FINANCIAL ACCOUNTING & CORPORATE REPORTING

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1. S Limited owns a workshop that it uses for serving electronic items under warranty. In
preparing its financial statements, the company needs to ascertain the provision of warranty
that it would be required to provide at year-end. The company’s past experience with
warranty claims is that 50% of the items sold in a year have zero defects, 30% of the items
sold in a year have normal defects and 20% of the items sold in a year have significant
defects. The cost of rectifying a normal defect in an electronic item is Rs. 25,000. The cost of
rectifying a significant defect is Rs. 90,000. Select the best option from the following that
represents amount of provision for warranty required at the year end.

a) Rs. 25,500. b) Rs. 25,000.

c) Rs. 90,000. d) No amount of provision would berecognized.

REFERENCE: SIMILAR QUESTION FROM THIS BOOK WILEY IFRS Practical

Implementation Guide And Workbook Second Edition CHAPTER NO 29
PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37)
CASE STUDY 2 PAGE NO 319 SOLUTION IS ALSO ON PAGE NO 319.

SOLUTION: The expected value of the provision for warranty needed at year-end is:
(50% x0) + (30% x Rs. 25,000) + (20% x Rs. 90,000) = 0 + 7,500 + 18,000 = Rs. 25,500

2. H Group of companies acquired 80% of the share capital of Z limited on January 1, 2019.
Part of the purchase consideration was Rs. 2000,000 cash to be paid on January 1, 2022. The
applicable cost of capital is 10%. will be the deferred consideration liability be at December
21, 2020.

a) Rs. 1652,880. b) Rs. 1818,181.

c) Rs. 2000,000. d) Rs. 1502,620.

REFERENCE: SIMILAR QUESTION ACCA KAPLAN PUBLISHING F7 KIT PAGE

NO 43 MCQ NO 144. SOLUTION IS ON PAGE NO 234. (Only 1 zero added in 2000000
rest ofthe question is same).

SOLUTION:
At January 1, 2019 the deferred consideration needs to be discounted to present value
by one year. Rs. 2,000,000/1.1 = Rs. 1818,181.
3. Hashim Limited (HL) acquired an 80% holding in S Limited (SL) on April 1, 2020. From
April 1, 2020 to December 31, 2020. SL sold goods to HL for Rs. 8.6 million at a mark up of
10%. HL inventory at December 31, 2020 included Rs. 4.4 million of such inventory. The
statement of profit or loss for each company for the year to December 31, 2020 amounted to
Rs. 29.4 million for HL and Rs. 23.2 million. What is the cost of sales to be shown in the
consolidated statement of profit or loss for the year ended December 31, 2020: (EXAM
QUESTION 2023)

a) Rs. 37.8 million. b) Rs. 40.4 million.

c) Rs. 38.2 million. d) Rs. 38.6 million.

REFERENCE: SIMILAR QUESTION ACCAKAPLAN PUBLISHING F7 KIT PAGE

NO 47 MCQ NO 157. SOLUTION IS ON PAGE NO 236. (Everything Multiplied By 2)

SOLUTION: Cost ofsales = Rs. 29.4m+ Rs. 17.4m(9/12 x Rs. 23.2m) – Rs. 8.6m(intra‐
group sale) + Rs. 0.44m = Rs. 38.64m.
Thus Rs. 4.4mx 10/110 = 0.44m.

4. At January 1, 2020, FL received a loan of Rs. 10 million at 6% per annum. The loan has an
effective finance cost of 7.5% per annum. The loan was specifically issued to finance the
construction of a new building and the loan will be treated under IAS 23. Construction
commenced on February 1, 2020 and it was completed and ready for use on November 30,
2020, but did not became operational until January 1, 2021. How much interest should be
capitalized as part of property, plant and equipment of FL as at December 31, 2020?

a) Rs. 600,000. b) Rs. 125,000.

c) Rs. 625,000. d) Rs. 750,000.

REFERENCE: SIMILAR QUESTION ACCA KAPLAN PUBLISHING F7 KIT PAGE

NO 68 MCQ NO 234. (COMPANY NAME CHANGED & $ SYMBOL CHANGED TO
RS.)

SOLUTION: The finance cost to be capitalised = Rs. 625,000 (Rs. 750,000 x 10/12).

5. ML obtained a government license to operate a mine from July 1, 2019. The license
requires that at the end of the mine’s useful life, all buildings must be removed from the site
and the site landscaped. ML estimated that the cost of this decommissioning work will be Rs.
2000,000 in ten years’ time (present value at July 1, 2019 Rs. 926,000) using a discount factor
of 8%. According to IAS 37, which one of the following amount should ML include in
provisions in its statement of financial position as at June 30, 2020? (FEB ATTEMPT 2024)

a) Rs. 1000,000. b) Rs. 2000,000.

c) Rs. 926,000. d) Rs. 200,000.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA [63 MIXED OBJECTIVE TEST QUESTIONS BANK 8 (5/12)]
(PAGE NO 125) (ANSWER IS ON PAGE NO 277) (Everything Multiplied By 2)

SOLUTION: Rs. 2,000,000 x discount rate 0.500 = Rs. 1000,000 (or Rs. 926,000 plus
8%)
6. On January 1, 2018, Raja Limited (RL) purchased a debt instrument at its fair value of Rs.
1 million. It had a principal amount of Rs. 1.1 million and was due to mature in five years.
The debt instrument carries fixed interest of 6% paid annually in arrears and has an effective
interest rate of 8%. It is held at amortized cost. is the amount at which the debt
instrument will be shown in the statement of financial position of RL as at December 31,
2019.

a) Rs. 1080,000. b) Rs. 1029,120.

c) Rs. 1014,000. d) Rs. 1095,120.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA MCQ bank – financial instruments (MCQ NO 162 PAGE NO 54)
(ANSWER IS ON PAGE NO 150)
SOLUTION:
Rs
1 January 2018 1,000,000
Interest 8% 80,000
Interest received (1,100,000 x 6%) (66,000)
31 December 2019 1,014,000
Interest 8% 81,120
Interest received (66,000)
31 December 2019 1,029,120

7. Rail Limited (RL) acquired a non-current asset on July 1, 2016 at a cost of Rs. 10,000,000
which had a useful life of ten years and a nil residual value. The asset had been correctly
depreciated up to June 30, 2021. At that date the asset was damaged and an impairment
review was performed. On June 30, 2021 the fair value of the asset less cost to sell was Rs.
3000,000 and the expected future cash flows amounted to Rs. 850,000 per annum for the next
five years. The current cost of capital is 10% and a five year present value factor for Re. 1 per
annum is Rs. 0.621 per annum and five years annuity of Rs. 1 per annum at 10% would have
a present value of Rs. 3.79. amount would be charged to statement of profit or
loss for the impairment of this asset for the year ended June 30, 2021.

a) Rs. 1778,500. b) Rs. 2000,000.

c) Rs. 2472,150. d) Rs. 4472,150.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA MCQ bank – impairment of assets (MCQ NO 68 PAGE NO 20)
(ANSWER IS ON PAGE NO 119)

SOLUTION:

Rs
Carrying amount (10,000,000 x 5/10) 5,000,000
Fair value less costs to sell 3,000,000
Value in use (850,000 x 3.79) 3,221,500

Recoverable amount is Rs. 3,221,500 and impairment loss = 5,000,000 – 3,221,500 = Rs.
1,778,500
8. FL owns an administration building which it no longer needs. On July 1, 2020 FL entered
into an agreement to lease the building out to another company. The building cost of Rs.
6000,000 on January 1, 2011 and is being depreciated over 50 years, based on the IAS 16 cost
model. FL applies the fair value model under IAS 40 investment property and the fair value
of the building was estimated to be 8000,000 on July 1, 2020. The valuation had not changed
at December 31, 2020 is the amount of the revaluation surplus that will be
recognized in respect of the building.

a) Rs. Nil. b) Rs. 2000,000.

c) Rs. 3080,000. d) Rs. 3140,000.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA Plethora plc – MCQ case (MCQ NO 27 PAGE NO 10) (ANSWER
IS ON PAGE NO 115) (JUST COMPANY NAME CHANGED & 0 EXTRA ADDED
AT THE END)

SOLUTION:
Building transferred to investment property
Rs.
'000
Original cost 6000
Depreciation 1.1.X0 to 1.7.X9 ((6000 / 50) x 9.5) (1140)
Carrying amount at 1.7.X9 4860
Revaluation surplus 3140
Fair value 8000

9. During the year ended December 31, 2019, Arif Limited (AL) had a credit balance brought
forward on current tax of Rs. 262,500. During the year, AL received a tax refund of Rs.
26,250. It has a provision for the current year of Rs. 315,000. The company has decreased the
deferred tax provision by Rs. 105,000. AL will record amount in respect of tax
expense in the statement of profit or loss for the year ended December 31, 2019. (EXAM
QUESTION 2023)

a) Rs. 52,500 credit. b) Rs. 78,750 debit.

c) Rs. 52,500 debit. d) Rs. 78,750 credit.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA 52 Objective test questions: Deferred tax (MCQ NO 7 PAGE NO
104) (ANSWER IS ON PAGE NO 263)
SOLUTION:
Rs.
Over-provision for prior period (288750)
Provision for current period 315000
Decrease in deferred tax charge (105000)
Credit to income statement (78750)
10. A cash generating unit comprises the following assets:

Rupees
Building 7000,000
Plant and equipment 2000,000
Goodwill 900,000
Current Assets 200,000

One of the machines, carried at Rs. 400,000 is damaged and will have to be scrapped. The
recoverable amount of the cash generating unit is estimated at Rs. 7500,000, will be the
carrying amount of the building after the impairment loss has been recognized.

a) Rs. 5480,000. b) Rs. 5770,000.

c) Rs. 5940,000. d) Rs. 5970,000.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA CBE style OTQ bank – impairment of assets (MCQ NO 62 PAGE
NO 18) (ANSWER IS ON PAGE NO 118) (Only One Extra Zero Is Added, Rest Of the
Question Is Same)

SOLUTION:

594,0000
Rs. '000
Total impairment (1,0100 – 7500) 2600
Goodwill (900)
Damaged plant
(400)
Balance to allocate 1300
The remaining Rs. 130,0000 will be allocated pro rata as follows.
Building Plant
Rs. '000 Rs. '000
7000 1600
Impairment (1060) (240)
5940
11. M Limited’s summarized statement of profit or loss for the year ended June 30, 2021 is as
follows: (NOT CONFIRM)

Rupees
Gross profit 1870,000
Administrative expenses (1260,000)
Distributioncosts (220,000)
390,000
Finance cost (20,000)
Profit before tax 370,000

1. Administrative expenses include donations to the local ruling political party of Rs. 50,000
and depreciation of property, plant and equipment of Rs. 390,000 (inclusive of depreciation of
new purchases).
2. ML made a tax loss during the year ended June 30, 2020. The loss carried forward at June
30, 2020 was Rs. 120,000.
3. At June 30, 2021 ML’s tax written down value of its property, plant and equipment was Rs.
1200,000. All of these assets qualified for the annual tax depreciation allowance. ML
purchased property, plant and equipment during the year for Rs. 300,000. Tax authorities
allow tax depreciation at the rate of 15%.
4. Tax rate is 29%.
is the amount of tax that ML is due to pay for the year ended June 30, 2021.
(EXAM QUESTION 2023)

a) Rs. 182,700. b) Rs. 134,850.

c) Rs. 107,300. d) Rs. 169,650.

REFERENCE: [SIMILAR QUESTION FROM CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA 79 MIXED SECTION B QUESTION BANK 12 (5/13)
QUESTION ON PAGE NO 150 Part (e) Answer Is On Page No 311] (ADDITIONAL
INFORMATION In Above Question Rest Of Question Is Same & One Zero Added As
Well. Tax authorities allow tax depreciation at the rate of 15%. Tax rate is 29%.]

SOLUTION:

Gross profit = 1870,000.

Less : Adminexpenses: (1260,000)
Add back: Donations = 50,000.
Add back: accounting dep. = 390,000.
Less: Tax allowable dep. = (1200,000 + 300,000) x 0.15 = (225,000)
PBIT = 825,000
Less: Interest = (20,000)
Less: distributioncost = (220,000)
Profit before tax = 585,000.
Tax@ 29%
Tax = 169,650.
Less: Tax loss ofprevious period = 120,000 x 0.29 = (34,800)
Tax exp. For the year = 134,850.
12. On January 1, 2020, M (ML) acquired an item of plant under a five year lease
arrangement. The agreement has an impact interest rate of 10% and required annual rentals of
Rs. 6 million to be paid on September 30 each year for five years. The present value of the
annual rental payment was Rs. 23 million. The current liability for the leased plant in ML’s
Statement of Financial Position as at December 31, 2020 will be: (EXAM QUESTION
DECEMBER 2023)

a) Rs. 19,300,000. b) Rs. 4070,000.

c) Rs. 3850,000. d) Rs. 5000,000.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED CERTIFIED

ACCOUNTANTS FINANCIAL REPORTING (FR) EXAM KIT VALID FOR
SEPTEMBER 2019 KAPLAN PUBLISHING QUESTION NO 84 EXACT SAME
QUESTION PAGE NO 24 ANSWER ON PAGE NO 218. $ SIGN CHANGED TO RS &
COMPANY NAME CHANGED.

SOLUTION:

b/f Interest @ 10% Payment c/f

Year end Rs 000 Rs. 000 Rs. 000 Rs. 000
January 1, 2020 23,000 2,300 (6,000) 19,300
December 31, 2020 19,300 1,930 (6,000) 15,230

Current liability at 31 December 2020 = 19,300,000 – 15,230,000 = Rs. 4,070,000

13. S Limited (SL) recognized a tax liability of Rs. 2900,000 in its financial statements for the
year ended June 30, 2018. This was subsequently agreed with and paid to the tax authorities
as Rs. 2800,000 on March 1, 2019. The directors of SL estimated that the tax due on the
profits for the year ended June 30, 2019 will be Rs. 3200,000. SL has no deferred tax liability
amount will be recorded in SL’s statement of profit or loss and other
comprehensive income in respect of the tax expense for the year ended June 30, 2019.

a) Rs. 3200,000. b) Rs. 3100,000.

c) Rs. 3300,000. d) Rs. 6000,000.

REFERENCE: SIMILAR QUESTION FROM CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA 51 OBJECTIVE TYPE QUESTIONS: TYPES OF TAXATION II
MCQ NO 24 PAGE NO 103 ANSWER ON PAGE NO 262

SOLUTION: B is the answer. Rs. 320,0000 less prior year over-provision (Rs. 290,0000 –
Rs. 280,0000)
14. At Dec 31, 2019, F Limited (FL) had 12,000 units of product “Alpha” in inventory,
included at cost of Rs. 600 per unit. During January 2020, units of “Alpha” were being sold at
a price of Rs. 540 each, with sales staff receiving a 15% commission on the sales price of the
product. Inventory of product “Alpha” should be recognized in the financial statements of FL
as at Dec 31, 2019 at an amount of: (EXAM QUESTION 2023)

a) Rs. 7452,000 b) Rs. 7200,000 c) Rs. 6480,000. d) Rs. 5508,000.

REFERENCE: (FROM ACCA PAPER F7 FINANCIAL REPORTING BPP

LEARNING MEDIA SIMILAR QUESTION ON PAGE NO 65 QUESTION NO 208
ANSWER IS ON PAGE NO 155)

SOLUTION: NRV – [12,000 x (Rs. 540 x 85%)] = Rs. 5508,000

Since NRV of Rs. 5508,000 is lower thancost, hence inventory will be shown at NRV.

15. A Limited (AL) trail balance shows a debit balance of Rs. 2.1 million brought forward on
current tax and a credit balance of Rs. 5.4 million on deferred tax. The tax charge for the
current year is estimated at Rs. 16.2 million and the carrying amounts of net assets are Rs. 13
million in excess of their tax base. The income tax rate is 29%. The amount that will be
shown as income tax in the statement of Profit or Loss for AL for the year ended December
31, 2020 is:

a) Rs. 3.77 million. b) Rs. 16.2 million. c) Rs. 1.63 million. d) Rs. 16.67 million.

REFERENCE: (FROM ACCA PAPER F7 FINANCIAL REPORTING BPP

LEARNING MEDIA SIMILAR QUESTION ON PAGE NO 66 QUESTION NO 209
ANSWER IS ON PAGE NO 155)

SOLUTION:

Rs. 000
Charge for year 16,200
Underprovision 2,100
Adjust deferred tax (W) (1,630)
Profit or loss charge 16,670

Working:

Provision needed (13mx 29%) 3,770

Provision b/f (5,400)
Reduce provision (1,630)
16. Which of thestatements about IAS 10 “Events after the reporting period” arecorrect

i. A material event that occurs before the financial statements are authorized that provides
more evidence of conditions that already existed at the reporting date should be adjusted for
in the financial statements.

ii. The notes to the financial statements must give details of non adjusting events affecting the
user’s ability to understand the company’s financial position.

iii. Financial statements should not be prepared on a going concern basis if after the end of the
reporting period but before the financial statements are authorized the directors have decided
to liquidate the company.

a) Option (i) and(iii) arecorrect. b) Option (ii) and (iii) are correct.
c) Option (i) and (ii) arecorrect. d) All the statements are correct.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA [20 Objective test questions: Accounting standards I MCQ NO 3
ON PAGE NO 42 ANSWER IS ON PAGE NO 186 EXACT SAME QUESTION.

17. Comparability is defined as an enhancing qualitative characteristic in the international

accounting standard board’s conceptual framework for financial reporting. Which of the
following does not improve comparability.

a) Applying a company’s current policy to a transaction which a company has not

engaged in before.

b) Restating the financial statements of previous years when there has been a change of
accounting policy.

c) Disclosing discontinued operations separately in financial statements.

d) Prohibiting change of accounting policy unless required by an IFRS standard or to give

more relevant and reliable information.

REFERENCE: FROMTHIS WEBSITE

https://www.acowtancy.com/textbook/acca-fr/a1-the-need-for-a-conceptual-
framework/a1f-comparability/exam

EXPLANATION: As it is a new type of transaction, comparability with existing

treatments is not relevant.
18. IFRS 5 ”Non-current assets Held for saleand discontinued operations” is applicable
on:

a) Non current assets that areaccounted for in accordancewith fair valuemodel.

b) Financial assets.

c) Assets that meet the criteria to be classified as held for sale.

d) Deferred tax assets.

REFERENCE: SEE POINT NO E

19. IAS 36 “Impairment of Assets” shallbeapplied in accounting for theimpairment of
assets:

a) Inventories. b) Imported plant.

c) Deferred tax assets. d) Investment properties that aremeasured at fair value.

REFERENCE: FROMTHIS WEBSITE

https://library.croneri.co.uk/cch_uk/iaststd/ias36-200403
20. Which one of thefollowing is not a purpose of the International Accounting Standard
Board?

a) Toassist theboard in thepreparation and review of IFRS standards.

b) Toassist auditors in forming an opinion on whether financial statements comply with IFRS
standards.

c) To be authoritative when a specific IFRS standard conflict with the conceptual

framework.

d) Toassist in determining thetreatment of items not covered byan existing IFRS.

REFERENCE: FROMTHIS WEBSITE

https://www.acowtancy.com/exams/acca-fr/paper-question/dec-2014specimen-
mc10
21. QL is facing a number of legal claims from its customers with regard to a faulty product
sold. The legal amount being claimed is Rs. 40 million. The company’s lawyer is of the
view that the customers have a chance of 80% being successful. What amount, if any,
should be recognized in respect of the above in QL’s statement of financial position as at
June 30, 2020?

REFERENCE: SIMILAR QUESTION FROM ACCA THE ASSOCIATION OF

CHARTERED CERTIFIED ACCOUNTANTS EXAM KIT - VALID FOR
SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020
EXAMINATION SITTINGS KAPLAN PUBLISHING QUESTION NO 132 ON PAGE
NO 39 ANSWER IS ON PAGE NO 232

EXPLANATION: Rs. 40,000,000.

ANSWER:

Since 80% chance of successful claim is present. Hence, an amount of Rs. 40 million will
be recorded as provision for legal claims.

Per IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the amount
payable relates to a past event (the sale of faulty products) and the likelihood of payout
is probable (i.e. more likely than not). Hence, the full amount of the payout should be
provided for.

22. Identify thebest option fromthefollowing, which represents true statement regarding
financial statements.

a) intangibleassets aretypically combined with plant assets and extractable natural resources
and shown in the property, plant, and equipment section.

b) since intangible assets lack physical substance, they need to be disclosed only in the notes
to the financial statements.

c) totals of major classes of assets can be shown inthe statement of financial position,
with assets details disclosed in the notes to the financial statements.

d) goodwill should bereported as a contra account in the equity section.

REFERENCE: FROMTHIS WEBSITE

https://www.coursehero.com/file/p4cauis/10-Indicate-which-one-of-these-statements-is-
true-a-Since-intangible-assets-lack/

EXPLANATION: Ans: c

Response A: This statement is not true because even though intangible assets lack
substance, they should still be reported inthe balance sheet.
Response B: This statement is not true because goodwill should be reported as an
intangible asset, not as a contra account inthe stockholders’ equity section.

Response C: Correct!
Response D: This statement is not true because intangible assets are not combined with
plant assets and natural resources and then reported in the property, plant, and
equipment section.

24. At January 1, 2022 ABC limited received a loan of Rs. 10 million at 6% per annum. The
loan will be redeemable at a premium which means the loan has an effective finance cost of
7.5% per annum. The loan was specifically issued to finance the construction of a new
building. How should the loan be treated in the financial statements of ABC for the year
ended December 31, 2022?

a) Fair valuethrough profit or loss. b) Amortized cost.

c) Present value. d) Fair valuethrough other compressive income.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED CERTIFIED

ACCOUNTANTS EXAM KIT - VALID FOR SEPTEMBER 2019, DECEMBER 2019,
MARCH 2020 AND JUNE 2020 EXAMINATION SITTINGS KAPLAN PUBLISHING
MCQ NO 231 QUESTION ON PAGE NO 68 ANSWER ON PAGE NO 253. JUST
COMPANY NAME CHANGED & $ SYMBOL CHANGED TO RS.

EXPLANATION: Loans are regarded as financial liabilities and should be held at

amortized cost.

25. Which one of the following cannot be recognized as an intangible non-current assets
in ABC’s consolidated statement of financialposition as at December 31, 2022.

a) ABC spent Rs. 21 million during the year on the development of a new product, after
management concluded it would be viable in February 2020. The product is being
launched on the market on March 1, 2021 and is expected to be profitable.

b) ABC purchased a brand name from a competitor on February 1, 2020 for Rs. 65
million.

c) ABC spent Rs. 132 million developing a new type of product. In September
2020, management worried that it would be too expensive to fund. The finances to
complete the project will come from a cash injection from a benefactor which will
be received in February 2021.

d) ABC purchased a subsidiary during the year. While conducting fair value exercise it
was found that the subsidiary had a brand name with an estimated value of Rs. 50
million but had not been recognized by the subsidiary as it was internally generated.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED CERTIFIED

ACCOUNTANTS EXAM KIT - VALID FOR SEPTEMBER 2019, DECEMBER 2019,
MARCH 2020 AND JUNE 2020 EXAMINATION SITTINGS KAPLAN PUBLISHING
MCQ NO 16 ON PAGE NO 5 ANSWER ON PAGE NO 205
EXPLANATION: The finance was only available after the year end. Therefore the
criteria of recognising an asset were not met, as the resources were not available to
complete the project.

Even though the brand is internally generated in the subsidiary’s accounts, it can be
recognised at fair value for the group. Item C can be recognised as a purchased
intangible and itemD meets the criteria for being capitalised as development costs.

26. Adjustment of thecarrying amount of anasset or a liability or the consumption of anasset

as a result of change in assessment is called:

a) misstatement. b) accounting policy.

c) correction of error. d) a change in accounting estimate.

REFERENCE: ACCA PAPER F7 FINANCIAL REPORTING FOR EXAMS IN

SEPTEMBER 2017, DECEMBER 2017, MARCH 2018 AND JUNE 2018 BPP
LEARNING MEDIA READ CHAPTER NO 17 PAGE NO 298

EXPLANATION: A change in accounting estimate is an adjustment of the

carrying amount of an asset or a liability or the amount of the periodic
consumption of an asset, that results from the assessment of the present status of,
and expected future benefits and obligations associated with, assets and
liabilities. Changes in accounting estimates result from new information or new
developments and, accordingly, are not corrections of errors.

27. Which one of the following accounting methods must be applied to all business
combinations under IFRS 3, “Business Combinations”?

a) Pooling of interest method. b) Proportionateconsolidation.

c) Acquisition method. d) Equity method.

EXPLANATION: The proposed objective of the Exposure Draft is:

…that all business combinations be accounted for by applying the acquisition
method. A business combination is a transaction or other event in which an
acquirer obtains control of one or more businesses (the acquiree). In accordance
with the acquisition method, the acquirer measures and recognises the acquiree,
as a whole, and the assets acquired and liabilities assumed at their fair values as
of the acquisition date.

28. Acompany shall measure a non-current asset classified as held for saleat the lower of its
carrying value and .

a) Recoverable amount. b) Fair value less cost to sell.

c) Valuein use. d) Fair value.

REFERENCE: FROM THIS WEBSITE

https://www.ifac.org/_flysystem/azure-private/meetings/files/8-Non-current-
Assets-Held-for-Sale-and-Discontinued-Operations_Final.pdf
EXPLANATION: Non-current assets classified as held for sale are measured at
the lower of carrying amount and fair value less costs to sell. When non-current
assets held for sale are measured at carrying amount lower than fair value, the
fair value of those assets is not disclosed anywhere in the financial statements. It
is possible that an asset’s carrying amount and fair value can be materially
different and the Board decided that in these circumstances, an entity should
disclose, for accountability purposes, the fair value of the asset classified as held
for sale.

29. Which of thefollowing is not trueregarding IAS 2, inventories:

a) Fixed production overheads must be allocated to items of inventory on the basis of the
normal level of production.

b) Unallocated overheads must berecognized as an expense in theperiod in which they are

incurred.

c) An abnormally high level of production will lead to a lower allocation of fixed production
overhead to each unit.

d) Plant lying idle will lead to a higher fixed overhead allocationto each unit.

REFERENCE: FROM CIMA PRACTICE & REVISION KIT OPERATIONAL

PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP LEARNING
MEDIA [16 OBJECTIVE TEST QUESTIONS: NON-CURRENT ASSETS,
INVENTORIES AND CONSTRUCTION CONTRACTS II] MCQ NO 4 EXACT
SAME QUESTION ON PAGE NO 34 ANSWER ON PAGE NO 180. EXACT SAME
QUESTION.

EXPLANATION: Low production or idle plant does not lead to a higher fixed
overhead allocation to each unit.
30. Select thebest option fromthefollowing which would not beincluded within the initial
cost of a right of use asset?

a) payments madeto the lessor beforecommencement of the lease.

b) total lease rentals payable under the lease agreement.

c) estimated cost of dismantling theasset at the end of the lease period.

d) installation cost of theasset.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED

CERTIFIED ACCOUNTANTS FINANCIAL REPORTING (FR) EXAM KIT
VALID FOR SEPTEMBER 2019 KAPLAN PUBLISHING MCQ NO 85 ON
PAGE NO 24 ANSWER ON PAGE NO 218

EXPLANATION: The value recognized in respect of the lease payments will be

the present value of future lease payments rather than the total value.

31. Which of the following could be classified as development expenditure in ABC

Limited’s statement of financial position as at December 31, 2019 according to IAS
38 “intangible Assets”?

a) Rs. 650,000 spent on developing a special type of new packaging for a new
energy efficient light bulb. The packaging is expected to reduce ABC’s
distribution cost by Rs. 350,000 a year.

b) a payment of Rs. 900,000 to a local university’s engineering faculty to research

new environmental friendly building technique.

c) Rs. 250,000 spent on developing a prototype and testing a new type of propulsion
system. The project need further workon it as the system is currently not visible.

d) Rs. 800,000 spent on developing an electric bicycle. This is near completion and
the product will be launched soon. As this project is first of its kind it is expected to
make a loss.

REFERENCE: FROM CIMA PRACTICE & REVISION KIT OPERATIONAL

PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP LEARNING
MEDIA [57 MIXED OBJECTIVE TEST QUESTIONS BANK 2 (5/10) MCQ NO 7 ON
PAGE NO 114 ANSWER IS ON PAGE NO 272]. ANSWER IS A.
32. Which of thefollowing statements regarding systems of regulation of accounting aretrue?

i. Aprinciples based system will require more detailed regulations than a rulebased system.

ii. A rules based system will tend to give rise to a larger number of accounting standards than
a principles based system.

iii. Aprinciples based systemseeks tocover every regulation eventually.

iv. Aprinciples based systemrequires the exercise of more judgement inapplication than a
rules based system.

a) Option(ii) and (iv) are correct. b) Option (i) and (iv) arecorrect.
c) Option (i) and (iii) arecorrect. d) Option (ii) and (iii) arecorrect.

REFERENCE: FROM ACCA FINANCIAL REPORTING FOR EXAMS IN

SEPTEMBER 2017, DECEMBER 2017, MARCH 2018 AND JUNE 2018 BPP
LEARNING MEDIA MCQ NO 16 ON PAGE NO 7 CBE style OTQ – regulatory
framework. ANSWER ON PAGE NO 114

SOLUTION: The correct answers are:

A rules-based system will tend to give rise to a larger number of accounting
standards than a principles based system.
A principles-based system requires the exercise of more judgement in
application than a rules-based system.

33. Whichofthe following statements relating to goodwill is correct?

a) If the fair value of a subsidiary’s contingent liabilities can be reliably

measured at the date of acquisition, they should be included in consolidated net
assets and will increase goodwill.

b) On the investment in an associate, any related goodwill should be separately

identified in the consolidated financial statements.

c) The testing of goodwill for impairment is only required when circumstances exist
which indicate potential impairment.

d) Goodwill is amortized over its useful life with the charge expensed to profit or loss.

REFERENCE: ACCA Fundamentals Level Paper F7 Financial Reporting Mock

Examination 3 December 2016 exam MCQ NO 15 ON PAGE NO 258 ANSWER
IS ON PAGE NO 270.

EXPLANATION: Goodwill is not amortised under IFRS and goodwill is not

recognised on acquisition of an associate. Goodwill is tested for impairment
annually.
34. ABC Limited is developing a new product and is expected to beable to capitalize the
costs. Which one of the following reason would disallow the capitalization of the costs?

a) Development of theproduct is not yet completed.

b) No patent has yet been registered in respect of theproduct.

c) It has not beenpossible to reliably allocate costs to development ofthe product.

d) No sales contracts have yet been signed inrelation to the product.

REFERENCE: PAPER F7 FINANCIAL REPORTING FOR EXAMS IN

SEPTEMBER 2017, DECEMBER 2017, MARCH 2018 AND JUNE 2018 BPP
LEARNING MEDIA MCQ bank – intangible assets MCQ NO 47 ON PAGE NO
14 ANSWER IS ON PAGE NO 117

EXPLANATION: In order for capitalisation to be allowed it is not necessary for

development to be completed, patents to be registered or sales contracts signed.
However, an intangible asset can only be recognised if its cost can be reliably
measured.

35. Whichone ofthe following is not the way in which an acquirer mayobtain
control of an acquiree.

a) Byproviding more than one type ofconsideration.

b) By purchasing equity interest.

c) Byincurring liabilities.

d) Bytransferring cash and other assets.

REFERENCE: FROM THIS WEBSITE

https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combinatio
n/business_combination 28_US/chapter_1_scope_US/1_3Identifybuscom.html
36. ABC limited leases a machine for fourteen years, but legal title does not pass to the lessee
at the end of the agreement. The company usually depreciate machinery over twenty years. In
this case ABC should depreciate the machine for a period of years.

a) 20 b) ABC should not depreciate the machine. c) 14 d) 6

REFERENCE: FROM EMILE WOOLF INTERNATIONAL PUBLISHING

2013 ACCA F7 (INT) Financial Reporting CHAPTER NO 12 LEASES READ
PAGE NO 199

EXPLANATION: The lessor has transferred the risks and rewards of

ownership of the leased asset to the lessee. Therefore the lessee records
the asset in his financial statements as an item of property, plant and
equipment. This reflects the underlying substance of the arrangement
whereby, even if a legal title does not pass to the lessee, he has use of the
asset over its useful life.

For the same reason, in the case of finance leases an asset should not be
accounted for by the lessor as a non-current asset.

The effect of classifying a lease incorrectly.

If a finance lease is treated as an operating lease, the financial statements

do not fairly present the financial position of the entity:

1. The leased asset is not recognised in the statement of financial position,

even though the substance of the lease is thatthe entity owns it.

2. The liability for the lease payments is not recognised in the statement of
financial position.

37. Information is obscured if it is communicated in a way that would have a similar

effect for primary users of financial statements for omitting that information. Which
one of the following represent an example of circumstance that may result in material
information being obscured.

a) similar items or transactions are appropriately disaggregated.

b) information regarding a material item or transaction is disclosed in the financial

statement in clear language.

c) information regarding a material item or transaction is summarized in the financial

statements.

d) dissimilaritems ortransactions are inappropriately aggregated.

REFERENCE:
38. Whichofthe following transactions involving the issuing ofshares does not come
within the definition of a share based payments under IFRS 2?

a) employee share option plans.

b) employee sharepurchase plans.

c) share based payments relating to anacquisitionof a subsidiary.

d) shareappreciation rights.

EXPLANATION: The correct option is (c) Share-based payment relating to an

acquisition of a subsidiary.
IFRS 2 deals with share-based payments such as granted share, share options,
share purchase plans, share appreciation rights, etc. It applies to all the entities.
However, this standard does not deal with share-based payment relating to an
acquisition of a subsidiary.
39. How should gain on the sale of an office building owned by a company, be
presented in the statement of cash flow?

a) Added to the sale proceeds and presented in the investing activities section of the
cash flows.

b) As an adjustment in the net income in the operating activities section, of the

statement of cash flows prepared under indirect method.

c) As an inflow in the financing activities section of the cash flows because the
building was constructed with a long term loan from a bank that needs to be repaid
fromthe sale proceeds.

d) As an inflow in the investing activities section of the cash flow because it pertains
to a long term asset.

REFERENCE: FROM THIS WEBSITE

https://homework.study.com/explanation/how-should-a-gain-on-the-sale-of-an-
office-building-owned-by-the-entity-be-presented-in-a-cash-flow-statement-a-as-
an-inflow-in-the-investing-activities-section-of-the-cash-flow-because-it-pertains-
to-a-long-term-asset-b-as-an-inflow-in-the-financing-
a.html#:~:text=Answer%20and%20Explanation%3A&text=The%20gain%20on
%20sale%20of,at%20the%20time%20of%20sale.

EXPLANATION: The gain on sale of office building is recorded in the statement

of cash flows under the head operating activities. In operating activities section,
it is deducted from the amount of net earnings as the excess value over and above
the asset's net value at the time of sale.

40. Whichone of thefollowing information is not required to be disclosed as per IAS 38

“intangibleassets”?

a) Reconciliation of carrying amount at thebeginning and end of theyear.

b) Fair value of similar intangible assets usedby its competitors.

c) Contractualcommitments forthe acquisition of intangible assets.

d) Usefullives of intangible assets.

REFERENCE: FROM THIS WEBSITE

https://www.ifrs.org/content/dam/ifrs/publications/pdfstandards/english/2021/iss
ued/part-a/ias-38-intangible-assets.pdf
41. Which ofthe following is not an indicator of impairment?

a) The carrying amount of a company’s net assets is higher than the company’s
number of shares in issue multiplied by its share price.

b) The estimated net realizable value of inventory has been reduced due to fire
damaged although the value is greater than its carrying amount.

c) An increase in interest rates which increases the discount rate a companyuses.

d) Advances in the technological environment in which an asset is employed have an

adverse impact on its future use.

REFERENCE: FROM ACCA PAPER F7 FINANCIAL REPORTING FOR

EXAMS IN SEPTEMBER 2017, DECEMBER 2017, MARCH 2018 AND JUNE
2018 BPP LEARNING MEDIA MCQ NO 70 ON PAGE NO 20 ANSWER IS ON
PAGE NO 119

EXPLANATION: If the NRV of inventory is greater than its carrying amount,

no impairment has arisen.

42. IFRS standards require extensive use of fair value when recording the acquisition
of a subsidiary, which of the following statements regarding the use of fair value on
the acquisition of subsidiary are correct?

(i) The use of fair value to record a subsidiary’s acquired assets does not comply with
the historical cost principle.

(ii) The use of fair value to record the acquisition of plant always increases
consolidated post-acquisition depreciation charges compared to the corresponding
charge in the subsidiary’s own financial statements.

(iii) Cash consideration payable one year after the date of acquisition needs to be
discounted to reflect its fair value.

a) option (i) is correct only. b) option (ii) is correct only.

c) option (i), (ii) and (iii) are correct. d) option (iii) is correct only.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED

CERTIFIED ACCOUNTANTS FINANCIAL REPORTING (FR) EXAM KIT -
VALID FOR SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND
JUNE 2020 EXAMINATION SITTINGS MCQ NO 176 ON PAGE NO 52
ANSWER ON PAGE NO 241

43. What is meant by “tax base”?

a) The amount attributed to an asset orliability for tax purposes.

b) The tax regime under which an entity is assessed for tax.

c) The amount oftax payable in a future period.

d) The amount oftax deductible in a future period.

REFERENCE: FROM PAPER F7 FINANCIAL REPORTING FOR EXAMS IN

SEPTEMBER 2017, DECEMBER 2017, MARCH 2018 AND JUNE 2018 MCQ
NO 214 ON PAGE NO 68 ANSWER ON PAGE NO 157
44. Which of the following will not be considered a qualifying asset under IAS 23
borrowing cost?

a) Apower generation plant that normally takes two years to construct.

b) Aship that normallytakes one to two years to complete.

c) An expensive private jet that can be purchased from a local vendor.

d) A toll bridge that usuallytakes more than a year to build.

EXPLANATION: International Accounting Standard (IAS) 23 deals with

borrowing costs. The borrowing costs should be capitalized until the asset can be
put to use for business. IAS 23 applies to qualifying assets, where a qualifying
asset is that asset that takes a substantial time to build for intended use or sale.
Out of the given options, a power generation plant, a toll bridge, and a ship fulfill
the criteria of a qualifying asset since these assets takes one or more years to be
completed.

45. On July 1, 2020, Z (ZL) purchased 70% of share capital of J Limited (JL) for the
year ended Dec 31, 2020, operating expenses of ZL and JL amounted to Rs.
101,220,000 million and 66240,000 million, respectively. On acquisition, JL’s net
assets were equal to their carrying amount, except JL’s head office which had a fair
value of Rs. 8 million in excess of its carrying amount and a remaining life at
acquisition of 20 years. The company has a policy to charge depreciation to operating
expenses, is the operating expenses, figure to be included in the
consolidated statement of profit or loss of ZL for the year ended Dec 31, 2020.

a) Rs. 101,220,000. b) Rs. 134,340,000.

c) Rs. 167,460,000. d) Rs. 134,540,000.

SOLUTION:
46. Faaltu Limited (FL) makes an accounting loss of Rs. 1225,000 during the year ended June
30,2020. This included non-taxable income of Rs. 87,500 and depreciation of Rs. 105,000. In
addition, Rs. 1400,000 of the expense are disallowable for tax purposes. If the tax allowable
depreciation totals Rs. 112,000. The taxable amount would be .

a) Rs. 2530,500 profit. b) Rs. 80,500 loss.

c) Rs. 2600,500 loss. d) Rs. 80,500 profit.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA [51 Objective Test Questions: Types of taxation II] MCQ NO 15
ON PAGE NO 101 ANSWER IS ON PAGE NO 261

SOLUTION:
Rs Rs
Accounting loss (1225,000)
Add: Depreciation 105,000
Disallowed expenses 1400,000
1505,000
280,000
Less: non-taxable income 87,500
Taxable allowable depreciation 112,000
(199,500)
Taxable profit 80,500

47. On January 1, 2019, Shahrukh Khan Limited (SL) purchased a debt instrument at its fair
value of Rs. 500,000. It had a principle amount of Rs. 550,000 and was due to mature in five
years. The debt instrument carries fixed interest of 6% paid annually in arrears and has an
effective interest rate of 8%. It is held at amortized cost. At ,amount the debt
instrument will be shown in the statement of financial position of SL as at December 31,
2020.

a) Rs. 520,800. b) Rs. 514,560.

c) Rs. 564,560. d) Rs. 566,000.

