Certificate in Accounting and Finance Stage Examination

Date: 25 Feb 2025 Additional reading time – 15 Minutes

Financial Accounting & Reporting II

SECTION A

Question: 01
(a) Control is considered as transferred when:
(i) The customer has legal title
(ii) The Customer has physical possession.
Required:
Write 3 exception of the above rules. (03)

(b) The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction
price.
List down any 4 factors that may affect the determination of transaction price. (02)

Question: 02
Habib is a chartered accountant and employed as Finance Manager of Ghizar Limited (GL). He has recently
returned after a long medical leave and has been provided with draft financial statements of GL for the year ended
30 June 2023.
While reviewing the financial statements, he noted the following issues:
i. As at 30 June 2023, dismantling cost relating to a plant has increased from initial estimate of Rs. 30
million to Rs. 40 million. Further, fair value of the plant on that date was assessed at Rs. 112 million
(net of dismantling cost). No accounting entries have been made in respect of increase in dismantling
liability and revaluation of the plant.
The plant had a useful life of 5 years when it was purchased on 1 July 2021. The carrying value of
plant and related revaluation surplus included in the financial statements are Rs. 135.4 million
(after depreciation for the year ended 30 June 2023) and Rs. 3.15 million (after transferring incremental
depreciation for the year ended 30 June 2023) respectively.
ii. During the year Investment property was purchased for Rs. 200 million. Loan taken to finance the
Investment property specifically @ 15%. Interest paid for the year was capitalized in Investment
property.
The appropriate discount rate is 8%.
Following figures are reflected in the draft financial statements:
Rs. in million
Profit before tax 125
Total assets 1,420
Total liabilities 925
Required:
Determine the revised amounts of profit before tax, total assets and total liabilities after incorporating the impact
of above adjustments, if any. (06)

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Question:03
(i) On 1 January 2022, Hassan limited (HL) entered into a contract with Ahad Limited to construct a
cruise ship for Rs. 400 million to be delivered on 31 December 2023 i.e. the date on which
control of the ship would be transferred to AL. As per the contract, 90% of agreed amount was
paid immediately by AL and the balance will be paid on delivery till 31 December 2022, only
40% of the construction of the ship was completed at a cost of Rs. 150 million which is recorded as
Cost of sales.
HL recorded the amount received at the date of contract as revenue. And only recorded an Interest
expense amounting to Rs 45.36 million at year end.
(ii) On 15 October 2022. Hassan Limited sold ready-made Cruise ship to Beta limited for Rs 25 million.
As per the contract, payment would be made after 2 years. The accountant recognized sales revenue of
Rs.25 million upon delivery on 15 October 2022. Further, commission paid to sales employees for
winning the contract of Rs 1.6 million was capitalized and is being amortized over 2 years period.
(iii) No Entry was passed for the services rendered for the contract entered into on 01 Nov 2022 between
Hasan Limited (HL) and Waseem Limited (WL). The Contract states that WL will issue its shares in
consideration for the services. The work begins immediately.
In exchange for the service, WL promises 300 shares of its ordinary shares per month of service. The terms
in the contract require that the shares must be paid upon the successful completion of each month of service.
On 30th November 2022, when HL received 300 shares as agreed, the fair value of one share of WL was
Rs. 28.
On 31st December 2022, when HL received 300 shares as agreed, the fair value of one share of WL was Rs.
35.
Other Information:
The Company designate its investments and liabilities to be valued at FV through OCI
Applicable discount rate/Interest rate is 15% per annum where ever required.

Required:
Prepare correcting entries in books of HL for the year ended 31 December 2022 in accordance with “Revenue from
contracts with customers” (09)

Question:04
(a) On 15 October 2023, Rubab Industries Limited (RIL) made the following investments:
Percentage of
No. of Cost of investment Transaction Cost
Name of Investees shareholding
shares (Rs. in million) (Rs. in million)
acquired
Kianat Limited
155,000 4% 20 01
(KL)
Bushra Limited 70
135,000 2%
(BL) (including transaction cost 2%)
Investment in KL was irrevocably elected at initial recognition as measured at fair value through OCI.
Investments in BL were designated as measured at fair value through profit or loss.
On 31 December 2023, the market price of shares of KL and BL as on 31 December 2023 was Rs. 120 and Rs. 550
respectively.
RIL’s broker normally charges transaction costs of 0.2%.
Required:
Explain the accounting treatment of above transactions in accordance with International Financial Reporting Standards.
(04)
(b)
On 1 January 2023, Rubab Industries Limited (RIL) issued a deep discount debenture with a Rs. 120,000 nominal value.
It is issued at discount rate of 12.5% of nominal value, and the costs of issue was Rs. 5,000.
Interest of 5% on nominal value is payable annually in arrears. The debenture must be redeemed on 31 December 2027
(after 5 years) at a premium of 15.098%. The effective interest rate is 12% per annum.
Required:
Calculate the amounts to be reported in Statement of financial Position of RIL from 2023 to 2027.
(year end is 31 December) (04)

