Unformatted text preview: REVISION PARTNER 1 QUESTIONS
ASSETS AND LIABILITIES
a) Distinguish between a finance lease and an operating lease indicating how they should
be treated in the financial statements as per International Accounting Standard (IAS) 17
June 2013 Question Five B
a) In the context of international Accounting Standard (IAS) 39 “Financial instruments”.
Distinguish between a financial asset and financial ability.
June 2013 Question Four A
a) Differentiate between “taxable temporary differences” and “deductible temporary
b) Equip Agencies Ltd. purchased an equipment for Sh.4,000,000 on 1 July 2008
Depreciation on equipment is provided on a straight line basis at the rate of 25% per
During the four years from 1 July 2008 to 30 June 2012 the profit after tax and allowed
wear and tear charges for tax purpose were as follows:
Profit after tax
Allowable wear and tear
1 July 2008-30 June 2009
40% on cost
1 July 2009-30 June 2010
30% on cost
1 July 2010-30 June 201 1 950.000
20% on cost
1 July 201 1-30 June 2012 850,000
10% on cost
Corporation tax rate is 30%
Deferred tax account
December 2012 Question Two A And B
a) Assure Ltd. borrowed Sh 30 million to finance two capital projects "A" and "B" on 1
July 201 1. The money was utilised on (he two projects as follows:
1 July 2011
1 January 2012
Unutilised funds on 1 July 2011 were invested temporarily at the rate of 7% per annum. The
rate of interest on the loan was 9%. CPA Section 3 Financial Reporting REVISION PARTNER 2 Required;(i) Borrowing costs to be capitalised for each of the projects as at 30 June 2012.
(ii) The value of the assets in the books of Assure Ltd as at 30 June 2012.
December 2012 Question Five D QUESTION 5
b) Distinguish between "deferred tax liabilities" and "deferred tax assets".
May 2012 Question Three B QUESTION 6
a) Distinguish between a finance lease and an operating lease.
b) On 1 January 2009, Kamulu Limited leased a machine from General Machines Ltd.
under a finance lease agreement. Kamulu Limited was to make instalment lease
payments of Sh. 14,000,000 every six months on 30 June and 31 December in
arrears.The first payment was made on 30 June 2009.The fair value of the machine was
Sh.60,000,000 with an estimated useful life of 3 years.The interest rate implicit in the
lease was 10% per six months.
i) Extracts of the stamen of comprehensive income for the years ended 31 December
2009 and 2010.
ii) Extracts of the statement of financial position as at December 2009 and 2010.
June 2011 Question Four A And B QUESTION 7
a) Outline the four main categories of financial instruments in the context of International
Accounting Standard (IAS) 39.
June 2011 Question Three A QUESTION 8
a) With respect to International Accounting Standard (IAS) 37 ,provisions ,contingent
liabilities and contingent Assets
i) Distinguish between “provisions” and “Contingent liabilities”
ii) Identify the three circumstances under which a provision should be recognized in
the financial statements
iii) Describe the accounting treatment of contingent liabilities in the financial
b) In the context of IAS 16 property, plant and equipment
i) Explain when the cost of an item of property ,plant and equipment should be
recognized as an asset
ii) Briefly describe the accounting treatment with respect to the increase in the carrying
amount of an asset as a result of revaluation
iii) Outline any two disclosure requirement for items of property, plant and equipment
which are stated at revalued amounts
c) Highlight four circumstances under which a legacy may fail
December 2010 Question Five QUESTION 9
a) Jenga Ltd. had a deferred tax liability balance brought forward of Sh.2 million. As at 31
December 2008, the firm hand the following assets: CPA Section 3 Financial Reporting REVISION PARTNER
Property, plant and equipment
7,500 Tax base
8,000 Temporary difference due to revaluation of buildings in the year was Sh. 1,000,000.
Compute the deferred tax liability as at 31 December 2008 and show the relevant journal
August 2009 Question Four B QUESTION 10
Muniu Ltd received a 20 % grant towards the cost of new item of machinery that cost ksh.
100,000 kshs.The machinery her on expected life of 4yrs and nil residual value.
The expected profits of the co. before accounting for deprecation of the new machinery
amounts to 50,000 p. a in each year of the machinery life
Profit and Loss Account Extract
Balance sheet extracts using two methods QUESTION 11
(a) With reference to IAS 36 (Impairment of Assets), identify any four circumstances that
may indicate that an asset has been impaired.