REFERENCE: FROM PAPER F7 FINANCIAL REPORTING MCQ bank –

financial instruments MCQ NO 162 ON PAGE NO 54 ANSWER ON PAGE NO
150 EXACT SAME QUESTION COMPANY NAME CHANGED AND $
SYMBOL CHANGED TO RS.
SOLUTION:
Rs
January 1 2019 500,000
Interest 8% 40,000
Interest received (550,000 x 6%) (33,000)
December 31, 2020 507000
Interest 8% 40,560
Interest received (33,000)
December 31, 2021 514,560

48. Following information is related to F Limited (FL):

Profit before tax for both the years 2020 and 2019 amounted to Rs. 4000,000.
Fanta Limited (FL) estimated that the value of the gratuity owing to its staff at December
31,
2019 is Rs. 1000,000. This gratuity was paid to its staff in 2020. The tax authorities allow
provisions to be deducted only when paid.
Accounting depreciation for the year 2020 amounted to Rs. 100,000 while Rs. 150,000 for
the year 2019.
Tax depreciation for the year 2020 amounted to Rs. 200,000 while it was Rs. 220,000 in the
year 2019.
Provision for doubtful debts amounted to Rs. 120,000 and Rs. 80,000 for the year 2020 and
2019 respectively. While bad debts written off amounted to Rs. 50,000 and Rs. 60,000 for the
years 2020 and 2019 respectively.
Applicabletax rate for the company is 29%.
Current tax for the year 2020 and 2019 will beandrespectively.
a) 2020: Rs. 861,300, 2019: 1435,500. b) 2020: Rs. 1160,000, 2019: 1139,700.
c) 2020: Rs. 861,300, 2019: 1139,700. d) 2020: Rs. 1131,000, 2019: 1160,000.

49. Thefollowing is an extract fromthetrial balance of Y Limited (YL) at June 30, 2021.

Rs. 000 Rs. 000

Administration expenses 260
Cost of sales 480
Financecost 190
Long-termborrowing 2,200
Inventory at June 30, 2021 220
Property, plant and equipment at cost 1,500
Property, plant and equipment, depreciation to June 30, 2020 540
Distribution costs 200
Revenue 2,000

Additional Information:
i. Included in the closing inventory at the year end was inventory at a cost of Rs. 35 million,
which was sold during July 2021 for Rs. 19 million.
ii. Depreciation is calculated on property, plant and equipment at 20% per year using the
reducing balance method. The company charges depreciation to cost of sales.
iii. A person was seriously injured because of using one of company’s products on January 4,
2021. Professional legal advice is that YL will probably have to pay Rs. 500 million in
respect of compensation. is the amount of profit before tax of Y Limited (YL) for the years
ended June 30, 2021.

a) Rs. 370 million. b) Rs. 330 million.

c) Rs. 662 million. d) Rs. 162 million.

REFERENCE: FROM CIMA PRACTICE & REVISION KIT OPERATIONAL

PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP LEARNING
MEDIA [8 Section B questions: Presentation] EXACT SAME QUESTION ON PAGE
NO 16, 17 ANSWER ON PAGE NO 162 COMPANY NAME CHANGED AND $
SYMBOL CHANGED TO RS.

SOLUTION:
50. I Limited (IL) received a government grant of Rs. 4 million on January 1, 2018, to
facilitate purchase of an asset on the same day which cost of Rs. 6 million. The asset has 5
years useful life and is depreciated on a 20% reducing balance basis. Company has a policy to
account for all grants received as deferred income , is the amount of income
that will be recognized in respect of the grant for the year ended December 31, 2019.

a) Rs. 960,000. b) Rs. 800,000.

c) Rs. 640,000. d) Rs. 1200,000.

REFERENCE: FROM ACCA PAPER F7 FINANCIAL REPORTING BPP

LEARNING MEDIA CBE style OTQ bank – revenue MCQ NO 86 ON PAGE NO 25
ANSWER ON PAGE NO 122

SOLUTION:
Rs
Grant Received 4000000
Recognised year (4000000 x 20%) 800000
Balance 3200000

Recognised year (3200000 x 20%) 6400000

51. IAS 24 ‘Related Party’ requires disclosure of compensation of key management

personnel. Which one of the following would not be considered ‘compensation’ for this
purpose? (EXAM QUESTION DECEMBER 2023)

a. Reimbursement ofout-of-pocket expenses b. Termination benefits

c. Share-based payments d. Short-termbenefits

REFERENCE: FROMTHIS WEBSITE

(https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-
a/ias-24-related-party-disclosures.pdf?bypass=on)

SOLUTION:
52. On June 30, 2021 Umaima Limited (UL) decided its activities in the food industry. UL
purchased a well-known franchise for Rs. 2.5 million. The franchise is recognized throughout
the Europe and the company has obtained the right to use the franchise for a period of 20
years in France. It is probable that future economic benefits will flow from the franchise.
Which one of the following statements is not correct regarding franchise? (EXAM
QUESTION DECEMBER 2023)

a. Umaima Limited controls the franchise through the legal right to usethefranchise over the
period of 20 years.

b. The franchise is not an intangible asset and cost of Rs. 2.5 millionshould be expensed
immediately in statement of profit or loss.

c. Thefranchise is an intangible asset as it is identifiable and has no physical substance.

d. The franchise cost can be measured at Rs. 2.5 million and its probable that Umaima
Limited will generate revenue from its use therefore it is an asset.

REFERENCE: LOGICAL ANSWER READTHIS BELOW

53. Which of thefollowing Ali Limited (AL) should recognize as liabilities as at December
31, 2022? (EXAM QUESTION DECMBER 2023)

a. The cost of a reorganization which was approved by the Board in November 2022 but has
not yet been implemented, communicated to interested parties or announced publicly.

b. All of the given options will berecognized as liabilities.

c. The balance on the warranty provision which relates to products for which there are no
outstanding claims and whose warranties has expired by December 31, 2022.

d. The signing of a non-cancellable contract in December 2022 to supply goods inthe

following year onwhich, due to a pricing error, a loss will be made.

SOLUTION: SIMILAR QUESTION AND ANSWER GIVENBELOW

54. Which one of the following is not included in the definition of an operating segment in
accordance with IFRS 8 Operating Segments? (EXAM QUESTION DECEMBER 2023)

a. Acomponent of a company for which discretefinancial information is available.

b. A component of a company whose operating results are regularly reviewed by the

company’s chief operating decision matter, to make decisions about resource allocations and
assess performance.

c. A component of a company that engages in business activities from which it may earn
revenues and incur expenses.

d. A component of a company that earns the majority of its revenue fromsales to

external customers.

REFERENCE: SIMILAR QUESTION CIMA PRACTICE & REVISION KIT

OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR EXAMS IN 2014 BPP
LEARNING MEDIA [58 Mixed objective test questions bank 3 (11/10)] MCQ NO 10
ON PAGE NO 116 EXACT SAME QUESTION ANSWER ON PAGE NO 273.

55. Which one of the following concept measure profit in terms of an increase in the
productive capacity of a company? (EXAM QUESTION DECEMBER 2023)

a) Historical cost accounting. b) Financial capital management.

c) Going concern concept. d) Physical capital maintenance.

REFERENCE: FROM CHAPTER NO 22 Accounting for inflation BPP LEARNING

MEDIA READ PAGE NO 398

EXPLANATION: Physical capital maintenance: profit is the increase in the physical

productive capacity over the period. This is the concept used in CCA.

56. Zara Limited (ZL) is a major customer of RKS Limited. On March 1, 2023 ZL went into
liquidation and the management of RKS Limited is of the view that the company will not be
able to pay the debt amounted to Rs. 950,000. RKS Limited’s year ends on December 31.
Select the most appropriate option from the following in which this situation should be treated
in the financial statements of RKS Limited: (EXAM QUESTION DECEMBER 2023)

a. Rs. 950,000 should be disclosed by noteas anirrecoverable debt.

b. Thefinancial statements for December 2022 should be adjusted to show Rs. 950,000 as an
irrecoverable debt.

c. Thefinancial statements of RKS Limited will not beaffected by this event.

d. The financial statements for December 2022 are not affected, but the balance should be
written off in the year ended December 2023.
57. Deferred tax income taxes result from . (EXAM QUESTION
DECEMBER 2023)

a. Theinitially of a bankrupt company to pay its income tax liability on schedule.

b. Thefact that bond interest is deductible in thecomputation of taxable income.

c. Depositing income taxes due in future years in a special fund managed by an independent
trustee.

d. Differencebetween certain revenueand expense items recognized in financial statements

but not in income tax return.

58. Naimal Limited (RL) has a 75% owned subsidiary Sumbul Limited (JL). During the year
ended December 31, 2022. NL sold inventory to SL for an invoiced price of Rs. 1600,000.
Since then SL has sold 75% of that inventory onto third parties. The sale was at a mark up of
25% on cost to NL. SL is the only subsidiary of NL. .............. is the adjustment to inventory
that would be included in the consolidated statement of financial position of NL as at
December 31,2022. (EXAM QUESTION DECEMBER 2023) (SIMILAR QUESTION
JUST COMPANY NAME CHANGED)

a) Rs. 100,000. b) Rs. 240,000.

c) Rs. 80,000. d) Rs. 320,000.

REFERENCE: FROM ACCA THE ASSOCIATION OF CHARTERED CERTIFIED

ACCOUNTANTS FINANCIAL REPORTING (FR) EXAM KIT - VALID FOR
SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020
EXAMINATION SITTINGS EXACT SAME QUESTION PRICES MULTIPLY BY 2
AND COMPANY NAME CHANGED MCQ NO 147 ON PAGE NO 44 ANSWER IS
ON PAGE NO 235

SOLUTION:

The profit onthe $800,000 sale is Rs. 320,000 (Rs. 1,600,000 x 25/125).
As 75% of the goods have been sold on to third parties, 25% remain in inventory at the
year end. Unrealised profits only arise on goods remaining in inventory at the year end,
so the unrealised profit is Rs. 80,000 (Rs. 320,000 x 25%).

59. On January 1, 2022, Blueberry Limited received Rs. 2500,000 from the government on
the condition that they employee at least 100 staff each year for the next 4 years. On this date,
it was almost certain that BL would meet these requirements. However, on January 1, 2023
due to an economic downturn and reduced consumer demand. BL could not manage to
employ 100 staff. The conditions of the grant required full payment. (EXAM QUESTION
DECEMBER 2023)

Required:

Explain how theabove event will be dealt in thefinancial statements of Blueberry Limited.

REFERENCE: ACCA THE ASSOCIATION OF CHARTERED CERTIFIED

ACCOUNTANTS FINANCIAL REPORTING (FR) EXAM KIT - VALID FOR
SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020
EXAMINATION SITTINGS MCQ NO 5 ON PAGE NO 2 ANSWER ON PAGE
NO 203

Answer: This is a revenue grant, and would therefore be released to the

statement of profit or loss over the 4 year life. By the end of year one, Rs.
2500,000 would have been credited to the statement of profit or loss, leaving Rs.
750,000 held in deferred income. At this point the amount is repaid, meaning
that the deferred income is removed, as well as the Rs. 250,000 income
previously recorded.

60. H Limited (HL) acquired an item of plant on July 1, 2018, at cost of Rs. 500,000.
It has a useful life of five years (straight line depreciation) and an estimated residual
value of 10% of its historical cost or current cost as appropriate. As at June 30, 2020,
the manufacturer of the plant still makes the same item of plant and its current price is
Rs. 600,000 is the correct carrying amount to be shown in the statement of
financial position of HL as at June 30, 2020 under historical cost and current cost.
(EXAM QUESTION DECEMBER 2023)

a. Historical cost: Rs. 320,000, current cost Rs. 360,000.

b. Historical cost: Rs. 300,000, current cost Rs. 360,000.
c. Historical cost: Rs. 320,000, current cost Rs. 384,000.
d. Historical cost: Rs. 300,000, current cost Rs. 384,000.

REFERENCE: FROM ACCA PAPER F7 FINANCIAL REPORTING MCQ

bank – accounting for inflation MCQ NO 288 ON PAGE NO 101 SAME
QUESTION COMPANY NAME CHANGED AND $ CHANGED TO RS.
ANSWERON PAGE NO 189

SOLUTION:

61. At December 31, 2022, Zaka Limited (ZL) carried receivables from Haris Limited
(HL), a major customer for Rs. 10 million. The authorization date of financial
statements is February 16, 2023. HL declared bankruptcy on February 14, 2023.
Which of the following step is most appropriate for ZL in the above situation?
(EXAM QUESTION DECEMBER 2023) (DOUBTFUL)

a. Disclose in the notes to the financial statements the fact that HL has been
bankrupted.

b. Reverse the sale pertaining to this receivables in the comparatives for the prior
period and treat this as an error.

c. Ignore the event and wait for the outcome ofthe bankruptcybecause the event took
place after the year-end.

d. Make a provision for this post-reporting period event in its financial

statements.

REFERENCE: https://www.coursehero.com/file/p4205sq4/The-entity-should-
provide-P100000000-because-this-is-an-adjusting-event-and-the/

SOLUTION:
D is the answer 7.5%. EXAM QUESTION 2023.
C is the answer. EXAMQUESTION 2023.
C is the answer. EXAMQUESTION 2023.
62. At June 30, 2020 R Limited (RL) trial balance showed a brand at cost of Rs. 30 million,
less accumulated amortization brought forward at July 1, 2019, of Rs. 9 million. Amortization
is based on a 10 year useful life. An impairment review on January 1, 2020, concluded that he
brand had a value in use of Rs. 12 million and a remaining useful life of three years.
However, on the same date RL received an offer to purchase the brand for Rs. 15 million. The
carrying amount of the brand in the statement of financial position of RL as at June 30, 2020
is . (EXAM QUESTION 2023)

a) Rs. 8 million. b) Rs. 23 million.

c) Rs. 12.5 million. d) Rs. 10 million.

REFERENCE: FROM ACCA PAPER F7 FINANCIAL REPORTING CBE style OTQ

bank – intangible assets MCQ NO 50 ON PAGE NO 13 EXACT SAME QUESTION
COMPANY NAME CHANGED $ SYMBOL CHANGED TO RS.

SOLUTION:
RS.
Recoverable amount – fair value less costs ofdisposal 15.0
Less depreciation (15m/ 3 x 6/12) (2.5)
12.5

63. P (PL) amounted to Rs. 140 million at 10% and Rs. 200 million at 8% in place throughout
the year ended December 31, 2019 which constitutes its general borrowings for the period.
On July 1, 2019 the company obtained Rs. 50 million loan for construction of a qualifying
asset which was completed during 2019, amount should be capitalized as
borrowing costs at December 31, 2019 in respect of this asset. (EXAM QUESTION 2023)

a) Rs. 2.8 million. b) Rs. 4.4 million.

c) Rs. 2.2 million. d) Rs. 5.6 million.

REFERENCE: FROMACCA PAPER F7 FINANCIAL REPORTING MCQ bank–

tangible non-current assets MCQ NO 22 ON PAGE NO 8 EXACT SAME QUESTION
COMPANY NAME CHANGED $ SYMBOL CHANGED TO RS.

SOLUTION:
Weightedcapitalisation rate = (10% x 140 / 340) + (8% x200 / 340) = 4.1% + 4.7% = 8.8%
Rs. 50 million x 8.8% x 6/12 = Rs. 2.2 million

64. Shujat Limited is in the process of finalizing its financial statements. The management has
corrected a prior period error in the comparative information presented in the financial statements for
the year ended December 31, 2022. Explain the information that the company is required to disclose in
respect of prior period errors. (04) (EXAM QUESTION 2023)

65. R Limited acquired computers on January 1, 2019 amounted to Rs. 2 million. The asset is
depreciated at 25% a year on straight line basis, while tax authority permits the company to
depreciate the asset at 30% a year for tax purposes. The tax rate applicable on company is
29%. The deferred tax liability which might arise on the plant and equipment at December 31,
2019 would be: (EXAM QUESTION 2023)

a. Zero b. Rs. 435,000 c. Rs. 100,000 d. Rs. 29,000

SOLUTION: 2,000,000*25%=500,000 , 2,000,000*30%=600,000 ,

600,000-500,000=100,000 , 100,000*29%=29,000
66. On March 1, 2019, S Limited received Rs. 8 million from local government on the
condition that they employ at least 80 staff each year for the next 4 years. Due an economic
down turn on March 1, 2020 the company no longer needed to employ any more staff and the
condition of the grant required full repayment. Identify the best option from the following that
should be recorded in the financial statements as on March 1, 2020: (EXAM QUESTION
2023)

a) Reduced deferred income by Rs. 6 million and recognize a loss ofRs. 2 million.
b) Reduced deferred income balanceby Rs. 8 million
c) Reduced deferred income balanceby Rs. 6 million
d) Reduced deferred income by Rs. 8 million andrecognize a loss of Rs. 2 million.

REFERENCE: SIMILAR QUESTION FROM ACCA THE ASSOCIATION OF

CHARTERED CERTIFIED ACCOUNTANTS FINANCIAL REPORTING (FR)
EXAM KIT - VALID FOR SEPTEMBER 2019, DECEMBER 2019, MARCH 2020
AND JUNE 2020 EXAMINATION SITTINGS KAPLAN PUBLISHING MCQ NO 5
ON PAGE NO 2 ANSWER ON PAGE NO 203.

67. Zafar Limited (ZL) has 5%, Rs. 100 redeemable preference shares in issue which will be
redeemed in 5 years’ time. How should the preference shares capital and preference dividend
be presented in the financial statements of ZL?

a. Preference shares capital as equity and preference dividend in the statement of profit or
loss.

b. Preference shares capital as a liability and preference dividend in the statement of changes
in equity.

c. Preference shares capital as a liability and preference dividend in the statement of

profit or loss.

d. Preference shares capital as equity and preference dividend in the statement of changes in
equity.

EXPLANATION: Preference share capital as a liability and preference dividend in the

statement of profit or loss. Explanation- Apart from equity share, redeemable
preference share are considered liability as their payment it is payable on priority.
FROM THE FOLLOWING SITE
(https://www.chegg.com/homework-help/questions-and-answers/financial-assets-
financial-abilities-redeemed-5-years-time-statement-changes-equity-b-4-sh-q84040427)
68. Sterling Limited issued a 8% Rs. 30 million convertible loan note on January 1, 2019 at
par. Interestis payable in arrears on December 31 each year. The loan note is redeemable at
par on December 31, 2021 or convertible into equity shares at the option of the loan note
holders on the basis of 30 shares for each Rs. 100 of loan. A similar instrument without the
conversion option would have an interest rate of 10% per annum.

The present values of Rs. 1 receivable at the end of each year based on discount rates of 8%
and 10% are:

Year end 8% 9%
2019 0.930 0.910
2020 0.860 0.830
2021 0.790 0.750

is theamount that will becredit to equity on January 1, 2019 in respect of this

financial instrument. (EXAM QUESTION 2023)

a) Rs. 1524,000. b) Rs. 5976,000.

c) Rs. 324,000. d) Rs. 9000,000.

SOLUTION: EXACT SAME QUESTION COMPANY NAME CHANGED AND $

SYMBOL CONVERTED TO RS.
69. For which category of financial instruments are transaction costs excluded from the initial
value and instead expensed to profit or loss? (EXAM QUESTION 2023) (FEB EXAM
2024)

a. Financial assets at fair value throughprofit or loss

b. Financial assets at amortized cost
c. Financial assets at fair valuethrough other comprehensive income
d. Financial liabilities at amortized cost

EXPLANATION: Transaction costs are included when measuring all financial assets
and liabilities at amortised cost, and when valuing financial assets valued at fair value
through other comprehensive income.
Transaction costs for financial assets valued at fair value through profit or loss are
expensed through the statement of profit or loss and not included in the initial value of
the asset.

70. EXAMQUESTION 2023 ANSWER IS D.

71. Tax planning opportunities are actions that the entity would take in order to create
or increase taxable income in a particular period before the expiry of a tax loss or tax
credit carryforward. Enlist the ways in which taxable profit maybe created or
increased. (EXAM QUESTION 2023)

Answer. Tax planning opportunities are actions that the entity would take in
order to create or increase taxable income in a particular period before the
expiry of a tax loss or tax credit carryforward. For example, in some
jurisdictions, taxable profit may be created or increased by:

(a) electing to have interest income taxed on either a received or receivable basis;

(b) deferring the claim forcertain deductions from taxable profit;

(c) selling, and perhaps leasing back, assets that have appreciated but for which
the tax base has not been adjusted to reflect such appreciation; and

(d) selling an asset that generates non-taxable income (such as, in some
jurisdictions, a government bond) in order to purchase another investment that
generates taxable income.

Where tax planning opportunities advance taxable profit from a later period to
an earlier period, the utilisation of a tax loss or tax credit carryforward still
depends on the existence of future taxable profit from sources other than future
originating temporary differences.
72. On January 1, 2020, Sattu Limited (SL) sold a property at its fair value of Rs. 20
million and transfer title to the property on that date. SL then leased it back under a
five year lease, paying Rs. 1500,000 per annum on December 31 each year. The
present value of rentals payable was Rs. 5990,000 and the interest rate implicit in the
lease was 8%. The carrying amount of the property on January 1, 2020 was Rs. 16
million and it had a remaining useful life of 20 years. SL will charge depreciation
amounting to and finance cost in the statement of profit or loss for the year ended
December 31, 2020.

a) Depreciation: 800,000 and finance cost: 359,200.

b) Depreciation: 958,400 and finance cost: 359,200.
c) Depreciation: 958,400 and finance cost: 479,200.
d) Depreciation: 800,000 and finance cost: 479,200.

SOLUTION: ANSWER MULTIPLY BY 2 SEE OPTIONS.

73. In which of the following situation a company would not recognize a deferred tax liability
for taxable temporary differences? (FEB EXAM QUESTION 2024)

a) Temporary differences associated with investments in subsidiaries when the parent is

able to control the timing of reversal of the temporary differences and is probable that
the temporary difference will not reverse in future.

b) In all of these situations a company would not recognize a deferred tax liability for taxable
temporary differences.

c) The initial recognition of an asset or liability in the transaction that is not a business
combination and does not affect accounting/taxable profit.

d) Theinitial recognition of goodwill.

REFERENCE: FROMTHIS WEBSITE

https://www.accaglobal.com/content/dam/acca/global/PDF-
students/acca/p2/exampapers/irl/p2irl-2013-dec-a.pdf

EXPLANATION: Under IAS 12, a deferred tax liability is recognised for all
taxable temporary differences associated with investments in subsidiaries, etc,
except to the extent that the parent, investor or venturer is able to control the
timing of the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.

74. In accordance with IAS 1 “Presentation of Financial Statements”, an entity whose

financial statements comply with IFRSs shall make an and statement of such
compliance in the notes. (FEB EXAM QUESTION 2024)

a) Explicit, unreserved. b) Implicit, unreserved.

c) Explicit, reserved. d) Implicit, reserved.

REFERENCE: FROM 15657 PAGES FILE

EXPLANATION:
75. HL granted its Finance manager, Mr. Ali the right to choose either 1 million shares or to
receive a cash payment equal to 750,000 shares. At the grant date, the value of the market
price of the share was Rs. 60. HL estimated that the fair value of the share alternative is Rs.
50 per share. Explain how this transaction will be accounted for in the books of HL. (FEB
ATTEMPT 2024)

Answer:
Value of 1 million shares at grant date = 1 million x 60 = 60 million
Cash payment at maturity = 750,000 x 50 = 37.5 million
If employee accepts the share optionof 750,000 shares at maturity, the loss will be
recognized. At amount of Rs. 22.5 million.

76. Accounting profit of M Limited (ML) for the year ended December 31, 2019 amounted to Rs.
2500,000. It includes depreciation of Rs. 450,000 and disallowable expenses of Rs. 200,000. Tax
authority allows depreciation of Rs. 300,000. The applicable tax rate is 29%. The tax expenses for
the year ended December 31, 2019 is: (FEB EXAM QUESTION 2024)

a) Rs. 725,000. b) Rs. 826,500. c) Rs. 638,000. d) Rs. 913,500.

REFERENCE: SIMILAR QUESTION FROM CIMA Practice & Revision Kit

QUESTION NO 17 FROM BPP LEARNING MEDIA ANSWER IS ON PAGE
NO 261 OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR
EXAMS IN 2014.

SOLUTION:
Rs Rs
Accounting profit 2500,000
Add: depreciation 450,000
Disallowed expenses 200,000
650,000
3150,000
Less: tax allowable depreciation (300,000)
Taxable profit 2850,000

Tax payable = Rs. 2850,000 x 29% = 826,500

77. Quartz Limited (QL) entered into a contract on January 1, 2019 to build a factory. The
total contract revenue was Rs. 2.8 million. At December 31, 2019, the contract was certified
as 35% completed. Costs incurred during the year amounted to Rs. 740,000 and costs to
complete are estimated at Rs. 1.4 million. Rs. 700,000 has been billed to the customer but not
yet paid. Identify whether the contract will be recognized as a contract asset or liability and
what the carrying amount will be in the statement of financial position of QL as at December
31, 2019? (FEB ATTEMPT 2024)

a) contract asset Rs. 271,000. b) contract liability Rs. 271,000.

c) contract asset Rs. 311,000. d) contract liability Rs. 271,000.

REFERENCE: EXACT SAME QUESTION COMPANY NAME CHANGED

AND $ SYMBOL CHANGED TO RS FROM CIMA Practice & Revision Kit
QUESTION NO 76 FROM BPP LEARNING MEDIA ANSWER IS ON PAGE
NO 120 OPERATIONAL PAPER F1 FINANCIAL OPERATIONS FOR
EXAMS IN 2014.
78. D Limited has the existing debit balance on the current tax account of Rs. 2.4 million
which represents the over/under provision of the tax liability for the year ended December 31,
2019. A provision of Rs. 28 million is required for income tax for the year ended December
31, 2020. The existing credit balance on the deferred tax account is Rs. 2.5 million and the
provision required at December 31, 2020 is Rs. 4.4 million. is the total amount which
will be charged to the statement of profit or loss of DL for the year ended December 31, 2020
in respect of taxation.

a) Rs. 30,400,000. b) Rs. 28,000,000. c) Rs. 32,300,000. d) Rs. 29,900,000.

REFERENCE: EXACT SAME QUESTION JUST $ SYMBOL CHANGED TO RS

AND COMPANY NAME CHANGED

QUESTION WITH SOLUTION

79. In accordancewith IAS 8“Accounting policies, changes in accounting estimates and
errors” how is a change in accounting estimate accounted for:

a) Bychanging thecurrent year figures andthe previous year figures.

b) No alteration of any figures but disclosure in thenotes.

c) Neither alteration of any figures nor disclosure in thenotes.

d) By changing thecurrent year figures but not theprevious year’s figures.

REFERENCE: EXACTSAME QUESTION ANDANSWER. OPTIONS ARE REARRANGED.

80. FL has built a newfactory incurring thefollowing costs:

Rupees
Land 1200,000
Material 2400,000
Labor 3000,000
Architect’s fee 25,000
Surveyor’s fee 15,000
Site overhead 300,000
Apportioned overhead 150,000
Testing of fire alarms 10,000

What is theamount of capital expenditure?

a) Rs. 7112,000. b) Rs. 7100,000. c) Rs. 6112,000. d) None./6950,000

REFERENCE: EXACT SAME QUESTION COMPANY NAME CHANGED & $

CHANGED TO RS.
81. Thefollowing details apply to a contract whereperformance obligations aresatisfied over
time at December 31, 2020.

Rupees “000”
Total contract revenue 120,000
Costs to date 48,000
Estimated costs to complete 48,000
Contract asset 8400

The contract is agreed to be 45% completed at December 31, 2020. Which one of the
following represents correct option for “amount invoiced” in respect of this contract?

a) Rs. 10.8 million. b) Rs. 120 million.

c) Rs. 3.78 million. d) Rs. 50.4 million.

REFERENCE: EXACT SAME QUESTION COMPANY NAME CHANGED & $

SYMBOL CHANGED TO RS.

SOLUTION:
Rs. (000)
Cost incurred to date 48,000
Recognised profits (W) 10,800
Amount invoiced (50,400)
Contract asset 8400

Working
Total contract revenue 120,000
Costs to date (48,000)
Costs to complete (48,000)
Total expected profit 24,000
Profit to date (24,000 x 45%) 10,800
82. Following areextracts from K Limited’s (KL) statement of financial position as at
June30:

Rs “000”
2021 2020
Property, plant and equipment 1905,000 1935,000
Non-current asset investments at fair value 279,000 321,000
Deferred development expenditure 87,000 72,000

During the year to June 30, 2021, the company sold property, plant and equipment of Rs. 135
million. It had originally cost 966 million and had its carrying value of 180 million at the date
of disposal. KL’s statement of profit or loss for the year ended June 30, 2021, included:

Depreciation of property, plant and equipment of Rs. 360 million.

Amortization of deferred development expenditure of Rs. 24 million.
Revaluation loss on investment of Rs. 63 million.

is the cash flows from investing activities section of KL’s

statement of cash flows for the year ended June 30, 2021.

a) Rs. 570 million outflow. b) Rs. 435 million inflow.

c) Rs. 435 millionout flow. d) Rs, 135 million inflow.

SOLUTION: EXACT SAME QUESTION COMPANY NAME CHANGED AND $

CHANGED TO SYMBOL RS. (EVERY VALUE DIVIDED BY 3) (1905,000 / 635
million= 3 & 1935,000 / 645 million= 3 and so onwards)
83. H Limited (HL) statement of profit and loss and other comprehensive income
showed a profit before tax of Rs. 3600,000. After the year end and before the
financial statements were authorized for issue, the following events took place:

The value of an investment held at the year end fall by Rs. 170,000.

A customer who owned Rs. 232,000 at the year end went bankrupt owing a total of
Rs. 276,000.

Inventory valued at cost Rs. 322,000 in the statement of financial position was sold
for Rs. 282,000. Assets with a carrying value at the year end of Rs. 480,000 were
unexpectedly expropriated by government. is the HL’s profit after making the
necessary adjustments for these events.

a) Rs. 3158,000 b) Rs. 2798,000

c) Rs. 3328,000 d) None is correct.

SOLUTION: EVERYTHING MULTIPLY BY 2. COMPANY NAME

CHANGED $ SYMBOL CHANGED TO RS.
84. Whichone of thefollowing does not represent akey step in the application of IFRS 8
“operating segments”? (DOUBTFUL)

a) identifying operating segments.

b) determining reportable operating segments.

c) Disaggregating information about reportablesegments.

d) Disaggregating reportable segments.

REFERENCE: FROM 4960 PAGES FILE.

85. For users of financial statements, the current liability classification in the statement of
financial statement is important because it is closely tied to the concept of:

a) Materiality. b) Leverage. c) Profitability. d) Liquidity.

EXPLANATION:

86. Which of thefollowing statements arecorrect as per IAS 1:

i) All financial statements areprepared using theaccrual basis of accounting.

ii) Thecompany shall reclassify comparativeamounts unless reclassification is impracticable.

a) option(i) and (ii) are correct. b) option (i) is correct only.

c) option (ii) is correct only. d) none of the option is correct.

REFERENCE: FROMTHIS WEBSITE

https://www.ipsasb.org/_flysystem/azure-private/publications/files/ipsas-1-presentation-
of-f-1.pdf

READ PAGE NO 9 & 22

87. Which one of the following statements about IAS 20 “Government Grants and
Disclosure of Government assistance” is true?

a) A grant related topurchase of an asset must be deducted from thecarrying amount of

the asset in the statement of financial position.

b) Free marketing advice provided by government department is included in the

definition of the government grant.

c) A grant related topurchase of an asset should be recognized in profit or loss over the
life of the asset.

d) Required repayment of a government grant received in earlier reporting period is

treated as prior period adjustment.

SOLUTION:
88. The IAS 7 format for a statement of cash flows using the indirect method opens with
adjustments to net profit before taxation to arrive at cash flow from operating activities.
Which of the following lists consists only of items that would be deducted in that calculation?

a) Loss on sale of non current assets, increase in inventories, decrease intradepayables.

b) Increase in trade receivables, profit on sale of non-current assets, decrease in trade

payables.

c) Depreciation, increase intrade receivables, decrease intrade payables.

d) Profit on sale of non-current assets, increase intrade payables, decrease intrade receivable.

SOLUTION:
89. Which one of the following is not included in the definition of an operating segment in
accordance with IFRS 8 Operating Segments?

a) A component of a company that earns the majority of its revenue from sales to
external customers.

b) A component of a company whose operating results are regularly reviewed by the

company’s chief operating decision maker, to make decisions about resource allocation and
assess performance.

c) A component of a company that engages in business activities from which it may earn
revenues and incur expenses.

d) Acomponent of a company for which discretefinancial information is available.

SOLUTION:

90. Which one of thefollowing would not be a lineitem of acompany’s reporting cost by
function?

a) utilities expenses. b) manufacturing.

c) distribution. d) administration.

EXPLANATION: To record the expenses by the function, they are being reported as
per the type of activity being conducted. There are different lines of expenses of a
company for reporting the varied kind of expenses for example administrative expenses,
financial expenses, manufacturing expenses, marketing expenses and selling expenses.
This approach shows the clear picture of each and every amount spend in the
productionprocess.
91. Thecommencement date of capitalization of borrowing cost is the date when the entity
first meets all of the following conditions, except:

a) Activities necessary to prepare the qualifying assets for its intended use or sell are
complete.

b) It incurs borrowing cost.

c) It incurs expenditures for theasset.

d) It undertakes activities that arenecessary topreparethe asset for its intended use or sell.

REFERENCE: FROMTHIS WEBSITE

https://www.ifrs.org/content/dam/ifrs/publications/pdf-
standards/english/2022/issued/part-a/ias-23-borrowing-costs.pdf?bypass=on

READ PAGE NO 6 & 7

92. Which of the following concepts aims to ensure that excess dividends are not paid in
times for charging prices?

a) faithfulrepresentation. b) capital maintenance.

c) amortized cost. d) going concern.

SOLUTION:
93. Which of thefollowing factors arereasons why key staff cannot becapitalized as an
intangible asset by a company?

(i) they do not provide expected future economic benefits.

(ii) theycannot becontrolled by a company.

(iii) their valuecannot be measured reliably.

(iv) theyarenot separable fromthebusiness as a whole.

a) option(ii) and (iii) are correct. b) option (iii) and (iv) are correct.
c) option (i) and (ii) arecorrect. d) option (ii), (iii) and (iv) arecorrect.

SOLUTION:
94. On August 1, 2020, Z Limited acquired 80% of the share capital of P Limited and is
preparing its group financial statements for the year ended Dec 31, 2020. How will P
Limited’s results will be included in the group statement of profit or loss?

a) 100% of P Limited’s revenue and expenses for the period August 1, 2020 to
December 31, 2020.

b) 80% of P Limited’s revenue and expenses for the period August 1, 2020 to December
31, 2020.

c) 100% of P Limited’s revenue and expenses for theyear ended December 31, 2020.

d) 80% of P Limited’s revenue and expenses fortheyear ended December 31, 2020.

SOLUTION:
95. A Limited deals extensively with foreign entities and its financial statements reflect those
foreign currency transactions. After statement of financial position date and before the date of
authorization of the issuance of financial statements, there were abnormal fluctuations in
foreign currency rates. In these circumstances which one of the following step the company
should take.

a) Adjust the foreign exchange year end balances to reflect theabnormal adverse fluctuations
in foreign exchange rates.

b) Disclose the post statement of financial position event in the notes as a non-adjusting
event.

c) Ignorethepost statement of financial position event.

d) Adjust theforeign exchange year end balances to reflect all abnormal adverse fluctuations
in foreign exchange rates and not just abnormal movements.

REFERENCE: FROMTHIS WEBSITE

https://www.flashcardmachine.com/ias-final.html
96. E Limited signed a contract leasing a vehicle to excellent limited. Following are the
details of terms of lease contract:
The lease commenced on January 1, 2019 for a period of four years.
Rs. 500,000 are payable in arrears in respect of lease payments.
There is no optionof renewal ofthe lease agreement and its purchase.
The interest rate in the lease is 10%.
The fair value of the vehicle amounted to Rs. 1585,000 on January 1, 2019 and the
useful life is estimated to be 5 years.
The lease does not transfer ownership ofthe vehicle to Excellent Limited.

Required:
Discuss whether the lease contract should be classified as a finance or operating lease.
(EXAM QUESTION FEB 2024)

Answer:

This transaction would be classified as an operating lease as Excellent Limited does not get to
use the asset for most of/all of the assets useful economic life and therefore it can be argued
that they do not enjoy all the rewards fromthis asset.

In addition to this, the present value of the minimum lease payments, would be substantially
less than the fair value of the asset. Also, The lease does not transfer ownership of the vehicle
to Excellent Limited.
97. On January 1, 2020, Meezan Limited (ML) acquired an oil platform at a cost
of Rs. 60 million. The estimated cost of removing the platform at the end of
the asset’s useful life will be Rs. 30 million. The present value Rs. 1 in 10
years’ time using ML’s cost of capital of 8% of 0.463. If ML makes the
provision what liability will be shown in its statement of financial position as at
December 31, 2020?

Answer: The provision should be recorded at the present value of Rs. 13890000 initially (Rs.
30 million x 0.463). After this, the discount on the provision must be unwound, meaning the
provision will increase by 8% a year. Therefore the year‐end provision is Rs. 13890000 x
1.08 = 15001200

REFERENCE: SIMILAR QUESTION VALUES CHANGED READ SECOND

PARAGRAPH ONLY PERCENTAGE AND 0.463 VALUES ARE SAME REST 15
million x 2 & 30 million x 2.

98. As per IAS 24, enlist any six examples where related party transactions are to be
disclosed in the period in which they occur.

Answer:
Thefollowing areexamples of the related party transactions in respect
of which disclosures may be made by a reporting enterprise:
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of fixed assets;
(c) rendering or receiving of services;
(d) agency arrangements;
(e) leasing or hirepurchasearrangements;
(f) transfer of researchand development;
(g) licence agreements;
(h) finance(including loans and equity contributions in cash or in kind);
(i) guarantees and collaterals; and
(j) management contracts including for deputation of employees.

99. IAS 7 defines cash equivalent as highly liquid investments that are held to meet short
term cash commitments rather than for investment purposes. In order to qualify as cash
equivalents, highly liquid investments must meet certaincriteria, enlist those criteria.

Answer: Cash and cash equivalents comprise cash on hand and demand deposits, together
with short-term, highly liquid investments that are readily convertible to a known amount of
cash, and that are subject to an in significant risk of changes in value.
Guidance notes indicate that an investment normally meets the definition of a cash equivalent
when it has a maturity of three months or less from the date of acquisition. Equity
investments are normally excluded, unless they are in substance a cash equivalent (e.g.
preferred shares acquired within three months of their specified redemption date). Bank over
drafts which are repayable on demand and which form an integral part of an entity's cash
management arealso included as a component of cash and cash equivalents.

100. List down the criteria that must be satisfied in order to recognize an intangible
asset raised from development phase. Also enlist examples of development activities as
described in IAS 38.

Answer: Recognition criteria for intangibleassets under IAS 38:

Under IAS 38, an intangible asset arising from development must be capitalized if an entity
can demonstrate all of the following criteria: the technical feasibility of completing the
intangible asset (so that it will be available for use or sale) intention to complete and use or
sell the asset.
Examples of development Activities:
a) Formulating product and process designs
b) Testing products and processes
c) Modifying formulas, products, or processes
d) Designing and testing prototypes
e) Designing tools that involve new technology
f) Designing and operating a pilot plant

101. AL limited was established on January 1, 2018 with the help of government
participation in the ownership of company. On January 1, 2019 AL applied for
government grant of Rs. 15 million for the purpose of acquisition of a nuclear plant.
Explain whether AL is eligible to apply for government grant. Enlist the circumstances
inwhich IAS 20 “Government grants and Government assistance” is not applicable.

Answer: Since IAS 20 does not deal with provision of general infrastructure, hence this not
apply to acquisition of nuclear plant.
The requirements of this standard are applicable for the recognition and measurement of
government grants including the disclosure requirements related to government grants and
government assistance.
However this standard does not deal with thefollowing aspects:
Government assistance in the form of tax related benefits such as income tax credits, tax
breaks, orreduced tax rates.
Benefits in theformof, government participation in the ownership of the entity
Government grants which are covered under IAS 41
Treatment of government grants dueto thechanging price levels.
Provision of general infrastructure
102. Enlist those conditions when an entity becomes related party of reporting entity in
accordance with IAS 24.

Answer: A related party is a person or entity that is related to the entity that is preparing its
financial statements (referred to as the 'reporting entity')
(a) A person or a close member of that person's family is related to a reporting entity if that
person:
o (i) has control or joint control over thereporting entity;
o (ii) has significant influence over thereporting entity; or
o (iii) is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.
(b) An entity is related to a reporting entity if any of thefollowing conditions applies:
o (i) The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
o (ii) One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
o (iii) Both entities arejoint ventures of thesame third party.
o (iv) One entity is a joint venture of a third entity and the other entity is an associate of the
third entity.
o (v) The entity is a post-employment defined benefit plan for the benefit of employees of
either the reporting entity or an entity related to the reporting entity. If the reporting entity is
itself such a plan, the sponsoring employers are also related to the reporting entity.
o (vi) The entity is controlled or jointly controlled bya person identified in(a).
o (vii) A person identified in (a)(i) has significant influence over the entity or is a member of
the key management personnel of the entity (or of a parent of the entity).
o (viii) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity*.

