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2019 FINANCIAL ACCOUNTING AND REPORTING I Additional Practice Questions
2019 FINANCIAL ACCOUNTING AND REPORTING I Additional Practice Questions
2019 FINANCIAL ACCOUNTING AND REPORTING I Additional Practice Questions
2019 FINANCIAL ACCOUNTING AND REPORTING I Additional Practice Questions

2019

FINANCIAL ACCOUNTING AND REPORTING I

Additional Practice Questions

2019 FINANCIAL ACCOUNTING AND REPORTING I Additional Practice Questions

Additional Practice Questions

Questions & Answers

CHAPTER 1

ACCOUNTING AND REPORTING CONCEPTS

CHAPTER 2

IAS 1: PREPARATION OF FINANCIAL STATEMENTS

CHAPTER 6

INTRODUCTION TO COST OF PRODUCTION

CHAPTER 7

IAS 16: PROPERTY, PLANT AND EQUIPMENT

Question

Answer

2

15

4

18

7

20

13

27

Additional Practice Questions

QUESTIONS

CHAPTER 1 ACCOUNTING AND REPORTING CONCEPTS

1.1 Question

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.

1.2 Question

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.

1.3 Question

What is the purpose of conceptual framework in presence of other international accounting standards?

1.4 Question

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

Additional Practice Questions

1.5 Question

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 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.

1.6 Question

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.

1. 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.

2. An expenditure incurred on repairs and maintenance of plant amounting Rs.300, 000.

3. 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.

4. Entity purchased goods costing Rs.20,000 for trading purposes and the same was sold for

Rs.25,000

1.7 Question

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:

1. Advance received from customer amounting Rs.50,000 against the goods to be delivered after 6 months

2. Services provided to ABC and Co. on credit amounting Rs.30, 000.

3. Account Receivables already written off in previous years amounting Rs.30,000 were received during the year.

Additional Practice Questions

CHAPTER 2 IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1

Question

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

Description

Rs.

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:

1. 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.

2. Board of Directors of the Company approved Interim dividend of Rs. 2.25 per share for the half year ended June 30, 2018.

3. Annual profit for the year ended December 31, 2018 is Rs. 10,250,000.

4. 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.

5. 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.

6. Board of Directors of the Company approved Interim dividend of Rs. 1.25 per share for the third quarter ended September 30, 2019.

7. Annual profit for the year ended December 31, 2019 is Rs. 12,500,000.

8. 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.

9. The Company has a policy to transfer 5% of the Annual Profit to General Reserves.

10. 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.

Additional Practice Questions

2.2 Question

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

Description

Rs.

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:

1)

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.

2)

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.

3)

Board of Directors of the Company approved Interim dividend of Rs. 1 per share for the third quarter ended September 30, 2018.

3)

Annual profit for the year ended December 31, 2018 is Rs. 130,250,000.

4)

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.

5)

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.

6)

Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for the third quarter ended September 30, 2019.

7)

Annual profit for the year ended December 31, 2019 is Rs. 175,000,000.

8)

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.

9)

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.

2.3 Question 3

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

Description

Rs.

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

Additional Practice Questions

Following events taken place in year 2018 and 2019:

1)

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.

2)

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.

3)

Board of Directors of the Company approved Interim dividend of Rs. 1 per share for the third quarter ended September 30, 2018.

3)

Annual profit for the year ended December 31, 2018 is Rs. 175,000,000.

5)

The Government of Pakistan, vide Finance Bill introduced a section whereby each Company declaring Profit after Tax of Rs. 150,000,000 or more has to distribute Dividend @ 20% of the Profit after Tax. The Board intends to comply with the minimum threshold and declared dividend accordingly on February 15, 2019, which was duly approved by Shareholders on March 21, 2019. Note: The Board wants to meet the requirement of the law (Interim + final dividend)

6)

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.

7)

Board of Directors of the Company approved Interim dividend of Rs. 1.5 per share for the third quarter ended September 30, 2019.

8)

Annual profit for the year ended December 31, 2019 is Rs. 185,250,000.

9)

The Government of Pakistan, vide Finance Bill introduced a section whereby each Company declaring Profit after Tax of Rs. 150,000,000 or more has to distribute Dividend @ 20% of the Profit after Tax. The Board intends to comply with the minimum threshold and declared dividend accordingly on February 15, 2019, which was duly approved by Shareholders on March 21, 2019. Note: The Board wants to meet the requirement of the law (Interim + final dividend)

10)

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.

