CAF Stage – MOCK EXAM

15th July 2018

3 hours – 100 marks
SKANS School of Accountancy Additional reading time – 15 minutes

Financial Accounting & Reporting-1 (CAF-5)

Q.1
You have recently been appointed as chief financial officer of Al-Hafiz limited (AHL). While finalizing the company’s
financial statement for the year ended 31 December 2014, you have observed the following issues:
a) Plant and equipment includes Machine A-31 at a carrying amount of Rs. 918,400 which was fabricated in-
house by AHL in February 2014 by using existing plant and machinery. The details are as follows:

Rupees
Direct material and labor 656,000
Depreciation- existing plant machinery 24,000
Administration 140,000
20% profit (normally charged to its customers) 164,000
984,000
Less: Depreciation for the year ( 10% of the cost for (65,600)
8 months)
Carrying value of the machine at year end 918,400

Direct material includes materials lost due to fire amounting to Rs. 40,000.
The fabricated machine was transferred and available for use on 1 March 2014 and was brought into
commercial production on 1 May 2014.
b) AHL provides transportation services to its factory workers through its fleet of six buses. The buses are
depreciated on straight lines basis. At the end of last year, the buses had carrying value of Rs. 7 million and
remaining useful life of 5 years.
On 1 July 2014, the local government promulgated a new legislation whereby all public transport buses were
required to undergo regular major inspection after a period of three years. An inspection exercise of the fleet
of buses was undertaken on 1 sept. 2014 at a cost of Rs. 1.8 million and this amount was capitalized in the
carrying amount of buses.
c) On 31 December 2014, AHL acquired a used specialized machine which has no active market, by exchange of
Machine X. The newly acquired machine was booked at the carrying value of Machine X which was 9.5
million. However, the fair value of Machine X on the date of sale was Rs. 8 million but no adjustment was
made on the premise that the acquisition of this specialized machine would increase efficiency and
consequently save approximately Rs. 1.5 million over its useful life.
Required:
In reference to international Accounting Standards- 16 “Property, Plant and Equipment prepare the necessary journal
entries. (12)

Q.2
The New Generation is a private club. Its financial year end is 31 October. The club has two classes of membership:
(i) full members who each pay a subscription of Rs. 21 per year;
(ii) cricket-only members who each pay a subscription of Rs. 8 per year.
The club buys and supplies tennis balls for use of the members and sells used balls for a nominal sum.
 New Generation Tennis and Cricket Club
Receipts and Payments Account for the year ended 31 October 1995
Rs. Rs.
Balance 1 November 1994 160 Payments to bar creditors 27,683
Bar takings 34,320 Heating and lighting 688
Sales of tennis balls 20 Insurance 526
Bowls hire 160 Repairs 420
Cricket Bowling members 400 General expenses 162
subscriptions
Full members subscriptions 1,995 Cleaning 308
Dinner receipts 1,200 Committee expenses 117
New lawnmower 460
Printing - dinner tickets 16
- general 181
Dinner expenses 1,483
Grounds man’s wages 5,720
Payment to Sports World for tennis 370
balls
Balance 31 October 1995 121
38,255 38,255
Additional information:
1) Six full members had owed subscriptions at 31 October 1994. Three of them paid their subscriptions in
November 1994. The committee has decided to write the remainder off as bad debts.
2) Cricket Bowling members’ subscriptions details:
Received in previous year for current year 130
Received in current year for previous year 10
Received in current year for future/next year 100
3) At 31 October 1994 the club’s lawnmower had a book value of Rs. 180. During the year ended
31 October 1995 a new lawnmower costing Rs. 540 was purchased. The old lawnmower was traded in against
this for Rs. 80, the balance being paid in cash. It is club policy to depreciate machinery by 10% per annum using
the reducing balance method.
4) The above receipts and payments account shows balances as per bank statement. A cheque for
Rs 200 drawn by the Club on 30.Oct.1995 for repair was not paid by the bank until 4.Nov.1995.
The assets and liabilities of the club other than the cash balance were as follows:
At 31 Oct 1994 At 31 Oct 1995
Rs. Rs.
Bar creditors 392 409
Sports World – creditor for tennis balls 130 62
Stock of tennis balls 87 79
Full members’ subscriptions in advance 42 21
Full members’ subscriptions in arrears (Note (1) above) 126 -
Cricket Bowling members’ subscriptions in advance (Note (2)) ? ?
Cricket Bowling members’ subscriptions in arrears (Note (2)) ? -
Fixtures and fittings 4,650 4,250
Lawnmower (Note (3) above) 180 ?
Heating and lighting owing 69 123
Insurance in advance 46 57
Bar stocks 2,600 1,750
Required:
a) Prepare the bar trading account and the income and expenditure account for the year ended
31 October 1995.
b) Prepare a balance sheet as at 31 October 1995. (15)
 Q.3
a) Big Bed enters in a contract with a customer to sell beds for $400 per bed on 1 January 2017. If the
customer purchases more than 1000 beds in a calendar year, the contract states that the price per unit
is retrospectively reduced to $380 per unit. As a result of this the consideration in the contract is variable.
As at 31 March 2017, Big Bed sells 80 beds to the customer; therefore Big Bed estimates that the
customer’s purchase will not exceed the 1000 bed threshold required for the volume discount in the
calendar year.
At the beginning of June 2017, the customer acquires another company and at the end of the second
quarter, 30 June 2017, Big Bed sells an additional 500 b e 1000 bed threshold for the calendar year and
therefore it would have to retrospectively reduce the price per unit. eds to the customer. In light of the new
fact, Big Bed estimates that the customer’s purchases will exceed th

