KASNEB Financial Reporting - Question 2b

Roy Ltd. has provided the following information to be used in inventory valuation: ProductCostRealisable valueSelling expenses Sh.“million” Sh.“million... [Click to view full question and step-by-step solution]

KASNEB Financial Reporting - Question 5

The following trial balance relates to Bidii Limited as at 31 December 2022: Sh.“000”Sh.“000”Property at cost (Building Sh.400 million) 600,000Plant at c... [Click to view full question and step-by-step solution]

FRA August 2023 Past Paper & PDF Solutions

1a

Public Sector Accounting Standards

International Public Sector Accounting Standard (IPSAS) 24 – Presentation of Budget Information in Financial Statements, requires a comparison of budget amounts and the actual amounts arising from execution of the budget to be included in the financial statements of entities that are required to, or elect to, make publicly available their approved budget(s), and for which they are, therefore, held publicly accountable.

With reference to International Public Sector Accounting Standard (IPSAS) 24:

(i) Differentiate between “original budget” and “final budget”.

(ii) Explain the requirements of the standard where there are changes between the original and final budget.

(iii) Summarise TWO key disclosure requirements of the standard.

1b

Analysing Financial Statements

Citing TWO practical examples, explain the meaning and application of “predictive analytics”, in the context of financial analysis.

1c

Preparation of Financial Statements for different entities/Transaction

With reference to International Accounting Standard (IAS) 21 – The Effects of Changes in Foreign Exchange Rates, describe the procedure for translating results and financial position of a foreign entity.

2a

Accounting and Financial Statements for Interests in Other Entities Preparation of Financial Statements for different entities/Transaction

Somalax Ltd. has its head office in town A and a branch in town B. Orders are received from customers by the head office, processed, packaged and sold at a profit of 12% of the selling price. Finished products are sent to the branch at selling price less 6%.

The following are extracts from the company as at 31 December 2022:

	Head Office		Branch
	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”
Bank balance	316,000		124,000
Branch office current account	720,000
Head office current account			562,080
Trade payables		800,000		80,000
Trade receivables	560,000		300,000
Other general expenses	800,000		80,000
Goods sent to branch		3,196,000	3,138,080
Sales		5,600,000		3,000,000
Purchase of material	8,000,000
Packaging material	880,000
Fixtures	320,000
Capital		2,000,000
	11,596,000	11,596,000	3,642,080	3,642,080

Additional information:

Fixtures are depreciated at the rate of 20% per annum on straight-line basis.
A provision is to be made for a bonus to the branch manager at the rate of 10% of the net profit after the bonus.
Finished products whose selling price to the public was Sh.61,618,000 were dispatched by head office to the branch on 30 December 2022 and were received on 10 January 2023.
The branch had sent cash amounting to Sh.100,000,000 to the head office on 28 December 2022. This amount was received on 8 January 2023.
Materials which cost the head office Sh.20,000,000 were considered worthless.
There was a loss of packaging materials costing Sh.10,000,000 at the head office.
There was a shortage of products from the head office at the branch valued at Sh.26,000,000. This loss was at invoice price by the head office to the branch.

Required:

(i) The head office, branch and combined statement of profit or loss for the year ended 31 December 2022.

(ii) The head office, branch and combined statement of financial position as at 31 December 2022, in a columnar format.

2b

Accounting for Assets and Liabilities

Roy Ltd. has provided the following information to be used in inventory valuation:

Product	Cost	Realisable value	Selling expenses
	Sh.“million”	Sh.“million”	Sh.“million”
A	100	120	25
B	50	60	5
C	75	85	15

Required:

Determine the value of closing inventory for Roy Ltd. in compliance with International Accounting Standard (IAS) 2 - Inventories

2c

Accounting for Specialized Transactions

On 1 January 2022, a farmer had a herd of 100 cattle all of which were 2 years old. At this date, the fair value less point of sale costs of the herd was Sh.10,000,000.

On 1 July 2022, the farmer purchased 20 cattle (each two and a half years old) for Sh.60,000 each.

As at 31 December 2022, three-year-old cattle were selling at the market for Sh.90,000 each. Market auctioneers usually charge a sales levy of 2%.

Required:

(i) Valuation of cattle bought on 1 July 2022.

(ii) Valuation of cattle as at 31 December 2022.

(iii) Total charge to statement of profit and loss for the year ended 31 December 2022.

3

Accounting and Financial Statements for Interests in Other Entities

Pika Limited, a public limited entity intends to expand its operations by acquiring investments in other entities. On 1 November 2022, Pika Limited secured a 75% equity interest in Shiba Limited under the following terms:

An immediate cash payment at a fair value of Sh.13 per share on 1 November 2022.
An issue of three ordinary shares of Sh.10 par value in Pika Limited for every five shares acquired in Shiba Limited. The fair value of a Pika Limited share was Sh.13 per share at the date of acquisition. The share issue has not yet been recorded by Pika Limited.

