Level 2 – Page 24

PSAF – L2 – Q9.3 – Employee Benefits

Show financial statement extracts for Ministry of Transport and Infrastructure's defined benefit plan for 2024 per IPSAS 39.

Question

As at 31st December 2023, the following balances were outstanding in respect of employee pensions which are determined based on a formula that considers number of years of service and the best last six months remuneration of the employee:

GHC million
Pension plan assets	65
Pension liabilities	85

During the year ending 31st December 2024, the following transactions occurred:

GHC million
Transfers into the investments of the scheme	15
Pension payments made	29
Investments liquidated to support pension payments	11
Current service cost	10
Cost resulting from improvement to the plan formula	6

At 31st December 2024, the present value of pension liabilities was computed at GHc127 million (using a discount rate of 15%) and the fair value of plan assets estimated at GHc98 million.

Required:
You are required to show extracts of the financial statements in respect of employee benefits for the year ended 31st December 2024.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Actuarial Difference, Cash Flow, Defined Benefit Plan, Employee Benefits, Financial Statements, IPSAS 39, Pension Expense, Pension Liability
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q75 – Discounted cash flow

Calculate NPV to decide between maintaining old equipment or buying new equipment for Wisdom Ltd, using a 20% cost of capital.

Question

The maintenance manager of Wisdom Ltd insists that management should maintain an old piece of equipment that had been used for 5 years and is fully depreciated rather than buy a new one. The old equipment has a current operating cost of GH₵53,000.00 per annum. The operating cost of the equipment is expected to increase at 5% every year over the next four years, with a sale value of GH₵6,500.00 in the fifth year.

The maintenance manager has proposed that a new system with enhanced technology to reduce operating cost to GH₵32,000.00 for the next three years and GH₵33,600.00 for the fourth and fifth years be introduced. The new equipment will cost GH₵60,000.00 and when introduced, a redundancy cost of GH₵25,000.00 will be paid, with the old equipment sold for GH₵12,000.00. The sale value of the new equipment will be GH₵10,200.00 after its five years’ useful life.

Required:

Using net present value (NPV) method of capital appraisal with 20% cost of capital, advise management on which option Wisdom Ltd should go for.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Capital, Discounted cash flow, Equipment replacement, NPV, operating costs
Level: Level 2

Topic: Discounted cash flow

PSAF – L2 – Q9.2 – Leases

Classify a lease for Keta District Hospital as finance or operating per IPSAS 13/43 criteria.

Question

Based on the information provided, this lease arrangement falls under the category of a finance lease according to IPSAS 13/43: Leases.
To classify a lease as a finance lease, the following criteria are typically considered:

Transfer of ownership: If the lease transfers ownership of the asset to the lessee by the end of the lease term.
Bargain purchase option: If the lessee has the option to purchase the asset at a price lower than the asset’s fair value.
Lease term: If the lease term is for a major part of the economic life of the asset.
Present value of lease payments: If the present value of lease payments amounts to substantially all of the asset’s fair value.
Specialized nature: If the asset is so specialized that only the lessee can use it without major modifications.

In this case, Keta District Hospital:

The lease term (4 years of primary lease period with an indefinite secondary lease period at peppercorn rent) covers a substantial portion of the asset’s useful life (10 years).
The present value of the lease payments is likely to cover a substantial part of the fair value of the asset.
The Assembly retains almost all risks and rewards of ownership (e.g., paying repair, maintenance, and insurance costs).

Therefore, the lease qualifies as a finance lease, meaning the equipment will be recorded as an asset with a corresponding liability for future lease payments. (B)

Prepare the extracts of the final accounts with regards to the lease of the equipment in accordance with IPSAS 43: Leases for the year ended 31st December 2024.
There are four steps in answering this question and these are:

Calculate the lease liability and right-of-use asset
Calculate depreciation on the right-of-use asset
Determine the lease liability and interest expense for 2024
Extract the financial statements

Calculation of lease liability and right-of-use asset
Since the lease is a finance lease, Keta District Hospital will recognize both a right-of-use asset and a lease liability at the inception of the lease. The lease liability is initially measured as the present value of the lease payments over the primary period, discounted using the interest rate implicit in the lease (15%). The present value of the lease payment is as follows:

Year	Lease payment (GHc)
2022	2,000,000
2023	2,000,000
2024	2,000,000

Answer

Find Related Questions by Tags, levels, etc.

Tags: Depreciation, Finance Lease, Financial Statements, Interest Expense, IPSAS 43, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

Question

TechNova Ltd

(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:

Year	Sales and production (units)	Selling price (GH₵ per game)
1	15,000	45
2	25,000	40
3	20,000	38
4	10,000	35

Financial information relating to the production of Zestora:

Item	GH₵ per game
Direct materials	6
Direct labour	8
Variable production overheads	4

Additional information:

Annual fixed production overheads will be GH₵150,000.
Initial investment in equipment will be GH₵800,000.
Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
Tax at the rate of 25% is payable on profits one year in arrears.
Capital allowance is available at 25% per year on a reducing balance basis.
TechNova Ltd’s cost of capital is 10%.
The equipment will have no residual value at the end of year four.

