Certificate in Accounting and Finance Stage Examination

Date: 28 January 2024 Additional reading time – 10 Minutes

Time: 2 Hour and 40 Min Syllabus: All Topics except Cash Flow
Marks: 83 marks Quarter Test 2

Financial Accounting & Reporting I

Instructions to examinees:
Answer all eight questions.
Answer in black pen only.
Start new question on new page
Write page number on top of your answer scripts.

Question # 1
The draft financial statements of Karachi Kings Limited (KKL) for the year ended 31 December 2020 include a
plant having a carrying value of Rs. 538 million on 1 January 2020. Due to technological change, the remaining
useful life of the plant has been reduced to 6 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 2020 are estimated at Rs.
176 million. These inflows are subject to 7% decrease in each subsequent year due to declining
demand.
ii. Outflows from operational cost for 2020 are estimated at Rs. 40 million. These outflow would
increase by 3% in each subsequent year despite decline in demand due to inflation and increase in
plant’s wear and tear.
iii. Depreciation on plant is calculated using straight line method.
iv. The plant’s net disposal proceeds at the end of the useful life is estimated at Rs. 125 million.
v. Pre-tax and post-tax discount rates are 12% and 9.6% per annum respectively.
vi. A technologically advanced plant with similar capacity can be purchased at Rs. 500 million. KKL
has received an offer to buy the existing plant for Rs. 330 million. KKL will have to incur shipping
cost of Rs. 17 million, to dispatch the existing plant to the purchaser.
Required:
Compute the impairment loss to be recognized as at 31 December 2020. (08)

Question # 2
(a) State the disclosure requirement of Government Grant as per IAS 20. (05)
(b) Zalmi Private Limited has investment property carried at its fair value of Rs. 1,000,000 on 1 January
2019 with remaining useful life of 10 years. Zalmi Private Limited uses fair value model under IAS 40.
On 30 June 2019, board of directors decided to develop the property and use it for sale of plots. At this
date the fair value was Rs. 1,200,000. On 31 December 2019 (year-end), the value of property has
increased to Rs. 1,300,000.

Required:
Pass the Journal Entries. (05)
Question # 3
Following is the summarized balances of Multan Sultan, a listed company.
Rs. in million
Debit Credit
Ordinary shares of Rs. 10 each fully paid on July 01, 2018 - 1,100
Share Premium as on July 01,2018 240
Retained earnings as at July 1, 2018 - 510
General Reserve as at July 1, 2018 240
Additional Information
(i) 10% Right shares were issued on May 1, 2018 at a premium of Rs. 9 per share.
(ii) The profit after tax for year ended June 30, 2018 & 2019 is Rs. 200 million & 250 million respectively.
(iii) It is company policy to transfer 10% of annual profits to General reserve.
(iv) Cash dividend and bonuses declared/paid during the three years:
For the year ended Final *Interim
Cash **Bonus Cash Bonus
30 June 2017 – – 5% 5%
30 June 2018 10% 1 share for every 5 held – –
30 June 2019 – 15% 10% 5%
* Declared with half yearly accounts
** For bonus, premium is utilized first.
Required:
Statement of Changes in Equity for the year ended June 30, 2018 and June 30, 2019. (08)

Question # 4
MS Ltd. Had 8,542,147 ordinary shares in issue on 1 January 2015. On 31st January 2015, the Company made
a right issue of 1 for 4 at Rs. 1.75. The cum rights price was Rs. 2 per share. On 31 June 2015, the company
made an issue at full market price of 125,000 shares.

Finally, on 30 November 2015, the company made a 1 for 10 bonus issue.

Profit for the year was Rs. 4,123,987.

The reported EPS for the year ended 31 December 2014 was 46.5 per share.

Required:
What was earnings per share figure for year ended 31 December 2015 and the restated EPS for year ended 31
December 2014? (07)

Question # 5
Select the most appropriate answer from the options available for each of the following Multiple Choice
Questions (MCQs) (10)

1. Which of the following is an optional disclosure requirement of IAS 16?

(a) Measurement bases for determining gross carrying amount
(b) Depreciation method
(c) Useful lives or depreciation rates
(d) The carrying amount of temporarily idle PPE

2. Which of the following errors will not affect a trial balance?

(a) Rs. 5,000 utility expenses were entirely omitted from recording
(b) Rent paid Rs. 2,500 has been recorded as Rs. 1,500 in rent account.
(c) Sales revenue account was under-casted by Rs. 10,000
 (d) Cash paid Rs. 3,000 for repair of equipment was credited to repairs account

3. Which TWO of the statements below regarding IAS 23 Borrowing Costs are correct?
(a) Borrowing costs must be capitalized if they are directly attributable to qualifying assets
(b) Borrowing costs should cease to be capitalized once the related asset is substantially complete
(c) Borrowing costs must be capitalized if they are directly attributable to non-current assets
(d) Borrowing costs may be capitalized if they are directly attributable to qualifying assets

4. An investment property with a useful life of 10 years was purchased by Akram Limited on 1 January
2019 for Rs. 200 million. By 31 December 2019 the fair value of the property had risen to Rs. 300 million.
Akram Limited measures its investment properties under the fair value model. What values would go
through the statement of profit or loss in the year?
(a) Gain: Rs. 100 million and Depreciation Rs. 30 million
(b) Gain: Rs. 0 and Depreciation of Rs. 30 million
(c) Gain: Rs. 100 million and Depreciation of 0
(d) Gain: Rs. 120 million and Depreciation of Rs. 20 million

