Question Tag: Depreciation

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  • 7 Marks

PSAF – Nov 2024 – L2 – Q2a – Valuation of Legacy Fixed Assets

Valuation and accounting treatment of legacy fixed assets in compliance with IPSAS.

The Ministry of Indigenous Enterprises has been charged to collect legacy fixed assets data and value them in accordance with International Public Sector Accounting Standards (IPSAS). The Fixed Assets Coordinating Unit (FACU) of the Ministry has collected for valuation the following data for your action:

The Ministry owns a four (4) storey Office Administration block. The average cost per floor is GH¢4,741,256.25. The building was constructed on a land size of 20 plots of land owned by the Ministry. Currently, a plot of land in that area costs GH¢2,500,000. The FACU has measured the sizes of the building as follows:

  • Length: 87.5 meters
  • Width: 42.65 meters
  • Reference Price per Square Meter: GH¢4,432

However, a professional body, the Institute of Architects and Engineers, has given the reference price for the cost of such an office building at an estimated price of GH¢87,965,025. The building has not seen any further facelift ever since. However, a fence wall with a gate to enforce security and secure the land has just been completed in the current year at a cost of GH¢8,970,000 with a lifespan of 50 years.

The year of construction of the office building could not be determined, yet an old watchman who had been there for ages remembers that the building was constructed some 42 years ago, a time when his seventh child was born. It is the decision of the Government of Ghana on the adoption of IPSAS not to take advantage of the three-year exemption period but to account for legacy fixed assets by taking 60% of the reference cost of the legacy assets as the deemed cost, with a reduced lifespan of 30 years.

Required:

i) Calculate the cost of the land and buildings with structures to be brought into the books on the adoption of IPSAS and determine the depreciation chargeable in the first year in respect of these assets.                                                                                              ii) Show the extract of Statement of Financial Position of the Ministry of Indigenous
Enterprises as at that date

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  • 2 Marks

PT – Nov 2024 – L2 – Q4c – Tax Treatment of Repairs and Renovations

Explains the tax treatment of repairs and renovations for businesses.

Question:
Repairs are essential for maintaining the safety of a property, and renovation improves the overall functionality of a property.

Required:
What is the tax treatment of repairs and renovations?

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  • 20 Marks

FR – Nov 2024 – L2 – Q3 – Financial Statements Preparation

Preparation of Fahnbulleh LTD’s Statement of Comprehensive Income and Statement of Financial Position using IFRS.

Fahnbulleh LTD (Fahnbulleh) is a well-known company manufacturing thrill rides. During the current economic climate, Fahnbulleh has experienced some difficulties and has had to close down its Merry Go Round division.

The company’s trial balance as at 31 October 2023 is as follows:

Account Description Dr (GH¢’000) Cr (GH¢’000)
Revenue 1,296,000
Cost of Sales 546,480
Distribution Costs 127,080
Administrative Expenses 142,560
Investment Income 28,080
Investment Property 270,000
Interest Paid 17,280
Income Tax 10,800
Property, Plant & Equipment (PPE) – Carrying Value at 1 Nov 2022 1,620,000
Inventories (31 October 2023) 108,000
Trade Receivables 135,000
Bank 64,800
Payables 43,200
Deferred Tax (1 Nov 2022) 75,600
8% Loan Note 432,000
Ordinary Share Capital (GH¢1 per share) 540,000
Retained Earnings (1 Nov 2022) 605,520
Totals 3,031,200 3,031,200

Additional Information:

  1. Revenue Adjustments:

    • Revenue includes VAT of GH¢72 million.

  2. Property, Plant & Equipment (PPE):

    • A building with a carrying value of GH¢54 million was revalued on 1 November 2022 to GH¢72 million.
    • The building had an estimated useful life of 25 years when purchased, and this has not changed after the revaluation.
    • All other PPE should be depreciated at 20% per annum (reducing balance method).
    • All depreciation should be charged to cost of sales.

  3. Closure of the Merry Go Round Division (Discontinued Operations):

    • Closure Date: 1 October 2023
    • Division’s Results (1 Nov 2022 – 1 Oct 2023):
    Item GH¢’000
    Revenue 58,800
    Cost of Sales 38,700
    Distribution Costs 12,240
    Administrative Expenses 11,880
    • The division’s net assets were sold at a loss of GH¢19.2 million, recorded in cost of sales.

