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2015

FINANCIAL ACCOUNTING
AND REPORTING II
QUESTION BANK

CAF-07

ICAP

Question
Bank

Financial accounting
and reporting II

Second edition published by


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Emile Woolf International, February 2015


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Certificate in Accounting and Finance


Financial accounting and reporting II

C
Contents
Page

Question and Answers Index

Questions
Section A

Questions

Answers

93

Answers
Section B

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Financial accounting and reporting II

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Certificate in Accounting and Finance


Financial accounting and reporting II

Index to questions and answers


Question
page

Answer
page

CHAPTER 2 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS


2.1

LARRY

94

2.2

MINGORA IMPORTS LIMITED

95

2.3

BARRY

97

2.4

OSCAR INC

99

2.5

CLIFTON PHARMA LIMITED

101

2.6

SARHAD SUGAR LIMITED

103

2.7

BSZ LIMITED

10

105

2.8

YASIR INDUSTRIES LIMITED

12

108

2.9

SHAHEEN LIMITED

14

112

2.10

MOONLIGHT PAKISTAN LIMITED

15

114

2.11

FIGS PAKISTAN LIMITED

17

115

CHAPTER 3 IAS 7: STATEMENTS OF CASH FLOWS


3.1

KLEA

19

119

3.2

STANDARD INC

21

121

3.3

FALLEN

22

124

3.4

BIN QASIM MOTORS LIMITED

24

126

3.5

ITTEHAD MANUFACTURING LTD

27

129

3.6

WASEEM INDUSTRIES LIMITED

29

131

3.7

JALIB INDUSTRIES LIMITED

31

134

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Financial accounting and reporting II

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3.8

APOLLO INDUSTRY LIMITED

32

136

3.9

MARVEL ENGINEERING LIMITED

34

137

CHAPTER 4 CONSOLIDATED ACCOUNTS: STATEMENTS OF


FINANCIAL POSITION BASIC APPROACH
4.1

HALL

36

139

4.2

HASSLE

37

140

4.3

HYMN

37

141

4.4

HANG

38

143

4.5

HASH

38

144

CHAPTER 5 CONSOLIDATED ACCOUNTS: STATEMENTS OF


FINANCIAL POSITION - COMPLICATIONS
5.1

HAIL

39

146

5.2

HAIRY

40

148

5.3

HARD

41

150

5.4

HALE

42

152

5.5

HELLO

42

153

5.6

HASAN LIMITED

43

155

CHAPTER 6 CONSOLIDATED ACCOUNTS: STATEMENTS OF


COMPREHENSIVE INCOME
6.1

HARRY

45

159

6.2

HORNY

46

161

6.3

HERON

47

163

6.4

HANKS

48

164

CHAPTER 7 PROPERTY, PLANT AND EQUIPMENT


7.1

ROONEY

50

168

7.2

EHTISHAM

51

170

7.3

CARLY

51

172

7.4

ADJUSTMENTS LIMITED

52

173

7.5

FAM

53

175

7.6

IMRAN LIMITED

54

177

7.7

HUMAYUN CHEMICALS LIMITED

55

179

7.8

FARADAY PHARMACEUTICAL LIMITED

55

180

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7.9

SPIN INDUSTRIES LIMITED

56

182

7.10

SCIENTIFIC PHARMA LIMITED

56

183

7.11

QURESHI STEEL LIMITED

57

184

7.12

GRANITE CORPORATION

58

185

CHAPTER 8 IAS 38: INTANGIBLE ASSETS


8.1

FAZAL

59

186

8.2

HENRY

59

186

8.3

TOBY

60

187

8.4

BROOKLYN

60

188

8.5

ZOUQ INC

61

189

8.6

STAR-BRIGHT PHARMACEUTICAL
LIMITED

62

190

8.7

RAISIN INTERNATIONAL

62

191

CHAPTER 9 IAS 17: LEASES


9.1

DAWOOD

64

192

9.2

FINLEY

64

192

9.3

FABIAN

64

193

9.4

XYZ INC

65

194

9.5

SNOW INC

65

197

9.6

MIRACLE TEXTILE LIMITED

66

199

9.7

SHOAIB LEASING LIMITED

66

200

9.8

NEPTUNE LIMITED

67

202

9.9

QUARTZ AUTO LIMITED

67

204

9.10

LODHI TEXTILE MILLS LIMITED

68

205

9.11

NOMAN ENGINEERING LIMITED

68

206

CHAPTER 10 IAS 37: PROVISIONS CONTINGENT LIABILITIES AND


CONTINGENT ASSETS AND IAS 10: EVENTS OCCURRING AFTER THE
REPORTING DATE
10.1

BADAR

69

207

10.2

GEORGINA

69

207

10.3

EARLEY INC

70

209

10.4

ACCOUNTING TREATMENT

70

210

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10.5

J-MART LIMITED

71

211

10.6

AKBER CHEMICALS LIMITED

72

212

10.7

QALLAT INDUSTRIES LIMITED

72

213

10.8

SKYLINE LIMITED

73

213

10.9

WALNUT LIMITED

74

214

10.10

ATTOCK TECHNOLOGIES LIMITED

75

215

CHAPTER 11 IAS 8: ACCOUNTING POLICIES, CHANGES IN


ACCOUNTING ESTIMATES AND ERRORS
11.1

WONDER LIMITED

76

216

11.2

DUNCAN

77

217

11.3

MOHANI MANUFACTURING LIMITED

78

218

CHAPTER 12 IAS 12: INCOME TAXES


12.1

FRANCESCA

79

219

12.2

SHEP (I)

79

220

12.3

SHEP (II)

80

221

12.4

SHEP (III)

81

222

12.5

SHEP (IV)

82

224

12.6

WAQAR LIMITED

82

225

12.7

SHAKIR INDUSTRIES

83

227

12.8

MARS LIMITED

84

228

12.9

BILAL ENGINEERING LIMITED

85

230

12.10

GALAXY INTERNATIONAL

85

231

12.11

APRICOT LIMITED

86

232

CHAPTER 13 RATIO ANALYSIS


13.1

WASIM

87

233

13.2

AMIR AND MO

88

233

CHAPTER 14 ETHICAL ISSUES IN FINANCIAL REPORTING


14.1

ETHICAL ISSUES

90

235

14.2

SINDH INDUSTRIES LTD

90

236

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SECTION

Certificate in Accounting and Finance


Financial accounting and reporting II

A
Questions

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Financial accounting and reporting II

CHAPTER 1 LEGAL BACKGROUND TO THE PREPARATION OF FINANCIAL


STATEMENTS
There are no questions specific to chapter one. This is because the learning outcomes in this
area concern the preparation of financial statements and these questions have given in
relation to chapter 2 in this question bank.

CHAPTER 2 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS


2.1

LARRY
The trial balance of Larry at 31 December 2015 is as follows.

Administration charges
Bank account
Cash
Payables ledger
Accumulated amortisation on patents at 31 December 2015
Accumulated depreciation at 31 December 2015
Receivables ledger
Distribution expenses
Property, plant and equipment at cost
Interest received
Issued share capital
Loan
Patents at cost
Accumulated profits
Purchases
Sales
Inventories at 31 December 2014

Rupees in million
Dr
Cr
342
89
2
86
5
918
189
175
2,830
20
400
18
26
1,562
2,542
3,304
118

6,313
6,313

The following information is also relevant.


(1)

Inventories on 31 December 2015 amounted to Rs. 127 million.

(2)

Current tax of Rs. 75 million is to be provided.

(3)

The loan is repayable by equal annual instalments over three years.

Required
Prepare an statement of profit or loss (analysing expenses by function) for the year
ended 31 December 2015 and a statement of financial position as at that date.

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Questions

2.2

MINGORA IMPORTS LIMITED


The trial balance of Mingora Imports Limited at 31 December 2015 is as follows.

Patent rights
Work-in-progress, 1 January `2015
Leasehold buildings at cost
Ordinary share capital
Sales
Staff costs
Accumulated depreciation on buildings, 1 January 2015
Inventories of finished games, 1 January 2015
Consultancy fees
Directors salaries
Computers at cost
Accumulated depreciation on computers, 1 January 2015
Dividends paid
Cash
Receivables
Trade payables
Sundry expenses
Accumulated profits, 1 January 2015

Rupees in million
Dr
Cr
60
125
300
600
1,740
260
60
155
44
360
50
20
125
440
420
92
294
121

2,633

2,633

The following information is also relevant.


(1)

Closing inventories of finished games are valued at Rs. 180 million. Work in
progress has increased to Rs. 140 million.

(2)

The patent rights relate to a computer program with a three year lifespan.

(3)

On 1 January 2015 buildings were revalued to Rs. 360 million. This has not
yet been reflected in the accounts. Computers are depreciated over five years.
Buildings are now to be depreciated over 30 years.
An allowance for bad debts (irrecoverable debts) of 5% is to be created.

(4)
(5)

There is an estimated bill for current tax of Rs. 120 million which has not yet
been recognised.

Required
Prepare an statement of profit or loss (analysing expenses by nature for the year
ended 31 December 2015 and a statement of financial position as at that date.

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Financial accounting and reporting II

2.3

BARRY
Barry has prepared the following draft financial statements for your review
Barry: Statement of profit or loss for year to 31st August 2015
Rs. in
000
Sales revenue
Raw materials consumed
Manufacturing overheads
Increase in inventories of work in progress and finished goods
Staff costs
Distribution costs
Depreciation
Interest payable

30,000
(9,500)
(5,000)
1,400
(4,700)
(900)
(4,250)
(350)

6,700

Statement of financial position as at 31st August 2015


Rs. in
000
Assets
Non-current
Freehold land and buildings
Plant and machinery
Fixtures and fittings

Rs. in
000

20,000
14,000
5,600

39,600
Current assets
Prepayments
Trade receivables
Cash at bank
Inventories

200
7,400
700
4,600

12,900

Total assets

52,500

Equity and liabilities


Equity shares of Rs. 1 each
Accumulated profit
Share premium

21,000
14,000
2,000

Total equity
Revaluation surplus
Current liabilities

37,000
5,000
5,300

Non-current liabilities
8% Debentures 2019

5,200

Total equity and liabilities

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Questions

Additional information
1

Income tax of Rs. 2.1 million has yet to be provided for on profits for the
current year. An unpaid under-provision for the previous years liability of Rs.
400,000 has been identified on 5th September 2015 and has not been
reflected in the draft accounts.

There have been no additions to, or disposals of, non-current assets in the
year but the assets under construction have been completed in the year at an
additional cost of Rs. 50,000. These related to plant and machinery.
The cost and accumulated depreciation of non-current assets as at 1st
September 2014 were as follows:

Freehold land and buildings


(land element Rs. 10 million)
Plant and machinery
Fixtures and fittings
Assets under construction

Cost

Depreciation

Rs. in 000
19,000

Rs. in 000
3,000

20,100
10,000
400

4,000
3,700
-

There was a revaluation of land and buildings during the year, creating the
revaluation surplus of Rs. 5 million (land element Rs. 1 million). The effect on
depreciation has been to increase the buildings charge by Rs. 300,000. Barry
adopts a policy of transferring the revaluation surplus included in equity to
retained earnings as it is realised.

Staff costs comprise 70% factory staff, 20% general office staff and 10%
goods delivery staff

An analysis of depreciation charge shows the following:


Rs. in
000
Buildings (50% production, 50% administration)
Plant and machinery
Fixtures and fittings (30% production, 70% administration)

1,000
2,550
700

Required
Prepare the following information in a form suitable for publication for Barrys
financial statements for the year ended 31st August 2015.
Statement of profit or loss
Statement of financial position
Reconciliation of opening and closing property, plant and equipment

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Financial accounting and reporting II

2.4

OSCAR INC
The following trial balance has been extracted from the books of accounts of Oscar
Inc as at 31 March 2015.
Rs. in 000
Dr
Cr
Administrative expenses
Share capital
Receivables
Bank overdraft
Income tax (overprovision in 2014)
Provision
Distribution costs
Non-current investments
Investment income
Plant and machinery
At cost
Accumulated depreciation (at 31 March 2015)
Retained earnings (at 1 April 2014)
Purchases
Inventory (at 1 April 2014)
Trade payables
Sales revenue
Interim dividend paid

210
600
470
80
25
180
420
560
75
750
220
180
960
140
260
2,010
120
3,630

3,630

Additional information
(1)

Inventory at 31 March 2015 was valued at Rs. 150,000.

(2)

The income tax charge based on the profits on ordinary activities is estimated
to be Rs. 74,000.

(3)

The provision is to be increased by Rs. 16,000.

(4)

There were no purchases or disposals of fixed assets during the year.

Required
Prepare the companys statement of profit or loss for the year to 31 March 2015 and
a statement of financial position as at that date in accordance with IAS 1.
(18)

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Questions

2.5

CLIFTON PHARMA LIMITED


The following trial balance relates to Clifton Pharma Limited, a public listed
company, at 30 September 2015.
Rs. in 000
Dr
Cr
Cost of sales
Operating expenses
Loan interest paid (see note (1))
Rental of vehicles (see note (2))
Revenue
Investment income
Leasehold property at cost (see note (4))
Plant and equipment at cost
Accumulated depreciation at 1 October 2014:
- leasehold property
- plant and equipment
Investments
Share capital
Share premium
Retained earnings at 1 October 2014
Loan notes (see note (1))
Deferred tax balance at 1 October 2014 (see note (5))
Inventory at 30 September 2015
Trade receivables
Trade payables
Bank

134,000
35,000
1,500
8,600
338,300
2,000
250,000
197,000
40,000
47,000
92,400
280,000
20,000
19,300
50,000
20,000
23,700
76,400
14,100
12,100
830,700

830,700

The following notes are relevant


(1)

The effective interest rate on the loan notes is 6% per year.

(2)

There are two separate contracts for rental of vehicles. A recent review by the
finance department of these contracts has reached the conclusion that Rs. 7
million of the total rental cost of vehicles relates to a finance lease rather than
an operating lease or rental arrangement.
The finance lease was entered into on 1 October 2014 which was when the
Rs. 7 million was paid: the lease agreement is for a four-year period in total,
and there will be three more annual payments in advance of Rs. 7 million,
payable on 1 October in each year. The vehicles in the finance lease
agreement had a fair value of Rs. 24 million at 1 October 2014 and they
should be depreciated using the straight line method to a nil residual value.
The interest rate implicit in the lease is 10% per year. The other contract for
vehicle rental is an operating lease and the rental payment should be charged
to operating expenses. (Note: You are not required to calculate the present
value of the minimum lease payments for the finance lease.)

(3)

Other plant and equipment is depreciated at 20% per year by the reducing
balance method.
All depreciation of property, plant and equipment should be charged to cost of
sales.

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(4)

The leasehold property has a 25-year life and is amortised at a straight-line


rate. On 30 September 2015 the leasehold property was re-valued to Rs. 220
million and the directors wish to incorporate this re-valuation in the financial
statements.

(5)

The provision for income tax for the year ended 30 September 2015 has been
estimated at Rs. 18 million. At 30 September 2015 there are taxable
temporary differences of Rs. 92 million. The rate of income tax on profits is
25%.

Required
(a)

Prepare an statement of profit or loss for Clifton Pharma Limited for the year to
30 September 2015
(8)

(b)

Prepare a statement of financial position (balance sheet) for Clifton Pharma


Limited as at 30 September 2015
(17)
(25)

2.6

SARHAD SUGAR LIMITED


The following trial balance relates to Sarhad Sugar Limited at 30 September 2015:

Leasehold property at valuation 1 October 2014 (note (i))


Plant and equipment at cost (note (i))
Plant and equipment accumulated depreciation at
1 October 2014
Capitalised development expenditure at 1 October 2014
(note (ii))
Development expenditure accumulated amortisation at 1
October 2014
Closing inventory at 30 September 2015
Trade receivables
Bank
Trade payables and provisions (note (iii))
Revenue (note (i))
Cost of sales
Distribution costs
Administrative expenses (note (iii))
Interest on bank borrowings
Equity dividend paid
Research and development costs (note (ii))
Share capital
Retained earnings at 1 October 2014
Deferred tax (note (v))
Revaluation surplus (Leasehold property)

Rs. in 000
Dr
Cr
50,000
76,600
24,600
20,000
6,000
20,000
43,100
1,300
23,800
300,000
204,000
14,500
22,200
1,000
6,000
8,600
70,000
24,500
5,800
10,000
466,000

466,000

The following notes are relevant:


(i)

Non-current assets tangible:


The leasehold property had a remaining life of 20 years at 1 October 2014.
The companys policy is to revalue its property at each year end and at 30
September 2015 it was valued at Rs. 43 million.

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Questions

On 1 October 2014 an item of plant was disposed of for Rs. 25 million cash.
The proceeds have been treated as sales revenue by Sarhad Sugar Limited.
The plant is still included in the above trial balance figures at its cost of Rs. 8
million and accumulated depreciation of Rs. 4 million (to the date of disposal).
All plant is depreciated at 20% per annum using the reducing balance method.
Depreciation and amortisation of all non-current assets is charged to cost of
sales.
(ii)

Non-current assets intangible:


In addition to the capitalised development expenditure (of Rs. 20 million),
further research and development costs were incurred on a new project which
commenced on 1 October 2014. The research stage of the new project lasted
until 31 December 2014 and incurred Rs. 14 million of costs. From that date
the project incurred development costs of Rs. 800,000 per month. On 1 April
2015 the directors became confident that the project would be successful and
yield a profit well in excess of its costs. The project is still in development at 30
September 2015.
Capitalised development expenditure is amortised at 20% per annum using
the straight-line method. All expensed research and development is charged
to cost of sales.

(iii)

Sarhad Sugar Limited is being sued by a customer for Rs. 2 million for breach
of contract over a cancelled order. Sarhad Sugar Limited has obtained legal
opinion that there is a 20% chance that Sarhad Sugar Limited will lose the
case. Accordingly Sarhad Sugar Limited has provided Rs. 400,000 (Rs. 2
million x 20%) included in administrative expenses in respect of the claim. The
unrecoverable legal costs of defending the action are estimated at Rs.
100,000. These have not been provided for as the legal action will not go to
court until next year.

(iv)

The directors have estimated the provision for income tax for the year ended
30 September 2015 at Rs. 114 million. The required deferred tax provision at
30 September 2015 is Rs. 6 million.

Required
(a)

Prepare the statement of profit or loss for the year ended 30 September 2015.
(10)

(b)

Prepare the statement of financial position as at 30 September 2015.

(10)

Note: notes to the financial statements are not required.

(20)

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Financial accounting and reporting II

2.7

BSZ LIMITED
The post-closing trial balance of BSZ Limited, a listed company, as at June 30,
2015 is given below:
Debit
Credit
Rs. in million
Cash at banks current accounts
Cash at banks in saving accounts
Stocks in trade closing
Accounts receivable
Provision for bad debts
Advances to suppliers
Advances to staff
Short term deposits
Prepayments
Sales tax receivable
Freehold land at revalued amount
Furniture and fixtures - cost
Accumulated depreciation Furniture and fixtures
Machines - cost
Accumulated depreciation Machines
Building on freehold land cost
Accumulated depreciation Building
Computer software cost
Accumulated amortization Computer software
Deferred taxation
Short term loan
Accounts payable
Accrued liabilities
Provision for taxation
Issued, subscribed and paid up capital (Rs. 10 each)
Surplus on revaluation of fixed assets
Accumulated profits

7
22
90
60
3
16
6
11
4
12
375
27
8
85
27
150
26
10

875

2
40
85
75
7
17
400
120
65
875

Additional Information
(i)

The first revaluation of freehold land was carried out in 2011 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 2015 are given below:

The company uses the straight line method for charging depreciation
and amortization. The building is depreciated at a rate of 5% whereas
10% is charged on machines, furniture and fixtures and computer
software.

Construction on third floor of the building commenced on March 1,


2015 and is expected to be completed on September 30, 2015. The
cost incurred during the year i.e. Rs. 20 million was capitalised on June
30, 2015.

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Questions

Furniture and fixtures worth Rs. 8 million were purchased on April 1,


2015.

A machine was sold on February 28, 2015 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, 2016.

(v)

Cash at banks in saving accounts carry interest / mark-up ranging from 3%


to 7% per annum.

(vi)

The authorised share capital of the company is Rs. 500 million.

Required
Prepare the statement of financial position as at June 30, 2015 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)

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Financial accounting and reporting II

2.8

YASIR INDUSTRIES LIMITED


The following trial balance related to Yasir Industries Limited (YIL) for the year
ended June 30, 2015:

Ordinary share capital (Rs. 10 each)


Retained earnings
Sales
Purchases
Production labour
Manufacturing overheads
Inventories (July 1, 2014)
Administrative expenses
Distribution expenses
Financial charges
Cash and bank
Trade creditors
Accrued expenses
10% redeemable preference shares
Debentures
Deferred tax (July 1, 2014)
Suspense account
Leasehold property - at cost
Machines at cost
Software at cost
Acc. depreciation Leasehold property (June 30, 2015)
Acc. depreciation Machines (June 30, 2015)
Acc. amortization Software (June 30, 2015)
Trade receivables

Dr
Cr
Rs. in million
120.00
10.20
472.40
175.70
61.00
39.00
38.90
40.00
19.80
0.30
13.25
30.40
16.20
40.00
80.00
6.00
30.00
230.00
168.60
20.00
40.25
48.60
12.00
66.00
889.30

889.30

Additional Information
(i)

Sales include an amount of Rs. 27 million, made to a customer under sale or


return agreement. The sale has been made at cost plus 20% and the expiry
date for the return of these goods is July 31, 2015.

(ii)

The value of inventories at June 30, 2015 was Rs. 42 million.

(iii)

A fraud of Rs. 30 million was discovered in October 2014. A senior employee


of the company who left in June 2014, had embezzled the funds from YILs
bank account. The chances of recovery are remote. The amount is presently
appearing in the suspense account.

(iv)

On January 1, 2015 YIL issued debenture certificates which are repayable in


2020. Interest is paid on these at 12% per annum.

(v)

Financial charges comprise bank charges and bank commission.

(vi)

The provision for current taxation for the year ended June 30, 2015 after
making all the above adjustments is estimated at Rs. 16.5 million.

Emile Woolf International

12

The Institute of Chartered Accountants of Pakistan

Questions

(vii) The carrying value of YILs net assets as on June 30, 2015 exceeds their tax
base by Rs. 30 million. The income tax rate applicable to the company is 30%.
(viii) On July 1, 2014, the leasehold property having a useful life of 40 years was
revalued at Rs. 238 million. No adjustment in this regard has been made in the
books.
(ix)

Depreciation of leasehold property is charged using the straight line method.


50% of depreciation is allocated to manufacturing, 30% to administration and
20% to selling and distribution.

Required
In accordance with the requirements of the Companies Ordinance, 1984 and
International Accounting Standards, prepare the:
(a)

statement of financial position as of June 30, 2015.

(b)

statement of profit or loss for the year ended June 30, 2015.

(20)

(Comparative figures and notes to the financial statements are not required.)

Emile Woolf International

13

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

2.9

SHAHEEN LIMITED
Following is the trial balance of Shaheen Limited (SL) as at June 30, 2015:
Rs. in 000
Dr
Cr
200,000
100,000
35,000
30,000
23,000
5,000
2,000
6,000
86,000

Sales revenue
Manufacturing costs
Selling and distribution costs
Administrative costs
Opening inventories
Interest on borrowings
Provision for income tax
Advance income tax paid
Property, plant and equipment
Accumulated depreciation on property, plant
and equipment
Export licence
Trade receivables
Cash and bank balances
Other receivable and prepayments
Trade payables
Provisions for litigation
Long term borrowings
Deferred tax
Share capital (Rs. 10 each and fully paid)
Retained earnings

12,000
6,000
37,800
4,725
14,000
12,000
5,000
31,525
5,000
60,000
20,000
347,525

347,525

Additional information
(i)

Sales last year (year ended 30 June 2014) included goods invoiced at Rs 10
million which were sent to a customer on June 25, 2014 under a sale or
return agreement, at cost plus 20%. The goods were returned on August 25,
2014. No correction has been made for the return.

(ii)

The export licence has been obtained for exporting a new product and is
effective for five years up to December 31, 2019. However, the exports
commenced from July 1, 2015.

(iii)

Closing inventories are valued at Rs. 30 million.

(iv)

Details of property, plant and equipment are as follows:


Land
Cost as at June 30, 2014
Fully depreciated amounts included in cost
Estimated useful life at the date of purchase

20,000

Plant and
Buildings equipment
Rs in 000
36,000
30,000
3,000
20 years
10 years

The company uses straight line method for charging depreciation.


Depreciation is allocated to manufacturing, distribution and administrative
costs at 75%, 15% and 10% respectively.
(v)

Rs. 6 million of the long term borrowings is of current maturity (i.e. will be
repaid within 12 months).

Emile Woolf International

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The Institute of Chartered Accountants of Pakistan

Questions

(vi)

During the year Rs. 5 million was paid in full and final settlement of income
tax liability against which a provision of Rs. 7.0 million had been made in the
previous year. Current years taxable income exceeds accounting income by
Rs. 5 million of which 0.8 million are permanent differences. Applicable tax
rate for the company is 35%.

(vii) On July 30, 2015 the board of directors proposed a final dividend at 15% for
the year ended June 30, 2015 (2014: at 20%)
Required
In accordance with the requirements of the Companies Ordinance, 1984 and
International Financial Reporting Standards, prepare:
(a)

The statement of financial position as of June 30, 2015

(b)

The statement of profit or loss for the year ended June 30, 2015

(c)

The statement of changes in equity for the year ended June 30, 2015.

(Comparative figures and notes to the financial statements are not required)
(25)

2.10

MOONLIGHT PAKISTAN LIMITED


Following is the summarised trial balance of Moonlight Pakistan Limited (MPL), a
listed company, for the year ended December 31, 2015:

Land and buildings - at cost


Plants at cost
Trade receivables
Stock in trade at December 31, 2015
Cash and bank
Cost of sales
Selling expenses
Administrative expenses
Financial charges
Accumulated depreciation as on January 1, 2015 Buildings
Accumulated depreciation as on January 1, 2015 Plants
Ordinary shares of Rs. 10 each fully paid
Retained earnings as at January 1, 2015
12% Long term loan
Provision for gratuity
Deferred tax on January 1, 2015
Trade payables
Right subscription received
Revenue

Emile Woolf International

15

Rs. in million
Debit Credit
2,600
2,104
702
758
354
1,784
220
250
210
400
670
1,200
510
1,600
8
22
544
420
3,608
8,982
8,982

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Additional Information
(i)

The land and buildings were acquired on January 1, 2011. The cost of
land was Rs. 600 million. On January 1, 2015 a professional valuation firm
valued the buildings at Rs. 1,840 million with no change in the value of land.
The estimated life at acquisition was 20 years and the remaining life has not
changed as a result of the valuation. 60% of depreciation on buildings is
allocated to manufacturing, 25% to selling and 15% to administration.

(ii)

Plant is depreciated at 20% per annum using the reducing balance method.

(iii)

On March 31, 2015 MPL made a bonus issue of one share for every six
held. The issue has not been recorded in the books of account.

(iv)

Right shares were issued on September 1, 2015 at Rs. 12 per share.

(v)

The interest on long term loan is payable on the first day of July and January.
No accrual has been made for the interest payable on January 1, 2013.

(vi)

MPL operates an unfunded gratuity scheme for all its eligible employees.
The provision required as on December 31, 2015 is estimated at Rs. 23
million. Rs. 3 million were paid during the year and debited to the provision
for gratuity account. Cost of gratuity is allocated to production, selling and
administration expenses in the ratio of 60% : 20% : 20%.

(vii) The tax charge for the current year after making all related adjustments is
estimated at Rs. 37 million. The timing differences related to taxation are
estimated to increase by Rs. 80 million, over the last year. The applicable
income tax rate is 35%.
Required
In accordance with the requirements of Companies Ordinance, 1984 and
International Financial Reporting Standards, prepare the following:
(a)

Statement of Financial Position as of December 31, 2015.

(b)

Statement of profit or loss for the year ended December 31, 2015.

(22)

(Comparative figures and notes to the financial statements are not required)

Emile Woolf International

16

The Institute of Chartered Accountants of Pakistan

Questions

2.11

FIGS PAKISTAN LIMITED


Figs Pakistan Limited is a listed company engaged in the business of manufacturing
and marketing of personal care and food products. Following is an extract from its
trial balance for the year ended 31 December 2015:
Debit

Credit

Rs. in million
Sales - Manufactured goods
Sales - Imported goods
Scrap sales
Dividend income
Return on savings account
Sales tax - Imported goods
Sales tax - Manufactured goods
Sales discount
Raw material stock as on 1 January 2015
Work in process as on 1 January 2015
Finished goods (manufactured) as on 1 January 2015
Finished goods (imported) as on 1 January 2015
Purchases - Raw material
Purchases - Imported goods
Stores and spares consumed
Salaries, wages and benefits
Utilities
Depreciation and amortization
Stationery and office expenses
Repairs and maintenance
Advertisement and sales promotion
Outward freight and handling
Legal and professional charges
Auditor's remuneration
Donations
Workers Profit Participation Fund
Worker Welfare Fund
Loss on disposal of property, plant and equipment
Financial charges on short term borrowings
Exchange loss
Financial charges on lease

56,528
1,078
16
12
2
53
10,201
2,594
1,751
73
1,210
44
22,603
658
180
2,367
734
1,287
230
315
4,040
1,279
71
13
34
257
98
10
133
22
11

Additional information
(i)

The position of inventories as at 31 December 2015 was as follows:


Raw material
Work in process
Finished goods (manufactured)
Finished goods (imported)

Emile Woolf International

17

Rs. m
2,125
125
1,153
66

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(ii)

The basis of allocation of various expenses among cost of sales, distribution


costs and administrative expenses are as follows:

Salaries, wages and benefits


Depreciation and amortization
Stationery and office expenses
Repairs and maintenance / Utilities

Cost of Distribution Administrative


sales
costs
expenses
%
%
%
55
30
15
70
20
10
25
40
35
85
5
10

(iii)

Salaries, wages and benefits include contributions to provident fund (defined


contribution plan) and gratuity fund (defined benefit plan) amounting to Rs. 54
million and Rs. 44 million respectively.

(iv)

Auditors remuneration includes taxation services and out-of-pocket expenses


amounting to Rs. 4 million and Rs. 1 million respectively.

(v)

Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One
of the companys directors, Mr. Peanut is a trustee of DCF.

(vi)

The tax charge for the current year after making all related adjustments is
estimated at Rs. 1,440 million. Taxable temporary differences of Rs. 3,120
originated in the year million, over the last year. The applicable income tax
rate is 35%.

(vii) 274 million ordinary shares were outstanding as on 31 December 2015.


(viii) There is no other comprehensive income for the year.
Required
Prepare the statement of profit or loss for the year ended 31 December 2015 along
with the relevant notes showing required disclosures as per the Companies
Ordinance, 1984 and International Financial Reporting Standards. Comparatives are
not required.
(24)

Emile Woolf International

18

The Institute of Chartered Accountants of Pakistan

Questions

CHAPTER 3 IAS 7: STATEMENTS OF CASH FLOWS


3.1

KLEA
The statement of financial position and statement of profit or loss for Klea for the
year to 31st March 2015 are provided below.
Statement of financial position as at 31st March 2015
2015
2014
Rs. in 000
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Financial assets

300
3,450
400

4,150

Current assets
Inventory
Trade receivables
Cash and cash equivalents

3,200
2,400
32

2,000
2,000
580

9,782

4,580

6,580

3,000
838
910

2,000
560
354

Total equity

2,000

5,632

Equity and liabilities


Equity
Issued share capital
Share premium account
Retained earnings

Total assets

200
1,600
200

4,748

2,914

Revaluation surplus

1,000

Non-current liabilities
Interest-bearing loans and liabilities

1,600

2,000

Current liabilities
Bank overdraft
Trade payables
Taxation

414
1,600
420

1,266
400

2,434

Total liabilities

4,034

Total equity and liabilities

Emile Woolf International

19

1,666

3,666

9,782

6,580

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Statement of profit or loss for the year ended 31st March 2015
Rs. in 000
Revenue
10,000
Other income
100
Change in inventory of finished goods and WIP
1,300
Raw materials and consumables used
4,000
Employee benefits costs
3,000
Depreciation and amortisation expense
800
Other expenses
1,724

Total expenses

(9,524)

1,876
(320)
50

1,606
(650)

956

Finance costs
Finance income
Profit before tax
Income tax expense
Profit for the year
Additional information
(i)

Rs. in 000
2014

Non-current assets
2015
Intangible assets
Property, plant and equipment

Cost

Deprecn

Cost

Deprecn

700

400

400

200

5,000

1,550

3,000

1,400

(ii)
(iii)

At 1 April 2014 land was revalued from Rs. 1million to Rs. 2 million.
During the year, plant and machinery costing Rs. 600,000 and depreciated by
Rs. 500,000 was sold for Rs. 150,000.

(iv)

The interest bearing loans relate to debentures which were issued at their
nominal value. Rs. 400,000 of these debentures were redeemed at par during
the year.

(v)

Ordinary shares were issued for cash during the year.

(vi)

Rs. 100,000 of current asset investments held as cash equivalents were sold
during the year for Rs. 94,000.

(vii) Dividends paid in the year were Rs. 200,000 relating to the 2014 proposed
dividend and a Rs. 200,000 interim dividend for 2015.
Required
Prepare a statement of cash flows for Klea for the year ended 31 March 2015 in
accordance with IAS 7 using the indirect method.
(25)

Emile Woolf International

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The Institute of Chartered Accountants of Pakistan

Questions

3.2

STANDARD INC
The summarised statements of financial position of Standard Inc at 31 December
2014 and 2015 are as follows.
2015
2014
Rs. in 000
Rs. in 000
Issued share capital
150,000
100,000
Share premium
35,000
15,000
Retained earnings
41,000
14,000
Long-term loans
30,000
70,000
Payables
48,000
34,000
Bank overdraft

14,000
Tax payable
33,000
21,500
Proposed dividends
15,000
7,500
Depreciation
Plant and machinery
54,000
45,000
Fixtures and fittings
15,000
13,000

421,000
334,000

Freehold property at cost


Plant and machinery at cost
Fixtures and fittings at cost
Inventories
Trade receivables
Long-term investments
Cash at bank

130,000
151,000
29,000
51,000
44,000
4,600
11,400

421,000

110,000
120,000
24,000
37,000
42,800

200

334,000

The following information is relevant:


(a)
(b)

There had been no disposal of freehold property in the year.


A machine tool which had cost Rs. 8,000,000 (in respect of which Rs.
6,000,000 depreciation had been provided) was sold for Rs. 3,000,000, and
fixtures which had cost Rs. 5,000,000 (in respect of which depreciation of Rs.
2,000,000 had been provided) were sold for Rs. 1,00,0000. Profits and losses
on those transactions had been dealt with through the statement of profit or
loss.

(c)

The statement of profit or loss charge in respect of tax was Rs. 22,000,000.

(d)

The premium paid on redemption of the long-term loan was Rs. 2,000,000,
which has been written off to the statement of profit or loss.

(e)

The proposed dividend for 2014 had been paid during the year.

(f)

Interest received during the year was Rs. 450,000. Interest charged in the
statement of profit or loss for the year was Rs. 6,400,000. Accrued interest of
Rs. 440,000 is included in payables at 31 December 2014 (nil at 31 December
2015).

(g)

The government stock is a long term investment.

Required
Prepare a cash flow statement for the year ended 31 December 2015, together with
notes as required by IAS 7.
(20)

Emile Woolf International

21

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.3

FALLEN
Fallen has prepared the following rough draft accounts for the year ended 31
December 2015.
Statement of profit or loss
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Interest payable
Operating profit before tax
Taxation (35%) including deferred tax
Profit after tax
Dividends
Retained profit

Rs. in 000
11,563
(5,502)

6,061
(402)
(882)
(152)

4,625
(1,531)

3,094
(700)

2,394

Statements of financial position

Leasehold premises (net)


Plant, machinery and equipment (net)
Investments at cost
Inventories
Receivables
Bank

Emile Woolf International

22

31 December
2015
2014
Rs. in 000
Rs. in 000
6,600
5,700
5,040
3,780
2,406
2,208
2,880
1,986
2,586
1,992

576

19,512
16,242

The Institute of Chartered Accountants of Pakistan

Questions

31 December
2015
2014
Rs. in 000
Rs. in 000
2,280
1,800
2,112
1,800
9,108
6,714
202
138
1,240
1,800
1,202
1,016
1,026
702
222

Share capital
Share premium
Profit and loss account
Deferred taxation
Long-term loan (10%)
Provision for deferred repairs
Payables
Overdraft
Taxation
Corporation tax
Proposed dividends

1,730
390

19,512

2,038
234

16,242

The following data is relevant.


(1)

The 10% long-term loan were redeemed at par.

(2)

Plant and equipment with a written down value of Rs. 276,000 was sold for
Rs. 168,000. New plant was purchased for Rs. 2,500,000.

(3)

Leasehold premises costing Rs. 1,300,000 were acquired during the year.

(4)

The investments are highly liquid securities held for the short term.

Required
Prepare the cash flow statement and supporting notes in accordance with IAS 7 for
Fallen Inc for 2015.
(20)

Emile Woolf International

23

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.4

BIN QASIM MOTORS LIMITED


The summarised financial statements of Bin Qasim Motors Limited for the year to 30
September 2015, together with a comparative balance sheet, are:
Statement of profit or loss

Rs. 000

Sales revenue

7,482

Cost of sales

(4,284)

Gross profit

3,198

Operating expenses

(1,479)

Interest payable

(260)

Investment income

120

Profit before tax

1,579

Income tax

(520)

Profit for the period

1,059

Statement of financial position as at 30 September

Assets
Non-current assets
Property, plant and equipment
Investment
Current assets
Inventory
Trade accounts receivable
Short term treasury bills
Bank
Total assets
Total equity and liabilities
Equity:
Share capital
Reserves:
Share premium
Retained earnings
At beginning of the year
Net profit for period
Dividends
At end of the year

Emile Woolf International

24

2015
Rs. in 000

2014
Rs. in 000

2,344
690
3,034

1,908
nil
1,908

1,046
935
120
nil
2,101
5,135

785
824
50
122
1,781
3,689

1,400

1,000

460

60

192
1,059
(180)
1,071
2,931

147
65
(20)
192
1,252

The Institute of Chartered Accountants of Pakistan

Questions

Revaluation surplus
Non-current liabilities
Deferred tax
Deferred income
10% Convertible loan stock
Current liabilities
Trade accounts payable
Accrued interest
Provision for negligence claim
Provision for income tax
Deferred income
Overdraft
Total equity and liabilities

90

40

439
275
nil
714

400
200
400
1,000

644
40
nil
480
100
136
1,400
5,135

760
25
120
367
125
nil
1,397
3,689

The following information is relevant


(i)

Non-current assets
Rs in 000

Property, plant and equipment is analysed as follows:


30 September 2015

30 September 2014

Cost/

Cost/

Valuation Depreciation

NBV

Valuation Depreciation

NBV

Land and buildings

2,000

760

1,240

1,800

680

1,120

Plant

1,568

464

1,104

1,220

432

788

3,568

1,224

2,344

3,020

1,112

1,908

On 1 October 2014 Bin Qasim Motors Limited recorded an increase in the


value of its land of Rs. 150,000.
During the year an item of plant that had cost Rs. 500,000 and had
accumulated depreciation of Rs. 244,000 was sold at a loss (included in cost
of sales) of Rs. 86,000 on its carrying value.
(ii)

Deferred income
Bin Qasim Motors Limited sells servicing contracts on certain types of
machinery. Payments are received in advance for a service which Bin Qasim
Motors Limited must provide over a number of following years. Income that
relates to these contracts is deferred and recognised in P&L as the period of
service passes.
A credit of Rs. 125,000 for the current years recognition of deferred income
has been included revenue in this period.

(iii)

Share capital and loan stocks


The increase in the share capital during the year was due to the following
events:
(1)

Emile Woolf International

On 1 January 2015 there was a bonus issue (out of the revaluation


surplus) of one bonus share for every 10 shares held.

25

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(iv)

(2)

On 1 April 2015 the 10% convertible loan stock holders exercised their
right to convert to ordinary shares. The terms of conversion were 25
ordinary shares of Rs. 1 each for each Rs. 100 of 10% convertible loan
stock.

(3)

The remaining increase in the ordinary shares was due to a stock


market placement of shares for cash on 12 August 2015.

Provision for negligence claim


In June 2015 Bin Qasim Motors Limited made an out of court settlement of a
negligence claim brought about by a former employee. The dispute had been
in progress for two years and Bin Qasim Motors Limited had made provisions
for the potential liability in each of the two previous years. The unprovided
amount of the claim at the time of settlement was Rs. 30,000 and this was
charged to operating expenses.

Required
Prepare a statement of cash flows for Bin Qasim Motors Limited for the year to 30
September 2015 in accordance with IAS 7 Statement of Cash Flows.
(25)

Emile Woolf International

26

The Institute of Chartered Accountants of Pakistan

Questions

3.5

ITTEHAD MANUFACTURING LTD


The financial statements of Ittehad Manufacturing Ltd for the year to 30 September
2015, together with the comparative statement of financial position (balance sheet)
for the year to 30 September 2014 are shown below:
Rs. in million
Sales revenue
Cost of sales (note 1)
Gross profit for period
Operating expenses (note 1)

3,820
(2,620)
1,200
(280)
920
(30)
890
(270)
620

Interest Loan note


Profit before tax
Taxation
Net profit for the period
Statement of financial position as at 30 September:
2015
Rs. in million
Non-current assets
Property, plant and equipment
Intangible assets (note 2)
Current assets
Inventory
Accounts receivable
Cash
Total assets
Equity and liabilities
Ordinary shares of Rs. 1 each
Reserves
Share premium
Revaluation
Retained earnings
Non-current liabilities (note 3)
Current liabilities (note 4)
Total equity and liabilities

2016
Rs. in million

1,890

1,830

670
2,560

300
2,130

1,420
990
70
2,480
5,040

940
680
nil
1,620
3,750

750

500

350
190
1,860
3,150
610
1,280
5,040

100
nil
1,600
2,200
240
1,310
3,750

Extract from statement of changes in equity


2015
2014
Rs. in million
1,600
1,000
620
800
(320)
(200)
(50)
10

1,860
1,600

Retained earnings brought forward


Profit for the year
Dividends
Bonus issue
Transfer from revaluation surplus
Retained earnings carried forward

Emile Woolf International

27

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Notes to the financial statements:


(1) Cost of sales includes depreciation of property, plant and equipment of Rs. 320
million and a loss on the sale of plant of Rs. 50 million.
2015

2014

Rs. in million

(2)

(3)

(4)

Intangible non-current assets:


Deferred development expenditure

470

100

Goodwill

200

200

670

300

10% loan note

300

100

Deferred tax

310

140

610

240

875

730

Bank overdraft

nil

115

Accrued loan interest

15

Deferred income

260

300

Taxation

130

160

1,280

1,310

Non-current liabilities:

Current liabilities:
Accounts payable

The following additional information is relevant:


(i)

Intangible non-current assets:

(ii)

The company successfully completed the development of a new product


during the current year, capitalising a further Rs. 500 million before
amortisation charges for the period.
Property, plant and equipment/revaluation surplus:

(iii)

The company revalued its buildings by Rs. 200 million on 1 October


2014. The surplus was credited to a revaluation surplus.

New plant was acquired during the year at a cost of Rs. 250.

Rs. 10 million has been transferred from the revaluation surplus to


retained earnings as a year-end adjustment in respect of the additional
depreciation created by the revaluation.

