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Financial accounting and reporting I

Fifth edition published by
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© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

 Certificate in Accounting and Finance

C
Financial accounting and reporting I

Contents
Page

Question and Answers Index v

Questions
Section A Questions 1
Answers
Section B Answers 73

© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting I

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

 Certificate in Accounting and Finance

I
Financial accounting and reporting I

Index to questions and answers

Question Answer
page page

CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS

1.1 CRITERIA FOR RECOGNITION 1 73

1.2 HABIB FACTORY 1 74

1.3 CARRIE 1 74

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1 DAFFODIL LIMITED 2 75

CHAPTER 3 – IAS 7: STATEMENT OF CASH FLOWS

3.1 TRANGO LIMITED 3 76

3.2 NARDONE LIMITED 4 76

3.3 HOT SAUCE LIMITED 5 78

3.4 QUETTA TRACK LIMITED 7 80

3.5 MARDAN SOFTWARE LIMITED 8 82

3.6 TARBELA TRADERS LIMITED 10 84

3.7 THE SINDH ROBOTICS COMPANY 11 85

3.8 ABIDA LIMITED 13 86

3.9 MOOSANI LIMITED 13 87

3.10 SAKHAWAT HUSSAIN LIMITED 14 88

3.11 JUNAID JANJUA LIMITED 14 89

3.12 AMIN INDUSTRIES LIMITED 16 90

3.13 NADIR LIMITED 17 92

© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

Introduction to accounting

Question Answer
page page

3.14 LIAQUAT INDUSTRIES 18 93

3.15 QUALITY ENTERPRISES 19 94

3.16 KLEA 20 96

CHAPTER 4 – INCOME AND EXPENDITURE ACCOUNTS

4.1 GILTAN GOLF CLUB 22 99

4.2 LANGTON HOCKEY CLUB 23 101

4.3 GULSHAN CRICKET CLUB 24 103

4.4 SEHAT CLUB 24 105

4.5 AB SPORTS AND SOCIAL CLUB 25 106

4.6 GD SPORTS CLUB 27 108

4.7 HB TENNIS CLUB 28 111

4.8 MONARCH SPORTS CLUB 29 113

4.9 LH SPORTS CLUB 30 114

4.10 LEISURE CLUB 31 115

4.11 SEAVIEW CLUB 32 117

CHAPTER 5 – PREPARATION OF ACCOUNTS FROM INCOMPLETE RECORDS

5.1 SHORT QUESTIONS 33 120

5.2 IRUM 33 121

5.3 COST STRUCTURES 34 122

5.4 TAHIR 34 123

5.5 IJAZ 35 124

5.6 RASHID 36 126

5.7 MUDASSAR 37 129

5.8 ASLAM 38 131

5.9 UMAR 39 133

5.10 YASIN 40 136

5.11 MUNIRA 42 138

5.12 ADNAN 43 139

5.13 ASIF 44 141

5.14 MANSOOR 45 144

5.15 DANISH 46 146

5.16 RAHIL 47 148

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 Questions

Question Answer
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5.17 S-MART GROCERY SOTRE 48 150

CHAPTER 6 – COST OF PRODUCTION

6.1 SIGMA LTD 50 152

6.2 MANAGEMENT INFORMATION FUNCTIONS 50 152

6.3 JOHN PIRELLI 50 153

6.4 CLASSIFICATION OF COSTS 50 154

6.5 CAR MAINTENANCE 51 154

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 SUNDRY QUESTIONS 1 52 156

7.2 ROONEY 52 156

7.3 EHTISHAM 52 158

7.4 CARLY 53 160

7.5 ADJUSTMENTS LIMITED 54 161

7.6 FAM 54 162

7.7 ORCHID LIMITED 55 164

7.8 ABID LIMITED 55 166

7.9 SHAHWEZ LIMITED 56 167

7.10 HAMZA LIMITED 56 168

7.11 SUNDRY QUESTIONS 2 56 168

Chapter 8 - NON-CURRENT ASSETS: SUNDRY STANDARDS

8.1 SHAYAN LIMITED 57 169

8.2 SARA LIMITED 57 169

8.3 LOONEY 57 169

8.4 GOOGLY INDUSTRIES LIMITED 58 170

8.5 KHAN LIMITED 58 170

8.6 SPIN INDUSTRIES LIMITED 58 171

8.7 KATIE 59 172

8.8 VICTORIA 59 174

CHAPTER 9 – IAS 36: IMPAIRMENT OF ASSETS

9.1 ABA LIMITED 60 176

9.2 HUSSAIN ASSOCIATES LTD 60 177

9.3 SUNSHINE LIMITED 61 177

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Question Answer
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CHAPTER 10 – IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS

10.1 PARVEZ LIMTED 62 179

10.2 SACHAL LIMITED 62 179

10.3 GALAXY TELECOMMUNICATION 62 181

10.4 JUPITAR LIMITED 63 181

10.5 PLUTO LIMITED 63 182

10.6 SINGLE PERFORMANCE OBLIGATION 63 182

10.7 CAR WORLD 64 183

10.8 SALEEM ENGINEERING 64 183

10.9 RECOGNITION OF REVENUE 64 184

10.10 LEGAL TITLE 64 184

10.11 BRILLIANT LIMITED 64 184

CHAPTER 11 – INTERPRETATION OF FINANCIAL STATEMENTS

11.1 WASIM PRIVATE LIMITED 66 186

11.2 AMIR AND MO LIMITED 67 186

11.3 ALPHA LIMITED AND OMEGA LIMITED 68 187

11.4 BOOM LIMITED 70 188

11.5 PROGRESSIVE STEEL LIMITED 71 189

11.6 DAIRY FOODS LIMITED 71 190

© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

 Certificate in Accounting and Finance

Q
Financial accounting and reporting I

Questions
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 CRITERIA FOR RECOGNITION
What is the criteria for recognition of assets and which of the following assets will be recognized in
the financial statements of a company in accordance with the criteria?
 A manufacturing unit valuing Rs. 5 million, owned and controlled by the Company
 A fleet of trucks valuing Rs 100 million, controlled by another company
 A highly skilled workforce, getting an annual compensation of Rs. 12.5 million

1.2 HABIB FACTORY

A factory building was purchased from Habib Factory by a company for Rs. 100 million in 2009. Its
useful life was estimated to be 25 years. The building was revalued in 2019 at Rs. 75 million.
It was decided to sell the factory building at Rs. 90 million after incurring repairs and painting work
done of Rs. 10 million.
What will be the cost of the asset under each of the following measurement basis:
 Historical cost
 Current cost
 Realizable(settlement) value

1.3 CARRIE
Carrie starts in business on 1 January Year 1. Carrie’s sole shareholder contributed capital of
Rs.1,000. Carrie purchased one item of inventory for Rs.1,000 and sold that inventory for cash of
Rs.1,400. At the end of Year 1 the replacement cost of the same item of inventory is Rs.1,100. General
inflation during the year was 7%.
Required
Calculate the profit for the year and set out a summary statement of financial position as of 31
December Year 1 under the following capital maintenance concepts.
(a) Physical capital maintenance
(b) Financial capital maintenance
(i) Historical cost accounting
(ii) Constant purchasing power accounting

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1 DAFFODIL LIMITED
For the purpose of preparation of statement of changes in equity for the year ended 31 December
2017, Daffodil Limited (DL) has extracted the following information:

2017 2016 2015

Draft Audited Audited
-------------- Rs. in million -------------
Net profit 650 318 214
Transfer to general reserves 112 - 141
Transfer of incremental depreciation - 49 55
Final cash dividend - - 7.5%

Additional information:
i) Details of share issues:
 25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market price per
share immediately before the entitlement date was also Rs. 18 per share.
 A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
 50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The market price
per share immediately before the entitlement date was Rs. 25 per share.
 A bonus issue of 15% was made on 1 September 2017 as interim dividend.
ii) Share capital and reserves as at 31 December:

2015 2014
------ Rs. in million ------
Ordinary share capital (Rs. 10 each) 1,600 1,600
General reserves 1,850 1,709
Retained earnings 1,430 1,302

Required
Prepare DL’s statement of changes in equity for the year ended 31 December 2017. (Ignore taxation)

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

 Questions

CHAPTER 3 – IAS 7: STATEMENT OF CASH FLOWS

3.1 TRANGO LIMITED
The following information has been extracted from the financial statements of Trango Limited for the
year ended 31 December 2015.
Statement of comprehensive income for the year ended 31 December 2015

Rs.

Sales 905,000

Cost of sales (311,000)

Gross profit 594,000

Loss on disposal of non-current asset (9,000)

Wages and salaries (266,000)

Other expenses (including depreciation Rs.46,000) (193,000)

126,000

Interest charges (24,000)

Profit before tax 102,000

Tax on profit (38,000)

Profit after tax 64,000

The asset disposed of had a carrying amount of Rs. 31,000 at the time of the sale.
Extracts from the statement of financial position:

At At
1 Jan 2015 31 Dec 2015

Rs.

Trade receivables 157,000 173,000

Inventory 42,000 38,000

Trade payables 43,600 35,700

Accrued wages and salaries 4,000 4,600

Accrued interest charges 11,200 10,000

Tax payable 45,000 41,000

Required
Present the cash flows from operating activities as they would be presented in a statement of cash
flows using the indirect method.

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

3.2 NARDONE LIMITED

The following information has been extracted from the draft financial information of Nardone Limited.
Statement of comprehensive income for the year ended 31 December 2015
Rs.000 Rs.000
Sales revenue 490
Administration costs (86)
Distribution costs (78)
(164)
Operating profit 326
Interest expense (23)
Profit before tax 303
Taxation (87)
Profit after tax 216
Dividends paid (52)
Retained profit for the year 164

Statement of financial position

31 December 2015 31 December 2014
Rs.000 Rs.000 Rs.000 Rs.000

Non-current assets (see below) 1,145 957

Current assets:
Inventory 19 16
Receivables 38 29
Bank 19 32
76 77
Total assets 1,221 1,034

Share capital 323 232

Revaluation reserve 170 0
Retained earnings 553 389
1,046 621
Non-current liabilities:
Long-term loans 70 320
Current liabilities:
Trade payables 12 17
Tax payable 93 76
105 93
Total equity and liabilities 1,221 1,034

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

 Questions

Note on non-current assets

Land and Fixtures &

Machinery Total
buildings fittings
Rs.000 Rs.000 Rs.000 Rs.000
Cost or valuation
At 31 December 2014 830 470 197 1,497
Additions - 43 55 98
Disposals - (18) - (18)
Adjustment on revaluation 70 - - 70
At 31 December 2015 900 495 252 1,647
Depreciation
At 31 December 2014 (90) (270) (180) (540)
Charge for the year (10) (56) (8) (74)
Disposals - 12 - 12
Adjustment on revaluation 100 - - 100
At 31 December 2015 0 (314) (188) (502)
Carrying amount:
At 31 December 2014 740 200 17 957
At 31 December 2015 900 181 64 1,145

You have been informed that included within distribution costs is Rs.4,000 relating to the loss on a
disposal of a non-current asset.
Required
Prepare a statement of cash flows for Nardone Limited for the year ended 31 December 2015.

3.3 HOT SAUCE LIMITED

Hot Sauce Limited summarised final accounts are as follows;

Statement of financial position

31 December 2014 31 December 2015
Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets:
Plant and machinery at cost 2,700 3,831
Accumulated depreciation (748) (1,125)
Carrying amount 1,952 2,706
Current assets:
Inventory 203 843
Receivables 147 184
Bank 51 -
401 1,027
Total assets 2,353 3,733

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

31 December 2014 31 December 2015

Rs.000 Rs.000 Rs.000 Rs.000

Ordinary share capital (Rs1 shares) 740 940

Share premium account 0 100

Retained earnings 671 1,034

1,411 2,074

Non-current liabilities:

Loans 320 150

Current liabilities:

Bank overdraft 0 766

Trade payables and accruals 152 141

Current taxation 470 602

622 1,509

Total equity and liabilities 2,353 3,733

Statement of comprehensive income for year ended 31 December 2015

R.s 000

Profit before tax 1,195

Taxation (602)

Profit after tax 593

Dividend payments during the year were Rs.230,000.

The following information is also available:
(1) The only new loan raised during the year was a five-year bank loan amounting to Rs.65,000.
(2) Interest charged during the year was Rs.156,000. Interest accrued was Rs.24,000 last year
and Rs.54,000 this year.
(3) Depreciation charged during the year amounted to Rs.401,000. This does not include any
profit or loss on disposal of non-current assets.
(4) During the year plant which originally cost Rs.69,000 was disposed of for Rs.41,000.
(5) During the year the company issued 200,000 new shares.
Required

Prepare a statement of cash flows.

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

 Questions

3.4 QUETTA TRACK LIMITED

The statement of financial position of Quetta Track Limited as at 30 June was as follows.

2015 2014
Rs. 000 Rs. 000 Rs. 000 Rs. 000
ASSETS
Non-current assets
Property cost 22,000 12,000
Depreciation (4,000) (1,000)
——— 18,000 ——— 11,000
Plant and equipment
Cost 5,000 5,000
Depreciation (2,250) (2,000)
——— 2,750 ——— 3,000
——— ———
20,750 14,000
Current assets
Inventories 16,000 11,000
Trade receivables 9,950 2,700
Cash and cash equivalents – 1,300
——— 25,950 ——— 15,000
——— ———
Total assets 46,700 29,000
——— ———
EQUITY AND LIABILITIES
Capital and reserves
Equity capital 3,000 3,000
Accumulated profits 16,200 3,800
——— ———
19,200 6,800
Non-current liabilities
Loan 6,000 10,000
Current liabilities
Operating overdraft 11,000 –
Trade payables 8,000 11,000
Income tax payable 1,800 1,000
Accrued interest 700 200
——— 21,500 ——— 12,200
——— ———
Total equity and liabilities 46,700 29,000
——— ———

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

Statement of comprehensive income (extracts)

2015 2014
Rs.000 Rs.000
Operating profit 15,400 5,900
Financing cost (Interest) (1,000) (1,400)
——— ———
Profit before tax 14,400 4,500
Income tax expense (2,000) (1,500)
——— ———
Net profit for the year 12,400 3,000
——— ———
Equipment of carrying amount Rs.250,000 was sold at the beginning of 2015 for Rs.350,000. This
equipment had originally cost Rs.1,000,000.
In recent years, no dividends have been paid.
Required:
Prepare a statement of cash flows, under the indirect method, for the year ended 30 June 2015

3.5 MARDAN SOFTWARE LIMITED

The following are the summarised accounts of Mardan Software Limited.
Statement of financial position at 31 December

2014 2015
Rs.(000) Rs.(000) Rs.(000) Rs.(000)
ASSETS
Non-current assets
Plant and equipment 2,086 2,103
Fixtures and fittings 1,381 1,296
——— ———
3,467 3,399
Current assets
Inventory 1,292 1,952
Trade receivables 713 1,486
Short term investment 1,050 600
Cash 197 512
——— 3,252 ——— 4,550
——— ———
Total assets 6,719 7,949
——— ———
EQUITY AND LIABILITIES
Capital and reserves
Equity capital 4,200 4,500
Share premium reserve 800 900
Accumulated profits (Note 1) 431 1,180
——— ———
5,431 6,580

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

 Questions

2014 2015
Rs.(000) Rs.(000) Rs.(000) Rs.(000)
Current liabilities

Dividend payable 132 154

Income tax payable 257 312

Trade payables 899 903

——— 1,288 ——— 1,369
——— ———
Total equity and liabilities 6,719 7,949
——— ———
Statement of comprehensive income (extracts) for the year ended 31 December 2015

Rs.(000)

Profit before taxation 1,381

Income tax expense (310)

Net profit for the period 1,071

Note 1 Accumulated profits

Rs.(000)

Balance at 1 January 431

Net profit for the year 1,071

Dividend for the year (322)

Balance at 31 December 1,180

Further information:
(1) Plant and equipment with a carrying amount of Rs184,000 was disposed of for Rs.203,000,
whilst a new item of plant was purchased for Rs312,000
(2) Fixtures and fittings with a carrying amount of Rs100,000 were disposed of for Rs95,000;
(3) Depreciation recognised on fixtures and fittings amounted to Rs 351,000.
(4) Dividend for the year was declared during the year. Dividend payable in the statements of
financial position at each year end relate to dividends declared in that year but not paid over
to shareholders by the reporting date.
Required:
Prepare a statement of cash flows for the year ended 31 December 2015 in accordance with IAS 7:
Statement of cash flows

© Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

3.6 TARBELA TRADERS LIMITED

The statement of financial position of Tarbela Traders Limited is presented below:
Statement of financial position

31 December 2015 31 December 2014

Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets (at WDV)
Premises 37,000 38,000
Equipment 45,800 17,600
Motor vehicles 18,930 4,080
——— 101,730 ——— 59,680
Investments 25,000 17,000
———— ————
126,730 76,680
Current assets
Inventories 19,670 27,500
Trade receivables and prepayments 11,960 14,410
Cash and bank balances 5,500 5,400
——— 37,130 ——— 47,310
———— ————
Total assets 163,860 123,990
———— ————
Capital and reserves
Share capital 67,940 67,940

Retained earnings 10,670 7,100

———— ————
78,610 75,040

Non-current liabilities
Interest-bearing borrowings 25,000 28,000
Current liabilities
Trade payables and accrued expenses 32,050 20,950
Bank overdraft 28,200 –
———— 60,250 ———— 20,950
———— ————
163,860 123,990
═════ ═════

© Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan

 Questions

Profit for the year ended 31 December 2015 is Rs.3,570,000 (after accounting for);

Rs.000
Depreciation
Premises 1,000
Equipment 3,000
Motor vehicles 3,000
Profit on disposal of equipment 430
Loss on disposal of motor vehicle 740
Interest expense 3,000

The written down value of the assets at date of disposal was:

Equipment 5,200
Motor vehicles 2,010

Interest accrued at 31 December 2015 is Rs.400,000.

Required:
Prepare a statement of cash flows for the year ended 31 December 2015. Assume that short-term
investments are cash equivalents.

3.7 THE SINDH ROBOTICS COMPANY

The statements of financial position and statement of comprehensive incomes of The Sindh
Robotics Company for two consecutive financial years are shown below.
Statements of financial position

31 December 2013 31 December 2014

Cost Dep’n Net Cost Dep’n Net
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000

Non-current assets
Land 43,000 – 43,000 63,000 – 63,000
Buildings 50,000 10,000 40,000 90,000 11,000 79,000
Plant 10,000 4,000 6,000 11,000 5,000 6,000
———— ———— ———— ———— ———— ————
103,000 14,000 89,000 164,000 16,000 148,000
———— ———— ———— ————

Investments 50,000 80,000

Current assets
Inventories 55,000 65,000
Trade receivables 40,000 50,000
Bank 3,000 –
———— 98,000 ———— 115,000
———— ————
237,000 343,000
———— ————

© Emile Woolf International 11 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

31 December 2013 31 December 2014

Cost Dep’n Net Cost Dep’n Net
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Capital
Issued shares of
Rs. 1 each 40,000 50,000
Share premium 12,000 14,000
Revaluation surplus – 20,000
Accumulated profit 25,000 25,000
———— ————
77,000 109,000
Non-current liabilities
10% loan borrowings 100,000 150,000

Current liabilities
Trade payables 40,000 60,000
Dividend payable 20,000 20,000
Bank overdraft – 4,000
———— ————
60,000 84,000
———— ————
237,000 343,000
———— ————

Statements of comprehensive incomes

2013 2014
Rs.000 Rs.000
Revenue 200,000 200,000
Cost of sales (100,000) (120,000)
———— ————
Gross profit 100,000 80,000
Distribution and administration expenses (50,000) (47,000)
———— ————
50,000 33,000
Interest (10,000) (13,000)
———— ————
Net profit for year 40,000 20,000
———— ————
Only one dividend is declared each year which is paid in the following year. No sales of non-current
assets have occurred during the relevant period. Ignore taxation.
Required:
Prepare a statement of cash flows for the year ended 31 December 2014 using the direct method.

© Emile Woolf International 12 The Institute of Chartered Accountants of Pakistan

 Questions

3.8 ABIDA LIMITED

Abida Ltd. made a net profit of Rs. 256,800 for the year ended June 30, 2015 after charging
depreciation of Rs. 17,500 and loss on disposal of furniture of Rs. 6,800. The sale proceeds of the
furniture were Rs. 12,000.
During the year, the net book value of non-current assets decreased by Rs. 7,400; receivables
increased by Rs. 11,700; inventories decreased by Rs. 21,600 and creditors increased by Rs. 8,900.
A long-term loan of Rs. 75,000 was repaid during the year and Abida withdrew Rs. 120,000 for his
own use.
Required:

Prepare the statement of cash flows for the year ended June 30, 2015.

3.9 MOOSANI LIMITED

The comparative statements of financial position of Moosani Ltd. show the following information:
December 31
2015 2014
Rs. Rs.
Cash 5,200 41,400
Accounts receivable 31,700 21,500
Inventory 25,000 19,400
Investments - 16,900
Furniture 80,000 64,000
Equipment 86,000 43,000
Total 227,900 206,200
Allowance for doubtful accounts 6,500 9,700
Accumulated depreciation on equipment 24,000 18,000
Accumulated depreciation on furniture 8,000 15,000
Trade creditors 10,800 6,500
Accrued expenses 4,300 10,800
Bills payable 6,500 8,600
Long-term loans 31,800 53,800
Capital 136,000 83,800
Total 227,900 206,200
Additional data related to 2015 is as follows:
(i) Equipment that had cost Rs. 23,000 and was 40% depreciated at the time of disposal was sold
for Rs. 6,500.
(ii) Payments against long-term loans amounted to Rs. 22,000 of which Rs. 12,000 was paid by Mr.
Moosani out of his personal account.
(iii) On January 1, 2015, the furniture was completely destroyed by a fire. Proceeds received from
the insurance company amounted to Rs. 60,000.
(iv) Investments were sold at Rs. 7,500 above their cost.
(v) Mr. Moosani withdraws Rs. 15,000 each month for his personal use.
Required:
Prepare a statement of cash flows for the year ended 31 December 2015.

© Emile Woolf International 13 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

3.10 SAKHAWAT HUSSAIN LIMITED

The statements of financial position of Sakhawat Hussain Ltd. as at December 31, 2015 and 2014
are as follows:

2015 2014
Rs. Rs.
Current assets 4,750,000 2,850,000
Investments 2,600,000 2,500,000
Non-current assets 9,750,000 9,600,000
Accumulated depreciation (2,950,000) (2,450,000)

14,150,000 12,500,000

Non-current liability (loan) 2,000,000 2,000,000

Current liabilities 1,850,000 1,450,000
Interest liability 200,000 150,000
Capital 9,000,000 8,000,000
Profit and loss account 1,100,000 900,000

14,150,000 12,500,000

Other information for the year 2015 is as follows:

(i) Investments costing Rs. 250,000 were sold for Rs. 320,000.
(ii) Fully depreciated furniture costing Rs. 200,000 was written-off.
(iii) Non-current assets costing Rs. 960,000 with a net book value of Rs. 160,000 were sold for
Rs. 250,000.
(iv) Interest amounting to Rs. 180,000 was paid during the year.
(v) Sakhawat Hussain withdrew Rs. 1,200,000 from the profits of 2014 and 2015.
(vi) 20% of the opening and closing balances of current assets are represented by cash.
Required:
Prepare a statement of cash flows for the year ended December 31, 2015.

3.11 JUNAID JANJUA LIMITED

Junaid Janjua Ltd. has provided you the following statements of financial position and statement of
comprehensive income.
Statements of financial position as on December 31, 2015

2015 2014
Rupees
Cash 145,000 32,000
Accounts receivable 280,000 104,000
Long-term investments 220,000 170,000
Inventory 424,000 200,000
Prepaid insurance 24,000 36,000

© Emile Woolf International 14 The Institute of Chartered Accountants of Pakistan

 Questions

2015 2014
Rupees
Office supplies 14,000 7,000
Land 1,810,000 2,500,000
Building 2,800,000 2,300,000
Accumulated depreciation (890,000) (720,000)
Equipment 1,200,000 1,150,000
Accumulated depreciation (380,000) (350,000)

Total assets 5,647,000 5,429,000

Accounts payable 158,000 263,000

Wages payable 40,000 24,000
Short-term loans 580,000 580,000
Long-term loans 985,000 1,160,000
Capital 3,884,000 3,402,000

Total liabilities and equity 5,647,000 5,429,000

Statement of comprehensive income for the year ended December 31, 2015

2015
Rupees
Sales revenue 9,280,000
Cost of goods sold (6,199,000)
Gross profit 3,081,000
Operating expenses
Selling expenses 634,000
Administrative expenses 1,348,000
Depreciation expenses 230,000
(2,212,000)
Income from operations 869,000
Other revenues/expenses
Gain on sale of land 64,000
Gain on sale of long term investment 32,000
Loss on sale of equipment (15,000)
81,000
Net income 950,000
Drawings (568,000)
Retained earnings 382,000

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Introduction to accounting

Notes:
(a) Part of the long term loan amounting to Rs. 100,000 was paid by Mr. Junaid from his personal
account.
(b) Long term investments costing Rs. 100,000 were sold during the year.
(c) Depreciation charged during the year on equipment amounted to Rs. 60,000. Equipment
having a book value of Rs. 75,000 was sold during the year.
Required:
Prepare a statement of cash flows for the year ended December 31, 2015.

3.12 AMIN INDUSTRIES LIMITED

The statements of financial position of Amin Industries Ltd. as at 31 August 2014 and 2015 are as
follows:

2015 2014 2015 2014

Rs. Rs. Rs. Rs.
Capital 33,433,000 27,942,000 Non-current
assets – book
value 15,172,000 12,346,000

Current liabilities Current

assets
Short term finance 2,545,000 1,616,000 Investments 4,911,000 -
Creditors 3,457,000 2,850,000 Inventory 12,178,000 14,950,000
6,002,000 4,466,000 Trade debts –
net of
provision for
bad debts 6,732,000 4,887,000
Bank 442,000 225,000
24,263,000 20,062,000
39,435,000 32,408,000 39,435,000 32,408,000

The following information is also available:

Rupees
Profit during the year ended 31 August 201 161,000
Mr. Amin’s withdrawals during the year 120,000
Accumulated depreciation on non-current assets – 31 August 2014, 605,000
Accumulated depreciation on non-current assets – 31 August 2015 470,000
Provision for bad debts – 31 August 2014 385,000
Provision for bad debts – 31 August 2015 484,000
During the year non-current assets costing Rs. 1,500,000 with a carrying amount of Rs. 867,000
were sold for Rs. 1,284,000.

Required:
Prepare a statement of cash flows for the year ended 31 August 2015. Show necessary workings.

© Emile Woolf International 16 The Institute of Chartered Accountants of Pakistan

 Questions

3.13 NADIR LIMITED

Following information pertains to Nadir Limited:
Extract from statement of profit or loss for the year ended 31 December 2017

Rs. in ‘000

Profit before taxation 8,955

Taxation (2,945)

Profit after taxation 6,010

Extract from statement of financial position as on 31 December 2017

2017 2016 2017 2016

Equity and liabilities Assets
---- Rs. in ‘000 ---- ---- Rs. in ‘000 ----

Share capital 12,400 10,000

Property plant &
Share premium 1,400 - equipment – net 21,400 15,800

Retained earnings 13,450 12,440 Current assets:

Surplus on revaluation 4,000 - Stock-in-trade 5,600 5,750

Non-current liabilities: Trade receivables – net 6,840 4,446

Long-term loans 4,100 5,000 Other receivables 2,385 800

Current liabilities: Cash & bank 2,355 3,204

Trade payables 1,900 1,400

Accruals & other payables 680 660

Tax liability 650 500

38,580 30,000 38,580 30,000

Other information:
(i) Shares issued during the year were as follows:
a. 10% bonus shares in March 2017.
b. Right shares in July 2017.
(ii) During the year, a plant costing Rs. 9,500,000 and having a book value of Rs. 5,200,000
was disposed of for Rs. 4,800,000 of which Rs. 1,800,000 are still outstanding.
(iii) Depreciation for the year amounted to Rs. 7,350,000.
(iv) Financial charges for the year amounted to Rs. 1,100,000. Accrued financial charges as on
31 December 2017 amounted to Rs. 112,000 (2016: Rs. 48,000).
(v) Provision for doubtful trade receivables is maintained at 5%.

Required
Prepare statement of cash flows for the year ended 31 December 2017, in accordance with IAS 7
‘Statement of Cash Flows’ using indirect method.

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Introduction to accounting

3.14 LIAQUAT INDUSTRIES

The statement of financial position of Liaquat Industries as at 31 December 2016 is as follows:

Equity and 2016 2015 2016 2015

Assets
liabilities -------- Rupees -------- -------- Rupees --------

Owner’s capital 13,938,060 13,665,280 Freehold land 4,778,400 6,600,000

Long-term loan 1,000,000 1,000,000 Building – WDV 5,057,600 4,171,200

Short term loan 1,331,200 1,531,200 Vehicle – WDV 600,000 800,000

Accounts payable 417,120 694,320 Equipment – WDV 1,643,100 2,112,000

Accrued interest 105,600 63,360 Capital work in 1,478,400 1,821,600

progress

Long-term deposits 580,800 448,800

Inventory 685,608 320,628

Accounts receivable 1,273,272 595,452

Cash 694,800 84,480

16,791,980 16,954,160 16,791,980 16,954,160

The following information has been extracted from income statement:

Rupees
Depreciation expenses 932,500
Finance cost 141,872
Gain on sale of fixed assets (net) 98,960
Net profit before tax 1,525,948

Additional information:
a Details of gain on sale of fixed assets are as follows:

Rupees
Gain on sale of freehold land 168,960
Loss on disposal of equipment due to fire (70,000)
98,960

The loss on disposal of equipment represents the WDV of the equipment. The amount
of insurance claim received, amounting to Rs. 30,000 was erroneously credited to
accumulated depreciation.
b Repairs to building amounting to Rs. 50,000 were erroneously debited to building
account on 31 December 2016.
c Transfers from capital work in progress to building amounted to Rs. 1,200,000.
d The owner withdrew Rs. 150,000 per month.
Required
Prepare statement of cash flows for the year ended 31 December 2016, in accordance with IAS – 7
using indirect method.

© Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan

 Questions

3.15 QUALITY ENTERPRISES

Following are the extracts from income statement of Quality Enterprises (QE) for the year ended 31
December 2015 and its statement of financial position as at that date, together with some additional
information:
Income statement for the year ended 31 December 2015

Rs. in ‘000
Profit from operations 6,402
Other income 1,357
Interest expense (100)
Profit before tax 7,659
Income tax expense (1,376)
Profit for the year 6,283

Statement of financial position as at 31 December 2015

2015 2014 2015 2014

Equity and liabilities Assets
--- Rs. in ‘000 --- --- Rs. in ‘000 ---
Non-current assets
Owner’s capital 14,219 10,703 Property, plant and 19,628 11,845
equipment
Unappropriated profit 10,652 6,697 Investments 7,645 6,498
27,273 18,343
Revaluation surplus 2,676 1,911
10% bank loan 6,000 -
Current liabilities Current assets
Trade and other 3,337 4,953 Inventories 4,642 3,073
payables
Income tax payable 1,300 994 Trade and other receivables 2,273 3,865
Bank overdraft - 27 Cash and bank 3,996 4
4,637 5,974 10,911 6,942
38,184 25,285 38,184 25,285

Additional information:
(i) During the year, movements in property, plant and equipment include:
 Depreciation amounting to Rs. 5,280,000.
 Machinery having a carrying amount of Rs. 2,481,000 was sold for Rs. 3,440,000.
 Factory building was revalued from a carrying amount of Rs. 5,963,000 to Rs. 8,000,000.
 An office building which had previously been revalued, was sold at its carrying
Amount of Rs. 2,599,000.
(ii) The owner of QE withdrew Rs. 300,000 per month. The amounts were debited to
unappropriated profit.
(iii) Trade debts written off during the year amounted to Rs. 200,000. The provision for bad debts
as at 31 December 2015 was Rs. 400,000 (2014: Rs. 550,000)

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Introduction to accounting

(iv) The interest on bank loan is payable on 30th June every year. The bank loan was received on
1 November 2015. Interest for two months has been accrued and included in trade and other
payables.
(v) Other income includes investment income of Rs. 398,000. As at 31 December 2015, trade
and other receivables included investment income receivable amounting to Rs. 96,000
(2014: Rs. 80,000).
Required
Prepare a statement of cash flows for Quality Enterprises for the year ended 31 December 2015,
using the indirect method.

3.16 KLEA
The statement of financial position and statement of profit or loss for Klea for the year to 31 st March
2015 are provided below.
Statement of financial position as at 31st March 2015
2015 2014
Rs. in ‘000
Assets
Non-current assets
Intangible assets 300 200
Property, plant and equipment 3,450 1,600
Financial assets 400 200
4,150 2,000
Current assets
Inventory 3,200 2,000
Trade receivables 2,400 2,000
Cash and cash equivalents 32 580
5,632 4,580
Total assets 9,782 6,580
Equity and liabilities
Equity
Issued share capital 3,000 2,000
Share premium account 838 560
Retained earnings 910 354
Total equity 4,748 2,914
Revaluation surplus 1,000 -

Non-current liabilities
Interest-bearing loans and liabilities 1,600 2,000
Current liabilities
Bank overdraft 414 -
Trade payables 1,600 1,266
Taxation 420 400
2,434 1,666
Total liabilities 4,034 3,666
Total equity and liabilities 9,782 6,580

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 Questions

Statement of profit or loss for the year ended 31st March 2015
Revenue 10,000
Other income 100
Change in inventory of finished goods and WIP 1,300
Raw materials and consumables used 4,000
Employee benefits costs 3,000
Depreciation and amortisation expense 800
Other expenses 1,724
Total expenses (9,524)
1,876
Finance costs (320)
Finance income 50
Profit before tax 1,606
Income tax expense (650)
Profit for the year 956

Additional information
(i) Non-current assets Rs. in ‘000
2015 2014
Cost Deprec’n Cost Deprec’n
Intangible assets 700 400 400 200
Property, plant and equipment 5,000 1,550 3,000 1,400

(ii) At 1 April 2014 land was revalued from Rs. 1million to Rs. 2 million.
(iii) During the year, plant and machinery costing Rs. 600,000 and depreciated by Rs. 500,000 was
sold for Rs. 150,000.
(iv) The interest bearing loans relate to debentures which were issued at their nominal value. Rs.
400,000 of these debentures were redeemed at par during the year.
(v) Ordinary shares were issued for cash during the year.
(vi) Rs. 100,000 of current asset investments held as cash equivalents were sold during the year
for Rs. 94,000.
(vii) Dividends paid in the year were Rs. 200,000 relating to the 2014 proposed dividend and a Rs.
200,000 interim dividend for 2015.
Required
Prepare a statement of cash flows for Klea for the year ended 31 March 2015 in accordance with
IAS 7 using the indirect method.

