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CPA
Intermediate Leval
Financial Reporting May 2017
ANSWERS

Financial reporting & analysis
Revision Kit

QUESTION 1(a)

Q With reference to International Public Sector Accounting Standard (IPSAS) 14-Events After the Balance Sheet Date:

(i) Describe the two categories of events after the balance sheet date.

(ii) Explain two disclosure requirements for each category of events identified in (a) (i) above.
A

Solution


Two Categories of Events After the Balance Sheet Date:

a. Adjusting Events:

These are events that provide further evidence of conditions that existed at the end of the reporting period.

Adjusting events require adjustments to the financial statements to reflect the new information.

Examples include the resolution of a lawsuit or the determination of the fair value of an asset at the reporting date.

b. Non-adjusting Events:

These are events that are indicative of conditions that arose after the reporting period.

Non-adjusting events do not require adjustments to the financial statements but may require disclosure.

Examples include a business combination, major restructuring, or a natural disaster occurring after the reporting date.

Disclosure Requirements:

a. Adjusting Events (i):

For adjusting events, the financial statements should be adjusted to reflect the new information.

There is no specific disclosure requirement for adjusting events because they are reflected in the financial statements.

b. Non-adjusting Events (i):

For non-adjusting events, the entity is required to disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made.

If it is not practicable to estimate the financial effect, that fact should be disclosed.

If an entity concludes that a non-adjusting event is not material, it does not need to be disclosed.

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QUESTION 1b

Q In the context of International Accounting Standard (IAS) 40-Investment Property:

(i) Define an "investment property", citing two examples.

(ii) Identify two types of property that are specifically not considered as investment property.

(iii) Discuss the fair value model as applied in the valuation of investment property.
A

Solution


IAS 40 - Investment Property


(i) Definition of "Investment Property" with Examples:


According to IAS 40, an "investment property" is defined as property (land or a building, or part of a building, or both) held to earn rentals or for capital appreciation or both, rather than for:

  • Use in the production or supply of goods or services or for administrative purposes; or
  • Sale in the ordinary course of business.

Examples of investment property include commercial buildings, residential properties held for rental income, and vacant land held for capital appreciation.


(ii) Types of Property Not Considered as Investment Property:


Properties that are specifically not considered as investment property under IAS 40 include:


  • Properties held for use in the production or supply of goods or services or for administrative purposes.
  • Properties held for sale in the ordinary course of business.
  • Properties that are being constructed or developed for future use as investment property.

(iii) Fair Value Model in the Valuation of Investment Property:


The fair value model, as applied in the valuation of investment property, requires that the property be measured at fair value at each reporting date. The key points regarding the fair value model include:


  • Changes in fair value are recognized in the profit or loss for the period.
  • Fair value is determined based on active market prices, if available. If there is no active market, the entity uses valuation techniques to determine fair value.
  • Gains or losses arising from changes in fair value are not considered as changes in accounting estimates and are recognized as income or expenses in the period in which they arise.

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QUESTION 2(a)

Q Realisation account.
A

Solution


W1

Purchase consideration

Ordinary shares Sh.10 x 15,000
Premium Shares(24% x 150,000)

"Sh.000"
150,000
36,000
186,000

Realization accounts
Equipment (20 - 8)
Motor vehicle (55 - 25)
Cash and bank
Prepayments
Inventory
Receivable
Premises
Conversion cost
Realization gain(bal): 34,000
:- Diva -
:-Vunia

 12,000
30,000
21,000
3,000
70,000
45,000
100,000
3,000

25,500
8,500
318,000		 Accruals
Payables
Asset taken over
Purchase consideration:








9,000
118,000
5,000
186,000







318,000



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QUESTION 2(b)

Q Partners' capital accounts.
A

Solution


W1

Trade payables and Accruals balance(To be paid by partners)
Trade payables(118,000 - 80,000)
Accrualse balance (9,000 - 10,000)

38,000
(1,000)
37,000

To be shared using Garner v Murray rule.

In the case of a partner's insolvency, any losses should be distributed based on the proportions of their most recently agreed-upon capital balances before the dissolution occurred. This principle is commonly referred to as the Garner v Murray rule.

