Certificate in Accounting and Finance Stage Examination

The Institute of 6 March 2019

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Financial Accounting and Reporting-I

Q.1 X, Y and Z were partners sharing profits and losses in the ratio of 4:3:3 respectively. The
balance sheet as on 31 December 2018 is given below:

Rs. in '000 Rs. in '000

Creditors 660 Cash and bank balances 250
Accrued expenses 150 Stock-in-trade 460
General reserve 250 Trade debtors 800
Capital: Provision for doubtful debts (80)
X 502 Machines 400
Y 358 Vehicles 310
Z 400 Equipment 180
2,320 2,320

On 31 December 2018, Z retired from the partnership. The following has been agreed in this
respect:
(i) Goodwill of the firm has been determined at Rs. 380,000. It has been estimated that
the value of goodwill after Z’s retirement would be Rs. 300,000. Goodwill is to be
written off from the books.
(ii) Machines would be adjusted to 85% of the book value whereas equipment would be
appreciated by 20%.
(iii) Trade debtors amounting to Rs. 100,000 would be written off. Existing percentage of
provision for doubtful debts would be maintained.
(iv) An accrual for repairs and maintenance amounting to Rs. 41,000 would be recorded
in the books.
(v) Z’s balance would be settled as follows:

Immediate cash payment of Rs. 150,000.

A vehicle would be given at an agreed value of Rs. 120,000 (book value
Rs. 70,000).

Fully depreciated items of furniture would be given at an agreed value of
Rs. 35,000.

Remaining balance would be paid after 6 months along with interest at 10%.
(vi) To determine new profit sharing ratio, Z’s share would be divided equally between X
and Y.
(vii) Y’s capital would be adjusted in new profit sharing ratio on the basis of X’s capital.
Any excess or deficiency would be adjusted through cash.

Required:
Prepare partners’ capital and revaluation accounts on the retirement of Z. (12)
 Financial Accounting and Reporting-I Page 2 of 5

Q.2 (a) Compare ‘Regression analysis’ with ‘High-low analysis’ for cost estimation. (03)

(b) Describe the behaviour of each of the following costs graphically by denoting
‘Per unit cost’ on vertical axis and ‘Level of activity’ on horizontal axis:
(i) Factory building rent – Fixed amount per month.
(ii) Direct labour cost – Increases proportionately with production.
(iii) Supervision cost – One supervisor is required for every 20 direct workers.
(iv) Direct material cost – Bulk discount is available on all purchases once the total
purchases exceed a certain level. (05)

Q.3 Following are the summarised financial statements of Keyboard Limited (KL):

Statement of financial position

2018 2017 2016
----------- Rs. in '000 -----------
Fixed assets 12,500 10,800 11,800

Current assets:
Inventory 4,000 4,500 3,000
Debtors 4,200 3,200 1,800
Cash - 800 2,100
8,200 8,500 6,900
20,700 19,300 18,700

Equity and reserves 10,400 9,000 8,600

Long term loan 4,400 5,000 5,600

Current liabilities:
Creditors 3,500 4,400 4,200
Bank overdraft 1,500 - -
Accrued expense 900 900 300
5,900 5,300 4,500
20,700 19,300 18,700

Statement of profit or loss

2018 2017 2016
----------- Rs. in '000 -----------
Sales 27,000 24,400 21,000
Cost of goods sold (21,300) (19,400) (17,200)
Gross profit 5,700 5,000 3,800
Operating expenses (3,400) (3,000) (2,400)
Finance cost (300) (350) (400)
Net profit 2,000 1,650 1,000

Required:
(a) Compute working capital cycle in days and liquidity ratios for 2018 and 2017. (11)
(b) Suggest three possible measures that can be taken by KL to improve working capital
cycle days. (03)
 Financial Accounting and Reporting-I Page 3 of 5

Q.4 (a) List the criteria that must be met to account for a contract with customer under
IFRS 15 ‘Revenue from Contracts with Customers’. (04)

(b) Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance
services for such type of machines are provided separately at Rs. 25,000 per month.
Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine
A13 with one year free maintenance services at a lumpsum payment of
Rs. 1.8 million. The amount was received upon delivery of machine on
1 August 2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for
Rs. 1.95 million. As per the contract, payment would be made after 2 years.
Maintenance services would also be provided for Rs. 25,000 per month for
two years which would be paid at the end of each month.

Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how
the above contracts should be recorded in GW’s books for year ended
31 December 2018. (Show supporting calculations but entries are not required) (11)

Q.5 The following information pertains to Piano Limited (PL):

Plant Equipment
Acquisition

Date of acquisition 1 January 2015 1 July 2015

Cost Rs. 500 million Rs. 360 million

Estimated useful life 10 years 12 years

Residual value Rs. 60 million Nil

Depreciation method Straight line method Straight line method

Revaluation on 31 December 2016

Fair value Rs. 526 million Rs. 280 million

Residual value Rs. 78 million Nil

Revaluation on 31 December 2018

Fair value Rs. 310 million Rs. 275 million

Residual value Rs. 64 million Nil

Additional information:
(i) PL uses revaluation model for subsequent measurement and accounts for revaluation
on net replacement value method.
(ii) There is no change in useful life of plant. The remaining useful life of equipment was
estimated as 15 years and 10 years in 2016 and 2018 respectively.
(iii) PL transfers maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iv) PL’s financial year ends on 31 December.

