The Institute of Chartered Accountants of Pakistan
Foundation Examinations Autumn 2001
September 05, 2001
FINANCIAL ACCOUNTING-2 (MARKS 100)
Module ‘C’, SM ‘1’ & 6B (Paper C 7) (3 hours)
Q.1 Healthmen Club provides weight control, physical exercise and body building facilities to
its members. The club is desirous to acquire new advanced equipment, in addition to its
existing fleet of machines. Therefore, Mr. Aman, manager of the Club approaches Oasis
Lease Limited on 31 December 1996 to finance such equipment. The main terms of the
lease agreement, entered into between the Club and the leasing company are:
(i) Cost of the equipment is Rs. 100,000 and its expected useful life is 4 years.
(ii) The lease transfers substantially all the risks and rewards of ownership to the club.
(iii) Rentals would be Rs. 8,582 payable at the end of each quarter.
(iv) Total lease payments would be Rs. 137,312
Finance charges appropriated are:
Year ended 31 December
1997 Rs. 14,870
1998 Rs. 11,566
1999 Rs. 7,700
2000 Rs. 3,176
Rs. 37,312
The allocation of financial charges is based on the use of an implicit interest rate of 16% as
a discount factor. Healthmen Club depreciates the equipment of this kind over a 4 year
period by straight line method.
Required: Disclose how the machine and lease liability will appear in the books of
Healthmen Club in the years 1997 to 2000. (Figures relating to
corresponding years are not required. (15)
Q.2 Gemex Communication Ltd. are sole distributors of GSM mobile telephones in Rawalpindi.
Mobile cases are imported by the company and after assembling and packing, mobiles are
sold out from their show room, located in Sadder. The company decided to introduce a
latest brand of mobile set in the local market. However, local assembling of such sets would
cost Rs. 20 million. The Directors decided to finance this project by obtaining loan
equivalent to 70% of the project cost @ 20% per annum for a period of six months.
The loan was sanctioned on 01 July 2000 and was immediately placed in a saving account.
The expected yield on saving account is @ 12% annually. Due to certain internal delays,
the company started utilization of borrowings from 01 August 2000. The entire loan was
paid off on 31 December 2000.
Required: Compute the amount of borrowing cost eligible for capitalization in
accordance with IAS 23. (03)
(02)
Q.3(a) During the audit of Axis Industries Limited for the year ended 30 June 2000, you observed
that 1040 liters of palm oil, which was already sold by the company during the year 1999,
was incorrectly included in closing inventory as at 30 June 1999. Such quantity carries a
financial impact of Rs. 52,000. Extracts from the accounts are as follows:
Year ending Year ending
30 June 2000 30 June 1999
(Rupees)
Sales 832,000 588,000
Cost of sales (Note 1) 692,000 428,000
Pretax profit 140,000 160,000
Income Tax @ 30% 42,000 48,000
Net profit after tax 98,000 112,000
Note 1: Cost of sales for the year ended 30 June 2000 contains the above mentioned error in
the opening inventory
Note 2: Retained earnings
As at 30 June 1998 Rs. 160,000
As at 30 June 1999 Rs. 272,000
Required: Draft the income statement and statement of retained earnings under the
benchmark treatment specified in IAS 8, for the relevant years. (08)
(b) From the data given below, compute the value of inventory in hand (800 units) in
accordance with the requirements of IAS 2.
Rs.
Invoice price (including sales tax) - 1000 units 11,150
Cost of material 8,250
Income Tax paid at import stage 800
Custom duty 600
Sales Tax (refundable) 2,000
Transport charges 500
Material handling charges 400
Store rent 300
Discounts allowed 250
Indirect labour 200
Variable overhead 130
Depreciation 520
Selling expenses 220
Maintenance of factory equipment 300
Designing charges 550
Material wasted 250 (07)
Q.4. Faizan and Furqan have been carrying on the business of towel manufacturing and export
for the past 10 years. Due to recession in their business and liquidity crunch, they decided
to dissolve the firm and sell off the business to Quality Garments (Pvt.) Ltd., a company in
the similar line of business. The Balance Sheet of Faizan and Furqan, as on 30 June 2000,
was as follows:
(03)
BALANCE SHEET
Rs. Rs.
Sundry creditors 212,500 Furniture & Fixture 33,200
Capital -Faizan 340,000 Stock in trade 153,800
-Furqan 170,000 Trade Debts 484,500
Bank 51,000
722,500 722,500
The arrangement with Quality Garments (Pvt.) Ltd. was as follows:
(a) Furniture and Stock in trade will be purchased at book value less 10%.
(b) Goodwill of the firm would be Rs. 101,200
(c) The existing debtors, cash and creditors will not be taken over by the company.
However, the company shall collect the outstanding debts and discharge the liabilities of
the firm as an agent. The company will charge 3% on all collections made from the firm's
debtors and 2% on cash payment made to the firm's creditors.
(d) Purchase consideration will be discharged by the company in fully paid ordinary shares
of Rs. 10 each.
The company recovered Rs. 480,000 from the debtors in full and final settlement. All
liabilities towards the creditors were paid except for the discount of Rs. 2,500 which was
allowed by the creditors. The company paid the balance to Faizan and Furqan on
31 July 2000.
Required: i) Prepare Realization account
ii) Compute purchase consideration
iii) Prepare capital accounts of the partners. (15)
Q.5 Qualitywise Construction Company has a contract to construct a building. Contract price is
Rs.8.5 million. The contract started in July 1997 and is expected to complete in December
2000.
1998 1999 2000
Rs. in 000
Costs to date 2,000 4,800 7,900
Estimated cost to complete 5,500 3,100 -
Contract price 8,500 8,500 8,500
Required: Calculate in tabular form the gross profit, percentage of completion, revenue
recognizable and gross profit recognizable for the above three calendar
years. (15)
Q.6 Following are the assets of a company as on 30-6-2000:
Particulars Cost Accumulated Rate of
Depreciation Depreciation
Rs. in million %
Land 78.000 ---
Factory building 167.000 68.523 10
Machinery 265.000 108.735 10
Factory Equipment 0.900 0.369 10
Office Equipment 0.800 0.328 10
Vehicles 4.600 2.931 20
Computers and Accessories 2.300 0.944 10
a. One of the vehicles costing Rs.600,000 included in cost purchased on 1 August
1998 totally destroyed in accident and insurance was not covered.
(04)
b. Machinery included additions during the year of Rs.35 million.
c. An old machinery purchased on 1 September 1996 amounting to Rs.30 million
which was sold during the year ended 30 June 2000 for Rs.18 million. Credited. to
machinery account
Required: Calculate depreciation for the year ended as on 30 June 2000 after
adjustment of above. (10)
Q.7 Following are the data related to Yee Co. Rs.
Gross profit 35,000,000
Closing stock decreased compared to
Opening stock 75,000
Gross profit rate 33%
Stock turnover 3
Debtors Turnover 3
Creditors Turnover 5
Required: Calculate the following:
Sales
Cost of sales
Trade debtors
Trade creditors
Stock in hand (07)
Q.8 M/s Imran Industries Limited is a listed company engaged in manufacturing of spare parts.
The company was incorporated in 1995 and listed in 1996 on Stock Exchange. The trial
balance as on June 30, 2000 is as follows:
Rs.in 000 Rs. in 000
Paid up capital 69,761
Reserve 33,113
Unappropriated profit B/F 17,598
Short Term Borrowing from Bee Bank Ltd. 23,812
Sundry Creditors 21,393
Sundry Debtors 59,573
Prepayments, Advances and Deposits 1,451
Fixed Assets (at cost) 440,440
Accumulated Depreciation 166,497
Accrued and other liabilities 2,112
Raw Material Stock 7,897
Work-in-process 5,675
Finished stock 9,243
Long Term Borrowing from Bee Bank Limited 110,000
Cash in Hand 8,838
Sales 445,465
Purchases 224,444
Manufacturing overheads 91,899
Administrative expenses 23,604
Selling expenses 12,920
Bank charges 139
Bank markup 3,013
Bank guarantee commission 615
889,751 889,751
===================
(05)
Other information
a. Authorized capital is 1 million ordinary shares of Rs.100 each.
b. Long term loan availed from Nori Bank Ltd up to sanctioned limit of Rs.120 million
secured against factory land, building and machinery. The loan is repayable in semi
annual installments of Rs.5 million beginning 1-7-1999. The loan carries markup rate @
41 paisa per day per thousand. Markup to be accrued for the whole year.
c. Short Term Borrowing availed from Nori Bank Ltd against sanctioned limit of Rs.30
million secured against the hypothecation of stock in trade and directors personal
guarantee. The loan carries markup rate @ 46 paisa per thousand per day.
d. The Sales Tax Adjudication Department issued a show cause notice to impose
additional tax and penalty amounting to Rs. 1.5 million. In the lawyer’s opinion, the
amount of additional tax and penalty payable is likely to become payable, however, the
quantum of the liability is uncertain.
e. Sales Tax on total sales was Rs.64,687,000/-.
f. Accrued Expenses related to cost of sales are Rs.963,500 and Administrative Expenses
298,000 are to be accrued in this accounts.
g. Management proposes to declare 30% dividend to shareholders.
h. Audit fees to be provided Rs.90,000.
i. Prepayments, advances and deposits includes long term deposits of Rs.1,000,000.
j. Ignore deferred taxation. Tax rate is 33% or 0.5% of turnover, whichever is higher and
rate of W.P.P.F is 5%
Rs. 000
k. Closing Stock
Raw Material Stock 7,980
Work-in-process 5,690
Finished Stock 12,560
26,230
l. Depreciation to be accounted for the year ended is as follows:
Manufacturing 25,986
Administrative 1,408
27,394
Required: Prepare balance sheet, profit and loss account and notes to the accounts in
accordance with the requirements of Companies Ordinance, 1984 and
relevant IAS. (20)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Foundation and Modular Foundation Examinations Spring 2002
March 06, 2002
FINANCIAL ACCOUNTING - 2 (MARKS 100)
Paper C7(Module ‘C’ SM ‘1’ & 6B ) (3 hours)
Q.1 The Board of Directors of Hotel Seaview approved earmarking of a huge fund specifically
for carrying out research and development activities, aimed at expanding the customer base
of the hotel. At the time of finalisation of the annual accounts of the company, the Finance
Manager of the company has approached you with the following problems:
(a) Expenditure on applied research during the year, amounted to Rs. 1,200,000 which
is the first annual installment of the cost of the applied research on a specified
project.
(b) Contribution to a research foundation amounted to Rs. 200,000. This contribution
was for pure research, related to the hotel industry.
(c) Research and development expenditure related to a patent granted for the
manufacture and sale of a product amounted to Rs. 500,000.
(d) Cost in the acquisition of specialised knowledge relating to a specified process
amounted to Rs. 80,000.
Required:
You are required to assist the Finance Manager on the accounting treatment of each of the
four items, keeping in view the requirements of IAS. (10)
Q.2 Superconstruction Ltd has a contract in progress. Expenditure on contract up to
30 April 2001 was as follows:
Rs
Raw materials 109,735
Wages 98,432
Special plant 95,000
Expected costs to completion (excluding special plant) 276,000
Stocks of raw materials on site at 30 April 2001 15,831
Value of work certified on 30 April 2001 483,000
Expected final contract price 776,000
Progress payment received 28 February 2001 300,000
The contract started on 1 October 1999 and the expected completion date is
31 December 2001.
The special plant will have no scrap value at the end of the contract and the cost should be
spread over the contract life.
Head office intends charging Rs. 45,000 to the contract for the year to 30 April 2001.
Required:
(a) Prepare a contract account showing the net profit that can reasonably be taken
against the contract for the year to 30 April 2001 showing and explaining clearly the
basis of your calculation. (08)
(b) Show how the figures affecting the contract at 30 April 2001 would be shown
in the balance sheet. (07)
(2)
Q.3 Ahmed and Bashir were trading as partners sharing profits in the ratio of 3:2 respectively.
Nadia was a sole trader in the same line of business. On 1 January 2001 the two firms were
to be merged to form ABN & Co., the partners sharing profits in the ratio Nadia 3; Bashir 2;
Ahmed 1. The summarized balance sheets of the two firms on 31 December 2001 were as
follows:-
Ahmed &
Bashir
Nadia
(Figures in thousands)
Assets
Freehold property -- 20,000
Plant 12,500 --
Debtors 12,000 --
Cash 8,000 2,000
32,500 22,000
Liabilities
Creditors 2,500 --
30,000 22,000
Capital
Bashir 12,000 --
Ahmed 18,000 --
Nadia -- 22,000
30,000 22,000
The freehold property is to be revalued at Rs. 24,000 and the plant at Rs. 11,000, Goodwill
is agreed at Rs. 5,000 for Ahmed and Bashir and Rs. 2,500 for Nadia, but is not to appear in
the books. All assets and liabilities are taken over by the new firm.
Required:
Show the partners’ capital accounts in the old and new firms, and the opening balance sheet
(in draft form) of ABN & Co. (15)
Q. 4 Under what circumstances should freehold land be depreciated? (05)
Q.5 Jawad is the proprietor of a shop which retails electrical appliances. An extract from the
trading account of his business is shown below.
2001 2000
Rs Rs Rs Rs
Sales 520,000 327,000
Opening stock 85,400 57,000
Add purchases 432,450 290,000
517,850 347,000
Less closing stock 60,250 85,400
Cost of sales 457,600 261,600
Gross profit 62,400 65,400
(3)
Mr. Jawad has studied the figures and approaches you for advice. He cannot understand
why gross profit for 2001 has fallen, when sales have increased by 59% over the 2000
figures.
Required
(a) Calculate the gross profit percentage and mark-up percentage for both years, and state
six factors which might have caused the situation which has worried Mr. Jawad.
(b) Calculate the stock turnover period for each year, and comment briefly on the figures
disclosed by your calculations. (10)
Q.6 R Company has the following accounts balances:
30 Jun 2001 30 Jun 2000
Plant & Machinery 320,000 250,000
Accumulated depreciation – P&M 120,000 102,000
Loss on sale of machinery 4,000 --
During 2001, R sold for Rs. 26,000 a machine costing Rs. 40,000 and purchased several
items of machinery.
Required:
(a) Show the computations for the depreciation expense for the year 2001?
(b) What was the amount of additions to P&M for 2001?
(c) Where will these items appear in the Cash flow statement? (05)
Q.7 Pakistan Software Limited closes its books on 31 December every year.
You are provided with the following data:
Shareholders’ Equity (Rs.’000’)
2001 2000
Opening 700 600
Profit after tax (PAT) 220 200
920 800
Dividend (100) (100)
Closing 820 700
Other Data
Number of Shares (in ‘000s) 60 60
Required:
(a) On the basis of above data, compute the following for the year 2001 and 2000
(i) Earnings per share (EPS)
(ii) Return on closing equity (ROE)
(iii) Book value per share (BV).
(b) Describe the relationship between the three ratios mentioned above. How does the
one affects the other?
(4)
(c) For the year ending 31 December, 2002, the management in its meeting decided
to aim for EPS Rs.4.00 (9% higher than for the year 2001) and return on closing
equity of 25%. Compute the estimated book value as at 31 December 2002,
assuming that management targets are achieved. Also compute estimated figures for
PAT, dividend and equity.
(d) Compute dividend per share and the rate of dividend for all the three years
(2000, 2001 & 2002 estimated based on data in c above). (10)
Q.8 Premium Petroleum Company Limited (PPCL) is listed on Stock Exchanges of Pakistan
and engaged in distributing petroleum products. Its Board of Directors have decided to
change its accounting policy with respect to the treatment of borrowing costs that are
directly attributable to building a new storage facility in Ghotki, for the year ended
30 June 2001.
In previous periods, PPCL had capitalised such costs, net of income taxes, in accordance
with the allowed alternative treatment in IAS 23, Borrowing Costs. The Company has now
decided to expense, rather than capitalise, these costs in order to conform with the
benchmark treatment in IAS-23.
PPCL capitalised borrowing costs incurred of Rs. 2,600 during 2000 and Rs. 5,200 in
periods prior to 2000.
PPCL’s accounting records for 2001 show profits from ordinary activities before financial
charges and income taxes of Rs. 30,000, interest expense of Rs. 3,000; and income taxes of
Rs. 8,100.
PPCL has not yet recognized any depreciation on the building at 5% per annum on WDV as
the facility has not been handed over to the Company by the contractor.
In 2000, PPCL reported:
Rs.
Profit from ordinary activities before interest and income taxes 18,000
Financial charges - _
Profit from ordinary activities before income taxes 18,000
Income taxes (5,400)
Net profit 12,600
In 2000 opening retained earnings was Rs. 20,000 and closing retained earnings was
Rs. 32,600.
PPCL’s tax rate was 30% for 2001 and 2000. All figures mentioned in thousand of rupees.
Required:
(a) Extract from the Profit & Loss Account under the benchmark treatment permitted by
IAS 8;
(b) Statement of retained earnings under the benchmark treatment
(c) Extracts from notes to the financial statements. (10)
Q.9 M/s Kamran Veterinary Pharmaceutical Ltd a listed company has been in the business of
manufacturing pharmaceuticals for the last 5 years. The company was incorporated as a
Public Limited Company in 1984 and was listed on Stock Exchange in 1997. The trial
balance of the company as on June 30, 2001 before adjustments, is as follows:
(5)
Rupees
Debit Credit
Share Capital 150,000,000
Fixed Assets- at cost 216,914,240
Share Premium 3,500,000
Unappropriated profit b/f 4,196,719
Long-term loan from bank 4,500,000
Short-term running finance from bank 3,917,174
Accumulated Depreciation 89,917,989
Trade Creditors 6,213,344
Accounts Receivable 64,754,171
Capital Work-in- progress 1,314,283
Accrued Expenses 716,777
Raw Material – Opening 2,144,999
Work-in-process-Opening 716,755
Finished goods – Opening 7,917,018
Sales Tax Refundable 3,250,515
Cash at bank 616,165
Cash in hand 1,544,917
Advances, Deposits & Prepayments 519,170
Sales 614,240,155
Purchases 491,315,115
Manufacturing Overheads 21,544,100
Administration Expenses 7,666,175
Financial Expenses 1,914,015
Sales Tax 69,901,020
L/C Margin on Imports 710,000
Import Bills Payable 15,540,500
892,742,658 892,742,658
Additional Information:
(i) Authorized capital – Rs. 300 million divided into 30 million ordinary shares of
Rs. 10/- each.
