Certificate in Accounting and Finance Stage Examinations

(Term Test) December 20, 2022

2 hour 5 minutes – 70 marks
Additional reading time – 10 minutes

Financial Accounting and Reporting 1

SECTION A
Q.1 (a) Onion 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.
Discuss how the above should be dealt with in the current year’s financial statements of
Onion Limited. (03)
(b) Zalmi Traders (ZT) commenced business on 1 January 2016 and is maintaining its
accounting records under ‘cash basis’. The following transactions are appearing in its
records:
Transaction date Description
8-Jan-2016 One year's office rent was paid in advance, amounting to Rs. 1.2 million.
Advance payment of Rs. 20 million was made against a purchase order.
15-Jan-2016
60% of the ordered goods were received in January 2016.
Rs. 5 million were received against supply of goods in January 2016.
21-Jan-2016 Goods amounting to Rs. 3 million could not be delivered in time because
of a transport strike.
Payment of salaries and wages for the month of January 2016 amounted
1-Feb-2016 to Rs. 0.5 million. This amount includes Rs 0.02 million paid to an
employee as advance salary for the month of February 2016.
Payment of utility bills for the month of January 2016 amounted to Rs.
15-Feb-2016
0.3 million.
Required:
Prepare adjusting entries to enable ZT to finalise its monthly financial statements for the
month of January 2016 under ‘accrual basis' of accounting. (05)
Q.2 During the review of accounting records and financial statements for the year ended30 June
2022 of Taamir Traders, following errors were highlighted:
(i) Sales included an outstanding balance of Rs. 500,000 for which a customer would needto 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 receivedfrom
supplier.
(v) An office machine costing Rs. 3,540,000 with a carrying value of Rs. 2,040,000 as on1 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) (06)

(FAR-I Term Test: 20 December 2022)

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Q.3 Bundu Khan Corporation (BKC) decided to construct a tunnel that will link two sides of the
village that were separated by a natural disaster years ago. Realizing its role as a good corporate
citizen, the BKC has been in this village for a couple of years exploring oil and gas in the nearby
offshore area. The tunnel would take two years to build. It began construction on January 1,
2016. The following payments were made during 2016:
Dates Rs.
January 31 200,000
March 31 450,000
June 30 100,000
October 31 200,000
November 30 250,000
The first payment on January 31 was funded from the entity's pool of debt. However, the entity
succeeded in raising a medium-term loan for an amount of Rs. 800,000 on March 31, 2016, with
simple interest of 9% per year calculated and payable quarterly in arrears. These funds were
specifically used for this construction. Excess funds were temporarily invested at 6 percent per
year. The construction project was temporarily halted for six weeks in May, June, when
substantial technical and administrative work was carried out which was necessary stoppage for
the completion of construction work. The following amounts of debt were outstanding at the
year end December 31, 2016:
Rs.
Medium-term loan (see description above) 800,000
Bank overdraft (The weighted average amount outstanding during the year was
1,200,000
Rs. 750,000, and interest charged thereon by the bank amounted to Rs. 33,800.)
A 10%, 7-year general loan taken on October 1, 2009, repayable in full in
9,000,000
December , 2017
Required:
Calculate the amount of borrowing cost to be capitalized to the cost price of the Tunnel in for
the year ended 31st December, 2016? (08)
Q.4 Supreme Cement Company Limited (SCCL), a company listed on the Karachi and Lahore
Stock Exchanges, is in process of finalization of its accounts for the year ended 31 December
2012. The following information is available:
(i) Shareholders’ equity as at 31 December 2011 and 2010 consisted of:
2011 2010
Rs. in million
Share capital (Rs. 10 each) 10,340 7,833
Unappropriated profit 6,945 4,508
(ii) The total comprehensive income for the years ended 31 December 2010, 2011 and 2012
(unaudited) was Rs. 4,240 million, Rs. 4,944 million and Rs. 5,090 million respectively.
(iii) Cash dividends and bonuses declared/paid during the last three years are as follows:

Cash dividend Bonus

*Interim Final *Interim Final
For the year ended 31 December 2010 10% - - 20%
For the year ended 31 December 2011 - 15% 10% 10%
For the year ended 31 December 2012 - 10% 5% 5%
*Interim dividend/bonus was declared at the time of announcement of half-yearly financial
results.

