PRACTICE QUESTIONS
Question One
The following trial balance relates to Faith at 30 September 2008:
GHS’000 GHS’000
Leasehold property – at valuation 1 October 2007 (note (i)) 50,000
Plant and equipment – at cost (note (i)) 76,600
Plant and equipment – accumulated depreciation at 1 October 2007 24,600
Capitalised development expenditure – at 1 October 2007 (note (ii)) 20,000
Development expenditure – accumulated amortisation at 1/10/07 6,000
Closing inventory at 30 September 2008 20,000
Trade receivables 43,100
Bank 1,300
Trade payables and provisions (note (iii)) 23,800
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses (note (iii)) 22,200
Preference dividend paid 800
Interest on bank borrowings 200
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Equity shares of 25 cents each 50,000
8% redeemable preference shares of GHS1 each (note (iv)) 20,000
Retained earnings at 1 October 2007 24,500
Deferred tax (note (v)) 5,800
Leasehold property revaluation reserve 10,000
–––––––– ––––––––
466,000 466,000
–––––––– ––––––––
The following notes are relevant:
i. Non-current assets – tangible:
The leasehold property had a remaining life of 20 years at 1 October 2007. The
company’s policy is to revalue its property at each year end and at 30 September 2008
it was valued at GHS43 million. Ignore deferred tax on the revaluation.
On 1 October 2007 an item of plant was disposed of for GHS2·5 million cash. The
proceeds have been treated as sales revenue by Faith. The plant is still included in the
above trial balance figures at its cost of GHS8 million and accumulated depreciation
of GHS4 million (to the date of disposal).
All plant is depreciated at 20% per annum using the reducing balance method.
Depreciation and amortisation of all non-current assets is charged to cost of sales.
ii. Non-current assets – intangible:
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In addition to the capitalised development expenditure (of GHS20 million), further
research and development costs were incurred on a new project which commenced on
1 October 2007. The research stage of the new project lasted until 31 December 2007
and incurred GHS1·4 million of costs. From that date the project incurred
development costs of GHS800,000 per month. On 1 April 2008 the directors became
confident that the project would be successful and yield a profit well in excess of its
costs. The project is still in development at 30 September 2008.
Capitalised development expenditure is amortised at 20% per annum using the
straight-line method. All expensed research and development is charged to cost of
sales.
iii. Faith is being sued by a customer for GHS2 million for breach of contract over a
cancelled order. Faith has obtained legal opinion that there is a 20% chance that Faith
will lose the case. Accordingly Faith has provided GHS400,000 (GHS2 million x
20%) included in administrative expenses in respect of the claim. The unrecoverable
legal costs of defending the action are estimated at GHS100,000. These have not been
provided for as the legal action will not go to court until next year.
iv. The preference shares were issued on 1 April 2008 at par. They are redeemable at a
large premium which gives them an effective finance cost of 12% per annum.
v. The directors have estimated the provision for income tax for the year ended 30
September 2008 at GHS11.4 million. The required deferred tax provision at 30
September 2008 is GHS6 million.
Required:
(a) Prepare the statement of comprehensive income for the year ended 30
September 2008.
(b) Prepare the statement of changes in equity for the year ended 30 September
2008.
(c) Prepare the statement of financial position as at 30 September 2008.
Note: notes to the financial statements are not required
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Question Two
JUBILEE is a quoted company reporting under IFRSs. During the year end 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 finalised before the financial statements can
be published.
JUBILEE’s trial balance from the general ledger at 31 December 2012 showed the following
balances:
GH¢’m GH¢’m
Revenue 2,648
Loan note interest paid 3
Purchases 1,669
Distribution costs 514
Administrative expenses 345
Interim dividend paid 6
Inventories at 1 January 2012 444
Trade receivables 545
Trade payables 434
Cash and cash equivalents 28
50Gp ordinary shares 100
Capital surplus 814
Retained earnings at 1 January 2012 349
4% loan note repayable 2018 (issued 2010) 150
Land and buildings: Cost (including GH¢60m land) 380
Accumulated depreciation at 1/1/2012 64
Plant and equipment: Cost 258
Accumulated depreciation at 1/1/2012 126
Investment property at 1 January 2012 548
Rental income 48
Proceeds from sale of equipment 7
, 4,740 4,740
Further information to be taken into account:
i. Closing inventories were counted and amounted to GH¢388m at cost. However,
shortly after the year end out-of-date inventories with a cost of GH15m were sold
for GH¢8m.
ii. 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 revalued
amounts at 1 January 2012 were GH¢800m (including GH¢100m for the land).
No further revaluation was necessary at 31 December 2012. The company wishes
to treat the revaluation surplus as being realised over the life of the asset.