The remaining movement on property, plant and equipment was due to


the disposal of obsolete plant.

Share issues:
On 1 October 2014 a bonus issue of 1 new share for every 10 held was made
from retained earnings. Ittehad Manufacturing Ltd made a further issue of
ordinary shares for cash during the year.

Required
(a)

A statement of cash flows for Ittehad Manufacturing Ltd for the year to 30
September 2015 prepared in accordance with IAS 7 Statement of Cash Flows.
(20)

(b)

Comment briefly on the financial position of Ittehad Manufacturing Ltd as


portrayed by the information in your statement of cash flows.

(5)
(25)

Emile Woolf International

28

The Institute of Chartered Accountants of Pakistan

Questions

3.6

WASEEM INDUSTRIES LIMITED


The following statements of financial position relate to Waseem Industries Limited for
the years ended December 31:

ASSETS
Non-current assets
Fixed assets
Property, plant and equipment
Capital work-in-progress
Long term investments
Long term deposits
Total non-current assets

2015

2014

Rs. in
million

Rs. in
million

242
20
262
75
13
350

182
18
200
100
13
313

Current assets
Stocks-in-trade
Trade debts
Advances, prepayments and other
receivables
Cash and bank balances
Total current assets

55
51

48
38

37
11
154

40
20
146

TOTAL ASSETS

504

459

150
55
85
290

125
80
50
255

94
16
110

118
12
130

25
13
66
104

22
6
46
74

504

459

EQUITY AND LIABILITIES


Shareholders' equity
Share capital
Share premium
Unappropriated profit
Non-current liabilities
Long term finances - Secured
Deferred liability - Gratuity (unfunded)
Current liabilities
Current portion of long term finances
Short term finances
Trade and other payables
TOTAL EQUITY AND LIABILITIES

Emile Woolf International

29

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

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% (2014: 8%), in its annual general meeting.

(ii)

During the year, the company provided Rs. 17 million (2014: 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. m
Plant and machinery
Vehicles

20
3

Rs. m
22
4

(iii)

Advances, prepayments and other receivables include advance tax of Rs. 10


million (2014: Rs. 7 million).

(iv)

In 2015, the company paid Rs. 6 million on account of gratuity.

(v)

Accrued mark-up on long term finances amounting to Rs. 7 million (2014:


Rs. 9 million) is included in trade and other payables. Financial charges
included in the profit and loss account are Rs. 16 million (2014 : Rs. 14
million).

(vi)

Income tax expense for the year 2015 amounted to Rs. 19 million (2014:
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)

Emile Woolf International

30

The Institute of Chartered Accountants of Pakistan

Questions

3.7

JALIB INDUSTRIES LIMITED


Jalib Industries Limited is a listed company. The relevant information contained
in the financial statements for the year ended December 31, 2015 is as follows:
Statement of Financial Position
2015

2014

Rupees in million

Non-current assets
Property, plant and equipment
Capital work in progress
Current assets
Stock in trade
Trade debts
Advances and other receivables
Cash and bank

Equity
Issued, subscribed and paid-up capital
Share premium
Unappropriated profit
Non-current liabilities
Deferred liabilities
Long term loans
Current liabilities
Current portion of long term loans
Creditors, accrued and other liabilities
Dividend payable

129.40
22.50
151.90

100.60
37.00
137.60

531.80
28.50
37.40
12.00
609.70
761.60

451.00
24.70
42.00
3.00
520.70
658.30

396.00
45.00
142.60
583.60

300.00
12.00
163.00
475.00

40.80
80.00
120.80

27.50
100.00
127.50

18.00
36.20
3.00
57.20
761.60

20.00
34.40
1.40
55.80
658.30

Statement of profit or loss 2015


Rupees in million

Sales
Cost of goods sold
Gross profit
Operating expenses
Financial charges
Loss on sale of fixed assets

2,535.00
(1,774.50)
760.50
(554.00)
(10.50)
(4.60)
(569.10)
191.40
(104.60)
(2.20)
(106.80)
84.60

Profit before tax


Tax expense - Current
- Deferred
Profit after tax

Emile Woolf International

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The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

The following supporting information is available:


(i)

During the year, an amount of Rs. 42 million was transferred from capital
work in progress to property, plant and equipment.

(ii)

The company sold property, plant and equipment having book value of Rs. 15
million for Rs. 10.4 million.

(iii)

Depreciation for the year amounted to Rs. 27.7 million.

(iv)

Trade debts written off during the year amounted to Rs. 1 million. It is the
policy of the company to maintain the provision for doubtful debts at 5% of
trade debts.

(v)

Advances and other receivables include advance tax of Rs. 3.6 million (2014:
Rs. 2.2 million).

(vi)

Deferred liabilities include deferred tax and provision for gratuity. There
was no deferred tax liability at the beginning of the year. Provision for gratuity
made during the year amounted to Rs. 15.5 million.

(vii) Creditors, accrued and other liabilities include accrued financial charges
amounting to Rs. 5 million (2014: Rs. 6 million).
(viii) On January 15, 2016, the company declared final dividend for the year ended
December 31, 2015 comprising 7.5% (2014: 25%) cash dividend and 12.5%
(2014:10%) bonus shares, for its ordinary shareholders.
Required
Prepare a statement of cash flow for the year ended December 31, 2015 in
accordance with the requirements of International Accounting Standards. Show all
necessary workings.
(23)

3.8

APOLLO INDUSTRY LIMITED


Following are the relevant extracts from the financial statements of Apollo Industry
Limited, a listed company, for the year ended December 31, 2015.
Statement of financial position as at December 31, 2015

Issued, subscribed and paid up capital


Unappropriated profit
Surplus on revaluation of property, plant & equipment
Non-current liabilities
Staff gratuity
Deferred tax liability- net
Trade and other payables

Emile Woolf International

32

2015

2014

Rs. 000

Rs. 000

25,000
20,900
45,900

20,000
22,000
42,000

7,000

8,000

1,400
590
1,990
4,200
59,090

1,190
1,190
6,250
57,440

The Institute of Chartered Accountants of Pakistan

Questions

Property, plant and equipment


Capital work in progress
Intangible assets
Deferred tax asset- net
Long term deposits and prepayments
Current Assets
Tax refundable
Other current assets
Cash and bank balances

2015

2014

Rs. 000

Rs. 000

35,000
5,500
1,100
41,600
400
42,000

25,500
10,000
1,140
36,640
350
300
37,290

950
15,700
440
17,090
59,090

800
12,125
7,225
20,150
57,440

Statement of comprehensiveiIncome for the year ended December 31, 2015


2015
Rs. 000
146,700
(127,500)
19,200

Sales
Cost of sales
Gross profit
Operating expenses
Financial charges
Other income

(15,000)
(500)
2,800
(12,700)
6,500
(4,660)
(940)
(5,600)
900

Profit before tax


Tax expense
- current
- deferred
Tax for the year
Profit after tax
Other relevant information is as under:
(i)

During the year, the company has issued 10% bonus shares.

(ii)

Depreciation and amortization for the year amounted to Rs. 7 million.

(iii)

WDV of assets disposed off during the year amounted to Rs. 1.2 million. (The
assets had not been revalued)

(iv)

Other income includes interest earned on short term placements, amounting


to Rs. 1 million. The remaining amount represents gain on disposal of
property, plant and equipment.

(v)

Gratuity of Rs. 0.3 million was paid to outgoing employees.

(vi)

Intangible assets worth Rs. 50 thousand were acquired during the year.

Required
Prepare the Statement of Cash Flows for the year ended December 31, 2015 in
accordance with the requirements of IAS - 7 (Statement of Cash Flows) using
indirect method.
(22)

Emile Woolf International

33

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.9

MARVEL ENGINEERING LIMITED


Following are the extracts from the draft financial statements of Marvel
Engineering Limited (MEL), a listed company, for the year ended 30 June 2015:
Statement of Financial Position
Rs. in million
2015
Non current assets
Property, plant and
equipment
Long term
investments

130

Share capital and


reserves
410 Share capital
(Rs. 10 each)
100 Share premium

763

510 Retained earnings

97

68 Non current
liabilities
57 Long term loans
120 Gratuity payable
39 Deferred taxation
284
Current liabilities
Trade and other
payables
Tax payable - net
Dividend payable

633

Current assets
Stock-in-trade
Trade debts
Other receivables
Cash at bank

2014

133
100
31
361

1,124

794

2015

2014

494

440

133
635

110
550

330
55
15
400

110
50
21
181

73

56

12
4
89
1,124

5
2
63
794

Statement of profit or loss


2015
Rs. in million
654
(458)
196
(68)
(75)
35
(108)
88
(21)
67

Revenue
Cost of sales
Gross profit
Operating expenses
Financial charges
Other income
Profit before tax
Income tax expense
Profit after tax
Additional information:
(i)

During the year, the company recognised a provision for impairment in


respect of one of its plant, amounting to Rs. 11 million. Total depreciation for
the year amounted to Rs. 50 million.

(ii)

It is the policy of the company to maintain a provision for doubtful debts at


5% of trade debts. During the year, trade debts amounting to Rs. 6 million
(2014: Rs. 2 million) were written off.

(iii)

Trade and other payables include accrued financial charges amounting to


Rs. 7 million (2014: Rs. 3 million).

Emile Woolf International

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The Institute of Chartered Accountants of Pakistan

Questions

(iv)

On 15 July 2015, MELs board of directors proposed a final dividend of 10%


for the year ended 30 June 2015 (2014: 5% cash dividend and 5% bonus
declared on 20 July 2014).

(v)

Other income comprises of the following:


Dividend income
Gain on sale of vehicles (carrying value of Rs. 5 million)
Gain on sale of investments (carrying value of Rs. 10 million)

(vi)

Rs. m
30
2
3
35

Gratuity paid during the year amounted to Rs. 6 million.

Required
Prepare the statement of cash flows for Marvel Engineering Limited for the year
ended 30 June 2015.
(24)

Emile Woolf International

35

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 4 CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL


POSITION BASIC APPROACH
4.1

HALL
Statements of financial position at 31 December 2015

Assets
Non-current assets
Property, plant and equipment
Investment in Stand
Current assets

Equity and liabilities


Capital and reserves
Share capital
Retained earnings

Non-current liabilities
8% Debenture loans
Current liabilities

Hall
Rs. 000

Stand
Rs. 000

35,000
12,000

20,000

16,000

63,000

14,000

34,000

10,000
13,000

23,000

4,000
12,000

16,000

20,000

9,000

20,000

63,000

9,000

34,000

On 1 January 2013 Hall acquired 75% of Stand for Rs. 12,000,000. At that date the
balance on Stands retained earnings was Rs. 8,000,000.
Required
Prepare the consolidated statement of financial position of Hall as at 31 December
2015.
(6)

Emile Woolf International

36

The Institute of Chartered Accountants of Pakistan

Questions

4.2

HASSLE
Statements of financial position at 31 December 2015
Hassle
Rs.
Investment in Strife
60,000
Sundry assets
247,500

307,500

Share capital
Retained earnings
Liabilities

Strife
Rs.

226,600

226,600

120,000
87,500
100,000

307,500

50,000
70,000
106,600

226,600

Hassle bought 80% of Strife when the balance on Strifes retained profit was Rs.
50,000.
Required
Prepare the consolidated statement of financial position at 31 December 2015.

4.3

(8)

HYMN
The following are the summarised statements of financial position of a group of
companies as at 31 December 2015.
Hymn
Rs.
Assets
Non-current assets
Property, plant and equipment
Investment
Current assets

Psalm
Rs.

105,000 65,000
85,000
220,000 55,000

410,000 120,000

Equity and liabilities


Equity
Share capital
Retained earnings

100,000
155,000

255,000
155,000

410,000

Current liabilities

50,000
49,000

99,000
21,000

120,000

Hymn purchased 80% of Psalms shares on 1 January 2015 when there was a
credit balance on that companys retained earnings of Rs. 20,000.
Required
Prepare the Hymn group consolidated statement of financial position as at 31
December 2015.

Emile Woolf International

37

(6)

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

4.4

HANG
On 31 December 2012, Hang acquired 60% of Swing for Rs. 140,000. At that date
Swing had a retained earnings balance of Rs. 50,000 and a share premium account
balance of Rs. 49,000.
The following statements of financial position have been prepared as at 31
December 2015.
Hang
Rs.
Assets
Non-current assets
Property, plant and equipment
Investment in Swing
Current assets

Equity and liabilities


Equity
Share capital
Share premium
Retained earnings
Current liabilities

Swing
Rs.

240,000
140,000
250,000

630,000

180,000

200,000
25,000
180,000

405,000
225,000

630,000

90,000
49,000
80,000

219,000
157,000

376,000

196,000

376,000

Required
Prepare the consolidated statement of financial position of Hang and its subsidiary
as at 31 December 2015.
(6)

4.5

HASH
Statements of financial position at 31 December 2015
Hash
Rs. 000
Investment in Stash (80%)
100,000
Sundry assets
207,500

307,500

Share capital
Retained earnings
Liabilities

120,000
87,500
100,000

307,500

Hash purchased the shares in Stash on 30th September 2015.

Stash
Rs. 000

226,600

226,600

50,000
70,000
106,600

226,600

Stashs retained profit for the year ended 31st December 2015 was Rs. 24,000,000.
Required
Prepare the consolidated statement of financial position at 31 December 2015.

Emile Woolf International

38

(8)

The Institute of Chartered Accountants of Pakistan

Questions

CHAPTER 5 CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL


POSITION COMPLICATIONS
5.1

HAIL
The following are the draft statements of financial position of Hail and its subsidiary
Snow as at 31 December 2015.

Assets
Non-current assets
Property, plant and equipment
Investments
Current assets
Cash
Trade receivables
Snow current account
Inventory

Equity and liabilities


Shareholders equity
Share capital
Retained earnings
Share premium
Capital reserve

Current liabilities
Hail current account

Hash
Rs. 000

Stash
Rs. 000

161,000
68,000

85,000

7,700
92,500
15,000
56,200

400,400

25,200
45,800
36,200

192,200

100,000
185,400
20,000

285,400
115,000

400,400

50,000
41,200
5,000

116,200
68,000
8,000

192,200

Notes
(1)

Snow has 50,000 shares in issues. Hail acquired 45,000 of these on 1


January 2012 for a cost of Rs. 65,000,000 when the balances on Snows
reserves were
Rs. 000
5,000

Share premium account


Capital reserve
Retained earnings

10,000

(2)

Hail declared a dividend of Rs. 3,000,000 before the year end and Snow
declared one of Rs. 2,000,000. These transactions have not been accounted
for.

(3)

The current account difference is due to cash in transit.

Required
Prepare the consolidated statement of financial position as at 31 December 2015 of
Hail.
(12)

Emile Woolf International

39

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

5.2

HAIRY
The summarised statements of financial position of Hairy and Spider as at 31
December 2015 were as follows.
Hairy Spider
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment
Investments

120,000
55,000

Current assets
Cash
Investments
Trade receivables
Current account Hairy
Inventory

60,000

11,000
4,000

3,000
72,600 19,100

3,200
17,000 11,000

275,600 100,300

Equity and liabilities


Share capital
Share premium
Capital reserve
Retained earnings
Trade payables
Current account Spider

100,000 60,000
20,000

23,000 16,000
91,900
7,300
38,000 17,000
2,700


275,600 100,300

The following information is relevant.


(1)

On 31 December 2012, Hairy acquired 48,000 shares in Spider for Rs.


55,000,000 cash. Spider has 60,000 shares in total.

(2)

The inventory of Hairy includes Rs. 4,000,000 goods from Spider invoiced to
Hairy at cost plus 25%.

(3)

The difference on the current account balances is due to cash in transit.

(4)

The balance on Spiders retained earnings was Rs. 2,300,000 at the date of
acquisition. There has been no movement in the balance on Spiders capital
reserve since the date of acquisition.

Required
Prepare the consolidated statement of financial position of Hairy and its subsidiary
Spider as at 31 December 2015.
(12)

Emile Woolf International

40

The Institute of Chartered Accountants of Pakistan

Questions

5.3

HARD
On 31 December 2011, Hard acquired 60% of the ordinary share capital of Soft for
Rs. 110 million. At that date Soft had a retained earnings balance of Rs. 50 million
and a share premium account balance of Rs. 10 million.
The following statements of financial position have been prepared as at 31
December 2015.

Assets
Non-current assets
Property, plant and equipment
Investments in Soft
Current assets

Equity and liabilities


Capital and reserves
Share capital
Share premium
Retained earnings

Current liabilities

Hard
Rs. 000

Soft
Rs. 000

225,000
110,000

175,000

271,000

606,000

157,000

332,000

100,000
15,000
260,000

375,000
231,000

606,000

100,000
10,000
80,000

190,000
142,000

332,000

During the year to 31 December 2015 Hard sold a tangible asset to Soft for Rs. 50
million. The asset was originally purchased in the year to 31 December 2012 at a
cost of Rs. 100 million and had a useful economic life of five years.
Softs depreciation policy is 25% per annum based on cost. Both companies charge
a full years depreciation in the year of acquisition and none in the year of disposal.
Required
Prepare the consolidated statement of financial position of Hard and its subsidiary
as at 31 December 2015.
(12)

Emile Woolf International

41

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

5.4

HALE
On 1 July 2012 Hale acquired 128,000 of Sowens 160,000 shares. The following
statements of financial position have been prepared as at 31 December 2015.
Hale Sowen
Rs. 000 Rs. 000
Property, plant and equipment
Investment in Sowen
Inventory at cost
Receivables
Bank balance

152,000
203,000
112,000
104,000
41,000

612,000

129,600

74,400
84,000
8,000

296,000

Hale Sowen
Rs. 000 Rs. 000
Share capital
Retained earnings
Payables

100,000
460,000
52,000

612,000

160,000
112,000
24,000

296,000

The following information is available.


(1)

At 1 July 2012 Sowen had a debit balance of Rs. 11 million on retained


earnings.

(2)

Property, plant and equipment of Sowen included land at a cost of Rs. 72


million. This land had a fair value of Rs. 100,000 at the date of acquisition.

(3)

The inventory of Sowen includes goods purchased from Hale for Rs. 16
million. Hale invoiced those goods at cost plus 25%.

Required
Prepare the consolidated statement of financial position of Hale as at 31 December
2015.
(12)

5.5

HELLO
On 1 January 2012, Hello acquired 60% of the ordinary share capital of Solong for
Rs. 110,000. At that date Solong had a retained earnings balance of Rs. 60,000.
The following statements of financial position have been prepared as at 31
December 2015.

Assets
Non-current assets
Property, plant and equipment
Investments in Solong
Current assets

Emile Woolf International

42

Hello
Rs.

Solong
Rs.

225,000
110,000

175,000

271,000

606,000

157,000

332,000

The Institute of Chartered Accountants of Pakistan

Questions

Equity and liabilities


Capital and reserves
Share capital
Retained earnings

100,000
275,000

375,000
231,000

606,000

Current liabilities

100,000
90,000

190,000
142,000

332,000

The fair value of Solongs net assets at the date of acquisition was determined to be
Rs. 170,000.
The difference between the book value and the fair value of the new assets at the
date of acquisition was due to an item of plant which had a useful life of 10 years
from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Hello and its subsidiary
as at 31 December 2015.
(12)

5.6

HASAN LIMITED
On 1 April 2014, Hasan Limited acquired 90% of the equity shares in Shakeel
Limited. On the same day Hasan Limited accepted a 10% loan note from Shakeel
Limited for Rs. 200,000 which was repayable at Rs. 40,000 per annum (on 31 March
each year) over the next five years. Shakeel Limiteds retained earnings at the date
of acquisition were Rs. 2,200,000.
Statements of financial position as at 31 March 2015
Hasan
Limited
Rs. 000

Shakeel
Limited
Rs. 000

2,120

4,110
200

1,990
1,800

65
6,495

210
4,000
560
328

Total assets

719
524
75
20
1,338
7,833

888
4,888

Equity and liabilities:


Capital and reserves
Equity shares of Rs. 1 each
Share premium

2,000
2,000

1,500
500

Non-current assets
Property, plant and equipment
Intangible software
Investments equity in Shakeel Limited
Investments 10% loan note Shakeel
Limited
Investments others
Current assets
Inventories
Trade receivables
Shakeel Limited current account
Cash

Emile Woolf International

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The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Retained earnings
Non-current liabilities
10% Loan note from Hasan Limited
Government grant
Current liabilities
Trade payables
Hasan Limited current account
Income taxes payable
Operating overdraft
Total equity and liabilities

2,900
6,900

1,955
3,955

230
230

160
40
200

475

228

703
7,833

472
60
174
27
733
4,888

The following information is relevant:


(i)

Included in Shakeel Limiteds property at the date of acquisition was a


leasehold property recorded at its depreciated historical cost of Rs. 400,000.
The leasehold had been sub-let for its remaining life of only four years at an
annual rental of Rs. 80,000 payable in advance on 1 April each year. The
directors of Hasan Limited are of the opinion that the fair value of this
leasehold is best reflected by the present value of its future cash flows. An
appropriate cost of capital for the group is 10% per annum.
The present value of a Rs. 1 annuity received at the end of each year where
interest rates are 10% can be taken as:
3 year annuity

(ii)

Rs. 2.50

4 year annuity
Rs. 3.20
The software of Shakeel Limited represents the depreciated cost of the
development of an integrated business accounting package. It was completed
at a capitalised cost of Rs. 2,400,000 and went on sale on 1 April 2013.
Shakeel Limiteds directors are depreciating the software on a straight-line
basis over an eight-year life (i.e. Rs. 300,000 per annum). However, the
directors of Hasan Limited are of the opinion that a five-year life would be
more appropriate as sales of business software rarely exceed this period.

(iii)

The inventory of Hasan Limited on 31 March 2015 contains goods at a


transfer price of Rs. 25,000 that were supplied by Shakeel Limited who had
marked them up with a profit of 25% on cost. Unrealised profits are adjusted
for against the profit of the company that made them.

(iv)

On 31 March 2015 Shakeel Limited remitted to Hasan Limited a cash payment


of Rs. 55,000. This was not received by Hasan Limited until early April. It was
made up of an annual repayment of the 10% loan note of Rs. 40,000 (the
interest had already been paid) and Rs. 15,000 of the current account
balance.

(v)

The accounting policy of Hasan Limited for non-controlling interests (NCI) in a


subsidiary is to value NCI at a proportionate share of the net assets.

(v)

An impairment test at 31 March 2015 on the consolidated goodwill concluded


that it should be written down by Rs. 120,000. No other assets were impaired.

Required:
Prepare the consolidated statement of financial position of Hasan Limited as at
31 March 2015.
(Total: 25 marks)

Emile Woolf International

44

The Institute of Chartered Accountants of Pakistan

Questions

CHAPTER 6 CONSOLIDATED ACCOUNTS: STATEMENTS OF


COMPREHENSIVE INCOME
6.1

HARRY
The following are the statements of profit or loss for the year ended 31 December
2015 of Harry and its subsidiary Sally.

Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Investment income
Finance costs
Profit before tax
Income tax expense
Profit for the year

Retained profit brought forward


Profit for year
Dividends paid and proposed
Retained profit carried forward

Harry
Rs. 000

Sally
Rs. 000

1,120
(610)
510
(50)
(55)
405
20
(18)
407
(140)
267

390
(220)
170
(40)
(45)
85
4
(4)
85
(25)
60

Rs. 000

Rs. 000

100
267
(50)
317

45
60
(20)
85

The following information is relevant.


(1)

Harry acquired 75% of Sally six years ago when Sallys retained earnings
were Rs. 9,000.

(2)

Harry made sales to Sally totalling Rs. 100,000 in the year. At the year end the
statement of financial position of Sally included inventory purchased from
Harry. Harry had taken a profit of Rs. 3,000 on this inventory.

(3)

Harrys investment income includes Rs. 15,000 being its share of Sallys
dividends.

Required
Prepare a consolidated statement of profit or loss and a working showing the
movement on consolidated retained profit for the year ended 31 December 2015.(10)

Emile Woolf International

45

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

6.2

HORNY
Statements of profit or loss for the year ended 31 December 2015.
Horny
Rs. 000
304,900
(144,200)
160,700
(76,450)
84,250
10,500
94,750

Revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Investment income
Profit before tax
Income tax expense(42,900)
Profit for the year

51,850

Smooth
Rs. 000
195,300
(98,550)
96,750
(52,100)
44,650
2,600
47,250
(16,500)
30,750

Statement of changes in equity (extracts) for the year ended 31 December 2015.
Horny
Rs. 000
80,200
51,850
(20,000)
112,050

Retained earnings brought forward


Profit for the year
Proposed ordinary dividend

Smooth
Rs. 000
31,000
30,750
61,750

The following information is also available.


(1)

Horny acquired 75% of the share capital of Smooth on 31 August 2015.

(2)

Negative goodwill of Rs. 3.8 million arose on the acquisition.

(3)

Profits of both companies are deemed to accrue evenly over the year except
for the investment income of Smooth all of which was received in November
2015.

(4)

Horny has bought goods from Smooth throughout the year at Rs. 2 million per
month. At the year-end Horny does not hold any inventory purchased from
Smooth.

Required
Prepare the consolidated statement of profit or loss and a working showing the
movement on consolidated retained profit for the year ended 31 December 2015.(10)

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The Institute of Chartered Accountants of Pakistan

Questions

6.3

HERON
Statements of financial position as at 30 June 2015
Assets
Non-current assets
Property, plant and equipment
Investment in Stork ( 1,000 ordinary shares)
Current assets

Heron
Rs. 000

Stork
Rs. 000

31,000
1,000
32,000
23,000
55,000

15,000
15,000
11,000
26,000

Shareholders equity and liabilities


Share capital (Rs. 0001 ordinary shares)
Share premium
Retained earnings

10,000
1,500
5,000

20,000
18,500
35,000
20,000
Non-current liabilities
15,000

Current liabilities
5,000
6,000
55,000
26,000
Heron acquired its shares in Stork when the balance on the retained earnings was
Rs. 000nil.
Statements of profit or loss for the year ended 30 June 2015
Heron
Rs. 000
Revenue
30,000
Cost of sales
(9,000)

Stork
Rs. 000
25,000
(10,000)

Gross profit
Distribution costs
Administrative expenses
Finance costs

21,000
(3,000)
(1,000)
(2,000)

15,000
(1,200)
(2,800)

Profit before tax


Income tax expense

15,000
(3,000)

11,000
(3,000)

Profit for the period

12,000

8,000

Statement of changes in equity for the year ended 30 June 2015 (extract)
Retained earnings brought forward
Profit for the financial year

8,000
12,000

20,000

Retained earnings carried forward

10,500
8,000

18,500

Required
Prepare Herons consolidated statement of profit or loss, consolidated statement of
financial position and a working showing the movement on consolidated retained
profit for Heron for the year ended 30 June 2015.
(12)

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Financial accounting and reporting II

6.4

HANKS
Statements of financial position as at 31 December 2015

Assets
Non-current assets
Property, plant and equipment
Investments
Current assets
Cash at bank and in hand
Trade receivables
Inventory

Equity and liabilities


Share capital
Share premium account
Retained earnings

Current liabilities

Hanks
Rs. 000

Streep
Rs. 000

Scott
Rs. 000

32,000
33,500

65,500

25,000

25,000

20,000

20,000

9,500
20,000
30,000

125,000

2,000
8,000
18,000

53,000

4,000
17,000
18,000

59,000

40,000
6,500
55,000

101,500

10,000

37,000

47,000

15,000

27,000

42,000

23,500

125,000

6,000

53,000

17,000

59,000

Statements of profit or loss for the year ended 31 December 2015


Hanks
Rs. 000
125,000
(65,000)

60,000
(21,000)
(14,000)

25,000
(10,000)

15,000

Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit before taxation
Income tax expense
Profit after tax

Streep
Rs. 000
117,000
(64,000)

53,000
(14,000)
(8,000)

31,000
(9,000)

22,000

Scott
Rs. 000
82,000
(42,000)

40,000
(16,000)
(7,000)

17,000
(5,000)

12,000

Statement of changes in equity (extract) for the year ending


31 December 2015
Hanks
Rs. 000
40,000
15,000

55,000

Retained earnings brought forward


Retained profit for the financial year
Dividends
Retained earnings carried forward

Emile Woolf International

48

Streep
Rs. 000
15,000
22,000

37,000

Scott
Rs. 000
15,000
12,000

27,000

The Institute of Chartered Accountants of Pakistan

Questions

You are given the following additional information


(1)

Hanks owns 80% of Streeps shares. These were purchased in 2012 for Rs.
20.5 million cash, when the balance on Streeps retained earnings stood at
Rs. 7million.

(2)

In 2010 Hanks purchased 60% of the shares of Scott by the issue of shares
with a nominal value of Rs. 6.5 million. These shares were issued at a
premium of Rs. 6.5 million. At that date the retained earnings of Scott stood at
Rs. 3 million and the fair value of the net assets of Scott was Rs. 24 million. It
was agreed that any undervaluation of the net assets should be attributed to
land. This land was still held at 31 December 2015.

(3)

Included in the inventory of Scott and Streep at 31 December 2015 are goods
purchased from Hanks for Rs. 5.2 million and Rs. 3.9 million respectively.
Hanks aims to earn a profit of 30% on cost. Total sales from Hanks to Scott
and to Streep were Rs. 8 million and Rs. 6 million respectively.

(4)

Hanks and Streep each proposed a dividend before the year end of Rs. 2
million and Rs. 2.5 million respectively. No accounting entries have yet been
made for these.

(5)

Hanks has carried out annual impairment tests on goodwill in accordance with
IFRS 3 and IAS 36. The estimated recoverable amount of goodwill at 31
December 2012 was Rs. 5 million and at 31 December 2015 was Rs. 4.5
million.

Required
Prepare the consolidated statement of profit or loss and consolidated statement of
changes in equity for the year ended 31 December 2015 and the consolidated
statement of financial position at that date.
(20)

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Financial accounting and reporting II

CHAPTER 7 TANGIBLE NON-CURRENT ASSETS (IAS 16: PROPERTY,


PLANT AND EQUIPMENT AND IAS 23: BORROWING COSTS)
7.1

ROONEY
(a)

Rooney has recently finished building a new item of plant for its own use. The
item is a press for use in the manufacture of industrial diamonds. Rooney
commenced construction of the asset on 1st April 2013 and completed it on 1st
April 2015.
1st January 2013, Rooney took out a loan to finance the construction of the
asset. Interest is charged on the loan at the rate of 5% per annum. The annual
interest must be paid in four equal instalments at the end of each quarter.
Rooney capitalises interest on manufactured assets in accordance with the
rules in IAS 23 Borrowing costs.
The costs (excluding finance costs) of manufacturing the asset were Rs. 28
million.
Required
State the IAS 23 rules on the capitalisation of borrowing costs, calculate the
cost of the asset on initial recognition and explain the amount of borrowing
cost capitalised.
(6)

(b)

The press comprises two significant parts, the hydraulic system and the
frame. The hydraulic system has a three year life and the frame has an eight
year life. Rooney depreciates plant on a straight line basis. The cost of the
hydraulic system is 30% of the total cost of manufacture.
Rooney uses the IAS 16 revaluation model in accounting for diamond presses
and revalues these assets on an annual basis.
Revaluation surpluses or deficits are apportioned between the hydraulic
system and the frame on the basis of their year end book values before the
revaluation.
Required
Explain the IAS 16 rules on accounting for significant parts of property, plant
and equipment and show the accounting treatment of the diamond press in
the financial statements for the financial years ending:
(i)
31st March 2016 (assume that the press has a fair value of Rs. 21
million)
(ii) 31st March 2017 (assume that the press has a fair value of Rs. 19.6
million).
(13)
(25)

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Questions

7.2

EHTISHAM
The following information relates to the financial statements of Ehtisham for the year
to 31 March 2015.
The head office of Ehtisham was acquired on 1 April 2012 for Rs. 1million. Ehtisham
intend to occupy the building for 25 years. On 31 March 2014 it was revalued to Rs.
1.15 million. On 31 March 2015, a surplus of vacant commercial property in the area
had led to a fall in property prices and the fair value was now only Rs. 0.8 million.
Required
Explain the correct accounting treatment for the above (with calculations if
appropriate).
(10)

7.3

CARLY
The following is an extract from the financial statements of Carly on 31 December
2014.
Property, plant and equipment
Land and
Plant and
buildings equipment

Computers

Total

Rs.

Rs.

Rs.

1,500,000

340,500

617,800

2,458,300

600,000

125,900

505,800

1,231,700

900,000

214,600

112,000

1,226,600

Rs.
Cost
On 31 December 2014
Accumulated depreciation
On 31 December 2014
Carrying amount
On 31 December 2014

Accounting policies
Depreciation
Depreciation is provided at the following rates.
On land and buildings

2% per annum straight line on buildings only

On plant and equipment

25% reducing balance

On computers

33.33% per annum straight line

During 2015 the following transactions took place.


(1)

On 31 December the land and buildings were revalued to Rs. 1,750,000. Of


this amount, Rs. 650,000 related to the land (which had originally cost Rs.
500,000). The remaining useful life of the buildings was assessed as 40 years.

(2)

A machine which had cost Rs. 80,000 and had accumulated depreciation of
Rs. 57,000 at the start of the year was sold for Rs. 25,000 in the first week of
the year.

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Financial accounting and reporting II

(3)

A new machine was purchased on 31 March 2015. The following costs were
incurred:
Rs.
Purchase price, before discount, inclusive of reclaimable
sales tax of Rs. 3,000

20,000

Discount

(4)

1,000

Delivery costs

500

Installation costs

750

Interest on loan taken out to finance the purchase

300

On 1 January it was decided to change the method of providing depreciation


on computer equipment from the existing method to 40% reducing balance.

Required
Produce the analysis of property, plant and equipment as it would appear in the
financial statements of Carly for the year ended 31 December 2015.

7.4

ADJUSTMENTS LIMITED
Adjustments Limited has carried out a review of its non-current assets.
(a)

A lathe was purchased on 1 January 2009 for Rs. 150,000. The plant had an
estimated useful life of twelve years, residual value of nil. Depreciation is
charged on the straight line basis. On 1 January 2015, when the assets net
book value is Rs. 75,000, the directors decide that the assets total useful life
is only ten years.

(b)

A grinder was purchased on 1 January 2012 for Rs. 100,000. The plant had
an estimated useful life of ten years and a residual value of nil. Depreciation is
charged on the straight line basis. On 1 January 2015, when the assets net
book value is Rs. 70,000, the directors decide that it would be more
appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.

(c)

The company purchased a fifty year lease some years ago for Rs. 1,000,000.
This was being depreciated over its life on a straight line basis. On 1 January
2015, when the net book value is Rs. 480,000 and twenty-four years of the
lease are remaining, the asset is revalued to Rs. 1,500,000. This revised value
is being incorporated into the accounts.

Required
Explain the effects of these changes on the depreciation for the year to 31
December 2015.

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(15)

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Questions

7.5

FAM
Fam had the following tangible fixed assets at 31 December 2014.
Cost
Depreciation
NBV
Rs. 000
Rs. 000
Rs. 000
Land
500

500
Buildings
400
80
320
Plant and machinery
1,613
458
1,155
Fixtures and fittings
390
140
250
Assets under construction
91

91

2,994
678
2,316

In the year ended 31 December 2015 the following transactions occur.


(1)
(2)
(3)
(4)
(5)

Further costs of Rs. 53,000 are incurred on buildings being constructed by the
company. A building costing Rs. 100,000 is completed during the year.
A deposit of Rs. 20,000 is paid for a new computer system which is
undelivered at the year end.
Additions to plant are Rs. 154,000.
Additions to fixtures, excluding the deposit on the new computer system, are
Rs. 40,000.
The following assets are sold.
Cost
Rs. 000
277
41

Plant
Fixtures
(6)

(7)
(8)

Depreciation
brought forward
Rs. 000
195
31

Proceeds
Rs. 000
86
2

Land and buildings were revalued at 1 January 2015 to Rs. 1,500,000, of


which land is worth Rs. 900,000. The revaluation was performed by Messrs
Jackson & Co, Chartered Surveyors, on the basis of existing use value on the
open market.
The useful economic life of the buildings is unchanged. The buildings were
purchased ten years before the revaluation.
Depreciation is provided on all assets in use at the year end at the following
rates.
Buildings
2% per annum straight line
Plant
20% per annum straight line
Fixtures
25% per annum reducing balance

Required
Show the disclosure under IAS 16 in relation to fixed assets in the notes to the
published accounts for the year ended 31 December 2015.
(14)

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Financial accounting and reporting II

7.6

IMRAN LIMITED
On January 1, 2015, 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 the company had the following sources of finance available.
(i)

Rights i s s u e o f shares amounting to Rs. 15 million on January 1, 2015.


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, 2015. (This loan was outstanding for 306 days in the year).

(iii)

On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest
thereon, is payable at the rate of 11%. (This loan was outstanding for 153 days
in the year).

Investment income on temporary investment of the borrowings amounted to Rs. 0.5


million.
The details of bills submitted by the contractor, during the year are as follows:
Particulars
On completion of 1st phase

Date of payment

Rupees

March 1, 2015

20,000,000

nd

April 1, 2015

18,000,000

rd

On completion of 3 phase

October 1, 2015

16,000,000

On completion of 4th phase

Payment not yet made

17,000,000

On completion of 2 phase

On June 1, 2015, the 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 companys favour on July
31, 2015. Work recommenced after a delay of 61 days.
The following periods may be relevant:
Period

Days

March 1 to December 31

306

April 1 to December 31

275

August 1 to December 31

153

October 1 to December 31

92

Required
a)

Assuming that the loans were taken specifically for the project, calculate the
amount of borrowing costs that s h o u l d be capitalised i n t h e p e r i o d
e n d i n g December 31, 2015 in accordance with the requirements of IAS 23
Borrowing Costs.

b)

Assuming that the loans constituted general finance, calculate the amount of
borrowing costs that s h o u l d be capitalised i n t h e p e r i o d e n d i n g
December 31, 2015 in accordance with the requirements of IAS 23 Borrowing
Costs.

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Questions

7.7

HUMAYUN CHEMICALS LIMITED


(a)

On July 1, 2013, 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, 2015 under each of the following assumptions:
(i)

the review of useful life and residual value was carried out on June 30,
2015;

(ii)

the review of useful life and residual value was carried out on June 30,
2014 but in the financial statements for the year then ended the
depreciation expense was erroneously recorded on the previous basis.
(11)

(b)

7.8

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)

FARADAY PHARMACEUTICAL LIMITED


Faraday Pharmaceutical Limited (FPL) acquired a building for Rs. 200 million on
July 1, 2011. The following information relating to the building is available:
(i)

It is being depreciated on the straight line basis, over 20 years.

(ii)

FPL uses the revaluation model for subsequent measurement of its


property, plant and equipment and accounts for revaluations on the net
replacement value method. The details of revaluation carried out by the
independent valuers during the past years are as follows:
Revaluation date
July 1, 2012
July 1, 2013
July 1, 2014

Fair value
Rupees in million
230
170
180

(iii)

FPL transfers the maximum possible amount from the revaluation surplus
to retained earnings on an annual basis.

(iv)

There is no change in the useful life of the building.

Required
Prepare the journal entries to record the above transactions from the date of
acquisition of the building to the year ended June 30, 2015.
(Ignore deferred tax)

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(16)

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

7.9

SPIN INDUSTRIES LIMITED


On September 1, 2014, Spin Industries Limited (SIL) started construction of its
new office building and completed it on May 31, 2015. The payments made to the
contractor were as follows:
Date of Payment
September 1, 2014
December 1, 2014
February 1, 2015
June 1, 2015

Rupees
10,000,000
15,000,000
12,000,000
9,000,000

In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1,
2014 for obtaining a permit allowing the construction of the building.
The project was financed through the following sources:
(i)

On August 1, 2014 a medium term loan of Rs. 25 million was obtained


specifically for the construction of the building. The loan carried mark up of
12% per annum payable semi-annually. A commitment fee @ 0.5% of the
amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On
February 1, 2015 SIL paid the six monthly interest plus Rs. 5 million towards
the principal.

(ii)

Existing running finance facilities of SIL

Running finance facility of Rs. 28 million from Bank A carrying mark


up of 13% payable annually. The average outstanding balance during
the period of construction was Rs. 25 million.

Running finance facility of Rs. 25 million from Bank B. The mark up


accrued during the period of construction was Rs. 3 million and the
average running finance balance during that period was Rs. 20 million.

Required
Calculate the amount of borrowing costs to be capitalised on June 30, 2015 in
accordance with the requirements of International Accounting Standards.
(Borrowing cost calculations should be based on number of months).

7.10

(18)

SCIENTIFIC PHARMA LIMITED


Scientific Pharma Limited (SPL) is a manufacturer of pharmaceutical products. In
January 2015, one of its plants suffered a major break down. It was repaired at a
cost of Rs. 1.5 million but the production capacity was reduced significantly. The
plant was ready for production on June 30, 2015. At that time the companys
engineers advised that the plant could be used at a reduced level for 3 years only.
The factory was estimated to have a recoverable amount of Rs. 19,277,000 at June 30,
2015
Other related information is as under:
(i)

The plant was imported at FOB price of US$ 800,000. The payment was
made at the time of shipment on July 1, 2005 at Rs. 52 per US$. Other
charges including installation cost amounted to Rs. 7 million. Installation of the
plant was completed on December 31, 2005 and commercial production
commenced from April 1, 2006.

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Questions

(ii)

The company uses straight line method of deprecation. Depreciation is


charged from the month the asset is available for use upto the month prior to
disposal. At the time of purchase, the estimated useful life of the plant was
estimated at 15 years whereas the salvage value was estimated at Rs. 2.0
million.

(iii)

Based on the report of a professional independent valuer, the plant was


revalued on July 1, 2010 at Rs. 45 million. There was however, no change in
estimated useful life of the plant.

(iv)

The factory remained closed from April 1, to June 30, 2012 due to law and
order situation.

(v)

The salvage value has not changed since it was first estimated at the time of
purchase.

Required
Prepare accounting entries for the year ended June 30, 2015. Give all the necessary
calculations.
(Ignore taxation)

7.11

(20)

QURESHI STEEL LIMITED


On July 1, 2014, Qureshi Steel Limited (QSL) signed an agreement with Pak
Construction Limited for construction of a factory building at a cost of Rs. 100
million. It was agreed that the factory would be ready for use from January 1,
2016. The terms of payments were agreed as under:
(i)

10% advance payment would be made on signing of the agreement. The


advance paid would be adjusted at 10% of the quarterly progress bills.

(ii)

5% retention money would also be deducted from the progress bills.


Retention money will be refunded one year after completion of the factory
building.

(iii)

Progress bills will be raised on last day of each quarter and settled on 15th of
the next month.

The under mentioned progress bills were received and settled by QSL as per the
agreement:
Invoice date
September 30, 2014
December 31, 2014
March 31, 2015
June 30, 2015

Amount (Rs. )
30 million
20 million
10 million
15 million

On April 30, 2015 an invoice of Rs. 1.5 million was raised by the contractor for
damages sustained at the site, on account of rains. After negotiations, QSL finally
agreed to make additional payment of Rs. 1.0 million to compensate the contractor.
The amount was paid on May 15, 2015. It is expected that 75% of the payment
would be recovered from the insurance company.
The cost of the project has been financed through the following sources:
(i)

Issue of right shares amounting to Rs. 15 million, on September 1, 2014.


The company has been following a policy of paying dividend of 20% for the
past many years.