D → 28,025

V → 8,975

W2

Interest on capital

D → 15% x 20,000 = 3,000

V → 15% x 30,000 = 4,500

W3

Interest on drawings

D → 10% x 15,000 x 6 / 12 = 750

V → 10% x 10,000 x 3 / 12 = 250

W4
Appropriation account for net profit
Net profit
Add: interest on drawing (750 + 250)
Less: Interest on capital (3,000 + 4500)
Adjusted profit
149,000
1,000
(7,500)
142,500


Share:
Dida = 3 / 4 x 142,500 = 106,875
Vuma = 1 / 4 x 142,500 = 35,625

Partners capital account
Dida Vuma Dida Vuma
Drawings
Motor vehicle
Interest on drawing.
Payables & Accruals
Purchase consideration (shares)		 15,000

750
28,025
111,600		 10,000
5,000
250
8,975
74,400		 Bal b/d
Salary
Interest on capital
Net profit share
Realisation gain		 20,000

3,000
106,875
25,500		 30,000
20,000
4,500
35,625
8,500
155,375 98,625 155,375 98,625

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QUESTION 2(c)

Q Statement of financial position of Fariji Ltd. as at 2 May 2017
A

Solution


W1

Goodwill = 186,000 - (50,000 + 18,000 + 10,000 + 95,000 + 63,000 - 80,000 - 10,000)

186,000 - 146,000 = 40,000



Fariji Itd
Statement of financial position as at 2 May 2017
Assets
Non current asset
Premises
Motor vehicle
Equipment
Goodwill (W2)
Current assets
Receivable 100,000×95%
Inventory 70,000×90%

Equity & liabilities
Ordinary share capital 15,000×10
Share premium 15,000×2.4
Liabilities
Trade payables
Accruals

 Sh 000

50,000
18,000
10,000
40,000

95000
63,000
276,000

150,000
36,000

80,000
10.000
276,000

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QUESTION 3(a)

Q Statement of comprehensive income for the year ended 31 March 2017.
A

Solution


workings

Note1

Revaluation
Land
Building

40,000
80,000 - 40,000 = 40,000

→ 24,000
→ 70,000
Net gain		 (16,000)
30,000
14,000


Depreciation of building = 70,000 / 14 = 5,000

Note2

Depreciation on plant = 20%(189,000 - 49,000) = 28,000

Note3

Provision for Directors remuniration

Expenses
Current tax
Deferred tax(18,800 - 12,400)

11,000


54,400
6,400
60,800


Note 4:

Rights issue
10,000 / 4 = 2,500

Dr: Cash 2,500 × 24 = 60,000
Cr. Ordinary share 2,500 x 10 = 25,000
Cr: Share premium 2,500 × 14 = 35,000

Adjustment for administration expenses
Balance b/d
Deprecation (5,000 + 28,000)
Provision for directors remuneration



PPE
Land
Building 70 - 5,000
Plant and equipment (189,000 - 49,000 - 28,000)

 61,800
33,000
11,000
105,800



24,000
65,000
112,000
201,000


Apple Ltd
Statement of comprehensive income for the year ended 31 march 2017

Revenue
Cost of sales
Gross profit
Expenses
Administrative expenses
Distribution expenses
Finance cost
Profit before tax
Tax expense
Profit after tax
Other comprehensive income
Revaluation
Total comprehensive income		 Sh 000
1,100,000
(823,000)
277,000

(105,800)
(43,000)
(1,400)
126,800
(60,800)
66,000

14,000
80,000

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QUESTION 3(b)

Q Statement of changes in equity as at 31 March 2017.
A

Solution


Apple Ltd
Statements of changes in Equity for the year ended 31 March 2017
Ordinary Share Share premium Retained earnings Revaluation Total
Balance b/d
Issue of share
Total income
Dividend paid
Balance c/d		 100,000
25,000


125,000		 40,000
35,000


75,000		 22,400

66,000
(40,000)
48,400

14,000

14,000

80,000

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QUESTION 3(c)

Q Statement of financial position as at 31 March 2017.
A

Solution


Apple Ltd
Statement of financial position as at 31st March 2017
Non-current asset
PPE
Current asset
Cash
Inventory
Receivables
Total
Equity & Liabilities
Ordinary share capital
Share premium
Retained Earnings
Revaluation reserve
Deferred tax
Current liabilities
Current tax 54,400 + 2,400
Trade payables
Bank balance
Directors remuneration payable