  4. Investment Property Revaluation (IAS 40):

    • Investment property value increased by 5%, which should be incorporated into the financial statements.

  5. Income Tax and Deferred Tax (IAS 12):

    • The estimated income tax provision for the year: GH¢140.4 million.
    • Deferred tax liability should be adjusted for temporary differences (GH¢129.6 million) at a 25% tax rate.

  6. Damaged Inventory (IAS 2):

    • Inventory worth GH¢46 million was damaged.
    • It can be reconditioned at a cost of GH¢12 million and sold for GH¢52 million.
    • Appropriate adjustments should be made.

Required:

Prepare and present the Statement of Comprehensive Income for the year ended 31 October 2023 and the Statement of Financial Position as at 31 October 2023 for Fahnbulleh LTD.

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  • 20 Marks

FA – Nov 2024 – L1 – Q4- Preparation of Financial Statements for a Sole Trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for a sole trader from given financial data and adjustments.

The following list of assets, liabilities, and equity as at 30 June 2023 was extracted from the books of Akuorkor, a sole trader:

Trial Balance as at 30 June 2023

Item GH¢
Plant and equipment – cost 100,000
Accumulated depreciation – Plant & Equipment 36,000
Office fixtures – cost 25,000
Accumulated depreciation – Office Fixtures 2,500
Inventory 15,250
Trade receivables and prepayments 17,500
Trade payables and accrued expenses 8,800
Bank overdraft 4,425
Loan (10% interest per annum) 47,500
Capital 58,525

Summary of Receipts and Payments for the Year Ended 30 June 2024

Receipts GH¢
Capital introduced 11,000
Cash from customers 213,750
Total Receipts 224,750
Payments GH¢
Cash drawings (Note 5) 11,225
Loan repayments (Note 7) 10,000
Payment to suppliers 87,800
Rent 11,000
Wages 45,000
Office expenses 6,250
Total Payments 171,275

Additional Information:

  1. Closing inventory on 30 June 2024 was GH¢13,925.
  2. Depreciation policies:
    • Plant & Equipment: 20% per annum reducing balance.
    • Office Equipment: 10% per annum on cost.
    • Fixtures & Fittings: Straight-line method over 4 years with a full year’s charge in the year of acquisition.
  3. GH¢2,500 worth of fixtures & fittings was introduced into the business.
  4. Prepayments and accrued expenses as at 30 June 2023:
    • Rent paid in advance: GH¢1,250
    • Accrued wages: GH¢2,150
  5. Cash drawings included:
    • Wages: GH¢3,375
    • Payments to suppliers: GH¢2,100
    • Advertising leaflets: GH¢1,300 (Half not yet distributed).
  6. Bank balance per statement: GH¢53,350 after adjusting for unpresented cheques.
  7. Loan repayments include GH¢4,750 in interest payments.
  8. Assets and liabilities as at 30 June 2024:
    • Rent paid in advance: GH¢1,350
    • Accrued wages: GH¢2,625
    • Amounts due to suppliers: GH¢6,100
    • Amounts due from customers: GH¢11,150
  9. Major customer went into liquidation owing GH¢8,000; only 20% recoverable.

Required:

Prepare:
i) Statement of Profit or Loss for Akuorkor for the year ended 30 June 2024. 
ii) Statement of Financial Position as at 30 June 2024.

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  • 15 Marks

ATAX – May 2016 – L3 – Q5 – Taxation of Companies

Compute the original and revised tax liabilities of Atlas Nigeria Limited, considering tax official adjustments.

Atlas Nigeria Limited is into the sale of Mobile Phones, and the company’s year-end is December 31 of each year. The company’s Annual Tax Returns for the year ended December 31, 2012, were submitted in January 2014. Tax officials found a number of irregularities during a routine examination of the Tax Returns. They discovered that trade payables included N940,000 representing VAT for the two months to December 31, 2012. All sales attract VAT. There was no Input VAT during 2012. Tax officials were, however, of the opinion that the income of the company accrued uniformly throughout the 12 months of the year.

