The Professionals’ Academy Of Commerce

Certificate in Accounting and Finance Stage Examinations

Mock Examination Spring-2015 19 February, 2015
(Additional reading time - 15 minutes) 100 marks – 3 hours

Financial Accounting & Reporting-II

Q.1 Following information relates to Ajmal Limited (AL):

(i) Profits for the years ended December 31, 2013 and 2014 are as follows:

2014 2013
------ Rs.’000----
Profit before tax 51,500 47,250
Tax 20,100 17,900
Profit after tax 31,400 29,350

(ii) During 2014, it has been discovered that certain major part replacement in plant and
machinery, carried on July 1, 2012 for Rs. 2,500,000, was charged to repairs. AL depreciates
its plant and machinery @ 20% on reducing balance basis.
(iii) During 2014, management has decided to change inventory valuation method from FIFO to
AVCO basis. In this respect following data has been gathered:

Inventory value:
FIFO AVCO
Year ended: --------- Rs.’000------
December 31, 2012 7,200 6,000
December 31, 2013 6,400 6,800
December 31, 2014 5,800 5,000

(iv) AL follows revolution model for land and buildings. Accounting depreciation charged on
these assets as well as depreciation based on historical cost are as follows:

Depreciation
Actual Cost based
Year ended: ------------Rs.’000---------
December 31, 2013 2,800 2,000
December 31, 2014 3,000 2,100

(v) Cash / Bonus dividends for last three years are as follows:

Cash Bonus
For the year ended: Interim Final Interim Final
December 31, 2012 - 5% - 5%
December 31, 2013 - 10% 5% 10%
December 31, 2014 20% 10% - 10%

(vi) Applicable tax rate for AL is 30% for many years.

(vii) During December 2013 AL made a right issue of one for five at a premium of Rs. 4 per
share.
(viii) Share capital and reserves as at December 31, 2012 were as follows:
 Financial Accounting & Reporting-II |Page 2 of 5

Rs.’000
Share capital (Rs. 10 each) 50,000
Share premium 7,500
Retained earnings 63,450

Required:
Prepare Statement of Changes in Equity for the year ended December 31, 2014 in accordance with
the requirements Companies Ordinance 1984 and International Financial Reporting Standards. (20)

Q.2 Following are the statement of profit or loss the year ending December 31, 2014:

Baap Ltd. Beta Ltd.

------ Rs.’000-----
Sales 190,000 150,000
Cost of sales (110,000) (96,000)
Gross profit 0 0
Distribution cost (11,000) (9,600)
Admin expenses (12,000) (6,000)
Finance cost (4,000) (5,600)
Other income 6,200 1,700
Profit before tax ** **
Expressio Expressio
n is faulty n is faulty
** **
Tax (21,500) (12,600)
Profit after tax 0 0

Following additional information is available:

(i) Baap Ltd. acquired 80% shares of Beta Ltd. on June 1, 2014 for Rs. 65 million. Fair value
of non-controlling interest at that date was Rs. 25 per share.
(ii) At acquisition date fair value of an internally generated brand of Beta Ltd. was Rs. 6
million. Reliable estimate of its useful life was made at 5 years.
(iii) On July 1, 2014 Baap Ltd. gave a loan of Rs. 40 million to Beta Ltd. at an annual interest of
10%. Interest is paid semiannually. Both companies have properly accounted for this
interest.
(iv) Beta Ltd. had been selling goods to Baap Ltd. for some years at a markup of 30%. Since
acquisition, markup was reduced to 25%. Average sales were Rs. 2 million per month. Out
of the post-acquisition sales, some goods having sales value of Rs. 1 million were still held
in Beta Ltd.’s stock at year end.
(v) Impairment loss of goodwill for the year was Rs. 500,000.
(vi) Beta Ltd.’s other income includes Rs. 200,000 which specifically relates to January 2014.
(vii) All other incomes and expenses are assumed to occur evenly throughout the year.
(viii) Balances extracted from balance sheet of Beta Ltd. as at December 31, 2013 are as follows:

Rs.’000
Share capital (Rs. 10 each) 30,000
Share premium 3,000
Retained earnings 29,300

Required:
(a) Calculate goodwill on acquisition. (15)
 Financial Accounting & Reporting-II |Page 3 of 5

(b) Prepare consolidated statement of profit or loss for the year ending December 31, 2014.

Q.3 Misbah Limited (ML) entered into a lease agreement with Afridi Leasing Company for specialized
machinery on April 1, 2014. Terms of the agreement was as follows:
Commencement: April 1, 2014
Lease term: 3 years
Processing charges (payable Rs. 6,000
by ML immediately):
Lease Payments: (i) Six monthly rental of Rs. 29,155 payable on every
September 1 and April 1. (1st payment was due on
September 1, 2014)
(ii) Lumpsum payment of Rs. 20,000 at end of lease term.
Ownership: Ownership will be transferred to ML at end of lease term.
Since the asset is of specialized nature and is not ordinarily traded in local market, its fair value is
not available. ML plans to use this machinery for two more years after lease. Applicable interest rate
is 15%.

