ICMA.

Pakistan
Extra Reading Time: Writing Time: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) 15 Minutes 02 Hours 30 Minutes

MODEL PAPER FINANCIAL ACCOUNTING (AF-301)

Maximum Marks: 80

Roll No.:

Attempt ALL questions. Answers must be neat, relevant and brief. In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/ chart, where appropriate. Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. Use of non-programmable scientific calculators of any model is allowed. DO NOT write your Name, Reg. No. or Roll No. anywhere inside the answer script. Question No.1 Multiple Choice Question printed separately, is an integral part of this question paper. Question Paper must be returned to invigilator before leaving the examination hall.

Answer Script will be provided after lapse of 15 minutes Extra Reading Time (9:45 a.m. or 2:45 p.m. [PST] as the case may be) .

Marks Q. 1 First question (MCQs Part) comprises 20 MCQs of one (1) mark each to be attempted in 30 minutes. PB Company Limited was incorporated many years ago. The scenario of the company is that it had been incorporated by foreign-aid and registered under Companies Ordinance, 1984. At that time, the staff had consisted of highly qualified personnel who had put the company on a successful track. Within few years, the majority of the staff quit the company for better opportunity. Ever since, the existing staff could not look after the affairs of the company adequately. The senior directors realized the situation and took drastic measures to reform affairs of the company. The highly qualified and experienced staffs were recruited during 2011. The accountant prepared the following trial balance of the company for the year ended December 31, 2011. The notes prepared by the new staffs are followed by the trial balance: PB Company Limited Trial Balance as at December 31, 2011 Rs. in million Debit Credit Property at cost 600 Plant and equipment at cost 450 Accumulated depreciation-property 90 Accumulated depreciation-plant and equipment 104 Lease rental 1 Inventories (Dec. 31,2011) 84 Accounts receivable 60 Cash and bank 253 Interest paid on loan notes 15 Dividend paid 1 Distribution costs 15 Administrative expenses 20 Revenue 800 Over provision of tax-2010 1 Deferred tax liability 25 Accounts payable 20 10% Loan notes 300 Retained earnings (Dec.31,2010) 62 Cost of sales 568 Share capital 465 8% Bonds payable 200 Totals 2,067 2,067
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Marks The following notes pertain to the accounts: (1) The various steps taken by the management are expected to increase the sales considerably. In order to meet the future sales targets, the production needs to be increased. Hoverer the present production facilities could not meet the improved sales targets. The management aptly decided to acquire a new plant for this purpose. Consequently a highly sophisticated plant was acquired on lease on January 1, 2011 and advance rental payment of Rs.1 million was made on the date. It was one of first ten rental payments. The cash price of the plant was 6.76 million. The staff suggested that the lease was a finance lease with implicit rate of 10% and the leased asset should be depreciated at 10% using reducing-balance method. The useful life of leased plant is assumed to be 10 years. (2) The directors of the company have been contemplating to raise extra funds not only to meet the production targets due to increase in sale but also to meet other expenses associated with the expansion plan. In order to provide required funds, they decided to issue convertible bonds amounting to Rs.200 million on January 1, 2011. The bonds carried nominal interest rate of 8% per annum payable on January 1, each year. Par value of bond is Rs.1,000 each, bonds were issued for a term of five years and each bond is convertible at any time up to maturity, into 30 ordinary shares of Rs.10 each. The prevailing interest rate on the similar debts without conversion option is 10% per annum. The accountant wrongly recorded the transaction as 8% long term bonds payable. The present administrative offices are located in a remote place of industrial area. Owing to the problems of frequent power break-downs, in sufficient transportation facilities and other issues, the management decided to shift to its factory premises having a capacity of administrative departments at the end of December 2011. The factory is located at a convenient place. The management decided to rent-out the former administrative offices having carrying value of Rs.50 million and fair value of Rs.65 million at December 31, 2011. The tenant signed the agreement and paid annual rent amounting to Rs.250,000 in advance on December 31, 2011. This amount is included in accounts payable.

(3)

(4) According to the policy of the company, the goods are also sold on sale or return agreement basis. In the month of December, the reported sales include Rs.25 million sales on sale or return basis. The buyer has one-month right of return. At the end of the year, the company was not certain as to whether the buyer will return the goods within 30 days. The company marks up 25% on cost. (5) Income tax provision for the current year was estimated at Rs.30 million. Taxable temporary differences have increased by Rs.12 million. The tax rate is 35%.

