CAF7 financial accounting and reporting II questionbank ICAP

Required Prepare an statement of profit or loss analysing expenses by function for the year ended 31 December 2015 and a statement of financial position as at that date... Required Prepa

FINANCIAL ACCOUNTING AND REPORTING II

QUESTION BANK

CAF-07

Question

Financial accounting

and reporting II

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I

Index to questions and answers

Question page

Answer page

CHAPTER 2 – IAS 1: PRESENTATION OF FINANCIAL STATEMENTS

CHAPTER 3 – IAS 7: STATEMENTS OF CASH FLOWS

Question page

Answer page

CHAPTER 4 – CONSOLIDATED ACCOUNTS: STATEMENTS OF

FINANCIAL POSITION – BASIC APPROACH

CHAPTER 5 – CONSOLIDATED ACCOUNTS: STATEMENTS OF

FINANCIAL POSITION - COMPLICATIONS

Question page

Answer page

CHAPTER 10 – IAS 37: PROVISIONS CONTINGENT LIABILITIES AND

CONTINGENT ASSETS AND IAS 10: EVENTS OCCURRING AFTER THE

Question page

Answer page

CHAPTER 11 – IAS 8: ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND ERRORS

CHAPTER 12 – IAS 12: INCOME TAXES

CHAPTER 1 – LEGAL BACKGROUND TO THE PREPARATION OF FINANCIAL STATEMENTS

There are no questions specific to chapter one This is because the learning outcomes in this area concern the preparation of financial statements and these questions have given in relation to chapter 2 in this question bank

CHAPTER 2 – IAS 1: PRESENTATION OF FINANCIAL STATEMENTS

Accumulated amortisation on patents at 31 December 2015 5

The following information is also relevant

(1) Inventories on 31 December 2015 amounted to Rs 127 million

(2) Current tax of Rs 75 million is to be provided

(3) The loan is repayable by equal annual instalments over three years

Required

Prepare an statement of profit or loss (analysing expenses by function) for the year ended 31 December 2015 and a statement of financial position as at that date

2.2 MINGORA IMPORTS LIMITED

The trial balance of Mingora Imports Limited at 31 December 2015 is as follows

Rupees in million

Dr Cr

Inventories of finished games, 1 January 2015 155

The following information is also relevant

(1) Closing inventories of finished games are valued at Rs 180 million Work in progress has increased to Rs 140 million

(2) The patent rights relate to a computer program with a three year lifespan (3) On 1 January 2015 buildings were revalued to Rs 360 million This has not yet been reflected in the accounts Computers are depreciated over five years Buildings are now to be depreciated over 30 years

(4) An allowance for bad debts (irrecoverable debts) of 5% is to be created (5) There is an estimated bill for current tax of Rs 120 million which has not yet been recognised

Required

Prepare an statement of profit or loss (analysing expenses by nature for the year ended 31 December 2015 and a statement of financial position as at that date

2.3 BARRY

Barry has prepared the following draft financial statements for your review

Barry: Statement of profit or loss for year to 31 st August 2015

Equity and liabilities

Additional information

1 Income tax of Rs 2.1 million has yet to be provided for on profits for the current year An unpaid under-provision for the previous year’s liability of Rs 400,000 has been identified on 5th September 2015 and has not been reflected in the draft accounts

2 There have been no additions to, or disposals of, non-current assets in the year but the assets under construction have been completed in the year at an additional cost of Rs 50,000 These related to plant and machinery

The cost and accumulated depreciation of non-current assets as at 1stSeptember 2014 were as follows:

Cost Depreciation

Rs in ‘000 Rs in ‘000

(land element Rs 10 million)

3 There was a revaluation of land and buildings during the year, creating the revaluation surplus of Rs 5 million (land element Rs 1 million) The effect on depreciation has been to increase the buildings charge by Rs 300,000 Barry adopts a policy of transferring the revaluation surplus included in equity to retained earnings as it is realised

