Unit: Financial Reporting
8 QuestionsExplain how IFRS 9 is likely to impact on the provisions for bad and doubtful debts by banks and by extension , the case of accessing bank loans
| Mwanzo Ltd. Sh."000" | Safari Ltd. Sh."000" | Upya Ltd. Sh."000" | |
| Non-current assets: | |||
| Property, plant and equipment | 7,960 | 4,600 | 2,680 |
| Patents | 500 | 840 | |
| Investments in: Safari Lid. | 5,000 | ||
| Upya Ltd. | 1,600 | ||
| Others | 300 | 400 | 120 |
| 15,360 | 5,840 | 2,800 | |
| Current assets: | |||
| Inventories | 1,140 | 800 | 600 |
| Trade receivables | 840 | 760 | 800 |
| Bank | - | 300 | 240 |
| 1,980 | 1,860 | 1,640 | |
| Total assets | 17,340 | 7,700 | 4,440 |
| Equity and liabilities: | |||
| Equity and reserves: | |||
| Ordinary shares of Sh.20 each | 4,000 | 2,000 | 1,000 |
| Reserves: Share premium | 2,000 | 1,000 | 200 |
| Revenue reserves | 9,000 | 3,800 | 2,400 |
| 15,000 | 6,800 | 3,600 | |
| Non-current liabilities: | |||
| Deferred tax | 400 | - | 160 |
| Current liabilities: | |||
| Trade payables | 1,500 | 900 | 560 |
| Current tax | 280 | - | 120 |
| Bank overdraft | 160 | - | - |
| 1,940 | 900 | 680 | |
| Total equity and liabilities | 17,340 | 7,700 | 4,440 |
| 1 | Mwanzo Ltd. acquired its investments as shown below: | ||||
| Company | Number of shares acquired | Cost of investment Sh."000" | Retained earnings Sh."000" | Date of acquisition | |
| Safari Ltd. | 80,000 | 5,000 | 2,400 | 1 October 2015 | |
| Upya Ltd. | 20,000 | 1,600 | 1,600 | 1 October 2016 | |
| 2 | At the date of its acquisition, the fair value of Safari Ltd.'s net assets were equal to their book values, with the exception of land that had a fair value of Sh.400,000 in excess of its book value |
| 3 | On 1 September 2017. Mwanzo Ltd. processed an invoice for Sh.100,000 in respect of an agreed allocation of management fee to Safari Ltd. As at 30 September 2017, Safari Ltd. had not accounted for this transaction. Prior to this, the current accounts between the two companies had been agreed at Safari Ltd. owing Sh.140,000 to Mwanzo Ltd. (included in trade receivables and trade payables respectively). |
| 4 | During the year ended 30 September 2017, Upya Ltd. sold goods to Mwanzo Ltd. at a selling price of Sh.280,000, which gave Upya Ltd. a profit of 40% on cost. Mwanzo Ltd. had halfof these goods in inventory as at 30 September 2017. |
| 5 | The fair value of the non-controlling interest (NCI) in Safari Ltd. was Sh.1,500,000. |
| TMN Enterprises Statement of financial position as at 31 August 2017 | ||
| Sh."000" | Sh."000" | |
| Non-current assets: | ||
| Premises | 10,500 | |
| Motor vehicles | 4,580 | |
| Furniture and fittings | 1,880 | |
| Equipment | 2,340 | 19,300 |
| Current assets: | ||
| Inventories | 3,000 | |
| Trade receivables | 2,000 | |
| Cash and bank | 200 | 7,200 |
| 26,500 | ||
| Capital account : Tenda | 12,000 | |
| : Mema | 8,000 | |
| : Nenda | 4,000 | 24,000 |
| Current account : Tenda | (2,000) | |
| : Mema | (3,000) | |
| : Nenda | (6,000) | (11,000) |
| Non-current liabilities: | ||
| Loan account - Mema | 2,000 | |
| Loan from microfinance bank | 4,000 | 6,000 |
| Current liabilities: | ||
| Trade payables and accruals | 7,500 | |
| 26,500 | ||
| 1 | The partners to take over the following assets: Equipment to be taken over by Tenda at an agreed valuation of Sh.2,000,000. Furniture to be taken over by Mema at a valuation of Sh.920,000. |
| 2 | The remaining assets were realised on installment basis as follows: 1s¹ installment Sh.12,000,000 2nd installment Sh.3,600.000 3rd installment Sh.2,610,000 |
| 3 | Nenda was adjudicated bankrupt before the dissolution and liquidation ofthe partnership was completed. |
| 4 | Liquidation expenses amounted to Sh.450,000. |
| 5 | Trade payables were settled net of a discount of Sh.700,000. |
| Sh."000" | Sh."000" | |
| Land | 20,100 | |
| Buildings | 42,600 | |
| Plant and machinery | 216,600 | |
| Accumulated depreciation: Buildings | 6,390 | |
| Plant and machinery | 127,710 | |
| Revenue | 180,030 | |
