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CPA
Intermediate Leval
Financial Reporting November 2016
ANSWERS

Financial reporting & analysis
Revision Kit

QUESTION 1a

Q (i) In the context of the above statement, outline four factors to be considered in determining whether a public sector entity is a going concern.

(ii) With reference to IPSAS IE — Construction Contracts, summarise four disclosure requirements for public sector entities with regard to construction contracts.
A

Solution


Factors to Consider in Determining Whether a Public Sector Entity is a Going Concern:


  1. Financial Health and Liquidity

    Evaluate the entity's current financial position, including liquidity, solvency, and the ability to meet short-term and long-term obligations.

  2. Budgetary Controls

    Assess the effectiveness of budgetary controls and whether the entity can operate within its approved budget.

  3. Economic and Political Stability

    Consider the economic and political stability of the jurisdiction in which the public sector entity operates, as external factors can impact its financial stability.

  4. Funding Sources

    Examine the availability and reliability of funding sources, such as government appropriations, grants, and other revenue streams.

  5. Legal and Regulatory Compliance

    Ensure compliance with relevant laws and regulations that may affect the entity's ability to continue its operations.

  6. Contingent Liabilities

    Assess any contingent liabilities or risks that could adversely affect the entity's financial position.

  7. Service Delivery and Performance

    Evaluate the entity's ability to continue delivering essential public services and assess the performance of key programs.

  8. Management's Plans and Strategies

    Review management's plans and strategies for addressing any identified financial challenges or uncertainties.

  9. Stakeholder Communication

    Consider communication with stakeholders, including transparent reporting and disclosure of financial information.

  10. Future Revenue Streams

    Analyze the sustainability of future revenue streams and the entity's ability to adapt to changing economic conditions.

Disclosure Requirements for Public Sector Entities Regarding Construction Contracts:


The International Public Sector Accounting Standards (IPSAS) provide guidelines for disclosure requirements in IPSAS IE — Construction Contracts. Key disclosure requirements include:

  1. General Information

    Disclose general information about construction contracts, including the nature and scope of the contracts and the activities to be performed.

  2. Contract Revenue

    Disclose the amount of revenue recognized from construction contracts during the reporting period.

  3. Contract Costs

    Disclose the methods used to determine the stage of completion of contracts, the amount of costs incurred, and any recognized profits or losses.

  4. Recognized Contract Revenue and Costs

    Disclose the amount of revenue recognized and costs incurred for each significant category of construction contracts.

  5. Amounts Retained

    Disclose the amount of any retention by customers and the accounting policies for recognizing and measuring amounts retained.

  6. Amounts Received Before Revenue Recognition

    Disclose the existence and amounts of advances received and the accounting policies for recognizing and measuring such amounts.

  7. Performance Bonds

    Disclose the existence and amounts of performance bonds outstanding.

  8. Joint Arrangements

    Disclose the existence and nature of joint arrangements and the share of the results and net assets attributable to the entity.

  9. Significant Changes in Contract Work

    Disclose significant changes in the contract work or performance obligations and the reasons for such changes.

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QUESTION 1b

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

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

Solution


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


Hire purchase
The purchase price 34,000+(6,000 x 15)
Cash ptrice
Interest per Unit		 124,000
100,000
24,000


Furniture 10% x 3,200 = 320
Motor Vehicle 20% x 1,800 = 360


Calculations Total
June sales


Repossessed units



July


August

15 + 14 + 13
120
x 24,000 x 10

15 + 14
120
x 24,000 x 2

15 + 14
120
x 24,000 x 20

15
120
x 24,000 x 30

 84,000


11,600



116,000


90,000
301,600


Debtors account

Bal b/d
Interest receivables

Sh
5,030.0
301.6
5,331.6
Cash received
Bal c/d

Sh
120.0
5,211.6
5331.6


Repossession account

Cost
gain



 Sh
144,000
34,000


178,000
Revaluation
Cash received
Deposit(34,000 x 2)
Instalment(6 x 2)

 Sh
98,000

68,000
12,000
178,000


Digital Ltd
Income statement for the year ended 31 August 2016

Sales (27,200 - 200)
Cost of sales
Opening stock
Purchases 20,160 - (72 × 2)
Closing stock
Gross profit
Interest income
Repossession gain
Expenses
Distribution cost
Accumulation expenses
Depreciation (320 + 360)
Profit before tax
Income tax expense
Profit after tax
Dividend paid
Retained earnings for the year		 Sh"000"


1,440
20,016
(2,016)




800
1,000
680





 Sh"000"
27,000



(19,440)
7,560
301.6
34



(2,480)
5,415.6
(1,500)
3,915.6
(1,400)
2,515.6


(ii) Statement of financial position as at 31 August 2016.