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iii. Due to a change in the company’s product portfolio plans, an item of plant with a
carrying value GH¢22m at 31 December 2012 (after adjusting for depreciation for
the year) may be impaired due to a change in use. An impairment test conducted
at 31 December, revealed its fair value less costs to sell to be GH¢16m. The asset
is now expected to generate an annual net income stream of GH¢3.8m for the next
5 years at which point the asset would be disposed for GH¢4.2m. an appropriate
discount rate is 8%. 5 year discount factors at are:
Simple Cumulative
0.677 3.993
iv. The income tax liability for the year is estimated at GH¢27m. Ignore deferred tax.
v. An interim dividend of 3Gp per share was paid on 30 June 2012. A final dividend of
1.5Gp per share was declared by the directors on 28 January 2013. No dividends
were paid or declared in 2011.
vi. During the year, Jubilee disposed of some malfunctioning equipment for GHC7m. the
equipment had cost GH¢15m and had accumulated depreciation brought forward
at 1 January 2012 of GH¢3m.
There were no other additions or disposals to property, plant and equipment
vii. The company treats depreciation on plant and equipment as a cost of sale and land
and buildings as an administration cost. Depreciation rates as per the company’s
accounting policy note are as follows:
Buildings Straight line over 50 years
Plant and equipment 20% reducing balance
Jubilee’s accounting policy is to charge a full year’s depreciation in the year of an
asset’s purchase and none in the year of disposal.
viii. During the year on 1 July 2012, Jubilee made a 1 for 4 bonus issue, capitalising its
general reserve. This transaction had not yet been accounted for. The fair value of
the company’s shares on the date of the bonus issue was GH¢0.50 each.
ix. Jubilee uses the fair value model of IAS 40. The fair value of the investment property
at 31 December 2012 was GH¢586m.
Required
Prepare the following financial statements in with IFRSs insofar as the information permits.
a. Statement of comprehensive income for the year ended 31 December, 2012
b. Statement of changes in equity for the year ended 31 December, 2012
c. Statement of financial position as at 31 December, 2012
Notes are not required but all workings should be clearly shown.
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Question Three
The following trial balance relates to HIS GLORY LTD, a quoted company at 31st December
2007.
DR CR
GH¢ GH¢
Land and buildings (1/1/07) 130,000
Plant at cost 128,000
Depreciation of plant (1/1/07) 32,000
Investments 26,500
Cost of sales 89,200
Investment income 2,200
Distribution costs 11,000
Administrative expenses 12,500
Interest on loan paid 800
Inventory 31/12/07 37,900
Current Corporation Tax 400
Trade receivables 35,100
Revenue 180,400
Ordinary shares (issued at GH¢1 each) 60,000
Retained earnings (1/1/07) 25,500
2% loan (2005 – 2010) 80,000
Trade payables 34,700
Revaluation surplus arising from land & building 14,000
Deferred tax provision (1/1/07) 11,200
Accruals 24,000
Bank ______ 6,600
471,000 471,000
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The following notes are relevant:
a. HIS GLORY LTD has a policy of revaluing its land and building at each year end.
The valuation in the trial balance includes a land element of GH¢30,000. The useful
life of the buildings at that date (1/1/07) was 20 years. On 31/12/07, a professional
valuer valued the buildings at GH¢92,000 with no change in the value of the land.
Depreciation of buildings is charged at 60% to cost of sales and 20% each to
distribution costs and administrative expenses.
b. During the year HIS GLORY LTD manufactured an additional plant for its
operations. The details of the costs, which have been included in cost of sales in the
trial balance, were:
GH¢
Material Cost 6,000
Direct labour cost 4,000
Machine time cost 8,000
Directly attributable overheads 6,000
The manufacture of the plant was completed on 30/06/07 and the plant was brought
into immediate use, but its cost has not yet been capitalized.
All plants are depreciated at 12½% per annum (time apportioned where relevant)
using the reducing balance method and charged to cost of sales.
No non-current assets were sold during the year.
c. The fair value of the investments held at 31/12/07 was GH¢27,100.
d. The balance on taxation in the trial balance represents the over provision of the
previous year’s estimate. The estimated tax liability for the year ended 31/12/07 is
GH¢18,700.
e. At 31/12/07 there were GH¢40,000 of taxable temporary differences. Deferred tax
provision should accordingly be adjusted to GH¢10,000 since deferred tax provision
is at 25% of all taxable temporary differences.
f. The directors have proposed dividend of GH¢0.40 per share for 2007. This is to be
dealt with in the financial statements in accordance with IAS 10.
Required:
Prepare for HIS GLORY LTD and in accordance with the International Financial Reporting
Standards (IFRS),
a) An Income Statement for the year ended 31 December, 2007.
b) A Statement of Financial Position as at 31 December, 2007