Summer Exam-2009

(Final)
Financial Reporting [04-05-2009]

Duration: 3 hrs.
[Instructions]
Ensure that the question paper delivered to you is the same, in which you intend to appear. Read the instructions given on the title page of Answer Copy.

Marks-100

Attempt all Questions

Q.1.

Faisal and Khalil have been partners for last many years carrying on the business of rice export to different European countries and sharing profits equally. On June 30, 2008 they decided to convert the partnership into a limited liability company named FK Limited to avail various incentives announced by the Government for SMEs in the current budget. The balance sheet of the firm at June 30, 2008 is as under: Rs. (000) Assets Furniture and fixture Plant Stock in trade Trade debts Bank Capital and liabilities Capital Faisal Khalil Trade creditors 33,200 100,000 53,800 384,500 151,000 722,500 300,000 310,000 112,500 722,500

The arrangements with the FK Limited are as follows: a. Furniture and stock will be purchased by FK at 5% below book value. b. The plant will be taken over 20% above book value. c. Trade debts will not be taken over by the company and have realized Rs. 335 million in total. d. The trade creditors have been taken over by the new company. e. FK Limited will issue 5 million shares of Rs. 10 each at premium as purchase consideration to the partners of the old firm. Required: i) Prepare realization account ii) Capital accounts of the old firm iii) Opening balance sheet of the new company
Q.2.

(05) (05) (05)

Salman Co has two contracts in progress, the details of which are as follows: Dam Bridge (Profitable) (Loss-making) Rs. 000 Rs. 000 Total contract price 450 400 Costs incurred to date 190 250 Estimated costs to completion 135 225 Progress payments invoiced and received 250 50 (10) Required: Show extract from the income statement and the balance sheet for each contract, assuming stage of completion is measured by cost to cost basis formula.

Contd. on back

Q.3.

M/S Haseeb Limited acquired 75% of M/S Saqib Limited on September 30, 2008 for Rs.12 million by paying immediately Rs.10 million to the former owners and agreed to pay the balance amount after one year. The discount rate Haseeb Limited uses for its present value calculation is 12%. The profit and loss account for both the companies for the year ended December 31, 2008 is as follows: Haseeb Ltd. (Rs. 000) 10,000 (6,500) 3,500 (1,500) 2,000 (450) 1,550 20,000 15,000 Saqib Ltd. (Rs. 000) 5,000 (4,000) 1,000 (400) 600 (200) 400 5,000 7,500

Revenue Cost of sales Gross profit Operating cost Operating profit Tax expense Profit after tax Statement of changes in equity extract Share capital Retained earnings on January 01, 2008

The following further information is also available: a) The fair value of property, plant and equipment of Saqib Ltd at the date of acquisition was Rs. 1,000,000 more than its carrying value which results in extra depreciation of Rs. 45,000 in the post acquisition period. b) In the post acquisition period Saqib Ltd sold goods to Haseeb Ltd valuing Rs. 250,000 charging Rs. 100,000 as margin on goods. 55% of the goods are still lying with Hasseeb Ltd. c) All revenues and expenses have accrued evenly through the year.
d) The impairment loss on goodwill is 25% of the amount determined at the date of

acquisition. Required: i) ii) iii)

Q.4.

Goodwill arising on acquisition Consolidated Profit and loss account of Haseeb Ltd group Statement of changes in equity of Haseeb Ltd Group

(05) (10) (05)

M/S XYZ acquired an asset on lease. The terms of the lease are as under: The cash price of the asset is Rs. 160,000. Initial direct cost incurred by the lessee is Rs. 7,500. Term of the lease is 5 years. The insurance cost paid by the lesser and recovered from the lessee is Rs. 3,000 per year. The amount of rental is Rs. 10,000 payable at the beginning of each quarter. The interest rate implicit in the lease is 12% p.a. The asset at the end of the lease term will revert back to the lessee. The guaranteed residual value by the lessee is Rs. 5,000 at the end of the lease term. The economic life of the asset is seven years. Required: Compute the value at which the asset to be recorded initially. i) ii) Prepare lease repayment schedule for first eight rentals and pass necessary journal entries iii)
for first two quarters. Prepare disclosures to the accounts at the end of first year?

(03) (07) (05)

Contd.

Q.5.

An entity in the oil industry contaminates the sites on which it conducts its operations. It operates in a country where there is no environmental legislation that requires the remediation of contaminated sites. The entity, however, has a widely published environmental policy in which it undertakes to clean up all contamination it causes, and it has a record of honoring this published policy. Required: Should management recognize liability when there is no legal obligation? (05)

Q.6.

Entity A purchased land to construct a new factory. The land was formerly used for agricultural purposes. As management has applied to the local authorities for permission to change the use of the land from agricultural to industrial. The process is expected to last six months, because of opposition from local residents. Management has financed the purchase with a bank loan, which will be repaid over a period of seven years, commencing from the scheduled date of completion of the factory. Management is confident that the authorities will approve the change of use of the land because the new factory will bring 1,000 new jobs to the area. Required: Can management recognize revenue before physical construction of asset and if yes what will happen if the approval is not granted afterwards? (05)

Q.7.