(b) In the context of the International Accounting Standards Board’s Framework for the
Preparation and Presentation of financial statements, identify and briefly explain any
four qualitative characteristics of financial statements. QUESTION 12
(a) In the context of IAS 17 (Leases), briefly explain the meaning of the following terms:
(ii) Guaranteed residual value.
(iii) Contingent rent.
(b) Silversands Manufacturing Company Ltd. has entered into an agreement with a
finance company, to lease a machine for a four year period. Under the terms of the
agreement, the machine is to be made available to Silversands Manufacturing
Company Ltd. on 1 January 2005, when an immediate payment of Sh. 2,550,000 will
be made, followed by seven semi-annual payments of an equivalent amount.
The fair market price of the machine on 1 January 2005 is expected to be Sh.
16,320,000. The estimated life of this type of machine is four years. The implicit rate
of interest in the transaction is 6.94% payable semi-annually and the corporate tax rate
is 30%. Silversands Manufacturing Company Ltd. has a policy of depreciating
machines of this type over a four year period on the straight line basis.
Assume the lease is to be capitalized. CPA Section 3 Financial Reporting REVISION PARTNER 4 Required:
Show how the above transactions will be reflected in the profit and loss account of
Silversands Manufacturing Company Ltd. for each of the four years ending 31
December 2005, 2006, 2007 and 2008.
(ii) Balance sheet extracts of Silversands Manufacturing Company Ltd. as at 31 December
2005 and 2006.
(use the acturial method to allocate the interest charge) QUESTION 13
M & I Bank Limited has its head office situated on “the hill” to the South West downtown
Nairobi. The piece of land of which the building is situated is freehold. The land cost Sh.10
million on 1 July 1989. The building on this piece of land was erected at a cost of Sh.100
million and was completed in June 1991. M & I Bank Limited moved its head office into the
building during June 1991, and occupied the whole building. The board of directors
estimated that the useful life of the building was 50 years with effect from 1 July 1991. They
estimated that the residual value of the building was nil. They decided to have depreciation
charged on the straight –line method.
On 1 July 2000 M & I Bank Limited purchased the leasehold of a plot of land in downtown
Nairobi. The lease cost of Sh.102 million was for a period of 51 years. Between 1 July 2000
and 30 June 2001, a building was erected on this land at a cost of Sh.300 million. Initially it
was planned that a branch of the bank would be situated in the building but this was thought
inappropriate. As result, it was decided that the whole building was to be rented out. The
estimated useful life of this building was also 50 years and the residual value nil. M & I
Bank Limited have found it difficult to find tenants to occupy the building. Income and
expenses in relation to this building are as follows (these figures are in the ledger but are not
yet reflected in the financial statements):
Year ended 30 June
Rental income receivable
Direct operating expenses including repairs and
Maintenance for floors rented out
Direct operating expensed including repairs and
maintenance for empty floors
Total direct operating expenses
Net income from investment property 2002
54 (6) (12) (6)
37 M & I Bank limited has always used the benchmark treatment for owner occupied under
IAS 16 (property, plant and equipment) and the cost model for investment properties under
IAS 40 (investment properties) however the directors were concerned about the fair values
of the head office building and land the buildings in downtown Nairobi, in case any
impertinent losses needed to be provided for under IAS 36 (impairment assets) in the year
ended 30 June 2002. As at 30 June 2002, the fair value of the head office land was Sh.50
million and the fair value of the head office building was Sh.468 million – there was no
change in the estimated useful life. The fair value of the building in downtown Nairobi at 30
June 2002 was Sh.310 million. Kysons, registered valuers and estate agents carried out this
valuation. The directors had Kysons repeat the valuation of the building in downtown
Nairobi in June 2003. The fair value at 30 June 2003 will be Sh.318 million. CPA Section 3 Financial Reporting REVISION PARTNER 5 The directors decide to change the accounting policies in relation to owner-occupied
property and investment property, from the benchmark treatment and the cost model to the
allowed alternative treatment and the fair value model, respectively. They decide that an
adjustment should be made to the opening balance of the retained earnings for the earliest
period presented in the accounts to 30 June 2003. The depreciation charge of the year ended
30 June 2002 will not change for the head office building. The directors think that the new
accounting policies will result in a more appropriate presentation of events in the financial
statements. The statement of changes in equity should reflect the fact that some of the
revaluation surplus is realized as the asset is used by the enterprise.
