FINANCIAL ACCOUNTING [M4]

MANAGERIAL LEVEL-2
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Extra Reading Time: 15 Minutes

Maximum Marks: 100 Roll No.:
Writing Time: 03 Hours 05 Minutes
(i) Attempt all questions.
(ii) Write your Roll No. in the space provided above.
(iii) Answers must be neat, relevant and brief. It is not necessary to maintain the sequence.
(iv) Use of non-programmable scientific calculators of any model is allowed.
(v) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(vi) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
(vii) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(viii) Question Paper must be returned to invigilator before leaving the examination hall.
DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT
EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME

Question No. 1 Time Allowed : 15 Min.  Total Marks : 10

The first question, printed separately comprises ten (10) MCQs of one (1) mark each having allowed
time of 15 minutes, is an integral part of this question paper.

Question No. 2 Proposed Time : 32 Min. | Total Marks : 17

(a) Write a short note on the structure of IASB, its functions and limitations. What is the purpose of
introducing IFRSs in place of IASs?

(b) Gaba Limited started construction of an asset in 2017, which satisfies the definition of a ‘qualifying
asset’ under IAS 23. For the construction of the asset, funds were arranged from following sources on
January 1, 2017:
 Issuance of 12% loan notes for Rs. 90 million
 Bank loan @ 15% for Rs. 110 million
In addition, issue costs of 1% of nominal value were incurred for 12% loan notes. All necessary
activities relating to the construction of the asset did not start until February 1, 2017. The directors of
the company estimated that all the funds will not be required immediately. Hence, keeping in view the
requirements of funds in future, the idle money was invested @ 8% per annum in the following manner:

Investment Period Invested Amount

From 01-Jan-2017 to 30-Apr-2017 Rs. 120 million
From 01-May-2017 to 31-Aug-2017 Rs. 55 million

During October 2017, the construction activities remained suspended due to some unavoidable
reasons. The asset was ready for use on November 30, 2017, after completion. However, the use of
the asset commenced on January 1, 2018. Company’s year ends on December 31.

Required:
For the year ended to December 31, 2017:
(i) What amount of borrowing cost (net of investment income) will be capitalized?
(ii) What amount of borrowing cost and investment income will be taken to profit or loss?
(iii) At what amount will the non-current asset be shown in the statement of financial position?

FA-MP [MSS 2018] 1 of 5 PTO

(Note: The number of questions and their marks may vary in the examination paper)
Question No. 3 Proposed Time : 38 Min. | Total Marks : 20
The following relates to Tehraz Company for the year ended June 30, 2017:

Statement of Financial Position

as on June 30
Rs. ‘000’
2017 2016
Assets
Non-current assets
Property, plant and equipment 50,500 39,000
Investment property 5,300 6,000
Intangible assets 7,500 8,000
63,300 53,000
Current assets
Inventories 3,500 2,000
Trade receivables 1,000 1,500
Cash and bank balances 500 2,000
5,000 5,500
Total assets 68,300 58,500
Equity and liabilities
Share capital @ Rs. 10 each 25,000 25,000
Retained earnings 33,930 24,350
Revaluation surplus 2,500 2,000
61,430 51,350
Non-current liabilities
Long-term loan 1,500 2,500
Liabilities against finance lease 1,400 1,200
Deferred tax liabilities 120 100
3,020 3,800
Current liabilities
Trade and other payables 950 1,050
Interest payable 850 750
Dividend payable 1,250 1,000
Current portion of liabilities against finance lease 400 300
Provision for taxation 400 250
3,850 3,350
Total equity and liabilities 68,300 58,500

The following information is relevant for the year:

 On June 30, 2017, the management transferred one of its ‘investment property’ to ‘property, plant and
equipment’ having fair value of Rs. 2,500,000.
 On July 1, 2016, Tehraz Company purchased an ‘investment property’ for Rs. 1,500,000, the fair value
of said property was Rs. 1,800,000 at the end of the year. Tehraz Company has adopted fair value
policy to value ‘investment property’.
 Revaluation surplus is related to property, plant and equipment only.
 During the year, the management sold part of its ‘property plant and equipment’ for Rs. 2,000,000
having carrying value of Rs. 1,500,000 and revaluation surplus of Rs. 300,000 on the date of sale.
 During the year, the management charged depreciation of Rs. 1,800,000.
FA-MP [MSS 2018] 2 of 5
(Note: The number of questions and their marks may vary in the examination paper)
 During the year, the management wrote-off intangible assets of Rs. 800,000 due to obsolescence and
purchased new intangible assets of Rs. 1,200,000. During the year, there were no sales of intangible
assets.
 Interest and tax expenses for the year are Rs. 700,000 and Rs. 800,000 respectively.
 Dividend declared for the year is Rs. 1,250,000.
 Paid Rs. 700,000 to leasing company against finance lease (other than interest).

Required:
(a) Prepare Statement of Cash Flows using indirect method for Tehraz Company for the year ended
June 30, 2017.
(b) Which one is the most appropriate method, ‘direct’ or ‘indirect’ method?

