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CPA
Intermediate Leval
Financial Reporting May 2016
ANSWERS

Financial reporting & analysis
Revision Kit

QUESTION 1(a)

Q For public sector entities with limited internally generated funds, external borrowings may constitute a viable alternative source of finance. Such borrowings are usually accessed at a cost.

Required:
In the context of International Public Sector Accounting Standard (IPSAS) 5- Borrowing Costs:

(i) Identify three items that could be considered as borrowing costs.

(ii) Describe the two alternative accounting treatments for borrowing costs.
A

Solution


International Public Sector Accounting Standard (IPSAS) 5 - Borrowing Costs


(i) Items Considered as Borrowing Costs


Under IPSAS 5, the following items could be considered as borrowing costs:

  • Interest on borrowings
  • Amortization of discounts or premiums relating to borrowings
  • Amortization of ancillary costs incurred in connection with the arrangement of borrowings
  • Finance charges in respect of finance leases
  • Variations in currency exchange rates pertaining to foreign currency transactions.

(ii) Alternative Accounting Treatments for Borrowing Costs


IPSAS 5 provides two alternative accounting treatments for borrowing costs:


A. Capitalization of Borrowing Costs


Entities can choose to capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. This includes the interest expense on funds borrowed specifically for the purpose of acquiring, constructing, or producing the asset.


B. Expensing Borrowing Costs


Alternatively, entities may choose to expense all borrowing costs as incurred. This approach is generally applied when the borrowing costs are not directly attributable to the acquisition, construction, or production of a qualifying asset, or when the asset's construction or production is of a short duration.

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QUESTION 1b

Q Government grants are a common source of finance in developing economies.

Required:
(i) Explain the term "government grants" in the context of International Financial Reporting Standards (IFRSs).

(ii) Government grants may be accounted for using either the "income" approach or the "capital" approach.
Discuss the arguments for each of the two approaches above.
A

Solution


Government Grants in the Context of International Financial Reporting Standards (IFRSs)


(i) Explanation of "Government Grants" under IFRS


Government grants, in the context of International Financial Reporting Standards (IFRSs), refer to assistance provided by government entities in the form of transfers of resources to an entity. These transfers may be in cash or kind and are usually intended to support the entity, either for specific projects or as general financial assistance.

(ii) Accounting Approaches for Government Grants


A. Income Approach


The "income" approach involves recognizing government grants as income in the statement of profit and loss when the grant becomes receivable and the entity meets the eligibility criteria specified in the grant agreement. It provides a more accurate reflection of the financial performance of the entity as it recognizes the grant as revenue when it is virtually certain.


B. Capital Approach


The "capital" approach involves recognizing government grants as deferred income (liability) in the statement of financial position and subsequently transferring the grant to the statement of profit and loss over the periods necessary to match them with the costs for which they are intended to compensate.It aligns with the matching principle and provides a more systematic allocation of the grant over the useful life of the related asset or project.

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QUESTION 1(c)

Q Evaluate four criteria for consideration of a lease as a capital lease.
A

Solution


Criteria for Consideration of a Capital Lease


Leases are classified as either operating leases or capital leases based on specific criteria. A lease should be considered a capital lease if it meets any of the following criteria:

1. Ownership Transfer


If the lease agreement transfers ownership of the asset to the lessee by the end of the lease term, the lease is classified as a capital lease. This criterion is met if there is a bargain purchase option or if the lease term is for a major part of the asset's economic life.


2. Bargain Purchase Option


When the lease agreement includes a bargain purchase option, allowing the lessee to purchase the asset at a price significantly below its fair market value, the lease is considered a capital lease.


3. Lease Term


If the lease term is for a major part of the economic life of the asset, even if ownership is not transferred, it is an indication that the lessee is obtaining most of the economic benefits from the use of the asset, and the lease is treated as a capital lease.


4. Present Value of Lease Payments


If the present value of minimum lease payments, excluding executory costs, at the inception of the lease exceeds a certain threshold (usually 90% or more) of the fair value of the leased asset, the lease is classified as a capital lease.

