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

FA – May 2018 – L1 – Q2 – Non-current assets and depreciation

Record and depreciate non-current asset transactions over a 15-month period.

Asasepa Ltd prepares its financial statements to 31 December each year until 31 December 2016, when the business changed its accounting date. The company prepared its next financial statements for 15 months to 31 March 2018.

At 1 January 2017, the following balances existed in the business’s accounting records:

  • Plant and machinery: cost GH¢819,000; accumulated depreciation GH¢360,000.
  • Motor vehicles: cost GH¢148,000; accumulated depreciation GH¢60,000.

Depreciation policy
The business’ policy on depreciation is to charge proportionate depreciation in the periods of purchase and sale of its non-current assets, charging depreciation as from the first day of the month in which assets are acquired, and up to the last day of the month before any disposal.
Annual rates of depreciation taken are:

  • Plant and machinery: 15% straight line
  • Motor vehicles: 25% straight line

Transactions during the year
During the 15 months ended 31 March 2018, the following transactions took place:

  • 10 January 2017: An item of plant was purchased. The cost was made up as follows:
    • Cost ex-factory: GH¢41,200
    • Delivery: GH¢300
    • Installation costs: GH¢800
    • Construction of foundations: GH¢3,600
    • Spare parts for repairs: GH¢4,000
    • Cost of one-year maintenance agreement: GH¢2,000
    • Total: GH¢51,900
  • 18 April 2017: A new motor vehicle was purchased for GH¢18,000. An existing vehicle which had cost GH¢12,000, and which had a book value at 1 January 2017 of GH¢6,000, was given in part exchange at an agreed value of GH¢5,000. The balance of GH¢13,000 was paid in cash.

Required:
a) Prepare the ledger accounts to show the balances at 1 January 2017.
b) Record the non-current asset transactions for the 15 months period ending 31 March 2018.

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  • 20 Marks

FA – Nov 2017 – L1 – Q5 – Preparation of limited liability company financial statements | Non-current assets and depreciation

Prepare the Statement of Profit or Loss and Statement of Financial Position for Bob & Sons as of December 31, 2016, including necessary adjustments.

The following trial balance was extracted from the ledger account of Bob & Sons, a sole proprietor, as at 31 December 2016:

Trial Balance as at 31 December 2016

Account Debit (GH¢) Credit (GH¢)
Building, at cost 650,000
Office equipment at cost 135,000
Plant and Machinery 263,500
Accumulated depreciation
– Building 39,000
– Office equipment 27,000
– Plant and Machinery 65,875
Purchases 248,000
Sales 500,000
Inventory 1 January 2016 27,500
Discount allowed 4,800
Returns inwards 3,200
Wages and Salaries 64,885
Rent 5,580
Insurance 6,000
Trade receivables 145,000
Trade payables 132,750
Provision for bad debt 24,840
Bank overdraft 58,956
Cash in hand 5,400
Long-term loan 350,000
Capital 1 January 2016  

1,558,865 

 360,444

1,558,865 

Additional Information:

i) Inventory as at December 2016 was valued at GH¢24,000.
ii) Insurance was paid for 15 months ending 31 March 2018.
iii) 3 months rent is outstanding. The agreed amount per month is GH¢620.
iv) Included in wages and salaries is an amount of GH¢2,500 withdrawn by the owner. Secondly, the cleaner has not been paid his salary for December 2016 as at the end of the year. His monthly salary is GH¢500.
v) Interest on capital per annum is 15% and is yet to be recorded.
vi) Depreciation for the year ended 31 December 2016 has not been charged as follows:

  • Building 3% per annum using the straight-line method.
  • Office equipment 20% using the reducing balance method.
  • Plant and machinery 25% using the reducing balance method.

Required:

a) Prepare Bob & Sons’ Statement of Profit or Loss account for the year ended 31 December 2016. (8 marks)
b) Prepare the Statement of Financial Position as at that date. (12 marks)

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  • 20 Marks

FA – May 2017 – L1 – Q7 – Preparations of accounts from Incomplete Records | Preparation of limited liability company financial statements

Preparation of the statement of profit or loss and statement of financial position for STL, including adjustments for drawings, depreciation, and closing inventory.