(ii) Stock-in-trade as at June 30, 2001 was as follows: (using FIFO method).
Cost Net Realisable
Value
Raw Material 3,450,955 3,451,000
Work-in-process 819,225 832,225
Finished Goods 6,995,300 6,745,300
(iii) A consignment of raw material imported from UK was lying at the port as it arrived
at the port on June 27, 2001. The C&F value was Rs. 1,025,000. No liability has
been booked for this as on June 30, 2001.
(iv) Depreciation for the year is Rs. 19,640,500 out of which Rs. 16,915,900 relates to
Factory Building and Plant & Machinery. It is provided on Diminishing balance
method.
(6)
(v) The company’s auditors have pointed out that entire cost of one imported
consignment has been debited to Sales Tax Refundable- Rs. 628,000, whereas, the
sales tax element in that cost of consignment was only Rs. 54,500.
(vi) Provision for WPPF and WWF is required to be made. Provision for WWF is
Rs. 54,669.
(vii) Provision for taxation @ 38%. There are no brought forward losses and assume that
all expenses except for Depreciation are allowable for tax purposes. The allowable
depreciation for tax purpose is Rs. 18,745,100.
(viii) Sales include Exports of Rs. 55,100,250.
(ix) Advances, Deposits and Prepayments include long-term deposits of Rs. 80,000.
(x) Long-term loan obtained from a bank is repayable in quarterly installments of
Rs. 500,000 each at Mark-up rate of Re. 0.41 per thousand per day. The loan is
secured by registration of first charge over Company’s Factory Land and Plant &
Machinery. Mark-up already provided in accounts.
(xi) Short-term running finance has been obtained from a bank having total limit of
Rs. 5,000,000 with hypothecation of stock-in-trade as security. Mark-up is payable
@ Re. 0.45 per thousand per day. Provision already made for mark-up.
Required:
You are required to prepare Balance Sheet, Profit and Loss Account and Notes to the
Accounts in accordance with the requirements of Companies Ordinance, 1984 and relevant
IAS. (20)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Modular Intermediate Examinations Autumn 2002
September 04, 2002
FINANCIAL ACCOUNTING (MARKS 100)
Module C Paper C7 (3 hours)
Q. 1 M/s. Diamond Industries Limited is a listed company engaged in business of
manufacturing. The company was incorporated in 1991 and listed in 1992 on
Stock Exchange. The trial balance as on June 30, 2001 is as follows:
Debit Credit
Rs. In 000 Rs. In 000
Paid up Share Capital 50,000
Unappropriated Loss brought forward 5,650
Sundry Creditors 16,950
Sundry Debtors – Secured 36,505
Prepayments, Advances and Deposits 1,950
Fixed Assets (at cost) 140,500
Accumulated Depreciation 90,560
Accrued and Other Liabilities 5,620
Closing Stock 59,600
Short Term Borrowing from ABC Bank Ltd. 105,600
Cash in Hand 836
Sales 388,300
Cost of Sales Other than Overheads 265,008
Manufacturing Overheads 105,600
Administrative Expenses 21,605
Selling Expenses 8,960
Bank Charges 36
Bank Markup 10,620
Bank Guarantee Commission _ 160 ______
657,030 657,030
Other Information
(a) Authorized capital is 1 million Ordinary shares of Rs. 100/- each.
(b) Short Term Borrowing availed from ABC Bank Ltd. against sanctioned
limit of Rs. 130 million secured against the hypothecation of stock in trade
and Directors’ personal guarantee. The loan carries markup at the rate of
35 paisa per thousand per day.
(c) The Directors of the company have requested ABC Bank Ltd to convert limit
to and amount of short term borrowing to Long Term Finance amounting
Rs. 100 million against mortgage of Fixed Assets and personal property of the
Directors. The loan carries markup at the same rate. The loan is payable
in six monthly installment of Rs. 5 million from July 2003. The transaction has
not been effected in the books of accounts.
(2)
(d) Unaccounted accrued expenses related to cost of goods sold are Rs. 365,000/ and
for administrative expenses Rs. 260,000/- which included audit fees
Rs. 75,000/-
(e) Break up of stocks
Opening
Stock
Closing
Stock
Rs. In 000 Rs. In 000
Raw Material Stock 5,487 20,980
Work-in-process 4,642 7,678
Finished Stock 10,220 30,942
20,349 59,600
(f) Depreciation to be accounted for the year ended is as follows;
Rs. In 000
Manufacturing 4,060
Administrative 990
5,050
(g) Income Tax rate is 33% or 0.5% of turnover, whichever is higher. Ignore
deferred taxation, WPPF and WWF.
Required :
You are required to prepare Balance Sheet, Profit and Loss Account and relevant Notes to
the Accounts in accordance with the requirements of Companies Ordinance, 1984 and
relevant IAS. (20)
Q.2 Post closing trial balance of EPCH Pharmaceuticals Ltd for the year ended December 31,
2000 and 2001 are as follows:-
2001 2000
Equity and liabilities Rupees in 000
Issued and paid up capital 5,000 5,000
Unappropriated profit 400 300
Short term running finance 3,000 800
Trade creditors 3,000 1,000
Accumulated Depreciation-
Plant & Machinery 900 600
Motor Vehicle 420 280
12,720 7,980
Assets
Land & Building 2,500 1,500
Plant & Machinery 3,000 2,500
Motor Vehicles 620 580
Stock in hand 3,600 1,100
Trade debtors 3,000 2,300
12,720 7,980
Additional data:
During the year 2001, a dividend @ 10% was distributed to the shareholders. The paid up
value of each share is Rs.10/-
A Motor Vehicle, having original cost of Rs. 100,000 and depreciated book value of
Rs.60,000 was sold for Rs. 80,000.
Gross fund generated from operation during the year 2001 was Rs. 1,060,000.
Required :
You are required to prepare a Cash Flow Statement as per IAS-7 for the year 2001 (10)
(3)
Q.3 Given below is the information of a limited company
Balance Sheet
Assets Rs.
Fixed Assets at W.D.V. 1,150,000
Investments 300,000
Current Assets
Stock 310,000
Sundry Debtors 350,000
Advances 100,000
Cash and Bank Balances 40,000
800,000
Total Assets 2,250,000
Capital and Liabilities
Share Capital 700,000
Unappropriated Profit 250,000
950,000
Long Term Loans 725,000
Current Liabilities
Accounts Payable 125,000
Sundry Creditors 250,000
Accrued and other liabilities 200,000
575,000
2,250,000
Profit and Loss Account
Sales 1,675,000
Cost of Sales 1,000,000
Gross Profit 675,000
Operating Expenses
Administrative Expenses 250,000
Selling Expenses 225,000
475,000
Net Profit 200,000
Taxation 50,000
Net Profit after tax 150,000
Accumulated Profit brought forward 100,000
Accumulated Profit carried forward 250,000
Required:
(a) Calculate:
(i) Acid Test Ratio
(ii) Debtors Turnover Ratio
(iii) Inventory Turnover Ratio
(iv) Assets Turnover Ratio (06)
(b) Prepare vertical analysis of Profit and Loss Account. (04)
(4)
Q.4 Mr. Bashir, a whole sale general merchant does not keep proper records of his business
transactions but stock taking is done at the end of each six months and stock is valued at
cost for estimating half yearly profits. He charges gross margin of 33 1/3% on cost for all
his sales. You are given the following figures for the half year ended 31 December, 2001
relating to his business:
(a) The total of sales as per invoices entered in the sales register form July to December 2001
amounted to Rs. 4,032,300. This amount includes Rs. 302,100 relating to goods delivered
to customers on or before 30 June 2001. The total of goods delivered to customers before
31 December 2001 but invoiced during first week of January 2002 was Rs. 413,400.
(b) The total of purchase invoices entered into purchase register during July to December 2001
was Rs. 3,043,500 and this amount includes Rs. 220,500 for the goods received on or
before June 30,2001.
Purchase invoices relating to goods received in December 2001 but which were entered in
the purchase register in 1st week of January, 2002 amounted to Rs. 291,000.
(c) The stock sheets as on 30 June 2001 revealed:
i) 120 items of woolen jerseys, the cost of which was Rs. 150 each, but had
been valued at Rs. 15 each.
ii) the total stock in woolen goods section was Rs. 394,500 but had been included in
the stock sheets as Rs. 439,500.
(d) The value of stock at cost as on 30 June 2001 was Rs. 3,198,000.
Required : Calculate the correct value of stock on 31 December 2001. (10)
Q.5 The balance sheet of a company at year end December 2001 reflects following status:
Rs. in 000
Plant under installation 2,000
Other assets 8,000
10,000
Loans
Bank loan 18% 2,000
Bank loan 20% 2,500
Bank loan 22% 1,500
6,000
Shareholders equity 4,000
10,000
Bank loan of 20% was taken on April 30,2001, other loans were brought forward from the
year 2000.
Expenditure incurred on plant under installation
May1, 2001 1,000
July 1, 2001 700
Nov 1, 2001 300
2,000
Required:
(a) Capitalization rate of the company
(b) Total borrowing cost to be capitalized during the year 2001. (10)
(5)
Q.6 The firm of J.S and R decide to form a limited company, J.S. & R Ltd., and transfer
business thereto. Their balance sheet is as follows:
J. S. & R
Abridged Balance Sheet as at 30 June
Equity and Liabilities Rs.000 Assets Rs.000
Capital accounts: Freehold property 30,000
J 25,000 Plant 10,900
S 15,000 Fixtures, fittings and
R 10,000 50,000 Furniture 1,500
Stock-in-trade 19,500
Debtors Rs. 68,830
Creditors 63,300 Less provision 2,000 66,830
Loan on mortgage 20,000 Cash at bank 4,500
Cash in hand 70 4,570
133,300 133,300
They share profits – J. four-ninths, S. three-ninths, R, two-ninths. The purchase
consideration was Rs. 85 million (the company taking over all the assets and liabilities
except the loan on mortgage) and was payable as to Rs. 25 million in cash Rs. 20 million in
5% loan and Rs. 40 million in ordinary shares. Expenses amounting to Rs. 0.6 million were
payable by the firm.
Assume that the transactions have been carried through and the loan on mortgage repaid.
Required:
Close the books of the firm after dividing the loan and shares between the partners in the
proportions : J one-half, S one-quarter, R one-quarter. (10)
Q.7 An asset is acquired under arrangement of finance lease by company A but being used by
company B?
Required:
What disclosures are required in the financial statements of both the companies. (05)
Q.8 Finance Limited leased out tractor on 1st July, 2001 to Fresh Farms who had option to
acquire owner ship of the tractor after three years of payments reserved under the
arrangement. The lease arrangement was as under:-
Rs.
(a) Cash sale price of tractor 75,000
(b) Down payment on delivery 15,000
(c ) Yearly payment 24,000
Required:
Prepare in the books of Finance Ltd personal account of Fresh Farm and allocation of lease
income over the years to end on December 31, 2001 to December 31, 2004 (4 years).
For allocation of lease income assume:
i) Yearly payment includes Rs. 20,000 towards cash price and Rs. 4,000 towards lease
income.
ii) Lease income apportionment is based upon the number of months cash price is
outstanding over the lease period. (05)
(6)
Q.9 Danish plc is a large paper manufacturing company. The company’s final accounts for the
year ended June 30, 2001 are in the finalization stage. The CFO has prepared the following
list of problems which will have to be resolved before the statements can be finalized.
(a) Post balance sheet events
On August 5, 2001 the net realizable value of raw material stock as at June 30, 2001
was found to be Rs.4 million lower than their historical cost.
On July 25, 2001 the board decided to close a factory situated at Mardan.
(b) Possible development expenditure
The company has opened a research department to develop a new pulping process
which the company intend to exploit in the future. The department has costed
Rs.10 million to operate in the year and the board suggests that this expenditure
should be carried forward to set off against revenue at a future date under the
matching convention (accrual concept).
(c) Possible contingent liabilities
One of the company’s employees was injured during the year. He had been
operating a piece of machinery which had been known to have a faulty guard. The
company’s lawyers have advised that the employee has a very strong case, but will
be unable to estimate likely financial damages until further medical evidence
becomes available.
Required: Explain how each of these matters should be dealt in the financial statements
for the year ended June 30, 2001 in the light of the International Accounting
Standards. Assume that the amounts involved are material in every case.
(15)
Q.10 M/s Gemini Construction Limited signed an agreement during the year ended June 30, 2000
for construction of Shaheed e Millat Road for Rs.25 million. At the time of signing of
contract the company had estimated that the total cost would be Rs.23.125 million. Upto
June 30, 2000 the company had received Rs.9 million being 80% of the work certified for
Section ‘A’ of the road and Rs.3 million being 50% of the work certified for Section B of
the road.
Certain work not yet certified had cost Rs.0.55 million.
Expenditure incurred on the project was:
Material
Labour
Depreciation on road construction equipment
Required: Calculate the profit/loss upto June 30, 2000 based on percentage of
completion method. (05)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Modular Intermediate Examinations Spring 2003
March 05, 2003
FINANCIAL ACCOUNTING (MARKS 100)
Module C Paper C7 (3 hours)
Q.1 The following are the balances extracted from the books of Karachi Paints Limited, a public
listed company as on December 31, 2002. The company is engaged in manufacturing of paints.
The licensed capacity of the company is 3,000,000 litres per annum
(Amount in “000”)
Dr. Cr.
Authorized capital (3 million ordinary shares of Rs.10 each)
Issued, subscribed and paid up capital 25,000
General reserve 25,000
Stocks, January 1, 2002
Work in process 3,400
Finished goods 12,400
Stores and spares 2,620
Fixed assets-cost
Leasehold Land 2,200
Buildings on leasehold land 4,620
Plant & machinery 18,380
Furniture 3,780
Vehicles 1,250
Fixed assets-accumulated depreciation
Leasehold land 505
Buildings on leasehold land 2,310
Plant & machinery 9,190
Furniture 1,890
Vehicles 1,000
Deferred taxation 1,000
Provision for taxation 4,500
Creditors and accrued expenses 33,300
Short term running Finance 12,000
Trade debtors 38,680
Other receivable 5,329
Short term running finance 5,020
Bank balances 38,450
Provision for bad debts 2,500
Sales 210,000
Manufacturing overheads 38,700
Selling and administration expenses 25,650
Financial expenses 3,360
Other income 650
Long term loan 15,000
Unclaimed dividend 81
Unappropriated profits brought forward 181
(2)
Raw materials consumed 125,250
Raw materials Dec 31, 2002 13,240
Workers’ Welfare Fund _______ 222
343,329 343,329
ADDITIONAL INFORMATION (IN FULL RUPEE VALUE)
(a) Stock at December 31, 2002
Work in process 4,200,000
Finished goods 13,300,000
(Total production during 2002 is 3,100,000 Litres)
(b) Depreciation / amortization charge on the reducing balance method:
Charge for the
Depreciation Year Included in
Rate (%) Acc. Dep.(Rs.)
Leasehold land 101,000
Buildings 10 462,000
Plant & machinery 10 1,838,000
Furniture 10 378,000
Vehicles 20 250,000
(c) During the year the company has introduced a gratuity scheme. A provision of
Rs 3,800,000 is to be made. The effect of this provision on closing stock of finished
goods and work in process is Rs 240,000 and Rs 76,000 respectively. The expense
is to be allocated to manufacturing and administration as to 60% and 40%
respectively.
(d) Current rate of taxation is 35%.
(e) Provide for Workers’ Profit Participation Fund and Workers’ Welfare Fund (taxable
income for the year was Rs 19,000,000 before charging Workers’ Welfare Fund).
(f) The repayment of long term loan will start from June 30, 2003 and the loan is
repayable in six semi-annual equal installments. The loan carries 10% mark-up and
secured by way of registered fixed charge on company’s fixed assets and registered
hypothecation on stock in trade ranking pari-passu with the Short term running
finance obtained from a bank.
(g) Issued, subscribed and paid up capital includes 1,500,000 shares issued as fully paid
bonus shares.
(h) The directors have proposed following appropriations in their meeting held on
February 15, 2003
Proposed dividend 20%
Transfer to general reserve 1,500,000
(i) Auditors’ fee includes Rs.100,000 on account of taxation services and Rs.25,000 on
account of out of pocket expenses.
(3)
(j) The rate of mark-up is 10% per annum and the purchase price and mark-up are
repayable by June 30, 2003 in respect of short term running finance.
(k) Some of the expenses were allocated as follows: (Rs in 000)
Manufacturing Selling &
Admin.
Wages, salaries and benefits 19,989 5,278
Stores and spares consumed 2,200 -
Fuel, water and power 3,872 892
Rent and rates 2,870 1,268
Insurance 780 234
Repairs and maintenance 6,740 642
Depreciation 2,249 780
Travelling and conveyance --- 366
Audit fee --- 280
Advertising --- 9,250
Freight outward --- 6,660
38,700 25,650
REQUIRED
Prepare Profit and loss Account, Balance sheet and notes to the accounts (only significant
accounting policies are required) in compliance with disclosure requirements of the
Companies Ordinance, 1984 and the International Accounting Standards. (20)
Q. 2 Following is the Balance Sheet of Zaman Ltd. as at June 30, 2001 and 2002:
June 2002 June 2001
Rs. in “000”
Fixes Assets 170,248 171,157
Long Term Deposits 135 135
Stocks in Trade 68,124 36,052
Trade Debtors 2,750 5,690
Advances, Deposits and Other Receivables 43,250 35,482
Cash and Bank Balances 8,350 4,609
_______ ______
292,857 253,125
Paid-up Capital 100,000 100,000
Accumulated Profit 5,457 3,027
Surplus on Revaluation of Assets 15,000 ---
Long Term Loans 70,000 79,000
Short Term Borrowings 10,000 10,000
Creditors 86,600 56,600
Accrued and Other Liabilities 5,800 4,498
_______ ______
292,857 253,125
(4)
Additional Information: Rs. in ”000”
Profit before tax 2,430
Addition to Fixed Assets 520
Depreciation for the year ended June 30, 2002 16,429
REQUIRED: Prepare Cash Flow Statement for the year ended June 2002 (10)
Q.3
(a) On January 1, 2001, Sigma Enterprises purchased a machine for Rs.20,000 that had an
estimated useful life of 5 years. The accountant incorrectly charged of this machine in 2001.
The error was discovered in 2002. The company desires to use straight-line depreciation
method on this asset.