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QUESTION 2

Q Required:
(a) Statement of comprehensive income for the year ended 30 April 2016.

(b) Statement of financial position as at 30 April 2016.
A

Solution


Workings

W1


Closing stock (40,000 - 900)
Damaged goods
Repair cost.
Carrying amount
Recoverable amount
Inventory loss		 39,100
4,000
400
4,400
(3,500)
900


W2


Contract A(Operating lease)
To admin expense 3,000

Contract B future lease

Period
1
-
2
-		 Bal b/d
70,000
63,000
55,650
47,932.5		 Payment
10,000
10,000
10,000
10,000		 Bal due
60,000
53,000
45,650
37,932.5		 5% Interest
3,000
2,650
2,282.5
1,896		 Principal
7,000
7350
7,717.5
8103		 Bal c/d
63,000
55,650
47,932.5
39,829


Interest cost = 3,000 + 2,650 = 5,650
Depreciation = 70,000 / 4 = 17,500
Non-current liability balance due Sh.37,933
Current liability payment Sh 20,000

W3

Property


Land 35,000 →
Depreciable 50,000 →

35,000 →
54,000→

46,000 = gain = 11,000
gain = 4,000
Revaluation gain = 15,000


Depreciation = 54,000 ÷ 50 = 1,080
Plant and equipment = 25% x 90,000 = 22,500

W4


Current tax 5,000 - 400 = 4,600
Deferred tax = 600
Tax expense = 5,200


W5


Bad debt = 2,000
Receivable = 8,000 x (1 + 0.1)-1 = 7,273
10,000 - 2,000 - 7,273 = 727

W6


Cost of sale
Opening stock
Add:
1. Purchases
2. Production cost
Less: closing stock
Inventory loss
Depreciation:
1. Property
2. Plants and equipment
3. Leased machine
Bad debt (2,000 + 727)


32,000

150,000
60,000
(39,100)
900

1,080
22,500
17,500
2,727
247,607


W7


PPE
PPE Property 46,000 + 54,000 - 1080
Plant and equipment = 90,000 - 30,000 - 22,500
Leased machine 70,000 - 17,500

98,920
37,500
52,500
188,920


(a) Statement of comprehensive income for the year ended 30 April 2016.


Dodoma Ltd
Statement of comprehensive income for the year 30 April 2016.
Revenue (315,000 - 5,000)
Cost of sales
Gross profit
Expenses
1. Administrative cost 22,000 + 3,000
2. Distribution cost
3. Finance cost
Profit before tax
Tax expense
Profit after tax
Other comprehensive income
Revaluation gain
Total comprehensive income



25,000
12,000
5,650






 310,000
(247,607)
62,393



(42,650)
19,743
(5,200)
14,543

15,000
29,543


(b) Statement of financial position as at 30 April 2016.


Dodoma Ltd
Statement of financial position as at 30 Abril 2016
Assets
Non-current assets
PPE
Current asset
Inventory
Receivables (50,000 - 2,727)
Cash
Total assets
Equity and liabilities
Ordinary share capital
Retained earnings
Revaluation reserve
Non-current liabilities
Deferred tax 7,200 + 600
Lease obligation
Current liabilities
Current tax
Payables
Prepaid revenue amount
Lease obligation
Total Equity and liabilities
 Sh"000"



39,100
47,273
24,800














Sh"000"

188,920



111,173
300,093

154,000
25,360
15,000

7800.
37,933

5,000
30,000
5,000
20,000
300,093




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QUESTION 3(a)

Q (a) Business purchases accounts.

(b) Partners' capital accounts.

(c) Bank account.

(d) Vendor's account.

(e) Statements of financial position for the two companies after formation.
A

Solution


(a) Business purchases accounts.