5. Which of the following is not covered by IAS 20 – Government Grants?

(a) Tax breaks
(b) Employment grants
(c) Subsidized loans
(d) Forgivable loans

6. Which of the following is NOT an indicator of impairment?

(a) Advances in the technological environment in which an asset is employed have an adverse
impact on its future use.
(b) An increase in interest rates which increases the discount rate an entity uses.
(c) The carrying amount of an entity’s net assets is higher than the entity’s number of shares in
issue multiplied by its share price.
(d) The estimated net realizable value of inventory has been reduced due to fire damage although
this value is greater than its carrying amount.

7. The monetary value of all the shares that the investors have committed to buy is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

8. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is a
change in accounting estimate accounted for?
(a) By changing the current year figures but not the previous years' figures
(b) By changing the current year figures and the previous years' figures
(c) No alteration of any figures but disclosure in the notes
(d) Neither alteration of any figures nor disclosure in the notes

9. Gulfishan Limited (GL) had profits after tax of Rs. 30 million in the year ended 31 December 20X7. On
1 January 20X7, GL had 2.4 million ordinary shares in issue. On 1 April 20X7 it made a 1 for 2 rights
issue at a price of Rs. 14 when the market price of Garfish’s shares was Rs. 20 before right issue. What
is the basic EPS for the year ended 31 December 20X7?
(a) Rs. 4.95
(b) Rs. 8.90
(c) Rs. 9.12
 (d) Rs. 9.26

10. Which of the following criticisms does NOT apply to historical cost financial statements during a period
of rising prices?
(a) They contain mixed values, some items are at current values, some at out-of-date values
(b) They are difficult to verify as transactions could have happened many years ago
(c) They understate assets and overstate profit
(d) They overstate gearing in the statement of financial position

Question # 6
Prepare Vertical and Horizontal analysis for the year 2019 from the following data. (05)
2019 Rs. 2018 Rs.
Revenue 1,700,000 1,400,000
Cost of sales (1,428,000) (1,200,000)
Gross profit 272,000 200,000
Other Admin expenses (32,600) (36,000)
Net Profit 239,400 164,000

Question # 7
The following information pertains to Quetta Gladiators Public Limited. (QG)
(i) QG purchased a bowling Machine for Rs. 400 million on January 01, 2018 for the practice of cricketers.
QG installed the machine at the cost of Rs. 34 million. The bowling machine was acquired by obtaining
a specific loan from National Bank of Pakistan (NBP) for the machine of 400 million at a markup of 15%.
The remaining amount was paid through running finance facility which carries markup at 16.5%. The
specific loan is payable by December 31, 2020.

QG had mortgaged the machine to obtain the specific loan.

The machine has an estimated useful life of 7 years with no residual value.

QG uses revaluation model for subsequent measurement of its plant and machinery and accounts for
revaluations on net replacement value method. The details of revaluations performed by an independent
firm of valuers “International Bowling Machine Specialist & Co” are as follows:

Revaluation date Fair value

31 December 2018 Rs. 360 million
31 December 2019 Rs. 320 million

(ii) QG purchased Vehicles, costing Rs. 160 million on 1 July 2015 for transportation of the cricketers. It is
to be depreciated using the straight-line method, with Rs. 10 residual value. On 31 December 2017 it
has accumulated depreciation of Rs. 25.
On 1 January 2019, QG decided to change the depreciation method from straight line to reducing
balance method. There is no change in life, however the estimate of residual value is Rs. 15

(iii) On January 01, 2019, the Company purchased a new head office property for 100 million. On January
01, 2019, The Company leased out the top three floors of the property to a third party on a long-term
operating lease. The annual rental receivable by The Company was 2 million, starting on January 01,
2019. The top three floors of the property were capable of being sold in a separate transaction. The
directors of The Company estimated that the initial cost of the property should be allocated as follows for
accounting purposes:
 Rs. Million
Top three floors of building 24
Remainder – buildings component 50
Remainder – land component 26
Total Initial Cost 100
On 31 December 2019, the property had an estimated total fair value of 108 million. The directors consider
that 25% of this fair value was attributable to the top three floors of the property.

(iv) The directors of the Company wish to use the cost model for measuring buildings and the fair value model
for measuring investment property. The Company depreciates the buildings component of properties
over an estimated useful life of 50 years, with no estimated residual value.

(v) An expenditure of Rs. 30 million was spent of the construction of a building for rental purpose on 31 May
2019. This building was financed by a loan of Rs. 100 million obtained from the bank on 01 May 2019
at the rate of 12% per annum. Surplus funds have been invested at 7.35%. The construction had not
been completed at the end of the year.

Required:
Prepare notes to the financial statement as per IAS 16 Property, Plant & Equipment for the year ended 31
December, 2019 (Comparatives are required, total column is not required) (17)
Note: you may round off your workings to the nearest million

Question # 8
Following is the trial balance of Kurlus Usman Charitable 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 (externally restricted) 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 organized 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 on 1st January
2019. 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
(b) Prepare statement of financial position as on 31 December 2019 (18)