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Question:05
(a)
During the year ended 31 December 2023, following transactions were made by Kaka Limited (KL):
On 1 April 2023 KL acquired a license for operating a TV channel for Rs. 98.4 million out of which Rs. 50 million
was paid immediately. The balance amount is payable on 1 April 2025. A mega social media and print media
campaign was launched to promote the channel at a cost of Rs. 9 million. The transmission of the channel started
on 1 August 2023.
In the absence of any active market, the management has estimated that residual value of the license would be Rs.
15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the renewal cost
is significant, the management intends to renew the license only once and sell it at the end of 8 years.
Applicable discount rate is 10% p.a.
Required:
Discuss how these transactions should be recorded in KL’s books of accounts for the year ended 31 December
2023. (07)
(b)
What documentation is encouraged to be prepared by chartered accountant when he faces an ethical issue at
employing organization? (02)

Question: 06
Select the most Appropriate answer(s) for the options available for each of the following Multiple-choice Questions:
(i) A foreign company having paid up capital equivalent of Rs.250 million, turnover of Rs 900 million and
725 employees. How it shall be classified according to companies act,2017
(a) Public interest company
(b) Large sized company
(c) Medium sized company
(d) Small sized company (01)
(ii) Mr Waseem is a car dealer. Cars are sold both on cash and finance lease basis. He has been selling a car
at the following terms:
Fair value Rs. 5,000,000
Annual lease rental in arrears Rs. 1,646,199
Market rate 12% per annum
Lease term 4 years
What would be the effect on sales revenue and Unearned finance income if annual lease rental is increased
to Rs. 1.8 million and all other terms remain the same?
(a) Increase in sales revenue and increase in finance income
(b) Decrease in sales revenue and increase in finance income
(c) No change in sales revenue and increase in finance income
(d) Increase in sales revenue and no change in finance income (02)

(iii) Naima Limited owns shares, 70% of Faiza Limited and 30% of Farhan Limited. The tax charge for each
company for the year is:
Naima Limited Rs. 80 million, Faiza Limited Rs. 64 million and Farhan Limited Rs. 48 million
respectively.
What should be shown as the tax charge in the consolidated statement of comprehensive income?
(a) Rs. 124.8 million
(b) Rs. 144 million
(c) Rs. 139.2 million
(d) Rs. 192 million (01)
(iv) Which of the following are true about “Ethics”?
(i) Ethical behavior is more than obeying laws, rules and regulations.
(ii) Ethics is about doing ‘the right thing’.
(iii) The accountancy profession is committed to acting ethically and not in the public
interest.

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 (a) (i) and (ii) only
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i), (ii) and (iii) all (01)

(v) A conditional grant related to a biological asset measured at its ‘fair value less estimated point-of-sale costs’
should be recorded as income:
(a) over the period in which conditions would be fulfilled
(b) only when the grant becomes receivable
(c) only when the conditions are met
(d) over the life of related biological asset (01)

(vi) An entity acquired a patent for a period of ten years at cost of Rs. 100 million. The patent can be further
renewed for another five years at renewal cost of Rs. 1 million. The entity estimated that expected period
of cash inflows is twelve years from acquisition date. The useful life of patent in years is:

(a) Five (b) Ten (c) Twelve (d) Fifteen (01)

(vii) An entity X has 3 reportable segments: A, B and C. The revenue for segments A, B and C for the
reporting period is Rs. 5 million, 6.5 million and 4.5 million respectively. These amounts include Rs.
1.3 million of intersegment revenue from B to A. There is also Rs. 2.4 million of other revenues not
allocated to any segment.
What amount of revenue should X report?
(a) Rs. 16 million
(b) Rs. 17.1 million
(c) Rs. 18.4 million
(d) Rs. 19.7 million (02)
(viii) Value of Internally Generated brand of kaly Khan limited has reduce from 200 million to Rs.150 million.
How it would affect the financial statements of Kaly khan Limited?
(a) Impairment of 50 million will be charged in P&L
(b) Revaluation loss will be recorded for 50 million.
(c) No effect on financial statements
(d) Gain would be charged for Rs 50 million in P& L (01)

