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No. of pages: 13

Executive Level
Financial Accounting & Reporting Fundamentals

Instructions to candidates

(1)

(2)
Time allowed: Reading and planning – 15 minutes
Writing

Total: 100 marks

– 3 hours K
(3) Section 1: Question 1: 10 multiple choice questions (MCQs) – all
questions are compulsory.

Question 2: 10 short answer questions – all questions

E
1
are compulsory.

Section 2: 4 questions – answer any 3 questions.

Section 3: 1 question – compulsory

(4) Answers to all the questions should be in the answer booklet/s given
to you.

Answers to Question 1 (the most suitable answer (A, B, C or D))

should be entered in the answer booklet against the relevant SEPTEMBER
question number.
2016
(5) Begin each answer in Section 2 and Section 3 on a separate page in
the answer booklet.

(6) All answers should be in one language and in the medium applied
for.
 SECTION 1

All questions are compulsory.

Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

Question 01

You are required to choose the most appropriate answer.

(Total: 20 marks)

1.1 Which of the following statements is true in relation to ‘comparability’ as per the
Conceptual Framework for Financial Reporting?
A. Comparability is same as consistency.
B. Applying alternative accounting methods for the same economic
phenomenon improve comparability.
C. Comparability is applying the same accounting policies over periods even
though they become inappropriate.
D. Comparability enables users to identify and understand similarities in, and
differences among, items.
(2 marks)

1.2 Which of the following statements is correct in relation to the objectives of general
purpose financial reporting?
A. General purpose financial statements are to provide financial information of
an entity that is useful to a wide range of users who do not have the authority
to demand financial information directly.
B. One of the objectives of general purpose financial statements is to provide
financial information to users for their specific decision making needs.
C. General purpose financial statements provide all the financial information
required by the users.
D. General purpose financial statements are designed to show the value of the
reporting entity.
(2 marks)
1.3 Which of the following statements best explains the “dual effect” in recording
financial transactions?
A. Recording a debit entry as an increase in an asset or an expense.
B. Recording every transaction in prime entry books.
C. Recording every transaction in such a way that every debit entry is balanced
by a credit entry.
D. Recording a credit entry as a decrease in an asset or an increase in a liability.
(2 marks)

KE1 – September 2016 Page 2 of 13

1.4 Which of the following is not a component of cash and cash equivalents?

A. Bank overdraft
B. Investment in overnight repos
C. Investment in 6-month treasury bills
D. Investment in 1-month fixed deposits
(2 marks)
1.5 A (Pvt) Ltd dispatched 20 wristwatches to a credit customer along with a credit
invoice for the value of Rs. 100,000 (i.e. Rs. 5,000 per watch). Upon receipt, the
customer found 5 watches being badly damaged, and informed about this to A (Pvt)
Ltd. Subsequently it was agreed that the customer will accept 15 good watches and
return the damaged watches to A (Pvt) Ltd.
The source document A (Pvt) Ltd will raise in relation to and the prime entry book it
will record the receipt of those watches returned would be:
A. Debit note and sales day book
B. Credit note and sales returns day book
C. Debit note and general journal
D. Credit note and general journal
(2 marks)
1.6 Which of the following is correct with regard to qualitative characteristics of
financial information as explained in the Conceptual Framework for Financial
Reporting?

A. Relevance, materiality, accrual basis and faithful representation are

considered as fundamental qualitative characteristics of financial
information.
B. Comparability, verifiability, timeliness and understandability are enhancing
qualitative characteristics.
C. Information must be relevant, neutral and free from error in order to secure
faithful representation.
D. Substance over form could be considered as a separate qualitative
characteristic under the conceptual framework.
(2 marks)
1.7 A (Pvt) Ltd owns 40% of the voting power of B (Pvt) Ltd and has the power to
appoint or remove a majority of the members of its board of directors.
Which of the following statements is true in relation to the above scenario?
A. A (Pvt) Ltd has control over B (Pvt) Ltd
B. A (Pvt) Ltd has a non-controlling interest in B (Pvt) Ltd
C. B (Pvt) Ltd is an associate of A (Pvt) Ltd
D. Investment in B (Pvt) Ltd should be shown as a trade investment in A (Pvt)
Ltd’s financial statements
(2 marks)

