Certified Finance and Accounting Professional Stage Examination

The Institute of 7 June 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 Year 2020 remained a difficult year for Pudding Limited (PL) due to COVID-19. In view of
the severe liquidity issues, PL entered into following arrangements with different banks in
the last two months of the year ended 31 December 2020:
(i) On 31 October 2020, PL defaulted in making payment of annual instalment of a loan
from Bank A. On 1 November 2020, Bank A agreed to extinguish the remaining loan
in exchange of 3 million PL’s shares having par value of Rs. 10 each.
On 1 November 2020, fair value of PL’s share was Rs. 56 each. Under the
arrangement, Bank A cannot sell these shares for a period of two years which reduces
the fair value of share by 20%.
The above mentioned loan was acquired on 1 November 2018. The original
disbursement amount was Rs. 140 million. The loan carried interest @ 10% per
annum and was repayable in 5 annual instalments of Rs. 36.93 million each.
(ii) On 1 November 2020, PL sold one of its investments in debentures for Rs. 110 million
to Bank B and simultaneously entered into a contract to buy the same debentures back
on 1 July 2021 at Rs. 119 million.
PL purchased these debentures on 1 November 2019 for Rs. 114 million (par value
Rs. 120 million). Debentures carry annual coupon at the rate of 11% per annum
payable on 31 October each year and have effective yield of 12% per annum. PL
carries this investment at amortised cost.
(iii) On 1 December 2020, PL transferred its receivables of South Region amounting to
Rs. 40 million to Bank C for an immediate cash payment of 90% of its value against
8% factoring fee. Remaining 10% amount will be paid by Bank C in 30 days. Under
the arrangement, PL is not liable to compensate Bank C for any default by PL’s
customers. 50% of receivables have not yet been recovered by Bank C till
31 December 2020.
(iv) On 1 December 2020, PL transferred its receivables of North Region amounting to
Rs. 50 million to Bank D for an immediate cash payment of 90% of its value against
3% factoring fee. Under the arrangement, PL is liable to compensate Bank D after
40 days for any default by PL’s customers in excess of 10%. PL is also entitled to
receive the amount that the Bank D will recover in excess of 90% within 40 days. Till
31 December 2020, 75% of receivables have been recovered by Bank D.
(v) On 1 December 2020, PL transferred its receivables of Central Region amounting to
Rs. 30 million to Bank E for a final payment of 95% of its value. Under the
arrangement, PL is liable to compensate Bank E after 30 days for any default by PL’s
customers upto a maximum of 4%. Till 31 December 2020, Bank E has recovered all
receivables except 3%, half of which are considered irrecoverable by PL.

Required:
Prepare journal entries in the books of PL in respect of the above for November and
December 2020. (20)
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Q.2 Following are the draft statements of profit or loss of Biscotti Limited (BL), Custard Limited
(CL) and Doughnut Limited (DL) for the year ended 31 December 2020:

BL CL DL
------ Rs. in million ----- F$ in million
Revenue 9,500 3,600 250
Cost of sales (3,500) (1,860) (120)
Gross profit 6,000 1,740 130
Operating expenses (2,750) (780) (112)
Operating profit 3,250 960 18
Other income 305 120 -
Finance cost (240) (180) -
Net profit 3,315 900 18

Other information:
(i) Details of BL’s investments in CL are as follows:

CL’s share
Market Cash CL’s retained
Date of capital
% holding price of payment earnings
investment (Rs. 10 each)
each share
-------------- Rs. in million --------------
1 Jan 2017 35% Rs. 11 1,100 3,000 600
1 Apr 2020 40% Rs. 15 1,400 3,000 1,300

(ii) In addition to cash payment of Rs. 1,400 million on 1 April 2020, it was agreed on
acquisition that further cash of Rs. 320 million would be paid in March 2021 if CL's
net profit for the year 2020 would be more than Rs. 500 million. Fair value of this
consideration on acquisition date was estimated at Rs. 240 million.