REQUIRED:
Pass the entry and give computation in this effect on December 31, 2002, to correct for this
error, given that the:
(i) Books have not been closed for 2002
(ii) Books have been closed for 2002 (05)
(b) The stock in Trade value was Rs.560,000 for year ended June 30, 2002, however, following
discrepancies found
(i) Stock sent to customer on approval for Rs.45,000 but no invoice raise. Customer
also did not approve that stock.
(ii) Advance Income Tax included in valuation of imported material for Rs.38,000.
(iii) 550 units of one raw material valued at Rs.90 instead of cost Rs.900.
(iv) A machine parts cost Rs.10,500 included in physical verification sheet of stock in
trade.
REQUIRED: Calculate correct valuation of closing stock. (05)
Q.4
(a) Jubilee Processing (Pvt.) Limited, trades off its used Plant and Machinery for a new model.
The machine given up has a book value of Rs 16,000 (original cost Rs 24,000 and
accumulated depreciation Rs 8,000) and a fair value of Rs 12,000. It is traded for a new
model that has a list price of Rs 32,000. In negotiations with the seller, a trade-in allowance
of Rs 18,000 is finally agreed on for the used machine.
REQUIRED
In the light of IAS-16
i) Calculate the cost of new Machine; (03)
ii) Compute Gain/(Loss) occurred in exchange transaction; (02)
iii) Record the transaction in the Books of Jubilee Processing (Pvt.) Limited (02)
(b) A free hold Building is purchased on January 01, 2000, for Rs 40,000.Its estimated useful
life is 20 years and it is depreciated at the rate of Rs 2,000 per annum in each of the year
ended December 31, 2000 and 2001. On January 1, 2002 a professional valuer estimates the
value of the building at Rs 108,000.
(5)
REQUIRED:
On the assumption that the revaluation is to be incorporated in to the books of account, and
that the original estimate of the useful life was correct, show the relevant ledger accounts
for the period January 2000 to December 31, 2002. (08)
Q.5 On November 01, 2001 Jamal Nasir & Company contracted Wardah Construction Company to
have a building constructed for Rs 2.8 millions on land costing Rs 0.2 million (purchased from
the contractor and included in the first payment). Jamal Nasir & Company made the following
payments to the construction company during 2002:
January 1 March 1 May 1 December
31
Total
Rs420,000 Rs 600,000 Rs 1,080,000 Rs 900,000 Rs 3,000,000
Construction was completed and the building was ready for occupancy on
December 31, 2002. Jamal Nasir & Company had the following debt outstanding at
December 31, 2002:
Specific Construction Debt
i. 15%, 3-year loan to finance purchase of land and construction of the
building, dated December 31, 2001, with interest payable annually on
December 31 - Rs. 1.5 million
Other Debts
ii. 10%, 5-year loan payable, dated December 31, 1998, with interest
payable annually on December 31 - Rs.1.1 million
iii. 12%, 10-year bonds issued on December 31, 1997, with interest payable
annually on December 31 - Rs. 1.2 million
REQUIRED
Keeping in view the requirement of IAS 23, calculate the following:
a) Total actual interest cost for the year (03)
b) Capitalization rate of borrowing cost (05)
c) Interest cost to be capitalized (07)
Q. 6 The firm of A,B and C decide to form a limited company, ABC Ltd. and transfer the
business of the firm. Their balance sheet as on 30-6-2002 is as follows:
A.B.C.
Balance Sheet as on 30-6-2002
Rs. Rs.
Capital Account Freehold property 55,000
A 249,850 Plant 210,000
B 124,925 Furniture and Fittings 35,600
C 124,925 Stock in trade 82,000
499,700 Debtors 85,000
Cash in hand 55,600
Creditors 23,500
523,200 523,200
(6)
ABC Ltd. will take over all assets except cash and other assets are valued as follows:
Rupees
Free hold property 100,000
Plant 180,000
Furniture and Fittings 29,600
Stock in trade 78,000
Debtors 80,000
The partners A,B & C share the profits in the ratio of 2:1:1. The purchase consideration is
Rs. 500,000/- in ordinary shares
Shares will be distributed according to their balance of capital. The balance will be paid
by cash available.
REQUIRED:
Prepare realization and partners capital account and balance sheet of ABC Ltd. (16)
Q.7 Qaseem Ahmad & Company and Ebad Company signed a lease agreement dated
January 1, 2001, that calls for Qaseem Ahmad & Company to lease equipment to Ebad and
Company beginning January 1, 2001. The terms and provisions of the lease agreement and
other pertinent data are as follows:
a. The term of the lease is 5 years, and the lease agreement is non-cancelable,
requiring equal rental payments of Rs 47,963 at the beginning of each year (annuity
due basis).
b. The equipment has a fair value at the inception of the lease of Rs 200,000, an
estimated economic life of 5 years, and no residual value.
c. The lease contains no renewal options, and the equipment reverts to Lessor
Company at the termination of the lease.
d. Ebad Company’s incremental borrowing rate is 11% per year.
e. Ebad Company depreciates on a straight line basis similar equipment that it owns.
f. Qaseem Ahmad & Company sets the annual rental to earn a rate of return on its
investment of 10% per year; this fact is known to Ebad & Company .
REQUIRED:
In light of IAS-17, state with the reasons:
(i) Which treatment will be accorded to Lease in the Books of Ebad & Company. (02)
(ii) Which rate would be used for capitalization of lease, in the books of Ebad &
Company in accordance with IAS-17. (02)
(iii) Calculate the amount to be capitalized in the books of lessee by using present value
of annuity factor 4.16986. (02)
(iv) Prepare a Lease Amortization Schedule in the Books of Ebad & Company, showing
amount of profit and reduction in principal. (Round-off the figures in nearest
rupees) (08)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2003
September 01, 2003
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 Following is the Trial Balance of Sana Health Care Limited as of June 30, 2002, a Public
Limited Company listed on all the three stock exchanges of Pakistan. The company is
engaged in production of health care products.
Figures in Rupees
DR CR
12,500,000 Ordinary shares 125,000,000
Land at Cost 2,300,000
Factory Building – WDV 23,000,000
Plant & Machinery – WDV 82,500,000
Office Furniture & Fittings – WDV 1,312,500
Capital Work in Progress 80,000,000
Raw materials, July 01, 2001 9,000,000
Finished goods July 01, 2001 6,250,000
Work in process July 01, 2001 3,125,000
Trade Debtors 9,187,500
Long Term Loan 38,750,000
Gratuity 6,250,000
Shares in subsidiary company
37,500 Ordinary Shares at cost
(Market value at June 30, 2002, Rs.1,562,500) 3,750,000
Quoted investments at cost 875,000
Unquoted investments at cost 1,250,000
Dividends on investments:
Quoted 187,500
Unquoted 175,000
Subsidiary 450,000
General Reserve 25,000,000
Profit & Loss Account July 01, 2001 9,375,000
Cash at Bank and in hand 6,340,333
Sundry Creditors 18,386,392
Sales 240,750,550
Purchases 176,475,350
Carriage inwards 2,087,650
Wages & Benefits 26,888,137
Rates & Taxes - factory 550,000
Repairs to building 375,440
Salaries 7,939,165
Postage and telephone 588,613
Printing & stationery 187,500
Legal and professional 526,250
Sundry selling expenses 4,360,745
Bank charges 87,805
Interest on Long Term Loan 6,006,250
Commissions 4,450,550
Fuel & Power 3,996,617
(2)
Figures in Rupees
Dr. Cr.
Insurance:
Factory 94,625
Offices 30,375
Repairs to plant and machinery 789,037
_________
464,324,442
_________
464,324,442
Following further information is also available with respect of company:
(a) Company has an Authorized Capital of 15,000,000 shares of Rs 10 each.
(b) Cost and depreciation rate of the different assets are given below:
Cost
Rs.
Depreciation Rate
%
Factory Building
Plant & Machinery
Office Furniture & Fittings
28,750,000
137,500,000
2,187,500
5
20
10
Depreciation on operating assets is charged to income using Reducing Balance
Method.
(c) Stocks at June 30, 2002 were :
Rs.
Raw Material 7,563,000
Work in process 1,875,000
Finished Goods 16,389,657
(d) Factory insurance amounting to Rs 19,625 and rates amounting to Rs 37,500 had
been paid for six months to September 30, 2002.
(e) Tax Liability is to be accounted for according to the rate and method provided in
the Income Tax Ordinance 2001.
(f) Company sells its Herbal product on two months credit basis to Jaz Departmental
store, who has filed a Bankruptcy suit in local court due to loss of uninsured
inventory, as fire erupted at its outlet. Sana Ltd’s outstanding sale to company is
Rs 2,750,000.
(g) Mark up on long term loan for the Financial Year 2002 at 15.5% was accrued and
paid during the year, however, due to decrease in discount rate, after intense
negotiation, Bank has agreed to reduce the Mark up rate on Long Term Loan by 6%
in second half of the current Financial Year 2002. The repayment will commence
from March 2003 in 5 equal half yearly installments. The arrangement is secured
by way of first charge on company’s present and future fixed assets.
(3)
(h) At the time of finalization of trial balance auditor’s bill had not been received and
Finance Manager did not account for the auditors remuneration in the books. The
bill was received later on which includes Rs 300,000 as fee on account of Taxation
services and Rs 26,000 Out of Pocket charges in addition to Audit Fees of Rs
500,000.
(i) According to latest actuarial valuation, an amount of Rs 275,000 needs to be
provided for Gratuity. Gratuity provision is apportioned equally in Factory Staff
and Head Office Staff remuneration.
(j) As at June 31, 2002 Company has given guarantees to Banks amounting to
Rs 4,500,000 for repayment of loans given by the banks to certain employees.
Required:
Prepare Balance Sheet, Profit and Loss Account and Notes to the accounts (only
significant Accounting Policies are required) in compliance with disclosure
requirements of the Companies Ordinance, 1984. (25)
Q.2 (a) Faraz Brothers Transport Company exchanged a number of used trucks and Cash
for vacant plot of Industrial Land. The trucks have a combined book value of Rs
126,000 (Cost 192,000 and Accumulated Depreciation Rs 66,000). Faiz Ahmad, a
purchasing agent for Faraz Brothers, who has had previous dealings in the secondhand
market indicates that the trucks have a fair Market value of Rs 147,000. In
addition to trucks Faraz Brothers is also required to pay Rs 51,000 cash for the
plot of Land.
Required:
Taking into account the requirements of IAS, 16 calculate the following:
(i) Cost of land (01)
(ii) Gain on disposal of used truck (02)
(iii) Prepare journal entry to record the aforesaid exchange transaction (02)
(b) You are required to identify following items pertaining to Research and
Development Activities and briefly elaborate the treatment of every item in the
Financial Statements in light of IAS 38. (Calculation is not required)
(i) Materials, Equipment and Facilities
(ii) Personnel Cost
(iii) Purchase of Intangibles
(iv) Contract Services
(v) Indirect Cost (05)
Q.3 Munir Niazi Corporation, a lessor, purchased a new machine for Rs 1,200,000 on
December 31, 2001, which was delivered the same day (prior arrangement) to Ahmad
Nadeem & Company, the lessee.
(4)
Following information relating to lease transaction is available:
(i) The Lease Asset has an estimated useful life of 5 years which coincides with
the Lease term.
(ii) At the end of lease term, Machine will revert to Munir Niazi Corporation, at
which time it is expected to have a residual value of Rs 100,000. (None of
which is guaranteed by Ahmad Nadeem & Company).
(iii) Munir Niazi Corporation’s implicit interest rate is 8% which is known to
Ahmad Nadeem & Company.
(iv) Ahmad Nadeem & Company’s incremental borrowing rate is 10% at
December 31, 2001.
(v) Lease rentals consist of five equal annual payments, the first of which was
paid on December 31, 2001.
(vi) Both the lessor and the lessee use calendar year as their accounts period and
depreciate all fixed assets on straight line basis.
Required:
(a) Compute the annual rental under the lease. (05)
(b) Compute the amounts of Gross lease rental receivable and unearned interest revenue
that Munir Niazi Corporation should disclose at the inception of the lease
December 31, 2001. (05)
(c) What expense should Ahmad Nadeem & Company record for the year ended
December 31, 2002. (05)
Q.4 A & Z and X & Y are two partnerships carrying on a similar type of business. They
agreed to amalgamate the two partnerships from July 1, 2001 and carry business
under the name of Azee and Company. The Profit & Loss sharing ratio are A=8, Z=7
and X=3 & Y=2. Following are the balance sheets of both the partnerships as on June
30, 2001.
A & Z
X & Y
Rs. Rs.
Capital Account
A & X
Z & Y
130,000
111,000
110,000
78,000
241,000 188,000
Accrued Liabilities 64,000
56,000
305,000 244,000
Freehold property
Fixture
Vehicles
Stock in trade
Debtors
Investment
Cash in hand
75,000
18,000
25,000
59,000
71,000
15,000
42,000
50,000
14,000
17,000
67,000
65,000
-
31,000
305,000
244,000
(5)
(a) The Freehold Property and fixtures of X & Y to be sold for Rs. 100,000
and this transaction was completed on 1/7/2001.
(b) Assets to be revalued
Freehold property
Fixtures
Vehicles
Stock in trade
A & Z
Rs.
95,000
20,000
23,000
57,000
X & Y
Rs.
-
-
15,000
62,000
(c) Provision for doubtful debts of Rs.4,000 by A & Z and of Rs.5,000 by X &
Y.
(d) Accrued liabilities to be reduced by 2.5%
(e) A takes over the firm’s investment at Rs.12,000
(f) The Goodwill of A & Z is to be taken at Rs.75,000 and X & Y at Rs.50,000
(g) Profits in the new firm are to be shared in proportion of 6/20 to A, 5/20 each
to Z and X and 4/20 to Y.
(h) The Capital of the new firm is to be Rs.500,000 in partners profit sharing
ratio, adjustment to be made in cash.
Required:
You are required to prepare profit and loss adjustment accounts, partners capital
accounts, new firm’s Balance sheet and Capital Accounts of new firm’s partners.
(15)
Q.5 Following is the Balance Sheet of Pure Water Limited as on June 30, 2002:
2002 2001
Rs. in 000
Tangible fixed assets 399 320
Intangible assets 263 210
Long terms investments - 26
CURRENT ASSETS
Stock in trade 158 107
Trade debtors 410 331
Investment 53 -
Cash in hand 2 1
623 439
1285 995
Paid-up capital 210 158
Share premium account 168 158
Revaluation reserve 105 96
Accumulated profit 168 105
Long term loans 179 53
CURRENT LIABILITIES
Short term borrowings 91 100
Trade creditors and accrued liabilities 133 125
Taxation 126 116
Proposed dividend 105 84
455 425
1,285 995
(6)
Extract of profit and loss account
for the year ended June 30, 2002
Rs. 000
Profit before tax 368
Interest received 26
394
Interest paid 79
Profit before tax 315
Taxation 147
Profit after tax 168
Dividends 105
Unappropriated profit 63
The following additional information is available:
(a) The proceeds of the sale of Long Term Investments amount to Rs.32,000.
(b) Fixture and fittings, with an original cost of Rs.89,000 and book value of
Rs.42,000 were sold for Rs.32,000 during the year.
(c) The following information is available for fixed assets:
2002 2001
Rs. in 000
Cost 756 625
Accumulated Depreciation 357 305
Net Book Value 399 320
Required:
Prepare cash flow statement for the year ended June 30, 2002.
(15)
Q.6 ABC Company contracted with XYZ Company to build additional factory building
of Rs.50,000,000 on existing land of the company. Work was completed as on June
30, 2001. ABC Company made first payment as on January 1, 2001 of
Rs.5,000,000. The company was availing bank loan for overall capital work in
progress from the Kashmir Bank Ltd. and rate of interest was 16% per annum.
Balance of bank loan was Rs.138,000,000 as on June 30, 2001. Following are the
further information regarding contract payments.
Date of payments Rupees in 000
25-01-2001 10,000
05-02-2001 5,000
03-03-2001 20,000
06-06-2001 10,000
Required:
Calculate the amount to be capitalized in the accounts of ABC Company as on June
30, 2001 in accordance with IAS 23.
(07)
When the capitalization of borrowing costs should commence to form part of
qualifying asset?
(03)
(7)
Q.7 Azhar and Company are importers of a particular item. Accountant of the company
has prepared the Profit and Loss Account following average method for valuation
of closing inventory.
Following are the details of transactions during the year:
Date
Opening Stock
Quantity
1,000
Amount
in Rupees
Purchases 05-07-2002 5,000 3,250,000
10-09-2002 14,000 8,750,000
26-12-2002 9,500 6,650,000
24-03-2003 18,600 13,857,000
05-04-2003 15,600 11,310,000
31-05-2003 10,100 6,969,000
Sales 57,000
Closing Stock 16,800
The Profit and Loss Account prepared by the Accountant on average method of
valuation of closing inventory is as follows:
PROFIT AND LOSS ACCOUNT
Rs. Rs.
Sales 41,325,000
Cost of Sales
Opening stock 560,000
Purchases 50,786,000
51,346,000
Less: Closing Stock 11,688,520
39,657,480
Gross Profit 1,667,520
Operating and Selling Expenses 1,525,900
Net Profit 141,620
Required:
Prepare a revised Profit & Loss Account based on FIFO method for valuation of
closing inventory at cost or net realizable value which ever is lower. The selling
expenses are 2% of sales.
(10)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Spring 2004
March 05, 2004
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 You are the accountant of Shayan Limited and have been presented with the following trial
balance as at 30 June 2003. Shayan Limited is a Public Limited Company listed on all the
stock exchanges of Pakistan. The Company is engaged in the production of various
consumer goods.
Dr Cr
(Rupees in thousand)
Ordinary Share Capital (10,000,000 shares) 100,000
Profit and loss account ( as at 1 July 2002) 22,890
Long term secured loan 3,350
Short term running finance 217
Contractors’ retention money 43
Dealership deposits 259
Trade creditors 512
Interest payable on long term loan 31
Markup payable on running finance 25
Tax deducted at source 2
Gratuity provision 7,000
Sales 336,149
Accumulated depreciation
- Building 3,179
- Plant and machinery 9,087
- Office furniture and fittings 295
- Vehicles 923
Provision for doubtful debts 250
Land at cost 10,000
Building at cost 7,791
Plant & Machinery 25,928
Office furniture and fittings 2,741
Vehicles 5,143
Raw materials – 1 July 2002 10,000
Work in process – 1 July 2002 2,150
Finished goods – 1 July 2002 7,000
Capital work in progress 56,000
Trade debtors 5,041
Long-term investments at cost 10,000
Provision for diminution in value of investment 550
Stores and spares 3,745
Provision for slow moving stores and spares 50
Cash and bank 5,415
Purchases 250,126
Depreciation – factory 2,750
Wages – factory 30,150
(2)
Dr Cr
(Rupees in thousand)
Water, electricity and other utilities 15,405
Repairs and maintenance – factory 205
Salaries – administration and selling 17,805
Printing and stationery 1,000
Interest expense 321
Legal and professional expenses 550
Depreciation – administration and selling 231
Selling expenses 4,615
Rates and taxes – factory 700
Taxation – current 10,000 ______
484,812 484,812
Additional information
(i) The Authorised Capital of the Company is 15 million ordinary shares of Rs 10 each.
