Financial Accounting and Reporting-II

Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.1 General Journal

Dr. Cr.
Date Description
Rs. in million
31/12/21 Depreciation expense (P&L) 1,845/9 205.0
Acc. depreciation 05.0
31/12/21 Interest expense (P&L) (W-1) 8.5
Dismantling liability/Provision for
decommissioning 8.5
31/12/21 Dismantling liability/Provision for (W-1)
decommissioning 32.7
Revaluation gain (P&L) (W-2) 24.4
Revaluation surplus (OCI) (Bal. fig.) 8.3

W-1: Dismantling cost Rs. in million

01/01/20 PV of dismantling cost 200×(1.10)–10 77.1
31/12/20 Unwinding of interest @10% 7.7
84.8
31/12/21 Unwinding of interest @10% 84.8×10% 8.5
93.3
31/12/21 PV of revised cost at revised rate 150×(1.12)–8 (60.6)
31/12/21 Decrease in liability due to revision 32.7

W-2: Previous revaluation loss on 31 December 2020:

Revalued amount 1,845.0
Carrying value of plant (2,000+77.1)×9/10 (1,869.4)
(24.4)

A.2 (a) Revenue recognition

As per IFRS 15, in cases where entity’s performance does not create an asset with
alternative use, the entity can recognize revenue over time if the entity also has an
enforceable right to payment for performance completed to date. As per agreement, EL
is entitled for remaining consideration only after delivery of each lot so revenue should
not be recognized over time as suggested by CFO. Proportionate revenue should be
recognized upon transferring control i.e. delivery of each lot consisting of 20 machines to
PL. Goods manufactured till year-end should be included in EL’s closing inventory and
the advance received from PL should be shown as contract liability.

Contract cost
The cost of Rs. 4 million for 1600 hours spent is correctly expensed out as such cost would
have been incurred whether contract was obtained or not. However, Rs. 6 million paid
for bonus should be capitalized as contract cost being an incremental cost of obtaining a
contract and should be amortized over contract period on a systematic basis. This
contract costs should not be amortized in year 2021 as no related revenue has been
recognized in 2021.

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) In given situation, CFO is in breach of principle of professional competence and due care
as CFO has a duty to maintain his professional knowledge and skill at such a level that
employer receives a competent service in accordance with applicable technical and
professional standards.

CFO should involve in continuing professional development activities which will develop
and maintain his capabilities enabling him to perform competently within the
professional environment.

A.3 Total Total

Net Profit
Assets Liabilities
---------- Rs. in '000 ----------
(i) As per Question 4,573 43,500 12,300
Dividend 40×5 200 200 -
Reversal of share of profit
(2,400/12×11×15%) (330) (330) -
Loss on fair value adjustment of shares
40×(80–70) (400) (400) -
(ii) Transaction cost (120/5×6/12) 12 (108) (120)
Additional finance cost (W-1) (33) - 33
Revised amounts 4,022 42,862 12,213

W-1: Additional finance cost

Rs. in '000
Correct cost (5,700–120)×13%×6/12 363
Wrongly charged 6,000×11%×6/12 (330)
33

A.4 (i) Cost incurred on pilot plant should be recorded as intangible as it falls under
development activities. As criteria for capitalizing development cost has been met, all
cost (i.e. designing, constructing and operating) incurred on pilot plant should be
capitalized as an intangible. Amortization will begin once development activity ends
and commercial production starts over the life of product.

(ii) This exchange has a commercial substance and future cash flows are expected to change
as a result of this exchange. Therefore, the exchange should be recognized at fair value.
As fair value of both assets exchanged is given, the exchange should be recorded at the
fair value of equipment given. So, the patent should be recorded at Rs. 60 million i.e.
sum of fair value of equipment given up (Rs. 35 million) and cash consideration (Rs. 25
million). Further, cost of transferring title of Rs. 2 million should be added to cost of
patent. No amortization will be charged on patent due to indefinite life. However, the
patent will be tested for impairment annually.