4 Staff costs comprise 70% factory staff, 20% general office staff and 10% goods delivery staff

5 An analysis of depreciation charge shows the following:

Rs in

‘000

Buildings (50% production, 50% administration) 1,000

Fixtures and fittings (30% production, 70% administration) 700 Required

Prepare the following information in a form suitable for publication for Barry’s financial statements for the year ended 31st August 2015

Statement of profit or loss

Statement of financial position

Reconciliation of opening and closing property, plant and equipment (25)

(1) Inventory at 31 March 2015 was valued at Rs 150,000

(2) The income tax charge based on the profits on ordinary activities is estimated

to be Rs 74,000

(3) The provision is to be increased by Rs 16,000

(4) There were no purchases or disposals of fixed assets during the year

Required

Prepare the company’s statement of profit or loss for the year to 31 March 2015 and

a statement of financial position as at that date in accordance with IAS 1 (18)

2.5 CLIFTON PHARMA LIMITED

The following trial balance relates to Clifton Pharma Limited, a public listed

Leasehold property at cost (see note (4)) 250,000

Deferred tax balance at 1 October 2014 (see note (5)) 20,000

(1) The effective interest rate on the loan notes is 6% per year

(2) There are two separate contracts for rental of vehicles A recent review by the finance department of these contracts has reached the conclusion that Rs 7 million of the total rental cost of vehicles relates to a finance lease rather than

an operating lease or rental arrangement

The finance lease was entered into on 1 October 2014 which was when the

Rs 7 million was paid: the lease agreement is for a four-year period in total, and there will be three more annual payments in advance of Rs 7 million, payable on 1 October in each year The vehicles in the finance lease agreement had a fair value of Rs 24 million at 1 October 2014 and they should be depreciated using the straight line method to a nil residual value The interest rate implicit in the lease is 10% per year The other contract for vehicle rental is an operating lease and the rental payment should be charged

to operating expenses (Note: You are not required to calculate the present

value of the minimum lease payments for the finance lease.) (3) Other plant and equipment is depreciated at 20% per year by the reducing balance method

All depreciation of property, plant and equipment should be charged to cost of sales

(4) The leasehold property has a 25-year life and is amortised at a straight-line rate On 30 September 2015 the leasehold property was re-valued to Rs 220 million and the directors wish to incorporate this re-valuation in the financial statements

(5) The provision for income tax for the year ended 30 September 2015 has been estimated at Rs 18 million At 30 September 2015 there are taxable temporary differences of Rs 92 million The rate of income tax on profits is 25%

The following trial balance relates to Sarhad Sugar Limited at 30 September 2015:

Rs in ‘000

Dr Cr

Leasehold property – at valuation 1 October 2014 (note (i)) 50,000

Plant and equipment – at cost (note (i)) 76,600

Plant and equipment – accumulated depreciation at

Research and development costs (note (ii)) 8,600

466,000 466,000 The following notes are relevant:

(i) Non-current assets – tangible:

The leasehold property had a remaining life of 20 years at 1 October 2014 The company’s policy is to revalue its property at each year end and at 30 September 2015 it was valued at Rs 43 million

On 1 October 2014 an item of plant was disposed of for Rs 2·5 million cash The proceeds have been treated as sales revenue by Sarhad Sugar Limited The plant is still included in the above trial balance figures at its cost of Rs 8 million and accumulated depreciation of Rs 4 million (to the date of disposal) All plant is depreciated at 20% per annum using the reducing balance method Depreciation and amortisation of all non-current assets is charged to cost of sales

(ii) Non-current assets – intangible:

In addition to the capitalised development expenditure (of Rs 20 million), further research and development costs were incurred on a new project which commenced on 1 October 2014 The research stage of the new project lasted until 31 December 2014 and incurred Rs 1·4 million of costs From that date the project incurred development costs of Rs 800,000 per month On 1 April

2015 the directors became confident that the project would be successful and yield a profit well in excess of its costs The project is still in development at 30 September 2015