(FAR-I Term Test: 20 December 2022)

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(iv) Right shares were issued on 30 November 2012 in the ratio of 4 right shares for every 5
shares held by the shareholders of the company. The right issue was made at Rs. 18 per
share.

Required:
Prepare the Statement of Changes in Equity for the year ended 31 December 2012 in accordance
with the requirements of the Companies Ordinance, 1984 and International Financial Reporting
Standards. (07)

Q.5 Select the most suitable options:

(i) 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)

(ii) On 1 January 2019, a company purchased an asset for Rs. 5 million against which it
received the government gr ant 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)

(iii) 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)

(iv) Which of the following statements about IAS-20 ‘Accounting for Government Grants
and Disclosure of Government Assistance’ are true?
(a) A government grant related to the purchase of an asset must be deducted from
the carrying amount of the asset in the statement of financial position
(b) A government grant related to the purchase of an asset should be recognized in
profit or loss over the life of the asset
(c) Free marketing advise provided by a government department is excluded from
the definition of government grants
(d) Any required repayment of a government grant received in an earlier reporting
period is reported as prior period adjustment (01)

(v) On 30 September 2014, Razor’s closing inventory was counted and its cost of Rs. 1
million. Some items of inventory which had cost Rs. 210,000 had been damaged in
flood (on 15 September 2014) and are not expected to recover their normal selling
price which is calculated to achieve a gross profit margin of 30%. The sale of these
goods will be handled by an agent who sells them at 80% of their normal selling price
and charges Razor a commission of 25%.

(FAR-I Term Test: 20 December 2022)

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At what value will the closing inventory of Razor be reported in its statement of
financial position as at 30 September 2014?
(a) Rs. 1 million (b) Rs. 790,000
(c) Rs. 180,000 (d) Rs. 970,000 (02)

(vi) Which TWO of the following would be shown as a deduction from the column of
retained earnings in statement of changes in equity?
(a) Transfer of incremental depreciation (c) Transfer to general reserves
(b) Issuance of shares at discount (d) Cash dividend (01)

SECTION B
Q.6 Super Pipes Limited (SPL) is a manufacturer of industrial products. On January, 1 2020, one
of its plants suffered a major break down. It was repaired at a cost of Rs. 1.5 million but the
production capacity was reduced significantly. The plant was ready for production on June
30, 2020. At that time the company’s engineers advised that the plant could be used at a
reduced level for 3 years only. Net operating cash inflows from the plant for the next three
years are budgeted as under:

Year ending June 30, 2021 Rs. 9 million

Year ending June 30, 2022 Rs. 7 million
Year ending June 30, 2023 Rs. 5 million

Assume that cash flow would occur on the last day of each year and applicable discount rates
are 10% (pre-tax) and 7% (post-tax). Other related information is as under:
(i) The plant was imported at FOB price of US$ 800,000. The payment was made at the
time of shipment on July 1, 2010 at Rs. 52 per US$. Other charges including installation
cost amounted to Rs. 7 million. Installation of the plant was completed and plant was
available for use on December 31, 2010 but commercial production commenced from
April 1, 2011.
(ii) The company uses straight line method of deprecation. Initially, the useful life of the
plant was estimated at 15 years whereas the salvage value was estimated at Rs. 2.0
million.
(iii) Based on the report of a professional independent valuer, the plant was revalued on July
1, 2015 at Rs. 45 million. There was however, no change in estimated useful life of the
plant on revaluation.
(iv) The factory remained closed from April 1, to June 30, 2017 due to law and order
situation in country.
(v) The salvage value has not changed since it was first estimated at the time of purchase.
Moreover, it is not expected to change in future.
Required:
Prepare accounting entries for the year ended June 30, 2020. Give all the necessary
calculations. (Ignore taxation) (13)

(FAR-I Term Test: 20 December 2022)

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Q.6 Following information pertains to non-current assets of Ghazi Limited (GL):

(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 andRs.
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.

Fair value of the warehouse on various dates are as follows:

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.

(iii) GL acquired a property comprising of three similar showrooms at a total cost of Rs.
900 million on 1 October 2021. 40% of the cost of property is attributable to thevalue of
land. Each of the showroom can be leased out separately and has a useful life of 15 years
with no residual value.

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 inclusionin
GL’s financial statements for the year ended 30 June 2022.
(Comparative figures and column for total are not required) (20)

(Good Luck)

(FAR-I Term Test: 20 December 2022)