Financial Reporting December 2023 Past Paper

CPA INTERMEDIATE LEVEL FINANCIAL REPORTING AND ANALYSIS
WEDNESDAY: 6 December 2023. Morning Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) With reference to International Financial Reporting Standard (IFRS) 6 – Exploration for and Evaluation of Mineral Resources:
(i) State the underlying principle for measurement of exploration and evaluation assets. (2 marks)
(ii) Describe THREE circumstances that indicate that an entity should test exploration and evaluation assets for impairment. (3 marks)
(b) International Financial Reporting Standard (IFRS) 15 – Revenue from Contracts with Customers establishes the principles that an entity shall apply to report information about the nature, amount, timing and uncertainty of revenue from a contract with a customer.
Required:
Summarise FIVE ways through which the benefits of an asset can be obtained in the context of IFRS 15.
(5 marks)
(c) International Accounting Standard (IAS) 26 – Accounting and Reporting by Retirement Benefit Plans provides the financial statements to be prepared by defined benefit plans.

Explain TWO key statements required under IAS 26. (4 marks)
(d) (i) Explain the term “heritage assets” as applied under International Public Sector Accounting Standard (IPSAS) 17 – Property, Plant and Equipment, citing suitable examples. (3 marks)
(ii) Describe THREE characteristics of heritage assets. (3 marks)
(Total: 20 marks)
QUESTION TWO
G Limited acquired 80% of the ordinary shares of Sh.10 par value in S Limited on 1 February 2023 at a cost of Sh.3,612 million. G Limited had acquired 4,500,000 shares at a cost of Sh.488 million in B Limited on 1 November 2021 when B Limited’s revenue reserves stood at Sh.50 million.
The financial statements of the three companies for the year ended 31 October 2023 are provided below:
Statement of profit or loss
G Ltd.
Sh.“million” S Ltd.
Sh.“million” B Ltd.
Sh.“million”
Revenue 3,600 1,500 1,000
Cost of sales (1,400) (600) (400)
Gross profit 2,200 900 600
Investment income 150 – –
Administrative expenses (500) (330) (200)
Distribution costs (200) (120) (100)
Finance cost (80) (60) (40)
Profit before tax 1,570 390 260
Income tax expense (300) (150) (80)
Profit after tax 1,270 240 180
Dividends paid (600) (120) (100)
Retained profit for the year 670 120 80

Statement of financial position as at 31 October 2023:
G Ltd. S Ltd. B Ltd.
Sh.“million” Sh.“million” Sh.“million”
Non-current assets:
Property, plant and equipment 5,000 4,200 1,900
Investment 4,500 450 –
9,500 4,650 1,900
Current assets:
Inventory
1,200
900
500
Trade receivables 900 900 350
Cash and cash equivalents 400 300 150
2,500 2,100 1,000
Total assets 12,000 6,750 2,900
Equity and liabilities:
Ordinary share capital
6,000
2,000
1,200
Share premium 1,500 400 300
Retained profit 2,500 1,950 300
10,000 4,350 1,800
Non-current liabilities:
10% loan stock 800 1,000 400
Deferred tax 200 560 180
1,000 1,560 580
Current liabilities:
Trade payables 800 750 430
Accruals 40 30 50
Current tax 160 60 40
1,000 840 520
Total equity and liabilities 12,000 6,750 2,900
Additional information:
1. On date of acquisition, the fair value of identifiable net assets of S Ltd. approximated their carrying amount except for an item of plant whose fair value was in excess of its carrying value by Sh.150 million. This item of plant had a remaining economic useful life of 5 years.
2. On 30 September 2023, S Ltd. sold goods worth Sh.100 million to G Ltd. reporting a gross profit margin of 20% on this sale. G Ltd. had neither received nor recorded those goods in its books of account as at 31 October 2023.
3. The group policy is to measure the non-controlling interest at their proportionate share of net assets in the subsidiary at the date of acquisition.
4. The inter-company outstanding balances between G Ltd. and S Ltd. did not agree due to goods in transit as per note 2 above. As at 31 October 2023, the trade receivables of S Ltd included Sh.60 million due from G Ltd. Amount due from B Ltd. to G Ltd. stood at Sh.20 million.
5. Any goodwill on acquisition of the subsidiary or associate is considered impaired by 20%.

