Fa2 Sugg All

FINANCIAL ACCOUNTING
Suggested Answers
Intermediate Examinations Autumn 2009
Ans.1
Yasir Industries Limited

Statement of Financial Position
As of June 30, 2009
Working
Assets
Non Current Assets
Property, plant and equipment
Intangible assets (20-12)
Current Assets
Stocks in trade
Trade debtors (Rs. 66m - Rs. 27 m)
351.00
8.00
359.00
64.50
39.00
103.50
462.50
Equity and Liabilities

Equity
Issued, subscribed and paid up capital
Retained earnings
Revaluation surplus
120.00
87.10
207.10
2
Non Current Liabilities

Redeemable preference shares
Debentures (Rs. 80m - Rs. 8m 2)
Deferred tax (Rs. 30m 30% + 12.75 0.37)
Current Liabilities
Current portion of debentures (Rs. 8m 2)
Trade creditors
Accrued expenses
Provision for taxation
Dividend payable
Bank overdraft

Statement of Comprehensive Income
For the year ended June 30, 2009
Working
4-Jan-10 10:11:23 AM
28.87
40.00
64.00
21.38
125.38
Total Equity and Liabilities
Sales revenue (Rs. 472.4m - Rs. 27m)

Cost of sales
Gross profit
Selling and distribution expenses (Rs. 19.8 + Rs. 0.25m)
Administrative expenses (Rs. 40m + Rs. 0.37m)
Financial charges
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Revaluation surplus - Incremental depreciation (1.2570%)
Total comprehensive income for the year
2009
Rupees in million
5
6
16.00
30.40
23.80
16.50
1.20
13.25
101.15
462.5
2009
Rupees in million
445.40
(250.73)
194.67
(20.05)
(40.37)
(9.10)
125.15
(19.13)
106.03
0.88
106.90
Page 1 of 8
Suggested Answers
Statement of Changes in Equity
Working
Balance as of July 1, 2008 (previously reported)

Correction of prior year error
Balance as of July 1, 2008 (restated)
Issued,
Subscribed
Retained
and Paid-up
Earnings
Capital
----Rupees in million---120.00
22.20
(30.00)
120.00
(7.80)
106.90
Dividend for the year ended June 30, 2008
(12.00)
87.1
120.00
2009
Rs. in million
1. Tangible Fixed Assets
Leasehold property [Rs. 238m (238 34)]
Machines (Rs. 168.6 Rs. 48.6m)
Total useful life
= 40 years
Less: utilized up to 2009 (40.25 5.75) = (7) years
Add: current year i.e. 2009
= 1 year
34 years
Allocation of Incremental depreciation
Allocated to:
Cost of sales (1.25 5/10)
Administrative expenses (1.25 3/10)
Selling and distributive expenses (1.25 2/10)
Depreciation on revalued amount (238 34)
Already charged to P & L (230 40)
Incremental depreciation
2. Revaluation Surplus
Revalued amount of leasehold property
Less: WDV of leasehold property at revaluation {230 [40.25 (230 40)]}
Revaluation Surplus
Less: deferred tax impact (42.50 30%)
Revaluation surplus
Less: Incremental depreciation [Rs. 7m (Rs. 230m 40)] 70%
3. Accrued Expenses
As per trial balance
Accrued markup on debentures (Rs. 80m 12% 6/12)
Dividend on preference shares (Rs. 40m 10%)
4-Jan-10 10:11:23 AM
231
120
351
0.63
0.37
0.25
1.25
7.00
5.75
1.25
238.00
195.50
42.50
(12.75)
29.75
(0.88)
28.87
15.00
4.80
4.00
23.80
Page 2 of 8
Suggested Answers
2009
Rs. in million
4 - Cost of sales
Opening stock as of July 1, 2008
Purchases
Direct labour
Manufacturing overheads excluding incremental depreciation
Incremental depreciation
Less: Closing balance
As given in (i)
Add: Sales under sale or return agreement (Rs. 27m x 100/120)
38.90
175.70
61.00
39.00
0.63
42.00
22.50
64.50
250.73
Cost of sales
5 - Financial charges
Balance as per trial balance
Accrued interest on debentures (Rs. 80m 12% 6/12)
Preference dividend for the year (Rs. 40m 10%)
0.30
4.80
4.00
9.10
6 Income tax expense

Tax provision for current year
Less: Opening deferred tax liability (given)
Add: Effect of timing difference (Rs. 30m 30%)
Less: Deferred tax effect of revaluation surplus (Rs. 1.25m 30%)
16.50
(6.00)
9.00
(0.37)
19.13
7 - Opening retained earnings

Balance as per trial balance
Dividend for the year ended June 30, 2008 (120 10%)
Ans.2
(a)
Date
1-Jul-08
Particulars
Motor Vehicle - Cost
Obligations under the finance lease
10.20
12.00
22.20
Debit
(Rupees)
Credit
(Rupees)
1,600,000
1,600,000
(Capitalize the lease assets and recoding of corresponding liability)
1-Jul-08
Obligations under the finance lease

Bank
(Record the first lease payment made in advance)
30-Jun-09 Finance charges

Accrued finance charges
480,000
480,000
153,451
153,451
(Accrue the finance charges for the year ended June 30, 2009)
Working:(Rs. 1,600,000 - 480,000)x13.701% = Rs. 153,451)
4-Jan-10 10:11:23 AM
Page 3 of 8
Suggested Answers
30-Jun-09 Depreciation
Accumulated depreciation - Motor Vehicle
400,000
400,000
(Charge the depreciation for the year ended June 30, 2009)
Working: Rs. 1,600,000 4 = Rs. 400,000.

Assuming that there is no reasonable certainty about
transfer of ownership at the end of lease term.
30-Jun-09 Tax expense (W-1)
Tax payable
1,492,035
1,492,035
(To record the tax expense for the year ended June 30, 2009)
30-Jun-09 Tax expense

Deferred tax (W-2)
(To raise the deferred tax asset)
W-1
W-2
22,035
22,035
Tax computation
Accounting profit before tax
Add: Depreciation on leased assets
Add: Finance charges
Less: Lease payment
Taxable profit
Rupees
4,900,000
400,000
153,451
(480,000)
4,973,451
Tax @ 30%
1,492,035
Deferred tax computation

Carrying amount
Taxable temporary difference
Leased assets
Deductible temporary difference
Obligations under finance lease
Accrued finance charges
Net taxable temporary difference
Deferred tax @ 30% (Asset)
(b)
Tax base
Difference
1,200,000
1,200,000
(1,120,000)
(153,451)
(1,120,000)
(153,451)
(73,451)
22,035
Liabilities against assets subject to finance lease (W-3)
Present value of minimum lease payments

Less: Current maturity shown under current liabilities
Minimum lease payments (W-3)

Not later than 1 year
Later than 1 year and not later than 5 years (480,000 2)
Less: future finance charges on finance lease
4-Jan-10 10:11:23 AM
2009
Rupees
1,120,000
(326,549)
793,451
480,000
960,000
1,440,000
(320,000)
Page 4 of 8
Suggested Answers
1,120,000
Present value of finance lease liabilities (W-3)

Not later than 1 year
Later than 1 year and not later than 5 years (371,289 + 422,162)
326,549
793,451
1,120,000
The minimum lease payment has been discounted at an interest rate of 13.701% to arrive at their
present value. Rentals are paid in annual installments.
W-3: Repayment Schedule
Opening
Principal
Interest
Annual
Closing
Years
Balance
repayment
13.701%
payment
Balance
-------------------------------------- Rupees -------------------------------------2009
1,600,000
480,000
480,000
1,120,000
2010
1,120,000
326,549
153,451
480,000
793,451
2012
793,451
371,289
108,711
480,000
422,162
2013
422,162
422,162
57,838
480,000
320,000
Ans.3
Date
1-Jul-05
30-Jun-06
1-Jul-06
1-Jul-06
30-Jun-07
30-Jun-07
4-Jan-10 10:11:23 AM
Particulars
Building
Bank
(Record purchase of plant)
Debit
Rs. in 000
200,000
200,000
Depreciation
Accumulated depreciation Building
(Record depreciation for the year 2005-6)
Working: Rs. 200,000 20 = Rs. 10,000
10,000

Building
(Reversal of prior year depreciation)
10,000
Building
Surplus on revaluation of fixed assets
(Increase in value through revaluation)
Working: Rs. 230,000 Rs. 190,000 = Rs. 40,000
40,000
Depreciation
Working: Rs. 230,000 19 = Rs. 12,105
12,105

Retained earnings/Profit & loss account
(transfer of surplus through retained earning to the extent of
excess depreciation)
Credit
Rs. in 000
10,000
10,000
40,000
12,105
2,105
2,105
Page 5 of 8
Suggested Answers
Working: Rs. 40,000 19 = Rs. 2,105

1-Jul-07
1-Jul-07

Building
12,105

Revaluation expense
Building
(Decrease in value through revaluation)
Working:
Reversal of Surplus balance (Rs. 40,000 Rs. 2,105) Rs.
37,895.
Balancing figure of Rs. 10,000 charged to Profit and Loss
37,895
10,000
12,105
47,895
Building value decline: (Rs. 230,000 Rs. 12,105) Rs.

170,000 =Rs. 47,895
30-Jun-08
1-Jul-08
1-Jul-08
30-Jun-09
30-Jun-09
4-Jan-10 10:11:23 AM
Depreciation
Working: Rs. 170,000 18 = Rs. 9,444
9,444

Building
9,444
9,444
9,444
Building
Revaluation income
Surplus on revaluation of fixed assets (balancing)
(Reversal of prior year impairment)
Working:
Revaluation income = Rs. 10,000 [ Rs. 10,000 Rs. 9,444]
= Rs. 9,444
Building: [Rs. 170,000 Rs. 9,444] Rs. 180,000 =Rs. 19,444
19,444
Depreciation
Working: Rs. 180,000 17 = Rs. 10,588
10,588

Retained earnings
(Reverse the excess depreciation)
Working: Rs. 10,000 17 = Rs. 588
9,444
10,000
10,588
588
588
Page 6 of 8
Suggested Answers
Ans.4
Commitment fee
Actual borrowing costs of specific loan
General borrowing costs
Less: Investment income
Interest costs to be capitalized
(W-1)
(W-1)
(W-2)
Rupees
125,000
2,050,000
1,175,283
(137,500)
3,212,783
W-1
Outstanding
amount
Months outstanding
Rupees
Specific loan
Utilized till first repayment
Utilized after the first repayment
25,000,000
20,000,000
1-Sep-08
1-Feb-09
31-Jan-09
31-May-09
Outstanding
month up to
completion
Rate of
interest
5
4
12%
12%
Borrowing
cost to be
capitalized
Rupees
1,250,000
800,000
2,050,000
(W-4)
General Borrowings
Utilized after specific loan exhausted
on 2nd payment to contractor (W-3)
Principal payment of specific loan
3rd payment to contractor
8,125,000
5,000,000
12,000,000
9,000,000
1-Dec-08
1-Feb-09
1-Feb-09
1-Jun-09
31-May-09
31-May-09
31-May-09
31-May-09
6
4
4
0
12.08%
12.08%
12.08%
12.08%
W-2
Investment income
Surplus fund available from 1-Sep-08 to 30-Nov-08 (Rs. 25m Rs. 0.125m Rs. 8m Rs. 10m) 8% 3/12
W-3
Specific loan utilization
Commitment fee
Payment for obtaining permit
1st payment to contractor
2nd payment to contractor (balancing)
490,750
201,333
483,200
1,175,283
Rupees
137,500
125,000
8,000,000
10,000,000
6,875,000
25,000,000
2nd payment to contractor (total)