Required:
As an accountant of Misbah Limited:
(a) Pass Journal entries for the year ending December 31, 2014.
(b) Prepare Extracts of statement of financial position and statement of profit or loss for the year
ending December 31, 2014. (14)

Q.4 Irfan Limited (IL) started construction of an office building on January 1, 2014. In this respect, an
agreement was signed with Junaid Constructions (JC) at a price of Rs. 45 million for a target
completion period of 24 months. Immediately after commencement, certain aggrieved parties
obtained a stay order from court and work remained suspended for 2 months. As per construction
agreement, JC had to be paid a penalty of Rs. 0.2 million per month for any delay beyond their
control. Construction work recommenced on March 1, 2014 and JC submitted following progress
bills:

Billing period Bill date Bill amount

Mar – Apr 30th April Rs. 5 m
May – Jun 30th June Rs. 7 m
Jul – Aug 31st August Rs. 4 m
Sep – Oct 31st October Rs. 6 m
Nov – Dec 31st December Rs. 3 m

Progress bills were paid after 15 days of bill date. However total penalty of Rs. 0.4 million was paid
 Financial Accounting & Reporting-II |Page 4 of 5

on recommencement of work. Initially IL had a plan to finance this construction by existing running
finance facility of Rs. 100 million carrying a markup of 18%. However, due to a change in plan,
remaining construction was decided to be financed by a specific loan. In this regard a specific loan
of Rs. 29 million was obtained on October 1 st at an interest of 14%. Surplus funds were kept in a
deposit account earning an interest of 6%.

Required:
Calculate cost of capital work in progress as at December 31, 2014. (12)

Q.5 Describe the possible threats faced by a chartered accountant in following the fundamental
principles as mentioned by ICAP’s Code of Ethics. (05)

Q.6 (a) Discuss the criteria that should be followed while recognizing development expenditure in
accordance with IAS 38. (06)

(b) Following expenditures were incurred by Ahmad Limited (AL) during the year ending
December 31, 2014. Discuss how each should be accounted for in light of guidance given in
IAS 38:
(i) On July 1, 2014 a license was acquired at a cost of Rs. 4 million. License is renewable
after 5 years for a further period of 3 years. However renewal fee has not yet been agreed.
AL has no experience regarding renewal of such licenses. (02)
(ii) During the year Rs. 2.5 million were incurred on advertisement campaign. AL
management is very optimistic about this campaign and believes it to result in improved
sales for atleast 4 years. (02)
(iii) During the year AL purchased an in-process research and development project for Rs. 4.5
million. Management has planned to work further on this project and it is quite confident
about success of this project. (02)

Q.7 Following information relates to Akmal Limited for the year ended December 31, 2014:
(i) On January 1, 2014, an owned machine was sold for Rs. 9 million and leased back on a
finance lease for remaining life of 4 years. Lease rental was agreed at Rs. 2.963 million
payable at end of every year with an effective interest rate of 12%. Profit in this transaction
was Rs. 1.6 million. This transaction has been correctly accounted for in accordance with
IAS 17. Accumulated accounting depreciation of machine at the time of sale was Rs. 3.6
million whereas accumulated capital allowance at that date was Rs. 5 million.
(ii) Owned property plant and equipment has a net book value at year end of Rs. 28.5 million.
Tax base of these assets as at January 1, 2014 was Rs. 19 million (excluding machine
referred to in point (i) above). Additions during the year amount to Rs. 3.5 million.
Accounting depreciation for the year on owned assets was Rs. 2.3 million whereas capital
allowance for the year was Rs. 5.2 million.
(iii) During the year Rs. 3 million was incurred on research. Due to deficiency in supporting
documents, only Rs. 2.4 million can be claimed as deduction for tax purposes. Such expenses
are allowed on straight line basis over 3 years.
(iv) Rent income is taxed on receipt basis. Rent income recognized during the year was Rs. 0.25
million. Unearned rent income at start and end of year was Rs. 0.1 million and Rs. 0.15
million respectively.
 Financial Accounting & Reporting-II |Page 5 of 5

(v) During the year a pending appeal in respect of tax year 2012 was settled. As a result, tax
return was revised and a tax refund of Rs. 0.3 million was approved. No adjustment in books
has been made so far in this respect.
(vi) Profit before tax for the year amounts to Rs. 18.2 million.
(vii) Corporation tax rate is 35%.

Required:
Prepare “Deferred tax” and “Taxation” notes to the financial statements for the year ending
December 31, 2014. (Comparative information is not required) (22)

(THE END)