Preparation of Financial Statements for other entities

April 2025

3 Questions

Question 4

Collin Limited, a private limited company, has experienced dwindling sales in the recent years largely due to stiff competition.

The company directors, who are also the main shareholders would like to transfer the assets and liabilities of Collin Limited to a newly formed company, Tobin Limited with effect from 1 April 2025.

The following is the latest statement of financial position of Collin Limited as at 31 March 2025:

Assets	Sh.“000”	Sh.“000”
Non-current assets:
Land and buildings		48,500
Plant and machinery		27,115
Motor vehicles		9,940
Furniture and equipment		4,260
		89,815
Current assets:
Inventories	10,550
Accounts receivable	7,370	17,920
Total assets		107,735
Equity and liabilities:
Equity:
Ordinary shares of Sh.10 each		80,000
12% redeemable preference shares of Sh.10 each		45,000
Share premium		4,000
Retained earnings (losses)		(41,760)
Total equity		87,240
Current liabilities:
Accounts payable	16,605
Bank overdraft	3,890	20,495
Total equity and liabilities		107,735

Additional information:

1.	The authorised share capital of Tobin Limited is Sh.100 million comprising of ordinary shares of Sh.10 par value.
2.	Tobin Limited issued new ordinary shares in favour of the preference shareholders in Collin Limited on the basis of three (3) new ordinary shares for every five (5) preference shares held. These ordinary shares were credited at Sh.6 each and the preference shareholders in Collin Limited agreed to pay up the balance immediately to make their ordinary shares fully paid.
3.	Preference dividends in Collin Limited were two years in arrears and the new company issued 540,000 fully paid ordinary shares of Sh.10 each as final settlement of the arrears.
4.	Tobin Limited also issued new ordinary shares in favour of the ordinary shareholders in Collin Limited on the basis of two (2) new ordinary shares for every five (5) ordinary shares held. These ordinary shares were credited at Sh.4 each and the ordinary shareholders in Collin Limited committed to pay up the balance immediately to make their ordinary shares fully paid.
5.	The assets of Collin Limited were transferred to the new company at the following fair values:

		Sh.“000”
	Land and buildings	52,400
	Plant and machinery	22,220
	Motor vehicles	7,170
	Furniture and equipment	3,320
	Inventories	10,130
	Accounts receivable	6,830
6.	The current liabilities were taken over by Tobin Limited at their book values.

7.	Liquidation expenses of Collin Limited amounted to Sh.12,800,000 and were paid for by Tobin Limited.
8.	Assume all the transactions were completed by the close of business on 1 April 2025.

Required:

(a)	The following ledger entries to close off the books of Collin Limited:
	(i)	Realisation account.
	(ii)	Preference shareholders sundry members account.
	(iii)	Ordinary shareholders sundry members account.

(b)	Journal entries in the books of Tobin Limited to record the acquisition of Collin Limited. (Narrations not required).
(c)	Opening statement of financial position as at 1 April 2025.

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Question 5a

The following financial information as at 31 December 2024 relates to Uwezo Bank Limited:

	Sh.“million”
Interest on loans and advances to customers	1,550
Interest on deposits with other banks	472
Interest on deposits from other banks	287
Interest on customer deposits	1,383
Interest on long term borrowings	386
Interest on government securities	501
Other interest income	200
Other interest expenses	204
Fees, commission and foreign exchange gain	3,350
Administrative expenses	1,469
Other operating expenses	1,396
Ordinary share capital	5,500
Share premium	2,800
Revaluation reserve	440
Retained profit as at 1 January 2024	2,738
Loan loss reserve	3,750
Loans and advances to customers	7,980
Customer deposits	6,640
Long term borrowings	3,510
Cash and balances with Central Bank	3,190
Money on demand and short term deposits	1,978
Deposits with other commercial banks	3,772
Deposits from other commercial banks	2,392
Equity investments	726
Investments in government securities	3,856
Property and equipment	5,042
Intangible assets	2,592
Other receivables	1,994
Other payables	2,037
Deferred tax	385
Current tax payable	232
Income tax expense	302
Gain on equity investments	60

Required:

(i) Statement of profit or loss for the year ended 31 December 2024.

(ii) Statement of financial position as at 31 December 2024.

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Question 1d

In view of the International Financial Reporting Standard (IFRS) 5 “Non-current Assets Held for Sale and Discontinued Operations”, analyse the presentation and disclosure requirements for discontinued operations.

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December 2024

1 Questions

Question 1c

An entity may determine that a fair value may not be achieved by compliance with International Financial Reporting Standards (IFRSs). If compliance would be misleading, departure from the requirements of a standard is permitted. However, this is extremely rare.

Required:

Describe FOUR disclosure requirements in relation to the departure in order to achieve fair presentation.

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April 2024

1 Questions

Question 1a

The International Financial Reporting Standard (IFRS) for SMEs Accounting Standard offers relief from compliance with full IFRS Accounting Standards. It provides an alternative framework which can be applied by eligible entities in place of the full IFRS Accounting Standards.

Required:

Explain FOUR objectives of the IFRS for SMEs Accounting Standard.