Less: paid out of specific loan (as worked out above)
Paid from general borrowing
15,000,000
6,875,000
8,125,000
W-4
Weighted average rate of borrowing
From Bank A
From Bank B
Weighted average amount of

loan Rupees
25,000,000
20,000,000
45,000,000
Interest Rupees
Rs. 25,000,000 13% 9/12
Weighted average rate of borrowing (Rs. 5,437,500 / 45,000,000)
4-Jan-10 10:11:23 AM
2,437,500
3,000,000
5,437,500
12.08%
Page 7 of 8
Ans.5
Suggested Answers
(a)
2009
81.00
110.40
61.20
3.31 : 1
1.64 : 1
*1
Trade debtors collection period (days)

Stock holding period (days)
*3
Trade creditors payment period (days)
*4
Current ratio
*5
Acid test ratio
*1
Average debtors sales 360
*2
Average stocks cost of sales 360
*3
Average creditors cost of sales 360
*4
Current assets current liabilities
*5
(Cash and bank + trade debtors) current liabilities
*2
Ans. 6
2008
75.00
104.00
60.00
3.26 : 1
1.60 : 1
2007
60.00
89.60
62.40
3.10 : 1
1.67 : 1
(b)
The companys liquidity position as evidenced by the current ratio and the acid test ratio appears
to be growing stronger. However, the ratios also indicate a change in the approach of working
capital management as larger funds are tied up in non-interest bearing current assets, as discussed
below:
Debtors are allowed longer period to pay which may be a result of more lenient credit terms
in order to improve sales, but it may also be a result of more lenient credit controls which
may result in bad debts arising.
Inventory holdings period has increased to 110 days. Here again, increased volume of
inventory may be necessary for quicker delivery, but it may also be due to obsolete or slow
moving items.
Creditors days have remained steady around 60 days. It indicates companys relationship
with the vendors has been consistent.
(a)
The company should recognize the revenue at the date of sale based on meeting the recognition
criteria, i.e. transfer of risks and rewards of ownership, no managerial involvement, measurement
of revenue, probable inflow of economic benefit and reliable measurement of cost of goods sold.
Warranty will not affect any of these criteria.
(b)
Some of the conditions for recognition of revenue have been met such as reliable estimate of cost
and revenue at the time of supply. However, company has retained significant risk of ownership
due to non compliance with primary condition of sale i.e. the conditions of installation.
Consequently, there is no transfer of ownership, managerial involvement exists, inflow of
economic benefit is not probable. Therefore, revenue will be recognized after satisfactory
installation.
(c)
The completion of the sale transaction is uncertain because it is contingent upon purchaser being
awarded the contract. Therefore the company will recognize the revenue when it is certain that
the purchaser will be granted the contract.
(d)
Revenue form lay away sales are recognized when the goods are delivered. However, based on
experience, such revenue may be recognized when it is probable that sale will materialize and
significant deposit is received. But in given case there is no history available and only two out of
seven installments have been received. Therefore, revenue will only be recognized when
machine has been delivered.
(The End)
4-Jan-10 10:11:23 AM
Page 8 of 8
Suggested Answers
Intermediate Examinations Spring 2010
A.1 (a) Journal entries
(i) Finance Lease:
Date
Particulars
1-Jan-2009
1-Jan-2009
31-Dec-2009
Finance lease debtors

Unearned finance lease income
Sale
(Record sale of vehicles on finance lease)
Bank
Finance lease debtors
(Installment received under finance lease)
Unearned finance lease income
Finance lease income
(Interest income earned at 15%)
(ii) Operating lease:

1-Jan-2009 Bank
Unearned rental income
(Operating lease installment received in advance)
31-Dec-2009 Unearned rental income
Rental income (11,410,0003)(W-2)
(Booking of operating lease income)
31-Dec-2009 Depreciation expenses (15,000,0006)
Accumulated depreciation on machine.
(Yearly depreciation on machine)
Debit
Credit
----- Rupees ----12,000,000
3,295,690
8,704,310
2,000,000
2,000,000
1,005,647
1,005,647
4,000,000
4,000,000
3,803,333
3,803,333
2,500,000
2,500,000
Reason for choice of leases:

1.
2.
W-1
Lease A should be accounted for as a finance lease because the lease term covers the
entire economic life.
Since none of the conditions specified in IAS-17 (Leases) for classification as a finance
lease is being met, Lease B shall be considered as an operating lease.
Finance lease:
Opening
Balance
Year
2009
2010
2011
2012
2013
2014
(A)
8,704,310
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000
(B)
(A)+(B)
W-2
Income at
Recovery of
15%
Principal
------------------ Rs. -----------------2,000,000
1,005,647
994,354
2,000,000
856,493
1,143,507
2,000,000
684,967
1,315,033
2,000,000
487,713
1,512,287
2,000,000
260,870
1,739,130
2,000,000
0
2,000,000
8,000,000
1,433,550
6,566,450
10,000,000
2,290,043
7,709,957
Installment
Closing
balance
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000
0
Operating lease:
Annual installment
2009
2010
2011
(4,000,000 95%)
(3,800,000 95%)
Rupees
4,000,000
3,800,000
3,610,000
11,410,000
Suggested Answers
(b) Neptune Limited
Notes to the Financial Statements
For the year ended December 31, 2009
(i)
Investment in finance lease

2009
Rupees
7,709,957
(1,143,507)
6,566,450
Present value of minimum lease payments

Less: current maturity
Less than one year

One to five years
Less: unearned finance income
Net investment in leases
Gross investment in
finance leases
2009
2,000,000
8,000,000
10,000,000
(2,290,043)
7,709,957
Rupees
Net investment in
leases
2009
1,143,507
6,566,450
7,709,957
The minimum lease payment has been discounted on interest rate of 15% per annum to
arrive at their present value. Rentals are paid in annual installments.
(ii)
Operating lease
Rupees
Future minimum lease payments (W-2)
Not later
than one
year
3,800,000
One to five
years
3,610,000
Total
7,410,000
Suggested Answers
A.2 Golden Limited
Platinum Limited is the parent company which holds majority shares of the company.
20. Related party transactions
The transaction with related parties are carried out in the ordinary course of business at
commercial rates except stated otherwise.
Parent
Company
Key
Associated
Under- Management
Personnel
takings
Major
Shareholders
-------- Rupees in '000 -------Transactions:

Sales
Sales discount
Sale of property
Reimbursement of expenses on sale of property
Interest free loans granted
Short term borrowings acquired
Interest on short term borrowings
Balances:
Accounts receivable
Loans to staff
Loans payable
Interest payable on the loan at 12%
20.1
20.2
20.3
20.4
18,000
1,500
10,000
500
2,000
25,000
1,500
6,500
5,000
1,800
25,000
1,500
Sales to related parties have been made at 20% mark up as against GL's policy to sell at a
markup of 30%.
Administrative services are provided by the parent company free of cost as per the agreement.
Market value of these services is Rs. 350,000.
In respect of sale of property, a buyer is required to bear all costs incurred on transfer. But in
this case the company has reimbursed the costs to SL
The interest free loan has been granted to the executive director as per the terms of
employment.
Suggested Answers
A.3 Apollo Industry Limited

Statement of cash flows
Rs. in 000
Cash used in operating activities
Profit before taxation
Adjustment for: (non cash items / separately disclosed items)
Depreciation for the year (7,000-90-1,000)
Amortization for the year (1140+50-1100)
Provision for staff gratuity (1,400+300-1,190)
Profit on sale of fixed assets (2,800-1,000)
Mark-up on short term placement
Operating profit before working capital changes
Increase in working capital (12,125 15,700 + 4,200 6,250)
Cash generated from operations
Payment for staff gratuity
Payment for taxation (950 + 4,660 800)
Cash used in investing activities
Capital expenditure incurred
Proceeds from sale of PPE (1,200 + 1,800)
Acquisition of intangible assets
Mark-up received on short term placement
Long term deposits (400-300)
Cash used in financing activities
Issue of ordinary share capital (25,000-2,000-20,000)
Net decrease in cash and cash equivalents
Opening balance: cash and cash equivalents
Closing balance: cash and cash equivalents
Note 1
Capital expenditure incurred:

Opening book value for PPE
Opening book value for CWIP
Book value of assets sold during the year
Depreciation for the year (7,000-90-1,000)
Revaluation reserve adjustment
Closing book value for PPE
Closing book value for CWIP
6,500
5,910
90
510
(1,800)
(1,000)
10,210
(5,625)
4,585
(300)
(4,810)
(525)
Note 1
(13,110)
3,000
(50)
1,000
(100)
(9,260)
3,000
(6,785)
7,225
440
Rs. in 000
25,500
10,000
(1,200)
(5,910)
(1,000)
(35,000)
(5,500)
(13,110)
Suggested Answers
A.4
Land and building
Machineries and equipment
Vehicles
Stocks
Trade debts
C capital account (Trade payables)
Cash & bank Realization gain:
A capital account
B capital account
C capital account
Realization Account
Rupees in 000
Long term loan
300
1,800 Trade payables
1,400
1,400 Other liabilities
450
650 Sales proceed (AIM Industries)
6,100
900 A capital account (vehicle)
900
2,000
250
300
1,057
529
264
1,850
9,150
(a) Partners capital accounts

Balance - December 31, 2009
Vehicle taken over by A
Trade payable settled by C
Realization gain in P&L sharing ratio (4:2:1)
Shares distribution in P&L sharing ratio (6,100-1,900)
Balance settled in cash (350+1,900-300)
9,150
A
B
C
--- Rupees in 000 --2,400
1,700
850
(900)
250
1,057
529
264
2,557
2,229
1,364
(2,400) (1,200)
(600)
(157) (1,029)
(764)
0
0
0
(b) AIM Industries (Private) Limited

Statement of Financial Position as on January 1, 2010
Rupees in 000
Share Capital
Non Current Assets
Issued and paid up capital
4,380 Land and building
3,000
Share premium
876 Machineries and equipment
1,100
Goodwill
1,006
Current Liabilities
Current Asset
Other liabilities
450 Stock in trade
700
Bank overdraft
1,900 Trade receivables
2,000
Less: provision for doubtful debts
(200)
1,800
7,606
7,606
Goodwill to be recorded by the company
Assets and liabilities took over by AIM Industries:
Land and building
Machinery and equipment
Stock in trade (at lower of cost and NRV)
Trade receivable (2,000,000 90%)
Trade payable (88,000 share @ Rs.12)
Other liabilities
Value of net assets
Purchase consideration
Goodwill to be recorded by the company
Rs. in 000
3,000
1,100
700
1,800
(1,056)
(450)
5,094
6,100
1,006
Suggested Answers
Share capital
Share capital (including premium) issued as purchase consideration (6,100-1,900)
Share capital (including premium) issued to creditors (88,000 12)
Less: share premium (5,256 2/12)
A.5 (a) Computation of current taxation

Profit before tax
Add: Accounting depreciation
Financial charges on lease liability (1.00 0.3) 13.701%
Amortization of research and development cost for the year
Less: Tax depreciation
Annual installment of lease payment
Amortization of research and development cost (15 0.9/10)
Current year taxable income
Rs. in 000
4,200
1,056
5,256
876
4,380
Rs. in million
50.000
10.000
0.096
1.000
(7.000)
(0.300)
(1.350)
52.446
Tax liability for the year (52.446 35%)

Tax liability for prior periods (0.100 35%)
18.356
0.035
18.391
Deferred taxation
Accounting depreciation
Tax depreciation
10.000
(7.000)
3.000
Financial charges on finance lease liability(1.00 0.3) 13.701%

Annual installment of lease payment allowed under tax
0.096
(0.300)
(0.204)
Amortization charged in accounts

