financial accounting past papers

The Institute of Chartered Accountants of Pakistan Foundation Examinations Autumn 2001 September 05, 2001 FINANCIAL ACCOUNTING-2 (MARKS 100) Module ‘C’, SM ‘1’ & 6B (Paper C 7) (3 hours) Q.1 Healthmen Club provides weight control, physical exercise and body building facilities to

its members. The club is desirous to acquire new advanced equipment, in addition to its existing fleet of machines. Therefore, Mr. Aman, manager of the Club approaches Oasis Lease Limited on 31 December 1996 to finance such equipment. The main terms of the lease agreement, entered into between the Club and the leasing company are:

(i) Cost of the equipment is Rs. 100,000 and its expected useful life is 4 years. (ii) The lease transfers substantially all the risks and rewards of ownership to the club. (iii) Rentals would be Rs. 8,582 payable at the end of each quarter. (iv) Total lease payments would be Rs. 137,312 Finance charges appropriated are:

Year ended 31 December 1997 Rs. 14,870 1998 Rs. 11,566 1999 Rs. 7,700 2000 Rs. 3,176

Rs. 37,312 The allocation of financial charges is based on the use of an implicit interest rate of 16% as a discount factor. Healthmen Club depreciates the equipment of this kind over a 4 year period by straight line method.

Required: Disclose how the machine and lease liability will appear in the books of

Healthmen Club in the years 1997 to 2000. (Figures relating to corresponding years are not required. (15)

Q.2 Gemex Communication Ltd. are sole distributors of GSM mobile telephones in Rawalpindi.

Mobile cases are imported by the company and after assembling and packing, mobiles are sold out from their show room, located in Sadder. The company decided to introduce a latest brand of mobile set in the local market. However, local assembling of such sets would cost Rs. 20 million. The Directors decided to finance this project by obtaining loan equivalent to 70% of the project cost @ 20% per annum for a period of six months. The loan was sanctioned on 01 July 2000 and was immediately placed in a saving account. The expected yield on saving account is @ 12% annually. Due to certain internal delays, the company started utilization of borrowings from 01 August 2000. The entire loan was paid off on 31 December 2000.

Required: Compute the amount of borrowing cost eligible for capitalization in

accordance with IAS 23. (03)

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Q.3(a) During the audit of Axis Industries Limited for the year ended 30 June 2000, you observed

that 1040 liters of palm oil, which was already sold by the company during the year 1999, was incorrectly included in closing inventory as at 30 June 1999. Such quantity carries a financial impact of Rs. 52,000. Extracts from the accounts are as follows:

Year ending Year ending 30 June 2000 30 June 1999 (Rupees)

Sales 832,000 588,000 Cost of sales (Note 1) 692,000 428,000 Pretax profit 140,000 160,000 Income Tax @ 30% 42,000 48,000 Net profit after tax 98,000 112,000 Note 1: Cost of sales for the year ended 30 June 2000 contains the above mentioned error in the opening inventory Note 2: Retained earnings

As at 30 June 1998 Rs. 160,000 As at 30 June 1999 Rs. 272,000

Required: Draft the income statement and statement of retained earnings under the benchmark treatment specified in IAS 8, for the relevant years. (08)

(b) From the data given below, compute the value of inventory in hand (800 units) in accordance with the requirements of IAS 2.

Rs. Invoice price (including sales tax) - 1000 units 11,150 Cost of material 8,250 Income Tax paid at import stage 800 Custom duty 600 Sales Tax (refundable) 2,000 Transport charges 500 Material handling charges 400 Store rent 300 Discounts allowed 250 Indirect labour 200 Variable overhead 130 Depreciation 520 Selling expenses 220 Maintenance of factory equipment 300 Designing charges 550 Material wasted 250 (07)

Q.4. Faizan and Furqan have been carrying on the business of towel manufacturing and export

for the past 10 years. Due to recession in their business and liquidity crunch, they decided to dissolve the firm and sell off the business to Quality Garments (Pvt.) Ltd., a company in the similar line of business. The Balance Sheet of Faizan and Furqan, as on 30 June 2000, was as follows:



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BALANCE SHEET Rs. Rs.

Sundry creditors 212,500 Furniture & Fixture 33,200 Capital -Faizan 340,000 Stock in trade 153,800 -Furqan 170,000 Trade Debts 484,500

Bank 51,000 722,500 722,500

The arrangement with Quality Garments (Pvt.) Ltd. was as follows: (a) Furniture and Stock in trade will be purchased at book value less 10%.

(b) Goodwill of the firm would be Rs. 101,200 (c) The existing debtors, cash and creditors will not be taken over by the company.

However, the company shall collect the outstanding debts and discharge the liabilities of the firm as an agent. The company will charge 3% on all collections made from the firm's debtors and 2% on cash payment made to the firm's creditors.

(d) Purchase consideration will be discharged by the company in fully paid ordinary shares of Rs. 10 each.

The company recovered Rs. 480,000 from the debtors in full and final settlement. All liabilities towards the creditors were paid except for the discount of Rs. 2,500 which was allowed by the creditors. The company paid the balance to Faizan and Furqan on 31 July 2000.

Required: i) Prepare Realization account

ii) Compute purchase consideration iii) Prepare capital accounts of the partners. (15)

Q.5 Qualitywise Construction Company has a contract to construct a building. Contract price is

Rs.8.5 million. The contract started in July 1997 and is expected to complete in December 2000.

1998 1999 2000 Rs. in 000 Costs to date 2,000 4,800 7,900 Estimated cost to complete 5,500 3,100 - Contract price 8,500 8,500 8,500

Required: Calculate in tabular form the gross profit, percentage of completion, revenue recognizable and gross profit recognizable for the above three calendar years. (15)

Q.6 Following are the assets of a company as on 30-6-2000: Particulars Cost Accumulated Rate of Depreciation Depreciation Rs. in million % Land 78.000 --- Factory building 167.000 68.523 10 Machinery 265.000 108.735 10 Factory Equipment 0.900 0.369 10 Office Equipment 0.800 0.328 10 Vehicles 4.600 2.931 20 Computers and Accessories 2.300 0.944 10

a. One of the vehicles costing Rs.600,000 included in cost purchased on 1 August 1998 totally destroyed in accident and insurance was not covered.



(04) b. Machinery included additions during the year of Rs.35 million. c. An old machinery purchased on 1 September 1996 amounting to Rs.30 million

which was sold during the year ended 30 June 2000 for Rs.18 million. Credited. to machinery account

Required: Calculate depreciation for the year ended as on 30 June 2000 after

adjustment of above. (10) Q.7 Following are the data related to Yee Co. Rs. Gross profit 35,000,000 Closing stock decreased compared to Opening stock 75,000 Gross profit rate 33% Stock turnover 3 Debtors Turnover 3 Creditors Turnover 5 Required: Calculate the following: Sales Cost of sales Trade debtors Trade creditors Stock in hand (07) Q.8 M/s Imran Industries Limited is a listed company engaged in manufacturing of spare parts.

The company was incorporated in 1995 and listed in 1996 on Stock Exchange. The trial balance as on June 30, 2000 is as follows:

Rs.in 000 Rs. in 000 Paid up capital 69,761 Reserve 33,113 Unappropriated profit B/F 17,598 Short Term Borrowing from Bee Bank Ltd. 23,812 Sundry Creditors 21,393 Sundry Debtors 59,573 Prepayments, Advances and Deposits 1,451 Fixed Assets (at cost) 440,440 Accumulated Depreciation 166,497 Accrued and other liabilities 2,112 Raw Material Stock 7,897 Work-in-process 5,675 Finished stock 9,243 Long Term Borrowing from Bee Bank Limited 110,000 Cash in Hand 8,838 Sales 445,465 Purchases 224,444 Manufacturing overheads 91,899 Administrative expenses 23,604 Selling expenses 12,920 Bank charges 139 Bank markup 3,013 Bank guarantee commission 615 889,751 889,751 ===================



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Other information

a. Authorized capital is 1 million ordinary shares of Rs.100 each. b. Long term loan availed from Nori Bank Ltd up to sanctioned limit of Rs.120 million

secured against factory land, building and machinery. The loan is repayable in semi annual installments of Rs.5 million beginning 1-7-1999. The loan carries markup rate @ 41 paisa per day per thousand. Markup to be accrued for the whole year.

c. Short Term Borrowing availed from Nori Bank Ltd against sanctioned limit of Rs.30 million secured against the hypothecation of stock in trade and directors personal guarantee. The loan carries markup rate @ 46 paisa per thousand per day.

d. The Sales Tax Adjudication Department issued a show cause notice to impose additional tax and penalty amounting to Rs. 1.5 million. In the lawyer’s opinion, the amount of additional tax and penalty payable is likely to become payable, however, the quantum of the liability is uncertain.

e. Sales Tax on total sales was Rs.64,687,000/-. f. Accrued Expenses related to cost of sales are Rs.963,500 and Administrative Expenses

298,000 are to be accrued in this accounts. g. Management proposes to declare 30% dividend to shareholders. h. Audit fees to be provided Rs.90,000. i. Prepayments, advances and deposits includes long term deposits of Rs.1,000,000. j. Ignore deferred taxation. Tax rate is 33% or 0.5% of turnover, whichever is higher and

rate of W.P.P.F is 5% Rs. 000

k. Closing Stock Raw Material Stock 7,980 Work-in-process 5,690 Finished Stock 12,560 26,230

l. Depreciation to be accounted for the year ended is as follows: Manufacturing 25,986 Administrative 1,408 27,394

Required: Prepare balance sheet, profit and loss account and notes to the accounts in accordance with the requirements of Companies Ordinance, 1984 and relevant IAS. (20)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Foundation and Modular Foundation Examinations Spring 2002 March 06, 2002 FINANCIAL ACCOUNTING - 2 (MARKS 100) Paper C7(Module ‘C’ SM ‘1’ & 6B ) (3 hours)

Q.1 The Board of Directors of Hotel Seaview approved earmarking of a huge fund specifically for carrying out research and development activities, aimed at expanding the customer base of the hotel. At the time of finalisation of the annual accounts of the company, the Finance Manager of the company has approached you with the following problems: (a) Expenditure on applied research during the year, amounted to Rs. 1,200,000 which

is the first annual installment of the cost of the applied research on a specified project.

(b) Contribution to a research foundation amounted to Rs. 200,000. This contribution was for pure research, related to the hotel industry.

(c) Research and development expenditure related to a patent granted for the manufacture and sale of a product amounted to Rs. 500,000.

(d) Cost in the acquisition of specialised knowledge relating to a specified process amounted to Rs. 80,000.

Required: You are required to assist the Finance Manager on the accounting treatment of each of the four items, keeping in view the requirements of IAS. (10)

Q.2 Superconstruction Ltd has a contract in progress. Expenditure on contract up to 30 April 2001 was as follows:

Rs Raw materials 109,735 Wages 98,432 Special plant 95,000 Expected costs to completion (excluding special plant) 276,000 Stocks of raw materials on site at 30 April 2001 15,831 Value of work certified on 30 April 2001 483,000 Expected final contract price 776,000 Progress payment received 28 February 2001 300,000

The contract started on 1 October 1999 and the expected completion date is 31 December 2001. The special plant will have no scrap value at the end of the contract and the cost should be spread over the contract life.

Head office intends charging Rs. 45,000 to the contract for the year to 30 April 2001.

Required:

(a) Prepare a contract account showing the net profit that can reasonably be taken against the contract for the year to 30 April 2001 showing and explaining clearly the basis of your calculation. (08)

(b) Show how the figures affecting the contract at 30 April 2001 would be shown in the balance sheet. (07)



(2)

Q.3 Ahmed and Bashir were trading as partners sharing profits in the ratio of 3:2 respectively.

Nadia was a sole trader in the same line of business. On 1 January 2001 the two firms were to be merged to form ABN & Co., the partners sharing profits in the ratio Nadia 3; Bashir 2; Ahmed 1. The summarized balance sheets of the two firms on 31 December 2001 were as follows:-

Ahmed &

Bashir Nadia

(Figures in thousands) Assets Freehold property -- 20,000 Plant 12,500 -- Debtors 12,000 -- Cash 8,000 2,000 32,500 22,000

Liabilities Creditors 2,500 -- 30,000 22,000

Capital Bashir 12,000 -- Ahmed 18,000 -- Nadia -- 22,000 30,000 22,000

The freehold property is to be revalued at Rs. 24,000 and the plant at Rs. 11,000, Goodwill is agreed at Rs. 5,000 for Ahmed and Bashir and Rs. 2,500 for Nadia, but is not to appear in the books. All assets and liabilities are taken over by the new firm.

Required:

Show the partners’ capital accounts in the old and new firms, and the opening balance sheet (in draft form) of ABN & Co. (15)

Q. 4 Under what circumstances should freehold land be depreciated? (05) Q.5 Jawad is the proprietor of a shop which retails electrical appliances. An extract from the

trading account of his business is shown below.

2001 2000 Rs Rs Rs Rs Sales 520,000 327,000 Opening stock 85,400 57,000 Add purchases 432,450 290,000 517,850 347,000 Less closing stock 60,250 85,400 Cost of sales 457,600 261,600 Gross profit 62,400 65,400



(3)

Mr. Jawad has studied the figures and approaches you for advice. He cannot understand why gross profit for 2001 has fallen, when sales have increased by 59% over the 2000 figures.

Required

(a) Calculate the gross profit percentage and mark-up percentage for both years, and state six factors which might have caused the situation which has worried Mr. Jawad.

(b) Calculate the stock turnover period for each year, and comment briefly on the figures disclosed by your calculations. (10)

Q.6 R Company has the following accounts balances: 30 Jun 2001 30 Jun 2000 Plant & Machinery 320,000 250,000 Accumulated depreciation – P&M 120,000 102,000 Loss on sale of machinery 4,000 --

During 2001, R sold for Rs. 26,000 a machine costing Rs. 40,000 and purchased several items of machinery. Required:

(a) Show the computations for the depreciation expense for the year 2001? (b) What was the amount of additions to P&M for 2001?

(c) Where will these items appear in the Cash flow statement? (05) Q.7 Pakistan Software Limited closes its books on 31 December every year.

You are provided with the following data:

Shareholders’ Equity (Rs.’000’) 2001 2000 Opening 700 600 Profit after tax (PAT) 220 200 920 800 Dividend (100) (100) Closing 820 700 Other Data Number of Shares (in ‘000s) 60 60

Required: (a) On the basis of above data, compute the following for the year 2001 and 2000

(i) Earnings per share (EPS) (ii) Return on closing equity (ROE) (iii) Book value per share (BV).

(b) Describe the relationship between the three ratios mentioned above. How does the

one affects the other?



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(c) For the year ending 31 December, 2002, the management in its meeting decided

to aim for EPS Rs.4.00 (9% higher than for the year 2001) and return on closing equity of 25%. Compute the estimated book value as at 31 December 2002, assuming that management targets are achieved. Also compute estimated figures for PAT, dividend and equity.

(d) Compute dividend per share and the rate of dividend for all the three years (2000, 2001 & 2002 estimated based on data in c above). (10)

Q.8 Premium Petroleum Company Limited (PPCL) is listed on Stock Exchanges of Pakistan

and engaged in distributing petroleum products. Its Board of Directors have decided to change its accounting policy with respect to the treatment of borrowing costs that are directly attributable to building a new storage facility in Ghotki, for the year ended 30 June 2001. In previous periods, PPCL had capitalised such costs, net of income taxes, in accordance with the allowed alternative treatment in IAS 23, Borrowing Costs. The Company has now decided to expense, rather than capitalise, these costs in order to conform with the benchmark treatment in IAS-23. PPCL capitalised borrowing costs incurred of Rs. 2,600 during 2000 and Rs. 5,200 in periods prior to 2000. PPCL’s accounting records for 2001 show profits from ordinary activities before financial charges and income taxes of Rs. 30,000, interest expense of Rs. 3,000; and income taxes of Rs. 8,100. PPCL has not yet recognized any depreciation on the building at 5% per annum on WDV as the facility has not been handed over to the Company by the contractor. In 2000, PPCL reported: Rs.

Profit from ordinary activities before interest and income taxes 18,000 Financial charges - _ Profit from ordinary activities before income taxes 18,000 Income taxes (5,400) Net profit 12,600

In 2000 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs. 32,600. PPCL’s tax rate was 30% for 2001 and 2000. All figures mentioned in thousand of rupees. Required: (a) Extract from the Profit & Loss Account under the benchmark treatment permitted by

IAS 8; (b) Statement of retained earnings under the benchmark treatment (c) Extracts from notes to the financial statements. (10)

Q.9 M/s Kamran Veterinary Pharmaceutical Ltd a listed company has been in the business of manufacturing pharmaceuticals for the last 5 years. The company was incorporated as a Public Limited Company in 1984 and was listed on Stock Exchange in 1997. The trial balance of the company as on June 30, 2001 before adjustments, is as follows:



(5)

Rupees Debit Credit Share Capital 150,000,000 Fixed Assets- at cost 216,914,240 Share Premium 3,500,000 Unappropriated profit b/f 4,196,719 Long-term loan from bank 4,500,000 Short-term running finance from bank 3,917,174 Accumulated Depreciation 89,917,989 Trade Creditors 6,213,344 Accounts Receivable 64,754,171 Capital Work-in- progress 1,314,283 Accrued Expenses 716,777 Raw Material – Opening 2,144,999 Work-in-process-Opening 716,755 Finished goods – Opening 7,917,018 Sales Tax Refundable 3,250,515 Cash at bank 616,165 Cash in hand 1,544,917 Advances, Deposits & Prepayments 519,170 Sales 614,240,155 Purchases 491,315,115 Manufacturing Overheads 21,544,100 Administration Expenses 7,666,175 Financial Expenses 1,914,015 Sales Tax 69,901,020 L/C Margin on Imports 710,000 Import Bills Payable 15,540,500 892,742,658 892,742,658

Additional Information:

(i) Authorized capital – Rs. 300 million divided into 30 million ordinary shares of Rs. 10/- each.

(ii) Stock-in-trade as at June 30, 2001 was as follows: (using FIFO method).

