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  • 20 Marks

FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

(a) Explain the terms “adjusting events” and “non-adjusting events” and give three examples of each

(b) Yamfo Retail Limited, a chain of departmental stores has distributed its operations into four Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is estimated that 5% of the sales made in June 20X4 will be refunded in July 20X4.
(ii) On June 2, 20X4, three employees were seriously injured as a result of a fire at the company’s warehouse. They have lodged claims seeking damages of GH¢2.0 million from the company. The company’s lawyers have advised that it is probable that the court may award compensation of GH¢400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December 31, 20X4. The company has not yet installed the smoke detectors.
(iv) On June 20, 20X4, the board of directors decided to close down the Household Appliances Division. However, the decision was made public after June 30, 20X4.
(v) The company has a large warehouse in Kumasi which was acquired under a three-year rent agreement signed on April 1, 20X3. The agreement is non-cancellable and the company cannot sub-let the warehouse. However, due to operational difficulties, the company shifted the warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 20X4.

Required
Describe how each of the above issue should be dealt with in the financial statements for the year ended June 30, 20X4. Support your point of view in the light of relevant International Accounting Standards.

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  • 15 Marks

FR – L2 – Q67 – Presentation of Financial Statements

Prepare Wenchi Exports' profit/loss statement and financial position for 20X4 using trial balance, with adjustments for inventory, patents, revaluation, bad debts, and tax.

The trial balance of Wenchi Exports Limited at 31 December 20X4 is as follows.

GH₵ in million
Dr Cr
Patent rights 60
Work-in-progress, 1 January 20X4 125
Buildings at cost 300
Ordinary share capital 600
Revenue 1,740
Staff costs 260
Accumulated depreciation on buildings, 1 January 20X4 60
Inventories of finished games, 1 January 20X4 155
Consultancy fees 44
Directors’ salaries 360
Computers at cost 50
Accumulated depreciation on computers, 1 January 20X4 20
Dividends paid 125
Cash 440
Receivables 420
Trade payables 294
Sundry expenses 94
Accumulated profits, 1 January 20X4 279
2,633 2,633

The following information is also relevant.
(1) Closing inventories of finished games are valued at GH₵180 million. Work in progress has increased to GH₵140 million.
(2) The patent rights relate to a computer program with a three-year lifespan.
(3) On 1 January 20X4 buildings were revalued to GH₵360 million. This has not yet been reflected in the accounts. Computers are depreciated over five years. Buildings are now to be depreciated over 30 years.
(4) An allowance for bad debts (irrecoverable debts) of 5% is to be created.
(5) There is an estimated bill for current tax of GH₵120 million which has not yet been recognised.

Required
Prepare a statement of profit or loss (analysing expenses by nature) for the year ended 31 December 20X4 and a statement of financial position as at that date.

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  • 20 Marks

FR – L2 – Q66 – Presentation of Financial Statements

Prepare profit or loss and financial position statements for Kumasi Healthcare Limited using trial balance and additional info.

The following trial balance has been extracted from the books of Kumasi Healthcare Limited, at 31 March 20X5.

GH₵ 000 GH₵ 000
Administrative expenses 210
Share capital (ordinary shares of GH₵ 1 fully paid) 600
Trade receivables 470
Bank overdraft 80
Income tax (overprovision in 20X4) 25
Retirement benefit liability 180
Distribution costs 420
Non-current asset investments 560
Investment income 75
Plant and equipment
At cost 750
Accumulated depreciation (at 31 March 20X5) 220
Accumulated profit (at 1 April 20X4) 240
Purchases 960
Inventories (at 1 April 20X4) 140
Trade payables 280
Revenue 1,950
Interim dividend paid 20
3,630 3,630

Additional information
(1) Inventories at 31 March 20X5 were valued at GH₵ 150,000.
(2) The following items are already included in the balances listed in the above trial balance.

Distribution costs GH₵ 000 Administrative costs GH₵ 000
Depreciation (for year to 31 March 20X5) 27 20

(3) A final dividend of GH₵ 120,000 was proposed but not yet paid.
(4) The retirement benefit liability increased by GH₵ 16,000 during the year which has not been included in the trial balance.
(5) Income tax for the year is estimated at GH₵ 29,000.

Required
Prepare a statement of profit or loss (analysing expenses by function) for the year ended 31 March 20X5 and a statement of financial position at 31 March 20X5.

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  • 15 Marks

FR – L2 – Q65 – Presentation of Financial Statements

Prepare a statement of profit or loss and financial position for Lorry Limited using the trial balance and additional info for 20X4.

LORRY LIMITED
The trial balance of Lorry Limited at 31 December 20X4 is as follows.

