CPA Financial Reporting December 2025 Past Paper with Answers (PDF)

1a

Preparation of Published Financial Statements

International Accounting Standard (IAS) 8 “Accounting Policies, Changes in Accounting Estimates and Errors” provides guideline on the treatments of prior period errors.

Required:

(i) Explain the term “prior period errors” as per IAS 8.

(ii) Describe how prior period errors are corrected as provided by IAS 8.

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1b

Accounting for Specialized Transactions

International Financial Reporting Standard (IFRS) 15 “Revenue from contracts with customers” establishes a comprehensive framework for revenue recognition guiding on how and when revenue is recognised.

Required:

With reference to IFRS 15, explain the following:

(i) Contract modification.

(ii) Performance obligations.

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1c

Accounting for Assets and Liabilities

With reference to International Accounting Standard (IAS) 40 “Investment Property”, explain the accounting treatment of investment properties.

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1d

Preparation of Published Financial Statements Accounting for Assets and Liabilities

International Financial Reporting Standard (IFRS) 5 “Non-current Assets Held for Sale and Discontinued Operations”, provides that when an operation qualifies as a discontinued operation, the standard requires specific disclosures to help users understand the financial impact.

Required:

Explain THREE disclosure requirements for a discontinued operation segment.

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2

Accounting and Financial Statements for Interests in Other Entities

Hazel Limited, a public limited company which operates in motor vehicle industry has owned 75% of the voting share capital of Senter Limited, another public limited company in the same industry since 1 October 2021. The acquisition consideration comprised of cash payment of Sh.47 million made on 1 October 2021. The retained profit of Senter Limited at the date of acquisition amounted to Sh.19 milllion and had no other reserves.

The completed financial statements for Hazel Limited and Senter Limited for the year ended 30 September 2025 are as follows.

Statement of profit or loss and other comprehensive income for the year ended 30 September 2025:

	Hazel Limited	Senter Limited
	Sh.“000”	Sh.“000”
Revenue	282,000	192,000
Cost of sales	(197,400)	(153,600)
Gross profit	84,600	38,400
Distribution costs	(23,200)	(8,400)
Administrative expenses	(36,800)	(13,600)
Profit from operations	24,600	16,400
Finance costs	(4,800)	(3,600)
Investment income	6,200	3,200
Profit before tax	26,000	16,000
Income tax expense	(8,200)	(5,200)
Profit for the year	17,800	10,800
Other comprehensive income:
Gain on property revaluation	3,200	2,600
Total comprehensive income for the year	21,000	13,400

Statements of financial position as at 30 September 2025:

	Hazel Limited	Senter Limited
	Sh.“000”	Sh.“000”
Non-current assets:
Property, plant and equipment	130,300	78,200
Investment in Senter Limited	47,000	-
Other investments	67,000	32,000
	244,300	110,200
Current assets:
Inventory	18,800	14,500
Trade receivables	14,200	9,700
Cash and cash equivalents	3,700	2,600
Total assets	281,000	137,000
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 par value)	50,000	20,000
Share premium	5,000	2,000
Revaluation surplus	13,400	10,800
Retained profit	153,500	50,400
Total equity	221,900	83,200
Non-current liabilities:
Long-term borrowings	38,400	37,800
Deferred tax	4,900	3,600
Current liabilities:
Trade payables	13,200	10,600
Current tax	2,600	1,800
Total equity and liabilities	281,000	137,000

Additional information:

A fair value exercise conducted on 1 October 2021 revealed that the carrying amounts of Senter Limited net assets were equal to their fair values with the exception of an item of machinery which had a carrying amount of Sh.18 million below its fair value. As at 1 October 2021, the machinery had a remaining useful life of nine (9) years. Depreciation on machinery is charged to cost of sales.
Hazel Limited’s policy is to value the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interest in Senter Limited on 1 October 2021 was estimated at Sh.16 million.
On 28 September 2025, Senter Limited dispatched goods to Hazel Limited with a selling price of Sh.6 million. These goods were not received by Hazel Limited until 5 October 2025. Senter Limited applies a consistent mark-up on cost of 25% when arriving at its selling prices.
On 30 September 2025, Senter Limited’s records showed a receivable due from Hazel Limited of Sh.6 million. This differed from the equivalent payable in Hazel Limited’s records due to the goods-in-transit.
The investment income of Hazel Limited for the year ended 30 September 2025 includes Sh.2 million interest received on an 8% loan of Sh.25 million made to Senter Limited on 1 October 2024. The loan is repayable on 1 October 2028.
There has been no impairment losses within the group since acquisition.

