Question Tag: Deferred Tax

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AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Question

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description	GH¢
Revenue (Gross)	200,000,000
Cost of Operations	80,000,000
Margin/Profit	120,000,000

Additional Information:

Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
The cost of assets acquired at their respective acquisition dates are as follows:

Year	Cost of Assets (GH¢)
2020	100,000,000
2021	75,000,000
2023	50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

Answer

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Tags: Acquisition, Capital Allowance, Corporate Restructuring, Deferred Tax, Mining Tax, Tax implications
Level: Level 3

Topic: Minerals and mining
Series: Nov 2024

CR – May 2016 – L3 – Q3 – Income Taxes (IAS 12)

Discuss and account for deferred taxation arising from temporary differences using IAS 12 for Limelight Plc.

Question

Limelight, a public limited company, is a major player in commodity brokerage and supplies. The following transactions relate to the year ended December 31, 2014.

Profit before taxation for the year was ₦487.5m. Taxable profit for the same period was ₦131.25m.

The balances of non-current assets of the company, at December 31, 2014:

N’000	Amount
Accounting carrying amount	937,500
Tax written down value	637,500

The balances above do not include a freehold building purchased in February 2014 for ₦750m. This building was revalued to ₦985m on December 31, 2014.

Accrued rental income on investment property at December 31, 2014, amounted to ₦9.75m. This income was credited to the statement of profit or loss as at year-end but was not received until three months after. Rental income is taxed by the Federal Inland Revenue Service on an actual basis when it is received.

No other temporary differences exist at December 31, 2014. Income tax and Withholding taxes on rental income are paid at 30% and 10% respectively, six months after the year.

Required:

a) Discuss the conceptual basis for the recognition of deferred taxation by Limelight Plc using the temporary difference approach in accordance with IAS 12, arising from the above transactions.

b (i) Outline how the above transactions should be accounted for using journal entries where appropriate.

b (ii) Calculate the provision for deferred tax after any necessary adjustments to the financial statements at December 31, 2014, and use journal entries.

Answer

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Tags: Deferred Tax, IAS 12, Journal Entries, Taxation, Temporary Differences
Level: Level 3

Topic: Income Taxes (IAS 12)

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

Question

The economic environment in the country has been very harsh, and it is now common knowledge that the economy is in a recession. This downturn impacts the income-generating capacity of companies, particularly in industries experiencing a significant decline in fortunes. Consequently, financial reporting regulators must closely examine evidence of impairment of assets in financial statements submitted by such companies.

Required:
Discuss briefly the reasons why the Financial Reporting Council of Nigeria (FRCN) should focus on the impairment of non-financial assets and deferred tax assets of listed companies in Nigeria during this period of slow economic growth. Also, outline the key areas entities should focus on when accounting for these items.

Answer

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Tags: Deferred Tax, Economic Recession, IAS 12, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2014 – L3 – SC – Q4b – Income Taxes (IAS 12)

Evaluate the impact of deferred tax on fair value adjustments for property, plant, and equipment in an acquisition.

Question

On 1 June 2013, Bam Plc acquired Mango Limited for N3,150 million.
The fair value of the identifiable net assets of Mango Limited at this date was N825 million, and N2,550 million and retained earnings and other components of equity were N105 million, respectively. Mango Limited’s share capital was N1,500 million.

The excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment.

Required:
Evaluate the impact of full deferred tax on the excess of the fair value of the net assets attributable to the increase in the value of property, plant, and equipment of Bam Plc.

Answer

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Tags: Acquisition, Business combination, Deferred Tax, Fair value adjustment, IAS 12, Identifiable Net Assets, Plant & Equipment, Property
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2014

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

Question

The following is the statement of financial position of Lagos Plc as at 31 December, 2013, with its immediate two comparative years.

The management of Lagos Plc is not sure of the impact of IAS 12 (Income Taxes) on its retained earnings as at 31 December, 2013, as well as what the new deferred tax balance will be on migrating to IFRS.

The following information was also available as at the year-end:

Details	Value (N’000)
Tax written down value of PPE	40,300
Tax written down value of goodwill	4,300
Tax base of trade receivables	29,800
Tax base of trade payables	13,000

Assume that current tax has been correctly computed in line with the applicable tax laws at 30%.

