Financial Accounting & Reporting-I

ARM & AMK

ARTT Business School
Certificate in Accounting and Finance (CAF)
200 Minutes – 100 Marks
Faculty: ARM & AMK
Final Mock
CAF-1 – Financial Accounting and Reporting 1

Question 1 (20 Marks)

SHS Ltd commenced its business on January 1, 2017. Following items of PPE were appearing in the balance sheet of
SHS Ltd on January 1, 2020
Particulars Cost/FV Acc. Dep Model Useful life/Rate Dep. Method
Building 5,000,000 - Revaluation* 20 years** SLM
Plant 2,300,000 623,300 Cost 10% WDV
Furniture 800,000 240,000 Cost 10 years SLM
* Revaluation surplus against the building was Rs.300,000
** Remaining useful life at the date of last revaluation
Following information is also available for the year ended December 31, 2020
• On April 1, 2020 SHS started the construction of a new plant facility. The construction was financed through a
loan of Rs.700,000 @ 15% from ARM Ltd acquired on January 1, 2020. payments made to the contractor were
as follows:
Date of payment April 30, 2020 June 30, 2020 October 1, 202
Amount Rs.450,000 Rs.500,000 Rs.250,000
The additional payments were made through a running finance facility with a limit of Rs. 2,000,000 @ 12%.
Surplus funds when available were invested in a savings account @ 8%. The construction work was completed
on October 31, 2020 however, the work was suspended during the month of August 2020 due to delay in delivery
of construction material. The running finance facility remained unpaid at year end. Rs.2,500 were paid as
government duties
• An item of furniture costing Rs.200,000 was disposed on June 30, 2020 at a loss of Rs.20,000. All items of PPE
were acquired when SHS Ltd commenced its business
• Revaluation is carried out on December 31 every year. during the revaluation it was found that the FV of the
asset was Rs.4,250,000 and the remaining useful life was assessed at 16 years
• An impairment test was also carried out for the building and the value in use of building was assessed at
Rs.4,100,000 while the cost to sell the asset was Rs.500,000
• During the year two new buildings were acquired the details of which are:
o Building 1: It was acquired on 1 April 2020 at a cost of Rs.1,200,000. Initially SHS Ltd was uncertain as
to whether use the building as a head office or to rent it out. On October 31, 2020 it was decided to rent
out the building (i.e. to be held as an investment property). The FV of the building on October 31, 2020
was Rs.1,000,000 while that on December 31, 2020 was Rs.1,500,000
o Building 2: It was acquired at a cost of Rs.1,000,000 on July 1, 2020 in a remote area of the country in
response to a housing society project announced by the government. SHS is of the view that when the
construction of the project will start the market value of this building will rise exponentially. During the
year however the market value was not determinable. The useful life of the building was estimated at 16
years.
SHS carries its investment properties at fair value model
• On April 1, 2020 SHS acquired a solar panel energy system to generate their own electricity for their entire facility
at a cost of Rs.5,000,000. As the new system will reduce the carbon emission of the company by 30% and also
create employment opportunities, SHS was awarded a grant of Rs.1,200,000 on May 1, 2020 under the condition
that SHS will employee, at all time during the next 3 years, at least 80 employees in the new system. SHS deducts
the grant from the cost of asset to arrive at the carrying amount.
The solar panel system is to be depreciated using WDV method @ 15% and it has a residual value of Rs.500,000.
Required
Prepare disclosure notes under IAS 16 and IAS 40 for SHS Ltd. to be included in the financial statements for the year
ended December 31, 2020 (Comparative figures and total column is not required)

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 Financial Accounting & Reporting-I
ARM & AMK
ARTT Business School
Question 2 (8 Marks)
Following balances were available for plant of Rana Limited (RL) for the year ended December 31, 2020
Rupees
Plants – Cost 1,500,000
Accumulated depreciation (388,000)
Accumulated impairment (98,000)
Net book value 1,014,000

Additional Information
1. The plant was last tested for impairment on December 31, 2019, at which point the remaining useful life of the
asset was revised from 20 to 15 years. The plant is depreciated using straight line method
2. Another impairment review was carried out on December 31, 2021, which resulted
a. After carefully analyzing the market, it was concluded that the asset in its current condition can be sold
for Rs.1,225,000 but RL will have to a brokerage cost of Rs.60,000 and commission to sales agent of Rs.
40,000
b. It is probable that the asset will generate cash inflows of Rs.685,000 in 2022 which will reduce by 6%
every year.
c. The outflows associated with the plant in 2022 will be Rs. 335,000 which includes the depreciation
allocation of Rs.15,000. The outflows will increase by 8% every year
3. Impairment review is carried out based on a 5 year projection of future cash flows. It is estimated that the asset
at the end of next 5 can be sold for Rs. 450,000 but brokerage of 50,000 will have to be paid. At the end of its
useful life the asset will have no scrap value
4. The pre-tax interest rate is 12% and post-tax interest rate is 10%
Required
Prepare journal entries for the year ended December 31, 2021

Question 3 (10 Marks)