Business Purchase Account

Bank overdraft
Account payable
Debenture
Purchase consideration (equity)



 Mabati
179,000
308,000
14,400
570,600



 Nyumba

52,000
9,600
459,400
Land and Building
Motor vehicle
Equipment
Cash
Receivable
Inventory
Goodwill		 Mabati
200,000
150,000
33,000
1,000
128,000
460,000
100,000		 Nyumba




216,000
225,000
80,000
1,072,000 521,000 1,072,000 521,000


(b) Partners' capital accounts.


Partners Capital Account

Ordinary Share
1.Mabati
2.Nyumba

 Faith

475,000
141,000

 Hope

95,600
318,400
Bal b/d
Goodwill
1. Mabati
2. Nyumba		 Faith
526,000

50,000
40,000		 Hope
324,000

50,000
40,000
616,000 414,000 616,000 414,000


(c) Bank account.


Bank account.

Balance b/d (cash)
Debentures
Ordinary shares


 Mabati
1,000
200,000
20,000

221,000		 Nyumba


30,000

30,000
Bal b/d (Overdraft)
Debenture expenses
Formation expense
Bal c/d

Mabati
179,000
7,000
13,000
22,000
221,000		 Nyumba


8,000
22,000
30,000


(d) Vendor's account.


Vendors account / Mabati and Nyumba Ltd

Purchase Consideration



Mabati
570,600


570,600		 Nyumba
459,400


459,400
Ordinary shares
- Mabati
- Nyumba

Mabati

475,000
95,600
570,600		 Nyumba

318,400
141,000
459,400


(e) Statements of financial position for the two companies after formation.


Statement of financial position for the two companies after formation

Non-current assets
Land and buildings
Motor vehicle
Equipment
Preliminary expenses
- Formation expenses
- Debenture expenses
Goodwill
Current assets
Bank
Inventory
Receivable
Total assets
Equity and liabilities
Ordinary share capital (570,600 + 20,000)&(459,400 + 30,000)
Non-current liabilities
Debentures (200,000 + 14,400)
Current liabilities
Account payable

Mabati Ltd

200,000
150,000
33,000

13,000
7,000
100,000

22,000
460,000
128,000
1,113,000

590,600

214,400

308,000
1,113,000		 Nyumba Ltd





8,000

80,000

22,000
225,000
216,000
551,000

489,400

9,600

52,000
551,000


Workings


W1

O.S

Mabati
Nyumba
Total		 Mabati
(23,750 x 20) = 475,000
141,000
616,000		 Nyumba
95,600
318,400
414,000		 Total
570,600
459,400




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QUESTION 4(a)

Q (a) Computation of goodwill on each investment

(b) Group statement of comprehensive income for the year ended 30 April 2016.

(c) Group statement of changes in equity for the year ended 30 April 2016.
A

Solution


(a) Computation of goodwill on each investment


Workings

Jamii → (80%)Bora
Jamii → (50%)Njema

Goodwill
Bora Jamii
Purchase consideration
Net asset acquired
Ordinary share capital
Share premium
Retained earnings
Revaluation

Goodwill

11,250
3,750
3,705
390
80% x 19,095

 18,000





(15,276)
2,724

6,000.0
1,500.0
2,767.5

50% x 10,267.5

 6,300.00





(5,133.75)
1,166.25


Retained earnings for Jamii on 1 November 2015 = 2,085 + (1,365 x 0.5) = 2,767.5

(b) Group statement of comprehensive income for the year ended 30 April 2016.


Working


W1


Depreciation of revalued PPE = 390 / 5 = 78

W2


Inter group sales
Bora →(6,000)Jamii

Unrealised profit(URP)
25 / 125 x 6,000 x 1 / 4 = 300

W3


Impairment loss for goodwill
25%(2,724 + 1,166.25) = 972.5


Jamii Group
Consolidated statement of comprehensive income for the year ended 30/4/2016

Revenue 102,180 + 52,800 - 6,000
Cost of sale 76,635+ 36,990 + 78 + 300 - 6,000
Gross profit
Investment income (584 + 60)
Expenses
Distribution expenses (12,810 + 7,260)
Administration expenses (7,779 + 4,815 + 972.5)
Finance cost (720 + 600)
Profit before tax
Income tax expense (1,530 + 1,125)
Profit after tax
Associate share of PAT 50% × 1,365 × 6 / 12
Total profit
Attributable to: Parent
NCI 20% (2,070 - 78 - 300)

 Sh. million
148,980.00
(108,003.00)
40,977.00
644.00

(20,070.00)
(13,566.50)
(1,320.00)
6,664.50
(2,655.00)
4,009.50
341.25
4,350.75
4,012.35
338.40
4,350.75


(c) Group statement of changes in equity for the year ended 30 April 2016.