Amortization cost claimed in tax
Excess of taxable income over accounting profit due to time differences
Deferred tax credit at 35%
1.000
(1.350)
Total tax expenses (current and deferred)
(0.350)
2.446
(0.856)
17.535
(b) Bilal Engineering Limited

for the year ended December 31, 2009
1.1
Relationship between tax expense and accounting profit

Tax on accounting profit at 35%
Tax on expenses disallowed (Permanent Difference)
Effective tax rate/tax charge
2009
Rs. in million
50.000
17.500
0.035
17.535
Suggested Answers
(c) Journal entries

1
Debit
Credit
----- Rs. in million ----18.391
18.391
Income tax expenses

(Tax provision for 2009)
Deferred tax asset
Tax expenses deferred
(Deferred tax credit for 2009)
0.856
0.856
A.6
Rs. in
million
Carrying value of plant as on 31-12-2009:
Cost (27+3)
Depreciation for the year 2008 (30/8)
WDV as of December 31, 2008
Depreciation for the year 2009 based on revised estimated life [26.25/(7+2 years)]
Net realizable value (NRV) on 31-12-2009:
Selling price
Plant decommissioning cost
Value in use
15.00
(0.20)
14.80
Discount
factor at
10%
0.9091
0.8264
0.7513
0.683
0.6209
0.5645
0.5645
0.5132
0.4665
Year 2010
Year 2011
Year 2012
Year 2013
Year 2014
Year 2015
Year 2015- Overhauling cost
Year 2016
Year 2017
Decommissioning cost at the end of 2017
1.0000
Impairment (excess of carrying value over recoverable amount)

Carrying value
Recoverable amount (Higher of NRV and value in use)
Impairment loss
(THE END)
30.00
(3.75)
26.25
(2.92)
23.33
Net cash
Present
flows
value
----- Rs. in million ----5.00
4.55
4.00
3.31
3.50
2.63
3.20
2.19
3.00
1.86
2.50
1.41
(1.00)
(0.56)
2.30
1.18
2.00
0.93
24.50
17.49
(0.20)
(0.20)
24.30
17.29
23.33
(17.29)
6.04
Suggested Answers
A.1 (i)
Since the event which caused the inventory to be sold at a loss occurred after the year end, it is nonadjusting event. However, the effect of the event should be disclosed in the financial statements for
the year ended June 30, 2010.
(ii) It is an adjusting event in accordance with the requirement of IAS-10. The debtors balance should be
written down by 80% amount.
(iii) It is non-adjusting event as the subsequent reduction in price is due to an event, introduction of
competitive product, occurred after the reporting period.
(iv) Since this change was not enacted before the reporting date, it is a non-adjusting event. However, a
disclosure should be made for this change.
(v) Since the declaration was announced after the year-end and there was no obligation at year-end it is a
non-adjusting event. Details of the dividend declaration must, however, be disclosed.
A.2 Scientific Pharma Limited

Journal entries for the year ended June 30, 2010
30-6-10
30-6-10
30-6-10
30-6-10
30-6-10
Repair and maintenance expenses

Account payable / Bank
(Repair cost of major break down of the plant)
Depreciation expense (45,000-2,000)/10.5 years
Accumulated depreciation
(Depreciation expense for the year)
Revaluation surplus (10,380/10.5)
Retained earnings
(Incremental depreciation credited to retained earnings)
Impairment loss
W-1
(Impairment of plant due to break down)
Revaluation surplus
Impairment loss
W-1
(Impairment loss adjusted against revaluation)
W-1: Impairment loss
Rupees in 000
Debit
Credit
1,500
1,500
4,095
4,095
989
989
5,296
5,296
5,296
5,296
Discounting at
10%
0.9091
0.8264
0.7513
0.7513
Present value in
use
8,182
5,785
3,757
1,503
19,227
Recoverable amount (value in use since there is no fair value less costs to sell)
WDV of the plant on impairment date
W-2
Impairment loss as on 30.06.2010
19,227
(24,523)
(5,296)
2010-11
2011-12
2012-13
2012-13 Salvage value
Value in use
Net cash inflows

9,000
7,000
5,000
2,000
Page 1 of 6
Suggested Answers
W-2: WDV of the plant on impairment date

FOB price (US$ 800,000 at Rs. 52)
Other charges including installation cost
Accumulated depreciation (1-1-2001 to 30-6-2005)
WDV as on 30-6-2005
Revaluation surplus (45,000-34,620)
Revalued amount as of July 1, 2005
Accumulated depreciation (1-7-2005 to 30-6-2010)
WDV as on 30-6-2010
W-3: Revaluation surplus on impairment date
Revaluation surplus
Transferred to retained earnings
(1-7-2005 to 30-6-2010)
Revaluation surplus balance on impairment date
{(48,600-2,000)/15*4.5}
{(45,000-2,000)/10.5*5)
Rs. in '000
41,600
7,000
48,600
(13,980)
34,620
10,380
45,000
(20,476)
24,523
W-2
10,380
(10,380/10.5*5)
(4,943)
5,437
Since impairment loss is less then the revaluation surplus on impairment date, the full amount of
impairment would be adjusted against the revaluation surplus.
A.3 Shaheen Limited
As of June 30, 2010
Assets
Non Current Assets
Intangible assets
Current Assets
Stock in trade
Trade receivables
Other receivables and prepayments
Cash and bank balances
2010
Rs. in 000
(86,000-12,000-4,500)
(6,000-600)
(37,800-10,000)
(14,000+6,000)
Equity and Liabilities

Share Capital and Reserves
issued, subscribed and paid up capital
Un-appropriated profit
30,000
27,800
20,000
4,725
82,525
157,425
60,000
35,372
95,372
Non Current Liabilities

Long term borrowings
Deferred taxation
Current Liabilities
Trade payables
Current portion of long term borrowings
Provision for litigation
69,500
5,400
74,900
(31,525-6,000)
(5,000-1,470)
(2,000+9,988-2,000)
Page 2 of 6
25,525
3,530
29,055
12,000
6,000
5,000
9,998
32,998
157,425
Suggested Answers
Shaheen Limited
Statement of Comprehensive income
Sales revenue
Cost of sales
Gross profit
Selling and distribution expenses
Administrative expenses
W-2
W-2
W-2
Financial charges
Taxation
Profit after taxation
Other comprehensive income net of tax
Total comprehensive income
W-3
Shaheen Limited
Statement of Changes in Equity
2010
Rupees in 000
Issued,
subscribed &
Retained
paid up
earnings
capital
60,000
32,000*
(1,667)
Balance July 1, 2009

Correction of prior years error (10,000/120*20)
Balance July 1, 2009 (restated)
Comprehensive income for the year
Dividend for the year ended June 30, 2009 (60,000*0.20)
Balance June 30, 2010
Retained earning as at 01-07-09 = 20,000+ (20% of 60,000)=32,000
W-1 Depreciation for the year
On building
On plant and equipments
Total
60,000
60,000
(36,000/20)
(30,000-3,000)/10
W-2 Costs
Cost of sales
Opening inventory
Costs as per Trial balance
Closing inventory
Depreciation (75%, 15%, and 10% of Rs. 4,500)
Adjustment for goods sent on sale or return,
erroneously booked as sales last year now returned
during the year. (10,000/1.2)
Amortization of export license (6,000/5*0.5)
2010
R.s. in 000
200,000
(104,708)
95,292
(36,275)
(30,450)
(66,725)
(5,000)
23,567
(6,528)
17,039
17,039
Selling and
distribution
costs
23,000
100,000
(30,000)
3,375
30,333
17,039
(12,000)
35,372
1,800
2,700
4,500
Administrative
costs
35,000
30,000
675
450
600
36,275
30,450
8,333
104,708
Page 3 of 6
Suggested Answers
W-3:Taxation
profit before tax
Disallowances and add backs
Taxable income
Current
For the year
For prior years
Deferred For the year
23,567
5,000
28,567
9,998
(2,000)
(1,470)
6,528
(28,567*0.35)
(7,000-5,000)
(5,000-800)*0.35
A.4 Capital work in progress Factory building

Progress invoices received from the contractor (30,000+20,000+10,000+15,000)
(Rain damages paid would be chargeable to profit and loss account/ insurance claim)
Borrowing costs to be capitalised:
Loan processing charges
Interest on bank loan
Interest on running finance
Interest income from surplus loan amount
Capital work in progress June 30, 2010
Rs. in 000
75,000.00
W-1
W-2
W-4
500.00
1,841.67
2,730.00
(395.00)
79,676.67
W-1: Interest on bank loan:

Rupees in 000
From
01-12-2009
01-06-2010
Interest amount
To
31-05-2010
30-06 -2010
Outstanding loan
amount
25,000
20,000
Months
6
1
Interest at 13%
1625.00
216.67
1,841.67
W-2: Interest on running finance

Rupees in 000
Payments
date
Description
Invoice
amount
01-07-09
15-10 -09
15-01 -10
15-04 -10
31-05 -10
31-05 -10
Advanced payment
1st progress bill
2nd progress bill
3rd progress bill
Loan interest
Loan instalment
Payments
net of
deductions
10,000
30,000
20,000
10,000
10,000
25,500
17,000
8,500
1,625
5,000
Payments from
Right
Bank
Running
issue
loan
finance
Months
outstanding
up to 30-6-10
10,000
10,500
1,000
1,625
5,000
29,125
12.00
8.50
2.50
1.00
1.00
15,000
17,000
7,500
15,000
*24,500
Interest at 15% per

annum (W-3)
1,500
1,116
31
20
63
2,730
*Loan amount of Rs. 25,000,000 less processing charges of Rs. 500,000

W-3: Average rate of interest for running finance facility (9,000/60,000)
15%
W-4: Interest income from surplus loan amounts:
From
01-12-09
16-01-10
Interest income
To
15-01-10
15-04-10
Months
1.5
3.0
Surplus loan
amounts
24,500
7,500
Page 4 of 6
Rupees in 000
Interest income at
8%
(245)
(150)
(395)
Suggested Answers
A.5 Journal entries

Date
Description
1-Jul-2009
Bank
Accumulated depreciation (18,750-15,000)
Deferred gain on disposal (20,000-15,000)
(Disposal of plant under sale and finance lease back)
1-Jul-2009

Long term finance lease liability
(Plant acquired under sale and lease back)
31-Dec-2009
30-Jun-2010
30-Jun-2010

Interest expense
Bank
(Payment of 1st. Instalment of lease liability)
Debit
Credit
Rupees in '000
20,000
3,750
18,750
5,000
20,000
20,000
1,127
1,373
W.1
W.1
2,500

Interest expense
Bank
(Payment of 2nd. Instalment of lease liability)
1,204
1,296
2,500
Deferred gain on disposal (5,000/6)

Gain on disposal
(Deferred gain on amortised over the life of the plant)
833
833
30-Jun-2010
Depreciation expense (20,000/6)

3,333
3,333
(Depreciation for the year for plant)
Note: If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease
term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
W-1:
Liability against finance lease