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December 2023

1 Questions

Question 5

For a number of years now, A Ltd. has been reporting operating losses, principally due to competition from firms operating in the same sector. A Ltd. is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch a new product. Technical experts have indicated that the new product will do well in the market once it is launched.

The statement of financial position of A Ltd. as at 31 October 2023 is as follows:

	Sh.“million”	Sh.“million”
Assets:
Non-current assets:
Tangible assets		5,000
Financial instruments		1,000
Current assets		4,125
Total assets		10,125
Equity and liabilities:
Equity:
Ordinary share capital (Sh.1 par value)		4,000
20% cumulative preference share capital (Sh.1 par value)		1,500
Retained earnings		(2,918)
		2,582
Non-current liabilities:
20% bonds		750
Current liabilities:
Trade payables	1,968
Bank overdraft (secured on tangible assets)	3,900
Loan from finance institution	925	6,793
Total equity and liabilities		10,125

Additional information:

1.	Preference dividends have been in arrears for three years.
2.	The retained earnings balance is to be eliminated.
3.	The following details relate to the assets: Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of Sh.720 million in full settlement of the debt and the remaining book value of these assets marked up to 110%. Inventories include obsolete items worth Sh.540 million below their book value of Sh.680 million. A bond investment (having 10 months to maturity date) is to be revised to Sh.280 million from its carrying value of Sh.370 million. Receivables with a carrying value of Sh.1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor. One customer who owes Sh.828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
4.	The bank has demanded repayment of the bank overdraft, while the finance institution has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, the finance institution is ready to immediately buy 15% Sh.900 million debentures in the reconstructed entity’s debts provided that the directors will attach the right to convert the debt into shares at maturity. The finance institution will also require 10% discount on the convertible debt at issue and repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7% and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
5.	Existing ordinary shareholders are prepared to inject Sh.4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance new production equipment whose estimated fair value is Sh.1,350 million. Each of these shares currently has a value of Sh.5.
6.	Half of the trade payables (suppliers) have agreed to be paid using ordinary shares in the reconstructed firm.
7.	The directors have projected annual profit before interest and tax in the reconstructed entity to be Sh.650 million.
8.	A firm order has been received from BB Ltd., a competitor, to buy all the business assets for Sh.7,200 million. 60% of these proceeds related to tangible assets. Closure costs are estimated at Sh.50 million.
9.	Assume a discount rate of 15%, unless a different rate is more appropriate.
10.	The present value of Sh.1 receivable at the end of the year for different discount rates is provided below:

10.	Year	Discount Rate
		10%	15%	18.7%	22.5%
	1	0.91	0.87	0.84	0.82
	2	0.83	0.76	0.71	0.67
	3	0.75	0.66	0.60	0.54

Required:

Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.

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April 2023

1 Questions

Question 1

Zura Limited, a private limited company which operates in the textile industry, has been in financial distress and has been reporting trading losses in recent years.

The company’s latest statement of financial position as at 31 July 2022 was as shown below:

	Sh.“000”	Sh.“000”
Assets:
Non-current assets:
Freehold property		48,550
Plant and equipment		14,175
Motor vehicles		7,075
Fixtures and fittings		4,725
Goodwill		4,375
		78,900
Current assets:
Inventories	11,825
Accounts receivable	3,175	15,000
Total assets		93,900
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)		50,000
Share premium		10,500
Retained earnings (losses)		(29,550)
Total equity		30,950
Non-current liability:
15% loan notes		40,000
Current liabilities:
Accounts payable	17,500
Bank overdraft	3,950
Accrued loan notes interest	1,500	22,950
Total equity and liabilities		93,900

The board of directors of Zura Limited, which also comprises the main shareholders, have proposed a scheme of internal financial reconstruction with effect from 1 August 2022, under the following terms:

1.	The existing ordinary shares are to be reduced to Sh.2.5 per share. The current shareholders are to fully subscribe for a new issue of ordinary shares of Sh.2.5 each at par value, on the basis of four (4) new shares for every five (5) shares held.
2.	The loan notes holders agreed to lower their interest rate to 12% per annum on condition that the accrued interest would be paid immediately.
3.	The outstanding accounts payable accepted 6.4 million ordinary shares of Sh.2.5 each in full settlement of the amounts due.
4.	The bank overdraft is to be repaid immediately.
5.	The share premium account is to be utilised for the purpose of capital reduction.
6.	The balances in the retained earnings (losses) and goodwill accounts are to be written off.

7.	The following assets are to be adjusted to their fair values as follows:
		Sh.“000”
	Freehold property	49,050
	Plant and equipment	9,505
	Motor vehicles	5,360
	Fixtures and fittings	3,780
	Inventories	10,050
	Accounts receivable	2,925

8.	Reconstruction costs of Sh.4 million are expected to be incurred and paid.
Required:
(a)	Journal entries to effect the scheme of internal reconstruction.
(b)	Capital reduction account as at 31 July 2022.
(c)	Statement of financial position as at 1 August 2022 (immediately after the scheme of internal reconstruction).