103. Discuss importance ofcash flows for business.

Answer: The cash flow is important because it is used to measure the cash position of the
business, i.e., the inflow and outflow of cash and cash equivalents in the business for an
accounting year, and it also helps the business to know the availability of cash in their
business. Cash flows helps the business in following ways:

1. MakeBetter Plans and Decisions:

With an accurate cash flow statement, company know the exact amount of funds the company
has available at any given moment. This is vital because any plans and decisions made must
be supported by accurate information.

2. Understand Where You’re Spending Money

Manage your cash flow effectively and you’ll gain a better understanding of where you’re
currently spending your money, something that's not on a profit and loss statement. It’s
important to know exactly where the money you spend is going and why.

3. Protect Business Relationships:

If business is having cash flow problems, then it may not have the funds available to pay
suppliers. This can harm the business relationship with them and damage overall reputation of
thebusiness.

4. Expand at the Right Time

Growing and expanding business requires new markets, new staff members and more
revenue. But if business expansion is at the wrong time or in the wrong way and it is more
likely to have issues in the long-term.
104. Discuss the information which anentity is required to disclose as per IAS 24.

Answer: Disclosure Relationships between parents and subsidiaries. Regardless of whether

there have been transactions between a parent and a subsidiary, an entity must disclose the
name of its parent and, if different, the ultimate controlling party. If neither the entity's parent
nor the ultimate controlling party produces financial statements available for public use, the
name of the next most senior parent that does so must also be disclosed. [IAS 24.16]
Management compensation. Disclose key management personnel compensation in total and
for each of the following categories: [IAS 24.17]
short-term employeebenefits
post-employment benefits
other long-term benefits
termination benefits
share-based payment benefits

Related party transactions. If there have been transactions between related parties, disclose
the nature of the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the relationship
on the financial statements. These disclosure would be made separately for each category of
related parties and would include:
theamount of the transactions
the amount of outstanding balances, including terms and conditions and guarantees
provisions for doubtful debts related to the amount of outstanding balances
expense recognized during the period in respect of bad or doubtful debts due from related
parties

105. As per IAS 37, discuss the situations in which constructive obligation to restructure
arise for a company.

Answer: Restructuring provisions should berecognized as follows:

Saleof operation: recognizea provision only after a binding saleagreement.
Closure or reorganization: recognize a provision only after a detailed formal plan is adopted
and has started being implemented, or announced to those affected. A board decision of itself
is in sufficient.
Future operating losses: provisions are not recognized for future operating losses, even in a
restructuring
Restructuring provision on acquisition: recognize a provision only if there is an obligation at
acquisition date

106. Discuss how a company will recognize the following items in its financial
statements.

1. TL provides legal services and hold computers for long term use in maintaining the
customer list and recording daily transactions.
2. TL holds cleaning supplies that areused by thecompany in production process.

Answer:
1. TL is service provider, hence it will record service revenue in its Statement of profit or
loss. TL holds computers for long term use, hence it is a non current asset and it will be
shown at carrying value (cost – depreciation expense) in Statement of financial position.
Customer list is an intangible asset which is amortized over its useful life and its carrying
amount is shown in Statement of financial position.
2. Cleaning supplies are used in production process, hence these are considered as indirect
materials and these are expensed in Statement of profit and loss as revenue expenditure.
107. State the situations in which the carrying amount of deferred tax assets and
liabilities may even change even though there is no change in the amount of related
temporary differences.

Answer: The general principle in IAS 12 is that a deferred tax liability is recognised for all
taxable temporary differences. There are three exceptions to the requirement to recognise a
deferred tax liability, as follows:

liabilities arising frominitial recognition of goodwill.

liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting or the
taxable profit and at the time of the transaction, does not give rise to equal taxable and
deductible temporary differences.
liabilities arising from temporary differences associated with investments in subsidiaries,
branches, and associates, and interests in joint arrangements, but only to the extent that the
entity is able to control the timing of the reversal of the differences and it is probable that the
reversal will not occur in the fore see able future.

108. T Limited has acquired a software for its newly established business. Discuss the
factors that the company would consider in determining the useful life of intangible
asset.

Answer: Classification of intangibleassets based on useful life

Intangible assets are classified as: [IAS 38.88]
Indefinite life: no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
Finitelife: a limited period of benefit to the entity.
Measurement subsequent to acquisition: intangibleassets with finite lives
Thecost less residual value of an intangible asset with a finite useful life should beamortized
on a systematic basis over that life:
Theamortization method should reflect thepattern of benefits.
If thepattern cannot bedetermined reliably, amortize by thestraight-line method.
Theamortization charge is recognized in profit or loss unless another IFRS requires that it
be included in the cost of another asset.
Theamortization period should bereviewed at least annually. [IAS 38.104]

109. Elaborate any five disclosure requirements under IFRS 3.

Answer: Disclosure
Disclosureof information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to
evaluate the nature and financial effect of a business combination that occurs either during the
current reporting period or after the end of the period but before the financial statements are
authorized for issue.
Among the disclosures required to meet the foregoing objective are the following:
name and a description of the acquiree
acquisition date
percentage of voting equity interests acquired
primary reasons for the business combination and a description of how the acquirer
obtained control of the acquiree
description of the factors that make up the goodwill recognised
details of acquired receivables
the amounts recognised as of the acquisition date for each major class of assets acquired
and liabilities assumed
 details of contingent liabilities recognised

110. Goodwill is an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognized. Briefly explain internally generated goodwill and purchased
goodwill and clarify how does the accounting treatment of positive and negative
goodwill differ?

Answer: Purchased goodwill:

Purchased goodwill arises from transactions involving the sale of business ventures. For
instance, when one company buys another company at a value higher or lesser than the actual
value, the resulting difference in price is normally regarded as goodwill.
When goodwill is purchased, it is treated as a non-current asset in the balance sheet, on
acquisition.

Internally generated goodwill:

Internally generated goodwill also referred to as non-purchased goodwill arises from all other
sources excluding that obtained through purchase. This goodwill is therefore not recognized
as an asset of the business entity because the transactions behind the accumulation of the
goodwill are difficult or rather impossible to identify.

Accounting treatment ofpositive and negative goodwill:

In the balance sheet of the selling company, positive goodwill is recorded as an asset, whereas
negative goodwill is part of the liabilities since it reduces the valuation. Alternatively,
negative goodwill may be recorded as a contra-asset, or a reduction to assets.

111. A company owns a number of hotels in the city and is in the process of finalizing its
financial statements for the year ended June 30, 2020. In May 2020 the government
announces to install the smoke detectors at the hotels by June 30, 2020. It is estimated to
cost Rs. 1.2 million. The company always complies with the government regulations and
intends to work by June 30, 2020.

Required:
Explain whether the company is required to make a provision in respect of the above
event for the year ended June 30, 2020 or not.

Answer: According to IAS 37, Provision, contingent assets and contingent liabilities, a
provision is recorded for an increase in liability or decrease in vale of asset in future. The
company shall record the provision, since the company complies with government regulation
and the amount of the liability can be measured reliably. The company shall provide
contingent liability of the amount of 1.2 million.

112. Describe how a company may assess the probability that taxable profit will be
available against which the unused tax losses or unused tax credits can be utilized.

Answer: Recognition of deferred tax assets

A deferred tax asset is recognized for deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilized, unless the deferred tax asset arises
from the initial recognition of an asset or liability other than in a business com bi nation
which, at the time of the transaction, does not affect accounting profit or taxable profit. The
following formula can be used in the cal cu la tion of deferred taxes arising from unused tax
losses or unused tax credits.
Deferred tax asset = Unused tax loss or unused tax credits x Taxrate
A deferred tax asset is recognized for an unused tax loss carry forward or unused tax credit if,
and only if, it is considered probable that there will be sufficient future taxable profit against
which the loss or credit carry forward can be utilized.

113. Temporary differences are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base. State the situations in
which temporary differences may arise.

Answer: Taxable temporary differences are those on which tax will be charged in the future
when the asset (or liability) is recovered (or settled).
Deductible temporary differences are those which will result in tax deductions or savings in
the future when the asset (or liability) is recovered (or settled).
An example of a timing difference is rent income. Accrual accounting will only allow
revenue to be recorded when it is earned, but if a company receives an advance payment of
rental income, it must report this under taxable income on its tax return.
As such, this revenue will be recorded on the tax return but not the book income. This creates
a timing difference in this period. At a future period when the rental revenue is finally earned,
the company will record that revenue under book income but not on its tax return, thereby
reversing and eliminating the initial difference.

114. A company’s business model workinthe following way:

1. Company stores inventory in a warehouse that is leased from the wife of one of the
Board of Directors of the company. The lease rentals are at arm’s length price.
2. Company has provided an interest free loan to a company owned by the CEO of the
company for the purpose of financing the purchase of delivery vans which the company
owned by the CEO is using for transporting goods from the warehouse of the supplier to
the warehouse used by the company for string inventory.

Required: Identify which of the above transactions needs to be disclosed as related party
transaction?

Answer: 1. Wife of Board of director is a related party since he has significant influence and
related to the director. The transaction falls under head “service and lease” provided by her to
the company. Following disclosures are required in this case according to IAS 24:
2. Since interest free loan is provided that is not an arm’s length transactions, Hence the
disclosure requirements of the IAS 24 requires disclosures related to related party transactions
to be maintained in both cases as follows:
Related party transactions. If there have been transactions between related parties, disclose
the nature of the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the relationship
on the financial statements. These disclosure would be made separately for each category of
related parties and would include: [IAS 24.18-19]
theamount of the transactions
the amount of outstanding balances, including terms and conditions and guarantees
provisions for doubtful debts related to the amount of outstanding balances
expense recognized during the period in respect of bad or doubtful debts due from related
parties
115. SL is engaged in offering online access to customers to a library at an annual
membership fee of Rs. 60,000 per year. Discuss how SL should measure the progress
relating to the performance obligation.

Answer: According to IFRS 15, Performance obligation and timing of revenue recognition, A
performance obligation is a promise to transfer to the customer a good or service (or a bundle
of goods or services) that is distinct. At a contract inception, entities need to identify the
goods or services promised in that contract. This is a starting point in identifying performance
obligations. In addition to the goods or services explicitly stated in the contract, all implied
promises (e.g. by past business practices or published policies) that create a valid expectation
of the customer that the entity will transfer a distinct good or service are also treated as
separate performance obligations, even though they may not be enforceable by law.
HenceRs. 60,000 will berecognized as revenuefromperformance obligation.

116. S Limited is reviewing one of its business segments for impairment. The carrying
value of its net assets is Rs. 60 million. Management has produced two computations for
the value-in-use of the business segment. The first value (54 million) excludes the
benefits to be derived from a future reorganization, but the second value (Rs. 66 million
includes the benefits to be derived from a future reorganization. There is no active
market for the sale of the business segments. Explain whether the business segment is
impaired or not?

Answer: According to IAS 16, Impairment loss, Since there is no active market for the sale
of business segment, hence the recoverable value (Higher of Fair value less cost to sell and
Value in use) will be the value in use (Rs. 66 million), Hence there is no impairment loss,
because the Recoverable amount is greater then carrying value (Cost less Accumulated
depreciation.

117. S Limited is in the process of finalizing its financial statements. The management
has corrected a prior period error in the comparative information presented in the
financial statements for the year ended December 31, 2020. Explain the information that
the company is required to disclose in respect of prior period errors.

Answer: Disclosurerequirements IAS 10, “Events after thereporting period”.

Non-adjusting events should be disclosed if they are of such importance that non-disclosure
would affect the ability of users to make proper evaluations and decisions. The required
disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a
statement that a reasonable estimate of the effect cannot be made.
A company should update disclosures that relate to conditions that existed at the end of the
reporting period to reflect any new information that it receives after the reporting period about
those conditions. Companies must disclose the date when the financial statements were
authorized for issue and who gave that authorization. If the enterprise's owners or others have
the power to amend the financial statements after issuance, the enterprise must disclose that
fact.
118. AA being a retailer sells goods to its customers at guarantee. Explain whether AA is
required to make a provision for the cost of meeting following future guarantee
obligations:
i. The manufacturer provides the guarantee but AA provides a guarantee irrespective of
whether the manufacturer honors his guarantee.
ii. The manufacturer provides the guarantee. AA is not liable in any way.
iii. The manufacturer and AA provides a joint guarantee whereby they share the cost of
fulfilling the guarantee: AA is not liable for the amounts that the manufacturer may fail
to pay.

Answer: i. Since the manufacturer provides the guarantee and the amount of future obligation
(present or constructive) is not measurable reliably, hence no provision shall be recorded in
this case.
ii. Since the manufacturer provides the guarantee, hence AA is not required to create any
provision in this regard.
iii. AA is liable to create provision up to the amount of obligation to which AA has contracted
to pay in case of warranty claims.

119. G Limited’s ending inventory is understated by Rs. 122,000. The effect of this error
on the current year’s cost of goods sold will be and net income will be
.

a) understated, overstated. b) overstated, understated.

c) overstated, overstated. d) understated, overstated.

 REFERENCE & EXPLANATION: The correct answer is option B-

Overstated and understated

The undervaluation of the closing inventory by Rs 122,000 results in an overstatement of

the Cost of Goods Sold and an understatement of the net income of the company by Rs.
122,000.
Closing inventory is deducted from the inventory during the year to arrive at cost of goods
sold. When ending inventory is low, the cost of goods sold will automatically be
overstated.
The reason for a low net income is that the understatement of closing inventory increases
the cost of goods sold. Hence, it decreases the profit as the cost is high.
120. Which of thefollowing best describes therole of the IFRS Advisory Council?

a) To provide the Board withthe views of its members onstandard setting projects.
b) To promote theuseof IFRS standards amongst its members.
c) Toselect the members of the Board.
d) Toprepareinterpretations of the IFRS standards.

REFERENCE: FROMTHIS WEBSITE

https://www.coursehero.com/file/79556856/CF-TASKSdocx/ (MCQ NO 4)

121. Which of thefollowing criteria must be met before development expenditure is

capitalized according to IAS 38 “Intangible Assets”?
i. Thetechnical feasibility of completing the intangible asset.
ii. Futurerevenue is expected.
iii. Theintention to complete and use or sell the intangible asset.
iv. Thereis no need for reliable measurement of expenditure.

a) Option (iii) and (iv) arecorrect. b) Option(i) and (iii) are correct.
c) Option (i) and (ii) arecorrect. d) All
REFERENCE: READ POINT NO 1&2

122. In accordancewith IAS 24 “Related party Disclosures”, which one of the following
information is not required to be disclosed while preparing financial statements?

a) Theamount of outstanding balances including commitments.

b) Provision for product warranties.
c) Theexpense recognized during theperiod in respect of doubtful debts duefrom
related parties.
d) Theamounts of transactions.

REFERENCE:

123. The process for developing an International Financial Reporting Standard involves a
number of stages. Following receipt and review of comments on a discussion paper, what will
be the next step undertaken by the International Accounting Standard Board (IASB)?

a) Consultation with the Advisory committee. b) Establishment of an Advisory committee.

c) Publication ofan Exposure Draft. d) Issue of a final IFRS.

REFERENCE:

124. Which of the following meet the definition of a financial asset in accordance with IFRS
9 Financial Instruments?
i. An equityinstrument of another entity.
ii. Acontract to exchangefinancial instruments with another entity under conditions which
are potentially favorable.
iii. Acontract to exchange financial instruments with another entity under conditions which
are potentially unfavorable.
iv. Cash.

a) Option (i) and (iv) arecorrect. b) Option (i) and (ii) arecorrect.
c) Option (ii), (iii) and (iv) arecorrect. d) Option(i), (ii) and (iv) are correct.

125. Capitalization of borrowing cost:

a) Will be suspended only during extended periods of delays in which active
developments is delayed.
b) Will besuspended during temporary periods of delay.
c) Should never besuspended oncecapitalization commences.
d) May besuspended only during extended periods of delays in which active development is
delayed.

Answerand Explanation:
Capitalization of borrowing costs: (a) will be suspended only during extended
periods of delays in which active development is delayed.
Always remember that the capitalization of borrowing costs is suspended when there are
interruptions in the period of active development of some projects.
Capitalization of borrowing costs does not stop when there is a temporary delay in the
process. Option (b) is also incorrect. It must be "shall" not "may." Capitalization of
borrowing costs can be suspended once capitalization commences.
126. The International Accounting Standards Board’s conceptual framework for financial
reporting defines recognition as a process of incorporating within the financial statements an
item which meets the definition of an element and satisfies certain criteria. Which of the
following elements should be recognized in the financial statements of the company in the
manner described?

a) Inequity: irredeemable preference shares.

b) In revenue: the whole of theproceeds fromthesale of an item of manufactured plant which
has to be maintained by seller for three years as part of the sale agreement.
c) As a non current liability: a provision for possible hurricane damage to property for a
company located in an area which experiences a high incidence of hurricanes.
d) As a trade receivables: an amount of Rs. 100,000 due from a customer which has been sold
to a finance company with no recourse to the seller.

REFERENCE:

127. is referred as ownership interest of investor-owned entities and owner,

member or participant interest.
a) Equity interest. b) Mutual entity.
c) Non-controlling interest. d) Contingent consideration.

REFERENCE:

128. Financial statements represents transactions in words and numbers. To be useful, financial
information must represent faithfully, these transactions, in terms of how they are reported. Which
of the following accounting treatments, would be an example of faithful representation? (B OR D)
(DOUBTFULL)

a) Includinga convertible loan note in equity onthe basis that the holders are likelyto choose the
equity option on conversion.
b) Continuingtorecognize factoredreceivables sold withresource.
c) Trading redeemable preference shares as equity.
d) Capitalizing development costs as anintangible asset.

REFERENCE:

129. An acquirer at the acquisition date recognize goodwill acquiredin business combinationas
an asset. Goodwill is to be accounted as follow:
a) Recognize as anintangible asset andamortize over its useful life.
b) Recognize as anintangible asset and annually test for impairment or more frequently if
impairment is indicated.
c) Write off against retained earnings.
d) Recognize as anintangible assets impairment test whena trigger event occurs.

REFERENCE:
Goodwill should be accounted for as follows: (b) Recognized as an intangible
asset and impairment tested annually (or more frequently if impairment is
indicated).
When goodwill is purchased by the business, it is recognized as an intangible
asset to be tested for impairment test on a yearly basis.
Goodwill has an indefinite life. Hence, it should not be amortized. A business could
either result in a gain or a recognition of Goodwill. Gain is an addition to Retained
Earnings while Goodwill is recognized as an asset. An impairment test should be
done annually and not only when a trigger event occurs.

130. If the total external revenue reported by operating segments contribute less than of the
company’s revenue, additional operating segment shall be identified as reportable segment
until the criteria is met.

a) 45 percent. b) 50 percent. c) 75 percent. d) 60 percent.

REFERENCE:

131. In accordance with IAS 1 “Presentation of Financial Statements”, an entity whose

financial statements comply with IFRSs shall make an and statement
of such compliance in thenotes. (FEB EXAMQUESTION 2024)

a) Explicit, unreserved. b) Implicit, unreserved.

c) Explicit, reserved. d) Implicit, reserved.

REFERENCE:

132. is defined as an amount used as a surrogate for cost or depreciated cost at a

given date.

a) Fair value. b) Net realizable value.

c) Deemed cost. d) Depreciable cost.

REFERENCE:

133. The nature, timing and amount of consideration promised by a customer effect the
estimate of the transaction price. Select the best option from the following that a company
shall not consider when determining thetransaction price.

a) Constraining estimates of variableconsideration.

b) Consideration payableto a customer.
c) Fixed consideration.
d) Theexistence of a significant financing component in thecontract.

REFERENCE:

134. SL is being sued by a customer for Rs. 2 million for breach of contract over a cancelled
order. SL has obtained legal opinion that there is a 20% chance that SL will lose the case. The
unrecoverable legal cost of defending the action are estimated at Rs. 100,000. The amount of
the provision that should be made by SL for the year ended December 31, 2019 is:

a) Rs. 100,000. b) Rs. 2 million. c) Rs. 400,000. d) Rs. 500,000.

REFERENCE: EXACT SAME QUESTION COMPANY NAME CHANGED & $

CHANGED TO RS.

135. On July 1, 2020, KL purchased 70% shares of ZL. For the year ended December 31,
2020, the cost of sales of KL and ZL amounted to Rs. 319,200,000 and Rs. 176,400,000
respectively. Since acquisition, KL sold goods to ZL amounting to Rs. 1 million per month, at
a margin of 20%. At the year end, ZL held 30% of these goods. Which one of the following
amount represents correct figure to be included in the consolidated statement of profit or loss
of KL for the year ended December 31, 2020?

a) Rs. 401,760,000.
b) Rs. 402,600,000.
c) Rs. 396,400,000.
d) Rs. 395,760,000.

REFERENCE: EXACT SAME QUESTION COMPANY NAME CHANGED AND $

SYMBOL CHANGED TO RS

136. On January 1, 2019, BL signed a contract to construct a building. Progress is to be

measured according to percentage of work completed as certified by the surveyor. At
December 31, 2019 the details of thecontract areas follows:

Rupees
Total contract value 5000,000
Cost to date 2300,000
Estimated cost to completion 2100,000
Work invoiced to date 2000,000
Cashreceived to date 1500,000

is the amount of profit to berecognized in the statement of profit or loss for the
year ended 31 December 2019.

a) Rs. 240,000. b) Rs. 1500,000. c) Rs. 2000,000. d) Rs. 2700,000.

REFERENCE: EXACT SAME QUESTION JUST COMPANY NAME CHANGED

AND $ CONVERTED TO RS. CONSIDER YEAR 20X8 FROM THE PICTURE

Answer:
%age ofworkcompleted = work invoiced to date/total revenue = 2000,000 / 5000000 =
40%.
137. WL purchased a machine on April 1, 2019, for Rs. 5 million. It is being depreciated on a
straight line basis over its useful life of ten years. Residual value is estimated at Rs. 200,000.
On October 1, 2019, following a change in legislation, WL fitted a safety guard to the
machine. The safety guard cost of Rs. 250,000 and has a useful life of five years with no
residual value. The amount that will be charged to statement of profit or loss for the year
ended December 31, 2019 in respect of depreciation on this machine is:

a) Rs. 360,000. b) Rs. 512,500. c) Rs. 372,500. d) Rs. 530,000.

REFERENCE: EXACT SAME QUESTION JUST ONE ZERO ADDED, COMPANY

NAME CHANGED & $ CHANGED TO RS.
138. On January 1, 2020, S Limited (SL) received a government grant of Rs. 2.4 million
relating to a cost of a plant which has a five year life. The company accounts for grants using
the deferred credit method, is the non-current liability in respect of the
government grant to be shown in SL’s statement of financial position for the year ended
June 30, 2020.

a) Rs. 1.92 million. b) Rs. 1.44 million.

c) Rs. 2.16 million. d) Rs. 1.68 million.

REFERENCE: SAME QUESTION EVERYTHING MULTIPLY BY 2. COMPANY

NAME CHANGED SEE HIGHLIGHTED PART
139. C Limited (CL) has thefollowing products in inventory at the year end:

Product Quantity Cost Selling price Selling cost

Alpha 15,000 600 825 120
Beta 37,500 225 375 60
Gamma 12,000 345 405 75

At , amount CL should state its total inventory in the statement of financial

position as at Dec 31, 2019.

a) Rs. 21,397,500. b) Rs. 8437,500.

c) Rs. 3960,000. d) Rs. 9000,000.

SOLUTION: SIMILAR QUESTION IN PICTURE BELOW

Product RS.
Alpha = 15000 x 600 = 9000,000
Beta = 37,500 x 225 = 8437500
Gamma = 12,000 x 330 = 3960,000
Total value of inventory = 21397500.
140. IAS 37 ensures that appropriate recognition criteria and measurement basis are
applied to provisions, contingent liabilities and contingent assets. Explain how the
terms “Provisions” and contingent liabilities can be distinguished from each other?

Answer: Provisions:
An entity must recognise a provision if, and only if: [IAS 37.14]
a present obligation (legal or constructive) has arisen as a result of a past event (the
obligating event),
payment is probable('more likely than not'), and
the amount can be estimated reliably.
Contingent liability:
a possibleobligation depending on whether some uncertain future event occurs, or
a present obligation but payment is not probable or theamount cannot be measured reliably

141. refers to the correcting the recognition, measurement and disclosure of

amounts in financial statements as if prior-period error had never occurred.

a) change in accounting estimate. b) prospective restatement.

c) retrospective statement. d) retrospective application.

REFERENCE:

142. Differentiate between “share based payment arrangement” and “share based
payment transaction”.

Answer: Share based payment arrangement:

Share-based payment arrangements can be defined as transactions between an entity and a
grantee where an entity awards a share-based payment to an employer or supplier in exchange
for goods and services delivered to the entity.
Companies usually pay for goods and services with cash, but sometimes entities use their
equity stock to pay employees or other suppliers. Share-based compensation is, in fact, the
largest element of the compensation packages for the top executives for S&P 500 companies.
Share based payment transaction:
A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the
price of the entity's shares or other equity instruments of the entity.
143. The independent valuation expert of Hasan Limited (HL) is of the view that the salvage
value of its plant and machinery has drastically changed and the change is material, which of
the following step the company should take?

a) Change the annual depreciation for the current year and future years
b) As salvage value effect the future only so ignore the effect of change on annual
depreciation.
c) Changethe depreciation chargeand treat it as a correction of an error.
d) Retrospectively changethe depreciation chargebased on the revised salvage value.

EXPLANATION: Always remember that changes relative to the computation of

depreciation are treated prospectively. It means that any changes will be applied in
the current accounting year and for future years. So, the statement that "Change
the annual depreciation for the current year and future years" is the correct
answer.

144. On January 1, 2020, a company acquired manufacturing rights of an assorted

range of juices and ice-creams from a well known multinational company for Rs. 50
million. Following are the relevant clauses of the agreement executed between the two
companies:
The agreement is valid for five years and is renewable for another five years at a
nominal price.
The manufacturing rights are not transferable and cannot be sublet.
After erection of its plant, the company started manufacturing the products on July 1,
2020 due to intense competition, the new products were not able to achieve the desired
sale in the first six months of their launching. Explain with reason how the company
should account for the above payment at December 31, 2020.

Answer:
Since the company is incurring losses due to high acquisition cost and losses in sales, the
company must assess its position for being going concern and if the company is not going
concern, then proper disclosure should be given according to the relevant IAS.

Moreover, if company is no longer going concern, then it cannot make its financing
statements on going concern basis, rather it shall make its financial statements according to
breakup fair value model.

145. ZL’s non current assets include property, plant and equipment a machine
that was purchased five years ago. New technology is possibly threating the value
of the machine. Discuss how ZL should present information in its financial
statements in order to be complete, neutral and free from error.

Answer: ZL can record the value of machine at carrying value (cost less accumulated
depreciation) or at revalued amount according to its fair value. If company revalues its
amount and uses fair value model, then the value of machine must be checked for any
impairment since market value is much declined.
146. A company owns a number of nuclear plants. The company is obliged to
dismantle one of these plants in 3 year’s time. The last nuclear plant is dismantled
by the company cost Rs. 2 million dismantle, but the company expects to
dismantle this nuclear plant at a reduced cost of Rs. 1.6 million due to increased
experience.
There is also a chance that completely new technology may be available at the
time of dismantling, which could lead to a further cost saving of Rs. 400,000.
Required: Discuss themeasurement of theabove provision.

Answer: The company should recognize the reduced dismantling cost of 1.6 million and
should not further reduce its cost by 400,000 since theamount of 400,000 is not certain.

147. On January 1, 2019, IL received a government grant of Rs. 2 million in order

to facilitate purchase on the same day of an asset which cost of Rs. 3 million. The
asset has a useful life of five years and is depreciated on a 25% reducing balance
basis. IL has a policy to account for all grants received as deferred income. What
amount of income will be recognized in respect of the grant for the year ended
December 31, 2020?

Answer: In the year to 31 DEC, 2019 credit will be taken for 25% x 2000,000 =
Rs. 500,000 leaving 2000,000 – 500,000 = Rs. 1500,000 as a deferred credit
In the year to 31 March, 2020 credit will be taken for 25% x 1500,000 = Rs.
375,000 leaving 1500,000 – 3750,000 = Rs. 1125,000 as a deferred credit

148. On July 1, 2019, AL sold out its factory having a carrying value of Rs. 12
million to KL to Rs. 16 million. At this date the factory had a fair value of Rs. 30
million. AL continued to use the factory and was responsible for the insurance and
maintenance of the factory. Al has the right to repurchase the factory for Rs. 19.6
million on July 1, 2022, representing a 7% growth in value each year.
Required: Discuss how the above transaction would be treated in the financial
statement of AL for the year ended June 30, 2020.

Answer: A financial lease is a type where the lessor allows the lessee to use the former's
asset instead of a periodical payment for an extended period. Hence, the above
transaction will be recorded as finance lease where the seller acquired the asset under
sale and lease back agreement according to IAS 17. AL has sold the asset for Rs. 16
million having fair value of Rs. 30 million, hence the arrangement was at Rs. 14 million
lower than fair value but Rs. 4 million higher than its cost.
149. The following information has been extracted from the records of A Limited,
pertaining to financial year ended March 31, 2020.
1. The company has been sued for the non-payment of end service compensation
and gratuity to 6 employees who were terminated without giving any notice . The
claim amounts to Rs. 3 million. The lawyer of the company is of the view that the
company would have to pay to the displaced employees, but the estimate of the
amount that would be payable if plaintiff succeeds against the company is Rs. 2
million.
2. The company is facing litigation due to an alleged breach of contract. The
contract contains a clause that prescribes damages of Rs. 4 million in case of
default. The management has assessed 60% probability that the damages will
have to be paid.

Required:
Discuss how each of the above matter should be dealt with in the financial
statements of A Limited for the year ended March 31, 2020.

Answer: 1. According to IAS 37, the company shall record aprovision of Rs. 2 million on
the opinion of the legal expert.
2. Since the chance of obligation is likely (i-e: 60%), hence the provision will be recorded
at Rs. 4 million.

150. IFRS 3 organizes groups of identifiable intangible assets acquired in a business

combination into categories. Enlist those categories.

Answer: IFRS 3 provides guidance on some specific aspects of business

combinations including: business combinations achieved without the transfer of
consideration, e.g. 'dual listed' and 'stapled' arrangements.
reverse acquisitions.

151. Discuss the requirements that a contract need to fulfill for the purpose of applying
IFRS 15 “revenue from contract with customers”:

Answer: A contract with a customer will be within the scope of IFRS 15 if all the
following conditions are met:
the contract has been approved bythe parties to the contract;
each party’s rights in relation to the goods or servicesto be transferred can be
identified;
the payment terms for the goodsor services to be transferred can be identified;
the contract has commercial substance; and
it is probable that the consideration to which the entity is entitled to in exchange
for the goodsor services will be collected.

152. Enlist the indicators for the impairment of financial instruments.

Answer: Indications ofimpairment [IAS 36.12]

External sources:
market valuedeclines
negativechanges in technology, markets, economy, or laws
increases in market interest rates
net assets of thecompany higher than market capitalization
Internal sources:
obsolescence or physical damage
asset is idle, part of a restructuring or held for disposal
worse economic performance than expected
for investments in subsidiaries, joint ventures or associates, the carrying amount is higher
than the carrying amount of the investee's assets, or a dividend exceeds the total
comprehensive income of the investee

153. Which of the following would require a provision to be created by Salman Limited (SL)
at its year end of December 31, 2019?

a) A customer is suing SL for damages alleged to have been caused by SL’s product. SL is
contesting the claim and, at December 31, 2019, the directors have been advised by SL’s
legal advisers it is very unlikely to lose the case.

b) SL makes refunds to customers for any goods returned within 30 days of sale, and
has done so for many years.

c) At the year end, SL is negotiating with its insurance provider about the amount of an
insurance claim that it had filed. On November 20, 2019, the insurance provider agreed to pay
Rs. 2 million.

d) None of these events would requirea provision.

REFERENCE:
154. Which one of the following would beshown in the Other Comprehensive Income
section of the statement of profit and loss and other comprehensive income?

a) Receipt of a government grant.

b) Profit on sale of aninvestment.
c) Arevaluation gain on an investment property.
d) Gainonrevaluationof a factory building.

REFERENCE:

155. When it is difficult to distinguish between a change of estimate and change in accounting
policy, which of the following step is most appropriate for the above situation?

a) Treat the entire change as achange inestimate with appropriate disclosure.

b) Ignore the effect in the year of change, wait for the next year to see how the change
develops and then treat it accordingly.
c) Treat the entire changeas a change in accounting policy.
d) Apportion on a reasonable basis therelativeamount of change in estimateand thechange
in accounting policy and treat each one accordingly.

REFERENCE: FROMTHIS WEBSITE

https://www.coursehero.com/file/p55lhev/4-When-it-is-difficult-to-distinguish-between-
a-change-of-estimate-and-a-change/
156. If a company incur transaction costs in issuing loan notes, howshould these transaction
cost be accounted for:

a) charged to financial costs.

b) added to theproceeds of the loan notes.
c) deducted fromthe proceeds of the loan notes.
d) amortized over the life of the loan notes.

REFERENCE: FROMSIR KASHIF ADEEL NOTES

157. Which one of the following properties owned by S Limited would be classified as an
investment property.

a) Astately homeused for executive training.

b) Land purchased for its investment potential for which permission has not been
obtained for construction of any kind.
c) A new office building used as SL’s office, purchased specifically in order to exploit its
capitalgains potential.
d) A property that has been leased to a tenant but which is no longer required and is now held
for being resale.

REFERENCE:
158. The objective of IFRS 16 Leases is to prescribe the appropriate accounting treatment and
required disclosures in relation to leases. Which of the following among the criteria set out in
IFRS 16 for an arrangement to be classified as lease.
i. The lessee has the right to substantially all of the economic benefits from the use of the
asset.
ii. Theleaseterm is for substantially all of the estimated useful life of theasset.
iii. Theagreement concerns an identified asset which cannot besubstituted.
iv. The lessor has the right to direct the use of the asset.
Select the most appropriate option fromtheabove options.

a) Option (ii) and(iv) arecorrect. b) Option (iii) and(iv) arecorrect.

c) Option(i) and (ii) are correct. d) Option (i) and (iii) arecorrect.

REFERENCE:
159. Which of the following is not a qualitative characteristic of financial statements
according to conceptual framework?

a) relevance. b) materiality. c) comparability. d) understandability.

EXPLANATION: The qualitative characteristics of financial information include:

1. Relevance
2. Faithful Representation
3. Comparability
4. Verifiability
5. Timeliness
6. Understandability

Amongthe options in the problem, onlymateriality was not included in the list.
Materiality is the principle under which the all the information related to material
items such as the items that affects the overall financial statement should be
recorded by the company in their books. It is a principle of accounting but not the
part of qualitative characteristics because it helps the company to make decisions
by considering all factors.
160. Pagal Limited (PL) has ceased operations overseas in the current accounting period. This
resulted in the closure of a number of small retail outlets. Which of the following costs would
be excluded from the loss on discontinued operations?

a) Redundancy costs for overseas staff.

b) Costs ofrestructuring head office as a result ofclosing the overseas operations.
c) Loss on the disposal of the retail outlets.
d) Trading losses of theoverseas retail outlets up tothe date of closure.

REFERENCE:

161. In accordance with IAS 36 “Impairment of assets” which one of the following
statement is true regarding cash-generating units?

a) A cash generating unit to which goodwill has been allocated should be tested for
impairment every five years.
b) There is no need to consistently identify cash-generating units based on the same
types of asset from period to period.
c) A cash generating unit is the smallest identifiable group of assets for which
independent cash flows can be identified.
d) A cashgenerating unit must be asubsidiary of the parent.

REFERENCE:
162. What are the qualitative characteristics of financial statements according to conceptual
framework?

a) Non-qualitative aspects of a company’s position, performance and changes in

financialposition.
b) Broadclasses of financial effects or transactions and other events.
c) The measurement of extent to which a company has complied with all relevant standards
and interpretations.
d) The attributes that make the information provided in financial statements, useful to
users.

REFERENCE: FROMTHIS WEBSITE

http://icap.net.pk/wp-content/uploads/2013/12/SME_Standard_2009.pdf

163. Which of thefollowing would betreated as a change of accounting policy for S Limited
(SL)?

a) SL has changed the rate of depreciation used for its office equipment from 25% to 20%
straight line basis.
b) SL has received its first government grant and is applying the deferred income method.
c) SL has reclassified development costs fromone operating expense to cost of sales.
d) SL has increased its irrecoverable debt allowancefrom 10% to 12%.

REFERENCE:

164. How does IAS defines operating cycle of a company?

a) The time between acquisition of assets for processing and delivery of finished goods to
customers.
b) Thetime between acquisition of assets for processing and payment of cash to supplier.
c) The time between acquisition of assets for processing and receipt of cash from
customers.
d) Thetime between delivery of finished goods and receipt of cash fromcustomers.

REFERENCE:

165. Identify thebest option fromthefollowing which does not give rise to deferred tax.

a) Expenses charged in thestatement of profit or loss but arenot allowablefor tax purposes.
b) Unused tax loses.
c) Differencebetween accounting depreciation and tax depreciation.
d) Revaluationof noncurrent assets but not allowable for tax purposes.

REFERENCE:

166. Identify thebest option fromthefollowing which represents appropriate statement

regarding compliance with IFRSs:

a) Thefinancial statements have been prepared in accordance with most of IFRSs.

b) Thefinancial statements havebeen prepared in accordance with selected IFRSs.
c) The financial statements have been prepared in accordance withIFRSs.
d) The financial statements have been prepared in accordance with all the IFRSs except IAS
8and IAS 2.

REFERENCE:

167. Inventory of ABC company has up to this year been valued using FIFO but the
management is considering changing to the weighted average method for the year to June 30,
2021 in applying the enhancing qualitative characteristics of comparability, how should the
change of inventory valuation basis be accounted for:

a) Thefinancial statements for June 30, 2021 should show both methods.
b) Thechange should be disclosed only.
c) Thenotes should show what the profit would havebeen if thechange had not taken place.
d) The financial statements for the prior period as shown at June 30, 2021 should be
restated using the weighted average basis.

REFERENCE:
168. Select thebest option fromthefollowing which should not be included in thephysical
inventory of a company.

a) Goods held on consignment fromanother company.

b) All of thestated options should be included in thephysical inventory of a company.
c) Goods intransit from another company shipped free onboard shipping point.
d) Goods shipped on consignment to another company.

EXPLANATION: Goods in transit from another company shipped FOB shipping

point should be included in the buyer's inventory. FOB shipping point means that
the title to the goods passes once the goods are shipped. These goods should not
be included in the seller's inventory but should be included in the buyer's
inventory. Goods held on consignment from another company should be included
in the other company's inventory since they are the owner of the goods.

169. refers to the removal of all or part of a recognized asset or liability

from a company’s statement of financial position.

a) De-recognition. b) Control of an economic resource.

c) Combined financialstatements. d) Classification.

EXPLANATION: FROM GOOGLE

Derecognition is the removal of all or part of a previously recognised asset or
liability from an entity's statement of financial position.

170. To determine the transaction price for the contract in which a customer promises
consideration in a form other than cash, the company shall measure the non-cash
consideration at .
a) Net realizable value. b) Carrying amount.
c) Tax written down value. d) Fair value.

EXPLANATION: Paragraph 606-10-32-21 [66] states that to determine the

transaction price for contracts in which a customer promises consideration in
a form other than cash, an entity shall measure the noncash consideration (or
promise of noncash consideration) at fair value.

171. Deferred tax income taxes result from .

a) Difference between certain revenue and expense items recognized in financial

statements but not in income tax return.
b) Theinability of thebankrupt company to pay its income tax liability on schedule.
c) Depositing income taxes due in future years in a special fund managed by an independent
trustee.
d) Thefact that bond interest is deductible in thecomputation of taxable income.

REFERENCE:

172. Which of the following events taking place after the year end but before the financial
statements wereauthorized for issue would requireadjustments in accordance with IAS 10?
a) Two lines of inventory held at the year end were discovered to have faults rendering
them unsaleable.
b) Thedirectors announced a major restructuring.
c) Thevalue of company’s investment fellsharply.
d) Threelines of inventory heldat the year end were destroyed by flooding inthe warehouse.

REFERENCE:

173. Which of thefollowing statement is correct?

a) The use of an accelerated depreciation method causes an asset to wear out more
quickly than use of the straight line method.
b) Accumulated depreciation represents a cash fund being accumulated for the replacement of
plant asset.
c) A company may use different depreciation methods in its financial statements and its
income tax return.
d) The cost of a machine includes the cost of repairing damage to the machine during the
installation process.

