CAF 5 – IAS 16

Property, Plant &

IAS 16 Equipment 01
Page | 1
MEASUREMENT AFTER RECOGNITION
IAS 16 allows choice of accounting treatment:
Cost model Cost – accumulated depreciation – accumulated impairment losses
Revaluation Revalued amount – subsequent accumulated depreciation
model Revalued amount is fair value (FV) at the date of revaluation.

RECORDING REVALUATION
Elimination of Dr. Accumulated depreciation
1.
depreciation Cr. Asset
Recording gain or Dr. Asset Dr. Loss on revaluation
2.
loss Cr. Gain on revaluation Cr. Asset

SPL OR OCI – WHERE THE GAIN OR LOSS SHOULD BE RECOGNISED?

Asset carried at cost
SPL
revalued downwards
Asset carried at cost
OCI (and added to Revaluation Surplus)
revalued upwards
Asset carried at OCI [up to the balance in revaluation surplus account (usually
revaluation surplus after incremental depreciation)]
revalued downwards SPL [Remaining amount]
Asset carried at SPL [up to the asset’s carrying amount had the
revaluation deficit impairment/revaluation loss never occurred]
revalued upwards OCI [Remaining amount]

DEPRECIATION OF REVALUED ASSETS

Depreciation The depreciation is charged on revalued amount.
The extra depreciation charged on the revalued amount (as compared to
cost) may be transferred from revaluation surplus to retained earnings (and
Incremental
this is shown in statement of changes in equity).
depreciation
= Depreciation after revaluation – Depreciation before revaluation
= Revaluation surplus / remaining useful life
CONDITIONS FOR REVALUATION MODEL
If the revaluation model is adopted, the following two conditions need to be fulfilled:
When an item of PPE is revalued, the entire class of assets to which the items
Class wise
belongs must be revalued. For example, if a plant is revalued all the plant and
application
machineries held by entity should be revalued.
After first revaluation, subsequent revaluations must be made with sufficient
Sufficient regularity to ensure that the carrying amount does not differ materially from the
regularity fair value at each reporting date. Revaluations need not necessarily be made
at each year – end.

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 CAF 5 – IAS 16

DERECOGNITION
= Net disposal proceeds – carrying amount at the time of disposal
Rs.
Sale proceeds on disposal (Cash received) XX
Page | 2 Sale proceeds (part-exchange asset received) XX
Less: Disposal costs and cash paid (X)
Gain or Net disposal proceeds XX
loss Asset at cost XX
Less: Accumulated depreciation (XX)
Carrying amount at date of disposal (XX)
GAIN (LOSS) ON DISPOSAL XX/(XX)
The gain or loss is recognised in profit or loss but gain is not classified as
revenue.
The carrying amount of replaced part is derecognised on disposal even if the
Replaced
replaced part was not depreciated separately. The cost of replacement may
part
be used as an indication for carrying amount of the replaced part.
Revaluation The revaluation surplus related to the asset disposed of is transferred
surplus to retained earnings.
Trade-in
The value of old asset agreed in exchange of assets.
value
JOURNAL ENTRIES – DISPOSAL
Dr. Disposal
1. Transfer the cost of non-current asset
Cr. PPE
Dr. Accumulated depreciation
2. Transfer the accumulated depreciation
Cr. Disposal
Dr. Bank / Receivable
3. Sale proceeds (cash received)
Cr. Disposal
Dr. PPE (new)
4. Part-exchange (asset received)
Cr. Disposal
Dr. Disposal
5. Disposal costs
Cr. Bank / Payables
Dr. Disposal
6. Cash paid in part exchange
Cr. Bank
Dr. Disposal
Gain or loss (balance on disposal Cr. Gain (PL)
7.
account) Dr. Loss (PL)
Cr. Disposal
Realisation of revaluation surplus on Dr. Revaluation Surplus
8.
disposal Cr. Retained Earnings
The entry 1 to 7 may be combined as follows:
Dr. Accumulated depreciation
Dr. Bank (received)
Dr. PPE (new)
1 to 7. Dr. Loss (balancing figure)
Cr. Bank (paid)
Cr. PPE (old)
Cr. Gain (balancing figure)

Latest update: March 2020

 CAF 5 – IAS 16

DISCLOSURE
 Measurement bases for determining gross carrying amount (Cost
model or revaluation model)
 Depreciation method
For each class
 Useful lives or depreciation rates
of PPE Page | 3
 Gross carrying amount and accumulated depreciation at beginning
and at end of the period and reconciliation thereof [PPE
Schedule]
 the existence and amounts of restrictions on title, and PPE pledged
as security for liabilities
Circumstantial  capital work in progress
disclosure  the amount of contractual commitments for the acquisition of PPE
 the amount of compensation from third parties for items of PPE
that were impaired, lost or given up.
Change in The nature and financial effect of the change in residual values, estimated
estimate dismantling costs, useful lives and depreciation method is to be disclosed.
 the effective date of the revaluation
 whether an independent valuer was involved
 the extent to which items’ fair values were determined directly by
reference to observable prices in an active market or recent market
For revalued transactions or were estimated using other valuation techniques.
assets  for each revalued class of PPE, the carrying amount that would
have been recognised had the assets been carried under the cost
model
 the revaluation surplus, indicating the change for the period and
any restrictions on the distribution of the balance to shareholders.
 the carrying amount of temporarily idle PPE
 the gross carrying amount of any fully depreciated PPE that is still
in use;
Optional
 the carrying amount of PPE retired from active use and not
disclosures
classified as held for sale in accordance with IFRS 5
 when the cost model is used, the fair value of PPE when this is
materially different from the carrying amount.
Motor
PPE SCHEDULE (SPECIMEN) Premises Total
vehicles
Cost Rs. m
At beginning of period 500 250 750
Additions 20 10 30
Acquisition through business combination 50 25 75
Revaluation effect 40 20 60
Impairment losses (30) (15) (45)
Disposals (60) (30) (90)
Assets classified as held for sale (IFRS 5) (10) (5) (15)
At the end of period 510 255 665
Accumulated depreciation
At beginning of period 100 50 150
Depreciation expense 40 20 60
Revaluation effect (10) (5) (15)
Disposals / Transfers (20 (10) (30)
At the end of period 110 55 165
Carrying amount 400 200 600

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 CAF 5 – IAS 16

ACCOUNTING POLICIES
IAS 1 requires the disclosure of accounting policies used that are relevant
to an understanding of the financial statements. Property, plant and
Requirement
equipment often includes the largest numbers in the statement of financial
Page | 4 of IAS 1
position and results in significant expense in the statement of
comprehensive income.

Illustrative example: Accounting policy – Property, plant and equipment

Property, plant and equipment comprises freehold and lease hold land and buildings, plant
and machinery, fixtures and fittings, vehicles, office equipment and capital work in progress.

Land and buildings

Land and buildings comprise mainly factories, warehousing and offices. Freehold land and
buildings are shown at their fair value less accumulated depreciation. Valuations are
performed with sufficient regularity to ensure that the fair value of a revalued asset does not
differ materially from its carrying amount.

Increases in the carrying amount arising on revaluation of land and buildings are credited to
other comprehensive income. Decreases that offset previous increases of the same asset
are charged directly to other comprehensive income. Any amounts not so covered are
recognised in profit or loss for the period.

Depreciation is based on the carrying amount of the asset after the revaluation. The
incremental depreciation is the difference between the depreciation based on historical cost
and depreciation based on fair value. Each year this amount is transferred from the
revaluation surplus to accumulated profits. Any accumulated depreciation at the date of
revaluation is eliminated against the gross carrying amount of the asset, and the net amount
is restated to the revalued amount of the asset.

When revalued assets are sold, the amounts included revaluation surplus in respect of that
asset is transferred to accumulated profits. Freehold land has an indefinite useful life and is
not depreciated. Freehold buildings are depreciated on a straight-line basis over their useful
economic lives over as shown below.

Leasehold land and buildings are all depreciated on a straight-line basis over the lease term.

Other tangible non-current assets

All other property, plant and equipment is carried at historical cost less accumulated
depreciation and accumulated impairment losses. Historical cost includes expenditure that is
directly attributable to the acquisition of the items, the cost of replacing parts of the plant and
equipment and borrowing costs capitalised in accordance with IAS 23: Borrowing costs.

Depreciation is calculated using the straight-line method to allocate their cost or revalued
amounts to their residual values over their estimated useful lives, as follows:
Buildings 35-50 years
Machinery 5 to15 years
Vehicles 3 years
Furniture, fittings and equipment 5 to 10 years
The residual values and useful lives of assets are reviewed on an annual basis and adjusted
as appropriate.

Latest update: March 2020

 CAF 5 – IAS 16

SYLLABUS

Reference Content/Learning outcome

C2 IAS 16 Property, plant and equipment (revaluation and disclosure)

Present property, plant and equipment after recognition under revaluation Page | 5
LO3.2.1
model using data and information provided.
Compute depreciation for assets carried under revaluation models using
LO3.2.2
information provided.
Account for de-recognition of property, plant and equipment recognised earlier
LO3.2.3
under revaluation methods
Understand the disclosure requirements and prepare extracts of necessary
LO3.2.4
disclosures.
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
CAF 5
25 14 15 13 17 04 18 17 12 16 141 122
Objective Type - 02
CAF 7
15 17 - 13 - - - 20 03 -
1
Total marks 17 (including IAS 23)
2
Total marks 20 (including IAS 20 and IAS 40)

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 CAF 5 – IAS 16

PRACTICE Q&A
Sr.# Description Marks Reference
REVALUATION
1H Basic Incremental Depreciation calculation 05 KA
Page | 6 2C *Surplus  Deficit – without transfer 10 KA
3C *Surplus  Deficit – with transfer 10 KA
4C *Deficit  Surplus 10 KA
5H Derecognition 04 CI
6C Derecognition of revalued asset 04 KA
7H Adjustments Limited – Effects of changes in depreciation 15 QB
8H Rooney: Complex asset loss on revaluation and reversal 12 QB
9H Ehtisham: Revaluation loss and reversal of loss 10 QB
10C SK Limited: JE for revaluation gain, reversal of gain and
11 PE S18
reversal of loss
11C PQR Enterprises: Disclosures and JE for revaluation
15 PE A15
including incremental depreciation with change in estimate
12H Shahzad Textile Mills Limited: JE for incremental
depreciation, revaluation gain, reversal of gain and reversal 15 PE A14
of losses
13H Omega Chemicals Limited: Revaluation gain and losses –
17 PE S15
detailed
14H Piano Limited: Depreciation and Revaluation entries 16 PE S19
DISCLOSURES
15H Carly: PPE Schedule 18 QB
16H Disclosure of revalued assets: Theory 04 PE S17
17C Sherdil Limited: PPE schedule / disclosure note
18 PE A17
(comprehensive)
18H Fam: Disclosure note 16 QB
19H Abid Limited: PPE Disclosure note with revaluation 13 PE S16
20C Orchid Limited: Disclosures PPE and change in
20 PE S18
depreciation method
21C Abbas Limited – Journal entries and disclosures 20 QB
22H Games Limited – Journal entries and disclosures 20 QB

Latest update: March 2020

 CAF 5 – IAS 16

QUESTION 01
A company revalued its buildings at the start of the year to Rs. 6 million. The property cost
was Rs. 4 million and it was bought 10 years ago. Its total useful life of 50 years is
unchanged. The company policy is to make an annual transfer of realised amounts to
retained earnings.

What is amount of incremental depreciation? (05) Page | 7

QUESTION 02
On 1 January 2001, M Limited purchased a building for Rs. 100,000 with nil residual value
and 10 years useful life. The company policy is not to transfer incremental depreciation.

On 31 December 2001, the building was revalued to Rs. 108,000.

On 31 December 2002, due to slump in the property market, the building was again revalued
but this time the worth was only Rs. 55,000.

REQUIRED
Pass the journal entries from 1 January 2001 to 31 December 2002. (10)

QUESTION 03
On 1 January 2001, M Limited purchased a building for Rs. 100,000 with nil residual value
and 10 years useful life.
On 31 December 2001, the building was revalued to Rs. 108,000.
On 31 December 2002, due to slump in the property market, the building was again revalued
but this time the worth was only Rs. 55,000.
REQUIRED
Pass the journal entries from 1 January 2001 to 31 December 2002. (10)

QUESTION 04
On 1 January 2001, J Limited purchased premises for Rs. 100,000 with nil residual value
and 10 years useful life.
On 31 December 2001, the building was revalued to Rs. 63,000.
On 31 December 2002, due to surge in the property market, the building was again revalued
but this time the worth was Rs. 92,000.

REQUIRED
Pass the journal entries from 1 January 2001 to 31 December 2002. (10)

QUESTION 05
Entity X has several motor cars that are accounted for as property, plant and equipment. As
at 1 January Year 5, the cost of the entity’s cars was Rs.200,000 and the accumulated
depreciation was Rs.80,000.
On 2 January Year 5, Entity X bought a new car costing Rs.50,000. The car dealer accepted
a car owned by Entity X in part-exchange, and the part-exchange value of this old car was
Rs.4,000. This car originally cost Rs.30,000 and its accumulated depreciation is Rs.25,000.
Required
Calculate the gain or loss on disposal of the old car (04)

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 CAF 5 – IAS 16

QUESTION 06
A revalued asset with a carrying amount of Rs. 70,000 (after deducting accumulated
depreciation of Rs. 30,000) was sold for Rs. 95,000. There is a Rs. 40,000 revaluation
surplus relating to this asset.

Required:
Page | 8 Pass the journal entries on disposal. (04)

QUESTION 07
Adjustments Limited has carried out a review of its non-current assets.
(a) A lathe was purchased on 1 January 2009 for Rs. 150,000. The plant had an
estimated useful life of twelve years, residual value of nil. Depreciation is charged on
the straight line basis. On 1 January 2015, when the asset’s net book value is Rs.
75,000, the directors decide that the asset’s total useful life is only ten years.

(b) A grinder was purchased on 1 January 2012 for Rs. 100,000. The plant had an
estimated useful life of ten years and a residual value of nil. Depreciation is charged
on the straight line basis. On 1 January 2015, when the asset’s net book value is Rs.
70,000, the directors decide that it would be more appropriate to depreciate this
asset using the sum of digits approach. The remaining useful life is unchanged.

(c) The company purchased a fifty year lease some years ago for Rs. 1,000,000. This
was being depreciated over its life on a straight line basis. On 1 January 2015, when
the net book value is Rs. 480,000 and twenty-four years of the lease are remaining,
the asset is revalued to Rs. 1,500,000. This revised value is being incorporated into
the accounts.
Required
Explain the effects of these changes on the depreciation for the year to 31 December 2015.
(15)

QUESTION 08
Rooney manufactured a press for Rs. 30 million. The press comprises two significant parts,
the hydraulic system and the ‘frame’. The hydraulic system has a three year life and the
‘frame’ has an eight year life. Rooney depreciates plant on a straight line basis. The cost of
the hydraulic system is 30% of the total cost of manufacture.

Rooney uses the IAS 16 revaluation model in accounting for diamond presses and revalues
these assets on an annual basis.

Revaluation surpluses or deficits are apportioned between the hydraulic system and the
‘frame’ on the basis of their year-end book values before the revaluation.

Required
Explain the IAS 16 rules on accounting for significant parts of property, plant and equipment
and show the accounting treatment of the diamond press in the financial statements for the
financial years ending:
(i) 31st March 2016 (assume that the press has a fair value of Rs. 21million)
(ii) 31st March 2017 (assume that the press has a fair value of Rs. 19.6 million).
(12)

Latest update: March 2020

 CAF 5 – IAS 16

QUESTION 09
The following information relates to the financial statements of Ehtisham for the year to 31
March 2015.

The head office of Ehtisham was acquired on 1 April 2012 for Rs.1 million. Ehtisham intend
to occupy the building for 25 years. On 31 March 2014 it was revalued to Rs. 1.15 million.
On 31 March 2015, a surplus of vacant commercial property in the area had led to a fall in Page | 9
property prices and the fair value was now only Rs. 0.8 million.

Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
(10)

QUESTION 10
Following information pertains to a building acquired by SK Limited (SKL) on 1 July 2012 for
Rs. 360 million:
(i) The building is being depreciated on straight-line basis over 10 years.
(ii) SKL uses revaluation model for subsequent measurement of buildings. It accounts
for revaluation on net replacement value method. The details of revaluations as
carried out by independent valuer are as follows:
Fair value
Revaluation date
(Rs. in million)
31 December 2013 323
31 December 2015 208
31 December 2017 167
(iii) There is no change in useful life of the building.
(iv) SKL transfers the maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(v) SKL’s financial year ends on 31 December.
Required:
Prepare entries to record revaluation surplus/loss on each of the above revaluation date.
(Entries to record depreciation expense, incremental depreciation and elimination of
accumulated depreciation are not required) (11)

QUESTION 11
(a) When a company follows revaluation model for subsequent measurement of its
Property, Plant and Equipment, it is required to provide certain additional disclosures
(as compared to cost model). Specify such disclosures as have been mentioned in
IAS 16 ‘Property, Plant and Equipment’. (03)

(b) PQR Enterprises was incorporated on 1 July 2012. The company depreciates its
property, plant and equipment on straight line basis over their useful life. It uses
revaluation model for subsequent measurement of the property, plant and equipment
and has a policy of revaluing these after every two years.

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 CAF 5 – IAS 16

Following information pertains to its property, plant and equipment:

Value as Useful life in years
determined
Cost WDV
by
as on as on Remaining
Assets professional
01-07-2013 01-07-2013 Original at as
valuer on
Page | 10 30-06-2014 acquisition determined
by valuer
---------------- Rs. in million ----------------
Office building 6,000 5,500 5,750 12 8
Factory building 4,400 3,960 3,320 10 9
Warehouse 4,500 4,050 3,350 10 8

During the year there were no addition or deletion in the above assets.

As per policy, PQR transfers the maximum possible amount from the revaluation surplus to
retained earnings on an annual basis.
Required:
Prepare necessary journal entries for the year ended 30 June 2014 and 2015. (12)

QUESTION 12
Shahzad Textile Mills Limited (STML) purchased a plant for Rs. 500 million on 1 July 2010.
The plant has an estimated useful life of 10 years and no residual value.

STML uses revaluation model for subsequent measurement of its property, plant and
equipment and accounts for revaluations on net replacement value method. The details of
revaluations performed by an independent firm of valuers are as follows:
Revaluation date Fair value
1 July 2011 Rs. 575 million
1 July 2012 Rs. 390 million
1 July 2013 Rs. 380 million

Required:
Prepare journal entries to record the above transactions from the date of acquisition of the
plant to the year ended 30 June 2014. (Ignore tax implications) (15)

QUESTION 13
On 31 December 2013, Omega Chemicals Limited (OCL) changed its valuation model from
cost to revaluation for its buildings. The following information pertains to its buildings as at 31
December 2013:
Prior to revaluation as at 31-12-2013 Revalued
Estimated
amount as
useful life Accumulated
Cost per valuation
as originally depreciation*
report
estimated
-----------------------Rs. in million---------------------------
Factory buildings 20 years 100.00 37.50 52.00
Office buildings 25 years 164.50 26.32 149.94
*Including depreciation for the year ended 31 December 2013

As per the report of the professional valuer, there was no change in estimated useful life of
the buildings. OCL recorded revaluation effect for the office buildings on 31 December 2013
as per the valuation report. However, no valuation effect was incorporated for the factory
buildings as the change in their value was considered to be temporary by OCL.

Latest update: March 2020

 CAF 5 – IAS 16

On 1 July 2014, one of the office buildings was sold for Rs. 30 million. On 31 December
2013, written down value before revaluation and revalued amount of the sold building
amounted to Rs. 27.72 million and Rs. 31.92 million respectively.

On 31 December 2014, factory buildings were revalued at Rs. 64 million whereas there was
no change in value of the office buildings. Page | 11

OCL uses straight line method of depreciation which is charged from the date the asset is
available for use up to the date of disposal. Revaluation is to be accounted for by using net
replacement value method.

Required:
In the light of the requirements of the International Financial Reporting Standards, prepare
accounting entries from the above information for the year ended 31 December 2014
including correcting entries. (Ignore taxation) (17)

QUESTION 14
The following information pertains to Piano Limited (PL):
Plant Equipment
Acquisition
 Date of acquisition 1 January 2015 1 July 2015
 Cost Rs. 500 million Rs. 360 million
 Estimated useful life 10 years 12 years
 Residual value Rs. 60 million Nil
 Depreciation method Straight line method Straight line method
Revaluation on 31 December 2016
 Fair value Rs. 526 million Rs. 280 million
 Residual value Rs. 78 million Nil
Revaluation on 31 December 2018
 Fair value Rs. 310 million Rs. 275 million
 Residual value Rs. 64 million Nil

Additional information:
(i) PL uses revaluation model for subsequent measurement and accounts for
revaluation on net replacement value method.
(ii) There is no change in useful life of plant. The remaining useful life of equipment was
estimated as 15 years and 10 years in 2016 and 2018 respectively.
(iii) PL transfers maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iv) PL’s financial year ends on 31 December.

Required:
(a) Calculate depreciation on each asset for 2015 to 2018. (08)
(b) Prepare entries to record revaluation in 2018. (Entries to record depreciation
expense, incremental depreciation and elimination of accumulated depreciation are
not required. Further, entries prior to 2018 are also not required.) (08)

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 CAF 5 – IAS 16

QUESTION 15
The following is an extract from the financial statements of Carly on 31 December 2014.
Property, plant and equipment
Land and Plant and Computers Total
buildings equipment
Rs. Rs. Rs. Rs.
Page | 12 Cost
On 31 December 2014 1,500,000 340,500 617,800 2,458,300
Accumulated depreciation
On 31 December 2014 600,000 125,900 505,800 1,231,700
Carrying amount
On 31 December 2014 900,000 214,600 112,000 1,226,600

Accounting policies
Depreciation
Depreciation is provided at the following rates.
On land and buildings 2% per annum straight line on buildings only
On plant and equipment 25% reducing balance
On computers 33.33% per annum straight line

During 2015 the following transactions took place.

(1) On 31 December the land and buildings were revalued to Rs. 1,750,000. Of this
amount, Rs. 650,000 related to the land (which had originally cost Rs. 500,000).
The remaining useful life of the buildings was assessed as 40 years.
(2) A machine which had cost Rs. 80,000 and had accumulated depreciation of Rs.
57,000 at the start of the year was sold for Rs. 25,000 in the first week of the year.
(3) A new machine was purchased on 31 March 2015. The following costs were
incurred:
Rs.
Purchase price, before discount, inclusive of reclaimable sales tax of
Rs. 3,000 20,000
Trade discount 1,000
Delivery costs 500
Installation costs 1,050
Interest on loan taken out to finance the purchase 300
(4) On 1 January it was decided to change the method of providing depreciation on
computer equipment from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the financial
statements of Carly for the year ended 31 December 2015. (18)

QUESTION 16
State the disclosure requirements for assets carried at revalued amounts, as referred to in
IAS – 16 ‘Property, Plant and Equipment’. (04)

QUESTION 17
The following information pertains to Sherdil Limited (SL):
(i) Buildings and equipment were acquired on 1 January 2014 for Rs. 450 million and
Rs. 50 million respectively.

(ii) The relevant information relating to both assets is summarised below:

Latest update: March 2020

 CAF 5 – IAS 16

Depreciation Subsequent
Assets Life/rate
method measurement
Buildings Straight line 20 years Annual revaluation
Equipment Reducing balance 10% Cost

SL transfers the maximum possible amount from revaluation surplus to retained

earnings on an annual basis. Page | 13

(iii) The revalued amount of buildings as determined by Accurate Valuers (Private)

Limited, an independent valuation company, on 1 January 2015 and 2016 was Rs.
456 million and Rs. 378 million respectively.

(iv) Equipment costing Rs. 35 million was purchased on 1 August 2015. Half of the
equipment purchased on 1 January 2014 was disposed off on 30 June 2016.

Required:
In accordance with International Financial Reporting Standards, prepare a note on ‘Property
plant & equipment’ (including comparative figures) for inclusion in SL’s financial statements
for the year ended 31 December 2016. (18)

QUESTION 18
Fam had the following tangible fixed assets at 31 December 2014.
Cost Depreciation NBV
Rs. 000 Rs. 000 Rs. 000
Land 500 – 500
Buildings 400 80 320
Plant and machinery 1,613 458 1,155
Fixtures and fittings 390 140 250
Assets under construction 91 – 91
2,994 678 2,316

In the year ended 31 December 2015 the following transactions occur.

(1) Further costs of Rs. 53,000 are incurred on buildings being constructed by the
company. A building costing Rs. 100,000 is completed during the year.
(2) A deposit of Rs. 20,000 is paid for a new computer system which is undelivered at
the year end.
(3) Additions to plant are Rs. 154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are Rs.
40,000.
(5) The following assets are sold.
Cost Depreciation Proceeds
brought forward
Rs. 000 Rs. 000 Rs. 000
Plant 277 195 86
Fixtures 41 31 2
(6) Land and buildings were revalued at 1 January 2015 to Rs. 1,500,000, of which land
is worth Rs. 900,000. The revaluation was performed by Messrs Jackson & Co,
Chartered Surveyors, on the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were
purchased ten years before the revaluation.

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 CAF 5 – IAS 16

(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required
Page | 14 Show the disclosure under IAS 16 in relation to fixed assets in the notes to the published
accounts for the year ended 31 December 2015. (16)

QUESTION 19
Abid Limited (AL) uses the revaluation model for subsequent measurement of its property,
plant and equipment and has a policy of revaluing its assets on an annual basis using the
net replacement value method.
The following information pertains to AL’s buildings:
(i) Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300
million. The useful life of the buildings on the date of acquisition was 20 years.
(ii) AL depreciates buildings on the straight line basis over their useful life.
(iii) The results of revaluations carried out during the last three years by Premier
Valuation Service, an independent firm of valuers, are as follows:
Fair value
Revaluation date
Rs in Million
1 January 2013 323
1 January 2014 252
1 January 2015 272
(iv) On 30 June 2015, one of the buildings was sold for Rs. 80 million.

Required:
Prepare a note on “Property, plant and equipment” (including comparative figures) for
inclusion in AL’s financial statements for the year ended 31 December 2015 in accordance
with International Financial Reporting Standard. (Ignore taxation) (13)

QUESTION 20
The following information pertains to property, plant and equipment of Orchid Limited (OL), a
listed company:
Cost Subsequent
Date of Original Depreciation
Description Rs. in measurement
purchase useful life method
million model
Buildings 1-Jan-15 600 30 years Straight line Revaluation
Plant 1-Jan-15 475 25 years Straight line Cost

Buildings
The revalued amount of buildings as determined by Shabbir Associates, an independent
valuer, on 31 December 2015 and 2017 was Rs. 700 million and Rs. 463 million
respectively.

On 30 June 2017 a building having original cost of Rs. 66 million was sold to Baqir Limited
for Rs. 85 million. It was last revalued at Rs. 87 million. OL incurred a cost of Rs. 2 million on
disposal.

OL transfers the maximum possible amount from revaluation surplus to retained earnings on
an annual basis.

Latest update: March 2020

 CAF 5 – IAS 16

Plant
On 31 December 2016 the recoverable amount of the plant was assessed at Rs. 360 million
with no change in useful life.

During 2017, OL has decided to change the depreciation method for plant from straight line
to reducing balance. The new depreciation rate would be 10%.
Page | 15
Required:
Prepare following notes (along with comparative figures) to be presented in the financial
statements of OL for the year ended 31 December 2017 in accordance with the
requirements of relevant IFRSs and Companies Act, 2017:
(a) Property, plant and equipment (18)
(b) Change in depreciation method (02)

QUESTION 21
Abbas Limited (AL) is engaged in the business of manufacturing near the Karachi-
Hyderabad Motorway. Its Property, Plant and Equipment comprises of land and buildings,
plant and machinery, and equipment and fittings. Details for the period up to 30 June 2018
are as follows:
(i) The balances as at 30 June 2018 are given below:
Gross Carrying Amount Accumulated Depreciation
Assets
(Rs. Million) (Rs. Million)
Land 12 N/A
Buildings 125 38
Plant and Machinery 500 300
Equipment 100 36
(ii) The relevant information pertaining these assets is given below:
Assets Depreciation Method Subsequent Measurement Model
Land N/A Fair Value
Buildings Straight-line Cost
Plant and Machinery Units of Production Cost
Equipment Written down value Cost
(iii) Abbas Limited uses proportionate policy to depreciate its Property, Plant and
Equipment.
(iv) All of the plant and machinery pertains to factory use whereas all the equipment
pertains to office use. However, floor areas occupied by factory and office are in the
ratio 60:40 respectively.
(v) The equipment was purchased on 1 July 2016. No disposals and acquisitions took
place in the period up to 30 June 2018.
(vi) Until 30 June 2018, 12,000 units had been produced by Abbas Limited in its factory.
The plant and machinery do not have any residual value. No additions or disposals of
plant and machinery took place till this date.
(vii) The buildings were acquired on 1 July 2014 with a residual value of Rs. 11 million.
No additions and disposals took place till 30 June 2018.
(viii) The land had actually cost Rs. 15 million on the date of its acquisition.
(ix) It is assumed that value of land and buildings is spread evenly across the area
occupied.
The following information pertains to the year ended 30 June 2019:
(i) On 1 July 2018, land was revalued to Rs. 20 million on 1 July 2018. The value was
determined by an independent firm M/s Ashfaq& Co. Chartered Accountants.

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 CAF 5 – IAS 16

(ii) This year, 5,000 units were produced in the factory of AL.
(iii) On January 1, 2019, AL disposed 25% of its area comprising of land and buildings at
a price of Rs. 90 million. The portion of land was sold at its fair value as determined
on 1 July 2018. The legal costs of drafting transfer agreements were Rs. 0.1 million.
It is assumed that this disposal will not affect the proportion of areas occupied by
factory and office.
Page | 16
(iv) Further equipment costing Rs. 60 million was acquired on 1 November 2018.
(v) In the meeting of its board of directors, it was decided to open a new factory
premises near Lahore-Islamabad motorway. An expenditure of Rs. 20 million was
spent of the construction of the factory on 1 December 2018, financed by a loan
obtained from the bank at the rate of 12% per annum. The construction had not been
completed at the end of the year.
(vi) Moreover, the directors also made a contract with M/s Uni Power& Co. to purchase
plant and machinery worth Rs. 35 million once the construction of factory building is
completed.
Required:
(a) Prepare journal entries to record the revaluation of land and disposal of land and
buildings.
(b) Prepare the disclosure under IAS 16 in relation to Property, Plant and Equipment in
the notes to the published accounts for the year ended 30 June 2019. (20)

QUESTION 22
Games Limited (GL) commenced a business of preparing and burning video game CDs on 1
July 2015. The following information pertains to the year ended 31 March 2016:
(i) GL purchased 30 computers on the date of commencement of business at a cost of
Rs. 20,000 each, purely for the task of burning CDs. The management of GL
estimates that since the computers are subject to obsolescence, more of its benefit
can derived in its early life. The total useful life at the date of acquisition was
estimated to be 4 years and residual value was estimated to be Rs. 4,802 for each
computer.GL decided to adopt historical cost model for subsequently measurement
of computers.
(ii) GL purchased an office building at the date of start of business worth Rs. 3 million.
GL decided to adopt fair value model due to fluctuations in property prices. 80% of
the building is occupied by computer labs, whereas 20% is used by administrative
and selling departments. The useful life is estimated to be 10 years at the date of
acquisition with no residual value, and the economic benefits are expected to be
derived evenly over its useful life. At the end of the year, the fair value of office
buildings was assessed to be Rs. 3,237,500.
(iii) GL also purchased fittings for its administrative and selling departments, costing Rs.
120,000 on 1 July 2015. It is to be depreciated over 10 years using the straight-line
method, with no residual value.
(iv) GL made a contractual commitment with Al-Karim Computers to purchase 6
computers of Rs. 20,000 each to be delivered at GL’s premises on 1 May 2017.

The following information pertains to the year ended 31 March 2017:

(i) The computers were delivered at the GL’s premises by Al-Karim Computers at the
said date. It was decided to use the same method and same rate to depreciate these
computers. However, no further space was utilised by the computer labs.

Latest update: March 2020

 CAF 5 – IAS 16

(ii) At the end of the year, the fair value of office building was assessed to be Rs. 2
million. At the yearend GL mortgaged entire building with JS Bank to obtain a loan
worth Rs. 1.75 million for prospective investments in other divisions.
(iii) Fittings with a cost of Rs. 30,000 were disposed of for Rs. 22,000 on 1 January 2017.
The Suzuki Driver was paid Rs. 1,000 to transfer the fittings to customer’s premises.
(iv) The fair values of the office building were determined by an independent firm M/s Page | 17
Hafeez Yasir Chartered Accountants& Co. Moreover, GL uses proportionate policy to
depreciate its assets.
Required:
(a) Prepare the disposal account to record the sale of fittings on 1 January 2017.
(b) Prepare the disclosure under IAS 16 in relation to Property, Plant and Equipment in
the notes to the published accounts for the year ended 31 March 2017 (comparatives
are required). (20)

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 CAF 5 – IAS 16

Page | 18

Latest update: March 2020

 CAF 5 – IAS 16

ANSWER 01
Rs.
Depreciation per year (before revaluation) Rs. 4,000,000 / 50 years 80,000
Accumulated depreciation at revaluation Rs. 80,000 x 10 years 800,000
Carrying amount before revaluation Rs. 4,000,000 – 800,000 3,200,000
Page | 19
Gain on revaluation Rs. 6,000,000 – 3,200,000 2,800,000
Deprecation – current year Rs. 6,000,000 / 40 years 150,000
Rs. 150,000 – 80,000 70,000
Incremental depreciation
Rs. 2,800,000 / 40 years 70,000

ANSWER 02
Date Particulars Dr. Rs. Cr. Rs.
01.01.01 Building 100,000
Bank 100,000
31.12.01 Depreciation 10,000
Accumulated depreciation 10,000
(Rs. 100,000 / 10 years) = Rs. 10,000
31.12.01 Accumulated depreciation 10,000
Building 10,000
31.12.01 Building 18,000
Gain on revaluation (OCI) 18,000
31.12.02 Depreciation 12,000
Accumulated depreciation 12,000
(Rs. 108,000 / 9 years) = Rs. 12,000
31.12.02 Accumulated depreciation 12,000
Building 12,000
31.12.02 Loss on revaluation (OCI) 18,000
Revaluation loss (P&L) 23,000
Building (cost) 41,000

ANSWER 03
Date Particulars Dr. Rs. Cr. Rs.
01.01.01 Building 100,000
Bank 100,000
31.12.01 Depreciation 10,000
Accumulated depreciation 10,000
(Rs. 100,000 / 10 years) = Rs. 10,000
31.12.01 Accumulated depreciation 10,000
Building 10,000
31.12.01 Building 18,000
Gain on revaluation (OCI) 18,000
31.12.02 Depreciation 12,000
Accumulated depreciation 12,000
(Rs. 108,000 / 9 years) = Rs. 12,000
31.12.02 Revaluation Surplus 2,000
Retained earnings 2,000
(Rs. 12,000 – 10,000 = Rs. 2,000 OR Rs. 18,000 / 9 years)

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 CAF 5 – IAS 16

31.12.02 Accumulated depreciation 12,000

Building 12,000
31.12.02 Loss on revaluation (OCI) [18,000 – 2,000] 16,000
Revaluation loss (P&L) 25,000
Building (cost) 41,000

Page | 20
ANSWER 04
Date Particulars Dr .Rs. Cr. Rs.
01.01.01 Building 100,000
Bank 100,000
31.12.01 Depreciation 10,000
Accumulated depreciation 10,000
(Rs. 100,000 / 10 years) = Rs. 10,000
31.12.01 Accumulated depreciation 10,000
Building (cost) 10,000
Revaluation/Impairment loss (P&L) 27,000
Building (cost) 27,000
31.12.02 Depreciation 7,000
Accumulated depreciation 7,000
(Rs. 63,000 / 9 years) = Rs. 7,000
31.12.02 Accumulated depreciation 7,000
Building (cost) 7,000
Building (cost) 36,000
Reversal of revaluation loss (P&L) 24,000
Gain on revaluation (OCI) 12,000
(now carrying amount Rs. 56,000 to HCA Rs. 80,000)

ANSWER 05
Rs.
Sale proceeds on disposal (Cash received) 0
Sale proceeds (part-exchange asset received) 50,000
Less: Disposal costs and cash paid [Rs. 50,000 – 4,000 trade in] (46,000)
Net disposal proceeds 4,000
Asset at cost 30,000
Less: Accumulated depreciation (25,000)
Carrying amount at date of disposal (5,000)
(LOSS) ON DISPOSAL (1,000)

ANSWER 06
Date Particulars DrRs. Cr. Rs.
XXX Accumulated depreciation 30,000
Cash 95,000
Asset 100,000
Gain on disposal (Other income) 25,000
XXX Revaluation surplus 40,000
Retained earnings 40,000

Latest update: March 2020

 CAF 5 – IAS 16

ANSWER 07
Part (a)
The lathe was purchased in 2009 and was originally being written off over an estimated
useful life of twelve years. As at 1 January 2015 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
Page | 21
IAS 16 requires that where the original estimate of useful life is revised, adjustments should
be made in current and future periods (not in prior periods). The unamortized cost of the
asset should be charged to revenue over the remaining useful life of the asset. The net book
value of Rs. 75,000 should therefore be charged over the remaining four years of useful life,
giving an annual depreciation charge of Rs. 18,750. The revision is not a change in
accounting policy, or a fundamental error but a change in accounting estimate. It is therefore
not appropriate to deal with any excess depreciation by adjusting opening retained earnings.

Part (b)
The grinder was purchased in 2012 and was originally being depreciated on a straight line
basis. It has now been decided to depreciate this on the sum of digits basis.

IAS 16 requires that depreciation methods be reviewed periodically and if there is a

significant change in the expected pattern of economic benefits, the method should be
changed. Depreciation adjustments should be made in current and future periods. This
change might be appropriate if, for instance, usage of the machine is greater in the early
years of an asset’s life when it is still new and consequently it is appropriate to have a higher
depreciation charge. If the change is implemented, the unamortized cost (the net book
value) of the asset should be written off over the remaining useful life commencing with the
period in which the change is made.

The depreciation charge for the remaining life of the asset will therefore be as follows.
Year No of digits Depreciation
2015 7 (7/28 x 70,000) 17,500
2016 6 (6/28 x 70,000) 15,000
2017 5 12,500
2018 4 10,000
2019 3 7,500
2020 2 5,000
2021 1 2,500
½ x 7 (7 + 1) 28 70,000
Disclosure will need to be made in the accounts of the details of the change, including the
effect on the charge in the year.

Part (c)
IAS 16’s allowed alternative treatment in respect of measurement of property plant and
equipment (subsequent to initial recognition), is that of revaluation. Revaluation is made at
fair value. Where any item of property plant or equipment is revalued, the entire class to
which the asset belongs should be revalued. Revaluations must be kept up to date. Where
there are volatile movements in fair value, the revaluation should be performed annually.
Where there are no such movements, revaluations every three to five years may be
appropriate.

Accumulated depreciation at the date of revaluation is either:

(i) Restated proportionately with the change in the gross carrying amount so that the
carrying amount after the revaluation equals the revalued amount (e.g. where
revaluations are made to depreciated replacement cost using indices)

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 CAF 5 – IAS 16

(ii) Eliminated against the gross carrying amount of the assets and the net amount
restated to the revalued amount of the asset (e.g. where buildings are revalued to
their market value).

AS 16 requires that the subsequent charge for depreciation should be based on the revalued
amount. The annual depreciation will therefore be Rs. 62,500, i.e. Rs. 1,500,000 divided by
Page | 22 the 24 years of remaining life. There will then be a difference between the revalued
depreciation charge and the historical depreciation charge. The resulting excess
depreciation may be dealt with by a movement in reserves, i.e. by transferring from the
revaluation reserve to retained earnings a figure equal to the depreciation charged on the
revaluation surplus each year.

ANSWER 08
IAS 16 requires that each part of an item (that has a cost that is significant in relation to the
total cost) is depreciated separately. Therefore, the cost recognized at initial recognition
must be allocated to each part accordingly.
(i) 31st March 2016
Hydraulic System Frame Total
Carrying amount 1-4-2015 9,000 21,000 30,000
Depreciation (3,000) (2,625) (5,625)
Carrying amount
6,000 18,375 24,375
31-3-2016
6,000 / 24,375 x 3,375 = 18,375 / 24,375 x
Loss on revaluation
(831) 3,375 = (2,544) (3,375)
Fair value 5,169 15,831 21,000

(ii) 31st March 2017

Hydraulic System Frame Total
Carrying amount 1-4-2016 5,169 15,831 21,000
Depreciation (2,585) (2,262) (4,847)
Carrying amount
2,584 13,569 16,153
31-3-2017
2,584 / 16,153 x 3,447 = 13,569 / 16,153 x
Gain on revaluation
551 3,447 = 2,896 3,447
Fair value 3,135 16,465 19,600

IAS 36 implications
Hydraulic System Frame Total
Loss recognised last year 831 2544 3375
Depreciation reduced by (416) (363) (779)
Loss reversal possible
415 2,181 2596
through PL
Gain in OCI 136 715 851
Total 551 2896 3,447

ANSWER 09
The original depreciation was Rs. 40,000 (Rs. 1,000,000/25 years) per annum.

On 31st March 2014 the asset is two years old. Its carrying value before revaluation was
therefore Rs. 1million less accumulated depreciation of Rs. 80,000 (2/25 × Rs. 1million).
Cost/valuation 1,000,000
Accumulated depreciation (80,000)
Net book value 920,000

Latest update: March 2020

 CAF 5 – IAS 16

In order to effect the revaluation, the cost is uplifted to fair value of Rs. 1.15m, the
accumulated depreciation is eliminated, and the uplift to the net book value is credited to a
revaluation surplus account.
Accumulated depreciation 80,000
Cost / Valuation 80,000
Page | 23
Cost/valuation 2300,000
Revaluation surplus 230,000

The asset is depreciated over its remaining useful economic life of 23 years giving a charge
of Rs. 50,000 (Rs. 1,150,000/23 years) per annum in the year to 31st March 2015.
Cost/valuation 1,150,000
Accumulated depreciation (50,000)
Net book value 1,100,000

Transfer from revaluation surplus to retained earnings:

Revaluation surplus (230,000 / 23) 10,000
Retained earnings 10,000
Fall in fair value to 0.8 million:
Accumulated depreciation 50,000
Asset 50,000
Revaluation surplus 220,000
Profit or loss 80,000
Asset 300,000

ANSWER 10
Debit Credit
Date Description
Rs. M
31 Dec 2013 Accumulated depreciation 18 + 36 54
Building 54
Building 17
Revaluation Surplus (OCI) 17

31 Dec 2015 Accumulated depreciation 38+38 76

Building 76
Revaluation Surplus (OCI) 13
Revaluation Loss (PL) 26
Building 39

31 Dec 2017 Accumulated depreciation 32+32 64

Building 64
Building 23
Revaluation Surplus (OCI) 5
Revaluation loss reversal (PL) 18

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 CAF 5 – IAS 16

Workings Building OCI PL

Rs. m Rs. m Rs. m
Cost 1 Jul 2012 360
2012 Depreciation 360 / 10 years x 6/12 (18)
2013 Depreciation 360 / 10 years x 12/12 (36)
306
Page | 24 Gain on revaluation (balancing figure) 17 17
Fair value on 31 December 2013 323 17
2014 Depreciation 323 / 8.5 years (38) (2)
2015 Depreciation (same) (38) (2)
247 13
Loss on revaluation (balancing figure) (39) (13) (26)
Fair value on 31 December 2015 208 0 (26)
2016 Depreciation 208 / 6.5 years (32) 4
2017 Depreciation (same) (32) 4
144 (18)
Gain on revaluation (balancing figure) (23) 5 18
Fair value on 31 December 2017 167 5 0

ANSWER 11
Part (a)
When items of property, plant and equipment are stated at revalued amounts, the following
additional disclosure should be made:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 for each revalued class of property, plant and equipment, the carrying amount that would
have been recognised had the assets been carried under the cost model; and
 the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.
Part (b)
Journal entries
Date Particulars Debit Credit
Rs. in million
30-Jun-14 Depreciation for the year (W-1) 1,390
Accumulated depreciation – Office building 500
Accumulated depreciation – Factory building 440
Accumulated depreciation – Warehouse 450
30-Jun-14 Accumulated depreciation – Office building (W-1) 1,000
Accumulated depreciation – Factory building (W-1) 880
Accumulated depreciation – Warehouse (W-1) 900
Office building 1,000
Factory building 880
Warehouse 900
30-Jun-14 Office building (W-1) 750
Loss on impairment – buildings and warehouse 450
Surplus on revaluation 750
Factory building (W-1) 200
Warehouse (W-1) 250
30-Jun-15 Depreciation expense (W-1) 1,507
Accumulated depreciation – Office building 719
Accumulated depreciation – Factory buildings 369
Accumulated depreciation – Warehouse 419
30-Jun-15 Surplus on revaluation (750÷8) 94
Retained earnings (incremental depreciation) 94

Latest update: March 2020

 CAF 5 – IAS 16

W-1:
Acc. Revaluation
Dep. for Revalued Dep. for
Dep. surplus/
Cost (A) WDV (B) the year amount the year
Assets D=A- (impairment)
2014 (C) (E) 2015
B+C F=E-(A-D)
---------------------------------- Rupees in million ----------------------------------
Office Page | 25
6,000 5,500 500 1,000 5,750 750 719
building
Factory
4,400 3,960 440 880 3,320 (200) 369
building
Warehouse 4,500 4,050 450 900 3,350 (250) 419
1,390 1,507

ANSWER 12
Debit Credit
Date Particulars
(Rs. m) (Rs. m)
1-Jul-10 Plant 500.00
Bank 500.00
Record purchase of plant
30-Jun-11 Depreciation 50.00
Accumulated depreciation - Plant 50.00
(Record depreciation for the year 2010-11)
Working: Rs. 500m ÷ 10 = Rs. 50m
1-Jul-11 Accumulated depreciation - Plant 50.00
Plant 50.00
(Reversal of prior years’ depreciation)

1-Jul-11 Plant 125.00

Revaluation Surplus 125.00
(Increase in value through revaluation)
Working: Rs. 575m - Rs. 450m = Rs. 125m

30-Jun-12 Depreciation 63.89

Accumulated depreciation – Plant 63.89
(Record depreciation for the year 2011-12)
Working: Rs. 575m ÷ 9 = Rs. 63.89m

30-Jun-12 Revaluation surplus 13.89

Retained earnings 13.89
(Reversal for excess depreciation)
Working: Rs. 125m ÷ 9 = Rs. 13.89m

1-Jul-12 Accumulated depreciation – Plant 63.89

Plant 63.89
(Reversal of prior year depreciation)

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 CAF 5 – IAS 16

1-Jul-12 Revaluation Surplus 111.11

Revaluation expense (balancing) 10.00
Plant 121.11
(Decrease in value through revaluation)
Surplus. = Rs. 125m - Rs. 13.89m = Rs. 111.11
Plant [Rs. 575m - Rs. 63.89m] - Rs. 390m =Rs.
Page | 26 121.11

30-Jun-13 Depreciation 48.75

Accumulated depreciation – Plant 48.75
(Record depreciation for the year 2012-13)
Working: Rs. 390m ÷ 8 = Rs. 48.75m

1-Jul-13 Accumulated depreciation – Plant 48.75

Plant 48.75
(Reversal of prior year depreciation)

1-Jul-13 Plant 38.75

Revaluation income 8.75
Revaluation surplus (balancing) 30.00
(Reversal of prior year depreciation)
Working:
Revaluation income = Rs. 10m-[Rs. 50m - Rs.
48.75m] = Rs.8.75m
Plant: Rs. 380m - [Rs. 390m - Rs. 48.75m] = Rs.
38.75m

30-Jun-14 Depreciation 54.29

Accumulated depreciation – Plant 54.29
(Record depreciation for the year 2013-14)
Working: Rs. Rs. 380m ÷ 7 = Rs. 54.29m

30-Jun-14 Revaluation surplus 4.29

Retained earnings 4.29
(Reversal for excess depreciation)
Working: Rs. 30m ÷ 7 = Rs. 4.29m

ANSWER 13
Omega Chemicals Limited
Accounting entries for the year ended 31 December 2014
Debit credit
Date Description
Rs. in million
31-Dec-13 FACTORY BUILDINGS
Accumulated depreciation-Factory buildings 37.50
Factory building 37.50
(Reversal of accumulated depreciation on revaluation of
factory buildings on 31 December 2013 – correcting entry)
31-Dec-13 Retained earnings (2013 Impairment) [52 – (100 – 37.5)] 10.50
Factory buildings 10.50
(2013 Impairment of factory buildings accounted for in 2014 –
correcting entry)
31-Dec-14 Depreciation expense(52÷12.5W1) 4.16
Accumulated depreciation-Factory buildings 4.16
(Depreciation expenses for the year ended 31 December
2014)

Latest update: March 2020

 CAF 5 – IAS 16

31-Dec-14 Accumulated depreciation-Factory buildings 4.16

Factory buildings 4.16
(Reversal of accumulated depreciation on revaluation
of factory buildings on 31 December 2014)
31-Dec-14 Factory buildings[64 – (52 – 4.16)] 16.16
PL account (Impairment) [10.5-(10.5÷12.5W1)] 9.66
Revaluation surplus - Factory buildings (Bal.) 6.50 Page | 27
(Revaluation of factory buildings on 31 December 2014
and reversal of previous impairment)
OFFICE BUILDINGS
1-Jul-14 Depreciation expense[31.92 ÷ 21 × 0.5] 0.76
Accumulated depreciation-Office buildings 0.76
(Depreciation expenses for the six months ended 1 July
2014 for the office building block sold)
1-Jul-14 Revaluation surplus [(31.92-27.72=4.2) ÷ 21 × 0.5] 0.10
Retained earnings 0.10
(Transfer of incremental depreciation for the six months
ended 31 December 2014 to retained earnings)
1-Jul-14 Bank 30.00
Revaluation surplus(4.2 – 0.1) 4.10
Accumulated depreciation 0.76
Loss on sale of Office buildings 30– (31.92-0.76) 1.16
Retained earnings 4.10
Office buildings 31.92
(Sale of office building)
31-Dec-14 Depreciation expense (149.94 – 31.92) ÷ 21 5.62
Accumulated depreciation-Office buildings 5.62
(Depreciation expenses for the year ended 31 December
2014)
Revaluation surplus- Office building[149.94-(164.5-26.32)-
31-Dec-14 4.2]÷21 0.36
Retained earnings 0.36
(Transfer of incremental depreciation for the year ended
31 December 2014 to retained earnings)

W1 – Remaining useful life of the buildings on revaluation date of 31 December 2013

Years
Factory buildings 20 – [(37.5 ÷ (100÷ 20)] 12.50
Office buildings 25 – [(26.32 ÷ (164.5÷ 25)] 21.00

ANSWER 14
Part (a)
Plant Equipment
----- Rs. in million -----
Cost 500 360
Depreciation 2015 [(500–60)/10] ; [(360/12)×(6/12)] (44) (15)
456 345
Depreciation 2016 [(456–78)/9], [345/15] (42) (23)
414 322
Revaluation–surplus/(loss) 2016 (balancing) 112 (42)
Fair value 526 280
Depreciation 2017 [(526–78)/8], [280/14] (56) (20)
470 260
Depreciation 2018 [(470–64)/7], [260/10] (58) (26)
412 234

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 CAF 5 – IAS 16

Part (b)
Piano Limited
Accounting entries for revaluation
Date Particulars Dr. Rs. m Cr. Rs. m
31-Dec-18 Revaluation loss (PL) 18
Revaluation surplus (OCI) 84
Page | 28 Plant 102
31-Dec-18 Equipment 41
Revaluation gain (PL) 35.1
Revaluation surplus (OCI) 5.9

Plant Equipment
W1: Revaluation surplus/(impairment): ----- Rs. in million -----
Fair value 310 275
Book value [From part(a)] (412) (234)
Increase / (Decrease) in asset (102) 41
Adjustment for previous:
Revaluation surplus 112–(112÷8)– (112÷8) 84
Revaluation loss 42–(42÷14)–(39÷10) (35.1)
Revaluation surplus/(Revaluation loss) (18) 5.9

ANSWER 15
Financial statements for the year ended 31 December 2015 (extract)
Property, plant and equipment
Land and Plant & Computer Total
buildings machinery equipment
Cost
At 1 January 2015 1,500,000 340,500 617,800 2,458,300
Revaluation 250,000 - - 250,000
Additions W2 - 17,550 - 17,550
Disposals - (80,000) - (80,000)
At 31 December 2015 1,750,000 278,050 617,800 2,645,850
Accumulated depreciation
At 1 January 2015 600,000 125,900 505,800 1,231,700
Charge for the year W1 20,000 51,191 44,800 115,991
Revaluation (620,000) - - (620,000)
Disposals - (57,000) - (57,000)
At 31 December 2015 Nil 120,091 550,600 670,691
Carrying Amount
At 31 December 2014 900,000 214,600 112,000 1,226,600
At 31 December 2015 1,750,000 157,959 67,200 1,975,159

Workings:
W1 -Depreciation charges
Buildings = (1,500,000 – 500,000) x 2% 20,000
Plant and machinery:
New machine (17,550 x 25% x 9/12) 3,291
Existing plant (((340,500 – 80,000) – (125,900 – 57,000)) x 25%) 47,900
Total 3,291 + 47,900 51,191
Computer equipment = 112,000 x 40% 44,800

Latest update: March 2020

 CAF 5 – IAS 16

W2 - Cost of new machine

Purchase price (20,000 – 3,000 – 1,000) 16,000
Delivery costs 500
Installation costs 1,050
17,550
Interest on loan taken out to finance the purchase will be charged to profit or loss.
Page | 29
ANSWER 16
When items of property, plant and equipment are stated at revalued amounts the following
must be disclosed:
 The effective date of the revaluation;
 Whether an independent valuer was involved;
 For each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model; and
 The revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

ANSWER 17
Property, plant & 2016 2015
equipment Building Equipment Total Building Equipment Total
Rs. in million
Cost / Revalued amount
1 Jan 456 85 541 450 50 500
Revaluation - cancellation (24) (24) (22.5) (22.5)
Revaluation surplus
28.5 – 28.5/19 (27) (27) 28.5 28.5
Revaluation loss (27) (27)
Additions 35 35
Disposal [50 x 50%] (25) (25)
31 December 378 60 438 456 85 541

Accumulated depreciation
1 Jan 24 10.96 34.96 22.5 5 27.5
Revaluation - cancellation (24) (24) (22.5) (22.5)
Disposal W2 (5.76) (5.76)
Depreciation W1 21 6.39 27.39 24 5.96 29.96
31 Dec 21 11.59 32.59 24 10.96 34.96

Carrying amount 357 48.41 405.41 432 74.04 506.04

Carrying amount 382.5 405

(cost model)
(450 less depreciation)
Building Equipment
Measurement basis Revaluation model Cost model
Useful life / depreciation rate 20 years 10%
Depreciation method Straight line Reducing balance

The revaluation was performed on 1 January 2016 by Accurate Valuers (Private) Limited, an
independent firm of valuers. The entity transfers effect of incremental depreciation from
revaluation surplus to retained earnings on annual basis.

© kashifadeel.com
 CAF 5 – IAS 16

W1 – Depreciation Rs. m
2015 – Building [456 / 19 years] 24
2015 – Equipment [45 x 10% = 4.5] + [35 x 10% x 5/12 = 1.46] 5.96
2016 – Building [378 / 18 years] 21
2015 – Equipment [74.04 – 20.25] x 10% + 1.01 6.39
Page | 30
W2 – Depreciation on disposed equipment Rs. m
Cost 50 x 50% 25
Depreciation 2014 10% (2.5)
22.5
Depreciation 2015 10% (2.25)
20.25
Depreciation 2016 10% x 6/12 (1.01)
19.24

Accumulated depreciation related to disposed equipment 2.5 + 2.25 + 1.01 5.76

ANSWER 18
Accounting policies
(a) Property, plant and equipment is stated at historical cost less depreciation, except
land and building which is stated at revalue amount less subsequent accumulated
depreciation.
(b) Depreciation is provided on all assets, except land, and is calculated to write down
the cost or valuation over the estimated useful life of the asset.

The principal rates are as follows:

Buildings 2% pa straight line
Plant and machinery 20% pa straight line
Fixtures and fittings 25% pa reducing balance
Fixed Assets Movements:
Land & Plant & Fixture Assets
buildings machinery & under Total
fittings construction
Cost
Cost at 1 January 2015 900 1,613 390 91 2,994
Revaluation adjustment 600 - - - 600
Additions - 154 40 73 (W1) 267
Reclassifications 100 - - (100) -
Disposals - (277) (41) - (318)
Cost at 31 December 2015 1,600 1,490 389 64 3,543
Depreciation
At 1 January 2015 80 458 140 - 678
Revaluation adjustment (80) - - - (80)
Depreciation for the year (W2) 17 298 70 - 385
Disposal - (195) (31) - (226)
At 31 December 2015 17 561 179 - 757
Net Book Value
At 31 December 2015 1,583 929 210 64 2,786
At 31 December 2014 820 1,155 250 91 2,316

Land and buildings have been revalued during the year by Messer Jackson & Co on the
basis of an existing use value on the open market.

Latest update: March 2020

 CAF 5 – IAS 16

The corresponding historical cost information is as follows.

Land & Building
Cost
Brought forward 900
Reclassification 100
Carried forward 1,000
Depreciation Page | 31
Brought forward (80)
For the year (10)
Carried forward (90)
NBV 910

W1 - Additions to assets under construction

Additions to assets under construction 53
Deposit on computer 20
73

W2 – Depreciation for the year

Depreciation on buildings 600/40 + (100 x 2%) 17

2% straight line depreciation is equivalent to a 50-year life. The buildings are ten
years old at valuation and therefore have 40 years remaining.
Depreciation on plant (1,613 + 154 – 277) x 20% 298

Depreciation on fixtures (390 + 40 – 41 – 140 + 31) x 25% 70

ANSWER 19
4 - Property, plant and equipment
2015 2014
----- Rs. in million ----
Gross carrying amount 252 323
Accumulated depreciation and impairment losses (323÷19) = 17 (14) (17)
Net carrying amount 238 306
Additions - -
Revaluation (expense)/Income (P/L)
[272- {300-(300÷20*3)}] and (306-252-36) 17 (18)
Revaluation surplus increase/(decrease) (OCI)
(272-238-17) and [{323-(300-15)} -(38÷19)] 17 (36)

Depreciation [(204÷17)+(68÷17×6÷12)] and (252÷18) (14) (14)

Disposal [68 - (68÷17×6÷12)] and 0 (66) -
192 238
Gross carrying amount 204 252
Accumulated depreciation and impairment losses (12) (14)
Net carrying amount 192 238
Useful life 20 years 20 years

The last revaluation was performed on 1 January 2015 by M/s Premier Valuation Services,
an independent firm of valuers. Revaluations are performed annually.

© kashifadeel.com
 CAF 5 – IAS 16

2015 2014
… Rs in million …
Carrying value had the cost model been used instead
[225 – (225÷20× 4)] and [300 – (300÷20×3)] 180 255

Page | 32 4.1 - Details of property, plant and equipment disposed of during the year
Cost /
Accumulated Carrying Sale
Revalued Mode of Particulars of
depreciation amount proceeds
amount disposal buyers
……… .Rs in million………
Building 68 2 66 80 Not mentioned Not mentioned

ANSWER 20
Orchid Limited
Notes to the financial Statements
For the year ended 31 December 2017
Property, plant & equipment 2017 2016
Building Plant Total Building Plant Total
Rs. in million
Cost / Revalued amount
1 Jan 700 475 1,175 700 475 1,175
Disposal (87) (87)
Revaluation – cancellation (42.28) (42.28)
Revaluation loss (OCI & PL) W1 (107.72) (107.72)
31 December 463 475 938 700 475 1,175

Acc. depreciation/Impairment
1 Jan 24.14 115 139.14 0 19 19
Disposal W2 (4.5) (4.5)
Depreciation W1 22.64 36 58.64 24.14 19 43.14
Revaluation (Cancellation) (42.28) (42.28)
Impairment W1 77 77
31 Dec 0 151 151 24.14 115 139.14

Carrying amount 463 324 787 675.86 360 1,035.86

Carrying amount (cost model)

Cost [after disposal] [ Before] 534 600
Accumulated Depreciation (53.4) (40)
480.6 560

Building Plant
Measurement basis Revaluation model Cost model
Useful life / depreciation rate 30 years 10%
Depreciation method Straight line Reducing balance

The last revaluation was performed on 31 December 2017 by Shabbir Associates, an independent
firm of valuer.

Cost /
Book Sale
Assets Rev. Gain Mode of
Purchaser Value Price
disposed amount disposal
Rs. in million
Building Baqir Ltd 87.00 82.50 85.00 0.5 Tender
Cost of disposal Rs. 2 m

Latest update: March 2020

 CAF 5 – IAS 16

Change in estimate
Due to significant change in the expected pattern or consumption of the future economic
benefits in the Plant assets, therefore, the company has decided to change the depreciation
method of plant from straight line to reducing balance method. The new depreciation rate is
10%.

Had the deprecation method been not changed, profit of 2017 would have been higher by Page | 33
Rs. 20.35 million. [Rs. 360 x 10% - 360 /23 years]

W1 – Depreciation / Impairment / Revaluation Surplus Rs. m

Building
2015 – Depreciation [600 / 30 years] 20
2015 – Revaluation Gain [700 – [600 – 20]] 120
2016 – Depreciation [700 / 29 years] 24.14
2017 – Depreciation [[700 – 24.14] – 84] / 28 years + [84 / 28 years x 6/12] W2 22.64
2017 – Revaluation 463 FV – [(700 – 87 Cost) – 42.28 Acc. Dep.] (107.72)

Plant
2015 – Depreciation [475 / 25 years] 19
2016 – Depreciation [475 / 25 years] 19
2016 – Impairment [475 – 19 – 19] – [360 Recoverable amount] 77
2017 – Depreciation [360 x 10% reducing balance] 36

W2 – Depreciation and Revaluation on disposed equipment Rs. m Rs. m

Cost 66
Depreciation 2015 [66 / 30 years] eliminated on revaluation (2.2)
63.8
23.2 23.2
Revalued 31 Dec 2015 87
Depreciation 2016 [87 / 29 years] (3) (0.8)
84
Depreciation 2017 [87 / 29 years x 6/12] (1.5) (0.4)
82.5 22

Accumulated depreciation related to disposed equipment 3 + 1.5 4.5

ANSWER 21
Part (a)
Dr Cr.
Date Particulars
R. 000 Rs. 000
July 1, 2018 Land 8,000
Revaluation surplus 5,000
Reversal of revaluation loss (other income) 3,000
Jan 1, 2019 Cash [90m – 0.1m] 89,900
Acc. Dep. [(125 - 11) x 25% / 12 years x 4.5 years] 10,687.5
Buildings [125m x 25%] 31,250
Land [20m x 25%] 5,000
Gain on disposal (Other income) 64,337.5
Jan 1, 2019 Revaluation surplus 1,250
Retained earnings 1,250

© kashifadeel.com
 CAF 5 – IAS 16

Part (b) Abbas Limited

Notes to Financial Statements for the year ended 30 June 2019
4. Property, Plant and Equipment:
4.1 Abbas Limited uses the following subsequent measurement bases to value its
Property, Plant and Equipment, and methods to calculate its depreciation.
Assets Depreciation Useful life/ Residual Subsequent
Page | 34 method value/ Rate Measurement
Land N/A N/A Fair value
Building Straight – line 12 years / 8.8% Cost less Acc dep
Plant & machinery Units of production Rs. 25,000 per unit W2 Cost less Acc dep
Equipment Written down value Rate of 20% W3 Cost less Acc dep

4.2 Schedule of movement in property, plant and equipment

Plant &
Land Building Equipment Total
machinery
Cost Rs. 000
At 1 July 2018 12,000 125,000 500,000 100,000 737,000
Acquisition - - - 60,000 60,000
Revaluation 8,000 - - - 8,000
Disposals (5,000) (31,250) - - (36,250)
At 30 June 2019 15,000 93,750 500,000 160,000 768,750
Accumulated dep.
At 1 July 2018 - 38,000 300,000 36,000 374,000
For the year - 8,312.5 W4 1250,000 20,800 W5 154,112.5
Revaluations - - - - -
Disposals - (10,687.5) - - (10,687.5)
At 30 June 2019 - 35,625 425,000 56,800 517,425

Carrying amount 2019 15,000 58,125 75,000 103,200 251,325

Carrying amount 2018 12,000 87,000 200,000 64,000 363,000

4.3 An amount of expenditure of Rs. 20 million was incurred on the construction of a

factory near Lahore – Islamabad Motorway on 1 December 2018. This amount was
capitalized as capital work – in – progress.
A further borrowing costs of Rs. 1.4 million (W6) were capitalized in respect of
interest on loan obtained from the bank to finance this project.
4.4 A contract was made with M/s Uni Power & Co. to purchase plant and machinery
worth Rs. 35 million once the construction of factory building is complete.
4.5 The following depreciations are either made part of inventory or expenses out in
statement of profit or loss:
Assets COS Rs. 000 Admin Rs. 000 Total Rs. 000
Building 4,987.5 3,325 8,312.5
Plant & machinery 125,000 - 125,000
Equipment - 20,800 20,800
Total 129,987.5 24,125 154,112.5
4.6 Revaluation disclosures:
The revaluation of land took place on 1 July 2018. The value was determined by an
independent firm M/s Ashfaq & Co. Chartered Accountants.
The carrying amount of land had the revaluation not taken place:
Rs. Million
At 1 July 2018 15
Disposals during the year (3.75)
At 30 June 2019 11.25

Latest update: March 2020

 CAF 5 – IAS 16

Revaluation surplus
Rs. Million
At 1 July 2018 -
Revaluation of land 5
Transfer to retained earnings (1.25)
At 30 June 2019 3.75 Page | 35
A further reversal of revaluation loss of Rs. 3 million was reversed during the year.
Workings
1. Annual depreciation on building = Rs. 38m / 4 years (2014 to 2018) = Rs. 9.5
Original useful life = Depreciable amount / Depreciation = (125 – 11) / 9.5 = 12 years
2. (Accumulated depreciation 300,000,000/12,000 units) = Rs. 25,000 per unit
3.
100 − 36
= 1− = 20%
100
4. Depreciation on buildings
On disposed [(125-11) x 25% / 12 years x 6/12] = Rs. 1,187.5
On other [(125-11) x 75% / 12 years x 12/12] = Rs. 7,125
Total = Rs. 8,312.5
5. Depreciation on equipment
On addition 60 x 20% x 8/12 = Rs. 8,000
On other (100 – 36) x 20% x 12/12 = Rs. 12,800
Total = Rs. 20,800
6. Borrowing costs capitalised
20 million x 12% x 7/12 = 1.4 million

ANSWER 22
Part (a)
Disposal account – Fittings
Rs. Rs.
Jan 1 Fittings – cost 30,000 Jan 1 Acc dep – fittings W1 4,500
Jan 1 Cash (disposal costs) 1,000 Jan 1 Cash (sale proceeds) 22,000
Mar 31 SPL – loss on disposal 4,500
31,000 31,000
W1 30,000 x 9/12 x 2 x 10% = 4,500

Part (b) Games Limited

Notes to the Financial Statements for the year ended 31 March 2017
4. Property, Plant and Equipment
4.1 Games Limited (GL) uses the following subsequent measurement bases to value its
Property, Plant and Equipment, and methods to calculate its depreciation.
Assets Deprecation method Rate Subsequent measurement
Building Straight – line 10% Fair value
Computers Written down value 30% W1 Cost less acc dep
Fittings Straight – line 10% Cost less acc dep
Furthermore, Games Limited uses proportionate policy to depreciate its assets.

© kashifadeel.com
 CAF 5 – IAS 16

4.2 Schedule of movements in Property, Plant and Equipment

2017 2016
Buildings Computers Fittings Buildings Computers Fittings
Cost Rs.
1 April 3,237,500 600,000 120,000 - - -
Acquisition - 120,000 - 3,000,000 600,000 120,000
Page | 36 Revaluations (1,237,500) - - 237,500 - -
Disposals - (30,000) - - -
31 March 2,000,000 720,000 90,000 3,237,500 600,000 120,000
Acc. dep
1 April - 135,000 9,000 - - -
For the year 350,000 172,500 11,250 225,000 135,000 9,000
Revaluations (350,000) - - (225,000)
Disposals - - (4,500)
31 March - 307,500 15,750 - 135,000 9,000

Net 2,000,000 412,500 74,250 3,237,500 465,000 111,000

Net – last year 3,237,500 465,000 111,000 - - -

4.3 The entire office building was mortgaged with Js Bank on 31 March 2017, to obtain a
bank loan worth Rs. 1.75 million for prospective investments in other divisions.

4.4 No contractual commitments were made during the year ended 31 March 2017 to
purchase Property, plant and equipment.

A contract was made with AL – Karim Computers during the year ended 31 March
2016 to purchase 6 Computers of Rs. 20,000 each to be delivered on 1 May 2017.

4.5 The following depreciations are either made part of inventory or expensed out in
statement of profit or loss:
2017 2016
Assets COS Admin Total COS Admin Total
Rs.
Buildings 280,000 70,000 350,000 180,000 45,000 225,000
Computers 172,500 - 172,500 135,000 - 135,000
Fittings - 11,250 11,250 - 9,000 9,000
Total 452,500 81,250 533,750 315,000 54,000 369,000
4.6 Revaluation disclosures
The revaluation of office building took place on 31 March 2017 and 31 March 2016
respectively. The fair values of the office building were determined by an
independent firm M/s Hafeez Yasir Chartered Accountants & Co.
The carrying amount of buildings had the revaluation not taken place:
2017 2016
Rs. Rs.
Cost at the start of the year 3,000,000 -
Acquisitions - 3,000,000
Disposals - -
At end of the year 3,000,000 3,000,000
Accumulated depreciation at start 225,000 -
Depreciation for the year 300,000 225,000
Disposals - -
At the end of the year 525,000 225,000
Carrying amount at year end 2,475,000 2,775,000
Carrying amount at year start 2,775,000 -

Latest update: March 2020

 CAF 5 – IAS 16

Revaluation Surplus
2017 2016
Rs. Rs.
At start of the year 462,500 -
Revaluation of building (412,500) 462,500
Transfer to retained earnings (350,000-300,000) (50,000) - Page | 37
At end of the year - 462,500

Furthermore, a revaluation loss of Rs. 475,000 was recognized in profit or loss at 31

March 2017.

Workings
1.
4802
= 1− = 30%
20000
2. Depreciation – Building
2017  3,237,500 / 9.25 = Rs. 350,000
2016  3,000,000 / 10 x 9/12 = Rs. 225,000
3. Depreciation – Computers
2017  Acquisitions (120,000x30%x11/12) = Rs. 33,000
+ Remaining [(600,000 - 135,000) x30%] = Rs. 139,500
= Rs. 172,500
2016  600,000 x 30% x 9/12 = 135,000
4. Depreciation – Fittings
2017  Disposals (30,000x10%x9/12) = Rs. 2,250
+ Remaining (90,000x10%) = Rs. 9,000
= Rs. 11,250
2016  120,000/10 x 9/12 = 9,000

© kashifadeel.com
 CAF 5 – IAS 16

Page | 38

Latest update: March 2020

 CAF 5 – IAS 16

ICAP OBJECTIVE BASED QUESTIONS

01. An entity purchased a property 15 years ago at a cost of Rs. 100,000 and have been
depreciating it at a rate of 2% per annum, on the straight-line basis. The entity has had the
property professionally revalued at Rs. 500,000.
What is the revaluation surplus that will be recorded in the financial statements in respect of this
property? Page | 39
(a) Rs. 400,000
(b) Rs. 500,000
(c) Rs. 530,000
(d) Rs. 430,000

02. An entity owns two buildings, A and B, which are currently recorded in the books at carrying
amounts of Rs. 170,000 and Rs. 330,000 respectively. Both buildings have recently been valued
as follows:
Building A Rs. 400,000
Building B Rs. 250,000
The entity currently has a balance on the revaluation surplus of Rs. 50,000 which arose when
building A was revalued several years ago. Building B has not previously been revalued.
What double entry will need to be made to record the revaluations of buildings A and B?
(a) Dr Non-current assets Rs. 150,000
Dr Statement of profit or loss Rs. 80,000
Cr Other comprehensive income (revaluation surplus) Rs. 230,000
(b) Dr Non-current assets Rs. 150,000
Dr Statement of profit or loss Rs. 30,000
Cr Other comprehensive income (revaluation surplus) Rs. 180,000
(c) Dr Non-current assets Rs. 150,000
Cr Other comprehensive income (revaluation surplus) Rs. 150,000
(d) Dr Non-current assets Rs. 150,000
Dr Statement of profit or loss Rs. 50,000
Cr Other comprehensive income (revaluation surplus) Rs. 200,000

03. An entity purchased property for Rs. 6 million on 1 July 2013. The land element of the purchase
was Rs. 1 million. The expected life of the building was 50 years and its residual value nil. On 30
June 2015 the property was revalued to Rs. 7 million, of which the land element was Rs. 1.24
million and the buildings Rs. 5.76 million. On 30 June 2017, the property was sold for Rs. 6.8
million.
What is the gain on disposal of the property that would be reported in the statement of profit or
loss for the year to 30 June 2017?
(a) Gain Rs. 40,000
(b) Loss Rs. 200,000
(c) Gain Rs. 1,000,000
(d) Gain Rs. 1,240,000

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 CAF 5 – IAS 16

04. Which of the following statements are correct?

1. If the revaluation model is used for property, plant and equipment, revaluations must
subsequently be made with sufficient regularity to ensure that the carrying amount does
not differ materially from the fair value at each reporting date.
2. When an item of property, plant and equipment is revalued, there is no requirement that
the entire class of assets to which the item belongs must be revalued.
Page | 40
(a) Only statement 1 is correct

(b) Only statement 2 is correct

(c) Both statements are correct

(d) None of the statement is correct

05. The following trial balance extract relates to a property which is owned by Maira Limited as at 1
April 2014.
Dr Cr
Rs. 000 Rs. 000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 2014 3,600
On 1 October 2014, following a sustained increase in property prices, Maira Limited revalued its
property to Rs. 10.8 million.
What will be the depreciation charge in Maira Limited’s statement of comprehensive income for
the year ended 31 March 2015?
(a) Rs. 540,000
(b) Rs. 570,000
(c) Rs. 700,000
(d) Rs. 800,000

06. A company purchased a building on 1 April 2007 for Rs. 10,000,000. The asset had a useful
economic life at that date of 40 years. On 1 April 2009 the company revalued the building to its
current fair value of Rs. 12,000,000.
What is the double entry to record the revaluation?
(a) Dr. Building 1,500,000
Dr. Accumulated depreciation 500,000
Cr. Other comprehensive income 2,000,000
(b) Dr. Building 2,000,000
Dr. Accumulated depreciation 500,000
Cr. Profit or loss 2,500,000
(c) Dr. Building 2,000,000
Dr. Accumulated depreciation 500,000
Cr. Other comprehensive income 2,500,000
(d) Dr. Building 1,500,000
Dr. Accumulated depreciation 500,000
Cr. Profit or loss 2,000,000

Latest update: March 2020

 CAF 5 – IAS 16

07. The carrying value of property at the end of the year amounted to Rs. 108 million. On this date
the property was revalued and was deemed to have a fair value of Rs. 95 million. The balance
on the revaluation reserve relating to the original gain of the property was Rs. 10 million.
What is the double entry to record the revaluation?
(a) Dr. Profit or loss 3 million Page | 41
Dr. Other comprehensive income 10 million
Cr. Property 13 million
(b) Dr. Profit or loss 10 million
Dr. Other comprehensive income 3 million
Cr. Property 13 million
(c) Dr. Profit or loss 13 million
Dr. Other comprehensive income 3 million
Cr. Property 16 million
(d) Dr. Profit or loss 13 million
Cr. Property 13 million

08. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property
originally cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of
40 years is unchanged. The company’s policy is to make a transfer to realized profits in respect
of excess depreciation.
At which amount the property be presented at as at 31 March 2010?
(a) Rs. 20 million
(b) Rs. 19.6 million
(c) Rs. 12 million
(d) Rs. 11.6 million

09. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property
originally cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of
40 years is unchanged. The company’s policy is to make a transfer to realized profits in respect
of excess depreciation.
What is amount of balance in revaluation surplus account as at 31 March 2010?
(a) Rs. 12 million
(b) Rs. 10 million
(c) Rs. 9.8 million
(d) Rs. 11.8 million

10. Which of the following is an optional disclosure requirement of IAS 16?

(a) Measurement bases for determining gross carrying amount
(b) Depreciation method
(c) Useful lives or depreciation rates
(d) The carrying amount of temporarily idle PPE

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 CAF 5 – IAS 16

11. Following information is available for equipment account of a business on 1st January 2018:
Opening balance of equipment, a/c (Revalued amount) Rs. 7,500,000
Surplus on revaluation of equipment a/c Rs. 2,000,000
At start of year company sold equipment for Rs. 90,000,000.
Page | 42
Company has a policy of charging 20% depreciation on straight line basis.
What will be treatment of revaluation surplus at disposal of asset?
(a) Dr Surplus on revaluation Rs. 2,000,000
Cr Retained earnings Rs. 2,000,000
(b) Dr Retained earnings Rs. 2,000,000,
Cr Surplus on revaluation Rs. 2,000,000
(c) Dr Surplus on revaluation Rs. 3,500,000
Cr Retained earnings Rs. 3,500,000
(d) Dr Surplus on revaluation Rs. 2,0000,000
Cr Equipment account Rs. 2,000,000

12. A non–current asset costing Rs. 216,000 and carrying value Rs. 145,000 is revalued to Rs.
291,000.
How should revaluation be recorded?
(a) Dr Asset a/c Rs. 75,000,
Cr Surplus on revaluation Rs. 75,000
(b) Dr Asset a/c Rs. 75,000,
Dr Accumulated Depreciation Rs. 71,000,
Cr Surplus on revaluation Rs. 146,000
(c) Dr Surplus on revaluation Rs. 146,000,
Cr Asset a/c Rs. 75,000,
Cr Accumulated Depreciation Rs. 71,000
(d) Dr Accumulated depreciation Rs. 146,000,
Cr Surplus on revaluation Rs. 146,000

13. When items of property, plant and equipment are stated at revalued amounts the following must
be disclosed:
(i) the effective date of the revaluation
(ii) whether an independent valuer was involved
(iii) the methods and significant assumptions applied in estimating the items’ fair values
(iv) the extent to which the items’ fair values were determined directly by reference to
observable prices in an active market or recent market transactions on arm’s length
terms or were estimated using other valuation techniques
(v) for each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model;
(vi) the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

Latest update: March 2020

 CAF 5 – IAS 16

(a) (i), (ii) and (vi) only

(b) (i), (ii), (v) and (vi) only
(c) (i), (ii), (iii) and (iv) only
(d) (i) to (vi) all

Page | 43
14. IAS 16 encourages disclosure of the following information as users of financial statements might
find it to be useful.
(i) the carrying amount of temporarily idle property, plant and equipment
(ii) the gross carrying amount of any fully depreciated property, plant and equipment that is
still in use
(iii) the carrying amount of property, plant and equipment retired from active use and held
for disposal
(iv) when the cost model is used, the fair value of property, plant and equipment when this
is materially different from the carrying amount
(a) (i), (ii) and (iii) only
(b) (i), (ii) and (iv) only
(c) (i), (iii) and (iv) only
(d) (i) to (iv) all

15. Which of the following statements is correct?

(a) An entity may present PPE at gross carrying amount or net carrying amount under IAS
16
(b) Either useful lives or depreciation rates are to be disclosed, both are not required.
(c) Under revaluation model, PPE are revalued at end of each year
(d) If an entity chooses revaluation model, it must apply revaluation model to all of its PPE.

16. Waqas Limited purchased a machine for Rs. 30,000 on 1 January 2015 and assigned it a useful
life of 12 years. On 31 March 2017 it was revalued to Rs. 32,000 with no change in useful life.
What will be depreciation charge in relation to this machine in the financial statements for the
year ending 31 December 2017?

Rs. ___________
17. A business purchased building costing Rs. 7,500,000 on 1 January 2018.
The policy of business is to charge straight line depreciation over its useful life of 20 years.
On 31 December 2020, building was revalued to Rs. 7,650,000.
What is the amount of incremental depreciation to be transferred to retained earnings at year
ending 31 December 2021?
Rs. ___________

18. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of
10 years with nil residual value. On 1 January 2018 balance of accumulated depreciation was
Rs. 1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.

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 CAF 5 – IAS 16

What is the depreciation charge for the year ended 31 December 2018?
Rs. ___________

19. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of
10 years with nil residual value. On 1 January 2018 balance of accumulated depreciation was
Page | 44 Rs. 1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the amount of revaluation surplus at the date of revaluation?
Rs. ___________

20. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of
10 years with nil residual value. On 1 January 2018 balance of accumulated depreciation was
Rs. 1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the amount of incremental depreciation for the year ended 31 December 2018?
Rs. ___________

21. A revaluation gain is credited into?

(a) Revaluation reserve
(b) Capital reserve
(c) Profit and loss
(d) Any of the above

22. After initial recognition, an entity has a choice to choose cost and?
(a) Realizable model
(b) Replacement model
(c) Revaluation model
(d) Carrying value model
23. When an item of property, plant and equipment is revalued, what should be revalued?
(a) A selection of assets decided by management
(b) The whole class of assets to which it belongs
(c) The individual asset
(d) A selection of assets picked at random

24. If an asset increases in value, the increase is noted as?

(a) An increase in net profit in the SOCI
(b) An increase in retained earnings in SOFP
(c) An increase in revaluation surplus in the SOFP and other comprehensive income in the
SOCI
(d) An increase in “other profit” in SOCI

Latest update: March 2020

 CAF 5 – IAS 16

25. Which of the following is not a valid reason for reporting non-current assets at revaluation
amount rather than cost?
(a) To prevent long life assets from being reported at out of date historical costs
(b) To keep owners of the business better informed of their equity in the business.
(c) To report performance correctly by matching earnings with the proper costs of assets
used. Page | 45
(d) To avoid having to pay higher taxes

26. An entity has a policy of revaluing its PPE. An asset cost Rs.5m on 1 January 2020 and has a
useful life of five years and is depreciated on a straight-line basis to a zero residual value. The
value of the asset at 31 December 2020 was Rs.3.8m. The fall in value will be accounted for as
follows?
(a) Depreciation Rs.1m and fall in value of Rs.200,000 both to the reserves
(b) Depreciation Rs.1m to the income statement and fall in value of Rs.200,000 ignored
until there is a revaluation surplus
(c) Depreciation Rs.1m to income statement and fall in value of Rs.200,000 to the reserves
(d) Depreciation Rs.1m and fall in value of Rs.200,000 both to the income statement

27. During the financial year, Akmal Ltd had the following increases in reserves:
i. Rs. 5 million from a revaluation of freehold premises
ii. Rs.10 million in share premium
iii. Rs.25 million from trading profit retained
Which of these are increases in capital reserves?
(a) i only
(b) ii only
(c) i. and ii. Only
(d) iii. only
28. The following gains may legally be withdrawn from the company by shareholders:
i. gains that arise from the upward revaluation of non-current assets
ii. gains that arise from the sale of non-current assets
What is the validity of each statement?
(a) Both i. and ii are true
(b) i. is true and ii. is false
(c) Both i. and ii are false
(d) ii. is true and i. is false

29. The financial statements of Saadi Limited for the most recent year indicated the following:
i. a bonus issue of shares
ii. a transfer of profit retained to retained earnings
iii. an increase in the revaluation reserve due non-current assets
iv. a rights issue of shares
Which of the above involved a movement of cash?

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 CAF 5 – IAS 16

(a) i. and ii
(b) ii. and iii.
(c) iii only
(d) iv only

Page | 46
30. An apartment is revalued upwards by Rs. 1 million. It was acquired 5 years ago for Rs. 5 million.
Its useful life remains same as 10 years.
What is the revised depreciation charge for the year after revaluation?
(a) Rs. 500,000
(b) Rs. 600,000
(c) Rs. 700,000
(d) Rs. 800,000

31. A building is revalued upwards by Rs. 2 million. It was acquired five years ago for Rs.10 million.
Its useful life remains same as 20 years. What is the incremental depreciation charge for the
year?
(a) Rs.100,000
(b) Rs.133,333
(c) Rs.166,667
(d) Rs.200,000

32. An IT equipment being carried at revaluation model has revaluation reserve balance of Rs.
50,000. During the year, it reduces its value due to technological obsolescence. It has Rs.
70,000 decrease in value. What would be the impact of this revaluation decrease?
(a) The decrease of Rs.50,000 is debited to revaluation reserve and Rs.20,000 to profit or
loss for the year
(b) The decrease of Rs.50,000 is debited to profit and loss account and Rs.20,000 to
revaluation reserve for the year
(c) The whole decrease is debited to revaluation reserve
(d) The whole decrease is debited to profit or loss for the year

Latest update: March 2020

 CAF 5 – IAS 16

OBJECTIVE BASED ANSWERS

01. (d) Rs.

Current value 500,000

Carrying amount
(100,000 – (100,000 × 2% × 15 yrs)) (70,000) Page | 47

Revaluation gain 430,000

02. (a)
Building A Building B

Current value 400,000 250,000

Carrying amount (170,000) (330,000)

Revaluation gain/(loss) 230,000 (80,000)

The gain on Building A will be credited to other comprehensive income and

the revaluation surplus.
The loss on Building B will be debited to the statement of profit or loss
expenses because we do not have a balance on the revaluation surplus in
respect of building B to offset the loss.
We make an overall debit to non-current assets of Rs. 230,000 – Rs.
80,000 = Rs. 150,000

03. (a) Land Buildings Total

Rs. Rs. m Rs. m

Cost 1 July 2013 1.00 5.00 6.00

Building depreciation
Rs. 5 million/50 years x 2 years (0.2) (0.2)

Carrying amount 30 June 2015 1.00 4.80 5.80

Revaluation gain 0.24 1.96 1.20

Revalued amount 1.24 5.76 7.00

Building depreciation
Rs. 5.76m/48 years x 2 years (0.24) (0.24)

Carrying amount 30 June 2017 1.24 5.52 6.76

Disposal proceeds 6.80

Gain on disposal 0.04

The gain on disposal is Rs. 40,000. The Rs. 1.2 million balance on the
revaluation reserve is transferred from the revaluation reserve to another
reserve account (probably retained earnings) but is not reported through the
statement of profit or loss for the year.

04. (a) IAS 16 (para 31) states that when the revaluation model is used,
revaluations should be made with sufficient regularity to ensure that the
carrying value of the assets remains close to fair value. IAS 16 also states
(para 36) that, if one item in a class of assets is revalued, all the assets in
that class must be revalued.

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05. (c) Six months’ depreciation to the date of the revaluation will be Rs. 300,000
(12,000/20 years × 6/12). Six months’ depreciation from the date of
revaluation to 31 March 2015 would be Rs. 400,000 (10,800/13.5 years
remaining life × 6/12). Total depreciation is Rs. 700,000.

06. (c) Building a/c

Page | 48 Particulars Rs. Particulars Rs.
b/d 10,000,000 Acc. dep 500,000
Surplus 2,500,000 c/d 12,000,000
12,500,000 12,500,000

Building net debited by Rs. 2,000,000 (2,500,000 – 500,000)

07. (a) Total loss Rs. 13 million, Rs. 10 will be charged to revaluation surplus and
remaining to profit or loss.

08. (b) Depreciation (20 – 8) / 30 years = Rs. 0.4 million

Carrying amount Rs. 20 million less 0.4 million = Rs. 19.6 million

09. (d) Depreciation Now (20 – 8) / 30 years = Rs. 0.4 million

Depreciation Cost (10 – 2) / 40 years = Rs. 0.2 million
Revaluation surplus
= Land Rs. 6 million + Building Rs. 6 million - incremental depreciation 0.2
million = Rs. 11.8 million

10. (d) The carrying amount of temporarily idle PPE

11. (a) On disposal of a revalued asset, the full balance of surplus on revaluation is
transferred to retained earnings.

12. (b) Accumulated depreciation = Rs. 216,000-Rs. 145,000=Rs. 71,000

Surplus = Rs. 291,000-Rs. 145,000=Rs. 146,000
Net amount debited to asset = Rs. 146,000-Rs. 71,000=Rs. 75,000

13. (d) All of items are required to be disclosed.

14. (d) All of items are required to be disclosed.

15. (b) Either useful lives or depreciation rates may be disclosed, both are not
required.

16. Rs. 3,087 The machine has been owned for 2 years 3 months, so the remaining
useful life at 31 March 2017 was 9 years 9 months.
Prior to revaluation it was being depreciated at Rs. 2,500 pa (30,000/12), so
the charge for the first three months of 2017 was Rs. 625.
The machine will now be depreciated over the remaining 9 years 9 months
= 117 months. So, the charge for the remaining 9 months of 2017 is Rs.
2,462 ((32,000 / 117) × 9).
So total depreciation for the year ended 31.12.17 is (625 + 2,462) = Rs.
3,087

17. Rs. 75,000 Incremental depreciation = depreciation on revalued amount – depreciation

at cost
Dep. before revaluation = Rs. 7,500,000 / 20 years = Rs. 375,000

Latest update: March 2020

 CAF 5 – IAS 16

Dep. after revaluation = Rs. 7,650,000 / 17 years = Rs. 450,000

Incremental depreciation = Rs. 75,000

18. Rs. 562,500 Depreciation = Rs. 4,500,000/8= Rs. 562,500

19. Rs. 500,000 Revaluation surplus = Rs. 4,000,000 – 4,500,000= Rs. 500,000

20. Rs. 62,500 Incremental depreciation = Dep on revalued amount – Dep on cost
Page | 49

= (4,500,000/8)– (5,000,000/10)
=Rs. 562,500 – 500,000 = 62,500
Alternatively, Rs. 500,000 surplus / 8 years = Rs. 62,500

21. (a) Revaluation reserve (surplus)

22. (c) Revaluation model

23. (b) The whole class of assets to which it belongs

24. (c) Increase in OCI in SOCI

Increase in Surplus in SOFP

25. (d) Revaluation does not affect tax payable or refundable.

26. (d) Depreciation Rs. 1 million (i.e. Rs. 5 million / 5 years)  SPL
Revaluation loss Rs. 3.8 million – (5 – 1) million = Rs. 0.2 million  SPL

27. (c) Revaluation reserve and share premium are capital reserves.

28. (d) Gain from sale of non-current assets may be withdrawn because these are
realised gains. Revaluation gains are not considered realised.

29. (d) Right issue of shares only. All other transactions do not involve cash.

30. (c) Before revaluation Rs. 5 million / 10 years x 5 years = Rs. 2.5 million
After revaluation Rs. 2.5m + 1m = Rs. 3.5 million
Depreciation Rs. 3.5 million / 5 years = Rs. 0.7 million

31. (b) Annual depreciation before revaluation = Rs. 10m / 20 years = Rs. 0.5m
Before revaluation Rs. 10 million – (0.5m x 5 years) = Rs. 7.5 million
After revaluation Rs. 7.5m + 2m = Rs. 9.5 million
Depreciation Rs. 9.5 million / 15 years = Rs. 633,333
Incremental depreciation Rs. 633,333 – 500,000 = Rs. 133,333

32. (a) Rs. 50,000 charge to Revaluation surplus

Remaining Rs. 20,000 to be charged to profit or loss

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 CAF 5 – IAS 23

IAS 23 Borrowing Costs 02

Page | 1
DEFINITIONS
Borrowing costs Qualifying asset
Borrowing costs are interest and A qualifying asset is an asset that
other costs that an entity incurs innecessarily takes a substantial period of
Definitions
connection with the borrowing of time to get ready for its intended use or
funds. sale.
Depending on the circumstances, any of
 Interest
the following may be qualifying assets:
 Loan processing charges
(a) inventories
 Commissions
Examples (b) manufacturing plants
 Commitment fee
(c) power generation facilities
 Documentation charges
(d) intangible assets
 Legal charges
(e) investment properties.
Financial assets, and inventories that are
manufactured, or otherwise produced,
Exclusion actual or imputed cost of equity,
over a short period of time, are not
from including preferred capital not
qualifying assets. Assets that are ready
Scope classified as a liability
for their intended use or sale when
acquired are not qualifying assets.

RECOGNITION
Borrowing costs

directly attributable (that would have

been avoided if the expenditure on Other
the qualifying asset had not been
made) to the acquisition, construction
or production of a qualifying asset
Recognise as an expense in the
Capitalise as part of the cost of that period in which it is incurred (P&L)
asset

The amount of borrowing costs capitalised cannot exceed the amount of borrowing costs it
incurred during a period.

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 CAF 5 – IAS 23

CALCULATION
IN CASE OF “SPECIFIC BORROWINGS” Rs.
Actual borrowing costs incurred [Outstanding borrowing x interest rate x months/12] XXX
Less: Temporary investment income [Amount invested x interest rate x months/12] (XX)
Page | 2 Amount to be capitalized XXX

IN CASE OF “GENERAL BORROWINGS” Rs.

[Expenditure on QA x Capitalisation rate x months/12] XXX
[Expenditure on QA x Capitalisation rate x months/12] XXX
Amount to be capitalized XXX

The capitalisation rate shall be the weighted average of the borrowing costs applicable to
the borrowings of the entity that are outstanding during the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset.

Total borrowing costs incurred

Capitalisation rate = X 100
Weighted borrowings outstanding during construction

The capitalisation rate is applied from the time expenditure on the asset is incurred.

PERIOD OF CAPITALISATION
The commencement date for capitalisation is the date when the entity
first meets all of the following conditions:
(a) it incurs expenditures for the asset;
Commencement
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset
for its intended use or sale.
Capitalisation of borrowing costs should be suspended if development
of asset is suspended for an extended period of time.

However, capitalisation is not suspended during a period when it

carries out substantial technical and administrative work or when a
temporary delay is a necessary part of the process of getting an asset
Suspension
ready for its intended use or sale.

For example, capitalisation continues during the extended period that

high water levels delay construction of a bridge, if such high-water
levels are common during the construction period in the geographical
region involved.
Capitalisation of borrowing costs is ceased when substantially all the
Cessation activities necessary to prepare the qualifying asset for its intended use
or sale are complete.

Latest update: March 2020

 CAF 5 – IAS 23

OTHER IMPORTANT CONCEPTS

Impairment As a result of capitalising borrowing costs, the cost of asset may exceed its
or write recoverable amount or NRV, therefore, an entity may have to recognise
down impairment loss or write down of inventory to NRV.
Expenditures on a qualifying asset include only those expenditures that Page | 3
Expenditures
have resulted in payments of cash, transfers of other assets or the
on a
assumption of interest-bearing liabilities. Expenditures are reduced by any
qualifying
progress payments received and grants received in connection with the
asset
asset
It is assumed when both general and specific borrowings are available to
Mixture of the construction project that the specific borrowings would be used first. Any
borrowings further borrowings required (where applicable) would therefore come from
the general (and often more expensive) borrowings.

DISCLOSURE
An entity shall disclose:
Disclosure
(a) borrowing costs capitalised; and
requirement
(b) capitalisation rate.
Borrowing costs capitalised
The amount of borrowing costs capitalised during the year is Rs. 351,225
Example
Capitalisation rate used
The capitalisation rate used is 13.38%

SYLLABUS

Reference Content/Learning outcome

C4 IAS 23 Borrowing Costs

LO3.4.1 Discuss and understand accounting treatment for borrowing cost
LO3.4.2 Identify and account for borrowing costs in accordance with IAS 23
LO3.4.3 Disclose borrowing costs in financial statements
Proficiency level: 2
Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
CAF 5
031 -
Objective Type 01 01
CAF 7
- 12 16 - 17 - 18 - - 17
1
Total Marks 17 (including IAS 16)

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 CAF 5 – IAS 23

PRACTICE Q&A
Sr.# Description Marks Reference
BASIC CLASS ILLUSTRATIONS
1C Identify qualifying assets 03 KA
Page | 4 2C Specific borrowing 04 KA
3C General borrowing – weighted capitalisation rate 05 KA
4C Period of capitalisation 04 KA
5C Effect of grants and progress payments 05 KA
6H Okara Engineering: Specific borrowings 04 ST
7H Sahiwal Construction: Capitalisation rate 04 ST
8H Sahiwal Construction: General borrowings 04 ST
9H Company A: Specific borrowing with suspension 06 KA + ST
PRACTICE QUESTIONS
10H Shayan Limited – Specific borrowing 05 QB
11H Sara Limited – General borrowings 05 QB
12H Looney – Theory + Specific 05 QB
13C Googly industries – two qualifying assets - specific 05 QB
14C Khan Limited – General borrowings 05 QB
15C Spin Industries Limited – mixed borrowings (advanced) 15 QB
16C Monday Limited: IAS 16 disclosures with IAS 23 workings 17 PE A19

Latest update: March 2020

 CAF 5 – IAS 23

QUESTION 01
Identify whether or not the following are qualifying assets. ANSWER
1. A construction company constructing a bridge for
government which will take 6 years to complete.
2. A very sophisticated integrated circuits being made by an
Page | 5
entity who manufactures and sales 10,000 to 12,000 units
every month.
3. A power plant under construction, it may take 10 months
to complete this.
4. An equipment purchased by X Limited, the equipment may
be used immediately after it is delivered.
5. Special order from a customer to manufacture a machine
for him which will take 11 months at the least.
6. An entity is constructing office building which will take 8
months to complete.
(03)

QUESTION 02
Up Limited borrowed a loan of Rs. 10 million from Down Bank on 15% per annum for
constructing its power generation facilities. The loan was received on February 01, 2011. Up
Limited paid Rs. 3 million to contractor immediately but remaining Rs. 7 million were paid to
the contractor on March 1, 2011. The remaining Rs. 7 million were temporarily invested in a
saving account at 9% per annum. Up Limited has year-end of 31 December. As on
December 31, 2011 the construction is still in process and the loan is also outstanding.