Balance
Payments made on
1-Jul-2009
31-Dec-2009
30-Jun-2010
Instalment
payments
Interest at
13.731%
2,500
2,500
5,000
1,373
1,296
2,669
Balance 30-6-2010
A.6 (i)
Principal
balance
20,000
(1,127)
(1,204)
(2,331)
17,669
Provision must be made for estimated future claims by customers for goods already sold.
The expected value i.e. Rs. 10 million ([Rs. 150m x 2%] + [Rs. 70m x 10%]) is the best estimate of
the provision.
(ii)
Warehouse A: It is an onerous contract. as the warehouse has been sublet at a loss of Rs. 200,000
per month. QIT should therefore create a provision for the onerous contract that arises on vacating
the warehouse. This is calculated as the excess of unavoidable costs of the contract over the
economic benefits to be received from it. Therefore, QIL should immediately provide for the
amount of Rs. 13.2 million. [5.5 years x 12 month x Rs. 200,000] in its financial statements i.e. for
the year ended June 30, 2010.
Page 5 of 6
Suggested Answers
Warehouse B: It is not an onerous contract because the warehouse has been sublet at profit. Hence
this would require no adjustment.
(iii) A provision is to be made by QIL against a contingent liability as:
(i) There is a present obligation (legal or constructive) as a result of a past event; i.e. accident
occurred on June 15, 2010.
(ii) It is probable that outflow of resources will be required to settle the obligation; and
(iii) A reliable estimate can be made of the amount of the obligation.
The amount of provision shall be Rs. 2.0 million i.e. the most probable amount as determined by the
lawyer.
(iv)
A provision of Rs. 0.4 million is required in relation to penalty for March 1 to June 30, 2010 because
at the reporting date there is a present obligation in respect of a past event.
The reimbursement of penalty amount from the vendor shall be recognized when and only when it is
virtually certain that reimbursement will be received if the entity settles the obligation. The
reimbursement should be treated as a separate asset in the balance sheet. However, in profit and loss
statement, the expense relating to a provision may be netted off with the amount recognized as
recoverable, if any.
(THE END)
Page 6 of 6
Suggested Answers
A.1
(a)
Machine and equipment
Vehicles
Furniture
Stocks in trade
Trade Debtors
Short term investments
Earth (Other liabilities)
Profit transferred to:
Earth (5/12)
Jupiter (4/12)
Mars (3/12)
(b)
Partners capital accounts
Earth, Jupiter and Mars

Realization Account
90.00
17.00
15.00
62.00
70.00
48.00
10.00
17.08
13.67
10.25
353.00
Earth
Jupiter
Rs. in million
100.00
79.00
10.00
(23.00)
17.08
13.67
127.08
69.67
(60.00)
Debentures issued
Share distribution in the final capital balance
proportion
Balance settled in cash (Balancing)
11% preference shares
12% debentures
Current Liabilities
Trade creditors
Bank overdraft (6-20+47)
45.00
12.00
23.00
6.00
267.00
353.00
Balance as on January 1, 2011

Other liabilities paid
Machine acquired
Realization gain in P&L sharing ratio (5:4:3)
Shareholder Equity
Share capital (160+20)
Rs. in million
Trade creditors
Other payable
Jupiter (Machines)
Bank overdraft
UL - Purchase consideration (W-1)
(103.04)
(24.04)
Universe Limited
as on January 1, 2011
180
40
220
60
45
33
78
358
(9.67)
Current Assets
Stocks in trade
Trade debtors
60.00
10.25
70.25
(56.96)
(13.29)
Rs. in million
Non Current Assets

Freehold premises
Machine and equipment (9025)
Vehicles
Furniture
Goodwill
Mars
40
65
17
15
137
50
60
63
48
171
358
Page 1 of 6
Suggested Answers
W-1: Purchase consideration

Assets and liabilities taken over
Goodwill
Equipment (90-25)
Vehicles
Furniture
Stocks in trade
Trade debtors
Bank overdraft
Trade creditors
A.2
(a)
Moonlight Pakistan Limited

As at December 31, 2010
ASSETS
Non-Current Assets
Property, plant and equipment (W-2)
Current Assets
Stocks in trade
Trade receivables
Cash and bank
EQUITY
Issued, subscribed and paid-up capital (W-3)
Share premium (420 x 2/12)
Retained earnings (W-3)
LIABILITIES
Non-current liabilities
Long term loan
Deferred tax (22 + 80 x 35%)
Provision for gratuity
Current liabilities
Creditor and other liabilities (544 + 96)
Income tax payable
Rs. in million
50
65
17
15
60
63
48
(6)
(45)
267
Rs. in million
3,472
758
702
354
1,814
5,286
1,750
70
876
2,696
240
1,600
50
23
1,673
640
37
677
5,286
Page 2 of 6
Suggested Answers
(b)
Moonlight Pakistan Limited

Income Statement
Rs. in million
3,608
(2,149)
1,459
Sales
Cost of sales (W-1)
Gross profit
Selling expenses (W-1)

Administrative expenses (W-1)
252
270
522
937
306
631
65
566
Financial charges (210 + 1,600 x 12% x 6/12)

Taxation (37 + 80 x 35%)
W1: Cost of sales/selling expenses/admin expenses

Depreciation building (60% : 25% : 15%) (W-2)
Depreciation plant
Provision for gratuity (23-8) x 60%:20%:20%
W2: Property, plant and equipment
Cost as at January 1, 2010
Revaluation (1,840 - (2,000 - 400 ))
Current year depreciation
W-3: Share Capital/Retained Earnings
Bonus issue (1200 6)
Right issue (420 x 10/12)
Profit for the year
Cost of
sales
1,784
69
287
9
2,149
Selling
expenses
Rs. in million
220
29
3
252
Admin.
expenses
-
250
17
3
270
Land
Building
Plant
Total
------------------- Rs. in million ----------------600
2,000
2,104
4,704
(400)
(670)
(1,070)
240
240
(115)
(287)
(402)
600
(1,840 16)
1,725
Share Capital
1,200
200
350
1,750
1,147
3,472
Retained Earnings
510
(200)
566
876
Page 3 of 6
Suggested Answers
A.3
2010
28 : TAXATION
Current - for the year (W 1)
Deferred (W 2)
28.1 : Relationship between tax expense and accounting profit
Profit/(Loss) before taxation
Tax at the applicable rate of 35%
Tax effect of exempt income (1.25 x 35%)
23.50
(1.75)
8.23
(0.44)
7.79
(0.61)
(0.35)
(0.96)
Accrued expenses
23.50
15.00
2.20
-
(1.75)
Tax depreciation
Interest income from SIBs (Exempt)
Accrued expenses
Taxable income / (loss)
Tax liability (@ 35%
Tax loss to be brought forward (29.05 x 35%)
Tax payable
(6.00)
(1.25)
(2.00)
31.45
11.01
(10.17)
0.84
(45.00)
(1.00)
(29.05)
-
21.00
(3.90)
17.10
30.00
(2.00)
(1.70 )
(29.05)
(2.75)
W-1 : Computation of Current Tax

(Loss) / profit before tax as per books
Add: Allowable income / Disallowed expenses

Less: Disallowed income / Allowable expenses
W -2: Computation of Deferred Tax

Timing differences (cumulative) on account of:
Depreciation (2010: 30-51, 2009: 15-45)
Accrued expenses
Tax losses
Deferred tax @ 35%
Add: Opening deferred tax (dr.)
Charge/(Reversal) for the year
A.4
2009
Rs. in million
0.84
6.95
(0.96)
7.79
(0.96)
(a)
(b)
Date
5.99
0.96
6.95
Particulars
Cash / bank / Receivable

Franchise fee receivable
Deferred financial income on installment plan (W-1)
Revenue from Franchise Fees (W-1)
Unearned Franchise Fees discount in setup (W-1)
Unearned franchise fees advertising (W-1)
Cash / bank / Receivable
Revenue from Franchise Fees
Dr.
Rupees
1,800,000
7,200,000
1,800,000
15.00
1.70
2.00
(0.96)
(0.96)
Cr.
1,499,820
6,720,180
240,000
540,000
1,800,000
Page 4 of 6
Suggested Answers
W-1:
Total franchise fees

Deferred financial income on installment plan
Less: (9,000,000 - 7,500,180)
Discount on setup (Rs. 1,200,000 x 20%)
Advertising (9,000 60)
9,000,000
(1,499,820)
(240,000)
(540,000)
(2,279,820)
6,720,180
Revenue to be recognized
A.5
Star-Bright Pharmaceutical Limited

Statement of financial position
Shareholders equity
Retained earnings
(W-5 and 6)
2010
2009
Restated
Rs. in million
2,071
Star-Bright Pharmaceutical Limited

1,879
2009
Restated
Rs. in million
2010
Non-current assets
Intangible asset brand
[Note 8]
8- Intangible assets Brand
Cost
274
Rs. in million
2009
2010
(Restated)
At beginning of the year (2010: 382+24+54+38, 2009: 382+

24+54)
Capitalized during the year
Amortization
At beginning of the year (W-1 and 2)

During the year (W-3 and 4)
A.6
(i)
W-1 : 382 x 50% + 24 x 30% + 54 x 20% + 38 x 10% = 213

W-2 : 382 x 40% + 24 x 20% + 54 x 10% = 163
W-3 : 541 x 10% = 54
W-4 : 498 x 10% = 50
W-5 : 1,950 + 24 + 54 + 38 + 43 [267 (382 x 60%)] = 2,071
W-6 : 1,785 + 24 + 54 + 38 [213 (382 x 50%)] = 1,879
285
498
43
541
(213)
(54)
(267)
274
*3
460
38
498
(163)
(50)
(213)
285
*4
Although the debt owing by the customer existed at reporting date, the inability of the
customer to pay did not exist at reporting date. This condition only arose in January 2011 after
the fire.
Thus, this is a non adjusting event. However, if it is material for the financial statements, the
following disclosure should be made.
Nature of the event
An estimate of its financial effect
Page 5 of 6
Suggested Answers
(ii)
Amount withdrawn before year end i.e. Rs. 1.5 million is an adjusting event as it existed at year
end but discovered after year end. However, since 60% has been recovered subsequently, Rs.
0.6 million would be provided.
Further withdrawal of Rs. 6.0 million is a non-adjusting event as it occurred after year end.
However, if considered material following disclosures should be made:
Nature of the event

The gross amount of contingency
The amount recovered subsequently
(iii) SL should not recognize the contingent gain until it is realized. However, if recovery of
damages is probable and material to the financial statements, SL should disclose the following
facts in the financial statements:
Brief description of the nature of the contingent asset

An estimate of the financial effect.
(iv) SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0 million x 60% +
Rs. 1.5 million x 40%) because
it is a present obligation as a result of past event;

it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligations; and
a reliable estimate can be made of the amount.
In addition, SL should disclose the following in the notes to the financial statements:
Brief nature of the contingent liability

The amount of contingency
An indication of the uncertainties relating to the amount or timing of any outflow.
(THE END)
Page 6 of 6
Suggested Answers
Clay Pakistan Limited
Statement of changes in equity
For the year ended 30 June 2011
Balance as at 1 July 2009

Effect of change in accounting policy as referred to in
note __. [Rs. 20m x 70%]
Balance as on 1 July 2009 - restated
Profit for the year after tax [Rs. 4,120m-Rs. 50mx70%]
Distributions to the owners
Final dividend for 2008-09 (Rs. 2.50 per ordinary
share)
Interim bonus shares issued for 2009 (10%)
Transfer to general reserves

Transfer from surplus on revaluation of property,
plant and equipment - net of deferred tax
Balance as at 30 June 2010 restated

Profit for the year after tax [Rs. 5,240m + Rs. 50m x 70%]
Distributions to the owners
Final dividend for 2009-10 (Rs. 2.00 per ordinary
share)
Final bonus shares issue for 2009-10 (10%)
Interim dividend for 2010-11 (Rs. 2 per ordinary
share)
Transfer to general reserves

Transfer from surplus on revaluation of property,
plant and equipment - net of deferred tax
Balance as at 30 June 2011
A.2
Borrowing costs to be capitalized
Commitment fee @ 1%
Borrowing costs on specific loan
Borrowing costs on running finance
Less: Investment income
Translation
Reserve
Un-appropriated
profit
General Reserves
Revenue
Reserves
Total
Rupees in million
Capital
Reserves
Capital Reserve
Issued, subscribed and

paid up share capital
A.1
9,400
3,210
750
8,905
5,410
27,675
120
120
*4,085
4,085
4,085
120
4,205
(2,350)
(940)
1,236
(1,236)
9,400
940
940
-
3,210
10,340
3,210
1,034
-
1,034
-
11,374
Workings
1
3
2
750
870
10,141
155
155
8,905
3,210 1,025
1,583
11,724
2011
6,987,500
1,381,625
(2,099,001)
6,720,124
Page 1 of 6
14
5,424
(3,290)
1,238
14
27,689
(2,350)
(2,350)
-
1,238
6,221
30,782
(2,068)
(2,068)
(2,275)
(2,275)
5,275
5,275
(1,034)
5,275
155
5,430
-
(5,377)
(4,343)
1,038
5,574
1,038
32,907
(1,583)
2010
700,000
3,033,333
(1,381,334)
2,351,999
From June 30 to first principal repayment

