Question Tag: Depreciation

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  • 20 Marks

IA – OCT 2022 – L1 – Q6 – Depreciation Concepts and Calculations

Explain depreciation-related concepts and compute depreciation and net book value for solar equipment using straight-line method.

a. Briefly explain the following concepts used in Accounting:

i. Depreciation

ii. Depreciable amount

iii. Net book value

iv. Straight line depreciation

v. Reducing balance depreciation

(10 marks)

b. The Managing Director of Agana Limited located at the Manya Krobo Municipality is uncomfortable with the impasse between the Municipality and the Electricity Company of Ghana. As such she decided to install solar equipment for her company. She purchased the equipment on 4th July 2021 at a cost of GH¢ 520,000. The estimated useful life of the asset is 10 years with a residual value of GH¢ 35,000. The company’s policy is to provide for a full year’s depreciation regardless of the date of purchase. You are required to:

i. Compute the rate of depreciation for the solar equipment using the straight-line method (2 marks)

ii. Compute the depreciation for the year 2021 using the straight-line method (4 marks)

iii. Compute the Net present value of the asset as at 31st December 2021 (4 marks)

(Total: 20 marks)

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  • 20 Marks

IA – OCT 2022 – L1 – Q1 – Preparation of Financial Statements from Trial Balance

Prepare the Income Statement for the year ended 31/12/2021 and the Statement of Financial Position as at 31/12/2021 for Kolikoli Enterprise using the given trial balance and additional information.

The following trial balance was extracted from the ledger of Kolikoli Enterprise as at 31/12/21.

Dr GH¢000 Cr GH¢000
Buildings at cost 750,000
Plant at cost 350,000
Provision for depreciation as at 1/1/2021 On buildings 100,000
Provision for depreciation as at 1/1/2021 On plant 190,000
Purchases 2,250,000
Sales 3,022,000
Stocks 01-01-2021 250,000
Discounts 40,000 24,000
Returns 11,000 75,000
Wages and salaries 294,000
Bad debts written off 23,000
Other expenses 114,000
Debtors 190,000
Creditors 180,000
Bank and Cash 8,000
Drawings 20,000
Provision for doubtful debts 2,500
Capital 706,500
Total 4,300,000 4,300,000

The following additional information is also made available:
a) Stocks at 31/12/2021 were valued at GH¢210,000
b) Wages and salaries accrued amounted to GH¢4,000
c) Other expenses prepaid amounted to GH¢1,500
d) Provision for doubtful debts is to be made at 2% of debtors at 31/12/2021
e) Depreciation for the year is to be provided as follows:
• Buildings 2% on cost
• Plant 25% reducing balance method

You are required to prepare the following:
i. Income Statement for the year ended 31/12/2021; and
ii. Statement of Financial Position as at 31/12/2021
[20 marks]

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  • 20 Marks

CIBG – FRPA 2022 – L3 – Q1B – Easy Way Limited Financial Statements

Prepare the statement of comprehensive income and statement of financial position for Easy Way Limited as at 31 December 2021 using the given trial balance and additional information.

EASY WAY LIMITED

The list of balances of Easy Way Limited shows the following balances at 31st December 2021.

Dr GH¢000 Cr GH¢000
Share capital (600,000 shares) 320
General reserve 20
Accumulated profit 1 January 2021 50
Inventory (goods for resale) at 1 January 2021 60
Revenue 1,000
Purchases 540
Purchases returns 26
Sales returns 28
Carriage outwards 28
Warehouse wages 80
Sales representatives salaries 60
Administrative wages 40
Warehouse plant and equipment cost 126
Accumulated depreciation — 1 January 2021 50
Delivery vehicle hire 20
Goodwill 100
Distribution expenses 10
Administrative expenses 30
Directors’ salaries (charge to administrative expenses) 30
Rental income 16
Trade receivables 330
Cash at bank 60
Trade payables 60
1,542 1,542

The following additional information has been provided: (1) Inventory of goods for resale at 31 December 2021 amounted to GH¢100,000. (2) Annual depreciation on warehouse plant and equipment of GH¢32,000 should be provided. (3) Income tax expense for 2021 amounts to GH¢50,000. (4) The recoverable amount of goodwill was GH¢90,000.

You are required to prepare: a) the company’s statement of comprehensive income for the year to 31 December 2021; and b) a statement of financial position at that date in accordance with IAS 1: Presentation of Financial Statements. (20 marks)

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  • 20 Marks

ITA – APR 2023 – L1 – Q1 – Trial Balance and Financial Statements Preparation

Prepare Income Statement and Statement of Financial Position from given trial balance with additional adjustments.

The following trial balance was extracted from the ledger of Adtrack Enterprise as at 31/12/21.