(ii) The Company has obtained a long term loan from a financial institution at a mark up
rate of 9% per annum. Out of the outstanding amount, a sum of Rs 350 thousand is due
in the next financial year. The loan is secured against first pari passu charge on
Company’s present and future assets.
(iii) The Company has revalued its leasehold land to Rs 15,000 thousand as at 30 June 2003
but has not yet accounted for this revaluation in its books.
(iv) The Company depreciates its fixed assets on a reducing balance method and applies the
following rates of depreciation.
Building 10%
Plant & Machinery 10%
Fixtures and fittings 5%
Vehicles 10%
Depreciation on additions and deletions during the year, is charged in proportion to the
period of use.
(v) A bonus issue of one to twenty has been approved for the year ended 30 June 2003.
Accounting entries for the same have not yet been incorporated.
(vi) Bank statement has shown that bank charges amounting to Rs 25 thousand have not
been recorded.
(vii) Asghar (Pvt) Limited a customer of Shayan Limited has filed for bankruptcy. An
amount of Rs 10 thousand was provided against the balance outstanding of Rs 15
thousand in previous year. The Company has decided to write-off the balance
completely as there are no realistic prospects of recovery.
Kashan Limited has paid a sum of Rs 20 thousand against its outstanding balance which
was written off in previous year. The cheque was deposited on June 29, 2003 but the
receipt has not been recorded in the books. The cheque was cleared on July 2, 2003.
(viii) Stocks as at 30 June 2003 were as follows:
Rs. ‘000’
Raw Materials 9,500
Work in process 3,330
Finished goods 6,155
(ix) Actuarial valuation indicates that gratuity provision of Rs 7,775 thousand is required as
at 30 June 2003. 2/3rd of the additional provision relates to factory workers whereas
remaining relates to administration and selling staff.
(x) The Company has investment in the shares of a non-listed company, Free Serve
Limited. The overall percentage held in the shareholding of Free Serve is 11%. The
value of investment based on the net assets of Free Serve Limited is Rs 9,450 thousand
calculated on the basis of accounts as on 30 June 2002.
(3)
(xi) Long term deposits have been obtained from dealers and distributors having a contract
of five years with the Company and are payable upon termination of the contract.
Required:
Prepare the Balance Sheet as at 30 June 2003 and the Profit and Loss account together
with the notes forming part thereof for the year then ended in accordance with the
requirements of the Companies Ordinance, 1984. Assumptions taken should be clearly
stated. (25)
Q.2 The Balance Sheet of ABC (Pvt) Limited as at 30 June 2003 and the Profit and Loss
account for the year then ended are as follows:
ABC (Pvt) Limited
Balance Sheet
As at 30 June 2003
2003 2002
Rupees
(‘000)
Rupees
(‘000)
Assets
Land 30,000 10,000
Building 170,000 30,000
Less: Accumulated depreciation 20,000 10,000
150,000 20,000
Inventory 130,000 85,000
Prepaid expenses 4,000 6,000
Trade debts 92,000 70,000
Cash 5,000 28,000
411,000 219,000
Shareholders’ Equity and Liabilities
Ordinary shares 106,000 96,000
Unappropriated profit and loss account 70,000 50,000
Long term loan 175,000 20,000
Accounts payable 49,000 44,000
Income taxes payable 5,000 4,000
Accrued liabilities 6,000 5,000
411,000 219,000
ABC (Pvt) Limited
Profit and Loss account
For the year ended 30 June 2003
Rupees
(‘000)
Sales 500,000
Cost of goods sold (310,000)
Gross profit 190,000
Selling and administration expenses (80,000)
Interest expense (11,000)
Profit before tax 99,000
Taxation (30,000)
Profit after tax. 69,000
(4)
The expenses include depreciation as follows:
Cost of goods sold Rs 4,000 thousand
Selling and administration expense Rs 6,000 thousand
During the year dividends amounting to Rs 49,000 thousand were paid to the shareholders.
Required:
Prepare Cash Flow Statement for the year ended 30 June 2003 in accordance with IAS-7
(10)
Q.3 Following is the extract of information from the financial statements of M/s. Matrix (Pvt)
Limited
Paid-up Capital (Rs.) 1,000,000
(Ordinary shares of face value of Rs. 10/- each)
Gross Profit (Rs.) 2,250,000
Earning per share (Rs.) 2.50
Net Assets (Rs.) 13,000,000
Fixed assets (Rs.) 10,500,000
Gross Profit (%) 20%
Debtors Turnover 7 times
Inventory Turnover 5 times
Current ratio 1 : 3
Utilization of Current Assets 3 times
Required:
Calculate the following:
Net Profit
Return on Capital Employed
Working Capital
Sales
Cost of sales
Trade Debtors
Closing inventory
Current Assets
Current Liabilities (10)
Q.4 Azhar and Company has a machine having a cost of Rs. 35 million and accumulated
depreciation of Rs. 14 million. Depreciation is charged @ 10% per annum. The company is
short of funds and has decided to sale and lease back this machine. The leasing company
has valued it at Rs. 25 million. The leasing company issued letter of offer containing the
following terms:
Monthly rent Rs.732,900
Security deposit 10%
IRR 10.65%
Period of lease 36 months
(5)
The lease shall commence on the Ist day of the accounting year and the rentals are due at
the end of the month.
Required:
Prepare journal entries to record:
(a) transfer of asset to the leasing company
(b) interest charge for the first year of operations. (Show all relevant calculations)
(10)
Q.5 Following is the fixed assets schedule and partial income statement of Plastic Card (Pvt)
Limited for the year ended 30 June, 2003:
Fixed Asset Schedule
Particulars Cost as on
1-7-2002 Addition Total Rate
Opening
Accumula
ted
Depreciat
ion
Depreciat
ion for
the year
W.D.V. as
on 30-6-
2003
Rs. Rs. Rs. Rs. Rs. Rs.
Land 1,000,000 -- 1,000,000 -- -- -- 1,000,000
Building 3,500,000 -- 3,500,000 5% 175,000 175,000 3,150,000
Plant & Machinery 56,000,000 -- 56,000,000 10% 5,600,000 5,600,000 44,800,000
Office Equipment 1,680,000 -- 1,680,000 10% 168,000 168,000 1,344,000
Vehicles 1,082,977 52,902 1,135,879 20% 216,595 227,176 692,108
Total 63,262,977 52,902 63,315,879 6,159,595 6,170,176 50,986,108
Partial Income Statement
2003 2002
Rs. Rs.
Profit Before Tax 5,650,000 4,560,000
Tax @ 43% (2002; 45%) 2,429,500 2,052,000
Net Profit After Tax 3,220,500 2,508,000
Retained earning – opening 2,508,000 -
Retained earning – closing 5,728,500 2,508,000
The company was incorporated in the month of July 2001 and acquired assets just after
incorporation. At the time of finalizing of financial statements of the company for the year
ended June 30, 2003, it was found that the vehicle was acquired on lease having cost of
Rs. 1,000,000/- and subsequent additions to vehicle are in fact, markup paid to the leasing
company. There were no other additions. Company's policy is to charge depreciation on
reducing balance method.
Required:
(a) Redraft fixed assets schedule. (12)
(b) Prepare Partial Income Statement and Statement of Retained Earnings as per related
IAS using benchmark treatment. (08)
(6)
Q.6 Absolute Projects Limited is a public limited company listed on stock exchange. Company
has a capital project in process. It has obtained a loan specifically for this project. In
addition to this the company has various financings obtained from various banks. The
details of the financing obtained by the company as at 30 June 2003 are as follows.
Amount in
Rupees ‘000’
Mark-up rate
Specific Loan for the Project 10,000 9%
General purpose loan 1 50,000 9.5%
General purpose loan 2 25,000 7.5%
General purpose loan 3 15,000 8%
All the loans have remained outstanding throughout the year. Cost incurred on the project
as at June 30, 2003 and 2002 stood at Rs 15 million and Rs. 10 million respectively. The
cost has been incurred evenly throughout the year.
The Company has a policy to capitalize interest on capital projects in accordance with the
International Accounting Standard 23. Kindly calculate the amount of interest to be
capitalized on the Project. (05)
Q.7 Wise Construction Company Limited has a contract to construct a small bridge. Contract
price is Rs. 40 million. The construction started in July 2001 and was completed in
November 2003.
(Rupees in thousand)
Year ended December 31, 2001 2002 2003
Costs to date 8,000 26,900 32,000
Estimated cost to complete 27,000 10,000 -
Progress billing during the year 8,000 21,500 10,500
Cash collected during the year 6,700 15,600 17,700
Required:
Prepare partial income statement and balance sheet for the three years, showing complete
calculation of revenue recognized and gross profit using percentage of completion method.
(20)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2004
September 06, 2004
FINANCIAL ACCOUNTING (MARKS 100)
MODULE C (3 hours)
Q.1 The following data of Minhaj Corporation is available for the year ended
June 30, 2004:
Rupees
Opening retained earning 98,000
Non-current assets 280,000
Sales 920,000
Expenses 180,000
Gross profit on sales 25%
Acid test ratio 2.5:1
Days sales in inventory 45
Days sales in receivables 18
Shareholders equity to debt (including current) 4:1
Tax rate 40%
Ordinary share capital (10,000 shares of Rs.15,
issued at Rs.21 each)
Total number of days in a year to be taken as 360
Required:
Prepare the income statement and balance sheet of Minhaj Corporation as at
June 30, 2004. Show all workings.
(20)
Q.2 The following is an abridged profit and loss account of Mumtaz & Co.
Rupees
2004 2003
Sales 1,200,000 850,000
Cost of goods sold 900,000 680,000
Gross Profit 300,000 170,000
Selling and Administrative expenses 180,000 127,500
Profit before tax 120,000 42,500
Taxation (40%) 48,000 17,000
Profit after tax 72,000 25,500
Opening Retained Earnings 475,500 450,000
In 2004 the company decided to change its costing method of inventories from lastin-
first out (LIFO) to first-in-first out (FIFO) in order to follow the benchmark
treatment of IAS 2.
The impact on the cost of inventories was as follows:
2004 2003
Closing Inventories (understated) 25,000 35,000
(2)
Required:
The company has decided to follow the benchmark treatment of IAS 8 [Net Profit
or Loss for the Period, Fundamental Errors and Changes in Accounting Policies]
and has requested you to prepare all related disclosures including the profit and loss
account and statement of retained earnings, as required under the IAS.
(20)
Q.3 Ali and Akbar were in partnership sharing profits and losses: Ali three fifth, Akbar
two-fifth. The following was the summarized Balance Sheet of the partnership as
on December 31, 2003:
Rupees
Assets
Buildings, plant, vehicles, machinery and equipment 84,000
Investments 32,000
Current Assets
Inventory 40,000
Accounts receivable 35,000 75,000
191,000
Capital and Liabilities
Capital Accounts
Ali 75,160
Akbar 44,080 119,240
Loan from Ali 30,000
Interest payable 800 30,800
Creditors 25,000
Short-term running finance 15,960
191,000
Ali and Akbar decided to convert the partnership into a limited company AA
Company from January 1, 2004.
· The company is to take over all investments, inventory, buildings, plant,
machinery and equipment with the exception of two motor vehicles whose
book values were Rs.8,000 and Rs.4,000 respectively.
· The purchase consideration consisted of 5,000 Ordinary shares of Rs. 10
each in AA Company and 5,000 Term Finance Certificates of Rs. 50 each at
six month KIBOR plus 1.5% with a floor of 8% and ceiling of 14% to be
divided between the partners in profit sharing ratio.
· Both the vehicles were disposed off for Rs. 20,000
· Ali’s loan together with interest payable was transferred to his Capital
Account
· The receivables were fully realized and creditors were paid in full by the
partnership firm.
Required:
Prepare the following:
(a) Realization Account (route all transfers through realization account). (05)
(b) Prepare the Capital Accounts of the Partners. (11)
(c) Prepare the Opening Balance Sheet of AA Company. (04)
(3)
Q.4 Soft Technologies is a public limited non-listed company. It was incorporated in
June 2003. Following is the Trial Balance of June 30, 2004
DR CR
(Rupees in 000)
Software exports 50,000
Local software sales 8,000
Share capital 10,000
Share application money 3,000
Creditors 2,000
Foreign currency loan 10,000
Accrued liabilities 1,000
Tax deducted on salaries 350
Accumulated depreciation 2,100
Salaries 22,000
Bonus to employees 2,000
Rent 2,500
Utilities 3,000
Internet 1,000
Sub-contracting cost 11,255
Stationery 1,250
Audit fee 1,000
Legal and professional 500
Miscellaneous 750
Trade debtors 27,000
Computers 6,300
Furniture & fixtures 1,000
Accounting software 6,000
Cash in hand 50
Cash at bank 345
Security deposits 500
86,450 86,450
Additional Information:
(i) Authorized capital of the company is Rs.25 million. Each share is of Rs.100
each
(ii) Accounting software has been developed by the company itself and has
capitalized the amount.
(iii) Foreign currency loan is from Soft Tech UK which holds 90% shares of the
company. The loan is interest free and will be converted into share capital
after 5 years.
(iv) The company has not made any taxation provision due to exemption to
software exporters.
(v) Allotment of shares for the share application money was done on
June 30, 2004.
(vi) Security deposits are of long term nature.
(vii) Computers of Rs. 5 million were purchased during the year.
(4)
Required:
(a) Prepare Balance Sheet as at June 30, 2004 and the Profit and Loss account
for the year then ended, in accordance with the requirements of the
Companies Ordinance 1984.
(10)
(b) Draft accounting policies of the company. (05)
(c) Prepare notes to the accounts and list down the additional information
required for the preparation of the notes in accordance with the Companies
Ordinance 1984.
(10)
Q.5 The Electro Sales Company sells computers on installment basis. Following data is
available from the records of the company:
2000 2001 2002
R u p e e s
Installment sales 240,000 250,000 300,000
Cost of installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000
Collections during 2002
Installment contracts – 2000 72,500
Installment contracts – 2001 80,000
Installment contracts - 2002 62,500
Defaults
Unpaid balance of 2000 installment contract
15,000
Value assigned to repossessed goods 6,000
Unpaid balance of 2001 installment contract 16,000
Value assigned to repossessed goods 9,000
Required:
Record all the entries for 2002 for recording of installment sales, collections,
defaults, and repossession and recognition of gross profit. Show all the
calculations.
(15)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Spring 2005
March 07, 2005
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 Balance Sheet of Qudrat Ltd. as on June 30, 2004 and the Profit and Loss account for
the year then ended are as follows:
Balance Sheet
2004
(Rs)
2003
(Rs)
2004
(Rs)
2003
(Rs)
FIXED ASSETS SHAREHOLDER’S EQUITY
Building 97,000 29,000 Paid up share capital 360,400 326,400
Plant & Machinery 340,000 102,000 General reserves 200,000 150,000
Acc. depreciation (68,000) (34,000) Un-appropriated profit 28,000 20,000
369,000 97,000 588,400 496,400
Capital work in progress 238,000 -
Deferred cost - 5,000 Long term loans 476,000 50,000
CURRENT ASSETS CURRENT LIABILITIES
Stock in trade 442,000 289,000 Current maturity of long term
loans
119,000
18,000
Debtors 312,800 238,000 Bills payable 166,600 149,600
Less Provision for bad
debts
5,000
- Accrued expenses 20,400 17,000
307,800
Advances and deposits 13,600 20,400 Income tax payable 17,000 13,600
Cash and bank balances 17,000 95,200
780,400 642,600 323,000 198,200
Total 1,387,400 744,600 1,387,400 744,600
Profit & Loss Account
Rupees
Sales 1,700,000
Cost of goods sold (1,029,000)
Gross profit 671,000
Administrative expenses (282,000)
Financial expenses (37,400)
(319,400)
Operating profit 351,600
Loss on sale of fixed assets (25,000)
Profit before taxation 326,600
Taxation (102,000)
Profit after taxation 224,600
Un-appropriated profit brought forward 20,000
Profit available for appropriation 244,600
Appropriation:
Dividend (166,600)
Transfer to general reserves (50,000)
(216,600)
Un-appropriated profit carried forward 28,000
(2)
During the month of May 2004 the company purchased a machine for Rs.100,000,
but due to sudden change in production plan, the machine was sold for Rs.75,000 in
the same month. Company has not charged any depreciation on the plant sold during
the year.
Required:
Prepare Cash Flow Statement for the year ended June 30, 2004 in accordance with IAS-7
(Cash Flow Statement).
(12)
Q.2 Following information relates to M/s Zameer Internationa l, who started business in
January 2004.
Sales (Rs.) 4,800,000
Gross profit ratio 25%
Net profit ratio 15%
Current assets ratio 1.5
Quick assets ratio 1.25
Stock turnover ratio 15
Debts collection period 1.5 month
Cost of sales to fixed assets 1.5
Fixed assets to net worth 0.8333
Required:
You are required to prepare the Balance Sheet of Zameer International, as at
December 31, 2004 and Profit and Loss Account for the year then ended. (12)
Q.3 During the night of 15th December 2004, flood water entered in the warehouse of
Fine Distributors and destroyed the entire inventory. Certain information relating to
the period from Ist July to 14th December, 2004 is however, available at the Sales
Office of the company.
Rupees
Gross sales 9,625,000
Opening stocks 1,250,000
Gross purchases 8,250,000
Un-recorded sales 625,000
Sales return 1,250,000
Purchase return 375,000
Freight on purchase 1,250,000
Mark up on cost 20%
Required:
Calculate the Cost of Stocks, for which the company should lodge an insurance claim. (06)
Q.4 You are an income tax officer, and assessing the income of Mr. Fazal, who has never
filed any return relating to income of his business. Upon initial inquiry, you are
reported that Mr. Fazal has been running his trading business since 2001, and has
kept records of his business.