Required:
(a) Consolidated statement of profit or loss for the year ended 31 October 2023. (10 marks)

(b) Consolidated statement of financial position as at 31 October 2023. (10 marks)
(Total: 20 marks)

QUESTION THREE
R and M were partners in the business of buying and selling fruits for two activities; export and oil processing, sharing profits and losses in the ratio 2:1 for R and M respectively. The partners agreed that with effect from 1 October 2023, the business be split off and transferred to two separate companies; P Ltd. and Q Ltd. P Ltd. took over the fruit buying for export business while Q Ltd. took over the fruit buying for oil processing business.

The partnership’s statement of financial position as at 30 September 2023 was as follows:

Non-current assets: Sh.“000” Sh.“000”
Land and building (cost) 750,000
Motor vehicles (cost) 300,000
Equipment (net book value) 90,000
Investment property 9,000

Current assets: 1,149,000
Cash in hand 3,000
Trade receivables: Export 384,000
Oil 648,000
Inventory: Export 1,380,000
Oil 675,000 3,090,000
Total assets
Capital and liabilities:
Capital: R

1,500,000 4,239,000
M 900,000 2,400,000
Current account: R 78,000
M 72,000 150,000
Non-current liabilities:
Bank loan
72,000
Current liabilities:
Bank overdraft
537,000
Trade payables: Export 924,000
Oil 56,000 1,617,000
Total capital and liabilities 4,239,000
Additional information:
1. P Ltd. took over all the non-current assets, cash, bank overdraft and its share of trade receivables, inventory and trade payables. Q Ltd. took its share of trade receivables, inventory and trade payables. The assets and liabilities were transferred at book values and the partners were paid Sh.300 million being goodwill for the oil business and Sh.240 million being goodwill for export business.
2. The bank that had provided the loan agreed to accept Sh.43.2 million 10% debentures in P Ltd. and Sh.28.8 million 10% debentures in Q Ltd.
3. On 1 October 2023, the purchase consideration was settled by the allotment of fully paid ordinary shares of Sh.20 each in the respective companies as follows:
R: 71,250,000 shares in P Ltd. and the balance in shares in Q Ltd.
M: 47,760,000 shares in Q Ltd. and the balance in shares in P Ltd.
4. P Ltd. also raised a 12% debenture of Sh.600 million on 1 October 2023 and paid-off the bank overdraft. The expenses incurred in raising the 12% debentures amounted to Sh.21 million.
5. P Ltd. and Q Ltd. also issued 3,000,000 and 4,500,000 fully paid ordinary shares of Sh.20 each respectively to two companies, E Ltd., and F Ltd. on 1 October 2023.
6. None of the companies has amortised the goodwill.
7. The formation expenses were paid by the respective companies as follows:
Sh.“million”
P Ltd. 39
Q Ltd. 24
Required:
(a) Business purchases accounts. (6 marks)
(b) Partners’ capital accounts. (2 marks)
(c) Bank account. (2 marks)
(d) Vendor’s account. (2 marks)

(e) Statements of financial position for P Ltd. and Q Ltd. as at 31 October 2023 (assuming no other transactions took place). (8 marks)
(Total: 20 marks)

QUESTION FOUR
The following financial information was extracted from the accounting records of Bundo Limited, a public limited company:
Statement of financial position as at 31 October:
2023
Sh.“000” 2022
Sh.“000”
Assets:
Non-current assets:
Property, plant and equipment 118,400 113,600
Intangible assets 24,290 23,680
142,690 137,280
Current assets:
Inventory 5,880 5,760
Trade receivables 4,070 4,290
Cash and cash equivalents 6,360 4,670
Total assets 159,000 152,000
Equity and liabilities:
Equity:
Ordinary share capital 40,000 32,000
Share premium 3,000 2,600
Revaluation surplus 3,400 2,560
Retained profit 52,770 42,400
Total equity 99,170 79,560
Non-current liabilities:
Long term borrowings 37,550 46,800
Deferred tax 6,750 7,070
Current liabilities:
Trade payables 7,800 8,200
Current tax 4,230 5,570
Interest payable 3,500 4,800
Total equity and liabilities 159,000 152,000

Statement of comprehensive income for the year ended 31 October 2023:
Sh.“000”
Revenue 312,300
Cost of sales (211,400)
Gross profit 100,900
Distribution costs (35,280)
Administrative expenses (43,120)
Profit from operations 22,500
Finance costs (3,800)
Profit before tax 18,700
Income tax expense (4,830)
Profit for the year 13, 870
Other comprehensive income:
Revaluation gain on property (net of deferred tax) 840
Total comprehensive income for the year 14,710

Additional information:
1. The property, plant and equipment was made up as follows:
31 October 2023 31 October 2022
Sh.“000” Sh.“000”
Cost of valuation 138,200 126,200
Accumulated depreciation (19,800) (12,600)
Carrying amount 118,400 113,600

During the year ended 31 October 2023, the property was revalued upwards for a gain amounting to Sh.1,200,000. The company does not make any transfers for excess depreciation upon revaluation. However, it accounts for deferred tax on revaluation gain. The income tax rate applicable to Bundo Limited is 30%. Depreciation on property, plant and equipment has been charged to profit or loss.

