Unit: Advanced Financial Reporting and Analysis
11 QuestionsAssets: | H Limited Kr."million" | B Limited Ksh."million" |
| Non-current assets: | ||
| Property, plant and equipment | 7,007 | 7,826 |
| Investment in B Limited | 838 | |
| 7,845 | 7,826 | |
| Current assets: | ||
| Inventories | 1,566 | 2,605 |
| Trade receivables | 1,401 | 2,000 |
| Cash and cash equivalents | 1,238 | 1,399 |
| 4,205 | 6,004 | |
| Total assets | 12,050 | 13,830 |
| Equity and liabilities: | ||
| Equity: | ||
| Ordinary share capital | 2,875 | 3,640 |
| Share premium | 1,437 | 1,820 |
| Retained earnings | 3,350 | 3,640 |
| Total equity | 7,662 | 9,100 |
| Non-current liabilities: | ||
| 10% loan note | 450 | 1,310 |
| Deferred tax | 569 | 1,600 |
| 1,019 | 2,910 | |
| Current liabilities: | ||
| Trade payables | 2,498 | 1,238 |
| Current tax | 871 | 582 |
| 3,369 | 1,820 | |
| Total equity and liabilities | 12,050 | 13,830 |
| 1 | On 1 October 2018, H Limited acquired 80% of the ordinary shares of B Limited when B Limited's retained earnings were 3,100 million Krones. The fair value of the identifiable net assets of B Limited on 1 October 2018 was 9,008 million Krones. The excess of the fair value over the carrying amount of net assets is due to an increase in the value of land. |
| 2 | H Limited wishes to use the "full goodwill" method and the fair value of the non-controlling interest in B Limited as at 1 October 2018 was 4,550 million Krones. There has been no impairment of goodwill since acquisition. |
| 3 | On 1 October 2018, H Limited issued a 10% loan note amounting to Ksh. 40 million to B Limited repayable in ten years' time. Interest on the loan note has been correctly accounted for by both entities. However, the loan note is still recorded in the financial statements of B Limited at the amount obtained by applying the rate of exchange at the date of the issue. |
| 4 | H Limited expanded its overseas operations and on 1 April 2019, acquired an overseas building with a fair value of 715 million Krones. In exchange for the building, H Limited paid the seller with land which it had held for long term capital appreciation. The carrying amount of the land was Ksh.100 million but it had an open market value of Ksh.140 million. H Limited has only recorded the transfer of Ksh.100 million from investment properties to property, plant and equipment. The transaction has commercial substance. H Limited has a policy of depreciating buildings over a period of 35 years and follows the revaluation model. As a result of a surge in the market, it is estimated that the fair value of the overseas building was 800 million Krones as at 30 September 2019. |
| 5 | The following foreign exchange rates are relevant to the preparation of consolidated financial statements: |
| Krones to Ksh.1 | ||
| 1 October 2018 | 6.0 | |
| 1 April 2019 | 5.5 | |
| 30 September 2019 | 5.0 | |
| Average for the year to 30 September 2019 | 5.8 |
| (i) | On 1 January 2009, the government built a market at a cost of Sh.150 million. The market was expected to provide service for 40 years. On 31 December 2018 after ten years of use, a fire caused severe structural damage to the market. Due to safety concerns, the market was closed for repairs that cost Sh.106.5 million. These repairs were made to restore the market to occupiable condition. The current cost of a new market is Sh.300 million. Required: Impairment loss to be recognised for the market using the cost restoration approach. |
| (ii) | On 1 January 2014, the government acquired a modern software to enhance service delivery at a cost of Sh.350 million. The software had an estimated useful life of 8 years and its benefits would accrue evenly on a straight line basis over the software's useful life. As at 31 December 2018, usage of the software had dropped to 15% of its originally anticipated demand. A software to replace the remaining service potential of the existing software would cost Sh.150 million. Required: cost Determine the impairment loss to be recognised for the software using the depreciated replacement approach. |
| 31 December | Fair value per share (sh.) |
| 2014 2015 2016 2017 2018 | 72 77.5 91 107 125 |
| Makongeni Group: Consolidated statement of financial position as at 31 October: | ||
Assets: | 2019 Sh."million" | 2018 Sh."million" |
| Non-current assets: | ||
| Property, plant and equipment | 10,180 | 6,500 |
| Goodwill | 7,720 | 7,400 |
| Investment in associate | 2,480 | 2,160 |
| 20,380 | 16,060 | |
| Current assets: | ||
| Inventories | 1,880 | 1,740 |
| Trade receivables | 1,560 | 1,320 |
| Short-term investments | 300 | 200 |
| Cash and bank balances | 540 | 360 |
| 4,280 | 3,620 | |
| Total assets | 24,660 | 19,680 |
| Equity and liabilities: | ||
| Equity: | ||
| Ordinary share capital (Sh.10 par value) | 6,000 | 6,000 |
| Revaluation surplus | 3,000 | 2,100 |
| Retained earnings | 7,020 | 4,340 |
| 16,020 | 12,440 | |
| Non-controlling interest | 1,240 | 1,280 |
| Total equity | 17,260 | 13,720 |
| Non-current liabilities: | ||
| Bank loans | 2,000 | 1,200 |
| Deferred tax | 600 | 420 |
| 2,600 | 1,620 | |
| Current liabilities: | ||
| Trade payables | 3,200 | 2,900 |
| Current tax | 1,600 | 1,440 |