 Sh"000"
201,000

60,000
87,400
84,400
432,800

125,000
75,000
48,400
14,000
18,800

56,800
70,200
13,600
11,000
432,800

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QUESTION 4(a)

Q Consolidated income statement for the year ended 30 April 2017
A

Solution


Workings

Note1



Note 2:

Loan investment 200 x 1 / 5 = 100
Dr: 10% loan stock -100
Cr: Investment -100

Interest on loan 10% x 100 = 10
Dr: Investment income -10
Cr: Finance cost -10

Note 3:

Inter group sales:

100 → Hema to shuka URP = 25 / 100 x 100 × 50% = 10

Dr: cost of sales +10
Cr: inventory -10

50 → Hema to Ajabu URP = 25 / 125 x 50 x 0 = 0

Inter group sale of fixed asset:
200 →Hema to Shuka :Profit 25 / 125 x 200 = 40

:Overcharged depreciation 20% x 40 = 8

Note 6:

Inter group balances 50

W1

Goodwill
Shuka Ajabu
Purchase consideration
Fair value of NCI
Less: net asset acquired
Ordinary share capital
Share premium
Revelation reserve
Retained earning


200
50
20
80
 300
75





(350)


200

25
150
425x40%		 200






(170)
Goodwill 25 30


Impairment loss = 60%(25 + 30) = 33 × 20% = 6.6 to P&L

NCL goodwill = 75 - (20% x 350) = 5

Loss for NCI = 60% x 5 = 3 × 20% = 0.6

Investment income = 70 - (50 × 80% + 30 x 40%) - 10 = 8

W2

Investment in Associate
Cost of investment
Add: Post acquisition changes in net asset
Retained earnings 40%(200 - 150)
Revaluation 40% x (50 - 25)

200

20
10
230


W3

Revaluation reserve
200 + 80%(50 - 20) + 40%(50 - 25) = 234

W4

Retained earnings
Parent retained earnings 710 - 10 - 40
Add:investee share of post acquisition RE
Shuka: 80% (375 - 80 + 8)
Ajabu: 40%(200 - 150)

660.0

242.4
20.0
922.4


W4

NCI
Shuka = 20%(200 + 50 + 50 + 375 + 8)
Goodwill = 5 - 3

136.6
2.0
138.6


Hema group
Consolidated income statement for the year ended 30 April 2017

Revenue 1200 + 600 - 100
Cost of sales 650 + 250 + 10 + 40 - 8 - 100
Gross profit
Investment Income
Distribution cost (100 + 40)
Administrative expense 130 + 90
Finance cost 40 + 20 - 10
Impairment of goodwill
Profit before tax
Income tax expense (70 + 50)
P.A.T
Add: Share of associate PAT = 40% × 70
Total income
Attributable to :- NCI: 20%(150 + 8) - 0.6
:- Parent

 Sh millions
1,700.0
(842.0)
858.0
8.0
(140.0)
(220.0)
(50.0)
(6.6)
449.4
(120.0)
329.4
28.0
357.4
31.0
326.4
357.4


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QUESTION 4(b)

Q Statement of changes in equity for the year ended 30 April 2017.
A

Solution


Hema Group
Statement of changes in equity for the year ended 30 April 2017.
Share capital Share premium Reatained earnings reserves NCI
Balance b/d
Profit for the year
Dividend paid
Inter group transactions
post-acquisition RE
post-acquisition Reserves
NCI share
Goodwill		 1,000







 300







480
280
(50)
(50)
262.4



 200




34





136.6
2
1,000 300 922.4 234 138.6

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QUESTION 4(c)

Q Consolidated statement of financial position as at 30 April 2017
A

Solution


Hema Group
Consolidated statement of financial position as at 30th April 2017.
Asset
Non current Assets
PPE 1,250 + 800 + 8 - 40
Intangible assets = 200 + 70
Goodwill 25 + 30 - 33
Investment in Associate (W2)
Investment 850 + 50 - 100 - 300 - 200
Current Assets
Inventory 200 + 75 - 10
Trade receivables 300 + 90 - 50
Financial asset at fair value 30 + 20
Cash and cash equivalent 150 + 40

