FINANCIAL ACCOUNTING & CORPORATE REPORTING (MCQs SET 14)

Q1: On January 1, 2020, H Limited (HL) leased out one of its building for a period of four years under
an operating lease. The carrying value of the building is Rs. 47,800,000 and its remaining useful life is
25 years with no residual value. As per terms of agreement Rs. 3200,000 was paid by lessee as initial
deposit and further rentals of Rs. 2 million will be paid at the end of next two years and Rs. 6400,000
will be paid for the following two years. HL will recognize amount of lease income for the
year ended Dec 31, 2020.

a) Rs. 2000,000.

b) Rs. 3200,000.

c) Rs. 5200,000.

d) Rs. 5000,000.

Answer:

= 3200000 + 2000000

Q2: F Limited was incorporated on Jan 1, 2016 and purchased following non current assets:

Cost (Rs. 000) Useful life (years)

Building 30,000 15

Plant and machinery 20,000 10

Furniture and fixtures 7000 7

On January 1, 2019 the company reviewed the useful lives of its non-current assets for building, plant
and machinery and furniture and fixture as 10 years, 7 years and 5 years respectively. Revised
depreciation of the non-current assets of F Limited for the year ended Dec 31, 2019 would be:

a) Rs. 15 million.

b) Rs. 5.2 million.

c) Rs. 4.4 million.

d) Rs. 5 million.

= 30000/15= 2000 x 3 = 6000 = 30000 – 6000 = 24000/10 = 2400

= 20000/10 = 2000 x 3 = 6000 = 20000 – 6000 = 14000/7 = 2000

= 7000/7 = 1000 x 3 = 3000 = 7000 – 3000 = 4000/5 = 800

= 5200 = 5.2 million.

Q3: S Limited owns a workshop that it uses for serving electronic items under warranty. In preparing
its financial statements, the company needs to ascertain the provision of warranty that it would be
required to provide at year-end. The company’s past experience with warranty claims is that 50% of
the items sold in a year have zero defects, 30% of the items sold in a year have normal defects and
20% of the items sold in a year have significant defects. The cost of rectifying a normal defect in an
electronic item is Rs. 25,000. The cost of rectifying a significant defect is Rs. 90,000. Select the best
option from the following that represents amount of provision for warranty required at the year end.

a) Rs. 25,500.

b) Rs. 25,000.

c) Rs. 90,000.

d) No amount of provision would be recognized.

Answer:

30% x 25000 = 7500.

20% x 90000 = 18000.

Total = 7500 + 18000 = 25,500.

Q4: On January 1, 2020, M (ML) acquired an item of plant under a five year lease arrangement. The
agreement has an impact interest rate of 10% and required annual rentals of Rs. 6 million to be paid
on September 30 each year for five years. The present value of the annual rental payment was Rs. 23
million. The current liability for the leased plant in ML’s Statement of Financial Position as at
December 31, 2020 will be:

a) Rs. 19,300,000.

b) Rs. 4070,000.

c) Rs. 3850,000.

d) Rs. 5000,000.

Lease amortization schedule:

Years Lease Rental Interest Principle Balance

1 6000,000 2300,000 3700,000 19300,000

2 6000,000 1930,000 4070,000 15230,000

Q5: S Limited (SL) recognized a tax liability of Rs. 2900,000 in its financial statements for the year
ended June 30, 2018. This was subsequently agreed with and paid to the tax authorities as Rs.
2800,000 on March 1, 2019. The directors of SL estimated that the tax due on the profits for the year
ended June 30, 2019 will be Rs. 3200,000. SL has no deferred tax liability amount will be
recorded in SL’s statement of profit or loss and other comprehensive income in respect of the tax
expense for the year ended June 30, 2019.

a) Rs. 3200,000.

b) Rs. 3100,000.

c) Rs. 3300,000.

d) Rs. 6000,000.

Answer:

= 3200,000 + 100,000

= 3300,000

Q6: Following data relates to A Limited (AL) for a construction contract.

Rs. 000
Contract price 15,000

Work certified to date 12,000

Costs to date 9000
Estimated costs to complete 4500

Company recognizes progress using an output method, based on work certified to date. The gross
profit to be recognized in Statement of Profit or Loss of AL for the year ended March 31, 2020 would
be:

a) Rs. 6 million.

b) Rs. 1.2 million.

c) Rs. 1.5 million.

d) Rs. 10.5 million.

Answer:

Contract price = 15 million

Less: cost to date = 9 million

Less: Estimated cost to complete = 4.5 million.

Total gross profit = 6 million.

Gross profit to date = gross profit for the period x stage of completion.
= 6 million x (work certified to date x contract price)

= 1.2 million.

Q7: On January 1, 2019, Z Limited (ZL) started construction of a building which will have an estimated
useful life of 30 years. It purchased the property for Rs. 10 million. The construction of the building
cost Rs. 8 million. Company borrowed Rs. 50 million at 9% interest on January 1, 2019 for financing
this project which will be repaid on June 30, 2020. The construction of the building was completed on
October 31, 2019 and it was brought into use on Jan 1, 2020. The total amount to be included in the
cost of building as at Dec 31, 2019 is:

a) Rs. 21.75 million.

b) Rs. 22.5 million.

c) Rs. 68 million.

d) Rs. 18 million.

Answer:

Cost of property = 10 million.

Cost of building = 8 million.

Interest on amount borrowed = 50 x 0.09 = 4.5 million

Total borrowing cost = 22.5 million.

Q8: At Dec 31, 2019, F Limited (FL) had 12,000 units of product “Alpha” in inventory, included at cost of
Rs. 600 per unit. During January 2020, units of “Alpha” were being sold at a price of Rs. 540 each, with
sales staff receiving a 15% commission on the sales price of the product. Inventory of product “Alpha”
should be recognized in the financial statements of FL as at Dec 31, 2019 at an amount of:

a) Rs. 7452,000

b) Rs. 7200,000

c) Rs. 6480,000.

d) Rs. 5508,000.

Answer:

Inventory according to IAS 2 will be shown at lower of cost or Net Realizable Value (NRV)

Here cost = 12000 units x 600 Rs. Per unit = Rs. 7200,000.

NRV = (Rs. 540 per unit – commission of 15% of 540) x 12000 = Rs. 5508,000

Since NRV of Rs. 5508,000 is lower than cost, hence inventory will be shown at NRV.
Q9: I Limited (IL) received a government grant of Rs. 4 million on January 1, 2018, to facilitate purchase
of an asset on the same day which cost of Rs. 6 million. The asset has 5 years useful life and is
depreciated on a 20% reducing balance basis. Company has a policy to account for all grants received
as deferred income, is the amount of income that will be recognized in respect of the
grant for the year ended December 31, 2019.

a) Rs. 960,000.

b) Rs. 800,000.

c) Rs. 640,000.

d) Rs. 1200,000.

Answer;

31 December 2019:

The company shall recognize the government grant directly in income and depreciate the asset by its
cost as follows:

Depreciation exp. Year 1 = 6000,000 x 0.20 = 1200,000.

Depreciation exp. For year ended 31 Dec 2019 by RDV = (6000,000 – 1200,000) x 0.20 = 960,000.

Hence the ending value of asset will be:

= 6000,000 – 1200,000 – 960,000 =

And the value of income recognized for year ended 31 December 2019:

= 4000,000/5 = 800,000.

Q10: The following is an extract from the trial balance of Y Limited (YL) at June 30, 2021.

Rs. 000
Administration expenses 260,000
Cost of sales 480,000
Finance cost 190,000
Long-term borrowing 2200,000
Inventory at June 30, 2021 220,000
Property, plant and equipment at cost 1500,000
Property, plant and equipment, depreciation

to June 30, 2020 540,000

Distribution costs 200,000
Revenue 2000,000

Additional Information:

i. Included in the closing inventory at the year end was inventory at a cost of Rs. 35 million, which was
sold during July 2021 for Rs. 19 million.

ii. Depreciation is calculated on property, plant and equipment at 20% per year using the reducing
balance method. The company charges depreciation to cost of sales.

iii. A person was seriously injured because of using one of company’s products on January 4, 2021.
Professional legal advice is that YL will probably have to pay Rs. 500 million in respect of compensation.

is the amount of profit before tax of Y Limited (YL) for the years ended June 30, 2021.

a) Rs. 370 million.

b) Rs. 330 million.

c) Rs. 662 million.

d) Rs. 162 million.

Answer:

Revenue..................................................................................... 2000,000,000.

Less:

Cost of sales:

Given in question........................................................................480,000,000

Add. (change due to lower of cost or NRV in info i) .................... 16,000,000

Add: Depreciation exp. (w-1) ...................................................... 192,000,000

Revised Cost of sales (688,000,000)

Gross profit .................................................................................. 1312,000,000

Less operating expenses:

Administration exp......................................................................... 260,000,000

Finance cost.................................................................................... 190,000,000

Distribution cost ............................................................................. 200,000,000

Expense on contingent liability........................................................ 500,000,000

Total operating exp.......................................................................... (1150,000,000)

Net profit 162,000,000

Working w-1:

PPE cost = 1500,000,000

Less: Accumulated dep. = 540,000,000

NBV = 960,000,000

Dep. Exp. For 2021 = 960,000 x 0.20 = 192,000,000

Q11: Z Limited (ZL) acquired an item of plant under a lease on July 1, 2019 with an initial payment of
Rs. 5000,000. The present value of the future lease payments amounted to Rs. 17,730,000. ZL will
make four further annual payments of 5 million. The useful life of the plant is estimated to be eight
years. ZL will obtain legal title of the asset following the final payment. The interest rate implicit in the
lease is 5% per annum. The total amount that would be recorded in the statement of profit or loss of
ZL for the year ended June 30, 2020 is:

a) Rs. 886,500.

b) Rs. 3727,750.

c) Rs. 3102,750.

d) Rs. 2841,250.

Answer:

Profit or loss statement = interest expense = 17,730,000 x 0.05 = 886,500.

Q12: The following balances were extracted from N (Pvt.) Limited’s financial statements:

Statement of financial position (Extract)

As at Dec 31:

2019 2018
Non-current Liabilities
Deferred Tax 190,000 135,000
Current Liabilities
Current Tax Payable 595,000 530,000
Income tax expenses for the year ended December 2019 amounted to Rs. 610,000. The amount of tax
paid that should be included in statement of cash flows for the year ended December 31,2019 is:

a) Rs. 490,000.

b) Rs. 55,000.

c) Rs. 610,000.

d) Rs. 65,000.

Income Tax payable

Current tax b/d ........................ 530,000
Income tax paid .................... 490,000 Deferred tax b/d ...................... 135,000
Current tax c/d ....................... 595,000 Income tax expense for year ...... 610,000
Deferred tax c/d ..................... 190,000

Answer:

Q13: On July 1, 2020, Z (ZL) purchased 70% of share capital of J Limited (JL) for the year ended Dec 31,
2020, operating expenses of ZL and JL amounted to Rs. 101,220,000 million and 66240,000 million,
respectively. On acquisition, JL’s net assets were equal to their carrying amount, except JL’s head office
which had a fair value of Rs. 8 million in excess of its carrying amount and a remaining life at
acquisition of 20 years. The company has a policy to charge depreciation to operating expenses,
is the operating expenses figure to be included in the consolidated statement of profit or loss of ZL for
the year ended Dec 31, 2020.

a) Rs. 101,220,000.

b) Rs. 134,340,000.

c) Rs. 167,460,000.

d) Rs. 134,540,000.

Q14: Following information is related to F Limited (FL):

 Profit before tax for both the years 2020 and 2019 amounted to Rs. 4000,000.
 Fanta Limited (FL) estimated that the value of the gratuity owing to its staff at December 31,
2019 is Rs. 1000,000. This gratuity was paid to its staff in 2020. The tax authorities allow
provisions to be deducted only when paid.
 Accounting depreciation for the year 2020 amounted to Rs. 100,000 while Rs. 150,000 for the
year 2019.
 Tax depreciation for the year 2020 amounted to Rs. 200,000 while it was Rs. 220,000 in the
year 2019.
  Provision for doubtful debts amounted to Rs. 120,000 and Rs. 80,000 for the year 2020 and
2019 respectively. While bad debts written off amounted to Rs. 50,000 and Rs. 60,000 for the
years 2020 and 2019 respectively.
 Applicable tax rate for the company is 29%.

Current tax for the year 2020 and 2019 will be and respectively.

a) 2020: Rs. 861,300, 2019: 1435,500.

b) 2020: Rs. 1160,000, 2019: 1139,700.

c) 2020: Rs. 861,300, 2019: 1139,700.

d) 2020: Rs. 1131,000, 2019: 1160,000.

Q15: P (PL) had the loans amounted to Rs. 140 million at 10% and Rs. 200 million at 8% in place
throughout the year ended December 31, 2019 which constitutes its general borrowings for the
period. On July 1, 2019 the company obtained Rs. 50 million loan for construction of a qualifying asset
which was completed during 2019, amount should be capitalized as borrowing costs at
December 31, 2019 in respect of this asset.

a) Rs. 2.8 million.

b) Rs. 4.4 million.

c) Rs. 2.2 million.

d) Rs. 5.6 million.

Answer:

Weighted average cost of capital = [(140 million x 0.10) + (200 million x 0.08)]/[140 million + 200 million]

= 8.82%

Borrowing cost = 50 million x 0.0882 x 6/12 = 2.2 million

Q16: The following details apply to a contract where performance obligations are satisfied over time
at December 31, 2020.

Rupees “000”
Total contract revenue 120,000
Costs to date 48,000
Estimated costs to complete 48,000
Contract asset 8400
The contract is agreed to be 45% completed at December 31, 2020. Which one of the following
represents correct option for “amount invoiced” in respect of this contract?

a) Rs. 10.8 million.

b) Rs. 120 million.

c) Rs. 3.78 million.

d) Rs. 50.4 million.

Answer:

Total contract revenue = 120 million

Less: cost to date = (48 million)

Less: estimated cost to complete = (48 million)

Total contract profit = 24 million

Profit for the year = 24 million x 0.45 = 10.8 million

Amount invoiced to customer:

Contract cost to date = 48 million

Add: Profit for the year = 10.8 million

Less: Amount billed to date =(8.4 million)

Cost invoiced = 50.4 million

Q17: On October 1, 2020 J Limited acquired office furniture for its corporate office under a two year
lease agreement. The terms of the lease require an initial payment of Rs. 70,000 followed by two
payments of Rs. 280,000 each on June 30,2021 and June 30, 2022. The amount to be recognized in
Statement of profit and loss of J Limited for the year ended June 30, 2021 would be:

a) Rs. 78,750.

b) Rs. 315,000.

c) Rs. 236,250.

d) Rs. 630,000.

Answer:

Annual lease rental expense = Total lease payments/ Total lease period

= 70,000 + 280,000 + 280,000/2

= Rs. 315,000 per annum.

Expense to be recorded up to June 30 = 315,000 x 9/12 = Rs. 236,250.

Q18: J Limited has a production capacity of 20,000 units but during the year ended June 30, 2020 the
company could produce only 15,000 units due to a technical fault of machine which resulted in scrap
of remainder units. The company incurred production overheads amounted to Rs. 2500,000. Cost of
raw materials and direct labor amounted to Rs. 500 and 260 per unit respectively. On June 30, 2020
the company had 6500 units in its inventory. amount of inventory would be reported on
the statement of financial position of J Limited as at June 30, 2020.

a) Rs. 3250,000.

b) Rs. 5752500.

c) Rs. 2502,000

d) Rs. 4940,000.

Answer:

Per unit cost:

Material = Rs. 500

Labor= Rs. 260

FOH = 2500,000/20,000

FOH = Rs. 125

Total cost per unit = Rs. 885 per unit.

Cost of 6500 units = 885 x 6500 = Rs. 57525,000.

Q19: A 5% loan note was issued on July 1, 2018, at face value of Rs. 20 million. Direct costs of the issue
amounted to Rs. 500,000. The loan note will be redeemed on June 30, 2021 . The effective interest
rate applicable is 10% per annum. The loan note appear in the statement of financial position as at
June 30, 2020 at an amount of:

a) Rs. 20.45 million.

b) Rs. 21 million.

c) Rs. 21.495 million.

d) Rs. 22.10 million.

