UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
ACCT 301: FINANCIAL REPORTING I
TUTORIAL SET 2
Question 1
ADONKO LTD.
Adonko Ltd is a listed company reporting under IFRS. During the year ended 31 December, 2012,
the company changed its accounting policy with respect to property valuation. There are also a
number of other issues that need to be finalized before the financial statement can be published.
Adonko Ltd trial balance from the general ledger 31st December, 2012 showed the following
balances:
GHCm GHCm
Revenue 2648
Loan note interest paid 3
Purchases 1669
Distribution 514
Administrative expenses 345
Interim dividend paid 6
Inventories at 1st January, 2012 444
Trade receivable 545
Trade payable 434
Cash and cash equivalent 28
Stated capital ( ordinary shares issues at 50p) 100
Capital
surplus 314
Retained earnings at 1st January,2012 849
4% loan note repayable 2018 ( issued 2010) 150
Land and buildings: cost ( including GHC120m land, 380
Accumulated depreciation at 1st January,2012 64
Plant and equipment: cost, 258
Accumulated depreciation at 1st
January,2012 126
Investment property at 1st January, 2012 548
Rental
income 48
Proceeds from sale of
equipment 7
4740 4740
a) Closing inventories were counted and amounted to GHC 388m at cost. However, shortly after
the year ended out – of date inventories with a cost of GHC15m were sold for GHC8m.
b) The company decided to change its accounting policy with respect to its 10 year old land and
buildings from the cost model to the revaluation model. The revaluation amounts at 1st January,
2012 were GHC800m (including GHC 100m for the land). No further revaluation was necessary
at 31st December, 2012. The company wishes to treat the revaluation surplus as being realized
over the life of the assets.
c) Due to change in the company’s product portfolio plans, an item of plants with a carrying value
GHC22m at 31st December, 2011 (after adjusting for depreciation for the year) may be impaired
due to change in use. An impairment test conducted at 31st December, 2012, revealed its fair value
less costs to sell to be GHC16m. the assets is now expected to generate an annual net income
stream of GHC3.8m for the next 5 years at which point the asset would be disposed forGHC4.2m.
An appropriate discount rate is 8%.
5 year discount factors at 8% are:
Simple Cumulative
0.677 3.993
d) The income tax liability for the year is estimated at GHC27m. ignore deferred tax.
e) An interim dividend of 3p per share was paid on 30th June, 2012. A final dividend of 1.5p per
share was declared by the directors on 28th January, 2013.
f) During the year, Adonko Co. disposed of some malfunctioning equipment for GHC7m. the
equipment had cost GHC15m and had accumulated depreciation brought forward at 1st January
2012 of GHC3m.
There were no other additions or disposal to property, plant and equipment in the year.
g) The company treats depreciation on plant and equipment as a cost of sale and on land and
buildings as at administration cost. Depreciation rates as per the company’s accounting policy
notes are as follows:
Buildings Straight line over 50 years
Plant and equipment 20% reducing balance
Adonko Ltd’s accounting policy is to charge a full years depreciation in the year of an asset’s
purchase and none in the year of disposal.
h) On 1st July 2012, Adonko Ltd made a bonus issue of 1 share for every 4 held capitalizing its
retained earnings. This transaction has not yet been accounted for.
i) Adonko Ltd use the fair value model of IAS 40. The fair value of the investment property at 31st
December, 2012 was GHC586m.
