Financial Accounting and Reporting I: Additional Practice Questions

2019
FINANCIAL ACCOUNTING
AND REPORTING I
Additional Practice Questions
Questions & Answers

Question Answer
CHAPTER 1 ACCOUNTING AND REPORTING CONCEPTS 2 15
CHAPTER 2 IAS 1: PREPARATION OF FINANCIAL

4 18
STATEMENTS
CHAPTER 6 INTRODUCTION TO COST OF PRODUCTION 7 20
CHAPTER 7 IAS 16: PROPERTY, PLANT AND EQUIPMENT 13 27
1 The Institute of Chartered Accountants of Pakistan

QUESTIONS
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 Question
Mark true/false against each given scenario and give reasons for the selected answer:
A. In case of conflict between requirements of conceptual framework and IFRS, the requirements of
conceptual framework shall prevail.
B. Conceptual framework is not an International financial reporting standard (IFRS)
C. HR related cost is recognized as an asset in the financial statements since economic benefit is
probable from human resource
D. Internally generated goodwill is recognized as asset and measured at fair value in the financial
statements
E. When economic benefits arise over several accounting periods, and the association with income can
only be decided in broad terms, expenses should be recognized in profit and loss of each accounting
period on the basis of systematic and rational allocation procedure
F. When an item of expenditure is not expected to provide any future economic benefit, it is recognized
as an asset in the financial statements
G. In fair value method, assets are measured at the amount that would be paid to purchase the same
or a similar asset currently.
1.2 Question
Identify the accounting concepts in each of the following scenarios:
A. The method of measurement is relevant when an entity is not a going concern, and is faced with
liquidation
B. HM has to incur dismantling cost amounting Rs.100,000 after 3 years, however he records this cost
at Rs.75,131
C. HM has purchased PPE costing Rs.10,000 to be depreciated over a period of 10 years, at the end of
year 3 the Book Value amounted to Rs.7,000, however HM considers measuring the PPE at its
current market value amounting Rs.15,000.
1.3 Question
What is the purpose of conceptual framework in presence of other international accounting standards?
1.4 Question
For any element to be recognized in accounting records, it must meet its definition criteria as well as
general recognition criteria:
A. Briefly explain the general recognition criteria
B. Definition of each element along with examples

1.5 Question
HM received Rs.160 000 in cash on 20 December 2004 from RM in return for having provided financial
advice during the 2004 financial year.
Required
A. Explain, with reference to the relevant definitions, which elements should possibly be recognized
in the 2004 financial year.
B. Briefly identify whether and/ or how your answer would change if the cash received had been
received for financial advice to be provided in the 2005 financial year.
1.6 Question
Which of the following, would be recognized as expense&/or asset in the financial statements of a
company in accordance with the criteria given in conceptual framework.
1. An amount paid to landlord totalling Rs.120, 000 on 1st January 2012 against the rent for the year
ended 31st December 2012. Year end of the entity is 30 June 2012.
2. An expenditure incurred on repairs and maintenance of plant amounting Rs.300, 000.
3. There has been legal dispute between the entity and its customer and company expects the outflow
of Rs. 200,000 in order to settle the dispute.
4. Entity purchased goods costing Rs.20,000 for trading purposes and the same was sold for
Rs.25,000
1.7 Question
Which of the following, would be recognized as income &/or liability in the financial statements of a
company in accordance with the criteria given in conceptual framework:
1. Advance received from customer amounting Rs.50,000 against the goods to be delivered after 6
months
2. Services provided to ABC and Co. on credit amounting Rs.30, 000.
3. Account Receivables already written off in previous years amounting Rs.30,000 were received
during the year.

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1 Question
MK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of manufacturing
and sale of yarn products. Company year-end is December. Below is the relevant information given:
Opening balances as at January 01, 2018
Description Rs.
Opening Share Capital (at par value of Rs. 10 per share) 25,000,000
Share Premium 7,500,000
Opening General Reserves 750,000
Opening RE 18,250,000
Revaluation Surplus 1,500,000
Following events have taken place in year 2018 and 2019:

1. On March 31, 2018, Company issued Right shares for Rs. 20 per share. Right shares were issued
in the proportion of 1 right share against 5 ordinary shares held.
2. Board of Directors of the Company approved Interim dividend of Rs. 2.25 per share for the half
year ended June 30, 2018.
3. Annual profit for the year ended December 31, 2018 is Rs. 10,250,000.
4. The Board of Directors of the Company recommended annual dividend of Rs. 4.25 per share on
February 15, 2019, which was duly approved by the Shareholders on March 21, 2019.
5. The Board of Directors approved Bonus Shares of 20% of the Outstanding shares on June 30,
2019 which were duly credited in Shareholders account on August 31, 2019.
6. Board of Directors of the Company approved Interim dividend of Rs. 1.25 per share for the third
quarter ended September 30, 2019.
7. Annual profit for the year ended December 31, 2019 is Rs. 12,500,000.
8. The Board of Directors of the Company recommended annual dividend of Rs. 5 per share on
9. The Company has a policy to transfer 5% of the Annual Profit to General Reserves.
10. Company revalued Fixed assets on December 31, 2017 resulting in Revaluation Surplus of Rs.
1,000,000. Remaining useful life of the Asset is 10 years and Company has a straight line method
for Depreciation.
Required
Make Statement of Changes in Equity for the year ended December 31, 2018 and 2019. Ignore taxation
impact if any.

