CPA INTERMEDIATE LEVEL FINANCIAL REPORTING AND ANALYSIS
WEDNESDAY: 21 August 2024. Morning Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) Distinguish between “taxable temporary differences” and “deductible temporary differences” as per the requirements of International Accounting Standard (IAS) – 12 “Income Taxes”. (4 marks)
(b) Explain THREE limitations of common size financial statements. (6 marks)
(c) International Public Sector Accounting Standard (IPSAS) 45 “Property, Plant and Equipment” provides public sector entities with a choice between the historical cost model and the current value model in the measurement of items of property, plant and equipment.
Required:
With reference to IPSAS 45 “Property, Plant and Equipment”, explain the accounting treatment of revaluation increases and revaluation decreases relating to property, plant and equipment in the financial statements of an entity that adopts the current value model. (4 marks)
(d) Citing examples, describe the accounting treatment of changes in accounting policies in line with International Accounting Standard (IAS) 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. (6 marks)
(Total: 20 marks)
QUESTION TWO
The following information was extracted from the financial statements of Xcel Ltd., Yep Ltd. and Zed Ltd. for the year ended 30 June 2024.
Statement of financial position as at 30 June 2024:
Xcel Ltd. Yep Ltd. Zed Ltd.
| Statement of financial position as at 30 June 2024: | |||
| Xcel Ltd. | Yep Ltd. | Zed Ltd. | |
| Non-current assets: | Sh.“million” | Sh.“million” | Sh.“million” |
| Property, plant and equipment | 2,100 | 1,500 | 900 |
| Intangible assets (including patents) | 400 | 300 | 200 |
| Investments | 1,400 | – | – |
| Current assets: | |||
| Inventories | 700 | 600 | 240 |
| Trade receivables | 640 | 340 | 160 |
| Financial assets at fair value | 360 | 260 | 240 |
| Bank and cash balance | 200 | 100 | 160 |
| Total assets | 5,800 | 3,100 | 1,900 |
| Equity and liabilities: | |||
| Equity and reserves: | |||
| Ordinary share capital (Sh.20 per share) | 1,600 | 400 | 200 |
| Share premium | 400 | 200 | 100 |
| Retained earnings | 800 | 700 | 500 |
| Shareholders funds | 2,800 | 1,300 | 800 |
| Non-current liabilities: | |||
| 10% debentures | 1,200 | 400 | 400 |
| Deferred tax | 500 | 200 | 100 |
Current liabilities:
Xcel Ltd. Yep Ltd. Zed Ltd. Sh.“million” Sh.“million” Sh.“million”
Trade payables 600 700 300
Current tax 500 300 200
Proposed dividends 200 200 100
Total equity and liabilities 5,800 3,100 1,900
Additional information:
1. Xcel Ltd. acquired its investments as follows:
| Company | Number of shares acquired | Cost of investment
Sh.“million” |
Retained earnings
Sh.“million” |
Date of acquisition |
| Yep Ltd. | 16 million | 960 | 300 | 1 July 2022 |
| Zed Ltd. | 3 million | 240 | 200 | 1 July 2023 |
Xcel Ltd. also invested in half of the 10% debentures of Yep Ltd. The fair value of the non-controlling interest in Yep Ltd. amounted to Sh.240 million.
2. The group use the full goodwill method. However it does not armotise goodwill, instead goodwill is assessed for impairment annually. Impairment tests for the year ended 30 June 2024 revealed that none of the goodwill is impaired.
3. Immediately prior to the date of its acquisition, Yep Ltd. revalued its non-current assets in readiness for acquisition as shown below:
| Carrying amount
Sh.“million” |
Fair value
Sh.“million” |
Remaining useful life in years | |
| Equipment | 500 | 580 | 10 |
| Patents | 300 | 320 | 10 |
4. During the year ended 30 June 2024, Xcel Ltd. sold non-current assets to Yep Ltd. for Sh.360 million. Xcel Ltd. marked-up the equipment at the rate of 20% per annum on cost. Yep Ltd. included the equipment in its non-current asset and charged depreciation at the rate of 20% per annum on cost.
5. During the year ended 30 June 2024, Yep Ltd. sold inventories to Xcel Ltd. for Sh.300 million. Yep Ltd. marked-up these goods at 25% on cost. Half of these goods were still held by Xcel Ltd. at the year end.
6. Xcel Ltd. owed Yep Ltd. Sh.200 million as at the year end with regards to the transaction in note 5 above. The books of Xcel Ltd. however showed that it owed Yep Ltd. Sh.160 million. Xcel Ltd. had sent a cheque to Yep Ltd. on 24 June 2024 which was not received by Yep Ltd. until 2 July 2024.
