Financial Reporting - First Term Exams (Fall 2018)

Question 1:
Jacobson Limited plans to build a new factory in Karachi. The following information is relevant for the
acquisition.
1. Jacobson Limited obtained a long term loan of Rs. 40,000,000 carrying interest rate of 12% per
annum on 1st January 2014 from Nova Bank. The loan is repayable in full after 5 years. The loan
covenant1 states that Jacobson Limited will buy land from its own resources, and the loan will only
be used to construct the factory building and to pay the related construction expenses. When the
loan is not being utilized, Jacobson Limited will invest the excess amount in a special deposit
account at Nova Bank earning interest rate of 6%.
2. The company has running finance facility of Rs. 100,000,000 at 14%. This facility will be used if the
long term loan proves to be insufficient. Currently Rs. 12,000,000 is withdrawn under the facility
(being used in business), and adequate funds are available if required for construction.
3. Jacobson Limited entered into contract to buy 1-acre land on 1st January 2014 from Marvel Limited.
The terms of the contract are:
a. Cost of Land will be Rs. 35,000,000. It is freehold. The full cost is payable on 1st January
2017.
b. Jacobson Limited will pay unpaid property taxes amounting to Rs. 750,000 that Marvel
Limited had not paid for the last many years in respect of land. Legal and other costs will
be Rs. 4,000,000. Both unpaid taxes and legal costs were paid to the legal consultant on 1st
April 2014 who will settle the obligation.
c. The land has an unused warehouse, that was removed at the cost of Rs. 1,000,000 on 15 th
March 2014. The amount is net of sale of scrap.
4. Jacobson hired Zero Construction Limited to build the proposed factory. The budgeted cost of
construction are Rs. 60,000,000. The payment terms are:
a. Zero Construction Limited will start work from 1st April 2014, and will be paid Rs. 25,000,000
as mobilization advance on the same date. The amount will be placed in a separate
‘advance against building’ account in the Jacobson’s books of accounts till the building is
complete.
b. The second instalment of Rs. 25,000,000 will be paid on 1st October 2014.
c. The remaining amount will be paid after approval of the architect when the building will be
ready.
5. The building was completed on 31st December 2015. Jacobson started using the factory from 1st
January 2016.
6. The total construction cost as attested by the architect, came out to be Rs. 65,000,000. The balance
of Rs. 15,000,000 was paid on 31st December 2015 to Zero Construction and the ‘advance against
building’ account transferred to the building account. Financial Charges are to be recorded at every
31st December year-end.
7. The building has an estimated useful life of 40 years.

Required:
a) Total cost of land to be capitalized
b) The amount of borrowing cost to be capitalized
c) Total cost of building to be capitalized
d) To record Journal entries till 31st December 2016.

1
Covenant is the condition stipulated in the contract that has to be abided by the parties.

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Question 2:

Space Jet has a small two-seater aircraft that was purchased for Rs. 20,000,000 on 1 st January 2009. The
aircraft has a useful life of 20 years and is primarily used for survey and photography purposes. The aircraft
requires an inspection after every five years. The cost of one inspection is Rs. 500,000. The last inspection
was made on 1st January 2014.

On 1st January 2016, the aircraft was revalued at Rs. 26,000,000. Space Jet has accounting year end of 31
December each year.

Required: Record accounting entries related to the calendar year 2016. (You are not required to prepare
entries for the previous years).

Question 3:
ACME Construction Limited purchased a second hand bulldozer for Rs. 2,000,000 on 1 st July 2015. The
bulldozer had a remaining life of 5 years. On 5th July 2016, the bulldozer was damaged in an accident.

Another Construction company working in the vicinity, Marvel Construction Limited had an excavator that
was not in working condition. Marvel offered ACME to exchange the bulldozer with the excavator. Marvel
had recently put an advertisement to sell the excavator, and the highest bid received from a buyer was Rs.
1,200,000.

On inspection, Marvel’s engineer found that the excavator can be brought into working condition by
replacing the undercarriage. The cost of replacement including labor and other charges would be Rs.
500,000, and will take one week to complete.

Required: Assuming ACME agrees to the exchange and subsequently gets the excavator in working
condition, what will be the cost of excavator in the books of ACME?

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You must mark these MCQs on the ANSWER SHEET at the end of the paper. DO NOT write them on
Answer Script.

1. Ahmed bought a business premises comprising of land and building at a cost of Rs. 50 million on 1st
January 2018. The market value of land component of the premises on 1st January 2018 is Rs. 24
million, and market value of building component of the premises on the same date is Rs. 36 million.
The business premises will be recorded as:
a) A single asset at a cost of Rs. 50 million.
b) A single asset at a cost of Rs. 60 million.
c) The land component will be recorded at Rs. 24 million, and building component will be
recorded at Rs. 36 million as separate assets
d) The land component will be recorded at Rs. 20 million, and building component will be
recorded at Rs. 30 million as separate assets.

2. Babar bought a generator on 1st January 2018 from Gentac, that was delivered to his premises on
the same day. The market price (amount shown on the official price list of Gentac) of the generator
is Rs. 120,000, and Gentac gives a warranty of 5 years on its generators. Gentac agreed to take Rs.
80,000 in cash on delivery of the generator, and Rs. 20,000 on 1st January 2023, when the warranty
will expire. Babar estimates that current discount rate is 10%. PV of 10% for 5 years is 0.621. The
cost of generator at initial recognition on 1st January 2018 is:
a) Rs. 120,000.
b) Rs. 100,000.
c) Rs. 92,420.
d) Rs. 74,520.

