Certificate in Accounting and Finance Stage Examination

19th May , 2025

1 hours 45 minutes– (60 marks)
Additional Reading Time – (10 minutes)

Financial Accounting and Reporting II

Term Test-1
Instructions to examinee
(i) Answer All Questions
(ii) Answer in Black pen only
(iii) Attempt each Question(part) on new page
(iv) After attempting, convert your answer script to PDF using CamScanner and upload on your LMS.

Section A

Question-1
Draft financial statements of Cuba Limited (CL) for the year ended 31 December 2019 show the following:
Rs.
Total assets 1,500,000
Total liabilities 900,000
Net profit for the year 700,000
While reviewing the draft financial statements, following matters have been noted:
1) On 1 Apr 2019, Cuba Ltd acquired some technical know-how which will completely change the way its
manufacturing process operates. The following costs have been incurred:
Rs.
Original cost of technical know-how 180,000
Legal costs incurred as part of acquisition 4,000
Manufacturing supervisors time to install new process 3,200
Staff training incurred in operating new process 13,000
Testing new manufacturing process 4,800
205,000
The new manufacturing process was available for use on 1 July 2019. It was believed that the new process
would be of benefit for the next four years after which it would be replaced. Although operations of the new
manufacturing process during its first six months went well, a breakthrough in the development of improved
technology by a competitor led to an impairment review being carried out by Cuba Ltd. At 31 Dec 2019 the fair
value (less costs to sell) of the technical know-how was assessed as being Rs. 100,000 compared with the
present value of the estimated future cash flows expected to be generated by the technology of Rs. 105,000.
The accountant has capitalized full cost of Rs. 205,000, and he has not recorded any amortization and
impairment.
2) In previous years Cuba Ltd had traded only with Pak suppliers. However, in Nov 2019, Cuba Ltd began
importing goods from USA. The goods were received on 23 Nov 2019, and the purchase invoice, for Rs.
300,000, was correctly processed. At the year end the invoice was unpaid and the goods were still in inventory.
Cuba valued this inventory using the spot rate at 31 Dec 2019 and included it in closing inventory and no
adjustment was made to payables figure.
The spot exchange rates were as follows:
 23 November 2019 – Rs. 165 :$ 1
 31 December 2019 – Rs. 172 :$ 1
Required:
Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the impact of above
adjustment(s), if any. (10)
 Financial Accounting and Reporting-II Page 2 of 4

Question-2
The Mirror Co. bought a flock of 500 sheep on 1 December 20X7 in Canada to be kept in a farm house there for
wool sheering. The cost of each sheep was ￡95, which represented fair value at that date. At 30 June 20X8 all of
the sheep are still held and fair value has increased to ￡107 per sheep. Mirror has a contract to sell the sheep on 31
July 20X8 for ￡119 each.
45 sheep were born on 1 February 20X8 and fair value of each of the sheep was ￡20 and their value has increased
by ￡12 at year end.
Auctioneers’ fees on sale are 5% of fair value, and the cost of transporting each sheep to market is ￡3.00. An
agricultural levy of ￡2.00 is payable on each sheep sold.
Further the entity has some mangoe trees in Multan having book value of Rs. 5,000,000 on 30 June 20X8. The
mangoes hanging with trees have a fair value less cost to sell of Rs. 480,000 and fruit juice lying in stock is of Rs.
70,000.
Date l-Dec-X7 1-Feb-X8 30-Jun-X8 Average Dec-Jun
1￡ Rs. 324 Rs. 330 Rs. 341 Rs. 327
Required: Prepare statement of financial position as on 30 June 20X8. (5)

Question- 3
On 1 January 2012, Javed Ltd purchased land and buildings abroad for MYR 1,500 million (including MYR 400
million for the land element) when exchange rate was Rs.1: MYR 18. The payment is to be made in 5 equal
installments after every 2 years. The first payment was made on 31 December 2013. The buildings are being
depreciated over 20 years to a MYR 100 million residual value. Javed Ltd’s policy is to revalue land and buildings
and a professional valuation has been obtained of MYR 1,760 million (including MYR 420 million for the land) as
at 31 December 2017.
No previous revaluations had been necessary.

Date 31 December 2016 31 December 2017 Average for 2017

Exchange rate Rs.1: MYR 20 Rs. 1: MYR 21 Rs. 1: MYR 20.4

Required: Pass the journal entries for the year ended December 31, 2017.
(8)

Question-4
Select the most appropriate answer(s) from the options available for each of the following Multiple Choice
Questions.
1. Which of the following would not be included within the initial measurement of lease liability?
(a) Payments made to the lessor before commencement of the lease
(b) Initial direct cost borne by lessor
(c) Guaranteed residual value
(d) Unguaranteed residual value
(1)
2. In arriving at its profit before tax for the year ended 31 December 2017, the Rumal Company has accrued
royalties receivable of Rs. 200,000 and interest payable of Rs. 250,000. Both royalties and interest are
dealt with on a cash basis in tax computations.
What are Rumal’s net temporary differences at 31 December 2017, according to IAS 12 Income taxes?
(2)
 Financial Accounting and Reporting-II Page 3 of 4