Required:
a) Prepare statement of profit or loss and other comprehensive income for the year ended 31st
December 2012.
b) Prepare Statement of changes in equity for the year ended 31st December 2012.
c) Prepare Statement of financial position as at 31st December 2012
Question 2
The following trial balance relates to QM Company Ltd as at
30/9/2012
GH₵ '000 GH₵ '000
Revenue 213,500
Cost of sales 136,800
Distribution cost 12,500
Administrative expenses 19,000
Loan note interest and dividend paid 20,700
Investment income 400
Equity shares of GHS 0.25 each 60,000
6% loan note 25,000
Retained earnings at 1/10/2012 18,500
Land and building at cost (land element GHS 10m) 50,000
Plant and equipment at cost 83,700
Accumulated depreciation at 1/10/11: building 8,000
Plant and equipment 33,700
Equity financial assets investments 17,000
Inventory at 30/9/12 24,800
Trade receivables 28,500
Bank 2,900
Current tax 1,100
Deferred Tax 1,200
Trade payables 36,700
397,000 397,000
The following notes are relevant:
On 1/10/11, QM Company ltd sold one of its products for GHS 10m which is included in
revenue in the trial balance. As part of the sale agreement, QM is committed to the ongoing
servicing of this product until 30/9/14. The value of this service has been included in the
selling price of GHS 10m. The estimated cost of servicing is GHS 600,000 pa and QM’s
normal gross profit margin on this type of servicing is 25%. The service performance
obligation will be satisfied over time.
QM issued a GHS 25m 6% loan note on 1/10/11. Issue costs were GHS 1m and these have
been charged to administrative expenses. The loan will be redeemed on 30/9/14 at a premium
which gives an effective interest rate on the loan of 8%.
QM paid an equity dividend of GHS 0.08 per share during the year ended
30/9/12.
QM had been carrying land and buildings at depreciated cost, but due to a recent rise in
property price, it decided to revalue its property on 1/10/11 to market value at GHS 60m
(land element is GHS 12m). The property had a remaining life of 16 years at the date of its
revaluation. QM will make a transfer from the revaluation reserve to retained earnings in
respect of the realization of the revaluation reserve.
Plant and equipment is depreciated at 15% per annum using the reducing balance method.
All depreciation is charged to cost of sales.
The investment had a fair value of GHS 15.7m as at 30/9/2012. There were no acquisitions
or disposals of these investments during the year ended 30/9/12.
The balance on current tax represents the under / over provision of the tax liability for the
year ended 30/9/11. A provision for income tax for the year ended 30/9/12 of GHS 7.4mis
required. At 30/9/12, QM had taxable temporary differences on GHS 5m, requiring a
provision for deferred tax. Any deferred tax adjustment should be reported in the statement
of profit or loss. The income tax rate of QM is 20%.
Required:
a) Prepare the statement of profit or loss and other comprehensive income for QM
Company ltd for the year ended 30/9/12
b) Prepare the statement of changes in equity for QM for the year ended 30/9/12
c) Prepare the statement of financial position for QM as at
30/9/12
d) Explain the fundamental qualitative characteristics of information contained in
the IASB Conceptual framework illustrating your answer with specific reference to
non-current assets.
Question 3
The following is the trial balance of Kakai Ltd as at 31 December 2014.
Debit Credit
GHS000 GHS000
450,000,000 ordinary shares (issued at GHS 1 per share) 450,000
150,000,000 10% cumulative preference shares (issued at
GHS 1 per share) 150,000
Retained earnings – 1 January 2014 425,200
Revaluation surplus 150,000
General reserve 75,000
Bank overdraft 76,350
Provision for doubtful debts 8,650
20% loan notes (2013-2017) 150,000
Sales 2,290,000
Deferred taxation – 1 January 2014 75,000
Patents and trademarks 323,200
Leasehold land and buildings (cost/amortization) 487,500 75,000
Factory plant and equipment (cost/depreciation) 225,000 102,750
Office fixtures and fittings (cost/depreciation) 95,000 23,250
Motor vehicles (cost/depreciation) 112,500 37,500
Trade receivables/trades payable 266,400 146,300
Inventories – 1 January 2014 488,450
Purchases of raw materials 1,173,250
Manufacturing wages 375,000
Manufacturing overheads 187,500
Cash 7,700
Administrative expenses 237,150
Selling and distribution expenses 175,200
Financial, legal and professional expenses 81,150
- 4,235,000 4,235,000
Additional information
a) Inventory at January 2014 and 31 December 2014 is made up as follows:
1/1/2014 31/12/2014
Raw materials 162,600 168,900
Work on progress 49,100 56,700
Finished goods 276,750 413,000
b) During the year to 31 December 2014, the company acquired a new factory equipment for
GHS25, 000,000, paying in full. It is the company’s policy to charge a full year’s depreciation
in the year of acquisition and no depreciation in the year of disposal.