Required:
Using relevant computations, advise the management of Lagos Plc on the impact of deferred tax calculated on retained earnings in accordance with IAS 12.

Answer

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Tags: Deferred Tax, Financial Reporting, Goodwill, IAS 12, Income Taxes, Plant & Equipment, Property, Retained Earnings, Tax Base
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2014

CR – Nov 2014 – L3 – SB – Q2b – Income Taxes (IAS 12)

Discuss reasons for variances in effective tax rates and differences between tax charges and tax payments.

Question

Mr. Ojoowuro, the director of a grocery store, has noticed that the tax charge for his company is N15million on profits before tax of N105million. This is an effective rate of 14.3%. Another company, Irin Plc, has an income tax charge of N30million on profit before tax of N90million. This is an effective rate of tax of 33.3%, yet both companies state that the rate of income tax applicable to them is 25%. Mr. Ojoowuro has also noticed that in the statements of cash flows, each company has paid the same amount of tax of N24million.

Required:
Advise Mr. Ojoowuro on the possible reasons why the income tax charge in the financial statements as a percentage of the profit before tax may not be the same as the applicable income tax rate and why the tax paid in the statement of cash flows may not be the same as the tax charge in the statement of profit or loss and other comprehensive income. (7 Marks)

Answer

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Tags: Cash Flow Variances, Deferred Tax, Effective Tax Rate, Financial Statements, Income Tax, Tax adjustments, Tax provisions
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2013

CR – May 2021 – L3 – Q6 – Associates and Joint Ventures (IAS 28)

Discuss equity accounting for investment, accounting for deferred tax, and calculate the recoverable amount of equipment.

Question

Awa Publish has just recently acquired 18% of the shareholding in Tunbe, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares is held by ten other shareholders, none holding more than 5% voting shares. The board of directors of Tunbe is made up of 12 members, with Awa Publish having 3 members and the majority shareholder having 7 members.

Awa Publish was able to negotiate its representation on the board due to its strategic importance in Tunbe’s operations and expansion plans. The directors of Awa Publish accounted for its investment in Tunbe as an equity investment. The directors feel that Tunbe should not be accounted for as an associate because Awa Publish does not have 20% of the voting interest and thus does not exercise significant influence over Tunbe.

Tunbe has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Tunbe will return to making taxable profits in another five years. As part of the acquisition of shares in Tunbe, deferred tax assets for deductible temporary differences arose. The directors of Awa Publish are unsure how to account for this deferred tax asset.

Awa Publish has an item of equipment that cost N56 million. This item of plant and equipment currently has a carrying amount in the financial statements of N39.2 million. Awa Publish expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years.

Awa Publish could generate immediate cash flow of N40 million if it sold the equipment today. However, if it did go ahead with the sale, it will have to pay a sales commission of 8.5%. The directors of Awa Publish are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Tunbe should be accounted for in the financial statements of Awa Publish. (7 Marks)

b. Advise the directors of Awa Publish how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Awa Publish to determine the recoverable amount of the equipment. You may assume a discount rate of 10% or five-year annuity rate of 3.791, if relevant. (6 Marks)

Answer

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Tags: Deferred Tax, Equity Accounting, IAS 12, IAS 36, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36), Income Taxes (IAS 12)

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

Question

Omoge Nigeria PLC has the following share options scheme for its directors as of May 31, 2021:

The price of the company’s shares as of:

May 31, 2021: ₦8 per share
May 31, 2020: ₦8.50 per share

Key details:

Directors must be working for Omoge Nigeria PLC on the vesting dates for the options to vest.
No directors have left the company since the share options were issued, and none are expected to leave before June 2023.
The options can be exercised on the first day of the month in which they vest.
In accordance with IFRS 2, an expense of ₦600,000 was charged to profit in the year ended May 31, 2020, and the cumulative expense for the two years ended May 31, 2021, is ₦2,200,000.
Tax allowances arise when the options are exercised and are based on the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.

Required:

Evaluate the deferred tax implications of the share options for the year ended May 31, 2020, and May 31, 2021. (10 Marks)

Answer

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Tags: Deferred Tax, IAS 12, IFRS 2, Share Options, Tax Allowances
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

Question

Maideline Nigeria Limited manufactures tyres for use by cars, trucks, and trailers. The company is owner-managed, meaning the shareholders are also the directors. On June 1, 2020, the directors decided to wind up the company due to the high cost of operations, the Naira’s depreciation against the US dollar, and the economic impact of COVID-19, which have severely impacted the company’s ability to continue business.

