FINANCIAL REPORTING

Mid-term Exam (Fall 2022)

Instructors: Dr. Sharjeel Hasnie / Dr. Asad Ilyas

Duration= 2 hours

Name:______________________________ ERP No._______________

Please note that, this paper consists of 2 parts:

 Part 1 = 15 MCQs = Total marks =15

 Part 2 = Subjective part = 2 questions = Total marks =20

ALL QUESTIONS ARE COMPULSORY

PART 1 - MCQs
Instructions for MCQs only:

Please note that each MCQ has only one correct answer (A/B/C/D/E). You are required to
use the MCQs SHEET for marking part 1 only, and this sheet is provided at the end of this
paper.

Question 1

An entity purchased a machinery for $5 million on 1 July 2016. The expected life of the
machinery was 10 years, and its residual value was estimated to be nil. On 30 June 2018 the
machinery was impaired, and its new value was $2.4 million. On 30 June 2020, the machinery
was sold for $3 million.

What was 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 2020?

A) $1.8 million
B) $0.3 million
C) $0.6 million
D) $1.6 million
E) All amounts are incorrect
The following scenario is related to question no. 2, 3 & 4.

Zhu Ltd. is constructing office building at a cost of $1.5 million and incurred the following
expenses during 2020:

1-Jan 1-May 1-Jul 31-Dec Total

$210,000 $300,000 $600,000 $390,000 $1,500,000

Actual construction started on Feb 1st but all activities relating to construction took place on
Jan1st, and asset was completed on Dec 31st. This asset is considered as a qualifying asset.

The Company used the following funds for construction of this asset.

General loans:

10%, 5- year note payable taken on 2018 $550,000

12%, 10-year bond taken on 2019 $700,000

14%, 3-year note taken on Jan1st, 2020 $750,000

Question 2

The amount of borrowing costs capitalized for the year ending Dec 31st, 2020, was expected to
be?

A) 88,460
B) 86,620
C) 82,420
D) 89,531
E) All amounts are incorrect

Question 3

Assume that 14% loan was specific which had to be utilized before general borrowings then the
capitalization rate for the year ending Dec 31st, 2020, was expected to be?

A) 11.1%
B) 6.95%
C) 8.2%
D) 12.88%
E) 10.25%
Question 4

Assume that 14% loan was specific which had to be utilized before general borrowings then the
amount of borrowing costs capitalized for the year ending Dec 31st, 2020, was expected to be?

A) 117,510
B) 119,760
C) 128,184
D) 124,980
E) All amounts are incorrect

Question 5

X ltd purchased a plant and machinery on Jan 1 st, 2017, for $500 million. This machine had a
useful life of 5 years. The fair value on 1/1/2018 was $450 million and on 1/1/2019 fair value of
machine changed to $200 million.

Each year a portion of revaluation surplus was transferred to retained earnings. Calculate the
amount of depreciation charged to P/L account and amount of revaluation surplus transferred to
retained earnings on 31/12/2018?

A) Depreciation= 100 & Transfer of revaluation surplus to retained earnings= 0

B) Depreciation= 112.5 & Transfer of revaluation surplus to retained earnings= 25
C) Depreciation= 100 & Transfer of revaluation surplus to retained earnings= 12.5
D) Depreciation= 112.5 & Transfer of revaluation surplus to retained earnings= 12.5
E) All amounts are incorrect

Question 6

A machine had a carrying value of $85,000 as of 31 December 2021. The fair value was $78,000
and disposal cost was $2,500 on this date. Company expected to earn cash flows of $30,000
annually for the next 3 years from this machine. Cost of capital was 8%. A new machine would
cost $150,000. The approximated impairment loss at Dec 31, 2021, was expected to be?

A) $9,500
B) $6,890
C) $7,687
D) $7,000
E) $8,120
Question 7
Zhang Ltd. was constructing a machine. The commencement of the asset took place on 1
February 2021 and was completed on 31 December 2021. Expenditure incurred on construction
were $1,800 on 1 March 2021, $1,200 on 1 June 2021 and $3,000 on Dec 31st, 2021. The
company obtained a specific bank loan of $6,000 on Jan 1st, 2021, for this machine at the rate of
10%.

All the construction expenditures were made from the specific loan and the remaining amounts
were reinvested at the rate of 5% per annum, while the amount remained un-utilized during the
year.