Additional Practice Questions

CHAPTER 6 INTRODUCTION TO COST OF PRODUCTION

6.1 Question

Describe briefly three major differences b/w:

(i)

financial accounting

(ii)

cost and management accounting

6.2 Question

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

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 Stocks at 1 April 2006:

50

- 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.

Additional Practice Questions

- Rent electricity and insurance are apportioned on the basis of 80% to factory and 20% to office.

- Finished goods are transferred to the trading account factory cost plus one third. Required

Prepare HM's manufacturing account for the year ended 31 March 2007

Additional Practice Questions

6.3 Question 4

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

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

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

Additional Practice Questions

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

- Cost of Goods manufactured

- Statement of comprehensive Income

6.4

Question

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 and 50% on FG purchases)

80,000

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 purchases)

40,000

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 purchases and remaining relates to FG purchases)

30,000

Carriage paid (50% relates to Direct RM purchases,20% relates to Indirect RM purchases and 30% relates to FG Purchases )

49,000

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 relates to IRM)

5,000

Penalty to driver carrying RM to factory

3,000

Opening stock-Direct RM

421,500

Additional Practice Questions

Rupees

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 RM purchases and 50% on FG purchases)

500,000

Other Information

Closing stock-RM

350,000

Closing stock -FG

421,000

Closing-WIP

100,000

Closing stock-Indirect RM

20,000

- 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

Additional Practice Questions

- 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 from the RD. Annual interest is charged out

Required

- Prepare: Cost of Goods manufactured for the year ended 31 December 2015

- Statement of comprehensive Income 31 December 2015

Additional Practice Questions

CHAPTER 7 IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1

Question

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:

1. The balances of the Property, Plant and Equipment as at 30 June 2018 are given below:

Assets

Gross Carrying Amount (Rs. Million)

Accumulated Depreciation (Rs. Million)

Land

12

N/A

Buildings

125

38

Plant and Machinery

500

300

Equipment

100

36

2. 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

3. Abbas Limited uses proportionate policy to depreciate its Property, Plant and Equipment.

4. 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.

5. The equipment was purchased on 1 July 2016. No disposals and acquisitions took place in the period up to 30 June 2018.

6. Until 30 June 2018, 12,000 units had been produced by Abbas Limited in its factory. The plant and machinery does not have any residual value. No additions or disposals of plant and machinery took place till this date.

7. 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.

8. The land had actually cost Rs. 15 million on the date of its acquisition.

9. 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:

1. 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.

2. This year, 5,000 units were product in the factory of AL.

3. On January 1, 2019, AL disposed 25% ofits 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 wereRs. 0.1 million. It is assumed that this disposal will not affect the proportion of areas occupied by factory and office.

4. Further equipment costing Rs. 60 million was acquired on 1 November 2018.

5. 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

Additional Practice Questions

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.

7.2

6. Moreover, the directors also made a contract with M/s UniPower& 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.

Question

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:

1)

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.

2)

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.

3)

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.

4)

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:

1)

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.

2)

At the end of the year, the fair value of office building was assessed to be Rs. 2 million. At the year- end GL mortgaged entire building with JS Bank to obtain a loan worth Rs. 1.75 million for prospective investments in other divisions.

3)

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.

The fair values of the office building were determined byan independent firm M/s 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).

Additional Practice Questions

ANSWERS

CHAPTER 1 ACCOUNTING AND REPORTING CONCEPTS

1.1 Question

A. False. In case of conflict between requirements of conceptual framework and IFRS, 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

C. False.HR related cost can never be capitalized as it does not meet the definition criteria of asset “controlled by the entity”

D. False. Internally generated goodwill can never be recognized as it does not meet 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

F. False. For any item to be recognized as an asset, it must be probable that an item shall provide future economic benefits to the entity.

G. False. In current cost method assets are measured at the amount that would be paid to purchase the same or a similar asset currently

1.2 Question

A. Realizable value/ settlement value

B. Present value

C. Fair Value

1.3 Question

The Conceptual Framework for Financial Reporting (CF) 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 w.r.t. 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

with information about its approach to the formulation of IFRSs 15 The Institute of Chartered Accountants

Additional Practice Questions

1.4

Question

(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

(B)

Definition of the elements

i. Asset

A resource

controlled by the entity

As a result of past events

From which future economic benefits are expected to flow to the entity.

