SKANS SCHOOL OF ACCOUTANCY

FINANCIAL ACCOUNTING AND REPORTING-I

MOCK EXAM
TOTAL MARKS: 100
SIR MOBEEN QURESHI AUGUST 18, 2022
CAF LEVEL EXAMINATION TIME : 3HOURS 15 MINUTES
INSTRUCTIONS
 Each new question shall be started from a new page. Otherwise, marks will be deducted.
 Using any pen other than black shall result in cancellation of paper.
 Use of Mobile Phone during paper shall also result in cancellation of paper
 Writing name and roll No. is compulsory. Otherwise, marks will be deducted.

Section A

Question 1:
(a) Following amounts have been determined from the records of Wayne Enterprises:

Description 2021 2020 2019

Rs in million
Sales (N - 1) 350 312.5 250
Cost of Sales (N - 2) 320 285 121
Trade Receivables (N - 3) 60 50 45
Trade Payables(N - 4) 22 18 20
Inventory (N - 5) 95 88 80
Additional Information:
1. Sales include cash sales which are 25% of credit sales.
2. Cost of sales includes depreciation of Rs. 10 million in each year.
3. Trade receivables of 2021 include bad debts of Rs. 5 million.
4. Receivables of 2021 include Rs. 3 million from a customer is to be adjusted against amount
payable to the same person.
5. Inventory of 2021 & 2019 includes obsolete items costing Rs. 3 million & 2 million
respectively and having no sales value.
Required:
Calculate working capital cycle for 2020 & 2021 and comment on the results of your calculations
assuming that all purchases are made on credit. (Round off number of days in whole numbers)
Marks 07

(b) Prepare Vertical and Horizontal analysis for the year 2019 from the following data.
2019 Rs. 2018 Rs.
Revenue 1,700,000 1,400,000
Cost of sales (1,428,000) (1,200,000)
Gross profit 272,000 200,000
Other Admin expenses (32,600) (36,000)
Net Profit 239,400 164,000
Marks 04
Question 2:
Voice Industries Ltd owns a plant which it acquired 1st January 2019 for Rs. 5,000,000. Useful
life of the plant was 8 years and no residual value was estimated.

 At 31st December, 2021, the plant could be sold in the market for Rs. 4 million and cost of
disposal would be Rs. 500,000.
 The cash flows from the existing plant during remaining life are estimated as follows:

Year 1 – 2 Rs. 1,000,000 per year

Year 3 – 4 Rs. 800,000 per year
Year 5 Rs. 500,000
Relevant discount rate is 10%.
 To replace the machine with a new version of plant would cost today Rs. 6,000,000.
Required:
Calculate the value of machine using following measurement bases for VIL using the above
information:

(i) Historic cost

(ii) Fair value
(iii) Value in use /(Present value)
(iv) Current cost/(replacement cost) Marks 06

Question 3:
Kal-el Chemicals Limited (KCL) received three grants from Government during the year ended
December, 31, 2021 with the following detail:
1. On 1st December, 2021 a grant of Rs. 1,000,000 received from Krypton Government. The grant
was in respect of relocation costs that KCL has incurred moving its manufacturing facilities from
Krypton to New York. The grant is repayable in full unless KCL recruits 100 employees
locally by the end of December, 2021. KCL is facing problems to recruit such number of
employees because local skill base does not match with the requirement of KCL.
2. On 1st May 2021, KCL bought a machine for Rs. 3.5 million. A grant of Rs. 1 million was
received from Government in respect of this acquisition. The machine has a residual value of
Rs. 200,000, is depreciated on a straight line basis over its useful life of 5 years. KCL treats grant
as deferred income and recognize as income over the useful life of the machine.
3. On 1st February, 2021 KCL received a grant of Rs. 500,000 from Local Government
as compensation of electricity bills for the year ended 31st December, 2020 under COVID – 19
business sustainability relief.
Required:
Show how the above transactions should be reflected in the statement of profit & loss and
statement of financial position of Kal-el Chemicals Limited (KCL) for the year ended December 31,
2021 in accordance with the requirements of IAS – 20 Government Grants.
Marks 08
Question 4:
Hope Limited has the following structure of shares and dilutive securities as at December 31, 2021:
1. Weighted average ordinary shares outstanding 800,000.
2. Convertible preference shares:
10% 10,000 preference shares of Rs.100 each. Each preference share is convertible
into 5 ordinary shares.
3. Convertible Bonds:
Rs.2,000,000 of 5% bonds convertible into 2 shares against Rs. 100 bonds.
4. Share options outstanding at beginning of the year
100,000 shares with exercise price of Rs. 45 each (Average market price of the
company shares during the year was Rs. 60 per share.)
5. Net profit after tax and preference dividend was Rs. 1,900,000. Tax rate is 25%.
Required:
Calculate Basic and diluted earnings per share of Hope Limited for the year ended December 31,
2021 for inclusion in HL’s financial statements. Show all relevant calculations.
Marks 05

