (d) Rs. 19,100 (01)

Financial Accounting and Reporting-I Page 4 of 7

(iv) Which of the following is NOT included in the Conceptual framework for financial
reporting?

(a) Objective of general purpose financial reporting

(b) Structure and content of financial statements

(c) Elements of financial statements

(d) Qualitative characteristics of useful financial information (01)

(v) On 1 January 2022, Gamma Limited (GL) purchased a manufacturing plant at a cost
Rs. 240 million with a useful life of 5 years. GL uses straight-line method of
depreciation. At 31 December 2023, GL determines that there are indications for
impairment. The plant’s value in use and fair value less costs of disposal are estimated
to be Rs. 113 million and Rs. 108 million respectively.

Which of the following should be reported as impairment loss in GL's statement of profit or loss for
2023?

(a) Rs. 31 million (b) Rs. 36 million (c) Rs. 79 million (d) Rs. 84 million (01)

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

(I) Relevance and faithful representation are the two fundamental qualities that
make accounting information useful for decision making.

(II) Comparability is an enhancing quality that makes accounting information useful

for decision-making.

(a) Only (I) is correct (b) Only (II) is correct

(c) Both are correct (d) None is correct (01)

(vii) Alpha Enterprises (AE) earned a profit of Rs. 700,000 for the year 2023 based on
historical cost accounting principles. AE had opening capital of Rs. 2 million. During
2023, specific price indices and general price indices increased by 12% and 21%
respectively.
 How much profit should be recorded for 2023 under the physical capital maintenance concept?

(a) Rs. 280,000 (b) Rs. 460,000 (c) Rs. 700,000 (d) Rs. 940,000 (01)

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

(I) Interest paid may be classified as an operating cash flow or as an investing cash
flow.

(II) Cash flows from operating activities calculated using ‘Indirect method’ are
greater than cash flows from operating activities calculated using ‘Direct
method’.

(a) Only (I) is correct (b) Only (II) is correct

(c) Both are correct (d) None is correct (01)

(ix) On 1 January 2021, Delta Limited (DL) acquired a manufacturing plant at a cost of Rs.
200 million and received a government grant of Rs. 40 million related to the plant. DL
recorded the grant as deferred income. The plant is being depreciated on a straight-
line basis over five years. The accounting period ends on 31 December each year. On 1
January 2023, the grant was repaid in full on failing to meet the attached conditions.
Profit or loss will be debited on the repayment of the grant by:

(a) Nil (b) Rs. 16 million (c) Rs. 24 million (d) Rs. 40 million (02)

Financial Accounting and Reporting-I Page 5 of 7

Section B

Q.7 Financial statements of Bard Limited (BL) for the year ended 31 December 2023 are under preparation.
During the review of the draft financial statements of BL, the following matters have been identified:

(p) Statement of changes in equity was not prepared in the draft financial statements. In this
respect, the following details have been gathered:

• Share capital and reserves as at 1 January:

2022 2021

---- Rs. in million ----

Ordinary share capital (Rs. 10 each) 2,400 2,400

Share premium 563 563

Retained earnings 1,345 1,153

 (xvii) BL’s profit for the year 2023 (draft), 2022 and 2021 were Rs. 575 million, Rs. 477 million and
Rs. 321 million respectively.

(xviii) Final dividend for the year ended 31 December 2021 comprised of 15% cash dividend and
10% bonus shares. The bonus issue was made from share premium, and the shares were
issued in April 2022 after payment of cash dividend.

(xix) A bonus issue of 25% was made in July 2023 as interim dividend.

(xx) 40 million right shares were issued in October 2023 at Rs. 18 per share. Transaction costs of
Rs. 3 million were also incurred.

(xvii) On 1 January 2020, BL had received a government grant of Rs. 600 million to acquire a
manufacturing plant. However, the grant was treated as income on receipt.

The manufacturing plant was acquired at a total cost of Rs. 1,000 million on 1 January 2020. It was
estimated to have a useful life of 8 years and residual value of Rs. 100 million.

(xviii)BL had decided to adopt the revaluation model from 1 January 2023 for subsequent
measurement of land and buildings included in property, plant and equipment. However, this
change has not been accounted for in the draft financial statements.

