Mixed IAS [16 – 20 – 23 – 36 – 40] – QUESTIONS (1)

Question – 1
Following information pertains to non-current assets of Bunny Ear Limited (BEL):
Land:
In January 2019, the government allotted a piece of land to BEL subject to the condition that BEL
will establish a factory building on it. The land was recorded at its fair value of Rs. 100 million.
Factory building:
On 1 March 2019, BEL started construction of the factory building. The construction work was
completed on 30 June 2020. Payments related to the construction of the factory were as follows:

The project was financed through:

(i) government grant of Rs. 200 million received on 1 February 2019. Unused funds from
government grant were invested in a saving account @ 8% per annum.
(ii) withdrawals from the following running finance facilities obtained from Bank A and Bank B.
The relevant details are:

Manufacturing plant:
The manufacturing plant was purchased on 1 August 2020 at cost of Rs. 420 million. Rs. 240
million was financed through an interest free loan from government. The loan will be forgiven if
the plant is operated for atleast 4 years by BEL. Upon acquisition, there is a reasonable
assurance that BEL will comply with this condition.
Other information:
- BEL uses cost model for subsequent measurement of property, plant and equipment.
- All government grants are recorded as deferred income and a part of it is transferred to
income each year.
- Useful life of the factory building and manufacturing plant has been estimated at 25 years
and 10 years respectively.
Required:
Prepare relevant extracts (including comparative figures) from BEL’s statement of profit or loss
for the year ended 31 December 2020 and statement of financial position as on that date. (Notes
to the financial statements are not required. Borrowing costs are to be calculated on the
basis of number of months) (16)
[Q-7 Aut-21]

Question – 2
You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft
financial statements for the year ended 31 December 2020 prepared by the junior accountant, you
have noted the following:

(i) In January 2020, Government allotted an industrial plot to CL at a prime location subject to
the condition that CL will establish a factory. CL constructed the factory building which was
available for use on 1 October 2020. Due to delay in recruitment of key factory employees,
Mixed IAS [16 – 20 – 23 – 36 – 40] – QUESTIONS (2)

the production activities will commence on 15 March 2021. The accountant has not
recorded the land as it was given free of cost. While the factory building is still appearing in
capital work in progress as production activities will commence on 15 March 2021. (06)

(ii) CL acquired a three-story building on 1 March 2020. CL uses the ground floor for its
marketing department while remaining two floors were in excess of CL’s need and therefore
were rented out. The first floor was rented out on 1 June 2020 and the second floor was
rented out on 1 December 2020. The accountant has recorded the building as property,
plant and equipment. The depreciation on ground, first and second floors has been
computed from 1 March 2020, 1 June 2020 and 1 December 2020 respectively. (05)

(iii) CL is constructing a power generation plant for its factory. The project started on 1
February 2020 and would complete on 30 November 2021. The work remained suspended
for 3 months. The project is financed through long term loan, acquired specifically on 1
January 2020. The unutilised amount of loan is kept in a separate saving account. The
accountant has deducted income of separate saving account from full year’s interest on loan
and presented the net amount as finance cost in the statement of profit or loss. (05)

The accounting policy of CL is to carry land and building at fair value (wherever permitted by IFRS).

Required:
Discuss how the above issues should be dealt in the financial statements of CL for the year ended
31 December 2020 in accordance with the requirements of IFRSs.
[Q-7, Spr-21]

Question – 3
On 1 July 2014, Indus Pharma Limited (IPL) received a government grant of Rs. 280 million to
setup a plant in an under-developed rural area. The grant is repayable in full if the conditions
attached to the grant are not met for a period of five years from the date of commencement of the
production. At the inception, it was highly probable that IPL would comply with the conditions for
the required period.
IPL incurred total cost of Rs. 630 million on plant and it started production on 1 January 2015.
Useful life of the plant was estimated at 7 years. IPL deducted government grant in arriving at the
carrying amount of the asset.
In January 2019, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant
was repaid by IPL.
In view of repayment of the grant, IPL carried out an impairment review of the plant on 31
December 2019. Net annual cash inflows for the remaining life of the plant have been estimated at
Rs. 90 million and Rs. 80 million for 2020 and 2021 respectively. These cash inflows are net of
annual interest and maintenance cost of Rs. 10 million and Rs. 6 million respectively for both
years. Applicable discount rate is 12%.
On the date of impairment review, the existing plant can be sold in the local market for Rs. 160
million. Estimated cost of disposal would be Rs. 5 million.
Required:
Prepare journal entries for the year ended 31 December 2019 in respect of the above information.
(Show all necessary workings. Narrations are not required) (08)
[Q-3, Aut-20]