Required:
Calculate the amount of borrowing cost to be capitalised for the year ended December 31,
2011? (04)

QUESTION 03
SIKA Sports Limited is constructing a stadium for last some years. During the year ended 31
December 2011, it has incurred the following expenditures.
April 30, 2011 Rs. 2,500,000
July 31, 2011 Rs. 2,300,000

No specific loan was borrowed for the construction; rather general pool of funds was used.
The following loans are outstanding:
Loan from FBL @12% Outstanding since 01-10-2010 Rs. 5,000,000
Loan from BAH @14% Outstanding since 01-08-2010 Rs. 10,000,000
Loan from BAF @16% Outstanding since 01-09-2011 Rs. 750,000

Required:
Calculate total borrowing costs eligible for capitalisation during the year ended 31 December
2011. (05)

QUESTION 04
Cord Limited is engaged in the manufacturing of automobiles. Currently the company is
manufacturing its power generation plant. The project was started on January 15, 2011 with
company’s own funds. Subsequently, Cord Limited borrowed a loan from ZBL Bank to
finance the project on February 22, 2011. The first payment out of the loan was made on
March 04, 2011. Due to some law and order situation, the project remained closed from April
25, 2011 to May 9, 2011. The work was also stopped for a week from May 23, 2011 to May

© kashifadeel.com
 CAF 5 – IAS 23

30, 2011 so that necessary plan and layout can be finalized after testing of project
completed so far. The plant was completed on July 31, 2011 except that some sign board
could not be installed until August 10, 2011. Loan was repaid on August 31, 2011. Cord
Limited started using the plant on September 1, 2011.

Required:
Page | 6 (a) From when Cord Limited should start capitalising borrowing costs?
(b) Should Cord Limited suspend capitalisation from April 25, 2011 to May 9, 2011?
(c) Should Cord Limited suspend capitalisation from May 23, 2011 to May 30, 2011?
(d) When Cord Limited should cease to capitalise borrowing costs? (04)

QUESTION 05
Zeal Limited is building a dam for Federal Government. The project will take 10 years to
complete. On February 01, 2011 it took a loan @ 12% of Rs. 100 million for the expenditures
incurred on the same date. On July 01, 2011 the Federal Government made first progress
payment of Rs. 30 million. Zeal Limited had offered employment opportunities to locals of the
area, considering this fact; Provincial Government has given Zeal Limited a grant (award) of
Rs. 10 million on October 31, 2011.

Required:
The borrowing costs to be capitalised for Zeal Limited for the year ended December 31,
2011 (05)

QUESTION 06
On 1 January 2016 Okara Engineering issued a bond to raise Rs. 25,000,000 to fund a
capital project which will take three years to complete.

Amounts not yet needed for the project are invested on a temporary basis.

During the year to 31 December 2016, Okara Engineering spent Rs. 9,000,000 on the
project.

The cost of servicing the bond was Rs. 1,250,000 during this period and the company was
able to earn Rs. 780,000 through the temporary reinvestment of the amount borrowed.

Required:
Calculate the additions to capital work in progress. (04)

QUESTION 07
Sahiwal Construction has three sources of borrowing:
Average loan in the Interest expense Interest rate
year (Rs.) incurred in the year
(Rs.)
7 year loan 8,000,000 800,000 10%
10 year loan 10,000,000 900,000 9%
Bank overdraft 5,000,000 900,000 18%

The 7 year loan has been specifically raised to fund the building of a qualifying asset.

Required:
Calculate capitalisation rate. (04)

Latest update: March 2020

 CAF 5 – IAS 23

QUESTION 08
Continuing the example above, Sahiwal Construction has incurred the following expenditure
on a project funded from general borrowings for year ended 31 December 2016.
Date incurred: Amount (Rs.)
31st March 1,000,000
31st July 1,200,000
Page | 7
30th October 800,000

Required:
Calculate addition to capital work in progress. (04)

QUESTION 09
Company A borrowed Rs. 9,000 @ 15% per annum to fund a project on 1st Jan 2016. The
following expenditures were made on the project during the year ending 31 December 2016
Date: 1st March 2016: Rs. 2,500
Date: 1st October 2016: Rs. 4,200
Date: 1st December 2016: Rs. 2,300

Surplus funds were invested @10% whenever available.

The project activities started on 1 March 2016. Work on the project was suspended during
the month of August and resumed in early September. Construction was completed on 31
December 2016.

Required:
Calculate the borrowing costs to be capitalised and to be charged to PL. (06)

QUESTION 10
Shayan Limited (SL) started the construction of its new factory on 1 January 2018 with a
loan of 50,000,000 borrowed at an interest rate of 8% per annum.

The loan was used on the factory as follows:

Date of Payment Rs. in million
Jan 1, 2018 25
May 1, 2018 15
Oct 1, 2018 10

The construction of the asset was completed on 31 December 2018. However, during the
accounting period SL invested the surplus funds at an interest rate of 3%.

Required
How much the amount of borrowing cost eligible for capitalization at 31.12.2018. (05)

QUESTION 11
On January 1, 2018 Sara Limited (SL) started the construction of an asset. To meet the
financing requirements, borrowing was made from three different banks at the start of the
year as follows:
Banks Amount Interest Rate p.a
A 70,000 10%
B 60,000 8%
C 50,000 12%

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 CAF 5 – IAS 23

The funds were used on the assets as follows:

Date of Payment Rs.
Jan 1, 2018 30,000
May 1, 2018 20,000
Oct 1, 2018 15,000

Page | 8 The construction of asset was completed on 31 December 2018.

Required
Calculate the general weighted average borrowing rate and eligible borrowing cost (05)

QUESTION 12
Looney has recently finished building a new item of plant for its own use. The item is a press
for use in the manufacture of industrial diamonds. Looney commenced construction of the
asset on 1st April 2013 and completed it on 1st April 2015.

1st January 2013, Looney took out a loan to finance the construction of the asset. Interest is
charged on the loan at the rate of 5% per annum. The annual interest must be paid in four
equal instalments at the end of each quarter. Looney capitalises interest on manufactured
assets in accordance with the rules in IAS 23 Borrowing costs.

The costs (excluding finance costs) of manufacturing the asset were Rs. 28 million.

Required
State the IAS 23 rules on the capitalisation of borrowing costs, calculate the cost of the asset
on initial recognition and explain the amount of borrowing cost capitalised. (05)

QUESTION 13
On 1 January 20X6 Googly Industries Limited (GIL) borrowed Rs.15 million to finance the
production of two assets, both of which were expected to take a year to build. Work started
during 20X6. The loan facility was drawn down and incurred on 1 January 20X6, and was
utilised as follows, with the remaining funds invested temporarily.
Asset A Asset B
----------- Rs. in million ---------
1 January 20X6 2.5 5
1 July 20X6 2.5 5

The loan rate was 9% and GIL can invest surplus funds at 7%.

Required
Ignoring compound interest, calculate the borrowing costs which may be capitalised for each
of the assets and consequently the cost of each asset as at 31 December 20X6. (05)

QUESTION 14
Khan Limited (KL) has the following loan arrangements as at 1 January 2020:
Rs. in million
7% Debentures 55
8% Loan notes 110
12% Line of credit 85
10% Running finance arrangement 150

On the 1 January 2020, KL commenced the construction of a new factory. The construction
of the factory will cost Rs.100 million and the company funded the construction with the
existing borrowings.

Latest update: March 2020

 CAF 5 – IAS 23

The factory was completed on 31 August 2020 but was not available for use until 31 January
2021 as a result of minor modification. During the construction period, active work was
interrupted, and the building construction was stopped for two months as a result of adverse
weather conditions.

Required Page | 9
Calculate the borrowing cost to be capitalised and the cost of the building to be recognised
upon initial recognition. (05)

QUESTION 15
On September 1, 2014, Spin Industries Limited (SIL) started construction of its new office
building and completed it on May 31, 2015. The payments made to the contractor were as
follows:
Date of Payment Rs.
September 1, 2014 10,000,000
December 1, 2014 15,000,000
February 1, 2015 12,000,000
June 1, 2015 9,000,000

In addition to the above payments, SIL paid a fee of Rs.8 million on September 1, 2014 for
obtaining a permit allowing the construction of the building.

The project was financed through the following sources:

(i) On August 1, 2014 a medium term loan of Rs.25 million was obtained specifically for
the construction of the building. The loan carried mark up of 12% per annum payable
semi-annually. A commitment fee @ 0.5% of the amount of loan was charged by the
bank.
Surplus funds were invested in savings account @ 8% per annum. On February 1,
2015 SIL paid the six monthly interest plus Rs.5 million towards the principal.

(ii) Existing running finance facilities of SIL

 Running finance facility of Rs.28 million from Bank A carrying mark up of 13%
payable annually. The average outstanding balance during the period of
construction was Rs.25 million.
 Running finance facility of Rs.25 million from Bank B. The mark up accrued
during the period of construction was Rs.3 million and the average running
finance balance during that period was Rs.20 million.

Required
Calculate the amount of borrowing costs to be capitalised on June 30, 2015 in accordance
with the requirements of International Accounting Standards. (15)
(Borrowing cost calculations should be based on number of months).

QUESTION 16
The following information pertains to Monday Limited (ML):
(i) The balances of property, plant and equipment as on 1 January 2018:
Cost/Revalued Accumulated
Assets amount depreciation
----------- Rs. in million -----------
Office building 240 36
Equipment 190 60

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 CAF 5 – IAS 23

Revaluation surplus related to the office building as at 1 January 2018 amounted to

Rs. 8.5 million.
(ii) On 1 September 2018, a new equipment was acquired by making payment of Rs. 70
million to the supplier. An old equipment was also given in exchange to the supplier.
The fair values of the old and new equipment were assessed at Rs. 21 million and
Page | 10 Rs. 93 million respectively. The old equipment had been acquired at a cost of Rs. 40
million on 1 July 2016. Cost incurred on installing the new equipment amounted to
Rs. 5 million.

(iii) On 1 January 2018, ML commenced construction of a manufacturing plant. The

whole process of assembling and installation was completed on 31 October 2018.
However, the work was stopped from 16 to 31 August 2018 due to unexpected rains.
The total cost of Rs. 660 million incurred on the plant was paid as under:
Description Payment date Rs. in million
1st payment 1 February 2018 140
2nd payment 1 April 2018 214
3rd payment 1 September 2018 146
4th payment 1 December 2018 160
The plant was financed through a bank loan of Rs. 500 million obtained on 1 March
2018. The loan carries a mark-up of 18% payable annually. The surplus funds
available from the loan were invested in a saving account and earned Rs. 17 million
during capitalization period.

(iv) On 31 December 2018, the revalued amount of office building was assessed at Rs.
178 million by Precise Valuers, an independent valuation firm. Value in use of the
office building as at 31 December 2018 was estimated at Rs. 186 million.

(v) Other relevant details are as follows:

Depreciation Subsequent
Assets Life/rate
method measurement
Office building Straight line 20 years* Revaluation
Equipment Reducing balance 20% Cost
Manufacturing plant Straight line 15 years Cost
* Remaining life at the date of last revaluation
ML accounts for revaluation on net replacement value method and transfers the
maximum possible amount from revaluation surplus to retained earnings on an
annual basis.
Required:
In accordance with IFRSs, prepare a note on ‘Property plant and equipment’ for inclusion in
ML’s financial statements for the year ended 31 December 2018.
(Comparatives figures and column for total are not required) (17)

Latest update: March 2020

 CAF 5 – IAS 23

ANSWER 01
ANSWER
1. A construction company constructing a bridge for
Qualifying asset
government which will take 6 years to complete.
2. A very sophisticated integrated circuits being made by an
entity who manufactures and sales 10,000 to 12,000 units Not a qualifying asset Page | 11
every month.
3. A power plant under construction, it may take 10 months
Qualifying asset
to complete this.
4. An equipment purchased by X Limited, the equipment may
Not a qualifying asset
be used immediately after it is delivered.
5. Special order from a customer to manufacture a machine
Qualifying asset
for him which will take 11 months at the least.
6. An entity is constructing office building which will take 8
Qualifying asset
months to complete.

ANSWER 02
Rs.
Actual borrowing costs Rs. 10 m x 15% x 11/12 1,375,000
Less: Temporary investment income Rs. 7m x 9% x 1/12 (52,500)
Borrowing costs to be capitalised 1,322,500

ANSWER 03
Rs.
Rs. 2,500,000 x 13.38% x 8/12 223,000
Rs. 2,300,000 x 13.38% x 5/12 128,225
Borrowing costs to be capitalised 351,225

2,040,000
Capitalisation rate = X 100 = 13.38%
15,250,000

Weighted
Borrowing
Loans Principal Rate Weight Borrowings
costs incurred
outstanding
Rs. % Rs. Rs.
Loan from FBL 5,000,000 12% 12/12 5,000,000 600,000
Loan from BAH 10,000,000 14% 12/12 10,000,000 1,400,000
Loan from BAF 750,000 16% 4/12 250,000 40,000
15,250,000 2,040,000

ANSWER 04
From when Cord Limited should start capitalising borrowing costs? 22 Feb 2011
Should Cord Limited suspend capitalisation from April 25, 2011 to May 9,
Suspended
2011?
Should Cord Limited suspend capitalisation from May 23, 2011 to May
Not suspended
30, 2011?
When Cord Limited should cease to capitalise borrowing costs? 31 Jul 2011

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 CAF 5 – IAS 23

ANSWER 05
From To Amount Time Rate Rs.
01-02-11 01-07-11 Rs. 100 m 5/12 12% 5,000,000
01-07-11 31-10-11 Rs. 100 m – Rs. 30 m = Rs. 70 m 4/12 12% 2,800,000
01-11-11 31-12-11 Rs. 70 m – Rs. 10 m = Rs. 60 m 2/12 12% 1,200,000
Page | 12
9,000,000

ANSWER 06
The amounts recognised as capital work in progress in the period:
Rs.
Costs incurred (labour, material, overhead etc.) 9,000,000
Interest capitalised:
Actual interest cost 1,250,000
Less: return on temporary investment (780,000)
470,000
Additions to capital work in progress 9,470,000

ANSWER 07
A suitable capitalisation rate for other projects is found as follows:
Average loan in the year Interest expense incurred
(Rs.) in the year (Rs.)
10 year loan 10,000,000 900,000
Bank overdraft 5,000,000 900,000
TOTAL 15,000,000 1,800,000

Capitalisation rate = 1,800,000/15,000,000 x 100 = 12%

ANSWER 08
The amount capitalised in respect of capital work in progress during 2016 is as follows:
Date Rs.
31st March Expenditure 1,000,000
Interest (1,000,000 x 12% x 9/12) 90,000
31st July Expenditure 1,200,000
Interest (1,200,000 x12 % x 5/12) 60,000
30th October Expenditure 800,000
Interest (800,000 x 12% x 2/12) 16,000
3,166,000

ANSWER 09
Borrowing costs to be capitalised Rs.
Borrowing costs incurred 9,000 x 15% x 9/12 1,012.5
Less: Temporary investment income 6,500 x 10% x 6/12 (325)
2,300 x 10% x 2/12 (38.3)
649.2

The project commenced on 1st March resulting in a period of 10 months up to the year end.
However, interest cannot be capitalised during the period of suspension. Therefore, interest
is capitalised only for 9 months.

Latest update: March 2020

 CAF 5 – IAS 23

Borrowing costs to be expenses Rs.

Borrowing costs incurred 9,000 x 15% x 3/12 337.5
Less: Temp. Inv. income 9,000 x 10% x 2/12 (before commencement) (150)
6,500 x 10% x 1/12 (suspension) (54.17)
133.33

ANSWER 10 Page | 13

Borrowing costs to be capitalised Rs.

Borrowing costs incurred 50m x 8% 4,000,000
Less: Temporary investment income 25m x 3% x 4/12 (250,000)
10m x 3% x 5/12 (125,000)
3,625,000

ANSWER 11
Rs.
30,000 x 9.89% x 12/12 2,967
20,000 x 9.89% x 8/12 1,318
15,000 x 9.89% x 3/12 371
Borrowing costs to be capitalised 4,656

17,800
Capitalisation rate = X 100 = 9.89%
180,000

Weighted
Borrowing
Loans Principal Rate Weight Borrowings
costs incurred
outstanding
Rs. % Rs. Rs.
A 70,000 10 12/12 70,000 7,000
B 60,000 8 12/12 60,000 4,800
C 50,000 12 12/12 50,000 6,000
180,000 17,800

ANSWER 12
IAS 23 should be applied in accounting for borrowing costs. Borrowing costs are recognised
as an expense in the period in which they are incurred unless they are capitalised in
accordance with IAS 23 which says that borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset can be capitalised as part of the
cost of that asset.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
Borrowing costs that are directly attributable to acquisition, construction or production are
taken to mean those borrowing costs that would have been avoided if the expenditure on the
qualifying asset had not been made.

When an enterprise borrows specifically for the purpose of funding an asset, the
identification of the borrowing costs presents no problem as the amount capitalised is the
actual borrowing costs net of any income earned on the temporary investment of those
borrowings.

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 CAF 5 – IAS 23

If funds are borrowed, generally, the amount of borrowing costs eligible for capitalisation is
determined by applying a capitalisation rate to the expenditures on that asset calculated as
the weighted average of the borrowing costs applicable to general borrowings.

IAS 23 also contains rules on commencement of capitalisation, suspension of capitalisation

and cessation of capitalisation.
Page | 14 Amount capitalised Rs.000
Cost of manufacture 28,000
Interest capitalised (Rs.28m × 5% × 2 years) 2,800
30,800

ANSWER 13
Cost of asset A Rs.
Expenditure 5,000,000

Borrowing costs incurred 5m x 9% x 12/12 450,000

Less: Temporary investment income 2.5m x 7% x 6/12 (87,500)
362,500
5,362,000

Cost of asset B Rs.

Expenditure 10,000,000

Borrowing costs incurred 10m x 9% x 12/12 900,000

Less: Temporary investment income 5m x 7% x 6/12 (175,000)
725,000
10,725,000

ANSWER 14
Total cost to be capitalised Rs.
Expenditure 100,000,000
100,000,000 x 9.46% x 6/12 4,730,000
104,730,000

January to August are 8 months – two months suspension.

37.85
Capitalisation rate = X 100 = 9.46%
400

Weighted Borrowing
Loans Principal Rate Weight Borrowings costs
outstanding incurred
Rs. m % Rs. m Rs. m
Debentures 55 7% 12/12 55 3.85
Loan notes 110 8% 12/12 110 8.80
Line of credit 85 12% 12/12 85 10.20
Running Finance 150 10% 12/12 150 15
400 37.85

Latest update: March 2020

 CAF 5 – IAS 23

ANSWER 15
Borrowing costs to be capitalized 2015
Rs.
Commitment fee [Rs.25m x 0.5%] 125,000
Interest on specific borrowings [25m x 12% x 5/12] 1,250,000
[20m x 12% x 4/12] 800,000 Page | 15
Temporary Investment income [Working below] (137,500)
Interest on general borrowings [163,583 + 1,062,033] 1,225,617
3,263,117

Date Particulars Rs. m Working

01-09-14 Specific loan 25,000,000
(125,000)
Permit (8,000,000)
1st payment (10,000,000)
Temp. Income 6,8750,000 x 8% x 3/12 = Rs. 137,500
nd
01-12-14 2 payment (15,000,000)
General (8,125,000) x 12.08% x 2/12 = Rs. 163,583
01-02-15 Loan interest (1,250,000)
Loan Principal (5,000,000)
3rd payment (12,000,000)
General (26,375,000) x 12.08% x 4/12 = Rs. 1,062,033
31-05-15 Completion

(25m x 13% x 9/12) + 3m

Capitalisation rate = X 100 = 12.08%
25m + 20m

ANSWER 16
Monday Limited
Notes to Financial Statements
For the year ended 31 December 2018
4. Property, Plant and Equipment:
4.1 The entity uses the following subsequent measurement bases to value its Property,
Plant and Equipment, and methods to calculate its depreciation.
Assets Depreciation Useful life / Rate Subsequent
method Measurement
Office building Straight line 20 years / 5% Revaluation model
Equipment Reducing balance 20% Cost model
Manufacturing plant Straight line 15 years Cost model

4.2 Schedule of movement in property, plant and equipment

Office building Equipment Manufacturing plant
Cost Rs. million
At 1 Jan 2018 240 190 -
Acquisition W4 - 96 -
Transfer from CWIP W6 - - 699.25
Revaluation – 48 – 14 W2 (62) - -
Disposals - (40) -
At 31 Dec 2018 178 246 699.25

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 CAF 5 – IAS 23

Accumulated dep.
At 1 Jan 2018 36 60 -
For the year 12 W1 30.48 W5 7.77 W6
Revaluations (48) - -
Disposals W3 - (15.04) -
At 31 Dec 2018 0 75.44 7.77
Page | 16
Carrying amount 2018 178 170.56 691.48
Carrying amount 2017 204 130 0

4.3 Manufacturing plant was constructed during the year. The cost includes Rs. 39.25
capitalised for borrowing costs (w6).

4.4 Revaluation disclosures:

The revaluation of building took place on 31 December 2018. The value was
determined by an independent valuation firm, Precise Valuers.
The carrying amount of office building had the revaluation not taken place, would be
Rs. 184 million (W7).

Movement of Revaluation surplus Rs. Million

At 1 Jan 2018 8.5
Incremental depreciation [8.5 / 17 years] (0.5)
Revaluation loss charged to OCI (8)
At 30 June 2019 Nil

Workings
Depreciation
1. 240 / 20 years = Rs. 12
Office building
2. Revaluation loss 240 – 48 = 192 – 178 fair value = Rs. 14 loss
Rs. m
40 x 20% x 6/12 4
Accumulated (4)
3. depreciation – 36 x 20% x 12/12 7.2
Disposal (7.2)
28.8 x 20% x 8/12 3.84
15.04
.

Cost of new
4. FV of asset given up 21 + Cash 70 + Installation 5 = 96
equipment
Rs. m
Disposed W3 3.84
Depreciation –
5. Addition 96 x 20% x 4/12 6.4
Equipment
Others [(190 – 40) – (60 – 11.2)] x 20% x 12/12 20.24
30.48
.

Rs. m
Construction cost 660
Interest on specific loan 500 x 18% x 7.5/12 56.25
Manufacturing Less: Temporary investment income (17)
6.
plant 39.25
699.25
Depreciation 699.25 / 15 years x 2/12 (7.77)
691.48
.

Latest update: March 2020

 CAF 5 – IAS 23

Rs. m
Carrying amount at 1 Jan 240 – 36 204
Less: Revaluation surplus (8.5)
7. Building HCA
Carrying amount under cost model – opening 195.5
Depreciation for the year 195.5 / 17 years (11.5)
Carrying amount under cost model - closing 184
. Page | 17

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 CAF 5 – IAS 23

Page | 18

Latest update: March 2020

 CAF 5 – IAS 23

ICAP OBJECTIVE BASED QUESTIONS

01. Which TWO of the statements below regarding IAS 23 Borrowing Costs are correct?
(a) Borrowing costs must be capitalised if they are directly attributable to qualifying assets
(b) Borrowing costs should cease to be capitalised once the related asset is substantially
complete Page | 19
(c) Borrowing costs must be capitalised if they are directly attributable to non-current assets
(d) Borrowing costs may be capitalised if they are directly attributable to qualifying assets

02. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was
specifically issued to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on
28 February 2018 but did not open for trading until 1 April 2018.
How much should be recorded as finance costs in the statement of profit or loss for the year
ended 31 March 2018?

(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000

03. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was
specifically issued to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on
28 February 2018 but did not open for trading until 1 April 2018.
How much interest should be capitalised as part of property, plant and equipment as at 31
March 2018?

(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000

04. An entity decided that not all of the funds raised were needed immediately and temporarily
invested some of the funds for one month before the construction started, earning Rs.40, 000
interest.
How should the Rs. 40,000 be accounted for in the financial statements?

(a) Net off the amount capitalised in property, plant and equipment
(b) Taken to the statement of profit or loss as investment income
(c) Taken as other comprehensive income
(d) Deducted from the outstanding loan amount in the statement of financial position

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 CAF 5 – IAS 23

05. Shine Limited (SL) had the following bank loans outstanding during the whole of 2018:

Rs. m
9% loan repayable 2019 15
11% loan repayable 2022 24
Page | 20 SL began construction of a qualifying asset on 1 April 2018 and withdrew funds of Rs. 6 million
on that date to fund construction. On 1 August 2018 an additional Rs. 2 million was withdrawn
for the same purpose.
Calculate the borrowing costs which can be capitalised in respect of this project for the year
ended 31 December 2018.

(a) Rs. 545,600

(b) Rs. 472,350
(c) Rs. 750,600
(d) Rs. 350,350

06. Jazz Limited (JL) has borrowed Rs. 24 million to finance the building of a factory. Construction is
expected to take two years.
The loan was drawn down and incurred on 1 January 2019 and work began on 1 March 2019.
Rs. 10 million of the loan was not utilized until 1 July 2019 so JL was able to invest it until
needed. JL is paying 8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended 31 December 2019 in respect
of this project.

(a) Rs. 1,400,000

(b) Rs. 1,920,000
(c) Rs. 1,300,000
(d) Rs. 1,620,000

07. A company has the following loans in place throughout the year ended 31 December 2018.

Rs. m
10% bank loan 140
8% bank loan 200
On 1 July 2018 Rs. 50 million was drawn down for construction of a qualifying asset which was
completed during 2019.
What amount should be capitalised as borrowing costs at 31 December 2018 in respect of this
asset?

(a) Rs. 5.6 million

(b) Rs. 2.8 million
(c) Rs. 4.4 million
(d) Rs. 2.2 million

Latest update: March 2020

 CAF 5 – IAS 23

08. An entity uses funds from its general borrowings to build a new production facility. Details of the
entity's borrowings are shown below:
Rs.10 million 6% loan
Rs.6 million 8% loan
The entity used Rs.12 million of these funds to construct the facility, which was under
construction for the entire year. Page | 21
How much interest should be capitalised as part of the cost of the asset?

Rs. ___________

09. Which of the following is not considered a “borrowing cost” under IAS 23?
(a) Interest expense calculated by the effective interest method
(b) Finance charges in respect of loan
(c) Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
(d) Principal repayments on a loan for property, plant and equipment

10. When activities to prepare an asset for its sale or use are suspended, borrowing costs must be?
(a) Capitalized
(b) Expensed
(c) Ignored
(d) Charged to equity

11. Which of the following is not a condition to commence capitalisation of borrowing costs?
(a) Expenditures are being incurred
(b) Borrowing costs are being incurred
(c) Repayment of borrowings has commenced
(d) Activities to produce the asset for its intended use or sale have commenced

12. Ghazi Limited (GL) is constructing an office building and is capitalising borrowing costs in
accordance with IAS 23. The office is almost complete; the only remaining work is to install
furniture. Is GL allowed to continue capitalising the borrowing costs?
(a) Yes
(b) No
(c) Don’t know
(d) None of the above

13. Which of the following is not a “qualifying asset” under IAS 23?
(a) Mass produced inventory
(b) Manufacturing plants
(c) Made to order inventory
(d) Investment property

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 CAF 5 – IAS 23

14. Which of the following can NOT be a ‘qualifying asset’ under IAS 23 Borrowing Costs? [A19]
(a) Inventories
(b) Manufacturing plants
(c) Assets that are ready for their intended use when acquired
(d) Investment property (01)
Page | 22

Latest update: March 2020

 CAF 5 – IAS 23

OBJECTIVE BASED ANSWERS

01. (a, b) Borrowing costs must be capitalised if they are directly attributable to qualifying
assets, which are assets that take a substantial time to complete. Capitalization
should cease once substantially all the activities to prepare the asset are
complete.
Page | 23
02. (c) Rs. 10 million x 7.5% x 2/12 = Rs. 125,000

03. (d) Rs. 10 million x 7.5% x 10/12 = Rs. 125,000

04. (b) Temporary investment income earned during the construction period should be
netted off the amount capitalised.
However, the interest was earned prior to the period of construction. Therefore,
the investment income earned should be taken to the statement of profit or loss
as investment income.

05. (a) (9% × 15 ) + (11% × 24 )

= = 10.23%
15 + 24
Rs. 6m × 10.23% × 9/12 = Rs.460,350
Rs. 2m × 10.23% × 5/12 = Rs. 85,250
Total Rs. 545,600
Rs.
06. (a)
March – December (Rs. 24m × 8% × 10/ 12) 1,600,000
Less investment income (Rs. 10m × 6% × 4/12) (200,000)
1,400,000
Temporary investment income before commencement would be recognized as
finance income in profit or loss.

07. (d) (10% × 140 ) + (8% × 200 )

= = 8.8%
140 + 200
Rs. 50 million × 8.8% × 6/12 = Rs. 2.2 million

08. Rs. 810,000 Rs.12m × 6.75% = Rs. 810,000

Capitalisation rate
= ((Rs.10m × 6%) + (Rs.6m × 8%))/Rs.16m = 6.75%.

09. (d) Principal repayment is not a borrowing cost.

10. (b) Expensed / Charged to profit or loss.

11. (c) Repayment of borrowing is not a condition for commencement.

12. (b) No. When work is substantially complete, it must discontinue capitalisation.

13. (a) Mass produced inventory is not a qualifying asset.

14. Assets that are ready for their intended use when acquired are opposite to
(c)
qualifying asset definition.

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 CAF 5 – IAS 36

Impairment of
IAS 36 Assets 03
Page | 1
INTRODUCTION
SCOPE
 Inventories [IAS 2]
 Assets arising from contracts with customers [IFRS 15]
 Investment property at fair value [IAS 40]
Excluded
IAS 36 also does not apply to deferred tax assets [IAS 12], assets arising
from employee benefits [IAS 19], financial assets [IFRS 9], biological
assets measured at fair value less costs to sell [IAS 41], non-current
assets held for sale [IFRS 5], which are out of syllabus at this level.
 If costs of disposal are negligible, there is no need to apply IAS 36.
Revalued
 If costs of disposal are NOT negligible, IAS 36 shall be applied as
assets
there may or may not be an impairment loss.

DEFINITIONS
Impairment Impairment loss is the amount by which the carrying amount of an asset
loss exceeds its recoverable amount.
Recoverable Recoverable amount of an asset is the higher of its fair value less costs
amount of disposal and its value in use.
Fair value is the price that would be received to sell an asset or paid to
Fair value transfer a liability in an orderly transaction between market participants at
the measurement date.
Cost of Cost of disposal are incremental costs directly attributable to the disposal
disposal of an asset, excluding finance costs and income tax expense.
Value in use is the present value of the future cash flows expected to be
Value in use
derived from an asset, including its eventual disposal.

TIMING OF IMPAIRMENT REVIEW

IAS 36 requires that at each reporting date, an entity must assess whether there are
indications of impairment. Indications may be derived from within the entity (internal
sources) or the external market (external sources).
 Obsolescence or physical damage or no longer of use to the entity
 Significant changes with an adverse effect in the manner in which an
Internal asset is used or is expected to be used.
sources  Economic performance of an asset is worse than expected.
 Actual cash flows are worse than the budgeted e.g. reduction is expected
remaining useful life.

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 CAF 5 – IAS 36

 Asset’s market value has declined significantly more than expected.

 Significant changes with an adverse effect in the technological, market,
economic or legal environment in which the entity operates.
External  Market interest rates have increased during the period, and those
sources increases are likely to affect the discount rate used in calculating an
Page | 2 asset’s value in use
 The entity’s net assets are measured more than its market capitalisation
(suggesting that assets are over-valued).
If an indication of impairment exists then an impairment review must be
Indication
performed. Where there is no indication of impairment, then no further action
exists
needs to be taken.
The following assets must be reviewed annually for impairment (in addition to
when an indication exists):
Annual
 Goodwill acquired in a business combination
review
 An intangible asset with an indefinite useful life
 An intangible asset not yet available for use

MEASURING RECOVERABLE AMOUNT

Entities have to bear in mind the following steps and considerations when evaluating an
asset’s recoverable amount:
Value in use is calculated by estimating future cash inflows and outflows
from the use of the asset and its ultimate disposal, and applying a
suitable discount rate to these cash flows.

Estimates of future cash flows should be based on reasonable and

supportable assumptions that represent management’s best estimate of the
economic conditions that will exist over the remaining useful life of the asset.

Estimates of future cash flows must not include:

 cash inflows or outflows from financing activities; or
 income tax receipts or payments.

Also note that future cash flows are estimated for the asset in its current
condition. Therefore, any estimate of future cash flows should not include
Value in use
estimated future cash flows that are expected to arise from:
 a future restructuring to which an entity is not yet committed; or
 improving or enhancing the asset’s performance.
The discount rate must be a pre-tax rate that reflects current market
assessments of:
 the time value of money; and
 the risks specific to the asset for which the future cash flow
estimates have not been adjusted.
However, both the expected future cash flows and the discount rate might
be adjusted to allow for uncertainty about the future – such as the business
risk associated with the asset and expectations of possible variations in the
amount or timing of expected future cash benefits from using the asset.

Latest update: March 2020

 CAF 5 – IAS 36

Fair value is normally market value. If no active market exists, it may be

possible to estimate the amount that the entity could obtain from the
disposal.
Fair value
Cost of disposal might include legal costs, stamp duty, costs relating to
less cost of
removal of sitting tenant but must exclude finance costs and income tax
disposal Page | 3
expense.
Redundancy and restructuring costs (to be incurred after the sale of
business) are not cost of disposal.
No need to It is not always necessary to determine both an asset’s net selling price and
calculate its value in use. For example, if either of these amounts exceeds the asset’s
both carrying amount, the asset is not impaired and it is not necessary to
amounts estimate the other amount

RECOGNITION OF IMPAIRMENT LOSS

An impairment loss should be recognized as an expense in the income
statement immediately, unless the asset is carried at revalued amount.
Dr. Impairment loss
Recognising
Cr. Asset
expense
Alternatively,
Dr. Impairment loss
Cr. Accumulated impairment losses
An impairment loss on a revalued asset is recognized directly against any
On revalued
revaluation surplus for the asset to the extent that the impairment loss does
asset
not exceed the amount held in the revaluation surplus for that same asset.
The reversal of impairment loss is dealt in the same way as reversal of
Reversal
revaluation loss is dealt in IAS 16.
Depreciation The depreciation (or amortisation) of an impaired asset shall be charged on
etc. its revised amount.

SYLLABUS
Reference Content/Learning outcome
C5 IAS 36 Impairment of Assets (other than cash-generating units CGU)
Identify and assess the circumstances when the assets may be impaired (other
LO3.5.1
than cash-generating units CGU).
LO3.5.2 Discuss the measurement of recoverable amount
LO3.5.3 Account for the related impairment expenses
Proficiency level: 2 Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
CAF 5
- -
Objective Type 03 03
CAF 7
- - - - - 12 - - 07 -

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 CAF 5 – IAS 36

PRACTICE Q&A
Sr.# Description Marks Reference
1C Basic Calculations 08 ST
2C Recognition: Entity Q (Cost Model) 06 ST
Page | 4
3C Recognition: Entity Q (Revaluation Model) 10 ST
4C Journal entries – Alternatives 06 KA
5H ABA Limited – FS extracts 15 QB
6C Hussain Associates Limited 08 QB
7C Sunshine Limited: Various machines with renewal usage 06 ST New
8C Sky-Line Limited: Probability based cash flows 06 ST New
9H Premier Limited: Typical calculations 04 ST New
10H Naveed Limited: Typical calculations 05 ST New
11C Apricot Pakistan Limited 07 PE A18

Latest update: March 2020

 CAF 5 – IAS 36

QUESTION 01
A company has a machine in its statement of financial position at a carrying amount of
Rs.300,000. The machine is used to manufacture the company’s best-selling product range,
but the entry of a new competitor to the market has severely affected sales.

As a result, the company believes that the future sales of the product over the next three
years will be only Rs.150,000, Rs.100,000 and Rs.50,000. The asset will then be sold for Page | 5
Rs.25,000. An offer has been received to buy the machine immediately for Rs.240,000, but
the company would have to pay shipping costs of Rs.5,000.The risk-free market rate of
interest is 10%.

Market changes indicate that the asset may be impaired and so the recoverable amount for
the asset must be calculated.

Required:
Relevant calculation for impairment loss and journal entry. (08)

QUESTION 02
On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful
life of 20 years and an estimated zero residual value.

Depreciation is on a straight-line basis.

On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be

Rs.100,000 and its remaining useful life to be 10 years.

Required:
Calculate:
(a) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
(b) The impairment loss recognised in the year to 31 December Year 4.
(c) The depreciation charge in the year to 31 December Year 4. (06)

QUESTION 03
On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful
life of 20 years and an estimated zero residual value.

Depreciation is on a straight-line basis.

The asset had been re-valued on 1 January Year 3 to Rs.250,000, but with no change in
useful life at that date.

On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be

Rs.100,000 and its remaining useful life to be 10 years.

Required:
Calculate:
(a) The carrying amount of the machine on 31 December Year 2 and hence the
revaluation surplus arising on 1 January Year 3.
(b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
(c) The impairment loss recognised in the year to 31 December Year 4.
(d) The depreciation charge in the year to 31 December Year 4. (10)

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 CAF 5 – IAS 36

QUESTION 04
An entity owns a property which was originally purchased for Rs. 300,000. The property has
been revalued to Rs. 500,000 with the revaluation of Rs. 200,000 being recognised as other
comprehensive income and recorded in the revaluation reserve. The accumulated
depreciation related to property after revaluation is Rs. 40,000 and therefore its carrying
amount is Rs. 460,000 but the recoverable amount of the property has just been estimated
Page | 6 at only Rs. 200,000. The entity does not transfer incremental depreciation.

What is the amount of impairment and how should this be treated in the financial
statements? (06)

QUESTION 05
Aba Limited conducts its activities from two properties, a head office in the city centre and a
property in the countryside where staff training is conducted. Both properties were acquired
on 1 April 2013 and had estimated lives of 25 years with no residual value. The company
has a policy of carrying its land and buildings at current values. However, until recently
property prices had not changed for some years. On 1 October 2015 the properties were
revalued by a firm of surveyors. Details of this and the original costs are:

Land Buildings
Rs. Rs.
Head office – cost 1 April 2013 500,000 1,200,000
– revalued 1 October 2015 700,000 1,350,000
Training premises – cost 1 April 2013 300,000 900,000
– revalued 1 October 2015 350,000 600,000

The fall in the value of the training premises is due mainly to damage done by the use of
heavy equipment during training. The surveyors have also reported that the expected life of
the training property in its current use will only be a further 10 years from the date of
valuation. The estimated life of the head office remained unaltered.

Note: Aba Limited treats its land and its buildings as separate assets.

Depreciation is based on the straight-line method from the date of purchase or subsequent
revaluation.

Required
Prepare extracts of the financial statements of Aba Limited in respect of the above properties
for the year to 31 March 2016. (15)

Latest update: March 2020

 CAF 5 – IAS 36

QUESTION 06
The assistant financial controller of the Hussain Associates Ltd group has identified the
matters below which she believes may indicate impairment of one or more assets.

Hussain Associates Ltd owns and operates an item of plant that cost Rs.640,000 and had
accumulated depreciation of Rs.400,000 at 1 October 2015. It is being depreciated at 12½%
on cost. Page | 7

On 1 April 2016 (exactly half way through the year) the plant was damaged when a factory
vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to
repair the plant, but it still operates, albeit at a reduced capacity. It is also expected that as a
result of the damage the remaining life of the plant from the date of the damage will be only
two years.

Based on its reduced capacity, the estimated present value of the plant in use is Rs.150,000.
The plant has a current disposal value of Rs.20,000 (which will be nil in two years’ time), but
Hussain Associates Ltd has been offered a trade-in value of Rs.180,000 against a
replacement machine which has a cost of Rs.1 million (there would be no disposal costs for
the replaced plant). Hussain Associates Ltd is reluctant to replace the plant as it is worried
about the long-term demand for the product produced by the plant. The trade-in value is only
available if the plant is replaced.

Required
Prepare extracts from the statement of financial position and statement of profit or loss of
Hussain Associates Ltd in respect of the plant for the year ended 30 September 2016. Your
answer should explain how you arrived at your figures. (08)

QUESTION 07
On 1 July 2016, Sunshine Limited (SL) acquired four machines namely A, B, C and D. The
following information is available in respect of these machines:
A B C D
Cost (Rs. in millions) 200 230 90 60
Expected useful life 10 years 10 years 6 years 12 years
Active market value at 30 June No active
170 300 65
2017 (Rs. in millions) market
Renewal cost (Rs. in millions) 65 85 2 1

(i) The renewal would allow SL to use the machines for another five years and it is
incurred at the end of year.
(ii) SL uses the revaluation model for subsequent measurement of its assets.
(iii) An independent value has estimated the value of machine ‘D’ at Rs. 130 million.

Required:
Compare the carrying value of machines with fair values (active market value) to determine
the revaluation surplus or impairment loss and prepare extracts of financial statements. (06)

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 CAF 5 – IAS 36

QUESTION 08
Sky-Line Limited (SL) operates a 4 Star Hotel facility in Muree. The hotel was constructed at
a cost of Rs.300 million, 5 years back and it is depreciated on a straight-line basis (total
useful life of 15 years and residual value of 20%). There are indications that the property is
not performing as expected due to:
(a) opening of a competing hotel nearby,
Page | 8 (b) a significant drop in number of tourists to the area because of terrorism.
There is a 40% probability that the hotel will generate net cash flows of Rs.40 million per
annum and 60% probability that the cash flows would only be Rs.20 million per annum.

The property’s net operating income is Rs.30 million which is at the rate of 15%. 5% of the
proceeds from sale would be expended in closing the deal.

Required:
If the appropriate discount rate is 10% then compare the carrying value with the recoverable
amount to arrive at the impairment loss. (06)

QUESTION 09
Premier Limited (PL) owns a plant which has a carrying amount of Rs.248 million as at 1
April 2019. It is being depreciated at 12½% per annum on a reducing balance basis. The
plant is used to manufacture a specific product which has been suffering a decline in sales
due to obsolescence. PL has estimated that the plant will be retired from use on 31 March
2023. The estimated net cash flows from the use of the plant and their present values are:
Net cash Present
flows values
Rs. in million
Year to 31 March 2020 120 109.2
Year to 31 March 2021 80 66.4
Year to 31 March 2022 52 39
TOTAL 252 214.6
On 30 March 2020, PL had an alternative offer from the competitor to purchase the plant for
Rs.200 million.

Required:
Measure the plant in the statement of financial position at recoverable amount after
impairment at 31 March 2020. (04)

QUESTION 10
Naveed Limited has an item of plant which has a carrying value of Rs.1,800,000 as at the
end of the year December 2020. It has undergone an impairment review and the following
estimates were produced:
Fair value of plant = Rs.1,400,000
Costs to sell 2% of selling price

Revenue and associated costs per annum for remaining useful life:
(assume all cash flows occur at the end of the year).
Revenue Costs
2021 Rs.960,000 Rs.240,000
2022 Rs.880,000 Rs.220,000
2023 Rs.700,000 Rs.290,000

The plant has an estimated residual value of Rs.50,000. A discount rate of 10% is applicable
to investments equivalent in risk to this plant.

Latest update: March 2020

 CAF 5 – IAS 36

Required:
Compare the carrying value with the recoverable amount to arrive at the impairment loss.
(05)

QUESTION 11
Property, plant and equipment as disclosed in the draft financial statements of Apricot Page | 9
Pakistan Limited (APL) for the year ended 30 June 2018 include a plant having a carrying
value of Rs. 610 million. The performance of the plant has been deteriorating since last year
which is affecting APL’s sales.

Following information/estimates relate to the plant for the year ending 30 June 2019:
Rs. in million
Inflows from sale of product under existing condition of the plant 250
Operational cost other than depreciation 25
Depreciation 170
Expenses to be paid in respect of 30 June 2018 accruals 8
Cost of increasing the plant’s capacity 60
Additional inflows (net) expected from the upgrade 40
Interest on finance lease 30
Maintenance cost 15
Tax payment on profits 18

Cash flows from the plant are expected to decrease by 15% each year from 2020 and
onward. The plant’s residual value after its remaining useful life of 3 years is estimated at
Rs. 100 million.

An offer has been received to buy the plant immediately for Rs. 570 million but APL has to
incur the following costs.
Rs. in million
Cost of delivery to the customer 45
Legal cost 10
Costs to re-organize the production process after disposal of plant 50

Applicable discount rate is 9%.

Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018.
(07)

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 CAF 5 – IAS 36

Page | 10

Latest update: March 2020

 CAF 5 – IAS 36

ANSWER 01
.

Rs.
Fair value less Fair value 240,000
costs of disposal Less: costs of disposal (5,000)
235,000 Page | 11
.
.

Discount Present value

Year Cash flows (Rs. 000)
factor (Rs. 000)
1 150,000 (1.10)-1 136,364
Value in use
2 100,000 (1.10)-2 82,645
3 50,000 + 25,000 (1.10)-3 56,349
275,358
.

Recoverable
Higher of the above: Rs. 275,358
amount
Carrying amount > Recoverable amount
Impairment loss
Rs. 300,000 – Rs. 275,358 = Rs. 24,642
Debit Impairment loss 24,642
Journal entry
Credit Accumulated impairment 24,642

ANSWER 02
Part (a)
Carrying amount of the machine on 31 December Year 3 Rs
Cost 240,000
Accumulated depreciation (3 × (240,000 ÷ 20 years)) (36,000)
Carrying amount 204,000

Part (b)
Impairment loss at the beginning of Year 4 of Rs.104,000 (Rs.204,000 – Rs.100,000). This is
charged to profit or loss.

Part (c)
Depreciation charge in Year 4 of Rs.10,000 (= Rs.100,000 ÷ 10). The depreciation charge is
based on the recoverable amount of the asset.

ANSWER 03
Part (a)
Carrying amount Rs.
Cost 240,000
Accumulated depreciation at 1 January Year 3 (2 years × (240,000 ÷ 20)) (24,000)
Carrying amount 216,000
Valuation at 1 January Year 3 250,000
Revaluation surplus 34,000

Part (b)
When the asset is revalued on 1 January Year 3, depreciation is charged on the revalued
amount over its remaining expected useful life.

On 31 December Year 3 the machine was therefore stated at: Rs.

Valuation at 1 January (re-valued amount) 250,000
Accumulated depreciation in Year 3 (= Rs.250,000 ÷ 18)) (13,889)
Carrying amount 236,111

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 CAF 5 – IAS 36

Note: The depreciation charge of Rs.13,889 is made up of Rs.12,000 (being that part of the
charge that relates to the original historical cost) and Rs.1,889 being the incremental
depreciation. Rs.1,889 would be transferred from the revaluation surplus into retained
earnings.

Part (c)
Page | 12 On 1 January Year 4 the impairment review shows an impairment loss of Rs.136,111
(Rs.236,111 – Rs.100,000).

An impairment loss of Rs.32,111 (Rs.34,000 – Rs.1,889) will be taken to other

comprehensive income (reducing the revaluation surplus for the asset to zero).

The remaining impairment loss of Rs.104,000 (Rs.136,111 – Rs.34,000) is recognised in the

statement of profit or loss for Year 4.

Part (d)
Year 4 depreciation charge is Rs.10,000 (Rs.100,000 ÷ 10 years).

ANSWER 04
Impairment = Carrying amount Rs. 460,000 – recoverable amount 200,000 = Rs. 260,000

Of this Rs. 200,000 is debited to the revaluation reserve to reverse the previous upwards
revaluation (and recorded as other comprehensive income) and the remaining Rs. 60,000 is
charged to profit or loss.

Method 1
Dr. Accumulated depreciation Rs. 40,000
Cr. Property Rs. 40,000
Dr. Revaluation reserve (OCI) Rs. 200,000
Dr. Impairment loss (PL) Rs. 60,000
Cr. Property Rs.260,000

Method 2
Dr. Revaluation reserve (OCI) Rs. 200,000
Dr. Impairment loss (PL) Rs. 60,000
Cr. Accumulated impairment losses Rs.260,000

ANSWER 05
Aba Limited statement of profit or loss (extracts) – year to 31 March 2016
Rs. Rs.
Depreciation: head office
6 months to 1 October 2015 [(1,200/25 x6/12)] 24,000
6 months to 31 March 2016 [(1,350/22.5 (W1) x 6/12)] 30,000 54,000

Depreciation: training premises

6 months to 1 October 2016 [(900/25 x 6/12)] 18,000
6 months to 31 March 2016 [(600/10 x 6/12)] 30,000 48,000

Impairment loss (W2) 210,000

258,000

Latest update: March 2020

 CAF 5 – IAS 36

Statement of financial position (extracts) as at 31 March 2016

Rs. Rs.
Non-current assets
Land and buildings – head office (700 + 1,350 – 30) 2,020,000
– training premises (350 + 600 – 30) 920,000
2,940,000
Revaluation reserve Page | 13
Head office land (700 – 500) 200,000
Building (1,350 – 1,080 (W1)) 270,000
Training premises land (350 – 300) 50,000 520,000

Transfer to realised profit

(270/22.5 (W1) x6/12 on to depreciation of buildings) (6,000)
514,000
Note: above workings in brackets are in Rs.000
Workings
(W1) The date of the revaluation is two and a half years after acquisition. This means the
remaining life of the head office would be 22.5 years. The carrying value of the head office
building at the date of revaluation is Rs.1,080,000 i.e. its cost less two and a half years at
Rs.48,000 per annum (Rs.1,200,000 – Rs.120,000).

(W2) Impairment loss: the carrying value of training premises at date of revaluation is
Rs.810,000 i.e. its cost less two and a half years at Rs.36,000 per annum (Rs.900,000 –
Rs.90,000). It is revalued down to Rs.600,000 giving a loss of Rs.210,000. As the land and
the buildings are treated as separate assets the gain on the land cannot be used to offset
the loss on the buildings.

ANSWER 06
Impairment of plant
The plant had a carrying amount of Rs.240,000 on 1 October 2015. The accident that may
have caused impairment occurred on 1 April 2016 and an impairment test would be done at
this date. The depreciation on the plant from 1 October 2015 to 1 April 2016 would be
Rs.40,000 (640,000 x 121/2% x 6/12) giving a carrying amount of Rs.200,000 at the date of
impairment. An impairment test requires the plant’s carrying amount to be compared with its
recoverable amount. The recoverable amount of the plant is the higher of its value in use of
Rs.150,000 or its fair value less costs to sell. If Hussain Associates Ltd trades in the plant it
would receive Rs.180,000 by way of a part exchange, but this is conditional on buying new
plant which Hussain Associates Ltd is reluctant to do. A more realistic amount of the fair
value of the plant is its current disposal value of only Rs.20,000. Thus the recoverable
amount would be its value in use of Rs.150,000 giving an impairment loss of Rs.50,000
(Rs.200,000 – Rs.150,000).

The remaining effect on income would be that a depreciation charge for the last six months
of the year would be required. As the damage has reduced the remaining life to only two
years (from the date of the impairment) the remaining depreciation would be Rs.37,500
(Rs.150,000/ 2 years x 6/12).Thus extracts from the financial statements for the year ended
30 September 2016 would be:

Statement of financial position

Non-current assets Rs.
Plant (150,000 – 37,500) 112,500
Statement of profit or loss
Plant depreciation (40,000 + 37,500) 77,500
Plant impairment loss 50,000

© kashifadeel.com
 CAF 5 – IAS 36

ANSWER 07
Thus, the extracts of profit and loss account and statement of financial position for the year
ended 30 June 2017 would be:
For the year ended 30 June 2017 Rs. in million
Amount to be recognised in SOFP
Page | 14 Machines (170+300+65+55) 590
Revaluation surplus (W-1) 93
Amount to be recognised in SOPL
Depreciation (W-1) 63
Impairment (W-1) 20

W1: Calculation A B C D Total

-------------------------- Rs. in million --------------------------
Cost of machine 200 230 90 60 580
Depreciation for the year (20) (23) (15) (5) (63)
(200÷10) (230÷10) (90÷6) (60÷12)
Cost less depreciation 180 207 75 55 517
Active market value No active
170 300 65
market
Impairment (10) - (10) (20)
Revaluation surplus - 93 - - 93

ANSWER 08
The detailed calculation is as under:
Carrying value of asset = Rs.300 million – [5 x (300 – 60) / 15 years]
= Rs.220 million

Fair value = Net operating income / return rate (since no active market)
= Rs.30 m / 15% =200 million
Fair value less costs to sell = Rs.200 million – 10 million (5%)=190 million

Value in use = PV of net cash flows discounted at 10% for 10 years

= (Rs.40 m x 0.4 + Rs.20 m x 0.6) x [1- (1.10)-10]/ 10%]
= Rs.28 m x 6.145
= Rs.172 m

Recoverable amount = Rs.190 million (Higher)

Impairment loss = Rs.30 million (i.e. Rs. 220 million – Rs. 190 million)

ANSWER 09
Value in use = PV of future net cash flows (Rs.214.6 million)
Fair value less costs of disposal = Rs.200 million
Carrying amount = Rs.217 million [248 m – (248 m x 12·5%)]
Impairment loss = Carrying amount – Recoverable amount
= Rs.217 million – Rs.214.6 million
= Rs.2.4 million

Latest update: March 2020

 CAF 5 – IAS 36

ANSWER 10
Cash flows 2021 2022 2023
--------------- Amount in Rs. --------------
Revenue 960,000 880,000 700,000
Costs (240,000) (220,000) (290,000)
Net Cash Inflow 720,000 660,000 410,000 Page | 15
Discount factor 0.909 0.826 0.751
Present Value 654,545 545,457 308,037

Present value of residual Value (50,000 x 0.751) = 37,566

Value in use = 654,545 + 545,457 + 308,037 + 37,566
= Rs.1,545,605
Fair value less cost to sell = Rs.1,400,000 – 2% of Rs.1.4 million
= Rs.1,372,000
Recoverable amount = Rs. 1,545,605
Carrying value = Rs.1,800,000
Impairment loss = Rs.254,395

ANSWER 11
Rs. in million
Carrying value 610
Recoverable amount
Value in use w1 537
Fair value less costs to sell w2 515
Higher 537
Impairment loss 73
W1 – Value in Use 2019 2020 2021
Description Rs. 000
Inflows from sale of product 250
Operational cost (25)
Maintenance cost (15)
Cash flows from use (yearly decreased by 15%) 210 178.5 151.73
Cash flows from ultimate disposal 100
210 178.5 251.73
Discount factor @9% 0.9174 0.8416 0.7720
192.6 150.2 194.38
Total 537
Note: Amounts ignored
Depreciation (Non-cash)
Accrued expenses (not future cash flows)
Cost of increasing capacity (not existing condition)
Inflows (net) from the upgrade (not existing condition)
Interest on lease (financing)
Tax payment on profits (taxation)
W2 – Fair value less cost to sell Rs. m
Fair value 570
Cost to sell
Cost of delivery to customer (45)
Legal cost involved in sale agreement (10)
Cost to re-organise (not relevant to disposal) 0
515

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 CAF 5 – IAS 36

Page | 16

Latest update: March 2020

 CAF 5 – IAS 36

ICAP OBJECTIVE BASED QUESTIONS

01. If the fair value less costs to sell cannot be determined

(a) The asset is not impaired.

(b) The recoverable amount is the value-in-use.

Page | 17
(c) The net realizable value is used.

(d) The carrying value of the asset remains the same.

02. Which TWO of the following could be an indication that an asset may be impaired according to
IAS 36 Impairment of Assets?

(a) Decrease in market interest rates

(b) Increase in market values for the asset

(c) Damage caused to the asset

(d) Management intention to reorganise the business

03. IAS 36 Impairment of Assets contains a number of examples of internal and external events
which may indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator of the
potential impairment of an asset (or group of assets)?

(a) An unexpected fall in the market value of one or more assets

(b) Adverse changes in the economic performance of one or more assets

(c) A significant change in the technological environment in which an asset is employed

making its software effectively obsolete

(d) The carrying amount of an entity’s net assets being below the entity’s market
capitalisation

04. A fire at the factory on 1 October 2016 damaged the machine, leaving it with a lower operating
capacity. The accountant considers that entity will need to recognise an impairment loss in
relation to this damage. The accountant has ascertained the following information at 1 October
2016:
The carrying amount of the machine is Rs.60,750.
An equivalent new machine would cost Rs.90,000.
The machine could be sold in its current condition for a gross amount of Rs.45,000.
Dismantling costs would amount to Rs.2,000.
 In its current condition, the machine could operate for three more years which gives it a
value in use figure of Rs.38,685.
What is the total impairment loss associated with the above machine at 1 October 2016?

(a) Rs.nil

(b) Rs.17,750

(c) Rs.22,065

(d) Rs.15,750

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 CAF 5 – IAS 36

05. Which of the following is NOT an indicator of impairment?

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

adverse impact on its future use.

(b) An increase in interest rates which increases the discount rate an entity uses.
Page | 18 (c) The carrying amount of an entity’s net assets is higher than the entity’s number of shares
in issue multiplied by its share price.

(d) The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount.

06. Cost of disposal are

(a) Incremental costs, directly attributable to the disposal of an asset, excluding finance
costs and income tax expense

(b) Incremental costs, directly attributable to the disposal of an asset, plus finance costs, but
excluding income tax expense

(c) Incremental costs, directly attributable to the disposal of an asset, plus finance costs and
income tax expense

(d) Incremental costs, directly attributable to the disposal of an asset, plus tax expense, but
excluding finance costs

07. An asset is impaired if:

(a) Its carrying amount equals the amount to be recovered through use (or sale) of the asset

(b) Its carrying amount exceeds the amount to be recovered through use (or sale) of the
asset

(c) The amount to be recovered through use (or sale) of the asset exceeds its carrying
amount

(d) If it has been damaged

08. Value in use is:

(a) The market value

(b) The discounted present value of future cash flows arising from use of the asset and from
its disposal.

(c) The higher of an asset’s fair value less cost to sell and its market value.

(d) The amount at which an asset is recognized in the statement of financial position.

09. IAS 36 applied to which of the following assets:

(a) Inventories.

(b) Financial assets including property plant and equipment and intangible assets

Latest update: March 2020

 CAF 5 – IAS 36

(c) Assets held for sale.

(d) Property, plant, and equipment and intangible assets

10. In accordance with IAS 36 Impairment of Assets which of the following statements are true?
Page | 19
1. An impairment review must be carried out annually on all intangible assets.
2. If the fair value less costs to sell of an asset exceed the carrying amount there is no
need to calculate a value in use.
3. Impairment is charged to the statement of profit or loss unless it reverses a gain that
has been recognised in equity in which case it is offset against the revaluation surplus.
(a) All three

(b) 1 and 2 only

(c) 1 and 3 only

(d) 2 & 3 only

11. What is the recoverable amount of an asset?

(a) Its current market value less costs of disposal

(b) The lower of carrying amount and value in use

(c) The higher of fair value less costs of disposal and value in use

(d) The higher of carrying amount and market value

12. A machine has a carrying amount of Rs. 850,000 at the year end of 31 March 2019. Its market
value is Rs. 780,000 and costs of disposal are estimated at Rs. 25,000. A new machine would
cost Rs. 1,500,000. The company which owns the machine expects it to produce net cash flows
of Rs. 300,000 per annum for the next three years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31
March 2019?

(a) Rs. 76,870

(b) Rs. 95,000

(c) Rs. 1,66,700

(d) Rs. 220,000

13. IAS 36 Impairment of Assets suggests how indications of impairment might be recognised.
Which TWO of the following would be external indicators that one or more of an entity's assets
may be impaired?

(a) An unusually significant fall in the market value of one or more assets

(b) Evidence of obsolescence of one or more assets

(c) A decline in the economic performance of one or more assets

(d) An increase in market interest rates used to calculate value in use of the assets

© kashifadeel.com
 CAF 5 – IAS 36

14. The following information relates to an item of plant.

 Its carrying amount in the statement of the financial position is Rs. 3 million.
 The company has received an offer of Rs. 2.7 million from a company in Karachi
interested in buying the plant.
 The present value of the estimated cash flows from continued use of the plant is Rs. 2.6
Page | 20 million.
 The estimated cost of transport the plant to Karachi is Rs. 50,000.
What is the amount of the impairment loss that should be recognised on the plant?

(a) Rs. 300,000

(b) Rs. 400,000

(c) Rs. 350,000

(d) Rs. 250,000

15. When calculating the estimates of the future cash flows, which of the following cash flows should
not be included?

(a) Cash flows from disposal.

(b) Income tax payments.

(c) Cash flows from the sale of assets produced by the asset.

(d) Cash outflows on the maintenance of the asset.

16. The following information relates to three assets held by a company:

Asset A Asset B Asset C
Rs. m Rs. m Rs. m
Carrying amount 200 100 80
Value in use 160 120 70
Fair value less cost to sell 180 130 60
What is the total impairment loss?

Rs. ___________

17. The following information relates to four assets held by the company:

A B C D
Rs.m Rs.m Rs.m Rs.m
Carrying amount 240 60 80 140
Value in use 160 140 160 40
Fair value less costs to sell 180 80 140 60
What is the total impairment loss?

Rs. ___________

Latest update: March 2020

 CAF 5 – IAS 36

18. A vehicle was involved in an accident exactly halfway through the year. The vehicle cost Rs. 10
million and had a remaining life of 10 years at the start of the year. Following the accident, the
expected present value of cash flows associated with the vehicle was Rs. 3.4 million and the fair
value less costs to sell was Rs. 6.5 million.
What is the recoverable amount of the vehicle following the accident?

Rs. ___________ Page | 21

19. Radium Limited (RL) acquired a non-current asset on 1 October 2019 at a cost of Rs. 100
million which had a useful life of ten years and a nil residual value. The asset had been correctly
depreciated up to 30 September 2024.
At that date the asset was damaged and an impairment review was performed. On 30
September 2024, the fair value of the asset less costs to sell was Rs. 30 million and the
expected future cash flows were Rs. 8.5 million per annum for the next five years.
The current cost of capital is 10% and a five year annuity of Rs. 1 per annum at 10% would have
a present value of Rs. 3.79.
What amount would be charged to profit or loss for the impairment of this asset for the year
ended 30 September 2024?

Rs. ___________

20. Metal Limited (ML) owns an item of plant which has a carrying amount of Rs. 248 million as at 1
April 2013. It is being depreciated at 12.5% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in
sales. ML has estimated that the plant will be retired from use on 31 March 2017.
The estimated net cash flows from the use of the plant and their present values are:
Net cash flows Present
values
Rs.000 Rs.000
Year to 31 March 2015 120,000 109,200
Year to 31 March 2016 80,000 66,400
Year to 31 March 2017 52,000 39,000
252,000 214,600
On 1 April 2014, Metric had an offer from a rival to purchase the plant for Rs. 200 million
At what value should the plant appear in Metric’s statement of financial position as at 31 March
2014?

Rs. ___________

21. Which of the following is covered by IAS 36 – Impairment?

(a) Non-current assets held for sale

(b) Investment property carried at cost

(c) Investment property carried at fair value

(d) Inventories

© kashifadeel.com
 CAF 5 – IAS 36

22. Which of the following is not covered by IAS 36 – Impairment?

(a) Goodwill

(b) Investment property carried at cost

(c) Investment property carried at fair value

Page | 22
(d) Intangible assets

23. When should an impairment loss be recognised?

(a) Immediately

(b) Over a number of accounting periods

(c) At management’s discretion

(d) When requested by the entity’s auditors

24. Value in use is?

(a) The undiscounted present value of future cash flows expected to arise from continuing
use of asset, and from its disposal at the end of its useful life.

(b) The undiscounted future value of present cash flows expected to arise from continuing
use of asset, and from its disposal at the end of its useful life.

(c) The discounted present value of future cash flows expected to arise from continuing use
of asset, and from its disposal at the end of its useful life.

(d) The discounted present value of historical cash flows expected to arise from continuing
use of asset, and from its disposal at the end of its useful life.

25. Which of the following element is not considered while computing value in use?

(a) expectations about possible variations in the amount or timing of those future cash flows

(b) the time value of money, represented by the current market risk-free rate of interest

(c) the price for bearing the uncertainty inherent in the asset

(d) estimated future restructuring cost

26. In measuring value in use, the discount rate used for discounting the cash flows should be the?

(a) Pre-tax rate that reflects the market assessment of time value of money and risks
specific to the asset

(b) Pre-tax rate that reflects the market assessment of time value of money and risks
specific to the entity’s competitors

(c) Post-tax rate that reflects the entity’s assessment of time value of money and risks
specific to the asset

(d) Pre-tax rate that reflects the entity’s assessment of time value of money and risks
specific to the asset

Latest update: March 2020

 CAF 5 – IAS 36

27. When the recoverable amount of an asset is less than its carrying value in the Statement of
Financial Position, the asset is?

(a) in a revaluation deficit

(b) Flawed

(c) In negative equity

Page | 23

(d) Impaired

28. Which of the following is an internal indication of impairment?

(a) Decline in market value

(b) Worse economic performance than expected

(c) Increase in market interest rates

(d) Technological obsolescence

29. Which of the following is an external indication of impairment?

(a) Physical damage

(b) Worse economic performance than expected

(c) Increase in market interest rates

(d) Asset is part of a restructuring program

30. Under IAS 36, what is the recoverable amount of an asset?

(a) The lower of its cost and net realisable value

(b) The higher of fair value less costs of disposal and value in use

(c) The lower of net present value and cost

(d) The higher of net present value and cost

31. Which of the following is not permitted as a cost to sell under IAS 36?

(a) Cost to dismantle machine

(b) Auctioneers fees

(c) Standard wages for employees

(d) Transport costs for machine

© kashifadeel.com
 CAF 5 – IAS 36

32. If the fair value less costs to sell for an asset cannot be determined, then recoverable amount is
its?

(a) Market value

(b) Fair value

Page | 24 (c) Value in use

(d) Replacement value

33. Which of the following is the best evidence of an asset's fair value less costs to sell?

(a) The carrying value of the asset

(b) The price in a binding sale agreement

(c) The disposal value of the asset in an arm`s length transaction

(d) An asset that is traded in an active market

34. When calculating the estimates of future cash flows which of the following cash flows should not
be included?

(a) Cash out flows on the maintenance of the asset

(b) Cash flows from disposal

(c) Cash flows from the sale of inventory produced by the asset

(d) Benefits from future restructuring

35. Under IAS 36 Impairment of Assets, if the fair value less costs to sell of an asset cannot be
determined then: [A19]
(a) the asset is not impaired
(b) the recoverable amount is the value in use
(c) the net realizable value is used
(d) the carrying value of the asset remains the same (01)

36. Which TWO of the following would be external indicators that one or more of an entity's assets
may be impaired? [A19]
(a) An unusually significant fall in the market value of one or more assets
(b) Evidence of obsolescence of one or more assets
(c) A decline in the economic performance of one or more assets
(d) An increase in market interest rates used to calculate value in use of the assets (01)

37. Which of the following future cash flows should NOT be included in the calculation of value in
use of an asset? [A19]
(a) Cash flows from disposal
(b) Income tax payments
(c) Cash flows from the sale of inventory produced by the asset
(d) Cash outflows on the maintenance of the asset (01)

Latest update: March 2020

 CAF 5 – IAS 36

OBJECTIVE BASED ANSWERS

01. (b) The recoverable amount is higher of value in use and fair value less cost to
sell and in case fair value cannot be measured reliably, the recoverable
amount is value in use.

02. (c) & (d) A decrease in interest rates would reduce the discount applied to future Page | 25
cash flows in calculating the value in use, therefore increasing the value in
use. An increase in market values will lead to the asset value increasing
rather than being impaired.

03. (d) The entity’s market capitalisation would not be reflected within the values
on the statement of financial position.

04. (b) Value in use of Rs.38,685 is lower than fair value less costs to sell of
Rs.43,000, so recoverable amount is Rs.43,000 and impairment is
Rs.60,750 – Rs.43,000 = Rs.17,750.

05. (d) Although the estimated net realisable value is lower than it was (due to fire
damage), the entity will still make a profit on the inventory and thus it is not
an indicator of impairment.

06. (a) Tax and finance costs are not cost of disposal.

07. (b) Asset may not be impaired even after damage. Impairment loss is excess of
carrying amount over recoverable amount.

08. (b) This is definition of value in use

09. (d) (a), (b) and (c) are excluded from scope of IAS 36 as the prudence
mechanism is already incorporated in the relevant standards of these items.

10. (d) Item 1 is untrue. An annual impairment review is only required for intangible
assets with an indefinite life.

11. (c) The higher of fair value less costs of disposal and value in use.

12. (a)

Fair value – costs of disposal

(780,000 – 25,000) Rs. 75,500

Value in use:

300,000 × 1 / 1.08 277,780

300,000 × 1 / 1.082 257,200

300,000 × 1 / 1.083 238,150

Rs. 773,130

Recoverable amount is Rs. 773,130 and carrying amount is Rs. 850,000, so

impairment is Rs. 76,870.

© kashifadeel.com
 CAF 5 – IAS 36

13. (a & d) The other options are internal indicators of impairment.

14. (c)
Rs.

Fair value less costs of disposal (2.7m – 50,000) 2,650,000

Page | 26
Value in use 2,600,000

Recoverable amount is therefore: 2,650,000

Impairment loss (balancing figure) 350,000

Carrying amount 3,000,000

15. (b) Cash flows related to taxations are ignored while calculating value in use.

16. Rs. 30 million 20 + Nil + 10 = Rs. 30 million

17. Rs. 140 60 + Nil + Nil +80 = Rs. 140 million

million

18. Rs. 6.5 million The recoverable amount of an asset is the higher of its value in use (being
the present value of future cash flows) and fair value less costs to sell.
Therefore, the recoverable amount is Rs. 6.5 million.

19. Rs. 17.785

million Rs. m

Cost 1 October 2019 100

Depreciation (100 /10 x 5 years) (50)

Carrying amount 50

The recoverable amount is the higher of fair value less costs to sell (Rs. 30
million) and the value in use (Rs. 8.,5 x 3.79 = Rs. 32.215). Recoverable
amount is therefore Rs. 32.215.
Rs. m
Carrying amount 50
Recoverable amount (32.215)
Impairment to statement of profit or loss 17.785

20. Rs. Is the lower of its carrying amount (Rs. 217 million) and recoverable amount
214,600,000 (Rs. 214.6 million) at 31 March 2015.
Recoverable amount is the higher of value in use (Rs. 214.6 million) and
fair value less costs to (Rs. 200 million).
Carrying amount = Rs. 217 million (248 million – (248 million × 12.5%))
Value in use is based on present values = Rs. 214.6 million

21. (b) Investment property carried at cost

22. (c) Investment property carried at fair value

Latest update: March 2020

 CAF 5 – IAS 36

23. (a) Immediately

24. (c) (a) & (b) mentioned undiscounted cash flows. (d) mentioned historical cash
flows.

25. (d) Future restructuring costs

Page | 27
26. (a) Pre-tax rate that reflects market assessment of time value of money and
risks specific to the asset

27. (d) Impaired

28. (b) Worse economic performance than expected

29. (c) Increase in market interest rates

30. (b) Higher of fair value less cost to sell and value in use

31. (c) Standard wages are not an incremental cost of disposal

32. (c) Value in use

33. (b) The price in binding sale agreement

34. (d) Benefits from future restructuring

35. (b) The recoverable amount is the value in use.

36. (a) & (d) (b) and (c) are internal indicators.

37. (b) Income tax payments

© kashifadeel.com
 CAF 5 – Accounting from Incomplete Records

Accounting from
- Incomplete records 04
Page | 1
ACCOUNTING ISSUES
Problems of incomplete records may arise with:
 Small businesses where proper accounting records are not kept.
Situations
 Loss of records because of some kind of disaster, for example by fire.
 A dishonest employee has stolen cash or inventory and took records.
Whatever the cause of the problem the accountant’s task involves piecing
What to
together information that is available (few invoices and bank statement etc.)
do?
in order to produce a set of financial statements or to calculate missing figures.

T ACCOUNTS FOR MISSING FIGURES

Prepare “Receivable Account” unless this can be calculated using
Credit sales
markup/margin equation.
Credit Prepare “Payables Account” unless this can be calculated using
purchases markup/margin and COS equations.

EXPENSES
Date Particulars Rs. Date Particulars Rs.
Bal. b/d (prepaid) XX Bal. b/d (payable) XX
Cash paid XX Expense β XX
Bal. c/d (payable) XX Bal. c/d (prepaid) XX
Accrual and XX XX
prepayment INCOME
Date Particulars Rs. Date Particulars Rs.
Bal. b/d (receivable) XX Bal. b/d (advance) XX
Income β XX Cash received XX
Bal. c/d (advance) XX Bal. c/d (receivable) XX
XX XX
.

Cash book If question indicates payment of some expense or drawings (or some
or account receipts), we may calculate it by making cash and/or bank account.

© kashifadeel.com
 CAF 5 – Accounting from Incomplete Records

EQUATIONS
Accounting This is often used for calculating opening equity (statement of affairs).
equation Equity = Assets – Liabilities
Business
Profit = Closing equity – Opening Equity + Drawings – Capital Invested
Page | 2 equation
COS
COS = Opening inventory + Purchases – Closing inventory
equation
Profit Gross Profit = Revenue – Cost of Sales
equations Net Profit = Gross Profit – Operating expenses
Markup 100 100 +
= × = ×
equations 100 + 100
Margin 100 − 100
= × = ×
equation 100 100 −
General Total sales = Cash sales + credit sales
equations Total purchases =Cash purchases + credit purchases

SYLLABUS

Reference Content/Learning outcome

B2 Preparation of accounts from incomplete records

Understand situations that might necessitate the preparation of accounts from
LO2.2.1 incomplete records (stock or assets destroyed, cash misappropriation or lost,
accounting record, destroyed etc.)
Understand and apply the following techniques used in incomplete record
situations:
LO2.2.2  Use of the accounting equation
 Use of opening and closing balances of ledger accounts
 Use of a cash and / or bank summary
 Use of markup on cost and gross and net profit percentage.
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
20 20 19 - 20 - 15 20 13 - 18 08

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

PRACTICE Q&A
Sr.# Description Marks Reference
SHORT QUESTIONS
1C Accounting equation and business equation 04 CI
2H Accounting equation and listing assets and liabilities 04 CI Page | 3
3C Sales from receivable account 06 CI & KA
4H Purchases from payable account 03 CI
5H Drawings from cash and bank 04 CI
6H Cost structures 08 CI
7C Multiple Cost Structures 08 CI
8C Inventory lost in fire using margin and COS equations 05 CI
9C Inventory, Sales and Bank 11 QB
10H Missing figures using cost structure 09 QB
11C Irum - RA, PA, Cash, Cost Structure and COS equation 10 QB
COMPLETE FINANCIAL STATEMENTS – SIMPLE
12H Tahir 20 QB
13H Ijaz – Medium level 20 QB
14H Rashid – Cash, RA, Cost structure, PA, accruals,
20 QB
prepayments
15H Mudassar 20 QB
16H Aslam 20 QB
17C Umar – including opening capital 20 QB
18C Babar – acquisition, abnormal loss, scattered information
20 PE S15
and cash account
COMPLETE FINANCIAL STATEMENTS – COMPLEX
19C Alpha Traders – RA, PA, Cash and Credit/Cash sales 20 PE S18
20H Yasin – Cash, RA, PA, Drawings, prepayments and un-
20 QB
presented cheques
21H Danish – opening capital, PA, RA, Cash, cost structure,
21 QB
cost equation and doubtful debts
22C Ashfaq – work back purchases with purchase discount,
20 PE A14
cost structure, RA and Cash
23C Friday Traders – Complicated cost structure 18 PE A19
24H Mansoor – Financial statements 24 QB
25H Asif – Financial statements 25 QB
26C Nezam FC Traders – Financial statements 20 PE A18 + KA
MISAPPROPRIATION, SUSPECTED FRAUD, CASH SHORTAGE & DEFALCATION
27C Munira: Multiple structure – calculating misappropriations 19 QB
28H Adnan – cash shortage 18 QB
29C Razi – cash shortage 19 PE A15
30C Rahil – Defalcation 20 PE A16
31H Saleem (S Mart) – Suspected fraud and SPL 15 PE A17

© kashifadeel.com
 CAF 5 – Accounting from Incomplete Records

QUESTION 01
The accountant for a sole trader has established that the total assets of the business at 31
December Year 4 were Rs. 376,000 and total liabilities were Rs. 108,000.

Checking the previous year’s financial statements, he was able to establish that at 31
December Year 3 total assets were Rs. 314,000 and total liabilities were Rs. 87,000.
Page | 4
During Year 4 the owner has taken out drawings of Rs. 55,000.

In December Year 4 the owner had been obliged to input additional capital of Rs. 25,000.

Required:
What was the profit of the business for the year to 31 December Year 4? (04)

QUESTION 02
A sole trader does not keep any accounting records, and you have been asked to prepare a
statement of comprehensive income and statement of financial position for the financial year
just ended. To do this, you need to establish the opening capital of the business at the
beginning of the year.
You obtain the following information about assets and liabilities at the beginning of the year:
Rs.
Motor van (balance sheet valuation) 1,600
Bank overdraft 560
Cash in hand 50
Receivables 850
Trade payables 370
Payables for other expenses 90
Inventory 410

Required
Calculate the capital of the business as at the beginning of the year. (04)

QUESTION 03
Part (a)
Calculate sales for the period from the following information. (03)
Rs.
Receivables at the start of the period 2,400
Receivables at the end of the period 1,800
Cash banked during the period 12,500
Bad debt written off 200

Part (b)
Calculate sales for the period from the following information. (03)
Rs.
Receivables at the start of the period 2,400
Receivables at the end of the period 1,800
Cash banked during the period 12,500
Bad debt to be written off 200

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 04
Calculate purchases for the period from the following information. (03)
Rs.
Payables at the start of the period 1,400
Payables at the end of the period 1,900
Cash paid to suppliers during the period 11,300
Page | 5
QUESTION 05
Calculate drawings for the period from the following information. (04)
Rs.
Cash in hand at the beginning of the year 100
Bank balance at the beginning of the year 2,400
Cash in hand at the end of the year 150
Bank balance at the end of the year 5,200
Receipts 51,700
Payments to employees 3,400
Payments to suppliers 38,200

QUESTION 06
Complete the following table. (08)
Rs. Rs. Rs. Rs.
Opening inventory 1,000 2,000 1,000
Closing inventory (1,200) (1,500) (500) (2,000)
Purchases 5,000 8,700 15,000
Sales 8,000 15,000 10,000 20,000
Cost of sales
Gross profit 5,000
GP as a % of sales 20% 25%
GP as a % of cost 33.3%

QUESTION 07
A company has sales of Rs. 1,000. The company sells three types of good.

60% of sales are of type A which is sold at a mark-up of 20%. Type B goods are sold at a
margin of 30%. The cost of type B sold in the year was Rs. 154. Total gross profit for the
year was Rs. 184.

Required
Prepare sales, cost of sales and gross profit workings for each product and in total for the
business and show the margin for type C goods. (08)

© kashifadeel.com
 CAF 5 – Accounting from Incomplete Records

QUESTION 08
A fire on 31 March destroyed some of the inventory of a company, and its inventory records
were also lost. The following information is available.

The company makes a standard gross profit of 30% on its sales.

Rs.
Page | 6
Inventory at 1 March 127,000
Purchases for March 253,000
Sales for March 351,000
Inventory in good condition at 31 March 76,000

Required
What was the cost of the inventory lost in the fire? (05)

QUESTION 09
(a) A business makes all of its sales at a mark-up of 25%. During the year sales totalled
Rs.98,000 and purchases were Rs.71,000. The inventory at the start of the year was
valued at Rs.10,200.

What was the value of the closing inventory at the end of the year? (3)

(b) A business has the following assets and liabilities at the start and end of March.
1 March 31 March
Rs. Rs.
Trade receivables 6,100 7,400
Trade payables 3,900 3,500

The summarised bank statements for the year showed the following figures:
 Bankings for the month were Rs.78,500
 Payments to suppliers for the month were Rs.49,700
 The owner banks her takings from the till each month but before doing so in
March she took Rs. 5,000 for her own use.

What are the sales for the year? (4)

(c) An accountant has prepared the following list of the assets and liabilities of a
business, but has forgotten to enter the cash balance.
Rs.
Trade payables 4,900
Inventory 9,300
Non-current assets 98,900
Capital 97,200
Bank loan 15,700
Receivables 16,800
Bank ?

What is the missing figure for 'Bank'? (4)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 10
(a) A greengrocer made sales during the month of Rs.49,200. Opening inventory
amounted to Rs.3,784 and month-end inventory was Rs.5,516. During the month he
purchased for cash goods which cost Rs.38,632.
Required:
Determine the gross profit and calculate the gross profit percentage as a percentage Page | 7
of sales value. (3)
(b) A rival has made sales of Rs.50,100 at a fixed mark-up of 25%. Closing inventory
was valued at Rs.5,438 and he purchased goods during the month amounting to
Rs.38,326.
Required:
Determine the value of the opening inventory. (3)
(c) A local store makes sales at a fixed gross profit of 10% on sales value. Sales during
the month amounted to Rs.186,460; closing inventory was Rs.16,800 and represents
an increase of 25% over the value of the opening inventory.
Required:
Determine the cost of purchases during the month. (3)

QUESTION 11
Irum is a sole trader. She does not keep a full set of accounting records but does keep some
records of transactions and documents. She has asked you to prepare her accounts for the
year ended 31 December 2015. You have been given a list of the assets and liabilities of the
business at the start and end of the year.

Assets and liabilities At 1 Jan 2015 At 31 Dec 2015

Rs.000 Rs.000
Trade receivables 5,500 6,100
Trade payables 2,800 3,500
Inventory 10,400 ?

Irum has no idea what her inventory value was at 31 December as that she did not count or
value her inventory at the year end.
She has also been given you a summary of her bank statements for the year.
Summary of bank statements
Receipts Rs.000 Payments Rs.000
1 Jan Balance b/d 1,620 To suppliers 42,800
Bankings 65,400 For expenses 9,300
Living expenses 10,400
31 Dec Balance c/d 4,520
You have also been able to gather the following information from Irum:
(i) Irum banks her takings from the till each week but before doing so pays Rs.50,000 to
her employees and takes Rs.30,000 herself. The business operates for 50 weeks
each year.
(ii) The till always has a cash float of Rs.100,000.
(iii) The sales of the business are both cash and credit sales and are all made at a mark-
up of 40%.

Required:
(a) Calculate sales for the year. (05)
(b) Calculate the value of the closing inventory at 31 December 2015. (05)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 12
Tahir retired from his employment abroad and returned to this country, where he purchased
a small kiosk.

He took over the business on 1 July 2014, acquiring the existing inventory at a valuation of
Rs.1,142,000. The rest of the purchase price was apportioned as to Rs.1,500,000 for fixtures
Page | 8
and fittings and the balance for goodwill.

The following day he acquired a second-hand computer and accounts package at a price of
Rs.80,000. Unfortunately, Tahir made an error when printing his year-end accounts causing
him to lose all data except for a printed summary listing of payments from the till. Other than
this, the only records available were his bank statements and a number of vouchers. Surplus
cash was banked during the year.

A summary of his bank account for the year ended 30 June 2015 shows the following.
Rs.000 Rs.000
Cash introduced 5,000 Purchase of business 3,192
Bankings from shop 16,427 Purchase of accounts computer 80
Loan from mother (long-term) Rent (15 months to 30
1,000 500
(interest at 5% pa) September 2015)
Rates (9 months to 31 March
84
2015)
Electricity 92
Purchases for resale 14,700
Private cheques 1,122
Balance 30 June 2015 2,657
22,427 22,427

The computer print-out was as follows.

Rs.000
Cash purchases for resale 1,606
Staff wages 742
Sundry shop expenses 156
Cash drawings 520

On 30 June 2015 inventory, measured at cost, amounted to Rs.1,542,000, amounts due

from customers Rs.74,000, and cash in hand amounted to Rs.54,000.

Depreciation is to be recognised on fixtures and fittings and computers at a rate of 10%.

Accounts outstanding on 30 June 2015 were purchases of Rs.470,000 and rates of

Rs.120,000 for the year ended 31 March 2016.

Required:
Prepare Tahir’s statement of comprehensive income for the year ended 30 June 2015 and a
statement of financial position at that date. (20)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 13
Ijaz is in business but does not keep proper books of account. In order to prepare his income
and expenditure account for the year ended 31 December 2015 you are given the following
information.
1 Jan 2015 31 Dec 2015
Rs.000 Rs.000
Inventory on hand 1,310 1,623 Page | 9
Receivables 268 412
Payables for goods 712 914
Payables for expenses 116 103

In addition you are able to prepare the following summary of his cash and bank transactions
for the year.
Cash account
Rs.000 Rs.000
Balance 1 January 62 Payments into bank 3,050
Shop takings 4,317 Purchases 316
Cheques cashed 200 Expenses 584
Drawings 600
Balance 31 December 29
4,579 4,579

Bank account
Rs.000 Rs.000
Balance 1 January 840 Cash withdrawn 200
Cheques from customers 1,416 Purchases 2,715
Cash paid in 3,050 Expenses 519
Drawings 400
Delivery van (purchased 1 900
September)
Balance 31 December 572
5,306 5,306

In addition Ijaz says that he had taken goods for personal consumption and estimates that
those goods cost Rs.100,000.

In considering accounts receivable Ijaz suggests that a provision is to be made of 5% of

amounts due after writing off a specific bad debt of Rs.30,000.

Depreciation on the delivery van is to be recognised at 20% per annum.

Required:
Prepare the statement of comprehensive income and a statement of financial position at 31
December 2015. (20)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 14
Rashid is coming to the end of his first year’s trading. He has not kept proper books and
records.

The following information relates to the year ended 30 September 2015.

(1) He set up in business when he won Rs. 200,000,000 on football pools. He invested
Page | 10
the money in the bank and set up in business as a retailer of clothing.

(2) He banks his takings periodically after payment of the following amounts.
Wages Rs.75,000 per week
Cleaning Rs.10,000 per week
Sundries Rs.15,000 per week
Personal expenses Rs.25,000 per week
Cash in hand at the end of the year was Rs.250,000.

(3) A summary of his bank statements reveals the following.

Rs.000 Rs.000
Capital introduced 200,000 Purchase of leasehold premises 150,000
Bankings 125,750 Purchase of vans 6,000
Telephone 896
Rent and rates 1,682
Payments to suppliers 86,232
Wages 15,282
Repairs 3,637
Personal expenses 323
Balance c/d 61,698
325,750 325,750

An un-presented cheque of Rs.385,000 for repairs was still outstanding.

(4) Other assets and liabilities at 30 September 2015 were as follows.

Rs.000
Inventory 8,400
Trade receivables 10,350
Trade payables 29,957
Accrued expense – telephone 125
Prepaid expense– rent and rates 258

(5) Depreciation is to be recognised on the van at 25% of its cost. The lease on the
premises is for 50 years.
(6) Rashid estimates that his gross profit percentage is 25% on sale price, and also
informs you that he does not keep a record of the goods he took for his own use.

Required:
Prepare a statement of comprehensive income for the year ended 30 September 2015 and a
statement of financial position at that date. (20)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 15
Mudassar had retired from the army some years ago to run a grocery business in the
country. On 1 October 2015 his assistant failed to report for work and it was later discovered
that he had disappeared taking the contents of the cash till with him.

An analysis of Mudassar’s bank statements for the year ended 31 December 2015 revealed
the following: Page | 11
Rs.000 Rs.000
Balance b/f 280 Suppliers 13,600
Tax refund 1,000 Rent 800
Bankings 16,720 Rates 400
Insurance 200
Drawings 2,500
Bank charges 100
Balance c/f 400
18,000 18,000

A statement of affairs produced by Mudassar comprised the following.

31 December
2015 2014
Rs.000 Rs.000
Motor car (NBV) 3,200 3,600
Fixtures (NBV) 3,400 4,000
Inventory 1,200 900
Trade receivables 150 90
Rent prepaid 30 20
Cash Nil 380
Trade payable 120 110

A rough cash book kept by Mudassar showed the following.

Rs.000
Assistant’s wages 1,800
Sundry expenses 250
Cash purchases 300
Drawings 2,400
Cash received from customers 21,550

A footnote recorded that discounts received and discounts allowed were Rs.200,000 and
Rs.300,000 respectively.
The insurance company agreed to admit the claim for loss of cash upon production of a full
set of accounts.

Required:
Prepare a statement of comprehensive income for the year ended 31 December 2015 and a
statement of financial position at that date. (20)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 16
Aslam, who has been in business as a contractor since 1 January 2015, received a request
from the tax authorities for his first year’s accounts.

He had not kept proper records of his business transactions, but was able to supply the
following information.
Page | 12
(1) All cheques received for work done had been paid into the bank, whilst cash receipts
had been used for paying cash expenses.

(2) From bundles of receipts and a wages notebook some of the cash expenses for the
year appeared to have been as follows.
Rs.000
Wages and Social Security 3,346
Materials 1,400
Electricity 56
General expenses 14

(3) Drawings were estimated at Rs.18,000 per week, out of which Aslam had paid the
rent of his builder’s yard of Rs.2,000 per week. His own Social Security contributions
had been included in Wages and Social Security and totaled Rs.65,000 for the year.

(4) On 1 April he purchased a van for Rs.856,000. His mother lent him Rs.400,000 for
the deposit, and the balance was payable by twelve monthly instalments of
Rs.38,000 each commencing on 1 June. The loan from his mother had not been
repaid at the end of the year.

(5) A summary of his bank account showed the following.

Rs.000 Rs.000
Balance 1 January 2015 150 Materials 4,790
Bankings 9,204 Van expenses 342
General expenses 110
Cheques drawn for cash 3,100
Cement mixer 200
Van instalments 266
Private cheques 342
Balance 31 December 2015 204
9,354 9,354

(6) On 31 December 2015 inventory (materials) amounted to Rs.560,000, cash in hand

Rs.10,000, trade receivables Rs.1,200,000, trade payables for materials Rs.149,000,
and outstanding van expenses Rs.36,000. There was no work in progress on 31
December 2015.

(7) Depreciation of Rs.108,000 is to be recognised on the van and Rs.50,000 on the

cement mixer.

Required:
Prepare Aslam’s statement of comprehensive income for the year ended 31 December 2015
and a statement of financial position at that date. (20)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 17
Umar is a grocer who had not kept a full set of books. The following was a summary of his
bank statements for the year ended 31 December 2015.
Rs.000 Rs.000
Amounts credited by bank 35,170 Balance 1 January 2015 892
Payments for trade payables 30,500
Page | 13
Rent and rates 475
Fixtures 100
Lighting and heating 210
General expenses 800
Loan interest 120
Drawings 900
Customers’ cheques dishonoured 180
Balance 31 December 2015 993
35,170 35,170

Additional information
(1) Trading receipts consisted partly of cash and partly of cheques. During the year
Umar had paid out of his cash takings, wages amounting to Rs.2,950,000 and sundry
expenditure of Rs.140,000. He retained Rs.3,000 a week and maintained a balance
of Rs.20,000 in the till for change. The balance of his takings, together with cheques
amounting to Rs.250,000, which he had cashed out of his takings for the
convenience of certain friends, was paid into the bank.

(2) Cheques drawn payable to trade payables, but not presented at 1 January 2015,
amounted to Rs.280,000 and at 31 December 2015 to Rs.320,000.

(3) All dishonoured cheques were re-presented and honoured during the year.

(4) The loan interest was paid to Brough who had lent Umar Rs.4,000,000 some years
ago at a rate of interest of 3% per annum. The interest was duly paid halfyearly on 31
March and 30 September, and the loan was still outstanding at the end of the year.

(5) Discounts allowed by suppliers amounted to Rs.480,000 and those allowed to

customers were Rs.520,000.
(6)
1 Jan 2015 31 Dec 2015
Rs.000 Rs.000
Inventories 4,500 5,800
Receivables (including a bad debt of Rs. 200,000 to 2,800 3,200
be written off)
Accrued general expenses 240 190
Rates paid in advance 40 50
Fixtures (including purchased during year) valued at 2,800 2,550
Trade payables 1,800 2,200
Amounts due for lighting and heating 80 70

Required:
Prepare
(a) a statement of Umar’s capital at 1 January 2015 (4)
(b) a statement of comprehensive income for the year ended 31 December 2015 (9)
(c) a statement of financial position at 31 December 2015. (7)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 18
Babar had purchased a running business from Razi on 1 January 2014 at a total agreed
price of Rs. 960,000. Babar died on 16 June 2014 and his son Sami took over the business.
Sami wants to assess the profitability of the business and for that purpose he has
collected the following information from the records maintained by him and his father:
Page | 14 (i) Correspondence between Babar and Razi has revealed that they had agreed to
value the inventory and other assets of the business at Rs.600,000 and
Rs.120,000 respectively. However, in view of Razi’s standing in the market, the
deal had been finalised at a lump sum price of Rs. 960,000 payable in two equal
installments. The first installment was paid by Babar from his personal account.

(ii) Babar had opened a bank account in the name of the business.
An analysis of the bank statement revealed the following details:
Receipts Rupees
Amount deposited by Babar on 1 January 2014 from his personal 2,000,000
account
Day to day collections banked at day end 3,800,000

Payments
Second installment to Mr. Razi on 31 January 2014 480,000
Purchases 3,150,000
Lease rent 120,000
Electricity 22,000
Furniture purchased on 1 July 2014 25,000

(iii) Babar and Sami kept a notebook which shows that the following payments
were made out of daily sale proceeds before depositing them in the bank:
Rupees
Salaries and EOBI payments 184,300
Purchases 49,500
Sundry shop expenses 35,600
Drawings 192,500

(iv) On 31 August 2014, there was a burglary at the warehouse and inventory
costing Rs. 50,000 was stolen. Due to defect in the insurance policy, the insurance
company acknowledged the claim of Rs.20,000 only, which was received on 5
November 2014.

(v) On 31 December 2014, stock on hand costed Rs.450,000.Cash in hand, trade

creditors and accrued expenses (electricity) amounted to Rs.34,500, Rs. 82,500 and
Rs. 5,200 respectively.

(vi) Depreciation on fixtures and fittings is to be provided at the rate of 10% per annum.

Required:
Prepare Trading and Profit and Loss Account for the year ended 31 December 2014 and
Balance Sheet as on 31 December 2014. (20)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 19
Following information pertains to Alpha Traders (AT) for the year ended 31 December 2017:
(i) 60% goods are sold for cash to walk-in customers at list price. Remaining goods are
sold to corporate customers on credit at a trade discount of 2% on list price. They
only pay through cheques.
(ii) Balances extracted from AT’s records:
Page | 15
31-Dec-2017 31-Dec-2016
--------- Rs. in ‘000 ---------
Furniture and fittings – net ? 10,175
Stock-in-trade 14,500 12,300
Trade debtors – gross 5,900 4,400
Prepaid rent 180 145
Cash in hand 430 750
Trade creditors 9,700 8,500
Accrued salaries 310 460
(iii) All furniture and fittings were purchased on 1 July 2015 and are depreciated using
straight-line method at 5% per annum.
(iv) Provision for doubtful debts is maintained at 4%. During the year, balances totaling
Rs. 260,000 were written-off.
(v) Summarised bank statement:
Deposits Rs. in Withdrawals Rs. in
‘000 ‘000
Opening balance 9,800 Utilities 1,400
Corporate customers 34,240 Rent, rates and taxes 2,100
Cash 56,380 Repairs & maintenance 2,800
Insurance claim 5,500 Cash 6,320
Return outward 2,170 Creditors 87,200
Delivery charges recovered 330 Delivery truck (second 2,300
hand)
Miscellaneous expenses 1,300
Closing balance 5,000
108,420 108,420
(vi) Cash payments for the year:
Rs. in
‘000
Salaries 6,500
Repairs & maintenance 500
Drawings ?
(vii) Insurance claim represents cost of goods lost in transit during the year.
(viii) A cheque of Rs. 300,000 issued on 15 December 2017 against rent, has not yet
been presented whereas cheque from a debtor, deposited on 31 December 2017
amounting to Rs. 3,200,000 is not appearing in the bank statement.
(ix) Creditors are paid through cheques only. Payments made to creditors include:
 Rs. 48,000,000 after availing discount of 4%.
 A cheque of Rs. 1,900,000 issued to a supplier in December 2016. No discount
was allowed by the supplier on this payment.
(x) The delivery truck was purchased on 1 March 2017. Prior to use, the truck was
repaired at a cost of Rs. 260,000. The repair work was completed on 31 March 2017.
The amount is included in payment for repairs and maintenance above. Depreciation
on delivery truck is charged on a straight-line basis at 12.5% per annum.

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 CAF 5 – Accounting from Incomplete Records

Required:
Prepare the following:
(a) Statement of profit or loss for the year ended 31 December 2017. (12)
(b) Statement of financial position as on 31 December 2017. (08)

Page | 16 QUESTION 20
Yasin received a legacy of Rs. 20,000,000 on 1 January 2015 and on that date purchased a
small retail business. The completion statement from the solicitor revealed the following.
Rs.000
Freehold shop property 10,000
Goodwill 2,000
Inventories 1,600
Trade receivables 400
Shop fixtures 2,600
Rates in advance to 31 March 2015 100
16,700
The legacy was used to discharge the amount due on completion and the balance was paid
into a newly opened business bank account.
Yasin had not kept proper records of his business transactions but was able to supply the
following information.
(1) A summary of the cash till rolls showed his shop takings for the year to be
Rs.25,505,000; this includes all cash received from customers including those at 1
January 2015.
(2) The takings had been paid periodically into the bank after payment of the following cash
expenses.
Rs.000
Wrapping materials 525
Staff wages 3,423
Purchases for resale 165
Petrol and oil 236
(3) Personal cash drawings were estimated at Rs.20,000 per week and goods taken for
own use at Rs.2,000 per week.
(4) A summary of the bank statements showed the following.
Rs.000 Rs.000
Legacy – residual balance 3,300 Purchases for resale 14,863
Motor expenses 728
Sale of fixtures purchased at 1 Delivery van (cost – 1 April
January 2015 but not required 2015) 1,200
130
(cost Rs.200,000; depreciation
Nil)
Loan from Robin at 10% pa 2,000 General expenses 625
Cash banked Loan interest (six months to
19,900 100
30 September)
Private cheques 1,329
Electricity 228
Rates (year to 31 March
500
2016)
Balance per statement at 31
5,757
December 2015
25,330 25,330

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

A cheque drawn on 28 December 2015 of Rs.125,000 for goods purchased was

presented to the bank on 4 January 2016.