© Emile Woolf International 21 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

CHAPTER 4 – INCOME AND EXPENDITURE ACCOUNTS

4.1 GILTAN GOLF CLUB
The treasurer of the Giltan Golf Club has prepared the following receipts and payments account for
the year ended 31 March 2016.
Rs.(000) Rs.(000)
Balance at 1 April 2015 682 Functions 305
Subscriptions 2,930 Repairs 146
Functions 367 Telephone 67
Sale of land 1,600 Extension of club house 600
Bank interest 60 Furniture 135
Bequest (legacy) 255 Heat and light 115
Sundry income 46 Salary and wages 2,066
Sundry expenses 104
Balance at 31 March 2016 2,402
5,940 5,940

(a) Subscriptions received included Rs.65,000 which had been in arrears at 31 March 2015 and
Rs.35,000 which had been paid for the year commencing 1 April 2016.
(b) Land sold had been valued in the club's books at cost Rs.500,000.
(c) Accrued expenses
31 March 2015 31 March 2016
Rs.(000) Rs.(000)
Heat and light 32 40
Wages 12 14
Telephone 14 10
58 64

(d) Depreciation is to be charged on the original cost of assets appearing in the books at 31
March 2016 as follows:
Buildings 5%
Fixtures and fittings 10%
Furniture 20%
(e) The following balances are from the club's books at 31 March 2015:
Rs.(000)
Land at cost 4,000
Buildings at cost 3,200
Buildings allowance for depreciation 860
Fixtures and fittings at cost 470
Fixtures allowance for depreciation 82
Furniture at cost 380
Furniture allowance for depreciation 164
Subscriptions in arrears 80
(including Rs.15,000 irrecoverable - member had emigrated)
Subscriptions in advance 30
Required:
Prepare an income and expenditure account for the year ended 31 March 2016 and a Statement of
financial position as at that date.

© Emile Woolf International 22 The Institute of Chartered Accountants of Pakistan

 Questions

4.2 LANGTON HOCKEY CLUB

The Langton Hockey club does not have any formal accounting records but the following information
is available.
(1) The payments that have been made by the club for the year ending 30 June 2016 are as
follows:
Rs.(000)
Purchase of second hand table tennis table 250
Rent 600
Tea stall purchases 900
Annual fair expenses 1,450
Outings expenses 370
Prizes for whist evenings 90
Repairs to snooker table 35
Refreshments at social evenings 240
(2) The club's income, apart from annual subscriptions, is as follows:
Rs.(000)
Contributions to outings 300
Takings at the annual fair 2,150
The club also run a tea stall in the village car park every Sunday in the summer months. This
sells tea and coffee, cakes, biscuits and ice creams etc. The profit margin on the tea stall is
normally 20% of selling price.
(3) All the club's transactions are in cash but if there are any surplus funds they are banked in a
local bank account. The balance on the bank account was Rs.30,000 at 1 July 2015.
(4) The club has an annual subscription rate of Rs.20,000 per annum per person or Rs.50,000
per annum for a family membership. Members are asked to pay their subscription in the July
at the beginning of the club's accounting year.
There are 10 family members of the club. Of these two paid their 2016 subscription in June
2015 and all the rest were received before 30 June 2016.
No individual members had paid their 2016 subscriptions in advance but at 30 June 2016 four
members still owed their subscriptions. They had been contacted and all four had promised
to pay at the next evening social event. There are in total 80 individual members.
(5) The club has the following other assets and liabilities:
30 June 30 June
2015 2016
Rs. (000) Rs. (000)
Sports equipment 2,560 Note 6
Inventory for the tea stall 120 60
Payables for the tea purchases 110 190
Prepayment of rent 40 50
(6) The sports equipment is all depreciated at 20% per annum on net book value on the basis of
the equipment held at 30 June each year.
(7) The old table tennis table was sold during the year for Rs.40,000. Its value as recorded by the
club at 30 June 2015 was Rs.30,000.
Required:
You are required to prepare an income and expenditure account for the year ended 30 June 2016
and a statement of financial position at that date.

© Emile Woolf International 23 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

4.3 GULSHAN CRICKET CLUB

The following balances have been obtained from the books of Gulshan Cricket Club:

June 30, 2014 June 30, 2015

Building 6,024,000 6,438,150
Furniture 3,012,000 2,710,800
Books 1,129,500 1,246,950
Sports equipment 1,807,200 1,595,200
Investments - 436,000
Advance subscription 86,000 92,000
Prepaid expenses 122,000 176,000
Expenses payable 186,900 207,600
Subscriptions receivable 326,000 357,000
Cash 1,204,800 1,586,500

The following information is also available in respect of the year ended June 30, 2015:
(i) Depreciation for the year has been credited directly to the asset accounts. The rates of
depreciation are as follows:

Building 5%
Furniture and books 10%
Sports equipment 20%

(ii) The club had 600 members on June 30, 2015. No fresh members were admitted during the
year but 10 members left the club on January 1, 2015. Subscription per member is Rs. 500
per month.
Required:
(a) Summary of receipts and payments made during the year ended June 30, 2015.
(b) Income and Expenditure Account for the year ended June 30, 2015.

4.4 SEHAT CLUB

Following is the Receipts and Payments Account of Sehat Club for the year ended 30 June 2015:
Receipts and payments account for the year ended 30 June 2015

Receipts Rupees Payments Rupees

Opening balance 15,000 Salaries 63,500
Subscriptions 201,000 Rent 34,000
Entrance fees 63,000 Travelling expenses 1,500
Donations 38,000 Printing and stationery 1,000
Interest 16,000 General charges 2,500
Receipt on disposal of furniture 500 Periodicals 500
Investments 200,000
Closing balance 30,500
333,500 333,500

© Emile Woolf International 24 The Institute of Chartered Accountants of Pakistan

 Questions

The club’s statement of financial position as on 30 June 2014 was as follows:

Statement of financial position as on 30 June 2014
Liabilities Rupees Assets Rupees
General Fund 172,500 Furniture – net 40,000
Liabilities: Rent 11,000 Sports equipment – net 20,000
Salaries 17,500 Investments 100,000
Subscription receivable 15,000
Interest receivables 11,000
Bank balance 15,000
201,000 201,000
Other details for the year ended 30 June 2015 are as follows:
(i) Furniture purchased on 1 July 2013 costing Rs. 4,000 was disposed off on 1 January 2015 at
a scrap value of Rs. 500.
(ii) On 1 July 2014, furniture having written down value of Rs. 6,000 was traded-in with new
furniture having fair value of Rs. 6,700.
(iii) Depreciation is charged on diminishing balance basis at 20% on furniture and 15% on sports
equipment.
(iv) Sports equipment worth Rs. 12,000 were received at year end as donation.
(v) Following amounts are receivable /outstanding as at 30 June 2015:
Rs.
Subscription receivable 8,000
Entrance fee receivable 3,000
Salaries outstanding 4,000
Rent outstanding 2,000
Required
Prepare an income and expenditure account of Sehat Club for the year ended 30 June 2015 and its
statements of financial position on that date.

4.5 AB SPORTS AND SOCIAL CLUB

You have agreed to take over the role of bookkeeper for the AB sports and social club.
The summarised statement of financial position on 31 December 2014 as prepared by the previous
bookkeeper contained the following items.
Assets Rs.
Heating oil for clubhouse 1,000
Shop and cafe inventories 7,000
New sportswear, for sale, at cost 3,000
Used sportswear, for hire, at valuation 750
Equipment for grounds man
Cost 5,000
Depreciation 3,500 1,500
Subscriptions due 200
Bank
Current account 1,000
Deposit account 10,000

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Introduction to accounting

Capital and liabilities Rs.

Accumulated fund 23,150

Payables:
Shop and cafe inventories 1,000
Sportswear 300
The bank account summary for the year to 31 December 2015 contained the following items.
Receipts Rs.
Subscriptions 11,000
Bankings
Shop and cafe 20,000
Sale of sportswear 5,000
Hire of sportswear 3,000
Interest on deposit account 800
39,800

Payments Rs.
Rent and repairs of clubhouse 6,000
Heating oil 4,000
Sportswear 4,500
Grounds person 10,000
Shop and cafe purchases 9,000
Transfer to deposit account 6,000
39,500

You discover that the subscriptions due figure as at 31December 2014 was arrived at as follows.
Subscriptions unpaid for 2013 10
Subscriptions unpaid for 2014 230
Subscriptions paid for 2015 40

Corresponding figures at 31 December 2015 are:

Subscriptions unpaid for 2013 10
Subscriptions unpaid for 2014 20
Subscriptions unpaid for 2015 90
Subscriptions paid for 2016 200

Subscriptions due for more than 12 months should be written off with effect from 1January 2015.
Asset balances at 31 December 2015 include:
Heating oil for club house 700
Shop and cafe inventories 5,000
New sportswear, for sale, at cost 4,000
Used sportswear, for hire, at valuation 1,000

© Emile Woolf International 26 The Institute of Chartered Accountants of Pakistan

 Questions

Closing payables at 31 December 2015 are for:

shop and cafe inventories 800
sportswear 450
heating oil for clubhouse 200

Two thirds of the sportswear purchases made in 2015 had been added to inventory of new
sportswear in the figures given in the list of assets above, and one third had been added directly to
the inventory of used sportswear for hire.
Half of the resulting 'new sportswear for sale at cost' at 31 December 2015 is actually over two years
old. You decide, with effect from 31 December 2015, to transfer these older items into the inventory
of used sportswear, at a valuation of 25% of their original cost.
No cash balances are held at 31 December 2014 or 31 December 2015. The equipment for the
grounds person is to be depreciated at 10% per annum, on cost.

Required:
Prepare the income and expenditure account and statement of financial position for the AB sports
club for 2015.

4.6 GD SPORTS CLUB

The GD Sports Club does not keep any accounting records other than notes concerning the
subscriptions of members and the amounts paid for expenses. During discussions with the club
committee you discover the following:
(1) The club does not have a bank account and conducts all its transactions in cash, any surplus
being paid into a building society account. The interest credited to this account for the year to
31 March 2015 was Rs.350.
(2) A summary of the payments for the year is:

Rs.
Deposit to building society account 250
Purchase of dartboards 100
Heat/light 262
Repairs to snooker tables 176
Cafe payables 7,455
Rental of premises 1,000
Club match referees’ fees and expenses 675
Trophies, etc (treated as an expense) 424
Refreshments for visiting teams 235

(3) The club has 100 members who each pay Rs.5 per annum subscription. However, on 31
March 2014 ten members had already paid their subscriptions for 2015.
On 31 March 2015 two members who had not been seen in the club since August 2014 had
not paid their subscriptions for 2015 and it has been decided that the amount due be written
off and that their names be removed from the list of members.
(4) The club has only two sources of income from club members – subscriptions and cafe sales.
A profit margin of 30% of selling price is normally applied to determine cafe selling prices but
during the year Rs.397 of goods were sold at cost.

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Introduction to accounting

(5) The club has the following other assets/liabilities:

1 April 2014 31 March 2015

Rs. Rs.
Equipment 4,000 ?
Building society account 4,600 5,200
Cafe inventories 840 920
Cafe payables 630 470
Cash in hand nil nil
Creditor for heat/light 34 41

(6) Equipment is depreciated at 10% of the value of equipment held on 31 March each year.
Required:
(a) Prepare a cafe trading account for the year ended 31 March 2015;
(b) Prepare an income and expenditure account for the year ended 31 March 2015;
(c) Prepare a statement of financial position at 31 March 2015.

4.7 HB TENNIS CLUB

The HB Tennis Club was formed on 1 April 2015 and has the following receipts and payments
account for the six months ended 30 September 2015:

Receipts Rs. Payments Rs.

Subscriptions 12,600 Purchase of equipment 4,080
Tournament fees 465 Grounds man’s wages 4,520
Bank interest 43 Rent and business rates 636
Sale of club ties 373 Heating and lighting 674
Life membership fees 4,200 Postage and stationery 41
Court maintenance 1,000
Tournament prizes 132
Purchase of club ties 450
Balance c/d 6,148
17,681 17,681
Notes:
(1) The annual subscription fee is Rs.300. On 30 September there were five members who had
not paid their subscriptions, but this money was received on 4 October 2015.
(2) The equipment is expected to be used by the club for five years, after which time it will need
to be replaced. Its estimated scrap value at that time is Rs.50.
(3) During the six months, the club purchased 100 ties printed with its own design. Forty of these
ties remained unsold at 30 September 2015.
(4) The club has paid business rates in advance on 30 September 2015 of Rs.68.
(5) The club treasurer estimates that the following amounts should be accrued for expenses:
Rs.
Grounds man’s wages 40
Postage and stationery 12
Heating and lighting 53

© Emile Woolf International 28 The Institute of Chartered Accountants of Pakistan

 Questions

(6) The life membership fees received relate to payments made by four families. The scheme
allows families to pay Rs.1,050 which entitles them to membership for life without further
payment. It has been agreed that such receipts would be credited to income and expenditure in
equal instalments over 10 years.
Required:
(a) Prepare the club’s income and expenditure account for the six months ended 30 September
2015.
(b) Prepare the club’s statement of financial position at 30 September 2015.

4.8 MONARCH SPORTS CLUB

The Monarch Sports Club has the following summary of its cash book for the year ended 30 June
2015:

Rs. Rs.
Opening bank balance 12,500

Receipts:
Subscriptions 18,000
Life membership fees 3,000
Competition receipts 7,500
Entrance fees 2,500
Equipment sold 1,000
32,000

44,500
Payments:
Transport to matches 3,700
Competition prizes 4,300
Coaching fees 2,100
Repairs to equipment 800
Purchase of new equipment 4,000
Purchase of sports pavilion 35,000
(49,900)
Closing balance (overdrawn) (5,400)

The following information is available regarding the position at the beginning and end of the
accounting year:

1 July 2014 30 June 2015

Rs. Rs.
Subscriptions in advance 1,100 900
Subscriptions in arrears 200 300
Coaching fees outstanding 150 450

Of the subscriptions outstanding at the beginning of the year, only half were eventually received.
The equipment sold during the year had a net book value of Rs.1,200 at 1 July 2014. Equipment is
to be depreciated at 20% per annum straight line. Life membership fees are taken to cover 10 years.

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Introduction to accounting

The treasurer insists that no depreciation needs to be charged on the sports pavilion, as buildings do
not decrease in value. He says that the last club of which he was treasurer did charge depreciation
on its buildings but that when the club came to replace them, there was still insufficient money in the
bank to pay for the new building.
Required:
Prepare an income and expenditure account for the Monarch Sports Club for the year ended 30
June 2015.

4.9 LH SPORTS CLUB

The LH Sports Club opened on 1 May 2014 having purchased premises for Rs.80,000 and furniture
for Rs.18,000, both financed by an interest-free loan from a member. The club secretary has
produced the following income and expenditure account for the year to 30 April 2015.
Income Rs. Rs.
Joining fees (89 members  Rs.200 each) 17,800
Annual subscriptions 12,000
Cafe profits 8,450
Dinner Dance surplus 830
Equipment hire receipts 1,750
40,830
Expenditure
Premises costs 10,990
Equipment costs 5,590
Secretary’s expenses 470
Bank charges 125 (17,175)
Surplus for the year 23,655

The income and expenditure account has been prepared after taking into account the following
items at 30 April 2015:
 cafe inventories Rs.1,400
 payables for cafe supplies Rs.1,320
 rates and insurances prepaid Rs.2,280
The following items have not been taken into account:
 the equipment costs figure includes Rs.4,000 for the purchase of equipment
 depreciation is to be provided as follows:
 at 2% on premises
 at 10% on furniture
 at 20% on equipment
 joining fees are to be spread over a five-year period
 the annual subscriptions figure includes Rs.960 paid in advance
 subscriptions outstanding at the end of the year, and expected to be collected, amount to
Rs.300.
The bank balance at 30 April 2015 was Rs.21,295.
Required:
(a) Calculate the correct surplus for the year.
(b) Prepare the statement of financial position at 30 April 2015.

© Emile Woolf International 30 The Institute of Chartered Accountants of Pakistan

 Questions

4.10 LEISURE CLUB

The accountant of Leisure Club was terminated on account of charges of fraud on 31 December 2016
and Mr. Emad has been appointed in his place. Emad has gathered the following information in respect
of the year ended 31 December 2016:
(i) The club has 3,300 members and the membership fee is Rs. 10,000 per annum. The fee
payable by each member becomes due on the first day of the quarter in which he became a
member. The fee received in each quarter was as follows:
Quarter First Second Third Fourth
Subscription received (Rs.) 9,900,000 8,250,000 5,500,000 9,350,000

Last year the fee was Rs. 9,000 per annum. However, the number of members was the
same.
(ii) A summary of the bank account for the year is shown below:

Deposits Rupees Withdrawals Rupees

Balance as at 1 Jan. 2016 3,700,500 Insurance 175,000
Cash deposited into bank 37,848,500 Rent and rates 4,200,000
Written off amount recovered 1,860,000 Utilities 4,365,000
Disposal of fixed assets 750,000 Freehold land purchased 17,000,000
Members subscription received Cash withdrawals from bank 6,120,000
directly in bank account 19,800,000 Payment to creditors 18,155,000
Repairs and maintenance 700,000
Exercise equipment 7,350,000
Balance as at 31 Dec. 2016 5,894,000
63,959,000 63,959,000

(iii) Amounts paid from petty cash were as follows:

Rupees
Salaries 2,300,000
Sundry expenses 640,000

(iv) The club has a tuck shop which earns a profit margin of 20% of sales. All sales of tuck shop are
made on cash. During the year, stock costing Rs. 500,000 was destroyed by fire.
(v) The opening WDV of fixed assets was Rs. 28,000,000. Exercise equipment was purchased on
1 October 2016. Fixed assets having opening WDV ofRs. 800,000 were disposed off on 31
March 2016. Fixed assets are depreciated @ 20% under the reducing balance method.
(vi) The opening and closing balances of cash in hand were Rs. 300,000 and Rs. 25,000
respectively.
(vii) The following balances have been extracted through a scrutiny of the available records:
2016 2015
------- Rupees -------
Creditors 3,330,000 2,500,000
Prepaid rent 175,000 168,000
Stock- tuck shop 2,500,000 2,300,000
Required:
(a) Determine the amount of loss incurred by the club due to fraud committed by the previous
accountant.
(b) An income and expenditure account for the year ended 31 December 2016.
(c) Statement of financial position as at 31 December 2016.

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Introduction to accounting

4.11 SEAVIEW CLUB

Seaview Club started its operations on 1 February 2015. Sponsor of the club contributed Rs. 50 million
towards general fund for the start of operations and placed the amount in the bank. Following is the
receipts and payments summary for the period from 1 February 2015 to 31 December 2015:
Receipts Rs. in ‘000 Payments Rs. in ‘000
Sponsor's contribution 50,000 Furniture & fixtures 1,200
Joining fees 20,800 Van 1,500
Subscription from members 29,952 Salaries 1,000
Sale of beverages 1,500 Rent 3,600
Utilities 570
Insurance 120
Repairs and maintenance 275
Purchase of beverages 1,367
Advance for plot of land 65,000
Balance 27,620
102,252 102,252

Additional information:
(i) The joining fee for award of membership is Rs. 50,000. Annual subscription is Rs. 24,000. All
new members pay three years’ subscription in advance.
The memberships were awarded as follows:

Month March June September December

No. of members 112 98 101 105

(ii) The club sells beverages at a gross profit margin of 20%. All sales are billed in the first week of
the next month and the payment is received in the same month. Sale of beverages during
December 2015 amounted to Rs. 150,000.
(iii) 25% of total purchases of beverages made during the year remained unsold at year-end.
(iv) Salaries are paid on the first day of next month. The amount of salaries includes an advance
amounting to Rs. 10,000 paid to an employee on 1 December 2015. The advance is repayable
on 1 February 2016.
(v) Rent for three years was paid in advance on 1 February 2015.
(vi) Presently the club is operating on rental premises. However, a plot of land has been purchased
on which construction would commence shortly. Title of land would be transferred after
completion of legal formalities.
(vii) Payments for utilities include security deposit paid to utility companies amounting to Rs. 20,000.
Utility bills are paid on the 7th day of the next month.
(viii) Insurance premium was paid on 1 February 2015 covering a period of 12 months.
(ix) Repairs and maintenance include an advance of Rs. 100,000 paid to a contractor for
construction of a parking shed. Repair bills amounting to Rs. 7,000 were outstanding at year-
end.
(x) Furniture & fixtures and van were purchased on 1 February 2015. Depreciation on these assets
is to be charged at 10% and 20% respectively.
Required:
Prepare statement of financial position as at 31 December 2015 and income & expenditure account
of Seaview Club for the period ended31 December 2015.

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 Questions

CHAPTER 5 – PREPARATION OF ACCOUNTS FROM INCOMPLETE RECORDS

5.1 SHORT QUESTIONS
a) A business makes all of its sales at a mark-up of 25%. During the year sales totalled
Rs.98,000 and purchases were Rs.71,000. The inventory at the start of the year was valued
at Rs.10,200.
What was the value of the closing inventory at the end of the year?
b) A business has the following assets and liabilities at the start and end of March.

1 March 31 March
Rs. Rs.
Trade receivables 6,100 7,400
Trade payables 3,900 3,500

The summarised bank statements for the year showed the following figures:
 Bankings for the year were Rs.78,500
 Payments to suppliers for the year were Rs.49,700
 The owner banks her takings from the till each month but before doing so in March she
took Rs. 5,000 for her own use.
What are the sales for the year?
c) An accountant has prepared the following list of the assets and liabilities of a business, but
has forgotten to enter the cash balance.

Rs.
Trade payables 4,900
Inventory 9,300
Non-current assets 98,900
Capital 97,200
Bank loan 15,700
Receivables 16,800
Bank ?

What is the missing figure for 'Bank'?

5.2 IRUM
Irum is a sole trader. She does not keep a full set of accounting records but does keep some records
of transactions and documents. She has asked you to prepare her accounts for the year ended 31
December 2015.
You have been given a list of the assets and liabilities of the business at the start and end of the
year.
Assets and liabilities

At 1 Jan 2015 At 31 Dec 2015

Rs.000 Rs.000
Trade receivables 5,500 6,100
Trade payables 2,800 3,500
Inventory 10,400 ?

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Introduction to accounting

Irum has no idea what her inventory value was at 31 December as that she did not count or value
her inventory at the year end.
She has also been given you a summary of her bank statements for the year.
Summary of bank statements
Receipts Payments
Rs.000 Rs.000
1 Jan Balance b/d 1,620 To suppliers 42,800
Bankings 65,400 For expenses 9,300
Living expenses 10,400
31 Dec Balance c/d 4,520
You have also been able to gather the following information from Irum:
i) Irum banks her takings from the till each week but before doing so pays Rs.50,000 to her
employees and takes Rs.30,000 herself. The business operates for 50 weeks each year.
ii) The till always has a cash float of Rs.100,000.
iii) The sales of the business are both cash and credit sales and are all made at a mark-up of
40%.
Required:
(a) Calculate sales for the year.
(b) Calculate the value of the closing inventory at 31 December 2015.

5.3 COST STRUCTURES

(a) A greengrocer made sales during the month of Rs.49,200. Opening inventory amounted to
Rs.3,784 and month-end inventory was Rs.5,516. During the month he purchased for cash
goods which cost Rs.38,632.
Required:
Determine the gross profit and calculate the gross profit percentage as a percentage of sales
value.
(b) A rival has made sales of Rs.50,100 at a fixed mark-up of 25%. Closing inventory was valued
at Rs.5,438 and he purchased goods during the month amounting to Rs.38,326.
Required:
Determine the value of the opening inventory.
(c) A local store makes sales at a fixed gross profit of 10% on sales value. Sales during the
month amounted to Rs.186,460; closing inventory was Rs.16,800 and represents an increase
of 25% over the value of the opening inventory.
Required:
Determine the cost of purchases during the month.

5.4 TAHIR
Tahir retired from his employment abroad and returned to this country, where he purchased a small
kiosk.
He took over the business on 1 July 2014, acquiring the existing inventory at a valuation of
Rs.1,142,000. The rest of the purchase price was apportioned as to Rs.1,500,000 for fixtures and
fittings and the balance for goodwill.
The following day he acquired a second-hand computer and accounts package at a price of
Rs.80,000. Unfortunately, Tahir made an error when printing his year-end accounts causing him to
lose all data except for printed a summary listing of payments from the till.. Other than this, the only
records available were his bank statements and a number of vouchers. Surplus cash was banked
during the year.

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 Questions

A summary of his bank account for the year ended 30 June 2015 shows the following.

Rs.000 Rs.000
Cash introduced 5,000 Purchase of business 3,192
Bankings from shop 16,427 Purchase of accounts computer 80
Loan from mother (long-term) Rent (15 months to
(interest at 5% pa) 1,000 30 September 2015) 500
Rates (9 months to
31 March 2015) 84
Electricity 92
Purchases for resale 14,700
Private cheques 1,122
Balance 30 June 2015 2,657

22,427 22,427

The computer print-out was as follows.

Rs.000
Cash purchases for resale 1,606
Staff wages 742
Sundry shop expenses 156
Cash drawings 520

On 30 June 2015 inventory, measured at cost, amounted to Rs.1,542,000, amounts due from
customers Rs.74,000, and cash in hand amounted to Rs.54,000. Depreciation is to be recognised
on fixtures and fittings at a rate of 10%.
Accounts outstanding on 30 June 2015 were purchases of Rs.470,000 and rates of Rs.120,000 for
the year ended 31 March 2016.
Required:
Prepare Tahir’s statement of comprehensive income for the year ended 30 June 2015 and a
statement of financial position at that date.

5.5 IJAZ
Ijaz is in business but does not keep proper books of account. In order to prepare his income and
expenditure account for the year ended 31 December 2015 you are given the following information.

1 Jan 2015 31 Dec 2015

Rs.000 Rs.000
Inventory on hand 1,310 1,623
Receivables 268 412
Payables for goods 712 914
Payables for expenses 116 103

In addition you are able to prepare the following summary of his cash and bank transactions for the
year.

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Introduction to accounting

Cash account
Rs.000 Rs.000
Balance 1 January 62 Payments into bank 3,050
Shop takings 4,317 Purchases 316
Cheques cashed 200 Expenses 584
Drawings 600
Balance 31 December 29

4,579 4,579

Bank account
Rs.000 Rs.000
Balance 1 January 840 Cash withdrawn 200
Cheques from customers 1,416 Purchases 2,715
Cash paid in 3,050 Expenses 519
Drawings 400
Delivery van (purchased
1 September) 900
Balance 31 December 572

5,306 5,306

In addition Ijaz says that he had taken goods for personal consumption and estimates that those
goods cost Rs.100,000.
In considering accounts receivable Ijaz suggests that a provision is to be made of 5% of amounts
due after writing off a specific bad debt of Rs.30,000.
Depreciation on the delivery van is to be recognised at 20% per annum.
Required:
Prepare the statement of comprehensive income and a statement of financial position at 31
December 2015.

5.6 RASHID
Rashid is coming to the end of his first year’s trading. He has not kept proper books and records.
The following information relates to the year ended 30 September 2015.
(1) He set up in business when he won Rs.200,000,000 on football pools. He invested the
money in the bank and set up in business as a retailer of clothing.
(2) He banks his takings periodically after payment of the following amounts.
Wages Rs.75,000 per week
Cleaning Rs.10,000 per week
Sundries Rs.15,000 per week
Personal expenses Rs.25,000 per week
Cash in hand at the end of the year was Rs.250,000.

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 Questions

(3) A summary of his bank statements reveals the following.

Rs.000 Rs.000
Capital introduced 200,000 Purchase of leasehold premises 150,000
Bankings 125,750 Purchase of vans 6,000
Telephone 896
Rent and rates 1,682
Payments to suppliers 86,232
Wages 15,282
Repairs 3,637
Personal expenses 323
Balance c/d 61,698
325,750 325,750

An un-presented cheque of Rs.385,000 for repairs was still outstanding.

(4) Other assets and liabilities at 30 September 2015 were as follows.
Rs.000
Inventory 8,400
Trade receivables 10,350
Trade payables 29,957
Accrued expense – telephone 125
Prepaid expense– rent and rates 258
(5) Depreciation is to be recognised on the van at 25% of its cost. The lease on the premises is
for 50 years.
(6) Rashid estimates that his gross profit percentage is 25% on sale price, and also informs you
that he does not keep a record of the goods he took for his own use.
Required:
Prepare a statement of comprehensive income for the year ended 30 September 2015 and a
statement of financial position at that date.

5.7 MUDASSAR
Mudassar had retired from the army some years ago to run a grocery business in the country. On 1
October 2015 his assistant failed to report for work and it was later discovered that he had
disappeared taking the contents of the cash till with him.
An analysis of Mudassar’s bank statements for the year ended 31 December 2015 revealed the
following.

Rs.000 Rs.000
Balance b/f 280 Suppliers 13,600
Tax refund 1,000 Rent 800
Bankings 16,720 Rates 400
Insurance 200
Drawings 2,500
Bank charges 100
Balance c/f 400

18,000 18,000

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Introduction to accounting

A statement of affairs produced by Mudassar comprised the following.

31 December
2015 2014
Rs.000 Rs.000
Motor car (NBV) 3,200 3,600
Fixtures (NBV) 3,400 4,000
Inventory 1,200 900
Trade receivables 150 90
Rent prepaid 30 20
Cash Nil 380
Trade payable 120 110

A rough cash book kept by Mudassar showed the following.

Rs.000
Assistant’s wages 1,800
Sundry expenses 250
Cash purchases 300
Drawings 2,400
Cash received from customers 21,550

A footnote recorded that discounts received and discounts allowed were Rs.200,000 and
Rs.300,000 respectively.
The insurance company agreed to admit the claim for loss of cash upon production of a full set of
accounts.
Required:
Prepare a statement of comprehensive income for the year ended 31 December 2015 and a
statement of financial position at that date.

5.8 ASLAM
Aslam, who has been in business as a contractor since 1 January 2015, received a request from the
tax authorities for his first year’s accounts.
He had not kept proper records of his business transactions, but was able to supply the following
information.
(1) All cheques received for work done had been paid into the bank, whilst cash receipts had
been used for paying cash expenses.
(2) From bundles of receipts and a wages notebook some of the cash expenses for the year
appeared to have been as follows.

Rs.000
Wages and Social Security 3,346
Materials 1,400
Electricity 56
General expenses 14

© Emile Woolf International 38 The Institute of Chartered Accountants of Pakistan

 Questions

(3) Drawings were estimated at Rs.18,000 per week, out of which Aslam had paid the rent of his
builder’s yard of Rs.2,000 per week. His own Social Security contributions had been included
in Wages and Social Security and totalled Rs.65,000 for the year.
(4) On 1 April he purchased a van for Rs.856,000. His mother lent him Rs.400,000 for the
deposit, and the balance was payable by twelve monthly instalments of Rs.38,000 each
commencing on 1 June. The loan from his mother had not been repaid at the end of the year.
(5) A summary of his bank account showed the following.

Rs.000 Rs.000
Balance 1 January 2015 150 Materials 4,790
Bankings 9,204 Van expenses 342
General expenses 110
Cheques drawn for cash 3,100
Cement mixer 200
Van instalments 266
Private cheques 342
Balance 31 December 2015 204

9,354 9,354
(6) On 31 December 2015 inventory (materials) amounted to Rs.560,000, cash in hand
Rs.10,000, trade receivables Rs.1,200,000, trade payables for materials Rs.149,000, and
outstanding van expenses Rs.36,000. There was no work in progress on 31 December 2015.
(7) Depreciation of Rs.108,000 is to be recognised on the van and Rs.50,000 on the cement
mixer.
Required:
Prepare Aslam’s statement of comprehensive income for the year ended 31 December 2015 and a
statement of financial position at that date.

5.9 UMAR
Umar is a grocer who had not kept a full set of books. The following was a summary of his bank
statements for the year ended 31 December 2015.

Rs.000 Rs.000
Amounts credited by bank 35,170 Balance 1 January 2015 892
Payments for trade payables 30,500
Rent and rates 475
Fixtures 100
Lighting and heating 210
General expenses 800
Loan interest 120
Drawings 900
Customers’ cheques dishonoured 180
Balance 31 December 2015 993
35,170 35,170

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Introduction to accounting

Additional information
(1) Trading receipts consisted partly of cash and partly of cheques. During the year Umar had
paid out of his cash takings, wages amounting to Rs.2,950,000 and sundry expenditure of
Rs.140,000. He retained Rs.3,000 a week and maintained a balance of Rs.20,000 in the till
for change. The balance of his takings, together with cheques amounting to Rs.250,000,
which he had cashed out of his takings for the convenience of certain friends, was paid into
the bank.
(2) Cheques drawn payable to trade payables, but not presented at 1 January 2015, amounted to
Rs.280,000 and at 31 December 2015 to Rs.320,000.
(3) All dishonoured cheques were re-presented and honoured during the year.
(4) The loan interest was paid to Brough who had lent Umar Rs.4,000,000 some years ago at a
rate of interest of 3% per annum. The interest was duly paid half-yearly on 31 March and 30
September, and the loan was still outstanding at the end of the year.
(5) Discounts allowed by suppliers amounted to Rs.480,000 and those allowed to customers
were Rs.520,000.
(6)

1 Jan 2015 31 Dec 2015

Rs.000 Rs.000
Inventories 4,500 5,800
(including a bad debt of Rs.200,000 to be written off) 2,800 3,200
Accrued general expenses 240 190
Rates paid in advance 40 50
Fixtures (including those purchased during year)valued at 2,800 2,550
Trade payables 1,800 2,200
Amounts due for lighting and heating 80 70
Required:
Prepare
(a) a statement of Umar’s capital at 1 January 2015
(b) a statement of comprehensive income for the year ended 31 December 2015
(c) a statement of financial position at 31 December 2015.

5.10 YASIN
Yasin received a legacy of Rs.20,000,000 on 1 January 2015 and on that date purchased a small
retail business. The completion statement from the solicitor revealed the following.

Rs.000
Freehold shop property 10,000
Goodwill 2,000
Inventories 1,600
Trade receivables 400
Shop fixtures 2,600
Rates in advance to 31 March 2015 100
16,700

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 Questions

The legacy was used to discharge the amount due on completion and the balance was paid into a
newly opened business bank account.
Yasin had not kept proper records of his business transactions but was able to supply the following
information.
(1) A summary of the cash till rolls showed his shop takings for the year to be Rs.25,505,000;
this includes all cash received from customers including those at 1 January 2015.
(2) The takings had been paid periodically into the bank after payment of the following cash
expenses.
Rs.000
Wrapping materials 525
Staff wages 3,423
Purchases for resale 165
Petrol and oil 236
(3) Personal cash drawings were estimated at Rs.20,000 per week and goods taken for own use
at Rs.2,000 per week.
(4) A summary of the bank statements showed the following.

