Certificate in Accounting and Finance Stage

Examinations
Rise August 28, 2021
School of 3 hours – 100 marks
Accountancy Additional reading time – 15 minutes

Financial Accounting and Reporting-II

MOCK PAPER
Section A

Question- 1
a) On 1 Jan 14 Cuba Ltd acquired a zero coupon Rs.1,000,000 bond for Rs. 950,000. Broker‟s
fees of Rs. 25,000 on purchase was recognized in profit or loss. The bond is redeemable on 31
December 2015 at a premium of 10% of its nominal value. The intention is to hold the bond
and sell it if a good opportunity arises. The effective interest rate on the bond is 6.22%. On
purchase of the bond, investments were debited at redemption value, cash credited with Rs.
950,000 and income credited with Rs. 150,000. Fair value on 31st Dec 14 is Rs. 1,200,000. No
subsequent accounting entries in respect of this bond have been made.
Required: Pass the correct journal entries for year ended December 31, 2014. (4)
b) A Company grows and harvests mangoes. Mango trees produce a new harvest of mangoes
each year. Mangoes are sold to mangoes juice producers. With regards to property, plant and
equipment, company accounts for land using the revaluation model and all other classes of
assets using cost model. On 1 January 2019, its mango trees had a carrying amount of Rs.
300,000 and remaining useful life of 20 years. The mangoes were plucked from trees on 28
December 2019 and had a fair value less cost to sell of Rs. 70,000 and these were still held at
year end. The land used for growing the mangoes had a fair value of Rs. 200,000 at year end.
Required: Discuss how it should be dealt with in the financial statements for the year ended
31.12 2019. (4)

Question-2
Hamdard Ltd made a profit for the year ended 31 December 2020 of Rs. 137,800. The following
information is available which needs consideration:
1. While preparing the financial statements for 2020, it was discovered that patents acquired
amounting to Rs. 18,000 and 22,000 during 2018 and 2019 respectively were recorded in
operating expenses. It is policy of the company to amortize the cost over the life of the patents.
Estimated useful life of both patents is 10 years.
2. On 1 February 2020 Hamdard Ltd issued a further 100,000 ordinary shares at a price of Rs. 1.50
per share and proceeds were credited to other income.
3. Plant and equipment were previously depreciated on a reducing balance basis using a rate of 25%
and the depreciation charge for 2020 has been recognized on this basis. However, the directors
decided that for one specialized item of plant a straight-line basis over an estimated life of six
years would more fairly represent usage. This plant was purchased on 1 Jan 2017 and had a
carrying amount of Rs. 30,000 on 1 Jan 2020.
4. Applicable tax rate is 30%.

Required:
Prepare notes to be included in the financial statements for the year ended 31 December 2020. (08)

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Question-3
Information below relates to Goods Ltd, a listed company with five divisions for the year ended June
30, 2013.
(Rs. in million)
Particulars DIVISIONS
A B C D E
Revenue from external customers 200 45 20 175 44
Inter-segment revenue 20 - 5 20 2
Interest revenue 10 5 - 9 5
Interest expense (0) (10) (5) - (6)
Reported profit 45 - 12 45 8
Assets 1,500 300 400 2,000 400
Capital Expenditures 50 100 200 - -
Liabilities 200 150 - 1,200 160
1. All inter-segment sales are made at a mark-up of 10%.
2. Head office expenses and assets and liabilities amounting to Rs. 30 million, Rs. 50 million and
Rs. 70 million have not been reported in the assets and liabilities of any segment.
3. Journal entry for interest payable of Rs. 20 million of segment A has wrongly been recorded in
head office expenses and liabilities.
Required:
a) Identify reporting segments.
b) Give disclosures for operating segments under IFRS-8. (09)

Question-4
Select/write down the most appropriate answer:
1. A US company has paid up capital equivalent of Rs. 500 million, turnover of Rs. 990 million
and 825 employees. How it shall be classified according to Companies Act, 2017?
(a) Pubic Interest Company
(b) Large Sized Company
(c) Medium Sized Company
(d) Small Sized Company
(1)

2. Identify the correct?

1. FVOCI – category for investment in Equity instruments is an elective category.
2. FVOCI – category for Investment in Debt instruments is an elective category.
3. Loans and receivables that satisfy the amortized cost criteria but there is an accounting
mismatch should be classified in FVTPL.

(1)

3. Which of the following are correct responses, where it is not possible to reduce the threats to
an acceptable level:
(i) The member must refuse to remain associated with information which may be
misleading
(ii) The member must report the matter to audit committee or other governance
authority within organisation.
(iii) The member may seek legal advice if it seems necessary to report the matter to legal
authorities.
(1)

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

5. On 1 April 2015, Schrute purchased a flock of sheep for 100,000. At 31 March 2016 the flock
has a fair value less cost to sell of Rs. 120,000. Every time animals are sold there is a 5%
commission fee payable to the national farming agency. Wool harvested during the year
amount to Rs. 10,000.
In addition to this, specialized farm machinery cost Schrute 200,000 on 1 April 2012 and has a
10-year useful life.
What should be taken to Schrute‟ statement of profit or loss for the year ended 31 March 2016
in respect of above?
(a) Rs. 10,000 Credit
(b) Rs. 4,000 Credit
(c) Rs. 10,000 Debit
(d) None of the above
(2)

6. On 30 June 20X4 GHI acquired 800,000 of JKL's 1 million shares.

GHI issued 3 shares for every 4 shares acquired in JKL. On 30 June 20X4 the market price of a
GHI share was Rs. 3.80 and the market price of a JKL share was Rs. 3.00.
GHI agreed to pay Rs. 550,000 in cash to the existing shareholders on 30 June 20X5. GHI's
borrowing rate was 10% per annum. NCI is measured at fair value.
GHI paid advisors Rs. 100,000 to advise on the acquisition.
What is the cost of investment that will be used in the goodwill calculation in the consolidated
accounts of GHI? (2)