REFERENCE: (OPTION A LOOKS CLOSET SEE PICTURE GIVENBELOW)

https://homework.study.com/explanation/which-of-the-following-statements-is-correct-
a-using-straight-line-depreciation-in-comparison-to-an-accelerated-depreciation-
method-will-result-in-a-lower-reported-amount-of-total-assets-at-end-of-the-first-year-
of-an-asset-s-life-b-using-accelerat.html
174. IAS 7, Statement of cash flows, defines cash equivalents as highly liquid investments
that are held to meet short term cash commitments rather than for investment or other
purposes. Select the best option from the following that does not represent criteria in order to
qualify as cash equivalents.

a) The investments areshort term.

b) They arehighly liquid.
c) They aresubject tosignificant risk of change in value.
d) They are readily convertible to known amounts ofcash.

REFERENCE:
175. Whichone of the following is not included instatement of cashflows?
a) Areconciliation of net income to net cash flows fromoperating activities.
b) The amount of cashandcash equivalents ownedby the business at the end of the accounting
period.
c) Disclosure of theamount of cashinvestedin money market funds duringthe accounting period.
d) Disclosure ofinvesting or financing activities that did not involve cash.

REFERENCE:

176. Factors that effect the election of inventory costing method do not include:

a) Tax effects. b) Incomestatement effects.

c) Statement of financial position effects d) Perpetual vs periodic inventory system.

EXPLANATION: Answer and Explanation: Option (d) is the correct

answer. Perpetual versus periodic inventory system is helpful in inventory
counting but not an important consideration in selecting the method for
inventory costing.

177. RSL Limited owns an office building which is used for administrative purposes gain on
January 1, 2020 it had a carrying amount of Rs. 4 million and a remaining life of 20 years. On
July 1, 2020 the building was let to a third party and RSL reclassified it as an investment
property. The building had a fair value of Rs. 4.6 million on July 1, 2020 and Rs. 4.68 million
on December 31,2020 will be the gain on investment property as at December
31, 2020.

a. Rs. 80,000. b. Rs. 800,000.

c. Rs. 880,000. d. There will be no gain in the investment property.

REFERENCE: SIMILAR QUESTION GIVEN BELOW.

Rs 000
Gainon investment properties: (4,680 – 4,600) 80

178. In thestatement of cash flows, a decrease in accounts payable would beshown as:
a) An increase in the operating activities category.
b) A decreasein operating activities category.
c) A decrease inthe operating activities category.
d) An increase in the financing category.

REFERENCE:
179. Factors that effect theselection of inventory costing method do not include:
a) Tax effects. b) Incomestatement effects.
c) Statement of financial position effects d) Perpetual vs periodic inventory system.

EXPLANATION: Perpetual versus periodic inventory system is helpful in

inventory counting but not an important consideration in selecting the method for
inventory costing. Perpetual inventory system records all inventory transactions at
the time of occurrence and counts inventory after every transaction, while periodic
system only makes the occasional counts.
The explanation for the incorrect options:
Option (a): It is an incorrect option because the tax effect is an important
consideration while deciding about the inventory costing method.
Option (b): It is incorrect because the balance sheet effect needs to be considered
as the ending inventory is reported on the balance sheet.
Option (c): It is an incorrect option because the cost of inventory used in the
production is reported in the income statement, so the company needs to consider
it at the time of inventory costing.

180. Select thebest option fromthefollowing which can be classified as an intangible asset.
a) Legal costs paid to intellectual property lawyers to register a patent.
b) Operating losses during the initial stages of theproject.
c) University fees paid to employees who decideto enroll in an executive MBAprogram
while working with the company.
d) Advertising and promotion on the launch of a hugeproduct.

REFERENCE:
181. Which of thefollowing would betreated as change of accounting policy by SL
company?

i) SL hasreceived its first grant and is applying the deferred income method.
ii) SL has revalued its property previously theyall had been carried at historical cost.
iii) SLreclassified development costs fromother operating expenses to cost of sales.
iv) SL has increased its recoverable debt allowancefrom 10% to 12%.

a) Option (i) and (ii) arecorrect. b) Option(iii) and (iv) are correct.
c) Option (ii), (iii) and (iv) arecorrect. d) Option (ii) and (iii) arecorrect.

REFERENCE:

182. If inventory is declined in value below its original cost, a company should write down
inventory to and report this loss in the in the period of decline.
a) Net realizablevalue, statement of financial position.
b) Fair value, statement of profit or loss.
c) Net realizable value, statement ofprofit or loss.
d) Fair value, statement of financial position.

REFERENCE:

183. R Limited (RL) purchased a machine for Rs. 600,000 on January 1, 2017, and assigned it
a useful life of 15 years. On March 31, 2019, it was revalued to Rs. 640,000 with no change
in useful life. The depreciation charge in relation to this machine in the financial statements of
RL for the year ended December 31, 2019, will be .

a) Rs. 40,000. b) Rs. 42,667.

c) Rs. 47,647. d) Rs. 50,196.

REFERENCE: COMPANY NAME CHANGED ONE ZERO ADDED & $ SYMBOL

CHANGED TO RS. (C is the closet)
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Q5:At June 30, 2020 R Limited (RL) trial balance showed a brand at cost of Rs. 30 million, less accumulated
amortization brought forward at July 1, 2019, of Rs. 9 million. Amortization is based on a 10 year useful life. An
impairment review on January 1, 2020, concluded that he brand had a value in use of Rs. 12 million and a
remaining useful life of three years. However, on the same date RL received an offer to purchase the brand
for Rs. 15 million. The carrying amount of the brand in the statement of financial position of RL as at June 30,
2020 is .
a) Rs. 8 million.

b) Rs. 23 million.

c) Rs. 12.5 million.

d) Rs. 10 million.

Answer:
Less: depreciation = (15/3) million = 5 million = (2.5 million) up to June 30

Value of brand = 12.5 million

Q1: Shah ji Limited (SL) borrowed Rs. 7.5 million at 10% per annum from Moiz Bank Limited (MBL) on
January 1, 2020 for the construction of a factory which is a qualifying asset. Construction began on
January 1, 2020. Rs. 6 million were paid evenly between March 1, 2020 and December 31, 2020.
Surplus funds were invested in a fixed deposit and earned interest at 6% per annum. No capital
portion of the loan was repaid during the year ended December 31, 2020. is the amountof
borrowing cost to be capitalized for the year ended December 31, 2020.

a) Rs. 750,000.

b) Rs. 300,000.

c) Rs. 450,000
d) No amountof borrowing cost would be capitalized.

Answer:

Cost of borrowing = 7500,000 x 10% = 750,000.

Less: interestincome = (1500,000 x 6%) = (90,000)

Less: 7500,000 x 2/12x 0.06 = (75000)

5400,000 x 1/12x 0.06 = (27000)

4800,000 x 1/12x 0.06 = (24000)

4200,000 x 1/12x 0.06 = (21000)

3600,000 x 1/12x 0.06 = (18000)

3000,000 x 1/12x 0.06 = (15000)

2400,000 x 1/12x 0.06 = (12000)

1800,000 x 1/12x 0.06 = (9000)

1200,000 x 1/12x 0.06 = (6000)

600,000 x 1/12x 0.06 = (3000)

Answer: 450,000

Q2: Ilaj Limited (IL) purchased an item of plant and machinery costing Rs. 5 million on July 1, 2017. The
company has a policy to depreciate plant and machinery on a straight line basis, over a period of ten
years with nil residual value while the tax authority allows tax depreciation at the rate of 15% per
annum. On June 1, 2019, IL revalued the plant and machinery to Rs. 4200,000. The applicable tax rate
is 29% is the amount of the deferred tax provision to be included in its statement of financial
position of IL as at June 30, 2020.

a) Rs. 72,500
b) Rs. 182,519.

c) Rs. 112,375.

d) Rs. 367,394.

Answer:

5000000x 10% = 500,000

5000000 X 15% = 750,000

750,000 – 500,000 = 250,000 X 0.29 = 72,500.

Q3: On March 31, 2020, R Limited performed an impairment review for one of its machine which had a
carrying amount of Rs. 1500,000. The fair value of the machine amounted to Rs. 1000,000 and the
company will incur Rs. 100,000 to sell the machine. The expected future cash flows amounted to Rs.
400,000 per annum for the next three years. The current cost of capital is 10% and a three year
annuity factor of Re. 1 per annum at 10% would have a presentvalue of Rs. 2.487. The recoverable
amount of the machine as at March 31, 2020 is .

a) Rs. 1500,000.

b) Rs. 900,000.

c) Rs. 994,800.

d) Rs. 400,000.

Answer:

Recoverable amount= higher of fair value and value inuse.

Fair value = 1000,000 – 100,000 = 900,000.

Value inuse = 2.487 x 400,000 = 994,800.

Hence, recoverable amount = 994,800.

Q4: An item of property, plant and equipment is shown in a company’s statement of financial position
at its written down value of Rs. 420,000. For tax purposes, the item’s written down value is Rs.
610,000. The residual value of the item at the end of its useful life is expected to be nil. Assuming that
the company pays tax at the rate of 29%, the resulting deferred tax asset or liability is .
a) Deferred tax asset of Rs. 55,100.
b) Deferredtax liability of Rs. 55,100.

c) Deferredtax asset of Rs. 190,000.

d) Nil.

Answer:

(610,000 – 420,000) x 0.29 = 55100.

Q5: On July 1, 2019, Thokar Niaz Baig Limited (TL) had property, plant and equipment with a carrying
amount of Rs. 3600,000. During the year, company disposed off assets with a carrying amount of Rs.
1200,000 for Rs. 1000,000. TL revalued the building from Rs. 1500,000 to Rs. 2000,000 and charged
depreciation for the year amounting to Rs. 400,000. At June 30, 2020, the carrying amount of property,
plant and equipment was Rs. 5000,000. The amount that will be reported in the statement of cash
flow for the year ended June 30, 2020 under the head cash flows from investing activities is
a) Rs. 1000,000inflow.

b) Rs. 2100,000 outflow.

c) Rs. 1500,000 outflow.

d) Rs. 2500,000 outflow.

Answer:

PPE

Opening 3600,000 Disposal 1200,000

Revaluationgain Depreciation 400,000
500,000
Additions 2500,000

Closing 5000,000

Outflow (additions in PPE) = (2500,000) outflow

Add: Sale proceeds from disposal = 1000000 inflow

= Rs. 1500,000 outflow

Q1: K Limited (KL) has the following payments and receipts during the year ended December 31, 2020:

Rupees
Issue of shares 515,000
Loanstock repaid 200,000
 Share premium received 230,000
Proceeds of a rightissue 315,000
Interest paid 115,000

is the amount to be recorded under “financial activities” in the statement of cash flows
for the year ended December 31, 2020.
a) Rs. 545,000.

b) Rs.745,000.

c) Rs. 860,000

d) Rs. 630,000

Answer:

Financing Activities:

Issue of shares = Rs. 515,000

Add:Share premium received= Rs. 230,000

Less: Loan repaid = (Rs. 200,000)

Add:Proceeds of rightissue = Rs. 315,000.

Less: Interest paid = (Rs. 115,000)

Cash flow from financing Activities = 745,000 inflow

Q3: On July 1, 2018, A Limited (AL) purchased a machine for Rs. 8 million having an estimated useful
life of ten years. The company has a policy to charge depreciation on time apportioned basis in the
years of acquisition and disposal. The machine was revalued to Rs. 8.5 million on July 1, 2019. There
was no change to the useful life of the asset. The depreciation expense that will be charged to
statement of profit or loss of AL for the year ended December 31, 2019 is .
a) Rs. 944,444.

b) Rs. 872,222.

c) Rs. 850,000.

d) Rs. 800,000.

Answer”:

8500,000/9= Rs. 944,444

Q5: The board of directors of S Limited (SL) made a decision to close down a regional office which was
communicated to employees before the year end. 50 employees out of eighty would be retained at a
cost of Rs. 80,000 per employee. Remaining employees will be redundant and a total sum of Rs. 9
million will be paid to them. SL should make a provision of in respect of closure of regional
office for the year ended December 31, 2019.
a) Rs. 9million.

b) Rs. 4million.
c) Rs. 13 million.
d) Noprovision should be made.

Answer:

(50x 80,000) + (9000,000)

= Rs. 13 million.

Q1: On January 1, 2021, H Limited (HL) acquired a building for investment purposes for Rs. 6 million
including refundable purchase taxes of Rs. 300,000. The purchase agreement provided for payment to
be made in full on December 31, 2021. Non-refundable property transfer taxes and direct legal cost
amounted to Rs. 30,000 and 300,000, respectively paid on January 1, 2021. The company uses 10%
cost of capital (Present value factor at 10% is 0.909). The initial cost of the building will be:
a) Rs. 6030,000.

b) Rs. 5511,300
c) Rs. 6330,000.

d) Rs. 6000,000.

Answer:

Building acquisition agreementis made on 1 jan 2021, while this payment(6000,000 – 300,000) will be
made on year end (31 dec 2021) so we have to take PV of it which is:

(6000,000 – 300,000) x 0.909 = 5181,300.

Add: 30,000

Add: 300,000

= Rs. 5511300

Q2: Z Limited (ZL) had a credit balance brought forward on current tax of Rs. 2000,000. During the year
ZL paid tax amounted to Rs. 1800,000 and the company has a provision for the current year amounted
to Rs. 5000,000. It has increased the deferred tax provision by Rs. 500,000. is the total charge
to tax for the year ended December 31, 2019 in the statement of profit or loss of ZL.
a) Rs. 5300,000.

b) Rs. 700,000.

c) Rs. 1800,000.

d) Rs. 4500,000.

Answer:
2000,000– 1800,000 + 500,000 = 700,000

Q3: On January 1, 2018 S Limited purchased a building amounted to Rs. 12 million for investment
purposes. The building had an estimated useful life of 20 years. At this time itwas determined that the
fair value of the building could not be reliably measured on an continuing basis. On December 1, 2019
an independent valuer estimated the fair value of the building to be Rs. 15 million. It is the policy of
the company to measure investment property at fair value. The carrying amount of the building at
December 31, 2019 will be .
a) Rs. 13.5million.

b) Rs. 10.8million.

c) Rs. 14.25 million.

d) Rs. 11.4million.

Answer:

Dep. Exp. Revalued amount/ Remaining useful life

15,000,000/18

0.833(approx..)

Book value = 15 – 0.833= 14.25 approx.

Q4: On July 1, 2020, Eagle Limited (EL) received a grant of Rs. 10 million for the purchase of a machine.
The grant will be repayable if the company sells the asset within 4 years, which is not intended to do
so. The asset has a useful life of five years. The deferred income liability balance as at December 31,
2020 will be:

a) Rs. 9 million.

b) Rs. 2.5million.

c) Rs. 2million.

d) Rs. 1 million.

Answer:

Since, the company is considering the governmentgrant as deferred income hence,

= Deferredincomeliability = 10,000,000 – [10,000,000 / 5 x 6/12]

= Deferredincome liability = 9000,000

Q5: F Limited (FL) started development project related to a new mobile phone which was completed
on September 30, 2019. Rs. 15 million had been spent up to that point. The mobile is expected to have
a useful life of three years. Rs. 150,000 was spent on marketing the mobile. The expense that should
be recorded in the Statement of Profit or Loss of FL for the year ended December 31, 2019 is:
a) Rs. 1.4million.

b) Rs. 1.25million.

c) Rs. 1.2million.

d) Rs. 0.15million.

15 million /3 = 5000,000 x 3/12 = 1250,000 + 150,000 = 1.4 million

Q1: On June 1, 2019, Z Limited sold a property having carrying amount of Rs. 3200,000 which had a
remaining useful life of 20 years at a fair value amounted to Rs. 4 million and transfer title of property
to the buyer. On the same date the company leased it back under a five year lease, paying Rs. 300,000
per annum on December 31 each year. The presentvalue of Rentals payable was Rs. 1200,000 and the
rate implicit in the lease is 7%. The amount of depreciation that would be reported in statement of
profit or loss of Z Limited for the year ended December 31, 2019 is:

a) Rs. 96,000.

b) Rs. 240,000.

c) Rs. 192,000.

d) Rs. 84,000.

4000,000 x 0.07 = 280,000

1200,000 – 280,000 = 920,000

Principle remaining = 4000,000 – 920,000 = 3080,000

Depreciation= 30,80,000/19 = 162105

162105 x 7/12 = 96000 (approx..)

Q2: U Limited (UL) makes a taxable profit of Rs. 350,000 during the year. This includes adjustments for
non taxable income of Rs. 25000, depreciation of Rs. 30,000 and 15,000 disallowed expenses. If the tax
allowable depreciation totals Rs. 32,000, the accounting profit will be:

a) Rs. 452,000.

b) Rs. 338,000.

c) Rs. 362,000.

d) Rs. 310,000.
Answer:

350,000-30,000-15,000+32,000+25,000 = 362,000

Answer:

.Q3: Following data relates to construction contract of S Limited (SL):

Contract Price Rs. 9000,000.

Cost to date Rs. 5200,000.

Estimated cost to complete Rs. 1200,000.

Estimated stage of completion 35%

The cost that should be recognized in statement of profit or loss of SL for the year ended June 30,
2020:

a) Rs. 2240,000.

b) Rs. 6400,000.

c) Rs. 4000,000.

d) Rs. 5200,000.

Answer:

cost to date = (5200,000)

Further cost to complete = (1200,000)

Total cost charged to P & L = 6400,000

Q4: On July 1, 2019, K Limited (KL) issued 50,000, redeemable preference shares of Rs. 10 with a
coupon rate of 8% at par. They are redeemable at a premium which gives them an effective finance
cost of 12% per annum. The amount of non current liability that would be reported on Statement of
financial position of KL as at June 30, 2020 is:
a) Rs. 500,000.
b) Rs. 520,000.
c) Rs. 540,000.

d) Rs. 560,000.

Answer:
 Interest= 500,000 x (12% - 8%) = 20,000

Add: Principle = 500,000

Long term liability = 520,000.

Q5: S (Pvt.) Limited, a small company, purchased its non-current tangible asset on January 1, 2018 at a
cost of Rs. 900,000, which qualified for tax depreciation at 15%. The company’s accounting
depreciation policy is to depreciate the asset over its useful economic life of ten years, assuming a
residual value of Rs. 50,000. The applicable tax rate is 29%. The deferred tax balance required in the
statement of financial position as at December 31, 2019 is:
a) Rs. 0.

b) Rs. 23128

c) Rs. 188573

d) Rs. 211700

Answer:

Deferredtax arises because there is a difference between taxable profits and accounting profits. When
computing taxable profits, companies claim tax depreciation called capital allowances while when
computing accounting profits companies deduct accounting depreciation.

The value of the asset in the accounts is the carrying value which is computed as cost less depreciation,
while the asset is shown in the tax computation as the tax base which is cost less capital allowances.

The difference between the carrying value and the tax base is called a ‘temporary difference’. The
deferred tax liability is computed by multiplying the temporary difference by the tax rate. Once the
deferred tax liability is established, it is only necessary to compute the difference.
2018 2019 .

Accounting depreciation 900,000– 50,000/ 10 = 85000 85,000

Carrying value of asset 900,000– 85000 = 815,000 815,000– 85,000 = 730,000

Tax base 900,000 – (900,000 x 0.15) = 765,000 765,000 – 114750 = 650,250

(costless capital allowance)

Temporary difference 50,000 79,750

(carrying value of asset – tax base)

Tax @ 29% 14,500 23,128

Q1: On December 1, 2019, J (Pvt.) Limited acquired office furniture for its corporate office under a two
year lease agreement. The terms of the lease require an initial payment of Rs. 70,000 followed by two
payments of Rs. 35,000 each on June 30, 2020 and June 30, 2021. The amount to be recognized in
statement of profit or loss of J (Pvt.) Limited for the year ended June 30, 2020 would be:

a) Rs. 122,500.

b) Rs. 71,458.

c) Rs. 35,000.

d) Rs. 70,000.

Q2: On July 1, 2019, H Limited (HL) had the balance of accrued interest payable Rs. 240,000. During the
year ended June 30, 2020 the company charged finance cost to Statement of Profit or Loss amounted
to Rs. 180,000. The closing balance on the accrued interest payable amounted to Rs. 125,000. The
amount that should be shown as interest paid on the statement of cash flows for the year ended June
30, 2022 is:
a) Rs. 115,000.

b) Rs. 180,000.

c) Rs. 295,000.

d) Rs. 420,000.

Interest Payable
Opening 240,000
Interestpaid 295,000 Interestexp. 180,000

Closing 125,000

Q3: On July 1, 2019, B Limited (BL) owned a building having carrying amount of Rs. 8 million and
estimated useful life of 20 years under the cost model. On January 1, 2019, the company decided to
sell the property and classified it as “held for sale”. On June 30, 2020 fair value less cost to sell the
building amounted to Rs. 7.91 million. The carrying value of the building in BL’s statement of Financial
Position as at June 30, 2020 is:
a) Rs. 7.91million.

b) Rs. 7.6million.

c) Rs. 7.5million.

d) Rs. 7.8million.

Q4: M Limited (ML) issued Rs. 1 million 5% loan notes on January 1, 2020. These loans are redeemable
at premium which means the effective finance cost amounts to Rs. 77,600 at an annual interest rate of
8%. Select the best option from the following which represents correct amount of issue cost that the
company incurred in issuing the loan notes.

a) Rs. 30,000.

b) Rs. 50,000.

c) Rs. 48,500.

d) Rs. 80,000.

Answer:

1000,000 (8% - 5%) = 30,000

Q5: The following trial balance extract relates to a property which is owned by W Limited (WL) as at
July 1, 2019.

Debit Credit
Rupees.

Property at cost (originally life 20 years) 30,000,00

0
Accumulated depreciation 9000,000

On January 1, 2020, following a sustained increase in property prices. WL revalued its property to Rs.
27 million is the amount of depreciation that will be charged in WL’s statement of profit
or loss for the year ended June 30, 2020.

a) Rs. 250,000.

b) Rs. 750,000.

c) Rs. 1000,000.

d) Rs. 1750,000.

Answer:

Since there is no change in useful life of asset upon revaluation, we will depreciate the new amount of
asset over its remaining useful life, but we have to find the remaining life first,

Taking the old values, per year dep. By straight line is:

30,000,000/20 = 1500,000

9000,000/1500,000 = 6 years. upto july 1 2019, but asset is revalued at January 2020, hence further
half year is passed, so life of asset passed uptil now is 6 + 0.5 = 6.5 years
so, asset was already depreciated 6.5 years till now
Hence, remaining life = 20 – 6.5 = 13.5 years.

27,000,000/13.5 = 2000,000 x 6/12 = 1000,000

Q1: W Limited accounting record shows the following details for the year ended March 31, 2020:

Rupees.

Income tax payable for the year 120,000

Over provision in relation to the previous years 9000

Opening provision for deferred tax 5200

Closing provision for deferred tax 6400

The income tax expense that will be shown in the Statement of Profit or Loss for the year ended
March 31, 2020 will be:

a) Rs. 140,600.

b) Rs. 116,200.

c) Rs. 122,200.

d) None of above.

Answer:

Provision for deferred tax

Balance ................ 7800 Opening 5200
Over provision 9000

Closing 6400

Income tax expense = 120,000 – 7800 = 112,200.

Q2: O Limited purchased a property for Rs. 18 million on January 1, 2016. The land element of the
purchase amounted to Rs. 3 million. The expected useful life of the building was estimated to be 50
years. On December 31, 2017, the property was revalued to Rs. 21 million, of which the land element
was Rs. 3.72 million and the building amounted to Rs. 17.28 million. On December 31, 2019 the
property was sold for Rs. 20.4 million. The gain or loss on disposal of property that would be reported
in the Statement of Profit or Loss for the year ended December 31, 2019 is:
a) Rs. 120,000 gain.

b) Rs. 400,000 gain.

c) Rs. 3000,000 Loss.

d) Rs. 3720,000 Loss.

Answer:

Revalued amountof property = 21 million.

Value of land = 3.72 million.

Value of building = 17.28 million.

Since property was revalued after 2 years of acquisition, hence remaining life = 50– 2 = 48 years.

*Land is notdepreciated.

Depreciation of building for 2years after revaluation = 17280,000/48 = 360,000 x 2 = 720,000.

Book value of building at 31 dec 2019 = 17280,000 – 720,000 = 16560,000

Add:Value of Land = 3720,000

Book value of property at date of disposal = 20,280,000.

Less:Market Value of property atdate of disposal = (20,400,000)

Gain = 120,000.

Q3: On July 1, 2020, BHL Limited acquired 60% holding in Zara Limited (zl). At this date BHL gave a loan
of Rs. 5 million at the date of 8% to ZL. The finance cost on the loan has been accounted for correctly
in the individual financial statements of BHL Limited and ZL. The totals for finance costs for the year
ended December 31, 2020 in the individual financial statements amounted to Rs. 2 million for BHL
Limited and Rs. 700,000 for ZL in the consolidated finance costs for the year ended December
31, 2020.
a) Rs. 2150,000.

b) Rs. 2250,000.

c) Rs. 2300,000.

d) Rs. 2500,000.

Answer:

2000,000 + (0.60 x 700,000) – (5000,000 x 0.08 x 0.60 x 6/12)

Q4: The following information represents extracts of trial balance of S Limited (SL) as at December 31,
2020:

Rs. “000” Rs. “000”

Lease hold property : at valuation January 1, 2020 75,000

Plant and equipment: at cost 114,900

Plant and equipment– accumulated depreciation 36,900

at January 1, 2020.

Additional information:

 The lease holdproperty had a remaining life of 20 years at January 1, 2020. SL has a policy to
revalue its property at each year end and at December 31, 2020 it was valued at Rs. 64.50
million.
 On January 1, 2020 an item of plant was disposed of for Rs. 3.75. The plant is still included in
the above trial balance at its cost of Rs. 12 million and accumulated depreciation of Rs. 6
million (to the date of disposal).
 Plant is depreciated at 20% per annum using reducing balance method.

Which one of the following amount of property, plant and equipmentrepresents correct figure to be
included within statement of financial position of SL as at December 31, 2020?
a) Rs. 117,600,000.

b) Rs. 122,100,000.

c) Rs. 126,900,000.

d) Rs. 57,600,000.

Answer:

Value of lease hold property = 64500,000.

After disposal value of land (114,900,000 – 12000,000) =

After disposal decrease in value of accumulated depreciation (36900,000 – 6000,000) =

Net book value of PPE after disposal = 72,000,000
Less: Depreciation expense for year = (7200,000 x 0.20)

Book value at 31 Dec 2020 = 57600,000.

Add: value of lease hold property = 64500,000

Amount to be shown in SFP= 122,100,000

Q5: A Limited (AL) trail balance shows a debit balance of Rs. 2.1 million brought forward on current tax
and a credit balance of Rs. 5.4 million on deferred tax. The tax charge for the current year is estimated
at Rs. 16.2 million and the carrying amounts of net assets are Rs. 13 million in excess of their tax base.
The income tax rate is 29%. The amount that will be shown as income tax in the statement of Profit or
Loss for AL for the year ended December 31, 2020 is:
a) Rs. 3.77million.

b) Rs. 16.2million.

c) Rs. 1.63million.

d) Rs. 16.67 million.

= (13x 0.29) + 16.2 – 5.4 + 2.1 = 16.67

Q1: F Limited purchased a new building amounted to Rs. 10 million on January 1, 2018. The estimated
useful life of building is estimated to be 60 years. On June 30, 2019 the company rented out this
building to a third party on a short term lease. The company uses fair value model for its investment
properties. At June 30, 2019 the fair value of the property was Rs. 12 million and at December 31,
2019 it was Rs. 12.5 million. The total net amount to be recorded in the Statement of profit or loss in
respect of the building for the year ended December 31, 2019 is:
a) Netincome Rs. 416,667.

b) Netincome Rs. 500,000.

c) Netincome Rs. 2500,000.

d) Netincome Rs. 2000,000.

Answer:

12500,000– 12,000,000 = 500,000.

Q2: Details of A Limited’s non current assets at January 1, 2020 were:

Plant
Rupees “000”

Cost 300,000
Accumulated depreciation 206,000
Carrying amount 94000

The following information is relevant:

  Plant is depreciated at 20% per annum on cost with time apportionment where appropriate.
On July 1, 2020 new plant costing Rs. 90 million was acquired. In addition, the company
incurred Rs. 10 million for installation of plant.
 There were no disposals of non current assets during the year.

is the depreciation charge on the plant for the year ended December 31, 2020.

a) 70 million.

b) 40 million.

c) 60 million.

d) 50 million.

Answer:

Depreciation of old plant = 300,000,000 x 0.20 = 60 million.

Depreciation onnew plant = 100,000,000 x 0.20 x 6/12 = 10million.

Total depreciation exp. For the year = 70 million.

Q3: Following data relates to T Limited (TL) for the year ended December 31, 2019:

 Extracts of Statement of profit or loss and other comprehensive income.

Rupees
Revenue 890,000
Cost of sales (440,000)
Gross profit 450,000
 Following administrative expenses were incurred and other income earned during the year.

Rupees
Wages 140,000
Other general expenses 30,000

Depreciation 184,000
Rentals received 90,000

Gain on disposal of non-current assets 120,000

 Statement of financial position extracts at:

December 31, 2019 December 31, 2018

Inventories 80,000 50,000

Trade receivables 100,000 90,000
 Trade payables 60,000 40,000

Cash generated from operations using direct method for the year ended December 31, 2019 will be:

a) Rs. 450,000.

b) Rs. 880,000.

c) Rs. 790,000.

d) Rs. 350,000.

Answer:

Cashreceived from customers = 890,000.

Increase in R/A = (10,000).

Increase ininventories = (30,000).

Increase in payables = 20,000.

Add:Rentals received = 90,000.

Less: wages paid = (140,000)
Less: other expenses = (30,000)

Cash generated from operations = 790,000

Q4: R Limited acquired computers on January 1, 2019 amounted to Rs. 2 million. The asset is
depreciated at 25% a year on straight line basis, while tax authority permits the company to
depreciate the asset at 30% a year for tax purposes. The tax rate applicable on company is 29%. The
deferred tax liability which might arise on the plant and equipment at December 31, 2019 would be:
a) Rs. 29,000.

b) Rs. 435,000.

c) Rs. 100,000.

d) Rs. Zero.

Answer:

Company depreciation expense = 2000,000 x 0.25 = 500,000.

Less: Tax allowable depreciation = 2000,000 x 0.30 = 600,000.
Temporary difference = 100,000

Tax liability = 100,000 x 0.29 = 29,000.

Q5: On July 1, 2019, Z Limited (ZL) acquired a building with a 40 year life for its investment potential
for Rs. 8 million. At June 30, 2020, the fair value of the property was estimated at Rs. 9 million with
cost to sell estimated at Rs. 200,000. The company uses fair value model for investment properties,
which one of the following amount of gain should be recorded in the statement of profit or loss of ZL
for the year ended June 30, 2020.
a) Nogain would be recognized.

b) Rs. 8.6million.

c) Rs. 1 million.

d) Rs. 7.8million.

Answer:

Book Value = 8000,000 – (8000,000/40) = 8000,000 - 200,000 = Rs. 7800,000.

Fairvalue less costto sale = 9000,000 – 200,000 = 8800,000.

Gain = 8800,000 – 7800,000 = 1000,000

Q6: the following balances have been extracted from the statement of financial position of R Limited
(RL):

2020 2019
Rupees
Non-current liabilities
Deferredtax 1500,000 1200,000
Current Liabilities
Currenttax payable 5340,000 5520,000

The company has recorded Rs. 4980,000 in respect of income tax paid in its Statement of cash flow for
the year ended December 31, 2020. Select the best option from the following that represent income tax
expense for the year ended December 31, 2020.
a) Rs. 4860,000.

b) Rs. 4980,000.

c) Rs. 5100,000.
d) Rs. 10,560,000.

Answer:

Income Tax payable

Currenttax b/d ........................ 5520,000

Income tax paid ...................... 4980,000 Deferredtax b/d ...................... 1200,000

Currenttax c/d .......................... 5340,000 Income tax expense for year.......5100,000

Deferredtax c/d ......................... 1500,000

Hence the value of income tax expense is Rs. 5100,000

Q7: A Limited (AL) has revalued its property and has recognized the increase in the revaluation in its
financial statements. The carrying value of the property was Rs. 8 million and the revalued amount
was Rs. 10 million. Tax base of the property was Rs. 6 million. The tax rate applicable to profit is 29%
and the tax rate applicable to profits made on the sale of property is 25%. If the revaluation took place
at the AL’s year end of December 31, 2020, is the deferred tax liability on the property as of
that date.
a) Rs. 0.5million.

b) Rs. 1million.

c) Rs. 1.16million.

d) Rs. 0.58million.

Answer:

Since, we are not concerned about overall tax rate (29%) on over all profit of the company , we are
dealing withprofiton sale of property only , hence the rate 25% will be multiplied to revaluation gain;

Revaluation gain = Fair value – book value.

= 10 million – 8 million = 2million x 0.25 = 0.5 million.

Q8: On January 1, 2018, S Limited (SL) boughta machine worth Rs. 80 million it has an expected useful
life of 20 years with a nil residual value. On August 31, 2019 the company decided to sell the machine
and started to locate a buyer. Management is confident that the machine will be sold quickly. The
market value of the machine at August 31, 2019 was Rs. 50 million and the costs to sell the machine to
Rs. 500,000. The value that should be stated in the Statement of Financial position of SL for the year
ended December 31, 2019 is:

a) Rs. 73.33million.

b) Rs. 76million.

c) Rs. 50.5million.

d) Rs. 49.5million.
Answer:

Fair value = Market value – Cost to sell:

50 million – 0.5 million= 49.5 million.

Q9: Un paid expenses are shown in a company’s statement of financial position as a current liability of
Rs. 30,000. These expenses have already been deducted when computing accounting profit but will
not be deducted for tax purposes until they are paid. The company pays tax at the rate of 29%, the
resulting deferred tax asset or liability is:
a) Deferredtax liability of Rs. 8700.

b) Deferredtax assetof Rs. 30,000.

c) Deferred tax asset of Rs. 8700.

d) Nil.

Answer:

30000 x 0.29 = 8700 deferredtax asset

Q10: C Limited (CL) has the following products in inventory at the year end:

Product Quantity Cost Selling price Selling cost

Alpha 15,000 600 825 120
Beta 37,500 225 375 60
Gamma 12,000 345 405 75

At , amount CL should state its total inventory in the statement of financial position as at
Dec 31, 2019.

a) Rs. 21,397,500.

b) Rs. 8437,500.
c) Rs. 3960,000.
d) Rs. 9000,000.

Answer:
Product Quantity Cost NRV LOWER OF
COST OR
NRV
Alpha 15,000 600 825 – 120 600
=705
Beta 37,500 225 375 – 60 = 225
315
Gamma 12,000 345 405 – 75 = 330
330

Alpha = 15000 x 600 = 9000,000

Beta= 37,500 x 225 =8437500

Gamma = 12,000 x 330 = 3960,000

Total value of inventory = 21397500.

Q1: J Limited (JL) entered into a lease for an item of plant on April 1, 2019 which required payments of
Rs. 225,000 to be made annually in arrears. The present value of the future lease payments was
estimated to be Rs. 1509,750 at the inception of the lease and the rate of interest implicit in the lease
was 8%. Both the lease term and the plant’s estimated useful life was 10 years. The total amount that
would be recorded in the statement of profit or loss of JL for the year ended 31 Dec, 2019.
a) Rs. 271,755.

b) Rs. 203,816.

c) Rs. 120,780.

d) Rs. 150,975.

Answer:

Interest expense for 2019 to be recorded in Statement of profit or loss is = 1509750 x 0.08 = 120,780,

Q2: Following are the extracts of statement of financial position of J Limited (JL) as at December 31:

2020 2019
Current Assets
 Inventory 5200,000 4400,000
Trade Receivables 7800,000 2800,000

Bank 700,000

Current Liabilities
Trade Payables 4200,000 4500,000
Negligence claim - 120,000
Warranty provision 1000,000 180,000
Additional Information:

 Profitbefore tax for JL for the year ended 31 December , 2020 amounted to Rs. 10.20 million.
 Finance cost for the year amounted to Rs. 600,000.
 Income tax amounted to Rs. 4500,000 while the company actually paid Rs. 3500,000.

is the amount of “Cash generated from operations” which will be recorded by JL in its
statement of cash flows for the year ended Dec 31, 2020.

a) Rs. 1900,000.

b) Rs. 5400,000

c) Rs. 4800,000.

d) Rs. 1300,000.

Answer:

Profit before tax ............................................................................. 10,200,000.

Working capital changes:

Increase in inventories.....................................................................(800,000)

Increase in receivables..................................................................... (5000,000)

Decrease in A/C payables ................................................................ (300,000)

Decrease in negligence claims ......................................................... (120,000)

Increase in warranty provision ........................................................ 820,000

Profit after working capital changes 4800,000

Less:

Less: Tax paid ...................................................................................... (3500,000)

Net cash flow from operating activities 1300,000.

Q3: I Limited (IL) borrowed Rs. 6 million at 12% per annum from MRC Bank Limited on July 1, 2019 for
the construction of a qualifying asset. Construction began on July 1, 2019. Rs. 5 million were paid
evenly between September 1, 2019 and June 30, 2020. Surplus funds are invested in a fixed deposit
and earned interest at 5% per annum. No capital portion of the loan was repaid during the year ended
June 30, 2020. The amount of investment income that will be recorded in the statement of profit or
loss for the year ended June 30, 2020 is:

a) Rs. 145,833.

b) Rs. 524,167.

c) Rs. 195,833.

d) Rs. 300,000.

Answer:

Interest expense = 6000,000 x 12% = 720,000.

Less: (6000,000 x 12%-5%) = 420,000.

Investment income = 300,000.

Q4: Darbaar Pe Jao Limited (DPL) started development of a drug for its new medicine on April 1, 2019
and spent Rs. 60,000 per month until the project was completed on September 30, 2019, The
management is confident for the success of the project on June 1 2019. The drug has an estimated
useful life of five years. The amortization of development cost that will be charged to Statement or
Profit or Loss of DPL for the year ended December 31, 2019 would be:
a) Rs. 240,000.

b) Rs. 48,000.

c) Rs. 120,000.

d) Rs. 15,000.

Answer:

Developmentexpenditure will be charged in the month in which the project is completed.

Hence development expenditure to be capitalized = 60,000.

Amortization = 60,000 x 3/12 = 15000.

Q5: On January 1, 2020, the carrying amount of non-current assets of J Limited (JL) exceeded their tax
written down value by Rs. 850,000. The tax written down value of non-current assets amounted to Rs.
3 million. During the year ended December 31, 2020 tax authorities allowed JL tax depreciation
amounting to Rs. 500,000 while JL charged depreciation of Rs. 450,000 in its financial statements.
During the year IL also revalued the property and revaluation surplus amounted to Rs. 250,000. Tax
rate applicable to the company is 29%. is the deferred tax liability of JL for the year ended
December 31, 2020.

a) Rs. 725,000.

b) Rs. 333,500.

c) Rs. 1058,500.

d) Rs. 246,500.

Answer:

(850,000 + 50,000 + 250,000) x 0.29 = 333,500.

Q6: On March 1, 2019, S Limited received Rs. 8 million from local government on the condition that
they employ at least 80 staff each year for the next 4 years. Due an economic down turn on March 1,
2020 the company no longer needed to employ any more staff and the condition of the grant required
full repayment. Identify the best option from the following that should be recorded in the financial
statements as on March 1, 2020.
a) Reduced deferred income by Rs. 6 million and recognize a loss of Rs. 2 million.

b) Reduced deferred income balance by Rs. 8 million

c) Reduced deferred income balance by Rs. 6 million

d) Reduced deferred income by Rs. 8 million andrecognize a loss of Rs. 2 million.

Q7: On January 1, 2020, S Limited (SL) received a government grant of Rs. 2.4 million relating to a cost
of a plant which has a five year life. The company accounts for grants using the deferred credit
method, is the non-current liability in respect of the government grant to be shown in SL’s
statement of financial position for the year ended June 30, 2020.

a) Rs. 1.92 million.

b) Rs. 1.44 million.

c) Rs. 2.16 million.

d) Rs. 1.68 million.

Answer:

Since, the company is considering the governmentgrant as deferred income hence,

= Deferred income liability = 2.4 million – [2.4 million / 5 x 6/12]

= Deferred income liability = 2.4 million – 0.24 million = 2.16 million

Q8: On July 1, 2019, H Limited (HL) entered into a lease arrangement to lease an item of plant for 5
years. The implicit rate of interest of the lease is 10% and Rs. 12 million will be paid as annual rent on
June 30 each year for the five years. The present value of the annual rental payment amounted to Rs.
46 million will be the current lease liability in HL’s Statement of Financial Position as at June
30, 2020.
a) Rs. 30.46 million.

b) Rs. 38.6 million.

c) Rs. 8.14 million.

d) Rs. 12million.

Answer

46 x 0.10 = 4.6

12 million – 4.6 million = 7.4 million

46 – 7.4 million = 38.6 million.

