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INTRODUCTION
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ICAP
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and Training of ICAP based on standards, laws, rules, regulations, theories and practice as applicable on
the date of examination, except as stated otherwise. These answers are not meant to provide the
assessment criteria against the particular examination questions. The purpose of these suggested answers
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ICAP
Certificate in Accounting and Finance Stage Examinations
The Institute of 8 September 2014
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Rs. in million
Sales 737
Stock at 1 July 2013 75
Purchases 301
Manufacturing expenses 240
Selling and marketing expenses 28
Administrative expenses 51
Factory building – cost at 1 July 2013 200
Machines – cost at 1 July 2013 280
Factory building – accumulated depreciation at 1 July 2013 50
Machines – accumulated depreciation at 1 July 2013 87
Advance income tax 4
Debtors 117
Cash and bank 51
Creditors 83
Share capital 300
Unappropriated profit at 1 July 2013 90
1,347 1,347
Additional information:
(i) Depreciation on factory building and machines are provided on reducing balance
method @ 10% and 15% per annum respectively. 60% depreciation on factory
building and 100% depreciation on machines are charged to cost of sales. The balance
depreciation is charged to administrative expenses.
(ii) On 31 May 2014, a fully depreciated machine was sold for Rs. 3 million. The sale
proceeds were received on 5 July 2014. No entries have been made in respect of these
transactions.
(iii) Debtors include an amount of Rs. 28 million owed by a customer who experienced
cash flow problems prior to the year-end. The company has agreed to accept
Rs. 18 million in full and final settlement of the debt. Four other debtors aggregating
Rs. 5 million are required to be written off.
(iv) Income tax liability for the year ended 30 June 2014 is estimated at Rs. 25 million.
(v) On 20 June 2014 an advance of Rs. 12 million was received under a contract for
supply of goods in August 2014. The advance was credited to sales.
(vi) Closing stock at 30 June 2014 amounted to Rs. 114 million. It included stock costing
Rs. 20 million whereas the related invoice was booked on 4 July 2014.
(vii) In June 2014, a competitor developed a new product which has affected ABC’s ability
to sell one of its products at its normal price of Rs. 160. It is estimated that to sell the
product, the company needs to offer a discount of 25%. 150,000 units of that product
were in hand as on 30 June 2014 at a cost of Rs. 120 per unit. Its selling costs are
estimated at Rs. 20 per unit.
Required:
Prepare the statement of comprehensive income for the year ended 30 June 2014 and the
statement of financial position as at that date in accordance with International Financial
Reporting Standards. (20)
Financial Accounting and Reporting-I Page 2 of 4
Q.2 Zeeshan Enterprise invoice goods to its Islamabad branch at cost plus 20 percent. The
expenses of the branch are paid by the head office. The branch has supplied the following
information for the year ended 30 June 2014:
Rupees
Opening stock - at invoice price 240,000
Closing stock - at invoice price 180,000
Cash sales 175,000
Credit sales 410,000
Collection from debtors 378,000
Debtors as on 30 June 2014 91,600
Goods received from head office - at invoice price 300,000
Goods returned to head office 30,000
Goods in transit from head office as on 30 June 2014 - at invoice price 36,000
Branch expenses paid by the head office 104,000
Required:
Show the Branch Account as it would appear in the books of head office for the year ended
30 June 2014 showing the profit made by the branch. (10)
Q.3 (a) List the conditions which are necessary to be fulfilled for recognizing revenue from sale
of goods under IAS 18 ‘Revenue’. (04)
(b) Attire Limited (AL) is a manufacturer of kids’ garments which are supplied to large
departmental stores. Following are some of the transactions which were carried out in
August 2014:
(i) AL delivered 2,000 garment pieces to Elegant Mart (EM). According to the terms
of sale, at the expiry of three months from the date of delivery, EM would have
the right to return the unsold garments to AL. All garments sold during this
period or retained by EM would be invoiced after three months of delivery and
would thereafter be paid within seven days.
EM has agreed to display AL’s garments at a prominent place at all its stores and
in return AL has agreed to allow a discount of 2%. (03)
(ii) AL sold 10,000 pieces of garments to Salam Garments on lay away basis. The
payment is to be made in 12 monthly instalments of Rs. 1,000,000 each. (03)
Required:
Describe how the above transactions would be accounted for in AL’s books of account.
Q.4 Shahzad Textile Mills Limited (STML) purchased a plant for Rs. 500 million on 1 July
2010. The plant has an estimated useful life of 10 years and no residual value.
STML uses revaluation model for subsequent measurement of its property, plant and
equipment and accounts for revaluations on net replacement value method. The details of
revaluations performed by an independent firm of valuers are as follows:
Required:
Prepare journal entries to record the above transactions from the date of acquisition of the
plant to the year ended 30 June 2014. (Ignore tax implications) (15)
Financial Accounting and Reporting-I Page 3 of 4
Q.5 Hammad Limited (HL) imports and supplies three products, Alpha, Gamma and Beta. The
opening balances and transactions for the month of June 2014 are as follows:
(i) HL’s bank charges a commission of 0.5% of invoice value for opening the letter of
credit.
(ii) Import taxes and duties were 23% of the invoice value out of which 40% are
refundable/adjustable.
(iii) The transportation charges are Rs. 1,500 per trip. 20 units of Alpha, 2 units of Gamma
or 15 units of Beta can be transported in each trip.
(iv) All goods are repacked after import. The cost of packing per unit was Rs. 300,
Rs. 1,500 and 700 respectively.
(v) HL values its stock on first-in, first-out basis.
(vi) Average selling costs per unit are Rs. 700, Rs. 1,500 and Rs. 400 respectively.
Required:
Compute the value of stock of each product as at 30 June 2014 in accordance with IAS-2
‘Inventories’. (15)
Q.6 Following information has been extracted from the financial statements of Full Speed
Enterprises (FSE) for the year ended 30 June 2013:
Rupees
Vehicles – cost 65,201,300
Less: Accumulated depreciation (24,450,500)
WDV of vehicles 40,750,800
FSE provides depreciation on vehicles @ 15% per annum on written down values.
Depreciation on addition/deletion is provided in proportion to the period of use.
(i) On 1 August 2013, a vehicle which was acquired at a cost of Rs. 850,000 on
1 July 2011 was exchanged for a new vehicle. The balance was settled with a cheque
for Rs. 350,000. The list price of the new vehicle was Rs. 900,000.
(ii) Three new vehicles were purchased on 1 December 2013 for Rs. 1,250,000 each.
(iii) On 1 February 2014, a vehicle having written down value of Rs. 550,000 was repaired
at a cost of Rs. 250,000. It is expected that the repairs would improve the efficiency of
the vehicle significantly.
(iv) On 30 June 2014, a vehicle purchased on 1 January 2012 at a cost of Rs. 1,500,000 was
sold for Rs. 1,350,000.
Required:
Prepare the following ledger accounts for the year ended 30 June 2014:
(a) Vehicles account
(b) Accumulated depreciation on vehicles
(c) Loss/gain on sale of vehicles (10)
Financial Accounting and Reporting-I Page 4 of 4
Ashfaq needs to submit his Trading and Profit and Loss Account for the year ended 30 June
2014 and Balance Sheet as of that date to his bankers in order to obtain an overdraft facility.
He has not maintained proper books of account of the business but has provided you the
following information:
(i) He purchased goods from a single supplier who allows a discount of 3% on goods
purchased in excess of Rs. 3,000,000 in a year. The discount for the year ended
30 June 2014 amounts to Rs. 265,800 and would be received in August 2014.
(ii) All goods are sold at cost plus 60%.
(iii) All cash received against sale of goods has been banked with the exception of the
following weekly average cash expenses/drawings:
Rupees
Drawings 30,000
Carriage outward 5,000
Petrol 3,000
Misc. expenses 2,500
(vi) Depreciation on motor car and furniture is to be provided @ 30% and 15%
respectively under the reducing balance method.
(vii) Stock-in-trade on 30 June 2014 amounted to Rs. 702,000.
Required:
Prepare Trading and Profit and Loss Account for the year ended 30 June 2014 and Balance
Sheet as on 30 June 2014. (20)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Current assets
Stock 111
Debtors [117-(28-18)-5] 102
Other receivable 3
Cash and bank 51
267
Total assets 566
Current liabilities
Creditors (83+20) 103
Income tax payable (25-4) 21
Advance from customer 12
136
Total equity and liabilities 566
Workings
W-1: Cost of Sales
Opening stock 75
Purchases (301+20) 321
Manufacturing expenses 240
Depreciation (W-3) 38
Closing stock (114-3) (W-2) (111)
563
W-2: Inventory adjustment
Cost of product (150,000 x Rs. 120) 18
NRV of product (150,000 x [((Rs. 160×75%) - Rs. 20)] (15)
3
W-3: Depreciation:
Chargeable to
Depreciation
Cost of sales Administration
Factory building [(200-50]*10%) (60:40) 15 9 6
Machinery [((280-87)*15%)] 29 29 -
44 38 6
Page 1 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
975,600 975,600
Working:
Debtors as on 30 June 2013
91,600 + 378,000 – 410,000 = 59,600
The entity has transferred to the buyer the ‘significant risks and rewards of
ownership of the goods’. This normally occurs when legal title to the goods or
possession of the goods passes to the buyer.
The entity does not retain effective control over the goods sold, nor retains a
continuing management involvement to the degree usually associated with
ownership.
The amount of revenue can be measured reliably.
It is probable that economic benefits associated with the transaction will flow
to the entity.
The costs incurred (or to be incurred) for the transaction can be measured
reliably.
(b) (i) The garments remain the property of AL and EM bears none of the risks of
ownership. When EM sells the garments or decides to keep them at the end of
three months, it records the purchases at that point from AL. This is therefore
the point at which the risks and rewards pass to EM. Up to that point there is
no sale and the garments should appear in inventory of AL.
(ii) A lay away sale does not involve financing and the revenue from the lay away
sale may be recognized in AL’s financial statements when the goods are
delivered. However, if experience indicates that most such sales are
consummated, revenue may be recognized when a significant deposit is
received provided the goods are on hand, identified and ready for delivery to
the buyer.
Page 2 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Page 3 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Page 4 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.5
Alpha Gamma Beta
Total
Cost Cost Cost
Units Cost (Rs.) Units Cost (Rs.) Units Cost (Rs.) Cost
P/U P/U P/U
Opening stock 20 3,000 60,000 100 48,000 4,800,000 30 4,000 120,000
Closing stock at lower of cost and NRV 98,880 4,267,125 444,000 4,810,005
Page 5 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.6 Vehicle
Rupees Rupees
1/7/2013 Opening balance 65,201,300 1/8/2013 Cost of vehicle exchanged 850,000
New vehicle in exchange
1/8/2013 for old car 900,000 6/30/2014 Vehicle sold 1,500,000
1/12/2013 3 car @ 1,250,000 each 3,750,000 30/6/2014 Closing balance 67,751,300
1/2/2014 Repair to a vehicle 250,000
70,101,300 70,101,300
Page 6 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Balance Sheet
As at 30 June 2014
Rupees Rupees
Owner's equity Fixed assets
Ashfaq's capital Freehold land 2,500,000
(4,396,600+3,332,020-1,560,000) 6,168,620 Motor car (2,000,000-600,000) 1,400,000
Furniture (1,000,000 - 150,000) 850,000
WORKINGS
W-1 : Creditors
Rupees Rupees
Bank 9,850,700 Balance b/d 1,102,000
Purchase discount 265,800 Purchases (W-1.1) 11,860,000
Balance c/d 2,845,500
12,962,000 12,962,000
Page 7 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
W-4 : Debtors
Rupees Rupees
Balance b/d 350,000 Bank 464,400
Credit sales (W-3) 4,480,920 Balance c/d (balancing) 4,366,520
4,830,920 4,830,920
(THE END)
Page 8 of 8
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Autumn 2014
General:
The overall result in this paper was 35%. The following general issues were observed
during the assessment process:
Students did not carefully read the style of amounts mentioned in the question like
Rupees, “Rs in 000” or “Rs in million”. Consequently, they arrived at abnormal
figures which confused them and resulted in errors.
The exact requirement of the question was not read. Consequently, either important
calculations were missed or additional working was carried out which resulted in
waste of precious time.
Question 1
Generally the performance was good; however, the following mistakes were observed:
Receivable from sale of machine was not incorporated in the statement of financial
position.
Rs. 20 million relating to invoice booked after year end was adjusted from stock
instead of purchases made during the year.
Net realizable value (NRV) of specified products was not correctly calculated.
Discount of 25% which should have been deducted from total sale in order to arrive
at NRV, was ignored. Many students ignored the selling costs that were required to
sell the related stock.
Many students did not include depreciation in cost of sales and included the entire
depreciation in administrative expenses.
Most of the students were not familiar with the treatment of tax. Instead of showing
tax as a deduction from profit before tax, many students included tax in
Administration Expenses. Further, most students did not adjust advance tax from the
income tax liability. Many students ignored it altogether.
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2014
Question 2
This question required preparation of branch account showing the profit made by the
branch. An average performance was observed because many students made errors even
in the treatment of simple items. Some of the common mistakes are enumerated below:
Many students ignored the stock reserve specially the reserve on opening stock.
Further, in computing reserve on closing stocks most of the students calculated it on
GIT also.
Question 3
(a) Conditions for revenue recognition as specified in IAS 18 were required. Majority
of the students missed one or two conditions specially those related to non-
retention of control by the seller and the condition that economic benefits
associated with the transaction should flow to the seller were missed.
(b) In this part, two transactions were described and the candidates were required to
specify the accounting treatment thereof. In such questions, the recommended
accounting treatment is required to be justified on the basis of relevant accounting
principles/rules. Many students ignored explanation altogether. Other common
mistakes were as follows:
(i) Majority of the students clearly knew that sales will be recorded on
completion of 3 months. However, only few were able to discuss the reasons
thereof in a proper way.
(ii) Majority of the students were unaware of the concept of sales on lay away
basis as has been discussed in IAS 18 and assumed it as Installment sales.
They are advised to refer to the ICAP’s suggested answer and to study the
relevant paragraphs of IAS 18 to understand this concept.
Question 4
This question required preparation of Journal Entries to record the transactions pertaining
to subsequent measurement of fixed assets under the Revaluation Model using Net
Replacement Value Method. Generally, the students did not have command over the
topic and were further confused between the Net Replacement Value Method and the
Gross Replacement Value Method. A number of errors were observed which are
discussed below:
Most of the students did not understand that the balance in the accumulated
depreciation account has to be reversed at the time of each revaluation.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2014
In the 2nd revaluation, many students debited the entire reduction in value of plant to
the surplus account. The correct procedure is to debit the surplus account only to the
extent of credit balance in the account and to debit the remaining loss to Retained
Earnings.
Similarly in the 3rd revaluation the entire difference between the carrying value of the
plant and the fair value was credited to Surplus account. For correct procedure the
students may refer to the ICAP’s suggested answer.
Question 5
The requirement of this question was simply to calculate the value of 3 (imported)
products under the FIFO method. However, the candidates made many errors while
performing simple calculations and missed an easy chance of scoring high marks.
Commonly observed errors are described below:
The refundable portion of import duty was also included in the cost.
Transportation cost per trip was taken as the transportation cost for entire purchases,
whereas many students were too confused and multiplied the cost per trip with the
units per trip to arrive at the total transportation cost for that product.
Some students ignored wrapping costs and commented that these are marketing
expenses.
Many students ignored the fact that closing inventory of Gamma included 30 units
from the opening balance.
Further, a number of students made separate calculations (on separate pages) for each
product which resulted in wastage of time.
Question 6
Majority of the students managed to score good marks in this question. The mistakes
observed were as follows:
(a) Some students prepared a single fixed asset account and merged depreciation and
cost in the same account.
(b) The depreciation on purchases during the year was mostly provided correctly based
on the period of use but no depreciation was provided on cars sold during the year.
(c) The concept of trade-in was misunderstood by many students as they debited the net
amount paid to the vehicle account.
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2014
Question 7
This was a question on single entry in which the requirement was to prepare Trading and
Profit and Loss Account and Balance Sheet. Majority of the students seemed well versed
with techniques involved and secured good marks. Most of the errors were in respect of
the following:
Cash sales were not calculated and cash deposited was considered as cash sales.
Sale was required to be calculated by multiplying cost of sales with 1.6. Instead,
many students calculated it by dividing cost of sales by 0.6.
Many students wasted time in preparing bank account which was not required as all
the information was already given in the question.
Purchase discount was shown in profit and loss account instead of trading account.
Carriage outward was taken to trading account instead of profit and loss account.
THE END
Page 4 of 4
Certificate in Accounting and Finance Stage Examinations
The Institute of 2 March 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
(i) Correspondence between Babar and Razi has revealed that they had agreed to value
the inventory and other assets of the business at Rs. 600,000 and Rs. 120,000
respectively. However, in view of Razi’s standing in the market, the deal had been
finalised at a lump sum price of Rs. 960,000 payable in two equal instalments. The
first instalment was paid by Babar from his personal account.
(ii) Babar had opened a bank account in the name of the business. An analysis of the
bank statement revealed the following details:
Receipts Rupees
Amount deposited by Babar on 1 January 2014 from his personal account 2,000,000
Day to day collections banked at day end 3,800,000
Payments
Second instalment to Mr. Razi on 31 January 2014 480,000
Purchases 3,150,000
Lease rent 120,000
Electricity 22,000
Furniture purchased on 1 July 2014 25,000
(iii) Babar and Sami kept a notebook which shows that the following payments were
made out of daily sale proceeds before depositing them in the bank:
Rupees
Salaries and EOBI payments 184,300
Purchases 49,500
Sundry shop expenses 35,600
Drawings 192,500
(iv) On 31 August 2014, there was a burglary at the warehouse and inventory costing
Rs. 50,000 was stolen. Due to defect in the insurance policy, the insurance company
acknowledged the claim of Rs. 20,000 only, which was received on 5 November 2014.
(v) On 31 December 2014, stock on hand costed Rs. 450,000. Cash in hand, trade
creditors and accrued expenses (electricity) amounted to Rs. 34,500, Rs. 82,500 and
Rs. 5,200 respectively.
(vi) Depreciation on fixtures and fittings is to be provided at the rate of 10% per annum.
Required:
Prepare Trading and Profit and Loss Account for the year ended 31 December 2014 and
Balance Sheet as on 31 December 2014. (20)
Financial Accounting and Reporting-I Page 2 of 5
Q.2 Trade Link Enterprises opened a branch at Lahore on 1 January 2014. The branch has
provided the following summary of transactions carried out by it during the year 2014 :
Rupees
Goods received from head office 21,732,000
Sales made during the year, of which 40% on credit 15,846,250
Realized from credit customers 4,753,875
Trade discount allowed to customers 36,220
Sales return by customers 108,660
Bad debts 9,055
Petty expenses incurred 70,629
Closing stock 6,385,000
Goods in transit from head office at year-end 250,000
Purchase of fixed assets, bills discharged by head office 1,448,800
Expenses incurred and reimbursed by head office:
Rent and utilities 537,100
Sales promotion 144,880
Payroll 724,400
Other information:
(i) Head Office invoices goods to branch at cost plus 25 percent.
(ii) The branch maintains an imprest of Rs. 100,000 and a balance of Rs. 500,000 in its
bank account. All other takings are transferred to head office.
(iii) Depreciation on fixed assets is to be charged at 15% per annum.
Required:
Prepare Lahore Branch Account in the books of Trade Link Enterprises for the year ended
31 December 2014 showing the profit made by the branch. (12)
Q.3 (a) HCL had agreed to provide services to NPL. The total contract price was Rs. 800,000
and HCL had initially expected to earn 25% profit on the contract. 50% of the work
had been completed at year end at the cost of Rs. 320,000. Soon thereafter, a dispute
arose on the quality of work and further work has been stopped pending settlement of
the dispute. HCL is however very confident of recovering the cost incurred on the
contract plus a margin of 10% above cost.
Required:
Discuss how much revenue should be recognised at the year end? (02)
(b) Saleem owns 10,000 shares in a listed company on 3 December 2014. On the same
date, the company declared a dividend of Rs. 2 per share on the basis of shares held
on 31 December 2014.
Required:
Prepare necessary journal entries relating to the dividend in the books of Saleem. (02)
(c) A company sold equipment to a customer on 1 September 2014 for Rs. 15 million. As
per market norms the company has agreed to provide free support services for the next
two years. The cost of providing the support services is estimated at Rs. 250,000 per
annum. On such services, the company usually earns a profit of 20% of cost.
Required:
Prepare journal entries relating to this transaction for the year ended
31 December 2014. (04)
(d) In the sale of goods how should the revenue be recognised when goods are shipped
subject to installation and inspection? (04)
Financial Accounting and Reporting-I Page 3 of 5
(b) Following is the draft balance sheet of XYZ Limited as at 31 December 2014 which
was prepared by its accountant:
Rs. in Rs. in
Assets Equities and liabilities
million million
Leasehold land – cost 250 Capital 1,000
Leasehold land – accumulated amortisation (200) Accumulated profit 1,816
Building – cost 1,000 Long term bank loan 200
Building – accumulated depreciation (500) Trade payables 228
Machinery – cost 1,750 Income tax payable 85
Machinery – accumulated depreciation (1,150) Accrued interest 13
Long term deposit 70
Stocks 910
Account receivables – net of provision 361
Cash and bank 851
3,342 3,342
Additional information:
(i) Profit before tax and income tax expenses for the year amounted to Rs. 275
million and Rs. 13 million respectively.
(ii) Balances as at 31 December 2013 were as under:
Rs. in million
Stock 703
Account receivables – net of provision 418
Cash and bank 243
Trade payables 150
Income tax payable 80
Long term deposit 70
The company follows a policy of maintaining provision for bad debts equal to
5% of account receivables.
(iii) The bank loan was obtained on 1 January 2014 and carries interest @ 9% per
annum.
(iv) XYZ uses straight line method for depreciation. Rates of depreciation are as
under:
Leasehold land 2%
Building 5%
Machinery 10%
Required:
Prepare a statement of cash flow as at 31 December 2014. (20)
Financial Accounting and Reporting-I Page 4 of 5
Q.5 (a) List the particulars that are required to be disclosed in the financial statements in
respect of inventories, according to IAS 2. (03)
(b) Soya Fry Limited manufactures Cooking Oil. Following information is available with
respect to purchases and overheads for the year ended 31 December 2014.
Details of purchases: Rs. in ‘000’
Raw material purchased (including 17% sales tax which
is refundable) 60,500
Packing material purchased 2,050
Settlement discount received on raw material purchases 400
Transportation cost relating to raw material (70%) and
packing material (30%) 300
Details of overheads:
Rent 2,700
Salaries and wages 2,500
Other variable overheads 5,000
Other fixed overheads 1,500
Other information:
(i) The break-up of rent is as follows:
Rs. in ‘000’
Factory 2,000
Warehouse (50% for raw material, 10% for
packing material and 40% for finished goods) 500
Shelf spacing in super markets 200
(ii) Break-up of salaries and wages, other variable and fixed overheads is as follows:
Allocation between
Manufacturing Administration
Salaries and wages *60% 40%
Other variable overheads 80% 20%
Other fixed overheads 60% 40%
*Manufacturing salaries includes 70% direct wages to labourers
working in the factory which vary with the level of production.
(iii) Normal production level is 45,000 units per annum. Actual production during
the year was 40,000 units.
(iv) Opening and closing inventories are as follows:
1-Jan-2014 31-Dec-2014
--------- Rs. in ‘000’---------
Packing material 700 285
Raw material 5,000 7,780
Finished goods 2,962 4,162
Work in process 1,950 3,000
Goods costing Rs. 200,000 (2013: Rs. 300,000) are considered as obsolete and
have been fully provided. Further, closing stock of finished goods include goods
costing Rs. 75,000 which were damaged due to flood and can only be sold at
60% of its cost.
Required:
Disclose the above information in the note on ‘Cost of goods sold’ as would appear in
the profit and loss account for the year ended 31 December 2014. (17)
Financial Accounting and Reporting-I Page 5 of 5
Q.6 You have recently been appointed as chief financial officer of Al-Hafeez Limited (AHL).
While finalizing the company’s financial statements for the year ended 31 December 2014,
you have observed the following issues:
(a) Plant and equipment includes Machine A-31 at a carrying amount of Rs. 918,400
which was fabricated in-house by AHL in February 2014 by using existing plant and
machinery. The details are as follows:
Rupees
Direct material and labour 656,000
Depreciation – existing plant and machinery 24,000
Administration costs 140,000
20% profit (normally charged to its customers) 164,000
984,000
Less: Depreciation for the year (10% of the cost for 8 months) (65,600)
Carrying value of the machine at year-end 918,400
Direct material includes material lost due to fire amounting to Rs. 40,000.
The fabricated machine was transferred and available for use on 1 March 2014 and
was brought into commercial production on 1 May 2014. (07)
(b) AHL provides transportation services to its factory workers through its fleet of six
buses. The buses are depreciated on straight line basis. At the end of last year, the
buses had carrying value of Rs. 7 million and remaining useful life of 5 years.
On 1 July 2014, the local government promulgated a new legislation whereby all
public transport buses were required to undergo regular major inspection after a
period of three years. An inspection exercise of the fleet of buses was undertaken on
1 September 2014 at a cost of Rs. 1.8 million and this amount was capitalized in the
carrying amount of buses. (04)
(c) On 31 December 2014, AHL acquired a used specialized machine which has no
active market, by exchange of Machine X. The newly acquired machine was booked
at the carrying value of Machine X which was Rs. 9.5 million. However, the fair value
of Machine X on the date of sale was Rs. 8 million but no adjustment was made on
the premise that the acquisition of this specialised machine would increase efficiency
and consequently save approximately Rs. 1.5 million over its useful life. (03)
Required:
Explain the correct accounting treatment of the transactions by AHL and substantiate your
point of view with references to International Accounting Standards – 16 ‘Property, Plant
and Equipment’. Also prepare the necessary journal entries.
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
BALANCE SHEET
As at 31 December 2014
Rupees Rupees
Owner's equity Fixed assets
Babar’s capital (2,000,000+480,000) Goodwill
2,480,000 (960,000–600,000–120,000) 240,000
Profit for the year 516,050 Furniture (25000 – 1250) 23,750
Drawings (192,500)
2,803,550 263,750
Liabilities Current assets
Creditors 82,500 Stock 450,000
Accrued expenses (Electricity) 5,200 Other assets* 120,000
Cash at bank (W-1) 2,023,000
Cash in hand 34,500
2,891,250 2,891,250
WORKING:
W-1 : Cash at Bank
Rupees Rupees
Capital introduced 2,000,000 Payment of 2nd installment to 480,000
Razi
Cash deposited 3,800,000 Payment for purchases 3,150,000
Cash received from insurance 20,000 Lease payment 120,000
Electricity 22,000
Furniture & Fixtures 25,000
Balance at bank 2,023,000
5,820,000 5,820,000
Page 1 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.3 (a) If the outcome of a services transaction cannot be estimated reliably, revenue should only be
recognized to the extent that expenses incurred are recoverable from the customer.
Therefore, HCL may recognize revenue to the extent of Rs. 320,000 only.
Page 2 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
(d) Revenue is normally recognised when the buyer accepts delivery, and installation
and inspection are complete. However, revenue is recognised immediately upon the
buyer’s acceptance of delivery when:
(i) the installation process is simple in nature, for example the installation of a
factory tested television receiver which only requires unpacking and
connection of power and antennae; or
(ii) the inspection is performed only for purposes of final determination of
contract prices, for example, shipments of iron ore, sugar or soya beans.
