Study Question
- 15 Marks
FR – L2 – Q62 – Financial Instruments
Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.
Question
Kumasi Ventures Plc has had 5 million shares in issue for many years. Earnings for the year ended 31 December Year 4 were GH₵2,579,000. Earnings for the year ended 31 December Year 3 were GH₵1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of years. These can be exercised at a future date at a price of GH₵3 per share. The average market price of shares in Year 3 was GH₵4 and in Year 4 was GH₵5.
On 1 April Year 3 Kumasi Ventures Plc issued GH₵1,000,000 convertible 7% bonds. These are convertible into ordinary shares at the following rates:
On 31 December Year 6: 30 shares for every GH₵100 of bonds
On 31 December Year 7: 25 shares for every GH₵100 of bonds
On 31 December Year 8: 20 shares for every GH₵100 of bonds
Required:
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3
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- Tags: Convertible bonds, Diluted EPS, Earnings per share, Financial instruments, Share options
- Level: Level 2
- Topic: Financial Instruments
- 15 Marks
FR – L2 – Q61 – Financial Statement Analysis
Calculate EPS for Year 5 and adjusted EPS for Year 4 for Unity Vaccines Plc after share transactions.
Question
On 1 January Year 5, Unity Vaccines Plc had 5 million ordinary shares in issue. The following transactions in shares took place during the next year.
1 February A 1 for 5 bonus issue
1 April A 1 for 2 rights issue at GH¢1 per share. The market price of the shares prior to the rights issue was GH¢4.
1 June An issue at full market price of 800,000 shares.
In Year 5 Unity Vaccines Plc made a profit before tax of GH¢3,362,000. It paid ordinary dividends of GH¢1,200,000 and preference dividends of GH¢800,000. Tax was GH¢600,500. The reported EPS for Year 4 was GH¢0.32.
Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.
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- 12 Marks
FR – L2 – Q60 – Financial Reporting Standards and Their Applications
Prepare a note for Bawku Limited’s financial statements disclosing related party transactions per IAS 24 for 20X4.
Question
Bawku Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers. During the year 20X4, the company has undertaken the following transactions with its related parties:
(i) Sales of GH₵500 million were made to its only subsidiary Akyem Auto Limited (AAL). Being the subsidiary, a special discount of GH₵25 million was allowed to AAL.
(ii) AAL returned spare parts worth GH₵5.5 million.
(iii) Raw materials of GH₵5 million were purchased from Asante Enterprises, which is owned by the wife of the CFO of Bawku Limited.
(iv) Equipment worth GH₵3 million was purchased from Kofi Limited (KL). The wife of the Production Director of the company is a director in KL.
(v) The company awarded a contract for supply of two machines amounting to GH₵7 million per machine to an associated company.
(vi) In 20X2, an advance of GH₵2 million was given to the Chief Executive of the company. During the year 20X4, he repaid GH₵0.3 million. The balance outstanding as on December 31, 20X4 was GH₵1,100,000.
Required
Prepare a note for inclusion in the company’s financial statements in accordance with the requirement of IAS 24 Related Party Disclosures.
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- 15 Marks
FR – L2 – Q59 – Related Party Disclosures
Define related party transactions, provide examples, and state conditions for related entities per IAS 24.
Question
(a) The determination of related party status depends on the substance of the relationship, not just the legal form.
Required:
(i) Define a related party transaction and state any TWO examples of such transactions. (3 marks)
(ii) Based on IAS 24 Related Party Disclosures, state any FOUR conditions under which an entity can be said to be related to another.
(b) Cedar Plc has two subsidiaries, Sycamore Ltd and Birch Ltd. The share capital of Cedar Plc is held by Alan and Akwasi at 60% and 40%, respectively. Alan is the Chair of Cedar Plc, while Akwasi is the Managing Director.
Sycamore Ltd is wholly owned by Cedar Plc. On 31 December 20X4, Sycamore Ltd sold a parcel of land it vacated some years back to Birch Ltd for GH¢2m. The latter company, owned and managed by Alan’s son, intends to develop the potential of the site as a location for an events center. The carrying amount at that date was estimated to be GH¢5m. This sale has not been reflected in the Financial Statements of Sycamore Ltd for the year ended 31 December 20X4.
Outline how the above transactions should be recorded in the financial statements of Sycamore Ltd and the consolidated financial statements of Cedar Plc for the year ended 31 December 20X4. (8 marks)
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- 5 Marks
FR – L2 – Q58 – Financial Instruments
Calculate finance cost and SFP extracts for Bolgania Ltd’s 6% convertible loan stock for 20X4; comment on Accra Advisors’ advice.
Question
On 1 October 20X3 Bolgania Ltd issued GH¢10 million 6% convertible loan stock on the following terms:
The issue price was at par.
The loan stock is convertible into the company’s equity shares at the option of the stockholders four years after the date of its issue (30 September 20X7) on the basis of 20 shares for each GH¢100 of loan stock. Alternatively it will be redeemed at par.
Accra Advisors had advised that if Bolgania Ltd had issued similar loan stock without the conversion rights, then it would have had to pay an interest (coupon) rate of 10% on the loan stock. This is because the terms of conversion to equity shares are favourable.
Accra Advisors further advised that because it is almost certain that the loan stock holders will exercise their right to convert to equity shares, the loan stock has the substance of equity and can be included as such on the statement of financial position. This has the added advantage of improving/reducing the company’s gearing (debt/equity) in comparison to what would be the case with the issue of ‘straight’ loan stock.
The present value of GH¢1 receivable at the end of each year, based on discount rates of 6% and 10% can be taken as:
Required
In relation to the 6% convertible loan stock, calculate the finance cost to be shown in the statement of profit or loss and the extracts from the statement of financial position for the year to 30 September 20X4; and comment on Accra Advisors’ advice.