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December 2022

1 Questions

Question 5

Tahidi Limited, a private limited company, has been in financial difficulties and has reported trading losses for a number of years. The directors of the company invited the shareholders and creditors for a special general meeting where it was resolved that the operations of Tahidi Limited be transferred to a newly formed company, Sitawi Limited, with effect from 1 August 2022.

The latest statement of financial position of Tahidi Limited as at 31 July 2022 was as follows:

	Sh. “000”	Sh. “000”
Assets:
Non-current assets:
Property, plant and equipment		31,750
Intangible assets (brand)		4,800
		36,550
Current assets:
Inventories	4,310
Accounts receivable	3,840	8,150
Total assets		44,700
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)		20,000
10% irredeemable preference share capital (Sh.10 par value)		10,000
Share premium		2,000
Retained earnings (losses)		(5,890)
Total Equity		26,110
Non-Current liabilities:
12% bonds		12,500
Current liabilities:
Accounts payable	3,090
Accrued interest on bonds	750
Bank overdraft	2,250	6,090
Total equity and liabilities		44,700

Additional information:

1.	The newly formed company’s authorised share capital comprised five (5) million ordinary shares of Sh.10 par value each.
2.	Sitawi Limited issued four (4) new ordinary shares of Sh.10 each credited at Sh.5 each for every two (2) preference shares held in Tahidi Limited. The preference shareholders agreed to immediately pay the balance on the shares allotted.
3.	Preference dividends in Tahidi Limited were two years in arrears. Half of the preference dividend arrears were settled by issue of fully paid ordinary shares Sh.10 each in Sitawi Limited.
4.	The new company also issued three (3) new ordinary shares of Sh.10 each credited at Sh. 5 each for every five (5) ordinary shares held in Tahidi Limited. The ordinary shareholders agreed to immediately pay the balance on the shares allotted.
5.	The bond holders in Tahidi Limited agreed to be transferred to the new company on condition that the bonds would be convertible into ordinary shares after three years. The coupon interest rate for the convertible bonds was to be 8% per annum. Similar bonds with no conversion rights attracted interest at the rate of 10% per annum. Accrued interest on the bonds was to be paid immediately upon taking over.
6.	The current liabilities of Tahidi Limited were transferred to Sitawi Limited at their book values.
7.	The brand was considered valueless and therefore written off.

8.	The tangible assets were taken over by Sitawi Limited at their fair values as follows:
		Sh.“000”
	Property, plant and equipment	29,200
	Inventories	3,870
	Accounts receivable	3,640
		36,710

9.	Liquidation expenses of Tahidi Limited amounted to Sh.6 million and were settled by Sitawi Limited.
7.	Immediately upon take over, Sitawi Limited invited its ordinary shareholders for a 1 for 5 rights issue of ordinary shares at an exercise price of Sh.15. The average market price of the ordinary shares on cum-rights basis immediately before the rights issue was Sh.20. The issue was fully subscribed.

Required
(a)	The following ledger accounts to close off the books of Tahidi Limited:
	(i)	Realisation account.
	(ii)	Preference shareholders sundry members account.
	(iii)	Ordinary shareholders sundry members account. ....................

(b)	Journal entries in the books of Sitawi Limited to record the initial recognition of the 8% convertible bonds and the rights issue on 1 August 2022.
(c)	Opening statement of financial position of Sitawi Limited as at 1 August 2022.

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August 2022

3 Questions

Question 3a

IFRS for small and medium-sized entities (the SMEs Standard) has been issued for use by entities that have no public accountability. One of the notable differences between the SMEs Standard and the full IFRS and IAS Standard is that there are a number of accounting policy choices allowed under full IFRS and IAS Standard, that are not available to companies that apply the SMEs Standard.

Required:

In view of the above statement, briefly describe the accounting policy choices that are disallowed under the SMEs Standard.

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Question 3d

The Conceptual Framework for Financial Reporting is a set of theoretical principles and concepts that underlie the preparation and presentation of financial statements. If no conceptual framework existed, then accounting standards would be produced in a haphazard basis as particular issues and circumstances arose.

Required:

In view of the above statement, discuss the purpose of the Conceptual Framework for Financial Reporting in underpinning the development of accounting standards.

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Question 4

Tanga Limited is a private limited liability company operating in the telecommunications industry. The company has suffered successive trading losses for a number of years, largely due to stiff competition and a sharp decline in revenues.

The directors of the company, who are also the main shareholders, agreed to reconstruct the company by transferring it to a new company to be named Elewa Limited.