b) Parson plc has entered into the following transactions during the year ended 31 December 20X3.

1) On 1 October 20X3 Parson plc received Rs. 400.000 in advance subscriptions. The subscriptions are for 20
monthly issues of a magazine published by Parson pic. Three issues of the magazine had been dispatched by the
year end. Each magazine is of the same value and costs approximately the same to produce.
2) A batch of unseasoned timber, which had cost Rs. 250,000, was sold to Banko plc for Rs. 100,000 on 1 February
20X3. Parson pic has an option to repurchase the timber in 10 years' time. The repurchase price will be Rs.
100.000 plus interest charged at 8% per annum from 1 February 20X3 to the date of repurchase.
3) Parson pic made a major sale on 1 April 20X3 and received a fee of Rs. 450,000, which is related to a completed
sale and after-sales support for three years. The cost of providing the after-sales support is estimated at Rs.
50,000 per annum, and the mark-up on similar after-sales only contracts is 20% on cost.
Required: In your opinion what will be the accounting treatment of above information in accordance with IFRS15. (10)

Q.4
Avocet Limited has produced an overhead budget for next year based on two levels of activity, 10,000 units and 12,000
units. It needs to calculate budgeted figures based on an activity level of 15,000 units. The budgeted figure for activity
level of 10,000 and 12,000 units are as follows.
Avocet Limited-budgeted overheads for the year ending 31 December, 20X2
Production (units) 10,000 12,000
Type of cost Rs. Rs.
Factory rent Fixed 5,000 5,000
Machine depreciation Fixed 7,500 7,500
Indirect labour Variable 20,000 24,000
Indirect material Variable 12,000 14,400
Electricity Semi-variable 8,000 9,000
Stock insurance Semi-variable 9,500 11,000
Total 62,000 70,900
Required:
Calculate the budgeted cost for each of the six types of overheads at an activity level of 15,000 units giving
consideration to the fact that some overheads are fixed costs, some are variables and some are semi-variables. (10)