The Balance Sheets of Mr. F at December 31, 2007 and 2008 are as follows: 2007 Rs. (000) Cash in hand Debtors-net Stocks Prepaid expenses Fixed Assets Allowance for Depreciation 200 450 400 100 1,150 (75) 2,225 Creditors Accrued Expenses Retained earnings Share Capital 400 125 300 1,400 2,225 Other Information: i) ii) iii) iv) Value of land included in fixed assets in 2007 amounted to Rs. 450,000. Another plot of land was acquired during the year, at a cost of Rs. 350,000. Dividend paid during the year was Rs. 100,000 out of profits made during 2008. Equipment costing Rs. 100,000 and having a book value of Rs. 40,000 was sold during the year for Rs. 60,000. 2008 Rs. (000) 300 500 650 50 1,650 (175) 2,975 515 100 785 1,575 2,975

(15)

Required: A statement of cash flow for the year ended December 31st, 2008.

Contd. on back

Q.8.

M/S Geo Limited has the following balances at January 01, 08 brought forward from previous year. (Rs. 000)
Un-used tax losses Carrying value of plant Tax WDV of plant Deferred tax liability 1,250 15,000 10,500 1,000 Carrying value of land Carrying value of building Tax WDV of building ------

(Rs. 000)
1,000 5,000 4,500 ------

During the year Geo revalued the land by Rs. 200,000, before revaluation, the carrying value and tax base were same. The accounting rate of depreciation is, building 5% and plant 10% on reducing balance basis. The tax rate of depreciation is, building 10% and plant 25% on reducing balance basis. The profit for the year before tax after accounting depreciation is Rs. 1,524,000. There has been no addition or disposal of any asset. The tax rate applicable to GEO is 35%. Required: i) ii) Calculate current as well as deferred tax for the year Prepare income statement and balance sheet extract for tax (10) (05)

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Winter Exam-2009
(Final)
Financial Reporting [02-11-2009]

Duration: 3 hrs.
[Instructions]
Ensure that the question paper delivered to you is the same, in which you intend to appear. Read the instructions given on the title page of Answer Copy.

Marks-100

Attempt all Questions

Q.1. IAS-1 deals with presentation of general purpose financial statements and has been amended recently by IASB (International Accounting Standard Board). The revised standard has changed the names and presentation of certain statements. Required: Discuss the followings under the revised IAS -1. a) Impracticable b) Components of financial statements c) Truth and fairness d) Un-reserved statements e) Disagreement with IFRS Q.2. (02) (02) (02) (02) (02)

M/S West Ltd acquired 40 % ordinary share capital of M/S East Ltd a real estate development company for Rs. 5.5 million on January 01, 2008, when the retained earnings of East Ltd were Rs. 10 million. Due to recent slump in the real estate market and burgeoning losses of East Ltd after acquisition, the management of West Ltd has decided to apply impairment test on the investment in East Ltd. The retained earnings of East stood at Rs. 2.5 million after adjustment of loss for the year amounting to Rs. 7.5 million. The recoverable value of East Ltd is Rs. 2 million. The West Ltd has treated the investment in East Ltd as an associate under IAS-28. The accounting year end of West Ltd and East Ltd is December 31, 2008. Required:
Calculate the carrying value of investment under IAS -28 and value of any impairment loss? M/S East Ltd has fleet of three passenger air crafts purchased on January 01, 2006 for Rs. 500 million each. Each air craft was having three major parts engine, body and interiors (including cabins and seats). The cost of each part is engines (two) Rs. 150 million, body Rs. 200 million and interiors and cabins Rs. 150 million. The use full life of engine is 100,000 hours; body 5 years and interiors and cabins three years. The residual value is assumed to be nil. On January 01, 2008 one of the air crafts slipped on the run way causing severe damage to the body and engines however, all the passengers and crew safely evacuated. The flying hours used till January 01, 2008 was 12,500. The plane went under comprehensive repair and maintenance, one engine which was permanently damaged replaced with a cost of Rs. 100 million and other repaired with a cost of Rs. 10 million. The body was repaired with a cost of Rs. 40 million. The management also decided to replace interiors and cabins with a total cost of Rs. 250 million as the plane was not operational even one year before their use full life. The plane flew for 2,500 hours during the year under consideration. Required: Prepare extract of statement of comprehensive income for the year ended December 31, 2008 and statement of financial position as at December 31, 2008 for the plane who got damaged only?
Contd. on back

(10)

Q.3.

(10)

Q.4.

The extract from statement of financial position of a company at year end June 30, 2008 reflects following status:
Plant under installation Loans Bank loan 15% Bank loan 20% Bank loan 13% 10,000 3,000 4,000 Rs. (000) 5,000

A loan of Rs. 1,000,000 was taken on July 01, 2008 specifically to finance the project at 16.5%.
Expenditure incurred on plant under installation July 1, 2008 October 1, 2008 February 1, 2009 June 1, 2009 Rs. (000) 700 700 1,000 500

An interest income of Rs. 50,000 has also been earned on temporary investment of specific funds borrowed at the start of the year.