Dr Cr GHe00 GHe00 Motor Vehicle at cost 350,000 700,000 Factory Building at cost 700,000 On Motor Vehicle On Factory Building Purchases and sales 5,250,000 250,000 Stocks 1/1/2022 290,000 290,000 Discounts 190,000 324,000 Returns 31,1,000 274,000 Wages and salaries 654,000 654,000 Bad debts written off 500,000 500,000 Other expenses 450,000 450,000 Debtors and creditors 1,1,900,000 1,1,900,000 Bank and Cash 900,000 900,000 Drawings 560,000 560,000 Provision for doubtful debts 75,500 75,500 Capital 10,057,000 10,057,000 The following additional information is also made available: a) Stocks at 31/12/2022 were valued at GHe $450,000,000$ b) Wages and salaries accrued amounted to GHe $9,560,000$ c) Other expenses prepaid amounted to GHe $1,800,000$ d) Provision for doubtful debts is to be made at $7 %$ of debtors at 31/12/2022 e) The factory plant and machinery was leased under an operating lease for a period of 7 years with a yearly payment of GHe $12,200,000$. This has not been paid for the year ended 31/12/2022. f) Depreciation for the year is to be provided as follows:

  • Factory Building $2 %$ on cost
  • Motor Vehicle $25 %$ reducing balance method

You are required to prepare: i. Income Statement for the year ended 31/12/2022 (10 marks) ii. Statement of Financial Position as at 31/12/2022

(Total: 20 marks)

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  • 20 Marks

FRPA – APRIL 2023 – L3 – Q1 – Financial Statements Preparation, Conceptual Framework, and Intangible Assets

Prepare the statement of profit or loss and other comprehensive income and the statement of financial position for ANG Ltd based on the given trial balance and additional information; explain the objective of general-purpose financial reporting and the terms relevance and faithful representation; define intangible assets, explain recognition criteria, and state disclosure requirements under IAS 38.

  A
The following is the trial balance of ANG Ltd, a trading company, as of 30 September 2022:

Debit Credit
GH¢’000 GH¢’000
Sales
Inventory 3,150
Cost of sales 35,500
Selling & distribution expenses 5,600
Administration expenses 8,540
Loan Note interest paid 110
Bank interest 85
Investment income
Leasehold building at valuation – 1 Oct 2021 14,000
Plant and equipment – cost/depreciation 13,750
Computer equipment – cost/depreciation 7,200
Motor vehicles – cost/depreciation 1,500
Trade receivables 17,900
Bank
Trade payables
500,000 Ordinary shares
8% Loan notes (2019 – 2023)
Revaluation surplus
General reserve
Retained earnings – 1 Oct 2021
107,335 107,335

The following additional information is made available:
i. The company paid ordinary dividends of GH¢2.2 per share on 31 January 2022 and GH¢2.6 per share on 30 June 2022. The dividend payments are included in administrative expenses in the trial balance.
ii. Provision is to be made for a full year’s interest on the Loan notes.
iii. 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 2022.
    • ANG Ltd revalues its buildings at the end of each accounting year. On 30 September 2022, 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 2021) was 25 years. ANG Ltd does not make an annual transfer from the revaluation reserve to retained earnings in respect of the realization of the revaluation surplus. Ignore deferred tax on the revaluation surplus.
    iv. Estimated corporate income tax payable on the profit for the year is GH¢3,500,000.

You are required to:
Prepare the following financial statements of ANG 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 2022 and.
b. Statement of financial position as of 30 September 2022.
c. Show clearly all relevant workings.

 B
I. What is the objective of general-purpose financial reporting?
II. The IASB’s Conceptual Framework for Financial Reporting states that “If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.” Explain the terms Relevance and Faithfully Representation.

 C
The accounting treatment of intangible assets is prescribed by IAS 38 Intangible Assets. You are required to:
i. Define intangible asset under IAS 38 Intangible Assets.
ii. Explain the recognition criteria for intangible assets.
iii. State 5 disclosure requirements of Intangible Assets under IAS 38.

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  • 20 Marks

FRPA – APRIL 2024 – L3 – Q1A – Preparation of Financial Statements for Vandee Oil Ltd

Using the provided trial balance and additional information on inventory, asset purchases, depreciation rates, utilities adjustments, and staff bonuses, prepare the Statement of Profit or Loss for 2023 and the Statement of Financial Position as at 31 December 2023.

Vandee Oil Ltd. has been in business for the past ten (10) years. The following Trial Balance was extracted from the books of Vandee Oil Ltd. for the year ended 2023.

