Certificate in Accounting and Finance Stage Examinations

2 March 2015
3 hours 100 marks
Additional reading time 15 minutes

The Institute of
Chartered Accountants
of Pakistan

Financial Accounting and Reporting-I

Q.1

Babar had purchased a running business from Razi on 1 January 2014 at a total agreed price
of Rs. 960,000. Babar died on 16 June 2014 and his son Sami took over the business. Sami
wants to assess the profitability of the business and for that purpose he has collected the
following information from the records maintained by him and his father:
(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 Razis 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:

(iii)

Receipts
Amount deposited by Babar on 1 January 2014 from his personal account
Day to day collections banked at day end

Rupees
2,000,000
3,800,000

Payments
Second instalment to Mr. Razi on 31 January 2014
Purchases
Lease rent
Electricity
Furniture purchased on 1 July 2014

480,000
3,150,000
120,000
22,000
25,000

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:

Salaries and EOBI payments

Purchases
Sundry shop expenses
Drawings

(iv)

(v)

(vi)

Rupees
184,300
49,500
35,600
192,500

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.
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.
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

Q.2

Page 2 of 5

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
21,732,000
15,846,250
4,753,875
36,220
108,660
9,055
70,629
6,385,000
250,000
1,448,800

Goods received from head office

Sales made during the year, of which 40% on credit
Realized from credit customers
Trade discount allowed to customers
Sales return by customers
Bad debts
Petty expenses incurred
Closing stock
Goods in transit from head office at year-end
Purchase of fixed assets, bills discharged by head office
Expenses incurred and reimbursed by head office:

Rent and utilities

Sales promotion

Payroll

537,100
144,880
724,400

Other information:
(i)
(ii)

Head Office invoices goods to branch at cost plus 25 percent.

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.
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?

(b)

(12)

(02)

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.
The dividend was paid by the company on 15 January 2015.
Required:
Prepare necessary journal entries relating to the dividend in the books of Saleem.

(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
31 December 2014.

(d)

(02)

relating

to

this

transaction

for

the

year

ended

In the sale of goods how should the revenue be recognised when goods are shipped
subject to installation and inspection?

(04)
(04)

Financial Accounting and Reporting-I

Q.4

Page 3 of 5

(a)

List the elements of financial statements.

(b)

Following is the draft balance sheet of XYZ Limited as at 31 December 2014 which
was prepared by its accountant:
Rs. in
million
Leasehold land cost
250
Leasehold land accumulated amortisation
(200)
Building cost
1,000
Building accumulated depreciation
(500)
Machinery cost
1,750
Machinery accumulated depreciation
(1,150)
Long term deposit
70
Stocks
910
Account receivables net of provision
361
Cash and bank
851
3,342
Assets

(02)

Equities and liabilities

Capital
Accumulated profit
Long term bank loan
Trade payables
Income tax payable
Accrued interest

Rs. in
million
1,000
1,816
200
228
85
13

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
703
418
243
150
80
70

Stock
Account receivables net of provision
Cash and bank
Trade payables
Income tax payable
Long term deposit

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
Building
Machinery

2%
5%
10%

Full months depreciation is provided in the month of acquisition but no

depreciation is charged in the month of disposal. Depreciation for the year 2014
has already been provided.
On review the CFO has discovered the following:

A machine with list price of Rs. 50 million was purchased on

1 January 2014. An amount of Rs. 30 million had been paid in cash
whereas Rs. 20 million were adjusted against trade-in of a machine costing
Rs. 40 million and having a book value of Rs. 25 million. The transaction
was recorded by debiting the plant and machinery account by Rs. 30
million i.e. the net amount paid to the supplier.
One of the company's customers became bankrupt during the year. Rs. 5
million out of total debt of Rs. 25 million were recovered from him.
Balance has to be written off.

Required:
Prepare a statement of cash flow as at 31 December 2014.

(20)

Financial Accounting and Reporting-I

Q.5

(a)
(b)

Page 4 of 5

List the particulars that are required to be disclosed in the financial statements in
respect of inventories, according to IAS 2.

(03)

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:
Raw material purchased (including 17% sales tax which
is refundable)
Packing material purchased
Settlement discount received on raw material purchases
Transportation cost relating to raw material (70%) and
packing material (30%)
Details of overheads:
Rent
Salaries and wages
Other variable overheads
Other fixed overheads

Rs. in 000
60,500
2,050
400
300
2,700
2,500
5,000
1,500

Other information:
(i)

The break-up of rent is as follows:

Factory
Warehouse (50% for raw material, 10% for
packing material and 40% for finished goods)
Shelf spacing in super markets

(ii)

Rs. in 000
2,000
500
200

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:

Packing material
Raw material
Finished goods
Work in process

1-Jan-2014
31-Dec-2014
--------- Rs. in 000--------700
285
5,000
7,780
2,962
4,162
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

Q.6

Page 5 of 5

You have recently been appointed as chief financial officer of Al-Hafeez Limited (AHL).
While finalizing the companys 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.

(b)

(c)

(07)

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)

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)