3. Faisal runs a delivery business. He had bought a Red Truck for Rs. 3 million a few years ago. On 1 st
January 2018, the Red Truck had accumulated depreciation of Rs. 800,000, and fair market value of
Rs. 2.5 million. Faisal exchanged the Red Truck with a Blue Truck on 1st January 2018. The fair market
value of Blue Truck was Rs. 2.4 million on that day. The cost of the Blue Truck at initial recognition
on 1st January 2018 is:
a) Rs. 2.5 million.
b) Rs. 2.4 million.
c) Rs. 2.2 million.
d) Rs. 3.0 million.

4. Abid runs a small manufacturing business. He decided to install a new generator at the premises.
Abid negotiated a price of Rs. 2.5 million with the supplier, and paid Rs. 100,000 for freight and
labor to bring the generator to his plant. A special foundation was constructed to place the
generator at a cost of Rs. 400,000. However, during installation, the foundation broke down due to
substandard materials used. A new foundation was built at a cost of 900,000 using reinforced
materials. Other miscellaneous installation costs were Rs. 200,000. The cost of generator at initial
recognition will be:
a) Rs. 4,100,000
b) Rs. 3,700,000
c) Rs. 4,000,000
d) Rs. 2,500,000

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5. Plankton Limited is building a cement plant at a cost of Rs. 5 billion. The plant will take four years
to complete. Plankton Limited took a loan of Rs.5 billion at rate of 6% per annum from the local
bank for the specific purpose of construction of the cement plant. The loan cannot be used
elsewhere, and when not used, could be reinvested at the rate of 4%. Plankton Limited paid 2.5
billion on 1st January 2015 at the start of construction, to the contractor, and will pay the balance
amount on 31st December 2018, when the asset will be complete. The loan is repayable after 10
years in full. The cost of the cement plant at initial recognition when it will be complete will be:
a) Rs. 5.80 billion
b) Rs. 5.12 billion
c) Rs. 7.60 billion
d) Rs. 8.00 billion

6. Amoeba Limited, a manufacturing company, is in heavy losses for the last many years. The board
of directors of the company decided to shut down the operations on 30th December 2017. On 31st
December 2017, the provincial government intimated the company that they are willing to pay Rs.
5 million as a grant, if the company remains in operation for the next 2 years without laying off any
employee. The Board of Directors accepted the grant with its condition, and Rs. 5 million were
received by Amoeba Limited on 1st January 2018. The company will record the grant by:
a) Crediting a grant reserve in the ‘Share Capital and Reserves’ section
b) Crediting grant as ‘unearned revenue’ at inception, and recording revenue in two equal
amounts at the end of year 1 and year 2 respectively
c) Taking the full amount of grant revenue in the P&L when money is received
d) Taking the full amount as expense in the P&L when money is received.

7. An entity can choose either the ‘cost model’ or the ‘revaluation model’ as its accounting policy to
subsequently measure (carry the asset after recognizing the asset) property, plant and equipment.
The cost model is:
a) Asset is carried at revalued amount
b) Asset is carried at its historical cost
c) Asset is carried at its historical cost less accumulated depreciation
d) Asset is carried it its historical cost less accumulated depreciation and any accumulated
impairment

8. If the carrying amount of an asset is increased as a result of revaluation, the increase shall be
recognized:
a) In the profit or loss account as ‘gain on revaluation’
b) In other comprehensive income and accumulated in equity under ‘revaluation surplus’
c) In the profit or loss account by directly crediting the closing ‘retained earnings’
d) In the profit or loss account as ‘other income’

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9. Asif bought a photocopy machine for Rs. 300,000 on 1st January 2010. He estimated life of the
machine to be 10 years at the acquisition date. On 1 st July 2018, the machine was revalued at Rs.
75,000 with a revised estimated of remaining life of 5 years. The amount of depreciation charged
to the profit or loss account for the year ending 31 December 2018 will be:
a) Rs, 22,500
b) Rs. 30,000
c) Rs. 15,000
d) Rs. 7,500

10. Bashir is performing impairment test for his factory plant. The carrying value of the plant on 31
December 2018 is Rs. 5.0 million. The fair value assessed by a professional valuer on the same
date is Rs. 4.5 million. The value in use of the plant is assessed to be Rs. 5.5 million.

Choose the INCORRECT statement:

a) The plant is impaired by Rs. 0.5 million therefore loss due to impairment will be charged
to profit or loss account amounting to Rs. 0.5 million
b) A revaluation reserve will be created with an amount of Rs. 0.5 million
c) The higher of the ‘fair value’ and the ‘value in use’ of an asset is called ‘recoverable
amount
d) An entity must assess at end of each reporting period whether there is an indication that
an asset may be impaired.

MCQ Answer Sheet is on the next page

End of Paper

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Name: ________________________________ ERP Number: ______________ Class slot:_____

MCQ Answer Sheet

01. A B C D

02. A B C D

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05. A B C D

06. A B C D

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09. A B C D

10. A B C D

Do not forget to write your name and ERP on this sheet

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