Item GH¢’000 (Debit) GH¢’000 (Credit)
Bank 46,200
Petty Cash 4,000
Computer and Accessories 8,370
Furniture and Fittings 10,255
Land and Building 214,000
Office Equipment 12,250
Plant and Machinery 239,400
Inventory 1,900
Staff Loan 5,088
Purchases 355,000
Bank Service Charges 1,300
Business Promotion 1,500
Communication 1,900
Insurance 1,660
Licenses and Permits 6,650
Medical Expenses 155
Printing and Stationery 300
Professional Fees: Legal Fees 500
Repairs: Equipment Repairs 2,600
Salaries 23,050
Electricity 780
Water 280
Vehicle Running Expense 4,560
Trade Payable 25,000
Directors Current Account 320,000
Computer and Accessories: Accumulated Depreciation 3,348
Furniture and Fittings: Accumulated Depreciation 2,050
Land and Building: Accumulated Depreciation 8,560
Office Equipment: Accumulated Depreciation 2,450
Plant and Machinery: Accumulated Depreciation 47,880
Payroll Liabilities 550
Retained Earnings 49,282
Taxation 3,003
Share Capital 10,000
Sales 574,145
TOTALS 993,983 993,983

Additional Information: i) Closing Inventory as at December 2023 amounts to GH¢48,500,000 ii) The following assets were bought during the year 2023. However, these transactions were not recorded in the above Trial Balance:

  • Computers and Accessories GH¢8,000,000
  • Fixtures and Fittings GH¢5,000,000
  • Plant and Machinery GH¢25,000,000 The following are the rates of Depreciation being used by the company, however Depreciation for 2023 is yet to be charged:
  • Land and Building 1%
  • Computers and Accessories 20%
  • Furniture and Fittings 10%
  • Plant and Machinery 20%
  • Office Equipment 20% iii) Electricity stated in the Trial Balance include January 2024 Electricity Bill while that of Water represents six (6) months’ payment for the year 2023. iv) Staff bonuses amounting to GH¢15,000,000 was agreed on 31 December 2023 for staff. However, it was paid after the year end.

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  • 20 Marks

ATP – Feb 2017 – L3 – Q3 – Pooling System

Explain general features of the pooling system for capital allowances.

You are a Chartered Tax Practitioner and you have been consulted to produce an article for publication in The Tax Collector, the monthly journal of the Ghana Revenue Authority on the topic “The Pooling System of granting allowance as provided in the Income Tax Act, 2015 (Act 896).

Required:

a. Explain the general features of the pool system. (10 Marks)

b. What are conditions expected to be satisfied before the grant of Capital Allowances? (8 Marks)

 

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  • 20 Marks

FR – Mar 2025 – L2 – Q3 – Preparation of Financial Statements

Prepare Halidu LTD's financial statements for 2024, including comprehensive income, changes in equity, and financial position per IFRS.

The following trial balance relates to Halidu LTD (Halidu) at 30 June 2024:

GH¢’000 GH¢’000
Revenue 3,120,000
Cost of sales 1,757,400
Distribution costs 45,600
Administration expenses 118,800
Loan interest paid 28,800
Property – cost 1,200,000
Property – depreciation at 1 July 2023 225,000
Plant and equipment – cost 1,011,600
Plant and equipment – depreciation at 1 July 2023 291,600
Licence – cost 240,000
Licence – amortisation at 1 July 2023 96,000
Trade receivables 259,200
Inventory – 30 June 2024 112,800
Bank 78,000
Trade payables 211,200
Share capital (GH¢0.25 each) 420,000
Revaluation surplus 78,000
12% loan note (issued 1 July 2023) 240,000
Taxation 12,000
Retained earnings at 1 July 2023 68,700
4,774,200 4,774,200

The following notes are relevant:
i) Halidu made credit sales for GH¢196 million on a sale or return basis and this is currently included in revenue in the trial balance. At 30 June 2024 customers who had not paid for the goods, had the right to return GH¢62.4 million of them. Halidu applied a mark-up on cost of 30% on all these sales. In the past Halidu’s customers have sometimes returned goods under this type of agreement.
ii) On 1 July 2023, Halidu revalued its property to GH¢1,440 million, of which GH¢360 million relates to the land. This property was acquired 10 years ago at a cost of GH¢1,200 million which included GH¢300 million for the land. The building had an estimated life of 40 years when it was acquired and this has not changed as a result of the revaluation. Depreciation is charged on a straight line basis. The revaluation has not yet been recorded in the books. Halidu has a policy of transferring any excess depreciation to retained earnings.
iii) During the year, Halidu sold some plant that cost GH¢120 million on 1 December 2020. The proceeds of this sale were GH¢72 million and these have been credited to cost of sales. No other entries have been made relating to the disposal. Plant and equipment is to be depreciated on the reducing balance basis at a rate of 20% per annum. Halidu charges a full year’s depreciation in the year of acquisition and none in the year of disposal.
iv) The licence is being amortised on the straight line basis at a rate of 20% per annum. All depreciation and amortisation is to be charged to cost of sales.
v) The directors have estimated the provision for income tax for the year ended 30 June 2024 at GH¢76.2 million. The balance of taxation in the trial balance relates to over/under provision of tax in the previous year. The only deferred tax consequence relates to those mentioned in note (ii) above. The company pays tax on profit at the rate of 25%.
vi) Halidu intends to dispose of a major line of its business operations in the course of the year. At the date the held for sale criteria were met, the carrying amount of the assets and liabilities comprising the line of business were:

GH¢’000
Plant and equipment 138,000
Trade receivables 9,000
Trade payables 7,000

It is anticipated that Halidu will realise GH¢135 million for the business. No entries have yet been made in respect of this information.

Required:
Prepare and present a statement of comprehensive income, a statement of changes in equity and a statement of financial position at 30 June 2024 in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards (IFRS).

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  • 20 Marks

PSAF – Mar 2025 – L2 – Q1- Preparation and presentation of financial statements for covered entities

Prepare the Statement of Financial Performance for Hamile Teaching Hospital for 2023 per IPSAS and related regulations.

The Trial Balance below relates to Hamile Teaching Hospital, a public hospital.

Trial Balance for the year ended 31 December 2023
Debit Credit
GHc’000 GHc’000
Government subvention 100,750
Out-patient services fees 35,000
In-patient services fees 40,000
Development Partner grants (ii) 16,000
Established position salaries 62,000
Casual Labour 5,600
Contract appointment (local and foreign) 1,400
Limited engagements 200
Rent (iii) 500 150
Insurance 340
Consultancy services 120
Conferences, workshops and training 4,500
Purchase of drugs 60,000
Purchase of medical consumables 80,000
Office expenses 20,000
Repairs and maintenance 6,000
Interest on loan 10,000
Pharmacy sales 180,000
Diagnostic 85,000
Mortuary Services 9,400
Cafeteria and Canteen 4,650
Extension services 14,500
Furniture and office equipment (iv) 200,000 40,000
Medical equipment & accessories (iv & v) 420,000 120,000
Motor vehicles (iv) 120,000 20,000
Land and buildings (iv) 300,000 70,000
Bank and Cash 30,000
Receivable from National Health Insurance Scheme (vi) 65,000
Receivable from patients 15,000
Payables 26,000
Loan from foreign Institution (2028) (vii) 350,000
Inventory of drugs 22,000
Inventory of medical consumables 12,000
Accumulated Fund 336,210
Other expenses 13,000
1,447,660 1,447,660

Additional Information:
i) The hospital prepares its financial statements in accordance with the International Public Sector Accounting Standards (IPSAS), the Public Financial Management Act 2016, (Act 921), the Public Financial Management Regulation 2019, L.I 2378, and the current Chart of Accounts of the Government of Ghana.
ii) The Development Partner grants received from the Health Care Fund, an international organization that provides free medical care to the rural poor and vulnerable individuals, are typically unconditional. However, 40% of this year’s grant is subject to certain conditions, which had not been met as of December 31, 2023.
iii) Rent received in advance during the year amounted to GH¢20,000 while rent owed by the hospital for the year amounts to GH¢300,000.
iv) The hospital charges consumption of fixed assets on straight line basis as follows

Non-current Assets Estimated Useful Life
Furniture and office equipment 5 years
Medical equipment and accessories 4 years
Motor vehicles 5 years
Buildings 10 years

Land constitutes 30% of the amount of land and building shown in the trial balance.
v) A medical equipment valued at GH¢20,000,000 which is included in the medical equipment and accessories listed on the trial balance, was completely damaged due to consistent power fluctuations. The value of this equipment should be written off.
vi) The hospital submitted a claim of GH¢11,000,000 to the National Health Insurance Scheme for services provided to patients in the last quarter of 2023, but the payment has not yet been received. This transaction has not yet been reflected in the trial balance.
vii) The hospital took a loan of $100,000,000 from Health World Bank on January 1, 2023, when the exchange rate was $1 to GH¢3.50. The exchange rate on 31 December 2023 is $1 to GH¢5.
viii) The inventories on 31 December 2023 were as follows:

Inventory type Cost Net Realizable Value Current Replacement
GHc’000 GHc’000 GHc’000
Drugs 15,000 16,000 14,000
Medical consumables 10,000 11,000 9,000

Required:
Prepare for Hamile Teaching Hospital:
a) Statement of Financial Performance for the year ended 31 December 2023.

b) Statement of Financial Position as of 31 December 2023.

c) Disclosure notes to the financial statements.