Capitalised development expenditure is amortised at 20% per annum using the straight-line method All expensed research and development is charged

to cost of sales

(iii) Sarhad Sugar Limited is being sued by a customer for Rs 2 million for breach

of contract over a cancelled order Sarhad Sugar Limited has obtained legal opinion that there is a 20% chance that Sarhad Sugar Limited will lose the case Accordingly Sarhad Sugar Limited has provided Rs 400,000 (Rs 2 million x 20%) included in administrative expenses in respect of the claim The unrecoverable legal costs of defending the action are estimated at Rs

100,000 These have not been provided for as the legal action will not go to court until next year

(iv) The directors have estimated the provision for income tax for the year ended

30 September 2015 at Rs 11·4 million The required deferred tax provision at

30 September 2015 is Rs 6 million

Required

(a) Prepare the statement of profit or loss for the year ended 30 September 2015

(10)

(b) Prepare the statement of financial position as at 30 September 2015 (10)

Note: notes to the financial statements are not required (20)

Issued, subscribed and paid up capital (Rs 10 each) 400

Additional Information

(i) The first revaluation of freehold land was carried out in 2011 and resulted

in a surplus of Rs 120 million The valuation was carried out under market value basis by an independent valuer, Mr Dee, Chartered Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad

(ii) The details relating to additions, disposal and depreciation/amortization of fixed assets, during the year 2015 are given below:

 The company uses the straight line method for charging depreciation and amortization The building is depreciated at a rate of 5% whereas 10% is charged on machines, furniture and fixtures and computer software

 Construction on third floor of the building commenced on March 1,

2015 and is expected to be completed on September 30, 2015 The cost incurred during the year i.e Rs 20 million was capitalised on June

30, 2015

 Furniture and fixtures worth Rs 8 million were purchased on April 1,

2015

 A machine was sold on February 28, 2015 to NJ Enterprise at a price of

Rs 13 million At the time of disposal, the cost and written down value

of the machine was Rs 15 million and Rs 10 million respectively

(iii) 50% of the accounts receivable were secured and considered good 10%

of the unsecured accounts receivable were considered doubtful Bad debts expenses for the year amounted to Rs 1.0 million An amount of Rs 1.4 million was written off during the year

(iv) All advances given to suppliers are considered good and include an

amount of Rs 4.0 million paid for goods which will be supplied on December

(Comparative figures and the note on accounting policies are not required.)(22)

2.8 YASIR INDUSTRIES LIMITED

The following trial balance related to Yasir Industries Limited (YIL) for the year ended June 30, 2015:

Acc depreciation – Leasehold property (June 30, 2015) - 40.25

889.30 889.30 Additional Information

(i) Sales include an amount of Rs 27 million, made to a customer under sale or return agreement The sale has been made at cost plus 20% and the expiry date for the return of these goods is July 31, 2015

(ii) The value of inventories at June 30, 2015 was Rs 42 million

(iii) A fraud of Rs 30 million was discovered in October 2014 A senior employee

of the company who left in June 2014, had embezzled the funds from YIL’s bank account The chances of recovery are remote The amount is presently appearing in the suspense account

(iv) On January 1, 2015 YIL issued debenture certificates which are repayable in

2020 Interest is paid on these at 12% per annum

(v) Financial charges comprise bank charges and bank commission

(vi) The provision for current taxation for the year ended June 30, 2015 after making all the above adjustments is estimated at Rs 16.5 million

(vii) The carrying value of YIL’s net assets as on June 30, 2015 exceeds their tax base by Rs 30 million The income tax rate applicable to the company is 30% (viii) On July 1, 2014, the leasehold property having a useful life of 40 years was revalued at Rs 238 million No adjustment in this regard has been made in the books

(ix) Depreciation of leasehold property is charged using the straight line method 50% of depreciation is allocated to manufacturing, 30% to administration and 20% to selling and distribution

Required

In accordance with the requirements of the Companies Ordinance, 1984 and

International Accounting Standards, prepare the:

(a) statement of financial position as of June 30, 2015

(b) statement of profit or loss for the year ended June 30, 2015 (20)

(Comparative figures and notes to the financial statements are not required.)