STL has been in business for a number of years. In the past year, she has been busy training for the Olympics and has not kept proper records for her business. She has given you some information.

The balances as at 1 May 2016 are as follows:

The balance on the bank statement at 30 April 2017 was GH¢1,144. There were no timing differences.

You are given the following additional information:
i) Closing inventory is valued at GH¢1,324.
ii) STL took goods which had a cost of GH¢96 and would have been sold for GH¢124 for her own personal use.
iii) A telephone bill was received on 7 July 2017 for GH¢75, this related to the quarter ended 30 June 2017.
iv) Rent includes GH¢1,000 paid on 1 January 2017 for the year to 31 December 2017.
v) STL takes GH¢60 every week out of the takings before banking them. She also spends GH¢20 every week on petrol for the company van.
vi) Depreciation is to be charged at 15% reducing balance.
vii) Closing trade receivables and payables were GH¢2,072 and GH¢967 respectively. However, one customer, Caroline, has vanished and her debt of GH¢575 is not likely to be paid.
viii) STL always keeps a cash float of GH¢50.
ix) STL makes sales to cash and credit customers. Customers taking credit always pay by cheque or bank transfer.

Required:
a) Prepare the statement of profit or loss for STL for the year ended 30 April 2017. (12 marks)
b) Prepare the statement of financial position for STL as at 30 April 2017. (8 marks)

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  • 20 Marks

FA – May 2017 – L1 – Q4 – Correction of errors | Non-current assets and depreciation

Differences between companies and partnerships, disadvantages of sole proprietorships, depreciation calculation for Otiko Ltd, and error correction for WD.

a) Partnerships and limited liability companies present several similarities for business owners looking for the right company structure. Both have similar income distribution and tax-reporting formats, and both are simpler to set up and operate than a corporation. Despite their similarities, they have differences.

Required:
Identify and explain THREE fundamental differences between a company and a partnership. (6 marks)

b) Sole proprietorships are the smallest form of business organization, and also the most common in the country. However, while there are certain advantages (it is easier to set up a sole proprietorship than a limited liability company, for instance), there are numerous disadvantages.

Required:
State FOUR disadvantages of the sole proprietorship as a mode of business. (4 marks)

c) Otiko Ltd’s head office building is the only building it owns. Using professional valuers, it revalued this building on 1 January 2016, at GH¢2,100,000. Otiko Ltd has adopted a revaluation policy for buildings from this valuation date and has decided that the original useful life of buildings has not changed as a result of the revaluation. The building was acquired on 1 January 2006. The cost of the building on acquisition was GH¢2,500,000 and the accumulated depreciation to the 31 December 2015 amounted to GH¢500,000. The depreciation up to 1 January 2016 was depreciated evenly since acquisition. The professional valuer believes that the residual value on the building would be GH¢600,000 at the end of its useful life.

Required:
Calculate the depreciation amount of the building for the year ended 31 December 2016 based on the information provided in the above scenario. (6 marks)

d) WD noted in 2016 that in 2015 it had omitted to record a depreciation expense on an asset amounting to GH¢600. Its accounts before the correction of the error are;

2016 (GH¢000) 2015 (GH¢000)
Gross profit 6,000 6,900
Distribution costs (600) (600)
Administration expenses (1,800) (1,800)
Depreciation (600) Nil
Profit from operations 3,000 4,500
Income tax (600) (900)
Net profit 2,400 3,600

WD’s retained earnings (income surplus) for the two years before the correction of the error were;

2016 (GH¢000) 2015 (GH¢000)
Retained earnings carried forward 6,900 4,500
Retained earnings brought forward 4,500 900

Required: Describe how the above error should be corrected in accordance with IAS 8: Accounting policies, changes in accounting estimates and errors. (4 marks)

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  • 31 Marks

FA – May 2016 – L1 – Q1 – Accruals and prepayments | Bad and doubtful debt | Preparation of financial statements of a sole trader

Prepare income statement and balance sheet, identify and explain accounting concepts related to specific adjustments.