Rs in million
Cash flow from operating activities
Profit before taxation as revised (W-1) 253
Adjustments for non-cash items and other changes:
Depreciation (W-3) 228
Loss on disposal of machine (W-2) 5
Interest expense (200×9%) 18
(Increase) / decrease in stock (703–910) (207)
(Increase) / decrease in account receivables (418–342)(W-4) 76
Increase / (decrease) in trade payables (228–150) 78
198
Finance cost paid (18–13) (5)
Income tax paid (80+13–85) (8)
(13)
Net cash flow from operating activities 438
WORKINGS:
W-1: Profit before tax Rs. in million
Profit before tax (as given) 275
Depreciation on addition of machine (2)
Reversal of depreciation excess provided 4
Loss on disposal (W-2) (5)
Additional provision for bad debts (19)
Profit before tax 253
Page 3 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
The accounting policy adopted for measuring inventories, including the cost
measurement method used.
The total carrying amount of inventories, classified appropriately. (For a
manufacturer, appropriate classifications will be raw materials, work-in-
progress and finished goods)
The amount of inventories carried at net realizable value or NRV.
The amount of inventories written down in value, and so recognized as an
expense during the period.
Details of any circumstances that have led to the write-down of inventories to
NRV. OR Reasons for write down of inventories.
The amount of any reversal of any write-down that is recognized as a
reduction in the amount of inventories recognized as expense in the period.
The circumstances or events that led to the reversal of a write-down of
inventories. OR Reasons for reversal of write down of inventories.
The carrying amount of inventories pledged as security for liabilities.
Page 4 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.6 (a) The capitalisation of the raw materials, labour and depreciation of plant &
machinery is correct as these costs were necessarily incurred in bringing the asset to
a location and condition enabling it to be used. However, the following costs
should not be capitalized:
The materials destroyed – all unnecessary wastage is expressly not allowed to
be capitalised per IAS 16.
Administration overheads of Rs. 140,000 – unless it can be proved that these
costs were directly linked to the manufacture of the machine.
IAS 16 doesn’t allow to capitalize internal profit
Property, plant and equipment must be depreciated from the date on which it first
becomes available for use. AHL provided depreciation expense for eight months
i.e. from the date of commercial production, which is not in accordance with the
requirement of IAS-16. This machine should be depreciated for 10 months i.e. from
1 March 2014.
Page 5 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Journal entry:
Date Description Debit Credit
31-Dec-2014 Loss due to fire 40,000
Administration expense 140,000
Other income/retained earning 164,000
Accumulated depreciation 12,267
Machine 344,000
Depreciation 12,267
(b) AHL’s decision to capitalize the cost of inspection into buses account is correct.
However, buses are depreciated over the useful life whereas major inspection
carried out by AHL should be depreciated over three years (next inspection date).
Therefore, AHL should amortize the inspection cost for 4 months of this year.
(c) A newly acquired asset should be brought into the accounting records at the fair
value. Where this fair value is not available, the fair value of the exchanged asset
should be used instead (in this case, Rs. 8.0 million).
(THE END)
Page 6 of 6
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Spring 2015
General:
The performance in this attempt was almost the same as the last two attempts. Poor
performances were witnessed in question 3 and 6 which required knowledge of
accounting standards. Good performance was witnessed in the remaining questions.
Question-wise comments:
Question 1
This was a simple question on preparation of trading and profit and loss account and
balance sheet for a recently acquired sole proprietorship business. It was the best
attempted question. The errors observed were as follows:
Depreciation on furniture purchased on July 1, was charged for full year instead of 6
months.
In capital account, Rs. 480,000 which were paid by Baber, the owner, from his
personal account, were ignored.
Question 2
This was a simple question relating to maintenance of branch account in Head Office
books. It was the second best attempted question and majority of the students were able
to secure passing marks.
Page 1 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2015
The question specifically required Branch Account in the books of Head Office,
showing the profit made by the branch. Some students mis-understood the
requirement and tried to prepare Profit and Loss Account.
Trade discount, sales returns and bad debts related to branch debtors were charged to
Branch Account instead of Branch Debtors Account.
Adjustment for loading of profit was calculated as 25/100 of the value of goods
received by the branch instead of 25/125 of the value. The main reason for such a
mistake was that candidates failed to appreciate that according to the question the
value of goods transferred had been taken from branch’s records which meant that
profit was already loaded on it.
Depreciation expenses were debited to branch account. The correct entry was to debit
the cost of fixed assets purchased and credit the net book value at year-end.
While calculating the cash transferred by branch, cash in hand and at the bank were
not deducted.
Question 3
This question tested the concept of revenue recognition. It consisted of four parts. In parts
(a) and (d) the candidates were required to explain the accounting treatment in the given
situations whereas in part (b) and (c) they were required to pass journal entries. The
overall performance was quite poor. Part-wise performance is discussed below:
(a) In this part, most of the students recommended that no revenue should be
recorded. However, in the given situations, IAS allows recording of that portion of
the revenue which is recoverable.
(b) Majority of the students passed the journal entry correctly. The most common
error was that dividend income was recorded on 3rd December instead of 31st
December.
(c) This part proved difficult and it was quite evident that majority of the students had
not studied this aspect. Many students did not attempt it altogether. Among those
who did attempt, only few could pass fully correct entries. Mostly, there were
three types of mistakes as discussed below:
Sales were recorded at Rs. 14.5 million and deferred services revenue at
Rs. 0.5 million i.e. profit and cost was ignored.
Sales were recorded at Rs. 15 million and provision was made for expenses.
Page 2 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2015
Sales and deferred revenue were recorded correctly but entry to record the cost
and revenue for the four months i.e. September to December 2014 was
ignored.
(d) This was a poorly attempted question. Most of the students replied in a single line
that revenue would be recognized when installation and inspection is complete.
The exceptions allowed by the IAS were rarely mentioned. Further, many students
narrated lengthy general revenue recognition criteria which were not relevant in
the context of this part of the question.
Question 4 (a)
This part of the question was quite easy and majority of the students secured full marks.
Some of them were however confused and mentioned the components of financial
statements instead of the Elements.
Question 4(b)
This question was quite simple but majority of the students were unable to understand the
non-routine adjustments/situations though the routine calculations were performed well.
Only few students worked out revised profit before tax after taking into account the
adjustments identified by the CFO.
Reconciliation of cash and cash equivalents at beginning and end of the year were
missed in many cases.
Provision for bad debt could not be worked out correctly as most of the students did
not seem to understand the whole process of calculating the required balance of the
provision for bad debts and the impact of write off thereon. They may seek guidance
from ICAP’s suggested answers.
Question 5 (a)
This part of the question was well attempted by most of the students. However, the
following requirements were commonly missed by the students:
Moreover, a number of students only mentioned one requirement i.e. that inventory
should be shown under the heads raw material, work-in-progress and finished goods.
Page 3 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2015
Question 5(b)
This question required preparation of a note on cost of goods sold as it would appear in
the profit and loss account. The performance was average.
Various items forming part of the note were not arranged in proper sequence.
While calculating purchases, amount inclusive of sales tax was taken. Further, some
students calculated net purchases using 17/117 of the gross amount instead of
100/117 of the gross amount.
Purchases of packing material and its stock were not taken into consideration.
Salaries of manufacturing staff were not allocated correctly between direct labour and
manufacturing overheads.
Some students tried to prepare income statement which was not required.
Question 6
This question was based on IAS-16. Three situations were given and in each case the
candidates were required to suggest appropriate accounting treatment.
It was the most poorly attempted question. Many students did not read the question
carefully and failed to realize that they have to pass the necessary entry and also to
substantiate their point of view with reference to IAS-16. Most of them passed the entry
but did not give any explanation.
(a) According to the scenario, a machine had been fabricated in-house. The details of
cost at which the machine was capitalized were given in the question. The
performance was average. The common mistakes were as follows:
Very few students could highlight the fact that depreciation should be charged
on new assets when these are available for use and accordingly, in this case,
depreciation should have been charged for 10 months instead of 8 months.
Page 4 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2015
Instead of passing the correcting entry, many students passed the complete
entry as if no entry had previously been made in the accounts.
(b) A poor performance was witnessed in this question as most of the students were
of the view that inspection costs should be written off immediately. In fact,
inspection costs are required to be deferred and amortized over three years i.e. the
next inspection date.
(c) Many students passed the journal entry correctly but only few could explain their
point of view with reference to IAS-16. For proper explanation, they may seek
guidance from ICAP’s suggested answers.
THE END
Page 5 of 5
Certificate in Accounting and Finance Stage Examinations
The Institute of 9 September 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Receipts and payments for the period from 1 July 2014 to 30 June 2015 Rs. in ‘000’
Receipts from cash sales 1,728
Receipts from debtors 4,475
Payments made to creditors 4,774
Payments for marketing expenses 205
Payments for utility expenses 240
Payments for salaries 600
Payments for other miscellaneous expenses 107
Equipment (purchased on 1 October 2014) 250
Withdrew by Razi for his personal expenditures 125
Other information:
(i) Razi makes 35% margin on gross sales price. However, during the year, he offered 5%
discount on credit sales and 10% discount on cash sales. 70% of his total sales were on
credit.
(ii) Actual bills for the year were as follows:
Rs. in ‘000’
Marketing expenses 200
Utility expenses 250
Other misc. expenses 100
Required:
Prepare income statement for the year ended 30 June 2015 and balance sheet as at
30 June 2015. Also compute the amount of cash shortage, if any. (19)
Financial Accounting and Reporting-I Page 2 of 5
Q.2 Following is the summarised trial balance of Eagles Limited (EL) as at 30 June 2015:
Debit Rs. in ‘000’ Credit Rs. in ‘000’
Plant 2,500 Accumulated depreciation at 1 July 2014
Equipment 700 – Plant 1,000
Stock as on 1 July 2014 1,500 – Equipment 270
Trade debtors 1,300 Provision for obsolete stock at 1 July 2014 45
Cash and bank 1,759 Provision for bad debts at 1 July 2014 48
Purchases 6,987 Capital 2,500
Salaries & wages 843 Accumulated profits 960
Warehouse rent 740 Trade creditors 1,545
Repair and maintenance 500 Revenue 10,706
Utilities expenses 400 Other income 425
Insurance expenses 300 Accruals at 1 July 2014
Bad debt written off 30 – Repairs & maintenance 45
Obsolete inventory written off 40 – Utilities expenses 55
17,599 17,599
Additional Information:
(i) The sales include goods supplied on 27 June 2015 to a customer at a price of
Rs. 390,000 on a sale or return basis. The goods were returnable by 15 July 2015. EL
sells such goods at a mark-up of 30% on cost.
(ii) Other income includes proceed from sale of an equipment amounting to Rs. 100,000
received on 31 December 2014. The cost and written down value of the equipment at
1 July 2014 were Rs. 200,000 and Rs. 70,000 respectively.
(iii) Plant and equipment are depreciated at the rate of 10% and 15% respectively on
straight line basis.
(iv) Cost of stock on 30 June 2015 was Rs. 1,400,000, having net realizable value of
Rs. 1,450,000.
(v) The management estimates that:
5% of trade debts would not be recovered.
3% of the stock is obsolete.
(vi) Current warehouse rent is Rs. 600,000 per annum which was paid in advance on
1 October 2014.
(vii) Following bills for expenses were received but not entered in books:
Rs. in ‘000’
Repair and maintenance 56
Utilities expenses 67
(viii) The company revalued its non-current assets on 31 December 2014. Valuer has
suggested following fair values:
Rs. in ‘000’
Plant 1,650
Equipment 175
(ix) The tax charge for the current year after making all related adjustments is estimated at
Rs. 200,000.
(x) No entry has been made in respect of disposal, revaluation and depreciation of fixed
assets.
Required:
Prepare statement of financial position as at 30 June 2015 and statement of comprehensive
income for the year ended 30 June 2015. (Deferred tax implication is to be ignored) (19)
Q.3 (a) When a company follows revaluation model for subsequent measurement of its
Property, Plant and Equipment, it is required to provide certain additional disclosures
(as compared to cost model). Specify such disclosures as have been mentioned in
IAS 16 ‘Property, Plant and Equipment’. (03)
Financial Accounting and Reporting-I Page 3 of 5
(b) PQR Enterprises was incorporated on 1 July 2012. The company depreciates its
property, plant and equipment on straight line basis over their useful life. It uses
revaluation model for subsequent measurement of the property, plant and equipment
and has a policy of revaluing these after every two years.
During the year there were no addition or deletion in the above assets.
As per policy, PQR transfers the maximum possible amount from the revaluation
surplus to retained earnings on an annual basis.
Required:
Prepare necessary journal entries for the year ended 30 June 2014 and 2015. (12)
Q.4 Diamond Limited has its head office in Karachi and two branches in Lahore and Quetta.
Balances of its head office and branch operations for the year ended 30 June 2015 are as
under:
Additional information:
(i) Head office transfers goods to branches at cost plus 20%.
(ii) Inventory as at 30 June 2015:
Rs. in million
Head office 375
Lahore branch 28
Quetta branch 150
(iii) Goods worth Rs. 20 million and Rs. 52 million sent to Lahore branch and Quetta
branch respectively were in transit at year-end.
(iv) Cash transfers to head office by Lahore branch and Quetta branch amounting to Rs. 10
million and Rs. 5 million respectively were in transit at year-end.
Required:
(a) Prepare statement of comprehensive income for the year ended 30 June 2015 showing
the total profit/loss as well as profit/loss earned by the head office and two branches. (10)
(b) Reconcile the balances between the head office and the two branches. (02)
Financial Accounting and Reporting-I Page 4 of 5
Q.5 (a) Describe the term ‘revenue’ and state when and how revenue shall be recognised in the
case of royalties and dividend. (03)
(b) Adnan Limited (AL) is a supplier of machinery and spare parts. The machines supplied
are installed by AL. Following transactions took place in the last week of the
accounting year i.e. 30 June 2015:
(i) A machine was delivered to a customer. The invoiced amount was Rs. 500,000.
In accordance with the Operating Manual, the customer had to arrange a voltage
stabiliser before connecting the machine to the power supply. Machine became
operational on 1 July 2015. (02)
(ii) A specialised machine was sold to Sun Technologies (ST) for Rs. 800,000. ST
agrees to make the payment on 7 July 2015. However, ST informed AL that it
would accept the delivery in the month of August 2015. (03)
Required:
Applying the principles of IAS 18, explain when revenue from the sale of above
machines may be recorded.
(c) (i) On 31 March 2015 a machine was sold under a package deal. The package
includes a machine with free after sale service for 2 years at a total price of
Rs. 50,000. Selling price of standalone unit is Rs. 40,000. Cost of providing after
sales service is estimated at Rs. 4,000 per year. (03)
(ii) A machine was delivered to the customer on 1 July 2014. However, the invoice
was raised on 30 September 2014. According to the invoice, the total price of
Rs. 300,000 is to be paid in 2 half yearly installments of Rs. 150,000 each,
commencing from 1 January 2015. Appropriate discount rate is 10% per annum.
The present value of these two half yearly installments is to be taken as
Rs. 278,912. (03)
Required:
Prepare necessary journal entries to record the above transactions in the books of
Adnan Limited for the year ended 30 June 2015.
Q.6 A company deals in Solar Panels which are imported from China. The company follows a
perpetual inventory system and values its inventory on weighted average basis. Details of
sales and purchases during the year ended 30 June 2015 are as follows:
(i) Opening inventory on 1 July 2014 amounted to Rs. 49,000,000 and consisted of 2,450
solar panels.
(ii) Purchases during the year were as follows:
Date Quantity (Units) Price (Rs. in ‘000’)
30-Sep-2014 4,200 78,120
31-Mar-2015 4,350 87,000
Costs related to imports were 29% of purchase cost, of which 17% is refundable.
(iii) Sales during the year were as follows:
Date Quantity (Units) Price (Rs. in ‘000’)
31-Jul-2014 2,100 52,500
31-Oct-2014 2,050 48,750
28-Feb-2015 2,300 55,200
15-May-2015 2,260 53,110
(iv) Sale on 31 October 2014 includes 100 solar panels which were damaged during the
year and sold at Rs. 12,000 per unit.
(v) On 31 May 2015, 50 solar panels were totally damaged and were written off.
(vi) On 30 June 2015 there was a significant decline in the prices of solar panels as a new
type of solar panel was introduced in the market. Selling prices are now Rs. 18,500 per
unit. However, the company has made some modification in its product which will
enable it to sell it at Rs. 22,000 per unit. Cost of modification is Rs. 2,500 per unit.
Financial Accounting and Reporting-I Page 5 of 5
Required:
Prepare disclosure of inventories in the financial position as at 30 June 2015 in accordance
with the requirements of IAS-2 ‘Inventories’. (Note: Accounting policy note and comparative
figures are not required) (13)
Q.7 A manager is interested in knowing the relationship between machine hours and production
expenses. Data collected for January 2015 to August 2015 is as follows:
Production expenses
Months Machine hours
(Rs. in million)
January 264 50
February 390 90
March 280 70
April 355 85
May 375 100
June 330 75
July 300 70
August 290 60
Required:
Develop relationship between production expenses and machine hours and predict
production expenses if machine works for 365 hours. (08)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
Mr. Razi
Balance Sheet
As at 30 June 2015
Rupees
Non-Current Assets
Land 450,000
Office equipment
Cost (600,000+250,000) 850,000
Accumulated depreciation (15,000+78,750) (93,750)
756,250
1,206,250
Current Assets
Stock [1,167,000-13,800(W-2)] 1,153,200
Debtors (W-3) 1,091,000
Bank (W-4) 291,000
2,535,200
Total Assets 3,741,450
Equity
Razi's capital opening 2,374,000
Profit for the year 157,450
Drawings (125,000)
2,406,450
Current Liabilities
Creditors (W-5) 1,195,000
Accrued expenses (W-6) 140,000
Total Equity and Liabilities 3,741,450
Rupees
Cash misappropriated in debtors (W-3) 250,000
Cash misappropriated in creditors (W-5) 150,000
Cash shortage 400,000
Page 1 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
Workings:
W-3: Debtors
Rupees Rupees
Opening balance 1,560,000 Sales discount (W-1) 224,000
Gross sales (W-1) 4,480,000 Receipts 4,475,000
Cash misappropriated 250,000
Closing balance 1,091,000
6,040,000 6,040,000
W-4: Bank
Rupees Rupees
Opening balance 389,000 Payments made to creditors 4,774,000
Receipts from cash sales 1,728,000 Payment for marketing exp. 205,000
Receipts from debtors 4,475,000 Payment for utility expenses 240,000
Payment for salaries 600,000
Payment for other misc. exp. 107,000
Drawing 125,000
Office equipment 250,000
Closing balance 291,000
6,592,000 6,592,000
W-5: Creditors
Rupees Rupees
Payments 4,774,000 Opening balance 1,348,000
Closing balance 1,195,000 Purchases (income statement) 4,471,000
Cash misappropriated 150,000
5,969,000 5,969,000
Page 2 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
Eagles Limited
Statement of Financial Position
As at 30 June 2015
Rupees
Non-current assets
Plant (1,650 – 825) 1,567,500
Office equipment (175 – 13.125) 161,875
Current assets
Stock (1,400,000 + 300,0000 – 51,000) 1,649,000
Debtors (1,300,000 – 390,000 – 45,500) 864,500
Prepaid rent 150,000
Cash & Bank 1,759,000
Total assets 6,151,875
Equity
Capital 2,500,000
Accumulated profits (960,000 + 548,875) 1,508,875
Revaluation surplus (W-2) 275,000
Current liabilities
Creditors 1,545,000
Provision for income tax 200,000
Accrued expenses (56 + 67) 123,000
Total equities and liabilities 6,151,875
Page 3 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
W-1: Depreciation
Before revaluation After revaluation
Total
(6 months) (6 months)
Depreciation
Rate Cost less Depreciation Revalued Depreciation
(A+B)
disposal (A) amount (B)
--------------------------------- Rupees in ‘000’ ---------------------------------
Plant 10% 2,500 125.0 1,650 82.500 207.500
Equipment 15% 500 52.5 175 13.125 65.625
273.125
A.3 (a) When items of property, plant and equipment are stated at revalued amounts, the following
additional disclosure should be made:
the effective date of the revaluation;
whether an independent valuer was involved;
for each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model; and
the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.
Page 4 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
W-1:
Dep. for Revaluation
Revalued
Cost WDV the year Acc. Dep. surplus/ Dep. for the
amount
Assets (A) (B) 2014 D=A-B+C (impairment) year 2015
(E)
(C) F=E-(A-D)
---------------------------------- Rupees in million ----------------------------------
Office building 6,000 5,500 500 1,000 5,750 750 719
Factory building 4,400 3,960 440 880 3,320 (200) 369
Warehouse 4,500 4,050 450 900 3,350 (250) 419
1,390 1,507
Page 5 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
A.5 (a) IAS 18 defines revenue as the gross inflow of economic benefits in a period arising in the
course of the ordinary activities of an entity when those inflows result in an increase in equity,
other than increases relating to contributions from equity participants.
In case of royalties, revenue shall be recognised on an accrual basis in accordance with the
substance of the relevant agreement.
In case of dividends, revenue shall be recognised when the shareholder’s right to receive
payment is established.
(b) (i) Where goods are subject to installation and inspection, revenue is normally recognized
only when installation and inspection are complete. However, where the installation
process is simple in nature, revenue is recognised immediately upon the buyer
accepting the goods.
This means that revenue of Rs. 500,000 from sale of machine can be recognized in the
year ended 30 June 2015.
(ii) AL should recognizes the revenue in the year ended 30 June 2015 as:
ST takes the title;
It is probable that delivery will be made in August 2015;
The item is on hand, identified and ready for delivery to ST at the time the sale is
recognized;
ST specifically acknowledges the deferred delivery instructions; and
The usual payment terms apply and ST agrees to make the payment on 7 July
2015.
A.6 2015
Rs. in ‘000’
20 – Closing inventory
Finished goods (W-1) 43,680
20.1 Closing inventory includes items costing Rs. 50,015,000 valued at net realisable value of
Rs. 43,680,000.
20.2 The inventory expenses (cost of sales) for the year is Rs. 190,254,000(W-4)
20.3 Damaged inventory of Rs. 1,116,000(W-1) has been written off.
Page 7 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
∑ ∑ ∑
∑
∑
∑ ∑
(THE END)
Page 8 of 8
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Autumn 2015
General:
The overall performance in this paper was poor mainly because of extremely poor
performances in question 2, 5 and 6. Majority of the students made mistakes even in the
simpler areas. The candidates also seemed to lack in practice as it was observed that
many students displayed good understanding of a concept in one question but made
mistakes on similar issues in the other question(s). For example, many students addressed
the issue of accrued expenses in question 1 correctly but made errors in similar type of
adjustments in question 2 and vice versa.
Question-wise comments:
Question 1
Though it was a simple and routine question, the overall performance was average
because many students made errors on the easier aspect of the question also.
Majority of the students were unable to understand the calculation of cash shortage
because they computed credit sales on the basis of movement in debtors account and
purchases on the basis of movement in creditors account; whereas, the other
information which was provided in the question i.e. the discount on the cash and the
credit sales and the ratio of credit sales as a percentage of total sales and margin on
gross sales, was ignored.
Net cash sales i.e. after deducting the discount was given and the cash sale before
discount should have been computed by working back the discount as 0.1/0.9 of the
net sales. Many students calculated the discount incorrectly as 10% of net sales.
While computing the cost of goods sold, many students applied the percentage of
gross margin on the net sales instead of gross sales.
Adjustment on account of NRV of damaged goods was mostly ignored whereas many
students deducted the expenses incurred in July from cost, to arrive at the NRV.
Page 1 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2015
Many students added the opening balance of accrued expenses to the amount of
payments and deducted the closing balance to arrive at the amount of expenses.
Many students calculated depreciation on equipment on opening WDV instead of
cost.
Many students arrived at the closing balance of cash by including amount of expenses
in their workings, instead of the amount of payments.
Question 2
This was a straight forward question on preparation of statement of financial position and
statement of comprehensive income of a company. The only difficult item in the whole
question was the effect of revaluation. However, a poor response was witnessed. Some of
the common mistakes were as follows:
Effects of goods shipped on sale or return basis was correctly adjusted from sales but
no adjustment was made in closing stocks whereas some students added the invoice
price to the cost of ending stock instead of adding the cost of the goods.
Many students reported closing stocks at realizable value which was higher than cost.
Most of the students did not seem to have appropriate understanding of how expenses
are recorded in the ledger. Consequently, in calculating repairs and maintenance and
utilities expenses for the period, many students wrongly added opening accruals and
deducted closing accruals from the recorded expenses whereas many students only
added the closing accruals to recorded expenses and ignored the opening accruals.
In the statement of comprehensive income, actual write-offs were included as
expenses i.e. opening and closing provisions were ignored. Many students added the
closing balance of the provisions and the write-offs, to arrive at the amount of
expenses and ignored the opening balance.
Most of the students failed to understand that the amount paid as advance warehouse
rent must have been included in the warehouse rent expenses account. They
considered it as an additional adjustment and added Rs. 450 thousand to the amount
recorded in the ledger instead of deducting Rs. 150 thousand therefrom.
Most of the students were unable to correctly calculate the adjustment required to
properly record the loss on sale of equipment. Many students ignored it altogether
whereas a large number of students ignored the depreciation for the year i.e. upto the
date of disposal.
Most of the students failed to calculate the depreciation correctly mainly because of
the following reasons:
o Ignored the depreciation for the year on equipment disposed of.
o Ignored the impact of revaluation in their calculations.
Most of the students made adjustment for income tax in Statement of Comprehensive
Income but did not adjust it in the amount of liability disclosed in the Statement of
Financial Position.
Many students did not show accruals and accumulated profit in the statement of
financial position.
Many students appeared to waste time in trying to reconcile the balance sheet which
does not contain any mark.
Page 2 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2015
Question 3
This question on revaluation of fixed assets was better attempted and the overall
performance was relatively better. However, about 13% of the students did not attempt it
altogether. Performance in each part is discussed below:
Question 3(a)
The performance in this part was mixed. About 15% of the students were well prepared
for this type of question and scored full marks. Among the rest, majority could only point
out the requirement to disclose the revaluation surplus and the amount thereof. Some of
the students also mentioned about the simultaneous disclosures of carrying amounts
under the cost model. However, only few could mention the remaining two conditions i.e.
about the effective date of revaluation and the involvement of independent valuer.
Question 3(b)
The performance in this part was good except in the case of very poor students who either
did not attempt it altogether or did not seem to know anything. The average students
made one or more of the following mistakes:
Entry related to transfer of surplus to retained earnings was ignored.
Majority of the students calculated incremental depreciation as difference of
depreciation before revaluation and after revaluation rather than allocating the re-
valuation surplus over the remaining useful lives of the assets.
The loss on impairment and revaluation surplus were not recorded separately as the
net amount was recorded as surplus.
Depreciation for 2013-14 was ignored.
Depreciation for 2015 was computed on the original life instead of remaining life.
The entry to close the accumulated depreciation balances against the cost of assets
was ignored.
Impairment and surplus on revaluation were calculated on the basis of cost instead of
written down value.
Many students did not read the question carefully. The revalued amount pertained to
year-end whereas they assumed that it pertained to the beginning of the year.