Required:
(a) Calculate depreciation on each asset for 2015 to 2018. (08)
(b) Prepare entries to record revaluation in 2018. (Entries to record depreciation expense,
incremental depreciation and elimination of accumulated depreciation are not required.
Further, entries prior to 2018 are also not required.) (08)
 Financial Accounting and Reporting-I Page 4 of 5

Q.6 Violin Family Club was formed in 2016. Following are the details of assets and liabilities of
the club as on 31 December 2017:

Assets Rs. in '000 Liabilities Rs. in '000

Subscription in arrears: Bank overdraft 181
2016 15 Subscription in advance for 2018 45
2017 90 Accrued electricity 23
Advance rent 24 Canteen wages 11
Canteen stock 215 Canteen creditors 118
Snooker tables 960
Furniture & equipment 720
2,024 378

Additional information:
(i) Some of the balances as on 31 December 2018 are as follows:
Assets Rs. in '000 Liabilities Rs. in '000
Subscription in arrears for 2018 30 Accrued electricity 35
Canteen stock 247 Canteen creditors 142
(ii) Break-up of the subscription received during 2018 is as follows:
Related to year Rs. in '000
2017 60
2018 920
2019 75
The club’s management has decided to write-off the remaining subscription in arrears
relating to the year 2016 and 2017.
(iii) A scheme was introduced in 2016 under which a person is awarded life time
membership upon payment of Rs. 120,000. Life memberships received in the years
2016, 2017 and 2018 were 5, 8 and 6 respectively. Life memberships are credited to
‘Life Membership Fund’ upon receipt and are transferred to income equally over
10 years, starting from the year of admission.
(iv) The club operates a canteen. Till last year, the canteen earned a gross profit of 20% of
sales. Effective 1 January 2018, selling prices were increased by 10%.
(v) Details of some payments during 2018 are as follows:
Rs. in '000
Canteen creditors 512
Salaries 285
Equipment 66
Electricity 263
(vi) Equipment acquired during the year is only 30% paid and the remaining amount is
payable in February 2019.
(vii) Wages of canteen staff are paid on 5th of each month.
(viii) The club operates from a rented place. The rent is paid quarterly in advance on
1 March, 1 June, 1 September and 1 December. As per agreement, annual rent was
increased by Rs. 6,000 with effect from 1 September 2018.
(ix) Balance of snooker tables as at 31 December 2017 represents the book value of
5 similar tables purchased in 2016. One of the tables was sold to a member for cash
during the year for Rs. 212,000.
(x) Snooker tables are depreciated at 12.5% on straight line method while furniture &
equipment are depreciated at 20% using reducing balance method. Full year
depreciation is charged in the year of addition whereas no depreciation is charged in
the year of disposal.
 Financial Accounting and Reporting-I Page 5 of 5

Required:
(a) Prepare income and expenditure account for the year ended 31 December 2018. (12)
(b) Prepare statement of financial position as on 31 December 2018. (09)

Q.7 Junior Accountant of Drum Limited has prepared the following statement of cash flows for
the year ended 31 December 2018:

Statement of cash flows

Rs. in '000
Cash flows from operating activities
Increase in retained earnings 1,360
Increase in dividend payable 200
Increase in net trade receivables (100)
Increase in interest accrued 50
1,510
Cash flows from investing activities
Increase in land and building (2,600)
Increase in equipment (1,550)
Decrease in inventory 400
Decrease in tax payable (60)
(3,810)
Cash flows from financing activities
Increase in share capital and premium 2,350
Decrease in long term loan (1,000)
Increase in trade and other payables 600
1,950
Decrease in cash balance during the year (350)
Opening cash balance 450
Closing cash balance 100

Junior Accountant informed you that he has taken the difference of opening and closing
balances of each balance sheet item and classified each difference as either operating,
investing or financing cash flows. He further informed that the statement is tied up with the
cash balances appearing in the balance sheet. He has ignored the following information:

(i) Depreciation on building and equipment amounted to Rs. 480,000 and Rs. 810,000
respectively.
(ii) During the year, an equipment costing Rs. 560,000 and having a book value of
Rs. 310,000 was sold for Rs. 440,000.
(iii) Provision for doubtful debts was increased by Rs. 140,000.
(iv) Dividend amounting to Rs. 700,000 was paid during the year.
(v) Interest and tax expenses for the year amounted to Rs. 378,000 and Rs. 650,000
respectively.
(vi) Trade and other payables as at 31 December 2018 included Rs. 950,000 for purchase
of land and building.

Required:
Prepare statement of cash flows for the year ended 31 December 2018, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method. (14)

(THE END)