3. On 1 January 2019, FL acquired a building on lease for a non-cancellable period of 6 years. Lease contains
rent free period of 2 years and 4 annual rentals of Rs. 60 million each are payable starting from the end of 3rd
year. Applicable discount rate is 12%.
What amount in total would be charged to entity’s statement of profit or loss for the year ended 30 June 2019
in respect of the above transactions?
(a) Rs. 23.32 million
(b) Rs. 20.82 million
(c) Rs. 41.56 million
(d) Rs. 26.12 million
(2)

Section B
Question-5
Following are the statement of financial position extracts of HB Limited.
31 Dec 2013 31 Dec 2012
(Rs.) (Rs.)
Non-current assets
Property, plant and equipment 61,413 72,250
Intangibles 13,964 16,000
Current assets
Stock 6,000 4,500
Debtors 3,800 3,325
Non-current liabilities
Provision for gratuity 6,600 6,000
Current liabilities
Accrued expenses 2,500 2,200

Additional information:
(i) All Property, plant and equipment were purchased in January 2011. All assets are being depreciated over 15%
reducing balance method. Tax rules allow 35% depreciation on reducing balance method.
(ii) A software costing Rs. 15,000 was developed by company in 2011. Company started its amortization in 2012
at 10% by using straight line method. Tax authorities allowed all development expenditure in the year in
which they were incurred. Other intangibles were purchased at 1st January, 2011. HB Limited amortized other
intangibles at 15% on straight line basis but tax authorities allow deduction at 10% on straight line method.
(iii) Stock figure in statement of financial position is after NRV loss of Rs. 200 and Rs. 300 in 2012 and 2013
respectively. Tax authorities do not allow NRV loss.
(iv) Debtors are after 5% provision for bad debts and tax rules allow only actual bad debts as deduction.
(v) Tax rules allow gratuity expenses on payment basis.
(vi) Tax authorities allow deduction on accrual basis on accrued expenses.
(vii) Tax rates changed from 35% to 36% during the year ended 31st December, 2013.

Required:
a) Calculate deferred tax liability/asset at year ended 31st December, 2012 and 31st Dec 2013.
b) Calculate deferred tax expense/income charged to profit or loss account for the year ended 31st Dec, 2013.
(15)
 Financial Accounting and Reporting-II Page 4 of 4

Question-6
CLASSIC CARS LIMITED (CCL) has identified a need for a manufacturing plant and new automotive spray
paint guns. Consequently, Classic Cars Limited entered into the following lease agreements:
Lease of manufacturing plant
CCL entered into a lease agreement with ABC Ltd. for a non-cancellable period of ten years. The following
information is applicable:
1. The commencement date of lease is 1 April 2022 when the fair value of the machine is Rs 14,500,000.
2. On 1 April 2022, ABC Ltd. paid an amount of Rs. 20,000 to Classic Cars Limited as an incentive and
CCL paid a deposit of Rs. 107,000 to ABC Limited to secure the lease agreement.
3. The external legal advisors of CCL invoiced on 1 April 2022, an amount of Rs. 15,000 and was paid by
CCL on 30 April 2022.
4. CCL has to return the plant to ABC Limited at the end of the lease term in its original condition. On 1
April 2022, Classic Cars Limited estimated that the costs related to the restoration of the plant would
amount to Rs. 931,755 at the end of the lease term.
5. Lease rentals are Rs. 1,293,408 fixed annual lease payment for first 5 years in advance and Rs. 1,000,000
fixed annual lease payment for next 5 years in arrears; and
4. The plant has an estimated remaining useful life of 15 years on 1 April 2022.
5. CCL and ABC Limited agreed, at commencement date, on a residual value guarantee of Rs 10,000,000.
CCL estimated at commencement date that fair value will be Rs. 9,200,000. ABC Ltd estimated that it
would be able to sell it at the end of the lease for Rs. 8,000,000
6. ABC Ltd paid initial direct costs to its lawyers of Rs. 27,000 on 1 April 2022.
7. The incremental borrowing rate of Classic Cars Limited is 10.5% per annum. Lessor implicit rate is not
known to lessee.

Lease of automotive spray paint guns

Classic Cars Limited entered into a non-cancellable lease agreement with Spray Away Limited on 1 September
2023 (commencement date) to lease five automotive spray paint guns (low value assets) for a period of three years.
The following lease payments are payable annually in arrears:
Year 1 Rs. 4,000 per spray gun
Year 2 Rs. 3,500 per spray gun
Year 3 Rs. 1,200 per spray gun
There is an option to extend the lease for a further two years. For these two years, the annual lease payment will
amount to Rs. 1,000 per spray gun per annum. At the commencement of the lease, CCL is reasonably expected to
extend the lease for the additional two year period.
Classic Cars Limited elected to apply the recognition exemption in respect of low value assets, to this lease
contract.

Required:
Prepare journal entries for year ended 31 December 2022 and 31 December 2023 to record the above transactions
in the books of Classic Cars Ltd.
(17)

THE END