2.2 Question
HMK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of manufacturing
and sale of Cars. Company year-end is December. Below is the relevant information given:
Description Rs.
Opening General Reserves 5,000,000
Following events have taken place in year 2018 and 2019:

1) On February 28, 2018, the Company issued Initial Public Offering, thereby offering 5 million
shares for Rs. 25 each. All shares were subscribed and company received the subscription
money by March 31, 2018.
2) The Board of Directors of the Company recommended annual dividend for the year ended
December 31, 2017 of Rs. 5 per share on February 15, 2018, whereas Shareholders only
approved Rs. 4 per share on March 31, 2018.
3) Board of Directors of the Company approved Interim dividend of Rs. 1 per share for the third
3) Annual profit for the year ended December 31, 2018 is Rs. 130,250,000.
4) The Board of Directors of the Company recommended annual dividend of Rs. 4.25 per share on
February 15, 2019, whereas Shareholders approved Rs. 6 per share on March 31, 2019.
5) The Board of Directors approved Bonus Shares of 10% of the Outstanding shares on June 30,
6) Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for the third
8) The Board of Directors of the Company recommended annual dividend of Rs. 5.5 per share on
9) The Company has a policy to transfer 5% of the Annual Profit to General Reserves.
Required
impact if any.
2.3 Question 3
HMK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of manufacturing
and sale of Cars. Company year-end is December. Below is the relevant information given:
Description Rs.
Opening General Reserves 5,000,000

Following events taken place in year 2018 and 2019:
1) On February 28, 2018, the Company issued Initial Public Offering, thereby offering 5 million
shares for Rs. 25 each. Only 75% shares were subscribed and company received the
subscription money by March 31, 2018.
2) The Board of Directors of the Company recommended annual dividend for the year ended
December 31, 2017 of Rs. 5 per share on February 15, 2018, whereas Shareholders only
approved Rs. 4 per share on March 31, 2018.
3) Board of Directors of the Company approved Interim dividend of Rs. 1 per share for the third
5) The Government of Pakistan, vide Finance Bill introduced a section whereby each Company
declaring Profit after Tax of Rs. 150,000,000 or more has to distribute Dividend @ 20% of the
Profit after Tax. The Board intends to comply with the minimum threshold and declared dividend
accordingly on February 15, 2019, which was duly approved by Shareholders on March 21, 2019.
Note: The Board wants to meet the requirement of the law (Interim + final dividend)
6) The Board of Directors approved Bonus Shares of 10% of the Outstanding shares on June 30,
7) Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for the third
9) The Government of Pakistan, vide Finance Bill introduced a section whereby each Company
declaring Profit after Tax of Rs. 150,000,000 or more has to distribute Dividend @ 20% of the
Profit after Tax. The Board intends to comply with the minimum threshold and declared dividend
accordingly on February 15, 2019, which was duly approved by Shareholders on March 21, 2019.
Note: The Board wants to meet the requirement of the law (Interim + final dividend)
10) The Company has a policy to transfer 5% of the Annual Profit to General Reserves.
Required
impact if any.

CHAPTER 6 – INTRODUCTION TO COST OF PRODUCTION

6.1 Question
Describe briefly three major differences b/w:
(i) financial accounting
(ii) cost and management accounting
6.2 Question
The following balances were extracted from HM's accounts as at 31 march 2007.
Rs. in "000"
Sales 3,200
Purchase of raw material 450
Purchase returns 18
Carriage inward 10
Direct labour 400
Direct overhead 60
Rent 40
Electricity 30
Insurance 55
Factory supervision salaries 65
Office salaries 70
Indirect factory wages 13
Factory cleaning 50
Office cleaning 50
Stocks at 1 April 2006:
- Raw material 110
- Work in progress 55
- Finished goods 80
Factory machinery cost 640
Provision for depreciation on factory machinery 280
Additional information at 31 march 2007:
Rs. In "000"
Rent Prepaid 5
Electricity accrued 15
Insurance prepaid 10
Stocks
Raw material 140
Work in progress 75
Finished goods 170
- Depreciation on factory machinery is to be provided at 25% per annum reducing balance.

- Rent electricity and insurance are apportioned on the basis of 80% to factory and 20% to office.
- Finished goods are transferred to the trading account factory cost plus one third.
Required
Prepare HM's manufacturing account for the year ended 31 March 2007

6.3 Question 4
Following is the list of balances of Bablu limited:
Rupees
Opening stock-Finished goods 50,000
purchases of RM 2,450,000
Custom duty 122,500
Sales tax paid on purchases of RM 392,000
Carriage paid on RM purchases 49,000
Demurrage and octroi 73,500
Opening stock-RM 421,500
Opening WIP 121,100
Labor wages paid 1,685,500
Supervisory salaries 250,000
Indirect labor wages 450,000
Office staff salaries 500,000
Sales team salaries 125,000
Postage and telegram 12,500
Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage paid on finished goods purchases 19,700
Carriage out 27,000
Other income 24,500
Interest expense 148,500
interest income 16,500
Distribution expense 200,000
Depreciation 650,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –RM 100,000
Purchase return –FG 85,000
Purchase discount –RM 40,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
Sales 16,500,000

Other Information
Closing stock-RM 350,000

Closing stock –FG 421,000
Closing-WIP 100,000
- Depreciation-70%factory, 30% office

- Electricity -65%factory, 35% office
- Fuel -85%factory, 15% office
- Repairs-90%factory, 10% office
- Canteen -80%factory, 20% office
- Opening provision for doubtful debts Rs.5,000 and closing balance Rs.40,000
- Wages paid in advance Rs.20,000
- Wages accrued and unpaid Rs.40,000
- Sales Commission 5% of sales
- Directors remuneration -5% of net profit
Required
- Cost of Goods manufactured
- Statement of comprehensive Income
6.4 Question
Following is the list of balances of Marfani limited for the period ended 31 December 2015
Rupees
Opening stock-Finished goods(FG) 50,000
Purchases of Raw Material(RM) 2,450,000
Trade discount (30% on Direct RM purchases,20% on Indirect RM purchases
and 50% on FG purchases) 80,000
Custom duty (80% relates to Direct RM and 20% relates to FG purchases) 122,500
Import duty (40% is refundable) (70% relates to RM and 30% relates to FG
purchases) 40,000
Sales tax paid on purchases of RM (20% is non-refundable) 392,000
LC Charges (30% relates to RM and 70% relates to FG purchases) 90,000
Advance tax paid (30% relates to RM purchases, 20% relates to Indirect RM
purchases and remaining relates to FG purchases) 30,000
Carriage paid (50% relates to Direct RM purchases,20% relates to Indirect RM
purchases and 30% relates to FG Purchases ) 49,000
Purchase of Indirect RM 40,000
Octroi charges (50% relates to Direct RM and remaining relates to IRM) 73,500
Demurrage charges (60% relates to Direct RM and remaining relates to IRM) 20,000
Ab. Demurrage charges (90% relates to Direct RM and remaining relates to
IRM) 5,000
Penalty to driver carrying RM to factory 3,000
Opening stock-Direct RM 421,500