Required:
(a) Calculate the value of the goodwill arising on acquisition of the investments in Yep Ltd. and Zed Ltd. (6 marks)
(b) Prepare the group statement of financial position as at 30 June 2024. (14 marks)
(Total: 20 marks)
QUESTION THREE
(a) Alfa Ltd. has an year end of 30 June. On 25 April 2024, Alfa Ltd. bought goods from a Mexican supplier for 286,000 Pesos. The goods were still in inventory at year end.
The following exchange rates are applicable:
| Exchange rates | Pesos to Ksh. |
| 25 April 2024 | 11.16 |
| 16 May 2024 | 10.87 |
| 30 June 2024 | 11.02 |
Required:
Show the accounting entries for the transaction in each of the following events:
(i) On 16 May 2024, Alfa Ltd. pays the Mexican supplier in full. (2 marks)
(ii) The supplier remains unpaid at the year ended 30 June 2024. (2 marks)
(b) The following trial balance was extracted from the books of Lakers Ltd. as at 30 June 2024:
| Sh.“000” | Sh.“000 | |
| Revenue | 1,153,800 | |
| Cost of sales | 678,900 | |
| Distribution costs | 95,700 | |
| Administrative expenses | 118,400 | |
| Inventory as at 30 June 2024 | 117,500 | |
| Trade receivables and trade payables | 155,600 | 87,200 |
| Bank balance | 29,800 | |
| Ordinary share capital (Sh.10 par value) | 60,000 | |
| Share premium | 5,000 | |
| Retained earnings as at 1 July 2023 | 44,300 | |
| Property at cost (Buildings: Sh.150 million) | 220,000 | |
| Plant and equipment at cost | 102,000 | |
| Motor vehicles at cost | 28,000 | |
| Furniture and fixtures at cost | 12,000 | |
| Accumulated depreciation as at 1 July 2023:
· Buildings |
75,000 |
|
| · Plant and equipment | 29,600 | |
| · Motor vehicles | 11,200 | |
| · Furniture and fixtures | 4,800 | |
| Deferred tax | 16,600 | |
| Current tax | 2,800 | |
| Investment property at fair value | 7,800 | |
| 12% bank loan | 87,500 | |
| Interest paid | 5,250 | |
| Interim dividend paid | 1,250 | |
| 1,575,000 | 1,575,000 |
Additional information:
1. On 1 July 2023, the property of Lakers Limited was revalued for the first time to a market value of Sh.190 million of which Sh.100 million related to the buildings. The buildings were being depreciated on a straight line basis over their economic useful life, originally of 50 years and annual depreciation charged to administrative expenses.
The remaining useful life of buildings remained unchanged. Lakers Limited will make annual transfer to retained earnings in respect of excess depreciation upon revaluation of its assets. However, the company does not intend to account for deferred tax on the revaluation surplus.
2. Depreciation on other non-current assets is to be provided and allocated as follows:
Assets Rate per annum Basis Allocation Plant and equipment 12.5% Reducing balance Cost of sales Motor vehicles 20% Straight line Distribution Furniture and fixtures 10% Straight line Administrative
3. The 12% bank loan was issued on 1 October 2023 with the same effective interest rate as the coupon rate. Interest is payable semi-annually on 31 March and 30 September.
4. Investment property has been recorded at its fair value on 1 July 2023. The fair value gain on the investment property for the year ended 30 June 2024 amounted to Sh.1,100,000.
5. The balance on the current tax in the above trial balance represents the withholding tax paid on the company’s behalf. The current income tax for the year ended 30 June 2024 is estimated at Sh.69 million. In addition, the carrying amounts of Lakers Limited’s net assets exceeded their tax bases by Sh.73 million at 30 June 2024.
The corporation tax rate applicable to Lakers Limited is 30%.
6. During the year ended 30 June 2024, the company made a rights issue of ordinary shares at a concessionary price of Sh.12 per share, on the basis of one new share for every five held. The rights issue had already been posted in the financial records of Lakers Limited.
Required:
(i) Statement of profit or loss and other comprehensive income for the year ended 30 June 2024. (6 marks)
(ii) Statement of changes in equity for the year ended 30 June 2024. (4 marks)
(iii) Statement of financial position as at 30 June 2024. (6 marks)
QUESTION FOUR
(a) In the context of International Accounting Standard (IAS) 10 “Events After the Reporting Period”, distinguish between “adjusting events” and “non-adjusting events”. (4 marks)
(b) John, Kelvin and Linet have been into partnership business for several years sharing profits and losses in the ratio of 5:3:2 respectively after allowing for a 10% interest on fixed capital balances of the partners. No salaries or commission were to be paid to partners.