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(ii)

Bank loan of Rs. 25 million obtained on December 1, 2014. The loan carries a
markup of 13% per annum. The principal is repayable in 5 half yearly equal
instalments of Rs. 5 million each along with the interest, commencing from
May 31, 2015. Loan processing charges of Rs. 0.5 million were deducted by
the bank at the time of disbursement of loan. Surplus funds, when available,
were invested in short term deposits at 8% per annum.

(iii)

Cash withdrawals from the existing running finance facility provided by a


bank. Average running finance balance for the year was Rs. 60 million.
Markup charged by the bank for the year was Rs. 9 million.

Required
Compute cost of capital work in progress for the factory building as of June 30,
2015 in accordance with the requirements of relevant IFRSs.
(Borrowing costs calculations should be based on number of months)

7.12

(18)

GRANITE CORPORATION
On 1 March 2014, Granite Corporation (GC) started the construction of a new plant
to meet the growing demand for its products. The new plant was completed at a
cost of Rs. 100 million on 31 May 2015.
GC financed the cost of the project from the following sources:
(i)

On 1 March 2014, a 7-year loan of Rs. 70 million was obtained specifically for
the construction of the plant. The loan carried mark-up @ 13% per annum
payable semi-annually. An arrangement fee @ 1% of the loan amount was
paid to the bank.
Two instalments, each comprising of repayment of principal of Rs. 5 million
with interest, were paid on 31 August 2014 and 28 February 2015.

(ii)

GC also has a running finance facility of Rs. 100 million carrying mark-up @
14% per annum. Average utilization of this facility, prior to commencement of
construction was Rs. 10 million. Any additional amount required for the
project was provided through this facility.

(iii)

Surplus funds were used to reduce the running finance utilization or invested
in savings account @ 8% per annum.

Payments made to the contractor were as follows:


Payment date
01 March 2014
31 January 2015
30 September 2015

Rs. m
25
65
10

The construction work was suspended from 1 February 2015 to 28 February 2015.
The suspension was caused due to delay in shipment of essential components for
the installation of the plant.
Required
Calculate the amount of borrowing costs that may be capitalised during the years
ended 30 June 2014 and 2015 in accordance with the requirements of International
Financial Reporting Standards.
(20)

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Questions

CHAPTER 8 IAS 38: INTANGIBLE ASSETS


8.1

FAZAL
The following information relates to the financial statements of Fazal for the year to
31 March 2015.
The IT division has begun a training course for all managers in a new programming
language at a cost of Rs. 200,000. The consultants running the training course have
quantified the present value of the training benefits over the next two years to be Rs.
400,000. The project cost has been included in the statement of financial position as
a current asset. The accounting policy note identifies that the costs will be written off
over the next two years to match the benefits.
Required
Explain the correct accounting treatment for the above (with calculations if
appropriate).
(3)

8.2

HENRY
During 2015 Henry has the following research and development projects in
progress.
Project A was completed at the end of 2014. Development expenditure brought
forward at the beginning of 2015 was Rs. 412,500 on this project. Savings in
production costs arising from this project are first expected to arise in 2015. In 2015
savings are expected to be Rs. 100,000, followed by savings of Rs. 300,000 in 2016
and Rs. 200,000 in 2017.
Project B commenced on 1 April 2015. Costs incurred during the year were Rs.
56,000. In addition to these costs a machine was purchased on 1 April 2015 for Rs.
30,000 for use on the project. This machine has a useful life of five years. At the end
of 2015 there were still some uncertainties surrounding the completion of the
project.
Project C had been started in 2014. In 2014 the costs relating to this project of Rs.
36,700 had been written off, as at the end of 2014 there were still some
uncertainties surrounding the completion of the project. Those uncertainties have
now been resolved and a further Rs. 45,000 costs incurred during the year.
Required
Show how the above would appear in the financial statements (including notes to
the financial statements) of Henry as of 31 December 2015.

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Financial accounting and reporting II

8.3

TOBY
Toby entered into the following transactions during the year ended 31 December
2015. The directors of Toby wish to capitalise all assets wherever possible.
(1)

On 1 January Toby acquired the net assets of George for Rs. 105,000. The
assets acquired had the following book and fair values.

Goodwill
Patents
Non-current assets
Other sundry net assets

Book value

Fair value

Rs.
5,000
15,000
40,000
30,000

Rs.
5,000
20,000
50,000
25,000

90,000
100,000

The patent expires at the end of 2022. The goodwill arising from the above
had a recoverable value at the end of 2015 of Rs. 7,000.
(2)
(3)

(4)

On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The
directors of Toby have assessed the useful life of the brand as five years.
During the year Toby spent Rs. 40,000 on developing a new brand name. The
development was completed on 30 June. The useful life of this brand has
been assessed as eight years.
The directors of Toby believe that there is total goodwill of Rs. 2 million within
Toby and that this has an indefinite useful life.

Required
Prepare the note to the financial statements for intangible assets as at 31 December
2015.

8.4

BROOKLYN
Brooklyn is a bio-technology company performing research for pharmaceutical
companies. The finance director has contacted your financial consulting company to
arrange a meeting to discuss issues relevant to the preparation of the financial
statements for the year to 30th June 2015. Your initial telephone conversation has
provided the necessary background information.
1

On 1st August 2014 Brooklyn began investigating a new bio-process. On 1st


September 2015, the new process was widely supported by the scientific
community and the feasibility project was approved. A grant was then
obtained relating to future work. Several pharmaceutical companies have
expressed an interest in buying the know how when the project completes in
June 2016. The nominal ledger account set up for the project shows that the
expenditure incurred between 1st August 2014 and 30th June 2015 was Rs.
300,000 per month.

In August 2015, an employee lodged a legal claim against the company for
damage to his health as a result of working for the company for the two years
through to 31st March 2014 when he had to retire due to ill health. He has
argued that his health deteriorated as a result of the stress from his position in
the organisation. Brooklyn has denied the claim and has appointed an
employment lawyer to assist with contesting the case. The lawyer has advised
that there is a 25% chance that the claim will be rejected, 50% chance that the
damages will be Rs. 600,000 and 25% chance of Rs. 1 million. The company
has an insurance policy that will pay 10% of any damages to the company.

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The lawyer has said that the case could take until 30th June 2018 to resolve.
The present value of the estimated damages discounted at 8% is Rs. 476,280
and Rs. 793,800 respectively.
3

Brooklyn owns several buildings, which include an administrative office in the


centre of London. The company has revalued these on a regular basis every
five years and the next valuation is due on 30th June 2017. Property prices
have increased since the last review and particularly for the London premises.
The cost of engaging a professionally qualified valuer is very expensive and
so to reduce costs the finance director is proposing that the property manager,
who is a professionally qualified valuer, should value the London property and
that the increase in value should be included in the financial statements. The
finance director is of the opinion that the property prices may fall next year.

Required
Prepare notes for your meeting with the finance director which explain and justify the
accounting treatment of these issues, preparing calculations where appropriate and
identifying matters on which your require further information.
(25)

8.5

ZOUQ INC
Zouq Inc. is a multinational company. As part of its vision to expand its business
in South Asia, it purchased a 90% share of a locally incorporated company, Momin
Limited. Following are the brief details of the acquisition:
January 1, 2014

Date of acquisition
Total paid up capital of Momin Limited (Rs. 10 each)
Purchase price per share

500,000,000
Rs. 30

Net assets of Momin Limited (as per 2013 audited financial


statements)
Fair value of net assets (other than intangible assets) of Momin
Limited

650,000,000
1,100,000,000

Momin Limited has an established line of products under the brand name of
Badar. On behalf of Zouq Inc., a firm of specialists has valued the brand name at
Rs. 100 million with an estimated useful life of 10 years at January 1, 2014. It is
expected that the benefits will be spread equally over the brands useful life.
An impairment test of goodwill and brand was carried out on December 31,
2014 which indicated an impairment of Rs. 50 million in the value of goodwill.
An impairment test carried out on December 31, 2015 indicated a decrease of Rs.
13.5 million in the carrying value of the brand.
Required:
(a)

What are the requirements of International Accounting Standards relating to


amortization of intangible assets having finite life?

(b)

Prepare the ledger accounts for goodwill and the brand, showing initial
recognition and all subsequent adjustments.

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Financial accounting and reporting II

8.6

STAR-BRIGHT PHARMACEUTICAL LIMITED


Star-Bright Pharmaceutical Limited (SPL), a listed company, purchased a brand
on January 1, 2010 at a cost of Rs. 382 million. It has incurred a substantial
amount on further development of the brand, in subsequent years.
It is the policy of SPL to amortise the development expenditures which meet
the recognition criteria as given in IAS-38 Intangible Assets, over a period of ten
years. The amortization commences when the development expenditures first
meet the recognition criteria. However, it was discovered during the year 2015 that
the development expenditure incurred after acquisition had erroneously been
written-off to the profit and loss account, details of which are as follows:
Year ended

Rs. m

December 31, 2012

24

December 31, 2013

54

December 31, 2014

38

December 31, 2015

43

The draft financial statements (before correction of error) show that retained
earnings as at December 31, 2015 was Rs. 1,950 million (2014: Rs. 1,785 million).
Required
In accordance with the requirements of International Financial Reporting Standards,
prepare relevant extracts of the Statement of Financial Position along with the
note on intangible assets after incorporating the required corrections.
(Ignore tax)
(16)

8.7

RAISIN INTERNATIONAL
(a)

Discuss the criteria that should be used while recognizing intangible assets
arising from research and development work.
(05 marks)

(b)

Raisin International (RI) is planning to expand its line of products. The related
information for the year ended 31 December 2015 is as follows:
(i)

Research and development of a new product commenced on 1 January


2015. On 1 October 2015, the recognition criteria for capitalization of an
internally generated intangible asset were met. It is estimated that the
product would have a useful life of 7 years. Details of expenditures
incurred are as follows:
Rs. m
Research work

4.50

Development work

9.00

Training of production staff

0.50

Cost of trial run

0.80

Total costs

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Questions

(ii)

The right to manufacture a well-established product under a patent for a


period of five years was purchased on 1 March 2015 for Rs. 17 million.
The patent has an expected remaining useful life of 10 years. RI has the
option to renew the patent for a further period of five years for a sum of
Rs. 12 million.

(iii)

RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred
in the month of June 2015. The life of the brand is expected to be 10
years. Currently, there is no active market for this brand. However, RI is
planning to launch an aggressive marketing campaign in February 2016.

(iv)

In September 2014, RI developed a new production process and


capitalised it as an intangible asset at Rs. 7 million. The new process is
expected to have an indefinite useful life. During 2015, RI incurred
further development expenditure of Rs. 3 million on the new process
which meets the recognition criteria for capitalization of an intangible
asset.

Required
In the light of International Financial Reporting Standards, explain how each of the
above transaction should be accounted for in the financial statements of Raisin
International for the year ended 31 December 2015.
(11)

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Financial accounting and reporting II

CHAPTER 9 IAS 17: LEASES


9.1

DAWOOD
The following information relates to the financial statements of Dawood for the year
to 31 March 2015.
On 1 October 2014, Dawood entered into a 5 year lease for a machine from
Narbonne, agreeing to make payments every 6 months of Rs. 29,500 beginning on
the 1 October. The cash price of the machine is Rs. 250,000 and the machine is
believed to have a useful life of 5 years. Dawood has treated the arrangement as a
finance lease. Any finance costs are to be treated using the sum-of-digits method.
Required
Explain the correct accounting treatment for the above (with calculations if
appropriate).
(7)

9.2

FINLEY
On 1 January 2015, Finley entered into an agreement to lease a boat. The fair value
of the boat was Rs. 36,000 and the term of the lease was four years. Annual lease
payments of Rs. 10,000 are payable in advance. The interest rate implicit in the
lease is 7.5%. Finley is responsible for insuring and maintaining the boat throughout
the term of the lease.
Required
Show how this lease would be presented in the statement of profit or loss of Finley
for the year ended 31 December 2015 and the statement of financial position as at
that date. Detailed disclosure notes are not required.

9.3

FABIAN
In the year ended 31 December 2015, Fabian leased two assets.
(1)

A car was leased on 1 July 2015 via a three year lease agreement. Fabian
paid a deposit of Rs. 7,500 followed by 36 monthly payments of Rs. 700 each
on the 1st of each month. At the end of the three years Fabian will return the
car. The car has a useful life of eight years.

(2)

A machine was leased on 1 January 2015 via a four year lease. The machine
has a fair value of Rs. 130,000 and Fabian is responsible for its upkeep.
Lease payments of Rs. 40,000 are payable in arrears annually. The interest
rate implicit in the lease is 10% and the present value of the minimum lease
payments is Rs. 126,760.

Required
Show how the two lease agreements would be presented in the statement of profit
or loss for 2015 and the statement of financial position at 31 December 2015. Notes
to the financial statements are not required.

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9.4

XYZ INC
A lessor, ABC Inc, leases an asset, which it purchased for Rs. 4,400,000, to XYZ Inc
under a finance lease. It estimates that its residual value after five years will be Rs.
400,000 and after seven years will be zero.
The lease is for five years at a rental of Rs. 600,000 per half year in advance, with
an option of two more years at nominal rental. The lease commences on 1 January
2015. The directors of XYZ Inc consider that the asset has a useful life of seven
years. The finance charge is to be allocated using the sum of digits (rule of 78)
method. Title to the asset will pass to XYZ at the end of seven years if the option is
exercised. It is likely that it will be.
Required
(a)
(b)

Show the relevant extracts from the accounts of XYZ Inc at 31 December
2015.

(5)

Show the allocation of the finance charge for XYZ Inc using the actuarial
before tax method (using the interest rate implicit in the lease). Compare this
with the sum of the digits allocation in (a) above.
(14)

The rate of interest implicit in the lease is 7.68% per half year.

9.5

SNOW INC
On 1 January 2015, Snow Inc entered into the following finance lease agreements.
(a)

Snowplough
To lease a snowplough for 3 years from Ice Inc. The machine had cost Ice Inc
Rs. 35,000,000.
A deposit of Rs. 2,000,000 was payable on 1 January 2015 followed by 6 half
yearly instalments of Rs. 6,500,000 payable in arrears, commencing on 30
June 2015. Finance charges are to be allocated on a sum of digits basis.

(b)

Snow machine
To lease a snow machine for 5 years from Slush Inc. The snow machine cost
Slush Inc Rs. 150,000 and is estimated to have a useful life of 5 years.
Snow Inc has agreed to make 5 annual instalments of Rs. 35,000,000,
payable in advance, commencing on 1 January 2015.
The interest rate implicit in the lease is 8.36%.

Required
Show the relevant extracts from the accounts of Snow Inc for year ended 31
December 2015.

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9.6

MIRACLE TEXTILE LIMITED


On 1 July 2013, Miracle Textile Limited (MTL) acquired a machine on lease,
from a bank.
Details of the lease are as follows:
(i)

Cost of machine is Rs. 20 million.

(ii)

The lease term and useful life is 4 years and 10 years respectively.

(iii)

Instalment of Rs. 5.80 million is to be paid annually in advance on 1 July.

(iv)

The interest rate implicit in the lease is 15.725879%.

(v)

At the end of lease term, MTL has an option to purchase the machine on
payment of Rs. 2 million. The fair value of the machine at the end of lease
term is expected to be Rs. 3 million.

MTL depreciates the machine on the straight line method to a nil residual value.
Required
Prepare relevant extracts of the statement of financial position and related notes to
the financial statements for the year ended 30 June 2015 along with comparative
figures. Ignore taxation
(16)

9.7

SHOAIB LEASING LIMITED


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, 2015.

(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 instalments 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, 2016, 2017 and
2018 in the books of lessor. Ignore tax.

(b)

Produce extracts from the statement of financial position including relevant


notes as at June 30, 2016 to show how the transactions carried out in 2016
would be reflected in the financial statements of the lessor.

(Disclosure of accounting policy is not required.)

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9.8

NEPTUNE LIMITED
Neptune Limited (NL) had established its business in December 2014 as a supplier
of plant and machinery. During the year ended December 31, 2015 the company
sold two machines under lease arrangements. The details are as under:
A
January 1, 2015
6 years
Rs. 2,000,000

Date of commencement of lease


Lease period
Lease instalments payable annually
in advance

B
January 1, 2015
3 years
Rs. 4,000,000
(to be reduced
annually by 5%)

Cost of machine
Economic life

Rs. 6,963,448
6 years

Rs. 15,000,000
6 years

NL sells machines on cash at cost plus 25%. It depreciates its assets under
straight line method with no residual value. Fair market annual interest rate is 15%.
Required
(a)
(b)

Prepare journal entries to record the above transactions.


Prepare notes to the financial statements for the year ended December
31, 2015 in accordance with the requirements of IAS - 17 (Leases).
(19)
(Ignore taxation and comparative figures)

9.9

QUARTZ AUTO LIMITED


Quartz Auto Limited (QAL) is engaged in the business of manufacturing of
trucks. Since a number of the prospective customers do not have adequate
funds to purchase the vehicles against full payment, QAL provides lease financing
facility to its customers. It expects to receive a return at the rate of 15% per annum
on the amount of lease finance.
On 1 July 2014, QAL sold seven trucks to Emerald Goods Transport Company
(EGTC) on lease. The terms of the lease and related information are as follows:
(i)
(ii)

(iii)
(iv)
(v)

The lease period is 4 years, extendable up to the expected useful life of


the trucks i.e. 5 years.
EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till
the end of the fourth year. However, the guarantee would lapse if the lease
term is extended to the fifth year. EGTC will return the truck at the end of the
lease term.
Lease rentals amount to Rs. 2,715,224 per annum and are payable in
arrears i.e. on 30 June.
The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs.
1,350,000 per truck.
The expected residual value of each truck at the end of the 4th and 5th year is
Rs. 150,000 and Rs. 100,000 respectively.

Required
Assuming that QAL and EGTC intend to extend the lease for a period of five years,
prepare:
(a) Journal entries to record the transactions for the year ended 30 June 2015. (08)
(b) A note for inclusion in the financial statements, for the year ended 30
June 2015, in accordance with the requirements of IAS 17 Leases.
(07)

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9.10

LODHI TEXTILE MILLS LIMITED


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, 2015. The company has assessed that all the
leases shall qualify as finance leases.
The related information as on August 15, 2015 is given below:
Cost

Book
Value

Fair Value Value in Amount of


Use
Financing

Rs. 000

Rs. 000

Rs. 000

Rs. 000

Rs. 000

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, 2015 in respect of the above transactions.

(13)

Note: Ignore tax and deferred tax implications, if any.

9.11

NOMAN ENGINEERING LIMITED


Noman Engineering Limited (NEL) manufactures auto parts. On July 1, 2014 it
finalised a lease agreement with a bank for sale and leaseback of one of its plants
costing Rs. 18.75 million.
Relevant information is as under:
(i)

Proceeds from the bank amounting to Rs. 20 million which represent the
prevailing market value of such type and age of plant, were received on July 1,
2014.

(ii)

The plant had a book value of Rs. 15 million at the time of commencement of
the lease.

(iii)

The remaining life of the plant on July 1, 2014 was estimated at 8 years.

(iv)

The lease period is 6 years. Lease instalments of Rs. 2.5 million each are
payable semi-annually in arrears from December 31, 2014.

(v)

NEL has the option to purchase the plant at market value at the end of the
lease term. No final decision has yet been made by NEL, in this regard.

(vi)

The rate of interest implicit in the lease is 13.731% per annum.

Required
Pass journal entries in respect of the lease, for the year ended June 30, 2015.

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Questions

CHAPTER 10 IAS 37: PROVISIONS CONTINGENT LIABILITIES AND


CONTINGENT ASSETS AND IAS 10: EVENTS OCCURRING AFTER THE
REPORTING DATE
10.1

BADAR
The following information relates to the financial statements of Badar for the year to
31 March 2015.
The mining division of Badar has a 3 year operating licence from an overseas
government. This allows it to mine and extract copper from a particular site. When
the licence began on 1 April 2014, Badar started to build on the site. The cost of the
construction was Rs. 500,000.
The overseas country has no particular environmental decommissioning laws. In its
past financial statements Badar has given information about the companys
environmental policy and has provided examples to demonstrate that it is a
responsible company that believes in restoring mining sites at the end of the
extraction period. The cost of removing the construction at the end of the three
years is estimated to be Rs. 100,000.
The cost of the site currently shown in the trial balance is Rs. 500,000. The
company has a cost of borrowing of 10%.
Required
Explain the correct accounting treatment for the above (with calculations if
appropriate).
(6)

10.2

GEORGINA
Georgina Company is preparing its financial statements for the year ended 30
September 2015. The following matters are all outstanding at the year end.
(1) Georgina is facing litigation for damages from a customer for the supply of
faulty goods on 1 September 2015. The claim, which is for Rs. 500,000, was
received on 15 October 2015. Georginas legal advisors consider that
Georgina is liable and that it is likely that this claim will succeed. On 25
October 2015 Georgina sent a counter-claim to its suppliers for Rs. 400,000.
Georginas legal advisors are unsure whether or not this claim will succeed.
(2) Georginas sales director, who was dismissed on 15 September, has lodged a
claim for Rs. 100,000 for unfair dismissal. Georginas legal advisors believe
that there is no case to answer and therefore think it is unlikely that this claim
will succeed.
(3) Although Georgina has no legal obligation to do so, it has habitually operated
a policy of allowing customers to return goods within 28 days, even where
those goods are not faulty. Georgina estimates that such returns usually
amount to 1% of sales. Sales in September 2015 were Rs. 400,000. By the
end of October 2015, prior to the drafting of the financial statements, goods
sold in September for Rs. 3,500 had been returned.
(4) On 15 September 2015 Georgina announced in the press that it is to close
one of its divisions in January 2016. A detailed closure plan is in place and the
costs of closure are reliably estimated at Rs. 300,000, including Rs. 50,000 for
staff relocation.
Required
State, with reasons, how the above should be treated in Georginas financial
statements for the year ended 30 September 2015.

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10.3

EARLEY INC
Earley Inc is finalising its accounts for the year ended 31 December 2014. The
following events have arisen since the year end and the financial director has asked
you to comment on the final accounts.
(a)

At 31 December 2014 trade receivables included a figure of Rs. 250,000 in


respect of Nedengy Inc. On 8 March 2015, when the current debt was Rs.
200,000, Nedengy Inc went into receivership. Recent correspondence with the
receiver indicates that no dividend will be paid to unsecured creditors.

(b)

On 15 March 2015 Earley Inc sold its former head office building, Whitley
Wood, for Rs. 2.7 million. At the year end the building was unoccupied and
carried at a value of Rs. 3.1 million.

(c)

Inventories at the year-end included Rs. 650,000 of a new electric tricycle, the
Opasney. In January 2015 the European Union declared the tricycle to be
unsafe and prohibited it from sale. An alternative market, in Bongolia, is being
investigated, although the current price is expected to be cost less 30%.

(d)

Stingy Inc, a subsidiary in Outer Sonning, was nationalised in February 2015.


The Outer Sonning authorities have refused to pay any compensation. The net
assets of Stingy Inc have been valued at Rs. 200,000 at the year end.

(e)

Freak floods caused Rs. 150,000 damage to the Southcote branch of Earley
Inc in January 2015. The branch was fully insured.

(f)

On 1 April 2015 Earley Inc announced a 1 for 1 rights issue aiming to raise Rs.
15 million.

Required
Explain how you would respond to the matters listed above.

10.4

(13)

ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the
following situations arising in the books of various companies. The year end in each
case can be taken as 31 December 2015 and you should assume that the amounts
involved are material in each case.
(a)

At the year end there was a debit balance in the books of a company for Rs.
15,000, representing an estimate of the amount receivable from an insurance
company for an accident claim. In February 2016, before the directors had
agreed the final draft of the published accounts, correspondence with lawyers
indicated that Rs. 18,600 might be payable on certain conditions.

(b)

A company has an item of equipment which cost Rs. 400,000 in 2012 and was
expected to last for ten years. At the beginning of the 2015 financial year the
book value was Rs. 280,000. It is now thought that the company will soon
cease to make the product for which the equipment was specifically
purchased. Its recoverable amount is only Rs. 80,000 at 31 December 2015.

(c)

On 30 November a company entered into a legal action defending a claim for


supplying faulty machinery. The companys solicitors advise that there is a
20% probability that the claim will succeed. The amount of the claim is Rs.
500,000.

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(d)

An item has been produced at a manufacturing cost of Rs. 1,800 against a


customers order at an agreed price of Rs. 2,300. The item was in inventory at
the year-end awaiting delivery instructions. In January 2016 the customer was
declared bankrupt and the most reasonable course of action seems to be to
make a modification to the unit, costing approximately Rs. 300, which is
expected to make it marketable with other customers at a price of about Rs.
1,900.

(e)

At 31 December a company has a total potential liability of Rs. 1,000,400 for


warranty work on contracts. Past experience shows that 10% of these costs
are likely to be incurred, that 30% may be incurred but that the remaining 60%
is highly unlikely to be incurred.

Required
For each of the above situations outline the accounting treatment you would
recommend and give the reasoning of principles involved. The accounting treatment
should refer to entries in the books and/or the year-end financial statements as
appropriate.
(12)

10.5

J-MART LIMITED
(a)

Explain the terms adjusting events and non-adjusting events and 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 2015
will be refunded in July 2015.

(ii)

On June 2, 2015, three employees were seriously injured as a result of


a fire at the companys warehouse. They have lodged claims seeking
damages of Rs. 2.0 million from the company. The companys 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, 2015. The company has not yet
installed the smoke detectors.

(iv)

On June 20, 2015, the board of directors decided to close down the
Household Appliances Division. However, the decision was made
public after June 30, 2015.

(v)

The company has a large warehouse in Lahore which was acquired


under a three-year rent agreement signed on April 1, 2014. The
agreement is non- cancellable 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, 2015.

Required
Describe how each of the above issue should be dealt with in the financial
statements for the year ended June 30, 2010. Support your point of view in
the light of relevant International Accounting Standards.
(15)

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10.6

AKBER CHEMICALS LIMITED


Akber Chemicals Limited is engaged in the business of manufacture and sale
of different type of chemicals. The following transactions have not yet been
incorporated in the financial statements for the year ended June 30, 2015:
(a)

On June 15, 2015, one of its tankers carrying chemicals fell into a canal, thus
polluting the water. The company has never faced such a situation before.
The company has neither any legal obligation to clean the canal nor does it
have any published environmental policy. In a meeting held on July 26,
2015 the Board of Directors decided to clean the canal, which is estimated to
cost Rs. 5.5 million.

(b)

During the second week of July 2015, a significant decline in the demand for
companys products was observed which also led to a decrease in net
realizable value of finished goods. It was estimated that goods costing Rs.
25 million as at June 30, 2015 would only fetch Rs. 23 million.

(c)

On June 21, 2015, a customer lodged a claim of Rs. 2 million with the
company as a consignment dispatched on June 1, 2015 was not according to
the agreed specifications. The companys inspection team found that this
defect arose because of inferior quality of raw materials supplied by the
vendor. On June 28, 2015, the company lodged a claim for damages of Rs.
5.0 million, with its vendor, which include reimbursement of the cost of raw
materials. The company anticipates that it will have to pay compensation to its
customer and would be able to recover 50% of the amount claimed from the
vendor.

Required
Discuss how Akber Chemicals (Pvt.) Limited would deal with the above
situations in its financial statements for the year ended June 30, 2015. Explain
your point of view with reference to the guidance contained in the International
Financial Reporting Standards.
(13)

10.7

QALLAT INDUSTRIES LIMITED


The following information pertains to Qallat Industries Limited (QIL) for its financial
year ended June 30, 2015:
(i)

QIL sells all its products on one-year warranty which covers all types of
defects. Previous history indicates that 2% of the products contain major
defects whereas 10% have minor defects. It is estimated that if major defects
were detected in all the products sold, repair cost of Rs. 150 million would
result. If minor defects were detected in all products sold, repair cost of Rs.
70 million would result. Total sales for the year are amounted to Rs. 830
million.

(ii)

QIL has two large warehouses, A and B. These were acquired under noncancellable lease agreements. Details are as follows:

Effective date of agreement


Lease period
Rental amount per month

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Warehouse A

Warehouse B

July 1, 2010
10 years
Rs. 450,000

January 1, 2013
8 years
Rs. 300,000

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Questions

On account of serious operating difficulties, QIL vacated both the


warehouses on January 1, 2015 and moved to a warehouse situated close
to its factory. On the same day QIL sub-let Warehouse A at Rs. 250,000
per month for the remaining lease period. Warehouse B was sub-let on
March 1, 2015 for Rs. 350,000 per month for the remaining lease period.
(iii)

On July 18, 2015, QIL was sued by an employee claiming damages for Rs. 6
million on account of an injury caused to him due to alleged violation of safety
regulations on the part of the company, while he was working on the machine
on June 15, 2015. Before filing the suit, he contacted the management on
June 29, 2015 and asked for compensation of Rs. 4 million which was turned
down by the management. The lawyer of the company anticipates that the
court may award compensation ranging between Rs. 1.5 million to Rs. 3
million. However, in his view the most probable amount is Rs. 2 million.

(iv)

On November 1, 2014 a new law was introduced requiring all factories to


install specialised safety equipment within four months. The Equipment
costing Rs. 5.0 million was ordered on December 15, 2014 against 100%
advance payment but the supplier delayed installation to July 31, 2015. On
August 5, 2015 the company received a notice from the authorities levying a
penalty of Rs. 0.4 million i.e. Rs. 0.1 million for each month during which the
violation continued. QIL has lodged a claim for recovery of the penalty from
the supplier of the equipment.

Required
Describe how each of the above issues should be dealt with in the financial
statements for the year ended June 30, 2015. Support your answer in the light of
relevant International Accounting Standards and quantify the effect where possible.
(14)

10.8

SKYLINE LIMITED
The following information pertains to Skyline Limited (SL) for the financial year
ended December 31, 2015:
(i)

A customer who owed Rs. 1 million was declared bankrupt after his
warehouse was destroyed by fire on February 10, 2016. It is expected that the
customer would be able to recover 50% of the loss from the insurance
company.
(ii) An employee of SL forged the signatures of directors and made cash
withdrawals of Rs. 7.5 million from the bank. Of these, Rs. 1.5 million were
withdrawn before December 31, 2015. Investigations revealed that an
employee of the bank was also involved and therefore, under a settlement
arrangement, the bank paid 60% of the amount to SL on January 27, 2016.
(iii) SL has filed a claim against one of its vendors for supplying defective goods.
SLs legal consultant is confident that damages of Rs. 1 million would be paid
to SL. The supplier has already reimbursed the actual cost of the defective
goods.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed
by a third party. SLs legal consultant is of the opinion that an unfavourable
outcome is most likely. On the basis of past experience he has advised that
there is 60% probability that the amount of damages would be Rs. 1 million
and 40% likelihood that the amount would be Rs. 1.5 million.
Required
Advise SL about the amount of provision that should be incorporated and the
disclosures that are required to be made in the financial statements for the year
ended December 31, 2015.
(16)

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10.9

WALNUT LIMITED
Walnut Limited (WL) is engaged in the business of import and distribution of
electronic appliances.
The following events took place subsequent to the reporting period i.e. 31 December
2015:
(i)

On 15 January 2016, one of WLs competitors announced launching of an


upgraded version of DVD players. WLs inventories include a large stock of
existing version of DVD players which are valued at Rs. 15 million. Because of
the introduction of the upgraded version, the net realizable value of the
existing version in WLs inventory at 31 December 2015 has reduced to Rs.
12.5 million.

(ii)

On 20 December 2015, the board of directors decided to close down the


division which imports and sells mobile sets. This decision was made public
on 29 December 2015. However, the business was actually closed on 29
February 2016.
Net costs incurred in connection with the closure of this division were as
follows:
Redundancy costs
Staff training
Operating loss from 1 July 2015 to closure of division
Less: Profit on sale of remaining mobile sets

Rs. m
1.50
0.15
0.80
(0.50)
1.95

(iii)

On 16 January 2016, LED TV sets valuing Rs. 3 million were stolen from a
warehouse. These sets were included in WLs inventory as at 31 December
2015.

(iv)

WL owns 9,000 shares of a listed company whose price as on 31 December


2015 was Rs. 22 per share. During February 2016, the share price declined
significantly after the government announced a new legislation which would
adversely affect the companys operations. No provision in this regard has
been made in the draft financial statements.

(v)

On 31 January 2016, a customer announced voluntary liquidation. On 31


December 2015, this customer owed Rs. 1.5 million.

(vi)

On 15 February 2016, WL announced final dividend for the year ended 31


December 2015 comprising 20% cash dividend and 10% bonus shares, for its
ordinary shareholders.

Required
Describe how each of the above transactions should be accounted for in the
financial statements of Walnut Limited for the year ended 31 December 2015.
Support your answer in the light of relevant International Financial Reporting
Standards.
(16)

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Questions

10.10 ATTOCK TECHNOLOGIES LIMITED


Attock Technologies Limited (ATL) manufactures five hi-tech products, each on a
different plant. It is in the process of preparing its financial statements for the year
ended June 30, 2015. As the CFO of the company, the following matters are under
your consideration:
(i)

Inventory carried at Rs. 25 million on June 30, 2015 was sold for Rs. 15
million after it had been damaged in a flood, in July 2015.

(ii)

On July 5, 2015 one of ATLs corporate customers declared bankruptcy.


The liquidator announced on August 25, 2015 that 20% of the debt would be
paid on liquidation.

(iii)

A new product introduced by a competitor on August 1, 2015 had caused


a significant decline in the market demand of one of ATLs major products. As
a result, ATL is considering a reduction in price and a cut in production.

(iv)

On August 18, 2015 the government announced a retrospective increase


in the tax rate applicable to the company.

(v)

The directors of ATL declared a dividend of Rs. 3 per share on August 28,
2015.

Required
State how the above events should be treated in ATLs financial statements for the
year ended June 30, 2015. You may assume that all the above events are material
to the company.
(11)

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CHAPTER 11 IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING


ESTIMATES AND ERRORS
11.1

WONDER LIMITED
Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery.
Following are the draft extracts of the statement of financial position and the
statement of profit or loss for the year ended 30 June 2015:
Statement of Financial Position
2015

2014

Rs. m

Rs. m

Property, plant and equipment

189

130

Retained earnings

166

108

45

27

2015

2014

Rs. m
90
32
58

Rs. m
120
42
78

Deferred tax liability


Statement of profit or loss

Profit before taxation


Taxation
Profit after taxation

Following additional information has not been taken into account in the
preparation of the above financial statements:
(i)

Cost of repairs amounting to Rs. 20 million was erroneously debited to the


machinery account on 1 October 2013. The estimated useful life of the
machine is 10 years.

(ii)

On 1 July 2014, WL reviewed the estimated useful life of its plant and
revised it from 5 years to 8 years. The plant was purchased on 1 July 2013 at
a cost of Rs. 70 million.

Depreciation is provided under the straight line method. Applicable tax rate is 30%.
Required
Prepare relevant extracts (including comparative figures) for the year ended 30 June
2015 related to the following:
(a)

Statement of financial position

(b)

Statement of profit or loss

(c)

Statement of changes in equity

(d)

Correction of error note

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11.2

DUNCAN
Duncan Company has previously written off any expenditure on borrowing costs in
the period in which it was incurred.
The company has appointed new auditors this year. They have expressed the view
that the previous recognition of borrowing costs in the statement of profit or loss was
in error. The company has decided to correct the error retrospectively in accordance
with IAS 8.
The financial statements for 2014 and the 2015 draft financial statements, both
reflecting the old policy, show the following.
Statement of changes in equity (extract)

Opening balance
Profit after tax for the period
Dividends paid

2014
Retained
earnings
Rs. 000
22,500
3,200
(1,750)

2015
Retained
earnings
Rs. 000
23,950
4,712
(2,500)

23,950

26,162

Closing balance

Borrowing costs written off were Rs. 500,000 in 2014 and Rs. 600,000 in 2015.
The directors have calculated that borrowing costs, net of depreciation which should
have been included in property, plant and equipment had the correct policy been
applied, are as follows.
Rs. 000
At 30 December 2013

400

At 31 December 2014

450

At 31 December 2015

180

Had the correct policy been in force depreciation of Rs. 450,000 would have been
charged in 2014 and Rs. 870,000 in 2015.
Required
Show how the change in accounting policy must be reflected in the statement of
changes in equity for the year ended 31 December 2015. Work to the nearest Rs.
000.

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11.3

MOHANI MANUFACTURING LIMITED


Mohani Manufacturing Limited is engaged in manufacturing of spare parts for
motor car assemblers. The audited financial statements for the year ended
December 31, 2014 disclosed that the profit and retained earnings were Rs. 21
million and Rs. 89 million respectively. The draft financial statements for the year
show a profit of Rs. 15 million. However, following adjustments are required to be
made:
(i)

The management of the company has decided to change the method for
valuation of raw materials from FIFO to weighted average. The value of
inventory under each method is as follows:
FIFO
Rs. m
37.0
42.3
58.4

December 31, 2013


December 31, 2014
December 31, 2015
(ii)

Weighted Average
Rs. m
35.5
44.5
54.4

In 2014, the company purchased a plant for Rs. 100 million. Depreciation on
plant was recorded at Rs. 25 million instead of Rs. 10 million. This error was
discovered after the publication of financial statements for the year ended
December 31, 2014. The error is considered to be material.

Required
Produce an extract showing the movement in retained earnings, as would
appear in the statement of changes in equity for the year ended December 31,
2015.
(11)

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Questions

CHAPTER 12 IAS 12: INCOME TAXES


12.1

FRANCESCA
On 30 June 2014 Francesca Company had a credit balance on its deferred tax
account of Rs. 1,340,600 all in respect of the difference between depreciation and
capital allowances.
During the year ended 30 June 2015 the following transactions took place.
(1)

Rs. 45 million was charged against profit in respect of depreciation. The tax
computation showed capital allowances of Rs. 50 million.

(2)

Interest receivable of Rs. 50,000 was reflected in profit for the period.
However, only Rs. 45,000 of interest was actually received during the year.
Interest is not taxed until it is received.

(3)

Interest payable of Rs. 32,000 was treated as an expense for the period.
However, only Rs. 28,000 of interest was actually paid during the year.
Interest is not an allowable expense for tax purposes until it is paid.

(4)

During the year Francesca incurred development costs of Rs. 500,600, which
it has capitalised. Development costs are an allowable expense for tax
purposes in the period in which they are paid.

(5)

Land and buildings with a net book value of Rs. 4,900,500 were revalued to
Rs. 6 million.

The tax rate is 30%. Francesca has a right of offset between its deferred tax
liabilities and its deferred tax assets.
Required
Calculate the deferred tax liability on 30 June 2015. Show where the increase or
decrease in the liability in the year would be charged or credited.

12.2

SHEP (I)
Shep was incorporated on 1 January 2015. In the year ended 31 December 2015
the company made a profit before taxation of Rs. 121,000
During the period Shep made the following capital additions.
Rs.
Plant
Motor vehicles

48,000
12,000

During the period:


Accounting depreciation
Tax depreciation
Tax is chargeable at a rate of 30%.

11,000
15,000

Required
(a)
(b)
(c)
(d)

Calculate the corporate income tax liability for the year ended 31st December
2015.
Calculate the deferred tax balance that is required in the statement of financial
position as at 31st December 2015.
Prepare a note showing the movement on the deferred tax account and thus
calculate the deferred tax charge for the year ended 31st December 2015
Prepare the statement of profit or loss note which shows the compilation of the
tax expense for the year ended 31st December 2015.

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12.3

SHEP (II)
Continuing from the previous year. The following information is relevant for the year
ended 31st December 2016.
(a)

Capital transactions
Rs.
Depreciation charged
Tax allowances

(b)

14,000
16,000

Interest payable
On 1st April 2016 the company issued Rs. 25,000 of 8% convertible loan stock.
Interest is paid in arrears on 30th September and 30th March. Assume that tax
relief on interest expense is only given when the interest is paid.

(c)

Interest receivable
On 1st April Shep purchased debentures having a nominal value of Rs. 4,000.
Interest at 15% pa is receivable on 30th September and 30th March. Assume
that interest income is not taxed until the cash is actually received.

(d)

Provision for warranty


In preparing the financial statements for the year to 31st December 2016, Shep
has recognised a provision for warranty payments in the amount of Rs. 1,200.
This has been correctly recognised in accordance with IAS 37 and the amount
has been expensed. Assume that tax relief on the warranty cost is only given
when the expense is paid.

(e)

Fine
During the period Shep has paid a fine of Rs. 6,000. The fine is not tax
deductible.

(f)

Further information
The accounting profit before tax for the year was Rs. 125,000.

Tax is chargeable at a rate of 30%.


Required
(a)

Calculate the corporate income tax liability for the year ended 31st December
2016.

(b)

Calculate the deferred tax balance that is required in the statement of financial
position as at 31st December 2016.

(c)

Prepare a note showing the movement on the deferred tax account and thus
calculate the deferred tax charge for the year ended 31st December 2016

(d)

Prepare the statement of profit or loss note which shows the compilation of the
tax expense for the year ended 31st December 2016.

(e)

Prepare a note to reconcile the product of the accounting profit and the tax
rate to the tax expense for year ended 31st December 2016.

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12.4

SHEP (III)
Continuing from the previous year. The following information is relevant for the year
ended 31st December 2017.
(a)

Interest payable/Interest receivable


Shep still has Rs. 25,000 of 8% convertible loan stack in issue and still retains
its holding in the debentures purchased in 2004.

(b)

Provision for warranty


During the year Shep had paid out Rs. 500 in warranty claims and provided for
a further Rs. 2,000.

(d)

Development costs
During 2017 Shep has capitalised development expenditure of Rs. 17,800 in
accordance with the provisions of IAS 38. Assume that tax relief on this
expenditure is taken in full in the period in which it is incurred.

(e)

Further information
Rs.
Profit before taxation
Depreciation charged
Tax allowable depreciation

(f)

175,000
18,500
24,700

Entertainment
Shep paid for a large office party during 2017 to celebrate a successful first
two years of the business. This cost Rs. 20,000. Assume that this expenditure
is not tax deductible.

Tax is chargeable at a rate of 30%.


Required
(a)

Calculate the corporate income tax liability for the year ended 31st December
2017.

(b)

Calculate the deferred tax balance that is required in the statement of financial
position as at 31st December 2017.

(c)

Prepare a note showing the movement on the deferred tax account and thus
calculate the deferred tax charge for the year ended 31st December 2017

(d)

Prepare the statement of profit or loss note which shows the compilation of the
tax expense for the year ended 31st December 2017.

(e)

Prepare a note to reconcile the product of the accounting profit and the tax
rate to the tax expense for year ended 31st December 2017.

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12.5

SHEP (IV)
Using the information provided in Shep III and assume that Shep is subject to a
higher tax rate of 34% in 2017.
Required

12.6

(a)

Calculate the corporate income tax liability for the year ended 31st December
2017.

(b)

Calculate the deferred tax balance that is required in the statement of financial
position as at 31st December 2017.

(c)

Prepare a note showing the movement on the deferred tax account and thus
calculate the deferred tax charge for the year ended 31st December 2017

(d)

Prepare the statement of profit or loss note which shows the compilation of the
tax expense for the year ended 31st December 2017.

(e)

Prepare a note to reconcile the product of the accounting profit and the tax
rate to the tax expense for year ended 31st December 2017.

WAQAR LIMITED
Waqar Limited has provided you the following information for determining its tax
and deferred tax expense for the year 2014 and 2015:
(i)

During the year ended December 31, 2015, the companys accounting profit
before tax amounted to Rs. 40 million (2014: Rs. 30 million). The profit
includes capital gains amounting to Rs. 10 million (2014: Rs. 8 million) which
are exempt from tax.

