Summer Exam-2009

(Final) Financial Reporting [04-05-2009]

Duration: 3 hrs. M a r k s - 1 0 0 [Instructions]

• Ensure that the question paper delivered to you is the same, in which you intend to appear.

• Read the instructions given on the title page of Answer Copy.

Attempt all Questions

Q.1. Faisal and Khalil have been partners for last many years carrying on the business of rice

export to different European countries and sharing profits equally. On June 30, 2008 they decided to convert the partnership into a limited liability company named FK Limited to avail various incentives announced by the Government for SME’s in the current budget. The balance sheet of the firm at June 30, 2008 is as under: -

Rs. (000) Assets Furniture and fixture 33,200 Plant 100,000 Stock in trade 53,800 Trade debts 384,500 Bank 151,000 722,500

Capital and liabilities Capital Faisal 300,000 Khalil 310,000 Trade creditors 112,500 722,500

The arrangements with the FK Limited are as follows: -

a. Furniture and stock will be purchased by FK at 5% below book value. b. The plant will be taken over 20% above book value. c. Trade debts will not be taken over by the company and have realized Rs. 335

million in total. d. The trade creditors have been taken over by the new company. e. FK Limited will issue 5 million shares of Rs. 10 each at premium as purchase

consideration to the partners of the old firm. Required:

i) Prepare realization account (05)

ii) Capital accounts of the old firm (05)

iii) Opening balance sheet of the new company (05) Q.2. Salman Co has two contracts in progress, the details of which are as follows:

Dam

(Profitable) Bridge

(Loss-making) Rs. ‘000’ Rs. ‘000’ Total contract price 450 400 Costs incurred to date 190 250 Estimated costs to completion 135 225 Progress payments invoiced and received 250 50

Required:

Show extract from the income statement and the balance sheet for each contract, assuming stage of completion is measured by cost to cost basis formula.

(10)

Contd. on back

2

Q.3. M/S Haseeb Limited acquired 75% of M/S Saqib Limited on September 30, 2008 for Rs.12

million by paying immediately Rs.10 million to the former owners and agreed to pay the

balance amount after one year. The discount rate Haseeb Limited uses for its present value

calculation is 12%. The profit and loss account for both the companies for the year ended

December 31, 2008 is as follows: -

Haseeb Ltd. Saqib Ltd. (Rs. 000) (Rs. 000) Revenue 10,000 5,000 Cost of sales (6,500) (4,000)

Gross profit 3,500 1,000 Operating cost (1,500) (400)

Operating profit 2,000 600 Tax expense (450) (200) Profit after tax 1,550 400

Statement of changes in equity extract Share capital 20,000 5,000 Retained earnings on January 01, 2008 15,000 7,500

The following further information is also available: -

a) The fair value of property, plant and equipment of Saqib Ltd at the date of acquisition was Rs. 1,000,000 more than its carrying value which results in extra depreciation of Rs. 45,000 in the post acquisition period.

b) In the post acquisition period Saqib Ltd sold goods to Haseeb Ltd valuing Rs. 250,000 charging Rs. 100,000 as margin on goods. 55% of the goods are still lying with Hasseeb Ltd.

c) All revenues and expenses have accrued evenly through the year.

d) The impairment loss on goodwill is 25% of the amount determined at the date of acquisition.

Required:

i) Goodwill arising on acquisition (05)

ii) Consolidated Profit and loss account of Haseeb Ltd group (10)

iii) Statement of changes in equity of Haseeb Ltd Group (05)

Q.4. M/S XYZ acquired an asset on lease. The terms of the lease are as under: -

• The cash price of the asset is Rs. 160,000.

• Initial direct cost incurred by the lessee is Rs. 7,500.

• Term of the lease is 5 years.

• The insurance cost paid by the lesser and recovered from the lessee is Rs. 3,000 per year.

• The amount of rental is Rs. 10,000 payable at the beginning of each quarter.

• The interest rate implicit in the lease is 12% p.a.

• The asset at the end of the lease term will revert back to the lessee.

• The guaranteed residual value by the lessee is Rs. 5,000 at the end of the lease term.

• The economic life of the asset is seven years.

Required:

i) Compute the value at which the asset to be recorded initially. (03) ii) Prepare lease repayment schedule for first eight rentals and pass necessary journal entries

for first two quarters. (07)

iii) Prepare disclosures to the accounts at the end of first year? (05)

Contd….

3

Q.5. An entity in the oil industry contaminates the sites on which it conducts its operations. It

operates in a country where there is no environmental legislation that requires the

remediation of contaminated sites. The entity, however, has a widely published

environmental policy in which it undertakes to clean up all contamination it causes, and it

has a record of honoring this published policy.

Required:

Should management recognize liability when there is no legal obligation?

(05)

Q.6.

Entity A purchased land to construct a new factory. The land was formerly used for agricultural purposes. A’s management has applied to the local authorities for permission to change the use of the land from agricultural to industrial. The process is expected to last six months, because of opposition from local residents.

Management has financed the purchase with a bank loan, which will be repaid over a period of seven years, commencing from the scheduled date of completion of the factory. Management is confident that the authorities will approve the change of use of the land because the new factory will bring 1,000 new jobs to the area.

Required:

Can management recognize revenue before physical construction of asset and if yes what will happen if the approval is not granted afterwards?

(05)

Q.7.

