Certificate in Accounting and Finance (CAF)

200 Minutes – 100 Marks

Faculty: ARM & AMK
Final Mock
CAF-1 – Financial Accounting and Reporting 1

Question 1 (05 Marks)

Majnu Limited (ML) has reported a profit of Rs 555,500 for the year ended 31 December 2023.
Following errors were noted by the Auditor:
1. Sales of Rs 85,000 was inadvertently recorded as 58,000. The company maintains a provision of 6%
of outstanding receivables as unrecoverable. Further, a recovery of Rs: 50,000 against receivables
written off in prior years was credited to trade receivables.
2. Plant acquired on 1 March 2023 costing Rs 500,000 was recorded from 1 January 2023 in the
financial statements. Installation cost of Rs 25,000 was charged to profit and loss account.
No provision is made for dismantling cost amounting to Rs 75,000 to be paid in 5 years’ time. Interest
rate applicable to the company is 12%. Depreciation is charged at 15% on written down value.
Required:
Prepare the correcting Entries and recompute the net profit.

Question 2 (4 Marks)
a. 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?
b. An entity made a profit of Rs. 480,000 for the year 2018 based on historical cost accounting
principles. It had opening capital of Rs. 1,100,000. During 2018, specific price indices increased by
15% while general price indices increased by 12%. How much profit should be recorded for 2018
under real financial capital maintenance concept?

Question 3 (9 Marks)
You are the audit manager for the client ML. The following matters are brought to you by the teams.

1. Alisha Group is a real estate development company following International Accounting

Standards. They own a commercial building initially classified as investment property. Alisha
Group plans to transition the commercial building from investment property for rental income
and capital appreciation to supporting manufacturing operations for core business activities
with intent to sell within the next one to two years.
2. The property was acquired 5 years ago for re-sale in the ordinary course of business. The cost
of the property was Rs 3.5 million. After a reasonable period, AL rented it out on 1 July 2020.
Remaining useful life was re-assessed to be 8 years on the date of renting out. Fair Value of the
property could not be expected to be determined with precision since acquisition. The property
was disposed of for Rs 2.2 million on 1 October 2023.
3. The property was acquired at the start of 2021 for Rs 800,000. Since acquisition the company
used it for rental income. The property was vacated to be sold in the ordinary course of business
on 1 July 2022. Fair Value of the property increase by 15% per annum proportionately since
acquisition. Disposal costs estimates on 1 November 2022 was 8% of fair value.

From The Desk of Saleh Muhammad

 Required:
Explain how each transaction should be treated in accordance with the international accounting
standard.
Question 4: (10 Marks)

1. Which of the following are acceptable methods of accounting for a government grant relating to an
asset in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance?
Set up the grant as deferred income
(ii) Credit the amount received to profit or loss
(iii) Deduct the grant from the carrying amount of the asset
(iv) Add the grant to the carrying amount of the asset
(a) (i) and (ii)
(b) (ii) and (iv)
(c) (i) and (iii)
(d) (iii) and (iv)
2. Which TWO of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
(a) A government grant related to the purchase of an asset must be deducted from the carrying
amount of the asset in the statement of financial position.
(b) A government grant related to the purchase of an asset should be recognized in profit or loss
over the life of the asset.
(c) Free marketing advice provided by a government department is excluded from the definition
of government grants.
(d) Any required repayment of a government grant received in an earlier reporting period is
treated as prior period adjustment.
3. Which of the following can NOT be a ‘qualifying asset’ under IAS 23 Borrowing Costs?
(a) Inventories
(b) Manufacturing plants
(c) Assets that are ready for their intended use when acquired
(d) Investment property

4. 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. Capitalization 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
5. 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

From The Desk of Saleh Muhammad

6. 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)

7. The IASB’s Conceptual Framework for Financial Reporting identifies qualitative characteristics of
financial statements.
Which TWO of the following characteristics are NOT fundamental qualitative characteristics according
to the IASB’s The Conceptual Framework for Financial Reporting?
(a) Relevance
(b) Reliability
(c) Faithful representation
(d) Comparability
8. An NPO has a fund that is subject to externally imposed stipulations specifying the resources
contributed be maintained permanently, although the constituent assets may change from time to time.
Which type of fund it is?
(a) Unrestricted fund
(b) Capital assets fund
(c) Restricted fund
(d) Endowment fund
9. Which of the following statement is incorrect with respect to restrictions on contribution revenue of
an NPO?
(a) Restrictions may be externally imposed.
(b) Restrictions may be internally imposed.
(c) Restrictions may be explicit.
(d) Restrictions may be implicit.
10. Which of the following cannot be a qualifying asset:
a. A piece of Property, Plant and Equipment
b. A Software
c. Inventory
d. Inventory that does not need substantial time.

