EXCEL MINI MOCK-2.1 FR
ICAG PROFESSIONAL EXAMSMINI MOCK EXAMS- MARCH 2017
COURSE / 2.1 FINANCIAL REPORTINGTIME / 3 HOURS
Instructions: Attempt all questions. Show all workings in the answer booklet provided.
Cheating in the exams is unethical, and will be least tolerated
QUESTION 1
The following extracted balances relate to Energiser at 31 December 2014:
GHC000 GHC000
Ordinary shares of 20pes each 100,000
Retained profits 1 January 2014 128,400
6% redeemable preference shares 60,000
Trade payables 73,800
Income tax 4,200
Deferred tax – 1 January 2014 29,400
Land and buildings – cost 300,000
Plant and equipment cost 217,200
Depreciation 1 January 2014 – land and buildings 18,000
Depreciation 1 January 2014 – plant and equipment 49,200
Trade receivables 62,400
Inventory – 1 January 2014 51,300
Bank 7,400
Revenue 600,000
Purchases 316,900
Distribution expenses 52,800
Administration expenses 46,400
Preference dividend 3,600
Interim ordinary dividend 5,000
––––––––– –––––––––
1,063,000 1,063,000
––––––––– ––––––––
Additional information:
(1) Revenue includes GHC100 million for an item of plant sold on 1 September 2014. The plant had a book value of GHC80 million at the date of its sale, which was charged to cost of sales. On the same date, Energiser entered into an agreement to lease back the plant for the next five years (being the estimated remaining life of the plant). Energiser has negotiated extended credit so that the first instalment of capital and interest on the lease falls after 31 December 2015, more than one year from the year end. An arrangement of this type is deemed to have financing cost of 12% per annum. No depreciation has been charged on the item of plant in the current year.
(2) The inventory at 31 December 2014 was valued at cost of GHC57 million. This includes GHC9 million of slow moving goods. Energiser believes that it will be able to sell these goods for only GHC4 million.
(3) The land and buildings cost of ghc300 million includes land at a cost of ghc60 million. The remaining life of the building as at 1 January 2014 was estimated at 40 years.
(4) Plant and equipment (other than that referred to in note 1 above) is depreciated at 20% per annum on the reducing balance basis. All depreciation is to be charged to cost of sales.
(5) The balance on the income tax account in the trial balance is the result of the settlement of the previous year’s tax charge. The directors have estimated the provision for income tax for the year to 31 December 2014 at GHC18.4 million. For the deferred tax provision, the only temporary differences are accelerated capital allowances.
At 31 December 2014 these temporary differences were GHC91 million. Assume an income tax rate of 30%.
(6) On 1 January 2014 Energiser issued a loan note, the details of which are:
Nominal value issued ghc60 million
Discount on issue 6%
Nominal interest rate 8%
The loan note is redeemable on 31 December 2017 at a premium of 10%. Interest is payable annually on 31 December. Energiser has not yet made any entries in respect of this loan note.
(7) The outstanding receivable balance of a major customer amounting to $12 million was factored to Debtco on 1 December 2014. The terms of the factoring were:
– Debtco will pay 80% of the gross debtor outstanding to Energiser immediately.
– The balance will be paid (less the charges below) when the trade receivable is collected in full. Any amount of the debt outstanding after four months will be transferred back to Energiser at its full book value.
– Debtco will charge 1% per month on the net amount owing fromEnergiser at the beginning of each month. Debtco had not collected any of the factored debtors by the yearend.
– Energiser debited the cash received from Debtco to its bank account and removed the debtor from its sales ledger. It has prudently charged the difference as an administration cost.
(8) The directors do not wish to propose a final ordinary dividend
Required:
Prepare Energiser’s statement of profit and loss and other comprehensive income for the year ended 31 December 2014 and its statement of financial position at that date. These should be in a form suitable for publication.
(25 marks)
All workings must be clearly shown
QUESTION 2: Mary
(a)On January year 5, Mary had 5 million shares in issue. The following transactions in shares took place during the next year.
