Certificate in Accounting and Finance Stage Examination

5 June 2022
3 hours – 100 Marks
Additional reading time – 15 minutes

Teacher: Sir Waseem Akram

Financial Accounting &

Reporting I – Mid Term Test
Instructions to examinees:
(i) Answer all Ten questions.
(ii) Answer in black pen only.
(iii) Start new question on new page
(iv) Write page number on top of your answer scripts.

Section A
Question # 1
What are the Indications of Impairment? (5)

Question # 2 (7)
Identifying which of the following may be regarded as “investment property” in accordance with IAS-40:
(i) Land held for long term capital appreciation.
(ii) Property intended for sale in the ordinary course of business.
(iii) Property held for future use as owner occupied property.
(iv) Property occupied by employees (whether or not the employees pay rent at market rates)
(v) A building that is being vacant but is held to be rented out.
(vi) Land held for currently undetermined future use.
(vii) Property that is being constructed or developed for future use as investment property.

Question # 3
There are two broad approaches to the accounting for government grants i.e the capital approach and the income
approach. Give your arguments in favor of both the approaches: (5)

Question # 4
Bulan Pakistan Limited (BPL) is planning to commence construction of a warehouse on 1 January
2023 and is expecting to complete it by 30 November 2023. The management wants to ascertain the
borrowing costs that can be included in the cost of warehouse. Relevant details in this respect are as
follows:

(i) Expected payments related to the construction of the warehouse will be as follows:

Description Date of Rs. in

payment million
1st bill of contractor 1-Feb-23 40
2nd bill of contractor 1-Apr-23 120
3rd bill of contractor 1-Sep-23 100
Last bill of contractor 1-Dec-23 90
350
(ii) The project can be financed through the following sources:
 Specific loan of Rs. 350 million at the rate of 16% per annum to be obtained on1
January 2023. The principal will be payable in 5 equal annual instalments along with
interest, from 1 January 2024.
 Withdrawals to be made from existing running finance facilities. These facilitieswill
also be used to finance other needs of BPL. Details of these facilities are as follows:

Expected
Limit
Name of bank average Interest rates
balance for
2023
------ Rs. in million ------
Bank A 300 22 13.7%
0
Bank B 350 28 14.6%
0

(iii) The surplus funds available from the loan will be invested in a saving account at
10% per annum.
(iv) The construction work is expected to be suspended for the entire month of June 2023due
to usual monsoon rains.

Required:
Calculate the borrowing costs to be capitalized in the cost of warehouse in each of thefollowing
independent cases:
(a) if all the payments will be made from the specific loan only. (04)
(b) if all the payments will be made from running finance facilities only. (04)
Question # 5
Both IAS 16 ‘Property, Plant and Equipment’ and IAS 40 ‘Investment Property’ deal with tangible non-current
assets of an entity. Discuss any four differences between IAS 16 and IAS 40. (6)

Question # 6

The trial balance of Moon Mart (MM) did not agree as at 31 December 2021 and the shortage of Rs.
215,000 on the debit side was carried to suspense account. The financial statements prepared from the
trial balance showed net profit of Rs. 1,431,000.
During review, following matters were noted:
A return outward of Rs. 18,000 was posted to the debit of return inward account ingeneral ledger.

A sales invoice of Rs. 42,000 was posted twice in sales ledger.

Balance of accumulated depreciation of equipment was brought forward asRs. 641,000
instead of Rs. 461,000 on 1 January 2021.
Following entries in cash book were not posted to general ledger:
Receipt of annual rent for the period ending 31 March 2022 amounting toRs.
336,000.
Payment of Rs. 220,000 for equipment purchased on 1 May 2021.

Additional information:
After passing all the adjustments, the remaining amount of suspense account is to beconsidered as
loss from embezzlement.
MM uses periodic inventory method. Control accounts are not maintained for trade receivables and
payables. Equipment are depreciated at 15% using reducing balance method.