(5) During the year bad debts of Rs.223,000 arose and were irrecoverable. The trade
receivables at 31 December 2015 amounted to Rs.637,000, of which Rs.100,000 is
doubtful and for which an allowance should be recognised should be made. Page | 17

(6) At 31 December 2015 there were

Rs.000
Inventories 2,360
Store of wrapping materials 53
Trade payables – purchases 358
Electricity accrued 50
Accountancy fees accrued 100
Cash float in till 180

(7) The difference arising on the cash account was discussed with Yasin but remained
unexplained and was dealt with in an appropriate manner.

(8) Depreciation is to be recognised at the rate of 10% per annum on the fixtures and at the
rate of 20% on the van.

Required:
Prepare a statement of comprehensive income for the year ended 31 December 2015 and a
statement of financial position at that date. (20)

QUESTION 21
Danish does not keep proper books of account due to his lack of knowledge of double entry
system of accounting. He has supplied you the following information with respect to the year
ended 31 December 2013 from the records kept in his diary:
(i) Transactions during the year:
Rupees
Cash received from customers 80,000
Discount allowed to customers 1,400
Bad debts written off 1,800
Cash paid to suppliers 63,000
Discount allowed by suppliers 1,000
Sales returns 3,000
Purchases returns 2,000
Expenses paid 6,000
Drawings 5,000
Rent paid 2,500

(ii) Opening balances as on 1 January 2013:

Assets and liabilities Rupees
Receivables 45,000
Payables 24,000
Cash 4,500
Furniture and fixtures 15,000
Inventory 25,000
Motor van 16,000

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 CAF 5 – Accounting from Incomplete Records

(iii) Receivables and payables as on 31 December 2013 amounted to Rs. 48,600 and
Rs. 27,000 respectively.

(iv) Outstanding expenses as on 31 December 2013 amounted to Rs. 1,200.

(v) Depreciation is charged on furniture and fixtures at the rate of 10% and on motor van
Page | 18 at 20%.

(vi) Danish sells goods at cost plus 40% and follows a policy of maintaining a allowance
of 5% of the outstanding receivables.

Required:
(a) Statement of comprehensive income for the year ended 31 December 2013.
(b) Statement of financial position as at 31 December 2013. (21)

QUESTION 22
Following is the balance sheet of Ashfaq as at 30 June 2013:
Owner's equity / Liabilities Rupees Assets Rupees
Ashfaq’s capital 4,396,600 Motor car 2,000,000
Creditors 1,102,000 Furniture 1,000,000
Accrued rent 20,000 Stock-in-trade 1,805,000
Loan taken from a friend 27,900 Debtors 350,000
Prepaid insurance 15,000
Balance at bank 360,600
Cash in hand 15,900
5,546,500 5,546,500
Ashfaq needs to submit his Trading and Profit and Loss Account for the year ended 30 June
2014 and Balance Sheet as of that date to his bankers in order to obtain an overdraft facility.
He has not maintained proper books of account of the business but has provided you the
following information:
(i) He purchased goods from a single supplier who allows a discount of 3% on
goods purchased in excess of Rs.3,000,000 in a year. The discount for the year
ended 30 June 2014 amounts to Rs.265,800 and would be received in August 2014.
(ii) All goods are sold at cost plus 60%.
(iii) All cash received against sale of goods has been banked with the exception
of the following weekly average cash expenses/drawings:
Rupees
Drawings 30,000
Carriage outward 5,000
Petrol 3,000
Misc. expenses 2,500
(iv) Cash in hand on 30 June 2014 amounted to Rs. 26,700.

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

(v) An analysis of Ashfaq’s bank statement revealed the following information:

Receipts Rupees Payments Rupees
Collection from debtors 464,400 Purchase of goods 9,850,700
Cash deposited into bank 13,717,800 Car expenses (for business) 73,000
Rent 42,000
Repayment of loan to friend 27,900
Salaries 1,600,000 Page | 19
Purchase of freehold land 2,500,000
Travelling expenses 40,000
Printing & stationery 46,000
Advertisement 125,000
Insurance 50,000
Truck hire charges 657,000
Misc. expenses 362,300

14,182,200 15,373,900
(vi) Depreciation on motor car and furniture is to be provided @ 30% and 15%
respectively under the reducing balance method.
(vii) Stock-in-trade on 30 June 2014 amounted to Rs. 702,000.
Required:
Prepare Trading and Profit and Loss Account for the year ended 30 June 2014 and Balance
Sheet as on 30 June 2014. (20)
QUESTION 23
Friday Traders (FT) is engaged in the business of supplying Blenders and Juicers. FT
purchases its products from Sigma Electronics. FT is presently negotiating with a bank for a
long-term loan and has been asked to provide the latest financial statements. Since FT does
not maintain proper accounting records, you are requested to prepare the financial
statements from the following information:
(i) Assets and liabilities as on 1 January 2018:
Rs. in '000
Equipment (40% depreciated) 2,490
Stock (stock value of Blenders was double of the Juicers) 3,705
Prepaid rent up to 30 April 2018 280
Trade debtors (only for Blenders) 1,410
Payable to Sigma Electronics 3,600
Salaries payable 98
Bank overdraft 740
(ii) Sales of Blenders are made on credit while Juicers are sold on cash basis.
(iii) Upto last year, FT was earning a gross profit of 30% on cost of Blenders and 35% on
sale value of Juicers. With effect from 1 January 2018:
 FT increased sales prices of both the products by 20%; and
 Sigma Electronics increased the prices of Juicers only by 40%.
(iv) 60% of the amount of purchases made during the year represents blenders.

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 CAF 5 – Accounting from Incomplete Records

(v) Summary of bank transactions during the year:

Rs. in '000
Receipts from credit customers 6,570
Payments:
Sigma Electronics 8,850
Insurance for one year starting 1 February 2018 204
Page | 20 Rent 826
Equipment 550
Salaries and wages 685
Total payments 11,115
(vi) Debtors amounting to Rs. 138,000 are considered as irrecoverable.
(vii) Rent of the premises was increased by 30% with effect from 1 September 2018.
(viii) Following payments were made from cash sales and remaining amounts were
deposited into the bank:
Rs. in '000
Repairs and maintenance 186
Salaries and wages 124
Drawings 477
787
(ix) Equipment is depreciated at 8% on cost.
(x) Some balances ascertained as at 31 December 2018:
Rs. in '000
Stock* – Juicers 975
– Blenders 2,597
Payable to Sigma Electronics 2,420
Salaries payable 134
*Comprises of stock purchased in 2018
Required:
(a) Prepare statement of profit or loss for the year ended 31 December 2018. (10)
(b) Prepare statement of financial position as at 31 December 2018. (08)

QUESTION 24
Mansoor deals in small electrical equipment and appliances. His Statements of financial
position for the year ended 30 June 2014 was as follows.
Assets Rupees
Fixtures 235,000
Inventories 552,000
Receivables 281,000
Business rates paid in advance 11,500
Cash in hand 35,000
Cash at bank 307,500
1,422,000
Capital and Liabilities
Capital 1,185,000
Liabilities:
Goods 220,000
Electricity charges 5,500
Accounting charges 11,500 237,000
1,422,000

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

On 30 June 2015, there was a fire in his shop which destroyed all his fixtures and
inventories. The following information has been gathered from the records available with
him.
(a) The insurance company agreed to pay Rs. 225,000 for fixtures and Rs. 630,000 for
inventory without production of accounts; the inventory on hand was however Rs.
670,000.
(b) The payments made during the year were as follows: Page | 21
Rupees Rupees
Personal expenses 188,000 Business rates 32,000
Sundry expenses 15,000 Rent 240,500
Accounting charges 20,500 Purchase of goods 5,061,000
Electricity 50,500 Fixtures 45,000
(c) The following payments were made during the year, out of cash receipts:
(i) Assistant's salary Rs. 132,000.
(ii) Cash purchases averaging Rs. 24,000 per month.
(iii) Drawings which varied between Rs. 10,000 and Rs. 15,000 per month.
All other receipts were deposited into the bank. Total deposits amounted to Rs.
5,780,800 and included scrap sale of Rs. 35,000.
(d) The following balances as on 30 June 2015 were determined from the available records:
Assets and Liabilities Rupees
Receivables 494,000
Creditors for goods 212,000
Creditors for electricity charges 1,900
Accounting charges payable 1,800
Rent outstanding 15,000
Business rates paid in advance 15,000
Cash in hand 40,500
(e) Included in the receivables is an amount of Rs. 14,000 which is considered uncollectible.
(f) The rate of gross profit as a percentage of sale was 20%.
Required:
Prepare the statement of comprehensive income for the year ended 30 June 2015 and a
statement of financial position as on that date. (24)

QUESTION 25
Due to the death of his book-keeper, Asif failed to keep proper records for the year ended
June 30, 2015. He has forwarded to you the following statements:

Statement of financial position as at June 30, 2014

Rs. Rs.
Land and building at cost 130,000
Furniture: Cost 825,000
Depreciation (485,000) 340,000
Inventory 482,500
Trade receivables: 670,000
Less: Provision (27,000) 643,000
Prepayments 53,800
Cash in hand 10,000
1,659,300

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 CAF 5 – Accounting from Incomplete Records

Rs.
Asif-capital account 613,300
6% Loan 500,000
Trade creditors 500,100
Accrued expenses 21,700
Bank overdraft 24,200
Page | 22 1,659,300

Summary of the transactions in the bank book for the year ended June 30, 2015
Receipts Rs. Payments Rs.
Deposits against cash sales 624,750 Creditors 2,509,600
Receipts from receivables 3,071,000 Sundry expenses 212,500
Furniture sold on 1-Jul-14
(purchased for Rs. 280,000 122,400 Salaries 440,400
on 1-Jul-11)
Furniture purchased on
64,000
01- Jan-15
Interest on loan up to
22,500
31-Mar- 15
Total 3,818,150 Total 3,249,000
You have carried out the necessary scrutiny and ascertained the following:
(i) Asif sells the goods at a profit margin of one-third of their selling price i.e. at a profit
margin of 50% of cost of sales.
(ii) On June 30, 2015 trade receivables aggregated Rs. 600,500. These included Rs.
18,000 pertaining to goods which were sent on sale or return basis and were unsold
on June 30.
(iii) Closing inventory was valued at Rs. 580,000.
(iv) Receipts from receivables include an advance of Rs. 2,500 for goods delivered in
July 2015.
(v) Rs. 3,700 were recovered from a debtor which had been fully provided for on June
30, 2014. A new customer who was introduced in 2015 and owed Rs. 4,200 was
declared as bankrupt.
(vi) Sundry expenses payable on June 30, 2015 amounted to Rs. 19,000 (excluding
interest on loan) whereas prepayments amounted to Rs. 9,700.
(vii) Asif estimates that he withdrew Rs. 60,000 for his personal use and paid sundry
expenses aggregating Rs. 25,000 before depositing the proceeds from cash sales.
(viii) Depreciation on furniture is provided at the rate of 10% per annum on cost.
(ix) Bonus is payable to the manager at 5% of the net profit after charging such bonus.
(x) The following account balances were obtained from the memorandum records:
Rs.
Purchases 2,570,000
Discounts received 30,300
Sales returns 15,000

Required:
(a) A Profit & Loss account of Mr. Asif for the year ended June 30, 2015; and
(b) A statement of financial position as on June 30, 2015 (25)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 26
On 1 July 2017, Nezam took over a running business namely FC Traders (FCT). Proper
books of account are not maintained for FCT. Following information has been gathered for
preparation of statement of profit or loss for the year ended 30 June 2018:
(i) Balances of certain assets and liabilities:
30-Jun-2018 1-Jul-2017 Page | 23
Assets and liabilities
------ Rs. in '000 ------
Equipment ? 4,000
Furniture and fixtures ? 2,500
Trade debtors 1,600 -
Inventory 2,400 2,800
Unused miscellaneous supplies 400 300
Unpaid suppliers’ bills 2,800 1,850
Shop rent payable 400 200
Cash and bank ? 1,000
(ii) Summary of bank payments for the year ended 30 June 2018:
Rs. in '000
Suppliers 13,600
Repair and maintenance 950
Shop rent 2,000
Miscellaneous supplies 800
Utilities 1,200
(iii) Payments made out of cash sales before being deposited into the bank:
Rs. in '000
Salaries and wages 1,800
Purchase of inventory 3,000
Part payment of sales commission to riders 90
(iv) Unpaid suppliers’ bills as at 30 June 2018 include a bill of Rs. 320,000 which was
mistakenly taken at Rs. 230,000.

(v) During the year, goods costing Rs. 540,000 were withdrawn by Nezam for personal
use.

(vi) Inventory as at 30 June 2018 includes goods costing Rs. 250,000 which were badly
damaged in an accident and have no sales value.

(vii) Mark-up on goods sold are as follows:

Mark-up on cost
50% of goods – sold on cash counter 35%
20% of goods – sold for cash through riders 40%
30% of goods – sold for credit 45%

(viii) The riders are entitled to 3% commission.

(ix) Fixed asset at 30 June 2018 are to be depreciated at 10% per annum.
(x) Salaries and wages for June 2018 amounting to Rs. 165,000 were paid on 5 July
2018.

Required:
Prepare financial statements for the year ended 30 June 2018. (20)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 27
Munira is engaged in trading of garments. She has not maintained proper accounting
records. She suspects that some of her employees are involved in some sort of
misappropriation. The list of creditors, receivables and inventories prepared by her, show the
following balances:
Balances at December 31
Page | 24
2015 2014
Rs. 000 Rs. 000
Trade payables 9,500 8,000
Trade receivables 3,600 2,000
Inventories at cost 8,500 12,500

The following transactions were recorded during the year ended December 31, 2015:
(Rs. 000s)
Sales to staff on cash basis 315
Discounts allowed on early payments 360
Collections banked 18,000
Paid to suppliers in cash 12,700
Trade discounts received 400
Bad debts written off 200

Additional information
(i) Normal sales are made at cost plus 20% but sales to staff are made at cost plus 5%.

(ii) About 4% of the purchases during the year were defective and had to be sold at 30%
below normal selling price.

(iii) The list of closing inventory at December 31, 2015 includes four items having a total
cost of Rs. 470,000. There was a casting error on the invoice raised by the supplier
and the total has been erroneously recorded as Rs. 740,000. The invoice is still
unpaid.

(iv) Collections made in the last week of December 2015 amounting to Rs. 860,000 were
deposited in bank on January 2, 2016. Likewise, collections made in the last week of
December 2014 amounting to Rs. 500,000 were deposited in bank on January 2,
2015.

Required:
You are required to calculate the loss incurred by Munira during the year 2015 on account of
misappropriations (if any). (19)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 28
Adnan runs a wholesale business. On December 31, 2015 he realised that his cash and
bank balances have reduced considerably. He has requested you to investigate the situation
and has provided you the following information:
(i) Balances
2015 2014
Rs. Rs. Page | 25
Cash in hand 700 14,300
Cash at bank 103,400 349,100
Sundry receivables 80,900 48,700
Inventory 27,500 15,700
Sundry creditors 130,800 116,100
Rent payable (one month) 4,500 3,500
Electricity and telephone bills payable 8,800 -

(ii) 20% of the goods were sold on cash basis at a mark-up of 22% on cost. Credit sales
were made at a profit of 20% on sales. All collections from receivables were made in
cash.

(iii) Adnan paid wages, rent, electricity and telephone charges in cash out of sale
proceeds. The remaining amount of sale proceeds was deposited into bank.

(iv) The bank pass book reveals the following withdrawals:

Rupees
Creditors 1,423,800
Non-current assets (acquired on July 1, 2015) 75,000
Drawings 122,600

(v) All purchases were made on credit.

(vi) Wages amounted to Rs. 8,900 per month.

(vii) Payment on account of electricity and telephone charges amounted to Rs. 33,000.

(viii) Rent has been increased from October 2015.

(ix) The opening balance in the non-current assets account net of depreciation was Rs.
285,000. Depreciation is recorded @ 10% p.a. on declining balance method and is
based on number of months for which the assets have been in use.

Required:
(a) Prepare Adnan’s profit and loss account for the year ended December 1, 2015 and
his statements of financial position as on that date.
(b) Compute the amount of cash shortage, if any. (18)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 29
Mr. Razi, a sole proprietor, runs a small business. On 30 June 2015, he realized that his
cash and bank balances have reduced considerably. He suspected that one of his
employees is involved in misappropriation. He has provided you the following information:

Opening balances on 1 July 2014 Rs. in ‘000’

Page | 26
Cash and bank 389
Debtors 1,560
Stock 856
Land 450
Equipment – WDV (purchased on 1 April 2014 at a cost of Rs. 600,000) 585
Creditors 1,348
Accrued expenses: Marketing 30
Utilities 25
Salaries 48
Other miscellaneous 15

Receipts and payments for the period from 1 July 2014 to 30 June 2015 Rs. in ‘000’
Receipts from cash sales 1,728
Receipts from debtors 4,475
Payments made to creditors 4,774
Payments for marketing expenses 205
Payments for utility expenses 240
Payments for salaries 600
Payments for other miscellaneous expenses 107
Equipment (purchased on 1 October 2014) 250
Drawings by Razi 125

Other information:
(i) Razi makes 35% margin on gross sales price. However, during the year, he offered
5% discount on credit sales and 10% discount on cash sales. 70% of his total sales
were on credit.
(ii) Actual bills for the year were as follows:
Rs. in ‘000’
Marketing expenses 200
Utility expenses 250
Other misc. expenses 100
(iii) Salary of the staff was Rs. 52,000 per month.
(iv) Balances of debtors and creditors as on 30 June 2015 were Rs. 1,091,000
and Rs.1,195,000 respectively.
(v) Closing stock at 30 June 2015 was Rs.1,167,000.It included 150 units costing
Rs. 1,500 each which were damaged and Razi incurred Rs. 900 per unit in July 2015
to bring them into saleable condition.
(vi) Razi depreciates equipment on straight line basis at the rate of 10% per annum.

Required:
Prepare income statement for the year ended 30 June 2015 and balance sheet as
at 30 June 2015. Also compute the amount of cash shortage, if any. (19)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

QUESTION 30
Rahil runs a retail business. He appointed a cashier at a monthly salary of Rs. 13,000 on 1
April 2016. The cashier did not report for work on 1 July 2016 and it was found that he had
left, taking with him the balance in the till.

It had been Rahil's practice to deposit on each weekend the available balance in the till after
retaining a float of Rs.5,000. He maintains record of sales on credit and a file of unpaid Page | 27
invoices in respect of goods purchased by him.

The following information has been ascertained from the available records:
(i) Balance Sheet as on 31 March 2016 was as follows:
Rupees Rupees
Rahil’s capital 233,000 Fixtures and fittings -WDV 161,000
Creditors for goods 159,000 Inventory 111,000
Creditors for expenses 16,000 Debtors 55,000
Cash at bank 76,000
Cash in hand 5,000
408,000 408,000

(ii) Following is a summary of the bank statement from 1April to 30 June 2016:
Rupees Rupees
Balance on 1 April 2016 76,000 Payment to suppliers for goods 604,000
Cheques received from Rent & other expenses 37,000
customers 29,000
Cash deposited 627,000 Balance on 30 June 2016 91,000
732,000 732,000

(iii) The following amounts were paid from the till:

Rs. per month
Salary to cashier 13,000
Rahil’s drawings 26,000
Petty expenses 5,000

(iv) Fixtures and fittings are depreciated at 10% per annum using reducing
balance method.

(v) Inventory on 1 July 2016 was Rs. 58,000.

(vi) Credit sales during the quarter ended 30 June 2016 amounted to Rs.64000 whereas
the debtors balances as on 30 June 2016 amounted to Rs.66,000. However, direct
confirmations from debtors showed that receivables in fact totaled Rs.54,000.

(vii) Creditors for goods and expenses had always been paid by cheque. Unpaid invoices
for goods on 30 June 2016 totalled Rs.181,000 and creditors for expenses
amounted to Rs.13,000. Detailed scrutiny of records revealed that a cash receipt of
Rs.8,000 which had been received against goods returned to a supplier had
not been recorded.

(viii) Rahil sells goods at a gross profit margin of 20% on sales.

Required:
(a) Prepare a statement showing calculation of the amount of defalcation. (11)
(b) Prepare a balance sheet as on 30 June 2016. (09)

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 CAF 5 – Accounting from Incomplete Records

QUESTION 31
Saleem is the owner of S-Mart, a grocery store. His accountant resigned and left on 1
January 2017. Saleem suspects that the previous accountant was involved in some sort of
misappropriation. The information available with him is as follows:
(i) Summary of bank statement:
Receipts Rupees Payments Rupees
Page | 28
Balance as at 1 Jan 2016 250,000 Suppliers 1,807,500
Cheques from debtors 824,000 Salaries 48,000
Cash sales 1,450,000 Rent 72,000
Sale of vehicle
15,000 Utilities 36,000
on 1 Jan 2016
Other expenses 24,750
New vehicle
230,000
on 1 Mar 2016
Balance as at
320,750
31 Dec 2016
2,539,000 2,539,000

(ii) Other balances extracted from the records maintained by the previous accountant:
Particulars 31-Dec-2016 31-Dec-2015
---------- Rupees ----------
Furniture and fixtures – WDV 555,000 550,000
Equipment – WDV 64,000 80,000
Vehicle – WDV 210,000 18,500
Inventory 215,000 250,000
Debtors 340,000 260,000
Advance rent - 3,000
Cash in hand 31,510 45,000
Creditors 354,500 100,000
Salaries payable 22,000 18,000

(iii) Before depositing the receipts from cash sales in the bank, Saleem took Rs. 12,000
per month for personal use. All other payments were made through bank and the
debtors settled their accounts through cheques.
(iv) The creditors have confirmed the balances due from them. However review of the
statement provided by one of the creditors indicates that goods returned for cash
amounting to Rs. 24,000 were not recorded in the books.
(v) Unpaid invoice for furniture purchased during the year for Rs. 45,000 is included in
creditors.
(vi) The margin on cash sales and credit sales is 20% and 25% respectively. From 1 July
2016, prices to cash customers were further reduced by 6% due to which quantity
sold against cash in the 2nd half of the year increased by 25% as compared to the
first half of the year.

(vii) All the debtors confirmed their balances except an amount of Rs. 50,000. On
investigation it was found that the related goods had been issued against fake
invoices.

Required:
(a) Determine the amount of suspected fraud.
(b) Prepare statement of profit or loss for the year ended 31 December 2016. (11)

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 01
Using accounting equation  Closing Equity = Assets – Liabilities
268,000 = 376,000 – 108,000
Using accounting equation  Opening Equity = Assets – Liabilities
227,000 = 314,000 – 87,000 Page | 29
Using business equation
Profit = Closing equity – Opening Equity + Drawings – Capital Invested
71,000 = 268,000 – 227,000 + 55,000 – 25,000

ANSWER 02
Total assets  2,910 = 1,600 + 410 +850 +50
Total liabilities  1,020 = 560 + 370 + 90
Using accounting equation  Opening Equity = Assets – Liabilities
1,890 = 2,910 – 1,020

ANSWER 03
Part (a)
Receivable (memorandum) account
Date Particulars Rs. Date Particulars Rs.
b/d 2,400 Cash banked 12,500
Sales 12,100 Bad debts 200
c/d 1,800
14,500 14,500

Part (b)
Receivable (memorandum) account
Date Particulars Rs. Date Particulars Rs.
b/d 2,400 Cash banked 12,500
Sales 11,900 Bad debts 200
c/d [1,800 – 200] 1,600
14,300 14,300

ANSWER 04
Payables (memorandum) account
Date Particulars Rs. Date Particulars Rs.
Cash paid 11,300 b/d 1,400
Purchases 11,800
c/d 1,900
13,200 13,200

ANSWER 05
Cash and Bank (memorandum) account
Date Particulars Rs. Date Particulars Rs.
b/d (cash) 100 Payment to suppliers 38,200
b/d (bank) 2,400 Payment to employees 3,400
Receipts 51,700 Drawings 7,250
c/d (cash) 150
c/d (bank) 5,200
54,200 54,200

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 CAF 5 – Accounting from Incomplete Records

ANSWER 06
Rs. Rs. Rs. Rs.
Opening inventory 1,000 2,000 1,000 2,000
Page | 30 Closing inventory (1,200) (1,500) (500) (2,000)
Purchases 5,000 8,700 7,500 15,000
Sales 8,000 15,000 10,000 20,000
Cost of sales 4,800 9,200 8,000 15,000
Gross profit 3,200 5,800 2,000 5,000
GP as a % of sales 40% 38.7% 20% 25%
GP as a % of cost 66.7% 63% 25% 33.3%

ANSWER 07
Type A Type B Type C Total
Rs. % Rs. % Rs. % Rs.
Sales 600 120 220 100 180 100 1,000
COS (500) 100 (154) 70 (162) 90 816
Gross profit 100 20 66 30 18 10 184

ANSWER 08
Using margin equation
100 − 30
= 351,000 × = . 245,700
100
Using COS equation
COS = Opening inventory + Purchases – Closing inventory
245,700 = 127,000 + 253,000 – 134,300
The inventory lost in fire = Inventory as should have been – inventory in good condition
58,300 = 134,300 – 76,000

ANSWER 09
Part (a)
Rs. Rs.
Sales 98,000
Less: Cost of sales W
Opening inventory 10,200
Purchases 71,000
Closing inventory β (2,800) (78,400)
Gross profit 19,600

Working:
Sales 125% 98,000
Cost of sales (98,000 x 100/125) (100%) (78,400)
Gross profit 25% 19,600

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Part (b)
Trade receivables
b/d 6,100 Bank (78,500 + 5,000) 83,500
Sales β 84,800 c/d 7,400
90,900 90,900

Part (c) Page | 31

Assets Rs.
Non-current assets 98,900
Inventory 9,300
Receivable 16,800
Bank -
125,000

Equity & Liabilities

Capital 97,200
Bank loan 15,700
Trade payables 4,900
Bank overdraft β 7,200
125,000

ANSWER 10
Part (a)
Percentage Rupees
Sales 100% 49,200
Cost of sales (3,784 + 38,632 – 5,516) (75%) (36,900)
Gross profit (12,300/49,200 x 100) 25% 12,300

Part (b)
Opening inventory W1 = Rs. 7,192

W1 – Calculation of opening inventory Rs. Rs.

Sales 50,100
Less: Cost of sales W2
Opening inventory β 7,192
Purchases 38,326
Closing inventory (5,438) (40,080)
Gross profit 10,020

W2 – cost of sales
Sales 125% 50,100
Cost of sales (50,000 x 100/125) (100%) (40,080)
Gross profit 25% 10,020

Part (c)
Purchases W1 = Rs. 171,174

W1 – Calculation of purchases Rs. Rs.

Sales 186,460
Less: Cost of sales W2
Opening inventory (16,800 x 100/125) 13,440
Purchases β 171,174
Closing inventory (16,800) (167,814)
Gross profit 18,646

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 CAF 5 – Accounting from Incomplete Records

W2 – cost of sales
Sales 100% 186,460
Cost of sales (186,460 x 90%) (90%) (167,814)
Gross profit 10% 18,646

Page | 32 ANSWER 11
Part (a)
Sales for the year W1 = Rs. 70,000

W1 - Trade receivables
b/d 5,500 Cash W2 69,400
Sales β 70,000 c/d 6,100
90,900 90,900
W2 – Cash
b/d 100 Bank 65,400
Trade receivables β 69,400 Salaries (50 x 50) 2,500
Drawings (30 x 50) 1,500
c/d 100
69,500 69,500
Part (b)
Closing inventory W1 = Rs. 3,900

W1 – Calculation of closing inventory Rs. Rs.

Sales 70,000
Less: Cost of sales W2
Opening inventory 10,400
Purchases W3 43,500
Closing inventory β (3,900) (50,000)
Gross profit 20,000

W2 – cost of sales
Sales 140% 70,000
Cost of sales (70,000 x 100/140) (100%) (50,000)
Gross profit 40% 20,000

W3 - Trade payables
Bank 42,800 b/d 2,800
c/d 3,500 Purchases β 43,500
46,300 46,300

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 12
Tahir
Statement of comprehensive income for the year ended June 30, 2015
Rs. 000 Rs. 000
Sales W1 19,579
Less: Cost of goods sold
Opening Stock 1,142 Page | 33
Purchases 1,606 W2 + 15,170 W3 16,776
Closing Stock (1,542) (16,376)
Gross profit 3,203
Less: Expenses
Rent (500 – (500x3/15)) (400)
Rates (84 + (120x3/12) 30) (114)
Electricity (92)
Staff salaries (742)
Sundry expenses (156)
Interest on loan (1,000 x 5%) (50)
Depreciation (1,580 x 10%) (158) (1,712)
Net profit 1,491

Tahir
Statement of financial position as at June 30, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Goodwill (3,192 – 1,142 – 1,500) 550
Furniture & fixtures (1,500 + 80 - 158) 1,422 1,972

Current assets
Inventory 1,542
Trade Receivables 74
Prepaid rent (500 x 3/15) 100
Bank 2,657
Cash 54 4,427
6,399

Equity & Liabilities

Capital and reserves
Capital 5,000
Add: profit 1,491
Less: drawings (1,642) 4,849

Non-current liabilities
Loan from mother 1,000

Current liabilities
Trade payables 470
Accrued rates (120 x 3/12) 30
Accrued interest (1,000 x 5%) 50 550
6,399

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 CAF 5 – Accounting from Incomplete Records

Workings:
W1 - Trade receivables
b/d - Cash W2 19,505
Sales β 19,579 c/d 74
19,579 19,579

Page | 34 W2 – Cash
b/d - Purchases 1,606
Trade receivables β 19,505 Wages 742
Expenses 156
Drawings 520
Bank 16,427
c/d 54
19,505 19,505

W3 - Trade payables
Bank 14,700 b/d -
c/d 470 Purchases β 15,170
15,170 15,170

ANSWER 13
Ijaz
Statement of comprehensive income
For the year ended December 31, 2015
Rs. 000 Rs. 000
Sales W2 5,877
Less: Cost of goods sold
Opening Stock 1,310
Purchases 3,233 W3 – 100 drawings 3,133
Closing Stock (1,623) (2,820)
Gross profit 3,057
Less: Expenses
General expenses W4 (1,090)
Bad debts W5 (49)
Depreciation (900 x 20% x 4/12) (60) (1,199)
Net profit 1,858
Ijaz
Statement of financial position
As at December 31, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Delivery van (900 - 60) 840

Current assets
Inventory 1,623
Trade Receivables 382
Less: allowance for doubtful debts (19) 363
Bank 572
Cash 29
2,587
3,427

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Equity & Liabilities

Capital and reserves
Capital W1 1,652
Add: profit 1,858
Less: drawings (600 + 400 + 100) (1,100) 2,410

Current liabilities Page | 35

Trade payables 914
Accrued expense 103 1,017
3,427

Workings:
W1 – Opening statement of financial positions
Assets
Inventory 1,310
Receivables 268
Bank 62
Cash 840
2,480
Liabilities
Payable for goods (712)
Payable for expenses (116)
1,652

W2 - Trade receivables
b/d 268 Bank 1,416
Sales β 5,877 Bad debs 30
Cash (shop takings) 4,317
c/d (412 - 30) 382
6,145 6,145

W3 - Trade payables
Cash 316 b/d 712
Bank 2,715
c/d 914 Purchases β 3,233
3,945 3,945

W4 - Expenses payables
Cash 584 b/d 116
Bank 519 PL β 1,090
c/d 103
1,206 1,206

W5 – Bad debts
Receivables 30 PL β 49
Allowance for BD (382 x5%) 19
49 49

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 CAF 5 – Accounting from Incomplete Records

ANSWER 14
Rashid
Statement of comprehensive income for the year ended September 30, 2015
Rs. 000 Rs. 000
Sales W2 142,850
Less: Cost of goods sold W4
Page | 36
Opening Stock -
Purchases 116,189 W5 – 651 W3 115,538
Closing Stock (8,400) (107,138) W4
Gross profit 35,712
Less: Expenses
Cleaning (10 x 52) (520)
Sundries (15 x 52) (780)
Wages W6 (19,182)
Telephone W7 (1,021)
Rent & rates W8 (1,424)
Repairs (3,637 + 385) (4,022)
Depreciation [(150/50) + (6,000 x 25%)] (4,500) (31,449)
Net profit 4,263

Rashid
Statement of financial position as at September 30, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Leasehold premises (150,000 – 3,000) 147,000
Van (6,000 – 1,500) 4,500 151,500

Current assets
Inventory 8,400
Trade Receivables 10,350
Prepayments 258
Bank (61,698 – 385 un-presented cheque) 61,313
Cash 250 80,571
232,071

Equity & Liabilities

Capital 200,000
Add: profit 4,263
Less: drawings ((25 x 52)1,300 + 323 + 651 W5) (2,274) 201,989

Current liabilities
Trade payables 29,957
Accrued expense 125 30,082
232,071

W1 – Cash
b/d - Wages (75 x 52) 3,900
Trade receivables β 132.500 Cleaning (10 x 52) 520
Sundries (15 x 52) 780
Drawings (25 x 52) 1,300
Bank 125,750
c/d 250
132,500 132,500

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

W2 - Trade receivables
Sales β 142,850 Cash 132,500
c/d 10,350
142,850 142,850

W3 – Calculation of drawings Page | 37

Rs.
COS = op + Purchases – Closing 
107,138 = 0 + Purchases – 8,400  Purchases 115,538
Purchases as per trade payables W5 116,189
Difference is drawings of goods 651

W4 – cost of sales
Sales 100% 142,850
Cost of sales (142,950 x 75%) (75%) (107,138)
Gross profit 25% 35,712

W5 - Trade payables
Bank 86,232 b/d -
c/d 29,957 Purchases β 116,189
116,189 116,189

W6 – Wages
Bank 15,282 PL 19,182
Cash (75 x 52) 3,900
19,182 19,182

W7 – Telephone
Bank 896 b/d -
c/d 125 PL 1,021
1,021 1,021

W8 – Rent & rates

b/d - PL β 1,424
Bank 1,682 c/d 258
1,682 1,682

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 CAF 5 – Accounting from Incomplete Records

ANSWER 15
Mudassar
Statement of comprehensive income for the year ended December 31, 2015
Rs. 000 Rs. 000
Sales W3 21,910
Less: Cost of goods sold
Page | 38
Opening Stock 900
Purchases W4 14,110
Closing Stock (1,200) (13,810)
Gross profit 8,100
Other income (Discount received) 200
8,300
Less: Expenses
Rent b/d 20 + 800 – c/d 30 790
Rates 400
Insurance 200
Bank charges 100
Assistant’s wages 1,800
Discount allowed 300
Sundry expenses 250
Depreciation (3,600 – 3,200) + (4,000 – 3,400) 1,000 (4,840)
Net profit 3,460

Mudassar
Statement of financial position as at December 31, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Motor car 3,200
Fixtures 3,400 6,600

Current assets
Inventory 1,200
Trade Receivables 150
Prepayments 30
Insurance claim W2 460
Bank 400 2,240
8,840

Equity & Liabilities

Capital and reserves
Capital W1 9,160 + 1,000 tax refund 10,160
Add: profit 3,460
Less: drawings (2,500 + 2,400) (4,900) 8,720

Current liabilities
Trade payables 120
8,840

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Workings:
W1 – Opening statement of financial positions
Assets
Motor car 3,600
Fixture 4,000
Inventory 900
Receivable 90 Page | 39
Prepayments 20
Bank 280
Cash 380
9,270
Liabilities
Trade payables (110)
9,160

W2 – Cash
b/d 380 Wages 1,800
Trade receivables 21,550 Sundry expenses 250
Purchases 300
Drawings 2,400
Bank 16,720
Theft (insurance claim)β 460
c/d -
21,930 21,930

W2 - Trade receivables
b/d 90 Cash 21,550
Sales β 21,910 Discount allowed 300
c/d 150
22,000 22,000

W3 - Trade payables
Cash 300 b/d 110
Bank 13,600 Purchases β 14,110
Discount received 200
c/d 120
14,220 14,220

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 CAF 5 – Accounting from Incomplete Records

ANSWER 16
Aslam
Statement of comprehensive income
For the year ended December 31, 2015
Rs. 000 Rs. 000
Sales W2 13,066
Page | 40
Less: Cost of goods sold
Opening Stock -
Purchases 1,400 Cash + 4,790 Bank + 149 W3 6,339
Closing Stock (560) (5,779)
Gross profit 7,287
Less: Expenses
Wages & social security W1 (3,281)
Electricity (56)
General expenses (14 Cash + 110 Bank) (124)
Rent W1 (104)
Van running expenses (342 Bank + 36 Payable) (378)
Depreciation (108 + 50) (158) (4,101)
Net profit 3,186

Aslam
Statement of financial position
As at December 31, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Van (856 - 108) 748
Cement mixer (200 - 50) 150 898

Current assets
Inventory 560
Trade Receivables 1,200
Bank 204
Cash 10 1,974
2,872

Equity & Liabilities

Capital (opening bank balance) 150
Add: profit 3,186
Less: drawings (65 W1 + 832 W1 + 342 Bank) (1,239) 2,097

Non-Current liabilities
Loan from mother 400

Current liabilities
Trade payables W3 149
Accrued van expenses 36
Accrued van instalments (38 x 5) 190 375
2,872

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Workings:
W1 – Cash
Bank 3,100 Wages & Social sec. (3,346-65) 3,281
Trade receivables β 11,866 Drawings 65
Materials 1,400
Electricity 56
General expenses 14 Page | 41
Bank 9,204
Drawings (18 – 2 = 16 x 52) 832
Rent (2 x 52) 104
c/d 10
14,966 14,966

W2 – Trade receivables
b/d - Cash W1 11,866
Sales β 13,066 c/d 1,200
13,066 13,066

W3 – Trade payables
b/d -
c/d 149 Purchases β 149
149 149

ANSWER 17
Part (a)
Capital at January 01, 2015
Assets
Fixtures 2,800
Inventory 4,500
Receivables 2,800
Rates prepaid 40
Cash 20
10,160
Liabilities
Loan (4,000)
Trade payable (1,800)
Accrued general expenses (240)
Accrued heating & lighting expense (80)
Accrued interest (4,000 x 3% x 3/12) (30)
Bank overdraft (892 + 280 (ii)) (1,172)
2,838

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 CAF 5 – Accounting from Incomplete Records

Part (b)
Umar
Statement of comprehensive income for the year ended December 31, 2015
Rs. 000 Rs. 000
Sales W2 39,156
Less: Cost of goods sold
Page | 42 Opening Stock 4,500
Purchases W3 31,420
Closing Stock (5,800) (30,120)
Gross profit 9,036
Other income: Discount received 480
9,516
Less: Expenses
Rent & rates W4 (465)
Heating & lighting W5 (200)
General expenses W6 (890)
Depreciation W7 (350)
Wages (i) (2,950)
Discount allowed (v) (520)
Bad debts (200)
Interest expense (4,000 x 3%) (120) (5,695)
Net profit 3,821

Part (c)
Umar
Statement of financial position as at December 31, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Furniture 2,550

Current assets
Inventory 5,800
Trade Receivables W2 3,000
Prepayment 50
Bank (993 – 320 (ii)) 673
Cash 20 9,543
12,093

Equity & Liabilities

Capital and reserves
Capital (Part a) 2,838
Add: profit 3,821
Less: drawings (3 x 52 = 156(i) + 900 Bank) (1,056) 5,603

Non-Current liabilities
Loan – Brough 4,000

Current liabilities
Trade payables W3 2,200
Accrued heating & lighting 70
Accrued sundry expenses 190
Accrued interest (4,000 x 3% x 3/12) 30 2,490
12,093

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Workings:
W1 – Cash
b/d 20 Wages 2,950
Friends 250 Sundry expenses 140
Trade receivables β 38,416 Drawings (3 x 52) 156
Friends 250 Page | 43
Bank 35,170
c/d 20
38,686 38,686

W2 – Trade receivables
b/d 2,800 Cash W1 38,416
Cheque dishonored 180 Discount allowed 520
Sales β 39,156 Bad debts 200
c/d (3,200 – 200) 3,000
42,136 42,136

W3 – Trade payables
Discount received 480 b/d 1,800
Bank (30,500 – 280(ii) + 30,540 Purchases β 31,420
320(ii))
c/d 2,200
33,220 33,220

W4 – Prepaid Rent & Rates

b/d 40 PL β 465
Bank 475 c/d 50
515 515

W5 – Accrued lighting & heating expense

Bank 210 b/d 80
c/d 70 PL β 200
280 280

W6 – Accrued sundry expense

Bank 800 b/d 240
Cash 140 PL β 890
c/d 190
1,130 1,130

W7 – Furniture & fixture

b/d 2,800 Depreciation β 350
Bank 100 c/d 2,550
2,900 2,900

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 CAF 5 – Accounting from Incomplete Records

ANSWER 18
Babar
Trading and Profit and loss account
For the year ended 31 December 2014
Rs.
Sales W2 4,296,400
Page | 44
Less: Cost of goods sold
Opening Stock (Razi) 600,000
Purchases 3,282,000 W3 – 50,000 abnormal loss 3,232,000
Closing Stock (450,000)
(3,382,000)
Gross profit 914,400
Less: Expenses
Salaries 184,300
Sundry shop expenses 35,600
Lease rentals 120,000
Loss on burglary 30,000
Electricity(22000+5200) 27,200
Depreciation 25,000 x 10% x 6/12 1,250
(398,350)
Net profit 516,050
Babar
Balance Sheet
As at 31 December 2014
Rs.
Non-current assets
Goodwill 960,000 – 600,000 – 120,000 240,000
Furniture 25,000 – 1,250 23,750
263,750
Current assets
Inventory 450,000
Other assets (Razi) 120,000
Bank W1 2,023,000
Cash 34,500
2,627,500
2,891,250

Capital and reserves

Capital 480,000 (to Razi) + 2,000,000 (in bank) 2,480,000
Add: profit 516,050
Less: drawings (192,500)
2,803,550
Current liabilities
Trade payables 82,500
Payable to Razi 480,000 – 480,000 bank 0
Accrued expenses 5,200
87,700
2,891,250

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

W1 Bank
Rupees Rupees
nd
Capital introduced 2,000,000 Payment of 2 installment to Razi 480,000
Cash deposited 3,800,000 Payment for purchases 3,150,000
Cash received from insurance 20,000 Lease payment 120,000
Electricity 22,000
Furniture & Fixtures 25,000 Page | 45
Balance at bank 2,023,000
5,820,000 5,820,000
W2 Cash
Rupees Rupees
Bank 3,800,000
Sales 4,296,400 Salaries and EOBI 184,300
(Payments for) Purchases 49,500
Sundry shop expenses 35,600
Drawings 192,500
c/d 34,500
4,296,400 4,296,400

W3 PA
Rupees Rupees
Cash 49,500 b/d 0
Bank 3,150,000 Purchases 3,282,000
c/d 82,500
3,282,000 3,282,000

ANSWER 19
Part (a) Alpha Traders
Statement of profit or loss for the year ended 31 December 2017 Rs. 000
Sales 39,200 W1 + 60,000 W3 99,200
Cost of sales
Opening inventory 12,300
Purchases 88,500 W2 – 2,170 Return outwards – 5,500 abnormal loss 80,830
Closing inventory (14,500)
(78,630)
Gross profit 20,570
Other income
Delivery charges 330
Discount received W2 2,000
2,330
Expenses
Rent exp. +145 Op. Prepaid – 180 Cl. Prepaid + 2,100 Bank + 300 cheque 2,365
Salaries – 460 Op. accrued + 310 Cl. Accrued + 6,500 cash 6,350
Depreciation – Furniture and Fittings 10,175 / 92.5% x 5% 550
Bad debts 260
Doubtful debts [5,900 x 4%] – [4,400 x 4%] 60
Abnormal loss 5,500 – 5,500 insurance claim received -
Utilities 1,400
Repair & maintenance 2,800 bank + 500 cash – 260 related to Truck 3,040
Miscellaneous expenses 1,300
Depreciation – Delivery Truck 2,560 SFP x 12.5% x 9/12 240
(15,565)
Net Profit 7,335

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 CAF 5 – Accounting from Incomplete Records

Part (b) Alpha Traders

Statement of financial position as on 31 December 2017 2017 2016
Rs. 000 Rs. 000
Non-current assets
Furniture and Fittings (net) 10,175 – 550 SPL 9,625 10,175
Delivery Truck (net) [2,300+260=2,560 – 240 SPL 2,320 -
Page | 46 11,945
Current assets
Stock in trade 14,500 12,300
Prepaid rent 180 145
Receivable [5,900 – 236 SPL] & [4,400 – 176 SPL] 5,664 4,224
Bank [5,000 – 300 issued + 3,200 deposit] & [9,800 – 1,900 LY] 7,900 7,900
Cash in hand 430 750
28,674
40,619 35,494

Equity
Capital 26,534
Net profit 7,335
Drawings W3 (3,260)
30,609 26,534 β
Current liabilities
Trade creditors 9,700 8,500
Salaries payable 310 460
10,010
40,619 35,494
W1 Receivables
Particulars Rs. 000 Particulars Rs. 000
b/d 4,400 Bank 34,240
Sales (Credit) β 39,200 Bank (Un-credited cheque) 3,200
Bad debts 260
c/d 5,900
43,600 43,600
W2 Trade creditors
Particulars Rs. 000 Particulars Rs. 000
Bank 87,200 b/d 8,500
Bank (Cheque related to last year) (1,900) Purchases β 88,500
Discount 48,000 /96 x 4 2,000
c/d 9,700
97,000 97,000
W3 Cash
Particulars Rs. 000 Particulars Rs. 000
b/d 750 Bank 56,380
Bank 6,320 Salaries 6,500
Sales (cash) * 60,000 Repair and maintenance 500
Drawings β 3,260
c/d 430
67,070 67,070
*Credit sales Rs. 39,200 W1 x 100 / 98 = Rs. 40,000 at list price x 60 /40 = Rs. 60,000 on
cash

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 20
Yasin
Statement of comprehensive income
For the year ended December 31, 2015
Rs. 000 Rs. 000
Sales W1 25,965
Less: Cost of goods sold Page | 47
Opening Stock 1,600
Purchases 15,511 W3 – [52 weeks x 2 drawings] 15,407
Closing Stock (2,360) (14,647)
Gross profit 11,318
Less: Expenses
Staff wages (3,423)
Petrol & oil (236)
Wrapping materials (525 – 53 prepaid) (472)
Motor expense (728)
General expenses (625)
Interest (100 paid + 2,000 x 10% x 3/12 = 50 accrued) (150)
Electricity (228 + 50 accrued) (278)
Rates W4 (475)
Accountancy fee (100)
Loss on disposal (200 – 130) (70)
Bad debts (223 + 100) (v) (323)
Dep. (2,600-200=2,400 x10%) 240 + (1,200x20% x9/12) 180 (420) (7,300)
Net profit 4,018

Yasin
Statement of financial position
As at December 31, 2015
Assets Rs. 000 Rs. 000
Non-current assets
Goodwill 2,000
Freehold property 10,000
Fixtures (2,600 – 200 – 240) 2,160
Delivery van (1,200 – 180) 1,020 15,180

Current assets
Inventory 2,360
Store of wrapping material 53
Trade Receivables 637
Less: allowance for doubtful debts (100) 537
Prepaid rates W4 125
Bank (5,757 – 125 un-presented cheque) 5,632
Cash W1 180
8,887
24,067

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 CAF 5 – Accounting from Incomplete Records

Equity & Liabilities

Capital and reserves
Capital 20,000
Add: profit 4,018
Less: drawings (36 + 1,040) W1 + 1,329 bank + 104 inventory (2,509) 21,509

Page | 48 Non-Current liabilities

Loan from Robin 2,000

Current liabilities
Trade payables W3 358
Accrued electricity 50
Accountancy fee accrued 100
Interest payable (2,000 x 10% x 3/12) 50 558
24,067
Workings:
W1 – Cash
b/d - Wrapping material 525
Trade receivables β 25,505 Staff wages 3,423
Purchases 165
Petrol & oil 236
Drawings (20 x 52) 1,040
Bank 19,900
Drawing β 36
c/d 180
25,505 25,505

W2 – Trade receivables
b/d 400 Cash W1 25,505
Sales β 25,965 Bad debts 223
c/d 637
26,365 26,365

W3 – Trade payables
Bank 14,863 b/d -
Cash 165
Un-presented cheque 125 Purchases β 15,511
c/d 358
15,511 15,511

W4 – Prepaid Rent & Rates

b/d 100 PL β 475
Bank 500 c/d (500 x 3/12) 125
600 600

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 21
Danish
Statement of comprehensive income for the year ended December 31, 2013
Rs. Rs.
Sales W1 89,800
Less: sales return (3,000) 86,800
Page | 49
Less: Cost of goods sold W5
Opening Stock 25,000
Purchases (69,000 – 2,000) 67,000
Closing Stock W6 (30,000) (62,000)
Gross profit 24,800
Other income (discount received) 1,000
25,800
Less: Expenses
Rent (2,500)
Sundry Expenses (6,000 + 1,200) (7,200)
Discount allowed (1,400)
Bad debts (1,800 + (2,430 – 2,250)) (1,980)
Depreciation (15,000 x 10%) + (16,000 x 20%) (4,700) (17,780)
Net profit 8,020

Danish
Statement of financial position as at December 31, 2013
Assets Rs. Rs.
Non-current assets
Motor van (16,000 – 3,200) 12,800
Furniture & fixture (15,000 – 1,500) 13,500 26,300

Current assets
Inventory W6 30,000
Trade Receivables 48,600
Less: allowance for bad debts (48,600 x 5%) (2,430) 46,170
Cash W4 8000
84,170
110,470

Equity & Liabilities

Capital and reserves
Capital W1 79,250
Add: profit 8,020
Less: drawings (5,000) 82,270

Current liabilities
Trade payables W2 27,000
Accrued expenses 1,200 28,200
110,470

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 CAF 5 – Accounting from Incomplete Records

W1 - Capital at January 01, 2013

Assets
Motor van 16,000
Furniture & fixture 15,000
Inventory 25,000
Receivable 45,000 – allowance Rs. 45,000 x 5% = 2,250 42,750
Page | 50 Cash 4,500
103,250
Liabilities
Trade payable (24,000)
79,250

W2 - Trade payables
Cash 63,000 b/d 24,000
Discount received 1,000 Purchases β 69,000
Purchases return 2,000
c/d 27,000
93,000 93,000

W3 - Trade receivables
b/d 45,000 Cash 80,000
Sales β 89,800 Discount allowed 1,400
Bad debts 1,800
Sales return 3,000
c/d 48,600
134,800 134,800

W4 – Cash
b/d 4,500 Creditors 63,000
Trade receivables 80,000 Expense 6,000
Rent 2,500
Drawings 5,000
c/d 8,000
84,500 84,500

W5 – Sales value cost structure % Rs.

Net Sales (89,800 – 3,000) 140% 86,800
COS 100% (62,000)
GP 40% 24,800

W6 – Cost of sales
25,000 + (69,000 – 2,000) – 30,000 β = 62,000 W5

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 22
Ashfaq
Trading and Profit and loss account
For the year ended 30 June 2014
Rs.
Sales 160% 20,315,520
Page | 51
Less: Cost of goods sold
Opening Stock 1,805,000
Purchases W1 11,594,200
Closing Stock (702,000)
100% (12,697,200)
Gross profit 60% 7,618,320
Less: Expenses
Carriage outward 260,000
Petrol 156,000
Car expenses 73,000
Rent (42,000 - 20,000 opening accrual) 22,000
Salaries 1,600,000
Traveling expenses 40,000
Printing & stationary 46,000
Advertisement 125,000
Insurance (50,000 + 15,000 opening prepaid) 65,000
Depreciation (600,000+150,000) 750,000
Truck hire charges 657,000
Misc. expense (362,300 bank + 130,000 cash) 492,300
(4,286,300)
Net profit 3,332,020

Ashfaq
Balance Sheet as at 30 June 2014
Rs.
Non-current assets
Freehold land 2,500,000
Motor car 2,000,0000 – 600,000 depreciation 1,400,000
Furniture 1,000,000 – 150,000 depreciation 850,000
4,750,000
Current assets
Inventory 702,000
Trade Receivables W3 4,366,520
Cash 26,700
5,095,220
9,845,220

Capital and reserves

Capital 4,396,600
Add: profit 3,332,020
Less: drawings (1,560,000)
6,168,620
Current liabilities
Trade payables W1 2,845,500
Bank overdraft 360,600 + 14,182,200 – 15,373,900 831,100
3,676,600
9,845,220

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 CAF 5 – Accounting from Incomplete Records

W1 Creditors a/c
Rupees Rupees
Bank 9,850,700 Balance b/d 1,102,000
Balance c/d 2,845,500 Purchases (W1.1) 11,594,200
12,696,200 12,696,200

Page | 52 W1.1: Rs. 3,000,000 + (Rs.265,800/0.03) =11,860,000 – 265,800 discount = Rs. 11,594,200

W2 Cash a/c
Rupees Rupees
Balance b/d 15,900 Bank 13,717,800
Cash sales and RA 15,834,600 Drawings (30,000 × 52) 1,560,000
Carriage outward (5,000 × 52) 260,000
Petrol (3,000 × 52) 156,000
Misc. expense (2,500 × 52) 130,000
Balance c/d 26,700
15,850,500 15,850,500

W3 Debtors
Rupees Rupees
Balance b/d 350,000 Bank 464,400
Sales SPL 20,315,520 Cash W2 15,834,600
Balance c/d (balancing) 4,366,520
20,665,520 20,665,520

ANSWER 23
Friday Traders
Statement of profit or loss
For the year ended 31 December 2018
Rs. 000
Sales 5,040 W3 + 6,981 W5 12,021
Cost of sales
Opening inventory 3,705
Purchases W1 7,670
Closing inventory (975 + 2,597) (3,572)
(7,803)
Gross profit 4,218
Expenses
Rent [280 / 4 months = (70 x 8 months) + (70 x 130% x 4 months) 924
Salaries b/d (98) + 685 bank + 124 cash + c/d 134 845
Bad debts 138
Insurance 204 x 11/12 187
Repair and maintenance 186
Depreciation 2,490 / 60% = 4,150 + 550 = 4,700 x 8% 376
(2,656)
Net Profit 1,562

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Friday Traders
Statement of Financial Position
As at 31 December 2018
2018 2017
Non-Current Assets Rs. 000 Rs. 000
Equipment 2,490 + 550 – 376 2,664 2,490
Page | 53
Current Assets
Stock 3,572 3,705
Prepaid rent b/d 280 + 826 bank – 924 PL 182 280
Prepaid insurance 204 x 1/12 17 -
Trade debtors W6 1,683 1,410
5,454
Total Assets 8,118 7,885

Equity
Capital 3,447
Profit for the year 1,562
Drawings (477)
4,532 3,447

Current Liabilities
Payable to Sigma Electronics 2420 3,600
Salaries payable 134 98
Bank overdraft W4 1,032 740
3,586
Total Equity and Liabilities 8,118 7,885

W1 Payables (Sigma Electronics)

Particulars Rs.000 Particulars Rs.000
Bank 8,850 b/d 3,600
c/d 2,420 Purchases 7,670
11,270 11,270

W2 Juicers (opening) Juicers (Purchased)

Rs.000 % Rs.000
Sales 2,280 100 x 120% = 120 2,760 120
Cost of sales
Opening stock 3,705 x 1/3 1,235
Purchases 40% x 7,670 W1 3,068
Closing inventory (975)
1,235 65 2,093 65 x 140% = 91

W3 Cash Account
Particulars Rs.000 Particulars Rs.000
b/d 0 Repair and maintenance 186
Sales 2,280 W2 + 2,760 W2 5,040 Salaries and wages 124
Drawings 477
Bank 4,253
c/d 0
5,040 5,040

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 CAF 5 – Accounting from Incomplete Records

W4 Bank
Particulars Rs.000 Particulars Rs.000
Receivables 6,570 b/d 740
Cash W3 4,253 Payments given in question 11,115
c/d 1,032
11,855 11,855
Page | 54
W5 Blenders
Rs.000 %
Sales 6,981 130 x 120% = 156
Cost of sales
Opening inventory 3,705 x 2/3 2,470
Purchases 60% x 7,670 W1 4,602
Closing inventory (2,597)
4,475 100

W6 Receivables
Particulars Rs.000 Particulars Rs.000
b/d 1,410 Bank 6,570
Sales W5 6,981 Bad debts 138
c/d 1,683
8,391 8,391

ANSWER 24
Mansoor
Statement of comprehensive income for the year ended June 30, 2015
Rs. Rs.
Sales W3 6,528,750
Less: Cost of goods sold W2
Opening Stock 552,000
Purchases 5,341,000 – 670,000 abnormal loss 4,671,000
Closing Stock (0) (5,223,000)
Gross profit 1,305,750
Other income (scrap sales) 35,000
1,340,750
Less: Expenses
Electricity charges (50,500 + 1,900 – 5,500) (46,900)
Business rates (32,000 + 11,500 – 15,000) (28,500)
Sundry expenses (15,000)
Accounting charges (20,500 – 11,500 + 1,800) (10,800)
Rent (240,000 + 15,000) (255,500)
Assistant salary (132,000)
Loss by fire: inventory (670,000 – 630,000) (40,000)
Loss by fire: fixtures (235,000 + 45,000 – 225,000) (55,000)
Bad debts (14,000) (597,700)
Net profit 743,050

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Mansoor
Statement of financial position as at June 30, 2015
Assets Rs. Rs.
Non-current assets -

Current assets
Inventory - Page | 55
Trade Receivables W4 480,000
Insurance claim (630,000 + 225,000) 855,000
Prepayments 15,000
Bank W6 435,800
Cash W5 40,500 1,826,300
1,826,300

Equity & Liabilities

Capital and reserves
Capital 1,185,000
Add: profit 743,050
Less: drawings 144,450 W5 + 188,000 W6 (332,450) 1,595,600

Current liabilities
Trade payables W1 212,000
Accrued electricity expense 1,900
Accrued accounting charges 1,800
Accrued rent expense 15,000 230,700
1,826,300

W1 - Trade payables
Bank 5,061,000 b/d 220,000
c/d 212,000 Purchases β 5,053,000
5,273,000 5,273,000
W2 – Cost of sales
552,000 + [5,053,000W1 + (24,000x12) 288,000] – 670,000 = 5,223,000

W3 – Sales value cost structure

% Rs.
Sales 100% 6,528,750
COS 80% (5,223,000) W2
GP 20% 1,305,750

W4 - Trade receivables
b/d 281,000 Bad debts 14,000
Sales W3 6,528,750 Cash β 6,315,750
c/d (494,000 – 14,000) 480,000
6,809,750 6,809,750

W5 – Cash
b/d 35,000 Assistant salary 132,000
Scrap sales 35,000 Purchases 288,000
Trade receivables W4 6,315,750 Bank 5,780,800
Drawings β 144,450
c/d 40,500
6,385,750 6,385,750

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 CAF 5 – Accounting from Incomplete Records

W6 – Bank
b/d 307,500 Drawings 188,000
Cash 5,780,800 Sundry expense 15,000
Accounting charges 20,500
Electricity 50,500
Page | 56 Business rates 32,000
Rent 240,500
Supplies 5,061,000
Fixtures 45,000
c/d β 435,800
6,088,300 6,088,300

ANSWER 25
Part (a)
Asif
Statement of comprehensive income for the year ended June 30, 2015
Rs. Rs.
Sales 2,996,000 W1 + 709,750 W5 3.705,750
Less: Sales return (15,000) 3,690,750

Less: Cost of goods sold W3

Opening Stock 482,500
Purchases 2,570,000
Closing Stock (592,000) (2,460,500)
Gross profit 1,230,250
Other income (discount received) 30,300
1,260,550
Less: Expenses
Salaries (440,400)
Interest expense (30,000)
Expenses W8 (278,900)
Bad debts 4,200 bad debts – 3,700 recovered (500)
Loss on disposal W9 (73,600)
Depreciation (825 – 280 = 545 x 10%) + (64 x 10% x 6/12) (57,700) (881,100)
379,450
Bonus to manager (379,450 x 5/105) (18,069)
Net profit 361,381

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

Part (b)
Asif
Statement of financial position as at June 30, 2015
Assets Rs. Rs.
Non-current assets
Land & building 130,000
Furniture Page | 57
[825,000 – 280,000 + 64,000] – [485000 -84,000 + 57,700] 150,300 280,300

Current assets
Inventory 592,000
Trade Receivables W1 578,300
Less: allowance for bad debts (27,000) 551,300
Prepayments W8 9,700
Bank W7 544,950
Cash W6 13,700
1,711,650
1,991,950

Equity & Liabilities

Capital and reserves
Capital 613,300
Add: profit 361,381
Less: drawings (60,000) 914,681

Non-Current liabilities
6% loan 500,000

Current liabilities
Trade payables W2 530,200
Accrued expense W8 19,000
Accrued interest [30,000 – 22,500] 7,500
Advance from customer 2,500
Due to manager 18,069 577,269
1,991,950

W1 - Trade receivables
b/d 670,000 Bank 3,071,000
Sales return 15,000
Sales β 2,996,000 Bad debts 4,200
C/d (Advance from 2,500 c/d (600,500 – 18,000 (ii) –
customer) (iv) 4,200 (v)) 578,300
3,668,500 3,668,500

W2 - Trade payables
Discount received 30,300 b/d 500,100
Bank 2,509,600 Purchases 2,570,000
c/d β 530,200
3,070,100 3,070,100
W3 – Cost of sales
482,500 + 2,570,000 – [580,000 + {18,000 (ii) /1.5}] 592,000 = 2,460,500

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 CAF 5 – Accounting from Incomplete Records

W4 – Sales value cost structure % Rs.

Sales 150% 3,690,750
COS 100% (2,460,500) W3
GP 50% 1,230,250

W5 – Cash sales
Page | 58 Total sales 3,690,750
Less: Net credit sales
Credit sales 2,996,000 W1
Sales return (15,000)
(2,981,000)
Cash sales 709,750

W6 – Cash
b/d 10,000 Bank 624,750
Cash Sales W5 709,750 Sundry expense 25,000
Cash (bad debts recovered) 3,700 Drawings 60,000
c/d β 13,700
723,450 723,450

W7 – Bank
Cash 624,750 b/d 24,200
Trade receivables 3,071,000 Sundry expense 212,500
Furniture disposal proceeds 122,400 Salaries 440,400
Furniture 64,000
Interest on loan 22,500
Trade payables 2,509,600
c/d β 544,950
3,818,150 3,818,150

W8 – Prepaid & Accrued expenses

b/d 53,800 b/d 21,700
Bank 212,500 PL β 278,900
Cash 25,000
c/d 19,000 c/d 9,700
310,300 310,300
W9 – Disposal furniture
Furniture 280,000 Dep. (280,000 x 10% x3) 84,000
Cash 122,400
Loss on disposal β 73,600
280,000 280,000

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 26
FC Traders
Statement of Profit or loss for the year ended 30 June 2018
Rs. 000
Sales at counter [COS x 50% x 135/100] 11,813
Sales on credit [COS x 30% x 145/100] 7,612
Page | 59
Sales through riders [COS x 20% x 140 /100] 4,900
24,325
Cost of sales
Opening inventory 2,800
Purchases 14,640 credit + 3,000 cash – 250 damaged – 540 drawings 16,850
Closing inventory [2,400 – 250 damaged] (2,150)
(17,500)
Gross profit 6,825
Expenses
Repair and maintenance 950
Shop rent b/d 200 – 2,000 cash – c/d 400 2,200
Misc. supplies b/d 300 + 800 cash – c/d 400 700
Utilities 1,200
Salaries and wages 1,800 + 165 accrued 1,965
Riders commission [4,900 x 3%] 147
Depreciation 4,000 x 10% + 2,500 x 10% 650
Abnormal loss (damaged stock) 250
(8,062)
Net loss (1,237)

FC Traders
Statement of financial position as at 30 June 2018
2018 2017
Non-current assets Rs. 000 Rs. 000
Equipment [4,000 – 400] 3,600 4,000
Furniture and fixture [2,500 – 250] 2,250 2,500
5,850 6,500
Current assets
Inventory [2,400 – 250 damaged] 2,150 2,800
Trade debtors 1,600 0
Unused supplies 400 300
Cash and bank 285 1,000
4,435 4,100
10,285 10,600
Equity
Capital 8,550
Net loss (1,237)
Drawings (540)
6,773 8,550 β
Liabilities
Unpaid suppliers bill [2,800 – (320- 230) 2,890 1,850
Shop rent payable 400 200
Accrued salaries 165 0
Riders commission payable 147 – 90 paid 57 0
3,512 2,050
10,285 10,600

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 CAF 5 – Accounting from Incomplete Records

Creditors
Bank 13,600 b/d 1,850
c/d [2,800 + (320 – 230) 2,890 Purchases 14,640
16,490 16,490
Page | 60 Cash and Bank
b/d 1,000 Bank payments 18,550
Counter sales 11,813 Cash payments 4,890
Cash from debtors
6,012
7,612 – 1,600
Cash from riders 4,900 c/d 285
23,725 23,725

ANSWER 27
Misappropriation W1 = Rs. 363,000

W1 – Difference in COS Rs. 000

COS as per equation W2 17,930
COS as per cost structure W3 17,567
Misappropriation 363

W2 – COS equation
COS = Opening inventory + Purchases - Closing Inventory
17,930 = 12,500 + 13,930 W5 - 8,500

W3 – Cost structure
Sales to staff Normal sales Loss Total
% Rs. % Rs. % Rs. Rs.
120 x 70 315 + 20,520
Sales 105 315 120 20,052 β 468
= 84 W4 = 20,835
13,930 W5 x
COS 100 (300) 100 16,710 (17,567)
100 4% = (557)
GP 5 15 20 3,342 16 (89) 3,268

W4 – Trade receivables
b/d 2,000 Bank (18,000 – 500 + 860) 18,360
Sales β 20,520 Bad debts 200
Discount allowed 360
c/d 3,600
22,520 22,520

W5 – Trade payables
Bank 12,700 b/d 8,000
Purchases β 13,930
c/d 9,500 – (740 – 470) 270 9,230
21,930 21,930

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 28
Part (a)
Adnan
Statement of comprehensive income for the year ended December 31, 2015
Rs. Rs.
Sales W3 1,774,815
Less: Cost of goods sold W2 Page | 61
Opening Stock 15,700
Purchases W1 1,438,500
Closing Stock (27,500) (1,426,700)
Gross profit 348,115
Less: Expenses
Wages (8,900 x 12) (106,800)
Rent (3,500 x 9) + (4,500 x 3) (45,000)
Electricity & telephone 33,000 + 8,800 accrued (41,800)
Dep. (285,000 x10%) 28,500 + (75,000x10% x6/12) 3,750 (32,250) (225,850)
Net profit 122,265

Adnan
Statement of financial position as at December 31, 2015
Assets Rs. Rs.
Non-current assets
285,000 + 75,000 – 28,500 -3,750 327,750

Suspense: Cash shortage (part b) 196,715

Current assets
Inventory 27,500
Trade Receivables W4 80,900
Bank W6 103,400
Cash W7 700 212,500
736,965

Equity & Liabilities

Capital and reserves
Capital W5 593,200
Add: profit 122,265
Less: drawings (122,600) 592,865

Current liabilities
Trade payables W1 130,800
Accrued rent 4,500
Accrued electricity & telephone 8,800 144,100
736,965

Part (b)
Cash shortage W7 = Rs. 196,715

W1 – Trade payables
Bank 1,423,800 b/d 116,100
c/d 130,800 Purchases β 1,438,500
1,554,600 1,554,600

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 CAF 5 – Accounting from Incomplete Records

W2 – Cost of sales
15,700 + 1,438,500 W1 – 27,500 = 1,426,700

W3 – Sales multi cost structure

Cash sales 20% Credit sales 80% Total
% Rs. % Rs. Rs.
Page | 62 Sales 122% 348,115 100% 1,426,700 1,774,815
COS 100% (285,340) 80% (1,141,360) (1,426,700) W2
GP 22% 62,775 20% 285,340 348,115

W4 – Trade receivables
b/d 48,700 Cash β 1,742,615
Sales W3 1,774,815 c/d 80,900
1,823,515 1,823,515

W5 – Capital at January 01, 2015

Assets
Non-current assets 285,000
Inventory 15,700
Receivables 48,700
Bank 349,100
Cash 14,300
712,800
Liabilities
Trade payable (116,100)
Rent payable (3,500)
593,200

W6 – Bank
b/d 349,100 Creditors 1,423,800
Cash β 1,375,700 Non-current assets 75,000
Drawings 122,600
c/d 103,400
1,724,800 1,724,800

W7 – Cash
b/d 14,300 Wages (8,900 x 12) 106,800
Trade receivables W4 1,742,615 Rent (3,500 x 10) + (4,500 x 2) 44,000
Electricity and telephone 33,000
Bank W6 1,375,700
Shortage β 196,715
c/d 700
1,756,915 1,756,915

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 29
Mr. Razi
Income Statement
For the year ended 30 June 2015
Rupees
Sales W1 5,984,000
Cost of Sales Page | 63
Opening stock 856,000
Purchases β 4,471,000
Closing stock 1,167,000 – NRV loss W2 13,800 (1,153,200)
[Gross 6,400,000 W1 x 65%] + NRV loss W2 13,800 4,173,800
Gross profit 1,810,200
Marketing expenses W6 (200,000)
Utility expenses W6 (250,000)
Salaries W6 (624,000)
Other misc. expenses W6 (100,000)
Depreciation expense 600,000 x 10% + 250,000 x 10% x 9/12 (78,750)
Loss due to cash shortage 150,000 W5 + 250,000 W3 (400,000)
Net profit 157,450

Mr. Razi
Balance Sheet
As at 30 June 2015
Rupees
Non-Current Assets
Land 450,000
Office equipment
Cost (600,000 + 250,000) 850,000
Accumulated depreciation (15,000 + 78,750) (93,750)
756,250
1,206,250
Current Assets
Stock [1,167,000-13,800 W2] 1,153,200
Debtors 1,091,000
Bank W4 291,000
2,535,200
Total Assets 3,741,450

Equity
Razi's capital opening 2,374,000
Profit for the year 157,450
Drawings (125,000)
2,406,450

Current Liabilities
Creditors 1,195,000
Accrued expenses W6 140,000
Total Equity and Liabilities 3,741,450

Rupees
Cash misappropriated in debtors W3 250,000
Cash misappropriated in creditors W5 150,000
Cash shortage 400,000

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 CAF 5 – Accounting from Incomplete Records

Workings:
W1: Determination of gross sales revenue and discount allowed
Net sales Discount allowed Gross sales
Cash sales 1,728,000 192,000 1,920,000
(Given) (1,728,000 x 0.1/0.9) (1,728,000+192,000)
Credit sales 4,256,000 224,000 4,480,000
Page | 64 (4,480,000 – 224,000) (4,480,000 x 5%) (1,920,000 x 70 / 30)
Total 5,984,000 416,000 6,400,000
Note: The discount is trade discount in nature.

W2: Adjustment for NRV on damaged stock Rupees

Selling price of damaged stock (1,500 ÷ 0.65) 2,308
Net realizable value (2,308 – 900) 1,408
NRV expense per unit (1,500 – 1408) 92
Total NRV expense (92 x 150 units) 13,800

W3 Debtors
Rupees Rupees
Opening balance 1,560,000 Receipts 4,475,000
Sales (Credit) W1 4,256,000 Cash misappropriated 250,000
Closing balance 1,091,000
5,816,000 5,816,000

W4 Bank
Rupees Rupees
b/d 389,000 Payments made to creditors 4,774,000
Receipts from cash sales 1,728,000 Payment for marketing exp. 205,000
Receipts from debtors 4,475,000 Payment for utility expenses 240,000
Payment for salaries 600,000
Payment for other misc. exp 107,000
Drawing 125,000
Office equipment 250,000
Closing balance 291,000
6,592,000 6,592,000
W5 Creditors
Rupees Rupees
Payments 4,774,000 Opening balance 1,348,000
Purchases (from COS) 4,471,000
Closing balance 1,195,000 Cash misappropriated 150,000
5,969,000 5,969,000
W6 Accrued expenses
A B C A+B-C
Expense for Accruals Payment during Accruals
the year 01-07-2014 the year 30-06-2015
--------------------------- Rupees ---------------------------
Marketing expenses 200,000 30,000 205,000 25,000
Utility expenses 250,000 25,000 240,000 35,000
Salaries (52,000 x 12) 624,000 48,000 600,000 72,000
Other misc. expenses 100,000 15,000 107,000 8,000
1,174,000 118,000 1,152,000 140,000

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ANSWER 30
Part (a)
Statement of amount of defalcation Rs.
Debtors balance short W1 12,000
Cash against purchase return W2 8,000
Cash missing from till W3 44,750
Page | 65
TOTAL 64,750

Part (b)
Balance Sheet of Rahil
As on 30 June 2016
Liabilities Rupees Assets Rupees
Sundry creditors 181,000 Fixtures and fittings (net) 156,975
Expenses owing 13,000
Capital:
Balance on 1 April 2016 233,000
Add: Net profit W4 10,975 Stock in trade 58,000
Less: Drawings (78,000) Sundry debtors 54,000
165,975 Balance at bank 91,000
359,975 359,975

W1 Debtors
Rupees Rupees
b/d 55,000 Bank (Cheques received) 29,000
Credit sales 3 months 64,000 Cash β 24,000
Short 66,000 – 54,000 12,000
c/d 54,000
119,000 119,000

W2 Creditors
Rupees Rupees
Purchase return 8,000 b/d 159,000
Bank 604,000 Cash against return 8,000
c/d 181,000 Purchases β 626,000
793,000 793,000

W3 Cash
Rupees Rupees
b/d 5,000 Bank 627,000
Debtors W1 24,000 Salary 13,000 x 3 month 39,000
Cash sales (note) 774,750 Drawings 26,000 x 3 78,000
Petty expenses 5,000 x 3 15,000
Loss 44,750
803,750 803,750
Note: Total sales 838,750 W4 – 64,000 credit sales = Rs. 774,750 cash sales

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 CAF 5 – Accounting from Incomplete Records

W4 Net Profit for 3 months Rs. %

Sales 838,750 100%
Cost of sales
Opening inventory 111,000
Purchases 626,000 – 8,000 returns 618,000
Closing inventory (58,000)
Page | 66 (671,000) 80%
Gross Profit 167,750 20%
Depreciation 161,000 x 10% x 3/12 (4,025)
Salary (39,000)
Petty expenses 16,000 opening - 15,000 paid – 13,000 closing (12,000)
Rent and other expenses (37,000)
Loss due to defalcation (64,750)
10,975

ANSWER 31
Part (a)
Loss due to defalcation Rs.
Cash embezzled through purchase returns (iv) 24,000
Stock embezzled through fake debtors (vii) 50,000 x 75 /100 37,500
Difference in cash W1 50,740
112,240

Part (b)
Statement of profit or loss Rs.
Sales W5 2,485,250
Cost of sales
Opening inventory 250,000
Purchases 1,979,500 W3 – 24,000 return (iv) 1,955,500
Closing inventory (215,000)
(1,990,500)
Gross profit 494,750
Expenses
Rent expenses 72,000 + 3,000 75,000
Utilities 36,000
Other expenses 24,750
Loss on sale of vehicle 18,500 NBV – 15,000 sale proceeds 3,500
Salaries expenses 48,000 – 18,000 + 22,000 52,000
Depreciation – Furniture 550,000 + 45,000 – 555,000 40,000
Deprecation – Equipment 80,000 – 64,000 16,000
Depreciation – Vehicle 230,000 – 210,000 20,000
Loss due to defalcation (part a) 112,240
(379,490)
115,260

W1 Cash Account
Particulars Rs. Particulars Rs.
b/d 45,000 Drawings 12,000 x 12 (iii) 144,000
Sales (on cash) W5 1,631,250 Bank 1,450,000
Difference 50,740
c/d 31,510
1,676,250 1,676,250

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

W2 Payables
Particulars Rs. Particulars Rs.
Bank 1,807,500 b/d 100,000
Purchase return 24,000 Cash for return 24,000
c/d 354,500 – 45,000 furniture (v) 309,500 Purchases 2,017,000
2,141,000 2,141,000
Page | 67
W3 Purchases
Particulars Rs. Particulars Rs.
Payables W2 2,017,000 Stock embezzled – Fake RA 37,500
Transfer to COS/SPL 1,979,500
2,017,000 2,017,000

W4 Receivables
Particulars Rs. Particulars Rs.
b/d 260,000 Bank 824,000
Sales (credit) 854,000 c/d 340,000 – 50,000 (vii) 290,000

W5 Cash normal Cash discounted

Credit Total
Qty = x Qty = 1.25x
Sales 750,000 100 881,250 94 854,000 W4 100 2,485,250
COS (600,000) β 80 (750,000) β 80 (640,500) 75 (1,990,500)
Profit 150,000 20 131,250 14 213,500 25 494,750

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 CAF 5 – Accounting from Incomplete Records

Page | 68

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

ICAP OBJECTIVE BASED QUESTIONS

01. Yusuf does not keep a full set of business records, but the following information is available
for the month of June 2019.

Rs. 000
Page | 69
Accounts receivable, 1 June 2019 800

Accounts receivable, 30 June 2019 550

Credit sales 6,800

Cash received from customer (credit) 6,730

Irrecoverable debt written off 40

General allowance for doubtful debts at 30 June 2019 100

Assuming no other transactions, how much discount was allowed to customers during the
month?

(a) Rs. 240,000

(b) Rs. 280,000

(c) Rs. 340,000

(d) Rs. 380,000

02. Many of the records of Ghalib have been destroyed by fire. The following information is
available for the period under review.
(i) Sales totaled Rs. 480,000
(ii) Inventory at cost was opening Rs. 36,420, closing Rs. 40,680
(iii) Trade payables were opening Rs. 29,590, closing Rs. 33,875
Gross profit for the period should represent a margin of 50%
What was the total for the period of cash paid to suppliers?

(a) Rs. 239,975

(b) Rs. 315,715

(c) Rs. 319,975

(d) Rs. 328,545

03. In the year to 31st April 2016, Abdullah’s sales were Rs. 182,000. All of his sales were made
at a mark-up of 30%. His opening inventory value was Rs. 11,800 and his closing inventory
value was Rs. 9,700.
What was the value of Abdullah’s purchases in the year to 31 April 2016?

(a) Rs. 125,300

(b) Rs. 137,900

(c) Rs. 140,000

(d) Rs. 142,100

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 CAF 5 – Accounting from Incomplete Records

04. The following information is relevant to the calculation of the sales figure for Arif, a sole
trader who does not keep proper accounting records:

Rs.

Opening accounts receivable 29,100

Page | 70
Cash received from credit customers and paid into the bank 381,600

Expenses paid out of cash received from credit customers before banking 6,800

Irrecoverable debts written off 7,200

Refunds to credit customers 2,100

Discounts allowed to credit customers 9,400

Cash sales 112,900

Closing accounts receivable 38,600

The figure which should appear in Arif’s statement of comprehensive income for sales is:

(a) Rs. 525,300

(b) Rs. 511,700

(c) Rs. 529,500

(d) Rs. 510,900

05. A sole trader who does not keep full accounting records wishes to calculate her sales
revenue for the year.
The information available is:

Rs.

1 Opening inventory 17,000

2 Closing inventory 24,000

3 Purchases 91,000

4 Standard gross profit percentage on sales 40%

revenue

Which of the following is the sales figure for the year calculated from these figures?

(a) Rs. 117,600

(b) Rs. 108,000

(c) Rs. 210,000

(d) Rs. 140,000

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

06. Salman is a sole proprietor whose accounting records are incomplete. All the sales are cash
sales and during the year Rs. 50,000 was banked, including Rs. 5,000 from the sale of a
business car. He paid Rs. 12,000 wages in cash from the till and withdrew Rs. 2,000 as
drawings. The cash in the till at the beginning and end of the year was Rs. 300 and Rs. 400
respectively. There were no other payments in the month.
Page | 71
What were the sales for the year?

(a) Rs. 58,900

(b) Rs. 59,100

(c) Rs. 63,900

(d) Rs. 64,100

07. There is Rs. 100,000 in the cash till at the year-end at F Ltd, but the accountant has
discovered that some cash has been stolen. At the beginning of the year there was Rs.
50,000 in the cash till and receivables were Rs. 2,000,000. Total sales in the year were Rs.
230,000,000. Accounts receivable at the end of the year were Rs. 3,000,000. Cheques
banked from credit sales were Rs. 160,000,000 and cash sales of Rs. 50,000,000 have been
banked.
How much cash was stolen during the year?

(a) Rs. 21,050,000

(b) Rs. 18,950,000

(c) Rs. 19,050,000

(d) Rs. 50,000

08. A business operates on a gross margin of 33 ¼ %. Gross profit on a sale was Rs. 800,000
and expenses were Rs. 680,000.
The net profit percentage is

(a) 3.75%

(b) 5%

(c) 11.25%

(d) 22.67%

09. A toyshop makes purchases of Rs. 20,248,000 and sales of Rs. 26,520,000. The proprietor’s
children take goods costing Rs. 486,000 without paying for them. Closing stock was valued
at its cost of Rs. 2,240,000 and the gross margin achieved was a constant 30% on sales.
What was the cost of the opening stock?

(a) Rs. 556,000

(b) Rs. 1,042,000

(c) Rs. 2,392,000

(d) Rs. 2,878,000

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 CAF 5 – Accounting from Incomplete Records

10. Which of the following calculations could produce an acceptable figure for a trader's net profit
for a period if no accounting records had been kept?

(a) Closing net assets plus drawings minus capital introduced minus opening net assets
Page | 72 (b) Closing net assets minus drawings plus capital introduced minus opening net assets

(c) Closing net assets minus drawings minus capital introduced minus opening net
assets

(d) Closing net assets minus drawings plus capital introduced plus opening net assets

11. On 30 September 2018 part of the inventory of a company was completely destroyed by fire.
The following information is available:

Inventory at 1 September 2018 at cost Rs. 49,800,000

Purchases for September 2018 Rs. 88,600,000

Sales for September 2018 Rs. 130,000,000

Inventory at 30 September 2018 undamaged items Rs. 32,000,000

Standard gross profit percentage on sales 30%

Based on this information, what is the cost of the inventory destroyed?

(a) Rs. 17,800,000

(b) Rs. 47,400,000

(c) Rs. 15,400,000

(d) Rs. 6,400,000

12. Sarim does not keep full accounting records. His last accounts show that his capital balance
was Rs. 42,890,000. At the year end, he calculated that his assets and liabilities were:

Rs. 000

Non-current assets 41,700

Inventory 9,860

Receivables 7,695

Payables 4,194

Bank overdraft 5,537

On reviewing his calculations, you note that he did not include Rs. 258,000 of unpaid
invoices for expenses.
What is the value of Sarim’s closing capital?

(a) Rs. 49,266,000

(b) Rs. 49,544,000

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

(c) Rs. 60,360,000

(d) Rs. 60,876,000

13. During the year to 30th November 2015 Amna bought goods for resale at a cost of Rs.
75,550,000. Her inventory at 1st December 2014 was valued at Rs. 15,740,000. She did not Page | 73
count her inventory at 30th November 2015, but she knows that her sales for the year to 30th
November 2015 were Rs. 91,800,000. All sales were made at a mark-up of 20%.
Based on the information above, what was the value of Amna’s inventory at 31 November
2015?

(a) Rs. 13,630,000

(b) Rs. 14,790,000

(c) Rs. 16,690,000

(d) Rs. 17,850,000

14. On 1 September 2018, Waris had inventory of Rs. 380,000. During the month, sales totalled
Rs. 650,000 and purchases Rs. 480,000. On 30 September 2018 a fire destroyed some of
the inventory. The undamaged goods were valued at Rs. 220,000. The business operates
with a standard gross profit margin of 30%.
Based on this information, what is the cost of the inventory destroyed in the fire?

(a) Rs. 185,000

(b) Rs. 140,000

(c) Rs. 405,000

(d) Rs. 360,000

15. You are given the following incomplete and incorrect extract from the Statement of
comprehensive income of a company that trades at a markup of 25% on cost:

Rs. Rs.

Sales 174,258

Less: Cost of goods sold

Opening inventory 12,274

Purchases 136,527

Closing inventory X

(X)

Gross profit X

Having discovered that the sales figure should have been Rs. 174,825 and the purchase
returns of Rs. 1,084 and sales returns of Rs. 1,146 have been omitted, the closing inventory
should be:

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 CAF 5 – Accounting from Incomplete Records

(a) Rs. 8,662

(b) Rs. 8,774

(c) Rs. 17,349

(d) Rs. 17,458

Page | 74

16. Profit is Rs. 1,051,000. Capital introduced is Rs. 100,000. There is an increase in net assets
of Rs. 733,000.
What are drawings?

Rs. ___________

17. The bookkeeper of Lego has disappeared. There is no cash in the till and theft is suspected.
It is known that the cash balance at the beginning the year was Rs. 240,000. Since then,
total sales have amounted to Rs. 41,250,000. Credit customers owed Rs. 2,100,000 at the
beginning of the year and owe Rs. 875,000 now. Cheques banked from credit customers
have totaled Rs. 2,429,000. Expenses paid from the till receipts amount to Rs. 180,500 and
cash receipts of Rs. 9,300,000 have been lodged in the bank.
What is the amount that bookkeeper stole during the period?

Rs. ___________

18. Taiwan Tyres does not keep full accounting records, but the following information is available
in respect of accounting year ended 31st December 2018.

Rs.

Cash purchases in year 3,900,000

Cash paid for goods supplied on credit 27,850,000

Payables at 1st January 2018 970,000

Payable at 31st December 2018 720,000

In the statement of comprehensive income for 2018, figure for purchases will be?

Rs. ___________

19. Deen has been trading for some time, but he neglected to maintain full accounting. He is
able to provide the following information.
He is owed Rs. 7,900 by his customers.
He has lodged Rs. 120,700 to his bank account since starting his business. This includes his
initial capital of Rs. 22,000.
All his sales are made at cost plus 30%
The value of Deen’s sale since he began trading is?

Rs. ___________

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

20. The diesel fuel included in the inventory at 1 November 2017 was Rs. 12,500,000 and there
were invoices wait for Rs. 1,700,000. During the year to 31 October 2018, diesel fuel bills of
Rs. 85,400,000 were paid, and a delivery worth Rs. 1,300,000 had yet to be invoiced.
At 31 October 2018, the inventory of diesel fuel was valued at Rs. 9,800,000.
The diesel fuel to be charged to the Statement of comprehensive income for the year to 31
October 2018 is: Page | 75
Rs. ___________

21. In which of the following systems of recording the financial statements reflect true and fair
view of an entity and accounting records are considered to be more accurate?

(a) Cash book system

(b) Single entry system

(c) Double entry system

(d) None of the above

22. Statement of financial position produced from incomplete accounting record

is commonly known as

(a) Statement of financial position

(b) Statement of affairs

(c) Statement of net assets

(d) Statement of financial operations

23. Which of the following businesses usually maintain incomplete accounting record of
the business activities?

(a) Large businesses

(b) Companies

(c) Partnership firms

(d) Small businesses

24. In single entry system, it is not possible to prepare,

(a) Statement of financial position

(b) Profit or loss account

(c) Trial balance from ledgers

(d) Receipt and payment account

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 CAF 5 – Accounting from Incomplete Records

25. The opening capital is ascertained by preparing:

(a) Cash book

(b) Creditors A/c

(c) Debtors A/c

Page | 76
(d) Opening statement of affairs

26. Identify the correct formula used to ascertain the closing balance of capital?

(a) Closing capital = Opening capital + Net profit – Expenses

(b) Closing capital = Opening capital + Net profit + Drawings

(c) Closing capital = Opening capital + Net profit – Drawings

(d) Closing capital = Opening capital + Revenue – Expenses

27. Net profit is calculated by:

(a) Closing capital + Drawings + Fresh capital injected – Opening capital

(b) Closing capital – Drawings + Fresh capital injected – Opening capital

(c) Closing capital + Drawings + Fresh capital injected + Opening capital

(d) None of the above

28. If opening capital = Rs.10 million and closing capital = Rs.20 million. Assuming no drawings
during the accounting period, calculated the net profit or loss for the period?

(a) Net profit = Rs.20 million

(b) Net loss = Rs.20 million

(c) Net profit = Rs.10 million

(d) Net loss = Rs.10 million

29. Which one of the following accounts is supposed to be used to get the figure of credit
purchases made during the current accounting period?

(a) Debtor account

(b) Creditor account

(c) Revenue account

(d) Expenses account

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

30. To obtain the amount of credit sales made during an accounting period, which account is
generally used in single entry and incomplete records?

(a) Debtor account

(b) Creditor account

(c) Revenue account Page | 77

(d) Expenses account

31. If Plant (closing balance) = Rs. 8 million, Land (opening balance) = Rs. 5 million and
Creditors (opening balance) = Rs. 1 million then opening capital balance is?

(a) Rs.3 million

(b) Rs.4 million

(c) Rs.5 million

(d) Rs.8 million

32. Opening and closing debtors were Rs. 412,800 and Rs. 524,400 respectively. During the
year Rs. 2,684,500 was received from sales after allowing a cash discount of Rs. 17,420.
Debts of Rs. 34,840 were written off as bad during the year. Find out the credit sales during
the year?

(a) Rs.2,778,680

(b) Rs.2,813,520

(c) Rs.2,848,360

(d) Rs.2,753,670

33. Opening and closing creditors were Rs. 450,000 and Rs. 700,000 respectively. During the
year, Rs. 3,400,000 was paid to suppliers. Find out the credit purchases during the year?

(a) Rs.3,150,000

(b) Rs.3,400,000

(c) Rs.3,650,000

(d) None of the above

34. Staff salary payable for the month end was Rs. 74,540 and Rs. 96,720 as its opening
balance. Salary paid during the period was Rs. 856,420. Find out the accrued salary during
the period?

(a) Rs.834,240

(b) Rs.856,420

(c) Rs.861,540

(d) Rs.878,600

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 CAF 5 – Accounting from Incomplete Records

Page | 78

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

OBJECTIVE BASED ANSWERS

01. (b)
Accounts receivables
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 1,700 Bad debts 40 Page | 79
Sales 6,800 Cash 6,730
Discount β 280
c/d 550
7,600 7,600

02. (a)
Accounts payable
Particulars Rs. Particulars Rs.
Cash β 239,975 b/d 29, 90
c/d 33,875 Purchases 244,260
237,850 237,850

Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 36,420 OS 480,000x0.5 240,000
Purchases β 244,260 c/d 40,680
280,680 280,680

03. (b)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 11,800 COS 182,000/130x100 140,000
Purchases β 137,900 c/d 9,700
1 9,700 149,700

04. (a)
Total sales = Rs. 112,900 + Rs. 412,400 = 525,300

Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 29,100 Bad debts 7,200
Sales β 412,400 Cash 381,600+6,800 388,400
Refunds 2,100
Discount allowed 9,400
c/d 38,600
443,600 443,6 0

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 CAF 5 – Accounting from Incomplete Records

05. (d) Cost of sales = 17,000 + 91,000 – 24,000 = 84,000

Sales = 84,000/60 x 100 = Rs. 140,000
06. (b) Sales = 64,100 – 5,000 = 59,100
Cash a/c

Page | 80 Particulars Rs. Particulars Rs.

Bal. b/d 300 Bank 50,000
Cash from sales 64,100 Wages 12,000
Drawings 2,000
c/d 400
64,400 64,400

07. (b)
Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 2,000,000 Cash 179,000,000
Sales +230,000,000- 180,000,000 c/d 3,000,000
50,000,000
182,000,000 182,000,000

Cash a/c
Particulars Rs. Particulars Rs.
Bal. b/d 50,000 Bank 210,000,000
160,000,000+50,000,000
Cash sales 50,000,000 Cash stolen 18,950,000

Receivables 179,000,000 c/d 100,000

229,050,000 229,050,000

08. (b) Sales = 800,000 /33.25 x 100 = 2,406,015

Net profit = 800,000 – 680,000 = 120,000
Net profit % = 120,000/2,406,015 x 100 = 5%
09. (b)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d β 1,042,000 COS 26,520,000x0.7 18,564,000
Purchases 20,248,000 Drawings 486,000
c/d 2,240,000
21,290,000 21,290,000

10. (a) Profit = Closing net assets + drawings – capital introduced - opening net assets

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

11. (c)
Inventory
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 49,800 COS 130,000x70% 91,000
Purchases 88,600 Destroyed β 15,400
Page | 81
c/d 32,000
138,400 138,400

12. (a)
Rs. 000
Non-current assets 41,700
Inventory 9,860
Receivables 7,695
Payables (4,194)
Bank overdraft (5,537)
Expense payable (258)
49,266

13. (b)
Inventory
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 15,740 COS 91,800/120x100 76,500
Purchases 75,550 c/d β 14,790

91,290 91,290

14. (a)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 380,000 COS 650,000x70% 455,000
Purchases 480,000 Lost by fire β 185,000
c/d 220,000

15. (b)
Rs. Rs.
Sales 174,825 – 1,146 173,679
Less: Cost of goods sold
Opening inventory 12,274
Purchases 136,527 - 1,084 135,443
Closing inventory β (8,774)
Cost of sales β 138,943
Gross profit 173,679 /125 x 25 34,736

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 CAF 5 – Accounting from Incomplete Records

16. Rs. Drawings = Opening capital + Profit + capital introduced – Closing capital
418,000 =1,051,000+100,000- 733,000 = Rs. 418,000
17. Rs.
6,515,500
Cash a/c

Page | 82 Particulars Rs. Particulars Rs.

Bal. b/d 240,000 Bank 9,300,000 + 11,729,000
2,429,000
Cash sales 9,300,000 Expenses 180,500
Receivables 8,885,000 Cash stolen β 6,515,500
18,425,000 18,425,000

Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 2,100,000 Cash β 8,885,000
Bank 24,290,000
Sales 41,250,000- 31,950,000 c/d 875,000
9,300,000
34,050,000 34,050,000

18. Rs. 31.5 Purchases = 27,600,000+3,900,000 = Rs. 31,500,000

million
Accounts payable
Particulars Rs. Particulars Rs.
Cash 27,850,000 b/d 970,000
c/d 720,000 Purchases 27,600,000
28,570,000 28,570,000

19. Rs. Sales = Rs. 7,900+ (120,700 - 22,000) = 106,600

106,600
20. Rs. 87.7
million
Diesel Fuel
Particulars Rs. Particulars Rs.
b/d 12,500,000 b/d 1,700,000
Cash 85,400,000 PL 87,700,000
c/d 1,300,000 c/d 9,800,000
99,200,000 99,200,000

21. (c) Double entry system

22. (b) Statement of affairs

Latest update: March 2020

 CAF 5 – Accounting from Incomplete Records

23. (d) Small businesses

24. (c) Trial balance form ledgers

25. (d) Opening statement of affairs

26. (c) Closing capital = Opening capital + Net profit – Drawings Page | 83

27. (a) Closing capital + Drawings + Fresh capital injected – opening capital

28. (c) Rs. 10 million i.e. Rs. 20 million – Rs. 10 million

29. (b) Creditors account

30. (a) Debtor account

31. (b) Rs. 4 million (Rs. 5 million land - 1 million creditor)

32. (c)
Receivables
Particulars Rs. Particulars Rs.
b/d 412,800 Cash 2,684,500
Sales 2,848,360 Discount allowed 17,420
Bad debts 34,840
c/d 524,400
3,261,160 3,261,160

33. (c)
Creditors
Particulars Rs. Particulars Rs.
Cash 3,400,000 b/d 450,000
c/d 700,000 Purchases 3,650,000
4,100,000 4,100,000

34. (a)
Salaries
Particulars Rs. Particulars Rs.
Cash 856,420 b/d 96,720
c/d 74,540 PL 834,240
930,960 930,960

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 CAF 5 – Income & Expenditure Account

Income &
- Expenditure Account 05
Page | 1
NOT FOR PROFIT ORGANISATIONS
Non-profit Their main purpose is not to earn profit rather they work for welfare and
oriented interest of public at large or their members e.g. charities, clubs and
organizations associations.

Profit oriented Not for profit

Statement of comprehensive
Income and expenditure account
income
Equity / Capital / Accumulated General Fund / Accumulated fund /
Different profit / Retained earnings Accumulated surplus
terminology Surplus
Net profit
/ Excess of income over expenditure
Deficit
Net loss
/ Excess of expenditure over income

It is simply summary of the cash book for a given period.

Receipt and payment account

Balance b/d X Donation X
Subscriptions X Repairs X
Functions X Telephone X
Sale of land X Extension of club house X
Receipt and
Bank interest X Furniture X
Payments A/c
Bequest X Heat and light X
Sundry income X Salary and wages X
Sundry expenses X
Balance c/d X
XX XX
Balance b/d
.

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 CAF 5 – Income & Expenditure Account

(On accrual basis) it is just like profit and loss account but terminology is
different due to the fact that such entities do not operate for profit.
Income & Expenditure Account
For the year ended ______________ Rs. Rs. Rs.
Income
Page | 2 Subscription income XXX
Donations XXX
Tournament income XX
Income and Less: prized in tournament (XX) XXX
Expenditure Coffee bar / shop profit XXX
A/c Interest on bank deposits XXX XXX

Expenditure
Club expenses XXX
Rent XXX
Electricity XXX
Depreciation XXX
Repairs XXX XXX
Surplus / (deficit) XXX
.
Sometimes NPOs do some trading or operations, not for profit but to serve
their main purpose from the income of such trading. In this case we
prepare separate trading account for the activity and include its income or
loss in the main “I&E A/c”

Coffee bar trading account Rs. Rs.