Management notified employees, suppliers, and customers that Maideline would cease all manufacturing activities by September 30. Consequently, all factory workers and most employees in accounts and administration were terminated effective September 30. Remaining employees will face redundancy by November 30. A minimal head office team, including the Company Secretary and some support staff, will remain operational for a few more years until the company winds down completely.

Maideline operated 20 branches and a head office. Of these, 12 branches are located in company-owned buildings, while the remaining 8 operate from leased buildings with lease terms of three to five years. Lease agreements prohibit sub-letting and sale. On adopting IFRS 16, the entity assumed lease renewals at term end, recording lease liabilities and right-of-use assets. A small head office building will remain in use until its lease expires in three years. Maideline accounts for its tangible non-current assets at cost, less depreciation, and has recognized deferred tax assets due to past tax losses and unutilized capital allowances.

All products sold carry a one-year warranty. Until May 31, 2020, the company offered two- and three-year extended warranties, but these were discontinued from March 1, 2020. Maideline distributes products nationally and internationally under three-year agreements and maintains annual supplier contracts. While no distributors or suppliers have pursued legal actions, some are withholding payments, awaiting penalty settlements they claim are due.

Required:
Using the information provided, identify and explain the financial statement risks to be taken into account in planning the final audit of Maideline in respect of the year ended December 31, 2020. (20 Marks)

Answer

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Tags: COVID-19 Impact, Deferred Tax, financial statement risks, IFRS 16, Inventory Valuation, Legal claims, Winding-up
Level: Level 3

Topic: Advanced Audit Planning and Strategy

CR – Nov 2020 – L3 – Q3 – Impairment of Assets (IAS 36)

Discuss the accounting treatment of Tupe Print's investment in Adowa plc, advise on deferred tax assets, and determine the recoverable amount of equipment.

Question

Tupe Print plc has just recently acquired 18% of the shareholding in Adowa plc, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares are held by ten other shareholders, with none holding more than 5% voting shares. The board of directors of Adowa is made up of 12 members, with Tupe Print having 3 members and the majority shareholder having 7 members. Tupe Print was able to negotiate its representation on the board due to its strategic importance in Adowa‘s operations and expansion plans. The directors of Tupe Print have accounted for its investment in Adowa as an equity instrument investment. The directors feel Adowa should not be accounted for as an associate because Tupe Print does not have 20% of the voting interest and thus does not exercise significant influence over Adowa.

Adowa has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Adowa will return to making taxable profits in another five years. As part of the acquisition of shares in Adowa, deferred tax assets for deductible temporary differences arose. The directors of Tupe Print are unsure of how to account for this deferred tax asset.

Tupe Print has an item of equipment which costs N56 million. This item of plant and equipment currently has a carrying value in the financial statements of N39.2 million. Tupe Print expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years. Tupe Print could generate immediate cash flow of N40 million if the equipment is disposed of today. However, if the disposal is carried out, it will have to pay a sales commission of 8.5%. The directors of Tupe Print are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Adowa plc should be accounted for in the financial statements of Tupe Print plc. (7 Marks)

b. Advise the directors of Tupe Print on how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Tupe Print in determining the recoverable amount of the equipment. You may assume a discount rate of 10% or a five-year annuity rate of 3.791 (if relevant). (6 Marks)

Answer

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Tags: Deferred Tax, Equity Instrument, Impairment Review, Investment Accounting, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36)

FR – Mar/Jul 2020 – L2 – Q5b – Gbebody Nigeria Limited Adjusted Retained Earnings and Statement of Financial Position

Preparation of adjusted retained earnings and statement of financial position considering property revaluation and deferred tax impact.

Question

b. The assistant accountant of Gbebody Nigeria Limited after preparing the company‟s draft statement of profit or loss for the year ended September 30, 2019 and adding the current year‟s profit to retained earnings extracted a summarised trial balance of the company as at that date are as follows:

The chief accountant of Gbebody Nigeria Limited on reviewing the draft trial balance discovered that the following information were not taken into consideration by the assistant accountant of the company.