After the 1st principal repayment
After the 2nd principal repayment to completion
Amount to be capitalized as on 30-Jun-11
W-2 : Investment income
Rs. 70m - Rs. 25m - Rs. 0.7m

Investment income 2010
Rs. 70m - Rs. 25m - Rs. 0.7m
Rs.44.3 - Rs. 5m - Rs. 4.55m
Investment income 2011
Available
Funds
44,300,000
44,300,000
34,750,000
O/s
amount
up to
completion
70,000,000
65,000,000
60,000,000
2
6
3
0
1
0
Used to reduce running

finance (14%)
Amount
Income
466,667
34,300,000
2
5
10,000,000
10,000,000
233,333
583,335
34,300,000
24,750,000
Amount
W-3 : Interest on running finance
2nd payment to contractor (Rs. 65m - 34.75m)

Payment of 2nd installment
Principal
Interest (Rs. 65m x 13% x 6/12)
A.3
5,000,000
4,225,000
10,000,000
49,475,000
Income
914,667
457,333
825,000
Suspension
No. of
months
outstanding
2011
30,250,000
Borrowing
cost to be
capitalized
(Rs.) @ 13%
Invested in saving
account @ 8%
10,000,000
Amount
2
5
3
3,033,333
3,033,333
1,516,667
3,520,833
1,950,000
6,987,500
All amounts in Rupees
Description
Net
outstanding
months
Suspension
70,000,000
4
3
3
0
1
0
0
0
Total
Income
1,381,334
1,381,334
690,666
1,408,335
2,099,001
Borrowing cost
to be capitalized
(Rs.) @ 14%
From commencement on to June 30

Amount to be capitalized as on 30-Jun-10
Net
outstanding
months
Outstanding
amount (Rs.)
W-1 : Actual borrowing costs on specific loan
Outstanding
month
Suggested Answers
3
3
3
0
1,058,750
175,000
147,875
1,381,625
IN THE BOOKS OF METAL LIMITED

23 Transactions with Related Parties
Related parties comprises of the companys subsidiaries. Transactions with related
parties are as follows:
2011
2010
Rupees
Subsidiaries
Sale of machine (at carrying amount plus 20%)
19,200,000
Management fees income (Note 23.1)
12,000,000
Management fee receivable
1,000,000
Other receivables - Sale of machine
19,200,000
23.1
No management fee was charged during the year ended 30 June 2010. Except for
this, all transactions have been carried out on arms length basis, as approved by the
board of directors of the company.
Page 2 of 6
Suggested Answers
IN THE BOOKS OF COPPER LIMITED
Related parties comprise of Metal Limited (parent company) and its subsidiaries.
Transaction with related parties can be summarized as follows:
2011
2010
Rupees
Parent Company
Purchase of machine
19,200,000
Management fees (Note 23.1)
6,000,000
Management fee payable
500,000
Other payables - Sale of machine
19,200,000
23.1
No management fee was charged for the year ended 30 June 2010. Except for this,
all transactions have been carried out on arms length basis, as approved by the
IN THE BOOKS OF ZINC LIMITED

Transaction with related parties can be summarized as follows:
2011
2010
Rupees
Parent Company
Contract for factory extension project (Note 23.1)
15,000,000
Management fees (Note 23.2)
6,000,000
Management fee payable
500,000
23.1
23.2
A.4
The contract has been awarded to Iron Builders and Developers in which one of the
directors of the parent company is a partner.
No management fee was charged for the year ended 30 June 2010. Except for this,
all transactions have been carried out on arms length basis, as approved by the
IN THE BOOKS OF STEEL LIMITED

However, there was no related party transaction during the year.
(a) Entries to record the lease in books of Quartz Auto Limited
Description
Lease receivable (2,715,224 5) + 700,000
Cost of goods sold [(900,000 7) - (100,000 7 0.49718)]
Inventory (900,000 x 7)
Sales (Note 1)
Unearned finance income
Debit
14,276,120
5,951,974
Bank
Lease receivable
Unearned finance income

Finance income
2,715,224
1,417,500
Note 1 Lower of fair value i.e. 9,450,000 (Rs. 1,350,000 x 7) and

PV of minimum lease payment (2,715,227 x 3.35219 = 9,101,974)
Page 3 of 6
Credit
6,300,000
9,101,974
4,826,120
2,715,224
1,417,500
Suggested Answers
(b) Disclosure in the financial statements

1- Net investment in lease
2011
(Rupees)
10,860,896
700,000
11,560,896
(3,408,620)
8,152,276
Lease receivable (2,715,227 x 4)

Unguaranteed residual amount
Gross investment in lease
Less: Unearned finance income (4,826,120 1,417,500)
1.1 Details of investment in finance lease

Not later than one year
Later than one year but not later than five years
Later than five years
(W-1)
Year ended
31/06/2011
31/06/2012
31/06/2013
31/06/2014
31/06/2015
A.5
Installment
at year end
2,715,224
2,715,224
2,715,224
2,715,224
2,715,224
(a) Journal Entries

Date
30-Jun-07
30-Jun-08
30-Jun-08
30-Jun-09
30-Jun-10
Tax expense
Deferred tax
Interest
1,417,500
1,222,841
998,984
741,548
445,247
Gross
investment in
lease
2,715,224
8,845,672
11,560,896
Net
investment in
lease
1,492,383
6,659,893
8,152,276
Net
Investment
in Lease
Gross
Investment in
Lease
Principal
1,297,724
1,492,383
1,716,240
1,973,676
2,269,977
Description
Deferred tax adjustment (W-2)
Impairment loss
Acc. depreciation & impairment losses
Impairment loss on revaluation (W-2)
Deferred tax
Tax expense
Tax expense
Deferred tax
Acc. depreciation & impairment losses

Impairment loss reversed (W-1)
Reversal of impairment loss up to historical carrying

amount
9,450,000
8,152,276
6,659,893
4,943,653
2,969,977
700,000
Debit
3,600,000
8,000,000
1,040,000
1,408,000
6,000,000
Page 4 of 6
14,276,120
11,560,896
8,845,672
6,130,448
3,415,224
700,000
Credit
3,600,000
8,000,000
1,040,000
1,408,000
6,000,000
Suggested Answers
30-Jun-10
30-Jun-10
30-Jun-11
30-Jun-11
Tax expense
Deferred tax
2,886,400
Plant
Deferred tax
Revaluation surplus
2,886,400
6,000,000
Revaluation of plant at fair value (6m x 70%) (6m x

30%)
Revaluation surplus
Retained earnings
Realized portion of revaluation surplus (Rs.3.6m 6)
Deferred tax
Tax expense
2,400,000
3,600,000
600,000
600,000
1,050,880
1,050,880
W-1: Revaluation calculations

Actual carrying amount (90m (9m 2) (8m 2) - 8m)
Fair value
Increase in value
Less: Reversal of impairment loss [48m - {90m - (90m 4 10)}]
Revaluation surplus
W-2: Deferred tax calculations
Date
1-Jul-06
30-Jun-07
30-Jun-07
30-Jun-08
30-Jun-08
30-Jun-08
Cost
Description
Depreciation
Depreciation
Impairment loss
30-Jun-09
30-Jun-09
Depreciation
30-Jun-10
30-Jun-10
Revaluation surplus
30-Jun-10
30-Jun-10
Depreciation
Reversal of imp. loss
30-Jun-11
30-Jun-11
Depreciation
(b) Taxation
Actual
carrying
amount
90,000,000
90,000,000
(9,000,000) (18,000,000)
81,000,000
72,000,000
(9,000,000) (14,400,000)
(8,000,000)
64,000,000
57,600,000
(8,000,000) (11,520,000)
56,000,000
46,080,000
(8,000,000)
6,000,000
54,000,000
6,000,000
60,000,000
(10,000,000)
50,000,000
Current (W-3)
Deferred
Tax rate reconciliation
Tax base
(9,216,000)
36,864,000
36,864,000
(7,372,800)
29,491,200
Rupees
48,000,000
60,000,000
12,000,000
(6,000,000)
6,000,000
Temporary
difference
Deferred
tax @ 40%
Deferred
tax charge/
(reversal)
9,000,000
3,600,000
3,600,000
6,400,000
2,560,000
(1,040,000)
9,920,000
3,968,000
1,408,000
17,136,000
6,000,000
20,508,800
6,854,400
2,400,000
9,254,400
8,203,520
2,886,400
(1,050,880)
2011
33,050,880
(1,050,880)
32,000,000
2010
21,113,600
2,886,400
24,000,000
80,000,000
60,000,000
32,000,000
Page 5 of 6
24,000,000
Suggested Answers
W-3: Current tax computation

Add: Accounting depreciation
Less: Tax depreciation
Less: Impairment loss reversed
80,000,000
10,000,000
(7,372,800)
82,627,200
Tax at 40%
A.6
(a) Days of inventories turnover

Days of debtors turnover
Days of creditors turnover
Cash operating cycle
60,000,000
8,000,000
(9,216,000)
(6,000,000)
52,784,000
33,050,880
30/150*360
50/300*360
21/140*360
21,113,600
72
60
(54)
78 days
The above calculation signifies that the period of time that elapses between the
payment for purchase of inventories and the collection of cash from customers in
respect of their sale is 78 days. SDL has to finance the investment in inventories for
that time period.
(b) LIMITATIONS OF RATIO ANALYSIS

(i) Limited Comparability:
Different firms apply different accounting policies. Therefore the ratio of one
firm cannot always be compared with the ratio of other firm. Some firms may
value the closing stock on weighted average basis while some other firms may
value on FIFO basis. Similarly there may be difference in providing depreciation
of fixed assets or certain of provision for doubtful debts etc.
(ii)
False Results:
Accounting ratios are based on data drawn from accounting records. In case
that data is incorrect, then the ratios will also be incorrect.
(iii) Effect of Price Level Changes:

Price level changes often make the comparison of figures difficult over a period
of time. Changes in price affect the cost of production, sales and also the value
of assets. Therefore, it is necessary to make proper adjustment for price-level
changes, for a good comparison.
(iv) Qualitative factors are ignored:
Ratio analysis is a technique of quantitative analysis and thus, ignores
qualitative factors, which may be important in decision making.
(THE END)
Page 6 of 6
Suggested Answers
Intermediate Examination - Spring 2012
(a)
Realization Account
Rs. in million
Vehicle (22.3-11.5)
Equipment (14-5)
Land
Building (14-5.5)
Trade debtors
Cash at bank
Stock-in-trade
Partners A/c - Trade creditors
Partners A/c - Realization profit
10.80
9.00
50.00
8.50
38.00
12.00
48.00
23.00
16.60
215.90
(b)
Trade creditors
Partners' A/c Vehicle (1.4+1.2+0.9)
Transfer to DFC (W-1)
53.00
3.50
159.40
215.90
1.20
12.00
35.82
9.45
0.90
10.00
23.88
9.75
91.90
58.47
44.53
Balance b/d
Interest for the year (10%)
*1
Profit for the year
*2
Realization profit
*3
Trade creditors
36.00
3.60
33.65
8.30
10.35
91.90
24.00
2.40
20.19
4.98
6.90
58.47
Almond
Almond
1.40
18.00
59.70
12.80
Cashew
Cashew
Vehicle
Debentures (W-1)
Ordinary shares (W-1)
Cash settlement (Bal.)
Pistachio
Partners Capital Account