Examples of assets:

Cash, Bank, Account receivable, Notes receivable

ii. Liability

A present obligation (not a future commitment!)

Of the entity

As a result of past events

The settlement of which is expected to result in an outflow from the entity of economic benefits.

Examples of liability:

Loans, Account payable, Notes payable

iii. Equity

The residual interest in the assets

After deducting all liabilities.

For Example:

Capital, Retained earnings etc

iv. Income

An increase in economic benefits

During the accounting period

In the form of inflows or enhancements of assets or decreases in liabilities

resulting in increases in equity (other than contributions from equity participants).

Examples of income:

Sale revenue, commission income, rent income etc

v. Expense

A decrease in economic benefits

During the accounting period

In the form of outflows or depletions of assets or an increase in liabilities

resulting in decreases in equity (other than distributions to equity participants).

For Example:

Salaries expense, rent expense, utilities expenses, rent expense

Additional Practice Questions

1.5 Question

Part A:

Income definition:

Income is defined as:

an increase in economic benefits during the accounting period

in the form of increases in assets or decreases in liabilities

resulting in increases in equity

Other than contributions from equity participants.

Asset definition:

The essence of the definition of income requires that there is either an increase in assets or a decrease in liabilities that results in an increase in equity during the year. The transaction involves the receipt of cash (asset). Thus we will assess whether the transaction has increased our assets. The definition of an asset is:

a resource controlled by the entity

as a result of a past event

from which future economic benefits are expected to flow to the entity.

Discussion of the asset definition:

The cash is a resource controlled by the entity (it is secured in HM’s business account and thus controllable). The cash was received in exchange for financial advice and since this advice was provided during the 2004 year, this event represents a past event at reporting date. The cash is able to be used to generate future income and thus future economic benefits are expected to flow to the entity from the use of this asset. The cash thus meets the definition of an asset.

Discussion of the income definition:

The receipt of the cash during 2004 meets the definition of an asset and thus represents an increase in assets. Since there was neither a concomitant increase in liabilities (HM has not obligations as a result

of this receipt of cash) nor decrease in assets, the receipt of this asset will have increased equity (using the equation: A = E + L). This increase in equity is not a contribution from equity participants (e.g. it is

Thus the receipt of cash meets the

not the receipt of cash in exchange for an issue of equity shares). definition of income.

Conclusion:

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.

1.6 Question

1

Rent (60,000)-Expense

Advance rent (60,000)-Asset

2.

Asset, if the cost of the asset is material

3.

Legal Charges- Expense

4.

Goods(inventory) amounting to Rs. 20,000-Asset

Additional Practice Questions

1.7

Question

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

Additional Practice Questions

CHAPTER 2 IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1

Answer

 

Share

Share

General

Retained

Revaluation

Description

Capital

Premium

Reserves

Earnings

Surplus

Total

Opening Balance

25,000,000

7,500,000

750,000

18,250,000

1,500,000

53,000,000

Issuance of Right Shares

5,000,000

5,000,000

-

-

-

10,000,000

Interim Dividend

(6,750,000)

(6,750,000)

Profit for the year

10,250,000

10,250,000

Transfer

512,500

(512,500)

-

Transfer of Rev Surplus to RE

150,000

(150,000)

-

Balance at the end of the year

30,000,000

12,500,000

1,262,500

21,387,500

1,350,000

66,500,000

 

(12,750,00

Annual Dividend

0)

(12,750,000)

Bonus Shares

6,000,000

(6,000,000)

-

-

Interim Dividend

(4,500,000)

(4,500,000)

Profit for the year

12,500,000

12,500,000

Transfer

625,000

(625,000)

-

Transfer of Rev Surplus to RE

150,000

(150,000)

-

Balance at the end of the year

36,000,000

6,500,000

1,887,500

16,162,500

1,200,000

61,750,000

Additional Practice Questions

2.2 Answer

Description

Share

Share

General

Retained

Capital

Premium

Reserves

Earnings

Total

Opening Balance

100,000,000

50,000,000

5,000,000

55,000,000

210,000,000

Issuance of Shares under IPO

50,000,000

75,000,000

-

-

125,000,000

Annual Dividend 17

(40,000,000)

