MAAC503/MPAC523 QUESTIONS AND

ANSWERS (2022)
Question 1
Alice Limited $000 $000
Trial balance on 31 December 2019 Notes
Dr. Cr
$ $
Sales revenue 1 236200
Purchases 127850
Loan note interest paid 2400
Operating expenses 12400
Preference dividend 1000
Land and buildings at valuation 2 130000
Plant and equipment at cost 84300
Software- cost 1 January 2016 10000
Stock market investments-Valuation 1 Jan 2019 3 12000
Depreciation 1 January 2019 plant and equipment 24300
Depreciation 1 January 2019 –
software 6000
Loss incurred due to fraud 4 32000
Trade receivables 23000
Inventory 1 January 2019 19450
Bank 350
Trade payables 15200
Ordinary shares of 25 cents each 60000
10% Preference shares 20000
12% Loan note (issued 1 April 2019) 40000
Deferred tax 3000
Revaluation reserve (land and buildings & investments) 45000
Retained earnings 1 January 2019 4350
454400 454400

The following notes are relevant:

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(i) Sales revenue includes $8 million for goods sold in December 2019 for cash to Agric, a
merchant bank. The cost of these goods was $6 million. Agric has the option to require
Alice to repurchase these goods within one month of the year-end at their original
selling price plus a facilitation fee of $250 000.

The inventory at 31 December 2019 was accounted at a cost of $8.5 million. This includes $500
000 of slow moving inventory that is expected to be sold for a net $300 000.

(ii) Non-current assets

On 1 January 2019 Alice Limited revalued its land and buildings. The details are as follows:
Cost Valuation
1 January 2013 1 January 2019
Land $20 000 000 $25 000 000
Building $80 000 000 $105 000 000

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 on a straight-line basis. The surplus on the revaluation
has been added to the revaluation reserve, but no other movements on the revaluation reserve
have been recorded
Plant and equipment is depreciated at 20% per annum on the reducing balance basis.
Software is depreciated by the sum of digits method over a five-year life.
(iii) The investment represents 7.5% of the ordinary shares of Shacks Limited. Alice has a
policy of revaluing its investments at their market price at each year-end. The auditors
have agreed that the changes in value can be taken to the revaluation reserve which on
1 January 2019 contained a surplus of $5 million for the previous revaluations of the
investments. The stock market price of Shacks ordinary shares was $2.50 on 1 January
2019 and by 31 December 2019 this had fallen to $2.25.
(iv) Loss incurred due to fraud
A senior employee of the company who left in October 2018, had diverted investment funds
into his private bank account. The fraud was discovered by the employee’s replacement in
January 2019. It is unlikely that any of the funds will be recovered. Alice has now implemented
tighter procedures to prevent such a fraud recurring. The company has been advised that this
loss will not qualify for any tax relief.
(v) Taxation
The directors have estimated the provision of corporate tax for the year to 31 December 2019
at $11.3 million. The deferred tax provision at 31 December 2019 is to be adjusted to reflect the
tax base of the company’s net assets being $16 million less than the carrying values. The rate of

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income tax is 30%. The movement of the deferred tax should be charged to the income
statement.

(vi) Dividends
The directors have declared a final ordinary dividend of 3 cents per share on 20 December
2019.
Required:
In accordance with International Accounting Standards and International Financial Reporting
Standards as far as the information permits prepare:
(a) Income statement for Alice Limited for the year ended 31 December 2019. ( 12 marks)
(b) The statement of changes in equity and reserves for the year ended 31 December 2019. (10
marks)
(c) The statement of financial position as at 31 December 2019. (18 marks)
[Total 40 marks]

Suggested Solution 1

Statement of profit or loss and other comprehensive income

Note $000
Revenue 1 228,200
COGS 2 (150,000)
Gross profit 78,200
Operating expenses (12,400)
Profit from operations (65,800)
Finance costs 3 (3,850)
Profit before tax 61,950
Income tax expense 4 (13,100)
Profit for the year 48,850

Statement of changes in Equity

Notes Ordinary Revaluation Retained Total
shares reserve earnings
Balance – 1 January 2019 60,000 5,000 4,350 69,350
Prior period error (32,000) (32,000)
Restated balance 60,000 5,000 (27,650) 37,350
Profit for the year 48,850 48,850
Revaluation of land & buildings 40,000 40,000
Transfer to realised profits 5 (1,000) 1,000 0

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 Loss on revaluation of investments 6 (1,200) (1,200)
Preference share dividend 7 (2,000) (2,000)
Final ordinary share dividend 8 (7,200) (7,200)
Balance – 31 December 2019 60,000 42,800 13,000 115,800
As the fraud occurred in previous years and is so fundamental, it should be treated as a prior
period adjustment.

Statement of financial position

Non-current assets Notes $000 $000
PPE 9 175,000
Intangible 10 2,000
Investments 6 10,800
187,800
Currents assets
Inventory 2 14,300
Trade receivables 23,000 37,300
Total assets 225,100
Equity and Liabilities
Ordinary shares of 25 cents each 60,000
10% Preference shares of $1 each 20,000
80,000
Reserves
Revaluation reserve 42,800
Retained earnings 13,000
Total equity 135,800
Non-current liabilities
Deferred tax liability 4 4,800
12% loan note 40,000
Current liabilities
Trade payables 15,200
Bank overdraft 350
Loan from Agric 8,000
Finance costs accrued 3 1,450
Proposed dividend - ordinary 7 1,000
-preference 8 7,200
Income tax liability 4 11,300 44,500
Total equity and liabilities 225,100

4 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Notes to the financial statements for the year ended 31 December 2019

1. Revenue $000
As per Trial Balance 236,200
Reversal of sales to be treated as short term loan (8,000)
228,200

The sale of goods to Agric is an attempt to ‘window dress’ the Statement of Financial Position
by improving its liquidity position. It is in substance a (short term) loan with a finance cost of
$250,000.

2. COGS
Opening inventory as per TB 19,450
Purchases as per TB 127,850
Depreciation on Buildings (105,000/35 years) 3,000
Depreciation on Plant (84,300 – 24,300) x 20% 12,000
Depreciation on software 2,000
Closing inventory (8,500 – 200 + 6,000 see below) (14,300)
150,000
Tutorial notes
Depreciation on buildings
As at 1 January 2019, 5 years of the 40 years have expired, thus after the revaluation of the
buildings they would have a remaining life of 35 years (40 years minus 5 years).

Depreciation on software
The software was purchased on 1 January 2017 with a five-year life. The depreciation for the year
to 31 December 2019 will be for the third year of its life. Using the sum of the digits method this
will be 3/15 of the cost i.e. $2 million. This will give accumulated depreciation of $8 million ($6
million b/f + $2 million).

The sum of digits (years) = 1 + 2 + 3 + 4 + 5 = 15 years (this becomes our DENOMINATOR in our
fraction). The NUMERATOR represents the number of years remaining in the useful life at the
beginning of 2019, i.e. 3 years.

Closing inventory
The slow moving inventory requires a write down of $200,000 to its net realisable value of
$300,000. The cost of the goods of the sale and repurchase agreement ($6 million) should be
treated as inventory.

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 3. Finance cost
As per Trial balance 2,400
Accrued loan interest (40,000 x 12% x 9/12) – 2,400 1,200
Accrued facilitation fee on loan 250
3,850
The 12% loan note has been in issue for nine months, but only six months interest has been
paid. Accrued interest of $1,200,000 is required.

