FINANCIAL REPORTING

1st Mid-term Exam (Fall 2021)

Instructors: Dr. Sharjeel Hasnie / Dr. Asad Ilyas

Duration=75 minutes No. of MCQs=20

Ammar Irfan
Name:______________________________ 23154
ERP No._______________

Please note that each question has only one correct answer (A/B/C/D/E). You are required
to use the ANSWER SHEET for marking all answers and this sheet is provided at the end
of this paper. Rough work can be done on the question booklet.

Question 1

An entity purchased a machinery for $6 million on 1 July 20X3. The expected life of the machinery
was 20 years and its residual value was estimated to be nil. On 30 June 20X5 the machinery was
impaired and its new value was $4.4 million. On 30 June 20X7, the machinery was sold for $4.5
million.

What is the approximate gain on disposal of the machinery that would be reported in the statement
of profit or loss for the year ended 30 June 20X7?
Dep Y1: 6m/20= 300k
A) $100,000 Dep Y2: 6m/20= 300k
B) $588,889
NBV 5.4m but impaired to 4.4m
C) $344,444
Dep Y3: 4.4m/18= 0.244m
D) $540,000 Dep Y4: 4.4m/18= 0.244m
E) All amounts are incorrect NBV at disposal= 3.911m and sold for 4.5m hence gain $588,889

Question 2

On Jan 1st, 2016, ABC ltd. purchased a plant for $20,000. Normally a payment period of 1 month
is allowed on such transactions but the vendor allowed ABC ltd. to pay the entire amount after 3
years. The interest rate is 10% per annum.

Calculate the amount of finance charges for the year ending Dec 31st, 2017?

A) $1,820
 B) $1,794
C) $1,660
D) $1,494
E) All amounts are incorrect

Question 3

An asset was purchased for $100,000 on 1 January 20X5 and straight line depreciation of $20,000
per annum is being charged (five-year life, no residual value). The annual review of asset lives is
undertaken and for this particular asset, the remaining useful life as at 1 January 20X7 is eight
years. The financial statements for the year ended 31 December 20X7 are being prepared.

What is the carrying amount of asset for the year ended 31 December 20X7?

A) $47,500 60000/8= 7500

B) $40,000
60000-7500= NBV (52500)
C) $51,500
D) $48,500
E) All amounts are incorrect 52500

Question 4
An entity purchases an aircraft that has an expected useful life of 20 years with no residual value.
The aircraft requires substantial overhaul at the end of years 5, 10 and 15. The aircraft cost $25
million and $5 million of this figure is estimated to be attributable to the economic benefits that
are restored by the overhauls. In year 6, the cost of the overhaul is estimated to be $6 million.

Calculate the annual depreciation charge for the years 1–5 and years 6–10?
A) $2 & $2.2 million
20/20 + 5/5 = 2m
B) $1 & $1.2 million
C) $2 & $1 million 20/20 + 6/5= 2.2m
D) $1 & $2 million
E) All amounts are incorrect

Question 5
Joshua ltd. purchased a machine on Dec 31st, 2018 for $500,000 by paying $100,000 as down
payment and agreeing to pay the balance in 3 equal instalments in the following manner:
Dec 31st, 2019= $150,000 PV= 136363.6

Dec31st, 2020= $100,000 PV= 82644.6

Dec31st, 2021= $150,000 PV= 112697.2

Add 100,000 down payment and all PV's= 431705 x 80%= $345364
The interest rate is 10% and useful life of the asset is 5 years (straight-line method). Calculate the
carrying amount of asset on Dec 31st, 2019?

A) $331,705
B) $473,028
C) $287,803
D) $345,364
E) All amounts are incorrect
Question 6

Alexander ltd. exchanged 2 old cars (Cost= $100,000 & Acc. dep.= $40,000) with a new Audi car
on Jan 1st, 2020. In addition to exchange of assets, Alexander ltd. also agreed to pay $10,000 cash
as down payment & $5,000 after 2 years. The FV of old cars and Audi are $50,000 & $70,000
respectively and the rate of interest in 12%.