The Balance Sheets of Mr. F at December 31, 2007 and 2008 are as follows:

2007 2008

Rs. (000) Rs. (000)

Cash in hand 200 300

Debtors-net 450 500

Stocks 400 650

Prepaid expenses 100 50

Fixed Assets 1,150 1,650

Allowance for Depreciation (75) (175)

2,225 2,975

Creditors 400 515

Accrued Expenses 125 100

Retained earnings 300 785

Share Capital 1,400 1,575

2,225 2,975

Other Information:

i) Value of land included in fixed assets in 2007 amounted to Rs. 450,000.

ii) Another plot of land was acquired during the year, at a cost of Rs. 350,000.

iii) Dividend paid during the year was Rs. 100,000 out of profits made during 2008.

iv) Equipment costing Rs. 100,000 and having a book value of Rs. 40,000 was sold during the year for Rs. 60,000.

Required:

A statement of cash flow for the year ended December 31st, 2008.

(15)

Contd. on back

4

Q.8. M/S Geo Limited has the following balances at January 01, 08 brought forward from previous year. (Rs. 000) (Rs. 000)

Un-used tax losses 1,250 Carrying value of land 1,000

Carrying value of plant 15,000 Carrying value of building 5,000

Tax WDV of plant 10,500 Tax WDV of building 4,500

Deferred tax liability 1,000 ------ ------

During the year Geo revalued the land by Rs. 200,000, before revaluation, the carrying value and tax base were same.

The accounting rate of depreciation is, building 5% and plant 10% on reducing balance basis. The tax rate of depreciation is, building 10% and plant 25% on reducing balance basis. The profit for the year before tax after accounting depreciation is Rs. 1,524,000. There has been no addition or disposal of any asset.

The tax rate applicable to GEO is 35%.

Required:

i) Calculate current as well as deferred tax for the year (10)

ii) Prepare income statement and balance sheet extract for tax (05)

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Winter Exam-2009

(Final) Financial Reporting [02-11-2009]

Duration: 3 hrs. M a r k s - 1 0 0 [Instructions]

• Ensure that the question paper delivered to you is the same, in which you intend to appear.

• Read the instructions given on the title page of Answer Copy.

Attempt all Questions

Q.1. IAS-1 deals with presentation of general purpose financial statements and has been amended recently by IASB (International Accounting Standard Board). The revised standard has changed the names and presentation of certain statements. Required:

Discuss the followings under the revised IAS -1.

a) Impracticable (02)

b) Components of financial statements (02)

c) Truth and fairness (02)

d) Un-reserved statements (02)

e) Disagreement with IFRS (02)

Q.2. M/S West Ltd acquired 40 % ordinary share capital of M/S East Ltd a real estate development company for Rs. 5.5 million on January 01, 2008, when the retained earnings of East Ltd were Rs. 10 million. Due to recent slump in the real estate market and burgeoning losses of East Ltd after acquisition, the management of West Ltd has decided to apply impairment test on the investment in East Ltd. The retained earnings of East stood at Rs. 2.5 million after adjustment of loss for the year amounting to Rs. 7.5 million. The recoverable value of East Ltd is Rs. 2 million. The West Ltd has treated the investment in East Ltd as an associate under IAS-28. The accounting year end of West Ltd and East Ltd is December 31, 2008.

Required:

Calculate the carrying value of investment under IAS -28 and value of any impairment loss?

(10)

Q.3. M/S East Ltd has fleet of three passenger air crafts purchased on January 01, 2006 for Rs. 500 million each. Each air craft was having three major parts engine, body and interiors (including cabins and seats). The cost of each part is engines (two) Rs. 150 million, body Rs. 200 million and interiors and cabins Rs. 150 million. The use full life of engine is 100,000 hours; body 5 years and interiors and cabins three years. The residual value is assumed to be nil. On January 01, 2008 one of the air crafts slipped on the run way causing severe damage to the body and engines however, all the passengers and crew safely evacuated. The flying hours used till January 01, 2008 was 12,500. The plane went under comprehensive repair and maintenance, one engine which was permanently damaged replaced with a cost of Rs. 100 million and other repaired with a cost of Rs. 10 million. The body was repaired with a cost of Rs. 40 million. The management also decided to replace interiors and cabins with a total cost of Rs. 250 million as the plane was not operational even one year before their use full life.

The plane flew for 2,500 hours during the year under consideration.

Required:

Prepare extract of statement of comprehensive income for the year ended December 31, 2008 and statement of financial position as at December 31, 2008 for the plane who got damaged only?

Contd. on back

(10)

2

Q.4.

The extract from statement of financial position of a company at year end June 30, 2008 reflects following status:

Rs. (000) Plant under installation 5,000

Loans Bank loan 15% 10,000 Bank loan 20% 3,000 Bank loan 13% 4,000

A loan of Rs. 1,000,000 was taken on July 01, 2008 specifically to finance the project at 16.5%.

Expenditure incurred on plant under installation Rs. (000) July 1, 2008 700

October 1, 2008 700 February 1, 2009 1,000

June 1, 2009 500

An interest income of Rs. 50,000 has also been earned on temporary investment of specific funds borrowed at the start of the year.

Required:

(i) Capitalization rate of the company (03)

(ii) Total borrowing cost to be capitalized during the year 2009. (05)

(iii) Cost of plant at June 30, 2009 and impact if any if the carrying value of asset exceeds its recoverable value.