Rupees
Opening WIP 121,100
Labor wages paid (60% relates to *manufacturing and 40%relates to admin) 2,185,500
Sales team salaries 125,000
Postage and telegram 12,500
Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage out 27,000
Other income 24,500
Interest paid 148,500
interest income 16,500
Distribution expense 200,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –Direct RM 100,000
Purchase return -FG 85,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
sales 16,500,000
settlement discount received (30% on Direct RM purchases,20% on Indirect
RM purchases and 50% on FG purchases) 500,000
Other Information
Closing stock-RM 350,000

Closing stock -FG 421,000
Closing-WIP 100,000
Closing stock-Indirect RM 20,000
- Depreciation-70%factory, 30% office

- Accrued electricity is 40,000(Electricity-65%factory, 35% office)
- Fuel exp. Relating to next period is Rs. 20,000(Fuel-85%factory, 15% office)
- Repairs-90%factory, 10% office
- Cantene-80%factory, 20% office
- Opening provision for doubtful debts Rs.5,000 and closing balance Rs.40,000
- Wages paid in advance Rs.30,000 Wages accrued and unpaid Rs.70,000

- Sales Commission 5% of sales
- Directors remuneration-5% of net profit
- *Labour wages relating to manufacturing includes 80% cost of labour which are directly involved in
production
- Above Interest paid includes interest for next two months from the RD. Annual interest is charged
out
Required
- Prepare: Cost of Goods manufactured for the year ended 31 December 2015
- Statement of comprehensive Income 31 December 2015

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 Question
Abbas Limited (AL) is engaged in the business of manufacturing near the Karachi-Hyderabad
Motorway. Its Property, Plant and Equipment comprises of land and buildings, plant and machinery,
and equipment and fittings.
Details for the period up to 30 June 2018 are as follows:
1. The balances of the Property, Plant and Equipment as at 30 June 2018 are given below:
Assets Gross Carrying Amount Accumulated Depreciation (Rs.

(Rs. Million) Million)
Land 12 N/A
Buildings 125 38
Plant and Machinery 500 300
Equipment 100 36
2. The relevant information pertaining these assets is given below:
Assets Depreciation Method Subsequent Measurement Model

Land N/A Fair Value
Buildings Straight-line Cost
Plant and Machinery Units of Production Cost
Equipment Written down value Cost
3. Abbas Limited uses proportionate policy to depreciate its Property, Plant and Equipment.
4. All of the plant and machinery pertains to factory use whereas all the equipment pertains to office
use. However floor areas occupied by factory and office are in the ratio 60:40 respectively.
5. The equipment was purchased on 1 July 2016. No disposals and acquisitions took place in the
period up to 30 June 2018.
6. Until 30 June 2018, 12,000 units had been produced by Abbas Limited in its factory. The plant
and machinery does not have any residual value. No additions or disposals of plant and
machinery took place till this date.
7. The buildings were acquired on 1 July 2014 with a residual value of Rs. 11 million. No additions
and disposals took place till 30 June 2018.
8. The land had actually cost Rs. 15 million on the date of its acquisition.
9. It is assumed that value of land and buildings is spread evenly across the area occupied.
The following information pertains to the year ended 30 June 2019:
1. On 1 July 2018, land was revalued to Rs. 20 million on 1 July 2018. The value was determined
by an independent firm M/s Ashfaq& Co. Chartered Accountants.
2. This year, 5,000 units were product in the factory of AL.
3. On January 1, 2019, AL disposed 25% ofits area comprising of land and buildings at a price of
Rs. 90 million. The portion of land was sold at its fair value as determined on 1 July 2018. The
legal costs of drafting transfer agreements wereRs. 0.1 million. It is assumed that this disposal
will not affect the proportion of areas occupied by factory and office.
4. Further equipment costing Rs. 60 million was acquired on 1 November 2018.
5. In the meeting of its board of directors, it was decided to open a new factory premises near
Lahore-Islamabad motorway. An expenditure of Rs. 20 million was spent of the construction of