Calculate the cost of Audi on Jan 1 st, 2020? FV of asset given up= 50000
Down payment= 10000
A) $73,986 PV of installment (5k)= 3986
B) $63,986
C) $68,450 Total: 63986
D) $61,958
E) All amounts are incorrect

Question 7
A plant was purchased for $10,000 on Jan 1st, 2019 with an estimated useful life of 5 years. On
Jan 1st, 2020, one of its component (that was not previously identified separately) was damaged
and replaced with a new component costing $5,000. It was estimated that the old component when
purchased in 2019 had a cost of $3,000. The estimated useful life of the new component was 3
years.
Calculate the total depreciation expense for the year ended Dec 31st, 2020?
A) $3,667 10000 x 80%= 8000 component excluded now
B) $2,267 less (3000x80%)= (2400)
plant nbv left= 5600 dep 5000/3= 1667
C) $3,267
D) $3,067 plant dep 5600 x 25%= 1400
total dep= 1400+1667= $3067
E) All amounts are incorrect
Question no. 8 to 13 are related to the following scenario

Jacobson Limited plans to build a new factory in Karachi. The following information is relevant
for the acquisition.
1. Jacobson Limited obtained a long term loan of PRs. 40,000 carrying interest rate of
12% per annum on 1st January 2014 from Nova Bank. The loan is repayable in full
after 5 years. The loan covenant1 states that Jacobson Limited will buy land from its own
resources, and the loan will only be used to construct the factory building and to pay the
related construction expenses. When the loan is not being utilized, Jacobson Limited will
invest the excess amount in a special deposit account at Nova Bank earning interest rate
of 6%.

2. The company has running finance facility of PRs. 100,000 at 14%. This facility will be
used if the long term loan proves to be insufficient. Currently PRs. 12,000 is withdrawn
under the facility (being used in business), and adequate funds are available if required
for construction.

3. Jacobson Limited entered into contract to buy 1-acre land on 1st January 2014 from Marvel
Limited.

The terms of the contract are:

a) Cost of Land will be PRs. 35,000. It is freehold. The full cost is payable on 1st
January 2017. (Ignore the present value).

b) Jacobson Limited will pay unpaid property taxes amounting to PRs. 750 that
Marvel Limited had not paid for the last many years in respect of land. Legal and
other costs will be PRs. 4,000. Both unpaid taxes and legal costs were paid to the
legal consultant on 1st April 2014 who will settle the obligation.

c) The land has an unused warehouse, that was removed at the cost of PRs. 1,000 on
15th March 2014. The amount is net of sale of scrap.

4. Jacobson hired Zero Construction Limited to build the proposed factory. The budgeted
cost of construction are PRs. 60,000. The payment terms are:

a) Zero Construction Limited will start work from 1st April 2014 (capitalization of
BC started on 1st April) , and will be paid PRs. 25,000 as mobilization advance on the
same date. The amount will be placed in a separate ‘advance against building’
account in the Jacobson’s books of accounts till the building is completed.

b) The second instalment of PRs. 25,000 will be paid on 1st October 2014. Please
note that general loan was utilized after the specific loan.
 c) The remaining amount will be paid after approval of the architect when the
building will be ready.

5. The building was completed on 31st December 2015. Jacobson started using the factory
from 1st January 2016.

6. The total construction cost as attested by the architect, came out to be PRs. 65,000. The
balance of PRs. 15,000 was paid on 31st December 2015 to Zero Construction and the
‘advance against building’ account transferred to the building account. Financial
Charges are to be recorded at every 31st December year-end.

7. The building has an estimated useful life of 40 years.

Question 8
The cost of land for the year ended Dec 31st, 2014 was?

A) 32,035 35000+4000+750= 39750

B) 40,750
C) 39,750
D) 35,000
E) All amounts are incorrect
Question 9

The amount of borrowing cost capitalized after deducting investment income for the year ended
Dec 31st, 2014 was expected to be?
A) 3,500
B) 3,275
C) 4,700
D) 3,250
E) All amounts are incorrect

Question 10
The amount of interest income recorded in the income statement for the year ended Dec 31 st, 2014
was expected to be?
A) Zero
B) 1,200
C) 600
D) 450
E) All amounts are incorrect
Question 11
The amount of total interest expense recorded in the income statement for the year ended Dec 31st,
2014 was expected to be?
A) 3,230
B) 1,680
C) 1,880
D) 2,880
E) All amounts are incorrect

Question 12
The amount of borrowing cost capitalized for the year ended Dec 31st, 2015 was expected to be?

A) 4,800
B) 5,000
C) 6,000
D) 5,200
E) All amounts are incorrect
Question 13

The total cost of constructing the factory building as of December 31 st, 2015 was expected to be?
A) 68,500
B) 74,700
C) 75,200
D) 76,100
E) All amounts are incorrect
Question 14

Ahmed bought a business premises comprising of land and building at a cost of $50 million on 1st
January 2018. The market value of land component of the premises on 1st January 2018 is $24
million, and market value of building component of the premises on the same date is $36 million.
The business premises will be recorded as:
doesn't matter whatever the MV is, asset to be
A) A single asset at a cost of $50 million. recorded at its historical cost
B) A single asset at a cost of $60 million.
C) The land component will be recorded at $24 million, and building component will be
recorded at $36 million as separate assets
D) The land component will be recorded at $20 million, and building component will be
recorded at $30 million as separate assets.
E) All statements are incorrect
Question 15

Babar bought a generator on 1st January 2018 from Gentac, that was delivered to his premises on
the same day. The market price (amount shown on the official price list of Gentac) of the generator
is Rs. 120,000, and Gentac gives a warranty of 5 years on its generators. Gentac agreed to take Rs.
80,000 in cash on delivery of the generator, Rs. 10,000 on 1st January 2021 and Rs. 30,000 on 1st
January 2023, when the warranty will expire. Babar estimates that current discount rate is 10%.