Required: Calculate the net present value of the proposed investment and comment on your findings.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Investment, Cost Estimation, Discounted cash flow, Financial analysis, Inflation, NPV, Project Appraisal, Sales Forecast, Software Industry, Taxation
Level: Level 2

Topic: Taxation and Inflation

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

Question

Kofi, after his National Service and with no hope of securing a job in the formal sector, has decided to run a taxi service. The following have been made for the operation of a service between Asikrom and Sunyasi:
(i) Revenue totalling GH¢300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
(ii) Tyres; four pieces for a year at GH¢120 per unit.
(iii) Maintenance and servicing; GH¢120 per month.
(iv) Salaries GH¢3,000 per year.
(v) Insurance GH¢350 per year.
The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However, the banks are offering rates far higher than the policy rate.

Required:
Calculate the breakeven rate of return for the project.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Cash Flow Analysis, Discounted cash flow, Internal Rate of Return, Net Present Value
Level: Level 2

Topic: Discounted cash flow

PSAF – L2 – Q9.1 – International Public Sector Accounting Standards

Account for borrowing costs for a tunnel project by the Ministry of Transport under IPSAS 5 for 2023.

Question

The Ministry of Transport decided to construct a tunnel that will link two major cities in the country to ease traffic congestion. The project, which commenced in January 2023, is expected to take two years to complete. The financing for the project includes the following borrowings:

Bank Term Loans: GHc50 million at 7% interest per annum
Institutional Borrowings: GHc70 million at 8% interest per annum
Corporate Bonds: GHc100 million at 9% interest per annum

The total borrowings amount to GHc220 million, of which GHc20 million was used for routine maintenance of existing roads, and the remaining was for the tunnel construction. During the year, the Ministry earned GHc5 million from temporary investments of the borrowed funds.

Required:
(a) Explain the accounting treatment for the borrowing costs under the benchmark treatment option (expense recognition) for the year ended 31st December 2023.
(b) Explain the accounting treatment for the borrowing costs under the alternative treatment option (capitalization of borrowing costs) for the year ended 31st December 2023.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset Recognition, Borrowing Costs, Capitalisation, Expense Recognition, Financial Performance, Infrastructure Projects, IPSAS 5
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q72 – Discounted cash flow

Calculate NPV for two machines with given cash flows, tax, and capital allowances.

Question

72 NANTWI PLC
The directors of Nantwi Plc are meeting to decide about the replacement of a machine. The existing machine has to be replaced soon, and there is a choice of two machines that could be purchased to replace it. These are Machine A and a larger Machine, B. The following information is available about each machine:

	Machine A	Machine B
Expected working life	4 years	5 years
Initial cost	GH₵600,000	GH₵750,000
Residual value	GH₵0	GH₵0
Working capital requirement	GH₵100,000	GH₵200,000

The forecast pre-tax cash flows that will be earned using each machine are as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5
	GH₵000	GH₵000	GH₵000	GH₵000	GH₵000
Machine A	470	520	490	450
Machine B	580	640	500	500	400

Nantwi Plc uses 10% as its cost of capital for capital expenditure evaluation.
Taxation at 30% is payable one year in arrears. Capital allowances are available at the rate of 25% each year on the reducing balance method. Inflation should be ignored.

Required
(a) Calculate the NPV with each of the machines.

(b) Calculate the payback period for each machine.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Investment decision, Machine Replacement, NPV
Level: Level 2

Topic: Capital budgeting

FM – L2 – Q71 – Discounted Cash Flow

Calculate NPV for a project with GH₵3M equipment cost, 5-year cash flows, and 8% cost of capital, ignoring inflation and taxation.

Question

A company, Zenith Innovations Ltd, is considering an investment in a new project to manufacture and sell a new product with a five-year lifespan. The project requires an investment of GH₵3 million in equipment. The residual value of this equipment after five years will be 30% of its original cost.

The estimates of net cash flows from operations in each year of the project are as follows:

Year	Net Cash Flow (GH₵)
1	400,000
2	800,000
3	800,000
4	700,000
5	400,000

These cash flows are based on estimates that the annual increase in cash spending on fixed costs will be GH₵200,000, and the contribution/sales ratio from transactions will be 40%. The company’s cost of capital is 8%.

The management of Zenith Innovations Ltd is aware that actual cash flows could be higher or lower than expected, and sensitivity analysis should be carried out to establish the extent to which costs or revenues could differ from the estimate before the project ceases to have a positive NPV.

The investment in working capital will be minimal. Inflation and taxation should be ignored.