Question No. 4 Proposed Time : 38 Min. | Total Marks : 20

Following is the trial balance of Akber (Private) Limited as at June 30, 2018:

Rs. ‘000’
Debit Credit
Share capital (450,000 ordinary shares of Rs. 10 each) 4,500
Retained earnings 405
Long-term loan 2,200
Trade payables 650
Sales 30,725
Other income 1,062
Accumulated depreciation – Plant and equipment 1,330
Accumulated depreciation – Motor vehicle 360
Amortization reserves 340
Cash and bank balances 2,277
Opening inventory July 01, 2017 900
Administrative expenses 7,450
Distribution costs 6,250
Plant and equipment, at cost 7,000
Motor vehicle, at cost 1,440
Computer software 850
Purchases 14,000
Finance costs 55
Advances to employees 250
Trade receivables 1,100
41,572 41,572

Additional Information:
 Closing inventory as at June 30, 2018 was Rs. 750,000.
 Depreciation is to be provided as follows:
- Plant and equipment @ 10% on reducing balance method (allocate 70% depreciation to
administration department and 30% to marketing department).
- Motor vehicle @ 25% on reducing balance method (allocate 60% depreciation to marketing
department and 40% to administration department).

FA-MP [MSS 2018] 3 of 5 PTO

(Note: The number of questions and their marks may vary in the examination paper)
 Computer software is to be amortized @ 20% on cost. Computer software was purchased for
administration department.
 Company obtained a long-term loan from a commercial bank @ 10% per annum on January 01, 2018.
The loan is repayable in 16 quarterly instalments of Rs. 137,500 each. The instalments start from
July 01, 2018.
 The mark-up on long-term loan is payable quarterly i.e., on April 01, July 01, October 01 and
January 01.
 During finalization of financial statements, it was observed that an amount of Rs. 225,000 received as
advance from a customer, was recorded as sales during the period. The goods were to be delivered in
the month of August 2018.

Required:
Prepare the following financial statements:
(a) Statement of Profit or Loss for the year ended June 30, 2018.
(b) Statement of Financial Position as at June 30, 2018.

Question No. 5 Proposed Time : 27 Min. | Total Marks : 14

(a) On January 1, 2013, Abrar Enterprises had acquired a franchise of a well-known courier company to
offer courier services in ‘Northern Areas’ of Pakistan. It had paid Rs. 5,000,000 being the franchise
license fee. A recurring fee of Rs. 2,000,000 is payable each year in arrears. Abrar Enterprises had
incurred lawyer's fee of Rs. 150,000 for vetting the franchise agreement. The company had also
incurred Rs. 50,000 and Rs. 100,000 being the franchise documentation charges and staff training
expenses respectively.
The franchise license was issued for a period of 10 years and is transferable. The company amortizes
the license cost on straight-line basis.
On December 31, 2017, the market value of the license was Rs. 3,000,000. The company decided to
revalue the franchise license cost.

Required:
(i) Compute the franchise license cost in accordance with the requirement of the IAS 38 ‘Intangible
Assets’.
(ii) Prepare journal entries for recording the franchise license cost and revaluation of the franchise
license.

(b) Identify an appropriate fundamental accounting concept for each of the situations given below:
(i) Application of a degree of caution that assets and income are not overstated and liabilities and
expenses are not understated.
(ii) The assets are normally being shown at cost price, which is the basis of their valuation.
(iii) Charging of various expenses to revenue in the related accounting period.
(iv) A company uses the same accounting principles and methods from year to year.

Question No. 6 Proposed Time : 35 Min. | Total Marks : 19

(a) The statement of financial position of Beej & Co. is showing deferred tax liability of Rs. 300,000 as at
June 30, 2017. Following information is available for the year ended June 30, 2018:
 Carrying value of property, plant and equipment is Rs. 12.50 million while tax base is Rs. 9.25
million.
 During the year, the management recognized provision of Rs. 2.00 million against warranty claim.
The warranty claim is deductible for tax purpose when payment is made.
 Interest receivable has carrying value of Rs. 800,000. The related interest revenue will be taxed on
cash basis.

FA-MP [MSS 2018] 4 of 5

(Note: The number of questions and their marks may vary in the examination paper)
  Trade receivables have a carrying value of Rs. 1.20 million. The related revenue has already been
included in taxable profit.
 Current liabilities include interest received in advance of Rs. 250,000. The related interest revenue
will be taxed on cash basis.
 Current liabilities also include accrued fines and penalties imposed by tax authorities amounting to
Rs. 1 million. Fines and penalties are not allowed as deduction for tax purposes.
 The tax rates for the year ended June 30, 2017 and 2018 are 34% and 33% respectively.

Required:
Calculate amount of deferred tax to be presented in the financial statements of Beej & Co. for the year
ended June 30, 2018. Provide necessary calculations.

(b) Friends Company Limited consists of three cash generating units. One of its cash generating units'
assets comprises the following:

Rs. in million
Property, plant and equipment 26
Goodwill 2
Patent rights 1
Inventory 12
Total 41

On December 31, 2017, an exercise with regard to assessment of impairment losses revealed that the
recoverable amount of the assets of the cash generating unit is Rs. 35 million.
Following information is relevant:
 The goods worth Rs. 1 million were destroyed by fire.
 The patent rights have no market value.
 Revaluation surplus account showing a credit balance of Rs. 1 million as of January 1, 2016
represents an upward revaluation of the property, plant and equipment.

Required:
As a Management Accountant, you are required to:
(i) Allocate the impairment losses to the above-mentioned assets.
(ii) Account for the same in the books of accounts in accordance with the requirements of IAS 36 by
preparing a journal entry.

THE END

FA-MP [MSS 2018] 5 of 5 PTO

(Note: The number of questions and their marks may vary in the examination paper)