CATHOLIC UNIVERSITY OF ZIMBABWE FACULTY OF COMMERCE BACHELOR OF ACCOUNTING (HONOURS) DEGREE YEAR FOUR: FIRST SEMESTER EXAMINATION ADVANCED FINANCIAL ACCOUNTING AC400 DATE: DECEMBER 2019 TIME: 3 HOURS INSTRUCTIONS TO CANDIDATE 1. 2. 3. 4. 5. The question paper carries four questions Answer all questions Marks to each question or subsection(s) of a question are included in square brackets[] Each question carries 25 marks Use non programmable calculators Page 1 of 5 QUESTION 1 Duncan Limited is a public limited company has shareholdings in two other companies, Ellison Ltd and Jimmy Ltd. Statements of Financial Position are shown below for all three companies as at 31 July 2019 were as follows. Statements of Financial Position as at 31 July 2019: NON-CURRENT ASSETS: Property, plant & equipment Investments CURRENT ASSETS: Inventories Trade receivables Cash & bank TOTAL ASSETS Equity: Equity share capital of $0.25 each Share premium Retained earnings NON-CURRENT LIABILITIES: 6% loan notes CURRENT LIABILITIES: Trade payables Dividends proposed TOTAL LIABILITIES TOTAL EQUITY & LIABILITIES Duncan Ltd Ellison Ltd $million $million Jimmy Ltd $million 500 300 800 145 48 193 100 5 105 180 64 24 268 1,068 51 24 13 88 281 23 13 8 44 149 250 200 358 808 100 80 65 245 40 20 61 121 100 --- --- 143 17 260 1,068 36 --36 281 18 10 28 149 Additional Information: (i) Duncan bought 300 million ordinary shares in Ellison on 1 August 2017, when the retained earnings of Ellison were $44 million. The consideration was agreed at $220 million for these shares of which $120 million of this was settled in cash on the date of purchase, the balance being paid by means of a 6% loan note. This investment has been recorded at cost in the books of Duncan, included under the heading “Investments”. The loan note interest was paid during the year ended 31 July 2018, but no entry has been made to reflect the interest payable in the current accounting period. (ii) Duncan bought a 40% holding in the ordinary shares of Jimmy on 1 August 2018, when the retained earnings balance in Jimmy’s books stood at $52 million. The consideration consisted of an immediate cash payment of $50 million. (iii) The group accounting policy is to value any Non-Controlling Interests (NCI) at their proportionate share of identifiable net assets at the acquisition date. Page 2 of 5 (iv) On 1 August 2017, certain property held by Ellison had a fair value $20 million in excess of its carrying value. The buildings component of this property, comprising 75% of the total value, had a useful economic life remaining of 10 years at the date of acquisition. It transpired that Ellison’s computer system had automatically charged to Duncan’ account interest of $2 million due to late payments. It was subsequently agreed that Ellison would waive this interest. (v) During the financial year ended 31 July 2019, Ellison had sold goods to Duncan amounting to $60 million. The purchase price included a mark-up of 20% on cost. Of these goods, one-quarter remained in the closing inventory of Duncan at the reporting date. (vi) Recorded in the books of Duncan was an intra-group trade payable of $20 million owed to Ellison at year-end. However, the books of Ellison showed a balance of $22 million owed by Duncan. (vii) Duncan has not accounted for any dividend receivable from its group companies. Both Duncan and Jimmy have proposed dividends as shown in current liabilities. Jimmy’s proposed dividend relates entirely to the post acquisition period. No other dividends were paid or proposed in the year. (viii) Goodwill was reviewed for impairment at the reporting date, and a $3 million impairment loss was considered necessary to the goodwill of Ellison. A $1 million impairment loss should be provided for on the investment in Jimmy. (ix) All workings may be rounded to the nearest $0.1m. REQUIRED: Prepare the Consolidated Statement of Financial Position for the Duncan group as at 31 July 2019 in accordance with International Financial Reporting Standards. [30] Total marks [30] QUESTION 2 The following Statements of Profit or Loss and Other Comprehensive Income relate to Clover Ltd and its investee companies, Starling Ltd and Finch Ltd. Statements of Profit or Loss and Other Comprehensive Income for year ended 31 March 2019 Clover Ltd Starling Ltd Finch Ltd $million $million $million Revenue ... 976.0 420.0 63.0 Cost of Sales ... (687.0) (228.0) (26.2) Gross profit … 289.0 192.0 36.8 Operating expenses ... (68.0) (54.0) (13.4) Finance costs ... (12.0) (18.0) (6.2) Other income … 6.1 – -Dividend received ... 8.1 -Profit before taxation ... 223.2 120.0 17.2 Taxation … (45.0) (30.0) (3.2) Profit for the year ... 