(40,000,000)

Interim Dividend

(15,000,000)

(15,000,000)

Profit for the year

130,250,000

130,250,000

Transfer

6,512,500

(6,512,500)

-

Balance at the end of the year 150,000,000 125,000,000 11,512,500 123,737,500 410,250,000

Annual Dividend

(63,750,000)

(63,750,000)

Bonus Shares

15,000,000

(15,000,000)

-

Interim Dividend

(24,750,000)

(24,750,000)

Profit for the year

175,000,000

175,000,000

Transfer

8,750,000

(8,750,000)

-

Balance at the end of the year 165,000,000 110,000,000 20,262,500 201,487,500 496,750,000

2.3 Answer

Description

Opening Balance

Issuance of Shares under IPO

Annual Dividend 17

Interim Dividend

Profit for the year

Transfer

Balance at the end of the year

Annual Dividend

Bonus Shares

Interim Dividend

Profit for the year

Transfer

Balance at the end of the year

Share

Share

General

Retained

Capital

Premium

Reserves

Earnings

Total

100,000,000

50,000,000

5,000,000

55,000,000

210,000,000

37,500,000

56,250,000

-

-

93,750,000

 

(40,000,000)

(40,000,000)

(13,750,000)

(13,750,000)

175,000,000

175,000,000

 

8,750,000

(8,750,000)

-

137,500,000

106,250,000

13,750,000

167,500,000

425,000,000

 

(21,250,000)

(21,250,000)

13,750,000

(13,750,000)

-

 

(22,687,500)

(22,687,500)

185,250,000

185,250,000

 

9,262,500

(9,262,500)

-

151,250,000

92,500,000

23,012,500

299,550,000

566,312,500

Additional Practice Questions

CHAPTER 6 INTRODUCTION TO COST OF PRODUCTION

6.1 Answer

Financial Accounting

1. It concerns with financial information

2. Primarily deals with financial reporting for external use

3. Primarily deals with monetary values

Cost and management accounting

1. It concerns with both financial as well as cost information

2. Primarily deals with cost information for internal use

3. Deals with both monetary and non-monetary information

6.2 Answer

M/S HM Cost of Goods Manufactured For the period ended 31 March 2007

Rs. In "000"

Rs. In "000"

Stock of raw material at 1 April 2006

110

add Purchases

450

Carriage inwards

10

460

less returns

18

442

 

552

less Stock of raw material at 31 March 2007

(140)

412

Direct Labour

400

Direct overheads

60

Prime Cost

872

Factory Overhead

Rent

28

Electricity

36

Insurance

36

Supervisory Salaries

65

Indirect wages

13

Cleaning

50

Provision for depreciation on machinery

90

318

 

1,190

Work in Progress at 1 April 2006

55

less Work in progress at 31 March 2007

75

(20)

Cost of Goods Manufactured

1,170

Additional Practice Questions

6.3 Answer 4

M/S Babloo Limited Cost of Goods Manufactured

RM

Opening stock

421,500

Purchases

2,450,000

Demurrage and Octroi

73,500

Custom duty

122,500

Purchase return

(100,000)

Carriage in

49,000

Closing stock

(350,000)

RM Consumed

2,666,500

Labour wages

1,705,500

Prime cost

4,372,000

Factory OH

Supervisor salary

250,000

Indirect labour wages

450,000

Fuel Expense

340,000

Electricity

364,000

Rent rate

345,000

Depreciation

455,000

Repairs & maintenance

232,065

Canteen expense

112,000

 

2,548,065

Manufacturing cost during the year

6,920,065

Opening WIP

121,100

Closing WIP

(100,000)

COGM

6,941,165

Additional Practice Questions

M/S Babloo Trading, Profit and loss account

Sales

16,500,000

Sales return

(200,000)

16,300,000

COGS

Op stock

50,000

Purchases

985,000

Purchase return

(85,000)

Carriage in

19,700

COGM

6,941,165

Closing stock

(421,000)

7,489,865

Gross profit

8,810,135

Operating expenses Office staff salaries Sales team salaries Postage and telegram Carriage outward Interest expense Sales discount Bad debts expense Depreciation expense Electricity expense Fuel expense Distribution expense Repair and maintenance Canteen expenses Sales commission Property tax Directors remuneration

 

(500,000)

(125,000)

(12,500)

(27,000)

(148,500)

(24,500)

(56,450)

(195,000)

(196,000)

(60,000)

(200,000)

(25,785)

(28,000)

(957,000)

(14,570)

(316,042)

Other Income Purchase discount Other income Interest income

40,000

24,500

16,500

Net profit

6,004,789

Additional Practice Questions

6.4

Answer

MARFANI Ltd.