4. Tax paid
Opening balance 11,300
Deferred tax 1,800
13,100
The difference between the tax base of the assets and their carrying value of $16 million would
require a balance sheet provision for deferred tax of $4·8 million (at 30%). The opening
provision is $3 million, thus an additional charge of $1·8 million is required.

5. Revaluation surplus

Buildings Land
$000 $000
Cost 1 January 2014 80,000 20,000
Five years depreciation (80,000 x 5/40) (10,000) -
Carrying amount prior to revaluation 70,000 20,000
Valuation 1 January 2019 105,000 25,000
Revaluation surplus 35,000 5,000

Transfer of revaluation surplus to realised profits 1,000

35,000/35 years

6. Loss on revaluation of investments

Opening balance (as per Trial Balance) 12,000
Closing balance (4,800 x $2.25/$2.50) 10,800
Loss on valuation of investments 1,200

7. Preference share dividend

As per Trial Balance - paid 1,000
Proposed preference dividend (balancing figure) 1,000
Preference share dividend (10% x 20,000) 2,000
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 8. Proposed ordinary share dividend
60,000/$0.25 x $0.03 7,200

9. PPE Schedule

Cost/valuation Accumulated Carrying

depreciation amount
Land and buildings (25,000 + 105,000) 130,000 3,000 127,000
Plant and equipment 84,300 36,300 48,000
Property, plant and equipment 214,300 39,300 175,000

10. Intangible assets Schedule

Cost/valuation Accumulated Carrying

depreciation amount
Software 10,000 8,000 2,000

Question 2
Paragon Limited
Statement of profit or loss and other comprehensive
income
for the year ended 31 December 2019
$000
Revenue 7482
Cost of sales -4284
Gross profit 3198
Operating expenses -1479
Interest expense -260
Investment
income 120
Profit before taxation 1579
Income tax -520
profit for the period 1059

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Paragon Limited
Statement of financial position as at 31 December 2019
Notes 2018 2019
$000 $000
ASSETS
Non-current assets
Property, plant and equipment 3020 3568
- -
Accumulated depreciation 1112 1224
Carrying amount 1908 2344
Investment 0 690
1908 3034
Current assets
Inventories 785 1046
Trade receivables 824 935
Short term treasury bills 50 120
Bank 122 0
3689 5135
EQUITY AND LIABILITIES
Equity share capital_ $1 each 1000 1400
Share premium 60 460
Revaluation reserve 40 90
Opening retained income 147 192
Net profit for the period 65 1059
Dividends declared -20 -180
Shareholders' equity and reserves 1292 3021

Non-current liabilities
Government grants 200 275
Deferred tax 400 439
10% Convertible loan stock 400 0

Current liabilities
Trade payables 760 644
Accrued interest 25 40
Provision for negligence claim 120 0
Government grants 125 100

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 Bank overdraft 0 136
Income tax payable 367 480
Total equity and liabilities 3689 5135

Notes to financial statements

1. Non-current assets 2018 2019
Land and buildings 1800 2000
Accumulated depreciation -680 -760
Carrying amount 1120 1240
Plant 1220 1568
Accumulated depreciation -432 -464
Carrying amount 788 1104
Carrying amount of PPE 1908 2344

On 1 January 2019 Paragon recorded an increase in the value of its land of $150 000.
During the year an item of plant that had a cost of $500 000 and accumulated
depreciation of $244 000 was sold at a loss ( included in cost of sales) of $86 000
on its carrying amount.

2. Government grant
A credit of $125 000 for the current year’s amortisation of the government grants has been
included in cost of sales.

3. Share capital and loan stocks

The increase in the share capital during the year was due to the following events:
(i) On 1 March 2019 there was a bonus issue (out of revaluation reserve) of one
bonus share for every 10 shares held.
(ii) On 1 June 2019 the 10% convertible loan stock holders exercised their right to
convert to ordinary shares. The terms of conversion were 25 ordinary share of $1
each for each $100 of 10% convertible loan stock.
(iii) The remaining increase in the ordinary shares was due to a stock market
placement of shares for cash on 12 November 2019.

4. Provision for negligence

In September 2019 Paragon made an out of court settlement of a negligence claim brought about
by a former employee. The dispute has been in progress for two years and Paragon had made
provisions for the potential liability in each of the two previous years. The unprovided amount of
the claim at the time of settlement was $30 000 and this was charged to operating expenses.
Required
Prepare a cash flow statement for Paragon Limited for the year ended 31 December 2019, use
the direct method. [30 marks]

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Suggested Solution 2
Paragon Statement of cash flows for the year ended 31 December 2019 (Direct method)

Cash flows from operating activities Notes $000 $000

Cash received from customers 1 7,371
Cash paid to suppliers and employees 2 (5,943)
Cash generated from operations 1,428
Interest paid 3 (245)
Tax paid 4 (368)
Dividends paid (180)
Net cash inflow from operating activities 635
Cash flows from investing activities
Purchase of land and buildings 5 (50)
Purchase of plant 6 (848)
Proceeds on sale of plant 7 170
Purchase of investments (690)
Government grant to purchase fixed assets 8 175
Investment income 120
Net cash outflow from investing activities (1,123)
Cash flows from financing activities
Proceeds from issue of shares 9 300
Net cash inflow from financing activities 300
Net decrease in cash and cash equivalents (188)
Cash and cash equivalents b/d 10 172
Cash and cash equivalents c/d 10 (16)

Notes to the statement of cash flows

1. Cash received from customers

Revenue 7,482
Changes in trade receivables (935 - 824) (111)
7,371

2. Cash paid to suppliers and employees

Cost of sales 4,284
Changes in inventories (1,046 - 785) 261
Changes in payables (760 - 644) 116
4,661

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 Other cash payments
Revenue – COGS – PBT (7,482 – 4,284 – 1,579) 1,619
Depreciation on PPE (356)
Loss on disposal of PPE (86)
Negligence claim previously provided 120
Amortisation of government grant 125
Finance cost (260)
Investment income 120 1,282
Cash paid to suppliers and employees 5,943

Depreciation on PPE
Land and buildings (680 – 760) 80
Plant (432 – 244 – 464) 276
356
3. Interest paid
Opening balance 25
SOP&L 260
Closing balance (40)
245
4. Taxation
Opening balances (367 + 400) 767
SOP&L 520
Closing balances (480 + 439) (919)
368

5. Purchase of land and buildings (at cost/valuation)

Opening balance 1,800
Revaluation (note 1 in question) 150
Closing balance (2,000)
50
6. Purchase of plant (at cost/valuation)
Opening balance 1,220
Disposals (500)
Closing balance (1,568)
848

7. Proceeds on sale of plant

Cost 500

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 Accumulated depreciation (244)
Carrying amount 256
Loss on disposal (note 1 in question) (86)
170

8. Government grant
Opening balances: current 125
: non-current 200
Amortisation of government grant (note 2 in question) (125)
Opening balances: current 125
: non-current 200
Government grant received 175

9. Proceeds from issue of shares

Movement in share capital (1,400 – 1,000) 400
Movement in share premium (460 - 60) 400
Bonus issue (100)
Conversion of loan stock – share capital ($400,000/$100) x 25 shares (100)
Conversion of loan stock – share premium ($400,000 – 100,000) (300)
300
10. Cash and cash equivalents
Closing Opening
Bank Nil 122
Overdraft (136) Nil
Short term treasury bills 120 50
(16) 172

Question 3 (a)
On 31 March 2019, an entity with a June 30 financial year end decided to dispose of an individual
asset which was correctly classified as held for sale and had a carrying amount of $7 500 000.

