FAR 2

Mock Exam
Question 1 (18 Marks)
Following are the statements of Comprehensive Income of Company A, and its subsidiaries B and C
for the year ended 31 December 2010 are as under:
Company A
4,500,000
(1,800,000)
2,700,000
(810,000)
1,500,000
3,390,000
(125,000)
3,265,000
(979,500)
2,285,500

Revenue
Cost of sales
Gross Profit
Operating Expenses
Investment Income
Profit before interest and Taxes
Interest
Profit before Tax
Taxation
Profit after tax

Company B
3,500,000
(875,000)
2,625,000
(1,050,000)
450,000
2,025,000
(400,000)
1,625,000
(487,500)
1,137,500

Company C
6,000,000
(2,400,000)
3,600,000
(1,080,000)
200,000
2,720,000
(375,000)
2,345,000
(703,500)
1,641,500

1. Company A holds 80% shares in company B for many years, however, Company A recently
bought 90% shares of C Limited on 1 April 2010.

2. During the year the companies of the group transacted in the following manner: (All sales took
place after May 2010)
From

To
A
C
B

Amount
B
A
A

GP
145,000
245,000
300,000

20% on sales
25% on sales
20% of cost

3. Company A sold an equipment to Company C at 31 December 2010 registering a gain on

disposal of Rs 40,000.

4. At the date of acquisition of Company C, the carrying amounts of its Assets were equal to their
book value except for Land whose value of was Rs 1 million in access of its carrying amount
Furthermore the carrying amount of plant was Rs 2 million lower than its fair value with a
useful life of 10 years from the date of acquisition

5. Company A is the recipient of 50% of interest paid by B and 30% of the interest paid by C on
account of loans provided by A. All the loans were extended after the acquisition of both
companies respectively.

6. Dividend paid by all the companies (interim dividend) paid in the last quarter of the year:
Company
A
B
C

Amount
1,000,000
400,000
550,000

FAR 2
Mock Exam
7. Impairment amounting to Rs 100,000 in goodwill of company B and Rs 70,000 in company C is
to be recognized.
Required
Prepare consolidated statement of comprehensive Income.
Question 2 (18 Marks)
United Front (Private) Limited (UFPL) is a company engaged in manufacturing and marketing of
Microwave Owens in Pakistan. On 1 January 2015 the company entered into two sale and
leaseback agreements with Sun Leasing Limited.
The details of machines sold and leased back under the two agreements are as under:

Date of purchase
Cost (Rs in Million)
Useful Life (Years)
Selling price to lessor (Rs in Million)
Fair Market Value (Rs in Million)

Machine A
Machine B
1 Jan 2010
1 Jan 2013
150
48
10
10
78
41
80
44

The terms of lease agreements are as follows:

Lease Term
Annual Rentals
Installment Due
Down payment

Machine A
5 Years
Rs 18.283 Million
In arrears
10% of the price

Machine B
3 Years
Rs 4 Million
In advance
Nil

The market interest rate is 9.5% per annum while the market rates of rentals for machines similar to
Machine-A and Machine-B are Rs. 19 million and Rs. 7 million per annum respectively.
Required:
Prepare the relevant extracts from the statements of financial position and comprehensive income
and the related notes to the UFPLs financial statements for the year ended 31 December 2015, in
accordance with the International Financial Reporting Standards.
Question 3 (19 Marks)
Company ABC has declared a profit of Rs 4.95 million for the year ended 31 December 2015.

1. The company purchased an asset valuing Rs 300,000 on 1 July 2015. The Asset was subject to a
depreciation of 20% on straight line basis. The following expenses were also incurred at the
time of acquisition (capitalisable):
Installation cost
PV of dismantling cost

Rs 24,500
Rs 12,500

FAR 2
Mock Exam
For tax purposes the asset was subject to a depreciation of 15% on declining balance method.
Installation costs are allowed in the year of incurrence while the dismantling cost is allowed on
payment basis

2. The company made provisions for warrantee during the years for the anticipated after sale
services. Following details are relevant:
Provisions made during the year (Expense)
Provisions reversed during the year
Warranties settled during the year

Rs 450,000
Rs 180,500
Rs 300,000

3. At the start of the year the company entered into a lease agreement with Sigma Leasing
whereby it leased out an asset with the following details:
Annual rental
Life of the asset
Borrowing rate