Question – 4
Following information pertain to property, plant and equipment of Harappa Industries Limited (HIL)
for the year ended 30 June 2020:
(i)
Balance as on June 30, 2019
Cost/Revalued Accumulated Revaluation Depreciation Useful
Assets
amount depreciation surplus method life/rate
-------------------- Rs. 000 -----------------
Land* 100,000 - - - Infinite
Buildings 70,000 14,000 16,000 SLM 20 years
Mixed IAS [16 – 20 – 23 – 36 – 40] – QUESTIONS (3)

Plant 180,000 60,000 - SLM 15 years

Vehicles 8,800 4,000 - RBM 20%
*An amount of Rs. 12 million had been charged to profit or loss upon previous revaluation

(ii) On 30 June 2020, the revalued amounts of the land and buildings were assessed by Smart
Consultant at Rs. 120 million and Rs. 35 million respectively.
(iii) Setting up of a new plant was commenced on 1 July 2019 and substantially completed on
29 February 2020. The plant was available for use on 1 April 2020 and immediately put into
use. Useful life of the plant was estimated at 10 years. Details of the cost incurred are as
under:

Description Payment date Rs.’000

1st payment 01-08-2019 12,000
2nd payment 01-10-2019 48,000
3rd payment 29-02-2020 48,000
4th payment 31-07-2020 12,000
120,000

The cost of the plant was financed through an existing running finance facility with a limit
of Rs. 200 million carrying mark-up of 12% per annum. A government grant of Rs. 20
million related to the plant was received on 1 January 2020. The grant amount was used for
repayment of the running facility.

(iv) One of the vehicles had an engine failure on 1 January 2020 and its engine had to be sold
as scrap for Rs. 0.1 million. The vehicle had been acquired on 1 January 2018 at a cost of
Rs. 2.5 million. 40% of the cost is attributable to its engine. Though the engine of similar
capacity was available at a cost of Rs. 1.2 million, the old engine was replaced on 1 January
2020 with a higher capacity engine at a cost of Rs. 1.8 million.
(v) HIL uses cost model for subsequent measurement of property, plant and equipment except
for land and buildings.
(vi) HIL accounts for revaluation on net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.
(vii) HIL deducts government grant in arriving at the carrying amount of the asset.

Required:
In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ for inclusion in HIL’s
financial statements for the year ended 30 June 2020.
(Comparatives figures and column for total are not required) (20)
[Q-8, Aut-20]
Question – 5
Following information pertains to non-current assets of Distaghil Limited (DL):
(i) DL purchased specialized vehicles for Rs. 370 million on 1 July 2017. The vehicles have an
estimated useful life of 10 years with residual value of Rs. 30 million. The revalued amounts
of the vehicle as at 31 December 2018 and 2019 were determined at Rs. 302 million and Rs.
290 million respectively. There was no change in useful life or residual value.

(ii) DL setup a manufacturing plant in a remote area at a cost of Rs. 280 million. The plant had
a useful life of 8 years. The plant was purchased on 1 January 2018 and was available for
use on 1 April 2018. The commercial production started on 1 June 2018. On 1 July 2018,
DL received a government grant of Rs. 120 million towards the cost of the plant. The
sanction letter states that if DL ceases to use the plant in the remote area before 31
December 2021, DL would be required to repay the grant in full.

(iii) A warehouse was given on rent on 1 January 2018. Previously, the warehouse was in use of
DL. On 1 January 2018, carrying value and remaining useful life of the warehouse was Rs.
80 million and 16 years respectively. Fair value of the warehouse on various dates are as
follows:
Mixed IAS [16 – 20 – 23 – 36 – 40] – QUESTIONS (4)

Rs. in million
01-01-2018 104
31-12-2018 96
31-12-2019 115

Other information:
• DL uses cost model for subsequent measurement of property, plant and equipment except
for specialized vehicles for which revaluation model is used.
• DL transfers the maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
• Government grant is recorded as deferred income and a part of it is transferred to income
each year.
• Investment property is carried at fair value model.