(ii)

The accounting written down values of the fixed assets, as at December 31,
2013 were as follows:
Accumulated
Cost
Rs. m
Machinery
Furniture and fittings

Depreciation
Rs. m

Written down
value
Rs. m

200

25

175

50

10

40

No additions or disposals of fixed assets were made in the years 2014 and
2015.
(iii)

Machinery was acquired on January 1, 2013 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, 2013 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, 2013 was Rs. 40.5 million.

(v)

Normal rate of tax depreciation on both types of assets is 10% on written


down value.

(vi)

The tax rates for 2013, 2014 and 2015 were 35%, 35% and 30% respectively.

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Required
For each year:

12.7

(a)

Calculate the corporate income tax liability for the year.

(b)

Calculate the deferred tax balance that is required in the statement of financial
position as at the year end.

(c)

Prepare a note showing the movement on the deferred tax account and thus
calculate the deferred tax charge for the year.

(d)

Prepare the statement of profit or loss note which shows the compilation of the
tax expense.

(e)

Prepare a note to reconcile the product of the accounting profit and the tax
rate to the tax expense.
(25)

SHAKIR INDUSTRIES
Given below is the statement of profit or loss of Shakir Industries for the year
ended December 31, 2015:
2015
Rs. m
143.00
(96.60)
46.40
(28.70)
17.70
3.40
21.10
(5.30)
15.80

Sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit Other income
Profit before interest and tax
Financial charges
Profit before tax
Following information is available:
(i)

Operating expenses include an amount of Rs. 0.7 million paid as penalty to


SECP on non-compliance of certain requirements of the Companies
Ordinance, 1984.

(ii)

During the year, the company made a provision of Rs. 2.4 million for
gratuity. The actual payment on account of gratuity to outgoing members was
Rs. 1.6 million.

(iii)

Lease payments made during the year amounted to Rs. 0.65 million which
include financial charges of Rs. 0.15 million. As at December 31, 2015,
obligations against assets subject to finance lease stood at Rs. 1.2 million.
The movement in assets held under finance lease is as follows:
Rs. m
2.50
(0.7)
1.80

Opening balance 01/01/2015


Depreciation for the year
Closing balance 31/12/2015

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(iv)

(v)

(vi)

The details of owned fixed assets are as follows:


Accounting
Tax
Rs. m
Rs. m
Opening balance 01/01/2015
12.50
10.20
5.30
5.30
5.3
5.3
Purchased during the year
(1.10)
(1.65)
(1.1)
Depreciation for the year
5.30
5.30
16.70
13.85
Closing balance 31/12/2015
(1.10)
(1.65)
Capital work-in-progress as on December 31, 2015 include financial charges
of Rs. 2.3 million which have been capitalised in accordance with IAS-23
Borrowing Costs. However, the entire financial charges are admissible,
under the Income Tax Ordinance, 2001.
Deferred tax liability and provision for gratuity as at January 1, 2015 was
Rs. 0.55 million and Rs. 0.7 million respectively.

(vii) Applicable income tax rate is 35%.


Required
Based on the available information, compute the current and deferred tax
expenses for the year ended December 31, 2015.

12.8

(15)

MARS LIMITED
Mars Limited (ML) is engaged in the manufacturing of chemicals. On July 1, 2014
it obtained a motor vehicle on lease from a bank. Details of the lease agreement
are as follows:
(i)

Cost of motor vehicle is Rs. 1,600,000.

(ii)

Instalments of Rs. 480,000 are to be paid annually in advance.

(iii)

The lease term and useful life is 4 years and 5 years respectively.

(iv)

The interest rate implicit in the lease is 13.701%.

ML follows a policy of depreciating the motor vehicles over their useful life, on
the straight-line method. However, the tax department allows only the lease
payments as a deduction from taxable profits.
The tax rate applicable to the company is 30%. MLs accounting profit before tax
for the year ended June 30, 2015 is Rs. 4,900,000.
There are no temporary differences other than those evident from the
information provided above.
Required
(a)

Prepare journal entries in the books of Mars Limited for the year ended June
30, 2015 to record the above transactions including tax and deferred tax.

(b)

Prepare a note to the financial statements related to disclosure of finance


lease liability, in accordance with the requirements of IFRS.
(18)

(Ignore comparative figures.)

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12.9

BILAL ENGINEERING LIMITED


Bilal Engineering Limited earned profit before tax amounting to Rs. 50 million
during the year ended December 31, 2015. The accountant of the company has
submitted draft accounts to the Finance Manager along with the following
information which he believes could be useful in determining the amount of taxation:
(i)

Accounting deprecation for the year is Rs. 10 million which includes Rs. 1
million charged on the difference between cost and revalued amount.

(ii)

A motor vehicle costing Rs. 1 million was taken on lease in 2014. Related
clauses of the lease agreement are as under:

Annual instalment of Rs. 0.3 million is payable annually in advance.

The lease term and useful life is 4 years and 5 years respectively.

The interest rate implicit in the lease is 13.701% per annum.

Accounting depreciation on the leased vehicle is included in the


depreciation referred to in para (i) above.

(iii)

Tax depreciation on the assets owned by the company is Rs. 7 million.

(iv)

Research and development expenses of Rs. 15 million were incurred in 2013


and are being amortised over a period of 15 years. For tax purposes research
and development expenses are allowed to be written off in 10 years. However,
10% of these expenses were not verifiable and have not been claimed.

(v)

Expenses amounting to Rs. 0.25 million were disallowed in 2012. Out of


these Rs. 0.15 million were allowed in appeal, during the current year. The
company had initially expected that the full amount would be allowed but has
decided not to file a further appeal.

(vi)

The applicable tax rate is 35%.

Required
(a)

Prepare journal entries in respect of taxation, for the year ended December 31,
2015.

(b)

Prepare a reconciliation to explain the relationship between tax expense and


accounting profit as is required to be disclosed under IAS 12 Income Taxes.
(18)

12.10 GALAXY INTERNATIONAL


The following information relates to Galaxy International (GI), a listed company,
which was incorporated on January 1, 2014.
(i)

The (loss) / profit before taxation for the years ended December 31, 2014 and
2015 amounted to (Rs. 1.75 million) and Rs. 23.5 million respectively.

(ii)

The details of accounting and tax depreciation on fixed assets is as follows:


2015
Rs. m
15
6

Accounting depreciation
Tax depreciation
(iii)

2014
Rs. m
15
45

In 2014, GI accrued certain expenses amounting to Rs. 2 million which were


disallowed by the tax authorities. However, these expenses are expected to
be allowed on the basis of payment in 2015.

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(iv)

GI earned interest on Special Investment Bonds amounting to Rs. 1.0 million


and Rs. 1.25 million in the years 2014 and 2015 respectively. This income is
exempt from tax.

(v)

GI operates an unfunded gratuity scheme. The provision during the years


2014 and 2015 amounted to Rs. 1.7 million and Rs. 2.2 million respectively.
No payment has so far been made on account of gratuity.

(vi)

The applicable tax rate is 35%.

Required
Prepare a note on taxation for inclusion in the companys financial statements for
the year ended December 31, 2015 giving appropriate disclosures relating to
current and deferred tax expenses including a reconciliation to explain the
relationship between tax expense and accounting profit.
(20)

12.11 APRICOT LIMITED


The following information relates to Apricot Limited (AL), a listed company, for the
financial year ended 31 December 2015:
(i)

The profit before tax for the year amounted to Rs. 60 million (2014: Rs. 45
million).

(ii)

The accounting and tax written down value of fixed assets as on 31 December
2014 was Rs. 95 million and Rs. 90 million respectively. Accounting
depreciation for the year is Rs. 10 million (2014: Rs. 9 million) whereas tax
depreciation for the year is Rs. 8 million (2014: Rs. 7 million).

(iii)

During the year, AL sold a machine for Rs. 3 million and recognised a profit of
Rs. 0.5 million. The tax written down value of the machine as on 31
December 2014 was Rs. 2 million. There were no other additions/disposals of
fixed assets in 2014 and 2015.

(iv)

AL earned capital gain of Rs. 6 million (2014:Nil) on sale of shares of a listed


company. This income is exempt from tax.

(v)

Bad debt expenses recognised during the year was Rs. 5 million (2014: Rs. 7
million).

(vi)

Bad debts written off during the year amounted to Rs. 3 million (2014: Rs. 4
million).

(vii) Deferred tax liability and provision for bad debts as on 31 December
2011 was Rs. 18.90 million and Rs. 9 million respectively.
(viii) The companys assessed brought forward losses up to 31 December 2011
amounted to Rs. 19.25 million.
(ix)

Applicable tax rate is 35%.

Required
Prepare a note on taxation for inclusion in ALs financial statements for the year
ended 31 December 2015 giving appropriate disclosures relating to current and
deferred tax expenses including comparative figures for 2014 and a reconciliation to
explain the relationship between 2015 tax expense and 2015 accounting profit.
(21)

Emile Woolf International

86

The Institute of Chartered Accountants of Pakistan

Questions

CHAPTER 13 RATIO ANALYSIS


13.1

WASIM
Wasim is an importer and retailer of vegetable oils. Extracts from the financial
statements for this year and last are set out below.
Income statements for the years ended 30 September
Year 7
Rs.000
Revenue

Year 6
Rs.000
1,806

2,160
(1,755)

405
(130)
(260)

15
(6)

Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit before tax
Income tax expense
Profit for the period

(1,444)

362
(108)
(198)

56
(3)

53

Statements of financial position as of 30 September


Year 7
Rs.000
Assets
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables
Cash
Total assets
Equity and liabilities
Equity
Ordinaryshares
Preference shares
Share premium
Revaluation reserve
Retained earnings
Current liabilities
Bank overdraft
Trade payables
Current tax payable
Total equity and liabilities

Emile Woolf International

87

Year 6
Rs.000

78

72

106
316

422

500

61
198
6

265

337

110
23
15
20
78
246

85
11
20
74
190

49
198
7

254

500

142
5

147

337

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Required
Define and calculate the following ratios:

13.2

a)

Gross profit percentage.

b)

Net profit percentage

c)

Return on capital employed

d)

Asset turnover

e)

Current ratio

f)

Quick ratio

g)

Average receivables collection period

h)

Average payables period

i)

Inventory turnover

AMIR AND MO
The income statements and statements of financial position of two manufacturing
companies in the same sector are set out below.
Amir
Mo
Rs.
Rs.
Revenue
150,000
700,000
Cost of sales
(60,000)
(210,000)

Gross profit
90,000
490,000
Interest payable
(500)
(12,000)
Distribution costs
(13,000)
(72,000)
Administrative expenses
(15,000)
(35,000)

Profit before tax


61,500
371,000
Income tax expense
(16,605)
(100,170)

Profit for the period


44,895
270,830

Assets
Non-current assets
Property
500,000
Plant and equipment
190,000
280,000

Current assets
Inventories
Trade receivables
Cash at bank

Total assets

Emile Woolf International

88

190,000

780,000

12,000
37,500
500

50,000

240,000

26,250
105,000
22,000

153,250

933,250

The Institute of Chartered Accountants of Pakistan

Questions

Equity and liabilities


Equity
Share capital
Retained earnings

Non-current liabilities
Long-term debt
Current liabilities
Trade payables
Total equity and liabilities

156,000
51,395

207,395

174,750
390,830

565,580

10,000

250,000

22,605

240,000

117,670

933,250

Required
Define and calculate the following ratios for each company:
a)

Gross profit percentage.

b)

Net profit percentage

c)

Return on capital employed

d)

Asset turnover

e)

Current ratio

f)

Quick ratio

g)

Average receivables collection period

h)

Average payables period

i)

Inventory turnover

Emile Woolf International

89

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 14 ETHICAL ISSUES IN FINANCIAL REPORTING


14.1

ETHICAL ISSUES
Waheed is a chartered accountant, recently employed by AA plc as deputy to the
finance director, Arif (also a chartered accountant). AA plc is listed on the Lahore
stock exchange.
On Waheeds first day on the job he met with Arif who said Look, keep it to yourself
but Im having a second interview next week for a new job. The first thing that I need
you to do is to review the financial statements before the auditors arrive. I qualified a
few years ago and am not up to date on all of the little technicalities in IFRS. You
should now these better than me and youll know more about what the auditors
might focus on. We must do our best to present the financial statements in the most
favourable light as the bonus paid to employees (including me) depends on profit
being more than 10% bigger than last years and remember that you qualify for this
too. Keep this in mind when you carry out the review as we do not really want to find
anything. Do well at this and I might put in a good word for you when I leave as Im
sure youll be a great replacement for me.
Required
Explain the ethical issues inherent in the above conversation and what Waheed
should do about them.

14.2

SINDH INDUSTRIES LTD


Jafar has recently been appointed as financial controller to Sindh Industries Ltd.
Until a month ago, Sindh Industries had a finance director, who resigned suddenly,
due to ill health. Since Jafar joined the company, he has learned that his resignation
was related to stress caused by a series of disagreements with the managing
director about the performance of the business.. The directors have not yet
appointed a replacement.
It is now March 2016 and you have been asked to finalise the financial statements
for the year ended 31 December 2015. The draft statement of profit or loss extract
and statement of financial position are shown below:
Draft statement of profit or loss for the year ended 31 December 2015
Rs. 000
2,500

Profit before tax


Draft statement of financial position at 31 December 2015
Property, plant and equipment
Current assets
Total assets

Rs. 000
12,000
3,500
15,500

Share capital
Retained earnings
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities

2,000
6,000
8,000
5,000
2,500
15,500

Emile Woolf International

90

The Institute of Chartered Accountants of Pakistan

Questions

During the year ended 31 December 2015 Sindh Industries entered into the
following transactions.
(1)

Just before the year end Sindh Industries signed a contract to deliver
consultancy services for a period of 2 years at a fee of Rs. 500,000 per
annum. The full amount of this fee has been paid in advance and is nonrefundable.

(2)

Sindh Industries has constructed a new factory. The construction has been
financed from the pool of existing borrowings. Land at a cost of Rs. 1.8 million
was acquired on 1 February 2015 and construction began on 1 June 2015.
Construction was completed on 30 September 2015 at an additional cost of
Rs. 2.7 million. Although the factory was usable from that date, full production
did not commence until 1 December 2015. Throughout the year the
companys average borrowings were as follows:

Amount
Rs.
1,000,000
1,750,000
2,500,000

Bank overdraft
Bank loan
Debenture

Annual
interest
rate
%
9.75
10
8

An amount of Rs. 450,000 has been included in property, plant and equipment
in respect of borrowing costs relating to the construction of the factory. The
useful life of the factory has been estimated at 20 years. No depreciation has
been charged for the year. The reason for this is that the factory has only been
in use for one month and that the depreciation charge would be immaterial.
(3)

A blast furnace with a carrying amount at 1 January 2015 of Rs. 3.5 million
has been depreciated in the draft financial statements on the basis of a
remaining life of 20 years. In December 2015 the directors carried out a review
of the useful lives of various significant items of plant and machinery, including
the blast furnace and came to the conclusion that the useful life of the furnace
was 20 years at 31 December 2015. The reasoning behind this judgement
was that the lining of the furnace had been replaced in the last week of
December 20X6 at a cost of Rs. 1.4 million. Provided that the lining is
replaced every five years, the life of the furnace can be extended accordingly.
You have found a report, commissioned by the previous finance director and
prepared by a firm of asset valuation specialists, which assesses the
remaining useful life of the main structure of the furnace at 1 January 2015 at
15 years and the lining of the furnace at 5 years. You have also found
evidence that the managing director has seen this report.
Jafar has had a conversation with the managing director who told him, We
need to make the figures look as good as possible so I hope youre not going
to start being difficult. The consultancy fee is non-refundable so theres no
reason why we cant include it in full. I think we should look at our depreciation
policies. Were writing off our assets over far too short a period. As you know,
were planning to go for a stock market listing in the near future and being
prudent and playing safe wont help us do that. It wont help your future with
this company either.

Emile Woolf International

91

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Required
(a)

Explain the required IFRS accounting treatment of these issues, preparing


relevant calculations where appropriate.
(17)

(b)

Prepare a revised draft of the statement of profit or loss extract for the year
ended 31 December 2015 and the statement of financial position at that date.
(6)

(c)

Discuss the ethical issues arising from your review of the draft financial
statements and the actions that you should consider.

Emile Woolf International

92

(5)

The Institute of Chartered Accountants of Pakistan

SECTION

Certificate in Accounting and Finance


Financial accounting and reporting II

B
Answers

Emile Woolf International

93

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 2 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS


2.1

LARRY
Statement of profit or loss
For the year ended 31 December 2015
Rs. in
million
Revenue
Cost of sales (2,542 + 118 127)
Gross profit
Other income
Distribution costs
Administrative expenses
Profit before tax
Income tax expense

3,304
(2,533)
771
20
(175)
(342)
274
(75)

Profit for the period

199

Statement of financial position


As at 31 December 2015
Assets

Rs. in
million

Non-current assets
Property, plant and equipment (2,830 918)
Intangible assets (26 5)

1,912
21
1,933

Current assets
Inventories
Trade and other receivables
Cash (89 +2)

127
189
91
407

Total assets

2,340

Equity and liabilities


Equity
Share capital
Retained earnings (1,562 + 199)

400
1,761
2,161

Non-current liabilities
Long-term borrowings (18 x 2/3)
Current liabilities
Trade and other payables
Current portion of long-term borrowing (18 3)
Current tax payable
Total equity and liabilities

Emile Woolf International

12
86
6
75
167
2,340

94

The Institute of Chartered Accountants of Pakistan

Answers

2.2

MINGORA IMPORTS LIMITED


Statement of profit or loss for the year ended 31 December 2015
Rs. in
million
Revenue
Change in inventories of finished goods and work-in-progress (W3)
Staff costs (W3)
Depreciation and other amortisation expense (W3)
Other expenses (W3)
Profit before tax
Income tax expense

1,740
40
(620)
(42)
(359)
759
(120)

Profit for the period

639

Statement of financial position as at 31 December 2015


Rs. in
million

Assets
Non-current assets
Property, plant and equipment (W1)
Intangible assets (W2)

368
40
408

Current assets
Inventories (180 + 140)
Trade and other receivables (420 x 95%)
Cash

320
399
440
1,159

Total assets

1,567

Equity and liabilities


Equity
Share capital
Other reserves
Retaind earnings

600
120
635
1,355

Current liabilities
Trade and other payables
Current tax payable

92
120
212

Total equity and liabilities

1,567

Statement of changes in equity for the year ended 31 December 2015


Share
capital

Amounts in Rs. million


Revaluati Retained
on
earnings
reserve
121
(125)
120
-

Total

Balance at 31 December 2014


Dividends paid
Net revaluation surplus in the
year (360 (300 60))
Profit after tax for the period

620

639

639

Balance at 31 December 2015

620

120

635

1,355

Emile Woolf International

95

721
(125)
120

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
(1)

Property, plant and equipment


Rs. in
million
Cost brought forward
Leasehold
Computers
Revaluation

300
50
60

Cost carried forward

410

Accumulated depreciation brought forward (60 + 20)


Revaluation
Charge for the year
Leasehold (360 30)
Computers (50 5)

80
(60)
12
10

Accumulated depreciation carried forward

42

Carrying amount carried forward


(2)

368

Intangible assets
Rs. in
million
Cost
Amortisation (60 3)

60
(20)

Carried forward
(3)

40

Allocation of costs
Amounts in Rs. million

Work-in-progress (140
125)
Staff costs
Finished goods (180
155)
Consultancy fees
Directors salaries
Doubtful receivables (420
5%)
Sundry
Amortisation of patent
(W2)
Depreciation (12 + 10)
(W1)

Change
in
inventori
es
(15)

Depreciat
ion etc

Other
expenses

260
(25)
44
360
21
294
20
22
(40)

Emile Woolf International

Staff
costs

96

620

42

359

The Institute of Chartered Accountants of Pakistan

Answers

2.3

BARRY
Barry
Statement of profit or loss
For the year ended 31st August 2015
Rs. in
million
30,000
(19,650)
10,350
(1,370)
(1,930)
7,050
(350)
6,700
(2,500)

Revenue
Cost of sales (W1)
Gross profit
Distribution costs (W1)
Administrative expenses (W1)
Profit from operations
Finance costs
Profit before tax
Tax (W2)
Profit after tax
Barry
Statement of financial position
As at 31st August 2015

4,200

Rs. in
million
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventory
Trade and other receivables (7,400 + 200)
Cash and cash equivalents
Total assets

4,600
7,600
700
12,900
52,500

EQUITY AND LIABILITIES


Capital and reserves
Equity shares
Share premium
Accumulated profits (W3)
Total equity
Revaluation reserve (W4)
Non current liabilities
Borrowings
Current liabilities
Trade and other payables
Taxation (2,100 + 400)

21,000
2,000
11,800
34,800
4,700
5,200
5,300
2,500
7,800

Total equity and liabilities

Emile Woolf International

39,600

52,500

97

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Reconciliation of opening and closing property, plant and equipment


Rs. in 000
Assets
Fixtures
under
&
construct
fittings
ion

Buildings

Plant &
machine
ry

10,000

9,000

20,100

10,000

400

49,500

Additions

50

50

Reclassification

450

(450)

1,000

1,000

2,000

11,000

10,000

20,550

10,000

51,550

At 1 Sept 2014

3,000

4,000

3,700

10,700

Revaluation

(3,000)

(3,000)

Charge for year

1,000

2,550

700

4,250

At 31 Aug 2015

1,000

6,550

4,400

11,950

At 31 Aug 2015

11,000

9,000

14,000

5,600

39,600

At 1 Sept 2014

10,000

6,000

16,100

6,300

400

38,800

Land

Total

Cost/ Valuation
At 1 Sept 2014

Revaluation
At 31 Aug 2015
Depreciation

Net book value

Workings
1

Rs.in 000

Allocation of expenses

Raw materials consumed


Manufacturing overheads
Increase in inventories
Staff costs (70%/20%/10%)
Distribution costs
Depreciation
Building (50%/50%)
Plant and machinery
Fixtures and fittings (30%/70%)
2

Cost of
sales
9,500
5,000
(1,400)
3,290

500
2,550
210
19,650

Admin

940

Distrib

470
900

500
490
1,930

1,370

Tax charge

Current year
Under provision from previous year

Emile Woolf International

98

Rs. in
000
2,100
400
2,500

The Institute of Chartered Accountants of Pakistan

Answers

Accumulated profits carried forward


Accumulated profits carried forward per question
Less tax charge
- Current year estimate
- Under-provision in previous year
Add transfer of excess depreciation on revalued building

2,100
400
(2,500)
300
11,800

Revaluation reserve carried forward


Revaluation reserve per question
Add transfer of excess depreciation on revalued building

2.4

Rs. in 000
14,000

5,000
(300)
4,700

OSCAR INC
(a)

Statement of profit or loss


For the year ended 31 March 2015
Rs. in 000
Sales
Operating costs (140 + 960 150 + 420 + 210 + 16)
Operating profit before interest
Income from investments
Profit before taxation
Income tax

Statement of financial position


As at 31 March 2015
Assets
Non-current assets
Tangible assets
Investments
Current assets
Inventory
Receivables

530
560

1,090
150
470

620

1,710

Equity and liabilities


Capital and reserves
Share capital
Retained earnings
Current liabilities
Provisions for liabilities and charges

Emile Woolf International

2,010
(1,596)

414
75

489
(49)

440

99

600
500

1,100
414
196

1,710

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
(1)

Income tax
Rs. in 000
Income tax (current year)
Over provision for tax in the previous year

(2)

74
(25)

49

Tangible assets plant and machinery


Rs. in 000
Cost at 1 April 2014 and 31 March 2015
Accumulated depreciation
At 31 March 2014
Provided during the year (27 + 5)

188
32

220

At 31 March 2015
Net book value at 31 March 2015

(3)

750

530

Current liabilities
Rs. in 000
Trade payables
Mainstream corporation tax
Bank overdraft

(4)

Provisions for liabilities and charges


Rs. in 000
180
16

196

At 1 April 2014
Provided in the year
At 31 March 2015

(5)

260
74
80

414

Retained earnings
Retained earnings
Opening retained earnings
Dividends
Closing retained earnings

Emile Woolf International

100

Rs. in 000
440
180
(120)

500

The Institute of Chartered Accountants of Pakistan

Answers

2.5

CLIFTON PHARMA LIMITED


(a)

Clifton Pharma Limited


Statement of profit or loss for the year ended 30 September 2015

Revenue
Cost of sales: see working (1)
Gross profit
Operating expenses: see working (2)
Investment income
Finance costs: Loan notes see working (3)
Finance lease see working (2)
Profit before tax
Income tax expense: see working (4)
Profit for the period
(b)

98,000

Clifton Pharma Limited


Statement of financial position as at 30 September 2015
Non-current assets
Property, plant and equipment: see working (5)
Investments
Current assets
Inventory
Trade receivables
Bank

358,000
92,400
450,400
23,700
76,400
12,100
112,200

Total assets

562,600

Equity and liabilities


Capital and reserves
Share capital
Share premium
Retained earnings: see working (6)
Revaluation surplus
Non-current liabilities
3% loan notes: see working (3)
Deferred tax: see working (4)
Finance lease obligation: see working (2)
Current liabilities
Trade payables
Accrued lease finance costs: see working (2)
Finance lease obligation: see working (2)
Income tax payable
Total equity and liabilities

Emile Woolf International

Rs. in
000
338,300
(180,000)
158,300
(36,600)
2,000
(3,000)
(1,700)
(4,700)
119,000
(21,000)

280,000
20,000
117,300
417,300
20,000
51,500
23,000
11,700
86,200
14,100
1,700
5,300
18,000
39,100
562,600

101

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
Rs. in 000

(1) Cost of sales


As given in the trial balance

134,000

Depreciation of plant and equipment: 20% (197,000


47,000)
Depreciation of leased vehicles: 24,000/4 years

30,000

Amortisation of leasehold property: 250,000/25 years

10,000

6,000
180,000

(2) Vehicle rentals and finance lease. Operating expenses


Rental costs given in the trial balance
Relating to finance lease

8,600
(7,000)

Balance: relating to operating lease operating expense

1,600

Other operating expenses (trial balance in question)

35,000

Total operating expenses

36,600

Finance lease
Fair value of leased assets

24,000

Less: First rental payment, paid in advance


1 October 2014

(7,000)

Remaining obligation, 1 October 2014

17,000

Interest at 10% to 30 September 2015 (current liability)

1,700

Lease payment due 1 October 2015

7,000

Capital repayment due (= balance, current liability)

(5,300)

Remaining lease obligation = non-current liability

11,700

(3)

Loan notes
The effective interest rate is 6%. Actual interest paid was Rs.1,500,000
(in trial balance); therefore the balancing Rs.1,500,000 should be added
to the loan notes obligation, to make the total loan notes liability Rs.50
million + Rs.1,500,000 = Rs.51.5 million.

(4)

Taxation
Deferred tax liability b/f

20,000

Deferred tax: credit in the statement of profit or loss


Deferred tax liability c/f (92,000 25%)

2,000
23,000

Tax expense
Income tax on profits for the year

18,000

Deferred tax movement

3,000

Tax charge in the statement of profit or loss

Emile Woolf International

102

21,000

The Institute of Chartered Accountants of Pakistan

Answers

(5) Non-current assets and depreciation


Rs. in 000

Leasehold property
Carrying value in the trial balance (250,000 40,000)

210,000

Amortisation charge for the year to 30 September 2015

(10,000)
200,000

Re-valued amount

220,000

Transfer to revaluation reserve

20,000

The annual depreciation charges for plant and equipment and the leased
vehicles are shown in workings (1)
Rs. in 000
Cost or
valuation

Accumulated
depreciation

Carrying
amount

Leasehold property

220,000

220,000

Plant and equipment


(non-leased)

197,000

77,000

120,000

24,000

6,000

18,000

441,000

83,000

358,000

Leased vehicles

(6) Retained profits


At 1 October 2014 (trial balance)

19,300

Profit for the year

98,000

Retained profits at 30 September 2015

2.6

117,300

SARHAD SUGAR LIMITED


(a)

Sarhad Sugar Limited


Statement of profit or loss for the year ended 30 September 2015
Revenue (300,000 2,500)
Cost of sales (w (i))
Gross profit
Distribution costs
Administrative expenses (22,200 400 + 100 see note below)
Finance costs
Profit before tax
(Income tax expense (11,400 + (6,000 5,800 deferred tax))
Profit for the year

(b)

297,500
(225,400)
72,100
(14,500)
(21,900)
(1,000)
34,700
(11,600)
23,100

Sarhad Sugar Limited


Statement of financial position as at 30 September 2015
Assets
Non-current assets (w (ii))
Property, plant and equipment (43,000 + 38,400)
Development costs
Current assets
Inventory
Trade receivables

Emile Woolf International

81,400
14,800
96,200
20,000
43,100

103

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

63,100
Total assets
Equity and liabilities:
Equity
Share capital
Retained earnings (w (iii))

159,300

70,000
41,600
117,100
5,500

Revaluation reserve (w (iii))


Non-current liabilities
Deferred tax

6,000

Current liabilities
Trade payables (23,800 400 + 100 re legal action)
Bank overdraft
Current tax payable
Total equity and liabilities

23,500
1,300
11,400
36,200
159,300

Note: As it is considered that the outcome of the legal action against Sarhad
Sugar Limited is unlikely to succeed (only a 20% chance) it is inappropriate to
provide for any damages. The potential damages are an example of a
contingent liability which should be disclosed (at Rs.2 million) as a note to the
financial statements. The unrecoverable legal costs are a liability (the start of
the legal action is a past event) and should be provided for in full.
Workings (figures in brackets in Rs.000)
(i)
Cost of sales:

(ii)

Rs. in 000

Per trial balance


204,000
Depreciation (w (iii)) leasehold property
2,500
plant and equipment
9,600
Loss on disposal of plant (4,000 2,500)
1,500
Amortisation of development costs (w (iii))
4,000
Research and development expensed (1,400 + 2,400 (w (iii))
3,800

225,400

Non-current assets:
Leasehold property
Valuation at 1 October 2014
Depreciation for year (20 year life)
Carrying amount at date of revaluation
Valuation at 30 September 2015
Revaluation deficit
Plant and equipment per trial balance (76,600 24,600)
Disposal (8,000 4,000)
Depreciation for year (20%)
Carrying amount at 30 September 2015

Emile Woolf International

104

50,000
(2,500)

47,500
(43,000)

4,500

52,000
(4,000)

48,000
(9,600)

38,400

The Institute of Chartered Accountants of Pakistan

Answers

Rs. in 000

Capitalised/deferred development costs


Carrying amount at 1 October 2014 (20,000 6,000)
Amortised for year (20,000 x 20%)
Capitalised during year (800 x 6 months)
Carrying amount at 30 September 2015

14,000
(4,000)
4,800

14,800

Note: development costs can only be treated as an asset from the point
where they meet the recognition criteria in IAS 38 Intangible assets.
Thus development costs from 1 April to 30 September 2015 of Rs.48
million (800 x 6 months) can be capitalised. These will not be amortised
as the project is still in development.
The research costs of Rs.14 million plus three months development
costs of Rs.24 million (800 x 3 months) (i.e. those incurred before 1
April 2015) are treated as an expense.
(iii)

Movements on reserves
Revaluation
Retained
surplus
earnings
Rs. in 000
10,000
24,500
(6,000)
23,100
(4,500)

Balances at 1 October 2014


Dividend
Comprehensive income
Revaluation loss
Balances at 30 September 2015

2.7

5,500

41,600

BSZ LIMITED
BSZ Limited
Statement of financial position as at June 30, 2015

ASSETS
Fixed Assets
Property, plant & equipment
Intangible assets
Long term advances considered good
Current assets
Stocks in trade
Accounts receivable
Advances, deposits, prepayments and other
receivables
Cash at banks

Note

Rs. in
million

1
2

576
8
584
4

3
4
5

90
57
45
29
221
809

Emile Woolf International

105

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Rs. in
million
EQUITY AND LIABILITIES
Share capital and reserves
Authorized share capital
50,000,000 shares of Rs. 10 each

500

Issued, subscribed and paid up capital


40,000,000 shares of Rs. 10 each
Unappropriated profit

400
65
465
120

Surplus on revaluation of fixed assets


Non-current liabilities
Deferred taxation

40

Current liabilities
Short term loan
Account and other payables
Provision for taxation

85
82
17
184

809
Rs. in
million

Notes
1. Property, plant and equipment
Operating assets
Capital work in progress building

556
20
576

1.1 Operating assets


Cost/revalued amount
As of July 01 2014
Additions
Disposals
As at June 30 2015
Accumulated
depreciation
As of July 01 2014
For the year
(105 85) + 10% 15
8
/12)
(105 19) + 10% 8 3/12)
Disposals

Rs. in million
Freehold
land
375.0
-

Building
130.0
-

Machines
100.0
(15.0)

Fixtures
19.0
8.0
-

Total
624.0
8.0
(15.0)

375.0

130.0

85.0

27.0

617.0

19.5
6.5

22.5

5.9

47.9
18.1

9.5

(5.0)

2.1
-

(5.0)

26.0

27.0

8.0

61.0

Carrying amount

375.0

104.0

58.0

19.0

556.0

Depreciation rate

5%

10%

10%

As at June 30 2015

Emile Woolf International

106

The Institute of Chartered Accountants of Pakistan

Answers

1.2

Revaluation
During the year 2011, the first revaluation of freehold land was carried out.
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. It resulted in a surplus of Rs. 120 million over book values
which was credited to surplus on revaluation of fixed assets. Had there
been no revaluation, the value of freehold land would be Rs. 255 million.

1.3

Disposal of machine
Rs. in
million
13.0
15.0
(5.0)
(10.0)

Proceeds
Cost
Accumulated depreciation
Carrying amount
Profit on disposal

3.0
Note

2.

3.

Intangible Assets
Cost of computer software/license
Accumulated Amortization as of July 1, 2014
Amortization for the year
Accumulated Amortization as of June 30, 2015
Carrying value as at June 30, 2015
Amortization rate

10.0
1.0
1.0
2.0
8.0
10%

Accounts Receivable
Considered good
- Secured
- Unsecured
Considered doubtful
Less: Provision for bad debts

3.1

3.1 Provision for bad debts


Balance as at July 1, 2014
Provision made during the year
Amount written off during the year
Balance as at June 30, 2015 (Rs. 30 million x 10%)
4

Advances, Deposits, Prepayments and Other Receivables


Advances
- suppliers - considered good
- staffs
Deposits
Prepayments
Sales tax receivable

Emile Woolf International

107

2015
Rs. in
million

30
27
57
3
60
3
57
3.4
1.0
(1.4)
3.0

12
6
18
11
4
12
45

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Cash at banks
Cash at banks - current accounts
saving accounts

5.1

7
22
29

5.1: It carries interest / mark up ranging from 3% to 7% per annum.


6

2.8

Accounts and other payables


Accounts payable
Accrued liabilities

75
7
82

YASIR INDUSTRIES LIMITED


Yasir Industries Limited
Statement of Financial Position as at June 30, 2015
Assets
Non-current assets
Property, plant and equipment (W2)
Intangible assets (20 12)
Current assets
Inventories (W6)
Trade receivables (W5)

Rs. in
million
351.00
8.00
359.00
64.50
39.00
103.50
462.50

Equity and Liabilities


Equity
Issued, subscribed and paid up capital
Retained earnings (W4)

Revaluation surplus

41.25

Non-current liabilities
Redeemable preference shares
Debentures
Deferred taxation (W 10)

40.00
80.00
9.00
129.00

Current liabilities
Trade payables
Accrued expenses (W3)
Taxation
Bank overdraft

30.40
25.00
16.50
13.25
85.15

Total equity and liabilities

Emile Woolf International

120.00
87.10
207.10

462.50

108

The Institute of Chartered Accountants of Pakistan

Answers

Yasir Industries Limited


Statement of profit or loss for the year ended June 30, 2015
Rs. in
million
445.40
(250.72)
194.68
(20.05)
(40.38)
(9.10)
125.15
(30.00)
95.15
(19.50)

Sales revenue (W5)


Cost of sales (W7)
Gross profit
Distribution costs (W8)
Administrative expenses (W8)
Financial charges (W9)
Loss due to fraud
Profit before tax
Income tax expense (W10)
Profit for the year

75.65

Workings
(W1)

Leasehold property
Annual depreciation before the revaluation (230 40 years) = Rs. 5.75 million per
annum.
Depreciation this year has been charged incorrectly on cost (whereas it should
have been on the revalued amount).
This years charge must be added back
Dr
Cr
Accumulated depreciation
5.75
Cost of sales (50%)
2.88
Administrative expenses (30%)
1.72
Distribution costs (20%)
1.15

Carrying amount at the 30 June (as per trial balance)(230.00 40.25)


Add back depreciation incorrectly charged (see above)
Carrying amount of property at the start of the year
Revaluation surplus
Revalued amount of leasehold property
Less: WDV of leasehold property at revaluation
Revaluation surplus arising in the year
Transfer to retained earnings in respect of incremental depreciation
(Rs. 7 million Rs. 5.75 million)

Rs. in
million
189.75
5.75
195.5
Rs. in
million
238.00
195.50
42.50
(1.25)
41.25

Depreciation of revalued property


Number of years depreciation by the year end: (40.25 5.75) = 7 years.
Therefore, remaining useful life as at the year-end = 33 years
Revaluation was at the start of the year
Remaining useful life at the start of the year = 34 years
Depreciation charge based on the revalued amount (238/34 years) = Rs. 7 million

Emile Woolf International

109

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Dr
3.5
2.1
1.4

Cost of sales (50%)


Administrative expenses (30%)
Distribution costs (20%)
Accumulated depreciation
(W2)

Cr

7.00

Property, plant and equipment


Rs. in
million
231
120
351

Leasehold property (Rs. 238m 7)


Machines (Rs. 168.6 Rs. 48.6m)
(W3) Accrued Expenses

Rs. in
million
15.00
4.80
4.00
23.80

As per trial balance


Accrued interest on debentures (Rs. 80m 12% 6/12)
Dividend on preference shares (Rs. 40m 10%)
(W4)

Retained earnings
Rs. in
million
10.20
75.65
1.25
87.10

Balance as per trial balance


Profit for the year
Transfer from revalution surplus
(W5)

Sales and receivables

Given in the trial balance


Deduct revenue incorrectly recognised (sale or return)
Cost of sales
(W6)

Sales.
Rs. in
million
478.40
(27.00)
451.40

66.00
(27.00)
39.00

Closing inventory

Given in the question


Add back inventory held by customer on sale or return (100/120 27)
Cost of sales
(W7)

Rec.
Rs. m

Rs. in
million
42.00
22.50
64.50

Cost of sales

Opening inventory as of July 1, 2014


Purchases
Direct labour
Manufacturing overheads excluding incremental depreciation
Less: Closing inventory
Deduct depreciation incorrectly charged on cost
Add depreciation charged on revalued amount
Cost of sales

Emile Woolf International

110

Rs. in
million
38.90
175.70
61.00
39.00
(64.50)
(2.88)
3.50
250.10

The Institute of Chartered Accountants of Pakistan

Answers

(W8)

Administrative expenses and distribution costs

Given in the trial balance


Deduct depreciation incorrectly charged on cost
Add depreciation charged on revalued amount
Cost of sales
(W9)

Admin.
Rs. in
million
40.00
(1.72)
2.10
40.38

DIst/
Rs. m
19.80
(1.15)
1.40
20.05

Financial charges

Balance as per trial balance


Accrued interest on debentures (Rs. 80m 12% 6/12)
Preference dividend for the year (Rs. 40m 10%)
(W10) Taxation
Deferred taxation
Balance b/f
Charge for the year (balancing figure)
Balance c/f (30% Rs. 30 million temporary difference)
Tax expense

Rs. in
million
6.00
3.00
9.00
Rs. in
million
16.50
3.00
19.50

Current tax
Deferred tax (see above)

Emile Woolf International

Rs. in
million
0.30
4.80
4.00
9.10

111

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

2.9

SHAHEEN LIMITED
Shaheen Limited
Statement of financial position
As of June 30, 2015
Assets
Non-current assets
Property, plant and equipment (86,000 12,000 4,500)
Intangible assets (6,000 600)
Current assets
Stock in trade
Trade receivables (37,800 10,000)
Other receivables and prepayments (14,000 + 6,000)
Cash and bank balances

Equity and liabilities


Share capital and reserves
issued, subscribed and paid up capital
Unappropriated profit

12,000
6,000
5,000
9,998
32,998
157,425

Shaheen Limited
Statement of profit or loss and other comprehensive income
As of June 30, 2015
Sales revenue

Emile Woolf International

112

30,000
27,800
20,000
4,725
82,525
157,425

25,525
3,530
29,055

Current liabilities
Trade payables
Current portion of long term borrowings
Provision for litigation
Provision for taxation (2,000 + 9,988 2,000)

Financial charges
Profit before taxation
Taxation (W3)
Profit after taxation
Other comprehensive income net of tax
Total comprehensive income

69,500
5,400
74,900

60,000
35,372
95,372

Non-current liabilities
Long term borrowings (31,525 6,000)
Deferred taxation (5,000 1,470)

Cost of sales (W2)


Gross profit
Selling and distribution expenses (W2)
Administrative expenses (W2)

Rs. in 000

Rs. in 000
200,000
(104,708
)
95,292
(36,275)
(30,450)
(66,725)
(5,000)
23,567
(6,528)
17,039
17,039

The Institute of Chartered Accountants of Pakistan

Answers

Shaheen Limited
Statement of changes in equity
As of June 30, 2015

2015
Rs.000
Issued,
Retained
subscribed &
earnings
paid up capital
32,000*
60,000
(1,667)
60,000
30,333
17,039

Balance July 1, 2014


Correction of prior year error (10,000 20/120)
Balance July 1, 2014 (restated)
Comprehensive income for the year
Dividend for the year ended June 30, 2014
(60,000*0.20)

(12,000)

Balance June 30, 2015

60,000

35,372

*Retained earnings as at 01-07-09 = 20,000+ (20% of 60,000)=32,000


Workings
W1 Depreciation for the year
On building (36,000/20)
On plant and equipment (30,000 3,000)/10

1,800
2,700

Total

4,500

W2 Costs

Cost of
sales

Opening inventory
Costs as per Trial balance
Closing inventory
Depreciation (75%, 15%, and 10% of
Rs. 4,500)
Adjustment for goods sent on sale or
return, erroneously booked as sales
last year now returned during the year.
(10,000/1.2)
Amortization of export license
(6,000/5*0.5)

23,000
100,000
(30,000)
3,375

Selling and
Administrative
distribution
costs
costs
35,000

30,000

675

450

8,333
600
104,708

36,275

30,450

W3:Taxation
profit before tax
Disallowances and add backs

23,567
5,000

Taxable income

28,567

Current

9,998
(2,000)
(1,470)

Deferred

For the year (28,567*0.35)


For prior years (7,000 5,000)
For the year (5,000 800)*0.35

6,528

Emile Woolf International

113

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Financial accounting and reporting II

2.10

MOONLIGHT PAKISTAN LIMITED


(a)

Moonlight Pakistan Limited


Statement of Financial Position
As at December 31, 2015
Rs. in
million
ASSETS
Non-current assets
Property, plant and equipment (W2)

3,472

Current assets
Stocks in trade
Trade receivables
Cash and bank

758
702
354
1,814
5,286

EQUITY
Issued, subscribed and paid-up capital (W3)
Share premium (420 x 2/12)
Retained earnings (W3)

Surplus on revaluation of fixed assets

1,750
70
876
2,696
240

LIABILITIES
Non-current liabilities
Long term loan
Deferred tax (22 + 80 x 35%)
Provision for gratuity

1,600
50
23
1,673

Current liabilities
Creditor and other liabilities (544 + 96)
Income tax payable

640
37
677
5,286

(b)

Moonlight Pakistan Limited


Statement of profit or loss
For the year ended December 31, 2015

Sales
Cost of sales (W1)
Gross profit
Selling expenses (W1)
Administrative expenses (W1)

Financial charges (210 + 1,600 x 12% x 6/12)


Profit before taxation
Taxation (37 + 80 x 35%)
Profit after taxation

Emile Woolf International

Rs. in
million
3,608
(2,149)
1,459
252
270
522
937
306
631
65
566

114

The Institute of Chartered Accountants of Pakistan

Answers

W1: Cost of sales/selling expenses/admin expenses


Cost of
sales
As per trial balance
Depreciation building (60% : 25% : 15%) (W2)
Depreciation plant
Provision for gratuity (23-8) x 60%:20%:20%

1,784
69
287
9

Selling
Admin.
expenses
expenses
Rs. in million
220
250
29
17
3
3

2,149

252

270

W2: Property, plant and equipment


Land

Cost as at January 1, 2015


Accumulated depreciation

Building
Plant
Rs. in million

600
-

Revaluation (1,840 - (2,000 - 400 ))


Current year depreciation
(1,840/16)

Total

2,000
(400)

2,104
(670)

4,704
(1,070)

240

(287)

240
(402)

1,147

3,472

(115)
600

1,725

W3: Share Capital/Retained Earnings


Share capital
Retained earnings
Rs. in million
1,200
510
200
(200)
350
566

As per trial balance


Bonus issue (1200 6)
Right issue (420 x 10/12)
Profit for the year

1,750

2.11

876

FIGS PAKISTAN LIMITED


Figs Pakistan Limited
Statement of profit or loss and other comprehensive income
For the year ended 31 December 2015

Note
1
2

Sales
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other operating expenses
Other operating income
Profit from operations
Finance costs
Profit before tax
Taxation
Profit after tax
Other comprehensive income

3
4
5
6
7
8

Total comprehensive income for the year

Emile Woolf International

115

2015
Rs. in
million
44,758
(26,203)
18,555
(6,431)
(752)
(399)
30
11,003
(166)
10,837
(2,532)
8,305
8,305

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Figs Pakistan Limited


Notes to the financial statements
For the year ended 31 December 2015

Sales
Manufactured goods
Gross sales
Sales tax

Note

56,528
(10,201)
46,327

Imported goods
Gross sales
Sales tax

1,078
(53)
1,025
(2,594)
44,758

Sales discounts

Rs. in
million

Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125)
Stores and spares consumed
Salaries, wages and benefits (2,367 55%)
Utilities (734 85%)
Depreciation and amortizations (1.287 70%)
Stationery and office expenses (230 25%)
Repairs and maintenance (315 85%)
Opening work in process
Closing work in process
Opening finished goods (manufactured)
Closing finished goods (manufactured)
Finished goods (imported)
Opening stock
Purchases

2.1

22,229
180
1,302
624
901
58
268
25,562
73
(125)
25,510
1,210
(1,153)
25,567
44
658
702
(66)
636

Closing stock

26,203
2.1

Salaries, wages and benefits include Rs. 30 million (54 55%) and Rs. 24
million (44 55%) in respect of defined contribution plan and defined benefit
plan respectively.