Answer: opening = 20 million – 0.5 million = 19.5 million.

Years Opening Balance effective at 10% coupon rate 5% Balance at end

1 19.5 million 1.95 million (0.975) million 20.475 million

 2 20.475 million 2.0475 million (1.02375) million 21.495 million

Q20: K Limited vacated its head office building and let it out to a third party on June 30, 2020. The
building had an original cost of Rs. 18 million on January 1, 2012 and was being depreciated over 50
years. It was judged to have a fair value on June 30, 2020 of Rs. 19 million. At the year end date of
December 31, 2020 the fair value of the building was estimated at Rs. 24 million. Company uses the
fair value model for investment property. amount will be shown in revaluation surplus at
December 31, 2020 in respect of this building.

a) Rs. 9060,000.

b) Rs. 4060,000.

c) Rs. 5000,000.

d) Rs. 1000,000.

Answer:

Fair value at year end = 24 million

Less: Fair value at june 30 = 19 million

Revaluation surplus = 5000,000

Q21: On June 1, 2021, Hy Limited (HL) acquired 80% of the equity shares of Bye Limited (SL). At the
date of acquisition, the fair values of SL’s net assets were equal to their carrying amounts with the
exception of its property. The property had a fair value for Rs. 1.2 million below its carrying amount
and had a remaining useful life of eight years. Which one of the following amounts represents correct
adjustment in respect of the property on group’s retained earnings as at September 30, 2021?

a) Rs. 10,000.

b) Rs. 40,000.

c) Rs. 150,000.

d) Rs. 50,000.

Answer:

Difference in fair value = 1200,000

Useful life = 8 years.

Depreciation expense = 1200,000/8 = 150,000.

%age of acquisition = 150,000 x 80% = Rs. 120,000.

Depreciation from June 1 to September 30 = 120,000 x 4/12 = Rs. 40,000.

Q22: On January 1, 2020, Sattu Limited (SL) sold a property at its fair value of Rs. 20 million and
transfer title to the property on that date. SL then leased it back under a five year lease, paying Rs.
1500,000 per annum on December 31 each year. The present value of rentals payable was Rs.
5990,000 and the interest rate implicit in the lease was 8%. The carrying amount of the property on
January 1, 2020 was Rs. 16 million and it had a remaining useful life of 20 years. SL will charge
depreciation amounting to and finance cost in the statement of profit or loss for
the year ended December 31, 2020.

a) Depreciation: 800,000 and finance cost: 359,200.

b) Depreciation: 958,400 and finance cost: 359,200.

c) Depreciation: 958,400 and finance cost: 479,200.

d) Depreciation: 800,000 and finance cost: 479,200.

Answer:

Depreciation expense = 1600,000,000/20 = 800,000.

Finance cost = 5990,000 x 0.08 = 479,200.

Q23: Following are extracts from K Limited’s (KL) statement of financial position as at June 30:

2021 2020
Rs. “000”
Property, plant and equipment 1905,000 1935,000
Non-current asset investments at fair value 279,000 321,000
Deferred development expenditure 87,000 72,000

During the year to June 30, 2021, the company sold property, plant and equipment of Rs. 135 million. It
had originally cost 966 million and had its carrying value of 180 million at the date of disposal.

KL’s statement of profit or loss for the year ended June 30, 2021, included:

 Depreciation of property, plant and equipment of Rs. 360 million.

 Amortization of deferred development expenditure of Rs. 24 million.
 Revaluation loss on investment of Rs. 63 million.

is the cash flows from investing activities section of KL’s statement of cash flows for the
year ended June 30, 2021.

a) Rs. 570 million outflow.

b) Rs. 435 million inflow.

c) Rs. 435 million out flow.

d) Rs, 135 million inflow.

Answer: Amounts in Rs.”000”

PPE
Opening........................ 1935,000 Depreciation Exp.......... 360,000
Additions (outflow)...... 510,000
Disposal......................... 180,000

Closing............................ 1905,000

Non-Current Assets
Opening....................... 321,000 Revaluation Loss........... 63,000
Additions (outflow)...... 21,000

Closing...................... 279,000

Deferred Development Expense

Opening........................ 72,000 Amortization.................. 24,000
Additions (Outflow)...... 39,000

Closing........................ 87,000

Cash flow from investing Activities:

Additions in PPE.................................................................................. (Rs. 510,000,000)

Cash proceeds from sale of PPE.......................................................... Rs. 135000,000

Additions in Non-current Assets......................................................... (Rs. 21,000,000)

Increase in deferred development expenditure................................. (Rs. 39,000,000)

Net cash flow from investing activities (Rs. 435 million)

Q24: Antibiotic Limited (AL) entered into a contract for construction of a shopping mall on January 1,
2019. The price of the contract amounted to Rs. 16 million. Cost incurred up to December 31, 2019
amounted to Rs. 8 million and further cost estimated to complete is Rs. 12 million. The company has
recorded 60% progress of the project and amount billed to date is Rs. 6 million. is the amount
of cost of sales that should be recorded in the statement of profit or loss of AL for the year ended
December 31, 2019.

a) Rs. 11.28 million.

b) Rs. 8.4 million.

c) Rs. 18.8 million.

d) Rs. 13.6 million.

Answer:

Contract Revenue = 16 million.

Less: cost to date = 8 million

Less: Further cost to complete = 12 million

Project Loss = (4 million)

Loss for the period = 60% x 4 million = 2.4 million

Add: Already billed = 6 million

Total cost of sale = 8.4 million.

Q25: The following information relates to Wao0o Limited (WL) for the year ended December 31, 2019.

 At January 1, 2019, the net book value of non-current assets exceeded their tax written down
value by Rs. 8500,000.
 The company claimed Rs. 5000,000 as depreciation for tax purposes and charged depreciation of
Rs. 4500,000 in financial statements.
 During the year, WL revalued a freehold property. The revaluation surplus was Rs. 2500,000. The
company has no plans to sell the property and realize the gain in the foreseeable future.
 29% tax rate is applicable to the company.

The deferred tax provision required for the year ended December 31, 2019 will be .

a) Rs. 4640,000.

b) Rs. 3335,000.

c) Rs. 2320,000.
d) Rs. 3190,000.

Answer:

Amount in excess of tax allowable value of non-current assets = 8500,000.

Depreciation for tax purposes = 5000,000

Revaluation surplus = 2500,000

Total amount = 16,000,000.

Tax @ 29% = 16,000,000 x 0.29 = 4640,0000.

Q1: Cherry Limited manufactured 90 units which used:

3kg of raw material at Rs. 80 per kg.

3 direct labor hours worked at the rate of Rs. 20 per hour.

2 indirect labor hours worked at the rate of Rs. 10 per hour.

Advertising expense amounted to Rs. 75,000.

The total variable manufacturing cost of the product is:

a) Rs. 46,2000.

b) Rs. 28,800.

c) Rs. 103,800.

d) Rs. 27,000.

Answer:

Direct material = 3kg x 80 per kg x 90 units = Rs. 21,600.

Direct labor = 3 hours x 20 per hour x 90 units = Rs. 5400

Variable FOH = 2 hours x 10 per hour x 90 units = 1800

Total variable manufacturing cost = Rs. 28800

Q2: Following are the extracts of Air Engineering Limited’s (AEL) statement of financial position as at
June 30:

2021 2020
Non-current Liabilities Rupees
Deferred tax provisions 1120,000 1080,000
 Current Liabilities
Tax payable 3960,000 3640,000

Tax paid during the year amounted to Rs. 3590,000, is the income tax expense to be
included in the statement of profit or loss for the year ended June 30, 2021.

a) Rs. 3230,000.

b) Rs. 3950,000.

c) Rs. 3910,000.

d) Rs. 3590,000.

Answer:

Income Tax payable

Opening ............. 3640,000
Increase in exp..... 320,000

Closing .............. 3960,000

Deferred Tax payable

Opening ............. 1080,000
Increase in exp..... 40,000

Closing ..............
11200,000

Total tax exp. = 320,000 + 40,000 + 3590,000 = 3950,000.

Q3: S Limited (SL) owns a machine that has a carrying amount of Rs. 1275,000 at the year end of
December 31, 2020 its market value is Rs. 1170,000 and costs of disposal are estimated at Rs. 37,500.
A new machine would cost Rs. 2250,000. SL expects it to produce net cash flows of Rs. 450,000 per
annum for the next three years. The cost of capital of SL is 8% is the impairment loss on the
machine to be recognized in the financial statement of SL at December 31, 2020. [PV factor at 8% Year
1 = 0.926, Year 2 = 0.857, Year 3= 0.794]

a) Rs. 142,500.

b) Rs. 115,305.

c) Rs. 75,000.

d) There will be no impairment loss on machine.

Answer:

Impairment Loss = Carrying value – recoverable amount.

Recoverable amount = higher of fair value and value in use.

Carrying value = Rs. 1275,000

Value in use = Rs. 1159650.

Years Cash flows Present value factor Present value

1 450,000 0.926 416,700

2 450,000 0.857 385,650

3 450,000 0.794 357,300

Value in use = 1159650.

Fair value = 1170,000 – 37,500 = Rs. 1132,500

Since value in use is higher, hence recoverable amount = Rs. 1159,650.

Impairment loss = Carrying value – recoverable amount.

= 1275,000 – 1159,650

= 115,305.

Q4: At the beginning of the year, the allowance for receivables was Rs. 850,000. At the year end, the
allowance required was Rs. 1000,000. During the year Rs. 500,000 of debts were written off, which
includes Rs. 100,000 previously included in the allowance for receivables, is the amount
of charge to be recorded in the statement of profit or loss for bad debts and allowance for receivables
for the year?

a) Rs. 1000,000.

b) Rs. 650,000.

c) Rs. 550,000.

d) Rs. 1500,000.

Allowance for doubtful debt

Opening ............. 850,000
Bad debts Previously included...
100,000
written off ............ 500,000

Closing .............. 1000,000 Bad deb exp........ 550,000

Q5: On January 1, 2020, Z Limited (ZL) borrowed Rs. 36 million at the rate of 8% for financing the
construction of a building which is expected to be completed in two year’s time. Construction began
on March 1, 2020, Rs. 15 million of the loan remained unutilized until July 1, 2020, ZL invested these
surplus funds and earned 6% on these funds, is the borrowing cost to be capitalized by ZL
for the year ended December 31, 2020.

a) Rs. 1500,000.

b) Rs. 2100,000.

c) Rs. 2430,000.

d) Rs. 2880,000.

Answer:

Interest expense = 36,000,000 x 0.08 = 2880,000

Less: Interest income = 15,000,000 x 0.06 x 6/12 = (450,000)

Amount to be capitalized = 2430,000

Q1: The following information represents extracts of trial balance of Junaid Limited (JL) as at Dec 31, 2020.

Rs. 000 Rs. 000

Capitalized development expenditure at January 1, 2020 20,000

Development expenditure accumulated amortization at 6000

January 1, 2020.

Additional Information:

 In addition to the capitalized development expenditure of Rs. 20 million, further research and
development cost were incurred on a new project which commenced on January 1, 2020. The
research stage of new project latest until March 31, 2020 and Rs. 1.4 million of cost were incurred.
From that date the project incurred development cost of Rs. 800,000 per month. On July 1, 2020,
the Directors became confident that the project would be successful and yield a project well in
excess of its cost. The project is still in development as at December 31, 2020.
 Capitalized development expenditure is amortized at 20% per annum using the straight line
method.

Which one of the following carrying amount of development cost would be included within statement of
financial position of SL as at December 31, 2020.

a) Rs. 14,800,000.

b) Rs. 14000,000.

c) Rs. 13,840,000.
d) Rs. 17,200,000.

Answer:

IAS related to research and development states that, cost on research could not be capitalized, only
development expenditure is capitalized if it meets the criteria.

So 1.4 million of research expense cannot be capitalized.

Since project is still under development and is not available for sale, hence this development expenditure
cannot be capitalized.

Moreover, only 20,000,000 – 6000,000 = 14000,000 shall be capitalized

Q2: HaJI Limited (HL) paid Rs. 250 per share to capture 100% of Karim Limited’s (KL) equity shares on June
1, 2019. At that date KL’s statement of financial position showed the following balances with equity.

Rupees.
Share capital of Rs. 100 each. 18,000,000
Share premium 6000,000
Accumulated profit 4000,000

KL’s net asset value were the same as their book value except for land which was valued at Rs. 7000,000
more than its book value. HL’s directors estimated that any goodwill arising on the acquisition will have a
useful life of 10 years. is the amount of goodwill that would arise on the acquisition of KL.

a) Rs. 28 million.

b) Rs. 7 million.

c) Rs. 10 million.

d) Rs. 45 million.

Answer:

Goodwill at acquisition = price paid for acquisition - market value of assets and liabilities

= [250 x 180,000] – 18000,000 – 6000,000 – 4000,000 – 7000,000

= 10,000,000

Q3: On September 1, 2019, Rainbow Limited (RL) entered into an agreement to lease a new machinery
under a 5 year lease, with Rs. 350,000 payable on December 31 each year. The asset has a useful life of 6
years. The interest rate implicit in the lease is 6%. RL recorded Rs. 25,650 as finance cost for the year ended
December 31, 2019. The amount of present value of minimum lease payment is .

a) Rs. 777,000.
b) Rs. 5052,000.

c) Rs. 1263,000.

d) Rs. 421,000.

Answer:

Minimum lease payment = interest + principal

= 25650/0.06 + 350,000 = 777,000

Q4: Faaltu Limited (FL) makes an accounting loss of Rs. 1225,000 during the year ended June 30,2020. This
included non-taxable income of Rs. 87,500 and depreciation of Rs. 105,000. In addition, Rs. 1400,000 of the
expense are disallowable for tax purposes. If the tax allowable depreciation totals Rs. 112,000. The taxable
amount would be .

a) Rs. 2530,500 profit.

b) Rs. 80,500 loss.

c) Rs. 2600,500 loss.

d) Rs. 80,500 profit.

Answer:

Since Loss is negative profit, so

Profit = -1225000

Add back: Depreciation = 105,000

Add back: non allowable deductions = 1400,000

Less: Tax allowable dep. = (112000)

Less: Non taxable income = (87500)

Profit = 80500

Q5: On January 1, 2019, Shahrukh Khan Limited (SL) purchased a debt instrument at its fair value of Rs.
500,000. It had a principle amount of Rs. 550,000 and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held at
amortized cost. At ,amount the debt instrument will be shown in the statement of financial
position of SL as at December 31, 2020.

a) Rs. 520,800.

b) Rs. 514,560.

c) Rs. 564,560.
d) Rs. 566,000.

Answer:

The coupon rate (6%) is applied to the face value of the debt instrument (550,000)

effective rate (8%) is calculated on the fair value 500,000.

Year Principle Fair value Balance

2019 (550,000 x 6%) 500,000 x 0.08 500000 + 40,000 -33,000 = 507000

2020 (550,000 x 6%) 507,000 x 0.08 507,000 + 40560 – 33000 = 514560

Q1: Zohair Limited (ZL) leased out its office building on January 1, 2020 under an operating lease for a
period of four years. The carrying value of the building amounted to Rs. 23,900,000 and its remaining
useful life is estimated to be 25 years with no residual value. ZL also incurred Rs. 11,00,000 in respect of
initial direct cost. As per agreement, Rs. 1600,000 were paid by the lessee as initial deposit and future
rentals of Rs. 1000,000 shall be paid at the end of next two years and Rs. 3200,000 per annum shall be paid
for following two years, will be recorded in respect of lease income in the statement of profit or
loss of ZL for the year ended December 31, 2020.

a) Rs. 2600,000.

b) Rs. 1600,000.

c) Rs. 1000,000.

d) Rs. 2500,000.