(04)

Q.5. IAS – 38 deals with accounting treatment of intangible assets held for use and IAS-2 deals with intangible assets developed for others in the ordinary course of business, which have become more important than the tangible assets in the knowledge based economy in the recent time. M/S SLQ Limited is a computer software development and marketing company. During the year ended June 30, 2009 the company has incurred following expenses and sought your opinion for the appropriate accounting treatment.

a) The company has developed new accounting software for retailers to facilitate them in filing sales tax returns and also maintaining appropriate books of accounts as required by Income Tax Ordinance 2001. The company incurred Rs. 200,000 on marketing the software and trained 10 employees with a cost of Rs. 150,000 for after sale service. The development cost of software worked out is Rs. 300,000. It is assumed that all the requisite criteria for internally developed intangible asset under IAS-38 are satisfied.

b) The company made a contract with New Vision Real Estate Developers for developing software worth Rs. 2 million. At the end of the year the software is still under development and the following expenses have been incurred on developing the software. Rs. (000) Salary of Personnel involved in development 200 Allocation of over heads (including depreciation/Amortization) 150 Sales person salary involved in securing the contract 20 Profit margin on the contract 250 License cost of a back end software used exclusively for this project 100

The stage of completion of the software is not reliably measurable and the whole amount of

revenue will be recognized at the time of completion of the software.

c) The company also acquired all the shares of M/S SOFTECH Limited during the year another software development company and paid the consideration to the shareholders of SOFTECH in its own shares. The company issued its two shares for every five shares of SOFTECH. The issued share capital of SOFTECH was 5 million shares of Rs. 10 each and market value of SLQ shares was Rs. 60 per share. The assets and liabilities of SOFTECH along with their fair values was as follows: -

Contd….

(15)

3

Carrying value Fair value Rs. (m) Rs. (m) Brand name Not recognized 35 Computers and accessories 15 10 License 5 25 Software 20 30 Customer list Not recognized 15 Land and building 30 60 Creditors 40 40

Q.6. On October 1st 2008, fire destroyed stock of Swat Furniture Ltd. The books of Accounts provided the following data:

Rs. (000) Sales for the year ended June 30, 2008 4,880 Stock on (June 30,2008) 1,200 Stock at cost on June 30, 2007 1,400 Purchases for the year ended June 30, 2008 3,300 Purchases from July 1st to September 30, 2008 1,200 Sales from July 1st to September 30, 2008 1,500

The value of stock on June 30, 2008, included an item valuing Rs. 100,000, which has been written down to Rs. 75,000. It was sold in August 2008 for Rs. 56,000. Apart from this, the gross profit ratio has remained uniform. The stock salvaged realized Rs. 140,000 only. The maximum value of stock insured is Rs. 3,000,000.

Required:

Calculate the amount of Insurance claim for stock destroyed by fire?

(08)

Q.7. Following is the trial balance of two sole traders at the year ended June 30, 2009. Adil Aleem Rs. (000) Rs. (000)

Plant and machinery 1,500 1,700 Sales (1,000) (1,250) Opening stock 200 300 Operating expenses 150 165 Purchases 550 650 Current capital (150) (265) Capital accounts (1,000) (1,000) Creditors (250) (300)

The closing stock of Adil was Rs. 150,000 and of Aleem was Rs. 125,000. The plant and machinery is depreciated at 20% per annum.

On July 01, 2009 they decided to merge their businesses and form a partnership in the name of AA enterprises and agreed as follows: -

The new business will take all the assets and liabilities of both the businesses at book value except plant and machinery of Aleem which is taken at Rs. 300,000 above its book value. The capital of new business will be Rs. 3,000,000 shared equally by the two partners adjusted by any cash contribution/distribution. The goodwill of Adil is worked out at Rs. 250,000 and of Aleem Rs. 300,000. The goodwill of old businesses will not appear in the books of new business. Adil has a license not recognized in its separate books having fair value of Rs. 250,000 on July 01, 2009.

Required:

Prepare opening statement of financial position of AA Enterprises on July 01, 2009 and capital accounts in the books of the new firm?

(15)

Contd. on back

4

Q.8. M/S Haneef Ltd purchased entire share capital of M/S Sajid Power Ltd at the date of its incorporation, several years before. The shares were purchased at par value of Rs. 10 each. The total number of shares issued by Sajid Power Ltd was 100 million. Following is the trial balance of both the companies for the year ended June 30, 2009.

Haneef Ltd Sajid Ltd Debit Credit Debit Credit Rs. (m) Rs. (m) Rs. (m) Rs. (m) Sales -- 12,000 -- 7,500 Cost of investment in Sajid Ltd 1,000 -- -- -- Cost of sales 6,500 -- 4,500 -- Operating expenses 3,500 -- 1,500 -- Closing stock 2,300 -- 2,000 -- Property, plant and equipment 3,500 -- 1,200 -- Accumulated depreciation b/f -- 1,500 -- 700 Dividend income from Sajid Ltd -- 1,000 -- -- Ordinary share capital -- 3,000 -- 1,000 Retained earnings opening -- 2,500 -- 2,000 Creditors -- 500 -- 300 Due from Sajid Ltd 1,000 -- -- -- Debtors 2,500 -- 1,500 -- Cash and bank balance 200 -- 500 -- Due to Haneef Ltd -- -- -- 700 Dividend paid -- -- 1,000 -- 20,500 20,500 12,200 12,200

Further, the following intra group transactions took place.

a) Haneef Ltd sold goods worth Rs. 500 million to Sajid Ltd during the year of which 1/5th are still in the inventory of Sajid Ltd. Haneef Ltd charges 20% margin on all goods it sells to associated companies.

b) The intra group balances are not reconciled because of a cheque in transit of Rs. 200 million sent by Sajid Ltd to Haneef Ltd and Rs. 100 million management fee charged by Haneef Ltd to Sajid Ltd.

c) The depreciation for the year is not charged in the above balances, the group uses 20% depreciation rate for all its property, plant and equipment on reducing balance basis. The depreciation is to be charged in cost of sales.