Following is the year-wise income of Mr. Fazal:
Rupees
2001 6,600,000
2002 6,490,000
2003 7,040,000
2004 7,810,000
(3)
While reviewing the income statements of Mr. Fazal, you noticed that closing stocks
of 2001 were undervalued by Rs.3,300,000 while closing stocks of 2002 were
overstated by Rs. 1,210,000. Rests of the income were calculated correctly.
Following are the year-wise applicable income tax-rates
%
2001 30
2002 30
2003 35
2004 35
Required:
What is the correct amount of Income before and after tax, for each year, and what is
total tax recoverable from Mr. Fazal, assuming that there is no penalty or additional
tax on concealment of Income?
(10)
Q.5 Childcare Pharmaceuticals Ltd dealing in pediatric medicines sends one of their
research scientists to U.K. for advance research program for development of a
medicine for children with chest related diseases. The research went successful and
the initial laboratory tests gave positive results of the medicine. The company
intends to market the product and for this purpose a technical feasibility was
prepared which proves that if the medicine is developed, for which all the technical
and financial resources are available; there is a good market for the product.
However the company has to design one of its production lines. The company
registered the patent of the medicine, named CHILD-HEALTH. Following is the
detail of cost incurred during the research and development phase of the medicine
CHILD-HEALTH:
Rs. in ‘000’
Cost of research scientist stay in U.K.
including fees for attending seminars and lectures 3,500
Fee for preparation of feasibility report 500
Designing cost of the process after feasibility study 4,000
Patent registration cost including attorney fees, etc. 250
Required:
In the light of IAS-38 (Intangible Assets)
(a) Compute the amount to be expensed out. (05)
(b) Compute the amount to be capitalized as an intangible asset. (05)
Q.6 The Pure Limited leased plant and machinery having fair value of Rs.125,000 from
Leasing Corporation Limited. The lease agreement contains a bargain purchase
option and requires 15 annual minimum lease payments of Rs.15,000 payable at the
end of each year. The economic life of the plant and machinery is 20 years. Implicit
rate of Leasing Corporation Limited is 8%.
Required:
(a) Calculate present value of minimum lease payments payable in 15 years. (03)
(b) Prepare a statement showing repayment of principal and mark- up for the first
five years.
(10)
(c) In the light of IAS-17, what are the criteria, which attract capitalization of
leased plant and machinery in above case?
(03)
(d) In the absence of bargain purchase option, will the Pure Limited capitalize the
leased plant and machinery? Briefly explain reasons.
(02)
(4)
Q.7 C & C Construction Limited commenced work on the construction of a block of flats
on July 1, 2004. During the period ended December 31, 2004 contract expenditure
was as follows:
Rs. in ‘000’
Materials issued from stores 13,407
Materials delivered direct to site 73,078
Wages 39,498
Administration expenses 3,742
Site expenses 4,693
On December 31, 2004 there were outstanding amounts for wages Rs.396,000 and
site expenses Rs.122,000 and the stock of materials on site amounted to
Rs.5,467,000.
The following information is also releva nt:
(i) On July 1, 2004 a plant was purchased for exclusive use on site at a cost of
Rs.15,320,000. It was estimated that it would be used for two years after
which it would have a residual value of Rs.5,000,000.
(ii) By December 31 the company had received Rs.114,580,000 being the amount
of work certified by the architects up to December 31 less a 15% retention.
(iii) The total contract price is Rs.780,000,000. The company estimates that
additional cost to complete the project will be Rs.490,000,000. From costing
records it is estimated that the cost of rectification and guarantee work will be
2.5% of the contract price.
Required:
(a) Prepare the contract account for the period, together with a statement showing
your calculation of the profit to be taken to the company’s profit and loss
account on December 31, 2004.
(15)
(b) Give the values which you think should be included as turnover and cost of
sales, in the profit and loss account, and those to be included in debtors and
work in progress in the balance sheet in respect of this contract.
(05)
Q.8 (a) When can an entity commence capitalizing borrowing cost as part of a
qualifying asset? Describe with reference to IAS-23 (Borrowing Cost).
(b) ABC Company contracted with XYZ Company to build additional factory
building of Rs.50,000,000 on existing land of the company. The work was
completed on June 30, 2004. ABC Company made first payment of
Rs.5,000,000 on January 1, 2004. During the period of construction, ABC
Company had availed bank loan for capital work in progress from Pak Bank
Ltd. The rate of interest was Re.0.23 per day per rupees thousand. The amount
outstanding was Rs.138,000,000 as on June 30, 2004. Following is the further
information regarding contract payments:
(03)
Date of payment Rupees
25.01.2004 10,000,000
05.02.2004 5,000,000
03.03.2004 20,000,000
06.06.2004 10,000,000
Required:
Calculate the borrowing cost to be capitalized in the accounts of ABC Company for
the year ended June 30, 2004 in accordance with IAS-23.
(09)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2005
September 05, 2005
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 KAH Limited was incorporated and listed after July 01, 2004. Following is the trial
balance of the company as at June 30, 2005:
Rs. in ‘000
Debit Credit
Share capital (4,500,000 shares of Rs.10/- each) 45,000
Incorporation and listing expenditure 1,750
Start up cost 2,100
Fixed Assets at cost
Land 7,500
Factory building 5,000
Office building 1,000
Plant and machinery 7,000
Furniture and equipment-Office 800
Furniture and equipment-Factory 200
Motor vehicles – Distribution Department 3,000
Trade debtors 21,000
Trade creditors 17,500
Accrued expenses 1,500
Sales 164,290
Purchase of raw material 126,070
Salaries & wages
Direct 11,900
Indirect 4,250
Fuel and power 5,870
Other overhead expenses 8,970
Repair and maintenance-Factory 4,510
Distribution expenses 6,250
Selling expenses 2,800
Administrative expenses 2,950
Cash and bank balance 5,370
228,290 228,290
The following additional information is available:
(a) The cost of stocks at June 30, 2005 was determined as under:
Rs. in ‘000
Raw material 8,800
Work in progress 4,700
Finished goods 9,600
(2)
(b) Depreciation is calculated on straight line basis at the following rates:
Buildings 2%
Plant and machinery 10%
Furniture and equipment 10%
Motor vehicles 20%
Depreciation on furniture and equipment is to be allocated 60% and 40% to
selling and administrative expenses respectively.
It may be assumed that all the above assets were acquired on October 01, 2004.
(c) A debt of Rs.0.50 million is to be written off. The management estimates that
bad debt shall be equal to 1% of the year end balance.
(d) Trade debts include a sum of Rs. 3.0 million receivable from an associated
company against a single transaction. The company has not paid the amount in
spite of many reminders.
(e) The General Manager Sales is entitled to a commission equal to 5% of the net
profit before tax but after the said commission.
(f) Tax is to be provided at 35%.
(g) Following dividends were approved and declared by the Board of Directors:
- Interim Re.0.50 per share declared on June 05, 2005 but paid on
July 8, 2005.
- Final Re.0.50 per share declared on August 18, 2005 and not yet paid.
Required:
Prepare balance sheet, profit and loss account and statement of changes in equity
along with notes forming part thereof (excluding note for accounting policy) in
accordance with the provisions of the Companies Ordinance, 1984.
(20)
Q.2 On October 01, 2004 ABC Limited, in the course of improvement and enhancement
of its production facility bought a plant having invoice value of Rs.25 million for the
production of its popular brand of electrical goods. Mr. Aslam, one of the directors,
was assigned the duty of supervising the installation of the plant. Other information
is given below:
(a) A special trade discount of 25% was allowed by the supplier due to efforts of
the agent involved in the deal, who had close association with Mr. Aslam.
Normally the supplier allows only 10% trade discount to his customers.
(b) The following costs were incurred on site preparation:
Rs. in ‘000
- Salary of civil engineers and labour 1,200
- Civil and electrical work 2,800
- Electrical item received from the company’s own production
department at cost plus 10% profit (similar items are sold to
customers at cost plus 30% profit)
330
- Remuneration of Mr. Aslam during site preparation 600
(3)
(c) Civil and electrical work includes cost of certain instruments amounting to
Rs. 150,000, which were poorly handled by the workers and were totally
damaged. Now they carry no value.
(d) On January 01, 2005 test run was started and successfully completed on
January 31, 2005 at a cost of Rs. 550,000. The sale proceeds of test
production were Rs. 320,000.
(e) The plant went into normal production from February 01, 2005 and attained
45% capacity during the period ended on June 30, 2005. The company, at this
stage, discovered that the actual capacity of the plant is about 85% of the
capacity declared by the supplier. The matter was discussed with the supplier
and his agent. The agent finally agreed to pay a compensation of 3% on
invoice value and issued his credit note to this effect on June 30, 2005.
(f) The company accounts for its assets under cost model and on June 30, 2005 it
estimated Rs. 21 million as the fair value of the plant. It is further estimated
that in case of disposal, the following expenditure will have to be incurred:
Rs. in ‘000
- Cost of dismantling 250
- Cost of transportation 100
- Terminal benefits of labour to be laid off 300
- Legal costs 100
- Stamp duty 50
- Salary of production manager during dismantling 100
(g) Depreciation is to be charged at 10% on straight line basis from the
commencement of normal production.
Required:
Calculate the following, also submit your explanation if necessary:
(a) Initial recognition of the cost of plant. (05)
(b) Impairment loss, if any, as at June 30, 2005 and accounting treatment thereof. (06)
Q.3 Finance Manager of RR Limited approached you to discuss implications of
following events on the financial statements of the company for the year ended June
30, 2005, which are to be placed before the Board of Directors for approval on
August 28, 2005:
(a) Trade debts as at June 30, 2005 include a debt of Rs. 500,000 recoverable
from Mr. P, who was declared insolvent on August 05, 2005.
(b) A computer software having carrying value of Rs. 1.5 million had been giving
operational problems since May, 2005. It became totally inoperative in July,
2005. It took 25 days and a cost of Rs. 31,000 for rectification.
(c) Investments of the company amounting to Rs.10 million at the year end were
disposed off for Rs. 6 million in response to a market crash on July 27, 2005.
(4)
(d) At the year end, the company had 950 laptops of a good brand each costing
Rs.65,000. There was rising trend of prices in the market, which influenced
the company’s sale policy and these computers were retained in stock till July
25, 2005 when market price started falling and within one week’s time
declined to Rs.68,000. This situation forced the management to start selling.
However, the whole stock could be sold till August 22, 2005 and fetched total
sale proceeds of Rs.40.85 million.
(e) On May 28, 2005, the head of sales department had placed his suggestion to
the Chief Executive Officer (CEO) for a free after-sale-service offer for two
years to customers, effective April 15, 2005. However, the CEO approved the
scheme on July 15, 2005 and it was announced by the company on the same
date. It is expected that service cost attributable to sales made during April
15, 2005 to June 30, 2005 would be Rs. 150,000.
Required:
Suggest appropriate accounting treatment in each case with proper reasoning.
(15)
Q.4 Following is the trial balance of RST Associates, a partnership firm, as at June 30,
2005.
Rs. in ‘000
Motor vehicles – cost 5,700
Motor vehicles – depreciation 2,280
Office equipment – cost 2,650
Office equipment – depreciation 1,590
Land 15,000
Buildings – cost 28,000
Buildings – depreciation 8,400
Debtors 19,305
Provision for doubtful debts 567
Cash at bank 7,224
Creditors 22,275
Capital
R 41,000
S 17,250
T 11,750
Drawings
R 6,000
S 3,600
T 2,400
Current account
R 1,350
S 675
T 540
Sales 515,463
Purchases 353,750
Carriage inward 5,400
Stock - opening balance 40,500
Administrative expenses 128,481
620,575 620,575
(5)
Some additional information is as under:
(a) Closing stock valued at Rs.47.250 million.
(b) Administrative expenses include a sum of Rs. 3.6 million paid towards office
rent for the year ending December 31, 2005.
.
(c) Depreciation on assets is to be charged under reducing balance method at the
following rates:
- Building 2%
- Office equipment 10%
- Motor vehicles 20%
(d) A sum of Rs. 1.2 million was payable to Mr. S as salary for the year.
The partners decided to convert the partnership firm into RST (Pvt) Limited. The
effective date was finalized as July 01, 2005.
Following information is also available:
(a) Debtors include a sum of Rs. 6.20 million receivable from a relative of Mr. S
and is outstanding for a long period. All the partners now agreed that Mr. S is
to settle this amount at Rs. 4.00 million as full and final settlement. Cheques
from all other customers were received by the firm on July 01, 2005.
(b) Mr. S also assumed a liability amounting to Rs. 3.60 million, which he
immediately settled through cheque at Rs. 2.80 million. All other liabilities
were paid by the firm.
(c) 10,500,000 ordinary shares of Rs. 10 each were issued to partners in equal
proportion.
(d) Balances in capital accounts were appropriately settled.
Required:
(a) Realization and bank accounts. (13)
(b) Partners’ capital accounts. (09)
Q.5 (a) Describe the disclosure requirements for finance lease in the financial
statements of lessee, as required by IAS - 17 (Leases).
(08)
(b) How is a financial lease transaction, initially recognized in the books of
lessee?
(06)
(c) Following are the transactions of sale and lease back arrangement:
(i) LMN Limited sold one of its three years old plants costing Rs. 25
million on June 30, 2005 to XYZ Leasing Limited for Rs. 20 million. It
was leased back to LMN for a term of two years at monthly installment
of Rs. 941,500 payable at the end of each month. Borrowing rate of
LMN is around 12% per annum. Depreciation rate for plant is 10%.
(6)
(ii) LMN Limited sold a two years old motor vehicle costing Rs. 1.50
million on June 30, 2005 to XYZ Leasing Limited for Rs. 1.00 million.
It was taken back on lease for six months at a lease rental of Rs. 30,000
payable at the end of each month. Depreciation rate for motor vehicle is
20%.
Required:
What accounting treatment do you suggest for LMN Limited for the above
transactions? (06)
Q.6 Following are some of the balances worked out from the trial balances of two
companies of GH Group as at June 30, 2005. Both companies are engaged in the same business in different locations.
Company A Company B
(Rs. in '000)
Fixed assets - tangible (WDV) 38,600 35,000
Total current assets 19,970 15,300
Share capital 20,000 27,000
Retained earnings 6,000 6,000
Profit after tax for the year 4,576 4,615
Long term loan 20,000 3,000
Total current liabilities 5,530 7,200
Income tax charge 2,464 2,485
Sales 54,000 30,000
Cost of goods sold 41,040 21,000
Administrative expenses 3,920 2,400
Financial charges 2,000 300
Profit received on short term deposits - 800
Required:
(a) Compute the following for both companies and comment very briefly.
(i) Interest cover (03)
(ii) Dividend cover (The Group has a policy to pay 10% dividend each year) (03)
(b) Did company B perform better than company A? Explain. (06)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Spring 2006
March 06, 2006
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 Following is the trial balance of Shams Limited, a public quoted company, as at
June 30, 2005:
Particulars Debit
Rs. in '000'
Credit
Rs. in '000'
Ordinary share capital 30,000
Land 12,000
Building 22,000
Office furniture and equipment 5,500
Investments 13,000
Advance tax deducted by a customer 800
Trade debtors 4,000
Other receivables 6,000
Prepayments 2,000
Bank overdraft 9,400
Trade creditors 2,500
Accrued expenses 1,000
Long term loans from banks 15,000
Sales 117,000
Administrative and selling expenses 21,000
Profit on investment 1,800
Dividend paid 1,500
Interest expenses on bank overdraft 500
Purchases (merchandise) 86,000
Other direct expenses 2,400
176,700 176,700
Some other relevant information is as under:
i) Company has authorized share capital of Rs. 100,000,000 divided into
10,000,000 ordinary shares.
ii) The store department reported closing value of stores at Rs. 1,800,000 that
includes stock in trade amounting to Rs. 1,650,000.
iii) Trade debts include credit balance of a customer amounting to Rs. 100,000.
iv) A long term loan amounting to Rs. 17,500,000 was obtained from a bank on
September 25, 2004. The principal is payable in equal installments on 25th of
March and September each year. It carries a markup of 12% payable with each
installment.
v) Interest on long term loan paid with the first installment was wrongly debited
to administrative and selling expenses.
(2)
vi) The land was revalued on June 30, 2005 at Rs. 18,000,000 and directors
approved the revaluation.
vii) Depreciation is charged on building at 5% and on office equipment and
furniture at 10% per annum. These assets were acquired on October 01, 2004.
viii) Investments include some securities amounting to Rs. 4,500,000 maturing on
August 31, 2006.
ix) The directors approved and declared a 5% interim stock dividend on June 18,
2005. The shares were allotted on June 28, 2005 but no certificate has yet been
issued to any shareholder.
x) The company has signed another long term loan agreement amounting to Rs.
5,000,000 with a bank in May, 2005 whereby the bank has given firm
commitment of its disbursement on or before June 05, 2005. However, actual
disbursement was made on July 05, 2005.
xi) The tax rate applicable to the company is 35%. However, tax on profit on
investment is payable at the rate of 20%.
Required:
You are required to prepare balance sheet, profit and loss account and statement of
changes in equity (without any notes to the accounts) for the year ended June 30,
2005 under the Companies Ordinance, 1984. Please also submit important workings
and computations. (24)
Q.2 Qamer Trading Company Limited is facing a litigation due to an alleged breach of
contract. The directors have made the following assessment about the damages:
Particulars Probability
i) The contract contains a clause that prescribes damages of
Rs. 5,000,000 in case of default. 60%
ii) The company has incurred a sum of Rs. 600,000 as legal expenses,
of which 50% is recoverable in case of a favourable decision. 40%
iii) The plaintiff has claimed Rs. 1,000,000 as legal expenses. 40%
iv) The plaintiff has also claimed Rs. 500,000 as interest on damages. 5%
Required:
Explain how the above information would affect the financial statements of the
company. (06)
Q.3 Following information has been extracted from the books of Sayyarah Limited.
i) The company, to curb the sharp decline in sales of its products 'Y' and 'Z', paid
Rs. 1.7 million to a consulting company for improvement in the design of the
products, if possible.
ii) On the basis of consultant's report, production of ‘Z’ was discontinued. The
consultant had suggested three new designs for 'Y'. One of them was selected
and company incurred Rs. 0.65 million on new moulds and patented the design
at a cost of Rs. 0.3 million. 60% of the fee payable to the consultant is directly
attributable to ‘Y’.