Q.5
Ali carries out business of selling electronic appliances in various cities of Pakistan.
• Its inventory ledger a c balance at December 31, 2015 under perpetual inventory system was Rs. 650,000.
• The physical count revealed on that date that cost of inventory on hand was Rs. 539,000 only.
On January 10, 2016, auditors carried out an investigation and discovered the following:
i. Invoices recorded in the inventory account for cameras in December 2015 include two invoices of Rs. 12,000 and
Rs. 15,000 related to goods received on 29 December 2015 and 5 January 2016 respectively.
 ii. Some of the goods costing Rs. 50,000 were destroyed by fire on 24 November 2015 in Murree shop but loss was
not recorded in the books.
iii. A loss of goods amounting to Rs. 2,000 occurred on eve of 24 December 2015 in Sialkot shop due to shoplifting.
This loss is considered to be a normal loss. No entry has been processed.
iv. Accounting records does not show any effect of goods having sale value of Rs. 2,100 given by way of charity.
v. On 31 December 2015, the stock sheets at Islamabad shop showed the following discrepancies:
a) A page total of Rs. 15,000 had been carried to the summary as Rs. 28,000.
b) 1,000 items costing Rs. 10 each had been valued at Rs. 2 each.
c) There was an under-casting of Rs. 2,000 on page £ 37 of stock sheet.
vi. Goods costing Rs. 50,000 were invoiced to X Limited for Rs. 75,000 on December 29, 2015. The goods were
actually dispatched on January 2, 2016.
vii. On December 25, 2015 goods costing Rs. 65,000 were purchased on credit from MK. The purchase was recorded
on December 27, 2015 i.e. when the goods were lifted by the transport company appointed by MK. The goods
arrived on January 3, 2016.
viii. Sales include Rs. 5,000 goods sent to a customer on December 25, 2015. The customer will accept the goods
when we will install the goods on January 4, 2016 as per customer requirement.
ix. Sales include Rs. 6,000 goods sent to a customer on December 26, 2015 on sale on return basis. The customer
can return the goods by January 31, 2016.
x. A sale invoice of Rs. 5,760 had been recorded twice in the books.
xi. An item costing Rs. 9,000 which had been purchased on June 25, 2015 was damaged on December 28, 2015. It
can be repaired at a cost of Rs. 1,000 and sold for Rs. 7,000. It is appearing in inventory account at cost and in
stock sheets at its NRV.
xii. Where gross profit ratio is not mentioned, assume profit is at 25% of selling price.
Required:
(a) Reconcile the balance in inventory account with balance as per physical count. Any shortage in inventory
account represents figure of abnormal loss in Lahore shop not known.
(b) Prepare the adjusting entries that should be recorded for year ended December 31, 2015. (12)

Q.6
Comparator assembles computer equipment and distributes them to various wholesalers. The specified ratios for
Comparator’s sector are shown below.
Return on capital employed 22.1%
Net assets turnover 1.8 times
Gross profit margin 30%
Operating profit/sales ratio 12.5%
Current ratio 1.6:1
Quick ratio 0.9:1
Inventory holding period 46 days
Accounts receivable collection period 45 days
Accounts payable payment period 55 days
Debt to equity (base is equity) 40%
Comparator’s financial statements for the year to 30 September 2003 are set out below:
Income statement Rs.000
Sales revenue 2,425
Cost of sales (1,870)
Gross profit 555
Other operating expenses (335)
Operating profit 220
Interest (34)
 Profit before taxation 186
Income tax (90)
Profit after taxation 96

Balance Sheet Rs.000 Rs.000

Non-current assets 540
Current Assets
Inventory 275
Accounts receivable 320
Bank nil 595
1,135
Share Capital and Reserves
Ordinary shares (Rs. 10 share) 150
Accumulated profits 185
335
Non-current liabilities 8% loan notes 300
Current liabilities
Bank overdraft 65
Trade accounts payable 350
Taxation 85 500
1,135
Required
Calculate the ratios for Comparator equivalent to those given above. (5)

