The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Mid-Term Examination Autumn-2024 May 27, 2024

Section: A (Sir Nasir Abbas) (Additional reading time - 15 minutes) 100 marks – 3 hours

Financial Accounting and Reporting II

Section A
Question 1
Bechaari Limited (BL) has been experiencing substantial losses at its furniture making operation which is treated as a
separate operating segment. The company’s year-end is 30 September. At a meeting on 1 July 2022 the directors
decided to close down the furniture making operation on 31 January 2023 and then dispose of its non-current assets
on a piecemeal basis. Affected employees and customers were informed of the decision and a press announcement
was made immediately after the meeting. The directors have obtained the following information in relation to the
closure of the operation:
(i) On 1 July 2022, the factory had a carrying amount of Rs.3·6 million and is expected to be sold for net proceeds
of Rs.5 million. On the same date the plant had a carrying amount of Rs.2·8 million, but it is anticipated that it
will only realize net proceeds of Rs.500,000.
(ii) Of the employees affected by the closure, the majority will be made redundant at cost of Rs.750,000, the
remainder will be retrained at a cost of Rs.200,000 and given work in one of the company’s other operations.
(iii) Trading losses from 1 July to 30 September 2022 are expected to be Rs.600,000 and from this date to the
closure on 31 January 2023 a further Rs.1 million of trading losses are expected.
Required:
Explain how the decision to close the furniture making operation should be treated in ML’s financial statements for
the years ending 30 September 2022 and 2023. Your answer should quantify the amounts involved. (9)

Question 2
Following issues relate to Depression Limited (DL). The financial statements for the year ending December 31, 2023
are being finalized, however, these issues have not yet been accounted for:
(i) In second week of January 2024 a factory worker filed a suit against DL because he suffered an accident during
production process in December 2023. He alleged that DL has not been following safety regulations and there
have been multiple accidents in past. Initially the worker contacted the management for compensation but
they refused. The company’s legal advisor is of this opinion that claim is highly likely to be successful as such
cases are normally decided in favor of petitioner. Legal advisor is trying his best to settle the matter out of
court and his best estimate of amount of damages is Rs. 500,000. (3)
(ii) DL sells an imported product to its customers on 3 month warranty. Past experience shows that 20% of
customers claim minor repairs and 8% of customers claim major repairs. Sales made during last quarter of
2023 amount to Rs. 24 million. Minor repair cost is 5% of sale value and major repair cost is 15% of sale value.
In respect of last quarter’s sale, no major claims have been received, however, minor repair cost of Rs. 0.1
million has been incurred upto December 31, 2023. (3)
(iii) One of the customers of DL, owing Rs. 150,000 at December 31, 2023, was declared bankrupt in February
2024. He had paid Rs. 80,000 after year end, out of which Rs. 50,000 relates to sales of January-February
2024. The bankruptcy was the outcome of financial difficulties spanning over a period of 6 months. It has
been declared by court that only 50% will be paid to creditors. (2)

Required:
Discuss in accordance with relevant IFRS how above issues should be dealt with in financial statements for the year
ending December 31, 2023.

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Question 3
Identify which of the following statements are true or false:
(1) A change in estimate for dismantling cost for an asset carried at revaluation model is not allowed because revaluation
automatically incorporates all changes in circumstances.
(2) A provision is a liability of uncertain timing or amount. But for its recognition, the outflow of resources must be
virtually certain to occur for settlement of obligation.
(3) Contingent asset is not recognized rather it is disclosed only if inflow of economic resources if probable.
(4) A lessee has a choice to use either implicit rate or incremental borrowing rate for accounting for lease in his books.
(5) Financial asset and monetary asset are two names for same assets.
(6) Investment in ordinary shares is a non-monetary asset but investment in debt instruments is a monetary asset.
(7) Investment in 25% shares of a company must be accounted for using equity method even if there is no significant
influence over the investee.
(8) Initial direct cost incurred by a lessee is included in initial measurement of lease liability.
(9) Transaction costs incurred in connection with issuance of debentures are always charged in profit and loss when
incurred.
(10) Residual value guaranteed by a 3rd party unrelated to lessor is a part of lease payments for lessee.
(10)

Question 4
On January 1, 2022, Sialkot Limited (SL) bought one hundred bonds (denominated in US dollars) at a price of $ 50 each
and incurred transaction cost of $ 0.5 per bond. The bonds will be redeemed at a premium of 20% over face value of $
40 each after four years. Coupon rate is 10%. The effective rate of interest is 6.80%.
The exchange rates and fair value of the bond were as follows:

Date Exchange rate Fair value

(Rs. per $) ($)
01-01-22 150 50
31-12-22 152 51
31-12-23 153 48

Average exchange rates for the year were assumed to be equal to year-end rates.

