Certificate in Accounting and Finance Stage Examination

The Institute of 7 March 2018

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

Financial Accounting and Reporting-I

Q.1 Kidz Party & Co. (KPC) manufactures and sells toys. Following information is available
regarding four of its inventory items as on 31 December 2017:

Normal
Cost per unit
Items Units selling price
(Rs.)
per unit (Rs.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500

Following information is also available:

(i) A sales order for 3,000 toy cars @ Rs. 1,100 per unit is in hand. The remaining units
can be sold at normal selling price after incurring selling cost of Rs. 150 per unit.
(ii) Doll houses include 1,000 defective units with no scrap value. 20% of the remaining
doll houses are damaged and can be sold at 50% of cost.
(iii) Stuffed toys costing Rs. 420,000 were accidentally damaged and are beyond repair.
KPC plans to sell these toys as scrap. Proceeds from such sale are estimated at
Rs. 175,000 and the sale would require transportation cost of Rs. 6,300.
(iv) All minion costumes have manufacturing faults and can be sold in present condition at
Rs. 1,350 per unit. However, 60% of the units can be rectified at a cost of
Rs. 200 per unit after which they can be sold at Rs. 1,600 per unit.

Required:
Calculate the amount at which above inventory items should be carried as on
31 December 2017 in accordance with IAS 2 ‘Inventories’. (08)

Q.2 (a) Define ‘performance obligation’. List any six examples of promised goods and
services as per IFRS 15 ‘Revenue from Contracts with Customers’. (05)

(b) On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a
bank for supplying 20 smart phones to the bank staff with unlimited use of mobile
network for one year. The contract price per smart phone is Rs. 34,650 and the price is
payable in full within 10 days from the date of contract. At the end of the contract, the
phones will not be returned to GT.

The entire amount received as per contract was credited by GT to advance from
customers account. The smart phones were delivered on 1 November 2017.

If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of
Rs. 1,800 for unlimited use of mobile network.

Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with
IFRS 15 ‘Revenue from Contracts with Customers’. (04)
 Financial Accounting and Reporting-I Page 2 of 5

Q.3 Following information pertains to Nadir Limited:

Extract from statement of profit or loss for the year ended 31 December 2017
Rs. in ‘000
Profit before taxation 8,955
Taxation (2,945)
Profit after taxation 6,010

Extract from statement of financial position as on 31 December 2017

2017 2016 2017 2016
Equity and liabilities Assets
---- Rs. in ‘000 ---- ---- Rs. in ‘000 ----
Share capital 12,400 10,000 Property plant &
Share premium 1,400 - equipment – net 21,400 15,800
Retained earnings 13,450 12,440 Current assets:
Surplus on revaluation 4,000 - Stock-in-trade 5,600 5,750
Non-current liabilities: Trade receivables – net 6,840 4,446
Long-term loans 4,100 5,000 Other receivables 2,385 800
Current liabilities: Cash & bank 2,355 3,204
Trade payables 1,900 1,400
Accruals & other payables 680 660
Tax liability 650 500
38,580 30,000 38,580 30,000

Other information:
(i) Shares issued during the year were as follows:

10% bonus shares in March 2017.

Right shares in July 2017.
(ii) During the year, a plant costing Rs. 9,500,000 and having a book value of
Rs. 5,200,000 was disposed of for Rs. 4,800,000 of which Rs. 1,800,000 are still
outstanding.
(iii) Depreciation for the year amounted to Rs. 7,350,000.
(iv) Financial charges for the year amounted to Rs. 1,100,000. Accrued financial charges
as on 31 December 2017 amounted to Rs. 112,000 (2016: Rs. 48,000).
(v) Provision for doubtful trade receivables is maintained at 5%.

Required:
Prepare statement of cash flows for the year ended 31 December 2017, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (15)

Q.4 Following information pertains to Dhaka Enterprises (DE).

Jul-2017 Aug-2017 Sep-2017 Oct-2017 Nov-2017 Dec-2017

Production costs
------------------------------------ Rs. in '000 -----------------------------------
Direct material 1,375 1,500 1,750 1,250 1,125 1,000
Direct labour 990 1,080 1,260 900 810 720
Overheads 3,240 3,400 3,800 3,200 2,700 2,600
5,605 5,980 6,810 5,350 4,635 4,320

----------------------------------- No. of units -----------------------------------

Production 550 600 700 500 450 400

DE is preparing its budget for the next year, therefore, it would like to determine the
relationship between production units and cost.

Required:
(a) Using regression analysis, determine the line of best fit for production units and
overheads. (Show all necessary workings) (06)
(b) Compute total prime cost and overheads for production of 650 units. (02)
 Financial Accounting and Reporting-I Page 3 of 5

Q.5 A and B were partners sharing profits and losses in the ratio of 3:2. The balance sheet as on
31 December 2017 is given below:

Equity and liabilities Rupees Assets Rupees

Capital – A 35,810 Goodwill 2,000
Capital – B 26,540 Fixed assets – net 42,000
Profit and loss account 10,000 Investments 8,000
Trade creditors 32,650 Trade debtors 27,000
Provision for doubtful debts (2,000)
Stock-in-trade 20,000
Cash and bank balances 8,000
105,000 105,000

On 1 January 2018, they agreed to admit C for 1/4th share in the partnership. On admission
of C, it has been agreed that:

value of goodwill of the firm is Rs. 32,000. Goodwill is to be written-off from the books.

assets would be revalued as follows:
Revalued amount
Assets
(Rs.)
Fixed assets 60,000
Investments 9,000
Stock-in-trade 18,000

provision for doubtful debts is to be made equal to 5% of the debtors.

