Financial Accounting and Reporting I: Additional Practice Questions
Financial Accounting and Reporting I: Additional Practice Questions
FINANCIAL ACCOUNTING
AND REPORTING I
Additional Practice Questions
Additional Practice Questions
QUESTIONS
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 Question
Mark true/false against each given scenario and give reasons for the selected answer:
A. In case of conflict between requirements of conceptual framework and IFRS, the requirements of
conceptual framework shall prevail.
B. Conceptual framework is not an International financial reporting standard (IFRS)
C. HR related cost is recognized as an asset in the financial statements since economic benefit is
probable from human resource
D. Internally generated goodwill is recognized as asset and measured at fair value in the financial
statements
E. When economic benefits arise over several accounting periods, and the association with income can
only be decided in broad terms, expenses should be recognized in profit and loss of each accounting
period on the basis of systematic and rational allocation procedure
F. When an item of expenditure is not expected to provide any future economic benefit, it is recognized
as an asset in the financial statements
G. In fair value method, assets are measured at the amount that would be paid to purchase the same
or a similar asset currently.
1.2 Question
Identify the accounting concepts in each of the following scenarios:
A. The method of measurement is relevant when an entity is not a going concern, and is faced with
liquidation
B. HM has to incur dismantling cost amounting Rs.100,000 after 3 years, however he records this cost
at Rs.75,131
C. HM has purchased PPE costing Rs.10,000 to be depreciated over a period of 10 years, at the end of
year 3 the Book Value amounted to Rs.7,000, however HM considers measuring the PPE at its
current market value amounting Rs.15,000.
1.3 Question
What is the purpose of conceptual framework in presence of other international accounting standards?
1.4 Question
For any element to be recognized in accounting records, it must meet its definition criteria as well as
general recognition criteria:
A. Briefly explain the general recognition criteria
B. Definition of each element along with examples
1.6 Question
Which of the following, would be recognized as expense&/or asset in the financial statements of a
company in accordance with the criteria given in conceptual framework.
1. An amount paid to landlord totalling Rs.120, 000 on 1st January 2012 against the rent for the year
ended 31st December 2012. Year end of the entity is 30 June 2012.
2. An expenditure incurred on repairs and maintenance of plant amounting Rs.300, 000.
3. There has been legal dispute between the entity and its customer and company expects the outflow
of Rs. 200,000 in order to settle the dispute.
4. Entity purchased goods costing Rs.20,000 for trading purposes and the same was sold for
Rs.25,000
1.7 Question
Which of the following, would be recognized as income &/or liability in the financial statements of a
company in accordance with the criteria given in conceptual framework:
1. Advance received from customer amounting Rs.50,000 against the goods to be delivered after 6
months
2. Services provided to ABC and Co. on credit amounting Rs.30, 000.
3. Account Receivables already written off in previous years amounting Rs.30,000 were received
during the year.
Description Rs.
Opening Share Capital (at par value of Rs. 10 per share) 25,000,000
Share Premium 7,500,000
Opening General Reserves 750,000
Opening RE 18,250,000
Revaluation Surplus 1,500,000
Description Rs.
Opening Share Capital (at par value of Rs. 10 per share) 100,000,000
Share Premium 50,000,000
Opening General Reserves 5,000,000
Opening RE 55,000,000
2.3 Question 3
HMK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of manufacturing
and sale of Cars. Company year-end is December. Below is the relevant information given:
Opening balances as at January 01, 2018
Description Rs.
Opening Share Capital (at par value of Rs. 10 per share) 100,000,000
Share Premium 50,000,000
Opening General Reserves 5,000,000
Opening RE 55,000,000
6.2 Question
The following balances were extracted from HM's accounts as at 31 march 2007.