Question 5 (12 Marks)

Artur has provided his son, Alex, with all the capital required in the setting up of a business on 1 April
2013 and its subsequent development. Alex has now produced the following summarized accounts as a
basis for discussing the progress of the business with his father.
Statement of profit Mar Mar Statement of financial 1 Apr Mar Mar
or loss 2014 2015 position 2013 2014 2015
Rupees in ‘000’ Rupees in ‘000’
Revenue 100 140 Non-current assets 70 70 80
Cost of sales (60) (90) Inventory 5 7 8
Gross profit 40 50 Trade receivables 0 11 24
Expenses (32) (51) Bank/(Overdraft) 13 2 (4)
From The Desk of Saleh Muhammad
 Profit/(Loss) 8 (1) 88 90 108

Trade payables 3 5 8
Capital employed 85 85 100
88 90 108

Alex is keen for his father to increase the capital employed in the business and has drawn his father’s
attention to the following matters revealed in the accounts.
1. A Rs.15,000 increase in net capital employed can be linked with a Rs.40,000 increase in revenue
during the past year.
2. The rate of inventory turnover during the past year has been 12 as compared with 10 in the previous
year.
3. The increase in fixed overheads last year is due to the renting of larger premises. However, these
new premises would be adequate for a turnover of Rs.200,000.
Artur is not pleased with the results of his son’s business. Alex can easily obtain employment offering a
salary of Rs.10,000 per annum and Artur can obtain 10% from a bank deposit account.

Required
a. Describe the limitations of ratio analysis (2)
b. Calculate for each of the years ended 31 March 2014 and 2015 FOUR financial ratios which draw
attention to matters which could give Artur cause for concern. State clearly the formula or basis for
each ratio used. (6)
c. Outline THREE reasons for closing the business and ONE reason in favor of its continuance (4)

Question 6 (16 Marks)

Muskan Limited (ML) was incorporated on 1 January 2021 with an authorized share capital of Rs. 850
million comprising of 85 million shares.
1.Outstanding ordinary, preference and potential shares of ML as at 1 January 2021:
* Paid up capital of Rs.600M and Share Premium of Rs.50M.
* 12 million share options for ordinary shares having exercise price of Rs. 34 each.
* 15 million irredeemable preference shares having par value of Rs. 25 each carrying cumulative dividend
of 16% per annum.
2. On 1 May 2021, ML issued 8 million shares at Rs. 30 each.
3. On 1 September 2021, ML issued 10% bonus shares. The market price per share immediately before the
announcement of bonus was Rs. 32 per share.
4. On 1 October 2021, 10 million 15% redeemable preference shares having par value of Rs.50 each were
issued at 60 Each. Each preference shares is convertible into 4 ordinary shares after 5 years.
5. Average Market Price during the year 2021 was 32 per share.
6. On 1 May 2022, CL issued 30% right shares at a premium of Rs. 15 per share. The market price per share
immediately before the entitlement date was Rs. 32 per share.
7. On 1 July 2022, 4 million convertible bonds having par value of Rs. 100 each were issued. The bonds
carry interest @ 12% per annum payable on 30 June each year. Each bond is convertible into 3 ordinary
shares after 3 years.
8. Average Market Price during the year 2022 was 36 per share.
9. Following information has been extracted from ML’s draft financial statements:
From The Desk of Saleh Muhammad
 2022 2021
Draft Audited
Rs.in Million
Net Profit 270 250
Revaluation surplus arising during the year 0 40
Transfer of Incremental Depreciation 10 0
Final Dividend 15%

10. After the preparation of draft financial statements for the year ended 31 December 2022, the following
matters were discovered:
* Installation cost of Rs. 30 million relating to a plant capitalized on 1 June 2021 was wrongly expensed
out. The plant is subsequently measured using cost model and is being depreciated @ 20% per annum on
reducing balance method.
* During the year trade receivable balance of Rs. 5 million which is recoverable but has been written-off
twice.
* Inventory purchased on 28 December 2022 for Rs.8 million included in purchases. However, inventory
is received on 5th of January 2023.
* Company purchased a plant at a cost of Rs.1 million in March 2021. Useful life of plant assessed to be 10
years and residual value at the end was assessed to be 0.075 million. Subsequently in 2022 it is evident that
market value of similar plants have grown as a result of which residual value at the end of the useful life
is assessed to be Rs. 0.1 million.
Required:
Compute ML’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.