The price of property has increased significantly in recent years and on October 1, 2018, the directors decided to revalue the land and building.

The directors accepted the report of an independent valuer who valued the land at N12m and the building at N58.5million on that date. The remaining life of the building at October 1, 2018 was 15 years. Gbebody Nigeria Limited does not make an annual transfer to retained earnings to reflect the realisation of the revaluation gain, however, the revaluation will give rise to a deferred tax liability. The company income tax rate is 30%.

Plant and equipment is depreciated at 12½% per annum using reducing balance method. No depreciation has been charged on any non-current assets for the year ended September 30, 2019.

Provision of N3.6million is required for current income tax on the profit for the year to September 30, 2019. The balance on current tax in the trial balance is the under/over provision of tax for the previous year. In addition to the temporary difference relating to the information in the note above. Gbebody Nigeria Limited has further taxable temporary difference of N15m as at September 30, 2019.

You are required to prepare:
(i) Adjusted retained earnings after taking into consideration the additional information in the notes above.
(5 Marks)
(ii) The statement of financial position of Gbebody Nigeria Limited as at
September 30, 2019.

Answer

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Tags: Deferred Tax, Depreciation, Financial Statement Preparation, Property Revaluation
Level: Level 2

Series: MAR/JULY 2020

FR – March 2023 – L2 – Q3 – Preparation of Financial Statements

Prepare the statement of profit or loss and financial position using the given trial balance and adjustments.

Question

Kinbuka Ltd has been in operation for the past five years. As a Public Listed Entity, the company uses full IFRSs in preparing its financial statements. Management of the company is preparing financial statements for the year ended 31 December 2021, and has produced the following trial balance for the period.

GH¢	GH¢
Revenue	1,171,000
Inventories (31/12/2020)	80,000
Purchases	543,000
Administrative expenses	180,000
Marketing & distribution expenses	55,000
Non-current assets (cost)-31/12/2020: Note (ii)
Furniture & fittings	88,000
Motor vehicles	180,000
Office equipment	30,000
Intangible assets	50,000
Accumulated depreciation -31/12/2020: Note (ii)
Furniture & fittings	18,000
Motor vehicles	62,400
Office equipment	13,000
Intangible assets	6,000
Taxation account Note (iii)	28,000
Trade & other receivables	151,000
Trade payables	125,000
Deferred tax-31/12/2020 Note (iii)	21,000
13% GOG Bond Note (iv)	19,000
Interest income Note (iv)	2,600
Bank account Note (v)	283,000
Share Capital	200,000
Retained earnings	68,000

Additional Information:

1. Inventories at 31 December 2021 were valued at GH¢65,000.
2. On 1 November 2021, one of the company’s vehicles used in selling and distributing its finished goods was involved in an accident; the vehicle was badly damaged beyond repairs as a result of the accident. This vehicle was acquired by the company on 1 January 2019 for GH¢95,000. The company, however, has insured the vehicle and thus on 4 November 2021 wrote to the insurance company for the claim, to purchase a new vehicle. In response, the insurance company picked and assessed the damaged car, and on 8 January 2022 paid the company a claim of GH¢80,000. There were no other changes in non-current assets for the year ended 31 December 2021. Non-current assets are depreciated or amortised as follows:
  - Furniture & fittings: 20% of cost
  - Office equipment, motor vehicles, and intangible assets: 10% of cost
  - No depreciation is charged on non-current assets in the year of de-recognition. Depreciation or amortisation expense is charged to cost of sales.
3. The taxation account represents the aggregate amount paid by the company as self-assessment tax on its estimated profit for the four quarters of the 2021 year of assessment. Kinbuka Ltd in the year 2021, had officers of the Ghana Revenue Authority (GRA) auditing its tax records for the 2019 and 2020 years of assessment. All the prior years before the 2019 year of assessment have already been audited by GRA. The audit report of GRA received and agreed by Kinbuka Ltd in November 2021 revealed the following:
  - Year of assessment:
    - 2019: Current tax provided: GH¢45,000; Tax liability from the audit: GH¢43,000.
    - 2020: Current tax provided: GH¢57,800; Tax liability from the audit: GH¢67,600.
  The company paid in full the current tax provided for the years 2019 and 2020 in the first half of the years 2020 and 2021, respectively. However, the differences arising from the tax audit have not been provided for in the above balances and are yet to be settled by the company. Current tax expense and an increase in deferred tax liability for the year ended 31 December 2021 have been estimated at GH¢35,300 and GH¢3,750, respectively.
4. As part of cash flow management, the company at the beginning of the current year, purchased a 13%, GH¢20,000 5-year bond at a price of GH¢19,000, incurring a brokerage fee of 2% of the par value. The bond will be redeemed at a premium of 5% over its par value. The brokerage fee paid is included in the administrative expenses. The business model of Kinbuka Ltd in relation to this bond is to hold it till maturity while availing itself to sell when there is a good opportunity to do so. The effective interest rate of the bond is 15% and its fair value at 31 December 2021 is GH¢21,000.
5. The bank account represents the cash book balance as at 31 December 2021. The bank statement, however, reveals a balance of GH¢353,000 as at this date. There are only two reconciling differences between the two figures:
  - Cheques recorded at the credit side of the cash book but yet to be presented to the bank for payment amount to GH¢72,000.
  - Bank charges yet to be recorded in the cash book. All bank charges are classified as administrative expenses.