The statement of financial position of Tanga Limited as at 30 June 2022 was as set out below:

Assets:	Sh.“000”
Non-current assets:
Property, plant and equipment	59,500
Goodwill	9,000
	68,500
Current assets:
Inventory	18,500
Trade receivables	14,500
	33,000
Total assets	101,500
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)	60,000
9% cumulative preference share capital (Sh.10 par value)	30,000
Share premium	3,000
Accumulated losses	(27,400)
Total equity	65,600
Non-current liabilities:
Bank loan	22,500
Current liabilities:
Trade payables	5,900
Tax payable	3,000
Bank overdraft	4,500
	13,400
Total equity and liabilities	101,500

Additional information:

1.	The authorised share capital of Elewa Limited was Sh.100 million comprising 10 million ordinary shares of Sh.10 each.
2.	Three new ordinary shares of Sh.10 each in Elewa Limited credited at Sh.6 each were issued for the benefit of the ordinary shareholders in Tanga Limited for every four (4) ordinary shares held. However, the ordinary shareholders in Tanga Limited were required to pay the balance to make their shares in Elewa Limited fully paid.
3.	Four new ordinary shares of Sh.10 each in Elewa Limited credited at Sh.8 each were issued for the benefit of the preference shareholders in Tanga Limited for every five (5) preference shares held. However, the preference shareholders in Tanga Limited were required to pay the balance to make their ordinary shares in Elewa Limited fully paid.
4.	The preference dividends in Tanga Limited were three years in arrears and the preference shareholders forfeited half of the preference dividend arrears. The balance was fully settled by the new company issuing ordinary shares of Sh.10 each.
5.	Liquidation expenses of Tanga Limited amounted to Sh.8 million and were settled by Elewa Limited.
6.	The tangible assets were transferred to the new company at the following fair values:

		Sh.“000”
	Property, plant and equipment	55,000
	Inventory	20,200
	Trade receivables	14,500
	Goodwill was considered valueless and therefore written off.
7.	The liabilities were taken over by the new company at their book values.

8.	Elewa Limited issued for cash and at par value all the remaining ordinary shares not issued as part of the purchase consideration. The proceeds from the issue were used to settle the bank loan.
9.	Assume that all the above transactions were completed by the close of business on 30 June 2022.

Required:
(a)	The following ledger accounts to close off the books of Tanga Limited:
	(i)	Realisation account.
	(ii)	Ordinary shareholders sundry members account.
	(iii)	Preference shareholders sundry members account..................

(b)	Journal entries in the books of Elewa Limited to record the acquisition of Tanga Limited.
(c)	Opening statement of financial position of Elewa Limited as at 1 July 2022.

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April 2022

2 Questions

Question 4

The following information was extracted from the financial records of Belta Bank Limited as at 31 March 2022:

	Sh."million"
Cash and balances with the Central Bank	4,046
Money on demand and short term deposits	2,150
Deposits with other commercial banks	4,600
Deposits from other commercial banks	3,324
Investments in government securities	4,485
Investments in equity instruments	765
Property, plant and equipment	7,416
Intangible assets	4,986
Loans and advances to customers	8,144
Customer deposits	7,065
Long-term borrowings	5,660
Other receivables	2,493
Other payables	2,717
Instalment tax paid	360
Deferred tax as at 1 April 2021	370
Interest on loans and advances to customers	2,575
Interest on government securities	2,264
Interest on deposits with other banks	646
Interest on deposits from other banks	662
Interest on customer deposits	1,833
Interest on long term borrowings	1,385
Administrative expenses	2,160
Other operating expenses	1,163
Fees, commission and foreign exchange income	6,090
Ordinary share capital	4,400
Share premium	2,500
Deposit protection reserve as at 1 April 2021	5,000
Retained earnings as at 1 April 2021	3,623
Suspense account (Cr.)	414

Additional information:

On 1 April 2021, Belta Bank Limited issued a Sh.450 million, five-year 8% coupon bond at par. The bond will be redeemable at a substantial premium which gives it an effective interest rate of 12% per annum. There were no issue costs. The only accounting entries made were to record the cash proceeds from the issue and the annual interest payment on 31 March 2022.
At 31 March 2022, the directors of Belta Bank Limited accepted a valuation report by a professional valuer which revealed the fair value of the property, plant and equipment to be Sh.2,500 million. The carrying amount of the property, plant and equipment amounted to Sh.1,850 million. The directors do not wish to make interreserve transfer upon revaluation. However, they do account for deferred tax on revaluation of property, plant and equipment. Revaluation is yet to be accounted for in the books of the bank.
During the year ended 31 March 2022, the current tax on profits was estimated at Sh.890 million. At 31 March 2022, the carrying amounts of the net assets exceeded their tax bases by Sh.1,800 million. These carrying amounts do not include the effect of the revaluation in note 2 above. The income tax rate applicable to Belta Bank Limited is 30%.

Required:

(a) Statement of profit or loss and other comprehensive income for the year ended 31 March 2022.

(b) Statement of financial position as at 31 March

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Question 3a

With regard to International Financial Reporting Standard (IFRS) 15: "Revenue from Contracts with Customers", explain the key factors that must be considered when determining the transaction price within a contract.

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December 2021

2 Questions

Question 4

Ongeza Ltd., a local company operating in the mineral water bottling industry, is in financial difficulty due to the unfavourable economic conditions. The company's statement of financial position as at 31 October 2021 was as given below:

Ongeza Ltd.