Required:

(a) Consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2025.

(b) Consolidated statement of financial position as at 30 September 2025.

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3

Preparation of Financial Statements for different entities/Transaction

Highland Farm Ltd. is a medium size company that operates an Agri-business. The following trial balance was extracted from the books of the company as at 30 June 2025:

	Sh.“000”	Sh.“000”
Land and building (land Sh.150 million)	250,000	-
Farm machinery (cost Sh.135 million)	97,500
Sales of crops		43,750
Sale of cattle		60,000
Sale of carcases		18,750
Balance at bank		3,000
Payables		18,750
Insurance premium - crops	6,000
Inventory as at 1 July 2024:
Growing crops, seeds and fertiliser	25,000
Livestock	30,000
Livestock feeds	7,500
Administrative expenses	5,000
Expenses: Crops	12,500
Expenses: Livestock	15,370
Purchase of: Livestock	16,250
Purchase of: Seeds	5,000
Purchase of: Livestock feeds	875
Farm house expenses	1,500
Repairs of farm machinery	1,875
Farm tools	3,100
Receivables	37,500
Cash in hand	32,500
Farm manager salary	7,500
Farm workers’ wages	6,250
Ordinary share capital		300,000
Retained profit 1 July 2024		41,970
Loan from co-operative society		75,000
	561,220	561,220

Additional information:

1.	Inventory as at 30 June 2025 was valued as follows:
		Sh.“000”
	Growing crops	5,000
	Seeds, fertilisers and pesticides	7,500
	Livestock	50,000
	Livestock feeds	1,250

2.	Farm managers salary is charged to livestock and crop accounts in the ratio of 4:1 respectively.
3.	The valuation of farm tools as at 30 June 2025 was Sh.2,500,000. Any depreciation on farm tools is to be apportioned equally for crop and livestock respectively.
4.	Depreciation on farm machinery is to be provided at 20% per annum on cost. This depreciation and the repairs on farm machinery are to be charged to the general statement of profit or loss.
5.	Buildings are depreciated at 2.5% per annum on cost.
6.	Growing crops valued at Sh.6,500,000 were destroyed by floods. The insurance company accepted 90% of the loss suffered by the company.
7.	Crops consumed by the farm workers were valued at Sh.1,500,000. This amount was recovered from their wages.
8.	The loan from co-operative society had an accrued interest of Sh.3,000,000.
9.	The company gave a donation of harvested crops to the disaster management committee valued at Sh.2,500,000.

Required:

(a) Crop account and livestock account for the year ended 30 June 2025.

(b) General statement of profit or loss for the year ended 30 June 2025.

(c) Statement of financial position as at 30 June 2025.

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4

Analysing Financial Statements

The following completed financial statements for the year ended 31 October 2025 together with the relevant comparatives were extracted from the accounting records of Pemways Limited, a public limited company.

Statement of profit or loss and other comprehensive income for the year ended 31 October 2025:

	Sh.“000”
Revenue	36,000
Cost of sales	(26,350)
Gross profit	9,650
Distribution costs	(2,630)
Administrative expenses	(3,290)
Profit from operations	3,730
Finance costs	(1,000)
Investment income (dividend received)	150
Profit before tax	2,880
Income tax expense	(940)
Profit for the year	1,940
Other comprehensive income:
Gain on property revaluation	7,000
Fair value gain on equity investments	600
Total comprehensive income for the year	9,540

Statement of financial position as at 31 October:

	2025	2024
	Sh.“000”	Sh.“000”
Assets:
Non-current assets:
Property, plant and equipment	37,470	24,160
Investment in equity instruments	12,100	-
Current assets:
Inventory	9,580	6,880
Trade receivables	6,500	5,590
Cash and cash equivalents	3,330	1,870
Total assets	68,980	38,500
Equity and liabilities:
Equity
Ordinary share capital (Sh.10 par value)	40,000	20,000
Share premium	4,000	4,000
Revaluation reserve	6,800	-
Financial asset reserve	600	-
Retained earnings	4,040	2,350
Total equity	55,440	26,350
Non-current liabilities:
12.5% loan stock (2028)	8,400	7,600
Deferred tax	880	960
Current liabilities:
Trade payables	3,640	3,100
Current tax	620	490
Total equity and liabilities	68,980	38,500