This recorded amount incorporates the following: original cost $13 900 000, accumulated
depreciation $4 300 000 and previously recognised impairment losses of $2 100 000. The asset’s
estimated fair value less costs to sell when it was classified as held for sale was $6 800 000.

On 30 June 2019, the asset was re-measured, and its fair value less costs to sell was estimated at
$ 9 500 000

REQUIRED

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Calculate the amounts which should be recognised in the entity's financial statements in relation
to the asset.
(1) In the statement of profit or loss and other comprehensive income on 31/3/2019 and
30/6/2019. (9 marks)
(2) In the statement of financial position as at 31/3/2019 and 30/6/2019. (6 marks)

Question 3 (b)
Chatira Limited bought a machine on 1 January 2019 for cash. The following details relate to the
asset:
$
Purchase price 4500000
Delivery costs 135000
installation costs 270000
General administration costs 45000
Pre-production costs 315000
Initial operating losses 450000

Additional information
1. The administration costs are of a general and indirect nature.
2. The pre-production costs were necessary to bring the machine to the desired working
condition.
3. The initial operating losses are attributable to the production of small quantities when the
machine was first put into use.
4. The machine was put into use on the date of acquisition.
5. The machine is depreciated using the straight line method, based on a useful life of 10 years
and has a residual value of $1 300 000.

REQUIRED
a) Calculate the cost price at which the asset should be recognised. (8 marks)
b) Calculate the asset's carrying amount as at 31 December 2019. (7 marks)
[Total 30 marks]

Question 4
Tariro Limited $000 $000
Trial balance on 31 December 2019 Notes
Dr. Cr
$ $
Sales revenue 1 98880

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 Cost of sales 56000
Joint arrangement-joint operation 2 1200
Operating expenses 14000
Loan note interest paid 1800
Investment income 700
Investment Property at fair value 10000
25 year leasehold factory at cost 3 50000
15 year leasehold factory at cost 30000
Plant and equipment at cost 49800
Depreciation 1 January 2019 25 year leasehold 10000
Depreciation 1 January 2019 15 year leasehold 10000
Depreciation 1 January plant and equipment 19800
Accounts receivable 1 16700
Inventory 31 December 2019 7500
Cash and bank 500
Accounts payable 9420
Deferred tax 1 January 2019 4 2100
Ordinary shares of 25 cents each 40000
10% Redeemable (in 2022 at par) preference shares of $1
each 10000
12% Loan note (issued in 2017) 30000
Retained earnings 1 January 2019 6100
Investment property revaluation
reserve 2000
Interim Dividends paid 1500
239000 239000

The following notes are relevant:

(1) On 1 April 2019 Tariro Limited agreed to act as an agent for a company in DRC, Kabola Limited.
The terms of the agency are that Tariro receives a 10% commission on all sales on behalf of
Kabola Limited. This is achieved by Tariro remitting 90% of the cash received from Kabola
Limited's customers’ one month after Tariro had collected it. Tariro had included in its sale
revenue of $7.2 million of sales on behalf of Kabola Limited of which there is one month’s
outstanding balances of $1.2 million included in Tariro Limited’s accounts receivable. The
cash remitted to Kabola Limited during the year was $5.4 million (that is being 90% of $6

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 million), in accordance with the terms of the agency. This has been treated as the cost of the
agency sales.
(2) The joint venture account represents the net balance of Tariro’s transactions in a joint
venture with Wabata, which commenced on 1 January 2019. Each venturer contributes their
own assets and pays their own expenses. The revenues for the venture are shared equally.
The joint venture is not a separate legal entity. This qualifies as a joint arrangement being a
joint operation in terms of IFRS11.
Details of Tariro Limited’s joint venture transactions are:
$000
Plant and equipment at cost 1 500
Share of joint venture sales revenue (50% of total sales revenues) (800)
Related cost of sales excluding depreciation 400
Accounts receivable 200
Accounts payable (100)
Net balance of joint venture account 1 200

Plant and equipment is depreciated at 20% per annum on a reducing balance basis.

(3) On 1 January 2019 Tariro Limited had its two leasehold factories revalued for the first time,
by an independent evaluator(surveyor) as follows:

25-year leasehold $52 million

15-year leasehold $18 million
Tariro Limited depreciates its leaseholds on a straight-line basis over the life of the lease.
The directors of Tariro Limited are disappointed with the value placed on the 15-year leasehold
surveyor has said that the fall in its value is due mainly to its unfavourable location, but in time
the surveyor expects its value to increase. The directors are committed to incorporating the
results of the 25-year leasehold into the financial statements, but wish to retain the historical
cost basis for the 15-year leasehold. Revaluation surpluses are transferred to retained earnings
in line with the realisation of the related asset.
(4) Prior to the current year Tariro Limited had adopted a policy of carrying its investment
property at fair value, with the surplus being credited to reserves. For the current year it will
be applying the fair value method of accounting for investment properties in IAS 40
Investment Property. The value of the investment property had increase by a further
$500,000 in the year to 31 December 2019.
(5) A provision for income tax for the year to 31 December 2019 of $5 million is required. The
temporary differences (related to the difference between tax base of the plant and statement
of financial position written down value) on 1 January 2019 were $7 million and on 31

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 December 2019 they had declined to $5 million. Assume a tax rate of 30%. Ignore deferred
tax on the property revaluations.
(6) The interim dividends paid include half of the full year’s preference dividends. On 23
December 2019 the directors declared a final dividend of 3 cents per share.

Required:
Prepare the financial statements for the year to 31 December 2019 for Tariro Limited in
accordance with International Accounting Standards and International Financial Reporting
Standards, as far as the information permits. They should include:
 A statement of profit or loss and other comprehensive income (14 marks)
 A statement of changes in equity and reserves (5 marks)
 A statement of financial position (21 marks)
[Total 40 marks]

Suggested Solution 4

Statement of profit or loss and other comprehensive income

Note $000
Revenue 1 92,480
COGS 2 (61,700)
Gross profit 31,500
Other income – gain on remeasurement of investment property 4 500
Other income – Agency commission 1 720
Operating expenses 1 (14,000)
Loss on revaluation of 15 year leasehold property 3 (2,000)
Finance costs 5 (4,600)
Investment income 700
Profit before tax 12,100
Income tax expense 7 (4,400)
Profit for the year 7,700
Other comprehensive income
Gain on revaluation of 25 year leasehold factory 3 12,000
Total comprehensive income 19,700

Statement of changes in Equity

Ordinary Revaluation Investment Retained Total
shares reserve income earnings
reserve

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 Balance b/d 40,000 0 2,000 6,100 48,100
Profit for the year 7,700 7,700
Revaluation of property 12,000 12,000
Transfer to realised profits (600) (2,000) 2,600 0
Dividend paid - interim (1,000) (1,000)
- final (4,800) (4,800)
Balance c/d 40,000 11,400 0 10,600 62,000