Required:
Prepare the Statement of Profit or Loss and Other Comprehensive Income of Kinbuka Ltd for the year ended 31 December 2021 and the Statement of Financial Position as at that date. Show clearly all relevant workings.

Answer

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Tags: Deferred Tax, Depreciation, Financial Statements, Inventory, Profit or Loss, Vehicle Derecognition
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAR 2023

FR – Mar 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation of deferred tax liability considering temporary differences in various assets and liabilities, including tax base and carrying values.

Question

The Financial Accountant of Abodie Ltd is finalising the financial statements of Abodie Ltd for the year ended 31 August 2021. The following items are being considered for deferred tax purposes:

At year end, Abodie Ltd’s property, plant & equipment had a tax base and carrying value of GH¢72 million and GH¢95 million, respectively.
The company’s provision for decontamination costs was GH¢11 million (appropriately discounted) at the year end. Decontamination costs are tax deductible when paid.
The company had inventory with a carrying value of GH¢24 million. This did not agree with the tax base because of a GH¢3 million write-down for obsolete items. Tax relief is only granted for inventories upon sale.
The company incurred GH¢15 million in respect of new software development during the year, which was capitalised and will be amortised over the next 5 years. Full year’s charge is required in the first year of completion or purchase. This cost was deducted in the current year for tax purposes. The company is liable for income tax at 30%.

Required:

Compute the company’s deferred tax liability at 31 December 2021.

Answer

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Tags: Deferred Tax, Inventory Write-down, Property, software development, Tax Base, Temporary Differences
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAR 2023

FR – April 2022 – L2 – Q1 – Group Financial Statements and Consolidation

Prepare consolidated statement of financial position for Stalky Ltd and its subsidiary Fanny Ltd as of 31 December 2020, including necessary adjustments.

Question

The following financial statements relate to Stalky Ltd and Fanny Ltd:

Additional information:
1. Stalky Ltd acquired 30 million ordinary shares of Fanny Ltd on 1 January 2019 when the book value of Fanny Ltd’s share capital (including preference share capital) plus reserves stood at GH¢58 million. The recorded investment includes GH¢1.5 million due diligence costs incurred by Stalky Ltd to facilitate its acquisition of Fanny Ltd. Stalky Ltd has no interest in Fanny Ltd’s issued preference shares.

2. Fair value exercise conducted at the time of Fanny Ltd’s acquisition revealed the following:

A piece of equipment with a carrying amount of GH¢10 million had an assessed fair value of GH¢16 million. Estimated remaining useful life: six years.
An in-process research and development project valued at GH¢5 million was identified. It started generating economic benefits a year ago and is expected to continue for four more years.
Deferred tax provision of GH¢1 million was required. By 31 December 2019, the provision required had reduced to GH¢0.9 million, and by 31 December 2020 had decreased further to GH¢0.7 million.