Required:
Journalize all transactions for the years ending December 31, 2022 and 2023 if investment is classified as amortized cost.
(8)

Question 5
Dhoka Limited (DL) purchased following instruments during the year ending December 31, 2023 but the accountant was
new and he wrongly accounted for those investments as follows:
1. On April 1, 2023 DL purchased 10% debentures at a price of Rs. 150,000 (nominal value Rs. 100,000). Transaction
cost of Rs. 2,500 was also incurred. The fair value of debentures at the time of purchase was Rs. 151,000. These
debentures should have been classified as amortized cost based on DL’s business model. However, the accountant
had no idea about IFRS 9, therefore, he made following mistakes:
- Fair value at the time of purchase was ignored.
- Transaction cost incurred was charged as finance cost to P&L.
- Interest income for 9 months based on annual coupon amount has been accrued.
Now in order to perform correct accounting treatment, his senior has determined the original effective interest rate
of 12.75%.
2. DL purchased 8,000 ordinary shares of Wafa Limited (WL) at a price of Rs. 40 per share. This investment is considered
as an strategic move and top management has made an irrevocable election to classify this investment as fair value
through OCI. The accountant was not aware of the accounting and he debited the purchase of shares to suspense
account. No other entries have been made so far. Fair value of these shares has moved to Rs. 48 per share at
December 31, 2023.
Required:
Pass necessary rectifying entries for the year ending December 31, 2023. (8)

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Question 6
Select the most suitable options:
(i) Which of the following is one of the conditions set out in IFRS 16 for an arrangement to be classified as a finance
lease?
A. The lessee has the right to obtain substantially all of the economic benefits from use of the asset
B. The lease term covers substantially all of the economic life of the asset
C. The lessor has a substantive right of substitution
D. The lessor has the right to direct the use of the asset (1)

(ii) An entity acquires property on lease for a non-cancellable period of 3 years. The lease payments are payable
semi-annually in arrears beginning from first year. What would be the impact of this transaction on lessee’s
current and gearing ratios upon commencement of lease?
A. Decrease in current ratio as well as gearing ratio
B. Decrease in current ratio and increase in gearing ratio
C. Increase in current ratio and decrease in gearing ratio
D. Increase in current ratio as well as gearing ratio (2)

(iii) Functional currency:

A. Can never be same as presentation currency
B. Is the currency of primary economic environment
C. Is the currency of parent company
D. Is always more expensive than foreign currency (1)

(iv) On January 1, 2020 a purchase order for import of machinery for a total price of $ 5 million was issued. 30%
advance was paid alongwith purchase order. Machinery was received and installed on April 30, 2020 and 50%
invoice value was paid. Remaining 20% of the invoice value was settled on May 31, 2020.
Exchange rates:
01-01-20 Rs./$ 140
30-04-20 Rs./$ 150
31-05-20 Rs./$ 155
What is the cost of machine?

A. Rs. 735 million

B. Rs. 700 million
C. Rs. 740 million
D. Rs. 750 million (2)

(v) Investment in shares can never be classified as:

A. Amortized cost
B. Fair value through OCI
C. Fair value through P&L
D. None of above (1)

SECTION B
Question 7
Khush Limited (KL) purchased an investment property in United States for USD 2.6 million. 10% advance payment was
made on 1 May 2023 and 70% payment was made on 1 July 2023 on transfer of title and possession of the property. The
remaining amount was paid on 1 August 2023.
On 1 September 2023, KL rented out this property at annual rent of USD 0.24 million for one year and received full
amount in advance on the same date.
KL uses fair value model for its investment property. On 31 December 2023, an independent valuer determined that fair
value of the property was USD 2.5 million.
Following spot exchange rates are available:

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 Date 01-05-23 01-07-23 01-08-23 01-09-23 31-12-23
Rs. per USD 200 210 216 220 232