Calculate the amount of borrowing costs capitalized for the year ending Dec 31st, 2021?

A) $435
B) $385
C) $330
D) $437.5
E) All amounts are incorrect

The following scenario is related to question no. 8 & 9.

Grant Ltd. received cash grant from Banana republic. $30,000 were provided for operational
expenses and the company had to abide by certain terms and conditions for 2 years. $150,000
were provided as loan for future acquisition of certain vehicles. Out of that loan $60,000 were
written off by Govt. on July 1st, Y1 (BOD decided to treat it as grant).
The entire amount of 180,000 was received on Jan 1, Y1. Vehicles were acquired on Jan 2, Y1
for $210,000. The vehicles were available for use immediately, having useful lives of 3 years
with residual values of $30,000. Grant Ltd. recognized grants by using the direct income
approach. Interest rate was 5% per annum.
Question 8
How much grant should be recognized in the income statement for the year ending Dec 31st, Y1?
A) 30,000
B) 35,000
C) 25,500
D) 28,500
E) All amounts are incorrect

Question 9
Assume that in the above-mentioned scenario, due to some disagreements with the govt. the
entire amount of grant (excluding loan- grant only) had to be reimbursed on Oct 1 st, Y2. How
much grant expense only (grant forfeited / reimbursed) should be recorded in the income
statement for the year ending Dec 31st, Y2?

(Note: Please do not net off grant expense against grant income during the year Y2)

A) 33,750
B) 56,250
C) 27,000
D) 30,000
E) All amounts are incorrect

Question 10

A plant was purchased on July 1st, 2020, at a cost of $1 million and has a useful life of 5 years.
On Dec 31st, 2020 (year-end), the plant was damaged, and the recoverable amount was estimated
to be $0.5 million. On Dec 31st, 2021, the fair value of the asset was estimated to be $1 million.

The reversal of impairment loss for the year ending Dec 31st, 2021, would approximately be?

A) 400,000
B) 388,889
C) 311,111
D) 300,000
E) All amounts are incorrect

Question 11
On 1 January 2018, X ltd purchased plant and machinery from Z ltd. for one of its factories
situated in FATA with following details:
List price of the plant was $5,000 million with $800 million trade discounts. Payment /
settlement terms with the vendor were as follows:

a. $1,500 million were up front on 1 January 2018.

b. An old plant and machinery having carrying amount of $180 million and agreed fair value of
$700 million was given to Z ltd as part of settlement.
c. Whereas the remaining amount would be payable after 4 years. The discount factor was 10%
per annum.
In addition to that cost of freight and installation charges were $200 which were paid to a local
contractor who specialized in machinery installation. The machinery was available for use on
January 1st, 2018.

Calculate the estimated cost of asset on Jan 1st, 2018?

