THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) FINANCIAL REPORTING QUESTION PAPER NOVEMBER 2014

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1 QUESTION 1 THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) The following trial balance relates to Agenkwa Ltd at 31 st March, 2014 GHC 000 GHC 000 Lease rental 5000 Revenue 1,040,000 Cost of sales 585,800 Distribution costs 15,200 Administrative expenses 39,600 Loan interest paid 9,600 Property cost 400,000 Property depreciation at 1 st April, ,000 Plant and equipment cost 337,200 Plant and equipment depreciation at 1 st April ,200 Licence cost 80,000 Licence-amortization at 1 st April, ,000 Trade receivables 81, 400 Inventory 31 st March, ,600 Bank 3,900 Trade payables 70,400 Ordinary shares of 50p each 100,000 12% loan note (issued 1 st April, 2013) 80,000 Taxation 4,000 Income surplus at 1 st April, ,900 1,591,400 1,591,400 The following notes are relevant: 1. On 1 st April, 2013 Agenkwa Ltd revalued its property to GHC480million, of which GHC120million relates to the land. The property s original cost on 1 st April, 2003 of GHC400million included GHC100million for the land. The building had an estimated life of 40 years when it was acquired and this has not changed as a result of the revaluation. Depreciation is charged on a straight line basis. The revaluation has not yet been recorded in the books. Agenkwa Ltd has a policy of transferring any excess depreciation to retained earnings. 2. During the year, Agenkwa Ltd sold some plant that cost GHC40million on 1 st December, The proceeds of this sale were GHC24million and these have been credited to cost of sales. No other entries have been made relating to the disposal.

2 THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) Page 1 of 12 Plant and equipment is to be depreciated on the reducing balance basis at a rate of 20% per annum. Agenkwa Ltd charges a full year s depreciation in the year of acquisition and none in the year of disposal. The licence is being amortized on the straight line basis at a rate of 20% per annum. All depreciation and amortization is to be charged to cost of sales. (i) Prepare a statement of profit or loss and other comprehensive income for the year ended 31 st March 2014 (ii) Prepare a statement of changes in equity for the year ended 31 st March 2014 (iii) Prepare a statement of financial position as at 31 st March (20 marks)

3 QUESTION 2 Page 2 of 12 (a) Under IFRS 10, Consolidated Financial Statements, a parent entity is allowed not to present or prepare consolidated financial statements if certain conditions prevail. (i) State any four (4) conditions (4 marks) (b) On 1 st January 2012, Prince Ltd acquired 75% of the equity shares of Saviour Ltd by means of an immediate share exchange and a cash payment of GH 2 per share. The cash payment was due on 1 st January, Prince Ltd has recorded the share exchange, but is yet to record the cash consideration. The cost of capital of Prince Ltd is 20% per annum. The summarized statements of financial position of the two companies as at 31 st December 2012 are: Prince Ltd Saviour Ltd GH GH ASSETS Non-current assets: Property, plant and equipment 164,300 85,500 Investments: Saviour Ltd 40,000 Loan notes (Note (ii)) 7,500 Other investments (Note (v)) 6, ,800 85,500 Inventory (note (iii)) 41,700 31,200 Trade receivables (note (iii)) 34,200 16,500 Bank (note (iii)) 2,700 1,800 Total assets 296, ,000 Equity and liabilities: Stated capital 75,000 30,000 Capital surplus 52,800 - Income surplus (at 31/12/2011) 48,600 54,000 For the year ended 31/12/ ,000 24, , ,000 Non-current liabilities: 25% loan notes 36,000 12,000 Deferred tax 13,500 - Current liabilities 28,500 15,000

