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Certificate in Accounting and Finance Stage Examinations

The Institute of 9 September 2015

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Q.1 Mr. Razi, a sole proprietor, runs a small business. On 30 June 2015, he realized that his cash
and bank balances have reduced considerably. He suspected that one of his employees is
involved in misappropriation. He has provided you the following information:

Opening balances on 1 July 2014 Rs. in ‘000’

Cash and bank 389
Debtors 1,560
Stock 856
Land 450
Equipment – WDV (purchased on 1 April 2014 at a cost of Rs. 600,000) 585
Creditors 1,348
Accrued expenses: Marketing 30
Utilities 25
Salaries 48
Other miscellaneous 15

Receipts and payments for the period from 1 July 2014 to 30 June 2015 Rs. in ‘000’
Receipts from cash sales 1,728
Receipts from debtors 4,475
Payments made to creditors 4,774
Payments for marketing expenses 205
Payments for utility expenses 240
Payments for salaries 600
Payments for other miscellaneous expenses 107
Equipment (purchased on 1 October 2014) 250
Withdrew by Razi for his personal expenditures 125

Other information:
(i) Razi makes 35% margin on gross sales price. However, during the year, he offered 5%
discount on credit sales and 10% discount on cash sales. 70% of his total sales were on
(ii) Actual bills for the year were as follows:

Rs. in ‘000’
Marketing expenses 200
Utility expenses 250
Other misc. expenses 100

(iii) Salary of the staff was Rs. 52,000 per month.

(iv) Balances of debtors and creditors as on 30 June 2015 were Rs. 1,091,000 and
Rs. 1,195,000 respectively.
(v) Closing stock at 30 June 2015 was Rs. 1,167,000. It included 150 units costing
Rs. 1,500 each which were damaged and Razi incurred Rs. 900 per unit in July 2015
to bring them into saleable condition.
(vi) Razi depreciates equipment on straight line basis at the rate of 10% per annum.

Prepare income statement for the year ended 30 June 2015 and balance sheet as at
30 June 2015. Also compute the amount of cash shortage, if any. (19)
Financial Accounting and Reporting-I Page 2 of 5

Q.2 Following is the summarised trial balance of Eagles Limited (EL) as at 30 June 2015:
Debit Rs. in ‘000’ Credit Rs. in ‘000’
Plant 2,500 Accumulated depreciation at 1 July 2014
Equipment 700 – Plant 1,000
Stock as on 1 July 2014 1,500 – Equipment 270
Trade debtors 1,300 Provision for obsolete stock at 1 July 2014 45
Cash and bank 1,759 Provision for bad debts at 1 July 2014 48
Purchases 6,987 Capital 2,500
Salaries & wages 843 Accumulated profits 960
Warehouse rent 740 Trade creditors 1,545
Repair and maintenance 500 Revenue 10,706
Utilities expenses 400 Other income 425
Insurance expenses 300 Accruals at 1 July 2014
Bad debt written off 30 – Repairs & maintenance 45
Obsolete inventory written off 40 – Utilities expenses 55
17,599 17,599

Additional Information:
(i) The sales include goods supplied on 27 June 2015 to a customer at a price of
Rs. 390,000 on a sale or return basis. The goods were returnable by 15 July 2015. EL
sells such goods at a mark-up of 30% on cost.
(ii) Other income includes proceed from sale of an equipment amounting to Rs. 100,000
received on 31 December 2014. The cost and written down value of the equipment at
1 July 2014 were Rs. 200,000 and Rs. 70,000 respectively.
(iii) Plant and equipment are depreciated at the rate of 10% and 15% respectively on
straight line basis.
(iv) Cost of stock on 30 June 2015 was Rs. 1,400,000, having net realizable value of
Rs. 1,450,000.
(v) The management estimates that:
 5% of trade debts would not be recovered.
 3% of the stock is obsolete.
(vi) Current warehouse rent is Rs. 600,000 per annum which was paid in advance on
1 October 2014.
(vii) Following bills for expenses were received but not entered in books:
Rs. in ‘000’
Repair and maintenance 56
Utilities expenses 67
(viii) The company revalued its non-current assets on 31 December 2014. Valuer has
suggested following fair values:

Rs. in ‘000’
Plant 1,650
Equipment 175
(ix) The tax charge for the current year after making all related adjustments is estimated at
Rs. 200,000.
(x) No entry has been made in respect of disposal, revaluation and depreciation of fixed

Prepare statement of financial position as at 30 June 2015 and statement of comprehensive
income for the year ended 30 June 2015. (Deferred tax implication is to be ignored) (19)

Q.3 (a) When a company follows revaluation model for subsequent measurement of its
Property, Plant and Equipment, it is required to provide certain additional disclosures
(as compared to cost model). Specify such disclosures as have been mentioned in
IAS 16 ‘Property, Plant and Equipment’. (03)
Financial Accounting and Reporting-I Page 3 of 5

(b) PQR Enterprises was incorporated on 1 July 2012. The company depreciates its
property, plant and equipment on straight line basis over their useful life. It uses
revaluation model for subsequent measurement of the property, plant and equipment
and has a policy of revaluing these after every two years.

Following information pertains to its property, plant and equipment:

Value as determined Useful life in years

Cost as on WDV as on
by professional valuer Original at Remaining as
Assets 01-07-2013 01-07-2013
on 30-06-2014 acquisition determined by
---------------- Rs. in million ---------------- valuer
Office building 6,000 5,500 5,750 12 8
Factory building 4,400 3,960 3,320 10 9
Warehouse 4,500 4,050 3,350 10 8

During the year there were no addition or deletion in the above assets.