7. The brand name that was acquired separately should initially be recognised, according to IAS
38 Intangible assets, at
a) recoverable amount
b) either cost or fair value at the choice of the acquirer
c) fair value
d) Cost
(1)

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Section B

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

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

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Question-6
a)
On 1 April 2011 Chardonnay plc. entered into a lease agreement for a telephone set.
The terms of each lease are as follows:
The telephone, which could have been purchased for cash of Rs. 25,500, was leased under a four-
year, non-cancellable agreement. The finance director of Chardonnay plc has negotiated a payment
“holiday” with the lessor, such that only three payments of Rs. 4,500 are due on 1 April 2012, 2013
and 2014. The telephone has an estimated useful life of eight years, and the lessor remains responsible
for maintenance and insurance.
Required:
Prepare all relevant extracts from Chardonnay plc‟s statement of comprehensive income and
statement of financial position for the year ended 31 December 2011 in respect of the lease described
above.
(4)
b)
Mardan Inc. was incorporated in 2010 to operate as a computer software service firm with an
accounting year ending September 30. Mardan Inc. has leased a large computer system from
manufacturer. The lease calls for a 2 monthly rental for 3 years of the lease term. Total lease
payments are equal to Rs. 720,000. The estimated useful life of the computer is 5 years. All rentals are
payable on the last day of the 2nd month. The lease period starts from April 1, 2012, the date the
computer was installed and the lease agreement was signed. Fair value of the Alpha-3 computer
system is Rs. 650,000 at April 1, 2012. The implicit rate for lease is 12%.
Required:
Prepare statement of financial position as on September 30, 2012 in the books of Mardan Inc. (7)

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

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Question-7
a)
Rainbird Company is involved in multiple businesses and has provided the following details:
1) It is planning to reorganize (restructure) its manufacturing facility of cars and commissioned
a consulting engineer to carry out a feasibility study who will finalise the plan as soon as
possible.
A provision for the reorganisation was created at 31 December 20X1.
2) Its staff involved in manufacturing of medicines needs training for making a new vaccine so
in December 20X1 Rainbird contracted with a training company to provide retraining to take
place in January 20X2. A provision for this expenditure was created at 31 December 20X1.
3) For security cameras business it gives a 3 month warranty with all products and the rate of
returns under warranty is 12%. 5% of the returned items can be repaired at a cost of Rs. 5,000
per unit (free of charge to the customer). The other 95% are scrapped and a full refund of Rs.
30,000 per unit is given. Rainbird sold 525,000 units during the year to 31 December 20X1.
4) In five years' time Rainbird will have to dismantle its factory making weapons and return the
site to the local authority. A provision was set up for the present value of the dismantling
costs when the factory was first acquired. The opening balance on the provision at 1 January
20X1 was Rs. 2.63 million. Rainbird has a cost of capital of 8%.
5) For cigarette manufacturing unit the company has obtained on rent a number of machines
under lease which have an average of three years to run after 31 December 20X1. These
machines are of no use in future due to new laws made by Government. The present value of
these future lease payments (rentals) at 31 December 20X1 was Rs. 600,000; however, the
lessor has said they will accept 350,000 for their cancellation.

Required:
Discuss how the above issues should be dealt with in the financial statements of Rainbird for the year
ended 31 December 20X1. Support your answer in the context of relevant IFRSs.
(9)
b)
Fine Woods Limited (FWL) markets quality wood furniture through its sales offices located in major
cities of Pakistan. In March 2012, the management of FWL decided to introduce online sales through
its website. The expenses incurred in this regard during the year ended 31 December 2012 were as
follows:
i. Feasibility was prepared by a consulting firm for upgrading the existing website to
facilitate online sales, at a cost of Rs. 3.5 million.
ii. Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million
respectively.
iii. Website was upgraded by FWL‟s IT team. The directly attributable costs amounted to
Rs. 5 million.
iv. Online payment system was developed by external experts at a cost of Rs. 3 million.
v. IT personnel were trained to deal with security issues relating to online transactions at a
cost of Rs. 1.5 million. The promotion costs are Rs. 0.2 million.
Required:
Discuss the accounting treatment in respect of the above, in the financial statements of FWL for the
year ended 31 December 2012 (6)

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

STATEMENT OF CHANGES IN EQUITY

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

STATEMENT OF FINACIAL POSITION (EXTRACTS)

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

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6) TL supplies a component to LL at cost plus a mark-up of 20%. At 30 June 2020, the inventories
of LL included Rs. 1.5 million in respect of this component. Balance outstanding in respect of
these goods at year end is Rs. 0.7 million.
7) TL started providing a management service to PL from 1 February 2020 at an annual fee of Rs.
24 million payable annually in arrears. No accrual has been booked by PL. TL has credited the
income in sales.
8) TL declared final dividends for the year ended June 30, 2019 on 30 September 2019. PL
declared an interim dividend on 28 June 2020 which is yet not paid at year end but was
properly recorded by TL and PL.
9) Due to seasonal nature of business, LL earns 40% of its profits in first quarter of the financial
year.
10) Group policy is to measure non-controlling interests at acquisition date fair value.
Required:
a) Prepare a Consolidated Statement of Comprehensive Income (SOCI) for the year ended 30
June 2020.
b) Prepare relevant extracts from Statement of financial position as on 30 June 2020 showing
consolidated retained earnings, Non-controlling interest, Investment in associate, Goodwill,
Current assets, Current liabilities and Purchased consideration payable.
(21)

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