Answer:

1600,000 + 1000,000 = 2600,000

Q2: Following data related to K Limited (KL):

Contract Price 10,000

Cost incurred to date (1250)
Cost to complete (5000)

Amount billed to date 2500

The company has recorded 25% progress in relation to the above contract. Select the best amount from the
following options that should be recorded in the statement of financial position of KL as at December 31,
2020 in respect of the above contract.

a) Nill.

b) Rs. 312,500 contract liability.

c) Rs. 1250,000 contract liability.

d) Rs. 7500,000 contract asset.

Answer:

Contract price = 10,000

Less: cost incurred to date = (1250)

Less: cost to complete = (5000)

Profit = 3750.

Profit for the period = 3750 x 0.25 = 937.5

Add: contract cost to date = 1250

Less: Amount billed to date (2500)

Contract liability = 312500.

Q3: On February 14, 2019, Cute Limited (CL) borrowed Rs. 2.5 million from a local bank. The fixed rate loan
bears interest at 9% per annum compounded annually. Interest is payable on December 31 each year. The
principle is repayable on December 31, 2028. Identify the best option from the following that should be
recorded in the statement of profit or loss of CL for the year ended December 31, 2019.

a) Rs. 225,000.

b) Rs. 18,750.

c) Rs. 196,875.

d) Rs. 206,250.

Answer:

FV = 2.5 x (1+0.09/10)^10x1

FV = 2734334.

Interest = 2734334 – 2500,000

Intersrt = 234,335

Interest for 10.5 months = 206,250.

Q4: H Limited (HL) statement of profit and loss and other comprehensive income showed a profit before
tax of Rs. 3600,000. After the year end and before the financial statements were authorized for issue, the
following events took place:

The value of an investment held at the year end fall by Rs. 170,000.
 A customer who owned Rs. 232,000 at the year end went bankrupt owing a total of Rs. 276,000.

Inventory valued at cost Rs. 322,000 in the statement of financial position was sold for Rs. 282,000.

Assets with a carrying value at the year end of Rs. 480,000 were unexpectedly expropriated by
government.

is the HL’s profit after making the necessary adjustments for these events.

a) Rs. 3158,000

b) Rs. 2798,000

c) Rs. 3328,000

d) None is correct.

Answer:

“After the end of the reporting period and before the financial statements were authorized for issue, the
following events took place”

So the fall in value occurred AFTER the year end and is therefore a non-adjusting subsequent event

“A customer who owned Rs. 232,000 at the year end went bankrupt owing a total of R. 272,000. – as at
the year end the debt was 232,000 so that’s the amount that should be written off as an adjusting event.
The additional 40,000 is a non-adjusting event – the bankruptcy gave us a better indication of the value
of the current asset as at the year end – it fixed with greater certainty an amount or estimate as at the
year end

The additional 40,000 did NOT relate to a condition or situation that existed as at the year end and is
therefore not an adjusting event

” Inventory valued at 322,000 in the statement of financial position was sold in year-end condition for
282,000.”

Inventory should be valued at the lower of cost and net realisable value and the post year-end sale gave
us a more accurate figure for the net realisable value, so it DID relate to a condition or situation that
existed as at the year end and is therefore an adjusting event.

“Assets with a carrying amount at the year end of 282,000 were unexpectedly expropriated by the
government.”

The expropriation by the government did NOT relate to a condition or situation that existed as at the
year end and is therefore not an adjusting event

Profit before changes = 3600,000

Less: Amount owned from customer = (232,000)

Less: Over stated value of inventory = (40,000)

Profit after changes = 3328,000

Q5:At June 30, 2020 R Limited (RL) trial balance showed a brand at cost of Rs. 30 million, less accumulated
amortization brought forward at July 1, 2019, of Rs. 9 million. Amortization is based on a 10 year useful life.
An impairment review on January 1, 2020, concluded that he brand had a value in use of Rs. 12 million and
a remaining useful life of three years. However, on the same date RL received an offer to purchase the
brand for Rs. 15 million. The carrying amount of the brand in the statement of financial position of RL as at
June 30, 2020 is .

a) Rs. 8 million.

b) Rs. 23 million.

c) Rs. 12.5 million.

d) Rs. 10 million.

Answer:
Less: depreciation = (15/3) million = 5 million = (2.5 million) up to June 30

Value of brand = 12.5 million

Q1: Shah ji Limited (SL) borrowed Rs. 7.5 million at 10% per annum from Moiz Bank Limited (MBL) on
January 1, 2020 for the construction of a factory which is a qualifying asset. Construction began on
January 1, 2020. Rs. 6 million were paid evenly between March 1, 2020 and December 31, 2020.
Surplus funds were invested in a fixed deposit and earned interest at 6% per annum. No capital
portion of the loan was repaid during the year ended December 31, 2020. is the amount of
borrowing cost to be capitalized for the year ended December 31, 2020.

a) Rs. 750,000.

b) Rs. 300,000.

c) Rs. 450,000.

d) No amount of borrowing cost would be capitalized.

Answer:

Cost of borrowing = 7500,000 x 10% = 750,000.

Less: interest income = (1500,000 x 6%) = (90,000)

Less: 7500,000 x 2/12x 0.06 = (75000)

5400,000 x 1/12x 0.06 = (27000)

4800,000 x 1/12x 0.06 = (24000)

4200,000 x 1/12x 0.06 = (21000)

3600,000 x 1/12x 0.06 = (18000)

3000,000 x 1/12x 0.06 = (15000)

2400,000 x 1/12x 0.06 = (12000)

1800,000 x 1/12x 0.06 = (9000)

1200,000 x 1/12x 0.06 = (6000)

600,000 x 1/12x 0.06 = (3000)

Answer: 450,000

Q2: Ilaj Limited (IL) purchased an item of plant and machinery costing Rs. 5 million on July 1, 2017. The
company has a policy to depreciate plant and machinery on a straight line basis, over a period of ten
years with nil residual value while the tax authority allows tax depreciation at the rate of 15% per
annum. On June 1, 2019, IL revalued the plant and machinery to Rs. 4200,000. The applicable tax rate
is 29% is the amount of the deferred tax provision to be included in its statement of financial
position of IL as at June 30, 2020.

a) Rs. 72,500.

b) Rs. 182,519.

c) Rs. 112,375.

d) Rs. 367,394.

Answer:

5000000x 10% = 500,000

5000000 X 15% = 750,000

750,000 – 500,000 = 250,000 X 0.29 = 72,500.

Q3: On March 31, 2020, R Limited performed an impairment review for one of its machine which had a
carrying amount of Rs. 1500,000. The fair value of the machine amounted to Rs. 1000,000 and the
company will incur Rs. 100,000 to sell the machine. The expected future cash flows amounted to Rs.
400,000 per annum for the next three years. The current cost of capital is 10% and a three year
annuity factor of Re. 1 per annum at 10% would have a present value of Rs. 2.487. The recoverable
amount of the machine as at March 31, 2020 is .

a) Rs. 1500,000.

b) Rs. 900,000.

c) Rs. 994,800.

d) Rs. 400,000.

Answer:

Recoverable amount = higher of fair value and value in use.

Fair value = 1000,000 – 100,000 = 900,000.

Value in use = 2.487 x 400,000 = 994,800.

Hence, recoverable amount = 994,800.

Q4: An item of property, plant and equipment is shown in a company’s statement of financial position
at its written down value of Rs. 420,000. For tax purposes, the item’s written down value is Rs.
610,000. The residual value of the item at the end of its useful life is expected to be nil. Assuming that
the company pays tax at the rate of 29%, the resulting deferred tax asset or liability is .

a) Deferred tax asset of Rs. 55,100.

b) Deferred tax liability of Rs. 55,100.

c) Deferred tax asset of Rs. 190,000.

d) Nil.

Answer:

(610,000 – 420,000) x 0.29 = 55100.

Q5: On July 1, 2019, Thokar Niaz Baig Limited (TL) had property, plant and equipment with a carrying
amount of Rs. 3600,000. During the year, company disposed off assets with a carrying amount of Rs.
1200,000 for Rs. 1000,000. TL revalued the building from Rs. 1500,000 to Rs. 2000,000 and charged
depreciation for the year amounting to Rs. 400,000. At June 30, 2020, the carrying amount of property,
plant and equipment was Rs. 5000,000. The amount that will be reported in the statement of cash
flow for the year ended June 30, 2020 under the head cash flows from investing activities is

a) Rs. 1000,000 inflow.

b) Rs. 2100,000 outflow.

c) Rs. 1500,000 outflow.

d) Rs. 2500,000 outflow.

Answer:

PPE
Opening 3600,000 Disposal 1200,000

Revaluation gain Depreciation 400,000

500,000

Additions 2500,000

Closing 5000,000

Outflow (additions in PPE) = (2500,000) outflow

Add: Sale proceeds from disposal = 1000000 inflow

= Rs. 1500,000 outflow

Q1: K Limited (KL) has the following payments and receipts during the year ended December 31, 2020:

Rupees
Issue of shares 515,000
Loan stock repaid 200,000
 Share premium received 230,000
Proceeds of a right issue 315,000
Interest paid 115,000

is the amount to be recorded under “financial activities” in the statement of cash flows
for the year ended December 31, 2020.

a) Rs. 545,000.

b) Rs.745,000.

c) Rs. 860,000

d) Rs. 630,000

Answer:

Financing Activities:

Issue of shares = Rs. 515,000

Add: Share premium received = Rs. 230,000

Less: Loan repaid = (Rs. 200,000)

Add: Proceeds of right issue = Rs. 315,000.

Less: Interest paid = (Rs. 115,000)

Cash flow from financing Activities = 745,000 inflow

Q2: D Limited has the existing debit balance on the current tax account of Rs. 2.4 million which
represents the over/under provision of the tax liability for the year ended December 31, 2019. A
provision of Rs. 28 million is required for income tax for the year ended December 31, 2020. The
existing credit balance on the deferred tax account is Rs. 2.5 million and the provision required at
December 31, 2020 is Rs. 4.4 million. is the total amount which will be charged to the
statement of profit or loss of DL for the year ended December 31, 2020 in respect of taxation.

a) Rs. 30,400,000.

b) Rs. 28,000,000.

c) Rs. 32,300,000.

d) Rs. 29,900,000.

Answer:

Provision = 28
Add: Provision required = 4.4

Less: Provision already recorded = (2.5)

Amount charged to P & L = Rs. 29,900,000

Q3: On July 1, 2018, A Limited (AL) purchased a machine for Rs. 8 million having an estimated useful
life of ten years. The company has a policy to charge depreciation on time apportioned basis in the
years of acquisition and disposal. The machine was revalued to Rs. 8.5 million on July 1, 2019. There
was no change to the useful life of the asset. The depreciation expense that will be charged to
statement of profit or loss of AL for the year ended December 31, 2019 is .

a) Rs. 944,444.

b) Rs. 872,222.

c) Rs. 850,000.

d) Rs. 800,000.

Answer”:

8500,000/9 = Rs. 944,444

Q4: R Limited (RL) purchased a machine for Rs. 600,000 on January 1, 2017, and assigned it a useful life
of 15 years. On March 31, 2019, it was revalued to Rs. 640,000 with no change in useful life. The
depreciation charge in relation to this machine in the financial statements of RL for the year ended
December 31, 2019, will be .

a) Rs. 40,000.

b) Rs. 42,667.

c) Rs. 47,647.

d) Rs. 50,196.

Depreciation expense = 640,000/12.75 = Rs. 50196

Q5: The board of directors of S Limited (SL) made a decision to close down a regional office which was
communicated to employees before the year end. 50 employees out of eighty would be retained at a
cost of Rs. 80,000 per employee. Remaining employees will be redundant and a total sum of Rs. 9
million will be paid to them. SL should make a provision of in respect of closure of regional
office for the year ended December 31, 2019.

a) Rs. 9 million.

b) Rs. 4 million.
c) Rs. 13 million.

d) No provision should be made.

Answer:

(50 x 80,000) + (9000,000)

= Rs. 13 million.

Q1: On January 1, 2021, H Limited (HL) acquired a building for investment purposes for Rs. 6 million
including refundable purchase taxes of Rs. 300,000. The purchase agreement provided for payment to
be made in full on December 31, 2021. Non-refundable property transfer taxes and direct legal cost
amounted to Rs. 30,000 and 300,000, respectively paid on January 1, 2021. The company uses 10%
cost of capital (Present value factor at 10% is 0.909). The initial cost of the building will be:

a) Rs. 6030,000.

b) Rs. 5511,300.

c) Rs. 6330,000.

d) Rs. 6000,000.

Answer:

Building acquisition agreement is made on 1 jan 2021, while this payment (6000,000 – 300,000) will be
made on year end (31 dec 2021) so we have to take PV of it which is:

(6000,000 – 300,000) x 0.909 = 5181,300.

Add: 30,000

Add: 300,000

= Rs. 5511300

Q2: Z Limited (ZL) had a credit balance brought forward on current tax of Rs. 2000,000. During the year
ZL paid tax amounted to Rs. 1800,000 and the company has a provision for the current year amounted
to Rs. 5000,000. It has increased the deferred tax provision by Rs. 500,000. is the total charge
to tax for the year ended December 31, 2019 in the statement of profit or loss of ZL.

a) Rs. 5300,000.

b) Rs. 700,000.

c) Rs. 1800,000.

d) Rs. 4500,000.

Answer:
2000,000 – 1800,000 + 500,000 = 700,000

Q3: On January 1, 2018 S Limited purchased a building amounted to Rs. 12 million for investment
purposes. The building had an estimated useful life of 20 years. At this time it was determined that the
fair value of the building could not be reliably measured on an continuing basis. On December 1, 2019
an independent valuer estimated the fair value of the building to be Rs. 15 million. It is the policy of
the company to measure investment property at fair value. The carrying amount of the building at
December 31, 2019 will be .

a) Rs. 13.5 million.

b) Rs. 10.8 million.

c) Rs. 14.25 million.

d) Rs. 11.4 million.

Answer:

Dep. Exp. Revalued amount/ Remaining useful life

15,000,000/18

0.833 (approx..)

Book value = 15 – 0.833= 14.25 approx.

Q4: On July 1, 2020, Eagle Limited (EL) received a grant of Rs. 10 million for the purchase of a machine.
The grant will be repayable if the company sells the asset within 4 years, which is not intended to do
so. The asset has a useful life of five years. The deferred income liability balance as at December 31,
2020 will be:

a) Rs. 9 million.

b) Rs. 2.5 million.

c) Rs. 2 million.

d) Rs. 1 million.

Answer:

Since, the company is considering the government grant as deferred income hence,

= Deferred income liability = 10,000,000 – [10,000,000 / 5 x 6/12]

= Deferred income liability = 9000,000

Q5: F Limited (FL) started development project related to a new mobile phone which was completed
on September 30, 2019. Rs. 15 million had been spent up to that point. The mobile is expected to have
a useful life of three years. Rs. 150,000 was spent on marketing the mobile. The expense that should
be recorded in the Statement of Profit or Loss of FL for the year ended December 31, 2019 is:

a) Rs. 1.4 million.

b) Rs. 1.25 million.

c) Rs. 1.2 million.

d) Rs. 0.15 million.

15 million /3 = 5000,000 x 3/12 = 1250,000 + 150,000 = 1.4 million

Q1: On June 1, 2019, Z Limited sold a property having carrying amount of Rs. 3200,000 which had a
remaining useful life of 20 years at a fair value amounted to Rs. 4 million and transfer title of property
to the buyer. On the same date the company leased it back under a five year lease, paying Rs. 300,000
per annum on December 31 each year. The present value of Rentals payable was Rs. 1200,000 and the
rate implicit in the lease is 7%. The amount of depreciation that would be reported in statement of
profit or loss of Z Limited for the year ended December 31, 2019 is:

a) Rs. 96,000.

b) Rs. 240,000.

c) Rs. 192,000.

d) Rs. 84,000.

4000,000 x 0.07 = 280,000

1200,000 – 280,000 = 920,000

Principle remaining = 4000,000 – 920,000 = 3080,000

Depreciation= 30,80,000/19 = 162105

162105 x 7/12 = 96000 (approx..)