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- 15 Marks
FR – L2 – Q57 – Financial Instruments
Calculate face value and proceeds of debentures issued by Unity Cooperative Ltd.
Question
UNION COOPERATIVE LTD
On 1 July 20X4, Union Cooperative Ltd., issued 20,000 8% debentures at GH¢97.50. The security is redeemable in five years’ time. The interest on the debentures is payable bi-annually on 30 June and 31 December.
On 31 December 20X4, the company’s year-end date, the debentures were quoted on the Ghanaian Stock Exchange for GH¢96.00. The company accountant has suggested each of the following as possible valuation basis for reporting the debentures liability on the statement of financial position as at 31 December 20X4: (i) Face value of the debentures. (ii) Face value of the debenture plus interest payment for five years. (iii) Market value on the statement of financial position as at the year end.
Required
(a) Determine the face value of the debentures and the proceeds accruing to the company.
(b) Determine the amount and explain the nature of the differences between the face value and the market value of the debentures on 1 July, 20X4.
(c) Distinguish between nominal and effective rate of interest.
(d) Determine the nominal interest payable on the debentures for the year ended 31 December 20X4.
(e) State arguments for or against each of the suggested alternatives for reporting the debentures liability on the statement of financial position as at 31 December 20X4.
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- 10 Marks
FR – L2 – Q56 – Financial Instruments
Account for convertible loan notes in Tafu Ltd's financial statements for the year to 30 September 20X4.
Question
Tafu Ltd issued GH¢10 million of 4% convertible loan notes on 1 October 20X3, on which interest is paid annually in arrears on 30 September. The loan notes are convertible into equity shares of Tafu Ltd on 30 September 20X6 at the rate of 20 shares in Tafu Ltd for every GH¢100 of notes. Alternatively, the notes can be redeemed on that date for cash at par, at the option of the note holder.
If Tafu Ltd had issued straight loan notes, redeemable at par after 3 years, it would have had to pay interest at the rate of 7% in order to persuade investors to subscribe for them.
Required:
(a) Show how the convertible loan notes would be accounted for in the financial statements of Tafu Ltd for the year to 30 September 20X4.
(b) Comment on the validity of the reasons of the directors for choosing to issue convertible loan notes.
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- 15 Marks
FR – L2 – Q55 – Financial Instruments
Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.
Question
On 1 January Year 1 Jordana PLC has the following capital and reserves.
| Equity | GH₵ |
|---|---|
| Share capital (1 million ordinary shares) | 1,200,000 |
| Retained earnings | 5,670,300 |
| 6,870,300 |
During Year 1 the following transactions took place.
- 1 January: An issue of GH₵100,000 8% GH₵1 redeemable preference shares at a premium of 60%. Issue costs are GH₵2,237. Redemption is at 100% premium on 31 December Year 5. The effective rate of interest is 9.5%.
- 31 March: An issue of 300,000 ordinary shares at a price of GH₵1.30 per share. Issue costs, net of tax benefit, were GH₵20,000.
- 30 June: A 1 for 4 bonus issue of ordinary shares.
Profit for the year, before accounting for the above, was GH₵508,500. The dividends on the redeemable preference shares have been charged to retained earnings.
Required
Set out capital and reserves and liabilities resulting from the above on 31 December Year 1.
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- 12 Marks
FR – L2 – Q54 – Fair Value Measurement
Calculate fair value of 150 vehicles based on market data and IFRS 13 principles.
Question
Zest Plc is a conglomerate with interests in a wide range of businesses including construction services, property management, and farming. Zest Plc owns a division which sells construction vehicles. At 31 December 20X6, Zest Plc holds an inventory of 150 new and identical vehicles. There are three markets in which the vehicles can be sold. Information about the sale price and costs in GH¢ of selling in each market are as follows.
| Market | Sales price per vehicle (GH¢) | Transaction costs per vehicle (GH¢) | Transport cost to the market per vehicle (GH¢) |
|---|---|---|---|
| A | 40,000 | 200 | 400 |
| B | 39,800 | 400 | 100 |
| C | 40,000 | 350 | 350 |
Required:
(a) Explain and calculate the fair value of the 150 vehicles at 31 December 20X6?
(b) Explain the impact of this new information on the fair value of the 150 vehicles at 31 December 20X6 (if any) and recalculate the fair value if needed
(c) Explain and estimate the fair value of the park land? (6 marks)
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- 12 Marks
FR – L2 – Q53 – Financial Reporting Standards
Differentiate between current tax and deferred tax per IAS 12 for Talu Ghana Limited.
Question
Talu Ghana Limited owns the following property, plant and equipment as at 31 December 20X6.
| Cost | Accumulated Depreciation | Carrying Amount | |
|---|---|---|---|
| GHe’000 | GHe’000 | GHe’000 | |
| Plant & machinery | 45,000 | 9,000 | 36,000 |
| Land | 25,000 | – | 25,000 |
| Office buildings | 75,000 | 15,000 | 60,000 |
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 20X6.
(ii) Land is not depreciated
(iii) Buildings are depreciated on a straight-line basis over 25 years.
(iv) Depreciation on office building 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 GH₵15,000,000 for the 20X7 financial year and GH₵20,000,000 for year 20X8. These figures include non-taxable revenue of GH₵4,000,000 in year 20X7 and GH₵5,000,000 in year 20X8.
(vi) Talu Nig. Ltd had a tax loss on 31 December 20X6 of GH₵12,500,000. The tax rate for year 20X6 was 35% and 30% for each of years 20X7 and 20X8.
Required:
(a) In accordance with IAS 12 on Income Taxes, differentiate between current tax and deferred tax.
(b). Prepare the deferred tax account for the year ended 31 December 20X8.
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