Q.7
Trial balance at 31 March, 2010 is shown below:
Rs.000 Rs.000
Administrative expenses 86
Cash and cash equivalents 134
Opening stock 18
Purchases 400
Distribution costs 69
Dividend paid 92
Land - 31 March 2009 700
Advance rental 15
Long term borrowings 250
Equity Shares Rs.1 each, fully paid at 31 March 2010 600
Equipment - at cost 31 March 2009 80
Acc. Depreciation - Equipment at 31 March 2009 44
Building - at cost 31 March 2009 400
Acc. Depreciation - Building 31 March 2009 100
Retained earnings at 31 March 2009 181
Revenue 730
Share premium at 31 March 2010 330
Suspense 2
Trade payables 32
Trade receivables 275
2,269 2,269
Additional information provided:
i. Inventories at 31 March 2010 were valued at Rs. 30,000. At the year-end inventory count, inventory with a
value of Rs. 9,000 was identified as being damaged and only suitable for scrap. It is expected to be sold for
Rs. 500 only.
ii. The tax charge for the current year is Rs. 9,000.
iii. During the year EZ disposed of old equipment for Rs.2,000. No entry has been made in the accounts for this
transaction except to record the cash received in the cash book and in the suspense account. The original
cost of the equipment sold was Rs.37,000 and its book value at 31 March 2009 was Rs.7,000.
iv. Building is revalued at year end at Rs. 500,000.
v. Property, plant and equipment is depreciated at 10% per year straight line. Depreciation of property, plant
and equipment is considered to be allocated 60:40 in cost of sales and admin expenses respectively.
vi. Long term borrowings consist of a loan taken out on 1 April 2009 at 4% interest per year.
vii. No loan interest has been paid at 31 March 2010.
viii. On 31 March, 2010 EZ discovered that ZZZ, its largest customer, had gone into liquidation. EZ has been
informed that it is very unlikely to receive any of the Rs.125,000 balance outstanding at
31 March 2010.
Required:
Prepare EZ’s statement of comprehensive income for the year to 31 March 2010 and a statement of financial position
at that date, in a form suitable for presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards. (20)

Q.8
Alpha, Beta and Gamma are partners in Karachi Chemicals (KC), sharing profit in the ratio of their
capitals. Faisalabad Chemicals (FC) is a sole proprietorship owned by Sigma. Their summarised
statements of financial position as at 31 December 2015 are as under:
KC FC
Rs. In Million
Assets
Fixed Assets net 125 80
Stock in trade 80 50
Trade debtors 60 40
Cash and bank balances 15 12
280 182
Capital and liabilities
Capital: Alpha 40 -
Beta 30 -
Gamma 30 -
Sigma - 20
Trade creditors and other payables 180 162
280 182
Alpha, Beta and Sigma wanted to amalgamate KC and FC on 31 December 2015. Since Gamma
was not in favour of the amalgamation, he decided to retire from the partnership. The retirement
of Gamma and amalgamation of the two businesses were agreed under the following terms and
conditions:
• All the assets and liabilities (except cash and bank balances) would be taken over by the new firm.
The assets and liabilities would be revalued as follows:
 KC FC
Rs. In Million
Fixed assets (excluding car to be taken by 150.00 100.00
Gamma)
30.00 20.00
Provision for obsolete stock 15.00 8.00
Trade debtors 57.00 38.00
A third party claim for damages to be 12.00 -
booked
Estimated realization expenses 0.50 0.50

• A car having book value of Rs. 0.8 million would be taken over by Gamma at an agreed value of
Rs. 0.5 million.
• The balance due to Gamma would be paid from the cash available with KC. Shortfall if any, would
be paid by Alpha and Beta in their profit and loss sharing ratio.
• The new firm will be registered under the name of ABS Enterprises. The capital of ABS would be
Rs. 120 million and shared by Alpha, Beta and Sigma in the profit and loss sharing ratio of 3:4:3
respectively. Any surplus or deficit will be settled in the new firm.
• No goodwill is to be retained in the new firm.
Required:
(a) Prepare capital accounts in the books of KC and FC. (10)
(b) Prepare statement of financial position of the new firm. (06)