Emile Woolf International

116

The Institute of Chartered Accountants of Pakistan

Answers

Distribution costs
Advertisement and sales promotion
Outward freight and handling
Salaries, wages and benefits (2,367 30%)
Utilities (734 5%)
Depreciation and amortization (1,287 20%)
Stationery and office expenses (230 40%)
Repairs and maintenance (315 5%)

3.2

Rs. in
million
4,040
1,279
710
37
257
92
16
6,431

3.1

4.1

Salaries, wages and benefits include Rs. 16 million (54 30%) and Rs. 13
million (4430%) in respect of defined contribution plan and defined benefit plan
respectively.
Administrative expenses
Salaries, wages and benefits (2,367 15%)
Utilities (734 10%)
Depreciation and amortization (1,287 10%)
Stationery and office expenses (230 35%)
Repairs and maintenance (315 10%)
Legal and professional charges
Auditor's remuneration

4.2

Salaries, wages and benefits include Rs. 8 million (54 15%) and Rs. 7 million
(4415%) in respect of defined contribution plan and defined benefit plan
respectively.
Rs. in
million
8
4
1
13

4.2

Auditor's remuneration
Audit fees
Taxation services
Out of pocket expenses

Other operating expenses


Donation
Worker's Profit Participation Fund
Worker Welfare Fund
Loss on disposal of property, plant and equipment

5.1

4.1

Rs. in
million
355
73
129
80
31
71
13
752

5.1

34
257
98
10
399

Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One
of the companys directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in
which a director or his spouse had any interest at any time during the year.

Emile Woolf International

117

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Other operating income


Income from financial assets
Dividend income
Return on savings account
Income from non-financial assets
Scrap sales
Finance costs
Finance charges on short term borrowings
Exchange loss
Finance charges on lease
Taxation
Current - for the year
Deferred (3,120 35%)

Emile Woolf International

Rs. in
million
12
2
16
30
133
22
11
166
1,440
1,092
2,532

118

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 3 IAS 7: STATEMENTS OF CASH FLOWS


3.1

KLEA
Statement of cash flows for the year ended 31st March 2015
Rs. in 000
Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation (W4)
Finance income
Interest expense

1,606
800
(50)
320

2,676
(400)
(1,200)
334

Increase in trade receivables


Increase in inventories
Increase in trade payables

Cash generated from operations


Interest paid
Income taxes paid (W1)

1,410
(320)
(630)

Net cash from operating activities


Cash flows from investing activities
Purchase of intangible assets (W2)
Purchase of property, plant and equipment (W3)
Proceeds from sale of equipment
Purchase of long-term investments
Finance income received

460
(300)
(1,600)
150
(200)
50

Net cash used in investing activities

(1,900)

Cash flows from financing activities


Proceeds from issue of share capital (1,000 + 278)
Payments to redeem debentures
Dividends paid

1,278
(400)
(400)

Net cash used in financing activities

478

Net decrease in cash and cash equivalents


Cash and cash equivalents at 1 April 2014

(962)
580

Cash and cash equivalents at 31 March 2015 (32 - 414)

(382)

(Note: Alternative classifications of the cash flows in accordance with IAS 7 should
receive full credit i.e. interest and dividends received as investing activities or
operating cash flows, interest and dividends paid as financing or operating cash
flows.)
Notes
(1)

Rs. in 000

Analysis of cash and cash equivalents


Cash on hand and balances with bank
Bank overdraft

2015
32
(414)

Cash and cash equivalents

(382)

Emile Woolf International

119

2014
580
-

580

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(2)

Material non-cash transactions


During the year land was re-valued upwards by Rs.1million
Rs. in 000

Workings
(W1) Taxation paid
Taxation creditor brought forward
Taxation expense for period

400
650

1,050
(420)

Taxation creditor carried forward

Taxation paid in the year

630

(W2) Intangible assets


Net book value brought forward
Capitalised in the year (from (i))

200
300

500
(200)

Amortisation charged in year (from (i))

Intangibles acquired in the year

300

(W3) Property, plant and equipment


Cost brought forward
Revaluation in year (from (ii))
Disposals (from (iii))
Additions (balancing figure)

3,000
1,000
(600)
1,600

Cost carried forward

5,000

(W4) Depreciation and amortisation


Depreciation (150 movement + 500 on disposal)
Amortisation
Profit on disposal (W5)
Charge shown in statement of profit or loss

650
200
(50)

800

Hence add back of depreciation and amortisation also takes account of the
profit on disposal of the plant and machinery.
(W5) Disposal
Cost of disposal
Accumulated depreciation

600
(500)

Net book value


Proceeds of sale

100
150

Profit on sale

Emile Woolf International

50

120

The Institute of Chartered Accountants of Pakistan

Answers

3.2

STANDARD INC
Statement of cash flows for the year ended 31 December 2015
Rs. in 000

Rs. in 000

Cash flows from operating activities


Net profit before tax (W7)
Adjustments for:
Depreciation, loss on sale (W1-5)
Interest receivable
Interest and premium payable

64,000
20,000
(450)
8,400

91,950

Operating profit
Increase in inventories
Increase in receivables
Increase in payables

(14,000)
(1,200)
14,440

91,190
(6,840)
(10,500)

Cash generated from operations


Interest paid
Tax paid (W6)
Net cash from operating activities
Cash flows from investing activities
Acquisition of long-term investment
Purchase of property plant and equipment
Receipt from sale of long-term investment
Interest received

73,850

(4,600)
(69,000)
4,000
450

Net cash used in investing activities

(69,150)

Cash flows from financing activities


Proceeds from issuance of shares
Redemption of long term loan
Dividends paid

70,000
(42,000)
(7,500)

Net cash used in financing activities

20,500

25,200

Net increase in cash and cash equivalents


WORKINGS
(1)

Balance b/d
Additions

Emile Woolf International

Plant and machinery account at cost


Rs.000
120,000
39,000

159,000

121

Disposals account
Balance c/d

Rs.000
8,000
151,000

159,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Fixtures and fittings account at cost

(2)

Rs.000
24,000
10,000

34,000

Balance b/d
Additions

Disposals account
Balance c/d

Rs.000
5,000
29,000

34,000

Fixed assets additions summary


Rs.000
Freehold property Rs.000(130,000 - 110,000)
Plant and machinery
Fixtures and fittings

(3)

Plant and machinery account depreciation

Disposals account
Balance c/d

(4)

Plant cost
Fittings cost

Rs.000
6,000
54,000

60,000

Rs.000
2,000
15,000

17,000

Balance b/d
Charge for year

Rs.000
13,000
4,000

17,000

Fixed assets disposals account


Rs.000
8,000
5,000

13,000

Emile Woolf International

Balance b/d
Charge for year

Rs.000
45,000
15,000

60,000

Fixtures and fittings account depreciation

Disposals account
Balance c/d

(5)

20,000
39,000
10,000

69,000

122

Plant depreciation
Fittings depreciation
Cash proceeds
Plant
Fittings
Depreciation underprovided
(bal fig)

Rs.000
6,000
2,000
3,000
1,000
1,000

13,000

The Institute of Chartered Accountants of Pakistan

Answers

(6)

Tax account

Cash paid (bal fig)


Balance c/f corporation tax

(7)

Rs.000
10,500
33,000

43,500

Rs.000
Balance b/f corporation tax 21,500
I&E account corporation tax 22,000

43,500

Net profit before tax


Note As profit before tax is required, reconstruct the statement of profit or
loss up to this figure.
Rs. in 000
Profit before tax
Taxation Corporation tax

64,000
(22,000)

42,000
(15,000)

27,000
14,000

41,000

Dividends
Retained profit for year
Balance b/f
Balance c/f

(8)

Cash and cash equivalents as shown in the statement of financial


position
Cash and cash equivalents consist of cash on hand and balances with banks.
2015

Cash at bank
Bank overdraft

Emile Woolf International

11,400

11,400

123

Rs. in 000
2014
Change
in
year
200
11,200
(14,000) 14,000

(13,800) 25,200

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.3

FALLEN
Statement of cash flows for the year ended 31 December 2015
Rs. in 000

Cash flows from operating activities


Net profit before tax
Adjustments for:
Depreciation, (W1-3)
Interest payable

4,625
1,472
152

6,249
186
(894)
(594)
324

5,271
(152)
(1,775)

Operating profit
Increase in deferred repairs provision
Increase in inventories
Increase in receivables
Increase in payables
Cash generated from operations
Interest paid
Tax paid (W5)
Net cash from operating activities

3,344

Cash flows from investing activities


Acquisition of long-term investment
Purchase of property plant and equipment
Receipt from sale of long-term investment

(198)
(3,800)
168

Net cash used in investing activities

(3,830)

Cash flows from financing activities


Proceeds from issuance of shares (W6-7)
Redemption of long term loan
Dividends paid

792
(560)
(544)

Net cash used in financing activities

(312)

(798)

Net increase in cash and cash equivalents

Rs. in 000

WORKINGS
(1)
Brought forward
Additions

Emile Woolf International

Leasehold premises (net)


5,700
1,300

7,000

124

Depreciation (to balance)


Carried forward

400
6,600

7,000

The Institute of Chartered Accountants of Pakistan

Answers

(2)
Brought forward
Additions

Plant (net)
3,780
2,500

Disposals
Depreciation (to balance)
Carried forward

6,280

(3)
Plant

Disposals
276

Cash
Loss on sale (to balance)

276

(4)
Cash (to balance)
Carried forward

(5)
Cash (to balance)
Carried forward
DT
CT

544
390

934

Brought forward
I&E account

1,775
202
1,730

Brought forward
DT
CT

138
2,038
1,531

3,707

Share capital
2,280

2,280

Brought forward
Cash (to balance)

(7)

Share premium

Carried forward

2,112

2,112

Emile Woolf International

234
700

934

Taxation

I&E account

Carried forward

168
108

276

Dividends

3,707

(6)

276
964
5,040

6,280

125

Brought forward
Cash (to balance)

1,800
480

2,280

1,800
312

2,112

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(8)

Long term loan

Cash (to balance)


Carried forward

(9)

560
1,240

1,800

Brought forward

1,800

1,800

Analysis of the balances of cash and cash equivalents as shown in the


statement of financial position
Cash and cash equivalents consist of cash on hand and balances with banks.
Rs. in 000

Cash at bank and in hand


Bank overdrafts

3.4

2015

2014

Change in
year

(222)

(222)

576

576

(576)
(222)

(798)

BIN QASIM MOTORS LIMITED


Note: figures in brackets are in Rs.000
Bin Qasim Motors Limited
Statement of cash flows for the year to 30 September 2015
Rs.000

Rs.000

Cash flows from operating activities


Net profit before interest and tax (3,198 1,479)
Adjustments for:
Depreciation buildings (W1)

1,719
80

plant (W1)

276

Loss on disposal of plant (W1)

86

442
442

Amortisation of government grants (W2)

(125)

Negligence claim previously provided

(120)

Operating profit before working capital changes

1,916

Increase in inventories (1,046 785)

(261)

Increase in accounts receivable (935 824)

(111)

Decrease in accounts payable (760 644)

(116)

Cash generated from operations

1,428

Interest paid (260 + 25 40)

(245)

Income tax paid (W4)


Dividends paid

(368)
(180)

Net cash from operating activities

635

Cash flows from investing activities

Emile Woolf International

126

The Institute of Chartered Accountants of Pakistan

Answers

Bin Qasim Motors Limited


Statement of cash flows for the year to 30 September 2015
Purchase of land and buildings (W1)
Purchase of plant (W1)
Purchase of non-current investments
Purchase of treasury bills (120 50)
Proceeds of sale of plant (W1)
Receipt of cash on servicing contracts (W2)
Investment income
Net cash used in investing activities
Cash flows from financing activities
Issue of ordinary shares (W3)
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period

Rs.000
(50)
(848)
(690)
(70)
170
175
120

Rs.000

(1,193)
300
(258)
122
(136)

Workings
(W1) Non-current assets
Rs.000
Land and buildings cost/valuation
Balance b/f
Revaluation surplus
Balance c/f
Difference cash purchase

1,800
150
(2,000)
(50)

Plant cost
Balance b/f
1,220
Disposal
(500)
Balance c/f
(1,568)
Difference cash purchase
(848)
Depreciation of non-current assets:
Building (760 680)
80
Plant (464 (432 244))
276
The plant had a carrying value of Rs.256,000 at the date of its disposal (500
cost 244 depreciation). As there was a loss on sale of Rs.86,000 (given in
question), the sale proceeds must have been Rs.170,000 (i.e. 256 86).
(W2) Deferred income
Balances b/f

current
non-current

(125)
(200)

Amortisation credited to cost of sales


Balances c/f current
non-current

100
275
375
175

Difference cash receipt

Emile Woolf International

(325)
125

127

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(W3) Share capital and convertible loan stock


A reconciliation of share capital, share premium and the revaluation reserve
shows the shares issued for cash:
Share
capital
Rs.000
Opening balance

(1,000)

Share
premium

Revaluatio
n reserve

Rs.000

Rs.000

(60)

Revaluation of land

(40)
(150)

Bonus issue 1 for 10

(100)

Conversion of loan stock (see below)

(100)

Closing balance

1,400

200

Difference issued for cash

100
(300)
460

100

90

nil

The 10% convertible loan stock had a carrying value of Rs.400,000 at the date
of conversion to equity shares. This would be taken as the consideration for
the shares issued which would be 100,000 Rs.1 shares (i.e. 400,000/100
25). This would increase issued share capital by Rs.100,000 and share
premium by Rs.300,000.
(W4) Income tax
Rs.000
Tax provision b/f

(367)

Deferred tax b/f


Statement of profit or loss tax charge

(400)
(520)

Tax provision c/f

480

Deferred tax c/f

439

Difference cash paid

Emile Woolf International

(368)

128

The Institute of Chartered Accountants of Pakistan

Answers

3.5

ITTEHAD MANUFACTURING LTD


(a)
Ittehad Manufacturing Ltd
Statement of cash flows for the year to 30 September 2015
Rs.m
Cash flows from operating activities
Net profit before interest and tax
Adjustments for:
Amortisation development expenditure (W1)
Depreciation property, plant and equipment
Loss on sale of plant
Increase in inventory (1,420 940)
Increase in accounts receivable (990 680)
Increase in accounts payable (875 730)
Decrease in deferred income (260 300)
Cash generated from operations
Interest paid (30 (15 5 accrual adjustments))
Income tax paid (W2)
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment (W3)
Capitalised development costs (W1)
Proceeds of sale of plant (W3)
Net cash from investing activities
Cash flows from financing activities
Issue of ordinary shares (W4)
Issue of loan notes (300 100)
Dividends paid
Net cash generated from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Rs.m
920
130
320
50
(480)
(310)
145
(40)
735
(20)
(130)
585

(250)
(500)
20
(730)

450
200
(320)
330
185
(115)
70

Workings
(W1) Development expenditure
Rs.m
Opening balance

100

Amount capitalised

500

Closing balance

(470)

Amortisation: balancing figure

Emile Woolf International

129

130

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(W2) Income tax


Opening balance: tax provision
Opening balance: deferred tax
Tax charged to statement of profit or loss
Closing balance: tax provision
Closing balance: deferred tax
Tax paid (cash payments)

Rs.m Rs.m
160
140
300
270
(130)
(310)
(440)
130

(W3) Property, plant and equipment


Opening balance
Revaluation surplus
Plant acquired
Depreciation
Closing balance
Disposal at net book value balancing figure
Disposal of plant:
Disposal at net book value (see above)
Loss on sale (given in the question)
Difference = Sale proceeds

Rs.m
1,830
200
250
(320)
1,960
1,890
70

70
(50)
20

(W4) Share capital


Rs.m
Opening balance, ordinary shares

500

Bonus issue 1 for 10 (from retained earnings)

(b)

50

Closing balance, ordinary shares

550
750

Difference: shares issued for cash (nominal value)

200

Plus increase in share premium (350 100)

250

Total cash proceeds of issue of ordinary shares

450

The cash flows generated from operations were Rs.685 million and are more
than enough to pay the interest costs and taxation, but these cash flows are
not as large as the equivalent profit figure. For most companies the operating
cash flows are higher than the profit before interest and tax due to the effects
of depreciation/amortisation charges (which are not cash flows). In the case of
Ittehad Manufacturing Ltd the depreciation/amortisation effect has been more
than offset by a much higher investment in working capital of Rs.645 million.
Inventory has increased by over 50% and accounts receivable by 45%. This
may be an indication of expanding activity, but it could also be an indication of
poor inventory management policy and poor credit control, or even the
presence of some obsolete inventory or unprovided bad accounts receivable.

Emile Woolf International

130

The Institute of Chartered Accountants of Pakistan

Answers

A cause of concern is the size of the dividends, which seem high at Rs.320
million. This is a very high distribution ratio, and it seems odd that the
company is returning such large amounts to shareholders at the same time as
they are raising finance. Rs.450 million has been received from the issue of
new shares and Rs.200 million from a further issue of loan notes.
The company has invested considerably in new plant (Rs.250 million) and
even more so in development expenditure (Rs.500 million). If management
has properly applied the capitalisation criteria in IAS 38 Intangible Assets, then
this indicates that they expect good future returns from the investment in new
products or processes. The net investment in non-current assets is Rs.680
million which closely correlates to the proceeds from financing of Rs.650
million. In general it is acceptable to finance increases in the capacity of noncurrent assets by raising additional finance, however operating cash flows
should finance replacement of consumed non-current assets.

3.6

WASEEM INDUSTRIES LIMITED


Waseem Industries Limited
Statement of cash flows for the year ended December 31, 2015
2015
Rs.m
Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation

64

W1

17

Gain on sale of fixed assets


Provision for gratuity
Interest expense

(3)
10
16
104

Increase/decrease in working capital


Increase in stocks-in-trade
Increase in trade debts
Decrease in advance, prepayments and other
receivables
Increase in trade and other payables
Cash generated from operations
Gratuity paid
Interest paid
Income taxes paid
Net cash from operating activities

Emile Woolf International

Workings

131

W2

(7)
(13)

(55-48)
(51-38)

6
22
8
112
(6)
(18)
(22)
66

W3
W4

W5
W6

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Cash flows from investing activities


Sale proceeds from sale of property, plant and
equipment
Purchase of property, plant and equipment
Increase in capital work in progress
Sale of long term investments
Net cash used in investing activities
Cash flows from financing activities
Payment of long term finances
Increase in short term finances
*Dividend paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalent at the beginning of the year
Cash and cash equivalent at the end of the year
W1: Profit before taxation
Unappropriated profit closing
Income tax expenses for the year 2015
Dividend (Rs. 125 million x 8%)

W2: Provision for gratuity


Provision for gratuity: Closing
Paid during the year 2015

W7
(20 -18)
(75-100)

(21)
7
(10)
(24)

W8
(13 - 6)

(9)
20
11

Rs.m
16
6
22
12
10

Less: Provision for gratuity - opening


Provision for the year
W3: Advances, prepayments and other receivables
Advances, payments and other receivables closing
Advance Tax - closing
Advances, payments and other receivables opening
Advance Tax opening
Decrease in advances, prepayments and other
receivables

132

(100)
(2)
25
(51)

Rs.m
85
19
10
114
(50)
64

Less: Unappropriated profit - opening

Emile Woolf International

26

Rs.m
37
(10)
27
40
(7)
33
(6)

The Institute of Chartered Accountants of Pakistan

Answers

W4: Trade and other payables


Trade and other payables closing
Accrued mark-up closing

Rs.m
66
(7)
59

Trade and other payables opening


Accrued mark-up opening

46
(9)
37
22

Increase in trade and other payables


W5: Interest paid
Accrued mark up opening
Expense for the year

Rs.m
9
16
25
(7)
18

Less: Accrued mark-up closing


Interest paid during the year
W6: Income taxes paid
Advances taxes closing
Provision for the year

Rs.m
10
19
29
(7)
22

Less: advance taxes - opening


Income taxes paid during the year
W7: Fixed assets purchase
Closing fixed assets
Depreciation for the year
Carrying amount of disposed off assets

Rs.m
242
17
23
302
(182)
100

Less: opening fixed assets


Purchase of fixed assets
W8: Payment of long term finances
Long term finance including current portion closing
(118 + 22)
Long term finance including current portion Opening
(94 + 25)
Payment during the year

Emile Woolf International

133

Rs.m
140
(119)
21

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.7

JALIB INDUSTRIES LIMITED


Jalib Industries Limited
Statement of cash flow for the year ended December 31, 2015
Rs. in
million
CASH FLOW FROM OPERATING ACTIVITIES
Net profit before tax
Adjustments for:
Depreciation
Loss on sale of fixed assets
Provision for gratuity
Financial charges
Bad debt expense
Working Capital Changes
Increase in creditors, accrued and other liabilities
([36.2 - 5] - [34.4 - 6])
Increase in stock in trade
Increase in trade debts
Decrease in advances and other receivables
[(42-2.2)-(37.4-3.6)]
Cash generated from operations
Gratuity paid
Income tax paid [3.6 + 104.6 - 2.2]
Financial charges paid (6 + 10.5 - 5)
Net cash from operating activities

191.40
27.70
4.60
15.50
10.50
1.20
250.90

2.80
(80.80)
(5.00)
6.00
173.90
(4.40)
(106.00)
(11.50)
52.00

Working 3

Working 4

Working 2

CASH FLOW FROM INVESTING ACTIVITIES


Capital expenditure incurred
Proceeds on sale of fixed assets
Net cash used in investing activities

(57.00)
10.40
(46.60)

Working 1

CASH FLOW FROM FINANCING ACTIVITIES


Issue of share capital
Repayment of long term loans (120 - 98)
Dividend paid (1.4 + 75 - 3)
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalent at the beginning of year
Cash and cash equivalent at the end of year

99.00
(22.00)
(73.40)
3.60
9.00
3.00
12.00

Working 5

WORKING 1
Rs. in
million
Capital expenditure incurred
Book value of PPE - Closing
Book value of CWIP - Closing
Add: Book value of assets sold during the year
Add: Depreciation for the year
Less: Book value of PPE - Opening
Less: Book value of CWIP - Opening

Emile Woolf International

134

129.40
22.50
15.00
27.70
(100.60)
(37.00)
57.00

The Institute of Chartered Accountants of Pakistan

Answers

WORKING 2
Rs. in
million
Gratuity paid during the year
Opening balance
Provision for gratuity

27.50
15.50
43.00
(38.60)
4.40

Less: Closing balance


Gratuity paid during the year
WORKING 3
Bad debts expense for the year
Closing balance (28.5 0.95) - 28.5
Less: Opening balance (24.7 0.95) - 24.7
Add: Bad debts written off
Bad debts expense for the year
WORKING 4
Increase in trade debts
Closing balance (28.5 0.95)
Less: Opening balance (24.7 / 0.95)
Add: Bad debts written off
WORKING 5
Issue of share capital
Closing balance of paid up capital
Closing balance of share premium
Less:
Opening balance of paid up capital
Opening balance of share premium
Issue of bonus shares (300 x 10%)

Emile Woolf International

135

1.50
(1.30)
1.00
1.20

30.00
(26.00)
1.00
5.00

396.00
45.00
(300.00)
(12.00)
(30.00)
99.00

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

3.8

APOLLO INDUSTRY LIMITED


Apollo Industry Limited
Statement of cash flows for the year ended December 31, 2015
Rs. in
000
Cash used in operating activities
Profit before taxation
Adjustment for: (non cash items / separately disclosed items)
Depreciation for the year (7,000-90-1,000)
Amortization for the year (1140+50-1100)
Provision for staff gratuity (1,400+300-1,190)
Profit on sale of fixed assets (2,800-1,000)
Mark-up on short term placement
Operating profit before working capital changes
Increase in working capital (12,125 15,700 + 4,200 6,250)
Cash generated from operations
Payment for staff gratuity
Payment for taxation (950 + 4,660 800)
Cash used in investing activities
Capital expenditure incurred
Proceeds from sale of PPE (1,200 + 1,800)
Acquisition of intangible assets
Mark-up received on short term placement
Long term deposits (400-300)

Note 1

Cash used in financing activities


Issue of ordinary share capital (25,000-2,000-20,000)
Net decrease in cash and cash equivalents
Opening balance: cash and cash equivalents

5,910
90
510
(1,800)
(1,000)
10,210
(5,625)
4,585
(300)
(4,810)
(525)
(13,110)
3,000
(50)
1,000
(100)
(9,260)
3,000
(6,785)
7,225
440

Closing balance: cash and cash equivalents


Note 1

6,500

Capital expenditure incurred:


Opening book value for PPE
Opening book value for CWIP
Book value of assets sold during the
year
Depreciation for the year (7,000-901,000)
Revaluation reserve adjustment
Closing book value for PPE
Closing book value for CWIP

Rs.000
25,500
10,000
(1,200)
(5,910)
(1,000)
(35,000)
(5,500)
(13,110)

Emile Woolf International

136

The Institute of Chartered Accountants of Pakistan

Answers

3.9

MARVEL ENGINEERING LIMITED


Marvel Engineering Limited
Cash Flow Statement
For the year ended 30 June 2015
Workings
Cash flows from operating activities
Profit before taxation
Adjustment for non-cash charges and other items:
Depreciation
Impairment of plant and machinery
Financial charges
Gain on sale of fixed assets
Gain on sale of investments
Dividend income
Provision for gratuity payable (55 - 50 + 6)
Working capital changes
Decrease / (increase) in current assets:
Increase in stock-in-trade (97 - 68)
Increase in trade debts (see tutorial note)
Other current assets (100 - 120)
Increase / (decrease) in current liabilities:
Trade and other payables ([73 - 7] - [56 - 3])
Cash generated from operations
Financial charges paid (3 + 75 - 7)
Income tax paid (5 + 21 + 21 - 12 - 15)
Gratuity paid
Net cash generated from operating activities
Cash flows from investing activities
Capital expenditure
Proceeds from sale of property, plant and equipment (5+2)
Proceeds from sale of investments (10+3)
Purchase of long term investments (130-100+10)
Dividend received
Net cash used in investing activities
Cash flows from financing activities
Insurance of ordinary shares
Proceeds from long term loan (330 - 110)
Payment of dividend (2 + (440 5%) - 4)
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalent at the beginning of the year
Cash and cash equivalent at the end of the year

Emile Woolf International

137

2015
Rs.m
88.00
50.00
11.00
75.00
(2.00)
(3.00)
(30.00)
11.00

(29.00)
(76.00)
20.00
13.00
128.00
(71.00)
(20.00)
(6.00)
31.00
1

(289.00)
7.00
13.00
(40.00)
30.00
(279.00)

40.00
220.00
(20.00)
240.00
(8.00)
39.00
31.00

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

W1: Capital expenditure


Closing balance
Add: Depreciation for the year
Add: Impairment against plant
Add: Disposal during the year
Less: Opening balance

Rs.m
633.00
50.00
11.00
5.00
(410.00)
289.00

W2: Issuance of ordinary shares


Closing balance of share capital
Closing balance of share premium
Less: Bonus shares issued (440 5%)
Less: Opening balance of share capital

494.00
8.00
(22.00)
(440.00)
40.00

Tutorial note:
The original ICAP answer did not simply adjust for the movement in trade debts but
added back the write off for bad debts (Rs. 6 million) and movement in the doubtful
debt provision (Rs. 4 million) and then adjusted for the movement in trade debt
before these write offs (Rs. 86 million).
As the trade debt contains the credit for the write off and the profit for the year
contains the debit it is easier to leave the expense in and adjust for the net
movement.
The following working was provided in the official answers.
WORKINGS (All amount in million rupees)
W1:
Closing balance
Add: Bad debts written off
Less : Opening balance

Emile Woolf International

(133 0.95) - 133


(57 0.95) - 57

138

Provision
for bad
debts
7.00
6.00
(3.00)
10.00

Trade
debtors
(133 0.95)
(57 0.95)

140.00
6.00
(60.00)
86.00

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 4 CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL


POSITION BASIC APPROACH
4.1

HALL
Consolidated statement of financial position as at 31 December 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment (35,000 + 20,000)
Goodwill
Current assets (16,000 + 14,000)

Equity and liabilities


Capital and reserves
Share capital
Retained earnings (W5)

55,000
3,000

58,000
30,000

88,000

10,000
16,000

26,000

Non-controlling interest (W4)


Long-term liabilities
8% Debenture loans (20,000 + 9,000)
Current liabilities (20,000 + 9,000)

4,000
29,000
29,000

88,000

WORKINGS
(1)

Group structure
Hall

75%

Stand

(2)

Net assets of Stand


Reporting
date
Rs.000
4,000
12,000
16,000

Share capital
Retained earnings

Emile Woolf International

139

Post
Date of
acquisition acquisition
Rs.000
4,000
8,000
4,000
12,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(3)

Goodwill
Rs.000
12,000
(9,000)

3,000

Cost of shares
Less
Net assets acquired (75% 12,000 (W2))

(4)

Non-controlling interest (25% 16,000 (W2))

Rs.000
4,000

(5)

Retained earnings
Rs.000
13,000
3,000

16,000

Hall Inc
Stand Inc (75% 4,000 (W2))

4.2

HASSLE
Consolidated statement of financial position as at 31 December 2015
Sundry net assets (207,500 + 226,600)

Rs.
474,100

474,100

Equity capital
Retained earnings (W5)

Non-controlling interests (W4)


Sundry liabilities (100,000 + 106,600)

120,000
123,500

243,500
24,000
206,600

474,100

WORKINGS
(1)

Group structure

Hassle

80%

Strife

Emile Woolf International

140

The Institute of Chartered Accountants of Pakistan

Answers

(2)

Net assets of Strife


Reporting
date
Rs.
50,000
70,000

Share capital
Retained earnings

120,000
(3)

Goodwill

Non-controlling interest

24,000

Retained earnings

Rs.

Hassle
Strife (80% (70,000 50,000) (W2))
Negative goodwill (W3)

4.3

60,000
(80,000)

(20,000)

Rs.

20% 120,000) (W2)


(5)

100,000
Rs.

Cost
Net assets acquired (80% 100,000) (W2)

(4)

Post
Date of
acquisition acquisition
Rs.
50,000
50,000
20,000

87,500
16,000
20,000

123,500

HYMN
Consolidated statement of financial position as at 31 December 2015
Rs.
Assets
Non-current assets
Property, plant and equipment
Goodwill
Current assets

170,000
29,000
275,000

474,000

Equity and liabilities


Shareholders equity
Share capital
Retained earnings (W5)

100,000
178,200

278,200
19,800
176,000

474,000

Non-controlling interest (W4)


Current liabilities

Emile Woolf International

141

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

WORKINGS
(1)

Group structure
Hymn

80%

Psalm

(2)

Net assets of Psalm


Reporting
date
Rs.
50,000
49,000

Share capital
Retained earnings

99,000
(3)

Goodwill

Non-controlling interest

(56,000)

(29,000)

19,800

Retained earnings

Rs.

Hymn
Psalm (80% 29,000 (W2))

Emile Woolf International

85,000

Rs.

20% 99,000 (W2)


(5)

70,000
Rs.

Cost of shares
Net assets acquired
Psalm Inc (80% 70,000) (W2)

(4)

Post
Date of
acquisition acquisition
Rs.
50,000
20,000
29,000

155,000
23,200

178,200

142

The Institute of Chartered Accountants of Pakistan

Answers

4.4

HANG
Consolidated statement of financial position as at 31 December 2015
Rs.
Assets
Non-current assets
Property, plant and equipment (240 + 180)
Goodwill
Current assets (250 + 196)

420,000
26,600
446,000

892,600

Equity and liabilities


Shareholders equity
Share capital
Share premium account
Retained earnings (W5)

200,000
25,000
198,000

423,000
87,600
382,000

892,600

Non-controlling interest (W4)


Current liabilities (225 + 157)

WORKINGS
(1)

Group structure
Hang

60%

Swing

(2)

Net assets of Swing Inc


31 Dec 31 Dec
2015
2014
Rs.
Rs.
Ordinary shares of Rs.1 each
Share premium account
Retained earnings

Emile Woolf International

90,000 90,000
49,000 49,000
80,000 50,000

219,000 189,000

143

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Reporting
date
Rs.
90,000
49,000
80,000

Share capital
Share premium
Retained earnings

219,000
(3)

Goodwill

(5)

140,000
(113,400)

26,600

Non-controlling interest

Rs.

40% 219,000 (W2)

87,600

Retained earnings

Rs.

Hang
Swing (60% 30,000 (W2))

4.5

189,000
Rs.

Cost
Net assets acquired (60% 189,000) (W2)

(4)

Post
Date of
acquisition acquisition
Rs.
90,000
49,000
50,000
30,000

180,000
18,000

198,000

HASH
Consolidated statement of financial position as at 31 December 2015
Sundry net assets (207,500 + 226,600)
Goodwill (W2)

Share capital
Retained earnings (W5)

Non-controlling interests (W4)


Sundry liabilities (100,000 + 106,600)

Emile Woolf International

144

Rs.000
434,100
8,800

442,900

120,000
92,300

212,300
24,000
206,600

442,900

The Institute of Chartered Accountants of Pakistan

Answers

WORKINGS
(1)

Group structure
Hash

80%

Stash

(2)

Net assets of Stash


Reporting
date
Rs.000
50,000

Share capital
Retained earnings:
At the start of the year
(70,000 24,000)
Profit for the first 9m
(24,000 9/12)

(3)

46,000

70,000

18,000
64,000

120,000

114,000

Goodwill

(5)

6,000

Rs.000

Cost
Net assets acquired (80% 114,000) (W2)

(4)

Post
Date of
acquisition acquisition
Rs.000
50,000

Non-controlling interest

100,000
(91,200)

8,800

Rs.000

20% 120,000) (W2)

24,000

Retained earnings

Rs.000

Hash
Stash (80% (70,000 64,000) (W2))

87,500
4,800

92,300

Emile Woolf International

145

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 5 CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL


POSITION COMPLICATIONS
5.1

HAIL
Consolidated statement of financial position as at 31 December 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment
Investments (68,000 65,000)
Goodwill (W3)
Current assets
Cash at bank and in hand
Trade receivables
Inventories

246,000
3,000
6,500
39,900
138,300
92,400

526,100

Equity and liabilities


Capital and reserves
Share capital
Capital reserve (W6)
Retained earnings (W5)

100,000
18,000
210,480

328,480
11,420

Non-controlling interest (W4)


Current liabilities
Trade payables
Proposed dividend

183,000
parent company
non controlling interest

3,000
200

3,200

526,100

WORKINGS
(1)

Group structure
Hail

90%

Snow

Emile Woolf International

146

The Institute of Chartered Accountants of Pakistan

Answers

(2)

Net assets of Snow


Reporting
date
Rs.000
50,000
5,000
20,000

Share capital
Share premium account
Revaluation reserve
Retained earnings
Per question
Proposed dividend

(3)

41,200
(2,000)
39,200

10,000

114,200

65,000

Rs.000
11,420

Retained earnings
Hail
Proposed dividend
Dividend receivable from Snow
Snow (90% 29,200 (W2))

(6)

Rs.000
65,000
(58,500)

6,500

Non-controlling interest
10% 114,200 (W2)

(5)

29,200

Goodwill
Cost of shares
Net assets acquired (90% 65,000) (W2)

(4)

Post
Date of
acquisition acquisition
Rs.000
50,000
5,000

Rs.000
185,400
(3,000)
1,800
26,280

210,480

Capital reserve
Rs.000
18,000

Snow (90% 20,000 (W2))

Emile Woolf International

147

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

5.2

HAIRY
Consolidated statement of financial position as at 31 December 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment

180,000

Current assets
Cash at bank and in hand
Investments
Receivables
Inventory (17,000 + 11,000 800)

Equity and liabilities


Capital and reserves
Share capital
Share premium account
Capital reserve
Retained earnings (W5)

15,500
3,000
91,700
27,200

317,400

100,000
20,000
23,000
102,900

245,900
16,500

Non-controlling interest (W4)


Current liabilities

55,000

317,400

WORKINGS
(1)

Group structure

Hairy

80%

Spider

Emile Woolf International

148

The Institute of Chartered Accountants of Pakistan

Answers

(2)

Net assets of Spider


Reporting
date
Rs.000
Share capital
Share premium account
Retained earnings
Per question
Unrealised profit

(3)

(4)

(5)

Post
Date of
acquisition acquisition
Rs.000

60,000
16,000

60,000
16,000

7,300
(800)
6,500

2,300

82,500

78,300

4,200

Goodwill

Rs.000

Cost of shares
Less Net assets acquired (80% 78,300 (W2))

55,000
(62,640)

(7,640)

Non-controlling interest

Rs.000

Share of net assets (20% 82,500 (W2))

16,500

Retained earnings

Rs.000

Hairy
Spider (80% 4,200 (W2))
Negative goodwill (W4)

91,900
3,360
7,640

102,900

Emile Woolf International

149

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

5.3

HARD
Consolidated statement of financial position as at 31 December 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment (225 + 175 17.5 (W6))
Goodwill (W3)
Current assets (271 + 157)

382,500
14,000
428,000

824,500

Equity and liabilities


Shareholders equity
Share capital
Share premium account
Retained earnings (W5)

100,000
15,000
260,500

375,500
76,000
373,000

824,500

Non-controlling interest (W4)


Current liabilities

WORKINGS
(1)

Group structure
Hard

60%

Soft

(2)

Net assets of Soft Inc

Share capital
Share premium account
Retained earnings

Emile Woolf International

150

31 Dec
2015
Rs.000

31 Dec
2014
Rs.000

100,000
10,000
80,000

100,000
10,000
50,000

190,000

160,000

Post
acquisition

30,000

The Institute of Chartered Accountants of Pakistan

Answers

(3)

Goodwill

Rs.000

Cost

110,000
Net assets acquired
60% 160,000 (W2)

(4)

(96,000)

14,000

Non-controlling interest

Rs.000

40% 190,000 (W2)


(5)

76,000

Retained earnings
Hard
Less

Rs.000

Adjustment re intra group transfer

Soft (60% (80,000 50,000 (W2))

(6)

260,000
(17,500)

242,500
18,000

260,500

PURP on non current assets


IS

Rs.000
50,000
(12,500)

37,500

Cost
Accumulated depreciation

SHOULD BE
Cost
Accumulated depreciation

100,000
(80,000)

20,000

Dr Retained earnings
Cr Non current assets

Emile Woolf International

151

17,500
17,500

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

5.4

HALE
(a)

Consolidated statement of financial position as at 31 December 2015


Rs.000
Assets
Non-current assets
Property, plant and equipment
(152,000 + 129,600 + 28,000 (W2))
Goodwill (W3)
Current assets
Bank (41,000 + 8,000)
Receivables (104,000 + 84,000)
Inventory (112,000 + 74,400 3,200 (W6))

309,600
61,400
49,000
188,000
183,200

791,200

Equity and liabilities


Capital and reserves
Share capital
Retained earnings (W5)

100,000
555,200

655,200
60,000
76,000

791,200

Non-controlling interest (W3)


Current liabilities (52,000 + 24,000)

WORKINGS
(1)

Group structure

Hale

128
160

= 80% ord
ordords
ords

Sowen

(2)

Net assets of Sowen


Reporting
date
Rs.000
160,000

Share capital
Fair value adjustment on
non-current assets
Retained earnings

Emile Woolf International

152

Post
Date of
acquisition acquisition
Rs.000
160,000

28,000
112,000

28,000
(11,000)

300,000

177,000

123,000

The Institute of Chartered Accountants of Pakistan

Answers

(3)

Goodwill
Rs.000
203,000
(141,600)

61,400

Cost of shares
Less
Net assets acquired (80% 177,000 (W2))

(4)

Non-controlling interest
Share of net assets (20% 300,000 (W2))

(5)

Rs.000
60,000

Retained earnings
Rs.000
460,000
(3,200)
98,400

555,200

Hale
PURP (W6)
Sowen (80% 123,000 (W2))

(6)

Unrealised profits
%
125
(100)

25

SP
Cost
GP

5.5

Rs.000
16,000
(12,800)

3,200

HELLO
Consolidated statement of financial position as at 31 December 2015
Rs.
Assets
Non-current assets
Property, plant and equipment (225 + 175 + 10 2)
Goodwill (W3)
Current assets (271 + 157)

428,000

844,000

Equity and liabilities


Shareholders equity
Called up share capital
Retained earnings (W5)

100,000
291,800

391,800
79,200
373,000

844,000

Non-controlling interest (W4)


Current liabilities

Emile Woolf International

408,000
8,000

153

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

WORKINGS
(1)

Group structure
Hello

60%

Solong

(2)

Net assets of Solong Inc

Share capital
Retained earnings
Per the question
Less: Fair value adjustment
for depreciation (2/10 10,000)
Fair value adjustment

(3)

Reporting
date
Rs.
100,000
90,000
(2,000)
88.000
10,000

60,000
10,000

198,000

170,000

Goodwill

Rs.