Rs.000 Rs.000
Legacy – residual balance 3,300 Purchases for resale 14,863
Sale of fixtures purchased Motor expenses 728
at 1 January 2015 but not required Delivery van (cost – 1 April 1,200
(cost Rs.200,000;depreciation Nil) 130 2015)
Loan from Robin at 10% pa 2,000 General expenses 625
Cash banked 19,900 Loan interest
(six months to 30 100
September)
Private cheques 1,329
Electricity 228
Rates (year to 31 March 500
2016)
Balance per statement at
31 December 2015 5,757
25,330 25,330
A cheque drawn on 28 December 2015 of Rs.125,000 for goods purchased was presented to
the bank on 4 January 2016.
(5) During the year bad debts of Rs.223,000 arose and were irrecoverable. The trade
receivables at 31 December 2015 amounted to Rs.637,000, of which Rs.100,000 is doubtful
and for which an allowance should be recognised should be made.
(6) At 31 December 2015 there were
Rs.000
Inventories 2,360
Store of wrapping materials 53
Trade payables – purchases 358
Electricity accrued 50
Accountancy fees accrued 100
Cash float in till 180

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Introduction to accounting

(7) The difference arising on the cash account was discussed with Yasin but remained
unexplained and was dealt with in an appropriate manner.
(8) Depreciation is to be recognised at the rate of 10% per annum on the fixtures and at the rate
of 20% on the van.
Required:
Prepare a statement of comprehensive income for the year ended 31 December 2015 and a
statement of financial position at that date.

5.11 MUNIRA
Munira is engaged in trading of garments. She has not maintained proper accounting records. She
suspects that some of her employees are involved in some sort of misappropriation. The list of
creditors, receivables and inventories prepared by her, show the following balances:

Balances at December 31
2015 2014
Rs. 000 Rs. 000
Trade payables 9,500 8,000
Trade receivables 3,600 2,000
Inventories at cost 8,500 12,500

The following transactions were recorded during the year ended December 31, 2015:
(Rs. 000s)
Sales to staff on cash basis 315
Discounts allowed on early payments 360
Collections banked 18,000
Paid to suppliers in cash 12,700
Trade discounts received 400
Bad debts written off 200
Additional information
(i) Normal sales are made at cost plus 20% but sales to staff are made at cost plus 5%.
(ii) About 4% of the purchases during the year were defective and had to be sold at 30%below
normal selling price.
(iii) The list of closing inventory at December 31, 2015 includes four items having a total cost of
Rs. 470,000. There was a casting error on the invoice raised by the supplier and the total has
been erroneously recorded as Rs. 740,000. The invoice is still unpaid.
(iv) Collections made in the last week of December 2015 amounting to Rs. 860,000 were
deposited in bank on January 2, 2016. Likewise, collections made in the last week of
December 2014 amounting to Rs. 500,000 were deposited in bank on January 2, 2015.
Required:
You are required to calculate the loss incurred by Munira during the year 2015 on account of
misappropriations (if any).

© Emile Woolf International 42 The Institute of Chartered Accountants of Pakistan

 Questions

5.12 ADNAN
Adnan runs a wholesale business. On December 31, 2015 he realised that his cash and bank
balances have reduced considerably. He has requested you to investigate the situation and has
provided you the following information:
(i) Balances

2015 2014

Rs. Rs.

Cash in hand 700 14,300

Cash at bank 103,400 349,100

Sundry receivables 80,900 48,700

Inventory 27,500 15,700

Sundry creditors 130,800 116,100

Rent payable (one month) 4,500 3,500

Electricity and telephone bills payable 8,800 -

(ii) 20% of the goods were sold on cash basis at a mark-up of 22% on cost. Credit sales were
made at a profit of 20% on sales. All collections from receivables were made in cash.
(iii) Adnan paid wages, rent, electricity and telephone charges in cash out of sale proceeds. The
remaining amount of sale proceeds was deposited into bank.
(iv) The bank pass book reveals the following withdrawals:

Rupees

Creditors 1,423,800

Non-current assets (acquired on July 1, 2015) 75,000

Drawings 122,600

(v) All purchases were made on credit.

(vi) Wages amounted to Rs. 8,900 per month.
(vii) Payment on account of electricity and telephone charges amounted to Rs. 33,000.
(viii) Rent has been increased from October 2015.
(ix) The opening balance in the non-current assets account net of depreciation was Rs.
285,000.Depreciation is recorded @ 10% p.a. on declining balance method and is based on
number of months for which the assets have been in use.
Required:
(a) Prepare Adnan’s profit and loss account for the year ended December 31, 2015 and his
statements of financial position as on that date.
(b) Compute the amount of cash shortage, if any.

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Introduction to accounting

5.13 ASIF
Due to the death of his book-keeper, Asif failed to keep proper records for the year ended June 30,
2015. He has forwarded to you the following statements:
Statement of financial position as at June 30, 2014

Rs. Rs.
Land and building at cost 130,000
Furniture: Cost 825,000
Depreciation (485,000) 340,000
Inventory 482,500
Trade receivables: 670,000
Less: Provision (27,000) 643,000
Prepayments 53,800
Cash in hand 10,000
1,659,300

Rs.
Asif-capital account 613,300
6% Loan 500,000
Trade creditors 500,100
Accrued expenses 21,700
Bank overdraft 24,200
1,659,300

Summary of the transactions in the bank book for the year ended June 30, 2015

Receipts Rs. Payments Rs.

Deposits against cash sales 624,750 Creditors 2,509,600

Receipts from receivables 3,071,000 Sundry expenses 212,500

Furniture sold on 1-Jul-14 Salaries 440,400

(purchased for Rs. 280,000 on 1-
Jul-11) Furniture purchased on 01-Jan-
15
122,400 64,000

Interest on loan up to 31-Mar-15 22,500

Total 3,818,150 Total 3,249,000

You have carried out the necessary scrutiny and ascertained the following:
(i) Asif sells the goods at a profit margin of one-third of their selling price i.e. at a profit margin of
50% of cost of sales.
(ii) On June 30, 2015 trade receivables aggregated Rs. 600,500. These included Rs. 18,000
pertaining to goods which were sent on sale or return basis and were unsold on June 30.
(iii) Closing inventory was valued at Rs. 580,000.

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 Questions

(iv) Receipts from receivables include an advance of Rs. 2,500 for goods delivered in July 2015.
(v) Rs. 3,700 were recovered from a debtor which had been fully provided for on June 30, 2014.
A new customer who was introduced in 2015 and owed Rs. 4,200 was declared as bankrupt.
(vi) Sundry expenses payable on June 30, 2015 amounted to Rs. 19,000 (excluding interest on
loan) whereas prepayments amounted to Rs. 9,700.
(vii) Asif estimates that he withdrew Rs. 60,000 for his personal use and paid sundry expenses
aggregating Rs. 25,000 before depositing the proceeds from cash sales.
(viii) Depreciation on furniture is provided at the rate of 10% per annum on cost.
(ix) Bonus is payable to the manager at 5% of the net profit after charging such bonus.
(x) The following account balances were obtained from the memorandum records:

Rs.

Purchases 2,570,000

Discounts received 30,300

Sales returns 15,000

Required:
(a) A Profit& Loss account of Mr.Asif for the year ended June 30, 2015; and
(b) A statement of financial position as on June 30, 2015

5.14 MANSOOR
Mansoor deals in small electrical equipment and appliances. His Statements of financial position for
the year ended 30 June 2014 was as follows.
Assets Rupees
Fixtures 235,000
Inventories 552,000
Receivables 281,000
Property tax paid in advance 11,500
Cash in hand 35,000
Cash at bank 307,500
1,422,000

Capital and Liabilities Rupees

Capital 1,185,000
Liabilities:
Goods 220,000
Electricity charges 5,500
Accounting charges 11,500 237,000

1,422,000

On 30 June 2015, there was a fire in his shop which destroyed all his fixtures and inventories. The
following information has been gathered from the records available with him.
(a) The insurance company agreed to pay Rs. 225,000 for fixtures and Rs. 630,000 for inventory
without production of accounts; the inventory on hand was however Rs. 670,000.

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(b) The payments made during the year were as follows:

Rupees Rupees
Personal expenses 188,000 Property tax 32,000
Sundry expenses 15,000 Rent 240,500
Accounting charges 20,500 Purchase of goods 5,061,000
Electricity 50,500 Fixtures 45,000

(c) The following payments were made during the year, out of cash receipts:
(i) Assistant's salary Rs. 132,000.
(ii) Cash purchases averaging Rs. 24,000 per month.
(iii) Drawings which varied between Rs. 10,000 and Rs. 15,000 per month.
All other receipts were deposited into the bank. Total deposits amounted to Rs. 5,780,800 and
included scrap sale of Rs. 35,000.
(d) The following balances as on 30 June 2015 were determined from the available records:

Assets and Liabilities Rupees

Receivables 494,000
Creditors for goods 212,000
Creditors for electricity charges 1,900
Accounting charges payable 1,800
Rent outstanding 15,000
Property tax paid in advance 15,000
Cash in hand 40,500

(e) Included in the receivables is an amount of Rs. 14,000 which is considered uncollectible.
(f) The rate of gross profit as a percentage of sale was 20%.

Required:
Prepare the statement of comprehensive income for the year ended 30 June 2015 and a statement
of financial position as on that date.

5.15 DANISH
Danish does not keep proper books of account due to his lack of knowledge of double entry system
of accounting. He has supplied you the following information with respect to the year ended 31
December 2013 from the records kept in his diary:
(i) Transactions during the year:
Rupees
Cash received from customers 80,000
Discount allowed to customers 1,400
Bad debts written off 1,800
Cash paid to suppliers 63,000
Discount allowed by suppliers 1,000
Sales returns 3,000
Purchases returns 2,000
Expenses paid 6,000
Drawings 5,000
Rent paid 2,500

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 Questions

(ii) Opening balances as on 1 January 2013:

Assets and liabilities Rupees
Receivables 45,000
Payables 24,000
Cash 4,500
Furniture and fixtures 15,000
Inventory 25,000
Motor van 16,000
(iii) Receivables and payables as on 31 December 2013 amounted to Rs. 48,600 and Rs.
27,000respectively.
(iv) Outstanding expenses as on 31 December 2013 amounted to Rs. 1,200.
(v) Depreciation is charged on furniture and fixtures at the rate of 10% and on motor van at20%.
(vi) Danish sells goods at cost plus 40% and follows a policy of maintaining an allowance of 5% of
the outstanding receivables.
Required:
(a) Statement of comprehensive income for the year ended 31 December 2013.
(b) Statement of financial position as at 31 December 2013.

5.16 RAHIL
Rahil runs a retail business. He appointed a cashier at a monthly salary of Rs. 13,000 on 1 April
2016. The cashier did not report for work on 1 July 2016 and it was found that he had left, taking
with him the balance in the till.
It had been Rahil's practice to deposit on each weekend the available balance in the till after
retaining a float of Rs. 5,000. He maintains record of sales on credit and a file of unpaid invoices in
respect of goods purchased by him.
The following information has been ascertained from the available records:
i. Balance Sheet as on 31 March 2016 was as follows:

Rupees Rupees
Rahil’s capital 233,000 Fixtures and fittings – WDV 161,000
Creditors for goods 159,000 Inventory 111,000
Creditors for expenses 16,000 Debtors 55,000
Cash at bank 76,000
Cash in hand 5,000
408,000 408,000

Following is a summary of the bank statement from 1 April to 30 June 2016:

Rupees Rupees
Balance on 1 April 2016 76,000 Payment to suppliers for goods 604,000
Cheques received from customers 29,000 Rent & other expenses 37,000
Cash deposited 627,000 Balance on 30 June 2016 91,000
732,000 732,000

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Introduction to accounting

ii. The following amounts were paid from the till:

Rs. per month

Salary to cashier 13,000
Rahil’s drawings 26,000
Petty expenses 5,000

iii. Fixtures and fittings are depreciated at 10% per annum using reducing balance method.
iv. Inventory on 1 July 2016 was Rs. 58,000.
v. Credit sales during the quarter ended 30 June 2016 amounted to Rs. 64,000 whereas the
debtors balances as on 30 June 2016 amounted to Rs. 66,000. However, direct confirmations
from debtors showed that receivables in fact totalled Rs. 54,000.
vi. Creditors for goods and expenses had always been paid by cheque. Unpaid invoices for goods
on 30 June 2016 totalled Rs. 181,000 and creditors for expenses amounted to Rs. 13,000.
Detailed scrutiny of records revealed that a cash receipt of Rs. 8,000 which had been received
against goods returned to a supplier had not been recorded.
vii. Rahil sells goods at a gross profit margin of 20% on sales.
Required:
(a) Prepare a statement showing calculation of the amount of defalcation.
(b) Prepare a balance sheet as on 30 June 2016.

5.17 S-MART GROCERY STORE

Saleem is the owner of S-Mart, a grocery store. His accountant resigned and left on 1 January 2017.
Saleem suspects that the previous accountant was involved in some sort of misappropriation. The
information available with him is as follows:
(i) Summary of bank statement:
Receipts Rupees Payments Rupees
Balance as at 1 Jan 2016 250,000 Suppliers 1,807,500
Cheques from debtors 824,000 Salaries 48,000
Cash sales 1,450,000 Rent 72,000
Sale of old vehicle on 1 Jan 2016 15,000 Utilities 36,000
Other expenses 24,750
New vehicle on 1 Mar 2016 230,000
Balance as at 31 Dec 2016 320,750
2,539,000 2,539,000

(ii) Other balances extracted from the records maintained by the previous accountant:
31-Dec-2016 31-Dec-2015
Particulars
---------- Rupees ----------
Furniture and fixtures – WDV 555,000 550,000
Equipment – WDV 64,000 80,000
Vehicle – WDV 210,000 18,500
Inventory 215,000 250,000

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31-Dec-2016 31-Dec-2015
Particulars
---------- Rupees ----------
Debtors 340,000 260,000
Advance rent - 3,000
Cash in hand 31,510 45,000
Creditors 354,500 100,000
Salaries payable 22,000 18,000

(iii) Before depositing the receipts from cash sales in the bank, Saleem took Rs. 12,000 per
month for personal use. All other payments were made through bank and the debtors settled
their accounts through cheques.
(iv) The creditors have confirmed the balances due from them. However review of the statement
provided by one of the creditors indicates that goods returned for cash amounting to Rs.
24,000 were not recorded in the books.
(v) Unpaid invoice for furniture purchased during the year for Rs. 45,000 is included in
creditors.
(vi) The margin on cash sales and credit sales is 20% and 25% respectively. From 1 July 2016,
prices to cash customers were further reduced by 6% due to which quantity sold against
cash in the 2nd half of the year increased by 25% as compared to the first half of the year.
(vii) All the debtors confirmed their balances except an amount of Rs. 50,000. On investigation it
was found that the related goods had been issued against fake invoices.
Required:
(a) Determine the amount of suspected fraud.
(b) Prepare statement of profit or loss for the year ended 31 December 2016.

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Introduction to accounting

CHAPTER 6 – Cost of production

6.1 SIGMA LTD
The managing director of Sigma Ltd is concerned about the differences between the reports
produced and records maintained by you, as management accountant, and by the company’s
financial accountant.
Required:
Explain the differences between:
(i) the profit statements produced, and
(ii) the accounting records maintained by the two of you.

6.2 MANAGEMENT INFORMATION FUNCTIONS

Outline the three main functions of management for which information must be provided.

6.3 JOHN PIRELLI

John Pirelli has been running a small printing business for the past six months; his accounting
records are limited to an analysed cash book, cheque book stubs and a file of invoices. Both he and
his accountant are happy with this for the preparation of annual accounts for the Inland Revenue
and the bank, but John Pirelli now wants more information for controlling the business.
When talking to his accountant about setting up a suitable costing system, John Pirelli was clear
about the difference between management and financial accounts. However, he became very
confused over different categories of cost and has asked you for some clarification.
Required:
Explain the distinction between:
(i) direct and indirect costs
(ii) fixed and variable costs
(iii) production and non-production costs
(iv) committed and discretionary costs.

6.4 CLASSIFICATION OF COSTS

(a) Explain the terms fixed, variable and semi-variable costs.
(b) Classify the following expenses under the headings in (a):
(i) Telephone charges
(ii) Factory insurance
(iii) Legal expenses
(iv) Social security (%)
(v) Rent of premises
(vi) Light and heat
(vii) Direct materials
(viii) Lift operator’s wages
(ix) Machine servicing and repairs
(x) Foreman’s salary
(xi) Contract cleaning services
(xii) Casual labour

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6.5 CAR MAINTENANCE

The following particulars/projections pertain to a well-maintained medium-sized car:
Rupees
Cost of car 1,200,000
Salvage value after 100,000 kilo meters (km) 300,000
Maintenance cost:
– Service after every 5,000 km 6,000
– Replacement of spares/parts (per 2,000 km) 4,000
Vehicle tax per annum (20% adjustable against income tax payable by the owner) 7,500
Insurance per annum 36,000
Cost of petrol per liter 75
Cost of tyres replacement after 25,000 km 20,000

On an average, the car consumes one litre for every 15 km.

Required:
For three different levels of use i.e. 10,000, 20,000 and 30,000 km per annum, prepare a schedule
showing:
Variable, fixed and total costs
Variable, fixed and total costs per km
In respect of each type of cost, give appropriate justification for treating it as a variable or a fixed
cost.

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Introduction to accounting

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 SUNDRY QUESTIONS 1
1 A business purchased some land and buildings on 1 January 2011 for Rs.800million (land
Rs.250 million and buildings Rs.550 million). The buildings are to be depreciated over a period of
50 years.
On 1 January 2015 the land and buildings were revalued to Rs.1,500 million (land Rs.400 million
and buildings Rs.1,100 million). At this date the buildings were believed to have a remaining
useful life of 40 years.
What is the original depreciation charge for the buildings and the revised charge from 1 January
2015?
2 A business purchased land for Rs.250 million and buildings for Rs.400 million on 1 January 2011.
The buildings were to be depreciated over a period of 50 years. On 1 January 2015 the land was
revalued to Rs.520 million and the buildings were revalued at Rs.750 million.
What amount is to be taken to the revaluation reserve on 1 January 2015?

7.2 ROONEY
Rooney has recently finished building a new item of plant for its own use. The item is a press for use
in the manufacture of industrial diamonds. Rooney commenced construction of the asset on 1st April
2013 and completed it on 1st April 2015.
The press comprises two significant parts, the hydraulic system and the ‘frame’. The hydraulic
system has a three-year life and the ‘frame’ has an eight-year life. Rooney depreciates plant on a
straight line basis. The cost of the hydraulic system is 30% of the total cost of manufacture.
Rooney uses the IAS 16 revaluation model in accounting for diamond presses and revalues these
assets on an annual basis.
Revaluation surpluses or deficits are apportioned between the hydraulic system and the ‘frame’ on
the basis of their year-end book values before the revaluation.
Required

Explain the IAS 16 rules on accounting for significant parts of property, plant and equipment and
show the accounting treatment of the diamond press in the financial statements for the financial
years ending:
(i) 31st March 2016 (assume that the press has a fair value of Rs. 21 million)
(ii) 31st March 2017 (assume that the press has a fair value of Rs. 19.6 million).

7.3 EHTISHAM
The following information relates to the financial statements of Ehtisham for the year to 31 March
2015.
The head office of Ehtisham was acquired on 1 April 2012 for Rs. 1 million. Ehtisham intend to occupy
the building for 25 years. On 31 March 2014 it was revalued to Rs. 1.15 million. On 31 March 2015, a
surplus of vacant commercial property in the area had led to a fall in property prices and the fair value
was now only Rs. 0.8 million.
Required

Explain the correct accounting treatment for the above (with calculations).

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7.4 CARLY
The following is an extract from the financial statements of Carly on 31 December 2014.
Property, plant and equipment

Land and Plant and

Computers Total
buildings equipment
Rs. Rs. Rs. Rs.
Cost
On 31 December 2014 1,500,000 340,500 617,800 2,458,300

Accumulated depreciation
On 31 December 2014 600,000 125,900 505,800 1,231,700

Carrying amount
On 31 December 2014 900,000 214,600 112,000 1,226,600

Accounting policies

Depreciation
Depreciation is provided at the following rates.

On land and buildings Over 50 years on straight line basis on buildings only
On plant and equipment 25% reducing balance
On computers 33.33% per annum straight line

During 2015 the following transactions took place.

(1) On 31 December the land and buildings were revalued to Rs. 1,750,000. Of this amount, Rs.
650,000 related to the land (which had originally cost Rs. 500,000). The remaining useful life of
the buildings was assessed as 40 years.
(2) A machine which had cost Rs. 80,000 and had accumulated depreciation of Rs. 57,000 at the
start of the year was sold for Rs. 25,000 in the first week of the year.
(3) A new machine was purchased on 31 March 2015. The following costs were incurred:

Rs.
Purchase price, before discount, inclusive of reclaimable sales tax of Rs.3,000 20,000
Trade Discount 1,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300

(4) On 1 January it was decided to change the method of providing depreciation on computer
equipment from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the financial statements
of Carly for the year ended 31 December 2015.

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7.5 ADJUSTMENTS LIMITED

Adjustments Limited has carried out a review of its non-current assets.
(a) A grinder was purchased on 1 January 2012 for Rs. 100,000. The plant had an estimated useful
life of ten years and a residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2015, when the asset’s net book value is Rs. 70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
(b) The company purchased a fifty year lease some years ago for Rs. 1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2015, when the net book value is
Rs. 480,000 and twenty-four years of the lease are remaining, the asset is revalued to Rs.
1,500,000. This revised value is being incorporated into the accounts.
Required
Explain the effects of these changes on the depreciation for the year to 31 December 2015.

7.6 FAM
FAM had the following tangible fixed assets at 31 December 2014.

Cost Depreciation NBV

Rs. 000 Rs. 000 Rs. 000
Land 500 – 500
Buildings 400 80 320
Plant and machinery 1,613 458 1,155
Fixtures and fittings 390 140 250
Assets under construction 91 – 91
——— —— ———
2,994 678 2,316
════ ════ ════
In the year ended 31 December 2015 the following transactions occur.
(1) Further costs of Rs. 53,000 are incurred on buildings being constructed by the company. A
building costing Rs. 100,000 is completed during the year.
(2) A deposit of Rs. 20,000 is paid for a new computer system which is undelivered at the year
end.
(3) Additions to plant are Rs. 154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are Rs. 40,000.
(5) The following assets are sold.

Depreciation
Cost Proceeds
brought forward
Rs. 000 Rs. 000 Rs. 000
Plant 277 195 86
Fixtures 41 31 2

(6) Land and buildings were revalued at 1 January 2015 to Rs. 1,500,000, of which land is worth
Rs. 900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors,
on the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were purchased ten
years before the revaluation.

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(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required
Show the disclosure under IAS 16 in relation to fixed assets in the notes to the published accounts
for the year ended 31 December 2015.

7.7 ORCHID LIMITED

The following information pertains to property, plant and equipment of Orchid Limited (OL), a listed
company:

Date of Cost Original Depreciation Subsequent

Description
purchase Rs. in million useful life method measurement model

Buildings 1-Jan-15 600 30 years Straight line Revaluation

Plant 1-Jan-15 475 25 years Straight line Cost

Buildings
The revalued amount of buildings as determined by Shabbir Associates, an independent valuer, on
31 December 2015 and 2017 was Rs. 700 million and Rs. 463 million respectively.
On 30 June 2017 a building having original cost of Rs. 66 million was sold to Baqir Limited for Rs. 85
million. It was last revalued at Rs. 87 million. OL incurred a cost of Rs. 2 million on disposal.
OL transfers the maximum possible amount from revaluation surplus to retained earnings on an
annual basis.

Plant
On 31 December 2016 the recoverable amount of the plant was assessed at Rs. 360 million with no
change in useful life.
During 2017, OL has decided to change the depreciation method for plant from straight line to
reducing balance. The new depreciation rate would be 10%.

Required:
Prepare following notes (along with comparative figures) to be presented in the financial statements
of OL for the year ended 31 December 2017 in accordance with the requirements of relevant
IFRSs and Companies Act, 2017:
(a) Property, plant and equipment
(b) Change in depreciation method

7.8 ABID LIMITED

Abid Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and
equipment and has a policy of revaluing its assets on an annual basis using the net replacement
value method.
The following information pertains to AL’s buildings:
i. Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300 million.
The useful life of the buildings on the date of acquisition was 20 years.
ii. AL depreciates buildings on the straight line basis over their useful life.

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iii. The results of revaluations carried out during the last three years by Premier Valuation Service,
an independent firm of valuers, are as follows:

Revaluation date Fair value Rs. in million

1 January 2013 323
1 January 2014 252
1 January 2015 272

iv. On 30 June 2015, one of the buildings was sold for Rs. 80 million.
Required
Prepare a note on “Property, plant and equipment” (including comparative figures) for inclusion in
AL’s financial statements for the year ended 31 December 2015 in accordance with International
Financial Reporting Standards. (Ignore taxation)

7.9 SHAHWEZ LIMITED

Shahwez Limited (SL) revalued its property on 1 April 20X1 to Rs.20 million (Rs.8 million for the
land). The property originally cost Rs.10 million (Rs.2 million for the land) 10 years ago. The original
useful life of 40 years is unchanged. SL’s policy is to make a transfer to realised profits in respect of
excess depreciation.
Required
How will the property be accounted for in the year ended 31 March 20X2?

7.10 HAMZA LIMITED

Hamza Limited (HL) acquired a building on 1 April 20X1 for Rs.100,000 at which point it was
considered to have a useful life of 40 years. At the year end 31 March 20X6, HL decided to revalue
the building to its current value of Rs.98,000.
Required:
How will the building be accounted for in the year ended 31 March 20X6?

7.11 SUNDRY QUESTIONS 2

1. When the asset should be derecognised from the balance sheet? What is the accounting
treatment for gain or loss on disposal for revaluation model?
2 What is the disclosure requirement of asset carried at revalued amount?

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CHAPTER 8 – NON-CURRENT ASSETS: SUNDRY STANDARDS

8.1 SHAYAN LIMITED
Shayan Limited (SL) started the construction of its new factory on 1 January 2018 with a loan of
5,000,000 borrowed at an interest rate of 8% per annum.
The loan was used on the factory as follows:

Date of Payment Rs. in million

Jan 1, 2018 15
May 1, 2018 20
Oct 1, 2018 10

The construction of the asset was completed on 31 December 2018. However, during the
accounting period SL invested the surplus funds at an interest rate of 3%.
Required
How much the amount of borrowing cost eligible for capitalization at 31.12.2018.

8.2 SARA LIMITED

On January 1, 2018 Sara Limited (SL) started the construction of an asset. To meet the financing
requirements, borrowing was made from three different banks at the start of the year as follows:

Banks Amount Interest Rate p.a

A 70,000 10%
B 60,000 8%
C 50,000 12%

The funds were used on the assets as follows:

Date of Payment Rs.

Jan 1, 2018 30,000
May 1, 2018 20,000
Oct 1, 2018 15,000

The construction of asset was completed on 31 December 2018.

Required
Calculate the general weighted average borrowing rate and eligible borrowing cost

8.3 LOONEY
Looney has recently finished building a new item of plant for its own use. The item is a press for use
in the manufacture of industrial diamonds. Looney commenced construction of the asset on 1st April
2013 and completed it on 1st April 2015.
1st January 2013, Looney took out a loan to finance the construction of the asset. Interest is
charged on the loan at the rate of 5% per annum. The annual interest must be paid in four equal
instalments at the end of each quarter. Looney capitalises interest on manufactured assets in
accordance with the rules in IAS 23 Borrowing costs.
The costs (excluding finance costs) of manufacturing the asset were Rs. 28 million.
Required
State the IAS 23 rules on the capitalisation of borrowing costs, calculate the cost of the asset on
initial recognition and explain the amount of borrowing cost capitalised.

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8.4 GOOGLY INDUSTRIES LIMITED

On 1 January 20X6 Googly Industries Limited (GIL) borrowed Rs.15 million to finance the production
of two assets, both of which were expected to take a year to build. Work started during 20X6. The
loan facility was drawn down and incurred on 1 January 20X6, and was utilised as follows, with the
remaining funds invested temporarily.
Asset A Asset B
----------- Rs. in million ---------
1 January 20X6 2.5 5
1 July 20X6 2.5 5

The loan rate was 9% and GIL can invest surplus funds at 7%.
Required
Ignoring compound interest, calculate the borrowing costs which may be capitalised for each of the
assets and consequently the cost of each asset as at 31 December 20X6.

8.5 KHAN LIMITED

Khan Limited (KL) has the following loan arrangements as at 1 January 2020:
Rs. in million
7% Debentures 55
8% Loan notes 110
12% Line of credit 85
10% Running finance arrangement 150
On the 1 January 2020, KL commenced the construction of a new factory. The construction of the
factory will cost Rs.100 million and the company funded the construction with the existing borrowings.
The factory was completed on 31 August 2020 but was not available for use until 31 January 2021 as
a result of minor modification. During the construction period, active work was interrupted and the
building construction was stopped for two months as a result of adverse weather conditions.
Required
Calculate the borrowing cost to be capitalised and the cost of the building to be recognised upon initial
recognition.

8.6 SPIN INDUSTRIES LIMITED

On September 1, 2015, Spin Industries Limited (SIL) started construction of its new office building
and completed it on May 31, 2016. The payments made to the contractor were as follows:

Date of Payment Rs. in million

September 1, 2015 10
December 1, 2015 15
February 1, 2016 12
June 1, 2016 9

In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2015 for
obtaining a permit allowing the construction of the building.
The project was financed through the following sources:
(i) On August 1, 2015 a medium term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-
annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On February 1, 2016 SIL
paid the six monthly interest plus Rs. 5 million towards the principal.

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(ii) Existing running finance facilities of SIL

 Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable
annually. The average outstanding balance during the period of construction was Rs.
25 million.
 Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the
period of construction was Rs. 3 million and the average running finance balance during
that period was Rs. 20 million.
Required
Calculate the amount of borrowing costs to be capitalised on June 30, 2016 in accordance with the
requirements of International Accounting Standards. (Borrowing cost calculations should be based
on number of months).

8.7 KATIE
During the year ended 30 June Year 2, Katie received three grants, the details of which are set out
below.
(1) On 1 September, a grant of Rs. 40,000 from local government. This grant was in respect of
training costs of Rs. 70,000 which Katie had incurred.
(2) On 1 November Katie bought a machine for Rs. 350,000. A grant of Rs. 100,000 was received
from central government in respect of this purchase. The machine, which has a residual value
of Rs. 50,000, is depreciated on a straight-line basis over its useful life of five years.
(3) On 1 June a grant of Rs. 100,000 from local government. This grant was in respect of
relocation costs that Katie had incurred moving part of its business from outside the local
area. The grant is repayable in full unless Katie recruits ten employees locally by the end of
Year 2. Katie is finding it difficult to recruit as the local skill base does not match the needs of
this part of the business.
Required
Show how the above transactions should be reflected in the financial statements of Katie for the
year ended 30 June Year 2. Where any accounting standards allow a choice you should show all
possible options.

8.8 VICTORIA
Victoria owns several properties and has a year end of 31 December. Wherever possible, Victoria
carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of Rs. 1 million, comprising Rs. 500,000
for land and Rs. 500,000 for buildings. The buildings have a useful life of 40 years. Victoria uses this
property as its head office.
Property 2 was acquired many years ago for Rs. 1.5 million for its investment potential. On 31
December Year 7 it had a fair value of Rs. 2.3 million. By 31 December Year 8 its fair value had
risen to Rs. 2.7 million. This property has a useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for Rs. 2 million for its investment potential. The
directors believe that the fair value of this property was Rs. 3 million on 31 December Year 7 and
Rs. 3.5 million on 31 December Year 8. However, due to the specialised nature of this property,
these figures cannot be corroborated. This property has a useful life of 50 years.
Required
(a) For each of the above properties briefly state how it would be treated in the financial
statements of Victoria for the year ended 31 December Year 8, identifying any impact on profit
or loss.
(b) Produce an analysis of property, plant and equipment for Victoria for the year ended 31
December Year 8, showing each of the above properties separately.

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CHAPTER 9 – IAS 36: IMPAIRMENT OF ASSETS

9.1 ABA LIMITED
Aba Limited conducts its activities from two properties, a head office in the city centre and a property
in the countryside where staff training is conducted. Both properties were acquired on 1 April 2013
and had estimated lives of 25 years with no residual value. The company has a policy of carrying its
land and buildings at current values. However, until recently property prices had not changed for
some years. On 1 October 2015 the properties were revalued by a firm of surveyors. Details of this
and the original costs are:

Land Buildings
Rs. Rs.
Head office – cost 1 April 2013 500,000 1,200,000
– revalued 1 October 2015 700,000 1,350,000
Training premises – cost 1 April 2013 300,000 900,000
– revalued 1 October 2015 350,000 600,000

The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated
life of the head office remained unaltered.
Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on the
straight-line method from the date of purchase or subsequent revaluation.
Required
Prepare extracts of the financial statements of Aba Limited in respect of the above properties for the
year to 31 March 2016.

9.2 HUSSAIN ASSOCIATES LTD

The assistant financial controller of the Hussain Associates Ltd group has identified the matters
below which she believes may indicate impairment of one or more assets:
Hussain Associates Ltd owns and operates an item of plant that cost Rs. 640,000 and had
accumulated depreciation of Rs. 400,000 at 1 October 2015. It is being depreciated at 12½% on
cost.
On 1 April 2016 (exactly half way through the year) the plant was damaged when a factory vehicle
collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but
it still operates, albeit at a reduced capacity. It is also expected that as a result of the damage the
remaining life of the plant from the date of the damage will be only two years.
Based on its reduced capacity, the estimated present value of the plant in use is Rs. 150,000. The
plant has a current disposal value of Rs. 20,000 (which will be nil in two years’ time), but Hussain
Associates Ltd has been offered a trade-in value of Rs. 180,000 against a replacement machine
which has a cost of Rs. 1 million (there would be no disposal costs for the replaced plant). Hussain
Associates Ltd is reluctant to replace the plant as it is worried about the long-term demand for the
product produced by the plant. The trade-in value is only available if the plant is replaced.
Required
Prepare extracts from the statement of financial position and statement of profit or loss of Hussain
Associates Ltd in respect of the plant for the year ended 30 September 2016. Your answer should
explain how you arrived at your figures.

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 Questions

9.3 SUNSHINE LIMITED

On 1 July 2016, Sunshine Limited (SL) acquired four machines namely A, B, C and D. The following
information is available in respect of these machines:
(i)

A B C D
Cost (Rs. in millions) 200 230 90 60
Expected useful life 12 years indefinite 6 years 12 years
Active market value at 30 June 2017 No active
170 300 65 market
(Rs. in millions)
Renewal cost (Rs. in millions) 65 85 2 1

(ii) The renewal would allow SL to use the machines for another five years.
(iii) SL uses the revaluation model for subsequent measurement of its assets.
(iv) An independent valuer has estimated the value of machine ‘D’ at Rs. 130 million.

Required:
Determine the amounts that should be recognised in respect of the machines in the statement of
financial position and statement of profit or loss for the year ended 30 June 2017.