(iii) On acquisition date of CL, fair value of its net assets was equal to their carrying value
except for:
 inventory which was carried at Rs. 600 million and had a fair value of
Rs. 960 million. 40% of this inventory is still included in CL's inventory as at
31 December 2020.
 a 14% bank loan of Rs. 800 million. Mark up is paid annually on 31 March
while entire principal would be paid on 31 March 2022. On acquisition date,
market rate for similar loan was 10% per annum.

(iv) On 1 January 2019, BL acquired 80% shareholding in DL for F$ 120 million. On

acquisition date, fair value of DL’s net assets was equal to their carrying value except
for an office building whose fair value was higher than its carrying value by
F$ 10 million. Remaining useful life of the building was 5 years.

(v) There was no goodwill / bargain purchase on acquisition of DL.

(vi) DL’s profit for the year ended 31 December 2019 was F$ 14 million.

(vii) DL was not acquired exclusively with a view of resale; however, owing to difficulties
in managing such major geographical operation, BL disposed of its entire
shareholdings in DL for Rs. 2,000 million on 31 December 2020. The sale proceeds
were credited to revenue. No other adjustment has been made on disposal.
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(viii) The exchange rates per F$ are as follows:

Average rate for

1 Jan 2019 31 Dec 2019 31 Dec 2020
2019 2020
Rs. 10 Rs. 9 Rs. 11.5 Rs. 9.5 Rs. 10.5

(ix) The income and expenses of all companies may be assumed to have accrued evenly
during the year except stated otherwise.

(x) BL values non-controlling interest on the acquisition date at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.

Required:
Prepare BL’s consolidated statement of profit or loss and other comprehensive income for
the year ended 31 December 2020 in accordance with the requirements of IFRSs.
(Disclosures relating to allocation of profit or loss and comprehensive income attributable to
non-controlling interest and owners of the parent are not required) (25)

Q.3 Marmalade Limited (ML) is a manufacturer of Industrial machines. During 2020, ML

launched a new machine with model name Alpha. Each unit of Alpha is being sold for
Rs. 10 million payable upon delivery. Revenue from sale of Alpha is recognised upon
delivery to the customer premises. Further, two year support service contract for Alpha is
sold separately at Rs. 0.1 million payable monthly. Revenue from support services is
recognized over contract period. Customers can also obtain such support services from third
parties.

Sales of Alpha have remained below expectation so far. The marketing department has
proposed the following options to increase the sales of Alpha:

Option 1:
ML would offer customers a bundle of Alpha and support services at a combined price of
Rs. 11 million.

Option 2:
ML would sell Alpha at Rs. 10 million on lease. The rate of interest implicit in the lease
would be 5% per annum which is significantly lower than market interest rate of
12% per annum. Customers would pay in five equal annual instalments payable in advance.
Ownership of Alpha would be transferred to the customer at the end of five years.

Option 3:
Upon purchase of one unit of Alpha, customers would be provided with an option to
purchase another unit of Alpha within 12 months at a material discount of 25%. It is
estimated that 40% customers will avail the option.

Option 4:
Customer would be given an option to get customized version of Alpha. The price would
vary in each case; however, the customer would be required to pay the entire amount in
advance as these machines could not be sold to other customers. The manufacturing of
customized Alpha might take an average of 3 months.

Required:
Discuss the recognition and amount of revenue under each of the above independent
options. Compute the amount of revenue, wherever possible. (18)
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Q.4 Ice Cream Limited (ICL) is a listed company. A junior accountant has prepared draft
consolidated financial statements of ICL for the year ended 31 December 2020 in which
results of Gelato Limited (GL) and Trifle Limited (TL) have also been included. However,
he could not prepare consolidated statement of changes in equity due to certain outstanding
issues.

For the purpose of preparation of consolidated statement of changes in equity, following

information is available:

(i) Share capital of ICL, consolidated retained earnings and non-controlling interest as of
31 December 2018 were Rs. 700 million, Rs. 1,013 million and Rs. 310 million
respectively.