GH₵ in million
Administration 86
5
918
189
175
2,830
20
400
18
1,562
3,304
6,313

The following information is also relevant.
(1) Inventories on 31 December 20X4 amounted to GH₵127 million.
(2) Current tax of GH₵75 million is to be provided.
(3) The loan is repayable by equal annual instalments over three years.

Required
Prepare a statement of profit or loss (analysing expenses by function) for the year ended 31 December 20X4 and a statement of financial position as at that date.

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  • 20 Marks

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

AX LTD
Below is the summarised draft statement of financial position of AX Ltd, a company listed on the West Africa Stock Exchange, as at 31 March, 20X9:

Non-current assets
Property at valuation (land GH₵20,000; buildings GH₵165,000) (note ii) 185,000
Plant (note ii) 180,500
Financial assets at fair value through profit or loss at 1 April 20X8 (note iii) 12,500
378,000
Current assets
Inventory 84,000
Trade receivables (note iv) 52,200
Bank 3,800
140,000
Total assets 518,000

Equity and Liabilities
Equity
Stated capital 290,000
Capital surplus 12,300
Income surplus
– At 1 April 20X8 96,700
– For the year ended 31 March 20X9 12,300
109,000
411,300
Non-current liabilities
Deferred tax – at 1 April 20X8 (note v) 19,200
Current liabilities 81,800
101,000
Total equity and liabilities 518,000

The following information is relevant:
(i) AX Ltd’s statement of profit or loss includes GH₵8million of revenue for credit sales made on a “sale or return” basis. At 31 March 20X9, customers who had not paid for the goods, had the right to return GH₵2.6million of them. AX Ltd applied a mark-up on cost of 30% on all these sales. In the past, AX Ltd’s customers have sometimes returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 20X9. AX Ltd has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position as at 1 April 20X8 when the building had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31 March 20X9 at GH₵180million. Plant is depreciated at 20% on the reducing balance basis.
(iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X8 the relevant index was 1,200 and at 31 March 20X9 it was 1,296.
(iv) In late March 20X9 the directors of AX Ltd discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of GH₵4 million of the trade receivables as shown in the statement of financial position at 31 March 20X9 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH₵1.5 million had been stolen in the year to 31 March 20X8 with the rest being stolen in the current year. AX Ltd is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purpose.
(v) During the year, the company’s taxable temporary differences increased by GH₵10 million of which GH₵6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 20X9. After allowing for any adjustments required in terms (i) to (iv), the directors have estimated the provision of GH₵11.4 million (this is in addition to the deferred tax effects of item (v).
(vii) During the year, dividends of GH₵15.5 million were paid. These have been correctly accounted for in the above statement of financial position.

Required:
Taking into account any adjustments required by items (i) to (vii) above:
(a) Prepare a statement showing the recalculation of AX Ltd’s profit for the year ended 31 March 20X9; and

(b) Redraft the statement of financial position of AX Ltd as at 31 March 20X9.

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  • 30 Marks

FR – L2 – Q63 – Earnings Per Share

Calculate EPS for Accra Trust for 20X8 and 20X9, including comparatives, after share issues.

(a) (i) The issued share capital of Accra Trust, a publicly listed company on the Accra Stock Exchange, at 31st March 20X7 was GH¢10 million. Its shares are denominated at 25 pesewas each. Accra Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 20X7 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 20X8
On 1st July 20X7 Accra Trust issued eight million ordinary shares at full market price. On 1st January 20X8 a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 20X8 were GH¢13.8 million.

Year ended 31st March 20X9
On 1st October 20X8 Accra Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Accra Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 20X9 were GH¢19.5 million.

Required:
Calculate Accra Trust’s earnings per share for the years ended 31st March 20X8 and 20X9 including comparative figures.

(a) (ii) On 1st April 20X9 Accra Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 20Y2) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 20X9 the directors of Accra Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 20Y2 at GH¢1.50 per share. The average market value of Accra Trust’s ordinary shares for the year ended 31st March 20X9 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 20X9 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Accra Trust’s basic and diluted earnings per share for the year ended 31st March 20X9 (comparative figures are not required).
You may assume that both the convertible loan and the directors’ options are dilutive.

(b) Nsawam Ltd issued 3,000 convertible bonds at par. The bonds are redeemable in 4 years’ time at their par value of GH¢100 per bond. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 5 GH¢1.00 shares. The prevailing market interest rate for four-year bonds that have no right of conversion is 8%.

The present value at 8% of GH¢1 receivable at end of:
Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735

Required:
Show the initial accounting treatment of the bond in accordance with International Financial Reporting Standards (IFRS Accounting Standards).

(c) You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 20X9. The following item has been brought to your attention:

ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was achieved through a share exchange. The terms of the exchange were based on the relative values of the two companies obtained by capitalizing the companies’ estimated cash flows. When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at GH₵2.5 million. A similar exercise valued the goodwill of ABC at GH₵4 million. The directors wish to incorporate both goodwill values in the companies’ consolidated financial statements.