Sales XXX
Less: Sales return (X) XXX
Surplus form
running an Less: Cost of Sales
operation Opening inventory XX
Purchases XXX
Less: Purchases return (X)
XXX
Closing inventory (XX) (XXX)
Gross Profit XX
Coffee shop worker’s salary (X)
Net profit (to be shown in I&E A/c) XX
.

If a club runs an event any surplus (or net expenditure) is generally

calculated separately and presented as a separate line item in I&E A/c.

Surplus from Surplus from sports event Rs.

running an Ticket revenue XXX
event Less: cost of prizes (XX)
Less: other event expenses (XX)
Surplus from event XXX
.

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

Mostly question give data about prepaid and outstanding subscription and
we have to calculate figure of subscription to be shown as income. In this
case, we prepare subscription account following accrual and prepayment
concept.

Subscription account
Page | 3
Rs. Rs.
Subscriptions
Balance b/d (in arrears) X Balance b/d (in advance) X
Income and expenditure X Cash X
Bad debts expense X
Balance c/d (in advance) X Balance c/d (in arrears) X
X X
Balance b/d (in arrears) X Balance b/d (in advance) X
.

The following entry needs to be incorporated:

Write off of
subscription Bad debts expense / I& E Account DR
Subscription account CR
A club should have accounting policies for these. Possible policies include:

Recognition as income Bank

On receipt
when received Membership fee income
Bank
On receipt
Recognition as income Deferred income
Life
over specified period Every year Deferred income
membership
end Membership fee income
Bank
On receipt
Recognition in equity Life membership fund
reserve Over period Life membership fund
or death Membership fee income
.
These are shown as income in “I&E A/c” in the year in which they are
received. However, donation for special purpose is included in fund
Donations account in equity section until that special purpose has been completed.
Bank DR
Football tournament fund CR
These are funds other than accumulated fund in SFP. These may arise:
 When an organisation receives cash for designated purpose.
Special funds  When an organisation sets aside resources for a designated
purposes.
 Life membership fund kept as equity reserve.
Single entry NPOs usually keep single entry records, so all rules of single entry
and Trial (incomplete records) should be kept in mind. You may also be given trial
Balance balance.

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 CAF 5 – Income & Expenditure Account

SYLLABUS

Reference Content/Learning outcome

B1 Accounting for non-profit organization / Income and expenditure account

Page | 4 Prepare simple income and expenditure account using data and information
LO2.1.1
provided.
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- - - 20 - 20 - - - 21 - 18
Objective Type 02 -

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

PRACTICE Q&A
Sr.# Description Marks Reference
SUBSCRIPTION ACCOUNT
1C Subscription account – simple 03 CI
2C Subscription account – simple 03 CI Page | 5
3C Subscription account – simple with bad debts 04 CI
FINANCIAL STATEMENTS OF NFP ORGANISATIONS
4H Gulshan Cricket Club
20 QB
R&P and I&E – PPE, subscription, expenses
5C AB Sports and Social Club
23 QB
Subscription, multi-cost structure with transfers
6H LH Sports Club – Joining fees 14 QB
7C Seaview Club
20 PE S16
Subscription, trading, accrual and prepayments
8H Giltan Golf Club – subscription, opening SFP 18 QB
9H Langton Hockey Club
20 QB
Trading, Subscription, Cash, Opening fund
10H HB Tennis Club
15 QB
Life membership fee, subscription, trading
11H Monarch Sports Club  I&E only - Subscription 10 QB
12H Sehat Club – Complete FS 18 QB
13H GD Sports Club – Complete FS including Trading account 20 QB
14C Leisure Club – Loss by fraud, Complete FS 20 PE S17
15C Violin Family Club – Subscription, life membership and
21 PE S19
trading account

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 CAF 5 – Income & Expenditure Account

QUESTION 01
A club has 500 members. Annual membership fees are Rs. 1,000. Therefore membership
fees for the year should be Rs. 500,000.

The club’s subscription records for the year ended 31 December 2013 show the following:
At 31 December At 31 December
Page | 6 2012 2013
Subscriptions received in advance 10,000 6,000
Subscriptions in arrears 18,000 22,000

Required:
Calculate the amount of cash received during the year. (03)

QUESTION 02
At 31 March 2012 a cricket club had membership subscriptions in arrears amounting to Rs.
48,000 and had received Rs. 12,000 subscriptions in advance.

During the year to 31 March 2013 the club received Rs. 624,000 including 26 memberships
for the year to 31 March 2014 at Rs. 1,200 per annum in advance.

At 31 March 2013 16 members owed subscriptions of Rs. 1,200 each.

Required:
Calculate the amount of subscription income during the year. (03)

QUESTION 03
At 31 March 2012 a cricket club had membership subscriptions in arrears amounting to Rs.
48,000 and had received Rs. 12,000 subscriptions in advance.

During the year to 31 March 2013 the club received Rs. 624,000 including 26 memberships
for the year to 31 March 2014 at Rs. 1,200 per annum.

At 31 March 2013 16 members owed subscriptions of Rs. 1,200 each.

Half of the members who were in arrears at the end of the previous period still had not paid
by 31 March 2013. It was decided to write these amounts off.

Required:
Calculate the amount of subscription income during the year. (04)

QUESTION 04
The following balances have been obtained from the books of Gulshan Cricket Club:
June 30, 2014 June 30, 2015
Building 6,024,000 6,438,150
Furniture 3,012,000 2,710,800
Books 1,129,500 1,246,950
Sports equipment 1,807,200 1,595,200
Investments - 436,000
Advance subscription 86,000 92,000
Prepaid expenses 122,000 176,000
Expenses payable 186,900 207,600
Subscriptions receivable 326,000 357,000
Cash 1,204,800 1,586,500

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

The following information is also available in respect of the year ended June 30, 2015:
(i) Depreciation for the year has been credited directly to the asset accounts. The rates
of depreciation are as follows:
Building 5%
Furniture and Books 10%
Sports equipment 20%
Page | 7
(ii) The club had 600 members on June 30, 2015. No fresh members were admitted
during the year but 10 members left the club on January 1, 2015. Subscription per
member is Rs. 500 per month.

Required:
(a) Summary of receipts and payments made during the year ended June 30, 2015.
(b) Income and Expenditure Account for the year ended June 30, 2015. (20)

QUESTION 05
You have agreed to take over the role of bookkeeper for the AB sports and social club.
The summarised statement of financial position on 31 December 2014 as prepared by the
previous bookkeeper contained the following items.
Assets Rs.
Heating oil for clubhouse 1,000
Shop and cafe inventories 7,000
New sportswear, for sale, at cost 3,000
Used sportswear, for hire, at valuation 750
Equipment for groundsman
Cost 5,000
Accumulated depreciation (3,500) 1,500
Subscriptions due 200
Bank
Current account 1,000
Deposit account 10,000
24,450
Capital and liabilities
Accumulated fund 23,150
Payables
Shop and cafe inventories 1,000
Sportswear 300
24,450

The bank account summary for the year to 31 December 2015 contained the following items.
Receipts Rs.
Subscriptions 11,000
Bankings
Shop and cafe 20,000
Sale of sportswear 5,000
Hire of sportswear 3,000
Interest on deposit account 800
39,800

© kashifadeel.com
 CAF 5 – Income & Expenditure Account

Payments Rs.
Rent and repairs of clubhouse 6,000
Heating oil 4,000
Sportswear 4,500
Grounds person 10,000
Shop and cafe purchases 9,000
Page | 8 Transfer to deposit account 6,000
39,500
You discover that the subscriptions due figure as at 31December 2014 was arrived at as
follows.
Subscriptions unpaid for 2013 10
Subscriptions unpaid for 2014 230
Subscriptions paid for 2015 40

Corresponding figures at 31 December 2015 are:

Subscriptions unpaid for 2013 10
Subscriptions unpaid for 2014 20
Subscriptions unpaid for 2015 90
Subscriptions paid for 2016 200
Subscriptions due for more than 12 months should be written off with effect from 1 January
2015.
Asset balances at 31 December 2015 include:
Heating oil for club house 700
Shop and cafe inventories 5,000
New sportswear, for sale, at cost 4,000
Used sportswear, for hire, at valuation 1,000

Closing payables at 31 December 2015 are for:

shop and cafe inventories 800
sportswear 450
heating oil for clubhouse 200

Two thirds of the sportswear purchases made in 2015 had been added to inventory of new
sportswear in the figures given in the list of assets above, and one third had been added
directly to the inventory of used sportswear for hire.
Half of the resulting 'new sportswear for sale at cost' at 31 December 2015 is actually over
two years old. You decide, with effect from 31 December 2015, to transfer these older items
into the inventory of used sportswear, at a valuation of 25% of their original cost.
No cash balances are held at 31 December 2014 or 31 December 2015. The equipment for
the grounds person is to be depreciated at 10% per annum, on cost.

Required:
Prepare the income and expenditure account and statement of financial position for the AB
sports club for 2015. (23)

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

QUESTION 06
The LH Sports Club opened on 1 May 2014 having purchased premises for Rs.80,000 and
furniture for Rs.18,000, both financed by an interest-free loan from a member. The club
secretary has produced the following income and expenditure account for the year to 30
April 2015.

Income Rs. Rs. Page | 9

Joining fees (89 members x Rs.200 each) 17,800
Annual subscriptions 12,000
Cafe profits 8,450
Dinner Dance surplus 830
Equipment hire receipts 1,750
40,830
Expenditure
Premises costs / expenses 10,990
Equipment costs / expenses (Note below) 5,590
Secretary’s expenses 470
Bank charges 125
(17,175)
Surplus for the year 23,655

The income and expenditure account has been prepared after taking into account the
following items at 30 April 2015:
 cafe inventories Rs.1,400
 payables for cafe supplies Rs.1,320
 rates and insurances prepaid Rs.2,280

The following items have not been taken into account:

 the equipment costs figure includes Rs.4,000 for the purchase of equipment
 depreciation is to be provided as follows:
at 2% on premises
at 10% on furniture
at 20% on equipment
 joining fees are to be spread over a five-year period
 the annual subscriptions figure includes Rs.960 paid in advance
 subscriptions outstanding at the end of the year, and expected to be collected,
amount to Rs.300.

The bank balance at 30 April 2015 was Rs.21,295.

Required:
(a) Calculate the correct surplus for the year. (6)
(b) Prepare the statement of financial position at 30 April 2015. (8)

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 CAF 5 – Income & Expenditure Account

QUESTION 07
Seaview Club started its operations on 1 February 2015. Sponsor of the club contributed Rs.
50 million towards general fund for the start of operations and placed the amount in the
bank. Following is the receipts and payments summary for the period from 1 February 2015
to 31 December 2015:
Receipt Rs in ‘000’ Payments Rs in ‘000’
Page | 10
Sponsor's contribution 50,000 Furniture & fixture 1,200
Joining fees 20,800 Van 1,500
Subscription from members 29,952 Salaries 1,000
Sale of beverages 1,500 Rent 3,600
Utilities 570
Insurance 120
Repairs & maintenance 275
Purchase of beverages 1,367
Advance for Plot of land 65,000
Balance 27,620
102,252 102,252

Additional information:
(i) The joining fee for award of membership is Rs. 50,000. Annual subscription is Rs.
24,000. All new members pay three years’ subscription in advance. The memberships
were awarded as follows:
Month March June September December
No. of member 112 98 101 105

(ii) The club sells beverages at a gross profit margin of 20%. All sales are billed in the
first week of the next month and the payment is received in the same month. Sale of
beverages during December 2015 amounted to Rs. 150,000.
(iii) 25% of total purchases of beverages made during the year remained unsold at year-
end.
(iv) Salaries are paid on the first day of next month. The amount of salaries includes an
advance amounting to Rs. 10,000 paid to an employee on 1 December 2015. The
advance is repayable on 1 February 2016.
(v) Rent for three years was paid in advance on 1 February 2015.
(vi) Presently the club is operating on rental premises. However, a plot of land has been
purchased on which construction would commence shortly. Title of land would be
transferred after completion of legal formalities.
(vii) Payments for utilities include security deposit paid to utility companies amounting to
Rs. 20,000. Utility bills are paid on the 7th day of the next month.
(viii) Insurance premium was paid on 1 February 2015 covering a period of 12 months.
(ix) Repairs and maintenance include an advance of Rs. 100,000 paid to a contractor for
construction of a parking shed. Repair bills amounting to Rs. 7,000 were outstanding
at year-end.
(x) Furniture & fixtures and van were purchased on 1 February 2015. Depreciation on
these assets is to be charged at 10% and 20% respectively.

Required:
Prepare statement of financial position as at 31 December 2015 and income & expenditure
account of Seaview Club for the period ended 31 December 2015. (20)

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

QUESTION 08
The treasurer of the Giltan Golf Club has prepared the following receipts and payments
account for the year ended 31 March 2016.
Rs.(000) Rs.(000)
Balance at 1 April 2015 682 Functions 305
Subscriptions 2,930 Repairs 146
Functions 367 Telephone 67 Page | 11
Sale of land 1,600 Extension of club house 600
Bank interest 60 Furniture 135
Bequest (legacy) 255 Heat and light 115
Sundry income 46 Salary and wages 2,066
Sundry expenses 104
Balance at 31 March 2016 2,402
5,940 5,940

(a) Subscriptions received included Rs.65,000 which had been in arrears at 31 March 2015
and Rs.35,000 which had been paid for the year commencing 1 April 2016.

(b) Land sold had been valued in the club's books at cost Rs.500,000.

(c) Accrued expenses

31 March 31 March
2015 2016
Rs.(000) Rs.(000)
Heat and light 32 40
Wages 12 14
Telephone 14 10
58 64

(d) Depreciation is to be charged on the original cost of assets appearing in the books at 31
March 2016 as follows:
Buildings 5%
Fixtures and fittings 10%
Furniture 20%

(e) The following balances are from the club's books at 31 March 2015:
Rs.(000)
Land at cost 4,000
Buildings at cost 3,200
Buildings allowance for depreciation 860
Fixtures and fittings at cost 470
Fixtures allowance for depreciation 82
Furniture at cost 380
Furniture allowance for depreciation 164
Subscriptions in arrears (including Rs.15,000 irrecoverable - member 80
had emigrated)
Subscriptions in advance 30

Required:
Prepare an income and expenditure account for the year ended 31 March 2016 and a
Statement of financial position as at that date. (18)

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 CAF 5 – Income & Expenditure Account

QUESTION 09
The Langton Hockey club does not have any formal accounting records but the following
information is available.
(1) The payments that have been made by the club for the year ending 30 June 2016 are as
follows:
Rs.(000)
Page | 12 Purchase of second hand table tennis table 250
Rent 600
Tea stall purchases 900
Annual fair expenses 1,450
Outings expenses 370
Prizes for whist evenings 90
Repairs to snooker table 35
Refreshments at social evenings 240

(2) The club's income, apart from annual subscriptions, is as follows:

Rs.(000)
Contributions to outings 300
Takings at the annual fair 2,150

The club also run a tea stall in the village car park every Sunday in the summer months.

This sells tea and coffee, cakes, biscuits and ice creams etc. The profit margin on the tea
stall is normally 20% of selling price.

(3) All the club's transactions are in cash but if there are any surplus funds they are banked
in a local bank account. The balance on the bank account was Rs.30,000 at 1 July 2015.

(4) The club has an annual subscription rate of Rs.20,000 per annum per person or
Rs.50,000 per annum for a family membership. Members are asked to pay their
subscription in the July at the beginning of the club's accounting year.
There are 10 family members of the club. Of these two paid their 2016 subscription in
June 2015 and all the rest were received before 30 June 2016.
No individual members had paid their 2016 subscriptions in advance but at 30 June 2016
four members still owed their subscriptions. They had been contacted and all four had
promised to pay at the next evening social event. There are in total 80 individual
members.

(5) The club has the following other assets and liabilities:
30 June 2015 30 June 2016
Rs. (000) Rs. (000)
Sports equipment 2,560 Note 6
Inventory for the tea stall 120 60
Payables for the tea purchases 110 190
Prepayment of rent 40 50

(6) The sports equipment is all depreciated at 20% per annum on net book value on the
basis of the equipment held at 30 June each year.

(7) The old table tennis table was sold during the year for Rs.40,000. Its value as recorded
by the club at 30 June 2015 was Rs.30,000.
You are required to prepare an income and expenditure account for the year ended 30 June
2016 and a statement of financial position at that date. (20)

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

QUESTION 10
The HB Tennis Club was formed on 1 April 2015 and has the following receipts and
payments account for the six months ended 30 September 2015:
Receipts Rs. Payments Rs.
Subscriptions 12,600 Purchase of equipment 4,080 Page | 13
Tournament fees 465 Groundsman’s wages 4,520
Bank interest 43 Rent and business rates 636
Sale of club ties 373 Heating and lighting 674
Life membership fees 4,200 Postage and stationery 41
Court maintenance 1,000
Tournament prizes 132
Purchase of club ties 450
Balance c/d 6,148
17,681 17,681

Notes:
(1) The annual subscription fee is Rs.300. On 30 September there were five members who
had not paid their subscriptions, but this money was received on 4 October 2015.

(2) The equipment is expected to be used by the club for five years, after which time it will
need to be replaced. Its estimated scrap value at that time is Rs.50.

(3) During the six months, the club purchased 100 ties printed with its own design. Forty of
these ties remained unsold at 30 September 2015.

(4) The club has paid business rates in advance on 30 September 2015 of Rs.68.

(5) The club treasurer estimates that the following amounts should be accrued for expenses:
Rs.
Groundsman’s wages 40
Postage and stationery 12
Heating and lighting 53

(6) The life membership fees received relate to payments made by four families. The
scheme allows families to pay Rs.1,050 which entitles them to membership for life
without further payment. It has been agreed that such receipts would be credited to
income and expenditure in equal instalments over 10 years.

Required:
(a) Prepare the club’s income and expenditure account for the six months ended 30
September 2015. (8)
(b) Prepare the club’s statement of financial position at 30 September 2015. (7)

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 CAF 5 – Income & Expenditure Account

QUESTION 11
The Monarch Sports Club has the following summary of its cash book for the year ended 30
June 2015:
Rs. Rs.
Opening bank balance 12,500
Receipts:
Page | 14 Subscriptions 18,000
Life membership fees 3,000
Competition receipts 7,500
Entrance fees 2,500
Equipment sold 1,000
32,000
44,500
Payments:
Transport to matches 3,700
Competition prizes 4,300
Coaching fees 2,100
Repairs to equipment 800
Purchase of new equipment 4,000
Purchase of sports pavilion 35,000
(49,900)
Closing balance (overdrawn) (5,400)

The following information is available regarding the position at the beginning and end of the
accounting year:
1 July 2014 30 June 2015
Rs. Rs.
Subscriptions in advance 1,100 900
Subscriptions in arrears 200 300
Coaching fees outstanding 150 450

Of the subscriptions outstanding at the beginning of the year, only half were eventually
received.

The equipment sold during the year had a net book value of Rs.1,200 at 1 July 2014.
Equipment is to be depreciated at 20% per annum straight line. Life membership fees are
taken to cover 10 years.

The treasurer insists that no depreciation needs to be charged on the sports pavilion, as
buildings do not decrease in value. He says that the last club of which he was treasurer did
charge depreciation on its buildings but that when the club came to replace them, there was
still insufficient money in the bank to pay for the new building.

Required:
Prepare an income and expenditure account for the Monarch Sports Club for the year ended
30 June 2015. (10)

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

QUESTION 12
Following is the Receipts and Payments Account of Sehat Club for the year ended 30 June
2015:

Receipts and payments account for the year ended 30 June 2015
Receipts Rupees Payments Rupees
Opening balance 15,000 Salaries 63,500 Page | 15
Subscriptions 201,000 Rent 34,000
Entrance fees 63,000 Travelling expenses 1,500
Donations 38,000 Printing and stationery 1,000
Interest 16,000 General charges 2,500
Receipt on disposal of furniture 500 Periodicals 500
Investments 200,000
Closing balance 30,500
333,500 333,500

The club’s statement of financial position as on 30 June 2014 was as follows:

Statement of financial position as on 30 June 2014
Liabilities Rupees Assets Rupees
General Fund 172,500 Furniture – net 40,000
Liabilities: Rent 11,000 Sports equipment – net 20,000
Salaries 17,500 Investments 100,000
Subscription receivable 15,000
Interest receivables 11,000
Bank balance 15,000
201,000 201,000

Other details for the year ended 30 June 2015 are as follows:
(i) Furniture purchased on 1 July 2013 costing Rs. 4,000 was disposed off on 1 January
2015 at a scrap value of Rs. 500.

(ii) On 1 July 2014, furniture having written down value of Rs. 6,000 was traded-in with
new furniture having fair value of Rs. 6,700.
(iii) Depreciation is charged on diminishing balance basis at 20% on furniture and 15%
on sports equipment.
(iv) Sports equipment worth Rs. 12,000 were received at year end as donation.
(v) Following amounts are receivable /outstanding as at 30 June 2015:
Rs.
Subscription receivable 8,000
Entrance fee receivable 3,000
Salaries outstanding 4,000
Rent outstanding 2,000

Required:
Prepare an income and expenditure account of Sehat Club for the year ended 30 June 2015
and its statements of financial position on that date. (18)

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 CAF 5 – Income & Expenditure Account

QUESTION 13
The GD Sports Club do not keep any accounting records other than notes concerning the
subscriptions of members and the amounts paid for expenses. During discussions with the
club committee you discover the following:

(1) The club does not have a bank account and conducts all its transactions in cash, any
Page | 16 surplus being paid into a building society account. The interest credited to this account
for the year to 31 March 2015 was Rs.350.
(2) A summary of the payments for the year is:
Rs.
Deposit to building society account 250
Purchase of dartboards 100
Heat/light 262
Repairs to snooker tables 176
Cafe payables 7,455
Rental of premises 1,000
Club match referees’ fees and expenses 675
Trophies, etc (treated as an expense) 424
Refreshments for visiting teams 235

(3) The club has 100 members who each pay Rs.5 per annum subscription. However, on 31
March 2014 ten members had already paid their subscriptions for 2015. On 31 March
2015 two members who had not been seen in the club since August 2014 had not paid
their subscriptions for 2015 and it has been decided that the amount due be written off
and that their names be removed from the list of members.

(4) The club has only two sources of income from club members – subscriptions and cafe
sales. A profit margin of 30% of selling price, is normally applied to determine cafe
selling prices but during the year Rs.397 of goods were sold at cost.

(5) The club has the following other assets/liabilities:

1 April 2014 31 March 2015
Rs. Rs.
Equipment 4,000 ?
Building society account 4,600 5,200
Cafe inventories 840 920
Cafe payables 630 470
Cash in hand nil nil
Creditor for heat/light 34 41

(6) Equipment is depreciated at 10% of the value of equipment held on 31 March each year.

Required:
(a) Prepare a cafe trading account for the year ended 31 March 2015; (8)
(b) Prepare an income and expenditure account for the year ended 31 March 2015; (7)
(c) Prepare a statement of financial position at 31 March 2015. (5)
(20)

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

QUESTION 14
The accountant of Leisure Club was terminated on account of charges of fraud on 31
December 2016 and Mr. Emad has been appointed in his place. Emad has gathered the
following information in respect of the year ended 31 December 2016:

(i) The club has 3,300 members and the membership fee is Rs. 10,000 per annum. The
fee payable by each member becomes due on the first day of the quarter in which he Page | 17
became a member. The fee received in each quarter was as follows:
Quarter First Second Third Fourth
Subscription received (Rs.) 9,900,000 8,250,000 5,500,000 9,350,000

Last year the fee was Rs. 9,000 per annum. However, the number of members was
the same.

(ii) A summary of the bank account for the year is shown below:
Deposits Rupees Withdrawals Rupees
Bal. as at 1 Jan. 2016 3,700,500 Insurance 175,000
Cash deposited into bank 37,848,500 Rent and rates 4,200,000
Written off amount recovered 1,860,000 Utilities 4,365,000
Disposal of fixed assets 750,000 Freehold land purchased 17,000,000
Members subscription received Cash withdrawals from bank 6,120,000
19,800,000
directly in bank account Payment to creditors 18,155,000
Repairs and maintenance 700,000
Exercise equipment 7,350,000
Bal. as at 31 Dec. 2016 5,894,000
63,959,000 63,959,000

(iii) Amounts paid from petty cash were as follows:

Rupees
Salaries 2,300,000
Sundry expenses 640,000

(iv) The club has a tuck shop which earns a profit margin of 20% of sales. All sales of
tuck shop are made on cash. During the year, stock costing Rs. 500,000 was
destroyed by fire.

(v) The opening WDV of fixed assets was Rs. 28,000,000. Exercise equipment was
purchased on 1 October 2016. Fixed assets having opening WDV of Rs. 800,000
were disposed off on 31 March 2016. Fixed assets are depreciated @ 20% under the
reducing balance method.

(vi) The opening and closing balances of cash in hand were Rs. 300,000 and Rs. 25,000
respectively.

(vii) The following balances have been extracted through a scrutiny of the available
records:
2016 2015
------- Rupees -------
Creditors 3,330,000 2,500,000
Prepaid rent 175,000 168,000
Stock – Tuck Shop 2,500,000 2,300,000

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 CAF 5 – Income & Expenditure Account

Required:
(a) Determine the amount of loss incurred by the club due to fraud committed by the
previous accountant. (09)
(b) An income and expenditure account for the year ended 31 December 2016.
(05)
(c) Statement of financial position as at 31 December 2016. (06)
Page | 18

QUESTION 15
Violin Family Club was formed in 2016. Following are the details of assets and liabilities of
the club as on 31 December 2017:
Assets Rs. in '000 Liabilities Rs. in '000
Subscription in arrears: Bank overdraft 181
2016 15 Subscription in advance for 2018 45
2017 90 Accrued electricity 23
Advance rent 24 Canteen wages 11
Canteen stock 215 Canteen creditors 118
Snooker tables 960
Furniture & equipment 720
2,024 378

Additional information:
(i) Some of the balances as on 31 December 2018 are as follows:
Assets Rs. '000 Liabilities Rs. '000
Subscription in arrears for 2018 30 Accrued electricity 35
Canteen stock 247 Canteen creditors 142

(ii) Break-up of the subscription received during 2018 is as follows:

Related to year Rs. in '000
2017 60
2018 920
2019 75
The club’s management has decided to write-off the remaining subscription in arrears
relating to the year 2016 and 2017.

(iii) A scheme was introduced in 2016 under which a person is awarded life time
membership upon payment of Rs. 120,000. Life memberships received in the years
2016, 2017 and 2018 were 5, 8 and 6 respectively. Life memberships are credited to
‘Life Membership Fund’ upon receipt and are transferred to income equally over 10
years, starting from the year of admission.

(iv) The club operates a canteen. Till last year, the canteen earned a gross profit of 20%
of sales. Effective 1 January 2018, selling prices were increased by 10%.

(v) Details of some payments during 2018 are as follows:

Rs. in '000
Canteen creditors 512
Salaries 285
Equipment 66
Electricity 263

(vi) Equipment acquired during the year is only 30% paid and the remaining amount is
payable in February 2019.

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

(vii) Wages of canteen staff are paid on 5th of each month.

(viii) The club operates from a rented place. The rent is paid quarterly in advance on 1
March, 1 June, 1 September and 1 December. As per agreement, annual rent was
increased by Rs. 6,000 with effect from 1 September 2018.

(ix) Balance of snooker tables as at 31 December 2017 represents the book value of 5 Page | 19
similar tables purchased in 2016. One of the tables was sold to a member for cash
during the year for Rs. 212,000.

(x) Snooker tables are depreciated at 12.5% on straight line method while furniture &
equipment are depreciated at 20% using reducing balance method. Full year
depreciation is charged in the year of addition whereas no depreciation is charged in
the year of disposal.

Required:
(a) Prepare income and expenditure account for the year ended 31 December 2018.
(12)
(b) Prepare statement of financial position as on 31 December 2018. (09)

© kashifadeel.com
 CAF 5 – Income & Expenditure Account

Page | 20

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ANSWER 01
Subscriptions
Rs. Rs.
Balance b/d: Members in arrears 18,000 Balance b/d: Advance payments 10,000
Membership fees for the year 500,000 Cash (balancing figure) 492,000
Page | 21
Balance c/d: Advance payments 6,000 Balance c/d: Members in arrears 22,000
524,000 524,000
Balance b/d: 22,000 Balance b/d: 6,000

ANSWER 02
Subscriptions
Rs. Rs.
Balance b/d 48,000 Balance b/d 12,000
Membership fees (I&E) 576,000 Cash 624,000
Balance c/d [26 x Rs. 1,200] 31,200 Balance c/d [16 x Rs. 1,200] 19,200
655,200 655,200
Balance b/d 19,200 Balance b/d 31,200

ANSWER 03
Subscriptions
Rs. Rs.
Balance b/d 48,000 Balance b/d 12,000
Membership fees (I&E) 600,000 Cash 624,000
Bad debts [48,000 x ½] 24,000
Balance c/d [26 x Rs. 1,200] 31,200 Balance c/d [16 x Rs. 1,200] 19,200
679,200 679,200
Balance b/d 19,200 Balance b/d 31,200

ANSWER 04
Part (a)
GULSHAN CRICKET CLUB
Receipts & Payments Account For the year ended 30 June 2015
Rs. Rs.
RECEIPTS
Subscription received W5 3,605,000
PAYMENTS
Additions to Building W1 (753,000)
Additions to Sports equipment W2 (186,800)
Additions to Books W4 (256,000)
Additions to Investment (436,000)
Expenses/Payments β (1,591,500) (3,223,300)
381,700
Opening balance 1,204,800
Closing balance 1,586,500

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 CAF 5 – Income & Expenditure Account

Part (b)
GULSHAN CRICKET CLUB
Income & Expenditure Account for the year ended 30 June 2015
Rs. Rs.
INCOMES
Subscription (600 x 6,000) + (10 x 3,000) 3,630,000
Page | 22 EXPENDITURES
Expenses A/C W6 (1,558,200)
Depreciation W1 338,850 + W2 398,800 + W3 301,200 + W4 138,550 (1,177,400) (2,735,600)
Excess of incomes over expenditures 894,400

WORKINGS
W1 – Building
b/d 6,024,000 Depreciation
(6,438,150 x 5/95) 338,850
Addition β 753,000 c/d 6,438,150
6,777,000 6,777,000

W2 – Sports equipment
b/d 1,807,200 Depreciation (1,595,200 x 398,800
20/80)
Addition β 186,800 c/d 1,595,200
1,994,000 1,994,000

W3 – Furniture
b/d 3,012,000 Depreciation (2,710,800 x 301,200
10/90)
c/d 2,710,800
3,012,000 3,012,000

W4 – Books
b/d 1,129,500 Depreciation (1,246,950 x 138,550
10/90)
Addition β 256,000 c/d 1,246,950
1,385,500 1,385,500

W5 – Subscription
Receivable subscription b/d 326,000 Advance subscription b/d 86,000
I & E A/C 3,630,000 Cash received β 3,605,000
Advance subscription c/d 92,000 Receivable subscription b/d 357,000
4,048,000 4,048,000

W6 – Expenses
Prepaid b/d 122,000 Payable b/d 186,900
R & P A/C 1,591,500 I & E A/C β 1,558,200
Payable c/d 207,600 Prepaid c/d 176,000
1,921,100 1,921,100

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ANSWER 05
AB SPORTS AND SOCIAL CLUB
Income & Expenditure Account
Rs. Rs.
INCOMES
Subscriptions W1 10,720
Shop & café profit W2 9,200 Page | 23
Sale of sportswear W2 2,900
Hire of sportswear W2 1,700
Interest on deposit account 800 25,320

EXPENDITURES
Rent & repairs (6,000)
Heating oil W3 (4,500)
Grounds person (10,000)
Bad debts (unpaid subscription = 20 + 10) (30)
Loss on inventory W2 (1,500)
Depreciation 5,000 x 10% (500) (22,530)
Excess of incomes over expenditures 2,790

AB SPORTS AND SOCIAL CLUB

Statement of financial position
Assets Rs. Rs.
Non-current assets
Equipment for grounds person 5,000 – [3,500 + 500] 1,000

Current assets
Heating oil 700
Shop & café inventories 5,000
New sportswear Rs. 4,000 – 2,000 transferred W2 2,000
Used sportswear Rs. 1,000 + 500 transferred W2 1,500
Subscription due 90
Bank – Current A/C 1,300
Bank – Deposit A/c 16,000 26,590
27,590

Equity & Liabilities

Accumulated fund 23,150
Excess of incomes over expenditures 2,790 25,940

Current liabilities
Shop & café 800
Sportswear 450
Heating oil 200
Subscription prepaid 200 1,650
27,590
W1 – Subscription Account
b/d (10 + 230) 240 b/d 40
Income and expenditure A/C β 10,720 Bank 11,000
c/d 200 Bad debts (10 + 20) 30
c/d 90
11,160 11,160

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 CAF 5 – Income & Expenditure Account

W2 – Incomes and purchases

Sale of Hire of
Shop & café
sportswear sportswear
Sales 20,000 5,000 3,000
Less: cost of sales
Opening stock 7,000 3,000 750
Page | 24 Purchases (see below) 8,800 3,100 1,550
Closing stock (5,000) (4,000) (1,000)
(10,800) (2,100) (1,300)
Income 9,200 2,900 1,700

2/3 1/3
Opening payables 1,000 200 100
Purchases β 8,800 3,100 1,550
Cash paid (9,000) (3,000) (1,500)
Closing payable 800 300 150

Loss on Inventory transfer from New Sportswear to Old Sportswear

Rs. 4,000 x ½ = Rs. 2,000 – transferred at 25% i.e. Rs. 500 = Loss Rs. 1,500

W3 – Heating Oil
b/d 1,000 I&E β 4,500
Cash 4,000
c/d 200 c/d 700
5,200 5,200

ANSWER 06
Part (a)
LH SPORTS CLUB
Income & Expenditure Account for the year ended April 30, 2015
Rs. Rs.
INCOMES
Subscriptions 11,340
Joining fees (17,800 / 5) 3,560
Café profits 8,450
Dinner dance surplus 830
Equipment hire receipts 1,750 25,930

EXPENDITURES
Premises cost (10,990)
Equipment costs (5,590 – 4,000) (1,590)
Secretary’s expenses (470)
Bank charges (125)
Depreciation [(80,000 x 2%) + (18,000 x 10%) + (4,000 x 20%)] (4,200) (17,375)
Excess of incomes over expenditures 8,555

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

Part (b)
LH SPORTS CLUB
Statement of financial position as at June 30, 2015
Assets Rs. Rs.
Non-current assets
Premises (80,000 – 1,600) 78,400
Furniture (18,000 – 1,800) 16,200 Page | 25
Equipment (4,000 – 800) 3,200 97,800

Current assets
Inventory 1,400
Prepaid rates 2,280
Subscription receivable 300
Bank 21,295 25,275
123,075

Equity & Liabilities

Accumulated fund -
Excess of incomes over expenditures 8,555 8,555

Non-Current liabilities
Interest free loan from member (80,000 + 18,000) 98,000
Joining fees 17,800 – 3,560 I&E – 3,560 CL 10,680 108,680

Current liabilities
Advance subscription 960
Joining fees 17,800 / 5 3,560
Payables 1,320 5,840
123,075

ANSWER 07
Seaview club
Income & Expenditure Account for the period ended 31 December 2015
Rs. 000
Income
Joining fees 20,800
Subscription income W1 4,630
Profit from beverages W2 330
25,760
Expenditure
Salaries and wages 1,000 – 10 advance = 990 + 99 accrued 1,089
Rent 3,600 / 3 years x 11/12 months 1,100
Utilities 570 – 20 deposit = 550 + 55 accrued 605
Insurance 120 – 10 prepaid 110
Repair and maintenance 275 – 100 advance + 7 accrued 182
Depreciation – F&F 1200 x 10% x 11/12 110
Depreciation – Van 1,500 x 20% x 11/12 275
(3,471)
Excess of income over expenditure 22,289

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 CAF 5 – Income & Expenditure Account

Seaview club
Statement of Financial Position as at 31 December 2015
Rs. 000
Non-current assets
CWIP – Advance for land plot 65,000
Furniture and fixture 1,200 – 110 1,090
Page | 26 Van 1,500 – 275 1,225
Security deposit 20
Advance for parking shed 100
Prepaid rent 3,600 – 1,100 IE – 1,200 CL 1,300
68,735
Current assets
Stock W2 440
Receivable for beverages 150
Advance salaries (iv) 10
Prepaid rent 3,600 / 3 years 1,200
Prepaid insurance 120 x 1/12 10
Bank 27,620
29,430
98,165
General Fund
Sponsor’s Contribution 50,000
Excess of income over expenditure 22,289
72,289
Non-current liabilities
Advance subscription 15,338
15,338
Current liabilities
Salaries payable 990 / 10 months x 1 month 99
Utilities payable 550 / 10 months x 1 month 55
Repairs payable 7
Advance subscription 9,984
Creditors 1,760 W2 – 1,367 paid 393
10,538
98,165
W1: Subscription income
Subscription for 3 years is Rs. 72,000 so subscription for 1 year is Rs. 24,000 or Rs. 2,000
per month
Subscription Deferred
No. of No. of
Month income for the subscription
members month
year income
A B A×B×2,000 A×(36-B)×2,000
..…………..Rupees…………
March 112 10 2,240,000 5,824,000
June 98 7 1,372,000 5,684,000
September 101 4 808,000 6,464,000
December 105 1 210,000 7,350,000
4,630,000 25,322,000
Less: Short term [(112+98+101+105)×24,000] (9,984,000)
Long term 15,338,000

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

W2: Beverage sales operations

Rs. in ‘000’
Sales (1,500 received + 150 receivable) 100% 1,650
Less: Cost of sales
Op stock 0
Purchase [1,320 x 100 / 75) 1,760
Closing stock 1,760 x 25% (440) Page | 27
80% (1,320)
Profit 20% 330

ANSWER 08
GILTAN GOLF CLUB
Income & Expenditure Account for the year ended 31 March 2016
Rs. 000 Rs. 000
INCOMES
Functions surplus (367 – 305) 62
Sale of land (1,600 – 500) 1,100
Bank interest 60
Bequest 255
Sundry income 46
Subscription W1 2,860 4,383

EXPENDITURES
Bad debts (15)
Repairs (146)
Telephone (67 - 14 + 10) (63)
Heat & light (115 - 32 + 40) (123)
Salaries & wages (2,066 - 12 + 14) (2,068)
Sundry expenses (104)
Depreciation [(3,200+600)x5%] + [470x10%] + [(380+135)x20%] (340) (2,859)
Excess of incomes over expenditures 1,524

GILTAN GOLF CLUB

Statement of financial position as at 31 March 2016
Assets Rs. 000 Rs. 000
Non-current assets
Land (4,000 – 500) 3,500
Buildings [3,200 + 600 – 860 – (3,800 x 5%)] 2,750
Fixtures & Fittings [470 – 82 - (470 x 10%)] 341
Furniture [380 + 135 – 164 - (515 x 20%)] 248 6,839

Current assets
Bank 2,402

9,241
Equity & Liabilities
Accumulated fund W2 7,618
Excess of incomes over expenditures 1,524 9,142

Current liabilities
Accruals 64
Subscription in advance 35 99
9,241

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 CAF 5 – Income & Expenditure Account

WORKINGS:
W1 – Subscription Account
Subscription in arrears b/d 80 Subscriptions in advance b/d 30
Income and expenditure A/C β 2,860 Bank 2,930
Subscriptions in advance c/d 35 Bad debts 15
2,975 2,975
Page | 28
W2 – Opening statement of financial positions
Assets
Bank 682
Subscription in arrears 80
Land 4,000
Building (3,200 - 860) 2,340
Fixtures (470 - 82) 388
Furniture (380 - 164) 216
7,706
Liabilities
Accruals (58 + 30) (88)
7,618

ANSWER 09
LANGTON HOCKEY CLUB
Income & Expenditure Account
For the year ended 30 June 2016
Rs. 000 Rs. 000
INCOMES
Profits from tea stall W1 260
Profit from annual fair (2,150 - 1,450) 700
Profit on sale of table tennis table (40 - 30) 10
Subscription W2 2,100 3,070

EXPENDITURES
Rent (600 + 40 - 50) (590)
Net expense of outings (370 - 300) (70)
Prizes for whist evenings (90)
Repairs to snooker table (35)
Refreshments (240)
Depreciation (2,560 + 250 - 30) x 20% (556) (1,581)
Excess of incomes over expenditures 1,489

LANGTON HOCKEY CLUB

Statement of financial position
As at 30 June 2016
Assets Rs. 000 Rs. 000
Non-current assets
Sports Equipment [(2,560 + 250 - 30 - (2,780 x 20%)] 2,224

Current assets
Inventory for tea stall 60
Subscription due (4 x 20) 80
Prepayments – rent 50
Bank W3 1,805 1,995
4,219

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

Equity & Liabilities

Accumulated fund W4 2,540
Excess of incomes over expenditures 1,489 4,029

Current liabilities
Trade payables (tea stall) 190
4,219 Page | 29

W1 – Tea Stall Rs.

Sales Rs. 1,040 x 100/80 1,300

Opening inventory 120

Purchases (900 - 110 + 190) 980
Less: Closing inventory (60)
Cost of sales (1,040)

Gross profit 1,300 x 20% 260

W2 – Subscription Account
Income & expenditure A/C β 2,100 b/d family (2 x 50) 100
Bank Family (8 x 50) 400
Bank Individual (76 x 20) 1,520
c/d individual (4 x 20) 80
2,100 2,100

W3 – Cash Account
b/d 30 Table tennis table 250
Contributions to outings 300 Rent 600
Annual fare takings 2,150 Tea stall purchases 900
Tea stall sales W1 1,300 Annual fare 1,450
Subscriptions (1,520 + 400) 1,920 Outings 370
Sale of table tennis table 40 Prizes 90
Repairs 35
Refreshments 240
c/d β 1,805
5,740 5,740

W4 – Opening Accumulated fund

Assets
Sports equipment 2,560
Inventory for tea stall 120
Rent prepaid 40
Bank 30
2,750
Liabilities
Subscription in advance (2 x 50) (100)
Payable for the tea stall (110)
2,540

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 CAF 5 – Income & Expenditure Account

ANSWER 10
Part (a)
HB TENNIS CLUB
Income & Expenditure Account for the year ended September 30, 2015
Rs. Rs.
INCOMES
Page | 30 Subscriptions W1 7,050
Tournament income [465 fee – 132 prizes ] 333
Bank interest 43
Sale of club ties W2 103
Life member ship fees (4,200/10 x 6/12) 210 7,739

EXPENDITURES
Grounds men wages (4,520 + 40) (4,560)
Rent & business rates (636 - 68) (568)
Heating & lighting (674 + 53) (727)
Postage & stationery (41 + 12) (53)
Court maintenance (1,000)
Depreciation (4,080 – 50)/5 x 6/12 (403) (7,311)
Excess of incomes over expenditures 428

Part (b)
HB TENNIS CLUB
Statement of financial position as at September 30, 2015
Assets Rs. Rs.
Non-current assets
Equipment (4,080 – 403) 3,677

Current assets
Inventory of ties (450 x 40%) 180
Subscription in arrears (5 x 300 x 6/12) 750
Rates paid in advance 68
Bank 6,148 7,146
10,823

Equity & Liabilities

Accumulated fund -
Excess of incomes over expenditures 428 428

Non-Current liabilities
Life membership fees (4,200 – 420 current liabilities – 210 I&E) 3,570

Current liabilities
Advance subscription 6,300
Accrued expenses (40 + 12 + 53) 105
Life membership fees 420 6,825
10,823

W1 – Subscription Account
b/d - b/d -
Income and expenditure A/C β 7,050 Bank 12,600
c/d (12,600x6/12) 6,300 c/d (5x300x6/12) 750
13,350 13,350

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

W2 – Sales of ties Rs. Rs.

Sales 373
Less: Cost of sales
Opening inventory -
Purchases 450
Closing inventory (450 x 40%) (180) (270)
Profit 103 Page | 31

ANSWER 11
MONARCH SPORTS CLUB
Income & Expenditure Account for the year ended June 30, 2015
Rs. Rs.
INCOMES
Subscriptions W1 18,400
Life member ship fees (3,000 x 10%) 300
Surplus from competition (7,500 – 4,300) 3,200
Entrance fees 2,500 24,400

EXPENDITURES
Transport 3,700
Coaching fee (2,100 – 150 + 450) 2,400
Repairs 800
Bad debts 100
Loss on disposal (1,200 - 1,000) 200
Depreciation (4,000 x 20%) 800 (8,000)
Excess of incomes over expenditures 16,400

WORKINGS
W1 – Subscription Account
b/d 200 b/d 1,100
Income and expenditure A/C β 18,400 Bank 18,000
Bad debts 100
c/d 900 c/d 300
19,500 19,500

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 CAF 5 – Income & Expenditure Account

ANSWER 12
SEHAT CLUB
Income & Expenditure Account for the year ended 30 June 2015
Rs. 000 Rs.000
INCOMES
Subscriptions (201 + 8 closing – 15 opening ) 194
Page | 32 Entrance fees (63 + 3 closing) 66
Donation (38 cash + 12 equipment) 50
Interest (16 – 11 opening) 5
Gain on trade-in of furniture 6.7 – 6.0 0.7 315.7

EXPENDITURES
Salaries (63.5 + 4 closing – 17.5 opening) (50)
Rent (34 + 2 closing – 11 opening) (25)
Travelling expenses (1.5)
Printing and stationery (1)
General charges (2.5)
Periodicals (0.5)
Depreciation W1 7.82 + [20 x 15%] (10.82)
Loss on furniture disposed of (2.88 W1 – 0.5) (2.38) (93.7)
Excess of incomes over expenditures 222

SEHAT CLUB
Statement of financial position as at 31 March 2016
Assets Rs. 000 Rs. 000
Non-current assets
Furniture W1 30
Sports equipment [20 – (20 x 15%) + 12] 29 59

Investments (100 + 200) 300

Current assets
Subscription receivable 8
Entrance fee receivable 3
Bank 30.5 41.5
400.5

Equity & Liabilities

Accumulated fund 172.5
Excess of incomes over expenditures 222 394.5

Current liabilities
Salaries payable 4
Rent payable 2 6
400.5

W1 – Furniture
b/d 40 Disposal (4 – 0.8 - 0.32) 2.88
Addition 6.7 Asset exchanged 6
Depreciation
7.82
[40 + 6.7 - (3.2x6/12) – 6] x 20%
c/d 30
46.7 46.7

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ANSWER 13
Part (a)
GD SPORTS CLUB
Café trading account for the year ended March 31, 2015
Rs. Rs.
Sales (9,740 W1 + 397) 10,137
Less: Cost of sales Page | 33
Opening inventory 840
Purchases 7,295
Closing inventory (920) (7,215)
Café profit 2,922

Part (b)
GD SPORTS CLUB
Income & Expenditure Account for the year ended March 31, 2015
Rs. Rs.
INCOMES
Subscriptions W2 500
Profit from café 2,922
Profit from building society interest 350 3,772

EXPENDITURES
Rent of premises (1,000)
Heat & light (269)
Repairs to snooker table (176)
Referees’ fee & expenses (675)
Trophies etc. (424)
Refreshment for visitor (235)
Bad debts (unpaid subscription) (10)
Depreciation (4,000 + 100) x 10% (410) (3,199)
Excess of incomes over expenditures 573

Part (c)
GD SPORTS CLUB
Statement of financial position
Assets Rs. Rs.
Non-current assets
Equipment (4,000 + 100 – 410) 3,690

Current assets
Café inventory 920
Building society deposit 5,200 6,120
9,810

Equity & Liabilities

Accumulated fund W4 8,726
Excess of incomes over expenditures 573 9,299

Current liabilities
Café 470
Heating oil 41 511
9,810

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 CAF 5 – Income & Expenditure Account

W1 – Cash Account
b/d - Payments (2) 10,577
Subscriptions W2 440 c/d -
Café sales – at cost 397
Café sales – at normal price β 9,740
10,577 10,577
Page | 34
W2 – Subscription Account
Income and expenditure A/C β 500 b/d (10 x 5) 50
Cash receipts ((100102)5) 440
Bad debts (2 x 5) 10
500 500

W3 – Café payables Account

Cash 7,455 b/d 630
c/d 470 Purchases β 7,295
7,925 7,925

W4 – Accumulated fund at March 31, 2015

Assets Rs.
Equipment 4,000
Café inventory 840
Building society account 4,600
9,440
Liabilities
Payables – café (630)
Payables – heat & light (34)
Subscription in advance (50)
8,726

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ANSWER 14
Part (a) Determination of amount of loss incurred due to fraud
Cash Account
Rs. Rs.
b/d 300,000 Salaries 2,300,000
Subscription (see below) 13,200,000 Sundry expenses 640,000
Page | 35
Bank 6,120,000 Bank 37,848,500
Tuck shop sales W2 22,856,250 Loss due to fraud 1,662,750
c/d 25,000
42,476,250 42,476,250
Note: (3,300 members x Rs. 10,000) – Rs. 19,800,000 in bank = Rs. 13,200,000

Part (b) Income and expenditure account

Rupees
Income
Subscription income W1 31,817,500
Income from tuck shop W2 4,571,250
Other income – Bad debts recovered 1,860,000
38,248,750

Expenditures
Salaries 2,300,000
Insurance 175,000
Rent expense (168,000+4,200,000-175,000) 4,193,000
Utilities 4,365,000
Repair & maintenance 700,000
Depreciation W3 5,847,500
Sundry expenses 640,000
Loss on disposal [750,000 – (800,000 – 40,000)] 10,000
Loss of inventory due to fire 500,000
Loss due to fraud 1,662,750
20,393,250
Excess of income over expenditure 17,855,500

Part (c) Statement of financial position

2016 2016
Funds and liabilities Assets
Rupees Rupees
Acc. Fund (bal.) 39,181,500 Fixed assets – WDV W3 45,742,500
Creditors 3,330,000 Stock 2,500,000
Unearned subscription W1 11,825,000 Prepaid rent 175,000
Bank 5,894,000
Cash 25,000
Total funds & liabilities 54,336,500 Total assets 54,336,500

W1 Subscription
Rs. Rs.
b/d (Closing x 9/10) 10,642,500
I&E β 31,817,500 Bank 19,800,000
c/d (see below) 11,825,000 Cash (see above) 13,200,000
43,642,500 43,642,500

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 CAF 5 – Income & Expenditure Account

Closing unearned subscription income

Quarter - 1 -
Quarter – 2 (8,250,000 x 3/12) 2,062,500
Quarter – 3 (5,500,000 x 6/12) 2,750,000
Quarter – 4 (9,350,000 x 9/12) 7,012,500
11,825,000
Page | 36
W2 Tuck shop sales and cost of sales Rupees

Sales 100% 22,856,250

Opening stock 2,300,000

Add: Purchases of stock (see below) 18,985,000
Less: Loss due to fire, charged to expenditures (500,000)
Less: closing stock (2,500,000)
80% (18,285,000)

Profit 4,571,250
Creditors
Rs. Rs.
Payments 18,155,000 b/d 2,500,000
c/d 3,330,000 Purchases 18,985,000
21,485,000 21,485,000

W3 Fixed assets and depreciation Rupees

Opening WDV before disposal 28,000,000
Add: Additions (7,350,000+17,000,000) 24,350,000
Less: WDV of assets disposed (800,000x20%x3/12) (760,000)
Depreciation for the year (5,847,500)
45,742,500

Depreciation
Depreciation on opening WDV [ (28,000,000-800,000)x20%] 5,440,000
Depreciation on disposed assets (800,000x20%x3/12) 40,000
Depreciation on addition (7,350,000x20%x3/12) 367,500
Depreciation for the year 5,847,500

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ANSWER 15
Part(a)
Violin Family Club
Income and expenditure account for the year ended 31 December 2018
Income Rs. in '000
Subscription (W-1) 995
Gain on disposal of table 212–960÷5 20 Page | 37
Profit from canteen 57
Life membership (W-2) 228
1,300
Expenditures
Rent [36(24×3÷2)+36+37.5+37.5]+[24–25(37.5×2÷3)] 146
Salaries 285
Electricity 263+(35–23) 275
Depreciation – snooker tables (960–192) ×(12.5÷75) 128
Depreciation – furniture & equipment (720+220) ×20% 188
Subscription written off 45
(1,067)
Excess of income over expenditure 233

Canteen trading account for the year ended 31 December 2018 Rs. in '000
Sales 504×110÷80 693
Cost of goods sold
Opening stock 215
Purchases 512+142–118 536
Closing stock (247)
504
Gross profit 189
Expenses
Wages 11×12 (132)
Profit from canteen 57

W1: Subscription Rs. in '000

Opening arrears: Opening advance 2018 45
2016 15 Receipts (60+920+75) 1,055
2017 90 Write off (15+30) 45
Income balance 995 Closing arrears 30
Closing advance 75
1,175 1,175

W2: Life membership Rs. in '000

Income [(5+8+6)×120÷10] 228 Opening balance
Closing balance 1,836 (5×120×8÷10)+( 8×120×9÷10) 1,344
Receipt (6×120) 720
2,064 2,064

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 CAF 5 – Income & Expenditure Account

Part (b)
Violin Family Club
Sstatement of financial position as on 31 December 2018
Rs. in '000
Assets
Non-current assets
Page | 38 Snooker table (960–192–128) 640
Furniture & equipment (720+220–188) 752
1,392
Current assets:
Canteen stock 247
Prepaid rent 25
Subscriptions in arrears 30
Bank (W-3) 1,094
1,396
2,788
General funds
Opening balance (2,024–378)–1,344(W-2) 302
Excess of income over expenditure 233
535
Life membership fund (W-2) 1,836
Liabilities
Canteen creditors 142
Accrued electricity 35
Subscription in advance (W-1) 75
Creditors for equipment (220–66) 154
Canteen wages payable 11
417
2,788

W3: Bank/cash Rs. in '000

Subscriptions 1,055 Opening balance 181
Life membership (W-2) 720 Rent 147
Sale proceeds from table 212 Salaries 285
Canteen receipts 693 Electricity 263
Canteen creditors 512
Canteen salaries 132
Equipment 66
Closing balance 1,094
2,680 2,680

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

ICAP OBJECTIVE BASED QUESTIONS

01. Which of the following is generally considered as a non-profit oriented organization?
(a) Charitable organization
(b) Corporation
(c) Audit firms Page | 39

(d) Insurance companies

02. Expenditures greater than incomes of a non-profit organization give rise to a:

(a) Loss
(b) Profit
(c) Surplus
(d) Deficit

03. An advance receipt of subscription from a member of the non-profit organization is considered
as a/an:
(a) Expense
(b) Liability
(c) Equity
(d) Asset

04. Income and expenditure account is based on;

(a) Cash accounting
(b) Accrual accounting
(c) Government accounting
(d) Management accounting

05. Life membership fees of not for profit concerns is?

(a) Capital Receipts
(b) Revenue Receipts
(c) Both (a) & (b)
(d) None (a) & (b)

06. When cash is received for life membership, which one of the following double entries is passed?
(a) Cash Debit and capital Credit
(b) Life membership Debit and cash Credit
(c) Investment Debit and cash Credit
(d) Cash Debit and life membership fund Credit

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 CAF 5 – Income & Expenditure Account

07. XYZ club has a bar that maintains a separate trading account for its trading activities. Which of
the following is the treatment of profit or loss on bar trading activities?
(a) Profit or loss is directly shown in the statement of financial position
(b) Profit or loss is to be presented in income and expenditure account
(c) Profit or loss is credited in income statement
Page | 40
(d) Profit or loss is added to accumulated fund

08. Which of the following is the accounting equation for a non-profit organization?
(a) Asset = Capital + Liabilities
(b) Capital + Liabilities = Assets
(c) Accumulated fund + Liabilities = Assets
(d) Liabilities = Asset + Accumulated fund

09. Subscription earned but not yet received is considered as a/an:

(a) Asset
(b) Liability
(c) Income
(d) Expenditure

10. A non-profit organization received Rs. 100,000 as the entrance fee of a new member. If 20% of
the fee has to be capitalized, what is the amount of fee needs to be shown in the income and
expenditure account?
(a) Rs. 20,000
(b) Rs. 80,000
(c) Rs. 90,000
(d) Rs. 10,000

11. Rs. 1,000,000 received as the annual membership subscription. Out of this, Rs. 200,000 is
pertaining to the previous accounting period whereas Rs. 100,000 is receivable at the end of the
current accounting period.
Calculate the amount of subscription that will be shown in the income and expenditure account.
(a) Rs. 100,000
(b) Rs. 900,000
(c) Rs. 1,200,000
(d) Rs. 800,000

12. Income and expenditure accounts show:

(a) Cash available to an organization
(b) Closing capital of an organization
(c) Cash available in the bank account
(d) Surplus or deficit for the current accounting period

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

13. On what basis the ‘receipts and payments account’ is prepared?

(a) Cash basis
(b) Accrual basis
(c) Both accrual and cash basis
(d) None of the two
Page | 41

14. Payment of Honorarium to secretary is treated as?

(a) Capital Expenditure

(b) Revenue Expenditure

(c) Cash Expenses

(d) None of these

15. Income and Expenditure Account records:

(a) Capital items
(b) Revenue items
(c) A and B both
(d) None of these

16. A club has 500 members. Annual membership fees are Rs. 1,000. Therefore, membership fees
for the year should be Rs. 500,000.
The club’s subscription records for the year ended 31 December 2013 show the following:
At 31 December At 31 December
2012 2013
Subscriptions in advance 10,000 6,000
Subscriptions in arrears 18,000 22,000
Calculate the amount of cash received during the year.
Rs. ___________

17. At 31 March 2012 a cricket club had membership subscriptions in arrears amounting to Rs.
48,000 and had received Rs. 12,000 subscriptions in advance.
During the year to 31 March 2013 the club received Rs. 624,000 including 26 memberships for
the year to 31 March 2014 at Rs. 1,200 per annum in advance.
At 31 March 2013 16 members owed subscriptions of Rs. 1,200 each.
Calculate the amount of subscription income during the year.
Rs. ___________

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 CAF 5 – Income & Expenditure Account

18. At 31 March 2012 a cricket club had membership subscriptions in arrears amounting to Rs.
48,000 and had received Rs. 12,000 subscriptions in advance.
During the year to 31 March 2013 the club received Rs. 624,000 including 26 memberships for
the year to 31 March 2014 at Rs. 1,200 per annum.
At 31 March 2013 16 members owed subscriptions of Rs. 1,200 each.
Page | 42 Half of the members who were in arrears at the end of the previous period still had not paid by
31 March 2013. It was decided to write these amounts off.
Required:
Calculate the amount of subscription income during the year.
Rs. ___________

19. Seaview Club started its operations on 1 February 2015. Total subscription received for the
period ended 31 December 2015 was Rs. 29,952,000
Annual subscription is Rs. 24,000. All new members pay three years’ subscription in advance.
The memberships were awarded as follows:
Month March June September December
No. of member 112 98 101 105
What amount of subscription income should be included in income and expenditure account for
the period ended 31 December 2015?
Rs. ___________

20. Seaview Club started its operations on 1 February 2015. Total subscription received for the
period ended 31 December 2015 was Rs. 29,952,000
Annual subscription is Rs. 24,000. All new members pay three years’ subscription in advance.
The memberships were awarded as follows:
Month March June September December
No. of member 112 98 101 105
What amount of advance subscription should be included in non-current liabilities as at 31
December 2015?
Rs. ___________

21. The main objective of a non-profit organization is;

(a) To earn profits
(b) To create monopoly
(c) Welfare of the society
(d) To provide for owner’s dividends

22. Non-profit organizations prepare all of the following accounts except the;
(a) Receipt and payment account
(b) Income and expenditure account
(c) Statement of financial position
(d) Profit or loss account

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

23. Examples of non-profit organization is:

(a) Commercial banks
(b) Civil hospital
(c) Private educational institutions
(d) Association of person
Page | 43

24. The main source of income for non-profit organization is:

(a) Subscription
(b) Sales
(c) Dividends
(d) Other income

25. Income and expenditure accounts show;

(a) Cash available to an organization
(b) Closing capital of an organization
(c) Cash available to the bank account
(d) Surplus or deficit for an accounting period

26. The statement of financial position of a non-profit organization does not contain the;
(a) Owner’s equity
(b) Liability
(c) Asset
(d) Income

27. Rent expense of a non-profit organization paid in advance. Which of the following is the
correct classification of rent?
(a) Expense
(b) Liability
(c) Asset
(d) Equity

28. An advance receipt of subscription from a member of the non-profit organization is considered
as a/an?
(a) Expense
(b) Liability
(c) Asset
(d) Income

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 CAF 5 – Income & Expenditure Account

29. The capital of a non-profit organization is generally known as

(a) Equity
(b) Accumulated funds
(c) Retained earning
(d) Cash fund
Page | 44
30. When cash is received for life membership, which one of the following double entries is
passed?
(a) Cash (debit) and capital (credit)
(b) Life membership (debit) and cash (credit)
(c) Cash (debit) and investment (credit)
(d) Cash (debit) and Life membership (credit)

31. If debit side of receipt and payment account exceeds credit, it represents:
(a) Cash at bank
(b) Bank overdraft
(c) Surplus
(d) Deficit

32. Receipt and payment account include:

(a) Revenue items
(b) Capital items
(c) Both capital and revenue items
(d) None of above

33. Sale of an old newspaper is classified as:

(a) Expense
(b) Liability
(c) Asset
(d) Income

34. Gift presented to Chief Guest at annual function by a non-profit organization is:
(a) Gift
(b) Reward
(c) Honorarium
(d) Grant

35. Morning Football Club has a monthly subscription fee of Rs. 800 per member. The club has 240
members on 31 December 2018. No fresh members were admitted during 2018 but 30
members left the club on 1 July 2018. As at 31 December 2018, the club has received
subscription in advance amounting to Rs. 60,000. The club’s subscription income for 2018 would
be: [A19 2 Marks]
(a) Rs. 2,448,000
(b) Rs. 2,388,000
(c) Rs. 2,160,000
(d) Rs. 2,100,000

Latest update: March 2020

 CAF 5 – Income & Expenditure Account

OBJECTIVE BASED ANSWERS

01. (a) Charitable organization
02. (d) Deficit
03. (b) Liability
04. (b) Accrual accounting Page | 45
05. (a) Capital receipts
06. (d) Cash debit and life membership fund credit
07. (b) Profit or loss is to be presented in income and expenditure account
08. (c) Accumulated fund + Liabilities = Assets
09. (a) An asset
10. (b) Rs. 100,000 x (1-20%) = Rs. 80,000
11. (b)
Subscription a/c
Particulars Rs. Particulars Rs.
b/d 200,000 Cash received 1,000,000
I&E 900,000 c/d 100,000
1,100,000 1,100,000

12. (d) Surplus or deficit for the current accounting period

13. (a) Cash basis
14. (b) Revenue expenditure
15. (b) Revenue items
16. Rs. 492,000
Subscriptions
Rs. Rs.
Balance b/d 18,000 Balance b/d 10,000
I&E 500,000 Cash 492,000
Balance c/d 6,000 Balance c/d 22,000
524,000 524,000

17. Rs. 576,000

Subscriptions
Rs. Rs.
Balance b/d 48,000 Balance b/d 12,000
I&E 576,000 Cash 624,000
Balance c/d Balance c/d
[26 x Rs. 1,200] 31,200 [16 x Rs. 1,200] 19,200
655,200 655,200

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 CAF 5 – Income & Expenditure Account

18. Rs. 600,000

Subscriptions
Rs. Rs.
Balance b/d 48,000 Balance b/d 12,000
Page | 46 I&E 600,000 Cash 624,000
Bad debts
[48,000 x ½] 24,000
Balance c/d Balance c/d
[26 x Rs. 1,200] 31,200 [16 x Rs. 1,200] 19,200
679,200 679,200

19. Rs. 4,630,000 Subscription for 3 years is Rs. 72,000 so subscription for 1 year is Rs.
24,000 or Rs. 2,000 per month
Rs.000

Receipt / I&E Current Non-current

Members Months Rs. Months Rs. Months Rs.
Mar / 112 10 2,240 12 2,688 14 3,136
Jun / 98 7 1,372 12 2,352 17 3,332
Sep / 101 4 808 12 2,424 20 4,040
Dec / 105 1 210 12 2,520 23 4,830
4,630 9,984 15,338

20. Rs. Subscription for 3 years is Rs. 72,000 so subscription for 1 year is Rs.
15,338,000 24,000 or Rs. 2,000 per month
Rs.000

Month / I&E Current Non-current

Members Months Rs. Months Rs. Months Rs.
Mar / 112 10 2,240 12 2,688 14 3,136
Jun / 98 7 1,372 12 2,352 17 3,332
Sep / 101 4 808 12 2,424 20 4,040
Dec / 105 1 210 12 2,520 23 4,830
4,630 9,984 15,338

21. (c) Welfare of the society

22. (d) Profit or loss account
23. (b) Civil hospital
24. (a) Subscription
25. (d) Surplus or deficit for an accounting period
26. (a) Owner’s equity
27. (c) Asset

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 CAF 5 – Income & Expenditure Account

28. (b) Liability

29. (b) Accumulated fund
30. (d) Cash (debit) and Life membership (credit)
31. (a) Cash at bank
32. (c) Both capital and revenue items Page | 47
33. (d) Income
34. (c) Honorarium
35. (a) Jan to Jun: 270 members x 6 months x Rs. 800 = Rs. 1,296,000
Jul to Dec: 240 members x 6 months x Rs. 800 = Rs. 1,152,000
Total Rs. 2,448,000

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 CAF 5 – IAS 20

Accounting for Government

IAS 20 Grants & Disclosure of
Government Assistance
06
Page | 1
DEFINITIONS
Government refers to government, government agencies and similar bodies
Government
whether local, national or international.
Government assistance is action by government designed to provide an
economic benefit specific to an entity or range of entities qualifying under
certain criteria.
Government
assistance
It does not include benefits provided only indirectly through action affecting
general trading conditions, such as the provision of infrastructure in
development areas or the imposition of trading constraints on competitors.
Government grants are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity.

They exclude those forms of government assistance which cannot

Government
reasonably have a value placed upon them and transactions with
grants
government which cannot be distinguished from the normal trading
transactions of the entity.

Government grants are sometimes called by other names such as subsidies,

subventions, or premiums.
These are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-
Grants
term assets.
related to
assets
Subsidiary conditions may also be attached restricting the type or location of
the assets or the periods during which they are to be acquired to held.
Grants
related to These are government grants other than those related to assets.
income

RECOGNITION
Government grants (including non-monetary grants at fair value) shall not be
Recognition recognized until there is reasonable assurance that:
Criteria (a) The entity will comply with the conditions attaching to the grant; and
(b) The grant will be received
They are two approaches to the accounting treatment of government grants:
(a) The capital approach (recognise directly in equity)  Not allowed
Approaches
(b) The income approach (recognise in profit or loss)  Matching
concept. IAS 20 uses this approach.
A government grant may be transfer of land or other resources (other than
Non- cash), for the use of the entity. In these circumstances it is usual to assess
monetary the fair value of the non-monetary asset and to account for both grant and
grant asset at that fair value. An alternative course that is sometimes followed is to
record both asset and grant at a nominal amount.

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 CAF 5 – IAS 20

PERIOD OF RECOGNITION
Government grants shall be recognized as income in profit or loss over the periods
necessary to match them with the related costs, which they are intended to compensate, on
a systematic basis.
Related to These are recognized over the period and matched with the related
Page | 2 income expenses.
A government grant that becomes receivable as compensation for
Expenditure
expenses or losses already incurred or for the purpose of giving
already incurred
immediate financial support to the entity with no future related costs
or immediate
shall be recognised in profit or loss of the period in which it
financial support
becomes receivable.
Related to These are usually recognised in profit or loss over the periods and in
depreciable the proportions in which depreciation expense on those assets is
assets recognised.
Grants related to non-depreciable assets may also require the fulfilment
of certain obligations and would then be recognised in profit or loss
Related to over the periods that bear the cost of meeting the obligations.
non-depreciable
assets As an example, a grant of land may be conditional upon the erection of
a building on the site and it may be appropriate to recognise the grant in
profit or loss over the life of the building.

PRESENTATION
GRANT RELATED TO INCOME
Method 1: Include the grant in “other income” in profit or loss.
Method 2: Deduct from related expense by linked presentation.

GRANT RELATED TO ASSET

Setting up the “deferred grant account” and amortise it (same basis as for
Method 1:
depreciation)
Method 2: Deducting the grant in arriving at the carrying amount of the asset

REPAYMENT
GRANT RELATED TO INCOME
The amount of repayment is first applied against any un-amortised balance of deferred
grant.
If repayment exceeds deferred grant, the excess is recognised as expense in profit or loss.
GRANT RELATED TO ASSET
Method 1: The amount of repayment is debited to “deferred grant account”.
Method 2: The amount of repayment is debited to cost of the asset.
Both methods
The cumulative additional depreciation that would have been recognized to date as an
expense in the absence of the grant shall be recognized immediately as an expense.

OTHER ISSUES
Forgivable A forgivable loan is treated as a government grant when there is

Latest update: March 2020

 CAF 5 – IAS 20

loans reasonable assurance that the entity will meet the terms for forgiveness of
the loan. Until then, such a loan is treated as a liability and recognised at
fair value under IFRS 9 (Financial Instruments).
The benefit of a government loan at a below market rate of interest is
treated as a government grant. The loan shall be recognized and
measured as per IFRS 9. The entity shall consider the conditions and
Loans with obligations to be met when identifying the costs which the benefit of the Page | 3
below-market loan is intended to compensate.
rate of interest
The benefit of below market rate of interest shall be measured as the
difference between the cash receipt under a government loan and the fair
value of the liability, the benefit will be accounted for IAS 20.

DISCLOSURES
The following matters shall be disclosed:
 the accounting policy adopted for government grants, including the
methods of presentation adopted in the financial statements;
Government  the nature and extent of government grants recognised in the
Grants financial statements and an indication of other forms of government
assistance from which the entity has directly benefited; and
 unfulfilled conditions and other contingencies attaching to
government assistance that has been recognised.
Examples of assistance that cannot reasonably have a value placed upon
them are free technical or marketing advice and the provision of guarantees.
An example of assistance that cannot be distinguished from the normal
Other
trading transactions of the entity is a government procurement policy that is
Government
responsible for a portion of the entity’s sales.
Assistance
The significance of the benefit in the above examples may be such that
disclosure of the nature, extent and duration of the assistance is necessary
in order that the financial statements may not be misleading.

SYLLABUS

Reference Content/Learning outcome

C3 IAS 20 Accounting for government grants and disclosure of government

assistance
LO3.3.1 Understand accounting and disclosure for government grants.
LO3.3.2 Understand disclosure for government assistance.
Proficiency level: 2
Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- - - - - - - - - - 05 041
1
Total 20 marks (including IAS 16 and IAS 40)

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 CAF 5 – IAS 20

PRACTICE Q&A
Sr.# Description Marks Reference
RECOGNITION AND PRESENTATION
1C Grant related to income 06 ST
Page | 4 2H Grant related to assets 08 ST
3C Grant related to assets 08 ST
4C Multiple scenarios 05 PE A19
5H Multiple scenarios 09 QB
6C Forgivable loans 04 ST
REPAYMENT
7C Grant related to income 06 ST
8C Grant related to assets (Full and partial repayments) 12 KA

Latest update: March 2020

 CAF 5 – IAS 20

QUESTION 01
A company receives a cash grant of Rs. 30,000 on 31 December Year 0. The grant is
towards the cost of training young apprentices, and the training program is expected to last
for 18 months from 1 January Year 1.

Actual costs of the training were Rs. 50,000 in Year 1 and Rs. 25,000 in Year 2.
Page | 5
Required:
Prepare relevant extracts of financial statements under both methods of presentation.
(06)

QUESTION 02
A company receives a government grant of Rs. 400,000 towards the cost of an asset with a
cost of Rs. 1,000,000.

The asset has an estimated useful life of 10 years and no residual value.

Required:
Prepare relevant extracts of financial statements at the end of year 1 to year 3 under both
methods of presentation. (08)

QUESTION 03
On January Year 1 Entity Oxygen purchased a non-current asset with a cost of Rs. 500,000
and received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated
on a straight-line basis over five years.

Required
Show how the asset and the grant would be reflected in the financial statements at the end
of the first year to third year under both methods of accounting for the grant allowed by IAS
20. (08)

QUESTION 04
Discuss how the following should be dealt with in the financial statements of relevant entities
according to IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance:

(a) The government makes a grant to an entity which is planning to develop teaching
software for children with learning difficulties. The purpose of the grant is to help the
entity to meet its general financing requirement in the initial phase. There are no
further conditions attached to the grant. (01)

(b) A manufacturing entity sets up a plant in an area of high unemployment. A

government grant of Rs. 4 million is received with a condition that the grant is
repayable in full if the number of its employees fell below 100 at any time during the
next four years. It is highly probable that the entity will comply with the condition
attached to the grant. (03)

(c) Free technical advice has been provided by the government’s export promotion
department to help an exporter to market his new technology in North America.
(01)

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 CAF 5 – IAS 20

QUESTION 05
During the year ended 30 June Year 2020, Katie received three grants, the details of which
are set out below:
(a) On 1 September 2019, a grant of Rs. 40,000 from local government. This grant was
in respect of training costs of Rs. 70,000 which Katie had incurred.
Page | 6 (b) On 1 November 2019 Katie bought a machine for Rs. 350,000. A grant of Rs.
100,000 was received from central government in respect of this purchase. The
machine, which has a residual value of Rs. 50,000, is depreciated on a straight-line
basis over its useful life of five years.
(c) On 1 June 2020 a grant of Rs. 100,000 from local government. This grant was in
respect of relocation costs that Katie had incurred moving part of its business from
outside the local area. The grant is repayable in full unless Katie recruits ten
employees locally by the end of Year 2. Katie is finding it difficult to recruit as the
local skill base does not match the needs of this part of the business.

Required
Show how the above transactions should be reflected in the financial statements of Katie for
the year ended 30 June Year 2020. Where any accounting standards allow a choice, you
should show all possible options. (09)

QUESTION 06
ABC Pharmaceutical Company received cash from government for a research and
development project of a children vaccine.

Scenario 1
As per the terms of the loan, the cash received from the government shall be waived off if
the entity is able to develop the vaccine within 3 years and sell it free of cost for 5 years.

Scenario 2
As per the terms of the loan, the cash received from the government is repayable in cash
only if the entity decides to commercialize the results of the research phase of the project. If
the entity decides not to commercialize the results of the research phase, the cash received
is not repayable in cash, but instead the entity must transfer to the government the rights to
the research.

Required:
Consider each scenario separately and explain whether the loan will be considered a
forgivable loan? (04)

QUESTION 07
On 1 January Year 1 X Limited received a cash grant of Rs. 500,000 towards the cost of
employing an environmental impact analyst on a new project for a 5 year period. The grant is
repayable in full if the project is not completed.

The analyst was employed and the project commenced from the 1 January Year 1.

On 1 January Year 3 the project was abandoned and the grant became repayable in full.

Required:
How the above should be accounted for? (06)

Latest update: March 2020

 CAF 5 – IAS 20

QUESTION 08
On 1st January 2020, Deep Limited installed a non-current asset with a cost of Rs. 500,000
and received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated
on a straight-line basis over five years.

Required:
Journal entries (under both methods): Page | 7
(a) for the year ended 31 December 2020 and 31 December 2021 (03)

(b) assuming that grant was repaid on 1st January 2022 in full on failing to meet the
conditions of grant, for the year ended 31 December 2022. (03)

(c) assuming that grant of Rs. 90,000 was repaid on 1st January 2022 on failing to meet
the few conditions of grant, for the year ended 31 December 2022. (03)

(d) assuming that grant of Rs. 35,000 was repaid on 1st January 2022 on failing to meet
the few conditions of grant, for the year ended 31 December 2022. (03)

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 CAF 5 – IAS 20

Page | 8

Latest update: March 2020

 CAF 5 – IAS 20

ANSWER 01
Method 1
Statement of Financial Position (extracts) Year 0 Year 1 Year 2
Rs. Rs. Rs.
Non-current liabilities: Deferred grant income 10,000 0 0
Current liabilities: Deferred grant income 20,000 10,000 0
Page | 9
Statement of Profit or Loss (extracts) Year 0 Year 1 Year 2
Rs. Rs. Rs.
Training costs 0 (50,000) (25,000)
Other income: government grant income 0 20,000 10,000

Method 2
Statement of Financial Position (extracts) Year 0 Year 1 Year 2
Rs. Rs. Rs.
Non-current liabilities: Deferred grant income 10,000 0 0
Current liabilities: Deferred grant income 20,000 10,000 0

Statement of Profit or Loss (extracts) Year 0 Year 1 Year 2

Rs. Rs. Rs.
Training costs 0 (30,000) (15,000)

ANSWER 02
Method 1
Statement of Financial Position (extracts) Year 1 Year 2 Year 3
Rs. Rs. Rs.
PPE (net) 900,000 800,000 700,000

Non-current liabilities: Deferred grant income 320,000 280,000 240,000

Current liabilities: Deferred grant income 40,000 40,000 40,000

Statement of Profit or Loss (extracts) Year 1 Year 2 Year 3

Rs. Rs. Rs.
Depreciation (100,000) (100,000) (100,000)
Other income: government grant income 40,000 40,000 40,000

Method 2
Statement of Financial Position (extracts) Year 1 Year 2 Year 3
Rs. Rs. Rs.
PPE (net) 540,000 480,000 420,000

Statement of Profit or Loss (extracts) Year 1 Year 2 Year 3

Rs. Rs. Rs.
Depreciation (60,000) (60,000) (60,000)

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 CAF 5 – IAS 20

ANSWER 03
Method 1
Statement of Financial Position (extracts) Year 1 Year 2 Year 3
Rs. Rs. Rs.
PPE (net) 400,000 300,000 200,000
Page | 10
Non-current liabilities: Deferred grant income 60,000 40,000 20,000
Current liabilities: Deferred grant income 20,000 20,000 20,000

Statement of Profit or Loss (extracts) Year 1 Year 2 Year 3

Rs. Rs. Rs.
Depreciation (100,000) (100,000) (100,000)
Other income: government grant income 20,000 20,000 20,000

Method 2
Statement of Financial Position (extracts) Year 1 Year 2 Year 3
Rs. Rs. Rs.
PPE (net) 320,000 240,000 160,000

Statement of Profit or Loss (extracts) Year 1 Year 2 Year 3

Rs. Rs. Rs.
Depreciation (80,000) (80,000) (80,000)

ANSWER 04
Part (a)
The grant has been provided for the purpose of giving immediate financial support to the
entity with no further conditions, so this grant should be immediately recognised in profit or
loss in full in the period in which the entity qualifies to receive it (when it is receivable) with
disclosure to ensure that its effect is clearly understood.

Part (b)
Since there is reasonable assurance that conditions attaching to the grant will be met, the
grant is recognised in statement of profit or loss over the four year period in which the entity
incurs the costs of employing 100 people. Amount taken to statement of profit or loss may be
either be presented as other income or shown as deduction from the related expense. The
remaining amount of grant will be presented as deferred income under liabilities in the
balance sheet.

Part (c)
Free technical advice is government assistance that cannot reasonably have a value placed
upon it and therefore should not be recognised. However, an indication of such assistance
should be disclosed in financial statements.

ANSWER 05
Part (a)
The grant shall be immediately recognised in profit or loss as it relates to expenditure
already incurred.
Option 1: Training cost expense of Rs. 70,000 and Grant income of Rs. 40,000
Option 2: Training cost expense of Rs. 30,000 (net)

Latest update: March 2020

 CAF 5 – IAS 20

Part (b)
Method 1
Statement of Financial Position (extracts) Rs.
PPE (net) 310,000

Non-current liabilities: Deferred grant income 100,000 – 13,333 – 20,000 66,667 Page | 11
Current liabilities: Deferred grant income 100,000 x 1/5 20,000

Statement of Profit or Loss (extracts) Rs.

Depreciation [350,000 – 50,000] / 5 years x 8/12 (40,000)
Other income: government grant income [100,000 / 5 years x 8/12] 13,333

Method 2
Statement of Financial Position (extracts) Rs.
PPE (net) 223,333

Statement of Profit or Loss (extracts) Rs.

Depreciation [(350,000 – 100,000) – 50,000] / 5 years x 8/12 (26,667)

Part (c)
The Rs. 100,000 grant in has conditions attached to it. In such a situation, IAS 20 states that
grants should not be recognised until there is reasonable assurance that the entity will
comply with any conditions attaching to the grant. Since Katie is struggling to recruit, and
there is only one month left for recruitment to meet these conditions, then it does not seem
that there is ‘reasonable assurance’. Hence the grant should not be recognised as such, but
should be held in current liabilities, pending repayment.

ANSWER 06
Scenario 1
If the entity takes more time than three years in the development or sells the vaccine for a
price before 5 years, it will be liable to repay the loan and the loan will not be considered a
forgivable loan.

Scenario 2
In this scenario, cash received from the government does not meet the definition of a
forgivable loan in IAS 20. This is because, in this arrangement, the government does not
undertake to waive repayment of the loan, but rather to require settlement in cash or by
transfer of the rights to the research. the cash receipt described in the submission gives rise
to a financial liability to be dealt with under IFRS 9.

ANSWER 07
Year 1
Debit Cash Rs. 500,000
Credit Deferred grant Rs. 500,000

Debit Deferred grant Rs. 100,000

Credit Profit or loss Rs. 100,000

Year 2
Debit Deferred grant Rs. 100,000
Credit Profit or loss Rs. 100,000

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 CAF 5 – IAS 20

Year 3
Debit Deferred grant Rs. 300,000
Debit Profit or loss Rs. 200,000
Credit Cash Rs. 500,000

Page | 12 ANSWER 08
Part (a)
Date Deferred grant account (Rs.) Deduction from cost (Rs.)
01.01.20 PPE 500,000 PPE 500,000
Cash 500,000 Cash 500,000
01.01.20 Cash 100,000 Cash 100,000
Deferred grant 100,000 PPE 100,000
31.12.20 Depreciation 100,000 Depreciation 80,000
PPE 100,000 PPE 80,000
31.12.20 Deferred grant 20,000
PL 20,000
31.12.21 Depreciation 100,000 Depreciation 80,000
PPE 100,000 PPE 80,000
31.12.21 Deferred grant 20,000
PL 20,000

Part (b)
Date Deferred grant account (Rs.) Deduction from cost (Rs.)
01.01.22 Deferred grant 60,000 PPE 60,000
PL 40,000 PL (Dep.) 40,000
Cash 100,000 Cash 100,000
31.12.22 Depreciation 100,000 Depreciation 100,000
PPE 100,000 PPE 100,000
*Rs. 500,000 / 5 years = Rs. 100,000 – 80,000 = Rs. 20,000 x 2 years = Rs. 40,000

Part (c)
Date Deferred grant account (Rs.) Deduction from cost (Rs.)
01.01.22 Deferred grant 54,000 PPE 54,000
PL 36,000 PL (Dep.) 36,000
Cash 90,000 Cash 90,000
31.12.22 Depreciation 100,000 Depreciation 98,000
PPE 100,000 PPE 98,000
31.12.22 Deferred grant 2,000
PL 2,000
*Rs. 490,000 / 5 years = Rs. 98,000 – 80,000 = Rs. 18,000 x 2 years = Rs. 36,000

Part (d)
Date Deferred grant account (Rs.) Deduction from cost (Rs.)
01.01.22 Deferred grant 21,000 PPE 21,000
PL 14,000 PL (Dep.) 14,000
Cash 35,000 Cash 35,000
31.12.22 Depreciation 100,000 Depreciation 87,000
PPE 100,000 PPE 87,000
31.12.22 Deferred grant 13,000
PL 13,000
*Rs. 435,000 / 5 years = Rs. 87,000 – 80,000 = Rs. 7,000 x 2 years = Rs. 14,000

Latest update: March 2020

 CAF 5 – IAS 20

ICAP OBJECTIVE BASED QUESTIONS

01. On 1 January 2021 Aim Limited (AL) received Rs. 1,000,000 from the local government on the
condition that they employ at least 150 persons each year for the next 4 years.
Due to an economic downturn and reduced consumer demand on 1 January 2022, AL no longer
needed to employ any more staff and the conditions of the grant required full repayment.
What should be recorded in the financial statements on 1 January 2022? Page | 13
(a) Reduce deferred income balance by Rs. 750,000
(b) Reduce deferred income by Rs. 750,000 and recognize a loss of Rs. 250,000
(c) Reduce deferred income by Rs. 1,000,000
(d) Reduce deferred income by Rs. 1,000,000 and recognize a gain of Rs. 250,000

02. Which of the following are acceptable methods of accounting for a government grant relating to
an asset in accordance with IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance?
(i) Set up the grant as deferred income
(ii) Credit the amount received to profit or loss
(iii) Deduct the grant from the carrying amount of the asset
(iv) Add the grant to the carrying amount of the asset
(a) (i) and (ii)
(b) (ii) and (iv)
(c) (i) and (iii)
(d) (iii) and (iv)

03. On 1 January 2019, Boom Limited (BL) received Rs. 2,000,000 from the local government on
the condition that they employ at least 200 staff each year for the next 4 years. On this date, it
was virtually certain that BL would meet these requirements.
However, on 1 January 2022, due to an economic downturn and reduced consumer demand, BL
no longer needed to employ 100 staff. The conditions of the grant required half repayment.
What should be recorded in the financial statements on 1 January 2022 for repayment of grant?
(a) Debit Deferred grant by Rs. 500,000 and PL by Rs. 500,000
(b) Debit Deferred grant by Rs. 250,000 and PL by Rs. 250,000
(c) Debit Deferred grant by Rs. 1,500,000 and PL by Rs. 500,000
(d) Debit Deferred grant by Rs. 500,000 and PL by Rs. 1,500,000

04. Which TWO of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
(a) A government grant related to the purchase of an asset must be deducted from the
carrying amount of the asset in the statement of financial position.
(b) A government grant related to the purchase of an asset should be recognised in profit or
loss over the life of the asset.
(c) Free marketing advice provided by a government department is excluded from the
definition of government grants.
(d) Any required repayment of a government grant received in an earlier reporting period is
treated as prior period adjustment.

05. A manufacturing entity receives a grant of Rs. 1,000,000 towards the purchase of a machine on
1 January 2013. The grant will be repayable if the entity sells the asset within 4 years, which it
does not intend to do. The asset has a useful life of 5 years.
What is the deferred income liability balance at 30 June 2013?

Rs. ___________

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 CAF 5 – IAS 20

06. A company receives a government grant of Rs. 500,000 on 1 April 2017 to facilitate purchase on
the same day of an asset which costs Rs. 750,000. The asset has a five-year useful life and is
depreciated on a 30% reducing balance basis. Company policy is to account for all grants
received as deferred income.
What amount of income will be recognized in respect of the grant in the year to 31 March 2019?
Page | 14 Rs. ___________

07. A manufacturing entity is entitled to a grant of Rs. 3 million for creating 50 jobs and maintaining
them for three years. Rs. 1.5m is received when the jobs are created and the remaining Rs.
1.5m is receivable after three years, provided that the 50 jobs are still in existence. The entity
creates 50 jobs at the beginning of year one and there is reasonable assurance that this level of
employment will be maintained.
What is the deferred income balance at the end of the first year?

Rs. ___________

08. If a government grant must be repaid, then it is;

(a) An error
(b) A change in accounting policy
(c) A change in accounting estimate
(d) A new transaction

09. If an entity receives a non-monetary asset as a grant, this is accounted for at the;
(a) Market value
(b) Fair value
(c) Net realizable value
(d) Present value

10. Which of the following is not covered by IAS 20 – Government Grants?

(a) Tax breaks
(b) Employment grants
(c) Subsidized loans
(d) Forgivable loans

11. Which of the following is not a correct treatment of government grants related to an asset?
(a) Deferred income
(b) Credit to income in period received
(c) Deducting the grant from the carrying amount of the asset
(d) None of the above

12. Which of the following is not a correct treatment of government grants related to income?
(a) Present as. Other income
(b) Deduct from the related expense
(c) Deduct from the cost of the asset
(d) None of the above

Latest update: March 2020

 CAF 5 – IAS 20

OBJECTIVE BASED ANSWERS

01. (b) This is a grant related to income and would therefore be released to the
statement of profit or loss over the 4 year life. By the end of year one, Rs.
250,000 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 Page | 15
previously recorded.

02. (c) The grant can be treated as deferred income or deducted from the carrying
amount of the asset. It cannot be credited directly to profit or loss.

03. (a) Half repayment is Rs. 1,000,000 (Rs. 2,000,000 x 50%)

At the date of repayment, the balance in deferred grant would be Rs. 500,000
and additional Rs. 500,000 shall be charged to profit or loss.

04. (b, c) Item a is incorrect as the deferred income method can be used.
Item d is incorrect as any repayment is corrected in the current period, not
retrospectively.

05. Rs. 900,000 The grant should be released over the useful life, not based on the possibility of
the item being repaid. Therefore, the Rs. 1m should be released over 5 years,
being a release of Rs. 200,000 a year. At 30 June 2013, 6 months should be
released, meaning Rs. 100,000 has been released (6/12 × Rs. 200,000). This
leaves Rs. 900,000 in deferred income.

06. Rs. 105,000

Rs.

Grant received 1.4.17 500,000

Recognized year to 31.3.18 (500,000 × 30%) (150,000)

Balance 31.3.18 350,000

Recognized year to 31.3.19 (350,000 × 30%) 105,000

07. Rs. 500,000 The total grant income is Rs. 3m, to be recognized over a three-year period.
Annual income is therefore Rs. 1m. At the end of the first year the entity has
received Rs. 1.5m of which Rs. 1m has been recognized in the statement of
profit or loss, leaving Rs. 500,000 deferred into future periods.

08. (c)

09. (b)

10. (a)

11. (b)

12. (c)

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 CAF 5 – Factory Ledger & Manufacturing Account

Factory Ledger &

- Manufacturing Account 07
Page | 1
INTRODUCTION
The systematic and comprehensive recording of financial transactions
pertaining to a business and the process of summarizing, analysing and
reporting these transactions.

A systematic process of identifying, recording, measuring, classifying,

Definition of
verifying, summarizing, interpreting and communicating financial
Accounting
information.

The process of identifying, measuring, and communicating economic

information to permit informed judgements and decisions by users of the
information
Cost and management accounting is concerned with the provision of
Cost and information, mainly of a financial nature, for management.
management
accounting Information produced from cost accounting data is management accounting
information.
 Data consists of unprocessed facts and statistics.
Data  Data is collected and processed to produce information.
 Data has no meaning until it has been processed into information.
Information has a meaning and a purpose. It is produced from ‘data’. It is
Information
processed data that has relevance to a particular useful purpose.
Accounting Accounting systems are designed to capture data and process it into
systems information.
Cost A cost accounting system records data about the costs of operations and
Accounting activities within the entity. The sources of cost accounting data within an
system organisation include invoices, receipts, inventory records and time sheets.
Many of the documents from which cost data is captured are internally-
Source data
generated documents, such as time sheets and material requisition notes.
Data is analysed and processed to produce management information, often
in the form of:
Report
 routine reports;
information
 specially-prepared reports;
 answers to ‘one-off’ enquiries that are input to a computer system.
Management Management accounting systems also obtain information from other
accounting sources, including external sources, but the cost accounting system is a
system major source of management accounting information.

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 CAF 5 – Factory Ledger & Manufacturing Account

 Accurate (fair and free from bias)

 Understandable
 Purpose and relevance
Qualities of  Reliable
good  Sufficiency complete
Page | 2 information  Timeliness
 Comparability
 Communicated to the right person
 Information must be cost effective
The purpose of management accounting is to provide information for:
Purpose of
 planning;
management
 control; and
information
 decision making.

Difference Financial Accounting Cost / Management Accounting

The main objectives of financial The main objective of managerial
accounting are to disclose the end accounting is to help management
Objectives results of the business, and the by providing information that is
financial condition of the business on used to plan, set goals and
a particular date. evaluate these goals.
Financial accounting produces Managerial accounting produces
information that is used by external information that is used within an
Audience
parties, such as shareholders and organization, by managers and
lenders. employees.
It is legally required to prepare
Legal Managerial accounting reports are
financial accounting reports and share
requirement not legally required.
them with investors.
Pertains to the entire organization. Pertains to individual departments
Segment
Certain figures may be broken out for in addition to the entire
reporting
materially significant business units. organization.
Financial accounting focuses on Managerial accounting focuses on
Historical vs
history; reports on the prior quarter or the present and forecasts for the
Future
year. future.
Financial accounts are reported in a
Format is informal and is on a per
specific format, so that different
Formats department/company basis as
organizations can be easily
needed.
compared.
Rules in financial accounting are Managerial accounting reports are
prescribed by standards such only used internally within the
Rules as IFRS. There are legal requirements organization; so they are not
for companies to follow financial subject to the legal requirements
accounting standards. that financial accounts are.
Reporting
Defined - annually, semi-annually, As needed - daily, weekly,
frequency
quarterly, yearly. monthly.
and duration
Monetary and company goal
Information Monetary, verifiable information.
driven information.

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INTRODUCTION TO COSTS ANS COST CLASSIFICATION

TYPES OF ORGANISATION
There are a great many different kinds of manufacturing organisations.
Manufacturing
They can be classified by their type of output which in turn implies the type
/ Trading
of costing system they might use.
Page | 3
Similar to the manufacturing industry there are a great many different kinds
of service organisations. For example:
 Training and education
Service  Healthcare
 Travel and tourism
 Financial services
 Entertainment and leisure

UNDERSTANDING OF MANUFACTURING ORGANSIATIONS

Type of production Examples Costing system
 Bottles of soft drink  Basic manufacturing
Identical (similar) products in
 Mobile phones costing
large numbers
 Garments  Standard costing
Identical products in large  Pharmaceuticals
amounts by passing the product  Paint Process costing
through a series of processes  Petroleum
Identical products in large  Aircraft (different types)
numbers customised in some  Own-brand foods for Job costing
way for different customers supermarkets
 Ships
One-off products to a customer’s  Airport facilities
Job costing
specification  Roads
 Bridges

TERMINOLOGY
Cost object Any activity for which a separate measurement of costs is needed.
Cost unit A unit of product or service for which costs are determined.
Composite A cost unit which comprises of two cost units, for example, a courier
cost unit company may measure its logistics cost per kg per km.
Unit Cost Unit cost is the cost incurred by a company to produce, store and sell one
(Cost per unit of a particular product. Unit cost includes all fixed costs and all variable
unit) costs involved in production

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Example 1: A company manufactures tinned foods. It has two products, tinned carrots and
tinned beans. In its costing system, it has two cost objects, carrots and beans.

Cost object Cost unit Cost per unit

1 Carrots Production cost per tin of carrots Rs. 40 per tin
Page | 4 2 Beans Production cost per tin of beans Rs. 90 per tin
.
Example 2: A transport company has a bus depot. The company has a cost accounting
system that records and measures the cost of operating the bus depot. The costs of
operating the depot are measured in three ways, as follows:

Cost object Cost unit Unit cost

Operating cost per bus per
1 Buses Rs. 250,000 per bus per month
month
Operating cost per month for Rs. 3,000,000 per month per
2 Bus routes
each bus route route
Cost of operating the depot per
3 Bus drivers Rs. 45,000 per bus driver
month, per bus driver employed
.

COST CLASSIFICATION
Costs can be classified in a number of ways including:
Ways Classification
Nature of cost Material, Labour cost, other overheads
Function of cost Production and non-production (admin, selling, distribution, finance)
Cost behaviour Fixed costs, variable costs, mixed costs, step-fixed costs
Cost attribution Direct and indirect costs
Cost recognition Period cost and product cost
Each of these will be explained in turn but before that note that the above
classifications are not mutually exclusive.
Example:
A car maker uses steel:
Nature of cost Steel is material.
Function of cost Steel is a production cost.
Cost behaviour Steel is a cost which varies with the number of cars produced.
Cost attribution Steel can be directly attributable to a car.
Cost recognition Steel is a product cost.
.

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COST CLASSIFICATION: NATURE (TYPE) OF COSTS

Material costs are the costs of any material items purchased from
suppliers, with the intention of using them or consuming them in the fairly
short-term future.
Material costs In a manufacturing company, material costs include the cost of the raw
materials that go into producing the manufactured output. Page | 5

In an office, costs of materials consumed include the costs of stationery

and replacement printer cartridges for the office laser printers.
Labour costs are the remuneration costs of all employees employed and
paid by the entity. This includes the wages and salaries of part-time
Labour costs
workers and the costs of any bonuses, pension contributions and other
items that are paid in addition to basic wages and salaries.
Other expenses include the costs of any items that are not material costs
or labour costs. They include the cost of services provided by external
suppliers (the charges made by sub-contractors, charges for repairs by
Other external contractors, rental costs, telephone costs, insurance costs, costs
expenses of energy (gas, electricity), travelling and subsistence expenses, and
depreciation charges for non-current assets.

This includes production, administrative and selling expenses.

In a cost accounting system, all these items of cost must be recorded, and there needs to be
an organised system for recording them. Cost items need to be grouped into categories of
similar costs.

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COST CLASSIFICATION: FUCNTION OF COSTS

Production costs are the costs incurred in manufacturing finished
products, up to the time that the manufacture of the goods is completed,
and the goods are either transferred to the finished goods inventory or
delivered immediately to the customer.
Page | 6
Production costs include:
Production  the material cost of the raw materials and components,
(Manufacturing) purchased from suppliers and used in the production of the goods
costs that are manufactured
 the labour cost of all employees working for the manufacturing
function, such as machine operators, supervisors, factory
supervisors and the factory manager
 other expenses of the factory, such as rental costs for the factory
building, energy costs and the cost of depreciation of factory
machinery.
Non-production costs are any items of cost that are not production costs.
Administration costs are the costs of providing
administration services for the entity. They might be
Administration
called ‘head office costs’ and usually include the costs
costs
of the human relations department and accounting
department.
Selling and distribution costs are the costs incurred in
Selling and marketing and selling goods or services to customers,
Non-production
distribution and the costs of delivering the goods to customers.
(non-
costs The costs of after-sales services, such as customer
manufacturing)
support services, are usually included in these costs.
costs
Finance costs include costs that are involved in
financing the organisation, for example, loan interest
or bank overdraft charges.
Finance costs
Finance costs might be included in general
administration costs. Alternatively, finance costs might
be excluded from the cost accounting system because
they are relevant to financial reporting
A cost may be shared by different functions in an organization, for example, building rent for
building used for administrative and production both.
Dividing shared costs on a fair basis is called apportionment of the cost.