Required:
(i) Journalize above transactions for the year ended December 31, 2023 in KL’s books. (8)
(ii) Prepare the extracts relevant to the above transactions from KL’s statements of financial position and
comprehensive income for the year ended December 31, 2023. (4)

Question 8
(a)
On 1 January 2021, Dukhi Motors Limited (DML) acquired a machine on lease through Bahaadur Leasing Company (BLC)
to manufacture components of a new model of vehicle, on the following terms:
(i) Non-cancellable lease period is 7 years.
(ii) The agreement contains an option for DML to extend the lease for further 3 years in which case the legal title of the
machine will be transferred to DML at the end of 10 years.
(iii) Lease instalments are payable annually in advance as under:
▪ first seven instalments at Rs. 80 million each.
▪ three instalments at Rs. 70 million each for the optional period.
DML also incurred initial direct cost of Rs. 15 million for the lease. DML's incremental borrowing rate on 1 January 2021
was 8% per annum. Useful life of the machine is 12 years. On commencement of the lease, DML was reasonably certain
that the option to extend the term will be exercised.
Required:
Determine the amounts of ‘Right of use asset’ and ‘Lease liability’ as at 31 December 2021, 2022 and 2023. (7)

(b)
If BLC wants to charge a uniform annual rental, calculate the amount of rental assuming that:
- it is reasonably certain that DML will not exercise the extension option.
- Fair value of machine at commencement date is Rs. 550 million and expected residual value at the end of 7 th year is
Rs. 50 million.
- Initial direct cost of Rs. 5 million was incurred by BLC for the lease.
- Implicit rate is 10% whereas market interest rate is 12%. (4)

Question 9
Jaadoo Motors (JM) is an importer of cars and also deals in used cars. It sells on cash as well as lease basis. It normally
sells all cars at a profit margin of 40%. JM pays commission to its sale staff equal to 2% of cash sale price irrespective
of the mode of sale. On April 1, 2023 it sold a car which had been imported at a total cost of Rs. 1.5 million.

Following terms were agreed with lessee:

Primary lease term 4 years
Extension option 2 years
Down payment by lessee Rs. 220,000 (It includes a cheque of Rs. 20,000 in the name of an external
consultant who verified lessee’s financial stability)
Lease rental Rs. 512,072 payable on every March 31st.
Implicit rate 11%
Title Title will remain with JM and vehicle will be returned by lessee at end of lease
term.

It is expected that residual value of car will be equal to 40% of cash sale price at end of year 4 and 10% of cash sale
price at end of year 6.
Required:
Assuming it is reasonably certain that lessee will utilize the extension period:
(a) Journal entries for the year ending December 31, 2023. (8)
(b) Prepare a note on net investment in lease for inclusion in financial statements for the year ending December 31,
2023. (6)

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Question 10
Hansi Pharma Limited (HPL) entered into the following arrangements during 2023:
(i) On 1 January 2023, HPL acquired a capsule manufacturing machine from Hi-Tech Industries Limited for a lease term
of 5 years with instalments of Rs. 50 million payable annually in advance. The useful life of the machine was
estimated at 6 years. HPL is also required to pay a usage fee of Rs. 0.3 per capsule produced in excess of 30 million
capsules per annum from the machine. During 2023, HPL produced 40 million capsules and accordingly an amount
of Rs. 3 million would be paid along with 2nd instalment. This usage fee is not a part of the definition of lease
payments in accordance with IFRS 16.
(ii) On 1 April 2023, HPL entered into a contract with Aansoo Cargo Limited (ACL) for the use of refrigerated Trucks for
a period of 3 years at semi-annual payment of Rs. 10 million payable in arrears. All costs pertaining to running and
maintenance of trucks, would be paid by ACL. However, HPL is required to reimburse 30% of the fuel cost to ACL.
Fuel cost for 2023 was Rs. 4 million. HPL will pay its share of fuel cost in 2024. HPL uses these trucks for transportation
of inventory all over the country. In order to save fuel and time, ACL often replaces a similar truck at the required
location from one of ACL’s nearby office.

HPL's incremental borrowing rate is 12% per annum

Required
Prepare the extracts relevant to the above transactions from HPL's statement of financial position and statement of profit
or loss for the year ended 31 December 2023 in accordance with the IFRS. (13)

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