Required
(a) Prepare Suspense Account (4)
(b) Compute the corrected net profit (4)

Question # 7
As part of annual routine, RHS & Company is testing the value of its assets to ascertain the impairment loss (if
any).
Following information is available in respect of the assets:

Assets WDV Value in Use Forced Sale Value Fair Value

Rs in 000 Rs in 000 Rs in 000 Rs in 000 Rs in 000
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. Asset 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 thousands respectively.
Sales 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 loss (if any) on each asset. (7)
Question # 8 (19)
Select the most appropriate answer from the options available for each of the following Multiple Choice
Questions (MCQs)

1. An Entity purchased a property 15 years ago at a cost of Rs. 100,000 and have been depreciating at a
rate of 2% per anum on the straight line method. The entity has had the property professionally
revalued at Rs. 500,000 at the end of 10 year.
What is the revaluation surplus that will be recorded in the financial statements in respect of this
property?

(a) Rs. 400,000

(b) Rs. 500,000
(c) Rs. 530,000
(d) Rs. 420,000

2. Which of the following statements is correct in the context of capitalization of borrowing costs?

(a) Capitalization always commence as soon as borrowing cost are incurred

(b) Capitalization always continues until the asset is brought in to use
(c) Capitalization always commences as soon as expenditure for the asset is incurred
(d) If fund have been arranged from various general borrowings, the amount to be capitalized is bases
on the weighted average cost of borrowings

3. IAS 36 applied to which of the following assets:

(a) PPE and Intangibles assets

(b) Assets held for sales
(c) Financial assets including PPE and intangibles assets
(d) Inventories

4. If a government grant must be repaid, then it is:

(a) An Error
(b) A change in accounting estimate
(c) A change in accounting policy
(d) A new transaction

5. Which of the following is not permitted as a cost to sell under IAS 36?

(a) Standard Wages for employees

(b) Transport cost for machines
(c) Cost to dismantle machine
(d) Auctioneer fees

6. A Machine had a carrying amount of Rs 850,000 at the year end of 31 March 2019. Its market value is
Rs 780,000 and costs of disposal are estimated at Rs 25,000. A new Machine would cost Rs. 1,500,000.
The company which owns the machine expects it to produce net cash flows of Rs 300,000 per annum
for the next 3 years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to recognize in the financial statement at 31 March?

(a) 220,000
(b) 95,000
(c) 166,700
(d) 76,870
7. Which of the following is not considered as an item of property, plant & equipment?

(a) A Standby generator expected to be used for seven years

(b) A plot of land held for sale
(c) A bus of pick and drop to staff members
(d) A generator for rental to others

8. If the fair value less cost to sell is not determined

(a) The asset is not impaired

(b) The recoverable amount is the value in use
(c) The net realizable value is used
(d) The carrying amount is the assets remains the same

9. Which of the following is not covered under IAS 20 Government Grant?

(a) Forgivable loans

(b) Employment grants
(c) Subsidized loans
(d) Tax rebates

10. Alpha limited received a Rs. 10 million loan at 7.5% on 1 April 2017. The loan was specifically issued
to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on 28
February 2018 but did not open for trading until 1 April 2018.
How much should be recorded as finance cost in the statement of comprehensive income for the year
ended 31 March 2018?

(a) Rs. 625,000

(b) Rs. 125,000
(c) Rs. 250,000
(d) Rs. 750,000

11. An investment property should initially be measured at:

(a) NRV
(b) Cost
(c) Market Value
(d) Fair Value

12. Which of the following is not a correct treatment of government grant related to income?

(a) Deduct from the related expense

(b) Present as other income
(c) Deduct from the related Cost of assets
(d) None of the above

13. Which of the following is not a qualifying assets under IAS 23?

(a) Investment property

(b) Manufacturing plants
(c) Mad to order inventory
(d) Mass produced inventory
 14. An investment property with a useful life of 10 years was purchased by SRK Limited on 1 January 2019
for 200 million. By 31 December 2019 the fair value of the property had risen to RS. 300 million. SRK
Limited measures its investment property under fair value model

What values would go through the statement of comprehensive income in the year?