Required:
(i) (ii) (iii) Q.5. Capitalization rate of the company Total borrowing cost to be capitalized during the year 2009. Cost of plant at June 30, 2009 and impact if any if the carrying value of asset exceeds its recoverable value. (03) (05) (04) (15)

IAS 38 deals with accounting treatment of intangible assets held for use and IAS-2 deals with intangible assets developed for others in the ordinary course of business, which have become more important than the tangible assets in the knowledge based economy in the recent time. M/S SLQ Limited is a computer software development and marketing company. During the year ended June 30, 2009 the company has incurred following expenses and sought your opinion for the appropriate accounting treatment. a) The company has developed new accounting software for retailers to facilitate them in filing sales tax returns and also maintaining appropriate books of accounts as required by Income Tax Ordinance 2001. The company incurred Rs. 200,000 on marketing the software and trained 10 employees with a cost of Rs. 150,000 for after sale service. The development cost of software worked out is Rs. 300,000. It is assumed that all the requisite criteria for internally developed intangible asset under IAS-38 are satisfied. b) The company made a contract with New Vision Real Estate Developers for developing software worth Rs. 2 million. At the end of the year the software is still under development and the following expenses have been incurred on developing the software.
Salary of Personnel involved in development Allocation of over heads (including depreciation/Amortization) Sales person salary involved in securing the contract Profit margin on the contract License cost of a back end software used exclusively for this project Rs. (000) 200 150 20 250 100

The stage of completion of the software is not reliably measurable and the whole amount of revenue will be recognized at the time of completion of the software. c) The company also acquired all the shares of M/S SOFTECH Limited during the year another software development company and paid the consideration to the shareholders of SOFTECH in its own shares. The company issued its two shares for every five shares of SOFTECH. The issued share capital of SOFTECH was 5 million shares of Rs. 10 each and market value of SLQ shares was Rs. 60 per share. The assets and liabilities of SOFTECH along with their fair values was as follows: -

Contd.

Brand name Computers and accessories License Software Customer list Land and building Creditors

Carrying value Rs. (m) Not recognized 15 5 20 Not recognized 30 40

Fair value Rs. (m) 35 10 25 30 15 60 40

Q.6.

On October 1st 2008, fire destroyed stock of Swat Furniture Ltd. The books of Accounts provided the following data:
Sales for the year ended June 30, 2008 Stock on (June 30,2008) Stock at cost on June 30, 2007 Purchases for the year ended June 30, 2008 Purchases from July 1st to September 30, 2008 Sales from July 1st to September 30, 2008 Rs. (000) 4,880 1,200 1,400 3,300 1,200 1,500

The value of stock on June 30, 2008, included an item valuing Rs. 100,000, which has been written down to Rs. 75,000. It was sold in August 2008 for Rs. 56,000. Apart from this, the gross profit ratio has remained uniform. The stock salvaged realized Rs. 140,000 only. The maximum value of stock insured is Rs. 3,000,000. Required: Calculate the amount of Insurance claim for stock destroyed by fire? Q.7. (08)

Following is the trial balance of two sole traders at the year ended June 30, 2009.
Adil
Rs. (000)

Aleem
Rs. (000)

Plant and machinery Sales Opening stock Operating expenses Purchases Current capital Capital accounts Creditors

1,500 (1,000) 200 150 550 (150) (1,000) (250)

1,700 (1,250) 300 165 650 (265) (1,000) (300)

The closing stock of Adil was Rs. 150,000 and of Aleem was Rs. 125,000. The plant and machinery is depreciated at 20% per annum. On July 01, 2009 they decided to merge their businesses and form a partnership in the name of AA enterprises and agreed as follows: The new business will take all the assets and liabilities of both the businesses at book value except plant and machinery of Aleem which is taken at Rs. 300,000 above its book value. The capital of new business will be Rs. 3,000,000 shared equally by the two partners adjusted by any cash contribution/distribution. The goodwill of Adil is worked out at Rs. 250,000 and of Aleem Rs. 300,000. The goodwill of old businesses will not appear in the books of new business. Adil has a license not recognized in its separate books having fair value of Rs. 250,000 on July 01, 2009. Required:
Prepare opening statement of financial position of AA Enterprises on July 01, 2009 and capital accounts in the books of the new firm? (15)

Contd. on back

Q.8.

M/S Haneef Ltd purchased entire share capital of M/S Sajid Power Ltd at the date of its incorporation, several years before. The shares were purchased at par value of Rs. 10 each. The total number of shares issued by Sajid Power Ltd was 100 million. Following is the trial balance of both the companies for the year ended June 30, 2009.
Haneef Ltd Debit Credit Rs. (m) Rs. (m) -12,000 1,000 -6,500 -3,500 -2,300 -3,500 --1,500 -1,000 -3,000 -2,500 -500 1,000 -2,500 -200 -----20,500 20,500 Sajid Ltd Debit Credit Rs. (m) Rs. (m) -7,500 --4,500 -1,500 -2,000 -1,200 --700 ---1,000 -2,000 -300 --1,500 -500 --700 1,000 -12,200 12,200

Sales Cost of investment in Sajid Ltd Cost of sales Operating expenses Closing stock Property, plant and equipment Accumulated depreciation b/f Dividend income from Sajid Ltd Ordinary share capital Retained earnings opening Creditors Due from Sajid Ltd Debtors Cash and bank balance Due to Haneef Ltd Dividend paid

Further, the following intra group transactions took place.

a) Haneef Ltd sold goods worth Rs. 500 million to Sajid Ltd during the year of which 1/5th are still in the inventory of Sajid Ltd. Haneef Ltd charges 20% margin on all goods it sells to associated companies. b) The intra group balances are not reconciled because of a cheque in transit of Rs. 200 million sent by Sajid Ltd to Haneef Ltd and Rs. 100 million management fee charged by Haneef Ltd to Sajid Ltd. c) The depreciation for the year is not charged in the above balances, the group uses 20% depreciation rate for all its property, plant and equipment on reducing balance
basis. The depreciation is to be charged in cost of sales.