Q9: On January 1, 2018, S Limited (SL) bought a machine worth Rs. 80 million it has an expected useful
life of 20 years with a nil residual value. On August 31, 2019, the company decided to sell the machine
and decided to locate a buyer. Management is confident that the machine will be sold quickly. The
market value of the machine at August 31, 2019 was Rs. 50 million and the costs to sell machine
amounted to Rs. 500,000. The value that should be stated in the Statement of Financial Position of SL
for the year ended December 31, 2019 is:

a) Rs. 50.5 million.

b) Rs. 73.33 million.

c) Rs. 76 million.

d) Rs. 49.5 million.

Answer:

50 million – 0.5 million = 49.5 million because it will be classified as held for sale.

Q10: K Limited has the following units in inventory at the end of December 2019:

Units Cost per unit (Rs.)

Raw materials 10,000 50

Work in process 4000 60

Finished goods 2000 70 .
Finished items are sold at Rs. 100 per unit. However inventories that are Damaged due to improper
handling results in selling of 600 units of finished goods to be sold at 60% of the normal selling price
less costs to sell of Rs. 10 per unit. Rs. 11 per unit is still to be incurred to finish off the items of work in
process.

The above inventories would be stated in the statement of financial position of KL as at December 31,
2019 at an amount of:
a) Rs. 868,000.

b) Rs. 740,000.

c) Rs. 500,000.

d) Rs. 770,000.

Answer:

Raw material cost = 10,000 x 50 = 500,000.

Work in progress = 4000 x (60+11) = 284,000.

Finished goods = (2000-600) x [70-10] = 84,000.

Q1: J Limited (JL) leases a plant on January 1, 2019. The present value of the minimum lease payments
is Rs. 4923,900 and the rate implicit in the lease is 10%. The terms of the lease require three annual
rentals to be paid amounting to Rs. 1800,000 each at the start of the year. is the amount that
would be reported as current liabilities in the Statement of Financial Position of JL as at December 31,
2019.

a) Rs. 2811510.

b) Rs. 3123900.

c) Rs. 3436290.

d) Rs. 1800,000.

Answer:

4923900 – 1800,000 = 3123.900.

Q2: On July 1, 2019, P Limited (PL) issued Rs. 5 million 8% loan notes and incurred Rs. 600,000 issue
costs. The loan notes are repayable at a premium giving them an effective finance cost of 13%. What is
the amount of finance cost that should be recorded in Statement of Profit or Loss of PL for the year
ended June 30, 2020.

a) Rs. 400,000.
b) Rs. 352,000.

c) Rs. 572,000.

d) Rs. 650,000.

(5000,000 – 600,000) x 0.08 = 352,000

Q3: A cash generating unit consists of the following assets at their carting values as at June 30, 2020:

Rupees “000”
Property, plant and equipment 500,000
Goodwill 300,000
Patent 50,000
Current Assets 75,000
 The current assets are shown at their net realizable value.
 The recoverable amount of the cash generating unit is Rs. 650 million.

The value of property, plant and equipment after allocation of impairment loss would be:

a) Rs. 75 million.

b) Rs. 300 million.

c) Rs. 18.18 million.

d) Rs. 181.82 million.

Answer:

850– 650 = 200

500– 200 = 300

Q4: A Limited receives a government loan amounting to Rs. 5 million on January 1, 2018 at an interest
rate of 8% while market rate is 10%. The company had met the conditions imposed by government on
January 1, 2018. The capital and interest is repayable in one single installment on December 31, 2020.
The company measures this loan at amortized cost. The value of closing balance of the loan on
December 31, 2019 will be:
a) Rs. 5.832 million.

b) Rs. 5.4 million.

c) Rs. 6.05 million.

d) Rs. 6.655 million.

Answer:

5000,000 x (10% - 2%) = 400,000

5000,000 + 400,000 = 5400,000 x 0.08 = 5.832 million

Q5: C Limited (CL) borrowed Rs. 2.4 million to finance the building of a factory construction was
expected to take two years. The loan was drawn on January 1, 2019 and work began on March 1, 2019
Rs. 1 million of the loan was not utilized until July 1, 2019 so CL was able to invest it until needed. The
company is paying 8% on the loan and can invest surplus funds at 6%. The borrowing costs to be
capitalized for the year ended 31 December 2019 in respect of this project is:
a) Rs. 192,000.

b) Rs. 130,000.

c) Rs. 140,000.

d) Rs. 162,000.

Answer:

(2.4 million x 8%) – (1000,000 x 0.06 x 6/12) = 162,000

Q1: J Limited (JL) leases a plant on January 1, 2019. The present value of the minimum lease payments
is Rs. 4923,900 and the rate implicit in the lease is 10%. The terms of the lease require three annual
rentals to be paid amounting to Rs. 1800,000 each at the start of the year. is the amount that
would be reported as current liabilities in the Statement of Financial Position of JL as at December 31,
2019.

a) Rs. 2811510.

b) Rs. 3123900.

c) Rs. 3436290.

d) Rs. 1800,000.

Answer:

Since, first payment will be at the start of the year, so no interest could be charged on first payment,
since interestis charged after some time is elapsed. Since first payment is on first day of lease, so whole
of 1800,000 will be deduction from the principle lease amount, hence current liability,
4923900 – 1800,000 = 3123,900.
Q2: On July 1, 2019, P Limited (PL) issued Rs. 5 million 8% loan notes and incurred Rs. 600,000 issue
costs. The loan notes are repayable at a premium giving them an effective finance cost of 13%. What is
the amount of finance cost that should be recorded in Statement of Profit or Loss of PL for the year
ended June 30, 2020.

a) Rs. 400,000.

b) Rs. 352,000.

c) Rs. 572,000.

d) Rs. 650,000.

Answer:

Finance cost = (5000,000 – 600,000) x 0.08 = Rs. 352,000

Q3: A cash generating unit consists of the following assets at their carting values as at June 30, 2020:

Rupees “000”
Property, plant and equipment 500,000
Goodwill 300,000
Patent 50,000
Current Assets 75,000
 The current assets are shown at their net realizable value.
 The recoverable amount of the cash generating unit is Rs. 650 million.

The value of property, plant and equipment after allocation of impairment loss to it would be:

a) Rs. 75 million.

b) Rs. 300 million.

c) Rs. 18.18 million.

d) Rs. 181.82 million.

Answer:

Carrying amount of Assets = 500 + 300 + 50 = 850 (note: current assets are already shown at market
value)

Less: recoverable amount of CGU = (650) million.

Impairment loss = 200 million.

If we allocate this loss to PPE= 500 – 200 = 300 million.

Q4: A Limited receives a government loan amounting to Rs. 5 million on January 1, 2018 at an interest
rate of 8% while market rate is 10%. The company had met the conditions imposed by government on
January 1, 2018. The capital and interest is repayable in one single installment on December 31, 2020.
The company measures this loan at amortized cost. The value of closing balance of the loan on
December 31, 2019 will be:

a) Rs. 5.832 million.

b) Rs. 5.4 million.

c) Rs. 6.05 million.

d) Rs. 6.655 million.

Answer:

Years Opening balance Interest 8% Ending Balance

2018 5000,000 400,000 5400,000
2019 5400,000 432,000 5832,000

Q5: C Limited (CL) borrowed Rs. 2.4 million to finance the building of a factory construction was
expected to take two years. The loan was drawn on January 1, 2019 and work began on March 1, 2019
Rs. 1 million of the loan was not utilized until July 1, 2019 so CL was able to invest it until needed. The
company is paying 8% on the loan and can invest surplus funds at 6%. The borrowing costs to be
capitalized for the year ended 31 December 2019 in respect of this project is:

a) Rs. 192,000.

b) Rs. 130,000.

c) Rs. 140,000.

d) Rs. 162,000.

Answer:

Interestexpense 2400,000 x 8% = 192,000

Less: interestincome = 1000,000 x 0.06 x 6/12 = (30,000)

Net interest exp. = 162,000.

Q1: F Limited (FL) sells goods under a six-month warranty. Any defect arising during that period is
repaired free of charge. FL has calculated that if all the goods sold in the last six months of the year
required repairs the cost would be Rs. 4 million. If all of these goods had more serious faults and had
to be replaced the cost would be Rs. 12 million. The normal pattern is that 80% of goods sold will be
fault-free, 15% will require repairs and 5% will have to be replaced. The amount of provisions required
is:
a) Rs. 600,000.

b) Rs. 3200,000.

c) Rs. 1200,000.

d) No provision is required in the case.

Answer:

Since 15% needs repairs and 5% need replacement, we have to make provision for these.

15% fall in category of routine repairs and 5% in replacement, hence

Provision = (4000,000 x 15%) + (12000,000 x 5%)

= Rs. 1200,000.

Q2: An asset has a carrying amount of Rs. 22,500,000 and is expected to yield cash flow of Rs.
8000,000 per annum for the next three years. The asset’s fair value less costs of disposal is Rs.
17,200,000. Assuming that all cash flows occur at the end of the year concerned and that the
appropriate discount rate is 7%, the amount of the impairment loss is .(Applicable present
value factors at 7% are: year 1: 0.935, year 2: 0.873, year 3: 0.816)
a) Rs. 1500,000.

b) Rs. 5300,000.

c) Rs. 1508,000.

d) Nil.

Answer:

Impairment loss = carrying amount – recoverable amount.

Recoverable amount = higher of fair value or value in use.

Fair value = 17200,000.

Value inuse = (8000,000 x 0.935) + (8000,000 x 0.873) + (8000,000 x 0.816)

Value in use = 20992,000,

Recoverable amount= 20992,000

Impairment loss = 22500,000 – 20,992,000 = 1508,000

Q3: On January 1, 2016, Lubna Limited acquired a patent for an amount of Rs. 1200,000 having an
estimated useful life of ten years. On December 31, 2019, management decided to carry out an
impairment review of the patent. Following information has been determined as part of impairment
review:

Rupees.
Potential sale proceeds of the patent 900,000
Estimated disposal cost 50,000
Value inuse of the patent 850,000

The impairmentloss of patent (if any) for the year ended December 31, 2019 is:

a) Rs. 130,000.

b) Rs. 110,000.

c) Rs. 10,000.

d) Zero.

Answer:

Impairment loss = Impairment loss = carrying amount – recoverable amount.

Recoverable amount = higher of fair value or value in use.

Fair value = 900,000 – 50,000 = 850,000.

Value in use = 850,000.

Recoverable amount= 850,000.

Carrying amount = cost – accumulated amortization

= 1200,000 – (1200,000/10 x 4)

= 720,000.

Since recoverable amountis more than carrying amount, there is no impairment.

Q4: H Limited (HL) issued Rs. 30 million convertible loan notes at January 1, 2020, that carry a nominal
interest rate of 5% per annum. A similar loan note, without the conversion option, would have
required rate of return of 8%. The value of liability element of the convertible loan notes at December
31, 2020 will be:

a) Rs. 30.9 million.

b) Rs. 30 million.

c) Rs. 28.5 million.

d) Rs. 32.4 million.

Answer:
Amount of liability = principle + interest

= 30 x (8% - 5%) = 30.9 million.

Q5: The current liabilities of Ammar Limited include fine and penalties of environmental damage. The
fines and penalties amounted to Rs. 5 million. They are not deductible for tax purposes. is the
tax base of fines and penalties.

a) 5 million.

b) 10 million.

c) 2.5 million.

d) Zero.

Q6: F Limited (FL) had Rs. 20 million of capitalized development expenditure at cost brought forward
at July 1, 2019, in respect of products currently in production and a new project began on the same
date. The research stage of the new project lasted until September 30, 2019, and incurred Rs. 1.4
million of costs. From the date the project incurred development costs of Rs. 800,000 per month. On
January 1, 2020 the directors of FL became confident that the project would be successful and yield a
profit. The project was still in development at June 30, 2020. Capitalized development expenditure is
amortized at 20% per annum using the straight line method. The amount that will be charged to
statement of profit or loss for the year ended June 30, 2020 in respect of research and development
costs is:

a) Rs. 6880,000.

b) Rs. 3800,000.

c) Rs. 7800,000.

d) Rs. 8280,000.

Answer:

Amount to be shown in profit and loss are basically of three types:

1. The research related cost that is fully capitalized

2. The developmentrelated cost until criteria is met
3. The amortization of capitalized cost

From last year we have capitalized cost of 20 million from which we will calculate amortization and
show it in profit and loss:

20,000,000 x 0.20 = 4000,000.

Secondly we will calculate research expenditure and show it in profit and loss:
1.4 million = 1400,000.

Next, we will calculate amortization on development cost after the directors became confident from
jan to june 2020.

800,000 x 6 = 4800,000 x 0.20 x 6/12 = 480,000.

Lastly, we will calculate the portion of development cost that is not capitalized due to non confidence
of completion from September 30 2019 until jan 2020 = oct , nov and dec:

= 800,000 x 3 = 2400,000.

Total cost = 4000,000 + 1400,000 + 2400,000 + 480,000 = 8280,000

Q7: At a board meeting on April 1, 2020, Directors decided to sell an item of plant which had a carrying
value of Rs. 5 million on July 1, 2019, and a remaining useful life of 20 years. The plant is expected to
sell for Rs. 4.8 million within a period of one year. According to IFRS 5, the plant would be held at a
value of as at June 30. 2020.
a) Rs. 4800,000.

b) Rs. 4750,000.

c) Rs. 4937,500.

d) Rs. 4812,500.

Q8: H Limited (HL) acquired an item of plant on July 1, 2018, at cost of Rs. 500,000. It has a useful life
of five years (straight line depreciation) and an estimated residual value of 10% of its historical cost or
current cost as appropriate. As at June 30, 2020, the manufacturer of the plant still makes the same
item of plant and its current price is Rs. 600,000 is the correct carrying amount to be shown
in the statement of financial position of HL as at June 30, 2020 under historical cost and current cost.
a) Historical cost: Rs. 320,000, currentcost Rs. 360,000.

b) Historical cost: Rs. 300,000, currentcost Rs. 360,000.

c) Historical cost: Rs. 320,000, current cost Rs. 384,000.

d) Historical cost: Rs. 300,000, current cost Rs. 384,000.

Answer:

Historical cost is original purchase price less: accumulated depreciation:

Historical cost= 500,000 – (500,000-50,000/5 x 2) = 320,000.

Currentcostis revaluation of historical cost to current cost by considering historical cost at current value
and charging depreciation:

Currentcost = 600,000 – [(600,000 – 60000)/5 x 2] = 384,000.

Q9: A Limited (AL) trial balance as at December 31, 2020 shows a debit balance of Rs. 700,000 on
current tax and a credit balance of Rs. 8400,000 on deferred tax. The directors have estimated the
provision for income tax for the year at Rs. 4.5 million and the required deferred tax provision is Rs.
5.6 million, Rs. 1.2 million of which relates to a property revaluation, amount will be
recorded as income tax expense to the statement of Profit or Loss for the year ended December 31,
2020.

a) Rs. 1.2 million.

b) Rs. 1 million.

c) Rs. 2.4 million.

d) Rs. 3.6 million.

Answer:

4.5 million + 0.7 million = 5.2 million.

5.6 – 1.2 = 4.4 million.

8.4 – 4.4 million = 4 million.

5.2 – 4 = 1.2 million.

The charge to income tax on current tax is $5.2 million, being the $4.5 million estimate for this year plus
the under provision (debit balance in the trial balance) of $0.7 million.

The challenge lies with the movement on deferred tax due to the impact of the revaluation. Remember
that any deferred tax on revaluations goes through other comprehensive income and not profit or loss. It
is important therefore that when we calculate the movement on the deferred tax liability we remove the
$1.2million that relates to the revaluation.

This then means that we are comparing last year’s $8.4 million deferred tax provision to an adjusted
figure of $4.4 million deferredtax provision ($5.6 million less $1.2 million), which gives rise to a credit of
$4.0 million throughprofit or loss as the provision has beenreduced.

Ifwe net-off the $5.2 million debit (current tax) and $4.0 million credit (deferred tax movement) then we
get the $1.2 million income tax charge for the year.

Q10: A Limited (AL) began construction of a qualifying asset on January 1, 2019 for which the company
has utilized general borrowings. The company had Rs. 15 million 7% loan on March 1, 2019, Rs. 8.5
million 5% loan on May 1, 2019 and a 19 million 10% loan on July 1, 2019, the company did not make
any repayments during the year ended December 31, 2019. The weighted average cost of borrowing
for AL will be:

a) 8.6%.

b) 10%.

c) 7.5%.

d) 5.43%.

Answer:

Loan Principle Rate Weight Weighted Borrowing cost

borrowing incurred
outstanding
1st 15000,000 7% 10/12 12500,000 875,000

2nd 8500,000 5% 8/12 5666667 283333

3rd 19000,000 10% 6/12 9500,000 950,000

27666667 2108,333

= 2108,333/27666667 = 7.62% = 7.5% approx..

Q1: Sterling Limited issued a 8% Rs. 30 million convertible loan note on January 1, 2019 at par. Interest
is payable in arrears on December 31 each year. The loan note is redeemable at par on December 31,
2021 or convertible into equity shares at the option of the loan note holders on the basis of 30 shares
for each Rs. 100 of loan. A similar instrument without the conversion option would have an interest
rate of 10% per annum.

The present values of Rs. 1 receivable at the end of each year based on discount rates of 8% and 10%
are:

Year end 8% 9%
2019 0.930 0.910

2020 0.860 0.830

2021 0.790 0.750

is the amount that will be credit to equity on January 1, 2019 in respect of this financial
instrument.
a) Rs. 1524,000.

b) Rs. 5976,000.

c) Rs. 324,000.

d) Rs. 9000,000.

Answer:

PV of loan:

Years Cash flow Discount Factor (10%) PV .

2019 2400,000 0.909 2181,600

2020 2400,000 0.826 1982,400

2021 2400,000 0.751 1802,400

2021 30,000,000 0.751 22530,000

28,496,400

Debt component = 28496,400.

Equity component = 30,000,000 – 28496400 = 1524,000 approx.

Q2: Quartz Limited (QL) entered into a contract on January 1, 2019 to build a factory. The total
contract revenue was Rs. 2.8 million. At December 31, 2019, the contract was certified as 35%
completed. Costs incurred during the year amounted to Rs. 740,000 and costs to complete are
estimated at Rs. 1.4 million. Rs. 700,000 has been billed to the customer but not yet paid. Identify
whether the contract will be recognized as a contract asset or liability and what the carrying amount
will be in the statement of financial position of QL as at December 31, 2019?
a) contract asset Rs. 271,000.

b) contract liability Rs. 271,000.

c) contract asset Rs. 311,000.

d) contractliability Rs. 271,000.

Answer:

Revenue ..................................................................................... 2800,000.

Less: Cost to date ......................................................................... (740,000)

Less: Further cost to complete ..................................................... (1400,000)

Profit for the year ........................................................................ 660,000

Profit to date (35%) 231,000

Add: cost to date. .......................................................................... 740,000

Less: already billed to date ............................................................. (700,000)

More required from customers 271,000

Since, work is complete till further amount thatis receivable from customers of 271,000 hence, it is
asset.

Q3: Sabeeha limited has a cash generating unit (CBU) that has suffered from reduced level of income
due to an economic downturn. An impairment review was carried out and the recoverable amount of
the CGU was determined at Rs. 200 million. The assets of the CGU had the following carrying amounts
immediately prior to the impairment:

Rs. 000

Goodwill 50,000
Intangibles 120,000

Property, plant & equipment 60,000

Inventory 30,000
Trade receivables 20,000

280,000

The inventory and receivables are considered to be included at their recoverable amounts. The
carrying amount of the intangibles once the impairment loss has been allocated will be:
a) Rs. 100 million.

b) Rs. 20 million.

c) Rs. 50 million.

d) Rs. 68million.

Answer:

Carrying amount= 280 million

The recoverable amount= 200 million

Impairment = 80 million

First charged to goodwill = (50)

Remaining impairment to be charged = 30 million.

Prorate based oncarrying value:

Intangibles = 120/(120+60) x 30 = 20 million.

Carrying value of intangibles – impairment = 120 -20 = 100 million.

Q4: The net book value of a PQX Limited’s non current assets was Rs. 2000,000 at January 1, 2020.
During the year ended December 31, 2020, the company sold non current assets for Rs. 250,000 on
which it made a loss of Rs. 50,000. The depreciation charge for the year amounted to Rs. 200,000.
Which one of the following represents correct amount of net book value of non current assets as at
December 31, 2020?
a) Rs. 1500,000.

b) Rs. 1800,000.

c) Rs. 1550,000.

d) Rs. 1600,000.

Answer:

First calculate the net book value of disposal asset:

Sale proceeds + loss on disposal = 250,000 + 50,000 = Rs. 300,000.

Netbook value at start – depreciation for the year – netbook value of asset disposed off = ending value

= 2000,000 – 200,000 – 300,000 = Rs. 1500,000.

Q5: Following is an extract of financial position of R Limited:

2019 2018
Carrying amounts 117,000 72,000

The following items were recorded during the year ended December 31, 2019:

 Depreciation charge amounted to Rs. 12.5 million.

 An item of plant with a carrying amount of Rs. 15 million was sold for Rs. 9 million.
 A property was revalued upwards by Rs. 10 million.
 Environmental provisions of Rs. 20 million relating to property, plant and equipment were
capitalized during the year.

The amount that will be recorded in RL’s statement of cash flows for the year ended December 31,
2019 is:

a) Rs. 15 million.

b) Rs. 62.5 million.

c) Rs. 10.2 million.

d) Rs. 42.5 million.

Answer:

Profit = 117 – 72 = 45.

Add back: dep. Exp = 12.5

Add: loss on disposal = 6

Add: sale proceeds from disposal = 9

Less: gain on revaluation = (10)

Less: capitalization in provision = (20)

= Rs. 42.5 million.

Q6: On July 1, 2019, H Limited (HL) entered into an agreement to lease a new machinery under a 5
year lease, was Rs. 250,000 payable on June 30th each year. The asset has a useful life of 6 years and
ownership transfers to HL at the end of the lease. The interest rate implicit in the lease is 7% and the
present value of the minimum lease payment is Rs. 1.5 million. The current liability that will be
recorded in HL’s statement of financial position as at June 30, 2020 will be:

a) Rs. 1199850.

b) Rs. 1355,000.
c) Rs. 250,000.

d) Rs. 155,150.

Answer:

1500,000 x 0.07 = 105,000.

250000-105000 = 145,000

1500,000 – 145,000 = 1355,000

Q7: M Limited’s statement of financial position shows dividends payable of Rs. 500,000 at December
31, 2019 and Rs. 750,000 at December 31, 2020. The statement of changes in equity (SOCIE) for the
year ended December 31, 2020 shows dividends of Rs. 650,000 is the figure for dividends
paid to be included in the statement of cash flows for the year ended December 31, 2020.

a) Rs. 650,000.

b) Rs. 500,000.
c) Rs. 400,000.

d) Rs. 750,000.

Dividend Payable
Opening ................... 500,000
Paid ..................... 400,000 During the year. ....... 650,000

Closing ................. 750,000

Q1: Accounting profit of M Limited (ML) for the year ended December 31, 2019 amounted to Rs. 2500,000.
It includes depreciation of Rs. 450,000 and disallowable expenses of Rs. 200,000. Tax authority allows
depreciation of Rs. 300,000. The applicable tax rate is 29%. The tax expenses for the year ended December
31, 2019 is:

a) Rs. 725,000.

b) Rs. 826,500.

c) Rs. 638,000.

d) Rs. 913,500.

Answer:

Accounting depreciation .......................................................................... Rs. 2500,000.

Add back: Depreciation............................................................................ Rs. 450,000.

Add back: Disallowable expenses............................................................ Rs. 200,000.

Less: Tax allowable depreciation. .............................................................. Rs. (300,000)

Taxable profit Rs. 2850,000.

Tax @ 29%................................................................................................ Rs. 826,500.

Q2: Y Limited purchased a machine for Rs. 5.5 million on January 1, 2016. It was estimated to have a 5-year
life with a residual value of Rs. 550,000. On December 31, 2017, Rs. 1650,000 was spent on an upgradation
of machine. This extended its remaining useful life to 5 years, with the same residual value. During 2016,
the market for the product declined and the machine was sold on January 1, 2019 for Rs. 3 million. The gain
or loss on disposal of machine is:
a) Loss of Rs. 1246,000.

b) Gain of Rs. 2170,000.

c) Loss of Rs. 2170000.

d) Gain of Rs. 1246,000.

Answer:

Book value of machine on December 31, 2017:

5500,000 – (5500,000-550,000/5) x 2 = 3520,000.

Add: upgradation expense = 1650,000

Book value at 31 December, 2017 = 5170,000.

Depreciation for 2018:

New book value/new useful life

5170,000 – 550,000/5 = 924,000.

Book value at disposal = cost – Accumulated depreciation:

5170,000 – 924,000 = 4246,000

Less: Market value= (3000,000)

Loss = Rs. 1246,000.

Q3: Following information is a summary of Think Box (Pvt.) Limited’s (TBPL) statement of profit or loss for
the year ended June 30, 2021:

Rupees.

Revenue 5000,000

Expenses (3925,000)
Profit before tax 1075,000

 Expenses include depreciation charge of Rs. 412,500 for property. These properties qualified for tax
depreciation allowance of Rs. 482,500 for the year ended June 30, 2021.
 On July 1, 2020 the company had to replace its only delivery vehicle. The vehicle was sold for Rs.
50,000. At the date of disposal the vehicle had a carrying value of Rs. 75,000 and a tax written
down value of Rs. 50,000.
  TBPL’s replacement vehicle cost Rs. 800,000, has an expected useful life of 7 years with a residual
value of Rs. 100,000. The appropriate accounting entries for these vehicles have been included in
the accounts. Tax authorities allow tax depreciation at the rate of 15% of cost.
 TBPL’s expenses include Rs. 157,500 for entertainment costs.
 The applicable tax rate to the company is 29%.

isthe amount of tax expense thatwill be recordedin the statement of profitand loss of
Think Box (Pvt.) Limited for the year ended June 30, 2021.

a) Rs. 314,375.

b) Rs. 311,750.

c) Rs. 403,825.

d) Rs. 338,575.

Answer:

Profit before tax........................................................................................ 1075,000.

Add back Accounting Depreciation........................................................... 412,500.

Less: Tax allowable depreciation. .......................................................... (482,500)

Add: accounting depreciation on replacement vehicle. .......................... 100,000

(800,000 – 100,000)/7

Less: Tax allowable depreciation on replacement vehicle ...................... (120,000)

Add back: non allowable entertainment expenses ............................... 157,500

Add: Loss on sale of property. .............................................................. 25000

Taxable income 1167500

Tax @ 29% 338,575

Q4: Raja Limited (RL) has a 75% owned subsidiary Jaja Limited (JL). During the year ended December 31,
2020. RL sold inventory to JL for an invo ced price of Rs. 1600,000. Since then JL has sold 75% of that
inventory onto third parties. The sale wasata mark up of 25% on cost to RL. JL is the only subsidiary of R . L
............is the adjustment to inventory that would be included in the consolidated statement of financ ial
position of RL a at December 31,2020.

a) Rs. 100,000.

b) Rs. 240,000.

c) Rs. 80,000.
d) Rs. 320,000.
= 1600,000 x 75% = 1200,000
= 1200,000 x 1.25 = 1500,000

Gain on sale = 1500,000 – 1200,000 = 300,000.

Gain on intercompanytransactions is deducted from ending inventory.

Ending inventory = 1600,000 – 1200,000 = 400,000

Less: gain = (300,000)

Adjustment = Rs. 100,000.

Q5: Fakhar Limited (FL) acquired 100% of the ordinary share capital of Wah wah Limited (WL) on October 1,
2020. The share capital and retained earnings of WL were as follows:

Rupees
Ordinary shares of Rs. 10 each December 31, 2020 400,000
Retained earnings at January 1, 2020 100,000
Profit for the year ended December 31, 2020 80,000
The profits of WL have accrued evenly throughout the year ended December 31, 2020. Goodwil arising on the
acquisition of WL was Rs. 30,000. was the cost of the investment in WL Limited.

a) Rs. 590,000.

b) Rs. 580,000.

c) Rs. 610,000.

d) Rs. 400,000.

Answer:

Cost of investment:

Share capital = 400,000.

Add: retained earnings = 100,000.

Add: Profit at acquisition acquisition = 80,000 x 9/12 = 60,000

Add: Goodwill = 30,000

Total = 590,000.

Q1: Engineer Limited (IEL) commenced trading on July 1, 2017 when it purchased all its non-current assets.
Following is the extract of statement of profit or loss for the year ended June 30, 2020.

Rs. 000

Gross Profit 735,000

 Administrative expenses (N-1) (399,000)
Gain on disposal of plant and equipment 14,000

Finance cost (245,700)

Profit before tax 104,300

N-1: Administrative expenses include depreciation as follows:

Rs. 000

Depreciation – Furniture and fittings. (17,500)

Depreciation – Buildings (11,200)

Depreciation – Plant and equipment (21,000)

IEL’s non current asset balance were

Net book value at July 1, 2019 Tax WDV at July 1, 2019

Rs. 000 Rs. 000

Buildings 257,600 105,000

Plant and equipment 3500 27,563

Furniture and fittings 17500 19,688

During the three year period no acquisition or disposal of non current assets took place. The tax authority allows
tax depreciation on building and furniture and fittings at 10% and at plant and machinery at 15%. The applicable
tax rate is 29%. Tax expense for the year ended June 30, 2020:

a) Rs. 45.42 million.

b) Rs. 40.60 million.

c) Rs. 35.785 million.

d) Rs. 30.247 million.

Answer:

Gross profit ............................................................................... 735,000,000.

Less: Admin exp.

Admin exp ................................................................................. 399,000,000

Add back: Accounting Depreciation ............................................... 49,700,000

(17500,000 + 11200,000 + 21000,000)

Less: tax dep ............................................................................... (16,603,250)

[(105,000,000 x 0.10) +(19,688,000 x 0.10) +(27563,000 x 0.15)]

Total admin exp (432,096,750)

PBIT .............................................................................................. 302,903,250

Add: gain on disposal ................................................................... 14000,000

Less: Finance cost ........................................................................ 245,700,000

Taxable income 71203250

Tax @ 29%

Q2: During the year ended December 31, 2019, Arif Limited (AL) had a credit balance brought forward on current
tax of Rs. 262,500. During the year, AL received a tax refund of Rs. 26,250. It has a provision for the current year
of Rs. 315,000. The company has decreased the deferred tax provision by Rs. 105,000. AL will record
amount in respect of tax expense in the statement of profit or loss for the year ended December 31, 2019.
a) Rs. 52,500 credit.

b) Rs. 78,750 debit.

c) Rs. 52,500 debit.

d) Rs. 78,750 credit.

Answer:

Current tax provision – refund= 262,500 – 26250 = 236,250.

Current tax provision = 315,000

= 315,000 – 236,250 = 78750 debit.

Q3: A cash generating unit comprises the following assets:

Rupees

Building 7000,000
Plant and equipment 2000,000
 Goodwill 900,000
Current Assets 200,000

One of the machines, carried at Rs. 400,000 is damaged and will have to be scrapped. The recoverable amount of
the cash generating unit is estimated at Rs. 7500,000, will be the carrying amount of the building after
the impairment loss has been recognized.
a) Rs. 5480,000.

b) Rs. 5770,000.

c) Rs. 5940,000.

d) Rs. 5970,000.

Answer:

Book value of CGU = 10,100,000

Less: Recoverable value = (7500,000)

Impairment = 2600,000

First allocate impairment togoodwill = (900,000)

Remaining impairment = 1700,000.

Then allocate tomachine that isfully impaired = (400,000)

Remaining value of impairment = 1300,000.

Note thatcurrent assets are not impaired,

This value ischarged toremaining accounts on prorate basis

Impairmentcharged tobuilding = 7000,000/7000,000 + 1600,000 x 1300,000

= 1058,000

Remaining bookvalue of building = 7000,000 – 1058,000 = 5940,000.

Q4: At January 1, 2020 there was a provision for doubtful debts of Rs. 3 million. During the year, Rs. 1million of
debts were written off, and Rs. 800,000 of bad debts was recovered. At December 31, 2020, it was decided to
adjust the provision for doubtful debts to 5% of receivables which are Rs. 20,000,000.

is the total bad debt expense for the year ended December 31, 2020.
a) Rs. 200,000 debit. b) Rs. 2200,000 debit.

c) Rs. 1800,000 debit. d) Rs. 1800,000 credit.

Answer:

Provisionfor doubtful debts

 Opening ................. 3000,000
Bad debts written
off .............. 1000,000

Bad debt exp. 200,000

Bad debts
recovered .......... 800,000
Closing ............ 1000,000

(5% of 20,000,000)

Q5: Saada Limited has inventory on hand at December 31, 2019 having cost of Rs. 500,000 that it expects to sell
in the ordinary course of business for Rs. 600,000. In order to sell the inventory, the company expects to incur
selling costs of Rs. 50,000 and expects to incur further cost of Rs. 60,000 to put this inventory into a saleable
condition. The possible written down value of inventory will be:

a) Zero.

b) Rs. 110,000.

c) Rs. 490,000.

d) Rs. 10,000.

Answer:

Inventory according to IAS 2, is shown at lower of cost or NRV principle, hence,

Cost = 500,000.

NRV= Market value less cost to sell = 600,000 – (50,000 + 60,000) = 490,000.

Hence, inventory is shown at 490,000.

Q6: M Limited’s summarized statement of profit or loss for the year ended June 30, 2021 is as follows:
Rupees

Gross profit 1870,000

Administrative expenses (1260,000)

Distribution costs (220,000)

390,000

Finance cost (20,000)

Profit before tax 370,000

  Administrative expenses include donations to the local ruling political party of Rs. 50,000 and
depreciation of property, plant and equipment of Rs. 390,000 (inclusive of depreciation of new
purchases).
 ML made a tax loss during the year ended June 30, 2020. The loss carried forward at June 30, 2020 was
Rs. 120,000.
 At June 30, 2021 ML’s tax written down value of its property, plant and equipment was Rs. 1200,000. All
of these assets qualified for the annual tax depreciation allowance. ML purchased property, plant and
equipment during the year for Rs. 300,000. Tax authorities allow tax depreciation at the rate of 15%.
 Tax rate is 29%.

is the amount of tax that ML is due to pay for the year ended June 30, 2021.
a) Rs. 182,700.

b) Rs. 134,850.

c) Rs. 107,300.

d) Rs. 169,650.

Answer:

Gross profit = 1870,000.

Less : Admin expenses: (1260,000)

Add back: Donations= 50,000.

Add back: accounting dep. = 390,000.

Less: Tax allowable dep. =(1200,000 + 300,000) x 0.15 = (225,000)

PBIT= 825,000

Less:Interest =(20,000)

Less: distribution cost =(220,000)

Profit before tax= 585,000.

Tax @ 29%

Tax = 169,650.

Less: Tax loss of previous period= 120,000 x 0.29 = (34,800)

Tax exp. For the year = 134,850.

Q2: Rail Limited (RL) acquired a non-current asset on July 1, 2016 at a cost of Rs. 10,000,000 which had
a useful life of ten years and a nil residual value. The asset had been correctly depreciated up to June
30, 2021. At that date the asset was damaged and an impairment review was performed. On June 30,
2021 the fair value of the asset less cost to sell was Rs. 3000,000 and the expected future cash flows
amounted to Rs. 850,000 per annum for the next five years. The current cost of capital is 10% and a
five year present value factor for Re. 1 per annum is Rs. 0.621 per annum and five years annuity of Rs.
1 per annum at 10% would have a present value of Rs. 3.79. amount would be charged to
statement of profit or loss for the impairment of this asset for the year ended June 30, 2021.
a) Rs. 1778,500.
b) Rs. 2000,000.
c) Rs. 2472,150.
d) Rs. 4472,150.

Answer:
Impairment loss = Carrying amount – recoverable amount
Recoverable amount = Higher of FV less cost of sale and Value in use
Value in use = present value of cash flows from assets.
Value in use = 3.79 x 850,000 = 3221500
Fair value less cost to sale = 3000,000
Recoverable amount= 3221500.
Carrying amount= cost – accumulated dep.
= 10,000,000 – (10,000,000/10 x 5) = 5000,0000
Impairment = 5000,000 – 3221500 = 1778500

Q3: RSL Limited owns an office building which is used for administrative purposes gain on January 1,
2020 it had a carrying amount of Rs. 4 million and a remaining life of 20 years. On July 1, 2020 the
building was let to a third party and RSL reclassified it as an investment property. The building had a
fair value of Rs. 4.6 million on July 1, 2020 and Rs. 4.68 million on December 31,2020 will be
the gain on investment property as at December 31, 2020.

a) Rs. 80,000.
b) Rs. 800,000.
c) Rs. 880,000.
d) There will be nogain in the investmentproperty.
Answer:

Fair value at 1 July 2020 = 4600,0000

Less: Fair value at 31 December 2020 = 4680,000

Gain = 80,000.

Q4: FL owns an administration building which it no longer needs. On July 1, 2020 FL entered into an
agreement to lease the building out to another company. The building cost of Rs. 6000,000 on January
1, 2011 and is being depreciated over 50 years, based on the IAS 16 cost model. FL applies the fair
value model under IAS 40 investment property and the fair value of the building was estimated to be
 8000,000 on July 1, 2020. The valuation had not changed at December 31, 2020 is the
amount of the revaluation surplus that will be recognized in respect of the building.
a) Rs. Nil.
b) Rs. 2000,000.
c) Rs. 3080,000.
d) Rs. 3140,000.
Answer:
Cost= 6000,000.

Depreciation until July 1, 2020:

6000,000/50 = 120,000 x 9.5 = 1140,000.

Carrying value on July 1, 2020:

6000,000 – 1140,000 = 4860,000

Fair value at July 1, 2020:

= 8000,000.

Revaluation gain = fair value – carrying value.

= 8000,000 – 4860,000.
= 3140,000.

Q5: HL purchased computers costing Rs. 6000,000 on July 1, 2017. HL depreciates computers at 20%
per annum on a reducing balance basis for accounting purpose while tax authority allows tax
depreciation at 30% on the same method. Tax rate applicable to the company is 29%. The amount of
deferred tax relating to this asset that should be recognized in the statement of financial position as at
June 30, 2020 is:
a) Rs. 294, 060.
b) Rs. 890,880.
c) Rs. 596,820.
d) Rs. 1487,700.

Answer:
= 6000,000 x 20% = 1200,000.
= 6000,000 – 1200,000 = 4800,000 x 0.20 = 960,000.
= 6000,000 – 1200,000 – 960,000 = 3840,000 x 0.20 = 768,000
= sum of above 3 = 2928,000.

= 6000,000 x 0.30 = 1800,000

= 6000,000 – 1800,000 = 42,000,000 x 0.30 = 1260,000
= 6000,000 – 1800,000 – 1260,000 = 2940,000 x 0.30 = 882,000
= sum of above 3 = 3942,000.
2928000 – 3942,000 = 1014,000 x 0.29 = 294,060.

Q1: On June 1, 2020 a machine was sold which cost Rs. 2000,000 on July 31, 2016. Sale proceeds
amounted to Rs. 550,000 and the profit on disposal was Rs. 150,000. The depreciation policy for
machinery is straight line with a full year being charged in the year of acquisition and none in the year
of disposal. Which one of the following represents correct rate of depreciation for the machine.
a) 20%.
b) 30%.
c) 25%.
d) 35%.

Answer:

Cost = 2000,000

Less : Accumulated depreciation = unknown

Carrying value = x

Since, machine was sold for 550,000 hence its fair value = 550,000.
Since machine was sold for profit of 150,000, hence, carrying amount was 150,000 less than fair value,
Hence carrying amount = 550,000 – 150,000 = 400,000.
Since cost – acc. Dep. = carrying amount
2000,000 – x = 400,000.
X = 2000,000 – 400,000 = 1600,000.
ACC. Dep. / no. of years = dep. Exp.

Dep. Exp. = 1600,000/4 = 400,000.

Dep. Exp. Percentage = 400,000 / 2000,000 = 20%.

Q2: RL owns a machine that has a carrying amount of Rs. 850,000 at the year end of June 30, 2020. Its
market value is Rs. 780,000 and costs of disposal are estimated to be Rs. 25,000. A new machine
would cost Rs. 1500,000. RL expects it to produce net cash flows of Rs. 300,000 per annum for the next
three years. The cost of capital of RL is 8% (Present value factor at 8% for year 1= 0.926, year 2= 0.857,
year 3 = 0.794) is the impairment loss (if any) on the machine to be recognized in the
financial statements at June 30, 2020.
a) Rs. 76,900.
b) Rs. 95,000.
c) Rs. 171,900.
d) No impairment loss would arise.