4 296, ,000 The following information is relevant Page 3 of 12 (i) At the date of acquisition, Prince Ltd conducted a fair value exercise on Saviour Ltd s net assets which were equal to their carrying amounts except the following: An item of a plant had a fair value of GH 9million above its carrying amount. At the date of acquisition, it had a remaining economic useful life of five (5) years. Ignore deferred tax implications. Prince Ltd s policy is to value non-controlling interest at fair value at the date of acquisition. The share price of Saviour Ltd at date of acquisition was GH (ii) (iii) (iv) (v) (vi) Immediately after the acquisition, Saviour Ltd issued GH 12million of 25% notes, GH 7.5million of which were bought by Prince Ltd. All interest due on the loan notes as at 31 st December 2012 has been duly paid and received. Prince Ltd sells goods to Saviour Ltd at cost plus 50%. During 2012, Prince Ltd sold goods priced at GH 12,000,000 to Saviour Ltd. A quarter of these goods remained in inventory of Saviour Ltd at 31 December, The other equity investments of Prince Ltd are carried at their fair values on 1 st January, At 31 December 2012 these had increased to GH 8,400,000. An impairment test at the year end showed that goodwill had suffered a loss of GH 4,000,000. The other investment of Prince Ltd are designated as fair value through profit or loss. The fair value at 31 December 2012 was GH 6,500,000. Prepare the consolidated statement of financial position of Prince Ltd as at 31 December 2012 (16 marks) (Total: 20 marks)

5 QUESTION 3 Page 4 of 12 Pink Sheet Ltd is listed on the Ghana Stock Exchange. It assembles domestic electrical goods which it then sells to both wholesale and retail customers. Pink Sheet Ltd s management were disappointed in the company s results for the year ended 31 st March, In an attempt to improve performance the following measures were taken early in the year ended 31 March 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 Pink Sheet Ltd to dispose of surplus plant. Pink Sheet Ltd s summarized financial statement for the year ended 31 March 2013 are set out below: Statement of profit or loss and other comprehensive income GH million Revenue (25% cash sales) 8,000 Cost of sales (6,900) Gross profit 1,100 Operating expenses (740) 360 Profit on disposal of plant (note (i)) 80 Finance charges (40) Profit before tax 400 Income tax expense (100) Profit for the period 300

6 Page 5 of 12 Statement of Financial Position GH million GH million Non-current assets Property, plant and equipment (note (i)) 1,100 Current assets Inventory 500 Trade receivables 720 Bank - 1,220 Total assets 2,320 Equity and liabilities Stated capital 200 Retained earnings Non-current liabilities 8% loan notes 460 Current liabilities Bank overdraft 20 Trade payables 860 Current tax payable Total equity and liabilities 2,320 Below are ratios calculated for the year ended 31 March 2012 Return on year end capital employed (Profit before interest and tax over total assets less current liabilities) 28.1% Net- asset (equal to capital employed) turnover 4 times Gross profit margin 17% Current ratio 1.6:1 Closing inventory holding period Trade receivables collection period 46days 45days

7 Trade payables payment period 55days Dividend yield 3.75% Notes (i) (ii) (iii) (iv) (v) Page 6 of 12 Pink Sheet Ltd received GH 240million from the sale of plant that had a carrying amount of GH 160million at the date of its sale. The market price of Pink Sheet Ltd s shares throughout the year averaged GH 3.75 each There were no issues or redemption of shares or loans during the year Dividends paid during the year ended 31 March 2013 amounted to GH 180million, maintaining the same dividend paid in the year 31 March The stated capital consists of equity shares issued at 25 pesewas per share. (a) Calculate ratios for the year ended 31 March 2013 (equivalent to those provided above) (8 marks) (b) Analyze the financial performance and position of Pink Sheet Ltd for the year ended 31 March 2013 compared to the previous year. (7 marks) (Total: 15 marks

8 Page 7 of 12 QUESTION 4 Addo, Arthur and Eghan have been partners since 2000 sharing profits and losses in the ratio 30%, 40% and 30% respectively. On 30 September, 2012 following a protracted misunderstanding among them, they decided to dissolve the partnership. The draft financial information showed the following as at 30 September GH GH Tangible non-current assets 60,000 Current assets: Inventories 375,000 Accounts receivables 100,000 Cash 90, ,000 Less accounts payable 125, , ,000 Financed by: Capital Addo 50,000 Arthur 200,000 Eghan 250, ,000 The dissolution process extended up to the end of October 2012, during which the following transactions took place (Normal business activities were completely halted during the dissolution period). (i) (ii) (iii) (iv) Addo agreed to settle an amount of GH 7,500 owed by the firm to Hire Purchase Financing Company. It was agreed among the partners to assign the accounts receivable to Arthur for a sum of GH 87,500. Arthur settled GH 3,150 owed to a supplier by transferring one of his personal cars The non-current assets (apart from one warehouse which has a book value of GH 11,250) were auctioned for GH 42,500. The warehouse was taken over by Eghan at book value, adjustment to be made in his capital account.