Digital limited
Statement of financial position as at 31st August 2016
Non-current assets
Motor vehicle (1,800 - 360)
Fixtures and fitness (3,200 - 320)
Current assets
Inventory (2,016 + 98)
Receivable
Cash at bank
Cash at hand

Equity and liabilities
Ordinary share capital
Share premium
Retained profit (500 + 2,515.6)
Current liabilities
Tax liability
Accounts payable

 Sh. "000"
1,440
2,880

2,114
5,211.6
810
136
12,591.6

5,000
2,500
3,015.6.

1,500
576
12,591.6

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QUESTION 2(a)

Q Income statement for Peak Ltd. in a form suitable for pubtication for the year ended 31 October 2016.
A

Solution


Workings

Peak Ltd (Published)
10 Debenture interest 8% x 300 x 10/12 = 20
Cost of sales is 226.8 + 469.2 - 259.2 = 436.8

Amortization Schedule for Lease
Period
1
2		 Bal b/d
552
462
 Payment
132
132		 Bal due
420
330		 Interest
42
33		 Principal
90
99		 Bal c/d
462
363


Interest = 42

Depreciation = 552 + 0.2 = 110.4

Non - current liability (balance due) = 330

Current liability (payment) = 132

Plant depreciation: 15% (936 - 156) = 117

Land 400 → 600 gain of sh. 200

Building 1,200 - 360 - 840 → 1,050 gain of 210

Total gain (210 + 200) = 410

Depreciation on building 1,050 / 35 = 30

Tax expense
Current tax
Deferred tax(84.6 - 75)

169.8
9.6
179.4


W1

Adjustment for Cost of sales
Bal b/b
Deprecation 117 + 30 + 110.4

 436.8
257.4
694.2


W2

PPE
Land
Building (1,050 - 30)
Plant (936 - 156 - 117)
Leased plant(552 - 110.4)

 600
1,020
663
441.6
2,724.6




Peak Ltd
Statement of comprehensive income for the year ended 31" October 2016

Revenue
Cost of sales
Gross profit
Investment income
Expenses
Administration
Distribution expenses
Finance cost (20 + 42)
Profit before tax (PBT)
Tax expenses
Profit after tax
Revaluation gain
Net profit		 Sh"million"

694.2



33
60
62





 Sh."million"
1,670.4
(694.2)
976.2
27



(155)
848.2
(179.4)
668.8
410
1,078.8



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QUESTION 2b

Q Statement of changes in equity for the period ended 31 October 2016
A

Solution


Peak Ltd
Statement of changes in equity for the year ended 31 October 2016

Balance b/d
PAT
Revaluation
Dividend paid
Balance c/d		 Ordinary share
900



900		 Retained earnings
717
668.8

(90)
1,295.8		 Revaluation


410

410



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QUESTION 2(c)

Q Statement of financial position as at 31 October 2016
A

Solution


Peak Ltd
Statement of financial position as at 31" October 2016

Non-current assets
PPE
Investment
Current assets
Inventory
Receivables
Cash in hand

Equity and receivables
Ordinary share capital
Retained earnings
Revaluation
Non-current liabilities
8% debenture
Deferred tax
Lease obligation
Current liabilities
Current tax
Lease obligation
Account payables
Bank overdraft
Interest payable (20 - 12)


 Sh. Million
2,724.6
540

259.2
327.2
2
3,853

900
1,295.8
410

300
84.6
330

169.8
132
202.4
20.4
8
3,853



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QUESTION 3(a)

Q (i). Describe the provisions governing the initial measurement and subsequent measurement of financial instruments.

(ii). Explain the requirements for derecognition of financial instruments.
A

Solution


Provisions Governing the Initial Measurement and Subsequent Measurement of Financial Instruments:


  1. Initial Measurement:
    • Fair Value Measurement: Financial instruments are initially measured at fair value...
    • Transaction Costs: Transaction costs directly attributable to the acquisition or issue of a financial instrument are included in the initial measurement...