(ii) Net profit for 2020 as per draft consolidated financial statements amounted to
Rs. 440 million (2019: Rs. 312 million) of which Rs. 60 million (2019: Rs. 50 million)
was attributable to non-controlling interest.

(iii) The draft consolidated statement of financial position as on 31 December 2020 shows
total assets and total liabilities of Rs. 3,804 million and Rs. 985 million respectively.

(iv) On 1 January 2019, ICL acquired 80% shareholding in GL for Rs. 800 million. Equity
of GL includes share capital and share premium of Rs. 500 million and
Rs. 400 million respectively. Fair value of GL’s identifiable net assets on the date of
acquisition amounted to Rs. 950 million.

(v) Following dividends were declared and paid by the group entities:

 On 1 August 2019, ICL made a bonus issue of 20%.

 On 1 March 2020, ICL declared a final cash dividend for the year 2019 at 15%.
 On 1 December 2020, GL made an interim cash dividend of 20%.

(vi) ICL values non-controlling interest on the acquisition date at its proportionate share
of the fair value of the subsidiary’s net identifiable assets.

Details of outstanding issues:

(i) On 1 January 2019, ICL acquired an asset on lease at a semi-annual rental of
Rs. 90 million payable in arrears for 5 years. Though accounting for both years have
been made, the accountant has not taken into account the fact that after expiry of first
6 months, both the lessee and the lessor has the right to terminate the lease at any time
without permission from the other party with no penalty. Discount rate of 10% per
annum has been used.

(ii) On 31 December 2020, ICL cancelled share appreciation rights (originally granted to
10 executives on 1 January 2019) and, in their place, granted 32,000 share options to
those executives on the condition that they will remain in ICL’s employment for the
next two years.

ICL originally granted 30,000 share appreciation rights to each of 10 executives that
will be settled in cash on the condition that they will remain in ICL’s employment for
the next four years.

Fair value of each share appreciation right as at 31 December 2019 and 2020 was
estimated at Rs. 150 and Rs. 190 respectively. On 31 December 2020, the fair value of
each share option was estimated at Rs. 200. All the executives are expected to remain
in employment for the required period of time.

Nothing has been recorded in 2020 in respect of share appreciation rights and their
cancellation.
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(iii) On 31 December 2020, TL issued further shares to increase its outstanding shares
from 1 million to 2.2 million. The new shares were issued to Cookie Limited (a third
party) which then obtained controlled of TL. Market value of each TL’s share was
Rs. 300 on 31 December 2020.

ICL owns 0.6 million shares in TL since 2017. The carrying values of TL’s assets
(excluding proceeds from further issue) and TL’s liabilities in the ICL’s consolidated
financial statements as at 31 December 2020 were Rs. 405 million and Rs. 85 million
respectively. In addition, goodwill of Rs. 57 million had been recognised upon the
acquisition of TL and has not subsequently been impaired.

Required:
(a) Determine the revised amounts of total assets and total liabilities after incorporating
the effects of the above corrections. (10)
(b) Prepare ICL’s consolidated statement of changes in equity for the year ended
31 December 2020 along with comparative figures after incorporating the effects of
the above corrections, if any. (Ignore taxation. ‘Total’ column is not required.) (15)

Q.5 The following data of Jelly Life Insurance Company is available for the year ended
31 December 2020:

Description Rs. in million

Regular premium individual policies 21,533
Group policies with cash value 350
Group policies without cash value 4,108
Single premium individual policies 439
Reinsurance premium ceded 1,156
Provision for experience refund 119
Investment income 17,881
Net fair value losses on financial assets at fair value through profit or loss 2,568
Net rental income 742
Other income 362
Claims under individual policies 12,448
Claims under group policies 8,105
Recoveries from reinsurer 497
Claims related expenses 10
Net increase in insurance liabilities (other than outstanding claims) 9,325
Acquisition expense 5,892
Marketing and administrative expenses 1,386
Other expenses 211
Finance cost 20

Required:
Prepare statement of profit or loss of Jelly Life Insurance Company for the year ended
31 December 2020. (12)

(THE END)