The accounts showed Adjusted Profits of N44,062,500, and Capital Allowances totaled N33,025,000. The tax liability arrived at was N4,406,250. The tax officials were not satisfied with the explanations received in connection with the Withholding Tax on the Director’s fee of N1,562,500, as well as Consultancy fee of N812,500. They also decided to write back 2/3 of the following expenses:

  • Printing and Stationery N168,750
  • Donations and Subscription N1,320,620
  • Losses claimed, amounting to N128,025 was disallowed. Included in the adjusted profit figure is N6,962,500 for Depreciation.

REQUIRED:

i. Show the computations resulting in the Original Tax Liability of N4,406,250 (5 marks)

ii. Compute a revised Tax liability based on the findings of the Tax Officials (10 marks)

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  • 7 Marks

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.

On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.

The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date Amount (N’000)
December 31, 2016 100,000
December 31, 2017 80,000
December 31, 2018 140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year PV Factor
1 0.909
2 0.826
3 0.751
4 0.683
5 0.620
6 0.564

Required:

Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)

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  • 10 Marks

CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

c. Ngono Plc. has a financial year end of September 30. The Company buys property, plant and equipment for its office in Nigeria from foreign supplier Omaha Inc. in USA. On June 30, 2020, Ngono Plc. took delivery of PPE from Omaha Inc. with invoice value amounting to $100,000 and is due for settlement in equal instalments on August 30, 2020 and November 30, 2020. Clearing cost and import duty paid on the acquisition of the PPE amounted to N1,250,000. It is the policy of Ngono Plc to depreciate PPE at 20% on cost using the straight –line method. The depreciation is provided in full in the year of acquisition and none in the year of disposal.
Both Ngono Plc. and Omaha Inc. honoured their own part of the agreement in the transaction.
Movement recorded in the exchange rate were as follows:

Required:
Show the journal accounting entries to record the above transaction in the books of Ngono Plc. (10 Marks)

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  • 30 Marks

CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below:

Draft Statements of Profit or Loss for the Year Ended December 31, 2018

Item Gbola Limited (N’000) Tanko Limited (N’000) Eze Limited (N’000)
Revenue 17,070 7,320 2,235
Cost of Sales (8,640) (3,210) (885)
Gross Profit 8,430 4,110 1,350
Other Operating Expenses (2,070) (810) (600)
Profit from Operations 6,360 3,300 750
Interest Expense (570) (660) (210)
Profit Before Tax 5,790 2,640 540
Income Tax Expense (810) (360) (90)
Profit for the Year 4,980 2,280 450

Draft Statements of Financial Position as at December 31, 2018

Additional Information

  1. On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000.
  2. A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made.
  3. Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition, and Tanko Limited wrote it off shortly after its acquisition.
  4. At the date of acquisition of Tanko Limited, the carrying amount of its property, plant, and equipment, considered to have a remaining life of 10 years, was N5,625,000 lower than its fair value.
  5. On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense.
  6. A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited, and it sells this component at a margin of 25%. Goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited, and Eze Limited sold all of these goods as at December 31, 2018.
  7. N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000, respectively. On December 31, 2018, Tanko Limited sent a cheque of N300,000 to Gbola Limited.
  8. There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis.
  9. Gbola Limited’s cash and cash equivalents included a Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.
  10. The goodwill arising on the acquisition of Tanko Limited is being amortized over a 10-year period, though this practice contravenes IAS 36, which prohibits goodwill amortization and instead requires annual impairment tests.

a. Prepare the necessary adjustments to account for the lease contract based on additional information provided in (ii) above in accordance with IFRS 16. (5 Marks)
b. Prepare the consolidated statement of profit or loss and other comprehensive income for the group for the year ended December 31, 2018. (8 Marks)
c. Prepare the consolidated statement of financial position of Gbola Limited group as at December 31, 2018. (12 Marks)
d. Discuss the ethical implication of the Director’s action in note (ix) above. (5 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – Q6 – Events After the Reporting Period (IAS 10)

Discuss IFRS 5 requirements for non-current assets held for sale and evaluate event impacts per IAS 10.