Accumulated depreciation on property, plant

Other receivable and prepayments 14,000

Share capital (Rs 10 each and fully paid) 60,000

347,525 347,525 Additional information

(i) Sales last year (year ended 30 June 2014) included goods invoiced at Rs 10 million which were sent to a customer on June 25, 2014 under a sale or return agreement, at cost plus 20% The goods were returned on August 25,

2014 No correction has been made for the return

(ii) The export licence has been obtained for exporting a new product and is effective for five years up to December 31, 2019 However, the exports commenced from July 1, 2015

(iii) Closing inventories are valued at Rs 30 million

(iv) Details of property, plant and equipment are as follows:

Land Buildings

Plant and equipment

Rs in ‘000

Estimated useful life at the date of purchase 20 years 10 years The company uses straight line method for charging depreciation

Depreciation is allocated to manufacturing, distribution and administrative costs at 75%, 15% and 10% respectively

(v) Rs 6 million of the long term borrowings is of current maturity (i.e will be repaid within 12 months)

(vi) During the year Rs 5 million was paid in full and final settlement of income tax liability against which a provision of Rs 7.0 million had been made in the previous year Current year’s taxable income exceeds accounting income by

Rs 5 million of which 0.8 million are permanent differences Applicable tax rate for the company is 35%

(vii) On July 30, 2015 the board of directors proposed a final dividend at 15% for the year ended June 30, 2015 (2014: at 20%)

Required

In accordance with the requirements of the Companies Ordinance, 1984 and

International Financial Reporting Standards, prepare:

(a) The statement of financial position as of June 30, 2015

(b) The statement of profit or loss for the year ended June 30, 2015

(c) The statement of changes in equity for the year ended June 30, 2015

(Comparative figures and notes to the financial statements are not required)

(25)

Following is the summarised trial balance of Moonlight Pakistan Limited (MPL), a listed company, for the year ended December 31, 2015:

Rs in million Debit Credit

8,982 8,982

Additional Information

(i) The land and buildings were acquired on January 1, 2011 The cost of land was Rs 600 million On January 1, 2015 a professional valuation firm valued the buildings at Rs 1,840 million with no change in the value of land The estimated life at acquisition was 20 years and the remaining life has not changed as a result of the valuation 60% of depreciation on buildings is allocated to manufacturing, 25% to selling and 15% to administration

(ii) Plant is depreciated at 20% per annum using the reducing balance method (iii) On March 31, 2015 MPL made a bonus issue of one share for every six held The issue has not been recorded in the books of account

(iv) Right shares were issued on September 1, 2015 at Rs 12 per share

(v) The interest on long term loan is payable on the first day of July and January

No accrual has been made for the interest payable on January 1, 2013

(vi) MPL operates an unfunded gratuity scheme for all its eligible employees The provision required as on December 31, 2015 is estimated at Rs 23 million Rs 3 million were paid during the year and debited to the provision for gratuity account Cost of gratuity is allocated to production, selling and administration expenses in the ratio of 60% : 20% : 20%

(vii) The tax charge for the current year after making all related adjustments is estimated at Rs 37 million The timing differences related to taxation are estimated to increase by Rs 80 million, over the last year The applicable income tax rate is 35%

Required

In accordance with the requirements of Companies Ordinance, 1984 and

International Financial Reporting Standards, prepare the following:

(a) Statement of Financial Position as of December 31, 2015

(b) Statement of profit or loss for the year ended December 31, 2015 (22) (Comparative figures and notes to the financial statements are not required)

2.11 FIGS PAKISTAN LIMITED

Figs Pakistan Limited is a listed company engaged in the business of manufacturing and marketing of personal care and food products Following is an extract from its trial balance for the year ended 31 December 2015:

Debit Credit

Rs in million

Raw material stock as on 1 January 2015 1,751

Finished goods (manufactured) as on 1 January 2015 1,210

Finished goods (imported) as on 1 January 2015 44

Loss on disposal of property, plant and equipment 10

Financial charges on short term borrowings 133

(ii) The basis of allocation of various expenses among cost of sales, distribution costs and administrative expenses are as follows:

Cost of sales

Distribution costs

Administrative expenses

(iii) Salaries, wages and benefits include contributions to provident fund (defined contribution plan) and gratuity fund (defined benefit plan) amounting to Rs 54 million and Rs 44 million respectively

(iv) Auditor’s remuneration includes taxation services and out-of-pocket expenses amounting to Rs 4 million and Rs 1 million respectively

(v) Donations include Rs 5 million given to Dates Cancer Foundation (DCF) One

of the company’s directors, Mr Peanut is a trustee of DCF

(vi) The tax charge for the current year after making all related adjustments is estimated at Rs 1,440 million Taxable temporary differences of Rs 3,120 originated in the year million, over the last year The applicable income tax rate is 35%

(vii) 274 million ordinary shares were outstanding as on 31 December 2015

(viii) There is no other comprehensive income for the year

CHAPTER 3 – IAS 7: STATEMENTS OF CASH FLOWS

Statement of profit or loss for the year ended 31 st March 2015

Rs in ‘000

––––– 1,876

–––––

Property, plant and equipment 5,000 1,550 3,000 1,400 (ii) At 1 April 2014 land was revalued from Rs 1million to Rs 2 million

(iii) During the year, plant and machinery costing Rs 600,000 and depreciated by

Rs 500,000 was sold for Rs 150,000

(iv) The interest bearing loans relate to debentures which were issued at their nominal value Rs 400,000 of these debentures were redeemed at par during the year

(v) Ordinary shares were issued for cash during the year

(vi) Rs 100,000 of current asset investments held as cash equivalents were sold during the year for Rs 94,000

(vii) Dividends paid in the year were Rs 200,000 relating to the 2014 proposed dividend and a Rs 200,000 interim dividend for 2015

Required

Prepare a statement of cash flows for Klea for the year ended 31 March 2015 in

3.2 STANDARD INC

The summarised statements of financial position of Standard Inc at 31 December

2014 and 2015 are as follows

421,000 334,000

The following information is relevant:

(a) There had been no disposal of freehold property in the year

(b) A machine tool which had cost Rs 8,000,000 (in respect of which Rs

6,000,000 depreciation had been provided) was sold for Rs 3,000,000, and fixtures which had cost Rs 5,000,000 (in respect of which depreciation of Rs 2,000,000 had been provided) were sold for Rs 1,00,0000 Profits and losses

on those transactions had been dealt with through the statement of profit or loss

(c) The statement of profit or loss charge in respect of tax was Rs 22,000,000 (d) The premium paid on redemption of the long-term loan was Rs 2,000,000, which has been written off to the statement of profit or loss

(e) The proposed dividend for 2014 had been paid during the year

(f) Interest received during the year was Rs 450,000 Interest charged in the statement of profit or loss for the year was Rs 6,400,000 Accrued interest of

Rs 440,000 is included in payables at 31 December 2014 (nil at 31 December 2015)

(g) The government stock is a long term investment

Required

Prepare a cash flow statement for the year ended 31 December 2015, together with

The following data is relevant

(1) The 10% long-term loan were redeemed at par

(2) Plant and equipment with a written down value of Rs 276,000 was sold for

Rs 168,000 New plant was purchased for Rs 2,500,000

(3) Leasehold premises costing Rs 1,300,000 were acquired during the year (4) The investments are highly liquid securities held for the short term

Required

Prepare the cash flow statement and supporting notes in accordance with IAS 7 for

3.4 BIN QASIM MOTORS LIMITED

The summarised financial statements of Bin Qasim Motors Limited for the year to 30 September 2015, together with a comparative balance sheet, are:

Statement of profit or loss Rs 000

Statement of financial position as at 30 September

Revaluation surplus 90 40 Non-current liabilities

The following information is relevant

(i) Non-current assets

Property, plant and equipment is analysed as follows: Rs in ‘000

of sales) of Rs 86,000 on its carrying value

(ii) Deferred income

Bin Qasim Motors Limited sells servicing contracts on certain types of machinery Payments are received in advance for a service which Bin Qasim Motors Limited must provide over a number of following years Income that relates to these contracts is deferred and recognised in P&L as the period of service passes