(3)
iii) Manufacturing license of product 'Z' is expiring on June 30, 2008 and has a
book value of Rs. 0.5 million. This license is not transferable.
iv) The company paid Rs. 1.0 million to an agency for an advertisement campaign
for product 'Y' that increased the company's sales substantially and there is a
strong evidence that it will also bring net cash flow of Rs. 6.5 million in the
next year. Thereafter its impact will be insignificant.
v) Product 'T' is one of the top brands of the company and bears a good market
reputation. The brand is currently being reported at zero value in the financial
statements despite the fact that the company incurred Rs. 3 million on setting
up a brand development department exclusively for the said item. This year
company has a firm offer for the said brand amounting to Rs. 12 million from
another financially sound company.
Required:
Suggest accounting treatment with brief reasons, in respect of each of the above
information. (14)
Q.4 The books and other records of Sitara Constructions Limited, the contractor contain
the following information:
Particulars Contract A Contract B
Date of commencement 1-Jan-05 1-Jul-04
Date of completion 31-Dec-05 31-Oct-05
Work certified by the surveyors 58% Not available
Rs. in '000'
Contract Price 120,000 150,000
Cost incurred upto June 30, 2005
Wages 49,140 64,800
Materials issued to site 17,640 52,920
Other costs 7,200 14,550
Machinery and equipment costs 12,000 18,000
Closing balance of material at site 3,900 675
Amount billed according to agreement 65,000 141,000
Expected additional cost to complete the projects
Wages 28,860 2,700
Materials 7,560 1,080
Other costs 2,400 45 0
Some other information is as under:
i) According to the company’s policy, certification of work has primary
importance in computing interim profits on a contract-in-process.
ii) The contracts signed with the respective customers contain a clause that
prescribes that in case of delay, penalty equal to 2% of the contract price will
be imposed on the contractor for each month. Whereas, in case of early
completion the contractor will be given a bonus at the similar rate. Contractor
is very much confident that both the contracts will be completed 30 days
before schedule.
(4)
iii) According to the terms of the contracts, all machinery and equipment used for
Contract A and B will be acquired by the respective customers at an agreed
price of Rs. 8,400,000 and Rs. 12,000,000 respectively, at the end of the
contract.
Required:
(a) Compute 'gross profit' and 'contract revenue earned' attributable to each
contract for the year ended June 30, 2005.
(b) Prepare separate contract accounts in the books of the contractor.
(13)
(08)
Q.5 Following information is available from the financial records of Marreekh Limited:
i) The life of a plant purchased on July 01, 2003 for Rs. 24 million, was estimated
by a valuation consultant at 4 years with no residual value. The depreciation for
the year ended June 30, 2004 was provided accordingly. On June 30, 2005, in
view of changed circumstances, the same consultant revised the previous
estimates and suggested remaining life of 4 years and residual value at
Rs. 2 million.
During the year 2004-05 certain equipments remained idle for ten months due
to company's engagement in executing a profitable order of a product for which
these equipments were not needed at all. These equipments have six years
remaining life on July 01, 2004 and residual value of Rs. 0.5 million.
The accountant of the company has prepared the financial statements for the
year ended June 30, 2005 alongwith the notes. An extract from the note related
to fixed assets is given below:
( Rs. in million)
Cost as
Particulars at June Depreciation
30, 2005 Opening Current Closing
WDV
Land 13.0 - - - 13.0
Building 25.0 4.0 0.5 4.5 20.5
Plant 24.0 *4.4 4.4 8.8 15.2
Equipments remained
idle during the year 3.0 1.0 - 1.0 2.0
Other equipment 10.0 4.0 1.0 5.0 5.0
75.0 13.4 5.9 19.3 55.7
*The accountant has credited the change in opening balance to other income.
(ii) The company was holding some stock of merchandise amounting to Rs. 5
million on behalf of its principal. Due to mishandling, quality of the said
merchandise was significantly affected. The technical staff has not yet
finalized its estimation of loss due to extra ordinary complexity involved in
assessment of quality of the damaged merchandise. The financial statements
are due for approval in the next few days. Therefore, accountant of the
company has made provision for the whole amount, as the company
acknowledges its default.
(5)
(iii) The company is also engaged in trading of certain products, which were
valued at the year end, as follows:
Per unit Value
Prod. Quantity Cost Freight
in Total
Net
Realizable
Value
Per
unit Rs.
A 5,400 45 2 47 42 42 226,800
B 2,500 18 3 21 20 20 50,000
C 1,450 56 8 64 65 65 94,250
D 7,000 32 11 43 41 41 287,000
E 6,500 121 5 126 170 170 1,105,000
1,763,050
During the year the accountant has debited the amount of transit insurance
aggregating to Rs. 1.5 million to prepayments account. The rate of premium is
3% of the purchase price.
Required:
Pass necessary entries to rectify the errors, if any, according to the principles laid
down in International Accounting Standards. Also submit necessary workings. (15)
Q.6 On January 1, 2005, partners of Chand & Company and Suraj & Company agreed to
merge their businesses. The new firm is to be called CS & Company. The balance
sheets as on December 31, 2004 showed the following position:
Chand
& Co.
Suraj
& Co.
Rs. in '000'
Capital accounts
- A / R 6,000 6,000
- B / S 4,500 3,000
- C 3,000 -
13,500 9,000
Loan - R - 3,000
Current accounts
- A / R 1,200 25
- B / S 930 875
- C 270 -
2,400 900
Creditors 1,350 1,650
17,250 14,550
Fixed assets
Land 2,250 2,625
Plant, equipment and fixtures 1,875 1,500
4,125 4,125
Current assets
Debtors 10,500 9,000
Stock in trade 1,350 1,125
Cash 1,275 300
13,125 10,425
17,250 14,550
(6)
For the purpose of merger the following was agreed:
i) The initial capital of new firm would be Rs. 27.0 million. 50% of the capital
shall belong to partners of Chand & Co. and 50% to partners of Suraj & Co.
ii) 50% share belonging to partners of each firm shall be allocated between its
partners in the ratio of their capital in the old partnership.
iii) No further cash is to be inducted in the new firm by the partners.
iv) Plant, equipment and fixtures are to be taken over by the new firm as follows:
- from Chand & Co. Rs. 900,000
- from Suraj & Co. Rs. 750,000
v) Debtors are to be taken at 95% of their book value. Stock in trade shall be
valued at 10% below its book value. Liability towards the creditors of both
firms and the liability in respect of loan from Mr. R shall be assumed by the
new firm.
vi) Each partner in the firm shall receive a salary of Rs. 500,000 per month,
interest on capital at 8% per annum and the remaining balance of profit shall
be shared in proportion to their share in the capital.
The firms were merged according to the above agreement effective January 01,
2005.
During the year 2005 the firm earned a profit of Rs. 56,201,000 before salaries,
interest and appropriations.
Each partner made monthly drawings of Rs. 450,000 per month and quarterly
drawings equal to 5% of the capital.
Required:
a) Draw ‘realization account’ of each firm.
b) Prepare the initial balance sheet of CS & Company i.e. immediately after the
merger.
c) Compute partners’ current account balance of CS & Company for the year
ended December 31, 2005.
(05)
(10)
(05)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2006
September 04, 2006
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
___________________________________________________________________________
Q.1 Following is the abridged balance sheet of Platinum International Traders Limited as
at June 30, 2006.
Rs. In Million
2006 2005
Property, plant and equipment 10,500 10,000
Intangible assets 1,200 1,000
Short term investments 750 500
Stocks 1,290 1,000
Trade receivables (net of provisions) 450 400
Advances and deposits 200 200
Cash and bank balances 160 100
Bank overdraft 400 200
Creditors and other liabilities 500 400
Provision for taxation 2,250 1,500
Net Equity and Surplus on Revaluation of Fixed Assets
11,400
11,100
The following additional information is also available:
(i) Accounting profit after tax is Rs. 3,000,000.
(ii) Income tax paid during the year amounted to Rs. 1,000,000.
(iii) Depreciation for the year is Rs. 750,000.
(iv) Provision for doubtful debts at the end of the year amounted to 5% of closing
balance of trade receivables. The opening balance of the provision was NIL.
(v) 48,000 shares were issued during the year at a premium of Rs. 2.50 per share.
Face value of the company’s share is Rs. 10.
(vi) Markup paid during the year amounted to Rs. 500,000.
(vii) An old machine having book value of Rs. 500,000 was exchanged with a new
machine costing Rs. 950,000. The company paid Rs. 350,000 as the
difference. No other fixed asset was sold during the year.
(viii) Intangibles are amortized at 35% of book value.
(ix) The company revalues its major fixed assets periodically. A revaluation
carried out during the year showed that the value of fixed assets had declined
by Rs. 3,300,000. The amount was charged against surplus recorded in earlier
years.
Required:
Prepare a cash flow statement under ‘indirect method’ in accordance with IAS-7.
Also submit necessary workings.
(16)
(2)
Q.2 Mr. Potassium, Radium and Uranium are partners in PRU & Company sharing profit
in the ratio of 3:2:2. The firm has been doing excellent business for last many years
and its products have a good reputation in the market. They decided to convert the
firm into a company limited by shares with the name and style of Iron Limited. The
final balance sheet of the firm immediately before the process of conversion was as
under:
PRU & Company
Balance Sheet as at June 30, 2006
Rs. in ‘000
Fixed Assets – Tangible
Building 25,000
Machinery 75,000
Vehicle 10,000
Furniture 12,000
122,000
Fixed Assets – Intangible
Manufacturing Quota 7,000
Current Assets
Stocks 23,000
Trade Debtors 18,000
Bank balances 4,000
45,000
Current Liabilities
Trade Creditors 11,000
Other liabilities 2,000
13,000
Net Assets 161,000
Represented by:
Mr. Potassium 69,000
Mr. Radium 46,000
Mr. Uranium 46,000
161,000
The conversion was carried out on the following terms and conditions:
(i) A friend of the old partners, Mr. Calcium contributed 2,000,000 shares of Rs.
10 each in the capital of Iron Limited. He paid Rs. 20,000,000 to the company
as share subscription money.
(ii) Mr. Radium was not willing to continue as equity-holder. Therefore, 480,000
long term debentures of Rs. 100 each were issued by Iron Limited against his
capital in the partnership.
(iii) The company issued 14,000,000 fully paid shares of Rs. 10 each including the
shares issued to Mr. Calcium.
(iv) Shares issued to the continuing partners are exactly in proportion to their final
capital account balances after incorporating realization gain or loss.
(v) Other liabilities were not assumed by Iron Limited. These were fully settled
by PRU & Company through cash payment of Rs. 1,800,000.
(vi) Trade debts amounting to Rs. 2,500,000 were considered as bad.
(3)
(vii) Vehicles having carrying value of Rs. 3,500,000 were not taken over by Iron
Limited. PRU & Company sold these vehicles for Rs. 2,800,000.
(viii) Manufacturing quota has a ready market of Rs. 8,600,000.
(ix) The firm owns a patent right which has an estimated value of Rs. 2,100,000.
Presently it is being carried by PRU & Company at nil value.
(x) All assets including cash and bank balances were taken over, and all liabilities
towards trade creditors were assumed by Iron Limited after incorporating the
above adjustments.
(xi) Goodwill is to be accounted for in the books of Iron Limited, if necessary.
July 01, 2006 may be assumed to be the effective date of all the above transactions.
Required:
Prepare the following:
(a) Realization Account.
(b) Statement of shareholding in Iron Limited.
(c) Balance sheet of Iron Limited as at July 01, 2006.
(16)
Q.3 The Chief Accountant of Shaheed & Company (Pvt.) Limited has resigned.
Management has hired you to prepare the balance sheet as at June 30, 2006 and the
profit and loss account for the year then ended. The records of the company have not
been maintained properly. While going through some of the files you found a report
in which the following ratios and information have been shown.
Current Ratio 1.50
Liquid/Quick/Acid test ratio 1.00
Stock turnover ratio 14.40
Gross profit 20%
Return on combined equity (ROCE) 20%
Return on equity (ROE) 27.2%
Debt collection period (months) 1.00
Revenue reserve as a percentage of capital 25%
Cost of goods sold to fixed assets 1.92
The management has informed you that the above ratios are mostly accurate. You
have also ascertained that the sale during the year was Rs. 216 million and selling &
administrative expenses amounted to Rs. 14.057 million. Tax rate applicable to the
company is 30% of net profit and 90% of the tax has been paid during the year.
Required:
Develop a summarized balance sheet as at June 30, 2006 and profit and loss account
for the year then ended.
(11)
Q.4 Copper Leasing Limited engaged in leasing of high cost sports equipment undertook
following transactions on June 01, 2006.
(i) A speed boat of a famous brand ABC was given on 3 years lease to Mr.
Carbon at an annual lease rental of Rs. 215,365 payable at the end of each year.
(ii) A motor boat of XYZ make was leased to Ms. Chlorine at an annual rent of Rs.
1,040,886 payable at the end of each year for three years. The price charged in
case of outright sale is Rs. 2,500,000.
(4)
(iii) A water bike of XYZ make was leased to Mr. Sulphur at an annual rent of Rs.
98,763 payable at the end of each year. The agreed lease term is three years.
Outright sale price of this bike is Rs. 250,000.
(iv) The following additional information is available:
- The company is also a sole dealer of XYZ make in the city and operates an
outlet for that purpose.
- At the above outlet 25% area is used as company’s administrative office.
- Outlet’s rent and other maintenance expenditures are approximately
Rs. 660,000 per month.
- Marketing staff is given a commission at 2% of price of goods whether they
are leased or sold outright.
- The company paid Rs. 3,770 to a local authority, for inspection of each unit.
- Registration charges incurred by the company for each unit of speed boat,
motor boat and water bike were Rs. 3,500 Rs. 22,500 and Rs. 2,000,
respectively.
- Cost of speed boat, motor boat and water bike were Rs. 500,000 Rs.
2,400,000 and Rs. 230,000, respectively.
- The ownership is transferred to lessees at the end of the lease.
- The company charges 9% markup on leases of water bikes as against
prevailing market rate of 11%.
Required:
(a) Compute ‘gross investment in lease’ and ‘unearned financial income’ in
respect of each lease.
(b) Prepare all necessary journal entries on June 01, 2006 and on receipt of first
rental.
(13)
(07)
Note: Present values of an annuity of Re. 1 received at the end of the year for three
years are as follows:
Rate 8% 9% 10% 11% 12% 13% 14%
Present Value 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216
Q.5 Gold Shoes Limited, a company engaged in manufacturing of pure and artificial
leather shoes has been facing a sharp decline in their profits for few years due to
severe competition from shoes imported from China. The board of directors of the
company formed a committee of executives to look into the matter. A detailed plan
was submitted by the committee, which was considered and approved by the board
on May 08, 2006. The approved plan has been circulated to members and other
stakeholders.
The following activities have taken place subsequently:
(i) Production of artificial leather shoes was discontinued and a number of new
designs of leather shoes were introduced from July 2006.
(ii) Some processing units having book value of Rs. 35 million have been sold, at
a price of Rs. 31 million in July 2006.
(iii) Certain work force was terminated in June 2006 for which payment of
compensation of Rs. 10.5 million was agreed with the union in July 2006.
(5)
(iv) Company’s legal advisor has been asked to prepare various sale agreements
of fixed assets and stocks, preparation of memorandums of understanding
with the distributor and workers union etc. related to discontinued business.
The legal advisor charged Rs. 0.2 million as fee in addition to his monthly
retainership fee amounting to Rs. 0.05 million in July 2006.
(v) Stock of artificial leather shoes available in company’s store on June 30,
2006, costing Rs. 11 million was sold in first week of July 2006 to the sole
distributor of the company at an agreed price of Rs. 12 million.
(vi) In July 2006 total assets of Peshawar office, having carrying value of Rs. 1.8
million on June 30, 2006 were agreed to be sold to a party for Rs. 2 million.
(vii) Purchase of additional machinery costing Rs. 3 million was approved in July
2006, for which a valid and firm quotation was received from the supplier in
June 2006.
(viii) Manager of Peshawar office was transferred to Islamabad due to closure of
Peshawar office in July 2006. A relocation compensation of Rs. 0.5 million is
agreed.
(ix) Certain workers of the discontinued unit were given the option to continue
their employment subject to successful completion of a specific training from
a reputed institute. They completed the required training in June 2006. In
July 2006 the company as a gesture of good relations reimbursed 75% of
their training expenditure, which amounted to Rs. 0.50 million.
(x) It has been estimated, with reasonable accuracy, that as a result of the sale
promotion and marketing costs of new designs of shoes, there will be an
operating loss of Rs. 8 million by the time the whole process is completed
(sometimes in December 2006).
Required:
Explain how each of the above matters will be recorded in the financial statements
clearly indicating whether:
- a provision will have to be made; or
- a disclosure will be required; or
- neither provision nor disclosure is necessary.
Give reasons to support your opinion. (No journal entries are required to be made).
(15)
Q.6 You have recently been appointed as the Chief Accountant of Steel Air Limited, a
commercial airline. Your accountant has prepared the financial statements for the
year ended June 30, 2006. You have reviewed them and found them satisfactory
except for the note on tangible fixed assets. You have scrutinized the records and
extracted the following information:
(i) The company acquired land on 99 years lease on January 1, 1999 for Rs. 200
million.
(ii) The company has a fleet of nine aircrafts, relevant details of which are as
under:
(6)
- Each aircraft consists of two major components i.e engine and airframe
having useful economic life of 20 and 12 years respectively. 70% of the cost
of aircrafts pertains to the engine and 30% to the airframe. The company has
10 years replacement policy for airframes.
- Five aircrafts were acquired on January 1, 2000 for Rs. 220 million each.
- Four used aircrafts were also bought on January 1, 2000 from another airline
for Rs. 55 million each. Each aircraft was renovated and overhauled at a cost
of Rs. 25 million. Rs. 10 million were spent on the airframe and Rs. 15
million on the engine. 15% of these expenditures has been in respect of costs
of consumables. The useful economic lives of engines and airframes are
estimated to be the same as those of the new aircrafts.
- Salvage value of engines as well as the airframes is estimated at 10% if sold
at the end of their economic life. Salvage value of airframes at the time of
replacement is estimated at 15% of the cost.
- A newly acquired aircraft was damaged during landing due to computer
malfunction on October 31, 2005. It remained in-operative during the
remaining period of the year. However, it does not require any revaluation.
(iii) Engineering machineries were acquired on April 01, 2000 for Rs. 330 million.