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 SECTION B

Question # 7
Pakistan Auto Limited (PAL) is a listed company engaged in the business of Manufacturing and trading of various
products. Following are the extracts from its trial balance for the year ended 30-06-2023.
Dr. Cr.
Rs in million
Sales - Manufactured goods (Local) 60,324
Sales - Manufactured goods (Export) 20,200
Purchased and packaged goods 40,300
Sales tax on Manufactured Goods 15,324
Sales tax on Purchased goods 9,224
Trade discount 2,594
Settlement Discount 682
Scrap Sales & interest income on lease 1,400
Salaries, wages and benefits (55% charged to cost of sales) 25,240
Repairs and Maintenance – office buildings 62
Auditor’s Remuneration 50
Donations 12
Loss on disposal of PPE 2
Stores and Spares consumed 18000
Other Expenses – Cost of sales 5,000
Raw material stock as on 1-07-2022 1,500
Work in Process stock as on 1-07-2022 1,000
Finished Goods stock as on 1-07-2022 1,500
Debtors 2,600
Raw Material Purchased during the year 30,500
Investment 125
Additional Information:
(i) Closing Stock as at 30-06-23 is as follows:
Rs in millions
Raw Material 2,000
Work in Process 882
Finished Goods 2,500

(ii) On 1-07-2022 PAL entered into a non-cancellable lease for a period of 3.5 years. Semi- annual lease
instalments of Rs. 48 million are receivable in arrears.
(iii) The lease contains an option to extend the lease term by 1.5 years. Each semi-annual lease instalment
in the extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL will
exercise this option. The rate implicit in the lease is 10% per annum. Useful life of machine is 6 years.
(iv) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million. PAL incurred a
direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the transaction.
As manufacturer Lessor, PAL has correctly recorded sales, cost of sales and other expenses.
(v) Donations includes following donations:
• Rs 1.1 million to Shaukat khanum hospital
• Rs 0.2 million to an NGO “Education for children”. The spouse of Mr Saleem
(director) is the trustee in NGO
(vi) Auditor’s remuneration includes out of pocket expenses and fee for review of Code of corporate
governance that are amounting to Rs. 3 million and 1 million respectively.
(vii) The tax charge for the current year after making all related adjustments is estimated at Rs. 1,352
million. The Deductible temporary differences of Rs. 3,120 million originated in the year over last year.
(viii) PAL also made an Investment in Babloo Limited during the year and recognize it at fair value
through OCI. The fair value of investment as at year end was Rs 95 million.
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(ix) During the year company has sold cars to its employees having carrying amount of 40 million at its book
value. One car having book value of 5 million was sold to Ms Ammara (Spouse of director Mr Hassan) for Rs 3
million. This sale was made through Auction.
(x) The applicable income tax rate is 30%.

Required:
(a) Prepare PAL’s Statement of comprehensive income for the year ended 30-06-2023 along with the relevant
notes showing possible disclosures as required Under the IFRSs and the companies Act,2017.(Comparative
figures and note on Accounting policies are not required) (13)
(b) Prepare Possible disclosures of Lease (07)

Question: 08
Following are the summarized statements of financial position of Tokyo Limited (TL) and Berlin Limited (BL) as
at 30 June 2023:
TL BL
--- Rs. in million ---
Property, plant and equipment 10,000 4000
Investment Property 440 290
Intangible Asset 300
Investment in Nairobi Limited 690
Investment in Berlin Limited 2,600 -
Inventories 1490 780
Other current assets 4500 1800
Share capital (Rs. 10 per share) 10,440 6,000
Share premium 3780 -
Retained earnings 2500 630
Liabilities 3000 540

