Certificate in Accounting and Finance Stage Examinations

School of (Term test 2) January 20, 2021

Accountancy 100 minutes – 55 marks
Additional reading time – 10 minutes

Financial Accounting and Reporting 1

SECTION A
Q.1 Good Plc constructed a factory building during the year ending September 30, 2020. Construction
took ten months to complete. A contractor was hired for this work and total contract price was
agreed to be Rs. 275 million. Progress payments were made as follows:
At start of work 10%
At end of 3rd month 45%
At end of 7th month 15%
At end of 9th month 20%
At completion 10%
This construction was financed by existing pool of loans:
Bank Amount of loan Interest
(Rs. million)
A 1,250 10%
B 825 14.5%
C 165 15%
All these loans remained outstanding throughout the year.
Required:
Calculate total cost of building. (7)

Q.2 On January 1, 2020, Masoom Limited (ML) received a government grant of Rs. 80 million towards
the purchase of new plant with a gross cost of Rs. 640 million. The plant has an estimated life of
10 years and is depreciated on a straight-line basis.
One of the terms of the grant is that the sale of the plant before December 31, 2023 would trigger
a repayment on a sliding scale as follows:
Sale in the year ended: Repayment:
December 31, 2020 100%
December 31, 2021 75%
December 31, 2022 50%
December 31, 2023 25%

Accordingly, the directors propose to credit to the statement of profit or loss Rs. 20 million
(Rs. 80 million x 1/4) being the amount of the grant income they believe has been earned in the
year to December 31, 2020 has 1 year out of restriction has passed. ML accounts for government
grants as a separate item of deferred credit in its statement of financial position. ML has no intention
of selling the plant before the end of its economic life.
Required:
Prepare extracts of SOFP and SOCI for the year ending December 31, 2020. Also comment on
director’s proposed treatment of grant income for the year. (4)

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Q.3 Select the most suitable options:
(i) Which of the following is not true concerning the treatment of investment properties
under IAS 40?
(a) after initial recognition, property can be held at either cost model or fair value
model.
(b) if fair value model is followed, then it must be applied to all investment
properties.
(c) property is initially measured at cost, including all transaction costs
(d) a gain or loss arising on changes in fair value shall be recognized in other
comprehensive income. (1)
(ii) Which of the following is not an indicator of impairment as per IAS 36?
(a) Advances in the technological environment in which an asset is employed have
an adverse impact on its future use.
(b) An increase in interest rates which increases the discount rate an entity uses.
(c) The carrying amount of an entity’s net assets is higher than the entity’s number
of shares in issue multiplied by its share price.
(d) The estimated net realisable value of inventory has been reduced due to fire
damage although this value is greater than its carrying amount. (1)
(iii) Jason Limited completed the construction of its new head office building during the
year. The construction was financed by bank loans. Building is available for use but
due to certain legal complications in previous building, this new building is currently
vacant. Which of the following standards, is not applicable to the new building?
(a) IAS 16 (b) IAS 23
(c) IAS 40 (d) IAS 36 (1)
(iv) Which of the following would be shown as a negative in cash flow from operating
activities?
(a) Depreciation expense (b) Purchase of PPE
(c) Repayment of loan (d) none of above (1)
(v) Which of the following statements is correct regarding capitalization of borrowing
cost?
(a) If funds have been arranged from various general borrowings, the amount to be
capitalised is based on the weighted average cost of borrowings
(b) Capitalisation always commences as soon as expenditure for the asset is
incurred
(c) Capitalisation always continues until the asset is brought into use
(d) Capitalisation always commences as soon as borrowing costs are incurred (1)

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 SECTION B

Q.4 Super Pipes Limited (SPL) is a manufacturer of industrial products. On January, 1 2020, 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, 2020. At that
time the company’s engineers advised that the plant could be used at a reduced level for 3 years
only. Net operating cash inflows from the plant for the next three years are budgeted as under:

Year ending June 30, 2021 Rs. 9 million

Year ending June 30, 2022 Rs. 7 million
Year ending June 30, 2023 Rs. 5 million

Assume that cash flow would occur on the last day of each year and applicable discount rates are
10% (pre-tax) and 7% (post-tax). 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, 2010 at Rs. 52 per US$. Other charges including installation cost
amounted to Rs. 7 million. Installation of the plant was completed and plant was available
for use on December 31, 2010 but commercial production commenced from April 1, 2011.
(ii) The company uses straight line method of deprecation. Initially, the 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,
2015 at Rs. 45 million. There was however, no change in estimated useful life of the plant
on revaluation.
(iv) The factory remained closed from April 1, to June 30, 2017 due to law and order situation in
country.
(v) The salvage value has not changed since it was first estimated at the time of purchase.
Moreover, it is not expected to change in future.
Required:
Prepare accounting entries for the year ended June 30, 2020. Give all the necessary calculations.
(Ignore taxation) (19)

Q.5 The following information has been extracted from the draft financial statements of Alpha Limited
for the year ended 31 December 2020.

2020 2019 2020 2019

ASSETS Equity & Liabilities
Rs. in million Rs. in million
Property, plant & equipment 208 183 Share capital (Rs. 10 each) 180 150
Intangible assets 18 23 Share premium 15 -
Trade receivables 45 36 Retained earnings 114 53
Advances and prepayments 84 70 Long term loan 40 -
Inventories 60 43 Trade payables 42 56
Short-term investments 12 9 Accrued expenses 60 70
Cash at bank 58 7 Tax payable 34 42

485 371 485 371

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 Following relevant information is available:
(i) Depreciation has been provided on straight line basis and is charged to operating expenses.
Estimated useful lives are as under:
Building 20 years
All other fixed assets 10 years
(ii) On 1 September 2020, the company purchased new machinery costing Rs. 65 million. The
purchase price of machinery was settled partially in cash Rs. 50 million and balance by
issuing 1 million shares.
(iii) A portion of building costing Rs. 20 million which was purchased on 1 July 2018 was sold
for Rs. 20 million on 30 June 2020.
(iv) Trade receivables written off during the year amounted to Rs. 5 million. It is the policy of
the company to maintain the provision for doubtful debts at 10% of trade receivables.
(v) Advances and prepayments include advance tax of Rs. 8 million (2019: Rs. 6 million).
(vi) Long term loan was obtained on 1 August 2020. Interest on loan @ 12% is payable on 31st
July each year. Interest payable for 5 months has been accrued.
(vii) During the year, gross profit and profit before tax as a percentage of sales were 30% and 10%
respectively.
(viii) Interim cash dividend paid during the year was 10%. (2019: 15%)
(ix) Tax expense for the year was Rs. 17 million. (2019: Rs. 8 million).
(x) Right shares were issued on 1 December 2020 at Rs. 15 per share.

Required:
(a) Prepare statement of cash flows for the year ended 31 December 2020 using the indirect
method.
(b) Determine “cash generated from operations” using direct method. (20)

(THE END)

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