© Emile Woolf International 61 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

CHAPTER 10: IFRS 15: REVENUE FROM CONTRACT WITH CUSTOMER

10.1 PARVEZ LIMITED
The following transactions took place at Parvez Limited (PL).
(1) On 5 March 2017 PL sold goods to a bank for Rs.18m cash and agreed to repurchase the
goods for Rs.19m cash on 5 July 2017. The goods will be shifted to a storage facility under
bank’s control and security.
(2) On 31 March PL’s car manufacturing division consigned several vehicles to independent
dealers for sale to third parties. The sales price to the dealer is PL’s list price at the date of
sale to third parties. If a vehicle is unsold after six months, the dealer has a right to return the
vehicle to PL within next fifteen days.
Required
Discuss how the above transactions should be accounted for in the books of accounts of Parvez
Limited.

10.2 SACHAL LIMITED

Sachal Limited (SL):
(a) Sells standard computer software package meant for small and medium sized restaurant
management. This software package is sold:
 at price of Rs.1.5 million payable before delivery,
 with thirty days trial time, and
 without any maintenance support after trial time
As per practice, it takes around six months for the customers to use the package independent
of any support from SL. Practically, SL has to provide on-site support service for at least six
months to almost all customers free-of-cost. However, in case of customer’s request for
support beyond six months, SL provides services under a formal paid service contract.
(b) Provides maintenance and support for the above standard software package at a price of
Rs.0.3 million per annum.
(c) Provides designing and development of customized software to customers. Payment is made
monthly by customers on the basis of chargeable hours of developers of SL. First year
maintenance service is provided free-of-cost. Subsequent maintenance service is provided at
the rate of 10% of the total contract price. Thereafter, for next three years maintenance
service is provided at 5% of the contract price per annum.
Required
Explain the considerations to be taken into account in determining accounting for revenue by Sachal
Limited.

10.3 GALAXY TELECOMMUNICATION

(a) Define ‘performance obligation’. List any six examples of promised goods and services as per
IFRS 15 ‘Revenue from Contracts with Customers’.
(b) On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a bank for
supplying 20 smart phones to the bank staff with unlimited use of mobile network for one year.
The contract price per smart phone is Rs. 34,650 and the price is payable in full within 10
days from the date of contract. At the end of the contract, the phones will not be returned to
GT.
The entire amount received as per contract was credited by GT to advance from customers
account. The smart phones were delivered on 1 November 2017.
If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of Rs. 1,800
for unlimited use of mobile network.

© Emile Woolf International 62 The Institute of Chartered Accountants of Pakistan

 Questions

Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15
‘Revenue from Contracts with Customers’.

10.4 JUPITER LIMITED

Jupiter Limited (JL) entered into a two-year contract on 1 January 2017, with a customer for the
maintenance of computer network. JL has offered the following payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
Required:
Prepare journal entries to be recorded in the books of JL under each option over the period of
contract.

10.5 PLUTO LIMITED

(a) Pluto Limited (PL) sells industrial chemicals at following standalone prices:

Products Rupees (per carton)

C-1 100,000

C-2 90,000

C-3 110,000

PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one carton
of each product for a total price of Rs. 260,000.
(b) An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service to a customer. An asset is transferred when (or as)
the customer obtains control of that asset.
Required:
List the different indicators of transfer of control.

10.6 SINGLE PERFORMANCE OBLIGATION

(i) ECL has entered into a contract with Kashif Builders for construction of a residential project,
including supply of construction material, architectural services, engineering and site
clearance. ECL and its competitors provide such services separately also.
(ii) eSolutions Limited, a software developer, entered into a two year contract with a customer to
provide software license including future software updates and post implementation support
services. The software license would remain functional even if the updates and post
implementation support services are discontinued.
Required:
(a) In view of the requirements of IFRS 15 ‘Revenue from Contracts with Customers’, discuss
whether goods and services provided in each of the above contracts represent a single
performance obligation.
(b) Define the term ‘performance obligation’ and state the criteria which should be met if goods or
services promised to a customer are to be considered as distinct.

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Introduction to accounting

10.7 CAR WORLD

Car World sells new cars on deferred payment basis whereby 40% deposit is received on sale and
the balance payment is received at the end of two years. The appropriate discount rate is 10%.
On 1 July 2014 a car was sold to a customer for Rs. 2,000,000.
Required:
Prepare necessary journal entries to record the above transaction in the books of Car World for the
years ended 30 June 2015 and 2016.

10.8 SALEEM ENGINEERING

Saleem Engineering (SE) is a supplier of various types of industrial machines. It also provides
services for the maintenance of these machines. Following transactions were carried out by SE
during the year ended 30 June 2016:
i. Five machines were sold on a lay away basis to one of its frequent customers.
Three out of a total of five instalments had been received till the year end.
ii. A service contract for maintenance of a machine for a period of one year was signed and SE
received a non-refundable annual fee amounting to Rs. 45,000 as advance on 15 April 2016.
Required:
Discuss when it will be appropriate for SE to recognise revenue in each of the above situations.

10.9 RECOGNITION OF REVENUE

State how revenue should be recognised in the following cases:
(i) Karim Industries Limited (KIL) has sold a machine on credit to Yawar Engineering (YE). The
machine would be used by YE if it is able to secure a contract for providing services to AMZ &
Company. KIL has agreed that the machine may be returned at 90% of the price, if YE fails to
secure the contract. (02)
(ii) Asif Electronics (AE) is about to sell a new type of food factory. Since customer demand is high,
AE is taking advance against orders. The selling price has been fixed at Rs. 7,000 per unit and
so far 175 customers have paid the initial 25% deposit which is non-refundable.
(iii) Nazir Engineering Limited (NEL) entered into a contract for the provision of services over a
period of two years. The total contract price was Rs. 25 million and NEL had initially expected
to earn a profit of Rs. 5 million on the contract. However, the contract had not progressed as
expected. In the first year, costs of Rs. 12 million were incurred. Management is not sure of the
ultimate outcome but believes that at least the costs on the contract would be recovered from
the customer.

10.10 LEGAL TITLE

In respect of sale of goods, give any two examples of each of the following situations:
(i) Legal title passes but the risks and rewards are retained.
(ii) Legal title does not pass but the risks and rewards are passed on to the customer.

10.11 BRILLIANT LIMITED

Brilliant Limited (BL) manufactures and sells plastic card printing machines with laminators. A
machine-specific card printing software is provided as a must part of the printing machine. BL also
sells plastic cards imported from Thailand.
BL agreed to supply the following to, Proud Learners (PL), a country-wide school network:
 15 Card printing machines – Available in ready stock
 8 Laminators – Would require 30 days to deliver
 100,000 Plastic cards – Available in ready stock

© Emile Woolf International 64 The Institute of Chartered Accountants of Pakistan

 Questions

A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and school
network.
Cost and list prices of the goods are:

Item Price (Rs.) Cost (Rs.)

Card printing machines 800,000 400,000

Laminators 200,000

Plastic cards 12 5

BL does not sell printing machine without laminator. However, in order to get this order x`BL went
against its policy. There is another supplier of imported card printing machine of almost similar
specification. This supplier sells the machine at Rs.750,000.
In most recent customers’ surveys printing machine of BL has been given 7 out of 10 points as against
9 out of 10 given to competitors’ imported machine. There is no supplier of laminator in the market.
Required
Identify performance obligations and allocate the transaction price to the identified performance
obligations.

© Emile Woolf International 65 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

CHAPTER 11 – INTERPRETATION OF FINANCIAL STATEMENTS

11.1 WASIM PRIVATE LIMITED
Wasim Pvt. Ltd. is an importer and retailer of vegetable oils. Extracts from the financial statements for
this year and last are set out below.
Income statements for the years ended 30 September
Year 7 Year 6
Rs.000 Rs.000
Revenue 2,160 1,806
Cost of sales (1,755) (1,444)
–––––– ––––––
Gross profit 405 362
Distribution costs (130) (108)
Administrative expenses (260) (198)
–––––– ––––––
Profit before tax 15 56
Income tax expense (6) (3)
–––––– ––––––
Profit for the period 9 53
–––––– ––––––
Statements of financial position as of 30 September
Year 7 Year 6
Rs.‘000 Rs.‘000
Assets
Non-current assets
Property, plant and equipment 78 72

Current assets
Inventories 106 61
Trade receivables 316 198
Cash - 6
––––– –––––
422 265
––––– –––––
Total assets 500 337
––––– –––––
Equity and liabilities
Equity
Ordinaryshares 110 85
Preference shares 23 11
Share premium 15 -
Revaluation reserve 20 20
Retained earnings 78 74
246 190
Current liabilities
Bank overdraft 49 -
Trade payables 198 142
Current tax payable 7 5
––––– –––––
254 147
––––– –––––
Total equity and liabilities 500 337
––––– –––––

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 Questions

Required
Define and calculate the following ratios:
a) Gross profit percentage.
b) Net profit percentage
c) Return on capital employed
d) Asset turnover
e) Current ratio
f) Quick ratio
g) Average receivables collection period
h) Average payables period
i) Inventory turnover

11.2 AMIR AND MO LIMITED

The income statements and statements of financial position of two manufacturing companies in the
same sector are set out below.
Amir Mo
Rs. Rs.
Revenue 150,000 700,000
Cost of sales (60,000) (210,000)
–––––––– ––––––––
Gross profit 90,000 490,000
Interest payable (500) (12,000)
Distribution costs (13,000) (72,000)
Administrative expenses (15,000) (35,000)
–––––––– ––––––––
Profit before tax 61,500 371,000
Income tax expense (16,605) (100,170)
–––––––– ––––––––
Profit for the period 44,895 270,830
–––––––– ––––––––
Assets
Non-current assets
Property - 500,000
Plant and equipment 190,000 280,000
––––––– –––––––
190,000 780,000
Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 500 22,000
––––––– –––––––
50,000 153,250
––––––– –––––––
Total assets 240,000 933,250
––––––– –––––––

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Introduction to accounting

Amir Mo
Rs. Rs.
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
––––––– –––––––
207,395 565,580
Non-current liabilities
Long-term debt 10,000 250,000

Current liabilities
Trade payables 22,605 117,670
––––––– –––––––
Total equity and liabilities 240,000 933,250
––––––– –––––––
Required
Define and calculate the following ratios for each company:
a) Gross profit percentage.
b) Net profit percentage
c) Return on capital employed
d) Asset turnover
e) Current ratio
f) Quick ratio
g) Average receivables collection period
h) Average payables period
i) Inventory turnover

11.3 ALPHA LIMITED AND OMEGA LIMITED

Alpha Limited and Omega Limited are in the same trade, but operate in different areas. Their accounts
for the year ended 31 December, 2016 are as follows:
Profit and loss account Alpha Limited Omega Limited
Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sales 1,440 1,720
Less: Cost of sales 1,120 1,342
──── ────
Gross profit 320 378
Less: Overheads 220 300
──── ────
Profit before tax 100 78
Taxation 40 30
Dividends 20 24
──── ────
60 54
──── ────
Retained earnings 40 24
──── ────

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 Questions

Alpha Limited Omega Limited

Rs.’000 Rs.’000 Rs.’000 Rs.’000
Statement of financial position

Share capital of Rs. 1 each 600 200

Reserves 240 104
──── ────
840 304
8% Debentures - 120
840 424
──── ────

Represented by:
Non-current assets at cost 660 520
Less: Depreciation 200 160
──── ────
460 360
Current assets:
Inventory 280 172
Receivables 310 300
Cash 30 32
──── ────
620 504
──── ────
Current liabilities:
Taxation 40 30
Creditors 180 344
Bank overdraft - 42
Dividends 20 24
──── ────
240 440
──── ────
Net Current assets 380 64
──── ────
840 424
──── ────
Required
(a) Compute the following ratios for each of the companies:
(i) Current ratio
(ii) Acid test
(iii) Creditors ratio
(iv) Collection period or Receivables Ratio
(b) Carry out comparative analysis of the companies based on the computed ratios in (a) above.

© Emile Woolf International 69 The Institute of Chartered Accountants of Pakistan

Introduction to accounting

11.4 BOOM LIMITED

Boom Limited (BL) is a manufacturer of sports goods. Following financial statements for the year
ended 31 December 2017 have been submitted to the Chief Executive Officer (CEO)
Statement of profit or loss

Rs. in ‘000
Revenues 21,000
Cost of sales (17,500)
Gross profit 3,500
Operating expenses (1,900)
Finance cost (450)
Profit before tax 1,150
Taxation (345)
Profit after tax 805

Statement of financial position

Rs. in ‘000

Property, plant and equipment 7,500

Current assets 1,500
9,000

Share capital 4,000

Reserves 1,000
Non-current liabilities 3,000
Current liabilities 1,000
9,000

Although performance of BL has improved from the last year, CEO wants to compare the results with
other companies operating in sports manufacturing industry. In this respect, following industry data
has been gathered:

Gross profit margin 23.5%

Net profit margin 7.7%
Current ratio 2.75
Gearing ratio 50:50
Return on non-current asset 32.9%
Return on capital employed 27.4%
Return on equity 31.3%

Required:
(a) Compute BL’s ratios for comparison with the industry.
(b) For each ratio, give one possible reason for variation from the industry

© Emile Woolf International 70 The Institute of Chartered Accountants of Pakistan

 Questions

11.5 PROGRESSIVE STEEL LIMITED

Progressive Steel Limited (PSL) commenced business in 2015. The following comparative data
pertains to the year ended 30 June 2017:

PSL Industry
Description
2017 2016 2017
Gross profit margin 13% 13% 16%
Net profit margin 8% 7% 10%
Return on shareholders’ equity 22% 18% 25%
Current ratio 1.2 1.6 1.5
Debt to equity ratio 40:60 30:70 50:50
Cash operating cycle in days 119 135 118

Required:
For each ratio/data give possible reasons for variation from comparative and industry data.

11.6 DAIRY FOODS LIMITED

(i) The following information has been gathered by an analyst, in respect of Dairy Foods
Limited (DFL) which specializes in various dairy products.

Industry
Ratio 2016 2015 2014
average
Profit margin % 11% 10% 8% 10.45%
Quick ratio 1.38 1.40 1.42 1.52
Current ratio 1.84 1.67 1.59 1.73
Days purchases in payables 80 91 89 82

In the latest annual report to the shareholders, Directors of DFL have claimed that liquidity
position of the Company has improved significantly.
Required:
Critically analyze and discuss whether you agree with the claim.
(ii) Extracts from latest financial statements of two companies are as follows:
Extracts from statements of financial position

A B A B
Equity and liabilities Assets
Rs. In million Rs. In million
Equity and reserves 51,690 72,114 Fixed assets 34,460 48,076
Long term loan - 36,057 Stock in trade 21,700 20,000
Trade creditors 35,790 45,135 Trade debtors 24,470 44,030
Other payables 12,000 8500 Cash and bank 18,850 49,700
99,480 161,806 99,480 161,806

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Introduction to accounting

Extracts from statements of comprehensive income

A B
------ Rs. in million ------
Revenue 161,600 220,150
Cost of sales (135,160) (180,520)

Gross profit 26,440 39,630

Operating expenses (9,840) (13,870)
Interest expense (720) (2,313)

Profit before tax 15,880 23,447

Income tax (333) (409)

Profit after tax 15,547 23,038

Required:
Analyze the profitability, liquidity and working capital ratios of both the companies.

© Emile Woolf International 72 The Institute of Chartered Accountants of Pakistan

 Certificate in Accounting and Finance

A
Financial accounting and reporting I

Answers
CHAPTER 1 – ACCOUNTING AND REPORTING CONCEPTS
1.1 CRITERIA FOR RECOGNITION
An entity can recognize assets in its balance sheet only if the following conditions are met:

 It is probable that any future economic benefits associated with the asset will flow to or from
the entity

 The cost/value of the asset can be measured reliably

The following will be recognized in the financial statements:

 A manufacturing unit valuing Rs. 5 million, owned and controlled by the Company

The fleet of truck will not be recognized because it is not controlled by the entity. Similarly, workforce
will not be recognized by the entity because there is no certainty about the probability of future
economic benefits from workers as they can quit the entity at any time.

1.2 HABIB FACTORY

The cost of the asset under each measurement basis shall be as follows:

Historical cost

The historical cost of the building is Rs. 100 million.

Current cost

The current cost of the building shall be its revalued amount which is Rs. 75 million.

Realizable(settlement) value

The realizable value of the building will be its selling cost less any costs incurred to sell the asset,
which is 90 million less 10 million, i.e, Rs, 80 million.

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Financial accounting and reporting I

1.3 CARRIE
(a) Physical Capital (b) Financial Capital
Maintenance Maintenance
(i) Historical (ii) Constant
Profit for the year cost purchasing power
accounting accounting
Rs. Rs. Rs.
Sales 1,400 1,400 1,400
Cost of sales (1,000) (1,000) (1,000)

Inflation adjustment
- Specific (1,100 – 1,000) (100) - -
- General (1,000  7%) - - (70)
––––– ––––– –––––
Profit 300 400 330
––––– ––––– –––––
Balance sheet as at 31 December Year 1
Cash at bank 1,400 1,400 1,400
––––– ––––– –––––
Share capital (1,000 + 100)
(1,000 + 70) 1,100* 1,000 1,070*
Reserves 300 400 330
––––– ––––– –––––
1,400 1,400 1,400
––––– ––––– –––––
Tutorial note
Share capital at the year end is restated under the physical capital maintenance concept for an
increase in specific price changes and under Constant Purchasing Power accounting for general
price changes. This is the other side of the entry to the inflation adjustments in the statement of profit
or loss

© Emile Woolf International 74 The Institute of Chartered Accountants of Pakistan

 Answers

CHAPTER 2 – IAS 1: PREPARATION OF FINANCIAL STATEMENTS

2.1 DAFFODIL LIMITED
Statement of changes in equity
For the year ended 31 December 2017

Ordinary
Share General Retained
share Total
premium reserves earnings
capital

-------------------- Rs. in million --------------------

Balance as at 31 December 2015 1,600.00 1,850.00 1,375.31 4,825.31

Final cash dividend @ 7.5% - 2015 (120.00) (120.00)

(1,600×7.5%)

Right issue @ 25% 400.00 320.00 720.00

(1,600×25%) (160×25%×8)

Net profit - 2016 331.67 331.67

Balance as at 31 December 2016 - 2,000.00 320.00 1,850.00 1,586.98 5,756.98

Final bonus dividend @ 10% - 200.00 (200.00) -

2016 (2,000×10%)

Right issue 500.00 250.00 750.00

(50×10) (50×5)

Interim bonus dividend @ 15% - 405.00 (405.00) -

2017 (2,700×15%)

Net profit - 2017 650 650

Transfer to general reserves 112.00 (112.00) -

Balance as at 31 December 2017 3,105.00 570.00 1,962.00 1,519.98 7,156.98

© Emile Woolf International 75 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting I

CHAPTER 3 – IAS 7: STATEMENT OF CASH FLOWS

3.1 TRANGO LIMITED
Statement of cash flows Rs.
Cash flows from operating activities
Profit before taxation 102,000
Adjustments for:
Depreciation and amortisation charges 46,000
Loss on disposal of non-current asset 9,000
Interest charges in the statement of comprehensive income 24,000
181,000
Increase in receivables (173,000 – 157,000) (16,000)
Decrease in inventories (42,000 – 38,000) 4,000
Decrease in trade payables (43,600 + 4,000) – (35,700 + 4,600) (7,300)
Cash generated from operations 161,700
Taxation paid (W1) (42,000)
Interest charges paid(W1) (25,200)
Net cash flow from operating activities 94,500

Workings:

W1: Interest and tax payments Tax Interest

Rs. Rs.
Liability at 1 January 2015 45,000 11,200
Taxation charge/interest charge for the year 38,000 24,000

83,000 35,200
Liability at 31 December 2015 (41,000) (10,000)

Tax paid/interest paid during the year 42,000 25,200

3.2 NARDONE LIMITED

Statement of cash flows for the year ended 31 December 2015

Rs.000 Rs.000

Cash flows from operating activities

Profit before taxation 303
Adjustments for:
Depreciation 74
Interest charges in the statement of comprehensive income 23
Losses on disposal of non-current assets 4
404

© Emile Woolf International 76 The Institute of Chartered Accountants of Pakistan

 Answers

Statement of cash flows for the year ended 31 December 2015

Rs.000 Rs.000
Increase in receivables (38 – 29) (9)
Increase in inventories (19 – 16) (3)
Decrease in trade payables (17 – 12) (5)
Cash generated from operations 387
Taxation paid (W1) (70)
Interest charges paid (23)
Net cash flow from operating activities 294
Cash flows from investing activities
Purchase of non-current assets (98)
Proceeds from sale of non-current assets (W2) 2
Net cash used in (or received from) investing activities (96)
Cash flows from financing activities
Proceeds from issue of shares (323 – 232) 91
Repayment of loans (320 – 70) (250)
Dividends paid to shareholders (52)
Net cash used in (or received from) financing activities (211)
Net increase/(decrease) in cash and cash equivalents (13)
Cash and cash equivalents at beginning of the year 32
Cash and cash equivalents at the end of the year 19
Workings
W1: Taxation paid Rs.000
Taxation payable at the beginning of the year 76
Tax charge for the year (statement of comprehensive income) 87
163
Taxation payable at the end of the year (93)
Therefore tax paid during the year 70

W2: Disposal of machinery Rs.000

Cost of machinery disposed of 18
Accumulated depreciation on machinery disposed of (12)
Net book value at disposal 6
Loss on disposal 4
Therefore cash received from the disposal 2

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Financial accounting and reporting I

3.3 HOT SAUCE LIMITED

Statement of cash flows for the year ended 31 December 2015
Rs.000 Rs.000
Cash flows from operating activities
Profit before taxation 1,195
Adjustments for:
Depreciation 401
Loss on sale of plant (W1) 4
Interest charges in the statement of comprehensive income 156
1,756
Increase in receivables (184 – 147) (37)
Increase in inventories (843 – 203) (640)
Decrease in trade payables (W2) (41)
Cash generated from operations 1,038
Taxation paid (W3) (470)
Interest charges paid (W4) (126)
Net cash flow from operating activities 442
Cash flows from investing activities
Purchase of non-current assets (1,200)
Proceeds from sale of non-current assets (see W1) 41
Net cash used in (or received from) investing activities (1,159)
Cash flows from financing activities
Proceeds from issue of shares (W5) 300
Bank loan raised 65
Repayment of loans (W6) (235)
Dividends paid to shareholders (230)
Net cash used in (or received from) financing activities (100)
Net increase/(decrease) in cash and cash equivalents (817)
Cash and cash equivalents at beginning of the year 51
Cash and cash equivalents at the end of the year (766)

W1: Gain or loss on disposal Rs.

Cost of asset disposed of 69
Accumulated depreciation on asset disposed of (24)
Carrying amount at date of disposal 45
Disposal proceeds (41)
Therefore loss on disposal 4

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 Answers

W2: Increase or decrease in trade payables Rs. Rs.

Trade payables and accruals at 31 December 2015 141
Less accrued interest (54)
87
Trade payables and accruals at 31 December 2014 152
Less accrued interest (24)
(128)
Decrease in trade payables and accruals (41)

Tutorial note
The accrued interest is removed from the figures because accrued interest is relevant to the amount
of interest paid in the year. This is a separate item in the statement of cash flows.

W3: Taxation paid Rs.

Current taxation liability at 31 December 2014 470
Taxation charge in the year 602
1,072
Current taxation liability at 31 December 2015 (602)
Therefore taxation paid in the year 470

W4: Interest paid Rs.

Accrued interest liability at 31 December 2014 24
Interest charge in the year 156
180
Accrued interest liability at 31 December 2015 (54)
Therefore interest paid in the year 126

W5: Proceeds from the issue of shares Rs. Rs.

Ordinary share capital at 31 December 2015 940
Share premium at 31 December 2015 100
1,040
Ordinary share capital at 31 December 2014 740
Share premium at 31 December 2014 -
(740)
Proceeds from the issue of shares 300

W6: Loans repaid Rs.

Loans at 31 December 2014 320
New loan during the year 65
385
Loans at 31 December 2015 (150)
Therefore loans repaid during the year 235

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Financial accounting and reporting I

3.4 QUETTA TRACK LIMITED

Statement of cash flows for the year ended 30 June 2015

Rs.000 Rs.000
Cash flows from operating activities
Net profit before tax 14,400
Adjustments for
Depreciation Rs.(3,000 + 1,000) 4,000
Profit on sale of non-current assets (W3) (100)
Interest expense 1,000
———
Operating profit before working capital adjustments 19,300
Increase in inventories (5,000)
Increase in trade receivables (7,250)
Decrease in trade payables (3,000)
———
Cash generated from operations 4,050
Interest paid (W5) (500)
Income taxes paid (W4) (1,200)
———
Net cash from operating activities 2,350

Cash flows from investing activities

Purchase of property (10,000)
Purchase of plant and equipment (W1) (1,000)
Proceeds from sale of plant and equipment (W3) 350
———
Net cash used in investing activities (10,650)

Cash flows from financing activities

Part repayment of loan (4,000)
———
———
Net cash used in financing activities (4,000)
———
Net decrease in cash and cash equivalents (12,300)

Cash and cash equivalents at beginning of year 1,300

———
Cash and cash equivalents at end of period (11,000)
———

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 Answers

Workings
(1) Plant and machinery – Cost

Rs.000 Rs.000
Bal b/d 5,000 Disposal 1,000
Additions () 1,000 Bal c/d 5,000
——– ——–
6,000 6,000
——– ——–

(2) Plant and machinery – Accumulated depreciation

Rs.000 Rs.000
Disposal 750 Bal b/d 2,000
Bal c/d 2,250 Depreciation charge for year () 1,000
——– ——–
3,000 3,000
——– ——–

(3) Plant and machinery – Disposals

Rs.000 Rs.000
Cost 1,000 Accumulated depreciation 750
Profit on sale 100 Proceeds 350
——– ——–
1,100 1,100
——– ——–

(4) Tax payable

Rs.000 Rs.000
Cash paid () 1,200 Bal b/d 1,000
Bal c/d 1,800 Tax charge to P&L 2,000
——– ——–
3,000 3,000
——– ——–

(5) Interest payable

Rs.000 Rs.000
Cash paid () 500 Bal b/d 200
Bal c/d 700 Charge to P&L 1,000
——– ——–
1,200 1,200
——– ——–

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Financial accounting and reporting I

3.5 MARDAN SOFTWARE LIMITED

Statement of cash flows for the year ended 31 December 2015

Rs.000 Rs.000

Cash flow from operating activities

Net profit before tax 1,381
Adjustments for
Depreciation charges (111 + 351) (W1, W2) 462
Profit on sale of machinery (W1) (19)
Loss on sale of fixtures (W2) 5
———
Operating profit before working capital adjustments 1,829
Increase in inventories (660)
Increase in trade receivables (773)
Increase in trade payables 4
———
Cash generated from operations 400
Income tax paid (W3) (255)
———
Net cash from operating activities 145

Cash flows from investing activities

Purchase of plant and equipment (312 + 366) (W1, W2) (678)
Proceeds from sale of plant and equipment (203 + 95) (W1, W2) 298
———
Net cash used in investing activities (380)

Cash flows from financing activities

Equity dividends paid (W4) (300)
Proceeds from issuance of ordinary share capital 400
———
100
———
Net decrease in cash and cash equivalents (135)

Cash and cash equivalents at beginning of year (1,050 + 197) 1,247

———
Cash and cash equivalents at end of year (600 + 512) 1,112
———

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 Answers

Workings
(1) Plant and equipment (carrying amt.)
Rs.000 Rs.000
Balance b/f 2,086 P & E – disposal 184
Bank – purchase 312 Depreciation (al fig) 111
Balance c/f 2,103
——– ——–
2,398 2,398
——– ——–

Plant and equipment– Disposal

Rs.000 Rs.000
P & E – Carrying amt. 184 Cash – proceeds 203
Gain on disposal 19
—— ——
203 203
—— ——

(2) Fixtures and fittings (Carrying amount)

Rs.000 Rs.000
Balance b/f 1,381 F & F – disposal 100
Bank – purchase (Bal. figure) 366 Depreciation 351
Balance c/f 1,296
——– ——–
1,747 1,747
——– ——–

Fixtures and fittings – Disposal

Rs.000 Rs.000
F & F – Carrying amt. 100 Cash – proceeds 95
Loss on disposal 5
—— ——
100 100
—— ——

(3) Tax payable

Rs.000 Rs.000
Bank – tax paid (al fig) 255 Balance b/f 257
Balance c/f 312 P&L a/c 310
—— ——
567 567
—— ——

(4) Dividends paid

Rs.000 Rs.000
Bank – dividends paid (al fig) 300 Balance b/f 132
Balance c/f 154 2015 dividend 322
—— ——
454 454
—— ——

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Financial accounting and reporting I

3.6 TARBELA TRADERS LIMITED

Statement of cash flows for the year ended 31 December 2015
Rs.000 Rs.000
Cash flows from operating activities
Net profit 3,570
Adjustments for
Depreciation 7,000
Net loss on disposals 310
Interest expense 3,000
———
Operating profit before working capital changes 13,880
Decrease in trade receivables (11,960 – 14,410) 2,450
Decrease in inventories (19,670 – 27,500) 7,830
Increase in trade payables ((32,050 – 400) – 20,950) 10,700
———
Cash generated from operations 34,860
Interest paid (3,000 – 400) (2,600)
———
Net cash from operating activities 32,260

Cash flows from investing activities

Purchase of long-term investments (25,000 – 17,000) (8,000)
Purchase of equipment and cars
(36,400 (W1)+ 19,860 (W2)) (56,260)
Proceeds from sale of equipment and cars (W3) 6,900
————
Net cash used in investing activities (57,360)

Cash flows from financing activity

Borrowing repayment (3,000)
————
Net decrease in cash and cash equivalents (28,100)

Cash and cash equivalents at beginning of period

(3,600 + 1,800) 5,400
————
Cash and cash equivalents at end of period
(4,800 + 700 – 28,200) (22,700)
————
Workings
(1) Equipment (WDV)
Rs.000 Rs.000
Bal b/d 17,600 Disposal 5,200
Depreciation 3,000
Additions () 36,400 Bal c/d 45,800
——– ——–
54,000 54,000
——– ——–

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 Answers

(2) Motor vehicles (WDV)

Rs.000 Rs.000
Bal b/d 4,080 Disposal 2,010
Depreciation 3,000
Additions () 19,860 Bal c/d 18,930
——– ——–
23,940 23,940
——– ——–
(3) Disposals
Rs.000 Rs.000
Equipment 5,200
Motor vehicle 2,010 Loss on disposal (vehicles) 740
Profit on disposal (equipment) 430 Proceeds () 6,900
——– ——–
7,640 7,640
——– ——–

3.7 THE SINDH ROBOTICS COMPANY

The Sindh Robotics Company: Statement of cash flows for the year ended 31 December 2014

Rs.000 Rs.000
Cash flows from operating activities
Cash receipts from customers (W1) 190,000
Cash paid to suppliers and employees (W2) (155,000)
————
Cash generated from operations 35,000
Interest paid (13,000)
Dividends paid* (20,000)
————
Net cash from operating activities 2,000
Cash flows from investing activities
Purchase of property and plant (40,000 + 1,000) (41,000)
Purchase of investments (30,000)
————
Net cash used in investing activities (71,000)
Cash flows from financing activities
Proceeds from issued shares (10,000 + 2,000) 12,000
Proceeds from long-term borrowings 50,000
————
Net cash from financing activities 62,000
————
Net decrease in cash and cash equivalents (7,000)
Cash and cash equivalents at 1 January 2014 3,000
————
Cash and cash equivalents at 31 December 2014 (4,000)
———
* Could be shown as a financing cash flow.

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Financial accounting and reporting I

Workings (1) Receipts from sales

Receivables control

Rs.000 Rs.000
Balance b/d 40,000 Cash receipts (al fig) 190,000
Sales 200,000 Balance c/d 50,000
_______ ________
240,000 240,000
———— ————

(2) Payments
Payables and wage control

Rs.000 Rs.000
Cash paid (al fig) 155,000 Balance b/d 40,000
Depreciation * 2,000 Purchases (W3) 130,000
Balance c/d 60,000 Expenses 47,000
________
________ 217,000
217,000 ————
————

(3) Cost of sales

Rs.000 Rs.000
Opening inventory 55,000 Cost of sales 120,000
Purchases and wages 130,000 Closing inventory 65,000
________ ________
185,000 185,000
———— ————
* Alternatively, depreciation could be adjusted against cost of sales.

3.8 ABIDA LIMITED

Cash flow for year ended June 30, 2015
Profit for the year 256,800
Depreciation 17,500
Loss on sale of furniture 6,800
Increase/decrease in working capital
Decrease in inventories 21,600
Increase in payables 8,900
Increase in receivables (11,700)
18,800
299,900
Add: Proceeds from sale of non-current assets 12,000
311,900
Less: Purchase of non-current assets (W) 28,900
Payment of long term loan 75,000
Drawings 120,000
223,900
Net increase in bank balance 88,000

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 Answers

W Non-current assets
Decrease in assets 7,400 Depreciation 17,500
Purchase of assets –
balancing figure 28,900 Sale of furniture 12,000
Loss on above sale 6,800
36,300 36,300

3.9 MOOSANI LIMITED

Statement of cash flows for the year ended 31 December 2015

Rs.000 Rs.000
Cash flows from operating activities
Net profit for the year (W1) 220,200
Adjustments for
Depreciation – equipment (24,000 + 9,200 – 18,000) 15,200
– furniture 8,000
Loss on sale of equipment (23,000 – 9,200 – 6,500) 7,300
Gain on sale of investments (7,500)
Insurance claim over book value (60,000 – [64,000 – 15,000]) (11,000)

Operating profit before working capital adjustments 232,200

Increase in payables 4,300
Decrease in bills payable (2,100)
Decrease in accrued expenses (6,500)
Increases in receivables (13,400)
Increase in inventory (5,600)

Cash generated from operations 208,900

Net cash from operating activities 208,900

Cash flows from investing activities

Insurance claim against furniture 60,000
Sale of investments (16,900 + 7,500) 24,400
Sale of equipment 6,500
Capital Expenditure – purchase of equipment
(86,000 + 23,000 – 43,000) (66,000)
Capital Expenditure – purchase of furniture
(80,000 + 64,000 – 64,000) (80,000)

Net cash used in investing activities (55,100)

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Financial accounting and reporting I

Cash flows from financing activities

Capital invested (payment of long-term loan) 12,000
Payment of long-term loan (22,000)
Drawings / withdrawals of capital (15,000 x 12) (180,000)

Net cash used in financing activities (190,000)

Net decrease in cash and cash equivalents (36,200)
Cash and cash equivalents at beginning of year 41,400
Cash and cash equivalents at end of period 5,200

Working

W1: Profit for the year Rs.

