Certificate in Accounting and Finance

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Additional reaUing time - 15 minutes

Financial Accounting and Reporting-l I

Section A
Q-1:
(a) Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints andpharma
businesses. Results of each business segrnent for the year ended 31 March 2015 are as follows:

Business Segment Sales Gross Operating Assets Liabilities

Frofit expenses
Chemicals 1,790 1,101 63 637 442
Soda Ash 2t6 tt7 57 444 355
Polyester 227 48 23 11s 94
Paints 247 26 t6 127 108
Pharma 252 31 t2 132 98
Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10 million
respectively at a contribution margin of 30%.
Operating expenses include GL's head ofifice expenses amounting to Rs. 75 million which have not been
allocated to any segment. Furthermore; assets and liabilities amounting to Rs. 150 million and Rs. 27
million have not been reported in the assets and liabilities of any segment.
Required:
In accordance with the requirements of Intemational Financial Reporting Standards:
determine the reportable segments of Gohar Limited. (0s)
(b) Debt is issued for Rs 1,000. The debt is redeemable at Rs 1,250. The term of the debt is five years and
interest is paid at5.9% pa. The effective rate of interest is 10%. Show how the value of the debt
changes over its life. (04)
(c) On 1 January 2018, afarmer had a her of 100 cows, all of which werc 2 years old, At *ris date, the fur
value less point of sale costs of the herd was Rs 10 million. On 1 July 2018, the farmer purchases 20 cows
(each two andhalf years old) for Rs 60,000 each.

As at 3tr December 2018, three year old cows sell at market for Rs 9Q,000 each.
Market auctioneers have charges a sales commission of 2o/o for many years.
Requirerl:
Discuss the accounting fteatment of the above in the financial statements for the year ended 31 December
2018. (03)
Q-Zr Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQS). (l Markfor each)
i. Which of the following is NOT a monetary item?
a) Cash at bank (Fixed deposit in Pakistani Rupees)
b) Investment equity insftuments of other companies
c) Trade receivables
d) Loanpayable
ii. On 19 December 2019 Star Limited sold goods to Clinton Inc for US$ 20,000. At the date of the
transactions, the exchange rates were $1 = PKR 148
On 3 1 December 2019 , Star Limited's financial year end, the equivalent rates were $ 1 = PKR 149
Star Limited received the amount due on 3 February 2020 whenthe exchange rates were $1 = PKR
146. Star Limited should record revenue on 19 December 2019 at:.
a) Rs, 2,960,000
b) Rs. 2,980,000
c) Rs,2,920,000
d) None ofabove
 iii. Cow Limited (CL) owned cattle recorded in the financial statements at Rs. 10.5 million on 1 January
2014.
At 31 December 20t4the cattle have afair value of Rs. 13 million. If CL sold the cattle, commission
of 2o/o wovld be payable.
What is the gain to be recognised in profit or loss for the period ended at 31 December 2014
according to IAS 41 Agriculture?
Rs,

iv. Which of the following statements are correct in accordance with IAS 37 Provisions, contingent
liabilities and contingent assets?
1, Provisions should be made for both constructive andlegal obligations.
2. Discounting may be used when estimating the amount of a provision.
3. A restructuring provision must include the estimated costs of reftaining or relocating continuingstaff.
4. A restructuring provision may only be made when a company has a detailed plan for the restructuring
and has communicated to interested parties a firm intention to carry itout.
a) All four statements are correct
b) (1), (2) and (4) only
c) (1), (3) and (4) only
d) (2) and (3) only
v. Which of the following events arisrng after the year end is an adjusting event?
a) The discovery of fraud or error which shows that financial statements are incorrect.
b) Announcement of a plan to discontinue an operation.
c) Destruction of a major production plant by fue.
d) Restructuring of a major loan (05)

Q-3:
Following expenditures were incurred by Ahmad Limited (AL) during the year ending
December 31, 2014. Discuss how each should be accounted for in light of guidance given in
IAS 38:

(r). On July l, 2014 a license was acquired at a cost of Rs. 4 million. License is
renewable after 5 years for a further period of 3 years. However renewal fee has not
yet been agreed. AL has no experience regarding renewal of such licenses. (02)
(ii). During the year Rs. 2.5 million were incurred on advertiserrlent campaign. AL
management is very optimistic about this campaign and believes it to result in
improved sales for atleast( years. (02)
(ii|. During the year AL purchased an in-process research and development project for
Rs. 4.5 million. Management has planned to work further on this project and it is
quite confident about success ofthis project. (02\