(iii) Grant of license by government should be treated as government grant. The license can
be recorded as intangible asset at its fair value of Rs. 50 million. Government grant so
recognized should be amortized to P&L over the life of license. Alternatively, intangible
asset can be recorded at a nominal amount. AL should select an accounting policy in
this regard and apply it consistently.

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.5 List of errors and omissions

Long term loans and advances – secured

1. With regards to loans and advances to directors, the purposes for which loans or advances
were made shall be disclosed.
2. Reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments shall be disclosed for directors only and not for Executives
and other employees;
3. The maximum aggregate amount outstanding at month end shall be disclosed for
Executives.
4. The particulars of collateral security held shall be disclosed when loans and advances are
secured.
5. The opening balance for year 2021 shall tie with closing balance for year 2020 i.e. Rs.
87,600.

Remuneration of chief executive, directors and executives

1. Comparative information for the year 2020 shall be provided.
2. Directors and Executives information shall be separately disclosed.
3. Number of persons shall be separately disclosed for chief executive, directors and
executives.
4. Other benefits e.g. vehicle, cellular phone, etc. in cash or in kind shall be disclosed stating
their nature and, where practicable, their approximate money values.

A.6 (i) (b) IAS 20

(ii) (b) recommending accounting standards to the Securities and Exchange Commission
of Pakistan for notification.
(iii) (d) None is correct
(iv) (c) at the date when fair value was determined
(v) (a) Directors approved the plan to close down the major segment before year-end but
announcement to public was made after year-end.
(d) A change in income tax rate announced after year-end.
(vi) (a) Only (I) is correct
(vii) (d) None is correct
(viii) (a) Accounts receivable Contract liability
(ix) (a) It may be a reportable segment if quantitative threshold is met

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.7 2021
Rs. in million
Current tax (W-1) 22.0
Deferred tax 10.5+1.8(6×30%)–0 12.3
34.3

Reconciliation between tax expense and accounting profit

Profit before tax 130.0
Tax @ 30% 39
Effect of low rate on dividend 4×20% (0.8)
Effect of low rate on fair value gain on investment 10×15% (1.5)
Effect of disallowed donation 5×40%×30% 0.6
Effect of previously unrecognized deferred tax on unused tax loss 10×30% (3.0)
34.3

W-1: Current tax Rs. in million

Profit before tax 130.0
Tax depreciation exceeding accounting depreciation (9.0)
Interest income exceeding interest receipt (12.0)
Commission receipt exceeding commission income 15.0
Donation disallowed 5×40% 2.0
Dividend income taxable at different rate (4.0)
Development cost expensed out 25.0
Tax amortization of development cost 25×28% (7.0)
Borrowing cost allowed in tax (8.0)
Fair value adjustment not yet taxable (10.0)
Taxable profit 122.0
Unused tax losses (50.0)
72.0

Tax @ 30% 21.6

Tax on dividend 4×10% 0.4
22.0

Deferred tax liability / (asset) as at 31 December 2021

Difference Tax rate Liability/(asset)
--------------- Rs. in million ---------------
Property, plant and equipment 63.0 30% 18.9
[60(18÷30%)–6+9]
Interest receivable 22.0 30% 6.6
[10(3÷30%)+12]
Unearned commission (45.0) 30% (13.5)
[30(9÷30%)+15]
Development cost (18.0) 30% (5.4)
(25×72%)
Capital work in progress 8.0 30% 2.4
Investment in FL 10.0 15% 1.5
(80–70)
Net deferred tax liability 10.5

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.8 Happiness Limited

Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2021
Rs. in million
Sales 4,100+2,250 6,350.0
Cost of sales 2,880+1,125+80(200×40%) (4,085.0)
Gross profit 2,265.0
Operating expenses 800+550+45(180/4) (1,395.0)
Other income 414+216–90(1,500×8%×75%) 540.0
Gain on re measurement of investments 195.0
Share of associate’s profit (W-2) 120.0
Other expenses 210(500–290)+42(280×15%) (252.0)
Finance cost 50+76.3(600×1.06×12%) (126.3)
Net Profit 1,346.7