Artur has provided his son, Alex, with all the capital required in the setting up of a business on 1 April 2013 and its
subsequent development. Alex has now produced the following summarized accounts as a basis for discussing the
progress of the business with his father.
Statement of profit or loss Mar 14 Mar 15 Statement of financial position 1 Apr 13 Mar 14 Mar 15
Rupees in ‘000’ Rupees in ‘000’
Revenue 100 140 Non-current assets 70 70 80
Cost of sales (60) (90) Inventory 5 7 8
Gross profit 40 50 Trade receivables 0 11 24
Expenses (32) (51) Bank/(Overdraft) 13 2 (4)
Profit/(Loss) 8 (1) 88 90 108

Trade payables 3 5 8
Capital employed 85 85 100
88 90 108

Alex is keen for his father to increase the capital employed in the business and has drawn his father’s attention to the
following matters revealed in the accounts.
1. A Rs.15,000 increase in net capital employed can be linked with a Rs.40,000 increase in revenue during the past
year.
2. The rate of inventory turnover during the past year has been 12 as compared with 10 in the previous year.
3. The increase in fixed overheads last year is due to the renting of larger premises. However, these new premises
would be adequate for a turnover of Rs.200,000.
Artur is not pleased with the results of his son’s business. Alex can easily obtain employment offering a salary of Rs.10,000
per annum and Artur can obtain 10% from a bank deposit account.

Required
a. Calculate for each of the years ended 31 March 2014 and 2015 FOUR financial ratios which draw attention to
matters which could give Artur cause for concern. State clearly the formula or basis for each ratio used. (6)
b. Outline THREE reasons for closing the business and ONE reason in favor of its continuance (4)

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 Financial Accounting & Reporting-I
ARM & AMK
ARTT Business School
Question 4 (16 Marks)
Following is the receipt and payment account of Launchpad Organization, which is engaged in the provision of
technological education, for December 31, 2019
Launchpad Organization
Receipts And Payments Account
For The Year Ended December 31, 2019
Receipt Rupees Payment Rupees
Op Bal 125,000 Electricity 184,000
Subscription Income 650,000 Rent of Premises 57,000
Debtors 63,000 Repairs and maintenance 47,000
Sale of equipment on March 31, 2019 124,500 Misc. expenses 425,000
Sale of merchandise 132,000 Purchase of merchandise 78,000
Contributions received 514,000 Wages and Salaries 38,000
Investment income 15,000 Creditors 98,000
Office supplies 181,000
Utilities 132,000
Furniture - June 30, 2019 128,000
Transportation-in for Merchandise 100
Closing Bal 249,000
1,623,500 1,623,500

Additional Information
1. The composition of accumulated funds at January 1, 2019 is as follows
Type Remarks Amount
It is an unrestricted fund used for the general operations of the
General fund 350,000
organization
It is a restricted fund used for multiple technologically equipped
Launchpad fund laboratory for students. An annual subscription of Rs.1,000 has to be paid 180,000
for using the laboratory
Endowment fund The fund is used to finance the education of meritorious students 120,000
650,000
2. Launchpad had following assets appearing in its balance sheet as at 31 December 2018
Assets NBV Rate Method
Vehicle 588,000 10% WDV
Furniture 385,000 8% WDV
Equipment 642,000 15% WDV
Buildings 284,800 12% WDV
Equipment sold had a NBV of Rs.142,000 at the time of sale.
3. Launchpad operates a canteen on its premises for its members as well as public which is operated by volunteers
and maintains a margin of 30%. The details of canteen operations were as follows
Particulars Op Bal. Cl. Bal
Inventory 34,000 42,000
Debtors 32,000 43,000
Creditors 64,000 48,500
Advance Salaries 46,000 55,000
Rs.12,000 worth of debtors were written off as non-recoverable
4. Breakup of incomes and expenses are as follows
Electricity Rent Salaries Utilities Misc. expenses Depreciation
General fund 75% 70% 40% 50% 20% 60%
Launchpad fund 25% 30% 60% 50% 80% 40%
All other unclassified incomes and expenses are adjusted into general funds

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 Financial Accounting & Reporting-I
ARM & AMK
ARTT Business School
5. Other account balances were as follows
Particulars Op Bal. Cl. Bal
Electricity – Prepaid 134,000 125,200
Rent of Premises - Prepaid 94,300 84,500
Repairs Payable 27,600 31,000
Investment receivable 34,000 36,000
Subscription in advance 135,000 114,000
Subscription receivable 202,000 164,000
6. Contribution received is 45% for general fund, 35% for launchpad and 20% for endowment fund
7. Subscription income is to be classified in launchpad fund only

Required
Prepare an income and expenditure account using restricted method for Launchpad Organization for the year ended
December 31, 2019 and astatement of changes in net asset for that date

Question 5 (18 Marks)