Answer:

Impairment loss = Carrying amount – recoverable amount

Recoverable amount = Higher of FV less cost of sale and Value in use
Value in use = present value of cash flows from assets.
Value in use = (300,000 x 0.926) + (300,000 x 0.857) + (300,000 x 0.794) = 773,100.
Fair value less cost to sale = 780,000 – 25,000 = 773,100.
Recoverable amount = 755,000.
Carrying amount= 850,000.
Impairment = 850,000 – 773,100 = 76,900.

Q3: SL had the following bank loans outstanding during the year ended December 31, 2019 which
formed the company’s general borrowings for the year:
Rupees.
9% loan repayable in 2019 30,000,000
11% loan repayable in 2022 48,000,000

SL began construction of a qualifying asset on April 1, 2019 and withdrew funds of Rs. 12 million on
that date to fund construction. On August 1, 2019 an additional amount of Rs. 4 million was
withdrawn for the same purpose. is the borrowing costs which can be capitalized in respect
of this project for the year ended December 31, 2019.
a) Rs. 1091,282.
b) Rs. 920,769.
c) Rs. 1636,800.
d) Rs. 170,513.
Answer:

First calculate weighted average capitalization rate:

= (9% x 30,000,000) + (11% x 48,000,000)
30,000,000 + 48,000,000
= 10.23%

Borrowing cost on loan of 12 million:

= 12,000,000 x 0.1023 x (9/12) = 920,700.
Borrowing cost on loan of 4 million:
= 4000,000 x 0.1023 x 5/12 = 170500.
Total borrowing cost:
= 920,700 + 170,500 = 1091282.

Q4: WL purchased a machine on April 1, 2019, for Rs. 5 million. It is being depreciated on a straight
line basis over its useful life of ten years. Residual value is estimated at Rs. 200,000. On October 1,
2019, following a change in legislation, WL fitted a safety guard to the machine. The safety guard cost
of Rs. 250,000 and has a useful life of five years with no residual value. The amount that will be
charged to statement of profit or loss for the year ended December 31, 2019 in respect of depreciation
on this machine is:
a) Rs. 360,000.
b) Rs. 512,500.
c) Rs. 372,500.
d) Rs. 530,000.

Answer:

Depreciation from 1 April 2019 to 31 December 2019:

= (5000,000 – 200,000)/10 = 480,000 x 9/12 = 360,000.

Add: Depreciation from 1 oct to 31 Dec on safety guard:

250,000/5 = 50,000 x 3/12 = 12500.

Total dep. Exp. To be charged to P & L = 3725,000.

Q5: On January 1, 2019, BL signed a contract to construct a building. Progress is to be measured

according to percentage of work completed as certified by the surveyor. At December 31, 2019 the
details of the contract are as follows:
Rupees
Total contract value 5000,000
Cost to date 2300,000
Estimated cost to completion 2100,000
Work invoiced to date 2000,000
Cash received to date 1500,000

is the amount of profit to be recognized in the statement of profit or loss for the year ended 31
December 2019.

a) Rs. 240,000.
b) Rs. 1500,000.
c) Rs. 2000,000.
d) Rs. 2700,000.
Answer:

%age ofwork completed = work invoiced todate/total revenue = 2000,000 / 5000000 = 40%.

Total contractrevenue = 5000,000.

Less: cost to date = 2300,000.

Less: further cost to complete = 2100,000.

Profit for the year= 600,000.

Profit todate = 600,000 x 0.40 = 240,000.

Q1: On January 1, 2018, Raja Limited (RL) purchased a debt instrument at its fair value of Rs. 1 million.
It had a principal amount of Rs. 1.1 million and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8% . It is held
at amortized cost. is the amount at which the debt instrument will be shown in the
statement of financial position of RL as at December 31, 2019.

a) Rs. 1080,000.

b) Rs. 1029,120.
c) Rs. 1014,000.

d) Rs. 1095,120.

Answer:
Years Opening balance Principle x coupon rate Fair value x effective rate Ending

1 1000,000 - 1100,000 x 0.06 + 1000,000 x 0.08 = 1014,000

2 1014,000 - 1100,000 x 0.06 + 1014,000 x 0.08 = 1029,120

Q2: ML obtained a government license to operate a mine from July 1, 2019. The license requires that
at the end of the mine’s useful life, all buildings must be removed from the site and the site
landscaped. ML estimated that the cost of this decommissioning work will be Rs. 2000,000 in ten
years’ time (present value at July 1, 2019 Rs. 926,000) using a discount factor of 8%. According to IAS
37, which one of the following amount should ML include in provisions in its statement of financial
position as at June 30, 2020?
a) Rs. 1000,000.
b) Rs. 2000,000.

c) Rs. 926,000.
d) Rs. 200,000.

Q3: During the year ended December 31, 2019, Lizard Limited (LL) entered into following transactions:

1. On January 1, 2019, LL acquired under a lease, a right of use asset which was initially measured at
Rs. 3400,000, under the terms of the lease, a payment in advance of Rs. 900,000 was made on
commencement of the lease being the first of five equal annual payments. The right of use asset has a
five year useful life. The lease has an implicit interest rate of 10%.
2. On November 1, 2019, LL made a payment of Rs. 180,000 for a nine-month lease of an item of
equipment. LL wishes to utilize the exceptions available under IFRS 16 Leases.

The amount that would be charged to LL’s statement of profit or loss for the year ended December 31,
2019 in respect of the above transactions is:
a) Rs. 970,000.

b) Rs. 250,000.

c) Rs. 720,000.

d) Rs. 680,000.

Answer:

1 January 2019:

3400,000/5 = 680,000

1 November, 2019

IFRS 16 Leases provides a recognition exemption whereby lessees can choose not to capitalise 'short-
term leases' on the balance sheet, and instead recognise lease payments as an expense, either on a
straight-line basis, or another systematic basis, if that basis is more representative of the pattern of the
lessee's...

Q4: At January 1, 2020, FL received a loan of Rs. 10 million at 6% per annum. The loan has an effective
finance cost of 7.5% per annum. The loan was specifically issued to finance the construction of a new
building and the loan will be treated under IAS 23. Construction commenced on February 1, 2020 and
it was completed and ready for use on November 30, 2020, but did not became operational until
January 1, 2021. How much interest should be capitalized as part of property, plant and equipment of
FL as at December 31, 2020?

a) Rs. 600,000.

b) Rs. 125,000.

c) Rs. 625,000.
d) Rs. 750,000.
Answer:

The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total finance cost
for the year ended 31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying
asset, the finance cost (or part of it in this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (Feb 1, 2020)
andmust cease when the assetis ready for its intended use (Nov 30, 2020); in this case a 10-month
period. Hence capitalization = 750,000 x 10/12 = 625,000
Q5: SL is being sued by a customer for Rs. 2 million for breach of contract over a cancelled order. SL has
obtained legal opinion that there is a 20% chance that SL will lose the case. The unrecoverable legal
cost of defending the action are estimated at Rs. 100,000. The amount of the provision that should be
made by SL for the year ended December 31, 2019 is:

a) Rs. 100,000.

b) Rs. 2 million.

c) Rs. 400,000.
d) Rs. 500,000.

Q1: On July 1, 2020, KL purchased 70% shares of ZL. For the year ended December 31, 2020, the cost of
sales of KL and ZL amounted to Rs. 319,200,000 and Rs. 176,400,000 respectively. Since acquisition, KL
sold goods to ZL amounting to Rs. 1 million per month, at a margin of 20%. At the year end, ZL held
30% of these goods. Which one of the following amount represents correct figure to be included in the
consolidated statement of profit or loss of KL for the year ended December 31, 2020?

a) Rs. 401,760,000.

b) Rs. 402,600,000.

c) Rs. 396,400,000.

d) Rs. 395,760,000.

Answer:

= COS of Parent + COS of subsidiary – Purchases + provision of unrealized profit (PURP):

= 319200,000 + (176,400,000 x 6/12) – 6000,000 + (6000,000 x 0.20 x 0.30)

= 401,760,000.

Q2: Following information is related to Tasneem (Private) Limited for the year ended December 31,
2020:
  Profitbefore tax amounted to Rs. 1.5 million.
 The company deducted accounting depreciation amounted to Rs. 950,000 while tax authorities
allow depreciation of Rs. 870,000.
 The company deducted fine and penalties amounted to Rs. 65,000 but this is not allowed by
tax authorities.
 Other income includes dividend income which is exempt for tax purposes amounted to Rs.
60,000.
 Applicable tax rate for the company is 29%. Current tax expense for the year ended December
31, 2020 will be:

a) Rs. 458,200.

b) Rs. 435,000.

c) Rs. 477,050.

d) Rs. 459,650.

Answer:

Profit before tax = 1500,000.

Add back: Accounting depreciation = 950,000

Less: Tax allowable dep. = (870,000)

Add back: non deductible fines = 65,000

Taxable income = 1645,000

Tax @ 29% = 477050

Q3: On October 1, 2018, TL sanctioned loan amounted to Rs. 3 million to FL Limited, receiving in
exchange a nine-month, 12% note receivables. TL’s financial year ends on December 31st each year. The
interest earned by TL on the notes receivables from FL during the year 2019 will amount to:

a) Rs. 270,000.

b) Rs. 360,000.

c) Rs. 90,000.

d) Rs. 180,000.

Answer:

= 3000,000 x 0.12 x 3/12 = 90,000.

Q4: RL limited operates clothing store and uses a periodic inventory system. During the year ended
December 31, 2019, RL made purchases of Rs. 2 million. A physical inventory count performed on
December 31, 2019, revealed an ending inventory balance of Rs. 250,000. Cost of goods sold
amounted to Rs. 2100,000. The opening inventory on January 1, 2019, was:
a) Rs. 100,000.

b) Rs. 350,000.

c) Rs. 250,000.

d) Rs. 150,000.

Answer:

Op. inventory + purchases – ending = COGS

Op. inv. = COGS – purchases + ending

= 2100,000 – 2000,000 + 250,000

= 350,000.

Q5: Hashim Limited (HL) acquired an 80% holding in S Limited (SL) on April 1, 2020. From April 1, 2020
to December 31, 2020. SL sold goods to HL for Rs. 8.6 million at a mark up of 10%. HL inventory at
December 31, 2020 included Rs. 4.4 million of such inventory. The statement of profit or loss for each
company for the year to December 31, 2020 amounted to Rs. 29.4 million for HL and Rs. 23.2 million.
What is the cost of sales to be shown in the consolidated statement of profit or loss for the year ended
December 31, 2020:
a) Rs. 37.8 million.

b) Rs. 40.4 million.

c) Rs. 38.2 million.

d) Rs. 38.6 million.

Answer:

= 29.4 + (23.2 x 9/12) – 8.6 + (4.4 x 10/110)

= 38.6

Q1: H Group of companies acquired 80% of the share capital of Z limited on January 1, 2019. Part of
the purchase consideration was Rs. 2000,000 cash to be paid on January 1, 2022. The applicable cost
of capital is 10%. will be the deferred consideration liability be at December 21, 2020.

a) Rs. 1652,880.

b) Rs. 1818,181.
c) Rs. 2000,000.
d) Rs. 1502,620.

Answer:

= 2000,000 x (1.10)^-3 = 1502,620.

Q2: On May 1, 2019, Z Limited (ZL) acquired a property (Land and building) and used 20% of the floor
area to accommodate the administrative and maintenance staff and the remaining area was rented
out under operating lease. Costs and other information associated with this acquisition are as follows:

Rupees
Purchase price (30% attributed to land) 80,000,000
Non-refundable transfer taxes 4000,000
Legal fees 6000,000

Mortgagee note payables 40,000,000

Cost of painting (repair & maintenance) 1000,000
Advertising costs to attract tenants 200,000
The value of land in the financial statements of ZL as an investment property will be .

a) Rs. 21600,000.

b) Rs. 19200,000.

c) Rs. 5400,000.

d) Rs. 50400,000.

Answer:

Cost = 20% x (30% 0f 80,000,000) = 4800,000

Add: Non-refundable taxes = 4000,000 x 0.20 x 0.30

Add: Legal fees = 6000,000 x 0.20 x 30

= 5400,000

Q3: On July 1, 2020, Zarda Limited (ZL) entered into an agreement to lease the plant from the
manufacturer. An initial payment was made on July 1, 2020 and the present value of the future lease
payments at that date amounted to Rs. 520,500. Payments in respect of the lease are made in advance
and are Rs. 300,000 per annum, commencing on July 1, 2021. The rate of interest implicit in the lease
is 10%. The lease does not transfer ownership of plant to ZL by the end of the lease term and there is
no purchase option available. ZL incurred initial direct costs of Rs. 60,000 to set up the lease and
received lease incentives from the manufacturer amounting to Rs. 21,000. The initial cost of the right
of use asset as at July 1, 2020 is:

a) Rs. 520,500.

b) Rs. 880,500.

c) Rs. 859,500.

d) Rs. 901,500.

Answer:

= 520,500 + 300,000 + 60,000 – 21,000 = 859,500.

Q4: On January 1, 2019, BL acquired a copyright to a series of new professional publications for Rs. 10
million including Rs. 500,000 non-refundable purchase taxes. The purchase agreement provided Rs. 2
million to be paid at acquisition and the balance to be paid on December 31, 2019. Legal fees of Rs.
400,000 were incurred in acquiring the copyright and paid on January 1, 2019. An appropriate discount
rate is 10% per annum. The copyright will be recognized initially at an amount of Rs:

a) Rs. 2400,000.

b) Rs. 9672,727.

c) Rs. 2000,000.

d) Rs. 9272,727.

Answer:

Cost of acquisition = 2,000,000 + [(8000,000 x 1.10^-1]

Legal fee = 400,000

Initial recognition= 9672727

Q5: During the year ended June 30, 2020, JL exchanged an old automobile with a book value of Rs. 1.4
million (Rs. 3.4 million cost less accumulated depreciation of Rs. 2 million) for a new automobile with
fair value for Rs. 1.6 million and Rs. 200,000 in cash. The fair value of the old automobile is Rs. 1.8
million. The transaction is deemed to lack commercial substance. At amount the automobile
received in the trade be recorded.
a) Rs. 1.8 million.

b) Rs. 1.2 million.

c) Rs. 1.6 million.

d) Rs. 200,000.

Answer:
New automobile will be recognized at Fair value:

= 1.6 million + 0.2 million= 1.8 million.

Q3: Amroz Limited (AL), a subsidiary sold goods cost Rs. 10 million to its parent, Faiza Limited (FL) for
Rs. 11 million, and all of these goods were still held in the inventory at the year end of December 31,
2020, FL and AL are resident in the same tax jurisdiction where applicable tax rate is 29%. Explain the
deferred tax implications of the above transaction as per IAS 12.

Answer:

A locally incorporated holding company and subsidiary of a 100% owned group may be taxed as one
group by giving an irrevocable option for taxation as one fiscal unit. The adjustment of losses prior to
the formation of group are not available.

There is no tax on Provision for Unrealized profit (PURP) arising out of intra group transactions as per IAS
12.

Tax = (11,000,000 – 10,000,000) x 0.29 = Rs. 290,000.

Q4: On January 1, 2019, S Limited (SL) had property, plant and equipment with a carrying amount of
Rs. 1080 million. During the year, the company disposed off assets with a carrying amount of Rs. 360
million for Rs. 300 million. The company revalued the building from Rs. 450 million to Rs. 600 million
and charged depreciation for the year of Rs. 120 million. At the end of the year, the carrying amount of
property, plant and equipment was Rs. 1500 million.

Required: What amount would SL report in the statement of cash flows for the year ended December
31, 2019, under the heading “cash flows from investing activities”.

Answer:

Cash flow from investing activities:

PPE
Opening ......... 1080 million Disposal .............. 360 million

Revaluation gain .... 150 Depreciation ...... 120 million

million
Additions in PPE ..... 750
Closing ........... 1500 million.
million

Hence there is an outflow of Rs. 750 million as shown in above T-account, ,Moreover, the company sold
asset for sales proceeds of Rs. 300 million, hence net cash flow (outflow) from investing activities is Rs.
450 million.

Q5: On January 1, 2020, AL sold an item of inventory to Allied bank Limited for Rs. 5 million. At this
date the inventory had cost Rs. 2 million to produce but had a fair value of Rs. 9 million which was
expected to increase over the next year 3 years. At the end of year 3, AL have the option to repurchase
the inventory of Rs. 6655,000 at an effective interest rate of 10%. Discuss what items should be
recorded by AL in the statement of profit or loss in respect of the above transaction for the year ended
December 31, 2020.
Answer:

On January 1, 2020, the inventory will be shown at lower of cost or NRV, according to IAS 2, hence it will
be recorded at Rs. 2 million.

Later the fair value was 9 million but NRV was 5 million, hence on the date of sale, the company will
record Profit of Rs. 3 million.
Atthe end of year 3, the inventory can be bought by paying Rs. 6655,000 whose presentvalue is
calculated as follows:

PV = 6655,000 X (1.10^-3) = Rs. 5 million.

Atthat point, since it costs 2 million to manufacture and 5 million to purchase, so purchase decision
must be aborted.

Q6: On July 1, 2019, S Limited (SL) acquired a building for Rs. 5 million for investment purposes,
including refundable purchase taxes of Rs. 200,000. The purchase agreement provided for payment to
be made in full on June 30, 2020. Non-refundable property transfer taxes and direct legal cost
amounted to Rs. 25,000 and 180,000, respectively, paid on July 1, 2019, were incurred in acquisition.
The company uses 10% cost of capital (present value factor at 10% is 0.909). What will be the initial
cost of the building?
Answer:

Initial cost of machine:

Acquisition cost = Rs. 5000,000 x 0.909 = Rs. 4545000.

Less: Refundable taxes = Rs. 200,000 x 0.909 = Rs. (181,800)

Add: Non-refundable taxes = Rs. 25000.

Add: Direct legal cost = Rs. 180,000

Initial cost ofmachine = Rs.4568200.

Q7: During the year 2020, T Limited (TL) was sued by a competitor to Rs. 15 million for infringement of
a trade mark. Based on the advice of the company’s legal counsel. TL accrued the sum of Rs. 10 million
as a provision in its financial statements for the year ended December 31, 2020. Subsequent to the
statement of financial position date on February 15, 2021, the court decided in favor of the party
alleging infringement of the trademark and ordered the defendant to pay the aggrieved party a sum of
Rs. 14 million. The financial statements were prepared by the company’s management on January 31,
2021, and approved by the Board on February 20, 2021.

Required:

Should TL adjust its financial statements for the year ended December, 31, 2021.

Answer:

Yes TL should adjust its financial statements for the year ended December 31, 2021, according to IAS 10
“Events after the Reporting Period”, which states thatEvents after the reporting period are those events,
favorable and unfavorable, that occur between the end of the reporting period and the date when the
financial statements are authorized for issue.

Since, the competitor sued TL in preceding year and the court decision relates to that year, and the court
decided between the end of the reporting period and the date when the financial statements are
authorized for issue, hence it is an “adjusting event”.

Following adjustment is made:

Increase in provision and related expense = 14 million – 10 million = 4 million.

Q8: On January 1, 2019, PL entered into a lease agreement. The initial lease liability amounted to Rs.
3602,000 and a deposit of Rs. 1200,000 was payable on January 1, 2019, with three further
installments of Rs. 1000,000 payable on December 31, 2019, December 31, 2020 and December 31,
2021. The rate of interest implicit in the lease is 12%. What will be the amount of the finance charge
arising from this lease which will be charged to profit or loss for the year ended December 31, 2020?
Answer:

Lease amortization Schedule:

Date Annual rental Interest Principal paid Balance

January 1, 2019 1200,000 0 1200,000 2402,000

December 31, 2019 1000,000 2402,000 x 0.12= 288240 711760 1690,240

December 31, 2020 1000,000 1690,240 x 0.12= 202829 797171 893,069

Total finance cost charged to Profit and Loss is = 288,240 + 202829 = Rs. 491,069

Q9: FL issued Rs. 12 million 6% loan notes on July 1, 2019, incurring issue cost of Rs. 600,000. The loan
notes are redeemable at a premium giving them an effective interest rate of 9%. What expense should
be recorded in relation to loan notes in the financial statements of FL for the year ended June 30,
2020?
Answer:
Loan note expense:

Issue cost = Rs. 600,000.

Interest expense = (12,000,000 – 600,000) x 0.06 = Rs. 684,000

Total expense = 600,000 + 684,000 = 1284,000.

Q10: On January 1, 2021, SL acquired ZL for a cash payment of Rs. 7 million. At the time of purchase,
the fair value of net assets was Rs. 6.2 million. Compute the amount of goodwill acquired by SL.
Answer:

Goodwill = Fair value of net assets at acquisition – Price paid for acquisition.

Goodwill = 7 million – 6.2 million = 0.8 million.

Q11: During the year ended December 31, 2020, RL spent Rs. 600,000 in developing a new product.
Those costs meet the definition of an intangible asset under IAS 38 and have been recognized in the
statement of financial position. Local tax legislation allows these costs to be deducted for tax purposes
when they are incurred. Therefore, they have been recognized as an expense for tax purposes. At the
year end the intangible asset is deemed to be impaired by Rs. 50,000.
Required:

Discuss what will be the tax base of the intangible asset as at December 31, 2020.

Answer:

A tax base is defined as the total value of assets, properties, or income in a certain area or jurisdiction.

Tax base = Asset value – impairment loss

Tax base = 600,000 – 50,000 = Rs. 550,000

Q12: On January 1, 2020, CL borrowed Rs. 10 million from a local bank. What information the
company will present in its Statement of financial position, statement of comprehensive income and
statement of cash flows regarding the borrowing cost for the year ended December 31, 2020?

Answer:

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing
costs are recognized as an expense.

 Since borrowing cost is capitalized, the capitalization amount of 10 million is shown in statement
of financial position.
 The interest is capitalized if it is qualifying asset otherwise, it is shown in statement of profit or
 loss.
 Cash borrowed is inflow shown as Rs. 10 million inflow in financing activities of cash flow
statement.

Q13: On January 1, 2020 RL entered into an agreement to lease a plant. The terms of the lease are as
follow:

Lease payment amounted to Rs. 320,000 are payable

annually on December 31st each year.

The present value of the lease payment is Rs. 913,600.

The interest rate implicit in the lease is 15%.

Required:
What amount of finance cost would be reported on the statement of profit or loss of RL for the year
ended December 31,2020.

Answer:

Finance cost = 913,600 x 0.15 = Rs. 137,040

Q14: NL has only two items of inventory on hand as at December 31, 2020:

Item 1: Materials costing Rs. 2400,000 bought for processing and assembly for a customer under a
one-off order which is expected to produce a high profit margin. Since buying this material, the cost
price has fallen to Rs. 2000,000.

Item 2: A machine constructed for another customer for a contracted price of Rs. 3600,000. This has
recently been completed at a cost of Rs. 3360,000. It has now been discovered that in order to meet
certain health and safety regulation modification at an extra cost of Rs. 840,000 will be required. The
customer has agreed to meet half of the extra cost.

Required:

Calculate the total value of these two items of inventory as at December 31, 2020.

Answer:

As per IAS 2, “Inventory”, the inventory is hown at lower of cost or NRV.

Item 1 has cost of Rs. 2400,000, while its Net realizable value (Fair value less cost to sell) is Rs. 2000,000.
Hence, Its value is Rs. 2000,000.

Item 2 has cost of construction and necessary expenditure amounting to Rs. 3360,000 + Rs. 840,000 =
Rs. 4200,000, while customer is willing to pay contract price plus half of extra charges that amounts to
Rs. 3600,000 + 0.50 x Rs. 840,000 = 4020,000 , Hence NRV is less than cost, so it will be shown at NRV of
Rs. 4020,000.
Q15: CL had the following balances in its statement of financial position as at December 31, 2019 and
2020.

2020 2019
Rupees
Share capital 255,000 225,000
Share premium 157,500 142,500
10% Debenture 255,000 285,000
Required:
Calculate the amount that will be reported in the statement of cash flows of CL for the year ended
December 31, 2020, under the heading, “Cash flows from financing Activities”.

Answer:

Cash flow from financing Activities: Amount in “Rs.”

Increase in Share Capital ...................................................................................30,000

Increase in share premium ................................................................................15000.

Payment of Debentures ..................................................................................... (30,000)

Net cash flow (inflows) from financing Activities 15000.

Q16: FL is engaged in selling fire houses to fire fighters. FL discovered that a part of its hoses were
defective and failed when fire fighters were using them to extinguish fires. FL has a warranty policy
against defective hoses and it anticipates that thousands of hoses will return to the company. FL has
determined that it needs to recognize a provision relating to the faulty fire hoses they sold.
Management has assembled the following data:

Fire hoses sold 100,000

Hoses anticipated to have no defects 75%
Hoses anticipated to have minor defects 15%
Hoses anticipated to have major defects 10%
Required:
Determine how FL will record the provision relating to the faulty fire hoses as at December 31, 2020.

Answer:

Provision relating to faulty fire hoses = [100,000 x 0.15] + [100,000 x 0.10]

Provision relating to faulty fire hoses = Rs. 25,000.

Q17: ALT acquired a bus license in exchange for Rs. 200,000 cash and a taxi license with a carrying
amount of Rs. 950,000 (cost Rs. 1250,000). In this case management believes that the exchange lacks
commercial substance and the fair value of neither the asset received nor the asset given up cannot be
reliably measured.

Required:

Show how the above transaction will be recorded in the books of ALT.

Answer:

If the asset lacks commercial substance, then its fair value cannot be reliably measures and it will be
shown at carrying value. Hence the intangible asset will be shown at exchange value of Rs. 200,000 plus
the book value of license exchanged that is, Rs. 950,000. Bus license will be Rs. 1150,000.

Q18: On July 5, 2020, TL received a contract to print large number of magazines in the month of
August 2020. The customer has not defined the number of copies to be printed. On July 12, 2020, the
company received Rs. 80,000 deposit that will be set-off against the contract price but is non-
refundable in the event that the contract is cancelled. The contract is cancelled on August 30, 2020.
Required:

Discuss how TL would account for the above transaction.

Answer:

At July 12, 2020, TL received cash deposit but the work is yet to be performed hence the transaction is
recorded as unearned revenue as follows:
TL will debitcash Account by Rs. 80,000 and creditunearned client revenue by Rs. 80,000.

ON August 30 2020, the contract was cancelled but the amount was non refundable, hence TL will record
it as revenue earned due to breach of contract as follows:

TL will debitunearned clientrevenue Account by Rs. 80,000 and credit revenue earned by Rs. 80,000.

Q19: On January 5, 2021, before LL’s financial statements for the year ended December 31, 2020 were
authorized for issue, a fire destroyed the company’s warehouse which was valued at Rs. 10 million.
Inventories on hand with a carrying amount of Rs. 800,000 were also damaged. Destroyed warehouse
will be replaced at Rs. 15 million. LL insure its inventories up to a maximum loss of Rs. 500,000. The
company remains a going concern. Explain how LL would disclose the above event in its financial
statements for the year ended December 31, 2020.

Answer:

LL should adjust its financial statements for the year ended December 31, 2020, according to IAS 10
“Events after the Reporting Period”, which states thatEvents after the reporting period are those events,
favorable and unfavorable, that occur between the end of the reporting period and the date when the
financial statements are authorized for issue.

Since the inventory is destroyed after the reporting period and before the authorization date, hence the
inventory will be revalued according to IAS 2, at lower of cost or NRV after adjusting it for insurance of
Rs. 500,000, (800,000 – 500,000 = Rs. 300,000 loss).

Destroyed warehouse will be shown at 15 million cost and a loss of 10 million will be recorded in
statement of profit or loss.

Since entity is still going concern, the going concern review will be performed and disclosure of going
concern will be shown in notes to the accounts.

Q20: On January 1, 2020 S Limited sold a property having carrying amount of Rs. 6400,000 which had a
remaining useful life of 20 years at its fair value amounted to Rs. 8 million and transfer title of
property to the buyer. The company leased it back under a five year lease, paying Rs. 600,000 per
annum on December 31st each year. The present value of rentals payable was Rs. 2400,000 and the
rate implicit in the lease is 8%.

Required:

What amount would be reported in respect of depreciation, finance cost and profit on disposal in the
statement of profit or loss of SL for the year ended December 31, 2020.
Answer:

Depreciation expense for the year ended December 31, 2020:

= Fair value at disposal / remaining useful life

= Rs. 8000,000/20 years.

= Rs. 400,000.

Profit on disposal at January 1, 2020:

= Fair value at disposal – Carrying value.

= Rs. 8000,000 – Rs. 6400,000

= Rs. 1600,000.

Finance cost for the year ended December 31, 2020:

= present value of lease rentals x rate implicit in lease.

= 2400,000 x 8%.

= Rs. 192,000.

Q1: A company owns a number of nuclear plants. The company is obliged to dismantle one of these
 FINANCIAL ACCOUNTING AND CORPORATE REPORTING
LONG 2

Q1: A company owns a number of nuclear plants. The company is obliged to dismantle one of these
plants in 3 year’s time. The last nuclear plant is dismantled by the company cost Rs. 2 million
dismantle, but the company expects to dismantle this nuclear plant at a reduced cost of Rs. 1.6 million
due to increased experience.

There is also a chance that completely new technology may be available at the time of dismantling,
which could lead to a further cost saving of Rs. 400,000.

Required: Discuss the measurement of the above provision.

Answer:

According to IAS 37, Provisions, contingent assets and contingent liabilities, the provision is recorded for
future increase in liability or decrease in value of asset, the value of which can be reliably measured.

Since, the dismantling requires future expense, hence provision will be recorded, the disclosure of which
is given in statement of financial position.

The amount of provision is determined as : Rs. 2000,000 – Rs. 400,000 – Rs. 400,000 = Rs. 1200,000
provision is recorded for future dismantling of nuclear plant.

Q2: On January 1, 2019, IL received a government grant of Rs. 2 million in order to facilitate purchase
on the same day of an asset which cost of Rs. 3 million. The asset has a useful life of five years and is
depreciated on a 25% reducing balance basis. IL has a policy to account for all grants received as
deferred income. What amount of income will be recognized in respect of the grant for the year ended
December 31, 2020?

Answer:

The IAS 20, Government Grant, the amount of government grant is either considered as income or as
decrease in expenditure. Since the grant is abtained for purchase of the asset, the income recognized in
each period will be off set against the depreciation expense arising from use of asset.

Depreciation expenditure for 2019 = 3000,000 x 0.25 = Rs. 750,000

Depreciation expenditure for 2020 = (3000,000 – 750,000) x 0.25 = Rs. 562,500

Hence, income of Rs. 562,500 will be recorded for the year ended December 31, 2020.

Q3: On July 1, 2019, AL sold out its factory having a carrying value of Rs. 12 million to KL to Rs. 16
million. At this date the factory had a fair value of Rs. 30 million. AL continued to use the factory and
was responsible for the insurance and maintenance of the factory. Al has the right to repurchase the
factory for Rs. 19.6 million on July 1, 2022, representing a 7% growth in value each year.

Required: Discuss how the above transaction would be treated in the financial statement of AL for the
year ended June 30, 2020.

Answer:

July 1, 2019: The company has sold the asset recording the disposal as follows:

Profit on disposal = Sale value – carrying amount

Profit on disposal = 16 million – 12 million = Rs. 4 million.

Since fair value of asset is much less (Rs. 30 million – 16 million = Rs. 14 million) which can be due to
impairment loss. Hence, impairment review must be done in order to account for the impairment loss.

At June 30, 2020, the present value of Rs. 19.6 million is = 19.6 x (1.07^-2) = Rs. 17.11 million, Since the
present value of factory is greater than value at June 30, 2019, hence the repurchase will cause a loss of
(Rs. 17.11 – Rs. 16 = Rs. 1.1 million).

Q4: The following information has been extracted from the records of A Limited, pertaining to
financial year ended March 31, 2020.

1. The company has been sued for the non-payment of end service compensation and gratuity to 6
employees who were terminated without giving any notice . The claim amounts to Rs. 3 million. The
lawyer of the company is of the view that the company would have to pay to the displaced employees,
but the estimate of the amount that would be payable if plaintiff succeeds against the company is Rs.
2 million.

2. The company is facing litigation due to an alleged breach of contract. The contract contains a clause
that prescribes damages of Rs. 4 million in case of default. The management has assessed 60%
probability that the damages will have to be paid.

Required:

Discuss how each of the above matter should be dealt with in the financial statements of A Limited for
the year ended March 31, 2020.

Answer:

1. According to IAS 37, Provisions, contingent assets and contingent liabilities, the provision is recorded
for future increase in liability or decrease in value of asset, the value of which can be reliably measured.
Since the opinion of lawyer about future liability is of Rs. 2 million, hence the company will record the
provision of Rs. 2 million and appropriate disclosure related to this contingent liability is provided in
Statement of Financial Position.

2. Since the chance of contingent liability in order of breach of contract is more then 50% (i-e. 60%)
hence the contingent liability of Rs. 4 million must be recorded by the company and appropriate
disclosure related to this contingent liability is provided in Statement of Financial Position.

Q5: Extracts from SL’s statement of financial position are as follows:

2020 2019
Rupees.
Non-current Assets
Asset 6500,000 2500,000

Non-current Liabilities
Lease obligations 4800,000 2000,000
Current Liabilities
Lease obligations 1700,000 800,000

During the year ended December 31, 2020, depreciation charged on leased plant amounted to Rs.
1800,000.

Required:

Calculate the amount that will be shown in the statement of cash flows of SL for the year ended
December 31, 2020 in respect of payments made under leases.

Answer:

Cash flows from investing Activities:

Additions in Asset = Ending value of asset + depreciation expense – opening value of asset

Additions in assets = 6500,000 + 1800,000 – 2500,000 = 5800,000.

Hence there is out flow from investing Activities of Rs. 5800,000.

Cash flow from financing Activities:

Increase in non current lease obligation = 4800,000 – 2000,000 = Rs. 2800,000

Increase in current lease obligation = 1700,000 – 800,000 = Rs. 900,000

Total outflow from financing Activities = Rs. 3700,000 inflow

Total cash outflow from all activities = Rs. 2100,000. Outflow.

Q6: On January 1, 2019, B Limited received Rs. 2500,000 from the government on the condition that
they employee at least 100 staff each year for the next four years. On this date, it was almost certain
that BL would meet these requirements. However, on January 1, 2020 due to downturn and reduced
consumer demand. BL could not manage to employ 100 staff. The conditions of the grant required full
payment.

Required:
Explain how the above event will be dealt in the financial statements of B Limited?
Answer:

According to IAS 20, Government Grant, the grant is amortized over its useful life (4 years in this case) if
the company abide by the provisions of grant. The company met the conditions of government grant for
1st year but could not maintain these conditions afterwards.

Since the company has recognized the grant income for first year equal to : 2500,000/4 = Rs. 625,000
which will now be regarded as loss , since according to grant conditions, the complete amount will be
reverted back if the company does not meet the conditions.

Q7: During the year ended December 31, 2019, SL exchanged an automobile from FL which has a
carrying amount of Rs. 1.2 million. (Rs. 3 million cost less accumulated depreciation of Rs. 1.8 million)
for a tooling machine which has a fair market value of Rs. 1.5 million. No cash is exchanged in the
transaction. The fair value of the auto mobile is not readily determinable.
Required:

Determine the gain or loss that SL would record in its financial statements in respect of the above
transaction for the year ended December 31, 2019.
Answer:

Since the fair value of the automobile can not be measured reliably at the date of disposal (December
31, 2019), hence the at disposal it will be taken at carrying amount of 1.2 million.

Since no cash is paid at the date of disposal, hence the automobile is still shown in books of company at
December 31, 2019.

Q8: ML, a construction company, entered into a contract with NL for the construction of a building of
NL’s new branch office.

ML agrees to complete the project within eight month period. Project manager has provided following
data:

Material cost Rs. 4000,000.

Labor cost Rs. 6400,000 (out of which Rs. 400,000 was paid when labor was on strike).

Other land preparation cost amounted to Rs. 2650,000.

Rs. 1200,000 paid to government authorities in order to obtain approval for the design of building.

Annual depreciation of machine amounted to Rs. 1200,000. It is used for months in project.

General and administration cost amounted to Rs. 100,000.

Required:

Calculate ML’s cost of fulfilling the contract as per IFRS 15.

Answer:

ML’s cost of fulfilling project:

Material cost = Rs. 4000,000.

Direct labor = Rs. 6400,000 – Rs. 400,000 = Rs. 6000,000.

Overhead cost (land preparation expense) = Rs. 2650,000.

Necessary expenditure (government taxes) = Rs. 1200,000.

Depreciation expenditure = 1200,000 x 8/12 = Rs. 800,000.

Total cost of project = Rs. 14650,000.

Q9: On January 1, 2020, TL purchased 70% share capital of RL. TL agreed to pay Rs. 9 million on
December 31, 2021, TL has a cost of capital of 8%.

Following are the extracts of statement of profit or loss for the year ended June 30, 2020 for both TL
and RL.

TL Limited RL Limited
Rs. 000

Cost of sales (478,800) (264,600)

Operating expenses (75,915) (49,680)

Required:

Calculate the liability that should be recorded in respect of the deferred consideration in TL’s
consolidated statement of financial position as at June 30, 2020.

Answer:

Present value of obligation = Rs. 9000,000 x (1.08 ^ -1) = Rs. 833,4000.

Cost of sales = Rs (264,600,000 x 0.70) = Rs. 185,220.

Operating expenses = (Rs. 49680,000 x 0.70) = Rs. 34776

Deferred consideration = Rs. 228330,000.

Q10: Shapuntala Limited signed a contract with a customer to sale the car for Rs. 2 million, consider,
the following scenarios and explain whether the additional term is explicit or implicit and whether this
fact would affect how the transaction price is allocated.
1. During the last five years, all customers have been given a maintenance plan for free. This is not
stated in the contract. Similar maintenance plans are currently valued at Rs. 50,000.

2. The contract specifically mentions that a 3 year maintenance plan will be provided for free. The
maintenance plan is currently valued at Rs. 50,000.

Answer:

1. It is implicit contract, since the terms are not expressed by words written or spoken, the company will
be liable to cover the warranty for maintenance up to Rs. 50,000 due to constructive obligation.

2. Since terms of contract are expressly measured in contract, hence it is explicit contract. Maintenance
is provided at Rs. 50,000 per annum for 3 years, hence Rs. 50,000 present liability is recorded as
provision and total amount is Rs. 150,000 since the maintenance is provided for 3 years.

Q11: As at December 31, 2020, a company had the following inventories:

Name Original cost Selling price Estimated cost to

sell
Rupees
Cold paper cups 640,000 656,000 48,000

Food container 320,000 288,000 16,000

Folding cartons 480,000 496,000 8000
Paper plates 240,000 256,000 8000
Paper bags 288,000 240,000 16,000
Required:
Determine the amount at which company will record the above transaction in its financial statements
as per IAS 2.

Answer: According to IAS 2, Inventory is shown at Lower of cost or NRV, following table depicts this rule:

Name Original cost NRV (Selling price – Cost to Lower of cost or

sell) NRV
Rupees
Cold paper cups 640,000 656,000 – 48,000 = 608,000 608,000

Food container 320,000 288,000 – 16,000 = 272,000 272,000

Folding cartons 480,000 496,000 – 8000 = 488,000 480,000
Paper plates 240,000 256,000 – 8000 = 248,000 240,000
Paper bags 288,000 240,000 – 16,000 = 224,000 224,000
Q12: ML developed a new online platform during the year ended December 31, 2020, and spent Rs.
500,000 per month evenly from February 1, 2020 to October 31, 2020. ML became sure for the success
of the project on May 1, 2020 and was expected to last five years. Calculate the amount that should be
recorded in ML’s statement of profit or loss for the year ended December 31, 2020, in relation to the
development of the online platform.
Answer:

Development expenditure is not capitalized and expensed in Profit or Loss until it meets the criteria
according to IAS 38, In this case the expenditure occurring from February 1, 2020 to May 1, 2020 (total 3
months) is expensed in Statement of profit or Loss for the year ended 31 December, 2020 and following
amount is recorded:

Development expenditure = Rs. 500,000 x 3 = Rs. 1500,000.

At May 1, 2020, ML became sure of success of the stated project, Hence the amount of Rs. 500,000 per
month will be capitalized as development expenditure from May 1, 2020 to October 31, 2020 (6 months)
and amount will be shown in statement of financial position as follows:

Capitalization of development cost = Rs. 500,000 x 6 = Rs. 3000,000.

Q13: Extracts from SL statement of financial position are as follows:

Rupees.
Nom-current liabilities
2020 2019
8% loan notes 4080,000 4000,000
Deferred tax 1500,000 800,000
Current liabilities
Trade payables 2650,000 2100,000
Current tax payables 1250,000 725,000
Additional Information:

 SL recorded finance cost on loan notes in its statement of profit or loss amounted to Rs.
400,000.
 Income tax expense for the year amounted to Rs. 1 million.

Calculate the amount that will be recorded in respect of loan notes and tax payment in the statement
of cash flows of SL for the year ended December 31, 2020.

Answer:

Cash outflow from loan notes:

Increase in loan notes (4080,000 – 4000,000)...................................... Rs. 80,000.(inflow)

Add: Finance cost for the year ............................................................ Rs. (400,000).