Q-4
Misbah Limited (ML) entered into a lease agreement with Afridi Leasing Company for
specialized machinery on April 1,20L4. Terms of the agreement was as follows:
Commencement: April l, 2014
Lease term: 3 years
Processing charges (payable Rs. 6,000
by ML immediatelv):
Lease Payments: O Six monthly rental of Rs. 29,155 payable on every
October I and April 1. (1" payment was due on
Cctober 1, 2014)
(ii) Lumpsum payment of Rs . 20,000 at end of lease
term.
Ownership: Ownership will be transferred to ML at end of lease
term.
Since the asset is of specialized nature and is not ordinarily traded in local market, its fair value
is not available. ML plans to use this machinery for two more years after lease. Applicable
interest rute is l5o/o.
Required:
As an accountant of Misbah Limited:
(a) Pass Journal enffies for the year ending December 31,2014.
(b) Prepare Extracts of statement of financial position and statement of profit or loss for the
year ending December 3t,20L4. (L2')

Q-s
Following information relates to Ajmal Limited (AL):
(0 Profits for the years ended December 3L , 2017 and 2018 are as follows:

20L7 2018
------ RS.,000----
Profit before tax 51,500 47,250
Tax 20,100 17,900
Profit after tax 31,400 29,350

(ii) During 2018, it has been discovered that certain major prt replacement in plant and
machinery, caried on July l, 2017 for Rs. 2,500,000, was charged to repairs. AL
depreciates its plant and machinery @20% onreducingbalance basis.
(iir) During 2018, management has decided to change inventory valuation method from
FIFO to AVCO basis. In this respect following data has beengathbred:

Inventory value:
FIFO AVCO
Year ended: P c ,n(ln
ILrJ o lrlrl,

December 3l , 2016 7 ,200 6,000

December 3I , 2017 6,400 6,800
December 3l , 2018 5,800 5,000

(iv) AL follows revolution model for land and buildings. Accounting depreciation
charged on these assets as well as depreciation based on historical cost are as
follows:
Depreciation
Actual Cost based
Year ended:
December 3l , 2017 2,800 2,000
December 3l , 20lB 3,000 2,100
(v) Cash / Bonus dividends for last three years are as follows:

Cash Bonus
For the year ended: Interim FinaI Interim Final
December 3l , 2015 s% s%
December 3l , 2017 rc% s% L0%
December 31, 2018 20% t0% T0%
(vi) Applicable taxrate for AL is 30% for many ye.rs.
(vii) During December 20L7 AL made a right issue of one for five at a premium of Rs. 4 per
share.
(viii) Share capital and reserves as at December 3l , 2016 were as follows:
 Rs. '000
Share capttal (Rs. 10 each) 50,000
Share premium 7,504
ed earnings
R-etain 63,450

Requireil:
Prepare Statement of Changes in Equity for the year ended December 31, 2018 in accordance
with the requirements Companies Act,2017 and International Financial Reporting Standards. (10)

Q-6
On 1 October 2010, Pink secured a majority equlty shareholding in Silver on the following terms:
. an immediate payment of Rs 40 per share on I October2010
. and a further amount deferred until 1 October 2011 of Rs 5.4 million.
The immediate payment has been recorded in Pink's financial statements, but the deferred payment has not
been recorded. Pink's cost of capital is 8% per annum.
On 1 February 2011, Pink also acquiredz1% of the equity shares of Amber payngRs 10 million in cash. The
summarised statements of financial position of the three companies at 30 September 20ll are:

Pink Silver Anrber

Assets Rs 000 Rs 000 Rs 000
I{on-curent assets
Properr),, plant and equipment 44,000 31,000 30,000
Intangible assets 7,500
Investments-Silver(0.8 million shares a( Rs 40 each) 32,000
- Amber 10,000 Nil Nil
89,500 31,000 30,000
Current assets
Inventory Ll ,200 8,400 10,000
Trade receivables 7,400 5,300 5,000
Bank 3,440 Nil 2,000
Total assets 1 I 1,500 44,700 47,000

Equin' and liabilities

Equifv
Equin, shares of Rs 10 each 50,000 10,000 10,000
R.etain ed earnings - at L Octob er 2010 25,700 12,000 31,800
- for yeff ended 30 September 20Tl 9,2A0 6,000 1,200
84,900 29,000 43,000
I\on- curuent liabilitie s
Deferred tax 15,000 8,000 1,000
Current liabilities
Bank nil 2,500 Nil
Trade payables 1 1,600 6,200 3,000
Total equiry and liabilities 1 1 1,500 44,100 47,000

The following information is relevant:

i. Pink's policy is to value the non-controlling interest atfat value at the date of acquisition. For
this purpose the directors of Pink considered a share price for Silver of Rs 35 per share to be
appropriate.
ii. At the date of acquisition, the fair values of Silver's property, plant and equipment was equal to
its carrying amount with the exception of Silver's plant which had afar value of Rs 4 million
above its carrying amount. At that date the plant had a remaining life of four years. Silver uses
straighrline depreciation for plant assuming a nil residual value.