Statement of financial position

Non-current assets Notes
PPE 3 90,800
Investment property 4 10,500
101,300
Currents assets
Inventory 7,500
Accounts receivable 8 15,820
Cash and bank 500 23,820
Total assets 125,120
Equity and Liabilities
Ordinary shares 40,000
Revaluation reserve 11,400
Retained earnings 10,600
Total equity 62,000
Non-current liabilities
10% redeemable preference shares 10,000
12% loan note 30,000
Deferred tax liability 7 1,500
Current liabilities
Accounts payable 9 9,520
Loan note interest accrued 5 1,800
Proposed dividend - ordinary 6 4,800
-preference 6 500
Income tax liability 5,000 21,620
Total equity and liabilities 125,120

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Workings
The company’s treatment of the transactions in relation to the agreement with Kabola Limited is
incorrect. Tariro Limited has treated the sales and expenses as if they were its own sales rather
than acting as an agent and receiving commission. The agency sales should be removed from
revenue (debit $7.2 million) and their ‘cost’ from cost of sales (credit $5.4 million). Instead, Tariro
Limited should report the commission earned of $0.72million ($7.2 million x 10%) (Credit) as
other operating income (or as revenue would be acceptable). Of the outstanding balances of $1.2
million included in Tariro Limited’s accounts receivable only $0.12 (10% x $1.2) actually belongs
to Tariro Limited, with the 90% to be remitted to Kabola Limited. The entries required to correct
the error are:

Dr Cr
Sales 7,200
Trade receivables 120
COGS 5,400
Trade receivables 1,200
Commission earned (7,200 x 10%) 720

W1 Revenue $000
As per trial balance 98,880
Remove agency sales (7,200)
Joint venture revenue 800
92,480

W2 Cost of sales
As per TB 56,000
Less agency cost of sales (5,400)
Joint venture costs 400
Depreciation on plant and equipment (49 800 – 19 800) 6,000
Depreciation on 25 year leasehold factory (52,000/20 years) 2,600
Depreciation on 15 year leasehold factory (18,000/10 years) 1,000
Depreciation on joint venture plant (1,500 x 20%) 300
61,700

The accumulated depreciation on the 25-year leasehold of $10,000 represents five years’
depreciation, thus after its revaluation it would have a remaining life of 20 years. A similar
exercise with the 15-year leasehold gives a remaining life of 10 years. These figures are used to
calculate the depreciation charges, which are charged to cost of sales.

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Joint venture
The joint venture with Waterfront qualifies to be treated under IFRS 11 ‘Joint Arrangements’ as
a jointly controlled operation. The Standard requires the use of “line by line basis” that is each
party should account for its own assets, liabilities and results according to the terms of the
agreement. Thus Tariro Limited transactions with the joint venture will be treated as if they were
Tariro Limited’s own transactions and included in the appropriate line items together with other
similar transactions e.g. sales revenues will include $800,000 in respect of the joint venture.

W3 PPE
Where a company chooses to revalue a non-current asset, it must revalue all the assets of the
same class as required by IAS 16 PPE. Selective revaluations are not permitted at all by IAS 16.
Thus, in this case,
Tariro Limited must recognise the fall in the value of the 15-year leasehold factory.
25-year leasehold – revaluation surplus is $12 million (52m – (50m – 10m))
15-year leasehold – revaluation deficit is $2 million (18m – (30m – 10m)

Dr Cr
25 year leasehold factory (52,000 – (50,000 – 10,000) 12,000
Revaluation Reserve (OCI) 12,000
Revaluation of 25 year leasehold factory

A transfer from the revaluation reserve to retained profits must be made. This will represent
the partial realisation of the surplus on the
25-year leasehold. It is realised at $600,000 per annum ($12 million/20 years) in line with the
remaining life of the leasehold.
Dr Cr
Revaluation Reserve (OCI) (12,000/20 years) 600
Retained earnings 600
Transfer to realised earnings

The revaluation loss must be charged directly to the statement of profit or loss; it cannot be
offset against the surplus on the 25-year leasehold.
Dr Cr
Statement of P/L (18,000 – (30,000 – 10,000) 2,000
15 year leasehold property factory 2,000
Revaluation of 15 year leasehold factory

19 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 PPE schedule
Cost/revalued Accumulated Carrying
amount depreciation amount
25 year leasehold factory 52,000 2,600 49,400
15 year leasehold factory 30,000 12,000 18,000
Plant and equipment 49,800 25,800 24,000
Joint venture plant 1,500 300 1,200
133,300 40,700 92,600

W4 Investment Property
N.B The fair value model in IAS 40 Investment Property requires investment properties to be
included in the statement of financial position at their fair value. Any surplus or deficit is
recorded in income.

Dr Cr
Investment property reserve (OCI) 2,000
Retained Profits (SOCIE) 2,000
Transfer to realised earnings

The fair value gain on remeasurement of investment property for the current year can be
recognised correctly as follows:
Dr Cr
Investment property (SFP) 500
Fair value gain on investment property (P/L) 500

W5 Finance costs
Loan note interest paid 1 800
Loan note interest accrued (12% x 30 000) – 1 800 1 800
Dividend on redeemable preference shares (10 000 x 10%) 1 000
4 600

Take note that half of the full year’s dividend should be recognised as an accrual in the
statement of financial position (1 000 x 50%) = 500

20 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

W6 Dividend
Interim dividends as per TB 1 500
Remove preference share dividend paid (W5) (500)
Final dividend declared [($40 000/$0.25) x $0.03] 4 800
5 800

The interim dividends are half of the preference dividend of $500,000 (10% x $10 million x 6/12)
and the balance must be an interim ordinary dividend of $1 million. The final proposed dividend
is another $500,000 preference and $4·8 million ordinary (40 million x 4 x 3 cents). Under IAS 32
‘Financial Instruments: Disclosure and Presentation’ redeemable preference shares have the
characteristics of debt and must be treated as such. The preference dividends will be treated as
interest costs and the shares will appear under non-current liabilities, not equity.

Remember to include the declared (unpaid) dividend in the statement of financial position
under current liabilities.

W7 Income tax expense

Provision for the year 5,000
Deferred tax [7,000 – 5,000) x 30% (600)
Income tax expense (P/L) 4,400

Deferred tax expense balance in SFP (5,000 x 30%) 1,500

As the temporary differences have fallen by $2 million this will cause a reversal of deferred tax
of $2 million x 30% = $600,000. This will reduce the tax charge for the year and the deferred tax
balance will be $2,100,000 – $600,000 = $1,500,000.