Required
(a) Calculate the net present value of the project.

(b) Carry out sensitivity analysis on the following items:

(i) The cost of the equipment, assuming that the residual value will be 30% of cost.

(ii) The residual value of the equipment.

(iii) Sales revenue.

(iv) Variable costs.

(v) Annual fixed costs.

Answer

Find Related Questions by Tags, levels, etc.

Tags: investment appraisal, NPV, Project Risk, Risk Assessment, Sensitivity Analysis
Level: Level 2

Topic: DCF: Risk and uncertainty

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

Question

Discuss the criteria for recognising revenue under IPSAS 47: Revenue and contrast these criteria with the criteria for revenue recognition under IPSAS 9 AND IPSAS 23.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Binding Arrangements, Financial instruments, IPSAS 23, IPSAS 47, IPSAS 9, Non-Binding Arrangements, Revenue Recognition
Level: Level 2

Topic: International Public Sector Accounting Standards

PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

Question

The academic year of Wisdom Academy starts from September each year but has a financial year from January 1 to December 31, consistent with the fiscal year of the Government of Ghana. With respect to the 2023/2024 academic year, a total of 6,000 students were on the roll of students, each expected to pay tuition fees of GHc8,000 for the academic year, divided into two equal parts for each semester. All students are expected to pay 25% of the first semester tuition fees at the start of September each year and pay the remaining 25% before the end of first semester examinations which starts in the first week of December. Similar arrangements pertain to the second semester which starts in February of the following year and ends in May. As at 31st December 2023, 20% of the total students’ population had paid their entire fees for the academic year, 60% of the students had paid full fees for the first semester only, the remaining 20% of the students had managed to pay only 90% of the tuition fees for the first semester but were allowed to write the end of semester examinations.

Required:

Explain the accounting treatment of tuition fees in the financial statements of Wisdom Academy for the year ended 31st December 2023 being guided by IPSAS 9: Revenue from exchange transactions.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accrual accounting, Deferred Income, Exchange Transactions, IPSAS 9, Receivables, Revenue Recognition, Tuition Fees
Level: Level 2

Topic: International Public Sector Accounting Standards

Level (SQ): Level 2

Search

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

PSAF – L2 – Q9.3 – Employee Benefits

Show financial statement extracts for Ministry of Transport and Infrastructure's defined benefit plan for 2024 per IPSAS 39.

FM – L2 – Q75 – Discounted cash flow

Calculate NPV to decide between maintaining old equipment or buying new equipment for Wisdom Ltd, using a 20% cost of capital.

PSAF – L2 – Q9.2 – Leases

Classify a lease for Keta District Hospital as finance or operating per IPSAS 13/43 criteria.

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

PSAF – L2 – Q9.1 – International Public Sector Accounting Standards

Account for borrowing costs for a tunnel project by the Ministry of Transport under IPSAS 5 for 2023.

FM – L2 – Q72 – Discounted cash flow

Calculate NPV for two machines with given cash flows, tax, and capital allowances.

FM – L2 – Q71 – Discounted Cash Flow

Calculate NPV for a project with GH₵3M equipment cost, 5-year cash flows, and 8% cost of capital, ignoring inflation and taxation.

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

Our Offerings

Contact Info

My Account

Get In Touch

Level (SQ): Level 2

Search

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

Show financial statement extracts for Ministry of Transport and Infrastructure's defined benefit plan for 2024 per IPSAS 39.

You're reporting an error for "PSAF – L2 – Q9.3 – Employee Benefits"

Calculate NPV to decide between maintaining old equipment or buying new equipment for Wisdom Ltd, using a 20% cost of capital.

You're reporting an error for "FM – L2 – Q75 – Discounted cash flow"

Classify a lease for Keta District Hospital as finance or operating per IPSAS 13/43 criteria.

You're reporting an error for "PSAF – L2 – Q9.2 – Leases"

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

You're reporting an error for "FM – L2 – Q74 – Discounted Cash Flow"

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

You're reporting an error for "FM – L2 – Q73 – Discounted Cash Flow"

Account for borrowing costs for a tunnel project by the Ministry of Transport under IPSAS 5 for 2023.

You're reporting an error for "PSAF – L2 – Q9.1 – International Public Sector Accounting Standards"

Calculate NPV for two machines with given cash flows, tax, and capital allowances.

You're reporting an error for "FM – L2 – Q72 – Discounted cash flow"

Calculate NPV for a project with GH₵3M equipment cost, 5-year cash flows, and 8% cost of capital, ignoring inflation and taxation.

You're reporting an error for "FM – L2 – Q71 – Discounted Cash Flow"

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

You're reporting an error for "PSAF – L2 – Q8.4 – Revenue Recognition Standards"

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

You're reporting an error for "PSAF – L2 – Q8.3 – Revenue from Exchange Transactions"

admin

Pick a Form