Question 4(a)
In this question on branch accounting, the candidates were required to compute the
separate profit and loss of a head office and its two branches and also the combined profit
and loss. The overall performance was quite good. Some of the common mistakes are
discussed below:
Provision for unrealized profit on 1 July 2014 was either ignored or deducted from
the opening inventory of the head office instead of adjusting it for the purpose of
opening inventory in the combined profit and loss account.
Unrealized profit at year-end was ignored.
Many students prepared individual profit and loss statements for head office and
branches but either ignored the combined profit or loss calculation or committed
mistakes in adjusting the impact of mark-up on stocks and goods in transit.
Page 3 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2015
Question 4(b)
This part was quite easy and most of the students were able to reconcile the balances as
required.
Question 5
This question on revenue recognition proved too difficult for majority of the students and
the overall performance was very poor. Performance in each part is discussed below:
Question 5(a)
This was a theory based question and at least in this part about 25% of the students
scored passing marks and a reasonable number of students scored full marks also.
Question 5(b)
(i) In the context of the overall performance in Question 5, the performance in this
sub-part was relatively better. About 15-20% of the students were able to identify
the key issue i.e. where the installation process is simple in nature, the revenue may
be recognized when the buyer accepts the goods.
(ii) This proved to be the most difficult part. In IAS 18 this situation is termed as bill
and hold but very few students were able to analyze the situation correctly.
Question 5(c)
(i) A very important logic was tested in this part i.e. when an item is sold as a package
deal, the revenues and costs associated with various components of the deal are to
be recorded separately. It was satisfying to note that at least half the students
seemed to understand the broader principle though difficulty was faced in its
practical application.
Deferred revenue of Rs. 10,000 was correctly recorded at the time of sale.
However, adjustment at year-end related to recognition of services income and
provision of cost thereof was generally missed or the amounts were calculated
incorrectly.
(ii) This part was based on principle of revenue recognition in situations where
recovery of the amount of sale is deferred. As in part c(i), generally the students
seemed to understand the principle but failed to apply it correctly. The common
mistakes were as follows:
Most of the candidates correctly calculated the interest element as the difference
between sale price and the present value. However, they recorded the entire
interest income at the end of the year instead of recording it separately for the
two half yearly periods. Many candidates divided the interest income equally
between the two half yearly periods. The correct method was to allocate it on
the basis of amount outstanding.
Page 4 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2015
Question 6
In this question, the candidates were required to compute the value of inventory based on
weighted average method under perpetual inventory system and prepare relevant
disclosures as per IAS-2.
Quite surprisingly, the performance in this part remained very poor mainly because very
few candidates seemed to be aware of perpetual inventory system and went on to
compute the value of inventory under the periodic inventory system. There were many
other types of mistakes which indicated a serious lack of conceptual understanding.
These are described below:
Question 7
Most of the errors were on account of incorrect formula. Selective study was quite
evident in this case as 13% of the students did not attempt it altogether.
THE END
Page 5 of 5
Financial Accounting and Reporting-I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015
A.1 Mark(s)
Income Statement
Sales 3.0
Cost of sales 3.0
Expenses 2.5
Presentation 0.5
Balance sheet
Non-current assets 0.5
Current Assets
o Stock 1.0
o Debtors 1.0
o Bank 2.0
o Creditors 1.0
o Accrued expenses 1.0
o Razi’s capital 1.0
o Presentation 0.5
Determination of cash shortage 2.0
A.2 Mark(s)
Statement of comprehensive income
Sales 1.0
Cost of sales 1.5
Expenses other than depreciation and impairment 4.5
Depreciation and impairment 4.5
Presentation 0.5
Statement of financial position
Non-current assets 1.0
Current assets 1.5
Equity including revaluation surplus 3.0
Current liabilities 1.0
Presentation 0.5
(b) Mark(s)
Preparation of accounting entries relating to:
Depreciation expense for the year 2014 and 2015 2.0
Reversal of accumulated depreciation at 30 June 2014 1.5
Recording of effects of revaluation at 30 June 2014 5.5
Adjustment of incremental depreciation from surplus 3.0
Page 1 of 2
Financial Accounting and Reporting-I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015
(b) Mark(s)
Reconciliation of branch balances with Head office
Adjustment relating to:
o Goods in transit 0.5
o Cash in transit 0.5
o Branch profit/loss 0.5
Opening and closing balances of branch and Head office 0.5
(b) Mark(s)
Explanation of recognition of revenue if goods delivered are subject to
installment 2.0
Explanation of recognition of revenue in the case of deferred delivery 3.0
(c) Mark(s)
Preparing journal entries relating to:
recording of deferred revenue on the date of transaction 1.0
recognizing the service fee income at year end 1.0
recognizing the cost of service fee at year end 1.0
Preparing journal entries relating to:
recognizing the credit sales 1.0
recording the installment received along with interest income 1.0
recording the accrual at year end 1.0
A.6 Mark(s)
Determination of purchase cost 1.5
Determination of NRV adjustment 2.0
Determination of value of closing inventory under perpetual system 6.0
Presentation and disclosure 3.5
A.7 Mark(s)
Computation of fixed costs 3.0
Computation of variable cost per unit 3.0
Developing the relationship between production expense and hours 0.5
Predicting the production expenses if machine works for 365 hours 1.5
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
The Institute of 9 March 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Q.2 AK Limited follows a perpetual inventory system. Following information is available from
the accounting records for the month of January 2016:
Additional information:
(i) 100 units out of 4,200 units purchased on 13 January 2016 were found defective and
returned to supplier on 28 January 2016.
(ii) Inventory count conducted on 31 January 2016 revealed that 4,820 units were
physically available.
Required:
(a) Prepare inventory ledger cards for the month of January 2016 under the perpetual
system showing quantity, unit cost and value under each of the following basis of
inventory valuation:
FIFO (07)
Weighted average (06)
(b) Under weighted average method, prepare journal entries to record the defective items
returned to supplier and surplus/shortfall in the inventory due to physical count. (02)
Q.3 (a) In respect of sale of goods, give any two examples of each of the following situations:
(i) Legal title passes but the risks and rewards are retained.
(ii) Legal title does not pass but the risks and rewards are passed on to the customer. (03)
(i) Karim Industries Limited (KIL) has sold a machine on credit to Yawar
Engineering (YE). The machine would be used by YE if it is able to secure a
contract for providing services to AMZ & Company. KIL has agreed that the
machine may be returned at 90% of the price, if YE fails to secure the contract. (02)
(ii) Asif Electronics (AE) is about to sell a new type of food factory. Since customer
demand is high, AE is taking advance against orders. The selling price has been
fixed at Rs. 7,000 per unit and so far 175 customers have paid the initial 25%
deposit which is non-refundable. (02)
(iii) Nazir Engineering Limited (NEL) entered into a contract for the provision of
services over a period of two years. The total contract price was Rs. 25 million
and NEL had initially expected to earn a profit of Rs. 5 million on the contract.
However, the contract had not progressed as expected. In the first year, costs of
Rs. 12 million were incurred. Management is not sure of the ultimate outcome
but believes that at least the costs on the contract would be recovered from the
customer. (02)
(c) Abid Textile Mills Limited (ATML) sold a property to a financial institution for
Rs. 90 million when the fair value and carrying value of the property was
Rs. 100 million and Rs. 95 million respectively. However, there is an agreement
between the parties whereby ATML could repurchase the property after one year for
Rs. 99 million.
State how the above transaction should be recorded in ATML’s records. (03)
Financial Accounting and Reporting-I Page 3 of 5
Q.4 (a) What conditions must be satisfied if an item has to be recognised as property, plant
and equipment? Also state at what amount such item shall be carried after the initial
recognition if the entity is following the revaluation model. (03)
(b) On 1 January 2013 Delta acquired a specialized machine for its production
department. The available information is as follows:
Rupees
List price of machine 9,200,000
Freight charges 263,000
Electrical installation cost 245,000
Staff training for use of machine 351,000
Pre-production testing 193,000
Purchase of a three-year maintenance contract 528,000
Estimated residual value 175,000
Required:
For the years ended 31 December 2013, 2014 and 2015, compute the relevant
amounts to be included (under each head) in the income statement and statement of
financial position. Notes to the financial statements are not required. (10)
Q.5 Maqsood Enterprises has its head office in Karachi and ten branches all over Pakistan.
Following are the details of balances related to the Peshawar branch in the books of head
office:
31-Dec-15 31-Dec-14
------ Rupees ------
Non-current assets 750,000 700,000
Inventory 250,000 200,000
Receivables 120,000 90,000
Cash 35,000 25,000
Goods returned by the branch 29,700 -
Other relevant information is as under:
(i) Goods invoiced to Peshawar branch during the year amounted to Rs. 330,000. Goods
are sent to Peshawar branch at cost plus 10%. Branch sells these goods at a further
mark-up of 15%.
(ii) During the year, Peshawar branch sent goods which were appearing in its books at
Rs. 27,500 to Lahore branch.
(iii) During the year, certain goods were sold by the branch on 30 days credit and invoiced
at Rs. 35,420 to a customer. However, the goods were returned by the customer before
the due date of payment directly to the head office. No entry has been made in respect
of return of goods.
(iv) Branch expenses amounted to Rs. 50,000 which were paid in cash.
(v) Non-current assets are net of depreciation. During the year, head office purchased
non-current assets on behalf of Peshawar branch amounting to Rs. 62,000.
Financial Accounting and Reporting-I Page 4 of 5
Required:
Prepare Peshawar branch account in the books of head office for the year ended
31 December 2015 showing profit/(loss) made by the branch. (12)
Q.6 Following are the extracts from income statement of Quality Enterprises (QE) for the year
ended 31 December 2015 and its statement of financial position as at that date, together with
some additional information:
Additional information:
(i) During the year, movements in property, plant and equipment include:
Depreciation amounting to Rs. 5,280,000.
Machinery having a carrying amount of Rs. 2,481,000 was sold for Rs. 3,440,000.
Factory building was revalued from a carrying amount of Rs. 5,963,000 to
Rs. 8,000,000.
An office building which had previously been revalued, was sold at its carrying
amount of Rs. 2,599,000.
(ii) The owner of QE withdrew Rs. 300,000 per month. The amounts were debited to
unappropriated profit.
(iii) Trade debts written off during the year amounted to Rs. 200,000. The provision for
bad debts as at 31 December 2015 was Rs. 400,000 (2014: Rs. 550,000)
(iv) The interest on bank loan is payable on 30th June every year. The bank loan was
received on 1 November 2015. Interest for two months has been accrued and included
in trade and other payables.
(v) Other income includes investment income of Rs. 398,000. As at 31 December 2015,
trade and other receivables included investment income receivable amounting to
Rs. 96,000 (2014: Rs. 80,000).
Required:
Prepare a statement of cash flows for Quality Enterprises for the year ended
31 December 2015, using the indirect method. (18)
Financial Accounting and Reporting-I Page 5 of 5
Required:
For three different levels of use i.e. 10,000, 20,000 and 30,000 km per annum, prepare a
schedule showing:
Variable, fixed and total costs
Variable, fixed and total costs per km
In respect of each type of cost, give appropriate justification for treating it as a variable or a
fixed cost. (10)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
Seaview club
Statement of Financial Position
As at 31 December 2015
Page 1 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
Page 2 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.3 (a) Examples of the situations where legal title passes but risk and rewards are retained
An entity may retain obligations for unsatisfactory performance not covered by normal warranty
provisions;
The receipt of revenue may be contingent on derivation of revenue by the buyer for its sale of
goods.
Examples of the situations where legal title does not pass but the risks and rewards are transferred
A seller may retain the legal title to the goods to protect the collectability of the amount due but
transfer the significant risks and rewards of ownership.
In retail sale, a seller may offer a refund if the customer is not satisfied.
(b) (i) The completion of the sale transaction is uncertain because it is contingent upon purchaser
securing the contract with another company. Therefore, KIL should only recognize the revenue
when it is certain that YE will secure the contract. 10% revenue may be recognized if and when it
is confirmed that YE would not be able to secure the contract.
(ii) Revenue should be recognized when the food factory is delivered to the customer. Until then no
revenue should be recognized and the deposit should be carried forward as deferred income. 25%
advance may be transferred to other income if the parties do not claim the asset.
(iii) If the outcome of a service transaction cannot be estimated reliably, revenue should only be
recognized to the extent that expenses incurred are recoverable from the customer. Thus revenue
to the extent of Rs. 12 million may be recognised.
(c) Since the sale and repurchase prices are lower than the fair values, the substance of the arrangement
appears to be that the financial institution has granted ATML a one year loan secured on the property,
charging interest of Rs. 9 million.
A.4 (a) The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
(i) It is probable that future economic benefits associated with the item will flow to the entity; and
(ii) The cost of the item can be measured reliably.
After recognition as an asset, an item of property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment
losses.
Page 3 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
Workings
W-1: Cost price of machine Rupees
List price 9,200,000
Less: Trade discount (9,200,000×5%) (460,000)
8,740,000
Add: Freight charges 263,000
Electrical installation cost 245,000
Pre-production testing 193,000
9,441,000
Page 4 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
Page 5 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Spring 2016
General:
The overall performance of the examinees was above average and much better than the
previous attempt. Surprisingly, extremely poor performance was witnessed in question 7
although apparently it was an easy question. The only probable reason for it was that the
topic had been introduced in the syllabus only recently. Performances in question 1, 3 and
4 were also below average.
Question-wise comments.
Question 1
This question required statement of financial position and income & expenditure account
of a club from the Receipt and Payment Summary and other available information.
Overall it was a simple question which mostly contained routine type of adjustments and
disclosures. However, the performance was below average as the following mistakes
were commonly observed:
Very few students were able to bifurcate the amount of subscription correctly
between subscription income and deferred income on the basis of number of months
passed till year-end. Many students did not carry out this calculation altogether
whereas many students took 1/3rd of the amount as subscription income. Further, even
fewer students bifurcated the deferred income between the short-term and long-term
portion.
Most of the examinees failed to accrue revenue related to sale of beverages in
December 2015 amounting to Rs. 150,000.
Very few students seemed to understand the calculation of purchases of beverages
and the closing stock correctly. Most of them failed to realise that according to the
question, 25% of the purchases remained unsold and therefore cost of sales
represented 75% of purchases and closing stock must be equal to 1/3rd of cost of sales
or 1/4th of total purchases. Many students presumed the total purchases as Rs. 1,367
thousand which in fact represented the amount paid for purchases till year end.
Consequently, they also failed to recognise the amount payable against purchases.
Rent expense, insurance and depreciation were calculated based on 12 months instead
of 11 months.
Page 1 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2016
Advance for land, advance for parking shed and utility deposit were included in
current assets instead of non-current assets by majority of the examinees.
Prepaid rent was not bifurcated with current and non-current.
Sponsor’s contribution was incorrectly included in income by some candidates.
Salaries and utilities were paid in subsequent months; therefore accruals of such
expenses were required but were missed generally.
Question 2
This question required determination of cost of inventory under the perpetual system
using FIFO and weighted average valuation methods and passing of journal entries to
record defective items returned to supplier and surplus/shortfall determined as a result of
stock check.
The performance in this question was very good as more than 80% students secured
passing marks and a good number scored full marks. Among the rest, the following errors
were observed:
Question 3
This question tested the concept of revenue recognition and consisted of three parts. The
performance in each part is discussed below:
(a) The question required two examples each of situations where (i) legal title passes
but risk and rewards are retained and ii) legal title does not pass but risk and reward
are passed on to the customer.
The overall performance was average. Generally the students were able to give
proper examples in the first case but not in the second case. Many candidates gave
only one example in each case. Surprisingly, many students repeated the same
examples in both the scenarios.
(b) This part contained three situations and in each case the candidates were required
to explain when the revenue would be recognized. The key observations in each
case are discussed below:
(i) Most of the students correctly mentioned that revenue will be recognized
when contract is secured; however they could not explain as to what would
happen if the buyer is unable to secure the contract. Many students
incorrectly mentioned that 10% revenue shall be recognized immediately on
sale.
Page 2 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2016
(ii) About 50% of the candidates mentioned correctly that revenue shall be
recognized on delivery; however, only few could specify the treatment if the
customer paying the security deposit does not take delivery. Rest of the
candidates mostly mentioned that revenue shall be recognised on receipt of
security deposit as the demand was high and no one would like the security
deposit to be forfeited. Like in sub-part (i) a number of candidates mentioned
incorrectly that 25% revenue shall be recognized on receipt as the security
deposit was not refundable.
(iii) Majority answered this sub-part correctly although it didn’t seem to be easy.
Most of those who erred either suggested proportionate recognition on the
basis of time or recommended that no revenue should be recognized.
(c) The performance in this part was poor. The candidates were unable to understand
that since sale and repurchase prices were lower than the fair value, under the
principle of substance over form, it was a loan rather than a sale. Most students
suggested that sale should be recorded and the asset should be credited.
Question 4
(a) This part of the question required the condition that must be met for an item to be
recognized as property plant and equipment and the amount at which such an
amount would be stated after the initial recognition if an entity follows the
revaluation model.
(b) In this part of the question the candidates were required to ascertain from the data
available in the question, the amounts which would appear under each head, in the
income statement and the statement of financial position. The overall performance
was average. The common mistakes were as follows:
Page 3 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2016
Question 5
Above average performance was witnessed in this question which required preparation of
branch account in the books of head office showing profit or loss made by the branch.
However, most of the students were able to secure marks on easier aspects of the account
such as opening and closing balances and transfer of goods. Most of the students were
unable to correctly calculate cash remitted to head office because of the following
mistakes:
Very few students had overall understanding of how the amount would be calculated
i.e. that first they would have to calculate the sale by branch at head office price.
Many of those who did try to calculate branch sale at head office price, used the price
before 10% mark-up instead of the price after the mark-up while some of them
ignored the goods transferred to Lahore Branch.
Branch debtors amounting to Rs. 35,420 were ignored in the calculation.
Question 6
Above average performance was witnessed in this question also which required
preparation of cash flow statement using the indirect method. Some of the common errors
are described below:
Difference in income tax payable was mentioned along with changes in working
capital instead of mentioning income tax paid separately. Some of the candidates
started the cash flow from Profit after Tax instead of Profit before Tax.
Various types of errors were seen in the calculation of amounts related to property
plant and equipment. Many students ignored the profit on sale whereas many students
ignored the amount of revaluation in arriving at the amount of purchases thereof.
Question 7
This was an easy question requiring computation of variable, fixed and total costs but
somehow proved to be the worst attempted question. Some of the common mistakes are
listed below:
Cost of the car was taken as fixed whereas depreciation was ignored.
Salvage value was considered as a deduction against cost of car whereas it should
have been used for the calculation of depreciation only.
Entire vehicle tax was included as an expense i.e. the fact that 20% of the amount was
adjustable against owner’s income tax was ignored.
Page 4 of 5
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2016
THE END
Page 5 of 5
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016
A.1 Mark(s)
Income and Expenditure Account
Subscription income and joining fees 2.0
Profit on sale of beverages 2.0
Expenses 6.0
A.3 (a) 0.75 mark for each example under (i) and (ii) 3.0
(b) (i) Recognition of revenue when it is certain that YE will secure the
contract 1.5
Treatment of 10% amount withheld by KIL, if YE is not able to secure
the contract 0.5
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016
Mark(s)
(c) Explaining the substance of the transaction 1.0
0.5 mark for each of the four points about how transaction should be
accounted for in the books 2.0
A.4 (a) 0.5 mark for each condition to recognise an item as PPE 1.0
0.5 mark for explanation of revalued amount at which an item of PPE is to
be carried subsequent to its initial recognition 2.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
The Institute of 7 September 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
It had been Rahil's practice to deposit on each weekend the available balance in the till
after retaining a float of Rs. 5,000. He maintains record of sales on credit and a file of
unpaid invoices in respect of goods purchased by him.
The following information has been ascertained from the available records:
Rupees Rupees
Rahil’s capital 233,000 Fixtures and fittings – WDV 161,000
Creditors for goods 159,000 Inventory 111,000
Creditors for expenses 16,000 Debtors 55,000
Cash at bank 76,000
Cash in hand 5,000
408,000 408,000
(ii) Following is a summary of the bank statement from 1 April to 30 June 2016:
Rupees Rupees
Balance on 1 April 2016 76,000 Payment to suppliers for goods 604,000
Cheques received from customers 29,000 Rent & other expenses 37,000
Cash deposited 627,000 Balance on 30 June 2016 91,000
732,000 732,000
(iv) Fixtures and fittings are depreciated at 10% per annum using reducing balance
method.
(v) Inventory on 1 July 2016 was Rs. 58,000.
(vi) Credit sales during the quarter ended 30 June 2016 amounted to Rs. 64,000 whereas
the debtors balances as on 30 June 2016 amounted to Rs. 66,000. However, direct
confirmations from debtors showed that receivables in fact totalled Rs. 54,000.
(vii) Creditors for goods and expenses had always been paid by cheque. Unpaid invoices
for goods on 30 June 2016 totalled Rs. 181,000 and creditors for expenses
amounted to Rs. 13,000. Detailed scrutiny of records revealed that a cash receipt of
Rs. 8,000 which had been received against goods returned to a supplier had not
been recorded.
(viii) Rahil sells goods at a gross profit margin of 20% on sales.
Required:
(a) Prepare a statement showing calculation of the amount of defalcation. (11)
(b) Prepare a balance sheet as on 30 June 2016. (09)
Financial Accounting and Reporting-I Page 2 of 4
Q.2 Khan Limited opened a new branch at Lahore on 1 January 2016. Goods are invoiced to
branch at 25% above cost and branch sells the goods on the invoice price. Expenses of
branch are met from branch cash and the balance amount is remitted to head office (HO).
Following information is available for the year ended 30 June 2016:
Rupees
Cost of goods sent to branch 460,400
Goods received by branch till 30 June 2016 (at invoice price) 454,000
Credit sales 328,000
Debtors on 30 June 2016 35,000
Cash remitted to HO 315,000
Cash at branch on 30 June 2016 14,000
Expenses by branch 40,000
Required:
Prepare following ledger accounts:
(a) Branch Cash Account (04)
(b) Branch Stock Account (04)
(c) Branch Stock Adjustment Account (04)
Q.3 The output and production costs of a garment factory for the last 10 months are given
below:
Output Production costs
Months
(units in million) (Rs. in billion)
1 1 2.05
2 2 2.82
3 4 4.33
4 8 7.31
5 6 5.80
6 5 5.08
7 8 7.29
8 9 8.10
9 7 6.52
10 6 5.82
Required:
Determine the regression line for output and production costs. Also estimate production
costs for next month if required output is 3 million units. (08)
Q.4 Salman Limited (SL) closes its books on 30th June each year. Due to an administrative
problem, SL carried out the stock-taking on 10 July 2016. The cost of stock as verified on
10 July 2016 was Rs. 812,500.
Details of transactions from 1 July to 10 July are given below:
(i) Total sales amounted to Rs. 326,000. The goods were sold in the normal course of
business at cost plus 25% except the following:
a sale of Rs. 25,000 was made at 40% of normal selling price.
a sale of Rs. 60,000 was made at normal selling price but the goods were
slightly damaged and an expenditure of Rs. 15,000 was incurred on these
goods to bring them to saleable condition.
(ii) Purchases amounted to Rs. 246,000. All such purchases were included in stock as
on 10 July 2016.
(iii) Sales returns and purchase returns amounted to Rs. 11,000 and Rs. 6,000
respectively.
(iv) Goods with customers on sale or return basis were Rs. 50,000 (at invoice value).
The goods had been sent to the customers on 15 June 2016. The customers have the
right to return the goods within four weeks. One of the customers informed SL on
29 June 2016 that goods worth Rs. 20,000 had been destroyed in fire.
Financial Accounting and Reporting-I Page 3 of 4
Required:
Calculate the value of stock as at 30 June 2016. (11)
Debit Credit
-------- Rupees --------
Sales 6,892,000
Purchases 4,124,000
Administrative expenses 1,855,000
Distribution costs 549,000
Property, plant and equipment
Cost 1,750,000
Accumulated depreciation at 30 June 2015 350,000
Inventories at 30 June 2015 344,000
Unappropriated profit at 30 June 2015 330,000
Mateen’s capital 2,000,000
Cash in hand 22,000
Cash at bank 14,000
Bank loan 500,000
Trade receivables 2,255,000
Trade and other payables 826,000
Provision for bad debts at 30 June 2015 15,000
10,913,000 10,913,000
Required:
Prepare the following:
(a) Statement of comprehensive income for the year ended 30 June 2016; and (10)
(b) Statement of financial position as at 30 June 2016. (10)
Financial Accounting and Reporting-I Page 4 of 4
Q.6 (a) Car World sells new cars on deferred payment basis whereby 40% deposit is
received on sale and the balance payment is received at the end of two years. The
appropriate discount rate is 10%.
Required:
Prepare necessary journal entries to record the above transaction in the books of
Car World for the years ended 30 June 2015 and 2016. (07)
(i) Five machines were sold on a lay away basis to one of its frequent customers.
Three out of a total of five instalments had been received till the year end. (03)
(ii) A service contract for maintenance of a machine for a period of one year was
signed and SE received a non-refundable annual fee amounting to Rs. 45,000
as advance on 15 April 2016. (02)
Required:
Discuss when it will be appropriate for SE to recognise revenue in each of the above
situations.
Q.7 Kamran Enterprises (KE) provides depreciation on plant and machines at 10% on
written-down value. Depreciation is charged from the month the asset is available for use
in operations up to the month prior to its disposal. Cost of its plant & machines and the
accumulated depreciation as on 1 July 2015 were Rs. 75 million and Rs. 17 million
respectively.
The following information is available in respect of its plant & machines, for the year
ended 30 June 2016:
(i) On 1 October 2015, a second-hand machine was acquired from a Chinese company
for Rs. 15 million. The machine was renovated and overhauled at a cost of
Rs. 3 million. 25% of this expenditure was in respect of purchase of consumables.
(ii) On 1 November 2015, KE transferred a machine having a list price of
Rs. 10 million from its stock-in-trade to its Engineering Department. KE sells such
machines at cost plus 25%.
(iii) On 1 January 2016, certain worn-out parts of a plant were replaced at a cost of
Rs. 4 million. The replaced parts neither enhanced the useful life of the plant nor its
operating efficiency. The old parts were sold for Rs. 0.75 million. The plant was
purchased for Rs. 25 million on 1 January 2015.
On 1 May 2016, the plant was damaged and remained in-operative for one month.
KE spent an amount of Rs. 3 million on repairs to restore the plant in working
condition.
(iv) On 1 April 2016, a machine which was purchased on 1 July 2012 for Rs. 12 million
was completely damaged and was sold for Rs. 1.2 million.