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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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  • 15 Marks

CR – May 2024 – L3 – SC – Q7 – Presentation of Financial Statements (IAS 1)

Discuss allocation impacts of purchase price for land and warehouse on earnings and identify ethical issues in CFO’s approach.

Signal PLC purchased land and warehouse for N90,000,000. The warehouse is expected to last for 20 years and to have a salvage value equal to 10% of its cost. The Chief Finance Officer (CFO) and the Chief Accountant (CA) discussed the allocation of the purchase price between the land and the warehouse. The CFO believes that the largest amount possible should be assigned to the land because that will improve reported net income in the future. Depreciation expense will be lower because land is not depreciated. He suggested allocation of one third of the cost to the land. The CA argues that the smallest amount possible, about one-fifth of the purchase price, should be allocated to the land, thereby saving income taxes, since the depreciation will be greater if lesser amount is allocated to land.

Required:

(a) Evaluate how the different allocations of one-third and one-fifth to land will affect reported earnings and determine how the purchase cost should be allocated. (8 Marks)

(b) Identify and discuss inherent ethical issues in the CFO’s submission in the above scenario. (7 Marks)

Total Marks: 15

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q5 – Impairment of Assets (IAS 36)

Evaluate if a manufacturing machine is impaired due to market changes and calculate the impairment charge.

Atigen Manufacturing Limited bought a new machine for its factory in Otta, Ogun State, for N140 million on January 1, 2015. At acquisition, the machine was estimated to have a life span of 7 years with no scrap value. The carrying amount at December 31, 2017, is N80 million.

The machine generates largely independent cash flows and is therefore tested for impairment as a standalone asset. Due to a downturn in the economy and the reduction and cancellation of major customer orders, the directors concluded that the machine might be impaired.

You are provided with the following information:

  • Fair value of the machine: N60 million
  • Selling costs: 5% of the fair value
  • Value-in-use based on discounted future cash flows: N63.5 million

Required:

a. Determine if the machine is impaired based on the above information. (6 Marks)

b. Calculate (if any) the impairment charge that the directors should recognize in profit or loss. (9 Marks)

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  • 15 Marks

CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

Roman Limited prepares its financial statements in accordance with International Accounting Standards. On March 16, 2017, Roman Limited made a public announcement of a decision to reduce the level of emission of harmful chemicals from its factories. The average useful life of the factories on March 31, 2017 was 25 years. The depreciation of the factories is computed on a straight-line basis and charged to cost of sales. The directors formulated the proposal for emission reduction following an agreement in principle earlier in the year.

The directors prepared detailed estimates of the costs of their proposals, showing the following expenditures:

  • N60 million on March 31, 2018
  • N60 million on March 31, 2019
  • N80 million on March 31, 2020

All estimates were for actual anticipated cash payments. No contracts were entered into until after April 1, 2017. The estimate proved accurate regarding the expenditure due on March 31, 2018. When the directors decided to proceed with this project, they used discounted cash flow techniques to appraise the proposed investment, with an annual discount rate of 8%. The company has a reputation for fulfilling its financial commitments after it has publicly announced them. Roman Limited has made a provision for the expected costs of its proposal in the financial statements for the year ended March 31, 2017.

In accordance with the provisions of IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets:

Required:
a. Explain the decision of the directors of Roman Limited to recognize the provision in the statement of financial position as at March 31, 2017.
(6 Marks)

b. Compute the appropriate provisions in the statement of financial position in respect of the proposed expenditure at March 31, 2017, and March 31, 2018.
(4 Marks)

Compute the TWO components of the charge to the statement of profit or loss in respect of the proposal for the year ended March 31, 2018. You should explain how each component arises and identify where in the statement of profit or loss each component is reported.
(5 Marks)

(Total 15 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain IFRS accounting treatment and ethical issues in Enugun Industries Ltd.’s draft financial statements for the year ended Dec 31, 2014.

Enugun Industries Limited
Atikun has recently been appointed as Financial Controller to Enugun Industries Limited. Until a month ago, Enugun Industries had a Finance Director, who resigned suddenly, due to ill health. Since Atikun joined the company, he has learned that his resignation was related to stress caused by a series of disagreements with the Managing Director about the performance of the business. The directors have not yet appointed a replacement.