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COST CLASSIFICATION: COST BEHAVIOUR

Cost behaviour refers to the way in which costs change as the volume of activity changes.
The volume of activity may be the volume of sales; the volume of production; total labour
hours worked, machine hours worked; the number of production units inspected; the number
of journeys (for buses or trains) or deliveries, and so on.
Fixed costs are items of cost that remain the same in total during a time Page | 7
period, no matter how many units are produced, and regardless of the
volume or scale of activity.
Fixed costs
Fixed costs might be specified for a given period of time. In such cases the
fixed costs for a longer period would be scaled up.

Examples: monthly rent, salary cost of a worker.

Variable costs are costs that increase, usually by the same amount, for
each additional unit of product that is made or each additional unit of
service that is provided.
Variable
The variable cost of a cost unit is also called the marginal cost of the unit.
costs
Example: The rate of pay for hourly-paid workers is Rs.150 per hour.
 400 hours of labour would cost Rs.60,000; and
 500 hours would cost Rs.75,000.
A semi-variable cost, is a cost that is partly fixed and partly variable. This is
also called semi-variable costs or semi-fixed costs.

Example: A company uses a photocopier machine under a rental

agreement. The photocopier rental cost is Rs.4,000 per month plus Rs.2
Mixed costs per copy produced. The company makes 15,000 copies during a month:
Total cost is as follows: Rs.
Fixed cost 4,000
Variable cost (15,000 x Rs. 2) 30,000
34,000
.

A stepped fixed cost is a cost which:

 has a fixed cost behaviour pattern within a limited range of activity, and
 goes up or down in steps when the volume of activity rises above or
falls below certain levels.

Example: A company might pay its supervisors a salary of Rs. 20,000 each
Stepped month. When production is less than 2,000 hours each month, only one
fixed cost supervisor is needed. When production is between 2,001 and 4,000 hours
each month, two supervisors are needed. When output is over 4,000 hours
each month, three supervisors are needed. The cost profile is as follows:
Activity level: Rs.
2,000 hours or less (1 x Rs. 20,000) 20,000
2,001 to 4,000 (2 x Rs. 20,000) 40,000
Over 4,000 (3 x Rs. 20,000) 60,000
.

Cost behaviour helps us estimate future cost at certain planned level of activity.

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COST BEHAVIOUR GRAPHS

Page | 8

Semi-variable costs Stepped fixed cost

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COST CLASSIFICATION: COST ATTRIBUTION

Costs that can be traced in full to a cost unit. A direct cost can be attributed in its
entirety to the cost of an item that is being produced.
Direct materials are all materials that become part of the cost unit.
Direct
Direct materials are all materials that can be attributed directly in full
material
to a cost unit. They are used directly in the manufacture of a Page | 9
costs
product or in providing a service.
Direct
Direct labour is labour time that can be attributed directly in full to a
labour
cost unit.
Direct costs
costs Direct expenses are expenses that can be attributed directly in full
to a cost unit.
Direct
expenses Direct expenses are expenses that have been incurred in full as a
direct consequence of making a unit of product, or providing a
service, or running a department.
The prime cost of a cost unit is the sum of all of the direct costs of making that
unit.

Prime costs = direct material cost + direct labour cost + direct expenses
An indirect cost (overhead cost) is any cost that is not a direct cost. Indirect
costs (overheads) cannot be attributed directly and in full to a cost unit.
Indirect materials are any materials that are used or consumed that
Indirect cannot be attributed in full to the item being costed. Indirect
materials materials in production include cleaning materials and any materials
cost used by production departments or staff who are not engaged
directly in making a product.
Indirect labour costs consist mainly of the cost of indirect labour
employees. Indirect labour employees are individuals who do not
work directly on the items that are produced or the services that are
Indirect provided.
Indirect
costs Some factory workers do not work directly in the production of cost
labour
costs units but are necessary so that production takes place. In a
manufacturing environment, indirect labour employees include staff
in the stores and materials handling department (for example, fork
lift truck drivers), supervisors, and repairs and maintenance
engineers.
Many costs incurred cannot be directly linked to cost units. For
example, the rental costs for a factory and the costs of gas and
Indirect
electricity consumption for a factory cannot be attributed in full to
expense
any particular units of production. They are indirect production costs
(production overheads).

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 CAF 5 – Factory Ledger & Manufacturing Account

The full cost of a unit of product (or the full cost of a unit of service) is a cost that
includes both direct costs and some overheads.
Rs.
Direct materials cost X
Direct labour cost X
Page | 10 Direct expenses X
Prime cost X
Manufacturing overhead (or production overhead) X
Full production cost X
Non-production costs
Administration overhead X
Selling and distribution overhead X
Full cost of sale X

In cost accounting systems, it is common practice to include production overheads in unit

costs and measure the full production cost per unit. However, administration and selling and
distribution overhead costs are not usually included in the cost of each unit. Instead, they are
treated in total as an expense for the period (‘period costs’ – see below).

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COST CLASSIFICATION: COST RECOGNITION

Product costs Period costs
Product costs are costs associated Period costs are costs that are
Definition with goods that are produced or deducted as expenses during a
purchased for resale. particular period. Page | 11
Product costs are accounted for as They do not contribute towards the
inventory and held on the balance value of inventory and are therefore
Inventory
sheet (subject to accounting not held on the balance sheet.
valuation
valuation rules) until the inventory is
sold.
Only when the inventory is sold are They are therefore expensed when
Charged as
product costs expensed in the profit they occur – i.e. in the period in
expense
and loss account. which they occurred.
Product costs include the prime cost Period costs are the non-production
Include
plus the production overhead. overheads
A retailer owns a shop, employs a shop assistant, invests in sales and
advertising and acquires goods for resale.
The sales and advertising costs and
The cost of goods purchased for the salary of the shop assistant are
resale is product costs and period costs which are expensed
Example
accounted for as inventory. These immediately in the accounting period
are only expensed when the goods in which they were incurred. Note
are sold (which may be in a that the salary of the shop assistant
subsequent accounting period). would be called an administration
expense.

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MANUFACTURING ACCOUNT
INTRODUCTION
Separating costs into the costs for each function can provide useful
information for management.
Why costs by
function?
Page | 12 Functional costs show managers what they are expected to spend on each
function (budgeted costs) and how much they are actually spending.
It is important to separate production costs from non-production costs in a
manufacturing business for the purpose of valuing closing inventory which
will consist of:
 finished goods that have been produced during the financial period
but not yet sold (finished goods inventory); and
 partly finished production (work-in-progress or WIP).
Separating
production
The costs of finished goods and work-in-progress consist of their
and non-
production costs.
production
costs for
Total production costs during a period must therefore be divided or shared
Inventory
between:
valuation
 goods produced and sold in the period;
 goods produced but not yet sold (finished goods);
 work-in-progress.

Non-production costs e.g. salaries of sales persons are never included in

the cost of inventory.
Profit is the revenue for a financial period minus the costs for the period.

In most financial accounting examples the cost of sales figure is built from
purchases as adjusted by inventory movement.
Reporting
It is comprised of the cost of goods manufactured (instead of
profit and
purchases) as adjusted by finished goods inventory movement. The cost
Manufacturing
of goods made is a more complex figure than purchases. It comprises
account
direct materials used, direct labour and production overheads adjusted by
movement in work in progress in the year.

It is often constructed in a manufacturing account. The total from this

account feeds into the statement of comprehensive income.

Statement of Comprehensive Income (FORMAT)

Rs. Rs.
Sales (net) XXX
Less: Cost of goods sold
Opening stock  Finished goods XX
+ Purchase of finished goods (if any) X
+ Cost of goods manufactured (as calculated below) XXX
Cost of goods available for sale XXX
- Closing stock  Finished goods (XX) (XXX)

Gross profit XX
Less: Administration costs (XX)
Less: Selling and distribution costs (XX)
Net profit XX

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 CAF 5 – Factory Ledger & Manufacturing Account

MANUFACTURING ACCOUNT (FORMAT)

Rs. Rs.
Purchases of raw material (including carriage in) net of returns XXX
+ Opening stock  raw material XX
Cost of materials available for consumption XXX
- Closing stock  raw material (XX) Page | 13
Cost of materials consumed XXX
+ Direct labour (wages) XX
+ Other direct expenses XX
Prime Cost (Total direct costs) XXX
+ Factory(production or manufacturing) overheads (expenses)
Indirect wages XX
Depreciation (on production related assets) XX
Insurance (relating to inventories or production) XX
Fuel and power (electricity) XX
Other factory or production expenses X XX
Factory (manufacturing or production) cost XXX
+ Opening stock  work in process XX
+ Purchase of WIP XX
Cost of goods available for manufacturing XXX
- Closing stock  work in process (XX)
COST OF GOODS MANUFACTURED XXX

COST ACCOUNTING CYCLE AND FACTORY LEDGERS

FACTORY LEDGER
A factory ledger is a group of accounts, containing the production costs of a business. These
accounts typically include the following:
 Direct material expenses
 Direct labour expenses
 Factory overhead expense

These accounts may contain the bulk of the expense transactions generated by a business,
and so are of particular interest to the cost accountant or financial analyst who is examining
the financial performance of an organization.

COST ACCOUNTING CYCLE

Cost accounts are an expansion of the general accounts. Accounts
Cost describing manufacturing operations are: Materials, Payroll, Factory
accounts Overhead Control, Work in Process, Finished Goods and Cost of Goods
Sold.
The flow of cost from acquisition of materials, through factory operations to
the cost of products sold is recognised and measured through these
Flow of cost accounts. In cost accounting, extensive use of control accounts is made
such as materials accounts, factory overhead account, Work in process
account and finished goods account etc.

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 CAF 5 – Factory Ledger & Manufacturing Account

Page | 14

JOURNAL ENTRIES
Ref Account & Description Debit Credit
1 Materials Inventory X
Cash / Trade payables X
(Purchased raw materials inventory)
2 Factory payroll X
Wages Payable X
(Record accrued wages for the period)
3 Manufacturing overhead X
Accumulated depreciation / Accruals / Cash X
(Record depreciation / supplies on credit / rent paid)
4 WIP Inventory X
Materials Inventory X
(Record Direct Materials Used)
5 Manufacturing overhead X
Materials inventory X
(Record INDIRECT materials used)
6 WIP Inventory X
Factory payroll X
(Record Direct Labor)
7 Manufacturing overhead X
Factory payroll X
(Record INDIRECT labor)
8 WIP Inventory X
Manufacturing overhead X
(Record Overhead APPLIED to production)
9 Finished goods inventory X
WIP Inventory X
(Record jobs or goods completed (CGM)
10 Cost of goods sold X
Finished goods inventory X
(Record cost of jobs or goods completed and sold)

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 CAF 5 – Factory Ledger & Manufacturing Account

SYLLABUS

Reference Content/Learning outcome

Maintenance of factory ledger and related accounting entries and preparation of

B3
manufacturing account. Page | 15
LO2.3.1 Explain the scope of cost accounting and managerial accounting and compare
them with financial accounting.
LO2.3.2 Explain using examples the nature and behaviour of costs
Identify and apply the concept of fixed, variable, and semi variable costs in
LO2.3.3
given scenarios.
Identify and apply the concept of direct and indirect material and labour cost in
LO2.3.4
given scenarios and differentiate them from overhead expenditure.
LO2.3.5 Understand cost accounting cycle and factory ledger of a manufacturing unit.
LO2.3.6 Post journal entries in factory ledger.
LO2.3.7 Prepare manufacturing account using given data.
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- 17 - 10 - - - - 08 05 07 -
Objective Type - 02
Excluded now 08 - 08 12 09 08 - 03

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PRACTICE Q&A
Sr.# Description Marks Reference
INTRODUCTION
1H Differences of cost and financial accounting systems 04 PE A18
Page | 16 2H Differences in reports and records 09 QB
3H Functions of management 06 QB
4H Difference b/w financial and management accounting 03 QB
COSTS AND COST CLASSIFICATION
5H Cost classification – Function 07 CI
6H Identify the behaviour of costs 06 CI
7H Identify the behaviour of cost from diagram 04 CI
8C Identify the behaviour of cost and make diagrams 04 PE A18
9C Identify the behaviour of cost and make diagrams 05 PE S19
10H Explain terms and classify according to cost behavior 10 QB
11C Identify costs according to attribution 10 CI
12H Cost Classification 10 QB
COST ESTIMATION
13C Cost estimation of car usage using cost behaviour 10 PE S16
MANUFACTURING ACCOUNT
14C Beauty Bars – simple data 10 CI
15H HM: Manufacturing account 12 QB
16H Bablu Limited: CGM and SCI 18 QB
17H Marfani Limited: CGM and SCI 20 QB
18C Tuesday Manufacturing Limited – CGS 07 PE A19
FACTORY LEDGER
19C Journal entries 10 KA

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 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 01
Describe any four differences between financial accounting system and cost accounting
system. (04)

QUESTION 02
The managing director of Sigma Ltd is concerned about the differences between the reports Page | 17
produced and records maintained by you, as management accountant, and by the
company’s financial accountant.

Required:
Explain the differences between:
(i) the profit statements produced, and
(ii) the accounting records maintained by the two of you. (09)

QUESTION 03
Outline the three main functions of management for which information must be provided.
(06)

QUESTION 04
Describe briefly three major differences b/w:
(i) financial accounting
(ii) cost and management accounting (03)

QUESTION 05
A company uses three categories of functional cost in its cost accounting system. These are
manufacturing costs, administration costs and sales and distribution costs.
Identify the functional cost category for each of the following costs:
1. Salary of the chief accountant
2. Telephone charges of head office
3. Telephone charges of factory
4. Cost of sales’ office cleaning services
5. Cost of warehouse finished goods
6. Cost of warehouse raw material
7. Electricity bill of building shared by sales office and factory plant.
(07)

QUESTION 06
Identify the behaviour of following costs:
1. Annual rates bill
2. Direct labour costs
3. Annual telephone bill
Direct materials cost if bulk discount is offered on all purchases once the total
4.
purchases exceeds a certain level
5. Supervisory costs for different level of production.
Labour costs if staff are paid a fixed weekly wage for a 35-hour week and any
6.
additional production is completed in overtime, when staff are paid time and a half.
(06)

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QUESTION 07
From the information in this cost behaviour graph, describe the behaviour of this item of cost,
and calculate the total cost at 10,000 units of output. (04)

Page | 18

QUESTION 08
Describe behaviour of each of the following costs graphically by denoting total cost on
vertical axis and level of activity on horizontal axis:
(i) Factory building rent - Fixed amount per month
(ii) Direct labour cost - Fixed per unit
(iii) Supervision cost - One supervisor is required for every 20 direct workers
(iv) Machine rental cost - Fixed monthly rent and an additional cost of Rs. 100 per unit for
the production exceeding certain limit (04)

QUESTION 09
Describe the behaviour of each of the following costs graphically by denoting ‘Per unit cost’
on vertical axis and ‘Level of activity’ on horizontal axis:
(i) Factory building rent – Fixed amount per month.
(ii) Direct labour cost – Increases proportionately with production.
(iii) Supervision cost – One supervisor is required for every 20 direct workers.
(iv) Direct material cost – Bulk discount is available on all purchases once the total
purchases exceed a certain level. (05)

QUESTION 10
(a) Explain the terms fixed, variable and semi-variable costs.
(b) Classify the following expenses under the headings in (a):
(i) Telephone charges
(ii) Factory insurance
(iii) Legal expenses
(iv) Social security (%)
(v) Rent of premises
(vi) Light and heat
(vii) Direct materials
(viii) Lift operator’s wages
(ix) Machine servicing and repairs
(x) Foreman’s salary
(xi) Contract cleaning services
(xii) Casual labour (10)

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 11
Identify the classification of cost in terms of attribution: (10)
Industry Cost unit Details Classification?
Shoe factory Pair of shoes Leather, glue, nails, laces
Wheels, a stand, a seat (with
Furniture
Office chair seat cushion), back rest, arm Page | 19
business
rests and fabric
Restaurant Restaurant meal Ingredients
Steel, aluminium, windows,
lights, gear box, engine,
wheels etc. etc.
Machinists working in the
Car
Car machining department
manufacturer
Assembly workers in the
assembly department
Workers in the spray painting
shop
Bricks, wood, cement
Bricklayers (workers)
Construction Hire of equipment (for example
House
business a cement mixer)
Payment of fees to sub-
contractors.
Coal mine
Tonne of coal Miners
extraction
Day of storage Warehouse staff
Audit (other
Service Professional staff
consultancy)
industry
Teachers (tutorial staff at a
Teaching day
college)
Manufacturing
company
Road
Vehicle running
transport Fuel cost per km per vehicle
costs
Construction
Motorway
Fuel station

QUESTION 12
John Pirelli has been running a small printing business for the past six months; his
accounting records are limited to an analysed cash book, cheque book stubs and a file of
invoices. Both he and his accountant are happy with this for the preparation of annual
accounts for the Inland Revenue and the bank, but John Pirelli now wants more information
for controlling the business. When talking to his accountant about setting up a suitable
costing system, John Pirelli was clear about the difference between management and
financial accounts. However, he became very confused over different categories of cost and
has asked you for some clarification.

Required: Explain the distinction between:

(i) direct and indirect costs
(ii) fixed and variable costs
(iii) production and non-production costs
(iv) committed and discretionary costs. (10)

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 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 13
The following particulars/projections pertain to a well-maintained medium-sized car:
Rupees
Cost of car 1,200,000
Salvage value after 100,000 kilometres (km) 300,000
Maintenance cost:
Page | 20 ---Service after every 5,000 km 6,000
---Replacement of spares/parts (per 2,000 km) 4,000
Vehicle tax p.a. (20% adjustable against income tax payable by the owner) 7,500
Insurance per annum 36,000
Cost of petrol per liter 75
Cost of tyres replacement after 25,000 km 20,000

On an average, the car consumes one liter for every 15 km.

Required:
For three different levels of use i.e. 10,000, 20,000 and 30,000 km per annum, prepare a
schedule showing:
 Variable, fixed and total cost
 Variable, fixed and total cost per km

In respect of each type of cost, give appropriate justification for treating it as a variable or a
fixed cost. (10)

QUESTION 14
The following data has been extracted from the books of Beauty Bars Ltd at 31 December
2018:
Rs.
Inventory at 1 Jan 2018
Raw materials 15,000
Work in progress 10,000
Finished goods 25,000
Purchases of raw materials 50,000
Sales 500,000
Direct Labour 20,000
Rent 22,000
Electricity 18,000
Office Salaries 30,000
Depreciation for the year:
Office 7,000
Factory 3,000
Advertisement 16,000

Inventory as on 31 Dec 2018

Raw materials 11,000
Work in progress 6,000
Finished goods 10,000

Rent and electricity are to be apportioned: Factory 70%, Office 30%

Required:
Make a manufacturing account and statement of comprehensive income for Beauty Mar Ltd
for the year ended December 31, 2018 (10)

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 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 15
The following balances were extracted from HM's accounts as at 31 March 2007.
Rs. in "000"
Sales 3,200
Purchase of raw material 450
Purchase returns 18
Page | 21
Carriage inward 10
Direct labour 400
Direct overhead 60
Rent 40
Electricity 30
Insurance 55
Factory supervision salaries 65
Office salaries 70
Indirect factory wages 13
Factory cleaning 50
Office cleaning 50
Stocks at 1 April 2006:
- Raw material 110
- Work in progress 55
- Finished goods 80
Factory machinery cost 640
Provision for depreciation on factory machinery 280

Additional information at 31 March 2007:

Rs. In "000"
Rent Prepaid 5
Electricity accrued 15
Insurance prepaid 10
Stocks
Raw material 140
Work in progress 75
Finished goods 170
- Depreciation on factory machinery is to be provided at 25% per annum reducing
balance.
- Rent electricity and insurance are apportioned on the basis of 80% to factory and 20% to
office.
Required
Prepare HM's manufacturing account for the year ended 31 March 2007 (12)

QUESTION 16
Following is the list of balances of Bablu limited:
Rupees
Opening stock-Finished goods 50,000
purchases of RM 2,450,000
Custom duty 122,500
Sales tax paid on purchases of RM 392,000
Carriage paid on RM purchases 49,000
Demurrage and octroi 73,500
Opening stock-RM 421,500
Opening WIP 121,100

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 CAF 5 – Factory Ledger & Manufacturing Account

Labor wages paid 1,685,500

Supervisory salaries 250,000
Indirect labor wages 450,000
Office staff salaries 500,000
Sales team salaries 125,000
Postage and telegram 12,500
Page | 22 Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage paid on finished goods purchases 19,700
Carriage out 27,000
Other income 24,500
Interest expense 148,500
interest income 16,500
Distribution expense 200,000
Depreciation 650,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –RM 100,000
Purchase return –FG 85,000
Purchase discount –RM 40,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
Sales 16,500,000

Other Information
Closing stock-RM 350,000
Closing stock –FG 421,000
Closing-WIP 100,000
- Depreciation-70%factory, 30% office
- Electricity -65%factory, 35% office
- Fuel -85%factory, 15% office
- Repairs-90%factory, 10% office
- Canteen -80%factory, 20% office
- Opening provision for doubtful debts Rs.5,000 and closing balance Rs.40,000
- Wages paid in advance Rs.20,000
- Wages accrued and unpaid Rs.40,000
- Sales Commission 5% of sales
- Directors remuneration -5% of net profit
Required
(a) Cost of Goods manufactured
(b) Statement of comprehensive Income (18)

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 17
Following is the list of balances of Marfani limited for the period ended 31 December 2015
Rupees
Opening stock-Finished goods (FG) 50,000
Purchases of Raw Material (RM) 2,450,000
Trade discount (30% on Direct RM purchases,20% on Indirect RM purchases
80,000 Page | 23
and 50% on FG purchases)
Custom duty (80% relates to Direct RM and 20% relates to FG purchases) 122,500
Import duty (40% is refundable) (70% relates to RM and 30% relates to FG
40,000
purchases)
Sales tax paid on purchases of RM (20% is non-refundable) 392,000
LC Charges (30% relates to RM and 70% relates to FG purchases) 90,000
Advance tax paid (30% relates to RM purchases, 20% relates to Indirect RM
30,000
purchases and remaining relates to FG purchases)
Carriage paid (50% relates to Direct RM purchases,20% relates to Indirect
49,000
RM purchases and 30% relates to FG Purchases)
Purchase of Indirect RM 40,000
Octroi charges (50% relates to Direct RM and remaining relates to IRM) 73,500
Demurrage charges (60% relates to Direct RM and remaining relates to IRM) 20,000
Ab. Demurrage charges (90% relates to Direct RM and remaining to IRM) 5,000
Penalty to driver carrying RM to factory 3,000
Opening stock-Direct RM 421,500
Opening WIP 121,100
Labor wages paid (60% relates to *manufacturing and 40%relates to admin) 2,185,500
Sales team salaries 125,000
Postage and telegram 12,500
Fuel expenses 400,000
Electricity 560,000
Rent rates and taxes 345,000
Property taxes 14,570
finished goods purchases 985,000
Carriage out 27,000
Other income 24,500
Interest paid 148,500
interest income 16,500
Distribution expense 200,000
Depreciation 650,000
Repair and maintenance 257,850
Canteen expenses 140,000
Sales tax received on sales 2,640,000
Purchase return –Direct RM 100,000
Purchase return -FG 85,000
sales returns 200,000
sales discount 24,500
Bad debts 21,450
Sales 16,500,000
Settlement discount received (30% on Direct RM purchases,20% on Indirect
500,000
RM purchases and 50% on FG purchases)

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 CAF 5 – Factory Ledger & Manufacturing Account

Other Information
Closing stock-RM 350,000
Closing stock -FG 421,000
Closing-WIP 100,000
Closing stock-Indirect RM 20,000

Page | 24 - Depreciation-70%factory, 30% office

- Accrued electricity is 40,000(Electricity-65%factory, 35% office)
- Fuel exp. Relating to next period is Rs. 20,000(Fuel-85%factory, 15% office)
- Repairs-90%factory, 10% office
- Cantene-80%factory, 20% office
- Opening provision for doubtful debts Rs.5,000 and closing balance Rs.40,000
- Wages paid in advance Rs.30,000 Wages accrued and unpaid Rs.70,000
- Sales Commission 5% of sales
- Directors remuneration-5% of net profit
- *Labour wages relating to manufacturing includes 80% cost of labour which are
directly involved in production
- Above interest paid includes interest for next two months on the loan. Annual interest
is charged out.

Required
(a) Prepare: Cost of Goods manufactured for the year ended 31 December 2015
(b) Statement of comprehensive Income 31 December 2015 (20)

QUESTION 18
Tuesday Manufacturers Limited produces a single product. The following costs were
incurred in the month of June 2019:
Rs. in '000
Direct labour 2,075
Depreciation on plant and machinery 380
Distribution costs 589
Factory manager’s salary 247
Indirect labour 848
Indirect material consumed 345
Raw material purchases 3,845
Selling costs 1,248
Other production overheads 580
Other administration overheads 388
Following other information is available:
(i) On 1 June 2019, stock of finished goods consisted of 1,350 units valued at Rs. 1,640
per unit while stock of raw materials was valued at Rs. 1,490,000.
(ii) 5,200 units of finished goods were produced during June 2019.
(iii) There was no work-in-progress at the end of the month whereas work in progress at
1 June 2019 was valued at Rs. 208,000.
(iv) Stock of raw materials on 30 June 2019 was valued at Rs. 970,000.
(v) 1,500 units of finished goods were available in stock as on 30 June 2019.
(vi) Cost of finished goods is determined using FIFO method.

Required:
Compute cost of goods sold for the month of June 2019. (07)

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

QUESTION 19
Pass journal entries from the following summarized data in a manufacturing environment
Rs.
Materials purchases during the year 100,000 Page | 25
Production payroll for the year (80% direct and 20% indirect) 70,000
Manufacturing overheads incurred excluding indirect material & labour 50,000
Direct materials used during the year 80,000
Indirect materials used during the year 15,000
Overheads applied/absorbed based on actual production 79,000
Transfer to finished goods inventory (cost) 190,000
Finished goods sold (Cost 170,000) 250,000
(10)

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Page | 26

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 01
Difference Financial Accounting system Cost Accounting system
Prepared to meet a legal or regulatory Prepared to meet the needs of
Requirement
requirement. management.
Used to prepare financial statements for Used to prepare information for
Page | 27
shareholders and other external users. management (internal use only).
Utilisation (Might also provide some information
for management but this is not their
primary purpose).
Prepared within a time frame specified
Prepared within a time frame
Time frame
by a legal or regulatory framework. specified by management.
Records revenues, expenditure, assets
Records costs of activities and
and liabilities. used to provide detailed
information about costs,
Activities
revenues and profits for specific
products, operations and
activities.
Used mainly to provide a historical Provides historical information,
Convention record of performance and financial but also used extensively for
position. forecasting (forward-looking).

ANSWER 02
Part (i) Differences in profit statements
The differences in the statements reflect the different uses of the two sets of accounts, as
detailed below.
Sr. # Financial accounts Management accounts
1 Analyze costs by function (e.g. Analyze costs by nature (e.g. fixed,
production, selling, finance, etc.) and variable, semi-variable, etc.)
comply with generally accepted
accounting practice (e.g. IASs) and
relevant legislation
2 Used externally by shareholders and Used internally for decision-making.
creditors
3 In the main give a financial record of past Profit statements may be prepared either
transactions but are very limited in their on absorption or on a marginal costing
use for control as they do not separate basis, the latter giving better information
fixed and variable costs. They must be for short-term decision-making, as fixed
prepared on an absorption basis, where costs are treated as period costs and
fixed production overheads are treated charged to the profit and loss account
as product costs and charged to the when incurred. Management accounts
income and expenditure account when record costs through cost centers
units are sold, in line with the accruals (departments) and cost units (products)
basis in IAS 1 (and The Framework) and to give responsibility for control of costs
inventory measurement principle in IAS to individuals.
2.
4 The financial accounts profit will include A standard costing system may be used
non-cost items, such as finance costs in the business to analyze variances
and profits or losses on disposal of effectively, and management accounts
assets. profit statements prepared, say, on a
departmental basis, may include notional
intra-departmental charges (e.g. for rent).

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Part (ii) Differences in accounting records

Sr. # Financial accounts Management accounts
1 Are summarized records accounting for Are far more detailed in that they break
costs as they accrue. down costs by centre and unit for control
purposes.
2 Must be kept separately from May be integrated within the financial
Page | 28 management accounts. ledgers where the basis of valuation
used in each is the same. However, the
cost accounts may well be kept
separately from the financial accounts in
a larger organization where different
people can be responsible for the
different areas.

ANSWER 03
The role of the management accountant within an organization is to provide information for
management in order that they may manage effectively. Although the information that the
management accountant must provide will be specific to the organization and the industry in
which it operates, there are three main functions for which information is required – planning,
decision-making and control.

The planning activities of an individual manager will depend on the objectives of the
organization as a whole. It will be assumed that normally these objectives will include the
achievement of at least a target level of profit. Planning must take place to ensure that those
products are sold which give the highest contribution towards profit. Therefore information
regarding the revenue and costs for each product under consideration will be needed in
order that relative profitability may be evaluated.

Once all the necessary information is available, the decision-making process can take
place. The chosen production plan must be expressed in financial terms as well as in terms
of units of product.

At the end of the accounting period under consideration, actual production and sales figures
must be compared with the results expected in the original plan. This is necessary for
management to control the business properly. Where there are differences between actual
and planned performance, investigation may be required so that, if necessary, corrective
action may be taken.

ANSWER 04
Financial Accounting Cost and management accounting
It concerns with both financial as well as cost
It concerns with financial information
information

Primarily deals with cost information for

Primarily deals with financial reporting for
internal use
external use
Deals with both monetary and non-monetary
Primarily deals with monetary values
information

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 05
1. Salary of the chief accountant Administration costs
2. Telephone charges of head office Administration costs
3. Telephone charges of factory Manufacturing costs
4. Cost of sales’ office cleaning services Sales and distribution costs
Page | 29
5. Cost of warehouse finished goods Sales and distribution costs
6. Cost of warehouse raw material Manufacturing costs
Electricity bill of building shared by Shared between sales and distribution
7.
sales office and factory plant. & manufacturing costs

ANSWER 06
1. Annual rates bill Fixed costs
2. Direct labour costs Variable costs
3. Annual telephone bill Semi-variable costs
Direct materials cost if bulk discount is
Variable cost with a step decrease at certain
4. offered on all purchases once the total
level and then variable cost behaviour again
purchases exceeds a certain level
Supervisory costs for different level of
5. Step fixed cost
production.
Labour costs if staff are paid a fixed
weekly wage for a 35-hour week and Fixed cost up to a certain level but exceeding
6. any additional production is completed that level it becomes variable cost at higher
in overtime, when staff are paid time rate.
and a half.

ANSWER 07
The cost item is a mixed cost. Up to 5,000 units of output, total fixed costs are Rs.14,000
and the variable cost per unit is Rs.(24,000 – 14,000)/5,000 units = Rs.2 per unit.

At the 5,000 units of output, there is a step increase in fixed costs of Rs.6,000 (from
Rs.24,000 total costs to Rs.30,000 total costs). Total fixed costs therefore rise from
Rs.14,000 to Rs.20,000. The variable cost per unit remains unchanged.

At the 10,000 units level, total costs are therefore:

Rs.
Variable costs (10,000 × Rs.2) 20,000
Fixed costs 20,000
Total costs 40,000

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 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 08

Page | 30

ANSWER 09

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 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 10
Part (a) Fixed, variable and semi-variable costs
A fixed cost item is one for which the expenditure will not be affected by changes in the level
of activity. In general, fixed costs are incurred in providing the facilities or conditions to
undertake production. Therefore, they are more usually incurred in relation to time periods
than to activity.
Page | 31
This is not to say that such costs are a constant amount even for short periods of time.
Clearly, price changes will vary the amount, as in the instance of paying local rates based on
rate-able value where the annual charges are in line with inflation. Finally, fixed cost per unit
of product varies inversely with output.

A variable cost item is one for which the total expenditure will tend to vary more or less
directly with output or activity. Nevertheless, the variable cost expenditure may also vary as
the result of other influences, such as inflation or competition or even changes in supply. It is
possible that any change in the number of units purchased could be more than offset by an
opposite price change. Even so, the total expenditure at the new price will vary directly with
output. Variable cost per unit of product tends to be more or less constant at each different
level of output, other things being equal.

A semi-variable cost is one for which the total expenditure tends to vary directly with the
volume of output/activity, but proportionately less than the change in output/activity.
Generally, such cost items are composites with a variable element and a fixed element. A
good example is telephone charges in which the rental is a fixed charge and payable
irrespective of activity levels. The variable element comprises the charge for calls made and
tends to be related to business activity. The cost per unit of product will reflect both.
Part (b)
Examples of each type of cost:
Fixed Variable Semi-variable
2 – factory insurance 7 – direct materials 1 – telephone (line rent + calls)
3 – legal expenses 4 – social security 6 – light & heat
5 – rent of premises 12 – causal labour 9 – machine servicing / repairs
8 – lift operator’s wages 11 – contract cleaning services
10 – foreman’s salary

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ANSWER 11
Industry Cost unit Details Classification
Shoe factory Pair of shoes Leather, glue, nails, laces Direct material cost
Wheels, a stand, a seat (with
Furniture
Office chair seat cushion), back rest, arm Direct material cost
Page | 32 business
rests and fabric
Restaurant Restaurant meal Ingredients Direct material cost
Steel, aluminium, windows,
lights, gear box, engine, Direct material cost
wheels etc. etc.
Machinists working in the
Car Direct labour
Car machining department
manufacturer
Assembly workers in the
Direct labour
assembly department
Workers in the spray painting
Direct labour
shop
Bricks, wood, cement Direct material cost
Bricklayers (workers) Direct labour
Construction Hire of equipment (for example
House Direct expenses
business a cement mixer)
Payment of fees to sub-
Direct expenses
contractors.
Coal mine
Tonne of coal Miners Direct labour
extraction
Day of storage Warehouse staff Direct labour
Audit (other
Service Professional staff Direct labour
consultancy)
industry
Teachers (tutorial staff at a
Teaching day Direct labour
college)
Manufacturing
Indirect material cost
company
Road
Vehicle running Direct material cost
transport Fuel cost per km per vehicle
costs
Construction Indirect material cost
Motorway
Direct material cost
Fuel station

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 12
Part (i) Direct and indirect costs
Direct cost is also called prime cost; indirect costs are often referred to as overheads.

Direct costs are those specifically attributable to units of output (clients’ jobs); these would
include printers’ time, paper costs, and plate-making costs.
Page | 33
Indirect costs are those not capable of such close matching, such as rent and rates,
insurance, depreciation of machinery.

Part (ii) Fixed and variable costs

Fixed costs are those independent of the level of output (the amount of printing work done).
Into this category would come rent and rates, advertising, audit fee, electricity for lighting and
heating.

Variable costs increase as output increases, such as paper costs, electricity costs for
powering printing presses and the cost of ink or plates.

A third category of cost is “semi-variable”, such as electricity (with a fixed and variable
element). These three can best be described graphically.

Total cost Total cost Total cost

Output Output Output

Fixed Cost Variable cost Semi-variable

Part (iii)
The category of “production costs” is important to the extent that such types of cost can be
incorporated in the valuation of any stocks of finished work at the end of an accounting
period which in turn is needed for profit determination.

Examples of these costs would be as follows.

Production Paper, all print-room costs
Non-production Your secretary’s salary, advertising, delivery van, running expenses

Part (iv)
Committed costs are those essential for the running of the business: paper, depreciation of
presses, assistant printer’s wages, rent of printing room.

Discretionary costs are incurred at the whim of management: machine maintenance contract
charges, cost of Christmas party, advertising costs.

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ANSWER 13

------- Kilometers -------

A 10,000 20,000 30,000
Variable costs: ----- Amount in Rs. -----
Page | 34 Maintenance – service after every 5000 km 12,000 24,000 36,000
Spares 20,000 40,000 60,000
Petrol 50,000 100,000 150,000
Replacement of tyres 20,000/25,000 x A 8,000 16,000 24,000
Depreciation [(1,200,000 – 300,000)/100,000 x A] 90,000 180,000 270,000
B 180,000 360,000 540,000
Fixed costs:
Vehicle tax 6,000 6,000 6,000
Insurance 36,000 36,000 36,000
C 42,000 42,000 42,000
Total cost 222,000 402,000 582,000

Variable cost per km (B / A) 18.00 18.00 18.00

Fixed cost per km (C / A) 4.20 2.10 1.40
Total cost per km 22.20 20.10 19.40
(i) Spares and petrol: Spares and petrol are variable costs being dependent on the
usage of car.
(ii) Depreciation: The depreciation in this case is variable because it is being charged on
the basis of actual running/usage and not on the basis of time.
(iii) Maintenance: Service is to be done after each 5,000 kms and is therefore a variable
cost.
(iv) Vehicle tax: Vehicle tax is payable per year irrespective of actual running and is
therefore a fixed cost.
(v) Insurance: Insurance is payable per year irrespective of usage and is therefore a
fixed cost.
(vi) Tyres: If the cost of tyres is accrued on the basis of usage, it would be a variable cost.

ANSWER 14
Beauty Bars Limited
Statement of Comprehensive Income
For the year ended 31 December 2018
Rs. Rs.
Sales (net) 500,000
Less: Cost of goods sold
Opening stock  Finished goods 25,000
+ Purchase of finished goods (if any) 0
+ Cost of goods manufactured (as calculated below) 109,000
Cost of goods available for sale 134,000
- Closing stock  Finished goods (10,000) (124,000)

Gross profit 376,000

Administration costs [(22,000 + 18,000) x 30% +7,000 + 30,000 (49,000)
Selling and distribution costs (Advertisement) (16,000)
Net profit 311,000

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

Beauty Bars Limited

Manufacturing Account for the year ended 31 December 2018
Rs. Rs.
Purchases of raw material (including carriage in) net of returns 50,000
+ Opening stock  raw material 15,000
Cost of materials available for consumption 65,000
- Closing stock  raw material (11,000) Page | 35
Cost of materials consumed 54,000
+ Direct labour (wages) 20,000
+ Other direct expenses 0
Prime Cost (Total direct costs) 74,000
+ Factory(production or manufacturing) overheads (expenses)
Rent [22,000 x 70%] 15,400
Depreciation 3,000
Electricity [18,000 x 70%] 12,600 31,000
Factory (manufacturing or production) cost 105,000
+ Opening stock  work in process 10,000
+ Purchase of WIP 0
Cost of goods available for manufacturing 115,000
- Closing stock  work in process (6,000)
COST OF GOODS MANUFACTURED 109,000

ANSWER 15
M/s HM
Cost of Goods Manufactured for the period ended March 31, 2007
MANUFACTURING ACCOUNT Rs. 000
Purchases of raw material 450-18 432
Transportation cost 10
+ Opening stock  raw material 110
Cost of materials available for consumption 552
- Closing stock  raw material 140
Cost of materials consumed 412
+ Direct labour (wages) 400
+ Other direct expenses 60
Prime Cost (Total direct costs) 872
+ Factory (production or manufacturing) overheads (expenses)
Indirect wages 13
Rent (40-5) x 80% 28
Electricity (30+15) x80% 36
Insurance (55-10) x80% 36
Supervisory salaries 65
Cleaning 50
Provision for depreciation on machinery (640-280) x25% 90
Factory (manufacturing or production) cost 1,190
+ Opening stock  work in process 55
+ Purchase of WIP -
Cost of goods available for manufacturing 1,245
- Closing stock  work in process 75
COST OF GOODS MANUFACTURED 1,170

Following items were to be ignored (being non-production):

Sales
Office salaries
Office cleaning

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ANSWER 16
M/s Babloo Limited
Statement of Comprehensive Income
Rs. Rs.
Sales (net) 16,500,000-200,000 16,300,000
Less: Cost of goods sold
Page | 36 Opening stock  Finished goods 50,000
+ Purchase of finished goods 985,000-85,000+19,700 919,700
+ Cost of goods manufactured (as calculated) 6,941,165
Cost of goods available for sale 7,910,865
- Closing stock Finished goods 421,000 (7,489,865)
Gross profit 8,810,135
Less: Administration costs W1 (2,570,305)
Other income W2 81,000
Net profit before directors’ remuneration 6,320,830
Directors’ remuneration 5% (316,042)
Net profit 6,004,788

Manufacturing Account Rs. Rs.

Purchases of raw material 2,450,000 + 49,000 – 100,000 2,399,000
Demurrage and octroi 73,500
Custom duty 122,500
+ Opening stock  raw material 421,500
Cost of materials available for consumption 3,016,500
- Closing stock  raw material 350,000
Cost of materials consumed 2,666,500
+ Direct labour (wages) 1,685,500+40,000-20,000 1,705,500
+ Other direct expenses -
Prime Cost (Total direct costs) 4,372,000
+ Factory (production or manufacturing) overheads (expenses)
Indirect wages 450,000
Supervisory salaries 250,000
Depreciation 650,000x70% 455,000
Rent, rates and taxes 345,000
Fuel and power 400,000x85% 340,000
Electricity 560,000x65% 364,000
Repair and maintenance 257,850 x 90% 232,065
Canteen expense 140,000x80% 112,000 2,548,065
Factory (manufacturing or production) cost 6,920,065
+ Opening stock  work in process 121,100
+ Purchase of WIP -
Cost of goods available for manufacturing 7,041,165
- Closing stock  work in process 100,000
COST OF GOODS MANUFACTURED 6,941,165

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

W1 Administration costs Rs.

Office staff salaries 500,000
Sales team salaries 125,000
Postage and telegram 12,500
Carriage outward 27,000
Interest expense 148,500
Sales discount 24,500 Page | 37
Bad debts expense 40,000-5000+21,450 56,450
Depreciation expense 650,000x30% 195,000
Electricity expense 560,000x35% 196,000
Fuel expense 400,000x15% 60,000
Distribution expense 200,000
Repair and maintenance 257,850x10% 25,785
Canteen expenses 140,000x20% 28,000
Sales commission (16,500,000+2,640,000) x5% 957,000
Property tax 14,570
2,570,305

W2 Other income Rs.

Purchase discount 40,000
Other income 24,500
Discount income 16,500
81,000

ANSWER 17
Mafrani Limited
Statement of Comprehensive Income
For the period ended 31 December 2015
Rs. Rs.
Sales (net) 16,500,000-200,000 16,300,000
Less: Cost of goods sold
Opening stock  Finished goods 50,000
+ Purchase of finished goods [985,000 - (80,000x50%)]-85,000 860,000
+Custom Duty 122,500x20% 24,500
+Import Duty 40,000x60%x30% 7,200
+L.C Charges 90,000x70% 63,000
+Carriage 49,000x30% 14,700
+ Cost of goods manufactured (as calculated) 5,962,965
Cost of goods available for sale 6,982,365
- Closing stock Finished goods 421,000 (6,561,365)
Gross profit 9,738,635
Less: Administration costs W1 (3,178,790)
Other income W2 541,000
Net profit before directors’ remuneration 7,100,845
Directors’ remuneration 5% (355,042)
Net profit 6,745,803

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 CAF 5 – Factory Ledger & Manufacturing Account

MANUFACTURING ACCOUNT Rs. Rs.

Purchases of raw material 2,450,000 - (80,000x30%) – 100,000 2,326,000
Custom Duty 122,500x80% 98,000
Import Duty 40,000x60%x70% 16,800
Sales tax paid - Non-refundable 392,000x20% 78,400
L.C Charges 90,000x30% 27,000
Page | 38 Carriage Paid 49,000x50% 24,500
Octroi Charges 73,500 x 50% 36,750
Demurrage Charges 20,000x60% 12,000
+ Opening stock  raw material 421,500
Cost of materials available for consumption 3,040,950
- Closing stock  raw material 350,000
Cost of materials consumed 2,690,950
+ Direct labour (wages) (2,185,500+70,000-30,000) x60%x80% 1,068,240
+ Other direct expenses -
Prime Cost (Total direct costs) 3,759,190
+ Factory (production or manufacturing) overheads (expenses)
Indirect raw material
Purchases 40,000
Trade Discount 80,000x20% (16,000)
Carriage Paid 49,000x20% 9,800
Octroi Charges 73,500x50% 36,750
Demurrage Charge 20,000x40% 8,000
Closing stock – indirect material (20,000)
58,550
Indirect Labour (2,185,500+70,000-30,000) x60%x20% 267,060
Fuel Expense (400,000-20,000) x85% 323,000
Electricity (560,000+40,000) x65% 390,000
Rent Rates & taxes 345,000
Depreciation 650,000x70% 455,000
Repair & maintenance 257,850x90% 232,065
Canteen Shop 140,000x80% 112,000 2,182,675
Factory (manufacturing or production) cost 5,941,865
+ Opening stock  work in process 121,100
+ Purchase of WIP -
Cost of goods available for manufacturing 6,062,965
- Closing stock  work in process 100,000
COST OF GOODS MANUFACTURED 5,962,965

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

W1 Administration costs Rs.

Abnormal Demurrage charges 5,000
Penalty on Driver 3,000
Salaries Wages 890,200
Sales team Salaries 125,000
Postage & telegram 12,500
Fuel Expense (40,000-20,000) x15% 57,000 Page | 39
Electricity (560,000+40,000) x35% 210,000
Property Taxes 14,570
Carriages 27,000
Interest Expenses 148,500/14x12 127,285
Distribution Expenses 200,000
Depreciation 650,000x30% 195,000
Repair and maintenance 257,850x10% 25,785
Canteen Exp 140,000x20% 28,000
Sales Discount 245,000
Bad Debts 21,450+40,000-5,000 56,450
Sales Commission (16,500,000+2,640,000) x5% 957,000
3,178,790

W2 Other Income Rs.

Other Income 24,500
Interest Income 16,500
Settlement Discount 500,000
541,000

ANSWER 18
Tuesday Manufacturers Limited
Cost of goods sold for the month of June 2019 Rs. in ‘000
Opening finished goods (1,350×1,640) 2,214
Cost of goods manufactured (W1) 9,048
Closing finished goods [1,500×(9,048,000÷5,200)] (2,610)
Cost of goods sold 8,652
W1: Cost of goods manufactured Rs. in ‘000
Opening raw material 1,490
Raw material purchases 3,845
Closing raw material (970)
Raw material consumed 4,365
Direct labour 2,075
Prime cost 6,440
Overheads:
Depreciation on plant and machinery 380
Factory manager’s salary 247
Indirect labour 848
Indirect material consumed 345
Other production overheads 580
2,400
Total manufacturing cost 8,840
Opening work in progress 208
Closing work in progress -
Cost of goods manufactured 9,048

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 CAF 5 – Factory Ledger & Manufacturing Account

ANSWER 19

JOURNAL ENTRIES
Ref Account & Description Debit Credit
1 Materials Inventory 100,000
Page | 40 Cash / Trade payables 100,000
(Purchased raw materials inventory)
2 Factory payroll 70,000
Wages Payable 70,000
(Record accrued wages for the period)
3 Manufacturing overhead 50,000
Accumulated depreciation / Accruals / Cash 50,000
(Record depreciation / supplies on credit / rent paid)
4 WIP Inventory 80,000
Materials Inventory 80,000
(Record Direct Materials Used)
5 Manufacturing overhead 15,000
Materials inventory 15,000
(Record INDIRECT materials used)
6 WIP Inventory 56,000
Factory payroll 56,000
(Record Direct Labor)
7 Manufacturing overhead 14,000
Factory payroll 14,000
(Record INDIRECT labor)
8 WIP Inventory 79,000
Manufacturing overhead 79,000
(Record Overhead APPLIED to production)
9 Finished goods inventory 190,000
WIP Inventory 190,000
(Record jobs or goods completed (CGM)
10A Receivable / Cash 250,000
Sales 250,000
(Recording sales)
10B Cost of goods sold 170,000
Finished goods inventory 170,000
(Record cost of jobs or goods completed and sold)

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

ICAP OBJECTIVE BASED QUESTIONS

01. Prime cost means
(a) Sum of direct material and factory overhead cost
(b) Sum of direct material and selling cost
(c) Sum of indirect material and direct labour Page | 41

(d) Sum of direct material and direct labour cost

02. When a cost manager wants to know the cost of “something” then this “something” is known as
(a) Cost center
(b) Cost object
(c) Cost unit
(d) Cost behavior

03. Which of the following is an example of financing cost

(a) Selling cost
(b) Administrative cost
(c) Loan interest cost
(d) Research and development cost

04. Which of the following statement is incorrect?

(a) Variable cost per unit remains fixed but varies in total
(b) Fixed cost per unit varies but remains fixed in total
(c) Selling cost is included in the cost of product
(d) Direct labour is a component of both prime cost and conversion cost

05. Which of the following is correct for conversion cost?

(a) Cost of direct material + cost of direct labour
(b) Cost of direct material + cost of production
(c) Prime cost + production cost
(d) Cost of direct labour + production overhead

06. Among the following given costs, which can be best described as semi variable cost?
(a) Direct material cost
(b) Electricity charges
(c) Basic pay of direct labour
(d) Plant’s supervisor’s salary

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 CAF 5 – Factory Ledger & Manufacturing Account

07. Direct costs are the costs that

(a) Are under the control of directors of the company
(b) Are directly charged to department
(c) Are directly under the control of a manager
Page | 42 (d) Can be directly identified with a product of service

08. Which chart shows the unit cost behavior of straight-line depreciation costs?

(a) Chart A
(b) Chart B
(c) Chart C
(d) Chart D

09. A particular cost is fixed in total for a period. What is the effect on the cost per unit of a
reduction in activity of 50%?
(a) Cost per unit increases by 50%
(b) Cost per unit reduces by 50%
(c) Cost per unit increases by 100%
(d) Cost per unit is unchanged.

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

10. A manufacturing company has four types of cost (identified as T1, T2, T3 and T4). The total
cost for each type at two different production levels is:
Total cost for180 units
Cost type Total cost for125 units Rs.
Rs.
T1 1,000 1,260
Page | 43
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
(a) T1 and T3
(b) T1 and T4
(c) T2 and T3
(d) T2 and T4

11. Costs which are included in the costs of inventories are called
(a) Period costs

(b) Selling costs

(c) Product costs

(d) Distribution costs

12. A restaurant has the following costs in a period

1. wages of the kitchen staff
2. depreciation of kitchen equipment
3. costs of ingredients for meals
4. rent paid for the restaurant building
What are indirect costs for an individual meal?

(a) 1, 2, 3 and 4

(b) 1, 2 and 3 only

(c) 1 and 2 only

(d) 2 and 4 only

13. A business pays a salesman a basic salary, plus commission based on how much he sells.
Which type of cost are the salesman’s total earnings?
(a) Fixed

(b) Semi-variable

(c) Stepped

(d) Variable

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 CAF 5 – Factory Ledger & Manufacturing Account

14. Which cost is treated as variable cost of a motor transport company?

(a) Advertising

(b) Driver insurance

(c) Fuel
Page | 44
(d) Vehicle license

15. Which item is a direct cost?

(a) Carriage inwards on production materials
(b) Cleaning materials for the factory
(c) Factory rent
(d) Wages of the factory manager

16. A company currently produces 6,000 units of its single product each period, incurring total
variable costs of Rs. 60,000 and fixed costs of Rs. 42,000. Production will increase to 8,000
units per period if the company expands capacity resulting in changes both to the variable
costs per unit and to the total fixed costs. For production of 8,000 units per period total variable
costs would be Rs. 76,000 and fixed costs Rs. 50,000.
What is the reduction in total cost per unit comparing the costs for 8,000 units per period with
the unit costs currently being incurred?

Rs. ___________

17. Faran Limited is manufacturer of hand bags. Following figures have been provided for the
month of April 2019;

April 1 April 30
Rs. Rs.

Raw material inventory 39,000 66,000

Raw materials purchased 400,000

Direct labour cost 300,000

What is the amount of raw materials consumed for the month of April 2019?
Rs. ___________

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

18. Faran Limited is manufacturer of hand bags. Following figures have been provided for the
month of April 2019;

Rs.

Raw materials consumed 373,000

Page | 45
Direct labour cost 300,000

Indirect labour 40,000

What is the figure for prime cost for the April 2019?
Rs. ___________

19. Faran Limited is manufacturer of hand bags. Following figures have been provided for the
month of April 2019;
Rs.
Raw materials purchased 400,000
Direct labour cost 300,000
Advertising expense 150,000
Selling and administrative salaries 140,000
Rent for factory 120,000
Depreciation - Sales equipment 110,000
Depreciation - Factory equipment 70,000
Indirect labour cost 40,000
Factory utilities 20,000
Factory insurance 10,000

Only 60% of the utilities expenses and 70% of the insurance expense apply to factory
operations, the remaining amount should be charged to selling and administrative expenses.
What is the amount of factory overheads for the month?
Rs. ___________

20. Neelam & Co. has provided following data for the month of January 2019;
(i) Material purchased for Rs. 500,000.
(ii) Opening inventory of raw material is Rs. 80,000 and closing inventory is Rs. 120,000.
(iii) Gross payroll for the month was Rs. 2,000,000. The distribution of payroll was 50%
direct labour, 20% indirect labour, 20% administrative staff salaries, and 10% sales
staff salaries.
What is the amount of prime cost incurred for the month of January 2019?
Rs. ___________

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 CAF 5 – Factory Ledger & Manufacturing Account

21. Which is not a fixed cost?

(a) monthly rent of Rs.100,000 contractually specified in a one-year lease
(b) an insurance premium of Rs.50,000 per year, paid last month
(c) an audit fee of Rs.500,000 per year:
Page | 46 (d) a post-paid mobile bill

22. Which of the following types of cost are assumed to stay the same per unit, irrespective of the
volume of output?
(a) Overheads
(b) Fixed
(c) Variable
(d) Relevant

23. A semi variable cost would:

(a) be zero when output is zero and would decrease in direct proportion to output
(b) be more than zero if no products were made and would then increase in direct
proportion to output
(c) be a fixed amount when output was zero and would not increase in direct proportion to
output
(d) be zero when output is zero and would increase in direct proportion to output

24. An example of a semi-variable cost would be:

(a) the wages paid to operatives on basic pay topped-up by a production bonus scheme
(b) the costs of raw material to be used for production
(c) the depreciation of intangible fixed assets
(d) the salaries of departmental supervisors

Latest update: March 2020

 CAF 5 – Factory Ledger & Manufacturing Account

OBJECTIVE BASED ANSWERS

01. (d) Sum of direct material and direct labour cost

02. (b) Cost object

03. (c) Loan interest cost Page | 47

04. (c) Selling cost is NOT included in the cost of product.

05. (d) Cost of direct labour + production overhead

06. (b) Electricity charges

07. (d) Can be directly identified with a product of service

08. (d) Chart D. The depreciation expense is fixed and it would decrease per unit when
level of activity increases.

09. (c) Cost per unit increases by 100%

10. (a) T1 and T3

11. (c) Product costs

12. (d) 2 and 4 only

13. (b) Semi-variable

14. (c) Fuel

15. (a) Carriage inwards on production materials

16. Rs. 1.25

Rs.

Cost per unit for 6,000 units (60,000+42,000) / 6,000 17

Cost per units for 6,000 units (76,000 + 50,000)/8,000 (15.75)

Reduction in cost per unit 1.25

17. Rs.
373,000 Rs.

Raw materials - opening 39,000

Raw material purchases 400,000

Raw material available for consumption 439,000

Raw materials - closing (66,000)

Raw material consumed 373,000

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 CAF 5 – Factory Ledger & Manufacturing Account

18. Rs.
673,000 Rs.

Raw materials consumed 373,000

Direct labour 300,000

Page | 48
Prime cost 673,000

19. Rs.
249,000 Rs.

Indirect labour cost 40,000

Rent for factory 120,000

Depreciation - Factory equipment 70,000

Factory utilities - 60% 12,000

Factory insurance – 70% 7,000

249,000

20. Rs.
1,460,000 Rs.

Raw materials - opening 80,000

Raw material purchases 500,000

Raw material available for consumption 580,000

Raw materials - closing (120,000)

Raw material consumed 460,000

Direct labour – Rs. 2,000,000 x 50% 1,000,000

Prime cost 1,460,000

21. (d)

22. (c)

23. (b)

24. (a)

Latest update: March 2020

 CAF 5 – IAS 40

Investment
IAS 40 Property 08
Page | 1
DEFINITIONS
An investment property is property (land or a building, part of a
building or both) held to earn rentals or for capital appreciation or
both.

Examples of investment property

The following are examples of investment property:
Investment
 land held for long-term capital appreciation rather than for short-term
property
sale in the ordinary course of business.
 land held for a currently undetermined future use. (If an entity has
not determined that it will use the land as owner-occupied property
or for short-term sale in the ordinary course of business),
 property that is being constructed or developed for future use as
investment property.
Investment property differs from other property, which is:
 used in the production or supply of goods, or for administrative
purposes (which is covered by IAS 16; Property, plant and
equipment); or
 held for sale in the ordinary course of business (which is covered by
IAS 2: Inventories).
Not an
Examples of items that are not investment property
investment
 property intended for sale in the ordinary course of business;
property
 owner-occupied property including (among other things),
 property held for future use as owner-occupied property,
 property held for future development and subsequent use as
owner-occupied property,
 property occupied by employees (whether or not the
employees pay rent at market rates) and
 owner-occupied property awaiting disposal.
An entity might use part of a property for the production or supply of goods
or services or for administrative purposes and hold another part of the same
property to earn rentals or for capital appreciation. In other words, part of a
property might be owner occupied and part held as an investment. The two
Partly
parts are accounted for separately if they could be sold separately (or
occupied
leased out separately under a finance lease).
buildings
If this is not the case, the property is investment property only if an
insignificant portion is held for use in the production or supply of goods or
services or administrative purpose.

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 CAF 5 – IAS 40

ACCOUNTING TREATMENT
An investment property should be recognised as an asset only when:
 it is probable that future economic benefits associated with the
Recognition
property will flow to the entity; and
 the cost of the property can be measured reliably.
Page | 2
Owned investment property should be measured initially at cost plus any
directly attributable expenditure (e.g. legal fees, property transfer taxes and
other transaction costs) incurred to acquire the property.

Measurement
The cost of an investment property is not increased by:
at
 start-up costs (unless necessary to bring the property to the
recognition condition necessary for it to be capable of operating in the manner
intended by management);
 operating losses incurred before the investment property achieves
the planned level of occupancy; or
 abnormal waste incurred in constructing or developing the property.
After initial recognition an entity may choose as its accounting policy:
 the fair value model; or
 the cost model.
Fair value is the price that would be received to sell an asset or paid to
Measurement transfer a liability in an orderly transaction between market participants at
the measurement date.
after
recognition The chosen policy must be applied to all the investment property.
Once a policy has been chosen it cannot be changed unless the change will
result in a more appropriate presentation. IAS 40 states that a change from
the fair value model to the cost model is unlikely to result in a more
appropriate presentation.
Under the fair value model the entity should:
 revalue all its investment property to ‘fair value’ (open market value)
at the end of each financial year; and
 recognise any resulting gain or loss in profit or loss for the period
 the property would not be depreciated.

This is different to the revaluation model of IAS 16, where gains are
reported as other comprehensive income and accumulated as a revaluation
Fair value surplus.
model If an entity’s policy is to measure investment properties at fair value but its
fair value cannot be measured reliably such investment property shall be
measured at cost for example an investment property under construction.
However, if the entity expects the fair value of the investment property
under construction to be reliably measured when construction is complete it
shall measure that investment property under construction at cost until
either its fair value becomes reliably measured or construction is completed
(whichever is earlier).
The cost model follows the provisions of IAS 16. The property is measured
Cost Model at cost less accumulated depreciation (related to the non-land element) and
less impairment loss if any.

Latest update: March 2020

 CAF 5 – IAS 40

WHY INVESTMENT PROPERTIES ARE TREATED DIFFERENTLY?

Most properties are held to be used directly or indirectly in the entity’s business. For
example, a factory, plant and equipment which is used to produce goods for sale. The
property is being consumed and it is appropriate to depreciate it over its useful life.

An investment property is held primarily because it is expected to increase in value over Page | 3
time (capital appreciation) or it is held to earn rentals. It generates economic benefits for
the entity because it might earn regular stream of income in the form of rentals or might be
sold at a profit.

An investment property also differs from owner-occupied properties (IAS 16) because it
generates cash flows that are largely independently of other assets held by an entity.

The most relevant information about an investment property is its fair value (the amount
for which it could be sold). Depreciation is largely irrelevant. Therefore, it is appropriate to
re-measure an investment property to fair value each year and to recognise gains and
losses in profit or loss for the period.

TRANSFERS AND DISPOSALS

TRANSFER
A transfer of investment property can only be made where there is a change in use (when
the property meets or ceases to meet, the definition of investment property):
Transfer Transfer
Change in use Deemed transfer value
from to
Commencement of or Fair value at the date of change of use
development with a view to IAS 40 IAS 16 becomes the deemed cost for future
owner-occupation accounting purposes
Where investment properties are
measured at fair value, revalue in
End of owner-occupation IAS 16 IAS 40
accordance with IAS 16 prior to the
transfer
Commencement of Fair value at the date of change of use
development with a view to IAS 40 IAS 2 becomes the deemed cost for future
sale accounting purposes
Fair value at the date of the transfer,
Inception of an operating and any difference compared to
IAS 2 IAS 40
lease to another party previous carrying amount is recognised
in profit or loss
Gain or loss on disposal
Gains or losses on disposals of investment properties are included in profit or loss in the
period in which the disposal occurs.

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 CAF 5 – IAS 40

DISCLOSURES
 whether the fair value model or the cost model is used
 the methods and assumptions applied in arriving at fair values
 the extent to which the fair value of investment property was based
on a valuation by a qualified, independent valuer with relevant,
Page | 4
recent experience
 amounts recognised as income or expense in the statement of profit
Applicable to or loss for:
both models  rental income from investment property
 operating expenses in relation to investment property
 details of any restrictions on the ability to realise investment property
or any restrictions on the remittance of income or disposal proceeds
 the existence of any contractual obligation to purchase, construct or
develop investment property or for repairs, maintenance or
enhancements.
There must be a reconciliation, in a note to the financial statements,
between opening and closing values for investment property, showing:
 additions during the year
 assets classified as held for sale in accordance with IFRS 5
 net gains or losses from fair value adjustments
 acquisitions through business combinations

Applicable to This reconciliation should show separately any amounts in respect of

fair value investment properties included at cost because their fair values cannot be
model only estimated reliably.

For investment properties included at cost because fair values cannot be

estimated reliably, the following should also be disclosed:
 a description of the property
 an explanation as to why fair values cannot be determined reliably
 if possible, the range within which the property’s fair value is likely to
lie.
 the depreciation methods used
 the useful lives or depreciation rates used
 gross carrying amounts and accumulated depreciation at the
beginning and at the end of the period
 A reconciliation between opening and closing values showing:
 additions
Applicable to  depreciation
cost model  assets classified as held for sale in accordance with IFRS 5
only  acquisitions through business combinations
 impairment losses
 transfers

When the cost model is used, the fair value of investment property should
also be disclosed. If the fair value cannot be estimated reliably, the same
additional disclosures should be made as under the fair value model.

Latest update: March 2020

 CAF 5 – IAS 40

SYLLABUS

Reference Content/Learning outcome

C6 IAS 40 Investment Property (other than lease issues)

Apply the requirements of IAS 40 in respect of recognition and measurement Page | 5
LO3.6.1
(excluding lease issues)
Proficiency level: 2
Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- 041
Objective Type 03 -

1
Total 20 marks (including IAS 16 and IAS 20)

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 CAF 5 – IAS 40

PRACTICE Q&A
Sr.# Description Marks Reference
1C Entity P: Cost model vs Fair value model 06 ST
2H Victoria: Different properties and different models 09 QB
Page | 6 3C Entity A: Transfer from IAS 40 to IAS 16 05 KA
4C Entity B: Transfer from IAS 16 to IAS 40 05 KA
5C Entity C: Transfer from IAS 40 to IAS 2 05 KA
6C Entity D: Transfer from IAS 2 to IAS 40 05 KA

Latest update: March 2020

 CAF 5 – IAS 40

QUESTION 01
On 1 January Year 1 Entity P purchased a building for its investment potential. The building
cost Rs. 1 million with transaction costs of Rs. 10,000.

The depreciable amount of the building component of the property at this date was Rs.
300,000. The property has a useful life of 50 years.
Page | 7
At the end of Year 1 the property’s fair value had risen to Rs. 1.3 million.

The investment property was sold early in Year 2 for Rs. 1,550,000, Selling costs were Rs.
50,000.

Required:
(a) How the above property shall be presented at the end of year 1 under cost model
and fair value model.
(b) Calculate the gain on disposal under cost model and fair value model. (06)

QUESTION 02
Victoria owns several properties and has a year end of 31 December. Wherever possible,
Victoria carries investment properties under the fair value model.

Property 1 was acquired on 1 January Year 1. It had a cost of Rs. 1 million, comprising Rs.
500,000 for land and Rs. 500,000 for buildings. The buildings have a useful life of 40 years.
Victoria uses this property as its head office.

Property 2 was acquired many years ago for Rs. 1.5 million for its investment potential. On
31 December Year 7 it had a fair value of Rs. 2.3 million. By 31 December Year 8 its fair
value had risen to Rs. 2.7 million. This property has a useful life of 40 years.

Property 3 was acquired on 30 June Year 2 for Rs. 2 million for its investment potential. The
directors believe that the fair value of this property was Rs. 3 million on 31 December Year 7
and Rs. 3.5 million on 31 December Year 8. However, due to the specialised nature of this
property, these figures cannot be corroborated. This property has a useful life of 50 years.

Required
(a) For each of the above properties briefly state how it would be treated in the financial
statements of Victoria for the year ended 31 December Year 8, identifying any impact on
profit or loss.
(b) Produce an analysis of non-current assets for Victoria for the year ended 31 December
Year 8, showing each of the above properties separately. (09)

QUESTION 03
Entity A has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019
with remaining useful life of 10 years. Entity A uses fair value model under IAS 40.

On 30 June 2019, it was decided to use the building for administration rather than keeping it
for investment potential. At this date the fair value was Rs. 1,200,000.

On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000.

Required:
Journal entries if Entity A uses cost model under IAS 16 and fair value model under IAS 40
(05)

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 CAF 5 – IAS 40

QUESTION 04
Entity B has property being used as warehouse carried at Rs. 1,000,000 on 1 January 2019
with remaining useful life of 10 years.

On 30 June 2019, property was vacated, and management decided to keep it for investment
potential. At this date the fair value was Rs. 1,200,000.
Page | 8
On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000.

Required:
Journal entries if Entity B uses cost model under IAS 16 and fair value model under IAS 40
(05)

QUESTION 05
Entity C has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019
with remaining useful life of 10 years. Entity C uses fair value model under IAS 40.

On 30 June 2019, board of directors decided to develop the property and use it for sale of
plots. At this date the fair value was Rs. 1,200,000.

On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000.

Required:
Journal entries (05)

QUESTION 06
Entity D has commercial shop held for resale in its ordinary course of property business
carried at Rs. 1,000,000 on 1 January 2019.

On 30 June 2019, it was given on rent at Rs. 10,000 per month to a local business rather
than keeping it for resale. At this date the fair value was Rs. 1,200,000.

On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000.
Entity D uses fair value model under IAS 40.

Required:
Journal entries. (05)

Latest update: March 2020

 CAF 5 – IAS 40

ANSWER 01
Part (a)
Cost Model Rs.
Cost (1,000,000 + 10,000) 1,010,000
Accumulated depreciation (300,000 ÷ 50 years) (6,000)
Investment property 1,004,000
Page | 9
SPL
Depreciation expense 6,000

Fair value model Rs.

Investment property 1,300,000

SPL
Investment income (Rs. 1,300,000 – Rs. 1,010,000) 290,000

Part (b).
Cost Model (Gain on disposal) Rs.
Sale value 1,550,000
Selling costs (50,000)
Net disposal proceeds 1,500,000
Minus: Carrying amount (1,004,000)
Gain on disposal 496,000

Fair value Model (Gain on disposal) Rs.

Sale value 1,550,000
Selling costs (50,000)
Net disposal proceeds 1,500,000
Minus: Carrying amount (1,300,000)
Gain on disposal 200,000

ANSWER 02
Part (a)
Property 1
Treatment in the financial statements for the year ended 31 December Year 8 (IAS16). This
is used by Victoria as its head office and therefore cannot be treated as an investment
property. It will be stated at cost minus accumulated depreciation in the statement of
financial position. The depreciation for the year will be charged in the statement of profit or
loss.

Property 2
This is held for its investment potential and should be treated as an investment property. It
will be carried at fair value, Victoria’s policy of choice for investment properties. It will be
revalued to fair value at each year end and any resultant gain or loss taken to the statement
of profit or loss (Rs. 400,000 gain in Year 8).

Property 3
This is held for its investment potential and should be treated as an investment property.
However, since its fair value cannot be arrived at reliably it will be held at cost minus
accumulated depreciation in the statement of financial position. The depreciation for the year
will be an expense in the statement of profit or loss.

This situation provides the exception to the rule whereby all investment properties must be
held under either the fair value model, or the cost model.

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 CAF 5 – IAS 40

Part (b)
Analysis of property, Other land Investment Investment
plant and equipment and buildings property held at property held Total
for the year ended 31 (W1) fair value at cost (W2)
December Year 8 Rs. Rs. Rs. Rs.
Cost/valuation
Page | 10 On 1 January Year 8 1,000,000 2,300,000 2,000,000 5,300,000
Revaluation – 400,000 – 400,000
On 31 December Year 8 1,000,000 2,700,000 2,000,000 5,700,000
Accumulated depreciation
On 1 January Year 8 87,500 - 220,000 307,500
Charge for the year (W1) 12,500 – 40,000 52,500
On 31 December Year 8 100,000 - 260,000 360,000
On 31 December Y7 912,500 2,300,000 1,780,000 4,992,500
On 31 December Y8 900,000 2,700,000 1,740,000 5,340,000

Workings
Depreciation on Property 1 Rs.
Brought forward (500,000 ÷ 40 x 7) 87,500
Year 8 (500,000 ÷ 40) 12,500

Depreciation on Property 3 Rs.

Brought forward (2,000,000 ÷ 50 x 5.5) 220,000
Year 8 (2,000,000 ÷ 50) 40,000

ANSWER 03
Date Particulars Dr. Rs. Cr. Rs.
30-06-19 Investment property 200,000
Investment income PL 200,000
30-06-19 PPE 1,200,000
Investment property 1,200,000
31-12-19 Depreciation [1,200,000 / 9.5 years x 6/12] 63,158
Accumulated depreciation 63,158

The value at year end has no impact as Entity A does not use revaluation model.

ANSWER 04
Date Particulars Dr. Rs. Cr. Rs.
30-06-19 Depreciation [1,000,000 / 10 years x 6/12] 50,000
PPE / Accumulated depreciation 50,000
30-06-19 PPE 250,000
Gain on revaluation (OCI) IAS 16 250,000
30-06-19 Investment property 1,200,000
PPE 1,200,000
31-12-19 Investment property 100,000
Investment income PL 100,000

Latest update: March 2020

 CAF 5 – IAS 40

ANSWER 05
Date Particulars Dr. Rs. Cr. Rs.
30-06-19 Investment property 200,000
PL 200,000
30-06-19 Inventory 1,200,000
Page | 11
Investment property 1,200,000

No adjustment required at year end as inventory is measured at lower of cost and NRV and
deemed cost of Rs. 1,200,000 is lower than NRV (i.e. fair value of Rs. 1,300,000)

ANSWER 06
Date Particulars Dr. Rs. Cr. Rs.
30-06-19 Investment property (See note below) 1,200,000
PL 200,000
Inventory 1,000,000
31-12-19 Investment property 100,000
Investment income PL 100,000
31-12-19 Cash 60,000
Rent Income 60,000

Note: Gain is recognised as if inventory is sold (these entries are just for understanding)
30-06-19 Investment Property 1,200,000
Sales PL 1,200,000
30-06-19 Cost of sales PL 1,000,000
Inventory 1,000,000

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 CAF 5 – IAS 40

Page | 12

Latest update: March 2020

 CAF 5 – IAS 40

ICAP OBJECTIVE BASED QUESTIONS

01. An entity purchased an investment property on 1 January 2013 for a cost of Rs. 35m. The
property had an estimated useful life of 50 years, with no residual value, and at 31 December
2015 had a fair value of Rs. 42m.
On 1 January 2016 the property was sold for net proceeds of Rs. 40m.
Calculate the profit or (loss) on disposal under both the cost and fair value (FV) model. Page | 13
(a) Cost model: Rs. 7.1 m and FV model: (Rs. 2.0 m)
(b) Cost model: Rs. 2.0 m and FV model: Rs. 2.0 m
(c) Cost model: Rs. 5.0 m and FV model: (Rs. 2.0 m)
(d) Cost model: Rs. 7.1 m and FV model: Rs. 5.0 m

02. An investment property with a useful life of 10 years was purchased by Akram Limited on 1
January 2019 for Rs. 200 million. By 31 December 2019 the fair value of the property had risen
to Rs. 300 million. Akram Limited measures its investment properties under the fair value model.
What values would go through the statement of profit or loss in the year?

(a) Gain: Rs. 100 million and Depreciation Rs. 30 million

(b) Gain: Rs. 0 and Depreciation of Rs. 30 million
(c) Gain: Rs. 100 million and Depreciation of 0
(d) Gain: Rs. 120 million and Depreciation of Rs. 20 million

03. Which of the following properties owned by an entity would be classified as an investment
property?
(a) A property that had been leased to a tenant, but which is no longer required and is now
being held for resale
(b) Land purchased for its investment potential. Planning permission has not been obtained
for building construction of any kind
(c) A new office building used as entity’s head office, purchased specifically in order to
exploit its capital gains potential
(d) A bungalow used for executive training

04. Sarfraz Limited (SL) uses fair value accounting where possible and has an office building used
by SL for administrative purposes. At 1 April 2012 it had a carrying amount of Rs. 20 million and
a remaining life of 20 years. On 1 October 2012, the property was let to a third party and
reclassified as an investment property. The property had a fair value of Rs. 23 million at 1
October 2012, and Rs. 23.4 million at 31 March 2013.
What is the correct treatment when the above property is reclassified as an investment
property?

(a) Take Rs. 3,500,000 gain to other comprehensive income

(b) Take Rs. 3,500,000 gain to the statement of profit or loss
(c) Take Rs. 4,000,000 gain to other comprehensive income
(d) Take Rs. 4,000,000 gain to the statement of profit or loss

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 CAF 5 – IAS 40

05. Cool Limited acquired a building with a 40-year life for its investment potential for Rs. 8 million
on 1 January 2013. At 31 December 2013, the fair value of the property was estimated at Rs. 9
million with costs to sell estimated at Rs. 200,000.
If Cool Limited uses the fair value model for investment properties, what gain should be
recorded in the statement of profit or loss for the year ended 31 December 2013?

Page | 14 Rs. ___________

06. Under IAS 40 – Investment Property, where should a gain or loss on disposal be recognized?
(a) Statement of Financial Position
(b) Profit and loss statement
(c) Statement of changes in equity
(d) None

07. If an entity uses part of a building for their own use, and rents the remainder. How should this be
treated?
(a) All as investment property under IAS 40 – Investment Property
(b) All under IAS 16 – Property, Plant and Equipment
(c) Account for separately under ‘IAS - 16 Property, Plant and Equipment’ and ‘IAS - 40
Investment Property’
(d) None of these

08. An investment property should initially be measured at?

(a) Cost
(b) Fair value
(c) Market value
(d) Net realizable value
09. If an entity wishes to change from a cost model to fair value model under IAS 40 – Investment
Property, when may it do so?
(a) When the board of directors approves a change
(b) When the value of the assets will improve with a revised model
(c) When a change will result in a more appropriate presentation
(d) When the market for these properties is fluctuation

10. Which two of the following properties fall under the definition of investment property and
therefore within the scope of IAS 40?
(a) Property occupied by an employee paying market rent
(b) A building owned by an entity and leased out under an operating lease
(c) Property being constructed on behalf of 3rd parties
(d) Land held for long term appreciation

Latest update: March 2020

 CAF 5 – IAS 40

11. Afternoon Limited (AL) uses cost model for its property, plant and equipment and fair A19
value model for its investment property. AL has an office building which was being used
for administrative purposes. At 1 July 2018, the building had a carrying amount of Rs. 20
million. On that date, the building was let out to a third party and therefore reclassified as
an investment property. The building had a fair value of Rs. 23 million on 1 July 2018
and Rs. 23.4 million on 30 June 2019.

What would be the increase in the profit or loss and other comprehensive income for the Page | 15
year ended 30 June 2019?
Profit or loss Other comprehensive income
(a) Nil Rs. 3.4 million
(b) Rs. 0.4 million Rs. 3 million
(c) Rs. 3.4 million Nil
(d) Rs. 3 million Rs. 0.4 million (02)

12. Which TWO of the following fall under the definition of investment property? A19
(a) Property occupied by an employee
(b) A building owned by an entity and leased out under an operating lease
(c) Property being constructed on behalf of third party
(d) Land held for long term appreciation (01)

© kashifadeel.com
 CAF 5 – IAS 40

Page | 16

Latest update: March 2020

 CAF 5 – IAS 40

OBJECTIVE BASED ANSWERS

01. (a) Under the cost model the property will be depreciated over 50 years for 3 years
up to the date of disposal. Therefore, at the disposal date the carrying value
would have been Rs. 35m – (Rs. 35m/50 × 3 years) = Rs. 32.9m and the profit
on disposal Rs. 7.1m (Rs. 40m – Rs. 32.9).
Under the fair value model the property will not be depreciated hence the loss Page | 17
on disposal would be Rs. 2m (Rs. 40m – Rs. 42m).

02. (c) Under the fair value model the property will not be depreciated hence the gain
on valuation would be Rs. 100 million (Rs. 300 million – Rs. 200 million).

03. (b) Asset A would be classed as a non-current asset held for sale under IFRS 5.
Assets C and D would both be classified as property, plant and equipment
under IAS 16.

04. (a) As SL uses the fair value model for investment properties, the asset should be
revalued to fair value before being classed as an investment property. The gain
on revaluation should be taken to other comprehensive income, as the asset is
being revalued while held as property, plant and equipment.
At 1 October, the carrying amount of the asset is Rs. 19.5 million, being Rs. 20
million less 6 months’ depreciation. As the fair value at 1 October is Rs. 23
million, this leads to a Rs. 3,500,000 gain which will be recorded in other
comprehensive income.

05. Rs. The fair value gain of Rs. 1 million (Rs. 9m – Rs. 8m) should be taken to the
1,000,000 statement of profit or loss. Costs to sell are ignored and, since entity uses the
fair value model, no depreciation will be charged on the building.

06. (b)

07. (c)

08. (a)

09. (c)

10. (b) & (d)

11. (b) Rs. 23m – Rs. 20m = Rs. 3m in OCI (IAS 16)
Rs. 23.4m – Rs. 23m = Rs. 0.4m in PL (IAS 40)

12. (b) & (d) IAS 16 and IAS 2 applies on (a) and (c) respectively.

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 CAF 5 – IFRS 15

Revenue from Contracts

IFRS 15 with Customers 09
Page | 1
CORE PRINCIPLE AND THE FIVE STEP MODEL
The core principle of IFRS 15 is that an entity recognises revenue:
(a) to depict the transfer of promised goods or services to customers
(b) at an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.
An entity recognises revenue in accordance with above core principle by applying the
following steps:
1 Identify the contract(s) with a customer
2 Identify the performance obligations (PO) in the contract
3 Determine the transaction price (TP)
4 Allocate the TP to the PO in the contract
5 Recognise revenue when (or as) the entity satisfies a PO

DEFINITIONS
Revenue Income arising in the course of an entity’s ordinary activities.
Customer A party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration.

STEP 1: IDENTIFY THE CONTRACT(S) WITH A CUSTOMER

Contract An agreement between two or more parties that creates enforceable rights
and obligations.
An entity shall account for a contract with a customer under IFRS 15 only
when all of the following criteria are met:
(a) the parties to the contract have approved the (binding) contract;
(b) the entity can identify each party’s rights regarding the goods or
services to be transferred;
Criteria (c) the entity can identify the payment terms for the goods or services to
be transferred;
(d) the contract has commercial substance; and
(e) it is probable that the entity will collect the consideration considering
only the customer’s ability and intention to pay that amount of
consideration when it is due.

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 CAF 5 – IFRS 15

When a contract with a customer does not meet the above criteria and an
entity receives consideration from the customer, the entity shall recognise
the consideration received as revenue only when either of the following
events has occurred:
(a) the entity has no remaining obligations to transfer goods or
Page | 2 services to the customer and all, or substantially all, of the
Consideration
consideration promised by the customer has been received by the
received in
entity and is non-refundable; or
advance
(b) the contract has been terminated and the consideration received
from the customer is non-refundable.

An entity shall recognise the consideration received from a customer as a

liability until one of the above-mentioned events occurs or until the
recognition criteria are subsequently met.
An entity shall combine two or more contracts entered into at or near the
same time with the same customer (or related parties of the customer) and
account for the contracts as a single contract if one or more of the
following criteria are met:
Combination (a) the contracts are negotiated as a package with a single
of contracts commercial objective;
(b) the amount of consideration to be paid in one contract depends on
the price or performance of the other contract; or
(c) the goods or services promised in the contracts (or some goods or
services promised in each of the contracts) are a single PO.

STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS (PO)

A promise in a contract with a customer to transfer to the customer either:
Performance
(a) good or service (or a bundle of goods or services) that is distinct; or
Obligation
(b) a series of distinct goods or services that are substantially the same
(PO)
and that have the same pattern of transfer to the customer.
A good or service that is promised to a customer is distinct if both of the
following criteria are met:
(a) the customer can benefit from the good or service either on its own
or together with other resources that are readily available to the
customer; and
Distinct (b) the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract.

If a good or service is regularly sold separately, this would indicate that

customers generally can benefit from the good/service on its own or in
conjunction with other available resources.
If a promised good or service is not distinct, an entity shall combine that
good or service with other promised goods or services until it identifies a
Not distinct bundle of goods or services that is distinct. In some cases, that would
result in the entity accounting for all the goods or services promised in a
contract as a single PO.

Latest update: March 2020

 CAF 5 – IFRS 15

Examples of promised goods and services include:

 Goods produced by an entity for sale
 Resale of goods purchased by an entity
 Resale of rights to goods or services purchased by an entity
 Performing a contractually agreed-upon task for a customer
 Standing ready to provide goods or services Page | 3
 Providing a service of arranging for another party to transfer goods or services to the
customer
 Granting rights to goods or services to be provided in the future that a customer can
resell
 Constructing, manufacturing or developing an asset on behalf of a customer
 Granting licences
 Granting options to purchase additional goods/services

STEP 3: DETERMINING THE TRANSACTION PRICE (TP)

The amount of consideration to which an entity expects to be entitled in
Transaction exchange for transferring promised goods or services to a customer,
Price (TP) excluding amounts collected on behalf of third parties (for example, some
sales taxes).
An entity shall consider the terms of the contract and its customary
Requirement
business practices to determine the TP.
The nature, timing and amount of consideration promised by a customer
affect the estimate of the TP. When determining the TP, an entity shall
consider the effects of all of the following:
(a) variable consideration;
Factors to be
(b) constraining estimates of variable consideration;
considered
(c) the existence of a significant financing component in the contract;
(d) non-cash consideration (measured at fair value); and
(e) consideration payable to a customer (reduction in TP due to coupon
or vouchers).

STEP 4: ALLOCATING THE TRANSACTION PRICE (TP)

The objective when allocating the TP is for an entity to allocate the TP to each PO (or
distinct good or service) in an amount that depicts the amount of consideration to which the
entity expects to be entitled in exchange for transferring the promised goods or services to
the customer.
Stand-alone The price at which an entity would sell a promised good or service
selling price separately to a customer.
Suitable methods for estimating the stand-alone selling price of a good or
service include, but are not limited to, the following:
Allocation (a) Adjusted market assessment approach
based on (b) Expected cost plus a margin approach
stand-alone (c) Residual approach
selling prices
A combination of methods may need to be used to estimate the stand-
alone selling prices of the goods or services promised in the contract

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 CAF 5 – IFRS 15

STEP 5: SATISFACTION OF PERFORMANCE OBLIGATIONS (PO)

An entity shall recognise revenue when (or as) the entity satisfies a PO by transferring a
promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as)
the customer obtains control of that asset.
Page | 4 SATISFACTION AT A POINT OF TIME
To determine the point in time at which a customer obtains control of a promised goods or
services and the entity satisfies a PO, the entity shall consider the requirements for control.

In addition, an entity shall consider indicators of the transfer of control, which include, but are
not limited to, the following:
(a) The entity has a present right to payment for the asset.
(b) The customer has legal title to the asset.
(c) The entity has transferred physical possession of the asset.
(d) The customer has the significant risks and rewards of ownership of the asset.
(e) The customer has accepted the asset.
SATISFACTION OVER TIME
When goods or services are transferred continuously, a revenue recognition method that
best depicts the entity’s performance should be applied (and updated as circumstances
change).

Acceptable methods include:

Output methods: units produced, units delivered, contract milestones, survey of work
performed.
Input methods: costs incurred, labour hours expended, machine hours worked.

CONTRACT COSTS
An entity shall recognise as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs.
Incremental
costs The incremental costs of obtaining a contract are those costs that an entity
incurs to obtain a contract with a customer that it would not have incurred if
the contract had not been obtained (for example, a sales commission).
Costs to obtain a contract that would have been incurred regardless of
Non-
whether the contract was obtained shall be recognised as an expense when
incremental
incurred, unless those costs are explicitly chargeable to the customer
costs
regardless of whether the contract is obtained.
As a practical expedient, an entity may recognise the incremental costs of
Less than obtaining a contract as an expense when incurred if the amortisation period
one year life of the asset that the entity otherwise would have recognised is one year or
less.

Latest update: March 2020

 CAF 5 – IFRS 15

If the costs incurred in fulfilling a contract with a customer are not within the
scope of another Standard (for example, IAS 2, IAS 16, or IAS 38), an entity
shall recognise an asset from the costs incurred to fulfil a contract only if
those costs meet all of the following criteria:
(a) the costs relate directly to a contract or to an anticipated contract that
Cost to fulfill the entity can specifically identify (for example, costs relating to Page | 5
a contract services to be provided under renewal of an existing contract or
costs of designing an asset to be transferred under a specific
contract that has not yet been approved);
(b) the costs generate or enhance resources of the entity that will be
used in satisfying (or in continuing to satisfy) POs in the future; and
(c) the costs are expected to be recovered.
Costs that relate directly to a contract might include:
 direct labour and direct materials;
 allocations of costs that relate directly to the contract or to contract
Directly
activities;
related
 costs that are explicitly chargeable to the customer under the
costs
contract; and
 other costs that are incurred only because an entity entered into the
contract (e.g. payments to subcontractors).
The following costs must be recognised as expenses when incurred:
 general and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract);
Costs to be
 costs of wasted materials, labour or other resources to fulfil the
charged to
contract that were not reflected in the price of the contract;
PL
 costs that relate to satisfied performance obligations (or partially
satisfied performance obligations) in the contract (i.e. costs that
relate to past performance).
An asset recognised for contract costs shall be amortised on a systematic
Amortisation basis that is consistent with the transfer to the customer of the goods or
services to which the asset relates.
An entity shall recognise an impairment loss in profit or loss to the extent
Impairment that the carrying amount of an asset recognised exceeds the following:
= Remaining expected revenue – remaining cost

PRESENTATION
A supplier might transfer goods or services to a customer before the customer
pays consideration or before payment is due. In this case the contract is
presented as a contract asset (excluding any amounts presented as a
receivable).
Contract
asset
A contract asset is a supplier’s right to consideration in exchange for goods or
services that it has transferred to a customer. A contract asset is reclassified
as a receivable when the supplier’s right to consideration becomes
unconditional.

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 CAF 5 – IFRS 15

An unconditional right to consideration is presented as a receivable. The

accounting treatment to record the transfer of goods for cash or for an
Receivable unconditional promise to be paid consideration is straightforward.
Dr. Bank/Receivable
Cr. Revenue
Page | 6 A contract might require payment in advance or allow the supplier a right to an
amount of consideration that is unconditional (i.e. a receivable), before it
transfers a good or service to the customer.
Contract In these cases, the supplier presents the contract as a contract liability when
liabilities the payment is made or the payment is due (whichever is earlier).
The contract liability is a supplier’s obligation to transfer goods or services to a
customer for which it has received consideration (an amount of consideration
is due) from the customer.

CONTRACT MODIFICATIONS
A contract modification is a change in the scope or price (or both) of a contract that is
approved by the parties to the contract.
Modification is separate contract NOT a separate contract
An entity shall account for a contract OTHERWISE
modification as a separate contract if
Accounting treatment
scope and price of the contract
An entity shall account for the contract
increases.
modification as if it were a termination of the
existing contract and the creation of a new
Accounting treatment
contract.
Original contract is recognised as it is,
and modification is recognised as a The amount of consideration to be allocated to the
separate contract. remaining POs is equal to
unearned revenue under previous arrangement
+ additional revenue from modification

SYLLABUS

Reference Content/Learning outcome

C7 IFRS 15 Revenue from Contracts with Customers

Describe and apply the principles relating to accounting and reporting of
revenue arising from the following contracts with customers:
LO3.7.1
 sale of goods;
 rendering of services
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
10 12 14 12 12 10 14 09 12 15 15 14

Latest update: March 2020

 CAF 5 – IFRS 15

PRACTICE Q&A
Sr.# Description Marks Reference
STEP 1: IDENTIFY THE CONTRACT WITH CUSTOMER(S)
1H Mr. Owais – Identify each party’s rights 03 CI
2H Existence of a contract 03 CI Page | 7
3H Combination of contracts 03 CI
STEP 2: IDENTIFY PERFORMANCE OBLIGAIONS
4H Software packages 06 KA
5C ECL & eSolutions Limited – Theory/scenario discussion of
10 PE S17
performance obligation
STEP 3: DETERMINING THE TRANSACTION PRICE
6C Expected value approach 04 IE20 KA
7C Probability weighted measurement 06 KA
8C Consideration payable to customer 04 IE32 KA
STEP 4: ALLOCATING THE TRANSACTION PRICE
9C Allocation of transaction price (simple) 04 IE33 KA
10C Allocation of transaction price (residual approach) 05 IE34A KA
11C Allocation of transaction price (residual not applicable) 08 IE34B KA
12H Galaxy Telecommunications – Theory & allocation of TP 09 PE S18
STEP 5: SATISFACTION OF PERFORMANCE OBLIGATIONS
13H Monthly payroll services 03 IE13 KA
14H Health Club 04 IE18 KA
15C Multi-unit residential complex I 07 IE17A KA
16C Multi-unit residential complex II 07 IE17B KA
17C Multi-unit residential complex III 07 IE17C KA
28H Weekly services 05 IE31 KA
CONTRACT COSTS
19C Incremental costs 05 IE36 KA
20H Recognition of contract costs I 03 CI
21H Recognition of contract costs II 04 CI
22H Recognition of contract costs III 03 CI
PRESENTATION
23H Receivables 04 CI
24C Contract assets and receivables 06 IE39 KA
25C Contract liability 06 CI
26C Contract liability – cancellable contract 04 IE38A KA
27C Contract liability – non-cancellable contract 06 IE38B KA
28C Retrospective reduction in price 03 IE40 KA
CONTRACT MODIFICATIONS
29C Modification as separate contract and otherwise 10 IE5 KA
ADVANCED SCENARIOS
30C Chances of returns 10 IE22 KA
31C Chances of application of retrospective reduction in price 04 IE24 KA
32C Customer having right of return with financing component 08 IE26 KA
33C Implicit rate vs incremental rate for financing component 06 IE29 KA
34C Discount vouchers 05 IE49 KA
35C Customer loyalty points 07 IE52 KA
36H Step 1 to Step 5 07 IE63 KA

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 CAF 5 – IFRS 15

PAST EXAMS AND ADDITIONAL PRACTICE

37H Chances of returns 12 PE A18
38H Sachal Limited – 5 Steps approach to software company
15 QB
scenarios
39C Jupiter Limited / Pluto Limited – JEs related to financing
14 PE A17
component, Allocation of TP, Indicators of control transfer
Page | 8 40C Karim, Asif, Nazir, Abid – Theroy, revenue recognition,
12 PE S16
sales and repurchase
41C Car World / Saleem Engineering – Financing component,
12 PE A16
lay away sales, PO over time
42H Parvez Limited – Sales and repurchase and consignment
08 QB
inventories
43H Brilliant Limited – Allocation of transaction price 10 QB
44C Guitar World 15 PE S19
45H Thursday Limited 15 PE A19

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 01
Mr. Owais agreed on March 1, 2017 to sell 5 cutting machines to Axiom Enterprises. Due to
some deficiency in drafting the agreement each party’s rights cannot be identified. On March
31, 2017 Mr. Owais delivered the goods and these were accepted by Axiom Enterprises.
After 10 days of delivery i.e. April 10, 2017 Axiom Enterprises made the full payment and the
payment is non-refundable.
Page | 9
When should Owais record the revenue? (03)

QUESTION 02
A shopkeeper agreed to deliver 10 computers to Waqas Enterprises within 3 months. As per
the agreement shopkeeper can cancel the contract any time before delivering the
computers. In case of cancellation, shopkeeper is not required to pay any penalty to Waqas
Enterprises.
Does the contract exist? (03)

QUESTION 03
Adil Ltd. enters into 2 separate agreements with customer X.
1. Agreement 1: Deliver 10,000 bricks for Rs. 100,000
2. Agreement 2: Build a boundary wall for Rs. 20,000

Should the above agreements be combined? (03)

QUESTION 04
Case A
An entity, a software developer, enters into a contract with a customer to transfer a software
licence, perform an installation service and provide unspecified software updates and
technical support (online and telephone) for a two-year period. The entity sells the licence,
installation service and technical support separately. The installation service includes
changing the web screen for each type of user (for example, marketing, inventory
management and information technology). The installation service is routinely performed by
other entities and does not significantly modify the software. The software remains functional
without the updates and the technical support.

Case B
The promised goods and services are the same as in Case A, except that the contract
specifies that, as part of the installation service, the software is to be substantially
customised to add significant new functionality to enable the software to interface with other
customised software applications used by the customer. The customised installation service
can be provided by other entities.

Required:
Identify performance obligations. (06)

QUESTION 05
(a) Define the term ‘performance obligation’ and state the criteria which should be met if
goods or services promised to a customer are to be considered as distinct.
(04)
(b) ECL has entered into a contract with Kashif Builders for construction of a residential
project, including supply of construction material, architectural services, engineering
and site clearance. ECL and its competitors provide such services separately also.
(03)

© kashifadeel.com
 CAF 5 – IFRS 15

(c) eSolutions Limited, a software developer, entered into a two year contract with a
customer to provide software license including future software updates and post
implementation support services. The software license would remain functional even
if the updates and post implementation support services are discontinued.
(03)
Required:
Page | 10 In view of the requirements of IFRS 15 ‘Revenue from Contracts with Customers’, discuss
whether (for (b) and (c) above) goods and services provided in each of the above contracts
represent a single performance obligation.

QUESTION 06
An entity enters into a contract with a customer to build an asset for Rs.1 million. In addition,
the terms of the contract include a penalty of Rs. 100,000 if the construction is not completed
within three months of a date specified in the contract.

Required:
Using the expected value approach, determine the transaction price if there is 40%
probability of completing the contract on time, 30% that there would be delay of 3 days and
30% that there would be delay of 5 days. (04)

QUESTION 07
An entity enters into a contract with a customer to build a customised asset. The promise to
transfer the asset is a performance obligation that is satisfied over time. The promised
consideration is Rs. 2.5 million, but that amount will be reduced or increased depending on
the timing of completion of the asset.

Specifically, for each day after 31 March 20X7 that the asset is incomplete, the promised
consideration is reduced by Rs. 10,000. For each day before 31 March 20X7 that the asset
is complete, the promised consideration increases by Rs. 10,000.

In addition, upon completion of the asset, a third party will inspect the asset and assign a
rating based on metrics that are defined in the contract. If the asset receives a specified
rating, the entity will be entitled to an incentive bonus of Rs. 150,000.

Required:
(a) Calculate the transaction price if entity estimates 60% chances that there will be
delay of two days (40% chance that it will build on due date) and 70% chances that
specified rating shall be received.
(b) Calculate the transaction price if entity estimates 35% chances to build 5 days before
due date, 40% chances to build on due date and 25% chances that delay of two days
will be made. There is 45% chance that specified rating shall be received. (06)

QUESTION 08
An entity enters into a one-year contract to sell goods to a customer that is a large global
chain of retail stores. The customer commits to buy at least Rs. 15 million of products during
the year. The contract also requires the entity to make a non-refundable payment of Rs. 1.5
million to the customer at the inception of the contract (1 Jan 2018) for the changes it needs
to make to its shelving to accommodate the entity’s products.
Required
Journal entries for first quarter, assuming that goods worth Rs. 4 million were invoiced (04)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 09
An entity enters into a contract with a customer to sell Products A, B and C in exchange for
Rs. 100. The entity will satisfy the performance obligations for each of the products at
different points in time. The entity regularly sells Product A separately and therefore the
stand-alone selling price is directly observable. To estimate the stand-alone selling prices,
the entity uses the adjusted market assessment approach for Product B and the expected
cost plus a margin approach for Product C. Page | 11

Stand-alone
Product Method
selling price
Product A 50 Directly observable
Product B 25 Adjusted market assessment approach
Product C 75 Expected cost (Rs. 60) plus a margin (Rs. 15) approach
Total 150

Required:
Allocate the transaction price of Rs. 100 to Product A, B and C. (04)

QUESTION 10
An entity regularly sells Products A, B and C individually, thereby establishing the following
stand-alone selling prices:
Stand-alone
Product
selling price Rs.
Product A 40
Product B 55
Product C 45
In addition, the entity regularly sells Products B and C together for Rs. 60.
The entity enters into a contract with a customer to sell Products A, B and C in exchange for
Rs. 100.
Required
Allocate the transaction price of Rs. 100 to Product A, B and C. (05)

QUESTION 11
An entity regularly sells Products A, B and C individually, thereby establishing the following
stand-alone selling prices:
Stand-alone
Product
selling price Rs.
Product A 40
Product B 55
Product C 45
Product D 15 to 45
In addition, the entity regularly sells Products B and C together for Rs. 60 and Products A, B
and C together for Rs. 100.
The entity enters into a contract with a customer to sell Products A, B, C and D in exchange
for Rs. 130.