Rs. in "000"
Sales 3,200
Purchase of raw material 450
Purchase returns 18
Carriage inward 10
Direct labour 400
Direct overhead 60
Rent 40
Electricity 30
Insurance 55
Factory supervision salaries 65
Office salaries 70
Indirect factory wages 13
Factory cleaning 50
Office cleaning 50
Stocks at 1 April 2006:
- Raw material 110
- Work in progress 55
- Finished goods 80
Factory machinery cost 640
Provision for depreciation on factory machinery 280
Rs. In "000"
Rent Prepaid 5
Electricity accrued 15
Insurance prepaid 10
Stocks
Raw material 140
Work in progress 75
Finished goods 170
Rupees
Opening stock-Finished goods 50,000
purchases of RM 2,450,000
Custom duty 122,500
Sales tax paid on purchases of RM 392,000
Carriage paid on RM purchases 49,000
Demurrage and octroi 73,500
Opening stock-RM 421,500
Opening WIP 121,100
Labor wages paid 1,685,500
Supervisory salaries 250,000
Indirect labor wages 450,000
Office staff salaries 500,000
Sales team salaries 125,000
Postage and telegram 12,500
Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage paid on finished goods purchases 19,700
Carriage out 27,000
Other income 24,500
Interest expense 148,500
interest income 16,500
Distribution expense 200,000
Depreciation 650,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –RM 100,000
Purchase return –FG 85,000
Purchase discount –RM 40,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
Sales 16,500,000
6.4 Question
Following is the list of balances of Marfani limited for the period ended 31 December 2015
Rupees
Opening stock-Finished goods(FG) 50,000
Purchases of Raw Material(RM) 2,450,000
Trade discount (30% on Direct RM purchases,20% on Indirect RM purchases
and 50% on FG purchases) 80,000
Custom duty (80% relates to Direct RM and 20% relates to FG purchases) 122,500
Import duty (40% is refundable) (70% relates to RM and 30% relates to FG
purchases) 40,000
Sales tax paid on purchases of RM (20% is non-refundable) 392,000
LC Charges (30% relates to RM and 70% relates to FG purchases) 90,000
Advance tax paid (30% relates to RM purchases, 20% relates to Indirect RM
purchases and remaining relates to FG purchases) 30,000
Carriage paid (50% relates to Direct RM purchases,20% relates to Indirect RM
purchases and 30% relates to FG Purchases ) 49,000
Purchase of Indirect RM 40,000
Octroi charges (50% relates to Direct RM and remaining relates to IRM) 73,500
Demurrage charges (60% relates to Direct RM and remaining relates to IRM) 20,000
Ab. Demurrage charges (90% relates to Direct RM and remaining relates to
IRM) 5,000
Penalty to driver carrying RM to factory 3,000
Opening stock-Direct RM 421,500
Rupees
Opening WIP 121,100
Labor wages paid (60% relates to *manufacturing and 40%relates to admin) 2,185,500
Sales team salaries 125,000
Postage and telegram 12,500
Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage out 27,000
Other income 24,500
Interest paid 148,500
interest income 16,500
Distribution expense 200,000
Depreciation 650,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –Direct RM 100,000
Purchase return -FG 85,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
sales 16,500,000
settlement discount received (30% on Direct RM purchases,20% on Indirect
RM purchases and 50% on FG purchases) 500,000
Other Information
3. Abbas Limited uses proportionate policy to depreciate its Property, Plant and Equipment.
4. All of the plant and machinery pertains to factory use whereas all the equipment pertains to office
use. However floor areas occupied by factory and office are in the ratio 60:40 respectively.
5. The equipment was purchased on 1 July 2016. No disposals and acquisitions took place in the
period up to 30 June 2018.
6. Until 30 June 2018, 12,000 units had been produced by Abbas Limited in its factory. The plant
and machinery does not have any residual value. No additions or disposals of plant and
machinery took place till this date.
7. The buildings were acquired on 1 July 2014 with a residual value of Rs. 11 million. No additions
and disposals took place till 30 June 2018.
8. The land had actually cost Rs. 15 million on the date of its acquisition.
9. It is assumed that value of land and buildings is spread evenly across the area occupied.
The following information pertains to the year ended 30 June 2019:
1. On 1 July 2018, land was revalued to Rs. 20 million on 1 July 2018. The value was determined
by an independent firm M/s Ashfaq& Co. Chartered Accountants.
2. This year, 5,000 units were product in the factory of AL.
3. On January 1, 2019, AL disposed 25% ofits area comprising of land and buildings at a price of
Rs. 90 million. The portion of land was sold at its fair value as determined on 1 July 2018. The
legal costs of drafting transfer agreements wereRs. 0.1 million. It is assumed that this disposal
will not affect the proportion of areas occupied by factory and office.