Q2: U Limited (UL) makes a taxable profit of Rs. 350,000 during the year. This includes adjustments for
non taxable income of Rs. 25000, depreciation of Rs. 30,000 and 15,000 disallowed expenses. If the tax
allowable depreciation totals Rs. 32,000, the accounting profit will be:

a) Rs. 452,000.

b) Rs. 338,000.

c) Rs. 362,000.

d) Rs. 310,000.
Answer:

350,000 -30,000-15,000+32,000+25,000 = 362,000

Answer:

.Q3: Following data relates to construction contract of S Limited (SL):

Contract Price Rs. 9000,000.

Cost to date Rs. 5200,000.

Estimated cost to complete Rs. 1200,000.

Estimated stage of completion 35%

The cost that should be recognized in statement of profit or loss of SL for the year ended June 30,
2020:

a) Rs. 2240,000.

b) Rs. 6400,000.

c) Rs. 4000,000.

d) Rs. 5200,000.

Answer:

cost to date = (5200,000)

Further cost to complete = (1200,000)

Total cost charged to P & L = 6400,000

Q4: On July 1, 2019, K Limited (KL) issued 50,000, redeemable preference shares of Rs. 10 with a
coupon rate of 8% at par. They are redeemable at a premium which gives them an effective finance
cost of 12% per annum. The amount of non current liability that would be reported on Statement of
financial position of KL as at June 30, 2020 is:

a) Rs. 500,000.

b) Rs. 520,000.

c) Rs. 540,000.

d) Rs. 560,000.

Answer:
 Interest = 500,000 x (12% - 8%) = 20,000

Add: Principle = 500,000

Long term liability = 520,000.

Q5: S (Pvt.) Limited, a small company, purchased its non-current tangible asset on January 1, 2018 at a
cost of Rs. 900,000, which qualified for tax depreciation at 15%. The company’s accounting
depreciation policy is to depreciate the asset over its useful economic life of ten years, assuming a
residual value of Rs. 50,000. The applicable tax rate is 29%. The deferred tax balance required in the
statement of financial position as at December 31, 2019 is:

a) Rs. 0.

b) Rs. 23128

c) Rs. 188573

d) Rs. 211700

Answer:

Deferred tax arises because there is a difference between taxable profits and accounting profits. When
computing taxable profits, companies claim tax depreciation called capital allowances while when
computing accounting profits companies deduct accounting depreciation.

The value of the asset in the accounts is the carrying value which is computed as cost less depreciation,
while the asset is shown in the tax computation as the tax base which is cost less capital allowances.

The difference between the carrying value and the tax base is called a ‘temporary difference’. The
deferred tax liability is computed by multiplying the temporary difference by the tax rate. Once the
deferred tax liability is established, it is only necessary to compute the difference.

2018 2019 .

Accounting depreciation 900,000 – 50,000/ 10 = 85000 85,000

Carrying value of asset 900,000 – 85000 = 815,000 815,000 – 85,000 = 730,000

Tax base 900,000 – (900,000 x 0.15) = 765,000 765,000 – 114750 = 650,250

(cost less capital allowance)

Temporary difference 50,000 79,750

(carrying value of asset – tax base)

Tax @ 29% 14,500 23,128

Q1: On December 1, 2019, J (Pvt.) Limited acquired office furniture for its corporate office under a two
year lease agreement. The terms of the lease require an initial payment of Rs. 70,000 followed by two
payments of Rs. 35,000 each on June 30, 2020 and June 30, 2021. The amount to be recognized in
statement of profit or loss of J (Pvt.) Limited for the year ended June 30, 2020 would be:

a) Rs. 122,500.

b) Rs. 71,458.

c) Rs. 35,000.

d) Rs. 70,000.

Q2: On July 1, 2019, H Limited (HL) had the balance of accrued interest payable Rs. 240,000. During the
year ended June 30, 2020 the company charged finance cost to Statement of Profit or Loss amounted
to Rs. 180,000. The closing balance on the accrued interest payable amounted to Rs. 125,000. The
amount that should be shown as interest paid on the statement of cash flows for the year ended June
30, 2022 is:

a) Rs. 115,000.

b) Rs. 180,000.

c) Rs. 295,000.

d) Rs. 420,000.

Interest Payable
Opening 240,000

Interest paid 295,000 Interest exp. 180,000

Closing 125,000

Q3: On July 1, 2019, B Limited (BL) owned a building having carrying amount of Rs. 8 million and
estimated useful life of 20 years under the cost model. On January 1, 2019, the company decided to
sell the property and classified it as “held for sale”. On June 30, 2020 fair value less cost to sell the
building amounted to Rs. 7.91 million. The carrying value of the building in BL’s statement of Financial
Position as at June 30, 2020 is:

a) Rs. 7.91 million.

b) Rs. 7.6 million.

c) Rs. 7.5 million.

d) Rs. 7.8 million.

Q4: M Limited (ML) issued Rs. 1 million 5% loan notes on January 1, 2020. These loans are redeemable
at premium which means the effective finance cost amounts to Rs. 77,600 at an annual interest rate of
8%. Select the best option from the following which represents correct amount of issue cost that the
company incurred in issuing the loan notes.

a) Rs. 30,000.

b) Rs. 50,000.

c) Rs. 48,500.

d) Rs. 80,000.

Answer:

1000,000 (8% - 5%) = 30,000

Q5: The following trial balance extract relates to a property which is owned by W Limited (WL) as at
July 1, 2019.

Debit Credit
Rupees.

Property at cost (originally life 20 years) 30,000,00

0
Accumulated depreciation 9000,000

On January 1, 2020, following a sustained increase in property prices. WL revalued its property to Rs.
27 million is the amount of depreciation that will be charged in WL’s statement of profit
or loss for the year ended June 30, 2020.

a) Rs. 250,000.

b) Rs. 750,000.

c) Rs. 1000,000.

d) Rs. 1750,000.

Answer:

Since there is no change in useful life of asset upon revaluation, we will depreciate the new amount of
asset over its remaining useful life, but we have to find the remaining life first,

Taking the old values, per year dep. By straight line is:

30,000,000/20 = 1500,000

9000,000/1500,000 = 6 years. upto july 1 2019, but asset is revalued at January 2020, hence further
half year is passed, so life of asset passed uptil now is 6 + 0.5 = 6.5 years
so, asset was already depreciated 6.5 years till now
Hence, remaining life = 20 – 6.5 = 13.5 years.

27,000,000/13.5 = 2000,000 x 6/12 = 1000,000

Q1: W Limited accounting record shows the following details for the year ended March 31, 2020:

Rupees.

Income tax payable for the year 120,000

Over provision in relation to the previous years 9000

Opening provision for deferred tax 5200

Closing provision for deferred tax 6400

The income tax expense that will be shown in the Statement of Profit or Loss for the year ended
March 31, 2020 will be:

a) Rs. 140,600.

b) Rs. 116,200.

c) Rs. 122,200.

d) None of above.

Answer:

Provision for deferred tax

Balance ................ 7800 Opening 5200

Over provision 9000

Closing 6400

Income tax expense = 120,000 – 7800 = 112,200.

Q2: O Limited purchased a property for Rs. 18 million on January 1, 2016. The land element of the
purchase amounted to Rs. 3 million. The expected useful life of the building was estimated to be 50
years. On December 31, 2017, the property was revalued to Rs. 21 million, of which the land element
was Rs. 3.72 million and the building amounted to Rs. 17.28 million. On December 31, 2019 the
property was sold for Rs. 20.4 million. The gain or loss on disposal of property that would be reported
in the Statement of Profit or Loss for the year ended December 31, 2019 is:
a) Rs. 120,000 gain.

b) Rs. 400,000 gain.

c) Rs. 3000,000 Loss.

d) Rs. 3720,000 Loss.

Answer:

Revalued amount of property = 21 million.

Value of land = 3.72 million.

Value of building = 17.28 million.

Since property was revalued after 2 years of acquisition, hence remaining life = 50 – 2 = 48 years.

*Land is not depreciated.

Depreciation of building for 2 years after revaluation = 17280,000/48 = 360,000 x 2 = 720,000.

Book value of building at 31 dec 2019 = 17280,000 – 720,000 = 16560,000

Add: Value of Land = 3720,000

Book value of property at date of disposal = 20,280,000.

Less: Market Value of property at date of disposal = (20,400,000)

Gain = 120,000.

Q3: On July 1, 2020, BHL Limited acquired 60% holding in Zara Limited (zl). At this date BHL gave a loan
of Rs. 5 million at the date of 8% to ZL. The finance cost on the loan has been accounted for correctly
in the individual financial statements of BHL Limited and ZL. The totals for finance costs for the year
ended December 31, 2020 in the individual financial statements amounted to Rs. 2 million for BHL
Limited and Rs. 700,000 for ZL in the consolidated finance costs for the year ended December
31, 2020.

a) Rs. 2150,000.

b) Rs. 2250,000.

c) Rs. 2300,000.

d) Rs. 2500,000.

Answer:

2000,000 + (0.60 x 700,000) – (5000,000 x 0.08 x 0.60 x 6/12)

Q4: The following information represents extracts of trial balance of S Limited (SL) as at December 31,
2020:

Rs. “000” Rs. “000”

Lease hold property : at valuation January 1, 2020 75,000

Plant and equipment : at cost 114,900

Plant and equipment – accumulated depreciation 36,900

at January 1, 2020.

Additional information:

 The lease hold property had a remaining life of 20 years at January 1, 2020. SL has a policy to
revalue its property at each year end and at December 31, 2020 it was valued at Rs. 64.50
million.
 On January 1, 2020 an item of plant was disposed of for Rs. 3.75. The plant is still included in
the above trial balance at its cost of Rs. 12 million and accumulated depreciation of Rs. 6
million (to the date of disposal).
 Plant is depreciated at 20% per annum using reducing balance method.

Which one of the following amount of property, plant and equipment represents correct figure to be
included within statement of financial position of SL as at December 31, 2020?

a) Rs. 117,600,000.

b) Rs. 122,100,000.

c) Rs. 126,900,000.

d) Rs. 57,600,000.

Answer:

Value of lease hold property = 64500,000.

After disposal value of land (114,900,000 – 12000,000) =

After disposal decrease in value of accumulated depreciation (36900,000 – 6000,000) =

Net book value of PPE after disposal = 72,000,000

Less: Depreciation expense for year = (7200,000 x 0.20)

Book value at 31 Dec 2020 = 57600,000.

Add: value of lease hold property = 64500,000

Amount to be shown in SFP= 122,100,000

Q5: A Limited (AL) trail balance shows a debit balance of Rs. 2.1 million brought forward on current tax
and a credit balance of Rs. 5.4 million on deferred tax. The tax charge for the current year is estimated
at Rs. 16.2 million and the carrying amounts of net assets are Rs. 13 million in excess of their tax base.
The income tax rate is 29%. The amount that will be shown as income tax in the statement of Profit or
Loss for AL for the year ended December 31, 2020 is:

a) Rs. 3.77 million.

b) Rs. 16.2 million.

c) Rs. 1.63 million.

d) Rs. 16.67 million.

= (13x 0.29) + 16.2 – 5.4 + 2.1 = 16.67

Q1: F Limited purchased a new building amounted to Rs. 10 million on January 1, 2018. The estimated
useful life of building is estimated to be 60 years. On June 30, 2019 the company rented out this
building to a third party on a short term lease. The company uses fair value model for its investment
properties. At June 30, 2019 the fair value of the property was Rs. 12 million and at December 31,
2019 it was Rs. 12.5 million. The total net amount to be recorded in the Statement of profit or loss in
respect of the building for the year ended December 31, 2019 is:

a) Net income Rs. 416,667.

b) Net income Rs. 500,000.

c) Net income Rs. 2500,000.

d) Net income Rs. 2000,000.

Answer:

12500,000 – 12,000,000 = 500,000.

Q2: Details of A Limited’s non current assets at January 1, 2020 were:

Plant
Rupees “000”

Cost 300,000
Accumulated depreciation 206,000
Carrying amount 94000

The following information is relevant:

  Plant is depreciated at 20% per annum on cost with time apportionment where appropriate.
On July 1, 2020 new plant costing Rs. 90 million was acquired. In addition, the company
incurred Rs. 10 million for installation of plant.
 There were no disposals of non current assets during the year.

is the depreciation charge on the plant for the year ended December 31, 2020.

a) 70 million.

b) 40 million.

c) 60 million.

d) 50 million.

Answer:

Depreciation of old plant = 300,000,000 x 0.20 = 60 million.

Depreciation on new plant = 100,000,000 x 0.20 x 6/12 = 10 million.

Total depreciation exp. For the year = 70 million.

Q3: Following data relates to T Limited (TL) for the year ended December 31, 2019:

 Extracts of Statement of profit or loss and other comprehensive income.

Rupees
Revenue 890,000
Cost of sales (440,000)
Gross profit 450,000
 Following administrative expenses were incurred and other income earned during the year.

Rupees
Wages 140,000
Other general expenses 30,000

Depreciation 184,000
Rentals received 90,000

Gain on disposal of non-current assets 120,000

 Statement of financial position extracts at:

December 31, 2019 December 31, 2018

Inventories 80,000 50,000

Trade receivables 100,000 90,000
 Trade payables 60,000 40,000

Cash generated from operations using direct method for the year ended December 31, 2019 will be:

a) Rs. 450,000.

b) Rs. 880,000.

c) Rs. 790,000.

d) Rs. 350,000.

Answer:

Cash received from customers = 890,000.

Increase in R/A = (10,000).

Increase in inventories = (30,000).

Increase in payables = 20,000.

Add: Rentals received = 90,000.

Less: wages paid = (140,000)

Less: other expenses = (30,000)

Cash generated from operations = 790,000

Q4: R Limited acquired computers on January 1, 2019 amounted to Rs. 2 million. The asset is
depreciated at 25% a year on straight line basis, while tax authority permits the company to
depreciate the asset at 30% a year for tax purposes. The tax rate applicable on company is 29%. The
deferred tax liability which might arise on the plant and equipment at December 31, 2019 would be:

a) Rs. 29,000.

b) Rs. 435,000.

c) Rs. 100,000.

d) Rs. Zero.

Answer:

Company depreciation expense = 2000,000 x 0.25 = 500,000.

Less: Tax allowable depreciation = 2000,000 x 0.30 = 600,000.

Temporary difference = 100,000

Tax liability = 100,000 x 0.29 = 29,000.

Q5: On July 1, 2019, Z Limited (ZL) acquired a building with a 40 year life for its investment potential
for Rs. 8 million. At June 30, 2020, the fair value of the property was estimated at Rs. 9 million with
cost to sell estimated at Rs. 200,000. The company uses fair value model for investment properties,
which one of the following amount of gain should be recorded in the statement of profit or loss of ZL
for the year ended June 30, 2020.

a) No gain would be recognized.

b) Rs. 8.6 million.

c) Rs. 1 million.

d) Rs. 7.8 million.

Answer:

Book Value = 8000,000 – (8000,000/40) = 8000,000 - 200,000 = Rs. 7800,000.

Fair value less cost to sale = 9000,000 – 200,000 = 8800,000.

Gain = 8800,000 – 7800,000 = 1000,000

Q6: the following balances have been extracted from the statement of financial position of R Limited
(RL):

2020 2019
Rupees
Non-current liabilities
Deferred tax 1500,000 1200,000
Current Liabilities
Current tax payable 5340,000 5520,000

The company has recorded Rs. 4980,000 in respect of income tax paid in its Statement of cash flow for
the year ended December 31, 2020. Select the best option from the following that represent income tax
expense for the year ended December 31, 2020.

a) Rs. 4860,000.

b) Rs. 4980,000.

c) Rs. 5100,000.
d) Rs. 10,560,000.