As a result of annual checkup, certain parts were replaced at a cost of Rs. 50
million on July 01, 2005. This replacement did not enhance the useful life nor
did it affect the efficiency of the machineries. New parts have a useful life of
30,000 hours. Cost of replaced defective parts was Rs. 20 million and they were
sold for Rs. 8 million.
Total useful life of machinery is 60,000 hours and the average usage has been
500 machine hours per month. Estimated salvage value is 10% of cost.
(iv) Hangers for aircrafts have been in use since July 1, 2000. The total cost of their
construction was Rs. 20 million and the total estimated useful life is 20 years.
(v) Furniture and fixtures costing Rs. 13 million, Rs. 7 million and Rs. 4 million
were acquired on July 01, 2000, July 01, 2002 and July 01, 2005 respectively.
(vi) Ten vehicles were taken on finance lease on July 1, 2005 with fair market value
of Rs. 1 million each.
(vii) The company’s policy as regards depreciation is as under:
- Leasehold land – straight line method.
- Hangers – straight line method.
- Aircrafts – straight line method.
- Engineering plant and equipment –machine hours used.
- Leased vehicles – declining balance method at the rate of 20% per annum.
- Furniture and fixture – declining balance method at the rate of 10% per
annum.
Required:
Draft a note to the accounts on fixed assets strictly in accordance with the
requirements of International Accounting Standards and the Companies Ordinance,
1984. Also submit necessary workings. (Give all figures to the nearest thousand)
(22)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Spring 2007
March 6, 2007
FINANCIAL ACCOUNTING (Marks 100)
Module C (3 hours)
Q.1 Following information is available from the records of Best Furniture Limited (BFL):
(i) A lease agreement was negotiated with a leasing company in October, 2006 for a
nails manufacturing machine having fair value of Rs. 1,000,000. The lease rental
has been agreed at Rs. 325,000 and is payable at the end of each year for three
years. BFL replaces such machines after 5 years.
(ii) The same leasing company has also leased an electrical wood cutter at a lease
rental of Rs. 50,000 payable at the end of each year for a term of two years. Fair
value of the cutter is Rs. 100,000. Although such cutters can be used for more
than four years but BFL replaces them in two and half years’ time.
At the end of the term BFL will have an option to purchase the leased items at a price to
be agreed between the parties. BFL’s incremental borrowing rate is 11%.
Required:
Explain with reference to IAS 17 (Leases), whether the above leases shall be classified
as an operating lease or a finance lease in the books of Best Furniture Limited. (09)
Q.2 Model Security Limited (MSL) is a supplier of high quality security systems. The
company also provides services for maintenance of the systems. Following are some of
the transactions which were carried out in January, 2007:
(i) Two systems were delivered to a customer on January 05, 2007. According to
the terms of sale, MSL was required to install the systems within three months.
The installation work was completed on February 28, 2007. Sale price and
installation charges of Rs. 60,000 and Rs. 25,000, respectively, had been paid by
the customer in advance.
(ii) A service contract was signed under which MSL was required to provide repair
and maintenance with parts and accessories. A non-refundable annual fee
amounting to Rs. 60,000 was received as advance on January 01, 2007.
(iii) A firm contract was signed, for supply of sixty systems at a price of Rs. 55,000
each. The systems were required to be altered for the customer’s specific
requirement. It was agreed that in case of cancellation, the customer will have to
pay a compensation equal to 25% of the total agreed price. MSL has estimated
that it would have to bear a cost of Rs. 12,000 to bring the systems in general
saleable condition. According to the agreement, the customer had paid 25%
advance on January 17, 2007.
(iv) Three systems have been delivered and installed at the office premises of Mr.
Fine, a close friend of Chief Executive Officer (CEO), on January 08, 2007. The
accountant has not recorded the sale, as the amount of discount has not been
decided by the CEO. List price of each system is Rs. 2.5 million.
Required:
With reference to IAS 18 (Revenue) explain how and when the sale should be recorded
in each of the above case. (08)
(2)
Q.3 Following data is available with Pink Limited in respect of two of its regular customers
who are engaged in the same kind of business:
Customer
‘A’
Customer
‘B’
(Rs. in million)
Stock in trade 22.00 74.00
Trade debtors 14.67 51.80
Other current assets 21.00 8.00
Trade creditors 37.40 53.10
Bank overdraft - 10.00
Sales 176.00 259.00
Cost of sales 149.60 212.38
Credit committee of Pink Limited has decided to allow credit limit of Rs. 18 million to
both customers. However, Mr. Alam, a member of the committee, had some
reservations on extending credit facility to customer ‘A’.
Required:
Compute and interpret the relevant ratios of each customer and submit your comments
on the opinion of Mr. Alam. (10)
Q.4 Following is a summarized trial balance of Gray Limited as on December 31,
(Rs. in million)
2006 2005
Debits
Fixed asset- tangible (net of accumulated depreciation) 292 103
Capital work in progress - 210
Intangible asset 12 12
Accumulated amortization on intangible asset 8 4
Inventories 3 5
Trade receivables 311 200
Other receivables 5 8
Bank balances 14 8
Cost of sales 992 943
Administrative expenses 145 132
1,782 1,625
Credit
Payables 242 225
Paid up capital 100 75
Share premium 150 125
Sales 1,232 1,150
Retained earnings 58 50
1,782 1,625
Following further information is available:
(i) Retained earnings have been debited in 2006, on account of dividend payments
of Rs. 25 million (2005: Rs. 22 million) and on account of dividend proposed
and approved in January, 2007 amounting to Rs. 42 million.
There was no change in ‘Paid up capital account’ during the year 2005.
(ii) During the year 2005, cost incurred on testing of a new plant amounting to
Rs. 12 million was accounted for as an intangible asset.
(iii) No depreciation was charged on the new plant mentioned in (ii) above although
it was ready for intended use on January 01, 2006. The cost of plant is Rs. 210
million and rate of depreciation is 15%.
(3)
(iv) The company had made no provision in the years 2004 and 2005 in respect of
some of its overdue debtors as they were fully secured then. However, the
security has been impaired and management now feels that a provision for Rs. 2,
4 and 5 million is necessary in respect of the years 2004, 2005 and 2006,
respectively.
Required:
(a) Make necessary adjusting entries. Ignore taxation. (10)
(b) Prepare ‘Statement of Changes in Equity’ for the year ended December 31, 2006. (16)
Q.5 White Limited is engaged in the construction of small townships. It announced a new
township with a name and style of ‘Ashiyana’.
The estimated cost of the project is as under:
Land Rs. 180 million
Construction Rs. 100 million
The company planned to finance the project through shareholders’ equity, bank loan
and down payments to be received from buyers. The land required for the project was in
the possession of the company and had been acquired in 2003. The construction started
on January 01, 2006 and completed on November 30, 2006.
Details of costs incurred are as follows:
Date of Bills Particulars Rs. in million
Feb 16, 06 Documentation 2.50
Mar 16, 06 Land preparation 13.50
May 16, 06 Structure 50.00
Dec 16, 06 Finishing 38.50
All the above bills were paid on the same dates except for Rs. 15 million included in
finishing cost, which was paid in January, 2007.
Funds were arranged as under:
Date Source Rs. in million Finance cost
Mar 01, 06 Shareholders equity 10.00 Yield required is 30%
Mar 01, 06 Bank Loan-A 30.00 Carry markup @ 12% p.a.
Mar 01, 06 Bank Loan-B 40.00 Carry markup @ 18% p.a.
Dec 16, 06 Down payments 24.50 No financial cost
Required:
Determine the amount of borrowing cost that can be capitalized by the company under
IAS 23 (Borrowing Costs). (15)
Q.6 Following transactions were carried out by Yellow Limited during the year ended June
30, 2006.
(i) Mr. Sharp, a well-known management consultant was hired, to conduct a three
weeks workshop on time management for the staff of the company at a fee of Rs.
0.5 million. Mr. Sharp is the son of the Chief Executive Officer.
(ii) A loan of Rs. 30 million was obtained from Blue Bank Limited. The loan was
negotiated by Mr. Slim, General Manager Finance of Yellow Limited, who was
formerly a senior executive of the Bank.
(iii) Three used delivery trucks of the company were sold to Red Supplies Limited,
which supplies approximately 60% of the total raw material used by the
company.
(4)
(iv) Granted interest bearing loan to its Chief Executive Officer for construction of
house in accordance with the company’s policy relating to employees’ benefit.
(v) Paid mobilization advance of Rs. 9 million against a construction contract to
Orange Limited which is owned by Mr. Clear, a member of a reputed business
family. Two influential directors of the company are nephews of Mr. Clear.
(vi) The company awarded a contract for plant maintenance services to its subsidiary
Brown (Pvt.) Limited effective August 01, 2007.
(vii) The company has nominated a director in Purple Limited who participates
actively in its operational decisions. However, no business relations exist
between the two companies.
Required:
For each case, discuss the requirement of IAS 24 (Related Party Disclosures) as regards
the following disclosures in the financial statements for the year ended June 30, 2006:
(a) Related party relationship; and
(b) Related party transactions. (14)
Q.7 A summarized trial balance of Green Limited for its first year is given below:
(Rs. in million)
Debit Credit
Paid up capital - 131.50
Payables - 3.50
Land 60.00 -
Buildings 35.00 -
Other fixed assets-tangible 22.00 -
Product research costs 15.00 -
Product development costs 12.00 -
Stocks 6.50 -
Accounts receivables 5.50 -
Cash and bank balances 8.00 -
Revenues - 108.00
Expenditures 79.00 -
243.00 243.00
All adjustments have been made except for the following:
(i) Depreciation has to be charged on buildings and other fixed assets at the rate of
15%. The rate of tax depreciation is 30%.
(ii) Half of the research and development costs are allowable for tax purposes in the
first year. The balance amount shall be permanently disallowed.
(iii) The company amortizes intangible assets over a period of three years.
(iv) The company’s profit is subject to tax at the rate of 35%.
(v) Interest of Rs. 1.25 million was paid on a short term loan received from directors,
which is not an allowable expense under the tax laws.
Required:
Prepare journal entries for necessary adjustments including taxation. Show necessary
workings. (18)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2007
September 06, 2007
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 D, E and F were partners in the firm DEF & Company and shared profit and loss in the
ratio 5:3:2 respectively. On July 01, 2007, F informed the other partners that he has
suffered heavy losses in one of his personal businesses and is unable to pay his debts. He
therefore requested D & E to settle his account in the partnership. D & E agreed to
continue the business without F but at the same time agreed to convert the partnership into
a limited company named Paradise Limited.
The trial balance of the firm as on June 30, 2007 appeared as follows:
Debit Credit
Rupees in thousands
Cash in hand 8,000
Trade debts 7,000
Inventories 5,000
Trade creditors 9,000
Other liabilities 5,000
Partners’ capital – D 21,000
– E 13,000
– F 2,000
Land and building 10,000
Plant 20,000
50,000 50,000
All the partners agreed to the following:
(i) On the basis of previous experience it was estimated that 4% of the trade debts will
not be recovered. These shall be recorded in the new company accordingly.
(ii) A creditor has left the country about five years ago and is not expected to claim his
dues amounting to Rs. 50 thousand.
(iii) A fully depreciated fixed asset costing Rs. 120 thousand was written off in March
2006. However the same is still in use and has a fair market value of Rs. 100
thousand.
(iv) Goodwill of the firm is estimated at Rs. 1,120 thousand. However, it shall not be
recorded in the books of the new company.
(v) Expenses incurred on the incorporation of Paradise Limited amounting to Rs. 120
thousand were paid by E. The company will issue 6% preference shares in lieu of
the above.
(vi) Salaries of Rs. 300 thousand had been credited to each partner’s capital accounts
while recording the distribution of profits for the year ended June 30, 2007. On the
insistence of F, it was agreed that based on the amount of efforts put in by D & E,
the salaries allowed to them should be reduced by 30%.
(2)
(vii) The paid-up capital of the company shall comprise of 4.0 million shares of Rs. 10
each, which shall be contributed equally by D & E.
Required:
Prepare the following:
(a) Partners' Capital Accounts
(b) Realization Account
(c) Opening Balance Sheet of Paradise Limited (20)
Q.2 Naseer Distributors have sole distribution rights of different products. These rights were
bought at substantial prices. According to the company’s policy the cost of distribution
rights are amortized over a period of ten years at a rate of 15% per annum for the first five
years and 5% per annum during the next five years.
While reviewing the accounting policies the management concluded that the policy of
amortization of distribution rights does not reflect the pattern in which benefits flow to the
company. Accordingly, they decided to amortize such rights over a period of eight years at
a rate of 20% per annum for the first four years and 5% per annum during the last four
years.
The relevant details are as follows:
Rupees in ‘000’
Products S T U
Cost of distribution rights 50,000 40,000 27,000
Accumulated amortization upto June 30, 2007
(Under the old policy) 15,000 32,000 24,300
Recoverable value 31,000 4,000 250
The management has been following a policy of recording gratuity on the basis of
payments. From this year it decided to account for the liability, in accordance with the
International Accounting Standards. A consultant was hired who had submitted his report,
the extracts from which are as under:
Rupees in ‘000’
Year Provision required Payment made
2005 1,500 200
2006 2,100 900
2007 2,500 700
Some of the extracts from the company’s trial balances after charging amortization under
the existing policy are as follow:
Rupees in ‘000’
June 30, 2007 June 30, 2006
Sales 813,000 718,000
Purchases 610,000 520,000
Amortization on intangible assets 18,250 22,250
Depreciation expenses 12,000 12,000
Salaries 46,000 45,000
Gratuity 700 900
Stocks 22,000 26,000
Other expenses 90,000 87,000
Wastage sales 2,000 2,700
Gain on sale of property 42,000 -
(3)
Closing stocks as on June 30, 2007 was valued at Rs. 18,250 thousand. Income tax rate
applicable to the company is 35%. Amortization is not allowed as tax expense whereas
gratuity is allowed to the extent of payments made.
Required:
Prepare a profit and loss account for the year ended June 30, 2007 with comparative
figures under the new policy in accordance with the requirements of International
Accounting Standards (Ignore deferred tax).
(18)
Q.3 Following is the trial balance of ABC Limited as at June 30, 2007.
Debit Credit
Rupees in thousands
Freehold land 17,000
Building 60,000
Accumulated depreciation – building 24,000
Plant and machinery 30,000
Accumulated depreciation – plant and machinery 15,000
Motor vehicles 16,000
Accumulated depreciation – motor vehicles 9,600
Furniture, fixtures and equipment 4,500
Acc. Depreciation – furniture, fixtures and equipment 2,000
Long term deposits 4,000
Investments 25,000
Advance for expenses 1,500
Other receivables 2,000
Trade debtors 16,000
Trade creditors 8,000
Other liabilities 1,300
Provision for gratuity 10,000
Long term deposits received from suppliers 5,200
Paid-up share capital 80,000
General reserve 19,700
Cash and bank balances 17,000
Stock in hand – raw material 11,000
– work in progress 4,500
– finished goods 2,100
Sales 334,050
Purchases – raw materials 216,000
Discount on purchases 2,300
Purchase returns 17,000
Salaries and wages 24,000
Depreciation expenses 9,050
Advertising expenses 2,500
All other expenses 66,000
528,150 528,150
Following details are available:
(i) Depreciation has been provided on straight line basis. Estimated useful lives are as
under:
Building 25 years
Motor vehicles 5 years
All other fixed assets 10 years
(4)
(ii) Office furniture costing Rs 750 thousand and book value of Rs 150 thousand was
traded in for Rs 120 thousand, against new furniture worth Rs 500 thousand.
However, the new furniture was erroneously recorded at the net payment of Rs.
380 thousand.
No other additions or deletions were made during the year.
(iii) Purchase returns include a sum of Rs 2,350 thousand which represents the cost of
an item which was returned to the supplier erroneously. On the balance sheet date
the supplier was holding the item on behalf of the company and delivered it back
after the year end.
(iv) On the basis of physical stock check carried out at the factory premises on June 30,
2007 the value of closing stock was determined as under:
Rs. in ‘000’
Raw material 8,200
Work in process 3,240
Finished goods 530
(v) The management intends to hold the investments on long term basis.
(vi) 60 % of all expenses other than directly attributable expenses are allocated to
manufacturing.
Required:
Prepare the balance sheet and the profit and loss account alongwith the notes on fixed
assets and cost of goods sold. Make all possible disclosures as required under the
International Accounting Standards and Companies Ordinance, 1984. (25)
Q.4 As part of annual routine, PQR & Company is testing the value of its assets to ascertain
the impairment (if any). Following information is available in respect of the assets:
WDV Value in
use
Forced sale
Assets value Fair value
Rupees in thousand
A 3,200 3,100 2,400 2,500
B 1,500 1,200 1,225 1,400
C 1,700 1,500 1,900 2,000
Every asset is sold through public tender, which costs around Rs. 50,000. Assets A and C
are required to be dismantled at the time of sales and the cost of dismantling is Rs. 100
thousand and Rs. 200 thousand respectively. Sale agreements of the assets are prepared by
the company’s legal advisor whose annual fee is Rs. 365 thousand. It takes about 4 days to
draft a sale agreement.
Required:
Compute impairment (if any) on each asset. (07)
Q.5 You are the Chief Financial Officer of Breeze Limited, a newly incorporated company
which manufactures portable air conditioners. The company has started commercial
production on September 01, 2006. While reviewing the financial statements on July 31,
(5)
2007 before presentation to the board of directors for approval, you found that the
following information has not been dealt with in the financial statements:
(i) While constructing the factory building it was agreed with the Union Council of
the area that any damage caused to a nearby school will be restored by the
company. As a gesture of goodwill the company had also offered that a donation of
Rs. 500,000 would be given to the school provided the Union Council also gives a
similar grant. On the balance sheet date, it was almost certain that the Union
Council would pay the grant. The damage caused by construction was restored at a
cost of Rs. 650,000 in July 2007. The Union Council paid the grant of Rs. 500,000
to the school in July 2007.
(ii) Within six months from the start of commercial production, the company was
required to maintain an in-house workers' canteen and provide subsidized meals to
its workers. The cost of construction of such canteen was Rs. 800,000; whereas
cost for running the canteen was Rs. 142,000 per month. The company failed to
comply with the requirement of the law.
The concerned authority took a serious note of the situation and issued a show
cause notice on July 18, 2007. To avoid adverse consequences the company
decided to start construction of the canteen immediately. It was also decided that
during the construction period, the company would reimburse the full amount of
meal expenses of its workers. The construction is expected to be completed on
August 30, 2007.