Cost Net Realisable Value Raw Material 3,450,955 3,451,000 Work-in-process 819,225 832,225 Finished Goods 6,995,300 6,745,300

(iii) A consignment of raw material imported from UK was lying at the port as it arrived

at the port on June 27, 2001. The C&F value was Rs. 1,025,000. No liability has been booked for this as on June 30, 2001.

(iv) Depreciation for the year is Rs. 19,640,500 out of which Rs. 16,915,900 relates to

Factory Building and Plant & Machinery. It is provided on Diminishing balance method.



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(v) The company’s auditors have pointed out that entire cost of one imported

consignment has been debited to Sales Tax Refundable- Rs. 628,000, whereas, the sales tax element in that cost of consignment was only Rs. 54,500.

(vi) Provision for WPPF and WWF is required to be made. Provision for WWF is Rs. 54,669.

(vii) Provision for taxation @ 38%. There are no brought forward losses and assume that

all expenses except for Depreciation are allowable for tax purposes. The allowable depreciation for tax purpose is Rs. 18,745,100.

(viii) Sales include Exports of Rs. 55,100,250. (ix) Advances, Deposits and Prepayments include long-term deposits of Rs. 80,000. (x) Long-term loan obtained from a bank is repayable in quarterly installments of

Rs. 500,000 each at Mark-up rate of Re. 0.41 per thousand per day. The loan is secured by registration of first charge over Company’s Factory Land and Plant & Machinery. Mark-up already provided in accounts.

(xi) Short-term running finance has been obtained from a bank having total limit of

Rs. 5,000,000 with hypothecation of stock-in-trade as security. Mark-up is payable @ Re. 0.45 per thousand per day. Provision already made for mark-up.

Required: You are required to prepare Balance Sheet, Profit and Loss Account and Notes to the

Accounts in accordance with the requirements of Companies Ordinance, 1984 and relevant IAS. (20)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Modular Intermediate Examinations Autumn 2002 September 04, 2002 FINANCIAL ACCOUNTING (MARKS 100) Module C Paper C7 (3 hours) Q. 1 M/s. Diamond Industries Limited is a listed company engaged in business of

manufacturing. The company was incorporated in 1991 and listed in 1992 on Stock Exchange. The trial balance as on June 30, 2001 is as follows:

Debit Credit Rs. In 000 Rs. In 000 Paid up Share Capital 50,000 Unappropriated Loss brought forward 5,650 Sundry Creditors 16,950 Sundry Debtors – Secured 36,505 Prepayments, Advances and Deposits 1,950 Fixed Assets (at cost) 140,500 Accumulated Depreciation 90,560 Accrued and Other Liabilities 5,620 Closing Stock 59,600 Short Term Borrowing from ABC Bank Ltd. 105,600 Cash in Hand 836 Sales 388,300 Cost of Sales Other than Overheads 265,008 Manufacturing Overheads 105,600 Administrative Expenses 21,605 Selling Expenses 8,960 Bank Charges 36 Bank Markup 10,620 Bank Guarantee Commission _ 160 ______ 657,030 657,030 Other Information

(a) Authorized capital is 1 million Ordinary shares of Rs. 100/- each.

(b) Short Term Borrowing availed from ABC Bank Ltd. against sanctioned limit of Rs. 130 million secured against the hypothecation of stock in trade and Directors’ personal guarantee. The loan carries markup at the rate of 35 paisa per thousand per day.

(c) The Directors of the company have requested ABC Bank Ltd to convert limit

to and amount of short term borrowing to Long Term Finance amounting Rs. 100 million against mortgage of Fixed Assets and personal property of the Directors. The loan carries markup at the same rate. The loan is payable

in six monthly installment of Rs. 5 million from July 2003. The transaction has not been effected in the books of accounts.



(2) (d) Unaccounted accrued expenses related to cost of goods sold are Rs. 365,000/ and

for administrative expenses Rs. 260,000/- which included audit fees Rs. 75,000/-

(e) Break up of stocks Opening Stock

Closing Stock

Rs. In 000 Rs. In 000 Raw Material Stock 5,487 20,980 Work-in-process 4,642 7,678 Finished Stock 10,220 30,942 20,349 59,600

(f) Depreciation to be accounted for the year ended is as follows; Rs. In 000 Manufacturing 4,060 Administrative 990 5,050

(g) Income Tax rate is 33% or 0.5% of turnover, whichever is higher. Ignore deferred taxation, WPPF and WWF.

Required :

You are required to prepare Balance Sheet, Profit and Loss Account and relevant Notes to the Accounts in accordance with the requirements of Companies Ordinance, 1984 and relevant IAS. (20)

Q.2 Post closing trial balance of EPCH Pharmaceuticals Ltd for the year ended December 31,

2000 and 2001 are as follows:- 2001 2000 Equity and liabilities Rupees in 000 Issued and paid up capital 5,000 5,000 Unappropriated profit 400 300 Short term running finance 3,000 800 Trade creditors 3,000 1,000 Accumulated Depreciation- Plant & Machinery 900 600 Motor Vehicle 420 280 12,720 7,980 Assets Land & Building 2,500 1,500 Plant & Machinery 3,000 2,500 Motor Vehicles 620 580 Stock in hand 3,600 1,100 Trade debtors 3,000 2,300 12,720 7,980 Additional data:

During the year 2001, a dividend @ 10% was distributed to the shareholders. The paid up value of each share is Rs.10/- A Motor Vehicle, having original cost of Rs. 100,000 and depreciated book value of Rs.60,000 was sold for Rs. 80,000. Gross fund generated from operation during the year 2001 was Rs. 1,060,000.

Required : You are required to prepare a Cash Flow Statement as per IAS-7 for the year 2001 (10)



(3) Q.3 Given below is the information of a limited company

Balance Sheet Assets Rs. Fixed Assets at W.D.V. 1,150,000 Investments 300,000 Current Assets Stock 310,000 Sundry Debtors 350,000 Advances 100,000 Cash and Bank Balances 40,000 800,000 Total Assets 2,250,000 Capital and Liabilities Share Capital 700,000 Unappropriated Profit 250,000 950,000 Long Term Loans 725,000 Current Liabilities Accounts Payable 125,000 Sundry Creditors 250,000 Accrued and other liabilities 200,000 575,000 2,250,000 Profit and Loss Account Sales 1,675,000 Cost of Sales 1,000,000 Gross Profit 675,000 Operating Expenses Administrative Expenses 250,000 Selling Expenses 225,000 475,000 Net Profit 200,000 Taxation 50,000 Net Profit after tax 150,000 Accumulated Profit brought forward 100,000 Accumulated Profit carried forward 250,000

Required: (a) Calculate: (i) Acid Test Ratio (ii) Debtors Turnover Ratio (iii) Inventory Turnover Ratio (iv) Assets Turnover Ratio (06) (b) Prepare vertical analysis of Profit and Loss Account. (04)



(4)

Q.4 Mr. Bashir, a whole sale general merchant does not keep proper records of his business transactions but stock taking is done at the end of each six months and stock is valued at cost for estimating half yearly profits. He charges gross margin of 33 1/3% on cost for all his sales. You are given the following figures for the half year ended 31 December, 2001 relating to his business:

(a) The total of sales as per invoices entered in the sales register form July to December 2001

amounted to Rs. 4,032,300. This amount includes Rs. 302,100 relating to goods delivered to customers on or before 30 June 2001. The total of goods delivered to customers before 31 December 2001 but invoiced during first week of January 2002 was Rs. 413,400.

(b) The total of purchase invoices entered into purchase register during July to December 2001

was Rs. 3,043,500 and this amount includes Rs. 220,500 for the goods received on or before June 30,2001.

Purchase invoices relating to goods received in December 2001 but which were entered in the purchase register in 1st week of January, 2002 amounted to Rs. 291,000.

(c) The stock sheets as on 30 June 2001 revealed:

i) 120 items of woolen jerseys, the cost of which was Rs. 150 each, but had been valued at Rs. 15 each. ii) the total stock in woolen goods section was Rs. 394,500 but had been included in the stock sheets as Rs. 439,500.

(d) The value of stock at cost as on 30 June 2001 was Rs. 3,198,000.

Required : Calculate the correct value of stock on 31 December 2001. (10) Q.5 The balance sheet of a company at year end December 2001 reflects following status: Rs. in 000 Plant under installation 2,000 Other assets 8,000 10,000 Loans Bank loan 18% 2,000 Bank loan 20% 2,500 Bank loan 22% 1,500 6,000 Shareholders equity 4,000 10,000

Bank loan of 20% was taken on April 30,2001, other loans were brought forward from the year 2000.

Expenditure incurred on plant under installation May1, 2001 1,000 July 1, 2001 700 Nov 1, 2001 300 2,000 Required: (a) Capitalization rate of the company (b) Total borrowing cost to be capitalized during the year 2001. (10)



(5)

Q.6 The firm of J.S and R decide to form a limited company, J.S. & R Ltd., and transfer business thereto. Their balance sheet is as follows:

J. S. & R Abridged Balance Sheet as at 30 June

Equity and Liabilities Rs.000 Assets Rs.000 Capital accounts: Freehold property 30,000 J 25,000 Plant 10,900 S 15,000 Fixtures, fittings and R 10,000 50,000 Furniture 1,500 Stock-in-trade 19,500 Debtors Rs. 68,830 Creditors 63,300 Less provision 2,000 66,830 Loan on mortgage 20,000 Cash at bank 4,500 Cash in hand 70 4,570 133,300 133,300

They share profits – J. four-ninths, S. three-ninths, R, two-ninths. The purchase consideration was Rs. 85 million (the company taking over all the assets and liabilities except the loan on mortgage) and was payable as to Rs. 25 million in cash Rs. 20 million in 5% loan and Rs. 40 million in ordinary shares. Expenses amounting to Rs. 0.6 million were payable by the firm. Assume that the transactions have been carried through and the loan on mortgage repaid. Required: Close the books of the firm after dividing the loan and shares between the partners in the proportions : J one-half, S one-quarter, R one-quarter. (10)

Q.7 An asset is acquired under arrangement of finance lease by company A but being used by

company B? Required: What disclosures are required in the financial statements of both the companies. (05)

Q.8 Finance Limited leased out tractor on 1st July, 2001 to Fresh Farms who had option to

acquire owner ship of the tractor after three years of payments reserved under the arrangement. The lease arrangement was as under:-

Rs. (a) Cash sale price of tractor 75,000 (b) Down payment on delivery 15,000 (c ) Yearly payment 24,000 Required:

Prepare in the books of Finance Ltd personal account of Fresh Farm and allocation of lease income over the years to end on December 31, 2001 to December 31, 2004 (4 years).

For allocation of lease income assume: i) Yearly payment includes Rs. 20,000 towards cash price and Rs. 4,000 towards lease income. ii) Lease income apportionment is based upon the number of months cash price is outstanding over the lease period. (05)



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Q.9 Danish plc is a large paper manufacturing company. The company’s final accounts for the

year ended June 30, 2001 are in the finalization stage. The CFO has prepared the following list of problems which will have to be resolved before the statements can be finalized.

(a) Post balance sheet events

On August 5, 2001 the net realizable value of raw material stock as at June 30, 2001 was found to be Rs.4 million lower than their historical cost. On July 25, 2001 the board decided to close a factory situated at Mardan.

(b) Possible development expenditure

The company has opened a research department to develop a new pulping process which the company intend to exploit in the future. The department has costed Rs.10 million to operate in the year and the board suggests that this expenditure should be carried forward to set off against revenue at a future date under the matching convention (accrual concept).

(c) Possible contingent liabilities

One of the company’s employees was injured during the year. He had been operating a piece of machinery which had been known to have a faulty guard. The company’s lawyers have advised that the employee has a very strong case, but will be unable to estimate likely financial damages until further medical evidence becomes available.

Required: Explain how each of these matters should be dealt in the financial statements

for the year ended June 30, 2001 in the light of the International Accounting Standards. Assume that the amounts involved are material in every case. (15)

Q.10 M/s Gemini Construction Limited signed an agreement during the year ended June 30, 2000

for construction of Shaheed e Millat Road for Rs.25 million. At the time of signing of contract the company had estimated that the total cost would be Rs.23.125 million. Upto June 30, 2000 the company had received Rs.9 million being 80% of the work certified for Section ‘A’ of the road and Rs.3 million being 50% of the work certified for Section B of the road.

Certain work not yet certified had cost Rs.0.55 million. Expenditure incurred on the project was: Material Labour Depreciation on road construction equipment Required: Calculate the profit/loss upto June 30, 2000 based on percentage of

completion method. (05)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Modular Intermediate Examinations Spring 2003 March 05, 2003 FINANCIAL ACCOUNTING (MARKS 100) Module C Paper C7 (3 hours) Q.1 The following are the balances extracted from the books of Karachi Paints Limited, a public

listed company as on December 31, 2002. The company is engaged in manufacturing of paints. The licensed capacity of the company is 3,000,000 litres per annum

(Amount in “000”)

Dr. Cr. Authorized capital (3 million ordinary shares of Rs.10 each) Issued, subscribed and paid up capital 25,000 General reserve 25,000 Stocks, January 1, 2002 Work in process 3,400 Finished goods 12,400 Stores and spares 2,620 Fixed assets-cost

Leasehold Land 2,200 Buildings on leasehold land 4,620 Plant & machinery 18,380 Furniture 3,780 Vehicles 1,250

Fixed assets-accumulated depreciation Leasehold land 505 Buildings on leasehold land 2,310 Plant & machinery 9,190 Furniture 1,890 Vehicles 1,000

Deferred taxation 1,000 Provision for taxation 4,500 Creditors and accrued expenses 33,300 Short term running Finance 12,000 Trade debtors 38,680 Other receivable 5,329 Short term running finance 5,020 Bank balances 38,450 Provision for bad debts 2,500 Sales 210,000 Manufacturing overheads 38,700 Selling and administration expenses 25,650 Financial expenses 3,360 Other income 650 Long term loan 15,000 Unclaimed dividend 81 Unappropriated profits brought forward 181



(2) Raw materials consumed 125,250 Raw materials Dec 31, 2002 13,240 Workers’ Welfare Fund _______ 222

343,329 343,329

ADDITIONAL INFORMATION (IN FULL RUPEE VALUE) (a) Stock at December 31, 2002

Work in process 4,200,000 Finished goods 13,300,000 (Total production during 2002 is 3,100,000 Litres)

(b) Depreciation / amortization charge on the reducing balance method:

Charge for the Depreciation Year Included in

Rate (%) Acc. Dep.(Rs.)

Leasehold land 101,000 Buildings 10 462,000 Plant & machinery 10 1,838,000 Furniture 10 378,000 Vehicles 20 250,000

(c) During the year the company has introduced a gratuity scheme. A provision of

Rs 3,800,000 is to be made. The effect of this provision on closing stock of finished goods and work in process is Rs 240,000 and Rs 76,000 respectively. The expense is to be allocated to manufacturing and administration as to 60% and 40% respectively.

(d) Current rate of taxation is 35%.

(e) Provide for Workers’ Profit Participation Fund and Workers’ Welfare Fund (taxable income for the year was Rs 19,000,000 before charging Workers’ Welfare Fund).

(f) The repayment of long term loan will start from June 30, 2003 and the loan is

repayable in six semi-annual equal installments. The loan carries 10% mark-up and secured by way of registered fixed charge on company’s fixed assets and registered hypothecation on stock in trade ranking pari-passu with the Short term running finance obtained from a bank.

(g) Issued, subscribed and paid up capital includes 1,500,000 shares issued as fully paid

bonus shares. (h) The directors have proposed following appropriations in their meeting held on

February 15, 2003

Proposed dividend 20% Transfer to general reserve 1,500,000

(i) Auditors’ fee includes Rs.100,000 on account of taxation services and Rs.25,000 on

account of out of pocket expenses.



(3) (j) The rate of mark-up is 10% per annum and the purchase price and mark-up are

repayable by June 30, 2003 in respect of short term running finance. (k) Some of the expenses were allocated as follows: (Rs in 000)

Manufacturing Selling & Admin.

Wages, salaries and benefits 19,989 5,278 Stores and spares consumed 2,200 - Fuel, water and power 3,872 892 Rent and rates 2,870 1,268 Insurance 780 234 Repairs and maintenance 6,740 642 Depreciation 2,249 780 Travelling and conveyance --- 366 Audit fee --- 280 Advertising --- 9,250 Freight outward --- 6,660 38,700 25,650

REQUIRED

Prepare Profit and loss Account, Balance sheet and notes to the accounts (only significant accounting policies are required) in compliance with disclosure requirements of the Companies Ordinance, 1984 and the International Accounting Standards. (20)

Q. 2 Following is the Balance Sheet of Zaman Ltd. as at June 30, 2001 and 2002: June 2002 June 2001 Rs. in “000” Fixes Assets 170,248 171,157 Long Term Deposits 135 135 Stocks in Trade 68,124 36,052 Trade Debtors 2,750 5,690 Advances, Deposits and Other Receivables 43,250 35,482 Cash and Bank Balances 8,350 4,609 _______ ______ 292,857 253,125 Paid-up Capital 100,000 100,000 Accumulated Profit 5,457 3,027 Surplus on Revaluation of Assets 15,000 --- Long Term Loans 70,000 79,000 Short Term Borrowings 10,000 10,000 Creditors 86,600 56,600 Accrued and Other Liabilities 5,800 4,498 _______ ______ 292,857 253,125



(4) Additional Information: Rs. in ”000” Profit before tax 2,430 Addition to Fixed Assets 520 Depreciation for the year ended June 30, 2002 16,429 REQUIRED: Prepare Cash Flow Statement for the year ended June 2002 (10)

Q.3 (a) On January 1, 2001, Sigma Enterprises purchased a machine for Rs.20,000 that had an

estimated useful life of 5 years. The accountant incorrectly charged of this machine in 2001. The error was discovered in 2002. The company desires to use straight-line depreciation method on this asset.