Required:
Prepare accounting entries to record the above transactions in KE’s books for the year
ended 30 June 2016. (17)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
Working Notes:
Page 1 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
369,000 369,000
Page 2 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
∑ ∑ ∑
∑
∑
∑ ∑
(b) The estimated production costs for next month if required output is 3 million units will be:
Value of stock as on 30 June 2016 [lower of cost (A) and NRV(B)] 850,500
*Goods destroyed in fire (Rs. 20,000) taken as sold
Page 3 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
3,937,940 3,937,940
Workings:
W-1: Allocation of expenses Administrative Distribution
Cost of sales
expenses costs
--------------- Rupees ---------------
Balances as per trial balance 1,855,000 549,000
Opening inventories as per trial balance 344,000
Purchases as per trial balance 4,124,000
Adjustments:
Closing stock (350,000 + 47,000) [(ii) & (i)] (397,000)
Transfer of 70% rent to cost of sales (iii) 490,000 (490,000)
Prepaid and accrued expenses (iv) (131,000) 176,000
Installation charges incorrectly expensed out (v) (30,000)
Depreciation expenses (W-2) (vi) 91,684 22,921
Loss on disposal (W-2) (vi) 34,255
Bad debts expenses
[(4% × (2,250,000 70,000)) 15,000+5,000] 77,200
4,652,684 1,338,376 725,000
W-2: Depreciation and loss on disposal Rupees Dep. for the year
Property, plant & equipment as per trial balance 1,750,000
Less: Cost of generator disposed of (A) (100,000)
Less: Cost of generator purchased during the year (500,000)
Cost of PPE used throughout the year 1,150,000
Less: Opening balance of Acc. Dep. (350,000)
Add: Opening balance of Acc. Dep. relating to disposed of generator
[100,000 – (100,000 × 0.9 × 0.9 × 0.9)] (B) 27,100
WDV of PPE used throughout the year 827,100
Depreciation for the year (827,100×10%) (82,710) 82,710
Addition:
New generator 500,000
Old generator – trade-in-allowance 35,000
Installation charges 30,000
565,000
Depreciation on additions (565,000 ×10% × 6/12) (28,250) 28,250
536,750
Depreciation on disposed of generator
[(100,000 – 27,100) × 10% × 6/12] (C) - 3,645
1,281,140 114,605
Page 4 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
991,736
(b) (i) Revenue from lay away sales is recognized when the goods are delivered against full payment.
However, based on experience, such revenue may be recognized earlier e.g. when a significant
deposit is received provided the goods are on hand, identified and ready for delivery to the buyer.
Hence the sale may be recognized in this case provided the machines are ready for delivery because
the sale is to a frequent customer and a significant portion of the sale proceeds has been received.
(ii) Although the fee is non-refundable, it will be recognized as income on the basis of matching
principle i.e. 1/12th of the annual fee will be taken to income each month.
1-5-2016 Cost of sales/Repair and maintenance / Profit & loss a/c 3,000,000
Bank/payable 3,000,000
Page 5 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016
W-1:
Written down Depreciation for the
value year
-------------Rupees-------------
Opening balance (75,000,000-17,000,000 58,000,000
Less: Disposal [12,000,000×(0.9)3] (8,748,000)
49,252,000 4,925,200
Addition
Addition on 01 October 2015 (17,250,000×10%×9/12) 17,250,000 1,293,750
Addition on 01 November 2015 (8,000,000×10%×8/12) 8,000,000 533,333
On 1 January 2015 4,000,000 200,000
Disposal
Depreciation on machine sold during the year (8,748,000×0.1×9/12) 656,100
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Autumn 2016
General:
This was a well attempted paper and the passing percentage increased significantly.
Below average performances were witnessed in Questions 4, 6 and 7. Questions 6 and 7
required conceptual understanding of relevant IFRSs and majority of the students seemed
unprepared for the same.
Question-wise comments.
Question 1
This question required the students to prepare balance sheet and determine the amount of
cash stolen by the cashier of a retail business which maintained records on single entry
basis. The question was quite straight forward however the overall performance of the
students was average. Majority of the students prepared some basic workings correctly
which secured them some marks but could not correlate them to arrive at the amount of
defalcation. Other common errors were as follows:
While calculating the amount of defalcation, most students did not compute cash
misappropriated from credit sales and/or from amount received from supplier against
purchase return.
In the calculation of purchases, cash received against purchase returns was ignored.
While preparing Profit and loss statement for the quarter, expenses paid were
considered whereas decrease in expenses payable was ignored. Many students
ignored the depreciation also or calculated it incorrectly.
Question 2
In this question the candidates were required to prepare Branch Cash account, Branch
Stock account and Branch Stock Adjustment account. It was an easy question with simple
data and no apparent complexity. Consequently, many students were able to secure full
marks. However the overall performance was average as most of the students could only
make the basic entries correctly.
The common mistakes were as follows:
Majority of the students could not understand that the balancing amount in Branch
Stock account represented Cash sales.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2016
In Branch Stock account many students were unable to work out the stock in transit
correctly. Further value of goods sent to branch was not grossed up.
Majority of the students seemed unaware of the use of Branch Stock Adjustment
account and made various mistakes/omissions. Many students ignored it altogether.
Question 3
This was an easy question in which the requirement was to determine the regression line
for output and production cost and to calculate the estimated production cost based on an
output of 3 million units.
Most of the students performed well in this question and many of them secured full
marks. However, some students ignored the requirement of the question and tried to solve
it using high / low method. Some students determined the regression line using output as
the dependent variable instead of cost.
Question 4
In this question the candidates were required to compute the value of stock at year-end
based on stock taking carried out 10 days after year-end and details given in the question
as regards transactions carried out during those ten days.
The overall performance was below average as only 27% students could secure passing
marks. Most of the students found it difficult to calculate NRV of stock items on which
repair cost was incurred and the stock was sold at 40% of selling price.
Question 5
In this question, trail balance of a sole proprietor and adjustment data were given and the
candidates were required to prepare Statement of Comprehensive Income and Statement
of financial position. The overall performance was good as about 53% students secured
passing marks and about 15% of the students scored more than 75% marks. The errors
observed were as follows:
Majority of the students could not correctly adjust the error related to recording of
disposal of old generator. Most students ignored it altogether whereas the others made
various types of errors including failure to calculate correct WDV of old generator
and failure to understand that the trade-in allowance of Rs. 35,000 represented sale
price thereof.
Many students did not record loss on disposal
Adjustments related to admin expenses and allocation of expenses among cost of
sales, admin expenses and distribution was not carried out carefully, resulting in the
following:
o Adjustment for prepaid admin expenses was mostly ignored
o 70% rent was charged to cost of sales but was not deducted from admin expenses
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2016
While calculating bad debt expenses, sales made on return basis was not deducted
from trade receivable before applying the bad debt percentage. Further, adjustment of
written off trade debts was often ignored.
Income tax liability and/or interest expenses/payable were not recorded.
Question 6(a)
In this part of the question, the candidates were required to prepare journal entries for sale
on deferred payment basis. A large number of students were totally ignorant of the
correct accounting treatment and simply booked the entire amount as sales. Many
students who had some idea, found it difficult to calculate present value of future
payments. Further, many students recorded income by crediting finance income but
didn’t understand what to debit.
Question 6(b)
In this part of the question, the candidates were required to suggest appropriate timing for
recognizing revenue in case of sales on lay away basis and also in case of a maintenance
service contract where the entire fee was received in advance.
With regard to lay away sales, most of the students were only able to mention one
condition for recognition of sales i.e. significant portion of payments has been received
but did not mention the other condition i.e. delivery of goods or goods being ready for
delivery. However, the question pertaining to receipt of maintenance fee in advance was
quite easy and most of the students answered it correctly.
Question 7
This question required preparation of accounting entries for various types of transactions
relating to Plant and Machinery. The overall response was quite poor. Depreciation on
already existing assets was calculated incorrectly by most of the students as they made
errors which could easily have been avoided at this level, by being a bit more careful.
Other Common errors were as follows:
In sub part (i), machine renovation and overhaul cost was fully expensed out whereas
only the consumables should have been charged off and the remaining amount should
have been capitalised.
In sub part (ii), instead of capitalizing the machine, a large number of students debited
engineering department.
THE END
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016
Mark(s)
A.1 (a) Statement showing amount of defalcation against:
cash sales 5.0
credit sales 5.0
purchase return and cash in hand 1.0
A.2 (a) Up to 1.5 marks for each entry in branch cash account 4.0
(c) Up to 01 mark for each entry in branch stock adjustment account 4.0
A.4 Up to 02 marks for each adjustment made in determination of value of the closing
stocks 11.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016
Mark(s)
A.6 (a) Up to 02 marks for each journal entry 6.0
01 mark for present value calculation 1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
The Institute of 8 March 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Last year the fee was Rs. 9,000 per annum. However, the number of members was the
same.
(ii) A summary of the bank account for the year is shown below:
Deposits Rupees Withdrawals Rupees
Balance as at 1 Jan. 2016 3,700,500 Insurance 175,000
Cash deposited into bank 37,848,500 Rent and rates 4,200,000
Written off amount recovered 1,860,000 Utilities 4,365,000
Disposal of fixed assets 750,000 Freehold land purchased 17,000,000
Members subscription received Cash withdrawals from bank 6,120,000
directly in bank account 19,800,000 Payment to creditors 18,155,000
Repairs and maintenance 700,000
Exercise equipment 7,350,000
Balance as at 31 Dec. 2016 5,894,000
63,959,000 63,959,000
(iv) The club has a tuck shop which earns a profit margin of 20% of sales. All sales of tuck
shop are made on cash. During the year, stock costing Rs. 500,000 was destroyed by
fire.
(v) The opening WDV of fixed assets was Rs. 28,000,000. Exercise equipment was
purchased on 1 October 2016. Fixed assets having opening WDV of Rs. 800,000 were
disposed off on 31 March 2016. Fixed assets are depreciated @ 20% under the
reducing balance method.
(vi) The opening and closing balances of cash in hand were Rs. 300,000 and Rs. 25,000
respectively.
(vii) The following balances have been extracted through a scrutiny of the available
records:
2016 2015
------- Rupees -------
Creditors 3,330,000 2,500,000
Prepaid rent 175,000 168,000
Stock- tuck shop 2,500,000 2,300,000
Financial Accounting and Reporting-I Page 2 of 5
Required:
(a) Determine the amount of loss incurred by the club due to fraud committed by the
previous accountant. (09)
(b) An income and expenditure account for the year ended 31 December 2016. (05)
(c) Statement of financial position as at 31 December 2016. (06)
Q.2 (a) Define the term ‘performance obligation’ and state the criteria which should be met if
goods or services promised to a customer are to be considered as distinct. (04)
(b) (i) ECL has entered into a contract with Kashif Builders for construction of a
residential project, including supply of construction material, architectural
services, engineering and site clearance. ECL and its competitors provide such
services separately also. (03)
(ii) eSolutions Limited, a software developer, entered into a two year contract with a
customer to provide software license including future software updates and post
implementation support services. The software license would remain functional
even if the updates and post implementation support services are discontinued. (03)
Required:
In view of the requirements of IFRS 15 ‘Revenue from Contracts with Customers’,
discuss whether goods and services provided in each of the above contracts represent a
single performance obligation.
(c) State the disclosure requirements for assets carried at revalued amounts, as referred to
in IAS – 16 ‘Property, Plant and Equipment’. (04)
Q.3 Nawaz Manufacturing Limited (NML) deals in various products. One of its product B2 is
produced using raw material A1. Production is carried out after receiving confirmed sales
order. Following information is available for the month of January 2017:
(i) Opening inventory of A1 was 200 kg @ Rs. 3,000 per kg.
(ii) Details of purchases made during the month ended 31 January 2017 are as follows:
Date Quantity (kg) Price per kg (Rs.)
1-Jan-17 250 2,800
15-Jan-17 250 2,900
50 kg of A1 purchased on 15 January 2017 were returned to the supplier on 16
January 2017 due to inferior quality of material supplied.
(iii) On 18 January 2017, 100 kg of A1 were destroyed. They had no scrap value.
(iv) Under normal circumstances 500 kg of A1 produce 400 liters of B2.
(v) Labour cost per liter of B2 was Rs. 700.
(vi) Overheads are estimated at 120% of labour cost. The actual overheads for the month
were Rs. 275,000.
(vii) There is no opening and closing work in progress.
(viii) Sales of B2 during the month of January were as follows:
Quantity Sales price per
Sale order date Delivery date
(liters) liter (Rs.)
2-Jan-17 4-Jan-17 100 7,000
26-Jan-17 28-Jan-17 160 6,250
(ix) NML uses weighted average method for valuation of inventory.
Required:
Prepare cost of goods sold statement for the month of January 2017 under each of the
following methods:
(a) Perpetual inventory method (10)
(b) Periodic inventory method (05)
Financial Accounting and Reporting-I Page 3 of 5
The management is considering to increase the capacity utilization to 85%, 90% or 95%. It
is estimated that if capacity utilization is increased to 90% or more, the fixed costs would
increase by Rs. 100,000 per month.
Required:
Determine the expected cost at each of the three desired levels, using regression analysis and
identify the most beneficial option. (12)
Q.5 A & B are partners in a firm sharing profits and losses in the ratio of their capital i.e. 3:2.
The statement of financial position of the firm as at 31 December 2016 was as under:
Profits of the firm for the last three years were as follows:
On 1 January 2017, C who is the son of A, was admitted as a partner under the following
terms and conditions:
(i) Goodwill is to be valued at two years purchase of average profit of the last three years.
However, it was agreed that following adjustments would have to be incorporated
before the computation of goodwill.
− A sale return of Rs. 200,000 on 1 January 2014 was debited to fixed assets. The
firm charges depreciation @ 20% on written down value of fixed assets.
− A debtor balance of Rs. 300,000 was settled against the amount due to the same
customer, in the year 2016. This adjustment was not recorded in the books.
(ii) C’s share of profit would be 20% of which 5% share would be ceded to him by A. The
remaining share would be purchased by C from B.
(iii) Loan from C would be treated as his capital injection.
(iv) The total capital of the new firm will be Rs. 3,500,000. Any excess or shortage will be
settled through cash.
Required:
Prepare partner’s capital account. (12)
Financial Accounting and Reporting-I Page 4 of 5
Additional information:
(i) Details of gain on sale of fixed assets are as follows:
Rupees
Gain on sale of freehold land 168,960
Loss on disposal of equipment due to fire (70,000)
98,960
The loss on disposal of equipment represents the WDV of the equipment. The
amount of insurance claim received, amounting to Rs. 30,000 was erroneously
credited to accumulated depreciation.
(ii) Repairs to building amounting to Rs. 50,000 were erroneously debited to building
account on 31 December 2016.
(iii) Transfers from capital work in progress to building amounted to Rs. 1,200,000.
(iv) The owner withdrew Rs. 150,000 per month.
Required:
Prepare statement of cash flows for the year ended 31 December 2016, in accordance with
IAS – 7 using indirect method. (12)
Q.7 (a) The following information has been gathered by an analyst, in respect of Dairy Foods
Limited (DFL) which specializes in various dairy products.
Industry
Ratio 2016 2015 2014
average
Profit margin % 11% 10% 8% 10.45%
Quick ratio 1.38 1.40 1.42 1.52
Current ratio 1.84 1.67 1.59 1.73
Days purchases in payables 80 91 89 82
In the latest annual report to the shareholders, Directors of DFL have claimed that
liquidity position of the Company has improved significantly.
Required:
Critically analyze and discuss whether you agree with the claim. (03)
Financial Accounting and Reporting-I Page 5 of 5
(b) Extracts from latest financial statements of two companies are as follows:
Required:
Analyze the profitability, liquidity and working capital ratios of both the companies. (12)
(THE END)
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Cash receipts
Collection from members [(3,300×10,000) – 19,800,000] 13,200,000
Bank withdrawals 6,120,000
Tuck shop sales (W-2) 22,856,250
42,176,250
Cash payments
Salaries (2,300,000)
Sundry expenses (640,000)
Cash deposited into bank (37,848,500)
(40,788,500)
Closing cash should have been 1,687,750
Closing cash-actual (25,000)
Loss due to fraud 1,662,750
Quarter – 1 -
Quarter – 2 (8,250,000×3/12) 2,062,500
Quarter – 3 (5,500,000×6/12) 2,750,000
Quarter – 4 (9,350,000×9/12) 7,012,500
11,825,000
W-3.1: Depreciation
Depreciation on opening WDV [(28,000,000–800,000)×20%] 5,440,000
Depreciation on disposed asset (800,000×20%×3/12) 40,000
Depreciation on addition (7,350,000×20%×3/12) 367,500
Depreciation for the year 5,847,500
(b) (i) The different services being performed under the contract are separately
identifiable but the customer cannot benefit from a services separately from the
other.
Based on this, ECL should account for services in the contract as a single
performance obligation.
Page 2 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
(ii) Transfer of software license, software updates and support services are distinct.
However, the software license is delivered before the other services and
remains functional without updates and technical support. Further, the
customer can benefit from each of the services either on their own or together
with other services that are readily available. Thus, the entity’s promise to
transfer the good or service is separately identifiable from other promises in the
contract.
Based on the above, the contract should not be accounted for as a single
performance obligation.
(c) When items of property, plant and equipment are stated at revalued amounts the
following must be disclosed:
Page 3 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Total Incremental
Units
Capacity production cost of Total cost Cost per unit
produced in
utilization cost y=a+bx repairs (Rs.)
‘000
---------------- Rs. in ‘000 ----------------
85% 408 8,383.81 - 8,383.81 20.55
90% 432 8,817.25 100 8,917.25 20.64
95% 456 9,250.69 100 9,350.69 20.51
The most beneficial option is the production at 95% capacity level where per unit cost is at
minimum.
Page 4 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
*1
A: 1,941,734(W-2)×3/5, B: 1,941,734(W-2)×2/5
*2
A: 1,941,734(W-2)×55%(W-3), B: 1,941,734(W-2)×25%(W-3), C: 1,941,734(W-2)×20%(W-3)
*3
A:3,500,000×55%(W-3), B: 3,500,000×25%(W-3), C: 3,500,000×20%(W-3)
Page 5 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Page 6 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
A.7 (a) While analyzing liquidity positions of DFL, it is noted that current ratio has steadily
increased over the years and is better than industry average. However, the quick ratio
has steadily declined and is even lower then industry average. This is a clear evidence
that the increase in liquidity is caused by an increase in inventory.
Based on the above, I do not agree with the claim of DFL’s directors.
Company B's gross profit and net profit ratio is slightly higher as compared to
Company A. The difference is not significant and may be on account of higher level
of sales resulting in lesser fixed costs per unit.
Company A’s return on capital employed ratio and return on asset employed ratio
are better than Company B, because Company B has accumulated large balances of
cash despite of availing long term loan. Had Company B had used its cash balances
to pay off the long term loan, it would have both of these ratio better than Company
A.
Liquidity Ratios A B
Current ratio (current assets ÷ current liabilities) 1.36 2.12
Quick ratio (current asset-inventory ÷ liabilities) 0.91 1.75
Company B has better current and quick ratio. However, it appears that these ratios
are better than Company A due to substantially high amount of trade debts in term
of percentage of sales as sales days. It also represents a risk that these trade debts may
prove irrecoverable. Moreover, they may be indicative of inefficient in debt collection
as well.
Company A is more effectively collecting it’s debtors than Company B. This could
also be due to the fact that Company B is following a lenient credit policy to attract
more revenue. This fact is also supported from higher stock turnover ratio of
Company B.
Company A have availed better credit facility from its creditors but it may have
forgone some settlement discounts which might have resulted in lower gross profit
ratio than that of Company B.
Page 7 of 8
Financial Accounting and Reporting-I
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
(THE END)
Page 8 of 8
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Spring 2017
General:
Overall performance of the candidates in this attempt was below average as only 21.6%
of the candidates secured passing marks. Very poor performances were witnessed in
Questions 2 and 3 although apparently they were simple questions. Almost similar
situation existed in Question 5 also. It was generally felt that the performance was poor in
those areas or aspects which were tested after a relatively longer period of time.
Question-wise comments.
Question 1
This question required preparation of income statement and balance sheet of a club and
computation of cash defalcated by an accountant. Certain opening balances and
summarized receipts and payments along with other necessary information was provided
in the question.
An average response was observed as almost 50% of the candidates secured passing
marks. Many students scored high and even full marks also. However, most of the
students made simple mistakes of varying nature on even the easier aspects of the
calculations which are not expected at this level. The major errors were as follows:
Only few students calculated the opening and closing balances of unearned
subscription correctly and tried various incorrect methods.
While computing the amount of cash defalcated, instead of considering receipt of
subscription in cash only, total collected amount of Rs. 33m was taken as the cash
receipts. Many students tried to compute the amount by preparing bank account or
through income and expenditure account, instead of cash account and could not
conclude anything.
Loss due to fraud was not shown in the income and expenditure account.
Loss of inventory due to fire was ignored in the calculation of cost of sales.
Loss on disposal of exercise equipment was determined without the impact of
depreciation of 3 months i.e. January to March.
Accumulated fund was not shown in the statement of financial position.
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2017
Question 2
This question was based on IFRS 15 ‘Revenue from Contracts with Customers’. It is a
new IFRS and keeping the same in view, a simple question was set to test the basic
understanding of this IFRS. However, the overall performance was poor and only 18% of
the candidates secured passing marks. Part wise comments are given below:
Question 2(a)
This part required the explanation of the term ‘Performance obligation’ and the criteria to
meet for goods and services to be classified as distinct. Very few students were able to
perform well in this part which was a clear indication of the fact that the students had
failed to grasp even the key concepts. Most of the students described the steps to
recognize revenue instead of criteria for distinct goods and services. They are advised
that displaying of knowledge which has not been asked for is of no use in the
examination marking.
Question 2(b)
Two scenarios were given in this part and candidates were required to discuss whether
contracts under those scenarios represent a single performance obligation. In the first
scenario, there were two contracts and the customer was unable to benefit from the
services separately unless both were completed and hence they were to be treated as a
single performance obligation. Based on the same criteria, the contracts referred to in the
second scenario should not have been identified as a single performance obligation. Most
of the students could not highlight these points. Many students simply answered in ‘Yes’
or ‘No’ without discussing the reasons thereof.
Question 2(c)
This was a very simple question and the candidates were asked to state the disclosure
requirements for assets carried at revalued amount under IAS 16 ‘Property, Plant and
Equipment’. The overall performance was average as many students were able to gain
passing marks and some got full marks also. However, some students attempted to
explain the treatment on revaluation of fixed asset instead of discussing the disclosure
requirements.
Question 3
This question required preparation of cost of goods sold statement by valuing inventory
under perpetual and periodic inventory methods. Despite the fact that students had
already studied the topic in Introduction to Accounting, the performance was very poor
and only 19% of the students could secure passing marks. A number of students were
totally unaware of the difference between perpetual and periodic inventory methods and
also made some very basic conceptual errors as mentioned below:
(i) Majority of the students showed quantity of finished product B2 sold as quantity of
material A1 without calculating the required quantity.
(ii) Issuance of inventory was taken at selling price instead of cost.
(iii) Cost of stocks destroyed was taken as zero.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2017
(iv) Many students determined the amount of closing inventory only and ignored cost
of goods sold.
(v) Purchase return was valued at average cost.
(vi) Those who computed cost of sales, mostly ignored the under absorption of
overheads.
(vii) Many students treated sale of B2 as issuance of A1.
Question 4
This was a simple question requiring estimation of cost at three production levels using
regression analysis and identifying the most beneficial option. The overall performance
was satisfactory as 54% of the candidates secured passing marks. More than 100 students
scored full marks also.
Question 5
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2017
Question 6
This was a routine question requiring preparation of statement of cash flows using
indirect method. The performance was reasonable as about 50% of the candidates secured
passing marks. The mistakes observed were as under:
Failure to calculate rectified profit.
Incorrect adjustment for gain on disposal.
Incorrect calculation of capital expenditure.
Capital expenditure was taken in financing activity instead of investing activity.
Amount injected by owner was not calculated correctly.
The common errors noted are discussed below:
Only few students could classify all the items under their correct head.
Adjustments to net profit before tax were ignored by a number of students.
Finance cost and interest paid were correctly reported but change in accrued interest
was also included in working capital changes.
Decrease in WDV of fixed assets was considered as the sale proceeds.
Many students included changes in short term loan as a cash flow item and also
included closing balance of short term loan in cash and cash equivalent.
Question 7(a)
This part of the question required the candidates to critically analyze the various ratios
pertaining to three years which were provided in the question and comment on the
management’s claim that the company’s liquidity has improved significantly.
The overall performance was below average as the candidates displayed lack of analytical
skills. Most of them declared on the basis of better current ratio that the management’s
point of view was correct and ignored the quick ratio. Some of them simply stated that
current ratio reflects an improvement whereas quick ratio indicated a declining trend.
Only few could provide an overall view based on both the ratios. The fact that decline in
quick ratio with increase in current ratio was indicative of stock build up was mentioned
by few candidates only. They are advised to seek guidance from ICAP’s suggested
answer.
Question 7(b)
This part of the question contained extracts from financial statements of two companies.
The requirement was to analyse the liquidity, profitability and working capital ratios. The
students were generally able to compute most of the ratios correctly but interpretation
skills were seriously lacking as most of the students only stated that as to which of the
two companies had a better ratio. In depth analysis was mostly missing.
Many students could not differentiate between the three types of ratios and classified
them incorrectly.
THE END
Page 4 of 4
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017
Mark(s)
A.1 (a) Statement showing amount of cash defalcation:
Cash receipts from tuck shop sales 3.0
Cash receipts from other than tuck shop sales 2.0
Cash payments 3.0
Loss due to fraud 1.0
(b) (i) Discussion on whether goods and services in the contract represent a
single performance obligation 2.0
Conclusion 1.0
A.3 (a) Computation of material cost valued under perpetual inventory method
− 0.5 mark for each purchase and balance entry on inventory ledger card 3.0
− 01 mark for each entry of sales, purchase return and abnormal loss 4.0
Computation of labour and factory overhead 2.0
Computation of under-absorbed overheads 1.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017
Mark(s)
A.4 Computation of ∑x and ∑y 1.0
Computation of ∑x2 and ∑xy 2.5
Computation of a and b 2.0
02 mark each for determination of cost per unit at 85%, 90% and 95% 6.0
Conclusion 0.5
(b) Up to 0.5 mark for calculation of each ratio of each company 6.0
Analysis of profitability ratios of both companies 2.0
Analysis of liquidity ratios of both companies 2.0
Analysis of working capital ratios of both companies 2.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of 8 September 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
On 31 December 2016, it was decided to dissolve the partnership. On the said date, the
current account balances of the partners were as follows:
A B C
Rs. 50,000 Rs. 30,000 Rs. (15,000)
Required:
Prepare the following accounts to show the effect of dissolution:
(a) Realization (05)
(b) Partners’ capital (05)
(c) Cash (02)
Required:
In accordance with International Financial Reporting Standards, prepare a note on ‘Property
plant & equipment’ (including comparative figures) for inclusion in SL’s financial statements
for the year ended 31 December 2016. (18)
Q.3 Following is the trial balance of Younus Limited (YL) as on 30 June 2017:
Debit Credit
Particular Particular
Rs. in ‘000 Rs. in ‘000
Property, plant and equipment 200,000 Share capital (Rs. 10 each) 35,000
Receivables and advances 13,000 Un-appropriated profit 66,820
Office rent 1,120 5% Bank loan 52,000
Opening stock 54,000 Trade payables 10,000
Taxation 6,000 Accumulated dep. – 30 June 2017 120,000
Cash and bank 40,000 Sales 240,000
Purchases 170,000
Selling expenses 20,000
Administrative expenses 17,000
Financial charges 2,700
523,820 523,820
The delivery truck was purchased on 1 July 2010. The cost of the delivery truck is
Rs. 5 million of which approximately Rs. 1 million is attributable to the seized engine.
Delivery trucks are depreciated over their useful life of 10 years.
(ii) Certain goods despatched on 28 June 2017 reached YL’s warehouse on 2 July 2017.
Break-up of the amount paid against these goods is as follows:
Rs. in ‘000
20% advance to supplier 500
Insurance in transit 50
Delivery charges 100
The above amounts are appearing under the head ‘Receivables and advances’.