Depreciation of non- current assets is to be provided on the following bases:
i. Leasehold land and buildings 5% on cost
ii. Factory plant and equipment 10% on cost
iii. Office fixtures and fittings 15% on cost
iv. Motor vehicles 20% on reducing value
The motor vehicles are used equally between administrative and distribution activities.
c) Corporate income tax payable estimated on the profit for the year is GHS22, 400,000. Tax on
profits for the year to 31 December 2014 is payable on 31 March 2015. A transfer of GHS15,
000,000 is to be made to the deferred taxation account.
d) During the year to 31 December 2014, the company made a bonus issue from retained earnings,
issuing 1 share for every 3 ordinary shares held at GHS 1 per share. This transaction is yet to
be recorded in the books.
e) Provision is to be made for a full year’s interest on the loan notes.
f) Included in financial, legal professional expenses is consultancy fees of GHS 1,500,000 paid
for the acquisition of a new factory equipment during the year.
g) The directors have proposed that a dividend of 5Gp per share be paid for the year ended 31
December 2013.
Required:
Prepare the following statements of Kakai Ltd for publication in accordance with International
Financial Reporting Standards:
a) Statement of profit or loss and other comprehensive income for the year ended 31
December, 2014
b) Statement of changes in equity for the year ended 31 December 2014
c) Statement of financial position as at 31 December 2104
Ignore the requirement for notes to the financial statements but clearly show all relevant workings.
Question 4
MCN acquired a new subsidiary on 1 January 20X5. The subsidiary operated a defined benefit
pension plan for its senior management. As part of the fair value exercise, an actuarial valuation
was carried out on the defined benefit pension plan at that date. The plan assets had a fair value of
GHS72,600 and the present value of the pension obligation was GHS116,500.
The following information has been provided for nine months to 30 September 20X5:
GHS
Plan assets at 30 September 20X5 at fair value 102,100
Present value of obligation at 30 September 20X5 119,500
Current service cost 15,500
Contributions paid into the fund by MCN 48,200
Benefits paid to pensioners 10,600
Yield on high quality corporate bonds (per annum) 6%
The group accountant of MCN is unfamiliar with accounting for defined benefit plans, as the other
plans within MCN are defined contribution plans. She has been advised that the directors must
account for the plan in accordance with IAS 19 Employee benefits as revised in 2011.
Required
Prepare the extracts from the consolidated statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 30 September 20X5.
Question 5
The following costs were incurred in 2018 in the design and construction of a new office
building over a nine-month period during 2018:
GHC 000
Feasibility study 8
Architects’ fees 100
Site clearance (by external demolition professionals) 80
Construction materials 600
Cost of own inventories used in the construction (net realizable value
if sold outside the company GHC 24,000 30
Internal construction staff salaries during period of construction 360
External contractor cost 2,400
Income from renting out part of site as storage depot during early
phase of construction (12)
3,566
Required:
In accordance with IAS 16 Property, plant and equipment, calculate the amount that should be
capitalized as property in the financial statements for the year ending 31 December 2018.
Question 6
(a) Revaluation increase
Denise bought an item of property, plant and equipment for $80 million on 1 January 2012. The
asset had zero residual value and was to be depreciated over its estimated useful life of 20 years.
On 1 January 2015 the asset was revalued to its fair value of $95 million.
Calculate the amounts to shown in the financial statements of Denise for the year-ended 31
December 2015.