Question 5:
The following information relates to Steven Institute of Management (SIM), a Not – for –
Profit organization for the year ended 31st December 2021:
1.The composition of fund balances as at 1st January, 2021 is as follows:
Rs. (000)

Fund for research & development in management sciences (Externally imposed 10,500
stipulation for specific use of resources)
Fund for Supporting the Deserving students (Externally imposed stipulation that 2,500
resources contributed along with 20% investment income shall be maintained
permanently.)
Fund for construction of new academic block (Internally imposed stipulation for 1,000
specific use of resources)
Fund for general operations: un-restricted. 20,000

34,000

2.The details of contributions (same restrictions apply as are applicable to related funds) are as
follows:
Rs.000

Contributions for “Supporting the deserving students” 5,200

Contributions for research and development in management sciences 9,550

Contributions to arrange transport facility (external restriction). However, the vehicle 3,000
shall be acquired next year.
Contributions for the general operations of the institute. 7,250

25,000
 3. The investment income of Rs. 2 million relates to fund for supporting deserving students.
4. As per agreement with contributors of funds for supporting deserving students, in
addition to 20%allocation of investment income, SIM is also required to allocate Rs.
1,500,000 from unrestricted fund to the restricted fund annually.
5. SIM itself imposed restriction that Rs. 500,000 will be allocated for construction of
academic block from unrestricted fund on annual basis.
6. At year end following expenses were allocated to research & development activities:
Rs.000
Salaries of research & development staff 3,200
Development cost incurred in designing new products & processes 5,000
Other expenses 1,100
9,300
7. Excess of income over expenditures (surplus) for the year ended December 31, 2021
from general operations was Rs. 8.15 million.
Required:
Prepare (under deferral method) statement of changes in net assets of SIM for the year ended 31st
December, 2021
Marks 08

Question 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)
(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)
 Section B

Question 7
(a) A company receives a cash loan of Rs. 100,000 from the government on 1 January 2020.
40% of the loan is forgivable (waived) from the date on which certain conditions are met.
Interest is charged at the market rate of 10% and is payable annually.
Required:
Show all journal entries for the year ended 31 December 2020 assuming that the conditions
had all been met by 30 September 2020. Marks 03

(b) In the factory of Mysterio Limited, a fire broke out in the month of December 2019 and
damaged the machine, causing lower operating capacity.
Following information are relevant to the machine as at 31 December 2019:
• Machine was acquired at a price of Rs. 2,000,000 as on 1st July 2017. An installation
and assembly cost of Rs. 500,000 was incurred and machine provided to production
department on 1st August 2017, however production started from 1st September 2017.
• Machine was depreciated by using reducing balance method @ 12% pa
• An equivalent new machine would cost Rs. 2,275,000.
• The machine could be sold in its current condition for an amount of Rs. 1,250,000.
Transportation and disposal costs would amount to Rs. 50,000.
• In its current condition, the machine would operate for three more years which will
generate following cash flows:
Years Year 1 Year 2 Year 3
Cash inflows 500,000 475,000 480,000
Cash outflow 70,000 75,000 40,000
At the end of year 3 machine could be sold at Rs. 280,000. Disposal cost would be Rs.
60,000
Applicable discount rate is 10%.

Required:
Work out the impairment loss (if any) associated with the machine at December 31, 2019.
Also Pass the Journal entry for impairment loss (if any).
Marks 06

Question 8
Following information have been extracted from the financial statements of Flash Limited

(FL) for the year ended 31 December 2019:

(i) 2019 2018 2017
Draft Audited Audited
--------- Rs. in million ---------
Net profit 84 98 72
Revaluation surplus arising during the year* 25 (14) -
*Transfer to retained earnings is made upon de-recognition of related asset.
(ii) Share capital and reserves as at 1 January:
2018 2017
----- Rs. in million -----
Share capital (Rs. 10 each) 300 300
Revaluation surplus 102 102
Retained earnings 348 276
(iii) On 1 March 2018, FL declared a final cash dividend of 10% for the year ended 31
December 2017. On 1 November 2018, FL issued 40% right shares to its ordinary
shareholders at Rs. 24 per share. On 1 August 2019, an interim bonus of 15% was
declared.

