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.
(a) Boards of Directors are expected to manage companies effectively. However, corporate boards sometimes fail to do so. Recent corporate scandals have highlighted key weaknesses of Board of Directors.
Required:
Explain FIVE common weaknesses of Board of Directors.
(b) Zamu Enterprises began as a small company which operated in the financial services sector of Zamora’s economy. Within the last ten years, the Board, which is chaired by the founder, Ms. Amina Zuri, has incrementally expanded into three more sectors of the economy, namely: telecommunications, logistics and real estate. Currently a conglomerate, Zamu Enterprises has four different companies in its portfolio and has its corporate head office located within the capital city, Zambara.
Required:
Explain the different levels of corporate strategy as it relates to Zamu Enterprises.
(c) Technology is one of the most powerful forces within the external business environment that has changed significantly how business is conducted especially within the 21st Century. For instance, information technology (IT), well exploited, can have significant impact on all the five forces of competition.
Required:
Identify FOUR effects of technological change on organization.
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.
(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.
(a) Different organizations take different stance on corporate social responsibility (CSR), which will be reflected in how they manage such responsibilities. The stance taken normally reflects the extent of inclusion of stakeholders’ interests.
Required:
Explain each of the following CSR stance:
(i) Enlightened self-interest.
(ii) Multiple stakeholder obligation.
(b) Zamtel Communications Ltd is a recently listed local company that is in the process of reorganizing its corporate governance structure to reflect its status as a public company. At the first board meeting after the listing, the board chairman raised the issue of setting up of sub-committees of the Board. The Board agreed to start with two sub committees which are Remuneration Committee and Audit Committee. The board chairman is unsure how the remuneration committee of the board should be composed, its functions and other related matters. As a corporate governance consultant, the board chairman has written to you for advice on various issues regarding the remuneration committee.
Required:
Write a report to the board chairman advising him of the following:
(i) The composition of the Remuneration Committee.
(ii) THREE functions of Remuneration Committee.
(iii) THREE factors to be considered in the remuneration of executive and non-executive directors.
Introduction
The government of Zamora has been concerned with low savings culture, low financial inclusion as well as high cash-based transactions in the country. In 2005, the government decided to pursue policies to grow the financial services industry (FSI) since it was indispensable to the accelerated economic growth required to make the country middle income country. The key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population remained excluded from any form of financial services.
There is generally high cost of credit in the country as the banks complain of difficulty in mobilizing deposits. Zamora is said to have one of the highest lending rates in the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2015 to 8.5% in 2020 respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organizations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of a mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile network’s operators. This allows mobile money to be operated from wherever there is network coverage. It is estimated that there is 70% mobile network coverage in Zamora.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to the customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in the urban centers to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, and in the most remote areas. The capital requirement for registration as mobile money agent is ZM₵4,000 and the daily transaction limit is currently at ZM₵5,000. On the average, agents operate one network mobile money, while very few agents have signed up to two or more different mobile money solutions. The total number of agents have increased from about 17,467 in 2016 to 93,376 as at close of 2023, and National Telecom Regulatory Authority (NTRA) has projected rapid annual growth for the next three years (2024 – 2027).
The Environment
Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle- and lower-income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require are a registered SIM card on the network of choice and a valid national ID. With these they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement by the Central Bank of Zamora. Remittances through mobile money is instant at a fee of 1% of amount remitted or received. Mobile money transactions in Zamora reached ZM₵679.17 million by the end of June 2022, according to the Central Bank of Zamora’s Payment Systems Department and it is expected to hit ZM₵35 billion by the close of 2023. Until very recently, the income from mobile money was not taxed but the Minister of Finance in his 2023 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
The mobile money operations face the issue of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards, and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2023. The government believes that mobile interoperability will deepen financial inclusion.
Regulation
Mobile money services have operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service requires stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Prime Tel Solutions Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented five-year estimates for the new venture as follows:
Year
0
1
2
3
4
5
ZM₵’000
ZM₵’000
ZM₵’000
ZM₵’000
ZM₵’000
ZM₵’000
Cost of capital asset
(200)
Total investment in net working capital
(20)
(25)
(30)
(35)
(35)
Gross Fees
250
300
350
350
300
Direct and other costs
(155)
(185)
(215)
(215)
(195)
Depreciation
(40)
(40)
(40)
(40)
(40)
Interest
(24)
(24)
(24)
(24)
(24)
Profit
31
51
71
71
41
Net total assets
220
200
211
220
240
190
For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per annum.
Required:
(a) Assess THREE environmental factors faced by Prime Tel Solutions Ltd.
(b) Analyse the competitive environment of mobile money segment using Porter’s Five Forces.
(c) Identify and explain FOUR critical success factors for the successful mobile money service operations.
(d) Determine the viability of the project using Net Present Value (NPV) technique and advise the Board of Directors whether to invest or not.
(e) Recommend THREE strategies which the Board of Directors could implement to give Prime Tel Solutions Ltd a competitive edge.
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
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.
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.
(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)
