KASNEB Financial Reporting - Question 1c

Summarise FIVE limitations of ratios in analysing financial performance. ... [Click to view full question and step-by-step solution]

KASNEB Financial Reporting - Question 3

The following trial balance was prepared by Salama Ltd. as at 31 December 2022: Sh.“000”Sh.“000”Ordinary share capital (Sh.10 each) 20,0008% ... [Click to view full question and step-by-step solution]

FRA April 2023 Past Paper & PDF Solutions

1a

Preparation of Published Financial Statements

Revenue from rendering of services should be recognised by reference to the stage of completion of the transaction at the balance sheet date.

Describe THREE conditions to be met before the above treatment can be applied.

1b

Public Sector Accounting Standards

International Public Sector Accounting Standard (IPSAS) 1 – Presentation of Financial Statements, provides that the presentation and classification of items in the financial statements shall be retained from one period to the next. The standard however, provides exceptions to this principle.

Discuss TWO exceptions to the above principle.

1c

Analysing Financial Statements

Summarise FIVE limitations of ratios in analysing financial performance.

1d

Accounting for Assets and Liabilities

With reference to International Financial Reporting Standard (IFRS) – 5, Non-Current Assets Held for Sale and Discontinued Operations, describe the conditions that must be met for an asset to be classified as held for sale.

2

Accounting and Financial Statements for Interests in Other Entities

Riva Limited operates in a fast moving goods sub-sector. During the year ended 31 March 2023, Riva Limited expanded its operations by acquiring a controlling interest in Sai Limited and a significant influence over the activities of Tutu Limited. The following draft financial statements for the year ended 31 March 2023 relate to the three companies:

Statements of profit or loss for the year ended 31 March 2023:

	Riva Limited	Sai Limited	Tutu Limited
	Sh.“million”	Sh.“million”	Sh.“million”
Revenue	4,190	2,600	1,960
Cost of sales	(2,730)	(1,400)	(1,370)
Gross profit	1,460	1,200	590
Distribution costs	(300)	(200)	(190)
Administrative expenses	(500)	(400)	(160)
Profit from operations	660	600	240
Investment income	40	20	30
Finance costs	(80)	(60)	-
Profit before tax	620	560	270
Income tax expense	(180)	(160)	(70)
Profit for the year	440	400	200

Statements of financial position as at 31 March 2023:

	Riva Limited	Sai Limited	Tutu Limited
Assets:	Sh.“million”	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment	2,070	1,290	950
Investments	1,600	-	-
	3,670	1,290	950
Current assets:
Inventory	530	390	240
Trade receivables	640	470	270
Financial assets at fair value through profit or loss	300	150	220
Cash and bank balances	360	200	320
Total current assets	1,830	1,210	1,050
Total assets	5,500	2,500	2,000
Equity and liabilities:
Equity:
Ordinary share capital	2,500	500	500
Share premium	500	200	200
Retained profit	1,020	800	500
Total equity	4,020	1,500	1,200
Non-current liabilities:
12.5% loan notes	640	480	-
Deferred tax	260	100	200
	900	580	200
Current liabilities:
Trade payables	420	330	520
Current tax	160	90	80
	580	420	600
Total equity and liabilities	5,500	2,500	2,000

Additional information:

On 1 July 2022, Riva Limited acquired an 80% ordinary shareholding in Sai Limited for a cash consideration of Sh.1,100 million. The fair value of assets and liabilities of Sai Limited were equal to their carrying amounts at the date of acquisition.
The group policy is to measure the non-controlling interests at their proportionate share of net assets of the subsidiary at the date of acquisition.
On 1 January 2023, Riva Limited acquired a 40% ordinary shareholding in Tutu Limited for a cash consideration of Sh.500 million.
During the post-acquisition period, Riva Limited sold goods to Sai Limited for Sh.300 million. Riva Limited reported a 20% profit margin on this sale. Half of these goods remained in the ending inventory of Sai Limited at the year end of 31 March 2023.
Included in the trade receivables of Riva Limited was Sh.80 million due from Sai Limited. In the books of Sai Limited, the amount due to Riva Limited was shown at Sh.60 million because Sai Limited had remitted Sh.20 million but Riva Limited had not recorded the remittance.
On 1 October 2022, Riva Limited sold an assembly plant to Sai Limited for Sh.400 million reporting a 25% profit margin on the selling price and netted off the profit against its cost of sales. The group charges depreciation on plant at the rate of 20% per annum on cost on full year basis in the year of asset purchase and none in the year of disposal.
Impairment tests carried out on 31 March 2023 revealed that neither the goodwill on acquisition nor the investment in associate had been impaired during the year. 8. None of the group companies paid dividends during the year to 31 March 2023.