Pistachio
A.1
20.00
2.00
13.46
3.32
5.75
44.53
*1
67.3 (W-2) 5/10, 3/10, 2/10

*2
16.6 5/10, 3/10, 2/10
*3
23 36/80, 24/80, 20/80
(c)
DF Company (Private) Limited

Statement of Financial Position as at 31 December 2011
EQUITY AND LIABILITIES
Rs. in
million
Shareholder equity
Ordinary share capital (119.4 x 10 12)
Share premium (119.4 x 2 12)
99.50
19.90
Long term loan

20% Debentures
40.00
Current liabilities
Trade creditors
30.00
189.40
ASSETS
Fixed assets
Land and building
Equipment
Vehicles
Total purchase consideration

Given to partners in the form of debentures
Pistachio
Cashew
Almond
78.50
9.00
7.70
Current assets
Stock in trade
Trade debt
Cash at bank
WORKINGS
W-1: Purchase consideration
Equipment
Land
Building
Vehicle (22.3-11.5-1.2-1.1-0.8)
Trade debtors (38 90%)
Cash at bank
Stock-in-trade
Trade creditors
36 x 10% 20%
24 x 10% 20%
20 x 10% 20%
Balance to be distributed in the form of shares
Rs. in
million
48.00
34.20
12.00
189.40
Rs. in million
9.00
70.00
8.50
7.70
34.20
12.00
48.00
(30.00)
159.40
Rs. in million
159.40
18.00
12.00
10.00
40.00
119.40
Page 1 of 7
Suggested Answers
Distribution of shares among partners
Pistachio 119.40 x 5 10
Cashew
119.40 x 3 10
Almond
119.40 x 2 10
59.70
35.82
23.88
119.40
W-2: Profit for the year

Sales
Less: Cost of sales (42.7+325-48)
Less: Admin expenses
Less: Interest on capital (3.6+2.4+2)
A.2
Rs. in
million
515.00
(319.70)
(120.00)
(8.00)
67.30
Figs Pakistan Limited

Statement of Comprehensive Income
For the year ended 31 December 2011
Sales
Cost of sales
Gross profit
Distribution costs
Other operating expenses
Other operating income
Profit from operations
Finance costs
Profit before tax
Taxation
Profit after tax
Note
1
2
3
4
5
6
7
8
Earnings per share (8,305 274)
2011
Rs. in million
44,758
(26,203)
18,555
(6,431)
(752)
(399)
30
11,003
(166)
10,837
(2,532)
8,305
8,305
30.32
Figs Pakistan Limited

Notes to the financial statements
1
Sales
Manufactured goods
Gross sales
Sales tax
Imported goods
Gross sales
Sales tax
Sales discounts
Note
Rs. in million
56,528
(10,201)
46,327
1,078
(53)
1,025
(2,594)
44,758
Page 2 of 7
Suggested Answers
2
Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125)
Stores and spares consumed
Salaries, wages and benefits (2,367 55%)
Utilities (734 85%)
Depreciation and amortizations (1.287 70%)
Stationery and office expenses (230 25%)
Repairs and maintenance (315 85%)
2.1
Opening work in process

Closing work in process
Opening finished goods (manufactured)
Closing finished goods (manufactured)
Finished goods (imported)
Opening stock
Purchases
Rs. in million
22,229
180
1,302
624
901
58
268
25,562
73
(125)
25,510
1,210
(1,153)
25,567
44
658
702
(66)
636
26,203
Closing stock
2.1
Salaries, wages and benefits include Rs. 30 million (54 55%) and Rs. 24 million (44 55%) in
respect of defined contribution plan and defined benefit plan respectively.
Distribution costs
Advertisement and sales promotion
Outward freight and handling
Utilities (734 5%)
Depreciation and amortization (1,287 20%)
3.1
4
3.2
4,040
1,279
710
37
257
92
16
6,431
Salaries, wages and benefits include Rs. 16 million (54 30%) and Rs. 13 million (4430%) in
Rs. in million
4.1
355
Utilities (734 10%)
73
Depreciation and amortization (1,287 10%)
129
80
31
Legal and professional charges
71
Auditor's remuneration
4.2
13
752
4.1
Salaries, wages and benefits include Rs. 8 million (54 15%) and Rs. 7 million (4415%) in
4.2
Auditor's remuneration
Audit fees
Taxation services
Out of pocket expenses
Rs. in million
8
4
1
13
Page 3 of 7
Suggested Answers
5
5.1
Other operating expenses

Donation
Worker's Profit Participation Fund
Worker Welfare Fund
Loss on disposal of property, plant and equipment
5.1
34
257
98
10
399
Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the
companys directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in which a director or
his spouse had any interest at any time during the year.
A.3
(i)
Other operating income

Income from financial assets
Dividend income
Return on savings account
Income from non-financial assets
Scrap sales
Finance costs
Finance charges on short term borrowings
Exchange loss
Finance charges on lease
Taxation
Current - for the year
Deferred (3,120 35%)
Rs. in million
12
2
16
30
133
22
11
166
1,440
1,092
2,532
This is an adjusting post reporting event as it provides evidence of conditions that existed at the
end of the reporting period. The reasons for the competitors price reduction will not have arisen
overnight, but will normally have occurred over a period of time, may be due to superior
investment in technology.
An inventory write down of Rs. 2.5 million should be recognized and the amount included as
inventory on the Statement of Financial Position reduced to Rs. 12.5 million.
(ii) The provision should be recognized because the obligating event is the communication of event
to the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognized to the extent of redundancy costs. IAS
prohibits the recognition of future operating losses, staff training and profits on sale of assets.
(iii) This is a non-adjusting event because the burglary and theft of consumable stores occurred after
reporting date. However, if the event is material, it should be disclosed in the financial
statements unless the loss is recoverable from the insurance company.
(iv) The drop in value of investment in shares is a non-adjusting event. Since the legislation was
announced after the reporting date, the event is not a past event. However, if the amount is
material, it should be disclosed in the financial statements.
Page 4 of 7
Suggested Answers
(v)
This is an adjusting event as it provides evidence of conditions that existed at the end of the
reporting period. The insolvency of a debtor and the inability to pay usually builds up over a
period of time and it can therefore be assumed that it was facing financial difficulty at year-end.
A bad debts expense of Rs. 1.5 million should be recognized in SOCI.
(vi) It is a non-adjusting event because the declaration was announced after the year-end and there
was no obligation at year end. Details of the bonus shares declaration must, however, be
disclosed.
A.4
(a)
Following are the criteria that should be used while recognizing intangible assets from research
and development work.
(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if , an entity can
demonstrate all of the following:
the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset.
the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the intangible asset during
its development.
(b) (i)
Since the product met all the criteria for the development of the product, it should be
recognized as an intangible in the statement of financial position (SOFP) of the company.
However, RI should capitalize only the development work (i.e. Rs. 9 million) as intangible
asset. IAS-38 does not allow capitalization of cost relating to the research work, training of
staff and cost of trial run.
Since the product has a useful life of 7 years, the amortization expense amounting to Rs.
0.32 million (Rs. 9 million 3/12 7 years) should be recorded in the statement of
comprehensive income (SOCI).
(ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP
because:
it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful life
will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years. The amortization
to be recorded in SOCI is Rs. 2.83 million (Rs. 17 million 10/12 5).
(iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition
price is a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12
million (Rs. 2 million 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs. 10 million in the
SOFP. Since there is an indefinite useful life of the intangible assets, it should not be
amortized. Instead, RI should test the intangible asset for impairment by comparing its
recoverable amount with its carrying amount.
Page 5 of 7
Suggested Answers
A.5
Taxation
Current (W-1)
Deferred (W-2)
Relationship between tax expense and accounting profit
Less: Tax effect of exempt income
W-1: Computation of Current Tax
Profit before tax as per books
Add: Allowable income / Disallowed expenses
Tax profit on sale of fixed assets
Bad debt expense
Less: Disallowed income / Allowable expenses
Tax depreciation
Accounting profit on sale of fixed assets
Capital gain
Bad debts written off
2011
2010
Rs. in million
20.48
10.76
(1.58)
(21.35)
18.90
(10.59)
2011
60.00
21.00
(2.10)
18.90
60.00
45.00
10.00
1.00
5.00
9.00
(8.00)
(0.50)
(6.00)
(3.00)
7.00
(7.00)
(4.00)
58.50
50.00
Tax losses to be brought forward

Taxable income
58.50
(19.25)
30.75
Tax liability (@ 35%)
20.48
10.76
2011
2010
Rs. in million
W-2: Computation of Deferred Tax
Fixed assets (2010: 95-90, 2011: 82.5-80) (W-2.1)
Provision for bad debts (2010: 1235%, 2011: 1435%) [W-2.2]
Closing balance of deferred tax
Less: Opening balance
Charge for the year
W-2.1 Movement of Fixed Assets
Opening balance
Disposal during the year
Depreciation for the year - 2011
Closing balance
W-2.2 Movement of provision for bad debts
Opening balance
Provision for the year
Write off during the year
Closing balance
0.87
(4.90)
(4.03)
(2.45)
(1.58)
1.75
(4.20)
(2.45)
(18.90)
(21.35)
Accounting
95.00
(2.50)
(10.00)
82.50
Tax
2011
12.00
5.00
(3.00)
14.00
2010
90.00
(2.00)
(8.00)
80.00
9.00
7.00
(4.00)
12.00
Page 6 of 7
Suggested Answers
(THE END)
Page 7 of 7
Suggested Answers
A.1
Marvel Engineering Limited

Cash Flow Statement
Workings
Cash flows from operating activities
Adjustment for non cash charges and other items:
Depreciation
Impairment of plant and machinery
Financial charges
Provision for bad debts
Gain on sale of fixed assets
Gain on sale of investments
Dividend income
Provision for Gratuity payable (55 - 50 + 6)
Working capital changes
Decrease / (increase) in current assets:
Stock-in-trade (97 - 68)
Trade debts
Other current assets (100 - 120)
Increase / (decrease) in current liabilities:
Trade and other payables ([73 - 7] - [56 - 3])
Cash generated from operations
Financial charges paid (3 + 75 - 7)
Income tax paid (5 + 21 + 21 - 12 - 15)
Gratuity paid
Net cash generated from operating activities
2012
Rs. in million
88.00
50.00
11.00
75.00
10.00
(2.00)
(3.00)
(30.00)
11.00
(29.00)
(86.00)
20.00
13.00
128.00
(71.00)
(20.00)
(6.00)
31.00
Cash flows from investing activities

Capital expenditure
Proceeds from sale of property, plant and equipment (5+2)
Proceeds from sale of investments (10+3)
Purchase of long term investments (130-100+10)
Dividend received
Net cash used in investing activities
Cash flows from financing activities
Insurance of ordinary shares
Proceeds from long term loan (330 - 110)
Payment of dividend (2 + (440 5%) - 4)
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalent at the beginning of the year
Cash and cash equivalent at the end of the year
(289.00)
7.00
13.00
(40.00)
30.00
(279.00)
40.00
220.00
(20.00)
240.00
(8.00)
39.00
31.00
WORKINGS (All amount in million rupees)

W-1:
Closing balance
Add: Bad debts written off
Less : Opening balance
(133 0.95) - 133

(57 0.95) - 57
Provision
for bad debts
7.00
6.00
(3.00)
10.00
(133 0.95)
(57 0.95)
Page 1 of 7
Trade
debtors
140.00
6.00
(60.00)
86.00
Suggested Answers
W-2: Capital expenditure
Closing balance
Add: Depreciation for the year
Add: Impairment against plant
Add: Disposal during the year
Less: Opening balance
Rs. in million
633.00
50.00
11.00
5.00
(410.00)
289.00
W-3: Issuance of ordinary shares