  2. Subsequent Measurement:
    • Fair Value Through Profit or Loss (FVTPL): Some financial instruments are measured at fair value through profit or loss...
    • Fair Value Through Other Comprehensive Income (FVOCI): Certain debt instruments are measured at fair value...
    • Amortized Cost: For financial assets measured at amortized cost (e.g., loans and receivables), subsequent measurement is at amortized cost...
    • Effective Interest Rate Method: The effective interest rate is the rate that discounts estimated future cash payments or receipts...

Requirements for Derecognition of Financial Instruments:


  1. Derecognition Criteria:
    • Transferred Rights to Receive Cash Flows: An entity derecognizes a financial asset when it transfers the contractual rights to receive cash flows from the asset...
    • Transferred Control of the Asset: For financial assets, the entity must also transfer control of the asset...
    • Significant Risks and Rewards: The entity derecognizes a financial asset when it transfers substantially all of the risks and rewards associated with the asset...
    • Continued Involvement: If the entity has neither transferred nor retained substantially all the risks and rewards, but has retained control, it continues to recognize the financial asset...

  2. Derecognition of Liabilities:
    • Extinguishment of the Liability: A financial liability is derecognized when it is extinguished...
    • Modification of Terms: If the terms of a financial liability are substantially modified, it is derecognized...

  3. Derecognition Process:
    • When a financial instrument is derecognized, any gain or loss on derecognition is generally recognized in the profit or loss statement...
    • The difference between the carrying amount of the financial instrument derecognized and the consideration received or paid is recognized as a gain or loss...


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QUESTION 3(b)

Q (i). Income statement fòr the year ended 31 October 2016.

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

Solution


(i). Income statement fòr the year ended 31 October 2016.


Magari Insurance
income statement for the year ended 31 October 2016

Gross premium (139,124 + 400,000)
Unearned premium reserves bal b/d
Reinsurance commission receivable (4 + 16)
Less: reinsurance premium ceded (92 + 88)
Net premium
Investment income
Total revenue
Expenses
Gross claims paid
Less: reinsurance claims paid
Less: claims balance b/d
Add: claim balance c/d (90 + 158)
Add: reinsurance share balance b/d
Net claims
Gross profit
Less: legal fees on claim settlements
Add: sale of salvaged vehicle
Less: reinsurance share of salvage
Premium acquisition cost
Other operating expenses
Commission payable
Depreciation expenses
Profit for the year
Tax expense
Profit after tax		 Sh. "000"








381,784
(200,000)
(240,000)
248,000
16,000



26,000
(4,000)







 Sh. "000"
539,124
40,000
20,000
(180,000)
419,124
89,564
508,688






(205,784)
302,904
(81,690)

22,000
(12,000)
(101,424)
(30,404)
(40,000)
59,386
(28,000)
31,386


(ii) Statement of financial position as at 31 October 2016.


Magari Ltd
Statement of financial position as at 31 October 2016
Assets
Non-current assets
PPE
Investment
Current assets
Receivables arising from direct insurance
Total assets
Equity and liabilities
Ordinary share capital
Retained earnings (65,000 + 31,386)
Liabilities
Claims payable (90 + 158)
Payables to reinsurance arrangements
Bank overdraft
Taxation
Total Equity and liabilities 		Sh."000"

495,600
79,846

8,940
584,386

200,000
96,386

248,000
6,000
6,000
28,000
584,386



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QUESTION 4

Q Group statement of financial position as at 30 September 2016
A

Solution


Workings

Note1



Investment in debenture = 1 / 2 x 200 = 100

Interest on debenture = 10% x 100 = 10

Note 2

Revaluation

Equipment 290 - 250 = 40
depreciation is 40 / 10 = 4 × 2 = 8

Patent = 160 - 150 = 10
amortization 10 / 5 = 2 × 2 = 4

Note 3:

Intergroup sale of asset(180)

A to B

profit= 20 / 120 x 180 = 30

Depreciation 20% x 30 = 6

Note 4:

Inter group sales(150)

B to A

50 / 150 x 150 x 1 / 2 = 25

Note 5:

Inter group balances

Dr. payables 80
Dr. cash in transit 20
Cr: receivables 100

W1

Goodwill
Purchase consideration
Fair value
Less: Net asset acquired
Ordinary share capital
Share premium
Retained earnings (pre-acquisition)
Revaluation (40+10)
Goodwill