Equity and liabilities
Ordinary share capital
Share premium
Revaluation reserve W3
Retained profit W4
NCI
Non-current liabilities
10% loan stock = 500 + 200 - 100
Current liabilities
trade and other payable 250 + 250 - 50
Current tax (20 + 20)

 shs million

2,018.0
270.0
22.0
230.0
300.0

265.0
340.0
50.0
190.0
3,685.0

1,000.0
300.0
234.0
922.4
138.6

600.0

450.0
40.0
3,685.0


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QUESTION 5(a)

Q Distinguish between "value based" and "cost based" method in determining the stage of completion of a construction contract.
A

Solution


Distinguishing Between Value-Based and Cost-Based Methods


In the context of construction contracts, determining the stage of completion is crucial for recognizing revenue and reporting financial information accurately. Two common methods used for this purpose are the "value-based" method and the "cost-based" method. Let's distinguish between these two approaches:

1. Value-Based Method:


  • Focus on Output/Progress: The value-based method assesses the stage of completion based on the value of work performed or the output achieved.
  • Consideration of Deliverables: The emphasis is on the actual outcomes or deliverables of the construction project.
  • Applicability: This method is often used in situations where the achievement of milestones is a more accurate reflection of the progress of the project.
  • Example: If a construction project involves building several floors of a building, the value-based method might consider the percentage of total building height completed or the completion of specific architectural features.

2. Cost-Based Method:


  • Focus on Input/Costs Incurred: The cost-based method determines the stage of completion by assessing the costs incurred on the project.
  • Emphasis on Effort and Resources: This method focuses on the resources, effort, and costs invested in the project.
  • Applicability: The cost-based method is often applied when the relationship between costs incurred and the progress of the project is more straightforward.
  • Example: If a construction project involves a series of tasks with predictable costs, such as laying a foundation, framing, and roofing, the cost-based method might assess progress based on the cumulative costs incurred for each task.

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QUESTION 5(b)

Q (i). Revenue account for both marine insurance and fire insurance for the year ended 31 March 2017.

(ii). Statement of comprehensive income for the year ended 31 March 2017.

(iii). Statement of financial position as at 31 March 2017.
A

Solution


(i). Revenue account for both marine insurance and fire insurance for the year ended 31 March 2017.

Malipo insurance ltd
Revenue account for the year ended 31 March 2017
Marine Fire Marine Fire
Claims paid
Add: claims payable bal c/d
Less: claims balance b/d
Add: claims expenses
Net claims
Commission accepted (5% x 1440) (5% × 960)
Management expenses
Bad debt written off
Legal cost
Unearned premium bal c/d
Gain (Balancing figure)

2,964
900
(960)
384
3,288
72
780
204
216
6,600
1,248
12,408		 2160
576
(648)

2,088
48
696
144
156
2,280
2,178
7,590		 Premium received
Premium bal c/d
Less: premium bal b/d
Add: Reinsurance received
Less: Reinsurance premium paid
Net premium
Unearned premium bal b/d
Commission earned (5% x 960) (5% x 600)




 5,400
1,800
(1,080)
1,440
(960)
6,600
5,760
48



12,408		 4,200
840
(840)
960
(600)
4,560
3,000
30



7,590


(ii) Statement of comprehensive income for the year ended 31 March 2017.

Malipo insurance ltd
Statement of comprehensive income for year ended 31 month of 2017

Revenue - marine
Fire
Investment income
Expenses
Audit fee
Directors fee
Depreciation
Profit before tax
Tax expense = 30% × 1,794
Less: Dividend 5% × 3,600
Returned earnings




288
594
1,086




 Sh.Million
1,248
2,178
336



(1,968)
1,794
(538.2)
(180)
1075.8



(iii) Statement of financial position as at 31 March 2017.

Malipo insurance ltd.
Statement of financial position as 31 march 2017
Non-current asset
Free hold property
Motor vehicle
Machinery & equipment
Furniture
Investment in shares
Current assets
Bank balance and cash
Account receivable
Premiums receivable bal c/d 1,800 + 840
Commission Ceded (48 + 30)

Equity and liabilities
Ordinary share capital
Share premium
Retained profit 540 + 1,075.8
Unearned premium reserve 2,280 + 6,600
Liabilities
Claims payables bal c/d 900 + 576
Commission accepted 72 + 48
Trade payables
Current tax.
Proposed dividend

 Sh "million".
5,040
4,200
1,800
1,560
1,680

132
876
2,640
78
18,006

3,600
1,200
1,615.8
8,880

1,476
120
396
538.2
180
18,006



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