W8 Accounts receivable
As per TB 16,700
Remove agency trade receivables (1,200)
Add: Commission receivable 120
Joint venture receivables 200
15,820

W9 Accounts payable
As per TB 9,420
Joint venture payables 100
9,520

21 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Question 5
Patrice Limited $000 $000
Note
Trial balance on 31 December 2019 s
Dr. Cr
$ $
Share premium 8000
Retained earnings 1 January 2019 70300
Profit before interest and tax- year to 31 Dec 2019 17900
Revaluation reserve 18000
8% loan notes 39800
Trade payables 26700
Accrued loan interest 300
Taxation 1100
Land and buildings at valuation 62300
Plant at cost 84600
Buildings accumulated depreciation 31 Dec 2019 6800
Plant - accumulated depreciation 31 Dec 2019 4 37600
Trade receivables 50400
Investment at cost 8200
Inventory 31 Dec 2019 43300
Investment income 400
Ordinary shares of $1.00 each 50000
Bank 1900
Loan interest 1700
Ordinary dividend 26100
27770 27770
0 0

Patrice Limited
Statement of financial position as at 1 January 2019
Note
s 2019
$000
ASSETS
Non-current assets

22 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Land and buildings (at valuation $49200 less accumulated dep
$5000) 44200
Plant (at cost of $70 000 less accumulated dep $ 22 500) 47500
Investment at cost 16900
10860
0
Current assets
Inventories 57400
Trade receivables 28600
Cash and cash equivalents 1200
19580
Total assets 0

EQUITY AND LIABILITIES

Equity share capital_ $1 each 25000
Share premium 5000
Revaluation reserve 12000
Retained Income 70300
11230
Total equity 0

Non-current liabilities
8% Loan notes 43200

Current liabilities
Trade payables 31400
Income tax 8900
19580
Total equity and liabilities 0

Notes
(i) There were no disposals of land and buildings during the year. The increase in the
revaluation reserve was entirely due to the revaluation of the company’s land.
(ii) Plant with a carrying amount of $12 000 (cost $23 500) was sold during the year for
$7 800. The loss on the sale has been included in the profit before interest and tax.

23 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 (iii) Investments with a cost of $8 700 were sold during the year for $11 000. The profit
has been included in profit before interest and tax. There were no further purchases
of investments.
(iv) On 10 June 2019 a bonus issue of 1 for 10 ordinary shares was made utilising the share
premium account. The remainder of the increase in ordinary shares was due to an
issue for cash on 30 June 2019.
(v) The balance on the taxation account is after settlement of the provision made for the
year to 31 December 2018. A provision for the current year has not yet been made.
Required:
Prepare the cash flow statement for the year ended 31 December 2019, using the indirect
method. [30 marks]

Suggested Solution 5
Patrice Ltd Statement of cash flows for the year ended 31 December 2019 (Indirect method)

Notes $ $
Cash flows from operating activities
Profit before tax 17,900
Adjustments for:
Depreciation on buildings 1 1,800
Depreciation on plant 2 26,600
Loss on disposal of PPE (7,800 – 12,000) 4,200
Profit on sale of investments (11,000 – 8,700) (2,300)
Operating profit before working capital changes 48,200
Working capital changes
Decrease in inventories (57,400 – 43,300) 14,100
Increase in trade receivables (28,600 – 50,400) (21,800)
Decrease in trade payables (31,400 – 26,700) (4,700)
Cash generated from operations 35,800
Loan interest paid 3 (1,400)
Tax paid 4 (10,000)
Net cash outflow from operating activities 24,400
Cash flows from investing activities
Purchase of land and buildings 5 (7,100)
Purchase of plant 6 (38,100)
Proceeds on disposal of plant (note i) 7,800
Proceeds on disposal of investments 11,000
Investment income (trial balance) 400

24 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Net cash out flows from investing activities (26,000)
Cash flows from financing activities
Proceeds from issue of ordinary shares 7 28,000
Repayment of 8% loan notes (43,200 – 39,800) (3,400)
Dividend paid (26,100)
Net cash inflow from financing activities (1,500)
Net decrease in cash and cash equivalents 3,100
Add: Cash and cash equivalents b/d 1,200
Cash and cash equivalents c/d (1,900)

The trial balance indicates that the profit is before interest and tax. This means interest has not
yet been subtracted. Additionally, investment income has not yet been added. There is thus no
need for you to adjust for these two items because they have not yet been taken into account.

Notes to the statement of cash flows for the year ended 31 December 2019

1. Depreciation on PPE

Opening accumulated depreciation balances 5,000

Closing accumulated depreciation balances (6,800)
Depreciation charge for the year 1,800

2. Depreciation on PPE

Opening accumulated depreciation balances 22,500

Disposals (note ii) (23,500 – 12,000) (11,500)
Closing accumulated depreciation balances (37,600)
Depreciation charge for the year 26,600

3. Loan interest paid

Opening balance 0
Statement of profit/loss 1,700
Accrued loan interest (300)
Loan interest paid 1,400

4. Tax paid
Opening balance 8,900

25 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 As per trial balance 1,100
10,000
N.B. The company overpaid because the SFP shows that they owed 8,900 (under current
liabilities) but there is now a debit balance of 1,100 in the trial balance. From owing the tax
authorities 8,900 they are now owed by the tax authorities 1,100.

5. Land and buildings at cost/ valuation

Opening balance 49,200
Revaluation (18,000 – 12,000) 6,000
Closing balance (62,300)
Purchase of land and buildings 7,100

6. Plant at cost
Opening balance 70,000
Disposals (note ii) (23,500)
Closing balance (84,600)
Purchase of plant 38,100
N.B. As long as this note is being done “at cost” do not subtract depreciation for the year. We
only subtract when this note is being done at carrying amount. Master this trick because it’s
common with statement of cash flows. To demonstrate this principle I will do this note at
“carrying amount” as follows:
Plant at carrying amount
Opening balance 47,500
Disposals (note ii) (12,000)
Depreciation (from note 2) (26,600)
Closing balance (84,600 – 37,600) (47,000)
Purchase of plant 38,100

7. Proceeds from issue of ordinary shares

Movement in share capital (50,000 – 25,000) 25,000
Bonus issue on share capital (1/10 x 25,000) (2,500)
Movement in share premium (8,000 – 5,000) 3,000
Bonus issue on share premium 2,500
28,000

26 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Question 6
Part (a)
On 30 June 2019, an entity has an asset with a carrying amount of $175 000-00. On that date,
management decided to sell the asset for $150 000-00 by 30 September 2019. A buyer was found
who signed an irrevocable sale agreement based on this amount. Available information showed
that the costs to sell the asset would amount to $10 000-00.

Required:
Outline the accounting treatment for the asset in terms of IFRS 5 on 30 June 2019 (10 marks)

Part (b)
On 1 January 2018 Chigure Limited received $60 000 government grant relating to equipment
which cost $180 000 and had a useful life of six years. The grant was netted off against the cost
of the equipment. On 1 January 2019, when the equipment had a carrying amount of $100 000,
its use was changed so that it was no longer being used in accordance with the grant. This meant
that the grant needed to be repaid in full but by 31 December 2019 this had not been done.
Required
What is the correct accounting treatment of the government grant and the equipment in the
financial statements of Chigure Limited for the year ended 31 December 2019? (10 marks)

Part (c)
The following matters relate to Chigayo Limited mining activities in Mberengwa district:
(i) Chigayo started operating a new mine in January 2018 under a five-year government
licence which required Chigayo Limited to landscape the area after mining ceased at an
estimated cost of $100 000.

(ii) During 2019, Chigayo Limited’s mining activities caused environmental pollution on
adjoining piece of government land. There is no legislation which requires Chigayo Limited
to rectify this damage, however Chigayo Limited does have a published environment
policy which includes that it would rectify any damage caused. The estimated cost of the
rectification is $100 000.