Capital b/f 83,800
Capital introduced (loan repayment) 12,000
Less: drawings (180,000)
Profit for the year (balancing figure) 220,200
Capital c/f 136,000

3.10 SAKHAWAT HUSSAIN LIMITED

Statement of cash flows for the year ended December 31, 2015

Rs.000 Rs.000
Cash flows from operating activities
Net profit before tax 1,400,000
Adjustments for
Depreciation on non-current assets
(2,950,000 – 2,450,000)+200,000+(960,000 – 160,000) 1,500,000
Profit on sale of investment (70,000)
Profit on sale of non-current assets (90,000)
Interest expense (180 + 200 – 150) 230,000

Operating profit before working capital adjustments 2,970,000

Increase in payables 400,000
Increase in current assets 80% of (4,750,000 – 2,850,000) (1,520,000)

Cash generated from operations 1,850,000

Interest paid (180,000)

Net cash from operating activities 1,670,000

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 Answers

Rs.000 Rs.000
Cash flows from investing activities
Purchase of non-current assets
(9,750,000 + 200,000 + 960,000 – 9,600,000) (1,310,000)
Purchase of investment
(2,600,000+250,000 – 2,500,000) (350,000)
Proceeds from sale of investment 320,000
Proceeds from sale of non-current assets 250,000 (1,090,000)

Net cash used in investing activities

Cash flows from financing activities

Capital introduced 1,000,000
Withdrawal by owner against profits (1,200,000)

Net cash used in financing activities (200,000)

Net increase in cash and cash equivalents 380,000

Cash and cash equivalents at beginning of year 570,000
Cash and cash equivalents at end of period 950,000

Working: Profit for the year

Closing balance 1,100,000

Drawings 1,200,000
2,300,000
Less: opening balance 900,000

Net profit for the year 1,400,000

3.11 JUNAID JANJUA LIMITED

Statement of cash flows for the year ended 31 December 2015
Rs. Rs.
Net income 950,000
Depreciation (170,000 + 60,000) 230,000
Items for separate consideration:
Gain on sale of land (64,000)
Gain on sale of long term investment (32,000)
Loss on sale of equipment 15,000

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Financial accounting and reporting I

Rs. Rs.
(Increase) / decrease in current assets:
Accounts receivable (176,000)
Inventory (224,000)
Prepaid insurance 12,000
Office supplies (7,000)
(395,000)
(Decrease) / Increase in current liabilities:
Decrease in accounts payable (105,000)
Increase in wages payable 16,000
Net (increase) / decrease in working capital (484,000)
Cash generated from operations 615,000
Cash invested 100,000
Proceeds from sale of:
Land (2,500,000 – 1,810,000 + 64,000) 754,000
Equipment (75,000 – 15,000) 60,000
Long term investments (100,000 + 32,000) 132,000 946,000
Fixed capital expenditure – building (2,800,000 – 2,300,000) (500,000)
– equipment
(1,200,000+105,000*–1,150,000) (155,000)
Long term investments (220,000 +100,000-170,000) (150,000)
Payment of long term loan (1,160,000– 985,000) (175,000)
Drawings (568,000)
Net increase in cash 113,000
Cash - opening 32,000
Cash - closing 145,000

*Book value 75,000 + accumulated depreciation 30,000 = Cost Rs. 105,000

3.12 AMIN INDUSTRIES LIMITED

Statement of cash flows for the year ended 31 August 2015
Rs. Rs.
Cash flows from operating activities
Profit for the year 3,161,000
Adjustments for:
Depreciation charge 2,498,000
Profit on sale of non-current assets (1,284,000 – 867,000) (417,000)
Provision for doubtful debts (484,000 – 385,000) 99,000
Operating profit before working capital adjustments 5,341,000

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 Answers

Rs. Rs.
Decrease in inventory 2,772,000
(Increase) in trade debts (1,944,000)
Increase in payables 607,000
Increase in short term finance 929,000
Net cash from operating activities 7,705,000

Cash flows from investing activities

Purchase of non-current assets (6,191,000)
Sale proceeds of non-current assets 1,284,000
Purchase of investment (4,911,000)
Net cash from investing activities (9,818,000)

Cash flows from financing activities

Capital input 5,450,000
Withdrawals by Mr. Amin (3,120,000)
Net cash from financing activities 2,330,000

Increase in cash and cash equivalents 217,000

Opening bank balance 225,000

Closing bank balance 442,000

Workings Non-current assets – cost

Opening (12,346+5605) 17,951,000 Sale 1,500,000
Additions – balancing figure 6,191,000 Closing (15,172+7,470) 22,642,000
24,142,000 24,142,000

Accumulated depreciation
On assets sold (1,500-867) 633,000 Opening 5,605,000
Closing balance 7,470,000 Charge for the year 2,498,000
8,103,000 8,103,000

Trade debts
Opening (4,887+385) 5,272,000
Increase in balance 1,944,000 Closing (6,732+484) 7,216,000
7,216,000 7,216,000

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Financial accounting and reporting I

Capital account – Mr. Amin

Withdrawals 3,120,000 Opening 27,942,000
Closing balance 33,433,000 Profit for the year 3,161,000
Capital introduced 5,450,000
36,553,000 36,553,000

3.13 NADIR LIMITED

Statement of cash flows for the year ended 31 December 2017
Cash flows from operating activities:
Profit before tax 8,955
Adjustment for:
Depreciation 7,350
Loss on disposal 5,200–4,800 400
Financial charges 1,100
Increase in provision for doubtful receivables (6,840×5÷95) – (4,446×5÷95) 126
17,931
Working capital changes:
31-12-2017 31-12-2016
Stock-in-trade 150
5,600 5,750
Other receivables 2,385–1,800 585 800 215
Trade receivables-gross 7,200 4,680 (2,520)
(6,840÷0.95);(4,446÷0.95)
Trade payables (1,900) (1,400) 500
Accrued exp./Other payables (568) (612) (44)
(680–112);(660–48)
Increase in working capital (1,699)
Cash generated from operations 16,232

Payment of interest 1,100 –112+48 (1,036)

Payment of taxes 2,945–650+500 (2,795)
12,401
Cash flows from investing activities
Additions to PP&E 15,800–7,350–5,200+4,000–21,400 (14,150)
Disposals of PP&E 4,800–1,800 3,000
(11,150)
Cash flows from financing activities
Issue of right shares (12,400–10,000)–(10,000×10%)+1,400 2,800
Loan repaid 5,000–4,100 (900)
Cash dividend paid [(12,440+6,010)–(10,000×10%)]–13,450 (4,000)
(2,100)
Net cash outflows (849)
Cash and cash equivalent at beginning of the year 3,204
Cash and cash equivalent at year-end 2,355

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 Answers

3.14 LIAQUAT INDUSTRIES

Cash flows from operating activities Rupees

Net profit before tax (1,525,948 – 50,000+ 30,000) 1,505,948

Adjustments for:

Depreciation expenses 932,500

Gain on disposal (70,000 – 30,000 – 168,960) (128,960)

Finance cost 141,872

Adjusted profit before working capital changes 2,451,360

Working capital changes:

Accounts receivable (595,452 – 1,273,272) (677,820)

Inventory (320,628 – 685,608) (364,980)

Accounts payable (417,120 – 694,320) (277,200)

Net cash from operating activities 1,131,360

Cash flows from investing activities

Proceed from sale of fixed assets (W-2) 2,020,560

Capital expenditure (1,821,600 – 1,200,000 – 1,478,400) (856,800)

Long term deposits (448,800 – 580,800) (132,000)

Net cash from investing activities 1,031,760

Cash flow from financing activities

Interest paid (105,600 – 63,360 – 141,872) (99,632)

Drawing made by the owner (150,000×12) (1,800,000)

Amount injected by the owner (W-1) 546,832

Repayment of short term loan (1,331,200 – 1,531,200) (200,000)

Net cash used in financing activities (1,552,500)

Net increase in cash and cash equivalents 610,320

Cash at the beginning of year 84,480

Cash at the end of year 694,800

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Financial accounting and reporting I

W-1: Movement in capital account

Opening capital 13,665,280
Less: Drawings (150,000×12) (1,800,000)
Add: Profit (1,525,948–50,000+30,000) 1,505,948
13,371,228
Less: Closing capital (13,938,060+30,000–50,000) 13,918,060
Capital injected 546,832
W-2: Disposal proceeds from sale of fixed assets
Freehold land – Opening 6,600,000
Lees: Freehold land – Closing (4,778,400)
Disposal cost 1,821,600
Add: Gain on disposal of freehold land 168,960
Sale proceeds from disposal of freehold land 1,990,560
Insurance claim received against fixed assets 30,000
2,020,560

3.15 QUALITY ENTERPRISES

Quality Enterprises Statement of cash flows
For the year ended 31 December 2015
Rupees
Cash flow from operating activities
Profit before tax 7,659,000
Non-cash adjustments
Investment income (398,000)
Interest expense 100,000
Depreciation charge 5,280,000
Bad debt expense [(200,000 +(400,000 – 550,000)] 50,000
Profit on disposal of property, plant and equipment (3,440,000–2,481,000) (959,000)

Changes in working capital

Increase in inventories (3,073,000–4,642,000) (1,569,000)
Decrease in trade and other receivables 1,558,000
[(3,865,000–80,000–2,273,000+96,000+(550,000– 400,000– 200,000))]
Decrease in trade and other payables [(4,953,000–(3,337,000–100,000))] (1,716,000)
Net changes in working capital (cash generated from operations) 10,005,000
Income tax paid (W-2) (1,070,000)
Net cash from operating activities 8,935,000

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 Answers

Rupees

Cash flow from investing activities

Purchase of property, plant and equipment (W-3) (16,106,000)

Proceeds from sale of property, plant and equipment (3,440,000+2,599,000) 6,039,000

Investment income received (W-1) 382,000

Purchase of investments (7,645,000 – 6,498,000) (1,147,000)

Net cash used in investing activities (10,832,000)

Cash flow from financing activities

Obtain bank loan 6,000,000

Additional capital (14,219,000 – 10,703,000) 3,516,000

Drawings (3,600,000)

Net cash from financing activities 5,916,000

Net increase in cash and cash equivalents 4,019,000

Cash and cash equivalents at beginning of period (4,000–27,000) (23,000)

Cash and cash equivalents at end of period 3,996,000

W-1: Investment income received Amount in Rs.

Balance b/d 80,000 Cash (balancing) 382,000

Income Statement 398,000 Balance c/d 96,000

478,000 478,000

W-2: Tax paid Amount in Rs.

Taxes paid (balancing) 1,070,000 Balance b/d 994,000

Balance c/d 1,300,000 Income Statement 1,376,000

2,370,000 2,370,000

W-3: Property, plant and Equipment Amount in Rs.

Balance b/d 11,845,000 Disposals (2,481,000+2,599,000) 5,080,000

Revaluation surplus
(8,000,000 5,963,000) 2,037,000 Depreciation 5,280,000

Additions (balancing) 16,106,000 Balance c/d 19,628,000

29,988,000 29,988,000

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Financial accounting and reporting I

3.16 KLEA
Statement of cash flows for the year ended 31st March 2015
Rs. in ‘000
Cash flows from operating activities
Profit before taxation 1,606
Adjustments for:
Depreciation (W4) 800
Finance income (50)
Interest expense 320
––––––
2,676
Increase in trade receivables (400)
Increase in inventories (1,200)
Increase in trade payables 334
––––––
Cash generated from operations 1,410
Interest paid (320)
Income taxes paid (W1) (630)
––––––
Net cash from operating activities 460
Cash flows from investing activities
Purchase of intangible assets (W2) (300)
Purchase of property, plant and equipment (W3) (1,600)
Proceeds from sale of equipment 150
Purchase of long-term investments (200)
Finance income received 50
––––––
Net cash used in investing activities (1,900)

Cash flows from financing activities

Proceeds from issue of share capital (1,000 + 278) 1,278
Payments to redeem debentures (400)
Dividends paid (400)
––––––
Net cash used in financing activities 478
–––––
Net decrease in cash and cash equivalents (962)
Cash and cash equivalents at 1 April 2014 580
–––––
Cash and cash equivalents at 31 March 2015 (32 - 414) (382)

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(Note: Alternative classifications of the cash flows in accordance with IAS 7 should receive full credit
– i.e. interest and dividends received as investing activities or operating cash flows, interest and
dividends paid as financing or operating cash flows.)
Notes
(1) Analysis of cash and cash equivalents Rs. in ‘000

2015 2014
Cash on hand and balances with bank 32 580
Bank overdraft (414) -
–––– ––––
Cash and cash equivalents (382) 580
–––– ––––

(2) Material non-cash transactions

During the year land was re-valued upwards by Rs.1million
Workings Rs. in ‘000
(W1) Taxation paid
Taxation creditor brought forward 400
Taxation expense for period 650
––––––
1,050
Taxation creditor carried forward (420)
––––––
Taxation paid in the year 630
––––––

(W2) Intangible assets

Net book value brought forward 200
Capitalised in the year (from (i)) 300
––––
500
Amortisation charged in year (from (i)) (200)
––––
Intangibles acquired in the year 300
––––

(W3) Property, plant and equipment

Cost brought forward 3,000
Revaluation in year (from (ii)) 1,000
Disposals (from (iii)) (600)
Additions (balancing figure) 1,600
––––––
Cost carried forward 5,000
––––––

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(W4) Depreciation and amortisation

Depreciation (150 movement + 500 on disposal) 650
Amortisation 200
Profit on disposal (W5) (50)
––––
Charge shown in statement of profit or loss 800
––––
Hence add back of depreciation and amortisation also takes account of the profit on disposal of
the plant and machinery.
(W5) Disposal
Cost of disposal 600
Accumulated depreciation (500)
––––
Net book value 100
Proceeds of sale 150
––––
Profit on sale 50
––––

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CHAPTER 4 – INCOME AND EXPENDITURE ACCOUNTS

4.1 GILTAN GOLF CLUB
Income and expenditure account for Giltan Golf Club for year ending 31 March 2016
Rs.(000) Rs.(000)
Income
Functions surplus (367  305) 62
Sale of land (1,600  500) 1,100
Bank interest 60
Bequest 255
Sundry income 46
Subscriptions(W1) 2,860
4,383
Expenditure
Bad debts 15
Repairs 146
Telephone (67  14 + 10) 63
Heat and light (115  32 + 40) 123
Salaries and wages (2,066  12 + 14) 2,068
Sundry expenses 104
Depreciation - building 190
Depreciation - furniture 103
Depreciation - fixtures and fittings 47
(2,859)
Surplus for the year 1,524
Giltan golf club: Statement of financial position as at 31 March 2016
Non-current assets Cost Accumulated Carrying
depreciation amount
Rs.(000) Rs.(000) Rs.(000)
Land (4,000 – 500) 3,500 - 3,500
Buildings(W3) 3,800 (1,050) 2,750
Fixtures and fittings(W4) 470 (129) 341
Furniture(W5) 515 (267) 248
8,285 (1,446) 6,839
Current assets
Bank 2,402
9,241

Accumulated Fund(W2) 7,618

Surplus for the year 1,524
9,142
Current liabilities
Accruals 64
Subscriptions in advance 35
99
9,241

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Workings
W1 Subscriptions account
Rs.(000) Rs.(000)
Subs in arrears b/d 80 Subs in advance b/d 30
Income and expenditure 2,860 Bank 2,930
Subs in advance c/d 35
_____ Bad debts 15
_____
2,975
_____ 2,975
_____

W2 Opening statement of affairs 2015

Assets Rs.(000)
Bank 682
Subscriptions in arrears 80
Land 4,000
Buildings (3,200  860) 2,340
Fixtures (470  82) 388
Furniture (380  164) 216
Liabilities 7,706
Accruals (58 + 30) (88)
7,618

W3 Buildings

Cost Acc. Depreciation

Rs.(000) Rs.(000)
Balance b/d 3,200 860
Extension to clubhouse 600
Depreciation (5%  3,800) 190
3,800 1,050

W4 Fixtures and fittings

Cost Acc. Depreciation

Rs.(000) Rs.(000)
Balance b/d 470 82
Depreciation (10%  470) 47
470 129

W5 Furniture

Cost Acc. Depreciation

Rs.(000) Rs.(000)
Balance b/d 380 164
Additions 135
Depreciation (20%  515) 103
515 267

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4.2 LANGTON HOCKEY CLUB

Income and Expenditure Account for the year ended 30 June 2016
Rs.(000) Rs.(000)
Income
Profits from tea stall (W1) 260
Profit from annual fair (2,150 - 1,450) 700
Subscriptions (W4) 2,100
Profit on sale of table tennis table (40 - 30) 10
_____

3,070
Expenditure
Rent (600 + 40 - 50) 590
Net expense of outings (370 - 300) 70
Prizes for whist evenings 90
Repairs to snooker table 35
Refreshments 240
Depreciation (W2) 556
___
1,581
_____
Excess of income over expenditure 1,489
_____

Statement of financial position as at 30 June 2016

Rs.(000) Rs.(000)
Assets
Non-current assets
Sports equipment 2,224

Current assets
Inventories for tea stall 60
Subscriptions due (4  20) 80
Prepayments - rent 50
Bank (W3) 1,805
______

1,995
_____

Total assets 4,219

_____
Equity and liabilities

Accumulated fund b/f (W5) 2,540

Excess of income over expenditure 1,489
_____
4,029
Current liabilities
Trade payables (tea stall) 190
_____
Total equity and liabilities 4,219
_____

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Workings
(W1) Tea stall
Rs.(000) Rs.(000)
Opening inventory 120
Purchases (900 - 110 + 190) 980
_____

1,100
Less: Closing inventory 60
_____

Cost of sales 1,040

_____

Sales 1,040  10080 1,300

Cost of sales 1,040
_____

Gross profit 1,300  20% 260

_____

(W2)
Opening value of sports equipment 2,560
Less: Table tennis table disposed of (30)
Add: Purchase of new table tennis table 250
_____

2,780
Less: Depreciation (20%  2,780) 556
_____

Book value at 30 June 2016 2,224

_____

(W3)
Cash account
Rs.(000) Rs.(000)

Opening balance 30 Table tennis table 250

Contribution to outings 300 Rent 600
Annual fair takings 2,150 Tea stall purchases 900
Tea stall sales (W1) 1,300 Annual fair 1,450
Subscriptions (1,520 + 400) Outings 370
Sale of table tennis table 1,920 Prizes 90
40 Repairs 35
Refreshments 240
Bal c/f (bal fig) 1,805
_____ _____

5,740 5,740
_____ _____

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(W4) Subscriptions account

Rs.(000) Rs.(000)
Income and Bal. b/f - Family (2  50,000) 100
expenditure(bal fig) 400
2,100 Bank - Family (8  Rs.50,000)
1,520
Bank - Individual (76  20,000)
80
_____ Bal. c/f - Individual (4  20,000) _____
2,100 2,100
_____
_____

(W5) Opening accumulated fund

Rs.(000)

Sports equipment 2,560

Inventory for tea stall 120
Subscriptions in advance (2  50,000) (100)
Rent prepaid 40
Bank 30
Payables for the tea stall (110)
_____

2,540
_____

4.3 GULSHAN CRICKET CLUB

Receipt &payment account for the year ended June 30, 2015
Receipts Rupees Payments Rupees
Balance b/d 1,204,800 Additions: to:
Building 753,000
Subscriptions received 3,605,000 Sports Equipment 186,800
Books 256,000
Investments made 436,000
Expenses (payments)
Balancing 1,591,500
Balance c/d 1,586,500
4,809,800 4,809,800

Income &expenditure account for the year ended June 30, 2015
Expenditures Rupees Incomes Rupees
Expenses A/c 1,558,200 Subscription
(600 x 6000 + 10 x 3000) 3,630,000
Dep. Exp. -Building 338,850
-Furniture 301,200
-Sports
Equipment 398,800
-Books 138,550

Surplus of Income over Exp. 894,400

3,630,000 3,630,000

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Workings
Building Account
Rupees Rupees
6,024,000 Depreciation
Balance b/d (6,438,150×5/95) 338,850
Addition 753,000
Balance c/d 6,438,150
6,777,000 6,777,000

Sports Equipment Account

Rupees Rupees
Depreciation
Balance b/d 1,807,200 (1,595,200 20/80 398,800
Addition 186,800
Balance c/d 1,595,200
1,994,000 1,994,000

Furniture Account
Rupees Rupees
Depreciation
Balance b/d 3,012,000 (2,710,800 10/90 301,200
Balance c/d 2,710,800
3,012,000 3,012,000

Books Account
Rupees Rupees
Depreciation
Balance b/d 1,129,500 (1,246,950 10/90 138,550
Addition 256,000
Balance c/d 1,246,950
1,385,500 1,385,500

Subscription Account
Rupees Rupees
Sub. Receivables - Balance
b/d 326,000 Adv. Subscription - b/d 86,000
Income & Exp. Account 3,630,000 Cash Received 3,605,000
Adv. Subscription - Balance Sub. Receivables - Balance
c/d 92,000 c/d 357,000
4,048,000 4,048,000

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Expenses Account
Rupees Rupees
Balance b/d 122,000 Balance b/d 186,900
Payment made (Rcpt. & Pay. Income & Exp A/c (Bal.
A/c) 1,591,500 Amount) 1,558,200
Balance c/d 207,600 Balance c/d 176,000
1,921,100 1,921,100

4.4 SEHAT CLUB

Sehat Club: Income and Expenditure Account for the year ended 30 June 2015
Amount Amount
Expenditure Income
(Rs.) (Rs.)
Salaries (63.5+4-17.5) 50,000 Subscriptions (201+8-15) 194,000
Rent (34+2-11) 25,000 Entrance fees (63+3) 66,000
Travelling expenses 1,500 Donation (38+12) 50,000
Printing and stationary 1,000 Interest (16-11) 5,000
General charges 2,500 Gain on trade-in of furniture 700
Periodicals 500
Depreciation on furniture *7,820
Depreciation on sports equipment 3,000
Loss on furniture disposed of 2,380
(2880-500)
Excess of income over 222,000
expenditure
315,700 315,700

Sehat Club: Statement of financial position as at 30 June 2015

Assets Rupees
Furniture (see account below) 30,000
Sports equipment (20-3+12) 29,000
Investments (100+200) 300,000
Subscription receivable 8,000
Entrance fee receivable 3,000
Bank balance 30,500
400,500

Equity and liabilities Rupees

General fund
Opening balance 172,500
Add: Excess of income over expenditure 222,000 394,500

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Liabilities:
Salaries payable 4,000
Rent payable 2,000
400,500

Furniture Account
Rupees Rupees
Balance b/d Asset disposed off (4,000 – 2,880
40,000 800 – 320)
New furniture 6,700 Asset exchanged 6,000
Depreciation expense *7,820
Balance c/d 30,000
46,700 46,700
* Depreciation on furniture:
20% of (40,000+6,700–3,200–6,000)=7,500+320 (i.e. 10% of Rs. 3,200).

4.5 AB SPORTS AND SOCIAL CLUB

AB Sports and social club: Income and expenditure account

Rs. Rs.
Subscriptions (W1) 10,720
Shop and cafe profit (W2) 9,200
Sale of sportswear (W3) 1,400
Hire of sportswear (W4) 1,700
Interest on deposit account 800
23,820

Rent of clubhouse 6,000

Heating oil (1,000  4,000  200  700) 4,500
Grounds person 10,000
Bad debts (unpaid subscriptions = 10 +20) 30
Depreciation 500
21,030
Net surplus 2,790

AB Sports and Social Club statement of financial position as at 31 December 2014

Non-current assets Rs. Rs.

Equipment for grounds person
Cost 5,000
Depreciation 4,000
1,000

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Rs. Rs.
Current assets
Heating oil 700
Shop and cafe inventories 5,000
New sportswear 2,000
Hire sportswear 1,500
Subscriptions due 90
Bank
Current account 1,300
Deposit account 16,000
26,590
27,590
Capital and liabilities
Accumulated fund b/f 23,150
Surplus for year 2,790
25,940
Current liabilities
Shop and cafe 800
Sportswear 450
Heating oil 200
Subscriptions prepaid 200
1,650
27,590

Workings
(W1) Subscriptions
Summary subscriptions account
Rs. Rs.
Opening balance (10 + 230) 240 Opening balance 40
Income for period 10,720 Bank 11,000
Bad debts (10 + 20) 30
Closing balance 200 Closing balance 90
11,160 11,160

(W2) Shop and cafe results

Rs. Rs.
Sales 20,000
Opening inventory 7,000
Purchases (9,000  800  1,000) 8,800
15,800
Closing inventory 5,000
10,800
Profit (gross) 9,200

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(W3) Sale of sportswear

Rs. Rs.
Sales 5,000
Opening inventory 3,000
Purchases (4,500  450  300)  2 3 3,100

6,100
Closing inventory 4,000
2,100
Profit (gross) 2,900
Loss on sportswear transferred 1,500
Profit 1,400

(W4) Hire of sportswear

Rs. Rs.
Rentals 3,000
Opening balance 750
Additions of cost (4,500  450  300)  1 3 1,550

2,300
Closing inventory at valuation 1,000
1,300
Surplus 1,700

4.6 GD SPORTS CLUB

(a) The GD sports club: Cafe trading account for the year ended
31 March 2015
Rs. Rs.
Sales (W1) 9,740 + 397 10,137
Opening inventory 840
Purchases (W3) 7,295
Closing inventory (920)
7,215

Cafe profit 2,922

(b) Income and expenditure account for the year ended 31 March 2015
Income Rs. Rs.
Subscriptions (W2) 500
Profit
From cafe 2,922
Building society interest 350
3,772

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Rs. Rs.
Expenditure
Rent of premises 1,000
Heat and light (262 – 34 + 41) 269
Repairs to snooker tables 176
Referees’ fees and expenses 675
Trophies etc. 424
Refreshments for visitors 235
Bad debts (unpaid subscriptions) 10
Depreciation (10%  (4,000 + 100)) 410
3,199
Surplus for the year 573

(c) Statement of financial position at 31 March 2015

Assets Rs. Rs.

Non-current assets:
Equipment at 1 April 2015 4,000
Additions in year – Dartboards 100
4,100
Less: Depreciation (410)
3,690
Current assets:
Cafe inventory 920
Building society deposit 5,200
6,120
9,810

Capital and liabilities

Accumulated fund:
Surplus at 1 April 2015 (W4) 8,726
Surplus for the year 573 9,299
Current liabilities:
Payables
Cafe 470
Heat and light 41
511
9,810

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Financial accounting and reporting I

Workings
(W1)
Cash account
Rs. Rs.
Balance b/d Cash Nil Payments as per note 2 10,577
Subscriptions (W2) 440 Balance c/d Cash Nil
Cafe sales
At cost 397
At normal selling price (bal fig) 9,740
10,577 10,577
Tutorial note: Sales have been found as a balancing figure from the cash account. An
alternative approach is to use the profit margin supplied in the question. Total purchases need to
be computed (W3) and then calculate:
Purchases Sales
Rs. Rs.
At cost 397 397
100
At margin 6,818  9,740
70
7,215 10,137
(W2)
Subscriptions account
Rs. Rs.
Income and expenditure account (bal Balance b/d
fig) 500 (Subs in advance (10 Rs.5)) 50
Cash receipts
((100  10  2)  Rs.5) 440
Bad debt (2 Rs. 5) 10
500 500
(W3)
Cafe purchases account
Rs. Rs.
Cash payments 7,455 Balance b/d 630
Balance c/d 470 Purchases (bal fig) 7,295
7,925 7,925
(W4) Accumulated fund at 31 March 2015
Rs.

Equipment 4,000
Cafe inventory 840
Building society account 4,600
Payables - Cafe (630)
Payables - Heat and light (34)
Subscriptions in advance (50)
8,726

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4.7 HB TENNIS CLUB

(a) HB Tennis Club income and expenditure account for the six months ended 30
September 2015
Rs. Rs.
Income
Subscriptions (W1) 7,050
Net income from tournaments (465  132) 333
Bank interest
Profit from sale of club ties (W2) 103
Life membership (W3) 210
7,739
Expenditure
Groundsman’s wages (4,520  40) 4,560
Rent and rates (636  68) 568
Heating and lighting (674  53) 727
Postage and stationery (41  12) 53
Court maintenance 1,000
Depreciation of equipment (W4) 403
(7,311)
Excess of income over expenditure 428

(b) HB Tennis Club statement of financial position as at 30 September 2015

Rs. Rs.
Non-current assets
Equipment at cost 4,080
Accumulated depreciation (403)
3,677
Current assets
Inventory of ties ( 40100 450) 180
Subscriptions in arrears (5  300  612 ) 750
Rates paid in advance 68
Balance at bank 6,148
7,146
10,823
Accumulated fund
Excess of income over expenditure 428
Life membership fund (W3) 3,990
4,418
Current Liabilities
Subscriptions in advance (12,600  612 ) 6,300
Accrued expenses (40  12  53) 105
6,405

10,823

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(W1) The subscriptions received of Rs.12,600 are for a full year and we are also told that 5
subscriptions were paid after 30 September.

Rs.

Subscriptions paid for 6 month period ( 612  12,600) 6,300

Subscriptions in arrears (5  612  300) 750

Subscription income 7,050

Alternatively this may be presented:

Subscriptions account
Rs. Rs.
Income and expenditure 7,050 Bank 12,600
Bal c/d subscriptions in Bal c/d subscriptions in
advance ( 12  12,600) arrears (5  300  12 )
6 6
6,300 750
13,350 13,350

Note also that the remaining Rs.6,300 that has been paid for subscriptions but which
relates to the six months from 1 October 2015 to 31 March 2016 will be shown as a
creditor, subscriptions in advance, in the statement of financial position.
(W2)

Rs. Rs.

Sale of ties 373

Cost of sales
Purchases 450
Closing inventory ( 40100 450) (1840)

2470
Profit on sale of ties 1043

(W3) The life membership fees paid of Rs.4,200 are to be taken to the income and expenditure
account over 10 years or 120 months. Therefore the amount to be taken to income and
expenditure in this 6 month period is 6/120 Rs.4,200 = Rs.210.
This will leave Rs.4,200 Rs.210 = Rs.3,990 in the Life membership fund on 30
September 2015.
(W4)

Rs.

Cost of equipment 4,080

Less: Estimated scrap value 450
4,030

This is to be depreciated over 5 years or 60 months.

 4,030 = Rs.403.
6
Depreciation charge 60

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4.8 MONARCH SPORTS CLUB

Monarch Sports Club: Income and expenditure account year ended 30 June 2015
Rs. Rs.
Income
Annual subscriptions (W1) 18,400
Life membership (3,000  10%) 300
Entrance fees 2,500
Surplus from competitions (W2) 3,200
24,400
Expenditure
Transport 3,700
Coaching fees (2,100  150 + 450) 2,400
Repairs 800
Bad debts 100
Loss on disposal of equipment (W3) 200
Depreciation (W4) 800
(8,000)
Surplus for the year 16,400

Workings
(W1)
Subscriptions account
Rs. Rs.
Balance b/d (in arrears) 200 Balance b/d (in advance) 1,100
I + E a/c 18,400 Cash
Balance c/d (in advance) 900 Bad debts 100
Balance c/d (in arrears) 300
19,500 19,500

(W2) Competitions
Rs.
Receipts 7,500
Prizes (4,300)
Surplus 3,200

(W3) Sale of equipment

Disposals account
Rs. Rs.
NBV 1,200 Cash 1,000
Loss to I & E a/c 200
1,200 1,200

(W4) Depreciation
20%  4,000 = 800.

