KASNEB Financial Reporting - Question 5

The following trial balance was extracted from the books of Kima Ltd., a manufacturing company as at 31 October 2023: Sh.“000”Sh.“000”Ordinary share capi... [Click to view full question and step-by-step solution]

FRA December 2023 Past Paper & PDF Solutions

1a

Accounting for Specialized Transactions

With reference to International Financial Reporting Standard (IFRS) 6 – Exploration for and Evaluation of Mineral Resources:

(i) State the underlying principle for measurement of exploration and evaluation assets.

(ii) Describe THREE circumstances that indicate that an entity should test exploration and evaluation assets for impairment.

1b

Accounting for Assets and Liabilities

International Financial Reporting Standard (IFRS) 15 – Revenue from Contracts with Customers establishes the principles that an entity shall apply to report information about the nature, amount, timing and uncertainty of revenue from a contract with a customer.

Required:

Summarise FIVE ways through which the benefits of an asset can be obtained in the context of IFRS 15.

1c

Accounting for Specialized Transactions

International Accounting Standard (IAS) 26 – Accounting and Reporting by Retirement Benefit Plans provides the financial statements to be prepared by defined benefit plans.

Explain TWO key statements required under IAS 26.

1d

Public Sector Accounting Standards

(i) Explain the term “heritage assets” as applied under International Public Sector Accounting Standard (IPSAS) 17 – Property, Plant and Equipment, citing suitable examples.

(ii) Describe THREE characteristics of heritage assets.

2

Accounting and Financial Statements for Interests in Other Entities

G Limited acquired 80% of the ordinary shares of Sh.10 par value in S Limited on 1 February 2023 at a cost of Sh.3,612 million. G Limited had acquired 4,500,000 shares at a cost of Sh.488 million in B Limited on 1 November 2021 when B Limited’s revenue reserves stood at Sh.50 million.

The financial statements of the three companies for the year ended 31 October 2023 are provided below:

	Statement of profit or loss
	G Ltd.	S Ltd.	B Ltd.
	Sh.“million”	Sh.“million”	Sh.“million”
Revenue	3,600	1,500	1,000
Cost of sales	(1,400)	(600)	(400)
Gross profit	2,200	900	600
Investment income	150	-	-
Administrative expenses	(500)	(330)	(200)
Distribution costs	(200)	(120)	(100)
Finance cost	(80)	(60)	(40)
Profit before tax	1,570	390	260
Income tax expense	(300)	(150)	(80)
Profit after tax	1,270	240	180
Dividends paid	(600)	(120)	(100)
Retained profit for the year	670	120	80

Statement of financial position as at 31 October 2023:

	G Ltd.	S Ltd.	B Ltd.
	Sh.“million”	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment	5,000	4,200	1,900
Investment	4,500	450	-
	9,500	4,650	1,900
Current assets:
Inventory	1,200	900	500
Trade receivables	900	900	350
Cash and cash equivalents	400	300	150
	2,500	2,100	1,000
Total assets	12,000	6,750	2,900
Equity and liabilities:
Ordinary share capital	6,000	2,000	1,200
Share premium	1,500	400	300
Retained profit	2,500	1,950	300
	10,000	4,350	1,800
Non-current liabilities:
10% loan stock	800	1,000	400
Deferred tax	200	560	180
	1,000	1,560	580
Current liabilities:
Trade payables	800	750	430
Accruals	40	30	50
Current tax	160	60	40
	1,000	840	520
Total equity and liabilities	12,000	6,750	2,900

Additional information:

On date of acquisition, the fair value of identifiable net assets of S Ltd. approximated their carrying amount except for an item of plant whose fair value was in excess of its carrying value by Sh.150 million. This item of plant had a remaining economic useful life of 5 years.
On 30 September 2023, S Ltd. sold goods worth Sh.100 million to G Ltd. reporting a gross profit margin of 20% on this sale. G Ltd. had neither received nor recorded those goods in its books of account as at 31 October 2023.
The group policy is to measure the non-controlling interest at their proportionate share of net assets in the subsidiary at the date of acquisition.
The inter-company outstanding balances between G Ltd. and S Ltd. did not agree due to goods in transit as per note 2 above. As at 31 October 2023, the trade receivables of S Ltd included Sh.60 million due from G Ltd. Amount due from B Ltd. to G Ltd. stood at Sh.20 million.
Any goodwill on acquisition of the subsidiary or associate is considered impaired by 20%.