4. Further equipment costing Rs. 60 million was acquired on 1 November 2018.
5. In the meeting of its board of directors, it was decided to open a new factory premises near
Lahore-Islamabad motorway. An expenditure of Rs. 20 million was spent of the construction of
7.2 Question
Games Limited (GL) commenced a business of preparing and burning video game CDs on 1 July 2015.
The following information pertains to the year ended 31 March 2016:
1) GL purchased 30 computers on the date of commencement of business at a cost of Rs. 20,000
each, purely for the task of burning CDs. The management of GL estimates that since the
computers are subject to obsolescence, more of its benefit can derived in its early life. The total
useful life at the date of acquisition was estimated to be 4 years and residual value was estimated
to be Rs. 4,802 for each computer.GL decided to adopt historical cost model for subsequently
measurement of computers.
2) GL purchased an office building at the date of start of business worth Rs. 3 million. GL decided to
adopt fair value model due to fluctuations in property prices. 80% of the building is occupied by
computer labs, whereas 20% is used by administrative and selling departments. The useful life is
estimated to be 10 years at the date of acquisition with no residual value, and the economic
benefits are expected to be derived evenly over its useful life. At the end of the year, the fair value
of office buildings was assessed to be Rs. 3,237,500.
3) GL also purchased fittings for its administrative and selling departments, costing Rs. 120,000 on 1
July 2015. It is to be depreciated over 10 years using the straight-line method, with no residual
value.
4) GL made a contractual commitment with Al-Karim Computers to purchase 6 computers of Rs.
20,000 each to be delivered at GL’s premises on 1 May 2017.
The following information pertains to the year ended 31 March 2017:
1) The computers were delivered at the GL’s premises by Al-Karim Computers at the said date. It was
decided to use the same method and same rate to depreciate these computers. However, no
further space was utilised by the computer labs.
2) At the end of the year, the fair value of office building was assessed to be Rs. 2 million. At the year-
end GL mortgaged entire building with JS Bank to obtain a loan worth Rs. 1.75 million for
prospective investments in other divisions.
3) Fittings with a cost of Rs. 30,000 were disposed of for Rs. 22,000 on 1 January 2017. The Suzuki
Driver was paid Rs. 1,000 to transfer the fittings to customer’s premises.
The fair values of the office building were determined byan independent firm M/s Hafeez
Yasir Chartered Accountants& Co. Moreover, GL uses proportionate policy to depreciate its
assets.
Required:
(a) Prepare the disposal account to record the sale of fittings on 1 January 2017.
(b) Prepare the disclosure under IAS 16 in relation to Property, Plant and Equipment in the notes to the
published accounts for the year ended 31 March 2017 (comparatives are required).
ANSWERS
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 Question
A. False. In case of conflict between requirements of conceptual framework and IFRS, the requirements
of IFRS shall prevail being an established principle that specific law requirements prevail over general
law requirements
B. True. Conceptual framework provides foundation for the IFRSs
C. False.HR related cost can never be capitalized as it does not meet the definition criteria of asset
“controlled by the entity”
D. False. Internally generated goodwill can never be recognized as it does not meet one of the basic
recognition criteria i.e. “The item should have a cost or value that can be measured reliably”
E. True, because of matching principle
F. False. For any item to be recognized as an asset, it must be probable that an item shall provide future
economic benefits to the entity.
G. False. In current cost method assets are measured at the amount that would be paid to purchase the
same or a similar asset currently
1.2 Question
A. Realizable value/ settlement value
B. Present value
C. Fair Value
1.3 Question
The Conceptual Framework for Financial Reporting (CF) forms the foundation of all IFRSs. One needs
a thorough understanding of all its concepts in order to be able to correctly apply the various IFRSs, in
other words it gives broader guidelines/ concepts that underlie the preparation and presentation of
financial statements for external users and other standards give specific guidelines w.r.t. individual
items/statements.