Additional information:
(i) Details of TL’s investments are as follows:
Date of Share capital (Rs. 10 each) Retained earnings of
Holding% Investee
investment of investee investee
-------------- Rs. in million --------------
1 Oct 2022 75% BL 6,000 (1,650)
1-Jul-22 30% NL 1,000 1,400
(ii) TL acquired the shareholding in BL at the following consideration:
• Immediate cash payment of Rs. 2,600 million. This amount was recorded as
investment in TL’s books, and includes Rs. 120 million incurred as a valuation fee.
• Further cash payments of Rs. 2 per share and Rs. 1.5 per share to be paid on 30
September 2024 and 30 September 2025, respectively. This has not been recorded in TL’s books.
(iii) At the date of acquisition, carrying values of BL’s net assets were equal to their fair values, with the
following exceptions:
• The brand, an intangible asset, had a carrying value of Rs. 160 million and a fair value
of Rs. 256 million. The remaining useful life of the brand on acquisition date is
estimated at four years. The recoverable amount of the brand as on 30 June 2023 was
estimated at Rs. 178 million.
• An investment property whose fair value exceeded the carrying value by Rs. 160
million. The property had a remaining useful life of eight years. Both TL and BL
subsequently measure investment properties using the cost model. Fair value of
Investment property at year end is increased by 150 million.
(iv) The fair value of BL’s share was Rs. 8.5 per share on the acquisition date.
(v) Subsequent to the acquisition date, TL sold goods to BL at a sale price of Rs. 500 million, generating a
profit of Rs. 160 million. 80% of these goods were sold by BL to its customers at a profit of Rs. 150 million
before 30 June 2023.

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(vi) TL acquired the shareholding in Nairobi Limited (NL) by transferring TL's land having a carrying value of
Rs. 690 million and a fair value of Rs. 932 million on that date. The investment in NL was recorded at
the carrying value of land.
(vii) NL paid a dividend of Rs. 5 per share on 1 June 2023. Earnings per share of NL for the year ended was
Rs. 14 per share.
(viii) TL measures non-controlling interest at the acquisition date at its fair value.
(ix) A discount rate of 17% per annum may be used wherever required.

Required:
Prepare TL’s consolidated statement of Financial Position for the year ended 30 June 2023. (16)

Question: 09
Tarzen Limited (TL) is finalizing its financial statements for the year ended 31 December 2021.
Following information has been gathered for preparing the disclosures relating to taxation:
(i) Profit before tax for the year was Rs. 350 million.
(ii) Accounting depreciation exceeds tax depreciation by Rs. 150 million (2020: Rs. 125 million). As on 1
January 2020, carrying value of property, plant and equipment exceeded their tax base by Rs. 600
million.
(iii) Expenses include restructuring of Rs. 50 million (2020: Rs. 35 million). As per tax rules, 150% of the said
expense is allowable as deduction.
(iv) On 1 July 2020, TL acquired an investment property for Rs. 100 million. The fair value of property as
on 31 December 2020 and 2021 was Rs. 115 million and Rs. 125 million respectively.TL follows fair value
model for accounting purposes. Tax authorities allow depreciation at 10% per annum on reducing balance
method. Further, full year’s tax depreciation is allowed in the year of purchase.
(v) On 1 July 2020, TL obtained a loan of USD 2 million which was entirely used to acquire a license from
a multinational company on the same date. The loan was repaid on 31 December 2020. TL estimates
the useful life of license to be indefinite. The exchange rate per USD on various dates are as follows:
1 Jul 2020 31 Dec 2020 30 Jun 2021
Rs. 145 Rs. 150 Rs. 160
Under the tax laws, exchange differences arising on foreign currency loans are added to / deducted from
the cost of asset. Amortization on license is allowed at 10% per annum on written down value. Further,
full year’s tax amortization is allowed in the year of purchase.
(vi) TL acquired 3% equity in Orange Limited for Rs. 400 million on 1 August 2021. The investment was
classified at fair value through other comprehensive income. As at 31 December 2021, the fair value of the
investment was Rs. 320 million. However, this has not yet been accounted for. As per tax laws, gain or loss
on investment is taxable at the time of sale.
(vii) Unused tax losses as at 31 December 2020 were Rs. 80 million.
(viii) Other receivable include dividend income of Rs. 10 million which is taxable at 12%.
(ix) Applicable tax rate is 30% except stated otherwise. However, it is announced on 29 December 2021 that
tax rate will be 32% in year 2022 and onwards.

Required:
(a) Prepare a note on taxation for inclusion in TL’s financial statements for the year ended 31 December 2021
and a reconciliation to explain the relationship between tax expense and accounting profit. (10)
(b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December 2021 and
2020. (07)

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