EXCEL 2.1 FINANCIAL REPORTING

ICAG PROFESSIONAL EXAMS

FINALMOCK EXAMS- OCT 2017

COURSE / 2.1 FINANCIAL REPORTING
TIME / 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

SUNRISE Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. SUNRISE Ltd’s management was disappointed in the company’s results for the year ended 31 March 2014. In an attempt to improve performance the following measures were taken early in the year ended 31 March 2015:

A national advertising campaign was undertaken,

Rebates to all wholesale customers purchasing goods above set quantity levels were introduced,

The assembly of certain lines ceased and was replaced by bought in completed products. This allowed SUNRISE Ltd to dispose of surplus plant. SUNRISE Ltd’s summarised financial statements for the year ended 31 March 2015 are set out below:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2015

GHSm
Revenue (25% cash sales) / 4,000
Cost of sales / (3,450)
Gross profit / 550
Operating expenses / (370)
Operating profit / 180
Profit on disposal of plant (note (i)) / 40
Financial charges / (20)
Profit before tax / 200
Income tax expense / (50)
Profit for the year / 150

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2015

GHSm / GHSm
Non-current Assets
Property, Plant and equipment (note (ii)) / 550
Current Assets
Inventory / 250
Trade receivables / 360
Bank / nil / 610
Total Assets / 1,160
Equity and Liabilities
Stated capital (400m shares) / 100
Income Surplus / 380
480
Non-current liabilities
8% loan notes / 200
Current liabilities
Bank overdraft / 10
Trade payables / 430
Current tax payables / 40 / 480
Total equity and liabilities / 1,160

Below are ratios calculated for the year ended 31 March 2014:

Return on year end capital employed (profit before interest and tax over total assets less current liabilities) 28.1%

Net assets (equal to capital employed) turnover 4 times

Gross profit margin 17%

Net profit (before tax) margin 6.3%

Current ratio 1.6:1

Closing inventory holding period 46 days

Trade receivables’ collection period 45 days

Trade payables’ payment period 55 days

Dividend yield 3.75%

Dividend cover 2 times

Notes

SUNRISE Ltd received GHS 120m from the sale of plant that had a carrying amount of GHS 80m at the date of its sale.

The market price of SUNRISE Ltd’s share throughout the year averaged GHS3.75 each.

There were no issues or redemption of shares or loans during the year.

Dividends paid during the year ended 31 March 2016 amounted to GHS 90m, maintaining the same dividend paid in the year ended 31 March 2015.

Required:

(a) Calculate ratios for the year ended 31 March, 2015 (showing your workings) for SUNRISE Ltd, equivalent to those provided above. (10 marks)

(b) Analyse the financial performance and position of SUNRISE Ltd for the year ended 31 March 2015 compared to the previous year. (10 marks)

(Total: 20 marks)

QUESTION 2

The following trial balance relates to KARL as at 30 September 2016:
GHC’000 / GHC’000
Revenue (note (i)) / 213,500
Cost of sales / 136,800
Distribution costs / 12,500
Administrative expenses (note (ii)) / 19,000
Loan note interest and dividend paid (notes (ii) and (iii)) / 20,700
Investment income / 400
Equity shares of 25 cents each / 60,000
6% loan note (note (ii)) / 25,000
Retained earnings at 1 October 2015 / 18,500
Land and buildings at cost (land element GHC10 million) (note (iv)) / 50,000
Plant and equipment at cost (note (iv)) / 83,700
Accumulated depreciation at 1 October 2015: buildings / 8,000
plant and equipment / 33,700
Equity financial asset investments (note (v)) / 17,000
Inventory at 30 September 2016 / 24,800
Trade receivables / 28,500
Bank / 2,900
Current tax (note (vi)) / 1,100
Deferred tax (note (vi)) / 1,200
Trade payables / 36,700
397,000 / 397,000

The following notes are relevant:

(i) On 1 October 2015, KARL sold one of its products for GHC10 million (included in revenue in the trial balance).