the factory on 1 December 2018, financed by a loan obtained from the bank at the rate of 12%
per annum. The construction had not been completed at the end of the year.
6. Moreover, the directors also made a contract with M/s UniPower& Co. to purchase plant and
machinery worth Rs. 35 million once the construction of factory building is completed.
Required:
a) Prepare journal entries to record the revaluation of land and disposal of land and buildings.
b) Prepare the disclosure under IAS 16 in relation to Property, Plant and Equipment in the notes to
the published accounts for the year ended 30 June 2019.
7.2 Question
Games Limited (GL) commenced a business of preparing and burning video game CDs on 1 July 2015.
The following information pertains to the year ended 31 March 2016:
1) GL purchased 30 computers on the date of commencement of business at a cost of Rs. 20,000
each, purely for the task of burning CDs. The management of GL estimates that since the
computers are subject to obsolescence, more of its benefit can derived in its early life. The total
useful life at the date of acquisition was estimated to be 4 years and residual value was estimated
to be Rs. 4,802 for each computer.GL decided to adopt historical cost model for subsequently
measurement of computers.
2) GL purchased an office building at the date of start of business worth Rs. 3 million. GL decided to
adopt fair value model due to fluctuations in property prices. 80% of the building is occupied by
computer labs, whereas 20% is used by administrative and selling departments. The useful life is
estimated to be 10 years at the date of acquisition with no residual value, and the economic
benefits are expected to be derived evenly over its useful life. At the end of the year, the fair value
of office buildings was assessed to be Rs. 3,237,500.
3) GL also purchased fittings for its administrative and selling departments, costing Rs. 120,000 on 1
July 2015. It is to be depreciated over 10 years using the straight-line method, with no residual
value.
4) GL made a contractual commitment with Al-Karim Computers to purchase 6 computers of Rs.
20,000 each to be delivered at GL’s premises on 1 May 2017.
The following information pertains to the year ended 31 March 2017:
1) The computers were delivered at the GL’s premises by Al-Karim Computers at the said date. It was
decided to use the same method and same rate to depreciate these computers. However, no
further space was utilised by the computer labs.
2) At the end of the year, the fair value of office building was assessed to be Rs. 2 million. At the year-
end GL mortgaged entire building with JS Bank to obtain a loan worth Rs. 1.75 million for
prospective investments in other divisions.
3) Fittings with a cost of Rs. 30,000 were disposed of for Rs. 22,000 on 1 January 2017. The Suzuki
Driver was paid Rs. 1,000 to transfer the fittings to customer’s premises.
The fair values of the office building were determined byan independent firm M/s Hafeez
Yasir Chartered Accountants& Co. Moreover, GL uses proportionate policy to depreciate its
assets.
Required:
(a) Prepare the disposal account to record the sale of fittings on 1 January 2017.
(b) Prepare the disclosure under IAS 16 in relation to Property, Plant and Equipment in the notes to the
published accounts for the year ended 31 March 2017 (comparatives are required).

ANSWERS
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 Question
A. False. In case of conflict between requirements of conceptual framework and IFRS, the requirements
of IFRS shall prevail being an established principle that specific law requirements prevail over general
law requirements
B. True. Conceptual framework provides foundation for the IFRSs
C. False.HR related cost can never be capitalized as it does not meet the definition criteria of asset
“controlled by the entity”
D. False. Internally generated goodwill can never be recognized as it does not meet one of the basic
recognition criteria i.e. “The item should have a cost or value that can be measured reliably”
E. True, because of matching principle
F. False. For any item to be recognized as an asset, it must be probable that an item shall provide future
economic benefits to the entity.
G. False. In current cost method assets are measured at the amount that would be paid to purchase the
same or a similar asset currently
1.2 Question
A. Realizable value/ settlement value
B. Present value
C. Fair Value
1.3 Question
The Conceptual Framework for Financial Reporting (CF) forms the foundation of all IFRSs. One needs
a thorough understanding of all its concepts in order to be able to correctly apply the various IFRSs, in
other words it gives broader guidelines/ concepts that underlie the preparation and presentation of
financial statements for external users and other standards give specific guidelines w.r.t. individual
items/statements.
Following are the main purposes of conceptual framework:
a. to assist the International Accounting Standards Board (IASB) in the development of future IFRSs
and in its review of existing IFRSs;
b. to assist the IASB in promoting harmonization of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs;
c. to assist national standard-setting bodies in developing national standards;
d. to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet
to form the subject of an IFRS;
e. to assist auditors in forming an opinion on whether financial statements comply with IFRSs;
f. to assist users of financial statements in interpreting the information contained in financial statements
prepared in compliance with IFRSs; and to provide those who are interested in the work of the
IASB with information about its approach to the formulation of IFRSs

1.4 Question
(A) General Recognition Criteria
 the flow of future economic benefits caused by this element must be probable; and
 the element must have a cost/value that can be reliably measured
(B) Definition of the elements
i. Asset
• A resource
• controlled by the entity
• As a result of past events
• From which future economic benefits are expected to flow to the entity.
Examples of assets:
Cash, Bank, Account receivable, Notes receivable
ii. Liability
• A present obligation (not a future commitment!)
• Of the entity
• As a result of past events
• The settlement of which is expected to result in an outflow from the entity of economic
benefits.
Examples of liability:
Loans, Account payable, Notes payable
iii. Equity
• The residual interest in the assets
• After deducting all liabilities.
For Example:
Capital, Retained earnings etc
iv. Income
• An increase in economic benefits
• During the accounting period
• In the form of inflows or enhancements of assets or decreases in liabilities
• resulting in increases in equity (other than contributions from equity participants).
Examples of income:
Sale revenue, commission income, rent income etc
v. Expense
• A decrease in economic benefits
• During the accounting period
• In the form of outflows or depletions of assets or an increase in liabilities
• resulting in decreases in equity (other than distributions to equity participants).
For Example:
Salaries expense, rent expense, utilities expenses, rent expense

1.5 Question
Part A:
Income definition:
Income is defined as:
• an increase in economic benefits during the accounting period
• in the form of increases in assets or decreases in liabilities
• resulting in increases in equity
• Other than contributions from equity participants.
Asset definition:
The essence of the definition of income requires that there is either an increase in assets or a decrease
in liabilities that results in an increase in equity during the year. The transaction involves the receipt of
cash (asset). Thus we will assess whether the transaction has increased our assets. The definition of an
asset is:
• a resource controlled by the entity
• as a result of a past event
• from which future economic benefits are expected to flow to the entity.
Discussion of the asset definition:
The cash is a resource controlled by the entity (it is secured in HM’s business account and thus
controllable). The cash was received in exchange for financial advice and since this advice was provided
during the 2004 year, this event represents a past event at reporting date. The cash is able to be used to
generate future income and thus future economic benefits are expected to flow to the entity from the use
of this asset. The cash thus meets the definition of an asset.
Discussion of the income definition:
The receipt of the cash during 2004 meets the definition of an asset and thus represents an increase in
assets. Since there was neither a concomitant increase in liabilities (HM has not obligations as a result
of this receipt of cash) nor decrease in assets, the receipt of this asset will have increased equity (using
the equation: A = E + L). This increase in equity is not a contribution from equity participants (e.g. it is
not the receipt of cash in exchange for an issue of equity shares). Thus the receipt of cash meets the
definition of income.
Conclusion:
The receipt of cash in return for services rendered leads to an asset and income in 2004.
Part B
If cash was received in 2004 for services to be provided in 2005, the asset definition would be met but
the income definition would not be. This is because although there is an increase in assets, it would not
lead to an increase in equity: the cash receipt would lead to an obligation to provide services, which would
meet the liability definition. An increase in both assets and liabilities results in a nil effect on equity.
1.6 Question
1 Rent (60,000)-Expense
Advance rent (60,000)-Asset
2. Asset, if the cost of the asset is material
3. Legal Charges- Expense
4. Goods(inventory) amounting to Rs. 20,000-Asset