Required:

Prepare consolidated statement of financial position as on June 30, 2009, statement of comprehensive income and consolidated statement of changes in equity for the year ended June 30, 2009?

(20)

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Summer Exam-2010

(Final)

Financial Reporting [03-05-2010]

Duration: 3 hrs. M a r k s - 1 0 0

[Instructions]

• Ensure that the question paper delivered to you is the same, in which you intend to appear.

• Read the instructions given on the title page of Answer Copy.

Attempt all Questions

Q.1. The statements of financial position of P and its subsidiary S at 31st

December 2009 were as

follows:

Statement of financial position at December 31, 2009

P S

Rs. Rs.

Total assets

Non-current assets

Property, plant and equipment 80,000 70,000

Intangible assets -- 30,000

Investment in shares of S 100,000

180,000 100,000

Net current assets 40,000 40,000

220,000 140,000

Equity and liabilities

Capital and reserves

Ordinary shares of Rs. 10 each 120,000 100,000

Retained profits 100,000 40,000

220,000 140,000

1. P purchased 80% of Rs. 10 shares of S on 1st

January 2007 for Rs. 100,000 when the

reserves of S showed a balance of Rs. 20,000.

2. S has all the same accounting policies as P, except as regards intangible assets and

property, plant and equipment (PPE). The intangible assets of S are all of a type

where recognition would not be permitted under IAS 38. When P made its

investments in S on 1st

January, 2007 the intangible assets of S included Rs. 15,000

that would not qualify for recognition under IAS 38.

3. The group has the policy of measuring PPE at Revalued amount less subsequent

accumulated depreciation and impairment losses. The revalued amount of PPE of P

at the date of acquisition and current reporting date are equal to carrying value.

However, the revalued amount of PPE of S was Rs. 15,000 more than their carrying

value of which Rs. 5,000 relate to date of acquisition. The revaluation will result in

extra depreciation of Rs. 2,000 in the post acquisition period.

4. During December 2009 P sold some goods to S for Rs. 12,000. P operates with a

gross profit margin of 25%. At the 31st

December 2009 S still holds one -third of

these goods in inventory.

5. The intra group balances are reconciled and the amount due to P in the books of S is

Rs. 4,000.

6. The Group has the policy of measuring Non Controlling Interest (NCI) fair value at

the date of acquisition, the fair value of NCI was Rs. 30,000.

7. Consolidated goodwill has been fully written off by the current reporting date.

Required:

Prepare the consolidated statement of financial position for the P group on 31st

December

2009? (20)

Contd. on back

2

Q.2. The accountant of JUNAID Limited has come across the following accounting issues while

finalizing the financial statements for the year ended December 31, 2009 and sought your

opinion being the company IFRS consultant.

i. JUNAID Limited issued a 1 year warranty for defects on a single item of equipment that it

delivered to its customer. At the company's year end, the company is being sued by the

customer for refusing to replace or repair the item of equipment within the warranty

period, as JUNAID Limited believes the defect is not covered by the warranty, but instead

has arisen because of the customer not following the instructions provided in the

working manual of the equipment. Khan and Khan the company's lawyer has advised

JUNAID Limited that it is more likely than not that they will be held liable. This would

result in the company being forced to replace or repair the equipment plus pay court

costs and a fine amounting to approximately Rs. 100,000. Based on past experience with

similar items of equipment, the company estimates that there is a 70% chance that the

equipment would need to be replaced which would cost Rs. 400,000 and a 30% chance

that the repair would only cost about Rs. 15,000.

(05)

ii. The company also manufactures small items of equipment which it sells through a retail

network. The company sold 12,000 items of this type this year, which also have a 1 year

warranty if the equipment fails to perform properly. Based on past experience, 5% of

items sold are returned for repair or replacement. In each case, one third of the items

returned are able to be repaired at a cost of Rs. 1,000 each, while the remaining two

thirds are scrapped and replaced. The manufacturing cost of a replacement item is Rs.

10,000.

(05)

iii. JUNAID Limited has a contract to buy 1,000 Kilograms of copper from a China Co each

month for Rs. 3,000 per Kilograms. From each Kilogram of copper JUNAID Limited make

one role of cable. The company also incurs labor and other direct variable costs of Rs.

1,000 per role. Usually company can sell each role of cable for Rs. 4,500 but in late July

2009 the market price falls to Rs. 3,500 per role. The company is considering ceasing

production since it thinks that the market may not improve. If the company decides to

cancel the copper purchase contract without 2 months' notice it must pay a cancellation

penalty of Rs 150,000 for each of the next two months.

(05)

Required:

Discuss the Accounting treatment of the above situations.

Q.3. On 31st

December 2008 PESHAWAR Co. purchased 90% shares of SIALKOT Co. for Rs. 2.2

million. The net fair value of the identifiable assets, liabilities and contingent liabilities of

SIALKOT Co at that date was Rs. 1.85 million. Peshawar Co. made a loss in year ended

31st

December 2009 and at 31st

December 2009 the net assets of SIALKOT Co based on fair

values at December 31, 2008 were as follows:

(Rs. 000)

Property, plant and equipment 1,300

Capitalized development expenditure 200

Net current assets 250

Total 1,750

An impairment review on 31st

December 2009 indicated that the recoverable amount of

SIALKOT Co at that date was Rs. 1.55 million. The capitalized development expenditure has

no ascertainable external market value and the current fair value less costs to sell of the

property, plant and equipment is Rs. 1.122 million Value in use could not be determined

separately for these two items.