KE1 – September 2016 Page 3 of 13

1.8 Which of the following statements is correct in relation to consolidated financial
statements?

A. Consolidated financial statements present the legal form, rather than the
substance, of the relationship between parent and subsidiaries.
B. Consolidated financial statements replace the separate financial statements
of the individual companies in the group.
C. Power of control is the determining factor in deciding whether a parent
company needs to present consolidated financial statements.
D. SLFRS 10 requires a parent company to issue consolidated financial
statements, consolidating only its domestic subsidiaries.
(2 marks)

1.9 The following information is relevant to Alpha (Pvt) Ltd for the year ended 31
March 2016.

Shareholders’ equity: Rs. 10 million

Profit before tax: Rs. 2 million
Interest cost: Rs. 500,000
Current liabilities: Rs. 3.5 million
Long term liabilities: Rs. 12 million

What is the return on capital employed (ROCE) of Alpha (Pvt) Ltd?

A. 11.4% B. 6.8% C. 9.0% D. 9.8%

(2 marks)

1.10 Which of the following statements is correct in relation to preference shares?

A. Preference shares have right to vote.

B. Preference shareholders have a priority right over ordinary shareholders to
the return of their capital in the event of liquidation.
C. Irredeemable preference shares are classified under the current liability in
the financial statements.
D. Dividend paid on redeemable preference shares are treated as
appropriations of profit.

(2 marks)

KE1 – September 2016 Page 4 of 13

Question 02

You are required to provide short answers/calculations to all questions, with attention
given to action verbs.
(Total: 30 marks)
2.1 Prepare journal entries to correct the following errors. (Narrations are not
required)
(i) Even though a credit sale amounting to Rs. 123,560 had been correctly
recorded in the debtor’s account, the sales account had been credited as
Rs. 132,560.
(ii) Nothing had been recorded relating to the purchase of office furniture
amounting to Rs. 65,000 other than recording the cash paid in the cash
account.
(iii) A discount received amounting to Rs. 2,860 had been accurately recorded in
the creditor’s account; however, it has been credited to the discount allowed
account.
(3 marks)
2.2 The trade receivable control account balance of a company as at 31 July 2016 was
Rs. 1,586,000. However, this amount did not tally with the total of the individual
debtors account balances on that date. Subsequent examination revealed the
following as reasons for the difference:
(i) A credit sale for Rs. 48,200 was correctly entered in the sub-ledger but
recorded as Rs. 482,000 in the receivable control account.

(ii) Rs. 8,000 received from a credit customer, which was written off as a bad
debt in the previous year, was credited to the control account.
Identify the correct total of the individual customer account balances. (3 marks)

2.3 List the criteria when revenue from sales is generally recognised as per LKAS 18,
Revenue.
(3 marks)
2.4 Ken (Pvt) Ltd purchased a machine to be used in its factory and the following costs
were incurred.
Purchase price : Rs. 10 million
Import duties : Rs. 2 million
Trade discount received : 2% of the purchase price
Initial delivery and handling costs : Rs. 150,000
Other general overhead costs : Rs. 75,000
Ken applies full SLFRSs in preparing financial statements.
(a) Compute the cost of the machine for initial recognition purposes.
(b) Explain the measurement requirement of the machine after initial
recognition.
(3 marks)
KE1 – September 2016 Page 5 of 13
2.5 The accountant of an entity has the following information when preparing its
financial statements for the current year.
(i) The company policy is to record closing inventory at cost.
(ii) The useful life of plant and machinery was changed from 10 years to 12 years
during the current financial year.
(a) State whether (i) and (ii) above can be considered as “prior period errors” as
per LKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
(b) State how prior period errors should be corrected as per LKAS 8.
(3 marks)
2.6 Discuss whether the following are adjusting events or non-adjusting events as per
LKAS 10 Events After the Reporting Period.
(i) Sale of inventories that existed on the reporting date at a significantly lower
value than its carrying value after the reporting period.
(ii) Destruction of a major production plant by a fire after the reporting period.
(iii) Issue of significant guarantees after the reporting period.
(3 marks)
2.7 State whether the following give rise to taxable temporary differences or deductible
temporary differences.
(i) Prepaid expenses that have been already deducted on a cash basis in
determining the taxable profit.
(ii) Retirement benefit costs that are deducted in determining accounting profit,
but cannot be deducted in determining taxable profit until such costs are
paid.
(iii) Depreciation of an asset accelerated for tax purposes.
(3 marks)
2.8 On 31 December 2015 an entity leased machinery for a period of 3 years. The entity
has to pay Rs. 130,000 as lease rentals annually in advance starting from
1 January 2016. The entity’s incremental borrowing rate is 10%. Initial direct cost
was Rs. 5,000. The fair value of the machinery as at 31 December 2015 was
Rs. 300,000.
Compute the amount to be recognised as an asset of the entity at initial recognition.
(3 marks)
2.9 List any three (03) disclosure requirements for a contingent liability.
(3 marks)
2.10 Jay (Pvt) Ltd has an investment in the shares of a quoted company.
State how the company will classify this investment in the following instances:
(i) If it is to be held in the short term
(ii) If it is to be held in the long term
(3 marks)