Cost OF Goods Manufactured

For the period ended 31, Dec 2105

 

Rs.

Rs.

Rs.

Opening - Raw Material Purchases Custom Duty Import Duty Sales tax paid - Non-refundable L.C Charged Carriage Paid Octroi Charges Demurrage Charges

 

421,500

 

2,426,000

98,000

16,800

78,400

27,000

24,500

36,750

12,000

Purchase Return

(100,000)

2,619,450

Closing - DRM

(350,000)

DRM - Consumed

2,690,950

Direct Labour

1,068,240

Prime Cost

3,759,190

F.O.H Indirect Raw Material:

OP

Purchases Trade Discount Carriage Paid Octro Charges Demurrage Charge

 

40,000

 

(16,000)

9,800

36,750

8,000

Raw c/s -RN

(20,000)

Indirect Raw Material Indirect Labour Fuel Expense Electricity Rent Rates & taxes Depreciation R&M Canteen Shop

 

58,550

267,060

323,000

390,000

345,000

455,000

232,065

112,000

Manufacturing Cost

2,182,675

5,941,865

W.I.P (Opening)

1,211,000

W.I.P (Closing)

100,000

COGM

5,962,965

Additional Practice Questions

MARFANI Ltd.

St. Of Comprehensive Income

For the period ended 31, Dec 2015

 

Rs.

Rs.

Rs.

Sales

16,500,000

Sales Return

(200,000)

COSI

16,300,000

Opening Stock - F.G Purchases - F.G (w1) Custom Duty Import Duty L.C Charges Carriage Purchases Return - F.G COGM Closing stock -FG

 

50,000

945,000

24,500

7,200

63,000

14,700

(85,000)

5,962,965

(421,000)

COS

(6,561,365)

Gross Profit

9,738,635

Operating Expenses Abnormal Damages Penalty on Driver Salaries Wages Sales team Salaries Postage & telegram Fuel Expense Electricity Property Taxes Carriages Interest Expenses Distribution Expenses Depreciation Repair and maintanance Canteen Exp Sales Discount Bad Debts Sales Commission

5,000

3,000

890,200

125,000

12,500

57,000

210,000

145,570

27,000

127,285

200,000

195,000

25,785

28,000

245,000

56,450

957,000

 

3,309,790

Other Income Other Income Intrest Income Settlement Discount

24,500

16,500

500,000

 

541,000

Additional Practice Questions

NP before Director remuneration Directors remuneration

Net profit Director's Remuneration

Working#1

D.R.M

6,969,845

(331,897)

6,637,948

I.R.M

F.G

P.P

2,450,000

40,000

985,000

0

0

1

T.D

(24,000)

(16,000)

(40,000)

P.P

2,426,000

24,000

945,000

Working#2

Sales

16,500,000

S/tax

2,640,000

19,140,000

Commission at 5%

957,000

Additional Practice Questions

CHAPTER 7 IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 Solution (a):

Date

Particulars

Dr.

 

Cr.

Rs. 000

Rs.000

2018

     

July 1,

Land Revaluation Surplus Reversal of Revaluation Loss (Other Income)

8,000

 

5,000

3,000

2019

     

Jan 1,

Cash (90m - 0.1m) Accumulated Depreciation Buildings (W1) Buildings Land Gain on Disposal (Other Income)

89,900

10,687.5

 

31,250

5,000

64,337.5

Jan 1,

Revaluation Surplus Retained Earnings

1,250

 

1,250

(W1)

Rs. 000

 

At the start of year (38 × 25%) During the year [(125 11) × 25% ÷ 12 ÷ 2]

9,500

 

1,187.5

Accumulated Depreciation of Buildings Disposed

10,687.5

 

Solution (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.