Question 7 (15 Marks)

1. Balance as of assets and liabilities as on 1 January 2023:
Assets Rs. In '000 Liabilities and Funds Rs. In '000

Cash and Bank 1,700.00 Funds 8,020.51

Prepaid Insurance 480.00 Trade Creditors 650.00

Property and equipment 6,100.00 Loans @ 12% 1,750.00

Investment @13% 3,000.00 Accumulated Depreciation 1,534.49

Receivables 550.00 Accrued expenditure 575.00

Stock 750.00 Interest Payable 50.00

From The Desk of Saleh Muhammad

 12,580.0 12,580.00

Additional Information:
2. The details pertaining to property and equipment are as follows:
* The property was acquired at a cost of Rs 2,600,000 on 1 July 2021of which 40% pertains to the cost of the
land.
* The equipment, purchased at a cost of Rs 3,500,000 on September 1, 2020, was exchanged on June 30,
2023, for another equipment. The fair value of the disposed asset is Rs 2,000,000 which is not reliable, and
the fair value of the new equipment is Rs 2,200,000.
* The depreciation rate on property is 20% on a reducing balance basis, while equipment is depreciated at
a rate of 15% on a reducing balance basis.

3. The details about the funds are:

a. Some funds amounting to Rs. 1.25 million were received on 1 September 2022 for the acquisition of plant.
The plant was acquired on 1 May 2023. Company depreciation the plant at 15%.

b. Some funds amounting to Rs. 2.5 million were received on 1 July 2022 for supporting the facilities of
medical clinics and hospitals in the rural areas. Till 31 Dec 2022 expenses amounting to Rs. 1.05 million
have been made, during the year a further expenditure of 0.25 million was made.
c. A specific fund has been set up for 20 years of Rs: 2 million from which the income earned will be used
for the education of the students and upon term expiration the principal be used to set up educational
Institution in the rural areas.

4. The summary of payments made during the year were:

Rs.in '000

Additional consideration paid on

exchange transaction 70
Plant was acquired on 1 May 1,800
Annual Insurance (valid till 30.06.2024) 960
Payments to creditors 700
Interest paid at year end 130
Loan Paid on 30 June 2023 250
Other Expenditure 510

* Payments made for other expenditures include a expenditure made for supporting Rs 250,000 to the
hospital expenses.

5. Sales are made on 20% markup on cost. 50% are cash sales and remaining are the credit sales.

6. Contribution Received during the year amounted to Rs. 8 Million. Breakup of the contribution is as
follows:
Rs.in '000
Contribution for purchase of plant 700
From The Desk of Saleh Muhammad
 Contribution for incurring future health expenses 2,150
Unrestricted fund 5,150

7. Balances of some assets and liabilities as on 31 December 2023:

Rs.in '000
Receivables 600
Stock 400
Trade Creditors 700
Accrued Expenditure 250
Loan Payable 1500

Required:
Prepare the following using the deferral method:
A. Statement of income and expenditure for the year ended 31 December 2023.
B. Statement of financial position as at 31 December 2023.