Required:

Calculate the impairment loss that would arise in the consolidated financial statements of

PESHAWAR Co as a result of the impairment review of SIALKOT Co at 31st

December 2009

and show how the impairment loss would be allocated.

(15)

Contd…

3

Q.4. During 2009, KAMAL Co. discovered that some products that had been sold during 2008

were incorrectly included in inventory at 31st

December 2008 at Rs. 6,500. Further, an

investment of Rs. 10,000 included in noncurrent assets was sold by the company

secretary prior to 2008 and took away the proceeds, nothing is recoverable from the

secretary as he left Pakistan and not traceable. The investment is still included in

noncurrent assets.

KAMAL’s accounting records for 2009 show sales of Rs. 104,000, cost of goods sold of Rs.

86, 500 (including Rs. 6,500 for the error in opening inventory) and income taxes of Rs.

5,250.

In 2009 KAMAL reported:

Statement of comprehensive income 2009 2008

Rs. Rs.

Sales 104,000 73,500

Cost of goods sold (86,500) (53,500)

Profit before income taxes 17,500 20,000

Income taxes (5,250) (6,000)

Profit 12,250 14,000

Statement of financial position

Assets 2009 2008

Non-current 50,000 40,000

Current assets 22,000 14,000

72,000 54,000

Equity and liabilities

Ordinary share capital 5,000 5,000

Retained earnings 46,250 34,000

51,250 39,000

Current liabilities 20,750 15,000

72,000 54,000

(a) The opening retained earnings of 2008 were Rs. 20,000 and closing retained

earnings was Rs. 34,000.

(b) KAMAL’s income tax rate was 30 per cent for 2009 and 2008. It had no other

income or expenses.

(c) KAMAL had Rs. 5,000 of share capital throughout, and no other components of

equity except for retained earnings. Its shares are not publicly traded and it does

not disclose earnings per share.

Required:

Prepare revised financial statements except statement of cash flows for KAMAL in

comparatives?

(15)

Q.5. M/S XYZ has taken an asset on lease from Commercial Leasing Corporation on

January 01, 2008 for four years. The asset has economic life of 10 years after which it will

have zero residual value. The fair value of asset is Rs. 1,300,000. The annual lease rental

is Rs. 150,000 with first year as grace period. The asset reverts back to lessor at the end

of lease term. The lessee ends its accounting year on December 31st

.

Required:

a) Discuss classification of lease. (05)

b) Provide relevant ledger accounts for first two years. (05)

Contd. on back

4

Q.6. An entity acquired a number of radio frequency licenses, which it has capitalized in

accordance with the requirements of IAS 38. The licenses give the entity a contractual

right to broadcast exclusively on specified radio frequencies for the next ten years. The

licenses can be sold to third parties.

Due to the limited availability of these licenses, and the commercial success of the radio

stations using those frequencies, management considers the value of the licenses to be

considerably more than carrying amount and intends to revalue them. The entity has

conducted a valuation using a professional qualified valuer. Comment.

(05)

Q.7. AKBAR Construction Limited (ACL) has entered in following four contracts during the

year. The detail of these contracts is as under: -

Alpha Beta Gama Ceta

Rs. (000) Rs. (000) Rs. (000) Rs. (000)

Contract price 5,000 4,000 4,500 10,000

Cost to date 1,000 800 3,000 4,500

Un-used raw materials at the site 250 -- 500 --

Future cost including un-used raw

material

3,000 2,200 3,000 --

Progress billings and receipts 2,500 1,500 2,000 2,000

The cost to date of Alpha contract includes an amount of Rs. 100,000 incurred by ACL on

rectification work because of error by the ACL’s designing department. The company

normally uses cost to cost basis for determining stage of completion. After entering into

the contract Gama, ACL came to know that the raw material to be used in the contract

has become expensive therefore, the contract has become onerous. After the start of

contract Ceta, ACL has entered in serious litigation with the customer, the outcome of

the contract is not determinable, however, whatever money has been received is not

payable and no further receipts are probable.

Required:

Prepare relevant extract of financial statements for the year then ended? (15)

Q.8. M/S Sajid Ltd has land and building in its property, plant and equipment purchased on

January 01, 2000. The land and building are revalued at each year end. The building has a

40 year life at the purchase date and has not changed yet.

The value of land and building at the start of current year are as follows:-

Historic

cost

Revalued

amount

Revaluation

surplus

Rs. (000) Rs. (000) Rs. (000)

01-01-2008

Land 80 140 60

Building 120 132 33

31-12-2008

Land 80 160

Building 120 130

The company has a policy of transferring an amount equal to extra depreciation from

revaluation surplus to retained earnings.

Required:

Provide extract of statement of comprehensive income and statement of financial

position for M/S Sajid Ltd for the year?

(05)

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Winter Exam-2010

(Final)

Financial Reporting [01-11-2010]

Duration: 3 hrs. M a r k s - 1 0 0

[Instructions] • Ensure that the question paper delivered to you is the same, in which you intend to appear.

• Read the instructions given on the title page of Answer Copy.

Attempt all Questions

Q.1. On July 01, 2009 PARVEZ LTD purchased 60% shares of SADIQ LTD through share for

share exchange by issuing its 4 shares for every 5 shares of SADIQ LTD. The fair

value of one share of PARVEZ LTD was Rs. 140 and of SADIQ LTD was Rs. 110 on

date of acquisition.