Additional information:

1.	The property, plant and equipment comprised of:
		31 October 2025	31 October 2024
		Sh. “000”	Sh. “000”
	Cost of valuation	47,900	33,400
	Accumulated depreciation	(10,430)	(9,240)
	Carrying amount	37,470	24,160

2.	On 1 November 2024, the company revalued its property for the first time to a fair value of Sh.24 million (land: Sh.6 million). The property had cost Sh.25 million (land: Sh.5 million). The building was being depreciated on a straight-line basis at the rate of 2% per annum and had a remaining economic useful life of thirty (30) years as at the date of revaluation. The company did not account for deferred tax on this revaluation. However, it made an inter-reserve transfer for excess depreciation upon revaluation.
3.	During the year ended 31 October 2025, a motor vehicle with a cost of Sh.2,000,000 and an accumulated depreciation of Sh.800,000 was disposed of for cash proceeds of Sh.1,020,000. The gain or loss on this disposal has been included in the distribution costs.
4.	The company acquired new investments in equity investments instruments for cash and designated them as at fair value through other comprehensive income.
5.	During the year to 31 October 2025, the company made a 1 for 5 bonus issue of ordinary shares, utilising the share premium account.
6.	All sales and purchases were made on credit.
Required: A statement of cash flows for Pemways Limited for the year ended 31 October 2025, using the indirect method.

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5a

Public Sector Accounting Standards

In the context of International and Public Sector Accounting Standards (IPSAS) 4, “The effect of Changes in foreign exchange rate”, explain how foreign currency monetary item and non-monetary items are translated and the treatment of subsequent exchange differences on both monetary and non-monetary items.

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5b

Accounting for Assets and Liabilities

Belta Ltd. purchased an equipment for Sh.12 million on 1 July 2021. Depreciation on equipment is provided on a straight-line basis at the rate of 25% per annum. During the four years from 1 July 2021 to 30 June 2025, the profit after tax and allowed wear and tear charges for tax purposes were as follows:

	Profit after tax	Allowable wear and tear charges for tax purpose
	Sh.“000”
1 July 2021 – 30 June 2022	2,400	40% on cost
1 July 2022 – 30 June 2023	2,700	30% on cost
1 July 2023 – 30 June 2024	2,850	20% on cost
1 July 2024 – 30 June 2025	2,550	10% on cost

Corporation tax rate is 30%.

Required:

(i) Taxable profits.

(ii) Temporary differences.

(iii) Deferred tax account.

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5c

Analysing Financial Statements

As a newly employed accountant of Bakers Ltd., you have been presented with the following financial statements:

Statement of profit or loss for the years ended 30 June:

	2024 Sh.“000”	2025 Sh.“000”
Net turnover	456,500	420,000
Cost of sales	(295,000)	(227,000)
Gross profit	161,500	193,000
Operating expenses	(109,500)	(93,000)
Operating profit	52,000	100,000
Interest expenses	(14,500)	(3,000)
Investment income	5,000	4,500
Profit before tax	42,500	101,500
Income tax	(12,500)	(15,000)
Profit for the year	30,000	86,500

Statement of retained earnings for the year ended 30 June:

	2024	2025
	Sh.“000”	Sh.“000”
Retained profit brought forward	149,500	89,500
Net profit for the year	30,000	86,500
	179,500	176,000
Dividends: Preference shares	(10,000)	(9,000)
Dividends: Ordinary shares	(12,000)	(17,500)
Retained profit carried forward	157,500	149,500

Statement of financial position as at 30 June:

	2024	2025
	Sh.“000”	Sh.“000”
Assets:
Property, plant and equipment	106,000	132,000
Goodwill	10,000	5,000
Inventories	147,000	118,500
Account receivable	80,000	24,000
Cash and bank balances	26,000	28,500
	369,000	308,000
Equity and liabilities:
Share capital:
Ordinary shares	50,000	50,000
Preference shares	40,000	25,000
Retained earrings	157,500	149,500
Account payable	37,500	26,500
Accruals	25,500	20,000
Debentures	58,500	37,000
	369,000	308,000

Required:

Compute for the two years, the following ratios:

(i) Return on capital employed.

(ii) Assets turnover.

(iii) Current ratio.

(iv) Quick ratio.

(v) Debt to equity ratio.

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CPA Financial Reporting – December 2025 Past Paper & Answers

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CPA Financial Reporting – December 2025 Past Paper & Answers

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