Required:
Prepare statement of financial position as at 30 June 2017 and statement of profit or loss for
the year ended 30 June 2017 in accordance with International Financial Reporting
Standards. (20)
Financial Accounting and Reporting-I Page 3 of 4
AKL has identified that total fixed costs increase by 20% when production exceeds
35000 units and the average variable costs for all units increase by 5% if production exceeds
75000 units.
Required:
(a) Construct total cost functions for different production ranges using high/low method.
(b) Determine the most feasible option if AKL can sell 25000, 55000 and 80000 units at
Rs. 20, Rs. 17 and Rs. 13 respectively. (09)
Q.5 Progressive Steel Limited (PSL) commenced business in 2015. The following comparative
data pertains to the year ended 30 June 2017:
PSL Industry
Description
2017 2016 2017
Gross profit margin 13% 13% 16%
Net profit margin 8% 7% 10%
Return on shareholders’ equity 22% 18% 25%
Current ratio 1.2 1.6 1.5
Debt to equity ratio 40:60 30:70 50:50
Cash operating cycle in days 119 135 118
Required:
For each ratio/data give possible reasons for variation from comparative and industry data. (12)
Q.6 (a) Jupiter Limited (JL) entered into a two year contract on 1 January 2017, with a
customer for the maintenance of computer network. JL has offered the following
payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
Required:
Prepare journal entries to be recorded in the books of JL under each option over the (05)
period of contract.
(b) Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Rupees
Products
(per carton)
C-1 100,000
C-2 90,000
C-3 110,000
PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one
carton of each product for a total price of Rs. 260,000. (05)
Financial Accounting and Reporting-I Page 4 of 4
(c) An entity shall recognise revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service to a customer. An asset is
transferred when (or as) the customer obtains control of that asset.
Required:
List the different indicators of transfer of control. (04)
Q.7 Saleem is the owner of S-Mart, a grocery store. His accountant resigned and left on
1 January 2017. Saleem suspects that the previous accountant was involved in some sort of
misappropriation. The information available with him is as follows:
(ii) Other balances extracted from the records maintained by the previous accountant:
31-Dec-2016 31-Dec-2015
Particulars
---------- Rupees ----------
Furniture and fixtures – WDV 555,000 550,000
Equipment – WDV 64,000 80,000
Vehicle – WDV 210,000 18,500
Inventory 215,000 250,000
Debtors 340,000 260,000
Advance rent - 3,000
Cash in hand 31,510 45,000
Creditors 354,500 100,000
Salaries payable 22,000 18,000
(iii) Before depositing the receipts from cash sales in the bank, Saleem took Rs. 12,000 per
month for personal use. All other payments were made through bank and the debtors
settled their accounts through cheques.
(iv) The creditors have confirmed the balances due from them. However review of the
statement provided by one of the creditors indicates that goods returned for cash
amounting to Rs. 24,000 were not recorded in the books.
(v) Unpaid invoice for furniture purchased during the year for Rs. 45,000 is included in
creditors.
(vi) The margin on cash sales and credit sales is 20% and 25% respectively. From 1 July
2016, prices to cash customers were further reduced by 6% due to which quantity sold
against cash in the 2nd half of the year increased by 25% as compared to the first half of
the year.
(vii) All the debtors confirmed their balances except an amount of Rs. 50,000. On
investigation it was found that the related goods had been issued against fake invoices.
Required:
(a) Determine the amount of suspected fraud. (04)
(b) Prepare statement of profit or loss for the year ended 31 December 2016. (11)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
(c) Cash
Rupees Rupees
Opening balance 300,000 Settlement of liabilities 155,000
Realization of assets 775,000 Final settlement A 657,500
B 165,000
C 97,500
1,075,000 1,075,000
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Accumulated depreciation
Opening 22.50 5.00
Cancellation (22.50)
Disposal
Depreciation
(456 ÷19) 24.00
[(45×10%)+(35×10%×5÷12)] 5.96
Closing 24.00 10.96
The last revaluation was performed on 1 July 2016 by Accurate Valuers (Private) Limited, an independent
firm of valuers. Revaluations are performed annually.
Carrying value had the cost model been used instead 382.50 405.00
(450×0.80) (450×0.90)
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Current assets
Stock in trade [50,000+ (500÷0.2) + 50+ 100] 52,650
Receivables and advances [13,000–(500+50+100)] 12,350
Short term prepayments (1120 ÷ 1.6 × 0.55 ) 385
Cash & Bank 40,000
105,385
Total assets 186,585
Equity
Issued subscribed and paid up capital 35,000
Unappropriated profit (66,820+18,415) 85,235
120,235
Non-current liabilities
Long term loan (52000 – 16,000) 36,000
Current liabilities
Trade and other payables (10,000+(2,500–500) 12,000
Accrued markup (52,000 × 5% × 3 ÷12 ) 650
Current portion of long term financing (52,000 × 4 ÷ 13) 16,000
Taxation-net (7,700–6,000) 1,700
30,350
Total equity and liabilities 186,585
Younus Limited
Statement of profit or loss
For the year ended 30 June 2017
2017
Rs. in ‘000
Sales 240,000
Cost of sales (54,000+170,000–50,000 -4,500) (169,500)
Gross profit 70,500
Selling and distribution expenses (20,000 –1,200+500–100+ 4,500) (23,700)
Administrative expenses (17,000+ 735) (17,735)
Operating profit 29,065
Financial charges ( 2,700+ 650) (3,350)
Other operating income ( 800– 400) 400
Profit before taxation 26,115
Taxation (7,700)
Profit for the year 18,415
Workings: Rupees
Variable cost 150,000/30,000 5.00
Cost function
Up to 35,000 units: 200,000+5x
35,001–75,000 units: 240,000+5x
More than 75,000 units: 240,000+5.25x
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
(THE END)
Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Examiners’ comments
Financial Accounting and Reporting-I
Certificate in Accounting and Finance
Autumn 2017 Examinations
General Comments:
Overall passing ratio of 13.4% was far below the previous two results. 9.8% students were just
short of 5 or fewer marks and could have easily obtained them had they covered all areas of
the syllabus. 17% of the students could not even secure 20 marks in the paper.
In this paper, though Q2, Q4 and Q5 were easier questions but a significant number of students
secured less than 20% marks even in these questions due to ‘cherry-picking’ topics from the
syllabus. Moreover, students were found struggling to apply their knowledge when questions
were presented slightly differently.
Students are using past papers as a key element of their examination preparation but they
should remember that topics/sub-topics/variations not covered in past papers are also
examinable. Majority of the students lost achievable marks in Question 2 & 4 just because
such variation was not previously examined.
Some examination technique issues also need to be improved which would have lifted many
marginal fails into the pass category. Many students are failing because of technique rather
than knowledge or ability.
Question-wise Comments:
Question 1
Calculation of opening capital account balances proved difficult. For arriving at the
opening balance of partners’ capital account, current account balance of Rs. 65,000 was
not adjusted against total net assets.
Many students accounted for unrecorded assets and allocated it to partners’ capital account
instead of simply crediting the proceeds to realization account.
Closing cash was allocated to partners in their profit sharing ratio instead of paying to each
partner his capital account’s balance.
Page 1 of 3
Examiners’ comments on Financial Accounting and Reporting-I,
CAF Examination Autumn 2017
Question 2
The question required preparation of note on property, plant and equipment. Only 20.4% of the
students secured passing marks in the question. Note in accordance with IAS 16 was examined
for the first time at FAR I level. Though it was an easier question, most of the students found it
difficult to prepare the required note. 39% of the students could not even score 20% marks in
the question which shows that they had not studied this area of the syllabus. The common
errors were as follows:
Rather than preparing statement showing opening and closing carrying amounts (or
alternatively cost and accumulated depreciation) and movement during the years, many
students prepared T-accounts of cost and accumulated depreciation.
Cancellation of opening accumulated depreciation for revaluation was ignored.
Effect of disposal was taken incorrectly in calculating depreciation of remaining assets.
Important disclosure requirements like measurement bases, useful lives, depreciation
method, revaluation details and carrying value of revalued assets at cost model for the both
the years were missed.
Question 3
It was a traditional question requiring preparation of financial statements from a trial balance
combined with several adjustments. A general weakness amongst most students was that they
failed to make a reasonable attempt at the question due to presence of one or two difficult
adjustments. Only 5.3% students secured passing marks. However, only 13.2% secured less
than 20% marks so majority of the students made just below passing performance in this
question. There were atleast 7 easy marks available in the question which could have been
obtained even if the students had just used the unadjusted amounts in the financial statements.
But it was observed that students left the question halfway if they could not incorporate the
effect of one or two adjustments. Some of the errors noted were as follows:
In adjustment (i) the disposal of the old engine was not recorded and depreciation on the
new engine was calculated on original useful life of the delivery truck rather than the
remaining useful life.
In adjustment (ii), goods in transit were not recorded. Those who recorded them did not
adjust the advance with the amount payable in respect of these goods.
Amount of prepaid rent was incorrectly calculated.
Mark-up on bank was either calculated for the full year or not calculated at all.
For calculating current portion of loan, amount of one instalment was calculated by
dividing the outstanding loan amount with total instalments rather than outstanding
instalments.
Question 4
The question required construction of cost function for different production ranges. Only
24.2% of the students could secure passing marks whereas 60.4% of the students secured less
than 20% marks which showed that they had not studied the sub-topic. Those who had studied
the topic scored well thus answers tended to be very polarised, either very good or very poor.
Some common errors were as follows:
Page 2 of 3
Examiners’ comments on Financial Accounting and Reporting-I,
CAF Examination Autumn 2017
Regression method and simultaneous equation methods were used though the requirement
of the question specifically mentioned the use of high low method.
Instead of formulating cost functions, computations were prepared for fixed and variable
cost.
In part (b), many students did not calculate the total profit for the different selling levels
and gave conclusion on the basis of cost per unit or profit per unit.
Question 5
The question required comparison of given ratios with previous year and industry data. Only
9.9% of the students could secure passing marks. Since the question was based on the
relatively infrequently examined topic of interpretation of ratios, many students were
unprepared. 62.7% of the students secured less than 20% marks.
Generally, students only focus on the formulas of the ratios. However, ratios were already
given and the students were required to identify reasons for variation from the given
information. The poor performance of the student was due to lack of their ability to interpret
the underlying ratios. Many students thought that just saying a ratio had gone up or down
amounted to interpretation. Also, merely stating increase or decrease in nominator and
denominator did not carry any marks.
Question 6
The question was based on IFRS 15 which is a new area of the syllabus. Only 4% students
could secure passing marks in this question. 55% students could not even answer the basic
concept examined in part (c). If students could not perform well in basic question then how
could they be expected to solve advance questions on this area?
In part (a) the students had no idea of adjusting the promised amount of consideration for
the effects of the time value of money.
In part (b), the transaction price needed to be allocated to the three products in two steps /
stages in their relative selling prices. Mostly the transaction price was allocated in a single
step.
Question 7
The question required preparation of statement of profit or loss and determination of the
suspected amount of fraud. 11% students obtained passing marks. The calculation of sales was
a difficult part of the question. Other than that, some easy marks were available to the students.
It was observed that students consumed lot of time in calculating sales and did not attempt the
remaining easier areas of the question. Some of the common errors were as under:
Most of the students could not compute loss due to defalcation which consisted of cash
embezzled through purchase return, stock embezzled through fake debtors and cash
defalcated through cash sales.
Cost of stock embezzled through fake debtors was not adjusted in calculation of cost of
goods sold.
Loss on disposal of vehicle was incorrectly calculated.
(THE END)
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017
Mark(s)
A.1 (a) Recording of assets and liabilities taken from abstracts of statement of financial
position 1.0
Recording of assets and liabilities determined from adjustments / further
information 3.5
Allocation of gain/loss on realization to partners as per given ratio 0.5
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017
Mark(s)
A.4 (a) Determination of variable and fixed costs by using high/low method 3.0
Construction of total cost functions at different production levels 3.0
(b) Analysis of given activity levels and determination of the most feasible option 3.0
A.5 Discussion on each relevant reason for variation from comparative period 6.0
Discussion on each relevant reason for variation from industry data 6.0
(b) Allocation of discount when C-2 and C-3 are sold together 2.0
Allocation of discount when C-1, C-2 and C-3 are sold together 3.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of 7 March 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Normal
Cost per unit
Items Units selling price
(Rs.)
per unit (Rs.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500
Required:
Calculate the amount at which above inventory items should be carried as on
31 December 2017 in accordance with IAS 2 ‘Inventories’. (08)
Q.2 (a) Define ‘performance obligation’. List any six examples of promised goods and
services as per IFRS 15 ‘Revenue from Contracts with Customers’. (05)
(b) On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a
bank for supplying 20 smart phones to the bank staff with unlimited use of mobile
network for one year. The contract price per smart phone is Rs. 34,650 and the price is
payable in full within 10 days from the date of contract. At the end of the contract, the
phones will not be returned to GT.
The entire amount received as per contract was credited by GT to advance from
customers account. The smart phones were delivered on 1 November 2017.
If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of
Rs. 1,800 for unlimited use of mobile network.
Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with
IFRS 15 ‘Revenue from Contracts with Customers’. (04)
Financial Accounting and Reporting-I Page 2 of 5
Extract from statement of profit or loss for the year ended 31 December 2017
Rs. in ‘000
Profit before taxation 8,955
Taxation (2,945)
Profit after taxation 6,010
Other information:
(i) Shares issued during the year were as follows:
10% bonus shares in March 2017.
Right shares in July 2017.
(ii) During the year, a plant costing Rs. 9,500,000 and having a book value of
Rs. 5,200,000 was disposed of for Rs. 4,800,000 of which Rs. 1,800,000 are still
outstanding.
(iii) Depreciation for the year amounted to Rs. 7,350,000.
(iv) Financial charges for the year amounted to Rs. 1,100,000. Accrued financial charges
as on 31 December 2017 amounted to Rs. 112,000 (2016: Rs. 48,000).
(v) Provision for doubtful trade receivables is maintained at 5%.
Required:
Prepare statement of cash flows for the year ended 31 December 2017, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (15)
DE is preparing its budget for the next year, therefore, it would like to determine the
relationship between production units and cost.
Required:
(a) Using regression analysis, determine the line of best fit for production units and
overheads. (Show all necessary workings) (06)
(b) Compute total prime cost and overheads for production of 650 units. (02)
Financial Accounting and Reporting-I Page 3 of 5
Q.5 A and B were partners sharing profits and losses in the ratio of 3:2. The balance sheet as on
31 December 2017 is given below:
On 1 January 2018, they agreed to admit C for 1/4th share in the partnership. On admission
of C, it has been agreed that:
value of goodwill of the firm is Rs. 32,000. Goodwill is to be written-off from the books.
assets would be revalued as follows:
Revalued amount
Assets
(Rs.)
Fixed assets 60,000
Investments 9,000
Stock-in-trade 18,000
C has contributed Rs. 38,000 in cash. Capital accounts of the old partners in the new
partnership would be adjusted in their new profit sharing ratio on the basis of C’s capital.
Any excess or deficiency would be adjusted through cash.
Required:
Prepare partners’ capital accounts on admission of C. (12)
Fair value
Revaluation date
(Rs. in million)
31 December 2013 323
31 December 2015 208
31 December 2017 167
Required:
Prepare entries to record revaluation surplus/loss on each of the above revaluation
date. (Entries to record depreciation expense, incremental depreciation and elimination of
accumulated depreciation are not required) (11)
Financial Accounting and Reporting-I Page 4 of 5
(b) Following information pertains to three exchange transactions relating to fixed assets:
(i) (ii) (iii)
--------- Rs. in million ---------
Cash received/(paid) 1.1 (2.1) -
Assets given-up:
Original cost 10.3 12.4 14.5
Book value 6.4 7.3 3.4
Estimated fair value 8.5 6.6 4.6
Assets received:
Estimated fair value 7.1 9.0 4.1
Additional information:
In case of transaction (i), fair values of both assets are reliably measurable.
In case of transaction (ii), fair value of the asset received is clearly more evident.
In case of transaction (iii), fair value of neither asset is reliably measurable.
Required:
Compute gain or loss on disposal of fixed assets in each of the above transactions. (06)
Q.7 Boom Limited (BL) is a manufacturer of sports goods. Following financial statements for
the year ended 31 December 2017 have been submitted to the Chief Executive Officer
(CEO).
Statement of profit or loss
Rs. in ‘000
Revenues 21,000
Cost of sales (17,500)
Gross profit 3,500
Operating expenses (1,900)
Finance cost (450)
Profit before tax 1,150
Taxation (345)
Profit after tax 805
Although performance of BL has improved from the last year, CEO wants to compare the
results with other companies operating in sports manufacturing industry. In this respect,
following industry data has been gathered:
Gross profit margin 23.5%
Net profit margin 7.7%
Current ratio 2.75
Gearing ratio 50:50
Return on non-current asset 32.9%
Return on capital employed 27.4%
Return on equity 31.3%
Required:
(a) Compute BL’s ratios for comparison with the industry. (04)
(b) For each ratio, give one possible reason for variation from the industry. (07)
Financial Accounting and Reporting-I Page 5 of 5
Q.8 Following information pertains to Alpha Traders (AT) for the year ended
31 December 2017:
(i) 60% goods are sold for cash to walk-in customers at list price. Remaining goods are
sold to corporate customers on credit at a trade discount of 2% on list price. They only
pay through cheques.
(ii) Balances extracted from AT’s records:
31-Dec-2017 31-Dec-2016
--------- Rs. in ‘000 ---------
Furniture and fittings – net ? 10,175
Stock-in-trade 14,500 12,300
Trade debtors – gross 5,900 4,400
Prepaid rent 180 145
Cash in hand 430 750
Trade creditors 9,700 8,500
Accrued salaries 310 460
(iii) All furniture and fittings were purchased on 1 July 2015 and are depreciated using
straight-line method at 5% per annum.
(iv) Provision for doubtful debts is maintained at 4%. During the year, balances totalling
Rs. 260,000 were written-off.
(v) Summarised bank statement:
Deposits Rs. in ‘000 Withdrawals Rs. in ‘000
Opening balance 9,800 Utilities 1,400
Corporate customers 34,240 Rent, rates and taxes 2,100
Cash 56,380 Repairs & maintenance 2,800
Insurance claim 5,500 Cash 6,320
Return outward 2,170 Creditors 87,200
Delivery charges recovered 330 Delivery truck (second hand) 2,300
Miscellaneous expenses 1,300
Closing balance 5,000
108,420 108,420
(vii) Insurance claim represents cost of goods lost in transit during the year.
(viii) A cheque of Rs. 300,000 issued on 15 December 2017 against rent, has not yet been
presented whereas cheque from a debtor, deposited on 31 December 2017 amounting
to Rs. 3,200,000 is not appearing in the bank statement.
(ix) Creditors are paid through cheques only. Payments made to creditors include:
Rs. 48,000,000 after availing discount of 4%.
A cheque of Rs. 1,900,000 issued to a supplier in December 2016. No discount
was allowed by the supplier on this payment.
(x) The delivery truck was purchased on 1 March 2017. Prior to use, the truck was
repaired at a cost of Rs. 260,000. The repair work was completed on 31 March 2017.
The amount is included in payment for repairs and maintenance above. Depreciation
on delivery truck is charged on a straight-line basis at 12.5% per annum.
Required:
Prepare the following:
(a) Statement of profit or loss for the year ended 31 December 2017. (12)
(b) Statement of financial position as on 31 December 2017. (08)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.2 SK Limited
(a) Performance obligation:
A performance obligation is a promise in a contract with a customer to transfer to the
customer either:
a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
(∑ ) (∑ )(∑ )
(∑ ) (∑ )(∑ )
( ) ( )
4.04
( ) ( )
(∑ )(∑ ) (∑ )(∑ )
(∑ ) (∑ )(∑ )
( ) ( )
1,002
( ) ( )
Regression line:
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.6 SK Limited
(a) Accounting entries for revaluation of building
Debit Credit
Date Description
Rs. in million
31-Dec-2013 Building 17.00
Revaluation surplus 17.00
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ratios Industry's
(a) BL's ratios (b) Reasons for variation from industry
ratios
Gross profit 16.67% 23.50% Lower than industry
margin Purchase of raw material at higher prices
as compared to its competitors
Inability to obtain economies of scale in
production as compared to its
competitors
Higher production costs due to
inefficiencies
Deliberately keeping selling prices lower
to gain the market share
Net profit 3.83% 7.70% Lower than industry
margin BL’s gross profit margin is 6.8% lower
than industry (16.6% Vs 23.5%) whereas
net profit margin is only 3.9% lower
which indicates that BL’s operating
expenses as a percentage of sales are
approximately 2.9% lower than the
industry
Current ratio 1.50 2.75 Lower than industry
Since gearing ratio is lower than the
industry so BL might have:
obtained running finances as
compared to long-term financing
by the industry
availed extended credit terms from
suppliers
Low inventory levels are maintained by
BL
Shorter credit terms are given to debtors
Gearing ratio 37.5: 62.5 50 : 50 Lower than industry
Difficulty in raising long-term finance
from banks due to low profits
Running finance or extended credit terms
from suppliers are available for BL
Return on non- 21.33% 32.90% Lower than industry
current assets Lower profit margins
Relatively newer non-current assets have
higher carrying value
Return on 20.00% 27.40% Lower than industry
capital employed Lower profit margins
High shareholder’s equity
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
(The End)
Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Spring 2018
General:
The overall performance was significantly better this time. The passing ratio was 43.2%
which was far above the last two results of 13.4% and 22%. Moreover 19% students were
just short of 9 or fewer marks and could have easily obtained them had they covered all
areas of the syllabus. The highest score in the paper was 96 marks which indicates that
the paper was very doable.
Performance in four questions (Q.1: Inventory, Q.3: Cash Flow, Q.4: Cost of production
and Q.5: Partnership) comprising of 43 marks was well above average.
Performance in Q.2: Revenues was below average. Students were found struggling to
even answer the theory part (5 marks) which was straight from the study text.
Some examination technique issues also need to be improved which would have lifted
many marginal fails into the pass category. Many students are failing because of
technique rather than knowledge or ability.
Although many students performed well but some common and illogical mistakes were
noted. The persisting issue appears to be lack of practice and poor presentation in many
cases.
Question-wise comments:
Question 1
The question required calculation of the amount of inventory in accordance with IAS 2. It
was an easy question with high performance i.e. 60.1% of the students secured passing
marks.
The correct approach was to calculate cost and NRV of each portion of individual
product and apply the lesser of cost or NRV rule and then calculate the total inventory
value for reporting purposes. However, students often aggregated the cost and NRV
of all items and then picked the lower, which was incorrect.
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2018
In the case of those damaged goods (minion costumes) which were repairable by
incurring cost of Rs. 200 per unit, the students failed to compute the correct NRV by
picking the higher NRV of those items from the available options.
Question 2
The question was based on IFRS 15 which is a new area of the syllabus. Only 16.2% of
the students secured passing marks. 20.9% of the students could not score any mark
which shows that they had not studied this area of the syllabus. The common errors were
as follows:
In part (a), majority of the students were successful in reproducing the definition of
‘performance obligation’ but failed to list down examples of promised goods and
services as per IFRS 15.
In part (b), only a handful of students were able to grab full or nearly full marks. The
entry was correct in many cases but various types of mistakes were made in
computing the revenues to be recognized.
Question 3
Change in net trade receivables was shown in working capital changes but increase in
provision for doubtful debts was also shown which was incorrect.
Although adjustment for interest expense and actual interest paid were reported
correctly, the effect of change in accrued interest was not excluded from changes in
accruals and other payables.
While reporting sale proceeds of plant under investing activity, the amount which
remained outstanding at the year-end was not excluded.
In reporting proceeds from issue of share capital, premium on right shares was shown
separately. Further, many students ignored bonus shares in the calculation of net
proceeds.
Question 4
The question required determination of line of best fit for production units and overheads
and computation of prime cost and overheads at a given production level. 71.3% of the
students secured passing marks in this question. Some common errors were as follows:
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2018
In part (b) students only calculated overhead cost, though the prime cost was also
required to be calculated.
Question 5
Full amount of goodwill was credited in old partner’s capital accounts instead of the
balance amount only, as goodwill of Rs. 2,000 was already appearing in the books.
Allocation of balance of profit and loss account to the old partners was omitted.
Full 5% provision for doubtful debts was adjusted in revaluation account though only
the difference should have been adjusted.
Question 6
The question was based on IAS 16. Part (a) required entries to record revaluation of a
building while part (b) required determination of gain or loss on the given exchange
transactions. Only few students were cognizant with the concept examined in part (b).
Only 34.5% students could secure passing marks in this question while 10.6% students
could not obtain any mark. Some common errors were as follows:
Question 6(a)
Students did not read the requirement carefully and also prepared entries for
depreciation expense, incremental depreciation, etc. This resulted in loss of valuable
time and affected the performance in other questions.
First year’s depreciation was charged for the full year instead of six months
Revaluation adjustment was not bifurcated between P&L and revaluation surplus, on
2nd and 3rd revaluation.
Question 6(b)
in transaction (i) since fair values of both assets were reliably measurable, the fair
value of asset given up should have been used for calculating gain or loss on disposal
but fair value of asset received was used.
in transaction (iii) since fair values of both assets were not reliably measurable, no
gain or loss should have been recognized. However this was ignored.
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-I - Spring 2018
Question 7
The question required calculation of ratios for comparison with the industry data and
explanation of one possible reason for variation with the industry. 23.3% students
obtained passing marks. Some of the common errors were as under:
An in-depth analysis was missing as many students seemed to think that just stating
that a ratio is higher or lower amounts to interpretation. Moreover, instead of
explaining the possible reasons for variation from the industry, students tried to
explain the objectives and purposes of such ratios and whether a particular ratio is
better or worse as compared to the industry. They are advised to seek guidance from
ICAP’s suggested answer.
Question 8
The question required preparation of statement of profit or loss and statement of financial
position from the given data. 27% students obtained passing marks. Some of the common
errors were as under:
Balance as per bank statement was not adjusted for the unpresented cheque and
deposit in transit.
Return outward and goods lost were mostly ignored while computing cost of goods
sold.
Many students prepared the cash account but were unaware that its balance
represented the drawings.
Depreciation rate on furniture and fixtures was applied on the WDV rather than the
original cost which was required to be worked back.
THE END
Page 4 of 4
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018
Mark(s)
A.1 02 marks for valuation of each of the given inventory items 8.0
(b) 1.5 marks each for computation of revenue to be recorded for smart phones and
network usage 3.0
Preparation of adjusting entry at the year-end 1.0
(b) 01 mark each for computing prime cost and overheads for production of 650 units 2.0
(b) 02 marks for computing gain/loss on each fixed asset exchange transaction 6.0
A.7 (a) Computation of BL’s ratios for comparison with the industry 4.0
(b) 01 mark for giving one possible reason against each ratio computed in (a) above 7.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018
Mark(s)
A.8 (a) Statement of profit or loss
Cash and credit sales 3.0
Cost of sales 3.0
Operating expenses 5.0
Miscellaneous income 1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of 5 September 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
(ii) Summary of bank payments for the year ended 30 June 2018:
Rs. in '000
Suppliers 13,600
Repair and maintenance 950
Shop rent 2,000
Miscellaneous supplies 800
Utilities 1,200
(iii) Payments made out of cash sales before being deposited into the bank:
Rs. in '000
Salaries and wages 1,800
Purchase of inventory 3,000
Part payment of sales commission to riders 90
(iv) Unpaid suppliers’ bills as at 30 June 2018 include a bill of Rs. 320,000 which was
mistakenly taken at Rs. 230,000.