Required:

(a) Consolidated statement of profit or loss for the year ended 31 March 2023.

(b) Consolidated statement of financial position as at 31 March 2023.

3

Preparation of Published Financial Statements

The following trial balance was prepared by Salama Ltd. as at 31 December 2022:

	Sh.“000”	Sh.“000”
Ordinary share capital (Sh.10 each)		20,000
8% redeemable preference shares		12,000
6% debentures		10,000
Revaluation reserve		3,400
Retained earnings (1 January 2022)		14,160
Revenue		283,460
Inventory (1 January 2022)	12,400
Purchases	147,200
Distribution costs	22,300
Administrative expenses	34,440
Interest paid on debentures	300
Interim dividends paid: - Ordinary	2,000
Interim dividends paid: - Preference	480
Investment income		1,500
Leasehold building	56,250
Plant and equipment at cost	55,000
Furniture and fittings at cost	35,000
Investment	34,500
Accumulated depreciation:
Leasehold building		18,000
Plant and equipment		12,800
Furniture and fittings		9,600
Accounts receivable	35,700
Bank overdraft		1,680
Accounts payable		17,770
Deferred tax		5,200
Suspense account		26,000
	435,570	435,570

Additional information:

1.	The inventory as at 31 December 2022 was valued at Sh.16 million. However, there were some goods which were considered obsolete with a net realisable value of Sh.400,000 and a cost of Sh.450,000 with a net replacement value of Sh.350,000.
2.	The 6% debentures were issued on 1 July 2022. Interest on debentures is payable semi-annually.

3.	The policy of the company in relation to the depreciation of its assets is as follows:
	Asset	Rate per annum	Method
	• Leasehold building	4%	On straight line basis
	• Plant and equipment	20%	On straight line basis
	• Furniture and fittings	4%	On reducing balance basis

	The plant and equipment had a residual value of Sh.5 million. Depreciation is classified as cost of sales expense except for the depreciation on furniture and fittings which is classified as administrative expense.
4.	The taxable timing differences were Sh.24 million while the deductible timing differences were Sh.10.5 million during the year.
5.	The corporation tax of Sh.21.4 million is to be provided for the year.
6.	The suspense account represents two components: • Proceeds from sale of plant of Sh.16 million whose cost was Sh.20 million and an accumulated depreciation of Sh.2.5 million. • Sh.10 million being a bonus issue of shares.
7.	The directors propose to pay a final dividend of Sh.1.50 per share on the outstanding shares at the year end.
8.	The tax rate was 30%.
Required:
(a)	Statement of profit or loss for the year ended 31 December 2022.
(b)	Statement of changes in equity for the year ended 31 December 2022.
(c)	Statement of financial position as at 31 December 2022.

4

Preparation of Financial Statements for different entities/Transaction

Baraka and Faulu were in partnership sharing profits and loses equally until 30 September 2021 when they decided to convert the partnership into a limited company; Bafa Ltd. The conversion of the books of account was however not completed.