2. During the year ended 31 October 2023, Bundo limited acquired some patent rights at a cost of Sh.5,000,000. Any amortisation of intangible assets has been included in administrative expenses.
3. The company repaid some borrowings which had matured during the year and issued new loans amounting to Sh.3,000,000.

Required:
A statement of cash flows for Bundo Limited for the year ended 31 October 2023 using the indirect method in accordance with the requirements of International Accounting Standard (IAS) 7 “Statement of cash flows”.
(Total: 20 marks)

QUESTION FIVE
The following trial balance was extracted from the books of Kima Ltd., a manufacturing company as at 31 October 2023:

Sh.“000” Sh.“000”
Ordinary share capital 2,500,000
Share premium 500,000
Revaluation reserve (1 November 2022) 600,000
Retained earnings (1 November 2022) 3,570,000
Purchases and revenue 3,000,000 17,400,000
Production cost 2,400,000
Administrative expenses 1,960,000
Distribution cost 740,000
Interest on loan 100,000
Research and development 940,000
Land and building at valuation (1 November 2022) 3,400,000
Equipment at cost 9,000,000
Investment property at valuation (1 November 2022) 4,400,000
Accumulated depreciation (1 November 2022):
– Building 800,000
– Equipment 900,000
Intangible assets at cost 1,000,000
Accumulated amortisation (1 November 2022) 100,000
Inventory (1 November 2022) 100,000
Bank balance 800,000
Trade receivables and trade payables 700,000 800,000
10% bank loan 2,000,000
Interim dividends paid 700,000
Corporate tax 70,000
29,240,000 29,240,000
Additional information:
1. Inventory as at 31 October 2023 was valued at Sh.130,000,000, but it was subsequently discovered that goods included in this value with a cost of Sh.14,000,000 were sold for Sh.4,000,000.
2. Kima Ltd. took out the bank loan of Sh.2,000,000,000 on 1 November 2022 which is repayable in four equal annual installments. The interest rate on the loan is 10% per annum payable semi-annually.
3. The corporation tax for the previous year was paid during the current year. The corporation tax for the year ended 31 October 2023 was Sh.1,250,000,000.
4. The directors have discovered that a customer who owed Sh.250,000,000 as at year end was declared bankrupt.
5. Included in the revenue is a grant from the government of Sh.300,000,000 that Kima Ltd. received for accepting to employ additional youth in the next financial year.
6. Research and development expenditure comprised of:
• Sh.160,000,000 on general research.
• Sh.134,000,000 on developing new technology. At the end of the year the directors did not have confidence that the development will be successful.
• Sh.643,000,000 on development of new production technology. The development is almost complete and the directors are highly confident that the technology would result in significant cost savings.
7. Intangible assets at cost relate to a development that was being amortised over a useful life of 10 years. As at 1 November 2022, this was reviewed and was then assessed as having a remaining useful life of 6 years.
8. The Sh.3,400,000,000 relating to land and building is based on last year’s valuation and includes land at a valuation of Sh.2,000,000,000 and has an indefinite useful life. The building should be depreciated on the value at the start of the year. The remaining useful life was 20 years as at 1 November 2022.

9. As at 31 October 2023, the values were as follows:
• Land Sh.2,500,000,000
• Building Sh.1,140,000,000
10. Equipment is depreciated on straight line basis over 5 years. Kima Ltd. estimated that the equipment is used in the business on the following basis:
• 50% on production.
• 25% in the administrative functions.
• 25% in the distribution functions.
11. As at 31 October 2023, investment property was valued at Sh. 5,000,000,000 and the company policy is to use fair value on investment valuation.

Required:
(a) A statement of comprehensive income for the year ended 31 October 2023. (10 marks)

(b) Statement of financial position as at 30 October 2023. (10 marks)
(Total: 20 marks)
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