Cost

(5)

Rs.
110,000

Net assets acquired


60% 170,000 (W2)

(4)

Post
Date of
acquisition
acquisition
Rs.
100,000

(102,000)

8,000

Non-controlling interest

Rs.

40% 198,000 (W2)

79,200

Retained earnings

Rs.

Hello
Solong (60% (88,000 60,000 (W2))

Emile Woolf International

154

275,000
16,800

291,800

The Institute of Chartered Accountants of Pakistan

Answers

5.6

HASAN LIMITED
Hasan Limited
Consolidated statement of financial position as at 31 March 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment (W1)
Goodwill (W4)
Software (W1)
Investments (65 + 210)

4,020
480
1,440
275

Current assets
Inventories (W2)
Trade receivables (524 + 328)
Cash and bank (20 + 55 cash in transit)

6,215

1,274
852
75

2,201

Total assets

8,416

Equity and liabilities


Capital and reserves
Equity capital
Reserves
Share premium
Retained earnings (W3)

2,000
2,000
2,420

4,420

6,420
350

Non-controlling interest (W5)


Non-current liabilities
Government grants (230 + 40)
Current liabilities
Trade payables (475 + 472)
Operating overdraft
Income tax liability (228 + 174)

270
947
27
402

1,376

Total equity and liabilities

8,416

Emile Woolf International

155

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
(W1) Property, plant and equipment
Rs.000
Balance from question Hasan Limited

2,120

Balance from question Shakeel Limited

1,990

Fair value adjustment on acquisition (see below)

(120)

Over-depreciation re fair value adjustment year to 31 March 2015

30

4,020

A fair value of the leasehold based on the present value of the future
rentals (receivable in advance) would be the next (non-discounted)
payment of the rental plus the final three years as an annuity at 10%:
Rs.000
PV of rental receipts: Rs.80,000 + (Rs.80,000 2.50)

280

Carrying value on acquisition is

(400)

Fair value reduction of leasehold

(120)

The depreciation of the leasehold in Shakeel Limiteds accounts would be


Rs.100,000 per annum. However in the consolidated accounts it should be
Rs.70,000 (Rs.280,000/4). This would require a reduction in depreciation
of Rs.30,000 in the consolidated accounts for the next four years.
Software:
Shakeel
Limiteds
accounts
Capitalised amount
Depreciation to
31 March 2014
Value at date of
acquisition
Depreciation to
31 March 2015
Carrying value
31 March 2015

Consolidated
figures

Rs.000

Rs.000

2,400

2,400

(300)

8 year life

2,100

(480)

1,920

(300)

(480)

1,800

Difference

5 year life
180 fair
value adjustment
180 additional
amortisation

1,440

(W2) Inventories
Rs.000
Amounts given in the question (719 + 560)
Unrealised profit in inventories (25 25/125)

1,279
(5)

1,274

Emile Woolf International

156

The Institute of Chartered Accountants of Pakistan

Answers

(W3) Retained earnings


Rs.000
Retained profits of Shakeel Limited, 31 March 2015

1,955

Adjustments:
Excess charge for leasehold depreciation
Insufficient charge for Software amortisation
Unrealised profit in inventory (W2)

30
(180)
(5)

Adjusted retained profits at 31 March 2015


Retained earnings of Shakeel Limited at 1 April 2014

1,800
2,200

Shakeel Limited: loss for the year (post-acquisition loss)

(400)

Rs.000
Parent company share of post-acquisition loss (90%)
Hasan Limited reserves at 31 March 2015
Goodwill impairment

(360)
2,900
(120)

Consolidated retained profits at 31 March 2015

2,420

(W4) Goodwill
Rs.000
At acquisition date
Shares of Shakeel Limited

1,500

Share premium of Shakeel Limited


Retained earnings of Shakeel Limited
Fair value adjustments:
Leasehold (W1)

500
2,200
(120)

Software (W1)

(180)

3,900

Acquired by Hasan Limited (90%)


Cost of investment

3,510
4,110

Goodwill at acquisition

600

Impairment

120

Goodwill at 31 March 2015

480

Emile Woolf International

157

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(W5) Non-controlling interests


Rs.000
Share capital of Shakeel Limited

1,500

Share premium of Shakeel Limited

500

Adjusted retained earnings of Shakeel Limited, 31 March


2015 (W3)
Fair value adjustments:
Leasehold
Software

1,800

(120)
(180)

Total net assets at 31 March 2015

3,500

Non-controlling interests (10%)

350

(W6) Elimination of current accounts:


Rs.000
Shakeel Limiteds current account with Hasan Limited per
question
Deduct cash in transit regarding this balance

75
(15)

Adjusted figure to cancel

60

(W7) Elimination of intra-group loan:


Rs.000
Investment in Hasan Limiteds books

200

Deduct repayment in transit

(40)

Non-current liability in Shakeel Limiteds books

160

Emile Woolf International

158

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 6 CONSOLIDATED ACCOUNTS: STATEMENTS OF


COMPREHENSIVE INCOME
6.1

HARRY
Consolidated statement of profit or loss for the year ended 31 December 2015
Rs.000
Revenue
Cost of sales

1,410
(733)

677
(90)
(100)

487
9
(22)

474
(165)

309
(15)

294

Gross profit
Distribution costs
Administrative expenses
Operating profit
Investment income
Finance costs
Profit before tax
Income tax expense
Profit after tax
Non-controlling interest (W3)
Profit

Movement on consolidated retained earnings for the


year ended 31 December 2015
Retained earnings at 1 January 2014 (W4)
Retained earnings for the year
Dividends
Retained earnings at 31 December 2015 (W5)

127
294
(50)

371

WORKINGS
(1)

Group structure

Harry

75%

Sally

Emile Woolf International

159

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(2)

Consolidated statement of profit or loss

Revenue
C of S

per Q
PURP
Distribution costs
Administrative expenses
Investment income (20 15)
Interest payable
Tax
PAT
(3)

Harry
Rs.000

Sally Adj
Rs.000 Rs.000

Consol
Rs.000

1,120
(610)
(3)
(50)
(55)
5
(18)
(140)

390
(220)

(40)
(45)
4
(4)
(25)

60

1,410

(100)
100

(733)
(90)
(100)
9
(22)
(165)

Non-controlling interest
Rs.000

25% 60,000 (W1) or as per PAT in question

15

(4)

Reserves brought forward


Rs.000
Harry
Sally (75% (45 9))

(5)

100
27

127

Reserves carried forward (proof)


Rs.000
Harry
PURP
Sally (75% (85 9))

(6)

317
(3)
57

371

Inter-company dividend
Rs.000
Payable by Sally
Receivable by Harry (75% 20)

Emile Woolf International

160

20

15

The Institute of Chartered Accountants of Pakistan

Answers

6.2

HORNY
Consolidated statement of profit or loss for the year ended 31 December
2015
Rs.000
Revenue
Cost of sales

362,000
(169,050)

192,950
(93,817)

99,133
13,100
3,800

116,033
(48,400)

67,633
(2,996)

64,637

Gross profit
Operating costs
Operating profit
Investment income
Negative goodwill
Profit before tax
Income tax
Profit after tax
Non-controlling interest (W3)
Profit
Movement on consolidated retained earnings for the year ended
31 December 2015

Rs.000
Retained earnings at 1 January 2015
Retained profit for the year
Dividend
Retained earnings at 31 December 2015

80,200
64,637
(20,000)

124,837

WORKINGS
(1)

Group structure
Horny

75% (acq 31 August 2005)

Smooth

Emile Woolf International

161

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(2)

Consolidation schedule
Horny Smooth Adj
Consol
4
12
Rs.000 Rs.000 Rs.000 Rs.000
Revenue
Cost of sales

304,900 65,100 (8,000) 362,000


(144,200) (32,850) 8,000 (169,050)

Operating costs
Investment income
of H
of S (all of it)

(76,450) (17,367)

Tax

(42,900)

(93,817)

10,500

PAT

2,600

13,100

(5,500)

11,983

(48,400)

(3)

Non-controlling interest

@ 25%

= 2,996

(4)

Consolidated retained earnings carried forward - proof


Rs.000
Horny
Simpson (11,983 2,996)
Negative goodwill

Emile Woolf International

112,050
8,987
3,800

124,837

162

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Answers

6.3

HERON
Consolidated statement of financial position as at 30 June 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment (31,000 + 15,000)
Current assets (23,000 + 11,000)

34,000

80,000

Equity and liabilities


Shareholders equity
Share capital
Share premium account
Retained earnings (20,000 + (

46,000

10,000
5,000
2
18,500))
3

32,333

47,333

1
Non-controlling interest (3 20,000)

6,667

Non-current liabilities
Current liabilities (5,000 + 6,000)

15,000
11,000

80,000

Consolidated statement of profit or loss for the year ended 30 June 2015
Rs.000
Revenue (30,000 + 25,000)
Cost of sales (9,000 + 10,000)

55,000
(19,000)

36,000
(4,200)
(3,800)
(2,000)

26,000
(6,000)

Gross profit
Distribution costs (3,000 + 1,200)
Administrative expenses (1,000 + 2,800)
Finance costs
Profit before tax
Income tax expense (3,000 + 3,000)
Profit for the period
20,000
1
Non-controlling interest (3 8,000)

(2,667)

Profit for the financial year attributable to the members of Heron Inc
17,333

Consolidated statement of changes in equity for the year ended 30 June 2015
(extract)
2
Retained earnings brought forward (8,000 + (3 10,500))
Profit for the financial year attributable to the members of Heron Inc
Retained earnings carried forward

Emile Woolf International

163

15,000
17,333

32,333

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

6.4

HANKS
Consolidated statement of financial position as at 31 December 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment
(32,000 + 25,000 + 20,000 + 6,000)
Goodwill

83,000
4,500

87,500

Current assets
Cash at bank and in hand (9,500 + 2,000 + 4,000)
Receivables (20,000 + 8,000 + 17,000)
Inventory (30,000 + 18,000 + 18,000 2,100)

15,500
45,000
63,900

124,400

211,900

Total assets
Equity and liabilities
Share capital
Share premium account
Retained earnings (W5)

40,000
6,500
88,300

134,800

Non-controlling interest (W4)

28,100

Current liabilities
Trade payables (23,500 + 6,000 + 17,000)
46,500
Proposed dividends to minority shareholders (2,500 2,000)
500
to Hankss shareholders
2,000

Total equity and liabilities

49,000

211,900

Consolidated statement of profit or loss for the year ended 31 December 2015
Rs.000
Revenue (W6)
Cost of sales (W6)

310,000
(159,100)

150,900
(51,000)
(29,500)

70,400
(24,000)

46,400
(9,200)

37,200

Gross profit
Distribution costs (W6)
Administrative expenses (W6)
Profit before taxation
Tax (W6)
Profit after taxation
Non-controlling interest (W6)
Profit

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Answers

Statement of movements on reserves for the year ended 31 December 2015


Share
premium
account
Rs.000

Share
Capital
At 1 January 2015
Profit for the year
Dividends (proposed)
At 31 December 2015

40,000

6,500

40,000

6,500

Retained
earnings
Rs.000

Total
Rs.000

53,100 (W7)
99,600
37,200
37,200
(2,000)
(2,000)

88,300
134,800

WORKINGS
(1)

Group structure
Hanks
80%

Streep

(2)

60%

Scott

Net assets
Streep
Reporting
date
Rs.000
10,000

Share capital
Retained earnings
Per question
Proposed dividend

Post
Date of
acquisition acquisition
Rs.000
10,000

37,000
(2,500)
34,500

7,500

44,500

17,500

27,000

Scott
Reporting
date
Rs.000
15,000
27,000
6,000

Share capital
Retained earnings
Revaluation reserve

48,000

Emile Woolf International

165

Post
Date of
acquisition acquisition
Rs.000
15,000
3,000
24,000
6,000
24,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(3)

Goodwill on Streep
Rs.000
20,500
(14,000)

6,500

Cost of shares
Net assets acquired (80% 17,500) (W2)

Of which:
Written off by start of the year (6,500 5,000)
Written off by end of the year (6,500 4,500)
Recognised as impairment during the year (balancing figure)

1,500
2,000

500

Goodwill on Scott
Rs.000
13,000
(14,400)

(1,400)

Cost of shares
Net assets acquired (60% 24,000 (W2))

(4)

Non-controlling interest
Rs.000
8,900
19,200

28,100

Streep (20% 44,500 (W2))


Scott (40% 48,000 (W2))

(5)

Consolidated retained earnings c/f


Rs.000
Hanks
Dividend receivable from Streep (80% of 2,500)
Proposed dividend
Streep (80% 27,000 (W2))
Scott (60% 24,000 (W2))
30
PURP ((5,200 + 3,900) 130 )
Goodwill impairment Streep
Negative goodwill Scott

Emile Woolf International

166

55,000
2,000
(2,000)
21,600
14,400
(2,100)
(2,000)
1,400

88,300

The Institute of Chartered Accountants of Pakistan

Answers

(6)

Consolidation schedule
Hanks Streep
Rs.000 Rs.000
Sales revenue
C of S per Q
PURP (W5)
Distrib
(51,000)
Admin
(29,500)
Tax
PAT
Non-controlling interest in
profit after tax

(7)

Scott
Adj
Consol
Rs.000 Rs.000 Rs.000

125,000 117,000 82,000 (14,000) 310,000


(65,000) (64,000) (42,000) 14,000
(2,100)
(159,100)
(21,000) (14,000) (16,000)
(14,000)

(8,000) (7,000)

(10,000) (9,000) (5,000)



22,000 12,000
@20%

4,400 +

@40%

4,800

(500)
(24,000)

9,200

Consolidated retained earnings b/f


Hanks
Share of post acquisition profits of Streep (80% (15,000 7,500))
Share of post acquisition profits of Scott (60% (15,000 3,000))
Goodwill impairment - Streep
Negative goodwill credited

Emile Woolf International

167

Rs.000
40,000
6,000
7,200
(1,500)
1,400

53,100

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 7 TANGIBLE NON-CURRENT ASSETS (IAS 16: PROPERTY,


PLANT AND EQUIPMENT AND IAS 23: BORROWING COSTS)
7.1

ROONEY
(a)

Borrowing costs
IAS 23 should be applied in accounting for borrowing costs.
Borrowing costs are recognised as an expense in the period in which they are
incurred unless they are capitalised in accordance with IAS 23 which says that
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset can be capitalised as part of the cost of that
asset.

A qualifying asset is an asset that necessarily takes a substantial period


of time to get ready for its intended use or sale.

Borrowing costs that are directly attributable to acquisition, construction


or production are taken to mean those borrowing costs that would have
been avoided if the expenditure on the qualifying asset had not been
made.

When an enterprise borrows specifically for the purpose of funding an asset,


the identification of the borrowing costs presents no problem as the amount
capitalised is the actual borrowing costs net of any income earned on the
temporary investment of those borrowings.
If funds are borrowed, generally, the amount of borrowing costs eligible for
capitalisation is determined by applying a capitalisation rate to the
expenditures on that asset calculated as the weighted average of the
borrowing costs applicable to general borrowings.
IAS 23 also contains rules on commencement of capitalisation, suspension of
capitalisation and cessation of capitalisation.
Amount capitalised

Rs.000

Cost of manufacture
Interest capitalised (Rs.20m 5% 2 years)

28,000
2,000

30,000

(b)

Accounting
Rule
IAS 16 requires that each part of an item (that has a cost that is significant in
relation to the total cost) is depreciated separately. Therefore the cost
recognised at initial recognition must be allocated to each part accordingly.

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Answers

Accounting
31st March 2016

(i)

Hydraulic system
Frame

Carrying
value
1.4.2015

Depreciation

Carrying
value
31.3.2016

Rs.000
9,000
21,000

Rs.000
3,000
2,625

Rs.000
6,000
18,375

30,000

5,625

24,375

Revaluation loss
(to profit and loss)

(3,375)

Fair value.

21,000

The carrying value of the assets should be written down by a factor of


21,000/24,375. This gives a carrying value for the hydraulic system (in
Rs.000) of 5,169 and for the frame 15,831.
The hydraulic plant should be depreciated over two more years and the
frame over 7 more years.
31st March 2017

(ii)

Carrying Depreciation
value
charge
1.4.2016
Hydraulic system
Frame

Carrying
value
31.3.2017

Rs.000
5,169
15,831

Rs.000
2,585
2,262

Rs.000
2,584
13,569

21,000

4,847

16,153
19,600

Revalued amount

Total gain

3,447

To statement of profit
or loss
Other comprehensive
income

3,375
72

19,600

Fair value

The total revaluation gain is 3,447. Of this total amount, 3,375 reverses
the loss in the previous year and is therefore reported in profit and loss for
the year. The remaining 72 is reported as other comprehensive income.
(Tutorial note: Deferred tax is ignored by this question.)

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169

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Financial accounting and reporting II

7.2

EHTISHAM
IAS 16 permits assets to be carried at cost or revaluation. Where the latter is
chosen, the asset must be stated at its fair value.
The original depreciation was Rs. 40,000 (Rs. 1,000,000/25 years) per annum.
On 31st March 2014 the asset is two years old. Its carrying value before revaluation
was therefore Rs.1million less accumulated depreciation of Rs.80,000 (2/25 Rs. 1
million).
Rs.
1,000,000

Cost/valuation
Accumulated depreciation

(80,000)

Net book value

920,000

In order to effect the revaluation, the cost is uplifted to fair value of Rs.1.15m, the
accumulated depreciation is eliminated, and the uplift to the net book value is
credited to a revaluation surplus account.
Debit
150,000
80,000

Cost/valuation
Accumulated depreciation

Credit

230,000

Revaluation surplus
The impact of the journal is as follows:
Before
1,000,000

Cost/valuation
Accumulated depreciation

(80,000)

Net book value

920,000

Adjustment
150,000

After
1,150,000

80,000

nil
1,150,000

The asset is depreciated over its remaining useful economic life of 23 years giving a
charge of Rs. 50,000 (Rs. 1,150,000/23 years) per annum in the year to 31st March 2015.
Debit
50,000

Statement of profit or loss

Credit
50,000

Accumulated depreciation
This results in a carrying value as at 31st March 2015 of:
Rs.
1,150,000

Cost/valuation

(50,000)

Accumulated depreciation

1,100,000

Net book value

Transfer from revaluation surplus to retained earnings


As a result of the revaluation, the annual depreciation has increased from Rs.40,000
to Rs.50,000. This extra depreciation of Rs.10,000 is transferred from the
revaluation reserve to accumulated profits each year.
Debit
10,000

Revaluation surplus

10,000

Accumulated profits

Emile Woolf International

Credit

170

The Institute of Chartered Accountants of Pakistan

Answers

By the 31st March 2015, the balance remaining on the revaluation reserve will be
Rs.220,000.
Surplus recognised at 31 March 2014

Rs.
230,000

Transfer to accumulated profits

(10,000)

Net book value

220,000

The fall in property values at the year-end. The asset must be revalued downwards
to Rs.0.8million, a write-down of Rs.300,000.
Rs.220,000 of this is charged against the revaluation reserve relating to this asset,
and the remaining Rs.80,000 must be charged against profits.
The reduction of the carrying amount of the asset is achieved by removing the
accumulated depreciation and adjusting the asset account by the balance.
Debit
220,000

Revaluation surplus
Statement of profit or loss

Credit

80,000
350,000

Asset at valuation
Accumulated depreciation

50,000

The impact of the journal is as follows:


Before
1,150,000

Cost/valuation

(50,000)

Accumulated depreciation

1,100,000

Net book value

Adjustment
350,000
50,000

After
800,000
nil
800,000

This balance is depreciated over the remaining useful life of the asset (22 years).

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171

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Financial accounting and reporting II

7.3

CARLY
Financial statements for the year ended 31 December 2015 (extract)
Property, plant and equipment

Cost/valuation
At 1 January 2015
Revaluation
Additions (W2)
Disposals
At 31 December 2015
Accumulated depreciation
At 1 January 2015
Charge for the year (W1)
Revaluation
Disposals
At 31 December 2015
Carrying amount
At 31 December 2014
At 31 December 2015

Land and
buildings
Rs.

Plant and
machinery
Rs.

1,500,000
250,000
-

340,500
17,550
(80,000)

Computer
equipment
Rs.

Total
Rs.

617,800
-

2,458,300
250,000
17,550
(80,000)

1,750,000

278,050

617,800

600,000
20,000
(620,000)
-

125,900
51,191
(57,000)

505,800
44,800
-

1,231,700
115,991
(620,000)
(57,000)

nil

120,091

550,600

900,000

1,750,000

2,645,850

214,600

157,959

112,000

67,200

670,691

1,226,600

1,975,159

Workings
(1) Depreciation charges
Buildings = (1,500,000 500,000) 2% = 20,000.
Plant and machinery:
Rs.
New machine (17,550 25% /12)
Existing plant (((340,500 80,000) (125,900 57,000)) 25%)
9

3,291
47,900

51,191

Computer equipment = 112,000 40% = Rs.44,800


(2)

Cost of new machine


Rs.
Purchase price (20,000 3,000 1,000)
Delivery costs
Installation costs
Interest on loan taken out to finance the purchase

16,000
500
750
300

17,550

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The Institute of Chartered Accountants of Pakistan

Answers

7.4

ADJUSTMENTS LIMITED
(a)

Lathe
The lathe was purchased in 2009 and was originally being written off over an
estimated useful life of twelve years. As at 1 January 2015 six of the years
have elapsed with a further six years remaining. It was decided that the
machine will now only be usable for a further four years.
IAS 16 Property, plant and equipment requires that where the original
estimate of useful life is revised, adjustments should be made in current and
future periods (not in prior periods). The unamortised cost of the asset should
be charged to revenue over the remaining useful life of the asset. The net
book value of Rs.75,000 should therefore be charged over the remaining four
years of useful life, giving an annual depreciation charge of Rs.18,750.
The revision is not a change in accounting policy, or a fundamental error but a
change in accounting estimate. It is therefore not appropriate to deal with any
excess depreciation by adjusting opening retained earnings.

(b)

Grinder
The grinder was purchased in 2012 and was originally being depreciated on a
straight line basis. It has now been decided to depreciate this on the sum of
digits basis.
IAS 16 requires that depreciation methods be reviewed periodically and if
there is a significant change in the expected pattern of economic benefits, the
method should be changed. Depreciation adjustments should be made in
current and future periods. This change might be appropriate if, for instance,
usage of the machine is greater in the early years of an assets life when it is
still new and consequently it is appropriate to have a higher depreciation
charge.
If the change is implemented, the unamortised cost (the net book value) of the
asset should be written off over the remaining useful life commencing with the
period in which the change is made. The depreciation charge for the
remaining life of the asset will therefore be as follows.
Year

No of digits

2015
2016
2017
2018
2019
2020
2021

7
6
5
4
3
2
1

28

1/2 7 (7 + 1)

7/28 Rs.70,000
6/28 Rs.70,000

Depreciation
Rs.
17,500
15,000
12,500
10,000
7,500
5,000
2,500

Rs. 70,000

Disclosure will need to be made in the accounts of the details of the change,
including the effect on the charge in the year.

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173

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(c)

Leasehold land
IAS 16s allowed alternative treatment in respect of measurement of property
plant and equipment (subsequent to initial recognition), is that of revaluation.
Revaluation is made at fair value.
Where any item of property plant or equipment is revalued, the entire class to
which the asset belongs should be revalued. Revaluations must be kept up to
date. Where there are volatile movements in fair value, the revaluation should
be performed annually. Where there are no such movements, revaluations
every three to five years may be appropriate.
Accumulated depreciation at the date of revaluation is either
(i)

restated proportionately with the change in the gross carrying amount so


that the carrying amount after the revaluation equals the revalued
amount (e.g. where revaluations are made to depreciated replacement
cost using indices)

(ii)

eliminated against the gross carrying amount of the assets and the net
amount restated to the revalued amount of the asset (e.g. where
buildings are revalued to their market value).

IAS 16 requires that the subsequent charge for depreciation should be based
on the revalued amount. The annual depreciation will therefore be Rs.62,500,
i.e. Rs.1,500,000 divided by the 24 years of remaining life.
There will then be a difference between the revalued depreciation charge and
the historical depreciation charge.
The resulting excess depreciation may be dealt with by a movement in
reserves, i.e. by transferring from the revaluation reserve to retained earnings
a figure equal to the depreciation charged on the revaluation surplus each
year.

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174

The Institute of Chartered Accountants of Pakistan

Answers

7.5

FAM
Accounting policies
(a)

Property, plant and equipment is stated at historical cost less depreciation, or


at valuation.

(b)

Depreciation is provided on all assets, except land, and is calculated to write


down the cost or valuation over the estimated useful life of the asset.
The principal rates are as follows.
Buildings
Plant and machinery
Fixtures and fittings

Fixed asset movements

Cost/valuation

2% pa straight line
20% pa straight line
25% pa reducing balance

Land
Plant
Fixtures, Payments on
and
and
fittings, account and
buildings machinery tools and assets in the Total
equipment course of
construction

Rs.000 Rs.000

Cost at 1 January 2015


Revaluation adjustment
Additions
Reclassifications
Disposals

900 1,613
600

154
100

(277)

Cost at 31 December 2015 100 1,490
2015 valuation
1,500

Depreciation
At 1 January 2015
80
458
Revaluation adjustment
(80)

Provisions for year (W2)


17
298
Disposals

(195)

At 31 December 2015
17
561

Net book value


At 31 December 2015

At 31 December 2014

Rs.000 Rs.000
390

40

(41)

389

Rs.000

91
2,994

600
73 (W1) 267
(100)

(318)

64
2,043
1,500

140

70
(31)

179

1,583
929

210

64

2,786

820 1,155

250

91

2,316

678
(80)
385
(226)

757

Land and buildings have been revalued during the year by Messrs Jackson &
Co on the basis of an existing use value on the open market.

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175

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

The corresponding historical cost information is as follows.


Land and buildings
Rs.000
Cost
Brought forward
Reclassification

900
100

1,000

Carried forward
Depreciation
Brought forward
Provided in year

80
10

90

910

Carried forward
Net book value

WORKINGS
(1)

Additions to assets under construction


Deposit on computer

Rs.000
53
20

73

Rs.000

(2)

600
Depreciation on buildings 40 + (100 2%)
2% straight line depreciation is equivalent to a 50 year life.
The buildings are ten years old at valuation and therefore
have 40 years remaining.
Depreciation on plant (1,613 + 154 277) 20%
Depreciation on fixtures (390 + 40 41 140 + 31) 25%

Emile Woolf International

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17

298
70

The Institute of Chartered Accountants of Pakistan

Answers

7.6

IMRAN LIMITED
(a)

Specific borrowings
Rs.
Borrowing costs incurred:
13% bank loan outstanding for 10 months
(Rs. 32 million x 306/365 x 13%)
11% bank loan outstanding for 5 months
(Rs. 10 million x 153/365 x 11%)
Borrowing costs
Less: Interest that relates to suspension
13% bank loan: (Rs. 32 million x 61/365 x 13%)
11% bank loan (Rs. 10 million x 61/365 x 11%)

3,487,562
461,096
3,948,658
695,233
183,836
(879,068)
3,069,590

Less: Investment income on temporary investment of the


borrowings

(b)

(500,000)
2,569,590

General borrowings
Phase 1

Building cost capitalised


Financed out of rights issue
Financed from borrowing

20,000,000
(15,000,000)
5,000,000

Period to the year end


March 1 to December 31
April 1 to December 31
October 1 to December 31
Period of suspension
Number of days for which
borrowing should be capitalised

Phase 3

18,000,000

16,000,000

18,000,000

16,000,000

306
275

Weighted average borrowing


rate (W3)
Fraction of the year for which
the rate should be applied to
costs incurred
Capitalised borrowing

(61)

(61)

92

245

214

92

12.73%

12.73%

214/365
1,343,451

92/365
513,385

12.73%
245/365
427,240

Total

Emile Woolf International

Phase 2

2,284,076

177

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
W1: Average borrowings

Rs.m

13% bank loan outstanding for 10 months


(Rs. 32 million x 306/365 days)
11% bank loan outstanding for 5 months
(Rs. 10 million x 153/365 days)
Average outstanding for the year

26,827,397
4,191,781
31,019,178

W2: Borrowing costs incurred (or from part a)


13% bank loan outstanding for 10 months
(Rs. 32 million x 306/365 x 13%)
11% bank loan outstanding for 5 months
(Rs. 10 million x 153/365 x 11%)
Borrowing costs

Rs.m
3,487,562
461,096
3,948,658

W3: Weighted average rate


Borrowing costs

Emile Woolf International

/ Average outstanding for the year = 3,948,658 (W2)/31,019,178 (W1) = 12.73%

178

The Institute of Chartered Accountants of Pakistan

Answers

7.7

HUMAYUN CHEMICALS LIMITED


(a)

If review is performed on June 30, 2015


Cost of machine
Depreciation charged @ 20% for the year ended June 30,
2013 and June 30, 2014
(Rs. 10,000,000 Rs. 3,000,000) x 20% x 2
WDV as at June 30, 2014
Residual value (10% of the cost of machine)
Depreciable amount - on July 1, 2014

Rs. 10,000,000

Rs. 2,800,000
Rs. 7,200,000
Rs. 1,000,000
Rs. 6,200,000

Remaining useful lives

6 years

Depreciation charge for the year ended June 30, 2015

Rs. 1,033,333

If review is performed on June 30, 2014


Cost of machine
Depreciation for the year ended June 30, 2013
(Rs. 10,000,000 - Rs. 3,000,000) x 20%
WDV as at June 30, 2013
Residual value (10% of the cost of machine)

(b)

Rs. 10,000,000
Rs. 1,400,000
Rs. 8,600,000
Rs. 1,000,000

Depreciable amount - on July 1, 2013


Remaining useful lives

Rs. 7,600,000
6 years

Depreciation charge for the year ended June 30, 2015


Depreciation charged in the financial statement for the
year ended June 30, 2014
Effect of change in estimate to be incorporated (Reversal)
[Rs. 1,400,000 1,266,667)

Rs. 1,266,667
Rs. 1,400,000
(Rs. 133,333)

According to IAS-16, the following factors should be considered when


estimating the useful life of a depreciable asset:
(i)

Expected usage

(ii)

Expected physical wear and tear

(iii)

Obsolescence

(iv)

Legal or other limits on the use of the assets.

Once the useful life of a depreciable asset is determined, it shall be reviewed


at least at each financial year-end.
If expectations vary from the previous estimates, then change should be
adjusted for current and future periods in accordance with the requirements of
IAS 8.

Emile Woolf International

179

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

7.8

FARADAY PHARMACEUTICAL LIMITED


Date
01.07.2011

30.06.2012

01.07.2012

01.07.2012

30.06.2013

30.06.2013

01.07.2013

01.07.2013

30.06.2014

01.07.2014

Emile Woolf International

Debit
Rs.000

Particulars
Building
Bank
(Record purchase of plant)

200,000
200,000

Depreciation
Accumulated depreciation Building
(Record depreciation for the year 2012)
Working: Rs. 200,000 20 = Rs. 10,000

10,000

Accumulated depreciation Building


Building
(Reversal of prior year depreciation)

10,000

Building
Surplus on revaluation of fixed assets
(Increase in value through revaluation)
Working: Rs. 230,000 Rs. 190,000 =
Rs. 40,000

40,000

Depreciation
Accumulated depreciation Building
(Record depreciation for the year 2013)
Working: Rs. 230,000 19 = Rs. 12,105

12,105

Surplus on revaluation of fixed assets


Retained earnings/Profit & loss account
(transfer of surplus through retained
earning to the extent of excess
depreciation)
Working: Rs. 40,000 19 = Rs. 2,105
Accumulated depreciation Building
Building
(Reversal of prior year depreciation)
Surplus on revaluation of fixed assets
Revaluation expense
Building
(Decrease in value through revaluation)
Working:
Reversal of Surplus balance (Rs. 40,000
Rs. 2,105) Rs. 37,895.
Balancing figure of Rs. 10,000 charged
to Profit and Loss
Building value decline: (Rs. 230,000
Rs. 12,105) Rs. 170,000 =Rs. 47,895
Depreciation
Accumulated depreciation Building
(Record depreciation for the year 2014)
Working: Rs. 170,000 18 = Rs. 9,444
Accumulated depreciation Building
Building
(Reversal of prior year depreciation)

180

Credit
Rs.000

10,000

10,000

40,000

12,105

2,105
2,105

12,105
12,105
37,895
10,000
47,895

9,444
9,444

9,444
9,444

The Institute of Chartered Accountants of Pakistan

Answers

Debit
Rs.000

Date

Particulars

01.07.2014

Building
Revaluation income
Surplus on revaluation of fixed assets
(balancing)
(Reversal of prior year impairment)
Working:
Revaluation income = Rs. 10,000 [ Rs.
10,000 Rs. 9,444] = Rs. 9,444
Building: [Rs. 170,000 Rs. 9,444] Rs.
180,000 =Rs. 19,444

19,444

Depreciation
Accumulated depreciation Building
(Record depreciation for the year 2015)
Working: Rs. 180,000 17 = Rs. 10,588

10,588

30.06.2015

30.06.2015

Emile Woolf International

Surplus on revaluation of fixed assets


Retained earnings
(Reverse the excess depreciation)
Working: Rs. 10,000 17 = Rs. 588

181

Credit
Rs.000
9,444
10,000

10,588

588
588

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

7.9

SPIN INDUSTRIES LIMITED


Commitment fee
Actual borrowing costs of specific loan
General borrowing costs
Less: Investment income
Interest costs to be capitalised

(W1)
(W1)
(W2)

Rupees
125,000
2,050,000
1,175,283
(137,500)
3,212,783

W1
Outstanding
amount
(Rs.)
Specific loan
Utilised till first repayment
Utilised after the first
repayment

Outstanding
month up to Rate of
Months outstanding completion interest

Borrowing
cost (Rs.)

25,000,000

1-Sep-14

31-Jan-15

12%

1,250,000

20,000,000

1-Feb-15 31-May-15

12%

800,000
2,050,000

General Borrowings
Utilised after specific loan
nd
exhausted on 2 payment
to contractor (W3)
Principal payment of
specific loan
3rd payment to contractor
4rd payment to contractor

(W4)

8,125,000

1-Dec-14

5,000,000
12,000,000
9,000,000

31-May-15

1-Feb-15 31-May-15
1-Feb-15 31-May-15
1-Jun-15
31-May-15

4
4
0

12.08%
12.08%

490,750
201,333
483,200
-

12.08%
12.08%

1,175,283

W2: Investment income


Surplus fund available from 1-Sep-14 to 30-Nov-14 (Rs. 25m Rs.
0.125m Rs. 8m Rs. 10m) 8% 3/12
W3: Specific loan utilization
Commitment fee
Payment for obtaining permit
1st payment to contractor
2nd payment to contractor (balancing)

Rs.137,500

125,000
8,000,000
10,000,000
6,875,000
25,000,000

2nd payment to contractor (total)


Less: paid out of specific loan (as worked out above)
Paid from general borrowing

15,000,000
6,875,000
8,125,000

W4: Weighted average rate of borrowing

From Bank A
From Bank B

Weighted average
amount of loan (Rs.)
25,000,000
20,000,000
45,000,000

Rs. 25,000,000 13% 9/12

Weighted average rate of borrowing (Rs. 5,437,500 / 45,000,000)

Emile Woolf International

182

Interest
(Rs.)
2,437,500
3,000,000
5,437,500

12.08%

The Institute of Chartered Accountants of Pakistan

Answers

7.10

SCIENTIFIC PHARMA LIMITED


Scientific Pharma Limited
Journal entries for the year ended June 30, 2015

30.06.2015

30.06.2015

30.06.2015

30.06.2015

30.06.2015

Repair and maintenance expenses


Account payable / Bank
(Repair cost of major break down of the
plant)
Depreciation expense (45,000-2,000)/10.5 years
Accumulated depreciation
(Depreciation expense for the year)
Revaluation surplus (10,380/10.5)
Retained earnings
(Incremental depreciation credited to retained
earnings)
W1
Impairment loss
Property, plant and equipment
(Impairment of plant due to break
down)
Revaluation surplus
W1
Impairment loss
(Impairment loss adjusted against
revaluation)

Debit
Rs.000
1,500

1,500

4,095
4,095
989
989

5,296
5,296

5,296
5,296

W1: Impairment loss


Recoverable amount
WDV of the plant on impairment date W2
Impairment loss as on 30.06.2015

19,227
(24,523)
(5,296)

W2: WDV of the plant on impairment date


FOB price (US$ 800,000 at Rs. 52)
Other charges including installation cost
Accumulated depreciation
(1-1-2006 to 30-6-2010)
WDV as on 30-6-2010
Revaluation surplus (45,000-34,620)
Revalued amount as of July 1, 2010
Accumulated depreciation
(1-7-2010 to 30-6-2015)

Credit
Rs.000

Rs.000
41,600
7,000
48,600
{(48,600-2,000)/15*4.5}

(13,980)
34,620
10,380
45,000

{(45,000-2,000)/10.5*5)

(20,476)
24,523

WDV as on 30-6-2015
W3: Revaluation surplus on impairment date
Revaluation surplus
Transferred to retained earnings
(01.07.2010 to 30.06.2015)
Revaluation surplus balance on impairment date

W2

10,380

(10,380/10.5*5)

(4,943)
5,437

Since impairment loss is less than the revaluation surplus on impairment date,
the full amount of impairment would be adjusted against the revaluation surplus.

Emile Woolf International

183

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

7.11

QURESHI STEEL LIMITED


Capital work in progress Factory building
Progress invoices received from the contractor
(30,000+20,000+10,000+15,000)
(Rain damages paid would be chargeable to profit and loss account/
insurance claim)
Borrowing costs to be capitalised:
Loan processing charges
Interest on bank loan
Interest on running finance
Interest income from surplus loan amount
Capital work in progress June 30, 2015

Rs.000
75,000.00

500.00
1,841.67
2,730.00
(395.00)
79,676.67

W1
W2
W4

W1: Interest on bank loan:


Interest amount
To
31-05-2015
30-06 -2015

From
01-14-2014
01-06-2015

Outstanding
loan amount
25,000
20,000

Months
6
1

Rs.000
Interest
at 13%
1625.00
216.67
1,841.67

W2: Interest on running finance


Rs.000
Payments from
Payment
Description
s date

01-07-14 Advanced
payment
st
15-10-14 1 progress
bill
nd
15-01-15 2
progress
bill
rd
15-04-15 3
progress
bill
31-05-15 Loan
interest
31-05-15 Loan
instalment

Invoice
amount

Payments
net of
deductions

10,000

10,000

30,000

25,500

20,000

17,000

17,000

10,000

8,500

7,500

Right
issue

Bank
loan

15,000

1,625
5,000
15,000

*24,500

Months
outstanding
up to
30-6-10

Interest
at 15%
per
annum
(W3)

10,000

12.00

1,500

10,500

8.50

1,116

Running
finance

1,000

2.50

31

1,625

1.00

20

5,000
29,125

1.00

63
2,730

*Loan amount of Rs. 25,000,000 less processing charges of Rs. 500,000


W3: Average rate of interest for running finance facility (9,000/60,000)

15%

W4: Interest income from surplus loan amounts:


Interest income
From
01-14-14
16-01-15

Emile Woolf International

To
15-01-15
15-04-15

Months
1.5
3.0

184

Surplus loan
amounts
24,500
7,500

Rs.000
Interest
income
at 8%
(245)
(150)
(395)

The Institute of Chartered Accountants of Pakistan

Answers

7.12

GRANITE CORPORATION
Borrowing costs to be capitalised
Workings
Commitment fee @ 1%
Borrowing costs on specific loan
Borrowing costs on running finance

1
3

Less: Investment income

2015
6,987,500
1,381,625

2014
700,000
3,033,333
-

(2,099,001)
6,720,124

(1,381,334)
2,351,999

Suspension

70,000,000

From June 30 to first principal repayment


After the 1st principal repayment
After the 2nd principal repayment to completion
Amount to be capitalised as on 30-Jun-2015

70,000,000
65,000,000
60,000,000

2
6
3

0
1
0

Borrowing cost
to be capitalised
(Rs.) @ 13%

Outstanding
month

From commencement on to June 30


Amount to be capitalised as on 30-Jun-2014

Net outstanding
months

Outstanding
amount (Rs.)

W1 : Actual borrowing costs on specific loan

3,033,333
3,033,333
2
5
3

1,516,667
3,520,833
1,950,000
6,987,500

W2 : Investment income (All amounts in Rupees)


Available
Funds

O/s amount up
to completion

Used to reduce
running finance (14%)
Amount

Rs.(70m 25m - 0.7m) 44,300,000


Investment income 2014
Rs. (70m 25m 0.7m)
44,300,000
Rs.(44.3 5m 4.55m)
34,750,000
Investment income 2015

Income

Invested in saving
account @ 8%
Amount

Total
Income

Income

10,000,000

466,667

34,300,000

914,667

1,381,334
1,381,334

10,000,000

233,333

34,300,000

457,333

690,666

10,000,000

583,335

24,750,000

825,000

1,408,335
2,099,001

Net
outstanding
months

30,250,000

1,058,750

5,000,000
4,225,000
10,000,000
49,475,000

3
3
0

0
0
0

3
3
0

175,000
147,875
1,381,625

Amount

2nd payment to contractor (Rs. 65m - 34.75m)


Payment of 2nd instalment
Principal
Interest (Rs. 65m x 13% x 6/12)
3rd payment to contractor

Emile Woolf International

Suspension

Description

No. of months
outstanding

2015

185

Borrowing cost
to be capitalised
(Rs.) @ 14%

W3 : Interest on running finance

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 8 IAS 38: INTANGIBLE ASSETS


8.1

FAZAL
In accordance with IAS 38, expenditure on intangible assets must be expensed
unless it meets the recognition criteria for capitalisation. These criteria require the
demonstration that future benefits will arise from the incurred costs. It would be
difficult to prove that this is the case in relation to training costs and IAS 38
specifically states that training costs should always be expensed as they are
incurred and not treated as an intangible asset.
Hence the treatment adopted by Fazal is not correct and the costs being carried
forward must be expensed to the years profits.

8.2

HENRY
Property, plant and equipment
Plant and machinery
Cost
On 1 January 2015
Additions

Rs.
X
30,000

On 31 December 2015

Accumulated depreciation
On 1 January 2015
Charge for the year (30,000 9/12 5)

X
4,500

On 31 December 2015

Carrying amount
On 31 December 2014

On 31 December 2015

25,500

Intangible assets
Internally generated research and development expenditure
Cost
On 1 January 2015
Additions

Rs.
412,500
45,000

On 31 December 2015

457,500

Accumulated amortisation
On 1 January 2015
Charge for the year (W)

68,750

On 31 December 2015

68,750

Carrying amount
On 31 December 2014

412,500

On 31 December 2015

Emile Woolf International

388,750

186

The Institute of Chartered Accountants of Pakistan

Answers

Working
Amortisation charge (Project A)
Rs.
Total savings (100,000 + 300,000 + 200,000)
2015 amortisation charge (100,000/600,000 412,500)

600,000
68,750

Tutorial notes
The costs in respect of Project B cannot be capitalised as there are uncertainties
surrounding the successful outcome of the project but the machine bought may be
capitalised in accordance with IAS16.
The 2015 costs in respect of Project C can be capitalised as the uncertainties have
now been resolved. However, the 2014 costs cannot be reinstated.