A credit of Rs 125,000 for the current year’s recognition of deferred income has been included revenue in this period

(iii) Share capital and loan stocks

The increase in the share capital during the year was due to the following events:

(1) On 1 January 2015 there was a bonus issue (out of the revaluation surplus) of one bonus share for every 10 shares held

(2) On 1 April 2015 the 10% convertible loan stock holders exercised their right to convert to ordinary shares The terms of conversion were 25 ordinary shares of Rs 1 each for each Rs 100 of 10% convertible loan stock

(3) The remaining increase in the ordinary shares was due to a stock market placement of shares for cash on 12 August 2015

(iv) Provision for negligence claim

In June 2015 Bin Qasim Motors Limited made an out of court settlement of a negligence claim brought about by a former employee The dispute had been

in progress for two years and Bin Qasim Motors Limited had made provisions for the potential liability in each of the two previous years The unprovided amount of the claim at the time of settlement was Rs 30,000 and this was charged to operating expenses

Required

Prepare a statement of cash flows for Bin Qasim Motors Limited for the year to 30

September 2015 in accordance with IAS 7 Statement of Cash Flows (25)

3.5 ITTEHAD MANUFACTURING LTD

The financial statements of Ittehad Manufacturing Ltd for the year to 30 September

2015, together with the comparative statement of financial position (balance sheet) for the year to 30 September 2014 are shown below:

Rs in million

920

Statement of financial position as at 30 September:

Rs in million Rs in million

Non-current assets

Equity and liabilities

Extract from statement of changes in equity

Rs in million

Notes to the financial statements:

(1) Cost of sales includes depreciation of property, plant and equipment of Rs 320

million and a loss on the sale of plant of Rs 50 million

Rs in million

(2) Intangible non-current assets:

The following additional information is relevant:

(i) Intangible non-current assets:

The company successfully completed the development of a new product during the current year, capitalising a further Rs 500 million before amortisation charges for the period

(ii) Property, plant and equipment/revaluation surplus:

 The company revalued its buildings by Rs 200 million on 1 October

2014 The surplus was credited to a revaluation surplus

 New plant was acquired during the year at a cost of Rs 250

 Rs 10 million has been transferred from the revaluation surplus to retained earnings as a year-end adjustment in respect of the additional depreciation created by the revaluation

 The remaining movement on property, plant and equipment was due to the disposal of obsolete plant

(iii) Share issues:

On 1 October 2014 a bonus issue of 1 new share for every 10 held was made from retained earnings Ittehad Manufacturing Ltd made a further issue of ordinary shares for cash during the year

Required

(a) A statement of cash flows for Ittehad Manufacturing Ltd for the year to 30

September 2015 prepared in accordance with IAS 7 Statement of Cash Flows

(20)

(b) Comment briefly on the financial position of Ittehad Manufacturing Ltd as

portrayed by the information in your statement of cash flows (5)

(25)

3.6 WASEEM INDUSTRIES LIMITED

The following statements of financial position relate to Waseem Industries Limited for the years ended December 31:

2015 2014

Rs in million

Rs in million

Current liabilities

Other relevant information is as follows:

(i) An interim bonus issue of one for five ordinary shares was made during the year out of share premium The company also approved final cash dividend of 10% (2014: 8%), in its annual general meeting

(ii) During the year, the company provided Rs 17 million (2014: Rs 13 million)

on account of depreciation The details relating to disposal of property, plant and equipment are as follows:

Carrying amount Sale proceeds

(iv) In 2015, the company paid Rs 6 million on account of gratuity

(v) Accrued mark-up on long term finances amounting to Rs 7 million (2014:

Rs 9 million) is included in trade and other payables Financial charges included in the profit and loss account are Rs 16 million (2014 : Rs 14 million)

(vi) Income tax expense for the year 2015 amounted to Rs 19 million (2014:

Rs 13 million)

Required

Prepare a cash flow statement in accordance with the requirements of IAS 7 Cash