Closing balance of share capital
Closing balance of share premium
Less: Bonus shares issued (440 5%)
Less: Opening balance of share capital
A.2
494.00
8.00
(22.00)
(440.00)
40.00
Miracle Textile Limited

Statement of financial position (Extracts)
As at 30 June 2012
Note
2012
2011
--------Rupees--------
ASSETS
Non-current assets
16,000,000
18,000,000
LIABILITIES
Non-current liabilities
Obligation under finance lease
6,505,219
10,633,074
Current liabilities
Current portion of obligation under finance lease
4,127,856
3,566,925
Miracle Textile Limited

Notes to the financial statements (Extracts)
As at 30 June 2012
4- Property, plant and equipment
Leased assets
Cost
Opening balance
Addition during the year
Opening balance
Depreciation for the year
Balance as at 30 June
2012
2011
--------Rupees-------20,000,000
20,000,000
20,000,000
20,000,000
(2,000,000)
(2,000,000)
(4,000,000)
16,000,000
(2,000,000)
(2,000,000)
18,000,000
Page 2 of 7
Suggested Answers
9- Obligations under finance lease (W-1)
30-Jun-12
30-Jun-11
Financial
Financial
Minimum
Minimum
charges for
Principal
charges for
Principal
lease
lease
future
outstanding
future
outstanding
payment
payment
periods
periods
-------------------------------------------------R u p e e s ---------------------------------------------Not later than
one year
Later than one
year but not
later than five
years
Later than five
years
9.1
5,800,000
1,672,144
4,127,856
5,800,000
2,233,075
3,566,925
7,800,000
1,294,781
6,505,219
13,600,000
2,966,926
10,633,074
13,600,000
2,966,926
10,633,074
19,400,000
5,200,000
14,200,000
The Company has entered into a finance lease agreement with a bank in respect of a
machine. The finance lease liability bears interest at the rate of 15.725879% per
annum. The company has the option to purchase the machine by paying an amount
of Rs. 2 million at the end of the lease term. The lease rentals are payable in annual
installments ending in June 2013. There are no financial restriction in the lease
agreement.
W-1: Lease Schedule

Payment
date
01-Jul-10
01-Jul-11
01-Jul-12
01-Jul-13
30-Jun-14
A.3
(a)
Opening
principal
20,000,000
14,200,000
10,633,075
6,505,219
1,728,222
Installment
5,800,000
5,800,000
5,800,000
5,800,000
2,000,000
Principal
Interest @
repayment 15.725879%
5,800,000
3,566,925
2,233,075
4,127,856
1,672,144
4,776,997
1,023,003
1,728,222
271,778
20,000,000
5,200,000
Closing
principal
14,200,000
10,633,075
6,505,219
1,728,222
-
This transaction involves two type of revenue:

Revenue from sale of goods
Interest income
Revenue from sale of goods will be recognized, as all the required criteria are met:
(i) The significant risks and rewards of ownership are transferred to STML on the
date of delivery, i.e. 5 July 2012.
(ii) BLs managerial involvement and control associated with the ownership
ceased on 5 July 2011 when STML accepted the delivery.
(iii) The revenue from the sale can be reliably measured as it is the fair value being
the net selling price that was agreed to at the time of transaction i.e. Rs. 4.0
million (net of trade discount).
(iv) STML is a regular customer of BL and no such evidence has been given to
suggest that the customer may be a bad debt. Therefore we may assume the
inflow of future economic benefits associated with the transactions will flow to
BL.
(v) The cost incurred in respect of this transaction can be reliably measured, as Rs.
3.6 million.
Conclusion:
The revenue from the sale of the machine of Rs. 4 million should be recognized on
the date of delivery, i.e. 5 July 2011.
Page 3 of 7
Suggested Answers
Interest income should be recognized when the following criteria are met:
Since there is no indication of bad debts, therefore it may be assumed that the
economic benefits will flow to BL.
The amount of revenue can be measured reliably that will be done by using
the effective interest rate method over the period for which the finance is
offered. Effective interest rate can be worked on the basis of information
given in the question.
Conclusion:
The interest should be recognized over the three year period of the financing.
(b)
Since the newspapers are sold on consignment therefore the risks of ownership
are transferred when the unsold newspapers are returned.
SLs managerial involvement continues until all unsold newspapers are returned
to the SL.
The amount of revenue can only be reliably measured once SL knows the
number of newspaper sold.
A reliable estimate of the cost of the newspapers is possible because the returned
newspapers would have very insignificant value.
Conclusion:
Revenue should only be recognized when SL is certain of the number of papers sold
on their behalf. Prior to this stage the probability of an inflow of benefits is uncertain
based on the unpredictability of newspaper sales.
(c)
(i)
Revenue may only be recognized when all the following criteria are met:
The revenue can be measured reliably which is stipulated in the agreement i.e.
Rs. 22 million.
The costs can be reliably measured which is worked out at year end as follows:
Incurred to date Rs. 10 million
Future costs
Rs. 7 million
It is probable that the economic benefits will flow to Fabulous Enterprise.

Since the customer is a well established company, it is unlikely that the
customer will default on payment.
The stage of completion can be reliably measured. A variety of methods of
calculating the stage of completion are allowed, of which either the percentage
of completion method or the number of services method would be suitable.
Conclusion:
A portion of the revenue should therefore be recognized at 30 June 2012 since all
recognition criteria are met.
(ii)
Fabulous Enterprises can recognize the revenue on the basis of cost method as the
costs are reliably measureable. It can use number of services method if each building
is similar, since we know that 6 of the 10 buildings have been completed.
Page 4 of 7
Suggested Answers
A.4
Wonder Limited
Extracts of Statement of financial position
2011
(Restated)
Rs. in million
178.50
111.50
158.65
95.05
41.85
21.45
2012

Retained earnings
Deferred tax liability
PPE: Year 2012: 189 - [20 - (20 10% 1.75)] + [56/4 56/7]
DTL: Year 2012: [(21.45 + (45 - 27) + {(6+2) 30%}]
PPE: Year 2011: 130 - 18.5(Note X)

DTL: Year 2011: 27 - 5.55 (Note X)
Wonder Limited
Extracts of Income Statement
2011
(Restated)
Rs. in million
98.00
101.50
(34.40)
(36.45)
63.60
65.05
2012

Taxation
PBT : Year 2012 : 90 + (20 10% ) + [(56/4) - (56/7)]
Tax : Year 2012: 32 + [(6+2) 30%]
PBT : Year 2011 : 120 - 18.5 (Note X)

Tax : Year 2011 : 42 - 5.55 (Note X)
Wonder Limited
Extracts of statement of changes in equity
Balance as on 1 July 2010 (108-78)
Profit for the year ended 30 June 2011 (78 - 12.95 (Note X))- restated
Balance as at 30 June 2011 - restated

Profit for the year ended 30 June 2012
Balance as at 30-June 2012
Retained earnings
Rs. in million
30.00
65.05
95.05
63.60
158.65
Wonder Limited
Notes to the financial statements
X
Correction of error
During the year ended 30 June 2010, the repair works was erroneously debited to
machinery account. The effect of this error is as follows:
Page 5 of 7
Suggested Answers
2011
Rs. in million
Effect on the income statement
(Increase) / decrease in expenses or losses
Repairs and maintenance
Depreciation (20 10% 9 12)
Tax expenses (30% (20-1.5))
Decrease in profit for the year
(20.00)
1.50
5.55
(12.95)
Effect on the statement of financial position

Increase / (decrease) in assets
Property, plant and equipment (20 1.5)
(18.50)
(Increase) / decrease in liabilities

Deferred tax liability (Rs. 18.5 30%)
5.55
(Increase) / decrease in equity

Retained earnings (18.50 - 5.55)
A.5
(a)
(12.95)
Property, plant and equipment (extract)

2012
2011
Rs. in million
Plant Revalued
Opening balance
Gross carrying amount
Accumulated depreciation and impairment
Net carrying amount
Additions
Depreciation
Revaluation surplus increase / (decrease) (W-1)
Revaluation income / (expense) (W-1)
Closing net book value
Closing net book value comprises of:
Gross carrying amount
Accumulated depreciation and impairment
Depreciation rate (% per annum)
108
(36)
72
180
(45)
135
(44)
8
8
(28)
44
(36)
(15)
(12)
(63)
72
88
(44)
44
108
(36)
72
20%
The last revaluation was performed on 1 July 2011 by M/s Supreme Valuation
Services, an independent firm of valuers. Revaluations are performed annually.
2012
2011
Rs. in million
40.00
80.00
Carrying amount had the cost model been used instead

2012: 200 - (200 5 4), 2011: 200 - (200 5 3)
Page 6 of 7
Suggested Answers
(b) Deferred tax asset / (liability)

The deferred taxation comprises of:
Property, plant and equipment (W-1)
2012
2011
Rs. in million
(1.20)
2.40
Reconciliation
Opening balance (W-1)
Recognized in profit and loss account (W-1)
Recognized in other comprehensive income (W-1)
Closing balance (W-1)
2.40
(1.20)
(2.40)
(1.20)
(4.50)
2.40
4.50
2.40
W-1: Deferred tax calculations

Description
Date
Balance
Dep (200 5)
Balance
Rev Surplus
Dep [(160+20) 4)
Balance
Rev Surplus
Impairment (120-108)
Dep (108 3)
Balance
Imp. Rev (12 2 3)
Rev Surplus
Dep (88 2)
Balance
1-Jul-08
30-Jun-09
30-Jun-09
1-Jul-09
30-Jun-10
30-Jun-10
1-Jul-10
1-Jul-10
30-Jun-11
30-Jun-11
1-Jul-11
1-Jul-11
30-Jun-12
30-Jun-12
Carrying
Tax
Deferred
Rev
Temp diff
amount
base
taxation surplus
---------------------Rupees in million--------------------200.00
200.00
(40.00)
(40.00)
160.00
160.00
20.00
(20.00)
(6.00)
(14.00)
(45.00)
(40.00)
5.00
1.50
3.50
135.00
120.00
(15.00)
(4.50)
(10.50)
(15.00)
15.00
4.50
10.50
(12.00)
12.00
3.60
(36.00)
(40.00)
(4.00)
(1.20)
72.00
80.00
8.00
2.40
8.00
(8.00)
(2.40)
8.00
(8.00)
(2.40)
(5.60)
(44.00)
(40.00)
4.00
1.20
2.80
44.00
40.00
(4.00)
(1.20)
(2.80)
(THE END)
Page 7 of 7
Suggested Answers
Ans.1
Paramount Limited
Extract of the Statement of financial position
As at 31 December 2012
Note
Long term account receivables
Current assets
Account receivables
Current maturity of long term account receivables
12
31-Dec-12
Rupees
10,000,000
92,298,471
20,000,000
8 - LONG TERM ACCOUNT RECEIVABLES
31-Dec-12
Rupees
Secured and considered good

Related party
Dee
Less: Current maturity
30,000,000
(20,000,000)
10,000,000
8.1
8.1: The amount is receivable in three equal annual instalments. The first instalment was due on 30 November
2012 but had not been paid. The amount is secured by bank guarantee.
12 - ACCOUNT RECEIVABLES
Considered Good
Related party
Unsecured
Bee
Tee
10,615,017
5,686,620
16,301,637
Non-related parties
Secured
Unsecured
46,767,608
21,230,048
67,997,656
84,299,293
Considered doubtful
Non-related parties
Unsecured
15,922,535
100,221,828
(7,923,357)
92,298,471
Less: Provision for doubtful debts (Note 12.2)
12.2 Provision for bad debts

