Caf 7 Far2

Certificate in Accounting and Finance Stage Examinations
6 September 2014
3 hours 100 marks
Additional reading time 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II

Q.1 The following balances have been extracted from the trial balance as at 30 June 2014 of Zee
Trading Limited (ZTL):
Description
Sales
Other income
Opening inventory
Purchases
Selling and distribution expenses
Administrative expenses
Financial charges
Investment at cost (50,000 shares of Rs. 100 each)
Trade receivables
Provision for doubtful debts
Finance lease obligation
Debit
Credit
------- Rs. in 000 ------80,000
5,300
4,000
35,000
15,000
9,700
7,200
6,800
10,000
380
6,890
The following matters need to be considered in finalizing the financial statements of ZTL:
(i)
As per store records, closing inventory as at 30 June 2014 amounted to Rs. 8,500,000.
Physical inventory taken on 1 July 2014 revealed the following information:
Value of goods found short by Rs. 1,500,000.
Goods costing Rs. 860,000 are obsolete. Their estimated net realizable value is
Rs. 600,000.
(ii)
As per the memorandum record of third party stock, stock in ZTLs store on sale or
return as at 30 June 2014 amounted to Rs. 3,000,000. It also shows that previous year in
June 2013, ZTL had sold goods held by it on sale or return basis for Rs. 2,000,000.
However, purchase of these goods was accounted for in July 2013 on receipt of invoice
amounting to Rs. 1,600,000.
(iii)
Selling and distribution expenses include trade discounts allowed to customers
amounting to Rs. 4,000,000.
(iv)
Annual finance lease installment of Rs. 5,000,000 due on 30 June 2014 was paid and
debited to finance lease obligation. However, interest thereon at 12.6% per annum due
on the closing balance has not yet been booked.
(v)
Accounting depreciation on the leased assets amounting to Rs. 3,750,000 has been
accounted for.
(vi)
Tax depreciation on the companys owned assets for the year ended 30 June 2014
exceeded the accounting depreciation by Rs. 3,000,000.
(vii) In June 2014, ZTL received 18% cash dividend on its investments. The amount received
net of 10% tax was credited to other income.
(viii) Trade receivables as at 30 June 2013 amounted to Rs. 8,600,000. ZTL maintains a
provision for doubtful debts at 5% of trade receivables.
(ix)
Applicable tax rate for business income is 34%.
Required:
(a)
Prepare ZTLs statement of comprehensive income for the year ended 30 June 2014 in
accordance with the requirements of the Companies Ordinance, 1984 and the
International Financial Reporting Standards.
(10)
(b)
Prepare a note to the statement of comprehensive income for the year ended
30 June 2014, relating to taxation expense and tax reconciliation.
(14)
Page 2 of 4
Q.2 Industrial Chemicals Limited (ICL) completed installation of its chemical plant on
30 June 2013. Costs incurred and debited to capital work in progress are summarized as under:
Rs. in million
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Landed cost of the plant, inclusive of refundable sales tax

amounting to Rs. 15 million
Contractor's billings net of tax deducted at 5%
Cost of material and spare parts (Spares costing Rs. 6 million are in
store and can be used for maintenance of the plant)
Interest on loan acquired for installation work for the period
1 September 2012 to 30 June 2013. (The installation work
commenced two months after the schedule date of 1 September
2012 and completed on 30 June 2013)
Interest income from investment of unutilized proceeds of the loan
Allocated general and administration costs
Capital work in progress as at 30 June 2013
850
57
30
15
(2)
6
956
Test run of the plant was successfully completed on 31 August 2013 at a cost of Rs. 5 million.
Proceeds from sale of test production amounted to Rs. 3 million. Test run cost, net of sale
proceeds, has been charged to profit and loss account. On commencement of commercial
production i.e. 1 September 2013, the following estimates were worked out:
Useful life of the plant
Residual value at the end of useful life of the plant
Present value of estimated cost of decommissioning/restoration of the site
10 years
Rs. 10 million
Rs. 20 million
Interest rate prevailing in the market is 12%. ICL uses straight line method of depreciation
which is charged from the month the asset is available for use and up to the month prior to
disposal.
Required:
Prepare accounting entries from the above information for the year ended 30 June 2014
including correcting entries in accordance with the International Financial Reporting Standards. (15)
Q.3 Quality Garments Limited (QGL) is a manufacturer of readymade garments. During
May 2014, a fire broke out in one of its units which resulted in deaths and severe injuries to a
number of workers.
At the time of finalisation of QGL's financial statements for the year ended 30 June 2014, the
following issues pertaining to the fire are under consideration:
(i)
(ii)
(iii)
(iv)
Families of certain deceased workers have filed compensation claims amounting to