Question 8 16 Marks

SHS Ltd commenced its business on January 1, 2017. Following items of PPE were appearing in the balance sheet of
SHS Ltd on January 1, 2020
Particulars Cost/FV Acc. Dep Model Useful life/Rate Dep. Method
Building 5,000,000 500,000 Revaluation* 20 years** SLM
Plant 2,300,000 623,300 Cost 10% WDV
Furniture 800,000 240,000 Cost 10 years SLM
* Revaluation Loss against the building was Rs.500,000 from which 200,000 was charged to P&L.
** Remaining useful life at the date of last revaluation
Following information is also available for the year ended December 31, 2020
 On April 1, 2020, SHS started the construction of a new plant facility. The construction was financed through a
loan of Rs.700,000 @ 15% from ARM Ltd acquired on January 1, 2020. payments made to the contractor were
as follows:
Date of payment April 30, 2020 June 30, 2020 October 1, 2020
Amount Rs.450,000 Rs.500,000 Rs.250,000
The additional payments were made through a running finance facility with a limit of Rs. 2,000,000 @ 12%.
Surplus funds when available were invested in a savings account @ 8%. The construction work was completed
on October 31, 2020 however, the work was suspended during the month of August 2020 due to delay in delivery
of construction material. The running finance facility remained unpaid at year end. Rs.2,500 were paid as
government duties.
 An item of furniture costing Rs.200,000 was disposed on June 30, 2020 at a loss of Rs.20,000. All items of PPE
were acquired when SHS Ltd commenced its business
 Revaluation is carried out on December 31 after every 3 years. during the revaluation it was found that the FV
of the asset was Rs.4,250,000 and the remaining useful life was assessed at 16 years.
 An impairment test was also carried out for the building and the value in use of building was assessed at
Rs.4,100,000 while the cost to sell the asset was Rs.500,000.
 During the year two new buildings were acquired the details of which are:
o Building 1: It was acquired on 1 April 2020 at a cost of Rs.1,200,000. Initially SHS Ltd was uncertain as
to whether use the building as a head office or to rent it out. On October 31, 2020, it was decided to

From The Desk of Saleh Muhammad

 rent out the building (i.e. to be held as an investment property). The FV of the building on October 31,
2020 was Rs.1,000,000 while that on December 31, 2020 was Rs.1,500,000
o Building 2: It was acquired at a cost of Rs.1,000,000 on July 1, 2020 in a remote area of the country in
response to a housing society project announced by the government. SHS is of the view that when the
construction of the project will start the market value of this building will rise exponentially. During the
year however the market value was not determinable. The useful life of the building was estimated at 16
years.
SHS carries its investment properties at fair value model.
1. On April 1, 2020 SHS acquired a solar panel energy system to generate their own electricity for their entire facility
at a cost of Rs.5,000,000. As the new system will reduce the carbon emission of the company by 30% and also
create employment opportunities, SHS was awarded a grant of Rs.1,200,000 on May 1, 2020 under the condition
that SHS will employee, at all time during the next 3 years, at least 80 employees in the new system. SHS deducts
the grant from the cost of asset to arrive at the carrying amount.
The solar panel system is to be depreciated using WDV method @ 15% and it has a residual value of Rs.500,000.
Required
Prepare disclosure notes under IAS 16 and IAS 40 for SHS Ltd. to be included in the financial statements for the year
ended December 31, 2020 (Comparative figures and total column is not required)

Question 9 (13 Marks)

Kantaap Ltd (KL) has the following balances appearing in its financial statements as on 31 December 2019:
Rupees
Share capital (Rs.10 each) 500,000
Share premium 300,000
Retained earnings 1,450,000

Additional information
 KL purchased a three-floor building on 1 January 2018 at a cost of Rs.900,000. The ground floor was
used as warehouse of the company while the remaining floors were given on rent on the date of
purchase at an annual rent of Rs.500,000 payable in advance. The accountant of KL recorded the entire
building as investment property even though each floor was separately saleable.
The building has a useful life of 20 years. KL has a policy of accounting for PPE at cost model and
investment property at fair value model. The fair value of building (equally attributable to three floors)
at difference dates were as follows:
Date Rupees
31 December 2018 1,200,000
31 December 2019 1,500,000
31 December 2020 1,650,000
 Final cash dividend of 2019 of 20% was announced in March 2020. An interim bonus dividend if 1 for
every 5 shares held was also announced on September 2020.
 A right issue of 20,000 shares was also made on 1 July 2020 at a total consideration of Rs.350,000.
 Profit after tax for 2020 was Rs.340,000
Required
a. Prepare a statement of changes in equity for KL for the year ended December 31, 2020 (Comparatives
are not required) (7 Marks)
b. Prepare an error note as should be presented in the financial statements of KL for the year ended
December 31 2020 (6 Marks)

From The Desk of Saleh Muhammad

 THE END

From The Desk of Saleh Muhammad