The following trial balance was extracted from the books of account as at 30 September 2022:

	Sh.“000”	Sh.“000”
Revenue		780,000
Production costs	450,000
Distribution costs	42,000
Administrative expenses	156,000
Inventory – 30 September 2021	109,200
Interest paid on loan stock	18,000
Income tax		1,200
Dividends paid	12,000
Property, plant and equipment	342,000
Accumulated depreciation – 30 September 2021		93,540
Suspense account		7,200
Trade receivables	296,000
Cash and cash equivalents	80,740
Trade payables		72,000
Provisions (Legal claim)		24,000
Loan stock		240,000
Lease rentals	48,000
Deferred tax		36,000
Net profit to 30 September 2021		40,000
Current account - Baraka		16,000
Current account - Faulu		4,000
Drawings to 30 September 2021 - Baraka	28,000
Drawings to 30 September 2021 - Faulu	12,000
Capital accounts - Baraka		160,000
Capital accounts - Faulu		120,000
	1,593,940	1,593,940

Additional information:

1.	Closing inventory as at 30 September 2022 was valued at Sh.132 million.
2.	On 1 October 2021, the company leased some equipment to boost production. The lease was for five years. The lease rental payments were Sh.24 million payable semi-annually in arrears. The fair value of the equipment was Sh.186 million. Depreciation is to be charged on straight line basis and allocated to cost of sales. The interest rate implicit in the lease is at 5% per half year.
3.	The suspense account represents sales proceeds from some items of plant and equipment which had cost Sh.36 million and which were disposed of during the year. The accumulated depreciation for the disposed items as at 30 September 2021 was Sh.27 million. Any gain or loss on disposal was to be adjusted in the depreciation expense account.
4.	The income tax amount of Sh.1.2 million included in the trial balance was the estimated tax as at 30 September 2021. The current year’s tax is estimated at Sh.9 million. In addition, a deferred tax liability of Sh.36 million was provided for as at 1 October 2021. As at 30 September 2022, temporary differences were Sh.168 million. The tax rate is 30%.
5.	A legal claim of Sh.60 million was lodged against the company during the year by a customer. The directors estimated that there was a 40% possibility of the claim being successful and had made a provision of Sh.24 million which was included in the administrative expenses.

6.	Property, plant and equipment as at 30 September 2022 comprised:
		Land	Building	Plant, equipment and furniture
		Sh.“000”	Sh.“000”	Sh.“000”
	Cost	72,000	108,000	162,000
	Accumulated depreciation	-	27,000	66,540
	Useful life (in years)	-	50	4
7.	Depreciation is to be provided on a straight-line basis and apportioned as follows:
	Cost	Percentage (%)
	Cost of sales	80
	Distribution cost	10
	Administrative expenses	10

8.

No entries were made to record the conversion of the partnership into a limited company. The assets were taken over by the company on 1 October 2021 at their book values except land which was revalued to Sh.80 million. The company issued to the partners 32 million shares of Sh.10 each in settlement of their outstanding capital account balances.

Required:

(a) Statement of profit or loss for the year ended 30 September 2022.

(b) Statement of financial position as at 30 September 2022.

5a

Accounting for Assets and Liabilities

In the context of International Accounting Standard (IAS) 12, Income Taxes:

(i) Explain the difference between “taxable temporary differences” and “deductible temporary differences”.

(ii) Suggest how the tax base for “assets”, “revenue received in advance” and “other liabilities” can be determined.

(iii) A deferred tax liability is generally recognised for all taxable differences. There are however exceptions to this rule.

Summarise TWO exceptions to the above rule.

5b

BXL Manufacturers Ltd., a small firm engaged in the production of fertilizer, purchased an item of equipment for Sh.12 million on 1 July 2018. The company provides depreciation on equipment on a straight-line basis at the rate of 25% per annum. During the four years from 1 July 2018 to 30 June 2022, the profit after tax and allowed wear and tear charges for tax purposes were as follows:

Period	Profit after tax	Allowable wear and tear charges
	Sh.“000”
1 July 2018 – 30 June 2019	2,400	40% on cost
1 July 2019 – 30 June 2020	2,700	30% on cost
1 July 2020 – 30 June 2021	2,850	20% on cost
1 July 2021 – 30 June 2022	2,550	10% on cost

Corporation tax for the period of four years remained at the rate of 30%.

Required:

Compute for each of the years ended 30 June 2019, 2020, 2021 and 2022:

(i) Taxable profit.

(ii) Deferred tax.

April 2023

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