Show the necessary journal entries required to finalize the accounts for the year ending 30
June 2003, taking into account the changes in the accounting policies. Show the prior
period adjustments separately.
(b). Show extracts from the balance sheet giving the figures as at 30 June 2002 and 30 June
2003 for land, buildings, revaluation reserve and deferred taxation. The rate of tax on
income is 30% and on capital gains is nil.
(c). Show extracts from the income statement that must be disclosed to ensure that the
disclosure requirements of the International Financial Reporting Standards are complied
with. (a). QUESTION 14
(a). The original IAS 12 did not refer explicitly to fair value adjustments made on a business
combination and did not require an enterprise to recognize a deferred tax liability in
respect of asset revaluations. The revised IAS 12 “income taxes” now requires deferred
tax adjustments for these items and classifies them as temporary differences.
Explain the reasons why IAS 12 (revised) requires companies to provide for deferred
taxation on revaluations of assets and fair value adjustments on a business combination
irrespective of the tax effect in the current accounting period. (b). Baobab Ltd. was incorporated on 1 April 2000. In the year ended 31 March 2001, the
company made a profit before taxation of Sh.10,000,000 (depreciation charged being
Sh.1,000,000). The company had made the following capital additions:
Motor vehicles - Sh.4,800,000
Sh.1,200,000 Corporation tax is chargeable at the rate of 30%. Capital deductions are computed at the
rate of 25% per annum on written-down value. The company has prepared capital expenditure budgets as at 31 March 2001 which reveal
the following patterns: Year to 31 March 2002
Year to 31 March 2003
Year to 31 March 2004
Year to 31 March 2005
Year to 31 March 2006 Capital allowance
2,400 CPA Section 3 Financial Reporting Depreciation
2,900 REVISION PARTNER 6 Year to 31 March 2007 2,500 2,000 From 1 April 2007, capital allowances are expected to exceed depreciation charges each
Compute the corporation payable for the year ended 31 March 2001
Compute the deferred tax charge for the year ended 31 March 2001 on: Full-provision basis Partial-provision basis
(Show the profit and loss account and balance sheet extracts with respect to the provisions
under each method). QUESTION 15
Jallam Co. Ltd. had been preparing its financial statements using actual taxes payable
method for computing tax expense. In the year ended 30 June 2000, the company changed to
deferred tax method and the new policy was to be applied retroactively to the accounts of
the years ended 30 June 1999 and 2000.
The following are the balance sheets of the company for the two years ended 30 June 1999
and 2000 before incorporating tax expense for the year 2000.
Year ended 30 June
Sh. ‘000’ Sh. ‘000’
Bank and cash Equity and liabilities
Current tax 47,000
76,000 Sh. ‘000’
80,200 Sh. ‘000’
76,000 The following additional information is provided:
The company reported profits before tax of Sh.6,200,000 in the year ended June 2000
Included in fixed assets are the following assets: CPA Section 3 Financial Reporting REVISION PARTNER Leasehold property
Fixed assets without capital allowances 7
30 June 2000
14,500 30 June 1999
17,000 No acquisition or disposal of fixed assets took place in the year ended 30 June 2000
10 Written down value of fixed assets were Sh.22,500,000 and Sh.18,000,000 as at 30 June
1999 and 2000 respectively
Stocks as at 30 June 2000 are net of a general provision for price fluctuation of 10% of the
cost. The provision is not allowed for tax purposes.
Accruals include leave passage provision of Sh.2,500,000 as at 30 June 1999 and
Sh.1,800,000 as at June 2000
Prepayments for the year 2000 include Sh.2,000,000 allowed as a deduction on
computation of current tax.
Assets subjects to wear and tear allowance were first revalued in 1999 and revaluation
repeated in 2000. No adjustments was made to the tax base of the assets following the
Foreign exchange loss balances amounted to Sh.3,600,000 and Sh.2,800,000 on 30 June
1999 and 2000 respectively.
Donations in the year 2000 was Sh.5,000,000.
Tax rates in 1999 and 2000 were 40% and 50% respectively.