KE1 – September 2016 Page 6 of 13

 SECTION 2

Three out of the four questions should be answered.

Total marks for Section 2 is 30 marks.
Recommended time for the section is 54 minutes.
Question 03
(a) Net assets of a sole proprietorship business as at 31 March 2015 and 31 March 2016
were Rs. 4,280,000 and Rs. 6,800,000 respectively. During the year the business
purchased a machine for Rs. 1,240,000. The proprietor’s drawings during the year
amounted to Rs. 240,000.
Required:
Compute the profit earned by the business during the year ended 31 March 2016.
(2 marks)

(b) Martin, an accounts assistant at Omega (Pvt) Ltd, wanted to resign from the
company with effect from 1 August 2016. He hurriedly prepared the following
statement as at 31 July 2016 to show how the bank statement balance agreed with
the cash book balance.
Rs.
Balance as per bank statement 3,250,000
Add: Deposits not yet realised (note: all subsequently realised 720,000
by 5 August)
L/C charges on imports 42,500
Bank charges 250
4,012,750
Less: Unpresented cheques (note: all cleared by 10 August) (840,000)
Direct deposits from customers (120,000)
Dividend from investments directly sent to the bank (38,500)
Balance as per cash book 3,014,250
During the month of August 2016, total debits (excluding the opening balance) and
total credits in the bank account (cash book) were Rs. 8,250,000 and Rs. 9,800,000
respectively.
Unrealised deposits and unpresented cheques as at 31 August 2016 amounted to
Rs. 480,000 and Rs. 720,000 respectively. Further, bank charges amounting to
Rs. 2,400 had not been taken into the cash book.
Required:
(i) Calculate the bank balance that should be reflected in the statement of
financial position as at 31 August 2016.
(6 marks)
(ii) Calculate the bank balance as per the bank statement as at 31 August
2016.
(2 marks)
(Total: 10 marks)
KE1 – September 2016 Page 7 of 13
Question 04
Anil, Ranil and Sunil are the partners of ARS Associates. The partnership agreement
provided the following:
Anil Ranil Sunil
Profit or loss sharing 50% 30% 20%
Partners’ monthly salary entitlement Rs. 30,000 Rs. 25,000 Rs. 20,000
Interest is payable on capital account balances at 6% per annum till 31 December 2015.
Thereafter, interest will not be paid and the capital account balance of each partner will be
adjusted to the profit sharing ratio. The total capital will be Rs. 10 million. These
adjustments should be made through their respective current accounts.
The summarised trial balance of ARS Associates as at 31 March 2016 is given below.
Rs. ʽ000
Dr. Cr.
Partners’ capital account - Anil 4,000
- Ranil 3,000
- Sunil 3,000
Partners’ current account - Anil 500
- Ranil 650
- Sunil 800
Partners’ salary account - Ranil 325
- Sunil 220
Property, plant and equipment 6,280
Inventory 1,780
Profit or loss account balance 1,400
Cash at bank 2,495
Trade receivables/Trade payables 1,250 300
13,000 13,000

