KASNEB Financial Reporting - Question 2a

The following trial balance was extracted from the books of Kaleb Ltd. as at 31 March 2024: Sh.“000”Sh.“000”Ordinary share capital 475,000Share premium95,0... [Click to view full question and step-by-step solution]

FRA April 2024 Past Paper & PDF Solutions

1a

Accounting for Assets and Liabilities

The objective of International Accounting Standard (IAS) 2 – Inventories, is to prescribe the accounting treatment for inventories for various types of business organisations.

Required:

Summarise the key requirements of IAS 2 for manufacturing entity under the following headings:

(i) Scope of the term “inventories”.

(ii) Measurement of inventories.

(iii) Disclosure requirements.

1b

Accounting for Assets and Liabilities

Highlight FOUR categories of expenses that should be recognised in the statement of profit or loss in accordance with International Accounting Standard (IAS) 19 – Employee benefits.

1c

Accounting for Specialized Transactions

International Financial Reporting Standard (IFRS) 15 – Revenue from contracts with customers specifies how and when an entity will recognise revenue.

The standard provides a single principle based five-step model to be applied to all contracts with customers.

Required:

Describe the five-step model as specified under IFRS 15.

1d

Accounting for Assets and Liabilities Accounting for Specialized Transactions

With reference to International Financial Reporting Standard (IFRS) 9 – Financial instruments, explain the requirement for derecognition of financial instruments.

2a

Preparation of Financial Statements for different entities/Transaction

The following trial balance was extracted from the books of Kaleb Ltd. as at 31 March 2024:

	Sh.“000”	Sh.“000”
Ordinary share capital		475,000
Share premium		95,000
Retained profit (1 April 2023)		184,600
8% loan note		120,000
Revenue		1,783,800
Cost of sales	1,300,500
Distribution costs	209,900
Administrative costs	258,600
Inventory (31 March 2024)	308,000
Trade receivables	382,400
Trade payables		388,300
Bank balance		27,500
Deferred tax	33,000
Property at cost (Land Sh.87 million)	457,000
Plant and equipment at cost	360,000
Motor vehicles at cost	82,000
Fixtures and fittings at cost	64,000
Accumulated depreciation (1 April 2023):
Building		162,800
Plant and equipment		119,400
Motor vehicles		41,000
Fixtures and fittings		25,600
Interest paid	9,600
Suspense account		42,000
	3,465,000	3,465,000

Additional information:

1.

During the year ended 31 March 2024, the company sold of an item of plant with a carrying amount of Sh.46,200,000 for cash proceeds of Sh.42,000,000. The disposal proceeds were credited to the suspense account. Plant and equipment is depreciated at the rate of 12.5% per annum on reducing balance basis. Full year depreciation is provided in the year of asset purchase and none in the year of disposal. Depreciation and any gain or loss on disposal of plant and equipment should be classified under the cost of sales.

2.	Depreciation on other non-current assets is provided and allocated as follows:
	Asset	Rate per annum (%)	Basis	Allocation
	Building	2	Straight line	Administration
	Motor vehicles	25	Straight line	Distribution
	Fixtures and fittings	10	Straight line	Administration

3.	The 8% loan note was issued on 1 April 2023 and will be redeemable in three years’ time at a substantial premium which gives an effective interest rate of 10% per annum.
4.	Tax provision for the year to 31 March 2024 was determined to be a tax credit estimated at Sh.15,700,000. In addition, at 31 March 2024, the tax bases of assets and liabilities exceeded their carrying amounts by Sh.121,000,000. The income tax rate applicable to Kaleb Ltd. is 30%.
Required:
(i)	Property, plant and equipment movement schedule for the year ended 31 March 2024.
(ii)	Statement of profit or loss for the year ended 31 March 2024.

2b

Accounting for Assets and Liabilities

On 30 June 2022, Fora Ltd. had a credit balance on its deferred tax account of Sh.1,340,600 all in respect of differences between depreciation and capital allowances. During the year ended 30 June 2023, the following transactions took place:

Sh.45 million was charged against profit in respect of depreciation. The tax computation showed capital allowances of Sh.50 million.
Interest receivable of Sh.50,000 was reflected in profits for the period. However, only Sh.45,000 of interest was actually received during the year. Interest is not taxed until received.
Interest payable of Sh.32,000 was treated as an expense for the period. However, only Sh.28,000 of interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is paid.
During the year, Fora Ltd. incurred development costs of Sh.500,600 which it has capitalised. Development costs are an allowable expense for tax purposes in the period in which they are paid.
Land and buildings with a net book value of Sh.4,900,500 were revalued to Sh.6 million.
The tax rate is 30%.
Fora Ltd. has a right to offset deferred tax asset and deferred tax liabilities.

Required:

Determine the deferred tax liability on 30 June 2023.

3

Accounting and Financial Statements for Interests in Other Entities

Poloh Ltd. acquired 90% of the ordinary shares of Sh.10 par value in Soloh Ltd. on 1 November 2021 paying Sh.30 per share. The balance on Soloh Ltd.’s retained reserves at this date was Sh.9,600 million.

On 1 May 2023, Poloh Ltd. acquired 30 % of Aloh Ltd.’s Sh.10 ordinary shares for Sh.35 per share.