The summarized statements of comprehensive income for the two companies for

the year ended June 30, 2010 are:

PARVEZ LTD. SADIQ LTD.

Rs. (000) Rs. (000)

Revenue 85,000 65,000

Cost of sales (35,000) (25,000)

Gross profit 50,000 40,000

Administrative expenses (10,500) (1,500)

Distribution expenses (12,500) (15,500)

Operating profit 27,000 23,000

Interest expense (1,500) (4,500)

Other income 2,500 --

Profit before tax 28,000 18,500

Tax expense (10,000) (5,500)

Profit for the year 18,000 13,000

a) A fair value exercise was carried out for SADIQ LTD at July 01, 2009, the date

of acquisition with the following results: -

Book value Fair value

Rs. (000) Rs. (000)

Land 20,000 20,500

Building 27,000 27,700

Inventory 5,000 5,300

The fair values of land and building have not changed materially from the

acquisition date and the assets still exist on current reporting date, however,

SADIQ LTD has not recorded the fair values in its separate books. The

remaining useful life of building at the date of acquisition was 10 years. The

inventories have been sold by SADIQ LTD before the year end.

b) The detail of each company’s share capital and reserves at July 01, 2009 are:

PARVEZ LTD SADIQ LTD

Rs. (000) Rs. (000)

Ordinary share capital of Rs. 10 each 20,000 1,500

Share premium 50,000 2,500

Accumulated profits 25,000 5,000

Contd. on Back

2

c) On January 01, 2010 SADIQ LTD sold goods to PARVEZ LTD which has been

treated as plant and equipment by PARVEZ LTD. The cost of goods to SADIQ

was Rs 10 million but sold to PARVEZ at Rs. 15 million. PARVEZ depreciates

such assets on four years using straight line depreciation method.

d) On January 01, 2010 SADIQ LTD issued Rs. 90 million 10% loan notes of

which PARVEZ LTD subscribed 40% loan notes. The other income includes

interest received from SADIQ LTD.

e) The group has the policy of measuring Non-Controlling Interest at fair value.

The goodwill has been tested for impairment at the year end and Rs. 1

million impairment losses on goodwill should be recognized in group

financial statements.

f) There has been no dividend payment by any company during the year.

Ignore deferred taxation while consolidating the above financial statements.

Required:

a) Calculate Goodwill at the date of acquisition? (05)

b) Prepare Consolidated Statement of Comprehensive Income for the year

ended June 30, 2010 for PARVEZ LTD Group?

(15)

Q.2. National Corporate Leasing Limited (Leasing Company) is a listed company engaged

in leasing of equipments. The equipments under lease some time are not available

from the market therefore, it maintains a reasonable stock of these equipment by

its own. During the year ended December 31, 2009 it had entered into many lease

contracts with individual as well as corporate clients. The detail of its two contracts

is as follows: -

a) Sale Type Lease: Equipment costing Rs. 250,000 purchased by it two

months back was leased to MB Limited on June 30, 2009. The fair value of

this equipment is Rs. 300,000. The lease agreement is for three years and

the rental due in advance, the first rental of Rs. 120,000 is received on

June 30, 2009. The leasing company has also incurred Rs. 10,000 on

commission to sales persons.

b) Finance Type Lease: Equipment having fair value of Rs. 500,000 has been

purchased by KD Limited and the leasing company has made payment on

behalf of KD Limited on September 30, 2009. The rental will due in arrear

but a deposit of Rs. 100,000 has been received in advance. The lease term

is for five years and annual rental is Rs. 134,000. The commission of

Rs. 20,000 has also been paid to sales persons.

The interest rate leasing company normally use for sale type lease is 21.5% and for

finance type lease is 20%. The market interest rate for sale type lease is 20%.

Required:

Prepare extract of financial statements for both the contracts?

(15)

Contd…..

3

Q.3. QUTAB Limited is a listed company, whose shares are trading on all the three stock

exchanges of the country. The financial year end of the company is June 30, 2010.

The financial statements of the company have been approved on September 05,

2010. The chief accountant of the company has come across the following events

occurring after the reporting date.

a) During a board meeting held on July 15, 2010 the board decided to dispose

off a location which is identified cash generating unit located in KHYBER

PAKHTUNKHA badly affected by the recent flood. The carrying value of the

cash generating unit is Rs. 15.5 million but the recoverable is now

significantly lower than the carrying value. The flood came in first week of

June 2010.

b) During the month of August a local distributor of Chinese Company

launched a new product at very low price, which forced the company to

reduce its selling price even below cost to dispose of the entire stock. In the

monthly meeting of board of directors, they decided to discontinue the

production of said product. The discontinuation of production will result in

redundancy payments of Rs. 2 million to employees currently involved in the

production of said product.

c) During the year 2010, the company was sued by a large multinational

company dealing in software development for using pirated soft ware on its

Information Technology equipments. The case was pending with the Court

and the legal advisor of the company has advised for a provision of Rs. 5

million at the reporting date. The decision of the court came on August 20,

2010 and penalty of Rs. 10 million was confirmed by the court. On August

25, 2010 the company filed appeal against the court verdict in Higher Court.

The legal advisor is still of the opinion the penalty should not exceed Rs. 5

million.

d) During audit for the year ended June 30, 2010, the auditors detected that

some tangible assets of Rs. 500,000 are not traceable physically. The enquiry

was initiated which concluded on August 31, 2010 that these assets were

stolen by someone and are not recoverable. The company was however,

insured against theft and claim was lodged with the insurance company. The

insurance company has not confirmed the amount of claim; however, there

is a possible chance that 50% of the claim will be accepted by the insurance

company.