C has contributed Rs. 38,000 in cash. Capital accounts of the old partners in the new
partnership would be adjusted in their new profit sharing ratio on the basis of C’s capital.
Any excess or deficiency would be adjusted through cash.

Required:
Prepare partners’ capital accounts on admission of C. (12)

Q.6 (a) Following information pertains to a building acquired by SK Limited (SKL) on

1 July 2012 for Rs. 360 million:

(i) The building is being depreciated on straight-line basis over 10 years.

(ii) SKL uses revaluation model for subsequent measurement of buildings. It
accounts for revaluation on net replacement value method. The details of
revaluations as carried out by independent valuer are as follows:

Fair value
Revaluation date
(Rs. in million)
31 December 2013 323
31 December 2015 208
31 December 2017 167

(iii) There is no change in useful life of the building.

(iv) SKL transfers the maximum possible amount from the revaluation surplus to
retained earnings on an annual basis.
(v) SKL’s financial year ends on 31 December.

Required:
Prepare entries to record revaluation surplus/loss on each of the above revaluation
date. (Entries to record depreciation expense, incremental depreciation and elimination of
accumulated depreciation are not required) (11)
 Financial Accounting and Reporting-I Page 4 of 5

(b) Following information pertains to three exchange transactions relating to fixed assets:
(i) (ii) (iii)
--------- Rs. in million ---------
Cash received/(paid) 1.1 (2.1) -
Assets given-up:
Original cost 10.3 12.4 14.5
Book value 6.4 7.3 3.4
Estimated fair value 8.5 6.6 4.6
Assets received:
Estimated fair value 7.1 9.0 4.1

Additional information:

In case of transaction (i), fair values of both assets are reliably measurable.

In case of transaction (ii), fair value of the asset received is clearly more evident.

In case of transaction (iii), fair value of neither asset is reliably measurable.

Required:
Compute gain or loss on disposal of fixed assets in each of the above transactions. (06)

Q.7 Boom Limited (BL) is a manufacturer of sports goods. Following financial statements for
the year ended 31 December 2017 have been submitted to the Chief Executive Officer
(CEO).
Statement of profit or loss
Rs. in ‘000
Revenues 21,000
Cost of sales (17,500)
Gross profit 3,500
Operating expenses (1,900)
Finance cost (450)
Profit before tax 1,150
Taxation (345)
Profit after tax 805

Statement of financial position

Rs. in ‘000
Property, plant and equipment 7,500
Current assets 1,500
9,000

Share capital 4,000

Reserves 1,000
Non-current liabilities 3,000
Current liabilities 1,000
9,000

Although performance of BL has improved from the last year, CEO wants to compare the
results with other companies operating in sports manufacturing industry. In this respect,
following industry data has been gathered:
Gross profit margin 23.5%
Net profit margin 7.7%
Current ratio 2.75
Gearing ratio 50:50
Return on non-current asset 32.9%
Return on capital employed 27.4%
Return on equity 31.3%

Required:
(a) Compute BL’s ratios for comparison with the industry. (04)
(b) For each ratio, give one possible reason for variation from the industry. (07)
 Financial Accounting and Reporting-I Page 5 of 5

Q.8 Following information pertains to Alpha Traders (AT) for the year ended
31 December 2017:
(i) 60% goods are sold for cash to walk-in customers at list price. Remaining goods are
sold to corporate customers on credit at a trade discount of 2% on list price. They only
pay through cheques.
(ii) Balances extracted from AT’s records:
31-Dec-2017 31-Dec-2016
--------- Rs. in ‘000 ---------
Furniture and fittings – net ? 10,175
Stock-in-trade 14,500 12,300
Trade debtors – gross 5,900 4,400
Prepaid rent 180 145
Cash in hand 430 750
Trade creditors 9,700 8,500
Accrued salaries 310 460
(iii) All furniture and fittings were purchased on 1 July 2015 and are depreciated using
straight-line method at 5% per annum.
(iv) Provision for doubtful debts is maintained at 4%. During the year, balances totalling
Rs. 260,000 were written-off.
(v) Summarised bank statement:
Deposits Rs. in ‘000 Withdrawals Rs. in ‘000
Opening balance 9,800 Utilities 1,400
Corporate customers 34,240 Rent, rates and taxes 2,100
Cash 56,380 Repairs & maintenance 2,800
Insurance claim 5,500 Cash 6,320
Return outward 2,170 Creditors 87,200
Delivery charges recovered 330 Delivery truck (second hand) 2,300
Miscellaneous expenses 1,300
Closing balance 5,000
108,420 108,420

(vi) Cash payments for the year:

Rs. in ‘000
Salaries 6,500
Repairs & maintenance 500
Drawings ?

(vii) Insurance claim represents cost of goods lost in transit during the year.
(viii) A cheque of Rs. 300,000 issued on 15 December 2017 against rent, has not yet been
presented whereas cheque from a debtor, deposited on 31 December 2017 amounting
to Rs. 3,200,000 is not appearing in the bank statement.
(ix) Creditors are paid through cheques only. Payments made to creditors include:

Rs. 48,000,000 after availing discount of 4%.

A cheque of Rs. 1,900,000 issued to a supplier in December 2016. No discount
was allowed by the supplier on this payment.
(x) The delivery truck was purchased on 1 March 2017. Prior to use, the truck was
repaired at a cost of Rs. 260,000. The repair work was completed on 31 March 2017.
The amount is included in payment for repairs and maintenance above. Depreciation
on delivery truck is charged on a straight-line basis at 12.5% per annum.
Required:
Prepare the following:
(a) Statement of profit or loss for the year ended 31 December 2017. (12)
(b) Statement of financial position as on 31 December 2017. (08)
(THE END)