Required:

Describe how ABC should treat the item in its financial statements for the year ended 31st December 20X9 commenting on the directors’ views, where appropriate.

(d) As a newly qualified accountant with The Institute of Chartered Accountants (Ghana) (ICAG), you are asked to make a short presentation to the rest of the staff in the accounting and finance department of your employer who are themselves yet to join ICAG as students about the standard setting process adopted by the International Accounting Standards Board.

Required:

Discuss the standard setting process as adopted by the IASB to these junior staff.

(e) The functional currency according to IAS 21 The Effects of Changes in Foreign Exchange Rates is the currency of the primary economic environment where the entity operates.

Required:

Identify THREE factors in accordance with IAS 21 that an entity will consider in determining its functional currency.

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  • 15 Marks

FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

Kumasi Ventures Plc has had 5 million shares in issue for many years. Earnings for the year ended 31 December Year 4 were GH₵2,579,000. Earnings for the year ended 31 December Year 3 were GH₵1,979,000. Tax is at the rate of 30%.

Outstanding share options on 500,000 shares have also existed for a number of years. These can be exercised at a future date at a price of GH₵3 per share. The average market price of shares in Year 3 was GH₵4 and in Year 4 was GH₵5.

On 1 April Year 3 Kumasi Ventures Plc issued GH₵1,000,000 convertible 7% bonds. These are convertible into ordinary shares at the following rates:

On 31 December Year 6: 30 shares for every GH₵100 of bonds

On 31 December Year 7: 25 shares for every GH₵100 of bonds

On 31 December Year 8: 20 shares for every GH₵100 of bonds

Required:

Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3

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  • 15 Marks

FR – L2 – Q61 – Financial Statement Analysis

Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.

On 1 January Year 5, Unity Vaccines Plc had 5 million ordinary 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 GH¢1 per share. The market price of the shares prior to the rights issue was GH¢4.

1 June An issue at full market price of 800,000 shares.

In Year 5 Unity Vaccines Plc made a profit before tax of GH¢3,362,000. It paid ordinary dividends of GH¢1,200,000 and preference dividends of GH¢800,000. Tax was GH¢600,500. The reported EPS for Year 4 was GH¢0.32.

Required

Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.

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  • 12 Marks

FR – L2 – Q60 – Financial Reporting Standards and Their Applications

Prepare a note for Bawku Limited’s financial statements disclosing related party transactions per IAS 24 for 20X4.

Bawku Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers. During the year 20X4, the company has undertaken the following transactions with its related parties:
(i) Sales of GH₵500 million were made to its only subsidiary Akyem Auto Limited (AAL). Being the subsidiary, a special discount of GH₵25 million was allowed to AAL.
(ii) AAL returned spare parts worth GH₵5.5 million.
(iii) Raw materials of GH₵5 million were purchased from Asante Enterprises, which is owned by the wife of the CFO of Bawku Limited.
(iv) Equipment worth GH₵3 million was purchased from Kofi Limited (KL). The wife of the Production Director of the company is a director in KL.
(v) The company awarded a contract for supply of two machines amounting to GH₵7 million per machine to an associated company.
(vi) In 20X2, an advance of GH₵2 million was given to the Chief Executive of the company. During the year 20X4, he repaid GH₵0.3 million. The balance outstanding as on December 31, 20X4 was GH₵1,100,000.

Required
Prepare a note for inclusion in the company’s financial statements in accordance with the requirement of IAS 24 Related Party Disclosures.

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  • 15 Marks

FR – L2 – Q59 – Related Party Disclosures

Define related party transactions, provide examples, and state conditions for related entities per IAS 24.

(a) The determination of related party status depends on the substance of the relationship, not just the legal form.

Required:

(i) Define a related party transaction and state any TWO examples of such transactions. (3 marks)

(ii) Based on IAS 24 Related Party Disclosures, state any FOUR conditions under which an entity can be said to be related to another.

(b) Cedar Plc has two subsidiaries, Sycamore Ltd and Birch Ltd. The share capital of Cedar Plc is held by Alan and Akwasi at 60% and 40%, respectively. Alan is the Chair of Cedar Plc, while Akwasi is the Managing Director.

Sycamore Ltd is wholly owned by Cedar Plc. On 31 December 20X4, Sycamore Ltd sold a parcel of land it vacated some years back to Birch Ltd for GH¢2m. The latter company, owned and managed by Alan’s son, intends to develop the potential of the site as a location for an events center. The carrying amount at that date was estimated to be GH¢5m. This sale has not been reflected in the Financial Statements of Sycamore Ltd for the year ended 31 December 20X4.

Outline how the above transactions should be recorded in the financial statements of Sycamore Ltd and the consolidated financial statements of Cedar Plc for the year ended 31 December 20X4. (8 marks)

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