The following information pertains to BL’s property, plant and equipment:

WDV as on 1 Revalued Remaining

January 2023
Assets amounts as on 1 useful life as on 1
January 2023 January 2023

-------- Rs. in million ---- Years

Land 1,000 1,250 -

Office building 750 1,200 9

Factory building 1,000 550 5

On 1 November 2023, BL sold 40% of its land.

Depreciation on buildings has been recorded using straight line method. BL transfers the maximum
possible revaluation surplus to retained earnings.

Required:

Prepare BL’s statement of changes in equity along with comparative figures for the year ended

31 December 2023. (The column of total is not required) (20)

Financial Accounting and Reporting-I Page 6 of 7

Q.8 Following information pertains to properties of Synthesia Limited (SL):

(i) SL obtained possession of property A from tenants on 30 April 2023 when SL shifted its head office from
property B to property A. Property B was rented out immediately. On 30 April 2023, the fair value of property
A was Rs. 740 million, while the fair value of property B was determined as equal to its carrying amount.
The details of properties A and B are as follows:

Fair value

Property Date of purchase Cost as on 31 December

2023 2022

---------- Rs. in million ----------

A 1 January 2021 750 750 720

B 1 July 2021 500 480 440

60% of costs and fair values of both properties refer to the land element.

(ii) On 1 February 2023, SL started construction of property C with a view to earn rentals in the future. The
construction was completed on 30 September 2023 at a total cost of Rs. 430 million. This included Rs. 7
million and Rs. 12 million for professional fees for legal services and abnormal wastage of material during
construction respectively.

Operating losses of Rs. 10 million were also incurred before the property was rented out on 1 December
2023.

Fair value of property C was determined as Rs. 380 million, Rs. 390 million and Rs. 395 million as at 30
September 2023, 1 December 2023 and 31 December 2023 respectively.

Other information:

 Fair value model is used for subsequent measurement of all investment properties.

 Cost model is used for subsequent measurement of all property, plant and equipment.

 Depreciation is charged using the reducing balance method at a rate of 10%.

 Rental revenue received during 2023 and accrued at 31 December 2023 are Rs. 45 million and Rs. 6
million respectively.

 Repair and maintenance expenses related to investment property amounted to Rs. 25 million.

 All fair values are determined by Alpha Brothers, an independent firm of valuers.

Required:

• Prepare the note on ‘Investment property’ to be included in SL’s financial statements

for the year ended 31 December 2023. (11)

• Show each property in a separate column.

• Columns for total and comparative are not required.

• Assuming that SL follows cost model for investment properties, prepare journal entry

to record transfer of property A on 30 April 2023. (02)

Financial Accounting and Reporting-I Page 7 of 7

Q.9 Following information relating to ChatGPT Limited (CL) has been gathered for the purpose of
calculating earnings per share:

(i) Profit after tax for the years ended 31 December 2022 and 2023 amounted to Rs. 308
million and Rs. 280 million respectively.

(ii) 25 million ordinary shares, each with a par value of Rs. 10, were outstanding as at 1
January 2022.

(iii) On 1 April 2022, 2 million convertible bonds with a par value of Rs. 100 each were
issued. The bonds carry interest at a rate of 18% per annum, payable on 31 March each
year. Every 2 bonds are convertible into 3 ordinary shares after 5 years.

(iv) On 1 January 2023, 6 million 16% cumulative irredeemable preference shares, each
with a par value of Rs. 50, were issued. Every preference share is convertible into 2
ordinary shares after four years.

(v) On 1 May 2023, CL announced 40% right issue to its ordinary shareholders at Rs. 45
per share. The entitlement date for the right issue was 1 June 2023. The market price
per share immediately before the announcement date and entitlement date was Rs. 65
and Rs. 80 respectively.

(vi) On 1 September 2023, CL issued 20% bonus shares to its ordinary shareholders.

(vii) The applicable tax rate is 30%.

Required:

Compute CL’s basic and diluted earnings per share to be disclosed in CL’s financial
statements for the year ended:

(a) 31 December 2022 (04)

(b) 31 December 2023 along with comparative figures (13)

(THE END)

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