As part of the sale agreement, KARL is committed to the ongoing servicing of this product until 30 September 2014 (i.e. three years from the date of sale). The value of this service has been included in the selling price of GHC10 million. The estimated cost to KARL of the servicing is GHC600,000 per annum and KARL’s normal gross profit margin on this type of servicing is 25%. Ignore discounting.

(ii) KARL issued a GHC25 million 6% loan note on 1 October 2015. Issue costs were GHC1 million and these have been charged to administrative expenses. The loan will be redeemed on 30 September 2014 at a premium which gives an effective interest rate on the loan of 8%.

(iii) KARL paid an equity dividend of 8 cents per share during the year ended 30 September 2016.

(iv) Non-current assets: KARL had been carrying land and buildings at depreciated cost, but due to a recent rise in property prices, it decided to revalue its property on 1 October 2015 to market value. An independent valuer confirmed the value of the property at GHC60 million (land element GHC12 million) as at that date and the directors accepted this valuation.

The property had a remaining life of 16 years at the date of its revaluation. KARL will make a transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation reserve. Ignore deferred tax on the revaluation.

Plant and equipment is depreciated at 15% per annum using the reducing balance method.

No depreciation has yet been charged on any non-current asset for the year ended 30 September 2016. All depreciation is charged to cost of sales.

(v) The investments had a fair value of GHC15·7 million as at 30 September 2016. There were no acquisitions or disposals of these investments during the year ended 30 September 2016.

(vi) The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 2015. A provision for income tax for the year ended 30 September 2016 of GHC7·4 million is required. At 30 September 2016, KARL had taxable temporary differences of GHC5 million, requiring a provision for deferred tax. Any deferred tax adjustment should be reported in the income statement. The income tax rate of KARL is 20%.

Required:

(a) Prepare the statement of comprehensive income for KARL for the year ended 30 September 2016.

(b) Prepare the statement of changes in equity for KARL for the year ended 30 September 2016.

(c) Prepare the statement of financial position for KARL as at 30 September 2016.

Notes to the financial statements are not required.

The following mark allocation is provided as guidance for this question:

(a) 9 marks

(b) 2 marks

(c) 9 marks

(20 marks)

QUESTION 3

(a)The profit after tax for LEO for the year ended 30 September 2016 was GHC15 million. At 1 October 2015 the company had in issue 36 million equity shares and a GHC10 million 8% convertible loan note. The loan note will mature in 2010 and will be redeemed at par or converted to equity shares on the basis of 25 shares for each GHC100 of loan note at the loan-note holders’ option. On 1 January 2016 LEO made a fully subscribed rights issue of one new share for every four shares held at a price of GHC2·80 each. The market price of the equity shares of LEO immediately before the issue was GHC3·80. The earnings per share (EPS) reported for the year ended

30 September 2015 was 35 Pesewas.

LEO’s income tax rate is 25%.

Required:

Calculate the (basic) EPS figure for LEO (including comparatives) and the diluted EPS (comparatives not required) that would be disclosed for the year ended 30 September 2016. (6

marks)

(b) LEO Co. wishes to expand their transport fleet and purchased three heavy Lorries with list price of GHC 18000 each. LEO has negotiated lease finance to fund this expansion, and the company has entered into a finance lease agreement with DÉCOR Garages Co. on 1 January 2016. The agreement states that LEO will pay a deposit of GHC 9000 on 1 January 2016, and two instalments of GHC 24000 on 31 Dec 2016, 2017 and a final instalment of GHC 20391on 31 December 2018. Ownership will pass to LEO at the end of the lease term.

Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on 31 December each year.

Depreciation policy of LEO Co. is to write off the vehicles over four year period using the straight line method and assuming a scrap value of GHC1333 for each vehicle at the end of its useful life.

Required:

Show the entries in the statement of profit or loss and the statement of financial position for the years 2016, 2017, 2018. This is the only lease transaction undertaken by this company. (7marks)

Calculations to the nearest GHC.

(C) IAS 41 Agriculture prescribes the accounting treatment and disclosures related to agricultural activities. An entity is encouraged, but not required, to provide a quantified description of each group of biological assets, distinguishing between consumables and bearer biological assets, or between mature and immature biological assets, as appropriate.