Required: Prepare consolidated statement of financial position as on June 30, 2009, statement of comprehensive income and consolidated statement of changes in equity for the year ended June 30, 2009?

(20)

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Summer Exam-2010
(Final)
Financial Reporting [03-05-2010] Duration: 3 hrs.
[Instructions]
Ensure that the question paper delivered to you is the same, in which you intend to appear. Read the instructions given on the title page of Answer Copy.

Marks-100

Attempt all Questions

Q.1.
The statements of financial position of P and its subsidiary S at 31st December 2009 were as follows: Statement of financial position at December 31, 2009
P Rs. Total assets Non-current assets Property, plant and equipment Intangible assets Investment in shares of S Net current assets Equity and liabilities Capital and reserves Ordinary shares of Rs. 10 each Retained profits S Rs.

80,000 -100,000 180,000 40,000 220,000

70,000 30,000 100,000 40,000 140,000

120,000 100,000 220,000

100,000 40,000 140,000

1. P purchased 80% of Rs. 10 shares of S on 1st January 2007 for Rs. 100,000 when the reserves of S showed a balance of Rs. 20,000. 2. S has all the same accounting policies as P, except as regards intangible assets and property, plant and equipment (PPE). The intangible assets of S are all of a type where recognition would not be permitted under IAS 38. When P made its investments in S on 1st January, 2007 the intangible assets of S included Rs. 15,000 that would not qualify for recognition under IAS 38. 3. The group has the policy of measuring PPE at Revalued amount less subsequent accumulated depreciation and impairment losses. The revalued amount of PPE of P at the date of acquisition and current reporting date are equal to carrying value. However, the revalued amount of PPE of S was Rs. 15,000 more than their carrying value of which Rs. 5,000 relate to date of acquisition. The revaluation will result in extra depreciation of Rs. 2,000 in the post acquisition period. 4. During December 2009 P sold some goods to S for Rs. 12,000. P operates with a gross profit margin of 25%. At the 31st December 2009 S still holds one -third of these goods in inventory. 5. The intra group balances are reconciled and the amount due to P in the books of S is Rs. 4,000. 6. The Group has the policy of measuring Non Controlling Interest (NCI) fair value at the date of acquisition, the fair value of NCI was Rs. 30,000. 7. Consolidated goodwill has been fully written off by the current reporting date.

Required: Prepare the consolidated statement of financial position for the P group on 31st December (20) 2009?

Contd. on back

Q.2.

The accountant of JUNAID Limited has come across the following accounting issues while finalizing the financial statements for the year ended December 31, 2009 and sought your opinion being the company IFRS consultant.
i. JUNAID Limited issued a 1 year warranty for defects on a single item of equipment that it delivered to its customer. At the company's year end, the company is being sued by the customer for refusing to replace or repair the item of equipment within the warranty period, as JUNAID Limited believes the defect is not covered by the warranty, but instead has arisen because of the customer not following the instructions provided in the working manual of the equipment. Khan and Khan the company's lawyer has advised JUNAID Limited that it is more likely than not that they will be held liable. This would result in the company being forced to replace or repair the equipment plus pay court costs and a fine amounting to approximately Rs. 100,000. Based on past experience with similar items of equipment, the company estimates that there is a 70% chance that the equipment would need to be replaced which would cost Rs. 400,000 and a 30% chance that the repair would only cost about Rs. 15,000. The company also manufactures small items of equipment which it sells through a retail network. The company sold 12,000 items of this type this year, which also have a 1 year warranty if the equipment fails to perform properly. Based on past experience, 5% of items sold are returned for repair or replacement. In each case, one third of the items returned are able to be repaired at a cost of Rs. 1,000 each, while the remaining two thirds are scrapped and replaced. The manufacturing cost of a replacement item is Rs. 10,000. JUNAID Limited has a contract to buy 1,000 Kilograms of copper from a China Co each month for Rs. 3,000 per Kilograms. From each Kilogram of copper JUNAID Limited make one role of cable. The company also incurs labor and other direct variable costs of Rs. 1,000 per role. Usually company can sell each role of cable for Rs. 4,500 but in late July 2009 the market price falls to Rs. 3,500 per role. The company is considering ceasing production since it thinks that the market may not improve. If the company decides to cancel the copper purchase contract without 2 months' notice it must pay a cancellation penalty of Rs 150,000 for each of the next two months.

(05)

ii.

(05)

iii.

(05)

Required: Discuss the Accounting treatment of the above situations.

Q.3.

On 31st December 2008 PESHAWAR Co. purchased 90% shares of SIALKOT Co. for Rs. 2.2 million. The net fair value of the identifiable assets, liabilities and contingent liabilities of SIALKOT Co at that date was Rs. 1.85 million. Peshawar Co. made a loss in year ended 31st December 2009 and at 31st December 2009 the net assets of SIALKOT Co based on fair values at December 31, 2008 were as follows:
Property, plant and equipment Capitalized development expenditure Net current assets Total
st

(Rs. 000) 1,300 200 250 1,750

An impairment review on 31 December 2009 indicated that the recoverable amount of SIALKOT Co at that date was Rs. 1.55 million. The capitalized development expenditure has no ascertainable external market value and the current fair value less costs to sell of the property, plant and equipment is Rs. 1.122 million Value in use could not be determined separately for these two items.