Rs. 60 million. A government agency has imposed a penalty of Rs. 35 million for
negligence on the part of the company. QGL's lawyers anticipate that the company
would have to pay Rs. 20 million and Rs. 10 million to settle the workers' claims and the
penalty respectively.
To maintain goodwill of the company, the Board of Directors is considering additional
payments to the families of the deceased workers amounting to Rs. 25 million.
Loss to fixed assets and inventories is estimated at Rs. 60 million. In this respect, a fire
insurance claim has been lodged. Due to certain policy clauses, QGLs consultant
anticipates that the claim for Rs. 15 million may not be accepted. The matter is under
negotiation with the insurance company.
Due to closure of the unit for repair, QGL would not be able to meet sales orders of
Rs. 50 million. This will reduce QGL's profitability for the half year ending
31 December 2014 by Rs. 10 million.
Required:
Discuss how the above issues should be dealt with in the financial statements of QGL for the
year ended 30 June 2014. Support your answers in the context of relevant International
Financial Reporting Standards.
(13)
Page 3 of 4
Q.4 Sky Limited (SL) commenced its business on 1 July 2013 by purchasing the business of Moon
Enterprises for a consideration of Rs. 60 million. The following information has been extracted
from its financial statements for the year ended 30 June 2014.
Particulars
Sales
Cost of sales
Operating and selling expenses
Bad debt expense
Loss on settlement of insurance claim
Finance charges paid
Taxation expense net of deferred tax credit
Closing stock in trade
Trade receivables
Provision for doubtful debts
Trade payables
Provision for taxation (net of payments)
Deferred tax asset
Property, plant and equipment - WDV
Debit
Credit
Rs. in million
172
80
40
6
2
8
15
10
28
6
20
5
4
105
Additional information:
(i)
At the time of acquisition, the assets and liabilities were valued as under:
Property, plant and equipment
Stock in trade
Trade receivables
Trade payables
(ii)
(iii)
Rs. in million
52
4
8
12
During the year, SL incurred a capital expenditure of Rs. 70 million.

Loss on settlement of insurance claim relates to a car which was destroyed in an
accident. Its cost and written down value at the time of accident was Rs. 5 million and
Rs. 4 million respectively. There were no other disposals during the year.
Required:
Prepare operating activities section of the statement of cash flows for the year ended
30 June 2014 using the direct method in accordance with the International Financial Reporting
Standards.
(11)
Q.5 Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on
1 July 2013. In this respect, the following information is available:
Cost of equipment
Amount received on 1 July 2013
Four annual installments payable in arrears on 30 June, each year
Guaranteed residual value on expiry of the lease
Rs. in million
28.69
3.00
7.80
5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a)
Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to
record the transactions related to the above lease arrangement in accordance with the
requirements of International Financial Reporting Standards.
(07)
(b)
Prepare a note for inclusion in GLL's financial statements for the year ended
30 June 2014, in accordance with the requirements of International Financial Reporting
Standards.
(10)
Page 4 of 4
Q.6 The following summarised statements of financial position pertain to Alpha Limited (AL) and
its subsidiary Delta Limited (DL) as at 30 June 2014.
Property, plant and equipment

Investment (2 million shares of DL)
Long term loan granted to DL
Current assets
Share capital (Rs. 100 each)
Retained earnings
Long term borrowings
Current liabilities
AL
DL
----- Rs. in million ----460
200
340
30
595
400
1,425
600
600
325
200
300
1,425
250
200
72
78
600
Following relevant information is available:

(i)
AL acquired investment in DL on 1 July 2013 when retained earnings of DL were
Rs. 140 million and the fair value of DL's net assets was equal to their carrying values.
(ii) Both the companies depreciate equipment at 10%, on straight line basis. On
30 June 2014, AL sold certain equipment to DL as detailed below:
Cost
Accumulated depreciation
Sale proceeds
(iii)
Rs. in million
40
30
25
Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details are
as under:
AL's inventory includes goods purchased from DL
DL's inventory includes goods purchased from AL
Receivable from DL on 30 June 2014 as per ALs books
Payable to AL on 30 June 2014 as per DLs books
(iv)
(v)
Rs. in million
27
24
19
19
Long term loan was granted to DL on 1 July 2013. It is repayable after five years and
carries interest at 12% per annum, payable on 30 June and 31 December, each year.
AL values non-controlling interest at the acquisition date at its fair value which was
Rs. 80 million.
Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with
the requirements of International Financial Reporting Standards.
(15)
Q.7 List the fundamental principles as mentioned in the ICAPs Code of Ethics and describe the
guidance expressed in respect of principle of integrity.
(05)
(THE END)

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Certificate in Accounting and Finance Stage Examinations

Financial Accounting and Reporting-II

Financial Accounting and Reporting-II

Landed cost of the plant, inclusive of refundable sales tax

Families of certain deceased workers have filed compensation claims amounting to

Financial Accounting and Reporting-II

During the year, SL incurred a capital expenditure of Rs. 70 million.

Financial Accounting and Reporting-II

Property, plant and equipment

Following relevant information is available:

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