8.3

TOBY
Intangible assets

Cost
On 1 January 2015
Additions (W1)
On 31 December 2015
Accumulated amortisation/impairment
On 1 January 2015
Written off/amortised during the year
(W1 and W2)
On 31 December 2015

Goodwill

Patents

Brands

Total

Rs.

Rs.

Rs.

Rs.

10,000

20,000

50,000

80,000

10,000

20,000

50,000

3,000

3,000
-

On 31 December 2015

80,000

Carrying amount
On 31 December Year 0

7,000

2,500

2,500

17,500

7,500

7,500

42,500

13,000

13,000

67,000

Workings
(1) Goodwill on acquisition of George
Rs.
Cost of acquisition
Minus fair value of net assets acquired (100,000 5,000)
Goodwill
Recoverable value
Amortisation of patent

(3)

20,000 8 = Rs.2,500
Amortisation of brand

10,000
(7,000)

Impairment write off


(2)

105,000
(95,000)

3,000

50,000 5 9/12 = Rs.7,500


Tutorial note
IAS38 Intangible assets prohibits the recognition of internally generated brands (3)
or internally-generated goodwill (4).

Emile Woolf International

187

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

8.4

BROOKLYN
1

Development expenditure
IAS 38 on intangibles requires that research and development be considered
separately:

research which must be expensed as incurred

development which must be capitalised where certain criteria are met.

It must first be clarified how much of the Rs.3 million incurred to date (10
months at Rs.300,000) is simply research and how much is development. The
development element will only be capitalised where the IAS 38 criteria are
met. The criteria are listed below together with the extent to which they appear
to be met.

The project must be believed to be technically feasible. This appears to


be so as the feasibility has been acknowledged.

There must be an intention to complete and use/sell the intangible.


Completion is scheduled for June 2016

The entity must be able to use or sell the intangible. Interest has been
expressed in purchasing the knoWhow on completion
It must be considered that the asset will generate probable future
benefits. Confirmation is required from Brooklyn as to the extent of
interest shown by the pharmaceutical companies and whether this is of a
sufficient level to generate orders and to cover the deferred costs.
Availability of adequate financial and technical resources must exist to
complete the project. The financial position of Brooklyn must be
investigated. A grant is being obtained to fund further work and the
terms of the grant, together with any conditions, must be discussed
further.

Able to identify and measure the expenditure incurred. A separate


nominal ledger account has been set up to track the expenditure.

If all of the above criteria are met, then the development element of the Rs.3m
incurred to date must be capitalised as an intangible asset. Amortisation will
not begin until commercial production commences.
2

Provision
Although the claim was made after the reporting period, IAS 10 considers this
to be an adjusting event after the reporting period. The employment of the
individual dates back to 20X2 and so the lawsuit constitutes a current
obligation for the payment of damages as a result of this past event (the
employment).
The amount and the timing are not precisely known but the likelihood of
payment of damages by Brooklyn is probable and so a provision should be
made for the estimated amount of the liability, as advised by the lawyer.
Disclosure, rather than provision, would only be appropriate if the expected
settlement was possible or remote, and the lawyers view is that a payment is
more likely than not.
It is not appropriate to calculate an expected value where there is only one
event, instead a provision should be made for the most likely outcome. The
lawyer has various views on the possible payout, but the most likely payout is
Rs.500,000 as this has a 50% probability. As settlement of the provision is not
anticipated until 2018, the provision should be discounted back at 8% to give a
liability of Rs.476,280.

Emile Woolf International

188

The Institute of Chartered Accountants of Pakistan

Answers

Provided that the payment from the insurance company is virtually certain, this
should be shown as an asset, also at its discounted value of Rs.47,628, being
10% of the provision.
In both cases the discounting should be unwound over the coming three years
through profit or loss.
3

Revaluation
IAS 16 on Property, Plant and Equipment does not impose a frequency for
updating revaluations. It simply requires a revaluation where it is believed that
the fair value of the asset has materially changed. Hence, if in the past there
have been material differences between the carrying amount and fair value at
the 5 yearly review then Brooklyn should consider having more frequent
valuations following on from this years valuation.
Revaluations should be regular and not timed simply when property prices are
at a peak. It is not acceptable for Brooklyn to defer its next revaluation while
values are low. If property prices do fall in 2016, then it may be necessary to
perform an impairment test in accordance with IAS 36 Impairment of assets.
If it is believed that an asset value has moved materially, then all assets in that
class must be revalued. Hence it is not sufficient for Brooklyn to just revalue
the London property.
IAS 16 does not require the valuation to be performed by an external party,
and so the use of the property manager to conduct the valuations is
acceptable. Notes to the financial statements will disclose that he is not
independent of the company.

8.5

ZOUQ INC
(a)

(i)
(ii)
(iii)
(iv)

(v)

The depreciable amount of an intangible asset with a finite useful life


shall be allocated on a systematic basis over its useful life.
Amortization shall begin when the asset is available for use
Amortization shall cease at the earlier of the date that the asset is
classified as held for sale and the date that the asset is derecognised.
The amortization method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the
entity.
The amortization charge for each period shall be recognised in
statement of profit or loss.
Goodwill Account

(b)

Rupees
01.01.2014

Goodwill recognised
(W1)

01.01.2015

Balance b/d

Rupees

270,000,000 31.12.2014
31.12.2014
270,000,000
220,000,000
220,000,000

189

50,000,000
220,000,000
270,000,000

31.12.2015

Emile Woolf International

Impairment of
goodwill
Balance b/d

Balance b/d

220,000,000
220,000,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Brand Account
Rupees
01.01.2014

Brand
recognised

Rupees

100,000,000

31.12.2014
31.12.2014

Amortization
Balance c/d

100,000,000
01.01.2015

Balance b/d

10,000,000
90,000,000
100,000,000

90,000,000

31.12.2015

31.12.2015
31.12.2015

Amortization
Impairment of
Brand
Balance c/d

90,000,000

10,000,000
13,500,000
68,000,000
90,000,000

W1: Value of goodwill


Rupees
1,350,000,000

Purchase price (50,000,000 x Rs. 30 x 90%)


Less: Fair value of net identifiable assets and liabilities
(Rs. 1,100,000,000 x 90%)
Less: Value of brand (Rs. 100,000,000 x 90%)

(990,000,000)
(90,000,000)

Goodwill recognised

8.6

270,000,000

STAR-BRIGHT PHARMACEUTICAL LIMITED


Star-Bright Pharmaceutical Limited
Statement of financial position
As at December 31, 2015
2014
2015
Restated
Rs. in million
Non-current assets
Intangible asset brand [Note 8]
Shareholders equity
Retained earnings
(W5 and 6)

274

285

2,071

1,879

498
43
541

460
38
498

Star-Bright Pharmaceutical Limited


Statement of Financial Position
As at December 31, 2015
8- Intangible assets Brand
Cost
At beginning of the year (2015: 382+24+54+38,
2014: 382+ 24+54)
Capitalised during the year
Amortization
At beginning of the year (W1 and 2)
During the year (W3 and 4)

(213)
(54)
(267)

*3

274

(163)
(50)
(213)

*4

285

W1 : 382 x 50% + 24 x 30% + 54 x 20% + 38 x 10% = 213


W2 : 382 x 40% + 24 x 20% + 54 x 10% = 163
W3 : 541 x 10% = 54
W4 : 498 x 10% = 50
W5 : 1,950 + 24 + 54 + 38 + 43 [267 (382 x 60%)] = 2,071
W6 : 1,785 + 24 + 54 + 38 [213 (382 x 50%)] = 1,879

Emile Woolf International

190

The Institute of Chartered Accountants of Pakistan

Answers

8.7

RAISIN INTERNATIONAL
(a)

Following are the criteria that should be used while recognizing intangible
assets from research and development work.
(i)
No intangible asset arising from research shall be recognised.
(ii)

An intangible arising from development shall be recognised if, and


only if , an entity can demonstrate all of the following:

the technical feasibility of completing the intangible asset so that


it will be available for use or sale.

its intention to complete the intangible asset and use or sell it.

its ability to use or sell the intangible asset.

(b)

how the intangible asset will generate probable future economic


benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or
the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
the availability of adequate technical, financial and other resources
to complete the development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the
intangible asset during its development.

(i)

Since the product met all the criteria for the development of the
product, it should be recognised as an intangible in the statement of
financial position (SOFP) of the company. However, RI should
capitalise only the development work (i.e. Rs. 9 million) as intangible
asset. IAS-38 does not allow capitalization of cost relating to the
research work, training of staff and cost of trial run.
Since the product has a useful life of 7 years, the amortization expense
amounting to Rs. 0.32 million (Rs. 9 million 3/12 7 years) should be
recorded in the statement of profit or loss.

(ii)

This purchasing of right to manufacture should be recognised as an


intangible in the SOFP because:
it is for an established product which would generate future
economic benefits.
cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortised over its useful
life. The useful life will be shorter of its actual life (i.e. 10 years) and its
legal life (i.e. 5 years. The amortization to be recorded in SOCI is Rs.
2.83 million (Rs. 17 million 10/12 5).

(iii) The acquired brand should be recognised as an intangible in the SOFP


because acquisition price is a reliable measure of its value. The
amortization to be recorded in SOCI is Rs. 0.12 million (Rs. 2 million
10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs.
10 million in the SOFP. Since there is an indefinite useful life of the
intangible assets, it should not be amortised. Instead, RI should test
the intangible asset for impairment by comparing its recoverable
amount with its carrying amount.

Emile Woolf International

191

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

CHAPTER 9 IAS 17: LEASES


9.1

DAWOOD
The lease has been correctly classified as a finance lease as it is being leased for its
entire useful economic life which indicates that the risks and rewards of ownership
have been transferred to Dawood.
The leased asset should be capitalised as a non-current asset and depreciated over
the 5 year lease period/useful life. By 31st March 2015, the net book value of the
asset will be Rs.225,000, being the cost of Rs.250,000 less 6 months depreciation.
A finance lease creditor should be established initially for Rs.250,000. During the
year, finance costs will be added and the first payment of Rs.29,500 will be
deducted.
The finance costs on the lease of Rs.45,000 (Being total payments of (10
Rs.29,500) cash price Rs.250,000) will be spread over the lease term using the
sum-of-digits method.
Sum of digits =

n (n 1) 9 10
= 45

2
2

(Note: n = number of periods of borrowing, and as the payments are in ADVANCE


not arrears, Dawood is only financing the asset of 4 1/2 years (9 six-monthly
periods)).
Therefore, the finance cost relating to the first 6 months through to 31st March 2015
is Rs.9,000 (9/45 Rs.45,000).
This will result in a movement on the finance lease creditor as follows:
6 months to Brought forward

Payment

Finance cost

Carried forward

31 March 13

250,000

(29,500)

9,000

229,500

30 Sept 13

229,500

(29,500)

8,000

208,000

31 March 14

208,000

(29,500)

7,000

185,500

The year end liability of Rs.229,500 will be split between current liabilities Rs.51,000
(29,500 + (29,5008,000)), and the balance of Rs.178,500 as non-current liabilities.

9.2

FINLEY
Financial statements for the year ended 31 December 2015 (extracts)
Statement of financial position
Non-current assets
Property, plant and equipment (36,000 9,000)

Rs.
27,000

Current liabilities
Finance lease obligations (W1)

10,000

Non-current liabilities
Finance lease obligations (W1)

17,950

Statement of profit or loss


Depreciation on leased assets ((36,000 4)
Finance lease charges (W1)

Emile Woolf International

192

9,000
1,950

The Institute of Chartered Accountants of Pakistan

Answers

Workings
(1)

Finance lease obligations (boat)


Opening
balance

Lease
payment

Capital
outstanding

Interest
at 7.5%

Closing
balance

Rs.

Rs.

Rs.

Rs.

Rs.

31 December 2015

36,000

(10,000)

26,000

1,950

27,950

31 December Year 5

27,950

(10,000)

17,950

1,346

19,296

Year ended

Rs.
Current (balancing figure)

10,000

Non-current

17,950

27,950

9.3

FABIAN
Financial statements for the year ended 31 December 2015 (extracts)
Statement of financial position
Non-current assets

Rs.

Property, plant and equipment (126,760 31,690)

95,070

Current assets
Trade and other receivables (W1)

6,250

Current liabilities
Finance lease obligations (W2)
Non-current liabilities

30,056

Finance lease obligations (W2)


Statement of profit or loss

69,380

Operating expenses
Operating lease rentals (W1)

5,450

Depreciation on leased assets (126,760 4)

31,690

Finance costs
Finance lease charges (W2)

12,676

Tutorial note
The notes to the financial statements would disclose the fact that included in trade
and other receivables is Rs.3,750 (W1) due in more than one year.

Emile Woolf International

193

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Workings
(1)

Operating lease (car)


Rs.
statement of profit or loss charge = ((7,500 + (36 700)) 6/36)
=
Cash paid in 2015 (7,500 + (700 6))
Minus charged to statement of profit or loss in 2015

11,700
(5,450)

Prepayment at end of 2015

6,250

Prepayment at end of 2015


Cash paid in 2016 (12 700)
Minus charged to statement of profit or loss in 2016 (5,450 2)
Prepayment at end of 2016
(2)

5,450

6,250
8,400
(10,900)

3,750

Finance lease obligations (machine)


Date

Opening
balance

Interest (10%)

Lease
payment

Closing
balance

2015
2016

Rs.
126,760
99,436

Rs.
12,676
9,944

Rs.
(40,000)
(40,000)

Rs.
99,436
69,380
Rs.

Current (balancing figure)


Non-current

30,056
69,380

99,436

9.4

XYZ INC
(a)

Extracts from the financial statements of XYZ Inc at 31 December 2015


Statement of financial position
(i)

Tangible fixed assets held under finance leases


Plant and machinery
Rs.000
Cost
At 1 January 2015
Additions

x
4,400

4,400

At 31 December 2015
Accumulated depreciation
At 1 January 2015
Charge for the year

x
629

629

At 31 December 2015
Net book value
At 31 December 2015

3,771

At 1 January 2015

Emile Woolf International

194

The Institute of Chartered Accountants of Pakistan

Answers

(ii)

Finance lease payables


Amounts payable:
Rs.000
4,516
996

3,520

Within one to five years (600 8 284)


Less future finance charges

Accruals
Rs.000
951

Finance leases (667 + 284)


Statement of profit or loss
Profit is stated after charging

Rs.000
Finance charges
Depreciation 4,400 7
(b)

604 (W2)
629

Table
Period ended

30 June 2015
31 December 2015
30 June 2016
31 December 2016
30 June 2017
31 December 2017
30 June 2018
31 December 2018
30 June 2019
31 December 2019

Amount
borrowed
Rs.000
4,400
4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600

Repaid Capital due 7.68% Amount due


for period interest at period end
Rs.000
Rs.000 Rs.000
Rs.000
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)

3,800
3,492
3,160
2,803
2,418
2,004
1,558
1,077
560

292
268
243
215
186
154
119
83
40

4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600

Comparison
Period
1
2
3
4
5
6
7
8
9
10

Emile Woolf International

Sum of digits (W2)


Rs.000
320
284
249
213
178
142
107
71
36

1,600

195

Actuarial (as above)


Rs.000
292
268
243
215
186
154
119
83
40

1,600

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

WORKINGS
(1)

Calculation of finance charge


Rs.000
6,000
(4,400)

1,600

Minimum lease payments 5 600 2


Fair value of asset
Finance charge
(2)

Allocation of finance charge


Period ended
30 June 2015
31 December 2015

30 June 2016
31 December 2016
30 June 2017
31 December 2017
30 June 2018
31 December 2018
30 June 2019
31 December 2019
n(n + 1)
9(9 + 1)
=
2
2

(3)

Digits

Finance charge
Rs.000
9/45 1,600
8/45 1,600

9
8

7/45 1,600
6/45 1,600
5/45 1,600
4/45 1,600
3/45 1,600
2/45 1,600
1/45 1,600

7
6
5
4
3
2
1

320
284

604
249
213
178
142
107
71
36

45

1,600

Lease obligation
Period ended

30 June 2015
31 December 2015
30 June 2016
31 December 2016

Emile Woolf International

Amount
borrowed

Repaid

Capital
due for
period

Interest

Rs.000

Rs.000

Rs.000

Rs.000

Amount
due at
period
end
Rs.000

4,400
4,120
3,804
3,453

(600)
(600)
(600)
(600)

3,800
3,520
3,204
2,853

320
284
249
213

4,120
3,804
3,453
3,066

196

The Institute of Chartered Accountants of Pakistan

Answers

9.5

SNOW INC
Extracts from the financial statements of Snow Inc for year ended 31
December 2015
Statement of profit or loss
Profit is stated after charging
Rs.000
Finance charges

(1,714 + 1,429 + 9,614) (W1 and 2)

Depreciation

12,757
41,667

Statement of financial position


Tangible fixed assets held under finance leases
Plant and
machinery
Rs.000

185,000

185,000

Cost
At 1 January 2015
Additions (35,000 + 150,000)
At 31 December 2015
Accumulated depreciation
At 1 January 2015
35,000 15,000
Charge for year
+
5
3

41,667

41,667

At 31 December 2015
Net book value
At 31 December 2015

143,333

At 1 January 2015
Finance lease payables
Amounts payable:
Rs.000
Within one to five years
Less future finance charges

166,000
18,243

147,757

(6,500 4 + 35,000 4)
(2,857 + 15,386 *)

* 35,000 5 = 175,000 150,000 9,614 = 15,386


Accruals
Rs.000
Finance leases

Emile Woolf International

46,000 (11,000 + 35,000)

197

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

WORKINGS
(1)

Snowplough
(a)

Calculation of finance charge


Rs.000
2,000
39,000
(35,000)

6,000

Deposit
MLP (6 6,500)
Fair value of asset
Finance charge

(b)

Allocation of finance charge


Period
ended

Digits

Finance
charge
Rs.000

30.06.2015

6
621
6,000

1,714

31.12.2015

5
521
4
421
3
321
2
221
1
121

6,000

1,429

6,000

1,143

6,000

857

6,000

571

6,000

286

6,000

30.06.2016
31.12.2016
30.06.2017
31.12.2017

21

n (n + 1)
6 (7)
=
= 21
2
2
(c)

Period
ended
30.6.15
31.12.15
30.6.16
31.12.16

(2)

Capital
Interest Amount Repayment Capital
O/S at start
O/S at end
O/S at end
Rs.000
Rs.000
Rs.000
Rs.000
Rs.000
33,000
28,214
23,143
17,786

1,714
1,429
1,143
857

34,714
29,643
24,286
18,643

(6,500)
(6,500)
(6,500)
(6,500)

28,214
23,143
17,786
12,143

Snow machine
Period
ended

Amount Repayment Capital


Interest Amount
O/s at start
O/S at start at 8.36% O/S at end
Rs.000
Rs.000
Rs.000
Rs.000
Rs.000
31.12.15 150,000
(35,000) 115,000
9,614
124,614
31.12.16 124,614
(35,000)
89,614
7,492
97,106

Emile Woolf International

198

The Institute of Chartered Accountants of Pakistan

Answers

9.6

MIRACLE TEXTILE LIMITED


Miracle Textile Limited
Statement of financial position (Extracts)
As at 30 June 2015
Note

2015

2014

Rs.

Rs.

16,000,000

18,000,000

LIABILITIES
Non-current liabilities
Obligation under finance lease

6,505,219

10,633,074

Current liabilities
Current portion of obligation under finance
lease

4,127,856

3,566,925

ASSETS
Non-current assets
Property, plant and equipment

Miracle Textile Limited


Notes to the financial statements (Extracts)
As at 30 June 2015
4- Property, plant and equipment
Leased assets
Cost
Opening balance
Addition during the year
Accumulated depreciation
Opening balance
Depreciation for the year
Balance as at 30 June

2015

2014

Rs.000

Rs.000

20,000,000
20,000,000

20,000,000
20,000,000

(2,000,000)
(2,000,000)
(4,000,000)
16,000,000

(2,000,000)
(2,000,000)
18,000,000

9- Obligations under finance lease (W1)


Minimum
lease
payment
Not later
than one
year
Later than
one year but
not later than
five years
Later than
five years

Emile Woolf International

30-Jun-2015
Financial
charges
Principal
for future
outstanding
periods

Minimum
lease
payment

30-Jun-2014
Financial
charges
Principal
for future outstanding
periods

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

5,800,000

1,672,144

4,127,856

5,800,000

2,233,075

3,566,925

7,800,000

1,294,781

6,505,219

13,600,000

2,966,926

10,633,074

13,600,000

2,966,926

10,633,074

19,400,000

5,200,000

14,200,000

199

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

9.1

The Company has entered into a finance lease agreement with a bank in
respect of a machine. The finance lease liability bears interest at the rate of
15.725879% per annum. The company has the option to purchase the
machine by paying an amount of Rs. 2 million at the end of the lease term.
The lease rentals are payable in annual instalments ending in June 2015.
There are no financial restrictions in the lease agreement.

W1: Lease Schedule


Payment
date
01.07.2013
01.07.2014
01.07.2015
01.07.2016
30.06.2017

9.7

Opening
principal
20,000,000
14,200,000
10,633,075
6,505,219
1,728,222

Instalment
5,800,000
5,800,000
5,800,000
5,800,000
2,000,000

Principal
repayment
5,800,000
3,566,925
4,127,856
4,776,997
1,728,222
20,000,000

Interest @
15.725879%
2,233,075
1,672,144
1,023,003
271,778
5,200,000

Closing
principal
14,200,000
10,633,075
6,505,219
1,728,222
-

SHOAIB LEASING LIMITED


Entries in the books of Lessor
Date

Particulars

Dr.

01.07.2015

Lease payments receivable (W1)


Machine
Unearned finance income (W1)

2,680,000

30.06.2016

Bank

2,100,000
580,000
860,000

Lease payments receivable


30.06.2016

30.06.2017

860,000

Unearned finance lease


Finance income (W2)

272,941

Bank

860,000

272,941

Lease payments receivable


30.06.2017

30.06.2018

860,000

Unearned finance lease


Finance income (W2)

196,640

Bank

960,000

196,640

Lease payments receivable


30.06.2018

Unearned finance lease


Finance income (W2)

W1: Total finance income


Total future lease payments (Rs. 860,000 x 3)
Add: Purchase bargain option
Gross investment in finance lease
Less: Cost of assets
Total finance income

Emile Woolf International

Cr.

200

960,000
110,419
110,422
Rupees
2,580,000
100,000
2,680,000
2,100,000
580,000

The Institute of Chartered Accountants of Pakistan

Answers

W2: Amortization schedule


Instalment

Interest

Principal

Date

Principal
Opening

30.06.2016
30.06.2017
30.06.2018

Rs.
2,100,000
1,512,941
849,581

Rs.
860,000
860,000
960,000

Rs.
272,941
196,640
110,419*
580,000

Rs.
587,059
663,360
849,581
2,099,997.04

Principal
Closing
Rs.
1,512,941.20
849,581.19
nil

Note that there is a rounding adjustment of Rs. 3 in the last interest amount.
Shoaib Leasing Limited
Extracts from the statement of financial position as at June 30, 2016
2016
Rupees
Non-current assets
Net investment in leases

Note 10
849,578

Current assets
Current portion of net Investment in leases
10

10.1

10.2

663,360

Net investment in leases


Minimum lease payments receivables (Note 10.1)
Add: Residual value of leased assets
Gross Investments in leases
Less: Unearned lease income (Rs. 580,000 - Rs. 272,941 - 3)
Net investment in leases (Note 10.2)
Note 10.2
Less: Current portion of net investment in leases

Minimum lease payments


Less than one year
More than one year and less than 5 years

Net investment in leases


Less than one year
More than one year and less than 5 years

Emile Woolf International

201

1,720,000
100,000
1,820,000
(307,062)
1,512,938
(663,360)
849,578

860,000
860,000
1,720,000

663,360
849,578
1,512,938

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

9.8

NEPTUNE LIMITED
(a)

Journal entries
(i)
Finance Lease:
Debit

Date

Particulars

1-Jan-2015

Finance lease debtors


Unearned finance lease
income
Sale
(Record sale of vehicles on
finance lease)
Bank
Finance lease debtors
(Instalment received under
finance lease)
Unearned finance lease
income
Finance lease income
(Interest income earned at
15%)

1-Jan-2015

31-Dec-2015

(ii)

Credit

Rupees
12,000,000
3,295,690
8,704,310

2,000,000
2,000,000

1,005,647
1,005,647

Operating lease:

1-Jan-2015

Bank
Unearned rental income
(Operating lease instalment
received in advance)
31-Dec-2015 Unearned rental income
Rental income
(11,410,0003)(W2)
(Booking of operating lease
income)
Depreciation expenses
31-Dec-2015 (15,000,0006)
Accumulated
depreciation on machine.
(Yearly depreciation on
machine)

4,000,000
4,000,000

3,803,333
3,803,333

2,500,000
2,500,000

Reason for choice of leases:


1.
2.

Emile Woolf International

Lease A should be accounted for as a finance lease because the


lease term covers the entire economic life.
Since none of the conditions specified in IAS-17 (Leases) for
classification as a finance lease is being met, Lease B shall be
considered as an operating lease.

202

The Institute of Chartered Accountants of Pakistan

Answers

W1

Finance lease:
Opening
Balance

Year

2015
2016
2017
2018
2019
2020

(A)

Rs.
8,704,310
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000

(B)
(A)+(B)

W2

Instalment

Income
at 15%

Rs.
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
8,000,000
10,000,000

Rs.
1,005,647
856,493
684,967
487,713
260,870
0
1,433,550
2,290,043

Recovery
of
Principal
Rs.
994,354
1,143,507
1,315,033
1,512,287
1,739,130
2,000,000
6,566,450
7,709,957

Closing
balance
Rs.
7,709,957
6,566,450
5,251,417
3,739,130
2,000,000
0

Operating lease:
Rs.

Annual instalment

(b)

2015
2016
2017

(4,000,000 95%)
(3,800,000 95%)

4,000,000
3,800,000
3,610,000
11,410,000

Neptune Limited
Notes to the Financial Statements
For the year ended December 31, 2015
(i)

Investment in finance lease


2015
Rs.

Present value of minimum lease payments


Less: current maturity

Less than one year


One to five years

Net
investment
in leases
2015

Rs.

Rs.

1,143,507
6,566,450
7,709,957

The minimum lease payment has been discounted on interest rate of


15% per annum to arrive at their present value. Rentals are paid in
annual instalments.
Operating lease
Not later
One to
than one
Total
five years
year
Future minimum lease
payments (W2)

Emile Woolf International

Gross
investment in
finance leases
2015
2,000,000
8,000,000
10,000,000
(2,290,043)
7,709,957

Less: unearned finance income


Net investment in leases

(ii)

7,709,957
(1,143,507)
6,566,450

203

Rs.

Rs.

3,800,000

3,610,000

Rs.

7,410,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

9.9

QUARTZ AUTO LIMITED


(a) Entries to record the lease in books of Quartz Auto Limited
Description
Debit
Credit
Lease receivable (2,715,224 5) + 700,000
14,276,120
Cost of goods sold [(900,000 7) - (100,000 7
5,951,974
0.49718)]
Inventory (900,000 x 7)
6,300,000
Sales (Note 1)
9,101,974
Unearned finance income
4,826,120
Bank
Lease receivable

2,715,224

Unearned finance income


Finance income

1,417,500

2,715,224
1,417,500

Note 1 Lower of fair value i.e. 9,450,000 (Rs. 1,350,000 x 7) and


PV of minimum lease payment (2,715,227 x 3.35219 = 9,101,974)

(b)

Disclosure in the financial statements


1-

2015

Net investment in lease

Rs.

Lease receivable (2,715,227 x 4)


Unguaranteed residual amount
Gross investment in lease

10,860,896
700,000
11,560,896

Less: Unearned finance income (4,826,120 1,417,500)

(3,408,620)
8,152,276

1.1 Details of investment in finance lease

Not later than one year


Later than one year but not later than five years
Later than five years

Gross
investment
in lease
2,715,224
8,845,672
11,560,896

Net
investment
in lease
1,492,383
6,659,893
8,152,276

(W1)
Year
ended

Instalment
at year end

Interest

Principal

31/06/2015
31/06/2016
31/06/2017
31/06/2018
31/06/2019

2,715,224
2,715,224
2,715,224
2,715,224
2,715,224

1,417,500
1,222,841
998,984
741,548
445,247

1,297,724
1,492,383
1,716,240
1,973,676
2,269,977

Emile Woolf International

204

Net
Investment
in Lease
9,450,000
8,152,276
6,659,893
4,943,653
2,969,977
700,000

Gross
Investment
in Lease
14,276,120
11,560,896
8,845,672
6,130,448
3,415,224
700,000

The Institute of Chartered Accountants of Pakistan

Answers

9.10

LODHI TEXTILE MILLS LIMITED


Particulars
Generator A
(i)
Cash / Bank
Accumulated depreciation Generator

Debit

Loss on sale/ Impairment loss


Property, plant and equipment - Generator

Credit

6,000,000
2,500,000
*1,500,00
0
10,000,000

*(This amount comprises of impairment loss amounted to


Rs. 1 million and loss on disposal amounted to Rs. 0.5
million.)

(ii)

Assets subject to finance lease - Generator


Liabilities against assets subject to finance lease

6,000,000
6,000,000

Generator B
(i)
Cash / Bank
Accumulated depreciation Generator
Property, plant and equipment - Generator

6,000,000
6,000,000

(ii)

Assets subject to finance lease - Generator


Liabilities against assets subject to finance lease

6,000,000

Impairment loss
Accumulated impairment (ASFL) - Generator

1,000,000

(iii)

Generator C
(i)
Cash / Bank
Accumulated depreciation Generator

12,000,000

6,000,000

1,000,000

8,000,000
3,000,000
10,000,00
0

Property, plant and equipment - Generator


Deferred income OR Surplus on revaluation of
fixed assets
(ii)

Assets subject to finance lease - Generator


Liabilities against assets subject to finance lease

Emile Woolf International

205

1,000,000
8,000,000
8,000,000

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

9.11

NOMAN ENGINEERING LIMITED


Journal entries
Debit

Credit

Rs.000

Rs.000

Date

Description

1-Jul-2014

Bank
Accumulated depreciation (18,750-15,000)
Property, plant and equipment
Deferred gain on disposal (20,000-15,000)
(Disposal of plant under sale and finance
lease back)

20,000
3,750

Property, plant and equipment


Long term finance lease liability
(Plant acquired under sale and lease back)

20,000

1-Jul-2014

31-Dec-2014 Long term finance lease liability


Interest expense
Bank
(Payment of 1st. Instalment of lease
liability)
30-Jun-2015

30-Jun-2015

W.1
W.1

18,750
5,000

20,000

1,127
1,373
2,500

Long term finance lease liability


Interest expense
Bank
(Payment of 2nd. Instalment of lease
liability)

1,204
1,296
2,500

Deferred gain on disposal (5,000/6)


Gain on disposal
(Deferred gain on amortised over the life of
the plant)

833
833

30-Jun-2015

Depreciation expense (20,000/6)


3,333
Accumulated depreciation
3,333
(Depreciation for the year for plant)
Note: If there is no reasonable certainty that the lessee will obtain ownership by
the end of the lease term, the asset shall be fully depreciated over the shorter
of the lease term and its useful life.

W1:
Liability against finance lease
Balance
Payments made on

1-Jul-2014
31-Dec-2014
30-Jun-2015

Balance 30-6-2015

Emile Woolf International

206

Instalment
payments
2,500
2,500
5,000

Interest
at
13.731%

Principal
balance

1,373
1,296
2,669

20,000
(1,127)
(1,204)
(2,331)
17,669

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 10 IAS 37: PROVISIONS CONTINGENT LIABILITIES AND


CONTINGENT ASSETS AND IAS 10: EVENTS OCCURRING AFTER THE
REPORTING DATE
10.1

BADAR
Decommissioning costs
IAS 37 Provisions, Contingent Liabilities and Contingent Assets only permits a
provision to be made if three conditions are met:
(i)

The company has a present obligation, either legally or constructively, as a


result of a past event;

(ii)

Probable outflow of resources is required to settle the obligation; and

(iii)

A reliable estimate is available.

Although there is no legal requirement to restore the site, the company has
established a constructive obligation by setting a valid expectation in the market,
due to its published policies and past practice, from which it cannot realistically
withdraw.
It therefore appears probable that Badar will have to pay money to improve the site
and so a provision should be created for the expected amount. As the expected
payment of Rs.100,000 will not be settled for three years, the provision should be
discounted and entered at its net present value of Rs.75,131 (Rs.100,000/(1.1)3).
Over the three years, the discounting should be unwound and charged to profit or
loss as finance costs, resulting in a provision of Rs.100,000 by the end of the third
year.
The cost of the construction work has been correctly capitalised. The cost of the
future decommissioning work should be added to this asset so that the total costs of
the site can be matched to the revenue from the copper over the period of mining.
This will result in an asset of Rs.575,131 which should be depreciated over the three
year life in line with anticipated revenues.

10.2

GEORGINA
(1)

Litigation for damages


Under IAS37, a provision should only be recognised when:

an entity has a present obligation as a result of a past event

it is probable that an outflow of economic benefits will be required to


settle the obligation

a reliable estimate can be made of the amount of the obligation.

Applying this to the facts given:

Georginas legal advisors have confirmed that there is a legal obligation.


This arose from the past event of the sale, on 1 September 2015 (i.e.
before the year end).

Probable is defined as more likely than not. The legal advisors have
confirmed that it is likely that the claim will succeed.

A reliable estimate of Rs.500,000 has been made.

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Therefore a provision of Rs.500,000 should be made.


Counter-claim
IAS37 requires that such a reimbursement should only be recognised where
receipt is virtually certain. Since the legal advisors are unsure whether this
claim will succeed no asset should be recognised in respect of this claim.
(2)

Claim for unfair dismissal


In this case, the legal advisers believe that success is unlikely (i.e. possible
rather than probable). Therefore this claim meets the IAS37 definition of a
contingent liability:

a possible obligation

arising from past events

whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events.

The liability is a possible one, which will be determined by a future court case
or tribunal. It did arise from past events (the dismissal had taken place by the
year end).
This contingent liability should be disclosed in the financial statements (unless
the legal advisors believe that the possibility of success is in fact remote, and
then no disclosure is necessary).
(3)

Returns
Applying the IAS37 conditions in (1) to the facts given:

Although there is no legal obligation, a constructive obligation arises


from Georginas past actions. Georgina has created an expectation in its
customers that such refunds will be given.

As at the year end, based on past experience, an outflow of economic


benefits is probable.

A reliable estimate can be made. This could be 1% 400,000 but since


the returns are now all in the actual figure of Rs.3,500 can be used.

Therefore a provision of Rs.3,500 should be made.


(4)

Closure of division
Applying the above IAS37 conditions in (1) to the facts given:

A present obligation exists because at the year end there is a detailed


plan in place and the closure has been announced in the press.

An outflow of economic benefits is probable.

A reliable estimate of Rs.300,000 has been made.

However, IAS37 specifically states in respect of restructuring that any


provision should include only direct expenses, not ongoing expenses such as
staff relocation or retraining. Therefore a provision of Rs.250,000 (300,000
50,000) should be made.

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10.3

EARLEY INC
(a)

IAS 10 (revised) Events After the Statement of financial position Date states
that assets and liabilities should be adjusted for events occurring after the
statement of financial position date that provide additional evidence relating to
conditions existing at the statement of financial position date. It specifically
includes the example of bad debts, where evidence of bankruptcy of a debtor
occurs after the year end.
In this case, Nedengy appears to have recovered part of the debt and as such
only Rs.200,000 needs to be provided. It may be argued that the receivership
has occurred as a result of events occurring after the statement of financial
position date, as a result of a change in legislation for example, but this is
unlikely.
IAS 18 Revenue states that when uncertainty arises about the collectability of
an amount already included in revenue, the amount should be recognised as
an expense.

(b)

It is likely that the fall in the value of the property will fit the IAS 10 (revised)
definition of adjusting events noted in (a) above, unless, again, it can be
argued that the decline in the property market occurred after the year-end.
IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment
require that the carrying amount of property, plant and equipment should be
reviewed periodically in order to assess whether the recoverable amount has
fallen below the carrying amount. Where it has, the property, plant and
equipment should be written down to the recoverable amount, either through
the statement of profit or loss as an expense, or though other comprehensive
income to revaluation reserve in shareholders equity, but only to the extent
that the balance on the revaluation reserve relates to a previous revaluation
surplus on the same asset.

(c)

IAS 2 Inventories requires that inventories be stated at the lower on cost and
net realisable value. Net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
Unless Earley was making a significant margin on the tricycles, it is likely that
the reduction in selling price of 30% will necessitate a write- down to net
realisable value, especially considering the transportation costs to Iraq which
must be included. If the Iraqi option is unlikely to proceed, it may be necessary
to write the tricycles down to scrap value.

(d)

Under IAS 10, the nationalisation is likely to be regarded as a non-adjusting


event that merely requires disclosure in the financial statements. IAS 27
Consolidated Financial Statements and Accounting for Investments in
Subsidiaries, requires that an investment in a enterprise should be accounted
for as an investment (under IAS 39: Financial Instruments: Recognition and
Measurement) from the date that it ceases to fall within the definition of a
subsidiary and does not become an associate. It seems here that Earley has
neither control nor significant influence, nor even an investment as the assets
have been in fact, expropriated. The loss of the investment should be
accounted for in the year in which it occurred, but disclosed in the current
year.
If the loss of the subsidiary results in Earley no longer being a going concern,
then the event becomes an adjusting event.

(e) & (f)

Emile Woolf International

Both of the events described are non-adjusting event which should be


disclosed, but not adjusted for in the current year financial statements.

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10.4

ACCOUNTING TREATMENTS
(a)

IAS 37 Provisions contingent liabilities and contingent assets states that


contingent gains should not be recognised as income in the financial
statements. The company has a debit balance already in its books which
indicates that it must be reasonably certain that at least part of the claim will
be paid. This element of the claim then is probably not a contingency at all.
The remaining part (the difference between the Rs.15,000 and the Rs.18,600)
is, and should be disclosed and not accrued.

(b)

IAS 16 Property, Plant and Equipment requires that the carrying amount of
property, plant and equipment should be reviewed periodically in order to
assess whether the recoverable amount has fallen below the carrying amount.
Where it has, the property, plant and equipment should be written down to the
recoverable amount through the statement of profit or loss as an expense. In
this case this would result in the recognition of an expense of Rs.200,000.
(280,000 80,000).
It may be the case that the amounts involved are so significant as to warrant
separate disclosure in the statement of profit or loss under IAS 8 Net Profit of
Loss for the Period, Fundamental Errors and Changes in Accounting Policies.

(c)

IAS 37 states that contingent liabilities should not be recognised. Though a


provision should be made for amounts where the company has an obligation
to pay them.
The question in this case is whether or there is an obligating event within the
context of IAS 37. On balance it seems inappropriate to recognise a provision
in respect of this amount but the possible liability should be disclosed as a
contingent liability.

(d)

(i)

the nature of the contingency

(ii)

the uncertainties surrounding the ultimate outcome

(iii)

the likely effect, ie Rs.500,000 loss less likely tax relief.

IAS 2 Inventories requires that inventories be stated at the lower on cost and
net realisable value. Net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
In this case, cost is Rs.1,800 and net realisable value is Rs.1,600

(e)

The company should set up a provision for Rs.100,040, ie should accrue for
the 10% probable liability. It should disclose the possible liability under
contingent liabilities. The disclosure is as noted in (c) except that the financial
effect is Rs.300,120 (30% Rs.1,000,400). The balance should be ignored as
it is a remote contingent liability.

Tutorial note
In (c) above it is not appropriate to provide for 20%receivableRs.500,000, ie
Rs.100,000. This would only be appropriate where the event is recurring many
times over.
In (e) it is appropriate to use the percentages provided, as warranty work is provided
for.

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Answers

10.5

J-MART LIMITED
(a)

Adjusting events:
Adjusting events are events that provide further evidence of conditions that
existed at the reporting date.
Examples of adjusting events include:
(i)

The subsequent determination of the purchase price or of the proceeds


of sale of non-current assets purchased or sold before the year end.

(ii)

The renegotiation of amounts owing by customers or the insolvency of


a customer

(iii)

Amounts received or receivable in respect of insurance or the


insolvency of a customer.

(iv)

The settlement after the reporting date of a court case that confirms
that the entity had a present obligation at the reporting date.

(v)

The receipt of the information after the reporting date indicating that an
asset was impaired at the reporting date.

(vi)

The discovery of fraud or errors that show that the financial statements
are incorrect.

Non-adjusting events:
Non-adjusting events are indicative of conditions that arose subsequent to
the reporting date.
Examples of non-adjusting events might be:

(b)

(i)

Losses of non-current assets or inventories as a result of a


catastrophe such as fire or flood

(ii)

Closing a significant part of the trading activities if this was not begun
before the year end

(iii)

The value of an investment falls between the reporting date and the
accounts are authorised

(iv)

Announcement of dividend after year end.

(i)

The conditions attached to the sale give rise to a constructive


obligation on the reporting date.
A provision for the sales return should be recognised for 5% of June
2015 sales. The related cost should also be reversed.

(ii)

Since the law suit was already in progress at year-end and the
amount of compensation can also be estimated, it is an adjusting
event.
A provision of Rs. 400,000 should be made.

(iii)

There is no obligating event at the year end either for the costs of
fitting the smoke detectors or for fines under the legislation.
No provision should be recognised in this regard.

(iv)

The obligating event is the communication of decision to the


customers and employees, which gives rise to a constructive
obligation from that date, because it creates a valid expectation that
the division will be closed.
Since no communication has yet been made, no provision is required
in this regard.

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Financial accounting and reporting II

(v)

The obligating event is the signing of the lease contract, which gives
rise to a legal obligation.
A provision is required for the unavoidable rent payments.

(vi)

Since the declaration was announced after year-end, there is no past


event and no obligation at year-end and is therefore non-adjusting
event.
Details of the dividend declaration must, however, be disclosed.

10.6

AKBER CHEMICALS LIMITED


(a)

The event is an accident, and since it happened before the year end, it is a
past event. However, there is no present obligation since:
(i)

there is no law requiring the company to clean the canal.

(ii)

there is no constructive obligation to clean the river since:

a public statement has not been made;

there is no established pattern of past practice as this was the first


time the company faced such a situation.

Although the company has decided to clean up the river and even has a
reliable estimate of the costs thereof, no liability or provision should be
recognised in the current year because:

(b)

the decision was taken after year end; and

the decision was not yet made public.

It is a non-adjustable event because the event due to which the net realizable
value (NRV) of stock has fallen, arose after the reporting date.
However, if this event is material, the company should disclose the decline in
NRV in its financial statement for the year ended June 30, 2015.

(c)

The company should make the provision because:


(i)

the company has a present obligation because of past event

(ii)

the claim of the customer is valid and is confirmed by the company's


inspection team which shows that an outflow will be required to settle
the obligation.

(iii)

the amount of outflow is reliably estimated i.e. Rs. 2 million.

Since the company is certain of recovery from the vendor, it should:


(i)

disclose it as a separate asset.

(ii)

recognise a receivable but the same should not exceed the amount of
the related provision i.e. rs. 2.0 million.