1.7 Question
1. Advance from customer amounting to Rs. 50,000 – Liability
2. Accounts receivable amounting to Rs. 30,000- Income
3. reversal of bad debts amounting to Rs. 30,000-Income

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1 Answer
Share Share General Retained Revaluation
Description Total
Capital Premium Reserves Earnings Surplus
Opening Balance 25,000,000 7,500,000 750,000 18,250,000 1,500,000 53,000,000
Issuance of Right
Shares 5,000,000 5,000,000 - - - 10,000,000
Interim Dividend (6,750,000) (6,750,000)
Profit for the year 10,250,000 10,250,000
Transfer 512,500 (512,500) -
Transfer of Rev Surplus

to RE 150,000 (150,000) -
Balance at the end of

the year 30,000,000 12,500,000 1,262,500 21,387,500 1,350,000 66,500,000
(12,750,00
Annual Dividend 0) (12,750,000)
Bonus Shares 6,000,000 (6,000,000) - -
Transfer 625,000 (625,000) -
Transfer of Rev Surplus

to RE 150,000 (150,000) -

the year 36,000,000 6,500,000 1,887,500 16,162,500 1,200,000 61,750,000

2.2 Answer
Share Share General Retained
Description Total
Capital Premium Reserves Earnings
Opening Balance 100,000,000 50,000,000 5,000,000 55,000,000 210,000,000

Issuance of Shares
under IPO 50,000,000 75,000,000 - - 125,000,000
Annual Dividend 17 (40,000,000) (40,000,000)
Transfer 6,512,500 (6,512,500) -
the year 150,000,000 125,000,000 11,512,500 123,737,500 410,250,000
Annual Dividend (63,750,000) (63,750,000)
Bonus Shares 15,000,000 (15,000,000) -
Transfer 8,750,000 (8,750,000) -
the year 165,000,000 110,000,000 20,262,500 201,487,500 496,750,000
2.3 Answer
Share Share General Retained
Description Total
Capital Premium Reserves Earnings
Opening Balance 100,000,000 50,000,000 5,000,000 55,000,000 210,000,000

Issuance of Shares
under IPO 37,500,000 56,250,000 - - 93,750,000
Annual Dividend 17 (40,000,000) (40,000,000)

Transfer 8,750,000 (8,750,000) -
the year 137,500,000 106,250,000 13,750,000 167,500,000 425,000,000
Annual Dividend (21,250,000) (21,250,000)
Bonus Shares 13,750,000 (13,750,000) -

Transfer 9,262,500 (9,262,500) -
the year 151,250,000 92,500,000 23,012,500 299,550,000 566,312,500

CHAPTER 6 – INTRODUCTION TO COST OF PRODUCTION

6.1 Answer
Financial Accounting
1. It concerns with financial information
2. Primarily deals with financial reporting for external use
3. Primarily deals with monetary values
Cost and management accounting
1. It concerns with both financial as well as cost information
2. Primarily deals with cost information for internal use
3. Deals with both monetary and non-monetary information
6.2 Answer
M/S HM
Cost of Goods Manufactured
For the period ended 31 March 2007
Rs. In "000" Rs. In "000"
Stock of raw material at 1 April 2006 110
add Purchases 450
Carriage inwards 10
460
less returns 18 442
552
less Stock of raw material at 31 March 2007 (140)
412
Direct Labour 400
Direct overheads 60
Prime Cost 872
Factory Overhead
Rent 28
Electricity 36
Insurance 36
Supervisory Salaries 65
Indirect wages 13
Cleaning 50
Provision for depreciation on machinery 90 318
1,190
Work in Progress at 1 April 2006 55
less Work in progress at 31 March 2007 75 (20)
Cost of Goods Manufactured 1,170

6.3 Answer 4
M/S Babloo Limited
Cost of Goods Manufactured
RM
Opening stock 421,500
Purchases 2,450,000
Demurrage and Octroi 73,500
Custom duty 122,500
Purchase return (100,000)
Carriage in 49,000
Closing stock (350,000)
RM Consumed 2,666,500
Labour wages 1,705,500
Prime cost 4,372,000
Factory OH
Supervisor salary 250,000
Indirect labour wages 450,000
Fuel Expense 340,000
Electricity 364,000
Rent rate 345,000
Repairs & maintenance 232,065
Canteen expense 112,000
2,548,065
Manufacturing cost during the year 6,920,065
Opening WIP 121,100
Closing WIP (100,000)
COGM 6,941,165

M/S Babloo
Trading, Profit and loss account
Sales 16,500,000
Sales return (200,000) 16,300,000
COGS
Op stock 50,000
Purchases 985,000
Purchase return (85,000)
Carriage in 19,700
COGM 6,941,165
Closing stock (421,000) 7,489,865
Gross profit 8,810,135
Operating expenses
Office staff salaries (500,000)
Sales team salaries (125,000)
Postage and telegram (12,500)
Carriage outward (27,000)
Interest expense (148,500)
Sales discount (24,500)
Bad debts expense (56,450)
Depreciation expense (195,000)
Electricity expense (196,000)
Fuel expense (60,000)
Distribution expense (200,000)
Repair and maintenance (25,785)
Canteen expenses (28,000)
Sales commission (957,000)
Property tax (14,570)
Directors remuneration (316,042)
Other Income
Purchase discount 40,000
Other income 24,500
Interest income 16,500
Net profit 6,004,789