Also at the date of acquisition, Pink valued Silver's customer relationships as a customer base
intangible asset at fair value of Rs 3 million. Silver has not accounted for this asset. Trading
relationships with Silver's customers last on average for six years.
 iii. At 30 September 2011, Silver's inventory included goods bought from Pink (at cost to Silver) of
Rs 2.6 million. Pink had marked up these goods by 30o/o on cost. Pink's agreedcurrent account
balance owed by Silver at 30 September 20ll was Rs 1.3 million.
iv, Impairment tests were carried out on 30 September 20ll which concluded that consolidated
goodwill was not impaned, but, due to disappointing eamings, the value of the investment in
Amber was impaired by Rs 2.5 million.
V. Assume all profits accrue evenly through the year.
Required:
Prepare the consolidated statement of financial position for Pink as at 30 September 2011. (1s)

Q-7
Following information relates to Akmal Limited for the year ended December 37,2014:
(r) On January l, 2A14, an owned machine was sold for Rs. 9 million and leased back on
a finance lease for remaining life of 4 yearc. Lease rental was agreed at Rs. 2.963
million payable at end of every year with an effective interest rate of L2%. Profit n
this transaction was Rs. I.6 million. This ffansaction has been correctly accounted for
in accordance with IAS 17. Accumulated accounting depreciation of machine at the
time of sale was Rs.3.6 million whereas accumulated capital allowance atthatdate
was Rs. 5 million.
(i1) Owned property plant and equipment has a net book value at year end of Rs. 28.5
million. Tax base of these assets as at Ianuary l, 2014 was Rs. 19 million (excluding
machine referred to in point (i) above). Additions during the year amount to Rs. 3.5
million. Accounting depreciation for the year on owned assets was Rs. 2.3 million
whereas capitaT allowance for the year was Rs. 5.2 million.
(iii) During the year Rs, 3 million was incurred on research. Due to deficiency in
supporting documents, only Rs, 2.4 mrllion can be claimed as deduction for tax
purposes. Such expenses are allowed on sftaight line basis over 3 years.
(iv) Rent income is taxed on receipt basis. Rent income recognized during the year was
Rs, 0.25 million. Unearned rent income at start and end of year was Rs. 0.1 million
and Rs. 0.15 million respectively.
(v) During the year a pending appeal in respect of tax year 2Ol2 was settled. As a result,
tax return was revised and a tax refund of Rs. 0.3 million was approved. No
adjustment in books has been made so far in this respect.
(vi) Profit before tax for the year amounts to Rs. 18.2 million.
(vii) Corporation taxrate is 35%.
Required:
Prepare "Deferred tax" and "Taxation" notes to the financial statements for the year
ending December 31, 2014. (Comparative infonnation is uot required) (LZ)
Q-8

Focus Limited is engaged in manufacturing multimedia projects. The company spends heavily on research
and development to introduce improvements in the existing products.

A free Lance researcherMr. Talent sent a conceptual paper to the company on developments of a new type
of projector which will significantly enhance the life and quality of the product.

An agreement was reached between Mr. Talent and the company whereby Mr. Talent agreed to conduct
and supervise the research and developments process at a lump sum remuneration of Rs. 8 million.
However , in case the research was unsuccessful , he agreed to reduce his remuneration to a time based
salary of Rs. 2,000 per hour.

The process of research commenced from July 2006 and the following costs were incurred upto June 30,
20a1. Rs. In million.
Tools consumed 2.000
Furnishing of the new laboratory 0.800
Salaries paid to research associates 1.620
Cost of conducting tests in U.k. on a device which was ultimately
used in the final product 0.400
Remuneration paid to Mr. Talent on successful completion of research 4.500
Expenses on preparing technical feasibility 0.250
Cost of manufacturing the sample before commencement
of commercial production 0.240
Material imported for commercial production 1.700
Final payment to Mr. Talent 3.500
Product launching expenses r.zaa

Required:
Discuss the accounting ffeatment of each of the above costs incurred by the company in the light of
International Accounting Standard 38 "Intangible Assets". (10)

Q-9

Flower inc. an American comp.rny acquired a machinery ,in l-1-2011 at a cost of 72 mrllion
dinars, The machinery classified as property, plant and equipment under IAS 16 is depreciated
over 20 years on a straight line basis with a nil residual value. At 3l-12-2015, the machinery was
revalued to 95 million dinars. The following exchange rates are relevant to the prepmation of the
financial statement:
11an-2011, 3.6 Dinar =1 US $
31-De c-201,5 4.3 Dnar =1 US $
Required:

Show how the transaction would be recorded in the Flower's financial statements for the year
ended 31- L2-2015. (03)
Q-10
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