(15) Required: Calculate the impairment loss that would arise in the consolidated financial statements of PESHAWAR Co as a result of the impairment review of SIALKOT Co at 31st December 2009 and show how the impairment loss would be allocated.

Contd

Q.4. During 2009, KAMAL Co. discovered that some products that had been sold during 2008
were incorrectly included in inventory at 31st December 2008 at Rs. 6,500. Further, an investment of Rs. 10,000 included in noncurrent assets was sold by the company secretary prior to 2008 and took away the proceeds, nothing is recoverable from the secretary as he left Pakistan and not traceable. The investment is still included in noncurrent assets. KAMALs accounting records for 2009 show sales of Rs. 104,000, cost of goods sold of Rs. 86, 500 (including Rs. 6,500 for the error in opening inventory) and income taxes of Rs. 5,250. In 2009 KAMAL reported: Statement of comprehensive income Sales Cost of goods sold Profit before income taxes Income taxes Profit Statement of financial position Assets Non-current Current assets Equity and liabilities Ordinary share capital Retained earnings Current liabilities 2009 Rs. 104,000 (86,500) 17,500 (5,250) 12,250 2009 50,000 22,000 72,000 5,000 46,250 51,250 20,750 72,000 2008 Rs. 73,500 (53,500) 20,000 (6,000) 14,000 2008 40,000 14,000 54,000 5,000 34,000 39,000 15,000 54,000

(a) The opening retained earnings of 2008 were Rs. 20,000 and closing retained earnings was Rs. 34,000.

(b) KAMALs income tax rate was 30 per cent for 2009 and 2008. It had no other
income or expenses. (c) KAMAL had Rs. 5,000 of share capital throughout, and no other components of equity except for retained earnings. Its shares are not publicly traded and it does not disclose earnings per share.

(15) Required: Prepare revised financial statements except statement of cash flows for KAMAL in comparatives? Q.5. M/S XYZ has taken an asset on lease from Commercial Leasing Corporation on
January 01, 2008 for four years. The asset has economic life of 10 years after which it will have zero residual value. The fair value of asset is Rs. 1,300,000. The annual lease rental is Rs. 150,000 with first year as grace period. The asset reverts back to lessor at the end of lease term. The lessee ends its accounting year on December 31st. Required: a) Discuss classification of lease. b) Provide relevant ledger accounts for first two years.

(05) (05)

Contd. on back

Q.6. An entity acquired a number of radio frequency licenses, which it has capitalized in (05)
accordance with the requirements of IAS 38. The licenses give the entity a contractual right to broadcast exclusively on specified radio frequencies for the next ten years. The licenses can be sold to third parties. Due to the limited availability of these licenses, and the commercial success of the radio stations using those frequencies, management considers the value of the licenses to be considerably more than carrying amount and intends to revalue them. The entity has conducted a valuation using a professional qualified valuer. Comment.

Q.7. AKBAR Construction Limited (ACL) has entered in following four contracts during the
year. The detail of these contracts is as under: Alpha Rs. (000) 5,000 1,000 250 3,000 2,500 Beta Rs. (000) 4,000 800 -2,200 1,500 Gama Rs. (000) 4,500 3,000 500 3,000 2,000 Ceta Rs. (000) 10,000 4,500 --2,000

Contract price Cost to date Un-used raw materials at the site Future cost including un-used raw material Progress billings and receipts

The cost to date of Alpha contract includes an amount of Rs. 100,000 incurred by ACL on rectification work because of error by the ACLs designing department. The company normally uses cost to cost basis for determining stage of completion. After entering into the contract Gama, ACL came to know that the raw material to be used in the contract has become expensive therefore, the contract has become onerous. After the start of contract Ceta, ACL has entered in serious litigation with the customer, the outcome of the contract is not determinable, however, whatever money has been received is not payable and no further receipts are probable. Required: Prepare relevant extract of financial statements for the year then ended? (15)

Q.8. M/S Sajid Ltd has land and building in its property, plant and equipment purchased on
January 01, 2000. The land and building are revalued at each year end. The building has a 40 year life at the purchase date and has not changed yet. The value of land and building at the start of current year are as follows:Historic cost Rs. (000) 01-01-2008 Land Building 31-12-2008 Land Building 80 120 80 120 Revalued amount Rs. (000) 140 132 160 130 Revaluation surplus Rs. (000) 60 33

The company has a policy of transferring an amount equal to extra depreciation from revaluation surplus to retained earnings. Required: Provide extract of statement of comprehensive income and statement of financial position for M/S Sajid Ltd for the year? (05)

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Winter Exam-2010
(Final)
Financial Reporting [01-11-2010] Duration: 3 hrs.
[Instructions]
Ensure that the question paper delivered to you is the same, in which you intend to appear. Read the instructions given on the title page of Answer Copy.