Depreciation

Method

Useful Life/Residual Value/Rate

Subsequent

Measurement

Assets

Land

N/A

N/A

Fair Value

Buildings

Straight-line

Useful life of 12 years with a residual value of 8.8% of cost.

(W1)

Cost less Accumulated Depreciation

Plant and

Machinery

Units of

production

Rs. 25,000 per unit (W2)

Cost less Accumulated Depreciation

Equipment

Written down

value

Rate of 20% (W3)

Cost less Accumulated Depreciation

Furthermore, Abbas Limited uses proportionate policy to depreciate its assets.

Additional Practice Questions

4.2. Abbas Limited

Schedule of Movement in Property, Plant and Equipment

For the year ended 30 June 2019 (in Rs. 000)

     

Plant and

 

Total

Land

Buildings

Machinery

Equipment

Gross Carrying Amount:

12,000

125,000

500,000

100,000

737,000

At 1 July 2018 Acquisitions Revaluations Disposals

-

-

-

60,000

60,000

8,000

-

-

-

8,000

(5,000)

(31,250)

-

-

(36,250)

At 30 June 2019

15,000

93,750

500,000

160,000

768,750

Accumulated Depreciation:

-

38,000

300,000

36,000

374,000

At 1 July 2018 Depreciation charge for the year Revaluation Disposals

-

8,312.5(W4)

125,000

20,800(W5)

154,112.5

-

-

-

-

-

-

(10,687.5)

-

-

(10,687.5)

At 30 June 2019

-

35,625

425,000

56,800

517,425

Carrying Amount at 1 July

12,000

87,000

200,000

64,000

363,000

2018

Carrying Amount at 30 June 2019

15,000

58,125

75,000

103,200

251325

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 capitalised as capital work- in-progress.

A further borrowing costs of Rs. 1.4 million (W6) were capitalised in respect of interest on loan obtained from the bank to finance this project.

4.4. A contract was made with M/s UniPower& Co. to purchase plant and machinery worth Rs. 35 million once the construction of factory building is completed.

4.5. The following depreciations are either made part of inventory or expensed out in statement of profit or loss:

Assets

Inventory

Expense

Total

Rs.000

Rs.000

Rs.000

Buildings

4,987.5

3,325

8,312.5

Plant and Machinery

125,000

-

125,000

Equipment

-

20,800

20,800

Total

129,987.5

24,125

154,112.5

4.6. Revaluation Disclosures:

(i) The revaluation of land took place on 1 July 2018. The value was determined by an independent firm M/s Ashfaq& Co. Chartered Accountants.

Additional Practice Questions

(ii)

The carrying amount of land had the revaluation not taken place:

Rs. million

At 1 July 2018

Disposals during the year

15

(3.75)

At 30 June 2019

11.25

(iii)

Revaluation Surplus

Rs. million

At 1 July 2018 Revaluation of land Transfer to retained earnings

-

5

(1.25)

At 30 June 2019

3.75

A further reversal of revaluation loss of Rs. 3 million was reversed during the year.

(W1)

125−11

38

× 4 = 12

(W2)

300,000,000

12,000

= . 25,000

(W3)

= 1 −

2

100−36

100

= 20%

(W4) Depreciation during the year

Rs. 000

Disposals

1,187.5

During the year [(125 11) × 75% ÷ 12]

7,125

Depreciation Expense

8,312.5

(W5) Depreciation during the year

Rs. 000

Acquisitions (60 × 0.2 × 8/12)

8,000

Remaining Assets (64 × 0.2)

12,800

Depreciation Expense

20,800

(W6) 20 × 12% ×

7

12 = 1.4

Additional Practice Questions

7.2 Solution (a):

Disposal Account - Fittings

2017

Rs.

2017

Rs.

Jan 1,

Fittings Cost

30,000

1,000

Jan 1,

Accumulated

Depreciation

Jan 1,

Cash

(Disposal

Fittings(W1)

4,500

Costs)

 
 

Jan 1,

Cash

22,000

Mar 31,

Statement of Profit or Loss (Loss on Disposal)

4,500

 

31,000

 

31,000

(W1)

30,000 ×

9

12 × 2 × 10% = 4,500

 

Solution (b):

Games Limited

Notes to the financial statements

For the year ended 31 March 2017

4.

