ADVANCED FINANCIAL REPORTING CUAC 402- MATERIAL
Questions 2.1 to 2.4 relate to the following information:
During the year ended 30 June 20.11, Violen Ltd has changed its accounting policy in respect of the valuation of inventories from the weighted average method to the first-in-first-out method to ensure a more relevant and reliable presentation. The value of inventories at 30 June based on the different methods of valuation was as follows:
20.11 20.10 20.9 20.8
$ $ $ $
Basis
First-in-first-out method 290 070 184 250 73 700 49 500
Weighted average method 248 600 145 200 68 750 53 350
The ZIMRA will not re-open the previous years’ assessments, but will accept the new policy in
respect of the current year for tax purposes. The tax rate is 28%.
2.1 What effect will the change in accounting policy have on profit after tax for the year ended
30 June 20.11?
(1) An increase in profit after tax of $29 029.
(2) An increase in profit after tax of $74 074.
(3) An increase in profit after tax of $1 742.
(4) A decrease in profit after tax of $1 694.
2.2 What effect will the change in accounting policy have on profit after tax for the year ended
30 June 20.10?
(1) An increase in profit after tax of $77 385.
(2) An increase in profit after tax of $27 335.
(3) An increase in profit after tax of $39 050.
(4) An increase in profit after tax of $24 552.
2.3 The change in accounting policy will require a restatement of retained earnings at 1 July 20.9
by an amount of:
(1) $16 940
(2) $53 517
(3) $4 950
(4) $3 564
2.4 The cumulative effect of the change on 30 June 20.10 will amount to:
(1) $28 116
(2) $77 385
(3) $72 380
(4) None of the above.
2.5 Y Ltd discovered in the current year (20.11) that expenses (tax deductible) amounting to
R200 000 were incorrectly capitalised at the end of the 20.8 financial year against an asset
with a useful life of 10 years. The asset was available for use at the beginning of the 20.9
financial year. The tax rate is 28%. The cumulative after tax effect of the correction of this
error at the beginning of 20.6 will amount to the following:
(1) $160 000
(2) $200 000
(3) $115 200
(4) $140 000
QUESTION 3
The following information relating to Muzari Ltd is presented to you for the year ended
28 February 20.11:
1. Inventories amounting to $95 000 were destroyed and written off due to a flood during the year. An amount of $60 000 was received from the insurance company as compensation.
2. The directors of the company decided to change the accounting policy in respect of the valuation of inventories, as the new policy will ensure a more reliable value of inventories. Previously inventories were valued according to the weighted average method, but now it should be valued according to the first-in-first-out method.
3. At the same time it was decided to increase the provision for obsolete inventories to 10% of the value of inventories, compared to the 5% used in the past.
4. The value of inventories at 28 February, based on the two methods of valuation, was as follows (before taking into account any provision for obsolete inventory):
20.11 20.10 20.9 20.8
$ $ $ $
Basis
First-in-first-out method 460 000 420 000 395 000 380 000
Weighted average method 420 000 395 000 382 000 375 000
5. The ZIMRA will not re-open the previous years’ assessments, but will accept the new policy in respect of the current year for tax purposes.
6. During the current year the bookkeeper established that a material error had been made in the published financial statements for the year ending 28 February 20.10. Equipment amounting to $25 000 that was acquired on 1 September 20.9 was incorrectly recorded as administration expenses. The company depreciates such equipment at 20% per annum according to the straight-line method. The accountant immediately informed ZIMRA of the error, ZIMRA agreed to re-open the 20.9 assessment and made the necessary adjustment. The ZIMRA allows a 20% deduction per annum according to the straight-line method on equipment, not apportioned for a portion of a year.
7. Assume a normal tax rate of 28% for all the years. The company had 500 000 issued ordinary shares for all the years
REQUIRED
Disclose the following notes to the financial statements of Muzari Ltd for the year ended 28 February 2011:
(i) Profit before tax
(ii) Change in accounting policy
(iii) Prior period error
Note: Round all amounts off to the nearest dollar
.
Your answer should comply with International Financial Reporting Standards (IFRS).
QUESTION 7
Zvataida Ltd has 10 employees, all earning a gross salary of $20 000 per month. All the employees belong to a funded provident fund (defined contribution plan) and contribute 7,5% of their gross salary to it. Zvataida Ltd contributes the same amount to the fund. An employee`s payslip is as follows;
Employee: Mr Manyemwe $
Gross salary 20 000
Deductions
PAYE (4 000)
Provident fund-7,5% (1 500)
Other sundry statutory deductions (400)
Net salary (paid into account no. YYYY-Zibank) 14 100
ADDITIONAL INFORMATION
1. The net salaries are paid at the end of each month, while the deductions are paid at the beginning of the following month. In addition to the entity`s contributions to the fund, Zvataida Ltd also incurs other sundry statutory costs of $1 000 per month.
2. Each employee is entitled to 20 working days` paid vacation leave per year. A maximum of five days may be carried forward to the following year, after which it lapses with payment. At 31 December 2018, each employee had four days unused leave and the directors expect that all four days will be taken as leave during the next financial year. All salary costs are expected to increase by 10% in the next financial year.
3. Although Zvataida Ltd is not contractually obliged to pay bonuses to the employees, the directors decided to give each one a bonus of $5 000 based on their employment during the current year. The directors sent an internal memorandum to this effect to all employees during the last week of December 2018. The bonuses will be paid in the second week of January 2019.
4. The tax rate is 28%. Assume that all salary costs paid in cash by Zvataida Ltd are deductible for tax purposes when the cash is paid. Assume that there are 20 working days per month.