(iv) Following matter is needed to be incorporated in the draft financial statements of FL:
To provide more relevant and reliable information about investment property, it has
been decided to change the measurement basis for investment property from cost
model to fair value model.
The only investment property of FL is a building purchased on 1 January 2016 at a cost of Rs.
150 million. 60% of the cost represents building component having estimated useful life of
20 years and residual value of Rs. 10 million. The depreciation is included in the above draft
financial statements. The fair value of the investment property has increased by 6% in each
year since acquisition.
Required:
Prepare FL’s statement of changes in equity (including comparative figures) for the year
ended 31 December 2019. (‘Total’ column is not required). Marks 10

Question 9
The following information pertains to Moon-Knight Limited (ML).
1) ML purchased delivery Truck, costing Rs. 170 million on 1 July 2014. It is to be
depreciated using the straight-line method, with Rs. 10 residual value. On 31 December
2017 it has accumulated depreciation of Rs. 35.
During 2019, ML decided to change the depreciation method from straight line to
reducing balance method. There is no change in life, however the estimate of residual
value is Rs. 15
2) In 2017 construction of buildings was started for rental purposes and spent Rs. 40 million.
In 2018 expenditure of Rs. 50 million incurred. An expenditure of Rs. 30 million was spent
on 31 May 2019. Now the company financed this expenditure by obtaining a loan of Rs.
100 million from the bank on 31 May 2019 at the rate of 12% per annum. Surplus funds
have been invested at 7.35%. At end of year 2019 one building of Rs. 60 million completed.
The remaining building’s had not been completed at the end of the year 2019.
3) ML purchased a plant for Rs. 375 million on January 01, 2018 and installed at the cost of
Rs. 59 million.
The plant has an estimated useful life of 7 years with no residual value.
ML uses revaluation model for subsequent measurement of its plant and machinery and
accounts for revaluations on net replacement value method. The details of revaluations
performed by an independent firm “Tony Stark & Co” are as follows:
Revaluation date Fair value
31 December 2018 Rs. 360 million
31 December 2019 Rs. 290 million
The auditor doubted the revalued amount presented in financial statements amount at
31.12.2019 and asked to perform impairment testing for the plant. The relevant data is as
follows.
• Estimated cost to sell is Rs. 10 million. The Fair value is same as revalued amount.
• Estimated Cash flows of plant acquird on January 01, 2018 would be as follows
Years 2020 2021 2022 2023 2024
Cash flows (Rs. in million) 88.00 82.28 73.21 65.81 56.37

• Applicable discount rate is 10%.

Required:
(a) Prepare the disclosure under relevant IAS’s in relation to Property, Plant and Equipment
in the notes to the published accounts for the year ended 31 December, 2019.
(Comparatives are required, total column is not required)
(b) Perform the impairment test and incorporate the impairment loss (if any) in above
disclosure of PPE.
Note: Round off your workings to the nearest millions. Marks 16

Question 10
The following information has been extracted from the draft financial statements of Alfred
Limited for the year ended 31 December 2020.
2020 2019 2020 2019
ASSETS Rs. in million Equity & Liabilities Rs. in million
Property, plant & equipment 208 183 Share capital (Rs. 10 each) 180 150
Intangible assets 18 23 Share premium 15 -
Trade receivables 45 36 Retained earnings 114 53
Advances and prepayments 84 70 Long term loan 40 -
Inventories 60 43 Trade payables 42 56
Short-term investments 12 9 Accrued expenses 60 70
Cash at bank 58 7 Tax payable 34 42

485 371 485 371

Following relevant information is available:
(i) Depreciation has been provided on straight line basis and is charged to operating
expenses. Estimated useful lives are as under:
Building 20 years
All other fixed assets 10 years
(ii) On 1 September 2020, the company purchased new machinery costing Rs. 65 million.
The purchase price of machinery was settled partially in cash Rs. 50 million and balance
by issuing 1 million shares.
(iii) A portion of building costing Rs. 20 million which was purchased on 1 July 2018 was
sold for Rs. 20 million on 30 June 2020.
(iv) Trade receivables written off during the year amounted to Rs. 5 million. It is the policy
of the company to maintain the provision for doubtful debts at 10% of trade receivables.
(v) Advances and prepayments include advance tax of Rs. 8 million (2019: Rs. 6 million).
(vi) Long term loan was obtained on 1 August 2020. Interest on loan @ 12% is payable on
31st July each year. Interest payable for 5 months has been accrued.
(vii) During the year, gross profit and profit before tax as a percentage of sales were 30% and
(viii) 10% respectively.
(ix) Interim cash dividend paid during the year was 10%. (2019: 15%)
(x) Tax expense for the year was Rs. 17 million. (2019: Rs. 8 million).
(xi) Right shares were issued on 1 December 2020 at Rs. 15 per share.
Required:
(a) Prepare statement of cash flows for the year ended 31 December 2020 using the indirect
method. Marks 12
(b) Determine “cash generated from operations” using direct method. Marks 05