200
100
150
50

 480
120




(500)
100


W2

Investment in C Associate
Purchase consideration
Add: post acquisition changes in net asset
Retained earnings: 30% (250 - 100)
Dividend receivable 30% x 50

 120

45
15
180


W3

Retained earnings
Parent R.E (400 - 30)
Add: investee share of post-acquisition retained earning
B Ltd = 80% (350 - 150 + 6 - 8 - 4 - 25)
C Ltd: 30%(250 - 100)
Dividend receivable (100 × 80%) + (30% × 50)

 370.0

135.2
45.0
95.0
645.2


W4

Non-controlling interest
Ordinary share capital
Share premium
Retained earnings (350 + 6 - 8 - 4 - 25)
Revaluation (40 + 10)


Add: NCI goodwill = 120 - (120 - (20% x 500))

 200.0
100.0
319.0
50.0
669.0
669 x 20% = 133.8
20.0
153.8


A Group
Consolidated statement of financial position as at 30 September 2016
Assets
Non-current assets
PPE (950 + 750 + 40 - 8 + 6 - 30)
Investment (700 - 100 - 480 - 120)
Intangible asset (200 + 150 + 10 - 4)
Goodwill
Investment in C
Current assets
Inventories (250 + 200 - 25)
Trade receivables (220 + 170 - 100)
Financial asset at fair value (180 + 130)
Cash and bank balance (100 + 50 + 20)

Equity and liabilities
Ordinary share capital
Share premium
Retained earnings
NCI
Non-current liabilities
10% debenture (600 + 200 - 100)
Deferred tax (250 + 100)
Current liabilities
Trade payables (300 + 250 - 80)
Current tax (250 + 150)
Proposed dividend (100 + 100 - 80)

Sh.Million

1,708
0
356
100
180

425
290
310
170
3,539

500
200
645.2
153.8

700
350

470
400
120
3,539




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QUESTION 5(a)

Q Statement showing how the proceeds of the dissolution would be shared among the partners using maximum possible loss method.
A

Solution


Cash Distribution Schedule
Date

20/6/2016

21/7/2016








18/8/2016






 Details
Cash balance b/d
Add: Realization
Less: Trade payables
Add: Realization 2.
Less: Bank overdraft
Less: Loan - Ali
Less: Dissolution expenses
Cash balance
Capital balance b/d
Minimum possible loss
Distribution 1
Capital balance
Less:Realization 3
Maximum loss
Distribution 2
Capital balance
Less:Realization 4
Maximum loss
Distribution 3		 Amount
80
30,000
(28,000)
125,000
(64,180)
(10,000)
(1,000)
51,900
(135,000)
(83,100)
↓
83,100
(34,000)
49,100
↓
49,100
(39,000)
10,100

 Ali








70,000
(33,240)
36,760
33,240

(19,640)
13,600
19,640

4,040
15,600		 Baba








45,000
(33,240)
11,760
33,240

(19,640)
13,600
19,640

4,040
15,600		 Chake








20,000
(16,260)
3,380
16,620

(9,820)
6,800
9,820

2,020
7,800



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QUESTION 5(b)

Q Realisation account.
A

Solution


Realization account
Freehold lands and building
Plant and machinery
Fixtures and fittings
Motor vehicles
Intangible assets
Inventory
Trade receivable
Dissolution expenses
Insurance premium


 75,000
38,600
8,500
4,000
50,000
32,000
29,500
1,000
20,000

258,600		 Discount received
Bank / realization
20 June 2016
21 July 2016
18 August 2016
25 October 2016
Realization loss of 30,100
Ali 2 / 5 x 30,100
Baba 2 / 5 x 30,100
Chake 1 / 5 x 30,100

 500

30,000
125,000
34,000
39,000

12,040
12,040
6,020
258,600



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QUESTION 5(c)

Q Capital accounts.
A

Solution


Partners capital account

Realization loss
Distribution
1
2
3
 Ali
12,040

36,760
13,600
15,600		 Baba
12,040

11,760
13,600
15,600		 Chake
6,020

3,380
6,800
7,800
Bal b/d
Current a/c
Insurance


 Ali
50,000
20,000
8,000


 Beba
30,000
15,000
8,000


 Chake
20,000

4,000
78,000 53,000 24,000 78,000 53,000 24,000



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