3. During the year, Stalky Ltd sold goods worth GH¢25 million to Fanny Ltd with a mark-up of one-third. At 31 December 2020, Fanny Ltd’s inventories included GH¢4.8 million of these goods. At 31 December 2019, Fanny Ltd’s inventories included GH¢3 million worth of goods purchased from Stalky Ltd at the same mark-up. Ignore deferred tax implications on these items.

4. The trade receivables of Stalky Ltd included GH¢8 million receivable from Fanny Ltd. This balance did not agree with the equivalent trade payable in Fanny Ltd’s books due to payment of GH¢2 million made on 30 December 2020 by Fanny Ltd to Stalky Ltd.

5. The group’s policy is to measure the non-controlling interests in subsidiaries at fair value. The fair value per ordinary share in Fanny Ltd at acquisition was GH¢1.50. Goodwill was impaired by 10% for the year ended 31 December 2019. A further impairment of 10% of the remaining goodwill is required in the current period. All impairment losses are charged to operating expenses.

Required:
Prepare the Consolidated Statement of Financial Position as at 31 December 2020 for Stalky Ltd Group.

Answer

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Tags: Deferred Tax, Goodwill, Group Consolidation, Intra-group Transactions, Non-Controlling Interests, Unrealized Profits
Level: Level 2

Topic: Group Financial Statements and Consolidation
Series: APR 2022

FR – April 2022 – L2 – Q3 – Preparation of Financial Statements and Adjustments

Prepare the statement of comprehensive income and statement of financial position for Caput Plc for the year ended 31 December 2020, incorporating necessary adjustments.

Question

The trial balance of Caput Plc, as at 31 December, 2020 is provided below:

Additional Information:
1. An inventory count at 31 December 2020 amounted to GH¢15,750,000. This includes damaged goods with a cost of GH¢1,200,000. These will require remedial work costing GH¢675,000 and could be sold for GH¢1,425,000.
2. Finance cost is made up of the full year’s preference and ordinary dividends paid.
3. Non-Current Assets:

Land and Building were revalued at GH¢22,500,000 and GH¢72,000,000 respectively on 1 January 2020, resulting in revaluation gain of GH¢11,000,000 for the current year. At that date, the remaining life of the building was 15 years. Depreciation is on a s

traight-line basis. Ignore deferred tax implications.

Depreciation on Plant and Equipment is at 12.5% on a reducing balance basis.
Investment Property: On 31 December 2020, a qualified surveyor valued the property at GH¢20,250,000. Caput Plc uses the fair value model under IAS 40: Investment Property to value its investment property.
It is the policy of the company to charge depreciation on a full-year basis

4. The directors have estimated the provision for income tax for the year ended 31 December 2020 at GH¢12,000,000. The deferred tax for the year ended 31 December 2020 is to be adjusted so that the tax base of the company’s net assets is GH¢18,000,000 less than the carrying amount. Assume the rate of tax is 30%.
5. On 1 October 2020, Caput Plc imported a piece of equipment from a European supplier for €1 million and agreed to settle the bill in six months’ time. The relevant exchange rates are provided below:

No entries have been made for the above transaction. Any exchange difference on translation should be debited or credited to operating expenses.
Required:
Prepare for Caput Plc:
a) Statement of Comprehensive Income for the year ended 31 December 2020. (10 marks)
b) Statement of Financial Position as at 31 December 2020. (10 marks)

Answer

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Tags: Adjustments, Deferred Tax, Depreciation, Exchange Rates, Financial Statements, Inventory Valuation, Revaluation, Trial Balance
Level: Level 2

Topic: Preparation of Financial Statements
Series: APR 2022

FR – May 2017 – L2 – Q2c – Financial Reporting Standards and Their Applications

Explain deferred tax, identify reasons for deferred tax increase, and explain overprovision in the income statement.

Question

The draft financial statements for the year ended 31 March 2015 for Kobby Ltd include the following:

Required:
i) Explain how deferred tax arises.
(2 marks)

ii) Identify the most likely reason for the increase of GH¢200,000 in the deferred tax provision for the year to 31 March 2015.
(2 marks)

iii) Explain what the over provision of GH¢50,000 in the income statement represents.
(2 marks)

Answer

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Tags: Deferred Tax, IAS 12, Income Tax, Overprovision, Taxation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – Nov 2021 – L2 – Q3 – Preparation of Financial Statements

This question focuses on the preparation of a Statement of Profit or Loss and Other Comprehensive Income and a Statement of Financial Position for Neeta Ltd, incorporating revaluations, deferred tax, and lease accounting.