Answer:

Income Tax payable

Current tax b/d ...................... 5520,000

Income tax paid..................... 4980,000 Deferred tax b/d..................... 1200,000

Current tax c/d......................... 5340,000 Income tax expense for year.... 5100,000

Deferred tax c/d ....................... 1500,000

Hence the value of income tax expense is Rs. 5100,000

Q7: A Limited (AL) has revalued its property and has recognized the increase in the revaluation in its
financial statements. The carrying value of the property was Rs. 8 million and the revalued amount
was Rs. 10 million. Tax base of the property was Rs. 6 million. The tax rate applicable to profit is 29%
and the tax rate applicable to profits made on the sale of property is 25%. If the revaluation took place
at the AL’s year end of December 31, 2020, is the deferred tax liability on the property as of
that date.

a) Rs. 0.5 million.

b) Rs. 1 million.

c) Rs. 1.16 million.

d) Rs. 0.58 million.

Answer:

Since, we are not concerned about overall tax rate (29%) on over all profit of the company , we are
dealing with profit on sale of property only , hence the rate 25% will be multiplied to revaluation gain;

Revaluation gain = Fair value – book value.

= 10 million – 8 million = 2 million x 0.25 = 0.5 million.

Q8: On January 1, 2018, S Limited (SL) bought a machine worth Rs. 80 million it has an expected useful
life of 20 years with a nil residual value. On August 31, 2019 the company decided to sell the machine
and started to locate a buyer. Management is confident that the machine will be sold quickly. The
market value of the machine at August 31, 2019 was Rs. 50 million and the costs to sell the machine to
Rs. 500,000. The value that should be stated in the Statement of Financial position of SL for the year
ended December 31, 2019 is:

a) Rs. 73.33 million.

b) Rs. 76 million.

c) Rs. 50.5 million.

d) Rs. 49.5 million.

Answer:

Fair value = Market value – Cost to sell:

50 million – 0.5 million = 49.5 million.

Q9: Un paid expenses are shown in a company’s statement of financial position as a current liability of
Rs. 30,000. These expenses have already been deducted when computing accounting profit but will
not be deducted for tax purposes until they are paid. The company pays tax at the rate of 29%, the
resulting deferred tax asset or liability is:

a) Deferred tax liability of Rs. 8700.

b) Deferred tax asset of Rs. 30,000.

c) Deferred tax asset of Rs. 8700.

d) Nil.

Answer:

30000 x 0.29 = 8700 deferred tax asset

Q10: C Limited (CL) has the following products in inventory at the year end:

Product Quantity Cost Selling price Selling cost

Alpha 15,000 600 825 120
Beta 37,500 225 375 60
Gamma 12,000 345 405 75

At , amount CL should state its total inventory in the statement of financial position as at
Dec 31, 2019.

a) Rs. 21,397,500.

b) Rs. 8437,500.
c) Rs. 3960,000.

d) Rs. 9000,000.

Answer:

Product Quantity Cost NRV LOWER OF

COST OR
NRV
Alpha 15,000 600 825 – 120 600
=705
Beta 37,500 225 375 – 60 = 225
315
Gamma 12,000 345 405 – 75 = 330
330

Alpha = 15000 x 600 = 9000,000

Beta = 37,500 x 225 =8437500

Gamma = 12,000 x 330 = 3960,000

Total value of inventory = 21397500.

Q1: J Limited (JL) entered into a lease for an item of plant on April 1, 2019 which required payments of
Rs. 225,000 to be made annually in arrears. The present value of the future lease payments was
estimated to be Rs. 1509,750 at the inception of the lease and the rate of interest implicit in the lease
was 8%. Both the lease term and the plant’s estimated useful life was 10 years. The total amount that
would be recorded in the statement of profit or loss of JL for the year ended 31 Dec, 2019.

a) Rs. 271,755.

b) Rs. 203,816.

c) Rs. 120,780.

d) Rs. 150,975.

Answer:

Interest expense for 2019 to be recorded in Statement of profit or loss is = 1509750 x 0.08 = 120,780,

Q2: Following are the extracts of statement of financial position of J Limited (JL) as at December 31:

2020 2019
Current Assets
 Inventory 5200,000 4400,000
Trade Receivables 7800,000 2800,000

Bank 700,000

Current Liabilities
Trade Payables 4200,000 4500,000
Negligence claim - 120,000
Warranty provision 1000,000 180,000
Additional Information:

 Profit before tax for JL for the year ended 31 December , 2020 amounted to Rs. 10.20 million.
 Finance cost for the year amounted to Rs. 600,000.
 Income tax amounted to Rs. 4500,000 while the company actually paid Rs. 3500,000.

is the amount of “Cash generated from operations” which will be recorded by JL in its
statement of cash flows for the year ended Dec 31, 2020.

a) Rs. 1900,000.

b) Rs. 5400,000

c) Rs. 4800,000.

d) Rs. 1300,000.

Answer:

Profit before tax........................................................................ 10,200,000.

Working capital changes:

Increase in inventories............................................................... (800,000)

Increase in receivables............................................................... (5000,000)

Decrease in A/C payables........................................................... (300,000)

Decrease in negligence claims.................................................... (120,000)

Increase in warranty provision................................................... 820,000

Profit after working capital changes 4800,000

Less:

Less: Tax paid................................................................................ (3500,000)

Net cash flow from operating activities 1300,000.

Q3: I Limited (IL) borrowed Rs. 6 million at 12% per annum from MRC Bank Limited on July 1, 2019 for
the construction of a qualifying asset. Construction began on July 1, 2019. Rs. 5 million were paid
evenly between September 1, 2019 and June 30, 2020. Surplus funds are invested in a fixed deposit
and earned interest at 5% per annum. No capital portion of the loan was repaid during the year ended
June 30, 2020. The amount of investment income that will be recorded in the statement of profit or
loss for the year ended June 30, 2020 is:

a) Rs. 145,833.

b) Rs. 524,167.

c) Rs. 195,833.

d) Rs. 300,000.

Answer:

Interest expense = 6000,000 x 12% = 720,000.

Less: (6000,000 x 12%-5%) = 420,000.

Investment income = 300,000.

Q4: Darbaar Pe Jao Limited (DPL) started development of a drug for its new medicine on April 1, 2019
and spent Rs. 60,000 per month until the project was completed on September 30, 2019, The
management is confident for the success of the project on June 1 2019. The drug has an estimated
useful life of five years. The amortization of development cost that will be charged to Statement or
Profit or Loss of DPL for the year ended December 31, 2019 would be:

a) Rs. 240,000.

b) Rs. 48,000.

c) Rs. 120,000.

d) Rs. 15,000.

Answer:

Development expenditure will be charged in the month in which the project is completed.

Hence development expenditure to be capitalized = 60,000.

Amortization = 60,000 x 3/12 = 15000.

Q5: On January 1, 2020, the carrying amount of non-current assets of J Limited (JL) exceeded their tax
written down value by Rs. 850,000. The tax written down value of non-current assets amounted to Rs.
3 million. During the year ended December 31, 2020 tax authorities allowed JL tax depreciation
amounting to Rs. 500,000 while JL charged depreciation of Rs. 450,000 in its financial statements.
During the year IL also revalued the property and revaluation surplus amounted to Rs. 250,000. Tax
rate applicable to the company is 29%. is the deferred tax liability of JL for the year ended
December 31, 2020.

a) Rs. 725,000.

b) Rs. 333,500.

c) Rs. 1058,500.

d) Rs. 246,500.

Answer:

(850,000 + 50,000 + 250,000) x 0.29 = 333,500.

Q6: On March 1, 2019, S Limited received Rs. 8 million from local government on the condition that
they employ at least 80 staff each year for the next 4 years. Due an economic down turn on March 1,
2020 the company no longer needed to employ any more staff and the condition of the grant required
full repayment. Identify the best option from the following that should be recorded in the financial
statements as on March 1, 2020.

a) Reduced deferred income by Rs. 6 million and recognize a loss of Rs. 2 million.

b) Reduced deferred income balance by Rs. 8 million

c) Reduced deferred income balance by Rs. 6 million

d) Reduced deferred income by Rs. 8 million and recognize a loss of Rs. 2 million.

Q7: On January 1, 2020, S Limited (SL) received a government grant of Rs. 2.4 million relating to a cost
of a plant which has a five year life. The company accounts for grants using the deferred credit

method, is the non-current liability in respect of the government grant to be shown in SL’s
statement of financial position for the year ended June 30, 2020.

a) Rs. 1.92 million.

b) Rs. 1.44 million.

c) Rs. 2.16 million.

d) Rs. 1.68 million.

Answer:

Since, the company is considering the government grant as deferred income hence,

= Deferred income liability = 2.4 million – [2.4 million / 5 x 6/12]

= Deferred income liability = 2.4 million – 0.24 million = 2.16 million

Q8: On July 1, 2019, H Limited (HL) entered into a lease arrangement to lease an item of plant for 5
years. The implicit rate of interest of the lease is 10% and Rs. 12 million will be paid as annual rent on
June 30 each year for the five years. The present value of the annual rental payment amounted to Rs.
46 million will be the current lease liability in HL’s Statement of Financial Position as at June
30, 2020.

a) Rs. 30.46 million.

b) Rs. 38.6 million.

c) Rs. 8.14 million.

d) Rs. 12 million.

Answer

46 x 0.10 = 4.6

12 million – 4.6 million = 7.4 million

46 – 7.4 million = 38.6 million.

Q9: On January 1, 2018, S Limited (SL) bought a machine worth Rs. 80 million it has an expected useful
life of 20 years with a nil residual value. On August 31, 2019, the company decided to sell the machine
and decided to locate a buyer. Management is confident that the machine will be sold quickly. The
market value of the machine at August 31, 2019 was Rs. 50 million and the costs to sell machine
amounted to Rs. 500,000. The value that should be stated in the Statement of Financial Position of SL
for the year ended December 31, 2019 is:

a) Rs. 50.5 million.

b) Rs. 73.33 million.

c) Rs. 76 million.

d) Rs. 49.5 million.

Answer:

50 million – 0.5 million = 49.5 million because it will be classified as held for sale.

Q10: K Limited has the following units in inventory at the end of December 2019:

Units Cost per unit (Rs.)

Raw materials 10,000 50

Work in process 4000 60

Finished goods 2000 70 .

Finished items are sold at Rs. 100 per unit. However inventories that are Damaged due to improper
handling results in selling of 600 units of finished goods to be sold at 60% of the normal selling price
less costs to sell of Rs. 10 per unit. Rs. 11 per unit is still to be incurred to finish off the items of work in
process.

The above inventories would be stated in the statement of financial position of KL as at December 31,
2019 at an amount of:

a) Rs. 868,000.

b) Rs. 740,000.

c) Rs. 500,000.

d) Rs. 770,000.

Answer:

Raw material cost = 10,000 x 50 = 500,000.

Work in progress = 4000 x (60+11) = 284,000.

Finished goods = (2000-600) x [70-10] = 84,000.

Q1: J Limited (JL) leases a plant on January 1, 2019. The present value of the minimum lease payments
is Rs. 4923,900 and the rate implicit in the lease is 10%. The terms of the lease require three annual
rentals to be paid amounting to Rs. 1800,000 each at the start of the year. is the amount that
would be reported as current liabilities in the Statement of Financial Position of JL as at December 31,
2019.

a) Rs. 2811510.

b) Rs. 3123900.

c) Rs. 3436290.

d) Rs. 1800,000.

Answer:

4923900 – 1800,000 = 3123.900.

Q2: On July 1, 2019, P Limited (PL) issued Rs. 5 million 8% loan notes and incurred Rs. 600,000 issue
costs. The loan notes are repayable at a premium giving them an effective finance cost of 13%. What is
the amount of finance cost that should be recorded in Statement of Profit or Loss of PL for the year
ended June 30, 2020.

a) Rs. 400,000.
b) Rs. 352,000.

c) Rs. 572,000.

d) Rs. 650,000.

(5000,000 – 600,000) x 0.08 = 352,000

Q3: A cash generating unit consists of the following assets at their carting values as at June 30, 2020:

Rupees “000”
Property, plant and equipment 500,000
Goodwill 300,000
Patent 50,000
Current Assets 75,000
 The current assets are shown at their net realizable value.
 The recoverable amount of the cash generating unit is Rs. 650 million.

The value of property, plant and equipment after allocation of impairment loss would be:

a) Rs. 75 million.

b) Rs. 300 million.

c) Rs. 18.18 million.

d) Rs. 181.82 million.

Answer:

850 – 650 = 200

500 – 200 = 300

Q4: A Limited receives a government loan amounting to Rs. 5 million on January 1, 2018 at an interest
rate of 8% while market rate is 10%. The company had met the conditions imposed by government on
January 1, 2018. The capital and interest is repayable in one single installment on December 31, 2020.
The company measures this loan at amortized cost. The value of closing balance of the loan on
December 31, 2019 will be:

a) Rs. 5.832 million.

b) Rs. 5.4 million.

c) Rs. 6.05 million.

d) Rs. 6.655 million.

Answer:

5000,000 x (10% - 2%) = 400,000

5000,000 + 400,000 = 5400,000 x 0.08 = 5.832 million

Q5: C Limited (CL) borrowed Rs. 2.4 million to finance the building of a factory construction was
expected to take two years. The loan was drawn on January 1, 2019 and work began on March 1, 2019
Rs. 1 million of the loan was not utilized until July 1, 2019 so CL was able to invest it until needed. The
company is paying 8% on the loan and can invest surplus funds at 6%. The borrowing costs to be
capitalized for the year ended 31 December 2019 in respect of this project is:

a) Rs. 192,000.

b) Rs. 130,000.

c) Rs. 140,000.

d) Rs. 162,000.

Answer:

(2.4 million x 8%) – (1000,000 x 0.06 x 6/12) = 162,000

Q1: J Limited (JL) leases a plant on January 1, 2019. The present value of the minimum lease payments
is Rs. 4923,900 and the rate implicit in the lease is 10%. The terms of the lease require three annual
rentals to be paid amounting to Rs. 1800,000 each at the start of the year. is the amount that
would be reported as current liabilities in the Statement of Financial Position of JL as at December 31,
2019.

a) Rs. 2811510.

b) Rs. 3123900.

c) Rs. 3436290.

d) Rs. 1800,000.

Answer:

Since, first payment will be at the start of the year, so no interest could be charged on first payment,
since interest is charged after some time is elapsed. Since first payment is on first day of lease, so whole
of 1800,000 will be deduction from the principle lease amount, hence current liability,

4923900 – 1800,000 = 3123,900.

Q2: On July 1, 2019, P Limited (PL) issued Rs. 5 million 8% loan notes and incurred Rs. 600,000 issue
costs. The loan notes are repayable at a premium giving them an effective finance cost of 13%. What is
the amount of finance cost that should be recorded in Statement of Profit or Loss of PL for the year
ended June 30, 2020.

a) Rs. 400,000.

b) Rs. 352,000.

c) Rs. 572,000.

d) Rs. 650,000.

Answer:

Finance cost = (5000,000 – 600,000) x 0.08 = Rs. 352,000

Q3: A cash generating unit consists of the following assets at their carting values as at June 30, 2020:

Rupees “000”
Property, plant and equipment 500,000
Goodwill 300,000
Patent 50,000
Current Assets 75,000
 The current assets are shown at their net realizable value.
 The recoverable amount of the cash generating unit is Rs. 650 million.

The value of property, plant and equipment after allocation of impairment loss to it would be:

a) Rs. 75 million.

b) Rs. 300 million.

c) Rs. 18.18 million.

d) Rs. 181.82 million.

Answer:

Carrying amount of Assets = 500 + 300 + 50 = 850 (note: current assets are already shown at market
value)

Less: recoverable amount of CGU = (650) million.

Impairment loss = 200 million.

If we allocate this loss to PPE = 500 – 200 = 300 million.

Q4: A Limited receives a government loan amounting to Rs. 5 million on January 1, 2018 at an interest
rate of 8% while market rate is 10%. The company had met the conditions imposed by government on
January 1, 2018. The capital and interest is repayable in one single installment on December 31, 2020.
The company measures this loan at amortized cost. The value of closing balance of the loan on
December 31, 2019 will be:

a) Rs. 5.832 million.

b) Rs. 5.4 million.

c) Rs. 6.05 million.

d) Rs. 6.655 million.