Required:

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

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

3

Preparation of Financial Statements for different entities/Transaction

R and M were partners in the business of buying and selling fruits for two activities; export and oil processing, sharing profits and losses in the ratio 2:1 for R and M respectively. The partners agreed that with effect from 1 October 2023, the business be split off and transferred to two separate companies; P Ltd. and Q Ltd. P Ltd. took over the fruit buying for export business while Q Ltd. took over the fruit buying for oil processing business.

	Sh.“000”	Sh.“000”
Non-current assets:
Land and building (cost)		750,000
Motor vehicles (cost)		300,000
Equipment (net book value)		90,000
Investment property		9,000
		1,149,000
Current assets:
Cash in hand	3,000
Trade receivables: Export	384,000
Trade receivables: Oil	648,000
Inventory: Export	1,380,000
Inventory: Oil	675,000	3,090,000
Total assets		4,239,000
Capital and liabilities:
Capital: R	1,500,000
Capital: M	900,000	2,400,000
Current account: R	78,000
Current account: M	72,000	150,000
Non-current liabilities:
Bank loan		72,000
Current liabilities:
Bank overdraft	537,000
Trade payables: Export	924,000
Trade payables: Oil	56,000	1,617,000
Total capital and liabilities		4,239,000

Additional information:

1.	P Ltd. took over all the non-current assets, cash, bank overdraft and its share of trade receivables, inventory and trade payables. Q Ltd. took its share of trade receivables, inventory and trade payables. The assets and liabilities were transferred at book values and the partners were paid Sh.300 million being goodwill for the oil business and Sh.240 million being goodwill for export business.
2.	The bank that had provided the loan agreed to accept Sh.43.2 million 10% debentures in P Ltd. and Sh.28.8 million 10% debentures in Q Ltd.
3.	On 1 October 2023, the purchase consideration was settled by the allotment of fully paid ordinary shares of Sh.20 each in the respective companies as follows: R: 71,250,000 shares in P Ltd. and the balance in shares in Q Ltd. M: 47,760,000 shares in Q Ltd. and the balance in shares in P Ltd.
4.	P Ltd. also raised a 12% debenture of Sh.600 million on 1 October 2023 and paid-off the bank overdraft. The expenses incurred in raising the 12% debentures amounted to Sh.21 million.
5.	P Ltd. and Q Ltd. also issued 3,000,000 and 4,500,000 fully paid ordinary shares of Sh.20 each respectively to two companies, E Ltd., and F Ltd. on 1 October 2023.
6.	None of the companies has amortised the goodwill.
7.	The formation expenses were paid by the respective companies as follows: Sh.“million” P Ltd. 39 Q Ltd. 24
Required:
(a)	Business purchases accounts.
(b)	Partners’ capital accounts.
(c)	Bank account.
(d)	Vendor’s account.
(e)	Statements of financial position for P Ltd. and Q Ltd. as at 31 October 2023 (assuming no other transactions took place).

4

Preparation of Financial Statements for different entities/Transaction

The following financial information was extracted from the accounting records of Bundo Limited, a public limited company:

Statement of financial position as at 31 October:

	2023	2022
	Sh.“000”	Sh.“000”
Assets:
Non-current assets:
Property, plant and equipment	118,400	113,600
Intangible assets	24,290	23,680
	142,690	137,280
Current assets:
Inventory	5,880	5,760
Trade receivables	4,070	4,290
Cash and cash equivalents	6,360	4,670
Total assets	159,000	152,000
Equity and liabilities:
Equity:
Ordinary share capital	40,000	32,000
Share premium	3,000	2,600
Revaluation surplus	3,400	2,560
Retained profit	52,770	42,400
Total equity	99,170	79,560
Non-current liabilities:
Long term borrowings	37,550	46,800
Deferred tax	6,750	7,070
Current liabilities:
Trade payables	7,800	8,200
Current tax	4,230	5,570
Interest payable	3,500	4,800
Total equity and liabilities	159,000	152,000

Statement of comprehensive income for the year ended 31 October 2023:

	Sh.“000”
Revenue	312,300
Cost of sales	(211,400)
Gross profit	100,900
Distribution costs	(35,280)
Administrative expenses	(43,120)
Profit from operations	22,500
Finance costs	(3,800)
Profit before tax	18,700
Income tax expense	(4,830)
Profit for the year	13,870
Other comprehensive income:
Revaluation gain on property (net of deferred tax)	840
Total comprehensive income for the year	14,710