Preparation of the equity statement for this scenario is not feasible due to the absence of information on the parent company's previous shares and share premium.

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QUESTION 5(a)

Q With reference to International Accounting Standard (IAS) 10 "Events After the Reporting Period", explain the following terms:

(i) Events after the reporting period.

(ii) Adjusting events.

(iii) Non-adjusting events.
A

Solution


(i) Events After the Reporting Period


Events after the reporting period, as defined by International Accounting Standard (IAS) 10, are those occurrences that take place between the end of the reporting period and the date when the financial statements are authorized for issuance. These events can be classified into two categories: adjusting events and non-adjusting events.

(ii) Adjusting Events


Adjusting events are events after the reporting period that provide additional evidence of conditions that existed at the end of the reporting period. If an entity identifies adjusting events, it must adjust the amounts recognized in its financial statements to reflect these new conditions. The financial statements are adjusted as if these events had occurred at the end of the reporting period.


(iii) Non-Adjusting Events


Non-adjusting events are events after the reporting period that are indicative of conditions that arose after the end of the reporting period. These events do not require adjustment of the financial statements but may require disclosure. The entity should disclose the nature of the non-adjusting events and, if practical, an estimate of their financial effect.

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QUESTION 5(b)

Q (i) Income statement for the year ended 31 March 2016.

(ii) Statement of financial position as at 31 March 2016
A

Solution


(i) Income statement for the year ended 31 March 2016.


Maendeleo Bank Ltd
Income statement for the year ended 31 March 2016
Interest income
Interest on loan and advances (16,790 + 1,284)
Other interest income
Interest on government securities
Interest received on deposit and placement
Interest expenses
Interest on customers deposit (10,616 + 896)
Other interest expense
Interest paid on deposit and placement
Net interest
Other incomes
Specific provision for doubtful debts (reduction)
Fees and commission income
Dividend income
Other expenses
Salaries and wages
Director's emoluments
Depreciation
Other operating expenses
Repair and maintenance
Printing and stationery
Bad debts written off
Additional provision for non-performing loans
Profit before tax
Tax expense
Profit after tax
Dividend
-Interim
-Proposed (5% of 20,000)
Retained earnings for the year		 Sh"000"





11,512
628
2,560






4,368
1,290
1,630
3,260
420
556
558
3,700




800
1,000

Sh"000"
18,074
860
9,536
7,600



(14,700)
21,370

5,500
1,528
816








(15,872)
13,432
(2,100)
11,332


(1,800)
9,532


(ii) Statement of financial position as at 31 March 2016


Maendeleo bank Ltd
Statement of financial position as at 31 March 2016
Assets
Cash and balances with central bank
Investment in securities
Government securities
Other assets
Deposit and placement due from other banks
Loans and advances to customer (135,310 - 3,700)
Interest on loan and advances receivable
PPE
Total assets
Equity and liabilities
Ordinary share capital
Revaluation reserve
Share premium
Retained earnings (4,960 + 9,532)
Non- current liabilities
Customer deposits
Deposits and placement due to other banks
Borrowed fund
Current liabilities
Miscellaneous accruals
Interest on customer deposit payables
Current tax
Proposed dividend
Total Equity and liabilities
 Sh. "000"
7,260
10,920
26,400
10,600
17,120
131,610
1,284
28,854
234,048

20,000
4,960
6,000
14,492

164,460
12,820
7,040

280
896
2,100
1,000
234,048



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