As per policy, PQR transfers the maximum possible amount from the revaluation
surplus to retained earnings on an annual basis.

Prepare necessary journal entries for the year ended 30 June 2014 and 2015. (12)

Q.4 Diamond Limited has its head office in Karachi and two branches in Lahore and Quetta.
Balances of its head office and branch operations for the year ended 30 June 2015 are as

Head office Lahore Quetta

Karachi branch branch
-------------- Rs. in million --------------
Inventory as at 1 July 2014 400 30 48
Sales 4,800 1,550 1,198
Purchases 3,800 230 200
Expenses 500 276 202
Head office – current account (Cr.) - 200 178
Lahore branch – current account (Dr.) 230 - -
Quetta branch – current account (Dr.) 235 - -
Goods sent to branches 1,760 - -
Goods received from head office - 1,070 618
Provision for unrealized profit - 1 July 2014 13 - -

Additional information:
(i) Head office transfers goods to branches at cost plus 20%.
(ii) Inventory as at 30 June 2015:

Rs. in million
Head office 375
Lahore branch 28
Quetta branch 150

(iii) Goods worth Rs. 20 million and Rs. 52 million sent to Lahore branch and Quetta
branch respectively were in transit at year-end.
(iv) Cash transfers to head office by Lahore branch and Quetta branch amounting to Rs. 10
million and Rs. 5 million respectively were in transit at year-end.

(a) Prepare statement of comprehensive income for the year ended 30 June 2015 showing
the total profit/loss as well as profit/loss earned by the head office and two branches. (10)
(b) Reconcile the balances between the head office and the two branches. (02)
Financial Accounting and Reporting-I Page 4 of 5

Q.5 (a) Describe the term ‘revenue’ and state when and how revenue shall be recognised in the
case of royalties and dividend. (03)
(b) Adnan Limited (AL) is a supplier of machinery and spare parts. The machines supplied
are installed by AL. Following transactions took place in the last week of the
accounting year i.e. 30 June 2015:
(i) A machine was delivered to a customer. The invoiced amount was Rs. 500,000.
In accordance with the Operating Manual, the customer had to arrange a voltage
stabiliser before connecting the machine to the power supply. Machine became
operational on 1 July 2015. (02)
(ii) A specialised machine was sold to Sun Technologies (ST) for Rs. 800,000. ST
agrees to make the payment on 7 July 2015. However, ST informed AL that it
would accept the delivery in the month of August 2015. (03)

Applying the principles of IAS 18, explain when revenue from the sale of above
machines may be recorded.

(c) (i) On 31 March 2015 a machine was sold under a package deal. The package
includes a machine with free after sale service for 2 years at a total price of
Rs. 50,000. Selling price of standalone unit is Rs. 40,000. Cost of providing after
sales service is estimated at Rs. 4,000 per year. (03)

(ii) A machine was delivered to the customer on 1 July 2014. However, the invoice
was raised on 30 September 2014. According to the invoice, the total price of
Rs. 300,000 is to be paid in 2 half yearly installments of Rs. 150,000 each,
commencing from 1 January 2015. Appropriate discount rate is 10% per annum.
The present value of these two half yearly installments is to be taken as
Rs. 278,912. (03)

Prepare necessary journal entries to record the above transactions in the books of
Adnan Limited for the year ended 30 June 2015.

Q.6 A company deals in Solar Panels which are imported from China. The company follows a
perpetual inventory system and values its inventory on weighted average basis. Details of
sales and purchases during the year ended 30 June 2015 are as follows:
(i) Opening inventory on 1 July 2014 amounted to Rs. 49,000,000 and consisted of 2,450
solar panels.
(ii) Purchases during the year were as follows:
Date Quantity (Units) Price (Rs. in ‘000’)
30-Sep-2014 4,200 78,120
31-Mar-2015 4,350 87,000
Costs related to imports were 29% of purchase cost, of which 17% is refundable.
(iii) Sales during the year were as follows:
Date Quantity (Units) Price (Rs. in ‘000’)
31-Jul-2014 2,100 52,500
31-Oct-2014 2,050 48,750
28-Feb-2015 2,300 55,200
15-May-2015 2,260 53,110
(iv) Sale on 31 October 2014 includes 100 solar panels which were damaged during the
year and sold at Rs. 12,000 per unit.
(v) On 31 May 2015, 50 solar panels were totally damaged and were written off.
(vi) On 30 June 2015 there was a significant decline in the prices of solar panels as a new
type of solar panel was introduced in the market. Selling prices are now Rs. 18,500 per
unit. However, the company has made some modification in its product which will
enable it to sell it at Rs. 22,000 per unit. Cost of modification is Rs. 2,500 per unit.
Financial Accounting and Reporting-I Page 5 of 5

Prepare disclosure of inventories in the financial position as at 30 June 2015 in accordance
with the requirements of IAS-2 ‘Inventories’. (Note: Accounting policy note and comparative
figures are not required) (13)

Q.7 A manager is interested in knowing the relationship between machine hours and production
expenses. Data collected for January 2015 to August 2015 is as follows:

Production expenses
Months Machine hours
(Rs. in million)
January 264 50
February 390 90
March 280 70
April 355 85
May 375 100
June 330 75
July 300 70
August 290 60

Develop relationship between production expenses and machine hours and predict
production expenses if machine works for 365 hours. (08)