Required adjustments have to be made for the following:

(i) Anil’s salary for the year was not paid. In the meantime Ranil’s salary was overpaid
by a month and Sunil’s salary was underpaid by a month.
(ii) A vehicle having a carrying amount of Rs. 1.6 million on 1 April 2015 was taken over
by Anil on 1 January 2016 at a valuation of Rs. 1.8 million. As adjusting entries were
not made, a depreciation charge of Rs. 500,000 had been made for the full year.
(iii) Sunil took trading stocks having a cost of Rs. 40,000 for his private use, but no
entries had been passed in this respect.
Required:
(a) Prepare the adjusted profit or loss account and appropriation account of ARS
Associates for the year ended 31 March 2016.
(4 marks)

(b) Prepare the statement of financial position as at 31 March 2016. (6 marks)

(Total: 10 marks)
KE1 – September 2016 Page 8 of 13
Question 05

The following details are relevant to Biyagama Gramodaya Society for the year ended
31 December 2015.
Receipt and payment account
Rs. Rs.
Cash balance as at 1 January
Donations 2,300
2015 105,000
Donations 5,640 Electricity 3,100
Sale of craft items 3,450 Stationery 800
Rent income 12,500 Insurance 4,500
Sundry receipts 1,230 Purchase of chairs 95,800
Subscription received 89,720 Travelling expenses 2,900
Sundry expenses 1,720
Cash balance as at 31 December
2015 106,420
217,540 217,540
Following additional information is provided.
(i) Subscriptions
 Subscriptions received during the year included subscriptions for 2016
amounting to Rs. 5,600.
 Arrears of subscriptions for 2014 of Rs. 3,800 had been received during
2015. However, an amount of Rs. 1,000 relevant for 2014 is yet to be
received.
 Rs. 1,700 has been received in 2014 for 2015.
 Arrears for 2015 are Rs. 7,000.
(ii) The useful life of chairs is 4 years. The chairs mentioned above were purchased at
the beginning of the year.
(iii) Income from hiring chairs of Rs. 4,000 relevant for 2015 were not received until the
end of the year.

(iv) Rent income received during the year includes Rs. 2,500 relevant for 2014.

Required:
(a) Prepare the statement of income and expenses of Biyagama Gramodaya
Society for the year ended 31 December 2015.
(6 marks)
(b) Explain the accounting treatment for specific donations, received by a non-
profit making organisation.

(4 marks)

(Total: 10 marks)

KE1 – September 2016 Page 9 of 13

Question 06

Books of accounts of Solomon’s business for the year ended 31 March 2016 were
destroyed by a fire on 3 April 2016. However, the management could collect the following
information.

1. Summarised statement of financial position as at 31 March 2015

Rs.
Non-current assets
Property, plant and equipment (net book value) 3,100,000
Current assets
Inventory 680,000
Trade receivables 540,000
Prepayments – warehouse rent 20,000
Cash at bank 360,000
4,700,000
Equity
Proprietor’s capital 4,322,000
Current liabilities
Trade payables 372,000
Accrued expenses - electricity 3,400
- telephone 2,600
4,700,000

2. Summarised bank account for the year ended 31 March 2016

Rs. Rs.
Balance as at 01 April 2015 360,000 Cash purchases 860,000
Cash sales 940,000 Payments to suppliers 3,240,000
Receipts from credit 4,640,000 Warehouse rent 200,000
customers
Telephone 30,000
Electricity 38,400
Insurance 12,000
Salaries 483,000
Other expenses 180,000
Purchase of a computer 250,000
Drawings by Solomon 200,000
Balance as at 31 March 446,600
2016
5,940,000 5,940,000

KE1 – September 2016 Page 10 of 13

3. Credit purchases (trading stock) made during the year amounted to Rs. 3,450,000.
The inventory value as at 31 March 2016 was Rs. 840,000.

4. Bad debts written off during the year amounted to Rs. 120,000. The total trade
receivables balance as at 31 March 2016 was Rs. 680,000.