(6) The depreciation policy of the company provides that the property should be depreciated at 2% on straight-line method. The plant and equipment should be depreciated at 10% using reducing-balance method. During the year an item of equipment costing Rs. 3 million with accumulated depreciation of Rs. 1 million was sold for Rs. 1 million for cash. The accountant made a wrong entry for this transaction by debiting bank account and crediting sales account for the proceeds. Required: (a) Prepare Profit or Loss Account for the year ended December 31, 2011. (b) (c) Prepare Statement of Financial Position as at December 31, 2011. Prepare a Schedule of Non-current assets. 10 14 06

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Marks Q. 3 Following are the statements of financial position of Kohinoor Company Limited as at December 31: ASSETS Non-Current Assets Machinery and equipments Accumulated depreciation-machinery and equipments Leased plant Accumulated depreciation leased plant Franchise licence Investment in securities Current Assets Inventories Account receivable Service income receivable Marketable securities Cash in hand Total Assets EQUITY AND LIABILITIES Equity Share capital Share premium Retained earnings Non-Current Liabilities 10% Bonds payable Finance lease obligation Current Liabilities Accounts payable Bank overdraft Finance lease obligation Tax payable Advance service income received Interest payable Total Equity and Liabilities Rs. in million 2012 2011 400 (50) 15 (6) 5 364 15 16 5 1 9 46 410 300 (40) 15 (3) 8 10 290 12 18 7 4 6 47 337

200 50 82 332 40 5 45 8 10 5 4 4 2 33 410

100 30 93 223 60 10 70 10 12 5 6 8 3 44 337

The statement of profit or loss for the year ended December 31, 2012 is as follows: Rs. in million Sales 50 Cost of sales (47) Gross profit 3 Operating expenses (35) Finance cost (4) Operating loss (36) Add: Gain on sale of machine 25 Gain on sale of investment 2 Net loss (9) Tax provision nil Loss transferred to retained earning (9) 3 of 5 PTO

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Marks Additional Information: (i) Investment in securities was sold for Rs.12 million. (ii) A fully depreciated machine having cost of Rs.20 million was sold for cash Rs.25 million. During the year an asset of Rs.25 million acquired by issuing shares at par. (iii) Dividend declared and paid Rs. 2 million. (iv) Interest on 10% bonds is payable semi-annually on January 1, and July 1. Bonds were redeemed on January 1, 2012 (v) Operating expenses include depreciation. Required: Prepare Statement of Cash Flows as per IAS-7 using indirect method. In the light of IAS 38 Intangible Assets, answer the following: (i) What is meant by research and development? 02 06 (ii) What are the criteria for recognition of intangible assets arising from development (development phase of an internal project)? (b) Karachi construction company has signed a fixed-price contract on January 1, 2011 for Rs.25,000 million for the purpose of constructing the over-head bridges and sub-ways in a posh location of Karachi. The total costs of the contract were to be Rs.18,000 million. The project is to be completed in three years. In the year 2011, Rs.6,250 million and Rs.4,500 million were recognised as revenue and cost. Following are details of cost incurred up to December 31, 2012: Rs. in million Cost of material 5,110 Cost of labour used 3,500 Depreciation of specialized construction machinery 1,830 Estimated future cost to complete 7,560 Required: Calculate the following as per IAS-11: (i) The percentage of completion. (ii) Amounts of revenue, cost and profit to be recognised for the year ended December 31, 2012. Q. 5 (a) Explain the following under Conceptual Framework: (i) (ii) (b) (i) (ii) (iii) (iv) (v) Required: What International Accounting Standards (IASs) will be applicable to the above situations?
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Q. 4

(a)

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Financial capital maintenance Physical capital maintenance Zee Company holds a plot for many years and its use has yet not been ascertained

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Sony Companys premises are vacant and management has decided to lease it out under operating lease. Karachi Real Estate holds property intended for sale in the ordinary course of business. Modern Tech Company owns factory premise which is entirely used for production. Property being constructed or developed on behalf of third parties.

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Marks (c) Swift Power Inc., borrowed Rs. 2 million to finance two (2) power plants, Plant-1, Plant-2 to be manufactured which were expected to take a year to build. The finance was arranged on January 01, 2012 and loan facility was drawn down. The loan facility carried a 10% interest per annum. Funds were utilized as follows with remaining funds invested temporarily @ 6% per annum: Plant-1 200 100 500 800 Rs. 000 Plant-2 300 200 700 1,200

January 01, 2012 fund used April 01, 2012 fund used July 01, 2012 fund used

Required: (i) Calculate the borrowing cost to be capitalized for each plant. (ii) Calculate the cost of each plant asset as at December 31, 2012. 04 02

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