(v) During the year, goods costing Rs. 540,000 were withdrawn by Nezam for personal
use.
(vi) Inventory as at 30 June 2018 includes goods costing Rs. 250,000 which were badly
damaged in an accident and have no sales value.
(vii) Mark-up on goods sold are as follows:
Mark-up on cost
50% of goods – sold on cash counter 35%
20% of goods – sold for cash through riders 40%
30% of goods – sold for credit 45%
Required:
Prepare a statement of profit or loss for the year ended 30 June 2018. (13)
Financial Accounting and Reporting-I Page 2 of 5
Q.2 Digital World (DW) closes its accounts on 30 June each year. This year physical stock
taking was delayed and carried out on 10 July 2018. The cost of physical stock on that date
was determined at Rs. 1,126,000. Following further information is available:
(i) Purchase invoices received from suppliers during 1 July to 10 July 2018 amounted to
Rs. 366,000. These include invoices amounting to:
Rs. 28,000 for goods dispatched by a supplier but not received by DW till
10 July 2018.
Rs. 20,000 for goods received on 28 June 2018.
(ii) Goods costing Rs. 44,000 were received on 8 July 2018 but the corresponding invoice
was not received till 10 July 2018.
(iii) Details of credit notes from suppliers are as follows:
(iv) Selling price of goods dispatched to customers from 1 July 2018 to 10 July 2018
amounted to Rs. 375,000. This included:
Rs. 62,500 relating to goods invoiced but not received by customers till
10 July 2018.
Rs. 34,000 relating to goods not invoiced till 10 July 2018.
Required:
Compute the value of stock as at 30 June 2018. (10)
Q.3 (a) List the five steps involved in recognizing revenue under IFRS 15 ‘Revenue from
Contracts with Customers’. (03)
(b) On 1 June 2018 Ravi Limited (RL) delivered 500 units of one of its products to Bravo
Limited (BL) at Rs. 200 per unit. BL immediately paid the amount and obtained
control upon delivery. BL is allowed to return unused units within 30 days and receive
a full refund. RL’s cost of the product is Rs. 150 per unit and it uses perpetual system
for recording inventory transactions.
Required:
Prepare necessary journal entries in the books of RL on 1 June 2018 and 30 June 2018
under each of the following independent situations:
(i) Based upon historical data, RL estimates that 5% units will be returned on
expiry of 30 days. (05)
(ii) The product is new and RL has no relevant historical evidence of product
returns or other available market evidence. (04)
Financial Accounting and Reporting-I Page 3 of 5
Q.4 Royal Fashions (RF) and Imperial Garments (IG) are two partnership businesses. Partners
of both firms were sharing profits in their capital ratios. It has now been decided to merge
the two businesses with effect from 1 July 2018 under the name of Quality Apparels (QA).
The respective statements of financial position as at 30 June 2018 were as under:
RF IG RF IG
Capital and liabilities Assets
Rs. in million Rs. in million
Capital accounts: Land 14 18
A 24 - Buildings 8 13
Z 16 - Machines 17 20
B - 27 Inventory 9 12
G - 33 Trade debtors - net of 2%
Trade payables 18 14 provision 12 15
Accruals and other payables 5 6 Cash 3 2
63 80 63 80
Following terms and conditions have been agreed for the merger:
(i) Total capital of QA will be Rs. 100 million. Capital as well as profits will be shared
equally by all the partners in the new firm. Any excess or deficiency in partners’
capital accounts will be adjusted through cash.
RF IG
--- Rs. in million ---
Land 16.0 17.0
Machines 15.0 15.0
Inventory 10.0 12.6
Required:
Prepare capital accounts in the old and new firms. (12)
(i) The balances of cost and accumulated depreciation of machines as on 1 January 2017
were Rs. 800,000 and Rs. 333,000 respectively.
(ii) A machine acquired on 1 January 2014 having net book value of Rs. 31,935 on
1 January 2017 was sold for Rs. 34,000 on 30 April 2017. Cost of disposal incurred
was Rs. 5,000.
(iii) On 1 July 2017, a machine having fair value of Rs. 40,000 on that date was exchanged
for a new machine. The balance of the purchase price was paid through a cheque of
Rs. 80,000. The list price of the new machine was Rs. 130,000. The old machine had
been acquired at a cost of Rs. 65,000 on 1 October 2015.
(iv) Machines are depreciated at 15% per annum using the reducing balance method.
Required:
Prepare the following ledger accounts pertaining to the machines for the year ended
31 December 2017:
(a) Cost (03)
(b) Accumulated depreciation (05)
(c) Gain/loss on disposal (04)
Financial Accounting and Reporting-I Page 4 of 5
Q.6 Following is a summarised trial balance of Omega Limited (OL) for the year ended
30 June 2018:
Rs. in million
Particulars Debit Particulars Credit
Land at revalued amount 30 Share capital 40
Buildings at revalued amount 60 Retained earnings 18
Equipment and other assets - at cost 47 Revaluation surplus 43
Trade receivables 21 Trade payables 29
Opening stock-in-trade 16 Accruals and other payables 9
Advances and other receivables 6 Accumulated depreciation:
Cash and bank balances 3 - Buildings 9
Purchases 180 - Equipment and other assets 18
Freight-in 4 Provision for doubtful receivables 4
Selling & administrative expenses Sales 235
(including depreciation expense) 39 Suspense account 1
406 406
Additional information:
(i) Cost of closing stock-in-trade was Rs. 19 million. However, following matters were
noted during physical inventory count:
Stock held under ‘Bill-and-hold arrangement’ was accepted and paid by the
customer on 25 June 2018. Proceeds amounting to Rs. 2.7 million were credited to
other payables. These goods were included in OL’s stock. Such stock items are
sold at cost plus 35%.
Stock items costing Rs. 3 million were damaged badly and could not be sold. A
claim was lodged with the insurance company which accepted the claim on
30 June 2018 to the extent of 80%.
Stock items costing Rs. 4.5 million lying with a third party were not included in
stock-in-trade.
(ii) OL’s policy for provision for doubtful trade receivables is as under:
Full provision is made for balances due for more than one year.
Provision at 5% is made on all other balances.
As on 30 June 2018, balances due for more than one year aggregated Rs. 3.4 million.
This includes a balance of Rs. 2 million which is no more recoverable and is required
to be written-off.
Suspense account represents an amount recovered from a customer whose balance
was written-off in 2016.
(iii) On 30 June 2018, a portion of land and building was sold for Rs. 30 million which had
been revalued once only on 30 June 2015. Relevant details are as follows:
As on 30 June 2015
Written down
Fair value Remaining
value
useful life
------ Rs. in million ------
Land 3 10 Indefinite
Building 13 18 20 years
Proceeds from the disposal are due to be received in September 2018. The disposal has
not yet been accounted for.
OL transfers maximum possible amount from revaluation surplus to retained earnings
on an annual basis.
(iv) Unrecorded freight-in invoices amounting to Rs. 0.5 million are pending with cashier
for payment.
(v) A cheque for Rs. 1.8 million received as advance from a customer has not been
recorded.
(vi) Income tax liability is estimated at 30% of profit before tax.
Financial Accounting and Reporting-I Page 5 of 5
Required:
Prepare a statement of financial position as on 30 June 2018 and a statement of profit or loss
for the year ended 30 June 2018 in accordance with IFRSs. (21)
Q.7 SK Limited (SKL) deals in a single product. Following are the summarized financial
statements of SKL for the year ended 31 December 2017:
Additional information:
(i) With effect from 1 January 2017, selling price was decreased by 5% to boost sales
volume.
(ii) During the year 2017, suppliers demanded price increase of 4%. SKL resisted the price
increase. However, both parties agreed to reduce the credit period.
(iii) SKL had been running its business in a rented building whose annual rent was
Rs. 15 million. During the year, SKL purchased this building for Rs. 200 million.
Funds were arranged partially through a long-term loan. Useful life of the building is
estimated at 40 years.
(iv) 75% of the selling and administration cost incurred in 2016 was fixed cost.
Required:
(a) Compute the following ratios for 2016 and 2017:
Q.8 (a) Describe any four differences between financial accounting system and cost
accounting system. (04)
(b) Describe behaviour of each of the following costs graphically by denoting total cost on
vertical axis and level of activity on horizontal axis:
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Note:
The suggested answers are provided for the guidance of the students. However, there are alternative
solution(s) to the questions which are also considered by the Examination Department while marking
the answer scripts.
Ans.1 FC Traders
Statement of profit or loss account for the year ended 30 June 2018
Rs. in '000
Sales:
50% cash sales at counter A×0.5×1.35 11,813
30% credit sales A×0.3×1.45 7,612
20% cash sales through riders A×0.2×1.40 4,900
24,325
Cost of sales:
Opening inventory 2,800
Purchases (14,640(W-1)+3,000) 17,640
Damaged stock (250)
Goods withdrawn (540)
Closing inventory 2,400–250 (2,150)
(A) (17,500)
Gross profit 6,825
Expenses:
Repair and maintenance 950
Shop rent 2,000+(400–200) 2,200
Misc. supplies used 800+(300–400) 700
Utilities 1,200
Staff salaries 1,800+165 1,965
Riders commission 4,900×3% 147
Depreciation – Equipment 4,000×10% 400
– Furniture & fixtures 2,500×10% 250
Damaged stock 250
(8,062)
Net loss (1,237)
Page 1 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
(ii) Goods received on 8 July 2018 but invoice was not yet received (44,000)
(iii) Credit notes received after year-end for the goods returned on:
7-Jul-2018 9,000
9-Jul-2018 14,000
23,000
(iv) Cost of goods dispatched during 1 July - 10 July 2018 (375,000/1.25) 300,000
(vii) Closing inventory items mistakenly valued at selling price (16,600×25/125) (3,320)
Page 2 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Ans. 3 (a) Five steps involved in recognising revenue under IFRS 15:
(i) Identify the contract(s) with a customer
(ii) Identify the separate performance obligations
(iii) Determine the transaction price
(iv) Allocate the transaction price
(v) Recognize revenue when or as an entity satisfies performance obligations
Page 3 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Page 4 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Gain/Loss on disposals
Date Description Rs. Date Description Rs.
30 Apr 17 Cost 52,000 30 Apr 17 Accumulated dep. (W-1) 21,662
30 Apr 17 Bank (Cost of disposal) 5,000 30 Apr 17 Bank (Sale proceeds) 34,000
1 Jul 17 Cost 65,000 1 Jul 17 Accumulated dep. (W-2) 15,810
1 Jul 17 Cost (Trade in at fair value) 40,000
31 Dec 17 Loss on disposal (P&L) 10,528
122,000 122,000
Page 5 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Omega Limited
Statement of financial position as on 30 June 2018
Rs. in million
Non-current assets:
Property, plant and equipment (W-3) 84.70
Current assets
Stock-in-trade PL 18.50
Trade receivables (W-4) 16.72
Advances and other receivables 6+30+(3×0.8) 38.40
Cash and bank balances 3+1.8 4.80
78.42
Total assets 163.12
Equity
Share capital 40.00
Retained earnings 18+7+4.25+17.16(PL) 46.41
Revaluation surplus 43– 7(10–3)–4.25[(18–13)×(17÷20)] 31.75
118.16
Current liabilities
Trade and other payables 29+9+0.5+1.8–2.7 37.60
Tax liability PL 7.36
44.96
Page 6 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
(ii) Liquidity:
The decrease in current ratio from 2.5 to 1.8 is net effect of the following:
Cash payment for purchase of building which significantly decreased current
assets.
Prompt payment to suppliers which decreased the current liabilities.
Page 7 of 8
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
(ii) Utilisation
Used to prepare financial statements for Used to prepare information for management
shareholders and other external users. (Might (internal use only).
also provide some information for
management but this is not their primary
purpose).
(iv) Activities
Records revenues, expenditure, assets and Records costs of activities and used to
liabilities. provide detailed information about costs,
revenues and profits for specific products,
operations and activities.
(v) Convention
Used mainly to provide a historical record of Provides historical information, but also used
performance and financial position. extensively for forecasting (forward-looking).
(i) Factory building rent - Fixed amount (ii) Direct labour cost - Fixed per unit
per month
(iii) Supervision cost - One supervisor is (iv) Machine rental cost - Fixed monthly
required for every 20 direct workers rent and an additional cost of Rs. 100
per unit for the production exceeding
certain limit.
(THE END)
Page 8 of 8
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I Certificate in Accounting and Finance
– Autumn 2018
General
The overall performance was significantly better this time. The passing ratio was 56.6%
which was much better than the last result of 43.2%. In fact it is the highest for this paper
since introduction of new education scheme. The highest score in the paper was 93 marks
which indicated that the paper was very doable. A significant number of students secured
80 or more marks in the paper.
Performances in all questions were quite good except for Q3 and Q8. Poor performances
in both the questions were mainly because such variations had not been examined
previously.
Although many students performed well but too often illogical mistakes were noted in
easy areas as well. The persisting issue appears to be lack of practice and poor
presentation in many cases.
It was observed that students spend too much time on completing the question even
though they have no idea of the difficult part of the questions. Students are strongly
advised to switch to the next question after they have spent reasonable time on a question.
This will ensure that they attempt all questions. 17.5% students were just short of 9 or
less marks and could have easily obtained them had they covered all areas on the syllabus
and/or attempted all questions in the paper.
Question-wise comments:
Question 1
The question required statement of profit or loss from the given information. The overall
performance in this question was average and 54.3% of the students secured passing
marks. Many students made errors on the easier aspects of the question which deprived
them of some precious marks. Some common errors were as follows:
Students failed to notice that sales should have been calculated by applying profit
margin on cost of sales. Students often prepared cash account and assumed the
balancing figure to be sales.
All effects of adjustment for damaged stock were not incorporated.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2018
Question 2
The question required computation of value of stock as at year end. The crux of the
question was that all physical movements after the year end needed to be reversed. The
performance in this question was above average as 77.1% of the students secured passing
marks. However, various errors were also observed. Most students ignored the fact that
40% of the goods were damaged after the year end in July 2018 so NRV adjustment was
required to be made in respect of 60% of the damaged goods only.
Question 3
The question was based on IFRS 15 which is a new area of the syllabus. Only 16.1% of
the students secured passing marks in this question. 18.2% of the students could not score
any mark which shows that they had not studied this area of the syllabus.
In theory based part (a), majority of the students were successful in listing down the five
steps involved in recognizing revenue as per IFRS 15. However, a significant minority
could not even list down these steps.
In part (b), only few students were able to secure good or even passing marks. The crux
of the question was the timing of revenue recognition in each case. In case (i) 95% of the
revenue should have been recognized on 1 June and remaining on 30 June while in case
(ii) whole revenue should have been recognized on 30 June. Answers to this part of the
question were generally poor as most of the students failed to pick the underlying concept
which was being tested. The performance in case (i) was generally better than case (ii).
Question 4
The question required effects of amalgamation on partners’ capital accounts in old and
new firm. The performance in this question was good and 68.6% of the students secured
passing marks. Many students unnecessarily prepared realization account and subjected
themselves to time pressure. Some common errors were as follows:
Provision for doubtful debts was calculated as 5% or 3% of the given balance without
realizing that the given balance was already net of 2% provision.
Cash was not excluded for calculating goodwill.
Question 5
The question required preparation of ledger accounts related to fixed assets (Machines).
70.7% of the students secured passing marks. Some common errors were as follows:
The new machine was recorded at the list price, instead of the sum of the fair value
of old machine (which was exchanged) and the amount paid.
Various types of errors were made in calculating deprecation for the year.
Cost of disposal was altogether ignored.
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting-I - Autumn 2018
Question 6
The question required statement of financial position and statement of profit or loss in
accordance with IFRSs. The overall performance in this question was average as 51.2%
of the students secured passing marks. A general weakness amongst most students was
that they failed to incorporate the double effect of each adjustment / correction. Many
students seemed to waste time in tallying the statement of financial position which was
totally unnecessary. Some common errors were as follows:
Stock held under ‘Bill and Hold arrangement’ was correctly excluded from the
closing stock; however, the corresponding adjustment for revenue was not made.
In respect of disposal of land and building, incorrect amounts were used to record
disposal. Moreover, the adjustment to transfer the remaining revaluation surplus of
the disposed of item was hardly seen.
Amount written off was not excluded from balances due for more than one year for
calculating specific provision.
Question 7
The question required computation of ratios and comments on the profitability and
liquidity, based on the given financial statements. The performance in this question was
below average and only 43.7% of the students could secure passing marks. The
computational part was easy but still some students missed those easy marks. Majority of
the students performed badly while commenting on the profitability and liquidity. The
main reason for such a performance was that the students did not understand the
requirement and did not relate the reasoning to the additional information given in the
question.
Question 8
The question comprised of two parts. The performance in this question was well below
average and only 29.1% of the students could secure passing marks.
Part (a) asked for four differences between financial accounting and cost accounting
system. This was answered in an average manner, with students at times repeating the
same point in different words. The students who were able to clearly identify the
differences secured full marks.
Part (b) required graphical presentation of different types of costs. Most of the students
were unable to present the correct graph of machine rental cost.
THE END
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018
Mark(s)
A.1 Determination of sales 2.5
Computation of credit and cash purchases 2.5
Treatment of damaged stock 1.5
Withdrawal of goods for personal use 1.0
Determination of closing inventory 0.5
0.75 mark each for computation of shop rent, misc. supplies used and staff salaries 2.25
01 mark each for calculation of riders’ commission and depreciation 2.0
0.25 mark each for the correct treatment of other amounts 0.75
A.2 Adjustment pertaining to purchases for the intervening period i.e. from the
year-end date to the inventory count date 3.5
Adjustment for credit notes and sales for the intervening period i.e. from the
year-end date to the inventory count date 4.0
Adjustments for goods-in-transit 1.0
Adjustment for NRV 1.5
A.3 (a) Up to 0.75 mark for each step involved in recognizing revenue under IFRS 15 3.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018
Mark(s)
A.5 (a) Posting of amounts to cost account 1.5
Calculation of cost from the given WDV amount 1.0
Computation of correct amount of addition 0.5
A.7 (a) 0.5 mark each for computation of gross and net profit margins, return on
assets and current ratio for 2016 and 2017 4.0
01 mark each for computation of debt equity ratio and return on capital
employed for 2016 and 2017 4.0
(b) 02 marks each for giving comments on profitability and liquidity position of SKL
for 2017 based on the given information 4.0
A.8 (a) 01 mark for stating each difference between financial and cost accounting systems 4.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of 6 March 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
On 31 December 2018, Z retired from the partnership. The following has been agreed in this
respect:
(i) Goodwill of the firm has been determined at Rs. 380,000. It has been estimated that
the value of goodwill after Z’s retirement would be Rs. 300,000. Goodwill is to be
written off from the books.
(ii) Machines would be adjusted to 85% of the book value whereas equipment would be
appreciated by 20%.
(iii) Trade debtors amounting to Rs. 100,000 would be written off. Existing percentage of
provision for doubtful debts would be maintained.
(iv) An accrual for repairs and maintenance amounting to Rs. 41,000 would be recorded
in the books.
(v) Z’s balance would be settled as follows:
Immediate cash payment of Rs. 150,000.
A vehicle would be given at an agreed value of Rs. 120,000 (book value
Rs. 70,000).
Fully depreciated items of furniture would be given at an agreed value of
Rs. 35,000.
Remaining balance would be paid after 6 months along with interest at 10%.
(vi) To determine new profit sharing ratio, Z’s share would be divided equally between X
and Y.
(vii) Y’s capital would be adjusted in new profit sharing ratio on the basis of X’s capital.
Any excess or deficiency would be adjusted through cash.
Required:
Prepare partners’ capital and revaluation accounts on the retirement of Z. (12)
Financial Accounting and Reporting-I Page 2 of 5
Q.2 (a) Compare ‘Regression analysis’ with ‘High-low analysis’ for cost estimation. (03)
(b) Describe the behaviour of each of the following costs graphically by denoting
‘Per unit cost’ on vertical axis and ‘Level of activity’ on horizontal axis:
(i) Factory building rent – Fixed amount per month.
(ii) Direct labour cost – Increases proportionately with production.
(iii) Supervision cost – One supervisor is required for every 20 direct workers.
(iv) Direct material cost – Bulk discount is available on all purchases once the total
purchases exceed a certain level. (05)
Q.3 Following are the summarised financial statements of Keyboard Limited (KL):
Current assets:
Inventory 4,000 4,500 3,000
Debtors 4,200 3,200 1,800
Cash - 800 2,100
8,200 8,500 6,900
20,700 19,300 18,700
Current liabilities:
Creditors 3,500 4,400 4,200
Bank overdraft 1,500 - -
Accrued expense 900 900 300
5,900 5,300 4,500
20,700 19,300 18,700
Required:
(a) Compute working capital cycle in days and liquidity ratios for 2018 and 2017. (11)
(b) Suggest three possible measures that can be taken by KL to improve working capital
cycle days. (03)
Financial Accounting and Reporting-I Page 3 of 5
Q.4 (a) List the criteria that must be met to account for a contract with customer under
IFRS 15 ‘Revenue from Contracts with Customers’. (04)
(b) Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance
services for such type of machines are provided separately at Rs. 25,000 per month.
Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine
A13 with one year free maintenance services at a lumpsum payment of
Rs. 1.8 million. The amount was received upon delivery of machine on
1 August 2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for
Rs. 1.95 million. As per the contract, payment would be made after 2 years.
Maintenance services would also be provided for Rs. 25,000 per month for
two years which would be paid at the end of each month.
Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how
the above contracts should be recorded in GW’s books for year ended
31 December 2018. (Show supporting calculations but entries are not required) (11)
Plant Equipment
Acquisition
Date of acquisition 1 January 2015 1 July 2015
Cost Rs. 500 million Rs. 360 million
Estimated useful life 10 years 12 years
Residual value Rs. 60 million Nil
Depreciation method Straight line method Straight line method
Additional information:
(i) PL uses revaluation model for subsequent measurement and accounts for revaluation
on net replacement value method.
(ii) There is no change in useful life of plant. The remaining useful life of equipment was
estimated as 15 years and 10 years in 2016 and 2018 respectively.
(iii) PL transfers maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iv) PL’s financial year ends on 31 December.
Required:
(a) Calculate depreciation on each asset for 2015 to 2018. (08)
(b) Prepare entries to record revaluation in 2018. (Entries to record depreciation expense,
incremental depreciation and elimination of accumulated depreciation are not required.
Further, entries prior to 2018 are also not required.) (08)
Financial Accounting and Reporting-I Page 4 of 5
Q.6 Violin Family Club was formed in 2016. Following are the details of assets and liabilities of
the club as on 31 December 2017:
Additional information:
(i) Some of the balances as on 31 December 2018 are as follows:
Assets Rs. in '000 Liabilities Rs. in '000
Subscription in arrears for 2018 30 Accrued electricity 35
Canteen stock 247 Canteen creditors 142
(ii) Break-up of the subscription received during 2018 is as follows:
Related to year Rs. in '000
2017 60
2018 920
2019 75
The club’s management has decided to write-off the remaining subscription in arrears
relating to the year 2016 and 2017.
(iii) A scheme was introduced in 2016 under which a person is awarded life time
membership upon payment of Rs. 120,000. Life memberships received in the years
2016, 2017 and 2018 were 5, 8 and 6 respectively. Life memberships are credited to
‘Life Membership Fund’ upon receipt and are transferred to income equally over
10 years, starting from the year of admission.
(iv) The club operates a canteen. Till last year, the canteen earned a gross profit of 20% of
sales. Effective 1 January 2018, selling prices were increased by 10%.
(v) Details of some payments during 2018 are as follows:
Rs. in '000
Canteen creditors 512
Salaries 285
Equipment 66
Electricity 263
(vi) Equipment acquired during the year is only 30% paid and the remaining amount is
payable in February 2019.
(vii) Wages of canteen staff are paid on 5th of each month.
(viii) The club operates from a rented place. The rent is paid quarterly in advance on
1 March, 1 June, 1 September and 1 December. As per agreement, annual rent was
increased by Rs. 6,000 with effect from 1 September 2018.
(ix) Balance of snooker tables as at 31 December 2017 represents the book value of
5 similar tables purchased in 2016. One of the tables was sold to a member for cash
during the year for Rs. 212,000.
(x) Snooker tables are depreciated at 12.5% on straight line method while furniture &
equipment are depreciated at 20% using reducing balance method. Full year
depreciation is charged in the year of addition whereas no depreciation is charged in
the year of disposal.
Financial Accounting and Reporting-I Page 5 of 5
Required:
(a) Prepare income and expenditure account for the year ended 31 December 2018. (12)
(b) Prepare statement of financial position as on 31 December 2018. (09)
Q.7 Junior Accountant of Drum Limited has prepared the following statement of cash flows for
the year ended 31 December 2018:
Junior Accountant informed you that he has taken the difference of opening and closing
balances of each balance sheet item and classified each difference as either operating,
investing or financing cash flows. He further informed that the statement is tied up with the
cash balances appearing in the balance sheet. He has ignored the following information:
(i) Depreciation on building and equipment amounted to Rs. 480,000 and Rs. 810,000
respectively.
(ii) During the year, an equipment costing Rs. 560,000 and having a book value of
Rs. 310,000 was sold for Rs. 440,000.
(iii) Provision for doubtful debts was increased by Rs. 140,000.
(iv) Dividend amounting to Rs. 700,000 was paid during the year.
(v) Interest and tax expenses for the year amounted to Rs. 378,000 and Rs. 650,000
respectively.
(vi) Trade and other payables as at 31 December 2018 included Rs. 950,000 for purchase
of land and building.
Required:
Prepare statement of cash flows for the year ended 31 December 2018, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (14)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Revaluation
Rs. in '000 Rs. in '000
Machine (400×0.15) 60 Equipment (180×20%) 36
Provision for doubtful debts 10
Trade debtors 100 (100×10%)
Accruals 41 Vehicle (120–70) 50
Furniture 35
Revaluation loss of 70
X 28
Y 21
Z 21
201 201
W-1: Ratios X Y Z
Old profit share 4/10 3/10 3/10
Share of Z divided equally between X and Y 3/20 3/20 –3/10
New profit share 11/20 9/20 -
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
(b)
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Ans.4 (a) The general IFRS 15 model applies only when all of the following conditions are met:
(b) (i) The contract contains two distinct performance obligations i.e. selling the machine
and providing the maintenance services as:
the customer can separately benefit from the machine without the
maintenance services from GW (or GW sells maintenance services separately)
and
the machine and maintenance services are separately identifiable in the
contract.
Thus GW will allocate the transaction price between the two performance
obligations as follows:
Revenue related to sale of machine would be recognized at a point in time i.e. upon
delivery on 1 August 2018.
While revenue related to maintenance service would be recognized over time i.e. as
the services are rendered.
(ii) The contract contains two distinct performance obligations i.e. selling the machine
and providing the maintenance services.
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
The difference between promised consideration and cash selling price of Rs.
250,000 would be recognized as interest revenue over two years using the implicit
rate of 7.1% [(1.95÷1.7)1/2–1].
Debit Credit
Date Description
------ Rs. in million ------
31-Dec-2018 Revaluation loss (P&L account) 18.00
Revaluation surplus 84.00
Plant 102.00
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Current assets:
Canteen stock 247
Prepaid rent 25
Subscriptions in arrears 30
Bank (W-3) 1,094
1,396
2,788
General funds
Opening balance (2,024–378)–1,344(W-2) 302
Excess of income over expenditure 233
535
Liabilities
Canteen creditors 142
Accrued electricity 35
Subscription in advance (W-1) 75
Creditors for equipment (220–66) 154
Canteen wages payable 11
417
2,788
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting-I (FAR-I) Spring 2019
Passing %
Question-wise
Overall
1 2 3 4 5 6 7
55% 07% 60% 22% 28% 21% 53% 29%
General comments
Performance in Q.2 was poor while it was average in Q.4, Q.5 and Q.6.
