Financial Reporting R.kit.pdf - REVISION PARTNER 1 QUESTIONS TOPIC 1 ASSETS AND LIABILITIES QUESTION 1 a Distinguish between a finance lease and an

Financial Reporting R.kit.pdf - REVISION PARTNER 1...

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Unformatted text preview: REVISION PARTNER 1 QUESTIONS TOPIC 1 ASSETS AND LIABILITIES QUESTION 1 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 “Leases”. June 2013 Question Five B QUESTION 2 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 QUESTION 3 a) Differentiate between “taxable temporary differences” and “deductible temporary differences” 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 annum. 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: Period Profit after tax Allowable wear and tear Sh. charges 1 July 2008-30 June 2009 800.000 40% on cost 1 July 2009-30 June 2010 900,000 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% Required;i) Taxable profits ii) Temporary differences iii) Deferred tax account December 2012 Question Two A And B QUESTION 4 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: Project "A" Project "B" Shs Shs 1 July 2011 5,000,000 10,000,000 1 January 2012 5,000,000 10,000,000 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. Required: 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 statements 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 Asset Property, plant and equipment Receivables Inventory 3 Carrying amount Sh. ‘000’ 20,000 8,000 7,500 Tax base Sh. ‘000’ 10,000 8,500 8,000 Temporary difference due to revaluation of buildings in the year was Sh. 1,000,000. Required: Compute the deferred tax liability as at 31 December 2008 and show the relevant journal entry. 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 Required a) Profit and Loss Account Extract b) 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: (i) Finance lease. (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: (i) 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 Sh million 24 2003 Sh million 54 (6) (12) (6) (12) (12) (5) (17) 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. Required: 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. Required: 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: Plant 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 Sh.’000’ 1,700 2,300 2,100 1,500 2,400 CPA Section 3 Financial Reporting Depreciation Sh.’000’ 1,600 1,900 1,900 2,100 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 year. Required: (i). Compute the corporation payable for the year ended 31 March 2001 (ii). 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 2000 1999 Sh. ‘000’ Sh. ‘000’ Non-current assets Fixed assets Goodwill Current assets Stocks Debtors Prepayments Bank and cash Equity and liabilities Shares capital Revaluation reserve Revenue reserve Long-term loan Trade creditors Accruals Current tax 47,000 3,000 53,500 3,500 13,500 8,700 5,000 3,000 80,200 7,500 6,000 3,500 2,000 76,000 Sh. ‘000’ 30,000 10,000 16,200 56,200 10,000 8,000 6,000 80,200 Sh. ‘000’ 30,000 8,000 10,000 48,000 15,000 6,000 4,500 2,500 76,000 The following additional information is provided: 1. The company reported profits before tax of Sh.6,200,000 in the year ended June 2000 2. 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 Sh. ‘000’ 7,500 14,500 30 June 1999 Sh. ‘000’ 9,000 17,000 No acquisition or disposal of fixed assets took place in the year ended 30 June 2000 3. 4. 5. 6. 7. 8. 9. 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 revaluations. 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 provision method. 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. Required: (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 provision method. (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 QUESTION 1 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. Required: 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 charge) 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%. Required: 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 Sh.2.49. Required: 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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