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Financial accounting and reporting I

4.9 LH SPORTS CLUB

(a) Surplus for the year

Rs. Rs.
Surplus per draft income and expenditure account 23,655
Add capital expenditure 4,000
Deduct depreciation
Premises 1,600
Furniture 1,800
Equipment 800
(4,200)
Less 80% joining fee (14,240)
Less net subscriptions in advance (960  300) (660)
New surplus for year 8,555

(b) LH Sports Club: Statement of financial position as at 30 April 2015

Assets
Non-current assets Rs. Rs.
Premises 78,400
Furniture 16,200
Equipment 3,200
97,800
Current assets
Inventory 1,400
Subscriptions in arrears 300
Prepaid rates and insurance 2,280
Bank 21,295
25,275
123,075

Capital and liabilities

Accumulated fund at 1 May 2014 98,000
Surplus for year 8,555
Accumulated fund at 30 April 2015 106,555
Joining fees c/f 14,240

Current liabilities
Payables 1,320
Subscriptions in advance 960
2,280
123,075

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Working
Non-current assets Cost Depreciation Net
Rs. Rs. Rs.
Premises 80,000 (1,600) 78,400
Furniture 18,000 (1,800) 16,200
Equipment 4,000 (800) 3,200
102,000 4,200 97,800

4.10 LEISURE CLUB

(a) Determination of amount of loss incurred due to fraud
Rupees
Opening cash balance 300,000

Cash receipts
Collection from members [(3,300 x 10,000) – 19,800,000] 13,200,000
Bank withdrawals 6,120,000
Tuck shop sales (W-2) 22,856,250
42,176,250

Cash payments
Salaries (2,300,000)
Sundry expenses (640,000)
Cash deposited into bank (37,848,500)
(40,788,500)
Closing cash should have been 1,687,750
Closing cash-actual (25,000)
Loss due to fraud 1,662,750
(b) Income and expenditure account
Income Rupees
Subscription income (W-1) 31,817,500
Income from tuck shop (22,856,250(W-2) – 18,285,000 (W-2)) 4,571,250
Other income – Bad debts recovered 1,860,000
38,248,750
Expenditures
Salaries 2,300,000
Insurance 175,000
Rent expense (168,000 + 4,200,000 – 175,000) 4,193,000
Utilities 4,365,000
Repair and maintenance 700,000
Depreciation (W-3.1) 5,847,500
Sundry expenses 640,000
Loss on disposal [750,000 – (800,000 – 40,000)] 10,000
Loss of inventory due to fire 500,000
Loss due to fraud 1,662,750
20,393,250
Excess of income over expenditures 17,855,500

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(c) Statement of Financial Position

2016 2016
Fund and Liabilities Assets
Rupees Rupees

Accumulated fund 39,181,500 Fixed asset - WDV (W-3) 45,742,500

(Balancing)

Creditors 3,330,000 Stock 2,500,000

Unearned subscription (W-1) 11,825,000 Prepaid rent 175,000

Cash and bank 5,919,000

(5,894,000+25,000 )

Total fund and liabilities 54,336,500 Total assets 54,336,500

2015
W-1: Determination of subscription income Rupees

Opening unearned subscription income (11,825,000(W-1.1)×9/10) 10,642,500

Add: Receipts for the year (3,300×10,000) 33,000,000

Less: Closing unearned subscription income (W-1.1) (11,825,000)

Subscription income for the year 31,817,500

W-1.1: Closing unearned subscription income

Quarter - 1 -

Quarter – 2 2,062,500

Quarter – 3 2,750,000

Quarter – 4 7,012,500

11,825,000

W-2: Tuck shop sales & cost of sales

Opening stock 2,300,000

Add: Purchases of stock (W-2.1) 18,985,000

Less: Loss due to fire, charged to expenditures (500,000)

Less: Closing stock (2,500,000)

Cost of goods sold 18,285,000

Sales (18,285,000/0.80) 22,856,250

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2015
W-2.1: Purchases of tuck shop Rupees

Closing creditors 3,330,000

Add: Payments to creditors 18,155,000

Less: Opening creditors (2,500,000)

Purchases 18,985,000

W-3: Fixed assets and depreciation

Opening WDV before disposal 28,000,000

Add: Addition (7,350,000 + 17,000,000) 24,350,000

Less: WDV of assets disposed off (800,000 – 40,000) (760,000)

Less: Depreciation for the year (W-3.1) (5,847,500)

Closing WDV 45,742,500

W-3.1: Depreciation

Depreciation on opening WDV [(28,000,000–800,000)×20%] 5,440,000

Depreciation on disposed asset (800,000×20%×3/12) 40,000

Depreciation on addition (7,350,000×20%×3/12) 367,500

Depreciation for the year 5,847,500

4.11 SEAVIEW CLUB

Seaview Club
Income & Expenditure Account
For the period ended 31 December 2015
Expenditure Rs.in ‘000 Income Rs.in ‘000
Salaries and wages 1,089 Joining fee 20,800
(1000-10+99)
Rent (3,600/3x11/12) 1,100 Subscription income (W-1) 4,630
Utilities (570-20+55) 605 Profit on sale of beverages 330
(W-2)
Insurance (120/12x11) 110
Repairs and maintenance 182
(275–100+7)
Depreciation expense 385
(1,200x10%x11/12+1,500x20%x11/12)
Excess of income over expenditure 22,289
25,760 25,760

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Financial accounting and reporting I

Statement of Financial Position

As at 31 December 2015

General Fund & Liabilities Rs. in ‘000 Assets Rs. in ‘000

General fund 50,000 Non-Current Assets

Excess of income over 22,289 Land/Capital advance 65,000

expenditure

72,289 Furniture & fixtures (1,200 110) 1,090

Van (1,500 275) 1,225

Deferred income/long term Advance for parking shed 100

advance (W-1)
15,338 Long term deposits 20

Long term prepayment 1,300

Current Liabilities 68,735

Creditors (1,760 – 1,367) 393 Current Assets

Accrued expenses (7+55+99) 161 Stock (W-2) 440

Advance subscription (W-1) 9,984 Debtors for beverages (credit 150

sale)

10,538 Advance & prepayments (W-3) 1,220

Bank 27,620

29,430

Total General Fund & Liabilities 98,165 Total Assets 98,165

W-1: Subscription income

Subscription for 3 years is Rs. 72,000 so subscription for 1 year is Rs. 24,000 or Rs. 2,000 per
month

No. of No. of Subscription income Deferred subscription

members months for the year income
Month
A×B×2,000 A×(36 B)×2,000
A B
--------------- Rupees ---------------

March 112 10 2,240,000 5,824,000

June 98 7 1,372,000 5,684,000

September 101 4 808,000 6,464,000

December 105 1 210,000 7,350,000

4,630,000 25,322,000

Less: Short term [(112+98+101+105)×24,000] (9,984,000)

Long term 15,338,000

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 Answers

W-2: Beverage sale results Rs. in ‘000

Sales (1,500 + 150) 1,650

Less: Cost of sales 1,760

Purchases (1,320/0.75) (440) 1,320

Closing stock (1,760×25%) 330

W-3: Advance & prepayments Rs. in ‘000

Rent [(3,600–1,100)–1,300(long term)] 1,200

Insurance (120 – 110) 10

Advance salary 10

1,220

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Financial accounting and reporting I

CHAPTER 5 – PREPARATION OF ACCOUNTS FROM INCOMPLETE RECORDS

5.1 SHORT QUESTIONS
a)
Rs.
Sales 98,000
Cost of sales (98,000  100/125) 78,400

Opening inventory 10,200

Purchases 71,000
81,200
Less: closing inventory (bal fig) (2,800)
Cost of sales 78,400
b)
Receivables account
Rs. Rs.
Opening balance 6,100 Takings (78,500 + 5,000) 83,500
Sales (bal fig) 84,800 Closing balance 7,400
–––––––– ––––––––
90,900 90,900
–––––––– ––––––––
c)
Assets Rs. Rs.
Non-current assets 98,900
Inventory 9,300
Receivables 16,800
125,000
Liabilities
Capital 97,200
Bank loan 15,700
Trade payables 4,900
117,800
Assets exceed liabilities: therefore bank overdraft 7,200

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 Answers

5.2 IRUM
a)
Cash account
Rs.000 Rs.000
Opening balance 100 Bankings 65,400
Wages (50 x Rs.50,000) 2,500
Drawings (50 x Rs.30,000) 1,500
Cash takings (bal fig) 69,400 Closing balance 100
69,500 69,500

Total receivables account

Rs.000 Rs.000
Balance b/d 5,500 Cash takings 69,400
Sales (bal fig) 70,000 Closing balance 6,100
75,500 75,500
b)
Sales (part a) = Rs.70,000,000
Cost of sales = Rs.70,000,000 x 100/140 =Rs.50,000,000

Total payables account

Rs.000 Rs.000
Payments to suppliers 42,800 Opening balance 2,800
Closing balance 3,500 Purchases (bal fig) 43,500
46,300 46,300

Cost of sales
Rs.000
Opening inventory 10,400
Purchases 43,500
53,900
Less: closing inventory (3,900)
(balancing figure)
Cost of sales (above) 50,000

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Financial accounting and reporting I

5.3 COST STRUCTURES

(a) Greengrocer
% Rs. Rs.
Sales revenue 100 49,200
Less Cost of goods sold
Opening inventory 3,784
Purchases 38,632
———
42,416
Less Closing inventory (5,516)
(75) ——— (36,900)
—— ———
Gross profit 25 12,300
—— ———
(b) Rival
% Rs.
Sales revenue 125 50,100
100
Cost of goods sold (  Rs.50,100 = Rs.40,080) (100) (40,080)
125
—— ———
Gross profit 25 10,020
—— ———

Opening inventory (al fig) 7,192

Purchases 38,326
———
45,518
Less Closing inventory (5,438)
———
Cost of goods sold 40,080
———
(c) Local store
% Rs.
Sales revenue 100 186,460
Cost of goods sold (90) (167,814)
—— ———
Gross profit (10%  Rs.186,460) 10 18,646
—— ———

100 13,440
Opening inventory (  Rs.16,800)
125
Purchases (al fig) 171,174
————
184,614
Closing inventory (16,800)
————
Cost of goods sold 167,814
————

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 Answers

5.4 TAHIR
Statement of comprehensive income for the year ended 30 June 2015
Rs.000 Rs.000
Revenue (74 + 16,427 + 3,024 + 54) 19,579
Opening inventory 1,142
Purchases (14,700 + 1,606 + 470) 16,776
17,918
Closing inventory (1,542)
(16,376)
Gross profit 3,203
Less Expenses
Rent (500 – 100) 400
Rates (84 + 30) 114
Electricity 92
Wages 742
Sundry expenses 156
Depreciation (10%  Rs. 1,580,000) 158
Loan interest (5%  Rs. 1,000,000) 50
(1,712)
Net profit 1,491
Statement of financial position at 30 June 2015
Rs.000 Rs.000
Non-current assets
Intangible – Goodwill (3,192 – 1,500 – 1,142) 550
Tangible – Fixtures and fittings (1,500 + 80 – 158) 1,422
1,972
Current assets
Inventory 1,542
Receivables 74
Prepaid rent 100
Bank 2,657
Cash in hand 54
4,427
6,399

Capital account
Capital introduced 5,000
Profit for the year 1,491
6,491
Drawings (1,122 + 520) (1,642)
4,849
Non-current liability
Loan 1,000

Current liabilities
Trade payables 470
Accrued expenses (30 + 50) 80
550
Total capital and liabilities 6,399

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Financial accounting and reporting I

5.5 IJAZ
Statement of comprehensive income for the year ended 31 December 2015

Rs.000 Rs.000
Revenue (W2) 5,877
Opening inventory 1,310
Add Purchases (W3) 3,133
4,443
Less Closing inventory (1,623)
(2,820)
Gross profit 3,057
Expenses (W4) 1,090
Bad debts (W6) 49
Depreciation (W7) 60
(1,199)
Net profit 1,858
Statement of financial position at 31 December 2015
Rs.000 Rs.000 Rs.000
Non-current asset
Delivery van, at cost 900
Less Depreciation (W7) (60)
840
Current assets
Inventory 1,623
Receivables 382
Less Provision for doubtful debts (W6) (19)
363
Cash at bank 572
Cash in hand 29 601
2,587
Total assets 3,427

Capital account
At 1 January 2015 (W1) 1,652
Add Profit for year 1,858
3,510
Less Drawings (W5) (1,100)
2,410
Current liabilities
Trade payables 914
Accrued expenses 103
1,017
Total capital and liabilities 3,427

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 Answers

Workings
(1) Opening statement of affairs
Rs.000
Inventory 1,310
Receivables 268
Cash 62
Bank 840
———
2,480
Less Payables (712 + 116) (828)
———
Capital at 1 January 2015 1,652
———
(2) Total sales (receivables) a/c

1 Rs.000 Rs.000
Balance b/d 268 Cheques receipts from
customers 1,416
Revenue for year (al fig) 5,877 Bad debt written off 30
Cash takings 4,317
Receivables c/d (412 – 30) 382
——— ———
6,145 6,145
——— ———

Balance b/d 382

(3) Total purchases (payables) a/c

2 Rs.000 Rs.000
Cash 316 Balance b/d 712
Bank 2,715 Drawings 100
Balance c/d 914 Purchases for year (al fig) 3,133
——— ———
3,945 3,945
——— ———

Balance b/d 914

(4) Expenses

3 Rs.000 Rs.000
Cash 584 Balance b/d 116
Bank 519 P & L a/c 1,090
Balance c/d 103
——— ———
1,206 1,206
——— ———

Balance b/d 103

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(5) Drawings

4 Rs.000 Rs.000
Purchases 100
Cash a/c 600
Bank a/c 400 Balance c/d (or trf capital) 1,100
——— ———
1,100 1,100
——— ———

(6) Bad debts a/c

5 Rs.000 Rs.000
Bad debt (w/off receivables) 30 P & L a/c 49
Provision for doubtful debts
a/c (5%  382) (increase) 19
—— ——
49 49
—— ——

(7) Depreciation
20%  900,000 4/12 = Rs.60,000

5.6 RASHID
Statement of comprehensive income for the year ended 30 September 2015

% Rs.000 Rs.000
Revenue (W8) 100 142,850
Opening inventory –
Purchases (balancing figure) 115,538
Closing inventory (8,400)
Cost of sales (75) (107,138)
Gross profit 25 35,712
Expenses
Cleaning 520
Sundries 780
Depreciation
Van 1,500
Leasehold premises 3,000
Telephone (W4) 1,021
Wages (W3) 19,182
Rent and rates (W5) 1,424
Repairs (W7) 4,022
(31,449)
Net profit 4,263

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 Answers

Statement of financial position at 30 September 2015

Cost Depn
Rs.000 Rs.000 Rs.000
Non-current assets
Leasehold premises 150,000 3,000 147,000
Van 6,000 1,500 4,500
156,000 4,500 151,500
Current assets
Inventory 8,400
Trade receivables 10,350
Prepayment (W5) 258
Cash at bank 61,313
Cash in hand 250
80,571
Total assets 232,071

Capital account
Capital introduced 200,000
Add Net profit 4,263
204,263
Less Drawings (W2) (2,274)
201,989
Current liabilities
Trade payables 29,957
Accrued expenses (W4) 125
30,082
Total capital and liabilities 232,071

Workings
(1) Cash

6 Rs.000 Rs.000
Balance b/d Nil Wages (75  52) 3,900
Total sales (al fig) 132,500 Cleaning (10  52) 520
Sundries (15  52) 780
Drawings (25  52) 1,300
Bank 125,750
Balance c/d 250
———— ————
132,500 132,500
———— ————

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Financial accounting and reporting I

(2) Drawings

7 Rs.000 Rs.000
Cash 1,300 Balance c/d (or trf capital) 2,274
Bank 323
Total purchases (W6) 651
——— ———
2,274 2,274
——— ———

(3) Wages

8 Rs.000 Rs.000
Cash 3,900 P & L a/c 19,182
Bank 15,282
——— ———
19,182 19,182
——— ———

(4) Telephone

9 Rs.000 Rs.000
Bank 896 P & L a/c 1,021
Balance c/d 125
——— ———
1,021 1,021
——— ———

(5) Rent and rates

10 Rs.000 Rs.000
Bank 1,682 P & L a/c 1,424
Balance c/d 258
——— ———
1,682 1,682
——— ———

(6) Total purchases (payables)

11 Rs.000 Rs.000
Bank 86,232 Trading a/c 115,538
Balance c/d 29,957 Goods for own use (al fig) 651
———— ————
116,189 116,189
———— ————

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 Answers

(7) Repairs

12 Rs.000 Rs.000
Bank 3,637 P & L a/c 4,022
Bank 385
——— ———
4,022 4,022
——— ———

(8) Total sales (receivables)

13 Rs.000 Rs.000
Trading a/c (al fig) 142,850 Cash (W1) 132,500
Balance c/d 10,350
———— ————
142,850 142,850
———— ————

5.7 MUDASSAR
Statement of comprehensive income for the year ended 31 December 2015

Rs.000 Rs.000
Revenue (W4) 21,910
Cost of sales
Opening inventory 900
Purchases (W3) 14,110
15,010
Closing inventory (1,200)
(13,810)
Gross profit 8,100
Less Expenditure
Rent (800 + 20 – 30) 790
Rates 400
Insurance 200
Bank charges 100
Assistant’s wages 1,800
Discounts (net) (300 – 200) 100
Sundry expenses 250
Depreciation
Car 400
Fixtures 600
(4,640)
Net profit 3,460

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Financial accounting and reporting I

Statement of financial position at 31 December 2015

Rs.000 Rs.000
Non-current assets
Motor car 3,200
Fixtures 3,400
6,600
Current assets
Inventory 1,200
Trade receivables and prepayments (150 + 30) 180
Insurance company claim (W2) 460
Bank 400
2,240
Total assets 8,840

Rs.000 Rs.000
Capital account b/f (W1) 9,160
Add Capital introduced 1,000
10,160
Profit for the period 3,460
13,620
Less Drawings (2,500 + 2,400) 4,900
8,720
Current liabilities
Trade payables 120
Total capital and liabilities 8,840

Workings
(1) Statement of affairs as at 31 December 2014
Rs.000

Motor car 3,600

Fixtures 4,000
Inventory 900
Receivables 90
Prepayments 20
Bank 280
Cash 380
———
9,270
Less Trade payables (110)
———
9,160
———

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 Answers

(2) Cash a/c

14 Rs.000 Rs.000
Balance b/f 380 Wages 1,800
Customers’ receipts 21,550 Sundry expenses 250
Purchases 300
Drawings 2,400
Bankings 16,720
Defalcation (theft!) 460
——— ———
21,930 21,930
——— ———

(3) Total purchases (payables)

15 Rs.000 Rs.000
Cash 300 Balance b/f 110
Bank 13,600 Purchases 14,110
Discounts received 200
Balance c/d 120
——— ———
14,220 14,220
——— ———

(4) Total sales (receivables)

16 Rs.000 Rs.000
Balance b/f 90 Receipts 21,550
Sales 21,910 Discounts allowed 300
Balance c/f 150
——— ———
22,000 22,000
——— ———

5.8 ASLAM
Statement of comprehensive income for the year ended 31 December 2015
Rs.000 Rs.000 Rs.000
Work done (= Revenue) (W3) 13,066
Direct expenses
Materials (W2) 5,779
Wages and Social Security (3,346 – 65) 3,281 9,060
Van expenses
Running costs (342 + 36) 378
Depreciation 108 486
Miscellaneous expenses
Electricity 56
Depreciation of cement mixer 50
Rent 104
General expenses (14 + 110) 124 334
(9,880)
Net profit for the year 3,186

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Financial accounting and reporting I

Statement of financial position at 31 December 2015

Rs.000 Rs.000 Rs.000
Non-current assets Cost Depn
Van 856 108 748
Cement mixer 200 50 150
1,056 158 898

Current assets
Inventory 560
Trade receivables 1,200
Balance at bank 204
Cash in hand (W1) 10
1,974
Total assets 2,872

Capital account
Capital introduced 150
Add Profit for the year 3,186
3,336
Less Drawings (936 – 104 + 65 + 342) (1,239)
2,097
Non-current liability
Loan account – mother 400

Current liabilities
Trade payables 149
Accrued expenses 36
Van instalments (5  38) 190
375
2,872

Workings
(1) Cash a/c

17 Rs.000 Rs.000
Bank a/c (cash from bank) 3,100 Bank a/c (bankings) 9,204
Work done a/c (al fig = Wages a/c 3,281
takings) 11,866 Drawing a/c (private NIC) 65
Materials a/c 1,400
Electricity a/c 56
General expenses a/c 14
Drawings a/c (52  16) 832
Rent a/c 104
Balance c/d (cash in hand) 10
——— ———
14,966 14,966
——— ———

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 Answers

(2) Materials a/c

18 Rs.000 Rs.000
Cash a/c 1,400 Balance c/d (inventory) 560
Bank a/c 4,790 P & L a/c 5,779
Balance c/d (liability) 149
——— ———
6,339 6,339
——— ———
(3) Work done a/c

19 Rs.000 Rs.000
P & L a/c 13,066 Cash a/c 11,866
Balance c/d 1,200
——— ———
13,066 13,066
——— ———

5.9 UMAR
To get sales and purchases, start with the cash account and then move on to the total accounts.
Many incomplete records questions require the use of these “collection” accounts to find missing
balances.
(a) Capital at 1 January 2015
Assets Liabilities
Rs.000 Rs.000
Operating overdraft 1,172
Cash in till 20
Inventories 4,500
Trade receivables 2,800
Brough’s loan
Principal 4,000
Accrued interest (40000  3% 3/12) 30
Accrued general expenses 240
Rates in advance 40
Fixtures 2,800
Trade payables 1,800
Accrued light and heat 80
10,160 7,322
(7,322)
Net assets – Capital account 2,838

(b) Statement of comprehensive income for the year ended 31 December 2015
Rs.000 Rs.000 Rs.000
Revenue (W2) 39,156
Opening inventory 4,500
Purchases (W3) 31,420
35,920
Less Closing inventory (5,800)
(30,120)
Gross profit 9,036

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Financial accounting and reporting I

Administrative expenses
Rent and rates (475 + 40 – 50) 465
Light and heat (210 – 80 + 70) 200
Wages 2,950
Depreciation of fixtures (2,880 + 100 – 2,550) 350
Sundry expenses (140 + 800 – 240 + 190) 890 4,855
Financing costs
Loan interest 120
Bad debt 200
Discounts (net) (520 – 480) 40 360
(5,215)
Net profit for the year 3,821

(c) Statement of financial position at 31 December 2015

Rs.000 Rs.000
ASSETS
Non-current assets
Tangible assets at cost less depreciation
Fixtures 2,550
Current assets
Inventories 5,800
Trade receivables 3,000
Prepayment 50
Cash (993 – 320 + 20) 693 9,543
Total assets 12,093

CAPITAL AND LIABILITIES

Capital account
At 1 January 2015 (per (a)) 2,838
Add Net profit for the year (per (b)) 3,821
6,659
Less Drawings (156 + 900) (1,056)
5,603
Non-current liabilities
Loan – Brough 4,000
Current liabilities
Trade and other payables (2,200 + 190 + 70 + 30) 2,490
Total capital and liabilities 12,093

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 Answers

Workings

(1) Cash and bank a/cs

Cash Bank Cash Bank

Rs.000 Rs.000 Rs.000 Rs.000
Balance b/f 20 Balance b/f 1,172
Bank (cheques cashed) 250 Purchases 30,540
Cash (bankings) 35,170 Rent and rates 475
Sales (cash takings) 38,416 Fixtures 100
Light and heat 210
General expenses 140 800
Loan interest 120
Drawings (52  3) 156 900
Sales (dishonoured
cheques) 180
Wages 2,950
Bank
Cheques cashed 250
Bankings 35,170
Balance c/f 20 673
——— ——— ——— ———
38,686 35,170 38,686 35,170
——— ——— ——— ———

Tutorial note: This working is not specifically required therefore no marks are awarded to it.

(2) Sales (or total receivables) a/c

20 Rs.000 Rs.000
Balance b/f 2,800 Cash a/c (takings) 38,416
Bank a/c Discounts allowed a/c 520
(dishonoured cheques) 180 Bad debts a/c 200
Trading a/c (al fig) 39,156 Balance c/f 3,000
——— ———
42,136 42,136
——— ———

(3) Purchases (or total payables) a/c

21 Rs.000 Rs.000
Bank a/c 30,540 Balance b/f 1,800
Discounts received a/c 480 Trading a/c (al fig) 31,420
Balance c/f 2,200
——— ———
33,220 33,220
——— ———

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Financial accounting and reporting I

5.10 YASIN
Statement of comprehensive income for the year ended 31 December 2015
Rs.000 Rs.000
Revenue (W1) 25,965
Opening inventory 1,600
Purchases (15,346 (W2) + 165 – 104) 15,407
———
17,007
Less Closing inventory (2,360)
——— (14,647)
———
Gross profit 11,318
Expenses
Selling and distribution costs
Wages 3,423
Wrapping materials (525 – 53) 472
Motor expenses (728 + 236) 964
Bad debts (223 + 100) 323
Depreciation of van (1,200  20% 9/12) 180
——— (5,362)
Administrative expenses
Rates (500 – 125 + 100) 475
General expenses 625
Electricity (228 + 50) 278
Depreciation of fixtures (2,600 – 200)  10% 240
Loss on disposal of fixtures (200 – 130) 70
Loan interest (100 + 50) 150
Accountancy costs 100
——— (1,938)
———
Net profit for the year 4,018
———
Statement of financial position at 31 December 2015

Cost Depn
ASSETS Rs.000 Rs.000 Rs.000
Non-current assets
Property, plant and equipment
Freehold property 10,000 – 10,000
Fixtures (2,600 – 200) 2,400 240 2,160
Delivery van 1,200 180 1,020
——— ——— ———
15,600 420 13,180
——— ———
Goodwill 2,000 – 2,000

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 Answers

Cost Depn
Rs.000 Rs.000 Rs.000
Current assets
Inventories 2,360
Trade receivables (637 – 100) 537
Prepayments (125 + 53) 178
Cash (5,757 – 125) + 180 5,812
———
8,887
———
Total assets 24,067
———

CAPITAL AND LIABILITIES Rs.000 Rs.000

Capital
Capital at 1 January 2014 20,000
Net profit for the year 4,018
———
24,018
Drawings (1,040 + 104 + 1,329 + 36 (W3)) (2,509)
———
21,509
Non-current liabilities
Loan 2,000
Current liabilities
Trade and other payables (358 + (50 + 50 + 100)) 558
———
Total capital and liabilities 24,067
———

Workings
(1) Trade receivables control a/c

22 Rs.000 Rs.000
Balance b/f 400 Cash received 25,505
Sales (al) 25,965 Bad debt 223
Balance c/f 637
——— ———
26,365 26,365
——— ———
Balance b/f 637

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Financial accounting and reporting I

(2) Trade payables control a/c

23 Rs.000 Rs.000
Bank 14,863 Credit purchases (al) 15,346
Bank (unpresented cheque) 125
Balance c/f 358
——— ———
15,346 15,346
——— ———

Balance b/f 358

(3) Cash a/c

24 Rs.000 Rs.000
Cash received 25,505 Wrapping materials 525
Staff wages 3,423
Purchases for resale 165
Petrol and oil 236
Drawings (20  52) 1,040
Cash banked 19,900
Balance c/f 180
Difference (drawings) (al) 36
——— ———
25,505 25,505
——— ———

5.11 MUNIRA
(i) Purchases ledger control account
Rs. 000 Rs. 000
Cash 12,700 Bal b/f 8,000
Trade discount Received Purchases (Credit)
(not to be booked) 0 Balancing figure 13,930
Bal c/f (9,500 + 470 – 740) 9,230
21,930 21,930

(ii) Sales ledger control account

Rs. 000 Rs. 000
Balance b/f 2,000 Bank (18,000–500+860) 18,360
Credit sales
(balancing figure) 20,520 Discount allowed 360
Bad debts 200
Balance c/d 3,600
22,520 22,520

(iii) Cost of Sales as per record Rs. 000

Opening Inventory 12,500
Add: Purchases (W-1) 13,930
Goods available for sale 26,430
Less: Closing Inventory 8,500
Cost of sales – as per record 17,930

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(iv) Cost of sales on mark-up basis

Description Sales (Rs.000)
Total normal and old inventory sales (as per (ii) above): 20,520
Sale of defective inventories:
Cost (4% of 13,930 = 557)
Normal sale price (557 x 1.20) = 668
Sales at 70% of 668 (468)
20,052
Sales to staff 315
Cost of sales at Standard Mark-up

Staff (315 100/105) 300

Cost of defective inventories (4% of 13,930) 557

Normal sales (20,052100/120) 16,710

17,567
Less: Cost of sales as per record (see (iii) above) (17,930)
Shortage of inventory 363

5.12 ADNAN
Adnan: Statement of comprehensive income for the year ended December 31, 2015

Rs. Rs.
Sales (W) 1,774,815
Opening inventory 15,700
Purchases (130,800+1,423,800 – 116,100) 1,438,500

1,454,200
Closing inventory (27,500)
1,426,700

Gross profit 348,115

Less expenses:
Wages 106,800
Rent (3,500×9) + (4,500×3) 45,000
Electricity & telephone (33,0000+8,800) 41,800
Depreciation (285,000×0.1)+(75,000×0.1×6/12) 32,250

(225,850)

Net profit 122,265

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Adnan: Statement of financial position as at 31 December

Assets 2015 2014
Rs. Rs.
(see note)
Non-current assets (285,000 + 75,000 – 32,250) 327,750
285,000
Inventory 27,500 15,700
Receivables 80,900 48,700
Bank 103,400 349,100
Cash 700 14,300
540,250 712,800

Capital and liabilities Rs. Rs.

Capital Account (Bal. Figure) 396,150 593,200
Sundry payables 130,800 116,100
Outstanding expenses:
Rent 4,500 3,500
Electricity & Telephone 8,800 -
540,250 712,800
Note: The statement of financial position for 2014 is not a part of the requirement, but has been
prepared for computing opening balance of capital.

Cash shortage Rs.

Opening Capital on December 31, 2014 593,200
Profit for the year 122,265
Less: Drawings (122,600)
Capital on December 31, 2015 396,150
Cash shortage (196,715)

Working

Computation of sales
Cost of sales (15,700 + 1,438,500 – 27,500) 1,426,700

Sales
Cost of cash sales (20% of 1,426,700) 285,340
Adjusting for mark up  1.22
Cash sales 348,115

Cost of credit sales (80% of 1,426,700) 1,141,360

Adjusting for margin 100/80
Credit sales 1,426,700
Total 1,774,815

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5.13 ASIF
Mr. Asif: Statement of comprehensive income for the year ended June 30, 2015
Rs. Rs.
Cash sales(W4) 709,750
Credit sales(W6) 2,996,000
Less: Returns (15,000)
3,690,750
Cost of goods sold:
Opening inventory 482,500
Add: Purchases 2,570,000
3,052,500
Less: Closing inventory (including inventory at cost on sale or
return basis)(W1) (592,000)
2,460,500
Gross profit 1,230,250
Discounts received 30,300
1,260,550
Less expenses
Salaries 440,400
Trade expenses
(212,500+19,000+53,800–21,700 – 9,700+25,000) 278,900
Interest on loan (6% of 500,000) 30,000
Provision for doubtful debts (4,200 – 3,700) 500
Loss on sale of furniture(W2) 73,600
Depreciation for year(W3) 57,700
(881,100)
379,450
Commission- (5/105 of 379,450) (18,069)
Net profit for the year 361,381

Statement of financial positionas at June 30, 2015

Non-current assets Rs. Rs.

Land and building at cost 130,000
Furniture

Cost: (825-280+64) 609,000

Less: Depreciation(485-84+57.7) (458,700)

150,300

280.300

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Current assets Rs. Rs.

Inventory (580,000 + 12,000) 592,000

Receivables 582,500
Less: Provision (27,000 + 500) (27,500)

555,000
Prepayments 9,700
Bank balance (3,818,150-24,200-3,249,000) 544,950
Cash in hand (W5) 10,000

1,711,650

1,991,950

Capital and liabilities

Asif-capital on July 1 613,300
Add: Net profit 361,381

974,681
Less: Drawings (60,000)

914,681
Non-current liabilities
6% Loan on mortgage 500,000
Add: Accrued interest (30,000–22,500) 7,500
507,500
Current liabilities
Trade payables (W7) 530,200
Accrued expense 19,000
Advance from customer 2,500
Due to manager 18,069

569,769
1,991,950

Workings:
1. Closing inventory Rs.
Inventory on premises 580,000
Add: Inventory with customers on sale or return (Rs.18,000/1.2) 12,000

592,000

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2. Non-current assets disposal Rs.

Cost of furniture 280,000
Less: Three years depreciation at 10% p.a. on cost: 3×28,000 84,000

Book value on July 1, 2014 196,000

Less: Sales proceeds 122,400

Loss on sale 73,600

3. Depreciation
(i) On Rs.825,000-Rs.280,000 = Rs.545,000 at 10% p.a. 54,500
(ii) On Rs.64,000 at 10% p.a. for six months 3,200
57,700

4. Cash Sales
Cost of goods sold 2,460,500
1/3 of selling price i.e. 33-1/3% of selling price = 50% of cost
Therefore, total sales would be (2,460,500×1.5) 3,690,750
Less: Credit sales – net (2,996,000 – returns 15,000) 2,981,000

Cash sales 709,750

5. Cash on hand
Opening Cash balance 10,000
Cash sales 709,750

719,750
Total of cash sales banked (624,750)
Drawings (60,000)
Sundry expenses (25,000)
Closing cash balance 10,000

6. Credit sales & receivables

Total Receivables Account

Rs. Rs.
Balance, 1st January, 2014 670,000 Receipt 3,071,000
Advance receipts (Cr.) 2,500 Sales Return 15,000
Credit sales (balancing Balance, June 30, 2015 582,500
figure) 2,996,000
(Rs. 600,500-18,000)

3,668,500 3,668,500

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7. Payables
Total Payables Account

Rs. Rs.
Discounts 30,300 Balance, July 1, 2014 500,100
Bank 2,509,600 Purchases 2,570,000
By balance, June 30, 2015
(bal.fig) 530,200

3,070,100 3,070,100

5.14 MANSOOR

Mansoor: Statement of comprehensive income for the year ended June 30, 2015
Rs. Rs.
Sales 125% of (552,000 + 5,341,000 - 670,000) 6,528,750

Opening inventory 552,000

Purchases (288,000+5,053,000) 5,341,000
5,893,000
Closing inventory (Destroyed in fire) (670,000)
(5,223,000)
Gross profit b/d 1,305,750
Scrap sales 35,000
1,340,750
Less: expenses
Assistant's salary 132,000
Electricity (50,500 + 1,900 - 5,500) 46,900
Rent (240,500 + 15,000) 255,500
Property tax (32,000 +11,500 -15,000) 28,500
Accounting charges (20,500 + 1,800 – 11,500) 10,800
Sundry expenses 15,000
(488,700)
Loss from fire:
Fixtures (235,000 + 45,000 – 225,000) 55,000
Inventories (670,000 – 630,000) 40,000
Provision for bad debt 14,000
(109,000)
Net profit 743,050

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Mansoor: Statement of financial position as at 30 June 2015

Assets Rs.
Receivables (494,000 – 14,000) 480,000
Receivable from Insurance Co. 855,000
Property tax paid in advance 15,000
Cash in hand 40,500
Cash at bank 435,800
1,826,300

Capital and liabilities Rs. Rs.

Capital 1,185,000
Net profit 743,050
Drawings (144,450 + 188,000) (332,450)
1,595,600
Payables:
For goods 212,000
Electricity 1,900
Accounting charges 1,800
Rent 15,000
230,700
1,826,300

Workings:
Payables
Bank 5,061,000 Opening balance 220,000
Purchases
Closing balance 212,000 (Balancing figure) 5,053,000

5,273,000 5,273,000

Receivables
Opening balance 281,000 Cash (Balancing figure) 6,315,750
Sales 6,528,750 Closing balance 494,000
6,809,750 6,809,750

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Amount in Rupees
Cash and Bank
Cash Bank Cash Bank
Opening balance 35,000 307,500 Assistant's salary 132,000
Receivables 6,315,750 Purchases 288,000
Drawings-bal
Scrap sales 35,000 figure 144,450
Cash 5,780,800 Bank 5,780,800
Drawings 188,000
Sundry expenses 15,000
Accounting
charges 20,500
Electricity 50,500
Property tax 32,000
Rent 240,500
Payables 5,061,000
Fixtures 45,000
Closing balance 40,500 435,800
6,385,750 6,088,300 6,385,750 6,088,300

5.15 DANISH
Danish
Statement of comprehensive income
for the year ended 31 December 2013
Rupees Rupees
Opening inventory 25,000 Sales (W - 1) 89,800
Purchases (W - 2) 69,000 less: Returns (3,000) 86,800
Less returns (2,000) 67,000 Closing Inventory (W - 5) 30,000
Gross profit c/d 24,800
116,800 116,800

Discount allowed 1,400 Gross profit b/d 24,800

Bad debts* 4,230 Discount received 1,000
Expenses
(6,000+1,200) 7,200
Rent 2,500
Depreciation
Furniture 1,500
Motor Van 3,200
Net profit 5,770
25,800 25,800
*1800+(48,600 × 5%)
Danish

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Statement of financial position as at 31 December 2013

Rupees Rupees
Liabilities and Capital Assets
Capital (W - 1) 81,500 Motor Van 16,000
Less: drawings (5,000) Less: Depreciation (3,200) 12,800
Add: net profit 5,770 82,270 Furniture and fixtures 15,000
Less: Depreciation (1,500) 13,500
Closing Inventory 30,000
Payables (W-2) 27,000 Receivables (W-3) 48,600
Accrued expenses 1,200 Less: allowance (2,430) 46,170
Cash (W - 4) 8,000
110,470 110,470

W-1 Opening Capital Rupees

Assets
Motor Van 16,000
Furniture and fixture 15,000
Inventory 25,000
Receivables 45,000
Cash 4,500
105,500
Liabilities
Payables (24,000)

Opening Capital 81,500

W -2 Payables control account

Rupees Rupees
Cash paid 63,000 Balance b/d 24,000
Discount received 1,000 Purchases (bal. fig) 69,000
Purchases return 2,000
Balance c/d 27,000
93,000 93,000

W-3 Receivables control account

Rupees Rupees
Balance b/d 45,000 Cash received 80,000
Sales (bal fig) 89,800 Discount allowed 1,400
Bad debts 1,800
Sales return 3,000
Balance c/d 48,600
134,800 134,800

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W-4 Cash
Rupees Rupees
Balance b/d 4,500 Payments to suppliers 63,000
Receipts from customers 80,000 Expenses paid 6,000
Drawings 5,000
Rent paid 2,500
Balance c/d 8,000
84,500 84,500

W-5 Calculation of closing inventory

Net Sales 86,800

Net purchases 67,000

Opening Inventory 25,000
92,000
Less cost of goods sold (100/140 of net sales) 62,000
Closing Inventory 30,000

5.16 RAHIL
(a) Statement of amount of defalcation

Rupees

Cash in hand 30/3/16 5,000

Cash sales [838,750(W-1) 64,000] 774,750

Receipts from customers as per debtor’s 24,000

account (W-3)

Less: Cash utilized

Bank lodgments (627,000)

Assistant's salary (13,000×3) (39,000)

Petty expenses (5,000×3) (15,000)

Drawings (26,000×3) (78,000)

(759,000)

Defalcation against cash sales 44,750

Difference in debtors balance 12,000

Defalcation from amount received from supplier against purchase return 8,000

Total defalcation amount 64,750

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Working Notes:
W-1: Sales Rupees
Stock on 1 April 2016 111,000
Add: Purchases for 3 months (626,000 – 8000) (W-2) 618,000
729,000
Less: Stock on 30 June 2016 (58,000)
671,000
Add: Gross profit 20% on sales (671,000 × 20÷80) 167,750
Total sales 838,750

W-2: Purchases Rupees

Cash paid to creditors against goods supplied 604,000
Add: Creditors on 30 June 2016 181,000
785,000
Less: Creditors on 31 March 2016 (159,000)
Cash received for returns (8,000)
Total purchases 618,000

W-3: Cash received from credit customers Rupees

Balance on 1 April 2016 55,000
Add: Credit sales for 3 months 64,000
119,000
Less: Balances outstanding on 30 June 2016 as per books (66,000)
53,000
Less: Receipts (cheques) shown in cash book (29,000)
Amount presumably received in cash 24,000

(b) Balance Sheet of Rahil

As on 30 June 2016

Liabilities Rs. Assets Rs.