REQUIRED:

Pass the entry and give computation in this effect on December 31, 2002, to correct for this error, given that the: (i) Books have not been closed for 2002 (ii) Books have been closed for 2002 (05)

(b) The stock in Trade value was Rs.560,000 for year ended June 30, 2002, however, following

discrepancies found (i) Stock sent to customer on approval for Rs.45,000 but no invoice raise. Customer

also did not approve that stock. (ii) Advance Income Tax included in valuation of imported material for Rs.38,000. (iii) 550 units of one raw material valued at Rs.90 instead of cost Rs.900. (iv) A machine parts cost Rs.10,500 included in physical verification sheet of stock in

trade.

REQUIRED: Calculate correct valuation of closing stock. (05) Q.4 (a) Jubilee Processing (Pvt.) Limited, trades off its used Plant and Machinery for a new model.

The machine given up has a book value of Rs 16,000 (original cost Rs 24,000 and accumulated depreciation Rs 8,000) and a fair value of Rs 12,000. It is traded for a new model that has a list price of Rs 32,000. In negotiations with the seller, a trade-in allowance of Rs 18,000 is finally agreed on for the used machine.

REQUIRED In the light of IAS-16 i) Calculate the cost of new Machine; (03)

ii) Compute Gain/(Loss) occurred in exchange transaction; (02) iii) Record the transaction in the Books of Jubilee Processing (Pvt.) Limited (02)

(b) A free hold Building is purchased on January 01, 2000, for Rs 40,000.Its estimated useful

life is 20 years and it is depreciated at the rate of Rs 2,000 per annum in each of the year ended December 31, 2000 and 2001. On January 1, 2002 a professional valuer estimates the value of the building at Rs 108,000.



(5)

REQUIRED: On the assumption that the revaluation is to be incorporated in to the books of account, and that the original estimate of the useful life was correct, show the relevant ledger accounts for the period January 2000 to December 31, 2002. (08)

Q.5 On November 01, 2001 Jamal Nasir & Company contracted Wardah Construction Company to

have a building constructed for Rs 2.8 millions on land costing Rs 0.2 million (purchased from the contractor and included in the first payment). Jamal Nasir & Company made the following payments to the construction company during 2002:

January 1 March 1 May 1 December

31 Total

Rs420,000 Rs 600,000 Rs 1,080,000 Rs 900,000 Rs 3,000,000

Construction was completed and the building was ready for occupancy on December 31, 2002. Jamal Nasir & Company had the following debt outstanding at December 31, 2002:

Specific Construction Debt

i. 15%, 3-year loan to finance purchase of land and construction of the building, dated December 31, 2001, with interest payable annually on December 31 - Rs. 1.5 million

Other Debts ii. 10%, 5-year loan payable, dated December 31, 1998, with interest payable annually on December 31 - Rs.1.1 million iii. 12%, 10-year bonds issued on December 31, 1997, with interest payable annually on December 31 - Rs. 1.2 million

REQUIRED

Keeping in view the requirement of IAS 23, calculate the following:

a) Total actual interest cost for the year (03) b) Capitalization rate of borrowing cost (05) c) Interest cost to be capitalized (07)

Q. 6 The firm of A,B and C decide to form a limited company, ABC Ltd. and transfer the

business of the firm. Their balance sheet as on 30-6-2002 is as follows: A.B.C. Balance Sheet as on 30-6-2002 Rs. Rs. Capital Account Freehold property 55,000 A 249,850 Plant 210,000 B 124,925 Furniture and Fittings 35,600 C 124,925 Stock in trade 82,000 499,700 Debtors 85,000 Cash in hand 55,600 Creditors 23,500 523,200 523,200



(6)

ABC Ltd. will take over all assets except cash and other assets are valued as follows:

Rupees

Free hold property 100,000 Plant 180,000 Furniture and Fittings 29,600 Stock in trade 78,000

Debtors 80,000

The partners A,B & C share the profits in the ratio of 2:1:1. The purchase consideration is Rs. 500,000/- in ordinary shares

Shares will be distributed according to their balance of capital. The balance will be paid by cash available.

REQUIRED: Prepare realization and partners capital account and balance sheet of ABC Ltd. (16)

Q.7 Qaseem Ahmad & Company and Ebad Company signed a lease agreement dated

January 1, 2001, that calls for Qaseem Ahmad & Company to lease equipment to Ebad and Company beginning January 1, 2001. The terms and provisions of the lease agreement and other pertinent data are as follows:

a. The term of the lease is 5 years, and the lease agreement is non-cancelable, requiring equal rental payments of Rs 47,963 at the beginning of each year (annuity due basis).

b. The equipment has a fair value at the inception of the lease of Rs 200,000, an estimated economic life of 5 years, and no residual value.

c. The lease contains no renewal options, and the equipment reverts to Lessor Company at the termination of the lease.

d. Ebad Company’s incremental borrowing rate is 11% per year. e. Ebad Company depreciates on a straight line basis similar equipment that it owns. f. Qaseem Ahmad & Company sets the annual rental to earn a rate of return on its

investment of 10% per year; this fact is known to Ebad & Company .

REQUIRED: In light of IAS-17, state with the reasons: (i) Which treatment will be accorded to Lease in the Books of Ebad & Company. (02) (ii) Which rate would be used for capitalization of lease, in the books of Ebad &

Company in accordance with IAS-17. (02) (iii) Calculate the amount to be capitalized in the books of lessee by using present value

of annuity factor 4.16986. (02) (iv) Prepare a Lease Amortization Schedule in the Books of Ebad & Company, showing

amount of profit and reduction in principal. (Round-off the figures in nearest rupees) (08)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2003 September 01, 2003 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 Following is the Trial Balance of Sana Health Care Limited as of June 30, 2002, a Public

Limited Company listed on all the three stock exchanges of Pakistan. The company is engaged in production of health care products.

Figures in Rupees

DR CR 12,500,000 Ordinary shares 125,000,000 Land at Cost 2,300,000 Factory Building – WDV 23,000,000 Plant & Machinery – WDV 82,500,000 Office Furniture & Fittings – WDV 1,312,500 Capital Work in Progress 80,000,000 Raw materials, July 01, 2001 9,000,000 Finished goods July 01, 2001 6,250,000 Work in process July 01, 2001 3,125,000 Trade Debtors 9,187,500 Long Term Loan 38,750,000 Gratuity 6,250,000 Shares in subsidiary company 37,500 Ordinary Shares at cost (Market value at June 30, 2002, Rs.1,562,500) 3,750,000 Quoted investments at cost 875,000 Unquoted investments at cost 1,250,000 Dividends on investments: Quoted 187,500 Unquoted 175,000 Subsidiary 450,000 General Reserve 25,000,000 Profit & Loss Account July 01, 2001 9,375,000 Cash at Bank and in hand 6,340,333 Sundry Creditors 18,386,392 Sales 240,750,550 Purchases 176,475,350 Carriage inwards 2,087,650 Wages & Benefits 26,888,137 Rates & Taxes - factory 550,000 Repairs to building 375,440 Salaries 7,939,165 Postage and telephone 588,613 Printing & stationery 187,500 Legal and professional 526,250 Sundry selling expenses 4,360,745 Bank charges 87,805 Interest on Long Term Loan 6,006,250 Commissions 4,450,550 Fuel & Power 3,996,617



(2)

Figures in Rupees Dr. Cr. Insurance: Factory 94,625 Offices 30,375 Repairs to plant and machinery 789,037

_________

464,324,442 _________

464,324,442

Following further information is also available with respect of company:

(a) Company has an Authorized Capital of 15,000,000 shares of Rs 10 each.

(b) Cost and depreciation rate of the different assets are given below:

Cost Rs.

Depreciation Rate

%

Factory Building Plant & Machinery Office Furniture & Fittings

28,750,000 137,500,000 2,187,500

5 20 10

Depreciation on operating assets is charged to income using Reducing Balance Method.

(c) Stocks at June 30, 2002 were : Rs. Raw Material 7,563,000 Work in process 1,875,000 Finished Goods 16,389,657

(d) Factory insurance amounting to Rs 19,625 and rates amounting to Rs 37,500 had been paid for six months to September 30, 2002.

(e) Tax Liability is to be accounted for according to the rate and method provided in the Income Tax Ordinance 2001.

(f) Company sells its Herbal product on two months credit basis to Jaz Departmental store, who has filed a Bankruptcy suit in local court due to loss of uninsured inventory, as fire erupted at its outlet. Sana Ltd’s outstanding sale to company is Rs 2,750,000.

(g) Mark up on long term loan for the Financial Year 2002 at 15.5% was accrued and paid during the year, however, due to decrease in discount rate, after intense negotiation, Bank has agreed to reduce the Mark up rate on Long Term Loan by 6% in second half of the current Financial Year 2002. The repayment will commence from March 2003 in 5 equal half yearly installments. The arrangement is secured by way of first charge on company’s present and future fixed assets.



(3)

(h) At the time of finalization of trial balance auditor’s bill had not been received and

Finance Manager did not account for the auditors remuneration in the books. The bill was received later on which includes Rs 300,000 as fee on account of Taxation services and Rs 26,000 Out of Pocket charges in addition to Audit Fees of Rs 500,000.

(i) According to latest actuarial valuation, an amount of Rs 275,000 needs to be

provided for Gratuity. Gratuity provision is apportioned equally in Factory Staff and Head Office Staff remuneration.

(j) As at June 31, 2002 Company has given guarantees to Banks amounting to

Rs 4,500,000 for repayment of loans given by the banks to certain employees.

Required: Prepare Balance Sheet, Profit and Loss Account and Notes to the accounts (only significant Accounting Policies are required) in compliance with disclosure requirements of the Companies Ordinance, 1984. (25)

Q.2 (a) Faraz Brothers Transport Company exchanged a number of used trucks and Cash

for vacant plot of Industrial Land. The trucks have a combined book value of Rs 126,000 (Cost 192,000 and Accumulated Depreciation Rs 66,000). Faiz Ahmad, a purchasing agent for Faraz Brothers, who has had previous dealings in the second-hand market indicates that the trucks have a fair Market value of Rs 147,000. In addition to trucks Faraz Brothers is also required to pay Rs 51,000 cash for the plot of Land.

Required: Taking into account the requirements of IAS, 16 calculate the following: (i) Cost of land (01) (ii) Gain on disposal of used truck (02) (iii) Prepare journal entry to record the aforesaid exchange transaction (02)

(b) You are required to identify following items pertaining to Research and

Development Activities and briefly elaborate the treatment of every item in the Financial Statements in light of IAS 38. (Calculation is not required) (i) Materials, Equipment and Facilities (ii) Personnel Cost (iii) Purchase of Intangibles (iv) Contract Services (v) Indirect Cost (05)

Q.3 Munir Niazi Corporation, a lessor, purchased a new machine for Rs 1,200,000 on

December 31, 2001, which was delivered the same day (prior arrangement) to Ahmad Nadeem & Company, the lessee.



(4)

Following information relating to lease transaction is available: (i) The Lease Asset has an estimated useful life of 5 years which coincides with

the Lease term. (ii) At the end of lease term, Machine will revert to Munir Niazi Corporation, at

which time it is expected to have a residual value of Rs 100,000. (None of which is guaranteed by Ahmad Nadeem & Company).

(iii) Munir Niazi Corporation’s implicit interest rate is 8% which is known to Ahmad Nadeem & Company. (iv) Ahmad Nadeem & Company’s incremental borrowing rate is 10% at

December 31, 2001. (v) Lease rentals consist of five equal annual payments, the first of which was

paid on December 31, 2001. (vi) Both the lessor and the lessee use calendar year as their accounts period and

depreciate all fixed assets on straight line basis.

Required:

(a) Compute the annual rental under the lease. (05) (b) Compute the amounts of Gross lease rental receivable and unearned interest revenue that Munir Niazi Corporation should disclose at the inception of the lease December 31, 2001. (05) (c) What expense should Ahmad Nadeem & Company record for the year ended December 31, 2002. (05)

Q.4 A & Z and X & Y are two partnerships carrying on a similar type of business. They

agreed to amalgamate the two partnerships from July 1, 2001 and carry business under the name of Azee and Company. The Profit & Loss sharing ratio are A=8, Z=7 and X=3 & Y=2. Following are the balance sheets of both the partnerships as on June 30, 2001.

A & Z

X & Y

Rs. Rs. Capital Account A & X

Z & Y 130,000 111,000

110,000 78,000

241,000 188,000

Accrued Liabilities 64,000

56,000

305,000 244,000

Freehold property

Fixture Vehicles Stock in trade Debtors Investment Cash in hand

75,000 18,000 25,000 59,000 71,000 15,000 42,000

50,000 14,000 17,000 67,000 65,000

- 31,000

305,000

244,000



(5) (a) The Freehold Property and fixtures of X & Y to be sold for Rs. 100,000

and this transaction was completed on 1/7/2001.

(b) Assets to be revalued

Freehold property Fixtures Vehicles Stock in trade

A & Z Rs.

95,000 20,000 23,000 57,000

X & Y Rs.

- - 15,000 62,000

(c) Provision for doubtful debts of Rs.4,000 by A & Z and of Rs.5,000 by X & Y.

(d) Accrued liabilities to be reduced by 2.5% (e) A takes over the firm’s investment at Rs.12,000 (f) The Goodwill of A & Z is to be taken at Rs.75,000 and X & Y at Rs.50,000 (g) Profits in the new firm are to be shared in proportion of 6/20 to A, 5/20 each

to Z and X and 4/20 to Y. (h) The Capital of the new firm is to be Rs.500,000 in partners profit sharing

ratio, adjustment to be made in cash. Required: You are required to prepare profit and loss adjustment accounts, partners capital accounts, new firm’s Balance sheet and Capital Accounts of new firm’s partners.

(15)

Q.5 Following is the Balance Sheet of Pure Water Limited as on June 30, 2002:

2002 2001 Rs. in 000

Tangible fixed assets 399 320 Intangible assets 263 210 Long terms investments - 26 CURRENT ASSETS

Stock in trade 158 107 Trade debtors 410 331 Investment 53 - Cash in hand 2 1

623 439 1285 995

Paid-up capital 210 158 Share premium account 168 158 Revaluation reserve 105 96 Accumulated profit 168 105 Long term loans 179 53 CURRENT LIABILITIES

Short term borrowings 91 100 Trade creditors and accrued liabilities 133 125 Taxation 126 116 Proposed dividend 105 84

455 425 1,285 995



(6) Extract of profit and loss account for the year ended June 30, 2002

Rs. 000 Profit before tax 368 Interest received 26 394 Interest paid 79 Profit before tax 315 Taxation 147 Profit after tax 168 Dividends 105 Unappropriated profit 63

The following additional information is available:

(a) The proceeds of the sale of Long Term Investments amount to Rs.32,000. (b) Fixture and fittings, with an original cost of Rs.89,000 and book value of

Rs.42,000 were sold for Rs.32,000 during the year.

(c) The following information is available for fixed assets: 2002 2001

Rs. in 000

Cost 756 625 Accumulated Depreciation 357 305 Net Book Value 399 320

Required:

Prepare cash flow statement for the year ended June 30, 2002.

(15)

Q.6 ABC Company contracted with XYZ Company to build additional factory building

of Rs.50,000,000 on existing land of the company. Work was completed as on June 30, 2001. ABC Company made first payment as on January 1, 2001 of Rs.5,000,000. The company was availing bank loan for overall capital work in progress from the Kashmir Bank Ltd. and rate of interest was 16% per annum. Balance of bank loan was Rs.138,000,000 as on June 30, 2001. Following are the further information regarding contract payments.

Date of payments Rupees in 000

25-01-2001 10,000 05-02-2001 5,000 03-03-2001 20,000 06-06-2001 10,000 Required:

Calculate the amount to be capitalized in the accounts of ABC Company as on June 30, 2001 in accordance with IAS 23.

(07)

When the capitalization of borrowing costs should commence to form part of qualifying asset?

(03)



(7)

Q.7 Azhar and Company are importers of a particular item. Accountant of the company has prepared the Profit and Loss Account following average method for valuation of closing inventory. Following are the details of transactions during the year:

Date Opening Stock

Quantity

1,000

Amount in Rupees

Purchases 05-07-2002 5,000 3,250,000 10-09-2002 14,000 8,750,000 26-12-2002 9,500 6,650,000 24-03-2003 18,600 13,857,000 05-04-2003 15,600 11,310,000 31-05-2003 10,100 6,969,000

Sales 57,000

Closing Stock 16,800

The Profit and Loss Account prepared by the Accountant on average method of valuation of closing inventory is as follows:

PROFIT AND LOSS ACCOUNT

Rs. Rs. Sales 41,325,000

Cost of Sales Opening stock 560,000 Purchases 50,786,000 51,346,000 Less: Closing Stock 11,688,520 39,657,480 Gross Profit 1,667,520 Operating and Selling Expenses 1,525,900 Net Profit 141,620

Required:

Prepare a revised Profit & Loss Account based on FIFO method for valuation of closing inventory at cost or net realizable value which ever is lower. The selling expenses are 2% of sales.

(10)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2004 March 05, 2004 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 You are the accountant of Shayan Limited and have been presented with the following trial

balance as at 30 June 2003. Shayan Limited is a Public Limited Company listed on all the stock exchanges of Pakistan. The Company is engaged in the production of various consumer goods.