The cost of generator at initial recognition on 1st January 2018 is:

down payment: 80,000
A) 120,000 installment: 10k after 3 years (PV 7513)
B) 87,513 installment: 30k after 5 years (PV 18628)
C) 98,628
D) 100,480 Initial recognition: 106141
E) All amounts are incorrect

Question 16

On 1 January 20X5, Sainsco began to construct a supermarket which had an estimated useful life
of 40 years. It purchased the raw material for $25 million. The construction of the building cost $9
million. Further, the non-traceable fixed cost & wastage cost a total of $6 million. The construction
of the supermarket was completed on 30 September 20X5 and it was brought into use on 1 January
20X6.

Sainsco borrowed $20 million on 1 February 20X5 in order to finance this project. The loan carried
interest at 10% pa. It was repaid on 30 August 20X5. An amount of $10 million was also withdrawn
from general pool of funds for construction of this asset on July 1st 20X5, and this loan carried
interest of 12% pa.

Calculate the total amount to be included at cost in property, plant and equipment in respect of the
development at 31 December 20X5?
20m loan interest= 20x10%x7/12)= 1.17m
A) 41.63 million 10m loan interest= 10x12%x3/12= 0.3m
B) 35.47 million + raw mat 25m and const cost 9m hence total= 35.47m

C) 42.13 million
D) 38.43 million
E) All amounts are incorrect

Question 17

An asset is purchased at a cost of $110 000 on 1 January 20X1. The asset has a total useful life of
10 years but the company will dispose of the asset after 5 years for an estimated $30 000 (present
value). This figure has been arrived at before taking into consideration the present value of the
expected costs of disposal of $20 000. The straight-line method of depreciation is to be used for
this asset.

Calculate the depreciation for the year ended December 31st, 20X1?

A) $22,000 Cost 110000

disp proceeds (30000)
B) $11,000 disp exp 20000
Value: 100000
C) $16,000 dep 100000/5= 20,000
D) $20,000
E) All amounts are incorrect

Question 18

Blue river ltd. received govt. grant of $10,000 for paying operational expenses with the condition
that no employee will be fired from job for the next 2 years. This grant was received on July 1st,
2020. On the similar date another grant of $15,000 was received from city govt. for the acquisition
of asset with a useful life of 5 years. This asset was damaged on Jan 1st, 2021 and expected useful
life of this asset was reduced to 3 years.

How much would be the remaining balance in deferred grant revenue account as at Dec 31st, 2020?

A) $20,833
10,000 for 2 years so for july-dec = 2500 used hence 7500 left
B) $21,000 15000 for 5 years so for july-dec= 1500 used hence 13500 left
C) $22,000 total deferred grant revenue left= 210000
D) $23,500
E) All amounts are incorrect

Question 19

New legislation was promulgated on 1 September 20X1 whereby all public transport buses are
required to undergo regular major inspections every 2 years. Vroom Limited owns a bus that has
a carrying amount of C80 000 as at 1 January 20X1. A major inspection of this bus was performed
on 1 October 20X1 at a cost of C20 000. This bus is depreciated on the straight-line method to a
nil residual value and had a remaining useful life of 10 years on 1 January 20X1.

Calculate the depreciation expense for the year ending Dec 31st, 20X1?

A) $8,000
inspection: 20000/24 x3= 2500
B) $9,500 bus: 80000/10= 8000
C) $8,500 Total dep: 10500
D) $10,000
E) All amounts are incorrect
Question 20

Grimtown took out a $10 million 6% loan on 1 January 20X1 to build a new football stadium. Not
all of the funds were immediately required so $2 million was invested in 3% bonds until 30 June
20X1. All activities necessary to construct the stadium began on 1 February 20X1 and was
completed on 31 December 20X1.

Calculate the amount of interest to be capitalized in respect of the football stadium as at 31

December 20X1?
10m x 6% x 11/12 = 550,000 exp
A) $525,000 2m x 3% x 5/12= 25,000 income

B) $520,000 net interest expense= $525,000

C) $570,000
D) $575,000
E) All amounts are incorrect

End of the question paper

FU