Sundry creditors 181,000 Fixtures and fittings (net) 156,975
Expenses owing 13,000 Stock in trade 58,000
Capital: Sundry debtors 54,000
Balance on 1 April 2016 233,000 Balance at bank 91,000
Add: Net profit (W-1) 10,975
Less: Drawings (78,000)
165,975
359,975 359,975

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W-1: Net profit for 3 months Rupees

Gross profit - 20% on sales (671,000 × 20÷80) 167,750
Less:
Depreciation (161,000×10%×3÷12) 4,025
Assistant's salary and petty cash expenses 54,000
Rent & other expenses 37,000
Decrease in creditors for expenses (16,000 - 13,000) (3,000)
Loss due to defalcation 64,750
(156,775)
10,975

5.17 S-MART GROCERY STORE

(A)
Loss due to defalcation Rupees
Cash embezzled through purchase returns 24,000
Stock embezzled through fake debtors (500,000×0.75) 37,500
Cash defalcated from cash sales (W-1) 50,740
112,240

W-1: Cash account

Opening balance 45,000
Add: Cash sales 1,631,250
Less: Drawings (144,000)
Payment into bank (1,450,000)
Closing balance of cash (31,510)
Cash defalcated 50,740
(B)
Statement of profit or loss ------------ Rupees ------------
Total cash sales (1,687,500 -56,250) (W-2) 1,631,250
Total credit sales (W-4) 854,000
2,485,250
Less: Cost of goods sold
Opening inventory 250,000
Purchases (W-3) 2,017,000
Less: Return outward (Alternatives are available) (24,000)
Stock misappropriated (37,500)
Less: Closing stock (215,000) (1,990,500)
Gross profit 494,750

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------------ Rupees ------------

Less: Operating expenses
Rent expenses (72,000+3,000) 75,000
Utilities 36,000
Other expenses 24,750
Loss on sale of vehicle (15,000–18,500) 3,500
Salaries expense (48,000–18,000+22,000) 52,000
Loss due to defalcation 112,240
Depreciation: Furniture (550,000+45,000–555,000) 40,000
Equipment (80,000–64,000) 16,000
Vehicle (230,000–210,000) 20,000 (379,490)
Net profit 115,260

W-2: Total cash sales

Cost Gross sales Discount (6%)
Period Ratio
----------------- Rupees -----------------
First six month 1 600,000 750,000 -
Second six months 1.25 750,000 937,500 56,250
Total (W-5)1,350,000 1,687,500 56,250

W-3: Creditors
Closing balance (354,500–45,000) 309,500
Add: Payment during the year 1,807,500
2,117,000
Less: Opening balance (100,000)
Purchases during the year 2,017,000

W-4: Debtors
Closing balance (340,000–50,000) 290,000
Add: Receipts during the year 824,000
1,114,000
Less: Opening balance (260,000)
Credit sales 854,000

Cost of goods sold credit sales (854,000×75%) 640,500

W-5: Cost of goods sold

Total Cost of goods sold (P&L) 1,990,500
Less: Cost of credit sales (W-3) (640,500)
Cost of cash sales 1,350,000

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CHAPTER 6 – Cost of production

6.1 SIGMA LTD
(i) Differences in profit statements
The differences in the statements reflect the different uses of the two sets of accounts, as
detailed below.
 Financial accounts analyse costs by function (e.g. production, selling, finance, etc.) and comply with generally
accepted accounting practice (e.g. IASs) and relevant legislation, as they are used externally by shareholders
and creditors.
 Management accounts analyse costs by nature (e.g. fixed, variable, semi-variable, etc.), as they are used
internally for decision-making.
 Management accounts profit statements may be prepared either on an absorption or on a marginal costing basis,
the latter giving better information for short-term decision-making, as fixed costs are treated as period costs and
charged to the profit and loss account when incurred. Management accounts record costs through cost centres
(departments) and cost units (products) to give responsibility for control of costs to individuals. A standard
costing system may be used in the business to analyse variances effectively, and management accounts profit
statements prepared, say, on a departmental basis, may include notional intra-departmental charges (e.g. for
rent).
 Financial accounts in the main give a financial record of past transactions but are very limited in their use for
control as they do not separate fixed and variable costs. They must be prepared on an absorption basis, where
fixed production overheads are treated as product costs and charged to the income and expenditure account
when units are sold, in line with the accruals basis in IAS 1 (and The Framework) and inventory measurement
principle in IAS 2. The financial accounts profit will include non-cost items, such as finance costs and profits or
losses on disposal of assets.
(ii) Differences in accounting records
 The accounting records for financial accounts are summarised records accounting for costs as they accrue.
 The accounting records for management accounts are far more detailed in that they break down costs by centre
and unit for control purposes.
 The cost accounts produced by the management accountant may be integrated within the financial ledgers where
the basis of valuation used in each is the same. However, the cost accounts may well be kept separately from
the financial accounts in a larger organisation where different people can be responsible for the different areas.
 Where cost accounts are kept separate, control accounts are maintained in both sets of books to ensure that the
double entry is maintained in each system.

6.2 MANAGEMENT INFORMATION FUNCTIONS

The role of the management accountant within an organisation is to provide information for
management in order that they may manage effectively. Although the information that the
management accountant must provide will be specific to the organisation and the industry in which it
operates, there are three main functions for which information is required – planning, decision-
making and control.
The planning activities of an individual manager will depend on the objectives of the organisation as
a whole. It will be assumed that normally these objectives will include the achievement of at least a
target level of profit. Planning must take place to ensure that those products are sold which give the
highest contribution towards profit. Therefore information regarding the revenue and costs for each
product under consideration will be needed in order that relative profitability may be evaluated.
Once all the necessary information is available, the decision-making process can take place. The
chosen production plan must be expressed in financial terms as well as in terms of units of product.
At the end of the accounting period under consideration, actual production and sales figures must be
compared with the results expected in the original plan. This is necessary for management to
control the business properly. Where there are differences between actual and planned
performance, investigation may be required so that, if necessary, corrective action may be taken.

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6.3 JOHN PIRELLI

(i) Direct and indirect costs
Direct cost is also called prime cost; indirect costs are often referred to as overheads.
Direct costs are those specifically attributable to units of output (clients’ jobs); these would
include printers’ time, paper costs, plate-making costs.
Indirect costs are those not capable of such close matching, such as rent and rates,
insurance, depreciation of machinery.
(ii) Fixed and variable costs
Fixed costs are those independent of the level of output (the amount of printing work done).
Into this category would come rent and rates, advertising, audit fee, electricity for lighting and
heating.
Variable costs increase as output increases, such as paper costs, electricity costs for
powering printing presses and the cost of ink or plates.
A third category of cost is “semi-variable”, such as electricity (with a fixed and variable
element). These three can best be described graphically.

(iii) Production and non-production costs

The category of “production costs” is important to the extent that such types of cost can be
incorporated in the valuation of any stocks of finished work at the end of an accounting period
which in turn is needed for profit determination. Examples of these costs would be as follows.
Production Paper, all print-room costs

Non-production Your secretary’s salary, advertising,

delivery van, running expenses

(iv) Committed and discretionary costs

Committed costs are those essential for the running of the business: paper, depreciation of
presses, assistant printer’s wages, rent of printing room.
Discretionary costs are incurred at the whim of management: machine maintenance contract
charges, cost of Christmas party, advertising costs.
Note Whatever you call them, it is necessary to recover all these costs from fees charged
to customers. To do that you need to know how much is their amount. Hence the
need for your costing system.

6.4 CLASSIFICATION OF COSTS

(a) Fixed, variable and semi-variable costs
 A fixed cost item is one for which the expenditure will not be affected by changes in the level of activity. In
general, fixed costs are incurred in providing the facilities or conditions to undertake production. Therefore, they

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are more usually incurred in relation to time periods than to activity. This is not to say that such costs are a
constant amount even for short periods of time. Clearly, price changes will vary the amount, as in the instance of
paying local rates based on rateable value where the annual charges are in line with inflation. Finally, fixed cost
per unit of product varies inversely with output.
 A variable cost item is one for which the total expenditure will tend to vary more or less directly with output or
activity. Nevertheless, the variable cost expenditure may also vary as the result of other influences, such as
inflation or competition or even changes in supply. It is possible that any change in the number of units
purchased could be more than offset by an opposite price change. Even so, the total expenditure at the new
price will vary directly with output. Variable cost per unit of product tends to be more or less constant at each
different level of output, other things being equal.
 A semi-variable cost is one for which the total expenditure tends to vary directly with the volume of output/activity,
but proportionately less than the change in output/activity. Generally, such cost items are composites with a
variable element and a fixed element. A good example is telephone charges in which the rental is a fixed charge
and payable irrespective of activity levels. The variable element comprises the charge for calls made and tends
to be related to business activity. The cost per unit of product will reflect both.
(b) Examples of each type of cost
Fixed Variable Semi-variable
2 Factory insurance 7 Direct materials 1 Telephone (standing charge + calls)
3 Legal expenses 4 Social Security 6 Light and heat
5 Rent of premises 12 Casual labour 9 Machine servicing/repairs
8 Lift operator’s wages 11 Contract cleaning services
10 Foreman’s salary
Tutorial note: Each classification is open to debate. Hard and fast rules cannot be laid down;
precise classification would depend upon the particular circumstances of the firm.

6.5 CAR MAINTENANCE

(a)

-------------- Kilometers --------------

A 10,000 20,000 30,000
Variable costs: -------------- Amount in Rs. --------------

Maintenance - service after every 5000 km 12,000 24,000 36,000

Spares 20,000 40,000 60,000
Petrol 50,000 100,000 150,000
Provision for replacement of tyres
(20,000÷25,000×A) 8,000 16,000 24,000
Depreciation
[(1,200,000 300,000)/100,000×A] 90,000 180,000 270,000

B 180,000 360,000 540,000

-------------- Kilometers --------------
10,000 20,000 30,000
-------------- Amount in Rs. --------------
Fixed costs:

Vehicle tax 6,000 6,000 6,000

Insurance 36,000 36,000 36,000

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C 42,000 42,000 42,000

Total cost 222,000 402,000 582,000

Variable cost per km (B÷A) 18.00 18.00 18.00

Fixed cost per km (C÷A) 4.20 2.10 1.40

Total cost per km 22.20 20.10 19.40

(b) (i) Spares and petrol:

Spares and petrol are variable costs being dependent on the usage of car.
(ii) Depreciation:
The depreciation in this case is variable because it is being charged on the basis of actual
running/usage and not on the basis of time.
(iii) Maintenance:
Service is to be done after each 5,000 kms and is therefore a variable cost.
(iv) Vehicle tax:
Vehicle tax is payable per year irrespective of actual running and is therefore a fixed cost.
(v) Insurance:
Insurance is payable per year irrespective of usage and is therefore a fixed cost.
(vi) Tyres:
If the cost of tyres is accrued on the basis of usage, it would be a variable cost.

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Financial accounting and reporting I

CHAPTER 7 – IAS 16: PROPERTY, PLANT AND EQUIPMENT

7.1 SUNDRY QUESTIONS 1

1 Original depreciation = Rs.550 million /50 years = Rs.11 million

Revised depreciation = Rs.1,100 million /40 years = Rs.27 million
2

Rs.m Rs.m
Land (520 - 250) 270
Buildings – cost 400
depreciation (400/50 x 4 years) (32)
Net book value 368
Revaluation 750
Transfer to revaluation reserve 382
Total revalution surplus 652

7.2 ROONEY
Accounting
Rule
IAS 16 requires that each part of an item (that has a cost that is significant in relation to the total
cost) is depreciated separately. Therefore, the cost recognised at initial recognition must be
allocated to each part accordingly.
Accounting
(i) 31st March 2016

Carrying Carrying
value Depreciation value

1.4.2015 31.3.2016

Rs.000 Rs.000 Rs.000

Hydraulic system 9240 3,080 6,160

“Frame” 21,560 2,695 18,865

30,800 5,775 25,025

Revaluation loss (to profit and loss) (4,025)

Fair value. 21,000

The carrying value of the assets should be written down by a factor of 21,000/25025. This gives
a carrying value for the hydraulic system (in Rs.000) of 5,169 and for the ‘frame’ 15,831.
The hydraulic plant should be depreciated over two more years and the ‘frame’ over 7 more
years.

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 Answers

(ii) 31st March 2017

Carrying Depreciation Carrying

value charge Value

1.4.2016 31.3.2017

Rs.000 Rs.000 Rs.000

Hydraulic system 5,169 2,585 2,584

“Frame” 15,831 2,262 13,569

21,000 4,847 16,153

Revalued amount 19,600

Total gain 3,447

To statement of profit or loss 3,097

Other comprehensive income 350

Fair value 19,600

The total revaluation gain is 3,447. Of this total amount, 3096 reverses the loss in the previous
year net of the benefit obtained through reduced depreciation and is therefore reported in profit
and loss for the year. The remaining 350 is reported as other comprehensive income.
Working

Hydr Frame Total

Carrying amount 5,169 15,831 21,000

Depreciation (2,585) (2,262) (4,847)

Carrying amount 2,585 13,569 16,153

FV 3,136 16,464 19,600

Value increased 551 2,895 3,447

Loss recognised last year 991 3,034 4,025

Depreciation reduced by (495) (433) (929)

Loss reversal possible thru P/L 495 2,601 3,097

Gain in OCI 56 294 350

(Tutorial note: Deferred tax is ignored by this question.)

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Financial accounting and reporting I

7.3 EHTISHAM
IAS 16 permits assets to be carried at cost or revaluation. Where the latter is chosen, the asset must
be stated at its fair value.
The original depreciation was Rs. 40,000 (Rs. 1,000,000/25 years) per annum.
On 31st March 2014 the asset is two years old. Its carrying value before revaluation was therefore
Rs.1million less accumulated depreciation of Rs.80,000 (2/25 × Rs. 1 million).

Rs.
Cost/valuation 1,000,000
Accumulated depreciation (80,000)
Net book value 920,000

In order to effect the revaluation, the cost is uplifted to fair value of Rs.1.15m, the accumulated
depreciation is eliminated, and the uplift to the net book value is credited to a revaluation surplus
account.

Debit Credit
Building 150,000
Accumulated depreciation 80,000
Revaluation surplus 230,000

The impact of the journal is as follows:

Before Adjustment After

Cost/valuation 1,000,000 150,000 1,150,000
Accumulated depreciation (80,000) 80,000 nil
Net book value 920,000 1,150,000

The asset is depreciated over its remaining useful economic life of 23 years giving a charge of Rs.
50,000 (Rs. 1,150,000/23 years) per annum in the year to 31st March 2015.

Debit Credit

Depreciation - Statement of profit or loss 50,000

Accumulated depreciation 50,000

This results in a carrying value as at 31st March 2015 of:

Rs.
Cost/valuation 1,150,000
Accumulated depreciation (50,000)
Net book value 1,100,000

Transfer from revaluation surplus to retained earnings

As a result of the revaluation, the annual depreciation has increased from Rs.40,000 to Rs.50,000.
This extra depreciation of Rs.10,000 is transferred from the revaluation reserve to accumulated profits
each year.

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 Answers

Debit Credit
Revaluation surplus 10,000
Accumulated profits 10,000

By the 31st March 2015, the balance remaining on the revaluation reserve will be Rs.220,000.

Rs.
Surplus recognised at 31 March 2014 230,000
Transfer to accumulated profits (10,000)
Net book value 220,000

The fall in property values at the year-end. The asset must be revalued downwards to Rs.0.8million,
a write-down of Rs.300,000.
Rs.220,000 of this is charged against the revaluation reserve relating to this asset, and the
remaining Rs.80,000 must be charged against profits.
The reduction of the carrying amount of the asset is achieved by removing the accumulated
depreciation and adjusting the asset account by the balance.

Debit Credit
Revaluation surplus 220,000
Revaluation Loss - Statement of profit or loss (Working - 1) 80,000
Asset at valuation 350,000
Accumulated depreciation 50,000

The impact of the journal is as follows:

Before Adjustment After

Cost/valuation 1,150,000 350,000 800,000
Accumulated depreciation (50,000) 50,000 nil
Net book value 1,100,000 800,000

This balance is depreciated over the remaining useful life of the asset (22 years).
Working - 1

Asset Account 2012-13 2013-14 2014-15

Opening Balance 1,000,000 960,000 1,150,000

Depreciation (40,000) (40,000) (50,000)

960,000 920,000 1,100,000

Revaluation - 230,000 (300,000)

Carrying amount 960,000 1,150,000 800,000

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Financial accounting and reporting I

2012-13 2013-14 2014-15

Revaluation Surplus
Opening balance - 230,000
Transfer - (10,000)
Balance - 220,000
Revaluation 230,000 (220,000)
230,000 -

Loss in P/L (80,000)

7.4 CARLY
Financial statements for the year ended 31 December 2015 (extract)
Property, plant and equipment

Land and Plant and Computer

buildings machinery equipment Total
Rs. Rs. Rs. Rs.
Cost/valuation
At 1 January 2015 1,500,000 340,500 617,800 2,458,300
Cancelation (620,000) (620,000)
Revaluation 870,000 - - 870,000
Additions (W2) - 17,250 - 17,150
Disposals - (80,000) - (80,000)
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 1,750,000 277,750 617,800 2,645,550
–––––––––– –––––––– –––––––– ––––––––––
Accumulated depreciation
At 1 January 2015 600,000 125,900 505,800 1,231,700
Charge for the year (W1) 20,000 50,775 44,800 115575
Cancelation (620,000) - - (620,000)
Disposals - (57,000) - (57,000)
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 Nil 119675 550,600 670275
–––––––––– –––––––– –––––––– ––––––––––
Carrying amount
At 31 December 2014 900,000 214,600 112,000 1,226,600
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 1,750,000 158075 67,200 1,975,275
–––––––––– –––––––– –––––––– ––––––––––

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 Answers

Workings
(1) Depreciation charges
Buildings = (1,500,000 – 500,000) / 50 years = 20,000.
Plant and machinery:

Rs.
New machine (17,250  25% 8/12) 2875
Existing plant (((340,500 – 80,000) – (125,900 – 57,000))  25%) 47,900
50775
Computer equipment = 112,000  40% = Rs.44,800
(2) Cost of new machine

Rs.
Purchase price (20,000 – 3,000 – 1,000) 16,000
Delivery costs 500
Installation costs 750
17,250

7.5 ADJUSTMENTS LIMITED

(a) Grinder
The grinder was purchased in 2012 and was originally being depreciated on a straight line
basis. It has now been decided to depreciate this on the sum of digits basis.
IAS 16 requires that depreciation methods be reviewed periodically and if there is a significant
change in the expected pattern of economic benefits, the method should be changed.
Depreciation adjustments should be made in current and future periods. This change might be
appropriate if, for instance, usage of the machine is greater in the early years of an asset’s life
when it is still new and consequently it is appropriate to have a higher depreciation charge.
If the change is implemented, the unamortised cost (the net book value) of the asset should be
depreciation over the remaining useful life commencing with the period in which the change is
made. The depreciation charge for the remaining life of the asset will therefore be as follows.
Year Digits Depreciation
Rs.
2015 7 7/28  Rs.70,000 17,500
2016 6 6/28  Rs.70,000 15,000
2017 5 12,500
2018 4 10,000
2019 3 7,500
2020 2 5,000
2021 1 2,500
—— ———–
1/2  7 (7 + 1) 28 Rs. 70,000
—— ———–
Disclosure will need to be made in the accounts of the details of the change, including the effect
on the charge in the year.

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Financial accounting and reporting I

The reassessment of the depreciation method is not a change in accounting policy and neither
rectification of a fundamental error so the effects of the change will not affect the previously
reported financial statements (opening retained earnings)
(b) Leasehold land
IAS 16 requires that the subsequent charge for depreciation should be based on the revalued
amount. The annual depreciation will therefore be Rs.62,500, i.e. Rs.1,500,000 divided by the
24 years of remaining life.
There will then be a difference between the revalued depreciation charge and the historical
depreciation charge.
The resulting excess depreciation may be dealt with by a movement in reserves, i.e. by
transferring from the revaluation reserve to retained earnings a figure equal to the depreciation
charged on the revaluation surplus each year.

7.6 FAM
Accounting policies
(a) Property, plant and equipment is stated at historical cost less depreciation, or at valuation.
(b) Depreciation is provided on all assets, except land, and is calculated to write down the cost or
valuation over the estimated useful life of the asset.
The principal rates are as follows.
Buildings 2% pa straight line
Plant and machinery 20% pa straight line
Fixtures and fittings 25% pa reducing balance

Land and Plant and Fixtures, fittings,

Fixed asset movements Total
buildings machinery tools and equipment
Cost/valuation Rs.000 Rs.000 Rs.000 Rs.000
Cost at 1 January 2015 900 1,613 390 2,903
Cancelation (80)
Revaluation adjustment 680 - - 600
Additions 100 154 40 294
Disposals (277) (41) (318)
Cost at 31 December 2015 1600 1,490 389 1,979
2015 valuation 1,500
Depreciation
At 1 January 2015 80 458 140 678
Revaluation adjustment (80) – – (80)
Provisions for year (W2) 17 298 70 385
Disposals – (195) (31) (226)
At 31 December 2015 17 561 179 757
Net book value
At 31 December 2015 1,583 929 210 2,722
At 31 December 2014 820 1,155 250 2,225

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 Answers

Land and buildings have been revalued during the year by Messrs Jackson & Co on the basis of an
existing use value on the open market.
The corresponding historical cost information is as follows.
Land and buildings
Rs.000
Cost
Brought forward 900
Reclassification 100
———
Carried forward 1,000
———
Depreciation
Brought forward 80
Provided in year 10
———
Carried forward 90
———
Net book value 910
———

Payments on account and assets in the course of construction

Cost at 1 January 2015 91

Additions (W1) 73
Reclassifications (100)
As at 31 December 2015 64
At 31 December 2014 91

WORKINGS Rs. 000

(1) Additions to assets under construction 53
Deposit on computer 20
——
73
——
600
(2) Depreciation on buildings 40 + (100  2%) 17

2% straight line depreciation is equivalent to a 50 year life.

The buildings are ten years old at valuation and therefore
have 40 years remaining.
Depreciation on plant (1,613 + 154 – 277)  20% 298
Depreciation on fixtures (390 + 40 – 41 – 140 + 31)  25% 70

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Financial accounting and reporting I

7.7 ORCHID LIMITED

Orchid Limited
Notes to the financial statement
For the year ended 31 December 2017
Property, plant and equipment:

2017 2016

Building Plant Building Plant

-------------------------------- Rs. in million ----------------------------
Gross carrying amount - 700.00 475.00 700.00 475.00
opening
Accumulated dep. & (24.14) (115.00) - (19.00)
impairment (475÷25)

Opening carrying 675.86 360.00 700.00 456.00

amount

2017 2016
Building Plant Building Plant
-------------------------------- Rs. in million ------------------------------

Depreciation (22.64) (36) (24.14) (19.00)

[21.14 (700-87) ÷ 29] + (360 × 10%) (700÷29) (475÷25)
[1.5 (87÷ 29 × 6 ÷12)]
Disposal (82.50) - - -
[87-{(87÷ 29)+ (87÷29×6
÷ 12)}]
Impairment (P&L) (77)
(456–19–
360)
Revaluation
- surplus [W-1] (90.12) - - -
- P&L [W-1] (17.60) - - -

Closing carrying amount 463.00 324.00 675.86 360.00

Gross carrying amount - 463.00 475.00 700.00 475.00

closing
Accumulated dep. & - (151) (24.14) (115.00)
impairment

Closing carrying amount 463.00 324.00 675.86 360.00

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 Answers

Building Plant

Measurement base Revaluation model Cost model

Useful life (years)/depreciation rate % 30 10%

Depreciation method Straight line Reducing balance

The last revaluation was performed on 31 December 2017 by Shabbir Associates, an independent
firm of valuers.

2017 2016

Carrying value of building had the cost model been 480.6 560
used instead (600–66)÷30×27 (600÷30×28)

Following disposal has been made during the year.

cost/revalued
Name of Book value Sale price Gain/(loss) Mode of
amount
purchaser disposal
------------------------- Rs. in million -------------------------

Building Baqir 87.00 82.50 85.00 0.5 (85–2) Tender

Limited – 82.5)

Change in estimate
In lieu of significant change in the expected pattern or consumption of the future economic benefits
embodied in the plant, company decided to change the depreciation method of plant from straight line
to reducing balance method. The new depreciation rate would be 10%.
Had the depreciation method been not changed, profit of 2017 would have been higher by Rs. 20.35
million. (360×10%-360÷23)

W-1: Revaluation of building as on 31 December 2017 Rs. in million

Carrying value of building (675.86-22.64-82.5) 570.72

Revalued amount 463.00

107.72

Available surplus [120(700-580)-23.2(W-2)]×(27÷29)

OR [120-4.14(120÷29)-3.74{4.14-(23.2÷29×0.5)}-22(23.2÷29×27.5)] (90.12)

Expense (P&L) 17.60

W-2: Rs. in million

Revalued amount of building sold 87.0

Carrying value (66÷30×29) 63.8

23.2

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Financial accounting and reporting I

7.8 ABID LIMITED

2015 2014
- Property, plant and equipment --------- Rs. in million ---------
Gross carrying amount 252 323
Accumulated depreciation and (14) (17)
impairment losses (323÷19)
Net carrying amount 238 306
Additions - -
Revaluation (expense)/Income (P/L) 17[272- {300-(300÷20x3)}] (18)(306-252-36)
Revaluation surplus 17 (272-238-17) (36)[{323-(300-15)}-
increase/(decrease) (OCI) (38÷19)]
Depreciation (14) (14)
[(204÷17)+(68÷17×6÷12)] (252÷18)
Disposal (66) [68 - (68÷17×6÷12)] -
192 238

Gross carrying amount 204 252

Accumulated depreciation and (12) (14)
impairment losses
Net carrying amount 192 238

Useful life 20 years 20 years

The last revaluation was performed on 1 January 2015 by M/s Premier Valuation Services, an
independent firm of valuers. Revaluations are performed annually.

2015 2014
--------- Rs. in million ---------
Carrying value had the cost model been used 180 255
instead [225 – (225÷20×4)] [300 – (300÷20×3)]
4.1- Details of property, plant and equipment disposed of during the year

Cost /
Accumulated Carrying Sale
Revalued depreciation amount proceeds Mode of Particulars of
amount disposal buyers
---------------------- Rs. in million ----------------------
Building 68 2 66 80 Not mentioned Not mentioned

7.9 SHAHWEZ LIMITED

Statement of comprehensive income extract for the year ended 31 March 20X2
Rs. In 000
Depreciation expense 400
Other comprehensive income:
Revaluation gain 12,000

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Statement of financial position extract as at 31 March 20X2

Rs. In 000
Non-current assets Property 19,600
(20,000 – 400)
Equity Revaluation reserve 11,800
(12,000 – 200)

Statement of changes in equity extracts

Revaluation reserve Retained earnings

Revaluation gain 12,000
Reserves transfer (200) 200
Workings:
Gain on revaluation: Rs. In 000
Carrying value at revaluation date
(10,000 – ((10,000 – 2,000)*40 years/10 years)) 8,000
Valuation 20,000
Gain on revaluation 12,000
Double entry:
Dr Property 10,000
(20,000 – 10,000)
Dr Accumulated depreciation 2,000
((10,000 – 2,000)/40 years x 10 years)
Cr Revaluation reserve 12,000
Depreciation charge for year to 31 March 20X2:
Dr depreciation expense 400
((20,000 – 8,000)/30 years)
Cr Accumulated depreciation 400
Reserves transfer:
Historical cost depreciation charge 200
((10,000 – 2,000)/40 years)
Revaluation depreciation charge 400
Excess depreciation to be transferred 200
Dr Revaluation reserve 200
Cr Retained earnings 200

7.10 HAMZA LIMITED

Rupees
Statement of comprehensive income extract 31 March 20X6
Depreciation charge 2,500
Other comprehensive income:
Revaluation gain 10,500
Statement of financial position extract 31 March 20X6
Building at valuation 98,000

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Financial accounting and reporting I

Statement of changes in equity extract

Revaluation gain
Revaluation reserve 10,500
Notes:
Revaluation takes place at year end, therefore a full year of depreciation must first be charged.
(W1) Depreciation year ended 31 March 20X6
100,0000 / 40 years = Rs.2,500 per annum
(W2) Revaluation as at 31 March 20X6
Carrying value of non-current asset at revaluation date
(100,000 – (100,000/40 years x 5 years)) 87,500
Valuation of non-current asset 98,000
Gain on revaluation 10,500
Double entry: Debit Credit
Accumulated depreciation 12,500
Building 2,500
Revaluation reserve 10,500

7.11 SUNDRY QUESTIONS 2

1. Property, Plant and Equipment should be derecognised (removed from PPE) either;
i. on disposal (sold or exchanged etc. by cash for asset given up) or
ii. when it is withdrawn from use and no future economic benefits are expected from the asset
(in other words, it is effectively scrapped).
A gain or loss on disposal is recognised as the difference between the disposal proceeds (gross
proceeds received minus cost of making sale) and the carrying value of the asset (using the
cost or revaluation model) at the date of disposal. This net gain is included in the income
statement. The sales proceeds should not be recognised as revenue.
Where assets are measured using the revaluation model, any remaining balance in the
revaluation reserve relating to the asset disposed of is transferred directly to retained earnings.
No recycling of this balance into the income statement is permitted.
2. General disclosures
The financial statements shall disclose, for each class of property, plant and equipment:
a) the measurement bases used for determining the gross carrying amount;
b) the depreciation methods used;
c) the useful lives or the depreciation rates used;
d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
e) a reconciliation of the carrying amount at the beginning and end of the period showing
increases or decreases resulting from revaluations from comparing its revalued amount to
the book value and recognize in other comprehensive income and accumulated in equity
under the heading of revaluation surplus. However, the revaluation increase shall be
recognised in profit or loss to the extent that it reverses a revaluation decrease of the same
asset previously recognised in profit or loss.
Specific disclosures
If items of property, plant and equipment are stated at revalued amounts, the following shall be
disclosed:
i. the effective date of the revaluation;
ii. whether an independent valuer was involved;
iii. for each revalued class of property, plant and equipment, the carrying amount that would
have been recognised had the assets been carried under the cost model; and
iv. the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

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 Answers

CHAPTER 8 – NON-CURRENT ASSETS: SUNDRY STANDARDS

8.1 SHAYAN LIMITED

Eligible Borrowing Cost = Actual Borrowing Cost – Income from temporary investment of funds =
(50,000,000 * 8%) less 375,000
Eligible Borrowing Cost = 3,625,000

Income from investment of Surplus funds:

(25,000,000 * 3%) * 4/12 + (1,000,000 * 3%) * 5/12 = 375,000

8.2 SARA LIMITED

Calculation of Eligible Borrowing Cost:

As the loan is General loan, so the amount of Borrowing Cost to be capitalized will be calculated as
follows:

Borrowing cost to be capitalized = Average amount invested * Weighted Average borrowing Cost Rate
= 54,583 * 9.79%
Eligible Borrowing Cost = 5,343

W 1: Average Amount Invested into Asset:

30,000 x 12/12 = 30,000

20,000 x 8/12 = 13,333
15,000 x 9/12 =11,250
54,583

W 2: Weighted Average Borrowing Cost Rate

(70,000 / 180,000) * 10% + (60,000 / 180,000) * 8% + (50,000 / 180,000) * 12% = 9.79%

8.3 LOONEY
IAS 23 should be applied in accounting for borrowing costs.
Borrowing costs are recognised as an expense in the period in which they are incurred unless they
are capitalised in accordance with IAS 23 which says that borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset can be capitalised as part of the cost
of that asset.
 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
 Borrowing costs that are directly attributable to acquisition, construction or production are taken
to mean those borrowing costs that would have been avoided if the expenditure on the
qualifying asset had not been made.
When an enterprise borrows specifically for the purpose of funding an asset, the identification of the
borrowing costs presents no problem as the amount capitalised is the actual borrowing costs net of
any income earned on the temporary investment of those borrowings.

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Financial accounting and reporting I

If funds are borrowed, generally, the amount of borrowing costs eligible for capitalisation is determined
by applying a capitalisation rate to the expenditures on that asset calculated as the weighted average
of the borrowing costs applicable to general borrowings.
IAS 23 also contains rules on commencement of capitalisation, suspension of capitalisation and
cessation of capitalisation.