Question

Neeta Ltd is a manufacturing company located in the Western Region. The trial balance of Neeta Ltd as at 31 March 2020 is as follows:

Trial Balance	GH¢’000	GH¢’000
Revenue (Note i)		164,000
Production costs	90,000
Distribution costs	8,000
Administrative expenses	26,000
Inventory at 31 March 2019	19,710
Interest paid on interest-bearing borrowings	3,000
Income tax (Note iii)	100
Dividends paid on equity shares	5,000
Property, Plant and Equipment (PPE) (Note iv)	77,000
Provision for depreciation on PPE at 31 March 2019		22,610
Trade receivables	53,000
Cash and cash equivalents	33,000
Trade payables		12,000
Long term interest-bearing borrowings		50,000
Lease rentals (Note v)	20,000
Deferred tax (Note iii)		7,000
Share capital		50,000
Retained earnings at 31 March 2019		29,000
Totals	334,710	334,710

Additional information:

i) On 1 April 2019, Neeta Ltd sold goods to a customer for a price of GH¢12.1 million. The terms of the sale allowed the customer extended credit, and the price was payable by the customer in cash on 31 March 2021. Neeta Ltd included the GH¢12.1 million in revenue for the current year and the corresponding entry in trade receivables. A discount rate that is appropriate for the risks in this transaction is 10%.

ii) The carrying value of inventory at 31 March 2020 was GH¢25 million.

iii) The estimated income tax on the profits for the year to 31 March 2020 is GH¢1.5 million. During the year, GH¢1.3 million was paid in full as the final settlement of income tax on the profits for the year ended 31 March 2019. The statement of financial position as at 31 March 2019 had included GH¢1.4 million in respect of this liability.

As at 31 March 2020, the carrying amounts of the net assets of Neeta Ltd exceeded their tax base by GH¢28 million. This information is before taking account of the Property revaluation (see Note iv below). The rate of income tax is 30%.

iv) Details of Property, Plant and Equipment are as follows:

Component of PPE	Cost (GH¢’000)	Accumulated depreciation at 31 March 2019 (GH¢’000)	Carrying Amount at 31 March 2019 (GH¢’000)
Land	22,000	0	22,000
Buildings	28,000	5,600	22,400
Plant and Equipment	27,000	17,010	9,990
Total	77,000	22,610	54,390

The estimated useful economic life (at the date of purchase) of PPE components are:

Land: Infinite life
Building: 50 years
Plant and Equipment: 4 years

On 1 April 2019, the property’s open market value was GH¢60 million, including GH¢32 million relating to the building. The directors wish to reflect this revaluation in the financial statements, but no entries regarding the revaluation have been made. The directors do not want to make an annual transfer of excess depreciation to retained earnings. The original estimate of the useful economic life of the building is still considered valid. No assets were fully depreciated at 31 March 2020. All the depreciation is to be charged to the cost of sales.

v) On 1 April 2019, Neeta Ltd leased a large group of machines used in the production process. The lease was for 4 years, and the annual rental (payable in advance) was GH¢20 million. The lessee has not elected to apply the recognition exemption under IFRS 16 leases. The interest rate implicit in the lease can be taken as 9% per year.

Required:

a) Prepare the Statement of Profit or Loss and Other Comprehensive Income for Neeta Ltd for the year ended 31 March 2020.
(10 marks)

b) Prepare the Statement of Financial Position for Neeta Ltd as at 31 March 2020.
(10 marks)

(Total: 20 marks)

Answer

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Tags: Deferred Tax, Depreciation, Lease Accounting, Revaluation of Assets, Statement of Financial Position, Statement of Profit or Loss
Level: Level 2

Topic: Preparation of Financial Statements
Series: NOV 2021

FR – May 2016 – L2 – Q1 – Preparation of Financial Statements

Prepare the statement of profit or loss and statement of financial position for Zealow Ltd as at 31st December 2015, incorporating relevant adjustments.