Total outflow from loan ..................................................................... Rs. 320,000.

Net cash flow from tax payment:

Increase in current tax liability (Rs. 1250,000 – Rs. 725,000) .................... Rs. 525,000.

Increase in deferred tax liability (Rs. 1500,000 – Rs. 800,000)................ Rs. 700,000.

Income tax expense for the year:

Net outflow on tax payment (Rs. 700,000 – Rs. 525,000 + Rs. 1000,000)........ Rs. 1175,000.

Q14: AL owns 80% shares of SL. In the year ended June 30, 2020. AL reported total revenues of Rs. 5.5
million and SL of Rs. 2.1 million. SL sold goods to AL during the year for an amount of Rs. 1 million,
earning a margin of 20%. Half of the goods remained in the inventory at the year end.

Calculate the consolidated revenue amount of AL for the year ended June 30, 2020.
Answer:

Consolidated Revenue = Revenue of parent + Revenue of subsidiary – intragroup sale + PURP

Consolidated Revenue = Rs. 5.5 million + Rs. 2.1 million – Rs. 1 million + (Rs. 1 million x 0.20 x 0.50)

Consolidated Revenue = Rs. 6.7 million.

Q15: Mr. Rehan, a customer, sues Diamond Hotels for providing him with raw food that resulted in his
sickness. The hotel’s lawyer is of the view that it is unlikely (but not remote) that the company will
have any obligation under his lawsuit. Management estimated that the hotel would have to pay rs.
300,000 if it were to lose the lawsuit. Discuss how the above event should be dealt by diamond Hotels
as per IAS 37, Provisions, contingent asset and contingent liabilities.

Answer:

As per IAS 37, since the liability arising out of the scenario is unlikely but is not remote, hence there is
more than 50% chance of occurring of such contingent liability, Hence a provision equal to reliably
measured vale, i-e. Rs. 300,000 should be recorded in Statement of Financial position by the entity and
appropriate disclosure must also be provided in notes to the accounts.

Q16: A company owns a machine that has a carrying value of Rs. 8500,000 at the year end of
December 31, 2020. Its market value is Rs. 7800,000 and costs of disposal are estimated at Rs.
250,000. A new machine would cost Rs. 15000,000. LL expects its existing machine to produce net cash
flows of Rs. 3000,000 per annum for the next three years. The cost of capital of LL is 8%. Calculate the
impairment loss on the machine to be recognize in the financial statements as at December 31, 2020.
(Presnt value factor at 8% for year 1 = 0.926, year 2 = 0.857, year 3 = 0.794).

Answer:
Impairment Loss = Carrying amount – Recoverable amount.

Recoverable amount = Higher of Fair value less cost to sell or Value in Use

Value in use = Present value of inflows

Value in Use = [Rs. 3000,000 x 0.926] + [Rs. 3000,000 x 0.857] + [Rs. 3000,000 x 0.794]

Value in use = Rs. 7731,000.

Fair value less cost to sell = Rs. 7800,000 – Rs. 250,000.

Fair value less cost to sell = 7550,000,

Hence, since value in use is greater then value in use, so Recoverable amount is Rs. 7731,000.
Impairment loss = 8500,000 – 7731,000 = Rs. 769,000.

Q17: During the year ended December 31, 2020, WL entered into the following transactions:

On January 1, 2020, WL acquired under a lease arrangement an equipment which was initially
measured as at Rs. 2040,000. Under the terms of lease a payment in advance of Rs. 540,000 was made
on commencement of the lease being the first of five equal payments. The equipment has a five years
useful life. The lease has an implicit interest rate of 10%.

On November 1, 2020, WL makes a payment of Rs. 108,000 for a nine month lease of an item of
excavation equipment. WL wishes to utilize the exceptions available under IFRS 16 “Leases”.

What amount in total would be charged to WL’s Statement of profit or loss for the year ended
December 31, 2020 in respect of above transaction.

Answer:

Lease amortization schedule:

Date Annual Payments Interest Principle paid Balance

1 Jan 2020 540,000 0 540,000 1500,000

Since, only one payment is made until 31 December , 2020 which was in advance (at first day of
inception of lease, hence there is no interest payment, only principle is paid by the whole payment of Rs.
540,000.

The second transaction falls under exception of IAS 16, Leases, which states that the whole amount of
lease is expensed to profit or loss statement, if lease term is less than one year, Hence the amount
charged to Profit or loss statement is Rs. 108,000.

Q18: SL has incurred the following expenditure during the year:

1. Rs. 1.5 million spent on the initial design work of a new product. It is anticipated that this design
will be taken forward over the next two year period to be developed and tested with a view to
production in three year’s time.

2. Rs. 7.5 million spent on the testing of a new production system which has been designed internally
and which will be in operation during the following year. This new system should reduce the cost of
production by 20%.

How should each of the above costs to be treated in the financial statements of the SL.

Answer:

1. Since, the expenditure is for initial design which under IAS 38, falls under research expenditure, Hence
amount of Rs. 1.5 million is expensed in Statement of Profit or Loss since the amount related to research
expenditure is always expensed, it can not be capitalized.

2. These would appear to be development stage costs as the new production system is due to
be in place fairly soon and will produce economic benefits in the shape of reduced costs.
Therefore these should be capitalised as development costs. Rs. 7.5 million spent on internally generated
asset must be capitalized since it is necessary expenditure of development of internally generated asset.
Moreover it reduces the cost of production by 20%.

19: On July 1, 2019, HL sold an item of machinery to AL at its fair value of Rs. 75 million. The asset had
a carrying amount of Rs. 30 million prior to sale. This sale represents the satisfaction of a performance
obligation in accordance with IFRS 15.

HL entered into a contract with AL for the right to use the asset for next five years. Annual payments
of Rs. 12.5 million are due at the end of each year. The interest rate implicit in the lease is 10%. The
present value of the annual lease payment is Rs. 47.5 million, the remaining useful life of the asset is
twelve years.
Explain how HL will account for the above transaction on July 1, 2019.

Answer:

On July 1, 2019, the entity will record a Profit on disposal of following amount:

Profit on disposal = Fair value – carrying value = Rs. 75 million – Rs. 30 million.

On July 1, the company entered into right of use asset lease agreement also, according to which
company has to make payments of Rs. 12.5 million, and 1st payment is due as current liability, Hence
amount of Rs. 12.5 million is shown as current lease liability in Statement of Financial position in which
there is implicit tax of 10% which means company has to record interest expense in Statement of profit
or loss equal to Rs. 47.5 million x 10% = 4.75 million.

Q20: A company manufactures five high tech products each on a different plant. The company is in the
process of preparing its financial statements for the year ended June 30, 2021. As the chief financial
officer, the following matters are under your consideration:

i. Inventory carried at Rs. 25 million on June 30, 2021 was sold for Rs. 15 million during the month of
July 2021 after it had been damaged due to a fire broke out at the factory premises.

ii. On July 5, 2021, one of the company’s corporate customers declared bankruptcy. The liquidator
announced on August 25, 2021 that 20% of the debt would be paid on liquidation.

iii. On August 28, 2021, the Board of directors of company announced a dividend of Rs. 3 per share.

State how the above event should be treated in the company’s financial statements of the year ended
June 30, 2021 assuming that all the above stated events are material to the company.

Answer:

i. Inventory, According to IAS 2 is shown at lower of cost or NRV. In this case, the cost is 25 million while
its NRV (Fair value less cost to sell) is Rs. 15 million. Hence, it must be shown at Rs. 15 million.

ii. In this case, the company must record provision for bad debts equal to 80% of the credit sales, since
the customer has become insolvent and can only pay 20% of the receivables.

iii. Company must record dividend expense and dividend payable, Accounting entry will be, debit
dividend expense and credit dividend payable.

Q21: A company obtained a license for a period of eight years for making and selling a life saving drug.
Following information is relevant to the drug:

Cost of license amounted to Rs. 8300,000 and amortization up to December 31, 2018 amounted to Rs.
3112500. On January 1, 2020, the government introduced a legislation which effectively ban this type
of product. As a consequence, the product was withdrawn from market and the company decided to
stop the sale of this drug.
Calculate the amount of impairment loss to be charged to statement of profit or loss of the company
for the year ended December 31, 2020.

Answer:

Since Impairment Loss is charged on devaluation of asset other than depreciation. In this case, the
License being intangible asset has become useless because of government legislatioin, hence the whole
remaining value of asset is impaied. Impairment is calculated as follows:

Impairment Loss = Carrying amount – Recoverable amount

Carrying amount = Cost – Accumulated amortization.

Carrying amount= 8300,000 – 3112500 = Rs. 5187500.

Impairment Loss = Rs. 5187500 – Rs. 0

Hence impairment loss = Rs. 5187500.

Q22: On January 1, 2020, a company acquired manufacturing rights of an assorted range of juices and
d) Rs. 200,000.

Q3: During the year ended December 31, 2019, Lizard Limited (LL) entered into following transactions:

1. On January 1, 2019, LL acquired under a lease, a right of use asset which was initially measured at
Rs. 3400,000, under the terms of the lease, a payment in advance of Rs. 900,000 was made on
commencement of the lease being the first of five equal annual payments. The right of use asset has a
five year useful life. The lease has an implicit interest rate of 10%.

2. On November 1, 2019, LL made a payment of Rs. 180,000 for a nine-month lease of an item of
equipment. LL wishes to utilize the exceptions available under IFRS 16 Leases.

The amount that would be charged to LL’s statement of profit or loss for the year ended December 31,
2019 in respect of the above transactions is:
a) Rs. 970,000.

b) Rs. 250,000.

c) Rs. 720,000.

d) Rs. 680,000.

Answer:

1 January 2019:

3400,000/5 = 680,000

1 November, 2019

IFRS 16 Leases provides a recognition exemption whereby lessees can choose not to capitalise 'short-
term leases' on the balance sheet, and instead recognise lease payments as an expense, either on a
straight-line basis, or another systematic basis, if that basis is more representative of the pattern of the
lessee's ...

Q4: At January 1, 2020, FL received a loan of Rs. 10 million at 6% per annum. The loan has an effective
finance cost of 7.5% per annum. The loan was specifically issued to finance the construction of a new
building and the loan will be treated under IAS 23. Construction commenced on February 1, 2020 and
it was completed and ready for use on November 30, 2020, but did not became operational until
January 1, 2021. How much interest should be capitalized as part of property, plant and equipment of
FL as at December 31, 2020?

a) Rs. 600,000.

b) Rs. 125,000.

c) Rs. 625,000.
d) Rs. 750,000.

Answer:

The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total finance cost
for the year ended 31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying
asset, the finance cost (or part of it in this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (Feb 1, 2020)
and must cease when the asset is ready for its intended use (Nov 30, 2020); in this case a 10-month
period. Hence capitalization = 750,000 x 10/12 = 625,000

Q5: SL is being sued by a customer for Rs. 2 million for breach of contract over a cancelled order. SL has
obtained legal opinion that there is a 20% chance that SL will lose the case. The unrecoverable legal
cost of defending the action are estimated at Rs. 100,000. The amount of the provision that should be
made by SL for the year ended December 31, 2019 is:

a) Rs. 100,000.

b) Rs. 2 million.

c) Rs. 400,000.

d) Rs. 500,000.

Q1: On July 1, 2020, KL purchased 70% shares of ZL. For the year ended December 31, 2020, the cost of
sales of KL and ZL amounted to Rs. 319,200,000 and Rs. 176,400,000 respectively. Since acquisition, KL
sold goods to ZL amounting to Rs. 1 million per month, at a margin of 20%. At the year end, ZL held
30% of these goods. Which one of the following amount represents correct figure to be included in the
consolidated statement of profit or loss of KL for the year ended December 31, 2020?

a) Rs. 401,760,000.

b) Rs. 402,600,000.

c) Rs. 396,400,000.

d) Rs. 395,760,000.

Answer:

= COS of Parent + COS of subsidiary – Purchases + provision of unrealized profit (PURP):

= 319200,000 + (176,400,000 x 6/12) – 6000,000 + (6000,000 x 0.20 x 0.30)

= 401,760,000.

Q2: Following information is related to Tasneem (Private) Limited for the year ended December 31,
2020:
  Profit before tax amounted to Rs. 1.5 million.
 The company deducted accounting depreciation amounted to Rs. 950,000 while tax authorities
allow depreciation of Rs. 870,000.
 The company deducted fine and penalties amounted to Rs. 65,000 but this is not allowed by
tax authorities.
 Other income includes dividend income which is exempt for tax purposes amounted to Rs.
60,000.
 Applicable tax rate for the company is 29%. Current tax expense for the year ended December
31, 2020 will be:

a) Rs. 458,200.

b) Rs. 435,000.

c) Rs. 477,050.

d) Rs. 459,650.

Answer:

Profit before tax = 1500,000.

Add back: Accounting depreciation = 950,000

Less: Tax allowable dep. = (870,000)

Add back: non deductible fines = 65,000

Taxable income = 1645,000

Tax @ 29% = 477050

Q3: On October 1, 2018, TL sanctioned loan amounted to Rs. 3 million to FL Limited, receiving in
exchange a nine-month, 12% note receivables. TL’s financial year ends on December 31st each year. The
interest earned by TL on the notes receivables from FL during the year 2019 will amount to:

a) Rs. 270,000.

b) Rs. 360,000.

c) Rs. 90,000.

d) Rs. 180,000.

Answer:

= 3000,000 x 0.12 x 3/12 = 90,000.

Q4: RL limited operates clothing store and uses a periodic inventory system. During the year ended
December 31, 2019, RL made purchases of Rs. 2 million. A physical inventory count performed on
December 31, 2019, revealed an ending inventory balance of Rs. 250,000. Cost of goods sold
amounted to Rs. 2100,000. The opening inventory on January 1, 2019, was:

a) Rs. 100,000.

b) Rs. 350,000.

c) Rs. 250,000.

d) Rs. 150,000.

Answer:

Op. inventory + purchases – ending = COGS

Op. inv. = COGS – purchases + ending

= 2100,000 – 2000,000 + 250,000

= 350,000.

Q5: Hashim Limited (HL) acquired an 80% holding in S Limited (SL) on April 1, 2020. From April 1, 2020
to December 31, 2020. SL sold goods to HL for Rs. 8.6 million at a mark up of 10%. HL inventory at
December 31, 2020 included Rs. 4.4 million of such inventory. The statement of profit or loss for each
company for the year to December 31, 2020 amounted to Rs. 29.4 million for HL and Rs. 23.2 million.
What is the cost of sales to be shown in the consolidated statement of profit or loss for the year ended
December 31, 2020:

a) Rs. 37.8 million.

b) Rs. 40.4 million.

c) Rs. 38.2 million.

d) Rs. 38.6 million.

Answer:

= 29.4 + (23.2 x 9/12) – 8.6 + (4.4 x 10/110)

= 38.6

Q1: H Group of companies acquired 80% of the share capital of Z limited on January 1, 2019. Part of
the purchase consideration was Rs. 2000,000 cash to be paid on January 1, 2022. The applicable cost
of capital is 10%. will be the deferred consideration liability be at December 21, 2020.

a) Rs. 1652,880.

b) Rs. 1818,181.
c) Rs. 2000,000.

d) Rs. 1502,620.

Answer:

= 2000,000 x (1.10)^-3 = 1502,620.

Q2: On May 1, 2019, Z Limited (ZL) acquired a property (Land and building) and used 20% of the floor
area to accommodate the administrative and maintenance staff and the remaining area was rented
out under operating lease. Costs and other information associated with this acquisition are as follows:

Rupees
Purchase price (30% attributed to land) 80,000,000
Non-refundable transfer taxes 4000,000
Legal fees 6000,000

Mortgagee note payables 40,000,000

Cost of painting (repair & maintenance) 1000,000
Advertising costs to attract tenants 200,000
The value of land in the financial statements of ZL as an investment property will be .
a) Rs. 21600,000.

b) Rs. 19200,000.

c) Rs. 5400,000.

d) Rs. 50400,000.

Answer:

Cost = 20% x (30% 0f 80,000,000) = 4800,000

Add: Non-refundable taxes = 4000,000 x 0.20 x 0.30

Add: Legal fees = 6000,000 x 0.20 x 30

= 5400,000

Q3: On July 1, 2020, Zarda Limited (ZL) entered into an agreement to lease the plant from the
manufacturer. An initial payment was made on July 1, 2020 and the present value of the future lease
payments at that date amounted to Rs. 520,500. Payments in respect of the lease are made in advance
and are Rs. 300,000 per annum, commencing on July 1, 2021. The rate of interest implicit in the lease
is 10%. The lease does not transfer ownership of plant to ZL by the end of the lease term and there is
no purchase option available. ZL incurred initial direct costs of Rs. 60,000 to set up the lease and
received lease incentives from the manufacturer amounting to Rs. 21,000. The initial cost of the right
of use asset as at July 1, 2020 is:

a) Rs. 520,500.

b) Rs. 880,500.

c) Rs. 859,500.

d) Rs. 901,500.

Answer:

= 520,500 + 300,000 + 60,000 – 21,000 = 859,500.

Q4: On January 1, 2019, BL acquired a copyright to a series of new professional publications for Rs. 10
million including Rs. 500,000 non-refundable purchase taxes. The purchase agreement provided Rs. 2
million to be paid at acquisition and the balance to be paid on December 31, 2019. Legal fees of Rs.
400,000 were incurred in acquiring the copyright and paid on January 1, 2019. An appropriate discount
rate is 10% per annum. The copyright will be recognized initially at an amount of Rs:

a) Rs. 2400,000.

b) Rs. 9672,727.

c) Rs. 2000,000.

d) Rs. 9272,727.

Answer:

Cost of acquisition = 2,000,000 + [(8000,000 x 1.10^-1]

Legal fee = 400,000

Initial recognition= 9672727

Q5: During the year ended June 30, 2020, JL exchanged an old automobile with a book value of Rs. 1.4
million (Rs. 3.4 million cost less accumulated depreciation of Rs. 2 million) for a new automobile with
fair value for Rs. 1.6 million and Rs. 200,000 in cash. The fair value of the old automobile is Rs. 1.8
million. The transaction is deemed to lack commercial substance. At amount the automobile
received in the trade be recorded.

a) Rs. 1.8 million.

b) Rs. 1.2 million.

c) Rs. 1.6 million.

d) Rs. 200,000.

Answer:
New automobile will be recognized at Fair value:

= 1.6 million + 0.2 million= 1.8 million.

year ended June 30, 2020.
Answer:

A financial lease is a type where the lessor allows the lessee to use the former's asset instead of a
periodical payment for an extended period. Hence, the above transaction will be recorded as finance
lease where the seller acquired the asset under sale and lease back agreement according to IAS 17.
AL has sold the asset for Rs. 16 million having fair value of Rs. 30 million, hence the arrangement was at
Rs. 14 million lower than fair value but Rs. 4 million higher than its cost.

Q34: The following information has been extracted from the records of A Limited, pertaining to
financial year ended March 31, 2020.
1. The company has been sued for the non-payment of end service compensation and gratuity to 6
employees who were terminated without giving any notice . The claim amounts to Rs. 3 million. The
lawyer of the company is of the view that the company would have to pay to the displaced employees,
but the estimate of the amount that would be payable if plaintiff succeeds against the company is Rs.
2 million.
2. The company is facing litigation due to an alleged breach of contract. The contract contains a clause
that prescribes damages of Rs. 4 million in case of default. The management has assessed 60%
probability that the damages will have to be paid.
Required:

Discuss how each of the above matter should be dealt with in the financial statements of A Limited for
the year ended March 31, 2020.
Answer:

1. According to IAS 37, the company shall record a provision of Rs. 2 million on the opinion of the legal
expert.
2. Since the chance of obligation is likely (i-e: 60%), hence the provision will be recorded at Rs. 4 million.

Q35: Extracts from SL’s statement of financial position are as follows:

2020 2019
Rupees.
Non-current Assets
Right of use asset 6500,000 2500,000

Non-current Liabilities
Lease obligations 4800,000 2000,000
Current Liabilities
Lease obligations 1700,000 800,000
During the year ended December 31, 2020, depreciation charged on leased plant amounted to Rs.
1800,000.

Required:

Calculate the amount that will be shown in the statement of cash flows of SL for the year ended
December 31, 2020 in respect of payments made under leases.

Answer:

The increase of right of use asset will be shown as outflow from investing activities at Rs. 4000,000 (Rs.
6500,000 – Rs. 2500,000)

Increase in non-current value of obligation will be shown as inflow from financing activities of Rs.
2800,000 (Rs. 4800,000 – Rs. 2000,000)

Increase in current value of obligation will be shown as inflow from financing activities of Rs. 900,000
(Rs. 1700,000 – Rs. 800,000)

Total cash flow from all activities = Rs. 300,000 outflow.

Q36: On January 1, 2019, B Limited received Rs. 2500,000 from the government on the condition that
they employee at least 100 staff each year for the next four years. On this date, it was almost certain
that BL would meet these requirements. However, on January 1, 2020 due to downturn and reduced
consumer demand. BL could not manage to employ 100 staff. The conditions of the grant required full
payment.

Required:

Explain how the above event will be dealt in the financial statements of B Limited?

Answer:

According to IAS 20, The company since the company failed to abide by the conditions of government
grant, it shall reverse the recognition of grant and shall repay the amount of grant and record the
transaction of loss in statement of profit or loss at Rs. 2500,000.

Q37: During the year ended December 31, 2019, SL exchanged an automobile from FL which has a
carrying amount of Rs. 1.2 million. (Rs. 3 million cost less accumulated depreciation of Rs. 1.8 million)
for a tooling machine which has a fair market value of Rs. 1.5 million. No cash is exchanged in the
transaction. The fair value of the auto mobile is not readily determinable.

Required:

Determine the gain or loss that SL would record in its financial statements in respect of the above
transaction for the year ended December 31, 2019.
Answer:

Gain or loss = Fair value of asset – Carrying value of asset

Gain = Rs. 1.5 million – Rs. 1.2 million

Gain = Rs. 0.3 million.

Q38: ML, a construction company, entered into a contract with NL for the construction of a building of
NL’s new branch office.

ML agrees to complete the project within eight month period. Project manager has provided following
data:

Material cost Rs. 4000,000.

Labor cost Rs. 6400,000 (out of which Rs. 400,000 was paid when labor was on strike).

Other land preparation cost amounted to Rs. 2650,000.

Rs. 1200,000 paid to government authorities in order to obtain approval for the design of building.

Annual depreciation of machine amounted to Rs. 1200,000. It is used for months in project.

General and administration cost amounted to Rs. 100,000.

Required:

Calculate ML’s cost of fulfilling the contract as per IFRS 15.

Answer:

According to IAS 15 Revenue Recognition, cost of contract:

Material = Rs. 4000,000.

Add: Labor = Rs. 6000,000.

Add: Land preparation cost = Rs. 2650,000.

Add: Amount paid for approval of design = Rs. 1200,000.

Total cost of contract = Rs. 13850,000.

Q39: On January 1, 2020, TL purchased 70% share capital of RL. TL agreed to pay Rs. 9 million on
December 31, 2021, TL has a cost of capital of 8%.

Following are the extracts of statement of profit or loss for the year ended June 30, 2020 for both TL
and RL.

TL Limited RL Limited
 Rs. 000
Cost of sales (478,800) (264,600)

Operating expenses (75,915) (49,680)

Required:
Calculate the liability that should be recorded in respect of the deferred consideration in TL’s
consolidated statement of financial position as at June 30, 2020.

Answer:

Cost of sale and operating expenses are added as line items at the date of consolidated statement while
the share capital of parent is recorded only in statement of financial position.

Hence consolidate will record expenses as follows:

Cost of goods sold = Rs. 264,600 + Rs. 478800 = Rs.

Operating expenses = Rs. 49680 + Rs. 75,916 = Rs.

Amount paid for acquisition of subsidiary = Rs. 900,000 x (1.08)^ -0.5

Q40: S Limited signed a contract with a customer to sale the car for Rs. 2 million, consider, the
following scenarios and explain whether the additional term is explicit or implicit and whether this
fact would affect how the transaction price is allocated.

1. During the last five years, all customers have been given a maintenance plan for free. This is not
stated in the contract. Similar maintenance plans are currently valued at Rs. 50,000.

2. The contract specifically mentions that a 3 year maintenance plan will be provided for free. The
maintenance plan is currently valued at Rs. 50,000.

Answer:

1. Since the terms of maintenance plans are not specifically mentioned hence it is an implied or implicit
contract.

2. 1. Since the terms of maintenance plans are specifically mentioned hence it is an express or explicit
contract.

Q41: As at December 31, 2020, a company had the following inventories:

Name Original cost Selling price Estimated cost to

sell
Rupees
Cold paper cups 640,000 656,000 48,000
 Food container 320,000 288,000 16,000
Folding cartons 480,000 496,000 8000
Paper plates 240,000 256,000 8000
Paper bags 288,000 240,000 16,000
Required:
Determine the amount at which company will record the above transaction in its financial statements
as per IAS 2.

Answer:

Name Original cost Selling price Lower of cost or

– Cost to sell NRV
Rupees
Cold paper cups 640,000 656,000 – 608,000
48000 =
608000
Food container 320,000 288,000 – 272,000
16000 =
272,000
Folding cartons 480,000 496,000 – 480,000
8000 =
488,000
Paper plates 240,000 256,000 – 240,000
8000 =
248,000
Paper bags 288,000 240,000 - 16,000
16000

Q42: ML developed a new online platform during the year ended December 31, 2020, and spent Rs.
500,000 per month evenly from February 1, 2020 to October 31, 2020. ML became sure for the success
of the project on May 1, 2020 and was expected to last five years. Calculate the amount that should be
recorded in ML’s statement of profit or loss for the year ended December 31, 2020, in relation to the
development of the online platform.

Answer:

Since the criteria to recognize the transaction was completed on 1st May 2020, hence the amount of Rs.
500,000 per month will be recognized for 6 month (i-e. from May 2020 to October 2020.

Total amount = Rs. 500,000 x 6 = Rs. 3000,000.

Q43: Extracts from SL statement of financial position are as follows:

Rupees.
Nom-current liabilities
2020 2019
8% loan notes 4080,000 4000,000
Deferred tax 1500,000 800,000
Current liabilities
Trade payables 2650,000 2100,000
Current tax payables 1250,000 725,000
Additional Information:

 SL recorded finance cost on loan notes in its statement of profit or loss amounted to Rs.
400,000.
 Income tax expense for the year amounted to Rs. 1 million.

Required:

Calculate the amount that will be recorded in respect of loan notes and tax payment in the statement
of cash flows of SL for the year ended December 31, 2020.

Answer:

Income Tax payable

Current tax b/d ......................... 725,000
Deferred tax b/d ....................... 800,000
Deferred tax c/d..................... 1500,000 Income tax expense for year ....... 1000,000
current tax c/d ...................... 1250,000

Income tax payment to be recorded in operating activities as outflow will be Rs. 225,000.

Similarly, increase in value of loan notes is shown at RS. 80,000 in investing activities of cash flow
statement as an inflow, while the amount of interest paid as interest expense is shown as outflow in
operating activities section of statement of cash flows.

Q44: AL owns 80% shares of SL. In the year ended June 30, 2020. AL reported total revenues of Rs. 5.5
million and SL of Rs. 2.1 million. SL sold goods to AL during the year for an amount of Rs. 1 million,
earning a margin of 20%. Half of the goods remained in the inventory at the year end.
Required:

Calculate the consolidated revenue amount of AL for the year ended June 30, 2020.

Answer:

Consolidated revenue = Revenue of Parent + Revenue of subsidiary – Sales + provision of unrealized

profit (PURP):

Consolidated Revenue = 5.5 million + (2.1 million x 6/12) – 1 million + (1 million x 0.20 x 0.50)

Consolidated Revenue = Rs. 5.65 million

Q45: Mr. Rehan, a customer, sues Diamond Hotels for providing him with raw food that resulted in his
sickness. The holder’s lawyer is of the view that it is unlikely (but not remote) that the company will
have any obligation under his lawsuit. Management estimated that the hotel would have to pay rs.
300,000 if it were to lose the lawsuit. Discuss how the above event should be dealt by diamond Hotels
as per IAS 37, Provisions, contingent asset and contingent liabilities.

Answer:

According to IAS 37, If the contingent liability is unlikely (Less than 50% chance of occurrence) to occur,
then the provision is not recorded. Only the disclosure of contingent liability is made in notes to the
accounts.

Q46: A company owns a machine that has a carrying value of Rs. 8500,000 at the year end of
December 31, 2020. Its market value is Rs. 7800,000 and costs of disposal are estimated at Rs.
250,000. A new machine would cost Rs. 15000,000. LL expects its existing machine to produce net cash
flows of Rs. 3000,000 per annum for the next three years. The cost of capital of LL is 8%. Calculate the
impairment loss on the machine to be recognize in the financial statements as at December 31, 2020.
(Presnt value factor at 8% for year 1 = 0.926, year 2 = 0.857, year 3 = 0.794).
Answer:

Impairment Loss = Carrying value – recoverable amount.

Recoverable amount = higher of fair value and value in use.

Carrying value = Rs. 8500,000.

Value in use = Rs. 1159650.

Years Cash flows Present value factor Present value

1 3000,000 0.926 2778,000

2 3000,000 0.857 2571,000

3 3000,000 0.794 2382,000

Value in use = 7731,000

Fair value = 7800,000 – 250,000 = Rs. 7550,000

Since value in use is higher, hence recoverable amount = Rs. 7731,000.

Impairment loss = Carrying value – recoverable amount.

= 8500,000 – 7731,000

Hence impairment loss = Rs. 769,000

Q47: On December 31, 2018 RL has accrued interest payable of Rs. 84,000. During the year ended
December 31, 2019 the company charged Rs. 1050,000 to statement of profit or loss in respect of
unwinding the discount related to a provision. The statement of cash flows showed Rs. 203,000 as
interest paid. The closing balance on accrued interest payable account was Rs. 105,000. The company
has a discount rate of 6%.

Required: What is the amount of interest expense that the company had charged to its statement of
profit or loss for the year ended December 31, 2019?

Answer:

Income Tax payable

Current tax b/d ......................... 84,000
Income tax paid ..................... 203,000
Income tax expense for year ....... 224,000
current tax c/d ...................... 105,000

From the above T-account, the income tax expense for the year is calculated at Rs. 224,000

Q48: Which of the following items should be recognized as an intangible asset:

(i) Patent for new drug.

(ii) License for new vaccine.

(iii) Specialist training courses.

a) Option (i) and (ii) are correct.

b) Option (i) and (iii) are correct.

c) Option (ii) and (iii) are correct.

d) Option (i) is correct.

Q49: Factors that effect the selection of inventory costing method do not include:
a) Tax effects.
b) Income statement effects.

c) Statement of financial position effects

d) Perpetual vs periodic inventory system.

Q50: In the statement of cash flows, a decrease in accounts payable would be shown as:

a) An increase in the operating activities category.

b) A decrease in operating activities category.

c) A decrease in the operating activities category.

d) An increase in the financing category.

Q51: HL bought a machine for Rs. 5000,000 on January 1, 2018, which had an expected useful life of
four years and an expected residual value of Rs. 1 million, the asset was to be depreciated on the
straight line basis. On December 31, 2020, the machine was sold for 1.6 million is the
amount of income/loss on disposal to be recorded in the statement for profit or loss for the year
ended December 31, 2020.

a) Profit of Rs. 350,000.

b) Profit of Rs. 600,000.

c) Loss of Rs. 400,000.

d) Loss of Rs. 600,000.

Answer:

Carrying value of asset = Cost – Accumulated depreciation

Carrying value of asset = Rs. 5 million – ( Rs. 5 million – 1 million/ 4 years) x 3 = Rs. 5 million – Rs. 3
million

Carrying value = Rs. 2 million.

Fair value = Rs. 1.6 million

Gain or Loss on disposal = Fair value – Carrying value

Loss = Rs. 1.6 million – Rs. 2 million = 0.4 million Loss.

Q53: At December 31, 2019, BN limited had finished goods inventory of juice packets with a carrying
amount of Rs. 560,000 (28,000 juice packets at a cost of Rs. 20 per unit). Out of total 15000 juice
packets were set aside for SR limited as terms of sale commitment at Rs. 30 per unit. The current
selling price is Rs. 35 per unit. Selling cost for the 15000 packets amounts to Rs. 70,000 while the
normal estimated selling cost is Rs. 5 per unit. The net realizable value of juice packets at Dec 31, 2019:

a) Rs. 905,000.

b) Rs. 845,000.

c) Rs. 835,000.

d) Rs. 770,000.
Ans wer:
NRV = Market value – Cost to sell

NRV of 15000 packets = [30 x 15000] - 70000

NRV = 450,000 – 70,000 = 380,000

NRV of remaining 13,000 packets = [35 x 13000] – [5 x 13000] = 390,000

Total NRV = 390,000 + 380,000 = Rs. 770,000

Q54: A cash generating unit of Supreme limited has the following balance in its financial statements:

Rupees
Goodwill 1050,000

Building 3450,000

Plant 1425,000
Intangibles 1200,000
Other net assets 645,000

The recoverable amount of the cash generating unit is estimated to be Rs. 6 million. On June 30, 2020
the building was at its fair value amounted to Rs. 3.75 million. The other net assets are at their
recoverable amount. The company uses cost model for valuing building and plant.

Required: Discuss how the impairment would be allocated amount the above assets of cash
generating unit.

Answer:

Impairment loss = carrying amount – recoverable amount

Carrying amount = goodwill + building + plant + intangibles + other net assets

= 1050,000 + 3450,000 + 1425,000 + 1200,000 + 645,000

= 7770,000

Impairment loss = 7770,000 – 6000,000 = 1770,000

Impairment will be charged to goodwill first, so Rs. 1050,000 goodwill will be written off

Remaining impairment loss = 1770,000 – 1050,000 = Rs. 720,000 will be apportioned on remaining
assets as follows:

The fair value of building is in excess of its carrying amount, hence no impairment will be charged to
building.

Other non current assets are also already valued at their recoverable amount, hence impairment will be
charged to remaining two assets:

Impairment charged to Plant = 1425,000/(1425,000 + 1200,000) x 720,000 = Rs. 390900

Impairment charged to Intangibles = 1200,000/(1425,000 + 1200,000) x 720,000 = Rs. 329,100

Q55: In accordance with IAS 8 “Accounting policies, changes in accounting estimates and errors” how
is a change in accounting estimate accounted for:

a) By changing the current year figures and the previous year figures.

b) No alteration of any figures but disclosure in the notes.

c) Neither alteration of any figures nor disclosure in the notes.

d) By changing the current year figures but not the previous year’s figures.

Q56: Which one of the following is not a purpose of the International Accounting Standard Board?

a) To assist the board in the preparation and review of IFRS standards.

b) To assist auditors in forming an opinion on whether financial statements comply with IFRS standards.

c) To be authoritative when a specific IFRS standard conflict with the conceptual framework.

d) To assist in determining the treatment of items not covered by an existing IFRS.

Q57: FL has built a new factory incurring the following costs:

Rupees
Land 1200,000
Material 2400,000
b) Fair value, statement of profit or loss.

c) Net realizable value, statement of profit or loss.

d) Fair value, statement of financial position.

Q17: Which of the statements about IAS 10 “Events after the reporting period” are correct

i. A material event that occurs before the financial statements are authorized that provides more
evidence of conditions that already existed at the reporting date should be adjusted for in the
financial statements.
ii. The notes to the financial statements must give details of non adjusting events affecting the user’s
ability to understand the company’s financial position.
iii. Financial statements should not be prepared on a going concern basis if after the end of the
reporting period but before the financial statements are authorized the directors have decided to
liquidate the company.
a) Option (i) and (iii) are correct.

b) Option (ii) and (iii) are correct.

c) Option (i) and (ii) are correct.

d) All the statements are correct.

Q18: Omar Limited (OL) acquired Jibran Limited (JL) for Rs. 7 million. The fair value of JL’s assets and
liabilities were as follows:

Rupees
Property, plant and equipment 5000,000
Patent 1000,000
Liabilities 2000,000

Which one of the following amount of goodwill would arise on the acquisition of JL?

a) Rs. 4 million.

b) Rs. No goodwill will arise on the acquisition.

c) Rs. 3 million.

d) Rs. 7 million.

Answer:

Amount paid for acquisition = 7 million.

Less Net assets at acquisition = 5 million + 1 million – 2 million = (4 million).

Goodwill = 3 million.

Q19: The following details apply to a contract of Hiba Limited (HL) where performance obligations are
satisfied over time at December 31, 2019:

Cost to date Rs. 480,000

Total expected profit Rs. 240,000
Estimated cost to completion Rs. 480,000
Amount invoiced Rs. 504,000

Percentage of completion 45%

is the amount of total contract revenue and amount should be recognized

as a contract asset in the statement of financial position of HL as at December 31, 2019:

a) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 588,000.

b) Total contract revenue: Rs. 744,000 and contract asset: Rs. 84,000.

c) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 84,000.
d) Total contract revenue: Rs. 744,000 and contract asset: Rs. 588,000.

Answer:

Total contract revenue – cost to date – further cost to complete = Total profit

Total revenue = 240,000 + 480,000 + 480,000 = 1200,000

Profit for the period = 0.45 x 1200,000 = 540,000

Less: amount invoiced = (504,000)

Further invoiced = 36,000

Q20: HL granted its Finance manager, Mr. Ali the right to choose either 1 million shares or to receive a
cash payment equal to 750,000 shares. At the grant date, the value of the market price of the share
was Rs. 60. HL estimated that the fair value of the share alternative is Rs. 50 per share. Explain how
this transaction will be accounted for in the books of HL.
Answer:

Value of 1 million shares at grant date = 1 million x 60 = 60 million

Cash payment at maturity = 750,000 x 50 = 37.5 million

If employee accepts the share option of 750,000 shares at maturity, the loss will be recognized

At amount of Rs. 22.5 million.

Q21: Which of the following will not be considered a qualifying asset under IAS 23 borrowing cost?

a) A power generation plant that normally takes two years to construct.

b) A ship that normally takes one to two years to complete.

c) An expensive private jet that can be purchased from a local vendor.

d) A toll bridge that usually takes more than a year to build.

Q22: Which one of the following should not be included within the initial cost of a right of use asset?

a) Gross lease rentals payable under the lease agreement.

b) Amount of initial measurement of the lease liability.

c) Payments made to the lessor before commencement of the lease.

d) Present value of estimated cost of dismantling the asset at the end of the lease period.

Q23: Which of the following would be treated as change of accounting policy by SL company?

i) SL has received its first grant and is applying the deferred income method .

ii) SL has revalued its property previously they all had been carried at historical cost.
iii) SL reclassified development costs from other operating expenses to cost of sales.

iv) SL has increased its recoverable debt allowance from 10% to 12%.

a) Option (i) and (ii) are correct.

b) Option (iii) and (iv) are correct.

c) Option (ii), (iii) and (iv) are correct.

d) Option (ii) and (iii) are correct.

Q24: Select the best option from the following which can be classified as an intangible asset.

a) Legal costs paid to intellectual property lawyers to register a patent.

b) Operating losses during the initial stages of the project.
c) University fees paid to employees who decide to enroll in an executive MBA program while working
with the company.

d) Advertising and promotion on the launch of a huge product.

Q25: TL has interest receivables of Rs. 500,000 and dividend receivables of Rs. 900,000. When
determining taxable profits or loss, interest will be taxed on cash basis. Dividends are deductible
against the economic benefits. The tax base of interest receivables and dividends will be and
respectively.

a) Nill and Rs. 400,000.

b) Nill and Rs. 900,000.

c) Rs. 500,000 and Rs. 900,000.

d) Rs. 500,000 and Nill.

Q26: EL purchased a plant on January 1, 2018, at a cost of Rs. 5 million and uses 25% reducing balance
method for accounting its depreciation. On December 31, 2019, EL received an offer of Rs. 2.9 million
from a company in Dubai interested in buying the plant. The present value of the estimated cash flows
from continued use of the plant in Rs. 2.6 million. The estimated cost of shipping the plant to Dubai is
Rs. 50,000 is the amount of the impairment loss that would be recognized on the plant.

a) No impairment loss will arise.

b) Rs. 212,500.

c) Rs. 37,500.

d) Rs. 87,500.

Answer:

Impairment Loss = Carrying value – recoverable amount.

Recoverable amount = higher of fair value and value in use.

Carrying value = Rs. 5000,000 – (5000,000 x 0.25) = 3750,000 – (3750,000 x 0.25) = 2812500

Value in use = Rs. 2600,000

Fair value = 2900,000 – 50,000 = Rs. 2850,000

Since value in use is higher, hence recoverable amount = Rs. 2850,000.

Impairment loss = Carrying value – recoverable amount.