| Cost of sales | 65,670 | |
| Inventory (30 September 2017) | 6,450 | |
| Distribution costs | 6,690 | |
| Administrative expenses | 11,340 | |
| Income tax | 8,580 | |
| Investment property at fair value (1 October 2016) | 20,340 | |
| Finance cost | 7,020 | |
| 8% redeemable preference shares | 15,000 | |
| 10% debentures | 30,000 | |
| Intangible assets | 34,200 | |
| Trade receivables and trade payables | 8,700 | 5,340 |
| Ordinary shares (each share Sh.20 par value) | 90,000 | |
| Share premium | 6,000 | |
| Retained profit (1 October 2016) | 7,620 | |
| Deferred tax | 8,490 | |
| Bank and cash balances | 1,350 | |
| Investment at fair value | 26,940 | |
| 476,580 | 476,580 |
| 1 | The fair value ofthe investment property on 30 September 2017 was Sh.20,790,000. |
| 2 | Information relating to intangible assets was as follows: |
|
| Cost Sh."000" | Accumulated amortisation Sh."000" | ||
| Development cost on software (it is to be amortised over 5 years) | 25,800 | 15,480 | |
| Patent | 15,600 | - | |
| Research costs | 8,280 | - | |
| |||
| |||
| 3 | The following details are relevant to the property, plant and equipment:
|
| 4 | Savanna Ltd. is also a sales agent for Majani Ltd. and is entitled to a sales commission of 10% on the sales made on behalf of Majani Ltd. The net proceeds obtained from the sales (after deducting the commission) are remitted to Majani Ltd. During the financial year ended 30 September 2017, Savanna Ltd. sold goods worth Sh.20,700,000 on behalf of Majani Ltd. This amount was included in the sales revenue disclosed in the above trial balance. Savanna Ltd. had not remitted the net sales proceeds to Majani Ltd. |
| 5 | Inventory as at 30 September 2017 included partially damaged and slow moving goods. The cost of these goods was Sh.450,000 and they were eventually sold in October 2017 for Sh.128.400. |
| Finance costs comprised: | ||
| Sh."000" | ||
| Interest on debentures | 3,000 | |
| Interim dividends paid on ordinary shares | 4,440 | |
| Dividends paid on redeemable preference shares | 1,200 | |
| Investment income from tax exempt companies | 1,620 | |
| 7,020 |
| 7 | The corporation tax rate is 30%. | |
| 8 | The balance on the income tax in the trial balance represents the amount paid for the year. The tax expense for the year is estimated to be Sh.7,770,000 inclusive of an increase in deferred tax liability of Sh.1,020,000. |
| Sh."000" | Sh."000" | |
| Share capital | 37,500 | |
| General operating expenses | 65,000 | |
| Cash balance | 3,104 | |
| Cash recovered from hire purchase customers | 157,734 | |
| Cash sales | 36,000 | |
| Hire purchase trade receivables (1 October 2016) | 1,134 | |
| Property, plant and equipment | 50,000 | |
| Accumulated depreciation (1 October 2016) | 22,500 | |
| Retained earnings (1 October 2016) | 3,500 | |
| Provision for unrealised profit (1 October 2016) | 504 | |
| Purchases | 171,000 | |
| Trade payables | 40,000 | |
| Inventory (1 October 2016) | 7,500 | |
| 297,738 | 297,738 |
| 1 | The company's policy is to take credit for gross profit including interest for hire purchase sales in proportion to the cash collected. It does this by raising a provision against the profit included in the hire purchase trade receivables not yet due. |
| 2 | The cash selling price is fixed at 50% and the hire purchase selling price at 80% respectively against the cost of goods purchased. |
| 3 | The hire purchase contract requires an initial deposit of 20% of the hire purchase selling price, the balance to be paid in four installments at quarterly intervals. The first installment is due three months after the agreement is signed. |
| 4 | Hire purchase sales for the year amounted to Sh.270,000,000 (including interest). |
| 5 | Depreciation is charged on property, plant and equipment at the rate of 15% per annum on cost. One third of the depreciation relates to cash sales. |
| 6 | Operating expenses are to be apportioned on the basis of cash and hire purchase sales. |
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