Question

The following trial balance relates to Zealow Ltd as at 31st December 2015:

GH¢000	GH¢000
Turnover	213,800
Cost of sales	143,800
Operating expenses	22,400
Trade receivables	13,500
Bank	900
Closing inventories – 31st December 2015 (note i)	10,500
Interest expenses (note iii)	5,000
Rental income from investment property	1,200
Plant and equipment-cost (note ii)	36,000
Land and building- at valuation (note ii)	63,000
Accumulated depreciation	16,800
Investment property-valuation 1st January 2015 (note ii)	16,000
Trade payables	11,800
Joint arrangement (note v)	8,000
Deferred tax (note iv)	5,200
Ordinary shares of 25p each	20,000
10% Redeemable preference shares of GH¢1 each	10,000
Retained earnings – 1st January 2015	17,500
Revaluation surplus (note ii)	21,000

Total: GH¢318,000 | GH¢318,000

The following additional information is relevant:

An inventory count on 31st December 2015 listed goods with a cost of GH¢10.5 million. This includes some damaged goods that had cost GH¢800,000. These would require remedial work costing GH¢450,000 before they could actually be sold for an estimated GH¢950,000.
Non-current assets:
- Plant: All plant, including that of the joint operation (note v), is depreciated at 12.5% on a reducing balance basis.
- Land and Building: The land and building were revalued at GH¢15 million and GH¢48 million respectively on 1st January 2015, creating a GH¢21 million revaluation surplus. At this date, the building had a remaining life of 15 years. Depreciation is on a straight-line basis. Zealow Ltd does not make a transfer to realized profits in respect of excess depreciation.
- Investment property: On 31st December 2015, a qualified surveyor valued the investment property at GH¢13.5 million. Zealow Ltd uses the fair value model in IAS 40 Investment property to value its investment property.
Interest expenses include overdraft charges, the full year’s preference dividend, and an ordinary dividend of 4p per share that was paid in June 2015.
The directors have estimated the provision for income tax for the year ended 31st December 2015 at GH¢8 million. The deferred tax provision at 31st December 2015 is to be adjusted (through the profit or loss statement) to reflect that the tax base of the company’s net assets is GH¢12 million less than their carrying amounts. The rate of tax is 30%.

On 1st January 2015, Zealow Ltd entered into a joint arrangement with two other entities. Each venturer contributes their own assets and is responsible for their own expenses, including depreciation on assets of the joint arrangement. Zealow Ltd is entitled to 40% of the joint venture’s total turnover. The joint arrangement is not a separate entity and is regarded as a joint operation.
Details of Zealow Ltd joint venture transactions are:

GH¢000
Plant and equipment at cost
Share of joint venture turnover (40% of total turnover)
Related joint venture cost of sales excluding depreciation
Trade receivables
Trade payables
Total

Required:

(a) Prepare the statement of profit or loss for Zealow Ltd for the year ended 31st December 2015. (10 marks)
(b) Prepare the statement of financial position for Zealow Ltd as at 31st December 2015. (10 marks)

Answer

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Tags: Deferred Tax, Depreciation, Financial Position, Investment Property, Joint Arrangements, Statement of Profit or Loss, Trial Balance
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2016

FR – Nov 2018 – L2 – Q2e- Financial Reporting Standards and Their Applications

This question tests the explanation of temporary differences in relation to deferred tax liabilities and assets under IAS 12.

Question

In accordance with IAS 12: Income Taxes, deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

Required:
Explain temporary differences.

Answer

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Tags: Deferred Tax, IAS 12, Income Tax, Temporary Differences
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2018

FR – Nov 2018 – L2 – Q2d- Financial Reporting Standards and Their Applications

This question tests the classification of events after the reporting period as either adjusting or non-adjusting.

Question

The following events occurred after the year end, but before the financial statements were authorised for issue:

Enactment by the government of a revised tax rate affecting the amount of the settlement of the deferred tax liability included in the financial statements.
A share split in respect of the earnings per share calculation.
Criteria being met in order to classify non-current assets as held for sale.
A material, but not fundamental, error arising in the comparative figures.

Required:
In accordance with IAS 10: Events after the reporting period, explain with justification whether each of the above is an adjusting or a non-adjusting event after the reporting period.

Answer

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Tags: Adjusting Events, Deferred Tax, Earnings Per Share, IAS 10, Non-adjusting Events
Level: Level 3

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2018

Question Tag: Deferred Tax

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