Dr Cr (Rupees in thousand)

Ordinary Share Capital (10,000,000 shares) 100,000 Profit and loss account ( as at 1 July 2002) 22,890 Long term secured loan 3,350 Short term running finance 217 Contractors’ retention money 43 Dealership deposits 259 Trade creditors 512 Interest payable on long term loan 31 Markup payable on running finance 25 Tax deducted at source 2 Gratuity provision 7,000 Sales 336,149 Accumulated depreciation - Building 3,179 - Plant and machinery 9,087 - Office furniture and fittings 295 - Vehicles 923 Provision for doubtful debts 250 Land at cost 10,000 Building at cost 7,791 Plant & Machinery 25,928 Office furniture and fittings 2,741 Vehicles 5,143 Raw materials – 1 July 2002 10,000 Work in process – 1 July 2002 2,150 Finished goods – 1 July 2002 7,000 Capital work in progress 56,000 Trade debtors 5,041 Long-term investments at cost 10,000 Provision for diminution in value of investment 550 Stores and spares 3,745 Provision for slow moving stores and spares 50 Cash and bank 5,415 Purchases 250,126 Depreciation – factory 2,750 Wages – factory 30,150



(2)

Dr Cr (Rupees in thousand) Water, electricity and other utilities 15,405 Repairs and maintenance – factory 205 Salaries – administration and selling 17,805 Printing and stationery 1,000 Interest expense 321 Legal and professional expenses 550 Depreciation – administration and selling 231 Selling expenses 4,615 Rates and taxes – factory 700 Taxation – current 10,000 ______ 484,812 484,812

Additional information (i) The Authorised Capital of the Company is 15 million ordinary shares of Rs 10 each. (ii) The Company has obtained a long term loan from a financial institution at a mark up

rate of 9% per annum. Out of the outstanding amount, a sum of Rs 350 thousand is due in the next financial year. The loan is secured against first pari passu charge on Company’s present and future assets.

(iii) The Company has revalued its leasehold land to Rs 15,000 thousand as at 30 June 2003 but has not yet accounted for this revaluation in its books.

(iv) The Company depreciates its fixed assets on a reducing balance method and applies the following rates of depreciation. Building 10% Plant & Machinery 10% Fixtures and fittings 5% Vehicles 10% Depreciation on additions and deletions during the year, is charged in proportion to the period of use.

(v) A bonus issue of one to twenty has been approved for the year ended 30 June 2003. Accounting entries for the same have not yet been incorporated.

(vi) Bank statement has shown that bank charges amounting to Rs 25 thousand have not been recorded.

(vii) Asghar (Pvt) Limited a customer of Shayan Limited has filed for bankruptcy. An amount of Rs 10 thousand was provided against the balance outstanding of Rs 15 thousand in previous year. The Company has decided to write-off the balance completely as there are no realistic prospects of recovery. Kashan Limited has paid a sum of Rs 20 thousand against its outstanding balance which was written off in previous year. The cheque was deposited on June 29, 2003 but the receipt has not been recorded in the books. The cheque was cleared on July 2, 2003.

(viii) Stocks as at 30 June 2003 were as follows: Rs. ‘000’

Raw Materials 9,500 Work in process 3,330 Finished goods 6,155

(ix) Actuarial valuation indicates that gratuity provision of Rs 7,775 thousand is required as at 30 June 2003. 2/3rd of the additional provision relates to factory workers whereas remaining relates to administration and selling staff.

(x) The Company has investment in the shares of a non-listed company, Free Serve Limited. The overall percentage held in the shareholding of Free Serve is 11%. The value of investment based on the net assets of Free Serve Limited is Rs 9,450 thousand calculated on the basis of accounts as on 30 June 2002.



(3)

(xi) Long term deposits have been obtained from dealers and distributors having a contract of five years with the Company and are payable upon termination of the contract.

Required: Prepare the Balance Sheet as at 30 June 2003 and the Profit and Loss account together with the notes forming part thereof for the year then ended in accordance with the requirements of the Companies Ordinance, 1984. Assumptions taken should be clearly stated. (25)

Q.2 The Balance Sheet of ABC (Pvt) Limited as at 30 June 2003 and the Profit and Loss

account for the year then ended are as follows:

ABC (Pvt) Limited Balance Sheet

As at 30 June 2003 2003 2002

Rupees (‘000)

Rupees (‘000)

Assets Land 30,000 10,000 Building 170,000 30,000 Less: Accumulated depreciation 20,000 10,000 150,000 20,000 Inventory 130,000 85,000 Prepaid expenses 4,000 6,000 Trade debts 92,000 70,000 Cash 5,000 28,000 411,000 219,000 Shareholders’ Equity and Liabilities Ordinary shares 106,000 96,000 Unappropriated profit and loss account 70,000 50,000 Long term loan 175,000 20,000 Accounts payable 49,000 44,000 Income taxes payable 5,000 4,000 Accrued liabilities 6,000 5,000 411,000 219,000

ABC (Pvt) Limited

Profit and Loss account For the year ended 30 June 2003

Rupees (‘000)

Sales 500,000 Cost of goods sold (310,000) Gross profit 190,000 Selling and administration expenses (80,000) Interest expense (11,000) Profit before tax 99,000 Taxation (30,000) Profit after tax. 69,000



(4)

The expenses include depreciation as follows: Cost of goods sold Rs 4,000 thousand Selling and administration expense Rs 6,000 thousand During the year dividends amounting to Rs 49,000 thousand were paid to the shareholders. Required: Prepare Cash Flow Statement for the year ended 30 June 2003 in accordance with IAS-7 (10)

Q.3 Following is the extract of information from the financial statements of M/s. Matrix (Pvt) Limited

Paid-up Capital (Rs.) 1,000,000 (Ordinary shares of face value of Rs. 10/- each) Gross Profit (Rs.) 2,250,000 Earning per share (Rs.) 2.50 Net Assets (Rs.) 13,000,000 Fixed assets (Rs.) 10,500,000 Gross Profit (%) 20% Debtors Turnover 7 times Inventory Turnover 5 times Current ratio 1 : 3 Utilization of Current Assets 3 times Required: Calculate the following: Net Profit Return on Capital Employed Working Capital Sales Cost of sales Trade Debtors Closing inventory Current Assets Current Liabilities (10)

Q.4 Azhar and Company has a machine having a cost of Rs. 35 million and accumulated

depreciation of Rs. 14 million. Depreciation is charged @ 10% per annum. The company is short of funds and has decided to sale and lease back this machine. The leasing company has valued it at Rs. 25 million. The leasing company issued letter of offer containing the following terms:

Monthly rent Rs.732,900 Security deposit 10% IRR 10.65%

Period of lease 36 months



(5)

The lease shall commence on the Ist day of the accounting year and the rentals are due at the end of the month.

Required: Prepare journal entries to record: (a) transfer of asset to the leasing company (b) interest charge for the first year of operations. (Show all relevant calculations) (10)

Q.5 Following is the fixed assets schedule and partial income statement of Plastic Card (Pvt)

Limited for the year ended 30 June, 2003:

Fixed Asset Schedule

Particulars Cost as on 1-7-2002 Addition Total Rate

Opening Accumula

ted Depreciat

ion

Depreciation for

the year

W.D.V. as on 30-6-

2003

Rs. Rs. Rs. Rs. Rs. Rs. Land 1,000,000 -- 1,000,000 -- -- -- 1,000,000 Building 3,500,000 -- 3,500,000 5% 175,000 175,000 3,150,000 Plant & Machinery 56,000,000 -- 56,000,000 10% 5,600,000 5,600,000 44,800,000 Office Equipment 1,680,000 -- 1,680,000 10% 168,000 168,000 1,344,000 Vehicles 1,082,977 52,902 1,135,879 20% 216,595 227,176 692,108

Total 63,262,977 52,902 63,315,879 6,159,595 6,170,176 50,986,108

Partial Income Statement

2003 2002

Rs. Rs.

Profit Before Tax 5,650,000 4,560,000 Tax @ 43% (2002; 45%) 2,429,500 2,052,000 Net Profit After Tax 3,220,500 2,508,000 Retained earning – opening 2,508,000 -

Retained earning – closing 5,728,500 2,508,000

The company was incorporated in the month of July 2001 and acquired assets just after incorporation. At the time of finalizing of financial statements of the company for the year ended June 30, 2003, it was found that the vehicle was acquired on lease having cost of Rs. 1,000,000/- and subsequent additions to vehicle are in fact, markup paid to the leasing company. There were no other additions. Company's policy is to charge depreciation on reducing balance method. Required: (a) Redraft fixed assets schedule. (12) (b) Prepare Partial Income Statement and Statement of Retained Earnings as per related

IAS using benchmark treatment. (08)



(6)

Q.6 Absolute Projects Limited is a public limited company listed on stock exchange. Company has a capital project in process. It has obtained a loan specifically for this project. In addition to this the company has various financings obtained from various banks. The details of the financing obtained by the company as at 30 June 2003 are as follows.

Amount in

Rupees ‘000’ Mark-up rate

Specific Loan for the Project 10,000 9% General purpose loan 1 50,000 9.5% General purpose loan 2 25,000 7.5% General purpose loan 3 15,000 8%

All the loans have remained outstanding throughout the year. Cost incurred on the project as at June 30, 2003 and 2002 stood at Rs 15 million and Rs. 10 million respectively. The cost has been incurred evenly throughout the year.

The Company has a policy to capitalize interest on capital projects in accordance with the International Accounting Standard 23. Kindly calculate the amount of interest to be capitalized on the Project. (05)

Q.7 Wise Construction Company Limited has a contract to construct a small bridge. Contract

price is Rs. 40 million. The construction started in July 2001 and was completed in November 2003.

(Rupees in thousand) Year ended December 31, 2001 2002 2003 Costs to date 8,000 26,900 32,000 Estimated cost to complete 27,000 10,000 - Progress billing during the year 8,000 21,500 10,500 Cash collected during the year 6,700 15,600 17,700

Required: Prepare partial income statement and balance sheet for the three years, showing complete calculation of revenue recognized and gross profit using percentage of completion method. (20)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2004 September 06, 2004 FINANCIAL ACCOUNTING (MARKS 100) MODULE C (3 hours) Q.1 The following data of Minhaj Corporation is available for the year ended

June 30, 2004:

Rupees Opening retained earning 98,000 Non-current assets 280,000 Sales 920,000 Expenses 180,000 Gross profit on sales 25% Acid test ratio 2.5:1 Days sales in inventory 45 Days sales in receivables 18 Shareholders equity to debt (including current) 4:1 Tax rate 40% Ordinary share capital (10,000 shares of Rs.15,

issued at Rs.21 each)

Total number of days in a year to be taken as 360 Required:

Prepare the income statement and balance sheet of Minhaj Corporation as at June 30, 2004. Show all workings.

(20)

Q.2 The following is an abridged profit and loss account of Mumtaz & Co.

Rupees 2004 2003 Sales 1,200,000 850,000 Cost of goods sold 900,000 680,000 Gross Profit 300,000 170,000 Selling and Administrative expenses 180,000 127,500 Profit before tax 120,000 42,500 Taxation (40%) 48,000 17,000 Profit after tax 72,000 25,500 Opening Retained Earnings 475,500 450,000 In 2004 the company decided to change its costing method of inventories from last-

in-first out (LIFO) to first-in-first out (FIFO) in order to follow the benchmark treatment of IAS 2.

The impact on the cost of inventories was as follows: 2004 2003 Closing Inventories (understated) 25,000 35,000



(2)

Required: The company has decided to follow the benchmark treatment of IAS 8 [Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies] and has requested you to prepare all related disclosures including the profit and loss account and statement of retained earnings, as required under the IAS.

(20)

Q.3 Ali and Akbar were in partnership sharing profits and losses: Ali three fifth, Akbar

two-fifth. The following was the summarized Balance Sheet of the partnership as on December 31, 2003:

Rupees Assets Buildings, plant, vehicles, machinery and equipment 84,000 Investments 32,000 Current Assets Inventory 40,000 Accounts receivable 35,000 75,000 191,000 Capital and Liabilities Capital Accounts Ali 75,160 Akbar 44,080 119,240 Loan from Ali 30,000 Interest payable 800 30,800 Creditors 25,000 Short-term running finance 15,960 191,000

Ali and Akbar decided to convert the partnership into a limited company AA

Company from January 1, 2004.

• The company is to take over all investments, inventory, buildings, plant, machinery and equipment with the exception of two motor vehicles whose book values were Rs.8,000 and Rs.4,000 respectively.

• The purchase consideration consisted of 5,000 Ordinary shares of Rs. 10

each in AA Company and 5,000 Term Finance Certificates of Rs. 50 each at six month KIBOR plus 1.5% with a floor of 8% and ceiling of 14% to be divided between the partners in profit sharing ratio.

• Both the vehicles were disposed off for Rs. 20,000

• Ali’s loan together with interest payable was transferred to his Capital

Account

• The receivables were fully realized and creditors were paid in full by the partnership firm.

Required:

Prepare the following:

(a) Realization Account (route all transfers through realization account). (05) (b) Prepare the Capital Accounts of the Partners. (11) (c) Prepare the Opening Balance Sheet of AA Company. (04)



(3)

Q.4 Soft Technologies is a public limited non-listed company. It was incorporated in

June 2003. Following is the Trial Balance of June 30, 2004

DR CR (Rupees in 000) Software exports 50,000 Local software sales 8,000 Share capital 10,000 Share application money 3,000 Creditors 2,000 Foreign currency loan 10,000 Accrued liabilities 1,000 Tax deducted on salaries 350 Accumulated depreciation 2,100 Salaries 22,000 Bonus to employees 2,000 Rent 2,500 Utilities 3,000 Internet 1,000 Sub-contracting cost 11,255 Stationery 1,250 Audit fee 1,000 Legal and professional 500 Miscellaneous 750 Trade debtors 27,000 Computers 6,300 Furniture & fixtures 1,000 Accounting software 6,000 Cash in hand 50 Cash at bank 345 Security deposits 500 86,450 86,450

Additional Information:

(i) Authorized capital of the company is Rs.25 million. Each share is of Rs.100 each

(ii) Accounting software has been developed by the company itself and has capitalized the amount.

(iii) Foreign currency loan is from Soft Tech UK which holds 90% shares of the company. The loan is interest free and will be converted into share capital after 5 years.

(iv) The company has not made any taxation provision due to exemption to software exporters.

(v) Allotment of shares for the share application money was done on June 30, 2004.

(vi) Security deposits are of long term nature. (vii) Computers of Rs. 5 million were purchased during the year.



(4) Required:

(a) Prepare Balance Sheet as at June 30, 2004 and the Profit and Loss account for the year then ended, in accordance with the requirements of the Companies Ordinance 1984.

(10)

(b) Draft accounting policies of the company. (05)

(c) Prepare notes to the accounts and list down the additional information required for the preparation of the notes in accordance with the Companies Ordinance 1984.

(10)

Q.5 The Electro Sales Company sells computers on installment basis. Following data is

available from the records of the company:

2000 2001 2002 R u p e e s Installment sales 240,000 250,000 300,000 Cost of installment sales 180,000 181,250 216,000 Gross profit 60,000 68,750 84,000 Collections during 2002

Installment contracts – 2000 72,500 Installment contracts – 2001 80,000 Installment contracts - 2002 62,500 Defaults Unpaid balance of 2000 installment contract

15,000

Value assigned to repossessed goods 6,000 Unpaid balance of 2001 installment contract 16,000 Value assigned to repossessed goods 9,000

Required:

Record all the entries for 2002 for recording of installment sales, collections, defaults, and repossession and recognition of gross profit. Show all the calculations.

(15)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2005 March 07, 2005 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 Balance Sheet of Qudrat Ltd. as on June 30, 2004 and the Profit and Loss account for

the year then ended are as follows:

Balance Sheet

2004 (Rs)

2003 (Rs)

2004 (Rs)

2003 (Rs)

FIXED ASSETS SHAREHOLDER’S EQUITY Building 97,000 29,000 Paid up share capital 360,400 326,400 Plant & Machinery 340,000 102,000 General reserves 200,000 150,000 Acc. depreciation (68,000) (34,000) Un-appropriated profit 28,000 20,000 369,000 97,000 588,400 496,400 Capital work in progress 238,000 - Deferred cost - 5,000 Long term loans 476,000 50,000 CURRENT ASSETS CURRENT LIABILITIES Stock in trade 442,000 289,000 Current maturity of long term

loans

119,000

18,000

Debtors 312,800 238,000 Bills payable 166,600 149,600 Less Provision for bad debts

5,000

- Accrued expenses 20,400 17,000

307,800 Advances and deposits 13,600 20,400 Income tax payable 17,000 13,600 Cash and bank balances 17,000 95,200

780,400 642,600 323,000 198,200 Total 1,387,400 744,600 1,387,400 744,600

Profit & Loss Account

Rupees Sales 1,700,000 Cost of goods sold (1,029,000) Gross profit 671,000 Administrative expenses (282,000) Financial expenses (37,400) (319,400) Operating profit 351,600 Loss on sale of fixed assets (25,000) Profit before taxation 326,600 Taxation (102,000) Profit after taxation 224,600 Un-appropriated profit brought forward 20,000 Profit available for appropriation 244,600 Appropriation: Dividend (166,600) Transfer to general reserves (50,000) (216,600) Un-appropriated profit carried forward 28,000



(2)

During the month of May 2004 the company purchased a machine for Rs.100,000, but due to sudden change in production plan, the machine was sold for Rs.75,000 in the same month. Company has not charged any depreciation on the plant sold during the year.

Required: Prepare Cash Flow Statement for the year ended June 30, 2004 in accordance with IAS-7 (Cash Flow Statement).

(12)

Q.2 Following information relates to M/s Zameer Internationa l, who started business in January 2004.

Sales (Rs.) 4,800,000 Gross profit ratio 25% Net profit ratio 15% Current assets ratio 1.5 Quick assets ratio 1.25 Stock turnover ratio 15 Debts collection period 1.5 month Cost of sales to fixed assets 1.5 Fixed assets to net worth 0.8333

Required: You are required to prepare the Balance Sheet of Zameer International, as at December 31, 2004 and Profit and Loss Account for the year then ended. (12)

Q.3 During the night of 15th December 2004, flood water entered in the warehouse of

Fine Distributors and destroyed the entire inventory. Certain information relating to the period from Ist July to 14th December, 2004 is however, available at the Sales Office of the company.

Rupees Gross sales 9,625,000 Opening stocks 1,250,000 Gross purchases 8,250,000 Un-recorded sales 625,000 Sales return 1,250,000 Purchase return 375,000 Freight on purchase 1,250,000 Mark up on cost 20%

Required:

Calculate the Cost of Stocks, for which the company should lodge an insurance claim. (06) Q.4 You are an income tax officer, and assessing the income of Mr. Fazal, who has never

filed any return relating to income of his business. Upon initial inquiry, you are reported that Mr. Fazal has been running his trading business since 2001, and has kept records of his business. Following is the year-wise income of Mr. Fazal:

Rupees

2001 6,600,000 2002 6,490,000 2003 7,040,000 2004 7,810,000



(3) While reviewing the income statements of Mr. Fazal, you noticed that closing stocks

of 2001 were undervalued by Rs.3,300,000 while closing stocks of 2002 were overstated by Rs. 1,210,000. Rests of the income were calculated correctly.