Required
(a) Allocate the transaction price of Rs. 130 to Product A, B, C and D
(b) Discuss the impact if total transaction price is Rs. 105 which needs to be allocated to
all four products as above. (08)

© kashifadeel.com
 CAF 5 – IFRS 15

QUESTION 12
Part (a)
Define ‘performance obligation’. List any six examples of promised goods and services as
per IFRS 15 ‘Revenue from Contracts with Customers’. (05)
Part (b)
Page | 12 On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a bank for
supplying 20 smart phones to the bank staff with unlimited use of mobile network for one
year. The contract price per smart phone is Rs. 34,650 and the price is payable in full within
10 days from the date of contract. At the end of the contract, the phones will not be returned
to GT. The entire amount received as per contract was credited by GT to advance from
customers account. The smart phones were delivered on 1 November 2017.

If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of Rs. 1,800
for unlimited use of mobile network.

Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15
‘Revenue from Contracts with Customers’. (04)

QUESTION 13
An entity enters into a contract to provide monthly payroll processing services to a customer
for one year. How the revenue related to this single performance obligation should be
recognised? (03)

QUESTION 14
An entity, an owner and manager of health clubs, enters into a contract with a customer for
one year of access to any of its health clubs. The customer has unlimited use of the health
clubs and promises to pay Rs. 15,000 per month. How the revenue related to this single
performance obligation should be recognised? (04)

QUESTION 15
An entity is developing a multi-unit residential complex. A customer enters into a binding
sales contract with the entity for a specified unit that is under construction. Each unit has a
similar floor plan and is of a similar size, but other attributes of the units are different (for
example, the location of the unit within the complex).

The contract inception is 1 January 2018. The price of one unit is Rs. 3,000,000. The
expected date of completion and possession transfer is 31 December 2019. The entity year
end is December 31. The construction is 40% complete by December 31, 2018.

The customer pays a 10% deposit upon entering into the contract and the deposit is
refundable only if the entity fails to complete construction of the unit in accordance with the
contract. The remainder of the contract price is payable on completion of the contract when
the customer obtains physical possession of the unit. If the customer defaults on the contract
before completion of the unit, the entity only has the right to retain the deposit.
Note: Ignore financing component & ignore accounting for contract costs
Required
Journal entries:
(a) The unit is completed and possession is transferred on due date
(b) The entity allocated the unit to another customer on 1 March 2018
(c) The entity completes the unit but customer defaults (the entity plans to sell unit to
another customer) (07)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 16
An entity is developing a multi-unit residential complex. A customer enters into a binding
sales contract with the entity for a specified unit that is under construction. Each unit has a
similar floor plan and is of a similar size, but other attributes of the units are different (for
example, the location of the unit within the complex).

The contract inception is 1 January 2018. The price of one unit is Rs. 3,000,000. The Page | 13
expected date of completion and possession transfer is 31 December 2019. The entity year
end is December 31. The construction is 60% complete by December 31, 2018.

The customer pays a 10% non-refundable deposit upon entering into the contract and will
make progress payments during construction of the unit on December 31 each year (45% of
total contract price). The contract has substantive terms that preclude the entity from being
able to direct the unit to another customer. In addition, the customer does not have the right
to terminate the contract unless the entity fails to perform as promised.

If the customer defaults on its obligations by failing to make the promised progress payments
as and when they are due, the entity would have a right to all of the consideration promised
in the contract if it completes the construction of the unit. The courts have previously upheld
similar rights that entitle developers to require the customer to perform, subject to the entity
meeting its obligations under the contract.

Note: Ignore financing component & ignore accounting for contract costs

Required
Journal entries as the unit is completed and possession is transferred on due date (07)

QUESTION 17
An entity is developing a multi-unit residential complex. A customer enters into a binding
sales contract with the entity for a specified unit that is under construction. Each unit has a
similar floor plan and is of a similar size, but other attributes of the units are different (for
example, the location of the unit within the complex).

The contract inception is 1 January 2018. The price of one unit is Rs. 3,000,000. The
expected date of completion and possession transfer is 31 December 2019. The entity year
end is December 31. The construction is 60% complete by December 31, 2018.

The customer pays a 10% non-refundable deposit upon entering into the contract and will
make progress payments during construction of the unit on December 31 each year (45% of
total contract price). The contract has substantive terms that preclude the entity from being
able to direct the unit to another customer. In addition, the customer does not have the right
to terminate the contract unless the entity fails to perform as promised.

In the event of a default by the customer, either the entity can require the customer to
perform as required under the contract or the entity can cancel the contract in exchange for
the asset under construction and an entitlement to a penalty of a proportion of the contract
price.

Note: Ignore financing component & ignore accounting for contract costs

Required
Journal entries as the unit is completed and possession is transferred on due date (07)

© kashifadeel.com
 CAF 5 – IFRS 15

QUESTION 18
An entity enters into a contract with a customer to provide a weekly service for one year. The
contract is signed on 1 January 20X1 and work begins immediately.

In exchange for the service, the customer promises 100 equity shares of its company per
week of service (a total of 5,200 shares for the contract). The terms in the contract require
Page | 14 that the shares must be paid upon the successful completion of each week of service.

Required:
(a) How the transaction price (amount of revenue) should be measured?
(b) How the progress towards complete satisfaction should be measured? (05)

QUESTION 19
X Limited wins a competitive bid to provide consulting services to a new customer. X Limited
incurred the following costs to obtain the contract:
Rs.
Commissions to sales employees for winning the contract 10,000
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Total costs incurred 50,000
How to recognise the above costs? (05)

QUESTION 20
X Limited wins a 5 year contract to provide a service to a customer. The contract contains a
single performance obligation satisfied over time. X Limited recognises revenue on a time
basis.
Costs incurred by the end of year 1 and forecast future costs are as follows:
Rs.
Costs to date 10,000
Estimate of future costs 18,000
Total expected costs 28,000

How to recognise the above costs? (03)

QUESTION 21
X Limited wins a 5 year contract to provide a service to a customer. The contract is
renewable for subsequent one-year periods. The average customer term is seven years.
The contract contains a single performance obligation satisfied over time. X Limited
recognises revenue on a time basis.
Costs incurred by the end of year 1 and forecast future costs are as follows:
Rs.
Costs to date 10,000
Estimate of future costs 18,000
Total expected costs 28,000

How to recognise the above costs? (04)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 22
X Limited wins a contract to build an asset for a customer. It is anticipated that the asset will
take 2 years to complete.
The contract contains a single performance obligation. Progress to completion is measured
on an output basis. At the end of year 1 the assets is 60% complete.
Page | 15
Costs incurred by the end of year 1 and forecast future costs are as follows:
Rs.
Costs to date 10,000
Estimate of future costs 18,000
Total expected costs 28,000

How to recognise the above costs? (03)

QUESTION 23
On 1 January 20X8, X Limited enters into a contract to transfer Products A and B to Y
Limited in exchange for Rs. 1,000. Product A is to be delivered on 28 February. Product B is
to be delivered on 31 March.

The promises to transfer Products A and B are identified as separate performance

obligations. Rs.400 is allocated to Product A and Rs.600 to Product B.

X Limited recognises revenue and recognises its unconditional right to the consideration
when control of each product transfers to Y Limited.

Required:
Journal entries to record revenue. (04)

QUESTION 24
On 1 January 20X8, X Limited enters into a contract to transfer Products A and B to Y
Limited in exchange for Rs. 1,000. Product A is to be delivered on 28 February. Product B is
to be delivered on 31 March.

The promises to transfer Products A and B are identified as separate performance

obligations. Rs.400 is allocated to Product A and Rs.600 to Product B.

Revenue is recognised when control of each product transfers to Y Plc. Payment for the
delivery of Product A is conditional on the delivery of Product B. (i.e. the consideration of Rs.
1,000 is due only after X Limited has transferred both Products A and B to Y Limited). This
means that X Limited does not have a right to consideration that is unconditional (a
receivable) until both Products A and B are transferred to Y Limited.

Required:
Journal entries to record revenue. (06)

© kashifadeel.com
 CAF 5 – IFRS 15

QUESTION 25
On 1 January 20X8, X Limited enters into a contract to transfer Products A and B to Y
Limited in exchange for Rs. 1,000. X Limited can invoice this full amount on 31 January.
Product A is to be delivered on 28 February. Product B is to be delivered on 31 March.

The promises to transfer Products A and B are identified as separate performance

Page | 16 obligations. Rs.400 is allocated to Product A and Rs.600 to Product B.

Revenue is recognised when control of each product transfers to Y Limited.

Required:
Journal entries to record revenue. (06)

QUESTION 26
On 1 January 2019, an entity enters into a cancellable contract to transfer a product to a
customer on 31 March 2019. The contract requires the customer to pay consideration of Rs.
1,000 in advance on 31 January 2019 but the customer pays the consideration on 1 March
2019. The entity transfers the product on 31 March 2019.
Required:
Journal entries for the above contract (04)

QUESTION 27
On 1 January 2019, an entity enters into a non-cancellable contract to transfer a product to
a customer on 31 March 2019. The contract requires the customer to pay consideration of
Rs. 1,000 in advance on 31 January 2019 but the customer pays the consideration on 1
March 2019. The entity transfers the product on 31 March 2019.

Required:
Journal entries for the above contract (06)

QUESTION 28
An entity enters into a contract with a customer on 1 January 2019 to transfer products to the
customer for Rs. 150 per product. If the customer purchases more than 1 million products in
a calendar year, the contract indicates that the price per unit is retrospectively reduced to
Rs. 125 per product. Consideration is due when control of the products transfer to the
customer. In determining the transaction price, the entity concludes at contract inception that
the customer will meet the 1 million products threshold.

Required:
Journal entry on shipment of first 100 products on 4 January 2019 (03)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 29
On 1 January 2015, SL promises to sell 120 products to CL for Rs. 12,000 (Rs. 100 per
product). The products are to be transferred equally on January 31 and February 28. CL
paid Rs. 12,000 on inception of contract.

The 60 products were delivered on January 31.

Page | 17
On February 15, the contract is modified to require the delivery of an additional 30 products
to CL on March 10. CL paid additional amount on modification date i.e. Feb 15, 2015.

Situation 1
The price of the contract modification for the additional 30 products is an additional Rs.
2,850 or Rs. 95 per product. The pricing for the additional products reflects the stand-alone
selling price of the products and the additional products are distinct from the original
products.

Situation 2
The parties initially agree on a price of Rs. 80 per product. However, the customer discovers
that the initial 60 products transferred to the customer contained minor defects that were
unique to those delivered products. The entity promises a partial credit of Rs. 15 per product
to compensate the customer for the poor quality of those products. The entity and the
customer agree to incorporate the credit of Rs. 900 (Rs. 15 credit × 60 products) into the
price that the entity charges for the additional 30 products.

Required:
Pass Journal entries. (10)

QUESTION 30
An entity enters into 100 contracts on 31 December 2017 with customers. Each contract
includes the sale of one product for Rs.100 (100 total products × Rs. 100 = Rs. 10,000 total
consideration).

Cash is received when control of a product transfers. The entity’s customary business
practice is to allow a customer to return any unused product within 30 days and receive a full
refund. The entity’s cost of each product is Rs. 60.

Using the expected value method, the entity estimates that 97 products will not be returned.

The entity estimates that the costs of recovering the products will be immaterial and expects
that the returned products can be resold at a profit.

Required:
Journal entries:
(a) 3 products are returned on January 30, 2018
(b) 2 products are returned on January 30, 2018
(c) 4 products are returned on January 30,2018 (10)

© kashifadeel.com
 CAF 5 – IFRS 15

QUESTION 31
An entity enters into a contract with a customer on 1 January 2018 to sell Product A for Rs.
100 per unit. If the customer purchases more than 1,000 units of Product A in a calendar
year, the contract specifies that the price per unit is retrospectively reduced to Rs. 90 per
unit.
Page | 18 For the first quarter ended 31 March 2018, the entity sells 75 units of Product A to the
customer. The entity estimates that the customer’s purchases will not exceed the 1,000- unit
threshold required for the volume discount in the calendar year.

In May 2018, the entity’s customer purchases an additional 500 units of Product A from the
entity. In the light of the new fact, the entity estimates that the customer’s purchases will
exceed the 1,000-unit threshold. The payment from customer will be received on 31
December 2018 for all units sold during the year.

Required:
Journal entries from 1 January 2018 to 30 June 2018 relating to above (04)

QUESTION 32
An entity sells a product to a customer for Rs.121 on 3 October 2017 that is payable 24
months after lapse of return period of 90 days. The customer obtains control of the product
at contract inception. The contract permits the customer to return the product within 90 days.
The product is new and the entity has no relevant historical evidence of product returns or
other available market evidence. The cash selling price of the product is Rs.100, which
represents the amount that the customer would pay upon delivery for the same product sold
under otherwise identical terms and conditions as at contract inception. The entity’s cost of
the product is Rs. 80.

The entity has year-end of December 31. The contract includes an implicit interest of 10 %.

Required:
Journal entries for the contract (08)

QUESTION 33
An entity enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (ie the performance obligation will be satisfied at a
point in time). The contract includes two alternative payment options: payment of Rs. 5,000
in two years when the customer obtains control of the asset or payment of Rs.4,000 when
the contract is signed. The customer elects to pay Rs. 4,000 when the contract is signed on
1 January 2018.

The entity concludes that the contract contains a significant financing component because of
the length of time between when the customer pays for the asset and when the entity
transfers the asset to the customer, as well as the prevailing interest rates in the market.

The interest rate implicit in the transaction is 11.8%, which is the interest rate necessary to
make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity’s incremental borrowing rate.

Required:
Journal entries for the above contract (06)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 34
An entity enters into a contract for the sale of Product A for Rs. 100 on 1 January 2019. As
part of the contract, the entity gives the customer a 40% discount voucher for any future
purchases up to Rs. 100 in the next 30 days. The entity intends to offer a 10% discount on
all sales during the next 30 days as part of a seasonal promotion. The 10% discount cannot
be used in addition to the 40% discount voucher. The entity estimates an 80% likelihood that
a customer will redeem the voucher and that a customer will, on average, purchase Rs. 50 Page | 19
of additional products.
Required
Allocate the transaction price of Rs. 100 for above contract and explain (05)

QUESTION 35
An entity has a customer loyalty programme that rewards a customer with one customer
loyalty point for every Rs.10 of purchases. Each point is redeemable for a Rs.1 discount on
any future purchases of the entity’s products. During 2017, customers purchase products for
Rs.100,000 and earn 10,000 points that are redeemable for future purchases. The
consideration is fixed and the stand-alone selling price of the purchased products is
Rs.100,000. The entity expects 9,500 points to be redeemed.
At the end of 2017, 4,500 points have been redeemed and the entity continues to expect
9,500 points to be redeemed in total.
At the end of 2018, 8,500 points have been redeemed cumulatively. The entity updates its
estimate of the points that will be redeemed and now expects that 9,700 points will be
redeemed.
Required
Allocation of transaction price along with journal entries assuming that all transaction is
made on cash basis (07)

QUESTION 36
An entity enters into a contract with a customer on 1 January 2018 for the sale of a machine
and spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare
parts meet the agreed-upon specifications in the contract. The promises to transfer the
machine and spare parts are distinct and result in two performance obligations that each will
be satisfied at a point in time.
On 31 December 2019, the customer pays Rs. 5 million for the machine and spare parts, but
only takes physical possession of the machine. Although the customer inspects and accepts
the spare parts, the customer requests that the spare parts be stored at the entity’s
warehouse because of its close proximity to the customer’s factory.
The customer has legal title to the spare parts and the parts can be identified as belonging to
the customer.
Furthermore, the entity stores the spare parts in a separate section of its warehouse and the
parts are ready for immediate shipment at the customer’s request. The entity expects to hold
the spare parts for two to four years and the entity does not have the ability to use the spare
parts or direct them to another customer.
The 80% of Rs. 5 million is to be allocated to machine. The entity will receive Rs. 15,000 per
month from the customer as custodial charges of spare parts at its premises.
Required:
Evaluate the above according to IFRS 15 (07)

© kashifadeel.com
 CAF 5 – IFRS 15

QUESTION 37
(a) List the five steps involved in recognizing revenue under IFRS 15 ‘Revenue from
Contracts with Customers’. (03)

(b) On 1 June 2018 Ravi Limited (RL) delivered 500 units of one of its products to Bravo
Limited (BL) at Rs. 200 per unit. BL immediately paid the amount and obtained
Page | 20 control upon delivery. BL is allowed to return unused units within 30 days and receive
a full refund. RL’s cost of the product is Rs. 150 per unit and it uses perpetual system
for recording inventory transactions.

On 30 June 2018, BL returned 20 units.

Required:
Prepare necessary journal entries in the books of RL on 1 June 2018 and 30 June
2018 under each of the following independent situations:
(i) Based upon historical data, RL estimates that 5% units will be returned on
expiry of 30 days. (05)
(ii) The product is new and RL has no relevant historical evidence of product
returns or other available market evidence. (04)

QUESTION 38
Sachal Limited (SL):
(a) Sells standard computer software package meant for small and medium sized
restaurant management. This software package is sold:
 at price of Rs.1.5 million payable before delivery,
 with thirty days trial time, and
 without any maintenance support after trial time
As per practice, it takes around six months for the customers to use the package
independent of any support from SL. Practically, SL has to provide on-site support
service for at least six months to almost all customers free-of cost. However, in case
of customer’s request for support beyond six months, SL provides services under a
formal paid service contract.

(b) Provides maintenance and support for the above standard software package at a
price of Rs.0.3 million per annum.

(c) Provides designing and development of customized software to customers. Payment

is made monthly by customers on the basis of chargeable hours of developers of SL.
First year maintenance service is provided free-of-cost. Subsequent maintenance
service is provided at the rate of 10% of the total contract price. Thereafter, for next
three years maintenance service is provided at 5% of the contract price per annum.
Required
Explain the considerations to be taken into account in determining accounting for revenue by
Sachal Limited. (15)

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 39
(a) Jupiter Limited (JL) entered into a two year contract on 1 January 2017, with a
customer for the maintenance of computer network. JL has offered the following
payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
Page | 21
The applicable discount rate is 6.596%.

Required:
Prepare journal entries to be recorded in the books of JL under each option over the
period of contract. (05)

(b) Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products Rupees (per carton)
C-1 100,000
C-2 90,000
C-3 110,000

PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.

Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell
one carton of each product for a total price of Rs. 260,000. (05)

(c) An entity shall recognise revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service to a customer. An asset is
transferred when (or as) the customer obtains control of that asset.

Required:
List the different indicators of transfer of control. (04)

QUESTION 40
(a) In respect of sale of goods, give any two examples of each of the following
situations:
(i) Legal title passes but the risks and rewards are retained.
(ii) Legal title does not pass but the risks and rewards are passed on to the customer
(03)
(b) State how revenue should be recognised in the following cases:
(i) Karim Industries Limited (KIL) has sold a machine on credit to Yawar Engineering
(YE). The machine would be used by YE if it is able to secure a contract for
providing services to AMZ & Company. KIL has agreed that the machine may be
returned at 90% of the price, if YE fails to secure the contract. (02)

(ii) Asif Electronics (AE) is about to sell a new type of food factory. Since customer
demand is high, AE is taking advance against orders. The selling price has been
fixed at Rs. 7,000 per unit and so far 175 customers have paid the initial 25%
deposit which is non-refundable. (02)

(iii) Nazir Engineering Limited (NEL) entered into a contract for the provision of
services over a period of two years. The total contract price was Rs. 25 million
and NEL had initially expected to earn a profit of Rs. 5 million on the contract.
However, the contract had not progressed as expected. In the first year, costs of
Rs.12 million were incurred. Management is not sure of the ultimate outcome but

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 CAF 5 – IFRS 15

believes that at least the costs on the contract would be recovered from the
customer. (02)

(c) Abid Textile Mills Limited (ATML) sold a property to a financial institution for Rs. 90
million when the fair value and carrying value of the property was Rs. 100 million and
Rs. 95 million respectively. However, there is an agreement between the parties
Page | 22 whereby ATML could repurchase the property after one year for Rs. 99 million.
State how the above transaction should be recorded in ATML’s records. (03)

QUESTION 41
(a) Car World sells new cars on deferred payment basis whereby 40% deposit is
received on sale and the balance payment is received at the end of two years. The
appropriate discount rate is 10%.
On 1 July 2014 a car was sold to a customer for Rs. 2,000,000.
Required:
Prepare necessary journal entries to record the above transaction in the books of Car
World for the years ended 30 June 2015 and 2016. (07)
(b) Saleem Engineering (SE) is a supplier of various types of industrial machines. It also
provides services for the maintenance of these machines. Following transactions
were carried out by SE during the year ended 30 June 2016:
(i) Five machines were sold on a lay away basis to one of its frequent
customers. Three out of a total of five installments had been received till the
year end. (03)
(ii) A service contract for maintenance of a machine for a period of one year was
signed and SE received a non-refundable annual fee amounting to Rs.
45,000 as advance on 15 April 2016. (02)
Required:
Discuss when it will be appropriate for SE to recognise revenue in each of the above
situations.

QUESTION 42
The following transactions took place at Parvez Limited (PL).
(1) On 5 March 2017 PL sold goods to a bank for Rs.18m cash and agreed to
repurchase the goods for Rs.19m cash on 5 July 2017. The goods will be shifted to a
storage facility under bank’s control and security. (04)

(2) On 31 March PL’s car manufacturing division consigned several vehicles to

independent dealers for sale to third parties. The sales price to the dealer is PL’s list
price at the date of sale to third parties. If a vehicle is unsold after six months, the
dealer has a right to return the vehicle to PL within next fifteen days. (04)

Required
Discuss how the above transactions should be accounted for in the books of accounts of
Parvez Limited.

Latest update: March 2020

 CAF 5 – IFRS 15

QUESTION 43
Brilliant Limited (BL) manufactures and sells plastic card printing machines with laminators.
A machine-specific card printing software is provided as a must part of the printing machine.
BL also sells plastic cards imported from Thailand.

BL agreed to supply the following to, Proud Learners (PL), a country-wide school network:
 15 Card printing machines – Available in ready stock Page | 23
 8 Laminators – Would require 30 days to deliver
 100,000 Plastic cards – Available in ready stock

A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and
school network.

Cost and list prices of the goods are:

Item Price (Rs.) Cost (Rs.)
Card printing machines 400,000
800,000
Laminators 200,000
Plastic cards 12 5

BL does not sell printing machine without laminator. However, in order to get this order BL
went against its policy. There is another supplier of imported card printing machine of almost
similar specification. This supplier sells the machine at Rs.750,000.

In most recent customers’ surveys printing machine of BL has been given 7 out of 10 points
as against 9 out of 10 given to competitors’ imported machine. There is no supplier of
laminator in the market.

Required
Identify performance obligations and allocate the transaction price to the identified
performance obligations. (10)

QUESTION 44
(a) List the criteria that must be met to account for a contract with customer under IFRS
15 ‘Revenue from Contracts with Customers’. (04)
(b) Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance
services for such type of machines are provided separately at Rs. 25,000 per month.
Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine
A13 with one year free maintenance services at a lumpsum payment of Rs.
1.8 million. The amount was received upon delivery of machine on 1 August
2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for Rs. 1.95
million. As per the contract, payment would be made after 2 years.
Maintenance services would also be provided for Rs. 25,000 per month for
two years which would be paid at the end of each month.

Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how the above
contracts should be recorded in GW’s books for year ended 31 December 2018. (Show
supporting calculations but entries are not required) (11)

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 CAF 5 – IFRS 15

QUESTION 45
Thursday Enterprise (TE) is a supplier of product Zee and has provided you the following
information:
(a) On 1 August 2018, TE entered into a six months contract with customer Alpha for
sale of Zee for Rs. 250 per unit, under the following terms and conditions:
 if Alpha purchases more than 5,000 units during the contract period, the price
Page | 24 per unit would be retrospectively reduced to Rs. 215 per unit.
 TE’s unconditional right to receive consideration would be established upon:
 completion of quality control procedures by Alpha for the first order.
The procedure would take a week after receiving the goods.
 placement of order by Alpha for subsequent orders.

At the inception of the contract, TE concludes that Alpha’s purchases will not exceed
the 5,000 units threshold for the discount.

Alpha placed the following orders:

Delivery date
Order date Units Payment date
(Transfer of control)
10 August 2018 3,000 28 August 2018 12 September 2018
25 December 2018 4,000 15 January 2019 10 January 2019
(10)

(b) On 1 February 2019, TE entered into a six months contract with another customer
Beta for sale of Zee for Rs. 250 per unit, under the following terms and conditions:
 if the Beta purchases more than 15,000 units during the contract period, the
price per unit would be retrospectively reduced to Rs. 215 per unit.
 TE’s unconditional right to receive consideration would be established upon
delivery of goods to Beta.

At the inception of the contract, TE concludes that Beta will meet 15,000 units
threshold for the discount.

Beta placed the following orders:

Delivery date
Order date Units Payment date
(Transfer of control)
14 February 2019 10,000 28 February 2019 20 March 2019
1 June 2019 8,000 15 July 2019 18 July 2019
(05)
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE
for the years ended 31 December 2018 and 2019.
(Entries without date will not be awarded any marks)

Latest update: March 2020

 CAF 5 – IFRS 15

ANSWER 01
Mr. Owais cannot identify each party’s rights so revenue recognition should be delayed until
the entity’s (Owais) performance is complete and substantially all of the consideration (cash)
in the arrangement has been collected and is non-refundable.

Therefore, Mr. Owais should record the revenue on April 10, 2017, as it is the date on which
performance is complete and non-refundable payment is received. Page | 25

ANSWER 02
A contract does not exist if each party (either buyer or seller) has an enforceable right to
terminate a wholly unperformed contract without compensating the other party. As
shopkeeper can cancel contract without compensating Waqas Enterprises so contract does
not exist.

ANSWER 03
The two agreements should be combined and considered as a one agreement because
contracts are negotiated with a single commercial objective of building a wall. The price of
two agreements is interdependent. Adil Ltd. is probably charging high price for bricks to
compensate for the discounted price for building the wall.

ANSWER 04
CASE A—Distinct goods or services
The entity identifies four performance obligations in the contract for the following goods or
services:
1. the software licence;
2. an installation service;
3. software updates; and
4. technical support.

Case B—Significant customisation

The software licence and the customised installation service are not distinct. On the basis of
this assessment, the entity identifies three performance obligations in the contract for the
following goods or services:
1. customised installation service (that includes the software licence);
2. software updates; and
3. technical support.

ANSWER 05
Part (a) Performance obligation
Performance obligation is a promise in a contract with a customer to transfer to the customer
either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

A good or service is distinct if both of the following criteria are met:

 the customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer; and
 the entity’s promise to transfer the good or service is separately identifiable from
other promises in the contract.

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 CAF 5 – IFRS 15

Part (b)
The three services namely construction material, architectural services and engineering work
are separately identifiable but have single purpose for the customer, therefore, are not
distinct.

Based on this, ECL should account for services in the contract as a single performance
Page | 26 obligation.

Part (c)
Transfer of software license, software updates and support services are distinct. However,
the software license is delivered before the other services and remains functional without
updates and technical support. Further, the customer can benefit from each of the services
either on their own or together with other services that are readily available. Thus, the
entity’s promise to transfer the good or service is separately identifiable from other promises
in the contract.

Based on the above, the contract should not be accounted for as a single performance
obligation.

ANSWER 06
The consideration promised in the contract includes a fixed amount of Rs. 900,000 and a
variable amount of Rs.100,000 (arising from the penalty).
900,000 + (100,000 x 40%) = Rs. 940,000

ANSWER 07
Part (a) Rs.
2,500,000 x 40% 1,000,000
(2,500,000 - 20,000) x 60% 1,488,000
150,000 150,000
2,638,000

Part (b) Rs.

2,500,000 x 40% 1,000,000
(2,500,000 + 50,000) x 35% 892,500
(2,500,000 - 20,000) x 25% 620,000
150,000 0
2,512,500

ANSWER 08
Date Particulars Dr .Rs. Cr. Rs.
01.01.18 Consideration paid to customer 1,500,000
Bank 1,500,000
31.03.18 Bank 4,000,000
Revenue (4m x (15 – 1.5)/15) 3,600,000
Consideration paid to customer 400,000

Latest update: March 2020

 CAF 5 – IFRS 15

ANSWER 09
Product Allocated price
Product A 33 (Rs. 50 / Rs. 150 × Rs. 100)
Product B 17 (Rs. 25 / Rs. 150 × Rs. 100)
Product C 50 (Rs. 75 / Rs. 150 × Rs. 100)
Total 100 Page | 27

ANSWER 10
Product Allocated price
Product A 40 Remaining amount
Product B 33 (55/100 x Rs. 60)
Product C 27 (45/100 x Rs. 60)
Total 100
The entire discount relates to Product B and C as when Product A is added it total stand-
alone price has been added in the package price.

ANSWER 11
Part (a)
Product Allocated price First allocation
Product A 40 Remaining amount
Product B 33 (55/100 x Rs. 60)
Product C 27 (45/100 x Rs. 60)
Total 100
The entire discount relates to Product B and C as when Product A is added it total stand-
alone price has been added in the package price.
Product Allocated price Second allocation
Product A 40 As above
Product B 33 As above
Product C 27 As above
Product D 30 Residual approach
Total 130
Part (b)
The application of the residual approach would result in a stand-alone selling price of Rs. 5
for Product D (Rs. 105 transaction price less Rs.100 allocated to Products A, B and C). The
entity concludes that Rs. 5 would not faithfully depict the amount of consideration to transfer
Product D, because Rs. 5 does not approximate the stand-alone selling price of Rs. 15–Rs.
45. The entity allocates the transaction price of Rs. 105 to Products A, B, C and D using the
relative stand-alone selling prices of those products.

ANSWER 12
Part (a)
Performance obligation:
A performance obligation is a promise in a contract with a customer to transfer to the
customer either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

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 CAF 5 – IFRS 15

Examples of promised goods and services

 Goods produced by an entity for sale
 Resale of goods purchased by an entity
 Resale of rights to goods or services purchased by an entity
 Performing a contractually agreed-upon task for a customer
 Standing ready to provide goods or services
Page | 28  Providing a service of arranging for another party to transfer goods or services to the
customer
 Granting rights to goods or services to be provided in the future that a customer can
resell
 Constructing, manufacturing or developing an asset on behalf of a customer
 Granting licences
 Granting options to purchase additional goods/services

Part (b)
Adjusting entry
Debit Credit
------ Rupees ------
Advance from customers 378,000
Revenue (Smart phones) W2 315,000
Revenue (Network-usage) W3 63,000

W1 Smart phone 18,000 + Network usage 21,600 (i.e. Rs. 1800 x 12 months] = Total 39,600
W2 18000 / 39600 W1 x 34650 x 20
W3 21600 / 39600 W1 x 34650 x [20 x 2/12]

ANSWER 13
The entity recognises revenue over time by measuring its progress towards complete
satisfaction of that performance obligation because the customer simultaneously receives
and consumes the benefits of the entity’s performance in processing each payroll transaction
as and when each transaction is processed.

ANSWER 14
The customer simultaneously receives and consumes the benefits of the entity’s
performance as it performs by making the health clubs available. Consequently, the entity’s
performance obligation is satisfied over time.

The customer benefits from the entity’s service of making the health clubs available evenly
throughout the year. (That is, the customer benefits from having the health clubs available,
regardless of whether the customer uses it or not.) Consequently, the best measure of
progress towards complete satisfaction of the performance obligation over time is a time-
based measure and it recognises revenue on a straight-line basis throughout the year at
Rs. 15,000 per month.

ANSWER 15
The entity does not have an enforceable right to payment for performance completed to date
because, until construction of the unit is complete, the entity only has a right to the deposit
paid by the customer. Because the entity does not have a right to payment for work
completed to date, the entity’s performance obligation is not a performance obligation
satisfied over time.

Latest update: March 2020

 CAF 5 – IFRS 15

All Situations
Date Particulars Dr .Rs. Cr. Rs.
01.01.18 Bank 300,000
Contract liability 300,000
(Deposit)

Part (a) Page | 29

31.12.19 Bank 2,700,000
Contract liability 300,000
Revenue 3,000,000
(Completion of contract)
Part (b)
01.03.18 Contract liability 300,000
Bank 300,000
(Return of deposit)

Part (c)
31.12.19 Contract liability 300,000
Revenue 300,000
(Revenue recorded on customers’ default)

ANSWER 16
The asset (unit) created by the entity’s performance does not have an alternative use to the
entity because the contract precludes the entity from transferring the specified unit to
another customer. The entity also has a right to payment for performance completed to date.
This is because if the customer were to default on its obligations, the entity would have an
enforceable right to all of the consideration promised under the contract if it continues to
perform as promised. Therefore, the entity has a performance obligation that it satisfies over
time.

Date Particulars Dr .Rs. Cr. Rs.

01.01.18 Bank 300,000
Contract liability 300,000
(Deposit)
31.12.18 Contract liability 300,000
Bank (3,000,000 x 45%) 1,350,000
Contract asset β 150,000
Revenue (3,000,000 x 60%) 1,800,000
(Recognition of revenue)
31.12.19 Bank 1,350,000
Contract asset 150,000
Revenue 1,200,000
(Revenue recorded on completion)

ANSWER 17
Notwithstanding that the entity could cancel the contract; the entity has a right to payment for
performance completed to date because the entity could also choose to enforce its rights to
full payment under the contract. Therefore, the entity has a performance obligation that it
satisfies over time.

© kashifadeel.com
 CAF 5 – IFRS 15

Date Particulars Dr .Rs. Cr. Rs.

01.01.18 Bank 300,000
Contract liability 300,000
(Deposit)
31.12.18 Contract liability 300,000
Bank (3,000,000 x 45%) 1,350,000
Page | 30 Contract asset β 150,000
Revenue (3,000,000 x 60%) 1,800,000
(Recognition of revenue)
31.12.19 Bank 1,350,000
Contract asset 150,000
Revenue 1,200,000
(Revenue recorded on completion)

ANSWER 18
Part (a)
The transaction price (and the amount of revenue to be recognised), the entity measures the
fair value of 100 shares that are received upon completion of each weekly service. The entity
does not reflect any subsequent changes in the fair value of the shares received (or
receivable) in revenue.

Part (b)
The entity is providing a series of distinct services that are substantially the same and have
the same pattern of transfer (a time-based measure of progress). The entity should measure
its progress towards complete satisfaction of the performance obligation as each week of
service is complete.
ANSWER 19
Incremental costs to be capitalised Rs. 10,000
Costs to be expensed as incurred Rs. 40,000

Analysis: The commission to sales employees is incremental to obtaining the contract and
should be capitalised as a contract asset. The external legal fees and the travelling cost are
not incremental to obtaining the contract because they have been incurred regardless of
whether X Plc obtained the contract or not.

ANSWER 20
The same basis on which revenue is recognised i.e. time
The basis to recognise cost:
basis in this case (over 5 years).
The amount that should be
Rs. 28,000 / 5 years = Rs. 5,600 per annum
recognised per annum:

ANSWER 21
The same basis on which revenue is recognised i.e. time
The basis to recognise cost:
basis in this case.
Total expected time: 7 years
The amount that should be
Rs. 28,000 / 7 years = Rs. 4,000 per annum
recognised per annum:

Latest update: March 2020

 CAF 5 – IFRS 15

ANSWER 22
The same basis on which revenue is recognised i.e. output
The basis to recognise cost:
basis in this case.
The amount that should be Total expected cost x completion %
recognised year 1: Rs. 28,000 x 60% = Rs. 16,800
Page | 31

ANSWER 23
Date Particulars Dr (Rs.) Cr (Rs.)
28 Feb Receivables 400
Revenue 400
31 March Receivables 600
Revenue 600

ANSWER 24
28 February: X Limited transfers Product A to Y Limited – X Plc does not have an
unconditional right to receive the Rs.400 so the amount is recognised as a contract asset.

31 March: X Limited transfers Product B to Y Limited – X Limited now has an unconditional

right to receive the full Rs. 1,000. The Rs.400 previously recognised as a contract asset is
reclassified as a receivable and the Rs.600 for the transfer of product B is also recognised
as receivable.

Date Particulars Dr (Rs.) Cr (Rs.)

28 Feb Contract asset 400
Revenue 400
31 March Receivables 1,000
Contract asset 400
Revenue 600

ANSWER 25
Date Particulars Dr (Rs.) Cr (Rs.)
31 Jan Receivable / Bank 1,000
Contract liability 1,000
28 Feb Contract liability 400
Revenue 400
31 Mar Contract liability 600
Revenue 600

ANSWER 26
Date Particulars Dr .Rs. Cr. Rs.
01.03.19 Cash 1,000
Contract liability 1,000
31.03.19 Contract liability 1,000
Revenue 1,000

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 CAF 5 – IFRS 15

ANSWER 27
Date Particulars Dr .Rs. Cr. Rs.
31.01.19 Receivable 1,000
Contract liability 1,000
01.03.19 Cash 1,000
Page | 32
Receivable 1,000
31.03.19 Contract liability 1,000
Revenue 1,000
If the entity issued the invoice before 31 January 2019 (the due date of the consideration),
the entity would not present the receivable and the contract liability on a gross basis in the
statement of financial position because the entity does not yet have a right to consideration
that is unconditional.

ANSWER 28
Date Particulars Dr .Rs. Cr. Rs.
04.01.19 Receivable 15,000
Revenue (100 x Rs. 125) 12,500
Contract (refund) liability (100 x Rs. 25) 2,500

ANSWER 29
Situation 1: This is separate contract that does not affect accounting for existing contract.
Date Particulars Dr. Rs. Cr. Rs.
01.01.15 Bank 12,000
Advance (Unearned revenue) 12,000
(cash received from customer)
31.01.15 Advance (Unearned revenue) 6,000
Revenue 6,000
(on delivery of first 60 items)
15.02.15 Bank 2,850
Advance (Unearned revenue) 2,850
(cash received from customer for additional items)
28.02.15 Advance (Unearned revenue) 6,000
Revenue 6,000
(on delivery of next 60 items)
10.03.15 Advance (Unearned revenue) 2,850
Revenue 2,850
(on delivery of additional 30 items)

Situation 2: It is termination of original contract and creation of new one.

Date Particulars Dr. Rs. Cr. Rs.
01.01.15 Bank 12,000
Advance (Unearned revenue) 12,000
(cash received from customer)
31.01.15 Advance (Unearned revenue) 6,000
Revenue 6,000
(on delivery of first 60 items)
15.02.15 Bank 1,500
Revenue (reversed) 900
Advance (Unearned revenue) 2,400
(cash received from customer for additional items)

Latest update: March 2020

 CAF 5 – IFRS 15

28.02.15 Advance (Unearned revenue) 5,600

Revenue 5,600
(on delivery of 60 items)(6000 + 2400)/90 items x 60
10.03.15 Advance (Unearned revenue) 2,800
Revenue 2,800
(on delivery of 30 items) (6000 + 2400)/90 items x 30
Page | 33
ANSWER 30
All Situations
Date Particulars Dr .Rs. Cr. Rs.
31.12.17 Bank (100 x Rs. 100) 10,000
Revenue (97 x Rs. 100) 9,700
Contract liability (3 x Rs. 100) 300
31.12.17 Cost of Sales (97 x Rs. 60) 5,820
Right to product (3 x Rs. 60) 180
Inventory (100 x Rs. 60) 6,000

Part (a)
30.01.18 Contract liability (3 x Rs.100) 300
Bank 300
Inventory 180
Right to product 180
Part (b)
30.01.18 Contract liability (3 x Rs.100) 300
Cash (2 x Rs.100) 200
Revenue (1 x Rs.100) 100
Inventory 120
COS 60
Right to product 180

Part (c)
30.01.18 Contract liability (3 x Rs.100) 300
Revenue 100
Cash (4 x Rs.100) 400
Inventory 240
COS 60
Right to product 180

ANSWER 31
Date Particulars Dr .Rs. Cr. Rs.
31.03.18 Receivable 7,500
Revenue 7,500
(75 x Rs. 100)
30.06.18 Receivable 44,250
Revenue 44,250
500 x Rs. 90 = Rs. 45,000 – (75 x Rs. 10) = Rs. 44,250

© kashifadeel.com
 CAF 5 – IFRS 15

ANSWER 32
Date Particulars Dr .Rs. Cr. Rs.
03.10.17 Inventory with customer 80
Inventory 80
(no revenue or contract asset recognised because there
Page | 34
is right of return)
31.12.17

(no interest to be recognised until contract asset or

receivable is recognised)
01.01.18 Receivable 100
Revenue 100
Cost of Sales 80
Inventory with customer 80
(Revenue recognised on completion of 90 days period)
31.12.18 Receivable 10
Interest income (100 x 10%) 10
31.12.19 Receivable 11
Interest income (110 x 10%) 11
31.12.19 Bank 121
Receivable 121

ANSWER 33
Date Particulars Dr .Rs. Cr. Rs.
01.01.18 Cash 4,000
Contract liability 4,000
31.12.18 Interest expense 240
Contract liability (4,000 x 6%) 240
31.12.19 Interest expense 254
Contract liability (4,240 x 6%) 254
31.12.19 Contract liability 4,494
Revenue 4,494

ANSWER 34
Additional discount due to voucher 40% – 10% = 30%
Estimated selling price of discount voucher = Rs. 50 x 30% x 80% = Rs. 12
PO Stand alone Allocated Recognise
Product A 100 89 [100/112 x Rs100] On control transfer 1 Jan
Discount voucher 12 11 [12/112 x Rs100] On redemption or expiry
Total 112 100

ANSWER 35
Estimated selling price of points = Rs. 1 x 9500 /10,000 = Rs. 0.95
PO Stand alone Allocated
Product 100,000 91,324 [100,000/109,500 x Rs100,000]
Points 9,500 8,676 [9,500/109,500 x Rs100,000]
Total 109,500 100,000

Latest update: March 2020

 CAF 5 – IFRS 15

Date Particulars Dr .Rs. Cr. Rs.

2017 Cash 100,000
Revenue Product 91,324
Revenue Points [Rs. 8,676 x 4500/9500] 4,110
Contract Liability [Rs. 8,676 x 5000/9500] 4,566
2018 Contract liability 3,493
Revenue Points 3,493 Page | 35
[Rs. 8,676 x 8500 / 9700 = Rs. 7,603 – Rs. 4,110
already recognised = Rs. 3,493]

ANSWER 36
1. There is one contract with the customer
2. There are three performance obligations (the promises to provide the machine, the
spare parts and the custodial services)
3. The transaction price is Rs. 5million fixed plus Rs. 15,000 per month variable
4. The Allocation is as follows:
 Machine Rs. 4m (80%)
 Spare parts Rs. 1m (Residual approach)
 Rs. 15,000 per month Variable
5. Satisfaction of performance obligations
 Machine – Point in time – 31 December 2019 (control transferred)
 Spare parts – Point in time – 31 December 2019 (Bill and hold arrangement
criteria met and control transferred)
 Custodial services – Satisfaction over time – Time based measure (monthly) is
suitable

ANSWER 37
Part (a)
Five steps involved in recognising revenue under IFRS 15:
(i) Identify the contract(s) with a customer
(ii) Identify the separate performance obligations
(iii) Determine the transaction price
(iv) Allocate the transaction price
(v) Recognize revenue when or as an entity satisfies performance obligations

Part (b) (i)

Debit Credit
Date Particulars
(Rs.) (Rs.)
1 Jun 18 Bank [500 units x Rs. 200] 100,000
Contract liability 5% 5,000
Revenue 95% 95,000
Cost of Sales 95% 71,250
Right to recover product 5% 3,750
Inventory [500 units x Rs. 150] 75,000

30 Jun 18 Contract liability 5,000

Revenue [5 units x Rs. 200] 1,000
Bank [20 units x Rs. 200] 4,000
Cost of Sales [5 units x Rs. 150] 750
Inventory [20 units x Rs. 150] 3,000
Right to recover product 3,750

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 CAF 5 – IFRS 15

Part (b) (ii)

Debit Credit
Date Particulars
(Rs.) (Rs.)
1 Jun 18 Bank 100,000
Contract liability [500 units x Rs. 200] 100,000
Page | 36
Right to recover product 75,000
Inventory [500 units x Rs. 150] 75,000

30 Jun 18 Contract liability 100,000

Revenue [480 units x Rs. 200] 96,000
Bank [20 units x Rs. 200] 4,000
Cost of Sales [480 units x Rs. 150] 72,000
Inventory [20 units x Rs. 150] 3,000
Right to recover product 75,000

ANSWER 38
Part (a) Restaurant management software
1. There exists a contract for sale of Restaurant management software between SL and
customers containing confirmation of respective obligation and right, payment term,
commercial substance and price is collected in advance.
2. There are two performance obligations, namely:
 Explicit: delivery of software and
 Implicit: six month on-site support
3. As per contract, the transaction price is Rs.1.5 million for both performance obligations.
4. Based on stand-alone selling price approach, software will be priced as Rs.1.35 million
and six month on-site support services will be priced as Rs.0.15 million.
5. PL will recognize revenue from sale of software upon delivery if SL can objectively
conclude that the software meets the requirements of the customer. The term of full
payment of transaction price in advance is a reasonable evidence of clarity of
specification between SL and customer. The agreed thirty days trial time will be
considered as a formality of the contract. PL will recognize revenue from on-site
support services over six months period on straight-line basis.

Part (b) Maintenance support for the standard software package

1. Such service is provided under a written contract that contains confirmation of
respective obligation and right, payment term, commercial substance. SL will assess
the collectability of the price if not received in advance.
2. The performance obligation is to provide maintenance and support services.
3. The price of the service is Rs.0.3 million for one year term.
4. Since there is only one performance obligation, the question of allocation of transaction
price does not arise.
5. PL will recognize revenue over one year period on straight-line basis, as in this case
input method is appropriate. The pattern of resources consumed by SL is evenly
spread over the period of contract.

Part (c) Customized software

1. Such service is provided under a written contract that contains confirmation of
respective obligation and right, payment term, commercial substance. SL will assess
the collectability of the price.
2. The performance obligations are:
 Designing and development of customized software, and
 Maintenance and support services of the said software

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 CAF 5 – IFRS 15

3. The total price of the software and maintenance service will be determined on the
basis of terms of contract.
4. The price will be allocated between the two performance obligations. Price of
maintenance services for the first year is included in the total contract price. The
allocated price of the first year would be 10% of the contract price, which is the stand-
alone price of the said services for the second year. For second year it would be 10%
of the contract price and for next three years the maintenance and support services will Page | 37
be priced at 5% of the contract price. The price of design and development will be 90%
of the contract price.
5. Revenue from design and development - PL will recognize revenue from design and
development over time, because the software at every stage is expected to be
customer- specific and would have no alternative use for SL. The monthly payment
based on the basis of charged hours confirms that SL would have an enforceable right
to receive payment if the contract is terminated before completion. Revenue from
Maintenance and support services - PL will recognize revenue over five years’ period
on straight-line basis, as in this case, input method is appropriate. The pattern of
resources consumed by SL is evenly spread over the period of contract.

ANSWER 39
Part (a)
Option 1: Lump Sum payment
Cash 200,000
01 Jan 17
Contract liability 200,000
Cash received before satisfaction of performance obligation

Interest expense 13,193

31 Dec 17
Contract liability 13,193
200,000 x 6.596% = Rs. 13,193

Contract liability 110,000

31 Dec 17
Revenue 110,000
Revenue recognised on the basis of performance obligation satisfied over time

Interest expense 6,807

31 Dec 18
Contract liability 6,807
200,000 + 13,193 – 110,000 = 103,193 x 6.596% = Rs. 6,807

Contract liability 110,000

31 Dec 18
Revenue 110,000
Revenue recognised on the basis of performance obligation satisfied over time

Option 2: Normal payment terms

Cash 110,000
31 Dec 17
Revenue 110,000
Revenue recognised on the basis of performance obligation satisfied over time

Cash 110,000
31 Dec 18
Revenue 110,000
Revenue recognised on the basis of performance obligation satisfied over time

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 CAF 5 – IFRS 15

Part (b)
C1 C2 C3 Total
Stand-alone prices 90,000 110,000
Transaction price allocated [90:110] 76,500 93,500 170,000

Stand-alone prices (Revised) 100,000 76,500 93,500

Page | 38 Transaction price allocated
96,296 73,667 90,037 260,000
[100:76.5:93.5]

Part (c)
Indicators of the transfer of control, which include, but are not limited to, the following:
(i) The entity has a present right to payment for the asset.
(ii) The customer has legal title to the asset.
(iii) The entity has transferred physical possession of the asset (except bill and hold etc)
(iv) The customer has the significant risks and rewards of ownership of the asset.
(v) The customer has accepted the asset

ANSWER 40
Part (a)
Examples of the situations where legal title passes but risk and rewards are retained
 An entity may retain obligations for unsatisfactory performance not covered by normal
warranty provision;
 The receipt of revenue may be contingent on derivation of revenue by the buyer for its
sale of goods.

Examples of the situations where legal title does not pass but the risks and rewards
are transferred
 A seller may retain the legal title to the goods to protect the collectability of the
amount due but transfer the significant risks and rewards of ownership.
 In retail sale, a seller may offer a refund if the customer is not satisfied.

Part (b)
(i) The completion of the sale transaction is uncertain because it is contingent upon
purchaser securing the contract with another company. Therefore, KIL should only
recognize the revenue when it is certain that YE will secure the contract. 10%
revenue may be recognized if and when it is confirmed that YE would not be able to
secure the contract.
(ii) Revenue should be recognized when the food factory is delivered to the customer.
Until then no revenue should be recognized and the deposit should be carried
forward as deferred income. 25% advance may be transferred to other income if the
parties do not claim the asset.
(iii) If the outcome of a service transaction cannot be estimated reliably, revenue should
only be recognized to the extent that expenses incurred are recoverable from the
customer. Thus revenue to the extent of Rs. 12 million may be recognized.
Part (c)
Since the sale and repurchase prices are lower than the fair values, the substance of the
arrangement appears to be that the financial institution has granted ATML a one year loan
secured on the property, charging interest of Rs. 9 million.
The transaction should be accounted for in ATML’s books as follows:
 continue to recognize the property as an asset at the carrying amount.
 credit the Rs. 90 million received to a liability account.
 recognize finance cost of Rs. 9 million over a period of one year.

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 CAF 5 – IFRS 15

 debit the liability when Rs. 99 million cash is paid out.

 recognise finance cost of Rs. 9 million over a period of one year.

ANSWER 41
Part (a)
Date Particulars Debit Credit
----------Rupees---------- Page | 39
01-07-14 Cash (40%×2,000,0000) 800,000
Receivables W1 991,736
Car Sales [800,000+991,736(W-1)] 1,791,736
30-06-15 Receivable (10% × 991,736) 99,174
Finance income 99,174

30-06-16 Receivable (208,264 – 99,174) 109,090

Finance income 109,090
30-06-16 Cash 1,200,000
Receivables 1,200,000

W - 1: Present value of future payments ----Rupees-----

Amount receivable 1,200,000
PV= 1,200,000/(1+10%)2 991,736
Part (b)
(i) Revenue from lay away sales is recognized when the goods are delivered
against full payment.
However, based on experience, such revenue may be recognized earlier e.g. when a
significant deposit is received provided the goods are on hand, identified and ready
for delivery to the buyer.
Hence the sale may be recognized in this case provided the machines are ready for
delivery because the sale is to a frequent customer and a significant portion of the
sale proceeds has been received.
The conclusive factor is considering transfer of control.
(ii) Although the fee is non-refundable, it will be recognized as income on the basis of
matching principle i.e. 1/12th of the annual fee will be taken to income each month.

ANSWER 42
Part 1 – Sale and repurchase agreement
The transaction is in the nature of sale and repurchase agreement therefore the economic
phenomenon of the transaction is that of a loan for which the goods have been given as
security. Therefore, no contract of sale of goods or services is identified. The difference
between the sale price of Rs.18m and the repurchase price of Rs.19m represents the
interest on the loan for a period of four months.
To account for the transaction in accordance with its substance:
 The goods should remain in inventories of PL at the lower of cost and net realisable
value.
 No sale should be recorded.
 The amount once received from the bank should be treated as a current loan liability
of Rs.18m.
 Interest should be charged applying implicit rate to profit or loss for each reporting
period.

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 CAF 5 – IFRS 15

Part 2 – Consignment inventories

1. There is a contract for sale of cars between Pervez Limited (PL) and dealer containing
confirmation of respective right and obligation, payment term, commercial substance
and probability of collection of price.
2. There is only one performance obligation, namely, the transfer of cars to the dealer.
3. As per contract, the transaction price would be list price on the date of sale to third
Page | 40 parties during the six month period. Thereafter, though not specifically mentioned, after
the lapse of fifteen days the list price applicable on sixteenth day would be the
transaction price of the unsold cars not returned.
4. Since there is only one performance obligation, the question of allocation of transaction
price does not arise till the time of sale to third parties.
5. PL will recognize revenue upon satisfaction of performance obligation. Performance
obligation would be satisfied once the dealer has sold any cars to third parties during
the six month period. Thereafter, if the dealer does not return the unsold cars within
fifteen days, the performance obligation would be considered as satisfied on sixteenth
day.
On 31 March 2017 the vehicles should remain in inventories in PL books of accounts.

ANSWER 43
Identification of performance obligations
There are three performance obligations:
1. Transfer of 15 Plastic card printing machines and its software
2. Transfer of 8 Laminators
3. Transfer of 100,000 plastic cards

Although the software is distinct from printing machine, but both are highly dependable to
each other and inter-related. In the context of this contract, these are providing a combined
output to PL. Therefore, software is not a separate performance obligation. The total
transaction price as per the contract is Rs.9.2 million. On the basis of available information
the stand-alone prices of each item will be estimated using the following approaches:

Plastic card printing machines and its software:In the absence of observable stand-
alone price, we may use ‘adjusted market assessment’ approach. The competitor’s machine
is sold at Rs.750,000 which is similar (not identical) to BL’s machine. As per given
information, we may use customers’ rating for adjustment of competitors’ price that worked
out as follows:
Rupees
Competitors’ price 750,000
Adjusted price of BL machine (7 / 9 x 750,000) 583,000
Total price (15 x 583,000) 8,745,000

Laminators: There is neither observable stand-alone price nor any comparable competitors’
product available in the market in which BL operates. In this case, we may use ‘expected
cost plus a margin approach’. The estimated stand-alone price is worked out as follows:
Rupees
Expected cost to BL 200,000
Margin estimated (800,000 - 600,000)/600,000 = 33% 66,000
266,000
Total price (8 x 266,000) 2,128,000

Latest update: March 2020

 CAF 5 – IFRS 15

Plastic cards: Observable stand-alone price is available

Rupees
Total price (100,000 x 12) 1,200,000

Allocation Stand alone Allocated

Printing machine and software 8,745,000 6,663,961
Laminators 2,128,000 1,621,602 Page | 41
Plastic Cards 1,200,000 914,437
Total 12,073,000 9,200,000

ANSWER 44
Part (a)
The general IFRS 15 model applies only when all of the following conditions are met:
 the parties to the contract have approved the contract.
 the entity can identify each party’s rights.
 the entity can identify the payment terms for the goods and services to be transferred.
 the contract has commercial substance.
 it is probable that the entity will collect the consideration.

Part (b)(i)
The contract contains two distinct performance obligations i.e. selling the machine and
providing the maintenance services as:
 the customer can separately benefit from the machine without the maintenance services
from GW (or GW sells maintenance services separately) and
 the machine and maintenance services are separately identifiable in the contract.

Thus, GW will allocate the transaction price between the two performance obligations as
follows:
Standalone Transaction
%
price price
Machine 1,700,000 85% 1,530,000
Maintenance (Rs. 25,000×12)(Rs. 22,500×12) 300,000 15% 270,000
2,000,000 100% 1,800,000

Revenue related to sale of machine would be recognized at a point in time i.e. upon delivery
on 1 August 2018. While revenue related to maintenance service would be recognized over
time i.e. as the services are rendered.

Till 31 December 2018, revenue would be recognized in respect of:

 Sale of machine Rs. 1,530,000
 Maintenance service Rs. 112,500 i.e Rs. 22,500 for 5 months

Remaining amount of Rs. 157,500 would appear in liabilities as deferred revenue.

Part (b)(ii)
The contract contains two distinct performance obligations i.e. selling the machine and
providing the maintenance services.
The contract includes a significant financing component in respect of sale of machine which
is evident from the difference between the amount of promised consideration of Rs. 1.95
million and the cash selling price of Rs. 1.7 million.
Revenue related to machine would be recognized upon delivery on 1 October 2018.
Revenue related to maintenance service would be recognized as the services are rendered
each month.

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 CAF 5 – IFRS 15

The difference between promised consideration and cash selling price of Rs. 250,000 would
be recognized as interest revenue over two years using the implicit rate of 7.1%
[(1.95÷1.7)1/2–1].

Till 31 December 2018, revenue would be recognized in respect of:

Page | 42  Sale of machine Rs. 1,700,000
 Maintenance service Rs. 75,000 i.e Rs. 25,000 for 3 months
 Interest revenue Rs. 30,175 (Rs. 1.7 million × 7.1% × 3/12)

ANSWER 45
Part (a)
Date Particulars Dr. (Rs.) Cr. (Rs.)

28-08-18 Contract asset – Alpha [3,000 units x Rs. 250] 750,000

Revenue 750,000

05-09-18 Receivable – Alpha 750,000

Contract asset – Alpha 750,000

12-09-18 Cash/Bank 750,000

Receivable – Alpha 750,000

25-12-18 Revenue 105,000

Contract liability – Alpha [3,000 units x Rs. 35] 105,000

25-12-18 Receivable – Alpha [(4,000 x Rs. 215) – 105,000] 755,000

Contract liability – Alpha 755,000

10-01-19 Cash / Bank 755,000

Receivable – Alpha 755,000

15-01-19 Contract liability – Alpha 860,000

Revenue 860,000

Part (b)
Date Particulars Dr. (Rs.) Cr. (Rs.)

28-02-19 Receivable – Beta [10,000 x Rs. 250] 2,500,000

Revenue [10,000 x Rs. 215] 2,150,000
Contract liability – Beta [10,000 x Rs. 35] 350,000

20-03-19 Cash / Bank 2,500,000

Receivable – Beta 2,500,000

15-07-19 Receivable – Beta [(8,000 x Rs. 215) – 350,000] 1,370,000

Contract liability – Beta 350,000
Revenue [8,000 x Rs. 215] 1,720,000

18-07-19 Cash / Bank 1,370,000

Receivable – Beta 1,370,000

Latest update: March 2020

 CAF 5 – IFRS 15

OBJECTIVE BASED QUESTIONS

01. Which of the following is not one of the 5 steps for recognizing revenue according to IFRS 15
Revenue from contracts with customers?
(a) Identify the contract
(b) Assess the likelihood of economic benefits
(c) Determine the contract price
(d) Allocate the transaction price to the performance obligations in the contract. Page | 43

02. Whale Limited (WL) is an agent who works on behalf of Dolphin, a famous performer. WL has
just collected Rs. 100 million from a promoter in terms of ticket sales for a recent show done by
Dolphin. WL earns commission of 10% in relation to Dolphin's work.

What is the correct double entry for the receipt of the Rs? 100 million?
(a) Dr Cash Rs. 100 million
Dr Trade Receivables Rs. 10 million
Cr Trade payables Rs. 100 million
Cr Revenue Rs. 10 million
(b) Dr Cash Rs. 100 million
Dr COS Rs. 90 million
Cr Revenue Rs. 100 million
Cr Trade payables Rs. 90 million
(c) Dr COS Rs. 90 million
Dr Cash Rs. 10 million
Cr Revenue Rs. 100 million
(d) Dr Cash Rs. 100 million
Cr Revenue Rs. 10 million
Cr Trade payables Rs. 90 million

03. Coin Limited (CL) sells a specialized piece of equipment to Orbit Limited on 1st September 2017
for Rs. 4m. Due to the specialized nature of the equipment, CL has additionally agreed to
provide a support service for the next two years. The cost per annum to CL of providing this
service will be Rs. 300,000. CL usually earns a gross margin of 20% on such contracts.

What revenue should be included in the statement of profit or loss of CL for the year ended 31
December 2017?
(a) Rs. 3,343,750
(b) Rs. 3,250,000
(c) Rs. 3,375,000
(d) Rs. 4,000,000

04. River Limited (RL) has prepared its draft financial statements for the year ended 30 September
2014. It has included the following transactions in revenue at the amounts stated below.

Which of these has been correctly included in revenue according to IFRS 15 Revenue from
Contracts with Customers?
(a) Agency sales of Rs. 2.5 million on which RL is entitled to a commission of 10%.
(b) Sale proceeds of Rs. 20 million for motor vehicles which were no longer required by RL
(c) Sales of Rs. 15 million on 30 September 2014. The amount invoiced to and received from
the customer was Rs. 18 million, which includes Rs. 3 million for ongoing servicing work to
be done by RL over the next two years.
(d) Sales of Rs. 20 million on 1 October 2013 to an established customer who (with the
agreement of RL) will make full payment on 30 September 2015. RL has a cost of capital
of 10%.

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 CAF 5 – IFRS 15

05. Cat Limited (CL) sold and installed an item of machinery for Rs. 800,000 on 1 November 2017.
Included within the price was 2 years servicing contract which has a value of Rs. 240,000 and a
fee for installation of Rs. 50,000.

How much should be recorded in CL’s revenue in its statement of profit or loss for the year
ended 31 December 2017 in relation to the machinery sale?
(a) Rs. 530,000
Page | 44 (b) Rs. 680,000
(c) Rs. 560,000
(d) Rs. 580,000

06. Sales director of a company is close to selling a machine which it sells for Rs. 650,000, offering
free service, therefore selling the entire machine for Rs. 560,000 including installation. The
company never sells servicing separately.

How should this discount be applied in relation to the sale of the machinery?
(a) Machine only
(b) Machine and Installation only
(c) Machine and Service only
(d) Machine, Installation and Service

07. Cheetah Limited (CL) works as an agent for a number of smaller contractors, earning
commission of 10%. CL’s revenue includes Rs. 6 million received from clients under these
agreements with Rs. 5.4 million in cost of sales representing the amount paid to the contractors.
What adjustment needs to be made to revenue in respect of the commission sales?
(a) Reduce revenue by Rs. 6 million
(b) Reduce revenue by Rs. 5.4 million
(c) Increase revenue by Rs. 600,000
(d) No adjustment is required

08. An entity regularly sells Products A, B and C individually, thereby establishing the following
stand-alone selling prices:
Product Stand-alone selling price Rs.
Product A 40
Product B 55
Product C 45
In addition, the entity regularly sells Products B and C together for Rs. 60. The entity enters into
a contract with a customer to sell Products A, B and C in exchange for Rs. 100. Allocate the
transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15
(a) A Rs. 40 and B Rs. 55 and C Rs. 45
(b) A Rs. 29 and B Rs. 39 and C Rs. 32
(c) A Rs. 40 and B Rs. 33 and C Rs. 27
(d) A Rs. 40 and B Rs. 27 and C Rs. 33

09. An entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs.
100.
Product Stand-alone selling price
Product A 50
Product B 25
Product C 75
Total 150
Allocate the transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15
(a) A Rs. 50 and B Rs. 25 and C Rs. 75
(b) A Rs. 33 and B Rs. 17 and C Rs. 50
(c) A Rs. 33 and B Rs. 50 and C Rs. 17
(d) A Rs. 17 and B Rs. 33 and C Rs. 50

Latest update: March 2020

 CAF 5 – IFRS 15

10. Which of the following items has correctly been included in Hakeem Limited (HL)’s revenue for
the year to 31 December 2011?
(a) Rs. 2 million in relation to a fee negotiated for an advertising contract for one of HL’s
clients. HL acted as an agent during the deal and is entitled to 10% commission.
(b) Rs. 500,000 relating to a sale of specialized equipment on 31 December 2011. The full
sales value was Rs. 700,000 but Rs. 200,000 relates to servicing that HL will provide over
the next 2 years, so HL has not included that in revenue this year.
(c) Rs. 800,000 relating to a sale of some surplus land owned by HL. Page | 45
(d) Rs. 1 million in relation to a sale to a new customer on 31 December 2011. Control passed
to the customer on 31 December 2011. The Rs. 1 million is payable on 31 December
2013. Interest rates are 10%.

11. Hover Limited (HL) is a car retailer. On 1 April 2014, HL sold a car to a customer on the
following terms:

The selling price of the car was Rs. 25.3 million. The customer paid Rs. 12.65 million (half of the
cost) on 1 April 2014 and will pay the remaining Rs. 12.65 million on 31 March 2016 (two years
after the sale). The customer can obtain finance at 10% per annum.

What is the total amount which HL should credit to profit or loss in respect of this transaction in
the year ended 31 March 2015?
(a) Rs. 23.105 million
(b) Rs. 23.000 million
(c) Rs. 20.909 million
(d) Rs. 24.150 million

12. Determining the amount to be recognized in the first year of a long term contract with a
customer is an example of which step in the IFRS 15’s 5-step model?
(a) Determining the transaction price
(b) Recognizing revenue when a performance obligation is satisfied
(c) Identifying the separate performance obligations
(d) Allocating the transaction price to the performance obligations

13. X Limited wins a competitive bid to provide consulting services to a new customer. X Limited
incurred the following costs to obtain the contract:
Rs.
Commissions to sales employees for winning the contract 10,000
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Total costs incurred 50,000

How to recognize the above costs?

(a) Capitalize Rs. Nil and expense Rs. 50,000
(b) Capitalize Rs. 10,000 and expense Rs. 40,000
(c) Capitalize Rs. 25,000 and expense Rs. 25,000
(d) Capitalize Rs. 50,000 and expense Rs. Nil

14. On 1 January 2019, an entity enters into a non-cancellable contract to transfer a product to a
customer on 31 March 2019. The contract requires the customer to pay consideration of Rs.
1,000 in advance on 31 January 2019 but the customer pays the consideration on 1 March
2019. The entity transfers the product on 31 March 2019.

What journal entry is required to be passed on 31 January 2019?

(a) No entry is required
(b) Debit Cash Rs. 1,000 and Credit Contract liability Rs. 1,000
(c) Debit Receivables Rs. 1,000 and Credit Contract liability Rs. 1,000
(d) Debit Receivables Rs. 1,000 and Credit Revenue Rs. 1,000

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 CAF 5 – IFRS 15

15. An entity enters into 100 contracts on 31 December 2017 with customers. Each contract
includes the sale of one product for Rs.100.

Cash is received when control of a product transfers. The entity’s customary business practice is
to allow a customer to return any unused product within 30 days and receive a full refund. The
entity’s cost of each product is Rs. 60.
Page | 46 Using the expected value method, the entity estimates that 97 products will not be returned. The
entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit.

What should be recognized in respect of above?

(a) Revenue Rs. Nil and Contract Liability Rs. 10,000
(b) Revenue Rs. 300 and Contract Liability Rs. 9,700
(c) Revenue Rs. 9,700 and Contract Liability Rs. 300
(d) Revenue Rs. 10,000 and Contract Liability Rs. Nil

16. Mechanical Limited (ML) sells machines, and also offers installation and technical support
services. The individual selling prices of each product are shown below.
Sale price of goods Rs. 75,000
Installation Rs. 30,000
One-year service Rs. 45,000

ML sold a machine on 1 May 2011, charging a reduced price of Rs. 100,000 including
installation and one year’s service. ML only offers discounts when customers purchase a
package of products together.

According to IFRS 15 Revenue from Contracts with Customers, how much should ML record in
revenue for the year ended 31 December 2011?

Rs. ___________

17. Car Limited (CL) sold a large number of vehicles spare parts to a new customer for Rs. 10
million on 1 July 2017. The customer paid Rs. 990,000 up front and agreed to pay the remaining
balance on 1 July 2018. CL has a cost of capital of 6%.

How much should initially be recorded in revenue in respect of the sale of vehicles spare parts in
the statement of profit or loss for the year ended 31 December 2017?

Rs. __________

18. Golden Limited enters into a contract with a major chain of retail stores. The customer commits
to buy at least Rs.20m of products over the next 12 months. The terms of the contract require
Golden Limited to make a payment of Rs.1 m to compensate the customer for changes that it
will need to make to its retail stores to accommodate the products.

By the 31 December 2011, Golden Limited has transferred products with a sales value of Rs.4m
to the customer.

How much revenue should be recognized by Golden Limited in the year ended 31 December
2011?

Rs. ___________

Latest update: March 2020

 CAF 5 – IFRS 15

19. Silver Limited sells a machine and one year’s free technical support for Rs. 100,000. It usually
sells the machine for Rs. 95,000 but does not sell technical support for this machine as a
standalone product. Other support services offered by Silver Limited attract a markup of 50%. It
is expected that the technical support will cost Silver Limited Rs. 20,000.

How much of the transaction price should be allocated to the technical support?

Rs. ___________ Page | 47

20. Jupiter Limited (JL) entered into a two-year contract on 1 January 2017, with a customer for the
maintenance of computer network. JL has offered the following payment options:

Option 1: Immediate payment of Rs. 200,000.

Option 2: Payment of Rs. 110,000 at the end of each year.

The applicable discount rate is 6.596%.

What amount of revenue should be recognized under option 2 on 31 December 2017?

Rs. ___________

21. Which two standards have been replaced by IFRS 15 Revenue from Contracts with Customers?
(a) IAS 20 Government Grants and IAS 36 Impairment of Assets
(b) IAS 36 Impairment of Assets and IAS 11 Construction Contracts
(c) IAS 18 Revenue and IAS 20 Government Grants
(d) IAS 18 Revenue and IAS 11 Construction Contracts

22. The accounting principle applied by IFRS 15 when determining whether or not revenue should
be recognized in respect of a repurchase agreement is:
(a) Prudence
(b) Relevance
(c) Substance over form
(d) Verifiability

23. With regard to the definition of revenue given by IFRS 15, which of the following statements is
true?
(a) Revenue includes cash received from share issues
(b) Revenue includes cash received from borrowings
(c) Revenue may arise from either ordinary activities or extraordinary activities
(d) Revenue arises from ordinary activities only
24. Identifying contract with customer under IFRS 15, a contract with customer exist when all the
following criteria are met when;
(a) It is approved and enforceable, can identify each party rights, payment terms, and
probable to collect consideration
(b) It is approved, can identify each party rights, payment terms, has commercial substance
and probable to collect consideration
(c) It is approved and enforceable, can identify each party rights, has commercial substance
and probable to collect consideration
(d) It is approved, can identify payment terms, has commercial substance and probable to
collect consideration
25. Step 1, “identifying the contract” of IFRS 15 states that certain conditions must be satisfied
before an entity can account for a contract with a customer. Which of the following is not one of
these conditions?
(a) Each party's rights with regard to the goods or services concerned can be identified
(b) The payment terms can be identified
(c) The entity and the customer have approved the contract and are committed to perform
their contractual obligations
(d) It is certain that the entity will collect the consideration to which it is entitled

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 CAF 5 – IFRS 15

26. Step two requires the identification of the separate performance obligations in the contract. This
is often referred to as unbundling and is done at beginning of a contract. What is the key factor
in identifying a separate performance obligation?
(a) The passing of the risks and rewards to the customer
(b) The distinctiveness of the good or service
(c) The identification of the payment terms
(d) The enforceability of the contract
Page | 48
27. Step three requires the entity to determine the transaction price. This is the amount of
consideration that an entity expects to be entitled to in exchange for the promised goods or
services. The transaction price might include variable or contingent consideration.

How does the entity estimate the amount of the variable consideration?
(a) The expected value or the most likely amount whichever best predicts the consideration
(b) The lower of the expected value or the most likely amount
(c) The choice of the expected value or the most likely amount
(d) The higher of the expected value or the most likely amount

28. Step 4 requires the allocation of the transaction price to separate performance obligations. The
allocation is based on the relative standalone selling prices of the goods or services promised
and are made at inception of the contract. It is not adjusted to reflect subsequent changes in the
standalone selling prices of those goods or services. What is the best evidence of standalone
selling price?
(a) An estimate that maximizes the use of observable inputs
(b) The observable price of a good or service when the entity sells that good or service
separately
(c) Unadjusted market prices for similar goods or services
(d) Expected cost

29. Step 5 allows an entity to recognize revenue when (or as) each performance obligation is
satisfied. Revenue is recognized in line with the pattern of transfer. If an entity does not satisfy
its performance obligation over time, it satisfies it at a point in time and revenue will be
recognized when control is passed at that point in time. Which of the following factors may not
indicate the passing of control?
(a) The present right to payment for the asset
(b) The customer has legal title to the asset
(c) The entity has physical possession but has transferred a portion of the economic risks
(d) The entity has transferred physical possession of the asset

30. Which of the following is true regarding discounts offered on a bundle of products/services?
(a) The discount should be applied across each performance obligation in the contract
(b) The discount should be recorded within cost of sales
(c) The discount should be applied to the largest component of the contract
(d) The discount should be recorded as an administrative cost

31. An entity can only include variable consideration in the transaction price to the extent that it is
highly probable that a subsequent change in the estimated variable consideration will not result
in a significant revenue reversal. What action should the entity take if it is not appropriate to
include all of the variable consideration in the transaction price?
(a) The entity should not include any of the variable consideration
(b) The entity can use its judgment in all matters such as this
(c) The entity should assess whether it should include part of the variable consideration
subject to the revenue reversal test
(d) The entity should assess whether it should include part of the variable consideration
without the need to use the revenue reversal test

Latest update: March 2020

 CAF 5 – IFRS 15

32. Which one of the following condition is not allow when performance condition to be satisfied
over time?
(a) the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs
(b) the entity’s performance creates or enhances an asset that the customer controls as the
asset is created or enhance
(c) they customer has paid the consideration in advance and goods / services are still to be
received Page | 49
(d) the entity’s performance does not create an asset with an alternative use to the entity

33. In general, contract costs incurred in relation to a contract with a customer must be:
(a) Recognized as an expense when incurred
(b) Recognized as an asset if they relate to a performance obligation which has been satisfied
(c) Recognized as an asset if they are not expected to be recovered
(d) Recognized as an asset if they relate to a performance obligation which has not yet been
satisfied

34. A company enters into a construction contract to build a warehouse for a customer. The agreed
price is Rs.20 million and the specified completion date is 31 October 2020. However, the
contract provides that the company should receive an incentive payment of a further Rs.2.5
million if the warehouse is completed before 30 June 2020. Similarly, the price will be reduced
by Rs. 2 million if the warehouse is not completed until after 31 December 2020.

The company estimates that there is a 15% probability that the warehouse will be completed
before 30 June 2020, an 80% probability that it will be completed by 31 October 2020 and a 5%
probability that it will not be completed until after 31 December 2020.

What is the expected value of the transaction price for this contract?
(a) Rs. 20 million
(b) Rs. 20.275 million
(c) Rs.20.5 million
(d) Rs.20.75 million

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 CAF 5 – IFRS 15

Page | 50

Latest update: March 2020

 CAF 5 – IFRS 15

OBJECTIVE BASED ANSWERS

01. (b) Assessing the likelihood of economic benefits is not one of the five steps. It
is one of the criteria for identifying the contract with customer.

02. (d) As an agent, WL should only record the commission of Rs. 10 million in
revenue. As the cash has been received, WL must record that in cash and Page | 51
create a payable for Rs. 90 million to Dolphin.

03. (c) There are two performance obligations here. The sale of the equipment
should be recognizing at a point in time, and the revenue in relation to the
support should be recognized over time. The services element costs Rs.
300,000 a year.
As CL makes a margin of 20% a year, this would be sold for Rs. 375,000
per year (300,000 × 100/80). Therefore, the total revenue on the service for
2 years = Rs. 375,000 × 2 = Rs. 750,000.
The revenue on the goods = Rs.4m – Rs. 750,000 = Rs. 3,250,000.
The revenue in relation to the service is released over 2 years.
By 31 December, 4 months of the service has been performed so can be
recognized in revenue (Rs. 375,000 × 4/12 = Rs. 125,000).
Therefore, the total revenue = Rs.3,250,000 + Rs.125,000 = Rs.3,375,000

04. (c) Although the invoiced amount is Rs. 180,000, Rs. 30,000 of this has not yet
been earned and must be deferred until the servicing work has been
completed. This is only correct inclusion in sales.

05. (d) The revenue in relation to the installation and the machine itself can be
recognized, with the revenue on the service recognized over time as the
service is performed. The service will be recognized over the 2-year period.
By 31 December 2017, 2 months of the service has been performed.
Therefore, Rs. 20,000 can be recognized (Rs. 240,000 × 2/24). Total
revenue is therefore Rs. 580,000, being the Rs. 800,000 less the Rs.
220,000 relating to the service which has not yet been recognized.

06. (d) Discounts should be applied evenly across the components of a sale unless
any one element is regularly sold separately at a discount. As entity does
not sell the service and installation separately, the discount must be applied
evenly to each of the three elements.

07. (b) Revenue as an agent is made by earning commission. Therefore, the

revenue on these sales should only be Rs. 600,000 (10% of Rs. 6 million).
As CL currently has Rs. 6 million in revenue, Rs. 5.4 million needs to be
removed, with Rs. 5.4 million also removed from cost of sales.

08. (c)
Product Allocated price
Product A 40 Remaining amount
Product B 33 (55/100 x Rs. 60)
Product C 27 (45/100 x Rs. 60)
Total 100
The entire discount relates to Product B and C as when Product A is added
it total stand-alone price has been added in the package price.

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 CAF 5 – IFRS 15

09. (b)
Product Allocated price
Product A 33 (Rs. 50 / Rs. 150 × Rs. 100)
Product B 17 (Rs. 25 / Rs. 150 × Rs. 100)
Product C 50 (Rs. 75 / Rs. 150 × Rs. 100)
Total 100
Page | 52
10. (b) For item (b) the sale of the goods has fulfilled a contractual obligation so the
revenue in relation to this can be recognized. The service will be recognized
over time, so the revenue should be deferred and recognized as the
obligation is fulfilled.
For item (a) HL acts as an agent, so only the commission should be
included in revenue.
For item (c) any profit or loss on disposal should be taken to the statement
of profit or loss. The proceeds should not be included within revenue.
For item (d) the Rs. 1 million should be initially discounted to present value
as there is a significant financing component within the transaction. The
revenue would initially be recognized at Rs. 826,000, with an equivalent
receivable. This receivable would then be held at amortized cost with
finance income of 10% being earned each year.

11. (d) At 31 March 2015, the deferred consideration of Rs. 12.65 million would
need to be discounted by 10% for one year to Rs. 11.5 million (effectively
deferring a finance cost of Rs. 1.15 million).
The total amount credited to profit or loss would be Rs. 24.15 million (12.65
million + 11.5 million).

12. (b) Recognizing revenue when a performance obligation is satisfied, it may be

a point in time or over time.

13. (b) The commission to sales employees is incremental to obtaining the contract
and should be capitalized as a contract asset. The external legal fees and
the travelling cost are not incremental to obtaining the contract because
they have been incurred regardless of whether X Limited obtained the
contract or not.

14. (c) The receivable is recorded when unconditional right to receive payment is
established and as entity has not performed its performance obligation yet;
a contract liability shall be recognized.

15. (c) Revenue Rs. 9,700 (97 x Rs. 100 for products expected to be not returned)
and remaining as contract liability.

16. Rs. 90,000 The discount should be allocated to each part of the bundled sale.
Applying the discount across each part gives revenue as follows:
Goods Rs. 50 (Rs. 75 × Rs. 100/Rs. 150)
Installation Rs. 20 (Rs. 30 × Rs. 100/Rs. 150)
Service Rs. 30 (Rs. 45 × Rs. 100/Rs. 150)
The revenue in relation to the goods and installation should be recognized
on 1 May 2011.
As 8 months of the service has been performed (from 1 May to 31
December 2011), then Rs. 20 should be recognized (Rs. 30 × 8/12).
This gives a total revenue for the year of 50 + 20 + 20 = Rs. 90.

Latest update: March 2020

 CAF 5 – IFRS 15

17. Rs. 9,490,000 The fact that CL has given the customer a year to pay on such a large
amount suggests there is a significant financing component within the sale.
The Rs. 990,000 received can be recognized in revenue immediately. The
remaining Rs. 9.01 million must be discounted to its present value of Rs.
8.5 million. This is then unwound over the year, with the interest recognized
as finance income.
Therefore, total initial revenue = Rs. 990,000 + Rs. 8,500,000 = Rs.
Page | 53
9,490,000.

18. Rs. 3,800,000 The payment made to the customer is not in exchange for a distinct good or
service. Therefore, the Rs.1m paid to the customer is a reduction of the
transaction price.
The total transaction price is being reduced by 5% (Rs.1m/Rs.20m).
Therefore, Golden Limited reduces the transaction price of each good by
5% as it is transferred. By 31 December 2011, Golden Limited should have
recognized revenue of Rs.3.8m (Rs.4m × 95%).

19. Rs. 24,000 The selling price of the service would be Rs. 30,000 (Rs. 20,000 × 150%).
The total standalone selling prices of the machine and support are Rs.
125,000 (Rs. 95,000 + Rs. 30,000).
The transaction price allocated to the machine is Rs. 76,000 (Rs. 95,000 ×
100,000 / 125,000). The transaction price allocated to the technical support
is Rs.24, 000 (Rs.30, 000 × 100,000 / 125,000).

20. Rs. 110,000 No need to calculate present value under option 2 as cash is being received
exactly when performance obligation is being satisfied.

21. (d)

22. (c)

23. (d)

24. (b)

25. (d)

26. (b)

27. (a)

28. (b)

29. (c)

30. (a)

31. (c)

32. (c)

33. (d)

34. (b) (20 x 80%) + (22.5 x 15%) + (18 x 5%) = Rs. 20.275 million

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 CAF 5 – IAS 1

Statement of
IAS 1 Changes in Equity 10
Page | 1
INTRODUCTION
A change in equity is simply the increase or decrease in the net assets of
the entity.

Overview The statement of changes in equity separates owner and non-owner

changes in equity in the following manner:
 transactions with owners; and
 non-owner changes in equity, i.e. total comprehensive income.
Statement of changes in equity helps users of financial statement to identify
the factors that cause a change in the owners' equity over the accounting
periods.

It is important to note that the Statement of financial position provides

information about the financial position of the business by presenting total
assets, liabilities and equity. Income statement on the other hand provides
information about how business has performed during the year and how
much income has been generated against the expenses and liabilities
incurred.

But shareholders are interested in knowing how the business’ financial

position and financial performance has impacted their interest in the
business. And this is not particularly addressed by Statement of Financial
Position or Income Statement.
Purpose and
importance
Thus, statement of changes in equity actually tells the users about the
status of owner’s equity at the beginning of the financial period, how it
has changed during the year and the status of equity at the end of the
period.

Therefore, through Statement of Changes in Equity users, especially

shareholders can get great insights about the effects of business
operations and related factors on the wealth of the owners invested in the
business.

Examples of the information provided in the statement of changes in equity

include share capital issue and redemption during the period, the effects of
changes in accounting policies and correction of prior period errors, gains
and losses recognised outside profit or loss, dividends and bonus shares
issued during the period.

© kashifadeel.com
 CAF 5 – IAS 1

CONTENTS OF SOCIE
A statement of changes in equity shows for each component of equity the amount at the
beginning of the period, changes during the period, and its amount at the end of the period.
It includes:
 Share capital
Page | 2  Share premium
Transactions
 Redemption
with owners
 Dividend
 Bonus shares
 Right issue
It includes:
 Profit for the year
 Other Comprehensive income
 revaluation surplus
Total
 gains and losses on available for sale financial assets
comprehensive
 actuarial gains and losses on defined benefit plans
income
 gains and losses on effective cash flow hedge
 gains and losses on translation of foreign operations

The last four are not examinable at this level.

RELEVANT TERMINOLOGY
Share capital is the sum of all funds raised by the company in the form of
Share Capital
ordinary shares and preference shares.
Preference shares confer preferential rights for their holders such
entitlement to a dividend out of profits before ordinary shareholders. Once
Preference
the preference dividend has been paid, the remaining profit 'belongs' to the
shares
ordinary shareholders at the discretion of the board of directors of the
company.
Preference shares are of two types: redeemable and irredeemable. Only
Redeemable
irredeemable preference shares are treated as share capital. Redeemable
vs
Preference shares which the company is entitled to redeem in future are
Irredeemable
treated as non-current liabilities.
It is the maximum amount of share capital that a company is authorized to
Authorized raise. A company does not usually issue the full amount of its authorized
Share Capital share capital. Instead, some of it is held by the company for possible future
use.
A company may elect to only issue a portion of the total share capital with
the plan of issuing more shares at a later date. Issued share capital is the
Issued Share
total value of the shares a company sells. The issued share capital of a
Capital
company is the par value of the shares that have actually been issued to
shareholders.
When a company issues its authorised share capital, some part of it may
Subscribed
not be subscribed by the investors. Subscribed share capital is the
Share Capital
monetary value of all the shares that the investors have committed to buy.
Paid up Paid-up share capital is the amount of money a company has received from
Share Capital shareholders in exchange for its shares.

Latest update: March 2020

 CAF 5 – IAS 1

The difference between the par value of a company’s shares and the total
amount a company received for shares is called Share premium.
Share
premium
Example: if a Rs. 10 share is sold for Rs, 12 then Rs. 2 is the share
premium.
It is the distribution of profits to shareholders. Many companies pay Page | 3
dividends in two stages during the course of their accounting year.
 In mid-year, after the half-year financial results are published, the
company might pay an interim dividend.
Dividend  At the end of the year, the company might propose a further final
dividend.

The proposed dividend is not accounted for, instead it is disclosed in the

notes to the accounts.
These shares are distributed by a company to its current shareholders free
of charge. A bonus issue does not involve any cash inflow. The company
Bonus shares
converts some of its reserves (share premium or retained earnings or both)
into new fully-paid share capital issued at its par value.
It is an invitation to existing shareholders to purchase additional new
Right issue shares in proportion to their shareholding in the company at a discount to
the market price on a stated future date.
Retained earnings comprise the income (profits and gains less losses) that
the company retains within the business, ie, income that has not been paid
out as dividends or transferred to any other reserve. A company might hold
retained earnings that it has no intention of distributing to owners as a
Retained
dividend at any time in the future in a general reserve rather than in
Earnings
retained earnings.

A debit balance on the retained earnings account indicates that the

company has accumulated losses.
The result of an upward revaluation of a non-current asset is a 'revaluation
surplus'. The amount accumulated in revaluation surplus is non-
Revaluation distributable, as it represents un-realised profits on the revalued assets. It
Surplus is another capital reserve. The revaluation surplus can only become
realised if the asset is sold. The revaluation surplus may diminish if an
asset which had previously been revalued upwards is devalued later.
Capital reserves are statutory reserves which a company is required to set
Capital
up by law, and which are not available for the distribution of dividends.
Reserves
Examples include: share premium, revaluation, contingencies.
Revenue reserves are non-statutory reserves consisting of profits which
Revenue
are distributable as dividends at the discretion of the company. These are
Reserves
also called general reserves.
It is the reacquisitions of the entity’s own equity instruments. A company
Redemption may redeem its shares for a number of reasons such as to buy out certain
shareholders or to provide an exit strategy to a third-party investor.

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 CAF 5 – IAS 1

ACCOUNTING FOR SHARE ISSUE

When an entity issues new ordinary shares:
 the issued shares become a part of equity, and
 the entity receives cash from the issue, or possibly assets other than
Page | 4 cash (for which a carrying value is determined).

Issue of The issue price of new equity shares is usually higher than their face value or
equity nominal value. The difference between the nominal value of the shares and
shares their issue price is accounted for as share premium and credited to a share
premium reserve. (This reserve is a part of equity).

Dr. Bank
Cr. Share capital (nominal amount)
Cr. Share premium (excess)
Transaction costs of issuing new equity shares for cash should be debited
directly to equity.

The costs of the issue, net of related tax benefit, are set against the share
Transaction
premium account. (If there is no share premium on the issue of the new
costs
shares, issue costs should be deducted from retained earnings).

Dr. Share premium / Retained earnings

Cr. Bank
A bonus issue of shares (also called a scrip issue or a capitalisation issue) is
an issue of new shares to existing shareholders, in proportion to their existing
shareholding, for no consideration. In other words, the new shares are issued
‘free of charge’ to existing shareholders.
Bonus
issue The new shares are created by converting an equity balance from the
statement of financial position into ordinary share capital.

Dr. Share premium / Retained earnings

Cr. Share Capital (nominal amount)
Payment of cash for redemption of shares
Debit Share Capital
Credit Bank
Redemption
Transfer from distributable reserves to capital reserve on redemption
Debit Retained earnings
Credit Capital repurchase reserve account

Latest update: March 2020

 CAF 5 – IAS 1

REQUIREMENT OF IAS 1 / FORMAT

In accordance with the requirements of IAS 1, an entity is required to present a statement of
changes in equity which includes the following information:
(a) total comprehensive income for the period
for each component of equity, the effects of retrospective application or retrospective
(b) Page | 5
restatement recognised in accordance with IAS 8 [not examinable at this level]
for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of period separately disclosing changes resulting from:
 profit or loss;
(c)
 other comprehensive income; and
 transactions with owners in their capacity as owners showing separately
contributions by and distributions to owners

Entity name
Statement of Changes in Equity
For the year ended ______________

Revaluation
repurchase
premium

Retained
earnings

Surplus
General
reserve
reserve
Capital

Capital
Share

Share

Total
-------------------------------RUPEES--------------------------
Balance at 1 Jan. 2019 100 20 50 20 20 210
Effect of change in policy* 0
Effect of correction of error* 0
Restated balance 100 20 50 20 20 210
Total comprehensive income 25 - 20 45
Bonus issue 30 (20) (10) -
Right issue 50 15 65
Redemption (10) 10 (13)
Dividend (5) (5)
Transfer to general reserve (10) 10 0
Incremental depreciation 4 (4) 0
Balance at 31 Dec. 2019 170 12 54 30 36 302
*Not examinable at this level.

© kashifadeel.com
 CAF 5 – IAS 1

SYLLABUS
Reference Content/Learning outcome

IAS 1 Preparation of financial statements (preparation of statement of

A1
changes in equity only)
Page | 6 Prepare statement of changes in equity in accordance with the guidance in IAS
LO1.1.1
1 from data and information provided
Proficiency level: 2
Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
07 -
Objective Types - 01

PRACTICE Q&A
Sr.# Description Marks Reference
PRACTICE
1H SMS Limited 04 ST
2H Pak Ocean Limited (CAF 7) 07 PE S15*
3C Daffodil Limited (CAF 7) 10 PE S18*
4H MK Corporation Limited 10 QB
5H HMK Corporation Limited I 10 QB
6C HMK Corporation Limited II 10 QB
7C Wednesday Limited 07 PE A19

Latest update: March 2020

 CAF 5 – IAS 1

QUESTION 01
The equity of SMS Ltd as on December 31, 2018 is as follows:
Total equity at the beginning of the year: Rs. in million
- Share Capital (@ Rs. 10 fully paid ordinary shares) 3,000
- Share premium 1,900
- Retained earnings 4,500
Profit for the year 400 Page | 7
Dividends declared and paid (300)
Total equity at the end of the year 9,500

The company made a bonus issue of 2 to 1.

Required:
Make the statement of changes in equity using the above figures. (04)

QUESTION 02
The following information pertains to draft financial statements of Pak Ocean Limited (POL)
for the year ended 31 December 2018.
Shareholders' equity as at 1 January 2018 was as follows: Rs m
Share capital (Rs. 100 each) 200
Retained earnings 45

Profit after tax 78

Other comprehensive income (Gain on revaluation) 12
Incremental depreciation on revaluation of property, plant and equipment 1.5

On 30 November 2018, POL issued 25% right shares to its ordinary shareholders at Rs. 120
per share.

Final cash dividend for 2017 @ 18% was declared.

Bonus issue declared during the year ended 31 December 2018:

Interim (declared with half yearly accounts) 10%
Final 25%

Required:
Make the statement of changes in equity using the above figures. (07)

© kashifadeel.com
 CAF 5 – IAS 1

QUESTION 03
For the purpose of preparation of statement of changes in equity for the year ended 31
December 2017, Daffodil Limited (DL) has extracted the following information:

2017 2016 2015

Draft Audited Audited
Page | 8
--------- Rs. in million ---------
Net profit 650 318 214
Transfer to general reserves 112 - 141
Transfer of incremental depreciation - 49 55
Final cash dividend – - 7.5%

Additional information:
(i) Details of share issues:
 25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market
price per share immediately before the entitlement date was also Rs. 18 per
share.
 A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
 50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The
market price per share immediately before the entitlement date was Rs. 25 per
share.
 A bonus issue of 15% was made on 1 September 2017 as interim dividend.

(ii) Share capital and reserves as at 31 December:

2015 2014
------ Rs. in million ------
Ordinary share capital (Rs. 10 each) 1,600 1,600
General reserves 1,801 1,709
Revaluation Surplus 49 104
Retained earnings 1,430 1,302

Required:
Prepare DL’s statement of changes in equity for the year ended 31 December 2017 along
with comparative figures. (Ignore taxation) (10)

Latest update: March 2020

 CAF 5 – IAS 1

QUESTION 04
MK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of
manufacturing and sale of yarn products. Company year-end is December. Below is the
relevant information given:

Opening balances as at January 01, 2018 Rs.

Page | 9
Opening Share Capital (at par value of Rs. 10 per share) 25,000,000
Share Premium 7,500,000
Opening General Reserves 750,000
Opening RE 18,250,000
Revaluation Surplus 1,500,000

Following events have taken place in year 2018 and 2019:

(a) On March 31, 2018, Company issued Right shares for Rs. 20 per share. Right shares
were issued in the proportion of 1 right share against 5 ordinary shares held.
(b) Board of Directors of the Company approved Interim dividend of Rs. 2.25 per share
for the half year ended June 30, 2018.
(c) Annual profit for the year ended December 31, 2018 is Rs. 10,250,000.
(d) The Board of Directors of the Company recommended annual dividend of Rs. 4.25
per share on February 15, 2019, which was duly approved by the Shareholders on
March 21, 2019.
(e) The Board of Directors approved Bonus Shares of 20% of the Outstanding shares on
June 30, 2019 which were duly credited in Shareholders account on August 31,
2019.
(f) Board of Directors of the Company approved Interim dividend of Rs. 1.25 per share
for the third quarter ended September 30, 2019.
(g) Annual profit for the year ended December 31, 2019 is Rs. 12,500,000.
(h) The Board of Directors of the Company recommended annual dividend of Rs. 5 per
share on February 15, 2020, which was duly approved by the Shareholders on March
21, 2020.
(i) The Company has a policy to transfer 5% of the Annual Profit to General Reserves.
(j) Company revalued Fixed assets on December 31, 2017 resulting in Revaluation
Surplus of Rs. 1,000,000. Remaining useful life of the Asset is 10 years and
Company has a straight-line method for Depreciation.

Required:
Make Statement of Changes in Equity for the year ended December 31, 2018 and 2019.
Ignore taxation impact if any. (10)

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 CAF 5 – IAS 1

QUESTION 05
HMK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of
manufacturing and sale of Cars. Company year-end is December. Below is the relevant
information given:
Opening balances as at January 01, 2018 Rs.
Page | 10 Opening Share Capital (at par value of Rs. 10 per share) 100,000,000
Share Premium 50,000,000
Opening General Reserves 5,000,000
Opening RE 55,000,000

Following events have taken place in year 2018 and 2019:

(a) On February 28, 2018, the Company issued Initial Public Offering, thereby offering 5
million shares for Rs. 25 each. All shares were subscribed, and company received
the subscription money by March 31, 2018.
(b) The Board of Directors of the Company recommended annual dividend for the year
ended December 31, 2017 of Rs. 5 per share on February 15, 2018, whereas
Shareholders only approved Rs. 4 per share on March 31, 2018.
(c) Board of Directors of the Company approved Interim dividend of Rs. 1 per share for
the third quarter ended September 30, 2018.
(d) Annual profit for the year ended December 31, 2018 is Rs. 130,250,000.
(e) The Board of Directors of the Company recommended annual dividend of Rs. 4.25
per share on February 15, 2019, whereas Shareholders approved Rs. 6 per share on
March 31, 2019.
(f) The Board of Directors approved Bonus Shares of 10% of the Outstanding shares on
June 30, 2019 which were duly credited in Shareholders account on August 31,
2019.
(g) Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for
the third quarter ended September 30, 2019.
(h) Annual profit for the year ended December 31, 2019 is Rs. 175,000,000.
(i) The Board of Directors of the Company recommended annual dividend of Rs. 5.5 per
share on February 15, 2020, which was duly approved by the Shareholders on March
31, 2020.
(j) The Company has a policy to transfer 5% of the Annual Profit to General Reserves.