Required:

Discuss the accounting treatment of above events in the financial statements of

QUTAB Limited?

(12)

Q.4. On 1 July 2009 a company held a freehold building in its books with a net book

value of Rs. 18 million and a remaining useful life of 30 years. On the same date, it

entered into an agreement to sell the building to a bank for Rs. 35 million, but

continues to occupy it for the next 5 years at an annual rental of Rs. 5 million per

annum payable in advance. The market value of the building at the date of sale was

approximately Rs. 20 million and an 'arm's length' rental would be approximately

Rs. 3 million per annum.

Required:

Describe how the above transaction should be treated in the financial statements of

the company for the year ended 30 June 2010?

(10)

Contd. on back

4

Q.5. You are presented with the statement of financial position of Sajjad Ltd. for the year

ended 30 June 2010, together with comparative figures for the previous year.

Sajjad Ltd.

Statement of Financial Position as at June 30, 2010

Fixed assets 2010 2010 2009 2009

Rs. (000) Rs. (000) Rs. (000) Rs. (000)

Tangible assets 2,900 2,000

Less: depreciation (700) 2,200 (470) 1,530

Goodwill 500 650

2,700 2,180

Current assets

Stock 550 450

Trade debtors 450 250

Bank 50 --

1,050 700

3,750 2,880

Share capital and reserves

Ordinary share capital of Rs. 10 each 2,000 1,500

Share premium 250 --

Retained earnings 405 460

2,655 1,960

Non-current liabilities

Deferred tax 100 150

Long term loans 150 50

250 200

Current liabilities

Trade creditors 400 370

Current tax 245 200

Dividends-interim 200 120

Bank overdraft -- 30

845 720

3,750 2,880

Additional information:

• A Plant which cost Rs. 130,000 on July 01, 2006 being depreciated at 10% per

annum on reducing balance basis was sold for profit of Rs. 55,000 at the start

of current year.

• The interim dividend for the year is Rs. 170,000.

• Interest paid was Rs. 33,000 during the year ended June 30th

, 2010.

• There was an over provision of tax amounting to Rs. 50,000 has been

reversed in the year 2010.

Required:

a) Calculate the operating profit of Sajjad Ltd. for the year ended

30th

June 2010?

(05)

b) Prepare a cash flow statement for Sajjad Ltd. for the year ended

30th

June 2010?

(10)

Contd…

5

Q.6. The extract of statement of financial position of MN Limited for the year ended June

30th

, 2010 and 2009 as comparative is as under: -

2010 2009

Rs. (000) Rs. (000)

Property, plant and equipment 135,000 150,000

Advance income -- 2,000

Accrued expenses 1,500 --

Prepaid expenses -- 3,500

Development cost 4,000 5,000

Loan 9,100 --

The following notes are also relevant for the computation of current and deferred tax:

(i) The property, plant and equipment is being depreciated under tax laws at

15% per annum while under IAS 16 it is being depreciated at 10% per

annum under reducing balance basis. The tax base of property, plant and

equipment was Rs. 109 million on June 30, 2009.

(ii) The profit before tax is Rs. 450 million for the year ended June 30, 2010.

(iii) Un-used tax losses brought forward at the start of year 2010 are Rs. 250

million.

(iv) The advance income has been taxed in the year of receipt.

(v) The expenses under tax laws are allowed when paid.

(vi) The development cost of Rs. 6 million has been incurred in 2009 and was

being amortized over six years; however, the whole amount was claimed

as an expense under tax laws in 2009.

(vii) The loan has been issued on last day of year 2010 for Rs. 10 million and

issuance cost of Rs. 0.1 million was incurred. The issuance cost is an

allowable expense under tax laws in the year of incurrence but is

amortized under IAS 23 over the loan term.

(viii) The tax rate has been 35% in the current year and in the previous years.

Required:

a) Calculate current tax and taxable profit? (07)

b) Calculate deferred tax? (08)

Q.7. Mega Contractors (Private) Limited is a developer of commercial properties. During

the year ended June 30, 2010 it started to develop a commercial plaza. Considering

the volume of work and forecasted cash flows, it borrowed Rs. 500 million from Fin

Solutions Bank Limited at six month average Kibor+3 percent, however, the total

project cost will be Rs. 1,200 million. The loan was borrowed on September 30, 2009

but the project started on October 31st

, 2009. The loan was utilized on the asset as

follows:-

October 31, 2009 200

January 31, 2010 150

The project is still in progress and will take at least one year to complete. The loan was

also temporarily invested to earn Rs. 12 million as interest income of which 5 million

earned in October 2009.

The kibor+3 in first six months of the loan were 15% and 17.5% thereafter. During the

year Mega Contractors also received Rs. 175 million as booking fee for space from

customers on March 31, 2010.

Required:

Calculate the cost of work in progress and amount of borrowing cost to be capitalized

in the cost of the asset?

(13)

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Winter Exam-2011  (Final)  

Financial Reporting [31-10-2011] Duration: 3 hrs.                                                                                                                                                                             Ma r k s ‐ 1 0 0                  

[Instructions]   • Ensure that the question paper delivered to you is the same, in which you intend to appear. • Read the instructions given on the title page of Answer Copy. 

Attempt all Questions

 

     

Q.1. IAS 24 (Related Party Disclosures) has recently been amended and the definition of related party has been  improved. You are required to give definition of related party under IAS 24 and  identify those related party relationships in which even there is no transaction during the period, they must be disclosed. 