Following are the year-wise applicable income tax-rates

%

2001 30 2002 30 2003 35 2004 35

Required: What is the correct amount of Income before and after tax, for each year, and what is total tax recoverable from Mr. Fazal, assuming that there is no penalty or additional tax on concealment of Income?

(10)

Q.5 Childcare Pharmaceuticals Ltd dealing in pediatric medicines sends one of their

research scientists to U.K. for advance research program for development of a medicine for children with chest related diseases. The research went successful and the initial laboratory tests gave positive results of the medicine. The company intends to market the product and for this purpose a technical feasibility was prepared which proves that if the medicine is developed, for which all the technical and financial resources are available; there is a good market for the product. However the company has to design one of its production lines. The company registered the patent of the medicine, named CHILD-HEALTH. Following is the detail of cost incurred during the research and development phase of the medicine CHILD-HEALTH:

Rs. in ‘000’ Cost of research scientist stay in U.K. including fees for attending seminars and lectures 3,500 Fee for preparation of feasibility report 500 Designing cost of the process after feasibility study 4,000 Patent registration cost including attorney fees, etc. 250 Required: In the light of IAS-38 (Intangible Assets) (a) Compute the amount to be expensed out. (05) (b) Compute the amount to be capitalized as an intangible asset. (05)

Q.6 The Pure Limited leased plant and machinery having fair value of Rs.125,000 from

Leasing Corporation Limited. The lease agreement contains a bargain purchase option and requires 15 annual minimum lease payments of Rs.15,000 payable at the end of each year. The economic life of the plant and machinery is 20 years. Implicit rate of Leasing Corporation Limited is 8%.

Required: (a) Calculate present value of minimum lease payments payable in 15 years. (03) (b) Prepare a statement showing repayment of principal and mark-up for the first

five years. (10)

(c) In the light of IAS-17, what are the criteria, which attract capitalization of leased plant and machinery in above case?

(03)

(d) In the absence of bargain purchase option, will the Pure Limited capitalize the leased plant and machinery? Briefly explain reasons.

(02)



(4)

Q.7 C & C Construction Limited commenced work on the construction of a block of flats on July 1, 2004. During the period ended December 31, 2004 contract expenditure was as follows:

Rs. in ‘000’ Materials issued from stores 13,407 Materials delivered direct to site 73,078 Wages 39,498 Administration expenses 3,742 Site expenses 4,693

On December 31, 2004 there were outstanding amounts for wages Rs.396,000 and site expenses Rs.122,000 and the stock of materials on site amounted to Rs.5,467,000.

The following information is also relevant:

(i) On July 1, 2004 a plant was purchased for exclusive use on site at a cost of Rs.15,320,000. It was estimated that it would be used for two years after which it would have a residual value of Rs.5,000,000.

(ii) By December 31 the company had received Rs.114,580,000 being the amount of work certified by the architects up to December 31 less a 15% retention.

(iii) The total contract price is Rs.780,000,000. The company estimates that additional cost to complete the project will be Rs.490,000,000. From costing records it is estimated that the cost of rectification and guarantee work will be 2.5% of the contract price.

Required: (a) Prepare the contract account for the period, together with a statement showing

your calculation of the profit to be taken to the company’s profit and loss account on December 31, 2004.

(15)

(b) Give the values which you think should be included as turnover and cost of sales, in the profit and loss account, and those to be included in debtors and work in progress in the balance sheet in respect of this contract.

(05)

Q.8 (a) When can an entity commence capitalizing borrowing cost as part of a

qualifying asset? Describe with reference to IAS-23 (Borrowing Cost). (b) ABC Company contracted with XYZ Company to build additional factory

building of Rs.50,000,000 on existing land of the company. The work was completed on June 30, 2004. ABC Company made first payment of Rs.5,000,000 on January 1, 2004. During the period of construction, ABC Company had availed bank loan for capital work in progress from Pak Bank Ltd. The rate of interest was Re.0.23 per day per rupees thousand. The amount outstanding was Rs.138,000,000 as on June 30, 2004. Following is the further information regarding contract payments:

(03)

Date of payment Rupees 25.01.2004 10,000,000 05.02.2004 5,000,000 03.03.2004 20,000,000 06.06.2004 10,000,000

Required: Calculate the borrowing cost to be capitalized in the accounts of ABC Company for

the year ended June 30, 2004 in accordance with IAS-23. (09)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2005 September 05, 2005 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 KAH Limited was incorporated and listed after July 01, 2004. Following is the trial

balance of the company as at June 30, 2005:

Rs. in ‘000 Debit Credit Share capital (4,500,000 shares of Rs.10/- each) 45,000 Incorporation and listing expenditure 1,750 Start up cost 2,100 Fixed Assets at cost Land 7,500 Factory building 5,000 Office building 1,000 Plant and machinery 7,000 Furniture and equipment-Office 800 Furniture and equipment-Factory 200 Motor vehicles – Distribution Department 3,000 Trade debtors 21,000 Trade creditors 17,500 Accrued expenses 1,500 Sales 164,290 Purchase of raw material 126,070 Salaries & wages Direct 11,900 Indirect 4,250 Fuel and power 5,870 Other overhead expenses 8,970 Repair and maintenance-Factory 4,510 Distribution expenses 6,250 Selling expenses 2,800 Administrative expenses 2,950 Cash and bank balance 5,370 228,290 228,290 The following additional information is available: (a) The cost of stocks at June 30, 2005 was determined as under:

Rs. in ‘000 Raw material 8,800 Work in progress 4,700 Finished goods 9,600



(2) (b) Depreciation is calculated on straight line basis at the following rates:

Buildings 2% Plant and machinery 10% Furniture and equipment 10% Motor vehicles 20%

Depreciation on furniture and equipment is to be allocated 60% and 40% to selling and administrative expenses respectively.

It may be assumed that all the above assets were acquired on October 01, 2004.

(c) A debt of Rs.0.50 million is to be written off. The management estimates that bad debt shall be equal to 1% of the year end balance.

(d) Trade debts include a sum of Rs. 3.0 million receivable from an associated company against a single transaction. The company has not paid the amount in spite of many reminders.

(e) The General Manager Sales is entitled to a commission equal to 5% of the net profit before tax but after the said commission.

(f) Tax is to be provided at 35%.

(g) Following dividends were approved and declared by the Board of Directors:

- Interim Re.0.50 per share declared on June 05, 2005 but paid on July 8, 2005.

- Final Re.0.50 per share declared on August 18, 2005 and not yet paid.

Required:

Prepare balance sheet, profit and loss account and statement of changes in equity along with notes forming part thereof (excluding note for accounting policy) in accordance with the provisions of the Companies Ordinance, 1984.

(20)

Q.2 On October 01, 2004 ABC Limited, in the course of improvement and enhancement

of its production facility bought a plant having invoice value of Rs.25 million for the production of its popular brand of electrical goods. Mr. Aslam, one of the directors, was assigned the duty of supervising the installation of the plant. Other information is given below:

(a) A special trade discount of 25% was allowed by the supplier due to efforts of

the agent involved in the deal, who had close association with Mr. Aslam. Normally the supplier allows only 10% trade discount to his customers.

(b) The following costs were incurred on site preparation: Rs. in ‘000 - Salary of civil engineers and labour 1,200 - Civil and electrical work 2,800 - Electrical item received from the company’s own production

department at cost plus 10% profit (similar items are sold to customers at cost plus 30% profit)

330

- Remuneration of Mr. Aslam during site preparation 600



(3) (c) Civil and electrical work includes cost of certain instruments amounting to

Rs. 150,000, which were poorly handled by the workers and were totally damaged. Now they carry no value.

(d) On January 01, 2005 test run was started and successfully completed on January 31, 2005 at a cost of Rs. 550,000. The sale proceeds of test production were Rs. 320,000.

(e) The plant went into normal production from February 01, 2005 and attained 45% capacity during the period ended on June 30, 2005. The company, at this stage, discovered that the actual capacity of the plant is about 85% of the capacity declared by the supplier. The matter was discussed with the supplier and his agent. The agent finally agreed to pay a compensation of 3% on invoice value and issued his credit note to this effect on June 30, 2005.

(f) The company accounts for its assets under cost model and on June 30, 2005 it estimated Rs. 21 million as the fair value of the plant. It is further estimated that in case of disposal, the following expenditure will have to be incurred:

Rs. in ‘000 - Cost of dismantling 250 - Cost of transportation 100 - Terminal benefits of labour to be laid off 300 - Legal costs 100 - Stamp duty 50 - Salary of production manager during dismantling 100

(g) Depreciation is to be charged at 10% on straight line basis from the commencement of normal production.

Required:

Calculate the following, also submit your explanation if necessary:

(a) Initial recognition of the cost of plant. (05)

(b) Impairment loss, if any, as at June 30, 2005 and accounting treatment thereof. (06) Q.3 Finance Manager of RR Limited approached you to discuss implications of

following events on the financial statements of the company for the year ended June 30, 2005, which are to be placed before the Board of Directors for approval on August 28, 2005:

(a) Trade debts as at June 30, 2005 include a debt of Rs. 500,000 recoverable from Mr. P, who was declared insolvent on August 05, 2005.

(b) A computer software having carrying value of Rs. 1.5 million had been giving operational problems since May, 2005. It became totally inoperative in July, 2005. It took 25 days and a cost of Rs. 31,000 for rectification.

(c) Investments of the company amounting to Rs.10 million at the year end were disposed off for Rs. 6 million in response to a market crash on July 27, 2005.



(4) (d) At the year end, the company had 950 laptops of a good brand each costing

Rs.65,000. There was rising trend of prices in the market, which influenced the company’s sale policy and these computers were retained in stock till July 25, 2005 when market price started falling and within one week’s time declined to Rs.68,000. This situation forced the management to start selling. However, the whole stock could be sold till August 22, 2005 and fetched total sale proceeds of Rs.40.85 million.

(e) On May 28, 2005, the head of sales department had placed his suggestion to the Chief Executive Officer (CEO) for a free after-sale-service offer for two years to customers, effective April 15, 2005. However, the CEO approved the scheme on July 15, 2005 and it was announced by the company on the same date. It is expected that service cost attributable to sales made during April 15, 2005 to June 30, 2005 would be Rs. 150,000.

Required:

Suggest appropriate accounting treatment in each case with proper reasoning.

(15) Q.4 Following is the trial balance of RST Associates, a partnership firm, as at June 30,

2005.

Rs. in ‘000 Motor vehicles – cost 5,700 Motor vehicles – depreciation 2,280 Office equipment – cost 2,650 Office equipment – depreciation 1,590 Land 15,000 Buildings – cost 28,000 Buildings – depreciation 8,400 Debtors 19,305 Provision for doubtful debts 567 Cash at bank 7,224 Creditors 22,275 Capital R 41,000 S 17,250 T 11,750 Drawings R 6,000 S 3,600 T 2,400 Current account R 1,350 S 675 T 540 Sales 515,463 Purchases 353,750 Carriage inward 5,400 Stock - opening balance 40,500 Administrative expenses 128,481

620,575 620,575



(5) Some additional information is as under: (a) Closing stock valued at Rs.47.250 million.

(b) Administrative expenses include a sum of Rs. 3.6 million paid towards office rent for the year ending December 31, 2005.

.

(c) Depreciation on assets is to be charged under reducing balance method at the following rates:

- Building 2% - Office equipment 10% - Motor vehicles 20%

(d) A sum of Rs. 1.2 million was payable to Mr. S as salary for the year.

The partners decided to convert the partnership firm into RST (Pvt) Limited. The effective date was finalized as July 01, 2005.

Following information is also available: (a) Debtors include a sum of Rs. 6.20 million receivable from a relative of Mr. S

and is outstanding for a long period. All the partners now agreed that Mr. S is to settle this amount at Rs. 4.00 million as full and final settlement. Cheques from all other customers were received by the firm on July 01, 2005.

(b) Mr. S also assumed a liability amounting to Rs. 3.60 million, which he immediately settled through cheque at Rs. 2.80 million. All other liabilities were paid by the firm.

(c) 10,500,000 ordinary shares of Rs. 10 each were issued to partners in equal proportion.

(d) Balances in capital accounts were appropriately settled. Required: (a) Realization and bank accounts. (13)

(b) Partners’ capital accounts. (09) Q.5 (a) Describe the disclosure requirements for finance lease in the financial

statements of lessee, as required by IAS - 17 (Leases). (08)

(b) How is a financial lease transaction, initially recognized in the books of lessee?

(06)

(c) Following are the transactions of sale and lease back arrangement:

(i) LMN Limited sold one of its three years old plants costing Rs. 25 million on June 30, 2005 to XYZ Leasing Limited for Rs. 20 million. It was leased back to LMN for a term of two years at monthly installment of Rs. 941,500 payable at the end of each month. Borrowing rate of LMN is around 12% per annum. Depreciation rate for plant is 10%.



(6) (ii) LMN Limited sold a two years old motor vehicle costing Rs. 1.50

million on June 30, 2005 to XYZ Leasing Limited for Rs. 1.00 million. It was taken back on lease for six months at a lease rental of Rs. 30,000 payable at the end of each month. Depreciation rate for motor vehicle is 20%.

Required: What accounting treatment do you suggest for LMN Limited for the above

transactions? (06) Q.6 Following are some of the balances worked out from the trial balances of two

companies of GH Group as at June 30, 2005. Both companies are engaged in the same business in different locations.

Company A Company B

(Rs. in '000)

Fixed assets - tangible (WDV) 38,600 35,000 Total current assets 19,970 15,300 Share capital 20,000 27,000 Retained earnings 6,000 6,000 Profit after tax for the year 4,576 4,615 Long term loan 20,000 3,000 Total current liabilities 5,530 7,200 Income tax charge 2,464 2,485 Sales 54,000 30,000 Cost of goods sold 41,040 21,000 Administrative expenses 3,920 2,400 Financial charges 2,000 300 Profit received on short term deposits - 800

Required: (a) Compute the following for both companies and comment very briefly.

(i) Interest cover (03)

(ii) Dividend cover (The Group has a policy to pay 10% dividend each year) (03)

(b) Did company B perform better than company A? Explain. (06)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2006 March 06, 2006

FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 Following is the trial balance of Shams Limited, a public quoted company, as at

June 30, 2005:

Particulars Debit Rs. in '000'

Credit Rs. in '000'

Ordinary share capital 30,000 Land 12,000 Building 22,000 Office furniture and equipment 5,500 Investments 13,000 Advance tax deducted by a customer 800 Trade debtors 4,000 Other receivables 6,000 Prepayments 2,000 Bank overdraft 9,400 Trade creditors 2,500 Accrued expenses 1,000 Long term loans from banks 15,000 Sales 117,000 Administrative and selling expenses 21,000 Profit on investment 1,800 Dividend paid 1,500 Interest expenses on bank overdraft 500 Purchases (merchandise) 86,000 Other direct expenses 2,400 176,700 176,700

Some other relevant information is as under: i) Company has authorized share capital of Rs. 100,000,000 divided into

10,000,000 ordinary shares. ii) The store department reported closing value of stores at Rs. 1,800,000 that

includes stock in trade amounting to Rs. 1,650,000. iii) Trade debts include credit balance of a customer amounting to Rs. 100,000. iv) A long term loan amounting to Rs. 17,500,000 was obtained from a bank on

September 25, 2004. The principal is payable in equal installments on 25th of March and September each year. It carries a markup of 12% payable with each installment.

v) Interest on long term loan paid with the first installment was wrongly debited

to administrative and selling expenses.



(2)

vi) The land was revalued on June 30, 2005 at Rs. 18,000,000 and directors approved the revaluation.

vii) Depreciation is charged on building at 5% and on office equipment and

furniture at 10% per annum. These assets were acquired on October 01, 2004. viii) Investments include some securities amounting to Rs. 4,500,000 maturing on

August 31, 2006. ix) The directors approved and declared a 5% interim stock dividend on June 18,

2005. The shares were allotted on June 28, 2005 but no certificate has yet been issued to any shareholder.

x) The company has signed another long term loan agreement amounting to Rs.

5,000,000 with a bank in May, 2005 whereby the bank has given firm commitment of its disbursement on or before June 05, 2005. However, actual disbursement was made on July 05, 2005.

xi) The tax rate applicable to the company is 35%. However, tax on profit on

investment is payable at the rate of 20%. Required:

You are required to prepare balance sheet, profit and loss account and statement of changes in equity (without any notes to the accounts) for the year ended June 30, 2005 under the Companies Ordinance, 1984. Please also submit important workings and computations. (24)

Q.2 Qamer Trading Company Limited is facing a litigation due to an alleged breach of

contract. The directors have made the following assessment about the damages:

Particulars Probability i) The contract contains a clause that prescribes damages of

Rs. 5,000,000 in case of default. 60% ii) The company has incurred a sum of Rs. 600,000 as legal expenses,

of which 50% is recoverable in case of a favourable decision. 40% iii) The plaintiff has claimed Rs. 1,000,000 as legal expenses. 40% iv) The plaintiff has also claimed Rs. 500,000 as interest on damages. 5% Required:

Explain how the above information would affect the financial statements of the company. (06)

Q.3 Following information has been extracted from the books of Sayyarah Limited.

i) The company, to curb the sharp decline in sales of its products 'Y' and 'Z', paid

Rs. 1.7 million to a consulting company for improvement in the design of the products, if possible.

ii) On the basis of consultant's report, production of ‘Z’ was discontinued. The

consultant had suggested three new designs for 'Y'. One of them was selected and company incurred Rs. 0.65 million on new moulds and patented the design at a cost of Rs. 0.3 million. 60% of the fee payable to the consultant is directly attributable to ‘Y’.