Required
Make Statement of Changes in Equity for the year ended December 31, 2018 and 2019.
Ignore taxation impact if any. (10)

Latest update: March 2020

 CAF 5 – IAS 1

QUESTION 06
HMK corporation Limited, an entity listed in Pakistan Stock Exchange is in the business of
manufacturing and sale of Cars. Company year-end is December. Below is the relevant
information given:
Opening balances as at January 01, 2018 Rs.
Opening Share Capital (at par value of Rs. 10 per share) 100,000,000
Page | 11
Share Premium 50,000,000
Opening General Reserves 5,000,000
Opening RE 55,000,000

Following events taken place in year 2018 and 2019:

(a) On February 28, 2018, the Company issued Initial Public Offering, thereby offering 5
million shares for Rs. 25 each. Only 75% shares were subscribed, and company
received the subscription money by March 31, 2018.
(b) The Board of Directors of the Company recommended annual dividend for the year
ended December 31, 2017 of Rs. 5 per share on February 15, 2018, whereas
Shareholders only approved Rs. 4 per share on March 31, 2018.
(c) Board of Directors of the Company approved Interim dividend of Rs. 1 per share for
the third quarter ended September 30, 2018.
(d) Annual profit for the year ended December 31, 2018 is Rs. 175,000,000.
(e) The board of directors has declared a final dividend for the year ended 31 December
2018 at the rate of Rs. 1.5 per share on February 15, 2019, which was duly approved
by Shareholders on March 21, 2019.
(f) The Board of Directors approved Bonus Shares of 10% of the Outstanding shares on
June 30, 2019 which were duly credited in Shareholders account on August 31,
2019.
(g) Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for
the third quarter ended September 30, 2019.
(h) Annual profit for the year ended December 31, 2019 is Rs. 185,250,000.
(i) The board of directors has declared a final dividend for the year ended 31 December
2019 at the rate of Rs. 1.75 per share on February 18, 2020 which was duly
approved by Shareholders on March 25, 2020.
(j) The Company has a policy to transfer 5% of the Annual Profit to General Reserves.

Required
Make Statement of Changes in Equity for the year ended December 31, 2018 and 2019.
Ignore taxation impact if any. (10)

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 CAF 5 – IAS 1

QUESTION 07
The following information pertains to Wednesday Limited (WL) for the year ended 30 June
2019:
(i) Shareholders' equity as at 1 July 2018:
Rs. in million
Share capital (Rs. 100 each) 200
Page | 12
Share premium 85
Retained earnings 124
Revaluation surplus 65

(ii) On 30 November 2018, WL issued 30% right shares at a premium of Rs. 120 per
share.

(iii) Cash dividend and bonus shares for the last two years:
Final dividend *Interim dividend
For the year ended
Cash Bonus Cash Bonus
30 June 2018 18% - 20% -
30 June 2019 - 25% - 10%
*Declared with half yearly accounts

(iv) Profit for the year amounted to Rs. 95 million.

(iv) Revaluation surplus arising during the year amounted to Rs. 35 million whereas
transfer of incremental depreciation for the year was Rs. 9 million.

Required:
Prepare WL’s Statement of Changes in Equity for the year ended 30 June 2019. (07)
(Column for total and comparative figures are not required)

Latest update: March 2020

 CAF 5 – IAS 1

ANSWER 01
SMS Limited
Statement of Changes in Equity for the year ended 31 December 2019
Share Share Retained
Total
Capital premium earnings
Rupees in million Page | 13
Balance at 1 Jan. 2019 3,000 1,900 4,500 9,400
Total comprehensive income 400 400
Bonus issue 6,000 (1,900) (4,100) -
Dividend (300) (300)
Balance at 31 Dec. 2019 9,000 - 500 9,500

ANSWER 02
Pak Ocean Limited
Statement of Changes in Equity for the year ended 31 December 2018
Share Share Retained Revaluation
Total
Capital premium earnings Surplus
Rupees in million
Balance at 1 Jan. 2019 200 - 45 - 245
Total comprehensive income 78 12 90
Bonus issue 10% x 200 20 (20) -
Right issue 25% x 220 55 11 66
Dividend 18% of 200 (36) (36)
Incremental depreciation 1.5 (1.5) -
Balance at 31 Dec. 2019 275 11 68.5 10.5 365

ANSWER 03
Daffodil Limited
Statement of Changes in Equity for the year ended 31 December 2017
Share Share General Reval. Retained
premium Reserves Surplus Total
capital earnings
Rs. in million
Balance at 31 December 2015 1,600 1,801 49 1,430 4,880
Final cash dividend 2015
(1,600 x 7.5%) (120) (120)
Right issue @25%
(at Rs. 18 per share) 400 320 720
Net Profit 318 318
Transfer - incremental depreciation (49) 49 -
Balance at 31 December 2016 2,000 320 1,801 - 1,677 5,798
Final bonus dividend 2016
(2,000 x 10%) 200 (200) -
Right issue
(50m @ Rs. 15 per share) 500 250 750
Interim bonus dividend
(2700 x 15%) 405 (405) -
Net Profit 650 650
Transfer to General reserves 112 (112) -
Balance at 31 December 2017 3,105 570 1,913 - 1,610 7,198

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 CAF 5 – IAS 1

ANSWER 04
Statement of Changes in Equity
For the year ended 31 December 2019
Share Share General Retained Revaluation
Total
Description Capital Premium Reserves Earnings Surplus
Rs.000
Page | 14 Balance 1 Jan 2018 25,000 7,500 750 18,250 1,500 53,000
Issuance of Right Shares 5,000 5,000 10,000
Interim Dividend (6,750) (6,750)
Profit for the year 10,250 10,250
Transfer 512.5 (512.5) -
Incremental depreciation 150 (150) -
Balance 1 Jan 2019 30,000 12,500 1,262.5 21,387.5 1,350 66,500
Annual Dividend (12,750) (12,750)
Bonus Shares 6,000 (6,000)
Interim Dividend (4,500) (4,500)
Profit for the year 12,500 12,500
Transfer 625 (625)
Incremental depreciation 150 (150)
Balance 31 Dec 2019 36,000 6,500 1,887.5 16,162.5 1,200 61,750

ANSWER 05
Statement of Changes in Equity
For the year ended 31 December 2019
Share Share General Retained
Total
Description Capital Premium Reserves Earnings
Rs. 000
Balance at 1 Jan 2018 100,000 50,000 5,000 55,000 210,000
Issuance of Shares under IPO 50,000 75,000 - - 125,000
Annual Dividend 2017 (40,000) (40,000)
Interim Dividend 2018 (15,000) (15,000)
Profit for the year 130,250 130,250
Transfer 6,512.5 (6,512.5)
Balance 1 Jan 2019 150,000 125,000 11,512.5 123,737.5 410,250
Annual Dividend 2018 (63,750) (63,750)
Bonus Shares 15,000 (15,000)
Interim Dividend 2019 (24,750) (24,750)
Profit for the year 175,000 175,000
Transfer 8,750 (8,750) -
Balance at 31 December 2019 165,000 110,000 20,262.5 201,487.5 496,750

Latest update: March 2020

 CAF 5 – IAS 1

ANSWER 06
Statement of Changes in Equity
For the year ended 31 December 2019
Share Share General Retained
Total
Description Capital Premium Reserves Earnings
Rs. 000
Balance 1 Jan 2018 100,000 50,000 5,000 55,000 210,000 Page | 15
Issuance of Shares under IPO 37,500 56,250 - - 93,750
Annual Dividend (40,000) (40,000)
Interim Dividend (13,750) (13,750)
Profit for the year 175,000 175,000
Transfer 8,750 (8,750)
Balance at 1 Jan 2019 137,500 106,250 13,750 167,500 425,000
Annual Dividend (20,625) (20,625)
Bonus Shares 13,750 (13,750)
Interim Dividend (22,687.5) (22,687.5)
Profit for the year 185,250 185,250
Transfer 9,262.5 (9,262.5)
Balance at 31 Dec 2019 151,250 92,500 23,012.5 300,175 566,937.5

ANSWER 07
Wednesday Limited
Statement of changes in equity
For the year ended 30 June 2019
Share Share Retained Revaluation
capital premium earnings surplus
--------------- Rs. in million ---------------
Balance as at 1 July 2018 (As given) 200 85 124 65
Final cash dividend 200 x 18% (36)
Right issue @ 30% 60 72
Interim bonus dividend 260 x 10% 26 (26)
Total comprehensive income 95 35
Transfer of incremental depreciation 9 (9)
Balance as at 30 June 2019 286 157 166 91

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 CAF 5 – IAS 1

Page | 16

Latest update: March 2020

 CAF 5 – IAS 1

ICAP OBJECTIVE BASED QUESTIONS

01. Which TWO of the following are separately identified in statement of changes in equity?
(a) Profit for the year
(b) Transactions with owners
(c) Other comprehensive income
(d) Non-owner changes in equity
Page | 17
02. Which of the following is not considered transaction with owners with reference to statement of
changes in equity?
(a) Share capital
(b) Redemption of equity shares
(c) Profit for the year
(d) Bonus issue of shares (no cash received from owners)

03. The maximum amount of share capital that a company is authorized to raise is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

04. The total value of shares a company offers to subscribe is called:

(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

05. The monetary value of all the shares that the investors have committed to buy is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

06. The amount of money a company has received from shareholders in exchange for its shares is
called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

07. Which of the following issued by an entity is treated as liability?

(a) Ordinary share capital
(b) Redeemable preference share capital
(c) Irredeemable preference share capital
(d) None of above

08. A debit balance on the retained earnings account indicates that:

(a) The company has made more dividend payments than the profit earned.
(b) the company has accumulated losses
(c) the company has redeemed some of its share capital
(d) the company has issued bonus shares

09. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It
has share capital of Rs. 500 million. During the year company has declared interim dividend of
10%.
How this dividend shall be presented in financial statements for the year ended 30 June 2019?
(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
(c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.

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 CAF 5 – IAS 1

10. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It
has share capital of Rs. 500 million. The board of directors proposed a final dividend of 10%
just after the year end, for the year ended 30 June 2019
How this dividend shall be presented in financial statements for the year ended 30 June 2019?
(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
Page | 18 (c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.

11. Which TWO of the following are usually shown in statement of changes in equity when right
issue of shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings

12. Which TWO of the following are usually shown in statement of changes in equity when bonus
issue of shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings
13. Transaction costs relating to issue of shares are usually debited to:
(a) Profit or loss
(b) Share capital
(c) Share premium
(d) Revaluation surplus

14. If there is no balance in share premium account, transaction costs relating to issue of shares
are usually debited to:
(a) Profit or loss
(b) Share capital
(c) Retained earnings
(d) Revaluation surplus

15. Incremental depreciation has following effects on statement of changes in equity:

(a) Increase in revaluation surplus and decrease in retained earnings
(b) Decrease in revaluation surplus and increase in retained earnings
(c) Decrease in revaluation surplus and decrease in retained earnings
(d) No effect

16. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share capital shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

Latest update: March 2020

 CAF 5 – IAS 1

17. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
Page | 19
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

18. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a bonus issue of 2 for 5 shares already held.
What amount of share capital shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

19. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a bonus issue of 2 for 5 shares already held.
What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

20. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
On 2 January 2019, all the revalued assets were disposed of for Rs. 90 million.
Profit for the year ended was Rs. 32 million.
Interim dividend of 5% was paid in July 2019 and final dividend of 8% has been proposed by
directors.
What amount of retained earnings shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

21. Which of the following does not appear in statement of changes in equity?
(a) Share premium
(b) Retained earning
(c) Goodwill
(d) Revaluation surplus

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 CAF 5 – IAS 1

22. Which of the following statements is likely to be true, for a company making profits?
(a) The operating profit will be less than the profit for the year.
(b) The profit for the year will be greater than the gross profit.
(c) Retained profits at the year-end will be greater than shareholders' equity.
(d) Retained profits at the year-end will be greater than retained profits at the beginning of
the year.
Page | 20 23. Which of the following is NOT a component of the statement of changes in equity?
(a) Total comprehensive income for the period
(b) The revaluation gain
(c) The amount of cash that the company has on hand
(d) Dividends paid to shareholders during the period

24. Which of the following statements is not true about preferred stock?
(a) The rate of dividend is usually fixed
(b) Shareholders always have a voting right
(c) Shareholders' usually have a preference as to assets upon liquidation of the
corporation
(d) Shareholders' usually have a preference as to dividends

25. Redeemable preferred shares is required to be reported as:

(a) Liability
(b) Equity
(c) Asset
(d) None of the above

26. Any unpaid dividend is carried forward to the future periods for which type of stock?
(a) Ordinary shares
(b) Cumulative preferred shares
(c) Non-cumulative preferred shares
(d) All of the above

27. What is the impact of dividend payments to shareholders on the statement of changes in
equity?
(a) It increases the retained earnings balance
(b) It decreases the retained earnings balance
(c) It increases the share capital balance
(d) It decreases the share capital balance

28. What is the impact of an additional share issue on the statement of changes in equity?
(a) It increases the share capital balance
(b) It increases the retained earnings balance
(c) It decreases the share capital balance
(d) It decreases the retained earnings balance

29. Xavier Limited issued 5,000 shares of its Rs.10 par value to its shareholder. These shares were
issued at a premium at a price of Rs.25 per share.
The correct journal entry to record this transaction is:
(a) Cash Rs.125,000 (Debit); Share capital Rs.125,000 (Credit)
(b) Cash Rs.50,000 (Debit); Share capital Rs.50,000 (Credit)
(c) Share capital Rs.50,000 (Debit); Share premium Rs.75,000 (Debit); Cash Rs.125,000
(Credit)
(d) Cash Rs.125,000 (Debit); Share capital Rs.50,000 (Credit); Share premium Rs.75,000
(Credit)

Latest update: March 2020

 CAF 5 – IAS 1

30. Dynasty Limited issues 1 million, Rs.10 shares at Rs.50 for each share. Which of the following
statements is true?
(a) Ordinary share capital will increase by Rs.10 million and share premium will increase
by Rs.50 million.
(b) Ordinary share capital will increase by Rs.10 million and share premium will increase
by Rs.40 million.
(c) Ordinary share capital will increase by Rs.20 million and share premium will increase
by Rs.50 million. Page | 21
(d) Ordinary share capital will increase by Rs.10 million and share premium will increase
by Rs.30 million.

31. Handsome Limited statement of financial position shows ordinary share capital of Rs.150
million and share premium of Rs.50 million at the beginning of a financial year. If the ordinary
share capital is Rs.250 million and share premium is Rs.120 million at the end of the financial
year, how much did the ordinary share with share premium issue raise?
(a) Rs.100 million
(b) Rs.150 million
(c) Rs.160 million
(d) Rs.170 million

32. Gigantic Limited opening retained earning balance was Rs.150 million. It made a net profit for
the year ended 31 March 2020 of Rs.30 million. During that year, an ordinary dividend of Rs.50
paisa per share was paid on 40 million ordinary shares. What was the retained profit for the
year ended 31 March 2020?
(a) Rs.150 million
(b) Rs.160 million
(c) Rs.165 million
(d) Rs.170 million

33. SK Limited paid Rs.10 million in debenture interest and an ordinary dividend of 10 paisa per
share on Rs.50 million ordinary shares. The retained profit was Rs.120 million. What was SK
Limited profit for the year?
(a) Rs. 125 million
(b) Rs.135 million
(c) Rs. 130 million
(d) Rs.140 million

34. Which of the following would be an entry in the statement of changes in equity?
(a) Taxation
(b) Long term loans
(c) Revaluation gain
(d) Revaluation reserve

35. During the year ended 30 June 2021, a company's revaluation reserve increased from Rs.
300,000 to Rs. 380,000 as a result of a property (land) revaluation. At the start of that financial
year, the company's property had been valued at Rs. 810,000. Assuming that no property was
disposed of during the year, which of the following statements is true?
(a) The property's revalued amount was Rs.890, 000.
(b) The property's revalued amount was Rs.1, 190,000.
(c) The property's revalued amount was Rs.380, 000.
(d) The property's revalued amount was Rs.1,310,000

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 CAF 5 – IAS 1

Page | 22

Latest update: March 2020

 CAF 5 – IAS 1

OBJECTIVE BASED ANSWERS

01. (b) & (d)

02. (c)

03. (a) Page | 23

04. (b)

05. (c)

06. (d)

07. (b)

08. (b)

09. (b) Rs. 500 million x 10% = Rs. 50 million to be recognized in statement of
changes in equity.

10. (d) This dividend shall be recognized next year. This year the proposed dividend
shall be disclosed only.

11. (a) & (c)

12. (a) & (b)

13. (c)

14. (c)

15. (b)

16. Rs. 120 million Rs. 100 million +

Rs. 100 million / Rs. 100 x 1/5 x Rs. 100] = Rs. 120 million

17. Rs. 39 million Rs. 30 million +

Rs. 100 million / Rs. 100 x 1/5 x Rs. 45] = Rs. 39 million

18. Rs. 140 million Rs. 100 million +

Rs. 100 million / Rs. 100 x 2/5 x Rs. 100] = Rs. 140 million

19. Rs. Nil Rs. 100 million / Rs. 100 x 2/5 x Rs. 100] = Rs. 40 million shares issued
Rs. 30 million from share premium and remaining Rs. 10 million from
retained earnings.

20. Rs. 82 million Rs. 35 million + Rs. 20 million from revaluation surplus + Profit of Rs. 32
million – Rs. 5 million dividends = Rs. 82 million
Proposed dividend shall be disclosed only.

21. (c)

22. (d)

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 CAF 5 – IAS 1

23. (c)

24. (b)

25. (a)

Page | 24 26. (b)

27. (b)

28. (a)

29. (d)

30. (b)

31. (d)

32. (b)

33. (a)

34. (c)

35. (a)

Latest update: March 2020

 CAF 5 – Conceptual Framework

Conceptual Framework
- for Financial Reporting 11
Page | 1
INTRODUCTION
A conceptual framework is a system of concepts and principles that
Meaning underpin the preparation of financial statements. These concepts and
principles should be consistent with one another.
The Conceptual Framework deals with:
 the objective of financial reporting;
 the qualitative characteristics of useful financial information;
Scope
 the definition, recognition and measurement of the elements from
which financial statements are constructed; and
 concepts of capital and capital maintenance.
The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users. Its
purpose is:
 to assist the International Accounting Standards Board (IASB) in the
development of future IFRSs and in its review of existing IFRSs;
 to assist the IASB in promoting harmonisation of regulations,
accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs;
 to assist national standard-setting bodies in developing national
Purpose
standards;
 to assist preparers of financial statements in applying IFRSs and in
dealing with topics that have yet to form the subject of an IFRS;
 to assist auditors in forming an opinion on whether financial
statements comply with IFRSs;
 to assist users of financial statements in interpreting the information
contained in financial statements prepared in compliance with
IFRSs; and
 to provide those who are interested in the work of the IASB with
information about its approach to the formulation of IFRSs.
This Conceptual Framework is not an IFRS and nothing in the Conceptual
Framework overrides any specific IFRS.
If in conflict
with IFRSs On very rare occasions there may be a conflict between the Conceptual
Framework and an IFRS. In those cases, the requirements of the IFRS
prevail over those of the Conceptual Framework.

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 CAF 5 – Conceptual Framework

RECOGNITION OF ELEMENTS OF FINANCIAL STATEMENTS

The IASB Framework states that an element (asset, liability, equity, income
or expense) should be recognised in the statement of financial position or in
profit and loss (the statement of profit or loss) when it:
 meets the definition of an element, and also
Page | 2
 satisfies certain criteria for recognition.

Recognition Items that fail to meet the criteria for recognition should not be included in
Criteria the financial statements. However, some if these items may have to be
disclosed as additional details in a note to the financial statements.

The criteria for recognition are as follows:

 It must be probable that the future economic benefit associated with
the item will flow either into or out of the entity.
 The item should have a cost or value that can be measured reliably.
The concept of probability relates to the degree of certainty or uncertainty
that the future economic benefit associated with the item will flow into or out
of the entity.

The degree of certainty or uncertainty should be assessed on the basis of

Probability of the evidence available at the time the financial statements are prepared.
future
economic For example, if it is considered fairly certain that a trade receivable will be
benefit paid at a future date, it is appropriate to recognise the receivable as an
flowing in or asset in the statement of financial position.
out
However, there is probably a reasonable degree of certainty that some
trade receivables will become ‘bad debts’ and the economic benefit will not
flow into the entity. It would then be appropriate to recognise an ‘expense’
for the expected reduction in economic benefits (as an allowance for
irrecoverable debts).
An item should be recognised in the financial statements only if it has a cost
or value that can be measured with reliability.

In many cases, the value of an item has to be estimated because its value
is not known with certainty. Using reasonable estimates is an essential part
of preparing financial statements, and provided that the estimates are
Reliability of reasonable, it is appropriate to recognise items in the financial statements.
measurement However, if it is not possible to make a reasonable estimate, the item
should be excluded from the statement of financial position and statement
of profit or loss and other comprehensive income.

An item that cannot be estimated with reliability at one point in time might
be estimated with greater certainty at a later time, when it would then be
appropriate to include it in the financial statements.

Latest update: March 2020

 CAF 5 – Conceptual Framework

ELEMENT WISE RECOGNITION

An asset is recognised in the statement of financial position when there is
an increase in future economic benefits relating to an increase in an asset
(or a reduction in a liability) which can be measured reliably.
Assets
An asset should not be recognised when expenses have been incurred but Page | 3
it is unlikely that any future economic benefits will flow to the entity. Instead,
the item should be treated as an expense, and the cost of the asset should
be ‘written off’.
A liability is recognised when it is probable that an outflow of resources that
Liabilities embody economic benefits will result from the settlement of a present
obligation, and the amount of the obligation can be measured reliably.
Income is recognised in the statement of profit when an increase in future
Income economic benefits arises from an increase in an asset (or a reduction in a
liability) and this can be measured reliably.
Expenses are recognised in the statement of profit or loss when a decrease
in future economic benefits arises from a decrease in an asset or an
increase in a liability, which can be measured reliably.

Note that an expense is recognised at the same time as an increase in a

Expenses liability (for example, trade payables) or a reduction in an asset (for
example, cash).

Expenses are recognised in the statement of profit or loss by means of a

direct association between items of income and the expenses incurred in
creating that income.
 Matching of costs and income involves the simultaneous recognition of revenues
and related expenses.
 When economic benefits arise over several accounting periods, and the
association with income can only be decided in broad terms, expenses should be
recognised in profit and loss (the statement of profit or loss) of each accounting
period on the basis of ‘systematic and rational allocation procedures’. For example,
depreciation charges for a non-current asset are allocated between accounting
periods on a systematic and rational basis, by means of an appropriate depreciation
policy and depreciation method.
 When an item of expenditure is not expected to provide any future economic
benefits, it should be recognised immediately as an expense in the statement of
profit or loss. When the future economic benefits associated with an asset are no
longer expected to arise, the value of the asset is written off, and the write-off is
treated as an expense.
 An expense may also be recognised when a liability arises without the
recognition of any matching asset. For example, a liability might arise when an
entity recognises that it will have to make a payment to settle a legal dispute. The
cost of the future liability is treated as an expense in the period when the liability is
recognised.

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 CAF 5 – Conceptual Framework

MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTS

The Conceptual Framework allows that several measurement bases are used for the
elements in financial statements. These include:
Assets are measured at the amount of cash paid, or at the fair value of the
consideration given to acquire them. Liabilities are measured at:
Page | 4 Historical
 the amount of proceeds received in exchange for the obligation (for
cost
example, bank loan or a bank overdraft), or
 the amount of cash that will be paid to satisfy the liability.
Current cost Assets are measured at the amount that would be paid to purchase the
or current same or a similar asset currently. Liabilities are measured at the amount
value that would be required to settle the obligation currently
This method of measurement is relevant when an entity is not a going
Realisable concern, and is faced with liquidation (and a forced sale of its assets).
value (or
settlement Assets are measured at the amount that could be obtained by selling them.
value) Liabilities are measured at the amount that would be required to settle them
currently
Assets might be measured at the value of the future net cash inflows that
Present the item is expected to generate, discounted to a present value. Similarly, a
value liability might be measured at the discounted present value of the expected
cash outflows that will be made to settle the liability.
Fair value (although it is not described in the IASB Conceptual Framework)
many IFRSs require or permit its use. Fair value may be used in the
following circumstances:
 Revaluation model used in IAS 16/IAS 36
 Fair value model in IAS 40
 Revenue should be measured in the statement of profit or loss at
the fair value of the consideration received or receivable (IFRS 15).

NRV may or may not be the same as fair value. Fair value is often
approximately the same as current value, but sometimes fair value and
current value can be very different.
Problem with the use of fair value
Fair value is easy to understand and more reliable than value to the
Fair value business/current value, because market value is more easily verified than
(for example) economic value. However, it has some serious
disadvantages:
 There may not be an active market for some kinds of asset. Where
there is no active market, estimates have to be used and these may
not be reliable.
 It anticipates sales and profits which may never happen (the entity
may have no plans to sell the asset).
 Market values can move up and down quite rapidly. This may distort
trends in the financial statements and make it difficult for users to
assess an entity’s performance over time.
Despite these problems, it looks increasingly likely that the IASB will require
greater use of fair value in future.

Latest update: March 2020

 CAF 5 – Conceptual Framework

Historical cost is the most commonly used measurement basis. However, the other bases of
measurement are often used to modify historical cost. For example, inventories are
measured at the lower of cost and net realisable value. Deferred income is measured at
present value. Some non-current assets may be valued at fair value.

The Framework does not favour one measurement base over the others.
Page | 5

CONCEPT OF CAPITAL AND CAPITAL MAINTENANCE

The Conceptual Framework states that there are two concepts of capital:
 A financial concept of capital; (money terms and real terms)
 A physical concept of capital.
Change in equity = Closing equity – Opening equity
Profit and
Increase in equity = Profit + capital introduced – distributions
Capital
Profit = Increase in equity – capital introduced + distributions
With the financial concept of capital maintenance, a profit is not earned
during a period unless the financial value of equity at the end of the period
exceeds the financial value of equity at the beginning of the period (after
Financial adjusting for equity capital raised or distributed).
Capital Historical cost accounting is based on the concept of money financial
maintenance capital maintenance. Under this concept, an entity makes a profit when its
(money terms) closing equity exceeds its opening equity measured as the number of
units of currency at the start of the period. Note that this is a separate
issue from asset valuation. Assets could be revalued during the period but
this would have no effect on the opening capital position.
An alternative view of financial capital maintenance is used in constant
purchasing power accounting. This system is based on the concept of
real financial capital maintenance.
Financial
Under this concept, an entity makes a profit when its closing equity
Capital
exceeds opening equity remeasured to maintain its purchasing power.
maintenance
(real terms) This requires the opening equity to be uplifted by the general inflation
rate. This is achieved by a simple double entry.
Debit Statement of profit or loss X
Credit Inflation reserve X
A physical concept of capital is that the capital of an entity is represented
by its productive capacity or operating capability.

With a physical concept of capital maintenance, a profit is not earned

during a period unless (excluding new equity capital raised during the
Physical
period and adding back any distribution of dividends to shareholders) the
capital
operating capability of the business is greater at the end of the period
maintenance
than at the beginning of the period.

This requires the opening equity to be uplifted by the specific rates of

inflation that apply to the individual components of the net assets of the
company. Again, this is achieved by the same simple double entry.

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 CAF 5 – Conceptual Framework

COMPARING THE CAPITAL MAINTENANCE CONCEPTS

Neither the IASB Conceptual Framework nor accounting standards require the use of a
specific capital maintenance concept. In practice, almost all entities use money financial
capital maintenance, but both concepts can provide useful information.

Page | 6 Financial capital maintenance is likely to be the most relevant to investors as they are
interested in maximising the return on their investment and therefore its purchasing
power.

Physical capital maintenance is likely to be most relevant to management and employees

as they are interested in assessing an entity’s ability to maintain its operating capacity.
This is particularly true for manufacturing businesses, where management may need
information about the ability of the business to continue to produce the same or a greater
volume of goods.

SYLLABUS

Reference Content/Learning outcome

The conceptual framework for financial reporting

C1  Recognition and measurement of the elements of financial statements
 Concepts of capital and capital maintenance
LO3.3.1 Recognize and measure elements of financial statements
LO3.3.1 Apply concepts of financial reporting, capital and capital maintenance.
Proficiency level: 2
Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- 06
Objective Type 01 -

Latest update: March 2020

 CAF 5 – Conceptual Framework

PRACTICE Q&A
Sr.# Description Marks Reference
RECOGNITION
1H Assets’ recognition 04 QB
MEASUREMENT Page | 7
2H Habib Factory: Historical vs Current vs Realisable value 06 QB
3C Zainab Limited: Four measurement basis calculation 12 KA
CAPITAL MAINTENANCE
4H Carrie: Comparison 10 QB
5C X Limited: Comparison 10 ST
ADDITIONAL PRACTICE QUESTIONS
6H True and False 07 QB
7H Identify measurement type from scenarios 03 QB
8H Purpose of framework – theory 05 QB
9H Recognition and elements – theory 12 QB
10H Recognition of elements from situations 06 QB
11C Recognition from scenarios 04 QB
12C Recognition from scenarios 03 QB

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 CAF 5 – Conceptual Framework

QUESTION 01
What is the criteria for recognition of assets and which of the following assets will be
recognized in the financial statements of a company in accordance with the criteria?
(a) A manufacturing unit valuing Rs. 5 million, owned and controlled by the Company
(b) A fleet of trucks valuing Rs 100 million, controlled by another company
(c) A highly skilled workforce, getting an annual compensation of Rs. 12.5 million
Page | 8 (04)

QUESTION 02
A factory building was purchased from Habib Factory by a company for Rs. 100 million in
2009. Its useful life was estimated to be 25 years. The building was revalued in 2019 at Rs.
75 million.

It was decided to sell the factory building at Rs. 90 million after incurring repairs and painting
work done of Rs. 10 million.

What will be the cost of the asset under each of the following measurement basis?
(a) Historical cost
(b) Current cost
(c) Realizable(settlement) value (06)

QUESTION 03
Zainab Limited owns a machine which it purchased four years ago for Rs. 100,000. The
accumulated depreciation on the machine to date is Rs. 40,000. The machine could be sold
to another manufacturer for Rs. 50,000 but there would be dismantling costs of Rs. 5,000.
To replace the machine with a new version would cost Rs. 110,000. The cash flows from the
existing machine are estimated to be Rs. 25,000 for the next two years followed by Rs.
20,000 per year for the remaining four years of the machine's life.

The relevant discount rate for this company is 10% and the discount factors are:
Year 1 0.909
Year 2 0.826
Years 3 – 6 inclusive 2.619 (annuity rate)

Calculate the following values for the machine:

(a) Historical cost
(b) NRV
(c) Replacement cost
(d) Economic value (12)

QUESTION 04
Carrie starts in business on 1 January Year 1. Carrie’s sole shareholder contributed capital
of Rs.1,000. Carrie purchased one item of inventory for Rs.1,000 and sold that inventory for
cash of Rs.1,400. At the end of Year 1 the replacement cost of the same item of inventory is
Rs.1,100. General inflation during the year was 7%.

Required
Calculate the profit for the year and set out a summary statement of financial position as of
31 December Year 1 under the following capital maintenance concepts.
(a) Financial capital maintenance
(i) Historical cost accounting
(ii) Constant purchasing power accounting
(b) Physical capital maintenance (10)

Latest update: March 2020

 CAF 5 – Conceptual Framework

QUESTION 05
X Limited commenced business on 1 January with a single item of inventory which
costRs.10,000.

During the year it sold the item for Rs.14,000 (cash).

During the year general inflation was 5% but the inflation specific to the item was 10%. Page | 9

Required:
Prepare financial statements under various capital maintenance concepts. (10)

QUESTION 06
Mark true/false against each given scenario and give reasons for the selected answer:
(a) In case of conflict between requirements of conceptual framework and IFRS, the
requirements of conceptual framework shall prevail.
(b) Conceptual framework is not an International financial reporting standard (IFRS)
(c) HR related cost is recognized as an asset in the financial statements since economic
benefit is probable from human resource
(d) Internally generated goodwill is recognized as asset and measured at fair value in the
financial statements
(e) When economic benefits arise over several accounting periods, and the association
with income can only be decided in broad terms, expenses should be recognized in
profit and loss of each accounting period on the basis of systematic and rational
allocation procedure
(f) When an item of expenditure is not expected to provide any future economic benefit,
it is recognized as an asset in the financial statements
(g) In fair value method, assets are measured at the amount that would be paid to
purchase the same or a similar asset currently. (07)

QUESTION 07
Identify the accounting concepts in each of the following scenarios:
(a) The method of measurement is relevant when an entity is not a going concern, and is
faced with liquidation
(b) HM has to incur dismantling cost amounting Rs.100,000 after 3 years, however he
records this cost at Rs.75,131
(c) HM has purchased PPE costing Rs.10,000 to be depreciated over a period of 10
years, at the end of year 3 the Book Value amounted to Rs.7,000, however HM
considers measuring the PPE at its current market value amounting Rs.15,000.
(03)

QUESTION 08
What is the purpose of conceptual framework in presence of other international accounting
standards? (05)

QUESTION 09
For any element to be recognized in accounting records, it must meet its definition criteria as
well as general recognition criteria:
(a) Briefly explain the general recognition criteria
(b) Definition of each element along with examples (12)

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 CAF 5 – Conceptual Framework

QUESTION 10
HM received Rs.160 000 in cash on 20 December 2004 from RM in return for having
provided financial advice during the 2004 financial year.
Required:
(a) Explain, with reference to the relevant definitions, which elements should possibly be
Page | 10 recognized in the 2004 financial year.
(b) Briefly identify whether and/ or how your answer would change if the cash received
had been received for financial advice to be provided in the 2005 financial year.
(06)

QUESTION 11
Which of the following, would be recognized as expense&/or asset in the financial
statements of a company in accordance with the criteria given in conceptual framework?
(a) An amount paid to landlord totalling Rs.120, 000 on 1st January 2012 against the
rent for the year ended 31st December 2012. Year end of the entity is 30 June 2012.
(b) An expenditure incurred on repairs and maintenance of plant amounting Rs.300, 000.
(c) There has been legal dispute between the entity and its customer and company
expects the outflow of Rs. 200,000 in order to settle the dispute.
(d) Entity purchased goods costing Rs.20,000 for trading purposes and the same was
sold for Rs.25,000 (04)

QUESTION 12
Which of the following, would be recognized as income &/or liability in the financial
statements of a company in accordance with the criteria given in conceptual framework:
(a) Advance received from customer amounting Rs. 50,000 against the goods to be
delivered after 6 months
(b) Services provided to ABC and Co. on credit amounting Rs. 30,000.
(c) Account Receivables already written off in previous years amounting Rs. 30,000
were received during the year. (03)

Latest update: March 2020

 CAF 5 – Conceptual Framework

ANSWER 01
An entity can recognize assets in its balance sheet only if the following conditions are met:
 It is probable that any future economic benefits associated with the asset will flow to
or from the entity
 The cost/value of the asset can be measured reliably

The following will be recognized in the financial statements: A manufacturing unit valuing Rs. Page | 11
5 million, owned and controlled by the Company

The fleet of truck will not be recognized because it is not controlled by the entity.

Similarly, workforce will not be recognized by the entity because there is no certainty about
the probability of future economic benefits from workers as they can quit the entity at any
time.

ANSWER 02
Historical cost
The historical cost of the building is Rs. 100 million.

Current cost
The current cost of the building shall be its revalued amount which is Rs. 75 million.

Realizable(settlement) value
The realizable value of the building will be its selling cost less any costs incurred to sell the
asset, which is 90 million less 10 million, i.e., Rs, 80 million.

ANSWER 03
Part (a) Historical cost Rs.
Cost 100,000
Less: Accumulated depreciation (40,000)
60,000

Part (b) NRV Rs.

Selling price 50,000
Less: cost to sell (5,000)
45,000

Part (c) Replacement cost Rs.

Replacement cost for new asset 110,000
Less: Accumulated depreciation (44,000)
66,000

Part (d) Present value (economic value) Rs.

25,000 x 0.909 22,725
25,000 x 0.826 20,650
20,000 x 2.619 52,380
95,735

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 CAF 5 – Conceptual Framework

ANSWER 04
Carrie Financial capital
Physical
maintenance
capital
Money Real
maintenance
terms terms
Page | 12
Statement of profit or loss Rs. Rs. Rs.
Revenue 1,400 1,400 1,400
Cost of sale (1,000) (1,000) (1,000)
Adjustment (inflation rate x opening equity):
General 7% x Rs.1,000 (70)
Specific 1,100 – 1,000 (100)
400 330 300

Statement of financial position Rs. Rs. Rs.

Net assets (Cash) 1,400 1,400 1,400
Equity:
Opening equity
Before adjustment 1,000 1,000 1,000
Inflation reserve (see above) 70 100
After adjustment 1,000 1,070 1,100
Retained profit (profit for the year) 400 330 300
1,400 1,400 1,400

Share capital at the year-end is restated under the physical capital maintenance concept for
an increase in specific price changes and under Constant Purchasing Power accounting for
general price changes. This is the other side of the entry to the inflation adjustments in the
statement of profit or loss.

ANSWER 05
Financial capital
Physical
maintenance
capital
Money Real
maintenance
terms terms
Statement of profit or loss Rs. Rs. Rs.
Revenue 14,000 14,000 14,000
Cost of sale (10,000) (10,000) (10,000)
Adjustment (inflation rate x opening equity):
5% x Rs.10,000 (500)
10% x Rs.10,000 (1,000)
4,000 3,500 3,000

Statement of financial position Rs. Rs. Rs.

Net assets (Cash) 14,000 14,000 14,000
Equity:
Opening equity
Before adjustment 10,000 10,000 10,000
Inflation reserve (see above) 500 1,000
After adjustment 10,000 10,500 11,000
Retained profit (profit for the year) 4,000 3,500 3,000
14,000 14,000 14,000

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 CAF 5 – Conceptual Framework

ANSWER 06
In case of conflict between requirements of conceptual framework and IFRS,
(a) False the requirements of IFRS shall prevail being an established principle that
specific law requirements prevail over general law requirements
(b) True Conceptual framework provides foundation for the IFRSs
HR related cost can never be capitalized as it does not meet the definition Page | 13
(c) False
criteria of asset “controlled by the entity”
Internally generated goodwill can never be recognized as it does not meet
(d) False one of the basic recognition criteria i.e. “The item should have a cost or value
that can be measured reliably”
(e) True Because of matching principle
For any item to be recognized as an asset, it must be probable that an item
(f) False
shall provide future economic benefits to the entity.
In current cost method assets are measured at the amount that would be
(g) False
paid to purchase the same or a similar asset currently

ANSWER 07
(a) Realizable value/ settlement value
(b) Present value
(c) Fair Value

ANSWER 08
The Conceptual Framework for Financial Reporting forms the foundation of all IFRSs. One
needs a thorough understanding of all its concepts in order to be able to correctly apply the
various IFRSs, in other words it gives broader guidelines/ concepts that underlie the
preparation and presentation of financial statements for external users and other standards
give specific guidelines for individual items/statements.

Following are the main purposes of conceptual framework:

(a) to assist the International Accounting Standards Board (IASB) in the development of
future IFRSs and in its review of existing IFRSs;
(b) to assist the IASB in promoting harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements by providing a
basis for reducing the number of alternative accounting treatments permitted by
IFRSs;
(c) to assist national standard-setting bodies in developing national standards;
(d) to assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRS;
(e) to assist auditors in forming an opinion on whether financial statements comply with
IFRSs;
(f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs; and to provide those who
are interested in the work of the IASB with information about its approach to the
formulation of IFRSs

ANSWER 09
Part (a) General Recognition Criteria
 the flow of future economic benefits caused by this element must be probable; and
 the element must have a cost/value that can be reliably measured

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 CAF 5 – Conceptual Framework

Part (b) Definition of the elements

Element Definition Examples
An asset is defined as a present economic Cash, Bank, Account
Asset resource controlled by the entity as a result of receivable, Notes
past events. receivable
A liability is a present obligation of the entity to
Page | 14 Loans, Account payable,
Liability transfer an economic resource as a result of past
Notes payable
events.
The residual interest in the assets After deducting Capital, Retained earnings
Equity
all liabilities. etc.
Income arise from increase in assets or decrease
Sale revenue, commission
Income in a liability, resulting in increase in equity other
income, rent income etc.
than contribution from owners.
Expenses arise from decrease in assets or
Salaries expense, rent
increase in liability, resulting in decrease in equity
Expense expense, utilities
other than distributions (drawings or dividends) to
expenses
owners.

ANSWER 10
Part (a)
The cash received meets the definition/recognition of an asset being the present resource
now controlled by an entity and entity may spend it as it may wish. The services have been
provided, so this is also an income being an increase in assets and resulting increase in
equity (there is no liability change). The receipt of cash in return for services rendered leads
to an asset and income in 2004.
Part (b)
If cash was received in 2004 for services to be provided in 2005, the asset definition would
be met but the income definition would not be. This is because although there is an increase
in assets, it would not lead to an increase in equity: the cash receipt would lead to an
obligation to provide services, which would meet the liability definition. An increase in both
assets and liabilities results in a nil effect on equity.

ANSWER 11
1. Rent expense Rs. 60,000 and Advance Rent (asset) Rs. 60,000
2. Expense (unless increase in present resources
and material to entity)
3. Expense and liability (outflows seem probable)
4. Inventory is asset but when sold becomes expense (cost of sales)

ANSWER 12
1. Advance from customer amounting to Rs. 50,000 – Liability
2. Accounts receivable amounting to Rs. 30,000 – Income
3. reversal of bad debts amounting to Rs. 30,000 – Income

Latest update: March 2020

 CAF 5 – Conceptual Framework

ICAP OBJECTIVE BASED QUESTIONS

01. Which of the following measurement bases are referred to in the Board's Conceptual
Framework?
(a) Current Cost, Residual Value, Fair Value, Present Value
(b) Current Cost, Historical Cost, Fair Value, Present Value Page | 15
(c) Current Cost, Fair Value, Present Value, Future Value
(d) Fair Value, Present Value, Future value, Residual Value

02. Financial capital maintenance (money terms) is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

03. Which of the following concepts measures profit in terms of an increase in the productive
capacity of an entity?
(a) Physical capital maintenance
(b) Historical cost accounting
(c) Financial capital maintenance
(d) Going concern concept

04. Which of the following statements is true about historical cost accounts in times of rising
prices?
(a) Profits will be overstated, and assets will be understated
(b) Asset values will be overstated
(c) Unrecognized gains will be recorded incorrectly
(d) Depreciation will be overstated

05. Which of the following criteria need to be satisfied in order for an element to be recognized
within the financial statements?
(i) It meets the definition of an element of the financial statements.
(ii) It is probable that future economic benefits will flow to or from the entity.
(iii) It is certain that future economic benefits will flow to or from the entity.
(iv) The item has a cost or value.
(v) The item has a cost or value that can be reliably measured.
(a) (i), (ii) and (v)
(b) (i), (iii) and (v)
(c) (i), (ii) and (iv)
(d) (i), (iii) and (iv)

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 CAF 5 – Conceptual Framework

06. Which of the following is NOT a purpose of the International Accounting Standards Board’s
Conceptual Framework?
(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.
Page | 16
(c) To assist in determining the treatment of items not covered by an existing IFRS
Standards.
(d) To be authoritative where a specific IFRS Standard conflicts with the Conceptual
Framework.

07. Which of the following items should be recognized as an asset in the statement of financial
position of an entity?
(a) A skilled and efficient workforce which has been very expensive to train. Some of
these staff is still employed by the entity.
(b) A highly lucrative contract signed during the year which is due to commence shortly
after the year-end.
(c) A government grant relating to the purchase of an item of plant several years ago
which has a remaining life of four years.
(d) A receivable from a customer which has been sold (factored) to a finance company.
The finance company has full recourse to the entity for any losses.

08. Which of the following criticisms does NOT apply to historical cost financial statements during a
period of rising prices?
(a) They contain mixed values, some items are at current values, some at out-of-date
values
(b) They are difficult to verify as transactions could have happened many years ago
(c) They understate assets and overstate profit
(d) They overstate gearing in the statement of financial position

09. Financial capital maintenance (real terms) is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

10. Physical capital maintenance is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

Latest update: March 2020

 CAF 5 – Conceptual Framework

11. In which of the following, no adjustment for inflation is considered?

(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting Page | 17

12. In which of the following, inflation adjustment is made on general rate of inflation?
(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting

13. In which of the following, inflation adjustment is made on specific rate of inflation?
(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting

14. Financial capital maintenance is likely to be most relevant to:

(a) Investors
(b) Management and employees
(c) Neither (a) nor (b)
(d) Capital maintenance is always irrelevant to decision making

15. Physical capital maintenance is likely to be most relevant to:

(a) Investors
(b) Management and employees
(c) Neither (a) nor (b)
(d) Capital maintenance is always irrelevant to decision making

16. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under money financial capital maintenance
concept?
Rs. ___________

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 CAF 5 – Conceptual Framework

17. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under real financial capital maintenance
concept?

Page | 18 Rs. ___________

18. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under physical capital maintenance concept?
Rs. ___________

19. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being
depreciated over five years, using straight-line depreciation and an estimated residual value of
10% of its historical cost or current cost as appropriate. As at 30 September 2014, the
manufacturer of the plant still makes the same item of plant and its current price is Rs.
600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30
September 2014 under historical cost accounting?
Rs. ___________

20. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being
depreciated over five years, using straight-line depreciation and an estimated residual value of
10% of its historical cost or current cost as appropriate. As at 30 September 2014, the
manufacturer of the plant still makes the same item of plant and its current price is Rs.
600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30
September 2014 under current cost accounting?
Rs. ___________

21. An entity made a profit of Rs. 480,000 for the year 2018 based on historical cost [A19]
accounting principles. It had opening capital of Rs. 1,100,000. During 2018, specific
price indices increased by 15% while general price indices increased by 12%. How
much profit should be recorded for 2018 under real financial capital maintenance
concept?
(a) Rs. 480,000
(b) Rs. 315,000
(c) Rs. 348,000
(d) Rs. 645,000 (01)

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 CAF 5 – Conceptual Framework

OBJECTIVE BASED ANSWERS

01. (b)

02. (a)

03. (a) Physical capital maintenance looks at profit in terms of the physical productive
Page | 19
capacity of the business, taking into account specific price changes relevant to
the entity.

04. (a) In times of rising prices, asset values will be understated, as historical cost will
not be a true representation of the asset values. Additionally, the real purchase
cost of replacement items will not be
Incorporated, meaning that profits are overstated.

05. (a) There only has to be probable flow of economic benefits, rather than a certain
flow. Also, the cost or value must be capable of reliable measurement, or no
amount can be put into the financial statements.

06. (d) Where there is conflict between the conceptual framework and an IFRS
Standard, the IFRS Standard will prevail. An example of this is IAS 20
Government grants, where deferred grant income is held as a liability, despite
not satisfying the definition of a liability.

07. (d) As the receivable is ‘sold’ with recourse it must remain as an asset on the
statement of financial position and is not derecognized.

08. (b) Historical cost is the easiest to verify as the cost can be proved back to the
original transaction. Fair value is often more difficult to verify as it may involve
elements of estimation.

09. (c)

10. (b)

11. (a)

12. (b)

13. (c)

14. (a)

15. (b)

16. Rs. 350,000 Money financial capital maintenance looks at the actual physical cash. No
inflation adjustment is required.

17. Rs. 300,000 Rs. 350,000 – (1,000,000 x 5%) = Rs. 300,000

18. Rs. 150,000 Rs. 350,000 – (1,000,000 x 20%) = Rs. 150,000

19. Rs. 320,000 Historical cost annual depreciation = Rs. 90,000 ((500,000 × 90%)/5 years).
After two years carrying amount would be Rs. 320,000 = (500,000 -
(2×90,000)).

20. Rs. 384,000 Current cost annual depreciation = Rs. 108,000 ((600,000 × 90%)/5 years).
After two years carrying amount would be Rs. 384,000 = (600,000 -
(2×108,000)).

21. (c) Rs. 480,000 – (Rs. 1,100,000 x 12%) = Rs. 348,000

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 CAF 5 – Conceptual Framework

Page | 20

Latest update: March 2020

 CAF 5 – IAS 7

Statement of
IAS 7 Cash Flows 12
Page | 1
INTRODUCTION
The fundamental purpose of being in business is to generate profit, as this will
increase the owners' wealth. Profitability relates to the long term performance of
the business and indicates that over the long term a business will generate cash.

In the short term, the business' viability is determined by its ability to generate
Purpose cash. However, as a statement of profit or loss is prepared on an accrual basis,
the profit for the year is unlikely to correlate with the movement in the company's
bank balance.

Items such as depreciation, provision movements and impairment of goodwill will

mean that profits and cash flows may differ dramatically.
Users need to know about the cash generating ability and financial adaptability
Users’ of an entity, i.e. can the business generate cash, and can it alter the timing of its
needs cash flows. If the entity can answer positively, users will be confident about the
entity's prospects.
Therefore, IAS 7 requires that entities should prepare a statement of cash flows
Scope
as an integral component of financial statements.

DEFINITIONS
Cash comprises cash on hand and demand deposits.
Cash are short terms, highly liquid investments that are readily convertible to known
equivalent amounts of cash and which are subject to an insignificant risk of changes in
value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating are the principal revenue producing activities of the entity and other
activities activities that are not investing or financing activities.
Investing are the acquisition and disposal of long term assets and other
activities investments not included in cash equivalents.
Financing are activities that result in changes in the size and composition of the
activities contributed equity and borrowings of the entity.

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 CAF 5 – IAS 7

CASH EQUIVALENT
An investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.
Investments Investment in equity shares is not included in cash and cash equivalents,
however, investment in redeemable shares may be included if specific
Page | 2 redemption date is very close.
If the balance of bank overdraft fluctuates normally from positive to negative
Bank or vice versa, it is included in cash and cash equivalent. However, if in
overdraft substance, the entity is using bank overdraft as short term loan, it should be
included in financing activities.
Movement Movement within cash and cash equivalent are not presented as cash flows.

REPORTING CASH FLOWS

OPERATING CASH FLOWS
An entity shall report cash flows from operating activities using either:
Direct whereby major classes of gross cash receipts and gross cash payments are
method disclosed; or
whereby profit or loss is adjusted for the effects of transactions of a non cash
Indirect nature, any deferrals or accruals of past or future operating cash receipts or
method payments, and items of income or expense associated with investing or
financing cash flows.

INVESTING AND FINANCING CASH FLOWS

An entity shall report separately major classes of gross cash receipts and
General
gross cash payments arising from investing and financing activities.
However, cash flows arising from the following activities may be reported on a
net basis:
 cash receipts and payments on behalf of customers when the cash
flows reflect the activities of the customer rather than those of the
entity (for example if rent is collected on behalf of and paid on to
owners of properties); and
Exceptions
 cash receipts and payments for items in which the turnover is quick,
the amounts are large, and the maturities are short (e.g. payments
made by credit card companies on behalf of their customers and
receipts from those customers.

It is unlikely that you will see this in a question.

Latest update: March 2020

 CAF 5 – IAS 7

INTEREST, DIVIDENDS AND TAXES ON INCOME

IAS 7 states that there is no consensus about how to treat interest
payments by an entity, other than a financial institution such as a bank.
Interest payments may be classified as either:
Interest paid
 an operating cash flow, because they are deducted when
calculating operating profit before taxation [Recommended], or Page | 3
 a financing cash flow, because they are costs of obtaining finance.
Interest and dividends received may be classified as either:
Interest and  an operating cash flow, because they are added when calculating
dividend operating profit before taxation, or
received  an investing cash flow, because they represent returns on
investment [Recommended].
IAS 7 allows dividend payments to be treated as either:
 a financing cash flow because they are a cost of obtaining financial
Dividends resources [Recommended], or
paid  a component of the cash flows from operating activities, in order to
assist users to determine the ability of the entity to pay dividends out
of its operating cash flows.
Cash flows arising from taxation on income should normally be classified as
Taxes on a cash flow from operating activities [Recommended] (unless the tax
income payments or refunds can be specifically associated with an investing or
financing activity).

NON-CASH TRANSACTIONS
Investing and financing transaction that do not require the use of cash or
cash equivalent shall be excluded from a statement of cash flows. Such
Requirement transaction shall be disclosed elsewhere in the financial statements in a way
that provides all the relevant information about these investing and financing
activities.
 Gain on revaluation
 Assets acquired under lease
Examples  Depreciation, amortisation and impairment losses
 Bonus issue of shares
 Conversion of convertible bonds in shares
DISCLOSURE
Components An entity shall disclose the components of cash and cash equivalents and
of cash and shall present a reconciliation of the amounts in its statement of cash flows
cash with the equivalent items reported in the SFP.
equivalents
An entity shall disclose, together with a commentary by management, the
Other
amount of significant cash and cash equivalent balance held by the entity
disclosures
that are not available for use by the group.

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 CAF 5 – IAS 7

ALLOWANCE FOR DOUBTFUL DEBTS AND BAD DEBTS

A question might provide information on the allowance for doubtful debts at the start and end
of the year.
Adjust the profit for the movement on the allowance as a non-cash item and
Method 1 adjust the profit figure for the movement in receivables using the gross
Page | 4 (better) amounts less bad debts (i.e. the balances before any deduction of the
allowance for doubtful debts); or
Make no adjustments for the movement on receivables as a non-cash item
Method 2 adjust the profit figure for the movement in receivables using the net
(quick) amounts (i.e. the balances after the deduction of the allowance for doubtful
debts).

FORMAT
[Entity Name]
Statement of cash flows
For the year ended [date here]
Cash flows from operating activities: <Indirect method> Rs.’000
Profit before tax Note 1 XXX

Adjustments for: Note 2

[non-cash income and expenses included in SPL] XX/(XX)
[items of income and expenses relating to investing or
financing activity but included in SPL] XX/(XX)
[post-employment benefit expense, finance income and
expense] XX/(XX)
Operating profit before working capital changes XXX
[increase or decrease in current assets and liabilities] Note 3 XX/(XX)
Cash generated from operations XXX
Interest paid (XX)
Pension benefits paid (XX)
Income tax paid (XX)
Net cash from (used in) operating activities A XXX

Cash flows from investing activities:

Purchase of non-current assets or short-term investment (on cash) (XXX)
Disposal of non-current assets or short-term investment (on cash) XX
Investment income (on cash basis) XX
Net cash from (used in) investing activities B (XXX)

Cash flows from financing activities:

Cash proceeds from share issue, loan issue and borrowings XXX
Cash paid for share re-purchase, loan and borrowings repayment (XX)
Interest paid on borrowings/Dividend paid (XX)
Net cash from financing activities C XXX

Net increase (decrease) in cash and cash equivalents A+B+C XXX

Cash and cash equivalents at beginning of the year SFP XX
Cash and cash equivalents at end of the year SFP XX

Latest update: March 2020

 CAF 5 – IAS 7

NOTE 1
If profit in not given in the question (for indirect method), it is usually determined by
reconciling retained earnings. Profit before tax is to be taken for starting statement of cash
flows under indirect method.

NOTE 2
Expenses add back in profit Page | 5
Incomes less back from profit

NOTE 3
Include increase/decrease in Exclude
 inventory,  Cash,
 prepayments,  Investment,
 advances,  borrowings,
 receivables,  interest payable,
 trade payables,  tax payable, and
 Accrued expenses.  bank overdraft.

Cash inflow  increase in liability, decrease in asset

Cash outflow  increase in asset, decrease in liability

ADDITIONAL NOTE 4
Some T accounts should be combined like:
 Share capital and Share premium
 Liabilities classified under current and non-current elements
 Deferred tax and current tax

[Entity Name]
Statement of cash flows
For the year ended [date here]
Cash flows from operating activities: <Direct method> Rs.’000
Cash receipts from customers W1 XXX
Cash paid to suppliers, employees and for expenses W2 (XXX)
Cash generated from operations XXX
Interest paid (XX)
Pension benefits paid (XX)
Income tax paid (XX)
Net cash from (used in) operating activities A XXX

Working 1 Rs.
Revenue (Cash + Credit) XXX
(Increase)/decrease in trade receivables XX/(XX)
XXX

Working 2 Rs.
All expenses and incomes in SPL for profit before tax excluding revenue (XXX)
[non-cash income and expenses included in SPL] XX/(XX)
[items of income and expenses relating to investing or financing activity but
included in SPL] XX/(XX)
[post-employment benefit expense, finance income and expense] XX/(XX)
[increase or decrease in current assets & liabilities excluding trade receivables] XX/(XXX)
(XXX)

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 CAF 5 – IAS 7

SYLLABUS

Reference Content/Learning outcome

IAS 7 Preparation of statement of cash flows (other than consolidated

A2
Page | 6 statement of cash flow)
LO1.2.1 Demonstrate thorough understanding of cash and cash equivalents,
operating, investing and financing activities
LO1.2.2 Calculate changes in working capital to be included in the operating activities
Compute items which are presented on the statement of cash flows other than
LO1.2.3
consolidated statement of cash
Prepare a statement of cash flows of a limited company in accordance with
LO1.2.4
IAS 7
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
CAF 5
- 22 - 18 - 12 - 15 - 14 19 08
CAF 7
11 - - 15 - - 15 - 15 -

Latest update: March 2020

 CAF 5 – IAS 7

PRACTICE Q&A
Sr.# Description Marks Reference
BASIC CLASS ILLUSTRATIONS
1C Effect on cash flows 03 KA
2C Cash and cash equivalent 04 KA Page | 7
3C Identify activities 09 KA
4C Operating activities – Direct and Indirect 08 KA
5C Investing and financing activities 06 KA
PRACTICE QUESTIONS
6H Nadir Limited 15 PE S18
7H Trango Limited: Operating activities – basic level 08 QB
8H Tarbela Traders 14 QB
9C XYZ Limited: with correction of errors relating to disposal,
22 PE S15
depreciation, bad and doubtful debts
10H Nardone Limited: Tax and disposal etc 20 QB
11H Quetta Track Limited: PPE (separate), Accumulated
20 QB
depreciation, Disposal, Accrued interest, tax
12H Sakhawat Hussain Limited: RE, Accumulated depreciation,
11 QB
Disposal, Interest, PPE, Investments
13C Quality Enterprises: investment income, Tax, PPE, RA 18 PE S16
14H Hot Sauce Limited 20 QB
15H Mardan Software Limited 15 QB
16H Sindh Robotics Company – Indirect Method 15 QB
17H Sindh Robotics Company – Direct Method 15 QB
18H Abida 07 QB
19H Moosani 12 QB
20H Junaid Janjua 14 QB
21H Amin Industries 13 QB
22C Liaqat Industries 12 PE S17
23C Drum Limited 14 PE S19
24C Sunday Traders Limited 19 PE A19

© kashifadeel.com
 CAF 5 – IAS 7

QUESTION 01
What would be the effect on statement of cash flows of the following transactions?
(03)
Rs. Effect
Cash deposited in bank account 100,000
Sale of prize bonds 500,000
Page | 8
Investment in treasury bills of government with 60 days maturity 800,000

QUESTION 02
Calculate the cash and cash equivalents from the following information: (04)
Rs. Rs.
Cash in hand 200,000
Cash at bank 140,000
Short term investments (1 month) in government treasury bills 40,000
Trade debts 40,000
Investment in prize bonds 80,000
Other receivables 40,000
Bank overdraft 20,000
TOTAL

QUESTION 03
Identify the following transactions as operating, investing, financing or otherwise: (09)
TRANSACTION ANSWER
1. Cash received from customers
2. Cash sales
3. Cash proceeds from disposal of PPE
4. Right issue of shares
5. Repayment of loan
6. Dividend received by stock market broker
7. Dividend paid
8. Salaries paid to employees
9. Interest on debentures paid
10. Interest received by a trading entity on some investment
11. Interest received by a bank on loans advanced
12. Taxes paid
13. Purchase of a patent and software
14. Advance paid to supplier
15. Depreciation
16. Bonus issue of shares
17. Impairment loss on a plant

Latest update: March 2020

 CAF 5 – IAS 7

QUESTION 04
The following are extracts from the financial statements of Oxygen Limited for the year
ended June 30, 2012 and 2011.
2012 2011
SFP (extracts) Rs. Rs.
Inventories 230,000 185,000
Prepayments 14,000 16,000 Page | 9
Trade receivables 52,000 30,000
Cash 15,000 38,000
Trade payables 39,000 44,000
Income tax payable 5,000 4,000

SPL (extracts)
Revenue 500,000
Cost of sales (includes depreciation of Rs. 6,000) (310,000)
Gross profit 190,000
Operating expenses (includes depreciation of Rs. 6,000) (80,000)
Finance costs (21,000)
Profit before tax 89,000
Taxation (30,000)
Profit after tax 59,000
Required:
What will be the net cash flow from operating activities using:
(a) Indirect method (04)
(b) Direct method (04)

QUESTION 05
The following are extracts from the financial statements of Nitrogen Limited for the year
ended June 30, 2012 and 2011.
2012 2011
SFP (extracts) Rs. Rs.
Property, plant and equipment 850,000 800,000
Intangible assets 0 200,000

Share capital 600,000 500,000

Share premium 200,000 150,000
Long term loans 500,000 0
Debentures 100,000 400,000

Additional information:
 During the year, right issue of shares was made.
 Depreciation for the year was Rs. 200,000. There was no disposal of PPE during the
year
 Intangible asset (patent) was sold at beginning of the year equal to its carrying
amount.

Required:
Present the above transactions in the statement of cash flows. (06)

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 CAF 5 – IAS 7

QUESTION 06
Following information pertains to Nadir Limited:

Extract from statement of profit or loss for the year ended 31 December 2017
Rs. in ‘000
Profit before taxation 8,955
Page | 10
Taxation (2,945)
Profit after taxation 6,010

Extract from statement of financial position as on 31 December 2017

Equity and liabilities 2017 2016 Assets 2017 2016
---- Rs. in ‘000 ---- ---- Rs. in ‘000 --
--
Share capital 12,400 10,000 Property plant & 21,400 15,800
Share premium 1,400 - equipment - net
Retained earnings 13,450 12,440 Current assets:
Surplus on revaluation 4,000 - Stock-in-trade 5,600 5,750
Non-current liabilities: Trade receivables – net 6,840 4,446
Long-term loans 4,100 5,000 Other receivables 2,385 800
Current liabilities: Cash & bank 2,355 3,204
Trade payables 1,900 1,400
Accruals & other 680 660
payables
Tax liability 650 500
38,580 30,000 38,580 30,000

Other information:
(i) Shares issued during the year were as follows:
 10% bonus shares in March 2017.
 Right shares in July 2017.

(ii) During the year, a plant costing Rs. 9,500,000 and having a book value of Rs.
5,200,000 was disposed of for Rs. 4,800,000 of which Rs. 1,800,000 are still
outstanding.

(iii) Depreciation for the year amounted to Rs. 7,350,000.

(iv) Financial charges for the year amounted to Rs. 1,100,000. Accrued financial charges
as on 31 December 2017 amounted to Rs. 112,000 (2016: Rs. 48,000).

(v) Provision for doubtful trade receivables is maintained at 5%.

Required:
Prepare statement of cash flows for the year ended 31 December 2017, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (15)

Latest update: March 2020

 CAF 5 – IAS 7

QUESTION 07
The following information has been extracted from the financial statements of Trango Limited
for the year ended 31 December 2015.

Statement of comprehensive income for the year ended 31 December 2015

Rs.
Sales 905,000 Page | 11
Cost of sales (311,000)
Gross profit 594,000
Loss on disposal of non-current asset (9,000)
Wages and salaries (266,000)
Other expenses (including depreciation Rs.46,000) (193,000)
126,000
Interest charges (24,000)
Profit before tax 102,000
Tax on profit (38,000)
Profit after tax 64,000

The asset disposed of had a carrying amount of Rs. 31,000 at the time of the sale.
Extracts from the statements of financial position:
At 1 January 2015 At 31 December
2015
Rs. Rs.
Trade receivables 157,000 173,000
Inventory 42,000 38,000
Trade payables 43,600 35,700
Accrued wages and salaries 4,000 4,600
Accrued interest charges 11,200 10,000
Tax payable 45,000 41,000

Required
Present the cash flows from operating activities as they would be presented in a statement
of cash flows using the indirect method. (08)

QUESTION 08
The statements of financial position of Tarbela Traders Limited at the end of two consecutive
financial years were:
Statements of financial position at 31 December 2015 31 December 2014
Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets (at WDV)
Premises 37,000 38,000
Equipment 45,800 17,600
Motor vehicles 18,930 4,080
101,730 59,680
Investments 25,000 17,000
126,730 76,680
Current assets
Inventories 19,670 27,500
Trade receivables and prepayments 11,960 14,410
Cash and bank balances 5,500 5,400
37,130 47,310
Total assets 163,860 123,990

© kashifadeel.com
 CAF 5 – IAS 7

Capital and reserves

Share capital 67,940 67,940
Retained earnings 10,670 7,100
78,610 75,040
Non-current liabilities
Interest-bearing borrowings 25,000 28,000
Page | 12
Current liabilities
Trade payables & accrued expenses 32,050 20,950
Bank overdraft 28,200 –
60,250 20,950
163,860 123,990

Profit for the year ended 31 December 2015 (Rs.3,570,000) is after accounting for
Rs.000
Depreciation
Premises 1,000
Equipment 3,000
Motor vehicles 3,000
Profit on disposal of equipment 430
Loss on disposal of motor vehicle 740
Interest expense 3,000

The written down value of the assets at date of disposal was:

Rs.000
Equipment 5,200
Motor vehicles 2,010
Interest accrued at 31 December 2015 is Rs.400,000.
Required:
Prepare a statement of cash flows for the year ended 31 December 2015. (14)

QUESTION 09
(a) List the elements of financial statements. (02)

(b) Following is the draft balance sheet of XYZ Limited as at 31 December 2014 which
was prepared by its accountant:
Assets Rs. m Equities & liabilities Rs. m
Leasehold land – cost 250 Share Capital 1,000
Leasehold land – acc. amortisation (200) Accumulated profit 1,816
Building – cost 1,000 Long term bank loan 200
Building – accumulated depreciation (500) Trade payables 228
Machinery – cost 1,750 Income tax payable 85
Machinery – acc. depreciation (1,150) Accrued interest 13
Long term deposit 70
Stocks 910
Account receivables – net 361
Cash and bank 851
3,342 3,342

Additional information:
(i) Profit before tax and income tax expenses for the year amounted to Rs. 275
million and Rs. 13 million respectively.

Latest update: March 2020

 CAF 5 – IAS 7

(ii) Balances as at 31 December 2013 were as under:

Rs. in million
Stock 703
Account receivables – net of provision 418
Cash and bank 243
Trade payables 150
Income tax payable 80 Page | 13
Long term deposit 70

The company follows a policy of maintaining provision for bad debts equal to 5% of
account receivables.
(iii) The bank loan was obtained on 1 January 2014 and carries interest @ 9% per annum.

(iv) XYZ uses straight line method for depreciation. Rates of depreciation are as under:
Leasehold land 2%
Building 5%
Machinery 10%

Full month’s depreciation is provided in the month of acquisition but no depreciation

is charged in the month of disposal. Depreciation for the year 2014 has already been
provided.

On review the CFO has discovered the following:

 A machine with list price of Rs. 50 million was purchased on 1 January 2014.
An amount of Rs. 30 million had been paid in cash whereas Rs. 20 million
were adjusted against trade-in of a machine costing Rs. 40 million and having a
book value of Rs. 25 million. The transaction was recorded by debiting the plant
and machinery account by Rs. 30 million i.e. the net amount paid to the supplier.
 One of the company's customers became bankrupt during the year. Rs. 5 million out
of total debt of Rs. 25 million were recovered from him. Balance has to be
written off.
Required:
Prepare a statement of cash flow as at 31 December 2014. (20)

QUESTION 10
The following information has been extracted from the draft financial information of
Nardone Limited.
Statement of comprehensive income for the year ended 31 December 2015
Rs.000 Rs.000
Sales revenue 490
Administration costs (86)
Distribution costs (78)
(164)
Operating profit 326
Interest expense (23)
Profit before tax 303
Taxation (87)
Profit after tax 216
Dividends paid (52)
Retained profit for the year 164

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 CAF 5 – IAS 7

Statements of financial position

31 December 2015 31 December 2014
Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets (see below)
1,145 957
Current assets:
Page | 14 Inventory 19 16
Receivables 38 29
Bank 19 32
76 77
Total assets 1,221 1,034
Share capital 323 232
Revaluation reserve 170 0
Retained earnings 553 389
1,046 621
Non-current liabilities:
Long-term loans 70 320
Current liabilities:
Trade payables 12 17
Tax payable 93 76
105 93
Total equity and liabilities 1,221 1,034

Note on non-current assets

Land and Fixtures &
Machinery Total
buildings fittings
Rs.000 Rs.000 Rs.000 Rs.000
Cost or valuation
At 31 December 2014 830 470 197 1,497
Additions – 43 55 98
Disposals - (18) - (18)
Adjustment on revaluation 70 - - 70
At 31 December 2015 900 495 252 1,647
Depreciation
At 31 December 2014 (90) (270) (180) (540)
Charge for the year (10) (56) (8) (74)
Disposals – 12 – 12
Adjustment on revaluation 100 - - 100
At 31 December 2015 0 (314) (188) (502)
Carrying amount:
At 31 December 2014 740 200 17 957
At 31 December 2015 900 181 64 1,145

You have been informed that included within distribution costs is Rs.4,000 relating to the
loss on a disposal of a non-current asset.

Required
Prepare a statement of cash flows for Nardone Limited for the year ended 31 December
2015. (20)

Latest update: March 2020

 CAF 5 – IAS 7

QUESTION 11
The financial statements of Quetta Track Limited, a limited liability company, at 30 June
were as follows.
2015 2014
Rs.000 Rs.000 Rs.000 Rs.000
ASSETS
Page | 15
Non-current assets
Property cost 22,000 12,000
Depreciation (4,000) (1,000)
18,000 11,000
Plant and equipment
Cost 5,000 5,000
Depreciation (2,250) (2,000)
2,750 3,000
20,750 14,000
Current assets
Inventories 16,000 11,000
Trade receivables 9,950 2,700
Cash and cash equivalents – 1,300
25,950 15,000
Total assets 46,700 29,000

Capital and reserves

Equity capital 3,000 3,000
Accumulated profits 16,200 3,800
19,200 6,800
Non-current liabilities
Loan 6,000 10,000
Current liabilities
Operating overdraft 11,000 –
Trade payables 8,000 11,000
Income tax payable 1,800 1,000
Accrued interest 700 200
21,500 12,200
Total equity and liabilities 46,700 29,000

Statement of comprehensive income (extracts)

2015 2014
Rs.000 Rs.000
Operating profit 15,400 5,900
Financing cost (Interest) (1,000) (1,400)
Profit before tax 14,400 4,500
Income tax expense (2,000) (1,500)
Net profit for the year 12,400 3,000

Equipment of carrying amount Rs.250,000 was sold at the beginning of 2015 for Rs.350,000.

This equipment had originally cost Rs.1,000,000.

In recent years, no dividends have been paid.

Required:
Prepare a statement of cash flows, under the indirect method, for the year ended 30 June
2015. (20)

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 CAF 5 – IAS 7

QUESTION 12
The statements of financial position of Sakhawat Hussain Ltd as at December 31, 2015 and
2014 are as follows:
2015 2014
Rs. Rs.
Current assets 4,750,000 2,850,000
Page | 16
Investments 2,600,000 2,500,000
Non-current assets 9,750,000 9,600,000
Accumulated depreciation (2,950,000) (2,450,000)
14,150,000 12,500,000
Non-current liability (loan) 2,000,000 2,000,000
Current liabilities 1,850,000 1,450,000
Interest liability 200,000 150,000
Share Capital 9,000,000 8,000,000
Retained earnings 1,100,000 900,000
14,150,000 12,500,000

Other information for the year 2015 is as follows:

(i) Investments costing Rs. 250,000 were sold for Rs. 320,000.
(ii) Fully depreciated furniture costing Rs. 200,000 was written-off.
(iii) Non-current assets costing Rs. 960,000 with a net book value of Rs. 160,000 were
sold for Rs. 250,000.
(iv) Interest amounting to Rs. 180,000 was paid during the year.
(v) 20% of the opening and closing balances of current assets are represented by cash.
Required:
Prepare a statement of cash flows for the year ended December 31, 2015. (11)

Latest update: March 2020

 CAF 5 – IAS 7

QUESTION 13
Following are the extracts from income statement of Quality Enterprises (QE) for the year
ended 31 December 2015 and its statement of financial position as at that date, together
with some additional information:
Income statement for the year ended 31 December 2015
Rs. in‘000’ Page | 17
Profit from operations 6,402
Other income 1,357
Interest expense (100)
Profit before tax 7,659
Income tax expense (1,376)
Profit for the year 6,283

Statement of financial position as at 31 December 2015

Equity and liabilities 2015 2014 Assets 2015 2014
Rs. in ‘000’ Rs. in ‘000’
Non-current assets
Owner’s capital 14,219 10,703 Property, plant and 19,628 11,845
equipment
Un-appropriated profit 10,652 6,697 Investments 7,645 6,498
27,273 18,343
Revaluation surplus 2,676 1,911
10% bank loan 6,000 -
Current liabilities Current assets
Trade and other 3,337 4,953 Inventories 4,642 3,073
payables
Income tax payable 1,300 994 Trade and other 2,273 3,865
receivables
Bank overdraft - 27 Cash and bank 3,996 4
4,637 5,974 10,911 6,942
38,184 25,285 38,184 25,285

Additional information:
(i) During the year, movements in property, plant and equipment include:
 Depreciation amounting to Rs. 5,280,000.
 Machinery having a carrying amount of Rs. 2,481,000was sold for Rs. 3,440,000.
 Factory building was revalued from a carrying amount of Rs. 5,963,000 to
Rs. 8,000,000.
 An office building which had previously been revalued, was sold at its
carrying amount of Rs. 2,599,000.
(ii) The owner of QE withdrew Rs. 300,000 per month. The amounts were debited
to un- appropriated profit.
(iii) Trade debts written off during the year amounted toRs. 200,000. The provision for
bad debts as at 31 December 2015 was Rs. 400,000 (2014: Rs. 550,000)
(iv) The interest on bank loan is payable on 30thJune every year. The bank loan
was received on 1 November 2015. Interest for two months has been accrued and
included in trade and other payables.
(v) Other income includes investment income of Rs. 398,000. As at 31 December 2015,
trade and other receivables included investment income receivable amounting
to Rs. 96,000 (2014: Rs. 80,000).
Required:
Prepare a statement of cash flows for Quality Enterprises for the year ended 31
December 2015,using the indirect method. (18)

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 CAF 5 – IAS 7

QUESTION 14
Hot Sauce Limited summarised final accounts are as follows

Statements of financial position

31 December 2014 31 December 2015
Page | 18 Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets:
Plant and machinery at cost 2,700 3,831
Accumulated depreciation (748) (1,125)
Carrying amount 1,952 2,706
Current assets:
Inventory 203 843
Receivables 147 184
Bank 51 -
401 1,027
Total assets 2,353 3,733
Ordinary share capital (Rs1 shares) 740 940
Share premium account 0 100
Retained earnings 671 1,034
1,411 2,074
Non-current liabilities:
Loans 320 150
Current liabilities:
Bank overdraft 0 766
Trade payables and accruals 152 141
Current taxation 470 602
622 1,509
Total equity and liabilities 2,353 3,733

Statement of comprehensive income for year ended 31 December 2015

Rs 000
Profit before tax 1,195
Taxation (602)
Profit after tax 593

Dividend payments during the year were Rs.230,000.

The following information is also available:

(1) The only new loan raised during the year was a five-year bank loan amounting to
Rs.65,000.

(2) Interest charged during the year was Rs.156,000. Interest accrued was Rs.24,000 last
year and Rs.54,000 this year.

(3) Depreciation charged during the year amounted to Rs.401,000. This does not include
any profit or loss on disposal of non-current assets.

(4) During the year plant which originally cost Rs.69,000 was disposed of for Rs.41,000.

(5) During the year the company issued 200,000 new shares.

Required
Prepare a statement of cash flows. (20)

Latest update: March 2020

 CAF 5 – IAS 7

QUESTION 15
The following are the summarised accounts of Mardan Software Limited, a limited liability
company.

Statements of financial position at 31 December

2014 2015
Page | 19
Rs.(000) Rs.(000) Rs.(000) Rs.(000)
ASSETS
Non-current assets
Plant and equipment 2,086 2,103
Fixtures and fittings 1,381 1,296
3,467 3,399
Current assets
Inventory 1,292 1,952
Trade receivables 713 1,486
Short term investment 1,050 600
Cash 197 512
3,252 4,550
Total assets 6,719 7,949
EQUITY AND LIABILITIES
Capital and reserves
Equity capital 4,200 4,500
Share premium reserve 800 900
Accumulated profits (Note 1) 431 1,180
5,431 6,580
Current liabilities
Dividend payable 132 154
Income tax payable 257 312
Trade payables 899 903
1,288 1,369
Total equity and liabilities 6,719 7,949

Statement of comprehensive income (extracts) for the year ended 31 December 2015
Rs.(000)
Profit before taxation 1,381
Income tax expense (310)
Net profit for the period 1,071

Note 1 Accumulated profits

Rs.(000)
Balance at 1 January 431
Net profit for period 1,071
Dividend for the year (322)
Balance at 31 December 1,180

Further information:
(1) Plant and equipment with a carrying amount of Rs184,000 was disposed of for
Rs203,000, whilst a new item of plant was purchased for Rs312,000

(2) Fixtures and fittings with a carrying amount of Rs100,000 were disposed of for Rs95,000;

(3) Depreciation recognised on fixtures and fittings amounted to Rs 351,000.

© kashifadeel.com
 CAF 5 – IAS 7

(4) Dividend for the year was declared during the year. Dividend payable in the statements
of financial position at each year end relate to dividends declared in that year but not
paid over to shareholders by the reporting date.

Required:
Prepare a statement of cash flows for the year ended 31 December 2015 in accordance with
Page | 20 IAS 7: Statement of cash flows (15)

QUESTION 16
The statements of financial position and statement of comprehensive incomes of The Sindh
Robotics Company Limited for two consecutive financial years are shown below.

Statements of financial position

31 December 2013 31 December 2014
Cost Dep’n Net Cost Dep’n Net
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets
Land 43,000 – 43,000 43,000 – 43,000
Buildings 50,000 10,000 40,000 90,000 11,000 79,000
Plant 10,000 4,000 6,000 11,000 5,000 6,000
103,000 14,000 89,000 144,000 16,000 128,000
Investments 50,000 80,000
Current assets
Inventories 55,000 65,000
Trade receivables 40,000 50,000
Bank 3,000 –
98,000 115,000
237,000 323,000
Capital
Shares of Rs. 1 each 40,000 50,000
Share premium 12,000 14,000
Accumulated profit 5,000 25,000
57,000 89,000
Non-current liabilities
10% loan borrowings 120,000 150,000
Current liabilities
Trade payables 40,000 60,000
Dividend payable 20,000 20,000
Bank overdraft – 4,000
60,000 84,000
237,000 323,000

Statements of comprehensive incomes

2013 2014
Rs.000 Rs.000
Revenue 200,000 200,000
Cost of sales (100,000) (120,000)
Gross profit 100,000 80,000
Distribution and administration expenses (50,000) (47,000)
50,000 33,000
Interest (10,000) (13,000)
Net profit for year 40,000 20,000

Latest update: March 2020

 CAF 5 – IAS 7

No sales of non-current assets have occurred during the relevant period. Land was revalued
to Rs. 63,000 during the year. Ignore taxation.

Required:
Prepare a statement of cash flows for the year ended 31 December 2014 using the indirect
method. (15)
Page | 21
QUESTION 17
Use the same data as given in Question 16 (Sindh Robotics Company)

Required:
Prepare a statement of cash flows for the year ended 31 December 2014 using the direct
method. (15)

QUESTION 18
Abida Limited made a net profit of Rs. 256,800 for the year ended June 30, 2015 after
charging depreciation of Rs. 17,500 and loss on disposal of furniture of Rs. 6,800. The sale
proceeds of the furniture were Rs. 12,000.

During the year, the net book value of non-current assets decreased by Rs. 7,400;
receivables increased by Rs. 11,700; inventories decreased by Rs. 21,600 and creditors
increased by Rs. 8,900. A long-term loan of Rs. 75,000 was repaid during the year and
Abida withdrew Rs. 120,000 for his own use.

Required:
Prepare the statement of cash flows for the year ended June 30, 2015. (07)

QUESTION 19
The comparative statements of financial position of Moosani Limited show the following
information:
December 31
2015 2014
Rs. Rs.
Cash 5,200 41,400
Accounts receivable 31,700 21,500
Inventory 25,000 19,400
Investments - 16,900
Furniture 80,000 64,000
Equipment 86,000 43,000
Total 227,900 206,200
Allowance for doubtful accounts 6,500 9,700
Accumulated depreciation on equipment 24,000 18,000
Accumulated depreciation on furniture 8,000 15,000
Trade creditors 10,800 6,500
Accrued expenses 4,300 10,800
Bills payable 6,500 8,600
Long-term loans 31,800 53,800
Share Capital 83,800 73,800
Retained earnings 52,200 10,000
Total 227,900 206,200

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 CAF 5 – IAS 7

Additional data related to 2015 is as follows:

(i) Equipment that had cost Rs. 23,000 and was 40% depreciated at the time of disposal
was sold for Rs. 6,500.

(ii) On January 1, 2015, the furniture was completely destroyed by a fire. Proceeds
received from the insurance company amounted to Rs. 60,000.
Page | 22
(iii) Investments were sold at Rs. 7,500 above their cost.
Required:
Prepare a statement of cash flows for the year ended 31 December 2015. (12)

QUESTION 20
Junaid Janjua Limited has provided you the following statements of financial position and
statement of comprehensive income.

Statements of financial position as on December 31, 2015

2015 2014
Rupees Rupees
Cash 145,000 32,000
Accounts receivable 280,000 104,000
Long-term investments 220,000 170,000
Inventory 424,000 200,000
Prepaid insurance 24,000 36,000
Office supplies 14,000 7,000
Land 1,810,000 2,500,000
Building 2,800,000 2,300,000
Accumulated depreciation (890,000) (720,000)
Equipment 1,200,000 1,150,000
Accumulated depreciation (380,000) (350,000)
Total assets 5,647,000 5,429,000
Accounts payable 158,000 263,000
Wages payable 40,000 24,000
Short-term loans 580,000 580,000
Long-term loans 1,085,000 1,160,000
Share capital 3,290,000 3,290,000
Retained earnings 494,000 112,000
Total liabilities and equity 5,647,000 5,429,000

Statement of comprehensive income for the year ended December 31, 2015
2015
Rupees
Sales revenue 9,280,000
Cost of goods sold (6,199,000)
Gross profit 3,081,000
Operating expenses
Selling expenses 634,000
Administrative expenses 1,348,000
Depreciation expenses 230,000
(2,212,000)
Income from operations 869,000

Latest update: March 2020

 CAF 5 – IAS 7

Other revenues/expenses
Gain on sale of land 64,000
Gain on sale of long term investment 32,000
Loss on sale of equipment (15,000)
81,000
Net income 950,000
Dividend paid (568,000) Page | 23
Retained earnings 382,000

Notes:
(a) Long term investments costing Rs. 100,000 were sold during the year.

(b) Depreciation charged during the year on equipment amounted to Rs. 60,000. Equipment
having a book value of Rs. 75,000 was sold during the year.

Required:
Prepare a statement of cash flows for the year ended December 31, 2015. (14)

QUESTION 21
The statements of financial position of Amin Industries Limited as at 31 August 2014 and
2015 are as follows:
2015 2014 2015 2014
Rs. Rs. Rs. Rs.
Share capital 25,172,000 22,842,000 Noncurrent assets 15,172,000 12,346,000
– book value
Retained earnings 8,261,000 5,100,00

Current liabilities Current assets

Short term finance 2,545,000 1,616,000 Investments 4,911,000 -
Creditors 3,457,000 2,850,000 Inventory 12,178,000 14,950,000
6,002,000 4,466,000 Trade debts
– net of provision for 6,732,000 4,887,000
bad debts
Bank 442,000 225,000
24,263,000 20,062,000
39,435,000 32,408,000 39,435,000 32,408,000

The following information is also available:

Rupees
Profit during the year ended 31 August 2015 3,161,000
Accumulated depreciation on non-current assets – 31 August 2014, 5,605,000
Accumulated depreciation on non-current assets – 31 August 2015 7,470,000
Provision for bad debts – 31 August 2014 385,000
Provision for bad debts – 31 August 2015 484,000

During the year non-current assets costing Rs. 1,500,000 with a carrying amount of Rs.
867,000 were sold for Rs. 1,284,000.

Required:
Prepare a statement of cash flows for the year ended 31 August 2015. Show necessary
workings. (13)

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 CAF 5 – IAS 7

QUESTION 22
The statement of financial position of Liaquat Industries as at 31 December 2016 is as
follows:
2016 2015 2016 2015
Equity and liabilities Assets
-------- Rupees -------- -------- Rupees --------
Owner’s capital 13,938,060 13,665,280 Freehold land 4,778,400 6,600,000
Page | 24 Long-term loan 1,000,000 1,000,000 Building – WDV 5,057,600 4,171,200
Short term loan 1,331,200 1,531,200 Vehicle – WDV 600,000 800,000
Accounts payable 417,120 694,320 Equipment – WDV 1,643,100 2,112,000
Accrued interest 105,600 63,360 Capital WIP 1,478,400 1,821,600
Long-term deposits 580,800 448,800
Inventory 685,608 320,628
Accounts receivable 1,273,272 595,452
Cash 694,800 84,480
16,791,980 16,954,160 16,791,980 16,954,160

The following information has been extracted from income statement:

Rupees
Depreciation expenses 932,500
Finance cost 141,872
Gain on sale of fixed assets (net) 98,960
Net profit before tax 1,525,948

Additional information
(i) In Details of gain on sale of fixed assets are as follows;
Rupees
Gain on sale of freehold land 168,960
Loss on disposal of equipment due to fire (70,000)
98,960
The loss on disposal of equipment represents the WDV of the equipment. The
amount of insurance claim received, amounting to Rs. 30,000 was erroneously
credited to accumulated depreciation.

(ii) Repairs to building amounting to Rs. 50,000 were erroneously debited to building
account on 31 December 2016.
(iii) Transfer from capital work in progress to building amounted to Rs. 1,200,000.
(iv) The owner withdrew Rs. 150,000 per month.

Required
Prepare statement of cash flows for the year ended 31 December 2016 in accordance with
IAS – 7 using indirect method. (12)

QUESTION 23
Junior Accountant of Drum Limited has prepared the following statement of cash flows for
the year ended 31 December 2018:
Statement of cash flows Rs. in '000
Cash flows from operating activities
Increase in retained earnings 1,360
Increase in dividend payable 200
Increase in net trade receivables (100)
Increase in interest accrued 50
1,510

Latest update: March 2020

 CAF 5 – IAS 7

Cash flows from investing activities

Increase in land and building (2,600 )
Increase in equipment (1,550)
Decrease in inventory 400
Decrease in tax payable (60)
(3,810)
Cash flows from financing activities Page | 25
Increase in share capital and premium 2,350
Decrease in long term loan (1,000)
Increase in trade and other payables 600
1,950
Decrease in cash balance during the year (350)
Opening cash balance 450
Closing cash balance 100

Junior Accountant informed you that he has taken the difference of opening and closing
balances of each balance sheet item and classified each difference as either operating,
investing or financing cash flows. He further informed that the statement is tied up with the
cash balances appearing in the balance sheet. He has ignored the following information:
(i) Depreciation on building and equipment amounted to Rs. 480,000 and Rs. 810,000
respectively.
(ii) During the year, an equipment costing Rs. 560,000 and having a book value of Rs.
310,000 was sold for Rs. 440,000.
(iii) Provision for doubtful debts was increased by Rs. 140,000.
(iv) Dividend amounting to Rs. 700,000 was paid during the year.
(v) Interest and tax expenses for the year amounted to Rs. 378,000 and Rs. 650,000
respectively.
(vi) Trade and other payables as at 31 December 2018 included Rs. 950,000 for
purchase of land and building.

Required:
Prepare statement of cash flows for the year ended 31 December 2018, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (14)

QUESTION 24
Following are the extracts from the financial statements of Sunday Traders Limited (STL) for
the year ended 30 June 2019:

Statement of financial position as on 30 June 2019

2019 2018 2019 2018
Assets Equity & liabilities
Rs. in million Rs. in million
Property, plant & equipment 8,555 7,240 Share capital (Rs. 100 each) 4,650 3,450
Investment property 1,800 1,120 Share premium 1,600 1,240
Stock in trade 4,800 4,500 Retained earnings 1,652 (655)
Prepayments 184 268 Long term loans 6,024 6,523
Trade receivables 3,800 3,600 Trade payables 3,422 5,390
Cash 194 480 Contract liability 250 40
Accrued liabilities 310 180
Interest payable 135 110
Current maturity: long-term loans 850 700
Provision for taxation 440 230
19,333 17,208 19,333 17,208

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 CAF 5 – IAS 7

Statement of profit or loss for the year ended 30 June 2019

Rs. in million
Sales 29,700
Cost of sales (15,750)
Gross profit 13,950
Distribution cost (6,185)
Page | 26 Administrative cost (2,302)
Other income 404
Profit before interest and tax 5,867
Interest expense (1,210)
Profit before tax 4,657
Tax expense (1,150)
Profit after tax 3,507

Additional information:
(i) 72% of sales were made on credit.
(ii) Depreciation expense for the year amounted to Rs. 750 million which was charged to
distribution and administrative cost in the ratio of 3:1.
(iii) Distribution cost includes:
 Rs. 40 million in respect of loss on disposal of equipment. The written down value
at the time of disposal was Rs. 152 million.
 impairment loss on vehicles amounting to Rs. 24 million.
(iv) Loan instalments (including interest) of Rs. 1,984 million were paid during the year.
(v) Other income comprises of:
 increase in fair value of investment property amounting to Rs. 220 million.
 rent received from investment property amounting to Rs. 184 million.
(vi) During the year, STL issued right shares at premium.

Required:
Prepare STL’s statement of cash flows for the year ended 30 June 2019 using direct
method. (19)

Latest update: March 2020

 CAF 5 – IAS 7

ANSWER 01
Rs. Effect
Cash deposited in bank account 100,000 No effect
Sale of prize bonds 500,000 No effect
Investment in treasury bills of government with 60 days maturity 800,000 No effect
Page | 27
ANSWER 02
Rs. Rs.
Cash in hand 200,000 200,000
Cash at bank 140,000 140,000
Short term investments (1 month) in government treasury bills 40,000 40,000
Trade debts 40,000
Investment in prize bonds 80,000 80,000
Other receivables 40,000
Bank overdraft 20,000 (20,000)
TOTAL 440,000

ANSWER 03
TRANSACTION ANSWER
1. Cash received from customers Operating
2. Cash sales Operating
3. Cash proceeds from disposal of PPE Investing
4. Right issue of shares Financing
5. Repayment of loan Financing
6. Dividend received by stock market broker Operating
7. Dividend paid Financing
8. Salaries paid to employees Operating
9. Interest on debentures paid Financing
10. Interest received by a trading entity on some investment Investing
11. Interest received by a bank on loans advanced Operating
12. Taxes paid Operating
13. Purchase of a patent and software Investing
14. Advance paid to supplier Operating
15. Depreciation Non-cash
16. Bonus issue of shares Non-cash
17. Impairment loss on a plant Non-cash

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 CAF 5 – IAS 7

ANSWER 04
Part (a)
Oxygen Limited
Statement of cash flows for the year ended June 30, 2012
Cash flows from operating activities Rs.
Profit before tax 89,000
Page | 28 Adjustments:
Depreciation 12,000
Finance costs 21,000
Operating capital before working capital changes 122,000
Increase in inventory (230,000 – 185,000) (45,000)
Decrease in prepayments (14,000 – 16,000) 2,000
Increase in trade receivables (52,000 – 30,000) (22,000)
Increase in trade payables (39,000 – 44,000) (5,000)
Cash generated from operations 52,000
Interest paid (21,000)
Income tax paid (b/f 4,000 + PL 30,000 – c/f 5,000) (29,000)
Net cash from operating activities 2,000

Part (b)
Oxygen Limited
Statement of cash flows for the year ended June 30, 2012
Cash flows from operating activities Rs.
Cash received from customers (500,000 revenue – 22,000 increase in RA) 478,000
Cash paid to suppliers and employees (W1) (426,000)
Cash generated from operations 52,000
Interest paid (21,000)
Income tax paid (b/f 4,000 + PL 30,000 – c/f 5,000) (29,000)
Net cash from operating activities 2,000

W1 Rs.
Cost of sales (310,000)
Operating expenses (80,000)
Finance costs (21,000)
(411,000)
Adjustments:
Depreciation 12,000
Finance costs 21,000
Operating capital before working capital changes (378,000)
Increase in inventory (230,000 – 185,000) (45,000)
Decrease in prepayments (14,000 – 16,000) 2,000
Increase in trade payables (39,000 – 44,000) (5,000)
Cash paid to suppliers and employees (426,000)

ANSWER 05
Nitrogen Limited
Statement of cash flows
For the year ended June 30, 2012
Cash flows from investing activities Rs.
Cash paid to acquire PPE (b/f 800,000 – 200,000 dep. – c/f 850,000) (250,000)
Sale proceeds of intangible assets 200,000
Net cash used in investing activities (50,000)

Latest update: March 2020

 CAF 5 – IAS 7

Cash flows from financing activities

Issue of shares [b/f 500,000 + 150,000] – [c/f 600,000 + 200,000] 150,000
Long term loan obtained 500,000
Redemption of debentures (100,000 – 400,000) (300,000)
Net cash from financing activities 350,000

ANSWER 06 Page | 29
Nadir Limited
Statement of Cash flow
For the year ended 31 December 2017
Rs 000
Cash flow from operating activities
Profit before tax 8,955
Adjustments
Depreciation 7,350
Doubtful debts [(6,840 x 5 / 95) – (4,446 x 5 / 95)] 126
Financial charges 1,100
Loss on disposal 5,200 – 4,800 400
Operating profit before working capital changes 17,931
Decrease in stock in trade 150
Increase in receivables [(6,840 x 100 / 95) – (4,446 x 100 / 95)] (2,520)
Decrease in other receivables [(2,385 – 1,800) – 800] 215
Increase in trade payables 500
Decrease in other payables and accruals [(680 – 112) – (660 – 48)] (44)
Cash generated from operations 16,232
Finance cost paid W2 (1,036)
Income tax paid [500 OP + 2945 PL – 650 CL] (2,795)
Net cash flow from operating activities 12,401

Cash flow from investing activities

Purchase of PPE W4 (14,150)
Sale proceeds from disposal [4,800 – 1,800 receivable] 3,000
Net cash used in investing activities (11,150)

Cash flow from financing activities

Repayment of loan (900)
Dividend paid W1 (4,000)
Proceeds from issue of shares W3 2,800
Net cash from financing activities (2,100)

Net decrease in cash & cash equivalents (849)

Cash & cash equivalents at beginning of the year 3,204
Cash & cash equivalents at end of the year 2,355

W1: Retained earnings

Rs. 000 Rs. 000
Bonus shares 10% 1,000 b/d 12,440
Cash (Dividend) 4,000 Profit after tax 6,010
c/d 13,450
18,450 18,450

© kashifadeel.com
 CAF 5 – IAS 7

W2: Interest expense

Rs. 000 Rs. 000
Cash β 1,036 b/d 48
c/d 112 PL 1,100
1,148 1,148

Page | 30 W3: Share capital + Share premium

Rs. 000 Rs. 000
b/d 10,000 + 0 10,000
RE (Bonus issue) 10% 1,000
c/d 12,400 + 1,400 13,800 Cash (Right issue) β 2,800
13,800 13,800

W4: PPE
Rs. 000 Rs. 000
b/d 15,800 Depreciation 7,350
Revaluation surplus 4,000 Disposal 5,200
Cash β 14,150 c/d 21,400
33,950 33,950

ANSWER 07
TRANGO LIMITED
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs.
Profit before tax 102,000
Adjustments for:
Depreciation / amortization of non-current assets 46,000
Loss on disposal 9,000
Finance costs 24,000
Operating profit before working capital changes 181,000
Decrease in inventory (42,000 – 38,000) 4,000
Increase in trade receivables (173,000 – 157,000) (16,000)
Decrease in trade payables (35,700 – 43,600) (7,900)
Increase in accrued wages & salaries (4,600 – 4,000) 600
Cash generated from operations 161,700
Interest paid W1 (25,200)
Income tax paid W2 (42,000)
Net cash from operating activities 94,500

W1 – Accrued interest charges

Cash β 25,200 b/d 11,200
c/d 10,000 Interest charges 24,000
35,200 35,200

W2 – Tax payables
Cash β 42,000 b/d 45,000
c/d 41,000 PL 38,000
83,000 83,000

Latest update: March 2020

 CAF 5 – IAS 7

ANSWER 08
TARBELA TRADERS Limited
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 3,570
Adjustments for:
Depreciation of non-current assets 1,000 + 3,000 + 3,000 7,000 Page | 31
Gain on disposal of Equipment (430)
Loss on disposal of Motor vehicle 740
Finance costs 3,000
Operating profit before working capital changes 13,880
Decrease in inventory (27,500 – 19,770) 7,830
Decrease in trade receivables (14,410 – 11,960) 2,450
Increase in trade payables (net of accrued interest) [(32,050-400) – 10,700
(20,950-0)]
Cash generated from operations 34,860
Interest paid W5 (2,600)
Net cash from operating activities 32,260

Cash flows from investing activities:

Purchase of property, plant and equipment W1 36,400 + W2 19,860 (56,260)
Purchase of long term investment (25,000 – 17,000) (8,000)
Proceeds from sale of asset W3 5,630 + W4 1,270 6,900
Net cash used in investing activities (57,360)

Cash flows from financing activities:

Repayment of borrowings (28,000 – 25,000) (3,000)
Net cash used in financing activities (3,000)

Net decrease in cash and cash equivalents (28,100)

Cash and cash equivalents at beginning of period 5,400
Cash and cash equivalents at end of period (5,500 – 28,200) (22,700)

W1 – Equipment
b/d 17,600 Depreciation 3,000
Cash β 36,400 Disposal 5,200
c/d 45,800
54,000 54,000

W2 – Motor vehicle
b/d 4,080 Depreciation 3,000
Cash β 19,860 Disposal 2,010
c/d 18,930
23,940 23,940

W3 – Disposal A/C – Equipment

Equipment 5,200 Cash β 5,630
Gain on disposal 430
5,630 5,630

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 CAF 5 – IAS 7

W4 – Disposal A/C – Motor vehicle

Motor vehicle 2,010 Loss on disposal 740
Cash β 1,270
2,010 2,010

W5 – Accrued Interest
Page | 32 Cash β 2,600 b/d Nil
c/d 400 Interest Expense 3,000
3,000 3,000

ANSWER 09
Part (a)
The elements of financial statement are as under:
(i) The elements directly related to the measurement of financial position in the
statement of financial position are assets, liabilities and equity.
(ii) The elements directly related to the measurement of performance in the statement of
comprehensive income are income and expenses.