On the same date, Pika Limited also acquired a 30% equity shareholding in Amua Limited paying Sh.24 million in cash.

The following draft statements of financial position as at 30 April 2023 relate to Pika Limited and Shiba Limited:

	Pika Limited	Shiba Limited
	Sh.“000”	Sh.“000”
Non-current assets:
Property, plant and equipment	135,000	100,400
Investments: Shiba Limited (6 million shares at Sh.13 each)	78,000	-
Investments: Amua Limited	24,000	-
	237,000	100,400
Current assets:
Inventory	28,400	12,100
Trade receivables	27,500	19,900
Cash and cash equivalents	10,600	6,800
Total assets	303,500	139,200
Equity and liabilities:
Equity:
Ordinary shares of Sh.10 each	160,000	80,000
Retained profit: As at 1 May 2022	62,400	12,800
Retained profit:For the year ended 30 April 2023	21,700	10,800
Total equity	244,100	103,600
Non-current liabilities:
10% bank loans	25,000	10,000
Deferred tax	3,700	3,100
Current liabilities:
Trade payables	28,800	21,200
Current tax payable	1,900	1,300
Total equity and liabilities	303,500	139,200

Additional information:

At the date of acquisition, the fair values of Shiba Limited’s net assets approximated their carrying values with the exception of plant whose fair value exceeded its carrying amount by Sh.10 million. The plant had a remaining useful life of ten years at the date of Shiba Limited’s acquisition. The plant is being depreciated on a straight-line basis. The plant is still carried at its carrying value in Shiba Limited’s financial statements. No fair value adjustments were necessary on the acquisition of investment in Amua Limited.
On 28 April 2023, Shiba Limited sent goods at an invoice price of Sh.7 million to Pika Limited which Pika Limited neither received nor recorded until 5 May 2023. Shiba Limited had marked up those goods by 25% on cost. The agreed trade payables recorded in the books of Pika Limited before the above transactions were Sh.6 million.
Pika Limited’s policy is to measure the non-controlling interests at fair value at the date of acquisition. For this purpose, the directors of Pika Limited considered Shiba Limited’s share price of Sh.12 per share to be appropriate.
Impairment tests performed on 30 April 2023 revealed that goodwill on acquisition of Shiba Limited had not been impaired, but due to declining sales of Amua Limited, the value of investment in Amua Limited had been impaired to the extent of Sh.2 million.
Amua Limited reported a profit after tax of Sh.4 million for the year ended 30 April 2023.
Assume all profits and losses of the three companies accrued evenly throughout the year.

Required:

(a) Calculate the value of goodwill arising on acquisition of Shiba Limited.

(b) Determine the value of investment in Amua Limited as at 30 April 2023.

(c) Prepare a consolidated statement of financial position for Pika Group as at 30 April 2023.

4a

Preparation of Published Financial Statements

Lilongwe Ltd. is a public listed company. Details of the company’s statement of financial position as at 31 March 2022 and 31 March 2023 are shown below together with other relevant information.

	Statement of financial position as at 31 March:
	2023		2022
	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment		880		760
Intangible assets		400		510
		1,280		1,270
Current assets:
Inventory	350		420
Trade receivables	808		372
Interest receivable	5		3
Short term deposits	32		120
Bank	15	1,210	75	990
Total assets		2,490		2,260
Share capital and reserves:
Ordinary shares of Sh.1 each		300		200
Reserves:
Share premium	60		-
Revaluation reserves	112		45
Retained earnings	1,098	1,270	1,165	1,210
Total equity		1,570		1,410
Non-current liabilities:
Non-current liabilities:
12% loan note	-		150
8% variable rate loan note	160		-
Deferred tax	90	250	75	225
Current liabilities:
Trade payables	530		515
Bank overdraft	125		-
Taxation	15	670	110	625
		2,490		2,260

Additional information:

1.	Details of property, plant and equipment as at:
			31 March 2023		31 March 2022
		Cost/ valuation	Depreciation	Carrying amount	Cost/ valuation	Depreciation	Carrying amount
		Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”
	Land and building	600	12	588	500	80	420
	Plant	440	148	292	445	105	340
				880			760

2.	The company revalued the carrying value of land and building by an increase of Sh.70 million on 1 April 2022. On 31 March 2023, it transferred Sh.3 million from revaluation reserves to retained earnings relating to depreciation on revaluation of buildings.
3.	During the year, the company acquired new plant at a cost of Sh.60 million and sold some old plant for Sh.15 million, incurring a loss of Sh.12 million.
4.	The following is the statement of profit or loss (extract) for the year ended 31 March 2023:

		Sh.“million”	Sh.“million”
	Operating loss		(32)
	Interest receivable		12
	Finance costs		(24)
	Loss before tax		(44)
	Income tax repayment claim	14
	Deferred tax charge	(15)	(1)
	Loss for the period		(45)
	Finance costs are made of:
	Interest expenses	(18)
	Penalty for early loan redemption	(6)
		24)
5.	Short term deposits are deemed as cash equivalents.
6.	Dividends of Sh.25 million were paid during the year.