(3) iii) Manufacturing license of product 'Z' is expiring on June 30, 2008 and has a

book value of Rs. 0.5 million. This license is not transferable. iv) The company paid Rs. 1.0 million to an agency for an advertisement campaign

for product 'Y' that increased the company's sales substantially and there is a strong evidence that it will also bring net cash flow of Rs. 6.5 million in the next year. Thereafter its impact will be insignificant.

v) Product 'T' is one of the top brands of the company and bears a good market

reputation. The brand is currently being reported at zero value in the financial statements despite the fact that the company incurred Rs. 3 million on setting up a brand development department exclusively for the said item. This year company has a firm offer for the said brand amounting to Rs. 12 million from another financially sound company.

Required: Suggest accounting treatment with brief reasons, in respect of each of the above information. (14)

Q.4 The books and other records of Sitara Constructions Limited, the contractor contain

the following information: Particulars Contract A Contract B

Date of commencement 1-Jan-05 1-Jul-04 Date of completion 31-Dec-05 31-Oct-05 Work certified by the surveyors 58% Not available

Rs. in '000' Contract Price 120,000 150,000 Cost incurred upto June 30, 2005 Wages 49,140 64,800 Materials issued to site 17,640 52,920 Other costs 7,200 14,550 Machinery and equipment costs 12,000 18,000 Closing balance of material at site 3,900 675 Amount billed according to agreement 65,000 141,000 Expected additional cost to complete the projects Wages 28,860 2,700 Materials 7,560 1,080 Other costs 2,400 450

Some other information is as under: i) According to the company’s policy, certification of work has primary

importance in computing interim profits on a contract-in-process. ii) The contracts signed with the respective customers contain a clause that

prescribes that in case of delay, penalty equal to 2% of the contract price will be imposed on the contractor for each month. Whereas, in case of early completion the contractor will be given a bonus at the similar rate. Contractor is very much confident that both the contracts will be completed 30 days before schedule.



(4)

iii) According to the terms of the contracts, all machinery and equipment used for

Contract A and B will be acquired by the respective customers at an agreed price of Rs. 8,400,000 and Rs. 12,000,000 respectively, at the end of the contract.

Required:

(a) Compute 'gross profit' and 'contract revenue earned' attributable to each

contract for the year ended June 30, 2005. (b) Prepare separate contract accounts in the books of the contractor.

(13) (08)

Q.5 Following information is available from the financial records of Marreekh Limited: i) The life of a plant purchased on July 01, 2003 for Rs. 24 million, was estimated

by a valuation consultant at 4 years with no residual value. The depreciation for the year ended June 30, 2004 was provided accordingly. On June 30, 2005, in view of changed circumstances, the same consultant revised the previous estimates and suggested remaining life of 4 years and residual value at Rs. 2 million. During the year 2004-05 certain equipments remained idle for ten months due to company's engagement in executing a profitable order of a product for which these equipments were not needed at all. These equipments have six years remaining life on July 01, 2004 and residual value of Rs. 0.5 million. The accountant of the company has prepared the financial statements for the year ended June 30, 2005 alongwith the notes. An extract from the note related to fixed assets is given below:

( Rs. in million)

Cost as at June Depreciation Particulars 30, 2005 Opening Current Closing

WDV

Land 13.0 - - - 13.0 Building 25.0 4.0 0.5 4.5 20.5 Plant 24.0 *4.4 4.4 8.8 15.2 Equipments remained idle during the year 3.0 1.0 - 1.0 2.0 Other equipment 10.0 4.0 1.0 5.0 5.0

75.0 13.4 5.9 19.3 55.7 *The accountant has credited the change in opening balance to other income. (ii) The company was holding some stock of merchandise amounting to Rs. 5

million on behalf of its principal. Due to mishandling, quality of the said merchandise was significantly affected. The technical staff has not yet finalized its estimation of loss due to extra ordinary complexity involved in assessment of quality of the damaged merchandise. The financial statements are due for approval in the next few days. Therefore, accountant of the company has made provision for the whole amount, as the company acknowledges its default.



(5)

(iii) The company is also engaged in trading of certain products, which were

valued at the year end, as follows: Per unit Value

Prod. Quantity Cost Freight in Total

Net Realizable

Value Per unit Rs.

A 5,400 45 2 47 42 42 226,800 B 2,500 18 3 21 20 20 50,000 C 1,450 56 8 64 65 65 94,250 D 7,000 32 11 43 41 41 287,000 E 6,500 121 5 126 170 170 1,105,000

1,763,050 During the year the accountant has debited the amount of transit insurance

aggregating to Rs. 1.5 million to prepayments account. The rate of premium is 3% of the purchase price.

Required:

Pass necessary entries to rectify the errors, if any, according to the principles laid down in International Accounting Standards. Also submit necessary workings. (15)

Q.6 On January 1, 2005, partners of Chand & Company and Suraj & Company agreed to

merge their businesses. The new firm is to be called CS & Company. The balance sheets as on December 31, 2004 showed the following position:

Chand

& Co. Suraj

& Co. Rs. in '000' Capital accounts - A / R 6,000 6,000 - B / S 4,500 3,000 - C 3,000 - 13,500 9,000 Loan - R - 3,000 Current accounts - A / R 1,200 25 - B / S 930 875 - C 270 - 2,400 900 Creditors 1,350 1,650 17,250 14,550 Fixed assets Land 2,250 2,625 Plant, equipment and fixtures 1,875 1,500 4,125 4,125 Current assets Debtors 10,500 9,000 Stock in trade 1,350 1,125 Cash 1,275 300 13,125 10,425 17,250 14,550



(6)

For the purpose of merger the following was agreed: i) The initial capital of new firm would be Rs. 27.0 million. 50% of the capital

shall belong to partners of Chand & Co. and 50% to partners of Suraj & Co. ii) 50% share belonging to partners of each firm shall be allocated between its

partners in the ratio of their capital in the old partnership. iii) No further cash is to be inducted in the new firm by the partners. iv) Plant, equipment and fixtures are to be taken over by the new firm as follows:

- from Chand & Co. Rs. 900,000 - from Suraj & Co. Rs. 750,000

v) Debtors are to be taken at 95% of their book value. Stock in trade shall be valued at 10% below its book value. Liability towards the creditors of both firms and the liability in respect of loan from Mr. R shall be assumed by the new firm.

vi) Each partner in the firm shall receive a salary of Rs. 500,000 per month,

interest on capital at 8% per annum and the remaining balance of profit shall be shared in proportion to their share in the capital.

The firms were merged according to the above agreement effective January 01, 2005. During the year 2005 the firm earned a profit of Rs. 56,201,000 before salaries, interest and appropriations. Each partner made monthly drawings of Rs. 450,000 per month and quarterly drawings equal to 5% of the capital.

Required: a) Draw ‘realization account’ of each firm. b) Prepare the initial balance sheet of CS & Company i.e. immediately after the

merger. c) Compute partners’ current account balance of CS & Company for the year

ended December 31, 2005.

(05)

(10)

(05)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2006 September 04, 2006 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) ___________________________________________________________________________ Q.1 Following is the abridged balance sheet of Platinum International Traders Limited as

at June 30, 2006.

Rs. In Million 2006 2005 Property, plant and equipment 10,500 10,000 Intangible assets 1,200 1,000 Short term investments 750 500 Stocks 1,290 1,000 Trade receivables (net of provisions) 450 400 Advances and deposits 200 200 Cash and bank balances 160 100 Bank overdraft 400 200 Creditors and other liabilities 500 400 Provision for taxation 2,250 1,500

Net Equity and Surplus on Revaluation of Fixed Assets

11,400

11,100

The following additional information is also available:

(i) Accounting profit after tax is Rs. 3,000,000.

(ii) Income tax paid during the year amounted to Rs. 1,000,000. (iii) Depreciation for the year is Rs. 750,000. (iv) Provision for doubtful debts at the end of the year amounted to 5% of closing

balance of trade receivables. The opening balance of the provision was NIL. (v) 48,000 shares were issued during the year at a premium of Rs. 2.50 per share.

Face value of the company’s share is Rs. 10. (vi) Markup paid during the year amounted to Rs. 500,000.

(vii) An old machine having book value of Rs. 500,000 was exchanged with a new machine costing Rs. 950,000. The company paid Rs. 350,000 as the difference. No other fixed asset was sold during the year.

(viii) Intangibles are amortized at 35% of book value. (ix) The company revalues its major fixed assets periodically. A revaluation

carried out during the year showed that the value of fixed assets had declined by Rs. 3,300,000. The amount was charged against surplus recorded in earlier years.

Required: Prepare a cash flow statement under ‘indirect method’ in accordance with IAS-7.

Also submit necessary workings.

(16)



(2) Q.2 Mr. Potassium, Radium and Uranium are partners in PRU & Company sharing profit

in the ratio of 3:2:2. The firm has been doing excellent business for last many years and its products have a good reputation in the market. They decided to convert the firm into a company limited by shares with the name and style of Iron Limited. The final balance sheet of the firm immediately before the process of conversion was as under:

PRU & Company Balance Sheet as at June 30, 2006 Rs. in ‘000 Fixed Assets – Tangible Building 25,000 Machinery 75,000 Vehicle 10,000 Furniture 12,000 122,000 Fixed Assets – Intangible Manufacturing Quota 7,000 Current Assets Stocks 23,000 Trade Debtors 18,000 Bank balances 4,000 45,000 Current Liabilities Trade Creditors 11,000 Other liabilities 2,000 13,000 Net Assets 161,000 Represented by: Mr. Potassium 69,000 Mr. Radium 46,000 Mr. Uranium 46,000 161,000 The conversion was carried out on the following terms and conditions: (i) A friend of the old partners, Mr. Calcium contributed 2,000,000 shares of Rs.

10 each in the capital of Iron Limited. He paid Rs. 20,000,000 to the company as share subscription money.

(ii) Mr. Radium was not willing to continue as equity-holder. Therefore, 480,000 long term debentures of Rs. 100 each were issued by Iron Limited against his capital in the partnership.

(iii) The company issued 14,000,000 fully paid shares of Rs. 10 each including the shares issued to Mr. Calcium.

(iv) Shares issued to the continuing partners are exactly in proportion to their final capital account balances after incorporating realization gain or loss.

(v) Other liabilities were not assumed by Iron Limited. These were fully settled by PRU & Company through cash payment of Rs. 1,800,000.

(vi) Trade debts amounting to Rs. 2,500,000 were considered as bad.



(3) (vii) Vehicles having carrying value of Rs. 3,500,000 were not taken over by Iron

Limited. PRU & Company sold these vehicles for Rs. 2,800,000.

(viii) Manufacturing quota has a ready market of Rs. 8,600,000. (ix) The firm owns a patent right which has an estimated value of Rs. 2,100,000.

Presently it is being carried by PRU & Company at nil value.

(x) All assets including cash and bank balances were taken over, and all liabilities towards trade creditors were assumed by Iron Limited after incorporating the above adjustments.

(xi) Goodwill is to be accounted for in the books of Iron Limited, if necessary. July 01, 2006 may be assumed to be the effective date of all the above transactions. Required:

Prepare the following: (a) Realization Account. (b) Statement of shareholding in Iron Limited. (c) Balance sheet of Iron Limited as at July 01, 2006.

(16)

Q.3 The Chief Accountant of Shaheed & Company (Pvt.) Limited has resigned.

Management has hired you to prepare the balance sheet as at June 30, 2006 and the profit and loss account for the year then ended. The records of the company have not been maintained properly. While going through some of the files you found a report in which the following ratios and information have been shown.

Current Ratio 1.50 Liquid/Quick/Acid test ratio 1.00 Stock turnover ratio 14.40 Gross profit 20% Return on combined equity (ROCE) 20% Return on equity (ROE) 27.2% Debt collection period (months) 1.00 Revenue reserve as a percentage of capital 25% Cost of goods sold to fixed assets 1.92 The management has informed you that the above ratios are mostly accurate. You

have also ascertained that the sale during the year was Rs. 216 million and selling & administrative expenses amounted to Rs. 14.057 million. Tax rate applicable to the company is 30% of net profit and 90% of the tax has been paid during the year.

Required: Develop a summarized balance sheet as at June 30, 2006 and profit and loss account for the year then ended.

(11)

Q.4 Copper Leasing Limited engaged in leasing of high cost sports equipment undertook following transactions on June 01, 2006.

(i) A speed boat of a famous brand ABC was given on 3 years lease to Mr.

Carbon at an annual lease rental of Rs. 215,365 payable at the end of each year. (ii) A motor boat of XYZ make was leased to Ms. Chlorine at an annual rent of Rs.

1,040,886 payable at the end of each year for three years. The price charged in case of outright sale is Rs. 2,500,000.



(4) (iii) A water bike of XYZ make was leased to Mr. Sulphur at an annual rent of Rs.

98,763 payable at the end of each year. The agreed lease term is three years. Outright sale price of this bike is Rs. 250,000.

(iv) The following additional information is available:

- The company is also a sole dealer of XYZ make in the city and operates an outlet for that purpose.

- At the above outlet 25% area is used as company’s administrative office. - Outlet’s rent and other maintenance expenditures are approximately

Rs. 660,000 per month. - Marketing staff is given a commission at 2% of price of goods whether they

are leased or sold outright. - The company paid Rs. 3,770 to a local authority, for inspection of each unit. - Registration charges incurred by the company for each unit of speed boat,

motor boat and water bike were Rs. 3,500 Rs. 22,500 and Rs. 2,000, respectively.

- Cost of speed boat, motor boat and water bike were Rs. 500,000 Rs. 2,400,000 and Rs. 230,000, respectively.

- The ownership is transferred to lessees at the end of the lease. - The company charges 9% markup on leases of water bikes as against

prevailing market rate of 11%.

Required:

(a) Compute ‘gross investment in lease’ and ‘unearned financial income’ in respect of each lease.

(b) Prepare all necessary journal entries on June 01, 2006 and on receipt of first rental.

(13) (07)

Note: Present values of an annuity of Re. 1 received at the end of the year for three

years are as follows: Rate 8% 9% 10% 11% 12% 13% 14% Present Value 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216

Q.5 Gold Shoes Limited, a company engaged in manufacturing of pure and artificial

leather shoes has been facing a sharp decline in their profits for few years due to severe competition from shoes imported from China. The board of directors of the company formed a committee of executives to look into the matter. A detailed plan was submitted by the committee, which was considered and approved by the board on May 08, 2006. The approved plan has been circulated to members and other stakeholders.

The following activities have taken place subsequently:

(i) Production of artificial leather shoes was discontinued and a number of new designs of leather shoes were introduced from July 2006.

(ii) Some processing units having book value of Rs. 35 million have been sold, at

a price of Rs. 31 million in July 2006.

(iii) Certain work force was terminated in June 2006 for which payment of

compensation of Rs. 10.5 million was agreed with the union in July 2006.



(5) (iv) Company’s legal advisor has been asked to prepare various sale agreements

of fixed assets and stocks, preparation of memorandums of understanding with the distributor and workers union etc. related to discontinued business. The legal advisor charged Rs. 0.2 million as fee in addition to his monthly retainership fee amounting to Rs. 0.05 million in July 2006.

(v) Stock of artificial leather shoes available in company’s store on June 30,

2006, costing Rs. 11 million was sold in first week of July 2006 to the sole distributor of the company at an agreed price of Rs. 12 million.

(vi) In July 2006 total assets of Peshawar office, having carrying value of Rs. 1.8

million on June 30, 2006 were agreed to be sold to a party for Rs. 2 million.

(vii) Purchase of additional machinery costing Rs. 3 million was approved in July

2006, for which a valid and firm quotation was received from the supplier in June 2006.

(viii) Manager of Peshawar office was transferred to Islamabad due to closure of

Peshawar office in July 2006. A relocation compensation of Rs. 0.5 million is agreed.

(ix) Certain workers of the discontinued unit were given the option to continue

their employment subject to successful completion of a specific training from a reputed institute. They completed the required training in June 2006. In July 2006 the company as a gesture of good relations reimbursed 75% of their training expenditure, which amounted to Rs. 0.50 million.

(x) It has been estimated, with reasonable accuracy, that as a result of the sale

promotion and marketing costs of new designs of shoes, there will be an operating loss of Rs. 8 million by the time the whole process is completed (sometimes in December 2006).

Required:

Explain how each of the above matters will be recorded in the financial statements clearly indicating whether:

- a provision will have to be made; or - a disclosure will be required; or - neither provision nor disclosure is necessary.

Give reasons to support your opinion. (No journal entries are required to be made).

(15)

Q.6 You have recently been appointed as the Chief Accountant of Steel Air Limited, a commercial airline. Your accountant has prepared the financial statements for the year ended June 30, 2006. You have reviewed them and found them satisfactory except for the note on tangible fixed assets. You have scrutinized the records and extracted the following information:

(i) The company acquired land on 99 years lease on January 1, 1999 for Rs. 200 million.

(ii) The company has a fleet of nine aircrafts, relevant details of which are as under:



(6) - Each aircraft consists of two major components i.e engine and airframe

having useful economic life of 20 and 12 years respectively. 70% of the cost of aircrafts pertains to the engine and 30% to the airframe. The company has 10 years replacement policy for airframes.

- Five aircrafts were acquired on January 1, 2000 for Rs. 220 million each.

- Four used aircrafts were also bought on January 1, 2000 from another airline for Rs. 55 million each. Each aircraft was renovated and overhauled at a cost of Rs. 25 million. Rs. 10 million were spent on the airframe and Rs. 15 million on the engine. 15% of these expenditures has been in respect of costs of consumables. The useful economic lives of engines and airframes are estimated to be the same as those of the new aircrafts.

- Salvage value of engines as well as the airframes is estimated at 10% if sold at the end of their economic life. Salvage value of airframes at the time of replacement is estimated at 15% of the cost.

- A newly acquired aircraft was damaged during landing due to computer malfunction on October 31, 2005. It remained in-operative during the remaining period of the year. However, it does not require any revaluation.