= 2812,500 – 2850,000

Since recoverable amount is more than carrying amount, hence no impairment is recognized.
Q27: CL, a public limited company granted 100 share appreciation rights to each of its 1000 employees
in January 2020. The management feels that as of December 31, 2020, 90% of the awards will vest on
December 31, 2020. The fair value of each share appreciation rights on December 31, 2020 is Rs. 10.
is the fair value of the liability to be recorded in the financial statements for the year ended December
31, 2020.

a) Rs. 10 million.

b) Rs. 90,000.

c) Rs. 300,000.
d) Rs. 100,000.

Q28: A company entered into a five year lease agreement on January 1, 2019 paying Rs. 164,625 per
annum, commencing on December 31, 2019. The present value of the minimum lease payments was
Rs. 675,000 and the interest rate implicit in the lease was 7%. The amount to be shown within non-
current liabilities as at December 31, 2019:

a) Rs. 546,105.

b) Rs. 432,034

c) Rs. 557,625.

d) Rs. 393,000.

Answer:

= 675,000 x 0.07 = 47,250

= 164,625 – 47,250 = 117,375

= 675,000 – 117,375 = 557,625

Q29: QL is facing a number of legal claims from its customers with regard to a faulty product sold. The
total amount being claimed is Rs. 40 million. The company’s lawyer is of the view that the customers
have a chance of 80% being successful. What amount, if any, should be recognized in respect of the
above in QL’s statement of financial position as at June 30, 2020.

Answer:

Since 80% chance of successful claim is present. Hence, an amount of Rs. 40 million will be recorded as
provision for legal claims.

Q30: ZL’s non current assets include property, plant and equipment a machine that was purchased five
Net cash flow from investing activities (Rs. 435 million)

Q24: Antibiotic Limited (AL) entered into a contract for construction of a shopping mall on January 1,
2019. The price of the contract amounted to Rs. 16 million. Cost incurred up to December 31, 2019
amounted to Rs. 8 million and further cost estimated to complete is Rs. 12 million. The company has
recorded 60% progress of the project and amount billed to date is Rs. 6 million. is the amount
of cost of sales that should be recorded in the statement of profit or loss of AL for the year ended
December 31, 2019.

a) Rs. 11.28 million.

b) Rs. 8.4 million.

c) Rs. 18.8 million.

d) Rs. 13.6 million.

Answer:

Contract Revenue = 16 million.

Less: cost to date = 8 million

Less: Further cost to complete = 12 million

Project Loss = (4 million)

Loss for the period = 60% x 4 million = 2.4 million

Add: Already billed = 6 million

Total cost of sale = 8.4 million.

Q25: The following information relates to Wao0o Limited (WL) for the year ended December 31, 2019.

 At January 1, 2019, the net book value of non-current assets exceeded their tax written down
value by Rs. 8500,000.
 The company claimed Rs. 5000,000 as depreciation for tax purposes and charged depreciation of
Rs. 4500,000 in financial statements.
 During the year, WL revalued a freehold property. The revaluation surplus was Rs. 2500,000. The
company has no plans to sell the property and realize the gain in the foreseeable future.
 29% tax rate is applicable to the company.

The deferred tax provision required for the year ended December 31, 2019 will be .

a) Rs. 4640,000.

b) Rs. 3335,000.

c) Rs. 2320,000.
d) Rs. 3190,000.

Answer:

Amount in excess of tax allowable value of non-current assets = 8500,000.

Depreciation for tax purposes = 5000,000

Revaluation surplus = 2500,000

Total amount = 16,000,000.

Tax @ 29% = 16,000,000 x 0.29 = 4640,0000.

Q1: Cherry Limited manufactured 90 units which used:

3kg of raw material at Rs. 80 per kg.

3 direct labor hours worked at the rate of Rs. 20 per hour.

2 indirect labor hours worked at the rate of Rs. 10 per hour.

Advertising expense amounted to Rs. 75,000.

The total variable manufacturing cost of the product is:

a) Rs. 46,2000.

b) Rs. 28,800.

c) Rs. 103,800.

d) Rs. 27,000.

Answer:

Direct material = 3kg x 80 per kg x 90 units = Rs. 21,600.

Direct labor = 3 hours x 20 per hour x 90 units = Rs. 5400

Variable FOH = 2 hours x 10 per hour x 90 units = 1800

Total variable manufacturing cost = Rs. 28800

Q2: Following are the extracts of Air Engineering Limited’s (AEL) statement of financial position as at
June 30:

2021 2020
Non-current Liabilities Rupees
Deferred tax provisions 1120,000 1080,000
 Current Liabilities
Tax payable 3960,000 3640,000

Tax paid during the year amounted to Rs. 3590,000, is the income tax expense to be
included in the statement of profit or loss for the year ended June 30, 2021.

a) Rs. 3230,000.

b) Rs. 3950,000.

c) Rs. 3910,000.

d) Rs. 3590,000.

Answer:

Income Tax payable

Opening ............. 3640,000
Increase in exp..... 320,000

Closing .............. 3960,000

Deferred Tax payable

Opening ............. 1080,000
Increase in exp..... 40,000

Closing ..............
11200,000

Total tax exp. = 320,000 + 40,000 + 3590,000 = 3950,000.

Q3: S Limited (SL) owns a machine that has a carrying amount of Rs. 1275,000 at the year end of
December 31, 2020 its market value is Rs. 1170,000 and costs of disposal are estimated at Rs. 37,500.
A new machine would cost Rs. 2250,000. SL expects it to produce net cash flows of Rs. 450,000 per
annum for the next three years. The cost of capital of SL is 8% is the impairment loss on the
machine to be recognized in the financial statement of SL at December 31, 2020. [PV factor at 8% Year
1 = 0.926, Year 2 = 0.857, Year 3= 0.794]

a) Rs. 142,500.

b) Rs. 115,305.

c) Rs. 75,000.

d) There will be no impairment loss on machine.

Answer:

Impairment Loss = Carrying value – recoverable amount.

Recoverable amount = higher of fair value and value in use.

Carrying value = Rs. 1275,000

Value in use = Rs. 1159650.

Years Cash flows Present value factor Present value

1 450,000 0.926 416,700

2 450,000 0.857 385,650

3 450,000 0.794 357,300

Value in use = 1159650.

Fair value = 1170,000 – 37,500 = Rs. 1132,500

Since value in use is higher, hence recoverable amount = Rs. 1159,650.

Impairment loss = Carrying value – recoverable amount.

= 1275,000 – 1159,650

= 115,305.

Q4: At the beginning of the year, the allowance for receivables was Rs. 850,000. At the year end, the
allowance required was Rs. 1000,000. During the year Rs. 500,000 of debts were written off, which
includes Rs. 100,000 previously included in the allowance for receivables, is the amount
of charge to be recorded in the statement of profit or loss for bad debts and allowance for receivables
for the year?

a) Rs. 1000,000.

b) Rs. 650,000.

c) Rs. 550,000.

d) Rs. 1500,000.

Allowance for doubtful debt

Opening ............. 850,000
Bad debts Previously included...
100,000
written off ............ 500,000

Closing .............. 1000,000 Bad deb exp........ 550,000

Q5: On January 1, 2020, Z Limited (ZL) borrowed Rs. 36 million at the rate of 8% for financing the
construction of a building which is expected to be completed in two year’s time. Construction began
on March 1, 2020, Rs. 15 million of the loan remained unutilized until July 1, 2020, ZL invested these
surplus funds and earned 6% on these funds, is the borrowing cost to be capitalized by ZL
for the year ended December 31, 2020.

a) Rs. 1500,000.

b) Rs. 2100,000.

c) Rs. 2430,000.

d) Rs. 2880,000.

Answer:

Interest expense = 36,000,000 x 0.08 = 2880,000

Less: Interest income = 15,000,000 x 0.06 x 6/12 = (450,000)

Amount to be capitalized = 2430,000

Q1: The following information represents extracts of trial balance of Junaid Limited (JL) as at Dec 31, 2020.

Rs. 000 Rs. 000

Capitalized development expenditure at January 1, 2020 20,000

Development expenditure accumulated amortization at 6000

January 1, 2020.

Additional Information:

 In addition to the capitalized development expenditure of Rs. 20 million, further research and
development cost were incurred on a new project which commenced on January 1, 2020. The
research stage of new project latest until March 31, 2020 and Rs. 1.4 million of cost were incurred.
From that date the project incurred development cost of Rs. 800,000 per month. On July 1, 2020,
the Directors became confident that the project would be successful and yield a project well in
excess of its cost. The project is still in development as at December 31, 2020.
 Capitalized development expenditure is amortized at 20% per annum using the straight line
method.

Which one of the following carrying amount of development cost would be included within statement of
financial position of SL as at December 31, 2020.

a) Rs. 14,800,000.

b) Rs. 14000,000.

c) Rs. 13,840,000.
d) Rs. 17,200,000.

Answer:

IAS related to research and development states that, cost on research could not be capitalized, only
development expenditure is capitalized if it meets the criteria.

So 1.4 million of research expense cannot be capitalized.

Since project is still under development and is not available for sale, hence this development expenditure
cannot be capitalized.

Moreover, only 20,000,000 – 6000,000 = 14000,000 shall be capitalized

Q2: HaJI Limited (HL) paid Rs. 250 per share to capture 100% of Karim Limited’s (KL) equity shares on June
1, 2019. At that date KL’s statement of financial position showed the following balances with equity.

Rupees.
Share capital of Rs. 100 each. 18,000,000
Share premium 6000,000
Accumulated profit 4000,000

KL’s net asset value were the same as their book value except for land which was valued at Rs. 7000,000
more than its book value. HL’s directors estimated that any goodwill arising on the acquisition will have a
useful life of 10 years. is the amount of goodwill that would arise on the acquisition of KL.

a) Rs. 28 million.

b) Rs. 7 million.

c) Rs. 10 million.

d) Rs. 45 million.

Answer:

Goodwill at acquisition = price paid for acquisition - market value of assets and liabilities

= [250 x 180,000] – 18000,000 – 6000,000 – 4000,000 – 7000,000

= 10,000,000

Q3: On September 1, 2019, Rainbow Limited (RL) entered into an agreement to lease a new machinery
under a 5 year lease, with Rs. 350,000 payable on December 31 each year. The asset has a useful life of 6
years. The interest rate implicit in the lease is 6%. RL recorded Rs. 25,650 as finance cost for the year ended
December 31, 2019. The amount of present value of minimum lease payment is .

a) Rs. 777,000.
b) Rs. 5052,000.

c) Rs. 1263,000.

d) Rs. 421,000.

Answer:

Minimum lease payment = interest + principal

= 25650/0.06 + 350,000 = 777,000

Q4: Faaltu Limited (FL) makes an accounting loss of Rs. 1225,000 during the year ended June 30,2020. This
included non-taxable income of Rs. 87,500 and depreciation of Rs. 105,000. In addition, Rs. 1400,000 of the
expense are disallowable for tax purposes. If the tax allowable depreciation totals Rs. 112,000. The taxable
amount would be .

a) Rs. 2530,500 profit.

b) Rs. 80,500 loss.

c) Rs. 2600,500 loss.

d) Rs. 80,500 profit.

Answer:

Since Loss is negative profit, so

Profit = -1225000

Add back: Depreciation = 105,000

Add back: non allowable deductions = 1400,000

Less: Tax allowable dep. = (112000)

Less: Non taxable income = (87500)

Profit = 80500

Q5: On January 1, 2019, Shahrukh Khan Limited (SL) purchased a debt instrument at its fair value of Rs.
500,000. It had a principle amount of Rs. 550,000 and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held at
amortized cost. At ,amount the debt instrument will be shown in the statement of financial
position of SL as at December 31, 2020.

a) Rs. 520,800.

b) Rs. 514,560.

c) Rs. 564,560.
d) Rs. 566,000.

Answer:

The coupon rate (6%) is applied to the face value of the debt instrument (550,000)

effective rate (8%) is calculated on the fair value 500,000.

Year Principle Fair value Balance

2019 (550,000 x 6%) 500,000 x 0.08 500000 + 40,000 -33,000 = 507000

2020 (550,000 x 6%) 507,000 x 0.08 507,000 + 40560 – 33000 = 514560

Q1: Zohair Limited (ZL) leased out its office building on January 1, 2020 under an operating lease for a
period of four years. The carrying value of the building amounted to Rs. 23,900,000 and its remaining
useful life is estimated to be 25 years with no residual value. ZL also incurred Rs. 11,00,000 in respect of
initial direct cost. As per agreement, Rs. 1600,000 were paid by the lessee as initial deposit and future
rentals of Rs. 1000,000 shall be paid at the end of next two years and Rs. 3200,000 per annum shall be paid
for following two years, will be recorded in respect of lease income in the statement of profit or
loss of ZL for the year ended December 31, 2020.

a) Rs. 2600,000.

b) Rs. 1600,000.

c) Rs. 1000,000.

d) Rs. 2500,000.

Answer:

1600,000 + 1000,000 = 2600,000

Q2: Following data related to K Limited (KL):

Contract Price 10,000

Cost incurred to date (1250)
Cost to complete (5000)

Amount billed to date 2500

The company has recorded 25% progress in relation to the above contract. Select the best amount from the
following options that should be recorded in the statement of financial position of KL as at December 31,
2020 in respect of the above contract.

a) Nill.

b) Rs. 312,500 contract liability.

c) Rs. 1250,000 contract liability.

d) Rs. 7500,000 contract asset.

Answer:

Contract price = 10,000

Less: cost incurred to date = (1250)

Less: cost to complete = (5000)

Profit = 3750.

Profit for the period = 3750 x 0.25 = 937.5

Add: contract cost to date = 1250

Less: Amount billed to date (2500)

Contract liability = 312500.

Q3: On February 14, 2019, Cute Limited (CL) borrowed Rs. 2.5 million from a local bank. The fixed rate loan
bears interest at 9% per annum compounded annually. Interest is payable on December 31 each year. The
principle is repayable on December 31, 2028. Identify the best option from the following that should be
recorded in the statement of profit or loss of CL for the year ended December 31, 2019.

a) Rs. 225,000.

b) Rs. 18,750.

c) Rs. 196,875.

d) Rs. 206,250.

Answer:

FV = 2.5 x (1+0.09/10)^10x1

FV = 2734334.

Interest = 2734334 – 2500,000

Intersrt = 234,335

Interest for 10.5 months = 206,250.

Q4: H Limited (HL) statement of profit and loss and other comprehensive income showed a profit before
tax of Rs. 3600,000. After the year end and before the financial statements were authorized for issue, the
following events took place:

The value of an investment held at the year end fall by Rs. 170,000.
Expense to be recorded up to June 30 = 315,000 x 9/12 = Rs. 236,250.

Q18: J Limited has a production capacity of 20,000 units but during the year ended June 30, 2020 the
company could produce only 15,000 units due to a technical fault of machine which resulted in scrap
of remainder units. The company incurred production overheads amounted to Rs. 2500,000. Cost of
raw materials and direct labor amounted to Rs. 500 and 260 per unit respectively. On June 30, 2020
the company had 6500 units in its inventory. amount of inventory would be reported on
the statement of financial position of J Limited as at June 30, 2020.

a) Rs. 3250,000.

b) Rs. 5752500.

c) Rs. 2502,000

d) Rs. 4940,000.

Answer:

Per unit cost:

Material = Rs. 500

Labor= Rs. 260

FOH = 2500,000/20,000

FOH = Rs. 125

Total cost per unit = Rs. 885 per unit.

Cost of 6500 units = 885 x 6500 = Rs. 57525,000.

Q19: A 5% loan note was issued on July 1, 2018, at face value of Rs. 20 million. Direct costs of the issue
amounted to Rs. 500,000. The loan note will be redeemed on June 30, 2021 . The effective interest
rate applicable is 10% per annum. The loan note appear in the statement of financial position as at
June 30, 2020 at an amount of:

a) Rs. 20.45 million.

b) Rs. 21 million.

c) Rs. 21.495 million.

d) Rs. 22.10 million.

Answer: opening = 20 million – 0.5 million = 19.5 million.

Years Opening Balance effective at 10% coupon rate 5% Balance at end

1 19.5 million 1.95 million (0.975) million 20.475 million

 2 20.475 million 2.0475 million (1.02375) million 21.495 million

Q20: K Limited vacated its head office building and let it out to a third party on June 30, 2020. The
building had an original cost of Rs. 18 million on January 1, 2012 and was being depreciated over 50
years. It was judged to have a fair value on June 30, 2020 of Rs. 19 million. At the year end date of
December 31, 2020 the fair value of the building was estimated at Rs. 24 million. Company uses the
fair value model for investment property. amount will be shown in revaluation surplus at
December 31, 2020 in respect of this building.

a) Rs. 9060,000.

b) Rs. 4060,000.

c) Rs. 5000,000.

d) Rs. 1000,000.

Answer:

Fair value at year end = 24 million

Less: Fair value at june 30 = 19 million

Revaluation surplus = 5000,000

Q21: On June 1, 2021, Hy Limited (HL) acquired 80% of the equity shares of Bye Limited (SL). At the
date of acquisition, the fair values of SL’s net assets were equal to their carrying amounts with the
exception of its property. The property had a fair value for Rs. 1.2 million below its carrying amount
and had a remaining useful life of eight years. Which one of the following amounts represents correct
adjustment in respect of the property on group’s retained earnings as at September 30, 2021?

a) Rs. 10,000.

b) Rs. 40,000.

c) Rs. 150,000.

d) Rs. 50,000.

Answer:

Difference in fair value = 1200,000

Useful life = 8 years.

Depreciation expense = 1200,000/8 = 150,000.

%age of acquisition = 150,000 x 80% = Rs. 120,000.

Depreciation from June 1 to September 30 = 120,000 x 4/12 = Rs. 40,000.

b) The estimated net realizable value of inventory has been reduced due to fire damaged although the
value is greater than its carrying amount.

c) An increase in interest rates which increases the discount rate a company uses.

d) Advances in the technological environment in which an asset is employed have an adverse impact on
its future use.

Q4: IFRS standards require extensive use of fair value when recording the acquisition of a subsidiary,
which of the following statements regarding the use of fair value on the acquisition of subsidiary are
correct?

(i) The use of fair value to record a subsidiary’s acquired assets does not comply with the historical cost
principle.

(ii) The use of fair value to record the acquisition of plant always increases consolidated post-acquisition
depreciation charges compared to the corresponding charge in the subsidiary’s own financial
statements.

(iii) Cash consideration payable one year after the date of acquisition needs to be discounted to reflect
its fair value.

a) option (i) is correct only.

b) option (ii) is correct only.

c) option (i), (ii) and (iii) are correct.

d) option (iii) is correct only.

Q5: What is meant by “tax base”?

a) The amount attributed to an asset or liability for tax purposes.

b) The tax regime under which an entity is assessed for tax.

c) The amount of tax payable in a future period.

d) The amount of tax deductible in a future period.

Q1: Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Select
the best option from the following which does not represent a circumstance giving rise to temporary
difference:

a) Revenue included in accounting profit when invoiced but only liable for tax when the cash received.

b) Development costs amortized in profit or loss but tax was deductible in full when incurred.
c) Accrued expenses which have already been deducted for tax purposes.

d) Depreciation accelerated for tax purposes.

Q2: The international Accounting standards board’s conceptual framework for financial reporting
defines a liability as:

a) A present obligation of the company to transfer an economic resource as a result of past event.

b) An obligation that may arise in the future.

c) An amount owed to another company.

d) Expenditure that has been incurred but not yet charged to the statement of profit or loss.

Q3: Which one of the following information cannot be readily determined from an amortization table
of lease?

a) Interest expense of the liability for the current year.

b) The portion of the unpaid balance that is a current liability.

c) The unpaid balance remaining after each payment.

d) The present value of the future payments under changing market conditions.

Q4: A limited is developing a new product and is expected to be able to capitalize the cost. Which one
of the following reason would disallow the capitalization of the costs?

a) It has not been possible to reliably allocate costs to development of the product.

b) No patent has yet been registered in respect of the product.

c) Development of the product is not yet completed.

d) No sales contracts have yet been signed in relation to the product.

Q5: Which one of the following statements about IAS 20 “Government Grants and Disclosure of
Government assistance” is true?

a) A grant related to purchase of an asset must be deducted from the carrying amount of the asset in the
statement of financial position.

b) Free marketing advice provided by government department is included in the definition of the
government grant.

c) A grant related to purchase of an asset should be recognized in profit or loss over the life of the
b) The directors announced a major restructuring.

c) The value of company’s investment fell sharply.

d) Three lines of inventory held at the year end were destroyed by flooding in the warehouse.

Q7: Deferred tax income taxes result from .

a) Difference between certain revenue and expense items recognized in financial statements but not in
income tax return.

b) The inability of the bankrupt company to pay its income tax liability on schedule.

c) Depositing income taxes due in future years in a special fund managed by an independent trustee.

d) The fact that bond interest is deductible in the computation of taxable income.

Q8: To determine the transaction price for the contract in which a customer promises consideration in
a form other than cash, the company shall measure the non-cash consideration at .

a) Net realizable value.

b) Carrying amount.

c) Tax written down value.

d) Fair value.

Q9: Which of the following situations requires recording a liability for the financial year ended Dec 31,
2020.

i) A company manufactures and sells stereo equipment that carries a three year warranty.

ii) A company is a defendant in a legal action. At the end of 2020 the lawyer is of the view that it is
possible that the company will lose and the amount of loan might be material.

iii) A theater group receives payment in advance from season ticket holders for production to be
performed in 2021.

iv) During the year ended Dec 31, 2020, an agricultural co-operative is concerned about the risk of loss if
extreme weather destroys the crop.

a) Option (i) and (ii) are correct.

b) Option (i) and (iii) are correct.

c) Option (iii) and (iv) are correct.

d) Option (ii) and (iii) are correct.

a) Goods held on consignment from another company.

b) All of the stated options should be included in the physical inventory of a company.

c) Goods in transit from another company shipped free on board shipping point.

d) Goods shipped on consignment to another company.

Q7: refers to the removal of all or part of a recognized asset or liability from a company’s
statement of financial position.

a) De-recognition.

b) Control of an economic resource.

c) Combined financial statements.

d) Classification.

Q8: In which of the following situation a prior year adjustment would not be required as per IAS 8
“Accounting Policies, changes in accounting estimates and errors.

a) In last year’s financial statements inventories were understated by a material amount due to system
error.

b) A company has chosen to value inventory using FIFO rather than AVCO as in prior periods.

c) A company has changes its allowance for irrecoverable receivables from 10% of outstanding debt to
everything over 120 days old.

d) A new accounting standard has been issued that require a company to change its accounting policy
but gives no guidance on the specific application of the change itself.

Q9: In order to hold a debt instrument at amortized cost, which of the following test must be applied?

a) Business model test.

b) Contractual cash flow characteristics test.

c) Both contractual cash flow characteristics and business model test.

d) Fair value test.

Q10: What is the primary criterion used to distinguish a financial liability from an equity instrument?

a) The length of the term of financial instrument.

b) Whether the financial instrument pays dividends.

c) The classification of the financial instrument as either a bond or a share.

d) A contractual obligation to make interest, principle or dividend payments.

Q11: Which of the following is not an intangible asset?

a) Patents.

b) Trade marks.

c) Goodwill arising as a result of an equipment.

d) Improvements to a building that the company already owns.

Q12: A sale and lease back transaction involves the sale of an asset and the leasing back of the same
asset. If the arrangement meets the IFRS 15 Revenue from contracts with customers criteria to be
recognized as a sale, how should any profit on the sale be treated.

a) Recognize proportion relating to right of use retained.

b) Recognize whole amount of profit immediately in profit or loss.

c) Defer profit and amortize over the lease term.

d) Recognize proportion relating to right of use transferred.

Q13: Which one of the following properties owned by S Limited would be classified as an investment
property.

a) A stately home used for executive training.

b) Land purchased for its investment potential for which permission has not been obtained for
construction of any kind.

c) A new office building used as SL’s office, purchased specifically in order to exploit its capital gains
potential.

d) A property that has been leased to a tenant but which is no longer required and is now held for being
resale.

Q14: Select the best option from the following which can be classified as an intangible asset:

i. Purchased brand name.

ii. Training of staff.

iii. Internally generated brand.

iv. Licenses and quotas.

a) Option (ii), (iii) and (iv) are correct.

b) Option (i) and (iv) are correct.

c) Option (i) and (ii) are correct.

d) Option (ii) and (iii) are correct.

Q15: When land and building are required at a lump sum consideration:

a) The entire amount should be considered cost of building.

b) The purchase amount should be allocated on the basis of the market value of the two assets.

c) The purchase amount should be allocated on the basis of the historical cost of the two assets.

d) The entire amount should be considered cost of the land.

Q16: Identify the best option from the following in which IAS 12 does not apply:

a) Accounting of foreign taxes.

b) Temporary differences arising from investment tax credits.

c) Accounting for government grants.

d) Accounting of income taxes.

Q17: The statement of cash flows is designed to assist users in assessing each of the following, except:

a) The major source of cash receipts during the period.

b) The company’s profitability.

c) The ability of the company to remain liquid.

d) The reasons why net cash flows from operating activities differ from net income.

Q18: CL, a limited company, granted 100 share appreciation rights to each of its 1000 employees in
January 2020. The management feels that as of December 31, 2020, 90% of the awards will west on
December 31, 2020. The fair value of each share appreciation right on December 31, 2020 is Rs. 10.
What is the fair value of the liability to be recorded in the financial statements for the year ended
December 31, 2020:
a) Rs. 300,000.

b) Rs. 90,000.

c) Rs. 100,000.

d) Rs. 10 million.

Q19: If a company incur transaction costs in issuing loan notes, how should these transaction cost be
accounted for:

a) charged to financial costs.

b) added to the proceeds of the loan notes.

c) deducted from the proceeds of the loan notes.

d) amortized over the life of the loan notes.

Q20: On October 1, 2020, HL limited borrowed Rs. 10 million at the rate of 9% from GBL Bank Limited,
signing a six month note payable for that amount. Select the best option from the following which
represent incorrect statement regarding the above loan.

a) The maturity value for this note is Rs. 10.45 million.

b) HL’s total ability for this loan at November will be Rs. 10.15 million.

c) HL’s liability at October 1, 2020 was Rs. 10 million.

d) At December 31, 2020, HL will have a liability for accrued interest payable of Rs. 450,000.

New Questions

Q1: When it is difficult to distinguish between a change of estimate and change in accounting policy,
which of the following step is most appropriate for the above situation?

a) Treat the entire change as a change in estimate with appropriate disclosure.

b) Ignore the effect in the year of change, wait for the next year to see how the change develops and
then treat it accordingly.

c) Treat the entire change as a change in accounting policy.

d) Apportion on a reasonable basis the relative amount of change in estimate and the change in
accounting policy and treat each one accordingly.

Q2: Which one of the following would be shown in the Other Comprehensive Income section of the
 Total expected profit Rs. 240,000
Estimated cost to completion Rs. 480,000
Amount invoiced Rs. 504,000

Percentage of completion 45%

is the amount of total contract revenue and amount should be recognized as

a contract asset in the statement of financial position of HL as at December 31, 2019:

a) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 588,000.

b) Total contract revenue: Rs. 744,000 and contract asset: Rs. 84,000.

c) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 84,000.

d) Total contract revenue: Rs. 744,000 and contract asset: Rs. 588,000.

Q20: HL granted its Finance manager, Mr. Ali the right to choose either 1 million shares or to receive a
cash payment equal to 750,000 shares. At the grant date, the value of the market price of the share was
Rs. 60. HL estimated that the fair value of the share alternative is Rs. 50 per share. Explain how this
transaction will be accounted for in the books of HL.

Answer:

Q21: Which of the following will not be considered a qualifying asset under IAS 23 borrowing cost?

a) A power generation plant that normally takes two years to construct.

b) A ship that normally takes one to two years to complete.

c) An expensive private jet that can be purchased from a local vendor.

d) A toll bridge that usually takes more than a year to build.

Q22: Which one of the following should not be included within the initial cost of a right of use asset?

a) Gross lease rentals payable under the lease agreement.

b) Amount of initial measurement of the lease liability.

c) Payments made to the lessor before commencement of the lease.

d) Present value of estimated cost of dismantling the asset at the end of the lease period.

Q23: Which of the following would be treated as change of accounting policy by SL company?

i) SL has received its first grant and is applying the deferred income method.

ii) SL has revalued its property previously they all had been carried at historical cost.

iii) SL reclassified development costs from other operating expenses to cost of sales.

iv) SL has increased its recoverable debt allowance from 10% to 12%.

a) Option (i) and (ii) are correct.

b) Option (iii) and (iv) are correct.

c) Option (ii), (iii) and (iv) are correct.

d) Option (ii) and (iii) are correct.

Q24: Select the best option from the following which can be classified as an intangible asset.

a) Legal costs paid to intellectual property lawyers to register a patent.

b) Operating losses during the initial stages of the project.

c) University fees paid to employees who decide to enroll in an executive MBA program while working
with the company.

d) Advertising and promotion on the launch of a huge product.

Q25: TL has interest receivables of Rs. 500,000 and dividend receivables of Rs. 900,000. When
determining taxable profits or loss, interest will be taxed on cash basis. Dividends are deductible against
the economic benefits. The tax base of interest receivables and dividends will be and

respectively.

a) Nill and Rs. 400,000.

b) Nill and Rs. 900,000.

c) Rs. 500,000 and Rs. 900,000.

d) Rs. 500,000 and Nill.

taxable temporary differences?

a) Temporary differences associated with investments in subsidiaries when the parent is able to
control the timing of reversal of the temporary differences and is probable that the temporary
difference will not reverse in future.

b) In all of these situations a company would not recognize a deferred tax liability for taxable temporary
differences.

c) The initial recognition of an asset or liability in the transaction that is not a business combination and
does not affect accounting/taxable profit.

d) The initial recognition of goodwill.

Q5: Ali limited (AL) has 300 items of product Alpha in inventory at June 30, 2021. The items were
found to be damaged by a water leak. Those items can be repaired and repacked for a cost of Rs. 225
per item. Once repackaged, the items can be sold at the normal price of Rs. 525 each. The original
price of the items was Rs. 330 each. The replacement cost at June 30, 2021 amounted to Rs. 412.5
each. The above inventory will be valued at in the statement of financial position of AL as
at June 30, 2021.

a) Rs. 121,500.

b) Rs. 99,000.

c) Rs. 90,000.

d) Rs. 123,700.

Solution:

NRV : (525 – 225) X 300 = Rs. 90,000.

Replacement cost = 412.5 x 300 = Ra. 123,750

According to IAS 2, Inventory must be revalued at lower of cost or NRV,

Hence inventory value = Rs. 90,000.

Q6: On January 1, 2020, BL sold its head office building and continued to use it under a lease
arrangement. The building had a useful life of 25 years. On January 1, 2020, the carrying amount of the
building was Rs. 25 million and company received Rs. 28.75 million as sale proceeds equivalent to its
fair value. would be the carrying amount of the head office building as at December 31,
2020.

a) Rs. 24 million.

b) Rs. 27.6 million.

c) Rs. Nill.

d) Rs. 28.75 million.

Answer:

Carrying value = Revalued amount of building – Accumulated depreciation

= 28.75 – [28.75/ 25]

= 28.75 million – 1.15 million = 27.6 million.

Q7: On January 1, 2019, SL had an opening credit balance of Rs. 100,000 on its tax account, which
represented the balance on the account after selling its tax liability for the previous year. The company
had a credit balance on its deferred tax account of Rs. 3.2 million at the same date. Income tax
expense for the year had been estimated at Rs. 2 million which would increase its deferred tax account
balance by Rs. 3000,000. The income tax expense that should be recorded in the statement of profit or
loss of SL for the year ended December 31, 2019 is:

a) Rs. 1200,000.

b) Rs. 2290,000.

c) Rs. 890,000.

d) Rs. 2300,000.

Answer:

Income Tax payable

Current tax b/d ........................ 10,000
Income tax paid .................... 2300,000 Deferred tax b/d ...................... 3200,000
Income tax expense for year ...... 2000,000
Deferred tax c/d ..................... 3000,000

Q8: On July 1, 2019, KL entered into an agreement to lease the plant from the manufacturer. An initial
payment was made on July 1, 2019, and the present value of the future lease payments at that date
amounted to Rs. 173,500. Payment in respect of lease are made in advance and are Rs. 100,000 per
annum, commencing on July 1, 2020. The rate of interest implicit in the lease is 10%. The total lease
liability as at June 30, 2020 is:
a) Rs. 273,500.

b) Rs. 173,500.

c) Rs. 100,000.

d) Rs. 190,850.

Answer:

Lease amortization schedule:

Years Lease Rental Interest Principle Balance

1 173,500 17350 82650 90850

Total lease liability = 100,000 + 90850 = 190850

Q9: Saim limited issued 3% convertible bonds at the nominal value of Rs. 6000,000. Interest is payable
annually in arrears. The bond will be redeemed at par after 3 years. The similar non-convertible bonds
carry an effective market interest rate at 9%. The present value factor at 3% and 9% are given below:

Year 3% 9%
1 0.971 0.917
2 0.943 0.842
3 0.915 0.772

is the amount that would be reported as a financial liability when the convertible bonds
are issued.

a) Rs. 5087,580.

b) Rs. 6000,000.

c) Rs. 4770,960.

d) Rs. 6180,000.

Answer:

Years Cash flow Discount factor (9%) Present value

1 6000,000 x 0.03 = 180,000 0.917 165,060

2 180,000 0.842 151,560

3 180,000 + 6000,000 = 6180,000 0.772 4770,960

5087580
 FINANCIAL ACCOUNTING & CORPORATE REPORTING (MCQs SET 14)

Q1: On January 1, 2020, H Limited (HL) leased out one of its building for a period of four years under
an operating lease. The carrying value of the building is Rs. 47,800,000 and its remaining useful life is
25 years with no residual value. As per terms of agreement Rs. 3200,000 was paid by lessee as initial
deposit and further rentals of Rs. 2 million will be paid at the end of next two years and Rs. 6400,000
will be paid for the following two years. HL will recognize amount of lease income for the
year ended Dec 31, 2020.

a) Rs. 2000,000.

b) Rs. 3200,000.

c) Rs. 5200,000.

d) Rs. 5000,000.

Answer:

= 3200000 + 2000000

Q2: F Limited was incorporated on Jan 1, 2016 and purchased following non current assets:

Cost (Rs. 000) Useful life (years)

Building 30,000 15

Plant and machinery 20,000 10

Furniture and fixtures 7000 7

On January 1, 2019 the company reviewed the useful lives of its non-current assets for building, plant
and machinery and furniture and fixture as 10 years, 7 years and 5 years respectively. Revised
depreciation of the non-current assets of F Limited for the year ended Dec 31, 2019 would be:

a) Rs. 15 million.

b) Rs. 5.2 million.

c) Rs. 4.4 million.

d) Rs. 5 million.

= 30000/15= 2000 x 3 = 6000 = 30000 – 6000 = 24000/10 = 2400

= 20000/10 = 2000 x 3 = 6000 = 20000 – 6000 = 14000/7 = 2000

= 7000/7 = 1000 x 3 = 3000 = 7000 – 3000 = 4000/5 = 800

= 5200 = 5.2 million.

2800,000 on March 1, 2019. The directors of SL estimated that the tax due on the profits for the year
ended June 30, 2019 will be Rs. 3200,000. SL has no deferred tax liability amount will be
recorded in SL’s statement of profit or loss and other comprehensive income in respect of the tax
expense for the year ended June 30, 2019.

a) Rs. 3200,000.

b) Rs. 3100,000.

c) Rs. 3300,000.

d) Rs. 6000,000.

Answer:

= 3200,000 + 100,000

= 3300,000

Q6: Following data relates to A Limited (AL) for a construction contract.

Rs. 000
Contract price 15,000

Work certified to date 12,000

Costs to date 9000
Estimated costs to complete 4500

Company recognizes progress using an output method, based on work certified to date. The gross
profit to be recognized in Statement of Profit or Loss of AL for the year ended March 31, 2020 would
be:

a) Rs. 6 million.

b) Rs. 1.2 million.

c) Rs. 1.5 million.

d) Rs. 10.5 million.

Answer:

Contract price = 15 million

Less: cost to date = 9 million

Less: Estimated cost to complete = 4.5 million.

Total gross profit = 6 million.

Gross profit to date = gross profit for the period x stage of completion.
= 6 million x (work certified to date x contract price)

= 1.2 million.

Q7: On January 1, 2019, Z Limited (ZL) started construction of a building which will have an estimated
useful life of 30 years. It purchased the property for Rs. 10 million. The construction of the building
cost Rs. 8 million. Company borrowed Rs. 50 million at 9% interest on January 1, 2019 for financing
this project which will be repaid on June 30, 2020. The construction of the building was completed on
October 31, 2019 and it was brought into use on Jan 1, 2020. The total amount to be included in the
cost of building as at Dec 31, 2019 is:

a) Rs. 21.75 million.

b) Rs. 22.5 million.

c) Rs. 68 million.

d) Rs. 18 million.

Answer:

Cost of property = 10 million.

Cost of building = 8 million.

Interest on amount borrowed = 50 x 0.09 = 4.5 million

Total borrowing cost = 22.5 million.

Q8: At Dec 31, 2019, F Limited (FL) had 12,000 units of product “Alpha” in inventory, included at cost of
Rs. 600 per unit. During January 2020, units of “Alpha” were being sold at a price of Rs. 540 each, with
sales staff receiving a 15% commission on the sales price of the product. Inventory of product “Alpha”
should be recognized in the financial statements of FL as at Dec 31, 2019 at an amount of:

a) Rs. 7452,000

b) Rs. 7200,000

c) Rs. 6480,000.

d) Rs. 5508,000.

Answer:

Inventory according to IAS 2 will be shown at lower of cost or Net Realizable Value (NRV)

Here cost = 12000 units x 600 Rs. Per unit = Rs. 7200,000.

NRV = (Rs. 540 per unit – commission of 15% of 540) x 12000 = Rs. 5508,000

Since NRV of Rs. 5508,000 is lower than cost, hence inventory will be shown at NRV.
Net profit 162,000,000

Working w-1:

PPE cost = 1500,000,000

Less: Accumulated dep. = 540,000,000

NBV = 960,000,000

Dep. Exp. For 2021 = 960,000 x 0.20 = 192,000,000

Q11: Z Limited (ZL) acquired an item of plant under a lease on July 1, 2019 with an initial payment of
Rs. 5000,000. The present value of the future lease payments amounted to Rs. 17,730,000. ZL will
make four further annual payments of 5 million. The useful life of the plant is estimated to be eight
years. ZL will obtain legal title of the asset following the final payment. The interest rate implicit in the
lease is 5% per annum. The total amount that would be recorded in the statement of profit or loss of
ZL for the year ended June 30, 2020 is:

a) Rs. 886,500.

b) Rs. 3727,750.

c) Rs. 3102,750.

d) Rs. 2841,250.

Answer:

Profit or loss statement = interest expense = 17,730,000 x 0.05 = 886,500.

Q12: The following balances were extracted from N (Pvt.) Limited’s financial statements:

Statement of financial position (Extract)

As at Dec 31:

2019 2018
Non-current Liabilities
Deferred Tax 190,000 135,000
Current Liabilities
Current Tax Payable 595,000 530,000
Income tax expenses for the year ended December 2019 amounted to Rs. 610,000. The amount of tax
paid that should be included in statement of cash flows for the year ended December 31,2019 is:

a) Rs. 490,000.

b) Rs. 55,000.

c) Rs. 610,000.

d) Rs. 65,000.

Income Tax payable

Current tax b/d ........................ 530,000
Income tax paid .................... 490,000 Deferred tax b/d ...................... 135,000
Current tax c/d ....................... 595,000 Income tax expense for year ...... 610,000
Deferred tax c/d ..................... 190,000

Answer:

Q13: On July 1, 2020, Z (ZL) purchased 70% of share capital of J Limited (JL) for the year ended Dec 31,
2020, operating expenses of ZL and JL amounted to Rs. 101,220,000 million and 66240,000 million,
respectively. On acquisition, JL’s net assets were equal to their carrying amount, except JL’s head office
which had a fair value of Rs. 8 million in excess of its carrying amount and a remaining life at
acquisition of 20 years. The company has a policy to charge depreciation to operating expenses,
is the operating expenses figure to be included in the consolidated statement of profit or loss of ZL for
the year ended Dec 31, 2020.

a) Rs. 101,220,000.

b) Rs. 134,340,000.

c) Rs. 167,460,000.

d) Rs. 134,540,000.

Q14: Following information is related to F Limited (FL):

 Profit before tax for both the years 2020 and 2019 amounted to Rs. 4000,000.
 Fanta Limited (FL) estimated that the value of the gratuity owing to its staff at December 31,
2019 is Rs. 1000,000. This gratuity was paid to its staff in 2020. The tax authorities allow
provisions to be deducted only when paid.
 Accounting depreciation for the year 2020 amounted to Rs. 100,000 while Rs. 150,000 for the
year 2019.
 Tax depreciation for the year 2020 amounted to Rs. 200,000 while it was Rs. 220,000 in the
year 2019.