1 February A 1 for 5 bonus issue
1 April A 1 for 2 rights issue at GHC1 per share. The market price of the shares prior to the right issue was GHC4.
1 June An issue at full market price of 800,000 shares.
In the year 5 Mary made a profit before tax of ghc3,362,000. It paid ordinary dividends of 1,200,000 and preference dividends of GHC800,000. Tax was GHC600,500. The reported EPS for year 4 was GHC0.32.
Required:
Calculate the EPS for year 5, and the adjusted EPS for year 4 for comparative purposes.(9 marks)
(b)Statements of financial position and statements P&L for Ocean Motors are set out below.
Statement of financial position for Ocean Motors
2012 2011
GHC000 GHC000 GHC000 GHC000
Non current assets:
Land and buildings
Cost 1,600 1,450
Depreciation (200) (150)
–––– ––––
1,400 1,300
Plant and machinery:
Cost 600 400
Depreciation (120) (100)
–––– ––––
480 300
–––– ––––
1,880 1,600
Current assets:
Inventory 300 100
Receivables 400 100
–––– ––––
700 200
–––– ––––
Total assets 2,580 1,800
Capital and reserves:
Share capital – gh1 ordinary shares 1,200 1,200
Retained earnings 310 220
–––– ––––
1,510 1,420
–––– ––––
Current liabilities:
Bank overdraft 590 210
Payables and accruals 370 70
Taxation liability 110 100
–––– ––––
1,070 380
–––– ––––
2,580 1,800
–––– ––––
Statements of P&L for Ocean Motors
20X2 20X1
gh000 gh000
Sales revenue 1,500 1,000
Cost of sales (700) (300)
–––– ––––
Gross profit 800 700
Administration and distribution expenses (400) (360)
–––– ––––
Net profit before tax 400 340
Income tax expense (200) (170)
–––– ––––
Net profit after tax 200 170
The dividend for 2011 was GHC100,000 and for 2012 was GHC110,000.
Calculate the following ratios for Ocean Motors and briefly comment upon what they indicate:
Profitability ratios:
• Gross profit margin
• Net profit margin
• ROCE
• Net asset turnover
Liquidity and working capital ratios:
• Current ratio
• Quick ratio
• Inventory turnover
• Accounts receivable collection period
• Accounts payable payment period. (16 marks)
QUESTION 3
(a)Rockbuster has recently purchased an item of earth moving plant at a total cost of GHC24 million. The plant has an estimated life of 10 years with no residual value; however its engine will need replacing after every 5,000 hours of use at an estimated cost of GHC7.5 million.
The directors of Rockbuster intend to depreciate the plant at GHC2.4 million (GHC24 million/10 years) per annum and make a provision of GHC1,500 (GHC7.5 million/5,000 hours) per hour of use for the replacement of the engine.
Required:
Explain how the plant should be treated in accordance with International Accounting Standards and comment on the Directors’ proposed treatment. (5 marks)
(a)In the year ended 31 December year 7, Fabian leased two assets.
(1)A car was leased on1 July year 7 via a Three years lease agreement. Fabian paid a deposit of GHC7,500 followed by 36 monthly payments of GHC700 each on the 1st of each month. At the end of the three years Fabian will return the car. The car has a useful life of eight years. (2 marks)
(2)A machine was leased on 1 January year 7 via a four year lease. The machine has a fair value of GHC130,000 and Fabian is responsible for its upkeep. Lease payments of GHC40,000 are payable in arrears annually. The interest rate implicit in the lease is 10% and the present value of the minimum lease payment is GHC126,760. (6 marks)
Required:
Show how the two lease agreement would be presented in the statement of profit and loss and other comprehensive income for year 7 and the statement of financial position at 31 December year 7. Notes to the financial statements are not required.
(c)The following is an extract from the financial statements of Carly on 31 December year 0.
Property, plant and equipment
Land and buildingsPlant and equipmentComputerTotal
Cost on 31 December year 0 1,500,000 340,500 617,800 2,458,300
Accum. Depreciation
On 31 December year 0 600,000125,900505,800 1,231,700
Carrying amount
On 31 December year 0 900,000214,600112,000 1,226,600
Accounting policies:
Depreciation
Depreciation is provided at the following rates.