10 

Q.2. The Income Statements for PL and SL for the year ended June 30, 2011 are shown below. 

PL SL Rs. Rs. Revenue   150,000 150,000 

Cost of sales  (70,500) (90,000) 

Gross profit  79,500 60,000 

Distribution expenses  (20,000) (15,000) 

Administrative expenses  (10,500) (10,500) 

Finance cost  (1,500) (2,000) 

Other income  1,700 ‐‐ 

Profit before tax  49,200 32,500 

Income tax expense  (9,200) (7,500) 

Profit for the year  40,000 25,000 

Additional information 

a) PL acquired 80% shares of SL at  the start of current year. The  issued share capital of SL was Rs. 50,000 divided into 5,000 share of Rs. 10 each. The retained earnings of SL were Rs. 250,000 at the date of acquisition. The carrying value of net assets of SL was equal to their fair values except one plant has fair value of Rs. 10,000 more than its carrying value. The remaining useful life of plant was 4 years at the date of acquisition. The fair value of one share of SL was Rs. 70 at the date of acquisition. 

b) PL issued its 1 share for every 2 shares as purchase consideration to the old shareholders of SL. The fair value of PL shares at the date of acquisition was Rs. 100 per share. PL also subscribed 30% of Rs. 20,000, 10%  loan of SL at  the  start of  the year. The other  income of PL  includes interest received from SL. 

c) SL declared 2%  interim dividend during  the  year.  The other  income of PL  includes dividend received from SL. 

d) 30% of the total Goodwill has been impaired by the current reporting date. e) The group has the policy of measuring NCI at fair value at the date of acquisition. f) SL  sold  goods  to  PL  valuing  Rs.  30,000  by  charging markup  of  20%.  The  whole  of  goods 

remained unsold by the current reporting date. 

Required: 

Prepare consolidated Income Statement for the PL group for the year ended June 30, 2011.

25 

Contd. on back

2

Q.3. Discuss the accounting treatment of the following under IAS 23;  

a) A telecom company has acquired a telecommunication license. The license could be sold or licensed  to  a  third  party. However, management  intends  to  use  it  to  operate  a wireless network. Development of the network starts when the license is acquired. 

Should borrowing costs on the acquisition of the license be capitalized until the network is ready for its intended use? 

b) A  real estate company has  incurred expenses  for  the acquisition of a permit allowing  the construction  of  a  building.  It  has  also  acquired  equipment  that  will  be  used  for  the construction of various buildings. 

Can borrowing  costs on  the acquisition of  the permit and  the equipment be  capitalized until the construction of the building is complete? 

c) Does management take  into account payments received  in advance  from customers when determining the amount of borrowing costs to be included in contract costs? 

d) A contract accounted  for under  IAS 11  is  financed with general borrowings and  is  in a net credit position (advances in excess of costs incurred). Is the net interest income treated as a contract ‘cost’? 

e) An entity incurs borrowing costs for the construction of an asset accounted for under IAS 11. Does management treat the borrowing costs as a contract cost under IAS 11? 

15 

Q.4.  Khalid and Jamil were in partnership sharing profits and losses in the ratio of 3:2. Their statement 

of financial position as at June 30, 2011 was as under: ‐  

Assets    Rs. (000) Non‐current assets   

  Freehold premises    16,000  Plant and machinery    5,000

      21,000Current assets   

  Inventory    16,000  Trade receivables    26,000  Cash     7,000

    49,000    70,000

Capital and liabilities   Capital   

  Khalid    20,000  Jamil    10,000

    30,000Non‐current liabilities     Notes payable    10,000Current liabilities   

  Trade creditors    20,000  Bank overdraft    10,000

    30,000    70,000

 

 

Contd….

3

  a) On July 01, 2011 they decided to convert into a private limited company named 

Style (Private) Limited. 

b) The Style (Pvt.) limited company will take over all the assets and liabilities with the exception of notes payable, cash and bank overdraft. The purchase price will be Rs. 60 millions. The purchase consideration will be settled through payment of  cash  of  Rs.  12 millions  and  balance  amount  through  issuance  of  shares  in Style (Pvt.) limited at par. The par value per share is Rs. 10. 

c) Notes payable were settled through cash payment of Rs. 9.8 millions. The bank overdraft  was  settled  at  full  value.  Any  difference  on  capital  accounts  of partners will be settled through cash. 

d) The  fair  values  of  all  assets  and  liabilities will  be  same  in  the  books  of  new company except freehold premises being valued at Rs. 25 millions. 

Required: 

 

  (i) Realization account in the books of old partnership?  05 

  (ii) Partner’s capital accounts in the books of old partnership?  05 

  (iii) Opening statement of financial position of Style (Private) Limited?  05 

Q.5. According to IAS 1 (Presentation of Financial Statements) discuss the following concepts: 

a) Impracticable 

b) Un‐reserved statement 

c) Disagreement with IFRS 

d) True and fair view 

e) Current assets 

20 

   Q.6. XYZ is a limited liability company engaged in production of poultry feed. XYZ has recently imported 

a machine worth Rs. 200 millions  (including Rs. 15 millions custom duties and handling charges). Due to the heavy cost of the machine XYZ entered into a sale and lease back transaction with FIN Bank Limited. The machine was sold to bank for Rs. 215 million on July 01, 2010 and  leased back for 5 years which is also the useful life of the machine. The interest rate implicit in the lease is 18% p.a. The rentals are in arrear and payable at the end of each year.  Required: 

Provide extract of Financial Statement of XYZ for the year ended June 30, 2011.  15

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