ICMA.

FINANCIAL ACCOUNTING
;

(AF-301)

Pakistan
SEMESTER-3
SPRING (AUGUST) 2014 EXAMINATIONS
Monday, the 18th August 2014
Time Allowed: 02 Hours 30 Minutes Maximum Marks: 80 Roll No.:

(i) Attempt all questions.

(ii) Answers must be neat, relevant and brief.
(iii) Use of non-programmable scientific calculators of any model is allowed.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
(vi) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(vii) Question No.1 – “Multiple Choice Question” printed separately, is an integral part of this question paper.
(viii) Question Paper must be returned to invigilator before leaving the examination hall.

Marks
Q. 2 The following trial balance of Pioneer Manufacturers Limited is available as on June 30, 2013:
Debit Credit
Rs.‘000’ Rs.‘000’
Revenue 730,000
Cost of sales 511,500
Administrative expenses 80,900
Marketing expenses 31,500
Financial expenses 700
Advances from customers 30,000
Share capital (5 million shares of Rs. 10 each) 50,000
Retained earnings - July 1, 2012 11,600
Land - cost 13,000
Building - cost 47,000
Plant & machinery - cost 60,000
Furniture & fixture - cost 34,500
Accumulated depreciation - building 20,000
Accumulated depreciation - plant & machinery 25,000
Accumulated depreciation - furniture & fixture 8,000
Inventory (June 30, 2013) 29,700
Trade receivables 68,200
Deferred tax 5,775
Bank - current account 18,275
Trade payables 14,900
895,275 895,275
Other Information:
(i) During finalization of financial statements, it was observed that an amount of Rs. 20
million is included in revenue, which had been received as advance from a customer for
sale of goods on April 1, 2013. Necessary internal approvals and processing has been
done and formal contract was already entered into with the customer, however, the risks
and rewards of ownership of the goods have not yet been transferred to the customer. No
interest is payable under the terms of contract on advance received.
(ii) On June 30, 2013, a provision is required for directors' bonus equal to 2% of revenue,
which is to be charged to administrative expenses.
(iii) Land and building have been revalued by the company on June 30, 2013 and an
independent professional valuer has valued them at Rs. 15 million and Rs. 32 million
respectively. The resultant gain has not been recorded in the above trial balance.
(iv) Depreciation for the year has been recorded in the above trial balance for all items of the
‘property, plant and equipment’.
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(v) Taxable temporary differences were Rs. 17.70 million on June 30, 2013. Taxable profit for
the year is Rs. 61.251 million. Tax rate is 35%.
Required:
Prepare the following for the year to June 30, 2013:
(a) Statement of Profit or Loss and Other Comprehensive Income 07
(b) Statement of Changes in Equity 02
(c) Statement of Financial Position 11

Q. 3 The financial statements of Galaxy International Limited are as follows:

Statements of Financial Position
as at June 30
2014 2013
Rs. ‘000’ Rs. ‘000’
Non-Current Assets
Property, plant and equipment 12,000 13,000
Intangible assets 800 -
Long-term loans and advances 900 400
13,700 13,400
Current Assets
Inventory 700 600
Accounts receivable 600 400
Advances, deposits and prepayments 700 300
Cash at bank: Saving account 1,000 -
Current account 500 1,500
3,500 2,800
Total Assets 17,200 16,200
Equity
Ordinary shares (@ Rs. 10 per share) 12,000 10,000
Share premium 750 150
Revaluation reserve 1,500 1,000
Retained earnings 1,500 900
15,750 12,050
Non-Current Liabilities
10% Long-term loan - 2,500
Current Liabilities
11% short-term loan - 100
Accounts payable 800 900
Interest payable 100 200
Bank overdraft - 50
Provision for legal claim 250 -
Provision for taxation 300 400
1,450 1,650
Total Equity and Liabilities 17,200 16,200