Required:

Cash flow statement for Lilongwe Ltd. for the year ended 31 March 2023 in line with International Accounting Standard (IAS) 7 - Cash Flow Statements.

4b

Accounting for Assets and Liabilities

An item of plant and equipment in the books of Lima Ltd. had a carrying amount of Sh.6,000,000. It was classified as held for sale on 30 September 2022. At that date, its fair value less costs to sell was estimated at Sh.5,500,000.

The asset was sold for Sh.5,550,000 on 30 November 2022. Lima Ltd.’s year end was 31 December 2022.

Required:

(i) Describe how the classification as held for sale and subsequent disposal should be treated in the financial statements of Lima Ltd.

(ii) State how your response in (b) (i) above would change if the carrying amount of the asset at 30 September 2022 was Sh.5,000,000 and the rest of the amounts remained unchanged.

4c

Accounting for Assets and Liabilities

A company received legal advice that the most likely outcome of a court case brought by an employee is that it will lose the case and have to pay Sh.10 million. The legal team estimates that there is an 80% chance of this, but that there is also a 10% chance of having to pay Sh.12 million and a 10% chance of paying nothing.

Required:

Determine if a provision is necessary and the best estimate of provision, if any.

5

Preparation of Published Financial Statements

The following trial balance relates to Bidii Limited as at 31 December 2022:

	Sh.“000”	Sh.“000”
Property at cost (Building Sh.400 million)	600,000
Plant at cost	280,000
Motor vehicles at cost	70,000
Office equipment at cost	40,000
Accumulated depreciation (1 January 2022):
Building		80,000
Plant		111,160
Motor vehicles		42,000
Office equipment		15,000
Inventory (1 January 2022)	138,000
Purchases at cost	667,000
Distribution costs	44,000
Administrative expenses	93,500
Revenue		1,123,500
Trade receivables and trade payables	74,500	68,800
Bank balance		15,500
Deferred tax		32,400
Current tax	2,600
Bank interest	2,400
Ordinary share capital (Sh.10 par value)		200,000
Share premium		50,000
Retained profit (1 January 2022)		223,640
Interim dividend paid	10,000
Suspense account		60,000
	2,022,000	2,022,000

Additional information:

1.

During the year ended 31 December 2022, Bidii Limited disposed of an item of plant for cash proceeds of Sh.20,000,000 which were credited to the revenue account. No other accounting entry was made. The plant had cost Sh.39,700,000 and had an accumulated depreciation of Sh.15,860,000. Any gain/loss on disposal of plant should be included within the cost of sales. It is the company’s policy to provide for full year’s depreciation in the year of asset purchase and none in the year of disposal.

2.	Depreciation on property, plant and equipment is to be provided and allocated as follows:
	Asset	Rate per annum	Basis	Allocation
	Building	2.5%	Straight-line	Administrative
	Plant	10%	Reducing balance	Cost of sales
	Motor vehicles	20%	Straight-line	Distribution
	Office equipment	12.5%	Straight-line	Administrative

3.	It has been discovered that the former financial controller of Bidii Limited engaged in fraudulent financial reporting. Sh.12,000,000 of trade receivables are non-existent and need to be written off. Of this amount, Sh.7,000,000 relates to the year ended 31 December 2022, with the balance relating to prior periods.
4.	The existing debit balance on the current tax in the trial balance represents the under/over provision for previous year’s tax. A provision for current tax for the year ended 31 December 2022 of Sh.52,000,000 is required, together with a decrease to the deferred tax provision of Sh.3,000,000.
5.	Inventory count on 31 December 2022 revealed the value of inventory at a cost of Sh.85,000,000.
6.	On 30 December 2022, the company directors invited the current shareholders to subscribe for a rights issue on the basis of one new share for every five shares held at an exercise price of Sh.15 each. The cum rights price on the last day of trading was Sh.20 per share. The proceeds from the fully subscribed rights issue were credited to the suspense account.
Required: The following financial statements presented in a suitable format for publication:
(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.

August 2023

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