Although many students performed well, some shortcomings such as lack of practice, poor
presentation, etc. were commonly noted.
A common weakness amongst most students was that they failed to make a reasonable
attempt of all questions. Students are advised to move to the next question after spending a
reasonable time on a particular question. This would help them to attempt all questions of
the paper. In this paper, 20% students were just short of 9 or less marks and could have
crossed the line had they attempted all questions in the paper.
Question 1
Question 2(a)
Students failed to identify any correct difference other than one based on number of data
set.
Question 2(b)
Graphs were made on the basis of ‘total cost’ instead of ‘per unit cost’ on y-axis.
Question 3
Closing balances were used instead of average balances for calculating ratios for
working capital cycle.
Page 1 of 2
Examiners’ comments on Financial Accounting and Reporting-I Spring 2019
Cost of sales was used instead of purchases for calculating creditor payment period.
Part (b) was either not attempted or attempted half-heartedly which showed lack of
knowledge.
Question 4(a)
Students could not understand the actual requirement of the question and often gave
altogether incorrect answer.
Question 4(b)
Student did not read the requirement carefully and restricted their answers to journal
entries (which were not even required) or/and calculations only.
In situation (i), explanations were often correct but incomplete.
In situation (ii), students could not identify existence of significant financing component
in the contract.
Question 5
Depreciation on equipment was required for 6 months whereas full year depreciation
was taken in first year.
Change in residual value of plant was taken from 2017 instead of 2016.
Students incorporated effects of revaluation even before calculating depreciation for
2016 and 2018.
Several mistakes were made in bifurcating the effect of revaluation into profit & loss
account and revaluation surplus.
Question 6
Annual increase in rent by Rs. 6,000 was considered as monthly or quarterly increase.
Students could not pick the fact that balance of snooker table as at 31 December 2007
represented 75% of the cost as those was purchased in 2016.
Opening balance of life membership fund was not correctly calculated.
Opening balance of life membership fund was not deducted while calculating opening
general fund.
Students left the question incomplete after getting stuck in some areas of the question.
Question 7
Students either did not calculate profit before tax or atleast missed one amount in the
calculation.
Effects of depreciation and disposal were not incorporated in calculating additions to
PPE.
In cash flow from operating activities, deductions had been shown as additions and vice
versa.
The End
Page 2 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019
Mark(s)
A.1 Preparation of revaluation account 3.0
Preparation of partners’ capital accounts
– Goodwill 2.0
– General reserve and revaluation loss 2.0
– Settlement of Z 2.0
– Revised capital 2.0
New profit sharing ratio 1.0
(b) 01 mark each for factory building rent and direct labour cost 2.0
1.5 marks each for supervision cost and direct material cost 3.0
A.3 (a) Computation of working capital cycles in days for 2018 and 2017:
– Working capital cycle in days 1.0
– Debtors collection period 2.0
– Inventory holding period 2.0
– Creditors payment period 3.0
Current and quick ratios 3.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019
Mark(s)
A.6 (a) Computation of items pertaining to income and expenditure account:
Subscription revenue 3.0
Profit from canteen 3.0
Life membership revenue 2.0
Rent expense 2.0
Depreciation expense 2.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of 4 September 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Q.1 The following information pertains to Wednesday Limited (WL) for the year ended
30 June 2019:
(i) Shareholders' equity as at 1 July 2018:
Rs. in million
Share capital (Rs. 100 each) 200
Share premium 85
Retained earnings 124
Revaluation surplus 65
(ii) On 30 November 2018, WL issued 30% right shares at a premium of
Rs. 120 per share.
(iii) Cash dividend and bonus shares for the last two years:
Final dividend *Interim dividend
For the year ended
Cash Bonus Cash Bonus
30 June 2018 18% - 20% -
30 June 2019 - 25% - 10%
*Declared with half yearly accounts
(iv) Profit for the year amounted to Rs. 95 million.
(v) Revaluation surplus arising during the year amounted to Rs. 35 million whereas
transfer of incremental depreciation for the year was Rs. 9 million.
Required:
Prepare WL’s Statement of Changes in Equity for the year ended 30 June 2019. (07)
(Column for total and comparative figures are not required)
Q.2 Discuss how the following should be dealt with in the financial statements of relevant
entities according to IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance:
(a) The government makes a grant to an entity which is planning to develop teaching
software for children with learning difficulties. The purpose of the grant is to help the
entity to meet its general financing requirement in the initial phase. There are no
further conditions attached to the grant. (01)
(c) Free technical advice has been provided by the government’s export promotion
department to help an exporter to market his new technology in North America. (01)
Financial Accounting and Reporting-I Page 2 of 7
Q.3 Tuesday Manufacturers Limited produces a single product. The following costs were
incurred in the month of June 2019:
Rs. in '000
Direct labour 2,075
Depreciation on plant and machinery 380
Distribution costs 589
Factory manager’s salary 247
Indirect labour 848
Indirect material consumed 345
Raw material purchases 3,845
Selling costs 1,248
Other production overheads 580
Other administration overheads 388
Required:
Compute cost of goods sold for the month of June 2019. (07)
Q.4 Select the most appropriate answer(s) from the options available for each of the following
Multiple Choice Questions (MCQs).
(i) 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?
(a) Rs. 480,000 (b) Rs. 315,000
(c) Rs. 348,000 (d) Rs. 645,000 (01)
(ii) Morning Football Club has a monthly subscription fee of Rs. 800 per member. The
club has 240 members on 31 December 2018. No fresh members were admitted
during 2018 but 30 members left the club on 1 July 2018. As at 31 December 2018,
the club has received subscription in advance amounting to Rs. 60,000. The club’s
subscription income for 2018 would be:
(a) Rs. 2,448,000 (b) Rs. 2,388,000
(c) Rs. 2,160,000 (d) Rs. 2,100,000 (02)
(iii) 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 (01)
Financial Accounting and Reporting-I Page 3 of 7
(iv) Afternoon Limited (AL) uses cost model for its property, plant and equipment and
fair value model for its investment property. AL has an office building which was
being used for administrative purposes. At 1 July 2018, the building had a carrying
amount of Rs. 20 million. On that date, the building was let out to a third party and
therefore reclassified as an investment property. The building had a fair value of
Rs. 23 million on 1 July 2018 and Rs. 23.4 million on 30 June 2019.
What would be the increase in the profit or loss and other comprehensive income for
the year ended 30 June 2019?
Profit or loss Other comprehensive income
(a) Nil Rs. 3.4 million
(b) Rs. 0.4 million Rs. 3 million
(c) Rs. 3.4 million Nil
(d) Rs. 3 million Rs. 0.4 million (02)
(v) Which TWO of the following fall under the definition of investment property?
(a) Property occupied by an employee
(b) A building owned by an entity and leased out under an operating lease
(c) Property being constructed on behalf of third party
(d) Land held for long term appreciation (01)
(vi) Under IAS 36 Impairment of Assets, if the fair value less costs to sell of an asset
cannot be determined then:
(a) the asset is not impaired
(b) the recoverable amount is the value in use
(c) the net realizable value is used
(d) the carrying value of the asset remains the same (01)
(vii) Which TWO of the following would be external indicators that one or more of an
entity's assets may be impaired?
(a) An unusually significant fall in the market value of one or more assets
(b) Evidence of obsolescence of one or more assets
(c) A decline in the economic performance of one or more assets
(d) An increase in market interest rates used to calculate value in use of the assets (01)
(viii) Which of the following future cash flows should NOT be included in the calculation
of value in use of an asset?
(a) Cash flows from disposal
(b) Income tax payments
(c) Cash flows from the sale of inventory produced by the asset
(d) Cash outflows on the maintenance of the asset (01)
(ix) Night Limited has a current ratio of 1.8. This ratio will increase if Night Limited:
(a) receives cash in respect of a short term loan
(b) receives cash from an existing receivable
(c) pays an existing trade payable
(d) purchases inventory on credit (01)
Section B
Q.5 Following are the extracts from the financial statements of Sunday Traders Limited (STL)
for the year ended 30 June 2019:
Additional information:
(i) 72% of sales were made on credit.
(ii) Depreciation expense for the year amounted to Rs. 750 million which was charged to
distribution and administrative cost in the ratio of 3:1.
(iii) Distribution cost includes:
Rs. 40 million in respect of loss on disposal of equipment. The written down
value at the time of disposal was Rs. 152 million.
impairment loss on vehicles amounting to Rs. 24 million.
(iv) Loan instalments (including interest) of Rs. 1,984 million were paid during the year.
(v) Other income comprises of:
increase in fair value of investment property amounting to Rs. 220 million.
rent received from investment property amounting to Rs. 184 million.
Required:
Prepare STL’s statement of cash flows for the year ended 30 June 2019 using direct method. (19)
Financial Accounting and Reporting-I Page 5 of 7
The total cost of Rs. 660 million incurred on the plant was paid as under:
Description Payment date Rs. in million
1st payment 1 February 2018 140
2nd payment 1 April 2018 214
3rd payment 1 September 2018 146
4th payment 1 December 2018 160
The plant was financed through a bank loan of Rs. 500 million obtained on
1 March 2018. The loan carries a mark-up of 18% payable annually. The surplus
funds available from the loan were invested in a saving account and earned
Rs. 17 million during capitalization period.
(iv) On 31 December 2018, the revalued amount of office building was assessed at
Rs. 178 million by Precise Valuers, an independent valuation firm. Value in use of
the office building as at 31 December 2018 was estimated at Rs. 186 million.
ML accounts for revaluation on net replacement value method and transfers the
maximum possible amount from revaluation surplus to retained earnings on an
annual basis.
Required:
In accordance with IFRSs, prepare a note on ‘Property plant and equipment’ for inclusion
in ML’s financial statements for the year ended 31 December 2018.
(Comparatives figures and column for total are not required) (17)
Financial Accounting and Reporting-I Page 6 of 7
Q.7 Friday Traders (FT) is engaged in the business of supplying Blenders and Juicers. FT
purchases its products from Sigma Electronics. FT is presently negotiating with a bank for a
long term loan and has been asked to provide the latest financial statements. Since FT does
not maintain proper accounting records, you are requested to prepare the financial
statements from the following information:
(ii) Sales of Blenders are made on credit while Juicers are sold on cash basis.
(iii) Upto last year, FT was earning a gross profit of 30% on cost of Blenders and 35% on
sale value of Juicers. With effect from 1 January 2018:
FT increased sales prices of both the products by 20%; and
Sigma Electronics increased the prices of Juicers only by 40%.
(iv) 60% of the amount of purchases made during the year represents blenders.
(v) Summary of bank transactions during the year:
Rs. in '000
Receipts from credit customers 6,570
Payments:
Sigma Electronics 8,850
Insurance for one year starting 1 February 2018 204
Rent 826
Equipment 550
Salaries and wages 685
11,115
Required:
(a) Prepare statement of profit or loss account for the year ended 31 December 2018. (10)
(b) Prepare statement of financial position as at 31 December 2018. (08)
Financial Accounting and Reporting-I Page 7 of 7
Q.8 Thursday Enterprise (TE) is a supplier of product Zee and has provided you the following
information:
(a) On 1 August 2018, TE entered into a six months contract with customer Alpha for
sale of Zee for Rs. 250 per unit, under the following terms and conditions:
if Alpha purchases more than 5,000 units during the contract period, the price
per unit would be retrospectively reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon:
− completion of quality control procedures by Alpha for the first order. The
procedure would take a week after receiving the goods.
− placement of order by Alpha for subsequent orders.
At the inception of the contract, TE concludes that Alpha’s purchases will not exceed
the 5,000 units threshold for the discount.
Delivery date
Order date Units Payment date
(Transfer of control)
10 August 2018 3,000 28 August 2018 12 September 2018
25 December 2018 4,000 15 January 2019 10 January 2019 (10)
(b) On 1 February 2019, TE entered into a six months contract with another customer
Beta for sale of Zee for Rs. 250 per unit, under the following terms and conditions:
if the Beta purchases more than 15,000 units during the contract period, the price
per unit would be retrospectively reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon
delivery of goods to Beta.
At the inception of the contract, TE concludes that Beta will meet 15,000 units
threshold for the discount.
Beta placed the following orders:
Delivery date
Order date Units Payment date
(Transfer of control)
14 February 2019 10,000 28 February 2019 20 March 2019
1 June 2019 8,000 15 July 2019 18 July 2019 (05)
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE
for the years ended 31 December 2018 and 2019.
(Entries without date will not be awarded any marks)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
A.2 (i) The grant has been provided for the purpose of giving immediate financial support to
the entity with no further conditions, so this grant should be immediately recognised
in profit or loss in full in the period in which the entity qualifies to receive it (when it is
receivable) with disclosure to ensure that its effect is clearly understood.
(ii) Since there is reasonable assurance that conditions attaching to the grant will be met,
the grant is recognised in statement of profit or loss over the four year period in which
the entity incurs the costs of employing 100 people. Amount taken to statement of
profit or loss may be either be presented as other income or shown as deduction from
the related expense. The remaining amount of grant will be presented as deferred
income under liabilities in the balance sheet.
(iii) Free technical advice is government assistance that cannot reasonably have a value
placed upon it and therefore should not be recognised. However, an indication of such
assistance should be disclosed in financial statements.
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
Workings:
W-1: Cash receipts from customers – sales Rs. in million
Sales for the year 29,700
Increase in trade receivables balances 3,600–3,800 (200)
Increase in contract liability balances 250–40 210
Cash received from customers 29,710
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
Operating expenses:
Insurance 204×11÷12 187
Rent (70×8)+(91×4) 924
Repair 186
Bad debts written off 138
Salary (124+685)+(134–98) 845
Depreciation - equipment (2,490÷0.6×8%)+(550×8%) 376
(2,656)
Net profit 1,562
W-1: POLICIES
Blenders Juicers
Updated Updated with
Previous Updated Previous
with sales sales & cost
(130×1.2) (100×1.2)1
Sales
130 156 100 20 120
Cost 100 100 65 65 (65×1.4) 91
Profit 30 56 35 55 29
Friday Traders
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
(b)
Statement of financial position as on 31 December 2018
Rs. in '000
Assets
Non-current assets
Equipment 2,490+550–376 2,664
Current assets:
Stock 975+2,597 3,572
Trade debtors (W-2) 1,683
Prepaid rent 280+826–924 182
Prepaid insurance 204–187 17
5,454
8,118
Equity and liabilities:
Opening capital 2,490+3,705+280+1,410–3,600–98–740 3,447
Net profit 1,562
Drawings (477)
4,532
Current liabilities
Trade payables (W-3) 2,420
Bank overdraft (W-4) 1,032
Salary payable 134
3,586
8,118
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
Debit Credit
Date Description
---------- Rupees ----------
28-02-19 Receivable – Beta (10,000×250) 2,500,000
Revenue (10,000×215) 2,150,000
Contract liability / Refund liability – Beta 350,000
(THE END)
Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting & Certificate in Accounting and Finance (CAF)
Reporting I Examination - Autumn 2019
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8
76% 35% 74% 53% 50% 20% 42% 13% 39%
General comments
An overall passing ratio of 39% stands between the last two results of 29% and 57%
respectively. 19% examinees were just short of 9 or fewer marks and could have easily
obtained them if they have covered all areas of the syllabus. The highest score in the
paper was 94 marks.
Performance in Q6 and Q8 was poor. Q6 (IAS 16) has a higher difficulty level as
compared to previously examined questions on this topic at FAR 1 due to recent changes
in syllabus. Examinees who only focused on previously examined questions faced
difficulty in attempting the question. Poor performance in Q8 (IFRS 15) was mainly due
to the inherent difficulty (newness) of the topic.
Although many examinees performed well, some shortcomings such as lack of practice,
poor presentation, etc. were commonly noted in most scripts. Many examinees secured
good marks in two to three questions but failed to obtain reasonable marks in the
remaining questions.
It has been observed that examinees often spend extra time on completing a question
which affect their performance in the other questions. Examinees are therefore strongly
advised to move to the next question after they have spent reasonable time on a particular
question. This would help them to attempt all questions of the paper.
Question 1
Amount of premium in right issue was taken at Rs. 12 million instead of Rs. 72
million.
Page 1 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2019
Several mistakes were made in presenting relevant dividends in the statement for the
year ended 30 June 2019. Please refer ICAP’s suggested solution for correct
presentation of relevant dividends.
Question 2
Question 3
Average cost of closing stock was calculated incorrectly and was often stated at Rs. 1,640
which was the cost of opening finished goods.
Question 4
MCQ numbers (i), (ii), and (x) were least well answered.
Question 5
Few examinees prepared the statement of cash flow by using indirect method.
Effects of contract liability and/or cash sales were not considered while calculating
receipts from customers.
Receipt of rent was not presented anywhere in the statement.
While calculating amount paid for additions to property, plant and equipment,
amount of impairment was ignored.
While calculating amount paid for additions to investment property, increase in fair
value was ignored.
Dividend paid was not computed and/or presented.
Repayment of loan did not include effect of current maturity.
Question 6
Amount of additions to equipment was calculated on the basis of fair value of the
new equipment instead of fair value of the old equipment.
Adjustment of revaluation of building was not properly presented and/or incorrectly
bifurcated into revaluation surplus and profit or loss.
Schedule of property, plant and equipment was often incomplete in terms of
presentation.
Carrying value of building if the cost model had been used was incorrectly
calculated.
Correct capitalization period of 7.5 months was not taken into account for borrowing
cost on manufacturing plant. Further, lengthy calculations were made for calculating
borrowing cost to be capitalized which were not required as it was the case of
‘Specific borrowings’.
Page 2 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2019
Question 7
Several types of mistakes were made in calculating sales and often were not
computed at all. Please refer ICAP’s suggested solution for correct calculation.
Rent expense and related prepaid were incorrectly calculated.
Depreciation of old equipment was calculated on book value.
Question 8
(THE END)
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019
Mark(s)
A.1 Statement of changes in equity
Opening and closing balances 1.0
Dividends 2.0
Right issue 1.0
Total comprehensive income 2.0
Incremental depreciation 1.0
A.4 Marks as mentioned on the question paper against each MCQ 12.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019
Mark(s)
A.7 (a) Statement of profit or loss
Sales 4.0
Cost of goods sold 2.0
Operating expenses 4.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
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:
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:
Total cost for 100 units Total cost for 150 units
Cost type
----------------------- Rupees -----------------------
A 1,500 2,250
B 1,800 2,400
C 2,000 3,000
D 3,000 4,200
(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)
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:
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
‘Revenue from Contracts with Customers’. (14)
(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
date. (Show comparative figures) (20)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
A.2 (i) A statement of cash flows begins with net profit which is arrived after deducting
depreciation expense. So to convert the net profit into net cash flow the deduction of
depreciation is reversed (i.e. added).
(ii) As per IAS 7, interest paid can be shown as either cash flow from financing activities
or cash flow from operating activities. Both classifications are correct as long as they
are consistently applied by an entity.
(iii) A statement of cash flows begins with net profit which is arrived after deducting cost
of sales. So to convert the effect of cost of goods sold into outflow for purchases of
inventory, change in inventory is adjusted i.e. increase is deducted and decrease is
added.
(iv) Statement of financial position shows cash and bank balances while the statement of
cash flows ends with cash and cash equivalents which may differ from cash and bank
balances due to existence of bank overdraft and short term investments.
Page 1 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
Fair value
Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. Fair value
reflects the perspective of market participants.
Value in use
Value in use is the present value of the cash flows or other economic benefit that
an entity expects to derive from the use of an asset and from its ultimate disposal.
Value in use reflect entity specific assumptions rather than assumptions by
market participants.
Current cost
The current cost of an asset is the cost of an equivalent asset at the measurement
date comprising the consideration that would be paid at the measurement date
plus the transaction cost that would be incurred at that date.
Current cost, like historical cost is an entry value; while fair value is an exit value.
However, unlike historical cost, current cost reflects conditions at the
measurement date.
A.4 The most appropriated answer(s) for Multiple Choice Questions (MCQs)
(i) (d)A profitable retailer about to embark on ambitious expansion plans.
(ii) (b)Rs. 390,000
(iii) (c)accumulated losses
(iv) (d)charge to profit or loss account
(v) (d)B and D
(vi) (a)Pre-tax rate that reflects the market assessment of time value of money and risks
specific to the asset
(vii) (b) A plot of land held for resale
(viii) (c) during extended periods in which active development of a qualifying asset is
interrupted.
Liabilities:
Creditors 38.9
Accrued expenses 1.4+1.2 2.6
41.5
354.3
Debit Credit
S.No. Description
---- Rs. in million ----
(i) Revenues 25–20.66{25×(1.1)–2} 4.34
Receivable 4.34
Receivable 20.66×10%×(3÷12) 0.52
Interest income 0.52
Commission expense 1.60
Amortization expense 1.6÷2×3÷12 0.20
Contract cost 1.40
(ii) Cost of goods sold 15.00
Inventories 15.00
Page 4 of 6
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
Non-current liabilities:
Deferred government grant (W-2) 93.75 108.75
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting & Certificate in Accounting and Finance (CAF)
Reporting I Examination - Spring 2020
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8
51% 49% 10% 56% 65% 63% 25% 46% 51%
General:
An overall passing ratio of 51% is much higher than previous two sessions’ results i.e.
39% and 29% respectively. The high result was mainly due to better than expected
performance in Q8 (based on newly added areas of the syllabus) which helped many
marginal cases. The highest score in the paper was 90 marks.
Performance in Q3 and Q7 was poor. Q3 (IAS 16) was based on measurement basis
which seems to have been completely overlooked by examinees. Poor performance in Q7
(IFRS 15) could be construed to the newness of the topic.
Although many students performed well, some shortcomings such as lack of practice,
poor presentation, etc. were commonly noted in most scripts. Many students seems
failing because of technique to approach the answer rather than knowledge or
understanding of the subject.
Question 1
Page 1 of 2
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Spring 2020
Question 2
Answers were correct to the extent discussed but often lacked completeness.
Answer to query (iv) was either totally incorrect or left un-attempted.
Question 3
Question 4
Question 5
Donation for burns ward was shown in income & expenditure account.
Medical equipment received as donation was not included in income.
Hospital facilities provided free of charge were treated as expenditure.
Cafeteria revenues were presented in income while cafeteria expenses were presented
in expenditure instead of presenting profit from cafeteria as a single line item.
Statement of financial position was often left incomplete.
Question 6
Question 7
Examinees prepared the correct entries that should have been prepared on the
transaction date. However, the question required correcting entries to rectify the
wrong entries already made in the books.
In part (i), correction for contract cost was ignored.
In part (ii), entry to record cost of goods sold was not made.
In part (iii), examinees could not differentiate between receivable and contract asset.
Question 8
Comparative figures for 2018 were not disclosed as required by the question.
Revaluation surplus was not presented in at least one statement.
Adjustment of revaluation of vehicle in 2019 was bifurcated into revaluation surplus
and profit or loss with incorrect amounts.
Grant income for 2018 was calculated for full year.
The End
Page 2 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020
Mark(s)
A.1 Computation of closing net assets (Up to 01 mark for each item) 5.0
Computation of increase in net assets 1.0
Drawings and investment for the year (01 mark each) 2.0
A.3 0.5 mark for identification of each measurement base and 01 mark for its explanation 6.0
A.4 Marks as mentioned on the question paper against each MCQ 10.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020
Mark(s)
A.8 Extracts from statement of financial position
Appropriate line items (0.5 mark each) 2.0
Calculation of amounts of:
− property, plant and equipment 1.5
− investment property 0.5
− revaluation surplus 2.0
− deferred government grant 1.0
Extracts from statement of profit or loss and other comprehensive income
Appropriate line item (0.5 mark each) 3.0
Calculation of amounts of:
− depreciation 4.0
− revaluation gain and loss 2.0
− grant income 1.0
− change in fair value of investment property 1.0
− revaluation surplus 2.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
Section A
Q.1 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
Warehouse
Factory Head office Sales office Raw Finished
Description
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
(iv) 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)
Q.2 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
information. (Show all necessary workings. Narrations are not required) (08)
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?
(iv) A company pays to its salesman a minimum salary plus commission based on sales.
Salesman’s total remuneration is the example of:
(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
(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:
(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
(b) 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:
(i) performance obligation under the contract is satisfied over time. (04)
(ii) performance obligation under the contract is satisfied at a point in time. (01)
(c) 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:
Additional information:
(i) Equipment having fair value of Rs. 240 million was acquired by issuing 2 million shares.
(ii) 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.
(iii) 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.
(iv) Depreciation on property, plant and equipment for the year amounted to
Rs. 290 million.
(v) An investment property was acquired for Rs. 180 million. TL applies cost model for
subsequent measurement of its investment property.
(vi) 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).
(vii) 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:
30-Jun-2020 30-Jun-2019
Particulars
------- 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
(iii) All debtors settle their accounts through cheques. All payments are made through
cheques except for average monthly petty expenses of Rs. 25,000.
(iv) 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.
(v) Goods are sold on cash and credit at cost plus 25% and 30% respectively.
(vi) 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:
(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:
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)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
Rs. in '000
Raw materials consumed (W-1) 89,550
Salaries and wages 9,200×0.75 6,900
Prime cost 96,450
Manufacturing overheads:
Salaries and wages 9,200×0.25+860 3,160
Depreciation 3,500 + 150 3,650
Rent 3,640 + 380 4,020
Utilities 2,780 + 450 3,230
Manufacturing overheads 14,060
Total manufacturing costs 110,510
Work in progress - opening 1,980
Work in progress - closing (1,600)
Cost of goods manufactured 110,890
(i) Historical
All information used in ratio analysis is derived from actual historical results. This
does not mean that the same results will carry forward into the future. However,
ratio analysis can be used on pro forma information and compare it to historical
results for consistency.
(iv) Aggregation
The information in a financial statement line item that is used for a ratio analysis may
have been aggregated differently in the past, so that running the ratio analysis on a
trend line does not compare the same information through the entire trend period.
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
A.4 (i) (a) Profits will be overstated and assets will be understated
(ii) (d) Residual value of the property
(iii) (c) A significant increase in credit sales
(iv) (b) Semi-variable cost
(v) (c) Rs. 1,905,000
(vi) (b) Increase current ratio and decrease quick ratio
(vii) (d) Declaration and payment of cash dividend
(viii) (a) If funds have been arranged from various general borrowings, the amount to be
capitalised is based on the weighted average cost of borrowings
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
(50,000×70,000÷80,000 (43,750×90,000÷100,000)
)
110,000 100,000 90,000
2019 2020
Completion % 65% 100%
(26÷40×100)
----------------- Rs. -----------------
Revenue 39.0 11.0
(50+10)×65% (50–39)
Cost (26.0) (16.0)
(42–26)
Profit/(loss) 13.0 (5.0)
2019 2020
----------------- Rs. -----------------
Revenue - 50.0
Cost - (42.0)
Profit - 8.0
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
W-1: Cash
Rs. in '000 Rs. in '000
Petty expenses
Opening balance 36 25×12 300
Cash sales PL 3,475 Cash banked 2,400
Cash shortage 48–20 28
Closing balance 20
Cash defalcated from
cash sales (Bal.) 763
3,511 3,511
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
W-2: Debtors
Rs. in '000 Rs. in '000
Opening balance 730 Bank 7,420
Credit sales (Bal.) 8,190 Uncleared cheques 860
Closing balance (900–
260) 640
8,920 8,920
W-3: Creditors
Rs. in '000 Rs. in '000
Bank 8,300 Opening balance 690
Unpresented cheques 950 Purchases (Bal.) 9,455
Closing balance 895
10,145 10,145
1.2 The last revaluation was performed on 30 June 2020 by Smart Consultants, an independent firm of
valuers.