6.4 Answer
MARFANI Ltd.
Cost OF Goods Manufactured
For the period ended 31, Dec 2105
Rs. Rs. Rs.
Opening - Raw Material 421,500

Purchases 2,426,000
Custom Duty 98,000
Import Duty 16,800
Sales tax paid - Non-refundable 78,400
L.C Charged 27,000
Carriage Paid 24,500
Octroi Charges 36,750
Demurrage Charges 12,000
Purchase Return (100,000) 2,619,450
Closing - DRM (350,000)

DRM - Consumed 2,690,950
Direct Labour 1,068,240
Prime Cost 3,759,190
F.O.H
Indirect Raw Material:
OP
Purchases 40,000
Trade Discount (16,000)
Carriage Paid 9,800
Octro Charges 36,750
Demurrage Charge 8,000
Raw c/s -RN (20,000)
Indirect Raw Material 58,550
Indirect Labour 267,060
Fuel Expense 323,000
Electricity 390,000
Rent Rates & taxes 345,000
R&M 232,065
Canteen Shop 112,000
2,182,675
Manufacturing Cost 5,941,865
W.I.P (Opening) 1,211,000
W.I.P (Closing) 100,000
COGM 5,962,965

MARFANI Ltd.
St. Of Comprehensive Income
For the period ended 31, Dec 2015
Rs. Rs. Rs.
Sales 16,500,000
Sales Return (200,000)
COSI 16,300,000
Opening Stock - F.G 50,000

Purchases - F.G (w1) 945,000
Custom Duty 24,500
Import Duty 7,200
L.C Charges 63,000
Carriage 14,700
Purchases Return - F.G (85,000)
COGM 5,962,965
Closing stock -FG (421,000)
COS (6,561,365)
Gross Profit 9,738,635
Operating Expenses
Abnormal Damages 5,000
Penalty on Driver 3,000
Salaries Wages 890,200
Sales team Salaries 125,000
Postage & telegram 12,500
Fuel Expense 57,000
Electricity 210,000
Property Taxes 145,570
Carriages 27,000
Interest Expenses 127,285
Distribution Expenses 200,000
Repair and maintanance 25,785
Canteen Exp 28,000
Sales Discount 245,000
Bad Debts 56,450
Sales Commission 957,000
3,309,790
Other Income
Other Income 24,500
Intrest Income 16,500
Settlement Discount 500,000
541,000

NP before Director remuneration 6,969,845

Directors remuneration (331,897)
Net profit Director's Remuneration 6,637,948
Working#1
D.R.M I.R.M F.G
P.P 2,450,000 40,000 985,000
0 0 1
T.D (24,000) (16,000) (40,000)
P.P 2,426,000 24,000 945,000
Working#2
Sales 16,500,000
S/tax 2,640,000
19,140,000
Commission at 5% 957,000

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 Solution (a):
Date Particulars Dr. Cr.
Rs. 000 Rs.000
2018
July 1, Land 8,000

Revaluation Surplus 5,000
Reversal of Revaluation Loss (Other Income) 3,000
2019
Jan 1, Cash (90m - 0.1m) 89,900

Accumulated Depreciation – Buildings (W1) 10,687.5
Buildings 31,250
Land 5,000
Gain on Disposal (Other Income) 64,337.5
Jan 1, Revaluation Surplus 1,250

Retained Earnings 1,250
(W1) Rs. 000

At the start of year (38 × 25%) 9,500
During the year [(125 – 11) × 25% ÷ 12 ÷ 2] 1,187.5
Accumulated Depreciation of Buildings Disposed 10,687.5
Solution (b)
Abbas Limited
Notes to Financial Statements
For the year ended 30 June 2019
4. Property, Plant and Equipment:
4.1. Abbas Limited uses the following subsequent measurement bases to value its Property, Plant and
Equipment, and methods to calculate its depreciation.
Depreciation Useful Life/Residual Subsequent
Assets Measurement
Method Value/Rate
N/A N/A Fair Value
Land
Useful life of 12 years with a Cost less Accumulated
Buildings Straight-line residual value of 8.8% of cost. Depreciation
(W1)
Units of Cost less Accumulated
Plant and Rs. 25,000 per unit (W2)
production Depreciation
Machinery
Written down Cost less Accumulated
Equipment Rate of 20% (W3) Depreciation
value
Furthermore, Abbas Limited uses proportionate policy to depreciate its assets.

4.2. Abbas Limited
Schedule of Movement in Property, Plant and Equipment
For the year ended 30 June 2019 (in Rs. 000)
Plant and Total
Land Buildings Equipment
Machinery
Gross Carrying Amount: 12,000 125,000 500,000 100,000 737,000

At 1 July 2018 - - - 60,000 60,000
Acquisitions 8,000 - - - 8,000
Revaluations (5,000) (31,250) - - (36,250)
Disposals
15,000 93,750 500,000 160,000 768,750
At 30 June 2019
Accumulated Depreciation: - 38,000 300,000 36,000 374,000

At 1 July 2018 - 8,312.5(W4) 125,000 20,800(W5) 154,112.5
Depreciation charge for the - - - - -
year - (10,687.5) - - (10,687.5)
Revaluation
Disposals
- 35,625 425,000 56,800 517,425
At 30 June 2019
Carrying Amount at 1 July 12,000 87,000 200,000 64,000 363,000

2018
Carrying Amount at 30 15,000 58,125 75,000 103,200 251325

June 2019
4.3. An amount of expenditure of Rs. 20 million was incurred on the construction of a factory near
Lahore-Islamabad Motorway on 1 December 2018. This amount was capitalised as capital work-
in-progress.
A further borrowing costs of Rs. 1.4 million (W6) were capitalised in respect of interest on loan
obtained from the bank to finance this project.
4.4. A contract was made with M/s UniPower& Co. to purchase plant and machinery worth Rs. 35
million once the construction of factory building is completed.
4.5. The following depreciations are either made part of inventory or expensed out in statement of
profit or loss:
Assets Inventory Expense Total
Rs.000 Rs.000 Rs.000
4,987.5 3,325 8,312.5

Buildings
125,000 - 125,000
Plant and Machinery
- 20,800 20,800
Equipment
129,987.5 24,125 154,112.5
Total
4.6. Revaluation Disclosures:

(i) The revaluation of land took place on 1 July 2018. The value was determined by an
independent firm M/s Ashfaq& Co. Chartered Accountants.