The statements of financial position of the three companies as at 31 October 2023 are provided below:

Statements of financial position as at 31 October 2023:

	Poloh Ltd.	Soloh Ltd.	Aloh Ltd.
	Sh.“million”	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment	96,600	43,200	19,800
Investments	48,000	10,920	-
	144,600	54,120	19,800
Current assets:
Inventories	9,960	4,080	3,000
Trade receivables	6,240	3,480	4,200
Bank balances	2,880	-	1,200
	19,080	7,560	8,400
Total assets	163,680	61,680	28,200
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 each)	60,000	14,400	7,200
Revenue reserves	87,600	26,400	16,800
	147,600	40,800	24,000
Non-current liabilities:
10% debentures	6,000	2,880	-
Current liabilities:
Trade payables	5,040	11,520	2,400
Current tax	5,040	4,200	1,800
Bank overdraft	-	2,280	-
	10,080	18,000	4,200
Total equity and liabilities:	163,680	61,680	28,200

Additional information:

1.	The details relating to revenue reserves were as follows:
		Poloh Ltd.	Soloh Ltd.	Aloh Ltd.
		Sh.“million”	Sh.“million”	Sh.“million”
	Revenue reserves as at 1 November 2022	72,000	16,800	9,600
	Retained earnings for the year ended 31 October 2023	15,600	9,600	7,200
		87,600	26,400	16,800

2.	It is the group’s policy to value non-controlling interest at acquisition date at fair value. The fair value of non-controlling interest on 1 November 2021 was Sh.3,600 million.
3.	A cheque of Sh.480 million from Soloh Ltd. to Poloh Ltd. was not received until 3 November 2023. Intercompany balances are included in the accounts receivables and payables as appropriate.
4.	In October 2023, Poloh Ltd. sold goods to Aloh Ltd. for Sh.780 million. These were transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the inventory of Aloh Ltd. as at 31 October 2023.
5.	Just prior to its acquisition, Soloh Ltd. was successful in applying for a six year licence to dispose of waste products. The licence was granted by the County government at no cost. However, Soloh Ltd. estimated that the licence was worth Sh.2,160 million at the date of acquisition.
6.	On 1 November 2021, Soloh Ltd. owned an investment property that had a fair value of Sh.1,440 million in excess of its book value. The value of this property has not changed since acquisition
Required:
(a)	Computation of goodwill on each investment.
(b)	Group statement of financial position as at 31 October 2023.

4a

Public Sector Accounting Standards

In the context of International Public Sector Accounting Standard (IPSAS) 23 – Revenue from non-exchange transactions (taxes and transfers):

(i) Explain when an entity is required to recognise an asset in respect of taxes.

(ii) Citing TWO suitable examples, explain the term “transfers”.

4b

Accounting for Specialized Transactions

Mazuri benefits scheme is a registered retirement scheme. The trustees of the scheme extracted the following trial balance as at 30 September 2023:

	Sh.“million”	Sh.“million”
Interest receivable	80
Payable to members		8
Receivable from members	635.6
Current account deposits	32.2
Fixed deposits	260
Accumulated fund balance (1 October 2022)		7,640
Employer’s contribution		630.6
Offshore investment in shares	1,200
Property, plant and equipment	800
Government securities	590
Investment in unquoted shares	2,500
Investment in quoted shares	3,000
Provision for exchange losses		160
Interest on investments		640
Members contributions		250.2
Management expenses	7
Withdrawals from scheme	15
Pensions and commutations	209
	9,328.8	9,328.8

Additional information:

1. Interest on investments amounting to Sh.24.5 million was accrued as at 30 September 2023.

2. Management expenses of Sh.450,000 was prepaid as at 30 September 2023.

Required:

(i) Statement of changes in net assets for the year ended 30 September 2023.

(ii) Statement of net assets as at 30 September 2023.

5a

Public Sector Accounting Standards

The following information was extracted from the financial records of the Ministry of Public Works for the fiscal year ended 30 June 2023:

	Sh.“million”
Accumulated fund as at 1 July 2022	17,850
Transfers in from exchequer	6,320
Transfers in from other ministries	1,870
Transfers out to other ministries	860
Fines and penalties	2,240
Wages, salaries and other emoluments	1,960
Finance expenses	680
Supplies consumed	1,790
Revenue from exchange transactions	6,730
Premises	26,390
Motor vehicles	20,350
Computers and accessories	1,430
Furniture and equipment	3,320
Receivables	13,680
Cash and cash equivalents	1,290
Payables	7,140
Long-term borrowings	29,600

Required:

Prepare the following financial statements for the Ministry of Public Works for the fiscal year ended 30 June 2023 in accordance with International Public Sector Accounting Standard (IPSAS) 1 “Presentation of Financial Statements”:

(i) Statement of financial performance for the year ended 30 June 2023.

(ii) Statement of financial position as at 30 June 2023.

5b

Accounting for Assets and Liabilities

On 1 December 2020, Zalendo Ltd. issued a 9% convertible loan stock at par value of Sh.120,000,000. There were no issue costs. Interest on loan stock is payable in arrears on 30 November each year.

The loan stock will be redeemable at par on 1 December 2024 or may be converted into 180 ordinary shares for every Sh.100 of the loan stock.

An equivalent loan stock without the conversion option would have carried an interest rate of 11% per annum.

Required:

With suitable calculations, demonstrate the accounting treatment of the above transactions in the financial statements of Zalendo Ltd. for the years ended 30 November: 2021, 2022, 2023 and 2024 (Round your answers to the nearest thousand).

April 2024

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