Required:
Prepare relevant extracts from DL’s statement of profit or loss and other comprehensive income for
the year ended 31 December 2019 and statement of financial position as on that date.
(Show comparative figures) (20)
[Q-8, Spr-20]

Question – 6
The following information pertains to Monday Limited (ML):
(i) The balances of property, plant and equipment as on 1 January 2018:

Cost/Revalued Accumulated
Assets amount depreciation
-------------- Rs. in million ----------
Office building 240 36
Equipment 190 60

Revaluation surplus related to the office building as at 1 January 2018 amounted to Rs. 8.5
million.
(ii) On 1 September 2018, a new equipment was acquired by making payment of Rs. 70 million
to the supplier. An old equipment was also given in exchange to the supplier. The fair values
of the old and new equipment were assessed at Rs. 21 million and Rs. 93 million
respectively. The old equipment had been acquired at a cost of Rs. 40 million on 1 July
2016. Cost incurred on installing the new equipment amounted to Rs. 5 million.
(iii) On 1 January 2018, ML commenced construction of a manufacturing plant. The whole
process of assembling and installation was completed on 31 October 2018. However, the
work was stopped from 16 to 31 August 2018 due to unexpected rains. The total cost of Rs.
660 million incurred on the plant was paid as under:

Description Payment date Rs. in million

1st payment 1 February 2018 140
2nd payment 1 April 2018 214
3rd payment 1 September 2018 146
4th payment 1 December 2018 160

The plant was financed through a bank loan of Rs. 500 million obtained on 1 March 2018.
The loan carries a mark-up of 18% payable annually. The surplus funds available from the
loan were invested in a saving account and earned Rs. 17 million during capitalization
period.
(iv) On 31 December 2018, the revalued amount of office building was assessed at Rs. 178
million by Precise Valuers, an independent valuation firm. Value in use of the office building
as at 31 December 2018 was estimated at Rs. 186 million.
Mixed IAS [16 – 20 – 23 – 36 – 40] – QUESTIONS (5)

(v) Other relevant details are as follows:

Assets Depreciation Life / rate Subsequent

method measurement
Office building Straight line 20 years* Revaluation
Equipment Reducing balance 20% Cost
Manufacturing plant Straight line 15 years Cost
* remaining life at the date of last revaluation

ML accounts for revaluation on net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.

Required:
In accordance with IFRSs, prepare a note on ‘Property plant and equipment’ for inclusion in ML’s
financial statements for the year ended 31 December 2018.
(Comparatives figures and column for total are not required) (17)
[Q-6, Aut-19]

Question – 7
The following information pertains to property, plant and equipment of Orchid Limited (OL), a listed
company:
Subsequent
Date of Cost (Rs. in Original Depreciation
Description measuremen
purchase million) useful life method
t model
Buildings 1-Jan-15 600 30 years Straight line Revaluation
Plant 1-Jan-15 475 25 years Straight line Cost

Buildings
The revalued amount of buildings as determined by Shabbir Associates, an independent valuer, on
31 December 2015 and 2017 was Rs. 700 million and Rs. 463 million respectively.
On 30 June 2017 a building having original cost of Rs. 66 million was sold to Baqir Limited for Rs.
85 million. It was last revalued at Rs. 87 million. OL incurred a cost of Rs. 2 million on disposal.
OL transfers the maximum possible amount from revaluation surplus to retained earnings on an
annual basis.

Plant
On 31 December 2016 the recoverable amount of the plant was assessed at Rs. 360 million with no
change in useful life.
During 2017, OL has decided to change the depreciation method for plant from straight line to
reducing balance. The new depreciation rate would be 10%.
Required:
Prepare a note on “Property, plant and equipment” (along with comparative figures) to be presented
in the financial statements of OL for the year ended 31 December 2017 in accordance with the
requirements of relevant IFRSs
(20)
(FAR II Spring 2018, Q # 4))