In terms of IAS 37, Provision, Contingent Liabilities and Contingent Assets, what is the correct
treatment in the financial statement of Chigayo Limited for the year ended 31 December 2019?
(10 marks)
[Total 30]

27 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Suggested Solution 6
(a) IFRS 5 Non-current assets held for sale and discontinued operations

Step 1: Determination of the carrying amount

The carrying amount of the asset on 30 June 2019 is $175,000

Step 2: Determination of the fair value less costs to sell

Fair value 150,000
Less: costs to sell (10,000)
Fair value less costs to sell 140,000

Step 3: Determination of the value at which the asset will be measured

An asset held for sale should be measured at the lower of the asset’s carrying amount ($175,000)
and fair value less cost to sell ($140,000) which in this case is $140,000.

Step 4: Recognition of the asset in the statement of financial position

Transfer the asset from the heading “non-current assets” to “current assets” in the statement of
financial position under “Non-current assets held for sale” at $140,000.

Step 5: Recognition of impairment loss in the statement of profit or loss

In the statement of profit or loss and other comprehensive income recognise impairment loss as
an expense. The impairment loss to be recognised will be calculated as follows:
Carrying amount 175,000
Less: Fair value less costs to sell (140,000)
Impairment loss 30,000

(b) IAS 20 Accounting for Government grants and government assistance

On failure to comply with grant conditions, the repayment of the grant will be treated as a change
in accounting estimate in terms of IAS 8 Accounting Policies, Estimates and Errors. The carrying
amount of the asset must be increased as the reduction of cost approach had been used.
Furthermore, the resulting extra depreciation must be charged immediately to the statement of
profit or loss. This can be shown as a journal entry as follows:

Details Debit Credit

Property, Plant and Equipment (SFP) 20,000
Depreciation expense (P/L) 40,000
Liability (SFP) 60,000

28 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

(c) IAS 37 Provisions, contingent liabilities and contingent assets

Matter 1
If a provision is to be made:
(1) there must be a present obligation as a result of a past event

(2) it must be probable that an outflow of economic benefits will be required to settle the
obligation, and

(3) it must be possible to make a reliable estimate of the amount of the obligation

Applying this to the facts in matter 1:

(1) Chigayo Limited has a legal obligation under the requirements of the licence granted by the
government. The obligation has arisen from a past event, which is the government licence
which was granted in January 2018.

(2) It is probable that Chigayo Limited will have to pay the $100,000. It is ‘more likely than not’
that $100,000 will be paid because Chigayo agreed to this at the time when it was granted
the licence by the government in 2018.

(3) A reliable estimate can be made. This is $100,000.

Since all the three conditions are met a provision should be recognised.
As well as recognising a liability for future expenditure, Chigayo Limited will recognise an asset.
Chigayo Limited cannot carry out its operations without agreeing to incur the expense of cleaning
up any damage that it causes. This expenditure meets the definition of an asset, because it gives
the Chigayo Limited access to future economic benefits in the form of sales revenue.

Therefore the double entry is:

 Debit: Non-current asset (licence) with $100,000

 Credit Provision with $100,000 (rather than Debit Expense; Credit Provision).

The asset is then amortised over its useful life in the same way as other non-current asset (licence
in this case).

Matter 2
If a provision is to be made:
(1) there must be a present obligation as a result of a past event

29 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 (2) it must be probable that an outflow of economic benefits will be required to settle the
obligation, and

(3) it must be possible to make a reliable estimate of the amount of the obligation

Applying this to the facts in matter 2:

(1) Chigayo Limited has no legal obligation as there is no legislation which requires Chigayo
Limited to rectify this damage. However, Chigayo Limited has a published environment policy
which includes that it would rectify any damage caused. The policy seems to be well-known
or has been made known to the public, which then means a constructive obligation arises.
The obligation has arisen from a past event, which is the publication of environmental policy.

(2) It is probable that Chigayo Limited will have to pay the $100,000. It is ‘more likely than not’
that $100,000 will be paid because Chigayo published environment policy which includes that
it would rectify any damage caused.

(3) A reliable estimate can be made. This is $100,000.

Since all the three conditions are met a provision should be recognised.
As well as recognising a liability for future expenditure, Chigayo Limited will recognise an
expense.
Therefore the double entry is:
 Debit: Expenses (P & L) with $100,000

 Credit Provision with $100,000

Question 7
Angel Limited
Trial balance on 31 December
2019 Notes
Dr. Cr
$000 $000
Freehold property 1 126000
Plant 110000
Investment property 1 January 2019 2 15000
Ordinary shares of 25 cents each 150000
Share premium 10000
Trade receivables and
prepayments 31200
Bank 13800

30 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Inventory 3 60400
Deferred tax 1 January 2019 4 18700
Retained earnings 1 January
2019 52500
Accumulated profits- year to 31 December 2019 47500
Suspense account 5 14100
Provision for plant overhaul 4 12000
Taxation payable 4200
Trade payables 47400
356400 356400

Notes to financial statement:

(i) The income statement has been charged with $3.2 million being the first of the four
equal annual rental payments for an item of excavating plant. This first payment was
made on 1 January 2019. Angel has been advised that this is a finance lease with an
implicit interest rate of 10% per annum. The plant had a fair value of $11.2 million at the
inception of the lease.
None of the non-current assets have been depreciated for the current year. The
freehold property should be depreciated at 2% on its cost of $130 million, the leased
plant is depreciated at 25% per annum on a straight line basis and the non-leased plant
is depreciated at 20% on the reducing balance basis.

(ii) Angel Limited adopted the fair value model for its investment property. The value at 31
December 2019 has been assessed by a qualified surveyor at $12.4 million.
(iii) During an inventory count on 31 December 2019 items that had a cost of $6 million
were identified as being either damaged or slow moving. It is estimated that that they
will only realise $4 million in total, on which sales commission of 10% will be payable. An
invoice for materials delivered on 12 December 2019 for $500 000 has been discovered.
It has not been recorded in Angel’s bookkeeping systems, although the materials were
included in the inventory count.
(iv) Angel operates some heavy excavating plant which requires a major overhaul every
three years. The overhaul is estimated to cost $18 million and is due to be carried out in
January 2020. The provision of $12 million represents two annual amounts of $6 million
made in the years to 31 December 2018 and 2019.
(v) Deferred tax provision required on 31 December 2019 has been calculated at $22.5
million.
(vi) The suspense account contains the credit entry relating to the issue on 1 July 2019 of a
$15 million 8% loan note. It was issued at a discount of 5% and incurred direct issue

31 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 costs of $150 000. It is redeemable after four years at a premium of 10%. Interest is
payable six months in arrears. The first payment of interest has not been accrued and is
due on 1 January 2020. Apportionment of issue cost, discounts and premiums can be
made on a straight line basis.
Required

(a) Commencing with the accumulated profit figure in the trial balance ($52.5 million and
$47.5 million), prepare a schedule of adjustments required to these figures taking into
account any adjustments required by notes (i) to (vi) above. (18 marks).
(b) Prepare the statement of financial position of Angel Limited as at 31 December 2019
taking into account the adjustments required in notes (i) to (vi) above. (22 marks)
[Total 40 marks]

Suggested Solution 7
Angel Ltd Restated Statement of profit or loss for the year ended 31 December 2019

Notes $000 $000

Profit for the year 47,500
Adjustments:
Operating lease rental cancellation 3,200
Finance cost charge 1 (1,700)
Deprecation 2 (27,400)
Fair value loss on re-measurement - investment property 3 (2,600)
Inventory valuation adjustments 4 (2,400)
Purchases omitted 5 (500)
Reversal of provision 6 6,000
Deferred tax 7 (3,800)
Total adjustments (29,200)
Adjusted profit for the year 18,300
Prior year retained earnings adjustment 9 28,500
Retained earnings as at 31 December 2019 9 76,800