Required:

(a)  Distinguish between a biological asset and an item of agriculture produce. (1 mark)

(b)  Explain how agricultural produce is measured in the financial statement of an entity. (2 marks)

(c)  Give two examples of biological assets and their relative agricultural produce. (2 marks)

(d)  Explain what is meant by consumable and bearer biological assets, giving one example for each. (2 marks)

QUESTION 4

(i) IFRS 10 “Consolidated financial statements” provides circumstances in which an entity can be said to have control over another (subsidiary).

Required:

(i) Outline two (2) conditions that are indicative of the existence of control

(ii) Below are the summarised statements of financial position for three companies as at 31 March 2016:

Sammy / Johnny / Christy
Assets / GHC million / GHC million / GHC million
Non-current assets
Property, plant and equipment / 520 / 280 / 240
Investments / 345 / 40 / nil
Current assets
Inventory / 142 / 160 / 120
Trade receivables / 95 / 88 / 50
Cash and bank / 8 / 22 / 10
Total assets / 1,110 / 590 / 420
Equity and liabilities
Equity shares of GHC1each / 500 / 145 / 100
Other reserves / 100 / nil / nil
Retained earnings / 130 / 260 / 240
730 / 405 / 340
Non-current liabilities
10% loan notes / 180 / 20 / nil
Current liabilities / 200 / 165 / 80
Total equity and liabilities / 1,110 / 590 / 420

Notes:

Sammy is a public listed company that acquired the following investments:

(i)Investment in Johnny On 1 April 2014 Sammy acquired 116 million shares in Johnny for an immediate cash payment of GHC210 million and issued at par one 10% GHC100 loan note for every 200 shares acquired. Johnny’s retained earnings at the date of acquisition were GHC120 million.

(ii)Investment in Christy On 1 October 2015 Sammy acquired 30 million shares in Christy in exchange for 75 million of its own shares. The stock market value of Sammy’s shares at the date of this share exchange was GHC1·60 each. Sammy has not yet recorded the investment in Christy.

(iii)Sammy’s other investments, and those of Johnny, are available-for-sale investments which are carried at their fair values as at 31 March 2015. The fair value of these investments at 31 March 2016 is GHC82 million and GHC37 million respectively.

Other relevant information:

(iv)Sammy’s policy is to value non-controlling interests at their fair values. The directors of Sammy assessed the fair value of the non-controlling interest in Johnny at the date of acquisition to be GHC65 million. There has been no impairment to goodwill or the value of the investment in Christy.

(v) At the date of acquisition of Johnny owned a recently built property that was carried at its (depreciated)

construction cost of GHC62 million. The fair value of this property at the date of acquisition was GHC82 million and it had an estimated remaining life of 20 years.

For many years Johnny has been selling some of its products under the brand name of ‘Johnnypop’. At the date of acquisition the directors of Sammy valued this brand at GHC25 million with a remaining life of 10 years. The brand is not included in Johnny’s statement of financial position.

The fair value of all other identifiable assets and liabilities of Johnny were equal to their carrying values at the date of its acquisition.

(vi) The inventory of Johnny at 31 March 2016 includes goods supplied by Sammy for GHC56 million (at selling price from Sammy). Sammy adds a mark-up of 40% on cost when selling goods to Johnny. There are no intra-group receivables or payables at 31 March 2016.

(vii) Christy’s profit is subject to seasonal variation. Its profit for the year ended 31 March 2016 was GHC100 million. GHC20 million of this profit was made from 1 April 2015 to 30 September 2015.

(viii) None of the companies have paid any dividends for many years.

Required:

Prepare the consolidated statement of financial position of Sammy as at 31 March 2016. (18marks)

Question 5

Ama, Kofi and Kojo were in partnership sharing profits and losses 4:3:3 respectively. The accounts of the firm were made up to December 31 each year. The partnership agreement provided that:

a) interest was to be credited at 10% per annum on capital account balances at the beginning of the year

b) no interest was to be charged on drawings

c) on the death of a partner:

i. goodwill was to be valued at three (3) years‟ purchase of the simple average profits of the three (3) years prior to the year of death;

ii. The total amount due to a deceased partner was to receive interest at 12% from the date of death until paid;