Part (b)
XYZ Limited
Statement of Cash flow
For the year ended 31 December 2014
Rs in million
Cash flow from operating activities
Profit before taxation 275 – 5 J1 + 2 J2 – 20 J3 + 1 J4 253
Adjustments:
Depreciation [250 x 2%] + [1,000 x 5%] + [(1,750 + 20 J1 – 40 J1) x 10%] 228
Loss on disposal of machine J1 5
Interest expense (200 × 9%) 18
Bad and doubtful debts 20 J3 – 4 W1 16

(Increase) / decrease in stock (703–910) (207)

(Increase) / decrease in account receivables W2 60
Increase / (decrease) in trade payables (228–150) 78
198
Finance cost paid (18–13) (5)
Income tax paid (80+13–85) (8)
(13)
Net cash flow from operating activities 438

Cash flow from investing activities

Capital expenditure- machine purchased amount paid (30)

Cash flow from financing activities

Loan 200

Net increase/decrease in cash & cash equivalents 608

Cash & cash equivalents at beginning of the year 243
Cash & cash equivalents at end of the year 851

Latest update: March 2020

 CAF 5 – IAS 7

W1: Provision for bad debts

Rs. m Rs. m
PL 4 b/d 418 x 5/95 22
c/d 361x 5/95 – 1 J4 18
22 22

W2: Receivables Page | 33

Rs. m Rs. m
Bal b/d 418 x 100 / 95 440 Bad debts 20
Decrease 60
c/d 361 x 100/95 – 20 J4 360
440 440

Machine (New) 50 – 30 20
Accumulated depreciation 15
(-) 1
Loss 5
Machine (old) 40

Accumulated depreciation 2
(-) 2
Depreciation expense 2
Depreciation impact of above error correction 40 – 20 = 20 x 10%= 2
Bad debts 20
(-) 3
Receivables 20
Write off of bad debts
Allowance for doubtful debts 1
(-) 4
Bad debts 1
Impact of bad debts on doubtful debts 20 x 5% = 1

ANSWER 10
NARDONE LIMITED
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 303
Adjustments for:
Depreciation of non-current assets 74
Loss on disposal 4
Finance costs 23
Operating profit before working capital changes 404
Increase in inventory (16 - 19) (3)
Increase in trade receivables (29 - 38) (9)
Decrease in trade payables (17 - 12) (5)
Cash generated from operations 387
Interest paid (23)
Income tax paid W1 (70)
Net cash from operating activities 294
Cash flows from investing activities:
Purchase of property, plant and equipment (98)
Proceeds from sale of asset W2 2
Net cash used in investing activities (96)

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 CAF 5 – IAS 7

Cash flows from financing activities:

Shares issued (323 - 232) 91
Repayment of loan (320 – 70) (250)
Dividends paid (52)
Net cash used in financing activities (211)

Page | 34 Net decrease in cash and cash equivalents (13)

Cash and cash equivalents at beginning of period 32
Cash and cash equivalents at end of period 19
W1 – Tax payable
Cash β 70 b/d 76
c/d 93 PL 87
163 163

W2 – Disposal A/C
Machinery 18 Accumulated Depreciation 12
Loss on disposal 4
Cash β 2
18 18

ANSWER 11
QUETTA TRACK LIMITED
Statement of cash flows for the year ended 30 June 2015
Cash flows from operating activities: Rs. 000
Profit before tax 14,400
Adjustments for:
Depreciation of non-current assets W3 3,000 + W4 1,000 4,000
Gain on disposal W5 (100)
Finance costs 1,000
Operating profit before working capital changes 19,300
Increase in inventory (11,000 – 16,000) (5,000)
Increase in trade receivables (2,700 – 9,950) (7,250)
Decrease in trade payables (8,000 – 11,000) (3,000)
Cash generated from operations 4,050
Interest paid W6 (500)
Income tax paid W7 (1,200)
Net cash from operating activities 2,350

Cash flows from investing activities:

Purchase of property, plant and equipment (W1 10,000 + W2 1,000) (11,000)
Proceeds from sale of asset 350
Net cash used in investing activities (10,650)

Cash flows from financing activities:

Repayment of loan (4,000)
Net cash used in financing activities (4,000)

Net decrease in cash and cash equivalents (12,300)

Cash and cash equivalents at beginning of period 1,300
Cash and cash equivalents at end of period (11,000)

Latest update: March 2020

 CAF 5 – IAS 7

Workings
W1 – Property
b/d 12,000
Cash β 10,000 c/d 22,000
22,000 22,000

W2 – Plant & equipment Page | 35

b/d 5,000 Disposal 1,000
Cash β 1,000 c/d 5,000
6,000 6,000

W3 – Accumulated depreciation – Property

b/d 1,000
c/d 4,000 Depreciation 3,000
4,000 4,000
W4 – Accumulated depreciation – Plant & equipment
Disposal 750 b/d 2,000
c/d 2,250 Depreciation 1,000
3,000 3,000
W5 – Disposal A/C
Plant & equipment 1,000 Acc. Depreciation – P & E 750
Gain on disposal β 100 Cash 350
1,100 1,100
W6 – Accrued Interest
Cash β 500 b/d 2,00
c/d 700 Interest expense 1,000
1,200 1,200

W7 – Income Tax payable

Cash β 1,200 b/d 1,000
c/d 1,800 PL 2,000
3,000 3,000

ANSWER 12
SAKHAWAT HUSSAIN Limited
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 200
Adjustments for:
Depreciation of non-current assets W2 1,500
Gain on disposal of equipment W3 (90)
Gain on Sale of investment (320 – 250) (70)
Finance cost W4 230
Operating profit before working capital changes 1,770
Increase in current assets (2,850 – 4,750) x 80% (1,520)
Increase in current liabilities (1,850 – 1,450) 400
Cash generated from operations 650
Interest paid (180)
Net cash from operating activities 470

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 CAF 5 – IAS 7

Cash flows from investing activities:

Purchase of non-current assets W5 (1,310)
Purchase of investment W1 (350)
Proceeds from sale of Investment 320
Proceeds from sale of equipment 250
Net cash used in investing activities (1,090)
Page | 36
Cash flows from financing activities:
Issue of share capital 1,000
Net cash used in financing activities 1,000

Net increase in cash and cash equivalents 380

Cash and cash equivalents at beginning of period (2,850 x 20%) 570
Cash and cash equivalents at end of period (4,750 x 20%) 950
Workings
W1 – Investments
b/d 2,500 Disposal 250
Cash β 350 c/d 2,600
2,850 2,850
W2 – Accumulated depreciation – Non-current assets
Written off – Furniture 200 b/d 2,450
Disposal (960 – 160) 800 PL β 1,500
c/d 2,950
3,950 3.950

W3 – Disposal A/C
Non-current asset 960 Acc. Depreciation 800
Gain on disposal β 90 Cash 250
1,050 1,050

W4 – Interest liability
Cash 180 b/d 150
c/d 200 Interest expense β 230
380 380
W5 – Non-current assets
b/d 9,600 Written off – Furniture 200
Cash β 1,310 Disposal 960
c/d 9,750
10,910 10,910

Latest update: March 2020

 CAF 5 – IAS 7

ANSWER 13
Quality Enterprises
Statement of cash flows
For the year ended 31 December 2015
Rs’ 000
Cash flow from operating activities
Profit before tax 7,659 Page | 37
Non-cash adjustments
Investment income (398)
Interest expense 100
Depreciation charge 5,280
Bad debt expense [(200 +(400 – 550)] 50
Profit on disposal of property, plant and equipment (3,440–2,481) (959)

Changes in working capital

Increase in inventories (3,073–4,642) (1,569)
Decrease in trade and other receivables W4 1,558
Decrease in trade and other payables [(4,953–(3,337–100))] (1,716)
Net changes in working capital (cash generated from operations) 10,005
Income tax paid (W-2) (1,070)
Net cash from operating activities (A) 8,935

Cash flow from investing activities

Purchase of property, plant and equipment W3 (16,106)
Proceeds from sale of property, plant and equipment (3,440+2,599) 6,039
Investment income received W1 382
Purchase of investments (7,645 – 6,498) (1,147)
Net cash (used in) investing activities (B) (10,832)

Cash flow from financing activities

Obtained bank loan 6,000
Additional capital (14,219 – 10,703) 3,516
Drawings (3,600)
Net cash from financing activities (C) 5,916

Net increase in cash and cash equivalents (A+B+C) 4,019

Cash and cash equivalents at beginning of period (4–27) (23)
Cash and cash equivalents at end of period 3,996

W1: Investment income received

Balance b/d 80 Cash (balancing) 382
Income Statement 398 Balance c/d 96
478 478

W2: Tax paid

Taxes paid (balancing) 1,070 Balance b/d 994
Balance c/d 1,300 Income Statement 1,376
2,370 2,370

W3: Property, plant and Equipment

Balance b/d 11,845 Disposals (2,481+2,599) 5,080
Rev. surplus (8,000 – 5,963) 2,037 Depreciation 5,280
Additions (balancing) 16,106 Balance c/d 19,628
29,988 29,988

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 CAF 5 – IAS 7

W4: Receivables
Bal. b/d 3,865 + 550 – 80 4,335 Bad debts 200
Decrease 1,558
Bal. c/d 2,273 + 400 – 96 2,577
4,335 4,335
Page | 38
ANSWER 14
HOT SAUCE LIMITED
Statement of cash flows for the year ended 30 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 1,195
Adjustments for:
Depreciation of non-current assets 401
Loss on disposal W2 4
Finance costs 156
Operating profit before working capital changes 1,756
Increase in inventory (203 - 843) (640)
Increase in trade receivables (147 - 184) (37)
Decrease in trade payables (net of accrued interest) [(152-24) – (141- (41)
54)]
Cash generated from operations 1,038
Interest paid W3 (126)
Income tax paid W4 (470)
Net cash from operating activities 442

Cash flows from investing activities:

Purchase of property, plant and equipment W5 (1,200)
Proceeds from sale of asset 41
Net cash used in investing activities (1,159)

Cash flows from financing activities:

Issue of shares [SC + SP] 300
Loan obtained 65
Repayment of long term loan W6 (235)
Dividends paid (230)
Net cash used in financing activities (100)

Net decrease in cash and cash equivalents (817)

Cash and cash equivalents at beginning of period 51
Cash and cash equivalents at end of period (766)
Workings
W1 – Accumulated depreciation
Disposal β 24 b/d 748
c/d 1,125 Depreciation 401
1,149 1,149

W2 – Disposal A/C
Plant & Machinery 69 Cash 41
Accumulated depreciation 24
W1
Loss on Disposal 4
69 69

Latest update: March 2020

 CAF 5 – IAS 7

W4 – Accrued interest
Cash β 126 b/d 24
c/d 54 Interest expense 156
180 180

W4 – Tax payable Page | 39

Cash β 470 b/d – current tax 470
c/d – Current tax 602 PL 602
1,072 1,072

W5 – Plant & Machinery

b/d 2,700 Disposal 69
Cash β 1,200 c/d 3,831
3,900 3,900
W6 – Loans
Cash β 235 b/d 320
c/d 150 Cash / Bank 65
180 385

ANSWER 15
MARDAN SOFTWARE LIMITED
Statement of cash flows
For the year ended 31 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 1,381
Adjustments for:
Depreciation of non-current assets W1 351 + W2 111 462
Loss on disposal W3 5
Loss on disposal W4 (19)
Operating profit before working capital changes 1,829
Increase in inventory (1,292 – 1,952) (660)
Increase in trade receivables (713 – 1,486) (773)
Increase in trade payables (903 - 899) 4
Cash generated from operations 400
Income tax paid W5 (255)
Net cash from operating activities 145

Cash flows from investing activities:

Purchase of property, plant and equipment W1 366 + W2 312 (678)
Proceeds from sale of asset W3 95 + W4 203 298
Net cash used in investing activities (380)

Cash flows from financing activities:

Shares issued (4,500 - 4,200) 300
Share premium (900 - 800) 100
Dividends paid W6 (300)
Net cash from financing activities 100

Net decrease in cash and cash equivalents (135)

Cash and cash equivalents at beginning of period (1,050 + 197) 1,247
Cash and cash equivalents at end of period (600 + 512) 1,112

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 CAF 5 – IAS 7

W1 – Furniture & Fittings (net)

b/d 1,381 Disposal 100
Cash β 366 Depreciation 351
c/d 1,296
1,747 1,747

Page | 40 W2 – Plant & equipment (net)

b/d 2,086 Disposal 184
Cash 312 Depreciation β 111
c/d 2,103
2,398 2,398

W3 – Disposal A/C – F&F

Furniture & fixture 100 Cash 95
Loss on disposal β 5
100 100

W4 – Disposal A/C – P&E

Plant & equipment 184 Cash 203
Gain on disposal β 19
203 203

W5 – Income Tax payable

Cash β 255 b/d 257
c/d 312 PL 310
567 567

W6 – Dividend payable
Cash β 300 b/d 132
C/d 154 PL 322
454 454

ANSWER 16
THE SINDH ROBOTICS COMPANY
Statement of cash flows for the year ended 31 December 2014
Cash flows from operating activities: Rs. 000
Net profit 20,000
Adjustments
Depreciation 2,000
Interest expense 13,000
Operating profit before working capital changes 35,000
Increase in trade receivables (50,000 – 40,000) (10,000)
Increase in inventories (65,000 – 55,000) (10,000)
Increase in trade payables (60,000 – 40,000) 20,000
Cash generated from operations 35,000
Interest paid (13,000)
Net cash from operating activities 22,000

Cash flows from investing activities:

Purchase of non-current assets (90,000 – 50,000) + (11,000 – 10,000) (41,000)
Purchase of investment (80,000 – 50,000) (30,000)
Net cash used in investing activities (71,000)

Latest update: March 2020

 CAF 5 – IAS 7

Cash flows from financing activities:

Issue of shares 12,000
Increase in long term loan (150,000 – 100,000) 30,000
Net cash from financing activities 42,000

Net decrease in cash and cash equivalents (7,000)

Cash and cash equivalents at beginning of period 3,000 Page | 41
Cash and cash equivalents at end of period (4,000)

ANSWER 17
THE SINDH ROBOTICS COMPANY
Statement of cash flows for the year ended 31 December 2014
Cash flows from operating activities: Rs. 000
Cash received from customers W1 190,000
Cash paid to suppliers and employees W2 (155,000)
Cash generated from operations 35,000
Interest paid (13,000)
Net cash from operating activities 22,000

Cash flows from investing activities:

Purchase of non-current assets (90,000 – 50,000) + (11,000 – 10,000) (41,000)
Purchase of investment (80,000 – 50,000) (30,000)
Net cash used in investing activities (71,000)

Cash flows from financing activities:

Issue of shares 12,000
Increase in long term loan (150,000 – 100,000) 30,000
Net cash from financing activities 42,000

Net decrease in cash and cash equivalents (7,000)

Cash and cash equivalents at beginning of period 3,000
Cash and cash equivalents at end of period (4,000)

W1: Cash receied from Customers Rs. 000

Revenue 200,000
Increase in trade receivables (50,000 – 40,000) (10,000)
190,000

W2: Cash paid to suppliers and for expenses Rs. 000

COS + Distribution + FC (120,000) +(47,000) +(13,000) (180,000)
Adjustments
Depreciation 2,000
Interest expense 13,000
Increase in inventories (65,000 – 55,000) (10,000)
Increase in trade payables (60,000 – 40,000) 20,000
(155,000)

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 CAF 5 – IAS 7

ANSWER 18
ABIDA Limited
Statement of cash flows for the year ended 30 June 2015
Cash flows from operating activities: Rs.
Profit before tax 256,800
Adjustments for:
Page | 42 Depreciation of non-current assets 17,500
Loss on disposal of fixed assets 6,800
Operating profit before working capital changes 281,100
Decrease in inventories 21,600
Increase in receivables (11,700)
Increase in trade payables 8,900
Net cash from operating activities 299,900
Cash flows from investing activities:
Purchase of non-current assets W1 (28,900)
Proceeds from sale of asset 12,000
Net cash used in investing activities (16,900)
Cash flows from financing activities:
Drawings / reduction in capital (120,000)
Repayment of long term loan (75,000)
Net cash used in financing activities (195,000)
Net increase in cash and cash equivalents 88,000

Workings
W1 – Non-current assets
Decrease in assets 7,400 Disposal (12,000 + 6,800) 18,800
Cash β 28,900 Depreciation 17,500
36,300 36,300

ANSWER 19
MOOSANI Limited
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs.
Profit before tax [52,200 – 10,000] 42,200
Adjustments for:
Depreciation of non-current assets W2 15,200 + W3 8,000 23,200
Loss on disposal of equipment W4 7,300
Reduction in doubtful debts [6,500 – 9,700] (3,200)
Gain from insurance claim W5 (11,000)
Gain on Sale of investment (7,500)
Operating profit before working capital changes 51,000
Increase in inventory (19,400 – 25,000) (5,600)
Increase in trade receivables (21,500 – 31,700) (10,200)
Decrease in accrued expenses (4,300 - 10,800) (6,500)
Decrease in bills payable (6,500 - 8,600) (2,100)
Increase in trade payables (10,800 – 6,500) 4,300
Cash generated from operations 30,900

Net cash from operating activities 30,900

Latest update: March 2020

 CAF 5 – IAS 7

Cash flows from investing activities:

Purchase of non-current assets W6 66,000 + W1 80,000 (146,000)
Insurance claim against furniture 60,000
Proceeds from sale of Investment (16,900 + 7,500) 24,400
Proceeds from sale of equipment 6,500
Net cash used in investing activities (55,100)
Page | 43
Cash flows from financing activities:
Issue of share capital 10,000
Payment of long term loan (22,000)
Net cash used in financing activities (12,000)

Net decrease in cash and cash equivalents (36,200)

Cash and cash equivalents at beginning of period 41,400
Cash and cash equivalents at end of period 5,200

Workings
W1 – Furniture
b/d 64,000 Disposal 64,000
Cash β 80,000 c/d 80,000
144,000 144,000

W2 – Accumulated depreciation – Equipment

Disposal (23,000 x 40%) 9,200 b/d 18,000
c/d 24,000 PL β 15,200
33,200 33,200

W3 – Accumulated depreciation – Furniture

Disposal (related to all furniture) 15,000 b/d 15,000
c/d 8,000 PL β 8,000
23,000 23,000

W4 – Disposal A/C – Equipment

Equipment 23,000 Acc. Depreciation 9,200
Cash 6,500
Loss on disposal β 7,300
23,000 23,000

W5 – Disposal A/C – Furniture

Furniture 64,000 Acc. Depreciation 15,000
Gain from insurance claim β 11,000 Cash 60,000
75,000 75,000

W6 – Equipment
b/d 43,000 Disposal 23,000
Cash β 66,000 c/d 86,000
109,000 109,000

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 CAF 5 – IAS 7

ANSWER 20
JUNAID JANJUA Ltd
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities: Rs. 000
Profit before tax 950
Adjustments for:
Page | 44 Depreciation of non-current assets 230
Gain on disposal of land (64)
Loss on disposal of equipment 15
Gain on Sale of investment (32)
Operating profit before working capital changes 1,099
Increase in inventories (200 – 424) (224)
Increase in trade receivables (104 - 280) (176)
Decrease in prepaid insurance (36 -24) 12
Decrease in office supplies (14 -7) (7)
Decrease in trade payables (263 - 156) (105)
Increase in wages payable (24 - 40) 16
Cash generated from operations 615

Net cash from operating activities 615

Cash flows from investing activities:

Purchase of non-current assets W2 500 + W3 155 (655)
Purchase of investment W5 (150)
Proceeds from sale of land (690 W1 + 64) 754
Proceeds from sale of Investment (100 + 32) 132
Proceeds from sale of equipment (75 – 15) 60
Net cash from investing activities 141

Cash flows from financing activities:

Long term loan repayment (1,160 – 1,085) (75)
Dividend paid (568)
Net cash used in financing activities (643)

Net increase in cash and cash equivalents 113

Cash and cash equivalents at beginning of period 32
Cash and cash equivalents at end of period 145

W1 – Land
b/d 2,500 Disposal β 690
c/d 1,810
2,500 2,500

W2 – Building
b/d 2,300
Cash β 500 c/d 2,800
2,800 2,800

W3 – Equipment
b/d 1,150 Disposal (75 + 30 W4) 105
Cash β 155 c/d 1,200
1,305 1,305

Latest update: March 2020

 CAF 5 – IAS 7

W4 – Accumulated depreciation – Equipment

Disposal β 30 b/d 350
c/d 380 Depreciation 60
410 410
W5 – Long term investment
b/d 170 Disposal 100 Page | 45
Cash β 150 c/d 220
320 320

ANSWER 21
AMIN INDUSTRIES Ltd
Statement of cash flows for the year ended 31 August 2015
Cash flows from operating activities: Rs. 000
Profit before tax 3,161
Adjustments for:
Depreciation of non-current assets W1 2,498
Gain on disposal of asset (1,284 – 867) (417)
Provision for bad and doubtful debts (484 - 385) 99
Operating profit before working capital changes 5,341
Decrease in inventories (14,950 – 12,178) 2,772
Increase in trade receivables W2 (1,944)
Increase in trade payables (2,850 – 3,457) 607

Cash generated from operations 6,776

Net cash from operating activities 6,776

Cash flows from investing activities:
Purchase of non-current assets W3 (6,191)
Purchase of investment (4,911)
Proceeds from sale of non–current asset 1,284
Net cash from investing activities (9,818)
Cash flows from financing activities:
Issue of shares 2,330
Short term finance 2,545 – 1,616 929
Net cash from financing activities 3,259
Net increase in cash and cash equivalents 217
Cash and cash equivalents at beginning of period 225
Cash and cash equivalents at end of period 442
W1 – Accumulated depreciation – Equipment
Disposal (1,500 - 867) 633 b/d 5,605
c/d 7,470 Depreciation for the year β 2,498
8,103 8,103
W2 – Trade receivables
b/d (4,887 + 385) 5,272
Increase β 1,944 c/d (6,732 + 484) 7,216
7,216 7,216
W3 – Non-current asset
b/d (12,346 + 5,605) 17,951 Disposal 1,500
Cash β 6,191 c/d (15,172 + 7,470) 22,642
24,142 24,142

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 CAF 5 – IAS 7

ANSWER 22
Cash flows from operating expenses Rupees
Net profit before tax (1,525,948 + 30,000 J1 – 50,000 J2) 1,505,948
Adjustments for:
Depreciation expense 932,500
Page | 46 Gain and loss on disposal 98,960 as given + 30,000 J1 (128,960)
Finance cost 141,872
Adjusted profit before working capital changes 2,451,360
Accounts receivables (595,452 – 1,273,272) (677,820)
Inventory (320,628 – 685,068) (364,980)
Accounts payable (417,120 – 694,320) (277,200)
Cash generated from operations 1,131,360
Interest paid W3 (99,632)
Net cash from operating activities 1,031,728

Cash flows from investing activities

Proceeds from sale of land 1,821,600 W1 + 168,960 gain 1,990,560
Proceeds from insurance for loss of equipment 30,000
Capital expenditure W2 (856,800)
Long term deposits (448,800 – 580,800) (132,000)
Net cash from investing activities 1,031,760

Cash flows from financing activities

Drawings made by the owner (150,000 x 12 months) (1,800,000)
Amount injected by the owner W4 546,832
Repayment of short term loan (1,331,200 – 1,531,200) (200,000)
Net cash (used in ) financing activities (1,453,168)

Net increase in cash and cash equivalent 610,320

Cash at the beginning of the year 84,480
Cash at the end of the year 694,800

W1 – Land
b/d Land 6,600,000 Disposal 1,821,600
c/d 4,778,400
6,600,000 6,600,000

W2 – CWIP
b/d CWIP 1,821,600 Transfer 1,200,000
Cash 856,800 c/d CWIP 1,478,400
2,678,400 2,678,400

W3 – Interest Paid
Cash 99,632 b/d 63,360
c/d 105,600 PL 141,872
205,232 205,232

W4 – Capital
Drawings 1,800,000 b/d 13,665,280
Profit (as corrected above) 1,505,948
c/d after correction of profit 13,918,060 Cash 546,832
15,718,060 15,718,060

Latest update: March 2020

 CAF 5 – IAS 7

Accumulated depreciation/Equipment 30,000

(-) 1
Loss due to fire 30,000
Error corrected
Repairs expense 50,000
(-) 2
Building account 50,000
Error corrected Page | 47

ANSWER 23
Drum Limited
Statement of cash flows for the year ended 31 December 2018
Cash flows from operating activities Rs. in ‘000
Profit before tax PAT 2,260 + Tax 650 2,910
Adjustment for:
Depreciation 480+810 1,290
Gain on disposal (130)
Doubtful debts 140
Interest expense 378
4,588
Working capital change
Decrease in inventory 400
Increase in trade receivables +100 + 140 (240)
Decrease in trade payable +600–950 (350)
(190)
Cash generated from operations 4,398
Interest paid (328)
Tax paid (710)
3,360
Cash flows from investing activities
Purchase of land and building –2,600–480+950 (2,130)
Purchase of equipment –1,550–810–310 (2,670)
Disposal of equipment 440
(4,360)
Cash flows from financing activities
Issuance of shares 2,350
Loan repaid (1,000)
Dividend paid (700)
650
Decrease in cash during the year (350)
Cash and cash equivalent at beginning 450
Cash and cash equivalent at end 100

Retained earnings
Dividend 900 b/d 0
c/d 1,360 PAT 2,260
2,260 2,260

Dividend payable
Cash 700 b/d 0
c/d 200 RE 900
900 900

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 CAF 5 – IAS 7

Interest
Cash 328 b/d 0
c/d 50 PL 378
378 378
Tax
Page | 48 Cash 710 b/d 60
c/d 0 PL 650
710 710

ANSWER 24
Sunday Traders Limited
Statement of Cash Flows
For the year ended 30 June 2019
Cash flows from operating activities Rs. m
Cash receipts from customers (W1) 29,710
Cash paid to suppliers and for expenses (W2) (25,477)
Cash generated from operations 4,233
Interest paid 110+1,210–135 (1,185)
Income taxes paid 230+1,150–440 (940)
Net cash inflow from operating activities 2,108

Cash flows from investing activities

Purchase of property, plant and equipment (8,555–7,240)+24+152+750 (2,241)
Proceeds from disposal of PPE 152–40 112
Rent received from investment property 184
Purchase of investment property (1,800–1,120)–220 (460)
Net cash outflow from investing activities (2,405)

Cash flows from financing activities

Proceeds from issue of shares (4,650–3,450)+(1,600–1,240) 1,560
Dividend paid 1,652+655–3,507 (1,200)
Repayment of loans 1,984 – 1,185 interest (799)
New loans acquired (6,024–6,523)+799+(850–700) 450
Net cash inflow from financing activities 11

Net decrease in cash and cash equivalents (286)

Cash and cash equivalent at the beginning of the year 480
Cash and cash equivalent at the end of the year 194

W1: Cash receipts from customers – sales Rs. m

Sales for the year 29,700
Increase in trade receivables balances 3,600–3,800 (200)
Increase in contract liability balances 250–40 210
Cash received from customers 29,710

Latest update: March 2020

 CAF 5 – IAS 7

W2: Cash paid to suppliers and for expenses Rs. m

Cost of sales (15,750)
Distribution cost (6,185)
Administrative cost (2,302)
Other income 404
Finance costs (1,210) Page | 49

Depreciation 750
Impairment 24
Gain on investment property (220)
Loss on disposal 40
Rent income on investment property (184)
Finance costs 1,210

Increase in stock balances 4,800–4,500 (300)

Decrease in prepayment balances 184–268 84
Decrease in trade payable balances 5,390–3,422 (1,968)
Increase in accrued liabilities balances 180–310 130
25,477

© kashifadeel.com
 CAF 5 – IAS 7

Page | 50

Latest update: March 2020

 CAF 5 – IAS 7

ICAP OBJECTIVE BASED QUESTIONS

01. Faria Limited is involved in the business of furniture. At 1 January 2018 the company’s issued
share capital consists of 50,000 Rs. 1 shares. During the year 2018 company has made a
bonus issue of 1 for 5 shares.

What is impact of bonus issue on cash flows of the business?

(a) Decrease in cash flows from operating activities Page | 51
(b) Increase in cash flows from financing activities
(c) No impact
(d) Increase in cash generated from operations

02. A company has incurred a loss of Rs. 40,000 during the year 2018; however, the balance in the
bank account at end of the year is more than the balance at start of the year.

What does this mean?

(a) Company has allowed a longer credit period to the credit customers
(b) Company has purchased more stock
(c) Company has made a right issue during the year
(d) Company has purchased fixed assets during the year

03. A company has provided the following information:

2018 2017
Rs. Rs.
Share capital 110,000 100,000
Share premium 30,000 40,000
A bonus issue of 1 for every 10 shares held has been made during the year.

What is the amount to be reported in cash flow from financing activities for the year 2018?
(a) Rs. 10,000 Inflow
(b) 0
(c) Rs. 10,000 outflow
(d) Cannot be determined

04. A company has provided following balances

Rs.
Non–current asset – 31 December 2018 125,000
Accumulated depreciation 1 January 2018 25,000
Accumulated depreciation 31 December 2018 38,000
During the year an asset having cost Rs. 10,000 was sold for Rs. 6,000 and gain on disposal
was Rs. 3,000.

What is the charge for depreciation for the year to be adjusted in statement of cash flows?
(a) Rs. 13,000
(b) Rs. 19,000
(c) Rs. 20,000
(d) Rs. 38,000

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 CAF 5 – IAS 7

05. A company has provided following information as at 31 March 2019:

2019 Rs. 2018 Rs.
Retained earnings 50,000 38,000

Following adjustments were made during the year 2019:

Dividends paid Rs. 5,000
Page | 52 Transfer to general reserves Rs. 12,000
Tax charge Rs. 4,000

What is the amount of profit before tax for the year 2019 for the purposes of preparing
statement of cash flows?
(a) Rs. 29,000
(b) Rs. 33,000
(c) Rs. 24,000
(d) Rs. 25,000

06. A company has provided the following data:

Rs.
Receivables at 1 April 2018 12,000
Receivables at 31 March 2019 25,000
Credit sales during the year 75,000
Discount allowed during the year 3,000
What is the amount to be shown as cash received from customers in statement of cash flows
using direct method?
(a) Rs. 62,000
(b) Rs. 75,000
(c) Rs. 59,000
(d) Rs. 65,000

07. Which TWO of the following are considered as inflows in a company’s statement of cash flows?
(a) Bonus shares issued
(b) Decrease in accounts receivables
(c) Increase in inventory
(d) Increase in accounts payables

08. Which of the following item will appear in cash flows from financing activities section of
statement of cash flows?
(a) Cash paid to acquire non-current assets
(b) Dividends paid
(c) Bonus shares issued
(d) Depreciation for the year

09. Following data is available for a company for the year ended 31 December 2018:
Rs.
Operating profit before working capital changes 30,000
Increase in accounts receivables 5,000
Increase in inventory 3,000
Increase in accounts payable 2,000
Interest paid 500
What is the net cash generated from cash flows from operating activities for the year ended 31
December 2018?
(a) Rs. 23,500
(b) Rs. 24,500
(c) Rs. 29,500
(d) Rs. 19,500

Latest update: March 2020

 CAF 5 – IAS 7

10. Which of the following is an advantage of statement of cash flows?

(a) It determines the profitability of a business
(b) It helps users to estimate the future expected cash flows of the business
(c) It determines the ratio of business debts and equity
(d) It helps in determining the net assets of a business

11. A company has made following investments during the year:

Rs. Page | 53
6 months Advance rent paid to landlord 30,000
Short term investments bond (highly liquid) 25,000
Debentures purchased- redeemable after 7 years 50,000
Non–current assets purchased 45,000

What is the amount to be shown in investing activities for the year?

(a) Rs. 45,000
(b) Rs. 150,000
(c) Rs. 95,000
(d) Rs. 100,000

12. A company has provided following data at the end of year 2017:
2017
Rs.
Share capital Rs. 1 each 100,000
Share premium 3,000
The company has made a right issue of 1 for 5 shares during the year 2018 at Rs. 1.2 per
share.

What is the amount to be shown in the cash flows from financing activities?
(a) Rs. 24,000 outflow
(b) Rs. 24,000 inflow
(c) Rs. 20,000 inflow
(d) Rs. 4000 inflow

13. How should gain on sale of used equipment be reported in a cash flow statement, using indirect
approach?
(a) In operating activities as deduction from Profit before tax
(b) In investing activities as a reduction in cash inflow
(c) In investing activities as an increase in cash inflows
(d) In operating activities as addition to profit before tax

14. Which TWO of the following are added as non-cash adjustments to the profit before tax in the
cash flow from operating activities section of statement of cash flows?
(a) Interest expense
(b) Interest income
(c) Loss on sale of non–current assets
(d) Tax charge for the year

15. Where, in a company are financial statements complying with international accounting
standards, should you find the proceeds of non-current assets sold during the period?
(a) Statement of cash flows and statement of financial position
(b) Statement of changes in equity and statement of financial position
(c) Statement of profit or loss and statement of cash flows
(d) Statement of cash flows only

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 CAF 5 – IAS 7

16. Zahid & Co. reported a profit Rs. 40,000 for the year, after charging the following:
Rs.
Depreciation 4,000
Loss on sale of assets 3,000
During the year there was a decrease in accounts receivables of Rs. 1,000.

Page | 54 What was the net cash flow generated from operations based on above data?

Rs. ___________

17. Asmat Limited made a profit for the year of Rs. 320,500, after accounting for depreciation Rs.
32,500. During the year following transactions took place:
Rs.
Purchase of machinery 125,000
Increase in accounts receivables 45,000
Increase in inventory 28,000
Increase in accounts payable 12,600

What is the net increase in cash and bank balance during the year?

Rs. ___________

18. A company has provided following information:

Rs.
4% Loan notes 1,000,000
Interest payable 1 January 2018 10,000
Interest payable 31 December 2018 20,000

What is the amount to be reported as interest paid during the year 2018 in the Statement of
Cash Flows?

Rs. ___________

19. Furqan Limited has provided following information about non–current assets:
Rs.
Cost as at 1 January 2018 350,000
Cost as at 31 December 2018 450,000

During the year an asset costing Rs. 100,000 and having net book value of Rs. 40,000 was
sold at a profit of Rs. 30,000.

What is the net to be shown as outflow in the “Cash flow from investing activities” section in
Statement of Cash Flows?
Rs. ___________

20. The following amounts have been calculated for inclusion in the statement of cash flow of
House Limited:
Rs.
Net cash inflow from financing activities 145,000
Net cash outflow from investing activities 160,000
Increase in cash and cash equivalents 24,000
Income taxes paid 65,000
Interest paid 12,000

How much cash has been generated from operations?

Rs. ___________

Latest update: March 2020

 CAF 5 – IAS 7

21. A cash flow statement provides information that enables users to evaluate the changes in:
(a) Solvency
(b) Net assets
(c) Its financial structure
(d) Its liquidity

22. Daily sales and purchases and employee costs comprise:

(a) Operating activities Page | 55
(b) Investing activities
(c) Financing activity
(d) Component of cash and cash equivalent

23. Which of the following involves a movement of cash?

(a) A rights issue
(b) Depreciation of fixed assets
(c) Creation of a provision for doubtful debts
(d) A bonus issue

24. Activities that result in changes in the size and composition of the equity capital and borrowings
of an entity are called:
(a) Operating activities
(b) Investing activities
(c) Financing activity
(d) None of these

25. Which of the following are not the operating activities?

(a) Interest paid
(b) Cash payments of income taxes
(c) Collections from customers
(d) Payment of dividends

26. Amplifier Limited had sales of Rs.120 million during the year. Trade and other receivables
increased from Rs.12 million to Rs.16 million, an increase of Rs. 4 million. What amount of
cash was received from customers during the year?
(a) Rs.124 million
(b) Rs.116 million
(c) Rs.120 million
(d) None of these

27. Cost of sales for Shah Textile Limited during the year was Rs.100 million. Opening inventory
was Rs.20 million and closing inventory was Rs. 28 million. Opening trade payables were Rs.5
million and closing trade payables were Rs.9 million. What amount of cash was paid to
suppliers?
(a) Rs.102 million
(b) Rs.104 million
(c) Rs.108 million
(d) Rs.110 million

28. Zaman Limited extracted general ledger from which it shows salaries and wages expense of
Rs.50 million during the year. Its cash flow statement reported cash paid to employees of Rs.42
million. The opening balance of accrued salaries and wages was Rs.3.6 million.

What was the closing balance for accrued salaries and wages?
(a) Rs.11.6 million
(b) Rs.11.8 million
(c) Rs.4.4 million
(d) Rs.3.8 million

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 CAF 5 – IAS 7

29. Sale proceeds from disposal of property, plant and equipment are classified as:
(a) Financing activities
(b) Operating activities
(c) Investing activities
(d) Either financing or operating activities, depending on which method (direct or indirect)
is used to determine cash flows from operating activities
Page | 56 30. Which one of the following events will increase the cash balances of a business?
(a) Loan repayment to banks
(b) Bank granting it an overdraft facility
(c) Debtors paying amounts owed
(d) Sale of stock on credit

31. A company with healthy profits is facing a cash shortage. Which of the following events could
account for this?
(a) Delaying payments to creditors
(b) The shortening of the credit period granted to debtors
(c) The recent acquisition of machinery
(d) An increase in dividend proposed by the directors

32. Which one of the following companies is most likely to run into cash flow problems?
(a) A loss making company making components of vital strategic importance to the
government
(b) A profitable new retailer about to embark on ambitious expansion plans
(c) A company which has recently sold part of its operations so as to concentrate on its
core areas
(d) Reasonably profitable, long established company with no expansion plans

33. What is the immediate effect of making a capital repayment on a loan on cash flow and profits?
(a) On profit - None; On cash – Decrease
(b) On profit - Increase; On cash – Decrease
(c) On profit - Decrease; On cash – Decrease
(d) On profit - Decrease; On cash – None

34. A company has a negative cash flow from operating activities. What could explain this negative
cash flow?
(a) High levels of dividend payments
(b) A substantial investment in new fixed assets
(c) A sudden increase in credit sales
(d) The repayment of a loan

35. Which of the following is NOT a cash outflow for the firm?
(a) Dividends
(b) Interest payments.
(c) Taxes
(d) Bad debts

Latest update: March 2020

 CAF 5 – IAS 7

OBJECTIVE BASED ANSWERS

01. (c) Bonus issue of shares involves transfer from Reserves to share capital of the
company. There is no cash flow involved.
02. (c) The statement indicates that the company had net cash receipts (inflows) despite the
losses, which is indicative of receipts of cash by issuing right shares.
Page | 57
03. (b) No cash is paid or received for bonus issue of share capital.
Entry to record bonus issue
Dr CR
Rs. Rs.
Share premium 10,000
Share capital 10,000

Share Capital + Share premium

b/d 100,000+40,000 140,000
c/d
110,000 + 30,000 140,000
140,0000 140,000

04. (c)
Accumulated depreciation
Particulars Rs... Particulars Rs.
Disposal (see below) 7,000 b/f 25,000
c/f 38,000 Depreciation 20,000
45,000 45,000

Disposal
Particulars Rs... Particulars Rs.
Asset 10,000 Provision for dep. (bal) 7,000
Gain on disposal 3,000 Cash 6,000
13,000 13,000

05. (b)
Retained earnings
Particulars Rs... Particulars Rs.
Dividends paid 5,000 b/f 38,000
Transfer to reserves 12,000 Profit for the year 29,000
c/f 50,000
67,000 67,000
Profit after tax 29,000 + Tax 4,000 = Rs. 33,000 profit before tax

06. (c)
Accounts receivables
Particulars Rs... Particulars Rs.
b/f 12,000 Cash (bal.) 59,000
Sales 75,000 Discount allowed 3,000
c/f 25,000
87,000 87,000

07. (b) & Decrease in accounts receivables indicates that they have paid the debt, hence,
(d) inflow for us.
Increase in accounts payable indicates that we have not paid them, thus reducing
outflows (or increasing cash flows)
Bonus shares issued do not affect cash flows.
Increase in inventory is cash outflows.

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 CAF 5 – IAS 7

08. (b) Dividend is paid to shareholders who provide finance to the business; therefore, it is
treated as financing activity.
Cash paid to acquire non-current assets is shown in investing activities.
Bonus issues have no impact on cash flows of the business.
Depreciation is non-cash item and is adjusted in operating activities.
Page | 58 09. (a)
Rs.
Operating profit before working capital changes 30,000
Increase in accounts receivables (5,000)
Increase in inventory (3,000)
Increase in accounts payable 2,000
Interest paid (500)
23,500

10. (b) Users of financial statements may predict future cash flows from past data of how the
entity generates and uses its cash.
Profitability is reflected in statement of comprehensive income.
Debt/Equity and net assets are reflected in statement of financial position.
11. (c) Only debentures and non – current assets purchased are included in investing
activities; Rs. 50,000+45,000= Rs. 95,000
Investment in short term bonds will be considered cash equivalent and advance rent
would affect operating activities cash flows.
12. (b) Shares issued = 100,000/5 = 20,000
Cash received = 20,000xRs.1.2= Rs. 24,000
13. (a) The gain on disposal in included in profit before tax as other income. This is deducted
back in order to determine the cash figure.
14. (a & c) Interest expense is added back as interest paid is separately reported.
Loss on disposal is added back as this is included in profit before tax as an expense.
Interest income is deducted back.
Tax charge need not be added back as already the amount taken is profit before tax.
15. (d)
16. Rs.
48,000
Rs.
Profit before tax 40,000
Adjustments for non-cash items
Depreciation 4,000
Loss on sale of fixed assets 3,000
Operating profit before working capital changes 47,000
Decrease in accounts receivables 1,000
Cash generated from operations 48,000

Latest update: March 2020

 CAF 5 – IAS 7

17. Rs.
167,600 Cash flows from operating activities Rs.
Profit before tax 320,500
Depreciation 32,500
Operating profit before working capital changes 353,000
Increase in accounts receivables (45,000)
Increase in inventory (28,000) Page | 59
Increase in accounts payable 12,600
292,600

Cash flow from investing activities

Purchase of machinery (125,000)
167,600

18. Rs. 30,000

Interest payable
Particulars Rs. Particulars Rs.
Cash 30,000 b/f 10,000
c/f 20,000 Interest expense 40,000
50,000 50,000
Interest expense = Rs. 1,000,000x4%= Rs. 40,000
19. Rs.
130,000 Amounts to be shown in Cash flows from investing activities are;
Cash flows from investing activities Rs.
Cash paid to acquire assets (200,000)
Cash received on disposal 70,000
130,000

Non-current assets
Particulars Rs. Particulars Rs.
b/f 350,000 Disposal 100,000
Cash 200,000 c/d 450,000
550,000 550,000

Disposal
Particulars Rs. Particulars Rs.
Asset 100,000 Acc. Dep [10,000 – 60,000
4,000]
Gain on disposal 30,000 Cash 70,000
130,000 130,000

20. Rs.
116,000 Rs.
Cash generated from operations (β) 116,000
Interest paid (12,000)
Income taxes paid (65,000)
Net cash from operating activities (β) 39,000
Net cash outflow from investing activities (160,000)
Net cash inflow from financing activities 145,000
Increase in cash and cash equivalents 24,000

21. (d)

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 CAF 5 – IAS 7

22. (a)
23. (a)
24. (c)
25. (d)
Page | 60 26. (b)
27. (b)
28. (a)
29. (c)
30. (c)
31. (c)
32. (b)
33. (a)
34. (c)
35. (d)

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

Interpretation of financial
- statements & Ratio
Analysis
13
Page | 1
INTRODUCTION
ANALYSIS AND INTERPRETATION

Calculation of key ratios Explanation of ratios to

from financial statements establish strengths and
weaknesses
PURPOSE
Depends on USER

Management Lender / analyst Investors / analyst

Cost control Lending Buy/Hold/Sell shares
Profitability analysis Security Quality of management
Investment decisions Credit worthiness

Comparison required with:

Previous years
Predetermined forecasts
Industry averages

LIMITATIONS – FS

Availability of Consistency Historic cost accounting

information
Cost/difficulty of obtaining Changes in accounting Inherent limitations of
Information policies between years HCA in periods of price
level
Different policies used by changes
different companies
A technique whereby complicated information is summarised to a common
denominator so that a meaningful comparison of the company's performance
and financial position can be made, or comparison be made with another
similar company
Ratio
analysis
A ratio is simply one figure divided by another meaningful figure with the
objective of disclosing significant relationships and trends which are not
immediately evident from the examination of individual balances appearing in
the accounts

© kashifadeel.com
 CAF 5 – Interpretation & Analysis

DIVISION OF RATIOS

FINANCIAL WORKING CAPITAL INVESTOR

LIQUIDITY
PERFORMANCE EFFICIENCY RATIOS

ROCE% SHORT TERM Stock t/o in days ROE%

Page | 2 Profit margin% Current ratio Debtors t/o in days EPS
Gross profit% Acid-test ratio Creditors t/o in days Dividend yield%
Net profit% Assets turnover Dividend cover
DEBT RATIOS
Gearing
Interest cover

PERFORMANCE RATIOS
Profitability and asset utilization
Return on Capital Employed (ROCE)

Profit before interest and tax (PBIT) Comments on how

Share capital + reserves + long term liabilities efficiently capital has
OR been employed by
Total assets – current Liabilities management

Profitability Asset utilization

Profit margin Asset turnover
Profit Sales
Sales Capital Employed
Comments on how profitable are sales and Measures performance of company in
control of operating costs generating sales from assets at their disposal

Gross profit margin Return on Equity

GP PAT – Dp
Sales Avg. Equity
 Measures margin earned  Measure return on investments by
 Indicates changes in margin and product shareholders
mix  Normally market value of equity is used

Operating cost ratio Return on Assets

Operating expenses PBIT
Sales Assets
Indicates whether costs are being controlled (other expense ratios Measures return as
may be calculated in same way e.g. cost of sales ratio) %age of assets

It can be useful to measure the annual growth (or decline) in sales and other costs
measured as a percentage of amounts in previous year.

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

LIQUIDITY RATIOS
Net working capital = CA - CL
Short term solvency
Can business pay its creditors / employees on time and service its assets
Page | 3
Current ratio (current ratio) Acid ratio (quick ratio)
Current assets Current assets – inventory
Current liabilities Current liabilities
 Indicates any potential  Indicates real short-term
liquidity problems liquidity

OPERATIONAL EFFICIENCY
Cash (operating) cycle is Working capital Overtrading is a condition
Inventory days management / efficiency where an entity’s receivables
+ Receivables days Inventory and credit control and inventory increases usually
– Payables days. more than proportionately to
revenue, cash is decreased at
alarming stage and payables
increase significantly.

Stock & Credit control (Multiple times) Stock and Credit control (Days)
Inventory turnover Inventory days
Cost of Sales Average Inventory x 365
Avg. Inventory Cost of sales
 Indicates times the inventory is moved  Indicates holding period

Receivable turnover Receivable days

Credit Sales Trade receivables x 365
Avg. Receivables Credit sales
 Number of times debt is collected  Number of days to collect debts
Payable turnover Payable days
Credit purchases Trade payables x 365
Avg. payables Credit purchases
 Number of times payables are paid  Number of days to pay debts

LONG TERM SOLVENCY

Gearing and long term financial strength
Risk business takes from using debt capital

Gearing: debt / equity ratio Interest cover

Long term debt*
Equity PBIT
Long term debt* Interest
Equity + Long term debt
Indicates how vulnerable company is to lenders of long Indicates safety of interest
term finance or how reliant it is on external finance payments
* Loans + redeemable preference shares + deferred tax + lease liability

© kashifadeel.com
 CAF 5 – Interpretation & Analysis

FINANCIAL STATEMENT ANALYSIS

Vertical analysis (also known as common-size analysis) is a popular
Vertical
method of financial statement analysis that shows each item on a statement
analysis
as a percentage of a base figure within the statement.
A horizontal analysis, or trend analysis, is a procedure in
Page | 4 Horizontal
fundamental analysis in which an analyst compares ratios or line items in a
analysis
company’s financial statements over a certain period of time.
Ratio
Already covered earlier.
analysis

Illustration
Terminator’s financial statements for the year to 30 September 2003 are set out below:
Income statement 2017 2016
Vertical Horizontal
Rs. Rs.
Sales revenue 100% 2,425 2,400 1%
Cost of sales (77%) (1,870) (1,900) 2%
Gross profit 23% 555 500 11%
Other operating expenses (14%) (335) (300) 12%
Operating profit 9% 220 200 10%
Finance costs (1%) (34) (30) 13%
Profit before taxation 8% 186 170 9%
Income tax (4%) (90) (80) 13%
Profit after taxation 4% 96 90 7%
Statement of Financial Position 2017 2016
Vertical Horizontal
Rs. Rs.
Non-current assets 48% 540 500 8%
Current Assets
Inventory 24% 275 250 10%
Accounts receivable 28% 320 300 7%
Bank - nil 50 (100%)
52% 595 600 (1%)
100% 1,135 1,100 3%
Share Capital and Reserves
Ordinary shares 14% 150 150 0%
Accumulated profits 16% 185 89 108%
30% 335 239 40%
Non-current liabilities
8% loan notes 26% 300 400 (25%)
Current liabilities
Bank overdraft 6% 65 nil 100%
Trade accounts payable 31% 350 386 (9%)
Taxation 7% 85 75 13%
44% 500 461 8%
100% 1,135 1,100 3%

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

USERS, IMPORTANCE AND LIMITATIONS

WHO ARE THESE USERS AND WHAT INFORMATION DO THEY WANT?
Shareholders (investment decisions) Profit and dividend prospects
Loan creditors (lending decisions) Creditworthiness and liquidity
Employees (safety of employment) Wage bargaining and future prospects Page | 5
Suppliers (credit decisions) Ability to pay on time and short term liquidity
Note that most users will be interested in what has happened in the past, and what may
happen in the future!

EXAM TECHNIQUE:
RATIO ANALYSIS-----------use appendices to show calculations / always show formula used

COMMENTS (cause) & CONSEQUENCES (effect) 3 steps

- The gearing ratio has moved from......}
- The gearing ratio measures.................} What is the overall picture?
- The move may be due to................}

USES OF RATIOS
Financial ratio analysis helps a business in a number of ways. The importance and
advantages of financial ratios are given below:
 Ratios help in analyzing the performance trends over a long period of time.
 They also help a business to compare the financial results to those of competitors.
 Ratios assist the management in decision making.
 They also point out problem and weak areas along with the strength areas.
 Ratios help to develop relationships between different financial statement items.
 Ratios have the advantage of controlling for differences in size. For example, two
businesses may be quite different in size but can be compared in terms of
profitability, liquidity, etc., by the use of ratios.

LIMITATIONS OF FINANCIAL STATEMENTS AND RATIO ANALYSIS

Financial statement are time and cost producing. Ratio analysis can be used to compare
information taken from the financial statements to gain an analytical understanding of the
results, financial position and cash flows of a business. This analysis is a useful tool,
especially for an outsider such as a supplier, lender or an investor. However, there are a
number of limitations of ratio analysis which are given below:
All of the information used in ratio analysis is derived from actual historical
results. This does not mean that the same results will carry forward into
Historical
the future. However, you can use ratio analysis on pro forma information
and compare it to historical results for consistency.
The information on the income statement is stated in current costs (or
Historical vs close to it), whereas many elements of the balance sheet are stated at
current cost historical cost (which could vary substantially from current costs). This
disparity can result in unusual ratio results.
If the rate of inflation has changed in any of the periods under review, this
can mean that the numbers are not comparable across periods. For
Inflationary
example, if the inflation rate was 100% in one year, sales would appear to
effect
have doubled over the preceding year, when in fact sales did not change
at all.
The information in a financial statement line item that you are using for a
ratio analysis may have been aggregated differently in the past, so that
Aggregation
running the ratio analysis on a trend line does not compare the same
information through the entire trend period.

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 CAF 5 – Interpretation & Analysis

Different companies in a similar industry may have different policies for

Accounting recording the same accounting transaction. This means that comparing the
policies and ratio results of different companies may be like comparing apples and
estimates oranges. For example, one company might use reducing
balance method while another company uses straight-line depreciation.
You need to place ratio analysis in the context of the general business
Page | 6 environment. For example, 60 days of sales outstanding for receivables
Business
might be considered poor in a period of rapidly growing sales but might be
condition
excellent during an economic contraction when customers are in severe
financial condition and unable to pay their bills.
It can be quite difficult to ascertain the reason for the results of a ratio. For
example, an acid test ratio of 2:1 might appear to be excellent, until you
realize that the company just sold a large amount of its stock to bolster its
Interpretation
cash position. A more detailed analysis might reveal that the acid test ratio
will only temporarily be at that level, and will probably decline in the near
future.
It can be difficult to interpret a ratio analysis comparison between two
companies that are pursuing different strategies. For example, one
company may be following a low-cost strategy, and so is willing to accept a
Company
lower gross margin in exchange for more market share. Conversely, a
strategy
company in the same industry is focusing on a high customer service
strategy where its prices are higher and gross margins are higher, but it
will never attain the revenue levels of the first company.
In short, ratio analysis has a variety of limitations that can restrict its usefulness. However,
as long as you are aware of these problems and use alternative and supplemental methods
to collect and interpret information, ratio analysis is still useful.

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 CAF 5 – Interpretation & Analysis

SYLLABUS

Reference Content/Learning outcome

Interpretation of financial statements and ratio analysis including Page | 7

A3
limitations of financial statement and ratio analysis
Compute the following ratios:
 Current ratio
 Acid-test ratio/quick ratio
 Gross profit
 Return on equity
LO1.3.1  Return on assets
 Return on capital employed
 Debt-equity ratio
 Inventory turnover
 Debtor turnover
 Creditor turnover
Interpret the relationship between the elements of the financial statements with
LO1.3.2
regard to profitability, liquidity, efficient use of resources and financial position.
Draw conclusions from the information contained within the financial statements
LO1.3.3 for appropriate user (Preparation of financial statements is not required from the
ratios provided / calculated).
LO1.3.4 Understand the limitation of financial statements and ratio analysis.
Proficiency level: 2
Testing level: 2

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
CAF 5
15 12 11 12 14 - 16
Objective Type 02 01
CAF 7
- - 07 06 10

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 CAF 5 – Interpretation & Analysis

PRACTICE Q&A
Sr.# Description Marks Reference
1H Terminator 09 KA / FR
2C Boom Limited: ratios and reasons for variation from the
11 PE S18
industry
Page | 8
3H Amir vs Mo: Calculating nine ratios of two businesses 09 QB
4H Alpha Limited & Omega Limited: Liquidity and efficiency
08 QB
ratios with comparative analysis
5H Computing liquidity, working capital and debt ratios 06 PE S16
6C Progressive Steel Limited: Possible reasons for variation
12 PE A17
from given ratios
7H Wasim: Calculation of ratios over two years 09 QB
8H Hassan Limited: Ratios and comments for two years with
10 PE A16
three years data
9C Dairy Foods Limited: Analysis of claim, ratios, and
15 PE S17
comparison
10H SK Limited: Compute ratios and comment 12 PE A18
11H Keyboard Limited 14 PE S19

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 CAF 5 – Interpretation & Analysis

QUESTION 01
Terminator’s financial statements for the year to 30 September 2003 are set out below:
Income statement Rs.
Sales revenue 2,425
Cost of sales (1,870)
Gross profit 555
Page | 9
Other operating expenses (335)
Operating profit 220
Finance costs (34)
Profit before taxation 186
Income tax (90)
Profit after taxation 96
Extracts of changes in equity: Rs.000
Accumulated profits – 1 October 2002 179
Net profit for the period 96
Dividends paid (interim Rs.60,000; final Rs.30,000) (90)
Accumulated profits – 30 September 2003 185
Statement of Financial Position Rs. Rs.
Non-current assets (note (i)) 540
Current Assets
Inventory 275
Accounts receivable 320
Bank nil 595
1,135
Share Capital and Reserves
Ordinary shares (25 cents each) 150
Accumulated profits 185
335
Non-current liabilities
8% loan notes 300
Current liabilities
Bank overdraft 65
Trade accounts payable 350
Taxation 85 500
1,135

Notes
(i) The details of the non-current assets are (Rs.):
Cost Accumulated Net book
depreciation value
At 30 September 2003 3,600 3,060 540
(ii) The market price of Terminator’s shares throughout the year averaged Rs.6·00 each.
Required
Calculate the relevant ratios from the above data. (09)

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 CAF 5 – Interpretation & Analysis

QUESTION 02
Boom Limited (BL) is a manufacturer of sports goods. Following financial statements for the
year ended 31 December 2017 have been submitted to the Chief Executive Officer (CEO).

Statement of profit or loss Rs. in ‘000

Revenues 21,000
Page | 10 Cost of sales (17,500)
Gross profit 3,500
Operating expenses (1,900)
Finance cost (450)
Profit before tax 1,150
Taxation (345)
Profit after tax 805

Statement of financial position Rs. in ‘000

Property, plant and equipment 7,500
Current assets 1,500
9,000
Share capital 4,000
Reserves 1,000
Non-current liabilities 3,000
Current liabilities 1,000
9,000

Although performance of BL has improved from the last year, CEO wants to compare the
results with other companies operating in sports manufacturing industry. In this respect,
following industry data has been gathered:
Gross profit margin 23.5%
Net profit margin 7.7%
Current ratio 2.75
Gearing ratio 50:50
Return on non-current asset 32.9%
Return on capital employed 27.4%
Return on equity 31.3%

Required:
(a) Compute BL’s ratios for comparison with the industry. (04)
(b) For each ratio, give one possible reason for variation from the industry. (07)

QUESTION 03
The income statements and statements of financial position of two manufacturing
companies in the same sector are set out below.
Amir Mo
Rs. Rs.
Revenue 150,000 700,000
Cost of sales (60,000) (210,000)
Gross profit 90,000 490,000
Interest payable (500) (12,000)
Distribution costs (13,000) (72,000)
Administrative expenses (15,000) (35,000)
Profit before tax 61,500 371,000
Income tax expense (16,605) (100,170)
Profit for the period 44,895 270,830

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 CAF 5 – Interpretation & Analysis

Amir Mo
Non-current assets Rs. Rs.
Property - 500,000
Plant and equipment 190,000 280,000
190,000 780,000
Current assets
Inventories 12,000 26,250 Page | 11
Trade receivables 37,500 105,000
Cash at bank 500 22,000
50,000 153,250
240,000 933,250

Equity
Share Capital 156,000 174,750
Retained earnings 51,395 390,830
207,395 565,580
Non-current liabilities
Long-term debt 10,000 250,000

Current liabilities
Trade payables 22,605 117,670
240,000 933,250

Required:
Define and calculate the following ratios for each company:
(a) Gross profit percentage.
(b) Net profit percentage
(c) Return on capital employed
(d) Asset turnover
(e) Current ratio
(f) Quick ratio
(g) Average receivables collection period
(h) Average payables period
(i) Inventory turnover (09)

QUESTION 04
Alpha Limited and Omega Limited are in the same trade, but operate in different areas. Their
accounts for the year ended 31 December, 2016 are as follows:

Profit and loss account Alpha Limited Omega Limited

Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sales 1,440 1,720
Less: Cost of sales 1,120 1,342
Gross profit 320 378
Less: Overheads 220 300
Profit before tax 100 78
Taxation 40 30
Dividends 20 24
60 54
Retained earnings 40 24

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 CAF 5 – Interpretation & Analysis

Statement of financial position

Share capital of Rs. 1 each 600 200
Reserves 240 104
840 304
8% Debentures - 120
840 424
Page | 12 Represented by:
Non-current assets at cost 660 520
Less: Depreciation 200 160
460 360
Current assets:
Inventory 280 172
Receivables 310 300
Cash 30 32
620 504
Current liabilities:
Taxation 40 30
Creditors 180 344
Bank overdraft - 42
Dividends 20 24
240 440
Net Current assets 380 64
840 424

Required
(a) Compute the current ratio, acid test ratio, creditors ratio and collection period for
each of the companies. (04)
(b) Carry out comparative analysis of the companies based on the computed ratios in (a)
above. (04)

QUESTION 05
The following information has been extracted from latest draft financial statements of the
company:
Rs. in ‘000
Sales 1,700
Gross profit 545
Tax expense 23
Profit after tax 40
Total assets 2,500
Non-current assets 900
Inventories 850
Trade receivables 600
Share capital 800
Reserves 152
Long term debt @ 9% 750

Following additional information is also available:

 80% of the sales are on credit.
 Opening inventory was Rs. 100 million.
 40% of current liabilities comprise of trade payables.

Required:
Compute liquidity, working capital and debt ratios of the company. (06)

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

QUESTION 06
Progressive Steel Limited (PSL) commenced business in 2015. The following comparative
data pertains to the year ended 30 June 2017:
PSL Industry
Description
2017 2016 2017
Gross profit margin 13% 13% 16%
Page | 13
Net profit margin 8% 7% 10%
Return on shareholders’ equity 22% 18% 25%
Current ratio 1.2 1.6 1.5
Debt to equity ratio 40:60 30:70 50:50
Cash operating cycle in days 119 135 118

Required:
For each ratio/data give possible reasons for variation from comparative and industry data.
(12)

QUESTION 07
Wasim is an importer and retailer of vegetable oils. Extracts from the financial statements for
this year and last are set out below.
Income statements for the years ended 30 September
Year 7 Year 6
Rs.000 Rs.000
Revenue 2,160 1,806
Cost of sales (1,755) (1,444)
Gross profit 405 362
Distribution costs (130) (108)
Administrative expenses (260) (198)
Profit before tax 15 56
Income tax expense (6) (3)
Profit for the period 9 53

Statements of financial position as of 30 September Year 7 Year 6

Rs.000 Rs.000
Non-current assets
Property, plant and equipment 78 72

Current assets
Inventories 106 61
Trade receivables 316 198
Cash - 6
422 265
Total assets 500 337

Equity
Ordinary shares 110 85
Preference shares 23 11
Share premium 15 -
Revaluation reserve 20 20
Retained earnings 78 74
246 190

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 CAF 5 – Interpretation & Analysis

Current liabilities
Bank overdraft 49 -
Trade payables 198 142
Current tax payable 7 5
254 147
Total equity and liabilities 500 337
Page | 14
Required:
Define and calculate the following ratios:
(a) Gross profit percentage. (b) Net profit percentage
(c) Return on capital employed (d) Asset turnover
(e) Current ratio (f) Quick ratio
(g) Average receivables collection period (h) Average payables period
(i) Inventory turnover
(09)

QUESTION 08
Following amounts have been determined from the records of Hassan Limited.
Description 2014 2015 2016
-------- Rs. in million --------
Sales 100.00 120.00 135.00
Cost of sales 75.00 90.00 101.25
Profit before interest and tax 6.00 5.50 5.60
Account receivable 16.50 25.00 35.00
Account payable 13.00 14.70 15.00
Inventory 18.75 26.00 30.40
Cash at bank / (overdraft) 5.00 (0.50) (2.00)

Required:
Calculate liquidity ratios and working capital cycle for 2015 and 2016 and comment on the
results of your calculation, assuming that all sales and purchases are made on credit. (10)

QUESTION 09
Part (a)
The following information has been gathered by an analyst, in respect of Dairy Foods
Limited (DFL) which specializes in various dairy products.

Industry
Ratio 2016 2015 2014
average
Profit margin (%) 11 10 8 10.45
Quick ratio 1.38 1.40 1.42 1.52
Current ratio 1.84 1.67 1.59 1.73
Days purchases in payables 80 91 89 82

In the latest annual report to the shareholders, directors of DFL have claimed that liquidity
position of company has improved significantly.

Required:
Critically analyse and discuss whether you agree with the claim. (03)

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

Part (b)
Extracts from latest financial statements of two companies are as follows;

Extracts from statements of financial position

Equity & Liabilities A B Assets A B
Rs. in millions Rs. in millions
Equity & reserves 51,690 72,114 Fixed assets 34,460 48,076 Page | 15
Long term loan - 36,057 Stock in trade 21,700 20,000
Trade creditors 35,790 45,135 Trade debtors 24,470 44,030
Other payables 12,000 8,500 Cash and bank 18,850 49,700
99,480 161,806 99,480 161,806

Extract from Statement of Comprehensive Income

A B
Rs. in million
Revenue 161,600 220,150
Cost of sales (135,160) (180,520)
Gross profit 26,440 39,630
Operating expenses (9,840) (13,870)
Interest expense (720) (2,313)
Profit before tax 15,880 23,447
Income tax (333) (409)
Profit after tax 15,547 23,038
Required:
Analyze the profitability, liquidity and working capital ratios of both the companies.
(12)

QUESTION 10
SK Limited (SKL) deals in a single product. Following are the summarized financial
statements of SKL for the year ended 31 December 2017:
Statement of financial position 2017 2016
Rs. in million
Fixed assets 410 240
Current assets 90 200
500 440
Capital 280 260
Long-term loan 170 100
Current liabilities 50 80
500 440

Statement of profit or loss 2017 2016

Units sold in million 39 30
Rs. in million
Sales 371 300
Cost of goods sold (273) (210)
Gross profit 98 90
Selling and administrative (55) (60)
Finance cost (13) (8)
Net profit 30 22

Additional information:
(i) With effect from 1 January 2017, selling price was decreased by 5% to boost sales
volume.

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 CAF 5 – Interpretation & Analysis

(ii) During the year 2017, suppliers demanded price increase of 4%. SKL resisted the
price increase. However, both parties agreed to reduce the credit period.
(iii) SKL had been running its business in a rented building whose annual rent was Rs.
15 million. During the year, SKL purchased this building for Rs. 200 million. Funds
were arranged partially through a long-term loan. Useful life of the building is
estimated at 40 years.
Page | 16 (iv) 75% of the selling and administration cost incurred in 2016 was fixed cost.

Required:
(a) Compute the following ratios for 2016 and 2017:
Gross profit margin
Net profit margin
Return on assets
Return on capital employed
Debt equity ratio
Current ratio (08)
(b) Keeping in view the above information, comment on profitability and liquidity position of
SKL for 2017. (04)

QUESTION 11
Following are the summarised financial statements of Keyboard Limited (KL):
Statement of financial position 2018 2017 2016
----------- Rs. in '000 -----------
Fixed assets 12,500 10,800 11,800
Current assets:
Inventory 4,000 4,500 3,000
Debtors 4,200 3,200 1,800
Cash - 800 2,100
8,200 8,500 6,900
20,700 19,300 18,700
Equity and reserves 10,400 9,000 8,600
Long term loan 4,400 5,000 5,600
Current liabilities:
Creditors 3,500 4,400 4,200
Bank overdraft 1,500 - -
Accrued expense 900 900 300
5,900 5,300 4,500
20,700 19,300 18,700

Statement of profit or loss 2018 2017 2016

----------- Rs. in '000 -----------
Sales 27,000 24,400 21,000
Cost of goods sold (21,300) (19,400) (17,200)
Gross profit 5,700 5,000 3,800
Operating expenses (3,400) (3,000) (2,400)
Finance cost (300) (350) (400)
Net profit 2,000 1,650 1,000

Required:
(a) Compute working capital cycle in days and liquidity ratios for 2018 and 2017.
(11)
(b) Suggest three possible measures that can be taken by KL to improve working capital
cycle days. (03)

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

ANSWER 01
Performance Ratios
ROCE [220 / (335+300)] = 34.65%
Profit margin [220 / 2,425] = 9.07%
GP margin [555 / 2,425] = 22.89%
Operating cost ratio [335 / 2,425] = 13.81%
Assets turnover [2,425 / (335+300)] = 3.81 times Page | 17
ROE [96 / 335] = 28.66%
Return of assets [220 / 1,135] = 19.38%

Liquidity Ratios
Net working capital [595 – 500] = Rs.95
Current ratio [595 / 500] = 1.19:1
Quick ratio [(595 – 275) / 500] = 0.64:1

Efficiency Ratios
Inventory days [275 / 1,870 x 365] = 54 days
Receivable days [320 / 2,425 x 365] = 48 days
Payable days [350 / 1,870 x 365] = 68 days
Operating cycle [54 + 48 – 68] = 34 days

Solvency (debt) Ratios

Debt / Equity ratio [300 / 335] = 0.9 : 1
Interest cover [220 /34 ] = 6.47 times
Debt Equity ratio [300 / (300+335)] ; [335 / (300 + 335)] = 47:53

ANSWER 02
Boom Limited
Comparison of BL's ratios with industry average and possible reasons for variation
Industry's
Ratios (a) BL's ratios (b) Reasons for variation from industry
ratios
16.67% 23.50% Lower than industry
(3,500/21,000)x100  Purchase of raw material at higher
prices as compared to its
competitors
Gross  Inability to obtain economies of
profit scale in production as compared to
margin its competitors
 Higher production costs due to
inefficiencies
 Deliberately keeping selling prices
lower to gain the market share
3.83% 7.70% Lower than industry
(805/21,000)x100  BL’s gross profit margin is 6.8%
lower than industry (16.6% Vs
23.5%) whereas net profit margin is
Net profit
only 3.9% lower which indicates
margin
that BL’s operating expenses as a
percentage of sales are
approximately 2.9% lower than the
industry

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 CAF 5 – Interpretation & Analysis

1.50 2.75 Lower than industry

1,500/1,000  BL might have obtained running
finances as compared to long-term
financing by the industry or availed
Current extended credit terms from
ratio suppliers
Page | 18  Low inventory levels are maintained
by BL
 Shorter credit terms are given to
debtors
37.5: 62.5 50 : 50 Lower than industry
3,000/  Difficulty in raising long-term finance
Gearing (4,000+1,000+3,000) from banks due to low profits
ratio  Running finance or extended credit
terms from suppliers are available
for BL
Return 21.33% 32.90% Lower than industry
on non- ((1,150+450)/7,500)  Lower profit margins
current x100  Relatively newer non-current assets
assets have higher carrying value
Return 20.00% 27.40% Lower than industry
on ((1,150+450)/  Lower profit margins
capital 4,000+1,000+3,000)  High shareholder’s equity
employed x100
16.10% 31.30% Lower than industry
Return
(805/(4,000+1,000))  Lower profit margins
on
x100  Higher shareholder’s equity/low
equity
gearing ratio

ANSWER 03
Gross Profit % Amir Mo
Gross profit 90,000 490,000
= 60% = 70%
Sales 150,000 700,000

Net Profit %
Net profit 44,895 270,830
= 30% =39%
Sales 150,000 700,00

Return on capital employed

PBIT 62,000 383,000
= 28.5% =47%
Equity + LT Loan 217,395 815,580

Asset Turnover
Sales 150,000 700,000
= 0.68 times = 0.85 times
Equity + LT Loan 217,395 815,580

Current ratio
Current assets 50,000 153,250
= 2.2 : 1 = 1.3 : 1
Current liabilities 22,605 117,670

Quick ratio
CA - Inventory 38,000 127,000
= 1.7 : 1 = 1.1 : 1
Current liabilities 22,605 117,670

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

Average time to collect

Trade receivables x 365 37,500 x 365 105,000 x 365
=91 days = 55 days
Sales 150,000 700,000

Average time to pay

Trade payables x 365 22,605 x 365 117,670 x 365 Page | 19
= 137 days = 204 days
Cost of sales 60,000 210,000

Inventory turnover
Inventory x 365 12,000 x 365 26,250 x 365
= 73 days = 46 days
Cost of sales 60,000 210,000

ANSWER 04
Part (a)
Current ratio Alpha Limited Omega Limited
Current assets 620,000 504,000
= 2.58 : 1 = 1.15 : 1
Current liabilities 240,000 440,000

Quick ratio
CA - Inventory 340,000 332,000
= 1.42 : 1 = 0.75 : 1
Current liabilities 240,000 440,000

Average time to pay

Trade payables x 365 180,000 x 365 344,000 x 365
= 59 days = 94 days
Cost of sales 1,120,000 1,342,000

Average time to collect

Trade receivables x 365 310,000 x 365 300,000 x 365
=79 days = 64 days
Sales 1,440,000 1,720,000

Part (b) Comments on comparative analysis of the two companies.

Based on the ratios computed above:
(i) In terms of working capital and liquidity, Alpha Limited is in a better position to honour
its obligations as they fall due because its current ratio and acid test ratio are higher
than those of Omega Limited.
(ii) Omega Limited’s payment period is better than that of Alpha Limited’s because
Omega Limited uses supplier’s funds to finance its operation.
(iii) Omega Limited’s collection period is also better than that of Alpha Limited. It extends
shorter credit period to its customers than Alpha Limited.
(iv) Omega Limited’s credit policy is better than that of Alpha Limited. This is because
there is 30 days difference between its payments period and collection periods
compared with Alpha Limited that had a longer collection period than its payment
period.

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 CAF 5 – Interpretation & Analysis

ANSWER 05
Current ratio
Current assets 2,500 – 900
= 2.01 : 1
Current liabilities 2,500 – 800 – 152 – 750
Acid test ratio
Page | 20
CA - Inventory 1,600 – 850
= 0.940 : 1
Current liabilities 2,500 – 800 – 152 – 750

Gearing ratio
Long term debt 1,600 - 850
=0.44
Capital employed 800 + 152 + 750

Interest Cover
PBIT 40 + 23 + 67.5
= 1.933 times
Interest expense 67.5

Average time to collect

Trade receivables x 365 600 x 365
= 161 days
Sales 1,700 x 80%

Average time to pay

Trade payables x 365 798 x 40% x 365
= 61 days
Cost of sales 1,155 – 100 + 850

Inventory turnover
Inventory x 365 [850 + 100] / 2 x 365
= 150 days
Cost of sales 1,700 – 545

ANSWER 06

Ratio Gross profit margin

Previous year In line with previous year. No variation.
Industry Lower than industry
 The company is in initial phase and may have kept the selling
prices lower than the industry to gain the market share.
 The company may not have been able to purchase raw material at
prices which is available to its competitors.
 The company may not have been able to obtain economies of scale
in its production which may have been obtained by its competitors.
 Possibility of higher production costs.

Ratio Net profit margin

Previous year Higher than previous year:
 Tight control over operating costs.
 Increase in other income.
 Decrease in fixed cost per unit due to increase in sale.
Industry Lower than industry however, the difference is mainly attributed to lower
gross profit margin.

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

Ratio Return on shareholder's equity

Previous year Higher than previous year:
 Reduction in tax rates.
 Reduction in interest rates.
 Decrease in equity might be due to buyback of shares.
 Distribution of profits from previous year which resulted in decrease
in equity. Page | 21
Industry Lower than industry
 Lower gross profit and net profit margins.
 Lower leverage.
 Higher net assets resulting in higher equity.

Ratio Current ratio

Previous year Lower than previous year:
 The company might have obtained running finance facility to fund
it's operations in the current year.
 Long term loan payments might have become due in the next 12
month, which decreases the current ratio.
 Decrease in current assets due to better inventory management/
reduction in credit period of debtors.
Industry Lower than industry
 Since the debt equity ratio is lower than the industry, company
might have obtained running finance or might have availed
extended credit terms from suppliers.

Ratio Debt to equity ratio

Previous year Higher than previous year
 Decrease in reserves due to dividend pay-out.
 Further debt obtained during the period.
 Decrease in equity might be due to buyback of shares.
Industry Lower than industry
 Being a new entrant the company may be in the phase of
expansion thereby raising debt accordingly.
Ratio Cash operating cycle
Previous year Lower than previous year
 Increase in current liabilities might be due to increase in credit
period.
 Decrease in current assets which might be due to greater stock
turnover or better inventory management.
 By giving lower credit days to debtors.
Industry In line with industry.

ANSWER 07
Gross Profit % Year 7 Year 6
Gross profit 405 362
=19% = 20%
Sales 2,160 1,806

Net Profit %
Net profit 9 53
=0.4% = 2.9%
Sales 2,160 1,806

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 CAF 5 – Interpretation & Analysis

Return on capital employed

PBIT 15 56
= 6% = 29%
Equity + LT Loan 246 190

Asset Turnover
Sales 2,160 = 8.8 1,806 = 9.5
Page | 22 Equity + LT Loan 246 times 190 times

Current ratio
Current assets 422 265
= 1.7 : 1 = 1.8 : 1
Current liabilities 254 147

Quick ratio
CA – Inventory 316 204
= 1.2 : 1 = 1.4 : 1
Current liabilities 254 147

Average time to collect

Trade receivables x 365 316 x 365 198 x 365
= 53 days =40 days
Sales 2,160 1,806

Average time to pay

Trade payables x 365 198 x 365 142 x 365
= 41 days =36 days
Cost of sales 1,755 1,444

Inventory turnover
Inventory x 365 106 x 365 61 x 365
=22 days = 15days
Cost of sales 1,755 1,444

ANSWER 08
Current ratio 2015 2016
Current assets 51 65.4
= 3.36 : 1 = 3.85 : 1
Current liabilities 15.2 17
Quick ratio
CA – Inventory 25 35
1.64 : 1 = 2.06 : 1
Current liabilities 15.2 17
Average time to collect
Trade receivables x 365 20.75 x 365 30 x 365
= 63 days = 81 days
Sales 120 135
Average time to pay
Trade payables x 365 13.85 x 365 14.85 x 365
= 52 days = 51 days
Credit purchases 97.25 105.65
Inventory turnover
Inventory x 365 22.38 x 365 28.2 x 365
= 91 days = 102 days
Cost of sales 90 101.25
Working capital cycle Days 2015 Days 2016
Average days to collect receivable 63 81
Average inventory holding period 91 102
Less : Average time to pay accounts payable (52) (51)
102 132

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

Comments
 The company's liquidity position, as evidenced from the current ratio and the quick
ratio, appears to be growing stronger. However, the working capital cycle of the
company is getting longer in 2016 as compared to 2015.
 The company may face liquidity problem in future, as debtors days are increasing
and a large cash is blocked in inventory.
 Higher investment in working capital would result in decrease in ROCE and Return Page | 23
on shareholders equity.
 The increase in debtors days may suggest inefficient collection of amounts due from
debtors.

ANSWER 09
Part (a)
While analyzing liquidity positions of DFL, it is noted that current ratio has steadily increased
over the years and is better than industry average. However, the quick ratio has steadily
declined and is even lower than industry average. This is a clear evidence that the increase
in liquidity is caused by an increase in inventory.
Further, by considering the nature of highly perishable inventories kept by a dairy food
company, it is a possibility that DFL may bear high inventory losses due to short expiry.
Based on the above, I do not agree with the claim of DFL’s directors.
Part (b)
Profitability ratios A B
Gross profit (GP/sales) 16.36% 18.00%
Profit to sales (Profit after tax/ sales) 9.62% 10.46%
ROCE (PBIT/capital employed) 32.11% 23.81%
Return on assets employed (PBIT/assets) 16.69% 15.92%

Company B’s gross profit and net profit ratio is slightly higher as compared to Company A.
The difference is not significant and may be on account of higher level of sales resulting in
lesser fixed costs per unit.

Company A’s return on capital employed ratio and return on assets employed ratio are better
than Company B, because Company B has accumulated large balances of cash despite of
availing long term loan. Had Company B had used its cash balances to pay off the long term
loan, it would have both of these ratios better than Company A.
Liquidity Ratios A B
Current ratio (current assets / current liabilities) 1.36 2.12
Quick ratio (current assets – inventory )/ current liabilities 0.91 1.75

Company B has better current and quick ratio. However, it appears that these ratios are
better than Company A due to substantially high amount of trade debts in term of percentage
of sales as sales days. It also represents a risk that these trade debts may prove
irrecoverable. Moreover, they may be indicative of inefficient in debt collection as well.

Working Capital turnover ratios A B

Stock turnover days (Stock / cost of goods sold x 365) [A] 58.60 40.44
Debtors turnover days (Debtors/ revenue x 365) [B] 55.27 73.00
Creditors turnover days (Creditors/ cost of goods sold x 365) [C] 96.65 91.26
Cash operating cycle [A+B-C] days 17.22 22.18

Stock turnover of Company B is better than that of Company A. Company B is turning over
its stock 9 times whereas Company A is doing it 6 times a year.

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 CAF 5 – Interpretation & Analysis

Company A is more effectively collecting it’s debtors than Company B. This could also be
due to the fact that Company B is following a lenient credit policy to attract more revenue.
This fact is also supported from higher stock turnover ratio of Company B.
Company A have availed better credit facility from its creditors, but it may have forgone
some settlement discounts which might have resulted in lower gross profit ratio than that of
Page | 24 the Company B.
Overall cash operating cycle of Company A is better than Company B. Furthermore
Company B has accumulated large balances of cash despite the fact that it has also availed
long term loan. Excess cash balance should have been used to pay off the long term loan to
reduce the finance cost.

ANSWER 10
Part (a)
Gross Profit margin 2017 2016
Gross profit 98 = 90
= 30.00%
Sales 371 26.42% 300

Net Profit margin

Net profit 30 22
= 8.09% =7.33%
Sales 371 300

Return on assets
PBIT 30+13 22+8
= 8.60% = 6.82%
Total Assets 500 440

Return on capital employed

PBIT 30+13 22+8
= 9.56% = 8.33%
Equity + LT Loan 280+170 260+100

Debt Equity ratio

Debt 170 100
= 38:62 = 28:72
Equity+ Debt 280+170 260+100

Current ratio
Current assets 90 200
= 1.8 : 1 = 2.5 : 1
Current liabilities 50 80

Part (b)
(i) Profitability:
In 2017, gross profit margin of SKL has reduce from 30% to 26.42%. however, gross and net
profits amounts have been increased by Rs. 8 million mainly due to:
 Increase in sales volume as a result of 5% decrease in selling price. This resulted in
increase in gross profit by 8.89%[(98-90)÷90×100].
 Acquisition of building has resulted in savings in expenses as rent saved (Rs. 15
million) is higher than the depreciation (Rs. 5 million) and increased in finance cost
(Rs. 5 million).
 Since 75% of selling and administrative cost was fixed, expenses did not increase
due to increase in sales volume (economies of scale).

(ii) Liquidity:
The decrease in current ratio from 2.5 to 1.8 is net effect of the following:
 Cash payment for purchase of building which significantly decreased current assets.
 Prompt payment to suppliers which decreased the current liabilities.

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

ANSWER 11
Part (a)

Page | 25

Part (b)
Measures to improve working capital cycle days:
 Give incentives to customers to pay on time
 Do not transact with customers who have a history of defaulting/late payments
 Automate the monitoring of accounts receivables

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 CAF 5 – Interpretation & Analysis

Page | 26

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

ICAP OBJECTIVE BASED QUESTIONS

01. The acid test also known as quick ratio should include which of the following?
(1) Inventory
(2) Accounts receivables
(3) Bank overdraft
(4) Accruals
(a) (1), (2), (3) and (4) Page | 27
(b) (1), (2) and (3) only
(c) (1), (2) and (4) only
(d) (2), (3) and (4) only

02. Salik has net current liabilities in its statement of financial position. He has decided to pay off its
accounts payables using surplus cash.
What will be the effect of the above transaction on the current ratio?
(a) Decrease
(b) Increase
(c) No effect
(d) The ratio could either increase or decrease

03. Extracts from the statement of Comprehensive Income and statement of financial position of
the Huda Limited are shown below:
Rs.
Revenue from sales (all on credit) 900,000
Cost of goods sold 756,000
Purchases (all on credit) 504,000
Receivables 112,500
Trade payables 75,600
Inventory 333,000
What is the length of the working capital cycle (also known as the operating or cash cycle) to
the nearest day?
(a) 170 days
(b) 152 days
(c) 261days
(d) 60 days

04. Which of the following should be included in acid test or quick ratio?
(a) Finished goods inventory
(b) raw materials and consumables
(c) long-term loans
(d) Accounts payable

05. Given below are included in the financial statements of Haris Limited for the year ending 30
June:
2015 2016
Rs. 000 Rs. 000
Receivables for disposal of PPE 36 54
Accounts receivables 108 72
144 126
Sales for the year amounted to Rs. 630,000, of which Rs. 90,000 were cash sales.
The average receivables turnover (in times) during the year ended 30 June 2016 was?
(a) 7
(b) 6
(c) 5
(d) 4

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 CAF 5 – Interpretation & Analysis

06. Dawn Limited has provided following information:

31st December 31st December
2014 2015
Rs. 000 Rs. 000
Non -current assets 36 61.2
Inventory 18 23.4
Page | 28
Accounts receivable 25.2 19.8
Bank balance 5.4 3.6
Accounts payable 19.8 16.2
Sales on credit 252 216
Purchases on credit 144 108
Which TWO of the following statements are correct?
(a) Net current assets have increased between the two years
(b) The quick (acid test) ratio has improved between the two years
(c) Customers are paying more quickly in 2015 than in 2014
(d) Dawn Limited is paying its suppliers more quickly in 2015 than in 2014

07. Amir sells fish and Abid sells books. Both operate on a 50% mark-up on cost.
However, their gross profit ratios are as follows.
Amir 25%
Abid 33%
The highest gross profit ratio of the bookseller may be because?
(a) There is more wastage with fish stocks than with book stocks
(b) Amir has a substantial bank loan whereas the Abid’s business is entirely financed by her
family
(c) Amir has expensive high street premises whereas Abid has cheaper back street
premises
(d) Amir’s turnover is declining whereas that of the Abid is increasing

08. Maira Limited has a current ratio of 2:1.

This ratio will decrease if Maira Limited
(a) will receive cash in respect of a long-term loan
(b) will receive cash in respect of a short-term loan
(c) pays an existing trade payable
(d) writes off an existing receivable against the provision for doubtful debts

09. Haris Limited has positive working capital.

What effect will the payment of a declared (payable) dividend using cash balances have upon
the current ratio and working capital?
(a) Increase in current ratio and increase in working capital
(b) Increase in current ratio and no effect on working capital
(c) No effect on current ratio and working capital
(d) Decrease in current ratio and decrease in working capital

10. After declaring a final dividend, Kashan Limited has a current ratio of 2.0 and a quick asset
ratio of 0.8.
If the company now uses its positive cash balance to pay that final dividend, what will be the
effect upon the two ratios?
(a) Increase in current ratio and increase in quick asset ratio
(b) Increase in current ratio and decrease in quick asset ratio
(c) Decrease in current ratio and increase in quick asset ratio
(d) Decrease in current ratio and decrease in quick asset ratio

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

11. The draft accounts of Super Star Limited for the year ended 31 December 2018 include the
following:
Revenue Rs. 360 million
Gross profit Rs. 90 million
It was subsequently discovered that the revenue was overstated by Rs. 45 million and the
closing inventory understated by Rs. 15 million.
After correction of these errors the gross profit percentage will be?
(a) 9.5% Page | 29
(b) 19.0%
(c) 23.8%
(d) 33.3%

12. The following has been extracted from the financial statements of a business.
SOCI Rs. SOFP Rs.
Profit from operations 86,400 7% debenture 117,000
Debenture interest (8,190) Ordinary share capital 171,000
Profit for the year 72,360 Share premium 13,500
Retained earnings 63,000
What was the return on capital employed (ROCE)?
(a) 19.9%
(b) 23.7%
(c) 29.2%
(d) 34.9%

13. Waris Limited buys and sells a single product. The following is an extract from its statement of
financial position at 31 December 2018.
2018 2017
Rs. Rs.
Inventory 75 60
Receivables 24 36
Sales and purchases during 2018 were Rs. 300,000 and Rs. 180,000 respectively. 20% of
sales were for cash.
Which TWO of the following are correct?
(a) Average receivables collection period is 37 days
(b) Average receivables collection period is 46 days
(c) Gross profit % is 35%
(d) Gross profit % is 45%

14. A company’s gearing ratio would rise if

(a) A decrease in long term loans is less than a decrease in shareholders’ funds
(b) A decrease in long-term loan is more than a decrease in shareholders’ funds
(c) Interest rates rose
(d) Dividends were paid

15. A business has the following trading account for the year ending 31 May 2018:
Rs. Rs.
Sales 450,000
Opening inventory 40,000
Purchases 260,500
300,500
Less: closing inventory (60,000) (240,500)
Gross profit 209,500
Its rate of inventory turnover for the year is?
(a) 4.9 times
(b) 5.3 times
(c) 7.5 times
(d) 9 times

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 CAF 5 – Interpretation & Analysis

16. Tara Ltd produces a single product with a margin on sales of 25%.
Total sales for the year Rs. 400,000
Receivables collection period 64 days
Average receivables Rs. 32,000
The value of inventory held during the year was constant.
Page | 30 The cost of credit sales was?

Rs. ___________

17. The following are extracts from the financial statements of Laiba Ltd for the year ended 31
December 2018.
Statement of financial position Statement of Comprehensive Income
Rs. 000 Rs. 000
Issued share capital 3,600 Operating profit 1,431
Reserves 1,800 Debenture interest (216)
5,400 1,215
12% debenture 2018 1,800
7,200
What is the return (%) on long-term funds?

___________%

18. The opening inventory for a business was Rs. 108,000. The closing inventory was Rs. 144,000.
Inventory turnover for the year was 10 times.
The gross margin was 30%.
What were the sales for the year?

Rs. ___________

19. Adeel Limited has trade payables (creditors) of Rs. 12,000 and a bank overdraft of Rs. 3,000.
Its current ratio is 2.5: 1 and its quick (acid test) ratio is 1.5:1.
What is the value of its inventory (stock)?

Rs. ___________

20. Extracts from statement of financial position of Turab Limited at 31 March 2019 are presented
below:
Rs. 000
Loans due in more than one year 32
5% loan notes 24
Ordinary shares - Rs. 1 each fully paid 80
6% redeemable preferred shares, Rs. 1 each fully paid 16
Retained profits 104
Revaluation reserve 40
The gearing ratio is (to one decimal place)?

___________%

21. Which ratio is considered as safe margin of solvency?

(a) Liquid ratio
(b) Quick ratio
(c) Current ratio
(d) Net profit ratio

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

22. Liquid ratio is also known as

i. Quick ratio
ii. Acid test ratio
iii. Working capital ratio
iv. Stock turnover ratio
(a) i. and ii.
(b) i. and iii.
(c) iii. and iii. Page | 31
(d) iii. and iv.

23. Care pharmacy Ltd. has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
company has Rs.200 million in sales and its current liabilities are Rs.10 million. what is the
value of company's current assets?
(a) Rs.14 million
(b) Rs.16 million
(c) Rs.18 million
(d) Rs.20 million

24. Determine working capital turnover ratio if, current assets is Rs.150 million, current liabilities is
Rs.100 million and Sales during the year are Rs.500 million.
(a) 5 times
(b) 10 times
(c) 15 times
(d) 20 times

25. A debtor turnover ratio of 12 times means that:

(a) one-twelfth of debtors will turn out to be bad debts
(b) debtors are about twelve times as big as creditors
(c) in any given month, twelve debtors are expected to pay in full
(d) the average debtor takes about one month to pay.

26. What is the impact of collection of debtors on the current ratio;

(a) Increase
(b) Decrease
(c) No impact
(d) None of the above

27. Which of the following is not included in the computation of acid test ratio?
(a) Debtors
(b) Cash at bank
(c) Short-term investments
(d) Stock

28. Determine inventory turnover ratio if, opening inventory is Rs.31 million, closing inventory is
Rs.29 million, sales are Rs.320 million and gross profit margin is 25%.
(a) 6 times
(b) 8 times
(c) 11 times
(d) 16 times

29. Debt-equity ratio is a sub-part of

(a) Short-term solvency ratios
(b) Long-term solvency ratios
(c) Debtors turnover ratios
(d) None of the above

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 CAF 5 – Interpretation & Analysis

30. Night Limited has a current ratio of 1.8. This ratio will increase if Night Limited: [A19]
(a) receives cash in respect of a short-term loan
(b) receives cash from an existing receivable
(c) pays an existing trade payable
(d) purchases inventory on credit (01)

Page | 32 31. A debtor turnover of 6 times means that: [A19]

(a) one-sixth of the debtors are collected in one month
(b) average debtors are collected in 6 months
(c) average debtors are collected in 2 months
(d) average debtors are collected 2 times in a year (01)

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

OBJECTIVE BASED ANSWERS

01. (d) Acid test ratio is calculated as (current assets - inventory) / current
liabilities
02. (a) Assume initially that Salik has assets of Rs. 100,000 and liabilities of Rs.
150,000
Its current ratio prior to the transaction will be: Rs. 100,000/Rs. 150 ,000=
0.67 Page | 33
If it then pays its trade payables by Rs. 50,000 the current assets will be Rs.
50,000 and the liabilities Rs. 100,000.
Hence the new current ratio is 50,000/100,000 = 0.50, i.e. a decrease.
03. (b)
days
Inventory turnover: 333/756× 365 160.8
Average collection period: 112.5/900 × 365 45.6
Average time to pay: 75.6/504× 365 (54.8)
151.6

04. (d) The acid test ratio excludes all inventory balances, and is based on short-
term creditors only.
05. (b) Credit sales = 630,000 – 9,000 = Rs. 540,000
Average receivables = (72000 + 108000)/2 =90,000
Receivable turnover =540,000/ 90,000 = 6
06. (a & c)
2014 2015
Net current (18 + 25.2 + 5.4 28.8 (23.4+ 19.8+ 30.6
assets – 19.8) 3.6 – 16.2)
Quick ratio (25.2 + 5.4)/19.8 1.55 (19.8 + 1.44
3.6)/16.2
Collection (25.2 /252) × 36.5 (19.8/216) × 33.5 days
period 365 days 365
Payment (19.8/144) × 365 50.2 (16.2/108) × 54.8 days
period days 365

07. (a) Cost plus 50% is equivalent to a gross profit ratio of 33%. Amir’s gross
profit margin may be low because of wastage.
The loan interest and rental would not affect gross profit (only affects net
profit) and declining turnover would not directly affect the gross profit
percentage.
08. (b) Receiving cash for a long-term loan increases current assets with no
change in current liabilities, hence improves the ratio. Payment on an
existing creditor improves the ratio.
Writing off a receivable against a provision has no effect on current assets.
Therefore receiving cash in respect of a short-term loan must be the correct
choice.
Thus, suppose current ratio is 2:1, that means assets 100,000 and current
liabilities 50,000
Now say Maira Limited receives loan = Rs. 50,000
Current assets will be 100,000 + 50,000=150,000
Current liabilities 50,000 + 50,000 = 100,000
New Current ratio 1.5:1

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 CAF 5 – Interpretation & Analysis

09. (b)
Before payment of proposed dividend
Rs.
Current assets 150,000
Current liabilities including proposed dividend Rs. 50,000
30,000
Page | 34 Current ratio 3:1
Working capital 100,000
After payment of proposed dividend
Rs.
Current assets 120,000
Current liabilities 20,000
Current ratio 6:1
Working capital 100,000

10. (b) Suppose that inventories are Rs. 120,000, cash plus receivables are Rs.
80,000 and creditors (including a Rs. 10,000 dividend) are Rs. 100,000.
Payment of the dividend will cause cash plus receivables to fall to Rs.
70,000 and creditors to fall to Rs. 90,000.
The current ratio will increase to 2.11 (190 ÷ 90).
The quick ratio will decrease to 0.77 (70 ÷ 90).
11. (b)
Rs. m Rs. m
Turnover 360-45 315
Cost of sales 270-15 (255)
Gross profit 60
Gross profit % =60/315= 19.0%
12. (b) ROCE = 86,400/364,500= 23.7%
13. (a) & (d) Credit sales = Rs. 300,000 x 80%= Rs. 240,000
Average receivables =Rs. (24,000+ 36,000)/2 = Rs. 30,000
Receivables’ turnover =Rs. 240,000/Rs. 30,000 = 8
Collection period =365/8 = 46 days
Rs. 000 %
Sales 300 100
Cost of sales (60+180-75) (165) 55
Gross profit 135 45

14. (b)
15. (a) Inventory turnover = COS/ average inventory
= 240,500 /[(40,000 + 60 ,000)/2 = 4.9 times
16. Rs. 136,875 Receivables of Rs. 32,000 represent 64 days’ credit sales.
Therefore, receivables of Rs. 182,500 would represent 365 days’ credit
sales. [32,000 x 365/64]
Cost of credit sales = Rs. 182,500 x 75% = Rs. 136,875
17. 19.88% Return on long-term funds = Operating profit (before debenture interest)
/(Share capital + Reserves + Debentures)
=1,431/7,200
= 19.88%
18. Rs. Inventory turnover =CGS/ average inventory
1,800,000 CGS = average inventory x inventory turnover
= ((108,000 + 144,0000)/2) x 10
= 126,000x10 = Rs. 1,260,000
Sales = Rs. 1,260,000 / 0.7 = Rs. 1,800,000

Latest update: March 2020

 CAF 5 – Interpretation & Analysis

19. Rs. 15,000 Current ratio = Current assets/ current liabilities

Current assets = Current ratio x Current liabilities
= 2.5 x (Rs. 12,000 + Rs. 3000) = Rs. 37,500
Quick ratio = (C.A – inventory)/ C.L
C.A – inventory = Quick ratio x C.L
Rs. 37,500 – inventory = 1.5 x 15,000
Rs. 37,500 – inventory = Rs. 22,500
Inventory = Rs. 15,000 Page | 35
20. 24.3 % Debt = 32 + 24 + 16 = 72
Equity = 80 + 104 + 40 = 224
Gearing = 72/(72 + 224) = 24.3 %
21. (c)
22. (a)
23. (b)
24. (b)
25. (d)
26. (c)
27. (d)
28. (b)
29. (b)
30. (c) Pays an existing trade payable
31. (c) Average debtors are collected in 2 months.

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