4.7.

Property, plant and equipment:

Games Limited (GL) uses the following subsequent measurement bases to value its Property, Plant and Equipment, and methods to calculate its depreciation.

Depreciation

Method

Subsequent

Measurement

Assets

Rate

Buildings

Straight-line

10%

Fair Value

Computers

Written-down

value

30% (W1)

Cost less Accumulated Depreciation

Fittings

Straight-line

10%

Cost less Accumulated Depreciation

Furthermore, Games Limited uses proportionate policy to depreciate its assets.

4.8.

Games Limited

Schedule of Movement in Property, Plant and Equipment

For the year ended 30 March 2017 (in Rs.)

   

2017

 

2016

Buildings

Computers

Fittings

Buildings

Computers

Fittings

Gross

Carrying

3,237,500

600,000

120,000

     
 

-

-

-

Amount:

At start of year Acquisitions Revaluations Disposals

-

120,000

 

- 3,000,000

600,000

120,000

(1,237,500)

-

- 237,500

- -

-

-

(30,000)

-

- -

At end of year

2,000,000

720,000

90,000

3,237,500

600,000

120,000

Accumulated

           

Depreciation:

At start of year

-

350,000

135,000

181,000

9,000

11,250

-

225,000

-

135,000

-

9,000

(350,000)

-

-

(225,000)

-

-

Additional Practice Questions

   

2017

 

2016

Buildings

Computers

Fittings

Buildings

Computers

Fittings

Depreciation

 

-

-

(4,500)

-

-

-

charge

for

the

year(W2)

Revaluation

 

Disposals

At end of year

 

-

316,000

15,750

-

135,000

9,000

Carrying Amount at year start

3,237,500

465,000

111,000

-

-

-

Carrying Amount at year end

2,000,000

404,000

74,250

3,237,500

465,000

111,000

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

4.10. 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.

4.11. The following depreciations are either made part of inventory or expensed out in statement of profit or loss:

Assets

 

2017

 

2016

Inventory

Expense

Total

Inventory

Expense

Total

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

Buildings

280,000

70,000

350,000

180,000

45,000

225,000

Computers

181,000

-

181,000

135,000

-

135,000

Fittings

-

11,250

11,250

-

9,000

9,000

Total

461,000

81,250

542,250

315,000

54,000

369,000

4.12. Revaluation Disclosures:

(iv)

The revaluations of office buildings 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.

(v)

The carrying amount of buildings had the revaluation not taken place:

 

2017

2016

Rs.

Rs.

Cost:

   

At start of year Acquisitions Disposals

3,000,000

-

-

3,000,000

-

-

At end of year

3,000,000

3,000,000

Accumulated Depreciation:

   

At start of year Depreciation charge for the year Disposals

225,000

-

300,000

225,000

-

-

Additional Practice Questions

 

2017

2016

Rs.

Rs.

At end of year

525,000

225,000

Carrying Amount at year start

2,775,000

-

Carrying Amount at year end

2,475,000

2,775,000

 

2017

2016

Rs.

Rs.

At start of year Revaluation of Buildings Transfer to Retained Earnings (350,000 -

300,000)

462,500

-

(412,500)

462,500

(50,000)

-

At end of year

-

462,500

(vi) Revaluation Surplus

Furthermore, a revaluation loss of Rs. 475,000 was recognized at 31 March 2017.

(W1)

= 1 − √

4

4,802

20,000

= 30%

(W2)

 

2017

   

2016

     

9

Buildings

 

3,237,500 ÷ 9.25 = 350,000

 

3,000,000 ÷ 10 ×

12

 

= 225,000

   

Rs.

 

Acquisitions (60,000 × 10% × 11/12)

 

5,500

3,000,000 × 30%

Computers

   

9

Remaining

[(720,000

-

135,000)

×

175,500

×

12 = 135,000

 

30%]

Total

181,000

 
   

Rs.

 

Fittings

Disposals (30,000 × 10% × 9/12)

Remaining (90,000 × 10%)

 

2,250

9,000

120,000 ÷ 10 ×

= 9,000

9

12

Total

181,000

 

Head Oce-Karachi:

Chartered Accountants Avenue, Cli

Head O ffi ce-Karachi: Chartered Accountants Avenue, Cli on, Karachi-75600

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