178.2 90.0 14.0 Other comprehensive income: Gains on revaluations of property 15.0 12.0 2.0 Total comprehensive income for the year 193.2 102.0 16.0 Reserve balances total at 1 April 2018 2,350.0 625.0 145.0 Equity share capital at 1 April 2018 1,000.0 775.0 10.0 Page 3 of 5 Additional Information: (i) Clover bought a 60% holding in the equity of Starling on 1 April 2018. The purchase price of the investment was agreed at $900 million, of which $600 million was paid in cash. The balance was satisfied by the immediate issue of a 5% 2028 bond to the seller at par value. Starling’s net assets had a fair value of $1,400 million on 1 April 2018, represented by equity share capital $775 million and retained earnings $625 million. It was decided to apply the proportion of net assets method to calculate goodwill on acquisition. Goodwill impairment loss amounting to 10% arose during the year. (ii) The interest on the above loan notes is payable annually in arrears. The first year’s interest payment has not yet been made, nor has it been provided for. (iii) Clover has owned 90% of the equity shares in Finch since incorporation. No goodwill arose on this acquisition. There were no reserves in existence at the acquisition date. (iv) During the year, Clover sold goods to Finch for $15 million. These goods were sold by Clover at a mark-up of 50% on cost price. Three fifths of the goods remained in the inventory of Finch at 31 March 2019. An amount of $4.3 million is outstanding to Clover in respect of these goods at 31 March 2019. (v) On 1 March 2019, Finch declared an interim dividend of $9 million. Clover has recorded its share of this dividend as income. No other dividends were declared by group companies. (vi) All calculations may be taken to the nearest $0.1 million. Assume all expenses and gains accrue evenly throughout the year unless otherwise instructed. No new equity capital was issued by any group company during the year. REQUIRED: Prepare the Consolidated Statement of Profit or Loss for the year ended 31 March 2019. [30] Total marks [30] QUESTION 3 IFRS 15 - Revenue from Contracts with Customers requires a 5-step approach to determining the amount of revenue to be recognised by an entity. a) MTL is a mobile operator network that provides mobile data, voice calls and internet services. During the year, $20 million airtime in recharge cards sold to agents but 85% of the airtime was utilised by customers. It is estimated that 1% of the value of recharge cards bought by customers during the year is lost through the misplacement or destruction of the cards. It is company policy to recognise revenue when the customer has utilised or enjoyed the economic benefits of services provided or when recharge cards bought are due for write-off. b) Derek Plc entered into a contract to build 1000 housing units to a property developer at a transfer price of cost plus 25%. The contract was signed on 1 April 2018 and 200 houses have been fully completed and 20 have been 60% completed during the year ended 31 March 2019. Estimated number of hours to build all the housing units were 200,000 and 40,000 hours were worked on the work done to date. The contractor estimates that each housing unit will be transferred at a price of $50,000 and costs were incurred in accordance with the contract. Page 4 of 5 REQUIRED: (i) Outline the general principles and the 5-step approach to recognising revenue as set out by IFRS 15 – Revenue from Contracts with Customers. [10] (ii) In each scenario above, calculate the amount of revenue to be recognised in the financial statements of MTL and Derek Plc for year current year. Justify your answer in each case. [10] Total marks [20] QUESTION 4 IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. IFRS 9 Financial instruments establishes principles for recognising and measuring financial assets and financial liabilities. On 1 January 2018 Abacus, wine merchants, buys a small bottling and labelling machine from Solenoid Co under a finance lease. The cash price of the machine was $7,710 while the amount to be paid was $10,000. The agreement required the immediate payment of a $2,000 deposit with the balance being settled in four equal annual instalments commencing on 31 December 2018. The effective interest rate is 15% per annum, calculated on the remaining balance of the liability during each accounting period. Depreciation on the plant is to be provided for at the rate of 20% per annum on a straight-line basis assuming a residual value of nil. Abacus bought 10,000 debentures/bonds at a 2% discount on the participants value of $100 each. The debentures/bonds are redeemable in 4 years at a premium of 5%. The coupon rate is 4% and the effective interest rate is 5,721177% per annum. REQUIRED a) Draw up the amortization tables in each of the above scenarios. [8] b) Show how the lease and financial instruments will be accounted in the financial statements over the respective periods. [12] Total marks [20] ………………………….….……….. END OF EXAMINATION …………….………………….……. Page 5 of 5