Current tax for a year is paid on 15 September of the following financial year. Required:
(a) Current tax for the year ended 30 June 2000
(b) Using the method recommended by the revised IAS 12, calculate deferred tax expense or
income for the years 1999 and 2000
(c) The current tax account, deferred tax account and revaluation account for the years 1999
and 2000 QUESTION 16
(a) IAS 12 (revised) “Income Taxes” requires an enterprise to provide for deferred tax in full
for all deferred tax liabilities with only limited expectations. The original IAS 12, and the
equivalent Kenyan Accounting Standard, allowed an enterprise not to recognize deferred
tax assets and liabilities where there was reasonable evidence that timing differences
would not reverse for some considerable period ahead; this was known as the partial
The original IAS 12 did not refer explicitly to fair value adjustments made on a business
combination and did not require an enterprise to recognize a deferred tax liability in
respect of asset revaluations. The revised IAS 12 now requires deferred tax adjustments
for these items and classifies them as temporary differences.
(i) Explain why the IASC decided to require recognition of the deferred tax liability for
all temporary differences (with certain exceptions) rather than allowing the partial
(ii) Discuss the reasons why IAS 12 (revised) requires enterprises to provide for deferred
taxation on revaluations of assets and fair value adjustments on business
combination. CPA Section 3 Financial Reporting REVISION PARTNER 8 QUESTIONS ON LEASES ADOPTED FROM PAPER
NO.18:ADVANCED FINANCIAL REPORTING
a) Madini Ltd. has entered into an agreement with a finance company to lease a machine for a
four-year period. Under the terms of the agreement, the machine is to be made available, to
Madini Ltd. on 1 January 2012'; when an immediate payment of Sh.2,550,000 will be made,
followed by seven semi-annual payments of an equal amount. The fair market price of the
machine on 1 January 2012 is expected to be Sh. 16,320,000. The estimated useful life of
this type of machine is 4 years. The implicit rate of interest in the transaction is 6.94%
payable annually. The corporate tax rate is 30%. Madini Ltd.'s policy is to depreciate
machines of this type over four-year period using the straight line basis.
Show how the above transaction would be reflected in the income statement of Madini Ltd
for each of the four years ending 31 December 2012,2013,2014 and2015.
(Assume that the lease is to be capitalised: Use the actuarial method to allocate the interest
December 2011 Question Five A QUESTION 2
a) A lessor leases out an asset on terms which constitute a finance lease. The primary period is
five years commencing 1 July 2010 and the rental payable is Sh.3, 000,000 per annum (in
arrears). The lessee has the right to continue the lease after the five-year period referred to
an indefinite period at a nominal rent. The cash price of the asset in question as at 1 July
2010 can be assumed to be Sh.11, 372,000. The rate of interest implicit in the lease is 10%.
Show the accounting entries in the leaser’s books (Apply the requirements of IAS 17Leases).
June 2010 Question Five C QUESTION 3
On 1 November 2008, Apple Ltd sold a plant with a book value of Sh. 10 million to Mango
Ltd. The fair value and the selling price of the plant at the date of sale was Sh. 15.2 million.
The plant was immediately leased back over a lease term of four years which the assets is
remaining useful life. The residual value at the end of the lease period is estimated to be a
negligible amount. Apple Ltd can purchase the plant at the end of the lease period for a
nominal amount of sh. 1000. The lease is non-cancellable and requires equal annual rental
payments of sh. 4.35 million at the commencement of each financial year.
The implicit interest in the lease is 10% per annum. The plant is depreciated on straight line
basis. The present value of an ordinary annuity of Sh.1 per year for 3 years at 10% interest is
Explain the classification of the above lease and show how the lease should be accounted for
in the financial statements of Apple Ltd for the year ended 31 October 2009 in accordance
with IAS 17(Leases).
December 2009 Question Four B CPA Section 3 Financial Reporting REVISION PARTNER 9 QUESTION 4
c) Capps Ltd.., a manufacturing company, leased production equipment from Deux Ltd On
1st January 2008. The lease provided for an immediate rental payment of sh. 10 million and
three other annual rentals of shs. 10 million commencing 1 January 2009.
The equipment has an estimated useful life of four years with a nil residual value.
The cash selling price of equipment is shs.32.1 million. Interest rate implicit in the lease is
17 per cent per annum.
Required:For the years ended 31 December 2008, 2009, 201...
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