Other Comprehensive Income

Loss on re-measurement of investment (80.0)
Share of associate’s OCI (20+100)×30% 36.0
(44.0)
Total comprehensive income 1,302.7

Profit or loss attributable to:

Owner of the parent (Bal.) 1,192.7
Non-controlling interests (W-3) 154.0
1,346.7

Comprehensive income attributable to:

Owner of the parent (Bal.) 1168.7
Non-controlling interests 154–20(80×25%) 134.0
1,302.7

W-1: Computation of goodwill Rs. in million

Cash 1,700.0
Contingent consideration 290.0
Deferred consideration 843×(1.12)–3 600.0
2,590.0
NCI 3,080×25% 770.0
3,360.0
Net assets of ML:
Share capital 1,500.0
Retained earnings 1,200.0
Fair value of software 180.0
Excess fair value of inventory 200.0
3,080.0
Goodwill 280.0

W-2: Share of associate’s profit Rs. in million

Profit 492(2,100–1,365–303+95–35)×10/12×30% 123.0
Share of unrealized profit on inventory 150×40%×20/120×30% (3.0)
120.0

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

W-3: Profit attributable to NCI Rs. in million

Profit 2,250–1125–550+216–50 741.0
Inventory at acquisition 200×40% (80.0)
Amortization of software 180/4 (45.0)
616.0
NCI @ 25% 154.0

A.9 (a) Statement of financial position (extracts) as at 31 December 2021

2021 2020
Note
--- Rs. in million ---
Non-current assets
Right of use - Machinery 1 17.77 26.66

Current assets
Photocopy rent prepaid 2/6×4 1.33 -

Non-current liabilities
Lease liability (W-2) 6.22 12.81

Current liabilities
Current portion of lease liability
(6.59+1.41);(7.74+2.26) 8.00 10.00

Statement of profit or loss (extracts) for the year ended 31 December 2021

2021 2020
Note
--- Rs. in million ---
Depreciation expense 1 8.89 8.89
Interest expense (W-2) 1.41 2.26
Photocopy rental 2×2/12×8 2.67 -

Notes to the financial statements (extracts) for the year ended 31 December 2021
2021 2020
--- Rs. in million ---
Right of use assets
Cost
Opening balance 35.55 -
Addition during the year 32.55(W-1)+3 - 35.55
35.55 35.55
Accumulated depreciation
Opening balance (8.89) -
Depreciation for the year 35.55/4 (8.89) (8.89)
(17.78) (8.89)
Closing carrying amount 17.77 26.66
Maturity Analysis
Not later than one year 8.00 10.00
Later than one year but not later than five years 7.00 15.00
15.00 25.00

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 Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

W-1: Present value of lease rentals

2020 12.00
2021 10×(1.11)–1 9.01
2022 8×(1.11)–2 6.49
2023 6×(1.11)–3 4.39
2024 1×(1.11)–4 0.66
32.55

W-2: Lease schedule

Opening Principal Interest Closing
Year Instalment
principal repayment @11% principal
2020 32.55 12.00 12.00 - 20.55
2021 20.55 10.00 7.74 2.26 12.81
2022 12.81 8.00 6.59 1.41 6.22
2023 6.22 6.00 5.32 0.68 0.90
2024 0.90 1.00 0.90 0.10 -
32.55 4.45

(b) Unguaranteed residual value (UGRV) estimated by FBL

Fair value 40.00
Initial direct to the lessor 2.00
Present value of lease payments (32.55–0.66+4×(1.11)–4+2×(1.11)–5 (35.71)
Present value of UGRV 6.29
UGRV 6.29×(1.11)6 11.76

(THE END)

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