1.3 Had revaluations not made, the carrying value of the land and buildings as on 30 June 2020 would
have been Rs. 112 million (100+12) and Rs. 37.5 million (35,000+2,500) respectively.
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting & Certificate in Accounting and Finance (CAF)
Reporting I Examination - Autumn 2020
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8
78% 27% 48% 31% 25% 43% 50% 12% 31%
General:
An overall passing ratio of 31% is much lower than previous two sessions’ results i.e. 51%
and 39% respectively. The low result was mainly due to lower than expected performance
in Q8 (based on IAS 16) and overall below average performance of the repeaters. The
highest score in the paper was 87 marks.
Performance in Q5 and Q8 was poor. Poor performance in Q7 (IFRS 15) was mainly due
to the inherent difficulty (newness) of the topic. Q8 was based on IAS 16 which seems to
have been overlooked by many examinees in this session on the assumption that it has been
tested in previous session.
16% examinees were just short of 9 or fewer marks and could have easily obtained them
if they had not missed straightforward marks and made basic mistakes. The most
commonly noted issues are lack of practice and poor presentation.
Question 1
In manufacturing overheads, examinees either did not include raw material warehouse cost
or also included cost incurred at other locations along with factory cost.
Question 2
A majority of examinees had not studied the topic. Thus answers tended to be very
polarized, either very good or very poor.
Page 1 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2020
Question 3
Examinees did not read the requirement carefully and also prepared entries for the years
2014 to 2018. This resulted in loss of valuable time and also affected the performance
in other questions.
Examinee presented entries as if the grant had been recorded initially by setting up
deferred income account.
Annual interest cost was either ignored or deducted from net annual cash inflows while
calculating value in use.
Question 4
Question 5
Question 6
Effect of transfer from revaluation surplus was not considered while determining profit.
Depreciation on investment property was not shown in ‘adjustments for’.
The adjustment for short term investments readily convertible to cash, outstanding
proceeds from disposal and/or accrued interest were not considered in ‘changes in
working capital’.
Repayment of loan did not include effect of current maturity.
Purchase of property, plant and equipment against issuance of shares was presented in
the statement though it was a non-cash transaction.
Question 7
In part (a), all components (as given in point vi of the question) of loss from suspected
fraud were not included in the calculation.
Goods in transit and goods issued against fake invoices were not deducted in
calculating cost of the goods sold.
Unpresented cheques and deposit in transit were not correctly incorporated in the
creditor and debtor accounts.
Examinees prepared cash account and assumed the balancing figure to be cash sales
and ignored the misappropriations from cash sales.
Page 2 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2020
Question 8
(THE END)
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2020
Mark(s)
A.1 Raw material consumed 2.5
Direct labour 0.5
Manufacturing overheads 3.5
Sub-totals 1.5
A.4 Marks as mentioned on the question paper against each MCQ 9.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2020
Mark(s)
A.7 (a) Cash defalcated from sales 2.0
Up to 01 mark for each other item 4.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
Section A
(ii) 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.
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
(iv) 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
Q.2 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:
(i) Depreciation expense – Depreciation on plant is computed using units of production
method.
(ii) Depreciation expense – Depreciation on plant is computed using straight line method.
(iii) Direct material cost – Bulk discount is available on additional purchases once the total
purchases exceed a certain level.
(iv) 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.
(v) Machine rent – Machines are acquired on a fixed monthly rent. One machine is
required for every 1 million units.
(vi) 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)
Q.3 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:
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).
(i) Which of the following future cash flows should NOT be included in the calculation
of value in use of an asset?
(ii) When an impairment review is carried out, an impaired asset is measured at:
(iii) Which of the following would be an external indicator that an asset of an entity may
be impaired?
(iv) Which of the following is NOT a measurement base for assets as referred in the
Conceptual Framework?
(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) 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?
(viii) In order to survive in the long run, a business must generate positive net cash flow
from:
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:
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 event 49 Misc. supplies 132
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)
(a) Gross profit margin
(b) Net profit margin
(c) Current ratio
(d) Stock turnover (times)
(e) Return on non-current assets
(f) Quick ratio (17)
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:
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
will commence on 15 March 2021. (06)
(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 2020, 1 June 2020 and 1 December 2020 respectively. (05)
(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
profit or loss. (05)
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:
(i) 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.
(ii) Details regarding components of the ship are as under:
Estimated
Cost
Component Useful life residual value
(Rs. in million)
(Rs. in million)
Engine 840 50,000 hours 40
Body 535 25 years 35
Dry-docking (overhaul) 60 5 years -
(iii) 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.
(iv) The average monthly sailing of the ship during the last three years are as under:
Year Hours
2018 360
2019 480
2020 600
(v) 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.
(vi) 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)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
(iii) (iv)
(v) (vi)
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
A.6 Measures
S. No. Ratios
(i) (ii) (iii) (iv) (v)
(a) Gross profit % No effect Decrease No effect No effect No effect
(b) Net profit % Increase Decrease Decrease Increase Increase
(c) Current ratio Increase No effect Decrease Increase Increase
(d) Stock turnover (times) No effect Increase No effect Increase No effect
(e) Return on non-current assets Increase No effect Decrease Increase Increase
(f) Quick ratio Increase Increase Decrease Increase Increase
A.7 (i) The accounting treatment adopted by accountant for not recording land is incorrect.
Allotment of land by Government is a transfer of a non-monetary asset and should be
considered as a government grant. Such non-monetary grant may be recorded at fair
value or at a nominal value. As per CL’s policy, fair value of the land should be assessed
and reported in the financial statements under the head property, plant and
equipment (PPE). The grant was made subject to construction of factory so the
resulting deferred income should be recognized in income on a systematic basis over
the useful life of the factory building.
The factory building should also be transferred from capital work in progress to PPE
account as the building is available for use on 1 October 2020. Further depreciation
should also be charged from same date i.e. 1 October 2020.
(ii) The accounting treatment adopted by accountant to record complete building under
PPE head is incorrect. Two floors which have been leased/rented separately so should
be accounted for as investment property. While ground floor used by marketing
department should be recorded as property, plant and equipment under IAS 16 and
depreciated over its useful life.
As per CL policy, investment property should be recorded at fair value and changes in
fair value should be taken to statement of profit or loss. Any depreciation already
charged on these floors should be reversed.
(iii) The accounting treatment adopted by accountant to expense out borrowing cost is
incorrect as some borrowing cost is eligible for capitalization. Power generation plant
falls under definition of qualifying asset as its construction involves substantial period.
In the statement of profit or loss, borrowing cost on loan and interest income earned
from saving account should be presently separately.
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2021
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting I Certificate in Accounting and Finance (CAF)
Examination - Spring 2021
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8
81% 14% 20% 65% 25% 70% 59% 32% 40%
General
An overall passing ratio of 40% is higher than previous session’s 31% but fairly consistent
with average of last 3 sessions. The highest marks obtained were 91.
It was observed that examinees did not study all areas of the syllabus on the assumption
that they would have least possibility of being examined. This was substantiated by the
fact that many examinees secured good marks in two to three questions but failed to obtain
reasonable marks in the remaining questions.
Question 1
Question 2
Graphs were made on the basis of ‘total cost’ instead of ‘per unit cost’ on y-axis.
Graph (iii) to (vi) were partially incorrect.
Question 3
Revenue from sale of mobile phone was also recognized over time.
Standalone price of on-net and other network call was worked out on quarterly basis
instead of annual basis.
Workings were haphazard and partial marks could not be awarded as trail for the
calculations was not available.
Page 1 of 2
Examiners’ Comments on Financial Accounting and Reporting I – CAF Examination
Spring 2021
Question 4
Question 5
Examinees tried to compute the missing amounts without preparing the relevant
accounts and missed at least one figure in the calculation.
Description of “N” i.e. “Members’ subscriptions received” was not identified and
consequently not computed.
Marks for amounts to be determined as balancing figures were lost due to incomplete
answers.
Question 6
In measure (ii) and (iv), it was wrongly identified that net profit margin and stock
turnover would remain unaffected.
Some of the examinees did not prepare format.
Few examinees also offered explanation of effect(s) which was not required.
Question 7
Answers were correct to the extent discussed but failed to cover all aspects of the given
issues.
In (i), recognition of grant over life of building was not discussed.
In (ii), answers were limited to the discussion that the building should be partially
recorded as property, plant and equipment and partially as investment property.
However, consequential adjustments to be made due to this bifurcation were not
discussed.
Question 8
Depreciation on dry docking and body were not prorated in year 2018.
Entry for incremental depreciation and its calculation was not presented.
Depreciation for year 2020 was computed on total life instead of remaining life.
(THE END)
Page 2 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2021
Mark(s)
A.1 Dividends 2.0
Presentation of total comprehensive income 2.0
Correct amount of total comprehensive income 2.0
Incremental depreciation 1.0
Opening and closing balances 1.0
A.4 Marks as mentioned on the question paper against each MCQ 8.0
A.5 02 marks each for determining the information at ‘K’ and ‘O’ 4.0
Up to 01 mark each for others 14.0
A.8 0.5 mark each for entries on initial recognition, repair, depreciation and
incremental depreciation 3.0
01 mark for entries on revaluation 2.0
2.5 marks each for computation of yearly depreciation and incremental
depreciation 10.0
Computation of corrected amount of revaluation adjustments 2.0
(THE END)
Page 1 of 1
Certificate in Accounting and Finance Stage Examination
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
Required:
(a) Calculate working capital cycle days for 2020. (Assume a 360 day year) (04)
(b) Suggest four possible measures that can be taken to reduce working capital cycle days. (03)
Q.2 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:
(i) 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.
(ii) 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.
(iii) BCL’s net profit is subject to income tax of 20%.
(iv) Depreciation on plant is calculated using straight line method.
(v) The plant’s net disposal proceeds at the end of the useful life is estimated at
Rs. 100 million.
(vi) Pre-tax and post-tax discount rates are 12% and 9.6% per annum respectively.
(vii) 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
manufacturing environment. (Narrations are not required) (08)
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.
(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.
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:
Other information:
(i) SL declared a final dividend of 10% on 30 September 2020 which was paid in
December 2020.
(ii) 20 million shares were issued in May 2021.
(iii) 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.
(iv) During the year, SL disposed of equipment having cost and net book value of
Rs. 75 million and Rs. 35 million respectively.
(v) Current portion of long-term loans include accrued interest of Rs. 5 million.
(2020: Rs. 1 million)
(vi) 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:
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:
BEL uses cost model for subsequent measurement of property, plant and equipment.
All government grants are recorded as deferred income and a part of it is transferred to
income each year.
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:
3 years’ subscription
Year No. of memberships
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)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021
Indirect method
Rs. in million
Cash flows from operating activities
Loss for the year 315–50(500×10%)–220 (45)
Adjustments for:
Depreciation on property, plant and equipment 300+40(75–35)–262 78
Interest expense 45–21 24
Gain on disposal of property, plant and equipment (17)
Operating profit before working capital changes 40
Changes in working capital:
Increase in inventory 274–245 (29)
Decrease in trade receivables 177–204 27
Increase in advance to supplier 78–60 (18)
Increase in accrued expenses 48–43 5
Increase in trade payables (180–14) –130 36
21
Cash generated from operations 61
227
Grant income:
Land 100÷25×6÷12 2.0 -
Factory building 200÷25×6÷12 4.0
Manufacturing plant 240÷10×5÷12 10.0
Non-current liabilities:
Deferred government grant
Land 100–2 98.0 100.0
Factory building 200–4 196.0 200.0
Manufacturing plant (forgivable loan) 240–10 230.0
Current liabilities:
Running finance 350+200 550.0 250.0
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021
Liabilities:
Creditors - golf kits (4,800÷0.8)–4,800 1,200
Subscription in advance (W-1) 13,400
30,320
Workings
W-1: Subscription Rs. in '000
Opening advance
2018: (100×60×1÷3) 2,000
Income (Bal fig) 10,750 2019: (140×75×2÷3) 7,000
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting & Certificate in Accounting and Finance (CAF)
Reporting I Examination - Autumn 2021
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8
58% 66% 30% 66% 23% 47% 17% 15% 31%
General:
An overall passing ratio of 31% is lower than previous result of 40%. Decline in result was
mainly due to lower than expected performance in Q2, Q3 and Q5. Around 25% of the
examinees could secure maximum of 1 mark in these questions. The examinees performed
well in section A comprising of short questions but the performance in section B was poor
except for Q6. It was also observed that many examinees secured good marks in two or
three questions but failed to obtain reasonable marks in the remaining questions. It seems
that they did not study all areas of the syllabus on the assumption that these topics would
have least possibility of being examined.
There were many examinees securing marks in the 80s and even as high as 95.
Question 1
Question 2
Value in use was calculated using post-tax discount rate instead of pre-tax discount rate.
Page 1 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2021
Question 3
Payment for Factory payroll was recorded but payroll was not transferred to ‘Work in
process’ and ‘Manufacturing overheads’.
Entries for usage of raw material and completion of finished goods were not presented.
Question 4
MCQs at serial (ii) and (iii) were not correctly answered by many examinees.
Some examinees wasted valuable time in reproducing the wordings of correct option
instead of only mentioning the serial of the option.
Question 5
Examinees did not read the requirement carefully and presented “Correct entries”
instead of “Correcting entries”. Also, workings were often haphazard and partial marks
could not be awarded as trail for the calculations was not available.
In respect of (ii), revenue for 11 units was recognized instead of 11th unit only.
In (iii), correction was often made with Rs. 160,000 instead of Rs. 152,000.
In (iv), revenue from annual maintenance was needed to be recognised for 4 months
which was often not recognised at all or recognised in full.
Question 6
Question 7
Comparative figures for 2019 were not disclosed as required by the question.
Interest earned on unused funds from grant was deducted from cost of factory building.
Capitalization rate for 2020 was either not computed or also applied to 2019 as well.
Portion of deferred grant related to land was not taken to profit or loss.
Forgivable loan related to manufacturing plant was not treated as government grant.
Page 2 of 3
Examiners’ Comments on Financial Accounting & Reporting I – CAF Examination
Autumn 2021
Question 8
Examinees could not prepare the subscription account and were mostly confused by
the fact that members were required to pay three years’ subscription.
Only cash purchases of golf kits were taken as purchases.
Golf kit for rent were not treated as non-current asset and consequently no depreciation
was charged on them.
Loss from misappropriation was not reduced by the insurance amount and
corresponding receivable from insurance claim was not presented.
Repair and maintenance fund was not included in calculation of ‘General fund’.
(THE END)
Page 3 of 3
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2021
Mark(s)
A.1 (a) 01 mark for calculation of each period/days 4.0
A.4 Marks as mentioned on the question paper against each MCQ 10.0
Page 1 of 2
Financial Accounting and Reporting - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2021
Mark(s)
A.8 (a) Subscription income 3.0
Profit and rent from Golf kits 3.5
Insurance and depreciation 2.0
Others 2.5
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
Section A
(i) Expected payments related to the construction of the warehouse will be as follows:
Expected average
Limit
Name of bank balance for 2023 Interest rates
------ Rs. in million ------
Bank A 300 220 13.7%
Bank B 350 280 14.6%
(iii) The surplus funds available from the loan will be invested in a saving account at
10% per annum.
(iv) 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:
(a) if all the payments will be made from the specific loan only. (04)
(b) if all the payments will be made from running finance facilities only. (04)
Financial Accounting and Reporting-I Page 2 of 6
Additional information:
(i) Final dividend was paid in respect of year 2020 amounting to Rs. 3.4 million.
(ii) Additions to property, plant and equipment during the year amounted to
Rs. 14 million.
(iii) 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)
Q.3 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:
(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.
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
(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)
(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:
(ii) 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:
(a) Compute QL’s ratios for 2021 for comparison with 2020. (06)
(b) 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.
(i) 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.
(ii) 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 -
Required:
(a) 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)
(b) 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)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
Current liabilities:
Payables 17
Hospital deferred contribution 240×5% 12
657
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
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Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
Page 6 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Spring 2022
1.2 The last revaluation was performed on 1 January 2021 by Sagheer valuation services, an
independent firm of valuers.
1.3 Had revaluations not been made, the carrying value of the buildings and warehouse as on
31 December 2021 would have been Rs. 63 million and Rs. 117 million respectively.
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting I Certificate in Accounting and Finance (CAF)
Spring 2022
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8 9
46% 46% 8% 52% 13% 54% 25% 23% 23% 23%
General comments
The overall result of 23% in this session is lower than the previous session’s result of
31%. Result of examinees who attempted this paper after passing Introduction to
Accounting (CAF-1) was 42% as compared to 17% for examinees who appeared in this
paper after obtaining exemption in Introduction to Accounting under the transition rules
of the Education Scheme 2021.
The performance of the examinees significantly varied from one answer script to
another answer script. There were many examinees who secured marks in the 80s and
even as high as 95. Some examinees secured good marks in three to four questions but
failed to obtain reasonable marks in the remaining questions. About one third
examinees did not secure any mark in Q.1, Q.3 and Q.5. It seems that they did not study
these areas of the syllabus on the assumption that these topics would have least
possibility of being examined. Some of the examinees were struggling to obtain the
easy marks available in the paper which could have been achieved with basic
preparation.
Question 1
Question 2
Amounts of profit before tax and working capital changes were usually incorrect.
A significant minority tried to solve the question using direct method despite the
fact that sufficient information was not available.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting I Spring 2022
Question 3
Examinees seemed to have no idea of the “deferral method”. This question was mostly
attempted half-heartedly in the last and therefore examinees could not even secure basic
marks available in the question which could have been easily obtained.
Question 4
Examinees mostly discussed difference no. (ii) and (iii) as appearing in the ICAP’s
suggested solution and struggled in identifying four differences.
Question 5
Examinees prepared correcting entries which were not required. This resulted in
loss of valuable time and also affected the performance in other questions
Amount of loss from embezzlement was neither calculated in suspense account nor
shown in computation of profit.
In (a), effect of (ii) was taken to the credit of suspense account while effect of (iii)
was taken to the debit of suspense account.
Question 6
Question 7
About one fourth of the examinees did not secure any mark in the question despite
availability of very easy marks in part (a).
In part (a), incorrect denominator was used in computing return on non-current asset
and incorrect numerator was used in computing interest cover. Further, debtors’
turnover was computed in ‘days’ instead of ‘times’.
In part (b), reasons for variation were not linked with financial and operating
decisions provided in the question.
Question 8
Question 9
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting I Spring 2022
Depreciation for 2020 was calculated using ‘original life’ instead of ‘revised life’.
Adjustment of revaluation of warehouse was not properly presented and/or
incorrectly bifurcated into revaluation surplus and profit or loss.
Carrying values of assets if the cost model had been used were incorrectly
calculated.
(THE END)
Page 3 of 3
FINANCIAL ACCOUNTING AND REPORTING - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022
Mark(s)
A.1 (a) Calculation of interest cost 1.0
Calculation of interest income 3.0
A.6 Marks as mentioned on the question paper against each MCQ 10.0
Page 1 of 2
FINANCIAL ACCOUNTING AND REPORTING - I
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022
Mark(s)
A.9 Presentation of note 2.0
Opening balances for 2020 3.0
Depreciation 3.5
Revaluation adjustments 4.5
Other disclosures 5.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
Section A
Q.1 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)
Q.2 Discuss how the following should be dealt with in the current year’s financial statements of
relevant entities in accordance with IAS 20.
(a) 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)
(b) 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
2021 2,800 Rent 990
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:
(i) OFC also operates a canteen. All sales and purchases of canteen are made for cash.
(ii) 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:
(i) 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.
(ii) 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.
(iii) 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.
(iv) A credit note issued to a customer of Rs. 128,000 was recorded as credit note received
from supplier.
(v) 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:
(i) 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.
(ii) The plant’s net disposal proceeds at the end of the useful life is estimated at
Rs. 4 million.
(iii) 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.
(iv) A junior accountant has calculated following net cash flows from operating the plant:
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.
(ii) 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?
(I) Giving incentives to customer to pay on time would result in decrease in debtor’s
turnover in times.
(II) If all debtors pay their debts within the credit period, the average collection period
would be Nil.
(iv) Which TWO of the following would improve gearing ratio of a company?
(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.
(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.
(viii) Which TWO of the following would be shown as a deduction from the column of
retained earnings in statement of changes in equity?
(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:
(i) 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.
(ii) Depreciation on building charged to profit or loss amounted to Rs. 72 million.
(iii) 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.
(iv) Vehicles costing Rs. 51 million were purchased during the year of which Rs. 12 million
is still unpaid.
(v) 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.
(vi) 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.
(vii) 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:
(i) On 1 July 2020, 50 million ordinary shares having par value of Rs. 10 each were issued
at Rs. 14 each.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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
for the years ended 30 June 2021 and 2022. (Show comparative figures) (15)
(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.
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.
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.
(Comparative figures and column for total are not required) (20)
(THE END)
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
A.2 (a) When a government grant becomes repayable it is accounted for as a change in
accounting estimate.
As the grant was presented as deduction from related plant, its repayment would
be recognized by increasing the carrying value of the plant
The cumulative additional depreciation that would have been recognized in profit
or loss to date in the absence of the grant must be recognized immediately in profit
or loss.
Also the circumstances giving rise to repayment of the grant might indicate the
possible impairment of the new carrying amount of the plant.
(b) The benefit of the government loan at a below market rate of interest is treated as
a government grant. The loan shall be recognised and measured as per IFRS 9.
Government grant should be recorded as the difference between the initial carrying
amount of the loan and the proceeds received.
As the primary condition for the loan is acquisition of textile machinery, the grant
should be considered as grant related to asset and should be recognized in profit
or loss over the life of the machinery.
The grant may be presented in the statement of financial position by setting up the
grant as deferred income or by deducting the grant in arriving at the carrying value
of the machinery.
Page 1 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
Liabilities:
Deferred life membership 1,840–360 1,480
Salaries payable (700+90)–640 150
Subscription in advance 1,360
7,420
Page 2 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
Page 3 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
Page 4 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
Ex-theoretical price:
40 × 20 = 800
100 × 30 = 3,000
140 3,800 ⇒ 3,800 ÷ 140 = 27.14
Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022
1.1 Manufacturing
Warehouse Showroom
plant
Measurement base Revaluation Cost model Cost model
Useful life/depreciation rate 12.5 years 10% 14 years
Depreciation method Straight line Reducing balance Straight line
1.2 Had revaluations not been made, the carrying value of the plant as on 31 December 2022 would
have been Rs. 306.2 (W-2) million.
1.3 The last revaluation was performed on 30 June 2022 by an independent firm of valuers.
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT SESSION
Financial Accounting and Reporting I Certificate in Accounting and Finance (CAF)
Autumn 2022
Passing %
Question-wise
Overall
1 2 3 4 5 6 7 8 9
55% 12% 27% 23% 54% 35% 48% 17% 19% 25%
General comments
The current result of 25% is consistent with the previous result of 23%. The result of
examinees who attempted this paper after passing Introduction to Accounting was 40%
as compared to 21% for examinees who attempted this paper after obtaining exemption
in Introduction to Accounting due to the transition to Education Scheme 2021.
Many examinees secured marks in the 80s and even as high as 88. It was commonly
noted that many examinees secured good marks in three to four questions but failed to
obtain reasonable marks in the remaining questions. The element of the selective study
was evident from the fact that a number of examinees secured a maximum of 1 mark in
Q2, Q3, Q4, and Q8 whereas numerous other examinees secured full marks in these
questions. The examinees struggled to obtain the easy marks available in the paper
which could have been achieved with just basic preparation of the topic.
Question 1
Question 2
Question 3
Overall approach to handling the question was missing and the performance was
lower than expected in such an easy question. Examinees made basic mistakes; for
example, reported equipment without deducting depreciation, computed opening
general fund and omitted interest receivable and cash balance.
Page 1 of 2
Examiners’ Comments on Financial Accounting and Reporting I Autumn 2022
Examinees could not work out the amount of closing inventory on the basis of the
canteen trading account.
Question 4
In error (ii), inventory was recorded by Rs. 450,000 instead of reducing the
inventory by Rs. 40,000.
In error (iv), corrections to trade receivables and trade payables were omitted.
Question 5
Discount rate of 8% was applied instead of 10% for calculating the value in use.
Cash flows were not adjusted for depreciation and tax while computing value in
use.
Question 6
Question 7
Question 8
Examinees were found lacking even the elementary concepts of calculating basic
earnings per share.
Calculations for diluted earnings per share were mostly altogether incorrect or were
left unattempted. Also, workings were haphazard and partial marks could not be
awarded as the trail for the calculations was not available.
Question 9
(THE END)
Page 2 of 2
FINANCIAL ACCOUNTING AND REPORTING - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022
Marks
A.1 True statements 3.0
False statements 4.0
A.4 01 mark each for error (i), (ii) and (iii) 3.0
Error (iv) 2.0
Error (v) 3.0
A.6 Marks as mentioned on the question paper against each MCQ 10.0
Page 1 of 2
FINANCIAL ACCOUNTING AND REPORTING - I
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022
Marks
A.9 Property, plant and equipment:
– Appropriate form of the schedule 2.0
– Opening balances 1.5
– Additions and reclassification 2.0
– Depreciation 2.5
– Revaluation adjustments 3.5
– Other disclosures 2.5
Investment property:
– Appropriate form of the schedule 1.0
– Additions and reclassification 2.0
– Fair value adjustments 2.0
– Other disclosures 1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
Section A
Q.1 Following information relating to Akkadian Limited (AL) has been gathered for the purpose
of calculating earnings per share:
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)
Q.2 Discuss how the following should be dealt with in the financial statements of relevant entities
according to IAS 20:
(a) 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)
(b) 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)
(c) 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
Q.3 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:
(i) Subsequent measurement of investment property from cost model to fair value model.
(ii) Subsequent measurement of property, plant and equipment from cost model to
revaluation model.
(iii) Cost formula for inventory from weighted average to FIFO method.
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)
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 (10)
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:
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
only) of IEL according to the concept of ‘Physical Capital Maintenance’. (04)
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.
(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?
(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.
(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?
(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:
(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?
(vii) Which of the following falls under the definition of investment property?
(I) Earnings per share amounts should not be presented if they are negative i.e. losses
per share.
(II) Earnings per share amounts calculated for discontinued operations must be
presented on the face of the statement of profit or loss.
(ix) Which TWO of the following may appear in the operating cash flows?
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:
Additional information:
(i) On 1 February 2021, a bonus issue of 10% was made as final dividend for 2020.
(ii) 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.
(iii) 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.
(iv) On 1 July 2022, 50 million irredeemable preference shares having par value Rs. 10 each
were issued at Rs. 15 per share.
(v) In October 2022, an interim 5% cash dividend on all shares was made.
Financial Accounting and Reporting-I Page 5 of 6
(vi) 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.
(vii) 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:
(i) 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
(iii) 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
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)
(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:
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
loss for the year ended 31 December 2022 and statement of financial position as on that date. (17)
(THE END)