Required:
(a) Calculate the total monthly cost to the company (excluding bonuses) per employee of Zvataida Ltd
(b) Prepare all the journal entries (including cash payments and deferred tax, but not current tax) for December 2018 to account for all employee benefits of Zvataida Ltd
(c) Prepare all the journal entries at the beginning of January 2019 to account for all the payments made in respect of the employee deductions and the entity`s contributions.
(d) Calculate the total expense for employee benefits of Zvataida Ltd for the year ended 31 December 2018.
(e) Indicate what the amount of the leave pay accrual in part (b) above would have been if it was expected that the four unused leave days as at 31 December 2018 would be paid out in cash during December 2019 (i.e. the employer`s contributions and other costs would normally not be made)
Your answer should comply with the requirements of International Financial Reporting standards. Clearly show all calculations and work to the nearest dollar. All amounts are material.
Case Study
You are a qualified accountant at Sigma PLC, a Zimbabwean listed company which prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year. In 2011, the company appointed a new managing director, Jesca, and a new financial controller, Peter. You knew Peter before he joined Sigma as you both attended various ACCA events organised by ACCA Zimbabwe. The remuneration of Jesca and Peter includes a bonus based on group profits. Since joining the organisation in November 2011, Jesca has quickly gained a reputation for being very interested in the social and environmental consequences of corporate activity. Indeed, eager to lead by example, she has sold her car and now cycles to and from work. Underlining the importance that she attaches to this area, one of her first decisions on joining Sigma was to introduce a compulsory half-day training seminar on social, environmental and sustainability reporting. In addition, after the training seminar Jesca sent the following email to Peter:
Peter,
I am becoming increasingly concerned about the social and environmental consequences of some of Sigma’s operational activities. I am very sceptical as to whether traditional financial reporting, and its concentration on the economic ‘bottom line’, is sufficient to address the information requirements of our users. I am worried that our competitors are beginning to address this issue before we do. Pressure is mounting for companies to widen their scope for corporate public accountability beyond the suppliers of capital. Can you do me a memo which outlines how we can begin to report information beyond the traditional IFRS based financial statements?
Regards
Jesca
It is a cold Thursday morning in June and you get a phone call from Peter asking you to go for a coffee.You have been suffering from a bad cold over the last week and you are behind on your work schedule. Peter, you think to yourself, is sure to ask about the draft consolidated statement of comprehensive income you have been working. On 1 July 2012, Sigma acquired 800,000 ordinary shares in Haveans Ltd on incorporation at par ($1 per share). It is your understanding that the remaining shares were subscribed for in equal proportions by two other companies: Choto Ltd and Hanyani Ltd (Hanya).The issued share capital of Rock at date of acquisition of the shares was two million shares.
On the recommendation of Jesca, the board of Sigma agreed to enter into an agreement so that all strategic operating and financial decisions would require the unanimous consent of all three parties. You cannot recall Sigma having entered any previous contractual agreements of a similar nature and, from previous conversations, you know that Peter is keen to apply proportionate consolidation, but realises that under IFRS11 Joint arrangements and IAS28 Investments in Associates and Joint Ventures this method will no longer be allowed. Peter wants to ensure that the accounting treatment adopted will be appropriate in future years. You are also concerned about a transaction that took place about six weeks ago. Sigma had spent much time and effort in trying to secure a valuable contract overseas in China. Negotiations have been mainly with Azwal Bysen, head of the Ministry for Trade and Investment. In early December, Peter instructed you to transfer $750,000 from Sigma documentation would be supplied, but you have to date not received anything. You have included the $750,000 under a suspense category in the draft consolidated statement of comprehensive income.
You meet Peter in the coffee shop on the ground floor. ‘Hello, have a seat’ he says. ‘I thought it would be better to chat over coffee as there was less chance of either of us being disturbed’. Peter then hands you a file labelled outstanding issues for the year ended 31 December 2012. Peter had already ordered your favourite cappuccino and you took a mouthful and sat back to listen to what he had to say.
‘You know Jesca is not going to let this nonsense about social and environmental reporting go away. I need you to provide me with some ideas on how we can begin to address this issue as, according to Jesca, our current system of financial reporting is outdated: her words not mine. I am not sure if there are any reports we could publish and, if there are, what use they would be. Oh, before I forget, the $750,000 payment to Azwal Bysen should be posted to operating expenses.
I know you have already prepared a draft statement of comprehensive income but you can now include this adjustment. I am telling you this in confidence, but I have an interview next week for a new position outside Sigma. You also know that I think highly of your work, so at the next board meeting I am happy to put in a good word for you as a possible candidate to take over my role. We have work to do to get these draft financial statements finalised: being younger than me, you will be more tuned into any changes in financial reporting standards and what auditors might be inclined to focus on. I noticed your draft statement of comprehensive income has not taken into account the acquisition of the shares in Heavens, although, it looks to me as though it should be treated as an associate company. What do you think? The directors have requested an estimate of consolidated profit for the board meeting next week. I would be grateful if you could adjust your previous draft for any outstanding accounting adjustments and complete whatever calculations are required. Also, I will need some sort of explanation as to why you are making your adjustments: you and I both know that there is a lot of professional judgement involved in the application of some of the IFRSs.
You leave to go to your office. On arriving back at your office you open the file and begin to read through the outstanding issues listed below. As you are reading these, you begin to reflect on the conversation you have just had with Peter. You think that is far too early in your career to even consider taking on the role of financial controller. Remembering a conversation you had with one of your university professors, you feel that experience is more important than status or a salary increase. Peter is an extremely confident individual and has built up many networks, including some in China. For a brief moment the thought comes through your mind that he may want the financial statements to show him in the best light. You quickly refocus your mind and begin to work on the outstanding issues; it is going to be a long night.