Maranathan Plc acquired a property for N4 million with annual depreciation on a straight-line basis at 7.5%. An impairment loss of N350,000 was recognized as of May 31, 2013, with accumulated depreciation at N1 million. The property was classified as held for sale on October 1, 2013, with fair value less costs to sell of N2.4 million. In December 2013, interim financials reported an improved fair value less costs to sell of N2.52 million. By May 31, 2014, fair value increased to N2.95 million, and the property was eventually sold on June 5, 2014, for N3 million.

Required:

a. Assess these transactions per IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of events on the property over time and on reported gain per IAS 10 Events After the Reporting Period. (10 Marks)

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  • 30 Marks

FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Femi Appliances Limited (FAL) is a Nigerian-based manufacturer of household appliances with many distribution centers across various locations in Nigeria and along the ECOWAS sub-region. FAL is now considering the development of a new motor vehicle vacuum cleaner – VC4.

The product can be introduced quickly and has an expected life of four years, after which it may be replaced with a more efficient model. Costs associated with the product are estimated as follows:

Direct Costs (per unit):

  • Labour:
    • 3.5 skilled labour hours at ₦500 per hour
    • 4 unskilled labour hours at ₦300 per hour
  • Materials:
    • 6 kilos of material Z at ₦146 per kilo
    • Three units of component P at ₦480 per unit
    • One unit of component Q at ₦640
  • Other variable costs: ₦210 per unit

Indirect Costs:

  • Apportionment of management salaries: ₦10,500,000 per year
  • Tax allowable depreciation of machinery: ₦21,000,000 per year
  • Selling expenses (excluding salaries): ₦16,600,000 per year
  • Apportionment of head office costs: ₦5,000,000 per year
  • Rental of buildings: ₦10,000,000 per year
  • Annual interest charges: ₦10,400,000
  • Other annual overheads: ₦7,000,000 (includes building rates ₦2,000,000)

If the new product is introduced, it will be manufactured in an existing factory, having no effect on rates payable. The factory could be rented out for ₦12,000,000 per year to another company if the product is not introduced.

New machinery costing ₦86,000,000 will be required, depreciated on a straight-line basis over four years with a salvage value of ₦2,000,000. The machinery will be financed by a four-year fixed-rate bank loan at 12% interest per year. Additional working capital requirements may be ignored.

The new product will require two additional managers at an annual gross cost of ₦2,500,000 each, while one current manager (₦2,000,000) will be transferred and replaced by a deputy manager at ₦1,700,000 per year. Material Z totaling 70,000 kilos is already in inventory, valued at ₦9,900,000.

FAL will utilize the existing advertising campaigns for distribution centers to also market the new product, saving approximately ₦5,000,000 per year in advertising expenses.

The unit price of the product in the first year will be ₦11,000, with projected demand as follows:

  • Year 1: 12,000 units
  • Year 2: 17,500 units
  • Year 3: 18,000 units
  • Year 4: 18,500 units

An inflation rate of 5% per year is anticipated, with prices rising accordingly. Wage costs are expected to increase by 7% per year, and other costs (including rent) by 5% annually. No price or cost increases are expected in the first year of production.

Income tax is set at 35%, payable in the year the profit occurs. Assume all sales and costs are on a cash basis and occur at the end of the year, except for the initial purchase of machinery, which would take place immediately. No inventory will be held at the end of any year.

Required:

a. Calculate the expected internal rate of return (IRR) associated with the manufacture of VC4. Show all workings to the nearest ₦million. (19 Marks)

b. i. Explain what is meant by an asset beta and how it differs from an equity beta. (2 Marks)
ii. Given the company’s equity beta is 1.2, the market return is 15%, and the risk-free rate is 8%, discuss whether introducing the product is advisable. (4 Marks)

c. The company is concerned about a potential increase in corporate tax rates. Advise the directors by how much that the tax rate would have to change before the project is not financially viable. A discount rate of 17% per year may be assumed for part (c). (5 Marks)

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  • 20 Marks

FR – Nov 2016 – L2 – Q3 – Preparation of Financial Statements

Prepare the financial statements of Kwadaso Ltd, including profit or loss, changes in equity, and financial position for the year ended 30 September 2015.