Additional information:

1.	The property, plant and equipment was made up as follows:
		31 October 2023	31 October 2022
		Sh.“000”	Sh.“000”
	Cost of valuation	138,200	126,200
	Accumulated depreciation	(19,800)	(12,600)
	Carrying amount	118,400	113,600

	During the year ended 31 October 2023, the property was revalued upwards for a gain amounting to Sh.1,200,000. The company does not make any transfers for excess depreciation upon revaluation. However, it accounts for deferred tax on revaluation gain. The income tax rate applicable to Bundo Limited is 30%. Depreciation on property, plant and equipment has been charged to profit or loss.
2.	During the year ended 31 October 2023, Bundo limited acquired some patent rights at a cost of Sh.5,000,000. Any amortisation of intangible assets has been included in administrative expenses.
3.	The company repaid some borrowings which had matured during the year and issued new loans amounting to Sh.3,000,000.

Required:

A statement of cash flows for Bundo Limited for the year ended 31 October 2023 using the indirect method in accordance with the requirements of International Accounting Standard (IAS) 7 “Statement of cash flows”.

5

Preparation of Financial Statements for different entities/Transaction

The following trial balance was extracted from the books of Kima Ltd., a manufacturing company as at 31 October 2023:

	Sh.“000”	Sh.“000”
Ordinary share capital		2,500,000
Share premium		500,000
Revaluation reserve (1 November 2022)		600,000
Retained earnings (1 November 2022)		3,570,000
Purchases and revenue	3,000,000	17,400,000
Production cost	2,400,000
Administrative expenses	1,960,000
Distribution cost	740,000
Interest on loan	100,000
Research and development	940,000
Land and building at valuation (1 November 2022)	3,400,000
Equipment at cost	9,000,000
Investment property at valuation (1 November 2022)	4,400,000
Accumulated depreciation (1 November 2022):
- Building	800,000
- Equipment	900,000
Intangible assets at cost	1,000,000
Accumulated amortisation (1 November 2022)		100,000
Inventory (1 November 2022)	100,000
Bank balance	800,000
Trade receivables and trade payables	700,000	800,000
10% bank loan		2,000,000
Interim dividends paid	700,000
Corporate tax		70,000
	29,240,000	29,240,000

Additional information:

1.	Inventory as at 31 October 2023 was valued at Sh.130,000,000, but it was subsequently discovered that goods included in this value with a cost of Sh.14,000,000 were sold for Sh.4,000,000.
2.	Kima Ltd. took out the bank loan of Sh.2,000,000,000 on 1 November 2022 which is repayable in four equal annual installments. The interest rate on the loan is 10% per annum payable semi-annually.
3.	The corporation tax for the previous year was paid during the current year. The corporation tax for the year ended 31 October 2023 was Sh.1,250,000,000.
4.	The directors have discovered that a customer who owed Sh.250,000,000 as at year end was declared bankrupt.
5.	Included in the revenue is a grant from the government of Sh.300,000,000 that Kima Ltd. received for accepting to employ additional youth in the next financial year.
6.	Research and development expenditure comprised of: Sh.160,000,000 on general research. Sh.134,000,000 on developing new technology. At the end of the year the directors did not have confidence that the development will be successful. Sh.643,000,000 on development of new production technology. The development is almost complete and the directors are highly confident that the technology would result in significant cost savings.
7.	Intangible assets at cost relate to a development that was being amortised over a useful life of 10 years. As at 1 November 2022, this was reviewed and was then assessed as having a remaining useful life of 6 years.
8.	The Sh.3,400,000,000 relating to land and building is based on last year’s valuation and includes land at a valuation of Sh.2,000,000,000 and has an indefinite useful life. The building should be depreciated on the value at the start of the year. The remaining useful life was 20 years as at 1 November 2022.
9.	As at 31 October 2023, the values were as follows: Land Sh.2,500,000,000 Building Sh.1,140,000,000
10.	Equipment is depreciated on straight line basis over 5 years. Kima Ltd. estimated that the equipment is used in the business on the following basis: 50% on production. 25% in the administrative functions. 25% in the distribution functions.
11.	As at 31 October 2023, investment property was valued at Sh. 5,000,000,000 and the company policy is to use fair value on investment valuation.
Required:
(a)	A statement of comprehensive income for the year ended 31 October 2023.
(b)	Statement of financial position as at 30 October 2023.

December 2023

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