| 4,800 | 4,340 | |
| Total equity and liabilities | 24,660 | 19,680 |
| Makongeni Group: Consolidated statement of comprehensive income for the year ended 31 October 2019 | |
| Sh."million" | |
| Revenue | 8,360 |
| Operating expense | (4,620) |
| Profit from operations | 3,740 |
| Gain on disposal of subsidiary | 400 |
| Finance costs | (140) |
| Share of profit of associate | 460 |
| Profit before tax | 4,460 |
| Income tax expense | (900) |
| Profit after tax for the year | 3,560 |
| Other comprehensive income: | |
| Revaluation gain on property | 800 |
| Other comprehensive income of associate | 200 |
| Total comprehensive income | 4,560 |
| Profit for the year attributable to: | |
| Owners of the parent | 3,180 |
| Non-controlling interests | 380 |
| 3,560 | |
| Total comprehensive income for the year attributable to: | |
| Owners of the parent | 4,080 |
| Non-controlling interests | 480 |
| 4,560 | |
| 1 | During the year, Makongeni Limited acquired 80% of the ordinary share capital of Razak Limited, paying a cash consideration of Sh.6,000 million. The non-controlling interest holding was measured at its fair value of Sh.1,360 million at the date of acquisition. The fair values of the net assets of Razak Limited as at the date of acquisition comprised the following: Sh."million" Property, plant and equipment 5,120 Inventories 600 Trade receivables 960 Cash and cash equivalents 320 Trade payables (880) Tax payables (160) 5,960 |
| 2 | During the year, Makongeni Limited also disposed of its entire 60% ordinary shareholding in Salama Limited. The subsidiary had been acquired several years ago for a cash consideration of Sh.2,400 million. The non-controlling interest holding was measured at its fair value of Sh.1,280 million as at the date of acquisition and the fair value of Salama Limited's net assets was Sh.2,920 million. Goodwill on acquisition of Salama Limited had not suffered any impairment. At the date of disposal, the net assets of Salama Limited had carrying values in the consolidated statement of financial position as set out below: Sh."million" Property, plant and equipment 2,900 Inventories 660 Trade receivables 480 Cash and cash equivalents 200 Trade payables (320) 3,920 |
| 3 | The short term investments are readily convertible into known amounts of cash and there is an insignificant risk of their fair value changing. |
| 4 | Depreciation of Sh.1,540 million was charged during the year. Plant with a carrying amount of Sh.1,000 million was sold for Sh.1,100 million. The gain on disposal was recognised in operating profit. Some properties were revalued during the year resulting in revaluation gain of Sh.800 million being reported. Ignore deferred tax on revaluation of property, plant and equipment. |
| Year ended 30 September: | 2019 Sh."000" | 2018 Sh."000" |
| Profit before interest and tax | 8,830 | 7,012 |
| Finance cos | 1,045 | 987 |
| Tax charge | 1,718 | 1,264 |
| Ordinary dividends paid | 120 | 100 |
| Preference dividends paid | 60 | 60 |
| Profit attributable to non-controlling interest (NCI) | 180 | 160 |
| 1 | Ordinary share capital as at 1 October 2017 was Sh.15,000,000 made up of shares of Sh.5 par value. |
| 2 | Dakika Ltd. issued some 500,000 ordinary shares at full market value on 1 January 2018. |
| 3 | Dakika Ltd. also made a rights issue of 2 new ordinary shares for every 10 ordinary shares held as at 1 April 2019. The rights price per share was Sh.42.5 (market value per share as at the same date was Sh.48). |
| 4 | Dakika Ltd. also had 1,000,000 6%, Sh.10 par value non-redeemable preference shares as at 1 October 2018. |
Required: | |
| (i) | The basic earnings per share (EPS) for the year ended 30 September 2018. |
| (ii) | The basic earnings per share (EPS) for the year ended 30 September 2019. |
| 1 | The company has available for sale financial assets with a carrying amount of Sh.80 million and financial assets at fair value through profit and loss of Sh.40 million. Both financial assets had reported losses in fair value of Sh.8 million each as at 30 September 2019. |
| 2 | Inventory is shown at the lower of cost and net realisable value. The cost is Sh.3,200 million while the net realisable value is Sh.3,120 million. |
| 3 | Receivables had a carrying amount of Sh.2,000 million after making an allowance for doubtful debts of Sh.80 million and an exchange gain of Sh.160 million (unrealised). Both the allowance and the exchange gain are not allowed for tax purposes. |
| 4 | Trade and other payables are stated at Sh.3,600 million after making provision for discount of Sh.40 million. |
| 5 | Property, plant and equipment has a carrying amount of Sh.4,800 million and a tax base of Sh 4,000 million. Some land and buildings were revalued upwards by Sh.200 million during the year ended 30 September 2019. |
| 6 | Intangible assets consisting of trade licences being amortised over five years had a carrying amount of Sh.240 million. This was allowed for tax purposes in full two years ago. |
| 7 | Assume a tax rate of 30%. |
Required: | |
| (i) | The relevant temporary differences. |
| (ii) | Journal entry to record changes in the deferred tax liability. |
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