Answer:

Years Opening balance Interest 8% Ending Balance

2018 5000,000 400,000 5400,000

2019 5400,000 432,000 5832,000

Q5: C Limited (CL) borrowed Rs. 2.4 million to finance the building of a factory construction was
expected to take two years. The loan was drawn on January 1, 2019 and work began on March 1, 2019
Rs. 1 million of the loan was not utilized until July 1, 2019 so CL was able to invest it until needed. The
company is paying 8% on the loan and can invest surplus funds at 6%. The borrowing costs to be
capitalized for the year ended 31 December 2019 in respect of this project is:

a) Rs. 192,000.

b) Rs. 130,000.

c) Rs. 140,000.

d) Rs. 162,000.

Answer:

Interest expense 2400,000 x 8% = 192,000

Less: interest income = 1000,000 x 0.06 x 6/12 = (30,000)

Net interest exp. = 162,000.

Q1: F Limited (FL) sells goods under a six-month warranty. Any defect arising during that period is
repaired free of charge. FL has calculated that if all the goods sold in the last six months of the year
required repairs the cost would be Rs. 4 million. If all of these goods had more serious faults and had
to be replaced the cost would be Rs. 12 million. The normal pattern is that 80% of goods sold will be
fault-free, 15% will require repairs and 5% will have to be replaced. The amount of provisions required
is:
a) Rs. 600,000.

b) Rs. 3200,000.

c) Rs. 1200,000.

d) No provision is required in the case.

Answer:

Since 15% needs repairs and 5% need replacement, we have to make provision for these.

15% fall in category of routine repairs and 5% in replacement, hence

Provision = (4000,000 x 15%) + (12000,000 x 5%)

= Rs. 1200,000.

Q2: An asset has a carrying amount of Rs. 22,500,000 and is expected to yield cash flow of Rs.
8000,000 per annum for the next three years. The asset’s fair value less costs of disposal is Rs.
17,200,000. Assuming that all cash flows occur at the end of the year concerned and that the
appropriate discount rate is 7%, the amount of the impairment loss is .(Applicable present
value factors at 7% are: year 1: 0.935, year 2: 0.873, year 3: 0.816)

a) Rs. 1500,000.

b) Rs. 5300,000.

c) Rs. 1508,000.

d) Nil.

Answer:

Impairment loss = carrying amount – recoverable amount.

Recoverable amount = higher of fair value or value in use.

Fair value = 17200,000.

Value in use = (8000,000 x 0.935) + (8000,000 x 0.873) + (8000,000 x 0.816)

Value in use = 20992,000,

Recoverable amount = 20992,000

Impairment loss = 22500,000 – 20,992,000 = 1508,000

Q3: On January 1, 2016, Lubna Limited acquired a patent for an amount of Rs. 1200,000 having an
estimated useful life of ten years. On December 31, 2019, management decided to carry out an
impairment review of the patent. Following information has been determined as part of impairment
review:

Rupees.
Potential sale proceeds of the patent 900,000
Estimated disposal cost 50,000
Value in use of the patent 850,000

The impairment loss of patent (if any) for the year ended December 31, 2019 is:

a) Rs. 130,000.

b) Rs. 110,000.

c) Rs. 10,000.

d) Zero.

Answer:

Impairment loss = Impairment loss = carrying amount – recoverable amount.

Recoverable amount = higher of fair value or value in use.

Fair value = 900,000 – 50,000 = 850,000.

Value in use = 850,000.

Recoverable amount = 850,000.

Carrying amount = cost – accumulated amortization

= 1200,000 – (1200,000/10 x 4)

= 720,000.

Since recoverable amount is more than carrying amount, there is no impairment.

Q4: H Limited (HL) issued Rs. 30 million convertible loan notes at January 1, 2020, that carry a nominal
interest rate of 5% per annum. A similar loan note, without the conversion option, would have
required rate of return of 8%. The value of liability element of the convertible loan notes at December
31, 2020 will be:

a) Rs. 30.9 million.

b) Rs. 30 million.

c) Rs. 28.5 million.

d) Rs. 32.4 million.

Answer:
Amount of liability = principle + interest

= 30 x (8% - 5%) = 30.9 million.

Q5: The current liabilities of Ammar Limited include fine and penalties of environmental damage. The
fines and penalties amounted to Rs. 5 million. They are not deductible for tax purposes. is the
tax base of fines and penalties.

a) 5 million.

b) 10 million.

c) 2.5 million.

d) Zero.

Q6: F Limited (FL) had Rs. 20 million of capitalized development expenditure at cost brought forward
at July 1, 2019, in respect of products currently in production and a new project began on the same
date. The research stage of the new project lasted until September 30, 2019, and incurred Rs. 1.4
million of costs. From the date the project incurred development costs of Rs. 800,000 per month. On
January 1, 2020 the directors of FL became confident that the project would be successful and yield a
profit. The project was still in development at June 30, 2020. Capitalized development expenditure is
amortized at 20% per annum using the straight line method. The amount that will be charged to
statement of profit or loss for the year ended June 30, 2020 in respect of research and development
costs is:

a) Rs. 6880,000.

b) Rs. 3800,000.

c) Rs. 7800,000.

d) Rs. 8280,000.

Answer:

Amount to be shown in profit and loss are basically of three types:

1. The research related cost that is fully capitalized

2. The development related cost until criteria is met
3. The amortization of capitalized cost

From last year we have capitalized cost of 20 million from which we will calculate amortization and
show it in profit and loss:

20,000,000 x 0.20 = 4000,000.

Secondly we will calculate research expenditure and show it in profit and loss:

1.4 million = 1400,000.

Next, we will calculate amortization on development cost after the directors became confident from
jan to june 2020.

800,000 x 6 = 4800,000 x 0.20 x 6/12 = 480,000.

Lastly, we will calculate the portion of development cost that is not capitalized due to non confidence
of completion from September 30 2019 until jan 2020 = oct , nov and dec:

= 800,000 x 3 = 2400,000.

Total cost = 4000,000 + 1400,000 + 2400,000 + 480,000 = 8280,000

Q7: At a board meeting on April 1, 2020, Directors decided to sell an item of plant which had a carrying
value of Rs. 5 million on July 1, 2019, and a remaining useful life of 20 years. The plant is expected to
sell for Rs. 4.8 million within a period of one year. According to IFRS 5, the plant would be held at a
value of as at June 30. 2020.

a) Rs. 4800,000.

b) Rs. 4750,000.

c) Rs. 4937,500.

d) Rs. 4812,500.

Q8: H Limited (HL) acquired an item of plant on July 1, 2018, at cost of Rs. 500,000. It has a useful life
of five years (straight line depreciation) and an estimated residual value of 10% of its historical cost or
current cost as appropriate. As at June 30, 2020, the manufacturer of the plant still makes the same
item of plant and its current price is Rs. 600,000 is the correct carrying amount to be shown
in the statement of financial position of HL as at June 30, 2020 under historical cost and current cost.

a) Historical cost: Rs. 320,000, current cost Rs. 360,000.

b) Historical cost: Rs. 300,000, current cost Rs. 360,000.

c) Historical cost: Rs. 320,000, current cost Rs. 384,000.

d) Historical cost: Rs. 300,000, current cost Rs. 384,000.

Answer:

Historical cost is original purchase price less: accumulated depreciation:

Historical cost = 500,000 – (500,000-50,000/5 x 2) = 320,000.

Current cost is revaluation of historical cost to current cost by considering historical cost at current value
and charging depreciation:

Current cost = 600,000 – [(600,000 – 60000)/5 x 2] = 384,000.

Q9: A Limited (AL) trial balance as at December 31, 2020 shows a debit balance of Rs. 700,000 on
current tax and a credit balance of Rs. 8400,000 on deferred tax. The directors have estimated the
provision for income tax for the year at Rs. 4.5 million and the required deferred tax provision is Rs.
5.6 million, Rs. 1.2 million of which relates to a property revaluation, amount will be
recorded as income tax expense to the statement of Profit or Loss for the year ended December 31,
2020.

a) Rs. 1.2 million.

b) Rs. 1 million.

c) Rs. 2.4 million.

d) Rs. 3.6 million.

Answer:

4.5 million + 0.7 million = 5.2 million.

5.6 – 1.2 = 4.4 million.

8.4 – 4.4 million = 4 million.

5.2 – 4 = 1.2 million.

The charge to income tax on current tax is $5.2 million, being the $4.5 million estimate for this year plus
the under provision (debit balance in the trial balance) of $0.7 million.

The challenge lies with the movement on deferred tax due to the impact of the revaluation. Remember
that any deferred tax on revaluations goes through other comprehensive income and not profit or loss. It
is important therefore that when we calculate the movement on the deferred tax liability we remove the
$1.2 million that relates to the revaluation.

This then means that we are comparing last year’s $8.4 million deferred tax provision to an adjusted
figure of $4.4 million deferred tax provision ($5.6 million less $1.2 million), which gives rise to a credit of
$4.0 million through profit or loss as the provision has been reduced.

If we net-off the $5.2 million debit (current tax) and $4.0 million credit (deferred tax movement) then we
get the $1.2 million income tax charge for the year.

Q10: A Limited (AL) began construction of a qualifying asset on January 1, 2019 for which the company
has utilized general borrowings. The company had Rs. 15 million 7% loan on March 1, 2019, Rs. 8.5
million 5% loan on May 1, 2019 and a 19 million 10% loan on July 1, 2019, the company did not make
any repayments during the year ended December 31, 2019. The weighted average cost of borrowing
for AL will be:

a) 8.6%.

b) 10%.

c) 7.5%.

d) 5.43%.

Answer:

Loan Principle Rate Weight Weighted Borrowing cost

borrowing incurred
outstanding
1st 15000,000 7% 10/12 12500,000 875,000

2nd 8500,000 5% 8/12 5666667 283333

3rd 19000,000 10% 6/12 9500,000 950,000

27666667 2108,333

= 2108,333/27666667 = 7.62% = 7.5% approx..

Q1: Sterling Limited issued a 8% Rs. 30 million convertible loan note on January 1, 2019 at par. Interest
is payable in arrears on December 31 each year. The loan note is redeemable at par on December 31,
2021 or convertible into equity shares at the option of the loan note holders on the basis of 30 shares
for each Rs. 100 of loan. A similar instrument without the conversion option would have an interest
rate of 10% per annum.

The present values of Rs. 1 receivable at the end of each year based on discount rates of 8% and 10%
are:

Year end 8% 9%
2019 0.930 0.910

2020 0.860 0.830

2021 0.790 0.750

is the amount that will be credit to equity on January 1, 2019 in respect of this financial
instrument.
a) Rs. 1524,000.

b) Rs. 5976,000.

c) Rs. 324,000.

d) Rs. 9000,000.

Answer:

PV of loan:

Years Cash flow Discount Factor (10%) PV .

2019 2400,000 0.909 2181,600

2020 2400,000 0.826 1982,400

2021 2400,000 0.751 1802,400

2021 30,000,000 0.751 22530,000

28,496,400

Debt component = 28496,400.

Equity component = 30,000,000 – 28496400 = 1524,000 approx.

Q2: Quartz Limited (QL) entered into a contract on January 1, 2019 to build a factory. The total
contract revenue was Rs. 2.8 million. At December 31, 2019, the contract was certified as 35%
completed. Costs incurred during the year amounted to Rs. 740,000 and costs to complete are
estimated at Rs. 1.4 million. Rs. 700,000 has been billed to the customer but not yet paid. Identify
whether the contract will be recognized as a contract asset or liability and what the carrying amount
will be in the statement of financial position of QL as at December 31, 2019?

a) contract asset Rs. 271,000.

b) contract liability Rs. 271,000.

c) contract asset Rs. 311,000.

d) contract liability Rs. 271,000.

Answer:

Revenue...................................................................................... 2800,000.

Less: Cost to date........................................................................ (740,000)

Less: Further cost to complete.................................................... (1400,000)

Profit for the year........................................................................ 660,000

Profit to date (35%) 231,000

Add: cost to date.......................................................................... 740,000

Less: already billed to date........................................................... (700,000)

More required from customers 271,000

Since, work is complete till further amount that is receivable from customers of 271,000 hence, it is
asset.

Q3: Sabeeha limited has a cash generating unit (CBU) that has suffered from reduced level of income
due to an economic downturn. An impairment review was carried out and the recoverable amount of
the CGU was determined at Rs. 200 million. The assets of the CGU had the following carrying amounts
immediately prior to the impairment:

Rs. 000

Goodwill 50,000

Intangibles 120,000

Property, plant & equipment 60,000

Inventory 30,000

Trade receivables 20,000

280,000

The inventory and receivables are considered to be included at their recoverable amounts. The
carrying amount of the intangibles once the impairment loss has been allocated will be:

a) Rs. 100 million.

b) Rs. 20 million.

c) Rs. 50 million.

d) Rs. 68 million.

Answer:

Carrying amount = 280 million

The recoverable amount = 200 million

Impairment = 80 million

First charged to goodwill = (50)

Remaining impairment to be charged = 30 million.

Prorate based on carrying value:

Intangibles = 120/(120+60) x 30 = 20 million.

Carrying value of intangibles – impairment = 120 -20 = 100 million.

Q4: The net book value of a PQX Limited’s non current assets was Rs. 2000,000 at January 1, 2020.
During the year ended December 31, 2020, the company sold non current assets for Rs. 250,000 on
which it made a loss of Rs. 50,000. The depreciation charge for the year amounted to Rs. 200,000.
Which one of the following represents correct amount of net book value of non current assets as at
December 31, 2020?

a) Rs. 1500,000.

b) Rs. 1800,000.

c) Rs. 1550,000.

d) Rs. 1600,000.

Answer:

First calculate the net book value of disposal asset:

Sale proceeds + loss on disposal = 250,000 + 50,000 = Rs. 300,000.

Net book value at start – depreciation for the year – net book value of asset disposed off = ending value

= 2000,000 – 200,000 – 300,000 = Rs. 1500,000.

Q5: Following is an extract of financial position of R Limited:

2019 2018
Carrying amounts 117,000 72,000

The following items were recorded during the year ended December 31, 2019:

 Depreciation charge amounted to Rs. 12.5 million.

 An item of plant with a carrying amount of Rs. 15 million was sold for Rs. 9 million.
 A property was revalued upwards by Rs. 10 million.
 Environmental provisions of Rs. 20 million relating to property, plant and equipment were
capitalized during the year.

The amount that will be recorded in RL’s statement of cash flows for the year ended December 31,
2019 is:

a) Rs. 15 million.

b) Rs. 62.5 million.

c) Rs. 10.2 million.

d) Rs. 42.5 million.

Answer:

Profit = 117 – 72 = 45.

Add back: dep. Exp = 12.5

Add: loss on disposal = 6

Add: sale proceeds from disposal = 9

Less: gain on revaluation = (10)

Less: capitalization in provision = (20)

= Rs. 42.5 million.

Q6: On July 1, 2019, H Limited (HL) entered into an agreement to lease a new machinery under a 5
year lease, was Rs. 250,000 payable on June 30th each year. The asset has a useful life of 6 years and
ownership transfers to HL at the end of the lease. The interest rate implicit in the lease is 7% and the
present value of the minimum lease payment is Rs. 1.5 million. The current liability that will be
recorded in HL’s statement of financial position as at June 30, 2020 will be:

a) Rs. 1199850.

b) Rs. 1355,000.

c) Rs. 250,000.

d) Rs. 155,150.

Answer:

1500,000 x 0.07 = 105,000.

250000-105000 = 145,000

1500,000 – 145,000 = 1355,000

Q7: M Limited’s statement of financial position shows dividends payable of Rs. 500,000 at December
31, 2019 and Rs. 750,000 at December 31, 2020. The statement of changes in equity (SOCIE) for the
year ended December 31, 2020 shows dividends of Rs. 650,000 is the figure for dividends
paid to be included in the statement of cash flows for the year ended December 31, 2020.

a) Rs. 650,000.

b) Rs. 500,000.
c) Rs. 400,000.

d) Rs. 750,000.