The following is the trial balance of Kwadaso Ltd, a trading company, as at 30 September 2015:

Additional Information:

  1. On 31 March 2015, the company made a bonus issue from retained earnings of one new share for every four shares in issue at GH¢10.00 each. This transaction is yet to be recorded in the books. The company paid ordinary dividends of GH¢2.2 per share on 31 January 2015 and GH¢2.6 per share on 30 June 2015. The dividend payments are included in administrative expenses in the trial balance.
  2. Provision is to be made for a full year’s interest on the Loan notes.
  3. The finance charge relating to the preference shares is equal to the dividend payable.
  4. Non-current assets:
    • Depreciation of Property, Plant, and Equipment is to be provided on the following bases:
      • Plant and equipment – 10% on cost
      • Computer equipment – 25% on cost
      • Motor vehicles – 20% on reducing balance
    • No depreciation has yet been charged on any non-current asset for the year ended 30 September 2015.
    • Kwadaso revalues its buildings at the end of each accounting year. At 30 September 2015, the relevant value to be incorporated into the financial statements is GH¢14,100,000. The building’s remaining life at the beginning of the current year (1 October 2014) was 25 years. Kwadaso does not make an annual transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation surplus.
  5. The available-for-sale investments held at 30 September 2015 had a fair value of GH¢8,400,000. There were no acquisitions or disposals of these investments during the year.
  6. In February 2015, Kwadaso’s internal audit unit discovered a fraud committed by the company’s credit manager who did not return from a foreign business trip. The outcome of the fraud is that GH¢500,000 of the company’s trade receivables have been stolen by the credit manager and are not recoverable. Of this amount, GH¢200,000 relates to the year ended 30 September 2014 and the remainder to the current year. Kwadaso is not insured against this fraud.
  7. Corporate income tax payable estimated on the profit for the year is GH¢3,500,000. An amount of GH¢1,200,000 is to be transferred to the deferred taxation account.

Required:
Prepare the following financial statements of Kwadaso Ltd for publication in accordance with International Financial Reporting Standards (IFRS):

a) Statement of profit or loss and other comprehensive income for the year ended 30 September 2015.

b) Statement of changes in equity for the year ended 30 September 2015.

c) Statement of financial position as at 30 September 2015.

d) Show clearly all relevant workings.

(Note: Accounting policy notes are not required)

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  • 6 Marks

FR – May 2018 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculate the carrying amount of a plant asset after applying impairment losses as at 31 March 2018 in line with IAS 36.

Devine Education Ltd acquired an item of plant at a cost of GH¢800,000 on 1 April 2016. The plant had an estimated residual value of GH¢50,000 and an estimated useful life of five years, neither of which has changed. Devine Education Ltd uses straight-line depreciation.

On 31 March 2018, Devine Education Ltd was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Devine Education Ltd. Even before this information was known, Devine Education Ltd had been having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the next three years will be:

Year ended GH¢’000
31 March 2019 220.00
31 March 2020 180.00
31 March 2021 170.00

Devine Education Ltd has confirmed that there is no market in which to sell the plant as at 31 March 2018, but is confident that it can still be sold for its original estimated realisable value on 31 March 2021. Devine Education Ltd’s cost of capital is 10%, and the following values should be used:

Value of GH¢1 at:
End of year 1 0.91
End of year 2 0.83
End of year 3 0.75

Required:
In line with IAS 36: Impairment of Assets, calculate the carrying amount of the asset above as at 31 March 2018 after applying any impairment losses. (Note: Calculations should be to the nearest GH¢1,000). (6 marks)

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  • 20 Marks

FR – Aug 2022 – L2 – Q3 – Preparation of Financial Statements

Prepare the Statement of Profit or Loss and Financial Position for Morontuo Plc for the year ended 31 December 2021, along with all relevant workings.

