Financial Accounting & Reporting 1 Page 1 of 4

Certificate in Accounting and Finance Stage Examination

ARTT Business School 06 May 2024

Fellow RAET of the ICAP 2 hours – 60 Marks
Prepared by Ahmed Raza Mir, FCA Additional reading time – 15 minutes

Financial Accounting & Reporting 1

Instructions to examinees:
(i) Answer all six questions (New Joiners should only attempt Q1 and Q5).
(ii) Answer in black pen only.

Q1 On January 1, 2017, ABC Limited strategically acquired an investment property to generate rental
income and capital appreciation over the long term. The acquisition was structured in three
instalments: Rs 150,000 on January 1, 2017; Rs 230,000 on December 31, 2017; and Rs 300,000 on
December 31, 2018. The applicable interest rate for the company is 10%.

Associated Costs and Adjustments:

1. A commission of 2.5% of the total purchase price was paid to an agent who facilitated the
acquisition.
2. Expenses for legal services, notarial actions, and document verification amounted to Rs
10,000.
3. Property transfer taxes totaled Rs 14,560, which included an advance payment of annual tax
amounting to Rs 3,400.
4. At the time of acquisition, the company also prepaid Rs 4,000 in income tax and Rs 3,000 in
sales tax. The prepayment of income tax is adjustable against future tax liabilities, while the
sales tax can be offset against rental income.

Post-Acquisition Costs:
1. Three months following the acquisition, the property underwent necessary repairs due to
minor damages, costing Rs 12,000.
2. An initial outlay of Rs 8,000 was required to prepare the property for rental.
3. Marketing expenses incurred during the year totaled Rs 100,000, against which the property
generated rental income of Rs 120,000.
4. Relocation expenses totaling Rs 20,750 were covered on behalf of certain tenants, under rental
agreements averaging a ten-year term.

Valuation and Depreciation: The property’s fair value was assessed at Rs 600,000 at the end of the
first year. It has an estimated useful life of 18 years.

Required:
Assume that the company value property at cost model, calculate the carrying amount of the property (10)
at the end of the year 31 December 2017.

Q2. Gabriel Limited acquired a plant on June 1, 2021, for Rs 700,000. The Government of Pakistan
awarded a grant covering 60% of the plant's cost immediately upon acquisition. The company also
incurred installation costs of Rs 100,000, and the installation process took one month to complete.
The asset was ready for commercial production immediately after the installation.

The grant was conditional on the company using the asset exclusively for producing fertilizers tailored
for wheat cultivation. Non-compliance with this condition would result in the proportional repayment
of the grant to the government.

On October 1, 2023, Gabriel Limited began producing fertilizers for crops other than wheat, due to
the lower margins in wheat fertilizers, which led to the immediate repayment of the proportionate
grant due to the cessation of compliance with the grant conditions.
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1. The useful life of the plant was projected to be 78 months.
2. The residual value of the plant was consistently estimated to be nil till December 31, 2023.
3. The company employs the nominal value method for the recognition of grants.

Impairment Review: An impairment review of the asset was conducted as of December 31, 2023.
The expected cash inflows and outflows for 2024 were estimated at Rs 144,500 and Rs 45,000,
respectively. The outflow amount includes an interest expense of Rs 5,000 and excludes a
maintenance expense of Rs 6,000 per year. All relevant cash inflows and outflows are projected to
increase by 7% per annum (other than interest cash flows) until the end of the asset’s useful life. The
fair value of the asset, net of disposal costs, as of December 31, 2023, was Rs 340,000.

Required
Calculate the carrying amount of the asset at 31 December 2023 (12)
Q3 Following are three independent scenarios where accounting for government grant is questioned:

1. Shynira Limited was awarded a government grant of Rs 600,000 on January 1, 2022, to facilitate
the purchase of machinery for use in an underdeveloped area. This grant was contingent upon the
company employing at least 300 local workers for a minimum of two years. Following the
immediate acquisition of the machinery, Shynira Limited recorded the grant as a deferred grant (a
liability) and amortized it in the profit and loss account over two years, as it was fulfilling the
employment conditions.

2. XYZ Limited received a subsidized loan of Rs 400,000 on January 1, 2022, for a term of three
years to assist in the acquisition of machinery with a useful life of four years. The subsidized loan
carried an interest rate of 10%, while the prevailing market rate for a similar loan was 14%. The
fair value of the loan, calculated using the market rate and expected cash flows, was Rs 362,853.
Despite this, XYZ Limited recorded the liability at its full amount, omitting any recognition of
grant income or the establishment of deferred grant liabilities.