Marks-100

Attempt all Questions

Q.1. On July 01, 2009 PARVEZ LTD purchased 60% shares of SADIQ LTD through share for share exchange by issuing its 4 shares for every 5 shares of SADIQ LTD. The fair value of one share of PARVEZ LTD was Rs. 140 and of SADIQ LTD was Rs. 110 on date of acquisition. The summarized statements of comprehensive income for the two companies for the year ended June 30, 2010 are: PARVEZ LTD. SADIQ LTD. Rs. (000) Rs. (000) 85,000 65,000 (35,000) (25,000) 50,000 40,000 (10,500) (1,500) (12,500) (15,500) 27,000 23,000 (1,500) (4,500) 2,500 -28,000 18,500 (10,000) (5,500) 18,000 13,000

Revenue Cost of sales Gross profit Administrative expenses Distribution expenses Operating profit Interest expense Other income Profit before tax Tax expense Profit for the year

a) A fair value exercise was carried out for SADIQ LTD at July 01, 2009, the date of acquisition with the following results: Book value Fair value Rs. (000) Rs. (000) 20,000 20,500 27,000 27,700 5,000 5,300

Land Building Inventory

The fair values of land and building have not changed materially from the acquisition date and the assets still exist on current reporting date, however, SADIQ LTD has not recorded the fair values in its separate books. The remaining useful life of building at the date of acquisition was 10 years. The inventories have been sold by SADIQ LTD before the year end. b) The detail of each companys share capital and reserves at July 01, 2009 are: PARVEZ LTD SADIQ LTD Rs. (000) Rs. (000) 20,000 1,500 50,000 2,500 25,000 5,000

Ordinary share capital of Rs. 10 each Share premium Accumulated profits

Contd. on Back

c) On January 01, 2010 SADIQ LTD sold goods to PARVEZ LTD which has been treated as plant and equipment by PARVEZ LTD. The cost of goods to SADIQ was Rs 10 million but sold to PARVEZ at Rs. 15 million. PARVEZ depreciates such assets on four years using straight line depreciation method. d) On January 01, 2010 SADIQ LTD issued Rs. 90 million 10% loan notes of which PARVEZ LTD subscribed 40% loan notes. The other income includes interest received from SADIQ LTD. e) The group has the policy of measuring Non-Controlling Interest at fair value. The goodwill has been tested for impairment at the year end and Rs. 1 million impairment losses on goodwill should be recognized in group financial statements. f) There has been no dividend payment by any company during the year. Ignore deferred taxation while consolidating the above financial statements. Required: a) Calculate Goodwill at the date of acquisition? (05)

b) Prepare Consolidated Statement of Comprehensive Income for the year (15) ended June 30, 2010 for PARVEZ LTD Group? Q.2. National Corporate Leasing Limited (Leasing Company) is a listed company engaged in leasing of equipments. The equipments under lease some time are not available from the market therefore, it maintains a reasonable stock of these equipment by its own. During the year ended December 31, 2009 it had entered into many lease contracts with individual as well as corporate clients. The detail of its two contracts is as follows: a) Sale Type Lease: Equipment costing Rs. 250,000 purchased by it two months back was leased to MB Limited on June 30, 2009. The fair value of this equipment is Rs. 300,000. The lease agreement is for three years and the rental due in advance, the first rental of Rs. 120,000 is received on June 30, 2009. The leasing company has also incurred Rs. 10,000 on commission to sales persons. b) Finance Type Lease: Equipment having fair value of Rs. 500,000 has been purchased by KD Limited and the leasing company has made payment on behalf of KD Limited on September 30, 2009. The rental will due in arrear but a deposit of Rs. 100,000 has been received in advance. The lease term is for five years and annual rental is Rs. 134,000. The commission of Rs. 20,000 has also been paid to sales persons. The interest rate leasing company normally use for sale type lease is 21.5% and for finance type lease is 20%. The market interest rate for sale type lease is 20%. Required: Prepare extract of financial statements for both the contracts? (15)

Contd..

Q.3.

QUTAB Limited is a listed company, whose shares are trading on all the three stock exchanges of the country. The financial year end of the company is June 30, 2010. The financial statements of the company have been approved on September 05, 2010. The chief accountant of the company has come across the following events occurring after the reporting date. a) During a board meeting held on July 15, 2010 the board decided to dispose off a location which is identified cash generating unit located in KHYBER PAKHTUNKHA badly affected by the recent flood. The carrying value of the cash generating unit is Rs. 15.5 million but the recoverable is now significantly lower than the carrying value. The flood came in first week of June 2010.

b) During the month of August a local distributor of Chinese Company launched a new product at very low price, which forced the company to reduce its selling price even below cost to dispose of the entire stock. In the monthly meeting of board of directors, they decided to discontinue the production of said product. The discontinuation of production will result in redundancy payments of Rs. 2 million to employees currently involved in the production of said product. c) During the year 2010, the company was sued by a large multinational company dealing in software development for using pirated soft ware on its Information Technology equipments. The case was pending with the Court and the legal advisor of the company has advised for a provision of Rs. 5 million at the reporting date. The decision of the court came on August 20, 2010 and penalty of Rs. 10 million was confirmed by the court. On August 25, 2010 the company filed appeal against the court verdict in Higher Court. The legal advisor is still of the opinion the penalty should not exceed Rs. 5 million. During audit for the year ended June 30, 2010, the auditors detected that some tangible assets of Rs. 500,000 are not traceable physically. The enquiry was initiated which concluded on August 31, 2010 that these assets were stolen by someone and are not recoverable. The company was however, insured against theft and claim was lodged with the insurance company. The insurance company has not confirmed the amount of claim; however, there is a possible chance that 50% of the claim will be accepted by the insurance company. (12)

d)

Required: Discuss the accounting treatment of above events in the financial statements of QUTAB Limited? Q.4. On 1 July 2009 a company held a freehold building in its books with a net book value of Rs. 18 million and a remaining useful life of 30 years. On the same date, it entered into an agreement to sell the building to a bank for Rs. 35 million, but continues to occupy it for the next 5 years at an annual rental of Rs. 5 million per annum payable in advance. The market value of the building at the date of sale was approximately Rs. 20 million and an 'arm's length' rental would be approximately Rs. 3 million per annum. Required: Describe how the above transaction should be treated in the financial statements of the company for the year ended 30 June 2010?