Morontuo Plc deals in electrical and other household appliances. It has a fleet of vehicles used in the distribution of these goods. The company is preparing its financial statements for the year ended 31 December 2021. Below is the trial balance for the period:

Additional Information:

i) The company repairs goods returned by customers for minor or major defects. It estimates that 25% of goods sold would have minor defects and 15% would have major defects. Estimated repairs cost for minor and major defects is GH¢8 million and GH¢2 million respectively. This effect has not been incorporated in the trial balance.

ii) Morontuo rents some of its vehicles and routinely sells them after some time. Vehicles X and Y (GH¢3.5 million and GH¢2 million respectively) used for rental services were acquired on 1 January 2021. Vehicle Y was sold on 1 December 2021 for GH¢1.88 million, which remains unpaid. The effects of the decision to sell the vehicles have not been incorporated.

iii) Suspense account represents interest and principal payments on a loan from Alpha Bank contracted on 1 July 2021. The loan is repayable in monthly instalments of GH¢1 million over 3 years, with 24% annual interest.

iv) Inventory includes slow-moving finished goods costing GH¢15 million. These were sold at 98% of their carrying amounts in January 2022.

v) Current tax for the year is estimated at GH¢15.8 million.

Required:

Prepare the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2021 and the Statement of Financial Position as at that date in accordance with IFRS. Include all relevant workings.

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  • 6 Marks

FR – Nov 2018 – L2 – Q2c- Financial Reporting Standards and Their Applications

This question requires calculating the adjustments to opening retained earnings and profit or loss due to changes in accounting policies and estimates.

Talensi, a company reporting under IFRS, is considering making the following changes to its financial statements for the year ended 31 December 2017. Talensi presents one year of comparative information.

  1. Changing the method of depreciation of its plant from straight-line depreciation over five years (with a nil residual value) to reducing balance at 20% per annum with effect from 1 January 2017. The plant originally cost GH¢100 million on 1 January 2015.
  2. Changing the basis of valuation of certain non-seasonal inventories from first-in, first-out (FIFO) to weighted average cost (WAC). Inventories were valued as follows under the two different methods:
    31 December 2015 31 December 2016 31 December 2017
    FIFO: GH¢64 million FIFO: GH¢66 million FIFO: GH¢71 million
    WAC: GH¢62 million WAC: GH¢63 million WAC: GH¢67 million
  3. Changing the revenue recognition basis for certain seasonal goods that were first sold in 2015 such that revenue is recognised on delivery to the customer rather than on shipment. This has arisen as a result of a change in delivery arrangements such that, with effect from 1 January 2017, risks are now borne by Talensi until delivery has been made to the customer.
    2015 2016 2017
    Revenue based on shipment date: GH¢50 million GH¢86 million GH¢90 million
    Revenue based on delivery date: GH¢46 million GH¢84 million GH¢88 million

The cost of the seasonal goods is consistently 80% of sales price.

Profit (calculated using existing policies and accounting estimates) was GH¢240 million for the year ended 31 December 2017.

Required:
Calculate the adjustment to opening retained earnings in the statement of changes in equity (including 2016 comparative figures) in the financial statements for the year ended 31 December 2017 and profit or loss for the year ended 31 December 2017.

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  • 3 Marks

FR – Nov 2018 – L2 – Q2b- Financial Reporting Standards and Their Applications

This question relates to the impairment test of an asset, applying IAS 36.

Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017 revealed its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate an annual net income of GH¢2 million for the next three years at which point the asset would be sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20% on a reducing balance method on machinery.

Note:

  • The present value of ordinary annuity of GH¢1 at 10% for one year, two years, and three years is 0.909, 1.736, and 2.487 respectively.
  • The present value of GH¢1 at 10% for one year, two years, and three years is 0.909, 0.826, and 0.751 respectively.

Required:
In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017.

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  • 12 Marks

FR – May 2019 – L2 – Q5b – Financial Reporting Standards and Their Applications

Calculation of accounting entries for machinery purchased under hire purchase and repossessed.

Lease and hire purchase are very popular options for financing assets. These options vary from each other in many aspects: ownership of the asset, depreciation, rental payments, duration, tax impact, repairs and maintenance of the asset, and the extent of finance.