3. Siddique Limited, a domestic automobile manufacturer, lobbied the Government of Pakistan to

impose restrictions on dealerships selling imported vehicles in an effort to boost local industry.
Subsequently, the government implemented a targeted ban on these dealerships. As a result,
Siddique Limited began to realize an additional annual income of Rs 100,000. This financial
benefit, stemming from governmental intervention, is now appropriately disclosed as government
assistance in Siddique Limited’s financial statements.
Required
Discuss the flaws in the accounting treatment given above and suggest the correct accounting
treatment. Your answer should only include these two aspects (12)

Q4 Statement of Financial position of Basim Limited is showing a balance of Rs 550,000 for Property,
Plant and Equipment as at 31 December 2018. Annual Depreciation is just charged as Rs 110,000.
The plant was acquired on 1 Jan 2016 at a cost of Rs 960,000. Depreciation method was assessed to
be straight line method. The plant was subject to impairment testing at 31 December 2016.

After impairment the annual depreciation was reduced by Rs 10,000. For the last two years the
company is benefiting with reduced depreciation.

On 31 December 2019 the company reassessed the recoverable amount after charging depreciation.
The details of this exercise is as under:

Expected annual cash Flows

Annual Sales of products Rs 345,000
Cost of good sold Rs (120,000)
Operating Costs Rs (58,000)
Maintenance Cost Rs (5,600)
Interest on Working Capital Rs (2,400)
Income Tax Expense Rs (34,500)
 Other information Financial Accounting & Reporting 1 Page 3 of 4
1. These cashflows are subject to a decrease of 5% per anum for the remainder of the term.
2. Applicable discount rate to the company is 10%
3. Fair Value less cost to sell Rs 470,000

Required (10)
Prepare journal entries for the year ended 31 December 2019

Q5 ABC Limited acquired and renovated a building to generate rental income. During this process, the
junior accountant's handling of various costs raised doubts about the accuracy of his capitalization of
costs in Investment Property. Initially, a total of Rs 1,800,000 was capitalized. Here are the details of
the expenditures are questionable:

1. Rs 245,000 was paid at the time of acquisition and Rs 366,000 was scheduled to be paid in
three years; both amounts were fully capitalized. The company's applicable discount rate is
10%.
2. A non-refundable, non-adjustable one-time property tax of Rs 25,000 was not capitalized,
whereas Rs 12,000 in adjustable taxes was capitalized.
3. Neither the normal loss of Rs 6,500 nor the abnormal loss of Rs 13,600 was capitalized.
4. Expected initial losses due to low operational capacity totaling Rs 14,750 were not capitalized.
5. Incremental brokerage fees of Rs 7,000 paid to an employee were not capitalized.
6. Major parts of the building were replaced at a net cost of Rs 40,000; however, the gross cost of
Rs 90,000 was capitalized.
7. Minor parts of the building costing Rs 9,800 were capitalized.
8. An incentive of Rs 12,000 given to a lessee was not capitalized; instead, a separate asset was
recorded for the same amount.
9. Costs amounting to Rs 104,000 related to initial planning and research were expensed.
10. Both pre- and post-construction marketing costs totaling Rs 13,800 were capitalized.

Required
The task is to reassess and calculate the correct cost of the investment property, adjusting from the (08)
initially recorded amount of Rs 1.8 million.

Q6 ARM Limited is evaluating an Asset for impairment at 31 December 2001. The following information
is extracted from the company budgets and other sources:

Annual net inflows

Year Net Inflows

1 458,000
2 370,000
3 890,000
4 940,000
5 740,000
Net inflows include:

1. Year 3 includes an outflow for overhauling Rs 100,000 which would have a possitive impact on
cash flow forecasts from year 3 and onwards.

Inflows expected (net) from overhauling

Year Net Inflows (Rs)

3 490,000
4 540,000
5 389,000

2. Net inflows include interest paid in the following years:

 Financial Accounting & Reporting 1 Page 4 of 4
Year Net Inflows (Rs)
1 23,000
2 24,500
3 30,000

3. Inflows for the first year include recipts from a receivable and payments for a payable which are
already recognised in the last year. Receivable amounts to Rs 10,870 and payable Rs 6,720.

Required
Calculate value in use for the asset subjected for impairment review. (08)