(10)

Contd. on back

Q.5. You are presented with the statement of financial position of Sajjad Ltd. for the year ended 30 June 2010, together with comparative figures for the previous year. Sajjad Ltd. Statement of Financial Position as at June 30, 2010 Fixed assets
Tangible assets Less: depreciation Goodwill Current assets Stock Trade debtors Bank

2010
Rs. (000) 2,900 (700)

2010
Rs. (000) 2,200 500 2,700 550 450 50 1,050 3,750

2009
Rs. (000) 2,000 (470)

2009
Rs. (000) 1,530 650 2,180 450 250 -700 2,880

Share capital and reserves Ordinary share capital of Rs. 10 each Share premium Retained earnings Non-current liabilities Deferred tax Long term loans Current liabilities Trade creditors Current tax Dividends-interim Bank overdraft

2,000 250 405 2,655 100 150 250 400 245 200 -845 3,750

1,500 -460 1,960 150 50 200 370 200 120 30 720 2,880

Additional information: A Plant which cost Rs. 130,000 on July 01, 2006 being depreciated at 10% per annum on reducing balance basis was sold for profit of Rs. 55,000 at the start of current year. The interim dividend for the year is Rs. 170,000. Interest paid was Rs. 33,000 during the year ended June 30th, 2010. There was an over provision of tax amounting to Rs. 50,000 has been reversed in the year 2010. Required: a) Calculate the operating profit of Sajjad Ltd. for the year ended 30th June 2010? b) Prepare a cash flow statement for Sajjad Ltd. for the year ended 30th June 2010? (05) (10)

Contd

Q.6.

The extract of statement of financial position of MN Limited for the year ended June 30th, 2010 and 2009 as comparative is as under: 2010 Rs. (000) Property, plant and equipment Advance income Accrued expenses Prepaid expenses Development cost Loan 135,000 -1,500 -4,000 9,100 2009 Rs. (000) 150,000 2,000 -3,500 5,000 --

The following notes are also relevant for the computation of current and deferred tax: (i) The property, plant and equipment is being depreciated under tax laws at 15% per annum while under IAS 16 it is being depreciated at 10% per annum under reducing balance basis. The tax base of property, plant and equipment was Rs. 109 million on June 30, 2009. (ii) The profit before tax is Rs. 450 million for the year ended June 30, 2010. (iii) Un-used tax losses brought forward at the start of year 2010 are Rs. 250 million. (iv) The advance income has been taxed in the year of receipt. (v) The expenses under tax laws are allowed when paid. (vi) The development cost of Rs. 6 million has been incurred in 2009 and was being amortized over six years; however, the whole amount was claimed as an expense under tax laws in 2009. (vii) The loan has been issued on last day of year 2010 for Rs. 10 million and issuance cost of Rs. 0.1 million was incurred. The issuance cost is an allowable expense under tax laws in the year of incurrence but is amortized under IAS 23 over the loan term. (viii) The tax rate has been 35% in the current year and in the previous years. Required: a) Calculate current tax and taxable profit? b) Calculate deferred tax? Q.7. Mega Contractors (Private) Limited is a developer of commercial properties. During the year ended June 30, 2010 it started to develop a commercial plaza. Considering the volume of work and forecasted cash flows, it borrowed Rs. 500 million from Fin Solutions Bank Limited at six month average Kibor+3 percent, however, the total project cost will be Rs. 1,200 million. The loan was borrowed on September 30, 2009 but the project started on October 31st, 2009. The loan was utilized on the asset as follows:October 31, 2009 January 31, 2010 200 150

(07) (08)

The project is still in progress and will take at least one year to complete. The loan was also temporarily invested to earn Rs. 12 million as interest income of which 5 million earned in October 2009. The kibor+3 in first six months of the loan were 15% and 17.5% thereafter. During the year Mega Contractors also received Rs. 175 million as booking fee for space from customers on March 31, 2010. Required: (13) Calculate the cost of work in progress and amount of borrowing cost to be capitalized in the cost of the asset?

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Winter Exam-2011
(Final)
Duration:3hrs.

Financial Reporting [31-10-2011] Marks100

[Instructions] Ensurethatthequestionpaperdeliveredtoyouisthesame,inwhichyouintendtoappear. ReadtheinstructionsgivenonthetitlepageofAnswerCopy.

Attempt all Questions

Q.1.

IAS24(RelatedPartyDisclosures)hasrecentlybeenamendedandthedefinitionofrelatedparty hasbeenimproved.YouarerequiredtogivedefinitionofrelatedpartyunderIAS24andidentify thoserelatedpartyrelationshipsinwhicheventhereisnotransactionduringtheperiod,theymust bedisclosed. TheIncomeStatementsforPLandSLfortheyearendedJune30,2011areshownbelow.

PL Rs. SL Rs.

10

Q.2.