Thereatta Ltd is a listed advertising company operating in Ghana. The Board of Thereatta Ltd (Thereatta) was contemplating the most suitable option to finance one of its machinery before settling on Hire Purchase. On 1 January 2016, Thereatta acquired a machinery on hire-purchase basis from Askona Ltd agency. The terms of the Hire Purchase agreement require Thereatta to make four annual installments of GH¢6,000 each, payable at the end of each year. There is no down payment. Interest is charged at 20% per annum and is included in the annual installments.

Because of financial difficulties, Thereatta, after having paid the first and second installments respectively, could not pay the third yearly installment due on 31 December 2018, whereas the vendor repossessed the machinery. Thereatta provides depreciation on the machinery at 10% per annum according to the written-down value method.

Required:

Show the accounting treatment of the Machinery account and the account of Askona Ltd agency in the books of Thereatta. (All workings must be shown).

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Preparation of Financial Statements

Preparation of Statement of Profit or Loss and Statement of Financial Position for Frafraha Ltd as at 31 March 2018.

The following trial balance was extracted from the books of Frafraha Ltd (Frafraha) on 31 March 2018:

The following notes may be relevant:

  1. Frafraha applies the revaluation model of IAS 16 Property, Plant & Equipment to its land and buildings. A revaluation took place on 31 March 2017 and resulted in the fair value of GH¢62 million shown above. This figure included GH¢22 million in respect of land. The buildings were deemed to have a 40-year useful economic life remaining at that date. No depreciation has yet been charged for the accounting period ended on 31 March 2018. All depreciation is charged to cost of sales. On 31 March 2018, a further revaluation took place, which revealed a fair value of GH¢24 million for the land and GH¢41 million for the buildings. This is to be recorded in the books in accordance with the accounting policy of Frafraha.
  2. Plant & equipment is being depreciated at 25% per annum straight line from the date of purchase to the date of sale. On 1 October 2017, a piece of plant was purchased at a cost of GH¢12 million. This replaced another piece of plant which had cost GH¢8 million some years ago and was fully depreciated prior to 31 March 2017. A trade-in allowance of GH¢1 million was received for the old plant. The only entries made to record this transaction were to credit cash and debit suspense with the net payment of GH¢11 million. No other item of plant was more than three years old at 1 April 2017.
  3. The inventories figure in the trial balance is the opening inventories balance measured on the first-in, first-out (FIFO) basis. Due to a change in Frafraha’s business, the company decided to change its accounting policy with respect to inventories to a weighted average basis, as follows:
Date FIFO (GH¢’000) Weighted Average (GH¢’000)
31 March 2016 33,200 30,300
31 March 2017 37,300 34,100

Closing inventories at 31 March 2018, measured under the weighted average basis, amounted to GH¢41.2 million.

  1. Intangible assets consist of capitalised development costs of GH¢30 million. These relate to products in development at 1 April 2017. No revenue has yet been earned from any of these products. They are all expected to be successful once ready for market, with the exception of one project. The amount previously capitalised in respect of this project was GH¢6 million. However, adverse developments have led to the decision to abandon the project as it was unlikely to be successful in the marketplace. During the year, further expenditure was incurred on other qualifying projects and was charged to administration expenses. The amounts are as follows:
    • Prototype development costs GH¢3 million.
    • Marketing research to determine the optimal selling strategy GH¢1 million.
    • Basic research which may lead to future projects GH¢4 million.
  2. Frafraha commenced construction of a new warehouse on 1 May 2017. The building was completed and available for use on 30 November 2017. The cost of construction amounted to GH¢9 million, funded out of general borrowings, which comprise two bank loans as follows:
    • GH¢4 million of bank loan finance at 6% interest.
    • GH¢6 million of bank loan finance at 4.5% interest.

    All interest costs have been expensed in the year to 31 March 2018, but no other entries have been passed in respect of this. Ignore any depreciation in relation to the new warehouse.

  3. Corporate tax for the year is estimated at GH¢0.25 million.

Required:

Prepare, in a form suitable for publication to the shareholders of Frafraha Ltd, the Statement of Profit or Loss for the year ended 31 March 2018 and Statement of Financial Position as at 31 March 2018.

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  • 6 Marks

PT – Aug 2022 – L2 – Q5a – Corporate Tax Liabilities

Compute the branch profit tax for Chahuncha Ghana Branch for the year of assessment 2020.