It is now March 2015, and you have been asked to finalize the financial statements for the year ended December 31, 2014. The draft statement of profit or loss extract and statement of financial position are shown below:

Draft statement of profit or loss for the year ended December 31, 2014:

Profit before tax ₦’000
2,500

Draft statement of financial position as of December 31, 2014:

Item Amount (₦’000)
Property, plant, and equipment 12,000
Current assets 3,500
Total assets 15,500
Share capital 2,000
Retained earnings 6,000
Equity 8,000
Non-current liabilities 5,000
Current liabilities 2,500
Total equity and liabilities 15,500

During the year ended December 31, 2014, Enugun Industries entered into the following transactions:

  1. Just before the year-end, Enugun Industries signed a contract to deliver consultancy services for a period of 2 years at a fee of ₦500,000 per annum. The full amount of this fee has been paid in advance and is non-refundable.
  2. Enugun Industries has constructed a new factory. The construction has been financed from the pool of existing borrowings. Land at a cost of ₦1.8 million was acquired on February 1, 2014, and construction began on June 1, 2014. Construction was completed on September 30, 2014, at an additional cost of ₦2.7 million. Although the factory was usable from that date, full production did not commence until December 1, 2014. Throughout the year, the company’s average borrowings were as follows:
    Borrowing Type Amount (₦) Annual Interest Rate (%)
    Bank overdraft 1,000,000 9.75
    Bank loan 1,750,000 10
    Loan notes 2,500,000 8

    An amount of ₦450,000 has been included in property, plant, and equipment in respect of borrowing costs relating to the construction of the factory. The useful life of the factory has been estimated at 20 years. No depreciation has been charged for the year. The reason for this is that the factory has only been in use for one month and that the depreciation charge would be immaterial.

  3. A blast furnace with a carrying amount at January 1, 2014, of ₦3.5 million has been depreciated in the draft financial statements based on a remaining life of 20 years. In December 2014, the directors carried out a review of the useful lives of various significant items of plant and machinery, including the blast furnace. They concluded that the furnace’s useful life was 20 years as of December 31, 2014. The reasoning behind this judgment was that the lining of the furnace had been replaced in the last week of December 2014 at a cost of ₦1.4 million. Provided that the lining is replaced every five years, the life of the furnace can be extended accordingly. You have found a report commissioned by the previous Finance Director and prepared by a firm of asset valuation specialists, which assesses the remaining useful life of the main structure of the furnace as 15 years at January 1, 2014, and the lining of the furnace as 5 years. You have also found evidence that the Managing Director has seen this report.

Atikun has had a conversation with the Managing Director, who told him, “We need to make the figures look as good as possible, so I hope you’re not going to start being difficult. The consultancy fee is non-refundable, so there’s no reason why we can’t include it in full. I think we should look at our depreciation policies. We’re writing off our assets over far too short a period. As you know, we’re planning to go for a stock market listing in the near future, and being prudent and playing safe won’t help us do that. It won’t help your future with this company either.”

Required:

  1. Explain the required IFRS accounting treatment of these issues, preparing relevant calculations where appropriate.
    (16 Marks)
  2. Discuss the ethical issues arising from your review of the draft financial statements and the actions that you should consider.
    (4 Marks)

Total: 20 Marks

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  • 30 Marks

AA – May 2016 – L2 – Q1 – The Role and Responsibilities of Auditors

Examines responsibilities in fraud prevention, asset ownership verification, depreciation rates, asset register contents, and revaluation effects.

You are an employee of Ben, Tai & Co., a firm of Chartered Accountants. One of the firm’s clients is Keke Limited, a car rental company whose shares are not traded on a stock exchange. The company has a large fleet of vehicles which it hires out on a contract basis.

The duration of a contract varies from one day to three months. Anybody wishing to hire a car must possess a valid driver’s license. In addition, they must take out insurance with Keke Limited.

You are involved in the audit of non-current assets for the year ended December 31, 2015.

The company’s main non-current assets are:

  • Freehold land and buildings
  • Office equipment (mainly computers)
  • Motor vehicles

The company was formed ten years ago, and all non-current assets (except for land and buildings) are maintained in a non-current assets register. The company depreciates non-current assets at the following rates:

  • Freehold land and buildings: 2% on cost
  • Office equipment: 20% on cost
  • Motor vehicles: 50% on cost

The company has recently revalued its buildings upwards by N200 million. The directors believe that they have fallen victim to a fraudster who has disappeared with a number of the company’s vehicles.

Required:

a. What is the difference between the responsibilities of management and the auditor for the prevention and the detection of fraud? Explain how these responsibilities are carried out. (6 marks)

b. Describe how you would verify the ownership of:
i. Freehold land and buildings
ii. Computers
iii. Motor vehicles
(6 marks)

c. Comment on the appropriateness of the depreciation rates of the non-current assets and their respective effect on the income statement. (6 marks)

d. List the contents of a non-current asset register and describe its usefulness for Keke Limited. (6 marks)

e. Explain the accounting effect of the revaluation of the buildings to the financial statements and the audit work you would perform in this matter. (6 marks)

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  • 15 Marks

PM – May 2017 – L2 – SA – Q6 – Standard Costing and Variance Analysis

Advise on optimal replacement timing for AL Limited's machine based on cost-benefit analysis.