9 (v) (vi) The remaining accounts payable were settled together with dissolution expenses of GH 8,750 Cash transfers among partners were completed. Page 8 of 12 As soon as the intention to dissolve the firm was made on 1 October, Arthur and Eghan decided to form a new firm by merging with another firm within the same industry owned by two partners, Sarfo and Ofosu. Sarfo and Ofosu are equal partners. The merged entity, to be known as People s Alliance & Co will take over inventories of both firms. The partners have agreed the following values for the assets which would be taken over: Arthur & Eghan GH Sarfo & Ofosu GH Inventories 210, ,000 Office equipment 30,000 Automobiles 50,000 Goodwill 52, ,000 The new profit sharing ratio was agreed at Arthur 20%, Eghan 15%, Sarfo 30% and Ofosu 35%. Capital is to be contributed in the same proportions as profit sharing ratio after allowing GH 40,000 cash for working capital in the books of the merged firm. (a) Show the Realization Account and Partners Capital Accounts to close the book of Addo, Arthur and Eghan partnership. (b) Prepare a statement of Financial Position of People s Alliance & Co as at 1 November, (15 marks)

10 QUESTION 5 Page 9 of 12 (a) The accounting treatment of investment properties is prescribed by IAS 40: Investment property. (i) (ii) Define investment property under IAS 40 and explain why its accounting treatment is different from that of owner-occupied property. Explain how the treatment of an investment property carried under the fair value model differs from an owner-occupied property carried under the revaluation model. (5 marks) (b) Alavanyo Ltd owns the following properties at 1 January, 2013: Property XYZ: An office building used by Alavanyo Ltd for administrative purposes with a depreciated historical cost of GHC4million. At 1 April 2012 it had a remaining life of 20 years. After a reorganization on 1 July 2013, the property was let to a third party and reclassified as an investment property to have a fair value of GHC4.6million at 1 July 2013, which had risen to GHC4.68 million at 31 December Property QRS: Another office building sub-let to a subsidiary of Alavanyo Ltd. At 1 January 2013, it had a fair value of GHC3million which had risen to GHC3.30million at 31 December Prepare extracts from Alavanyo Ltd s entity statement of profit or loss and other comprehensive income and statement of financial position for the year ended 31 December 2013 in respect of the above properties. In the case of property QRS only, state how it would be classified in Alavanyo Ltd s consolidated statement of financial position.

11 (5 marks) Page 10 of 12 (c) MNO Ltd adopts fair value for subsequent measurement of its intangible assets. An intangible with an estimated useful life of 9 years was acquired on 1 January 2012 for GHC90,000. It was revalued to GHC108,800 on 31 December 2012 and the revaluation surplus was correctly recognized on that date. As at 31 December 2013, the asset was revalued at GHC64,000. State the accounting treatment required in 2012 and 2013 financial statements. (5 marks) (d) Adama Ltd entered into a 20-year operating lease for a property on 1 January 2001 which has a remaining life of 8 years at 1 January The rental payments are GHC460,000 per annum. Prior to 1 January 2013, Adama Ltd obtained permission from the owner of the property to make some internal alterations to the property so that it can be used for a new manufacturing process which Adama Ltd is undertaking. The cost of these alterations was GHC140,000 and they were completed on 1 January 2013 (the time taken to complete the alterations can be taken as being negligible). A condition of being granted permission was that Adama Ltd would have to restore the property to its original condition before handing back the property at the end of the lease. The estimated restoration cost on 1 January 2013, discounted at 20% per annum to its present value, is GHC100,000. (a) Explain how the lease, the alterations to the leased property and the restoration costs should be treated in the financial statements of Adama Ltd. for the year ended 31 December (4 marks) (b) Prepare extracts from the financial statements of Adama Ltd for the year ended 31 December 2013 reflecting your answer to (a) above. (6 marks)

12 Page 11 of 12 (e) The definition of a liability forms an important element of IABS s Framework for Preparation and Presentation of Financial Statements which in turn forms the basis of IAS 37 Provisions, contingent liabilities and contingent assets. (i) (ii) Distinguish between a liability and a provision Describe the circumstances under which provisions should be recognized. (5 marks) (Total: 30 marks)

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