25

Revenue Costofsales Grossprofit Distributionexpenses Administrativeexpenses Financecost Otherincome Profitbeforetax Incometaxexpense Profitfortheyear Additionalinformation
a)

150,000 (70,500) 79,500 (20,000) (10,500) (1,500) 1,700 49,200 (9,200) 40,000

150,000 (90,000) 60,000 (15,000) (10,500) (2,000) 32,500 (7,500) 25,000

b)

c) d) e) f)

PL acquired 80% shares of SL at the start of current year. The issued share capital of SL was Rs.50,000dividedinto5,000shareofRs.10each.TheretainedearningsofSLwereRs.250,000 atthedateofacquisition.ThecarryingvalueofnetassetsofSLwasequaltotheirfairvalues exceptoneplanthasfairvalueofRs.10,000morethanitscarryingvalue.Theremaininguseful lifeofplantwas4yearsatthedateofacquisition.ThefairvalueofoneshareofSLwasRs.70 atthedateofacquisition. PLissuedits1shareforevery2sharesaspurchaseconsiderationtotheoldshareholdersofSL. ThefairvalueofPLsharesatthedateofacquisitionwasRs.100pershare.PLalsosubscribed 30% of Rs. 20,000, 10% loan of SL at the start of the year. The other income of PL includes interestreceivedfromSL. SL declared 2% interim dividend during the year. The other income of PL includes dividend receivedfromSL. 30%ofthetotalGoodwillhasbeenimpairedbythecurrentreportingdate. ThegrouphasthepolicyofmeasuringNCIatfairvalueatthedateofacquisition. SL sold goods to PL valuing Rs. 30,000 by charging markup of 20%. The whole of goods remainedunsoldbythecurrentreportingdate.

Required:
PrepareconsolidatedIncomeStatementforthePLgroupfortheyearendedJune30,2011.
Contd. on back

2
Q.3.

DiscusstheaccountingtreatmentofthefollowingunderIAS23;
a)

15

Atelecomcompanyhasacquiredatelecommunicationlicense.Thelicensecouldbesoldor licensed to a third party. However, management intends to use it to operate a wireless network.Developmentofthenetworkstartswhenthelicenseisacquired. Shouldborrowingcostsontheacquisitionofthelicensebecapitalizeduntilthenetworkis readyforitsintendeduse?

b)

A real estate company has incurred expenses for the acquisition of a permit allowing the construction of a building. It has also acquired equipment that will be used for the constructionofvariousbuildings. Can borrowing costs on the acquisition of the permit and the equipment be capitalized untiltheconstructionofthebuildingiscomplete?

c)

Doesmanagementtakeintoaccountpaymentsreceivedinadvancefromcustomerswhen determiningtheamountofborrowingcoststobeincludedincontractcosts? AcontractaccountedforunderIAS11isfinancedwithgeneralborrowingsandisinanet creditposition(advancesinexcessofcostsincurred).Isthenetinterestincometreatedasa contractcost? AnentityincursborrowingcostsfortheconstructionofanassetaccountedforunderIAS11. DoesmanagementtreattheborrowingcostsasacontractcostunderIAS11?

d)

e)

Q.4. KhalidandJamilwereinpartnershipsharingprofitsandlossesintheratioof3:2.Theirstatement

offinancialpositionasatJune30,2011wasasunder:

Assets Noncurrentassets Freeholdpremises Plantandmachinery Currentassets Inventory Tradereceivables Cash Capitalandliabilities Capital Khalid Jamil Noncurrentliabilities Notespayable Currentliabilities Tradecreditors Bankoverdraft

Rs.(000) 16,000 5,000 21,000 16,000 26,000 7,000 49,000 70,000

20,000 10,000 30,000 10,000 20,000 10,000 30,000 70,000

Contd.

3 a) OnJuly01,2011theydecidedtoconvertintoaprivatelimitedcompanynamed Style(Private)Limited. b) TheStyle(Pvt.)limitedcompanywilltakeoveralltheassetsandliabilitieswith theexceptionofnotespayable,cashandbankoverdraft.Thepurchasepricewill beRs.60millions.Thepurchaseconsiderationwillbesettledthroughpayment of cash of Rs. 12 millions and balance amount through issuance of shares in Style(Pvt.)limitedatpar.TheparvaluepershareisRs.10. c) NotespayableweresettledthroughcashpaymentofRs.9.8millions.Thebank overdraft was settled at full value. Any difference on capital accounts of partnerswillbesettledthroughcash. d) The fair values of all assets and liabilities will be same in the books of new companyexceptfreeholdpremisesbeingvaluedatRs.25millions.

Required:

Q.5.
(i) (ii) (iii)

Realizationaccountinthebooksofoldpartnership? Partnerscapitalaccountsinthebooksofoldpartnership? OpeningstatementoffinancialpositionofStyle(Private)Limited?

05 05 05 20

AccordingtoIAS1(PresentationofFinancialStatements)discussthefollowingconcepts:
a) Impracticable b) Unreservedstatement c) DisagreementwithIFRS d) Trueandfairview e) Currentassets XYZisalimitedliabilitycompanyengagedinproductionofpoultryfeed.XYZhasrecentlyimported amachineworthRs.200millions(includingRs.15millionscustomdutiesandhandlingcharges). DuetotheheavycostofthemachineXYZenteredintoasaleandleasebacktransactionwithFIN BankLimited.ThemachinewassoldtobankforRs.215milliononJuly01,2010andleasedback for5yearswhichisalsotheusefullifeofthemachine.Theinterestrateimplicitintheleaseis18% p.a.Therentalsareinarrearandpayableattheendofeachyear.

Q.6.

Required:
ProvideextractofFinancialStatementofXYZfortheyearendedJune30,2011. 15

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