Tajdaar Limited is in the process of finalizing its financial statements for the year ended December 31, 2020. Following
information has been made available for the preparation of statement of changes in equity
Particulars 31 Dec 2019
Share capital 3,400,000
Share premium 1,500,000
Retained earnings 5,800,000
Revaluation surplus 900,000
Additional information
1. The details of shares issued are as follows
a. An ordinary share issue of 50,000 shares at a premium of Rs.8 was made on 1 April 2019
b. A right issue of 20% was made on 1 June 2020 at an exercise price of Rs.15 per share. Market price
immediately before right issue was Rs.21 per share
c. An ordinary share issue on 1 October 2020 was also made of 30,000 shares and a total of Rs.570,000
was raised through the share issue
2. The details of dividends declared are as follows
Final dividend* Interim dividend**
Year end
Cash Bonus Cash Bonus
Dec-18 8% 15% 20% 16%
Dec-19 12% - 15% 20%
Dec-20 - 18% - 15%
* Declared on 31 March every year
** Declared on 30 June every year
3. During the review, it was identified that a plant was purchased on 30 June 2016 at a cost of Rs.800,000 but was
capitalized as furniture and fixtures on 1 August 2016 when the production start. The plant was available for use
on the date of purchase. Company depreciates its furniture using straight line method over a useful life of 10
years and plants using written down value method at 15%. The plant has a residual value of 50,000
4. The company decided to change its accounting policy of valuation of inventory from FIFO to weighted average.
The change in policy will have the following impact on closing inventory of the company
Year end Increase / (decrease) by
Dec-17 80,000
Dec 18 (120,000)
Dec 19 142,000
Dec-20 (30,000)
5. The transfer of incremental depreciation for December 2020 was Rs.120,000 (2019: 80,000)
6. Revaluation surplus is from the revaluation of buildings. Due to revaluation carried out on 31 December 2020,
the carrying amount of buildings has to be reduced by 800,000.
7. Profit after tax for December 31, 2020 was Rs.1,500,000 (2019: 1,250,000)

Required
Prepare a statement of changes in equity for the year ended December 31, 2020 (including comparative figures) along
with relevant notes to the financial statements. (Total column is not required)

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 Financial Accounting & Reporting-I
ARM & AMK
ARTT Business School

Question 6 (4 Marks)
Window dressing is the adaptation of the rules and practices to present financial statements in a way that business situation
appears better than it actually is.
Give any four examples of how financial statements can be window dressed

Question 7 (8 Marks)
Laser Limited has a profit for the year ended 31 December 2015 of Rs.125,000 (2014: loss of Rs.50,000). Details of Laser
Limited’s share capital and potential share capital include the following:
• At 1 January 2014 there were 100,000 ordinary shares in issue, all of which were issued at a fair value of Rs.17.5
per share.
• On 30 November 2014, 12,000 ordinary shares were issued at a fair value Rs.20 per share. There have been no
other issues since 30 November 2014.
• There are 25,000 options in issue entitling the option holder to 1 ordinary share at a strike price of Rs.20 per
share (the average market price of an ordinary share for 2015: Rs.27.5).
Additional Information
• An interim ordinary dividend of Rs.0.4 per share was declared and paid on the 30 June 2015. On 15 December
2015 a final ordinary dividend of Rs.2,800 was declared.
• No dividends were declared in 2014 due to the loss made in 2014.
• Corporate income tax is levied at 35%.
• There are no components of other comprehensive income.
Required
Disclose earnings per share in the statement of comprehensive income of Laser Limited for the year ended 31 December
2015, in accordance with the International Financial Reporting Standards.

Question 8 (12 Marks)

Malaika Limited (ML) is engaged in the business of supplying juicers and blenders which it purchases from Farishta
Limited (FL). Following information is available for the year ended December 31, 2020.
1. Profit before interest and tax for the year is Rs.2,340,000
2. Sales of Blenders are made on credit while Juicers are sold on cash basis.
3. Up to last year, ML was earning a gross profit of 30% on cost of Blenders and 35% on sale value of Juicers. With
effect from 1 January 2020 ML increased sales prices of both the products by 20%
4. Payable to FL on 31 December 2020 was Rs.2,420,000 (2019: Rs.3,600,000)
5. Position of stock was as follows
Juicer Blender
Stock on 1 Jan 2020 1,235,000 2,470,000
Stock on 31 Dec 2020 975,000 2,597,000

6. Purchases amounted to Rs.7,670,000. 60% of the purchases made during the year represent blenders.
7. Receivable from blender sales on 31 December 2020 was Rs.1,683,000 (2019: 1,410,000)
8. Depreciation for the year amounted to Rs.500,000 and bad debt expense amounted to Rs.250,000
9. Interest expense and tax expense paid amounted to Rs.320,000 and 285,000 respectively

Required
Prepare ‘operating activities’ segment of statement of cash flows for the year ended December 31, 2020 using direct
method

Question 9 (4 Marks)
a. An entity made a profit of Rs. 550,000 for the year 2020 based on historical cost accounting principles. It had
opening capital of Rs. 1,500,000. During 2020, specific prices indices increased by 15% while general price indices
increased by 10%. How much profit should be recorded for 2020 under physical capital maintenance concept?
b. An entity made a profit of Rs. 480,000 for the year 2018 based on historical cost accounting principles. It had
opening capital of Rs. 1,100,000. During 2018, specific price indices increased by 15% while general price indices
increased by 12%. How much profit should be recorded for 2018 under real financial capital maintenance
concept?

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