Dividend Payable
Opening................... 500,000

Paid..................... 400,000 During the year........ 650,000

Closing................. 750,000

Q1: Accounting profit of M Limited (ML) for the year ended December 31, 2019 amounted to Rs. 2500,000.
It includes depreciation of Rs. 450,000 and disallowable expenses of Rs. 200,000. Tax authority allows
depreciation of Rs. 300,000. The applicable tax rate is 29%. The tax expenses for the year ended December
31, 2019 is:

a) Rs. 725,000.

b) Rs. 826,500.

c) Rs. 638,000.

d) Rs. 913,500.

Answer:

Accounting depreciation.......................................................................... Rs. 2500,000.

Add back: Depreciation............................................................................ Rs. 450,000.

Add back: Disallowable expenses............................................................ Rs. 200,000.

Less: Tax allowable depreciation............................................................. Rs. (300,000)

Taxable profit Rs. 2850,000.

Tax @ 29%................................................................................................ Rs. 826,500.

Q2: Y Limited purchased a machine for Rs. 5.5 million on January 1, 2016. It was estimated to have a 5-year
life with a residual value of Rs. 550,000. On December 31, 2017, Rs. 1650,000 was spent on an upgradation
of machine. This extended its remaining useful life to 5 years, with the same residual value. During 2016,
the market for the product declined and the machine was sold on January 1, 2019 for Rs. 3 million. The gain
or loss on disposal of machine is:

a) Loss of Rs. 1246,000.

b) Gain of Rs. 2170,000.

c) Loss of Rs. 2170000.

d) Gain of Rs. 1246,000.

Answer:

Book value of machine on December 31, 2017:

5500,000 – (5500,000-550,000/5) x 2 = 3520,000.

Add: upgradation expense = 1650,000

Book value at 31 December, 2017 = 5170,000.

Depreciation for 2018:

New book value/new useful life

5170,000 – 550,000/5 = 924,000.

Book value at disposal = cost – Accumulated depreciation:

5170,000 – 924,000 = 4246,000

Less: Market value = (3000,000)

Loss = Rs. 1246,000.

Q3: Following information is a summary of Think Box (Pvt.) Limited’s (TBPL) statement of profit or loss for
the year ended June 30, 2021:

Rupees.

Revenue 5000,000

Expenses (3925,000)
Profit before tax 1075,000

 Expenses include depreciation charge of Rs. 412,500 for property. These properties qualified for tax
depreciation allowance of Rs. 482,500 for the year ended June 30, 2021.
 On July 1, 2020 the company had to replace its only delivery vehicle. The vehicle was sold for Rs.
50,000. At the date of disposal the vehicle had a carrying value of Rs. 75,000 and a tax written
down value of Rs. 50,000.
  TBPL’s replacement vehicle cost Rs. 800,000, has an expected useful life of 7 years with a residual
value of Rs. 100,000. The appropriate accounting entries for these vehicles have been included in
the accounts. Tax authorities allow tax depreciation at the rate of 15% of cost.
 TBPL’s expenses include Rs. 157,500 for entertainment costs.
 The applicable tax rate to the company is 29%.

is the amount of tax expense that will be recorded in the statement of profit and loss of
Think Box (Pvt.) Limited for the year ended June 30, 2021.

a) Rs. 314,375.

b) Rs. 311,750.

c) Rs. 403,825.

d) Rs. 338,575.

Answer:

Profit before tax....................................................................................... 1075,000.

Add back Accounting Depreciation...................................................... 412,500.

Less: Tax allowable depreciation......................................................... (482,500)

Add: accounting depreciation on replacement vehicle....................... 100,000

(800,000 – 100,000)/7

Less: Tax allowable depreciation on replacement vehicle................... (120,000)

Add back: non allowable entertainment expenses.............................. 157,500

Add: Loss on sale of property............................................................... 25000

Taxable income 1167500

Tax @ 29% 338,575

Q4: Raja Limited (RL) has a 75% owned subsidiary Jaja Limited (JL). During the year ended December 31,
2020. RL sold inventory to JL for an invoiced price of Rs. 1600,000. Since then JL has sold 75% of that
inventory onto third parties. The sale was at a mark up of 25% on cost to RL. JL is the only subsidiary of RL.
............is the adjustment to inventory that would be included in the consolidated statement of financial
position of RL as at December 31,2020.

a) Rs. 100,000.

b) Rs. 240,000.

c) Rs. 80,000.

d) Rs. 320,000.

Answer:
= 1600,000 x 75% = 1200,000

= 1200,000 x 1.25 = 1500,000

Gain on sale = 1500,000 – 1200,000 = 300,000.

Gain on intercompany transactions is deducted from ending inventory.

Ending inventory = 1600,000 – 1200,000 = 400,000

Less: gain = (300,000)

Adjustment = Rs. 100,000.

Q5: Fakhar Limited (FL) acquired 100% of the ordinary share capital of Wah wah Limited (WL) on October 1,
2020. The share capital and retained earnings of WL were as follows:

Rupees
Ordinary shares of Rs. 10 each December 31, 2020 400,000
Retained earnings at January 1, 2020 100,000
Profit for the year ended December 31, 2020 80,000
The profits of WL have accrued evenly throughout the year ended December 31, 2020. Goodwil arising on the
acquisition of WL was Rs. 30,000. was the cost of the investment in WL Limited.

a) Rs. 590,000.

b) Rs. 580,000.

c) Rs. 610,000.

d) Rs. 400,000.

Answer:

Cost of investment:

Share capital = 400,000.

Add: retained earnings = 100,000.

Add: Profit at acquisition acquisition = 80,000 x 9/12 = 60,000

Add: Goodwill = 30,000

Total = 590,000.

Q1: Engineer Limited (IEL) commenced trading on July 1, 2017 when it purchased all its non-current assets.
Following is the extract of statement of profit or loss for the year ended June 30, 2020.

Rs. 000

Gross Profit 735,000

 Administrative expenses (N-1) (399,000)
Gain on disposal of plant and equipment 14,000

Finance cost (245,700)

Profit before tax 104,300

N-1: Administrative expenses include depreciation as follows:

Rs. 000

Depreciation – Furniture and fittings. (17,500)

Depreciation – Buildings (11,200)

Depreciation – Plant and equipment (21,000)

IEL’s non current asset balance were

Net book value at July 1, 2019 Tax WDV at July 1, 2019

Rs. 000 Rs. 000

Buildings 257,600 105,000

Plant and equipment 3500 27,563

Furniture and fittings 17500 19,688

During the three year period no acquisition or disposal of non current assets took place. The tax authority allows
tax depreciation on building and furniture and fittings at 10% and at plant and machinery at 15%. The applicable
tax rate is 29%. Tax expense for the year ended June 30, 2020:

a) Rs. 45.42 million.

b) Rs. 40.60 million.

c) Rs. 35.785 million.

d) Rs. 30.247 million.

Answer:

Gross profit............................................................................... 735,000,000.

Less: Admin exp.

Admin exp................................................................................. 399,000,000

Add back: Accounting Depreciation........................................... 49,700,000

(17500,000 + 11200,000 + 21000,000)

Less: tax dep............................................................................... (16,603,250)

[(105,000,000 x 0.10) + (19,688,000 x 0.10) + (27563,000 x 0.15)]

Total admin exp (432,096,750)

PBIT.............................................................................................. 302,903,250

Add: gain on disposal.................................................................. 14000,000

Less: Finance cost........................................................................ 245,700,000

Taxable income 71203250

Tax @ 29%

Q2: During the year ended December 31, 2019, Arif Limited (AL) had a credit balance brought forward on current
tax of Rs. 262,500. During the year, AL received a tax refund of Rs. 26,250. It has a provision for the current year
of Rs. 315,000. The company has decreased the deferred tax provision by Rs. 105,000. AL will record
amount in respect of tax expense in the statement of profit or loss for the year ended December 31, 2019.

a) Rs. 52,500 credit.

b) Rs. 78,750 debit.

c) Rs. 52,500 debit.

d) Rs. 78,750 credit.

Answer:

Current tax provision – refund = 262,500 – 26250 = 236,250.

Current tax provision = 315,000

= 315,000 – 236,250 = 78750 debit.

Q3: A cash generating unit comprises the following assets:

Rupees

Building 7000,000
Plant and equipment 2000,000
 Goodwill 900,000
Current Assets 200,000

One of the machines, carried at Rs. 400,000 is damaged and will have to be scrapped. The recoverable amount of
the cash generating unit is estimated at Rs. 7500,000, will be the carrying amount of the building after
the impairment loss has been recognized.

a) Rs. 5480,000.

b) Rs. 5770,000.

c) Rs. 5940,000.

d) Rs. 5970,000.

Answer:

Book value of CGU = 10,100,000

Less: Recoverable value = (7500,000)

Impairment = 2600,000

First allocate impairment to goodwill = (900,000)

Remaining impairment = 1700,000.

Then allocate to machine that is fully impaired = (400,000)

Remaining value of impairment = 1300,000.

Note that current assets are not impaired,

This value is charged to remaining accounts on prorate basis

Impairment charged to building = 7000,000/7000,000 + 1600,000 x 1300,000

= 1058,000

Remaining book value of building = 7000,000 – 1058,000 = 5940,000.

Q4: At January 1, 2020 there was a provision for doubtful debts of Rs. 3 million. During the year, Rs. 1 million of
debts were written off, and Rs. 800,000 of bad debts was recovered. At December 31, 2020, it was decided to
adjust the provision for doubtful debts to 5% of receivables which are Rs. 20,000,000.

is the total bad debt expense for the year ended December 31, 2020.

a) Rs. 200,000 debit. b) Rs. 2200,000 debit.

c) Rs. 1800,000 debit. d) Rs. 1800,000 credit.

Answer:

Provision for doubtful debts

 Opening................. 3000,000
Bad debts written
off.............. 1000,000

Bad debt exp. 200,000

Bad debts
recovered...........800,000

Closing............. 1000,000

(5% of 20,000,000)

Q5: Saada Limited has inventory on hand at December 31, 2019 having cost of Rs. 500,000 that it expects to sell
in the ordinary course of business for Rs. 600,000. In order to sell the inventory, the company expects to incur
selling costs of Rs. 50,000 and expects to incur further cost of Rs. 60,000 to put this inventory into a saleable
condition. The possible written down value of inventory will be:

a) Zero.

b) Rs. 110,000.

c) Rs. 490,000.

d) Rs. 10,000.

Answer:

Inventory according to IAS 2, is shown at lower of cost or NRV principle, hence,

Cost = 500,000.

NRV = Market value less cost to sell = 600,000 – (50,000 + 60,000) = 490,000.

Hence, inventory is shown at 490,000.

Q6: M Limited’s summarized statement of profit or loss for the year ended June 30, 2021 is as follows:

Rupees

Gross profit 1870,000

Administrative expenses (1260,000)

Distribution costs (220,000)

390,000

Finance cost (20,000)

Profit before tax 370,000

  Administrative expenses include donations to the local ruling political party of Rs. 50,000 and
depreciation of property, plant and equipment of Rs. 390,000 (inclusive of depreciation of new
purchases).
 ML made a tax loss during the year ended June 30, 2020. The loss carried forward at June 30, 2020 was
Rs. 120,000.
 At June 30, 2021 ML’s tax written down value of its property, plant and equipment was Rs. 1200,000. All
of these assets qualified for the annual tax depreciation allowance. ML purchased property, plant and
equipment during the year for Rs. 300,000. Tax authorities allow tax depreciation at the rate of 15%.
 Tax rate is 29%.

is the amount of tax that ML is due to pay for the year ended June 30, 2021.

a) Rs. 182,700.

b) Rs. 134,850.

c) Rs. 107,300.

d) Rs. 169,650.

Answer:

Gross profit = 1870,000.

Less : Admin expenses: (1260,000)

Add back: Donations = 50,000.

Add back: accounting dep. = 390,000.

Less: Tax allowable dep. = (1200,000 + 300,000) x 0.15 = (225,000)

PBIT = 825,000

Less: Interest = (20,000)

Less: distribution cost = (220,000)

Profit before tax = 585,000.

Tax @ 29%

Tax = 169,650.

Less: Tax loss of previous period = 120,000 x 0.29 = (34,800)

Tax exp. For the year = 134,850.

Q2: Rail Limited (RL) acquired a non-current asset on July 1, 2016 at a cost of Rs. 10,000,000 which had
a useful life of ten years and a nil residual value. The asset had been correctly depreciated up to June
30, 2021. At that date the asset was damaged and an impairment review was performed. On June 30,
2021 the fair value of the asset less cost to sell was Rs. 3000,000 and the expected future cash flows
amounted to Rs. 850,000 per annum for the next five years. The current cost of capital is 10% and a
five year present value factor for Re. 1 per annum is Rs. 0.621 per annum and five years annuity of Rs.
1 per annum at 10% would have a present value of Rs. 3.79. amount would be charged to
statement of profit or loss for the impairment of this asset for the year ended June 30, 2021.
a) Rs. 1778,500.
b) Rs. 2000,000.
c) Rs. 2472,150.
d) Rs. 4472,150.

Answer:
Impairment loss = Carrying amount – recoverable amount
Recoverable amount = Higher of FV less cost of sale and Value in use
Value in use = present value of cash flows from assets.
Value in use = 3.79 x 850,000 = 3221500
Fair value less cost to sale = 3000,000
Recoverable amount = 3221500.
Carrying amount = cost – accumulated dep.
= 10,000,000 – (10,000,000/10 x 5) = 5000,0000
Impairment = 5000,000 – 3221500 = 1778500

Q3: RSL Limited owns an office building which is used for administrative purposes gain on January 1,
2020 it had a carrying amount of Rs. 4 million and a remaining life of 20 years. On July 1, 2020 the
building was let to a third party and RSL reclassified it as an investment property. The building had a
fair value of Rs. 4.6 million on July 1, 2020 and Rs. 4.68 million on December 31,2020 will be
the gain on investment property as at December 31, 2020.
a) Rs. 80,000.
b) Rs. 800,000.
c) Rs. 880,000.
d) There will be no gain in the investment property.

Answer:

Fair value at 1 July 2020 = 4600,0000

Less: Fair value at 31 December 2020 = 4680,000

Gain = 80,000.

Q4: FL owns an administration building which it no longer needs. On July 1, 2020 FL entered into an
agreement to lease the building out to another company. The building cost of Rs. 6000,000 on January
1, 2011 and is being depreciated over 50 years, based on the IAS 16 cost model. FL applies the fair
value model under IAS 40 investment property and the fair value of the building was estimated to be
8000,000 on July 1, 2020. The valuation had not changed at December 31, 2020 is the
amount of the revaluation surplus that will be recognized in respect of the building.
a) Rs. Nil.
b) Rs. 2000,000.
c) Rs. 3080,000.
d) Rs. 3140,000.

Answer:

Cost = 6000,000.

Depreciation until July 1, 2020:

6000,000/50 = 120,000 x 9.5 = 1140,000.

Carrying value on July 1, 2020:

6000,000 – 1140,000 = 4860,000

Fair value at July 1, 2020:

= 8000,000.

Revaluation gain = fair value – carrying value.

= 8000,000 – 4860,000.
= 3140,000.

Q5: HL purchased computers costing Rs. 6000,000 on July 1, 2017. HL depreciates computers at 20%
per annum on a reducing balance basis for accounting purpose while tax authority allows tax
depreciation at 30% on the same method. Tax rate applicable to the company is 29%. The amount of
deferred tax relating to this asset that should be recognized in the statement of financial position as at
June 30, 2020 is:
a) Rs. 294, 060.
b) Rs. 890,880.
c) Rs. 596,820.
d) Rs. 1487,700.

Answer:
= 6000,000 x 20% = 1200,000.
= 6000,000 – 1200,000 = 4800,000 x 0.20 = 960,000.
= 6000,000 – 1200,000 – 960,000 = 3840,000 x 0.20 = 768,000
= sum of above 3 = 2928,000.

= 6000,000 x 0.30 = 1800,000

= 6000,000 – 1800,000 = 42,000,000 x 0.30 = 1260,000
= 6000,000 – 1800,000 – 1260,000 = 2940,000 x 0.30 = 882,000
= sum of above 3 = 3942,000.
2928000 – 3942,000 = 1014,000 x 0.29 = 294,060.

