Tag (SQ): Depreciation

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  • 15 Marks

Title: FR – L2 – Q11 – Accounting Policies

Define accounting policies as per IAS 8 requirements.

(a) Define accounting policies.

(b) State the main factors that IAS 8 requires management to consider in selecting and applying accounting policies in the absence of any IFRS Accounting Standard.

(c) Discuss, briefly, alternative accounting policies on the following items in financial statements:

(i) Property, plant, and equipment

(ii) Inventories

(iii) Depreciation

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  • 30 Marks

SCS – L3 – Q15 – Environment analysis

Analyze the general environment of Beta Pure Water Ltd using PESTEL framework.

(a)Assess the general environment in which Beta Pure Water Ltd operates

(b) Analyse the nature of competition faced by Beta Pure Water Ltd.                                                                                                                  (c) Advise management on the best option between lease or buy. Support your advice with relevant calculations.                                      (d)Explain TWO other factors you will consider in reaching your conclusion in (c) above.

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  • 10 Marks

PSAF – L2 – Q10.3 – International public sector accounting standards

Account for the treatment of a property reclassified as investment property in 2024 financial statements of the National Retirement Oversight Agency.

The National Retirement Oversight Agency acquired a property on 1 January 2021 at a cost of GHc40,000,000 and immediately occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years. Subsequent to its acquisition, the asset was measured at depreciated cost until 1 October 2024 when management decided to use the building mainly for rentals. Following this decision, the property was fair valued at GHc38,000,000. The National Retirement Oversight Agency adopted the fair value model for subsequent measurement. At 31 December 2024, it was fair valued at GHc39,000,000.

Required:

Account for the treatment of this property in the 2024 financial statements of The National Retirement Oversight Agency.

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  • 10 Marks

PSAF – L2 – Q10.2 – International public sector accounting standards

Prepare financial statement extracts for a new technology acquisition by the Office of Business Registry for 2023 and 2024, considering delayed deployment.

The Office of Business Registry has successfully acquired a new technology that will transform the landscape of business registration in the Republic of Zamara and make the Republic of Zamara a preferred destination for business.

The cost of the technology is GHc375 million. Professional advisers charged GHc5 million for providing advice in the acquisition of the technology which was estimated to have a useful life of 20 years effective from 1 January 2023.

Delay for the construction of the supporting infrastructure meant that the new technology could not be deployed until 1 January 2024.

Required:

Show extracts of the financial statements of the Office of Business Registry for the years ending 31st December 2023 and 2024.

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  • 10 Marks

PSAF – L2 – Q10.1 – Revaluation of Assets

Show financial statement extracts for Kumawu District Assembly's building revaluation at 31 December 2024 under IPSAS.

Kumawu District Assembly revalues its buildings and decides to incorporate the revaluation into the financial statements. The following information has been made available:
a) Extract from the statement of financial position at 31 December 2023

Buildings at cost GHc’000
Buildings at cost 300,000
Accumulated Depreciation (93,000)
Carrying amount 207,000

b) Depreciation has been provided at 2% per annum on a straight-line method.
c) The building is revalued at 30 June 2024 at GHc276 million. There has been no change in the remaining estimated future life of the buildings.
Required:
Show the relevant extracts from the financial statements at 31 December 2024.

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  • 20 Marks

PSAF – L2 – Q9.2 – Leases

Classify a lease for Keta District Hospital as finance or operating per IPSAS 13/43 criteria.

Based on the information provided, this lease arrangement falls under the category of a finance lease according to IPSAS 13/43: Leases.
To classify a lease as a finance lease, the following criteria are typically considered:

  • Transfer of ownership: If the lease transfers ownership of the asset to the lessee by the end of the lease term.
  • Bargain purchase option: If the lessee has the option to purchase the asset at a price lower than the asset’s fair value.
  • Lease term: If the lease term is for a major part of the economic life of the asset.
  • Present value of lease payments: If the present value of lease payments amounts to substantially all of the asset’s fair value.
  • Specialized nature: If the asset is so specialized that only the lessee can use it without major modifications.

            In this case, Keta District Hospital:

  • The lease term (4 years of primary lease period with an indefinite secondary lease period at peppercorn rent) covers a substantial portion of the asset’s useful life (10 years).
  • The present value of the lease payments is likely to cover a substantial part of the fair value of the asset.
  • The Assembly retains almost all risks and rewards of ownership (e.g., paying repair, maintenance, and insurance costs).