Rs 150,000
5 years (Which is the lease term too)
10%

4. Opening deferred tax asset was Rs 65,000 (only against provision for warrantee as there were
no other differences).

5. Tax rates for all the past years is 40% which is expected to continue in foreseeable future
Required
Disclose the taxation matters in the financial statements of Company ABC.
Question 4 (18 Marks)
Adnan Limited produces industrial blades for heavy machines used in wood cutting and lumber
making. The company recently changed its finance manager. The new finance manager has
identified the following issues pertaining to current and prior years:
1. On 1 January 2012 the company incurred some repair expenses which the finance manager
capitalized (Amount Rs 450,000). The useful life of the machine in which these expense
were capitalized is 8 years.
2. On 1 Jan 2013 the Company acquired an plant costing Rs 400,000. The same was correctly
capitalized. The depreciation rate on such asset is 25% on declining balance. The manager
inadvertently booked a depreciation of Rs 10,000 in year 2013. Thereafter the same rate of
depreciation is applied to the asset.
Balance sheet Extracts from December 31, 2013 to December 31, 2015

Retained Earnings
Deferred Tax Liability
Current Tax Liability

2013
1,360,000
360,000
400,360

2014
1,875,000
285,000
363,500

2015
3,200,250
475,350
250,000

FAR 2
Mock Exam
Tax rate is past years was 30%.
Required
Prepare relevant extracts and notes for the rectification of errors
Question 5 (6 Marks)
Zamin Limited has two potential liabilities to assess. The first is an outstanding court case
concerning a customer claiming damages for losses due to faulty components supplied by Zamin.
The second is the provision required for product warranty claims against 200,000 units of retail
goods supplied with a one-year warranty.
The estimated outcomes of the two liabilities are:
Court case Product warranty claims
10% chance of no damages awarded
65% chance of damages of Rs 4 million
25% chance of damages of Rs 6 million

Product warrantee claim

70% of sales will have no claim
20% of sales will require a Rs 25 repair
10% of sales will require a Rs 120 repair

Required
Suggest the correct accounting treatment for the above issue.
Question 6 (10 Marks)
Bilal Limited is presently experiencing short term cash flow problems. The chief executive officer has
approached you for advice on how to improve the present cash flow situation. The following
amounts were extracted from the records of the company:

Particulars
Sales
Cost of sales
Average Trade Debtors
Average trade creditors
Average Stock in trade
Bank / Overdraft

2009
2008
2007
-------Rs in Million-----400
360
300
300
270
225
90
75
50
51
45
39
92
78
56
(4)
(2)
15

All sales are made on credit.

Required:
Calculate and comment on the ratios that would be needed to analyze the working capital of the
company. (Assume a 360 day year)
Question 7 (6 Marks)
The board of director of Killing smile Limited (KS Limited) is reviewing the financial statements of
the company. The company has produced the same profit as last year which is very encouraging in
the declining market where all the companies are performing below par.

FAR 2
Mock Exam
The directors, however, are confused whether to disclose the earnings per share or not. This is
because due to 100% bonus payout the number of shares have doubled and causing the EPS to
half. The directors are forcing the Financial Controller (FC) (who is a Chartered Accountant) not to
disclose the EPS figure as the directors think that this may lead to decline in the prices of the shares.
The auditors informed the FC that the disclosure requirement of IAS 33 is applicable on the
company and disclosure of EPS figure is necessary. They also informed the board that its a normal
reporting feature and IFRS allows the prior EPS to be restated (reducing the prior year EPS and
making it comparable with the current EPS) to make an informed decision.
Required
Identify the categories of threats to the fundamental principles of objectivity or professional
competence and due care, that may be created in the above situation and discuss the safeguards
available to the FC in this respect, under the ICAPs Code of Ethics.
Question 8 (15 Marks)
Jibran and company sells customized software solutions to its customers. The company has
statured the construction of a software which will be completed till 31 May 2016. The company
expects to sell the same right after completion. The company obtained a loan on July 31 2015 of Rs
400,000 for the said purpose and financed the entire project with it along with the running finance
facility.
Following expenditures were made on the asset:
Date
1 Sep 15
1 Dec15
1 Mar 16
1 Jun 16

Expenditure made
125,000
250,000
250,000
100,000

Interest rate on loan was 16% whereas the running finance facility carried a markup of 20%.
Incidental income is earned at 10%.
The selling price of the software at 30 June 2016 was Rs 600,000 and its cost to sell is Rs 15,000.
Required
Journalise the above transactions for the year ended 30 June 2016.