Statement of financial position as at 31 October 2021

	Sh."000"	Sh."000"
Non-current assets:
Land		8,000
Building at NBV		6,000
Machinery at NBV		2,800
Intangible assets - Investments		4,500
Intangible assets - Goodwill		6,000
Intangible assets - Patents and trademarks		500
		27,800
Current assets:
Inventories	7,200
Trade receivables	4,000
Cash	100	11,300
Total assets		39,100
Equity and liabilities:
Equity shares of Sh.10 par value		20,000
10% preference shares of Sh.10 par value		8,000
12% debentures		6,000
Interest payable on debentures		720
Loan from directors		2,000
Accumulated loss		(5,800)
		30,920
Current liabilities:
Bank overdraft	3,000
Sundry payables	5,180	8,180
Total capital liabilities		39,100

1.	Assets are to be adjusted to their fair values as follows:
		Sh."000"
	Trade receivables	3,600
	Inventories	6,400
	Machinery	2,000
	Buildings	5,000
	Accumulated depreciation charged:
	Buildings	1,500
	Machinery	1,600

2.	Each ordinary share is to be re-designated as a share of Sh.2.50. The ordinary shareholders are to accept a reduction in the nominal value of their shares from Sh.10 to Sh.2.50. In addition, the shareholders are to subscribe for a new issue on the basis of one share for every two held at a price of Sh.4 per share.
3.	The existing preference shares are to be exchanged for a new issue of 6 million 15% preference shares of Sh.10 each and 800,000 ordinary shares of Sh.2.50 each.
4.	The debenture holders are to accept 200,000 ordinary shares of Sh.2.50 each in lieu of interest payable. The 12% debentures are to be converted to 14% debentures. A further Sh.2 million of 14% debentures of Sh.100 each are to be issued and taken up by the existing debenture holders at Sh.90 each.
5.	Sh.800,000 of the loan from directors is to be cancelled. The balance of the loan is to be settled by the issue of 200,000 ordinary shares of Sh.2.50 each.
6.	The investments are to be sold at their current market price of Sh.6 million.
7.	The bank overdraft is to be paid in full.
8.	A sum of Sh.3.18 million is to be paid to offset the sundry payables immediately and the balance in four equal instalments at the end of each quarter.
9.	All intangible assets are to be eliminated. 1
10.	0. It is estimated that under the new arrangement, the net profit before interest and tax will be Sh.5 million per year. There will be no tax liability relating to the company for the next five years.
Required:
(a)	Journal entries to effect the scheme of internal reconstruction.
(b)	Statement of financial position as at 1 November 2021 (immediately after reconstruction).
(c)	A statement showing how the anticipated profits under the new arrangement will be distributed to the various providers of capital.

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Question 3c

The International Financial Reporting Standard for Small and Medium Sized Entities (IFRS for SMEs standard) was issued for use by entities that have no public accountability. This standard reduces the burden of producing information that is not likely to be of interest to the stakeholders of a small or medium entity.

Required:

Discuss any four simplifications introduced by the IFRS for SMEs standard as compared to the full IFRS standard requirements.

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May 2021

1 Questions

Question 2

Swara Limited has been suffering great financial stress. The directors of Swara Limited decided that the company should be reconstructed.

The following was the statement of financial position of Swara Limited as at 31 March 2021:

Assets:	Sh."000"	Sh."000"
Non-current assets:
Land and buildings	2,134,200
Plant and machinery	1,591,200
Furniture and fixtures	594,600
Investments	345,000
Goodwill	390,000
Patents	240,000
Preliminary expenses	100,800	5,395,800
Current assets:
Inventories	975,000
Trade receivables	858,000
Cash at bank	271,200	2,104,200
Total assets		7,500,000
Equity and liabilities:
Equity:
Ordinary shares of Sh.10 each	3,000,000
8% preference shares of Sh.50 each	3,600,000
Profit and loss account	(2,520,000)	4,080,000
Non current liabilities:
4% debentures		2,400,000
Current liabilities:
Trade payables	876,000
Accrued debenture interest	144,000	1,020,000
Total equity and liabilities		7,500,000

Additional information:

1.

On 1 April 2021, a new company (Twiga Ltd.), was formed to take over the business of Swara Ltd. Twiga Ltd. was formed with an authorised share capital comprising 600 million ordinary shares of Sh.10 each and 40 million 6% preference shares of Sh. 100 each.

2.

Preference dividends in Swara Ltd. were two years in arrears.

3.

Three ordinary shares of Sh.10 each credited at Sh.5 each in Twiga Ltd. would be issued for each preference share in Swara Ltd. In addition, one fully paid preference share in Twiga Ltd. would be issued for every four preference shares in Swara Ltd. The preference shareholders would, however. pay the balance to make their ordinary shares fully paid.

4.

The preference shareholders in Swara Ltd. would forego half of the preference dividends in arrears and would receive fully paid preference shares in Twiga Ltd. for the balance of the arrears of the preference dividends.

5.

One ordinary share of Sh.10 each credited at Sh.5 each in Twiga Ltd. would be issued for every two ordinary shares in Swara Ltd. The ordinary shareholders would, however, pay the balance to make their shares fully paid.

6.

The debenture holders would receive half of their dues (excluding accrued interest) in 6% debentures of Twiga Ltd. and the balance in fully paid ordinary shares of Twiga Ltd. Interest accrued on debentures would be paid in cash by Twiga Ltd. after taking over Swara Ltd.