5. Warehouse rent is payable at Rs. 20,000 per month. Accrued electricity and the
prepaid telephone bill as at 31 March 2016 were Rs. 2,000 and Rs. 2,400
respectively.

6. Annual depreciation charge in relation to property, plant and equipment other than
the computer purchased during the year is Rs. 420,000. The computer was
purchased on 1 April 2015 and is depreciated at 20% per annum.

7. Rs. 320,000 received from a customer, being the settlement of an outstanding bill,
was erroneously treated as cash sales.

Required:

(a) Prepare the statement of profit or loss of the business for the year ended 31
March 2016.
(4 marks)
(b) Prepare the statement of financial position as at 31 March 2016.
(6 marks)

(Total: 10 marks)

KE1 – September 2016 Page 11 of 13

 SECTION 3

Compulsory question.
Total marks for Section 3 is 20 marks.
Recommended time for the section is 36 minutes.

Question 07

Auto Mirage PLC’s trial balance as at 31 March 2016 is given below.

Rs.
Dr. Cr.
Property, plant and equipment
Land and buildings –at cost 2,500,000
Machinery- at revalued amount 1,250,000
Furniture and fittings - at cost 275,400
Equipment - at cost 126,850
Accumulated depreciation as at 31 March 2016
Buildings 200,560
Machinery 156,984
Furniture and fittings 98,536
Equipment 32,750
Investment 500,000
Inventory as at 31 March 2016 - at cost 197,630
Trade receivables/Trade payables 744,756 998,204
Provision for doubtful debts 5,200
Cash and cash equivalents 69,870
Accrued expenses 68,450
Stated capital 1,000,000
Retained earnings 2,249,062
Revaluation surplus 120,000
Cost of sales/Sales 1,956,060 3,260,100
Other income 156,200
Employee benefits 45,230
Administrative expenses 500,520
Selling and distribution expenses 152,890
Rent 100,000
Finance cost 12,300
Income tax 90,000
Income tax liability - 2014/2015 ____________ 85,000
8,476,276 8,476,276

KE1 – September 2016 Page 12 of 13

The following additional information is also provided.

(i) The net realisable value of inventories as at 31 March 2016 was Rs. 185,000.

(ii) Machinery is carried at revalued amount. The last revaluation had been done in
2012. On 31 March 2016, the machinery was sold for Rs. 950,000 and this amount is
yet to be received. Nothing has been recorded in relation to this.
(iii) The company obtained a machine under an operating lease arrangement on
1 April 2015. As per the lease agreement, the company has to pay Rs. 100,000 every
6 months for 5 years. This has to be paid in arrears on the last day of each 6-month
period. Further, the lessor has agreed to provide the machine for the first 6-month
period rent-free. Rent paid on 31 March 2016 had been included in the ‘Rent’
account.

(iv) During the previous financial year, the company provided a guarantee for a loan
obtained by Rio (Pvt) Ltd, related company, amounting to Rs. 500,000. At that time
the financial position of Rio was sound. However, during the year Rio’s financial
position deteriorated and on 1 February 2016, it filed for bankruptcy. Based on the
information available, Auto Mirage will have to pay 80% of the loan amount to Rio’s
lender during the next financial year. No entries have been made in the ledger in this
regard.

(v) A provision of 1% of trade receivables should be made for bad and doubtful debts.

(vi) The investment represents the cost of shares purchased in Trimex PLC with the
intention of holding them in the long term. Transaction costs relating to this
amounting to Rs. 6,000 had been included in selling and distribution expenses. The
fair value of these shares as at 31 March 2016 was Rs. 525,000.

(vii) Taxable profit for the year after all the necessary adjustments was Rs. 310,000. Auto
Mirage pays income tax at the rate of 28%. The income tax account includes
Rs. 70,000 paid in relation to the year of assessment 2014/2015 as a final payment.

Required:
(a) Prepare the statement of comprehensive income for the year ended 31 March
2016.
(7 marks)
(b) Prepare the statement of changes in equity for the year ended 31 March 2016.
(3 marks)
(c) Prepare the statement of financial position as at 31 March 2016.
(10 marks)
(Total: 20 marks)

KE1 – September 2016 Page 13 of 13