Certificate in Accounting and Finance Stage Examinations

(Term Test 1) June 11, 2024

1 hour 35 minutes – 53 marks
Additional reading time – 10 minutes

Financial Accounting and Reporting 1

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.
(iii) Multiple choice questions must be answered in answer script only.
SECTION A
Q.1 Bundu Khan Corporation (BKC) decided to construct a tunnel that will link two sides of the
village that were separated by a natural disaster years ago. Realizing its role as a good corporate
citizen, the BKC has been in this village for a couple of years exploring oil and gas in the nearby
offshore area. The tunnel would take two years to build. It began construction on January 1,
2016. The following payments were made during 2016:
Dates Rs.
January 31 200,000
March 31 450,000
June 30 100,000
October 31 200,000
November 30 250,000
The first payment on January 31 was funded from the entity's pool of debt. However, the entity
succeeded in raising a medium-term loan for an amount of Rs. 800,000 on March 31, 2016, with
simple interest of 9% per year calculated and payable quarterly in arrears. These funds were
specifically used for this construction. Excess funds were temporarily invested at 6 percent per
year. The construction project was temporarily halted for six weeks in May, June, when
substantial technical and administrative work was carried out which was necessary stoppage for
the completion of construction work. The following amounts of debt were outstanding at the
year-end December 31, 2016:
Rs.
Medium-term loan (see description above) 800,000
Bank overdraft (The weighted average amount outstanding during the year was
1,200,000
Rs. 750,000, and interest charged thereon by the bank amounted to Rs. 33,800.)
A 10%, 7-year general loan taken on October 1, 2009, repayable in full in
9,000,000
December, 2017
Required:
Calculate the amount of borrowing cost to be capitalized to the cost price of the Tunnel in for
the year ended 31st December, 2016? (08)

Q.2 Select the most suitable options:

(i) Which of the following is not permitted as a cost to sell under IAS 36?
(a) Cost to dismantle machine (b) Auctioneers fees
(c) Standard wages for employees (d) Transport costs for machine (01)

(ii) The forgivable loan from government is accounted for as _____________ if there is no
reasonable assurance that the entity will meet the terms for forgiveness of loan.
(a) a liability (b) an income
(c) a government assistance (d) a government grant (01)

(FAR-I Term Test: 11 June 2024)

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(iii) On 1 January 2021, Delta Limited (DL) acquired a manufacturing plant at a cost of Rs.200
million and received a government grant of Rs.40 million related to the plant. DL recorded the
grant as deferred income. The plant is being depreciated on a straight- line basis over five years.
The accounting period ends on 31 December each year. On 1 January 2023, the grant was repaid
in full on failing to meet the attached conditions. Profit or loss will be debited on the repayment
of the grant by:
(a) NIL (b) Rs. 16 million
(c) Rs. 24 million (d) Rs. 40 million (02)

(iv) Which of the following statements about IAS-20 ‘Accounting for Government Grants and
Disclosure of Government Assistance’ are true?
(a) A government grant related to the purchase of an asset must be deducted from
the carrying amount of the asset in the statement of financial position
(b) A government grant related to the purchase of an asset should be recognized in
profit or loss over the life of the asset
(c) Free marketing advises provided by a government department is excluded from
the definition of government grants
(d) Any required repayment of a government grant received in an earlier reporting
period is reported as prior period adjustment (01)

(v) On 30 September 2014, Razor’s closing inventory was counted and its cost of Rs. 1 million.
Some items of inventory which had cost Rs. 210,000 had been damaged in flood (on 15
September 2014) and are not expected to recover their normal selling price which is
calculated to achieve a gross profit margin of 30%. The sale of these goods will be handled
by an agent who sells them at 80% of their normal selling price and charges Razor a
commission of 25%.
At what value will the closing inventory of Razor be reported in its statement of financial
position as at 30 September 2014?
(a) Rs. 1,000,000 (b) Rs. 790,000
(c) Rs. 180,000 (d) Rs. 970,000 (02)

Q.3 You have recently joined as the finance manager of Commited Limited (CL) and have been
asked by the CFO to prepare a power point presentation on CL’s financial statements for the
year ended 31 December 2020 for the board of directors’ meeting. These financial statements
were finalised by the CFO. While preparing the presentation, you have noted the following
issues:
(i) CL uses fair value model for subsequent measurement of all investment properties. A five-
storey building purchased in July 2020 by CL was entirely classified as an investment
property. CL uses the ground and first floors for its administrative purposes while
remaining three floors were rented out to different tenants and will be sold in future.
Further, on 31 December 2020, the fair value increase of Rs. 150 million for the entire
building has been taken to the statement of profit or loss which has ensured that the
required interest cover as per bank loan covenants has been met.
The CFO is of the view that IFRSs allow such application as CL only uses less than 50%
of the building for its own use. He further explained that non-compliance of loan
covenants should be avoided at any cost as the bank loan would become immediately
payable upon non-compliance. This would create significant financial difficulties for CL
which may even result in closure of business. (03)