A) 3,566
B) 3,046
C) 3,246
D) 3,766
E) 3,703

Question 12
Abid runs a small manufacturing business. He decided to install a new generator at the premises
and a specific loan of $1 million @ 10% was taken on March 1st.2020. Abid negotiated a price
of $2.5 million with the supplier and paid $100,000 for freight and labor to bring the generator to
his plant. A special foundation was constructed to place the generator at a cost of $400,000.
However, during installation, the foundation broke down due to substandard materials used. A
new foundation was built at a cost of 900,000 using reinforced materials. Other miscellaneous
installation costs were $200,000. Further, adjustable taxes of $100,000 were also paid to the
local government.
The generator was completed on Dec 31st, 2020 & calculate the cost of generator (qualifying
asset)?
A) 4,183,333
B) 3,783,333
C) 4,283,333
D) 3,883,333
E) 3,483,333
Question 13
Alexander ltd. exchanged 2 old BMW 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
$5,000 cash as down payment & $10,000 after 2 years. The FV of old cars and Audi are $50,000
& $55,000 respectively, but the FV of Audi was more clearly evident. The rate of interest was
12%.
Further, Alexander ltd. also paid registration expenses of $500 and non-adjustable taxes of $300
for the new Audi on behalf of the other party (unpaid for last 2 years and Alexander agreed to
pay and adjust in the exchange transaction). Finally, a penalty of $300 was also paid for this
Audi by Alexander ltd. for failing to comply with some govt. regulations.
Calculate the approximate cost of Audi on Jan 1st, 2020?
A) $69,070
B) $67,970
C) $68,770
D) $63,770
E) All amounts are incorrect
Question 14
An asset was purchased on Jan 1st, 2020, for $2,000. It comprised of two different components
(Component A= useful life 10 years & Component B= useful life 5 years). On Jan 1 st, 2021,
component A was damaged and had to be replaced with a new component A.
The new component A was installed on the same day at a cost of $1,000. It was estimated that
the old component A when originally purchased as a part of the asset had a cost of $600. The
estimated useful life of the new component A was 5 years. In the year 2021, it was also estimated
that remaining useful life of component B was increased to 8 years.
Calculate the carrying amount of the whole asset on Dec 31st, 2021 (year-end)?
A) 1,780
B) 2,120
C) 1,820
D) 1,880
E) All amounts are incorrect
Question 15
An entity purchased an aircraft that has an expected life of 20 years with nil salvage value. The
aircraft required substantial overhaul at the end of year 5, 10 & 15. The cost of aircraft was $25
million and $5 million of that figure was attributed to the economic benefits that were restored
by this overhaul. In year 6, the cost of overhaul was estimated to be $6 million.
Calculate the annual depreciation charge for the years 1-5 and 6-10?
A) Year 1-5 = $2.2 million Year 6-10 = $2 million
B) Year 1-5 = $2.2 million Year 6-10 = $1.2 million
C) Year 1-5 = $1.2 million Year 6-10 = $2 million
D) Year 1-5 = $2 million Year 6-10 = $2.2 million
E) All amounts are incorrect
 PART 2 – SUBJECTIVE PART
Instructions for subjective part:

Please solve these questions on the answer sheet provided by the examination department.

Question 1

ABC ltd. has the following trial balance for the year ending December 31, 2021.
  Dr. Cr.
     
Land 1,000  

Building - cost 2,000  

Acc.dep. - building   500

Plant - cost 5,000  

Acc.dep. - plant   1,000

Goodwill 400  
CWIP ----  

Inventory 500  

Cash & bank balances 15,000  

10% Bank loan - for qualifying asset   6,500

12% Bank loan - general   6,000

14% Bank loan - general   7,000

Revenues   5,900

Cost of sales 2,000  

Operating expenses 500  

Finance charges 500  

26,900 26,900
Adjustments:

1) ABC decided to construct a plant during the year 2021and yet to record the following
costs related to the qualifying asset.
a. The specific loan was obtained on April 1st, 2021, however, the commencement of
plant started on Feb 1st, 2021. All the general loans were obtained on Jan 1st, 2021.
b. ABC ltd. made the following payments to the contractor:
i. $3,000 on Feb 1st, 2021
ii. $2,000 on Mar 31st, 2021
iii. $6,500 on Oct 31st, 2021
All payments from April 2021 onwards were made from specific loan and general
funds were utilized for all prior payments.
c. ABC ltd. invested all the excess funds from general and specific loans to earn a
return of 6%. Further, only $5,000 from general borrowings were utilized for the
entire year of 2021.
d. The asset was completed on Dec 31st, 2021.
2) Building had a total useful life of 4 years and the depreciation for the year 2021 was not
booked so far. It was estimated that the remaining useful of building was expected to be
10 years.
3) The plant had a total useful life of 5 years and the deprecation for the current year was
not recorded. The fair value of plant on Dec 31st, 2021, was $5,000.
4) The goodwill was impaired by $100 during the year.
5) On Dec 31st, 2021, ABC obtained a bank loan of $500 from a govt. owned bank. The
market rate of interest was 10% but a discounted rate of 6% was allowed by govt. The
entire amount of loan was spent during December on company’s operating expenses.

Required:

1) Statement of comprehensive income for the year ended December 31, 2021.
2) Statement of financial position as at December 31st, 2021.
(Marks =15)

Question 2

Space Jet has a small two-seater aircraft that was purchased for $20,000,000 on 1st January
2009. The aircraft has a useful life of 20 years and is primarily used for survey and photography
purposes. The aircraft requires an inspection after every five years. The cost of one inspection is
$500,000. The last inspection was made on 1st January 2014.
On 1st January 2016, the aircraft was revalued at $26,000,000. Space Jet has accounting year end
of 31 December each year.

Required:

Record accounting entries related to the calendar year 2016. (You are not required to prepare
entries for the previous years).

(Marks = 5)
End of Paper