AL Limited, a manufacturing company based in Aba, produces a popular mortar coloring agent called Hadtone. Hadtone is packaged in five-litre cartons, sold at ₦300 each. Estimated maximum annual demand is 300,000 cartons, justifying one processing machine, replaced every three years though it has a four-year productive life.

  • Machine Details: Initial productive capacity aligns with maximum demand, decreasing by 15,000 units per annum. Maintenance costs in year one are ₦300,000, rising by ₦50,000 each subsequent year. Variable costs per carton (excluding maintenance) are ₦200.
  • Machine Depreciation: Straight-line method. Sale proceeds after one year are ₦8,000,000, reducing by ₦3,000,000 each following year.
  • Machine Cost Increase: Recent machine cost rise to ₦12,000,000 prompts reconsideration of replacement policy to optimize cash flow. Assume all costs/revenues except initial payment occur year-end; initial cost paid at purchase.

Requirements:

a. Calculate replacement frequency based on maximum capacity usage, including supporting calculations. Assume a 10% cost of capital. (12 Marks)

b. Itemize key assumptions made in the calculations. (3 Marks)

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  • 40 Marks

FR – May 2021 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Prepare financial statements from a trial balance, including adjustments for provisions, tax, asset disposals, depreciation, and development costs.

The following is the trial balance of Almajiri Nigeria Limited as at September 30, 2018:

Account Debit (₦’m) Credit (₦’m)
Revenue 60,000
Cost of sales 40,800
Distribution costs 2,900
Administrative expenses 4,440
Interest on bank borrowings 40
Research and development costs 1,720
Leasehold property (at valuation Oct 1, 2017) 10,000
Plant and equipment (at cost) 15,320
Plant and equipment (accum. depr. at Oct 1, 2017) 4,920
Capitalised development expenditure (Oct 1, 2017) 4,000
Development expenditure (accum. amortiz. at Oct 1, 2017) 1,200
Closing inventory (30 Sept 2018) 4,000
Trade receivables 8,620
Bank 260
Trade payables & provisions 4,760
Preference dividend paid 160
Dividend paid on ordinary shares 1,200
Ordinary shares at 25k each 10,000
8% Redeemable preference shares at N1 each (year 2020) 4,000
Retained earnings brought forward 4,900
Deferred tax 1,160
Leasehold property revaluation reserve 2,000
Total 93,200 93,200

Additional information:
(i)
One of the reputable customers of Almajiri Nigeria Limited sued the company for
N
400 million for breach of contract over a cancelled order. Almajiri Nigeria
Limited obtained a legal opinion that there is 20% chance that Almajiri will lose the
case.
Accordingly, it has provided for N
80 million (N
400 million x 20%) included in
administrative expenses in respect of the claim. The unrecoverable legal cost of
defending the action was estimated at N20 million and these have not been
provided for as the legal action will not go to court until next year.
(ii)
The directors of the Company have estimated the provision for income tax for the
year ended September 30, 2018 at N2,280 million. The required deferred tax
provision at September 30, is N
1,200 million.
(iii) The redeemable preference shares were issued on April 1, 2018 at par. They are
redeemable at a large premium which gives them an effective finance cost of 12%
per annum.
(iv) The leasehold property had a remaining life of 20 years at October 1, 2017. The
company‟s policy is to revalue its property at each year end and as at September
30, 2018 it was revalued at N
8,600 million.
(v) On October 1, 2017 an item of plant and equipment was disposed of for N500
million cash. The proceeds have been treated as revenue by the company. The
plant is still included in the company‟s trial balance figure at the cost of N
million and accumulated depreciation of N
1,600
800 million (to date of disposal). All
plants and equipment are depreciated at 20% per annum using reducing balance
method. Depreciation and amortisation of all non-current assets are charged to
cost of sales.
(vi) In addition to capitalised development expenditure of N
4,000 million further
research and development cost were incurred on a new project which commenced
on October 1, 2017. The research stage of the new project lasted until December
31, 2017 and incurred N
280 million costs, from that date the project incurred
development cost of N160 million per month. On April 1, 2018 the directors
became confident that the project would be successful and yield a profit well in
excess of its costs. The project is still in development as at September 30, 2018.

Capitalised development expenditure is amortised at 20% per annum using straight
line method. All expensed research and development expenditure is charged to
cost of sales.

You are required to prepare:
a. Statement of profit or loss and other comprehensive income for the year ended
September 30, 2018.

b. Statement of changes in equity for the year ended September 30, 2018.

c. Statement of movement in property, plant and equipment to be included in
published financial statements.

d. Statement of financial position as at September 30, 2018.