Balance as on 01 January 2012
Provision made during the year (Balancing)
Balance as on 31 December (W-1)
W-1:
3,750,211
4,173,146
7,923,357
Computation of provision for bad debts

Age category
under 90 days
91-180 days
181-365 days
over 365 days
Amount past due

Rs.
1,516,431
6,823,944
3,032,864
4,549,296
Provision rate
per policy
10%
25%
50%
100%
as
Provision amount
Rs.
151,643
1,705,986
1,516,432
4,549,296
7,923,357
Page 1 of 6
Suggested Answers
Ans.2
(a)
Partners' Capital Account

Motor vehicle
Loss on realization (W-1)
Equity shares from SCL
Cash (Balancing)
Great
Superb Brilliant
-----------Rs. in 000----------1,500
1,568
784
262
30,000
15,000
5,000
1,432
9,716
4,042
33,000
27,000
9,304
(b)
Opening balance
Great
Superb
Brilliant
-----------Rs. in 000----------33,000
27,000
9,304
33,000
9,304
Cash Account
Opening balance
Account receivables
Cash from SCL
Rs. in million
90
27,800
10,000
Account payables
Great
Super
Brilliant
37,890
27,000
Rs. in million
22,700
1,432
9,716
4,042
37,890
W-1: Realisation Account

Realisation Account
Rs. in million
Plant & machinery
Motor vehicles
Inventory
Account receivables
(36,000 - 27,800)
48,000
12,000
16,800
8,200
Account payables
(23,186 - 22,700)
Motor vehicles
Bank overdraft
Rs. in million
Long term loan

SCL - Purchase price
Loss on realization
(balancing)
85,000
Ans.3
(i)
486
1,500
14,400
6,000
60,000
2,614
85,000
The given situation may give rise to two different scenarios i.e.
I
II
When the bonus is communicated to the sales team before year-end.

When the bonus is not communicated to the sales team before year-end.
In case of (I) it would be an adjusting event and TIL should make a provision in its
financial statements for the bonus to sales person.
In case of (II) it would be a non-adjusting event because this bonus payment can be avoided
by the future actions of the TILs management and does not meet the definition of
obligating event. Therefore, TIL is neither legally nor constructively obligated to pay the
bonus to sales team.
(ii)
It is a non-adjusting event because the expected future losses on account of a change in

government policy does not give rise to an obligation at year end.
However, an expectation of future operating losses is an indication that certain assets of the
operation may be impaired and TIL should test these assets for impairment.
(iii)
Although the announcement was made after year-end, the condition (non-collection for a
long period) that prompted the management to allow cash discount existed at year-end.
Therefore, it is an adjusting event.
TIL should provide the amount of discount availed by the debtors.
Page 2 of 6
Suggested Answers
(iv)
Although the courts decision was announced after year end, it pertains to past years.
Therefore, it is an adjusting event.
TIL should reverse the amount of provision provided the TILs lawyer assures that decision
given by the ITAT will have a no chance; or a remote chance of change if the Income Tax
Department appeals against the decision of the Tribunal.
(v)
It is a non-adjusting event because the event that caused the debtor to go insolvent was the
fire, which happened after year-end.
Disclosure of this should be made as the amount is material.
(vi)
It is a non-adjusting event because the announcement was made after the year end and
there was no obligation at year end.
However, details of declaration of bonus shares must be disclosed.
Ans.4
Intelligent Technologies Limited

Computation of tax expense
2012
Rs. in million
20 -
Taxation
Current (W-1)
Deferred (W-2)
4.34
4.34
20.1 - Reconciliation of tax charge for the year

2012
Rs. in million
11.00
Applicable tax rate
35%
Tax on accounting profit at 35%

Less: Effect of exempt income
Add: Effect of prior year taxation
Add: Permanent difference (0.4 million 35%)
3.85
(0.70)
1.05
0.14
4.34
W-1 : Computation of current tax expense

Profit before tax
Add: Allowable income / disallowed expenses
Expenses expected to be disallowed
Less: Exempt income / allowable expenses
Tax depreciation
Capital gain
Add: Previous year expense
Less: Assessed brought forward losses
Taxable loss to be carried forward
2012
Rs. in million
11.00
30.00
0.90
30.90
(25.60)
(2.00)
(27.60)
14.30
3.00
(21.00)
(3.70)
Page 3 of 6
Suggested Answers
W-2 : Computation of deferred tax expense

Difference of accounting and tax written down value
[(90-102.4) 35%]
Expenses expected to be allowed (0.5 35%)
Taxable loss (3.70 35%)
Deferred tax asset as at 31 December 2012
Opening deferred tax asset
Deferred tax charge for the year
Ans.5
Rs. in million
(4.34)
(0.18)
(1.29)
(5.81)
10.15
4.34
P-1
P-2
Fair Value as given
Rs. in million
210.00
150.00
Less: Incremental Selling Cost

Fair value less incremental selling cost
(7.00)
203.00
(4.00)
146.00
Value in use (W-1)
238.19
125.80
Recoverable Value (Being higher of value in use and fair

value less incremental selling cost)
238.19
146.00
220.00
(160.00)
(14.00)
Written down value

Impairment loss
W-1: Value in use
Expected cash inflows each year

Expected outflows per year
Sale proceeds
Disposal costs
Net cash flows
Present value factor
Present value of net cash flows
P-1
P-2
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
----------------------Rs. in million------------------------105
105
105
55
55
55
(11)
(11)
(11)
(5)
(5)
(5)
8
3
(2)
(1)
94
94
100
50
50
52
0.909
0.826
0.751
0.909
0.826
0.751
85.45
77.64
75.1
45.45
41.3
39.05
Ans.6
Interest on redeemable preference shares [150 12% (11 1)12]
Interest on TFCs [300 14% (8-1) 12]
Right issue
Less: Interest income from surplus funds (W-1)
Amount to be capitalized
Surplus funds available
From
To
Months
01-01-2012
31-03-2012
3
01-04-2012
30-11-2012
8
01-07-2012
30-11-2012
5
Rs. in million
15.00
24.50
39.50
(3.53)
35.97
Surplus Amount
Interest income @ 9%
-------------------Rs. in million----------------50
1.13
40
2.40
50
3.53
Page 4 of 6
Suggested Answers
Ans.7
(a)
(i)
01 January 2012 (Initial recognition)

IAS-38 allows the recognition of an identifiable non-monetary assets without
physical substance as intangible assets, subject to fulfillment of the following
conditions:
It is probable that expected future economic benefits that are attributable to the
asset will flow to the entity.
The cost of the assets can be measured reliably.
Since rights acquired by TFL meet the above conditions, it should recognize the
rights as intangible asset which should initially be measured at cost.
(ii)
31 December 2012 (Subsequent to initial recognition)
(b)
IAS-38 permits an entity to adopt the cost or revaluation model as its

accounting policy.
The revaluation model can only be adopted if intangible assets are traded in an
active market. As the rights cannot be sold, the revaluation model cannot be
used.
The cost model requires intangible assets to be carried at cost less amortization
and impairment losses.
Amortization shall begin with effect from 01 July 2012 when utilization of the
rights start.
As required by IAS, residual value of intangible assets with finite useful life
shall be assumed to be zero.
IAS-38 includes of renewal period in the useful life if there is evidence to
support renewal by the entity without significant cost. Therefore, amortization
should be made systematically over the useful life of intangible assets i.e. 9.5
years.
An impairment review shall be undertaken at year-end because the failure to
achieve the desired sales is an indication that the new products may not
generate required economic benefits and therefore, the value of the intangible
may be impaired.
Description
Intangible asset
Bank
(Record the purchase of in-process
development)
Debit
2,000,000
2,000,000
research
and
Intangible asset
Profit and loss account / Research expense
Bank
(Record the subsequent expenditure on an in process
research and development)
Ans.8
Credit
2,500,000
700,000
3,200,000
Supreme Cement Company Limited

Page 5 of 6
Suggested Answers
Total
Unappropriated
profit
Rs. in million
Share premium
Issued, subscribed
and paid-up share
capital
Statement of changes in equity

-------------Rs. in million--------7,833
4,508
12,341
Balance as at 01 January 2011

Total comprehensive income for the year ended 31 December
2011-restated (W-1)
4,964
1,567
940
2,507
(1,567)
(940)
(2,507)
10,340
6,965
17,305
5,063
5,063
(1,034)
Transactions with owners recognized directly in equity

Bonus shares issued for the year ended 31 December 2010 (20%)
Interim bonus shares issued for the year 2011 (10%)
Balance as at 31 December 2011 - restated

Total comprehensive income for the year ended 31 December
2011
Transactions with owners recognized directly in equity
Bonus shares issued for the year ended 31 December 2011 (10%)
Final cash dividend for the year ended 31 December 2011
(15%)
Interim bonus shares issued for the year 2012 (5%)
80% right issue at a premium of Rs. 8 per share
Balance as at 31 December 2012
1,034
4,964
569
9,554
11,157
7,643
7,643
(1,551)
(569)
(3,154)
(1,551)
17,197
15,646
21,497
7,643
8,874
38,014
W-1: Revised profits for 2011 and 2012

Profit for the year
Effect of debiting inventory instead of machinery (net of tax)
Depreciation not charged (net of tax)
Revised profit
2012
2011
--------Rs. in million------5,090.00
4,944.00
(22.75)
22.75
(4.10)
(2.28)
5,063.15
4,964.48
(THE END)
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FINANCIAL ACCOUNTING

Yasir Industries Limited

Equity and Liabilities

Non Current Liabilities

Yasir Industries Limited

Total Equity and Liabilities

Sales revenue (Rs. 472.4m - Rs. 27m)

Balance as of July 1, 2008 (previously reported)

Total comprehensive income for the year

Dividend for the year ended June 30, 2008

6 Income tax expense

7 - Opening retained earnings

(Capitalize the lease assets and recoding of corresponding liability)

Obligations under the finance lease

30-Jun-09 Finance charges

Working: Rs. 1,600,000 4 = Rs. 400,000.

30-Jun-09 Tax expense

Deferred tax computation

Liabilities against assets subject to finance lease (W-3)

Present value of minimum lease payments

Minimum lease payments (W-3)

Present value of finance lease liabilities (W-3)

Accumulated depreciation Building

Surplus on revaluation of fixed assets

Working: Rs. 40,000 19 = Rs. 2,105

Accumulated depreciation Building

Surplus on revaluation of fixed assets

Building value decline: (Rs. 230,000 Rs. 12,105) Rs.

Accumulated depreciation Building

Surplus on revaluation of fixed assets

2nd payment to contractor (total)

Weighted average amount of

Weighted average rate of borrowing (Rs. 5,437,500 / 45,000,000)

Trade debtors collection period (days)

Finance lease debtors

(ii) Operating lease:

Reason for choice of leases:

Investment in finance lease

Present value of minimum lease payments

Less than one year

Future minimum lease payments (W-2)

-------- Rupees in '000 -------Transactions:

A.3 Apollo Industry Limited

Capital expenditure incurred:

(a) Partners capital accounts

(b) AIM Industries (Private) Limited

A.5 (a) Computation of current taxation

Tax liability for the year (52.446 35%)

Financial charges on finance lease liability(1.00 0.3) 13.701%

Amortization charged in accounts

Total tax expenses (current and deferred)

(b) Bilal Engineering Limited

Relationship between tax expense and accounting profit

(c) Journal entries

Income tax expenses

Impairment (excess of carrying value over recoverable amount)

A.2 Scientific Pharma Limited

Repair and maintenance expenses

W-1: Impairment loss

Net cash inflows

W-2: WDV of the plant on impairment date

Equity and Liabilities

Non Current Liabilities

Balance July 1, 2009