32 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Angel Ltd Restated Financial Position as at 31 December 2019

Assets Notes $ $
Non-current assets
Freehold property (126 000 – 2 600) 2 123,400
Owned plant (110 000 – 22 000) 2 88,000
Leased plant (11 200 – 2 800) 2 8,400
Investment property - given 3 12,400
232,200
Current assets
Inventory (60,400 – 2,400) 4 58,000
Trade receivables and prepayments 31,200
Bank 13,800 103,000
Total assets 335,200
Equity and liabilities
Equity
Ordinary shares of 25 cents each 150,000
Share premium 10,000
Retained profits 76,800
Total equity 236,800
Non-current liabilities
8% loan notes (14,100 + 300) 8 14,400
Deferred tax 7 22,500
Lease liability 1 5,600
Current liabilities
Trade payables (47,400 + 500) 5 47,900
Accrued lease finance interest 1 800
Accrued loan interest 600
Lease liability 1 2,400
Taxation - given 4,200 55,900
Total equity and liabilities 335,200

Notes

1. Finance charges

The lease has been incorrectly treated as an operating lease. Treating it as a finance lease
it will be necessary to prepare the amortisation table as follows:

33 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Amortisation table
Year Liability b/d Finance cost@10% Annual payment Liability c/d
2019 8,000* 800 3,200 5,600
*N.B. Where lease payments are made in ADVANCE ALWAYS REMOVE THE FIRST
PAYMENT from the fair value of the assets to get the opening liability for the year (11,200
– 3,200)

The capital outstanding of $8 million must be split between current and non-current
liabilities. The second instalment payable on 1 January 2020 will contain $800,000 of
interest (8,000 × 10%), therefore the capital element in this payment will be $2·4 million
and this is a current liability. This leaves $5·6 million (8,000 – 2,400) as a non-current
liability.

Current year finance cost $000

Finance costs – lease 800
Finance costs – 8% loan notes (W8) 900
Total finance costs charges 1 700

2. Depreciation on PPE
Freehold property (130,000 x 2%) 2,600
Leased plant (11,200 x 25%) 2,800
Non leased plant (20% x 110,000) 22,000
Total depreciation charge for the year 27,400

3. Fair value of loss on remeasurement of investment property recognised in SOPL

Opening – investment property as per TB 15,000
Closing – investment property (note 11) 12,400
Fair value loss on remeasurement 2,600

4. Inventory valuation adjustment

Damaged/slow moving inventory at cost 6,000
Net realizable value (90% x 4 000) 3,600
Inventory write down 2,400

As per IAS 2 Inventory should be valued at the lower of cost and net realizable value

5. Purchases journal for omitted purchases

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 Dr Cr
Purchases (P&L) 500
Payables (SFP) 500

6. Provision for major overhaul costs

As per IAS 37 provision overhaul costs do not meet the definition of a liability and the
general recognition criteria and this is because the reporting entity always has an
alternative to incurring expenditure. The provision should therefore be reversed from the
statement of profit and loss (increase current year profits), statement of changes in
equity (increase previous year profits through retained earnings) and statement of
financial position (reduce liabilities). The journal entry is as follows.

Dr Cr
Provision (SFP) 12,000
Reversal (P&L) – current year 6,000
Reversal (P&L) – Prior year 6,000

7. Deferred tax
Opening deferred tax as per TB 18,700
Deferred tax – current year – balancing figure 3,800
Closing deferred tax (note 5) 22,500

Journal entry for recording the deferred tax

Dr Cr
Deferred tax expense (P&L) 3,800
Deferred tax liability (SFP) 3,800

8. Financial liability
Carrying amount of 8% loan notes at inception
8% loan notes 15,000
Issued @ a discount (15,000 x 5%) (750)
Issue costs (150)
Carrying amount (as shown in suspense account) 14,100
International accounting standards require issue costs, discounts on issue and premiums
on redemptions of loan instruments to be included as part of the finance costs:

Total payment calculation for 8% loan notes

Interest payments (15,000 x 8% x 4years) 4,800

35 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Redemption (15,000 x 110%) 16,500
Total payments 21,300

Calculation of the total finance charge over 4 years

Total payment 21,300
Less: carrying amount at inception (14,100)
Total finance charge 7,200

Finance charge for the year (7,200/4) 1,800

Finance charge for the 6 months 900
Accrued finance charges 900

The question says these may be apportioned on a straight-line basis at $1·8 million pa.
The loan stock was issued on 1 July 2019 therefore an interest charge of $900,000 is
required for the current year. Of this $600,000 is represented by the accrual to be paid
on 1 January 2020 and the remainder is also accrued, but added to the carrying value of
the loan stock on the statement of financial position.

9. Prior year retained income adjustment

Retained earnings opening 52,500
Adjustments 6,000
Adjusted prior year retained earnings 58,500

Question 8
Kenny Statement of financial position as at 31 December 2019
2019 2018
$ $
Assets
Non-current assets
Property, Plant and equipment 1 028 000 620 000
Deferred Tax 0 31 000
Investment in subsidiary 0 88 100
Current assets
Inventories 33 800 8 000
Trade and other receivables 772 000 350 000
Financial assets held at fair value 32 800 78 800
Cash and cash equivalents 110 720 182 000
Total assets 1 977 320 1 357 900

36 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Equity and liabilities
Share capital and reserves
Share capital 400 000 200 000
Retained earnings 653 820 157 000
Other components of equity 200 000 140 000
Shareholders capital and reserves 1 253 820 497 000
Non-current liabilities
Long term borrowings 400 000 620 000
Deferred tax 9 000 0
Current liabilities
Trade and other payables 159 100 147 240
Dividends payable 100 000 60 000
Taxation 55 400 33 660
Total equity and liabilities 1 977 320 1 357 900

Kenny Limited
Statement of comprehensive income for the year ended 31 December 2019
$
Revenue 1 330 000
Cost of Sales -552 000
Gross profit 778 000
Other income 445 820
Other expenses -146 000
Finance costs -177 320
Profit before tax 900 500
Income tax -243 680
Profit for the year 656 820
Other comprehensive income
Gain on property revaluation 0
Total comprehensive income for the year 656 820

Kenny limited
Statement of changes in equity for the year ended 31 December 2019
Ordinary Asset replacement Retained Total
Share reserve income
$ $ $ $
Balance at 1 January 2019 200 000 140 000 157 000 497 000

37 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Profit of the year 656 820 656 820
Dividends -100 000 -100 000
Redeemable debentures converted
To shares 200 000 200 000
Transfer to assets replacement reserve 60 000 -60 000 0
400 000 200 000 653 820 1 253 820

Additional information
1. Property plant and equipment consist only of delivery vehicles

2. No delivery vehicles were disposed of during the past year. The delivery vehicles that
were bought for replacement purposes were bought at the end of the current year in
terms of an instalment credit agreement. A deposit of $110 000 was paid in cash and
the remaining amount will be paid with interest over a period of 4 years.

3. Included in trade and other payables is the current portion of $100 920 (2018:$Nil)
applicable to the instalment credit agreement.