The trial balance as at 30 June 2024 extracted from the financial records of the business revealed the following:
| Sh.“000” | Sh.“000” | |
| Net profit for the year | 42,800 | |
| Inventory as at 30 June 2024 | 28,400 | |
| Accounts receivable | 23,800 | |
| Accounts payable | 32,700 | |
| Bank overdraft | 6,800 | |
| Property at carrying amount | 72,950 | |
| Plant and machinery at carrying amount | 37,730 | |
| Motor vehicles at carrying amount | 10,580 | |
| Office equipment at carrying amount | 25,240 | |
| Equity investments at fair value | 10,000 | |
| Capital accounts: John | 43,700 | |
| Kelvin | 28,500 | |
| Linet | 18,800 | |
| Current accounts: John | 14,790 | |
| Kelvin | 12,960 | |
| Linet | 9,850 | |
| Drawings: John | 4,370 | |
| Kelvin | 4,020 | |
| Linet | 2,910 | |
| Loan from Kelvin | 9,100 | |
| 220,000 | 220,000 |
Additional information:
The partnership was converted into a limited liability company JKL Limited with effect from 1 July 2024 under the following terms:
1. The purchase consideration on business purchase was agreed at Sh.150 million and the new company issued 15 million ordinary shares of Sh.10 par value each in full satisfaction of the purchase consideration.
2. Equity investments were taken over by the partners at the new fair value of Sh.18 million and allocated to the partners in their profit and loss sharing ratios.
3. Loan from partner Kelvin was transferred to the new company at its carrying amount.
4. Other assets and liabilities of the partnership were taken over by the new company at the following values:
Sh.“000”
• Property 74,560
• Plant and machinery 35,200
• Motor vehicles 9,520
• Office equipment 23,660
• Inventory at book value less 15%
• Accounts receivable at book value less 10%
• Current liabilities at book value
5. The new company issued two million ordinary shares of Sh.10 each at par value. The proceeds from the issue were utilised to settle the bank overdraft and the loan taken over, with the balance used as working capital.
Required:
The following ledger entries to close off the books of the partnership:
(i) Realisation account. (4 marks)
(ii) Partners current accounts. (4 marks)
(iii) Partners capital accounts. (3 marks)
(iv) Opening statement of financial position for JKL Limited as at 1 July 2024. (5 marks)
QUESTION FIVE
(a) Top Ltd. a Construction Company entered in a leasing agreement on 31 December 2023 for a piece of equipment costing Sh.94,920,000, with Zuk Bank Ltd. The lease requires Top Ltd. to pay an annual rent of Sh.27,220,000 payable in advance. The primary period of the lease is for 4 years. After the end of the primary period, Top Ltd. has the right to extend the lease indefinitely on a payment of a nominal annual rental. Top Ltd. believes that the equipment will last for 4 years and will have no scrap value at the end of that period. Top Ltd. depreciates assets of this type using straight line basis. Top Ltd. and Zuk Bank Ltd. have accounting periods ending 31 December. The implicit rate of interest is 10%.
Required:
(i) Show how the above transactions will be reflected in the statement of profit or loss extracts of Top Ltd. for each of the 5 years ending 31 December 2023, 31 December 2024, 31 December 2025, 31 December 2026
and 31 December 2027. (3 marks)
(ii) Prepare an extract statement of financial position of Top Ltd. as at 31 December 2023, 31 December 2024, 31 December 2025, 31 December 2026 and 31 December 2027. (6 marks)
(b) Explain the following terms as used in the accounts of professional practitioners:
(i) Office account. (1 mark)
(ii) Client account. (1 mark)
(c) The following trial balance was extracted from the books of Kakai and Kabanze a firm of practicing advocates as at 31 July 2024:
| Sh.“000” | Sh.“000” | |
| Cash at bank: Client account | 3,720 | |
| Office account | 8,355 | |
| Furniture, fitting and library books | 6,750 | |
| Insurance expenses | 1,275 | |
| Disbursement on behalf of clients | 13,500 | |
| Accounts payables | 4,080 | |
| Work-in-progress (1 August 2023) | 5,520 | |
| Clients for the money held on their behalf | 3,720 | |
| Cost charged to clients | 37,500 | |
| Communication expenses | 2,730 | |
| Printing and stationery | 5,250 | |
| Rent and rates | 9,000 | |
| Salaries | 10,800 | |
| Drawings | 9,000 | |
| Capital account | 30,600 | |
| 75,900 | 75,900 | |
Additional information:
1. The uncompleted work on 31 July 2024 was valued at Sh.3,525,000.
2. Depreciation to be provided at 20% per annum on the book value of the furniture, fittings and library books.
Required:
(i) Statement of profit or loss for the year ended 31 July 2024. (4 marks)
(ii) Statement of financial position as at 31 July 2024. (5 marks)
(Total: 20 marks)
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