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(ii) CL is constructing a power generation plant for its factory. The project started on 1
February 2020 and would complete on 30 November 2021. The work remained
suspended for 3 months. The project is financed through a long term loan, acquired
specifically on 1 January 2020. The unutilised amount of loan is kept in a separate saving
account. Full year’s interest on loan was capitalized in the cost of power generation plant
as the CFO is of the view that the loan is taken specifically for the purpose of constructing
the plant.
The income of separate saving account has been recorded as other income in the statement
of profit or loss. (03)

(iii) Incorporation of the new revaluation report of CL’s buildings was deferred to the next
year as the resulting increase in valuation is substantial and would result in increase in the
depreciation for the year. The revaluation was initiated during the year since the fair
values of the buildings had increased materially. CFO is of the view that the buildings
were revalued last year and there is no need of such frequent revaluations. (02)

(iv) The adoption of the revaluation model has been accounted for as a ‘Change in
estimate’ (i.e. prospectively) though it is a ‘Change in accounting policy’. (02)
Required:
Discuss how the above issues should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.
Q.4 The accountant of Momin Enterprises (ME) prepared the draft statement of profit or loss for
the year ended 31 December 2023, which showed gross profit and net profit of Rs.1,360,000
and Rs.590,000 respectively. The following errors were found on a detailed review of the draft
financial statements:
(i) Purchase returns of Rs.20,000 were recorded as sales returns of Rs.2,000.
(ii) Free samples of goods costing Rs.30,000 were distributed to potential customers, but
were mistakenly recorded as credit sales at a mark-up of 30% on cost.
(iii) Proceeds from the disposal of office equipment on 31 December 2023, amounting to
Rs.382,000, were credited to sales. The equipment had cost and carrying amount on 31
December 2023 of Rs.500,000 and Rs.320,000 respectively. ME depreciates office
equipment at 20%.
(iv) Transportation outward, amounting to Rs.240,000, was recorded as transportation
inward. This also resulted in overstatement of closing inventory by Rs.36,000.
(v) While recording impairment for an item of property, plant and equipment, its value in
use of Rs.1.200.000 was ignored. The item had a carrying value (before impairment) of
Rs.1,800,000 and fair value less costs of disposal of Rs.1,000,000.
ME uses periodic inventory system for recording its inventory.
Required:
Compute the corrected gross profit and profit of ME for the year 2023. (08)

(FAR-I Term Test 1: 11 June 2024)

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SECTION B
Q.5 Financial statements of Bard Limited (BL) for the year ended 31 December 2023 are under
preparation. During the review of the draft financial statements of BL, the following matters
have been identified:

(i) Statement of changes in equity was not prepared in the draft financial statements. In this
respect, the following details have been gathered:
▪ Share capital and reserves as at 1 January
2022 2021
—— Rs. in million ——
Ordinary share capital (Rs. 10 each) 2,400 2,400
Share premium 563 563
Retained earnings 1,345 1,153
▪ BL’s profit for the year 2023 (draft), 2022 and 2021 were Rs.575 million, Rs.477
million and Rs.321 million respectively.
▪ Final dividend for the year ended 31 December 2021 comprised of 15% cash dividend
and 10% bonus shares. The bonus issue was made from share premium, and the shares
were issued in April 2022 after payment of cash dividend.
▪ A bonus issue of 25% was made in July 2023 as interim dividend.
▪ 40 million right shares were issued in October 2023 at Rs.18 per share. Transaction
costs of Rs.3 million were also incurred.

(ii) On 1 January 2020, BL had received a government grant of Rs.600 million to acquire a
manufacturing plant. However, the grant was treated as income on receipt.
The manufacturing plant was acquired at a total cost of Rs.1,000 rmnion on 1 January
2020. It was estimated to have a useful life of 8 years and residual value of Rs.100 million.

(iii) BL had decided to adopt the revaluation model from 1 January 2023 for subsequent
measurement of land and buildings included in property, plant and equipmen However,
this change has not been accounted for in the draft financial statements.
The following information pertains to BL’s property, plant and equipment:
Revalued Remaining
WDV as on
amounts as on useful life as on
Assets 1 January 2023
1 January 2023 1 January 2023
Rs. in million Years
Land 1,000 1,250 -
Office building' 750 1,200 (9)
Factory building 1,000 550 (5)
On 1 November 2023, BL sold 40% of its land.
Depreciation on buildings has been recorded using straight line method. BL transfers the
maximum possible revaluation surplus to retained earnings.

Required:
Prepare BL’s statement of changes in equity along with comparative figures for the year ended
31 December 2023. (The column of total is not required) (20)

(Good Luck)

(FAR-I Term Test 1: 11 June 2024)