Following are the main purposes of conceptual framework:
a. to assist the International Accounting Standards Board (IASB) in the development of future IFRSs
and in its review of existing IFRSs;
b. to assist the IASB in promoting harmonization of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs;
c. to assist national standard-setting bodies in developing national standards;
d. to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet
to form the subject of an IFRS;
e. to assist auditors in forming an opinion on whether financial statements comply with IFRSs;
f. to assist users of financial statements in interpreting the information contained in financial statements
prepared in compliance with IFRSs; and to provide those who are interested in the work of the
IASB with information about its approach to the formulation of IFRSs
1.6 Question
1 Rent (60,000)-Expense
Issuance of Right
Shares 5,000,000 5,000,000 - - - 10,000,000
(12,750,00
Annual Dividend 0) (12,750,000)
2.3 Answer
Share Share General Retained
Description Total
Capital Premium Reserves Earnings
6.2 Answer
M/S HM
Cost of Goods Manufactured
For the period ended 31 March 2007
Rs. In "000" Rs. In "000"
Stock of raw material at 1 April 2006 110
add Purchases 450
Carriage inwards 10
460
less returns 18 442
552
less Stock of raw material at 31 March 2007 (140)
412
Direct Labour 400
Direct overheads 60
Prime Cost 872
Factory Overhead
Rent 28
Electricity 36
Insurance 36
Supervisory Salaries 65
Indirect wages 13
Cleaning 50
Provision for depreciation on machinery 90 318
1,190
Work in Progress at 1 April 2006 55
less Work in progress at 31 March 2007 75 (20)
Cost of Goods Manufactured 1,170
RM
Purchases 2,450,000
Carriage in 49,000
RM Consumed 2,666,500
Factory OH
Electricity 364,000
Depreciation 455,000
2,548,065
COGM 6,941,165
Sales 16,500,000
Sales return (200,000) 16,300,000
COGS
Op stock 50,000
Purchases 985,000
Purchase return (85,000)
Carriage in 19,700
COGM 6,941,165
Closing stock (421,000) 7,489,865
Gross profit 8,810,135
Operating expenses
Office staff salaries (500,000)
Sales team salaries (125,000)
Postage and telegram (12,500)
Carriage outward (27,000)
Interest expense (148,500)
Sales discount (24,500)
Bad debts expense (56,450)
Depreciation expense (195,000)
Electricity expense (196,000)
Fuel expense (60,000)
Distribution expense (200,000)
Repair and maintenance (25,785)
Canteen expenses (28,000)
Sales commission (957,000)
Property tax (14,570)
Directors remuneration (316,042)
Other Income
Purchase discount 40,000
Other income 24,500
Interest income 16,500
Net profit 6,004,789
F.O.H
Indirect Raw Material:
OP
Purchases 40,000
Trade Discount (16,000)
Carriage Paid 9,800
Octro Charges 36,750
Demurrage Charge 8,000
Raw c/s -RN (20,000)
Indirect Raw Material 58,550
Indirect Labour 267,060
Fuel Expense 323,000
Electricity 390,000
Rent Rates & taxes 345,000
Depreciation 455,000
R&M 232,065
Canteen Shop 112,000
2,182,675
Manufacturing Cost 5,941,865
W.I.P (Opening) 1,211,000
W.I.P (Closing) 100,000
COGM 5,962,965
Operating Expenses
Abnormal Damages 5,000
Penalty on Driver 3,000
Salaries Wages 890,200
Sales team Salaries 125,000
Postage & telegram 12,500
Fuel Expense 57,000
Electricity 210,000
Property Taxes 145,570
Carriages 27,000
Interest Expenses 127,285
Distribution Expenses 200,000
Depreciation 195,000
Repair and maintanance 25,785
Canteen Exp 28,000
Sales Discount 245,000
Bad Debts 56,450
Sales Commission 957,000
3,309,790
Other Income
Other Income 24,500
Intrest Income 16,500
Settlement Discount 500,000
541,000
Working#1
D.R.M I.R.M F.G
P.P 2,450,000 40,000 985,000
0 0 1
T.D (24,000) (16,000) (40,000)
P.P 2,426,000 24,000 945,000
Working#2
Sales 16,500,000
S/tax 2,640,000
19,140,000
Commission at 5% 957,000
2019
Solution (b)
Abbas Limited
Notes to Financial Statements
For the year ended 30 June 2019
4. Property, Plant and Equipment:
4.1. Abbas Limited uses the following subsequent measurement bases to value its Property, Plant and
Equipment, and methods to calculate its depreciation.
Depreciation Useful Life/Residual Subsequent
Assets Measurement
Method Value/Rate
N/A N/A Fair Value
Land
Useful life of 12 years with a Cost less Accumulated
Buildings Straight-line residual value of 8.8% of cost. Depreciation
(W1)
Units of Cost less Accumulated
Plant and Rs. 25,000 per unit (W2)
production Depreciation
Machinery
Written down Cost less Accumulated
Equipment Rate of 20% (W3) Depreciation
value
4.3. An amount of expenditure of Rs. 20 million was incurred on the construction of a factory near
Lahore-Islamabad Motorway on 1 December 2018. This amount was capitalised as capital work-
in-progress.