Statement of Profit or Loss

for the year ended June 30, 2014 Rs. ‘000’
Sales 16,200
Cost of sales (11,100)
Gross profit 5,100
Administrative expenses (3,000)
Selling expenses (600)
(3,600)
Operating profit 1,500
Interest income 33
Financial charges (105)
Profit before taxation 1,428
Taxation (329)
Profit after taxation 1,099
Profit brought forward 900
Un-appropriated profit 1,999
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Other Information:
(i) ‘Property, plant and equipment’, includes assets, which have been revalued during the
year. An asset having written down value of Rs. 200,000 was disposed of during the year,
earning gain of Rs. 50,000.
(ii) On July 1, 2013, software was purchased at a cost of Rs. 1,000,000. It is company’s
policy to amortize all intangible assets over five-year period on straight-line basis and
charge amortization to cost of sales.
(iii) Current depreciation for the year of Rs. 2,000,000 has been charged to cost of sales.
(iv) Previously the company used to keep all its cash in current accounts, however, since
February 1, 2014, the company opened saving accounts yielding interest @ 8% per
annum receivable after every six months. (The interest accrued on investments is
included in advances, deposits and prepayments).
(v) On July 1, 2013, the company issued one right share for 5 previously held shares at a
premium of 30% of the par value and utilized the proceeds to pay of all of the long-term
and short-term loans on July 31, 2013. Interest for the month of July 2013, when both
loans were outstanding and some other bank charges are included in financial charges.
(vi) Retained earnings in statement of financial position are after payment of dividend during
the year out of un-appropriated profits of the company.
(vii) On receipt of advice from legal advisor as to probable loss of court case, provision for
legal claim has been recorded in profit or loss at Rs. 250,000.
Required:
Prepare Statement of Cash Flows for the year ended June 30, 2014, including reconciliation
of cash and cash equivalents in accordance with IAS 7 using ‘indirect method’. 20

Q. 4 (a) (i) The fundamental qualitative characteristics of useful financial information are
‘relevance’ and ‘faithful representation’. Name the enhancing qualitative
characteristics. 02
(ii) Define criteria for recognition of elements of financial statements. 02

(b) What are the criteria for recognition of intangible assets arising from development
(development phase of an internal project) under IAS 38? 06

(c) MAS Company entered into finance lease arrangement on July 1, 2008, for an
equipment and paid initial deposit of Rs. 500,000. The lease agreement requires
payments of five annual installments of Rs. 7,584,000 each on June 30, from 2009 to
2013. Interest rate implicit in the lease is 9%. The annual installments have been duly
paid by the company on or before June 30 every year. Had the plant been not leased it
would have cost Rs. 30 million to purchase the plant. Depreciation is charged on a
straight-line basis over five-year period with zero residual value.
Required:
Prepare relevant extracts of Statement of Profit or Loss and Statement of Financial
Position for the years ended June 30, from 2009 to 2013. 10

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Q. 5 (a) Following data relates to ‘property, plant and equipment’ (PPE) of Sterling Ltd.:
Assets (at cost) Rs. ‘000’
Land 10,000
Building 40,000
Furniture and fixture 30,000
Plant and Machinery 40,000
Accumulated depreciation (June 30, 2011)
Land -
Building 12,000
Furniture and fixture 16,000
Plant and Machinery 22,000
Additions during financial year 2011-12
Land -
Building 5,000
Furniture and fixture -
Plant and Machinery 2,000
Additions during financial year 2012-13
Land -
Building -
Furniture and fixture 2,000
Plant and Machinery 3,000
Rate of depreciation using reducing-balance method
Land -
Building 10%
Furniture and fixture 10%
Plant and Machinery 20%
 In 2011-12, ‘furniture and fixture’ costing Rs. 500,000 and having written down value
of Rs. 10,000 was disposed of for Rs. 12,000.
 In 2012-13, ‘plant and machinery’ costing Rs. 2,000,000 was disposed of for
Rs. 800,000 resulting in a loss of Rs. 500,000.
 Company policy is to charge no depreciation in the year of disposal and full year’s
depreciation in the year of purchase of the assets.
Required:
Prepare Non-Current Assets Schedule meeting disclosure requirements of IAS 16 in
respect of information provided above. 11

(b) The following data is related to Marhaba & Company:

2011 2012 2013
Profit before tax for the year 500,000 600,000 700,000
Accounting depreciation 800,000 800,000 800,000
Accounting written down value of
property, plant and equipment (PPE) 1,600,000 800,000 -
Tax depreciation 1,200,000 600,000 600,000
Tax written down value of PPE 1,200,000 600,000 -
Other expenses permanently disallowed
under tax law 50,000 40,000 60,000
Applicable tax rate 35% 35% 35%
Note: Accounting and tax depreciation relate to an asset purchased in the year 2011
depreciated in three years on straight-line basis in accounts while in taxation initial
allowance is allowed @ 50% while remaining depreciation allowed in next two years.
Required:
(i) Calculate current tax liability for all three years. 03
(ii) Calculate deferred tax asset/ liability as at the close of every year, while there were
no temporary differences before 2011. 03
(iii) Calculate deferred tax expense/ income for the year. 03

THE END
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