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Answers

10.7

QALLAT INDUSTRIES LIMITED


(i)

Provision must be made for estimated future claims by customers for goods
already sold.
The expected value i.e. Rs. 10 million ([Rs. 150m x 2%] + [Rs. 70m x 10%])
is the best estimate of the provision.

(ii)

Warehouse A: It is an onerous contract. as the warehouse has been sublet


at a loss of Rs. 200,000 per month. QIT should therefore create a provision
for the onerous contract that arises on vacating the warehouse. This is
calculated as the excess of unavoidable costs of the contract over the
economic benefits to be received from it. Therefore, QIL should immediately
provide for the amount of Rs. 13.2 million. [5.5 years x 12 month x Rs.
200,000] in its financial statements i.e. for the year ended June 30, 2015.
Warehouse B: It is not an onerous contract because the warehouse has
been sublet at profit. Hence this would require no adjustment.

(iii)

A provision is to be made by QIL against a contingent liability as:


(i)

There is a present obligation (legal or constructive) as a result of a


past event; i.e. accident occurred on June 15, 2015.

(ii)

It is probable that outflow of resources will be required to settle the


obligation; and

(iii)

A reliable estimate can be made of the amount of the obligation.

The amount of provision shall be Rs. 2.0 million i.e. the most probable
amount as determined by the lawyer.

(iv)

A provision of Rs. 0.4 million is required in relation to penalty for March 1 to


June 30, 2015 because at the reporting date there is a present obligation in
respect of a past event.
The reimbursement of penalty amount from the vendor shall be recognised
when and only when it is virtually certain that reimbursement will be received
if the entity settles the obligation. The reimbursement should be treated as a
separate asset in the statement of financial position. However, in profit and
loss statement, the expense relating to a provision may be netted off with the
amount recognised as recoverable, if any.

10.8

SKYLINE LIMITED
(i)

Although the debt owing by the customer existed at the reporting date, the
customers inability to pay did not exist at that point. This condition only arose in
January 2016 after the fire.
Thus, this is a non-adjusting event. However, if it is material for the financial
statements, the following disclosure should be made.

(ii)

Nature of the event

An estimate of its financial effect

The amount withdrawn before year end i.e. Rs. 1.5 million is an adjusting event as
although it was discovered after year end it existed at the year end. However,
since 60% has been recovered subsequently, Rs. 0.6 million would be provided.

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The further withdrawal of Rs. 6.0 million is a non-adjusting event as it occurred


after year end. However, if the events are considered material the following
disclosures should be made:

Nature of the event


The gross amount of contingency
The amount recovered subsequently
(iii)

SL should not recognise the contingent gain until it is realised. However, if


recovery of damages is probable and material to the financial statements, SL
should disclose the following facts in the financial statements:

Brief description of the nature of the contingent asset


An estimate of the financial effect.
(iv)

SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0
million x 60% + Rs. 1.5 million x 40%) because

it is a present obligation as a result of past event;


it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations; and
a reliable estimate can be made of the amount.
In addition, SL should disclose the following in the notes to the financial
statements:

Brief nature of the contingent liability


The amount of contingency
An indication of the uncertainties relating to the amount or timing of any
outflow.

10.9

WALNUT LIMITED
(i)

This is an adjusting post reporting event as it provides evidence of conditions that


existed at the end of the reporting period. The reasons for the competitors price
reduction will not have arisen overnight, but will normally have occurred over a
period of time, may be due to superior investment in technology.
An inventory write down of Rs. 2.5 million should be recognised and the amount
included as inventory on the Statement of Financial Position reduced to Rs. 12.5
million.

(ii)

The provision should be recognised because the obligating event is the


communication of event to the public which creates a valid expectation that the
division will be closed.
However, the provision should only be recognised to the extent of redundancy
costs. IAS prohibits the recognition of future operating losses, staff training and
profits on sale of assets.

(iii)

This is a non-adjusting event because the burglary and theft of consumable stores
occurred after reporting date. However, if the event is material, it should be
disclosed in the financial statements unless the loss is recoverable from the
insurance company.

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Answers

(iv) The drop in value of investment in shares is a non-adjusting event. Since the
legislation was announced after the reporting date, the event is not a past event.
However, if the amount is material, it should be disclosed in the financial
statements.
(v)

This is an adjusting event as it provides evidence of conditions that existed at the


end of the reporting period. The insolvency of a debtor and the inability to pay
usually builds up over a period of time and it can therefore be assumed that it was
facing financial difficulty at year-end.
A bad debts expense of Rs. 1.5 million should be recognised in SOCI.

(vi) It is a non-adjusting event because the declaration was announced after the yearend and there was no obligation at year end. Details of the bonus shares
declaration must, however, be disclosed.

10.10 ATTOCK TECHNOLOGIES LIMITED


(i)

Since the event which caused the inventory to be sold at a loss occurred after the
year end, it is non-adjusting event. However, the effect of the event should be
disclosed in the financial statements for the year ended June 30, 2015.

(ii)

It is an adjusting event in accordance with the requirement of IAS-10. The


debtors balance should be written down by 80% amount.

(iii)

It is non-adjusting event as the subsequent reduction in price is due to an event,


introduction of competitive product, occurred after the reporting period.

(iv) Since this change was not enacted before the reporting date, it is a non-adjusting
event. However, a disclosure should be made for this change.
(v)

Since the declaration was announced after the year-end and there was no
obligation at year-end it is a non-adjusting event. Details of the dividend
declaration must, however, be disclosed.

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Financial accounting and reporting II

CHAPTER 11 IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING


ESTIMATES AND ERRORS
11.1

WONDER LIMITED
2014
2015

(Restated)

Rs.m

Rs.m

Wonder Limited
Extracts of Statement of financial position
For the year ended 30 June 2015
Property, plant and equipment

178.50

111.50

Retained earnings

158.65

95.05

41.85

21.45

Deferred tax liability


PPE:

Year 2015: 189 - [20 - (20 10% 1.75)] + [56/4 56/7]

DTL: Year 2015: [(21.45 + (45 - 27) + {(6+2) 30%}]

PPE: Year 2014: 130 - 18.5(Note X)


DTL: Year 2014: 27 - 5.55 (Note X)

Wonder Limited
Extracts from the Statement of profit or loss for the year ended 30 June 2015
Profit before taxation
Taxation
Profit after taxation

98.00

101.50

(34.40)

(36.45)

63.60

65.05

PBT : Year 2015 : 90 + (20 10% ) + [(56/4) - (56/7)]

PBT : Year 2014 : 120 - 18.5 (Note X)

Tax : Year 2015: 32 + [(6+2) 30%]

Tax : Year 2014 : 42 - 5.55 (Note X)

Wonder Limited
Extracts of statement of changes in equity for the year ended 30 June 2015
Retained
earnings
Rs.m

Balance as on 1 July 2013 (108-78)

30.00

Profit for the year ended 30 June 2014 (78 - 12.95 (Note X))restated

65.05

Balance as at 30 June 2014 - restated

95.05

Profit for the year ended 30 June 2015

63.60

Balance as at 30-June 2015

Emile Woolf International

158.65

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Answers

Wonder Limited
Notes to the financial statements
For the year ended 31 December 2015
X Correction of error
During the year ended 30 June 2013, the repair works was erroneously
debited to machinery account. The effect of this error is as follows:
2014
Rs.m

Effect on the statement of profit or loss


(Increase) / decrease in expenses or losses
Repairs and maintenance
Depreciation (20 10% 9 12)
Tax expenses (30% (20-1.5))
Decrease in profit for the year

(20.00)
1.50
5.55
(12.95)

Effect on the statement of financial position


Increase / (decrease) in assets
Property, plant and equipment (20 1.5)

(18.50)

(Increase) / decrease in liabilities


Deferred tax liability (Rs. 18.5 30%)

5.55

(Increase) / decrease in equity


Retained earnings (18.50 - 5.55)

11.2

(12.95)

DUNCAN
Statement of changes in equity (extract)
Retained
earnings

Retained
earnings

Opening balance as reported


Change in accounting policy (W2)

2015
Rs.000
23,950
450

2014
Rs.000
22,500
400

Re-stated balance
Profit after tax for the period (W1)
Dividends paid

24,400
4,442
(2,500)

22,900
3,250
(1,750)

Closing balance

26,342

24,400

2015

2014

Rs.000
4,712
600
(870)

Rs.000
3,200
500
(450)

Workings
(1)

Revised profit

Per question
Add back: Expenditure for the year
Minus: Depreciation
Revised profit

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4,442

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(2)

Prior period adjustment


The prior period adjustment is the reinstatement of the Rs.400,000 asset on 1
January 2014 and the Rs.450,000 asset at 1 January 2015. On 31 December
2015 the closing balance above of Rs.26,342,000 can be reconciled as the
original Rs.26,162,000 plus the reinstatement of the remaining asset of
Rs.180,000.

11.3

MOHANI MANUFACTURING LIMITED


Mohani Manufacturing (Private) Limited
Statement of changes in equity
For the year ended December 31, 2015
Retained
Earnings
Rs. in
million

Balance at December 31, 2013 as previously reported (Rs. 89m


Rs. 21m)
Effect of change in accounting policy (Rs. 37m - Rs. 35.5m)
Balance at December 31, 2013 restated
Profit for the year ended December 31, 2014 - restated (W1)
Balance at December 31, 2014 restated
Profit for the year ended December 31, 2015 (W2)

68.00
(1.50)
66.50
39.70
106.20
8.80

Balance at December 31, 2015

115.00

W1: Profit for the year ended December 31, 2014 (as restated)
Profit as previously reported
Incorrect recording of depreciation (Rs. 25 million Rs. 10 million)
Reversal of FIFO method
Opening inventory
Closing inventory

Rs. in
million

21.00
15.00

37.00
(42.30)
(5.30)

Application of weighted average method


Opening inventory
Closing inventory

(35.50)
44.50
9.00
39.70

W2: Adjusted profit for year ended June 30, 2015


Profit as per draft financial statements
Adjustment in Opening Inventory
FIFO
Weighted average
Adjustment in Closing Inventory
FIFO
Weighted average

42.30
(44.50)
(2.20)
(58.40)
54.40
(4.00)

Adjusted profit

Emile Woolf International

15.00

8.80

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Answers

CHAPTER 12 IAS 12: INCOME TAXES


12.1

FRANCESCA
Rs.

Rs.

Opening liability

1,340,600

Capital allowances during the year

50,000,000

Depreciation charged during the year

(45,000,000)

5,000,000

30%

1,500,000

30%

1,500

30%

(1,200)

Interest receivable in statement of profit or


loss
Interest received in tax computation

50,000
(45,000)

Receivable in statement of financial


position

5,000

Interest payable in statement of profit or


loss
Interest paid in tax computation

32,000
(28,000)

Payable in balance sheet

4,000

Development costs as allowable expense

Revaluation

500,600

30%

150,180

x 30%

329,850

6,000,000

Carrying value

(4,900,500)

Revaluation surplus

1,099,500

Closing liability

3,320,930

Rs.
Charged to the revaluation reserve
Charged in the statement of profit or loss (balancing figure)
Total movement on the provision of (3,320,930 1,340,600)

Emile Woolf International

219

329,850
1,650,480

1,980,330

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

12.2

SHEP (I)
(a)

Corporate income tax liability - year ended 31st December 2015


Rs.
Profit per accounts
Add Depreciation

121,000
11,000

133,000
(15,000)

117,000

Less tax depreciation


Taxable profits

Tax payable @ 30%


(b)

35,100

Deferred tax liability


Rs.
Carrying amount (48,000 + 12,000 = 60,000 11,000)
Tax base (48,000 + 12,000 = 60,000 15,000)
Temporary difference
Deferred tax liability required @ 30%

(c)

49,000
45,000

(4,000)

(1,200)

Movement on the deferred tax liability


Rs.
Balance b/f
Statement of profit or loss (balancing figure)
Balance c/f

(d)

1,200

1,200

Statement of profit or loss note


Rs.
35,100
1,200

36,300

Current tax expense


Deferred tax expense
Tax expense

Emile Woolf International

220

The Institute of Chartered Accountants of Pakistan

Answers

12.3

SHEP (II)
(a)

Corporate income tax liability - year ended 31st December 2016


Rs.
Profit per accounts
Add Depreciation
Interest payable
Provision
Fine

125,000
14,000
500
1,200
6,000

146,700
(16,000)
(150)

130,550

39,165

Less tax allowance (given)


Interest receivable
Taxable profits
Tax payable @ 30%

(b)

Deferred tax liability


Carrying
amount
Rs.
Tangible assets
Carrying amount (49bf 14)
Tax base (45bf 16)
Interest payable (25,000 x 8% x 3/12)
Interest receivable (4,000 x 15% x 3/12)
Provision

Temporary
difference
Rs.

29,000

29,000

6,000
(500)
150
(1,200)

4,450

35,000
(500)
150
(1,200)

33,450

Deferred tax @30%

(c)

Tax
base
Rs.

1,335

Movement on the deferred tax liability


Rs.
Balance b/f
Statement of profit or loss (balancing figure)
Balance c/f

(d)

1,200
135

1,335

Statement of profit or loss note


Rs.
39,165
135

39,300

Current tax expense


Deferred tax expense
Tax expense

Emile Woolf International

221

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

(e)

Tax reconciliation
Rs.
125,000

37,500
1,800

39,300

Accounting profit
Accounting profit @ 30%
Tax effect of the fine (6,000 @ 30%)
Tax expense

12.4

SHEP (III)
(a)

Corporate income tax liability - year ended 31st December 2017


Rs.
Profit per accounts
Add Depreciation
Interest payable (note)
Provision
Entertainment

175,000
18,500

2,000
20,000

215,500
(24,700)

(17,800)
(500)

172,500

Less tax allowance (given)


Interest receivable (note)
Development costs
Provision
Taxable profits

Tax payable @ 30%

51,750

Note
There is no adjustment to profit for the interest paid and the interest receivable.
Consider the interest payable. The tax authority will disallow the closing accrual but
will allow last years accrual (that has been paid in this year) as a deduction. These
amounts are equal so there is no net effect.
Similar comments can be made about the interest receivable.

Emile Woolf International

222

The Institute of Chartered Accountants of Pakistan

Answers

(b)

Deferred tax liability


Carrying
amount
Rs.
Tangible assets
Carrying amount (35bf 18.5) 16,500
Tax base (29bf 24.7)
Interest payable
(500)
Interest receivable
150
Provision
(2,700)
Development expenditure
17,800

31,250

Deferred tax @ 30%

(c)

Tax
base
Rs.

Temporary
difference
Rs.

4,300

4,300

12,200
(500)
150
(2,700)
17,800

26,950

8,085

Movement on the deferred tax liability


Rs.
Balance b/f
Statement of profit or loss (balancing figure)
Balance c/f

(d)

Statement of profit or loss note


Rs.
51,750
6,750

58,500

Current tax expense


Deferred tax expense
Tax expense

(e)

1,335
6,750

8,085

Tax reconciliation
Accounting profit
Accounting profit @ 30%
Tax effect of the fine (20,000 @ 30%)
Tax expense

Emile Woolf International

223

Rs.
175,000

52,500
6,000

58,500

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

12.5

SHEP (IV)
(a)

Corporate income tax liability - year ended 31st December 2017


Rs.
Taxable profits (as before)

172,500

58,650

Tax payable @ 34%


(b)

Deferred tax liability


Rs.
Temporary difference (as before)

26,950

9,163

Deferred tax @ 34%


(c)

Movement on the deferred tax liability


Rs.
Balance b/f
Adjustment due to change in rate
Opening balance restated to 34% (1,335 x 34/30)
Statement of profit or loss (balancing figure)
Balance c/f

(d)

Statement of profit or loss note


Current tax expense
Deferred tax expense relating to origination and reversal
of temporary differences
Deferred tax expense resulting from increase in tax rate
Tax expense

(e)

1,335
178

1,513
7,650

9,163

Rs.
58,650
7,650
178

66,478

Tax reconciliation
Accounting profit
Accounting profit @ 34%
Tax effect of the fine (20,000 @ 34%)
Increase in opening deferred tax balances due to
change in rate
Tax expense

Emile Woolf International

224

Rs.
175,000

59,500
6,800
178

66,478

The Institute of Chartered Accountants of Pakistan

Answers

12.6

WAQAR LIMITED
a)

Computation of current period income tax liability


2015

2014

Rs.m

Rs.m

Accounting profit before tax


Less: Admissible deductions
Capital Gain
Tax depreciation on furniture and fittings
Rs. 40.5 x 10%
Rs. 40.5 (1-10%) x 10%
Tax depreciation on Machinery
Rs. 90 x 10%
Rs. 90 (1-10%) x 10%

40.00

30.00

(10.00)

(8.00)
(4.05)

(3.65)
(9.00)
(8.10)

Add: Inadmissible deductions


Accounting depreciation on machinery
Accounting depreciation on furniture and fittings
Taxable profit
Tax rate
Tax payable (current tax)

25.00
5.00
48.25
30%
14.48

25.00
5.00
38.95
35%
13.63

b) Deferred taxation computation

Working 2
At December
31,2013
Machinery
Furniture and fittings
Deferred tax liability
at December
31,2013 (35%)
At December 31,
2014
Machinery
Furniture and fittings
Deferred tax liability
at December
31,2014 (35%)
WDV as at
December 31, 2015
Machinery
Furniture and fittings
Deferred tax liability
at December
31,2015 (35%)

Emile Woolf International

NBV (W1)

Tax base
(W1)

Temporary
difference

Deferred tax
liability

Rs.m

Rs.m

Rs.m

Rs.m

175.00
40.00

90.00
40.50

85.00
(0.50)

29.75
(0.18)

29.57

150.00
35.00

81.00
36.45

69.00
(1.45)

24.15
(0.51)

23.64

125.00
30.00

72.90
32.80

52.10
(2.80)

15.63
(0.84)

14.79

225

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Working 1
Carrying amount and tax base of machinery
Cost b/f
Accumulated depreciation b/f
At 31 December 2013
Accounting depreciation (200/8 years)
Tax depreciation (10% of WDV)

NBV
200.0
(25.0)
175.0
(25.0)

d)

At 31 December 2014
Accounting depreciation (200/8 years)
Tax depreciation (10% of WDV)

150.0
(25.0)

81.0

At 31 December 2015

125.0

72.9

NBV
50.0
(10.0)
40.0
(5.0)

Tax base
50.0

(8.1)

40.5
(4.05)

At 31 December 2014
Accounting depreciation (10% 50)
Tax depreciation (10% of WDV)

35.0
(5.0)

At 31 December 2015

30.0

36.45
(3.65)

Movement on deferred taxation account (W2)


At January 1
Change due to change in rate (23.64 5/35)

2015
23.64
(3.38)
20.26

32.8
2014
29.57
-

Change due to origination and reversal of temporary


differences in the period (balancing figure)

(5.47)

(5.93)

At December 31

14.79

23.64

Tax expense
Current tax
Deferred tax:
Due to origination and reversal of temporary
differences in the period
Due to change in rate

2015
14.48

2014
13.63
-

Tax expense
e)

90.0
(9.0)

Carrying amount and tax base of furniture and fittings


Cost b/f
Accumulated depreciation b/f
At 31 December 2013
Accounting depreciation (10% 50)
Tax depreciation (10% of WDV)

c)

Tax base
200.0

Tax reconciliation
Accounting profit
Tax rate

(5.93)

5.63

7.7

2015
40.0
30%
12.0

Tax effect of untaxed gain:


30% 10.0
35% 8.0
Decrease in opening deferred tax balances due to
change in rate (with rounding adjustment)
Tax expense

Emile Woolf International

(3.38)
(5.47)

(3.0)
(2.8)
(3.37)
5.63

226

2014
30.0
35%
10.5

7.7

The Institute of Chartered Accountants of Pakistan

Answers

12.7

SHAKIR INDUSTRIES
COMPUTATION OF TAX EXPENSE
FOR THE YEAR ENDED DECEMBER 31, 2015
2015
Rs. in
million

Profit before tax


Add: Inadmissible expenses
Accounting depreciation (Rs. 1.1 million + Rs. 0.7 million)
Financial charges on finance lease
Penalty paid to SECP
Provision for gratuity

15.80
1.80
0.15
0.70
2.40
5.05

Less: Admissible expenses


Tax depreciation
Lease payments
Payment of gratuity
Borrowing cost capitalised

Rs.m

1.65
0.65
1.60
2.30
6.20

Taxable profit for the year

14.65

Current tax expense @ 35%

5.13

COMPUTATION OF DEFERRED TAX EXPENSE


FOR THE YEAR ENDED DECEMBER 31, 2015
Carrying
amount
Fixed assets Owned
Fixed assets Leased
Capital work in progress
Provision for gratuity (0.7 + 2.4 1.6)
Obligation against assets subject to finance
lease

Tax
base

Temp
difference

Rs.m

Rs.m

Rs.m

16.70
1.80
2.30
(1.50)

13.85
-

2.85
1.80
2.30
(1.50)

(1.20)

Total

(1.20)
4.25

Deferred tax expense @ 35%

1.49
Rs. in
million

Deferred tax liability (Opening)

0.55

Deferred tax expense for the year (balancing figure)


Deferred tax liability as at December 31, 2015 (Rs. 4.25 million x
35%)

0.94

Emile Woolf International

227

1.49

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

12.8

MARS LIMITED
(a)

Date

Particulars

Debit

Credit

Rupees
01.07.2014

01.07.2014

30.06.2015

Motor Vehicle - Cost


Obligations under finance lease
Capitalisation of the lease

1,600,000
1,600,000

Obligations under finance lease


Bank
First lease payment made in advance

480,000

Finance charges
Accrued finance charges

153,451

480,000

153,451

Finance charge accrual for the year ended June 30, 2015
Working: (Rs. 1,600,000 480,000) 13.701% = Rs. 153,451)
30.06.2015

Depreciation
Accumulated depreciation - Motor
Vehicle

400,000
400,000

Depreciation charge for the year ended June 30, 2015


Working: Rs. 1,600,000 4 = Rs. 400,000.
Assuming that there is no reasonable certainty about transfer of
ownership at the end of lease term.
30.06.2015

Tax expense (W1)


1,492,035
Tax payable
1,492,035
Recognition of tax expense for the year ended June 30, 2015)

30.06.2015

Tax expense
Deferred tax (W2)
Recognition of deferred tax asset.

W1

22,035
22,035

Tax computation
Rs.

Emile Woolf International

Accounting profit before tax


Add: Depreciation on leased assets
Add: Finance charges
Less: Lease payment

4,900,000
400,000
153,451
(480,000)

Taxable profit

4,973,451

Tax @ 30%

1,492,035

228

The Institute of Chartered Accountants of Pakistan

Answers

W2

Deferred tax computation


Carrying
amount
Taxable temporary difference
Leased assets
Deductible temporary difference
Obligations under finance
lease
Accrued finance charges

Tax
base

1,200,000

(1,120,000)
(153,451)

Net taxable temporary


difference

1,200,000

(1,120,000)
(153,451)
(73,451)

Deferred tax @ 30% (Asset)


(b)

Difference

22,035

Liabilities against assets subject to finance lease (W3)


2015
Rs.

Present value of minimum lease payments


Less: Current maturity shown under current liabilities

1,120,000
(326,549)
793,451

Minimum lease payments (W3)


Not later than 1 year
Later than 1 year and not later than 5 years (480,000 2)
Less: future finance charges on finance lease

480,000
960,000
1,440,000
(320,000)
1,120,000

Present value of finance lease liabilities (W3)


Not later than 1 year
Later than 1 year and not later than 5 years
(371,289 + 422,162)

326,549
793,451
1,120,000

The minimum lease payment has been discounted at an interest rate of


13.701% to arrive at their present value. Rentals are paid in annual
instalments.
W3: Repayment Schedule
Opening
Principal
Years
Balance
repayment
Rs.m

2015
2016
2017
2018

1,600,000
1,120,000
793,451
422,162

Rs.m

480,000
326,549
371,289
422,162

Interest
13.701%

Annual
payment

Closing
Balance

Rs.m

Rs.m

Rs.m

153,451
108,711
57,838

480,000
480,000
480,000
480,000

1,120,000
793,451
422,162
-

320,000

Emile Woolf International

229

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

12.9

BILAL ENGINEERING LIMITED


(a)

Computation of current taxation


Rs.m

50.000
10.000

Tax liability for the year (52.446 35%)


Tax liability for prior periods (0.100 35%)

18.356
0.035
18.391

Deferred taxation
Accounting depreciation
Tax depreciation

0.096
1.000
(7.000)
(0.300)
(1.350)
52.446

10.000
(7.000)

Financial charges on finance lease liability(1.00


0.3) 13.701%
Annual instalment of lease payment allowed under
tax
Amortization charged in accounts
Amortization cost claimed in tax
Excess of taxable income over accounting profit due
to time differences
Deferred tax credit at 35%
Total tax expenses (current and deferred)
(b)

Rs.m

Profit before tax


Add: Accounting depreciation
Financial charges on lease liability (1.00
0.3) 13.701%
Amortization of research and development
cost for the year
Less
:
Tax depreciation
Annual instalment of lease payment
Amortization of research and development
cost (15 0.9/10)
Current year taxable income

3.000

0.096
(0.300)

(0.204)

1.000
(1.350)

(0.350)
2.446
(0.856)
17.535

Bilal Engineering Limited: Notes to the financial statements


for the year ended December 31, 2015
1.1

Relationship between tax expense and accounting


profit

2015

Accounting profit before tax


Tax on accounting profit at 35%
Tax on expenses disallowed (Permanent Difference)
Effective tax rate/tax charge

50.000
17.500
0.035
17.535

Rs.m

(c)

Journal entries
1

Emile Woolf International

Income tax expenses


Provision for taxation
(Tax provision for 2015)
Deferred tax asset
Tax expenses deferred
(Deferred tax credit for 2015)

230

Debit

Credit

Rs.m

Rs.m

18.391
18.391
0.856
0.856

The Institute of Chartered Accountants of Pakistan

Answers

12.10 GALAXY INTERNATIONAL


28 : TAXATION

2015

2014

Rs.m

Rs.m

0.84
6.95
7.79

(0.96)
(0.96)

28.1 : Relationship between tax expense and accounting profit


Profit/(Loss) before taxation
23.50

(1.75)

Current - for the year (W 1)


Deferred (W 2)

Tax at the applicable rate of 35%


Tax effect of exempt income (1.25 x 35%)

W1 : Computation of Current Tax


(Loss) / profit before tax as per books
Add: Allowable income / Disallowed expenses
Accounting depreciation
Provision for gratuity
Accrued expenses
Less: Disallowed income / Allowable expenses
Tax depreciation
Interest income from SIBs (Exempt)
Accrued expenses
Taxable income / (loss)
Tax liability (@ 35%
Tax loss to be brought forward (29.05 x 35%)
Tax payable
W -2: Computation of Deferred Tax
Timing differences (cumulative) on account of:
Depreciation (2015: 30-51, 2014: 15-45)
Accrued expenses
Provision for gratuity
Tax losses

Deferred tax @ 35%


Add: Opening deferred tax (dr.)
Charge/(Reversal) for the year

Emile Woolf International

231

8.23
(0.44)
7.79

(0.61)
(0.35)
(0.96)

23.50

(1.75)

15.00
2.20
-

15.00
1.70
2.00

(6.00)
(1.25)
(2.00)
31.45
11.01
(10.17)
0.84

(45.00)
(1.00)

21.00
(3.90)
17.10

30.00
(2.00)
(1.70 )
(29.05)
(2.75)

5.99
0.96
6.95

(0.96)
(0.96)

(29.05)
-

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

12.11 APRICOT LIMITED


Taxation

2015

2014

Rs.m

Rs.m

Current (W1)
Deferred (W2)

20.48
(1.58)
18.90

10.76
(21.35)
(10.59)

Relationship between tax expense and accounting profit


Profit before taxation
Tax at the applicable rate of 35%
Less: Tax effect of exempt income

2015
60.00
21.00
(2.10)
18.90

W1:

W2:

Computation of Current Tax


Profit before tax as per books
Add: Allowable income / Disallowed expenses
Accounting depreciation
Tax profit on sale of fixed assets
Bad debt expense

60.00

45.00

10.00
1.00
5.00

9.00
7.00

Less: Disallowed income / Allowable expenses


Tax depreciation
Accounting profit on sale of fixed assets
Capital gain
Bad debts written off

(8.00)
(0.50)
(6.00)
(3.00)

(7.00)
(4.00)

Taxable income

58.50

50.00

Tax liability (@ 35%)

20.48

17.50

2015

2014

Rs.m

Rs.m

Computation of Deferred Tax


Fixed assets (2014: 95-90, 2015: 82.5-80) (W2.1)
Provision for bad debts (2014: 1235%, 2015: 1435%)

0.87

1.75

Closing balance of deferred tax


Less: Opening balance

(4.90)
(4.03)
(2.45)

(4.20)
(2.45)
(18.90)

Charge for the year

(1.58)

(21.35)

[W2.2]

W2.1

W2.2

Movement of Fixed Assets


Opening balance
Disposal during the year
Depreciation for the year - 2015

Accounting
95.00
(2.50)
(10.00)

Tax
90.00
(2.00)
(8.00)

Closing balance

82.50

80.00

Movement of provision for bad debts


Opening balance
Provision for the year
Write off during the year

2015
12.00
5.00
(3.00)

2014
9.00
7.00
(4.00)

Closing balance

14.00

12.00

Emile Woolf International

232

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 13 RATIO ANALYSIS


13.1

WASIM
Ratios
Year 7
Gross profit % =
Gross prof it
x 100
Sales
Net profit % =
Net prof it
x 100
Sales

Return on capital employed =


Prof it bef ore interest and tax

405

x 100 = 19%

2,160
9

x 100 = 0.4%

Share capital and reserv es+ Long - term debt capital

15

x 100 = 6%

Sales

2,160

Current ratio =
Current assets

422

Current liabilities
Quick ratio =
Current assets excluding inv entory

13.2

56

x 100 = 29%

x 100

= 8.8 times

246

x 100 = 2.9%

Asset turnover =

53

190

Share capital and reserv es+ Long - term debt capital

x 100 = 20%

1,806

246

362
1,806

2,160

Year 6

422 - 106

Current liabilities
Average time to collect =
Trade receiv ables
x 365
Sales
Average time to pay =
Trade pay ables
x 365
Cost of purchases
Inventory turnover =
Inv entory
x 365
Cost of sales

= 1.7 times

1.2 times

254

316 x 365
2,160

198 x 365
1,755

106 x 365

1,755

Amir

= 9.5 times

190

254

1,806

265

= 1.8 times

147
265 - 61

1.4 times

147

53 day s

198 x 365

1,806

= 41 day s

22 day s

40 day s

142 x 365

= 36 day s

1, 444
61 x 365

= 15 day s

1, 444

AMIR AND MO

Mo

Gross profit % =

Gross prof it

90,000

x 100

x 100 = 60%

150,000

Sales

490,000

x 100 = 70%

700,000

Net profit % =
Net prof it
x 100
Sales

Emile Woolf International

44,895

x 100 = 30%

150,000

270,830

x 100 = 39%

700,000

233

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Return on capital employed =


Prof it bef ore interest and tax
Share capital and reserv es+ Long - term debt capital
Amir
61,500 + 500
x 100 = 28.5%
207, 395 +10,000

Mo

371,000 +12,000

x 100 = 47%

565,580 + 250,000

Asset turnover =

Sales

x 100

Share capital and reserv es+ Long - term debt capital

Amir

150,000

= 0.7 times

207, 395 +10,000

Mo

700,000

= 0.85 times

565,580 + 250,000

Amir

Mo

ratio =
Current
Current assets

50,000

Current liabilities

22,605

153,250

= 2.2 times

= 1.3 times

117,670

Quick ratio =

Current assets excluding inv entory

50,000 - 12,000
22,605

Current liabilities

Average time to collect =

Trade receiv ables

x 365

= 1.7 times

37,500

150,000

153,250 - 26,250

= 1.1 times

117,670

x 365 = 91 day s

105,000

x 365 = 55 day s

700,000

Sales

Average time to pay =

Trade pay ables

22,605

x 365

Cost of purchases

Inventory turnover =
Inv entory

Emile Woolf International

x 365 = 137 day s

60,000

117,670

x 365 = 204 day s

210,000

12,000

x 365

x 365 = 73 day s

60,000

Cost of sales

26,250

x 365 = 46 day s

210,000

234

The Institute of Chartered Accountants of Pakistan

Answers

CHAPTER 14 ETHICAL ISSUES IN FINANCIAL REPORTING


14.1

ETHICAL ISSUES
The range of comments made by Arif raises questions over his ethical behaviour
and professional standards.
A chartered accountant should be unbiased when involved in preparing and
reviewing financial information. A chartered accountant should prepare financial
statements fairly, honestly, and in accordance with relevant professional standards
and must not be influenced by considerations of the impact of reported results.
Arifs failings
Arif appears to be influenced by the need to achieve a specified level of profit. This
is not appropriate and calls his integrity into question.
In addition Arifs professional competence seems to be suspect. His comment on
not being up to date on all of the little technicalities in IFRS s suggests that he has
not maintained a level of professional competence appropriate to his professional
role.
ICAP members have a responsibility to engage in continuing professional
development in order to ensure that their technical knowledge and professional skills
are kept up to date. Arif should seek continuing professional development activities
and improve his knowledge on ethical standards. Furthermore, it might be expected
that as Waheeds superior he should set an example to Waheed and guide him in
his responsibilities. Clearly this is not happening.
As a member of ICAP Arif should be aware of the ICAP code of ethics. Arif should
know of the danger of self-interest threats and intimidation threats to himself and to
others. His attempt to influence the outcome of a fellow professional by applying
such a threat to that individual is very unprofessional.
Waheeds ethical issues
Waheed faces a self-interest threat, in that there is the possibility of a bonus
provided the earnings per share figure remains the same as last year. Arif has also
suggested that she can influence the Boards decision over employing him as a
replacement finance director another self-interest threat to Waheed. Both of these
threats must be ignored.
Arifs comments imply that his application of professional responsibility is lacking.
This may extend into the way in which the current financial statements have been
prepared. Waheed must be very careful (as always) to carry out the review with all
due care.
Waheed should first discuss his recommendations with Arif and remind his of his
professional responsibilities to ensure that the accounting standards are correctly
followed. If the financial statements are found to contain errors or incorrect
accounting treatment then they must be amended. If Arif refuses to amend the draft
financial statements if necessary Waheed should discuss the matter with other
board members (including non- executives and the audit committee, if possible).
Further action might include consulting with ICAP.

Emile Woolf International

235

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

14.2

SINDH INDUSTRIES LTD


(a)

Financial reporting issues


Revenue
IAS 18 Revenue sets out the rules to be followed in recognising revenue.
The fact that the customer cannot cancel the contract is not relevant to the
recognition of revenue. Revenue from providing a service is recognised
according to the stage of completion subject to satisfying criteria set out in IAS
18. In the absence of other information the revenue in this contract should be
recognised over the life of the contract as time progresses. As the contract
was only signed just before the year end, none of the revenue can be
recognised in 2015.
The credit for the amount received should be recognised as a liability. This
represents the obligation that the company has to provide the service over the
next two years.
The fact that the customer cannot cancel the contract is not relevant to the
recognition of revenue. If Sindh Industries failed to provide the service they
would be sued for restitution. Therefore the revenue can only be recognised
as the service is provided.
New factory
Borrowing costs directly attributable to construction of an asset which
necessarily takes a substantial period to get ready for its intended use should
be capitalised as part of the cost of that asset under IAS 23 Borrowing Costs.
IAS 23 states that the capitalisation of borrowing costs should commence
when three conditions are all met for the first time: borrowing costs are being
incurred, expenditure is being incurred and activities to prepare the asset are
being undertaken. Although borrowing costs were incurred throughout the
year and expenditure was incurred from 1 February 2015 (the date the land
was purchased), construction only started on 1 June 2015. Therefore this is
the date on which capitalisation commences.
Capitalisation ceases when substantially all of the activities required to make
the asset ready for use/sale have been completed, that is on 30 September
2015. (The actual date on which the factory was brought into use is irrelevant.)
Therefore the period of capitalisation should be four months.
Where construction is financed from general borrowings, the calculation of the
amount to be capitalised should be based on the weighted average cost of
borrowings. This is:
(Rs.1,000,000 9.75%) + (Rs.1,750,000 10%) + (Rs.2,500,000 8%)/
(Rs.1,000,000 + Rs.1,750,000 + Rs.2,500,000) = 9%
Therefore the amount capitalised should be 9% Rs.4.5 million (land Rs.1.8
million plus construction costs Rs.2.7 million) 4/12 = Rs.135,000. The total
cost of the factory should be measured at Rs.4,635,000 (Rs.1.8 million plus
Rs.2.7 million, plus Rs.135,000). The amount that has been recognised in the
statement of financial position should be reduced by Rs.315,000 (Rs.450,000
Rs.135,000). Finance costs recognised in profit or loss should be increased
by Rs.315,000.
Land should not be depreciated because it has an indefinite life. Under IAS 16
Property, Plant and Equipment depreciation charges should start when the
asset becomes available for use, from 1 October 2015 in this case.

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The Institute of Chartered Accountants of Pakistan

Answers

Depreciation of Rs.35,000 ((Rs.2.7 million, plus (Rs.135,000 2.7/4.5) 20)


3/12) should be recognised in profit or loss for the year ended 31 December
2015 and the carrying amount of the asset reduced by the same amount to
Rs.4.6 million.
Useful life of the blast furnace
Depreciation of the blast furnace has been based on an estimated useful life
of 20 years. This is at variance with a report by a qualified expert. The asset
valuation specialist treats the furnace as being made up of two components,
the main structure and the lining, which must be replaced at regular five yearly
intervals over the life of the asset. This is the approach required by IAS 16.
The uncertainties inherent in business mean that many items in financial
statements cannot be measured with certainty, but estimates should always
be made using the most up to date and reliable information. Where estimates
have been prepared by professionals with relevant qualifications, then it is
nearly always most appropriate to use those estimates. Therefore in
accordance with the valuers report the main structure of the furnace should
be depreciated over 15 years from 1 January 2015 and the lining should be
depreciated over five years from that date.
The reassessment of the estimated lives of assets is a change in accounting
estimate, rather than a change in accounting policy (IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors). Changes in
accounting estimate should be dealt with on a prospective basis. This is
achieved by including the effect of the change in profit or loss in current and
future periods. The additional depreciation should be calculated as:
Rs.000
Revised depreciation:

main structure
((Rs.3.5m Rs.1.4m)/15 years)

140

lining (Rs.1.4m/5 years)

280
420

Current depreciation (Rs.3.5m/20 years)

(175)

Additional depreciation

245

IAS 8 requires the disclosure of the nature and amount of the effect of the
change in the estimate of useful lives on the profit for the year.
(b)

Revised financial statements


Statement of profit or loss extract for the year ended 31 December 2015
Draft

Revenue

Rs.000
Profit before tax

Emile Woolf International

Rs.000

2,500

(1,000)

237

Borrowing

Blast

costs

furnace

Rs.000
(315)+ (35)

Revised

Rs.000

Rs.000

(245)

905

The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II

Statement of financial position at 31 December 2015


Draft
Revenue
Rs.000 Rs.000

(c)

Non-current assets
Property, plant and
equipment
Current assets
Total assets

12,000
3,500
15,500

Share capital
Retained earnings
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities

2,000
6,000
8,000
5,000
2,500
15,500

(1,000)
500
500

Borrowing
costs
Rs.000

Blast
furnace
Rs.000

(315) + (35)

(245)

(315) + (35)

(245)

Revised
Rs.000

11,405
3,500
14,905
2,000
4,405
6,405
5,500
3,000
15,905

Ethical issues
It is noticeable that all the adjustments required reduce profit. This and the
background to the previous finance directors resignation suggest serious
problems.
It is not clear who actually prepared the draft financial statements. If they were
prepared by more junior staff in the absence of a finance director, some of the
adjustments (for example, the calculation of borrowing costs to be capitalised)
could be the result of genuine errors or lack of accounting knowledge.
However, it seems reasonably clear that the managing director has attempted
to influence the treatment of the revenue and the estimated useful life of at
least one significant non-current asset. (Note: the directors have reviewed the
useful lives of several items of plant and machinery and it is possible that
other assets besides the furnace are being depreciated over unrealistically
long periods.)
It seems almost certain that the previous finance director resigned as a result
of pressure from the managing director (and possibly from other members of
the Board) to present the financial statements in a favourable light. The
directors intend to seek a stock market listing in the near future. Therefore
they have clear motives for manipulating the profit figure and also (perhaps)
for making controversial decisions before the financial statements come under
much greater scrutiny as a result of the listing. The job title of financial
controller is also significant. It suggests that the role has been downgraded
and that the person holding it has less authority than the rest of the Board.
Possible courses of action:

Discuss with the managing director the financial reporting standards that
apply to the transactions and explain the implications of non-compliance.
If the managing director is himself a member of a professional body then
it might be worth pointing out to him that he himself is bound by an
ethical code.

Advise him that as a Chartered Accountant you are bound by the ICAP
code of ethics, and that you would not be prepared to compromise your
views of the figures he has prepared for career advancement.

Consider speaking to the other directors (or audit committee if there is


one) and seeking their support.

If all of these actions produce a negative response then it would be


appropriate to consult the ICAP ethical handbook and/or the Institute.

If all else fails then consider seeking alternative employment.

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238

The Institute of Chartered Accountants of Pakistan

Head Oce-Karachi:

Chartered Accountants Avenue, Clifton, Karachi-75600


Phone: (92-21) 99251636-39, UAN: 111-000-422, Fax: (92-21) 99251626, e-mail: info@icap.org.pk

Regional Oce-Lahore: 155-156, West Wood Colony, Thokar Niaz Baig, Raiwind Road, Lahore
Phone: (92-42) 37515910-12, UAN: 111-000-422, e-mail: lahore@icap.org.pk
Islamabad Oce:

Sector G-10/4, Mauve Area, Islamabad


UAN: 111-000-422, Fax: (92-51) 9106095, e-mail: islamabad@icap.org.pk

Faisalabad Oce:

36-Z, Commerical Center, Near Mujahid, Hospital Madina Town, Faisalabad


Phone: (92-41) 8531028, Fax: (92-41) 8503227, e-mail: faisalabad@icap.org.pk

Multan Oce:

3rd Floor, Parklane Tower, Ocers Colony, Near Eid Gaah Chowk, Khanewal Road, Multan.
Phone: (92-61) 6510511-6510611, Fax: (92-61) 6510411, e-mail: multan@icap.org.pk

Peshawar Oce:

House No. 30, Old Jamrud Road, University Town, Peshawar


Phone: (92-91) 5851648, Fax: (92-91) 5851649, e-mail: peshawar@icap.org.pk

Gujranwala Oce:

2nd Floor, Gujranwala Business Center, Opp. Chamber of Commerce, Main G.T. Road, Gujranwala.
Phone: (92-55) 3252710, e-mail: gujranwala@icap.org.pk

Sukkur Oce:

Admin Block Sukkur IBA, Airport Road, Sukkur


Phone: (92-71) 5806109, e-mail: sukkur@icap.org.pk

Quetta Oce:

Civic Business Center, Hali Road, Quetta Cantt


Phone: (92-81) 2865533, e-mail: quetta@icap.org.pk

Mirpur AJK Oce:

Basic Health Unit (BHU) Building Sector D, New City Mirpur, Azad Jammu and Kashmir
e-mail: mirpur@icap.org.pk

2015

FINANCIAL ACCOUNTING
AND REPORTING II
QUESTION BANK