(a) Gain 100 million and Depreciation of 0

(b) Gain 120 million and depreciation of 20 million
(c) Gain 100 million and depreciation of 30 million
(d) Gain 0 and depreciation of 30 million

15. Which of the following is an optional disclosure requirement of IAS 16?

(a) Measurement bases for determining gross carrying amount

(b) Depreciation Method
(c) Useful lives or depreciation rates
(d) The carrying amount of temporarily idle PPE

16. A plant has a carrying amount of Rs. 3.3 million as at 31 December 2021. Its fair value is Rs. 2.4 million
and costs of disposal are estimated at Rs. 0.1 million. Cash flows from the plant for the next 4 years are
estimated at Rs. 0.7 million per annum. It will be disposed of at the end of the 4th year for Rs. 0.6 million.
Applicable discount rate is 10% per annum.

What is the approximate impairment loss on the plant to be recognized in the financial statements for the
year ended 31 December 2021?

(a) Rs. 1 Million

(b) Rs. 2.6 Million
(c) Rs. 0.7 Million
(d) Rs. 1.1 Million

17. On 1 January 2019, a company purchased an asset for Rs. 5 million against which it received the
government grant of Rs. 0.5 million. The company deducted the grant from the cost of asset. It is the
policy of the company to depreciate such assets using straight line method over ten years. On 1 January
2021, the government grant became repayable due to non-fulfilment of conditions. Repayment of grant
will result in increasing:

(a) Carrying value by Rs. 0.5 Million

(b) Carrying value by Rs. 0.4 Million
(c) Expense by Rs. 0.4 Million
(d) Expense by Rs. 0.5 Million

Section B
Question # 9

Following information pertains to property, plant and equipment of Tsuki Limited (TL):

Office Warehous
building e
Acquisition:
 Date of acquisition 1 July 2017 1 July 2018
 Cost (Rs. in million) 96 156
 Estimated useful life (in years) 16 12

Revalued amount:
  1 January 2019 (Rs. in million) 116 138
 1 January 2021 (Rs. in million) 80 143

Revised useful life on 1 January 2020 (in years) 9 14

Additional information:
(i) TL uses revaluation model for subsequent measurement and accounts for revaluationon
net replacement value method.
(ii) TL transfers maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iii) The revalued amounts were determined by Sagheer Valuers (Private) Limited, an
independent valuation company.

Required:
In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ (includingcomparative
information) for inclusion in TL’s financial statements for the year ended
31 December 2021. (Column for total is not required) (18)

Question # 10
Bala Investment Company Limited (BICL) acquires properties and develops them for diversified purpose i.e
resale, renting and its own use. BICL applies the fair value model for investment properties and cost model for
property, plant & equipment.

The details of the buildings owned are as follows:

Fair value as on 31
Useful Residual
Cost December
Property Date of acquisition life Value
2021 2020
(Years)
Rs. In million
A 1 August 2016 20 130 14 100 150
B 1 January 2019 15 240 24 240 210
C 1 July 2019 10 160 20 150 120
D I July 2018 10 10 1 Not available
E 1 August 2021 20 48 4 51 -

The following information is also available:

BICL had been trying to sell this property for the last two years. However, due to weak
Property A market, the directors finally decided to give this on rent with effect from 1 st October
2021 when its fair value was Rs. 120 million.
The possession of this property was acquired from the tenants on 30th June 2020 when
Property B the company shifted its head office from Property C to Property B. The fair value on
the above date was Rs. 195 million.
When the head office was shifted from this property, it was then converted into a
cinema. On the date of shifting the fair value was equal to its carrying amount. Further
Property C specifically the Loan obtained for the conversion of this building into cinema
amounting to Rs. 12 million at the rate of 12% on 1st April 2021. Rs. 7 million paid to
contractor immediately and remaining amount is invested in Lakshmi chit fund at the
rate of 7% on next month. Cinema completed on 1st November 2021
This property is situated outside the main city and its fair value cannot be
determined. It was rented to a government organization soon after the acquisition.
Property D This property is an office building comprising of three floors. After acquisition, two
floors were rented out. On 1st November 2021, BICL established a branch office on
the thirds floor.
Details of costs incurred on acquisition are as follows:
Rs. In million
 Purchase price 42.50
Property E Agent’s commission 0.50
Registration fees and taxes 2.00
Administrative costs allocated 3.00
48.00

Required:
Prepare relevant extracts for the year ended 31st December 2021 for inclusion in BICL’s financial statements
(Ignore comparative figures) (17)