Asomdwee Enterprise is run by a sole trader. The following Trial Balance was prepared from the business accounts on 30th September 2015:

Account Dr (GH¢) Cr (GH¢)
Capital 185,280
Inventory 24,200
Sales 421,450
Purchases 167,350
Purchase returns 6,040
Electricity 2,230
Discounts allowed 2,420
Discounts received 4,270
Motor expenses 1,580
Drawings 32,000
Bank 24,511
Salaries 108,000
Insurance 15,400
Receivables 110,140
Irrecoverable debts 1,420
Allowance for receivables 3,153
Payables 76,288
General expenses 6,780
9% Loan (2012-2019) 150,000
Loan interest 12,000
Land and buildings 340,000
Accumulated depreciation – buildings 26,000
Equipment 22,000
Accumulated depreciation – equipment 10,300
Motor vehicles 26,000
Accumulated depreciation – motor vehicles 13,250
Total 896,031 896,031

The following information is also available:
i) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for salaries for each month of the year.
ii) As at 30th September 2015, GH¢3,200 had been prepaid for insurance, whilst GH¢410 was owing for general expenses.
iii) GH¢4,600 had been charged to general expenses for the owner’s private holiday.
iv) As at 30th September 2015, inventory was valued at GH¢22,500.
v) A customer, owing GH¢5,040, has been declared bankrupt. This amount is to be written off in full.
vi) An allowance for receivables is to be maintained at 3% of the remaining receivables.
vii) As at 30th September 2015, the business’s land was valued at GH¢100,000. Land is not depreciated.
viii) Depreciation is to be provided as follows:

  • Buildings: 4% per annum using the straight-line method.
  • Equipment: 25% per annum using the straight-line method.
  • Motor vehicles: 40% per annum using the reducing balance method.
    ix) There were no additions or disposals of non-current assets during the financial year.

Required:
a) Prepare the Income Statement for the year ended 30th September 2015. (8 marks)
b) Prepare the Statement of Financial Position as at 30th September 2015. (6 marks)
c) i) Identify the accounting concept involved in each of the footnotes/items (i), (iii), and (v). (3 marks)
ii) Explain the correct accounting treatment in each case. (3 marks)

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  • 20 Marks

FA – Nov 2015 – L1 – Q1 – Bank reconciliations

Discuss depreciation, useful life of fixed assets, factors causing depreciation, and prepare various accounts including adjusted cash book and bank reconciliation statement.

(a) Explain the following Terms:
i. Depreciation.
ii. Useful Life of a Fixed Assets. (4 marks)

(b) There are four (4) factors/causes that contribute to depreciation of a Fixed Asset. List these factors or causes. (2 marks)

(c) Atta Moses is a trader who prepares account to 31st December each year. The following transactions with regard to Assets have taken place:
i. 3rd January, 2010 purchased one Office Equipment (Laptop) for GH¢2,000.
ii. 5th July, 2011 purchased Plant and Machinery costing GH¢50,000.
iii. 1st December, 2011 purchased Plant and Machinery for GH¢20,000
iv. 15th December, 2012 bought Office Equipment (Printer) for GH¢1,000.

Mr. Atta maintains its Fixed Assets at cost and depreciates its Asset at a constant rate of 20% using the straight-line method of providing for depreciation for all Assets. Assets purchased attract full depreciation charge in the year of purchase, whilst any asset disposed of attracts no depreciation charge.

You are required to prepare the following:
i. Plant and machinery Account.
ii. Office Equipment Account.
iii. Provision for Depreciation Account. (6 marks)

(d) The following information was extracted from the records of Mama Constance, a Petty Trader as at 31st December, 2014. Balance as per Bank Statement as at 31st December, 2014 was GH¢10,000 credit. Cash Book balance was GH¢40,000 credit in the Bank Account column. The following had been reflected in the Bank Statement but not in the Cash Book:
i. Bank loan interest GH¢ 2,000
ii. Bank Charges GH¢ 6,000
iii. Dividends from Investment GH¢ 10,000
iv. Interest from Treasury Bill GH¢ 4,000

In addition, a cheque of GH¢ 20,000 issued to Madam Peace was dishonoured because of insufficient funds. A cheque of GH¢25,000 from Stephen has not been credited. A cheque of GH¢49,000 issued to Samuel remained unpresented.

You are required to prepare:
i. An adjusted Cash Book. (2 marks)
ii. Bank Reconciliation Statement as at 31st December, 2014. (6 marks)

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