4. Debentures of $400 000 were redeemed at par and the remainder was converted into
ordinary share capital.

5. Cost of sales includes an amount of $136 000 in respect of depreciation on the delivery
vehicles.

6. Included in profit before tax are the following income and expenses

$
Investment income – dividends received 88 200
Gain on sale of subsidiary 357 620
Fair value adjustment – held trading investments -46 000
Other costs paid in cash -100 000

7. The income tax expenses in the statement of comprehensive income consist of the
following:

38 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Current tax 203 680
Deferred tax 40 000

8. Long-term borrowings are made up as follows:

2019 2018
$ $
Instalment credit agreement liability 250 000 0
Bank loan 150 000 20 000
Redeemable debentures 0 600 000
Required
Prepare the statement of cash flows of Kenny Limited, using the direct method, for the year
ended 31 December 2019 in accordance with the requirements of IAS 7 Cash flow statements.
(30 marks)

Suggested Solution 8
Kenny Statement of cash flows for the year ended 31 December 2019 (Direct method)

Cash flows from operating activities Notes $ $

Cash received from customers 1 908,000
Cash paid to suppliers and employees 2 (630,860)
Cash generated from operations 277,140
Interest paid (177,320)
Tax paid 3 (181,940)
Dividends paid 4 (60,000)
Net cash flows from operating activities 142,120
Cash flows from investing activities
Cash deposit paid on purchase of vehicles (110,000)
Proceeds on sale of subsidiary 5 445,720
Dividend received 88,200
Net cash inflow from investing activities 423,920
Cash flows from financing activities
Redemption of debenture (given) (400,000)
Cash payment on credit installment 6, 7 (83,080)
Proceeds from long term loan (150,000 – 20,000) 130,000
Net cash out flows from financing activities (353,080)
Net decrease in cash and cash equivalents (71,280)
Cash and cash equivalents b/d 182,000

39 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 Cash and cash equivalents c/d 110,720

Notes to the statement of cash flows

11. Cash received from customers

Revenue 1,330,000
Changes in trade receivables (772,000 – 350,000) (422,000)
908 000

12. Cash paid to suppliers and employees

Cost of sales (552,000 – 136,000) 416,000
Changes in inventories (33,800 – 8,000) 25,800
Changes in payables (159,100 – 100,920 – 147,240) 89,060
530,860
Other cash payments
Revenue – COGS – PBT (1,330,000 – 552,000 – 900,500) (122,500)
Investment income (dividend received) 88,200
Gain on sale of subsidiary 357,620
Fair value adjustment (46,000)
Finance cost (177,320) 102,000
Cash paid to suppliers and employees 630,860

13. Taxation
Opening balances (33,660 – 31,000) 2,660
SOP&L 243,680
Closing balances (55,400 + 9,000) (64,400)
181,940

14. Dividend paid

Opening balance of dividend payable 60,000
SOCIE 100,000
Closing balance of dividend payable (100,000)
60,000

15. Proceeds in sale of subsidiary

Investment in subsidiary at cost (SPF) 88,100
Gain on sale of subsidiary (note 6 in question) 357,620

40 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

 445,720

16. PPE
Opening balance 620,000
Depreciation for the year (note 5 in question) (136,000)
Closing balance (1,028,000)
PPE purchased through credit instalments facility 544,000

17. Annual cash payment on credit instalment

Opening balances 0
PPE purchased (note 6 in notes to cash flows) 544,000
Cash deposit paid (110,000)
Closing balances (250,000 + 100,920) (350,920)
83,080

Question 9 (a)
Chatora Ltd is a manufacturing company and owns various items of machinery. At the end of
the current year, two items were damaged, but are still in working order. The useful lives
and pattern of use of the machines were not influenced by the damage. The carrying
amounts of the two items on 31 December 2019 were as follows:
$
Machine (1) 500 000
Machine (2) 380 000

Machine 1 can at this stage be disposed of for $490 000, in an orderly transaction between
market participants. In order to sell the machine, it has to be serviced and tuned at a cost of
$10 000. Direct selling expenses of $5 000 would also have to be incurred. Management
determined the value in use of the machine to be $488 000 using an appropriate discount
rate of 10%.

Machine 2 can at this stage be disposed of for $380 000, in an orderly transaction between
market participants. Direct selling expenses of $5 000 would also have to be incurred.
Management determined the value in use of the machine to be $390 000 using an
appropriate discount rate of 10%.
Ignore any tax implications.

Required

41 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Establish the recoverable amounts of each of the two machines and establish the impairment
loss incurred by Chatora Ltd for the year ended 31 December 2019, so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Comparative amounts and
an accounting policy note are not required. [15 marks]

Question 9 (b)

Malacha restaurant operates a customer loyalty programme, in terms of which customers

earn one award credit for every $5 that they spent. Only amounts paid in cash qualify for
award credits. Each award credit entitles the customer to a $1 discount on future meals.

It is expected that all award credits will be redeemed and the fair value of each award
credit granted is measured at $1.

Mr. Timba a regular customer to the restaurant has the following information relating to the
months of June and July 2019

Total lunch bills on 30/6/2019- amount settled in cash $140-00

Total lunch bills on 31/7/2019- all available credits redeemed and $ 60-00
remainder settled in cash
Required

Establish the amount to be recognised as revenue separately for the month of June and
July 2019, taking into consideration deferred amounts if any? [15 marks]

Suggested Solution 9

Part a

Machine 1
Carrying amount = 500,000

Calculation of the fair value less costs to sell

Fair value 490,000
Less: costs to sell:
Servicing costs (10,000)
Direct selling costs (5,000)

42 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Fair value less costs to sell 475,000

Value in use = 488,000

The recoverable amount is the greater of the fair value less costs to sell and the value in use
which is 488,000.

Calculation of impairment loss

Carrying amount 500,000
Recoverable amount (488,000)
Impairment loss 12,000

Machine 2
Carrying amount = 380,000

Calculation of the fair value less costs to sell

Fair value 380,000
Less: costs to sell:
Direct selling costs (5,000)
Fair value less costs to sell 375,000

Value in use = 390,000

The recoverable amount is the greater of the fair value less costs to sell and the value in use
which is 390,000.

Calculation of impairment loss

Carrying amount 380,000
Recoverable amount (390,000)
Impairment loss 0

An asset is only impaired if its recoverable amount is lower than its carrying amount. In this case
there is no impairment loss to be recognised.

Profit before tax note

Profit before tax is stated after taking into account the following:
Impairment loss on property, plant and equipment 12,000

43 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com

Part b
Revenue recognised on 30 June 2019
Cash received 140
Less: deferred revenue (140/5 x $1) (28)
Revenue recognised 112

Revenue recognised on 31 July 2019

Cash received (60 – 28) 32
Deferred revenue in June 2019 – redeemed in July 2019 28
Less: deferred revenue (32/5 x $1) (limited to 30/5x$1) (6)
Revenue recognised 54

ABOUT THE COMPILER OF SUGGESTED SOLUTIONS

Tawanda. T. Herbert is the Co-Founder and Managing Partner of Herbert and Co. Chartered
Accountants. Among other qualifications, he is a holder of the following qualifications:

ACCA, CIMA, CIS, M.Com in Applied Accounting and B.Sc. in Applied Accounting. He is also a PHD
in Accounting candidate.

For more information visit my website: www.herbertmentor.com

44 Compiled by T T Herbert (0773 038 651 / 0712 560 772) www.herbertmentor.com