 

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  • 20 Marks

TAX – Nov 2014 – L2 – Q5 – Companies Income Tax (CIT)

Compute adjusted profit, tax ratios, total profit, and income tax for Kenky Limited.

Kenky Limited, an Austrian company, operates cable undertakings in Nigeria and has significant business in several African countries. The Nigerian Revenue Authority disputed the company’s financial returns, resulting in a Best of Judgement (BoJ) Assessment. Below is an extract from Kenky Limited’s income statement for the fiscal year ending 30 September 2012:

 

Notes:

  1. The Federal Inland Revenue Service (FIRS) considers both Nigerian and Austrian operations under specialized business taxation.
  2. The Austrian authority verified the Adjusted Profit and Depreciation Ratios.
  3. A donation to Jeje, totaling ₦40,000,000, is part of the overhead expenses.

Requirements: a. Compute the Adjusted Profit for the year. (4 Marks)
b. Determine the Adjusted Profit Ratio and Depreciation Ratio. (4 Marks)
c. Compute the Total Profits and Income Tax payable in Nigeria. (4 Marks)
d. List other business activities, besides cable messages, recognized under specialized business taxation. (3 Marks)

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  • 30 Marks

PSAF – May 2023 – L2 – SA – Q1 – Public Sector Financial Statements

Prepare statements for government performance and financial position, including adjustments and depreciation calculations.

a. The following information relates to the accounts of Dovet State Government for the year ended December 31, 2022:

Description DR (N’M) CR (N’M)
Land and buildings (cost) 387,500
Long-term investments 187,500
Equipment and furniture 67,500
Accumulated depreciation:
– Land and building 40,000
– Motor vehicles 30,000
– Equipment and furniture 21,250
Motor vehicles (cost) 145,000
Federation account allocation 287,500
VAT allocation 87,500
Grants from Federal Government 33,750
Internally generated fund 97,500
Grant from donor agency 25,000
Personnel emolument 125,000
Maintenance of premises 5,000
Consolidated Revenue Fund charges 32,500
Overhead expenses 25,000
Miscellaneous expenditure/income 37,500 61,250
Loan notes 250,000
Current assets/liabilities 38,750 36,250
Consolidated Revenue Fund (CRF) 81,250
Total 1,051,250 1,051,250

Additional Information:

  1. Loan interest outstanding at the end of the year was N12.5 billion.
  2. Depreciation on tangible assets is charged at the following rates on cost:
    • Building is 5% (cost of land is N250 billion)
    • Motor vehicles is 20%
    • Equipment and furniture is 15%
  3. A building costing N12.5 billion with accumulated depreciation of N5 billion was sold for N11.25 billion. This transaction has not been adjusted in the accounts.
  4. Interest on receivable amounted to N10 billion.

Required:

  1. Prepare the Statement of Financial Performance for the year ended December 31, 2022.
  2. Prepare the Statement of Financial Position as at December 31, 2022.

b. Financial statements provide information that meets a number of qualitative characteristics in financial reporting.

Required:
Discuss FOUR characteristics of financial reporting.

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  • 15 Marks

FR – Nov 2014 – L2 – Q6 – Property, Plant and Equipment (IAS 16)

Analyze the Property, Plant, and Equipment of Skelewu Nigeria Limited and compute the deferred tax implications.

Skelewu Nigeria Limited owns the following Property, Plant and Equipment as at 31 December 2011.

 

Additional pieces of information are:

(i) Plant and Machinery are depreciated on a straight-line basis over 5 years. The plant & machinery was acquired on 1 January 2011.
(ii) Land is not depreciated.
(iii) Buildings are depreciated on a straight-line basis over 25 years.
(iv) Depreciation on office buildings is not deductible for tax purposes, but for the plant and machinery; tax deductible is granted over a period of 3 years in the ratio 50:30:20 percent of cost consecutively.
(v) The accounting profit before tax amounted to N15,000,000 for the 2012 financial year and N20,000,000 for the year 2013. These figures include non-taxable revenue of N4,000,000 in year 2012 and N5,000,000 in year 2013.
(vi) Skelewu Nigeria Limited had a tax loss on 31 December 2011 of N12,500,000. The tax rate for year 2011 was 35% and 30% for each of the years 2012 and 2013.

Required:

a. In accordance with IAS 12 on Income Taxes, differentiate between Current Tax and Deferred Tax. (2 Marks)

b. Prepare the Deferred Tax Account for the year ended 31 December 2013. (10 Marks)

c. Advise the Directors of Skelewu Nigeria Limited on the reasons why it is necessary to recognize or make provision for Deferred Tax in the company’s Financial Statements. (3 Marks)

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