Amount capitalised Rs.000

Cost of manufacture 28,000
Interest capitalised (Rs.28m × 5% × 2 years) 2,800
–––––––
30,800
–––––––

8.4 GOOGLY INDUSTRIES LIMITED

Asset A Asset B

Rs. in m Rate Months Rs. in m Rs. in m Rate Months Rs. in m

Borrowing cost 5 9% 12 0.45 10 9% 12 0.9

(31 Dec)

Investment 2.5 7% 6 (0.0875) 5 7% 6 (0.175)

income (30
June)

Total 0.3625 0.725

Borrowing
Cost

Expenditure 5 10
incurred

Cost of Assets 5.3625 10.725

8.5 KHAN LIMITED

Rs. in million General capitalization rate Months Rs. in million

Borrowing cost 100 9.4625% (W1) 6 4.731

Cost of factory 100

Total cost to be 104.731

capitalized

W1

Computation of capitalization rate

Weighted average rate (55 / 400) * 7% + (110 / 400) * 8% + (85 / 400) * 12% + (150 / 400) * 10%

0.9625% + 2.2% + 2.55% + 3.75% = 9.4625%

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 Answers

8.6 SPIN INDUSTRIES LIMITED

Rs.
Commitment fee 125,000
Actual borrowing costs of specific loan (W1) 2,050,000
General borrowing costs (W1) 1,175,283
Less: Investment income (W2) (137,500)
Interest costs to be capitalised 3,212,783

W1
Borrowing
Outstanding Outstanding
Months Rate of cost to be
amount month up to
outstanding interest capitalised
completion
Rs. Rs.
Specific loan
Utilised till first 31-Jan-
repayment 25,000,000 1-Sep-15 16 5 12% 1,250,000
Utilised after the first 31-May-
repayment 20,000,000 1-Feb-16 16 4 12% 800,000
2,050,000
General
Borrowings (W4)
Utilised after specific
loan exhausted on
2nd payment to 31-May-
contractor (W3) 8,125,000 1-Dec-15 16 6 12.08% 490,750
Principal payment of 31-May-
specific loan* 5,000,000 1-Feb-16 16 4 12.08% 201,333
3rd payment to 31-May- 12.08%
contractor 12,000,000 1-Feb-16 16 4 483,200
4rd payment to 1-Jun-16 31-May- 12.08%
contractor 9,000,000 16 0 -
1,175,283

W2: Investment income Rs.

Surplus fund available from 1-Sep-15 to 30-Nov-15
(Rs. 25m – Rs.0.125m – Rs. 8m – Rs. 10m) × 8% × 3/12 137,500

W3: Specific loan utilization

Commitment fee 125,000
Payment for obtaining permit 8,000,000
1st payment to contractor 10,000,000
2nd payment to contractor (balancing) 6,875,000
25,000,000

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Financial accounting and reporting I

Rs.
2nd payment to contractor (total) 15,000,000
Less: paid out of specific loan (as worked out above) 6,875,000
Paid from general borrowing 8,125,000

W4: Weighted average rate of borrowing

Weighted average
amount of loan Interest Rs.
Rs.
Rs. 25,000,000 × 13% ×
From Bank A 25,000,000 2,437,500
=
From Bank B 20,000,000 3,000,000
45,000,000 5,437,500

Weighted average rate of borrowing (Rs. 5,437,500 / 45,000,000) 12.08%

8.7 KATIE
Option 1 – Net grants off related expenditure
Statement of financial position as at 30 June Year 2 (extracts)

Rs.

Non-current assets

Property, plant and equipment 223,333

Current liabilities

Other current liabilities 100,000

Notes to the financial statements for the year ended 30 June Year 2 (extracts)

Property, plant and equipment Rs.

Cost (350,000 – 100,000) 250,000

Accumulated depreciation ((250,000 – 50,000) ÷ 5  8/12) (26,667)

––––––––

Carrying amount 223,333

––––––––

Included in statement of profit or loss for the year ended 30 June Year 2

Rs.

Depreciation charge 26,667

Training costs (70,000 – 40,000) 30,000

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Option 2 – Show grants separately from related expenditure

Statement of financial position as at 30 June Year 2 (extracts)

Rs.

Non-current assets

Property, plant and equipment 310,000

Current liabilities

Other current liabilities 186,667

Notes to the financial statements for the year ended 30 June Year 2 (extracts)

Rs.

Property, plant and equipment

Cost 350,000

Accumulated depreciation ((350,000 – 50,000) ÷ 5  8/12) (40,000)

––––––––

Carrying amount 310,000

––––––––

Other current liabilities

Deferred income relating to government grants 86,667

(100,000 - (100,000 ÷ 5  8/12))

Government grant repayable 100,000

––––––––

186,667
––––––––

Included in statement of profit or loss for the year ended 30 June Year 2

Rs.

Depreciation charge 40,000

Training costs 70,000

Government grant received (40,000)

Release of deferred government grant (13,333)

Tutorial note
The Rs. 100,000 grant in (3) has conditions attached to it. In such a situation, IAS 20 states that grants
should not be recognised until there is reasonable assurance that the entity will comply with any
conditions attaching to the grant. Since Katie is struggling to recruit, and there is only one month left
for recruitment to meet these conditions, then it does not seem that there is ‘reasonable assurance’.
Hence the grant should not be recognised as such, but should be held in current liabilities, pending
repayment.

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8.8 VICTORIA
(a) Treatment in the financial statements for the year ended 31 December Year 8 (IAS16)

Property 1

This is used by Victoria as its head office and therefore cannot be treated as an investment
property. It will be stated at cost minus accumulated depreciation in the statement of financial
position. The depreciation for the year will be charged in the statement of profit or loss.

Property 2

This is held for its investment potential and should be treated as an investment property. It will
be carried at fair value, Victoria’s policy of choice for investment properties. It will be revalued
to fair value at each year end and any resultant gain or loss taken to the statement of profit or
loss (Rs. 400,000 gain in Year 8).

Property 3

This is held for its investment potential and should be treated as an investment property.
However, since its fair value cannot be arrived at reliably it will be held at cost minus
accumulated depreciation in the statement of financial position. The depreciation for the year
will be an expense in the statement of profit or loss.

This situation provides the exception to the rule whereby all investment properties must be held
under either the fair value model, or the cost model.

(b) Analysis of property, plant and equipment for the year ended 31 December Year 8

Other land Investment Investment

and buildings property held property held Total
(W1) at fair value at cost (W2)

Rs. Rs. Rs. Rs.

Cost/valuation
On 1 January Year 8 1,000,000 2,300,000 2,000,000 5,300,000
Revaluation - 400,000 - 400,000
––––––––– ––––––––– ––––––––– –––––––––

On 31 December Year 8 1,000,000 2,700,000 2,000,000 5,700,000

––––––––– ––––––––– ––––––––– –––––––––

Accumulated depreciation
On 1 January Year 8 87,500 - 220,000 307,500
Charge for the year (W1) 12,500 - 40,000 52,500
––––––––– ––––––––– ––––––––– –––––––––

On 31 December Year 8 100,000 - 260,000 360,000

––––––––– ––––––––– ––––––––– –––––––––

Carrying amount
On 31 December Year 7 912,500 2,300,000 1,780,000 4,992,500
––––––––– ––––––––– ––––––––– –––––––––

On 31 December Year 8 900,000 2,700,000 1,740,000 5,340,000

––––––––– ––––––––– ––––––––– –––––––––

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Tutorial note
In practice, with a more complex property, plant and equipment table the investment
properties would be included within the land and buildings column with the required
disclosures being given separately in a note to the table.
Workings
(1) Depreciation on Property 1

Rs.

Brought forward (500,000 ÷ 40  7) 87,500

Year 8 (500,000 ÷ 40) 12,500

(2) Depreciation on Property 3

Rs.

Brought forward (2,000,000 ÷ 50  5.5) 220,000

Year 8 (2,000,000 ÷ 50) 40,000

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CHAPTER 9 – IAS 36: IMPAIRMENT OF ASSETS

9.1 ABA LIMITED
Aba Limited statement of profit or loss (extracts) – year to 31 March 2016

Note: workings in brackets are in Rs.000 Rs. Rs.

Depreciation: head office – 6 months to 1 October 2015
(1,200/25  6/12) 24,000
– 6 months to 31 March 2016
(1,350/22.5 (W1)  6/12) 30,000
54,000
Depreciation: training premises
– 6 months to 1 October 2016
(900/25  6/12) 18,000
– 6 months to 31 March 2016
(600/10  6/12) 30,000
48,000
Impairment loss (W2) 210,000
258,000
Statement of financial position (extracts) as at
31 March 2016 Rs. Rs.
Non-current assets
Land and buildings – head office (700 + 1,350 – 30) 2,020,000
– training premises (350 + 600 – 30) 920,000
2,940,000
Revaluation reserve
Head office land (700 – 500) 200,000
Building (1,350 – 1,080 (W1)) 270,000
Training premises land (350 – 300) 50,000
520,000
Transfer to realised profit (270/22.5 (W1)  6/12
re depreciation of buildings) (6,000)
514,000

Workings
(W1) The date of the revaluation is two and a half years after acquisition. This means the remaining
life of the head office would be 22.5 years. The carrying value of the head office building at the
date of revaluation is Rs. 1,080,000 i.e. its cost less two and a half years at Rs. 48,000 per
annum (Rs. 1,200,000 – Rs. 120,000).
(W2) Impairment loss: the carrying value of training premises at date of revaluation is Rs. 810,000
i.e. its cost less two and a half years at Rs. 36,000 per annum (Rs. 900,000 – Rs. 90,000). It is
revalued down to Rs. 600,000 giving a loss of Rs. 210,000. As the land and the buildings are
treated as separate assets the gain on the land cannot be used to offset the loss on the
buildings.

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9.2 HUSSAIN ASSOCIATES LTD

Impairment of plant
The plant had a carrying amount of Rs. 240,000 on 1 October 2015. The accident that may have
caused impairment occurred on 1 April 2016 and an impairment test would be done at this date. The
depreciation on the plant from 1 October 2015 to 1 April 2016 would be Rs. 40,000 (640,000 x 121/2%
x 6/12) giving a carrying amount of Rs. 200,000 at the date of impairment. An impairment test requires
the plant’s carrying amount to be compared with its recoverable amount. The recoverable amount of
the plant is the higher of its value in use of Rs. 150,000 or its fair value less costs to sell. If Hussain
Associates Ltd trades in the plant it would receive Rs. 180,000 by way of a part exchange, but this is
conditional on buying new plant which Hussain Associates Ltd. is reluctant to do. A more realistic
amount of the fair value of the plant is its current disposal value of only Rs. 20,000. Thus the
recoverable amount would be its value in use of Rs. 150,000 giving an impairment loss of Rs. 50,000
(Rs. 200,000 – Rs. 150,000).
The remaining effect on income would be that a depreciation charge for the last six months of the year
would be required. As the damage has reduced the remaining life to only two years (from the date of
the impairment) the remaining depreciation would be Rs. 37,500 (Rs. 150,000/ 2 years  6/12).Thus
extracts from the financial statements for the year ended 30 September 2016 would be:

Statement of financial position

Non-current assets Rs.

Plant (150,000 – 37,500) 112,500

Statement of profit or loss

Plant depreciation (40,000 + 37,500) 77,500

Plant impairment loss 50,000

9.3 SUNSHINE LIMITED

Sunshine Limited 1

For the year ended 30 June 2017 Rs. in million

Amount to be recognised in SOFP

Machines (170+300+65+55) 590

Revaluation surplus (W-1) 93

Amount to be recognised in SOPL

Depreciation (W-1) 63

Impairment (W-1) 20

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A B C D Total

W-1: -------------------------- Rs. in million --------------------------

Cost of machine 200 230 90 60 580

Depreciation for the year (20) (23) (15) (5) (63)

(200÷10) (230÷10) (90÷6) (60÷12)

Cost less depreciation 180 207 75 55 517

Active market value No active

170 300 65 market

Impairment (10) - (10) (20)

Revaluation surplus - 93 - - 93

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CHAPTER 10: IFRS 15: REVENUE FROM CONTRACT WITH CUSTOMER

10.1 PARVEZ LIMTED
(1) Sale and repurchase agreement
The transaction is in the nature of sale and repurchase agreement therefore the economic
phenomenon of the transaction is that of a loan for which the goods have been given as security.
Therefore no contract of sale of goods or services is identified.
The difference between the sale price of Rs.18m and the repurchase price of Rs.19m
represents the interest on the loan for a period of four months.
To account for the transaction in accordance with its substance:
 The goods should remain in inventories of PL at the lower of cost and net realisable value.
 No sale should be recorded.
 The amount once received from the bank should be treated as a current loan liability of Rs.18m.
 Interest should be charged applying implicit rate to profit or loss for each reporting period.
(2) Consignment inventories
There is a contract for sale of cars between Parvez Limited (PL) and dealer containing
confirmation of respective right and obligation, payment term, commercial substance and
probability of collection of price.
There is only one performance obligation, namely, the transfer of cars to the dealer.
As per contract, the transaction price would be list price on the date of sale to third parties during
the six month period. Thereafter, though not specifically mentioned, after the lapse of fifteen
days the list price applicable on sixteenth day would be the transaction price of the unsold cars
not returned.
Since there is only one performance obligation, the question of allocation of transaction price
does not arise till the time of sale to third parties.
PL will recognize revenue upon satisfaction of performance obligation. Performance obligation
would be satisfied once the dealer has sold any cars to third parties during the six month period.
Thereafter, if the dealer does not return the unsold cars within fifteen days, the performance
obligation would be considered as satisfied on sixteenth day.
On 31 March 2017 the vehicles should remain in inventories in PL books of accounts.

10.2 SACHAL LIMITED

General considerations for revenue recognition
International Financial Reporting Standard (IFRS 15) provides that the revenue is recognized:
(i) when the performance obligation is satisfied by the entity by transferring a promised good or
service (ie an asset) to the customer; and
(ii) the asset is transferred when the customer obtains the control of that asset.
Based on this principle, the following is the considerations to be taken into account in determining
accounting for revenue:
(a) Restaurant management software
There exists a contract for sale of Restaurant management software between SL and customers
containing confirmation of respective obligation and right, payment term, commercial substance
and price is collected in advance.

There are two performance obligations, namely:

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Financial accounting and reporting I

 Explicit: delivery of software and

 Implicit: six month on-site support
As per contract, the transaction price is Rs.1.5 million for both performance obligations.
Based on stand-alone selling price approach, software will be priced as Rs.1.35 million and six
month on-site support services will be priced as Rs.0.15 million.
PL will recognize revenue from sale of software upon delivery if SL can objectively conclude that
the software meets the requirements of the customer. The term of full payment of transaction price
in advance is a reasonable evidence of clarity of specification between SL and customer. The
agreed thirty days trial time will be considered as a formality of the contract.
PL will recognize revenue from on-site support services over six months period on straight-line
basis.
(b) Maintenance support for the standard software package
Such service is provided under a written contract that contains confirmation of respective
obligation and right, payment term, commercial substance. SL will assess the collectability of the
price if not received in advance.
The performance obligation is to provide maintenance and support services.
The price of the service is Rs.0.3 million for one year term.
Since there is only one performance obligation, the question of allocation of transaction price does
not arise.
PL will recognize revenue over one year period on straight-line basis, as in this case input method
is appropriate. The pattern of resources consumed by SL is evenly spread over the period of
contract.
(c) Customized software
Such service is provided under a written contract that contains confirmation of respective
obligation and right, payment term, commercial substance. SL will assess the collectability of the
price.
The performance obligations are:
 Designing and development of customized software, and
 Maintenance and support services of the said software
The total price of the software and maintenance service will be determined on the basis of terms
of contract.
The price will be allocated between the two performance obligations. Price of maintenance
services for the first year is included in the total contract price. The allocated price of the first year
would be 10% of the contract price, which is the stand-alone price of the said services for the
second year. For second year it would be 10% of the contract price and for next three years the
maintenance and support services will be priced at 5% of the contract price. The price of design
and development will be 90% of the contract price.
Satisfaction of performance obligation:
Revenue from design and development - PL will recognize revenue from design and development
over time, because the software at every stage is expected to be customer- specific and would
have no alternative use for SL. The monthly payment based on the basis of charged hours
confirms that SL would have an enforceable right to receive payment if the contract is terminated
before completion.
Revenue from Maintenance and support services - PL will recognize revenue over five years
period on straight-line basis, as in this case, input method is appropriate. The pattern of resources
consumed by SL is evenly spread over the period of contract.

10.3 GALAXY TELECOMMUNICATIONS

(a) Performance obligation:

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A performance obligation is a promise in a contract with a customer to transfer to the customer

either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
Examples of promised goods and services
(i) Goods produced by an entity for sale
(ii) Resale of goods purchased by an entity
(iii) Resale of rights to goods or services purchased by an entity
(iv) Performing a contractually agreed-upon task for a customer
(v) Standing ready to provide goods or services
(vi) Providing a service of arranging for another party to transfer goods or services to the
customer
(vii) Granting rights to goods or services to be provided in the future that a customer can resell
(viii) Constructing, manufacturing or developing an asset on behalf of a customer
(ix) Granting licences
(x) Granting options to purchase additional goods/services
(b)

Debit Credit
Adjusting entry ------ Rupees ------
Advance from customers 378,000
Revenue (Smart phones) (18,000÷*39,600×34,650)×20 315,000
(Network-usage) (21,600÷*39,600×34,650)×{20×(2÷12)} 63,000

Full price 18,000+1,800×12=39,600

10.4 JUPITER LIMITED

(a) Option 1: Lump sum payment
Debit Credit
Date Description
---------- Rupees ----------
01-01-17 Cash 200,000
Contract liability 200,000
31-12-17 Interest expense 13,193
Contract liability (200,000×6.596%) 13,193
31-12-17 Contract liability 110,000
Revenue 110,000
31-12-18 Interest expense 6,807
Contract liability 6,807
(200,000+13,192–110,000)×6.596%
31-12-18 Contract liability 110,000
Revenue 110,000
Option 2: Normal payment terms

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Financial accounting and reporting I

Debit Credit
Date Description
---------- Rupees ----------

31-12-17 Cash 110,000

Revenue 110,000

31-12-18 Cash 110,000

Revenue 110,000

10.5 PLUTO LIMITED

a) DISCOUNT ALLOCATION
Stand- Price after
1st discount Price after 1st 2nd discount
alone 2nd
Chemical allocation discount allocation
price discount
------------------------------------------- Rupees -------------------------------------------
C-1 100,000 - 100,000 3,704 96,296
(100,000×
10,000/270,000)
C-2 90,000 13,500 76,500 2,833 73,667
(90,000×30,000 (76,500×10,000/
/200,000) 270,000)
C-3 110,000 16,500 93,500 3,463 90,037
(110,000×30,000 (93,500×10,000
/200,000) /270,000)
300,000 30,000 270,000 10,000 260,000

b) Indicators of transfer of control include the following:

 The entity has a present right to payment for the asset
 The customer has legal title
 The customer has physical possession (except in case of bill and hold, consignment sales
and repos)
 The customer has significant risks and rewards of ownership of the asset
 The customer has accepted the asset

10.6 SINGLE PERFORMANCE OBLIGATION

(a) Performance obligation
Performance obligation is a promise in a contract with a customer to transfer to the customer
either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
A good or service is distinct if both of the following criteria are met:
 the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer; and
 the entity’s promise to transfer the good or service is separately identifiable from other
promises in the contract.
(b)

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(i) The different services being performed under the contract are separately identifiable but
the customer cannot benefit from a services separately from the other.
Based on this, ECL should account for services in the contract as a single performance
obligation.
(ii) Transfer of software license, software updates and support services are distinct.
However, the software license is delivered before the other services and remains
functional without updates and technical support. Further, the customer can benefit from
each of the services either on their own or together with other services that are readily
available. Thus, the entity’s promise to transfer the good or service is separately
identifiable from other promises in the contract.
Based on the above, the contract should not be accounted for as a single performance
obligation.

10.7 CAR WORLD

Debit (Rs.) Credit (Rs.)

Date Particulars
--------- Rupees ---------

1/7/2014 Cash (40%×2,000,000) 800,000

Accounts receivable (2,000,000 / 1.1^2) 991,736

Revenue [800,000 + 991,736(W-1)] 1,791,736

30/6/15 Accounts receivable (10% × 991,736) 99,174

Interest income 99,174

30/6/16 Accounts receivable (208,264 – 99,174) 109,091

Interest income 109,091

30/6/16 Cash 1,200,000

Account Receivables 1,200,000

W-1: Present value of future payments Rupees

Amount receivable 1,200,000

PV=1,200,000 (1+10%)2 991,736

10.8 SALEEM ENGINEERING

(i) Revenue from lay away sales is recognized when the goods are delivered against full payment.
However, based on experience, such revenue may be recognized earlier e.g. when a significant
deposit is received provided the goods are on hand, identified and ready for delivery to the
buyer. Hence the sale may be recognized in this case provided the machines are ready for
delivery because the sale is to a frequent customer and a significant portion of the sale proceeds
has been received.
(ii) Although the fee is non-refundable, it will be recognized as income on the basis of matching
principle i.e. 1/12th of the annual fee will be taken to income each month.

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10.9 RECOGNITION OF REVENUE

(i) The completion of the sale transaction is uncertain because it is contingent upon purchaser
securing the contract with another company. Therefore, KIL should only recognize the revenue
when it is certain that YE will secure the contract. 10% revenue may be recognized if and when
it is confirmed that YE would not be able to secure the contract.
(ii) Revenue should be recognized when the food factory is delivered to the customer. Until then
no revenue should be recognized and the deposit should be carried forward as deferred income.
25% advance may be transferred to other income if the parties do not claim the asset.
(iii) If the outcome of a service transaction cannot be estimated reliably, revenue should only be
recognized to the extent that expenses incurred are recoverable from the customer. Thus
revenue to the extent of Rs. 12 million may be recognised.

10.10 LEGAL TITLE

(i) Examples of the situations where legal title passes but risk and rewards are retained
 An entity may retain obligations for unsatisfactory performance not covered by normal
warranty provisions;
 The receipt of revenue may be contingent on derivation of revenue by the buyer for its
sale of goods.
(ii) Examples of the situations where legal title does not pass but the risks and rewards are
transferred
 A seller may retain the legal title to the goods to protect the collectability of the amount
due but transfer the significant risks and rewards of ownership.
 In retail sale, a seller may offer a refund if the customer is not satisfied.

10.11 BRILLIANT LIMITED

Identification of performance obligations
There are three performance obligations:
1. Transfer of 15 Plastic card printing machines and its software
2. Transfer of 8 Laminators
3. Transfer of 100,000 plastic cards
Although the software is distinct from printing machine, but both are highly dependable to each other
and inter-related. In the context of this contract, these are providing a combined output to PL.
Therefore, software is not a separate performance obligation.
The total transaction price as per the contract is Rs.9.2 million.
On the basis of available information the stand-alone prices of each item will be estimated using the
following approaches:
Plastic card printing machines and its software:
In the absence of observable stand-alone price, we may use ‘adjusted market assessment’ approach.
The competitor’s machine is sold at Rs.750,000 which is similar (not identical) to BL’s machine. As
per given information, we may use customers’ rating for adjustment of competitors’ price that worked
out as follows:
Rupees
Competitors’ price 750,000
Adjusted price of BL machine (7/9*750,000) 583,000
Total price (15*583,000) 8,745,000

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Laminators:
There is neither observable stand-alone price nor any comparable competitors’ product available in
the market in which BL operates. In this case, we may use ‘expected cost plus a margin approach’.
The estimated stand-alone price is worked out as follows:
Rupees
Expected cost to BL 200,000
Margin estimated (800,000 - 600,000)/600,000 = 33% 66,000
266,000
Total price (8*266,000) 2,128,000
Plastic cards:
Observable stand-alone price is available
Total price (100,000*12) 1,200,000

Total of stand-alone prices is:

Plastic card printing machines and its software 8,745,000
Laminators 2,128,000
Plastic cards 1,200,000
Total 12,073,000
Allocation of Rs.9.2 million (transaction price) will be based on relative stand-alone prices, as the
difference of Rs.2.873 million between stand-alone price and transaction price is not specific to any
performance obligation.
Rupees
Plastic card printing machines and its software 6,663,961
(9,200,000*8,745,000/12,073,000)
Laminators 1,621,602
(9,200,000*2,128,000/12,073,000)
Plastic cards 914, 437
(9,200,000*1,200,000/12,073,000)
Total 9,200,000

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Financial accounting and reporting I

CHAPTER 11 – INTERPRETATION OF FINANCIAL STATEMENTS

11.1 WASIM PRIVATE LIMITED
Ratios
Year 7 Year 6
Gross profit % =
Gross prof it 405 362
x 100 x 100 = 19% x 100 = 20%
Sales 2,160 1,806

Net profit % =
Net prof it 9 53
x 100  2,160
x 100 =
0.4%
1,806
x 100 = 2.9%
Sales
Prof it bef ore interest and tax
Return on capital employed =
Share capital and reserv es+ Long - term debt capital
  
15 56
x 100 = 6% x 100 = 29%
246 190

Sales
Asset turnover = x 100
Share capital and reserv es+ Long - term debt capital
 
2,160 1,806
= 8.8 times = 9.5 times
246 190

Current ratio =
Current assets 422 265
= 1.7 times = 1.8 times
Current liabilities  254  147
Quick ratio =
Current assets excluding inv entory 422 - 106 265 - 61
 1.2 times  1.4 times
 Current liabilities  254  147
Average time to collect =
Trade receiv ables 316 x 365 198 x 365
x 365  53 day s  40 day s
 Sales  2,160  1,806

Average time to pay =

Trade pay ables 198 x 365 142 x 365
x 365 = 41 day s = 36 day s
 Cost of purchases  1,755  1, 444

Inventory turnover =
Inv entory 106 x 365 61 x 365
 22 day s = 15 day s
 x 365  1,755  1, 444
Cost of sales

11.2 AMIR AND MO LIMITED

  
Amir Mo
Gross profit % =
Gross prof it 90,000 490,000
x 100 x 100 = 60% x 100 = 70%
Sales 150,000 700,000

Net profit % =
Net prof it 44,895 270,830
x 100 x 100 = 30% x 100 = 39%
Sales  150,000  700,000

  
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Prof it bef ore interest and tax

Return on capital employed =
Share capital and reserv es+ Long - term debt capital
Amir 61,500 + 500
x 100 = 28.5%
207, 395 +10,000
Mo  +12,000
371,000
x 100 = 47%
565,580 + 250,000
 Sales
Asset turnover = x 100
Share capital and reserv es+ Long - term debt capital
Amir  150,000
= 0.7 times
207,395 + 10,000

Mo  700,000
= 0.85 times
565,580 + 250,000

Amir Mo
Currentratio =
Current assets 50,000 153,250
= 2.2 times = 1.3 times
Current liabilities 22,605 117,670
Quick ratio =
Current assets excluding inv entory 50,000 - 12,000 153,250 - 26,250
= 1.7 times = 1.1 times
 Current liabilities  22,605  117,670
Average time to collect =
Trade receiv ables 37,500 105,000
x 365 x 365 = 91 day s x 365 = 55 day s
 Sales  150,000  700,000
Average time to pay =
Trade pay ables 22,605 117,670
x 365 x 365 = 137 day s x 365 = 204 day s
 Cost of purchases  60,000  210,000
Inventory turnover =
Inv entory 12,000 26,250
x 365 x 365 = 73 day s x 365 = 46 day s
 Cost of sales  60,000  210,000

11.3 ALPHA LIMITED AND OMEGA LIMITED

 (a)  

Alpha Limited Omega Limited

(i) Current ratio
Current assets 620,000 504,000
Current liabilitie s 240,000 440,000
= 2.58:1 = 1.15:1
(ii) Acid test
Current assets - stock 340,000 332,000
Current liabilitie s 240,000 440,000
= 1.42:1 = 0.75:1
(iii) Creditors ratio
Average creditors 180,000 344,000
 365  365  365
Purchases or cost of sale 1,120,000 1,342,000
= 59 days = 94 days

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Financial accounting and reporting I

Alpha Limited Omega Limited

Collection period/Receivables
(iv)
Ratio
Average debtors 310,000 300,000
 365  365  365
Sales 1,440,000 1,720,000
= 79 days = 64 days
(b) Comments on comparative analysis of the two companies.
Based on the ratios computed above:
(i) In terms of working capital and liquidity, Alpha Limited is in a better position to honour its
obligations as they fall due because its current ratio and acid test ratio are higher than
those of Omega Limited.
(ii) Omega Limited’s payment period is better than that of Alpha Limited’s because Omega
Limited uses supplier’s funds to finance its operation.
(iii) Omega Limited’s collection period is also better than that of Alpha Limited. It extends
shorter credit period to its customers than Alpha Limited.
(iv) Omega Limited’s credit policy is better than that of Alpha Limited. This is because there
is 30 days difference between its payments period and collection periods compared with
Alpha Limited that had a longer collection period than its payment period.

11.4 BOOM LIMITED

Comparison of BL's ratios with industry average and possible reasons for variation

Ratios Industry's
(a) BL's ratios (b)Reasons for variation from industry
ratios
Gross profit 16.67% 23.50% Lower than industry
margin  Purchase of raw material at higher
prices as compared to its competitors
 Inability to obtain economies of scale in
production as compared to its
competitors
 Higher production costs due to
inefficiencies
 Deliberately keeping selling prices
lower to gain the market share
Net profit 3.83% 7.70% Lower than industry
margin  BL’s gross profit margin is 6.8% lower
than industry (16.6% Vs 23.5%)
whereas net profit margin is only 3.9%
lower which indicates that BL’s
operating expenses as a percentage of
sales are approximately 2.9% lower
than the industry
Current ratio 1.50 2.75 Lower than industry
 Since gearing ratio is lower than the
industry so BL might have:
 obtained running finances as compared
to long-term financing by the industry
availed extended credit terms from
suppliers
 Low inventory levels are maintained by
BL

© Emile Woolf International 188 The Institute of Chartered Accountants of Pakistan

 Answers

Ratios Industry's
(a) BL's ratios (b)Reasons for variation from industry
ratios
 Shorter credit terms are given to
debtors

Gearing ratio 37.5: 62.5 50 : 50 Lower than industry

 Difficulty in raising long-term finance
from banks due to low profits
 Running finance or extended credit
terms from suppliers are available for
BL

Return on 21.33% 32.90% Lower than industry

non- current  Lower profit margins
assets
 Relatively newer non-current assets
have higher carrying value

Return 20.00% 27.40% Lower than industry

on  Lower profit margins
capital
 High shareholder’s equity
employed

Return 16.10% 31.30% Lower than industry

on  Lower profit margins
equity
 Higher shareholder’s equity/low gearing
ratio

11.5 PROGRESSIVE STEEL LIMITED

Ratios Reasons for fluctuation Reason for fluctuation with Industry

with previous year

Gross profit In line with previous year. No Lower than industry

variation.
margin  The company is in initial phase and may
have kept the selling prices lower than
the industry to gain the market share.
 The company may not have been able
to purchase raw material at prices
which is available to its competitors.
 The company may not have been able
to obtain economies of scale in its
production which may have been
obtained by its competitors.
 Possibility of higher production costs.

Net profit Higher than previous year: Lower than industry however, the
difference is mainly attributed to lower
margin  Tight control over operating
gross profit margin.
costs.
 Increase in other income.
 Decrease in fixed cost per unit
due to increase in sale.

Return on Higher than previous year: Lower than industry

shareholder's
 Reduction in tax rates.  Lower gross profit and net profit
equity
margins.

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Financial accounting and reporting I

Ratios Reasons for fluctuation Reason for fluctuation with Industry

with previous year
 Reduction in interest rates.  Lower leverage.
 Decrease in equity might be due  Higher net assets resulting in higher
to buyback of shares. equity.
 Distribution of profits from
previous year which resulted in
decrease in equity.

Current ratio Lower than previous year: Lower than industry

 The company might have
obtained running finance facility
to fund it's operations in the
current year.
 Long term loan payments might
have become due in the next 12
month, which decreases the
current ratio.
 Decrease in current assets due
to better inventory
management/ reduction in
credit period of debtors.

Debt to equity Higher than previous year Lower than industry

ratio
 Decrease in reserves due to  Being a new entrant the company may
dividend pay- out. be in the phase of expansion thereby
raising debt accordingly.
 Further debt obtained during
the period.
 Decrease in equity might be
due to buyback of shares.

Cash Lower than previous year In line with industry.

operating
 Increase in current liabilities
cycle
might be due to increase in credit
period.
 Decrease in current assets
which might be due to greater
stock turnover or better inventory
management.
 By giving lower credit days to
debtors.

11.6 DAIRY FOODS LIMITED

(a) While analyzing liquidity positions of DFL, it is noted that current ratio has steadily increased
over the years and is better than industry average. However, the quick ratio has steadily
declined and is even lower then industry average. This is a clear evidence that the increase in
liquidity is caused by an increase in inventory.
Further, by considering the nature of highly perishable inventories kept by a dairy food
company, it is a possibility that DFL may bear high inventory losses due to short expiry.
Based on the above, I do not agree with the claim of DFL’s directors.

© Emile Woolf International 190 The Institute of Chartered Accountants of Pakistan

 Answers

(b)

Profitability ratios A B

Gross profit ratio (GP ÷ sales) 16.36% 18.00%

Profit to sales (Profit after tax ÷ sales) 9.62% 10.46%

Return on capital employed (Profit before interest and tax ÷ capital

employed) 32.11% 23.81%

Return on asset employed (Profit before interest and tax ÷ assets) 16.69% 15.92%

Company B's gross profit and net profit ratio is slightly higher as compared to Company A. The
difference is not significant and may be on account of higher level of sales resulting in lesser fixed
costs per unit.
Company A’s return on capital employed ratio and return on asset employed ratio are better than
Company B, because Company B has accumulated large balances of cash despite of availing long
term loan. Had Company B had used its cash balances to pay off the long term loan, it would have
both of these ratio better than Company A.

Liquidity Ratios A B

Current ratio (current assets ÷ current liabilities) 1.36 2.12

Quick ratio (current asset-inventory ÷ liabilities) 0.91 1.75

Company B has better current and quick ratio. However, it appears that these ratios are better than
Company A due to substantially high amount of trade debts in term of percentage of sales as sales
days. It also represents a risk that these trade debts may prove irrecoverable. Moreover, they may be
indicative of inefficient in debt collection as well.

Working capital turnover ratios A B

Stock turnover days (Stock ÷ Cost of goods sold × 365) [A] 58.60 40.44

Debtor turnover days (Debtor ÷ Revenue × 365) [B] 55.27 73.00

Creditor turnover days (Creditor ÷ Cost of goods sold × 365) [C] 96.65 91.26

Cash operating cycle [A+B–C] (days) 17.22 22.18

Stock turnover of Company B is better than that of Company A. Company B is turning over its stock 9
times whereas company A is doing it 6 times a year.
Company A is more effectively collecting it’s debtors than Company B. This could also be due to the
fact that Company B is following a lenient credit policy to attract more revenue. This fact is also
supported from higher stock turnover ratio of Company B.
Company A have availed better credit facility from its creditors but it may have forgone some
settlement discounts which might have resulted in lower gross profit ratio than that of Company B.
Overall cash operating cycle of Company A is better than Company B. Furthermore Company B has
accumulated large balances of cash despite the fact that it has also availed long term loan. Excess
cash balance should have been used to pay off the long term loan to reduce the finance cost.

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Financial accounting and reporting I

© Emile Woolf International 192 The Institute of Chartered Accountants of Pakistan