(b) Revaluation decrease
On 1 January 2013, Denise purchased an item of property, plant and equipment for $12 million.
Denise uses the revaluation model to value its non-current assets. The asset has zero residual
value and is being depreciated over its estimated useful life of 10 years. At 31 December 2014,
the asset was revalued to $14 million but at 31 December 2015, the value of the asset had fallen
to $8 million. Denise has not taken the effect of the revaluation at 31 December 2015 in its
financial statements.
Calculate the amounts to shown in the financial statements of Denise for the year-ended 31
December 2015.
Question 7
PPE and financial statements
The extracts from the trial balance of Kandy as at 30 September 2014 are:
$’000 $’000
Land ($5 million) and buildings – at cost 55,000
Plant and equipment – at cost 58,500
Accumulated depreciation at 1 October 2013
: buildings 20,000
: plant and equipment 34,500
The following notes are relevant:
Non-current assets:
The price of property has increased significantly in recent years and on 1 October 2013, the
directors decided to revalue the land and buildings. The directors accepted the report of an
independent surveyor who valued the land at $8 million and the buildings at $39 million on that
date. The remaining life of the buildings at 1 October 2013 was 15 years. Kandy does not make an
annual transfer to retained profits to reflect the realisation of the revaluation gain.
Plant and equipment is depreciated at 12½% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30 September
2014. Depreciation is charged to cost of sales.
Required:
Prepare extracts from the statement of profit or loss and other comprehensive income for Kandy
for the year ended 30 September 2014 and from the statement of financial position as at the same
date with regards property, plant and equipment
Question 8
The following details relate to two items of property, plant and equipment (A and B) owned by
Beta which are depreciated on a straight-line basis with no estimated residual value:
Item A Item B
Estimated useful life at acquisition 8 years 6 years
$ 000 $ 000
Cost on 1 April 2010 240,000 120,00
Accumulated depreciation (two years) (60,000) (40,000)
Carrying amount at 31 March 2012 180,000 80,000
Revaluation on 1 April 2012:
Revalued Amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalized on 1 April 2013 nil 14,400
At 31 March 2013 item A was still in use, but item B was sold (on that date) for $70 million.
Note: Beta makes an annual transfer from its revaluation surplus to retained earnings in respect
of excess depreciation.
Required:
Prepare extracts from:
i) Beta’s statements of profit or loss for the years ended 31 March 2013 and 2014 in respect of
charges (expenses) related to Property, Plant and Equipment.
ii) Beta’s statements of financial position as at 31 March 2013 and 2013 for the carrying amount
of property, plant and equipment and the revaluation surplus.
Question 9
The draft financial statements of Deegan plc for the year to 31 December 2015 are being prepared
and the accountant has requested your advice on dealing with the following issues.
(a) Deegan plc has an administration building which it no longer needs following a delayering
exercise. On 1 July 2015 Deegan plc entered into an agreement to let the building out to
another company. The building cost $600,000 on 1 January 2006 and is being depreciated
over 50 years. Deegan plc applies the fair value model under IAS 40 and the fair value of
the building was judged to be $800,000 on 1 July 2015. This valuation had not changed at
31 December 2015.
Another building has been let out for a number of years. It had a fair value of $550,000 at 31
December 2014 and $740,000 at 31 December 2015.
Required
Explain how these two buildings should be accounted for in the financial statements of Deegan
plc for the year to 31 December 2015 and quantify the amounts involved.
(b) Deegan plc owns a retail business which has suffered badly during the recession. Deegan plc
treats this business as a separate cash generating unit.
The carrying amounts of the assets comprising the retail business are:
$'000
Building 900
Plant and equipment 300
Inventory 70
Other current assets 130
Goodwill 40
An impairment review has been carried out as at 31 December 2015 and the recoverable amount
of the cash generating unit is estimated at $1.3m.
Required
Restate the carrying amounts of the assets of the retail business after accounting for the result of
the impairment review.