Chahuncha Ghana Branch declares a profit before tax of GH¢6,000,000 in 2020 year of assessment after charging depreciation of GH¢680,000 and a loss of GH¢1,500,000 which was incurred in 2012. The capital allowance for the year amounted to GH¢750,000, yet to be adjusted. The corporate tax rate is 25%.
Required:
Compute the Branch Profit Tax for the 2020 year of assessment.

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  • 16 Marks

PT – Nov 2021 – L2 – Q4a – Corporate Tax Liabilities

Calculate the capital allowance claimable for NASA Ltd for the years 2017-2020 based on its non-current assets.

NASA Ltd commenced business on 1 October 2017, preparing accounts to 31 December each year. Accordingly, the company has the following extracts from its financial records on non-current assets:

Year 2017

  • Purchased Office furniture and fittings costing GH¢40,000.
  • Purchased office Air conditioners at the cost of GH¢20,000.
  • The company bought a land costing GH¢55,000.
  • Bought office building at the cost of GH¢700,000.
  • Purchased a computer at the cost of GH¢1,500.
  • Purchased office Photocopier at the cost of GH¢2,500.

Year 2018

  • Purchased a Television Set for the office at the cost of GH¢3,500.
  • Bought a 4×4 Vehicle (7-passenger-seater) for an amount of GH¢200,000.
  • Purchased a File Cabinet for GH¢2,000.

Year 2019

  • Exchanged the vehicle bought in 2018 for four plots of land valued at GH¢200,000.
  • Paid for a Trade Mark costing GH¢15,000, which was licensed for ten years.
  • Purchased a business that resulted in Goodwill of GH¢100,000. The company decided to amortize the goodwill over 20 years.

Year 2020

  • Bought a home-used motor vehicle at the cost of GH¢70,000.
  • Purchased office computers for GH¢5,000.
  • Purchased Trucks and Trailers for GH¢50,000.
  • Sold some of the office furniture for GH¢3,000.

Required:
Calculate the amount of capital allowance claimable for 2017, 2018, 2019, and 2020 years of assessment. (16 marks)

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  • 20 Marks

PT – Nov 2020 – L2 – Q4 – Corporate Tax Liabilities

Compute capital allowances for a manufacturing company over two years and explain the class or pool system of capital allowances.

Fafana Manufacturing Company Ltd, producers of special fruit juice, started business on 01/01/2016 and prepares accounts to 31 December each year. The company had constructed an office building, which was put into use on 01/01/2016. The following are the capital allowance written down values brought forward from pools of assets as at 01/01/2017:

Item Written Down Value (GH¢)
Pool 1 12,000
Pool 2 520,000
Pool 3 405,000
Office Building 540,000
Patent (acquired in 2016 for five years) 48,000

The company acquired the following chargeable assets for the business in 2017:

  • Factory Buildings GH¢958,000
  • Plant and Machinery GH¢2,500,000
  • File Cabinet GH¢10,000
  • Electric Ceiling and Standing Fans GH¢20,000
  • Window and Split Air Conditioners GH¢157,000
  • Motor Vehicles GH¢110,000
  • Photocopier GH¢14,000
  • LCD Television GH¢3,000
  • Visitors Chairs GH¢5,500
  • Office Chairs and Tables GH¢56,000

Some assets were disposed of in 2017, namely:

  • Computers and Accessories GH¢11,600
  • Standing Fans GH¢3,500

The company acquired the following chargeable assets for the business in 2018:

  • Toyota Salon Car GH¢70,000
  • Toyota Pick-up (only one) GH¢95,000
  • LCD Projector GH¢5,500
  • Data Handling Machine GH¢36,000
  • Trucks and Trailers GH¢54,000
  • Trademark (registered for 8 years) GH¢72,000

One of the vehicles was involved in an accident in 2018, and the company received GH¢45,000 as insurance compensation.

Required:
a) Determine the capital allowances for Fafana Manufacturing Company Ltd for 2017 and 2018 years of assessment. (16 marks)
b) Indicate how the class or pool system works with the treatment of capital allowances. (4 marks)

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