(ii) The carrying amount of land had the revaluation not taken place:
Rs. million
15
At 1 July 2018
(3.75)
Disposals during the year
11.25
At 30 June 2019
(iii) Revaluation Surplus

Rs. million
At 1 July 2018 -
Revaluation of land 5
Transfer to retained earnings (1.25)
At 30 June 2019 3.75
A further reversal of revaluation loss of Rs. 3 million was reversed during the year.
125−11
(W1) × 4 = 12 𝑦𝑒𝑎𝑟𝑠
38
300,000,000
(W2) = 𝑅𝑠. 25,000 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
12,000
2 100−36
(W3) 𝑟 =1− √
100
𝑟 = 20%
(W4) Depreciation during the year Rs. 000
Disposals 1,187.5
During the year [(125 – 11) × 75% ÷ 12] 7,125
Depreciation Expense 8,312.5
(W5) Depreciation during the year Rs. 000
Acquisitions (60 × 0.2 × 8/12) 8,000

Remaining Assets (64 × 0.2) 12,800
Depreciation Expense 20,800

7
(W6) 20 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 × 12% × = 1.4 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
12

7.2 Solution (a):
Disposal Account - Fittings
2017 Rs. 2017 Rs.
Jan 1, Fittings – Cost Jan 1, Accumulated Depreciation
30,000
Jan 1, Cash (Disposal – Fittings(W1) 4,500
1,000
Costs)
Jan 1, Cash 22,000
Mar 31, Statement of Profit or Loss
4,500
(Loss on Disposal)
31,000 31,000
9
(W1) 30,000 × × 2 × 10% = 4,500
12
Solution (b):
Games Limited
Notes to the financial statements
For the year ended 31 March 2017
4. Property, plant and equipment:
4.7. Games Limited (GL) uses the following subsequent measurement bases to value its Property,
Plant and Equipment, and methods to calculate its depreciation.
Depreciation Subsequent
Assets Rate Measurement
Method
Straight-line 10% Fair Value
Buildings
Written-down Cost less Accumulated
Computers 30% (W1) Depreciation
value
Cost less Accumulated
Fittings Straight-line 10% Depreciation
Furthermore, Games Limited uses proportionate policy to depreciate its assets.
4.8. Games Limited

Schedule of Movement in Property, Plant and Equipment
For the year ended 30 March 2017 (in Rs.)
2017 2016
Buildings Computers Fittings Buildings Computers Fittings
Gross Carrying
3,237,500 600,000 120,000 - - -
Amount:
- 120,000 - 3,000,000 600,000 120,000
At start of year
(1,237,500) - - 237,500 - -
Acquisitions
- - (30,000) - - -
Revaluations
Disposals
2,000,000 720,000 90,000 3,237,500 600,000 120,000
At end of year
Accumulated
- 135,000 9,000 - - -
Depreciation:
350,000 181,000 11,250 225,000 135,000 9,000
At start of year
(350,000) - - (225,000) - -

2017 2016
Buildings Computers Fittings Buildings Computers Fittings

Depreciation - - (4,500) - - -
charge for the
year(W2)
Revaluation
Disposals
- 316,000 15,750 - 135,000 9,000
At end of year
Carrying Amount 3,237,500 465,000 111,000 - - -
at year start
Carrying Amount 2,000,000 404,000 74,250 3,237,500 465,000 111,000

at year end
4.9. The entire office building was mortgaged with JS Bank on 31 March 2017, to obtain a loan worth
Rs. 1.75 million for prospective investments in other divisions.
4.10. No contractual commitments were made during the year ended 31 March 2017 to purchase
Property, Plant and Equipment.
A contract was made with Al-Karim Computers during the year ended 31 March 2016 to
purchase 6 computers of Rs. 20,000 each to be delivered on 1 May 2017.
4.11. The following depreciations are either made part of inventory or expensed out in statement of
profit or loss:
Assets 2017 2016
Inventory Expense Total Inventory Expense Total
Rs. Rs. Rs. Rs. Rs. Rs.
280,000 70,000 350,000 180,000 45,000 225,000
Buildings
181,000 - 181,000 135,000 - 135,000
Computers
- 11,250 11,250 - 9,000 9,000
Fittings
461,000 81,250 542,250 315,000 54,000 369,000
Total
4.12. Revaluation Disclosures:
(iv) The revaluations of office buildings took place on 31 March 2017 and 31 March 2016
respectively. The fair values of the office building were determined by an independent firm
M/s Hafeez Yasir Chartered Accountants & Co.
(v) The carrying amount of buildings had the revaluation not taken place:
2017 2016
Rs. Rs.
Cost:
At start of year 3,000,000 -
Acquisitions - 3,000,000
Disposals - -
At end of year 3,000,000 3,000,000
Accumulated Depreciation:
At start of year 225,000 -
Depreciation charge for the year 300,000 225,000
Disposals - -

2017 2016
Rs. Rs.
At end of year 525,000 225,000
Carrying Amount at year start 2,775,000 -
Carrying Amount at year end 2,475,000 2,775,000
(vi) Revaluation Surplus

2017 2016
Rs. Rs.
462,500 -
At start of year
(412,500) 462,500
Revaluation of Buildings
(50,000) -
Transfer to Retained Earnings (350,000 -
300,000)
- 462,500
At end of year
Furthermore, a revaluation loss of Rs. 475,000 was recognized at 31 March 2017.
4 4,802
(W1) 𝑟 =1− √
20,000
𝑟 = 30%
(W2) 2017 2016