(iii) Engineering machineries were acquired on April 01, 2000 for Rs. 330 million. As a result of annual checkup, certain parts were replaced at a cost of Rs. 50 million on July 01, 2005. This replacement did not enhance the useful life nor did it affect the efficiency of the machineries. New parts have a useful life of 30,000 hours. Cost of replaced defective parts was Rs. 20 million and they were sold for Rs. 8 million.

Total useful life of machinery is 60,000 hours and the average usage has been 500 machine hours per month. Estimated salvage value is 10% of cost.

(iv) Hangers for aircrafts have been in use since July 1, 2000. The total cost of their construction was Rs. 20 million and the total estimated useful life is 20 years.

(v) Furniture and fixtures costing Rs. 13 million, Rs. 7 million and Rs. 4 million were acquired on July 01, 2000, July 01, 2002 and July 01, 2005 respectively.

(vi) Ten vehicles were taken on finance lease on July 1, 2005 with fair market value of Rs. 1 million each.

(vii) The company’s policy as regards depreciation is as under:

- Leasehold land – straight line method. - Hangers – straight line method. - Aircrafts – straight line method. - Engineering plant and equipment –machine hours used. - Leased vehicles – declining balance method at the rate of 20% per annum. - Furniture and fixture – declining balance method at the rate of 10% per

annum.

Required:

Draft a note to the accounts on fixed assets strictly in accordance with the requirements of International Accounting Standards and the Companies Ordinance, 1984. Also submit necessary workings. (Give all figures to the nearest thousand)

(22)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2007 March 6, 2007 FINANCIAL ACCOUNTING (Marks 100) Module C (3 hours) Q.1 Following information is available from the records of Best Furniture Limited (BFL):

(i) A lease agreement was negotiated with a leasing company in October, 2006 for a nails manufacturing machine having fair value of Rs. 1,000,000. The lease rental has been agreed at Rs. 325,000 and is payable at the end of each year for three years. BFL replaces such machines after 5 years.

(ii) The same leasing company has also leased an electrical wood cutter at a lease rental of Rs. 50,000 payable at the end of each year for a term of two years. Fair value of the cutter is Rs. 100,000. Although such cutters can be used for more than four years but BFL replaces them in two and half years’ time.

At the end of the term BFL will have an option to purchase the leased items at a price to be agreed between the parties. BFL’s incremental borrowing rate is 11%.

Required: Explain with reference to IAS 17 (Leases), whether the above leases shall be classified

as an operating lease or a finance lease in the books of Best Furniture Limited. (09)

Q.2 Model Security Limited (MSL) is a supplier of high quality security systems. The company also provides services for maintenance of the systems. Following are some of the transactions which were carried out in January, 2007:

(i) Two systems were delivered to a customer on January 05, 2007. According to the terms of sale, MSL was required to install the systems within three months. The installation work was completed on February 28, 2007. Sale price and installation charges of Rs. 60,000 and Rs. 25,000, respectively, had been paid by the customer in advance.

(ii) A service contract was signed under which MSL was required to provide repair and maintenance with parts and accessories. A non-refundable annual fee amounting to Rs. 60,000 was received as advance on January 01, 2007.

(iii) A firm contract was signed, for supply of sixty systems at a price of Rs. 55,000 each. The systems were required to be altered for the customer’s specific requirement. It was agreed that in case of cancellation, the customer will have to pay a compensation equal to 25% of the total agreed price. MSL has estimated that it would have to bear a cost of Rs. 12,000 to bring the systems in general saleable condition. According to the agreement, the customer had paid 25% advance on January 17, 2007.

(iv) Three systems have been delivered and installed at the office premises of Mr. Fine, a close friend of Chief Executive Officer (CEO), on January 08, 2007. The accountant has not recorded the sale, as the amount of discount has not been decided by the CEO. List price of each system is Rs. 2.5 million.

Required: With reference to IAS 18 (Revenue) explain how and when the sale should be recorded

in each of the above case. (08)



(2)

Q.3 Following data is available with Pink Limited in respect of two of its regular customers who are engaged in the same kind of business:

Customer ‘A’

Customer ‘B’

(Rs. in million) Stock in trade 22.00 74.00 Trade debtors 14.67 51.80 Other current assets 21.00 8.00 Trade creditors 37.40 53.10 Bank overdraft - 10.00 Sales 176.00 259.00 Cost of sales 149.60 212.38

Credit committee of Pink Limited has decided to allow credit limit of Rs. 18 million to both customers. However, Mr. Alam, a member of the committee, had some reservations on extending credit facility to customer ‘A’.

Required: Compute and interpret the relevant ratios of each customer and submit your comments

on the opinion of Mr. Alam. (10)

Q.4 Following is a summarized trial balance of Gray Limited as on December 31,

(Rs. in million) 2006 2005 Debits Fixed asset- tangible (net of accumulated depreciation) 292 103 Capital work in progress - 210 Intangible asset 12 12 Accumulated amortization on intangible asset 8 4 Inventories 3 5 Trade receivables 311 200 Other receivables 5 8 Bank balances 14 8 Cost of sales 992 943 Administrative expenses 145 132 1,782 1,625 Credit Payables 242 225 Paid up capital 100 75 Share premium 150 125 Sales 1,232 1,150 Retained earnings 58 50 1,782 1,625 Following further information is available:

(i) Retained earnings have been debited in 2006, on account of dividend payments of Rs. 25 million (2005: Rs. 22 million) and on account of dividend proposed and approved in January, 2007 amounting to Rs. 42 million.

There was no change in ‘Paid up capital account’ during the year 2005.

(ii) During the year 2005, cost incurred on testing of a new plant amounting to Rs. 12 million was accounted for as an intangible asset.

(iii) No depreciation was charged on the new plant mentioned in (ii) above although it was ready for intended use on January 01, 2006. The cost of plant is Rs. 210 million and rate of depreciation is 15%.



(3)

(iv) The company had made no provision in the years 2004 and 2005 in respect of some of its overdue debtors as they were fully secured then. However, the security has been impaired and management now feels that a provision for Rs. 2, 4 and 5 million is necessary in respect of the years 2004, 2005 and 2006, respectively.

Required: (a) Make necessary adjusting entries. Ignore taxation. (10) (b) Prepare ‘Statement of Changes in Equity’ for the year ended December 31, 2006. (16)

Q.5 White Limited is engaged in the construction of small townships. It announced a new township with a name and style of ‘Ashiyana’.

The estimated cost of the project is as under:

Land Rs. 180 million Construction Rs. 100 million

The company planned to finance the project through shareholders’ equity, bank loan and down payments to be received from buyers. The land required for the project was in the possession of the company and had been acquired in 2003. The construction started on January 01, 2006 and completed on November 30, 2006.

Details of costs incurred are as follows: Date of Bills Particulars Rs. in million

Feb 16, 06 Documentation 2.50 Mar 16, 06 Land preparation 13.50 May 16, 06 Structure 50.00 Dec 16, 06 Finishing 38.50

All the above bills were paid on the same dates except for Rs. 15 million included in finishing cost, which was paid in January, 2007.

Funds were arranged as under: Date Source Rs. in million Finance cost

Mar 01, 06 Shareholders equity 10.00 Yield required is 30% Mar 01, 06 Bank Loan-A 30.00 Carry markup @ 12% p.a. Mar 01, 06 Bank Loan-B 40.00 Carry markup @ 18% p.a. Dec 16, 06 Down payments 24.50 No financial cost

Required: Determine the amount of borrowing cost that can be capitalized by the company under

IAS 23 (Borrowing Costs). (15)

Q.6 Following transactions were carried out by Yellow Limited during the year ended June 30, 2006.

(i) Mr. Sharp, a well-known management consultant was hired, to conduct a three weeks workshop on time management for the staff of the company at a fee of Rs. 0.5 million. Mr. Sharp is the son of the Chief Executive Officer.

(ii) A loan of Rs. 30 million was obtained from Blue Bank Limited. The loan was negotiated by Mr. Slim, General Manager Finance of Yellow Limited, who was formerly a senior executive of the Bank.

(iii) Three used delivery trucks of the company were sold to Red Supplies Limited, which supplies approximately 60% of the total raw material used by the company.



(4)

(iv) Granted interest bearing loan to its Chief Executive Officer for construction of house in accordance with the company’s policy relating to employees’ benefit.

(v) Paid mobilization advance of Rs. 9 million against a construction contract to Orange Limited which is owned by Mr. Clear, a member of a reputed business family. Two influential directors of the company are nephews of Mr. Clear.

(vi) The company awarded a contract for plant maintenance services to its subsidiary Brown (Pvt.) Limited effective August 01, 2007.

(vii) The company has nominated a director in Purple Limited who participates actively in its operational decisions. However, no business relations exist between the two companies.

Required: For each case, discuss the requirement of IAS 24 (Related Party Disclosures) as regards

the following disclosures in the financial statements for the year ended June 30, 2006: (a) Related party relationship; and (b) Related party transactions. (14)

Q.7 A summarized trial balance of Green Limited for its first year is given below:

(Rs. in million) Debit Credit

Paid up capital - 131.50 Payables - 3.50 Land 60.00 - Buildings 35.00 - Other fixed assets-tangible 22.00 - Product research costs 15.00 - Product development costs 12.00 - Stocks 6.50 - Accounts receivables 5.50 - Cash and bank balances 8.00 - Revenues - 108.00 Expenditures 79.00 - 243.00 243.00

All adjustments have been made except for the following:

(i) Depreciation has to be charged on buildings and other fixed assets at the rate of 15%. The rate of tax depreciation is 30%.

(ii) Half of the research and development costs are allowable for tax purposes in the first year. The balance amount shall be permanently disallowed.

(iii) The company amortizes intangible assets over a period of three years.

(iv) The company’s profit is subject to tax at the rate of 35%.

(v) Interest of Rs. 1.25 million was paid on a short term loan received from directors, which is not an allowable expense under the tax laws.

Required: Prepare journal entries for necessary adjustments including taxation. Show necessary

workings. (18)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2007 September 06, 2007 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 D, E and F were partners in the firm DEF & Company and shared profit and loss in the

ratio 5:3:2 respectively. On July 01, 2007, F informed the other partners that he has suffered heavy losses in one of his personal businesses and is unable to pay his debts. He therefore requested D & E to settle his account in the partnership. D & E agreed to continue the business without F but at the same time agreed to convert the partnership into a limited company named Paradise Limited.

The trial balance of the firm as on June 30, 2007 appeared as follows: Debit Credit

Rupees in thousands Cash in hand 8,000 Trade debts 7,000 Inventories 5,000 Trade creditors 9,000 Other liabilities 5,000 Partners’ capital – D 21,000 – E 13,000 – F 2,000 Land and building 10,000 Plant 20,000 50,000 50,000

All the partners agreed to the following: (i) On the basis of previous experience it was estimated that 4% of the trade debts will

not be recovered. These shall be recorded in the new company accordingly.

(ii) A creditor has left the country about five years ago and is not expected to claim his

dues amounting to Rs. 50 thousand.

(iii) A fully depreciated fixed asset costing Rs. 120 thousand was written off in March

2006. However the same is still in use and has a fair market value of Rs. 100 thousand.

(iv) Goodwill of the firm is estimated at Rs. 1,120 thousand. However, it shall not be

recorded in the books of the new company.

(v) Expenses incurred on the incorporation of Paradise Limited amounting to Rs. 120

thousand were paid by E. The company will issue 6% preference shares in lieu of the above.

(vi) Salaries of Rs. 300 thousand had been credited to each partner’s capital accounts

while recording the distribution of profits for the year ended June 30, 2007. On the insistence of F, it was agreed that based on the amount of efforts put in by D & E, the salaries allowed to them should be reduced by 30%.



(2)

(vii) The paid-up capital of the company shall comprise of 4.0 million shares of Rs. 10 each, which shall be contributed equally by D & E.

Required: Prepare the following: (a) Partners' Capital Accounts (b) Realization Account (c) Opening Balance Sheet of Paradise Limited (20) Q.2 Naseer Distributors have sole distribution rights of different products. These rights were

bought at substantial prices. According to the company’s policy the cost of distribution rights are amortized over a period of ten years at a rate of 15% per annum for the first five years and 5% per annum during the next five years. While reviewing the accounting policies the management concluded that the policy of amortization of distribution rights does not reflect the pattern in which benefits flow to the company. Accordingly, they decided to amortize such rights over a period of eight years at a rate of 20% per annum for the first four years and 5% per annum during the last four years. The relevant details are as follows:

Rupees in ‘000’ Products S T U

Cost of distribution rights 50,000 40,000 27,000 Accumulated amortization upto June 30, 2007 (Under the old policy) 15,000 32,000 24,300

Recoverable value 31,000 4,000 250

The management has been following a policy of recording gratuity on the basis of

payments. From this year it decided to account for the liability, in accordance with the International Accounting Standards. A consultant was hired who had submitted his report, the extracts from which are as under:

Rupees in ‘000’

Year Provision required Payment made 2005 1,500 200 2006 2,100 900 2007 2,500 700

Some of the extracts from the company’s trial balances after charging amortization under

the existing policy are as follow:

Rupees in ‘000’ June 30, 2007 June 30, 2006 Sales 813,000 718,000 Purchases 610,000 520,000 Amortization on intangible assets 18,250 22,250 Depreciation expenses 12,000 12,000 Salaries 46,000 45,000 Gratuity 700 900 Stocks 22,000 26,000 Other expenses 90,000 87,000 Wastage sales 2,000 2,700 Gain on sale of property 42,000 -



(3)

Closing stocks as on June 30, 2007 was valued at Rs. 18,250 thousand. Income tax rate applicable to the company is 35%. Amortization is not allowed as tax expense whereas gratuity is allowed to the extent of payments made.

Required: Prepare a profit and loss account for the year ended June 30, 2007 with comparative

figures under the new policy in accordance with the requirements of International Accounting Standards (Ignore deferred tax).

(18)

Q.3 Following is the trial balance of ABC Limited as at June 30, 2007. Debit Credit

Rupees in thousands Freehold land 17,000 Building 60,000 Accumulated depreciation – building 24,000 Plant and machinery 30,000 Accumulated depreciation – plant and machinery 15,000 Motor vehicles 16,000 Accumulated depreciation – motor vehicles 9,600 Furniture, fixtures and equipment 4,500 Acc. Depreciation – furniture, fixtures and equipment 2,000 Long term deposits 4,000 Investments 25,000 Advance for expenses 1,500 Other receivables 2,000 Trade debtors 16,000 Trade creditors 8,000 Other liabilities 1,300 Provision for gratuity 10,000 Long term deposits received from suppliers 5,200 Paid-up share capital 80,000 General reserve 19,700 Cash and bank balances 17,000 Stock in hand – raw material 11,000 – work in progress 4,500 – finished goods 2,100 Sales 334,050 Purchases – raw materials 216,000 Discount on purchases 2,300 Purchase returns 17,000 Salaries and wages 24,000 Depreciation expenses 9,050 Advertising expenses 2,500 All other expenses 66,000 528,150 528,150

Following details are available: (i) Depreciation has been provided on straight line basis. Estimated useful lives are as

under:

Building 25 years

Motor vehicles 5 years All other fixed assets 10 years



(4)

(ii) Office furniture costing Rs 750 thousand and book value of Rs 150 thousand was traded in for Rs 120 thousand, against new furniture worth Rs 500 thousand. However, the new furniture was erroneously recorded at the net payment of Rs. 380 thousand.

No other additions or deletions were made during the year. (iii) Purchase returns include a sum of Rs 2,350 thousand which represents the cost of

an item which was returned to the supplier erroneously. On the balance sheet date the supplier was holding the item on behalf of the company and delivered it back after the year end.

(iv) On the basis of physical stock check carried out at the factory premises on June 30,

2007 the value of closing stock was determined as under:

Rs. in ‘000’

Raw material 8,200 Work in process 3,240 Finished goods 530

(v) The management intends to hold the investments on long term basis. (vi) 60 % of all expenses other than directly attributable expenses are allocated to

manufacturing.

Required: Prepare the balance sheet and the profit and loss account alongwith the notes on fixed

assets and cost of goods sold. Make all possible disclosures as required under the International Accounting Standards and Companies Ordinance, 1984. (25)

Q.4 As part of annual routine, PQR & Company is testing the value of its assets to ascertain

the impairment (if any). Following information is available in respect of the assets:

WDV Value in

use Forced sale

value Fair value Assets Rupees in thousand

A 3,200 3,100 2,400 2,500 B 1,500 1,200 1,225 1,400 C 1,700 1,500 1,900 2,000

Every asset is sold through public tender, which costs around Rs. 50,000. Assets A and C

are required to be dismantled at the time of sales and the cost of dismantling is Rs. 100 thousand and Rs. 200 thousand respectively. Sale agreements of the assets are prepared by the company’s legal advisor whose annual fee is Rs. 365 thousand. It takes about 4 days to draft a sale agreement.

Required: Compute impairment (if any) on each asset. (07) Q.5 You are the Chief Financial Officer of Breeze Limited, a newly incorporated company

which manufactures portable air conditioners. The company has started commercial production on September 01, 2006. While reviewing the financial statements on July 31,



(5)

2007 before presentation to the board of directors for approval, you found that the following information has not been dealt with in the financial statements:

(i) While constructing the factory building it was agreed with the Union Council of

the area that any damage caused to a nearby school will be restored by the company. As a gesture of goodwill the company had also offered that a donation of Rs. 500,000 would be given to the school provided the Union Council also gives a similar grant. On the balance sheet date, it was almost certain that the Union Council would pay the grant. The damage caused by construction was restored at a cost of Rs. 650,000 in July 2007. The Union Council paid the grant of Rs. 500,000 to the school in July 2007.

(ii) Within six months from the start of commercial production, the company was

required to maintain an in-house workers' canteen and provide subsidized meals to its workers. The cost of construction of such canteen was Rs. 800,000; whereas cost for running the canteen was Rs. 142,000 per month. The company failed to comply with the requirement of the law.

The concerned authority took a serious note of the situation and issued a show cause notice on July 18, 2007. To avoid adverse consequences the company decided to start construction of the canteen immediately. It was also decided that during the construction period, the company would reimburse the full amount of meal expenses of its workers. The construction is expected to be completed on August 30, 2007.