7.

Trade payables would be taken over by the new company and immediately settled by issue of fully paid ordinary shares of equal value.

8

The assets were transferred to the new company at the following values:

	Sh."000"
Land and buildings	2,880,000
Plant and machinery	1,770,000
Furniture and fixtures	510,000
Investments	197,400
Inventories		at book value less 10%
Trade receivables		at book value less 5%
Cash at bank		at book value

9.

Twiga Ltd. paid Sh.30 million to Swara Ltd. to pay for dissolution expenses.

10.

Twiga Ltd. issued for cash and at par all the remaining ordinary shares and preference shares not issued as part ofthe settlement of the purchase consideration on acquisition of Swara Ltd.

11.

Assume that all the above transactions were completed on 1 April 2021.

Required:

(a) The following accounts in the books of Swara Ltd.:

(i) Realisation account.

(ii) Twiga Ltd. account.

(iii) Ordinary shareholders sundry members account.

(iv) Preference shareholders sundry members account.

(b) Statement of financial position of Twiga Ltd. as at 1 April 2021 after completion of the reconstruction.

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November 2020

1 Questions

Question 4b

Dynamic Ltd. has been reporting losses for the past few years. The creditors and shareholders have come up with a capital re-organisation plan aimed at putting the company back on the path of profitability.

The following is the summarised statement of financial position of the company as at 30 June 2019:

Assets	Sh."million"	Sh."million"
Non-current assets:
Tangible assets		3,040
Intangible assets		1,872
		4,912
Current assets:
Inventory	2,720
Accounts receivable	3,104
Investment (market value Sh.896 million)	352	6,176
Total assets		11,088
Capital and liabilities:
Share capital:
240 million ordinary shares of Sh. 20 each		4,800
6%, 128 million cumulative preference shares of Sh.20 each		2,560
		7,360
Revenue reserve;
Accumulated losses		(2,624)
Non-current liabilities:
6% debentures		2,400
		7,136
Current liabilities:
Accounts payable	1,600
Bank overdraft	1,248
Debenture interest payable	144
Accruals	320
Directors loans	640
		3,952
Total capital and liabilities		11,088

The court approved the scheme of reorganisation and it was to take effect on 1 July 2019. Details of the approved scheme were as follows.

1	Tangible assets comprised freehold property and plant valued at Sh.2,720 million and Sh.320 million respectively while the intangible assets comprised patents and goodwill valued at Sh.976 million and Sh.896 million respectively. Patents and goodwill are to be written off. An amount of Sh.480 million is to be written off inventory and Sh.374.4 million is to be provided for bad debts. The remaining freehold property is to be revalued at Sh.2,480 million. The investment was sold at the prevailing market value.
2	The 6% preference dividends are four years in arrears of which three-quarters are to be waived and ordinary shares are to be allocated at par for the balance.
3	The 6% preference shares are to be written down to Sh.15 each and the existing ordinary shares to Sh.4 cach. All the ordinary shares are to be consolidated into shares of Sh.20 each. The rate of dividend on preference shares is to be increased to 10%.
4	There are capital commitments amounting to Sh.2,400 million which are to be cancelled, on payment of 3%% of the contract price as a penalty
5	The 6% debenture holders were to have their interest paid in cash and to take over part of the freehold property (book value Sh.640 million) at a valuation of Sh.768 million in part payment of their holding. The 6% debenture holders are also to provide additional cash of Sh.832 million secured by a floating charge on the company's assets at an interest rate of 12% per annum.
6	The directors were to accept settlement of their loans as to 90% thereof by allotment of ordinary shares at par and as to 5% in cash. The balance of 5% was to be waived.
7	The trade payables were to be paid Sh.0.40 in every shilling to maintain and obtain an extension of the credit period.
8	The bank has sanctioned an overdraft limit of Sh.40 million to provide working capital.

Required
(i)	The capital reduction account to record the scheme of capital re-organisation.
(ii)	The statement of financial position of Dynamic Ltd. as at 1 July 2019 immediately after effecting the scheme of reorganisation.

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May 2019

1 Questions

Question 3b

Matatizo Limited has been recording losses for the last few years.

The statement of financial position of the company as at 31 March 2019 was as given below:

	Sh. "000"		Sh. "000"
Equity share capital (Sh.10 par value)	30,000	Goodwill	5,000
10% preference share capital (Sh.100 par value fully paid)	10,000	Plant and machinery	30,000
Share premium	4,000	Equipment	15,000
Loan from directors	5,000	Receivables	2,500
Bank overdraft	450	Inventory	1,500
Creditors	2,200	Cash in hand	150
12% debentures	5,000	Patents and trademarks	500
		Accumulated losses	2,000
	56,650		56,650

The authorised share capital of Matatizo Limited is composed of 5,000,000 equity shares of Sh.10 each and 200,000 10% preference shares of Sh.100 each. It was decided during a meeting of the shareholders and directors of the company to carry out a scheme of internal reconstruction with effect from 1 April 2019 as follows:

1	Each equity share is to be re-designated as a share of Sh.4.50. The equity shareholders are to accept a reduction in the nominal value of their shares from Sh. 10 to Sh.4.50. In addition, the shareholders are to subscribe for a new issue of shares on the basis of one share for every 3 held at the price of Sh.6 per share.
2	The existing preference shares are to be exchanged for a new issue of 55,000 15% preference shares of Sh. 100 each and 500,000 equity shares of Sh.4.50 each.
3	The 12% debentures are to be converted into 15% debentures. A further Sh.1,000,000 of 15% debentures of Sh.100 each are to be issued at Sh.75 each.
4	The directors agreed to forego 50% of their loan. The balance of the loan is to be settled by the issue of 400,000 equity shares of Sh.4.50 each.
5	The bank overdraft is to be repaid in full.
6	All intangible assets and accumulated losses are to be eliminated.
7	Creditors accepted to be paid half of the amount due at a discount of 10%.
8	Assets are to be adjusted to their fair values by the following amounts: Sh. "000" Plant and machinery 6,100 Equipment 3,250 Receivables 1,160 Inventory 460
9	The share premium account is to be utilised for purposes of capital reduction.

Required:

A capital reduction account for Matatizo Limited after completion of the internal reconstruction.

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May 2018

2 Questions

Question 2b

The following statement of financial position relates to the affairs of Fanakawa Ltd. as at 31 December 2017:

Assets:	Sh."000"	Sh."000"
Non-current assets:
Land and buildings		3,160
Plant and machinery		4,040
Intangible assets:
Goodwilm		1,300
Development expenditure		750
Current assets:
Inventories	1,900
Receivables	1,700	3,600
Total assets		12,850
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)		6,000
Share premium		2,000
Accumulated losses		(2,070)
Shareholders' funds		5,930
Current liabilities:
Trade payables	1,820
Bank overdraft	1,100
Bank loan (secured on land and buildings)	4,000	6,920
Total equity and liabilities		12,850

Additional information:

Fanakawa Ltd. has been making losses in recent years, but recent board changes and the development of a new product line are believed to have significantly improved the company's future prospects. The following scheme of financial reorganisation has been prepared for consideration by the shareholders and creditors:

1	The existing ordinary shares are to be written down to Sh.4 per share and then consolidated into shares of Sh.10 par.
2	Existing shareholders are to subscribe to a rights issue of three new shares for every one share held after making the changes in (1) above. The shares are to be issued at Sh.11 each.
3	The company's major supplier has agreed to convert an amount of Sh.1,000,000 owed to him into fully paid ordinary shares issued at par.
4	The bank requires immediate payment of the overdraft but has agreed to convert the loan currently payable on demand, into a debenture carrying an interest of 10% per annum payable in full in the next 5 years.
5	The balances in the accumulated losses and goodwill accounts are to be written off.
6	Development expenditure is to be written off.
7	The remaining assets are to be restated to their fair values as follows: Sh. "000" Land and buildings 3,320 Plant and machinery 1,000 Inventories 1,500 Receivables 1,700
8	The amount in the share premium account is to be utilised in the capital reduction scheme.

Required:

(i) Journal entries to record the above transactions.

(ii) Capital reduction account.

(iii) Statement of financial position after effecting the scheme of capital reduction.

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Question 5

G Ltd. is a company that is quoted on the securities exchange. The following trial balance was extracted from the books of the company as at 31 March 2018:

	Sh."000"	Sh."000"
Revenue		18,960
6% convertible bonds		3,000
Cost of sales	5,670
Property, plant and equipment	19,420
Intangible assets	1,750
Administrative expenses	2,830
Selling and distribution cost	1,890
Provision for damages		1,200
Finance cost	1,560
Inventories	4,730
Trade and other receivables	1,270
Ordinary share capital		5,800
Trade and other payables		920
Retained earnings		5,410
Instalment tax paid	740
Deferred tax		270
Share premium		1,400
Revaluation reserve (property, plant and equipment)		1,500
Cash in hand	380
Financial assets at fair value	1,250
Investment income		120
Accumulated depreciation (property, plant and equipment)		2,910
	41,490	41,490

Additional information:

1

G Ltd. is also a sales agent for another company, P Ltd. and is entitled to a sales commission of 10% on the sales made on behalf of P Ltd. The net proceeds obtained from the sale (after deducting the commission) are remitted to P Ltd. During the financial year ended 31 March 2018, G Ltd. sold goods worth Sh.2,400,000 on behalf of P Ltd. This amount was included in the sales revenue disclosed in the trial balance. G Ltd. had not remitted the net sales proceeds to P Ltd. as at 31 March 2018.