Q1: On June 1, 2020 a machine was sold which cost Rs. 2000,000 on July 31, 2016. Sale proceeds
amounted to Rs. 550,000 and the profit on disposal was Rs. 150,000. The depreciation policy for
machinery is straight line with a full year being charged in the year of acquisition and none in the year
of disposal. Which one of the following represents correct rate of depreciation for the machine.
a) 20%.
b) 30%.
c) 25%.
d) 35%.

Answer:

Cost = 2000,000

Less : Accumulated depreciation = unknown

Carrying value = x
Since, machine was sold for 550,000 hence its fair value = 550,000.
Since machine was sold for profit of 150,000, hence, carrying amount was 150,000 less than fair value,
Hence carrying amount = 550,000 – 150,000 = 400,000.
Since cost – acc. Dep. = carrying amount
2000,000 – x = 400,000.
X = 2000,000 – 400,000 = 1600,000.

ACC. Dep. / no. of years = dep. Exp.

Dep. Exp. = 1600,000/4 = 400,000.

Dep. Exp. Percentage = 400,000 / 2000,000 = 20%.

Q2: RL owns a machine that has a carrying amount of Rs. 850,000 at the year end of June 30, 2020. Its
market value is Rs. 780,000 and costs of disposal are estimated to be Rs. 25,000. A new machine
would cost Rs. 1500,000. RL expects it to produce net cash flows of Rs. 300,000 per annum for the next
three years. The cost of capital of RL is 8% (Present value factor at 8% for year 1= 0.926, year 2= 0.857,
year 3 = 0.794) is the impairment loss (if any) on the machine to be recognized in the
financial statements at June 30, 2020.
a) Rs. 76,900.
b) Rs. 95,000.
c) Rs. 171,900.
d) No impairment loss would arise.

Answer:
Impairment loss = Carrying amount – recoverable amount
Recoverable amount = Higher of FV less cost of sale and Value in use
Value in use = present value of cash flows from assets.
Value in use = (300,000 x 0.926) + (300,000 x 0.857) + (300,000 x 0.794) = 773,100.
Fair value less cost to sale = 780,000 – 25,000 = 773,100.
Recoverable amount = 755,000.
Carrying amount = 850,000.
Impairment = 850,000 – 773,100 = 76,900.

Q3: SL had the following bank loans outstanding during the year ended December 31, 2019 which
formed the company’s general borrowings for the year:
Rupees.
9% loan repayable in 2019 30,000,000
11% loan repayable in 2022 48,000,000

SL began construction of a qualifying asset on April 1, 2019 and withdrew funds of Rs. 12 million on
that date to fund construction. On August 1, 2019 an additional amount of Rs. 4 million was
withdrawn for the same purpose. is the borrowing costs which can be capitalized in respect
of this project for the year ended December 31, 2019.
a) Rs. 1091,282.
b) Rs. 920,769.
c) Rs. 1636,800.
d) Rs. 170,513.
Answer:

First calculate weighted average capitalization rate:

= (9% x 30,000,000) + (11% x 48,000,000)
30,000,000 + 48,000,000
= 10.23%

Borrowing cost on loan of 12 million:

= 12,000,000 x 0.1023 x (9/12) = 920,700.
Borrowing cost on loan of 4 million:
= 4000,000 x 0.1023 x 5/12 = 170500.
Total borrowing cost:
= 920,700 + 170,500 = 1091282.

Q4: WL purchased a machine on April 1, 2019, for Rs. 5 million. It is being depreciated on a straight
line basis over its useful life of ten years. Residual value is estimated at Rs. 200,000. On October 1,
2019, following a change in legislation, WL fitted a safety guard to the machine. The safety guard cost
of Rs. 250,000 and has a useful life of five years with no residual value. The amount that will be
charged to statement of profit or loss for the year ended December 31, 2019 in respect of depreciation
on this machine is:
a) Rs. 360,000.
b) Rs. 512,500.
c) Rs. 372,500.
d) Rs. 530,000.

Answer:

Depreciation from 1 April 2019 to 31 December 2019:

= (5000,000 – 200,000)/10 = 480,000 x 9/12 = 360,000.

Add: Depreciation from 1 oct to 31 Dec on safety guard:

250,000/5 = 50,000 x 3/12 = 12500.

Total dep. Exp. To be charged to P & L = 3725,000.

Q5: On January 1, 2019, BL signed a contract to construct a building. Progress is to be measured

according to percentage of work completed as certified by the surveyor. At December 31, 2019 the
details of the contract are as follows:
Rupees
Total contract value 5000,000
Cost to date 2300,000
Estimated cost to completion 2100,000
Work invoiced to date 2000,000
Cash received to date 1500,000

is the amount of profit to be recognized in the statement of profit or loss for the year ended 31
December 2019.

a) Rs. 240,000.
b) Rs. 1500,000.
c) Rs. 2000,000.
d) Rs. 2700,000.

Answer:

%age of work completed = work invoiced to date/total revenue = 2000,000 / 5000000 = 40%.

Total contract revenue = 5000,000.

Less: cost to date = 2300,000.

Less: further cost to complete = 2100,000.

Profit for the year= 600,000.

Profit to date = 600,000 x 0.40 = 240,000.

Q1: On January 1, 2018, Raja Limited (RL) purchased a debt instrument at its fair value of Rs. 1 million.
It had a principal amount of Rs. 1.1 million and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8% . It is held
at amortized cost. is the amount at which the debt instrument will be shown in the
statement of financial position of RL as at December 31, 2019.

a) Rs. 1080,000.

b) Rs. 1029,120.

c) Rs. 1014,000.

d) Rs. 1095,120.

Answer:

Years Opening balance Principle x coupon rate Fair value x effective rate Ending

1 1000,000 - 1100,000 x 0.06 + 1000,000 x 0.08 = 1014,000

2 1014,000 - 1100,000 x 0.06 + 1014,000 x 0.08 = 1029,120

Q2: ML obtained a government license to operate a mine from July 1, 2019. The license requires that
at the end of the mine’s useful life, all buildings must be removed from the site and the site
landscaped. ML estimated that the cost of this decommissioning work will be Rs. 2000,000 in ten
years’ time (present value at July 1, 2019 Rs. 926,000) using a discount factor of 8%. According to IAS
37, which one of the following amount should ML include in provisions in its statement of financial
position as at June 30, 2020?

a) Rs. 1000,000.

b) Rs. 2000,000.

c) Rs. 926,000.
d) Rs. 200,000.

Q3: During the year ended December 31, 2019, Lizard Limited (LL) entered into following transactions:

1. On January 1, 2019, LL acquired under a lease, a right of use asset which was initially measured at
Rs. 3400,000, under the terms of the lease, a payment in advance of Rs. 900,000 was made on
commencement of the lease being the first of five equal annual payments. The right of use asset has a
five year useful life. The lease has an implicit interest rate of 10%.

2. On November 1, 2019, LL made a payment of Rs. 180,000 for a nine-month lease of an item of
equipment. LL wishes to utilize the exceptions available under IFRS 16 Leases.

The amount that would be charged to LL’s statement of profit or loss for the year ended December 31,
2019 in respect of the above transactions is:

a) Rs. 970,000.

b) Rs. 250,000.

c) Rs. 720,000.

d) Rs. 680,000.

Answer:

1 January 2019:

3400,000/5 = 680,000

1 November, 2019

IFRS 16 Leases provides a recognition exemption whereby lessees can choose not to capitalise 'short-
term leases' on the balance sheet, and instead recognise lease payments as an expense, either on a
straight-line basis, or another systematic basis, if that basis is more representative of the pattern of the
lessee's ...

Q4: At January 1, 2020, FL received a loan of Rs. 10 million at 6% per annum. The loan has an effective
finance cost of 7.5% per annum. The loan was specifically issued to finance the construction of a new
building and the loan will be treated under IAS 23. Construction commenced on February 1, 2020 and
it was completed and ready for use on November 30, 2020, but did not became operational until
January 1, 2021. How much interest should be capitalized as part of property, plant and equipment of
FL as at December 31, 2020?

a) Rs. 600,000.

b) Rs. 125,000.

c) Rs. 625,000.
d) Rs. 750,000.

Answer:

The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total finance cost
for the year ended 31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying
asset, the finance cost (or part of it in this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (Feb 1, 2020)
and must cease when the asset is ready for its intended use (Nov 30, 2020); in this case a 10-month
period. Hence capitalization = 750,000 x 10/12 = 625,000

Q5: SL is being sued by a customer for Rs. 2 million for breach of contract over a cancelled order. SL has
obtained legal opinion that there is a 20% chance that SL will lose the case. The unrecoverable legal
cost of defending the action are estimated at Rs. 100,000. The amount of the provision that should be
made by SL for the year ended December 31, 2019 is:

a) Rs. 100,000.

b) Rs. 2 million.

c) Rs. 400,000.

d) Rs. 500,000.

Q1: On July 1, 2020, KL purchased 70% shares of ZL. For the year ended December 31, 2020, the cost of
sales of KL and ZL amounted to Rs. 319,200,000 and Rs. 176,400,000 respectively. Since acquisition, KL
sold goods to ZL amounting to Rs. 1 million per month, at a margin of 20%. At the year end, ZL held
30% of these goods. Which one of the following amount represents correct figure to be included in the
consolidated statement of profit or loss of KL for the year ended December 31, 2020?

a) Rs. 401,760,000.

b) Rs. 402,600,000.

c) Rs. 396,400,000.

d) Rs. 395,760,000.

Answer:

= COS of Parent + COS of subsidiary – Purchases + provision of unrealized profit (PURP):

= 319200,000 + (176,400,000 x 6/12) – 6000,000 + (6000,000 x 0.20 x 0.30)

= 401,760,000.

Q2: Following information is related to Tasneem (Private) Limited for the year ended December 31,
2020:
  Profit before tax amounted to Rs. 1.5 million.
 The company deducted accounting depreciation amounted to Rs. 950,000 while tax authorities
allow depreciation of Rs. 870,000.
 The company deducted fine and penalties amounted to Rs. 65,000 but this is not allowed by
tax authorities.
 Other income includes dividend income which is exempt for tax purposes amounted to Rs.
60,000.
 Applicable tax rate for the company is 29%. Current tax expense for the year ended December
31, 2020 will be:

a) Rs. 458,200.

b) Rs. 435,000.

c) Rs. 477,050.

d) Rs. 459,650.

Answer:

Profit before tax = 1500,000.

Add back: Accounting depreciation = 950,000

Less: Tax allowable dep. = (870,000)

Add back: non deductible fines = 65,000

Taxable income = 1645,000

Tax @ 29% = 477050

Q3: On October 1, 2018, TL sanctioned loan amounted to Rs. 3 million to FL Limited, receiving in
exchange a nine-month, 12% note receivables. TL’s financial year ends on December 31st each year. The
interest earned by TL on the notes receivables from FL during the year 2019 will amount to:

a) Rs. 270,000.

b) Rs. 360,000.

c) Rs. 90,000.

d) Rs. 180,000.

Answer:

= 3000,000 x 0.12 x 3/12 = 90,000.

Q4: RL limited operates clothing store and uses a periodic inventory system. During the year ended
December 31, 2019, RL made purchases of Rs. 2 million. A physical inventory count performed on
December 31, 2019, revealed an ending inventory balance of Rs. 250,000. Cost of goods sold
amounted to Rs. 2100,000. The opening inventory on January 1, 2019, was:

a) Rs. 100,000.

b) Rs. 350,000.

c) Rs. 250,000.

d) Rs. 150,000.

Answer:

Op. inventory + purchases – ending = COGS

Op. inv. = COGS – purchases + ending

= 2100,000 – 2000,000 + 250,000

= 350,000.

Q5: Hashim Limited (HL) acquired an 80% holding in S Limited (SL) on April 1, 2020. From April 1, 2020
to December 31, 2020. SL sold goods to HL for Rs. 8.6 million at a mark up of 10%. HL inventory at
December 31, 2020 included Rs. 4.4 million of such inventory. The statement of profit or loss for each
company for the year to December 31, 2020 amounted to Rs. 29.4 million for HL and Rs. 23.2 million.
What is the cost of sales to be shown in the consolidated statement of profit or loss for the year ended
December 31, 2020:

a) Rs. 37.8 million.

b) Rs. 40.4 million.

c) Rs. 38.2 million.

d) Rs. 38.6 million.

Answer:

= 29.4 + (23.2 x 9/12) – 8.6 + (4.4 x 10/110)

= 38.6

Q1: H Group of companies acquired 80% of the share capital of Z limited on January 1, 2019. Part of
the purchase consideration was Rs. 2000,000 cash to be paid on January 1, 2022. The applicable cost
of capital is 10%. will be the deferred consideration liability be at December 21, 2020.

a) Rs. 1652,880.

b) Rs. 1818,181.
c) Rs. 2000,000.

d) Rs. 1502,620.

Answer:

= 2000,000 x (1.10)^-3 = 1502,620.

Q2: On May 1, 2019, Z Limited (ZL) acquired a property (Land and building) and used 20% of the floor
area to accommodate the administrative and maintenance staff and the remaining area was rented
out under operating lease. Costs and other information associated with this acquisition are as follows:

Rupees
Purchase price (30% attributed to land) 80,000,000
Non-refundable transfer taxes 4000,000
Legal fees 6000,000

Mortgagee note payables 40,000,000

Cost of painting (repair & maintenance) 1000,000
Advertising costs to attract tenants 200,000
The value of land in the financial statements of ZL as an investment property will be .

a) Rs. 21600,000.

b) Rs. 19200,000.

c) Rs. 5400,000.

d) Rs. 50400,000.

Answer:

Cost = 20% x (30% 0f 80,000,000) = 4800,000

Add: Non-refundable taxes = 4000,000 x 0.20 x 0.30

Add: Legal fees = 6000,000 x 0.20 x 30

= 5400,000

Q3: On July 1, 2020, Zarda Limited (ZL) entered into an agreement to lease the plant from the
manufacturer. An initial payment was made on July 1, 2020 and the present value of the future lease
payments at that date amounted to Rs. 520,500. Payments in respect of the lease are made in advance
and are Rs. 300,000 per annum, commencing on July 1, 2021. The rate of interest implicit in the lease
is 10%. The lease does not transfer ownership of plant to ZL by the end of the lease term and there is
no purchase option available. ZL incurred initial direct costs of Rs. 60,000 to set up the lease and
received lease incentives from the manufacturer amounting to Rs. 21,000. The initial cost of the right
of use asset as at July 1, 2020 is:

a) Rs. 520,500.

b) Rs. 880,500.

c) Rs. 859,500.

d) Rs. 901,500.

Answer:

= 520,500 + 300,000 + 60,000 – 21,000 = 859,500.

Q4: On January 1, 2019, BL acquired a copyright to a series of new professional publications for Rs. 10
million including Rs. 500,000 non-refundable purchase taxes. The purchase agreement provided Rs. 2
million to be paid at acquisition and the balance to be paid on December 31, 2019. Legal fees of Rs.
400,000 were incurred in acquiring the copyright and paid on January 1, 2019. An appropriate discount
rate is 10% per annum. The copyright will be recognized initially at an amount of Rs:

a) Rs. 2400,000.

b) Rs. 9672,727.

c) Rs. 2000,000.

d) Rs. 9272,727.

Answer:

Cost of acquisition = 2,000,000 + [(8000,000 x 1.10^-1]

Legal fee = 400,000

Initial recognition= 9672727

Q5: During the year ended June 30, 2020, JL exchanged an old automobile with a book value of Rs. 1.4
million (Rs. 3.4 million cost less accumulated depreciation of Rs. 2 million) for a new automobile with
fair value for Rs. 1.6 million and Rs. 200,000 in cash. The fair value of the old automobile is Rs. 1.8
million. The transaction is deemed to lack commercial substance. At amount the automobile
received in the trade be recorded.

a) Rs. 1.8 million.

b) Rs. 1.2 million.

c) Rs. 1.6 million.

d) Rs. 200,000.

Answer:
New automobile will be recognized at Fair value:

= 1.6 million + 0.2 million= 1.8 million.