(iii) The company allows full refund if the goods sold by it are returned within two

months from the date of sale. According to the best estimate, the goods return ratio is 10 percent. The returned goods can be sold in second hand market at cost which is 60% of the selling price. The accounts were appropriately adjusted on June 30, 2007 based on the above estimates. The actual returns and the relevant information is summarized below:

Returns during the month Amount of sales May, 07 June, 07 July, 07 Month of sales Rs. in million

May, 07 28.00 - 0.20 2.10 June, 07 32.00 - - 0.40

Required: Discuss each event in the light of the relevant International Accounting Standards and

suggest how these should be dealt in the financial statements for the year ended June 30, 2007.

(15)

Q.6 Focus Limited is engaged in manufacturing multimedia projectors. The company spends

heavily on research and development to introduce improvements in the existing products.

A free lance researcher Mr. Talent sent a conceptual paper to the company on

development of a new type of projector which will significantly enhance the life and quality of the product.

An agreement was reached between Mr. Talent and the company whereby Mr. Talent

agreed to conduct and supervise the research and development process at a lump sum remuneration of Rs. 8 million. However, in case the research was unsuccessful, he agreed to reduce his remuneration to a time based salary of Rs. 2,000 per hour.



(6)

The process of research commenced from July 2006 and the following costs were incurred upto June 30, 2007.

Rs. In million

Tools purchased 2.000 Furnishing of the new laboratory 0.800 Salaries paid to research associates 1.620 Cost of conducting tests in U.K. on a device which was ultimately used in the final product 0.400 Remuneration paid to Mr. Talent on successful completion of research 4.500 Expenses on preparing technical feasibility 0.250 Cost of manufacturing the samples before commencement of commercial production 0.240 Material imported for commercial production 1.700 Final payment to Mr. Talent 3.500 Product launching expenses 1.200

Required: Discuss the accounting treatment of each of the above costs incurred by the company in

the light of International Accounting Standard 38 ‘Intangible Assets’. (15)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2008 March 6, 2008 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 Following is the balance sheet of Waseem Industries Limited as at December 31, 2007: 2007 2006

Rupees in million ASSETS

Non current assets Fixed assets

Property, plant and equipment 242 182 Capital work-in-progress 20 18

262 200 Long term investments 75 100 Long term deposits 13 13

Total non current assets 350 313

Current assets Stocks-in-trade 55 48 Trade debts 51 38 Advances, prepayments and other

receivables 37 40 Cash and bank balances 11 20

Total current assets 154 146 TOTAL ASSETS 504 459 EQUITY AND LIABILITIES Shareholders' equity Share capital 150 125 Share premium 55 80 Unappropriated profit 85 50 290 255 Non current liabilities Long term finances - Secured 94 118 Deferred liability - Gratuity (unfunded) 16 12 110 130 Current liabilities Current portion of long term finances 25 22 Short term finances 13 6 Trade and other payables 66 46 104 74 TOTAL EQUITY AND LIABILITIES 504 459

Other relevant information is as follows: (i) An interim bonus issue of one for five ordinary shares was made during the year out

of share premium. The company also approved final cash dividend of 10% (2006: 8%), in its annual general meeting.



(2)

(ii) During the year, the company provided Rs. 17 million (2006: Rs. 13 million) on account of depreciation. The details relating to disposal of property, plant and equipment are as follows:

Carrying

amount Sale

proceeds

Rs. in million Plant and machinery 20 22 Vehicles 3 4 (iii) Advances, prepayments and other receivables include advance tax of Rs. 10 million

(2006: Rs. 7 million). (iv) In 2007, the company paid Rs. 6 million on account of gratuity. (v) Accrued mark up on long term finances amounting to Rs. 7 million (2006: Rs. 9

million) is included in trade and other payables. Financial charges included in the profit and loss account are Rs. 16 million (2006 : Rs. 14 million).

(vi) Income tax expense for the year 2007 amounted to Rs. 19 million (2006: Rs. 13 million).

Required: Prepare a cash flow statement in accordance with the requirements of IAS 7 “Cash Flow

Statement” using the indirect method. (20)

Q.2 Waqar Limited has provided you the following information for determining its tax and

deferred tax expense for the year 2006 and 2007: (i) During the year ended December 31, 2007, the company’s accounting profit before

tax amounted to Rs. 40 million (2006: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million (2006: Rs. 8 million) which are exempt from tax.

(ii) The accounting written down values of the fixed assets, as at December 31, 2005 were as follows:

Cost Accumulated Depreciation

Written down value

-------------- Rupees in millions -------------- Machinery 200 25 175 Furniture and fittings 50 10 40

No additions or disposals of fixed assets were made in the years 2006 and 2007. (iii) Machinery was acquired on January 1, 2005 and is being depreciated on straight-

line basis over its estimated useful life of 8 years. The tax base of machinery as at December 31, 2005 was Rs. 90 million.

(iv) Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The tax base of furniture and fittings as at December 31, 2005 was Rs. 40.5 million.

(v) Normal rate of tax depreciation on both types of assets is 10% on written down value.

(vi) As on December 31, 2005, Waqar Limited had unused tax losses of Rs. 75 million. (vii) The tax rates for 2005, 2006 and 2007 were 35%, 35% and 30% respectively. Required: Determine the tax and deferred tax expense for the year 2006 and 2007. Ignore minimum

turnover tax. (16)



(3)

Q.3 On January 1, 2007, Imran Limited started the construction of its new factory. The construction period is approximately 15 months and the cost is estimated at Rs. 80 million. The work has been divided into 5 phases and payment to contractor shall be made on completion of each phase. In the year 2007, the project has been financed through the following sources:

(i) Right shares amounting to Rs. 15 million were issued on January 1, 2007. The

company usually pays a dividend of 10% each year. (ii) Bank loan of Rs. 32 million carrying a mark up of 13% was raised on March 1,

2007. (iii) On August 1, 2007, Rs. 10 million were borrowed from the bank. Interest thereon,

is payable at the rate of 11%. The details of bills submitted by the contractor, during the year are as follows: Particulars Date of payment Rupees

On completion of 1st phase March 1, 2007 20,000,000 On completion of 2nd phase April 1, 2007 18,000,000 On completion of 3rd phase October 1, 2007 16,000,000 On completion of 4th phase Payment not yet made 17,000,000

The unutilized portion of the loan was invested in the money market. The interest

received on such investment amounted to Rs. 0.5 million.

On June 1, 2007, Building Control Authority issued instructions for stoppage of work on

account of certain discrepancies in the completion plan. The company filed a petition in the Court and the matter was decided in the company’s favour on July 31, 2007. During this interim period, construction work remained suspended.

Required: Calculate the amount of borrowing costs that may be capitalised as on December 31,

2007 in accordance with the requirements of IAS-23 “Borrowing Costs”. (17)

Q.4 Fazal Limited is engaged in the manufacturing of specialized spare parts for automobile

assemblers. During the year 2007, the company has undertaken the following transactions with its related parties:

(i) Sales of Rs. 500 million were made to its only subsidiary M/s Sami Motors

Limited (SML). Being the subsidiary, a special discount of Rs. 25 million was allowed to SML.

(ii) SML returned spare parts worth Rs. 5.5 million. (iii) Raw materials of Rs. 5 million were purchased from Jalal Enterprises, which is

owned by the wife of the CFO of Fazal Limited. (iv) Equipment worth Rs. 3 million was purchased from Khan Limited (KL). The wife

of the Production Director of the company is a director in KL. (v) The company awarded a contract for supply of two machines amounting to Rs. 7

million per machine to an associated company. (vi) In 2005, an advance of Rs. 2 million was given to the Chief Executive of the

company. During the year 2007, he repaid Rs. 0.3 million. The balance outstanding as on December 31, 2007 was Rs. 1,100,000.

Required: In accordance with the requirement of IAS-24 “Related Party Disclosures”, prepare a

note to the financial statements, for inclusion in the company’s financial statements. (12)



(4)

Q.5 Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz Limited (the lessee) to lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000.

The following information relating to lease transaction is available:

(i) Date of commencement of lease is July 1, 2007. (ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease

term, the value of the machine will be Rs. 300,000. (iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30. (iv) The implicit interest rate is 12.9972%.

Required: (a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in

the books of lessor. Ignore tax. (b) Produce extracts from the balance sheet including relevant notes as at June 30,

2008 to show how the transactions carried out in 2008 would be reflected in the financial statements of the lessor.

(Disclosure of accounting policy is not required.) (20) Q.6 According to the sales budget prepared by the marketing department of Mohsin Limited,

the sales for the year 2008 has been estimated at Rs. 210 million. Before finalizing the sales target, the chief executive has asked the chief financial officer to prepare the projected financial statements of the company, for the year 2008.

Based on the experienced gained in prior years, the financial ratios for the year 2008 has

been projected as follows:

Average debtors collection period 30 days

Average creditors collection period 45 days

Inventory turnover 8.0 times

Fixed assets turnover 2.8 times

Ratios

Current 2.2 : 1 Acid test ratio 1:1 Long term debt to total equity 35% Gross profit (as % of sales) 20% Selling and admin. expenses (as % of sales) 15% Total liabilities to total equity 75%

The shareholders’ equity as at December 31, 2007 is as follows: Rupees

Share capital 80,000,000 Accumulated profits 14,500,000 94,500,000

Required: Being the CFO of the company, prepare the projected balance sheet and income

statement for the year 2008. Assume a 360 day year. (15)

(THE END)



THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2008 September 4, 2008 FINANCIAL ACCOUNTING (MARKS 100) Module C (3 hours) Q.1 Aay and Bee are partners in a firm and share profits and losses in the ratio of 3:2

respectively. The firm’s summarized balance sheet as on December 31, 2007 is as under: Rs. in million Rs. in million

Capital Accounts: Land and building 110 Aay 170 Machines 116 Bee 140

Inventories 64 Accounts payable 130 Accounts receivable 168 Accrued liabilities 55 Cash and bank 37 495 495

Effective from January 1, 2008, the partners have decided to convert the partnership into

a private limited company and have agreed to admit Cee into the business. All partners agree on the following terms and conditions:

(i) The name of the company will be Akbar (Private) Limited. (ii) The company will acquire all the assets and liabilities of the firm at their fair values,

including recognition of goodwill based on discounted cash flow method. The fair values and goodwill will be determined by an Independent Evaluator.

(iii) The company will issue shares at par value to Aay and Bee against the net assets (including goodwill) acquired from the firm.

(iv) Cee will invest Rs. 200 million in cash, on the date of incorporation of the company in consideration for 20 million shares of Rs. 10 each.

The Independent Evaluator provided the following information about the firm’s net

assets as on December 31, 2007: Land and building have a fair value of Rs. 210 million. Machines have a fair value of Rs. 105 million. Based on age-analysis, a provision of 10% has been suggested against accounts

receivable. An adjustment of Rs. 10 million is required against slow moving and obsolete

inventory. Liabilities of Rs. 35 million have not been accounted for in the partnership accounts. The goodwill is estimated at Rs. 150 million. Required:

(a) Work out the number of shares to be issued to Aay and Bee. (b) Prepare the opening balance sheet of Akbar (Private) Limited. (15)



(2)

Q.2 (a) On July 1, 2005, Humayun Chemicals Limited acquired a machine at a cost of Rs. 10 million. The useful life of the machine and its salvage value was estimated at 5 years and Rs. 3.0 million respectively. The cost of machine is being depreciated under the straight line method.

Based on the practice followed by similar type of companies, the company has

determined that the remaining useful economic life of the machine is six years. It has also been established that the residual value at the end of the useful life will be equal to 10% of the cost of machine.

Required: Compute the depreciation expenses and other adjustments (if any) required to be

made in the financial statements of the company for the year ended June 30, 2008 under each of the following assumptions:

(i) the review of useful life and residual value was carried out on June 30, 2008; (ii) the review of useful life and residual value was carried out on June 30, 2007

but in the financial statements for the year then ended the depreciation expense was erroneously recorded on the previous basis. (11)

(b) Discuss the requirements of International Accounting Standard(s) in respect of

estimation and revision of useful life of an item of property, plant and equipment.

(04) Q.3 Lodhi Textile Mills Limited is facing severe financial difficulties. To improve the cash

flows, the management has decided to sell and lease back three power generators of the company under three different sale and lease back arrangements which were signed on August 15, 2008. The company has assessed that all the leases shall qualify as finance leases.

The related information as on August 15, 2008 is given below: Cost Book

Value Fair

Value Value in

Use Amount of Financing

------------------Rupees in thousands------------------ Generator A 10,000 7,500 6,000 6,500 6,000 Generator B 12,000 6,000 4,000 5,000 6,000 Generator C 10,000 7,000 10,000 12,000 8,000

Required: Prepare the accounting entries that should be recorded by the company on August 15,

2008 in respect of the above transactions. (13) Note: Ignore tax and deferred tax implications, if any. Q.4 During the year ended June 30, 2008, Baber Limited (BL) has carried out several

transactions with the following individuals/entities: (i) AK Associates provides information technology services to BL. One of the

directors of BL is also the partner in AK Associates. (ii) SS Bank Limited is the main lender. By virtue of an agreement it has appointed a

nominee director on the Board of BL. (iii) Mr. Zee who supplies raw materials to BL, is the brother of the Chief Executive

Officer of the company. (iv) JB Limited is the distributor of BL’s products and have exclusive distribution

rights for the province of Punjab. (v) Mr. Tee is the General Manager-Marketing of BL and is responsible for all major

decisions made in respect of sales prices and discounts. (vi) BL’s gratuity fund is administered by the Trustees appointed by the company.



(3)

(vii) MM Limited is the leading supplier of BL and supplies 60% of BL’s raw materials.

(viii) Ms. Vee who conducted various training programmes for the employees of the company, is the wife of BL’s Chief Executive Officer.

Required: Comment as to whether the above individuals/entities are ‘related parties’ of the

company or not. Support your arguments with references from International Accounting Standards. (15)

Q.5 The post closing trial balance of BSZ Limited, a listed company, as at June 30, 2008 is

given below: Dr. Cr.

Rupees in million Cash at banks – current accounts 7 Cash at banks – in saving accounts 22 Stocks in trade – closing 90 Accounts receivable 60 Provision for bad debts 3 Advances to suppliers 16 Advances to staff 6 Short term deposits 11 Prepayments 4 Sales tax receivable 12 Freehold land – at revalued amount 375 Furniture and fixtures - cost 27 Accumulated depreciation – Furniture and fixtures 8 Machines - cost 85 Accumulated depreciation – Machines 27 Building on freehold land – cost 150 Accumulated depreciation – Building 26 Computer software – cost 10 Accumulated amortization – Computer software 2 Deferred taxation 40 Short term loan 85 Accounts payable 75 Accrued liabilities 7 Provision for taxation 17 Issued, subscribed and paid up capital (Rs. 10 each) 400 Surplus on revaluation of fixed assets 120 Accumulated profits 65 875 875

Additional Information: (i) The first revaluation of freehold land was carried out in 2004 and resulted in a

surplus of Rs. 120 million. The valuation was carried out under market value basis by an independent valuer, Mr. Dee, Chartered Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad.

(ii) The details relating to additions, disposal and depreciation/amortization of fixed

assets, during the year 2008 are given below:



(4)

The company uses straight line method for charging depreciation/ amortization. Building is depreciated at the rate of 5% whereas 10% depreciation/amortization is charged on machines, furniture and fixtures and computer software.

Construction on third floor of the building commenced on March 1, 2008 and is expected to be completed on September 30, 2008. The cost incurred during the year i.e. Rs. 20 million was capitalized on June 30, 2008.

Furniture and fixtures worth Rs. 8 million were purchased on April 1, 2008. A machine was sold on February 29, 2008 to NJ Enterprise at a price of Rs. 13

million. At the time of disposal, the cost and written down value of the machine was Rs. 15 million and Rs. 10 million respectively.

(iii) 50% of the accounts receivable were secured and considered good. 10% of the

unsecured accounts receivable were considered doubtful. Bad debts expenses for the year amounted to Rs. 1.0 million. An amount of Rs. 1.4 million was written off during the year.

(iv) All advances given to suppliers are considered good and include an amount of Rs. 4.0 million paid for goods which will be supplied on December 31, 2009.

(v) Cash at banks in saving accounts carry interest / mark-up ranging from 3% to 7% per annum.

(vi) The authorized share capital of the company is Rs. 500 million. Required:

Prepare the balance sheet as at June 30, 2008 along with the relevant notes showing all possible disclosures as required under the International Accounting Standards and the Companies Ordinance, 1984. (Comparative figures and the note on accounting policies are not required.)

(22) Q.6 (a) What do you understand by the terms “adjusting events” and “non-adjusting

events”? Give three examples of each. (05) (b) J-Mart Limited, a chain of departmental stores has distributed its operations into

four Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following information has been extracted from the records:

(i) The company allows the dissatisfied customers to return the goods within 30

days. It is estimated that 5% of the sales made in June 2008 will be refunded in July 2008.

(ii) On June 2, 2008, three employees were seriously injured as a result of a fire at the company’s warehouse. They have lodged claims seeking damages of Rs. 2.0 million from the company. The company’s lawyers have advised that it is probable that the court may award compensation of Rs. 400,000.

(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December 31, 2008. The company has not yet installed the smoke detectors.

(iv) On June 20, 2008, the board of directors decided to close down the Household Appliances Division. However, the decision was made public after June 30, 2008.

(v) The company has a large warehouse in Lahore which was acquired under a three-year rent agreement signed on April 1, 2007. The agreement is non-cancelable and the company cannot sub-let the warehouse. However, due to operational difficulties, the company shifted the warehouse to a new location.

(vi) A 15% cash dividend was declared on July 5, 2008. Required: Describe how each of the above issue should be dealt with in the financial statements for

the year ended June 30, 2008. Support your point of view in the light of relevant International Accounting Standards. (15)

(THE END)



financial accounting past papers

Documents

furqan rs

financial impact of

ordinary shares of rs

leasing company

trade trade debts bank

cost of sales note

project cost

year period