A further borrowing costs of Rs. 1.4 million (W6) were capitalised in respect of interest on loan
obtained from the bank to finance this project.
4.4. A contract was made with M/s UniPower& Co. to purchase plant and machinery worth Rs. 35
million once the construction of factory building is completed.
4.5. The following depreciations are either made part of inventory or expensed out in statement of
profit or loss:
Assets Inventory Expense Total
Rs.000 Rs.000 Rs.000
A further reversal of revaluation loss of Rs. 3 million was reversed during the year.
125−11
(W1) × 4 = 12 𝑦𝑒𝑎𝑟𝑠
38
300,000,000
(W2) = 𝑅𝑠. 25,000 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
12,000
2 100−36
(W3) 𝑟 =1− √
100
𝑟 = 20%
Disposals 1,187.5
During the year [(125 – 11) × 75% ÷ 12] 7,125
Solution (b):
Games Limited
Notes to the financial statements
For the year ended 31 March 2017
4. Property, plant and equipment:
4.7. Games Limited (GL) uses the following subsequent measurement bases to value its Property,
Plant and Equipment, and methods to calculate its depreciation.
Depreciation Subsequent
Assets Rate Measurement
Method
Straight-line 10% Fair Value
Buildings
Written-down Cost less Accumulated
Computers 30% (W1) Depreciation
value
Cost less Accumulated
Fittings Straight-line 10% Depreciation
2017 2016
Gross Carrying
3,237,500 600,000 120,000 - - -
Amount:
- 120,000 - 3,000,000 600,000 120,000
At start of year
(1,237,500) - - 237,500 - -
Acquisitions
- - (30,000) - - -
Revaluations
Disposals
2,000,000 720,000 90,000 3,237,500 600,000 120,000
At end of year
Accumulated
- 135,000 9,000 - - -
Depreciation:
350,000 181,000 11,250 225,000 135,000 9,000
At start of year
(350,000) - - (225,000) - -
2017 2016
4.9. The entire office building was mortgaged with JS Bank on 31 March 2017, to obtain a loan worth
Rs. 1.75 million for prospective investments in other divisions.
4.10. No contractual commitments were made during the year ended 31 March 2017 to purchase
Property, Plant and Equipment.
A contract was made with Al-Karim Computers during the year ended 31 March 2016 to
purchase 6 computers of Rs. 20,000 each to be delivered on 1 May 2017.
4.11. The following depreciations are either made part of inventory or expensed out in statement of
profit or loss:
Assets 2017 2016
Inventory Expense Total Inventory Expense Total
Rs. Rs. Rs. Rs. Rs. Rs.
280,000 70,000 350,000 180,000 45,000 225,000
Buildings
181,000 - 181,000 135,000 - 135,000
Computers
- 11,250 11,250 - 9,000 9,000
Fittings
461,000 81,250 542,250 315,000 54,000 369,000
Total
4.12. Revaluation Disclosures:
(iv) The revaluations of office buildings took place on 31 March 2017 and 31 March 2016
respectively. The fair values of the office building were determined by an independent firm
M/s Hafeez Yasir Chartered Accountants & Co.
(v) The carrying amount of buildings had the revaluation not taken place:
2017 2016
Rs. Rs.
Cost:
At start of year 3,000,000 -
Acquisitions - 3,000,000
Disposals - -
At end of year 3,000,000 3,000,000
Accumulated Depreciation:
At start of year 225,000 -
Depreciation charge for the year 300,000 225,000
Disposals - -
𝑟 = 30%
Rs.
Acquisitions (60,000 × 10% × 11/12)
5,500 3,000,000 × 30%
Computers 9
Remaining [(720,000 - 135,000) × × = 135,000
175,500 12
30%]
Total 181,000
Rs.
Disposals (30,000 × 10% × 9/12) 2,250 9
120,000 ÷ 10 ×
Fittings 12
Remaining (90,000 × 10%) 9,000 = 9,000
Total 181,000
2019
FINANCIAL ACCOUNTING
AND REPORTING I
Additional Practice Questions