9
3,237,500 ÷ 9.25 = 350,000 3,000,000 ÷ 10 ×
Buildings 12
= 225,000
Rs.
Acquisitions (60,000 × 10% × 11/12)
5,500 3,000,000 × 30%
Computers 9
Remaining [(720,000 - 135,000) × × = 135,000
175,500 12
30%]
Total 181,000
Rs.
Disposals (30,000 × 10% × 9/12) 2,250 9
120,000 ÷ 10 ×
Fittings 12
Remaining (90,000 × 10%) 9,000 = 9,000
Total 181,000

Head Office-Karachi: Chartered Accountants Avenue, Cli on, Karachi-75600
Phone: (92-21) 99251636-39, UAN: 111-000-422, Fax: (92-21) 99251626, e-mail: info@icap.org.pk
Hyderabad Office: 3rd oor, Salman Icon Tower, Main Auto Bhan Road, Near RT Restaurant,
Opp. Faysal Bank, La fabad, Hyderabad.
Phone: (022) 3821227, e-mail: hyderabad@icap.org.pk
Sukkur Office: Admin Block Sukkur IBA, Airport Road, Sukkur
Phone: (92-71) 5806109, e-mail: sukkur@icap.org.pk
Que a Office: Civic Business Center, Hali Road, Que a Can
Phone: (92-81) 2865533, e-mail: que a@icap.org.pk
Regional Office-Lahore: 155-156, West Wood Colony, Thokar Niaz Baig, Raiwind Road, Lahore
Phone: (92-42) 37515910-12, UAN: 111-000-422, e-mail: lahore@icap.org.pk
Islamabad Office: Sector G-10/4, Mauve Area, Islamabad
UAN: 111-000-422, Fax: (92-51) 9106095, e-mail: islamabad@icap.org.pk
Faisalabad Office: P- 3/33 East Canal road, Muhammadi Colony, Near Govt. College of Commerce Abdullahpur,
Opposite Nusrat Fateh Ali Khan under pass, Faisalabad
Phone: (92-41) 8531028, Fax: (92-41) 8712626, e-mail: faisalabad@icap.org.pk
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Phone: (92-61) 6510511-6510611, Fax: (92-61) 6510411, e-mail: multan@icap.org.pk
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Phone: (92-91) 5851648, Fax: (92-91) 5851649, e-mail: peshawar@icap.org.pk
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Phone: (92-55) 3252710, e-mail: gujranwala@icap.org.pk
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Phone: 05828-205296, e-mail: mirpur@icap.org.pk
Abbo abad Office: Yusef Jammal Plaza, Mansehra Road, Abbo abad
Phone: 0992-405515, e-mail: abbo abad@icap.org.pk
2019
FINANCIAL ACCOUNTING
AND REPORTING I

Financial Accounting and Reporting I: Additional Practice Questions

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2019

Questions & Answers

CHAPTER 1 ACCOUNTING AND REPORTING CONCEPTS 2 15

CHAPTER 2 IAS 1: PREPARATION OF FINANCIAL

CHAPTER 6 INTRODUCTION TO COST OF PRODUCTION 7 20

CHAPTER 7 IAS 16: PROPERTY, PLANT AND EQUIPMENT 13 27

1 The Institute of Chartered Accountants of Pakistan

2 The Institute of Chartered Accountants of Pakistan

3 The Institute of Chartered Accountants of Pakistan

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

Following events have taken place in year 2018 and 2019:

4 The Institute of Chartered Accountants of Pakistan

Following events have taken place in year 2018 and 2019:

5 The Institute of Chartered Accountants of Pakistan

6 The Institute of Chartered Accountants of Pakistan

CHAPTER 6 – INTRODUCTION TO COST OF PRODUCTION

Additional information at 31 march 2007:

- Depreciation on factory machinery is to be provided at 25% per annum reducing balance.

7 The Institute of Chartered Accountants of Pakistan

8 The Institute of Chartered Accountants of Pakistan

9 The Institute of Chartered Accountants of Pakistan

Closing stock-RM 350,000

- Depreciation-70%factory, 30% office

10 The Institute of Chartered Accountants of Pakistan

Closing stock-RM 350,000

- Depreciation-70%factory, 30% office

11 The Institute of Chartered Accountants of Pakistan

12 The Institute of Chartered Accountants of Pakistan

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

Assets Gross Carrying Amount Accumulated Depreciation (Rs.

2. The relevant information pertaining these assets is given below:

Assets Depreciation Method Subsequent Measurement Model

13 The Institute of Chartered Accountants of Pakistan

14 The Institute of Chartered Accountants of Pakistan

15 The Institute of Chartered Accountants of Pakistan

16 The Institute of Chartered Accountants of Pakistan

Advance rent (60,000)-Asset

2. Asset, if the cost of the asset is material

3. Legal Charges- Expense

4. Goods(inventory) amounting to Rs. 20,000-Asset

17 The Institute of Chartered Accountants of Pakistan

1. Advance from customer amounting to Rs. 50,000 – Liability

2. Accounts receivable amounting to Rs. 30,000- Income

3. reversal of bad debts amounting to Rs. 30,000-Income

18 The Institute of Chartered Accountants of Pakistan

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

Opening Balance 25,000,000 7,500,000 750,000 18,250,000 1,500,000 53,000,000

Interim Dividend (6,750,000) (6,750,000)

Profit for the year 10,250,000 10,250,000

Transfer 512,500 (512,500) -

Transfer of Rev Surplus

Balance at the end of

Bonus Shares 6,000,000 (6,000,000) - -

Interim Dividend (4,500,000) (4,500,000)

Profit for the year 12,500,000 12,500,000

Transfer 625,000 (625,000) -

Transfer of Rev Surplus

Balance at the end of

19 The Institute of Chartered Accountants of Pakistan

Opening Balance 100,000,000 50,000,000 5,000,000 55,000,000 210,000,000

Opening Balance 100,000,000 50,000,000 5,000,000 55,000,000 210,000,000

Annual Dividend 17 (40,000,000) (40,000,000)

Interim Dividend (13,750,000) (13,750,000)