    Therefore, the lease qualifies as a finance lease, meaning the equipment will be recorded as an asset with a corresponding     liability for future lease payments.                                                                                                                                                                                                                                                                                                                                                                                                                             (B)

Prepare the extracts of the final accounts with regards to the lease of the equipment in accordance with IPSAS 43: Leases for the year ended 31st December 2024.
There are four steps in answering this question and these are:

  • Calculate the lease liability and right-of-use asset
  • Calculate depreciation on the right-of-use asset
  • Determine the lease liability and interest expense for 2024
  • Extract the financial statements

Calculation of lease liability and right-of-use asset
Since the lease is a finance lease, Keta District Hospital will recognize both a right-of-use asset and a lease liability at the inception of the lease. The lease liability is initially measured as the present value of the lease payments over the primary period, discounted using the interest rate implicit in the lease (15%). The present value of the lease payment is as follows:

Year Lease payment (GHc)
2022 2,000,000
2023 2,000,000
2024 2,000,000

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  • 16 Marks

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

A business entity, Volta Ventures, is considering its policy for the replacement of machines. One type of machine in regular use is Machine Y. This machine has a maximum useful life of four years, but maintenance costs and other running costs rise with use. An estimate of costs and disposal values is as follows:

Machine Y: Purchase cost GH₵40,000

Year Maintenance costs and other running costs in the year Disposal value at the end of the year
GH₵ GH₵
1 8,000 25,000
2 12,000 20,000
3 20,000 10,000
4 25,000 0

The cost of capital is 10%.

Required
Calculate the equivalent annual cost of a replacement policy for the machine of replacement:
(a) every one year
(b) every two years
(c) every three years
(d) every four years.
Recommend a replacement policy for the machine.

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  • 15 Marks

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

Kumasi Tech Ltd is organised into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre.
One of the investment centres has achieved a ROI in excess of 35% in each of the past four years. Its managers are considering a new investment project that will have the following cash flows:

Year Cash flow
Beginning of Year 1 (42,000)
1–3 19,000 each year

The initial investment will be in an item of machinery that will have no residual value at the end of Year 3. Assume that depreciation is charged on a straight-line basis.
Required:
(a) Calculate the ROI for the project, each year and on average for the three-year period.

(b) Suggest whether the managers of the investment Centre are likely to invest in the project.

(c) Residual income

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  • 20 Marks

FA – L1 – Q102 – Statement of cash flows

Prepare a statement of cash flows for ZA Ltd for the year ended 31 May 20X9 using the indirect method per IAS 7.

The statements of financial position for the last two years for ZA Ltd are shown below. ZA Ltd implemented an expansion programme during the year ended 31st May 20X9.

20X8 20X9
GH¢ GH¢ GH¢ GH¢
Non-current assets (net) 380,000 530,000
Current assets
Inventory 80,000 108,000
Receivables 32,000 37,000
Bank 13,000 –
Cash 1,000 3,000
Total assets 506,000 678,000
Current liabilities
Payables 26,000 30,000
Corporation Tax 22,000 28,000
Overdraft – 5,000
Dividends – 21,000
Accruals – 4,000
Total liabilities 68,000 88,000
Capital and Reserves
Ordinary shares 350,000 490,000
General reserve 62,000 62,000
Revaluation reserve – 10,000
Retained earnings 26,000 28,000
Total capital and liabilities 506,000 678,000

Additional information:
(i) The total depreciation provision incorporated in the statements of financial position was GH¢48,000 at 31st May 20X8 and GH¢122,000 at 31st May 20X9.
(ii) During the year ended 31st May 20X9 a non-current asset costing GH¢22,000 with a carrying amount of GH¢6,000 was sold for GH¢1,000. No other disposals took place.
(iii) The revaluation surplus represents a revaluation of premises during the year ended 31st May 20X9.

Required:
(a) Prepare a statement of cash flows for ZA Ltd for the year ended 31st May 20X9 in accordance with IAS 7. (Use the indirect method).

(b) State the effects of the expansion policy on ZA Ltd.

Answer:

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  • 20 Marks

FA – L1 – Q101 – Statement of cash flows

Prepare a statement of cash flows for StarPharma Ltd for the year ended 30 June 20X9 using the indirect method.

The financial statements of StarPharma Ltd, a limited liability company that operates in the pharmaceuticals sector, at 30 June were as follows.

20X9 20X8
GH¢000 GH¢000 GH¢000 GH¢000
Assets
Non-current assets
Property cost 22,000 12,000
Depreciation (4,000) (1,000)
Plant and equipment 18,000 11,000
Cost 5,000 5,000
Depreciation (2,250) (2,000)
2,750 3,000
20,750 14,000
Current assets
Inventories 16,000 11,000
Trade receivables 9,950 2,700
Cash and cash equivalents – 1,300
25,950 15,000
Total assets 46,700 29,000
Equity and liabilities
Capital and reserves
Equity capital 3,000 3,000
Accumulated profits 16,200 3,800
19,200 6,800
Non-current liabilities
Loan 6,000 10,000
Current liabilities
Operating overdraft 11,000
Trade payables 8,000 11,000
Income tax payable 1,800 1,000
Accrued interest 700 200
21,500 12,200
Total equity and liabilities 46,700 29,000

Statement of profit or loss (extracts)
Operating profit
Financing cost (Interest)
Profit before tax
Income tax expense
Net profit for the year

Equipment of carrying amount GH¢250,000 was sold at the beginning of 20X9 for GH¢350,000. This equipment had originally cost GH¢1,000,000.
In recent years, no dividends have been paid.

Required
Prepare a statement of cash flows, under the indirect method, for the year ended 30 June 20X9.

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