2

During the year ended 31 March 2018, G Ltd. incurred Sh.1,750,000 relating to research and development expenditure on a new product. All of this expenditure was capitalised as an intangible asset. The Sh.1,750,000 expenditure was composed of the following costs:

		Sh."000"
	Background investigation work (1 April 2017-31 May 2017)	250
	Initial development work (1 June 2017-15 July 2017)	428
	Second phase development work (16 July 2017-30 November 2017)	600
	Product launch cost (December 2017)	316
	Staff training (February 2018)	156
		1,750

	The product was assessed as being commercially viable on 16 July 2017 and product development was completed on 30 November 2017. The product was launched in December 2017 although the first products were not delivered until April 2018.
3	On 1 April 2017, G Ltd. issued Sh.3,000,000, 6% convertible bonds at par. Each bond could be redeemed for cash at par or converted into three ordinary shares on 31 March 2020. The interest due on the bonds was paid on 1 April 2018. The equivalent effective interest rate on similar bonds without the conversion right is 9% per annum. The only accounting entries which had been made as at 31 March 2018 were to recognise the Sh.3,000,000 cash proceeds as a non-current liability.
4	On 1 January 2018, G Ltd. made a one-off purchase from a supplier in Zebuland. The goods were invoiced in the local currency of Zebuland which is the Zebu (Zb). The purchase was for Sh.2,200,000 and a 120-day credit period was given by the supplier. The purchase was recognised in purchases and payables using the 1 January 2018 spot exchange rate. No other accounting entries have been made. The cash was paid to the supplier on 1 May 2018. The relevant spot exchange rates were as follows: 1 January 2018 - 1 Ksh = 10 Zb 31 March 2018 - 1 Ksh = 11 Zb 1 May 2018 - 1 Ksh = 12 Zb
5	Depreciation on property, plant and equipment for the year ended 31 March 2018 has not yet been charged. All depreciation is provided on a straight line basis. Buildings were assessed as having a 40-year useful life and plant and machinery a 15-year useful life with a scrap value of Sh.150,000. The cost of property, plant and equipment as at I April 2017 included: Sh. Land 13,420,000 Building 3,600,000 Plant and machinery 2,400,000 Depreciation on plant and machinery is classified as cost of sales while depreciation on building is classified as administrative expenses.
6	Selling and distribution expenses included a provision for damages payable to a customer whose order had not been delivered on time. A provision for damages amounting to Sh.1,200,000 had been made. This provision is to be reversed.
7	The current year's tax is estimated at Sh.980,000. The net taxable temporary differences amount to Sh.840,000.
8	The applicable tax rate is 30%.
Required: The following statements in a form suitable for publication:
(a)	Statement of comprehensive income for the year ended 31 March 2018.
(b)	Statement of changes in equity for the year ended 31 March 2018.
(c)	Statement of financial position as at 31 March 2018.

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November 2016

2 Questions

Question 3a

Explain four differences between an internal reconstruction and an external reconstruction.

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Question 3b

The following is the summarised statement of financial position of P Ltd. as at 30 June 2016:

	Sh."million"	Sh."million"	Sh."million"
Non-current assets:
Tangible: Freehold property			680
Plant			80
			760
Intangible: Patents		244
Goodwill		224	468
			1,228
Current assets:
Inventory	680
ccounts receivable	776
Investment (market value Sh.224 million)	88	1,544
Current liabilities:
Accounts payable	400
Bank overdraft	312
Debenture interest payable	36
Accruals	80
Directors' loans	160	(988)	556
			1,784
Financed by:
Share capital:
120 million ordinary shares of Sh.10 each			1,200
6% 64 million cumulative preference shares of Sh.10 each			640
			1,840
Revenue reserves:
Accumulated losses			(656)
			1,184
Non-current liabilities:
6% debentures			600
			1,784

The court approved a scheme of reorganisation submitted by the debenture holders and agreed upon by other interested parties to take effect on 1 July 2016. Details ofthe approved scheme are as follows:

1. The 6% debenture holders were to have their interest paid in cash and to take over part of the freehold property (book value Sh.160 million) at a valuation of Sh. 192 million in part repayment of their holding. The 6% debenture holders are also to provide additional cash of Sh.208 million secured by a floating charge on the company's assets at an interest rate of 12% per annum.

2. Patents and goodwill are to be written off, Sh.120 million is to be written off inventory and Sh.93.6 million is to be provided for bad debts. The remaining freehold property is to be revalued at Sh.620 million. The investment was sold at the prevailing market value.

3. The directors were to accept settlement of their loans as to 90% thereof by allotment of ordinary shares at par and as to 5% in cash. The balance of 5% was to be waived.

4. The trade payables are to be paid Sh.0.10 in every shilling to maintain and obtain an extension of the credit period.

5. The bank has sanctioned an overdraft limit of Sh.10 million to provide working capital.

6. The 6% preference dividends are four years in arrears of which three-quarters are to be waived and ordinary shares are to be allocated at par for the balance.

7. The 6% preference shares are to be written down to Sh.7.50 each and the existing ordinary shares to Sh.2 each. All the ordinary shares are to be consolidated into shares of Sh.10 each. The rate of dividends on preference shares is to be increased to 10%.

8. There are capital commitments amounting to Sh.600 million which are to be cancelled on payment of 3/% of the contract price as a penalty.

Required:

(i) The capital reduction account to record the scheme of capital reorganisation.

(ii) The statement of financial position of P Ltd. as at the close of business on 1 July 2016 immediately after effecting the scheme of reorganisation.

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