- On land and buildings- 2% per annum straight line on building only
- On plant and equipment – 25% reducing balance
- On computers- 33.33% per annum straight line
A full year’s depreciation is charged in the year of purchase and none in the year of sale.
During year 1 the following transactions took place.
(1)On 31 December the land and building were revalued to ghc1,750,000. Of this amount , ghc650,000 related to the land (which had original cost ghc500,000). The remaining useful life of the building was assessed as 40 years.
(2)A machine which had cost ghc80,000 and had accumulated depreciation of ghc57,000 at the start of the year was sold for ghc25,000.
(3)A new machine was purchased, incurring the following costs.
GHC
Purchase price, before discount, inclusive of reclaimable sales tax of GHC3,000 20,000
Discount 1,000
Delivery cost 500
Installation costs 750
Interest on loan taken to finance the purchase 300
(4)On 1 January it was decided to change the method of providing depreciation on computer equipment from the existing method to 40% reducing balance.
Required:
Produce the analysis of property, plant and equipment as it would appear in the financial statements of Carly for the year ended 31 December year 1. Ignore taxation. (10marks)
(b)Elikem Transformers Ltd (ETL) is organized into several divisions. The following events relate to the year ended 31 December 2015.
(1)A number of products are sold with a warranty. At the beginning of the year the provision stood at ghc 750,000. A number of claims have been settled during the period for GHC400,000. As at the year end there were unsettled claims from 150 customers. Experience is that 40% of the claims submitted do not fulfil warranty conditions and can be defended at no cost. The average cost of settling the other claims will be GHC7,000 each.(3marks)
(2) A transformer unit supplied to Ridge Hospital exploded during the year. The hospital has initiated legal proceedings for damages of ghc10 million against ETL. ETL’s legal advisors have warned that ETL has only a 40% chance of defending the claim successfully. The present value of this claim has been estimated at ghc9 million. The explosion was due to faulty components supplied to ETL for inclusion in the transformer. Legal proceedings have been started against the supplier. ETL’s legal advisors say that ETL have a very good chance of winning the case and should receive 40% of the amount that they have to pay to the hospital.(4marks)
Required:
Prepare the provisions and contingencies note for the financial statements for the year ended 31 December 2015, including narrative commentary.
QUESTION 4
Haidar plc acquired 75% of Saqib Ltd’s ordinary shares on 1 April for an agreed consideration of gh25 million when Saqib had retained earnings of gh10,200,000.
The draft statements of financial position of the two companies at 31 December are:
H (GHC’000 ) S (GHC’000)
Non-current assets:
Property, plant and equipment 78,540 27,180
Investment in S 25,000 nil
Current assets
Inventory 7,450 4,310
Accounts receivable 12,960 4,330
Cash and bank nil 920
Total assets 123,950 36,740
Equity
Share capital 50,000 10,000
Retained earnings 64,060 15,200
114,060 25,200
Bank loan 6,000
Current liabilities
Accounts payable and accruals 5,920 4,160
Bank overdraft 2,100 Nil
Taxation 1,870 1,380
9,890 5,540
Total equity and liabilities 123,950 36,740
The following information is relevant
(i) The fair value of Saqib Ltd’s land at the date of acquisition was gh4 million in excess of its carrying value. The fair value of Saqib Ltd’s other net assets approximated to their carrying values.
(ii) During the year Haidar Ltd sold inventory to Saqib Ltd for GHC2.4 million. The inventory had originally cost Haidar plc GHC2.0 million. Saqib Ltd held 25% of these goods at the year-end.
(iii) The two companies agreed their current account balances as GHC500,000 payable by Saqib Ltd to Haidar Ltd at the year-end. Inter-company current accounts are included in accounts receivable or payable as appropriate.
(iv) An impairment test at 31 December on the consolidated goodwill concluded that it should be written down by GHC625,000.
Prepare a consolidated statement of financial position as at 31 December. (15 marks).
QUESTION 5
(a)Explain the difference recognition criteria under IAS 16, PPE and under IAS 39, Financial instruments, recognition and measurement
(b)The process of issuing a standard passes through a process known as due process. Outline the due process involved in developing International financial reporting standards. (10 marks)
Total: 20 marks
*END OF PAPER*
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