(iii) The company allows full refund if the goods sold by it are returned within two
months from the date of sale. According to the best estimate, the goods return ratio
is 10 percent. The returned goods can be sold in second hand market at cost which
is 60% of the selling price. The accounts were appropriately adjusted on June 30,
2007 based on the above estimates. The actual returns and the relevant information
is summarized below:
Amount of sales Returns during the month Month May, 07 June, 07 July, 07
of sales Rs. in million
May, 07 28.00 - 0.20 2.10
June, 07 32.00 - - 0.40
Required:
Discuss each event in the light of the relevant International Accounting Standards and
suggest how these should be dealt in the financial statements for the year ended June 30,
2007.
(15)
Q.6 Focus Limited is engaged in manufacturing multimedia projectors. The company spends
heavily on research and development to introduce improvements in the existing products.
A free lance researcher Mr. Talent sent a conceptual paper to the company on
development of a new type of projector which will significantly enhance the life and
quality of the product.
An agreement was reached between Mr. Talent and the company whereby Mr. Talent
agreed to conduct and supervise the research and development process at a lump sum
remuneration of Rs. 8 million. However, in case the research was unsuccessful, he agreed
to reduce his remuneration to a time based salary of Rs. 2,000 per hour.
(6)
The process of research commenced from July 2006 and the following costs were incurred
upto June 30, 2007.
Rs. In million
Tools purchased 2.000
Furnishing of the new laboratory 0.800
Salaries paid to research associates 1.620
Cost of conducting tests in U.K. on a device which was ultimately
used in the final product 0.400
Remuneration paid to Mr. Talent on successful completion of research 4.500
Expenses on preparing technical feasibility 0.250
Cost of manufacturing the samples before commencement of
commercial production 0.240
Material imported for commercial production 1.700
Final payment to Mr. Talent 3.500
Product launching expenses 1.200
Required:
Discuss the accounting treatment of each of the above costs incurred by the company in
the light of International Accounting Standard 38 ‘Intangible Assets’. (15)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Spring 2008
March 6, 2008
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 Following is the balance sheet of Waseem Industries Limited as at December 31, 2007:
2007 2006
Rupees in million
ASSETS
Non current assets
Fixed assets
Property, plant and equipment 242 182
Capital work-in-progress 20 18
262 200
Long term investments 75 100
Long term deposits 13 13
Total non current assets 350 313
Current assets
Stocks-in-trade 55 48
Trade debts 51 38
Advances, prepayments and other
receivables 37 40
Cash and bank balances 11 20
Total current assets 154 146
TOTAL ASSETS 504 459
EQUITY AND LIABILITIES
Shareholders' equity
Share capital 150 125
Share premium 55 80
Unappropriated profit 85 50
290 255
Non current liabilities
Long term finances - Secured 94 118
Deferred liability - Gratuity (unfunded) 16 12
110 130
Current liabilities
Current portion of long term finances 25 22
Short term finances 13 6
Trade and other payables 66 46
104 74
TOTAL EQUITY AND LIABILITIES 504 459
Other relevant information is as follows:
(i) An interim bonus issue of one for five ordinary shares was made during the year out
of share premium. The company also approved final cash dividend of 10% (2006:
8%), in its annual general meeting.
(2)
(ii) During the year, the company provided Rs. 17 million (2006: Rs. 13 million) on
account of depreciation. The details relating to disposal of property, plant and
equipment are as follows:
Carrying
amount
Sale
proceeds
Rs. in million
Plant and machinery 20 22
Vehicles 3 4
(iii) Advances, prepayments and other receivables include advance tax of Rs. 10 million
(2006: Rs. 7 million).
(iv) In 2007, the company paid Rs. 6 million on account of gratuity.
(v) Accrued mark up on long term finances amounting to Rs. 7 million (2006: Rs. 9
million) is included in trade and other payables. Financial charges included in the
profit and loss account are Rs. 16 million (2006 : Rs. 14 million).
(vi) Income tax expense for the year 2007 amounted to Rs. 19 million (2006: Rs. 13
million).
Required:
Prepare a cash flow statement in accordance with the requirements of IAS 7 “Cash Flow
Statement” using the indirect method.
(20)
Q.2 Waqar Limited has provided you the following information for determining its tax and
deferred tax expense for the year 2006 and 2007:
(i) During the year ended December 31, 2007, the company’s accounting profit before
tax amounted to Rs. 40 million (2006: Rs. 30 million). The profit includes capital
gains amounting to Rs. 10 million (2006: Rs. 8 million) which are exempt from tax.
(ii) The accounting written down values of the fixed assets, as at December 31, 2005
were as follows:
Cost Accumulated
Depreciation
Written
down value
-------------- Rupees in millions --------------
Machinery 200 25 175
Furniture and fittings 50 10 40
No additions or disposals of fixed assets were made in the years 2006 and 2007.
(iii) Machinery was acquired on January 1, 2005 and is being depreciated on straightline
basis over its estimated useful life of 8 years. The tax base of machinery as at
December 31, 2005 was Rs. 90 million.
(iv) Furniture and fittings are also depreciated on the straight line basis at the rate of
10% per annum. The tax base of furniture and fittings as at December 31, 2005 was
Rs. 40.5 million.
(v) Normal rate of tax depreciation on both types of assets is 10% on written down
value.
(vi) As on December 31, 2005, Waqar Limited had unused tax losses of Rs. 75 million.
(vii) The tax rates for 2005, 2006 and 2007 were 35%, 35% and 30% respectively.
Required:
Determine the tax and deferred tax expense for the year 2006 and 2007. Ignore minimum
turnover tax.
(16)
(3)
Q.3 On January 1, 2007, Imran Limited started the construction of its new factory. The
construction period is approximately 15 months and the cost is estimated at Rs. 80
million. The work has been divided into 5 phases and payment to contractor shall be
made on completion of each phase. In the year 2007, the project has been financed
through the following sources:
(i) Right shares amounting to Rs. 15 million were issued on January 1, 2007. The
company usually pays a dividend of 10% each year.
(ii) Bank loan of Rs. 32 million carrying a mark up of 13% was raised on March 1,
2007.
(iii) On August 1, 2007, Rs. 10 million were borrowed from the bank. Interest thereon,
is payable at the rate of 11%.
The details of bills submitted by the contractor, during the year are as follows:
Particulars Date of payment Rupees
On completion of 1st phase March 1, 2007 20,000,000
On completion of 2nd phase April 1, 2007 18,000,000
On completion of 3rd phase October 1, 2007 16,000,000
On completion of 4th phase Payment not yet made 17,000,000
The unutilized portion of the loan was invested in the money market. The interest
received on such investment amounted to Rs. 0.5 million.
On June 1, 2007, Building Control Authority issued instructions for stoppage of work on
account of certain discrepancies in the completion plan. The company filed a petition in
the Court and the matter was decided in the company’s favour on July 31, 2007. During
this interim period, construction work remained suspended.
Required:
Calculate the amount of borrowing costs that may be capitalised as on December 31,
2007 in accordance with the requirements of IAS-23 “Borrowing Costs”.
(17)
Q.4 Fazal Limited is engaged in the manufacturing of specialized spare parts for automobile
assemblers. During the year 2007, the company has undertaken the following transactions
with its related parties:
(i) Sales of Rs. 500 million were made to its only subsidiary M/s Sami Motors
Limited (SML). Being the subsidiary, a special discount of Rs. 25 million was
allowed to SML.
(ii) SML returned spare parts worth Rs. 5.5 million.
(iii) Raw materials of Rs. 5 million were purchased from Jalal Enterprises, which is
owned by the wife of the CFO of Fazal Limited.
(iv) Equipment worth Rs. 3 million was purchased from Khan Limited (KL). The wife
of the Production Director of the company is a director in KL.
(v) The company awarded a contract for supply of two machines amounting to Rs. 7
million per machine to an associated company.
(vi) In 2005, an advance of Rs. 2 million was given to the Chief Executive of the
company. During the year 2007, he repaid Rs. 0.3 million. The balance outstanding
as on December 31, 2007 was Rs. 1,100,000.
Required:
In accordance with the requirement of IAS-24 “Related Party Disclosures”, prepare a
note to the financial statements, for inclusion in the company’s financial statements.
(12)
(4)
Q.5 Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz
Limited (the lessee) to lease a machine with an expected useful life of 4 years. The cost
of machine is Rs. 2,100,000.
The following information relating to lease transaction is available:
(i) Date of commencement of lease is July 1, 2007.
(ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease
term, the value of the machine will be Rs. 300,000.
(iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30.
(iv) The implicit interest rate is 12.9972%.
Required:
(a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in
the books of lessor. Ignore tax.
(b) Produce extracts from the balance sheet including relevant notes as at June 30,
2008 to show how the transactions carried out in 2008 would be reflected in the
financial statements of the lessor.
(Disclosure of accounting policy is not required.) (20)
Q.6 According to the sales budget prepared by the marketing department of Mohsin Limited,
the sales for the year 2008 has been estimated at Rs. 210 million. Before finalizing the
sales target, the chief executive has asked the chief financial officer to prepare the
projected financial statements of the company, for the year 2008.
Based on the experienced gained in prior years, the financial ratios for the year 2008 has
been projected as follows:
Average debtors collection period 30 days
Average creditors collection period 45 days
Inventory turnover 8.0 times
Fixed assets turnover 2.8 times
Ratios
Current 2.2 : 1
Acid test ratio 1:1
Long term debt to total equity 35%
Gross profit (as % of sales) 20%
Selling and admin. expenses (as % of sales) 15%
Total liabilities to total equity 75%
The shareholders’ equity as at December 31, 2007 is as follows:
Rupees
Share capital 80,000,000
Accumulated profits 14,500,000
94,500,000
Required:
Being the CFO of the company, prepare the projected balance sheet and income
statement for the year 2008. Assume a 360 day year.
(15)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Intermediate Examinations Autumn 2008
September 4, 2008
FINANCIAL ACCOUNTING (MARKS 100)
Module C (3 hours)
Q.1 Aay and Bee are partners in a firm and share profits and losses in the ratio of 3:2
respectively. The firm’s summarized balance sheet as on December 31, 2007 is as under:
Rs. in million Rs. in million
Capital Accounts: Land and building 110
Aay 170 Machines 116
Bee 140
Inventories 64
Accounts payable 130 Accounts receivable 168
Accrued liabilities 55 Cash and bank 37
495 495
Effective from January 1, 2008, the partners have decided to convert the partnership into
a private limited company and have agreed to admit Cee into the business. All partners
agree on the following terms and conditions:
(i) The name of the company will be Akbar (Private) Limited.
(ii) The company will acquire all the assets and liabilities of the firm at their fair values,
including recognition of goodwill based on discounted cash flow method. The fair
values and goodwill will be determined by an Independent Evaluator.
(iii) The company will issue shares at par value to Aay and Bee against the net assets
(including goodwill) acquired from the firm.
(iv) Cee will invest Rs. 200 million in cash, on the date of incorporation of the company
in consideration for 20 million shares of Rs. 10 each.
The Independent Evaluator provided the following information about the firm’s net
assets as on December 31, 2007:
.. Land and building have a fair value of Rs. 210 million.
.. Machines have a fair value of Rs. 105 million.
.. Based on age-analysis, a provision of 10% has been suggested against accounts
receivable.
.. An adjustment of Rs. 10 million is required against slow moving and obsolete
inventory.
.. Liabilities of Rs. 35 million have not been accounted for in the partnership accounts.
.. The goodwill is estimated at Rs. 150 million.
Required:
(a) Work out the number of shares to be issued to Aay and Bee.
(b) Prepare the opening balance sheet of Akbar (Private) Limited. (15)
(2)
Q.2 (a) On July 1, 2005, Humayun Chemicals Limited acquired a machine at a cost of
Rs. 10 million. The useful life of the machine and its salvage value was estimated at
5 years and Rs. 3.0 million respectively. The cost of machine is being depreciated
under the straight line method.
Based on the practice followed by similar type of companies, the company has
determined that the remaining useful economic life of the machine is six years. It
has also been established that the residual value at the end of the useful life will be
equal to 10% of the cost of machine.
Required:
Compute the depreciation expenses and other adjustments (if any) required to be
made in the financial statements of the company for the year ended June 30, 2008
under each of the following assumptions:
(i) the review of useful life and residual value was carried out on June 30, 2008;
(ii) the review of useful life and residual value was carried out on June 30, 2007
but in the financial statements for the year then ended the depreciation expense
was erroneously recorded on the previous basis. (11)
(b) Discuss the requirements of International Accounting Standard(s) in respect of
estimation and revision of useful life of an item of property, plant and equipment.
(04)
Q.3 Lodhi Textile Mills Limited is facing severe financial difficulties. To improve the cash
flows, the management has decided to sell and lease back three power generators of the
company under three different sale and lease back arrangements which were signed on
August 15, 2008. The company has assessed that all the leases shall qualify as finance
leases.
The related information as on August 15, 2008 is given below:
Cost Book
Value
Fair
Value
Value in
Use
Amount of
Financing
------------------Rupees in thousands------------------
Generator A 10,000 7,500 6,000 6,500 6,000
Generator B 12,000 6,000 4,000 5,000 6,000
Generator C 10,000 7,000 10,000 12,000 8,000
Required:
Prepare the accounting entries that should be recorded by the company on August 15,
2008 in respect of the above transactions. (13)
Note: Ignore tax and deferred tax implications, if any.
Q.4 During the year ended June 30, 2008, Baber Limited (BL) has carried out several
transactions with the following individuals/entities:
(i) AK Associates provides information technology services to BL. One of the
directors of BL is also the partner in AK Associates.
(ii) SS Bank Limited is the main lender. By virtue of an agreement it has appointed a
nominee director on the Board of BL.
(iii) Mr. Zee who supplies raw materials to BL, is the brother of the Chief Executive
Officer of the company.
(iv) JB Limited is the distributor of BL’s products and have exclusive distribution
rights for the province of Punjab.
(v) Mr. Tee is the General Manager-Marketing of BL and is responsible for all major
decisions made in respect of sales prices and discounts.
(vi) BL’s gratuity fund is administered by the Trustees appointed by the company.
(3)
(vii) MM Limited is the leading supplier of BL and supplies 60% of BL’s raw
materials.
(viii) Ms. Vee who conducted various training programmes for the employees of the
company, is the wife of BL’s Chief Executive Officer.
Required:
Comment as to whether the above individuals/entities are ‘related parties’ of the
company or not. Support your arguments with references from International Accounting
Standards. (15)
Q.5 The post closing trial balance of BSZ Limited, a listed company, as at June 30, 2008 is
given below:
Dr. Cr.
Rupees in million
Cash at banks – current accounts 7
Cash at banks – in saving accounts 22
Stocks in trade – closing 90
Accounts receivable 60
Provision for bad debts 3
Advances to suppliers 16
Advances to staff 6
Short term deposits 11
Prepayments 4
Sales tax receivable 12
Freehold land – at revalued amount 375
Furniture and fixtures - cost 27
Accumulated depreciation – Furniture and fixtures 8
Machines - cost 85
Accumulated depreciation – Machines 27
Building on freehold land – cost 150
Accumulated depreciation – Building 26
Computer software – cost 10
Accumulated amortization – Computer software 2
Deferred taxation 40
Short term loan 85
Accounts payable 75
Accrued liabilities 7
Provision for taxation 17
Issued, subscribed and paid up capital (Rs. 10 each) 400
Surplus on revaluation of fixed assets 120
Accumulated profits 65
875 875
Additional Information:
(i) The first revaluation of freehold land was carried out in 2004 and resulted in a
surplus of Rs. 120 million. The valuation was carried out under market value basis
by an independent valuer, Mr. Dee, Chartered Civil Engineer of M/s SSS
Consultants (Pvt.) Ltd., Islamabad.
(ii) The details relating to additions, disposal and depreciation/amortization of fixed
assets, during the year 2008 are given below:
(4)
.. The company uses straight line method for charging depreciation/
amortization. Building is depreciated at the rate of 5% whereas 10%
depreciation/amortization is charged on machines, furniture and fixtures and
computer software.
.. Construction on third floor of the building commenced on March 1, 2008 and
is expected to be completed on September 30, 2008. The cost incurred during
the year i.e. Rs. 20 million was capitalized on June 30, 2008.
.. Furniture and fixtures worth Rs. 8 million were purchased on April 1, 2008.
.. A machine was sold on February 29, 2008 to NJ Enterprise at a price of Rs. 13
million. At the time of disposal, the cost and written down value of the
machine was Rs. 15 million and Rs. 10 million respectively.
(iii) 50% of the accounts receivable were secured and considered good. 10% of the
unsecured accounts receivable were considered doubtful. Bad debts expenses for
the year amounted to Rs. 1.0 million. An amount of Rs. 1.4 million was written off
during the year.
(iv) All advances given to suppliers are considered good and include an amount of
Rs. 4.0 million paid for goods which will be supplied on December 31, 2009.
(v) Cash at banks in saving accounts carry interest / mark-up ranging from 3% to 7%
per annum.
(vi) The authorized share capital of the company is Rs. 500 million.
Required:
Prepare the balance sheet as at June 30, 2008 along with the relevant notes showing all
possible disclosures as required under the International Accounting Standards and the
Companies Ordinance, 1984.
(Comparative figures and the note on accounting policies are not required.)
(22)
Q.6 (a) What do you understand by the terms “adjusting events” and “non-adjusting
events”? Give three examples of each. (05)
(b) J-Mart Limited, a chain of departmental stores has distributed its operations into
four Divisions i.e. Food, Furniture, Clothing and Household Appliances. The
following information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30
days. It is estimated that 5% of the sales made in June 2008 will be refunded
in July 2008.
(ii) On June 2, 2008, three employees were seriously injured as a result of a fire
at the company’s warehouse. They have lodged claims seeking damages of
Rs. 2.0 million from the company. The company’s lawyers have advised that
it is probable that the court may award compensation of Rs. 400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all
the stores by December 31, 2008. The company has not yet installed the
smoke detectors.
(iv) On June 20, 2008, the board of directors decided to close down the
Household Appliances Division. However, the decision was made public
after June 30, 2008.
(v) The company has a large warehouse in Lahore which was acquired under a
three-year rent agreement signed on April 1, 2007. The agreement is non cancelable
and the company cannot sub-let the warehouse. However, due to
operational difficulties, the company shifted the warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 2008.
Required:
Describe how each of the above issue should be dealt with in the financial statements for
the year ended June 30, 2008. Support your point of view in the light of relevant
International Accounting Standards. (15)
(THE END)
Regards
Syed Shuja Abbas
